To the House of Representatives:
I return herewith, without my approval, H.R. 1, entitled: "An Act to reduce individual income tax payments."
The right kind of tax reduction, at the right time, is an objective to which I am deeply committed. But I have reached the conclusion that this bill represents the wrong kind of tax reduction, at the wrong time. It offers dubious, ill-apportioned, and risky benefits at the expense of a sound tax policy and is, from the standpoint of Government finances, unsafe. Proposals for tax reduction must be examined in the light of sound and carefully-related fiscal and economic policies. Unless they are consistent with the demands of such policies, they should not be approved.
In my Budget Message of January 10, 1947, I said:
"As long as business, employment, and national income continue high, we should maintain tax revenues at levels that will not only meet current expenditures but also leave a surplus for retirement of the public debt. There is no justification now for tax reduction."
Developments since January do not warrant a change in that conclusion. Total employment in May increased by a million and a half over that in April, and the total number now employed is over 58 million. The number of unemployed is now less than 2 million, practically a peace-time minimum. Income payments to individuals are estimated to be at the record annual rate of $176 billion. Department store sales in May were up 6 percent over April, and equalled the all-time high in dollar volume. The number of houses begun by private enterprise in May was the largest in any month since V-J Day. Despite many gloomy predictions, there is no convincing evidence that a recession is imminent.
Ample evidence points to the continuation of inflationary pressures. Tax reduction now would increase them. If these pressures are long continued, and if essential readjustments within the price structure are long deferred, we are likely to induce the very recession we seek to avoid.
Reductions in income tax rates are not required now to permit necessary investment and business expansion. There is no shortage of funds for this purpose in any wide sector of our economy. As a matter of fact, the amount of liquid funds in the hands of corporations and individuals at the present time is nearly $200 billion. Under these circumstances, tax reduction is not now needed to provide additional funds for business expansion.
The argument is made that the funds added to consumer purchasing power through this tax reduction are needed to maintain employment and production at maximum levels.
It is true, as I have pointed out many times, that the purchasing power of large groups of our people has been seriously reduced. We must take every step possible to remedy the disparity between prices and the incomes of the rank and file of our people, so as not to put brakes on our continued prosperity and lead us toward a recession. Tax reduction as proposed in H.R. 1 is not the proper way to remedy the current price situation and its effect upon consumers and upon prospective employment. Necessary adjustments in incomes, production, and prices should be made by wise policies and improved practices of business and labor, not by hastily invoking the fiscal powers of Government on a broad scale.
The time for tax reduction will come when general inflationary pressures have ceased and the structure of prices is on a more stable basis than now prevails. How long it will take for this point to be reached is impossible to predict. Clearly, it has not been reached as yet. Tax reduction now would add to, rather than correct, maladjustments in the economic structure.
Sound fiscal policy also requires that existing tax rates be maintained for the present. I have always been keenly aware of the necessity for the utmost economy in government and of the need for a progressive reduction in government expenditures to the greatest extent possible consistent with our national interests. However, necessary expenditures for essential Government operations are still high. We are still meeting heavy obligations growing out of the war. We continue to be confronted with great responsibilities for international relief and rehabilitation that have an important bearing on our efforts to secure lasting peace. We are still in a transition period in which many uncertainties continue. In the face of these facts, common prudence demands a realistic and conservative management of the fiscal affairs of the Government.
A time of high employment and high prices, wages, and profits, such as the present, calls for a surplus in Government revenue over expenditures and the application of all or much of this surplus to the reduction of the public debt. Continuing public confidence in Government finances depends upon such a policy. If the Government does not reduce the public debt during the most active and inflationary periods, there is little prospect of material reduction at any time, and the country would, as a result, be in a poorer position to extend supports to the economy should a subsequent deflationary period develop.
With the present huge public debt, it is of first importance that every effort now be made to reduce the debt as much as possible. If H.R. 1 were to become law, the amount available for debt retirement would be entirely too low for this period of unparalleled high levels of peacetime income and employment.
The integrity of the public debt is the financial bedrock on which our national economy rests. More than half of the American people are direct owners of Government securities. A major portion of the assets of banks, insurance companies, and trust funds is invested in Government bonds. To maintain the integrity of the public debt, we must now reduce it by substantial amounts.
In addition to the fact that this is not the time for tax reduction, there is a fundamental objection to this particular bill. An adjustment of the tax system should provide fair and equitable relief for individuals from the .present tax burden, but the reductions proposed in H.R. 1 are neither fair nor equitable. H.R. 1 reduces taxes in the high income brackets to a grossly disproportionate extent as compared to the reduction in the low income brackets. A good tax reduction bill would give a greater proportion of relief to the low income group.
H.R. 1 fails to give relief where it is needed most. Under H.R. 1, tax savings to the average family with an income of $2500 would be less than $30, while taxes on an income of $50,000 would be reduced by nearly $5000, and on an income of $500,000 by nearly $60,000.
Insofar as "take-home" pay is concerned under H.R. 1, the family earning $2500 would receive an increase of only 1.2 percent; the family with an income of $50,000 would receive an increase of 18.6 percent; and the family with an income of $500,000 would receive an increase of 62.3 percent.
If H.R. 1 were to become law, the inequity of its provisions would be frozen into the tax structure. The reduction in government receipts resulting from this bill would be such that the Government could ill afford to make fair tax reductions at the proper time in the form of a carefully-considered revision of our entire tax structure.
Now is the time to plan for a thoroughgoing revision of the tax system. We should consider not only individual income tax rates, but also the level of personal exemptions and many other adjustments in the personal income tax structure. We should also consider changes in excise tax laws, gift and estate taxes, corporation taxes, and, in fact, the entire field of tax revenues. Such a program of tax adjustment and tax reduction should be geared to the financial and economic needs of this country. It will be an important contribution to economic progress. The timing of such a program is highly important to achieve economic stability, to promote the investment of capital, and to maintain employment, purchasing power and high levels of production.
For the compelling reasons I have set forth, I return H.R. 1 without my approval.
HARRY S. TRUMAN