Chaotic Spending and Taxing

November 5, 1951

The history and contents of the new tax law are one more illustration of what is wrong with our whole budgetary system.

It was irresponsible and hypocritical for the House to vote for colossal appropriations and then try to reject the taxes to meet the appropriations. It was irresponsible for Congress to make these appropriations and then pass a tax law calculated to leave a deficit of more than $6,000,000,000 in the current fiscal year, and an estimated $18,000,000,000 to $24,000,000,000 in the next fiscal year. In combination these fiscal actions were recklessly inflationary.

So far the critics of Congress are right. But when they go on, as most of them do, to support Mr. Truman’s lip-demand for $5,000,000,000 to $10,000,000,000 of still further taxes, they are closing their eyes to the facts. These further sums simply cannot be raised (at present price levels) without irreparable harm to the American economy.

Taxes are now scraping the bottom of the barrel. In the highest brackets of the personal income tax the rates long ago passed the point of maximum productivity. Today they reflect mainly an attempt to punish success. It has already been pointed out in Newsweek that a 100 percent tax on all taxable incomes above $25,000—that is, complete confiscation—would yield only $700,000,000 a year more in revenue, while a similar tax on all taxable incomes above $10,000 would yield only about $3,500,000,000. But even these represent the maximum possible yields, on the assumption that people would be foolish enough to go on earning what they could not keep.

Corporation tax rates now reach 52 percent on corporate incomes, plus 82 percent on so-called excess profits, with a maximum overall rate of 70 percent. Just look at that as an incentive to start new corporate enterprises, to put more capital into old ones, and to expand the capital equipment upon which the growth of all production, the creation of new employment and the increase of all real wages depends. The government takes up to 70 percent of a corporate investor’s earnings on his investment before he even gets them, and then taxes the remainder, when, as, and if he gets it, at personal income-tax rates up to 91.8 percent. This is what we do to encourage new production.

In my Newsweek article of Oct. 22 I referred, in connection with Britain, to the conclusion of Colin Clark, the Australian statistician, that the safe limit of total taxation in any country was 25 percent of the national income, and that any attempt to take more than this is so discouraging to hard work, risk-taking and production that it must lead to inflation. Let us apply this to the United States.

It is expected that the national income for the current fiscal year ending June 30, 1952, will reach $289,000,000,000. Federal tax receipts are now estimated at about $63,700,000,000, and state and local taxes at about $19,000,000,000. This would represent a total tax burden of about 30 percent of the national income. And it would still leave an inflationary deficit estimated at more than $6,000,000,000. If we tried to cover projected fiscal 1953 expenditures of $85,000,000,000 to $90,000,000,000 completely by taxation, we would reach a total tax burden of 40 percent of the national income, which would parallel the plight of Great Britain.

There is only one real fiscal solution. It is a drastic slash in government expenditures. This solution is usually dismissed by Administration spokesmen as “economizing with a meat ax.” But as long as the Administration continues to spend with a steam shovel it is hopeless for Congress to try to economize with a teaspoon. It is wrong, of course, to economize blindly. But it will be disastrous to continue to spend blindly.

The political problem is how to restore Congress and the Administration to a sense of their fiscal responsibilities. While the solution lies mainly in a change in present ideology, it is unlikely to be achieved without reform of our entire budgetary procedure.