My Tax Return
Reflections After March 15by ARTHUR GARFIELD HAYS
I inserted a new blade into my safety razor. I had paid a 2 percent sales tax when I. bought the package. In the cost of the blades to me are included corporation taxes of various kinds, organization, franchise, unemployment, social security and what not, including real estate and other taxes imposed on the manufacturer and his share of automobile, truck and gasoline taxes, or the part his freight rates contributed to the taxes paid by the railroads. Not only this, but the manufacturer had had to buy raw materials. Practically every tax of the producer of the raw material was passed alonghis corporation, real estate, automobile, gasoline, railroad, and even perhaps processing taxes. Now how much of the cost of this razor blade was due to taxes all down the line? Apply the above process to my breakfast food, the gas and gas tank and cooking utensils used in its preparation, the ice box used in its refrigeration. In my food cost are included part of the taxes of the farmer who raised the food, the manufacturer who sold him machinery, the company which processed or packaged the food, the railroads or automobiles which at various stages transported the raw or finished product, and the wholesaler, jobber, dealer and retailer of the food. My home is heated a good part of the year, and lighted a good part of the time. I pay a tax on coal, oil and electricity, and included in my bill is a large part of the tax that all the suppliers and their predecessors pay.
I drive my car to the stationI paid a tax on its purchase. I pay a yearly registration tax and even for a license without which I am not permitted to drive the car. I fill up with gasoline, the price of which is increased 30 percent by a tax. I commute to the city, take a subway downtown. Included in my fare are the taxes on the companies which transport me. I get to my office where the rent we pay includes real estate and other taxes of my landlord. I use stationery and other supplies, telegraph, telephone and other servicesall of which shift a part of the tax burden to me, and in my office we pay a business, social security and unemployment tax. (We try to shift these to our clients, as well as the taxes the other fellows put on us, but we don't show it on the bill.) At lunch a sales tax is added to my food check, and there is included a part of the rent which pays a part of the real estate taxes of my restauranteur's landlord. I buy cigarettes and tobacco which bear a heavy tax, or I might have a drink which bears a heavier one. In the evening I may go to the theater and pay an "amusement" tax as well as a share of the taxes of the producing company, its landlord, and everybody included in the production. And in addition to all of this are taxes (though we don't use the word) which industry has been able to impose by monopolies, trade agreements, sabotage, and all those other artificial curbs to production which add to the price of a large and increasing proportion of what I buy.
Finally, my day is ended. While worrying about the income tax which I didn't pay, I again fell into a troubled sleep, haunted by dreams of tax collectors who seemed to have left no surplus to pay the butcher, the baker and candlestick maker. It is not surprising that the immigrant, realizing that everything was taxed, and who had in the fervor of war patriotism bought a Liberty Bond, wrote to the government, "I read in the paper that interest is due to my bond. Let me know when and where to pay it."
Sometimes I dream that I am very rich. The dream becomes a nightmare that I have an income of a million dollars. My federal income tax is $681,000; state tax perhaps $100,000. About 20 percent remains. Out of this come real estate, personal property, and all the other indirect and hidden taxes. But then I sleep more peacefully in the realization that the total annual burden can never be more than 100 percent of my million-dollar income, unless I have capital losses which I might have to pay from current income.
My dream shiftswe are playing poker. The "kitty" is getting all the money so that chips are scarce, particularly blue chips. We all demand that the "kitty" get into the game. At first the "kitty" demurs, saying, "My business is merely to control the game." But we all insist that the "kitty" must extend her functions or we will all go broke.
Taxes as Revenue
AM I JOINING IN THE JEREMIADS OF The New York Herald Tribune, The Chicago Tribune, and the countless taxpayers' associations who would have the poor share the tax, if not the wealth, of the rich? Not at all, The rates of income taxation in higher brackets may have to be revised. In an effort to bring about a fairer distribution of the tax burden and of income, we may, because of high rates, actually collect less, and we may have brought about a situation which defeats the more important purpose of greater production. Sudden raises in rates often cause such economic dislocation as to bring no net return.
No just complaint can be made by the rich that they pay more than their share. The government revenue derived from automobile owners' taxes in 1936 was $1,448,266,976. Individual income taxes fell far short of this amount: And 94 percent of all motor cars are owned by families with incomes of less than $3000.
