Taxation without representation cannot be defended on any principle of economics or philosophy. But taxation with representation also has its drawbacks. The representation inevitably means a taxing authority composed of politicians; and this implies a body of men who love to spend the public money but who shrink from setting in motion the machinery by which the sums to be expended are provided. Nothing which that highly political agency, the legislature, does, registers its effect upon its constituents so swiftly as the levying of taxes. It is for this reason that taxing bodies take refuge in those taxes which are least noticeable to those who pay them and, when this is no longer possible, in government borrowing, which is merely another way of saying government deficits.
It is entirely possible that as many states have been wrecked by the cowardice of their duly elected taxing authorities as by the greed and brutality of their undemocratic oppressors. In a practical world where men acting collectively must act under the dominion of very practical considerations, one may well be tolerant of these timid tax leviers in ordinary circumstances. There are, however, times when it is not so difficult to be courageous. One such period was those precious two years, 1933 and 1934, when all the practical men were in disgrace and retreat and when a chastened population, in a state of repentance, was prepared for sacrifices and for reform. This should have been the moment for introducing into our society a just and equitable and at the same time a socially and economically sound tax system. People would have accepted it. After 1934 the opportunity had departed. But now once more a mood of questioning returns. At least some of the appalling frailties of our whole Federal financial structure stand out with such disconcerting clarity that it may well be that the moment for intelligent tax revision is at hand. If it is, the moment is being wasted as completely as it was in 1933. And for the same reason: the timidity of a president who cannot think of any economic or social question save in terms of its political elements.
The subject of taxation had already become an irritant even in the lush days of Mr. Coolidge. Even then the greatly expanded expenditures for government had brought us to a series of deficits. The purposes of government had already outrun the willingness of the taxpayers to foot all the bills, and the ever-timid legislators had taken refuge in their invariable shelter—public borrowing. We have not had a balanced government budget in this country for twenty years.
The government, after all, is not merely that collection of functions and functionaries found in Washington. Government is split up among numerous ruling and, of course, taxing units. From 1915 to 1921 the Federal government budget was unbalanced because of the war. Since 1931 it has been unbalanced because of the depression. In the years between 1922 and 1930 the combined budgets of the State and local governments were unbalanced.
It is common to find these unbalanced budgets of the prosperous Coolidge era completely overlooked. Yet they ran along gaily and were, indeed, a contributing force to the thoroughly unsound boom of the ‘twenties. Here is a table covering all the States and 146 cities—which arc as many as data are available for. It gives the excess of expenditures over receipts from 1922 to 1930:
$151,812,517 $412,745,308 1926 . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. $219,063,464
1928 . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. $192,373,223
1929 . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. $321,247,754
1930 . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. $397,348,191
In 1930, however, Federal, State, and local governments joined in the orgy. The important fact about these figures is that they antedate the Roosevelt regime. The folly of unbalanced budgets did not begin with Franklin D. Roosevelt. Here is a table of receipts and expenditures for the Federal, State, and local governments:
1928 . . .. . .. . .. . .. . .. . … $8,681,876,721 $8,689,462,909
1929 . . .. . .. . .. . .. . .. . … $8,905,183,163 $9,042,642,000
1930 . . .. . .. . .. . .. . .. . … $8,419,717,423 $9,719,782,509
1931 . . .. . .. . .. . .. . .. . … $7,377,115,497 $10,697,634,178
The above is for the United States, the States, and 146 cities. But for 1932 we have a complete compilation of all of the 183,000 tax units in the United States. In that year, total receipts were $11,090,273,181, and total expenditures $13,592,199,886.
We have not paid our government bills in this country for two decades. For a while we escaped the consciousness and part of the burden of our public expenditures; but now the deficits have grown so large, and their continuance seems so perilous a practice, that we seem to be driven for the first time to face the problem of paying our bills as we go. And now we are in for an era of lamentations and denunciations of taxes as the first of all human evils.
