maximum debt with its additional burden of interest, both to be paid out of a reduced amount of real wealth that will be constantly declining in nominal value. In view of these possible contingencies, it might be well to defer final judgment upon even the most conscienceless profiteer. If conviction is to be had upon motive, it is to be feared that there are not enough innocents to incarcerate the guilty, while if actual accomplishment of the purpose is to be the test, justice demands that the game be concluded first.

BUSINESS AN INSTRUMENT.

Business, whether individual, partnership, or corporate in form, is the economic mechanism for supplying the wants of society. Conducted under private initiative, its life principle is profit. Anything that increases profit accelerates it and whatever decreases profit retards it. Its constant aim is to increase profits and conserve gains.

In normal times the mention of taxation gives it tremors, and at the sight of the tax bill it begins to cry, "Murder!" In the great crisis in which the world now finds itself, business, in the main, recognizes that it must do its part, not only in performing its functions efficiently but in supplying means, to a large extent, to keep things going. It must be emphasized, however, that business, normally, is not a taxpayer. It levies tribute for itself and surrenders to the Government only a part of what it collects. Business taxation is the modern adaptation of the Roman and Chinese methods of farming out the taxing function. The principle of the present economic system confers upon business the special privilege of levying tribute upon the individual, who, in the last analysis, is the only ultimate taxpayer. Business, therefore, is a shifter and diffuser of taxes. If it fail to levy sufficient tribute upon individuals to cover all expenses, including taxes, it at once begins the march toward bankruptcy.

The welfare of society and the safety of the Nation make it imperative that all necessary and useful business shall now be kept functioning at its maximum efficiency. Any other course would be legislative sabotage. Any legislation that would weaken the springs of production at this time would in effect be throwing the monkey wrench into the machine to the delectation and benefit of our enemies.

The principles governing the taxation of business and individuals are differ ent. The first must be dealt with as an instrumentality-a utility that must not be taxed to the extent of decreasing its efficiency-while the latter must pay what is necessary, and if the public exigency demands it lower the standard of living in order to make ends meet. In taxing business we should make the eggs the object of quest rather than the goose, although I am quite in accord with Talleyrand's suggestion that we take incidently all the feathers we can get provided we do not excite too much squawking or materially affect the goose's egg-laying capacity. It is generally recognized that the Government must have more income. The problem is how to get the most with the least harm. If business is taxed more heavily, it will probably produce the effect of raising prices, thus shifting the tax to consumers, or of reducing working reserves, which will impair efficiency and lessen production or of curtailing dividends to investors or, what is more probable, it will likely result in a combination of these effects. It is unthinkable that a policy of repression of business activity will be adopted now, when every nerve should be strained to meet the urgent demands for maximum production.

TAXATION OF INCOME.

The taxation of income may be most conveniently considered under two heads, viz, business income and individual income. The principles governing the two are different, and the methods must likewise be different. The term "individual income" in this connection being used to designate the results of one's own labor and the returns on capital invested.

BUSINESS INCOME.

Let us conceive of the national income derived from business conducted by individuals, partnerships, and corporations as a unit. This represents the net return on the operation of the national economic machine. Each part of this machine, if it is functioning properly, performs its part in the public service, and the whole should be dealt with in a uniform way. If the mechanism is

faulty and there unnecessary parts that produce undesirable results, these can be severely regulated, if not entirely eliminated, by methods that will be explained in the discussion of individual income. The point is that business income should be approached with the single purpose of confiscating so much of it for governmental purposes as can be done without reducing the speed and efficiency of business itself. If undue profits have been taken in the past, and it is conceded that many cases of this kind can be found, the imposition of punitive rates on business income is not a proper remedy for the very simple reason that the effect of the tax on business will be measured not by the innate justice of it, but by the ratio it bears to the present income. If it bears too heavily upon present earnings, the machine will begin to slow down. Less than a proper ration for the work horse now is a poor remedy for overfeeding last year. The income tax, if its potentialities are understood, is a most effective instrument in the hands of democracy. The undue accumulation referred to above can be reached by it, but business does not furnish the

means.

I do not think the world comprehends the possibilities of the income-tax principle. I think we will find, as we grow older and the urgent needs of society press more insistently, that we can use it for a great many purposes that are, perhaps, not well understood at present.

