By HARLEY L. LUTZ, Professor of Public Finance, Princeton University, Princeton, N. J.

Delivered before the Philadelphia Control of the Controllers Institute of America, May 4, 1944

IN one sense, the discussion of taxation after the war, to be most helpful, should be related to the federal budget after the war. That is, we should decide, or we should at least have some opinion, about a balanced budget, and about the level of the federal expenditures. Otherwise, there can be no common meeting ground for a consideration of the extent and the character of the changes that can be made in the war tax structure. To be sure, there are those who assure us that we need not be concerned about the relation between the budget and the taxes. According to this doctrine, we should simply plan to collect whatever may be convenient in taxes and put the rest of the budget "on the cuff." This makes about as much sense as does the story about the gentleman farmer's advice to his men, which was to stack all the hay outside that they could and put the rest in the barn.

It is possible that these fiscal soothsayers and medicine men are trying to be realistic to the extent of recognizing: that there is no possibility of redeeming the public debt and therefore in counseling that we should adopt a policy in fiscal matters that will keep the ship afloat as long as possible. But, if this be their aim, I cannot agree with their view as to the best measures for keeping afloat as long as possible. The quickest way to sink the ship of state, with all hands aboard, is to continue the rise of the public debt. I doubt if anyone is under any illusion as to the ultimate disposition of the public debt, although there is an immense amount of whistling to keep up our courage. Certainly the future of the debt would now be much less dark had it not been for the indefensible fiscal policy which added some 50 billions to the debt, direct and contingent, in the ten years after 1930.

If we are by any means to stabilize the debt and avoid its repudiation, after the war, it is absolutely essential that there be no further debt increase. This means that we must look ahead to a balanced budget, after the war, and in order to keep the budget balanced we must not permit the government to engage in any kind of transaction or operation for which the people are not ready and willing to foot the bill as they go. There will be many attractive and enticing things which the government will be asked to do. No matter how promising, or even how urgent they may appear to be, if they involve further additions to the debt they should not be undertaken.

The use of public credit can mean only one of two things: first, it is a mortgaging of future tax revenues, a means of getting increased funds now against the pledge of future taxes. As the debt matures, its repayment diminishes the proportion of future revenues that can be devoted to current uses; or second, it may mean that debt is being created with no intention to repay, a policy which involves getting something for nothing through inflation, a policy which can end only in the repudiation of all debt. During a war, there must he a desperate mortgaging of the future since no nation has ever been willing, not even the nations under dictatorships, to operate a war on a cash bases, which would mean curtailing civilian incomes and civilian purchasing power in the same proportion as the government's diversion of the current product for the war purposes. Consequently, debt financing appears to be inevitable in greater or less extent, during a war. But this fact or condition points the more surely to a course of prudence after the war.

While the above line of argument might appear to compel me to set a limit to the federal budget after the war,this is not really the case, for what I am saying is, in effect, that the federal government must plan to spend only such amount as the people are willing to provide in taxes. This amount may be as little as 15 billions or as much as 25 billions. The precise amount is not so important as it is that whatever it may be shall not exceed the amount to be taken from the people in taxes. This will not be an easy course to follow. Apart from the influence of powerful pressure groups that can be most readily placated by Treasury hand-out, there is the fact that the federal budget has not been balanced since 1930. If we assume that no one acquires sufficient civic and political intelligence before age 15 to have any sort of grasp of fiscal affairs, it follows that the entire population under age 30 has observed and experienced only deficit and war financing. This group has seldom, if ever heard the expression, "a balanced budget" referred to except in terms of ridicule. Little wonder, then, that it should so easily be persuaded that the false prosperity el a war period can be maintained during peace by a continuance of the bankruptcy methods of financing used during the war.

And yet, the level of the postwar expenditures, with the corresponding level of the postwar taxes, does become. important in that the effect of the taxes on the motives and incentives which actuate the people must be considered. All taxes are merely transfers of money from the citizens to the government. This transfer does not affect the total volume of purchasing power, hence has neither depressing ¹nor inflating effects, per se, for the government spends instead of the people. Heavy taxation produces a definite repressive effect because of the feeling that is engendered in many minds that the purposes of the government in levying the final installments of the taxes are not economically or socially justifiable in relation to the tax burdens imposed.