The tax rates on incomes in higher brackets have been so large that there is little inducement to gamble or invest, for the government would take most of the return. Tax exempt securities have been the attractive field of investment. Something must be done about that. Capital gains and undistributed profits taxes have exaggerated the condition and what little has been lacking to deter investment has been supplied by government regulation of Wall Street and other investment markets, the reason for which is much like that for prohibitionthat it is the duty of government to protect people from themselves. With exceptions not important here, we require the filing of voluminous reports with, and approval by, the SEC, before permitting the issue of securities. There have heretofore been vast reservoirs of information, but we now require more data in order to protect those who have heretofore neglected to make use of the already available sources of information. Time must elapse before we find out whether everything is in order. By that time the market for investment securities may have changed. It's difficult to do business if everything one does must await checking by some government department. There must be some simpler way to protect us from dishonesty. The inconvenience, expense and loss to honest men is a heavy price to pay in order to prevent the cheat from doing business. Nor does it prevent him. Draconian laws prevent quick decision, temper the natural flow of business and deter investment. The effect is not only to make the rich poorer but everybody else as well.
Lack of investment is in part due to the depression. The continuation of the depression is in part due to the lack of investment. It would seem obvious, however, that we should encourage the storing up of income, the replenishment of capital, to lead to investment. Our expenditures toadylocal, state and nationalare almost $18 billion per annum. Our tax yield, at present high rates from individual income taxes, is not 7 percent of this amount. (The gain is not worth the candle.) We could encourage investment by reducing the rates in the higher brackets.
But how are you to bring about a situation where we share more equitably the recurring wealth (by which I mean the annual income) without taking unduly from the large incomes? I have referred to the law of "diminishing returns," and to the dislocation of the accustomed process which normally led to investment, accelerated production and progress. The answer will come when we realize that producing more, not dividing up, is the road to prosperity.
Taxes as a Social Instrument
THE GROWTH OF THE TAX BURDEN IS SHOWN BY THE FOLLOWING figures:*
Total receipts of government are greater than the taxes. Today expenses are far greater than either. Probably the figures from the federal government make clear the trend applicable as well to state and local governments
According to World Almanac figures, the 1789 91 annual cost of the government of the United States was about $4 millionour present cost for about five hours. By 1825 we had reached a figure of $17 million, less than a present day's cost; by 1850, $45 millionthe cost of two days.
Astronomical as our present figures appear, gigantic as they are compared to those of the early days of the Republic, there is reason to believe that at the end of the next hundred years, these figures will be used as an indication of the simplicity and parochialism of government function in the middle of the twentieth century. After all, figures are relative, as all countries learn in times of inflation.
MORE IMPORTANT THAN THE FIGURES THEMSELVES ARE THREE considerations: First, the equity of the apportionment of the tax burden; second, what proportion of the national income is spent by the government; third, for what do we spend the money? The trend in these will throw some light on the direction in which our society is moving.
1. In 1913, taxes of all our government agencies totaled about two and a quarter billions; in 1922, about seven and a half billions; in 1930, ten and a quarter billions; and in 1937, about ten and one half billions.
I have not the figures covering all tax collections classified subsequent to 1930, but the percentages of burden of federal taxes throws light on the question we are considering. Income, gift and estate taxes constituted almost half the federal revenue for 1937; liquor and tobacco taxes almost an additional quarter.
We are gradually placing a greater proportion of burdens of taxation on those who reap the benefit, and on those best able to pay who by reason of their financial position are the greater beneficiaries of stable government.
These huge increases in taxation and government spending are due largely to the World War and the depression. But the trend has been running in this direction for generations. The federal government bore the cost of war. Yet between 1913 and 1922, annual expenditures state and local governments increased from 1597 millions to 4016 millions (and thereafter to 1930, to 6797 million Making every allowance for the growth in population and the difference in dollar value, there is still a tremendous and growing proportionate increase from year.
A tabulation of the percentages of all government expenditures to national income makes the trend clear.* [*Source: Chart in "The National Debt and Government Credit, 1937," Twentieth Century Fund. It is interesting to note the relationship in foreign countries: in 1935-37 the percentages were: 28.5 for the U.S.; 29.7 for Great Britain; and 39.9 for France.]
