Senator THOMAS. We have decided it right now. At the end of half an hour we are going to hear somebody else. Mr. THOMAS. That will be all right with me, Mr. Chairman. (Mr. Thomas thereupon read to the committee from his brief, printed at the end of his statement, during the reading of which the following occurred :) Senator SMOOтT. Whatever you say, I take it for granted you have in that paper. What I would like to do would be to have you now submit your paper to be printed in the record just as if you had delivered it, and then I would like to ask you a few questions; and I think we could get more information that way, because we read your paper anyhow, which is what you want. It is not the mere question of taking up time. Mr. THOMAS. No: I have no desire to take the time of the committee. Senator SMOOT. You have only a few minutes more, and I will ask you to let me ask you some questions, because I want to get some information. Mr. THOMAS. I will yield to the wishes of the committee in the matter. Senator SMOOт. No; your wishes. Senator PENROSE. I would like to remind you, Senator Smoot, that we are all very busy men; some of us have been on this committee 20 years and studied the thing pretty carefully, and an academic paper does not interest the committee very much. Mr. THOMAS. I thank you, Senator, for the suggestion. At the same time, I feel that there are some things that the committee might hear to its advantage. Senator PENROSE. You have not advanced a proposition that I have not been familiar with for the last 15 years. I say that respectfully to you. Mr. THOMAS. If the committee desires that I should discontinue the reading of the paper, it is all right with me. I want to put before you, however, before you ask a question, the remedy I propose, in a few words. Senator SMOOт. Very well. But I would like to ask you a few questions. Mr. THOMAS. I should be very glad to answer your questions if I can. Senator THOMAS. You can put your manuscript in the record, and we will read it. Mr. THOMAS. I have no pride of authorship, and I will submit it any way that will suit you. I want to say that the principle which I undertake to explain in there is that the income of the country has been selected as the subject of taxation, and under any system you may devise it takes a certain percentage of that income. You can not help that. That is obliged to be a fact. I notice Mr. Kitchin in his report estimates that at $10,000.000.000. To raise the revenue that is wanted from that source will take a uniform tax on business profits of about 333 per cent. As I say in that paper, under the systems they propose the tax ranges from four-tenths of 1 per cent under one plan to 37 per cent on certain cases cited by the Secretary of the Treasury. Under the war-profits plan it ranges from 1 per cent to 56 per cent. I hold that if you tax the sum of these profits, the tax should be uniform; that every business should be required to pay the same part of its net earnings that other businesses are required to pay; that there should be no differentiation in the rate of business taxation. It should be the percentage upon the whole. I suggest, in order to meet the views of the Secretary of the Treasury, to assist along in the sale of bonds, that you place a normal tax of 10 per cent on income and an excess tax or supertax of 30 per cent on income, which would be equivalent to a uniform flat tax of 37 per cent on incomes. Senator SMOOT. What is your idea as to exemptions? Mr. THOMAS. None. Senator SMOOT. None at all? Mr. THOMAS. No. All business, both individual, partnership, and corporate, would come under that, and no exemptions from it at all, except perhaps a nominal arbitrary exemption to eliminate inconsequential incomes. Senator SMOOT. Amounts it would not be possible to collect? Senator SMOOT. That would cost more to collect than they would amount to? Mr. THOMAS. Yes. Senator THOMAS. Would you exempt benefactions to hospitals and schools and other public institutions? Mr. THOMAS. That would come in the nature of arriving at the income, and I would exempt those charitable institutions. That does not come in the tax plan. My idea was a uniform tax, and then, of course, reasonable exemptions under the general plan. That is a detail. I would exempt, and I think there ought to be exempted, all gifts for public purposes; that is, of a public nature. I would exempt anything that happened to be for war purposes, whether direct or indirect, as it is a governmental purpose. All beneficial and charitable enterprises should be exempted. However, I see in the bill a provision that I think is rather broad there. In the Kitchin bill I notice that they exempt all income of corporations organized for charitable purposes. A good many of thein may be run on their income, and not on these donations, and the effect of that would be to increase the endowment. I do not know; I have not had time to examine it, and have not had the opportunity. But it may be that some of those corporations are so organized that they may be disorganized and become the property of the people who started them. In that case they would furnish a most convenient receptacle for income taxes until the clouds blow away. The CHAIRMAN. Your time has expired. Mr. THOMAS. Mr. Chairman, I am perfectly willing to get out of the way. Senator SMOOT. Leave your brief with the reporter. (The brief submitted by Mr. Thomas is here printed in full, as follows:) INCOME-TAX LEGISLATION. By A. F. THOMAS, Lynchburg, Va. Thomas Payne opened his brochure "The Crisis" with the memorable observation, "These are the times that try men's souls," which is entirely applicable to our present situation. It is patent even to the casual observer that the United States of America has assumed world leadership, with its tremendous power and equally tremendous responsibilities. History offers no parallel; past experience dwindles into insignificant incident; there is no trail to follow; we must blaze the way as we go. Never since the dawn of human history has the world been confronted with such gigantic problems, upon the correct solution of which depends the hope of future well-being. The situation presents a ringing challenge to the leaders of the world, and never before was there so great need of patriotic purpose and constructive ability of the highest order. The Congress is undertaking to do that which has never been done before on so