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Special Message to the Congress Recommending a "Pay as We Go" Tax Program

February 2, 1951

To the Congress of the United States:

In the January messages to the Congress, I stated my intention of making further recommendations on a number of important matters. One of the most urgent of these is the need for increased taxation.

The budget for the fiscal year ending June 30, 1952, which was transmitted to the Congress, included estimated expenditures of 71.6 billion dollars, and estimated receipts under present tax laws of 55.1 billion dollars.

It is my firm conviction that we should pay for these expenditures as we go. A balanced budget now is just as important a mobilization measure as larger armed forces, allocations of basic materials, and controls over prices and wages.

This is true for three main reasons.
First, we should pay as we go because that is the way to keep the Government's finances on a sound footing.

We are now strengthening our national security, in order to increase our ability to meet whatever situation may arise in the future. Our Government financial policies, like every other part of our national effort, must be designed to leave us stronger, not weaker, as the years go by. If in this period we pay for our necessary expenditures as we go along, rather than adding to the public debt, we will obviously be better prepared to meet our future needs whatever they may be.

There is a question as to how high we can push taxes without having serious effects upon the productive growth of our economy. But I am sure that we could increase Federal revenues by considerably more than enough to cover the expenditures now anticipated without reaching those limits. During recent years we have taxed ourselves at high levels--and during those years our economy has bounded forward: incomes have risen rapidly, new plants and industries have sprung up, and the standard of living of our people has increased steadily. The growth in the strength of our economy that has occurred under these tax rates gives us confidence that we can safely pay the estimated expenditures for the next fiscal year out of taxes.

Second, we should pay for defense as we go because that is the way to distribute the cost of defense fairly.

We cannot escape paying the real cost of defense now--the cost in materials and days of work that are devoted to defense purposes. Whatever we do about taxes, the amount of goods available for consumers to buy is only going to be what is left over after defense needs are met.

We could try to escape the financial cost of defense by borrowing--but that would only transfer the financial problem to our children, and would increase the danger of inflation with its grossly unfair distribution of the burden.

The sensible and honest thing to do now is to tax ourselves enough, as we go along, to pay the financial costs of defense out of our current income.

Our Federal tax system can spread the cost of defense fairly among our people. There are many ways in which the fairness of the present tax system can and should be improved, but on the whole we have a good system. It recognizes differences in incomes and in family obligations. It protects incentives for initiative and effort. It takes account of the special needs of new undertakings and the expansion of existing businesses.

I am convinced, after studying the matter thoroughly, that the people of our country-and I am thinking primarily of the average family of modest income--will all be better off if everybody pays his fair share of the financial costs of defense in taxes now. If we don't do that, we will only be putting off the evil day, and making matters worse for ourselves in the future.

Third, we should pay as we go to help prevent inflation.
If we do not tax ourselves enough to pay for defense expenditures, the Government will be spending more than it takes in, and the extra money it spends will add to total purchasing power and inflationary pressures.

Inflationary pressures will be strong, of course, even with the budget balanced. Military production results in wage payments, and buying of materials, long before the goods are produced and paid for by the Government. Businessmen who build new plants spend money well in advance of producing any goods for the Government or consumers to buy. Furthermore, consumers have accumulated large amounts of cash and other liquid assets which they are free to spend if they so choose.

Thus, inflationary pressures will be strong even after taxes are increased enough to balance the budget. We will still need direct controls over prices and wages. But it may not be possible to make those controls effective unless we tax ourselves enough. Certainly, those controls will be far more effective if we pay for expenditures through taxes as we go along.

During World War II, taxes were not high enough, and the Government was forced to borrow too much. As a result, when controls were taken off after the war, prices skyrocketed and we paid in inflation for our failure to tax enough. The value of people's savings was cut down by the higher prices they had to pay.

We must not let that happen now. We must have both an adequate tax program and proper controls on prices and wages if we are to prevent inflation and preserve the value of savings and fixed incomes.

For these reasons, the case for a pay as we go tax program is conclusive at the present time, and I urge the Congress to continue to keep that goal before it.

I believe that the wisest and most practical approach to this goal is to enact the tax program we need this year in two parts rather than enacting the full tax program all at once.

Government expenditures will be increasing very rapidly during the next few months. We will have to act fast if our revenues are to keep pace with rising expenditures.

I recommend that as rapidly as possible the Congress enact revenue legislation to yield additional taxes of at least 10 billion dollars annually, and later in the year enact the remaining amounts needed to keep us on a pay as we go basis.

If we follow this course, our revenues will keep pace with increasing expenditures, and we shah have some months in which to observe economic developments and to consider the several serious questions that will need to be resolved before all parts of this year's tax program are enacted.

For example, we will have better information on exactly how much we shall need to balance the budget. As I explained in the Budget Message, our estimates of military expenditures are still tentative. In particular, the amount we spend for military equipment will depend on how fast the production lines are geared up and the equipment is actually turned out. If our military production program can be got under way faster-as we hope it can--expenditures will, of course, be larger than the budget estimates.

Moreover, the Congress has not yet had an opportunity to act on the budget. I believe the Congress will find that the budget is sound, and provides only for the essential needs of our Nation in this time of world crisis. Nevertheless, the appropriations actually enacted by the Congress will, of course, control the actual expenditures.

