The Capital Levy and the Colleges
TAX PROGRAM SHOULD BE REALISTIC AND FEARLESS
By EVERETT NEEDHAM CASE, President, Colgate University
Delivered before the Executives Club of Chicago, March 5, 1943
Vital Speeches of the Day, Vol. IX, pp. 399-402.
NEARLY three years ago I was discussing the war in Europe with a cautious and conscientious Yankee whom I had not seen for some time. Naturally, our conversation turned upon the war which many Americans still liked to think of, you will remember, as the European and even as the "phoney" war. Both of us happened to regard it more seriously, but the soberness of my friend took a quaint and rather old-fashioned turn. He saw in the war a challenge to us so grave that, as he put it, we could not hope to meet it out of income; we would have to "dip into principal."
Though the turn of thought and phrase was distinctly nineteenth century, his analysis was sound and even prophetic. The challenge we sought first to dodge and next to meet by production alone was driven home by the fact of Pearl Harbor. Now in 1943 it has become the central core of our existence as individuals and as a people. Any vague notion, however we might phrase it, that the war could be fought, so to speak, out of income and without "dipping into principal" has by this time been pretty effectively shattered. We no longer think of principal, however—or capital, if you please—merely in the nineteenth-century-Yankee sense of the term.
What is our capital as a people? Certainly it is not the mere amassing of fortunes by a few multimillionaires or a handful of large corporations. Basically it is something far broader and more valuable than that. It consists first of all of our human resources: our manpower, skilled and unskilled; our organizing abilities; our human potentialities. Second, it includes our natural resources; our farm land, our minerals, our forests and water power. Third, it includes our tools of production and distribution, highly developed yet still susceptible of vast improvement; still uneven and hard to keep in balance. It is only after reciting these basic factors that one comes at last to the fourth; namely, the accumulation of savings on which we draw to replace worn-out or obsolete machines, to expand old enterprises and launch new ones.
Now war is the natural enemy to all of these forms of capital. I am not speaking here of war and the so-called capitalist system; that is another and relatively superficial question. I speak of capital rather in terms of those basic resources, human and natural, without which no economic or social system can flourish. Insofar as a given system is antiquated or obsolete, war, to be sure, may destroy or drastically revise it. Total war, however, is no respecter of people or systems. It threatens all in proportion as they come within its orbit. It threatens them precisely because it shatters and destroys basic capital resources faster than they can be replenished.
The Fabian socialist, you will remember, used to alarm or entertain us by recurrent proposals of a capital levy. Thanks to the war we have a capital levy now on a scale that the Fabians never dreamed of. In Europe and in Asia the war-gods have imposed it without discrimination on Nazis and Communists, on slave states and democracies, on militant and peace-loving peoples. Human beings have been slaughtered by the millions; other millions have beenmaimed in mind and body. Land by the millions of acres has been scorched or soured; minerals have been taken from the earth and destroyed with prodigal disregard of the future. Factories and refineries, railroads, ships and planes have been bombed on a breath-taking scale. Our spiritual capital—the accumulated achievements of the human mind and the monuments to human aspiration—has likewise been ruthlessly attacked. Under these circumstances there is small wonder that capital in the narrow or monetary sense finds itself subject to destructive levies, too.
Set beside the other levies war imposes on our distracted world, this restricted or monetary form of capital levy seems relatively unimportant; and if we could consider it apart from the rest, it would in fact be unimportant. Its real importance is derivative, but that does not mean that we can afford to dismiss it lightly. On the contrary, it is precisely because current management of our monetary and economic resources so vitally affects our future ability to replenish our human and spiritual resources that it becomes a matter of grave public concern. Except perhaps to the cautious Yankee, putting one's financial house in order can never be an end in itself. It is important only as a means to other and more important human ends, and it is important to America today for just these reasons.
I say to America because our great natural and spiritual resources, still removed as they are from the principal theatres of war, constitute the greatest single power-house for post-war reconstruction of which the world has any current knowledge. This power-house must be geared ever more effectively to smash the forces that now challenge human liberty and dignity and decency. The one thing we cannot afford is to squander our resources through loose management or cynical mismanagement—temptations which are present in the very scale of our present operations. To yield to those temptations would be to dissipate the world's and our own great hope for the future. For what is that hope if not that we shall be able to replenish in time, and then safeguard, the physical and spiritual resources which the war is so dangerously depleting?
