Preserve Self-Government


By WENDELL L. WILLKIE, Lawyer and Author

Delivered at the first of a series of three meetings under the general title of "America Plans and Dreams," arranged by The New York Times, New York City, February 2, 1944

Vital Speeches of the Day, Vol. X, pp. 269-273.

THE struggle in which we are engaged has imposed on all of us a number of extraordinary duties. One of the most important of these is a duty toward the future. The nature of the victory that we gain depends greatly on our ability to look ahead clearly. It is in the fulfillment of this duty, I take it, that The New York Times has inaugurated the present series of conferences under the title of "America Plans and Dreams."

The editors have asked me tonight to discuss "America as a World Power." For, whether we like it or not, the United States has become a world power. The future peace and prosperity of the earth depend in large measure upon policies originated here.

First, however, we must be clear as to what we mean by power. The fact is that the United States has always been a world power. Even when our Union was first formed in 1789, when our population was only 4,000,000 and we were in debt and all but defenseless, we were yet one of the mightiest powers on earth.

Our power in those days, however, was neither financial nor military; we were of small account in the diplomatic councils of the world. Our power resided in an Idea—the Idea of self-government by free men; of self-government by men whose future would depend, not upon the will of kings or the plans of dictators, but upon their own innate courage and abilities. This American Idea changed the whole course of history. No riches, no navy, no army had ever exercised such power over the destinies of mankind.

Pleads for Early American Ideas

The American Idea, which our forefathers undertook as a dangerous but exciting experiment, has now proved itself. Our free society has made us the richest nation on earth. Out of those riches, in this hour of test between our ideas and those of totalitarian powers, we have created the greatest navy in history, the greatest air force, and one of the world's great armies.

Today we are a world power in a sense other than ideological. And the great responsibility that we shoulder is the maintenance, despite this material power, of our former ideological leadership.

Efforts to define America as a world power in terms of foreign policy have given rise to several schools of thought. One, which maintains a position of extreme nationalism, argues that the United States should endeavor to be almost wholly self-sufficient and make no arrangements of any importance with the rest of the world. Allied to, or growing out of this nationalistic school, there are those who contemplate building some sort of American empire.

With both versions of this extreme nationalism I profoundly disagree.

Then there is a school which believes that the United States should make itself the master of what is commonly called "power politics." According to this concept we should seek to maintain world stability by the open or secret manipulation of other nations, using our great material power either to constrain them to our will or to balance off one against the other.

Power Politics Opposed

I am likewise opposed to this interpretation of American power. It is true that the sheer power of our position will impose on us the necessity of political action in international affairs. We must know our friends from our potential enemies, and we must always help to strengthen our friends.

But to adopt the power game as the object of our diplomacy could only lead us to recurring conflict. We do not want to live by secret treaties in the constant threat of war,

nor do our great political institutions lend themselves to such a course. Our democratic process calls for a diplomacy far more open than the diplomacy of the power game.

There is a third school of thinking, to which I subscribe. It believes that our best hope for the future lies in the creation of an international organization by which to safeguard the rights of small nations, preserve world peace, bring about economic cooperation and promote the growth of free institutions.

Now for the past several years we have argued these weighty issues at great length. We have argued them primarily in terms of foreign policy because that is the way they were presented to us by the tragic course of events.

I believe now that the time has come for us to broaden our approach. In the world that ties ahead of us we shall find it wholly impossible to place foreign policy and domestic policy in convenient separate compartments. We cannot solve our domestic problems without due regard to our foreign policy. And by the same token, we can define our position as a world power only with our domestic policy as a base. We must hew the definition of our power out of the native rock of our convictions—the idea that made us a world power in the first place.

Realistic Fiscal Policy Urged

But the realization of that idea in the modern world is contingent upon the health of our domestic economy. Hence, domestic economic health must provide the foundation for our foreign policy of the future. Without this we can have no effective American foreign policy whatever.

Now, of course, in the achievement of this general domestic aim, many complex factors will be involved. But I can think of no single factor more important than our "fiscal policy." The fiscal policy of an economic system is like the bloodstream of the human body, which carries oxygen and other indispensable chemicals to the billions of cells.

As any doctor knows, unless the bloodstream is chemically balanced, the cells cannot do their work, or even survive. So, in our economic system, whose cells are 135,000,000 American citizens, the fiscal bloodstream must flow freely. It must flow under even and proper pressures. And it must provide the cells with the economic rewards and incentives necessary for their well-being. An economic bloodstream composed largely of debt will eventually starve all the cells in the body.

