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diff --git a/29252.txt b/29252.txt new file mode 100644 index 0000000..21a6dd6 --- /dev/null +++ b/29252.txt @@ -0,0 +1,1500 @@ +The Project Gutenberg EBook of War Taxation, by Otto H. Kahn + +This eBook is for the use of anyone anywhere at no cost and with +almost no restrictions whatsoever. You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: War Taxation + Some Comments and Letters + +Author: Otto H. Kahn + +Release Date: June 26, 2009 [EBook #29252] + +Language: English + +Character set encoding: ASCII + +*** START OF THIS PROJECT GUTENBERG EBOOK WAR TAXATION *** + + + + +Produced by The Online Distributed Proofreading Team at +https://www.pgdp.net (This file was produced from images +generously made available by The Internet Archive/American +Libraries.) + + + + + + +War Taxation + + +_Some Comments and Letters_ + + +OTTO H. KAHN + + +1917 + + + + +War Taxation + +_Contents_ + + +Some Comments Pages 7 to 42 + +Letters + +I +THE INCOME TAX _Pages 43 to 60_ + +II +RETURN UPON TAXABLE AND TAX-EXEMPT SECURITIES _Pages 61 to 70_ + + + + +_War Taxation_ + + +The recent publication of a little pamphlet entitled "Some Comments on +War Taxation" elicited numerous interesting comments by the readers. +The points to which these comments mainly related were the statements +contained in the pamphlet that: + +_First._ If our neighbor Canada continues her present policy of not +taxing incomes, or if she imposes only a moderate tax while rates of +income taxation in America are fixed at oppressively and unnecessarily +high rates, there can be little question that the ultimate result will +be an outflow of capital to Canada, and that men of enterprise will +seek that country. + +_Second._ Moneyed men not having their capital engaged in active +business, if they are so constituted that their consciences permit them +to evade their share of monetary sacrifice, can put their funds into +tax-exempt securities. + +In reference to the foregoing points, I have written two letters in +answer to correspondents. These letters contain an elaboration of +certain arguments and viewpoints set forth in the original article on +War Taxation and also refer to some additional phases of the subject. +Those who have done me the honor of perusing that article may possibly +be interested in reading these letters. + +In order that they may be presented as a part of the argument as a +whole, the original article with a few additions and slight revisions +is printed in the first part of this pamphlet, followed by the letters. + +O. H. K. + +52 William Street, +New York, July 5, 1917. + + + + +SOME COMMENTS ON WAR TAXATION + + + _This is a reprint, somewhat amplified, of an article printed + recently in the New York Times. The original article was written + before the recommendations of the Ways and Means Committee of the + House of Representatives were reported._ + + +In a time of patriotic exaltation and of universal obligation and +readiness to make great sacrifices to bring a most just and righteous +war to a successful conclusion, the voice of sober argument and matter +of fact considerations is apt to grate upon the ears of the people. + +That voice is all the less likely to be popular when the arguments it +puts forth may easily lend themselves to the interpretation of being +actuated by solicitous care for selfish interests. + +I am fully aware that by publishing the following observations I am +exposing myself to that interpretation and to criticism of, and attack +upon, my motives. + +Yet, seeing that certain measures now under consideration threaten to +take shape in a way which, from my practical business experience and +after mature deliberation, I am bound to regard as faulty and as indeed +harmful to the country, I believe it to be right and proper to +contribute my views to the public discussion of the subject, for +whatever they may be worth. + +I can only hope, then, that in what I am going to say I shall be given +credit for endeavoring to speak conscientiously and to the best of my +knowledge and judgment from the point of view of the welfare of the +entire country and not of the welfare merely of the well-to-do. + +I shall address myself to the practical aspect and to a few phases only +of the question and shall not attempt to enter into the economic +theories and the broader and deeper considerations involved. + +I shall assume in my argument that what Congress is seeking to +accomplish is to impose taxes justly, effectively and scientifically +with the desire to disturb the country's trade and commerce as little +as possible and to avoid as much as may be the evils of financial +dislocation. + +I shall take it for granted that at a time when more than ever the +unity of the country should be emphasized, sectional selfishness will +find no place in the taxation program, and that, should it be attempted +nevertheless, the congressional delegations of the States which would +be unjustly affected, would resist, regardless of party affiliations, +harmful discrimination against their constituents and their States. + +I shall assume that it is not the purpose and intent of Congress, under +the guise of the necessities of the war situation, to embrace the +doctrines of Socialism. + +Our present economic system, our present method of wealth distribution +may or may not stand in need