Chapter I: The Income Tax

Dear Sir:

I fully agree with you in the principle of your conceptions of the
duties of moneyed men towards the country. They must be willing not
only to surrender such part of their income, indeed of their
fortune, as the necessities of the country require, they must be
ready not only to relinquish their affairs and to put their time,
their energies, capacities and experience at the disposal of the
Government in time of war, but they must be prepared to offer their
very lives if the country calls for them. Those are the duties, of
course, of every citizen, but they are doubly the duties of those
who have won success. I am firmly convinced that capitalists as a
class will not fail in them during the war.

My article on war taxation was not written with any idea of
questioning these manifest and uncontrovertible truths, but solely
with the purpose of contributing to the discussion of the taxation
proposals certain considerations which I believe to be well founded
in economics and history no less than in experience and reason, and
the disregard of which would be apt, I think, to lead to
consequences gravely detrimental to the commonwealth.

The question to which my article addressed itself was not what
sacrifices capital should and would be willing to bear if called
upon, but what taxes it was fair, reasonable and, above all, to the
public advantage to impose on capital, seeing that there is a point
at which the country's economic equilibrium would be thrown out of
gear and at which the incentive to use capital constructively and
productively and to take those business risks which are incident to
all business activity, would be killed.

I greatly regret if what I said on the subject of Canada being free
from income tax gave the impression of being a suggestion for the
evasion by wealthy men of taxation during the war. The fact that
capital is not subject to income tax in Canada was, of course, well
known to men of wealth. I thought it a point and a fact of
sufficient importance as bearing upon our own taxation program to
deserve to be made generally known. That this might be considered
as either a suggestion or a threat of what capital might do during
the war, never, I confess, entered my mind, _for it would, of
course, be little short of treason for capital and capitalists to
take advantage of Canada's propinquity while the war is on._

You speak of the possibility of legislation to prevent this. If
capital meant to leave the country to evade taxation, there would
have been ample time and opportunity for it to do so during the
past six weeks. The price of exchange would indicate if that had
been done to any appreciable extent, and proves, as a matter of
fact, that it is not being done. If it were being done, I quite
agree with you that legislation should be sought to prevent it and
to punish the attempt. But I am entirely certain that moneyed men
will not think of evading whatever sacrifice may be required of
them by their country under war conditions.

What I meant to intimate in saying that capital and men of
enterprise would seek Canada if there was no income tax, or only a
moderate one, in that country, whilst America at this time imposed
excessive and practically punitive income taxation, was this:

Capital has a long memory. Capital is proverbially timid. I am not
referring only to large aggregations of capital but to all capital.
I am not referring only to the capital and capitalists of to-day,
but to those who accumulate capital by practising thrift and to
those who by invention, by conspicuous organizing or other ability,
by originality of method, etc., are instruments in the creation of
capital and will be, presumably, amongst the future owners of
capital.

The possessors of capital, present and future, would not easily
forget if, in the very first year of the war capital in this
country were to be taxed at far higher rates than prevail in any
European country after three years of war. Even if such
extraordinary taxation was removed at once, after the termination
of the war, capital would remain disquieted by the fear that the
machinery of excessively high income taxation, once used and found
easy of motion, might be used again for purposes of a less serious
emergency than now exists. Those seeking capital for other
countries--_and there is bound to be a very keen contest for
capital after the war_--would not fail to make use of these
arguments. Moreover, experience has proved that very high rates of
income taxation once adopted, are not easily reduced to the level
from which they started.

Therefore, in the case to which my argument was addressed, _i.e._,
unduly high income taxation in this country and no, or only very
moderate, income taxation in Canada, there can be little doubt that
_after the war_ there would be an outflow of capital to Canada, and
that--which is still more important--men of enterprise, especially
young men, will be apt to seek in that and other countries, fields
for their activities if the reward of enterprise is too greatly
diminished in America as compared to what it is elsewhere. Such men
would be doing nothing else than what many thousands of
American-born farmers have done within recent years in transferring
themselves, their capital and their working capacity to Canada.

_Not a single one of the leading European nations, after three
years of the most exhausting war, has an income taxation schedule
as high as that adopted by the House of Representatives; neither
Republican France, nor Democratic England, nor Autocratic Germany._
Of these three countries, England has imposed the highest income
taxation; yet, _the maximum rate in England is almost fifty per
cent. less than the maximum rate in the House Bill. The Cabinets in
these countries have undergone many changes in the course of the
war. They include Socialists and Representatives of Labor._ In the
determination of their taxation program, they have had the
assistance of the best economic brains in Europe. Those nations
have had far longer experience than we in the science of government
financing.

Yet not one of them has deemed it wise and advantageous to the
state to impose rates of income taxation as high as those fixed by
the House of Representatives. Surely, this fact and the economic
considerations underlying it, are deserving to be seriously weighed
by our legislators.

Does not the attitude of all the leading countries plainly indicate
their recognition of the fact that the action and reaction of
excessive income taxation create a vicious circle from which the
governments of all belligerent nations even in their extremity have
shrunk?

And is it not a manifest dictate of reason that such burden of
taxation as must be borne should be imposed gradually, as was in
fact done everywhere in Europe, so as to give to all concerned a
chance to adjust themselves to the new conditions, and not with one
violent jerk? England imposed her present rate of income and excess
profit taxes not in the first year of the war, but started on a
much lower scale and by successive steps, in the course of nearly
three years, attained the figures now prevailing.

