Cordell Hull to Woodrow Wilson
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I would not presume to offer my individual views, even briefly, with respect to the state of our revenues and finances, present and prospective, except for the reported divergent attitudes of the Treasury and some of the leading members of the two Houses of Congress.
The controlling question for determination at this time, I think, is whether it is deemed wise and necessary to make an additional tax levy on profits arising during the calendar year 1918. If so, it is manifest that Congress should take action during the present rather than the short session next winter. A bill offered next winter would not become a law before near the , whereas tax returns under such measure would be due on the first of March preceding, and besides the treasury would be obliged to consume several weeks in the preparation of regulations. The loud cry of "retroactive legislation" would be promptly offered after the turn of the year, as it has been effectively offered in similar circumstances heretofore. The general demand would be that the law should only apply to profits of the calendar year 1919. In making immense war tax levies, running into the billions, business should be given as nearly a year's notice as possible, in view of the fact that most large business concerns adopt plans and contract financial obligations several months in advance of their fulfillment. I think that most business people would prefer that if an additional tax levy is to be made with respect to the calendar year 1918, it should be made during this session so as to avoid the confusion, apprehension, and protracted suspense that would occur during next winter and spring under the effects of similar legislation at the short session.
The necessity for an additional levy on this year's profits is, in my judgment, manifest. The English government, realizing that it will be confronted by an annual tax levy of about $3,500,000,000 after the war, prepared in its recent budget to increase revenues $550,000,000 for each full year in the future, making a total aggregate of $4,500,000,000 of tax revenue. This action has proceeded with the general approval of the public and the press, on the ground of war necessity. The United States will probably find itself carrying a debt of not less than $40,000,000,000 at the close of the war. If the amount we are loaning and shall loan to the Allies, together with the interest they are expected to pay on it, should be treated as a sinking fund, the government would then pay 4 % interest on a total debt of $40,000,000,000 during the years following the war. Pensions and similar compensation to soldiers and sailors will then doubtless exceed $500,000,000. The amount of our pre-war expenditures for material, supplies, etc., will on account of the increase in prices be considerably augmented after the war. New expenditures growing out of the war, such as those for reconstruction work and the maintenance of new agencies created during the war which cannot be discontinued, at least for some time, will involve several hundred millions additional. These sums added to our normal pre-war expenditure of a little over $1,000,000,000 will make the total annual expenditures after the war not less than $4,000,000,000, in my judgment.
If we can only levy $4,000,000,000 taxes during the war when war profits are swollen and when the people are disposed to accept forms of taxation they will not accept in times of peace, how can we expect in a satisfactory way to raise $4,000,000,000 from taxation after the war, when profits have largely declined and there is demand for repeal of more or less war taxation? It is true, furthermore, that the great war expenditures contracted in inflated prices of about 100% should be met as fully as possible in similar inflated values, otherwise a much larger amount of commodity values would be required to pay off a given amount of bonded debt some years after the war than at present. The principle now recognized as sound finance by every country at war is that the maximum amount of taxation which can be levied during the war without material injury to business should be imposed. Another point worthy of note is that under war conditions when government control is very general, taxation will not injuriously affect business except when imposed to a point where business concerns have not left an adequate amount for reserves and necessary additions to capital. Fortunately, our business concerns were able prior to our entry into the war to pay off floating and much other indebtedness and fully to fill up their reserves. In another respect heavy war taxation is a great benefit in keeping down inflation, because it operates greatly to diminish useless private expenditures.
It is agreed that every employe should have reasonable compensation for his services and every producer a reasonable profit on his products, in the light of all the conditions and circumstances.
A glance at the income tax returns of corporations and of from 300,000 to 429,000 individuals for the years 1915-16-17 shows that those subject to the income tax alone derived an aggregate net profit of substantially $30,000,000,000 for these three years, whereas the amount of taxes imposed by the federal government on these taxpayers under the income and excess profits tax laws is below $3,500,000,000. This reveals a net profit of $26,500,000,000. The net income returned by these classes for the calendar year 1916 was $13,000,000,000. It is probably $14,000,000,000 or more for the calendar year 1917. This would indicate a total net income for the entire population of an amount in the neighborhood of $18,000,000,000.
England has handled her excess profits law with the minimum of complaint by giving the Treasury the fullest latitude a statute can give to deal with individual cases of hardship according to the special circumstances and to make such allowances, deductions, etc., in computing both "capital invested" and taxable profits as would most nearly insure to each taxpayer a good and reasonable profit from his business, in view of the amount of capital invested and the nature, hazards, etc. of the business. After thus satisfying each taxpayer, the government takes 80% of the remainder, which is surrendered much more cheerfully than under our law which does not permit the same full and liberal computation in many cases and which imposes an average tax of some 30% on a larger excess of taxable profit. To illustrate, the English returns, I believe, only indicate excess profits of $1,500,000,000, but the government takes $1,200,000,000 of this, whereas our law shows some $6,000,000,000 excess profits on account of the lower capital percentage and denial of specific allowances when meritorious, and on which amount we levy an average of near 30%, as best I can estimate it.
Congress could without protracted delay combine all income and excess profits tax rates, exemptions, etc., into one set of rates and exemptions and eliminate such features of the present revenue laws as are inequitable, and such action would materially off-set any dissatisfaction arising from the increased tax levy.
I agree that our revenue situation presents a serious problem, but am of opinion that a prompt dealing with such problem and a consequent readiness to meet the great responsibility involved would be approved by the people generally. When the full facts as to the necessities of the government are presented to the American people, they will be ready in a patriotic spirit, just as the people in other countries at war, to meet without complaint such further burdens as an additional tax levy may impose. To make our tax laws equitable in their operation is the controlling consideration with the taxpayer.
Asking pardon for having elaborated to a far greater extent than I intended, I am,
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