Taxation of Business Income


By MATTHEW WOLL, Vice President, American Federation of Labor

Delivered at Special Luncheon—Government Finance, War Council of the Chamber of Commerce of the United States, 31st Annual Meeting, Waldorf-Astoria Hotel, New York City, April 28, 1943

Vital Speeches of the Day, Vol. IX, pp. 500-504.

FOUR years ago I had the privilege of discussing taxation at the annual meeting of the Chamber. At that meeting, held just a few months before the outbreak of this World War, I discussed with you "Taxation and Jobs."

In that address I indicated that taxes played an important part in the history of America. I pointed out that the United States was born in a revolt on taxes; that the stamp and other taxes imposed by the mother country upon American Colonies culminated in the Declaration of Independence.

Attention was called to the fact that our Constitution contained important provisions with reference to the taxing power; how it was to be exercised and how taxes were to be collected, pointing out that city officials had been recalled and governments and presidents voted out of office because excessive and unreasonable taxes having been levied. The validity of that which I stated on that occasion has been confirmed and strengthened in the intervening years between then and now. Indeed, the soundness of the maxim, "the Power to Tax is the Power to Destroy" has become clearer and more widely understood today than ever. Taxes may become confiscatory; they may deprive a man of hisproperty virtually without due process of law; they may have the effect of drying up the source of initiative and they may impoverish the great many and make of them irredeemable debtors to the State and Nation.

It is for these and other understandings that every American today is greatly concerned about taxes and the tax structure in America. Whatever may be the purpose of government in a time of peace or of war, whether viewed from the standpoint of interest of labor, or of management, or of capital, its operations must be paid for out of the products of industry. The more the government exacts in taxes, the less there is left to be spent by private persons at their discretion.

Unfortunately and regrettably, there are those both in and out of office who would use the power to tax to undermine and ultimately to destroy our present economic if not political order, and who would more or less hasten the approach of what is believed by them to be an ideal collectivism, patterned somewhat after socialism of one kind or another.

In this connection, might I make clear that the American labor movement as represented by the American Federation of Labor is a firm believer in our present economic andpolitical order, and that we favor the safeguarding of our present system of individual initiative and of private enterprise with its profit motive, with the understanding always that labor must receive its fair share in profits of production and distribution, and that the consumer shall likewise benefit by way of reduced prices.

Then, too, the American workers have no more inclination or desire for dependency on government relief payments, doles or artificially stimulated work than they would relish being supported by their neighbors or by organized charity or being required to stand in a bread line. What the American wishes is the opportunity for honest employment in private industry and with full freedom accorded to participate in the determining of wages, hours and working conditions and which will assure him and his family the standard of living to which he aspires and to which he is entitled.

To hold secure this freedom and to attain these ends the worker knows that free enterprise must be safe-guarded and that industry must be encouraged not be crucified by government on the cross of punitive legislation.

While my theme for today is quite the same, the topic assigned is in somewhat a different direction and requires at least a different approach. The subject I am to discuss today is "Taxation of Business Income." To me this is a discussion of another phase, in the wartime betting, of the same problem. The future of employment and the future of America's business enterprise are intimately bound together.

This discussion and at this time is of transcending importance. It is of such importance because the very conflict of wartime policies and actions has cast doubt over the future. Promulgation of wartime fiscal and other government regulations unrelated to our post-war requirements, has placed in jeopardy the attainment of full employment through private industry and the future development of free enterprise itself.

What are the future potentialities of free enterprise in America? If the trend of industrial expansion brought on by the war is sustained, if expansion of employment and of production of goods and services is carried on beyond the war years, we shall have achieved what mankind has never achieved before. If our national income is sustained at the annual figure of 135 billion dollars after the war, we shall, in 1942 prices, achieve an average annual income of over $4,000 per family. Such a level of family income will mean a standard of living not only above that attained by any nation, but also higher than anything we in America have hoped to attain in recent years.

The truly dramatic fact in this is that in terms of productive performance we have already attained that level of activity. Our total production of goods and services has already broken all records; our utilization of manpower is already approaching maximum employment. But our system of productive enterprise is geared up to the production not of wealth, but of weapons. The winning of the war is the prime objective we are pursuing to the exclusion of all others. To win the war we are producing weapons and equipment necessary to wage a war.

The products of the war industries are put to the most necessary and effective use—to preserve, to protect, and to further the ideas, the ideals, and the way of life which have gone into the making of America. Production of munitions, however, is different from production of civilian consumer goods. The products of war industries are instruments of destruction and of defense. Had we been producing the same amount of goods and services for consumer use, that production would have contributed directly to the raising of our standard of life and wealth.

