to draw. The outstanding fact remains, however, that income may come either from active business enterprises, involving the use of capital, or from non-business sources, and the two kinds of income must not be jumbled together. The distinction is clearly carried out to-day in the application of the income tax. From a business income the tax-payer deducts all proper expenses before he computes his income; from a non-business or personal income an apt word is hard to find—he may not deduct any expense. The widow clipping her coupons which give her an income of five thousand a year, even though she must expend the entire five thousand in maintaining her house and family, pays an income tax on the whole sum; so must a salaried man or wage-earner. A business man with a gross income of five thousand and business expenses of three thousand pays a tax only on the difference. In short, income means gain or profit; business expenses, but not living expenses, may be deducted.

When we consider a spending or expense tax as a substitute for the income tax this distinction is vital. The friends of an outgo tax urge that the World War has decreased sadly and to a dangerous degree the wealth of the nation. Tax not energy by taxing profits, the urge to energy, but tax waste and outgo, so that we may increase our stock of wealth, runs the familiar argument. Yet though the income tax does partly encourage waste and expenditure, an outgo tax applied at the point where the unfortunate encouragement of waste exists will be fatal. The reluctance to appreciate this truth rises from the failure to

distinguish between a business and a non-business income.

An income tax in no way encourages expenditures in the case of a non-business income, and criticism directed against the tax in the case of such incomes is only confusing. But in the case of business profits, such expenditures are deductible. Here emerges the great and unmistakable defect of the income tax when applied to a business income. If the tax is high, as it has been in recent years, business is encouraged to be extravagant. Evidences of this in the last few years are all too familiar. Advertising, which soared suddenly into the skies like Jack's fairy-land bean-stalk, inordinate expansion of agencies, efforts to develop foreign business rashly and without preparation-all these unhappy episodes are due largely to the income tax. Business was encouraged to increase expenditure in order to avoid showing a large income, with the resulting necessity of paying the government taxes. Thus, unquestionably, a baneful effect of the income tax method in business has been the encouragement of unwise expenditure, if not waste and extravagance.

An outgo tax upon expenditures involving a business income would have sinister, far-reaching effects. The income tax has encouraged business expenditure and waste, but an outgo tax upon such expenditures would unwisely discourage all business expenditure. ture. It would ruthlessly cut down business enterprise. The business man building up new enterprises, erecting new factories, carrying on a vigorous advertising and selling campaign, is creating prosperity. To discourage such expenditure by taxing it would be courting, indeed imposing,

hard times upon the nation. A distinction cannot be drawn between proper and wasteful business expenditure in applying a tax. Such an interference in business would be sheer paternalism. The government cannot either dictate the method of business expenditure or seek to check the amount expended.

In the case of non-business income, the present tax in no way encourages waste or expenditure, because expense is not deductible. To suggest a tax upon expenditure in order to encourage thrift is to add a new feature to taxation. Would such a tax, aside from discouraging expenditure, create a sizable revenue? For the dominant consideration in taxation is the revenue produced. The first requisite of a tax, as Jacques Necker aptly said when tax difficulties were plunging the proud lilies of France into the abyss of savage revolution, is the production of an ample revenue; otherwise a government imposes an affliction which has no excuse for existence. Would a tax on expenditures, aside from those involved in business, create a worthwhile revenue?

Views differ here. Such a tax could best be imposed in the form of a modified sales tax. A turnover tax, applied without exemptions, is of course impossible because unenforceable. If we have any form of sales tax, it will be after the fashion of the Canadian tax, with its hundred-odd schedules of exemptions,-think of the pulling and hauling and the skill at leap-frog displayed by the lobbyists in Washington while trying to crowd their clients into these schedules!-exempting necessities of life and desired sales. It is doubtful if we should add at this time, when business is repining with melan

choly complaint over a buyers' strike, an additional discouragement on purchases. It would indeed be ironical if these retail interests who have ardently urged the sales tax should receive instead an amplified luxury tax that would further discourage buying. For a sales tax, after the Canadian theory, is virtually an extended luxury tax. Luxury taxes in theory are admirable, but in practice exasperating and disappointing in revenue, although the Canadian tax has been moderately successful. It is not enough to say that such a tax would not be felt by the consumer because it would be concealed; the present income tax, which many insist is being passed on to the consumer, is concealed so far as the consumer is concerned, and yet is complained about harshly enough.

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Indeed, the blithe assumption that our present income taxes are passed on to the consumer, and that a widespread consumers' tax is therefore preferable, is droll, and also specious in its implications.

