Capital is proverbially timid. It will not take risks, except in the expectation of commensurate reward, and if it sees the danger of its reward being unduly infringed upon by excessively rigorous income taxation, it will anticipate that menace by withdrawing from the field of constructive investment to the greatest extent possible.
So much is this the case that I incline to the belief that taxation so graded as to result in a maximum average of say 33-1/3 per cent. would produce at least as great a revenue as a maximum average of 50 per cent.
It is one of the oldest principles of taxation that an excessive impost destroys its own productivity.
The flood of securities which would be coming for sale in order to escape extreme income taxation would create a grave condition of demoralization in the investment markets of the country, with the resulting inevitable effect upon the country's general business, and upon its capacity to absorb Government loans.
IV
The tax recently enacted by Congress imposing a burden of 8 per cent. on business profits over and above 8 per cent. on the capital employed, regardless of whether such profits have any relation to war conditions or not, is unscientific and unsound.
(Incidentally, it is a strange provision of that law that it applies only to co-partnerships and corporations, whilst an individual engaged in business, however profitable, is not taxed.)
It is unquestionably right and in accordance with both good morals and good economics, to prevent, as far as possible, the enrichment of business and business men through the calamity of war.
But the recently enacted so-called excess profit tax which it is now proposed to augment largely does not accomplish that. It taxes not merely the exceptional profit, i.e., the war profit. It lays a burden not on business due to war, but on all business.
It does this at a time when it is more than ever necessary that energy, enterprise, efficiency, the commercial and financial brain and work-power of the nation, be stimulated to their utmost in order to make good, as far as possible, the waste and destruction which go with war.