tremendous a scale. It has wisely, I think, determined to apportion the burden of this war, so far as possible, between the present and the future, and perhaps never before has a larger percentage of the costs of similar undertakings been put upon a cash basis. I have no criticism to make either of the purpose or the judgment displayed in making this division. It is generally understood that it is the purpose of the Congress to raise $8,000,000,000 by taxation, a large part of which is to come from business profits and personal income. The question before the Congress to-day does not touch this purpose. It is conceded that the amounts desired from these sources can be raised by either of the methods that have so far been suggested and, therefore, the problem before us is not one of providing revenue. The task at hand is to provide a method of equitable apportionment of the burden between the individuals and units of business that must meet these large demands of the Government. To stress the point: The thing to be done is to provide a method of taxing business and personal income that will conform to sound economic principles and be essentially just to the different taxpayers. It has been estimated that the business of the country will receive this year an income of something over $9,000,000,000, out of which the Government, if the method is fair, can collect the amount required without seriously interfering with the efficient conduct of business. It is more important just now to concern ourselves with the effects which a particular method may superinduce than to consider the amounts to be paid by any particular taxpayer or class of taxpayers, for of all times the present and the immediate future are least opportune to invite industrial and financial disturbances. With the total amount of revenue needed assured, Congress can well afford to devote its attention to the economic and sociological effects of the methods proposed before enacting them into law. He who assumes that the conduct of the war and the provision for funds to pay its costs are the only essential factors, has only a partial conception of the situation and should be reminded that when the great purpose to which this Nation has unreservedly committed its lives and fortunes has been accomplished and the peace terms shall have been dictated by the allies at Berlin, there will still remain the problems of reconstruction and readjustments that will call for the best statesmanship of all the world if our hopes of democratic development are to be realized. The point is that we should not only provide a method of raising the necessary revenue, but what is of equal and perhaps of more importance, we should so provide it that the operation of the plan will be in consonance with the demands of justice and sound economic principles. Discussion of income-tax legislation suggests a division of the subject into taxation of business income and taxation of personal income. The principles applying to these classifications are different. The method which with entire propriety might be employed for one of them would not be permissible for the other. It is to be said, too, that income taxation in this country is as yet in an embryonic state and there is, therefore, the greater reason that the groundwork of the system should be well considered now in order to avoid unfortunate results in the future. Empiricism is always risky and sometimes dangerous. It is well, too, to stress the fact that the income tax is a highly efficient instrument which can be used with equal facility to promote well-being or to rob mercilessly the class against which it may be directed. It is opportune, too, to point out to the rich and powerful that the misuse of power by them to secure favors would establish an extremely dangerous precedent which may be used against them at some future time when perchance they no longer shall be so potent in shaping the public policies of the Nation. Being most vulnerable on account of having most to lose, it behooves them to do their utmost to insure the legitimate and just use of this instrument of taxation. Clearly in their own interest, they should seek no special favor for themselves nor willingly submit to the adoption of any plan that conferred it upon others. TAXATION OF BUSINESS INCOME. Business, whether conducted under the individual, partnership, or corporate form, is a social instrument. Society permits it in order to get the service it renders. Conducted under private initiative it is a privilege, the conditions of which it is perculiarly the duty of government to prescribe. The public good is the standard by which the legislature should be guided in limiting its operation or restricting its opportunities. The Government in taxing it uses it as an instrument to collect the tax from the public it serves. It is a modern application of the Chinese and Roman customs of farming out the taxing function. A tax upon business whatever form the imposition may take is an excise tax on privilege. If it is made a tax on net earnings the theory assumes that the net earnings of the business of the country is a unit, and from this sum of business profits a certain percentage is taken for public use. Not only is this an assumed theory but it is a practical fact. Even Congress with all its power by any device, however ingenious, can no more alter this result than its enactments could make 2 plus 2 equal 5. What it can do is to devise a plan for apportionment of the tax between the different units of business equitably or inequitably. In the past it has done it inequitably, and if certain proposed methods are adopted it will make the division of the burden still more inequitable. It must be understood that business is not a taxpayer. It is a tax shifter. Without a clear understanding of the principle of tax diffusion it is hardly possible to arrive at a satisfactory conclusion on the subject. Business under private initiative is dependent upon profit for its growth, capacity for service, and its life. Without it it must cease to serve and die of inanition. Profit being its lifeblood whatever lessens it becomes at once a matter of vital conBusiness seeks to lessen expense, to keep taxes at the lowest rate, and to increase earnings in every permissible way, and sometimes in ways that are not justifiable either in law or morals. cern. That the power to tax is the power to destroy is perhaps more