Madison County Democrat. (London, Ohio) 19??-1958, 1950-11-17

Trade Economist, Federal Reserve
Bank of Cleveland
II is practically q foregone con-
clusion that Federal taxes will
be further increased. As Con-
gress reconvenes, one Of the ma
jor questions viii be the over
all amount of the increase, as we'll
as the eyer-present question as
TO where the taxes will fall and
how the burden win be shared.
The reasons why taxes are
headed higher are understood by
the American public i'm a broad
and general way, but some as
poets of the explanation still need
clarifying. It might be thought
that the reason why taxes are
slated for increase is simply that
the government must raise funds
to pay for the substantial rear
mament which is now in progress.
However, because of the rather
complex way in which modern
government acquires and spends
its funds, this is far from the
complete explanation, AS a mat
ter of fact, the underlying en-
phasis at present is not so much
on the governments need for
funds (true as this is) as on the
desirability of using the tax in
strument to drain funds from
civilian buyers in order to head
off serious initiation This pro-
cedure, under certain eircumstan-
ces, is recognized as an entirely
legitimate and proper use of the
tax power
The situation comes about as
follows: As the government is now
in process of approximately
doubling its rate of defense ex-
penditures over a period of a year,
it spends additional money for
goods and services leading up to
finished products, lie. war goods,
which are not destined for sale
in civilian markets. Total incomes
of consumer and business buyers
are thus enlarged without cor
responding gain in the total of
civilian goods to be bought The
extra funds compete to buy
limited goods, and unless such
funds are drained off or other
wise neutralized, the result is
bound to be higher prices. 1t
should be noted that this is the
primary source of the initiation
ary danger in modern economies
of our type during war time or
during a rearmament program
like the present one. If it could
be imagined that the government
could arrange to buy its defense
materials at half the going mar
ket prices. and to pay workers
in defense plants at half the
going rate of wages, it is obvious
that the problem would not be
likely to arise. The latter type
of procedure, however, is conn
pleteiy out Of the question since
it would Immediately disrupt the
lIGGt G11JGIHIlSE SycASttt.
The problem just raised, which
is basic to the tax question, car
be explained further i'm dollal
terms, provided it is understood
that the estimates are highly
tentative. 1t is anticipated thai
by the second quarter of mex
year, when the defense program il
expected to get into high gear
the total of defense expenditure:
will reach an annual rate of abou
S32 billion expressed at today!
level of prices. Ut is assumed a
the start of the illustration tha
there is no rise in prices simply
in order to lay out the problem
involved in attempting to keep tt
the present price Ievel.) Nov
this annual rate of $32 billion fo
defense is approximately $18 bill
lion higher than the rate of de
fense expenditures during recen
months, lie. the third quarter o
this year. 1t has been estimated
that the available volume of ci
william goods and services, durinj
the second quarter of next yea
viii be no higher than presen
levels, and more likley will fal
short by an annual rate of per
haps ST billion, at todays pric
level. The incomes arising fror
this civilian production woul
also drop by about 81 billior
This would leave about SIT bill
lion (before taxes in additions
private incomes, not matched b
an equivalent increase in the SUP
ply of civilian goods.
The above estimates are draw
from a recent analysis by M
Woodlief Thomas, Economic Ac
wiser to the Board of Governor
of the Federal Reserve System
The figures make allowance fo
increased productivity as well q
greater production efforts tha
at present both in the defens
and civilian sectors of the eC
onomy. The significant point
that after deduction for taxes
applied to the ST billion, eve
at the recently increased rate
there would still be S11 billio
on an annual basis remaining
the hands of consumers and bus
ness, representing addition;
spendable funds not matched b
available civilian goods. The la
-. E.sarn, L. s.l.r,no4sr,ae.e "a Had Il