The profit fund of business having been selected as the source from which to draw revenue, equitable principles, and effective methods both demand that the tax be definite and the method simple and uniform. Without first analyzing statistics of income not available to the public, it would be difficult to suggest with any degree of certainty the proportion of business income that should be taken. I believe, however, that business could stand a tax of one-third of its net income which if uniformly laid upon all business with no exemptions or exceptions would, I think, yield an amount largely in excess of that received under the present law this year from the same source. The net earnings of the railroads should be included along with the rest, and, if necessary, further adjustment of rates could be made to meet the change of circumstances. The uniform rate here advocated would form a basis for taxation of this subject and future changes could be affected by simply moving the rate up or down as experience might indicate the expediency of it. This plan eliminates all reference to the capital employed, thereby simplifying the process and removing a hiding place in which tax dodgers might operate with more or less safety to themselves and to the detriment of the Government.

In this connection, I recall having been in the Senate gallery a year or so ago and heard Senator Lewis, of Illinois, make the charge upon the floor, that the Treasury Department had the evidence of income-tax robbery amounting to a very large sum. I think it was three or four hundred million dollars. The thing impressed me, and not having heard of any prosecutions or convictions, I have been wondering ever since why there was not more effective cooperation between the Treasury Department and the Department of Justice. If the income-tax law is drawn or administered so as to affect only small taxpayers and the more honest larger ones, while tax thieves are permitted to shirk, it must fall short of giving the results the public have a right to expect. The policy of secrecy in income-tax returns is indefensible. Whatever there is of income that amounts to much, separately considered, is derived from the public and of right it should have the opportunity to inform itself as to the extent of the tribute it pays whether it be levied by its own taxing power or imposed by the exercise of economic privilege. The public policy that employs "pitiless publicity " to prevent taxpayers and profiteers from going wrong will likely produce better results than that which only uses it to punish those who have been caught, since an ounce of prevention has always been worth pound of cure. Democracy will not have been made entirely safe so long as secret methods in governmental matters are tolerated.

INCOME TAX SECTIONAL.

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It has been charged that the income tax is sectional in effect. Let us hope in the interest of our great Democracy and its people who desire to develop its ideals, that the charge is true. It would fail of its purpose if it were not true. The tax is sectional in effect only because conditions are sectional. Under our economic organization with its essential tribute greatly augmented by discriminatory legislation, centralized financial and industrial interests have gathered a golden harvest from the whole country with the result that the

situs of income has become largely localized.

There is satisfactory evidence that a relatively small section of the country through control of financial and industrial organization under a public policy of special favor has garnered profits in every field of American effort. The result is that a large part of the annual profits of the entire country is gathered into the tills of these beneficiaries of special privilege, and the income tax reaches them in a disturbing way. It may afford them comfort to reflect that the less favored who now escape income tax, having none to tax, would gladly relieve them of the burden provided the income came along with it. The psychological state of the public mind as well as the facts of the case indicate this as an inopportune time to arouse discussion of the merits or justice of the income tax as affecting those receiving large incomes. It would be safer for them to accept what comes to them with the best grace possible, solacing themselves with the thought that it is sometimes better to bear the ills we have rather than fly to those we know not of. As we get deeper into the war, and its sacrifices become greater, more and more of individual income will likely be taken.

PERSONAL INCOME.

The individual is the ultimate taxpayer. Taxes must come out of production and this is the property of the individual. Individuals may shift the burden from one to the other, but some individuals must pay it. If the tax is imposed upon the income from services it may be shifted temporarily by advance in wages, but it comes back in the form of higher prices for articles of consumption. The individual as a productive worker can not escape taxation. I believe that it is not at all essential that the taxgatherer go to every man's house to get his taxes. In the refinements of social organization no guilty man escapes; we get him, and the poorer he is the more sure we are to get him. [Reading:]

