How Finance Defense?

Last week Congress batted a new National Defense tax bill up to the President.

Its purpose (according to the Treasury): to raise tax collections by $715,300,000 during the 1941 fiscal year, by $994,300,000 during the first full year of operation.

The new revenue:

> $70,000,000 from a 1% increase in the income tax paid by corporations, big and little. New corporation tax top: 19%.

> $252,000,000 more from personal income taxes by: 1) lowering exemptions to $800 for unmarried persons, $2,000 for heads of families; 2) adding.a flat 10% extra to the total tax everyone owes.

> $34,500,000 from an increase in the cigaret tax (6-c- to 6 1/2-c- a package).

> $123,900,000 from an increase in the distilled-spirits tax from $2.25 per gallon to $3.00, plus a 20% increase on beers and wines.

> $141,400,000 from consumption taxes (euphemistically called manufacturers' excise taxes) on a flock of universally used articles, including increases on cosmetics (up 10%), gasoline (up 50%), autos and parts (up 16 2/3%-25%), radios and refrigerators (up 10%), electric power (up 11.1%). Thrown in was an increase of 10% in the tax on pistols (wherever found).

> $62,400,000 by starting amusement taxes on admissions of 21-c- up (instead of 41-c- up), additional taxes on safe-deposit boxes, etc.

Hastily drawn, this bill evaded many a growing U. S. fiscal problem. Secretary Henry Morgenthau Jr., who thinks a lot more of the bill than do most Government economists, himself admitted that the entire tax structure needs scientific revision.

Applauding the strategy of introducing a tough tax bill now (when the bloom on National Defense enthusiasm gives it a chance of passing), the bill's many non-enthusiasts nevertheless thought the Treasury should have waited longer, studied more.

Chief target was the bill's consumption taxes. These seemed to assume that National Defense can be financed only at the consumer's expense from the start, as though the consumer's dollar were already threatening to give the Army & Navy's dollar competition in producer markets.

Many economists doubt that consumption needs or ought to be curtailed for a long time. They point out, for example, that the types of finished steel and the machinery used in auto-and-refrigerator-making is different from that used in making arms. What is needed first, they say, is a plant-construction boom in new munitions capacity, to be added to (not to replace) present commercially oriented capacity in durable goods. Such economists fear that to finance gun production by cutting butter consumption will merely redistribute, not absorb, the present horde of unemployed (around 10,000,000 in March). The Treasury would then be in the silly position of having to pay billions of dollars in relief, instead of riding (and collecting fat taxes on) a full employment boom.

To businessmen, the new bill begs a more immediate question: will there be a war-profits or excess-profits tax, and how much? Last week this problem was underscored when Senator Robert Marion La Follette Jr. tacked an approximate copy of the old 1918 war-&-excess-profits taxes on to the Morgenthau bill. To his surprise it passed right through the Senate but the joint conference killed it. Main provisions of the La Follette rider, aimed at all corporate net incomes (in addition to the ordinary corporate income tax):

1) A flat exemption of $3,000, plus an additional exemption equal to 8% of invested capital.

2) Profits in excess of the exemption, but not more than 20% on the invested capital, to be taxed 20%.

3) Profits in excess of 20% on invested capital to be taxed 40%.

The La Follette rider was not to be classed with the many emotional proposals of recent years (often sponsored by the American Legion) that have sought to tax all war profits up to 95%. Mild, as war-profits taxes go, La Follette 's was nevertheless inequitable. Reason: corporations that have recently earned a high rate of return would be penalized in comparison with those that have been running at or near a deficit. For the latter (railroads, etc.) could ride the boom a long time (with a leverage quotient seductive to investors) before reaching the onerous tax brackets. The more efficient a corporation has been, the more its capital consists of brains instead of brick -- in short, the more successful a corporation has been in terms of its normal rate of return, the more burdensome would be its share of war's cost.

Last week Administration tax experts got down to the problem of sifting such problems. They intended, first of all, to make a distinction between a war-profits tax (on munitions-makers selling to the Government) and an excess-profits tax (on all corporations -- as in 1918). The munitions-makers (aircraft and shipbuilders are already subject to a 10 or 12% profit limitation) may be treated more severely than the rest. On ordinary excess profits, the experts were looking for a formula to give corporations an incentive for ploughing their boom profits into new plant, thus multiplying defense production.

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