Adventures in Taxation--the Sales Tax
I
TAXES are as inevitable and as unwelcome as death. In America we are just beginning to appreciate how great a blight modern taxation is, and we are still dazed. With a national expenditure of between four and six billions a year, and a soaring municipal and state budget, taxation has suddenly become an acute American problem. To-morrow our tax perplexities will probably emerge as an embittered political issue. To-day we arc still hopeful of a primrose path out.
With high hopes, therefore, we are searching for a kindly, gentle tax, which we can pay without hardship or sacrifice, and which, like the Arabian genie of the lamp, will produce ample revenues with the simplicity of fairyland. Already the sales, or turnover, tax has att ained a striking popularity. Various organizations are urging it enthusiastically. Its advocates offer it almost as a blessing — a financial touchstone. The cynic may hint at propaganda, and the pessimist may grumble that there never will be a tax by which the state can exact several billions of dollars annually from the public without causing distress and resentment. Yet it must be admitted that the sales tax has achieved striking popularity, and is being gayly welcomed by the business man.
The attractions of a sales tax seem to be legion. It is urged as the only substitute for our present unpopular excess-profits tax and the crushing weight of surtaxes on income. The excess-profits tax has all but repealed itself, since large business profits have disappeared. Taxes as high as seventy-two per cent on individual incomes, it is true, stifle initiative and drive large wealth into tax-exempt securities. Our present national system of taxes is complicated, obscure; only lawyers and expert accountants can puzzle out what the terms income and expense and invested capital mean. The business man is always at sea as to what tax-payments he will have to make at the end of the year. And, naturally, we are willing to attribute business depression and high prices to our unpopular taxes. Thus, there is a wide desire for a simple, easily understood method of taxation, and particularly for an indirect method, so that t he tax-payer is unconscious of the weight of his load. Since our present tax methods are so objectionable, it is urged, we must find a substitute. The concluding argument seems unanswerable — what substitute have we except the sales tax?
There is considerable to be said in favor of the sales tax. Adopted in 1905 in the Philippine Islands, through the efforts of Mr. John S. Hord, who had been struck with its apparent success under Porfirio Diaz in Mexico, it has produced a steady revenue without great hardship. In a primitive or agricultural community the sales tax probably is unobjectionable. France put it into operation in July of 1920. Canada has adopted a modified turnover tax. The nature of a sales tax is easily stated and easily understood — a tax of one per cent on the gross turnover of all sales, to be paid to the government by the seller. In a small way it is already applied by the Federal government in the form of consumption, or luxury, taxes. Its operation is apparently equal, simple, open. There is no obscurity about it. It will produce between two and six billions of revenue annually — perhaps more. And it is so novel and so pleasant a contrast to our present muddled system, that it can be advocated with enthusiasm.
Yet the Federation of Brit ish Industries, exceedingly unhappy under taxes that ride British industry like the Old Man of the Sea, has hopefully examined the sales tax and sadly rejected it. It prefers the frying-pan to the fire.
Should we in America, with our national instinct for adopting untried legislation first, and understanding it afterward, accept the sales tax before we have ascertained its effect with a reasonable degree of certainty?
In the first place, the sales tax, in its application, will not be much simpler than our present system. Ours is an exceedingly complex social structure, with infinite variety and endlessly varying circumstance. Those intrusted with the drafting of economic legislation may well complain that America is so full of a number of things, we are sure we should all be as unhappy as kings. Apply a uniform blanket tax to all industries and sales alike, and gross injustice, maladjustment, and even ruin will result. The most unjust law is the simple law that applies uniformly, regardless of varying circumstances. A one per cent tax on the sale of bonds and stocks on our stock exchanges, or on the sale of real estate, where there are constant turnovers of the same property, would prove in practice almost a prohibitive tax. So, too, in the sale and discounting of commercial paper and other negotiable documents. A one per cent tax on the sale of urban lands would be a restraint on alienation that would be particularly unfortunate today, in view of our urgent need of more building. Building and real-estate speculation are Siamese twins: stab one, and you kill both.