of change; the fact remains that Congress +has no mandate to effect a fundamental change. + +The consequence of such a change would be so immensely far-reaching +that no government has the right to sanction steps to bring it about +until the subject has been fully discussed before the people in all its +bearings and the people have pronounced judgment through a Presidential +or other election. + +I will first state what in my opinion ought not to be done: + + + + +I + + +I take it that not many words need be used to expose the fallacy of the +argument, heard even in the Halls of Congress: "If men are to be +conscripted, wealth also must be conscripted." + +_Men will be conscripted to the extent that it is wise and just and +needful. So, and no other, should wealth and the country's resources in +general be conscripted._ + +And, are not the children of the well-to-do conscripted equally with +the children of the poor? + +Indeed, the proportion of the sons of the well-to-do on the actual +fighting line is bound to be a predominating one, because vast numbers +of wage workers in the industries and on the farms will necessarily +have to be retained at their accustomed vocations in order to maintain +the output of our factories and farms. + +Have the children of the well-to-do been backward in volunteering? Were +they not, on the contrary, amongst the very first to offer to serve and +to fight? + + + + +II + + +_There appears to prevail amongst not a few people the strange delusion +that America's entrance into the war was fomented by moneyed men, in +part, at least, from the motive and for the purpose of gain._ + +_Were there any such men, no public condemnation of them could be too +severe, no punishment would be adequate. I am absolutely certain that +no such hideous and dastardly calculation found lodgment in the brain +of any American, rich or poor._ + +Moreover, is it not perfectly manifest that any rich man in his senses +must have known that his selfish interest was best promoted by the +continuance of the conditions of the last three years in which America +furnished funds and supplies to Europe at huge profits, whilst our +entering the war was bound to diminish those profits very largely +(indeed, to entirely eliminate some of them), to interfere with +business activity in many lines and to compel the imposition of heavy +taxes on wealth? + +It is to the credit of our rich men that, though fully realizing the +extent of the monetary loss and sacrifices which war between this +country and Germany must necessarily bring to them, there were but very +few of them who supported the Peace-at-any-Price Party or favored the +avoidance of America entering into the war when it had become plain +that our participation in that war could not be avoided with honor and +with due regard for our duty to our own country, or to the cause of +right and liberty throughout the world. + +Yet, somehow, the pacifists seem to have singled out the rich as mainly +responsible for the war. + +It may be due, consciously or unconsciously, to a resulting feeling of +resentment that _the proposal to confiscate during the war all incomes +beyond a certain figure is actively promoted by leading pacifists_--a +proposal based upon ignorance of, or disregard for, the laws of +economics, teachings of history and practical considerations. + +If any such scheme were to be adopted, the consequences to the country +at large would be far more serious than to the victims of the proposed +action. + +If such a measure of outright confiscation were seriously apprehended, +at a time moreover and under conditions which are far as yet from +calling for extreme measures, capital would cease to flow in its +accustomed currents and some of it would seek other channels +legitimately open to it. + +It would certainly cease flowing into constructive use and would +instead confine itself, to an extent at least, to municipal, state and +federal tax-exempt securities. Enterprise would be seriously hampered +and in some respects brought to a standstill entirely. + +Many thousands of workmen would be thrown out of employment. Many +businesses and shops would close. + +There would ensue, as a natural consequence and without any conscious +determination, a nation-wide strike of constructive activity and +enterprise in commerce and finance, because men will not look upon it +as a "square deal" if they are to take all the risk and responsibility, +all the hard work and ceaseless strain and care of business effort, +whilst the Government would _needlessly_ take from them an unduly large +share of the fruit of their labor, let alone all of it except an +arbitrarily fixed sum. + +I say "needlessly" because, _were it really needed, business men would +willingly sacrifice their entire income for the country's cause._ + +They would work for patriotism, without any recompense whatever, just +as hard and harder than they do for gain or for ambition, if the +occasion required it. + +But, of course, everyone knows that nothing remotely approaching such +drastic taxation is required in this country at this time. + +It is absolutely right to proclaim and to enforce by legislation that +no man, as far as it is possible to prevent it, shall make money _out +of a war_ in which his country is engaged, but there is all the +difference in the world between that just and moral doctrine and +between