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diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..6833f05 --- /dev/null +++ b/.gitattributes @@ -0,0 +1,3 @@ +* text=auto +*.txt text +*.md text diff --git a/29493-h.zip b/29493-h.zip Binary files differnew file mode 100644 index 0000000..eb7e36c --- /dev/null +++ b/29493-h.zip diff --git a/29493-h/29493-h.htm b/29493-h/29493-h.htm new file mode 100644 index 0000000..1c49ffb --- /dev/null +++ b/29493-h/29493-h.htm @@ -0,0 +1,1254 @@ +<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" + "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> + +<html xmlns="http://www.w3.org/1999/xhtml"> + <head> + <meta http-equiv="Content-Type" content="text/html;charset=iso-8859-1" /> + <title> + The Project Gutenberg eBook of Government Ownership of Railroads, and War Taxation, by Otto H. Kahn. + </title> + <style type="text/css"> + + p { margin-top: .75em; + text-align: justify; + margin-bottom: .75em; + } + h1,h2,h3,h4,h5,h6 { + text-align: center; /* all headings centered */ + clear: both; + } + hr { width: 33%; + margin-top: 2em; + margin-bottom: 2em; + margin-left: auto; + margin-right: auto; + clear: both; + } + + table {margin-left: auto; margin-right: auto;} + + body{margin-left: 12%; + margin-right: 12%; + } + + .pagenum { /* uncomment the next line for invisible page numbers */ + /* visibility: hidden; */ + position: absolute; + left: 92%; + font-size: smaller; + text-align: right; + } /* page numbers */ + + .blockquot{margin-left: 5%; margin-right: 10%;} + + .figcenter {margin: auto; text-align: center;} + + a:link {color:#0000ff; text-decoration:none} + a:visited {color:#6633cc; text-decoration:none} + + </style> + </head> +<body> + + +<pre> + +The Project Gutenberg EBook of Government Ownership of Railroads, and War +Taxation, by Otto H. Kahn + +This eBook is for the use of anyone anywhere at no cost and with +almost no restrictions whatsoever. You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: Government Ownership of Railroads, and War Taxation + +Author: Otto H. Kahn + +Release Date: July 22, 2009 [EBook #29493] + +Language: English + +Character set encoding: ISO-8859-1 + +*** START OF THIS PROJECT GUTENBERG EBOOK GOVERNMENT OWNERSHIP *** + + + + +Produced by Stephanie Eason and the Online Distributed +Proofreading Team at http://www.pgdp.net (This file was +produced from images generously made available by The +Internet Archive/American Libraries.) + + + + + + +</pre> + + + +<p><span class='pagenum'><a name="Page_1" id="Page_1">[Pg 1]</a></span></p> + +<h2>Government Ownership<br /> +of Railroads,<br /> +and<br /> +War Taxation</h2> + +<p> </p> +<div class="figcenter"><img src="images/dec.png" alt="decorative leaf" /></div> +<p> </p><p> </p> + +<h2>OTTO H. KAHN</h2> +<p> </p><p> </p><p> </p> + +<h4>AN ADDRESS BEFORE THE<br /> +NATIONAL INDUSTRIAL CONFERENCE BOARD<br /> +NEW YORK, OCTOBER 10, 1918</h4> +<p> </p><p> </p><p> </p> + +<p><span class='pagenum'><a name="Page_2" id="Page_2">[Pg 2]</a></span></p> +<h2>Table of Contents</h2> +<table border="0" cellpadding="5" cellspacing="5" summary="Table of Contents"> +<tr><td><strong>Government Ownership of Railroads</strong></td><td> </td><td align="right"><a href="#Page_3">3</a></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#I"> Section I</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#II">Section II</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#III">Section III</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#IV">Section IV</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#V">Section V</a></span></td></tr> +<tr><td> </td></tr> +<tr><td><strong>Punitive Paternalism in Taxation</strong></td><td> </td><td align="right"><a href="#Page_27">27</a></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#I.2"> Section I</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#II.2">Section II</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#III.2">Section III</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#IV.2">Section IV</a></span></td></tr> +<tr><td><span style="margin-left: 2em;"><a href="#V.2">Section V</a></span></td></tr></table> + + +<p> </p><p> </p><p> </p> +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_3" id="Page_3">[Pg 3]</a></span></p> +<h2><a name="I" id="I"></a>I</h2> + +<h3><i>GOVERNMENT OWNERSHIP OF RAILROADS</i></h3> + +<p>Paternalistic control, even when entirely benevolent in intent, is +generally harmful in effect. It is apt to be doubly so when, as +sometimes occurs, it is punitive in intent.</p> + +<p>The history of our railroads in the last ten years is a case in point.</p> + +<p>In their early youth our railroads were allowed to grow up like spoiled, +wilful, untamed children. They were given pretty nearly everything they +asked for, and what they were not given freely they were apt to get +somehow, anyhow. They fought amongst themselves and in doing so were +liable to do harm to persons and objects in the neighborhood. They were +overbearing and inconsiderate and did not show proper respect to their +parent, i. e., the people.</p> + +<p><span class='pagenum'><a name="Page_4" id="Page_4">[Pg 4]</a></span>But the fond parent, seeing how strong and sturdy they were and on the +whole, how hustling and effective in their work, and how, with all their +faults of temper and demeanor, they made themselves so useful around the +house that he could not really get along without them, only smiled +complacently at their occasional mischief or looked the other way. +Moreover, he was really too busy with other matters to give proper +attention to their education and upbringing.</p> + +<p>As the railroads grew towards man's estate and married and begot other +railroads, they gradually sloughed off the roughness and objectionable +ways of their early youth, and though they did not sprout wings, and +though once in a while they still did shock the community, they were +amazingly capable at their work and really rendered service of +inestimable value.</p> + +<p><span class='pagenum'><a name="Page_5" id="Page_5">[Pg 5]</a></span>But meanwhile, for various reasons and owing to sundry influences, the +father had grown testy and rather sour on them. He cut their allowance, +he restrained them in various ways, some wise, some less so, he changed +his will in their disfavor, he showed marked preference to other +children of his. And one fine day, partly because he was annoyed at the +discovery of some wrongdoing in which, despite his repeated warnings, a +few of the railroads had indulged (though the overwhelming majority were +blameless) and partly at the prompting of plausible self-seekers or +well-meaning specialists in the improvement of everybody and +everything—one fine day he lost his temper and with it his sense of +proportion. He struck blindly at the railroads, he appointed guardians +(called commissions) to whom they would have to report daily, who would +<span class='pagenum'><a name="Page_6" id="Page_6">[Pg 6]</a></span>prescribe certain rigid rules of conduct for them, who would henceforth +determine their allowance and supervise their method of spending it, +etc.</p> + +<p>And these commissions, naturally wishing to act in the spirit of the +parent who had designated them, but actually being, as guardians are +liable to be, more harsh and severe and unrelenting than he would have +been or really meant to be, put the railroads on a starvation diet and +otherwise so exercised their functions, with good intent, doubtless, in +most cases, that after a while those railroads, formerly so vigorous and +capable, became quite emaciated and several of them succumbed under the +strain of the regime imposed upon them. And then, seeing their condition +and having need, owing to special emergencies, of railroad services +which required great physical strength and endurance, one fine morning +the parent determined upon the drastic step of taking things into his +own hands. And so forth....</p> + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_7" id="Page_7">[Pg 7]</a></span></p> +<h2><a name="II" id="II"></a>II</h2> + +<p>To drop the style of story-telling: Individual enterprise has given us +what is admittedly the most efficient railroad system in the world. It +has done so whilst making our average capitalization per mile of road +less, the scale of wages higher, the average rates lower, the service +and conveniences offered to the shipper and the traveler greater than in +any other of the principal countries.</p> + +<p>It must be admitted that in the pioneer period of railroad development, +and for some years thereafter, numerous things were done, and although +generally known to be done, were tolerated by the Government and the +public, which should never have been permitted. But during the second +administration and upon the<span class='pagenum'><a name="Page_8" id="Page_8">[Pg 8]</a></span> courageous initiative of President +Roosevelt these evils and abuses were resolutely tackled and a definite +and effective stop put to most of them. Means were provided by salutary +legislation, fortified by decisions of the Supreme Court, for adequate +supervision and regulation of railroads.</p> + +<p>The railroads promptly fell in line with the countrywide summons for a +more exacting standard of business ethics. The spirit and practices of +railroad administration became standardized, so to speak, at a moral +level certainly not inferior to that of any other calling. It is true, +certain regrettable abuses and incidents of misconduct still came to +light in subsequent years, but these were sporadic instances, by no +means characteristic of railroading methods and practices in general, +condemned by the great body of those responsible for the<span class='pagenum'><a name="Page_9" id="Page_9">[Pg 9]</a></span> conduct of our +railroads, no less than by the public at large, and entirely capable of +being dealt with by the existing law, possibly amended in nonessential +features, and by the force of public opinion.</p> + +<p>Unfortunately, the law enacted under President Roosevelt's +administration was not allowed to stand for a sufficient length of time +to test its effects. The enactment of new railroad legislation in 1909, +largely shaped by Congressmen and Senators of very radical tendencies +and hostile to the railroads, and acquiesced in by President Taft with +ill-advised and opportunist complacency, established, for the first time +in America, paternalistic control over the railroads. It was an +unscientific and ill-devised statute, gravely defective in important +respects and bearing evidence of having been shaped in heat, hurry and +anger. Mr. Taft himself, it seems, has since recognized its faultiness,<span class='pagenum'><a name="Page_10" id="Page_10">[Pg 10]</a></span> +for he has repeatedly and publicly protested against the +over-regulation, the starvation and the oppression of the railroad which +were the inevitable and easy-to-be-foreseen consequences of its +enactment.