If it does not reach him directly, it comes indirectly through the various taxshifting instrumentalities incident to social organization. Individual income may be divided into the productions due to the efforts of the individual acting either alone or in collaboration with others and the return on invested capital, which is social tribute. Sound public policy would seem to require that in so far as practicable the tax should be as light as possible on the former, while the latter should be reached by a progressive scale rapidly increasing after a proper standard of living had been reached. Heavy exactions to be taken out of the labor income would have a deterrent effect upon productive effort while a heavy tax on income from investment would not seriously affect the productivity of labor but would strongly tend to reduce consumption of nonessential things. In the discussion of business income reference was made to this matter. It was suggested there that a uniform tax on business without regard to the character of the business was desirable, and now it is suggested that a proper graduation of the tax on individual income will effectually regulate the scope of business, since the reduction of personal income will at once restrict the demand for nonessential goods. The multiplicity of automobiles with numerous chauffeurs, luxurious living with its demand for service, the idleness of the seashore, and the costly arrangements for diversion are not the concomitants of a greatly reduced personal income. If frugality and conservation of resources are desirable, if waste is detrimental to the public welfare, then large personal incomes are productive of evil. As personal income increases, social parasites increase also.

This income, when excessive, superinduces idleness in the recipient and the employment of labor in useless service, thus increasing the burdens of those who are usefully employed. The rich idler with his wasteful entourage is far more detrimental to social progress than his counterpart, the tramp, who regales himself upon the scraps secured from some charitable kitchen. They both are parasites, the cost of keeping the one being many times greater than that of the other.

It is by no means contended that all large individual incomes are wastefully used. I am here referring to that part of the money that is luxuriantly and wastefully used. Much of it finds its way back into productive use. When such is the case it involves no economic loss, but tends to produce a state of monopoly of ownership of the machinery of production, distribution, and finance which still more centralizes income. The ultimate of this process is plutocracy.

The restriction of individual income under the method herein suggested would not affect unfavorably any necessary business, but would induce a general slowing down of all business that ministers to luxury and extravagance. It is but fair to point out that a continuous policy of limiting individual income to the extent here suggested would change materially the class of investors who furnish the reserve capital necessary to the promotion of new enterprise. Either the many smaller investors must take the place of the few larger ones, or new business development slow down, or public initiative be substituted for private. In our present situation the country does not need new enterprises so much as it does the efficient operation of those we now have engaged in necessary work. With ample provision for keeping the present business organization in a state of high efficiency, we can well afford to take time to devise plans designed to take care of new development.

TAX ON BUSINESS PROFITS.

I suggest a uniform tax of 33 per cent on the net profits of all business, whether conducted by an individual, a partnership, or a corporation; steamships and railroads controlled by the United States Government, and all public utilities privately owned, to be included. This tax is to be levied upon the net profits of each business without regard to the amount of capital employed or the amount or percentage of profit previously earned. This would be a tax upon the entire business-profit fund of the United States. All business is a privilege, and this tax would in effect be the confiscation by the Government of one-third of the benefits arising from the exercise of the privilege. I believe business could bear this tax without seriously impairing its efficiency. When the income tax returns are analyzed, I suspect that the yield at the rate suggested will show an increase of 30 to 50 per cent in amount above that received from the same source under the present law.

Since writing this I am rather inclined to think that the yield will be very much greater than that; but, of course, it is a guess. I would have to see the actual tabulated statistics in order to arrive at anything like a just and fair conclusion. [Reading:]

The method suggested greatly simplifies the process of ascertaining the tax and at the same time makes impossible many injustices and discriminations incident to the method employed in the present law. In computing business net income, reasonable salaries should be allowed individuals and partners actually conducting the business. In corporations this is already provided for in their salary expense. Two reports should be required from individuals and partners-the one to represent the business and the other the person-the latter should report the salary as income. Stringent provision should be made to compel every business, whether individual or corporate, to distribute to its owners all income in excess of that actively employed in conducting such business. If this were done, the business income would pay its tax, and the surplus not needed in the business itself would go into the hands of the individual, where it would again be taxed as individual income. This method would insure that excess profits would be adequately taxed but in a way that would not deprive business of that adequate support indispensable to its growth and efficiency. There should be no tax on stock dividends, since they do not represent any distribution but are only the issue of evidence of ownership. The profits represented by stock dividends remain in the business, and the stock issue in no wise alters the status either of the corporation or the stockholder. The corporation holds the money and the stockholder owns it in the first case, and the same is true after the stock dividend is issued.

TAX ON INDIVIDUAL INCOME.