To keep the matter clear, may we not suggest, as a prelude, that the problem of taxation assumes differing shapes as we look at it in the local government, the State, or the nation?
The local government is no longer a mere policeman and police magistrate. The town has become a great utility.
The rising costs of local government, therefore, are due almost wholly to the fact that the town government has undertaken to supply to the citizens services which were formerly available only to those who could pay certain private enterprisers to perform for them. Public education, a public and efficient fire protection system, good streets and the maintenance of them, waste collection, health protection, welfare services of all kinds—all these utilities cost a great deal of money. They are services which are enjoyed by all the people, and there is no reason why the cost of them should not be imposed upon all the people with some reference to the extent to which they enjoy these services. Now the town’s opportunities for taxation are limited. There are sources of tax income which vanish out of its jurisdiction at the approach of the tax-gatherers. Furthermore, the town’s power to reach those economic forces which dominate the lives of its people is extremely restricted, since the forces themselves originate often outside the town and those which operate in the town are but segments of the larger economic apparatus that does its work over a far more extensive area.
The city tax problem resolves itself largely into a problem of better administration of the city’s affairs. This, however, is not true of the State and of the nation. In these fields the character of the government as a great utility is not so apparent. And hence, the problem of taxes is affected by political, social, and economic considerations which are the source of endless controversy.
But at the very outset one observation is essential in any consideration of taxation on this larger stage. Just as in the cities the demand for the operation of all sorts of community utilities has grown up in the last fifty years, so, in the last two decades, there has arisen in the State and Federal tax provinces a demand that the governments assume the role of economic adjuster.
The capitalist money economy, like all human institutions, does not work smoothly. Its most ardent apologist will not insist that it does. The very central idea of the system is that it shall operate automatically, yet in the simplest society it could not operate automatically without some maladjustments. In our highly complicated and vast society, rendered far more complex now by the development of machine production and the credit mechanism, these maladjustments have become increasingly disturbing and at times catastrophic.
From its earliest organization the economic society has had a way of rejecting certain unusable elements. It flings out of its orbit those persons it cannot use; it throws out just as unceremoniously the money claims which it can no longer accommodate. But at intervals it becomes so jammed with these impedimenta that it begins to idle. It is far too vast, both in its extent and in its horse power, to yield to treatment by private agencies. Indeed, the very genius of the system makes this quite impossible. There is no power except the government with sufficient strength and authority to climb upon this idling monster and set it to rights. And in the last twenty years, at least, first one group and then another has demanded that the government take up this function. Hence we now see both State and Federal governments departing from their ancient roles of majestic and remote policemen to become the trouble-shooters of the disarrayed economic machine.
This new character has been imposed upon the State and Federal governments not by the red-eyed radicals, but by the most conservative elements in the community, organized into numerous pressure groups clamoring for rescue work for their several areas. In 1933 it was the President of the Chamber of Commerce of the United States who was most vocal for that amazing economic expeditionary force known as the N.R.A. It was he who reminded the people generally and his industrial colleagues especially that the old day of individualism was dead and that the fatal sputterings and haltings of their beloved capitalist machine necessitated some sort of collectivist guardianship.
This is the state of mind at which we have now arrived. At the moment, however, as the Roosevelt regime bogs down, the same industrial leaders who clamored for government interference in 1933, even to the guaranteeing of dividends and the payment of corporation bond interest, are now crying out with equal volume for a return to the old individualism. They yearn for the reconstruction of that happy Coolidgian peace when all men went their way unhampered and rose to glamorous heights of prosperity and profit, when the captains of industry toiled through the nights and the Great White Father on Pennsylvania Avenue slept even through the day.
At this juncture the eternal problem of taxes confronts the government and gets itself mixed up with this question of what the role of the central government must be. Before long, perhaps, we shall see the tax problem take first place among the irritants of Washington. And of course we shall see the disputants ranged sharply into two camps — those who insist that taxes must be raised for revenue only and those who assert that taxation may be employed as an implement of social and economic adjustment.