</p> + +<p>The States, to extent that they had not already anticipated it, were not +slow to follow the precedent set by the Federal Government. The +resulting structure of Federal and State laws under which the railroads +were compelled to carry on their business, was little short of a +legislative monstrosity.</p> + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_11" id="Page_11">[Pg 11]</a></span></p> +<h2><a name="III" id="III"></a>III</h2> + +<p>You all know the result. The spirit of enterprise in railroading was +killed. Subjected to an obsolete and incongruous national policy, +hampered, confined, harassed by multifarious, minute, narrow, and +sometimes flatly contradictory regulations and restrictions, State and +Federal, starved as to rates in the face of steadily mounting costs of +labor and materials—that great industry began to fall away. Initiative +on the part of those in charge became chilled, the free flow of +investment capital was halted, creative ability was stopped, growth was +stifled, credit was crippled.</p> + +<p>The theory of governmental regulation and supervision was entirely +right. No fair-minded man would quarrel with that.<span class='pagenum'><a name="Page_12" id="Page_12">[Pg 12]</a></span> The railroads had +exercised great, and in certain respects undoubtedly excessive power for +a long time, and all power tends to breed abuses and requires +limitations and restraints. But the practical application of that theory +was wholly at fault and in defiance of both economic law and common +sense. It was bound to lead to a crisis.</p> + +<p>It is not the railroads that have broken down, it is our railroad +legislation and commissions which have broken down.</p> + +<p>And now the Government, in the emergency of war, probably wisely and, in +view of the prevailing circumstances, necessarily, has assumed the +operation of the railroads.</p> + +<p>The Director General of Railroads, rightly and courageously, proceeded +to do immediately that which the railroads for years had again and again +asked in vain to be permitted to do—only more so.</p> + +<p><span class='pagenum'><a name="Page_13" id="Page_13">[Pg 13]</a></span>Freight rates were raised twenty-five per cent., passenger rates in +varying degrees up to fifty per cent. Many wasteful and needless +practices heretofore compulsorily imposed were done away with.</p> + +<p>Passenger train service, for the abolition of some of which the +railroads had petitioned unsuccessfully for years, was cut to the extent +of an aggregate train mileage of over 47,000,000.</p> + +<p>The system of pooling for which since years many of the railroads had in +vain endeavored to obtain legal sanction was promptly adopted with the +natural result of greater simplicity and directness of service and of +considerable savings.</p> + +<p>The whole theory under which intelligent, effective and systematic +co-operation between the different railways had been made impossible +formerly, was thrown into the scrap heap.</p> + +<p><span class='pagenum'><a name="Page_14" id="Page_14">[Pg 14]</a></span>Incidentally, certain services and conveniences were abolished, of which +the railroad managements would never have sought to deprive the public, +and the very suggestion of the abrogation of which would have led to +indignant and quickly effective protest had it been attempted in the +days of private control.</p> + +<p>Lest this remark might be misunderstood, let me say that I have no word +of criticism against Mr. McAdoo's administration of the railroads, as +far as I have been able to observe it.</p> + +<p>I think, on the contrary, that he is entitled to great praise and that +he has handled the formidable and complex task confided to him with a +high degree of ability, fine courage, indefatigable energy, and with the +evident determination to keep the running of the railroads clear of +politics and to make them above all things effective instruments in our +war effort.</p> + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_15" id="Page_15">[Pg 15]</a></span></p> +<h2><a name="IV" id="IV"></a>IV</h2> + +<p>For a concise statement of the results accomplished elsewhere under +government ownership I would recommend you to obtain from the Public +Printer, and to read, a short pamphlet entitled "Historical Sketch of +Government Ownership of Railroads in Foreign Countries," presented to +the Joint Committee of Congress on Interstate Commerce by the great +English authority, Mr. W. M. Acworth. It will well repay you the half +hour spent in its perusal. You will learn from it that, prior to the +war, about fifty per cent. of the railways in Europe were state +railways; that in practically every case of the substitution of +government for private operation (with the exception, subject to certain +reservations, of Germany) the<span class='pagenum'><a name="Page_16" id="Page_16">[Pg 16]</a></span> service deteriorated, the discipline and +consequently the punctuality and safety of train service diminished, +politics came to be a factor in the administration and the cost of +operations increased vastly. (The net revenue, for example, of The +Western Railway of France in the worst year of private ownership was +$13,750,000, in the fourth year of government operation it fell to +$5,350,000.) He quotes the eminent French economist, Leroy-Beaulieu, as +follows:</p> + +<div class="blockquot"><p>"One may readily see how dangerous to the liberty of citizens the +extension of the industrial regime of the State would be, where the +number of functionaries would be indefinitely multiplied.... From +all points of view the experience of State railways in France is +unfavorable as was foreseen by all those who had reflected upon the +bad results given by the other industrial undertakings of the +State.... The State, above all, under an elective government, +cannot be a good commercial mana<span class='pagenum'><a name="Page_17" id="Page_17">[Pg 17]</a></span>ger.... The experience which we +have recently gained has provoked a very lively movement, not only +against acquisition of the railways by the State, but against all +extension of State industry. I hope ... that not only we, but our +neighbors also may profit by the lesson of these facts."</p></div> + +<p> </p> +<p>Mr. Acworth mentions as a characteristic indication that after years of +sad experience with governmentally owned and operated railways, the +Italian Government, just before the war, started on the new departure +(or rather returned to the old system) of granting a concession to a +private enterprise which was to take over a portion of the existing +state railway, build an extension with the aid of state subsidies, <i>and +then work on its own account both sections as one undertaking under +private management</i>.</p> + +<p>I may add, as a fact within my own knowledge, that shortly before the +outbreak of the war the Belgian Government was studying the question of +returning<span class='pagenum'><a name="Page_18" id="Page_18">[Pg 18]</a></span> its state railways to private enterprise and management.</p> + +<p>Mr. Acworth relates a resolution <i>unanimously</i> passed by the French +Senate a few years after the State had taken over certain lines, +beginning: "The deplorable situation of the State system, the insecurity +and irregularity of its workings." He gives figures demonstrating the +invariably greater efficiency, economy and superiority of service of +private management as compared to State management in countries where +these two systems are in operation side by side. He treats of the effect +of the conflicting interests, sectional and otherwise, which necessarily +come into play under government control when the question arises where +new lines are to be built and what extensions to be made of existing +lines.</p> + +<p>He asks: "Can it be expected that<span class='pagenum'><a name="Page_19" id="Page_19">[Pg 19]</a></span> they (these questions) will be +decided rightly by a minister responsible to a democratic legislature, +each member of which, naturally and rightly, makes the best case he can +for his own constituents, while he is quite ignorant, even if not +careless, of the interests, not only of his neighbor's constituency, but +of the public at large?" And he replied: "The answer is written large in +railway history.... The facts show that Parliamentary interference has +meant running the railways, not for the benefit of the people at large, +but to satisfy local and sectional or even personal interests." He +maintains that in a country governed on the Prussian principles railroad +operation and planning may be conducted by the Government with a fair +degree of success, as an executive function, but in democratic +countries, he points out that in normal times "it is the legislative +branch of the<span class='pagenum'><a name="Page_20" id="Page_20">[Pg 20]</a></span> government which not only decides policy but dictates +always in main outline, often down to the detail of a particular +appointment or a special rate, how the policy shall be carried out."</p> + +<p>For corroboration of this latter statement we need only turn to the +array of statutes in our own States, which not only fix certain railroad +rates by legislative enactment, but deal with such details as the repair +of equipment, the minimum movement of freight cars, the kind of +headlights to be used on locomotives, the safety appliances to be +installed, etc.—and all this in the face of the fact that these States +have Public Service Commissions whose function it is to supervise and +regulate the railroads.</p> + +<p>The reason why the system of state railways in Germany was largely free +from most, though by no means all, of the unfavorable features and +results<span class='pagenum'><a name="Page_21" id="Page_21">[Pg 21]</a></span> produced by government ownership and operation elsewhere, is +inherent in the habits and conditions created in that country by +generations of autocratic and bureaucratic government. But Mr. Acworth +points out very acutely that while German manufacturers, merchants, +financiers, physicians, scientists, etc., "have taught the world a good +deal in the twenty years preceding the war, German railway men have +taught the world nothing." And he asks: "Why is this?" His answer is: +"Because they were state officials, and, as such, bureaucrats and +routiniers, and without incentive to invent and progress themselves or +to encourage or welcome or even accept inventions and progress.</p> + +<p>It is the private railways of England and France, and particularly of +America, which have led the world in improvements and new ideas, whilst +it would be<span class='pagenum'><a name="Page_22" id="Page_22">[Pg 22]</a></span> difficult to mention a single reform or invention for which +the world is indebted to the state railways of Germany."