Federal Taxes and Defense Financing

Report Outline
Plans for new Defense Loans and Taxes
Receipts, Expenditures, and Public Debt
Federal Tax Legislation Under New Deal
Problem of Financing Defense Program
Special Focus

Plans for new Defense Loans and Taxes

Complementing its appropriation of unprecedented sums for expenditure on national defense, Congress in the summer and autumn of 1940 passed two tax bills calculated to yield, when in full effect, approximately $2,000,000,000 of additional revenue annually. Despite this action, Congress will be obliged, in view of the magnitude of defense expenditures already authorized and the prospect of still heavier defense spending in the future, to levy additional taxes at the next session. Since President Roosevelt has made known his firm opposition to imposition of a general manufacturers' sales tax, which it has been estimated could be made to raise $800,000,000 a year, it is assumed the new revenue will have to be obtained for the most part from increases in the rates of existing taxes, supplemented possibly by such comparatively small sums as may be obtained by withholding tax exemption from future issues of government securities.

Following a meeting of the President with congressional framers of revenue legislation, November 29, it was reported that the administration was giving serious consideration to a fiscal program of which the principal features would be: (1) Segregation of rearmament expenditures, exclusive of normal outlays for the Army and Navy, in a separate defense budget; (2) prompt balancing of the regular budget through increased taxes and economies; (3) raising of the debt limit by an amount sufficient to provide for all probabla borrowing necessitated by the defense program; and (4) imposition of special defense taxes to amortize all defense borrowing over a definite number of years. It is suggested that, under this scheme, the first tax bill submitted at the new session would be limited to levies needed to balance the regular budget. Taxes to amortize defense costs would be deferred until the Treasury had had time to review the revenue possibilities of the new excess profits tax, imposed by the Second Revenue Act of 1940, in the light of the returns to be made March 15. 1941.

The principle of restricting new federal borrowing, under an expanded debt limit, to the specific purpose of financing defense expenditures, and of earmarking the proceeds of special defense taxes for retirement of the additional loans, was recognized in the First Revenue Act of 1940. Its application to the whole defense program now getting under way would tend to place its financing on an orderly basis. In addition, restriction of additional borrowing authority to defense would have the effect of compelling a balancing of ordinary receipts and expenditures, since the government's power to borrow for general expenditures has already been virtually exhausted.