obtain adequate funds to conduct their business—especially also as investors will be fearful that high rates of taxation once established will not easily be reduced to normal levels, even when the present emergency is passed.

Extravagance, log-rolling, the unwise and inefficient expenditure of money by governmental bodies are amongst the besetting sins of democracy. The formula once found, the machinery once employed for the raising of huge revenues, are apt to make the way of wasteful governmental spending all too temptingly easy.

It must not be forgotten that taxation must necessarily by that much diminish the surplus income fund of the individual and that both theoretically and actually the spending of money by the government cannot and does not have the same effect upon the country's prosperity and enterprise as productive use of his surplus funds by the individual.

The sentimental, and thereby the actual, effect of extreme taxation will not be confined to the relatively small number of people in possession of very large incomes. The disturbance and fear caused by the contemplation of an excessively high ratio of taxation, even when applied to a relatively few, is bound to spread to those also of more moderate incomes.

Capital is proverbially timid. It will not take risks, except in the expectation of commensurate reward, and if it sees the danger of its reward being unduly infringed upon by excessively rigorous income taxation, it will anticipate that menace by withdrawing from the field of constructive investment to the greatest extent possible.

So much is this the case that I incline to the belief that taxation so graded as to result in a maximum average of say 33-1/3 per cent. would produce at least as great a revenue as a maximum average of 50 per cent.

It is one of the oldest principles of taxation that an excessive impost destroys its own productivity.

The flood of securities which would be coming for sale in order to escape extreme income taxation would create a grave condition of demoralization in the investment markets of the country, with the resulting inevitable effect upon the country's general business, and upon its capacity to absorb Government loans.

IV

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