Special Message to the Congress Recommending Tax Legislation.

To the Congress of the United States:

When this Administration took office four months ago, it inherited a critically unsound state of financial affairs. The federal budget was unbalanced by 4 billion dollars in the fiscal year 1952; the estimates of the outgoing Administration indicated a further deficit of 5.9 billion dollars in the current fiscal year, and a still larger deficit of 9.9 billion dollars in the fiscal year 1954. Moreover, the estimate of the former Administration left on hand for the end of this fiscal year 81 billion dollars of unspent appropriations; in effect 81 billion dollars of bills which would fall due and have to be paid by the new Administration.

In addition, revenues appear to have been over-estimated by the former Administration to the extent of at least 1.5 billion dollars in the fiscal year 1953 and about 1.2 billion dollars in the fiscal year 1954. These over-estimates will have the effect of increasing the deficits already indicated for both of these years.

In addition to that, the present tax laws contain certain provisions which will soon begin sharply to reduce Government revenues. These tax reductions will reduce annual revenues by an estimated 8 billion dollars. Only 2.1 billion dollars of this loss fails in the fiscal year 1954. But the full effect falls in 1955-the latter being the first year for which the budget will be prepared by the incoming Administration. The fact is that in 1954 and 1955 we reach the peak of expenditures caused by earlier appropriations and programmed and contracted for expenditure at the same time Government revenues are sharply reduced. These simple facts highlight the problems we have faced in trying to bring prudence and foresight into our budgetary planning.

Despite these problems we have made real progress in attempting to straighten out our financial affairs. Our first effort was a prompt review of the outgoing Administration's budget recommendations for the fiscal year 1954- We have thus far succeeded in reducing those recommended requests for new appropriations by about 8½ billion dollars, an amount equivalent to over fifty dollars for each man, woman and child in the Nation.

Expenditures in the fiscal year 1954 cannot immediately be reduced by the full amount of this 8 1/2 billion dollars, because a large part of the 1954 expenditures will be for the payment of obligations incurred by the Government in previous years. However, the reductions made in requested appropriations will eventually lead to a saving of the full amount. Some of this saving will be reflected in lower expenditures in 1955 and later years as well as in 1954.

Expenditures by the previous Administration in 1954 were estimated at 78.6 billion dollars. They now are estimated at 74.1 billion dollars, 4.5 billion dollars less than had been planned. We intend to continue our efforts to reduce Government spending and to put the Nation's financial affairs on a sound basis. These objectives will be pursued in our everyday operations and will chart our course in every budget this Administration transmits to the Congress.

Almost 73 percent of our spending in 1954 will be for national security purposes, mostly for our own military services, international programs, and atomic energy. Another 15 percent will be for interest and veterans' programs, largely fixed costs brought about by past wars. The remaining 12 percent has already been substantially trimmed, and further reductions are under study.

To reduce expenditures enough to balance the 1954 budget would require more drastic curtailment of our national security programs than we can safely afford in today's troubled world. These programs will be continually reviewed in light of the world situation, our international commitments, and the need for economy and prudence in all Government operations. Substantial reductions have been made already. We are working hard to increase them within the framework of the Administration program.

Against the foregoing revised expenditure estimate of 74.1 billion dollars, net revenues for the next fiscal year are now estimated at 67.5 billion dollars, if all of the reductions in taxes authorized under present laws take place. This would leave a deficit of 6.6 billion dollars.

Receipts for the current fiscal year ending on June 30 will be at an all-time high level. Nevertheless, they will probably fall short of the estimate made in the January budget message of the prior Administration by 1.5 billion dollars, perhaps even more. With the large collections at the end of June, a margin of error of several hundred million dollars must be allowed for even at this late date, but it is clear now that the earlier estimate was too high.