true of business than other things. As soon as the tax imposed becomes too heavy to shift with facility business like a tired beast begins to slacken its speed, and if the burden it made sufficiently heavy it will stop altogether. Manifestly, then, the wise, prudent, and just thing to do is to place upon business a tax that will yield all the revenue possible without lowering its productive efficiency and further to provide a plan so equitable that each separate business will only be called upon to surrender for public use a just proportion of its earnings. Having selected, as the income tax does, the profit fund of the country as the subject of taxation the capital invested furnishes no standard by which to measure the amount of the tax, because there is in this case no fixed relation between the different capitals and earnings. The earnings themselves furnish an exact, definite, and just standard leaving neither justification nor excuse for the adoption of any other. If we, hypothetically, grant that capital invested should be used as the measure of tax obligation, common justice would require that the exact capital of each taxpayer should be ascertained. This would necessitate Government audit of every business in the country beside which the ascertaining of the physical values of the railroads would appear as a holiday diversion. To accept less than such an audit would put a high premium upon every stock-watering scheme that has been foisted in all the past upon a gullible public. If anything approaching a fair and just system of taxation is to be realized the use of capital invested or prewar earnings as a standard of tax obligation can not be permitted. The fact that I would impress upon the committee is that neither the war-profits plan nor the excess-profits plan is anything more than an excise tax on profits. The objection to both of them is not that they tax profit but that their standards are incorrect, producing an inequality of apportionment of the tax between the respective taxpayers that is unsound, unfair, and unnecessary. The war-profits plan with a flat tax on so-called war profits aims to restrict the tax to that part of the profit fund derived from business during the war that may be in excess of profits obtained at some period anterior to the war, while the excess-profit plan undertakes by exemption and graduation to take so much of the profit fund as may not under the method be found to be a permissible profit. Both are similar in selecting only a part of the profit fund rather than all of it for taxation. Both fail to grasp the broad principle that justifies the taxation of business profits. Profit is social tribute. It is the price that society pays for its deficiency in organization. Whether the public reaches it through price regulation or an excise tax, it is the attempt to minimize the exaction to the extent that the public good may require. Upon this ground the restrictive action may go even to the extent of destroying all profit and thereby destroying the business if the public good is subserved. It may be fairly assumed that all business permitted to operate, to the extent of such permission, is necessary to efficient production and therefore that there is no legislative purpose, either by retardation or acceleration, to regulate commercial and industrial enterprise by diccriminatory taxation. If then the purpose is to use business as an instrument for the collection of revenue and it, in order not to interfere with economic operation or lessen productive impetus, is to be disturbed as little as possible, it is highly desirable that the tax should not be in excess of that which may be shifted with facility to the consuming public. The importance of the point here demands perfect frankness. Whenever the tax is made sufficiently large to endanger that which the manager of the business may believe to be a necessary return to take care of the possible losses, the normal growth of the business, and asatisfactory return on capital, business activity will begin to wane. If, too, the method of taxation is faulty giving some businesses advantage over others it degenerates into legislative sabotage, throws a monkey wrench into the Nation's industrial and commercial machinery, and insures the abnormal success of the favored class with a corresponding destruction of those adversely affected by the discrimination. Both the war-profits and the excess-profits plans are faulty in this respect, as I shall demonstrate later on. Both of the above plans profess to be hot on the trail of that elusive character the "profiteer," whose identity, so far, has not been definitely determined, except that his name is Human Nature and he has something to sell. It does not seem to alter the case whether the article for sale is a bag of peanuts, a day's labor, the products of mines, the factory, or the farm. WHAT IS PROFITEERING? Before undertaking to use the power to tax for corretive and punitive purposes it is proper to ascertain the true nature of the evils to be reached and to inquire further whether the good results reasonably to be expected from the proposed remedy will likely compensate for the undesirable effects that may follow its application. Let us analyze present profits to see if they are altogether what they seem: In the first place we must realize that money standard, whether of dollars, pounds, france, or marks, is not a measure of value. It is only a means of expressing the ratio of values. It fluctuates as these ratios change. Weight and measures are standards of actual value. The pound of meat, the bushel of wheat, and the yard of cloth remain the same, however much the values as expressed in money may change. These values are the same now that they were before the war, hence to ascertain the real change that has taken place or to ascertain the increase in the percentage of profit one must not only compare the nominal profits of the antewar period with those of the present, but must translate both of them into actual values as expressed by weight or measure, and the difference between the two profits of these periods so expressed will be the increase or decrease of the respective periods. To illustrate: If the profit-and-loss account for 1913 shows a credit of $100,000, while that of 1918 shows $200,000, the difference expressed in dollars would be an increase for 1918 of $100,000, or 100 per cent, which would make |