Letter to Committee Chairmen on Taxation of Excess Profits.

My dear Mr. Chairman:

I am very glad that the Committee on Ways and Means is returning to Washington to expedite the next step in the tax program required for our increased defense effort.

After the communist aggression in Korea last summer, the Congress recognized the need for greatly increasing the Government's revenues to meet the grave dangers that confront our country. As a first step, it promptly enacted the Revenue Act of 1950 to provide 4.6 billion dollars of additional revenue annually. In section 701 of the same Act, the Congress called for further action at this session to supplement this revenue by taxing the excess profits of corporations.

As your committee meets to carry out its obligation under this section, I want to express my hearty accord with its purpose. It is scarcely 'possible to overemphasize the importance of an adequate tax system in performing the tremendous tasks that lie ahead of us. I am pleased that we have found general agreement thus far on the proposition that we should finance our defense effort on a pay-as-you-go basis. This will not be easy. It will require both wisdom and determination. It is never pleasant to increase taxes, but in such times as these it is absolutely necessary.

In section 701 of the Revenue Act of 1950, the Congress indicated its purpose to have the new corporate excess profits tax take effect as of October 1 or July 1, 1950. I recommend that it be made effective as of July 1. Business volume and prices rose rapidly after that date as a result of the decision to enlarge our defense program greatly, and profits have increased as a consequence. These profits should obviously be taxed as part of a sound program of defense taxation.

I realize that there are many variations in the form this tax might take. The Secretary of the Treasury will be glad to discuss with the committee the considerations involved in choosing among them.

I believe the rates of the new tax should be designed to produce additional annual revenue of 4 billion dollars at current income levels. Although the total amount of the expenditures which will ultimately be required for military security is necessarily uncertain, it will certainly exceed the yield of existing taxes augmented by such a profits tax. When the 1950 tax program has been completed with the enactment of this tax, we shall be in a position, early next year, to assess our needs for further tax legislation. To preserve the integrity of the Government's finances, our revenue system must keep pace with our defense expenditures.

An adequate tax program is our strongest weapon in preventing inflation. The need for action on this score is urgent. Contracts for most military items must be placed long before deliveries can be made, and before payments are made by the Government. These contracts, however, result almost immediately in competition for scarce materials and labor, producing expanding incomes and an inflationary threat. We must have increased taxes to maintain the soundness of the dollar.

These considerations point up the need for immediate action on profits taxation. I am sure we can count on you and Senator George and your committees, at this time, for the same kind of fine cooperation and leadership you showed in securing enactment of the Revenue Act of 1950 earlier this year.

I am sending a copy of this letter to Senator George (Mr. Doughton).

Sincerely yours,

HARRY S. TRUMAN