In view of recent experience with collections, the estimate of receipts for the next fiscal year, made early last January by the past Administration, is now revised downward by 1.2 billion dollars. The new estimate is made on the assumption that employment and business will continue at a high level, but in the interest of prudence some relaxation of the extremely high rates of activity now existing is allowed for.

Because of the reduced estimates of receipts, the deficit for the next fiscal year, which the past Administration projected at 9.9 billion dollars, would rise to 11.1 billion dollars if expenditures were not curtailed. With the economies in expenditures which I have recommended, the projected deficit would be brought down to 6.6 billion dollars in the conventional or administrative budget. The deficit on a cash basis, that is, after adjusting for the retirement reserves and other special accounts, would then be 3.3 billion dollars.

The above estimates are based on the assumption that the reductions in tax rates will take effect as now scheduled under the law. Those reductions would involve a loss in revenue of 2.1 billion dollars in the fiscal year 1954, as follows:

ESTIMATED REVENUE LOSS FROM SCHEDULED TAX REDUCTIONS

[In billions of dollars]

Effective date Fiscal year Full year

Corporation: of reduction 1954 loss

Excess profits tax 7/1/53 .8 2.0

Income tax 4/1/54 2.0

Individual income tax 1/1/54 1.1 3.0

Excise taxes 4/1/54 .2 1.0

Total 2.1 8.0

If no reductions were made in present tax rates, estimated receipts would be 69.6 billion dollars in the next fiscal year, which would exceed those of the current year by 2.4 billion dollars. Even if the scheduled reductions in tax rates go into effect, total receipts are estimated to reach an all-time high, exceeding those of the current year by 300 million dollars.

Nevertheless, tax receipts will apparently fall considerably short of our necessary expenditures during the next fiscal year. In view of this fact I have come to the conclusion that no reductions in tax rates should become effective during this calendar year. I regret this conclusion because I share the widespread feeling that our taxes are generally too high and that some of our tax laws are inherently defective. But facts are facts and I propose that we face them. It seems to me that under the conditions stated here and regardless of the origination of the tax reductions now written in the law, no Administration could acquiesce in their taking place as scheduled unless it was willing to take vigorous action to reduce expenditures sufficiently to bring outlays within available revenues.

The problem of fiscal readjustment is one of timing. Under present conditions of high business activity, coupled with a budget deficit, a tax reduction would not be consistent with attaining the vital financial objective of a sound dollar. I want to see a tax reduction carried out; I want it very much. But I want even more to stop the deterioration of the currency which has been going on for so many years under the unsound fiscal and monetary policies of the past Administration.

As a matter of basic long-term policy, we must look forward to reducing tax revenues as Government expenditures are curtailed. But it is also wise under existing conditions not to reduce receipts any faster than we can cut back on expenditures.

Since an immediate tax reduction would be financially unsound, I submit the following six recommendations for tax legislation by the Congress:

(1) The excess profits tax should be extended as now drawn for six months beyond its present expiration date of June 30. This action seems necessary in spite of the fact that this is an undesirable way of taxing corporate profits.

Though the name suggests that only excessive profits are taxed, the tax actually penalizes thrift and efficiency and hampers business expansion. Its impact is especially hard on successful small businesses which must depend on retained earnings for growth. These disadvantages of the tax are now widely recognized. I would not advocate its extension for more than a matter of months. However, under existing circumstances the extension of the present law is preferable to the increased deficit caused by its immediate expiration or to any short-term substitute tax.

The scheduled expiration of the tax in June would be misleading in its consequences. It would simply mean that the tax would be applied at half the full rate, 15 percent, to all of this year's business income. Therefore its bad effects in penalizing efficiency and encouraging waste will continue through this year in any event. The extension of the tax through December 1953 would maintain the full 30 percent rate for the entire year and would produce a gain in revenue of 800 million dollars in the fiscal year 1954.