</p> + +<p>The question of the disposition to be made of the railroads after the +war is one of the most important and far-reaching of the post-bellum +questions which will confront us. It will be one of the great test +questions, the answer to which will determine whither we are bound.</p> + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_23" id="Page_23">[Pg 23]</a></span></p> +<h2><a name="V" id="V"></a>V</h2> + +<p>And, it seems to me, one of the duties of business men is to inform +themselves accurately and carefully on this subject, so as to be ready +to take their due and legitimate part in shaping public opinion, and +indeed to start on that task now, before public opinion, one-sidedly +informed and fed of set purpose with adroitly colored statements of half +truths, crystallizes into definite judgment.</p> + +<p>My concern is not for the stock and bond holders. They will, I have no +doubt, be properly and fairly taken care of in case the Government were +definitely to acquire the railroads. Indeed, it may well be, that from +the standpoint of their selfish interests, a reasonable guarantee or +other fixed compensation by the Govern<span class='pagenum'><a name="Page_24" id="Page_24">[Pg 24]</a></span>ment would be preferable to the +financial risks and uncertainties under private railroad operation in +the new and untried era which we shall enter after the war. I know, +indeed, that not a few large holders of railroad securities take this +view and therefore have this preference.</p> + +<p>Nor do I speak as one who believes that the railroad situation can be +restored just as it was before the war. The function, responsibility and +obligation of the railroads as a whole are primarily to serve the +interests and economic requirements of the nation. The disjointed +operation of the railroads, each one considering merely its own system +(and being under the law practically prevented from doing otherwise) +will, I am sure, not be permitted again.</p> + +<p>The relinquishment of certain features of our existing legislation, the +addition of others, a more clearly defined and pur<span class='pagenum'><a name="Page_25" id="Page_25">[Pg 25]</a></span>poseful relationship +of the nation to the railroads, involving amongst other things possibly +some financial interest of the Government in the results of railroad +operations, are certain to come from our experiences under Government +operation and from a fresh study of the subject, in case the railroads, +as I hope, are returned to private management.</p> + +<p>Personally I believe that in its underlying principle, the system +gradually evolved in America but never as yet given a fair chance for +adequate translation into practical execution, is an almost ideal one. +If preserves for the country, in the conduct of its railroads, the +inestimable advantage of private initiative, efficiency, resourcefulness +and financial responsibility, while at the same time through +governmental regulation and supervision it emphasizes the semi-public +character and duties of railroads, pro<span class='pagenum'><a name="Page_26" id="Page_26">[Pg 26]</a></span>tects the community's rights and +just claims and guards against those evils and excesses of unrestrained +individualism which experience has indicated.</p> + +<p>It is, I am profoundly convinced, a far better system than government +ownership of railroads, which, wherever tested, has proved its +inferiority except, to an extent, in the Germany on which the Prussian +Junker planted his heel and of which he made a scourge and a horrible +example to the world; and the very reasons which have made state +railways measurably successful in <i>that</i> Germany are the reasons which +would make government ownership and operation in America a menace to our +free institutions, a detriment to our racial characteristics and a grave +economic disservice.</p> + + + +<hr style="width: 65%;" /> +<p><span class='pagenum'><a name="Page_27" id="Page_27">[Pg 27]</a></span></p> +<h2><a name="I.2" id="I.2"></a>I</h2> + +<h3><i>PUNITIVE PATERNALISM IN TAXATION</i></h3> + +<p>I have spoken of the treatment of our railroads in the past ten years as +"punitive paternalism." In some respects this same term may be applied +to our existing and proposed war taxation.</p> + +<p>Of course, the burden of meeting the cost of the war must be laid +according to capacity to bear it. It would be crass selfishness to wish +it laid otherwise and fatuous folly to endeavor to have it laid +otherwise.</p> + +<p>We all agree that the principal single sources of war revenue must +necessarily be business and accumulated capital, but these sources +should not be used excessively and to the exclusion of others.<span class='pagenum'><a name="Page_28" id="Page_28">[Pg 28]</a></span> The +structure of taxation should be harmonious and symmetrical. No part of +it should be so planned as to produce an unscientific and dangerous +strain.</p> + +<p>The science of taxation consists in raising the largest obtainable +amount of needed revenue in the most equitable manner, with the least +economic disturbance and, as far as possible, with the effect of +promoting thrift.</p> + +<p>The House Bill proposes to raise from income, excess or war profit and +inheritance taxes $5,686,000,000 out of an estimated total of +$8,182,000,000. In other words, almost seventy per cent. of our +stupendous total taxation is to come from these few sources. It seems to +me that the effect and meaning of this is to penalize capital, to fine +business success, as well as thrift and self-denial practised in the +past, thereby tending to discourage saving.</p> + +<p><span class='pagenum'><a name="Page_29" id="Page_29">[Pg 29]</a></span>The House Bill fails, on the other hand, to impose certain taxes the +effect of which is to promote saving. Intentionally or not, yet +effectively, it penalizes certain callings and sections of the country +and favors others.</p> + +<p>Let me say at the outset that my criticism does not refer to the +principle of an eighty per cent. war profits tax. Indeed, I have from +the very beginning advocated a high tax on war profits. To permit +individuals and corporations to enrich themselves out of the dreadful +calamity of war is repugnant to one's sense of justice and gravely +detrimental to the war morale of the people.</p> + +<p>Strictly from the economic point of view, the eighty per cent. war +profits tax is not entirely free from objection. Whether England did +wisely on the whole in fixing the tax at quite so high a rate is a +debatable point, and is being questioned<span class='pagenum'><a name="Page_30" id="Page_30">[Pg 30]</a></span> by some economists of high +standing in that country, not from the point of view of tenderness for +the beneficiaries from war profits, but from that of national advantage.</p> + +<p>Moreover, conditions in America and England are not quite identical and +I believe it to be a justifiable statement that British industry is +better able to stand so high a tax than American industry, for reasons +inherent in the respective business situations and methods.</p> + +<p>However, everything considered, circumstances being what they are, I +believe the enactment of the proposed eighty per cent. war profits tax +to be expedient, provided that, like in England, the standard of +comparison with pre-war profits is fairly fixed and due and fair +allowance made, in determining taxable profits, for such bona fide items +of depreciation and other write-offs as a reasonably conservative +business<span class='pagenum'><a name="Page_31" id="Page_31">[Pg 31]</a></span> man would ordinarily take into account before arriving at net +profits.</p> + +<p>Amongst the principles of correct and effective taxation, which are +axiomatic, are these:</p> + +<div class="blockquot"><p>1. No tax should be so burdensome as to extinguish or seriously +jeopardize the source from which it derives its productivity. In +other words, do not be so eager to secure every possible golden +egg, that you kill the goose which lays them.</p> + +<p>2. In war time, when the practice of thrift is of more vital +importance than ever to the nation, one of the most valuable +by-products which taxation should aim to secure is to compel +reduction in individual expenditures.</p> + +<p>3. Taxation should be as widely diffused as possible, at however +small a rate the minimum contribution may be fixed, if only to give +the greatest possible number of citizens an interest to watch +governmental expenditure, and an incentive to curb governmental +extravagance.</p></div> + +<p> </p> +<p>It may safely be asserted that our war taxation runs counter to every +one of these tested principles.</p> + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_32" id="Page_32">[Pg 32]</a></span></p> +<h2><a name="II.2" id="II.2"></a>II</h2> + +<p>The characteristic difference between the House Bill and the revenue +measures of Great Britain (I am not referring to those of France and +Germany, because they are incomparably less drastic than ours or Great +Britain's) is, first, that we do not resort to consumption taxes and +only to a limited degree to general stamp taxes, and, secondly, that our +income tax on small and moderate incomes is far smaller, on large +incomes somewhat smaller and on the largest incomes a great deal +heavier.</p> + +<p>The House rate of taxation on incomes up to, say, $5,000, averages only +one-fifth of what it is in England; the House rate of taxation on +maximum incomes is approximately fifty per cent. higher than<span class='pagenum'><a name="Page_33" id="Page_33">[Pg 33]</a></span> it is in +England. Moreover, married men with incomes of less than $2,000 are +entirely exempted from taxation in this country. In England all incomes +from $650 on are subject to taxation.</p> + +<p>I believe, on the whole, our system of gradation is juster than the +English system, but I think we are going to an extreme at both ends. And +it must be borne in mind that our actual taxation of high incomes is not +even measured by the rates fixed in the House Bill, because to them must +be added State and municipal taxes. There must further be added what to +all intents and purposes is, though a voluntary act, yet in effect for +all right-minded citizens tantamount to taxation, namely, a man's +habitual expenditures for charity and his contributions to the Red Cross +and other war relief works.</p> + +<p>The sentimental and thereby the actual<span class='pagenum'><a name="Page_34" id="Page_34">[Pg 34]</a></span> effect of extreme income +taxation is not confined to the relatively small number of people in +possession of very large incomes directly affected by it. The +apprehension caused by the contemplation of an excessively high ratio of +taxation is contagious and apt to react unfavorably on constructive +activity.