RV THE SALES TAX Exposition of the Theory and Practice of This Form of Taxation SIXTH EDITION REVISED AND ENLARGED June, 1922 A Reprint of Questions Received by The Minneapolis Tribune and Answers by Hazen J. Burton, Plymouth Building Minneapolis, Minnesota. President of The Plymouth Clothing House. Minneapolis, Former Chairman of Committee on Taxation of the National Association of Building Owners and Managers, Member of the National Tax Association To the hundreds of thousands of thinking men in the Undted States who have spontaneously desired the One Per Cent Sales Tax as the sole tax on Business, and the wide diffusion of elementary economic knowledge, to the end that governmental business shall be conducted on the same high plane of honesty and accuracy that they strive for in the direction of their individual affairs, this Digest of basic principles is respectfully dedicated. “Progress made in any field of human activity is dependent upon reliable and accurate relevant facts. By as much as that evidence fails in accuracy or extent the deficiencies of progress are measured."—Chief Justice Wm. H. Taft. ARGUMENT AGAINST TURNOVER FEATURE OF SALES TAX The most plausible argument against the sales tax is based on the turnover feature, from which most of its advantages are derived. If a shoe, manufacturer sells directly to the consumer, one tax being paid, another shoe manufacturer and the retailer to whom he sells are at a serious disad¬ vantage, so it is said, because between them they pay two taxes. Of course, they do not pay twice as much tax, for the selling price to the retailer, on which one tax is based, would be less than the retailer’s price to the con¬ sumer, on which the second tax is based. In fact, even where a number of turnovers occur it has been computed that seldom, if ever, does the aggre-f gate tax exceed 3J per cent of the final selling price. But the sufficient answer to this charge of possible discrimination is that, taking everything into consideration, it is unimportant. If a manu-j facturer and retailer can now compete with a manufacturer who sells to the public, as they can and do, earning their double profits and paying their theoretically double overhead expenses, a difference of a fraction of 1 per cent in the tax can be readily adjusted. Methods of doing business are a matter of choice, dependent upon location and a variety of other factors, the least of which would be this difference. The Harvard Bureau of Busi¬ ness Research in a survey of 197 retail shoe stores found that the percent¬ age of operating expenses to net sales ranged from 13.62 per cent to 35.63 per cent, a variation of 22 per cent. A 1 per cent sales tax is obviously negligible. REMOVE THE PRESENT TAX COST SPREAD JThe High Rate and Uncertainty of Taxation is the chief cause of the present Business Stagnation. Substitute the Low Rate and Certainty of a widespread One Per Cent Sales Tax on the turnover of all commodities for the present extreme surtax on income of individuals and for at least one-half of the high rate of 12*4 per cent on income of corporations. Such a Tax will remove the present Tax Cost Spread between the price received by the Farmer for basic products and the retail prices the farmer and all other consumers now pay for the manufactured articles. $ Indicates addition and revision for Fifth Edition, May 1, 1922. THE SALES TAX Exposition of the Theory and Practice of this Form of Taxation Note. The following series of Articles on Sales Tax, Chapters i to 17, from the Minneapolis Tribune also appeared on same days, tri¬ weekly, in the Chicago Daily Nezvs, Toledo Blade, New Orleans Times- Picayune, and other western papers of wide circulation. These pam¬ phlets were prepared for the members of the National Tax Association at its Annual Conference at Minneapolis, Minn., Sept. 18-22, 1922. Additional copies of this enlarged Sixth Edition will cost Seven Cents each in any quantity, which includes postage (2. cents) prepaid. Address Hazen J. Burton, Plymouth Bldg., Minneapolis, Minn. August 1, 1921. $ Chapter !. Mr. Mellon says that the government will require in the neighborhood of $4,000,000,000 within the next fiscal year. The present sys¬ tem of taxation is not calculated to produce this revenue without at the same time rob¬ bing industry of.its earnings to such an ex¬ tent as to affect it unfavorably and delay the restoration of normal conditions, so neces¬ sary to the general welfare. With the realization that some new system must be devised to yield the necessary reve¬ nues for the government there has been much study of taxation methods, and a large group of the students of taxation have proposed what is known as the sales, or turnover tax. Hazen J. Burton of Minneapolis has con¬ sented to answer questions regarding the sales tax, and ail those who desire information are invited to ask questions through The Tribune, which Mr. Burton will undertake to answer in order to instruct people with regard to it. Such questions should be addressed to the Taxation Editor of The Tribune. The first of the series of questions and an¬ swers is as follows.—The Editor. Q—What is a sales tax? A—A sales tax is a tax on the sales of all goods, wares and merchandise levied at the time of the transfer of the property from the seller to the buyer. Q—What is the specific form of a sales tax now being advocated? A—A tax on all gross sales of not exceeding 1 per cent, with no exemp¬ tions except to an amount not exceed¬ ing $6,000 of annual sales. Q—How would a tax of this kind be collected? A—It would be easily collectible. No stamps or receipts would be used. It would be collected and remitted to the government by the merchant on monthly or quarterly statements from the merchant’s books. Q—How much revenue would a sales tax produce? $A—Experts have determined that a turn-over sales tax of 1 per cent, on commodities would raise in the neighborhood of $1,000,000,000. Q—How is the United States gov¬ ernment now raising its revenues? JA—It has a patchwork system of taxation. There is the income tax, inheritance taxes, many excise taxes, which are in reality sales taxes, and customs duties. Q—Would a sales tax take the place of all these? A—It would not. Advocates of the sales tax believe that the graduated personal income tax, with certain modifications, should remain as an equalizer. They believe that certain longstanding excise taxes might be continued. They would not disturb the inheritance taxes except perhaps to revise them. The excess profits tax has been abandoned. $Q—What was the matter with the excess profits tax? ^Indicates addition and revision for Sixth Edition, June, 1922. A—Originally devised as an emer¬ gency measure during the war, it has had the effect of stifling American in¬ dustry. It is now counted a failure both by government officials and busi¬ ness men generally. Calculated to tax capital, it has only served to retard trade and contribute to prolonged business depression. %Q —Is there any general demand that the excess profits tax be re¬ stored? A—There