Taxation Today


By ROBERT A. TAFT, U. S. Senator from Ohio

Delivered on the National Radio Forum, arranged by the Washington Star, and Broadcast over the Blue Network, March 23, 1942

Vital Speeches of the Day, Vol. VII, pp. 398-401.

ONE of the most difficult and unpleasant jobs that Congress has is to levy taxes. The President and his subordinates apparently get some pleasure in spending money no matter what it is spent for, but no one likes the job of taking it away from the people so that they can have it to spend. While everyone admits in theory the necessity for paying taxes, there are very few who do not claim that they are being singled out inequitably and unfairly for an especially heavy burden. Witness after witness appearing before our Finance Committee begins his talk in some such way as this: "We believe in heavy taxes and wish to pay our share, but," and then he goes on to explain how unfair the proposal is to him. Nevertheless, the people today are more willing to pay taxes than they ever have been before.

Taxes are already heavy. The first question is why we have to have more taxes. The answer to that one is comparatively simple. We have to have more money to pay the tremendous bills required by this war. It looks as if we would spend 57 billion dollars in the year beginning July first for war purposes alone. The government has to pay real money for the munitions and the equipment and all the different kinds of war expenditures. Men won't work for nothing in the munitions plants or in the mines or on the farm, as they have to do in Germany. As a matter of fact, we don't want them to. They must be paid real money that they can spend, and the government has to get that money by taxing or by borrowing from someone.

There are some who suggest that the government might just print the money. That has been tried often enough, and experience shows that it always brings about a tremendous increase in prices, doubling or tripling our present prices or even more. Certainly it is a good deal better to pay taxes than to pay twice as much for everything you have to buy. Governments have sometimes tried to borrow the whole cost of the war without taxing, but if you borrow too much, it has to some extent the same effect as printing paper money, and the people pay the cost of the war in increased prices for food, clothing, rent, and other things, a heavier burden even than taxes. The truth is that the financial burden of war, like the physical burden of war, like the casualty lists, falls upon the generation which is fighting the war, in one way or another. We cannot pass on to our descendants the cost of the war, but if we handle our military operations badly, or handle our foreign policy badly, or handle our finances badly, we will not only pay the cost of this war ourselves, but we will pass on to our children a world in which there no longer exists the freedom or the opportunity or the standard of living which we ourselves have enjoyed. I am convinced that in the long run, regardless of appearances, the easiest way to pay for it is by taxation to the heaviest extent that will not disrupt the war effort.

How much should we raise in taxes? What percentage of our total income should be paid in taxes? Well, this fiscal year we are only paying about 12 billion dollars to the federal government, while it is spending 30 billion. The other 60per cent is being borrowed. If Mr. Morgenthau's proposals are enacted, the federal government will collect in taxes 24 billion to pay expenses of 63. My criticism of the program is that it is rather too small than too large. I believe we ought to raise half the cost in taxes. I entirely agree with Secretary Morgenthau's own statement, and I quote "I should like to urge, therefore, the adoption and attainment of the goal the President has set, not as a maximum but as the very least that the American people can afford to provide at this critical time."

How shall this tremendous tax burden be distributed? That is the most difficult and controversial question. No one can be sure that he is right in his conclusion, but there are certain principles which ought to underlie the decision. In the first place, everybody ought to contribute something. In the second place, those who are better off ought to contribute more than those who are less well off. In the third place, no one should expect to profit from the war, in increased net returns from profits, dividends, interests, rents, wages or prices.

Taking first the principle that no one shall profit from the war, there can be no disagreement on this principle. When we consider that we are requiring millions of men to leave their homes and even their families to go to all sections of the world and put their lives in peril to defend the rest of us at a mere subsistence wage, those who stay at home ought to be glad if they come out of the war as well off as they went in. This is the basis, first, of the excess profits tax. No corporation and no individual in business ought to make more than he made in normal times. We ought to take away the excess before we begin to consider what the normal tax on pre-war income ought to be. In principle the excess profits tax ought to be 100 per cent. Human nature being what it is, and since this removes all incentive to run a profitable business with economy and efficiency, I should favor a 90 per cent tax on excess profits instead of the 75 per cent suggested by the Treasury. I believe that a 10 per cent interest in these profits would supply just about as much incentive to economy as a 25 per cent interest.

We should apply the same principle to wages and prices. As a general principle, prices should only be increased in proportion to the increase in costs, and wage rates should only be increased in proportion to increases in the cost of living. There is no way to reach prices and wages by taxation, so we have tried to eliminate excess profits in these fields by price control and by a rather indefinite and unsatisfactory control of wage rates.

In all three fields of profits and prices and wages we have to permit the adjustment of depressed and unfair conditions before we take the excess. An increase in wages must be permitted in industries or individual cases where they were unduly low. Farm prices must be permitted to increase to a relationship with other prices fair to the farmer, generally considered to be parity. Profits must be permitted to increase in depressed industries to a reasonable return on the capital invested. After the excess has been eliminated or recaptured or prevented, we can consider the question of taxing the normal income and profits that remain.

