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I

PUNITIVE PATERNALISM IN TAXATION

I have spoken of the treatment of our railroads in the past ten years as "punitive paternalism." In some respects this same term may be applied to our existing and proposed war taxation.

Of course, the burden of meeting the cost of the war must be laid according to capacity to bear it. It would be crass selfishness to wish it laid otherwise and fatuous folly to endeavor to have it laid otherwise.

We all agree that the principal single sources of war revenue must necessarily be business and accumulated capital, but these sources should not be used excessively and to the exclusion of others. The structure of taxation should be harmonious and symmetrical. No part of it should be so planned as to produce an unscientific and dangerous strain.

The science of taxation consists in raising the largest obtainable amount of needed revenue in the most equitable manner, with the least economic disturbance and, as far as possible, with the effect of promoting thrift.

The House Bill proposes to raise from income, excess or war profit and inheritance taxes $5,686,000,000 out of an estimated total of $8,182,000,000. In other words, almost seventy per cent. of our stupendous total taxation is to come from these few sources. It seems to me that the effect and meaning of this is to penalize capital, to fine business success, as well as thrift and self-denial practised in the past, thereby tending to discourage saving.

The House Bill fails, on the other hand, to impose certain taxes the effect of which is to promote saving. Intentionally or not, yet effectively, it penalizes certain callings and sections of the country and favors others.

Let me say at the outset that my criticism does not refer to the principle of an eighty per cent. war profits tax. Indeed, I have from the very beginning advocated a high tax on war profits. To permit individuals and corporations to enrich themselves out of the dreadful calamity of war is repugnant to one's sense of justice and gravely detrimental to the war morale of the people.

Strictly from the economic point of view, the eighty per cent. war profits tax is not entirely free from objection. Whether England did wisely on the whole in fixing the tax at quite so high a rate is a debatable point, and is being questioned by some economists of high standing in that country, not from the point of view of tenderness for the beneficiaries from war profits, but from that of national advantage.

Moreover, conditions in America and England are not quite identical and I believe it to be a justifiable statement that British industry is better able to stand so high a tax than American industry, for reasons inherent in the respective business situations and methods.

However, everything considered, circumstances being what they are, I believe the enactment of the proposed eighty per cent. war profits tax to be expedient, provided that, like in England, the standard of comparison with pre-war profits is fairly fixed and due and fair allowance made, in determining taxable profits, for such bona fide items of depreciation and other write-offs as a reasonably conservative business man would ordinarily take into account before arriving at net profits.

Amongst the principles of correct and effective taxation, which are axiomatic, are these:

It may safely be asserted that our war taxation runs counter to every one of these tested principles.

II

The characteristic difference between the House Bill and the revenue measures of Great Britain (I am not referring to those of France and Germany, because they are incomparably less drastic than ours or Great Britain's) is, first, that we do not resort to consumption taxes and only to a limited degree to general stamp taxes, and, secondly, that our income tax on small and moderate incomes is far smaller, on large incomes somewhat smaller and on the largest incomes a great deal heavier.

The House rate of taxation on incomes up to, say, $5,000, averages only one-fifth of what it is in England; the House rate of taxation on maximum incomes is approximately fifty per cent. higher than it is in England. Moreover, married men with incomes of less than $2,000 are entirely exempted from taxation in this country. In England all incomes from $650 on are subject to taxation.

I believe, on the whole, our system of gradation is juster than the English system, but I think we are going to an extreme at both ends. And it must be borne in mind that our actual taxation of high incomes is not even measured by the rates fixed in the House Bill, because to them must be added State and municipal taxes. There must further be added what to all intents and purposes is, though a voluntary act, yet in effect for all right-minded citizens tantamount to taxation, namely, a man's habitual expenditures for charity and his contributions to the Red Cross and other war relief works.

The sentimental and thereby the actual effect of extreme income taxation is not confined to the relatively small number of people in possession of very large incomes directly affected by it. The apprehension caused by the contemplation of an excessively high ratio of taxation is contagious and apt to react unfavorably on constructive activity.

It is highly important that taxation should not reach a point at which business would be crippled, cash resources unduly curtailed and the incentive to maximum effort and enterprise destroyed. And it should not be forgotten that both theoretically and actually the spending of money by the Government cannot and does not have the same effect on the prosperity of the country as productive use of his funds by the individual.

If all the European nations have stopped during the war at a certain maximum limit of individual income and inheritance taxation, even after four years of war, the reason is surely not that they love rich men more than we do or that they are all less democratic than we are. The reason is that these nations, including the financially wisest and most experienced, recognize the unwisdom and economic ill effect under existing conditions of going beyond that limit.

III

The same observations hold good in the case of our proposed inheritance taxation (maximum proposed here forty per cent., as against twenty per cent. maximum in England and much less in all other countries). And again there are to be added to Federal taxation the rates of state legacy and inheritance