is not. The sentiment as expressed before congressional com¬ mittees is all against its retention. —From The Minneapolis Tribune. August 3, 1921. Chapter II. Q. Is there any difference between a sales or turnover tax? A. A sales tax can be applied to each sale cr business transaction while a turnover tax is just what its name implies—a tax on the aggregate business for a month or any other specified period. The terms have be¬ come almost interchangeable, how¬ ever. The tax now being proposed, while known as a sales tax, is, more properly, a turnover tax. Q. Are these sales taxes now be¬ ing levied in the United States? A. There are over 50 such taxes. Automobiles, jewelry, tires, soft drinks and a number of other things are subject to sales taxes, but these taxes run from 5 to 10 per cent, and in many cases to higher percentages. Q. Are many other countries now employing the sales or turnover tax? A. Yes. Canada has a limited turnover tax. France is trying it out in a modified form. The most con¬ spicuous example of the successful operation of a sales or turnover tax is found in the Philippine Islands. Q. Is it true that taxes are, in the main, shifted to the consumer? $A. That is true. It has been defi¬ nitely established that the excess profits tax has been shifted to the ul¬ timate consumer in the form of higher prices. Q. What has been the effect on prices of this shifting? A. There has been pyramiding of the tax to an alarming extent. Natu¬ rally, the dealers in various commodi¬ ties have tried to estimate what their tax would be and have added to their prices in proportion, to protect them¬ selves from loss. Each dealer has done this in turn so that when the commodity has reached the ultimate consumer the price has been pyra¬ mided very high. Q. Have any estimates of the ex¬ tent of this pyramiding been made? A. Experts have figured that of the high prices paid during the war, fully 23 per cent, has been due to the py ra¬ miding process by dealers providing for their tax costs. Q. Would a sales tax be shifted to the consumer? $A. In most cases it would, but there would be no opportunity for pyramiding beyond 1 per cent, on each process. The dealer would al¬ ways know just what to charge. His tax of 1 per cent, on gross sales is fixed. The small tax would be ab¬ sorbed by seller where profits were good. Q. In order to show just how much of a sales or turnover tax would be paid on a suit of men’s clothes, give an example showing the various transactions. A. William Goldman of New York has made the following table showing the effect on a 1 per cent, sales or turnover tax on a suit of men’s clothing designed to retail at $60. Tax at 1 pet. 1. Raw wool in the grease, value about $6.50 . $.065 2. The wool dealer has the wool scoured and sells it to the spinner, at say $8.00 . . .080 3. The spinner converts it into yarn and sells it to the cloth manufac¬ turer for say $10.00.1000 4. The cloth manufacturer weaves it into cloth which he sells for about $4 a yard, 3% yards.....'.1333 5. Trimmings, linings, etc., have a value of about 50 per cent of the value of the cloth, and have gone through the same processes of conversion as the wool has to the finished cloth. The tax on these would therefore be 50 per cent of the sum total of the foregoing taxes, or .1.-.1891 6. These materials are converted into a suit of clothes by the manufac¬ turer, who sells it for $40.4000 7. The suit is sold at retail for $60.6000 Total tax on price for consump¬ tion .$1.5674 Or 2.61 per cent of the price, $60, to the consumer. Or 2.34 per cent of the present price, $40, to consumer. ^Indicates addition and revision for Fifth Edition, May 1, 1922. 2 Notice that the percentage has been reduced from that shown in the original estimate made a year ago. This is due to the fact that raw materials are now abnormally low, whereas manufacturing processes, which include labor and taxes, have scarcely been reduced at all. —From the Minneapolis Tribune. August 6, 1921. Chapter III. $Q. Would men rendering profes¬ sional services, and bankers, commis¬ sion men and others be taxed? Would wages and salaries be taxed? A A. They would not be subject to the sales or turnover tax but would be taxed as personal incomes. Q. If a sales tax is substituted for a profits tax oh business ought the present exemptions on personal in¬ comes to be ..increased? A. The revenues derived from a sales tax would be large enough to permit raising the present exemp¬ tions on personal incomes. Q. What would be the object of in¬ creasing the exemptions on personal incomes? A. The fair rule in all taxation is the “ability to pay.” The revenue law of 1913 fixed exemptions for sin¬ gle persons at $3,000 and for married persons at $4,000. The war made lower exemptions necessary. The war period has passed. It is true the war debts must be paid, but a longer time can be taken. Exemptions could well be fixed at the pre-war levels, or even higher. It has been suggested there be exemptions on incomes of $4,000 for single persons and $5,000 for mar¬ ried persons. Q. Would the imposition of a sales tax encourage thrift? A. It certainly would. The per¬ sons who buy many things, including many luxuries, would have to pay more in sales taxes than those who did not purchase as much. In fact, the sales tax is founded on the basic theory of the “ability to pay.” Q. How will the sales tax be col¬ lected? $A. The tax is paid to the govern¬ ment on total sales of commodities. Q. How often would the tax be paid? ^ A. It would be paid either month¬ ly or quarterly; preferably monthly. Q. How would this help the gov¬ ernment? A. Instead of having its income - coming in the year after the taxes are levied, the government would receive hundreds of millions of dollars each month of the year. There would not be the constant need of the issu¬ ance of short tijne treasury certificates at high interest rates, in anticipation of taxes to be collected in the future. —From The Minneapolis Tribune. August 8, 1921. Chapter IV. Q. How can the American farmer be benefited by the substitution of one per cent, sales tax for all present taxes on business? A. First, the farmer is a large buyer of manufactured products. He will benefit by the reduction of prices in these products. He will no longer pay the increased prices due to the pyramiding of the excess profits taxes. Q. Would all farmers be subject to a sales tax on the sale of their prod¬ ucts ? t A. All products sold for export are exempt in taxation and furthermore it is proposed that all sales of every na¬ ture not exceeding $6,000 a year be exempt from the sales tax. It is cal¬ culated that the great majority of farmers and small business men would thus pay no sales tax. In fact, many advocates of the turnover tax would exempt all farm products. Q. Will farmers gain by simplified ! methods of taxation? A. The farmer is in reality a busi¬ ness man. A simplified method of taxation will aid him as it will every other class of citizen. Q. What taxes are now shifted to the farmer? $A. First, there have been the ex¬ cess profits taxes which were shifted and pyramided by every manufacturer and dealer along the line. Then there are the special excise taxes. He pays these special taxes on his automobile, his tires, motor accessories, his watch, his wife’s fur coat, his chewing gum, movie tickets, sodas and soft drinks and a host of other things which, in common with all other classes, he buys for his comfort. These special excise taxes amount to from 10 to 20 cents on every dollar. ^Indicates addition and revision for Fifth Edition, May 1, 1922. 