Letter to the Chairman, Senate Committee on Finance, on the Need for an Increase in Taxes.

My dear Mr. Chairman:

The increased military appropriation requests transmitted to the Congress on July 24, 1950, together with other requests I shall transmit at a later date, will entail sharply increased Federal expenditures. We embark on these enlarged expenditures at a time when the Federal budget is already out of balance. This makes it imperative that we increase tax revenues promptly lest a growing deficit create new inflationary forces detrimental to our defense effort.

We must make every effort to finance the greatest possible amount of needed expenditures by taxation, and we must design taxation methods which prevent profiteering and distribute the tax burden fairly among the different groups of our people.

I appreciate that the development of a comprehensive revenue program adequate for our present needs will require careful Congressional consideration. Our wartime experience will need to be reviewed and alternative approaches explored. Under the most auspicious circumstances, such a comprehensive tax program could not be completed for some time.

In the present situation, however, speed is of the essence and delay would be costly.

I recommend that, as an interim revenue measure, action should be taken immediately to revise and enact the tax bill now pending before your Committee, so as to increase tax collections substantially for the taxable year 1950. Specifically, I suggest that the revenue-raising provisions of the pending bill be retained and supplemented by increases in the corporate and individual income tax rates. This could be done without interfering in any way with the development of a more comprehensive revenue program as soon as practicable.

Three adjustments would be required in the pending bill:

First, to eliminate the excise tax reductions and other revenue-losing provisions, but retain the loophole-closing, dividend withholding, and life insurance company provisions.

Second, to adjust the revised corporate rate structure contained in the pending bill by increasing the normal corporate rate from 21 to 25 percent. Taking into account the 20 percent surtax contained in the present bill, and the $25,000 exemption from surtax, this would result in a 25 percent tax on the first $25,000 of a corporation's income, and a 45 percent tax on the balance.

Third, to increase individual income tax rates to the "tentative" levels adopted in 1945, by removing the reductions from those levels made in 1945 and 1948. This would leave unchanged the income-splitting provisions of present law, and the present personal exemptions of $600 per person. These rate schedules are familiar to the Congress, since they were involved in the consideration of the tax reductions adopted in 1945 and 1948.

The increased corporate income tax rates should be made applicable beginning with 1950 corporation incomes, as the pending bill would do. With respect to individual income taxes, the increased rates should be applicable beginning with one-quarter of each taxpayer's 1950 income. This would require an increase in the withholding rate from the present 15 percent to 18 percent, beginning with the last quarter of 1950.

These adjustments in the pending tax bill would increase the Government's revenue, on a full year basis, by about $5 billion at present income levels. Clearly, this will not meet our long-run revenue requirements. As an interim step, however, it will have a timely effect on tax revenues and our financial preparedness. It will serve to restrain inflationary forces generated by increased defense expenditures. Without this action, we would face very substantial deficits before any additional taxes could begin to be collected.

In addition to increasing revenues, enactment of the revenue legislation I am recommending would improve the soundness of our tax system. The loophole-closing provisions of the pending bill will strengthen the tax structure and make it more equitable. This is particularly desirable in view of the higher tax rates in prospect, which would surely increase the incentive to exploit present tax loopholes. Moreover, the corporate income tax structure will be substantially improved by eliminating the present "notch" rate, which bears heavily on smaller corporations. This will moderate the effect of increased rates on business incentives.

I believe that prompt interim legislation along these lines will provide tangible evidence of our determination to conduct our national finances in a sound manner, consistent with the national effort we are required to make. It will also be a major step toward preventing inflation during the time necessary to develop a carefully balanced tax program suited to our longer-range requirements. I expect to transmit further recommendations to the Congress concerning a more comprehensive tax program when we have additional information on the extent of our needs.

I am grateful for your cooperation in working out arrangements for the prompt consideration of these interim proposals. I earnestly hope that they will be favorably acted upon by the Congress at an early date.

I am sending a copy of this letter to the Chairman of the Ways and Means Committee of the House of Representatives, who, as you know, participated in working out the procedure for prompt action recommended in this letter.

Very sincerely yours,

HARRY S. TRUMAN

[Honorable Walter F. George, Chairman, Committee on Finance of the United States Senate, Washington, D.C.]