Postwar Taxation and Its Effect
PROBLEM NOT SOLVED BY WISHFUL DREAMING
By RANDOLPH PAUL, of Lord, Day & Lord, New York City
Delivered before the Taxation and Price Division of the New York Chapter of the American Statistical Association,November 28, 1944
Vital Speeches of the Day, Vol. XI, pp. 158-160.
NOTHING is so pleasing to a speaker as to be invited back. A return engagement is a kind of a badge of previous good behavior. When we last met together in 1942, we talked about some of the taxation and economic problems engendered by the war. We were then still feeling our way along as a nation at war. Now we are grown old in the experience of this war and we have gone a long way in solving our wartime problems. Tonight, however, you have challenged me with the harder task of projecting the discussion into the longed-for peacetime period, the boundaries of which and many of the components of which are still unknown. And I have accepted the challenge.
Our subject is "Postwar Taxation and Its Effects." Since I am only one of four speakers, and since I have no seven-league boots, I shall have to limit myself to a small part of the vast territory covered by that title. I shall discuss postwar taxation, but I shall place my emphasis upon its effects in the corporate area.
Everyone is interested in future corporate taxes, though the reasons for this interest vary in different quarters. About 500,000 corporations are interested for the good and immediate reason that they are subject to these taxes. These corporations are owned by nearly 10 million stockholders. These stockholders at least think that they bear the burden of the taxes paid by their corporations, though eminent authorities assert that it is the wage earners and consumers who pay. Others are less directly, but no less surely, interested in corporate taxes because they know that a heavy tax load is inevitable and that if the corporations do not pay, they will. All this adds up to widespread public interest.
At the risk of being a prophet without honor, I shall venture, before the end of the war, to guess the future of corporate taxation. At this early date my guess can at best be only slightly educated. We do not know how long the war will last, either in Europe or the Pacific. We cannot now know what the postwar international economic structure will be, or what political trends will be current, either here or abroad, in the postwar future. We cannot at this time foresee what defense and other necessities will confront us when the war ends. Even with national security assured by an international organization to enforce peace, some economic philosophies would support greater governmental responsibilities—and expenses—than would be undertaken if more conventional philosophies were accepted. These are some of the imponderables which lie ahead. These and other uncertainties bear directly upon the future of corporate taxation in two ways. They will determine (1) the size of the postwar budget, and (2) the level of postwar national income.
Estimates of the federal postwar budget are now running to figures that would have sent chills down the spines of the most daring spenders of the thirties. Mr. Houston's Twin Cities plan contemplates a budget of $15 to $21 billion, not including social security and debt retirement. So does the Ruml-Sonne plan. The CED plan has a budget of from $16 to $18 billion. Others have given us various estimates. The late Wendell Willkie spoke of a budget of $20 billion or more. Professor Harley L. Lutz has estimated $14 to $15 billion. He seems to be the low bidder among postwar tax architects.Postwar budget guessing is a hazardous enterprise. The cost of our military establishments, benefits to veterans, and public works expenditures, are particularly unpredictable. Requirements of the Armed Forces after the war may vary over a wide range, depending on military events and international relations. It is almost impossible to forecast expenditures for veterans, which may well include dismissal pay and bonus payments. Expenditures for aid to agriculture, for foreign investment, and for relief may vary greatly. About the only budget items which can be projected with any accuracy are the ordinary costs of government and interest on the national debt. Even the latter will depend upon the length of the war.
At this point I am going to take the bull by the horns and give you my own budget forecast. I dare to say that we shall never again see a federal budget below $20 billion; and I am inclined to believe that our postwar budgets will average $25 billion. This figure may be too high; if it is, I shall be agreeably surprised. But I prefer agreeable surprise to disagreeable shock. A realist always hopes for the best, but prepares for the worst. It is much safer than preparing for the best and being unready for the worst.
Published prophecies as to our postwar national income cover a wide range. I suppose the leading prophecy is that of Mr. S. Morris Livingston in "Markets After the War," published by the Department of Commerce. Mr. Livingston's estimate is $134 billion at 1942 prices. Dr. Goldenweiser and Mr. Hagen prophesy $142 billion at 1943 prices. Considering the differences in 1942 and 1943 price levels, these estimates are about the same. The Ruml-Sonne and
CED plans are premised on a national income of $140 billion at 1943 prices. The Twin Cities plan uses a figure of $120 billion at 1942 prices; this amounts to about $125 billion at 1943 prices. Mr. Joseph Mayer, on the basis of his "underlying assumptions," thinks the national income in 1947 will be "in the neighborhood of $123 billion," which, in his opinion, is only approximately 17 per cent below the actual 1943 level. Mr. Willkie has stated that the national income "should never fall below $120 billion at 1942 prices." Vice President Wallace has said that "we have to have full employment and an expanding economy to carry our debt load easily;" this, in Mr. Wallace's view, would mean "$170 billion in terms of total goods and services." Mr. Wallace was referring to gross national product (the total amount of goods and services produced), which makes his estimate comparable to Mr. Livingston's forecast. He goes on to say: "If we go up to $200 billion, as we can go, we could carry the debt load that much more easily."
