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HOW SHALL WE
PAY FOR THE WAD?
A Constructs Criticism on the
House Revenue 6i!i.
LOANS BETTER THAN TAXES
Five Reasons Why Excessive Taxes at
the Outset of War Are Disadvantage
ous—Great Britain Example Worthy
of Emulation—How the Taxes Should
Be Apportioned.
By EDWIN R. A. SELIGMAN,
McVickar Profeseor of Political Kcon
omy, Columbia University.
On May 23, 1017, lhe House of Rep
resentatives passed uti uct "to provide
revenue to defray war expenses and
for other purposes.'' lu the original
hill ns presented by tlie Committee of
Ways and .Means, the additional reve
nue to lie derived was estimated at sl,-
810,420,000. The amendment to the in
come tax. which was Incited on to the
bill during the discussion in the House,
was expected to yield another $40,000,-
000 or 8T,0,000,000.
In discussing the House hill, two
problems arise:
I. How much should he raised by
taxation ?
11. lu what manner should this sum
be raisedV
I. How Much Should Be Raided by
T axaiion ?
How was the figure «.f $1,800,000,0 s»
arrived at ? The answer in simple. When
the Secretary of the Treasure nine to
estimate the additional xpemn i
for the year 1017-hS, he cub-uni.-si that
they would amount to Dome $0.(10 i.
000,000, of which $3,000,01 HY.uliO was In
be allotted to the all*c and $2,000,
000,000 was to lie utilised for the do
mestie purposes Thin',in that It
would be a fair proposition in divide
this latter stun between loam; and
taxes, he concluded that the amount
to ho raised by taxes wan ," 1,!: >0,000,-
000.
There are two extreme them h t, each
of which may be dlsmis d wiih scant
courtesy. The one is that all war ex
penditures should he defrayed I y loans,
and the other is that all war expendi
tures should he defrayed by tuxes
Each theory is untenable
It Is indeed true that the burdens of
the war should be borne by the pres
ent rather limit the future generation:
hut this does not mean that they should
he 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 he distributed at least over n
decade within (ho same generation.
In the second place, when expendi
tures approach the gigantic sums of
present-day warfare, the tax-only pol
icy would require more (bun (in' total
surplus of social Income. Were this
absolutely necessary, the ensuing hav
oc in the economic life of the communi
ty would have to be endured, But
where the disasters are so s eat and
at the same lime so unnece; ary, the
tax-only policy may be declared im
practicable.
Secretary McAdoo had the right in
stinct and highly commendable cour
age in deciding that a substantial por
tion, at least, of the revenues should
be derived from taxation. But when
he hit upon the plan of 50-50 per cent.,
that is, of raising one-half of all do
mestic war expenditures by taxes, the
question arises whether ho did not go
too far.
Tlie relative proportion of loans to
taxes Is after all a purely business
proposition. Not to rely to a large ex
tent on loaus at the outset of a war is
a mistake.
Disadvantages of Excessive Taxes.
The disadvantages of excessive taxes
at the outset of the war are us follows:
1. 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 Is
needed.
3. Excessive taxes on incomes will de
plete the surplus available for invest
meats and Interfere with the placing of
the enormous loans which will be neces
sary in any event.
4. Excessive taxes on wealtli will
cause a serious diminution of (he In
comes which are at present largely
drawn upon for the support of cduca
tlounl and philanthropic enterprises
Moreover, these sources of support
would be dried up precisely at the time
when the need would lie greatest.
5. Excessive taxation at the outset of
the war will reduce the elasticity avail
able for the increasing demands that
are soon to come.
Great Britain’s Policy.
Take Great Britain as an example.
During the tirst year of the war she
Increased taxes only slightly, in order
to keep industries going at top notch.
During the second year she raised by
new taxes only 9 per cent, of her war
expenditures. During the third year
she levied by additional taxes (over
and above tbe 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 ns Great
Britain did in the third year It would
suffice to raise by taxation $1,250,000.-
000. If, in order to be absolutely on
the safe side, it seemed advisable U>
Increase the sum to $1,600,000,000, this
should. In our opinion, be the maxi
mum.