The notion that you can raise taxes for revenue only and let the matter rest there, is, to say the least, naive. You cannot levy a tax without producing an economic effect. If the government’s expenditures are slight, this economic effect may be slight and so may escape our notice. But you cannot spend six or seven billion dollars without producing far-reaching consequences, not only in the act of spending it but also in the act of raising it. The most you can hope to do is to make a choice of the economic consequences you wish to produce.
Let me illustrate this by selecting perhaps the most important financial episode in our history. For some years—since 1931—the Federal government has been piling up its deficits. Since 1933, as Secretary Morgenthau truthfully said, it has done this deliberately. The government has borrowed huge sums of money from the banks and has spent this money on recovery and relief. As a result we have accumulated, since 1931, an addition of twenty-one billion dollars to the nation’s debt.
It is not quite well understood that one of the difficulties of our present economic jam is the lethargy of investment. This is only another way of saying that those who manage to save money out of their current incomes refuse to invest it. The reasons for this refusal are beside the point.
The money savings of the economic society are, of course, accumulated out of income. And money incomes originate in the business operations of the so-called business machine. Mr. X receives a salary. He spends it all. It goes chiefly to the merchants. The merchants spend it, laying it out on labor, raw materials, services, interest, and other charges. Those who receive these dollars spend them in their turn, and as long as this process goes forward the dollars remain in circulation, moving about from employer to workers to employer, from till to till, making income as they go and nourishing the economic anatomy as the blood stream nourishes the body. But as these dollars move along from hand to hand, at each stage some person decides not to spend all that he receives. He decides to save some of the dollars. He decides to put them in a sock. Thereafter these dollars move no more and create no spending. They are no longer spending dollars; they are saved dollars. And if you can imagine this process continuing long enough, you can imagine these dollars, one by one, leaking into the savings funds until all of the dollars which started out as a week’s salary to a worker have been drained into the savings funds of a number of people. If we suppose that in each case the dollars have gone into the ancient sock it will not be very difficult to see that their spending days are over as long as they remain thus immured. It is also clear that they will never be spent again until some of these savers decide to lend them or to invest them or, of course, to release them from savings and return them directly to spending. But if they lend or invest, then the dollars come into the hands of people who will spend them, usually on capital outlays, and thus they begin again careers of spending until again trapped in the savings fund. In modern practice, of course, these dollars do not go into socks, but into savings banks or other savings institutions. But if these institutions stop lending, then the dollars are as effectually imprisoned in the savings fund as if they had gone into the sock itself.
Now let us apply this principle to our Federal fiscal policies. In 1933 the government began borrowing money and paying it out for relief. It handed a dollar to an unfortunate victim of the depression. He promptly spent it in a store. The store spent it with the wholesaler, who in turn bought materials from the manufacturer, who paid it out in wages. And thus this relief dollar went traveling about from business man to business man, from worker to worker. But this dollar came at last into the hands of some person— some employee or enterpriser—who decided not to spend it but to save it. Thus the dollar which began as a dole to some hungry unemployed worker ended as an addition to the capital accumulations of some saver.
This being so, some very grave consequences flow from it. First, it will be seen that the vast expenditures of the government on unemployment tend in time to flow into capital accumulations of those able to save. Although these dollars originated in a plan to help the rejected members of our halting capitalist system, they end by adding to the capital accumulations of the wealthier minority. This is a result which was never intended by the benign but ill-informed gentlemen who have monkeyed so insouciantly with this delicate mechanism since 1933.
In the second place, these dollars, as fast as they flowed into the savings funds, found themselves imprisoned, for the very good reason that savers have not invested their money to any important extent in the last five years. Having piled up in the banks—both in commercial and in savings banks and in other forms of savings—the saved money has remained to a great extent idle and sterilized. Slowly but relentlessly the whole vast flood of relief money has moved into these sterile accumulations.