the doctrine that no man shall be permitted to have more than +an arbitrarily fixed income _during_ a war. + +If $100,000 or any fixed sum is the limit of what may be permissible +income during war time, why not by and by a lesser sum? + +If the principle is once admitted, where will its application stop, +even in time of peace? + +Why is not the proposed plan, or anything in the nature of that plan, +simply license for the materially unsuccessful to despoil the +materially successful? + +History shows more than one instance where this road inevitably leads +to when once entered upon. + +And who are our successful men? The vast majority of them are self-made +men who started at the bottom of the ladder. + +It is trite to say that inequality of endowment and therefore +inequality of results in human beings, as well as in inanimate things, +is a law of nature. The capacity for creating, organizing, leading, +etc., in short, the possession of those qualities of brain and +disposition which beget success, is rare. + +It is in the interest of the community, whilst carefully guarding and +fostering the rights, the opportunities and the well-being of all of +its members, to give liberal incentives to men possessing those gifts +to put them to active and intensive use. It is hardly open to doubt +that, generally speaking, the work of able men, engaged in serious and +legitimate business (I am not speaking of gamblers and parasites), +whilst naturally benefiting them, benefits the community a great deal +more. + +The income of hospitals, orphan asylums, institutions of learning and +of art and many other altruistic enterprises depends largely upon the +voluntary taxation, aggregating a great many millions annually, to +which those men in America who have attained financial success have +always willingly submitted themselves--more so, probably than in any +other country. + +Who is to take care of all of those institutions if extreme taxation +compels the rich to cease their contributions? + + + + +III + + +The arguments above set forth apply likewise, though naturally not +quite in the same degree, to the proposal of levying an income tax +rising to an excessively high level, as, for instance, the suggested +tax of fifty per cent. on incomes over $500,000. + +There, again, the test should be whether so radical a tax is wise and +required by the necessities of the country. + +The nations in Europe have been fighting for nearly three years and +have been under an infinitely greater financial strain than our country +is or will be, yet none of these nations have resorted to extreme +taxation of income. + +_Even in Great Britain_, whose financial burden is the heaviest of all, +whose debt is many times the total of ours and who has loaned about +$5,000,000,000 to her Allies, the highest income tax rate, the maximum +percentage in the graduated scale of taxation, is to-day no more than +approximately forty per cent. + +In the last budget, introduced a couple of weeks ago, the British +Chancellor of the Exchequer declined, so I am informed, to consider an +increase in the income tax rate, because of the damaging effect which +such increase would be apt to have on the country's business and +prosperity. + +In France and Germany the burden laid on incomes is much lower than +in England. _In Canada_ where war loans have been raised equivalent +on the basis of comparative population to what would be more than +$10,000,000,000 for America, _no Federal Income Tax exists at all_. + +I doubt whether this latter fact is generally known in this country and +whether its significance is receiving the measure of serious +consideration which it deserves. + +I understand that it is the deliberate policy of the Dominion +Government to endeavor to avoid resort to an income tax in order to +attract capital to Canada. + +There can be little question that if our income taxation is fixed at +unduly and unnecessarily high rates, whilst Canada has no or only a +very moderate income tax, men of enterprise will seek that country and +there will be a large outflow to it of capital in course of time--a +development which cannot be without effect upon our own prosperity, +resources and economic power. + +The financial dislocation, the discouragement and the apprehension +caused by unduly heavy taxation of incomes will not only act as a drag +on enterprise and constructive activity, but will make it exceedingly +difficult, if not impossible, for corporations to sell securities in +sufficient volume and thus to obtain adequate funds to conduct their +business--especially also as investors will be fearful that high rates +of taxation once established will not easily be reduced to normal +levels, even when the present emergency is passed. + +Extravagance, log-rolling, the unwise and inefficient expenditure of +money by governmental bodies are amongst the besetting sins of +democracy. The formula once found, the machinery once employed for the +raising of huge revenues, are apt to make the way of wasteful +governmental spending all too temptingly easy. + +It must not be forgotten that taxation must necessarily by that much +diminish the surplus income fund of the individual and that both +theoretically and actually the spending of money by the government +cannot and does not have the same effect upon the country's prosperity +and enterprise as productive use of