he turns over to the Government now in order to finance this war. That is all that the future generation bears. Mr. LONGWORTH. Take the case of France, for instance. Mr. SPRAGUE. Yes. Mr. LONGWORTH. You realize, of course, that it would be really impossible for France to pay the entire cost of the war by taxation? Mr. SPRAGUE. They have virtually taxation through the process of an excessive issue of the notes of the Bank of France, which has subjected the people with stationary incomes to huge reductions in their incomes. You do it, but you do not do it in a direct fashion. It is the same case as that I put of the woman with a $1,000 income. Mr. LONGWORTH. Have the taxes in France advanced anything like that-four or five times what they were before the war? Mr. SPRAGUE. If you take into account everything there is an increase, and you do not have to have but an increase of 100 per cent to cut the amount in half. That is what you do when prices go up 100 per cent. If everybody's income went up in direct proportion to the advance in prices inflation would not work as a process of financing war. Mr. LONGWORTH. Assuming that the total expense of France so far has been my guess is eighteen billions. Mr. SPRAGUE. Yes. Mr. LONGWORTH. Would it have been possible for France to have raised that money by taxation? Mr. SPRAGUE. Yes. They could have, for example, established an increased tax at an earlier date in the war and imposed present rates-somewhat higher rates. They are certainly no better able to pay taxes now than they were two years ago; rather less able; and yet the taxes have advanced. There is a very common fallacy afloat that we are able to pay more taxes the longer we keep in the war, except so far as prices advance, so that we have a general conception that is by no means the case. The people, certainly with fixed incomes, are not as able to pay a fixed amount in taxation as they were a year ago or to subscribe for liberty bonds. You have to get it from the French people, and you have got to get it from the same source. This which has come from the French people has not come out of the air or out of the future. And they are going to be compensated, of course, in the future for some of the sacrifices they have made in sacrificing income. Mr. LONGWORTH. Are not the future generations, 30 years from now, say, going themselves to pay a large proportion of the money that the people of France to-day owe? Mr. SRAGUE. Yes; but it will be very differently distributed. The result of the process of borrowing with large inflation will be that at the end of the war you will find a rather greater degree of concentration of ownership in the current income of France after the taxation has been collected and the interest paid, than was the situation before the war. There will be very large numbers of people who, because of their military service, were unable to acquire their quota of Government bonds. They will return to active life and work energetically and have incomes which will be heavily taxed in order to pay interest on the bonds which will be owned by a comparatively small number of people in the community. Mr. GREEN. Who did not go to the war? Mr. SPRAGUE. Who did not go, or who may be older; and it will come down through relationship, and so on: and it will be a very uneven and haphazard situation; and I think it is to the general interest of the public in France that they should be taxed more heavily than they were at an earlier stage. But public opinion was not prepared for it, because people at that time did not fully realize; they did not realize how long the war was going to last, how expensive it was going to be, and they did not realize the consequences of the extreme inflation which has taken place. Mr. GREEN. There was another consideration there in the fact that the German invasion overran the country and dislocated a substantial portion of the French industries? Mr. SPRAGUE. Yes; that is true. It is very much more difficult. having to establish a base for a concern, to know whether they might have made some profits where they have lost a great deal of profits: and that is why I say, if your rates are high you have to be very certain of your base, and that is why I say I believe in financing the war wholly by taxation. I am more convinced that it can be done when it costs ten billions, than when twenty-five billions are required. I can see no reason why, if we can raise eight millions next year, we could not have raised that much this year. Mr. HULL. What do you estimate the net income of the country at, leaving out unearned increment, and leaving out, of course, increases of capital? Mr. SPRAGUE. There are various estimates. With prices rising as rapidly as they are, it would be my opinion that the annual income of the people, estimated in money, would run somewhere between $50,000,000,000 and $60,000,000,000. Mr. HULL. Do you mean the net or gross? Mr. SPRAGUE. Í mean the net; I mean, out of which they pay their living expenses, and all that sort of thing. I do not mean what they saved before the war. Aside from the depreciation of property owned, which you