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Show HOW SHALL' WE PAY FAR THE WAR? A Constructive Criticism on tha Hons? Reyenua Bill. LOANS BETTER THAN JAXES Five Reasons Why Excessive Taxe9 at the Outset of War Are Disadvantageous Disadvantage-ous Great Britain Example Worthy of Emulation How the Taxes Should Be Apportioned. By EDWIN R. A. SELIGMAN, McVlckar Professor of Political Economy, Econ-omy, Columbia University. On May 23, 1917, the House of Representatives Rep-resentatives 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 reve-nue to be derived was estimated at $1,-810,420,000. $1,-810,420,000. The amendment to the Income In-come tax, which was tacked on to the bill during the discussion in the House, was expected to yield another $40,000.-000 $40,000.-000 or $50,000,000. In discussing the House bill, two problems arise: I. How much should be raised by taxation? II. 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 ! .17-13. he calculated that they would a mount to some $G,G00,-000,000, $G,G00,-000,000, of wlii.-u $3,000,000,000 was to be allotted i. the allies, and $3,600,-000,000 $3,600,-000,000 was to be utilized for the domestic do-mestic purposes. Thinking that it would be a fair proposition to divide this latter sum between loans and faxes, he concluded, that the amount to be raised by taxes' was $1,800,000.-000. $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 ex-penditures should be defrayed by loans, and the other is that all war expenditures expendi-tures 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 pres-ent 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 expendi-tures approach the gigantic sums of present-day warfare, the tax-only policy pol-icy would require more than the total surplus of social income. Were this absolutely necessary, the ensuing havoc hav-oc In the economic life of the community communi-ty 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. im-practicable. Secretary McAdoo had the right instinct in-stinct and highly coinmendable courage cour-age in deciding that a substantial portion, 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 domestic do-mestic 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 to a large extent ex-tent on loans 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 as 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. 8.' Excessive taxes on incomes will deplete de-plete the surplus available for Investments Invest-ments and Interfere with the placing of the enormous loans which will be necessary neces-sary in any event. 4. Excessive taxes on wealth will cause a serious diminution of the incomes in-comes which are at present largely drawn upon for the support of educational educa-tional and philanthropic enterprises. Moreover, these sources of support would be dried up precisely at the time when the need would be greatest. 5. Excessive taxation at the outset of the war will reduce the elasticity available avail-able for the increasing demands that are soon to come. Great Britain's Policy. Take Great Britain as an example During the first 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 0 per cent, of nor war expenditures. During the third year she levied by additional taxes (over and above the pre-war levell only slightly more than 17 per cent, of her war expenses. If we should attempt to do much tn the first year of the w; r as Great Britain did In the third year It would suffice tn raise by taxation ?1.2j0,O00,. 000. If, in order to be absolutely on the safe side. It scored advisable to increase the sum to Sl.S-WOO.i.oo, this should. In our opinion, be the maii-inuni. Iu considering the apportionment ojr the extraordinary burden of taxes in war times certain scientific principles are definitely established: How Taxes Should Be Apportioned. (1) The burden of taxes must be spread as far as possible over the whole couimunlty so as to cause each individual to share in the sacr!3ces according ac-cording to his ability to pay and according ac-cording to his share iu the Government (2) Taxes on consumption, which are necessarily borne by the community at large, should be imposed as far as possible pos-sible on articles of quasl-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 pri-marily 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 re-ceipts or capital invested. (5) Taxes upon income which will necessarily be severe should e 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 sq excessive as to lead to evasion, administrative difficulties, or to the more fundamental objections which have been urged above. (G) The gxcess profits which are due to the war constitute the most obviou.? and reasonable source of revenue during dur-ing war times. But the principle upon which these war-profit taxes are laid must be equitable in theory and easily calculable in practice. . The Proposed Income Tax. The additional income tax as passe by" the House runs up' to a rate of (i per cent. This is a sum unheard of ii the history of civilized society. It mns be remembered that it was only afte; the first year of the war that Greai Britain increased her income tax to the maximum of 34 per cent., and thai even now (n the fourth year of the war the incomo tax does not exceed 42'2 per cent. It could easily be shown that a tax with rates on moderate incomes substantially sub-stantially less than in Great Britain and on the larger incomes about as high, would yield only slightly less than the $332,000,000 originally estimated in the House bill. It Is to be hoped that the Senate will reduce the total rate on the highest incomes 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 Vn-comes Vn-comes derived from personal pr professional profes-sional earnings. If the war continues we shall have to depend more and more upon the income in-come tax. By imposing excessive rates now we aro not only endangering the future, but are inviting all manner of difficulties which even Great Britain has been able to escape. Conclusion. The House bill contains other fundamental funda-mental defects which may be summed up as follows : (1) It pursues an erronpous principle in imposing retroactive taxes. (2) It selects an unjust and unworkable unwork-able 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. commu-nity. (0) It is calculated to throw business into confusion by levying taxes on gross receipts Instead of upon commodities. I (0) It fails 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 pet-ty and unlncrative taxes, the vexntious 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 summed 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 as unwise as it is unnecessary. To do even this would . be to do more than has ever been done by any civilized Government 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 income-tax schedule ought to be revised with a lowering of the rates on earned Incomes below $10,000, and with an analogous lowering of the rates on the higher incomes, so as not to exceed 3-1 per cent. A careful calculation cal-culation shows that an Income tax of this kind w;ould yield some $450,000,-. 000 additional. (4) The tax on 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 tax at even the low rate of the House bill, and with an Improved automobile au-tomobile tax, ..will yield over $1,250,-000,000, $1,250,-000,000, which is the amount of money thought desirable. The above program would be in harmony har-mony with an approved scientific system. sys-tem. It will do away with almost all of the complaints that are bfc-ing urged against the present. It w hi refrain from taxing the consumption of the poor. It will throw a far heavier burden upon the rich, but will not go to the extremes of confiscation. It will obviate ob-viate Interference with business and will keep unimpaired the social productivity pro-ductivity of the community. It will establish a just halnnce between be-tween loans and taxes and will not succumb to the danger of approaching either the tax-only policy or the loan-only loan-only policy. Above all. it will keep an undisturbed clastic margin, which mnst be more and mcire heavily drawn, vpon 3 .be T8r proceed-: |