</p> + +<p>It is highly important that taxation should not reach a point at which +business would be crippled, cash resources unduly curtailed and the +incentive to maximum effort and enterprise destroyed. And it should not +be forgotten that both theoretically and actually the spending of money +by the Government cannot and does not have the same effect on the +prosperity of the country as productive use of his funds by the +individual.</p> + +<p>If all the European nations have stopped during the war at a certain +maximum limit of individual income and inheritance<span class='pagenum'><a name="Page_35" id="Page_35">[Pg 35]</a></span> taxation, even after +four years of war, the reason is surely not that they love rich men more +than we do or that they are all less democratic than we are. The reason +is that these nations, including the financially wisest and most +experienced, recognize the unwisdom and economic ill effect under +existing conditions of going beyond that limit.</p> + + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_36" id="Page_36">[Pg 36]</a></span></p> +<h2><a name="III.2" id="III.2"></a>III</h2> + + +<p>The same observations hold good in the case of our proposed inheritance +taxation (maximum proposed here forty per cent., as against twenty per +cent. maximum in England and much less in all other countries). And +again there are to be added to Federal taxation the rates of state +legacy and inheritance taxation.</p> + +<p>Inheritance taxation, moreover, has that inevitable element of +unfairness that it leaves entirely untouched the wastrel who never laid +by a cent in his life, and penalizes him who practiced industry, +self-denial and thrift. And it cannot be too often said that the +encouragement of thrift and enterprise is of the utmost desirability +under the circumstances in which the world finds itself, because it is<span class='pagenum'><a name="Page_37" id="Page_37">[Pg 37]</a></span> +only by the intensified creation of wealth through savings and +production that the world can be re-established on an even keel after +the ravages and the waste of the war.</p> + +<p>Furthermore, business men, of necessity, have only a limited amount of +their capital in liquid or quickly realizable form, and through the +absorption by the inheritance tax of a large proportion of such assets, +many a business may find itself with insufficient current capital to +continue operations after the death of a partner. This effect is not +only unfair in itself, but is made doubly so, as being a discrimination +in favor of corporations as against private business men and business +houses, inasmuch as corporations are, of course, not amenable to +inheritance taxation.</p> + +<p>Whilst in the case of the rich we discourage saving by the very hugeness +of our taxation, or make it impossible, we<span class='pagenum'><a name="Page_38" id="Page_38">[Pg 38]</a></span> fail to use the instrument +of taxation to promote saving in the case of those with moderate +incomes. And the enormous preponderance of saving which could and should +be effected does not lie within the possibilities of the relatively +small number of people with large means, but of the huge number of +people with moderate incomes.</p> + +<p>Moreover, while the rich, in consequence of taxation, limitation of +profits, etc., have become less able to spend freely since our entrance +into the war, workingmen and farmers, through increased wages, steadier +employment and higher prices of crops, respectively, have become able to +spend more freely.</p> + +<p>Workingmen are in receipt of wages never approached in pre-war times, +many of them making incomes a good deal higher than the average +professional man, while the profits of business, generally speaking, are +rather on a declining scale<span class='pagenum'><a name="Page_39" id="Page_39">[Pg 39]</a></span> and certain branches of business have been +brought virtually or even completely to a standstill.</p> + +<p>Of our total national income, conservatively estimated at, say, +$40,000,000,000 for the last year before our entrance into the war, i. e., +the year 1916, it is safe to say that not more than $2,000,000,000 +went to those with incomes of, say, $15,000 and above, whilst +$38,000,000,000 went to those with lower incomes.</p> + +<p>A carefully compiled statement issued by the Bankers Trust Company of +New York estimates the total individual incomes of the nation for the +fiscal year ending June 30, 1919, at about $53,000,000,000, and +calculates that families with incomes of $15,000 or less receive +$48,250,000 of that total; or, applying the calculation to families with +incomes of $5,000 or less, it is found that they receive $46,000,000,000 +of that total.</p> + + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_40" id="Page_40">[Pg 40]</a></span></p> +<h2><a name="IV.2" id="IV.2"></a>IV</h2> + + +<p>Whilst the House Bill imposes luxury and semi-luxury taxes, it fails—as +I have mentioned before—to resort to consumption taxes of a general +kind—a deliberate but, in my opinion, unwarrantable omission.</p> + +<p>My advocacy of consumption and similar taxes, such as stamp taxes of +many kinds, is not actuated by any desire to relieve those with large +incomes from the maximum of contribution which may wisely and fairly be +imposed on them. I advocate consumption and general stamp taxes—such as +every other belligerent country without exception has found it well to +impose—because of the well attested fact that while productive of very +large revenues in the aggregate, they<span class='pagenum'><a name="Page_41" id="Page_41">[Pg 41]</a></span> are easily borne, causing no +strain or dislocation, and automatically collected; and because of the +further fact that they tend to induce economy than which nothing is more +important at this time and which, as far as I can observe, is not being +practised by the rank and file of our people to a degree comparable to +what it is in England and France.</p> + +<p>The tendency of the House Bill is to rely mostly on heavy taxation—in +some respects unprecedentedly heavy—of a relatively limited selection +of items. I am—as I have already said—in favor of the highest possible +war profits tax and of at least as high a rate of income and inheritance +taxation during the war as exist in any other country. But apart from +these and a few other items which can naturally support very heavy +taxation, such, for instance, as cigars and tobacco, I believe that the +maximum of<span class='pagenum'><a name="Page_42" id="Page_42">[Pg 42]</a></span> revenue and the minimum of economic disadvantage and +dislocation can be secured not by the very heavy taxation of a +relatively limited selection, but by comparatively light taxation +distributed over a vast number of items. I believe such taxes would be +productive enough to make good the impending revenue losses from +Prohibition.</p> + +<p>I think, for instance, the imposition of a tax of one per cent. on every +single purchase exceeding, say, two dollars (the tax to be borne by the +purchaser, not by the seller) would be productive of a large amount of +revenue and be harmful to none. A similar tax was imposed in the course +of the Civil War and appears to have functioned so well and met with +such ready acceptance that it was not repealed until several years after +the close of that war.</p> + +<p>There is apparently small limit to the<span class='pagenum'><a name="Page_43" id="Page_43">[Pg 43]</a></span> zeal of many politicians and +others when it is a question of taxing business and business men, +especially those guilty of success. We are, I believe, justified in +inquiring to what extent there is a relation between this tendency and +political considerations which ought to be remote from the treatment of +economic subjects such as taxation.</p> + +<p>Let us take, as an instance, the case of the farmer. I do not pretend to +judge whether in these war times the farmers of the country are bearing +an equitable share of taxation in proportion to other callings or not. I +certainly recognize that they are entitled to be dealt with liberally, +even generously, for I know the rigors of the farmers' life, the ups and +downs of their industry's productivity, and fully appreciate that their +work lies at the very basis of national existence. Everything that can +fairly make for the con<span class='pagenum'><a name="Page_44" id="Page_44">[Pg 44]</a></span>tentment, well being and prosperity of the +farmer is to be wholeheartedly welcomed and promoted.</p> + +<p>Yet, we cannot avoid noticing that the average value of farm lands in +this country is estimated to have increased between 1900 and 1918 more +than 200 per cent., that the value of farm products has been vastly +enhanced, but that according to the latest published details of income +tax returns, the farmer contributes but a very small percentage to the +total income tax collected. Of twenty-two selected occupations the +farmers' class contributes the least in the aggregate, although it is +numerically the largest class in the country.</p> + +<p>Let it be clearly understood that I have not the remotest thought of +suggesting "tax dodging" on the part of the farmers. I know well how +fully they are doing their part towards winning the war, and am<span class='pagenum'><a name="Page_45" id="Page_45">[Pg 45]</a></span> +entirely certain that they are just as ready to carry patriotically +their due share of the financial cost of achieving victory as the +splendid young fellows taken from the farms, many of whom I met in +Europe, have been ready to bear their full share of the cost in life and +limb of achieving victory.</p> + +<p>The point of my question is not the action and attitude of the farmer. +But here is a great industry exempt from the excess profit and war +profit tax and apparently not effectively reached by the income tax, +which is entirely natural, because in this case the income tax can +neither be retained at the source nor are the large body of the farmers, +many of whom do not keep and cannot be expected to keep books, in a +position to determine their taxable income.</p> + +<p>Is it conceivable that the politicians who are so rigorous in their +watchfulness<span class='pagenum'><a name="Page_46" id="Page_46">[Pg 46]</a></span> that no business profit shall escape the tax-gatherer, +would not devise means to lay an effective tax if the same situation +existed in a business industry?