Evening Republican, Volume 21, Number 127, Rensselaer, Jasper County, 14 June 1917 — HOW SHALL WE FAY FOR THE WAR? [ARTICLE]

HOW SHALL WE FAY FOR THE WAR?

A Gonstruetlw Criticism on tin House Revenue Bill. LOANS BETTER THAN TAXES

Flv© Reason* Why Excessive Tax** at th© Outset of War Ar© Dlsadvantageeub—Great Britain Example Worthy of Emulation —How th* Taxee Should Be Apportioned.

By EDWIN R. A. SELIGMAN.

McVicker Professor of Political Economy, Columbia University. v On May 23, 1917, the House of Representatives passed an’ act “to provide revenue to defray war expenses and for other purposes.” In the original bill as presented by the Committee of Ways and Means, the additional revenue to be derived was estimated at sl.810,420,000. The amendment to the income tax, which was tacked on to the bill during the discussion in the House, was expected to yield another $40,000,000 or $50,000,000. In discussing the House bill, two problems arise: 1. How much should be raised by taxation? IL In what manner should this sum be raised?

I. How Much Should Be Raised by Taxation? How was the figure of $1,800,000,000 arrived at? The answer Is simple. When the Secretary of the Treasury came to estimate the additional war expenses for the year 1917-18, he calculated that they would amount to some $6,600,000,000, of which $3,000,000,000 was to be allotted to the allies, and $3,600,000,000 was to be utilized for the domestic purposes. Thinking that It would be a fair proposition to divide this latter sum between loans And taxes, he concluded that the amount to be raised by taxes was $1,800,000,000. There are two extreme theories, each of which may be dismissed with scant courtesy. The one is that all war expenditures should be defrayed by loans, and the other Is that all war expenditures should be defrayed by taxes. Each theory is untenable. It is indeed true that the burdens of the war should be borne by the present rather than the future generation; but this does not mean that they should be borne by this year’s taxation. Meeting all war expenses by taxation makes the taxpayers in one or two years bear the burden of benefits that ought to be distributed at least over a decade within the same generation. In the second place, when expenditures approach the sums of present-day warfare, the tax-only policy would require more than the total surplus of social income. Were this absolutely necessary, the ensuing havoc In the economic life of the community would have to be endured. But where the disasters are so great and at the same time so unnecessary, the tax-only policy may be declared Impracticable. Secretary McAdoo had the right instinct and highly commendable courage In deciding that a substantial portion, at least, of the revenues should be derived from taxation. But when be hit upon the plan of 50-50 per cent, that is, of raising one-half of all domestic war expenditures by taxes, the question arises whether he did not go too far. The relative proportion of loans to taxes Is after all a purely business proposition. Not to rely tq a large extent on loans at the outset of a war Is a mistake

Disadvantage* *f Excessive Tax©©. The disadvantages of excessive taxes at the outset of the war are as follows: L Excessive - taxes on consumption will cause popular resentment 2. Excessive taxes on industry will disarrange business, damp enthusiasm, and restrict the spirit of enterprise at the very time when the opposite to needed. i 8. Excessive taxes on Incomes will deplete the surplus available for investments and Interfere with the placing of the enormous loans which will be necessary in any event 4. Excessive taxes on wealth will cause a serious diminution of the incomes which are »t preset largely drawn upon for the support of educational and philanthropic enterprises. Moreover, these sources of support would be dried up precisely at the time when the need .wouM be greatest & Excessive taxation at th* outeet of th* war will reduo* th* •laatlcity available for th* increasing demanda that ar* *oon to com*. Great Britain’* Policy. Take Great Britain aa an example. During the first year of the war she Increased taxes only slightly, in order to keep industries going at top notch. During ths second year she raised by new taxes only 9 per cent of hey war expenditures. During the third year she levied by additional taxes (over and above the pre-war level) only slightly more than 17 per cent of her war expenses. | If we should attempt to do as much In the first year of the war aa Great Britain did In the third year it would suflice to raise by taxation $1,250,000,00tt If, tn drder to be absolutely on th* safe side, it seemed advisable to Increase the sum to >1,500,000,000, this should, in our opinion, be the maximum.

