The Limits of Taxation

January 7, 1952

How much taxation can our economy stand? This question will become more insistent than ever when Mr. Truman presents his new budget.

One of the latest efforts to answer it appears in a pamphlet published by the United States Chamber of Commerce under the title: “How Much Can Our Economy Stand?” The pamphlet calls attention to some startling facts.

For the three fiscal years, 1952 through 1954, government expenditures will take on the average approximately one-third of each dollar of the income of every person in the country.

Though Mr. Truman, in his budget message last year, stated that the government “must practice rigid economy in its nondefense activities,” he went on to advocate nondefense expenditures higher than in any previous year in our history and nearly double those of the fiscal year 1948.

To analyze a $57,000,000,000 military appropriation, the Senate Appropriations Committee had the assistance of only one technical staff member.

Personal income taxes now range from 22.4 percent on the lowest bracket to 92 percent on the highest.

According to Secretary Snyder’s estimates, there is $68,000,000,000 of personal income available for additional taxation; but more than 73 percent of this amount falls in the income tax bracket of less than $2,000.

If the government seized all personal income above $6,000 it could not get more than $6,500,000,000 additional revenue. This would fall nearly $1,000,000,000 short of this year’s foreign-aid program alone.

The corporation income-tax rate, which never exceeded 40 percent during the second world war, was raised by the 1951 Tax Act to 52 percent. In addition, an excess-profits tax takes 82 percent of corporation earnings in excess of 83 percent of the average of the best three years from 1946 through 1949. Federal taxes can run as high as 70 percent of a corporation’s total earnings.

The Canadian Minister of Finance, D.C. Abbott, said in April 1951: “I am not happy about corporation tax rates when they go over 50 percent. . . . It would be only too easy to take a superficially popular line and increase these taxes to a point which while yielding larger immediate revenues would do great damage in the longer run to the economy as a whole.”

Heavy progressive taxation in the United States is retarding capital formation and the growth of production. Until the past decade our productivity per man-hour increased about 2.5 percent per year. Since 1940, however, the rise in productivity has been below the long-term trend.

The Chamber’s pamphlet concludes that our present tax programs penalize saving and risk-taking and destroy the incentives to work. This conclusion carries additional force if taken in connection with a study made by the Australian economist Colin Clark in the (London) Economic Journal of December 1945. There, as the result of a survey of a large number of countries which he summarized in impressive tables, Clark concluded that “the critical limit of taxation is about 25 percent of the national income, or possibly rather less.” That conclusion was based, as he has since written, “not upon theoretical considerations but upon a study of the actual experience of attempts which had been made, at various times and places, to exceed this limit.”

A 25 percent limit is, of course, purely empiric, not “scientific.” The factors involved are so complex, indeed, that the precise limit to taxation under all conditions is probably indeterminable. Yet Clark’s statistics do, as he declares, “appear to give very considerable support to the hypothesis that once taxation has exceeded 25 percent of the national income (20 percent or less in certain countries), influential sections of the community become willing to support a depreciation of the value of money,” the political forces making for inflation become irresistible, and production is seriously undermined.

We urgently need further statistical studies of the limits of taxation.