</p> + +<p>The point of my question is, taking the case of the farmers as an +instance, whether in framing our system and method of taxation, the +steady aim has been to ascertain impartially what is equitable and +wisely productive of revenue and to act accordingly, or whether +considerations of the anticipated effect of taxation measures upon the +fortunes of individual legislators or of their party, have been +permitted unduly to sway their deliberations and conclusions.</p> + + + +<hr style="width: 25%;" /> +<p><span class='pagenum'><a name="Page_47" id="Page_47">[Pg 47]</a></span></p> +<h2><a name="V.2" id="V.2"></a>V</h2> + + +<p>Turning aside from this interrogation mark, I will only add, in +returning to our general scheme of taxation, that there are numerous +taxes of a tried and tested and socially just kind—some of them applied +in this country during the Civil War and the Spanish War—which would +raise a very large amount of revenue and yet would be little felt by the +individual. Some of them have been suggested to our legislators, but +have not found favor in their eyes. Their non-imposition, taken together +with the entire character of our taxation program, the burden of which +falls to an enormously preponderant extent upon the mainly industrial +States and the business classes, not only proportionately, which, of +course, is just,<span class='pagenum'><a name="Page_48" id="Page_48">[Pg 48]</a></span> but discriminatingly, which is not just, seems hardly +explainable except on the theory that the intention of those who were +primarily in charge of framing that program was punitive and corrective +and that they were influenced—though I am willing to believe +unconsciously—by sectional and vocational partiality.</p> + +<p>The fact that the revenue bill was passed in the House by a unanimous +vote does not mean, of course, that it met with unanimous approval on +the part of Congressmen. The debate shows this. The bill, as reported +after months of labor, either had to be approved practically as it stood +or rejected and returned to the Committee. It is not possible for a body +of 400 men to deal in a detailed manner with a subject so complex as a +taxation measure of the magnitude of the present one.</p> + +<p>The bill could not be made over or<span class='pagenum'><a name="Page_49" id="Page_49">[Pg 49]</a></span> materially amended in the House. In +view of the urgency of the emergency and the vital need to raise the sum +asked for by the Treasury, no patriotic course was open to the House but +to accept the bill and pass it up to the Senate.</p> + +<p>I know it is not popular to say things in criticism of war burdens of a +financial nature. One's motives are liable to be misunderstood or +misinterpreted and he is very apt to have it scornfully pointed out to +him how small relatively is the sacrifice asked of him, compared with +the sacrifice of position, prospects, and life itself, so willingly and +proudly offered by the young manhood of the land.</p> + +<p>It is a natural and effective rejoinder, but it is not a sound or +logical one. Heaven knows, my heart goes out to our splendid boys, and +my admiration for their conduct and achievements and my reverence for +the spirit which animates<span class='pagenum'><a name="Page_50" id="Page_50">[Pg 50]</a></span> them knows no bounds. But I am acquainted +with hundreds of business men who bemoan their gray hair and their +responsibilities, which prevent them from having the privilege of +fighting our foe arms in hand.</p> + +<p>And I know no American business man worthy of the name, who would not +willingly give his life and all his possessions if the country's safety +and honor required that sacrifice.</p> + +<p> </p><p> </p> + +<hr style="width: 65%;" /> +<p>Transcriber's Notes:<br /> +<br /> +The Table of Contents was generated as an aid for the reader.<br /> +<br /> +Additional spacing after the block quotes is intentional to indicate both the end of a quotation and the beginning of a new paragraph as presented in the original text.</p> + + + + + + + + +<pre> + + + + + +End of the Project Gutenberg EBook of Government Ownership of Railroads, and +War Taxation, by Otto H. 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You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: Government Ownership of Railroads, and War Taxation + +Author: Otto H. Kahn + +Release Date: July 22, 2009 [EBook #29493] + +Language: English + +Character set encoding: ASCII + +*** START OF THIS PROJECT GUTENBERG EBOOK GOVERNMENT OWNERSHIP *** + + + + +Produced by Stephanie Eason and the Online Distributed +Proofreading Team at http://www.pgdp.net (This file was +produced from images generously made available by The +Internet Archive/American Libraries.) + + + + + + + + + + Government Ownership + of Railroads, + and + War Taxation + + OTTO H. KAHN + + AN ADDRESS BEFORE THE + NATIONAL INDUSTRIAL CONFERENCE BOARD + NEW YORK, OCTOBER 10, 1918 + + + + +I + +_GOVERNMENT OWNERSHIP OF RAILROADS_ + + +Paternalistic control, even when entirely benevolent in intent, is +generally harmful in effect. It is apt to be doubly so when, as +sometimes occurs, it is punitive in intent. + +The history of our railroads in the last ten years is a case in point. + +In their early youth our railroads were allowed to grow up like spoiled, +wilful, untamed children. They were given pretty nearly everything they +asked for, and what they were not given freely they were apt to get +somehow, anyhow. They fought amongst themselves and in doing so were +liable to do harm to persons and objects in the neighborhood. They were +overbearing and inconsiderate and did not show proper respect to their +parent, i. e., the people. + +But the fond parent, seeing how strong and sturdy they were and on the +whole, how hustling and effective in their work, and how, with all their +faults of temper and demeanor, they made themselves so useful around the +house that he could not really get along without them, only smiled +complacently at their occasional mischief or looked the other way. +Moreover, he was really too busy with other matters to give proper +attention to their education and upbringing. + +As the railroads grew towards man's estate and married and begot other +railroads, they gradually sloughed off the roughness and objectionable +ways of their early youth, and though they did not sprout wings, and +though once in a while they still did shock the community, they were +amazingly capable at their work and really rendered service of +inestimable value. + +But meanwhile, for various reasons and owing to sundry influences, the +father had grown testy and rather sour on them. He cut their allowance, +he restrained them in various ways, some wise, some less so, he changed +his will in their disfavor, he showed marked preference to other +children of his. And one fine day, partly because he was annoyed at the +discovery of some wrongdoing in which, despite his repeated warnings, a +few of the railroads had indulged (though the overwhelming majority were +blameless) and partly at the prompting of plausible self-seekers or +well-meaning specialists in the improvement of everybody and +everything--one fine day he lost his temper and with it his sense of +proportion. He struck blindly at the railroads, he appointed guardians +(called commissions) to whom they would have to report daily, who would +prescribe certain rigid rules of conduct for them, who would henceforth +determine their allowance and supervise their method of spending it, +etc. + +And these commissions, naturally wishing to act in the spirit of the +parent who had designated them, but actually being, as guardians are +liable to be, more harsh and severe and unrelenting than he would have +been or really meant to be, put the railroads on a starvation diet and +otherwise so exercised their functions, with good intent, doubtless, in +most cases, that after a while those railroads, formerly so vigorous and +capable, became quite emaciated and several of them succumbed under the +strain of the regime imposed upon them. And then, seeing their condition +and having need, owing to special emergencies, of railroad services +which required great physical strength and endurance, one fine morning +the parent determined upon the drastic step of taking things into his +own hands. And so forth.... + + + + +II + + +To drop the style of story-telling: Individual enterprise has given us +what is admittedly the most efficient railroad system in the world. It +has done so whilst making our average capitalization per mile of road +less, the scale of wages higher, the average rates lower, the service +and conveniences offered to the shipper and the traveler greater than in +any other of the principal countries. + +It must be admitted that in the pioneer period of railroad development, +and for some years thereafter, numerous things were done, and although +generally known to be done, were tolerated by the Government and the +public, which should never have been permitted. But during the second +administration and upon the courageous initiative of President +Roosevelt these evils and abuses were resolutely tackled and a definite +and effective stop put to most of them. Means were provided by salutary +legislation, fortified by decisions of the Supreme Court, for adequate +supervision and regulation of railroads. + +The railroads promptly fell in line with the countrywide summons for a +more exacting standard of business ethics. The spirit and practices of +railroad administration became standardized, so to speak, at a moral +level certainly not inferior to that of any other calling. It is true, +certain regrettable abuses and incidents of misconduct still came to +light in subsequent years, but these were sporadic instances, by no +means characteristic of railroading methods and practices in general, +condemned by the great body of those responsible for the conduct of our +railroads, no less than by the public at large, and entirely capable of +being dealt with by the existing law, possibly amended in nonessential +features, and by the force of public opinion. + +Unfortunately, the law enacted under President Roosevelt's +administration was not allowed to stand for a sufficient length of time +to test its effects. The enactment of new railroad legislation in 1909, +largely shaped by Congressmen and Senators of very radical tendencies +and hostile to the railroads, and acquiesced in by President Taft with +ill-advised and opportunist complacency, established, for the first time +in America, paternalistic control over the railroads. It was an +unscientific and ill-devised statute, gravely defective in important +respects and bearing evidence of having been shaped in heat, hurry and +anger. Mr. Taft himself, it seems, has since recognized its faultiness, +for he has repeatedly and publicly protested against the +over-regulation, the starvation and the oppression of the railroad which +were the inevitable and easy-to-be-foreseen