The Incentive Tax Argument

...His aiguments contain much truth, and that is their strength...

...In either esse, therefore, the proportionate tax load is cut on the person whose income consists of dividends...

...4 and 69...

...All three plavi, I believe, can be condemned on both ground*: they wilt not work and they are undemocratic...

...he is too sagacious for that...

...But with reduced consumption there will be less need for new plant and equipment and therefore less incentive to invest the new savings...

...There is no good reason to risk such a danger for the edification ef the big taxpayer and those who hope to make a fortune for themselves in the hoped-for postwar boom...

...Let us suppose that the owner of a corporation earning a million dollars annually now has remaining, after both corporate and individual income taxes, $100,000, and that he spends $50,000 for consumption, leaving him with $50,000 of savings...

...A similar plan was recently published also by Rural snd Sonne, snd a third is sponsored by a group of executives hi tha Twin Cities.* All ef these plana have one common feature: a ¦kill of the postwar tax harden from the higher to the lower income groups...

...and to reduce the burden on the higher brackets and increase the proportionate load on the lower brackets...

...Indeed, since these proposals hsve been msde there has been considerable activity in lata and dogs on the stock exchange...

...To repeal the excesa profits tax at s time when these companies will be able to charge high prices and make good profits on a large volume of business appears to be unwarranted...

...The same result follows from Groves's proposal, to reduce the rates on the highest income groups by from 25 per cent to 33 per cent (p...

...Since these proposals come from those with big incomes, they may be subject to an emotional bias created by personal financial interest...

...For that reason we certainly should not by tax policy discourage consumption and promote more savings by the big income groups...

...If deficits are proposed, we can agree that printing money or bank borrowing is more stimulating than taxation...

...Proves argues repeatedly that the surtaxes on the higher bracket, should be reduced SO as to provide this group with investment incentives...

...Obviously the additional $300,000 must come from somewhere, either from additional taxes on lower incomes or from deficit financing...

...We nerd to ditpfs* wealth, not to concentrate it...

...The rich, on the other hand, will increase their consumption very little, saving practically all of the two billion dollars...

...Ruml's plan is quite similar, whereas the Twin Cities plsn would retain the corporate income tax but allow a reduction of 40 per cent on -dividend income...

...The Incentives Theorists may have their own reasons for worshiping this Calf, but since there is no substsnc* to their argument, there is no reason why anyone els* should do so...

...The forces back of tha repeal of the corporation Income tsxes sre primarily the holders of and speculator, in equity securities...

...The issue is whether such s shift is necessary for reasons of incentives snd whether it will promote income and employment...

...Sonne, Planning Pamphlets, No...

...This is common sense *na • the present law recognizes its equity...

...If he invests in government bonds, he transfers the money to another potential investor...

...It follows by the same reasoning that since the rates on the lower brackets still leave enough incentive after taxes they need not be reduced but might even be increased without affecting incentives adversely...

...In spite of all this, and the fact that the Kuinl incentive technique of infiltration is more- subtle' than that used by Andrew Mellon, the new tax plan, whether we call it the Ruml plan or the Groves plan, uses the time-worn conservative argument: that lower taxes on the wealthy will Stimulate business, and...

...At first glance, it seems obvious that a reduction of top rates from 90 per cent to 60 per cent would save the millionaire about $300,000 a year and thus provide him with more incentive to invest...

...ThK cessation of government demand for war material will release a tremendous industrial capacity for which no corresponding demand is immediately in sight Indeed, it is doubtful even now whether wt csn find outlets for a high level of postwar savings even should we reduce taxes drastically on low income* alone...

...The plans of Rami and Groves, if put into effect, will be worth billions In eapitslized value lo «hM group...

...If stress is laid on incentive* as Groves and Kuml do, a choice must eventually be made between incentive taxation snd ability-to-pay taxstion...

...This he can hoard or invest...

...The higher incomes will pay $2,000,000,000 less in taxes...

...Such a reduction would give this taxpayer an additional $300,000 annually to induce him to invest $50,000...

...The professed aim ef all Is to make the economic system function at a high level ef income and employment Among tha leading planning organisations is tha Committee for Economic Development which has a Board of Trustees of ft businessmen, and a Research Committee of IS including Thomas W. Lamont, Chair-ma...

...All of the three proposals would decrease the burden on the income from corporate property and increase ft on in-ome from salaries and labor...

...Let us see, therefore, what will happen to income if we should adopt the shift proposed by the Minnesota group...

...IV H tedacsr the teJoaHvo to to vest hsransi H reduces the demand far consume*)km gawds...