his surplus funds by the +individual. + +The sentimental, and thereby the actual, effect of extreme taxation +will not be confined to the relatively small number of people in +possession of very large incomes. The disturbance and fear caused by +the contemplation of an excessively high ratio of taxation, even when +applied to a relatively few, is bound to spread to those also of more +moderate incomes. + +Capital is proverbially timid. It will not take risks, except in the +expectation of commensurate reward, and if it sees the danger of its +reward being unduly infringed upon by excessively rigorous income +taxation, it will anticipate that menace by withdrawing from the field +of constructive investment to the greatest extent possible. + +So much is this the case that I incline to the belief that _taxation so +graded as to result in a maximum average of say 33-1/3 per cent. would +produce at least as great a revenue as a maximum average of 50 per +cent_. + +It is one of the oldest principles of taxation that an excessive impost +destroys its own productivity. + +The flood of securities which would be coming for sale in order to +escape extreme income taxation would create a grave condition of +demoralization in the investment markets of the country, with the +resulting inevitable effect upon the country's general business, and +upon its capacity to absorb Government loans. + + + + +IV + + +The tax recently enacted by Congress imposing a burden of 8 per cent. +on business profits over and above 8 per cent. on the capital employed, +regardless of whether such profits have any relation to war conditions +or not, is unscientific and unsound. + +(Incidentally, it is a strange provision of that law that it applies +only to co-partnerships and corporations, whilst an individual engaged +in business, however profitable, is not taxed.) + +It is unquestionably right and in accordance with both good morals and +good economics, to prevent, as far as possible, the enrichment of +business and business men through the calamity of war. + +But the recently enacted so-called excess profit tax which it is now +proposed to augment largely does not accomplish that. It taxes not +merely the exceptional profit, _i.e._, the war profit. It lays a burden +not on business due to war, but on all business. + +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. + + + + +V + + +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. + + * * * * * + +Since this article was published, I have received several letters +stating that, owing to the excessively high cost of living and for +other reasons, men of small means could not afford and should not be +asked to bear additional taxation to any appreciable extent and that +therefore the proposed vast increase in the income tax is a necessity. + +I fully agree with the premise, but not with the conclusion. Economics +are stubborn things and cannot be successfully dealt with emotionally. +I yield to no one in my sympathy for those who have to struggle to make +both ends meet and in my desire to see their difficulties lightened. I +quite agree that the financial burden of the war should be made to +weigh as little as possible upon the shoulders of the poor and those of +small means. Will a two-cent tax on checks be a burden upon the poor +and those of small means? Will a five-cent tax on single purchases +(excepting foodstuffs) of $5? Will an excess-profit tax on the lines +which I propose? The list of similar queries could easily be continued. + +The present cost of living is undoubtedly alarmingly high. I believe +this condition of affairs, to a certain extent at least, could be +alleviated by appropriate measures and that every effort should be made +to that end. But a huge increase in the income tax and unwise business +taxation will not accomplish this. It will, in fact, rather accomplish +the opposite, apart from lessening employment. + + + + +LETTERS + +I + +The Income Tax + + + Dear Sir: + + I fully agree with you in the principle of your conceptions of the + duties of moneyed men towards the country. They must be willing not + only to surrender such part of their income, indeed of their + fortune, as the necessities of the country require, they must be + ready not only to relinquish their affairs and to put their time, + their energies, capacities and experience at the disposal of the + Government in time of war, but they must be prepared to offer their + very lives if the country calls for them. Those are the duties, of + course, of every citizen, but they are doubly the duties of those + who have won success. I am firmly convinced that capitalists as a + class will not fail in them during the war. + + My article on war taxation was not written with any idea of + questioning these manifest and uncontrovertible truths, but solely + with the purpose of contributing to the discussion of the taxation + proposals certain considerations which I believe to be well founded + in economics and history no less than in experience and reason, and + the disregard of which would be apt, I think, to lead to + consequences gravely detrimental to the commonwealth. + + The question to which my article addressed itself was not what + sacrifices capital should and would be willing to bear if called + upon, but what taxes it was fair, reasonable and, above all, to the + public advantage to impose on capital, seeing