A third effect of the Federal fiscal policy is the generation of a government credit inflation. For these billions, borrowed from the banks and thus created out of nothing, have added enormously to the purchasing power of the nation. That expanded purchasing power (in its ultimate volume far in excess of the loans themselves) has created a market for all sorts of consumers’ goods—not only for the products which the unemployed have bought directly, but also for the products bought by those who were the indirect recipients of the relief and recovery dollars. And the impact of this great flood of government-created purchasing power upon the market has tended to produce that great rise in prices which is now disturbing the sleep of those who set it in motion. One effect of these price increases, of course, has been to cancel the effectiveness of the purchasing power created by the government.
What has all this to do with taxation? It supplies a perfect instance of the impossibility of evading the creation of an economic effect by tax policy. In these years we might have decided to tax or not to tax, to tax one way or another, but no matter what decision we came to, whether we increased taxes or reduced them or abolished them, we could not possibly have avoided increasing or reducing or influencing the operation of the inflationary energies set off by the government’s borrowing and spending. The most we could do would have been to choose which effects we would produce. The intelligent method, of course, would have been to examine expertly the series of actions we were starting and then decide which set of influences we would bring to bear on their reactions. But we did not do this. We preferred to drift, not because that was the wisest economic policy, but because, as far as our short-sighted leaders could see, that seemed the wisest political policy for the individuals concerned.
Here is the problem that confronted the government. The wide and swift stream of income that it was turning into the stream of business was flooding at last into the capital accumulations of people with the larger incomes. And there the funds were coming to rest because of the paralysis of investment. Because of that it was necessary for the government to go on pouring fresh supplies of income into the economic stream, thus piling up the government deficit and, by the resulting inflation, raising prices as a monstrous counter-irritant to the stimulation first produced.
If the government had raised the money by taxation in the first place, many of these evils would have been avoided. That point we can put aside. Perhaps that was too heroic a course for any purely political government to adopt, though the English government adopted it. But having embarked upon the policy of raising its relief and recovery funds by borrowing, it was a matter of vital necessity that these relief and recovery dollars, as fast as they were turned into savings funds, should be recaptured by the government through taxation for spending once again. I do not mean that a tax should have been put on savings. But I do mean that incomes in all brackets which might be reasonably assumed to be within the savings areas, should have been taxed sufficiently to recover as much as the government was spending.
Such a policy would have avoided the corrosive inflation which now nibbles away at our national purchasing power; it would have saved the government’s credit; it would have created a healthier, though not so gaudy, recovery. Instead of doing this, however, the President resolutely resisted tax increases and still does. He made some dramatic gestures of taxing a few very wealthy political enemies. But he boasted no longer ago than last year that he had actually decreased income taxes on incomes below $26,000 a year. Those who oppose the use of the tax weapon for effecting economic results are innocent indeed if they suppose the government escaped the creation of economic results by shrinking away from taxes.
But this is not all. Throughout this period the government has relied upon invisible taxes for most of its revenue. I think it is fair to assume that no tax which would reach only the savings funds would be sufficient to meet the enormous expenditures of the government. But it is, I believe, a sound principle of taxation that taxes should not, if possible, diminish the expendable incomes of the people. It is true that the money collected by the government in taxes is promptly spent by that government; that the dollar taken from X as a tax is handed to Y for some government purpose and that one effect of this is to enable Y to spend it instead of X. Thus, while the spending is done by a different person as a result of the tax, the total of spending is not diminished. But this is subject to a serious modification. Last year, for instance, the government paid out in round numbers a billion dollars in interest on and retirement of the public debt. It took, therefore, a billion dollars in taxes from one group of persons and paid them out to another group. To the extent that it took money from smaller income groups which would have spent it, and paid it out to bondholders, who would have put it into capital funds, the government actually diminished the nation’s effective purchasing power.
The two important economic factors in our present impasse are the lack of adequate purchasing power and the sterility of investment funds. This very fact should furnish the taxing authority with an economic problem which it could not possibly escape. It could lay taxes so as to draw them from the stream of expendable income or it could lay them so as to draw them from the reservoirs of savings.