Of course since 1930 we have been paying for the depression and we should perhaps regard the figures as of no more consequence than during the years we paid for the war. Since 1932 the government has spent an amount equal to about 30 to 35 percent of the national income. I say this not in criticism. I believe it has been necessary. And we must not overlook the fact that the government has acquired valuable assets. They may be capital assets or frozen assets; some of them may not bring in direct income; but they are there and add to our national health, wealth, and well-being.
The upward trend is likely to continue. You may not like this tendency. Your wishes will not change the facts. You may protest against high taxes and government extravagance, against waste and government inefficiency, against trial and error methods which appear to be all trial and all error. You may persuade the voters to put another political party in power, or to elect enough opposition candidates to block effective action. But your new party will be obliged to adopt policies which will promote general welfare; and to avoid calamity, it will continue on a course of increased government spending despite political watch-words of thrift and economy. For the only way to prosperity is to increase the national income and the mass purchasing power.
As an illustration, it is significant that in the by-election of 1938, while all Republican candidates deprecated the huge government expenditures, none of them suggested cutting down on relief, government work or, for that matter, any of the major New Deal social measures. They merely intimated that they would do these things without spending money. By 1929 an amount equal to almost 15 percent of the national income was spent by the government. When and if we get back to normal, the proportion may be 20 percent; in another generation, 30 percent. In spite of upsets and dislocations causing violent fluctuations, the upward trend will probably continue, gradually and slowly, in that democratic way which is called "muddling through."
3. We now come to the question: For what is government money spent? What have been the trends there? With governments, as with individuals, the purpose and end are more important than the fact of spending. In order to keep us properly informed, the National Manufacturers' Association issued a little pamphlet. It seems that taxes are too high, that there is no use soaking the rich, and that men would earn more if they didn't work less. But the pamphlet agreed that "taxes are necessary":
There are a multitude of functions that government must perform. We need schools and roads and police and fire protection. We must have an army and navy for our defense. We must have legislators to make the laws and a large number of civil employees to do the things that government needs to do.
This was one of a hallelujah series ofwhat year, do you think1936! It was called "You and Industry" series. It congratulates us and itself on our high standards of living. Government must not intervene "in the ordinary processes of production and distribution." It should continue in its "normal role of umpire," "Down with Wagner labor acts" and such like! "Edison, MacCormick Singer and a galaxy of inventors were the sons of poor men. Carnegie, Schwab, Ford, Chrysler and thousands of other manufacturers rose from the ranks." To retain our opportunities and high standards, government should pro vice only the accustomed services of highways, laws, education, protection, defense and the hiring of men "to do the things that government needs to do."
There was a time in history when many of the service mentioned above were private, when even public defers' was in the hands of private mercenaries. Much as private defense is today in the hands of mercenaries supplied by Bergdoff and other detective agencies to the strike-bound industrialists.
From the point of view of the manufacturers, the tariff is no doubt one of the thingsperhaps the one thingalong economic lines "that government needs to do.'' There has been no complaint about the Department of Commerce, or expenditures on the navy made necessary to protect Americans owning property or doing business abroad. The Reconstruction Finance Corporation was created during the Hoover administration in order to help out business corporations. The purpose of such laws has been "to give security to property owners, to industrialists, to merchants and to bankers."
If the conservative critics of pump-priming knew their history they would know that the government has always used a pump. Much of the national domain was given away, at first to the veterans of the Revolutionary War. The railroads were pumped into existence by free grants of land, which were the basis of scandalous speculation. Building roads, subsidizing canals, dredging waterways, subsidies to build up a merchant marine, franchises in perpetuity to public utilities, power to banks to issue currency, and in addition a vast amount of plain pork-barrel legislationall for the purpose of priming the pump. Stripped of its pretenses, much of the criticism of pump-priming arises from the fact that the new pump is a modern instrument meeting human needs instead of fostering speculation. When the pump is once primed, it may operate for some time to come; and if we keep it going, we won't have to prime it.
Taxes were necessary for many purposes in 1936 which were not regarded as governmental functions a generation ago, and a generation ago taxes were needed for many purposes not regarded as governmental a generation before that.