...Buml does Hot, however, atop with tax policy alone) be believes in deficit financing to create jobs and incomi during the depression phase of the business eyele...

...When faced with the obvious unpopularity of their program, ced spokesmen claim that they can reduce the taxes psid by the millionsire by from 1200,000 to $300,000 a year without shifting the burden upon the small man...

...Under the Groves plan, the corporation would pay a withholding tax which would be deducted by th* stockholder on dividends received...

...Stocks of holding companies which are now of little value because of heevy prior charges, might become worth s great deal more if the corporate tax is eliminated snd if this Is accompanied by further price Inflation...

...others have the protective coloration afforded by research staffs, academic per sennet, and protestations ef public interest...

...after tax** it was siiilthe highest on record— 9 billions...

...But with the new tax rates this taxpayer would now have $350,000 to invest annually instead of the original $50,000...

...But it overlooks the simple fsrt that a man who has only his own labor with which to earn hi-, living has less ability to pay than one who gets the income from dividends, and has in addition, »¦?• $100,000 in securities...

...At best the excess profits tax might be reduced somewhat to prevent obviously wasteful practices, but it should not be repealed...

...The CED tax plan was written by Professor Harold M. Groves...

...He also proposes to abolish federal excise taxes, except those on liquor and tobacco, which constitute 60 percent of the total, and to plug loopholes...

...It his program produces depression, or if In the absence of government spending, a depression ensues, Ruml would begin public works...

...As In all times of stress, speculators and owners of cheap or worthless .securities are hoping for end promoting s price inflation...

...r has published a clear cut and forthright statement (page 17): "It is one of the basic concepts of this study ttist the shifting of not more than $2 billion in the tax burden is the key to the entire question of whether or not the private enterprise system will continue to function in a vigorous manner...

...A wider distribution of property, though in itself not a solution of the savings-investment dilemma, is a step in the right direction and will provide both increased consumption and is-creased security for all...

...If this $2 billion or any substantial part of it is to be removed from the taxes of the low-Income group on the political ground that there are more voters in that area, the free enterprise system will be seriously jeopardized," , In its defense, it is said that tha marginal net return, after taxes, te .the higher bracket income taxpayer is at present so low that it discourages risk taking A person with a 90 per cent marginal rate, for example, will be allowed to keep only 10 per cent of his winnings...

...in either case the proportioning of the tax burden ¦a shifted from whst it would hsve been if the rut hsd not been made...

...Just how does Professor Groves propose to stop the hoarding of this $50,000?, By reducing the rate-on the top bracket to 60 per cent...

...Morgan dr...

...Pursuing this argument to its logical terminus, it follows that a steeply progressive tsx /system provides less incentives thsn a less progressive or even a proportional system...

...of the Board ef J.'P...

...It toereasee hoarding ami thus towers eetamt income ami emsloymeat . 4. Bvoaj under the very doabtfal ssawsspitoa that the rich can iavest all they get from the poor, it follows that this transfer can merely divert •ipondiWre from the mw to the high income gro«»*, without Incressiag the total...

...This move, combined with reduction of income-taxes on the higher brackets and.deficit financing, is about all that an inflation-minded group of stock speculators could ask for...

...It is a tribute to Uu.nl » psychological insight that he does not make a frontal attack to achieve his alma...

...Under the Mlnnesota plan a man earning $5,000 as a salary would pay (380 more in taxes than a man receiving $5,000 ai dividends, but a 40 per cent corporate tax would bs retained...

...the lower will pay that much more and will reduce their consumption by, say, one and one-half billion and their savings by a half billion...

...Ruml is, not only a successful businessman but also an able student of economics, at home alike when dealing with the financial mechanism of Wall Street and - the operation of the economic system ss a whole...

...Per the rich man need not invest if you take too much of his profits, whereas the poor man must continue to work so long as his income is inadequate to support his family...

...That, 'withal, he is a most able strategist is shown by the manner in which he was able to put over the plan last year which saved the high income groups about 19,000,000,000...

...Most companies already have adequate funds for expansion...

...Fiscal and Monetary Policy, by Beardsley Ruml and H. Chr...

...For If the high brackets will not psy taxes, it is also likely that the middle classes, labor and the farmer will refuse to foot the bill, with the result that the budget cannot be balanced on any level of economic activity...

...That is not, ho»/ever, the end of the matter...

...If I can find no ground in the theory of income snd employment to support the Groves shift, the Ruml shift, or the Minnesota shift, neither can I find justification in a democratic social philosophy...

