Steve Bank: On July 9, 1942, during a period dominated by rising wages and wartime scarcity, Treasury circulated a proposal for a consumption tax. This proposal was most notable for its graduated spendings tax feature, which would have imposed a surtax on expenditures in excess of $1,000, with rates ranging from twenty percent on spending under $2,000, to seventy-five percent on spending over $10,000. The tax was to be collected by requiring taxpayers to pay on the difference between their income and their savings. According to Treasury Secretary Henry Morgenthau, the purpose was "to reduce consumer spending . . . by creating a strong tax incentive to save."
This proposed tax may sound familiar to those of you who read about the progressive consumption tax proposal Professor Edward McCaffery testified on before the President’s Advisory Commission on Tax Reform earlier this year. Although the World War II-era graduated spendings tax was promoted as a tool to dampen consumer spending and thereby limit inflation, its advocates justified it on broader grounds. Irving Fisher, an economics professor at Yale, testified that it could eventually replace the income tax altogether and thereby eliminate the obstacle to expansion caused by the double taxation of savings and investment.
Despite receiving the support of many academics and some businessmen, the graduated spendings tax proposal faced a "hostile" reaction when it was subsequently discussed before the Senate Finance Committee in September and was quickly rejected. The Washington Post called it "Morgenthau’s morning glory — It opened Tuesday morning and it folded before noon." Senator Harry Byrd said that "[i]t has all the evils and none of the virtues of a sales tax." The Wall Street Journal described it as "an income tax walking about on its hands." Given that Congress later adopted the "Victory tax," which combined a flat rate tax with a deduction for certain forms of savings and investing, it may have been that the progressive rate feature was simply unpalatable to consumption tax proponents and the deduction for savings was simply too broad for income tax proponents.
It will be interesting to see if the modern progressive consumption tax proposal, which again is supported by many academics, will receive a different reception in the tax reform discussions likely to take place in the year ahead.