that there is a point + at which the country's economic equilibrium would be thrown out of + gear and at which the incentive to use capital constructively and + productively and to take those business risks which are incident to + all business activity, would be killed. + + I greatly regret if what I said on the subject of Canada being free + from income tax gave the impression of being a suggestion for the + evasion by wealthy men of taxation during the war. The fact that + capital is not subject to income tax in Canada was, of course, well + known to men of wealth. I thought it a point and a fact of + sufficient importance as bearing upon our own taxation program to + deserve to be made generally known. That this might be considered + as either a suggestion or a threat of what capital might do during + the war, never, I confess, entered my mind, _for it would, of + course, be little short of treason for capital and capitalists to + take advantage of Canada's propinquity while the war is on._ + + You speak of the possibility of legislation to prevent this. If + capital meant to leave the country to evade taxation, there would + have been ample time and opportunity for it to do so during the + past six weeks. The price of exchange would indicate if that had + been done to any appreciable extent, and proves, as a matter of + fact, that it is not being done. If it were being done, I quite + agree with you that legislation should be sought to prevent it and + to punish the attempt. But I am entirely certain that moneyed men + will not think of evading whatever sacrifice may be required of + them by their country under war conditions. + + What I meant to intimate in saying that capital and men of + enterprise would seek Canada if there was no income tax, or only a + moderate one, in that country, whilst America at this time imposed + excessive and practically punitive income taxation, was this: + + Capital has a long memory. Capital is proverbially timid. I am not + referring only to large aggregations of capital but to all capital. + I am not referring only to the capital and capitalists of to-day, + but to those who accumulate capital by practising thrift and to + those who by invention, by conspicuous organizing or other ability, + by originality of method, etc., are instruments in the creation of + capital and will be, presumably, amongst the future owners of + capital. + + The possessors of capital, present and future, would not easily + forget if, in the very first year of the war capital in this + country were to be taxed at far higher rates than prevail in any + European country after three years of war. Even if such + extraordinary taxation was removed at once, after the termination + of the war, capital would remain disquieted by the fear that the + machinery of excessively high income taxation, once used and found + easy of motion, might be used again for purposes of a less serious + emergency than now exists. Those seeking capital for other + countries--_and there is bound to be a very keen contest for + capital after the war_--would not fail to make use of these + arguments. Moreover, experience has proved that very high rates of + income taxation once adopted, are not easily reduced to the level + from which they started. + + Therefore, in the case to which my argument was addressed, _i.e._, + unduly high income taxation in this country and no, or only very + moderate, income taxation in Canada, there can be little doubt that + _after the war_ there would be an outflow of capital to Canada, and + that--which is still more important--men of enterprise, especially + young men, will be apt to seek in that and other countries, fields + for their activities if the reward of enterprise is too greatly + diminished in America as compared to what it is elsewhere. Such men + would be doing nothing else than what many thousands of + American-born farmers have done within recent years in transferring + themselves, their capital and their working capacity to Canada. + + _Not a single one of the leading European nations, after three + years of the most exhausting war, has an income taxation schedule + as high as that adopted by the House of Representatives; neither + Republican France, nor Democratic England, nor Autocratic Germany._ + Of these three countries, England has imposed the highest income + taxation; yet, _the maximum rate in England is almost fifty per + cent. less than the maximum rate in the House Bill. The Cabinets in + these countries have undergone many changes in the course of the + war. They include Socialists and Representatives of Labor._ In the + determination of their taxation program, they have had the + assistance of the best economic brains in Europe. Those nations + have had far longer experience than we in the science of government + financing. + + Yet not one of them has deemed it wise and advantageous to the + state to impose rates of income taxation as high as those fixed by + the House of Representatives. Surely, this fact and the economic + considerations underlying it, are deserving to be seriously weighed + by our legislators. + + Does not the attitude of all the leading countries plainly indicate + their recognition of the fact that the action and reaction of + excessive income taxation create a vicious circle from which the + governments of all belligerent nations even in their extremity