Like many facile assumptions, it proves too much. No one can accurately say how far a tax is passed on to the consumer. The question is not susceptible of accurate mathematical calculation. The best computations indicate that only a small fraction of the income and excess-profits tax is passed on to consumers in comparison with the burden placed directly on consumers by a sales tax. Profiteers do not need a tax as an excuse to send prices soaring toward the stars; yet profiteers are helpless if they cannot sell. On a rising market greedy men boost prices so high that a small tax charge is unimportant. In a stagnant

or falling market tax burdens cannot be passed on, and profits fade away. If this is not so, why the great outcry against the present taxes because they stifle business? Is not business passing them on to the consumer and escaping the affliction? If the present income and excess-profits tax impose a burden of five billions of dollars that business passes on to the consumer, what great advantage will come by rearranging the same burden on the same backs? Will concealing the tax a little more deftly or collecting it a little more neatly or computing it a little more easily change the hard fact that the burden is breaking the back of business? The chilling effect of our present income taxes upon business arises largely from the fact that business cannot pass on the burden to the consumer, and has been making a bad situation worse by trying through unwise expenditure to decrease its taxable income.

Aside from the encouragement of expenditure a tax upon business income has other unfortunate aspects. To-day the corporate form is used widely in business because of advantages of limited liability afforded. In applying the business income tax to the corporate form, however, double taxation results. The corporation is taxed on its income, and the stockholder is taxed a second time when the remaining income is distributed to him by dividends. This obviously is unjust, and although under the present arrangement the normal income tax is not applied to corporation dividends, yet the individual surtaxes, which are by far the important feature, are rigorously applied. This tends to the accumulation of large surpluses by corporations, and the distribution of

stock dividends which are tax-exempt under the recent decision of the Supreme Court of the United States. The encouragement of stock dividends for tax reasons is unfortunate because investors are entitled to their dividends in cash. Such a policy again encourages sharply corporate expansion in order to use up accumulating profits. If business is to be kept healthy and investors are to be encouraged to save and risk their savings in business, the fair profits must be given back to the stock-holders in cash in order that they may be free to do therewith as they choose.

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Indeed, the income tax well nigh breaks down in determining the relation between the tax upon the corporation and the tax upon corporate profits distributed to the stock-holder. In putting a heavy tax upon corporate income and no tax upon dividends, a small stock-holder is taxed as heavily as the large stock-holder who has a tremendous income. This discourages the investment of surplus capital in business. Stock dividends may be desirable in the case of a large stockholder, but are discouraging in the case of a small stock-holder. Double taxation is not only inherently unjust, but creates dismal confusion. Some suggest as a solution that the corporation, and thereby the stock-holder, should be taxed upon any surplus accumulated over a certain amount, whether distributed or not, in addition to the normal corporation income tax. Obviously, the government dare not, indeed, must not, fix the extent of a normal tax-exempt surplus, for the size of a surplus, involving intimately the financial resources of an enterprise, is

the most vital and dangerous aspect of business judgment. To tax all surpluses over a certain size would result in the government forcing the distribution of such surpluses. Could anything be more dangerous? In a word, those who feel that a large tax should be placed on big business through the income tax are confronted by the fact that it is impossible to work out any system by which the income tax can take from business more than a modest charge without disastrous results.

Again, some businesses make a small profit in relation to the amount of capital used; others, most speculative undertakings, make dazzling profits with little capital. An income tax must be imposed, if it be made heavy, with some relation to the capital used. Otherwise the capital of a business with a small relative profit may pay no return, and will immediately be invested in other forms, and the business be destroyed. The excess-profits tax was an effort to prevent a heavy income tax from becoming fatal by using a sliding-scale of adjustment based on capital invested. But the scale is so complicated as to make the entire matter a business nightmare. A simpler scale cannot be devised, and without such a compensating-scale a heavy income tax, if applied to business, will be as destructive as dynamite.

So long as the business income tax is kept to a modest ten or fifteen per cent., none of these unfortunate problems arise. Within such limits the tax is wise, because it obeys the fundamental principle of collecting no tax unless a profit is made, and the taxpayer thereby enabled to pay. The encouragement of business which arises from tax exemption where no profits are made is an overlooked, yet

far-reaching, incitement to new enterprises. Thus, in a word, the income tax on business is admirable as long as it is slender in amount and unoppressive. Where the income tax on business becomes heavy, it becomes not only unenforceable, but destructive. It is literally an impossible tax if it must produce a tremendous income.

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What substitutes have we if we must obtain more revenue than the income tax itself can produce? Shall we abandon the income tax and adopt an entirely new theory of taxation, or try to supplement the income tax by other levies? This question should be considered not only from the point of view of federal needs, but also from the angle of increasing state and municipal expenditure. A state income tax added to a moderate federal income tax may produce an intolerable joint tax.

Fundamentally, there are two and possibly three means of gathering taxes. Without speaking with the close accuracy of the college classroom, and excluding such relatively unimportant taxes as head-taxes, we can discern the tax on capital, more commonly called the direct property tax; second, the tax on income; and, third, a modification or combination of both of these taxes in the privilege or excise tax.

The capital, or direct property tax, is the most familiar of our modern exactions. The present tax on land, involving the payment of a certain percentage of the value of the land, is at heart a capital tax. The tax itself, of course, may be paid out of income or other sources of revenue, yet the tax remains still a tax on capital. It is only when the tax becomes very high