[Released April 2, 1948. Dated April 1, 1948]
To the House of Representatives:
I return herewith, without my approval, H.R. 4790, entitled "An Act to reduce individual income tax payments, and for other purposes".
It is a matter of deep regret to me that I am compelled to take this action. If I could conscientiously approve tax reductions, I would gladly do so. But I am convinced that to reduce the income of the Government by $5 billion at this time would exhibit a reckless disregard for the soundness of our economy and the finances of our Government.
All of us are aware that the world situation is one of uncertainty and, indeed, of danger. The United States, in common with other free nations, is taking positive action on many fronts to preserve conditions of peace with justice against the forces of dissension and chaos. In this endeavor, as I stated in my address to the Congress on March 17, 1948, "the United States has a tremendous responsibility to act according to the measure of our power for good in the world".
Under these conditions, the primary test which I must apply in considering this bill is whether or not it would contribute to the strength of the United States. My fundamental objection to the bill is that it would not strengthen, but instead would weaken, the United States.
This is true for two reasons.
First, the bill would reduce Government revenues to such an extent as to make likely a deficit in Government finances, at a time when responsible conduct of the financial affairs of this Nation requires a substantial surplus in order to reduce our large public debt and to be reasonably prepared against contingencies.
Second, the bill would greatly increase the danger of further inflation, by adding billions of dollars of purchasing power at a time when demand already exceeds supply at many strategic points in the economy, and when Government expenditures are necessarily rising.
The estimates of Government expenditures for the fiscal year 1949 which I submitted to the Congress in January totaled $39.7 billion. Receipts were estimated at $44.5 billion, leaving a surplus of $4.8 billion for debt retirement and contingencies.
It has since become apparent that despite the most stringent efforts toward economy, there will be several important increases in expenditures above the January estimates. Legislation has been enacted increasing payments to veterans. Larger amounts will be required for assistance to certain foreign countries. Legislation to increase the salaries of Federal employees is being considered. It has been necessary to recommend substantial additional appropriations to the Congress to bring our armed forces to a proper strength.
Altogether these increases, after taking due account of appropriation actions by the Congress to date and of the additional tax refunds which would occur under this bill, involve additional expenditures for the fiscal year 1949 of at least $3.5 billion above the January estimates. In the fiscal year 1950, these additional programs would increase expenditures by another $2 billion, or by a total of $5.5 billion. It is clear that, if this bill which reduces taxes by $5 billion were to become law, there would in fact be a deficit in the fiscal year 1949 even under the more optimistic estimates of revenue used by the Congressional Committees.
The Congress proposes to extricate itself from this situation by charging $3 billion of 1949 expenditures under the European Recovery Program against the 1948 revenues. This might avoid a deficit in 1949. But the facts cannot be obscured by the fiscal sleight-of-hand by which a prospective deficit in 1949 is made to appear as a surplus. Actually the surplus available for debt retirement for the two years 1948 and 1949 would not be affected in the slightest by such a shift in accounting.
The public debt is $253 billion. I repeat what I have so often said before--if we do not reduce the public debt by substantial amounts during a prosperous period such as the present, there is little prospect that it will ever be materially reduced.
I am aware that some hold the view that it would be proper to reduce taxes now, and that it will be time enough to restore adequate Federal revenues when the full extent and cost of our commitments are more definitely determined. I cannot subscribe to such an erratic and vacillating tax policy. We already know enough about the Government's financial outlook to demonstrate the serious effects of reducing revenues now by $5 billion. The additional expenditures which are in prospect, although not exactly determined as to amount, are of sufficient size to make clear the shortsightedness of cutting taxes at the very time our obligations are increasing. If I endorsed tax reduction now, knowing that to do so would in all likelihood mean increased taxes next year, I would not be dealing fairly with the American people.
This bill would undermine the soundness of our Government finances at a time when world peace depends upon the strength of the United States.
It would also gamble with the dangers of further inflation. I have urged on many occasions that steps be taken to relieve the distressing effects of high prices. Since these steps have not been taken, the most important force restraining inflation has been the Government surplus and the use of this surplus to reduce the public debt. This bill would reduce or eliminate this important weapon against inflation.
It has been argued that tax reduction now would furnish incentives for more active investment and business enterprise and, consequently, more production. The plain facts show that neither funds nor profit incentives are lacking for investment and business enterprise at present tax rates.
Industrial expenditures for new plant and equipment reached the record level of more than $16 billion in 1947, contrasted with $12 billion in 1946 and $8 billion in 1941. Preliminary estimates indicate that industrial expenditures for new plant and equipment during the first quarter of 1948 ran much higher than the average for 1947.
Corporate profits were at extraordinary levels during 1947, reaching $17.3 billion after taxes, contrasted with a previous peak of $12.5 billion in 1946. Preliminary estimates indicate that corporate profits during the first quarter of 1948 have substantially maintained the very high level of 1947.
The national income is at a record level. Employment is at a record level. Production is at a record peacetime level. The resources and labor force of this country are fully employed. Under these circumstances, tax reduction could only result in higher prices-not in higher production.
From the viewpoint of the average family which spends most of its income to buy the necessities of life, the kind of tax reduction which this bill provides would be an evil in disguise. Inflation is still here and the cost of living has not descended to reasonable levels. The consumers' price index, which was 159 for 1947 as a whole, was 17.5 in February, 1948, and preliminary figures indicate that it was even higher in March. A large tax reduction at this time would help to drive the cost of living still higher.
With wise and careful planning the American tax system can make an important contribution to economic progress. But if we dissipate the strength of our revenue system by ill-timed tax reduction, we shall sacrifice for many years our opportunities to lay a solid foundation for a more effective tax system. Major reforms are needed in all important areas of the Federal tax system-excise taxes, corporate taxes, individual income taxes, and estate and gift taxes. The enactment of H.R. 4790 would, by prematurely weakening the tax system, not only aggravate our immediate problems but also constitute a serious obstacle in the path of realizing many urgently needed fundamental tax reforms.
The tax reduction provided by this bill is inequitable as well as untimely.
In the case of the income tax, nearly forty percent of the reduction would go to individuals with net incomes in excess of $5,000, who constitute less than 5 percent of all taxpayers.
In the case of the estate and gift taxes, nearly all of the $250 million annual reduction would go to only about 12,000 of the most wealthy families. The discovery that it is possible to make very substantial savings in the gift and estate taxes by dividing a family's wealth between husband and wife has brought forth much ingenious argument to the effect that the provisions in this bill are needed to equalize the application of these taxes in community-property and common-law States. In fact, this equalization was in all essential respects achieved by legislation enacted by the Congress in 1942.
For the reasons I have set forth, H.R. 4790 is not compatible with the requirements of the critical international situation. It is not compatible with sound domestic economic and debt management policies. If enacted, it would materially weaken this Nation's efforts to maintain peace abroad and prosperity at home.
It is bad policy to reduce taxes in a manner which would encourage inflation and bring greater hardship, not relief, to our people. It is bad policy to endanger the soundness of our national finances at a time when our responsibilities are great in an unsettled world.
I am confident that the men and women of our country prefer the maintenance of our national strength to a reduction in taxes under the present circumstances.
I consider it my clear duty, therefore, to return H.R. 4790 without my approval.
HARRY S. TRUMAN