I am persuaded that legislation along the lines suggested would be helpful to the Government, largely increasing its revenues and highly beneficial in a broader sense in that it will help to clear the field for future action when the need for further remedial legislation shall arise. In conclusion, Mr. Chairman, permit me to thank you and your committee for the opportunity to present these views and to assure you that if I have been able to assist you even in a slight degree in the arduous task you have in hand I shall, indeed, feel gratified.

Mr. GREEN. I never exactly understood the argument that a tax upon capital is a tax upon efficiency. Is not that true in any case where we tax either the earnings or the accumulation of those earnings?

Mr. THOMAS. I think I can make that clear to you. If you tax a business, the more heavily you tax it the less profit it will make and the less risk it will take.

Mr. GREEN. I see I did not make my question clear. Your arguments addressed to the committee would indicate you are seeking to find revenue. We have to go after revenue wherever we find it, and the man who does not make anything would not be an object of

taxation.

Mr. THOMAS. Upon what point do you want me to reply?

Mr. GREEN. How are we to escape taxing earnings of property accumulated by earnings?

Mr. THOMAS. That same argument would apply if you go out and attempt to tax maximum production and take it all. Do you think that productive of difficulties?

Mr. GREEN. You are asking me if we have a shower this afternoon whether it would be a good thing if it were a flood.

Mr. THOMAS. The point I have tried to make clear in there is that we recognize, at least I do, that everything must be taxed, and there is a point at which business will yield the largest revenue consistent with the highest efficiency, just as sometimes a man sells goods at lower prices because he makes more money by selling them at lower prices than he would by selling them at higher prices. If he charges too much his overturn is decreased to such an extent that he makes less at the higher price than he would at the lower price.

Besides, there is this element of business, which I have tried to make clear-that it is an organism, it is an instrument, and you can not put any more on it than it can shift. If you do you begin to dig under and destroy its efficiency and impair its usefulness. We can not afford in this stage of the game to do that. There is no argument on my part to the effect that we should take from business any burden that could be reasonably put on it. I think if you will take the schedule I have suggested there and test it by the income-tax returns and include the subjects that will come under those in the law, you will find that the income from it will be manifestly greater than we have already received under the tax law that run up to 60 per cent. Mr. GREEN. Your plan of taxation is without regard to capital? Mr. THOMAS. Yes, sir.

Mr. GREEN. I presumed that was so, but if you do that, wouldn't that in most cases amount to a consumption tax?

Mr. THOMAS. You take one-third of the income, and that is pretty heavy. Of course, business is eventually going to shift. If business has not already collected it you can not get it unless you confiscate the capital, and if you confiscate the capital you kill the business;

you go after the goose instead of the egg; and unless you take care of the goose-you may steal a feather, but if you undertake to kill the goose you have lost the egg and lost the goose that laid the egg, too. Mr. GREEN. Have you reached any conclusion as to how much would be raised under your plan?

Mr. THOMAS. I have not done so, because I have not the facts. The principle is what I contend for, and I contend for the method to be arrived after a thorough examination of the statistical arrangement of the matters affecting the last year's income. I did not undertake to be exact, because it is a thing which the outsider can not be exact about with any degree of justice to the subject or himself.

Mr. STERLING. I understand you would tax all incomes the same ratio, without reference to capital?

Mr. THOMAS. Certainly; they have no relation.

Mr. STERLING. Suppose a business of $100,000 was making 8 per cent. They would pay $2,000, would they not?

Mr. THOMAS. A $100,000 business making how much?

Mr. STERLING. Make $8,000.

Mr. THOMAS. It depends upon how you would tax it, sir. A third of that would be $8,000.

Mr. STERLING. After deducting the exemption?

Mr. THOMAS. There is no exemption in business.
Mr. STERLING. You said $2,000 would be exempted.

Mr. THOMAS. No; $2,000 would not be exempted.

Mr. STERLING. Let us take a $100,000 investment that makes $6,000. Mr. THOMAS. Are you dealing with the individual or the business? Mr. STERLING. Either one.

Mr. THOMAS. They do not apply.

Mr. STERLING. A $100,000 investment that makes $6,000, and you take one-third of it?

Mr. THOMAS. I would take a third of it; yes.

Mr. STERLING. Suppose there is an investment of $25,000, making $6,000?