That is, the taxes paid to defray the ordinary and accepted costs of government in performing those services which are ¹recognized as being conducive to peace, order, justice and stability are not burdensome. There is an ample value ; rendered in return for these taxes. The onerous taxes begin beyond this point, whether it be in paying more than is warranted for an obviously useful service like police or education, or in undertaking experiments which are of dubious or unproven value to the productive energies of the nation.

It is axiomatic that no government policy, whether in taxation or elsewhere, should have the effect of restraining or repressing the productive efforts of the people. The worst J possible course that any government could take would be to create in the people the attitude of "What' the use?" It is as true today as it was in Adam Smith's time that the government's prosperity rests on the prosperity of the people. And it is likewise true today, as it was then, that the prosperity of the people derives from their freedom to pursue their own interest and from their freedom to have and enjoy the fruits of their labor, their thrift, their ingenuity, their foresight, their risk-taking, and their daring.

The conclusion of the argument to this point, is that taxes should be moderate. Government must not undertake projects so ambitious or so costly as to involve heavy taxation at any point If, through moderate taxation, there is attained a level of prosperity under which moderate taxes J will provide revenues sufficient to permit the government to embark on projects that may appear desirable, there can be no objection from the standpoint of taxation. Severe or crushing taxes for such purposes would defeat their own objective by reducing the capacity of the nation to finance any level of public activity.

Coming more directly to the subject of postwar taxation, and assuming that the primary objective of anything that is worth saying on that subject is the creation of a tax and fiscal environment in which the private enterprise system will thrive and flourish, I have developed some remarks along two paths. One is a discussion of desirable postwar tax changes along conventional lines and in accord with conventional thinking; the other path is one in which I have ventured to do some pioneering. I shall presently wander for a time along this second path because I am always hopeful that there may be a few who would like to see a new approach to an old problem.

All of the discussion of postwar tax changes that has come to my attention indicates substantial agreement on a number of outstanding issues, although none of this discussion has been sufficiently concerned with details to uncover some matters regarding which there is likely to be lack of unanimity. For example, it is generally agreed that the excess profits tax should be repealed at the close of the war. All businessmen devoutly hope for this consummation. But repeal of this tax involves a complication for some, for it would cut off the privilege of carrying back unsued excess profits credits, and hence the possibility of securing a refund of excess profits tax. The reconversion period is likely to be one in which corporate earnings will be, in many cases, less than the normal amount not subject to excess profits tax. Any deficiency of earnings below the standard allowance or credit for the base period or for invested capital, as the case may be, would give rise to an unused excess profits credit which could be carried back against excess profits in the two preceding years, provided the law has not been repealed in the meantime.

The carry-back would involve refunds at the time business Earnings were below normal, or were nonexistent. By the same token, the refunds would be a heavy drain on the Treasury at a time when revenues were declining. The dilemma is obvious. To keep the excess profits tax through the reconversion period, in order to use the carry-back, might create a precedent for its indefinite retention. To insist upon the refunds recoverable through the carry-back would strengthen the charge, already being made, that the government is to guarantee corporate profits, and give additional force, in the view of labor, to the demand that the corporations should guarantee annual wages. It may be that as the prospect of refunds looms large, Congress will promptly repeal the tax, since the refund is as dangerous for the politician as it is for business.

A second point on which there will be general agreement is reduction of the ordinary corporation tax rate. Such a detail as what the postwar rate should be is not usually considered, but it: should be clear that, as a matter of wise long-range tax policy, the corporation rate should be geared to the normal or standard rate on individual incomes and that dividends should be excluded from income for purposes of the normal tax. Were this done, then the various individuals subject to income tax would all pay the same starting rate regardless of the source of their respective incomes.

