In addition to the concrete factors, there enter into this question certain psychological elements of a somewhat subtle character, but sufficiently definite and potent to be plainly discernible to those who are experienced in dealing with business affairs and with men of business, large and small.
I believe an income tax greatly increased over the rates heretofore prevailing, yet keeping within the bounds of moderation, would produce at least as large a total revenue as an exceedingly high one. And the consequences of the economic error of placing too vast a burden direct upon incomes would be more serious, I think, to the people in general than to the individuals directly concerned. The question of the individual is not the princ.i.p.al one. The essential thing is that no undue strain be placed upon that great fund of capital as a whole which is derived from incomes of all kinds. It is this fund which in its turn is one of the vital forces necessary for the normal activities and progress of industry. If that fund is suddenly and too greatly reduced, the effect upon commerce and industry is liable to be abrupt and withering.
I yield to no one in my desire to see the burden upon the poor and those of moderate means lightened to the utmost extent possible.
I realize but too well that the load weighing at this time upon wage earners and still more perhaps upon men and women with moderate salaries is almost too great to be borne and certainly much greater than it should be. I wish a commission might be appointed, consisting of those best qualified in the entire country, to apply themselves to this most serious, difficult and complex problem, indeed to the entire problem of excessively high prices. I hope they would discover means, if not to remedy the situation entirely, at least to alleviate it.
But I am convinced that relief cannot be found in taxation of incomes at rates without a parallel anywhere, and in unduly burdensome imposts upon business activities. I am convinced that certain theories being urged upon Congress and the people and to which the House War Revenue measure is in part responsive, while doubtless meant to tend and seemingly tending to a desirable consummation, are in fact bound, in their longer effect, to bring about results harmful to the community at large, rich and poor alike.
It is only that conviction which has emboldened me to state my views publicly. In doing so I fully realized that I was running the risk of having my action misunderstood or misconstrued, and to be charged with selfishness and lack of patriotism.
Yet, I feel certain that in the end just recognition of their motives will not be withheld from those who, in defiance of the fleeting popularity of the plausible, venture to point out the dangers of impetuous action, however well intentioned, in the present emergency, and to urge that moderation and that regard for the lessons of history and of economics which can be left aside only at the peril of the general welfare.
Very faithfully yours,
(_Signed_) OTTO H. KAHN
P.S.--That you or any one else should even for a moment attach credence to the monstrous suggestion that capitalists fomented America"s entrance into the war because they feared that otherwise the amounts loaned by them to the Allies might be jeopardized or lost, is a truly distressing manifestation of the willingness of some of our people--I trust not many--to believe evil of men simply because they have been materially successful.
Leaving aside the cruel injustice of such an imputation, it attributes to moneyed men a degree of stupidity and of ignorance as to their own interests, of which they are not usually held guilty.
America loaned to the Allied nations, prior to our entrance into the war, roughly speaking, $2,000,000,000, of which sum all but a small fraction was loaned to England and France.
These loans were made almost entirely in the shape of bond issues which were widely distributed amongst individuals and inst.i.tutions throughout this country. Therefore, no very large portion of the aggregate is in the hands of any one person or inst.i.tution.
To any one acquainted with financial affairs it is absolutely inconceivable that England or France would have defaulted on the relatively moderate amount of their foreign debt, whatever might have been the outcome of the war, if America had not joined.
Let us grant, for argument"s sake, the wildly far-fetched supposition that in one way or another their internal debt might have become affected; it would still be utterly inconceivable that they would have permitted a default in their foreign debt, because it is, of course, suicidal for any nation to jeopardize its world credit.
But let us go still a step further and a.s.sume, in defiance of all reason, that even this totally inconceivable thing were to have happened. It would have meant, of course, not a total and irrecoverable loss to the holders of obligations of the Allied countries, but merely a more or less temporary shrinkage of the value of such holdings.
_A single year"s war taxation will take out of the pockets of capitalists a great deal more than they could possibly have lost through depreciation in value of such amount of Allied bonds or loans as they may hold._
If you add to these considerations the circ.u.mstance that, owing to the intervention of our Government in financing and otherwise providing for the Allies, the commissions and profits of those who have heretofore dealt with the Allies will be largely cut off; that business will, quite rightly, be subjected to a large excess profits tax; that capital for years to come will have to pay increased taxes to provide for the debt incurred through the war, for pensions, etc.; if you will reflect on these and various other patent considerations, you will realize that any rich man, fomenting for selfish reasons our entrance into the war, would be a fit subject for the immediate appointment of a guardian to take care of him and of his affairs.
II
_The Actual Return Upon Taxable and Tax-Exempt Securities_
Dear Sir:
Your letter indicates that you do not sufficiently realize the enormous advantage in interest yield which under the income tax schedule as fixed in the House Bill is possessed by tax-exempt securities as compared to taxable securities, especially, of course, in respect of large incomes.