Thus the destiny of our people rests upon the fiscal policy of their Government. In order to assume our proper responsibilities in the world and play the role there indispensable to our welfare at home, in order even to survive in the gigantic world struggle for existence, we must have a fiscal policy that squarely faces the economic realities.

Moreover, we are dependent upon our fiscal policy, now and in the future, for the realization of all the economic and social aims that we want to achieve after the war. Without a realistic fiscal policy we cannot have full employment. Without such a policy we cannot finance the enlargement of social security. Without it we cannot attain higher standards of living, or better housing, or broader education, or sounder health.

All these depend for their fulfillment upon the economic bloodstream, which will either starve us or support us in health.

Tax Laws Are Assailed

Any discussion of fiscal policy at the present time is inevitably complicated by the fact that we are engaged in war. For, as examination shows, the fiscal requirements of war are, in almost every instance, the opposite of the fiscal requirements of peace. If we were to apply a designated fiscal policy for war in time of peace we should ruin our American system of individual initiative and opportunity.

On the other hand, if we use peacetime taxation methods and principles for raising wartime revenue we will obtain an inadequate amount and thereby we will transfer such a load of debt to the future as to jeopardize the very things for which we fight. This distinction, I believe, has not been made sufficiently clear. And yet without it we shall fall into grievous—indeed, fatal—errors of fiscal policy.

I do not want to spend all my time this evening on the question of war taxation. Nevertheless our tax legislation is now in a state of confusion—a confusion for which both the Administration and the Congress are to blame.

In order to discuss intelligently our future peacetime fiscal policy it is necessary for a moment to consider our wartime policy and to look behind the political masquerading which has characterized some of it.

There is an old political adage: Vote for every appropriation; vote against every tax measure. That is dubious counsel in ordinary times. It is fatal in these times. Whatever the political risk, the political leader is not worth his salt who shirks the responsibility of presenting wartime necessities to the people. We have been following a fiscal primrose path. It will not lead to a solution of our problems. It is time for us to face up.

Public Debt Reviewed

The fact is that if we solve this problem realistically—as all who have studied it agree—we must actually materially lower the American standard of living during the war. And this not merely by submitting to rationing and restricted use of gasoline and minor discomforts, or by decreasing the amounts which we have hitherto saved, but by actual reduction of our standards—the change of our habits to the use of those things that constitute necessitous living.

In the four years from fiscal 1941 through fiscal 1944 this country will have obligated itself on account of the war to the extent of $307,000,000,000. We cannot predict how long these vast expenditures must continue, but we can say with certainty that at the conclusion of the war our total public debt will be not less than $250,000,000,000. In my opinion, this figure is low.

Moreover, immediately after the war there must follow a period in which the Government will incur extraordinary expenditures. There will be the cost of liquidation of the war. There will be the vital expenditures for soldier rehabilitation. If we include the costs of this period among our war costs I believe that we shall face the peace with a public debt of over $300,000,000,000.

At present the interest on our public debt averages almost exactly 2 per cent. It is, I believe, optimistic to hope that we can keep the interest rate that low indefinitely; yet even if we do, the service charge on $300,000,000,000 of debt will be $6,000,000,000 per year.

That is a staggering charge—only a little less than our whole Federal budget as recently as 1934. And it is that contemplated debt and that charge which must determine our fiscal policy from this day forward, whether in peace or in war.

Heavier Taxes Foreseen

For as we look toward the future today we face ironically this tremendous risk: that we shall lose in debt the victory we have gained in blood.

In order to prevent this we have a single duty: to tax ourselves now beyond any limit that we have hithertoimagined possible. Every dollar of war cost that we pass on to the future thins the fiscal bloodstream of the future. There is only one principle to apply to war taxation, and that is a hard principle: we must tax to the limit every dollar, corporate and individual, that is capable of bearing a tax, particularly those corporate and individual earnings which are created by the war itself. That limit is reached only when the war effort itself is threatened. All else must be sacrificed and all must share the sacrifice to the bone.

Of course, the war effort is threatened if we destroy our human resources by taxing them below the level of necessity; but we are talking about real necessity and not comfortable peacetime habits.

It is likewise threatened if we tax our corporate structure to a point that spells insolvency or to a point that prevents business from springing to action immediately after the war, converting to peacetime production, and providing jobs for the returning soldiers and the war workers.