This challenge of the future, then, is the challenge weourselves have made to ourselves. We have in our wartime experience demonstrated to ourselves and to the world that we can attain full production, that we can attain employment for all. Can we, when the war is won, substitute consumer goods for war materials and maintain the same level of production and the same level of employment, thus raising our standards of living? I firmly believe that it can be done. I am confident all are willing to dedicate their best efforts to make that belief a reality.

I feel certain that this belief is well founded. It is founded upon the remarkable record of performance of the last forty years which compounded the skill of America's labor, the genius of its science, and the technical competence of its management to weld such rich and rapid growth of our young industrial nation. What our industry was able to do in the forty years before the war was dwarfed by the progress shown in the four years since the outbreak of the world conflict.

We are making a record-breaking job in war production, but we can do even better in peacetime production. The potentialities of the human needs and human wants to sustain that peacetime production are truly limitless. The immediate task of relief and reconstruction of liberated nations through constructive contribution to our productive enterprise will in itself be significant. But such work will bring us only to the threshold of the new frontiers the post-war world will be opening to us in world markets.

Within the boundaries of our own land, opportunities for expansion are also real and tangible. The wartime air transport equipment will provide us with undreamed-of facilities for the transportation of passengers and freight. Airports, air terminals, warehouses and roads to make this transportation accessible to our communities provide an enormous field for development. We have over 18,000 cities with a population of over 5,000 persons. While but a few of them have had direct access to air transportation, most of them will demand it. This will call for new roads, new truck and bus facilities, new pipe lines, and for vast and continuous supplies of gasoline and service equipment.

Because of the suspension of housing activity during the war, we shall have a large deficit of good housing, to redevelop whole communities to make them into better communities, and to provide for those shifts of population which have already taken place and for those which are to follow.

Enormous technological progress is being made in the electrical, chemical, physical and biological sciences. Only the inactive and mentally unalert can fail to observe the upheavals of magnitude taking place in our industrial laboratories. Such developments will inevitably create newer and enlarged opportunities for labor manpower, new responsibilities for management, benefits to ourselves and to our coming civilization.

Specific fields of plastics, of electronics will be part of this new world. In the field of radio, frequency modulation and television, new networks of stations, and production of new equipment will be called for. Better housing and more and better agricultural implements will become available to millions of those farmers who have not had access to adequate equipment in the past.

I could go on with a long list of such specific prospects for industrial and economic expansion immediately after the war. These prospects will be neither distant nor theoretical. They will be within our ready grasp if we unite in our determination to reach for them. To be able to extend our reach and translate these possibilities into tangible realities, we must make our choice now.

That choice is between security and plenty, between expanding employment and rising business activity on onehand, and economic chaos and utter collapse on the other. For, the task of post-war reconstruction can only be accomplished by the American people themselves through the established institutions they have at hand. It is a task which will involve a shift in the work and pursuits of between 20 and 30 million people. It is one which will call for the full utilization of investment resources of the entire community. To bring those resources into full play quickly, to make that capital available, to provide for reconversion and reemployment rapidly, is a task whose burden must be undertaken by private enterprise. It will be too big for any government to undertake in its entirety and it will be too urgent for its cumbersome machinery to carry out.

The American people have a deep-seated faith in the ability of our industry and our labor to undertake this gigantic task. They believe that the system of individual initiative and private enterprise which shares fairly with labor in the returns of production and distribution provides the most effective and efficient machinery for carrying this task out.

The leadership of American business must not fail in this faith nor belie this trust. It must shape its post-war policies and shape them now. It must shape them not in terms of special advantages to particular firms or to particular communities or regions, but in terms of a cooperative and concerted effort. It must shape them to the objective which is not only to make the post-war expansion real, but also to make that expansion stable and secure. That stability and that security are of paramount importance to the American workers, who will reject any blueprint of the post-war world in which the threat of unemployment and want is not completely eliminated.

To have health and stable expansion of employment there must be healthy and stable expansion of production. To make this expansion possible, the extent to which free enterprise will be permitted to expand must be charted in advance.

In a very large measure both the limits and the direction of growth are prescribed by our tax laws. What are the basic provisions in the federal tax structure to permit that expansion? In wartime, labor as well as business has recognized the need for high federal income taxes, corporate as well as individual. With the threat of inflation enhanced by the large governmental borrowings from commercial banking institutions, we willingly accept even a higher level of taxes than already exists, to remain with us for the duration of the war.

In some respects, however, wartime tax policies are neither constructive nor realistic. In dealing with the income of corporations, our tax laws depend too much on a statutory concept of income which do not accord with correct income. The chief shortcoming in our tax policy is its failure to provide the incentive for investment to produce business income. More specifically, I am concerned with the failure to provide a favorable tax treatment of reserves essential for stability of enterprise and future expansion.