Again, what is a sale? The Uniform Sales Act indicates that a sale is a technical, artificial affair. Is the issuance of bonds or stock by a corporation to the public a sale? How about corporate reorganizations and consolidat ions? Moreover, you must exempt occasional sales involving trilling amounts. All these objections can be taken care of in legislation; yet, when you have made a sales-tax act enforceable and fairly adjusted to all the different circumstances of modern life, you have a complex and involved statute that must result in much litigat ion. No sooner has the United States Supreme Court determined the outstanding uncertainties under an income-tax system, than we are asked to adopt a new system, with fresh uncertainties. Mankind always seeks to avoid the payment of taxes; and tax statutes, to be workable, must be drawn with that fundamental instinct in mind. The enforcement of a sales tax, also, will be complex. An army of tax-collectors must be employed to enforce payment, since almost every citizen will be liable. Otherwise no one will pay the tax — for no tax can be devised that will collect itself. Possibly, with a sales tax we shall not need to increase greatly our present tribe of tax-gatherers; but surely we could make no decrease.
The fundamental objection to a sales tax, however, is the profound change it would work in our economic structure. Taxation at best is an interference with economic tendencies, a poison administered in small doses. Make the dose too large, and weird transformations result. The tendency in America since the Civil War has been toward specialization and separation of processes in manufacturing. In most of our industries, specialization, the production of separate parts of a finally assembled product by independent manufacturers, has been the great counter-influence to monopoly. To be sure, specialization is placing a great strain upon our transportation system. Yet for several decades we have been attempting, by Sherman Anti-Trust Acts and a Federal Trade Board, to encourage specialization and to arrest the development of great synthesized industries, which control the production of the raw product, its conversion into a manufactured article, and its distribution to the consumer. We are still shuddering at the prospect of the packers’ monopoly, and are attempting to wrench the stockyards out of their control. Specialization is the only way in which the small manufacturer can successfully resist the competition of monopoly. A sales tax would tend to destroy specialization and probably would prove the greatest accelerator of monopoly in our economic history.
A tax of one per cent every time that a manufactured product moves from independent process to independent process toward completion would pyramid up to a large amount. In the Philippines, a primitive, non-industrial society, there are many instances where the tax amounts to three per cent. In our highly specialized industrial system a five to seven per cent tax would not be uncommon. In some cases it would be even greater. Of course, figured on the final retail price, the amount of the tax would be reduced to much less than five to seven per cent. But is that a fair way to figure the tax? A concern with a capital of $350,000,000, doing a gross turnover of a million, itself paying two and one half per cent more in taxes than its monopoly competitor, in order to sell goods at the same price, would earn over seven per cent less on its capital. If the monopoly allowed the independent concern to fix prices, still the independent concern makes over seven per cent less on its capital.
Such a tax would, in modern industry, be well-nigh decisive. The Steel Corporation, our extensive systems of chain stores, our large mail-order houses would have an advantage over independent concerns that might well result in the most distinct move toward monopoly known in modern history. To be sure, a sales tax would not greatly alter our agricultural system. Indeed, the farmers, with their passionat e dislike of modern distribution systems, as well as all middlemen, may incline toward a sales tax because it would tend to destroy all intermediate handling of goods and favor coöperative distribution.
It is futile to suggest that a blanket tax could be laid upon consumption as distinct from production, or that a sales tax could be graded. When a railroad buys a locomotive or a farmer erects a silo, is that consumption? Any attempt to draw a distinction between consumption and production in a workable manner would make the difficulties and complexities of invested capital under the excess-profits tax seem lucid and alluring.
Again, our tariff must not be overlooked. To-day the adherents of a high tariff to prevent European dumping seem to have the upper hand. Much can be said at the moment in favor of such a policy. A sales tax would tend to destroy tariff barriers — its effect is precisely the opposite from the tendency of a tariff. Imported goods would pay solely a consumption tax; goods manufactured in America would pay a much greater production tax. That factor greatly influenced even the free-trade British in their rejection of the turnover tax. If we erect a tariff wall to keep foreign goods out, and then enact a sales tax which will get them in, with costly armies to enforce each law, we shall have an American comedy, after the style of Alice in Wonderland, which will make the tax-payer wonder indeed.
