No adequate conception of the extent to which the public finance of the nation is dominated by the defense program is possible without some realization of the stupendous requirements of that program as well as the rapidity with which its demands have increased.
Some perspective may be gained from realization of the fact that our total national defense expenditures for the years 1917-1920 amounted to about $21,000,000,000, the largest single year's expenditure having been $10,965,000,000 in 1919.
During the fiscal year ended June 30, 1941, actual net receipts of the Federal Government, excluding additions to social security funds and returns of surplus funds from government corporations, amounted to $7,289,000,000, the largest in the history of the United States. The sharp increase in this amount over the estimates contained in the budget message of January 1940 results primarily from two factors: first, additional tax legislation during 1940, and second, a higher level of business activity than had been expected. The gross Federal debt on June 30, 1941, amounted to $48,961,000,000, an increase of about $6,000,000,000 during the year. The figure stood at $57,620,000,000 on December 31, 1941. The President's budget message of January 7, 1942, estimates that the gross debt will stand at $70,612,000,000 by June 30, 1942, and $110,421,000,000 a year later.
Estimates of the receipts of the government, as well as expenses, have been revised sharply upward for the fiscal year ending June 30, 1942. The original estimate in the budget message of January 1941 was $8,275,000,000, but higher taxes and increased business activity resulted in the revision of this figure a year later to $11,944,000,000. On the basis of existing tax legislation, estimated receipts for the year ending June 30, 1943, are $16,487,000,000. The President has requested that additional tax legislation should add $7,000,000,000 to this sum.
The country was staggered in 1940 by defense appropriations aggregating about $17,000,000,000. However, it seems by now to have become somewhat inured to huge figures, and has taken the additional 1941 authorization of more than $60,000,000,000 more or less in its stride. Included in this figure is about $13,000,000,000 appropriated for lend-lease purposes. The nation is confronted by two major problems: first, the raising of the billions required, and second, their expenditure. It is quite probable that the second problem, which is not the concern of this article, may be the more difficult of the two. Ciphers are not bullets and appropriating billions does not automatically provide defense.
The question of how best to finance the defense program is one of the most important problems confronting the country. Aside from the obvious desirability of cutting non-defense expenditure to a minimum, the two possibilities are of course taxation and borrowing. Both will have to be used, but the proportionate reliance to be placed upon each is a matter upon which opinions differ widely. The Secretary of the Treasury has frequently expressed the desirability of meeting two-thirds of the cost from taxation and one-third from borrowing. As a result of the greatly increased financial requirements, the present program seems to be to raise as much by taxes as possible without destroying the economic strength of the nation, and to rely upon borrowing for the balance. The budget estimates for the fiscal year ending in 1943 provide for raising about 40 per cent of total expenditures by taxation, exclusive of additions to the social security fund.
Taxes were increased during 1940 by two tax bills, and were further sharply increased by the tax legislation of September 1941. From the standpoint of the average individual taxpayer the effect of this latter legislation is very serious. Exemptions are lowered from $2,000 to $1,500 for married couples and from $800 to $750 for single persons, thus requiring the annual filing of an estimated 5,000,000 new returns. The effective tax rate in the lowest tax-paying bracket, including both normal tax and surtax, becomes 10 per cent instead of 4.4 per cent, and rates for intermediate income groups are also much higher. Corporation tax rates were likewise substantially increased, as well as excise taxes on a wide range of consumer goods. The estimated revenue to be raised by the new bill was about 50 per cent of total Federal receipts for the previous fiscal year.
As already mentioned, $7,000,000,000 in additional taxes are requested by the President. The administration and Congress have had opposed views on many phases of taxation in recent years. It remains to be seen whether the ideas of Congress or the Treasury will prevail in the tax legislation of 1942. Adequate price control is an essential if the costs of the defense program are to be kept within current estimates. Although it has been considering the matter for nearly six months, Congress seems to have made very little progress towards adequate price regulation. Unwillingness to include wages, or adequate farm price regulation, in the proposed legislation may defeat the purpose of the bill. The sale of defense bonds has been rapidly accelerated in recent months, and this development is an important one from the standpoint both of raising revenue and of diminishing the degree of threatened inflation. The Government's borrowing program is facilitated by the continuation of interest rates at unprecedentedly low levels. State and local government financial problems are playing a distinctly secondary role for the time being. See also BUDGET OF THE UNITED STATES; FINANCIAL REVIEW; INCOME TAXATION; TAXATION.
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