Special reserves may be established for different purposes. Such reserves are seldom funds; they are usually accounts on the firm's books. They may take the form of reserve accounts for depreciation and bad debts. I am here concerned, however, with special reserves which are used to sustain post-war expansion and post-war security of the business enterprise.

Reserves of this type may fit various purposes. They may be designed to provide additional working capital to meet immediate wartime needs without reducing post-war liquidity. Or, and more importantly, their purpose may be to make specific provision for financial needs after the war. It is this type of reserves that will play a decisive role in the ability of business to meet the post-war requirements of production and investment.

Such reserves are necessary if business enterprise is to be able to make the transition from wartime to peacetime activity without disruption. The need for these reserves may be based on the fact that special facilities developed for war production cannot be fully used or may not be suitable for peace production. Production of war goods may be brought to a sudden halt, by the termination of contracts suddenly stopping production of the entire enterprise of the war contractor and of the subcontractors dependent on him for orders. The impact of such termination upon employment may be disastrous unless provision is made for transition to peacetime activity. The settlement of contracts terminated may not be prompt or adequate enough to equip the contractor for the financial responsibility of transition to other work. Failure in this respect alone could produce a crisis in employment.

Equally important is the whole set of problems involved in the ownership by the government of facilities, supplies and other property in enterprises whose wartime expansion has been financed by the government. Last, but by no means least, is the heavy burden of liability for taxes on earnings from war production that will have to be met after that production will have ceased. The combination of these pressures, uncertain and not precisely measurable beforehand, at the time when quick reconversion is critically urgent, will make advance provision for reserves a manifest necessity.

The financial position of many business corporations has undergone marked changes. Many companies which have been generally regarded as financially stable and looked upon as bulwarks of assured employment, have shown declining ratios of current assets to current liabilities. In many such cases, while the volume of sales has increased, the net income after taxes has decreased—sometimes in dollar amounts, but more often in relation to the assets employed.

It is important to note that while the total current assets may show a substantial increase, the cash position is not materially improved and the current assets consist largely of inventory and accounts receivable. Such a condition is, of course, extremely precarious. If at the end of the war inventories must be sacrificed because of declining values or changed needs, and the accounts receivable (being mainly payments due from government or from other firms depended upon payments by government) are not readily collectible, the firms in question will be faced with the immediate threat of financial collapse. Such a threat will become all the more real at the time when large cash amounts due the government for taxes on past performance become payable.

With the decline in the ratio of current assets to current liabilities and the great rise in fixed assets, and particularly under the pressure of the 40 percent normal tax and surtax plus the 90 percent excess profits tax, many war producers and others will find it increasingly difficult to set aside sufficient liquid reserves to enable them to meet and solve the problems of transition.

There is nothing in our present tax policy, including the meager post-war credits on excess profits taxes, that is adequate to meet the situation. It is not my purpose to develop in detail a specific program of tax legislation to fulfill this need. I merely wish to point out the necessity of permitting and assisting productive enterprise to set aside adequate reserves from current earnings within limits consistent with our main objectives.

Clear recognition of the need to provide for the crucial contingencies of the shift from war to peace seems to me to be imperative. It is essential that the general principle of either tax-free or low-tax-cost reserves be made a feature of the income and excess profits taxes on corporations and be recognized in connection with renegotiations of war contracts by price adjustment boards.

The right to establish such reserves should be explicitly granted by statute. Congress must recognize in the enactment of future tax laws that, up to a specified percentage of gross or net income, provision of reserves for demobilization and reconversion should be encouraged. The necessity for postwar reserves must not only be recognized in a system of wartime taxation, but must also be fitted into the practical and consistent framework of that taxation. It would be a paradox for the government to require that if a business enterprise sets aside a dollar of earnings to meet unquestioned needs of transition, it may only do so at the expense of paying as high as 80 cents of the dollar in taxes. If the reserves are reasonably limited to a percentage of gross or net income and for recognized purposes are made tax-free, and for other purposes made subject to a low tax rate, many wartime enterprises that would otherwise be disrupted may be saved to play a leading part in industrial reconstruction.

Fair methods of determining the portion of earnings to he placed to reserves with favorable tax treatment will have the support not only of business, but also of labor because labor has a direct stake in the keeping of our productive enterprise solvent during the period of demobilization.