eliminated, it is my guess that it was five or six billions of dollars. The war has to be financed in some way or other by abnormal saving, and there has been a good deal of abnormal saving during the last year in order to subscribe to liberty bonds, and it is on the increase. Mr. HULL. What proportion of the income of the country do you think comes through the corporations? Mr. SPRAGUE. Comes through them? Mr. HULL. Yes. Mr. SPRAGUE. There, again, where you have a rapid advance in prices such as occurred last year, and so a large appreciation in inventories, you have a very large increase in income, which really would not count very much when you began to measure it in gallons and bushels and yards. There is an illustration. The British were pretty well pleased by the fact that last year they raised by means of taxation something like £800,000,000, as contrasted with £2,000,000,000 before the war. But calculations based upon prices show that after all they were only taking in about £475,000,000; that is to say, that their real transfer of goods to the State was only a little over two and a quarter times what it was before the outbreak of the war. These figures with rising prices deceive us all, and you will probably find a year from now, if we finance the war heavily by inflation, that your appropriations will go up, for the same volume of goods, to a very much larger total. Mr. LONGWORTH. In that connection, in connection with rising prices, do you favor price fixing by the Government? Mr. SPRAGUE. Only here and there. There may be a few comparatively simple occupations, in which the costs are fairly uniform, in which you can determine costs. But if you have a general advance of prices going on with wages and prices of materials going up, you need to revise your prices every little while. It would greatly facilitate price fixing if you had a situation like this, of generally stationary prices, or certain things going up because of a huge Government demand which would enable the producers to get extraordinary profits, and if you had a simple situation of that sort, then the Government stepping in and controlling the prices would. I think, be entirely feasible. Take the copper companies, for example: it would be very much simpler for the Government, so far as an equitable copper price goes, if general prices had not advanced so much during the last nine months, because then the price originally determined, if equitable, would probably be equitable now. Therefore, without saying that the original price was equitable, at least there are certain factors entering into the situation that raised the price, like the cost of labor, which leads one to say that this may not be equitable now. As to that I do not express an opinion, not having looked into the matter. I merely cite it as a case showing how the rising price of material and labor complicates the matter of price fixing, and would complicate other things; as, take, for instance, an excess-profits tax. Many companies can only say, "Of course we have apparently made very large earnings, but this bubble is going to collapse, and we are going to have very heavy losses when it does, and we ought to have very large reserves to face a situation of that sort." I believe that is true, that in some way or another the possibility of very heavy losses when we get down from a period of inflation ought to be taken into account, and that can be done in the law if you will allow a certain contingent claim for a rebate on excess-profits taxes, say in the event that within a certain number of years losses occur arising quite as definitely out of the war as the profits arose out of the war. That is the way they have handled the war-profits tax in Great Britain. Mr. GREEN. In other words, you think that our excess-profits tax should be more or less? Mr. SPRAGUE. Very much more; and then you can impose very high rates on particular industries or in particular cases. Most proposals for heavy taxes fall down on account of the 3 or 4 or 5 per cent of hard cases. Now, if you can eliminate those people or make provision. for them in one way or another, then you can jack up the rest to a very high point indeed. Mr. GREEN. Coming back to this matter of price fixing, where the product concerned is one of the necessaries of life or one of the necessaries of war, and the demand exceeds the supply, which may now be said, as I understand, of a great many such products, or at least of some considerable number Mr. SPRAGUE. Yes. Mr. GREEN (continuing). Would it not be well to fix prices in such cases? Mr. SPRAGUE. Why, if the price fixed does not work against increased production of the output. Mr. LONGWORTH. In other words, it would be better not to fix prices that would prevent some people from making large profits, if thereby you would decrease the production of the article? Mr. SPRAGUE. Yes; whereas, if you have your heavy war-profits tax of 30 per cent, you will not be so much concerned about price fixing, and the producer will not be quite so much concerned about taking advantage of every situation to increase the price. But it does not make so very much