Ic considering the apportionment of
the extraordinary burden of taxes in
war times certain scientific principles
are definitely established:
How Taxes Should Ba Apportioned.
il) The burden of taxes must bo
spread as far as possible over the
whole community so as to cause each
individual to share in the sacrifices ac
cording to his ability to pay and ac
cording to his share in the Government.
(2) Taxes on consumption, which are
necessarily borne by the community at
large, should be Imposed as far as pos
sible on articles of quasi-luxury rather
than on those of necessity.
(3) Excises should he imposed as far
as possible upon commodities in the
hands of the (Inal consumer rather
than upon tlie serve pri
marily as raw MwTuil for further
production.
(4) Taxes upon business should be
imposed as far upon net
earnings gross re
ceipts or capita™# Sled
(5) Taxes upon income which will
necessarily be sucre should be both
differentiated aiflkraduated. That is
there should he JP 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 which have been urged
above.
(0) The excess profits which are due
to the war constitute the most'obvious
and reasonable source of revenue dur
ing war times. But the principle upon
which these war-profit taxes are laid
must ho equitable iu theory and easily
calculable in practice.
The Proposed Incoms Tax.
The additional income tax as passed
by (he Hom e runs up to a rate of <lO
per cent. This Is a sum unheard of in
the history of civilized society. It must
be remembered that It was only after
the first year of (he war that Great
Britain Increased her Income tax to the
maximum of 34 per cent., and that
even now In the fourth year of the war
the Income tax does not exceed 42'/ 2
per cent.
It could easily he shown thnt a tax
with rates on moderate incomes sub
sfinitially less than in Great Britain,
and on the larger Incomes about a--
hlgh, 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 tlie total ruto on the highest in
comes to 34 per cent, or at most to 40
per cent, and that at the same time it
will reduce the rate on the smaller in
comes derived from personal or profes
sional earnings.
If the war continues we shall have to
depend more and more upon tha in
come tax. By imposing excessive rates
now wo aro not only endangering the
future, but aro inviting all manner of
difficulties which even Great Britain
has been able to escapo.
Conclusion.
The House bill contains otliet funds
mental defects which muy bo summed
up as follows:
(!) It pursues an erroneous principle
in imposing retroactive taxes.
(2) It selects an unjust and unwork
able criterion for the excess-profits tux.
(3) It proceeds to an unheard-of
height in income lax.
( I) It imposes unwarranted burdens
upon the consumption of the commu
nity.
(5) II is calculated to throw business
into confusion by levying taxes on gross
receipts instead of upon commodities.
(0) It fails to make a proper use of
stamp taxes.
(7> It follows an unscientific system
In ils flat rate on imports.
(S) It Includes a multiplicity of pet
ty and unlucrative taxes, the vexatious
ness of which is out of all proportion to
the revenue they produce.
»•»•«»•
The fundamental lines on which the
House bill should be modified are sum
med 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 ns unwise as
it is unnecessary. To do even this
would be to do more than has ever
been done by any civilized Govern
ment in time of stress.
(2) The excess-profits tax based upon
a sound system ought to yield about
$500,000,000*,
(3) The ljttame tax schedule ought to
he revised Fith n lowering of the rates
on earned incomes below SIO,OOO, and
with an aj-jlogous lowering of the
rates on t&S&Jlier incomes, so as not
to exceed ftjppor cent. A careful cal
culation shows that an income tax of
this kind w aid yield some $450,000.-
000 additicj^.
(4i The whisky and tobacco
ought to remain approximately as it is.
with a yield of about $230,000,000.
These three taxes, together with the
stamp t: x at even the low rate of the
House bill, and with an Improved au
tomobile tax, will yield over $1,250,-
000.000, which is the amount of money
thought desirable.
The above program would be in liar
mony with an approved scientific sys
tem. It will do away with almost all
of tlie complaints that are being urged
against the present. It will refrain
from taxing the consumption of the
poor.
It will throw a far heavier burden
upon tlie rich, but will not go to the
extremes of confiscation. It will ob
viate interference with business and
will keep unimpaired the social pro
ductivity of the community.
It will establish a just balance be
tween loaus and taxes and will not
succumb tit the danger of approaching
either the tax-only policy or the loan
only policy. Above all. it will keep an
undisturbed elastic margin, which
must be more and more heavily drawn
upon as the war proceeds.
PEARSON TRIRENE, JUNE 15,1917
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