II
The sales tax, if reduced to the form of an additional consumption tax on luxuries, and confined to certain simple transactions, may well prove helpful. But as a basic method of raising taxes it is of slender merit. Like all consumption taxes, it is inherently limited in scope, and cannot produce anywhere near so large a revenue as an income tax. It is proposed as an easy tax — and an easy tax is usually a dangerous tax. And it has the final ob jection of being a tax that disregards the only fair rule of taxation — that the heaviest tax should be placed upon those who can best meet it. If justice in government means anything, it requires the recognition of this principle. Do not the rich, with their financial security, their ease, and their luxuries, receive more benefits from government than the poor, who live from hand to mouth? The sales tax is a tax upon the great mass of the people regardless of accumulated wealth. A tax on bread is always abhorrent.
Yet one cannot criticize the sales tax without suggesting a substitute. The excess-profits tax must go — what tax should take its place? If we cannot discover an easy substitute, what then?
To-day students of taxation are urging that the basic principle of all taxation is to keep taxes low. The only tolerable tax, the only unoppressive and mild tax, is a low tax. Taxation at best is a cumbersome evil. Indiscriminate bond issues alone are worse. There is no way, under any system of society based upon the theory of private property, of enforcing a heavy tax without causing distress, arrested economic development — and danger of revolt. We storm at Bolshevism. If Marx lived today, he would probably point to our soaring taxes as the great current that would sweep us into Socialism. All just taxation is fundamentally leveling and communistic; high taxes accelerate the process.
This coming year, with only minor modifications of our present tax-system, but without the excess-profits tax, we can raise four billions of revenue. There are differences of opinion on this point. It is always hard to foretell the yield of a tax. Yet the facts indicate such a return. It is to be doubted if our present tax system can be much simplified. High taxes inevitably mean complex taxes. Seven billions of loans must be refunded or paid within the next three years. This seems scarcely the time to pay off so large a share of our loans through taxation. In a word, the outstanding policy of taxation that must be adopted to-day is to reduce our national outlay, even to the extent of delaying the reduction of our debt.
If more revenue must be obtained, we have three unpleasant, grim ways of obtaining it. Possibly we shall have to adopt modifications of all three. The simplest way is to increase the tax on such conveniences as automobiles and tobacco and medicinal liquors and to gain an additional revenue from our tariff. Why should transportation by railroad be taxed so many times more heavily than transportation by automobile or by truck? Yet anyone who advocates additional taxes on automobiles is grabbing a Tartar. Our automobile industry seems to consider itself favored of the gods. Increased consumption taxes, though exasperating, might well be adopted.
The next easiest way — and the fairest method of all — is to amend the Sixteenth Amendment of the Federal Constitution and place a tax upon the income derived from exempt municipal and state bonds. The exempt security is the outstanding defect to-day of our tax system. Our fourteen-odd billions of exempt securities are held largely by those with large incomes, who thus escape the surtax. Obviously this is unjust. Accumulated wealth should be rudely jerked out of this refuge. And, what is more, the economic influence of tax-exempt securities is much more significant than the revenue thus lost to the public. The collateral effects of taxation are oft en of greater importance than the revenue features. Tax-exem pt securities are issued by our cities and our counties largely to finance activities which the reactionary calls socialistic. The demand by the rich for tax-exempt securities is so great in these days that our municipalities are the only part of society that can obtain capital readily. This factor is the impelling force to-day toward municipal ownership of street railroads and public utilities. The increase during the last ten years of municipal and state indebtedness in America is astounding. And our rich are the direct cause of these strides toward Socialism, although they shiver and rage, and finance propaganda against the rising tide of Socialism. Surely the only man who can enjoy himself over our tax muddle is the humorist; and the encouragement of Socialistic undertakings by the frightened rich, through the eager demand for tax-exempt securities, is a droll bit of American humor that cannot quickly be forgotten.
