Federal Taxes for Defense
SPREAD THE INCOME TAX BASE
By MARK EISNER, Attorney and former Chairman of the Board of Higher Education of the City of New York
Delivered over Municipal Broadcasting System, Radio Station WNYC, New York City, Tuesday, May 28, 1940
Vital Speeches of the Day, Vol. VI, pp. 528-530
PUBLIC opinion in the United States is usually mirrored by Congress in Washington. It is often one of the best indexes available for measuring public sentiment on important issues. Our House of Representatives reflects the public mind best in an election year. Our Congressmen like to lie low on most issues when an election impends, but they do not dare, on peril of being turned out, to disregard matters which require urgent action.
Perhaps the best proof of the efficacy of our system of representative government and its adaptability to national needs is the unanimous response by Congress to the almost universal demand of the American people to increase appropriations for defense. It is now nearly in the limbo of forgotten events, but less than two months ago, the House of Representatives cut the Army appropriations almost to the detriment of the Army procurement and educational order program. By now all America is familiar with the excellent practical plan of our war department to ready our industrial plants during peacetime, by accumulating a mass of practical technical and mechanical experience for the immediate production of war necessities, if we should have to go to war. Assistant Secretary of War Louis Johnson has said that the purpose of these educational orders to industry is to reverse our "traditional practice which is to wait until a war is upon us before we do anything about it." In the face of this warning, just a week before the German legions overran Denmark, our House of Representatives and the Senate, concurring, for the sake of economy, reduced Army appropriations by eighteen millions of dollars, fourteen millions of which were scheduled for the educational orders program. Thus, in the 1941 fiscal year, only six to ten industrial plants were to receive such orders instead of 115 plants as originally proposed.
By contrast, only six weeks later Congress overnight almost unanimously voted three billions of dollars for defense purposes in response to a public opinion which wasaroused by the dangerous developments in the War overseas. When the President, as is his duty as the Commander-in-Chief of our armed forces, pointed to the insufficiency of our armaments against triumphant dictatorships, and sketched an immediate minimum program of defense, the response of Congress was instantaneous. The President made it very plain that he considered our national security the paramount question of the hour. He asked Congress for a huge increase in our defense outlays, and Congress responded with alacrity. In responding, Congress seemed to agree with the President that financing the expansion was a minor question, solution of which will be tackled at a later time.
On May 25th columnist Harlan Miller reported from Washington that he had "Strolled into Senator Pat Harrison's office to find out whether he's thinking of selling Liberty Bonds or Defense Bonds or inventing new taxes for the new defense program." Senator Harrison is the able Chairman of the Senate Finance Committee. Miller reports that Senator Harrison seemed "to think such fiscal puzzles (as inventing new taxes for the new defense program) will be simpler to solve after election." I was glad to read in the current papers that the Secretary of the Treasury and some legislators are now seriously considering the enactment of a new revenue measure. Indeed, it is my judgment that the country will be better prepared for any emergency if we will start building our fiscal defenses now, instead of waiting until a new Congress convenes some seven months hence and a newly elected President takes office.
I do not have any doubts about the essential soundness of our economy. Despite the calamity howlers of all shades of political and personal interests, our economic position today is stronger than that of any nation in the world. The factors which make for this strength are our God-given store of essential raw materials and our great nation of productive men and women who have the strength and the will and the ability to work. Yet, it is idle to deny the financialstrain imposed on our economy by our present commitments for our defense needs. What is perhaps even more important, our future defense requirements, especially if it should become necessary to take part in the warówill mean a burden for which we must have a plan or we risk an economic breakdown.
Foreign governments have resorted to various means for financing their defense and wartime needs. The totalitarian states, in line with their policy, have harnessed their populations to their war machines. Just as so many slaves, they pull the entire load, without choice and without consideration. A form of economic organization has been effected by the dictatorship states by which all resources, including labor, are at the complete command of the state, before anything is released for the needs of the individual. Thus the man and his family who by their labor succeed in raising a crop of cabbages are not permitted to satisfy their hunger by eating part of their crop. The produce are the property of the state and it retains all for the state, doling out what the functionaries think proper.
This is a system of economic organization which prevailed among savages, who required no tax laws, because their society operated in the pattern of our modern dictatorship. The tax problem in the totalitarian states is no problem because in the main government revenues do not derive from taxes, but from the labor of slaves. In this connection it is interesting to observe that when the Nazis occupy a country they immediately confiscate, presumably for the benefit of the Third Reich, all the resources including the labor supply. They organize the population of the occupied states into labor battalions and drive them to tasks for which they get little or no pay except some uniforms and food to continue their usefulness to the Nazi state. Thus the Third Reich continues to function and to conduct a most expensive war and propaganda machine, although without visible resources.