3 Q. Would the farmer be the losei by the imposition of a sales tax? A. On the contrary, as a heavy consumer he would be the distinct gainer. Q. Do the farmers know that their indirect consumption taxes have been large because of the shifting of the burdens from dealer to dealer? A. The farmer is awakening to the actual facts. Farmers know that tax¬ es have been shifted to them. They know that the business taxes are not borne solely by corporations, partner¬ ships and sole traders. Q. Do the arguments cited in re¬ gard to the farmer apply equally to the laboring man in the cities? A. They do. The laborer in the city is now subjected to heavy indi¬ rect taxes just as is the farmer. The sales tax would, in most instances, be shifted to him. But instead of pay¬ ing a pyramided tax amounting to more than 20 per cent., according to the most painstaking estimates, he would pay a tax that could not be pyramided higher than SV 2 per cent. —From The Minneapolis Tribune. August 10, 1921. Chapter V. Q. If a sales or turnover tax were adopted, would the consumer pay one per cent, tax on each article he buys? For instance, if he purchased an ar¬ ticle selling for 10' cents, would he have to pay an additional one cent as a tax, making, in reality, a 10 per cent tax? A. That is not the plan of the sales or turnover tax. The turnover tax is a tax on the entire gross sales of a merchant for a month. His prices would naturally be so arranged as to take care of the one per cent, on the whole volume which the government would receive. If the merchant did a business of $1,000 in the month he would pay the government a tax of $10. His prices would naturally have been arranged to cover that $10. Q. Can a general gross sales or turnover tax be administered without increasing the burden of the Internal Revenue department? A. The adoption of this form of taxation in place of the present taxes on profits would certainly simplify the work and therefore greatly decrease the burden of the Department of In¬ ternal revenue. The department is now way behind in its work of check¬ ing returns on profits taxes. Dr. Thomas S. Adams, formerly chairman of the tax advisory board of the Unit¬ ed States government, in an article in the New York Evening Post, Au¬ gust 4, 1920, said: “In the long run a general sales tax in place of the income and profits taxes would great¬ ly. simplify the work of the bureau of Internal Revenue.” Q. Could the sales tax be applied to the Grain Trade, especially option transactions? If so, how? A. The sales tax as now advocated would not be applied to the sales of securities or of contracts on produce exchanges. The reason for this, brief¬ ly, is that the rate would prevent the transaction and would not produce the revenue. Every tax has a maximum revenue point beyond which an in¬ crease in the rate tends to diminish the revenue, and it also has a poten¬ tial maximum where it is actually de¬ structive of the object of the tax. Q. Why cannot a sales tax be ap¬ plied to exports? A. Article 1, Section IX of the con¬ stitution of the United States provides that no tax or duty shall be laid on articles exported from any state in the Union. —From The Minneapolis Tribune. August 12, 1921. Chapter VI. Q. Why does the Tax league advo¬ cate a specific exemption of $6,000 annual sales in advocating the gross sales tax? A. The reason for fixing the ex¬ emption at $6,000 is that this will as¬ sist small dealers and farmers and encourage thrift and enterprise among business beginners in their struggle with competition. It was felt that there should be some exemption and $6,000 was fixed as a proper amount to accomplish the ends men¬ tioned. JQ. Dr. Joseph McCoy has given us what is considered the most reliable estimate of the yield of a 1 per cent, tax covering sales of all kinds by traders, manufacturers, mines and {Indicates addition and revision for Fifth Edition, May 1, 1922. 4 farms of $1,100,000,000. This estimate is considered by Treasury officials as being' one of the most reliable that has been made. Is it not a dangerous and unwise move to have the government re¬ lying on a single tax for a large por¬ tion of its revenue? Again, is it not a fact that the yield of any tax fluctuates with the changes occurring in the object to which the tax rate is applied, thus causing the national revenue to be uncertain? X A. The widespread application of this tax is one of the strongest points in its favor. It is universal in its scope and therefore does not mean that the government is relying upon the tax upon any one commodity or group of commodities. Furthermore, if it found that 1 per cent, rate would raise too much revenue, the rate could be made one-half of 1 per cent. It is true that the yield of any tax fluctu¬ ates with the changes occurring in the object to which the tax is applied, but the national revenue could cer¬ tainly be far more reliable than it is now under the existing profits taxes where there is much revenue one year and little or none the next. —From The Minneapolis Tribune. August 15, 1921. Chapter VII. Q. Where such a staggering sum of money must be raised annually through such means of taxation as the government requires, is it not a wise provision to have the tax apply over a wide range of objects instead of be¬ ing confined to only a -few? tA. That is just the plan of the sales tax. It covers all commodities. It is thus diffused over a wide range of objects and is not confined to only a few. Q. If a sales tax law as proposed should be passed would it correct to any extent the patchwork system of raising the government’s revenue now in use? A. It is a tax to take the place of the present patchwork system of rais¬ ing the government’s revenue now in use. It could take the place of many of the present taxes. Q. Is it possible under our present tax law to make returns which are correct both from the standpoint of the government and of the taxpayer? A. Judging from the experience of the past two years, it is almost im¬ possible to do so. Corporations, part¬ nerships and individuals have hired attorneys and expert accountants to make up their tax returns and in spite of this the government has collected hundreds of millions of dollars due to incorrect tax returns, which it has stated are not fraudulent, but merely mistaken. It has announced that it expects to collect many hundreds of millions more when back returns have been checked up. Most corporations have not had their books inspected on later than their 1917 returns. Q. Why