Congress Gives Orders

Henry Morgenthau and his tax experts marched up Capitol Hill and marched right down again. They came up to propose a new tax program; for all political purposes they were almost kicked downhill. The tacit assumption of recent years that the Administration knows best about taxes/- was for once emphatically rejected. The Senate Finance Committee let the Treasury understand that it knew what it wanted.

Secretary Morgenthau apparently sensed what was coming. He read the committee some generalities that "The Treasury has diligently sought and will continue to seek funds from those sources where borrowing will have the least inflationary effect, and we have done so with what I believe to be most gratifying results." Then he hastily ducked out leaving Expert Randolph Paul and about two dozen other Treasury experts to face the committee.

Randolph Evernghim Paul presented the Committee with his biggest tax proposal since he took this job last December. From his predecessor, John L. Sullivan, he had learned never to fight back at a committee. As a tax lawyer in Wall street and as a lecturer on taxation at Yale and Harvard he had learned how to explain and convince. (Says Chairman Doughton of Ways & Means of Paul: "He's about like all them other fellers they send up here, only he don't make you so mad.")

Mr. Paul proposed cutting personal income-tax exemptions further--to $500 for single persons, $1,000 for man & wife, $250 for dependents. But the guts of his proposal was something new: a spending tax.

A spending tax is like an income tax except that it is calculated not on what a man earns but on what he spends (income less savings, payments on debts, etc.) There is much to be said for it as a preventative for inflation.

But Mr. Paul's spending tax was not simple. It began with a 10% tax on a person's total spending over the personal exemptions; this would be refunded after the war--a kind of forced savings as well as a tax. It went on to a surtax (not refundable) that climbed from 10% to 75% on expenditures in excess of $1,000 for a single person, $2,000 for a married couple and $500 for a dependent. Taxpayers were to make quarterly returns reporting their spendings; and this whole new tax system was to be imposed on top of the present income tax.

The committeemen reeled for an hour under the impact of Paul's 33-page document, then recovered to deliver body blows of their own. Harry Byrd called the proposal the "most complicated and unworkable plan" the Treasury had submitted in nine years: "It would compel taxpayers to pay more taxes than they have income." Bob La Follette termed its provisions "heresy" and "a hell of a note." To Joe Guffey the scheme was stillborn. It "staggered" Colorado Ed Johnson's imagination. Puddler Jim Davis threw up his hands: "It is too complicated for an ordinary man like me to understand." It was "the most complicated monstrosity" Bennett Champ Clark had ever seen.

When Randolph Paul had finished, the Senate committee piled insult on reproof. It asked him to supply a Treasury proposal for a sales tax--one kind of tax which he has always opposed. As if he had known the worst in advance, Paul fished in his brief case and brought out a sales-tax proposal readymade.

The Treasury, said he, still does not want a sales tax, but if there must be one, it ought to be a general tax on retail sales of both goods and services. He estimated that a 5% levy would yield about $2.5 billion. But he unloosed another stinger: a scheme to license tens of thousands of retailers to enforce the tax and 15,000 tax policemen.

The Senators then let him go and went to listen to other sales-tax proposals. One for a sales tax on merchants' gross sales of goods (not services) was offered by the committee's counsel, Colin F. Stam. The other, a proposal for a 10% stamp tax on sales--the Government to pay back the stamp buyers after the war or accept the stamps as income-tax payments--came from Connecticut's John A. Danaher.

The committee hoped it might be able to agree on "some kind of a bill" next week. But it obviously will not be one the Treasury likes. And the bill the Treasury liked most--the spending tax--was rejected this week by the committee in closed session by a vote of 12 to 0.

/- Contrary to the Constitution, which provides that the power to write tax bills should belong exclusively to the elected representatives of the people.

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