Mr. THOMAS. That is all right; take the same amount.

Mr. STERLING. Do you not think that would destroy business?

Mr. THOMAS. Not at all; if your schedule of percentage is correct, if your imposition upon business is reasonable, it would not affect business because it comes out of earnings and of a reasonable imposition and therefore will not destroy business. I am assuming that you will be reasonable in your taxation.

Mr. STERLING. I am assuming we take out what you suggest, a third of it.

Mr. THOMAS. I think business could bear that. The man who was making $6,000 in that $6,000 is not included any expense, and no interest. All labor, all services-everything is written off, before that $6,000 is ascertained. That is cash; and if he were getting $4,000 cash after paying his taxes, if the business itself or work was bad, he might change his business just as we do oftentimes when the revenue is not satisfactory, and that would help to eliminate what we ought not to suggest.

Mr. STERLING. Ought we not to be just and equitable?

Mr. THOMAS. The principle I contend for is entirely fair, and it is the exemplification of a method that can be so exercised as to be fair.

Of course, if the Congress undertakes to exercise arbitrarily this method of any other method, it will destroy the thing it operates upon, because inherently in the power to tax is the power to destroy. What I am trying to do is put before you a simple method by which you can, by the exercise of good judgment, based upon such information as you can get, a regulation of this tax so that it will not stop business, but really prove a source of large income and leave business in the exercise of its functions and yield the most efficient. results.

Mr. HAWLEY. Do you propose a graduated tax on incomes?
Mr. THOMAS. Yes, sir.

Mr. HAWLEY. You do not propose a graduated tax on business?
Mr. THOMAS. No, sir.

Mr. HAWLEY. I do not quite understand why you proceed on that basis.

Mr. THOMAS. I will explain that. There is absolutely no base on which you justify an income tax, unless the preexisting condition of injustice of return is admitted. If the returns are just, an income tax is an outrage, because you can not reach all property by an income tax, and if I have gotten what is mine and you have gotten what is yours and he has gotten what is his, there is absolutely no justice in making you and me pay his taxes. Therefore, if you want to go down to the bottom of it, the income tax exists because somebody got off with something that he had no equitable, just right to, and that income tax at its bottom is intended to equalize that injustice. That is the basic foundation for an income tax. My contention is that if you are going to exercise this instrumentality, if you are going to use it, you will have to use it true to its nature to get results. You will have to proceed on the assumption-if the assumption is wrong, then the income tax is wrong-but if the assumption is correct that the distribution has been unjust, then the income tax furnishes the instrument to undertake to restore to some extent the injustices that have resulted from the economic system.

Mr. HAWLEY. Why would not the injustice arise just as much out of business incomes as individual incomes?

Mr. THOMAS. For this reason: You have to be more than a horse. A horse is said to have one idea, but a Congressman has to have more than one idea, because there are a great many different phases to any question that comes up for legislation. You have an instrument. It matters not what the injustice may be, you must preserve that instrument. We are not going to sacrifice that instrument in the face of national danger, at any rate, and if we have to maintain it we must provide for that. Therefore, I would not undertake any distribution based on business for that reason. I would not interfere dangerously with that. That would slow the wheels down. I do not want to slow the wheels down. I want the Kaiser licked, and to lick the Kaiser you have to keep the wheels going, and we have to go with the wheels.

Another reason for not putting it on business is that you miss the objective when you put it on business. If a large corporation has made too much money and you undertake to correct that and the income tax is justified, the distribution is unfair and unjust, you can not reach that by a graduated income tax, because every corpo

ration of any importance is composed not only of big rich people, but little poor people, and any graduated income tax that digs down to correct an injustice of distribution is correcting the injustice. of distribution in the pockets of people that never got it. That is why you find a great many people who are largely interested in corporations are willing to submit to a graduated income tax, because it makes the little poor fellow pay his part of it, whereas, if you take it to the individual and apply a graduated tax, then you get it out of the last owner. If the fellow has gotten off with excess profits you would take it back, and then you do not go to the man who did not get it. In other words, you go to the ultimate source. Mr. LONGWORTH. I have a question I would like to ask. You are evidently an economist and a philosopher.

Mr. THOMAS. I am not a philosopher, but merely a plain citizen. Mr. LONGWORTH. I understood you to say that in your opinion a man who spent any portion of his income unproductively was a greater burden on the community than an idler.