It may be said to permit business concerns to set aside—tax fees, or low-cost reserves, or some of both, out of earnings and for purpose of weathering the transition from a war to a peace time basis of production that reserves will reduce proportionally government revenues. Whether that be true or not depends largely upon the policy that is to govern and how quickly a favorable policy may operate to encourage greater risk-taking and greater earnings. It is the fundamental thought that the net effect will be no loss of revenue spread over a period of a few years—but an actual conservation or even enhancement of revenues.

It is obvious that war production has increased gross income, if not its net income after payment of taxes. The standard of living which labor wishes to protect and the higher standards to which it aspires depend largely upon an unprecedented volume of peacetime production. It is apparent that there will be a lowering in the war-time level of production during the period of adjustment. To a considerable degree the level of production in the transition period will be reflected in our attitude toward reserves and as related to the tax policy that is to govern. The prevailing government policy of permitting the averaging of losses is a recognition of the general principle here advanced but is inadequate for the urgencies and requirements with which free enterprises will be faced at the end of the war.

It is also to be remembered that if business generally is rendered unable successfully to make the transition from war endeavors to peace time pursuits and in a manner that will insure employment to all, the burden will fall upon government and in turn upon taxpayers for relief and artificially stimulated work, which undoubtedly can and may exceed whatever sacrifice of tax revenue may be involved in a reasonable allowance of special reserves.

Labor is also concerned with the problem of reserves for workers. No matter what incentives are accorded by public policy to facilitate transition from war to peace production, peacetime employment for all cannot be achieved overnight. Demobilization of a large portion of our armed forces will become pressing as soon as hostilities cease. Millions of workers whose wartime skills had been newly developed and who have contributed their maximum effort to turn out war production will find that use of these skills cannot be made, that reconversion of skills and retraining will also be necessary. To them it will mean also an economic transition and at least temporary unemployment. To them it will also benecessary to fall back on reserves set aside from the current wartime earnings.

In this connection labor finds itself in disagreement with a fixed wage policy in a field of uncontrolled and rising prices. Such a wage policy can only lessen the opportunities to workers for individual reserves out of war time savings. There is the growing fear that the freezing of employment opportunities and current wage freezing will result not only in a deflation of workers income but endanger as well such reserves as the working population has thus far been encouraged to establish by investment in government bonds and other forms of savings.

Then, too, labor has proposed that provision of additional reserves in the form of extended employment benefits be made part of our social security system. Provision of such benefits is essential, for otherwise the failure in the supply of the purchasing power will mean failure to sustain post-war production.

Employment for all and stability after the war cannot be achieved through corporate reserves alone. Corporate reserve accounts alone will not finance new production and the development and marketing of new products. Corporate enterprise will have to achieve post-war liquidity by increasing cash and other liquid assets and strengthening their credit position. Corporate reserves are essential to achieve that liquidity. In addition to corporate reserves it is essential we encourage venture capital or risks—investments for the development of new industries and enterprises needed in the period of transition. Venture capital in the main springs from individual reserves or surpluses. To encourage these reserves is to encourage the spirit of private adventure and which after all distinguishes the American way of life from all others.

But even then, to maintain expanded production and encourage business adventure, business and industry will have to rely on sustained purchasing power. Reserves and venture capital do start production and production in turn will provide employment which in turn will provide consumer buying power. Nevertheless, social insurance and workers savings are essential in tiding over the emergencies that are inevitable in a period of transition and thus the whole will prosper in proportion to maximum employment.

Recognition of this principle and mutuality of interests is fundamental in our approach to the postwar problem.

Let me cite you a few words from a report of the Federation of British Industries to indicate how completely it was recognized by the British industry. This report, submitted by the request of the British Board of Trade last year, recommended:

"That the power of the home market to consume the products of industry in the post war period is an essential element in reconstruction. The Government should consider how this power can be maintained or developed both as regards consumer goods and capital equipment, and should take industry into the fullest consultation on the problems involved."

When war ends we shall have the largest productive plant in the history of the world. We will have a larger, better balanced and more flexible force of skilled workers. We will have management steeped in the experience and engineering knowledge of the intensive war production effort. Let us now meet the issue squarely: let us recognize frankly that efficient production backed by the solvent financial position of private enterprise is just as essential to win the peace as it is to win the war.

Let us agree that post-war business reserves are necessaryas a means of a general program to bring economic activity to a high level. Let us agree also that economic security for the workers is also essential to sustain that production and to enable democracy itself to endure this transition.

The eyes of the world are upon America. Our purpose to restore freedom-loving peoples now dominated by fascist

aggression will be hopelessly thwarted if we fail in working out our internal economic problem.

Let labor and business join hands in a concerted effort to make the American system of private enterprise a prime mover toward a better, more secure and richer future for the American people, a future founded upon freedom.