have + shrunk? + + And is it not a manifest dictate of reason that such burden of + taxation as must be borne should be imposed gradually, as was in + fact done everywhere in Europe, so as to give to all concerned a + chance to adjust themselves to the new conditions, and not with one + violent jerk? England imposed her present rate of income and excess + profit taxes not in the first year of the war, but started on a + much lower scale and by successive steps, in the course of nearly + three years, attained the figures now prevailing. + + We know that man and beast are capable of carrying far heavier + weights if the strain is gradually increased than if the whole of + the burden is dumped on their backs at once. The same holds good of + economic strain. + + Is it not plain that if the unprecedentedly high income taxation of + the House Bill--exceeding as it does any rates ever imposed by any + of the leading nations of the world--is enacted into law, the + Government will find itself crippled in respect of taxable + resources during the second year of the war; the very year which, + if the war does last beyond the present one, will presumably be the + crucial period. + + Of course, the cost of the war must be laid according to the + capacity to bear it. It would be fatuous folly and crass + selfishness to wish it laid or endeavor to have it laid otherwise. + All I am advocating in effect is that in the public interest not + too much be exacted at once, but that by dividing the burden over a + reasonable number of years, capital in no one year and especially + not during the first year of the war, should be so excessively + taxed as to produce an unscientific and dangerous strain. + + In addition to the concrete factors, there enter into this question + certain psychological elements of a somewhat subtle character, but + sufficiently definite and potent to be plainly discernible to those + who are experienced in dealing with business affairs and with men + of business, large and small. + + I believe an income tax greatly increased over the rates heretofore + prevailing, yet keeping within the bounds of moderation, would + produce at least as large a total revenue as an exceedingly high + one. And the consequences of the economic error of placing too vast + a burden direct upon incomes would be more serious, I think, to the + people in general than to the individuals directly concerned. The + question of the individual is not the principal one. The essential + thing is that no undue strain be placed upon that great fund of + capital as a whole which is derived from incomes of all kinds. It + is this fund which in its turn is one of the vital forces necessary + for the normal activities and progress of industry. If that fund is + suddenly and too greatly reduced, the effect upon commerce and + industry is liable to be abrupt and withering. + + I yield to no one in my desire to see the burden upon the poor and + those of moderate means lightened to the utmost extent possible. + + I realize but too well that the load weighing at this time upon + wage earners and still more perhaps upon men and women with + moderate salaries is almost too great to be borne and certainly + much greater than it should be. I wish a commission might be + appointed, consisting of those best qualified in the entire + country, to apply themselves to this most serious, difficult and + complex problem, indeed to the entire problem of excessively high + prices. I hope they would discover means, if not to remedy the + situation entirely, at least to alleviate it. + + But I am convinced that relief cannot be found in taxation of + incomes at rates without a parallel anywhere, and in unduly + burdensome imposts upon business activities. I am convinced that + certain theories being urged upon Congress and the people and to + which the House War Revenue measure is in part responsive, while + doubtless meant to tend and seemingly tending to a desirable + consummation, are in fact bound, in their longer effect, to bring + about results harmful to the community at large, rich and poor + alike. + + It is only that conviction which has emboldened me to state my + views publicly. In doing so I fully realized that I was running the + risk of having my action misunderstood or misconstrued, and to be + charged with selfishness and lack of patriotism. + + Yet, I feel certain that in the end just recognition of their + motives will not be withheld from those who, in defiance of the + fleeting popularity of the plausible, venture to point out the + dangers of impetuous action, however well intentioned, in the + present emergency, and to urge that moderation and that regard for + the lessons of history and of economics which can be left aside + only at the peril of the general welfare. + + Very faithfully yours, + + (_Signed_) OTTO H. KAHN + + P.S.