The second principle I suggested was that everyone would have to pay something to the war effort. I don't believe there is any man, woman or child in the United States who isn't willing to make a substantial contribution out of his income in the shape of war taxes. Under the Treasury program federal taxes will amount to 30 per cent of the national income, and I believe they should amount to at least 25 per cent. The Treasury proposes to take 70 per cent from anyone with an income of $100,000 and 90 per cent of the income of the very wealthy. I believe this is drastic, but not unfair in this crisis. But is seems reasonable to me that everyone, man, woman and child, should pay from 5 per cent to 10 per cent of his normal income as a war contribution. This principle is the justification for a general sales tax or a general withholding tax, which I shall discuss in a moment. The Treasury still resists any such tax, but Mr. Roosevelt himself admits that we must face it sooner or later. He said in January, "All through the years of the depression I opposed general excise and sales taxes, and I am as convinced as ever that they have no permanent place in the federal tax system. In the face of the present financial and economic situation, however, we may later be compelled to reconsider the temporary necessity of such measures." The time has come to impose whatever taxes we are going to impose. If we must inevitably come to a sales tax, we might as well start this year. Of course it should only be used to supplement a heavily graduated income tax.

The third principle is that the people who are best able to pay should pay more heavily than the lower-income groups. The best method of reaching this is by a graduated net income tax. We have always had that principle, and the Treasury proposal extends it to an amount which will seem very burdensome to many families. Under the proposed Treasury rates, a family with a gross income of about $2,700 will pay $175 in income taxes, or about 6 per cent; a family with a gross income of $5,500 will pay $805, or 15 per cent; a family with an income of $11,000 will pay $2,435, or more than 22 per cent; the brackets above $10,000 will pay from 42 per cent to 90 per cent. The tax is graduated about as steeply as anyone could ask. The burden on the wealthy and the middle-income groups is very heavy, but I don't see how we can avoid it, and it may be still heavier before the war is over.

On the other hand, while everyone agrees to the principle of a graduated tax, I believe everyone also agrees that the income remaining to each man shall have some relation to what he had before. Differences in income, differences in ability in past thrift, and in value to the community. Unless we are going to adopt Communism and expect to level all incomes, we cannot say that every family shall be reduced to a gross income of $2,500 a year, which will be approximately the average after federal taxes. That would require an economic revolution and upset most of our normal activities. It would upset the whole production program, so essential to success in the war. There is no doubt whatever that with the present rates every family with an income of $5,000 or more is going to have to adjust drastically its whole standard of living, even at the proposed tax rates. Any greater adjustment would probably produce dislocations in every human relationship, which might destroy the very industrial and commercial structure to which we are looking for future taxes.

There are those who feel that we should raise the entire war cost in taxes. They point out that our national income next year will be 115 billion dollars, whereas the amount of goods and services available for civilian use will be only 55 billion. In other words, the people who get 115 billion won't be able to find things to buy of value greater than 55 billion. Why not make them pay all the excess in taxes, it is said everyone will be just as well off as before, except for the things they can't get anyway.

This sounds all right in theory, but it would really be grossly unfair to any individuals in the lower-income groups and some others. Suppose two men, one who earned $2,500 last year and another one $1,500, perhaps because his plant did not work full time, or because he had just begun to learnthe job. Suppose they both receive $2,500 this year, and suppose that the second man is a much better workman, or has been advanced to a better and more difficult task, or his plant is now running full time. The principle suggested would require him to pay $1,000 in taxes, whereas the man who always had $2,500 would pay nothing. This is only an example, but it is typical of millions of cases. We simply cannot tax individuals on the basis of improvement over last year's income. It is hard enough to do with corporations, and the effort to do so has produced many inequalities in the excess profits tax, but it is impossible with individuals. There are a good many sound principles in taxation, but if any of them are pressed to extremes, particularly when the rates are very high the results turn out to be unjust to a large proportion of those taxed.

To sum up, we have to spread the burden as equitably as possible on the basis of a man's present income. We have to tax everyone. We have to tax the wealthy more heavily, but we have to leave them after taxes with an income having some distant relation to what they have been receiving in past years. At the same time we can't tax any man more heavily simply because he has improved his condition since last year.

Finally, we come to the question of taxing business and corporations. Of course, all corporations are owned by somebody, bondholders or stockholders. Furthermore, they distribute to stockholders from 70 per cent to 80 per cent of their earnings. Since these stockholders are already being taxed, any tax on the net income of corporations is double taxation. In other words, the earnings are taxed once when the corporation makes its return; and then the stockholder has to pay on his dividends, which are the same earnings, at the very high rates I have discussed. If a man conducts business in his own name, he only has to pay one tax, and the corporate taxes proposed by the Treasury are so high that it will certainly pay thousands of smaller businesses to give up their corporate charters and operate as individuals or partnerships. The chance of individual liability for debts will be much less than the certainty of corporate taxes.

