Some Notes on War Taxes

August 28, 1950

Overall price and wage control would not only unbalance and disrupt production. It would divert public attention away from the only real remedy for inflation, which is to refrain from expanding money and credit.

We are not likely to do this unless we bring the budget to a balance or near-balance. There has been some recognition of this need in Washington, but the emphasis has been thrown in the wrong place. It has been all on imposing still more drastic taxes, with at best a perfunctory acknowledgment, unaccompanied by serious action, of the need for reducing non-military government spending.

Any congressman who still doesn’t know where these non-military economies could be effected might consult the August letter of the National City Bank of New York. “With the widespread anxieties over possible shortages,” suggests the bank, “expenditures of $1,066,000,000 in public funds to hold up [farm] prices and remove agricultural products from the market seems more than ever indefensible.” It goes on to recommend cutbacks in the new “welfare” programs which the President proposed to launch this year, in the record-breaking $961,000,000 “rivers and harbors” bill, and in civilian ECA.

If such economies were made, the problem of increased taxation would prove far less formidable than it appears at present.

Two forms of war taxation deserve careful study. The first is the so-called “excess-profits” tax. It would promote clarity of thought to call this, rather, a war-profits tax. Zealots hostile to free enterprise regard almost any profit as “excessive,” and seize on the phrase “excess-profits” tax to put forward punitive schemes which have nothing to do with war. A war-profits tax is simply an effort to skim off most of the windfall profits due to war itself.

How are we to identify such profits, however, and segregate them from those that would have been made anyway had peace continued? It has been usual to regard as specifically “war profits” all profits made in excess of those in the three or four years before the war. There is a plausible presumption in favor of this. But in no case can one be sure that the presumption is more than roughly correct, and in many cases it is unjustified. In all growing industries (e.g., television) at least part and perhaps all of the increase in earnings would have occurred anyway.

There is talk of applying the principle of a war-profits tax not merely to corporate but to individual incomes, This would no doubt be consistent. But it would clearly apply unjustly in many cases—to people with fluctuating incomes, say, and particularly to young workers who would have been promoted to higher-paying jobs even in peacetime. Should a lower absolute corporate or individual income be taxed more than a higher income, even in the event of war, simply because the recipient is not accustomed to it? We must remember, finally, that a drastic corporate “excess-profits” tax, as we learned during the last war, encourages higher costs and a wasteful use of men and materials.

Particularly appropriate to wartime, however, is an excise tax on civilian-consumption goods. This should be charged separately to the consumer, and labeled a war-purchase tax. Congress might fix a minimum uniform tax on all goods except foodstuffs (say 2 to 5 percent) and authorize the Administration to impose an added tax in its discretion, at any rate up to a maximum of 50 or even 100 percent, on any luxury or other product the civilian production or consumption of which it wished to discourage in wartime. This would be a far more flexible and less disruptive way of dealing with certain commodities, such as gasoline, sugar, and rubber, than the hit-or-miss rationing of the last war.

To prevent such a war-purchase tax from becoming a permanent part of the tax structure, Congress should grant such a power for not more than a year at a time, and should retain, in addition, the right to terminate it even before then by a vote of either House.