Raising the National Income

I

MORE than a quarter of a century ago the State of New York made me a Certified Public Accountant. For a longer period than that my business has been to audit the books of business enterprises, small and large, and to write reports which undertake to analyze and draw conclusions from the figures in their ledgers. The long practice of that profession leaves me with the fixed habit of wondering where the profits are made and why sometimes losses take the place of profits.

Some persons call me a liberal, perhaps because I frequently maintain that big business is relatively inefficient. The more persons who stand between the boss and his workers, between the chief salesman and his customers, the more chances exist for misunderstanding, for error, and for personal favoritisms which beget inefficiency. New factors in research, in engineering and transportation, may widen the circle of effectiveness, but every business has its critical point, the place where the law of diminishing return begins to work. Aside from such conclusions based on experience, the fact is that I am not politically minded; my thinking is primarily that of an accountant, accustomed to consider figures and appraise their significance.

Whether any business is too large or too small is important chiefly to its stockholders, because competition will take care of errors in both directions. However, the biggest business of all — government — operates in the vacuum of sovereignty entirely without the checks and balances of competition. Its costs are overhead costs, but, unlike other overhead, they are not subject to control by the market. The inefficiencies of big business are here present in greater degree, not only because of immense size, which I still think is the most important factor, but also because of the absence of the yardstick of competitors. In addition to all this, government executives, even more than big business executives, owe their jobs to whom rather than to what they know.

All of these ideas I have had in a general way for many years. The phenomena of the great depression, however, brought home to me vividly the importance of clear thinking on our economic problems. It seemed to me that the tools of the accountant’s trade should be turned to answer the question of what is a depression and why. By keeping a theoretical set of books on the affairs of this country and its citizens, — consolidated balance sheets and income accounts for Uncle Sam and Subsidiaries, if you please — I have satisfied myself as to what is the real cause of our troubles; have isolated, so to speak, the virus which periodically attacks our national income. Further than that, I am prepared to suggest a remedy, which I believe will greatly relieve the pain, if not entirely cure the disease. I also hope that this remedy for depression fever will leave the patient stronger than he was before the onset of the disease, for by practising this regimen it is entirely possible that our body politic may learn how to live both justly and vigorously.

Of the pressing need for diagnosis and treatment there can be little doubt. Through the 1920’s the national income rose to about ninety billions, then dropped to less than half that sum and has since risen slowly until it hangs around sixty billions. Some economists will attack these totals, but they are substantially correct, and small variations do not matter. The important thing is that, no matter how many billions are involved, the American people now have one third less to live on than they had nine or ten years ago. This means that there is n’t enough income to maintain the old standard of living for the entire population, and at the same time the cost of servicing our debt structure grows apace. We still struggle with excessive unemployment and low wages, with reduced dividends, defaults on interest, foreclosures and liquidations.

While the national income remains one third under par, anything can happen in the political field. Prosperity is so much the basic gospel of American life that privation, particularly unnecessary privation, is not patiently borne. Government feeds and clothes the poor, be it noted, not only to keep the poor alive but to preserve itself. But the costs of maintaining large numbers in whole or partial idleness are colossal and arouse exasperation from those who pay the shot. Therefore it seems to me that continued impairment of the national income leaves the door wide open for attack on our fundamental democratic processes. Impoverished masses may drive for an American brand of Communism, or exasperated taxpayers may seek to bring in a New World kind of Fascism. Either one would sacrifice individualism and the liberty we won when we fought the Revolution. I believe that the Republic cannot endure on sixty billions of national income a year, and even this amount is now supported by government borrowings which must end sometime.

Standing on this broad platform, it is easy for a man to arrive at something like a fair judgment on Administration policies. I find myself in accord with the New Deal in many of its aims, but in few of its methods in relation to raising the national income. Sadly enough, its course has not always been consistent, and one hand has too often undone what the other tried to do. What I propose is advanced in no spirit of partisanship. If the Administration likes the idea, it is welcome to use it. If the opposition forces believe that it offers a concrete programme, which they can incorporate in their platform, I should be glad to have them do so. And if the thinking men of both parties were to see in this plan, or some variation based upon its logical conclusions, a means of giving us both liberty and prosperity I should be very happy.