No one can be found who will say a good word for the capital stock and declared value excess profits tax. This pair of taxes is completely phony and its operation is best illustrated by the familiar trick question—"Have you stopped beating your wife?" It is time that we were grown up past the stage of trick, wife-beating types of taxation.

When we get farther into the income tax and encounter such matters as capital gains, consolidated returns and the treatment of business net losses, the going gets harder, so far as a concensus is concerned. There is a sensible and rational solution for each of these issues and if this address were to be confined entirely to the conventional lines of tax improvement it would be worth while to set them out I may add that there will be agreement, probably not quite

so general, as to the reduction of the extreme rates of personal income tax and of estate and gift taxes. The excise tax on liquors is already higher than is required to afford the bootlegger his necessary margin of costs plus profit. Some other excise rates are equally due to be revised as the war ends, if not sooner.

All of these matters are important and all deserve careful consideration.¹ Were the situation that we shall face in the postwar period less grave, they would serve as the nucleus of a reasonably acceptable program. But in reality, they are merely essential preliminaries, and my belief is that any postwar program which follows the conventional pattern and arrives only at a series of changes in the conventional tax astern, will be another case of too little and too late. The system of free enterprise and the system of democratic control of the purse alike face a serious threat. It is the threat of destruction through taxation. It is this danger which compels the conclusion that any scheme of taxation revision which goes no farther than changes of rates, of definitions, and of allowances of one sort or another, will be both too little and too late.

I invite you to begin the consideration of this aspect of the problem, as I have, by taking a good long look at John Marshall's famous dictum, so often quoted and as often disregarded—"The power to tax involves the power to destroy." Taxation can involve, or be so used, as to result in destruction. Observation suggests and experience confirms that this is a profound truth. No argument is required to demonstrate the futility of destruction, hence it should be unnecessary to produce weighty evidence to establish the undesirability of destructive taxation.

Yet, despite the conclusion to which logic and reason lead, taxation has become destructive at many points and in many ways. This has not been altogether accidental, for there is more than a little evidence of destructive intention in various quarters.

Different methods might be tried to prevent destructive uses of the taxing power. Indeed, it might be supposed that an enlightened citizenry would be, in itself, a sufficient safeguard. But such is the reaction, or rather the lack of reaction, of human nature to taxation that reliance on sheer enlightenment may be at times misplaced. In this respect taxation stands virtually alone. Few persons would stand indifferently by while another was being beaten or robbed by thugs. Yet, great numbers of persons not only stand by, but give active support, while others lose their property or their business under crushing taxation, or while their pockets are being picked by a confiscatory tax. The situation that will obtain under the 1944 tax law, as passed by the Senate, confirms this statement. More than 100% of all large incomes is to be taken this year in taxes. And not as much as $24,000 can be left out of any income after taxes. Only when those who are not affected by a particular tax are as ready as those who must pay it to protest against excessive rates or inequitable tax treatment can general civic enlightenment be depended upon to prevent economic destruction through taxation. While this kind of restraint may be the ultimate goal, it is beyond question a long way off. In the meantime, a practical way of preventing the destructive use of taxation is to arrange the various taxes so as to provide wherever possible an automatic check upon abuse. Some time ago, I outlined a plan² of distribution of taxes among federal, state and local governments which appears to offer the maximum possibilities of automatic restraint upon the abuse and the destructive use of the taxing power. In outline, this proposal is as follows:

d. A flat rate tax on individual gross incomes collected at source in the greatest degree possible

c. Taxes on individual incomes, at proportional or progressive rates as may be desired

a. The property tax, a field now being entered by the federal government via the use tax on automobiles and boats

This program was devised as an answer to the alarming concentration of fiscal power in Washington. In my opinion, that tendency offers far more serious threat to our institutions and our liberties than any concentration of economic power, although the latter subject is of perennial interest to Congressional committees, to the Department of Justice, and to the demagogue. It is possible to correct undesirable economic concentration by economic means, but there will be no way of breaking the grip of fiscal despotism in Washington once it has acquired firm hold.