--That you or any one else should even for a moment attach + credence to the monstrous suggestion that capitalists fomented + America's entrance into the war because they feared that otherwise + the amounts loaned by them to the Allies might be jeopardized or + lost, is a truly distressing manifestation of the willingness of + some of our people--I trust not many--to believe evil of men simply + because they have been materially successful. + +Leaving aside the cruel injustice of such an imputation, it attributes +to moneyed men a degree of stupidity and of ignorance as to their own +interests, of which they are not usually held guilty. + +America loaned to the Allied nations, prior to our entrance into the +war, roughly speaking, $2,000,000,000, of which sum all but a small +fraction was loaned to England and France. + +These loans were made almost entirely in the shape of bond issues which +were widely distributed amongst individuals and institutions throughout +this country. Therefore, no very large portion of the aggregate is in +the hands of any one person or institution. + +To any one acquainted with financial affairs it is absolutely +inconceivable that England or France would have defaulted on the +relatively moderate amount of their foreign debt, whatever might have +been the outcome of the war, if America had not joined. + +Let us grant, for argument's sake, the wildly far-fetched supposition +that in one way or another their internal debt might have become +affected; it would still be utterly inconceivable that they would have +permitted a default in their foreign debt, because it is, of course, +suicidal for any nation to jeopardize its world credit. + +But let us go still a step further and assume, in defiance of all +reason, that even this totally inconceivable thing were to have +happened. It would have meant, of course, not a total and irrecoverable +loss to the holders of obligations of the Allied countries, but merely +a more or less temporary shrinkage of the value of such holdings. + +_A single year's war taxation will take out of the pockets of +capitalists a great deal more than they could possibly have lost +through depreciation in value of such amount of Allied bonds or loans +as they may hold._ + +If you add to these considerations the circumstance that, owing to the +intervention of our Government in financing and otherwise providing for +the Allies, the commissions and profits of those who have heretofore +dealt with the Allies will be largely cut off; that business will, +quite rightly, be subjected to a large excess profits tax; that capital +for years to come will have to pay increased taxes to provide for the +debt incurred through the war, for pensions, etc.; if you will reflect +on these and various other patent considerations, you will realize that +any rich man, fomenting for selfish reasons our entrance into the war, +would be a fit subject for the immediate appointment of a guardian to +take care of him and of his affairs. + + + + +II + +_The Actual Return Upon Taxable and Tax-Exempt Securities_ + + + Dear Sir: + + Your letter indicates that you do not sufficiently realize the + enormous advantage in interest yield which under the income tax + schedule as fixed in the House Bill is possessed by tax-exempt + securities as compared to taxable securities, especially, of + course, in respect of large incomes. + + Permit me to call your attention to the following eloquent facts: + + The yield of tax-exempt securities at prevailing prices ranges from + 3-1/2% to nearly 4-1/2%. _Under the rates fixed in the War Revenue + Bill as it passed the House of Representatives, a taxable 6% + investment_ would yield: + + PER ANNUM + 2.28% on incomes over $2,000,000 + 2.34% " " " 1,500,000 + 2.40% " " " 1,000,000 + 2.69% " " " 500,000 + 2.97% " " " 300,000 + 3.26% " " " 250,000 + 3.54% " " " 200,000 + 3.90% " " " 150,000 + 4.20% " " " 100,000 + + Or, to put it in another way, the investment in 3-1/2% "Liberty + Bonds" is thus equivalent to investing in a taxable security + yielding: + + PER ANNUM + 9.21% in respect of incomes over $2,000,000 + 8.97% " " " " " 1,500,000 + 8.75% " " " " " 1,000,000 + 7.82% " " " " " 500,000 + 7.07% " " " " " 300,000 + 6.45% " " " " " 250,000 + 5.93% " " " " " 200,000 + 5.38% " " " " " 150,000 + 5.02% " " " " " 100,000 + + The investment in, say, New York City Bonds, being tax-exempt, at + their present yield of 4.20%, would represent the following rates + of income as compared to investments in taxable securities: + + PER ANNUM + 11.05% in respect of incomes over $2,000,000 + 10.76% " " " " " 1,500,000 + 10.50% " " " " " 1,000,000 + 9.38% " " " " " 500,000 + 8.48% " " " " " 300,000 + 7.74% " " " " " 250,000 + 7.12% " " " " " 200,000 + 6.46% " " " " " 150,000 + 6.02% " " " " " 100,000 + + Of course, all these figures hold good only for the period during + which the proposed rates of income taxation would prevail. As the + income tax rate decreases, the yield from tax-exempt securities + diminishes proportionately. + + The volume of tax-exempt securities at present outstanding, + including the new "Liberty Loan," is estimated at not less than + $8,000,000,000. + + The ability of corporations to find a ready market for their + securities is a prerequisite for the continuance of business + prosperity or, indeed, of adequate business activity. I need not + elaborate the effect which the comparison of the income yield from + tax-exempt securities as against taxable securities under an + excessively high income tax schedule--even if confined to larger + incomes--must necessarily have upon the eligibility of corporate + securities for investment purposes. The conclusion seems + unescapable that the resulting degree of disinclination to invest + in such securities coupled with the impulse to dispose of existing + holdings would bring about liquidation, severe shrinkage of values + and more