Background and Basic Principles Post-War Taxation*

Transcription

1 24 THE ANALYSTS JOURNAL Background and Basic Principles Post-War Taxation* By DR RUFUS S TUCKER for The first question is how much revenue is required in the post-war period and how much can be raised ) That is really three questions How much must we spend) Shall the budget be balanced ) What will be the size of the national income from which taxes must be obtained ) Some people say that we should balance the budget only m periods of high employment What is high employment ~ Mr Rural says that 55 mllhon employed should be the test The President recently, apparently indulging m what Mr Wlllkle called "campaign oratory", set his aim at 60 mllhon In my opinion, even 55 mllhon is out of the question, if we are referring to clvlhan employment m 1947 and 1948 The number of persons m the labor force will not exceed 58 5 mdhon That is the answer obtained by taking the latest offficml pro3ectlons of the populatmn by age and sex groups and applying to each group a ratio that takes into account trends toward the increased employment of women and decreased employment of children and aged persons Out of this 58 5 mllhon we must deduct somewhere between 2 and 3 5 mflhon for the armed forces and a minimum number of unemployed of at least 3 mllhon With the present system of putting floors under wages and making unemployment rehef easy to obtain, I think we will never again have m times of peace less than 3 mflhon unemployed, and normal unemployment may be as high as 4 5 mflhon If we deduct only 2 mflhon for the armed forces and 3 million for the unemployed, we have a maximum of 53 5 mflhon clwhan employed, ff 1947 and 1948 are prosperous years In hmes of peace we have never had more than 48 8 clvflmn employed, although our armed forces have been very small If there is to be a really sincere and effective effort to balance the budget ~t must be balanced m every year m which c~whan employment ~s normal or above-- not merely m the abnormally high years For the lmmedmte Address before the November 28th meeting of the Taxation and Price Division of the New York Chapter of the American Statistical Association

2 JANUARY, future normal employment would not exceed 52 million and would be less than that if the armed forces number more than 2 million. With 52 million civilians employed what will be the national income that can be taxed? This depends in large measure on the price level, which for the purposes of this discussion we may assume to be as at present, although there is danger that it may be higher. Full productivity, allowing for the same rate of increase in output per worker since 1941 as was experienced in the twelve preceding years, might give us 128 billion dollars of income payments, but that is a high estimate. Projections of trends and regressions going back to 1910 give estimates of only 112 to 121 billion dollars of present purchasing power. Perhaps the most convenient figure to use for further calculations is 120 billion. Source of Tax Revenues What revenue from individuals could be obtained with 120 billion dollars of national income payments? As I calculate it, there would be, under the present system of exemptions, 60 billions of taxable income, 25 billions of exemptions on taxable returns, 13 billions of income on non-taxable returns, and 22 billions of income not reported. There would be 48 million tax returns, of which 40 million would be taxable. If these estimates are correct, the yield of the income tax may be calculated under various proposed schedules. First, the yield of the present tax schedules, as I figure it, would be slightly over 14 billion dollars at present rates and with present exemptions. Other schedules and estimates have been recently published, none of which contemplate such a high yield. The Twin Cities group has proposed two schedules, one for use if there is a sales tax, one for use without a sales tax. They estimate the yield of the first schedule as 7.8 billion dollars; of the second as 5 billion dollars. My calculations give 9.4 billion as the yield of the first schedule, 6.7 billion as the yield of the second. The difference between my estimates and those of the Twin Cities group is largely because they contemplate higher personal exemptions, and partial exemption of dividends. Messrs. Rural and Sonne have suggested a schedule to be used if corporation income taxes are practically abolished. They assume national income payments of 140 billions and a yield of 13 billions. My calculations, based on income payments of 120 billions, show a yield of 9.5 billions, plus 0.8 from taxes on the

3 26 THE ANALYSTS JOURNAL increase in dividends expected as a result of reducing the tax on corporations. The Committee for Economic Development has suggested another schedule, or rather three schedules, also based on a national income of 140 billions, with yields respectively of 9.9, 10.9, and 11.9 billions. My calculations, on a 120 billion income, give a yield of 9.6 billions from the C.E.D?s lowest schedule, but whereas the C.E.D. proposes to credit stockholders with the taxes paid on their dividends by the corporations, my calculations do not allow for such credits. My estimate, allowing for this difference, in the treatment of dividends, would be 1.3 billions less than theirs. So we see that under various tax schedules we could obtain between 6.7 and 14.0 billion dollars from individual income tax. How Much from Individuals? How much do we need to obtain from the individual tax? Federal expenditures in 1947 will be at least 18 billion dollars, and may be as high as 25 billions. Other taxes may be expected to yield between 7 and 13 billions, unless Mr. Ruml's proposal for practical abolition of the tax on corporations is adopted. There seems to be a fair amount of agreement that if there is no sales tax, individual income tax must be made to yield at least 7.8 billions, and that if there is any considerable reduction in corporations' income taxes the individual tax must yield at least 9.9 billions. As I have shown, none of the three best-known tax plans will yield as much as 9.9 billions, although the schedules now in effect would do so. The obvious conclusion is that corporation income taxes cannot be greatly reduced, and that even individual income taxes cannot be at once reduced to their 1942 level. Excess Profits Tax Must Go Unfortunately there are in our present tax structure some elements that would make it difficult to obtain even a 120 billion dollar national income except for a short time during the period of making up war-time shortages. These elements are the ones that prevent new investment and business expansion. They are the ones that must be removed first. First and foremost is the excess-profits tax, which is wholly unsuitable for times of peace. It is generally agreed that this should be abolished as soon as the fighting stops, although it might be continued at a nominal rate in order to safeguard the carrybacks now in the law.