The placing of a tax upon municipal securities involves, of course, many difficulties. It seems widely agreed that any constitutional amendment should not affect municipal securities already outstanding. The amendment to the Sixteenth Amendment now pending in Congress is so drawn. Yet if t he amendment be made retroactive, Congress in imposing the tax can so adjust the amount as not to impair the credit of our municipalities. Of course, a constitutional amendment would require an adjustment of the bond market. Some cities might well complain that they needed money to complete extensive undertakings which would thus be denied them and that their fiscal policies would be disturbed. But the time required to put through a constitutional amendment would afford ample warning and ample opport unity for our cities to set their finances in order. Above all else, the increase in the amount of this exempt wealth, regardless of other considerations, must be stopped as quickly as possible. Even those who favor the marked tendency toward the municipal undertaking of private enterprises must recognize the danger of doing so by means of a vast accumulation of tax-free wealth.
Indeed, the apparent impetus behind the sales tax makes one suspect that there are some who fear that the proposed constitutional amendment, making future issues of municipal and state bonds subject to the income tax, will be passed unless the sales tax is accepted as a substitute. Moreover, the question of a graded surtax on corporate income, somewhat similar to the surtax on individual incomes, in place of the excessprofits tax, seems to frighten many business men, who are fleeing to the sales tax as a refuge.
Repeal the excess-profits tax, and corporations will be subject to only a ten per cent income tax, no matter how large their income. There must be some relation between the surtaxes on individual incomes and those on corporate incomes. Otherwise all individuals or partnerships employing capital in their business will become corporations. Should we, then, directly or indirectly, abolish the surtax on individuals?
The third method of raising additional revenue is to adjust our income taxes on individual incomes. Our surtaxes of over fifty per cent of a man’s income are unquestionably too high, and should be reduced. But if we must have more revenue, and the other methods fail, we must increase our rate of taxation on smaller incomes. In Great Britain the income tax for married men starts with an income of $725; in America with an income of $2000. On incomes up to $5000, the British tax is almost six times as heavy as ours. On an income of $5000 a married man in America today pays 2.4 per cent; in France, where we hear so much about unwillingness to tax, the rate is 3.2 per cent; in Great Britain, the rate is 15 per cent. The British maximum surtax is 521/2 per cent; ours is 73 per cent. Unquestionably a high income tax on small incomes would be unpopular in America. It should be avoided if possible. Surely it cannot be thought of if we abolish or unduly reduce the surtax on individual incomes. But if we must have more revenue, and if we must take it from the small wageearner, let us do so openly and frankly, and not try to exact it from him clandestinely, under the doubtful and unnecessary experiment of a sales tax. To decrease the tax on small incomes, in order to lure the mass of our population into accepting a much heavier sales-tax burden, is dangerous politics.
The fact that the sales tax is being so urgently favored in conservative quarters is no reason for rejecting it. The fact that the enactment of a sales tax will make the taxation of exempt securities unlikely, and will make possible a tremendous decrease in the tax on corporate income and also in the surtax on individual income, however, must make us hesitate. The adoption of a sales tax will mean a startling shift in the burden of our taxat ion. The burden will fully and suddenly be put upon the consumer — upon the mass of our population, disregarding their ability to pay. Those who accumulate will be spared, because only those who spend will be taxed. If a sales tax is adopted, it will mean, in effect, a titanic shift toward reaction, and a dangerous experiment in taxation, as well. Even the conservatives may be wrong as to the working of legislative theories.
It never pays to blind one’s self to the truth. Such concealment is part icularly dangerous in a democracy. Taxation, particularly heavy taxation, in any form, is a miserable affliction. The only acceptable tax is a low tax. Since the sales tax is a tax on the consumer, let us say so openly. The effects of such a consumers’ tax must be faced frankly. We are now trying to force down the wages of labor toward a pre-war standard. Admitting that labor should accept a lower wage, we must agree that the process of reducing wages is an extremely painful one for the wageearner. It must strike some of our workers with a harrowing dread of a return to conditions in many industries that even the conservative recognizes to-day as unfortunate. Labor is in travail — but so far is acting fairly. Labor in England is infinitely more truculent. Congress should not complicate this great adjustment, which many of us a few short months ago deemed impossible, by a shift in taxation. This is a time for caution, not for experiment. And when European radical experiments in government arc assailed in America as novel and deadly, and so unusual and dubious an experiment as a sales tax is urged by conservatives as a substitute for all burdensome taxes, or a compromise is suggested, of trying it out for a couple of years, the conviction is irresistible that only the humorist has a right to devise tax laws.