Shortly before the publication of the paper quoted above, an expression of the extreme centralization viewpoint had been given by a high federal official. Although he spoke in bis individual capacity, as federal officials always do, the views expressed were not repugnant to many who are influential in shaping national policy. The following passage³ is quoted from the address in question:

"If we are to be successful in the objective of creating a high and steadily increasing demand for the products of industry after the defense period, we must adopt a progressive tax system bearing heavily upon savings concentrated in creditor areas and lightly upon the great mass of families in the low income groups. This means that we must get rid of, or at least check, the growth of the sort of taxes to which our states have unfortunately been forced to resort more and more in recent years. I am referring to the general sales taxes and the taxes on gasoline, tobacco, and other articles of mass consumption. . . .

"If we are to make progressive taxes the major element of our national tax structure, however, it will not be possible to continue the present system of having both the stares and the federal government levy taxes on corporate and individual incomes and transfers at death. . . . In the end the only thoroughgoing cure for these difficulties lies in a drastic re-allocation of taxing powers between the states andthe federal government. Such an allocation would involve restricting the right to levy taxes on income, gifts and bequests wholly to the federal government. I know how controversial this subject is but I think we will have to face, quite frankly, the implication that state revenues will tend to consist more and more of taxes shared with the federal government and of grants from the federal government, which already make up about 14 per cent of states revenues. . . ."

The above passage states the recent trend very well, and were that trend to be continued, it would eventually destroy the states as independent and equal members of a federal union. With the reduction of the states to a dependency status, limited for their funds to grants from the federal treasury, and obliged to resort to begging or political jockeying in order to obtain them, both the historical and the actual bulwark of American freedoms would disappear. It will be remembered that early in his march toward complete control of the German people, Hitler wiped out such independent authority as the German states possessed.

The program offered here would transfer all sales and excise taxes to the federal government, and the states would be asked to give up their taxes of this sort. It transfers all death and gift taxes to the states, and also all taxation of business as such. Individual incomes could be taxed by both jurisdictions, but the federal tax would be limited to the kind of tax now imposed for old age insurance, that is, a flat rate tax on gross individual income. It should be collected at source in the greatest degree possible.

The revenues suggested for the federal government in the above scheme possess the following characteristics:

Productivity. The general sales tax and the tax on gross individual incomes would be much less affected by variations in economic activity than are the taxes on business and individual net income which know constitute so large a feature of the federal tax program. The taxes recommended for federal use will produce their, revenue currently, with little lag between levy and collection. The current tax payment act of 1942 was an attempt to place the individual income tax on a current basis, but it has involved such serious complications, both of administration and of compliance, as to produce grave taxpayer discontent and resistance. Any scheme to collect currently, a tax imposed at progressive rates is certain to produce these results.

We are likely to see a demonstration of those results under the new tax simplification bill. I digress for a moment, and revert to what I have called the conventional pattern of tax charge, in order to make some comments on the individual income tax:

First, there has been too great obsession with the idea that the personal income tax is the best method of reaching all individuals. Hence, this tax has been pushed down into income ranges where it becomes cumbersome and costly to operate;

Second, both Congress and the Treasury have been slow to perceive the advantage of simplification, but once having begun, the idea is being carried too far and will involve more rather than less confusion through the effort to collect tax at source under graduated rates;

To raise the floor of the income tax to some such figure as $2,000 or $2,500, and substitute a federal sales tax as the only means of taxing individuals below that income limit; everyone would, of course, be subject to sales tax, but for persons with higher incomes it would be an additional tax;

To raise the income level at which the surtax rates first apply, thereby leaving a certain range of income subject to normal tax only.

Regularity and stability of the federal revenues will be ighly important in federal budgetary calculations, if and when the people recover from the fiscal dimentia that was responsible for the illusion that a perpetual deficit is the best evidence of a beneficial condition.

Universal Distribution. The federal government exists to serve all of the people, and all parts of the country. It is both logical and just that the cost of services intended to benefit all citizens and all sections be met by federal taxes which are borne in some degree by all citizens. The populous creditor areas would continue, as under the present federal tax methods, to contribute the bulk of the federal revenues, but there would be a wholesome diffusion of the federal tax load that is impossible under the existing system.