Furthermore, the economic developments of the months ahead--the impact of the defense effort and of tighter controls on prices and wages and profits--should be considered before the balance of our tax program for the coming fiscal year is completed.

These uncertainties, however, do not affect our obvious need for much larger taxes--and our need for the bulk of them very soon. I am therefore transmitting, for the consideration of the Congress at this time, my recommendations as to the best way to raise at least 10 billion dollars now.

I know the Congress will want to consider these problems very carefully, and to review my recommendations in the light of their own independent analysis. The Secretary of the Treasury is prepared to discuss these matters in detail with the committees of Congress.

I believe we should meet our immediate objective by increasing existing taxes. The present Federal tax structure, while marred by imperfections, contains the most equitable types of taxes we have been able to devise. Under these taxes, our economy has demonstrated a surge in productive power to increasingly higher levels.

I recommend an immediate increase in personal income taxes to bring in 4 billion dollars in additional revenue.

The personal income tax is the mainstay of our Federal tax system. It should be the major source of the additional revenue we need.

This is true because it is the personal income tax that allows us the greatest opportunity, to be fair. It is the personal income tax above all else which takes account of differences in ability to pay--both differences in income and differences in family obligations. It allows an exemption of $600 per person, and deductions for charitable contributions, extraordinary medical expenses, and other expenses as provided by law. Under present law, a single person earning a net income of $3,000 a year pays a tax of about 16 percent of his income, or $488, while a married person with two dependents and earning the same net income pays a 4 percent tax, or $120. The average rate of tax reaches 50 percent at about the $45,000 income level for a single person and the $90,000 income level for a family of four.

In increasing the yield of the personal income tax, everyone should realize that the higher taxes cannot be limited to the upper income groups. To obtain revenue commensurate with our defense expenditures, all taxpayers must contribute, because the bulk of the income in this country is received by persons whose incomes are between $2,000 and $10,000 a year. We should tax the upper income groups--and tax them heavily--but it will also be necessary to tax people with moderate incomes.

I do not believe that the personal exemption of $600 should be lowered at the present time. Although the exemption was $500 during World War II, the present $600 exemption is less generous, in terms of present costs of living, than was $500 six or eight years ago.

I recommend, second, an increase in corporation income taxes to yield an additional 3 billion dollars.

The corporation income tax is the major supplement to the personal income tax in our present Federal tax system. Basic corporation tax rates now begin at 25 percent on corporation profits less than $25,000, and increase to 47 percent for larger corporations. Those corporations covered by the excess profits tax pay more--up to a maximum set by law of 62 percent of net profits.

In the light of high and rising corporate profits, the increase in corporation taxes I propose will leave corporations generally able to maintain the dividend and reinvestment policies of recent years.

The first tax returns under the new excess profits tax law will be received later this spring. We shall then be in a position to consider what changes in the excess profits tax law are desirable to obtain more revenue from that source. I believe, therefore, we should defer this matter until later this year.

I recommend, third, increases in selective excise taxes to yield 3 billion dollars. Under present circumstances, these increases should be concentrated upon less essential consumer goods, and upon goods which use materials that will be in short supply.

In addition to the tax increases recommended above, I recommend that the Congress carry further the program it started last year to close loopholes in the present tax laws.

The revenue to be gained by closing these loopholes is not large in comparison with our needs. But in terms of fairness, and willingness of people to pay their share of taxes, closing these loopholes is worth a very great deal.

Those required to bear higher taxes for defense are entitled to the assurance that others will not be permitted to avoid them. The last Congress closed several important loopholes. But a number remain.

I have previously called attention to the gross under-taxation of the oil and mining industries, to the broad loopholes in the estate and gift taxes, and to the undue preferential treatment granted to capital gains in comparison with ordinary income. I urge the Congress to examine these provisions of the law very carefully, together with those relating to life insurance companies and to holders of securities now exempt from income taxes, and to review the tax status of organizations now exempt under present law. I do not believe any of us, in good conscience, can take action to increase taxes on the man, with a wife and two children, who earns $60 a week--an increase I am now recommending--without at the same time taking action to reduce the glaring inequities in present law--some of which permit a man with one hundred times as much income to avoid paying any taxes at all.

In addition to the changes in the law that are needed to close loopholes, we shall continue to improve our enforcement efforts to make sure that the taxes which are due under present laws are actually paid.

The tax program I am proposing will require higher rates in some cases than those paid during the last year. I believe our people understand that if we had paid higher taxes then we would be better off today. I believe our people are ready and willing to pay the taxes needed to cover essential Government expenditures in this time of danger.

I am convinced that the average citizen in our country will be best served by fair tax laws which will balance the budget. He will be better off now, because he will pay his share of the cost of defense now, once and for all. He will be better off in the future, because his savings and his future income will not be dissipated by inflation.

The American people understand that the cost of freedom is high at a time when aggression has been loosed on the world. I urge the Congress to act rapidly so that we can pay that cost as we go.
HARRY S. TRUMAN

NOTE: For a statement by the President upon signing the Revenue Act of 1951, see Item 264.