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Permanent War Economy

T.N. Vance

The Permanent War Economy

VI – Taxation and the Class Struggle
[Section A]

From New International, Vol. XVII No. 6, November–December 1951, pp. 251–266.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

Preliminary figures for 1951 indicate that 25 per cent of current production went to government in the form of taxes, as measured by the ratio of total government receipts (Federal plus state and local) minus total government receipts of social insurance contributions to net national product. This represents an all-time high, exceeding the peak World War II year of 1943 when the ratio was 24.5 per cent. The relationship of government income to current production and surplus value was shown in Table I of Part III (see May–June 1951 issue of The New International). For the estimated ratio of 22 per cent for 1950 presented there, we can now substitute the actual ratio of 24 per cent.

As was stated in Part III, “The increase in state functions, accompanied by a loss in the effectiveness of the capitalist market, has meant a colossal expansion in government expenditures, which, in turn, has necessitated a phenomenal increase in taxes.” With the state (all branches) consuming one-fourth of current output and two-fifths of surplus value, it is no wonder that all segments of the American population have become tax conscious.

Taxes, their amount, character and incidence, are a reflection of the class struggle. This is necessarily so in any class society. It is particularly true under American capitalism where practical politics is keenly alert to group and class pressures, both crude and subtle. In the epoch of the Permanent War Economy, when the ratio of total taxes to current production has increased from 16 per cent in 1939 to an estimated 25 per cent in 1951 – a rise in impact on all classes of better than 50 per cent – taxation becomes a central political and economic question of the highest magnitude.

Who pays the taxes becomes another way of asking who pays for war and war preparations and who bears the major burden of inflation? While the state is periodically forced to resort to borrowing, as shown in the previous article, in the long run the power of the state and the state bureaucracy is dependent on the portion of output that can be siphoned off in the form of taxes of various kinds.

It was not until 1941 that Federal tax receipts exceeded those of state and local governments. And it was only beginning in 1943 that the Federal personal income tax reached magnitudes sizable enough to penetrate the consciousness of the average individual. With the passage of the Revenue Act of 1951, we have now reached a situation where every class resents its tax burden. The, bourgeoisie complain that “taxes have destroyed individual initiative and are impairing the accumulation of capital.” The workers gripe and grumble that “they cannot make ends meet and that their take-home pay is inadequate to cope with the rising cost of living.” In between, the various layers of the middle classes and farming classes bewail “the pressure exerted on entrepreneurial income and professional salaries by rising costs of production, especially taxes.”
 

TOTAL TAX RECEIPTS have increased almost sixfold since 1939. With the major components of taxes accounting for 85-90 per cent of total tax receipts, the basic changes in the tax picture are shown in Table I.

The data are from the 1951 National Income Supplement to the Survey of Current Business of the Department of Commerce. Aside from the major tax components shown, other sources of Federal tax revenue are estate and gift taxes, which rose from $61 million in 1929 to $371 million in 1939 and to a peak of $900 million in 1948, declining to $658 million in 1950; and customs duties, which have not changed materially over the years, yielding $599 million in 1929, $344 million in 1939, and $550 million in 1950. Other sources of state and local government tax revenue are corporate profits tax accruals, which were $145 million in 1929, $156 million in 1939, and rose to a peak of $895 million in 1950; and motor vehicle licenses other than those classified as personal taxes, which were $153 million in 1929, $182 million in 1939, and rose to a peak of $469 million in 1950. In addition, both Federal and state and local governments receive a variety of miscellaneous taxes and fees. Other than Federal grants-in-aid to state and local governments, these miscellaneous revenues do not have a significant effect on the tax structure so far as quantitative impact is concerned.

It will be seen that in 1929 Federal tax revenues were less than one-half the amount collected by state and local governments, with property taxes of $4.5 billion amounting to almost one-half of the total tax yield. In spite of the Great Depression and increasing state intervention under the New Deal, the tax picture remained fundamentally the same in 1939, the only significant change being the more than threefold increase in excise and sales taxes. With the advent of the Permanent War Economy, there occurred a sharp rise in virtually all existing forms of taxation, the most noteworthy increases being in the Federal personal income tax, corporation income and excess profits taxes, and excise and sales taxes. Despite the fact that property taxes rose from $4.3 billion in 1939 to $7.3 billion in 1950, their share of revenue raised by major tax sources declined from 40 per cent to 12 per cent.

Federal personal income taxes yielded less than $1 billion in 1939, but on a gross basis (prior to refunds) produced $15.9 billion in 1943 due to the drastic lowering of exemptions and the sharp rise in rates. Prior to 1943 the average worker was virtually unaffected by personal income taxes. After 1943, taxes become an important element in the cost of living, giving rise to the eminently reasonable demand by the trade unions that personal income taxes should be included in the BLS “cost-of-living” index. Naturally, the income tax yield fluctuates not only with respect to the effective tax rate, but also in relation to the size of the national income. From 1945 to 1950, the gross yield of the Federal personal income tax varied between a high of $20.4 billion in 1947 and a low of $17.7 billion in 1949. But during the same period, personal income rose from $172 billion to almost $225 billion – an increase of more than 30 per cent. The proportion of total tax receipts accounted for by the personal income tax – the one relatively progressive feature in the American tax structure – therefore declined steadily as both real output and total tax receipts increased.