should the government collect such huge'amounts of arrears of taxes as it now is collecting under the revenue acts of 1917 and 1918? A. The revenue act is so difficult to understand that even the advice of highly-paid experts has not pro¬ tected the taxpayers against errors in making their returns. Q. What has been the experience in the Philippine Islands regarding administration of the sales tax? A. In reply to an official inquiry made by Secretary Houston, the Phil¬ ippine government stated that: “The sales tax is the most satisfactory, ac¬ curate, economical, productive and equitable tax in our system.” This tax has been in force in the islands since 1905 and has proven a complete success. Q. What is the Canadian sales tax? A. This tax is applicable to sales by manufacturers, wholesalers or job¬ bers, and is payable on all goods or articles which are not specifically ex¬ empted. The sales tax is cumulative in effect, the rate of tax being 1 per cent, on sales and deliveries by man¬ ufacturers, wholesalers or jobbers; but, in respect to sales by manufac¬ turers direct to retailers, or to con¬ sumers, and on importations by a re¬ tailer or consumer, the rate is 2 per cent. Exports are exempted from the sales tax. —From The Minneapolis Tribune. Indicates addition and revision for Fifth Edition, May 1, 1922. 5 August 17, 1921. Chapter VIM. Q. Is it not a fact that the sales tax is fundamentally based on needs rather than the ability to pay? \ A. The sales tax, plus the personal income and inheritance taxes, are re¬ quired by the needs of the govern¬ ment and are fundamentally based on the ability to pay of all the taxpayers Possession of property is evidence of ability to pay these cash taxes from the cash sales of business and from the cash incomes of individuals. The correct valuation of property is its net cash value at time of sale, when both buyer and seller determine that it is for the best interests of each that such sale be made at that time. The almost negligible 1 per cent, sales tax may indeed be considered as an in¬ surance premium for the continuance of the stable government without which civilization and property values would disappear. Every business man will welcome a uniform 1 per cent, rate of tax to all competitors alike on a property valu¬ ation determined by buyer and seller at time of sale, making a small tax on each individual business and in¬ dividual consumption, with no exemp¬ tions to any competitor greater than $6,000 of annual sales. This ensures compliance with the basic economic principles of universality, equality of taxation and ability to pay, as laid down by John Stuart Mill and ac¬ cepted by all taxation authorities. Q. A sales tax is based on the mere form of business transactions. Is it not a fact that such a method of taxation will lead to disastrous changes in business practices, and eventually, if continued, revolutionize our methods of doing business? $A. The sales tax is based on the simple, certain fact of sale. Every buyer and seller knows what constitutes a sale. A small tax on these certainties will be vastly different from the complica¬ tions and excessive rates of the pres¬ ent federal tax system which have al¬ ready led to that destruction of capi¬ tal, general stagnation of enterprise and unemployment of labor which has always followed excessive and uncer¬ tain taxation. “The heavy but indefinable future tax obligations,” as Secretary .Hous¬ ton has called them, “hang like a suspended avalanche over American business.” JThe tax would be invoiced, or in other words added at the bottom of each bill rendered, as a specific cost charge to the purchaser, all the way down the line to the retail purchaser, in whose case the tax would be in¬ cluded in the cost and absorbed by the retailer. —From The Minneapolis Tribune. August 19, 1921. Chapter IX. Q. Assuming that a Sales Tax is an equitable, practical and sane method of raising a large per cent of the re¬ quired revenue, why should bread and common clothes be taxed at the same rate as 1 the sales of precious stones, jewelry and articles now commonly classed, from a taxation standpoint, as luxuries ? A. So long as the Sales Tax is ex¬ empted on all sales less than $6,000 per year, and does not exceed one per cent on all business, and is substituted for the present grossly unequal, exces¬ sive sales taxes, there is no reason why sales of bread and clothes should not also be taxed at 1 per cent. The addition to the price to the con¬ sumer of a loaf of bread figures only one-sixth (1-6) of a cent, and the ad¬ dition to the price of a $40 suit of clothes figures only ninety-four cents. Much of this would be absorbed in good times by the seller. And yet politicians talk of a tax “upon the backs and bellies of the poor man.” Q. It is proposed to shift the Sales Tax. Is it not a fact that a tax can be shifted only through a rise in price and that this can come about as a re¬ sult of the tax only through a restric¬ tion in the supply? A. Every business tax is shifted. If it is not shifted business stagnates. A government tax on business is the first lien on the assets of every busi¬ ness. It is the first cost in overhead expense. All costs must be shifted to the consumer or the business fails to pay. Former Congressman Good, who op¬ poses the sales tax, for political rea- Jlndicates addition and revision for Fifth Edition, May 1, 1922. 6 sons, says: “How would a laboring man feel if asked, while out of em¬ ployment, with only a small or scarce¬ ly any income, to pay a tax on every¬ thing that he eats and everything that he wears, not realizing that the excess profits tax has been passed on to the consumer and that in the past he has been compelled indirectly to pay it?” There is a world of wisdom in the acknowledgment of ex-Congressman Good, that the laboring man does “not realize that the excess profits tax nas been passed on to the consumer and that in the past he has been compelled to pay it.” This is, of course, the CRUX OF THE QUESTION. Any tax revision which will actually lighten the tax burden of the consumer w T hile get¬ ting revenue for the government, must appeal to all. The lighter the tax bur¬ den is on the consumer, the greater will be his purchasing power, and in- ceased purchasing power means more and better business. The issue is the actual fact about the present federal taxes versus the actual fact regarding a small turnover tax. Q. Professor Friday tells us in his “Profits, Wages and Prices” that the price level of commodities began to rise in 1915, 'two years before the 1917 excess profits' tax law was passed, and that by 1917 the price level stood at 181 compared with 100 in 1913. We know the 1918 excess profits tax rates were increased and that the 1919 rates were greatly reduced. We also know prices continued to rise all during the 1915-1919 period, the level being 238 in December, 1919, and 266 in April, 1920. We know the 1920 fall in prices was not preceded by any reduction in excess' profits tax rates. Does the above not indicate there is no correla¬ tion between price movements and taxation? A. The world-wide laws of supply and demand are the chief causes of wide fluctuations in price movements of commodities and of labor. But there is a distinct relation be¬ tween existing federal taxes and the present uncertainties and stagnation of business. By substituting the sales tax the saving in tax costs to all consumers alike averages over 20 per cent on all purchases. This saving is independent of any price fluctuations in commodities caused by the lav/ of supply and de¬ mand. Authorities on the sales tax empha¬ size the point that this 20 per cent tax cost difference between the pyra¬ mided existing federal taxes and the pyramided 1 per cent sales tax must surely continue to hold down and de¬ press the prices of wheat, wool, cot¬ ton and all basic farm products as well as to hold up and perhaps ad¬ vance again retail prices of finished goods to the ultimate consumer. —From The Minneapolis Tribune. August 22, 1921. Chapter X. Q. Is 1 it not true that during the 1915-1919 period there was a tremend¬ ous expansion of industry and busi¬ ness enterprises, paid for out of the profits remaining after the income and excess profits taxes had been paid, and that there has been more than sufficient profit to induce enterprise? A. This hypothesis and conclusion does not rest, in my opinion, upon a sound statement of facts, outside of war activities. Q. Is it not a fact that the substi¬ tution of the sales tax for the excess profits tax and all or a portion of the income tax will transfer the tax bur¬ den from the richer classes to the poorer classes? If such a burden is so transferred is it not a fact that it will have a tendency to materially reduce the amount of goods poorer classes will consume by reason of their having to take a large portion of their aggregate income to pay this additional burden? JA. The advocates of a small di¬ rect sales tax at 1 per cent or less heartily support the personal income tax as an equalizer, and at the same time are equally desirous of a reason¬ able duty on competitive imports, in¬ heritance taxes and graduated taxes on personal incomes, graduated to the highest point at which such a tax can be levied and collected from the rich, with increased exemptions for the single man to $2,500 and for the mar¬ ried man to $5,000, with liberal provi¬ sion for dependents. This ought to pro¬ vide enough revenue to pay all the ex¬ penses of the government, if reason- tlndicates addition and revision for Fifth Edition, May 1, 1922. 7 able economy be practiced*, and to gradually retire our huge national debt. JQ. Is it not true that where the sales tax is substituted for the ex¬ cess profits tax and a portion of the income tax, that the richer class will pay the sales tax on the goods that they consume thus dis charging their tax liability (the sales tax they thus pay merely replacing a portion of the excess and income taxes previously paid by them); but the sales tax liability shifted to the poorer classes serves as an additional bur¬ den they must pay, being based on their needs instead of ability to pay and an additional burden over and above any carried heretofore? A. We again repeat that the 1 per cent sales tax is a substitute for the profits taxes on business and exces¬ sive special taxes on business, but that we also insist on the retention of the personal income tax as an equalizer, graduated to the highest practicable point. The book profits of business enterprises should not be taxed until they are proved to be actual cash profits, and as such have been paid out in dividends, when they become subject to the graduated personal in¬ come taxes of the stockholders. Remove the academic antiquated ob¬ stacles to business, which business experience has abundantly discredited. Business will not revive until Con¬ gress “clears the track” in compliance with the political platform at the last presidential election. —From The Minneapolis Tribune. August 24, 1921. Chapter XI. Q. Is it not true that the Philippine sales tax is a continuation of the old Spanish taxing methods; that it is subject to a large number of exemp¬ tions, including agricultural products used by farmers and other necessi¬ ties? JA. It is not a continuation of the Spanish tax. The law has been in ex¬ istence for 16 years, and has been suc¬ cessful in all respects. It is now col¬ lected practically without a murmur from the taxpayer. The tax originally was one-third of 1 per cent. It since has been raised to 1 per cent and we are informed the government of the islands is contemplating raising it to 2 per cent. The law was written by John S. Hord and was administered by him as collector of internal revenue for a period of six years. He says: “The law is being successfully ad¬ ministered in the Philippine Islands, and is the biggest revenue-producing item. The whole tax burden is dis¬ tributed among all and to each accord¬ ing to his ability and willingness to pay. It is not a tax against the living wage, and can be defended on the ground of social justice. The tax rate is small, and can be shifted and is not heavily accumulative. It is easily as¬ sessed and fully collected at a reason¬ able expense and without harassing the taxpayers.” There are certain ex¬ emptions. We exempt all farmers out there. We consider that the farm is a basic industry, and they could proba¬ bly be exempted from produce of their own that they sold. Of course, the merchant who sold farm produce be¬ gan to pay the tax. There would be one less in the line from the producer to the consumer in the case of produce raised in the Philippines. Everything imported would pay the sales tax, sold by the importer or by the man he sold it to. It is really a very simple tax. There never was any trouble about collecting it. It was collected automatically.” Some time ago Secretary Houston made official inquiry of the Philippine government as to the success of the sales tax in the islands and his reply was “that the sales tax is the most satisfactory, accurate, economical, pro¬ ductive and equitable tax in our sys¬ tem.” (See records of the Treasury department.) The opponents of this plan brush aside our experience in the Philip¬ pines with a wave of the hand on the ground that that archipelago is a small country compared with our own and that conditions there are quite dif¬ ferent from what they are here. True, everything is on a smaller scale there than here, but, nevertheless, we there have classes and conditions quite simi¬ lar to those we have here. Human nature and economic laws are the same there as here. —From The Minneapolis Tribune. August 26, 1921. Chapter XII. Q. Does the nature, volume and complexity of the sales transactions of the Philippines bear close enough relation and likeness to those of the {Indicates addition and revision for Fifth Edition, May 1, 1922. 