...The issues here are two: (1) those relating to cause and effect in economics—will the proposed plan increase the national income...

...The $2,000,000,000 will consequently be hoarded, and this will promote depression...

...it 'contains all of the limitations of that argument...

...Company, and fie.rd.ley Rumi, Treasurer ef R. H. Mary A Company, Chairman of the federal Reserve Bank of New York, snd author of the Jtuml "tax forgiveness" plsn...

...Those companies operating in markets such as automobiles, radios and other durable goods where war-created scarcities will continue should have a very profitable postwar record...

...Groves proposes to eliminate the excess profits tax andj the corporate income tax, to reduce the taxes on the high brackets by 25 to 33 per cent, and to retain war time rates on the lower brackets...

...This is simply an arithmetical contradiction, if you reduce one man's taxes by 33 per cent, you will either get less revenue or you must raise it somewhere else...

...Assuming, however, a balanced budget, this money comes from the smaller taxpayers who might have spent much of it for consumption and invested the balance, since ttley have no high marginal rates to inhibit them...

...during depression we should use these funds for public works, and only If they are still found to be insufficient should we expend the national debt...

...if he hoards, he impedes.the income flow...

...The elimination of the corporate tax...

...The Twin Cities group * Production, Jobi and Taxes, by Harold m. Groves...

...If the Groves-plan had been in effect last ¦ year, the individual taxpayer would hav* hsd to pay an additional 12 billions in taxes...

...Pamphlet No...

...The main end served by such n policy would be to add to the holdings of government bonds by the wealthy and to increase the government debt We should use high income taxation to balance the budget in prosperity and even to reduce the debt...

...Although their techniques differ, all three schemes have the same two objectives: to reduce the total taxes paid out of corporate profits and to make up the deficit by taxing other forms of earned income...

...In 1948 corporate laeehp before Usee was 24 billions...

...This procedure is justified by its proponents t* eliminate what is railed double taxation...

...ThE plan proposed by Groves, Ruml, and the Minnesota group will therefore fail to stimulate economic activity because: 1. It reduces consumption and increases savings, whsrose we need mors (sasnmpHasi ami ksea ss-ing...

...They are so phrased, moreover, as to be very convincing to the typical American who has little inclination to study them agrlously...

...It makes no difference whether you call the device by which this is accomplished a withholding tax or a deduction for corporate income tax payments...

...To invest the larger amount, he might again need more incentives...

...Although we might agrse that tt is better to incur a deficit than to suffer a depression, It does not appeer desirable to produce a deficit by tax reduction in favor of the high income groups...

...35, National Planning Association, Washington, d. C, 25c1...

...Just as he pat across tax forgiveness in connection with Pay ae You Co, so now he aims to abolish the excess profits tax, the corporate income tsx, and to reduce high bracket rates as a part of a fiscal snd monetary policy ' designed to promote prosperity, lie combines the orthodox with the heterodox: tax reduction and a ' balanced budget with public works and deficit financing...

...Securities of bankrupt or semi-bankrupt congerns, particularly those with heavy prior charges for preferred stocks, might again become valuable as the net income from tax reduction acrruedHo profits available for common stock...

...Since I do not subscribe to the view that the sise of the national debt is a matter of indifference, I cannot admit that the upper bracket tax load should have preferred consideration...

...McGraw-Hill, New York, 1944, 116 psges, $1.25...

...The Brookings Institution Published in 1943 Postwar Tax Policy and Business Expansion, by Lewis H. Kimmel...

...Monopoly and financial oligarchy, on the other hand, are the logical consequences of bowing and scraping to the theory of incentives...

...2) those relating to the ethics of social policy—-is it fair...

...In March of this year, the National Industrial Conference Board reported that: "The great majority of the concerns expect to do their own financing out of company resources-surplus, earnings, rash on hand, reserves for depreciation, the liquidation of inventories of war goods, and postwar tax refunds...

...Hence the rate upon high incomes should be reduced...

...If this argument is anslyzed, it becomes clear that it leads te just the opposite results as the canon of ability-to-pay...

...At best then, all that Professor Groves can accomplish is to shift expenditure and investment from the less to the more wealthy, and under probable postwar conditions he would actually decrease consumption and impede investment as well...

...Postwar Taxes, the Twin Cities Plan, published by the Twin Pities Research Bureau, Inc., Carl P, Herbert, Secrecy, St Paul, Minnesota...

...and the excess profits t|i it, In practice, therefore a large gift to the common stockholders which must be paid by the rest of the.nation...