consequences of its +enactment. + +The States, to extent that they had not already anticipated it, were not +slow to follow the precedent set by the Federal Government. The +resulting structure of Federal and State laws under which the railroads +were compelled to carry on their business, was little short of a +legislative monstrosity. + + + + +III + + +You all know the result. The spirit of enterprise in railroading was +killed. Subjected to an obsolete and incongruous national policy, +hampered, confined, harassed by multifarious, minute, narrow, and +sometimes flatly contradictory regulations and restrictions, State and +Federal, starved as to rates in the face of steadily mounting costs of +labor and materials--that great industry began to fall away. Initiative +on the part of those in charge became chilled, the free flow of +investment capital was halted, creative ability was stopped, growth was +stifled, credit was crippled. + +The theory of governmental regulation and supervision was entirely +right. No fair-minded man would quarrel with that. The railroads had +exercised great, and in certain respects undoubtedly excessive power for +a long time, and all power tends to breed abuses and requires +limitations and restraints. But the practical application of that theory +was wholly at fault and in defiance of both economic law and common +sense. It was bound to lead to a crisis. + +It is not the railroads that have broken down, it is our railroad +legislation and commissions which have broken down. + +And now the Government, in the emergency of war, probably wisely and, in +view of the prevailing circumstances, necessarily, has assumed the +operation of the railroads. + +The Director General of Railroads, rightly and courageously, proceeded +to do immediately that which the railroads for years had again and again +asked in vain to be permitted to do--only more so. + +Freight rates were raised twenty-five per cent., passenger rates in +varying degrees up to fifty per cent. Many wasteful and needless +practices heretofore compulsorily imposed were done away with. + +Passenger train service, for the abolition of some of which the +railroads had petitioned unsuccessfully for years, was cut to the extent +of an aggregate train mileage of over 47,000,000. + +The system of pooling for which since years many of the railroads had in +vain endeavored to obtain legal sanction was promptly adopted with the +natural result of greater simplicity and directness of service and of +considerable savings. + +The whole theory under which intelligent, effective and systematic +co-operation between the different railways had been made impossible +formerly, was thrown into the scrap heap. + +Incidentally, certain services and conveniences were abolished, of which +the railroad managements would never have sought to deprive the public, +and the very suggestion of the abrogation of which would have led to +indignant and quickly effective protest had it been attempted in the +days of private control. + +Lest this remark might be misunderstood, let me say that I have no word +of criticism against Mr. McAdoo's administration of the railroads, as +far as I have been able to observe it. + +I think, on the contrary, that he is entitled to great praise and that +he has handled the formidable and complex task confided to him with a +high degree of ability, fine courage, indefatigable energy, and with the +evident determination to keep the running of the railroads clear of +politics and to make them above all things effective instruments in our +war effort. + + + + +IV + + +For a concise statement of the results accomplished elsewhere under +government ownership I would recommend you to obtain from the Public +Printer, and to read, a short pamphlet entitled "Historical Sketch of +Government Ownership of Railroads in Foreign Countries," presented to +the Joint Committee of Congress on Interstate Commerce by the great +English authority, Mr. W. M. Acworth. It will well repay you the half +hour spent in its perusal. You will learn from it that, prior to the +war, about fifty per cent. of the railways in Europe were state +railways; that in practically every case of the substitution of +government for private operation (with the exception, subject to certain +reservations, of Germany) the service deteriorated, the discipline and +consequently the punctuality and safety of train service diminished, +politics came to be a factor in the administration and the cost of +operations increased vastly. (The net revenue, for example, of The +Western Railway of France in the worst year of private ownership was +$13,750,000, in the fourth year of government operation it fell to +$5,350,000.) He quotes the eminent French economist, Leroy-Beaulieu, as +follows: + + "One may readily see how dangerous to the liberty of citizens the + extension of the industrial regime of the State would be, where the + number of functionaries would be indefinitely multiplied.... From + all points of view the experience of State railways in France is + unfavorable as was foreseen by all those who had reflected upon the + bad results given by the other industrial undertakings of the + State.... The State, above all, under an elective government, + cannot be a good commercial manager.... The experience which we + have recently gained has provoked a very lively movement, not only + against acquisition of the railways by the State, but against all + extension of State industry. I hope ... that not only we, but our + neighbors also may profit by the lesson of these facts." + + +Mr. Acworth mentions as a characteristic indication that after years of +sad experience with governmentally owned and operated railways, the +Italian Government, just before the war, started on the new departure +(or rather returned to the old system) of granting a concession to a +private enterprise which was to take over a portion of the existing +state railway, build an extension with the aid of state subsidies, _and +then work on its own account both sections as one undertaking under +private management_. + +I may add, as a fact within my own knowledge, that shortly before the +outbreak of the war the Belgian Government was studying the question of +returning its state railways to private enterprise and management. + +Mr. Acworth relates a resolution _unanimously_ passed by the French +Senate a few years after the State had taken over certain lines, +beginning: "The deplorable situation of the State system, the insecurity +and irregularity of its workings." He gives figures demonstrating the +invariably greater efficiency, economy and superiority of service of +private management as compared to State management in countries where +these two systems are in operation side by side. He treats of the effect +of the conflicting interests, sectional and otherwise, which necessarily +come into play under government control when the question arises where +new lines are to be built and what extensions to be made of existing +lines. + +He asks: "Can it be expected that they (these questions) will be +decided rightly by a minister responsible to a democratic legislature, +each member of which, naturally and rightly, makes the best case he can +for his own constituents, while he is quite ignorant, even if not +careless, of the interests, not only of his neighbor's constituency, but +of the public at large?" And he replied: "The answer is written large in +railway history.... The facts show that Parliamentary interference has +meant running the railways, not for the benefit of the people at large, +but to satisfy local and sectional or even personal interests." He +maintains that in a country governed on the Prussian principles railroad +operation and planning may be conducted by the Government with a fair +degree of success, as an executive function, but in democratic +countries, he points out that in normal times "it is the legislative +branch of the government which not only decides policy but dictates +always in main outline, often down to the detail of a particular +appointment or a special rate, how the policy shall be carried out." + +For corroboration of this latter statement we need only turn to the +array of statutes in our own States, which not only fix certain railroad +rates by legislative enactment, but deal with such details as the repair +of equipment, the minimum movement of freight cars, the kind of +headlights to be used on locomotives, the safety appliances to be +installed, etc.--and all this in the face of the fact that these States +have Public Service Commissions whose function it is to supervise and +regulate the railroads. + +The reason why the system of state railways in Germany was largely free +from most, though by no means all, of the unfavorable features and +results produced by government ownership and operation elsewhere, is +inherent in the habits and conditions created in that country by +generations of autocratic and bureaucratic government. But Mr. Acworth +points out very acutely that while German manufacturers, merchants, +financiers, physicians, scientists, etc., "have taught the world a good +deal in the twenty years preceding the war, German railway men have +taught the world nothing." And he asks: "Why is this?" His answer is: +"Because they were state officials, and, as such, bureaucrats and +routiniers, and without incentive to invent and progress themselves or +to encourage or welcome or even accept inventions and progress. + +It is the private railways of England and France, and particularly of +America, which have led the world in improvements and new ideas, whilst +it would be difficult to mention a single reform or invention for which +the world is indebted to the state railways of Germany." + +The question of the disposition to be made of the railroads after the +war is one of the most important and far-reaching of the post-bellum +questions which will confront us. It will be one of the great test +questions, the answer to which will determine whither we are bound. + + + + +V + + +And, it seems to me, one of the duties of business men is to inform +themselves accurately and carefully on this subject, so as to be ready +to take their due and legitimate part in shaping public opinion, and +indeed to start on that task now, before public opinion, one-sidedly +informed and fed of set purpose with adroitly colored statements of half +truths, crystallizes into definite judgment. + +My concern is not for the stock and bond holders. They will, I have no +doubt, be properly and fairly taken care of in case the Government were +definitely to acquire the railroads. Indeed, it may well be, that from +the standpoint of their selfish interests, a reasonable guarantee or +other fixed compensation by the Government would be preferable to the +financial risks and