Part 4

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.

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.

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