In considering the apportionment of lhe extraordinary burden of taxes In war times certain scientific principles are definitely established: How Taxes Should B* Apportioned. (1) The burden of taxes must be spread as far as possible over the whole community so as to cause each Individual to sharp in the sacrifices according to his ability to pay and according to his share Ih the Government (2) Taxes on consumption, wfilCh are necessarily borne by the community at large, should be Imposed as far as possible on articles of quasi-luxury rather than on those of necessity. (3) Excises should be imposed as far as possible upon commodities in the hands of the final consumer rather than upon the articles which serve primarily as raw material for further production. (4) Taxes upon business should be imposed as far as possible upon net earnings rather than upon gross receipts or capital Invested. (5) Taxes upon income which will necessarily be severe should be both differentiated and graduated. That Is, there should be a distinction between earned and unearned Incomes and there should be a higher rate upon the larger incomes. It is essential, however, not to make the income rate so excessive as to lead to evasion, administrative difficulties, or to the more fundamental objections tfhlch have been urged above.. (6) The excess profits which are dtle to the war constitute the most obvious and reasonable source of revenue during war times. But the principle upon which these war-profit taxes are laid must be equitable in theory and easily calculable in practice. Th© Proposed Income Tax. The additional Income tax as passed by the House runs up to a rate of 60 per cent This is a sum unheard of in the history of civilized society. It must be remembered that it was only after I the first year of the war that Great I Britain increased her Income tax to the maximum of 84 per cent, and that even now in the fourth year of the war the income* tax does not exceed 42% per cent It could easily be shown that a tax with rates on moderate Incomes substantially less than in Great Britain, and on the larger incomes about as high, would yield only slightly less than the $532,000,000 originally estimated in the House bill It is to be hoped that the Senate will reduce the total rate on the highest incomes to 84 per cent, or at most to 40 per cent, and that at the same time it will reduce the rate on the smaller incomes derived from personal or professional earnings. If the war continues w* shall have to depend mor© and mor* upon th* Income tax. By Imposing excoealv* rates now wo ar© not only endangering the future, but are Inviting all manner of difficult!** which even Great Britain has boon able to escape. Conclusion. The House bill contains other fundamental defects which may be summed up as follows: (1) It pursues an erroneous principle in Imposing retroactive taxes. (2) It selects an unjust and unworkable criterion for the excess-profits tax. (3) It proceeds to an unheard-of height in the income tax. (4) It imposes unwarranted burdens upon the consumption of the community. (5) It is calculated to throw business Into confusion by levying taxes on gross receipts Instead of upon commodities. (6) It falls to make a proper use of stamp taxes. -■ (7) It follows an unscientific system in its flat rate on imports. (8) It Includes a multiplicity of petty and unlucratlve taxes, the vexatiousness of which Is out of all proportion to the revenue they produce. The fundamental lines on which the House bill should be modified are summed up herewith: (1) The amount of new taxation should be limited to $1,250,000,000-or at the outset to $1,500,000,000. To do more than this would be as unwise as it is unnecessary. To do even this would be to do more than has ever been done by any civilized Government in time- of stress. (2) The excess-profits tax based upon a> sound system ought to yield about $500,000,000. (3) The income-tax schedule ought to be revised with a lowering of the rates on earned incomes below SIO,OOO, and with an analogous lowering of the ©©taann the higher incomes, so as not to exceed 84 per cent A careful calculation shows that an income tax of thia kind would yield some $450,000,000 additional. (4) The tax on whisky and tobacco ought to remain approximately as It to with a yield of about $230,000,000. These three taxes, together with the stamp tax at even the low rate of the House bill, and with an improved automobile tax, will yield over $1,250,000,000, which is the amount of money thought desirable. '-L The above program would be in harmony with an approved scientific system. It will do away with almost all of the complaints that are being urged against the present It will refrain from taxing the consumption of the poor. It will throw a tor heavier burden upon the rich, but will not go- to the extremes of confiscation. It will obviate interference with business and will keep unimpaired the social productivity of the community. A It will establish a just balance between loans and taxes and win not succumb to ths danger of approaching either the tax-only policy or the loanonly policy. Above all, it will keep an undisturbed elastic margin, which must be more and more heavily drawn upon as tbs war proceeds.