At best the race will be close and once again the opportunities and responsibilities of victory will rest most heavily on America. If this time we are to mind our business and not neglect our larger obligations by failing to perceive that they are a part of our business, we would better lose no time in putting our house in order and keeping it that way.
Of the job that confronts us, the development and safeguarding of a sensible fiscal and financial policy is of itself only a small part. It is not so much a segment, however, as a base. To put one's own financial house in order is to maintain or restore one's self-respect. Implicit in the process is a recognition of obligations and a willingness to forego many gratifying pleasures, and it may be comforts, to meet them. So it is with us as a nation.
Uncontrolled and uncontrollable inflation would constitute a fifth column here in America as dangerous as any in human experience. Now in the midst of the war the President's words of a decade ago are no less true and even more pertinent: "too many liberal governments have been wrecked onthe shoals of loose fiscal policy." And when that happens, it is not merely fortunes and governments that are wrecked, but also human faith and human hopes. That is a kind of capital levy we cannot and dare not afford.
So much—possibly too much—for the setting of the problem. Now let's get down to cases.
You know the problem as well as I do. It is so clear that not even the rationalizations and metaphysical jargon of our economic and political experts can really obscure it. In 1943 we shall spend some $85 billions on war production and supply. At current prices the volume of civilian goods and services will hardly exceed $70 billions. The money income of the American people as a whole is expected to reach the all-time peak of $125 billions, or $55 billions in excess of the available supply of goods. Of this, personal taxes would absorb at current rates some $15 billions and savings—including the purchase of war bonds, insurance, cash deposits and reduction of debt—are counted on to absorb another $25 billions. Even so an excess purchasing power of at least $15 billions would still remain in the hands of the people which could easily be doubled by any substantial failure to save. It is this excess, of course, which constitutes the so-called inflationary gap, and since it is derived largely from the war effort, the use to which it is put becomes doubly a matter of public concern.
Now When potential demand so far exceeds supply it upsets the balance. There are so many bidders competing for each article that prices are under pressure to go up. Normally this is the way in which the balance is restored; as prices rise the pressure is relieved and a brake is finally applied upon excessive demand. One difficulty is that this makes for an uneven and hence unfair distribution of the limited supply. Another difficulty is that if the price rises become too drastic, panicky buying and hoarding may develop to a point where prices soar out of reach. It is to avert such dangers as these that we resort to price controls, implemented by the rationing of goods.
Far from solving the problem, however, these devices alone are inadequate at best and at worst tend to conceal, or at least obscure, the need for other measures. They are inadequate because they have not reduced the pressures or in any sense restored the balance. Indeed by applying the lid too rigidly or too soon they may intensify the pressures they disguise. These pressures will then seek other outlets, and since men can always be found who will do things for a price, black markets begin to rear their ugly heads. Thus if we seriously mean to exercise control of prices, we would better not make our ceilings too low or too rigid, and we would better not trust to price controls alone.
Aside from rising prices, there is only one other means of balancing the equation and that is by siphoning off the excess purchasing power. Resort to price controls does not make this siphoning process less necessary, but more* It makes it more necessary because insofar as price ceilings are effective they remove or check the natural corrective of rising prices.
That means that so far as this war is concerned we have only begun to tax. I do not suggest that every dollar of excess purchasing power must be siphoned off by new federal taxes. Some part at least would better go into savings, compulsory or otherwise, into contributions to the Red Cross, or even to the colleges. Some further upward adjustment of prices, moreover, seems to me imperative if current pressures are to become manageable, and if the damaging inequities in our present productive setup are to be corrected.
