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basis and how much by borrowing. Only very drastic and restrictive taxation which curtails consumption would finance defense wholly on a pay-as-you-go basis. I fear that such taxation would interfere with the full use of our productive capacities. We have a choice between restrictive tax measures applied to the present national income and a higher tax yield from increased national income under less restrictive tax measures. I suggest, therefore, a financial policy aimed at collecting progressive taxes out of a higher level of national income. I am opposed to a tax policy which restricts general consumption as long as unused capacity is available and as long as idle labor can be employed.

We cannot yet conceive the complete measure of extraordinary taxes which are necessary to pay off the cost of emergency defense and to aid in avoiding inflationary price rises which may occur when full capacity is approached.

However, a start should be made this year to meet a larger percentage of defense payments from current tax receipts. The additional tax measures should be based on the principle of ability to pay. Because it is the fixed policy of the Government that no citizen should make any abnormal net profit out of national defense, I am not satisfied that existing laws are in this respect adequate.

I hope that action toward these ends will be taken at this session of the Congress.

I see many ways in which our tax system can be improved without resort to restrictive tax levies. By adjustments in the existing tax laws the present rates of progressive taxation could be made fully effective, as I believe the Congress intended.

We must face the fact that the continued maintenance of an expanded Army and Navy and the interest on our defense debt will call for large Federal expenditures in the years ahead. Our tax system must be made ready to meet these requirements.

I am as much concerned about our long-run need for an improved tax system as I am about the immediate necessity of financing the defense program.

I have often expressed my belief that no really satisfactory tax reform can be achieved without readjusting the Federal-State-local fiscal relationship. I urge a thorough investigation of the possibilities of a comprehensive tax reform; I propose that meanwhile we make all possible progress in improving the Federal tax system.

Borrowing.--A substantial part of the defense program must, of course, be financed through borrowing. Individual investors will be given increased opportunities to contribute their share toward defense through the purchase of Government securities. Such borrowing is not hazardous as long as it is accompanied by tax measures which assure a sufficient tax yield in the future. This raises the question of the debt limit. The Congress, by making appropriations and levying taxes, in fact, controls the size of the debt regardless of the existence of a statutory debt limit. If the Congress, subsequent to the establishment of a statutory debt limit, makes appropriations and authorizations which require borrowing in excess of that limit, it has, in effect, rendered that prior limit null and void. In the first 130 years of our national life, the Congress controlled the debt successfully without requiring such a limit. In view of these facts, I question the significance of a statutory debt limit, except as it serves as a fiscal monitor.

The fiscal policy outlined here would be in accord with our objective of financing the defense program in an equitable manner, facilitating full use of our national resources, and avoiding inflationary policies which would aggravate the problems of post-defense adjustment.

The debt problem.-For more than 25 years the world has been in a state of political turmoil and its economies have been out of balance. This world condition is reflected in unbalanced budgets in all countries. Here, the first World War, the war against the depression, the present defense program, all resulted in large additions to the Federal debt.

I understand the concern of those who are disturbed by the growth of the Federal debt. Yet the main fiscal problem is not the rise of the debt, but the rise of debt charges in relation to the development of our resources.

The fight for recovery raised national income by more than 30 billion dollars above the depression depth. In the same period the total annual Federal interest charges increased by 400 million dollars. Even if these interest charges increase, they can scarcely present a serious fiscal problem so long as a high level of national income can be maintained.

Investors are fully aware of this fact. The bonds of the United States Government are the safest securities in the world because they are backed by the best asset in the world--the productive capacity of the American people. Our tax burden is still moderate compared to that of most other countries.

It should be borne in mind that our national debt results from wars and the economic upheavals following war. These conditions are not of our own making. They have been forced upon us. The national debt of almost all nations would be far lower today if competitive armaments had not existed during the past quarter of a century. If this war should be followed, as I hope it will, by peace in a world of good neighbors, then the complete elimination of competitive armaments will become possible. Only in such a world can economic stability be restored.

If a high level of economic activity can be maintained during the defense period and—what will be a more difficult task-maintained in the post-defense period, then the fiscal needs can be readily met.

The Budget of the United States presents our national program. It is a preview of our work plan, a forecast of things to come. It charts the course of the Nation.

The necessity for loading the present Budget with armament expenditures is regretted by every American. A wry turn of fate places this burden of defense on the backs of a peace-loving people.

We can meet the demands of armament because we are a people with the will to defend and the means to defend. The boundaries of our productive capacity have never been set.

The whole program set forth in this Budget has been prepared at a time when no man could see all the signposts ahead. One marker alone stands out all down the road. That marker carries not so much an admonition as a command to defend our democratic way of life.

FRANKLIN D. ROOSEVELT.

JANUARY 3, 1941.

GENERAL BUDGET SUMMARY AND SUPPORTING SCHEDULES

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