Payment of 15 or 20 percent of national income doesn't seem too high for national defense, education, police and ire protection, for tribunals to get disputes settled (which is almost as important as working out justice), for public health and for a myriad of things which can be handled better collectively than singly. Imagine what a mess our life would be in a complicated society if we tried to-handle these undertakings other than collectively. The argument applies to food, clothing and shelter as well, if we cannot make and distribute a sufficient supply any other way.
The notable change has been in the growth of new services. But here too is no novelty. Controls and activities relating to commerce and industry, transportation, communication, public health and welfare, promotion of education, science and research, have had a tremendous growth through two generations. The Interstate Commerce Commission, Department of Commerce, federal activities dealing with natural resources, those concerning agricultural services with extension departments which have to do with the investigation and suppression of plant and animal pests and diseases, maternity and health bureaus, bureaus of standards, research departments, vocational education and rehabilitation departments, sanitation and irrigation projects-all of these were on their way before the depression-and before Roosevelt. "It has been estimated that perhaps one third of the actual types of administrative work carried on by the federal government in 1930 had not been authorized prior to 1915."* [*Source: Recent Social Trends"The Growth of Governmental Functions," by Wooddy.] Then came the Federal Reconstruction Finance Corporation, the NRA, the AAA, the TVA, the PWA, the WPA, the Securities Exchange Act, the Corporation Registration Act and innumerable other agencies of government.
In the year ending June 30,1937, out of the federal expenditures of over $8,000,000,000, economic assistance to the public totaled over $4,300,000,000. The expenditures of 1937 show not much greater totals for war costs than in 1932. Naturally the percentages have changed. About 30 percent represents war costs; over 50 percent is devoted to economic reconstruction. Of course we will agree that if we could get the reconstruction without spending the money, we would be better off. The "recession" in the middle of 1937 indicated what would happen if the government didn't ''prime the pump."
Money for the American Dream
IS THIS A PLEA OR AN ARGUMENT FOR ROOSEVELT, for the New Deal or the Democratic Party? It is not so intended. I am thrilled that the government under Roosevelt's leadership has undertaken what seems to me should be a prime responsibility of any governmentto assure its citizens food and shelter. I am not appalled at government spending. Like every man who is not "in politics," however, I have my own set of complaints, criticisms and grievances. The fact is that "the Government," moved by a public demand which was sensed by an acute politician, "has assumed a more prominent role in the national economy than before the depression." Many hope that the present situation may prove to be an exception. Where the desirable balance between public and private activity may be, no one can tell, and of course it shifts from time to time. We should be concerned chiefly, not with the amount of government expenditures, but with seeking to find and hold the proper balance in the changing and complicated world in which we live.
Consider what this means in relation to the development of democracy in the future. Heretofore, to a large extent, the public's business has been nobody's business. We had no common interest in the day-to-day accretion of the common wealth. Certainly, if it is true that the most sensitive of our nerves is embedded in our pocketbooks, we shall be more sensitive as to what is done with our money. We shall demand a higher standard in the election of our public servants because we shall understand better the importance of public jobs to our private interests. Without going through the agonies of revolution, we shall have the sense of participation which gives new dignity to the human being. We shall be engaged in one capacity or another in that "great adventure" which Stuart Chase foreshadows in "Man and Machines." He calls "the boldest, most exhilarating, most dangerous adventure that ever challenged the intelligence and spirit of ma kind." He means the adventure of building the New America which can be built only with the full use of that instrument of our common will which we call government.
WHERE IS THE MONEY COMING FROM TO BUILD THE NEW AMERICA? Where did the money come from to build our highways? The automobile industry brought direct and indirect employment to millions, and eventually the automobile itself became a prime source of taxation. We have built roads at the rate of a billion and a half dollars a year. Yet less than a billion and a half has been appropriated for public housing and slum clearance, while we are actual trying to find work for idle hands to do. There are more sources of taxation in the maintenance of a home than arise from an automobile, and they grow just as fast. Why don't we go to it with an immense housing program? The automobile, radio and airplane once didn't look like sound investments. But men were willing to gamble on a new product. There's nothing new about building houses. But it's a poor private investment today. A huge building program is too big for any but government undertaking. The last few years have compelled us to leap where before we crept. With housing the command is "Forward double-time!" The indirect returns which the government will get would not go to a private individual. It is a natural extension of government functions. The habit of spending for public use will be pretty well ingrained someday. It does not seem likely or desirable to go back to pre-automobile days.