uncertainties under private railroad operation in +the new and untried era which we shall enter after the war. I know, +indeed, that not a few large holders of railroad securities take this +view and therefore have this preference. + +Nor do I speak as one who believes that the railroad situation can be +restored just as it was before the war. The function, responsibility and +obligation of the railroads as a whole are primarily to serve the +interests and economic requirements of the nation. The disjointed +operation of the railroads, each one considering merely its own system +(and being under the law practically prevented from doing otherwise) +will, I am sure, not be permitted again. + +The relinquishment of certain features of our existing legislation, the +addition of others, a more clearly defined and purposeful relationship +of the nation to the railroads, involving amongst other things possibly +some financial interest of the Government in the results of railroad +operations, are certain to come from our experiences under Government +operation and from a fresh study of the subject, in case the railroads, +as I hope, are returned to private management. + +Personally I believe that in its underlying principle, the system +gradually evolved in America but never as yet given a fair chance for +adequate translation into practical execution, is an almost ideal one. +If preserves for the country, in the conduct of its railroads, the +inestimable advantage of private initiative, efficiency, resourcefulness +and financial responsibility, while at the same time through +governmental regulation and supervision it emphasizes the semi-public +character and duties of railroads, protects the community's rights and +just claims and guards against those evils and excesses of unrestrained +individualism which experience has indicated. + +It is, I am profoundly convinced, a far better system than government +ownership of railroads, which, wherever tested, has proved its +inferiority except, to an extent, in the Germany on which the Prussian +Junker planted his heel and of which he made a scourge and a horrible +example to the world; and the very reasons which have made state +railways measurably successful in _that_ Germany are the reasons which +would make government ownership and operation in America a menace to our +free institutions, a detriment to our racial characteristics and a grave +economic disservice. + + + + +I + +_PUNITIVE PATERNALISM IN TAXATION_ + + +I have spoken of the treatment of our railroads in the past ten years as +"punitive paternalism." In some respects this same term may be applied +to our existing and proposed war taxation. + +Of course, the burden of meeting the cost of the war must be laid +according to capacity to bear it. It would be crass selfishness to wish +it laid otherwise and fatuous folly to endeavor to have it laid +otherwise. + +We all agree that the principal single sources of war revenue must +necessarily be business and accumulated capital, but these sources +should not be used excessively and to the exclusion of others. The +structure of taxation should be harmonious and symmetrical. No part of +it should be so planned as to produce an unscientific and dangerous +strain. + +The science of taxation consists in raising the largest obtainable +amount of needed revenue in the most equitable manner, with the least +economic disturbance and, as far as possible, with the effect of +promoting thrift. + +The House Bill proposes to raise from income, excess or war profit and +inheritance taxes $5,686,000,000 out of an estimated total of +$8,182,000,000. In other words, almost seventy per cent. of our +stupendous total taxation is to come from these few sources. It seems to +me that the effect and meaning of this is to penalize capital, to fine +business success, as well as thrift and self-denial practised in the +past, thereby tending to discourage saving. + +The House Bill fails, on the other hand, to impose certain taxes the +effect of which is to promote saving. Intentionally or not, yet +effectively, it penalizes certain callings and sections of the country +and favors others. + +Let me say at the outset that my criticism does not refer to the +principle of an eighty per cent. war profits tax. Indeed, I have from +the very beginning advocated a high tax on war profits. To permit +individuals and corporations to enrich themselves out of the dreadful +calamity of war is repugnant to one's sense of justice and gravely +detrimental to the war morale of the people. + +Strictly from the economic point of view, the eighty per cent. war +profits tax is not entirely free from objection. Whether England did +wisely on the whole in fixing the tax at quite so high a rate is a +debatable point, and is being questioned by some economists of high +standing in that country, not from the point of view of tenderness for +the beneficiaries from war profits, but from that of national advantage. + +Moreover, conditions in America and England are not quite identical and +I believe it to be a justifiable statement that British industry is +better able to stand so high a tax than American industry, for reasons +inherent in the respective business situations and methods. + +However, everything considered, circumstances being what they are, I +believe the enactment of the proposed eighty per cent. war profits tax +to be expedient, provided that, like in England, the standard of +comparison with pre-war profits is fairly fixed and due and fair +allowance made, in determining taxable profits, for such bona fide items +of depreciation and other write-offs as a reasonably conservative +business man would ordinarily take into account before arriving at net +profits. + +Amongst the principles of correct and effective taxation, which are +axiomatic, are these: + + 1. No tax should be so burdensome as to extinguish or seriously + jeopardize the source from which it derives its productivity. In + other words, do not be so eager to secure every possible golden + egg, that you kill the goose which lays them. + + 2. In war time, when the practice of thrift is of more vital + importance than ever to the nation, one of the most valuable + by-products which taxation should aim to secure is to compel + reduction in individual expenditures. + + 3. Taxation should be as widely diffused as possible, at however + small a rate the minimum contribution may be fixed, if only to give + the greatest possible number of citizens an interest to watch + governmental expenditure, and an incentive to curb governmental + extravagance. + + +It may safely be asserted that our war taxation runs counter to every +one of these tested principles. + + + + +II + + +The characteristic difference between the House Bill and the revenue +measures of Great Britain (I am not referring to those of France and +Germany, because they are incomparably less drastic than ours or Great +Britain's) is, first, that we do not resort to consumption taxes and +only to a limited degree to general stamp taxes, and, secondly, that our +income tax on small and moderate incomes is far smaller, on large +incomes somewhat smaller and on the largest incomes a great deal +heavier. + +The House rate of taxation on incomes up to, say, $5,000, averages only +one-fifth of what it is in England; the House rate of taxation on +maximum incomes is approximately fifty per cent. higher than it is in +England. Moreover, married men with incomes of less than $2,000 are +entirely exempted from taxation in this country. In England all incomes +from $650 on are subject to taxation. + +I believe, on the whole, our system of gradation is juster than the +English system, but I think we are going to an extreme at both ends. And +it must be borne in mind that our actual taxation of high incomes is not +even measured by the rates fixed in the House Bill, because to them must +be added State and municipal taxes. There must further be added what to +all intents and purposes is, though a voluntary act, yet in effect for +all right-minded citizens tantamount to taxation, namely, a man's +habitual expenditures for charity and his contributions to the Red Cross +and other war relief works. + +The sentimental and thereby the actual effect of extreme income +taxation is not confined to the relatively small number of people in +possession of very large incomes directly affected by it. The +apprehension caused by the contemplation of an excessively high ratio of +taxation is contagious and apt to react unfavorably on constructive +activity. + +It is highly important that taxation should not reach a point at which +business would be crippled, cash resources unduly curtailed and the +incentive to maximum effort and enterprise destroyed. And it should not +be forgotten that both theoretically and actually the spending of money +by the Government cannot and does not have the same effect on the +prosperity of the country as productive use of his funds by the +individual. + +If all the European nations have stopped during the war at a certain +maximum limit of individual income and inheritance taxation, even after +four years of war, the reason is surely not that they love rich men more +than we do or that they are all less democratic than we are. The reason +is that these nations, including the financially wisest and most +experienced, recognize the unwisdom and economic ill effect under +existing conditions of going beyond that limit. + + + + +III + + +The same observations hold good in the case of our proposed inheritance +taxation (maximum proposed here forty per cent., as against twenty per +cent. maximum in England and much less in all other countries). And +again there are to be added to Federal taxation the rates of state +legacy and inheritance taxation. + +Inheritance taxation, moreover, has that inevitable element of +unfairness that it leaves entirely untouched the wastrel who never laid +by a cent in his life, and penalizes him who practiced industry, +self-denial and thrift. And it cannot be too often said that the +encouragement of thrift and enterprise is of the utmost desirability +under the circumstances in which the world finds itself, because it is +only by the intensified creation of wealth through savings and +production that the world can be re-established on an even keel after +the ravages and the waste of the war. + +Furthermore, business men, of necessity, have only a limited amount of +their capital in liquid or quickly realizable form, and through the +absorption by the inheritance tax of a large proportion of such assets, +many a business may find itself with insufficient current capital to +continue operations after the death of a partner. This effect is not +only unfair in itself, but is made doubly so, as being a discrimination +in favor of corporations as against private