The rate of withholding tax on individual income payments might be used as the flexible factor in federal budgeting. That is, this rate could be adjusted from year to year as required in order to produce the remainder of the revenue needed, above other tax receipts, to balance the budget. Since such a tax would reach every corner of the nation, changes in its rate would immediately apprise every voter of the significance of the spending policies being proposed or undertaken in Washington, and there would thus be provided an acid test of whether or not these policies were being approved.

Elimination of the Excesses of Progressive Taxation. Progressive taxation of incomes and estates at the rates now found in federal tax laws can have only one result, namely, the destruction of the private enterprise system and of the economic liberties which are dependent for survival upon that system. The present federal tax system has "frozen" the economic order at its current stage of development.

The crowning irony of all postwar planning for full employment and the restoration of free enterprise is that the planners are taking no account whatever of the destructive effects of the progressive income tax. The only way to achieve the expanding, dynamic economy and the high level of national income for which the planners' plan, aside from inflation, is by the creation of new large mass production industries.

No new large-scale mass production industry can arise in this country under the progressive tax system, because the tax would absorb the funds required for expansion while they would destroy all incentive to do so. Progressive taxation is the most powerful instrument for the peaceful achievement of the socialist state, and this purpose constitutes the only valid argument in its support. When a future Edward Gibbon, shall write the history of the decline and fall of the American Republic, the date he will use to mark the beginning of that decline will be March 1, 1913. On that date, the people sanctioned federal taxation of incomes with no thought of restraint upon the abuse of this method, or of the evils that would be produced by abuse.

A recent press dispatch carries a story of the present plans of the Republican National Committee for postwar budgetary and tax policy. This story concluded with Senator Taft's statement that the Committee research staff had been asked to determine, among other things, how heavy a burden of taxation the people can carry without socialization. It is to be suspected that neither the august committee nor its research staff are adequately aware of the socializing effectsof progressive taxation. We may be certain that they are wholly unaware of the inability, under a government like ours, to prevent the abuses which will hasten socialization.

Elimination of Federal Waste. In the vocabulary of deficit financing there is no such terms as "Wasteful spending." When government sets out to use its fiscal processes to manipulate the economy, to redistribute wealth, or to assure the good life to all citizens, the ordinary criteria of sound budgeting are discarded. The quantity of public spending, rather than the utility of the spending to the economic system, becomes the principal, if not the sole, standard. When the fiscal objective is the sheer quantity of spending, no amount of camouflage under the terms "public investment" or "public asset" can disguise the fact that enormous wastes are not only probable, but inevitable.

Paralleling the concentration of fiscal power in Washington has gone the concentration of fiscal waste. As the federal government has moved toward absolute domination of revenue resources, it has become correspondingly wasteful and imprudent. It is too far removed from the people to enable them to have definite knowledge of these wastes, or to be capable of exercising an effective curb upon them. Even with the; best of intentions to economize, the sheer size of the federal organization makes for waste. Decentralization of fiscal power will compel the introduction of a new and higher standard of values in the federal spending. It will restore to effective operation the principle that the people should support the government instead of being supported The automatic restraint upon excessive federal taxation that would thus be provided is clearly evident. General popular support for federal policies would be secured only in so far as these policies clearly served the national, rather; than some sectional or groups interest. After all, the national government was established to serve and promote the national interest. When it is again restricted to this sphere, its budget can be reduced and the state and cities will have both greater resources and greater opportunity to look after their own affairs.

This brings up the advantages of the arrangement of revenues proposed above for the states.

Preservation of the States as Integral Members of a Federal Union. The division of revenues suggested here will improve state revenues. As this occurs, they will become less dependent upon, even wholly independent of, the federal treasury. Raids upon that treasury, now so popular and so fruitful for the enterprising politician, will cease. State prestige will be restored, state morale will be revived, and the pretense of a federal obligation to provide aid will disappear.