It is possible to argue that to tax incomes so as to diminish the amount of savings in itself delivers a wound to the economic system. But that argument is not permissible in the presence of a situation where the savings are not being invested. Furthermore, no one proposes to tax savings as such or to make the tax so large as to completely consume savings. We are confronted with an inescapable choice. To diminish expendable income is fatal. To diminish savings is at least to accomplish almost all that investment can accomplish, namely, to return sterilized savings to the expendable stream again.
In this situation the present government has chosen to tax expendable income. It has put the great burden of its tax measures upon those who buy goods, through invisible taxes —taxes on commodities, excise taxes, and customs taxes. And I think it is proper to say also that it has chosen to levy a social security tax enormously in excess of the current social security needs for the purpose of creating a great reserve fund—which the government uses to pay its current bills.
If we go back to the days of the prosperous ‘twenties we find that eighty per cent of our taxes were raised from visible taxes — taxes on incomes — and only twenty per cent from invisible taxes. By 1931, however, the ratio had changed: fifty-seven per cent of the taxes were derived from visible and forty-three per cent from invisible items. However, the first tax bill of the present government brought us to a complete reversal in policy. It came at the very moment when the government was preparing to spend over three billion dollars on recovery and relief and when, therefore, it should have weighed seriously the results of that policy. It came, also, when the air waves trembled with pity for the forgotten man. The 1933-34 tax bill drew only twenty-six per cent of its revenues from visible taxes and seventy-four per cent from invisible taxes—chiefly taxes on various commodities. In the current year, thus far, the taxes collected have come from incomes to the extent of forty per cent and from invisible taxes to the extent of sixty per cent.
This is all the more serious since in the States and cities almost all the taxes—save in a few States using income taxes —come from invisible taxes and visible sales taxes paid over the retailer’s counter. And at this very moment the nation is being “reassured” by the President that he does not propose to increase taxes.
On this question, therefore—whether or not tax policy is to be employed to influence economic forces—the argument strikes me as being closed against those who insist that this ought not be done. It cannot be escaped. What we have to do is decide what effect we wish to produce. And this is a decision we shall have to come to quite soon, for events now run against the drifters.
The simple truth is that this country is only at the threshold of taxes. It has been singularly blessed, despite much misuse of government moneys, in the matter of taxes. That happy day is past. Now it must begin to pay the bills due upon its pleasant inflations. And now it must face resolutely the problem of keeping its economic machine running. This, of course, carries in it the implication of that now abused and degraded word “planning.” Yet planning we must have. It is only the word that is degraded. For we ran cff on the crazy notion that planning for the capitalist money economy consisted in laying out programs for everybody. Any economic system must be subjected to planning, but it must be planning in accordance with the genius and character of the system being treated. The capitalist system, operated by individuals and individual groups, and flourishing, as far as it does flourish, under the dominion of forces which cannot be scheduled precisely, must be looked at for what it is. It has in it certain glands which supply it with energy and which control those energies. Those glands are few but they are vital. They may become sluggish; they may become overactive. They may produce weak, sterile, and anasmic bodies; they may produce goitrous formations. Intelligent planning for the capitalist system consists, not in fixing prices for steel-mongers and pants pressers, in licensing grocers or ereating scarcity by proclamation, but in administering to the health of the glands.
One of these glands, of course, is that one which stimulates the steady flow of money income into the blood stream. When it fails to function normally the whole economic body becomes sick. One manner in which this gland functions abnormally is by feeding too large a part of the income produced into the hands of those who save large proportions of that income. When this happens, unless the credit gland is functioning, the income becomes sterile and a whole new pathology is set up. The distribution of this sterile income into other hands for spending purposes is not merely the dream of the sentimental lover of his species who wants to soak the rich to help the poor. It is an act of economic intelligence to keep in order the whole machine which feeds both the rich and the poor.
It is, of course, not true that all the ills of our present system can be corrected by a sound tax program. But it is true that a sound tax program can do much to prevent those diseases from getting out of hand, and can even invigorate the entire economic system.