So much for the ‘why,’ which may be simpler to explain in a few words than the ‘how.’ In the interests of clarity and readability, I will omit both the statistics and involved mathematical formulæ by which I arrived at these conclusions, but of course stand ready to supply them upon serious inquiry.

II

It is often said that during a depression the rich grow richer, and the poor poorer. The rich will claim that they do not grow richer in dollars, for values fall in such periods, but they do accumulate possessions at declining prices which may later advance. Having ready money or available credit, they buy the securities or properties which bankrupt or distressed holders must liquidate. Savings and investment are not genuinely productive in such periods, since little new physical wealth is being created. What goes on under those names is chiefly a transfer of ownership. Some will say this transfer is from weak hands to strong, but too often it is from progressive and courageous business men to nonconstructive hoarders, from energetic wealth creators to automatic savers in the higher income brackets.

This evil effect of depressions, this tendency of venture capital to dry up, has been recognized and preached against, but what do we do about it? Efforts may be made to sustain the distressed, to lend money to farmers with ruined markets, to delay foreclosure actions, and otherwise to bind up the wounds of economic mayhem. But a direct solution which will expand production and put men back to work is avoided, lest it involve infraction of the rights of liberty and property. It seems to me, however, that a solution can be reached which invades no right of person or property, by so assessing our taxes that self-interest will impel the man with income to use it constructively.

Taxation for social and economic purposes has gone far in our day. In many ways it has been overdone, chiefly where the assessing and collecting of the tax involve more cost to government and the businesses concerned than the end is worth. If the punitive features of a new tax measure outweigh its curative benefits, if it frightens capital into hiding instead of calling it into use, or if it is so costly to collect that it becomes only an annoyance and a burden, then a tax to achieve a desired social end may well prove to be a failure. But if such a tax is a stimulant instead of a drag, if it brings positive boons at moderate expense, no practical man will object. After all, we are habituated to the method on a record of legislation running back to the first protective tariff.

My proposal is briefly this: Let the Federal Government enact a tax on that portion of a taxpayer’s income which is not respent in a manner that produces income to others. Such spending would, of course, include not only expenses but capital expenditures of a constructive nature, so that thrift which creates wealth would be encouraged, as distinguished from the mere acquisition of wealth.

Taxpayers with less than $10,000 a year of taxable income can be exempted from this tax and not required to file returns. On the basis of the statistics published for the year 1934, this would exclude all but about 3 per cent of the individuals who filed income tax returns. It would undoubtedly call for a much larger proportion of returns from corporation taxpayers, but the return could be made in a form which involves a fraction of the effort now called for by the current returns. No appreciable extra burden of record keeping need be assumed by the taxpayers of either class.

To the disgusted reader who at this point snorts, ‘Oh, another tax!' we hasten to point out that this would be one tax easily avoided. It all depends upon what you do with your surplus income. Furthermore, there may not be any tax at all. The rate of tax is something which should vary with the times, being low in good years and high in bad. The proper yardstick for determining the rate in any given year should be an index figure on unemployment. A rising tide of unemployment would be accompanied by a marked increase in the tax rate on all incomes over $10,000 not spent in activities which make jobs and add to national income. Thus, if the tax is avoided by constructive spending, unemployment is correspondingly reduced, while individuals unwilling to venture surplus earnings in activities which make employment must pay the tax, and thereby finance the resulting relief efforts.

This arrangement should encourage good managers to postpone construction work, which adds to the overbuilding that goes on in flush times, in order to gain a tax credit for filling in the lack of construction work in bad times. If we were able to slice off the peaks and fill in the valleys, we might not have any peaks high enough or valleys deep enough to unsettle our national economy.

From accounting records, individuals or corporations could readily show what constructive expenditures had been made. If such expenditures exceeded the surplus income of that taxpayer, the credit under this tax might be passed on to the one who supplied the money. Thus securities sold for plant extensions or any other purpose which created national income could carry a special coupon entitling the purchaser to claim the spending credit, these coupons to be detached and submitted with the return of the taxpayer who claims the credit.

A market, noticeable by its absence during depressions, would thus be created for securities of a constructive nature. This market would be stimulated in direct relation to the need created by unemployment. Surplus capital of the wealthy would be encouraged to venture into less conservative investments, leaving to the thrifty with less than $10,000 a year a better break in investing in the more conservative, seasoned, and refunding issues. The man of moderate means would be encouraged to save and become a capitalist, while the man of large capital would be induced to risk his surplus earnings in activities which make employment and increase our national wealth.

