If the foregoing reasoning is correct, these conclusions would seem to follow:
1. There ought to be a substantial and progressive increase in the rate of income taxation during the war, together probably with a lowering of the existing limit of income tax exemption. I believe that in practice the best result would be obtained if the rates of taxation were not to exceed a scale producing from maximum incomes an average tax of 33-1/3 per cent., at any rate for the first year of the war.
A materially higher rate would not, in my opinion, yield a substantially higher aggregate of revenue to the Government (if as high an aggregate), while at the same time, if only for sentimental reasons, and even though only applied to very large incomes, it would be apt to cause financial dislocation and r.e.t.a.r.d business activity and enterprise.
It would seem advisable that such portion of a person"s income as is devoted to charitable and kindred purposes should be, if not entirely free from income tax, at least subject to a reduced tax only, so as to counteract the tendency which experience has shown to follow in the wake of heavy taxation, of greatly diminishing charitable contributions.
2. There _ought to be an excess profit tax which might well be at a considerably higher rate than the present 8 per cent., or even the proposed 16 per cent._, but it should only be applicable to the extent that business profits exceed the profits of say a certain average period before the war and thus may justly be held to be attributable to war conditions.
In determining the basis for calculating excess profits, an offset which might be fixed at say 10 per cent. per annum, due consideration being given to the question of depreciation and to special circ.u.mstances, ought to be allowed on all new capital invested in business since the beginning of the war.
I think for the purpose of figuring the excess profit tax the five, four or three years _before America"s entrance into the war_ would probably form the most appropriate basis. The aggregate industrial plant of this country, the entire scale and scope of our commerce and its concomitants, have been so completely modified in the course of the European war that a comparison which leaves out of account the years 1915 and 1916 does not seem to me to fit the case. I believe, both from the point of view of economics and of public opinion, a tax of say 32 per cent. or even 40 per cent., or eventually, if needed, a still higher percentage, calculated on a reasonably high average of earnings (that is, an average including 1916) is preferable to a tax of 16 per cent. or 20 per cent. on an inordinately low average.
I believe that as between the proposed 16 per cent. profit tax and an _excess_ profit tax on the British model, at the rate of say twice that figure--to begin with--the general consensus of opinion would consider the latter as much the fairer, much the less c.u.mbersome to handle and collect, and much the less hampering upon business activities. Yet, statistics seem to show that such an _excess_ profit tax would bring in a far larger return than the proposed 16 per cent. profit tax. From figures which were shown to me it would appear that a 40 per cent. tax on excess profits over and above the average earnings for the past three years would yield for the present year the amazing total of at least $800,000,000 (in addition to the yield from the corporate income tax taken at the rate of 4 per cent.).
These figures are based on the a.s.sumption that the aggregate profits for 1917 will approximately equal those of 1916--a not unreasonable a.s.sumption provided always that unscientific taxation or other unwise measures do not destroy prosperity. (As a matter of fact, the profits for the first half of 1917 are likely to exceed those for the same period of 1916.) The three-year average was selected on the theory that 1914 was an exceedingly poor business year, 1915 was a year of fair prosperity and in 1916 the full effect of our stupendous war business had come to raise profits to an exceedingly high level.
3. There are very numerous forms of taxes, stamp-taxes, etc. (such as, for instance, a 2 cent tax on checks), which, whilst they would mainly fall on the well-to-do, would be in no way burdensome, and would produce a very large aggregate of revenue.
What seems to me in principle a very sensible tax, has been suggested, namely, _a tax on purchases_ (_i.e._, each single purchase) of all kinds of merchandise (excepting foodstuffs, and probably raw material) of one cent for each dollar or greater part thereof, exempting single purchases of less than say five dollars.
This tax, _which should be paid by the purchaser_, would produce a very large revenue. It would be borne mainly by the well-to-do, would be more widely distributed than almost any other form of taxation and would be felt but very little. It would be easily and cheaply collected and would begin to accrue much sooner than most other taxes.
4. I am not convinced that the total amount which needs to be spent or which as a matter of fact can be spent in the course of the year requires so huge a sum to be raised by taxation as our legislators appear to contemplate.
The policy of raising a large portion of war expenditures by taxation is wise and sound. But to be iconoclastic in applying that policy, to make that portion so large as to chill the spirit and lame the enterprise of the country is neither good politics nor good economics.
The present has its rights as well as the future. Sacrifices should be reasonably averaged. An annual sinking fund of 5 per cent. would extinguish the war debt in fifteen years.