Consequently, even though the Federal personal income tax yield is estimated to rise sharply in 1951 to about $25 billion, the progressive aspects of the American tax structure are still sharply outweighed by its regressive features. This conclusion is without reference to the specific nature of the income tax itself. It is based on the fact that corporation taxes, excise and sales taxes, and business property taxes are shifted entirely or almost entirely to the average consumer. Since these taxes account for the bulk of the total tax revenue, the concept that those who can afford to should pay the major part of the tax load is conspicuously absent in the American tax picture – despite the personal income tax.
 

THE ILLUSION THAT the bourgeoisie bears the real brunt of taxes is one of the biggest swindles ever perpetrated by capitalist propaganda. Capitalist apologists like to refer to the sharply rising rates on large individual incomes, which for the calendar year 1951 reach a maximum of 87.2 per cent of net income (possibly affecting those with individual incomes in excess of one million dollars), but the incidence of taxation can only be seen when the entire tax burden by classes of income is analyzed. It is just as impermissible to confine one’s judgments on the American tax structure solely to the personal income tax as it is to draw conclusions on the average worker’s standard of living without reference to salary deductions, rising prices or the increase in total output.

All taxes and their impact must be considered, as well as the differences in income levels and proportionate shares in total output. Rather than go back to our own estimates, presented in Part II on Declining Standards of Living, we prefer to rely on official sources wherever possible.

First, it is necessary to establish that there has been no fundamental change in the distribution of personal income by income levels, despite the vast growth in total output and personal incomes. This can be done by a percentage analysis of money income going to each fifth of the population, as shown in Table II.

While much has been made of the slight improvement in the position of the middle income groups at the expense of the highest fifth, the changes are all well within the margin of error inherent in all such data. Moreover, there have been certain conceptual changes in this type of analysis over the years. In addition, comparisons between a depression year and a war economy year are apt to be misleading. Fundamentally, there has been no change. If the rich haven’t gotten richer as the poor have become poorer, the relative disparities in income levels have not changed. The rich remain rich while the poor remain poor – despite the tremendous increase in output, both in real and monetary terms. The richest twenty per cent of the population receives almost half the income, in 1948 averaging $9,911, while the poorest 20 per cent receives 3–4 per cent of the income, in 1948 averaging $893.

The distribution of personal income by income levels is before taxes and provides a necessary background for consideration of the impact of all taxes. If the tax burden falls chiefly on the upper fifth, then it would be possible to speak of a relatively progressive tax structure. This is especially so since those in the lower 60 per cent received a maximum income of less than $4,000 in 1948 – the minimum required to maintain any type of “decent” standard of living by any set of criteria. Or, if the upper income groups are bearing a noticeably heavier proportion of the total tax burden as total tax receipts increase, there would at least be evidence that the tax structure is becoming less regressive.

The facts are, however, that the American tax structure was and remains regressive to an amazing degree. The wealthy pay only a slightly higher percentage of their income in taxes than do other groups, and the poorest pay a higher percentage of their income in taxes than the middle income groups. The reason, as has already been mentioned, is that the Federal personal income tax is overshadowed by other taxes whose burden is an inverse proportion to income. That this is indeed the situation and that it has not changed fundamentally under the Permanent War Economy, despite the enormous increase in taxes, can be seen from Tables III and IV.

Thus, just prior to the advent of the Permanent War Economy, taxes took about one-fifth of total personal income, with state and local government taxes accounting for more than one-half of the total tax yield. The completely regressive nature of state and local taxes, together with the semi-regressive nature of Federal taxes, produced a situation where the lowest income groups paid a higher proportion of their income in taxes than did all income groups under $10,000. It is only when the top income class of $20,000 and over (consisting of 0.3 per cent of spending units who received 9.1 per cent of total personal income) is considered that a feeble approach to a progressive tax system is apparent. And, obviously, a member of the bourgeoisie who in 1938–39 received $20,000 cheerfully paid about one-third of his income in taxes, while the average worker who received less than $1,500 could ill afford to pay about one-fifth of his income in taxes.

With personal income having tripled by 1948, the opportunity to recast the American tax structure in a progressive direction, despite the fivefold increase in total tax receipts, was present. Obviously, this could have been done without impoverishing the bourgeoisie who, as demonstrated in Part III, had accumulated sufficient surplus values to permit considerable easing of the tax burden of the lower income groups. Equally obviously, as can be seen from Table IV, this was not done.

Thus, after a decade of the Permanent War Economy, taxes took about one-fourth of total personal income, with Federal taxes now accounting for more than three-fourths of the total tax yield. Nevertheless, the completely regressive nature of state and local taxes still combines with such regressive features of Federal taxes as excise taxes and corporation taxes to produce a situation where the lowest income group still pays a higher percentage of its income in taxes than all except the 5.3 per cent of the spending units in the $7,500 and over category. If there were a finer income breakdown in the higher income groups, the beginnings of a progressive tax structure would become apparent at a somewhat lower figure than in 1938–39, but there has been no fundamental change in the incidence of taxation nor in the character of the American tax structure.