8 United States' to justify the United States in accepting and adopting, with¬ out question, the Philippine method for raising the volume of revenue it is proposed to raise through a sales tax? A. See previous chapter. The Phil¬ ippine tax law is not complex. It was taken from Mexico, where it has been in operation for half a century and was utilized very effectively by President Porfirio Diaz, and his celebrated minis¬ ter of finance, Jose Yives Limantour, in the financial rehabilitation of that country. In order that you may have an authoritative statement in regard to the operation of the sales tax in Mex¬ ico, we submit a letter on the subject which has just been received from Se- nor Pascual Luna Y Parra, who for many years was officially connected with the department of finance in Mexi¬ co under Diaz and Limantour and dur¬ ing other administrations, and which reads as follows: “To the Tax League of America: “Gentlemen: In response to your re¬ quest for information on the subject of the operation of the sales tax law in Mexico, I take pleasure in saying that a general sales tax law imposing a small tax on sales of goods, wares and merchandise has been in existence continuously since February 14, 1856, under the administration of President Comonfort,’and has continued under the administration of President Benito Juarez, Sebastian Lerdo de Tejada, Por¬ firio Diaz, and subsequent administra¬ tions and has uniformly yielded satis¬ factory results. The amount of the tax at present is one-half of 1 per cent. This tax has been in existence so long, and the people have become so thor¬ oughly accustomed to it that it is col¬ lected without friction or difficulty of any kind and on account of the amount being so small the consumer pays it un¬ consciously. It is economically collect¬ ed and uniformly produces a very im¬ portant item of the revenue. Very sincerely yours, “Pascual Luna Y Parra. “New York, April 15, 1921.” $GEN. LEONARD WOOD ON SALES TAX At a meeting of the Havana Cham¬ ber of Commerce last month, a tele¬ gram was received from General Leon¬ ard Wood, Governor of the Philippines, in answer to an official communication from the War Department at Washing¬ ton, which was in part as follows: “The Sales Tax has worked out very well in the Philippines and I believe it to be a most desirable form of taxation. The only difficulties which have arisen in this connection are due to the fact that small business men are not obliged to keep books here. I think, however, that this difficulty can easily be obvi¬ ated. “I believe that this system of taxa¬ tion could be most successfully applied to Cuba.” At the meeting, after due delibera¬ tion, the Chamber of Commerce of Ha¬ vana decided to accept the Sales Tax, but only as a substitute for the stamp tax and the tax on profits, and not as an additional burden to be borne by the business men. The smaller nations are beginning to avail themselves of this panacea of all tax burdens—the Sales Tax. Czecho¬ slovakia, adopting it from the begin¬ ning, was the only Central European nation that balanced its budget, and its credit has become so good that it recently negotiated a large loan in America and Great Britain. A Feather-Weight Tax The money raised by a Sales Tax comes from somewhere and from some¬ body. It does not manufacture funds out of the air. If somebody has to pay it, it is a burden to be borne. The Sales Tax is a burden, but it is such a light burden at each point where it finally falls for ultimate payment, that it is not felt; it is not perceptible. The payer does not know he is paying it; that is, he does not, because of any exertion he has to make or hardship he has to bear. If you ask one man to lift a piano he will not be able to do it. If four men undertake to do it they succeed, but it is something of a strain. If, however, a contrivance is rigged up so that 100 men can each help equally, the burden becomes a feather. That is what happens with the Sales Tax. The great burden of raising one, two, or three billion dollars, is spread around so widely, so many hands— scores of millions of them—do their part in lifting, that the tax becomes a feather-weight.—Bache Review, May 20. Chapter XIII. Q. If the price level of commodities began to rapidly advance in 1915, ap proximately two years before tlie Ex¬ cess Profits Tax law was enacted, and continued to advance by leaps and bounds after the 1919 excess profits rates were greatly reduced below those of 1918, how can it be proven by any¬ one that the pyramiding of commodity prices was due to the excess profits tax? A. We must repeat that the world¬ wide laws of supply and demand are the chief causes of the wide fluctua¬ tions in commodity prices, and labor costs, and that the present stagnation in business will probably continue so long as the present complex federal tax laws compel an additional tax spread of at least 20 per cent between the basic prices of the farmers 1 ’ prod¬ ucts and the retail prices of the mer¬ chant to the consumer. The additional tax spread due to the uncertain costs of taxation are today really more than 20 per cent as proven by an examination of the books of all concerned for 1919, 1920, 1921, of the farmers on the one hand, and on the other of any solvent retail tlndicates addition and revision for Sixth Edition, June, 1922. 9 business in the country that turns its average well assorted stock on hand less than four times a year. Every stage of manufacture is com¬ pelled to add 4 per cent to 6 per cent to its overhead costs to be safe from losses due to the uncertainties of fed¬ eral taxation, otherwise they must shut down and discharge their help and refuse orders. Five or six sepa¬ rate processes will make the addi¬ tional tax spread more than 25 percent between the farmer and the retailer. If this taxation cost is 1 reduced to a 1 per cent sales tax on each process then the present pyramided uncertain¬ ties will be changed from a 4 per cent up to 6 per cent charge at each step to a positive 1 per cent tax cost which will be diffused by competition and rendered impossible of reaching a total spread of more than 3 per cent tax cost between producer and con¬ sumer. This is the crux of the situation, and theorists, party politicians or demagogues can gain no advantage by ignoring these existing facts and eco¬ nomic principles any longer. As a leading economist has well stated Au¬ gust 12: “The maladjustment be¬ tween the prices of farm products and raw materials and the prices of manu¬ factured goods is the most significant instance of price maladjustment.” This obstacle of “price maladjust¬ ment” and its causes should be again analyzed and presented to Congress by the federal Department of Justice. It is the function of a democratic gov¬ ernment to remove obstacles to trad© and commerce, not to add to them. —From The Minneapolis Tribune. August 31, 1921. Chapter XIV. Q. Is it not a fact that the sales tax was used in Egypt, Babylonia and Rome; that it prevailed in France prior to the Revolution; that it has prevailed in many instances when a privileged aristocracy was in position to dictate the method of securing reve¬ nues of the state, thus deriving the greater part of the revenues from the sales' of necessities to the common