The High Cost of Morgenthau

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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.