Permit me to call your attention to the following eloquent facts:
The yield of tax-exempt securities at prevailing prices ranges from 3-1/2% to nearly 4-1/2%. _Under the rates fixed in the War Revenue Bill as it pa.s.sed the House of Representatives, a taxable 6% investment_ would yield:
PER ANNUM 2.28% on incomes over $2,000,000 2.34% " " " 1,500,000 2.40% " " " 1,000,000 2.69% " " " 500,000 2.97% " " " 300,000 3.26% " " " 250,000 3.54% " " " 200,000 3.90% " " " 150,000 4.20% " " " 100,000
Or, to put it in another way, the investment in 3-1/2% "Liberty Bonds" is thus equivalent to investing in a taxable security yielding:
PER ANNUM 9.21% in respect of incomes over $2,000,000 8.97% " " " " " 1,500,000 8.75% " " " " " 1,000,000 7.82% " " " " " 500,000 7.07% " " " " " 300,000 6.45% " " " " " 250,000 5.93% " " " " " 200,000 5.38% " " " " " 150,000 5.02% " " " " " 100,000
The investment in, say, New York City Bonds, being tax-exempt, at their present yield of 4.20%, would represent the following rates of income as compared to investments in taxable securities:
PER ANNUM 11.05% in respect of incomes over $2,000,000 10.76% " " " " " 1,500,000 10.50% " " " " " 1,000,000 9.38% " " " " " 500,000 8.48% " " " " " 300,000 7.74% " " " " " 250,000 7.12% " " " " " 200,000 6.46% " " " " " 150,000 6.02% " " " " " 100,000
Of course, all these figures hold good only for the period during which the proposed rates of income taxation would prevail. As the income tax rate decreases, the yield from tax-exempt securities diminishes proportionately.
The volume of tax-exempt securities at present outstanding, including the new "Liberty Loan," is estimated at not less than $8,000,000,000.
The ability of corporations to find a ready market for their securities is a prerequisite for the continuance of business prosperity or, indeed, of adequate business activity. I need not elaborate the effect which the comparison of the income yield from tax-exempt securities as against taxable securities under an excessively high income tax schedule--even if confined to larger incomes--must necessarily have upon the eligibility of corporate securities for investment purposes. The conclusion seems unescapable that the resulting degree of disinclination to invest in such securities coupled with the impulse to dispose of existing holdings would bring about liquidation, severe shrinkage of values and more or less p.r.o.nounced demoralization in the investment market--a condition of things which could not fail in a measure to affect adversely the country"s business in general, and which could only partially be counteracted by Government expenditures, however large.
As to your observations concerning the principle of tax-exempt issues, I believe the Government acted wisely, considering all the elements of the situation, in making its first great war issue, the Liberty Loan, tax free. But in the face of the figures above quoted, the question naturally presents itself whether our traditional policy of making Government issues tax-exempt should not be discontinued, which, of course, would mean that a materially higher rate of interest than 3-1/2% would have to be paid for Government borrowing.
In theory, it seems to me, there can be little doubt that the balance of arguments is against the tax-exemption of Government loans. As an abstract proposition little can be said, I think, in favor of a policy the effect of which gives an advantage to the rich and well-to-do, militates against the widest possible distribution of Government issues amongst the people, tends to facilitate Governmental extravagance by concealing the true cost and establishes a fict.i.tious basis of national credit.
Thus, for instance, on the $1,000,000,000, or thereabouts, which our Government has loaned to the Allies at 3-1/2% interest, it is losing money, because, whilst it nominally borrows this money through the Liberty Loan at 3-1/2%, the cost to it is actually considerably higher because it loses the revenue which would accrue to it from the income tax if the bonds were not tax-exempt.
Let me add that I do not wish to be understood as suggesting that our Government should charge to the Allied Nations more than the nominal rate at which it is borrowing. They have been fighting these three years and bringing unheard of sacrifices for a cause which we have recognized to be ours no less than theirs, and if we loan them money somewhat below its actual cost to us that item weighs but very lightly in the scale, especially also if we consider the immense monetary profits which our country has reaped from the sale to them of munitions, material and supplies.
However, as against the theoretical objections, some of which I have mentioned, to the tax-exemption of Government loans, there are certain "imponderabilia"--things which cannot be exactly weighed--in favor of a low rate of interest for Government borrowing, even if the lowness of the rate is to an extent fict.i.tious. There are also certain practical reasons for the maintenance of our traditional policy, and various concrete facts which must be taken into account. For instance, there is the problem of how to deal with the situation that might result from the withdrawal of deposits from savings banks and similar inst.i.tutions, which probably would be liable to occur in case the Government offered a bond issue at the higher rate it would have to fix if the inducement of tax-exemption were removed.
There is the problem of the existence of billions of munic.i.p.al and state securities which offer to the holder the privilege of freedom from munic.i.p.al, state _and Federal_ taxes. I understand that it is the consensus of opinion of our leading lawyers that under the legal theory which treats such issues as "instrumentalities of government" that privilege cannot be abridged and that Congress has no const.i.tutional power to tax state and munic.i.p.al issues.
If state and munic.i.p.al issues to be made during war time retain the feature of being free from taxation, can the Federal Government afford to make its war loans taxable, and thereby place itself in a position where it would have to borrow under conditions which would put it and its credit at a disadvantage as compared to state and munic.i.p.al issues?
The problem is a complex one altogether and, like all economic questions, requires to be approached in a dispa.s.sionate spirit, giving due consideration to the reasons for and against. The temper of the stump speaker is not appropriate for dealing with taxation problems.
Let me add, in conclusion, that I fully agree that it is "sheer fiscal stupidity" and "socially inexpedient as well" to permit "mushroom fortunes" to be built out of war profits. I believe there ought to be imposed a large excess war profits tax on the English model upon a fair and well conceived average basis of earnings so calculated as to take account of the vast difference in the country"s industrial plant to-day and before the European war. Such a tax may not be entirely free from objections in theory, but from the social and moral point of view it is, I am convinced, thoroughly sound and proper and called for. Appropriate taxation of excess profits, together with an adequately though not exorbitantly heavy income tax would go a long way to prevent the enrichment of a cla.s.s through the calamity of war, without at the same time affecting wages or laming the enterprise and business activities of the country.
Yours very truly,
(_Signed_) OTTO H. KAHN