I suggest that net income of the individual, with provision for the present exemptions, be taxed as follows:

5 per cent on net income in excess of exemptions and not in excess of $10,000.

6 per cent on net income in excess of $10,000 and not in excess of $12,500. 8 per cent on net income in excess of $12,500 and not in excess of $15,000. 10 per cent on net income in excess of $15,000 and not in excess of $20,000.

14 per cent on net income in excess of $20,000 and not in excess of $40,000. 20 per cent on net income in excess of $40,000 and not in excess of $60,000. 28 per cent on net income in excess of $60,000 and not in excess of $80,000. 36 per cent on net income in excess of $80,000 and not in excess of $100,000. 44 per cent on net income in excess of $100,000 and not in excess of $150,000. 50 per cent on net income in excess of $150,000 and not in excess of $200,000. 60 per cent on net income in excess of $200,000 and not in excess of $250,000. 68 per cent on net income in excess of $250,000 and not in excess of $300,000. 74 per cent on net income in excess of $300,000 and not in excess of $500,000. 80 per cent on net income in excess of $500,000 and not in excess of $750,000. 90 per cent on all net income in excess of $750,000.

The practical results of this scale would be as follows:

Tax on $10,000 income, less $2,000 exemption, would be $400. Tax on $12,500 income, less $2,000 exemption, would be $550. Tax on $15,000 income, less $2,000 exemption, would be $750. Tax on $20,000 income, less $2,000 exemption, would be $1,250. Tax on $40,000 income, less $2,000 exemption, would be $4,050. Tax on $60,000 income, less $2,000 exemption, would be $8.050. Tax on $80,000 income, less $2,000 exemption, would be $13,650. Tax on $100,000 income, less $2,000 exemption, would be $20,850. Tax on $150,000 income, less $2,000 exemption, would be $42,850. Tax on $200,000 income, less $2,000 exemption, would be $67,850. Tax on $250,000 income, less $2.000 exemption, would be $97,850. Tax on $300,000 income, less $2,000 exemption, would be $131,850. Tax on $500,000 income, less $2.000 exemption, would be $279,850. Tax on $750,000 income, less $2.000 exemption, would be $479.850. Tax on $1,000,000 income, less $2,000 exemption, would be $704,850. After the income reaches $750,000 the Government takes 90 per cent of it. This scale practically doubles the present personal income tax. While the method here suggested for ascertaining the tax on individual income is practically the same used in the present law, the motive is reversed. The present law proreeded upon the assumption that business should bear the greater burden of taxation, and further that the parts of it deriving abnormal profits should payʻ the greater share, and that individual income should be taxed as an ancillary source of income thrown in to help out. The method of taxing business income defeated the object of imposing greater burdens upon war profits in that false capitalization afforded an avenue of escape for many and the limitation of exemption to 7 or 9 per cent practically destroyed any comparison between profits before and during the war. In many cases, too, the small capital with large earning capacity was heavily struck, while business not so well managed received a premium for its inefficiency. The methods here suggested are intended to conform to the principles that business being the economic organism should be supported to promote maximum efficiency, and that if sacrifice is to be made it should be made by the individual in order that waste and extravagance may be reduced to the minimum. The individual scale suggested practically doubles the present tax on individual incomes, but it will be observed that at the increased rates suggested the individual does not pay as much tax as is suggested for business until his income reaches approximately $200,000 per annum. The rates suggested both for business and individual incomes are, of course, tentative. It would be impossible satisfactorily to arrive at definite figures until an analysis and thorough study of the income-tax returns for the past year had been made.

What I contend for is the recognition of the fact that sound public policy requires the preservation in its full efficiency of the economic machine, industrial, commercial, and financial, and that no greater tax should be imposed upon it than it can bear without impairing its power to serve, and further that the tax should be uniform upon all parts of this machine, and that a simple method of ascertaining the tax be adopted. I contend also for the principle of graduated taxes in individual income taking as much of it as may be necessary to meet the needs of the Government. The scale should be so arranged as to bear lightly on service income needed for reasonable consumptive use, and so that investment income above the amount necessary for reasonable consumption should be taxed heavily. This, in my opinion, is as far as Congress could safely go at the present time.

64059-18-No. 3-3