Where's the Money Coming From?

Like awed Lilliputians entering a Brobdingnagian labyrinth, the House Ways & Means Committee this week faced the job of converting half of U.S. industrial manpower, horsepower, purchasing power to war, without wrecking the other half. The means: taxes, of which the Treasury offered a plan to raise another $8 billions (see p. 75), and borrowing.

Money votes since Pearl Harbor have totaled $48,932,995,278; the pending fifth supplemental defense bill will make it $81 billions. Not only must the Treasury raise enough money to pay this bill, it must also prevent citizens from getting and spending it on nonwar goods.

A British formula of 1940 held that a minimum of inflation follows a war finance program of one-half taxes, one-half loans. Britain soon fell behind this goal; so did the U.S. (see chart). For the fiscal year ending next June 1943, budgeted defense expenditures tot up to $56 billions, all expenditures to $59 billions. Even after the proposed $8 billions in new taxes, annual revenues in sight are $26 billions. More than half, therefore, must be borrowed.

The Power to Tax. To the U.S., whose national income was $92 billions last year, astrophysical sums are nothing new. But to Congressmen, who face an election in the fall, the job of sluicing over half this income through Government channels was not only new but terrifying. It was especially terrifying to those who realized that the main cost of this war must be borne by the vote-potent low-income groups. Reasons:

1) Only the medium and low-income groups have enough money to pay for it. Even in 1940, when there were only 7,000,000 income-taxpayers instead of 11,000,000, individuals with incomes of less than $5,000 had more than half ($14.5-billions) of total net income reported, though they paid only 14% of the tax.

2) A dollar taken from a poor man always reduces his current consumption, whereas a dollar taken from a rich man often merely reduces his capital or his savings. Part of the wartime fiscal job is to reduce current consumption, which competes with war production.

These were iron-hard facts for any Congressman to face. Yet they will be implacably implicit in all the lesser issues over which Congress will wrangle before it passes a tax law. Some issues:

Sales Tax? Pressure is bound to grow for a general sales tax; even President Roosevelt, long its foe, said: "We may later be compelled to reconsider the temporary necessity of such measures." A sales tax is "painless," can be fabulously productive. But Senator Vandenberg is not the only man who thinks it would also set off a new spiral of wage demands, price increases, inflation.

Profit Limitation? The Treasury would still like to assess excess-profits taxes solely on invested capital, in effect recapture all profits (whether "war profits" or not) above 6 or 8%. But Congress has thrice rejected the idea, and this week the Treasury let the sleeping dog lie-for the time being. Instead, adopting a British idea, it proposed a post-war refund of profits taxes in excess of 80%, for expenses of conversion to peace.

The Treasury also left the present normal corporate income tax unchanged at 24%. Instead, it would convert the present 6% and 7% surtax into a "war surtax" of maybe 31%, aimed at the most profitable corporations. One reason for not raising the normal rate: some outstanding Federal bonds are tax-exempt as to normal tax, not as to surtax. If the normal tax were increased, these bonds might become unduly attractive in comparison with new (wholly taxable) issues to come.

Lottery. To give the taxpayer a thrill for his money, some Congressmen who junketed to South America last summer are ballyhooing a national lottery. Their estimates of revenue: $1 billion up.

The Power to Borrow. Sooner or later taxes become intolerable. But borrowing raises a new worry. With the national debt ($62.3 billions) already within easy hail of the limit ($65 billions), Chairman Doughton has the thankless job of asking Congress to raise the limit to $125 billions. Problem: not whether to borrow, but from whom?

Old-fashioned Treasury bonds (not savings bonds) sell all too easily in the wrong spots. Giving no more than a casual notice of sale, Morgenthau offered $1.6 billions of 2 1/2s, 1967-72, last October, got cash offers totaling $10.4 billions. Last month the market took $1.5 billions of 10-13-year 2 1/4s, but not so eagerly: offers were only three times that amount, showing that the Treasury was shooting closer to the ruling price mark, getting a better bargain.

This market consists of banks, insurance companies and moneyed individuals who respond like a sensitive machine to fine shadings of interest rate, maturity, proportion of long and short dating. They buy because they can find little else to invest in. Of $63.7 billions direct and guaranteed debt outstanding last December 31, banks and insurance companies owned $33.5 billions. Commercial banks alone hold one-third of the debt, are in the war-financing program up to their necks. But since bond buying by banks increases the amount of money and credit in the country, its effect in the long run is inflationary.

The consuming public can buy defense savings bonds, but doesn't. Since Pearl Harbor their sales have about tripled, were $660,000,000 in 26 days of February. But Morgenthau figures less than one-seventh of the nation's income earners own bonds. Hence, to absorb the dangerous purchasing power of this vast group, compulsory savings or a deferred-wage plan may prove necessary.

Apart from its war necessity, borrowing from the poor would prove a great post-war advantage. A national debt concentrated in the hands of the wealthy, as heretofore, is a standing temptation to demagogues, inflation, even repudiation. A debt in which everyone shares (provided everyone helps to service it) is a much healthier burden.

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