The democratic states which are in the war have continued to derive their principal revenues from taxes and loans. They have stiffened the tax rates, but they have not yet resorted to outright confiscation of private property, such as has been done by both Italy and Germany. The English Parliament has voted to conscript labor and capital to meet the emergency created by the threatened invasion of the enemy, but this is not the same as confiscation. Conscription may be compared rather to an enforced tax, to be resorted to in times of stress for the common defense. The essential tax structure of the Allied Powers have been held to the purpose for which taxes have been invented by society, namely, to effect an equitable distribution of the burden of government among all the people.
In our modern economy it is not always easy to achieve a fair and equitable distribution of the tax burden. Thus, for instance, we have insisted that taxes be levied in accordance with ability to pay, even though the benefits of our government accrue to all the people without regard to their contributions, to our Treasury. These are some of the things which make it necessary to resort to careful tax planning in a time like this, when it is so easy to forget taxing principles which are fundamental to our society. This is the time when tax plans must be available for careful study to avoid the inequities which might result from haste and the pressure of the need for tax revenues.
In January of this year the President recommended the raising of four hundred and sixty millions in new defense taxes, to be apportioned according to ability to pay. Congress is yet to act on this recommendation. In the last session of Congress, Senators Bone and Connelly introduced theWar Profits Bills. Under these bills individual tax rates run up to 99%, and corporate profits in excess of 6% on declared capital stock value would be confiscated.
More recent tax proposals are not so drastic, and yet promise to produce considerable revenues. There is a proposal to enact a supertax or tax on tax, by which an income taxpayer would pay an additional percentage on his regular tax. Estimates indicate that a ten per cent supertax will yield two hundred million dollars, and a twenty-five per cent tax will yield about one-half billion dollars. Another proposal of a similar character would increase the normal income tax rate from four to ten per cent effecting a rise in income tax revenue of nearly one-half billion dollars. There are also several general sales tax bills, which the President and all liberal economists deem the least desirable because they overburden the poor among us. In the Hoover administration it was shown that a two and a quarter per cent manufacturer's excise tax would yield in a depression year about five hundred and fifty millions of dollars.
These and other similar proposals for raising revenues seem to me to be unwise, uneconomical and unnecessary at this time. In their stead, I hold with Senator LaFollette and his colleagues who have long ago advocated a spreading of the income tax base. This plan is flexible and very many variations of it have been proposed. It recommends itself principally because it would increase the number of federal income taxpayers in the United States, triple the revenue income under some plans, simplify our income tax laws, and could be set into operation to produce real revenue in the least possible time.
The May issue of the Bulletin of the National Tax Association contains a most interesting study by Messrs. Durham and Ensley of the University of Denver on "The Revenue Possibilities of the Personal Income Tax." The object of this study is "to determine the tax base and the rate schedule which would be required in order to raise from personal income taxation approximately three times as much revenue as is currently being secured." For "illustrative purposes, the authors" have increased the number of persons subject to taxation and decreased the variety and amount of tax exemptions and computed the tax revenue for 1936 as it might have been if these changes in the tax laws had been effected.
They found that under such hypothetical conditions the federal revenues from income taxes without any changes in the existing rates would have mounted to more than three times the actual revenues. They also found that nearly twenty-five million income tax returns would have been filed for 1936 instead of the nearly five and a half million returns which were actually filed for that year. The authors of the study point out that "even with much lower personal exemptions it is the families in the upper income levels who would pay most of the total income tax. More than 71 per cent . . . would have been obtained from families and single individuals with incomes of five thousand dollars and over." These figures were based on a family income beginning at $1250 and a single individual's income beginning at $500.
If Congress would immediately resort to the expedient of spreading the income tax base in accordance with this study, there would be a tax return, from personal income sources alone, sufficient to meet nearly two-thirds of the emergency defense taxes which it has just voted. In 1939 the personal income tax revenues were more than nine hundred and thirty-seven millions of dollars. A little more than tripling this sum would easily net two billions of dollars in revenues, equitably distributed without doing harm or injury to ourpresent economic structure. In fact, it would give a substantial boost to our economy because it would help Congress toward the goal of averting a rise in our existing debt limit. It would be a spur toward finding additional sources of revenue of a stable character. It would be an incentive to our legislators to hunt and find items in our budget to cut out or reduce, so that our debt limit might be kept approximately within the present limits. As I said at the beginning, Congress responds to the will
of the American electorate. If the electorate makes itself heard, Congress will not hesitate to enact new taxes. This it will do even though it is unorthodox politics to vote new taxes in an election year. I have an unbounded faith in the patriotism and unselfish devotion of our representatives in Washington. They will sense the signals that we, the electorate, give them in this matter, and they will act accordingly. This they will do in the fine tradition of our representative system of government.