We know that man and beast are capable of carrying far heavier
weights if the strain is gradually increased than if the whole of
the burden is dumped on their backs at once. The same holds good of
economic strain.

Is it not plain that if the unprecedentedly high income taxation of
the House Bill--exceeding as it does any rates ever imposed by any
of the leading nations of the world--is enacted into law, the
Government will find itself crippled in respect of taxable
resources during the second year of the war; the very year which,
if the war does last beyond the present one, will presumably be the
crucial period.

Of course, the cost of the war must be laid according to the
capacity to bear it. It would be fatuous folly and crass
selfishness to wish it laid or endeavor to have it laid otherwise.
All I am advocating in effect is that in the public interest not
too much be exacted at once, but that by dividing the burden over a
reasonable number of years, capital in no one year and especially
not during the first year of the war, should be so excessively
taxed as to produce an unscientific and dangerous strain.

In addition to the concrete factors, there enter into this question
certain psychological elements of a somewhat subtle character, but
sufficiently definite and potent to be plainly discernible to those
who are experienced in dealing with business affairs and with men
of business, large and small.

I believe an income tax greatly increased over the rates heretofore
prevailing, yet keeping within the bounds of moderation, would
produce at least as large a total revenue as an exceedingly high
one. And the consequences of the economic error of placing too vast
a burden direct upon incomes would be more serious, I think, to the
people in general than to the individuals directly concerned. The
question of the individual is not the principal one. The essential
thing is that no undue strain be placed upon that great fund of
capital as a whole which is derived from incomes of all kinds. It
is this fund which in its turn is one of the vital forces necessary
for the normal activities and progress of industry. If that fund is
suddenly and too greatly reduced, the effect upon commerce and
industry is liable to be abrupt and withering.

I yield to no one in my desire to see the burden upon the poor and
those of moderate means lightened to the utmost extent possible.

I realize but too well that the load weighing at this time upon
wage earners and still more perhaps upon men and women with
moderate salaries is almost too great to be borne and certainly
much greater than it should be. I wish a commission might be
appointed, consisting of those best qualified in the entire
country, to apply themselves to this most serious, difficult and
complex problem, indeed to the entire problem of excessively high
prices. I hope they would discover means, if not to remedy the
situation entirely, at least to alleviate it.

But I am convinced that relief cannot be found in taxation of
incomes at rates without a parallel anywhere, and in unduly
burdensome imposts upon business activities. I am convinced that
certain theories being urged upon Congress and the people and to
which the House War Revenue measure is in part responsive, while
doubtless meant to tend and seemingly tending to a desirable
consummation, are in fact bound, in their longer effect, to bring
about results harmful to the community at large, rich and poor
alike.

It is only that conviction which has emboldened me to state my
views publicly. In doing so I fully realized that I was running the
risk of having my action misunderstood or misconstrued, and to be
charged with selfishness and lack of patriotism.

Yet, I feel certain that in the end just recognition of their
motives will not be withheld from those who, in defiance of the
fleeting popularity of the plausible, venture to point out the
dangers of impetuous action, however well intentioned, in the
present emergency, and to urge that moderation and that regard for
the lessons of history and of economics which can be left aside
only at the peril of the general welfare.

Very faithfully yours,

(_Signed_) OTTO H. KAHN

P.S.--That you or any one else should even for a moment attach
credence to the monstrous suggestion that capitalists fomented
America's entrance into the war because they feared that otherwise
the amounts loaned by them to the Allies might be jeopardized or
lost, is a truly distressing manifestation of the willingness of
some of our people--I trust not many--to believe evil of men simply
because they have been materially successful.

Leaving aside the cruel injustice of such an imputation, it attributes to moneyed men a degree of stupidity and of ignorance as to their own interests, of which they are not usually held guilty.

America loaned to the Allied nations, prior to our entrance into the war, roughly speaking, $2,000,000,000, of which sum all but a small fraction was loaned to England and France.

These loans were made almost entirely in the shape of bond issues which were widely distributed amongst individuals and institutions throughout this country. Therefore, no very large portion of the aggregate is in the hands of any one person or institution.

To any one acquainted with financial affairs it is absolutely inconceivable that England or France would have defaulted on the relatively moderate amount of their foreign debt, whatever might have been the outcome of the war, if America had not joined.

Let us grant, for argument's sake, the wildly far-fetched supposition that in one way or another their internal debt might have become affected; it would still be utterly inconceivable that they would have permitted a default in their foreign debt, because it is, of course, suicidal for any nation to jeopardize its world credit.

But let us go still a step further and assume, in defiance of all reason, that even this totally inconceivable thing were to have happened. It would have meant, of course, not a total and irrecoverable loss to the holders of obligations of the Allied countries, but merely a more or less temporary shrinkage of the value of such holdings.

_A single year's war taxation will take out of the pockets of capitalists a great deal more than they could possibly have lost through depreciation in value of such amount of Allied bonds or loans as they may hold._

If you add to these considerations the circumstance that, owing to the intervention of our Government in financing and otherwise providing for the Allies, the commissions and profits of those who have heretofore dealt with the Allies will be largely cut off; that business will, quite rightly, be subjected to a large excess profits tax; that capital for years to come will have to pay increased taxes to provide for the debt incurred through the war, for pensions, etc.; if you will reflect on these and various other patent considerations, you will realize that any rich man, fomenting for selfish reasons our entrance into the war, would be a fit subject for the immediate appointment of a guardian to take care of him and of his affairs.