Program Called Unrealistic

Beyond the precautions necessary to preserve our effective manpower and womanpower, and the industrial structure by which they live, every other dollar in every income group, corporate and individual, must be taxed, and ruthlessly taxed, for the preservation of the American future.

Now, we have not done this. We are not doing it. And neither Congress nor the Administration expresses any intention of doing it. Last month the President called for a "realistic" tax program. Since he did not specify in his statement either the size or the nature of a "realistic" program, we must assume that his idea of realism is represented by the recommendations of his Secretary of the Treasury.

Yet, surely, in the light of a probable $300,000,000,000 debt, the Treasury program broached last fall cannot be described as "realistic." That program purported to raise an additional $10,600,000,000. But this was a misleading figure because the program included a provision to refund some $2,700,000,000 of that amount after the war. The net expectant increase proposed by the Treasury was, therefore, only $8,000,000,000.

The Treasury program is also unrealistic because of the argument it puts forward as to the principal reason for higher taxes. This argument illustrates that lack of understanding of fiscal affairs which has characterized the Administration's whole tenure of office.

Tax Against Inflation Hit

According to Mr. Morgenthau, the chief reason why we must bear high taxes during the war is to combat the danger of inflation. I am well aware that inflation is a danger, yet it is certainly not the chief reason for high taxes. The chief reason we need big taxes is to pay for a big war without mortgaging our future more than is necessary. If we pay for the war to the extent of our ability as it goes on, the problem of inflation will be largely taken care of.

The Treasury refund provision is a disguised forced savings program. I am not against forced savings as such: but I am for forced savings only after we have fulfilled our tax duties. Indeed, this refund provision is, one suspects, a political gesture, for the whole inflation argument upon which it is predicated is obviously misleading.

In taxing ourselves to pay for the war up to the limit of our capacity we shall automatically combat inflation. But in taxing ourselves only to combat inflation, with the idea of refunding the money later, we shall not pay for the war to the limit of our capacity.

Warns of Effect of Refunds

Moreover, many experts are agreed that the real danger of inflation will come after the war. If, at that time, large refund obligations are hanging over the economy, inflation control will become even more difficult, if not impossible. Thus, in proposing refunds the Treasury is endangering the post-war future for the sake of a measure of political advantage in the present.

Now I know that in the opinion of Congress, as evidenced by the bill on which the Senate and House Conference Committee has agreed, the $8,000,000,000 Treasury proposal is too high. If we are to be realistic it is far too low. If we are to be realistic we should aim to raise in additional taxes more than double, that proposal.

Many will exclaim that in making any such suggestion we are being wholly unrealistic Yes, of course. If we insist upon maintaining in war the comforts and conveniences of peace it is unrealistic. For have no illusions concerning the effect of raising such a sum on every man, woman and child in the United States. It cannot be raised by petty sacrifices. It will require major and, in some cases, dangerous sacrifices. The habits of every member of every group will have to change.

Those are the facts that we must face. And they all add up to this one fact that we have not faced: that if we are going to save our standard of living in the future our standard of living today must go down.

Issue Is Called Obscure

There are 10,000,000 men, the physical pick of the nation, in our armed forces; 10,000,000 young men who have suffered a dislocation in their habits, their comforts, and their living standards far more profound than any tax can create. There can be very few Americans who haven't some relative, some close friend among them. By the end of the year, we are told, three-quarters of them will be overseas. And we do not yet know how many of them will stay there forever.

The boys who come home will be hungry for the occupations and rewards of peace. What shall we say to them if, while they are gone, we have rolled up a debt so vast that they will be saddled all the rest of their lives with interest on money that we at home have refused to pay? What shall we say to men who have faced in their persons the hazards of war, if we have coddled ourselves, at their eventual expense, by clinging to the living standards of peace?

Shall we say: "We are sorry?" Shall we say: "It seemed more important to us to live in our accustomed manner than to reduce the debt that you boys will have to pay?"

So-called political experts tell you that the American people will never stand for a tough tax program. I do not agree with those so-called experts. Give the people an understanding of the issues involved, and they will do their duty by their country, however incredibly painful it may be. All this talk about inflation has not clarified the issue for our people. It has obscured it.

Says Public Needs Facts

The Administration has counted too little on the people's sense of obligation.

It is but natural that individual citizens occupied with everyday matters should put aside the problem of the country's fiscal future. It is likewise natural that they should fail to realize the deadly serious nature of the armed conflict now facing us. Particularly, when our governmental leaders do not make the issues clear, but, on the contrary, confuse us with conflicting statements—some optimistic, some pessimistic.