man; and that the democratic move¬ ment was instigated and is maintained for the prevention of such methods of oppression? A. Both the income tax and the sales tax have been safely used from the time of Moses with tithes on in¬ come of 10 per cent and on general sales of 1 per cent. Both have suc¬ ceeded at reasonable rates, and other wise they have failed. Professor Seligman gave a good his¬ torical summary of the varying rates of sales taxes before the Senate com¬ mittee May 27th, 1921, Part 16 Com¬ mittee Print, but his conclusions did not emphasize the certain failure of a high rate of every form of taxation, which usually led to revolution, what¬ ever the tax. He states of the Sales Tax: “The only country where it was tried in all its fullness was Spain. It started there in the early Middle Ages in the Communes, and when Spain be¬ came a nation it was introduced as a national tax in 1342. It included virtually all articles, first as a 1 per cent tax, later as a 5 per cent tax on all sales. It was known as the Alcavala.” Apparenty the Alcavala was so suc¬ cessful at the original 1 per cent rate, that the absolute monarchs of that day jumped the rate five fold, and even then the people paid the tax. In later years it was' again increased to 10 per cent, at which rate the people rebelled. Q. Is it not a fact that the most notable instances of a general sales tax on a large scale are those of France and Canada; that neither of these countries impose a flat rate on sales; that, according to official re¬ ports, the French tax is yielding less than 45 per cent of the estimated reve¬ nue; that the Canadian tax exempts a long list of commodities, among which are all food products, building mate¬ rials for construction purposes, fuel and other necessities, and provided that the governor and council might add to the list of exempt articles so far as the public welfare made it ex¬ pedient and necessary? A. France and Canada would suc¬ ceed much better if the sales tax were confined to 1 per cent rate or less, with no exemptions whatever except for $6,- 900 annual sales for the small farmer and dealer. This exemption would otherwise treat all business competi- 10 tors alike, while all the social inequali¬ ties of acquired personal wealth could be levelled up by the graduated per¬ sonal income tax and the inheritance tax, tariff and tobacco. —From The Minneapolis Tribune. September 2, 1921. Chapter XV. JQ. Is it not a fact that a tax of $1,000,000,000 can not be treated as a trifling sum and that the burden thereof is bound to be felt by some¬ one? A. It varies with the scope of the general sales tax. Certainly goods, wares and merchandise should be sub¬ ject. Mr. Charles E, Lord stops there, saying that will yield sufficient reve¬ nue, $1,200,000,000 at 1 per cent, $600,- 000,000 at one-half of 1 per cent. These are not trifling sums. “What the people undoubtedly want is lower taxes. But realizing that taxes must remain high for a consider¬ able period, they demand and will in¬ sist upon three things: (1) That the burden of taxation be equally spread; (2) that taxes be capable of being forecast with reasonable certainty; and (3) that the labor of computing and reporting tax liability be reduced to a minimum. As 1 between a multi¬ tude ui Heterogeneous specific sales taxes and a uniform turnover tax, who can doubt the eventual decision.” tQ. Is it not a fact that the Philip¬ pine sales tax raised only about $7,000,- 000 during the past year from a popu¬ lation of 10,000,000 people or approxi¬ mately 70 cents 1 per capita; and that if a sales tax is imposed on the con¬ sumers of the United States sufficient to raise $1,000,000,000 that it will mean a per capita tax of $10 or for the average family of five persons, $50? $A. A sales tax of $1,000,000,000 would be partly diffused before reach¬ ing the retail consumer. The hypo¬ thesis of an average tax for an aver¬ age family of five would imply identi¬ cal conditions for all and identical abilities and desires. This is not pos¬ sible of realization. The snow that falls on a level today is not less surely blown into drifts on the morrow. The government, however, can and must give equal opportunity to all fami¬ lies and protection to every individual against class prejudice and the tyranny of monopolists, demagogues or bolshevists. —From The Minneapolis Tribune. September 5, 1921. Chapter XVI. JQ. It has been asserted that a sales tax would be a “certain tax.” It has also been asserted that a sales tax would be a “simple tax.” Who is to tell us and how can it be shown, without years of experimentation in a new form of taxation, that the tax is either certain or simple? A. It has been shown in previous chapters that there is nothing new or uncertain in either a half of 1 per cent or 1 per cent sales tax or a 5 or 10 per cent personal income tax, pro¬ vided exemptions are at the minimum. Any sales tax that is not widespread and equal, or that is above 2 or 3 per cent seems certain to fail, except the tax on “pleasant vices” like liquors and tobacco. Graduated personal income taxes above 10 or 15 per cent have been likewise sure to fail except during actual war. To maintain low rates and attain social justice, both the per¬ sonal income and sales taxes are necessary. Q. Is it not a fact that the basic criterion on which the tax burden should be distributed is ability to pay; that nothing so well measures tax pay¬ ing ability as net income and that it is generally recognized that tax pay¬ ing ability increases in a ratio faster than income? A. The chief subjects of federal taxation are property (“Things are worth what they will sell for,” said Lord Coke), cash income, personal earning capacity, tariff for revenue, tobacco and liquors. JNote for Fifth Edition, May 1st, 1922: Herbert L. Casson, correspondent for “Barron’s” Financial Weekly, {Indicates addition and revision for Fifth Edition, May 1, 1922. 11 writes from London: “The whole drink trade has been ‘savagely over¬ taxed’—to use one of its own phrases. Drink-sellers are primarily tax-collec¬ tors. “The beer tax is $24 a barrel. It is 13 times what it was in 1914. “The total amount paid in rates and taxes last year, by the drink trade, was fully $1,300,000,000. This is more than one-fifth of the total revenue of the British government. “About 20 per cent of the drink rev¬ enue is shared, half and half, by labor and capital. About 15 per cent goes for materials and expenses; and 65 per cent goes to the government. “It is greatly amusing Britishers to notice that there were nearly twice as many arrests for drunkenness in Chicago as in London. The ratio of drunkenness appears to be 18 per 1,000 in Chicago and only four per 1,000 in London.” The lowest price for bottled beer in London is 12 cents a half-pint. A glass of beer still is costing as much as six daily papers or an eight-mile ride on a bus. There seems to be no hope that the present taxes will be reduced. The government needs the money, and nothing will induce it to lower the rate of taxation except a falling off in