business men and business +houses, inasmuch as corporations are, of course, not amenable to +inheritance taxation. + +Whilst in the case of the rich we discourage saving by the very hugeness +of our taxation, or make it impossible, we fail to use the instrument +of taxation to promote saving in the case of those with moderate +incomes. And the enormous preponderance of saving which could and should +be effected does not lie within the possibilities of the relatively +small number of people with large means, but of the huge number of +people with moderate incomes. + +Moreover, while the rich, in consequence of taxation, limitation of +profits, etc., have become less able to spend freely since our entrance +into the war, workingmen and farmers, through increased wages, steadier +employment and higher prices of crops, respectively, have become able to +spend more freely. + +Workingmen are in receipt of wages never approached in pre-war times, +many of them making incomes a good deal higher than the average +professional man, while the profits of business, generally speaking, are +rather on a declining scale and certain branches of business have been +brought virtually or even completely to a standstill. + +Of our total national income, conservatively estimated at, say, +$40,000,000,000 for the last year before our entrance into the war, i. e., +the year 1916, it is safe to say that not more than $2,000,000,000 +went to those with incomes of, say, $15,000 and above, whilst +$38,000,000,000 went to those with lower incomes. + +A carefully compiled statement issued by the Bankers Trust Company of +New York estimates the total individual incomes of the nation for the +fiscal year ending June 30, 1919, at about $53,000,000,000, and +calculates that families with incomes of $15,000 or less receive +$48,250,000 of that total; or, applying the calculation to families with +incomes of $5,000 or less, it is found that they receive $46,000,000,000 +of that total. + + + + +IV + + +Whilst the House Bill imposes luxury and semi-luxury taxes, it fails--as +I have mentioned before--to resort to consumption taxes of a general +kind--a deliberate but, in my opinion, unwarrantable omission. + +My advocacy of consumption and similar taxes, such as stamp taxes of +many kinds, is not actuated by any desire to relieve those with large +incomes from the maximum of contribution which may wisely and fairly be +imposed on them. I advocate consumption and general stamp taxes--such as +every other belligerent country without exception has found it well to +impose--because of the well attested fact that while productive of very +large revenues in the aggregate, they are easily borne, causing no +strain or dislocation, and automatically collected; and because of the +further fact that they tend to induce economy than which nothing is more +important at this time and which, as far as I can observe, is not being +practised by the rank and file of our people to a degree comparable to +what it is in England and France. + +The tendency of the House Bill is to rely mostly on heavy taxation--in +some respects unprecedentedly heavy--of a relatively limited selection +of items. I am--as I have already said--in favor of the highest possible +war profits tax and of at least as high a rate of income and inheritance +taxation during the war as exist in any other country. But apart from +these and a few other items which can naturally support very heavy +taxation, such, for instance, as cigars and tobacco, I believe that the +maximum of revenue and the minimum of economic disadvantage and +dislocation can be secured not by the very heavy taxation of a +relatively limited selection, but by comparatively light taxation +distributed over a vast number of items. I believe such taxes would be +productive enough to make good the impending revenue losses from +Prohibition. + +I think, for instance, the imposition of a tax of one per cent. on every +single purchase exceeding, say, two dollars (the tax to be borne by the +purchaser, not by the seller) would be productive of a large amount of +revenue and be harmful to none. A similar tax was imposed in the course +of the Civil War and appears to have functioned so well and met with +such ready acceptance that it was not repealed until several years after +the close of that war. + +There is apparently small limit to the zeal of many politicians and +others when it is a question of taxing business and business men, +especially those guilty of success. We are, I believe, justified in +inquiring to what extent there is a relation between this tendency and +political considerations which ought to be remote from the treatment of +economic subjects such as taxation. + +Let us take, as an instance, the case of the farmer. I do not pretend to +judge whether in these war times the farmers of the country are bearing +an equitable share of taxation in proportion to other callings or not. I +certainly recognize that they are entitled to be dealt with liberally, +even generously, for I know the rigors of the farmers' life, the ups and +downs of their industry's productivity, and fully appreciate that their +work lies at the very basis of national existence. Everything that can +fairly make for the contentment, well being and prosperity of the +farmer is to be wholeheartedly welcomed and promoted. + +Yet, we cannot avoid noticing that the average value of farm lands in +this country is estimated to have increased between 1900 and 1918 more +than 200 per cent., that the value of farm products has been vastly +enhanced, but that according to the latest published details of income +tax returns, the farmer contributes but a very small percentage to the +total income tax collected. Of twenty-two selected occupations the +farmers' class contributes the least in the aggregate, although it is +numerically the largest class in the country. + +Let it be clearly understood that I have not the remotest thought of +suggesting "tax dodging" on the part of the farmers. I know well how +fully they are doing their part towards winning the war, and am +entirely certain that they are just as ready to carry patriotically +their due share of the financial cost of achieving victory as the +splendid young fellows taken from the farms, many of whom I met in +Europe, have been ready to bear their full share of the cost in life and +limb of achieving victory. + +The point of my question is not the action and attitude of the farmer. +But here is a great industry exempt from the excess profit and war +profit tax and apparently not effectively reached by the income tax, +which is entirely natural, because in this case the income tax can +neither be retained at the source nor are the large body of the farmers, +many of whom do not keep and cannot be expected to keep books, in a +position to determine their taxable income. + +Is it conceivable that the politicians who are so rigorous in their +watchfulness that no business profit shall escape the tax-gatherer, +would not devise means to lay an effective tax if the same situation +existed in a business industry? + +The point of my question is, taking the case of the farmers as an +instance, whether in framing our system and method of taxation, the +steady aim has been to ascertain impartially what is equitable and +wisely productive of revenue and to act accordingly, or whether +considerations of the anticipated effect of taxation measures upon the +fortunes of individual legislators or of their party, have been +permitted unduly to sway their deliberations and conclusions. + + + + +V + + +Turning aside from this interrogation mark, I will only add, in +returning to our general scheme of taxation, that there are numerous +taxes of a tried and tested and socially just kind--some of them applied +in this country during the Civil War and the Spanish War--which would +raise a very large amount of revenue and yet would be little felt by the +individual. Some of them have been suggested to our legislators, but +have not found favor in their eyes. Their non-imposition, taken together +with the entire character of our taxation program, the burden of which +falls to an enormously preponderant extent upon the mainly industrial +States and the business classes, not only proportionately, which, of +course, is just, but discriminatingly, which is not just, seems hardly +explainable except on the theory that the intention of those who were +primarily in charge of framing that program was punitive and corrective +and that they were influenced--though I am willing to believe +unconsciously--by sectional and vocational partiality. + +The fact that the revenue bill was passed in the House by a unanimous +vote does not mean, of course, that it met with unanimous approval on +the part of Congressmen. The debate shows this. The bill, as reported +after months of labor, either had to be approved practically as it stood +or rejected and returned to the Committee. It is not possible for a body +of 400 men to deal in a detailed manner with a subject so complex as a +taxation measure of the magnitude of the present one. + +The bill could not be made over or materially amended in the House. In +view of the urgency of the emergency and the vital need to raise the sum +asked for by the Treasury, no patriotic course was open to the House but +to accept the bill and pass it up to the Senate. + +I know it is not popular to say things in criticism of war burdens of a +financial nature. One's motives are liable to be misunderstood or +misinterpreted and he is very apt to have it scornfully pointed out to +him how small relatively is the sacrifice asked of him, compared with +the sacrifice of position, prospects, and life itself, so willingly and +proudly offered by the young manhood of the land. + +It is a natural and effective rejoinder, but it is not a sound or +logical one. Heaven knows, my heart goes out to our splendid boys, and +my admiration for their conduct and achievements and my reverence for +the spirit which animates them knows no bounds. But I am acquainted +with hundreds of business men who bemoan their gray hair and their +responsibilities, which prevent them from having the privilege of +fighting our foe arms in hand. + +And I know no American business man worthy of the name, who would not +willingly give his life and all his possessions if the country's safety +and honor required that sacrifice. + + + +Transcriber's Notes: + Passages in italics indicated by underscore _italics_. + + Additional spacing after the block quotes is intentional to indicate + both the end of a quotation and the beginning of a new paragraph as + presented in the original text. + + + + + +End of the Project Gutenberg EBook of Government Ownership of Railroads, and +War Taxation, by Otto H. 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