The tax recently enacted by Congress imposing a burden of 8 per cent.
on business profits over and above 8 per cent. on the capital employed,
regardless of whether such profits have any relation to war conditions
or not, is unscientific and unsound.
(Incidentally, it is a strange provision of that law that it applies
only to co-partnerships and corporations, whilst an individual engaged
in business, however profitable, is not taxed.)
It is unquestionably right and in accordance with both good morals and
good economics, to prevent, as far as possible, the enrichment of
business and business men through the calamity of war.
But the recently enacted so-called excess profit tax which it is now
proposed to augment largely does not accomplish that. It taxes not
merely the exceptional profit, _i.e._, the war profit. It lays a burden
not on business due to war, but on all business.
It does this at a time when it is more than ever necessary that energy,
enterprise, efficiency, the commercial and financial brain and
work-power of the nation, be stimulated to their utmost in order to
make good, as far as possible, the waste and destruction which go with
war.
Any scheme of taxation which imposes an unnecessary burden upon
commercial enterprise and thereby handicaps the nation in its business
activities--especially in world competition with other nations--is
unsound and bound to be gravely detrimental, both to the business men
and still more to the wage-worker; in fact, to every element of the
population.
It is worth noting that England, the conduct of whose finances, based
upon the experience of many generations as the leading financial power,
has always been a model for other nations to follow, has imposed an
excess profit tax on business during the war _merely_ to the extent
that such profits are attributable to the war, _i.e._, to the extent
that they exceed the profits of normal years.
In principle, direct taxation of business activities should be avoided
as much as possible, apart from a _war profit excess_ tax.
Care should be taken lest the wealthy man least entitled to
preferential consideration, _i.e._, he who neither works nor takes
business risks or business responsibilities, be favored as against the
man who puts his brains, his capacities and his money to constructive
use in active business.
The idle man possessing capital, much or little, if he is so
constituted that his conscience permits him to evade his share of
monetary sacrifice, can put his money into tax-exempt securities. The
man of means who toils in business or a profession must pay a heavy
income tax, an excess profit tax, etc. To an extent this undesirable
differentiation is probably unavoidable, but it is neither fair nor in
the interest of the community that it be accentuated.
V
It seems to me so manifest as to hardly require argument that a
retroactive income tax, such as has been suggested, is wrong both in
morals and in economics.
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 retard 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
circumstances, 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 cumbersome 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 assumption that the aggregate profits
for 1917 will approximately equal those of 1916--a not unreasonable
assumption 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.