the returns. So, here is a vast trade with a capi¬ tal of more than $2,000,000,000 entire¬ ly overwhelmed with taxes. It no longer belongs to itself. It is used as a tax-collecting device with amaz¬ ing success. Q. As a result of the fundamental principle recognized above, is it not a fact that the progressive income tax has come to form the backbone of the revenue system of most modern demo¬ cratic states? A. The personal income tax comes first in importance, then the 1 per cent sales tax on business, from which about one-third of the total revenue should be obtained. Then comes the inheritance tax and the import tax on business for revenue chiefly. The real issue is between a continu¬ ation and extension of the present sys¬ tem or lack of system of specific sales taxes at high rates on the one hand, and a turnover sales tax at the rate of 1 per cent or less on goods, wares and merchandise on the other hand. It is a case of sales tax versus sales taxes. The administration of the present specific sales taxes is extremely diffi¬ cult. Their bases are so varied that we doubt if even the most experienced revenue agent could offhand state the rate, the incidence and the scope of most of such taxes. About twenty separate sets of regulations, each a sizeable pamphlet, have been issued by the Internal Revenue bureau, and it now in addition has a special bulle¬ tin service, to instruct its agents and the public in the administration of the specific sales taxes. On the other hand, the turnover sales tax, being imposed at a single low rate on every sale of every article by every person, will in comparison be simplicity itself to administer. Every store would pay merely 1 per cent of its gross sales for the month, and the yearly return would De little more than a summary of the periodical returns. In fact it would be possible to combine the annual turnover sales tax return with the income tax return, for the latter starts out with the same figure which would be the sole basis of the turnover sales tax, that is to say, the gross sales. The uniform rate of 1 per cent on all commodities approaches as nearly as possible to absolute equality. What could be fairer than to tax business (beyond $6,000 a year exemption), at the same low rate in proportion to the gross business done, and every per¬ sonal income (beyond a reasonable ex¬ emption) by a tax graduated accord¬ ing to ability to pay? —From The Minneapolis Tribune. September 7, 1921. Chapter XVII. Q. How does the spendings tax dif¬ fer from the sales tax? A. This plan would tax sales from the returns made by the purchaser and at much higher graduated rates. It is advocated by Congressman Mills. The administrative form of the turn¬ over tax is far superior. For example: The sales' tax on millions of separate purchases at Marshall Field & Co.’s store could be collected better in one monthly total return by that concern than by millions of separate returns by the individual purchasers. •Indicates addition and revision for Fifth Edition, May 1, 1922. 12 Q. Why do business men insure themselves against the uncertainties of federal tax costs by 4 per cent to 6 per cent increase of overhead costs until Congress has legislated instead the certainty of a 1 per cent sales tax? A. So as not to impair their capital by taking risks without profits. The experienced merchant and manufac¬ turer insures himself in every transac¬ tion, and likes small and sure gains from large sales. Indeed, Congress itself, since the armistice, has con¬ tinued to impose and collect billions of dollars in taxes in preparation for and insurance against future wars, an insurance which the average business man looks upon as next to absurd dur¬ ing the present generation. Q. What do business men fear? A. Politicians or others seeking to array one class against another class, and especially the farmer’s business against the manufacturing business and the distributing business. Labor leaders continuing to resist economic law, and the indefinite continuance of r he “buyer’s strike,” so-called, until business can be done on correct busi¬ ness principles with all classes alike. At the London conference of the In- ;ernational Chamber of Commerce the lord chancellor, Viscount Birkenhead, spoke of the special duty imposed on business men at this time, “because quite obviously they can give guidance upon these points which no other class in the whole world can give.” “Experience and common sense have habituated us to asking for and ob¬ taining advice from specialists. There never was any pursuit known,” said he, “which was more specialized in its character, more specialized in the la borious attainment of the experience which leads to efficiency than the oc¬ cupation of business men. The world problems of today are those to which business men alone can and must give guidance.” The Chamber of Commerce of the United States of America, in which more than 1,400 commercial and trade organizations hold membership, as a result of two referendum votes on the subject, has presented to Congress, now considering tax legislation, a pro¬ gram which it believes if adopted will obtain the funds needed with the least disturbance to trade and industry. These proposals call for repeal of the present excess profits and war excise taxes and substitution in so far as necessary of a general turnover tax cn all business transactions. The 1 per cent sales tax, to every¬ body, is practically the smallest in¬ direct tax any voter can pay to become a “partaker in the government” and be qualified to vote intelligently on matters of taxation. While for all the well-to-do and rich people a reasonable graduated income tax, in connection with the sales or turnover tax, will act both as a levelling tax between concerns that make little or no profits and concerns which make large profits and a tax based upon “ability to pay.” This point cannot be too strongly em¬ phasized and driven home if we hope to educate the masses and silence the demagogue. Q. What is the pure, business logi¬ cal basis for the Sales Tax? To show the simplicity, equity, mod¬ eration and fundamental soundness of these practical working measures of business taxation., we quote from “Fed¬ eral Income Taxation,” by Prof. T. S. A.dams, on page 551, August number of the “Quarterly Journal of Eco¬ nomics:” Business taxes are imposed because it costs money to maintain'a market and those costs should in some way be distributed over all the beneficiaries' of that market. Looking at the same question from another viewpoint, a market is a valuable as¬ set to the social group which main¬ tains it and the community ought to charge for the use of community as¬ sets. As a matter of pure business logic the government might well meas¬ ure the tax by gross business, saying in effect to the business 1 ^fean: “You have come amongst usjSci have ex¬ ploited our market; ytp have traf¬ ficked as much as y©ur competitor; whether you have used"* your; Opportu¬ nity as well as he i4 not gur^concern. It is the gross voUiihe of your trade which both reprs&pnts'