Mr. THOMAS. I think I did not say it exactly that way. What I did say was, that the man who idled away his time, or the idler, was more expensive to society than the poor tramp, because he wasted more. That is the sum of what I said.

Mr. LONGWORTH. Here was one question I desired to ask on that subject: Do you think that a man who spends a portion of his income in buying works of art is a greater burden on the community than an idler?

Mr. THOMAS. You want to narrow the question down to what I think are the extremes of economic waste. I would not like to decide that question for you, nor would I like you particularly to decide it for me. The principle I lay down is that things which one man. might call extravagant are things of high utility to somebody else, and in an economic discussion I am a little averse to going into any proposition as an aside and saying what is waste and what is not waste. But if there is waste-and I believe there is-I do not undertake to define it, because I think it is indefinable.

Mr. O'SHAUNESSY. Mr. Thomas, do you put business on the same basis where great profits have been made out of material used in the conduct of the war and ordinary business in which the war has made no difference?

Mr. THOMAS. That really has nothing whatever to do with it. It is absolutely a humbug. The profiteer is a dangerous man, no matter whether engaged in war profiteering or in any other kind of profiteering profiteering is the thing that hurts. I think it is a colossal humbug. It is profiteering I care about; the different kinds. of profiteering all look alike to me.

Mr. STERLING. Do you not think there is some difference between the man who takes advantage of the war situation to make big profits out of the Government and the man who does not take advantage of the war situation?

Mr. THOMAS. Did he take advantage? That is the next question. Are you correct about it? Here is the United States Steel Corporation. It has made outrageous profits. Everybody knows that. But did not the United States Government set the price for the steel? Should Mr. Gary get up an army and come down and put President Wilson out of business?

Mr. STERLING. I do not suppose the Government set a price any higher than it had to pay to get the stuff.

Mr. THOMAS. I am not arguing the righteousness of the thing, but I am showing you that the steel corporation has been acting in conformity with law.

Mr. STERLING. I am not referring to the steel corporation.

Mr. THOMAS. Of course, if you go back to the man who goes deliberately to restrict output or corners the supply or does anything else to compel his Government to pay unreasonable profits, I say that man ought to be met with the firing squad at sunup. He is disloyal; he is a traitor. But in the general trend of advancing prices, much of this profit you talk about as being profiteering came from this fact. of tremendously increased values of inventories. The man who bought goods in 1913 at one price and sold them at another price that yielded a very large income presents only one side of the picture. The other side is coming on. The devil himself can not feel the decline that must follow in the natural evolution of that cycle, and therefore it does not affect me personally.

Mr. MOORE. Take you own illustration of the United States Steel Corporation. Under your scheme of raising income taxes would you release corporations like the United States Steel Corporation from taxation?

Mr. THOMAS. Not at all. I would require them to pay a third of their net earnings, if that were the percentage reached.

Mr. MOORE. You differentiate, then, between the person and the business?

Mr. THOMAS. That is right.

Mr. MOORE. And in devising a new scheme according to the present law under the graduated income tax you could collect from the individual?

Mr. THOMAS. That is right.

Mr. MOORE. I wanted to know whether under that system you would relieve the steel corporation or the business concern from making the return and rely solely upon the individual?

Mr. THOMAS. No; I do not. There are three parts of the inAll of the income in the hands of the business would be taxed, first, one-third. Then, I would subdivide the rest into two parts, one to be paid out as dividends, which will again be taxed.

Mr. MOORE. You are speaking of income now.

Mr. THOMAS. Here are two things [illustrating]. This [indicating] is business; here [indicating] is the stockholder. Business itself makes all of it. I take one-third. That lease two-thirds in the hands of business. This business may need a certain part of that two-thirds or all of it. If it keeps it in the business, there is no further tax on that particular profit fund.

Mr. MOORE. Is it all funds in the business or just income?

Mr. THOMAS. Income is what I am talking about, not confiscation of capital. Somebody raised the point about low-rate bonds—11 per cent in Germany.

Mr. MOORE. You are starting out in your taxicab with a charge of 50 cents against you before you begin, applying that to the business, and then the profits that result from the various trips, so far as the owner and driver is concerned, that is what we are going to tax.