Some of the current optimism as to postwar national income is based upon the high volume of liquid savings which will be available for spending after the war, and the pent-up demand for consumer goods. But we cannot know in advance how 130 million people will spend their savings or, indeed, whether they will spend the bulk of them on consumption goods when these goods are again available. Most people made bad guesses about the spending pattern which would govern the high income of the war period. Furthermore, we know neither how these savings are distributed among income groups nor what proportion of them is held by the high income groups, which rarely spend all of their income. I am strongly inclined to doubt whether there will be any postwar spending spree.
I am not qualified to make any estimate of postwar national income, but I can say that even the lowest of the estimates I have quoted calls for the stabilization of a boom. It means production, without the Government as a war customer, at a rate three times that of 1933, 70 per cent higher than that of 1940, and only a little less than that of 1943. This implies the conversion of almost all of our war production to civilian production. It assumes full employment, which means at least 56 million jobs at sufficient pay to buy the goods and services produced by workers in those jobs. In fact, national income is the result rather than the cause of full employment. The high estimates of national income are nothing more than projections of the effect of full employment upon the economy.
If we realistically contemplate a drop in plane production to about 5 per cent of its present level, a shrinkage of the shipbuilding industry to about 10 per cent, and if we remember that the machine tool industry is now operating at ten times the rate of any year of peace, the synthetic rubber factories at a considerably greater rate than in peacetime, and the steel industry at about 90 million tons, we begin to realize the magnitude of our assumption that national income will be as high as $140 billion. All the employees displaced after the war from these industries and from the production of aluminum, magnesium, and other non-ferrous metals, will have to find jobs in peace industries. So will about 9 million returning soldiers. I should like to see more discussion of how this miracle is to happen, and less bland assumption that it will happen.
Our unpreparedness for the postwar period extends into tax theory. So far our thinking has not faced the perhaps insoluble dilemma confronting us. Everyone wants the highest possible amount of consumption and investment. Certain taxes, such as payroll taxes, excise taxes, and lower bracket income taxes, reduce consumption. We should reduce these taxes if we wish to increase consumption. High bracket income taxes and estate taxes do not significantly affect consumption. But these taxes may discourage investment; it is therefore argued that they should be reduced. A disquieting question might be asked in parenthesis: Why did investment almost completely disappear in the early Thirties after several years of low taxes? But I am not debating; I sincerely want to meet this issue at a more basic level. We must get taxes somewhere, and we shall have to decide the question whether our approach to postwar taxation should favor consumption or investment. This latent ambiguity lurks in almost all current discussion of the subject.
Nor do those who urge that income taxes are a deterrent to investment all agree as to the point in our economic system at which investment decisions are made. Are they made primarily at the level of the corporation executive whose foremost concern is corporate profits, or are they made at the level of the individual investor who is interested in his own income? If we think that these decisions are made primarily by the corporate executive, we should move to solve our problem in the field of business taxes. If we think that these decisions are made principally by the individual investor, we should move to solve our problem in the field of the individual income tax. At the present time we do not know which way to move.
If we assume that we should be primarily concerned with investment decisions of the individual income recipient, we should still have to decide upon the income ranges which could be expected to furnish the main source of investment funds. This we do not know now. Is it the recipients of incomes under $50,000, or the recipients of incomes between $50,000 and $100,000, or the recipients of still larger incomes? At the moment we have no adequate analysis of the income ranges which are most strategic from the investment point of view.
We are also without sufficient knowledge of the incidence of corporation taxes. Mr. Ruml, Mr. Sonne, and the Committee for Economic Development, contend that these taxes are shifted to consumers and wage earners as well as stockholders. Their argument is against the corporate tax because : (1) it reduces corporate investment by lowering yields; (2) it takes away vital and enormous funds which would otherwise be used to raise wages or lower prices; and (3) it results in double taxation of the shareholder's dividend income. Points (1) and (3) are good only to the extent that the corporation tax falls upon corporate profits, and point (2) only to the extent that the tax is shifted. The three arguments, it should be noted, do not apply simultaneously.If corporate taxes are shifted to consumers they become, in fact, excise taxes or concealed sales taxes, although they are perhaps a less efficient instrument than a direct sales tax. To the extent that they are shifted to wage earners in the form of reduced wages they have a tendency to reduce consumer expenditures. To the extent that they are shifted to the owners of capital, they represent additional personal income taxes. The traditional economic view is in the direction that these taxes are not shifted. But certainly considerable respect should be given to the views of Mr. Ruml and others who contend that the real incidence of these taxes is on wage earners and consumers. At any rate, the formulation of a sound postwar tax plan depends upon the answer to this vexed question.