There is no other way of effectively restoring the states to a position of proper balance and influence, against the federal government, except to provide them with larger revenues which are entirely within their own control. The Conference of State Governors has been quite aggressive in its emphasis upon the theme of states' rights, but it should be clear that such a movement will get nowhere except by a realignment of financial powers. Under such a realignment, the necessary services of all levels of government can be adequately performed for a smaller over-all tax "take"than is possible under the present situation. The plan proposed here is calculated to accomplish that result.

The bitter fight in Congress over the poll tax is a symptom of the feeling about states' rights that has long been latent but has lately become resurgent. It must be admitted that the states' rights issue takes queer turns. Southern senators were active in supporting the federal bill for an education grant of $300,000,000 until the Taft Amendment barring race discrimination killed their enthusiasm. The south had one experience with carpet-baggers and they want no more, The thing that people everywhere, north and south, should realize is that the whole country is overrun with federal carpet-baggers.

As of May, 1943, the federal employees outnumbered all state and local employees in the following states:

State

Number of Employees

Federal

State and Local

Alabama

64.8

45.7

Arizona

16.4

11.8

California

239.6

218.5

Florida

59.8

49.0

Georgia

73.9

55.3

Maine

29.2

26.6

Maryland

62.1

38.3

Massachusetts

129.7

127.8

Nevada

5.7

3.8

New Jersey

98.5

97.1

New Mexico

17.6

12.6

Pennsylvania

212.5

200.8

Rhode Island

22.9

19.5

South Carolina

53.9

35.2

Texas

149.4

124.3

Utah

38.4

17.0

Virginia

119.7

57.2

Washington

85.2

50.6

Totals above stats

1,479.3

1,191.1

Totals all states (excl. D.C.)

2,810.8

3,053.8

Special Communication from the Bureau of Labor Statistics, dated February 2, 1944.

And thus it has come to pass, as it was written by Thomas Jefferson in his classic indictment of George III: "He has erected a multitude of new offices, and sent hither swarms of Officers to harass our People, and eat out their substance."

Restoration of Private Enterprise. The stagnation of private business was the principal reason given for the large-scale deficit spending that was undertaken some years ago to relieve unemployment. It is now a matter of history that the course of government policy during those years was not shaped with a view to the speediest absorption ot workers into private jobs. Rather, that policy was aimed at a perpetuation of government support, with little regard to the establishment of the conditions under which private enterprise could resume its normal role of the principal source of economic opportunity. Changes of governmental policy at points other than taxation will be required if the enterprise system is to be revitalized, but the tax relief that would be supplied by the above program would be an enormously encouraging move in the right direction.

Equalization between Debtor and Creditor Areas. Under the program proposed here, there would emerge a certain degree of competition among the stares to attract business and residents. When and as expressed through the form of tax adjustments, such competition may be regarded as wholly desirable. It would be the most effective way of dealing

with the condition complained of by Mr. Eccles, namely, the disparities of wealth, income and business activity, as between debtor and creditor areas. The present approach to this problem, which is federal taxation of the creditor areas to provide funds for the support of the debtor areas, is wrong in principle and futile in practice. It perpetuates the disparity since it provides no incentive to correct the differences now existing in the geographical distribution of wealth, industry and population. It thus creates a strong case for continuing and extending the vicious circle of heavy federal taxes, demoralized state revenues, greater state aid, heavier federal taxation, and so on.

Business taxes are generally regarded as a minor factor among the causes of industrial migration. This is more likely to be true while the same heavy federal taxes on business must be paid regardless of location. Once this burden were removed, as it would be under the plan offered here, a more adequate test would be provided of the capacity of the south, or the west, for example, to attract business capital or residents with money to spend. Such a prospect would not appeal to the states of the north and east, and many can still recall the fight made by New York against the Florida policy of no inheritance tax. But these states would do well to bear in mind that under the Eccles program, they face the prospect of being taxed to provide the subsidies that will be sent by the federal government into the "under-privileged" states. In so far as the variations of state tax policy werwto result in attracting business or residents with money to spend or invest, the geographical unbalance which now affords ground for complaint would be removed.

