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Show howIhallwe pay for the war? A Constructive Criticism onttia Kause Revenue Bill. LOANS BETTER THAN TAXES Tlv Reasons Why Excessive Taxes at tha Outset of War Are Disadvantage- Groat Britain Example WortH.. f simulation How the Taxes Shoi j 9-S Apportioned. By tDWIN R. A. SELIGMAN, ttcVlcbar Professor of Political Economy, Econ-omy, Columbia University. On May 23, 1917, the House of Kep-(oentatlves Kep-(oentatlves passed an act "to provide revenue to defray war expenses and jfor 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 tills 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 tby would amount to some $G.0O0.-000,000, $G.0O0.-000,000, of which $3,000,000,000 was to bo allotted to the allies, and $3.G0O,-000,000 $3.G0O,-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 taxes, he concluded that the amount to be raised by taxes was $1,800,000.- coa There are two extreme theories, each of which may be dismissed with scant coortesy. The one is that all war expenditures ex-penditures should be defrayed by loans, and tha other is that air 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; bai this does not mean that they should ba 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 Aecade 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 wtuld have to be endured. But waere the disasters are so great and t the same time so unnecessary, the tax-only policy may be declared lm-nractlcable. lm-nractlcable. Secretary McAdoo had the right Instinct In-stinct and highly commendable courage cour-age in deciding that a substantial portion, por-tion, at least, of the revenues should be derived from taxation. But when lie hit upon the plan of 60-50 per cent., that Is, of raising one-half of all do nestle war expenditures by taxes, the qnestlon arises whether be 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: X. Excessive taxes on consumption will cause popular resentment Excessive taxes on Industry will fitoarrange business, damp enthusiasm tad restrict the spirit of enterprise at tbe very time when the opposite is os4ed. 8. Excessive taxes on incomes will de piete the surplus available for Invest-meuta Invest-meuta and Interfere with the placing of tka enormous loans which will be necessary neces-sary la any event. A Kxcesslve taxes on wealth will csisse a serious diminution of the In-eeenes In-eeenes which are at. present largely tfjowu upon for the support of educational educa-tional and philanthropic enterprises. Moreover, these sources of support won Id be dried up precisely at the time when the need would be greatest. It Excessive taxation at the outset of the war will reduce the elasticity available avail-able far the increasing demands that are eaon to come. Croat Britain's Policy. Take Great Britain as an examp'e Daring the first year of the war she Increased taxes only slightly. In order t 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 aad above the pre-war level) only slightly more than 17 per cent, of her war ex icnses. If we should attempt to do ns much in the first year of the war ns Great Britain did in the third year It would suffice to raise lv taxation ?1.2.Vt.m0.. (iO0. If. In order to be absolutely on the safe slile. it seemed advisable to increase the sum to $l.;Vi.O00.O0O, this j should, in our opinion, be the mail- . . - - - - Jn considering the apportionment of the extraordinary burden of taxe3 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 community so as to cause each individual f- share In the sacrifices according ac-cording tt Ms ability to pay and according ac-cording to his shave in 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 quasi-luxury rather than ou 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 pri- j marily as raw material for further production. (4) Taxes upon business 6hould 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 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 which have been urged above. (6) The excess profits which are due to the war constitute the most obvious 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 passed by the House runs up to a rate of GO 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 the 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 42V4 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 $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 in-comes to 34 per cent, or at most to 40 per cen and that at the same time it will reduce the rate on the smaller Incomes In-comes derived from personal or profes slonal earnings. If the war continues we shall have to depend ipore and more upon the income in-come tax. By imposing excessive rates now we are not only endangering the future, but are inviting all manner of difficulties which even Great Britain haa been able to escape. Conclusion. The House biU contains other fundamental funda-mental defects which may be summed up as follows : (1) It pursues an erroneous principle In Imposing retroactive taxes. (2) It selects an uujust aud 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. (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 pet ly and unlucratlve 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 summed sum-med up herewith: (1) The amount of new taxation should be limited to $l,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 34 per cent. A careful calculation cal-culation shows that an Income tax of this kind would yield some $450,000.-000 $450,000.-000 addition:;). (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 thp House bill, and with an improved automobile au-tomobile tax, will yield over $1,250,-100,000, $1,250,-100,000, 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 being urged Hgainst the present. It will 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 pro-Im pro-Im tivlty of the community. It will establish a Just balance between be-tween loans and taxes and will not succumb to the danger of approaching either the tax-only policy or the lnan-only lnan-only policy. Above all. It will keep an undisturbed elastic margin, which ! must be more and more heavily frawn 0P M Ue irf jrocwla. |