The High Cost of Morgenthau

Dour, diffident Henry Morgenthau Jr. sat in the House Ways & Means Committee room one morning last week munching raisins. Beside him also munching raisins sat his chief tax expert, small, dun-colored Randolph Paul. Now & then they both drank water from a cone of paper cups piled beside a big water jug, while a battery of grey young Treasury experts, without benefit of raisins and water, periodically scrabbled for documents in accordion-sized brief cases. Morgenthau & Co. needed their vitamins: they had been up most of the night before, putting the finishing touches on the Treasury’s recommendations for the 1944 tax bill. They had missed their breakfasts, too.

Almost before the Secretary had finished reading his prepared statement, the U.S. Treasury’s design for extracting another $10,500,000,000.00 from the U.S. pocketbook was mackerel-dead. Cried Democrat Robert L. (“OF Muley”) Doughton, head of the Ways & Means Committee: “Utterly indefensible.” Cried Republican Harold Knutson: “How much of it is for revenue and how much is for politics?”

Henry Morgenthau’s failure was that he did not clearly define the fiscal problem that the U.S. faces—or show how that problem forced any particular tax solution on the country.

Thus his answer to the unstated probrlem was too unpalatable for Congress to swallow. He did not demonstrate that this was the best possible solution—and not politics.

Simplification. Actually there were several good points in the Treasury proposal. One of the great burdens of the tax system is that most taxpayers now must calculate and pay three separate Federal income taxes—the Victory tax, the normal tax and the surtax, each of which has a different set of exemptions and deductions. The Treasury proposed one consolidated income tax, in effect, by eliminating the Victory tax and the earned-income credit.

Painful Money. What made the Morgenthau proposals unpalatable was that they called for raising the total tax take on a married man’s income from 13½% to 20% on a $3,000 income, from 18% to 28% on a $5,000 income, from 25% to 39% on a $10,000 income and so on up. This would up personal income taxes by $6.5 billion.

These drastic increases would have been hard for Congress to take at any time. But the Secretary then muddied up the case for them. He declared: 1) the “dangerous dollars” in the hands of U.S. consumers with too few goods to buy were one of the chief reasons for drastic taxes; 2) “four-fifths of all the income of the Nation is going to people earning less than $5,000 a year” (and 65% of it to the $3,000-and-under brackets). Yet he proposed to lower the Federal taxes now assessed against most of those “dangerous dollars” by eliminating the Victory tax and proposing postwar refunds chiefly applicable to the low-income groups. The otherwise desirable elimination of the Victory tax would, under the Treasury’s plan, give a tax-free ride to 9,000,000 taxpayers from these low-income groups. (Total taxpayers now: 44,000,000.) The new postwar credits would ease the load for another 14,000,000.

Later in the week, when ex-Congressional Tax Expert Fred Vinson, now stuck with the job of Economic Stabilizer, appeared to urge the same program, he submitted figures that dramatically underlined this Administration paradox:

Share of total U.S. Share of tax bill Income Bracket Income after Taxes for each Group $ 0-3,000 65.2% 26.0% 3,000-5,000 19.5% 26.4% 5,000-10,000 8.6% 20.5% Over $10,000 6.7% 27.1%

The Morgenthau answer to inflation was not to tax the income groups that hold most of the new inflationary money.*

Dangerous Money. Even the Treasury’s chief proposal for taking some of the “dangerous dollars”—higher excise taxes —raised a rumpus. The Treasury asked for $2.5 billion from increased excises on liquor, tobacco, furs, candy, etc.

Just Money. For the rest of its hoped-for billions, the Treasury suggested: 1) $400,000,000 more from estate and gift taxes; 2) $1.1 billion from raising the normal tax and surtax rate for corporations from 40% to 50% for companies with net incomes of over $50,000 a year. Nobody squawked much at this: neither corporations nor dead men vote. But these taxes are no solution of the inflation problem.

Of the Treasury’s proposed $10.5 billion in new taxes, only about one quarter (chiefly excise taxes) were aimed at the pocketbooks which hold most of the new inflationary money. Even for Henry Morgenthau, this was an extraordinary lack of political courage. And his proposal naturally gave fresh excuses to those who often accuse him of planning even wartime fiscal measures toward the redistribution of wealth rather than toward making economic sense.

Quick Money. At week’s end the Congress’ most important tax man stepped into the problem of trying to strike this delicate balance. This was Georgia’s Senator Walter F. George (TIME, July 19), chairman of the Senate Finance Committee. As the man who will bear major responsibility for the new bill—and as one who hopes to get a bill by Christmas—Senator George now spoke up for the sales tax, main quick source of revenue yet untapped. With the Administration so far violently opposed to the sales tax, which would clip every voter exactly when it hurt most, this now loomed as the tax issue of the year. The public got ready for a battle that might out-rumble the Ruml Plan fight of last session.

If the sales tax is political dynamite, then, like dynamite, its explosion may be along the line of least resistance. That this line may lead to a popular demand for the sales tax itself was the clear implication of a FORTUNE Survey finding released this week. Asked by FORTUNE: “If the Government needs to increase taxes, which would you personally prefer: to increase the withholding tax on your salary or to put sales taxes on all things you buy?” 52.3% of the public plumped for a sales tax, only 33% for a greater withholding tax. The preference was maintained on all economic levels.

* The suggested maximum rates for the few U.S. citizens in the veryhigh income brackets would mean that those who live in states with incometaxes like New York’s would end the year owing money for the privilege of living.