On one item of postwar corporate taxation there is almost complete agreement. It is that the excess profits tax should go. This tax may be advisable for the transition period, but for the long pull it is peculiarly inappropriate. Mr. Blough,of the Treasury, has said that the tax has a "short life expectancy." The only open question is the date on which repeal should take effect. Mr. Harold Groves has suggested repeal at the close of hostilities, with provision for the repeal "to take effect later." This may be a wise compromise.
The elimination of the excess profits tax will leave us with about $31 billion of revenue with taxes at present levels and a national income of $140 billion. We can continue in territory of fairly general agreement by assuming: (1) a considerable reduction of excise taxes; (2) the repeal of the 3 per cent normal tax; and (3) the repeal of the capital-stock and declared-value excess-profits taxes.
Besides being politically popular, the reduction of the excise taxes will give a valuable stimulus to purchasing power, as will also the repeal of the 3 per cent normal tax. The capital-stock and declared-value excess-profits taxes have been justly condemned in almost every quarter. Recently Mr. Blough suggested that these taxes be "simplified in the manner urged by the Treasury for some years and unanimously concurred in by business—namely, repeal." These three changes will reduce to $25 billion the yield of $31 billion which would come from our present system without the excess-profits tax.
Now we begin to walk on quicksand. If our budget stays as low as $20 billion, we still have left $5 billion of possible reduction, assuming no amortization of the national debt. If our budget should be $25 billion, we have no room for further reduction if we would balance the budget. If our budget should exceed $25 billion, we are in the red. Bear in mind that we are assuming a top postwar national income of $140 billion. If our national income should drop to $120 billion, we are almost in the red with a $20 billion budget. This is without allowance for any relief expenditures, which would probably be necessary at this level of national income, and would certainly be necessary if the national income dropped any lower.
Assuming the most favorable possible postwar financial picture, and no debt retirement, there is a possible $5 billion tax reduction. A 5-point drop in the first bracket of the surtax would involve a loss of revenue of nearly $3 billion at the $140 billion level of national income. This would leave only about $2 billion for corporate tax reduction—enough perhaps to reduce the rate 10 per cent, from 40 to 30 per cent, or to allow for the exemption of dividends from coroprate tax with a tax on undistributed profits at 40 per cent. This, I should say, was the ultimate in corporate tax reduction.
This outlook is not so dismal as may first appear. With national income at the $140 billion level, corporate profits should reach $18 billion. Even with no reduction beyond the elimination of the excess profits tax, this will leave $11 billion of corporate profits after taxes. I need hardly add that this amount exceeds anything in corporate tax history, even including the war years. A reduction in corporate taxes of $2 billion would leave $13 billion in corporate profits after taxes.
I wish we could think that we had solved our problem by keeping out budget at $20 billion and our national income at $140 billion. Unfortunately, this is not so. We have to take account of the problem of balancing savings and investment. The savings habit is in the blood-stream of the American people. As children they were taught that saving was a virtue. As workers they are paying Social Security taxes to provide a nest egg for their old age. As citizens they are salting money in War Bonds—nearly $12 billion worth in 1943. Even in the year 1932, with national income at only $40 billion, individual savings amounted to $2.6 billion, or 6 1/2 percent of national income. Lately, because of lack of civilian goods and services, and a wartime sense of restraint, savings have been going on at the rate of about 22 per cent of national income—$17.6 billion for the first half of 1944. It does not seem reasonable to assume that individual income recipients will save less than $25 billion out of a national income of $140 billion. With this amount of individual savings, how shall we achieve a balance between savings and investment? How shall we make it possible for total savings to flow into enterprise directly or indirectly by way of investments? In other words, how shall we absorb annual savings in new capital formation?
In no sense do I wish to imply that we have arrived at a mature economy. Please understand that. I am optimistic about the future. I see many hopeful factors. But there is a difference between a mature economy and a mature approach to economic problems. In approaching this phase of our problem we have to take experience into account. History, including the year 1941, shows us no record of business investment sufficient to balance savings at the level of income which will reflect full employment in the postwar period. To do our job we shall have to break records.
To some of you I may have sounded somewhat pessimistic this evening. I hope that I will not be misunderstood. In spite of the taint of Government experience, I am not a tired defeatist. I believe in the future of America. I think we can lick our problems. But what we need to lick them is intelligent confidence which faces obstacles—not empty, vacant optimism looking in the other direction. It is the people who are afraid of a $25 billion budget who do not believe in America. They, and those who blandly assume a high national income while doing nothing to achieve full employment, will be the real defeatists of the postwar period. The problem of postwar taxation will not be solved by wishful dreaming. It will be solved only if we bear the "fire in our bellies," which, in Justice Holmes' words, will "survive and transfigure the hard facts."