4 JANUARY, Second place is contended for by the corporate income tax and the higher individual surtax brackets. The combination of these, visible in the double taxation of dividends, is peculiarly atrocious. The relief of dividends from double taxation is essential to stimulate investment in risky new ventures and would be helpful in the expansion of existing enterprises. Perhaps that is all that can be hoped for in the next two or three years. Political Considerations But for political reasons it will be necessary to give some tax relief to individuals who are not stockholders. The common argument for such relief the increase of consumer purchasing powermis, in my opinion, largely fallacious. It assumes, in its popular form, that wage earners are the only consumers and that investment does not create as much of a demand for labor as does spending for personal consumption. Those assumptions, I believe, are false and dangerous. If purchasing power is given to consumers, the demand for existing goods is increased, but there will be no production of further goods in consequence unless the producers are allowed to make a fair profit and the consumers, having spent their subsidy, will be in a worse position than before. But if producers are permitted to make a fair profit, they will hire men and pay wages and the purchasing power of wage earners will be increased, goods will be bought, and further goods will be produced to replace them, which in turn will be bought. In other words, tax relief or any other kind of subsidy to consumers is a one-shot device, whereas tax relief to producers sets going a self-perpetuating chain of events increasing purchasing power, production and consumption all together. To put it more succinctly, purchasing power does not of itself create jobs, but jobs do create purchasing power. However aside from the theory of increasing consumer purchasing power certain reductions may be, and must be, granted to wage earners and other persons with small incomes. These reductions should be aimed at reducing the cost of collecting taxes while preserving a lively interest in governmental economy in the minds of the voters. Collection at the source should be maintained and perhaps extended to cover bond interest. But the single individual's exemption could be raised to perhaps $600 and the married couple's to $1,200, retaining the present $500 for each dependent with an income of his own less than the single individual's exemption. The combined normal and first surtax rate could be reduced from 23% to 20%, and the dependency allowances permitted against the normal

5 28 THE ANALYSTS JOURNAL tax as well as the surtax Of course, if a general sales tax were pohtmally possible, the individual exemptions might be rinsed considerably more, with considerable advantage to the natron More tax reductmn than this, before 1947, I would not consider necessary or adwsable We may expect a boom, at least m some sectors of our economy, between the sixth and thirtieth month following the end of the fighting m Europe Thls may be delayed m its begmmng and prolonged by the Japanese war. During that boom many people will be able to pay high taxes, and it is better that they should do so than that they should spend their high incomes and war sawngs on scarce commodltms, with the effect of rinsing the prme level Persons with lower than their present incomes would, of course, pay lower taxes than at present, even if the tax law is not changed It is fortunate that we have "pay-as-you-go" collectmn, since that system gives ~mmedmte rehef to dechnmg m- comes In 1947 the effect of accumulated demands will begin to wear out Further tax reductions at that time would be helpful ff consistent with a balanced budget and the preservatmn of the natmnal credit and the value of the currency, and they would be much more practicable ff m the intervening years government revenues had been high enough to cover the necessardy hlgh government expenditures When those tax reductions are made the personal exemptions must be adjusted to conform to changes that may have occurred m the cost of hvmg, but the chmf emphasis should still be on permlthng an adequate amount of investment, whmh means, for one thing, reducing the high surtax rates first to a maximum effective rate of 66-2/3%, including the normal tax, and later to a maximum rate of 50%. The second stimulus to investment required m 1947 would be a reduction In the rate on corporate incomes The aim should be to equahze the taxation of incomes derived from corporate profits with incomes derived from other sources This aim would be achmved by having the corporation income tax not more than 5% higher than the lowest combined normal and surtax rate on individuals, with dividends subject to surtax when received. In closing, I would hke to emphmze the following objectives m our post-war tax system 1 Taxes on business should be so contrived as not to deter enterprise

6 JANUARY, Taxes on business should be so contrived as to avoid making business decisions (such as plant improvements or dividend payments) primarily on the basis of tax considerations. 3. Taxes based on income, unless imposed at very low rates, should make ample provisions for fluctuating incomes. This applies to all war-profits taxes and all taxes imposed on a progressive scale. 4. All income and profits taxes (particularly personal taxes) should be collected as far as possible at or very near the time when the income is received. 5. Taxes on income should not be so high as to discourage productive investment. 6. Collection at the source reduces evasion and is for most persons the most convenient method of tax. Analytical Double-Talk In financial organizations serving the general public, a usual link between the organization and its clients is the written material prepared by the research or analytical staff--more commonly and erroneously termed the "statistical" department. If you were a client of such an organization, what would you say upon arriving at these words, down toward the end of a memorandum: "... would mean total earnings of $4 per share. It is absolutely impossible to be very dogmatic about post-war earnings at this early date, but the above assumption would appear to be reasonably sound and conservative. Assuming that it proves to be not too incorrect, Common Stock would appear to have excellent speculative possibilities over the next two or three years." This analytical double-talk obviously represents an effort by the author to indicate the limitations of his earnings forecast. It results in a statement which does credit neither to the author nor to the hours of work that probably preceded the preparation of his analysis. If this were a horrible but exceptional example of "street patois", there would be little point in discussing it. But the truth is that such statements appear all too frequently in the material mailed from below Liberty Street to the four corners of the country. Before the public asks itself, "Are we men or mice?" we analysts ought to ask ourselves a question. Can't we admit our shortcomings outright? Can't we learn to separate statements of (1) fact, (2) presumption, and (3) opinion, in our writing? How much more persausive would the excerpt have been, had it followed these lines: "... would mean total earnings of $4 per share. We do not have the same confidence in this estimate that we would have in a shorter-range forecast. But we consider our assumptions reasonable if not conservative. It is our opinion that Common Stock has excellent speculative possibilities over the next two or three years."