If, however, it is brought home that something more than mere dollars is involved in the country's fiscal policy, that our whole future way of living is at stake; if the people are permitted to know that in the impending invasion of the European continent—so essential to our victory—we are undertaking one of the most stupendous and hazardous operations of military history, possibly involving untold loss of life; if the stark facts are presented to them, they will rise to any sacrifice and they will do so steadfastly.

But while I sincerely believe that the people will accept these burdens if the issues are made clear, I know that they will at the same time demand an economy in Government of a severity equal to their sacrifice. They will demand that the war shall not be used as an excuse for the continued extravagant waste of their money; they will demand that the administration of the war effort at home shall be untouched with politics and conducted with competence, efficiency and singleness of purpose.

Takes Up Federal Budget

I hope I have made clear my profound conviction that we should pay now for as much of the war as we possibly can. And I hope I have made clear the fiscal reason for imposing on ourselves such a heavy burden, namely, the preservation of the future which is precious to every American.

A formidable fact that looms up when we face that future is the size of the Federal budget. It is extremely improbably that in our lifetime we shall ever see a Federal budget under $20,000,000,000, measured in 1942 prices. In any such estimate there are, of course, incalculable factors.

We do not know, for instance, how big a military establishment we are going to have to maintain—and as I have so often pointed out, one of the important reasons for an international organization is that a joint force would help to keep the enormous item down. There are many other items that we cannot easily foresee; yet we can see easily enough that the total figure is going to be breathtaking.

As already stated, the interest on our debt will be a minimum of $6,000,000,000. If we allow $7,000,000,000 for the military and naval establishment (a figure that might easily be doubled), we have $13,000,000,000 of necessary expenditures to start with.

I do not think it would be realistic to attempt to itemize other Government requirements at this distance, yet it is difficult to see how they can total less than $7,000,000,000. The normal non-military cost of Government should be ground down to a minimum. But aid and rehabilitation of veterans must be many times larger than the pre-war figure.

Hopes for Bigger National Output

We shall have to undertake a truly dynamic social security program for the purpose of increasing the health and effectiveness of those of our citizens whose usual standard of living is too low. All this and many other things will make a budget of a minimum of $20,000,000,000, at 1942 prices, absolutely inescapable. A rise in prices will, necessarily, increase this budget.

Of course we could take care of the debt by inflation, or repudiation. But either of these courses would lead to the ruin of our political system and our social structure.

There is indeed only one way by which we can legitimately meet the demands of a budget of $20,000,000,000 or more. This is through increased productivity. The national income, which is now reaching toward the $160,000,000,000 mark, to meet such a budget should never fall below $120,000,000,000 at 1942 prices.

If the price level continues above that of 1942 the low limit of national income should increase proportionately. Or to state the matter another way: the wheels of industry must turn, and markets must be developed big enough so that every worker has a chance of a job at good pay.

Now in a real sense the objective of our post-war tax program must be identical with the objective of our wartime tax program—namely, the preservation of the Idea upon which we were founded: self-government by men whose future depends upon their own innate courage and abilities.

Greater Incentives Advocated

But, as I indicated at the beginning, the fiscal policy that will achieve this objective in peacetime will be almost the exact opposite of that necessary in wartime. After the war, in order to stimulate the flow of goods and services, the taking of risks, the creation of millions of jobs, taxes must be minimized rather than maximized. We must solve the post-war tax problem not by imposing the biggest possible rates on our income but by creating the biggest possible income on which to impose relatively modest rates.

For, properly managed and with encouragement to expand, our peacetime economy will yield more tax income from relatively low rates, both individual and corporate, than from relatively high ones.

The difference lies in the fact that today, in war, our incentives are provided for us in our relentless pursuit of the enemy; whereas tomorrow, in peace, we must create our incentives from the energies and aspirations of our citizens.

In order to accomplish this transition we must arouse once more in men the hope of reward; not unlimited and consequently ruthless reward, but fair, sufficient reward that will drive us ahead.

It is only by the application of this principle that we can eventually solve our fiscal problems and at the same time fulfill our manifold economic and social responsibilities.

In wartime all of our major industries are primarily engaged in producing for the Government, and according to Government specifications. And those that are engaged in the manufacture of civilian products, in view of priorities, rationing and restricted markets, are not concerned with the ordinary problems of peacetime growth.

Today the incentive, the energy, the imagination that normally are the very yeast of our economy are being devoted to the gigantic needs of wartime production and distribution. But in peacetime, if we are to have anything approaching full employment, those qualities must be stimulated into channels which provide jobs.