5. Democratic England under two Prime Ministers belonging to the Liberal party has shown how huge amounts of increased revenue--much greater relatively and greater even absolutely than are required in this country during the first year of the war--can be obtained by taxation without undue dislocation of the existing economic structure and without banefully affecting the country"s prosperity. While it would not do for us to follow the English method of taxation in all respects, it would seem the part of wisdom for us to profit from her successful experience. And I hope it will not be deemed presumptuous if I venture to suggest that it might not be amiss for our Government in this connection to permit to the practical experience and judgment of business men some recognized scope in the deliberations, as I understand was freely done in England. I am entirely certain that the spokesmen for the business community would give their time, their best thought and their disinterested service to the task of co-operating in devising a wise and fair scheme of taxation as fully, readily and patriotically as they have done and are doing to the task of placing the Liberty Loan.
6. In determining upon the scheme and detail of taxation, it should be borne in mind that the intent of the proceedings is not punitive, neither is it to apply practical Socialism under the guise of war finance.
Taxation is a problem in mathematics and national economics. It cannot be tackled successfully by hit or miss methods, or upon the impulse of the moment. It needs to be approached "_sine ira et studio_" if the best results are to be obtained for the country at large.
Congress and public opinion might well ponder the advice recently cabled here by one of the leading financial writers in England: "You should go slow in your tax plans. Too violent a financial dislocation would be caused, unless taxation is most judiciously and scientifically apportioned."
The desire to place the financial burden incident to war preponderantly upon the wealthy is just and right, but even in doing things from entirely praiseworthy motives, it is well to remember the old French saying, that virtue is apt to be more dangerous than vice, because it is not subject to the restraint of conscience.
Since this article was published, I have received several letters stating that, owing to the excessively high cost of living and for other reasons, men of small means could not afford and should not be asked to bear additional taxation to any appreciable extent and that therefore the proposed vast increase in the income tax is a necessity.
I fully agree with the premise, but not with the conclusion. Economics are stubborn things and cannot be successfully dealt with emotionally.
I yield to no one in my sympathy for those who have to struggle to make both ends meet and in my desire to see their difficulties lightened. I quite agree that the financial burden of the war should be made to weigh as little as possible upon the shoulders of the poor and those of small means. Will a two-cent tax on checks be a burden upon the poor and those of small means? Will a five-cent tax on single purchases (excepting foodstuffs) of $5? Will an excess-profit tax on the lines which I propose? The list of similar queries could easily be continued.
The present cost of living is undoubtedly alarmingly high. I believe this condition of affairs, to a certain extent at least, could be alleviated by appropriate measures and that every effort should be made to that end. But a huge increase in the income tax and unwise business taxation will not accomplish this. It will, in fact, rather accomplish the opposite, apart from lessening employment.
LETTERS
I
The Income Tax
Dear Sir:
I fully agree with you in the principle of your conceptions of the duties of moneyed men towards the country. They must be willing not only to surrender such part of their income, indeed of their fortune, as the necessities of the country require, they must be ready not only to relinquish their affairs and to put their time, their energies, capacities and experience at the disposal of the Government in time of war, but they must be prepared to offer their very lives if the country calls for them. Those are the duties, of course, of every citizen, but they are doubly the duties of those who have won success. I am firmly convinced that capitalists as a cla.s.s will not fail in them during the war.
My article on war taxation was not written with any idea of questioning these manifest and uncontrovertible truths, but solely with the purpose of contributing to the discussion of the taxation proposals certain considerations which I believe to be well founded in economics and history no less than in experience and reason, and the disregard of which would be apt, I think, to lead to consequences gravely detrimental to the commonwealth.
The question to which my article addressed itself was not what sacrifices capital should and would be willing to bear if called upon, but what taxes it was fair, reasonable and, above all, to the public advantage to impose on capital, seeing that there is a point at which the country"s economic equilibrium would be thrown out of gear and at which the incentive to use capital constructively and productively and to take those business risks which are incident to all business activity, would be killed.