However, there must of course be some business taxation, and a tax on corporate profits is the easiest way to do it. The only way to recapture excess profits resulting from the war is in the business, before they get to the stockholder, and I have stated why I think this tax ought to be 90 per cent. Furthermore, as a practical matter, corporations do not distribute all of their earnings. A certain amount, from 20 per cent to 30 per cent of income after taxes in recent years, is retained in the business to help build up the business, and while it may improve the stockholder's values, he does not pay income tax on it. The tax on normal profits this year has been 31 per cent, and even that seems unreasonable on any equitable basis on top of high taxes on dividends. The Treasury, however, now proposes to increase it for corporations of any considerable size to 55 per cent, leaving them only 45 per cent of the profits which they earned in normal times, besides taking 75 per cent of the excess profits.

As I see it, the result will be that corporations must cut in half the normal dividends which they paid in pre-war years. This would clearly be double taxation and a gross discrimination against people who receive dividends from common stocks, particularly the common stocks of conservatively-operated companies. Compare a man who has retired, or his widow, who has an income of $100 a month from dividends, with another man who has an income of $100 a month from wages, or salary, or interest on bonds. The man with dividends would have his income cut in half to $50 a month. The man with $100 a month from other sources would pay only $6.00 a month tax if unmarried, nothing if married. One trouble is that the word "profits" is misunderstood.

The profits of a corporation, to the extent that they are merely normal peacetime profits, are simply a return on past savings of people who have invested their money in stocks Of course, excess profits are a very different thing, but there seems no reason why one who has saved his money all his life and invested in stocks should be treated any more drastically with regard to his normal income than any other man who has saved. The size of the corporation has nothing to do with it, for many poor people have invested in stocks of large corporations, and many older people and widows are living on the dividends received from these stocks. The Treasury seems to be inspired with a hatred of any return on any money invested in a corporation, but its proposal is so clearly double taxation that it departs entirely from the general principle of taxing people in proportion to their ability to pay. It is grossly inequitable, not necessarily to the corporation, which is only an imaginary person anyway, but to its thousands of stockholders, many with limited means, whose income comes from dividends.

To correct this situation, I believe that the excess profits tax should be increased from 75 per cent to 90 per cent, and that there should be little if any increase in the tax on normal corporation profits. The total increase for corporations would probably be about the same.

The Morgenthau program proposes increased taxes of 7 billion 610 million dollars. I criticize it with some hesitation at the present time because we have not completed our hearings, but it does not seem to me to be the all-out program which is necessary to meet the present situation. We know now about what we can spend in war-time. We ought to provide the money by taxation to meet at least half of that expense. My first criticism, therefore, is that the Morgenthau program does not raise enough money. The reason is fairly obvious. It proposes a total increase of 7 billion 600 million dollars. Of this about 6 1/2 billion comes from individual income taxes, corporation taxes, and estate taxes. These increases fall entirely on incomes over $2,500 a year, and almost entirely on incomes over $5,000 a year. These incomes already provide most of the taxes. Out of a total estimated income of 92 billion in 1941, these taxes would come entirely from 28 billion of income, and would not touch the other 65 billion of income. For the most part they would come from one-fifth of the income of the country, and leave the other four-fifths almost untouched. The Morgenthau program includes 1 billion 340 million in excise taxes, almost entirely on drink, cigarettes and gasoline. While I approve of the principle of these taxes, there is a serious question whether these articles are not already so heavily taxed that we will fail to realize any increase in income by increasing the rates. I believe the Secretary's estimate or return from all his proposed increases is in excess of what will actually be realized.

In my opinion, the program falls down because it only reaches such a small proportion of the population, and should be supplemented by a sales tax or a general withholding tax. I have always opposed such a tax, but today I believe everyone should contribute, and this is the best way of securing that result. I estimate we could get two billion dollars additional from a 5 per cent retail sales tax, four billion from a 10 per cent retail sales tax. This would not decrease anyone's standard of living, because there are so many things that people will not be able to buy, and so many things people will not be able to do, like traveling in automobiles, that they can well afford to pay this additional tax. From the mail I am receiving, the people are in favor of such a tax. No one objects to contributing 5 per cent to the war effort.

We have to remember another thing. The tremendous increase in national income is going almost entirely to wages in the war industries. The increase in 1942 in this field isestimated to be 15 billion dollars. The Morgenthau plan practically does not reach this additional income at all unless it is spent for liquor, tobacco or gasoline.

I have always rather favored a general withholding tax than a sales tax, but it is more complicated, and it may be necessary to resort to it later as part of a compulsory saving plan. A retail sales tax is the simplest, most direct, and easiest to understand of any general tax. It is not inflation in the slightest degree. It is deflationary. Standing by itself,it is unfair. Combined with a heavily graduated net income tax, I believe it is the best method of making all contribute to the war effort.

I have said enough to show you that the task of Congress is not pleasant. I can only assure you that the Congressmen and Senators concerned with this problem are sincerely trying to work out the best possible system, one that will raise the money and will distribute the burden equitably as we see it. When we get through I hope the country will forgive us.