(2) The reduction in the regular corporate tax rate from 52 percent to 47 percent, now scheduled to go into effect on April 1, 1954, should be rescinded. A continuation of these extra five percentage points on the corporate tax will bring in about 9 billion dollars a year, about the same amount as will be lost annually by the expiration of the excess profits tax at the end of this calendar year.

Though a 52 percent corporate tax rate is too high for the long run, the budget will not now permit a reduction in both individual and regular corporate tax rates. A reduction in individual taxes must come first, for the benefit of the entire economy.

(3) The increase in the old-age insurance tax from 1 1/2 to 2 percent on both employees and employers, now scheduled to go into effect next January 1, should be postponed until January 1, 1955.

The old-age and survivors trust fund has now reached almost 18 billion dollars. Receipts at present tax rates are currently well in excess of expenditures. The further addition to the fund which would flow from the projected tax increase is not required.

From now on, the old-age tax and trust accounts, while maintaining the contributory principle, should be handled more nearly on a pay-as-you-go basis.

The postponement of the tax increase will reduce the impending tax burden on every covered employee and employer. It will not influence the administrative budget, but it will involve an increase in the cash deficit.

(4) The wide variety of existing excise rates makes little economic sense and leads to improper discrimination between industries and among consumers. Specific proposals for a modified system of excise taxation will be included in the recommendations for tax revisions that will be submitted to the Congress next January.

The reductions in excise taxes, which would take place next April 1 under present law, should be rescinded pending the development of a better system of excise taxation.

(5) I believe that a reduction in personal income taxes can and should be made effective next January 1. This reduction will amount to about 10 percent on the lower and middle incomes, graduating down to between one and two percent on the highest brackets. While this reduction is in accordance with existing law, it would have been impossible to accomplish on the basis of the previous Administration's budget without additional deficit financing with its resultant inflationary pressures. A reduction will be justified next January only because of reductions in proposed expenditures which the present Administration has already been able to make and because of additional economies we expect to achieve in the future.

While this Administration will spare no effort to effect further economies, large-scale success in that effort will depend on some easing of the tension that besets the world today. Should this improvement fail to come about and thereby prevent significant further economies, I shall find it necessary to make recommendations for alternative sources of revenue. However, if we are able to follow without interruption the course we have marked out, a balanced budget will be in sight and the much-needed tax relief will be a sound financial measure.

(6) As you know, the Ways and Means Committee of the House of Representatives is currently engaged in a comprehensive re-examination of the existing tax structure. To help achieve this objective, I have asked the Secretary of the Treasury to present by the end of the year recommendations to remove existing inequities of our tax structure, simplify the needless complications which have developed over the years in tax laws, and generally secure a better balance of tax revenues. The analysis in the Treasury is being made in close cooperation with the appropriate Committees of the Congress and their staffs.

The Treasury must be assured of adequate revenues to finance necessary expenditures for national security and other essential purposes. At the same time, we must develop a system of taxation which, to the greatest extent possible, will not discourage work, savings and investment, but will permit and encourage initiative and the sound growth of our free economy.

A recapitulation of the budget position for the next fiscal year is given below, showing the effects of the revisions and recommendations which I have made in this message:

BUDGET OUTLOOK FISCAL YEAR 1954

[In billions of dollars]

Budget ex- Budget Deficit ad- Deficit cash

penditures receipts ministrative

January budget, past Administration 78.6 68.7 9.9 6.6

Revisions in estimates --4.5 --1.2 --3.3 --3.3

Revised budget, with scheduled tax

reductions 74.1 67.5 6.6 3.3

Effect of recommended changes in taxes

from rates now scheduled to become

effective 1.0 --1.0 1 --.5

Revised budget 74.1 68.5 5.6 2.8

The Administration has begun the heavy task of putting the federal government's fiscal house in order. It is moving vigorous!y to reduce expenditures with due regard for the needs of national security. I am making the above tax recommendations in the conviction that they are prudent and sound. I commend them to the earnest attention of the Congress.

DWIGHT D. EISENHOWER