or less pronounced demoralization in the investment + market--a condition of things which could not fail in a measure to + affect adversely the country's business in general, and which could + only partially be counteracted by Government expenditures, however + large. + + As to your observations concerning the principle of tax-exempt + issues, I believe the Government acted wisely, considering all the + elements of the situation, in making its first great war issue, the + Liberty Loan, tax free. But in the face of the figures above + quoted, the question naturally presents itself whether our + traditional policy of making Government issues tax-exempt should + not be discontinued, which, of course, would mean that a materially + higher rate of interest than 3-1/2% would have to be paid for + Government borrowing. + + In theory, it seems to me, there can be little doubt that the + balance of arguments is against the tax-exemption of Government + loans. As an abstract proposition little can be said, I think, in + favor of a policy the effect of which gives an advantage to the + rich and well-to-do, militates against the widest possible + distribution of Government issues amongst the people, tends to + facilitate Governmental extravagance by concealing the true cost + and establishes a fictitious basis of national credit. + + Thus, for instance, on the $1,000,000,000, or thereabouts, which + our Government has loaned to the Allies at 3-1/2% interest, it is + losing money, because, whilst it nominally borrows this money + through the Liberty Loan at 3-1/2%, the cost to it is actually + considerably higher because it loses the revenue which would accrue + to it from the income tax if the bonds were not tax-exempt. + + Let me add that I do not wish to be understood as suggesting that + our Government should charge to the Allied Nations more than the + nominal rate at which it is borrowing. They have been fighting + these three years and bringing unheard of sacrifices for a cause + which we have recognized to be ours no less than theirs, and if we + loan them money somewhat below its actual cost to us that item + weighs but very lightly in the scale, especially also if we + consider the immense monetary profits which our country has reaped + from the sale to them of munitions, material and supplies. + + However, as against the theoretical objections, some of which I + have mentioned, to the tax-exemption of Government loans, there are + certain "imponderabilia"--things which cannot be exactly + weighed--in favor of a low rate of interest for Government + borrowing, even if the lowness of the rate is to an extent + fictitious. There are also certain practical reasons for the + maintenance of our traditional policy, and various concrete facts + which must be taken into account. For instance, there is the + problem of how to deal with the situation that might result from + the withdrawal of deposits from savings banks and similar + institutions, which probably would be liable to occur in case the + Government offered a bond issue at the higher rate it would have to + fix if the inducement of tax-exemption were removed. + + There is the problem of the existence of billions of municipal and + state securities which offer to the holder the privilege of freedom + from municipal, state _and Federal_ taxes. I understand that it is + the consensus of opinion of our leading lawyers that under the + legal theory which treats such issues as "instrumentalities of + government" that privilege cannot be abridged and that Congress has + no constitutional power to tax state and municipal issues. + + If state and municipal issues to be made during war time retain the + feature of being free from taxation, can the Federal Government + afford to make its war loans taxable, and thereby place itself in a + position where it would have to borrow under conditions which would + put it and its credit at a disadvantage as compared to state and + municipal issues? + + The problem is a complex one altogether and, like all economic + questions, requires to be approached in a dispassionate spirit, + giving due consideration to the reasons for and against. The temper + of the stump speaker is not appropriate for dealing with taxation + problems. + + Let me add, in conclusion, that I fully agree that it is "sheer + fiscal stupidity" and "socially inexpedient as well" to permit + "mushroom fortunes" to be built out of war profits. I believe there + ought to be imposed a large excess war profits tax on the English + model upon a fair and well conceived average basis of earnings so + calculated as to take account of the vast difference in the + country's industrial plant to-day and before the European war. Such + a tax may not be entirely free from objections in theory, but from + the social and moral point of view it is, I am convinced, + thoroughly sound and proper and called for. Appropriate taxation of + excess profits, together with an adequately though not exorbitantly + heavy income tax would go a long way to prevent the enrichment of a + class through the calamity of war, without at the same time + affecting wages or laming the enterprise and business activities of + the country. + + Yours very truly, + + (_Signed_) OTTO H. KAHN + + + + + +End of the Project Gutenberg EBook of War Taxation, by Otto H. 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