In this competition among the states there would be provided an automatic check on excessive taxation in any locality or section. While the writer disapproves entirely of progressive taxation⁴ because there is no way of preventing gross abuse and hence because it is the shortest way to the socialist state, he would have no serious objection to relegating this method to state use, since the competition of other states would provide an effective and well-nigh automatic check on abuse. In the same way, no state would be able for long to engage in excessive or abusive taxation of business.

The tendency of the states to erect foolish interstate trade barriers has no doubt been fostered by the deadening effects of heavy federal income and death taxes. Under these taxes the states have little opportunity to attract either business or residents. Therefore, their inclination is to prevent outsiders from doing business within the state and from drawing income out of the state by such business. They have sought, as naturally as have nations, to limit those forms of trade which tend to create an "unfavorable" balance of payments.

The best cure for this paralyzing provincialism is to introduce a healthy rivalry among the states in attracting both business and residents. In so far as this rivalry were to result in a better geographical distribution of business and of domiciles of those having substantial incomes or estates, there would be an equalization between debtor and creditor areas. This equalization would have been accomplished through the forces of private economic activity and not by the bureaucratic methods of federal control and subsidy.

In recent months, the waters of sectionalism have been stirred again, and the familiar, threadbare charges of monopoly against eastern money interests, railroad conspiracy, etc., have been dragged out. The New York Times of Jan. 23, 1944, carried a United Press dispatch reporting that special congressional committees were being planned to discuss how to regionalize industry and distribute the country's wealth more evenly. It goes without saying that as long as the present federal taxes continue, any material regionalization of industry will be accomplished only by federal mandate and maintained by a federal subsidy. An advantage in this plan so great as to offset many of the drawbacks and objections which might be urged against Il is that the present complicated tax law, with its volumes of rulings, regulations and decisions, could all be scrapped. Such virtue as the income tax may once have had, in principle, has now disappeared in a fog of incomprehensible language. There would be no taxpayer headaches over forms or returns, no worry about where to find the money on tax payment dates. The proposed federal tax system would be built upon the principles of certainty and convenience and as Adam Smith pointed out, these are equal, if not superior, in importance to equality of taxation.

The question of the federal budget should be anticipated by offering some approximations, based on the following assumptions:

The proposed plan will stimulate production and employment, thereby affording prospect of the high level national income for which all planners ask;

The business activity that would be engendered by the relief from federal taxes and other interferences will make possible a national income of at least $125 billions;

Given high level general prosperity, there will be no need for federal aid expenditure for agriculture, for state subsidies, or for relief;

Therefore, a much smaller federal budget will be required than would be necessary if the federal government Were to finance and support the whole economy.

On the foregoing assumptions, a federal budget of $15 billions should be an outside figure. The following figures are suggestive of what its main subdivisions might be:

The federal revenues under the proposed allocation of taxes would be approximately as follows:

The social security trust fund transactions would be outside of this arrangement. As this system now operates, large revenues are produced in excess of benefit payments. Since the investment of this excess necessarily involves the creation of a debt owed by the Treasury to the fund, the law should forbid use of the excess receipts for current purposes, and should direct that the government's debt to the fund be offset by a reduction of debt privately held.

The choice that is presented here is one between continuance of the present top-heavy federal structure and a streamlined federal administration that could be smaller, more compact and more efficient because it would have less to do. It is also the choice between taxation that can destroy and taxation that will stimulate vigor and growth. Finally, it is the choice between supporting the government and being supported by it.

¹ From this point the address follows closely a paper by the writer, published in the Commercial and Financial Chronicle, February 10, 1944, under the title, "A Postwar Tax Program."

² H. L. Lutz, "A Tax on Gross Income Payments to Individuals," in Financing the War, A Symposium conducted by the Tax Institute, December 1-2, 1941, Chapter VII. Extracts used by permission.

³ Marriner S, Eccles, Remarks before the National Tax Association, in Proceedings of the Thirty-Fourth Annual Conference, 1941, at p. 336.