The year 1940 saw spectacular developments in the field of public finance in this country, growing out of war conditions. Such developments were spectacular not merely for what happened during 1940, but much more so because of what they portend for the future. The world war has resulted in the embarkation by this country upon a program of national defense and taxation, the ultimate size of which defies reliable estimate. During the fiscal year ended June 30, 1940, actual net receipts and disbursements of the Federal Government, excluding social security receipts and payments, amounted to $5,386,000,000 and $8,998,000,000, respectively. The deficit for the year was thus $3,612,000,000, as contrasted with the original budgetary estimate in January 1939 of $3,326,000,000. The increased deficit was due almost entirely to the fact that receipts were less than expected, since aggregate disbursements were almost exactly what had been anticipated.
The National Debt.
The gross Federal debt on June 30, 1940, totalled $42,968,000,000, an increase of $2,528,000,000 for the fiscal year; fully guaranteed obligations of Federal agencies stood at $5,528,000,000, an increase of only $78,000,000. Corresponding figures for debt and guaranteed obligations at the end of October 1940, were $44,137,000,000, and $5,810,000,000, respectively.
National Budget.
The budget message of January 1940, covering the fiscal year ending June 30, 1941, estimated net receipts of $5,548,000,000 and expenditures of $8,424,000,000. This would result in a deficit of $2,876,000,000 which it was expected would be met to the extent of $700,000,000 by the return to the treasury of surplus funds of various government corporations. The estimated expenditures included a regular appropriation for national defense of $1,540,000,000, the largest in our history since 1920, and an additional emergency appropriation for the same purpose of $300,000,000. The President, however, accompanied his budget message by a request for additional taxes sufficient to cover the emergency defense estimate of $300,000,000, as well as a similar item of $160,000,000 spent in the previous year. This would further reduce the estimated deficit to $1,716,000,000.
National Defense.
Developments in the war in Europe, culminating in June in the declaration of war by Italy and the surrender of France, resulted in an overwhelming demand in this country for a defense program on a scale unprecedented in peace time. In furtherance of this defense program huge sums were requested by the President and appropriated by Congress; the staggering total of such appropriations during 1940 amounted to approximately $17,000,000,000. This figure, moreover, will undoubtedly be substantially increased as additional defense requirements arise from time to time. The President's lease-lend program for supplying armaments to Britain may add additional billions to the sums to be raised by the United States Government.
Of course, only a small part of the $17,000,000,000 just referred to will actually be spent in the current fiscal year. Treasury estimates last August indicated that it was expected that defense expenditures in the current fiscal year would total about $5,000,000,000 as contrasted with the original provision for a total of $1,840,000,000. The current lag in expenditures throws some doubt upon whether the $5,000,000,000 figure will be reached, but, if it is, the estimated deficit for the current fiscal year will be increased by more than $3,000,000,000, with tremendous deficits to be expected in subsequent years.
Financing the Defense Program.
The question of how best to finance the defense program is one of the most important problems confronting the country. The two possibilities are, of course, taxation and borrowing. Undoubtedly both will be used, but the proportionate reliance to be placed upon each is a matter upon which opinions differ widely.
There is already an indication that taxation increases are to be relied upon to an appreciable extent. Two important tax measures were passed by Congress in 1940, and further tax increases seem to be expected in the near future. There is some feeling that further taxes should not be levied until more reliable estimates of the productivity of present tax laws under the existing condition of a rapidly rising national income are available. The most important provisions of the first Revenue Act of 1940, signed in June, were as follows: (1) for individuals, personal exemptions were reduced by one-fifth, sur-taxes were substantially raised for incomes between $6,000 and $100,000, and a special levy of 10 per cent of the amount of the tax due was imposed for the next five years; (2) for corporations, rate increases were small but were superseded by those of the second Revenue Act of 1940; (3) miscellaneous provisions included a 10 per cent increase in estate and gift taxes, broadening of admission taxes, increase in alcoholic beverage and tobacco taxes, and an increase in the debt limit from $45,000,000,000 to $49,000,000,000.
The second Revenue Act of 1940, signed in October, increased the normal tax rate on corporate income from the 19 per cent of the first Revenue Act to 24 per cent. More important, it levied a high rate of taxation on excess profits, the rate rising to 50 per cent on such profits in excess of $500,000. Excess profits were those in excess of either the 1936-39 average or 8 per cent on invested capital, whichever base the corporation might choose. It has been estimated that the two tax measures together should give an annual yield of about $2,000,000,000, though this figure will increase as the national income increases.
The raising of funds by the government through sale of securities was facilitated by the fact that interest rates, which were already very low at the close of 1939, declined further during 1940 to reach in November the lowest levels in history. Long-term United States treasury bonds sold during that month at a price to yield 1.94 per cent as compared with a figure of 2.35 per cent in December 1939. The highest annual interest rate paid during the year on the weekly $100,000,000 offering of 91-day treasury bills was less than one-tenth of one per cent, and in nine weeks of the year such new offerings sold at a premium instead of a discount. Higher taxes, removal of tax exemption on new issues of government bonds, and increased Federal Reserve control over the credit system of the country seemed likely at the close of the year. See also TAXATION; UNITED STATES: National Defense.
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