difference, perhaps, where you catch hold of the animal, but sometimes one part is better than another for the purpose in view. Mr. LONGWORTH. And if you can take it away from him afterwards. Mr. SPRAGUE. Yes. Mr. GREEN. It sometimes seems to me that the ultimate consumers. or the laboring classes, or those who have small incomes, are certainly hurt. Mr. SPRAGUE. Yes. Mr. GREEN. Now, for instance, the demand for cotton print goods very much exceeds the supply, and no matter what the price was, it would exceed the supply. Mr. SPRAGUE. Yes. Mr. GREEN. So that they have what they sometimes term a runaway market, and can get almost any price they ask. Mr. SPRAGUE. If your primary object is to relieve people with small incomes from an intolerable burden in such a product as you have mentioned, I see no other method except rationing, because if you reduce the price of this cotton cloth, it is by no means certain that there will be enough to go around at the lower price, and it is by no means certain that people of small incomes would even then get their share of the small supply. Mr. HULL. If you are to levy an excess-profits tax, there will not be much inducement to make these big profits when they know that they have got to turn it all right back to the Government, will there? Mr. SPRAGUE. The conditions in a case like this are the result of the economic situation, and are not due to any positive, concerted action on the part of anyone in particular. Let me illustrate: Last year I suppose everybody in the grain business in New England made large profits. They could not very well help making them. because they would order their grain several weeks or some months in advance, and by the time it arrived in New England the price was higher. There was no lack of competition. Business was being conducted just as before; but the whole situation was one in which there was an acute demand for grain, and the price went up. Now, in the case of cotton cloth, if there is an inadequate supply of cotton cloth at 50 cents a yard, no diminution of the inducements to make profits by shop keepers or other dealers will keep that price down to 50 cents. You must in some way or other curtail the demand. And that leads me to the second class of taxes which I have in mind. Mr. HULL. May I interrupt you before you take that up? Mr. HULL. I did not get through, a moment ago, on your estimate of the income of the country, amounting to fifty or sixty billions. Mr. SPRAGUE. Yes. Mr. HULL. Now, supposing the national wealth to be two hundred and fifty billions under inflated conditions, is it your judgment that the country realized a net profit of 20 per cent on that last year? Mr. SPRAGUE. I would hardly say that, because this fifty or sixty billions includes all the wages of everybody, and all salaries. Now, you take a corporation in a particular kind of business, iwth a capital. of a million dollars; its wake bill may be two or three million dollars; and all this goes to make up this fifty or sixty billions. I did not mean net income, I meant the actual money income, or gross income. in the case of farmers who grow crops which they consume, largely— all of that taken together, if we estimated it in money for all the individuals, it would run probably between fifty and sixty billons of dollars. Mr. HULL. So far as deriving revenue from the income tax and the excess-profits tax are concerned, and they are the two largest items in the bill that might be framed Mr. SPRAGUE. Yes. Mr. HULL (continuing). We are obliged to look to the net income that is returned by the individual or the corporation, and compute it under the income-tax law. Mr. SPRAGUE. Yes. Mr. HULL. The total income-tax return by corporations and individuals for 1916 did not exceed $13,000,000,000. Mr. SPRAGUE. No. Mr. HULL. How would you extend the law so as to reach, so as to bring within the net, twenty-five or thirty or forty billions? Mr. SPRAGUE. I would not expect to get it through income and excess-profits tax. When we are so heavily engaged in the war that it takes about half of the products of our industries to keep the war going, then the income of the people of the United States must be reduced by something like 50 per cent. Now, you may reduce some persons' income by more than 50 per cent. Take a man with an income of $1,000,000. You can reduce it more than 50 per cent by taxes and subscriptions to liberty bonds. A person with an income of $1.000 a year, you can not probably reduce by legislation. You will do it by inflation. In that unconscious manner you will reduce the purchasing power of the incomes of a large number of people, whether you will or no, if you get onehalf of the products of industry during the next 12 months. That is how the sacrifice must come; and the question as to how it should be distributed is another matter; but there is great danger, of course, that you will not spend $25,000,000,000, but that it will be found impossible to gather the materials and the labor to produce the particular things in the quantities for which provision has been made, and one obstacle which will be encountered will be the continued |