I refer in particular to the present inequality in the rewards and incentives of industry and agriculture. I do not pretend to be an expert on the intricacies of the farm problem here in the Middle West, much less that of the nation. I do know that the rewards and incentives enjoyed on the whole by industrial labor have been flagrantly denied to the farmers of the dairy country in which I live. Caught between ceilings on their product and an acute labor shortage, some three thousand farmers in the New York milk shed have sold or otherwise dispersed their herds within the past year. Small wonder. The individual dairy farmer has lately found himself dealing with big bureaucracy; and with all our talk of the virtues of planned economy, big bureaucracy is probably the worst planning agency which could be devised. This is no indictment of the bureaucrats themselves, for it is natural for bureaucracy to look backward. Thus in the midst of war it may still be worrying about a peacetime surplus when every one else is concerned about an actual shortage. If this statement seems extravagant, I invite you to review the record of producers' price regulation and production in the New York milk shed during the past two years.
When all is said and done, however, we must put our principal reliance on new taxes, supplemented by the sale of war bonds. The problem is always one of balance, and it is only as this excess purchasing power is siphoned off and used to pay the cost of the war effort itself that prices can be controlled and corrective adjustments in certain prices safely undertaken. For the taxpayer it is not a pleasant prospect. It threatens a drastic readjustment in my own mode of living and that of my family. It will mean the same for you and for countless millions. Yet what are these adjustments compared to those that our armed forces are called upon to make? I say that the Administration and the Congress have grossly underestimated, if not the need for these further sacrifices, then certainly our willingness to make them.
We would, to be sure, like reassurance on two points. One is that the funds taken from us shall be economically and expeditiously put to work to win the war. The other is that the incidence of taxation be basically fair, and that once this base is established the program be realistic in conception and fearless in execution.
And what do these abstractions mean in fact? I have no ready-made tax and fiscal program to offer. Nevertheless, it seems to me that the American people are perfectly capable of laying down and insisting upon certain basic specifications.
1. The new tax program must be genuinely comprehensive. We have long since passed the stage where any one economic group or type of tax can shoulder the whole burden. Soaking the rich may be pleasant, but there is a point at which it ceases to be profitable. With the possible exception of income from bonds—which is a subject in itself—income rates in the upper brackets already approach their maximum yield; besides, it is in the lower and middle brackets that the fight against inflation is going to be won or lost. This is a simple statement of fact. In this war, it is the incomes and purchasing power of our millions of industrial workers which have shown the most marked increase to date. In taking account of this fact and broadening the base of the income tax, Congress has already acted wisely and courageously. It will have to act wisely and courageously again and again if the surplus of purchasing power is to be drawn off.
If we mean business, moreover, we can no longer choose between the income tax alone and some form of sales or purchase tax. The fact is that we must employ,if we cannot embrace, all sorts of taxes. Personally, I would prefer to see our income and corporate tax structure supplemented in the first instance not by a flat sales tax, but by a tax on purchases so graduated as to increase the consumer cost not of necessities but of luxuries. Let us not, except as a last resort, tax staple foods and inexpensive clothing. A heavy tax, however, on fancy foods and expensive clothing, on jewelry and amusements, on tobacco and hard liquor, might yield substantial revenues and other less tangible but not less important benefits.
I repeat: we must explore all reasonable channels of increasing government revenues and siphoning off excess purchasing power if our new tax program is to be anything like adequate. The manpower shortage, moreover, suggests that taxation would better discourage production and consumption of non-essentials for the duration.
2. The new tax program must be easy to understand and simple to compute. The broader the base, the more important this becomes if we are to know what is expected of us. Reports of recent committee hearings infallibly remind the average citizen of some Never-Never Land, in which only the mathematician can find his way about. We are told first that we must pay as we go, but at the same time pay for where we have lately been. Then, since we can hardly do both at once, we are told that we shall have to pay half of last year's tax or less depending on our income; or that our 1942 tax will be spread over ten years, no doubt with interest compounded quarterly or semi-annually. We are told that the withholding tax is to apply only to incomes (I speak now wholly from memory and hence irresponsibly) exceeding $624.99 for a single man and $801.33 for a married man with additional allowances of $35.79 for each female child, $43.26 for each male child, and $61.47 for twins. The employer whose nonessential staff has already been drafted or translated into more essential work is then to withhold the monthly sum of $153.22 from A's salary and $177.81 from B's, after deducting in each instance subscriptions to war bonds, social security tax, victory tax and union dues. If the English were once a nation of shopkeepers, the war taxes promise to make America a nation of bookkeepers.