I greatly regret if what I said on the subject of Canada being free from income tax gave the impression of being a suggestion for the evasion by wealthy men of taxation during the war. The fact that capital is not subject to income tax in Canada was, of course, well known to men of wealth. I thought it a point and a fact of sufficient importance as bearing upon our own taxation program to deserve to be made generally known. That this might be considered as either a suggestion or a threat of what capital might do during the war, never, I confess, entered my mind, _for it would, of course, be little short of treason for capital and capitalists to take advantage of Canada"s propinquity while the war is on._
You speak of the possibility of legislation to prevent this. If capital meant to leave the country to evade taxation, there would have been ample time and opportunity for it to do so during the past six weeks. The price of exchange would indicate if that had been done to any appreciable extent, and proves, as a matter of fact, that it is not being done. If it were being done, I quite agree with you that legislation should be sought to prevent it and to punish the attempt. But I am entirely certain that moneyed men will not think of evading whatever sacrifice may be required of them by their country under war conditions.
What I meant to intimate in saying that capital and men of enterprise would seek Canada if there was no income tax, or only a moderate one, in that country, whilst America at this time imposed excessive and practically punitive income taxation, was this:
Capital has a long memory. Capital is proverbially timid. I am not referring only to large aggregations of capital but to all capital.
I am not referring only to the capital and capitalists of to-day, but to those who acc.u.mulate capital by practising thrift and to those who by invention, by conspicuous organizing or other ability, by originality of method, etc., are instruments in the creation of capital and will be, presumably, amongst the future owners of capital.
The possessors of capital, present and future, would not easily forget if, in the very first year of the war capital in this country were to be taxed at far higher rates than prevail in any European country after three years of war. Even if such extraordinary taxation was removed at once, after the termination of the war, capital would remain disquieted by the fear that the machinery of excessively high income taxation, once used and found easy of motion, might be used again for purposes of a less serious emergency than now exists. Those seeking capital for other countries--_and there is bound to be a very keen contest for capital after the war_--would not fail to make use of these arguments. Moreover, experience has proved that very high rates of income taxation once adopted, are not easily reduced to the level from which they started.
Therefore, in the case to which my argument was addressed, _i.e._, unduly high income taxation in this country and no, or only very moderate, income taxation in Canada, there can be little doubt that _after the war_ there would be an outflow of capital to Canada, and that--which is still more important--men of enterprise, especially young men, will be apt to seek in that and other countries, fields for their activities if the reward of enterprise is too greatly diminished in America as compared to what it is elsewhere. Such men would be doing nothing else than what many thousands of American-born farmers have done within recent years in transferring themselves, their capital and their working capacity to Canada.
_Not a single one of the leading European nations, after three years of the most exhausting war, has an income taxation schedule as high as that adopted by the House of Representatives; neither Republican France, nor Democratic England, nor Autocratic Germany._ Of these three countries, England has imposed the highest income taxation; yet, _the maximum rate in England is almost fifty per cent. less than the maximum rate in the House Bill. The Cabinets in these countries have undergone many changes in the course of the war. They include Socialists and Representatives of Labor._ In the determination of their taxation program, they have had the a.s.sistance of the best economic brains in Europe. Those nations have had far longer experience than we in the science of government financing.
Yet not one of them has deemed it wise and advantageous to the state to impose rates of income taxation as high as those fixed by the House of Representatives. Surely, this fact and the economic considerations underlying it, are deserving to be seriously weighed by our legislators.
Does not the att.i.tude of all the leading countries plainly indicate their recognition of the fact that the action and reaction of excessive income taxation create a vicious circle from which the governments of all belligerent nations even in their extremity have shrunk?
And is it not a manifest dictate of reason that such burden of taxation as must be borne should be imposed gradually, as was in fact done everywhere in Europe, so as to give to all concerned a chance to adjust themselves to the new conditions, and not with one violent jerk? England imposed her present rate of income and excess profit taxes not in the first year of the war, but started on a much lower scale and by successive steps, in the course of nearly three years, attained the figures now prevailing.
We know that man and beast are capable of carrying far heavier weights if the strain is gradually increased than if the whole of the burden is dumped on their backs at once. The same holds good of economic strain.
Is it not plain that if the unprecedentedly high income taxation of the House Bill--exceeding as it does any rates ever imposed by any of the leading nations of the world--is enacted into law, the Government will find itself crippled in respect of taxable resources during the second year of the war; the very year which, if the war does last beyond the present one, will presumably be the crucial period.
Of course, the cost of the war must be laid according to the capacity to bear it. It would be fatuous folly and cra.s.s selfishness to wish it laid or endeavor to have it laid otherwise.
All I am advocating in effect is that in the public interest not too much be exacted at once, but that by dividing the burden over a reasonable number of years, capital in no one year and especially not during the first year of the war, should be so excessively taxed as to produce an unscientific and dangerous strain.