My study of the accounts of Uncle Sam and Subsidiaries convinces me that the key to the business cycle is in capital expenditures. The building boom is basic to all booms whether it takes the form of structures, railroads, or utility extensions. It is the pace of capital construction which makes the difference between good times and bad. Construction provides income to those engaged in the work and creates an asset on the books of those who invest the money. When it stops, incomes from that source stop, and with their stoppage goes no small part of the earning power of the assets created. Rent rolls, for instance, depend upon payrolls. There follows a period in which there is no incentive to build more assets until new development starts the construction boom going again. Whatever levels out the building curve also levels the income curve, and tends to keep the nation on an even keel.

III

Important collateral effects would flow from this anticipated transfer of buying power from good years to bad years. There would be a decided tendency towards a decrease of debt set up for new construction projects; more original capital and less borrowed money would flow into venturesome enterprises — all of which conduces to the stability of banks, insurance companies, and such financial institutions. A heavy debt structure intensifies the effect of depressions and threatens all human beings living within its shadow. For millions of persons incomes would be raised, since jobs would multiply and wages rise, giving a tremendous lift to purchasing power. While benefits would be widely spread among all classes, the greatest beneficiaries, both in extent and in degree, would be wage earners and salaried persons. And rightly so, in my opinion, for they are the greatest sufferers from loss of accustomed income. If we are to give them real social security we must assure the workers a market for their services, a demand for labor substantially equal to the supply.

While I prefer not to cumber this plan by estimating its effect on other taxes, I feel confident that incomes of all taxpayers would be so increased that normal income taxes would produce enough additional revenue to permit the dropping of several taxes which now not only are troublesome to the taxpayer but have a depressing effect on business. Certainly those taxes which directly penalize spending for worthy purposes should be dropped, as they discourage the very object sought. But here again the test should be pragmatic rather than dogmatic; there is a world of difference between taxing automobiles, for instance, and taxing liquor.

Unlike certain New Deal measures, this proposal aims to fill the treasury, to raise the government income and remove the need for relief and other forms of government expense. Under this plan the government should be able to balance its budget and start the long job of whittling away at our mountain of debt. Under increased productivity this can be done, for through the 1920’s we were able to reduce our national debt by about nine billion dollars, precisely because money kept moving.

I have sought objections to this plan from the members of my profession, who make a business of finding fault, from professional economists, from bankers and lawyers and ordinary hard-headed business men. I have heard no criticism of it which appeared to me to be valid.

The chief complaint is that my plan constitutes a tax on thrift, and that every incentive is needed to get people to increase the country’s capital. My answer is to point out that accumulation of distressed properties does not increase the country’s capital, and that savers of modest sums would remain precisely in their present position, since the extra tax would not apply to them. Those with more than $10,000 a year could also do as they pleased, but they would find their self-interest directing them into investments which contribute to the welfare of their fellow men. If they contribute to an unemployment problem, theirs is the major burden to support the resulting relief efforts.

For that matter, is thrift to-day entirely a personal matter involving industry and sacrifice? It hardly seems so. There are automatic savers, persons so abundantly blessed that they are never conscious of ‘doing without’ while their fortunes are growing, often under trusteeships which function adequately without the beneficiary’s attention. It is perhaps sufficient to remind these fortunates, many of whom are already notable for good works, that unearned income is something of a misnomer. All income has to be earned by someone somewhere, and the American system will not work unless enough income returns through the grass roots to provide employment and high living standards for all industrious citizens, their dependents, and the handicapped wards of society.

Those wealth accumulations which produce large unearned incomes, with the help of labor and management, were fruitful in the making, but equally are they to be judged by their fruits in the present. And hungry, distressed men and women are not likely to be kindly judges. If income is to continue to flow into the hands of the well-to-do, it must also flow through them. The rich should be encouraged to spend freely and constructively in order that the rest of our people may be assured of a continued and growing earning power. Money must be used as a medium of exchange and not as a one-way sluice into the reservoirs of wealth. Private income must beget private income, if the democratic way of life is to continue.