After all, there is a war on and we are pressed for time. By the end of 1943 we shall have 11 million men under arms. They and their families must be supplied. There is simply not time for these elaborate computations. There is not time for the niceties of applying to our tax program Platonic maxims of distributive justice. Give us rough justice, and we will not complain, if only our tax program is comprehensible as well as comprehensive.
3. The new tax program must be levied chiefly on current rather than past or future income. I have not studied the ramifications of the so-called Ruml plan, but if it will help us lick Rommel—as I believe it will-then I am for it. Certainly the principle is sound and simplifies the problem both of payment and collection where the great mass of the American people is concerned. Maybe we ought to be wise enough to save now to meet taxes due next year; the plain fact is that most of us do not, and if the time comes when our earnings fall off, we shan't be able to pay taxes levied on the previous year's earnings. Pay-as-you-go is basic, and I have every confidence in Congress' ability to dealwith any windfalls that may follow its adoption. In any event, such windfalls are accidental and non-recurrent, and can have little effect on the success or failure of the war against inflation.
4. The new tax rates must be flexible so that they may be adjusted up or down at short notice and with a minimum of confusion. If we are to fight inflation successfully and meet the Government's changing need for war funds we must have rates that can be adjusted immediately the need is established. That is another great advantage of pay-as-you-go and of the suggested selective tax on purchases.
In summing up, let me emphasize again the importance first of clarity and simplicity in the tax structure. A tax which is quickly computed is half collected, and understanding of the need increases capacity to pay. So, of course, does public confidence that funds so collected will not be wasted and will be used so effectively as to hasten victory of our arms and incidentally lay the specter of violent inflation. With such confidence the average citizen will cheerfully pay twice the tax he would otherwise pay with the utmost reluctance.
It boils down, I think, to this. Not only our incomes but our capital must be enlisted in the service of our country; when 11 million men are called to the colors it could not and should not be otherwise. We have the resources to do the job, and we must be prepared to use them without stint. The future, however, is still our greatest capital resource and that we must guard at all costs. The more heavily we draw on the past and on the present the more jealously we must guard that future. That is why in financing the war we must literally pay as we go, and do it by taxation to the limits of our capacity. Every dollar that is paid by borrowing, and especially through the creation of bank credit, is a limiting charge against the future, and a mortgage on opportunity, which is still our greatest national resource. Let our capital levies draw upon past and present as they will, but let us hold in trust that capacity to replenish our depleted resources which is the birthright of American youth.
Although in the rash moment when I ventured to give this still unborn address a name, I included the colleges, you will observe that I have so far scarcely mentioned them. The omission is not, I can assure you, because we have no problems. We have, but in that respect we only share the common lot. Our capital is composed of many things: of books and laboratory equipment, of buildings and endowment, of prestige and reputation, and last but not least, of human beings. The war subjects us then to various sorts of capital levy. Valued members of our faculties are called to the armed forces or to government service. Our student bodies are summoned in overwhelmingly greater numbers. Our endowment income suffers, and its principal value becomes subject to new hazards. For our scientific laboratories, effective use is assured, but our libraries and our buildings and the skills of our highly trained faculties can be used, if at all, chiefly for various special forms of war training.
We at Colgate invite such use and are proud of the fact that already more than six hundred Naval aviation cadets have been assigned to the College for training. We are proud, too, of our tentative selection by the Navy as one of the institutions at which the new V-12 college training program may be established. The more we can participate in the all-important war job, the greater the demands made upon us, the happier we shall be.
Of course, this conversion of the College into a war training center places a heavy burden on faculty and administration alike; New and unfamiliar subjects must be taught, new schedules adopted, vacations forgotten, but I have heard no complaint. Despite this heavy current load we must somehow contrive the means of keeping alive and even nourishing the vital spark of the liberal arts. True, the problems of the future will require skilled technicians. But
they will require above all men who are educated to understand the underlying problems of human relationships and effective human adjustment.
We can survive the capital levies of the present so long as they do not foreclose the future. For, after all, it is with the future and with the young men whose opportunities we hold in trust that the colleges and universities of America must always be principally concerned in war and in peace.