Because of this difference between wartime and peacetime needs and methods, our wartime taxation program, both corporate and individual, must be completely revised when peace comes.

The corporation tax should consist simply of a single, ungraduated tax applicable to the net income of all corporations earning more than a given amount per year—say $25,000 or $50,000. The rate on corporations earning less than $25,000 or $50,000 should be somewhat lower.

Would End Excess Profits Levy

This single corporation tax would supplant the piecemeal growths which make up the present tax structure. It would permit a sane, simplified tax structure. The wartime excess profits tax should be repealed. It would be well to recognize in peacetime that excess profits taxes of all kinds frequently punish the competents in comparison with the incompetents, and have a way of creating inequitable competitive advan-

cages and disadvantages which retard industrial advance and cost the economy as a whole more dollars than they yield to the Treasury.

We should also repeal the so-called "guessing game tax," which consists of two parts, the Declared Value Excess Profits Tax and the Capital Stock Tax. These accomplish no constructive purpose.

We must devise ways and means of encouraging venture capital to flow into new enterprises, and this means that we must find a practical way of relieving new enterprises from crippling taxation for a reasonable period.

And, finally, we should thoroughly inquire into all forms of incentive taxation by which business and industry can be stimulated to adopt policies that will expand employment and advance the welfare of society.

Double Taxation Charged

In the interests of stability we should also, in my opinion, liberalize the present provisions by which businesses are entitled to carry forward losses for a period of two years only. In order not to penalize businesses subject to cyclical fluctuations, this period should be extended.

There is one problem in the present tax structure which impinges on both the corporation and the individual taxpayer and which may prove somewhat difficult of solution. As things now stand, corporation dividends suffer a double tax, one at their source in the form of a corporation income tax and the other at their outlet in the form of the individual income tax. On the other hand, interest payable on bonds is a deductible item in the corporation income statement, before taxes. The effect of this arrangement is to encourage corporations to finance themselves by debt rather than by equity.

And such financing has evil results because it builds up a large debt structure which greatly aggravates depressions and increases the danger of bankruptcy. Also it discourages new venture capital.

This situation should be corrected by eliminating the present double tax on dividend payments. The various possible methods for doing this raise complicated technicalities. But the objective of all the methods is simple enough—to stimulate equity financing and thus to make our entire system more flexible.

For Severance Pay Reserves

There is one item I should like to add to this tax program, and this is an item for the immediate attention of the Congress. During the conversion period after the war many thousands of men and women whose long hours of work have been indispensable to the war effort may well find themselves, at least temporarily, without jobs.

The Government, of course, must guarantee their subsistence; yet they—and indeed our whole society—will be much better served if private industry provides them with adequate severance pay. In order to encourage this, appropriate legislation should be passed at once to enable employers to set up reserves earmarked for this purpose.

In addition, I believe that other measures should be explored by which to encourage business to convert itself rapidly to peacetime production and to mitigate the losses of conversion.

The post-war will bring the need for changes not only in business taxes but also in taxes on individuals. When our economy is adjusted to peacetime production our postwar aims of full employment, full consumption and full production require a lowering of all taxes affecting the peoples power to consume. For in order to maintain the economy at a high level of production and so provide the maximum number of jobs, it is essential to plan a post-war tax program that will take away as little as possible of the money normally spent by individuals on consumer goods and services.

This means a reduction, and in some instances the elimination of excise taxes on non-luxuries. In addition, it means a lowering of the individual income tax, particularly in the lower and middle brackets.

I have put forward these tax suggestions, not as a comprehensive plan but as illustrations of the kind of measures I believe to be necessary, now and in the future, in order to preserve for ourselves, our fighting men and our children a system operated by free men on their own initiative. A system that will unleash the energies of our citizens, that will give them a chance to get ahead, that will allow the establishment of new industries that will raise the living standards of the people.

If we want to preserve this system we must pay for it, and pay for it now. Corporations and individuals alike must pour into the Federal Treasury every dollar that can be spared from the hard, back-breaking business of fighting the biggest war in history.

Of course, this will mean hardship; of course, this will mean discomfort. But the long future is worth all the sacrifice.

There is not much comfort in a foxhole. There's little comfort waist-deep in the mud of Guadalcanal. It is not comfortable to crash-land a flaming plane. There is small comfort in the cold sea; there is no comfort as a prisoner of the Japs. Why should we be comfortable?