The worker who received $1,000 in 1938–39 and paid approximately 18 per cent in total taxes may have had his income increased to $2,500 in 1948, with his tax payments rising to 21 per cent. His contribution to total government tax receipts would then have gone up from $180 to $525, leaving his net income after taxes at $1,957 against $820 – an increase in effective money income of 141 per cent. Meanwhile, the bourgeois whose income in 1938–39 was $10,000, on which he likewise paid 18 per cent in total taxes, may have had his income increased to $30,000 in 1948, with his tax payments rising to 40 per cent. The bourgeois’ contribution to total government tax receipts would then have increased from $1,800 to $12,000, leaving his net income after taxes at $18,000 against $8,200 – an increase in effective money income of only 120 per cent. On the surface, therefore, the worker is better off and capitalist inequality has tended to be reduced as a result of rising taxes.

Such growing “equality” the bourgeoisie can well afford, for if our hypothetical worker and bourgeois are assumed to represent their respective classes, what has happened is that total effective money income of both classes has risen from $9,020 to $19,975 – an increase of $10,955, of which $9,800, or 89.5 per cent, has gone to the bourgeoisie. The bourgeois is now only nine times better off than the worker, whereas previously his effective money income was ten times greater, but again nothing fundamental has changed in the relative positions of the basic classes of modern capitalist society. The state, however, whose function is more and more to protect the rule and the wealth of the bourgeoisie, is being financed in steadily increasing measure by the workers and lower middle classes. Therein lies the secret of the role of taxation under the Permanent War Economy, while equality of incomes remains just as much a mirage on the horizon as it ever was.

The data in Table IV can be used to derive the relative class burdens of taxation, if certain arbitrary assumptions be made to relate income brackets to classes. The results are necessarily rough, but demonstrate conclusively that the bourgeoisie by no means bear the major share of financing their state. If we assume that those in the $7,500 and over group, comprising 5.3 per cent of the number of spending units, represent the bourgeoisie and their main supporters among the upper middle classes, we can calculate their class tax burden, since Kreps notes that the effective tax rates are computed on an estimated personal income in 1948 of $211.9 billion, which is close enough to the reported figure of $209.5 billion. With this upper income group receiving 28.8 per cent of personal income, it is apparent that they received $61 billion, on which they paid an over-all tax rate of 31.7 per cent, or a total tax bill of $19.3 billion. This is equivalent to slightly more than one-third of total tax payments. In other words, the working classes and lower middle classes contribute almost two-thirds of total tax payments.
 

THE KREPS PAMPHLET, previously cited, constitutes one of the most effective indictments yet published on the inequities of the present American tax structure. In addition, it effectively refutes the arguments advanced by the apologists of the bourgeoisie that the masses must necessarily bear the major burden of tax increases. Kreps states and proves that “the principal beneficiaries of inflation were (in terms of actual dollars and cents) not the lower-income-bracket wage-and-pension-receiving masses but the upper-bracket-income entrepreneurs and owners of properties and equities.” Readers of earlier articles in this series are thoroughly familiar with the facts of income distribution, which thoroughly debunk the carefully cultivated notion that the working masses have been the beneficiary of inflation.

Another assiduously propagandized falsehood is that the low-income masses are under-taxed and should therefore bear the major burden of new taxes. The factual refutation of this argument has already been presented, but there is another side to this coin which is most interesting. Not only do the upper income groups pay a smaller proportion of taxes than they claim or than they should by any standard of justice or equity, but they pay much less than they legally and morally should. The tax laws are drafted and administered by the representatives of capital in the interests of the ruling class. As Kreps puts it, “... opportunities for tax avoidance and tax evasion are much larger in the high-income brackets than in those below $3,000.”

The gap between Treasury reports of adjusted gross personal income, based on income tax returns, and Commerce estimates of personal income is extremely large. In 1948, for example, the Commerce figure was $45 billion higher than the Treasury total. Today, it must run well over $60 billion. Only a portion of this income that somehow miraculously evaporated when income tax returns were filled out can be attributed to non-monetary aspects of personal income included by Commerce, or to legal tax avoidance by low-income groups such as the exemption of military pay below $1,500 and the right to postpone reporting of accrued interest on E-bonds.

“Tax avoidance, completely legal but nonetheless real,” states Kreps, “favors those in the upper income groups; for example, those who own their own homes. In the $7,500 and over bracket two out of three own their own homes whereas in the brackets between $1,000 and $3,000 the figure is about half that percentage. Now homeowners are not required to report the constructive income which they receive from their investment in their home (which may keep them out of a higher tax bracket). In addition, they can actually deduct local taxes on their home, and interest on the mortgage if there be one, which deduction cuts down their Federal income taxes at the highest marginal rate applicable to their income. Renters (of whom there are proportionately more than twice as many in the lower income brackets) simply pay out rent each month from an income total on which they pay taxes in full.

“Moreover, the splitting of incomes of married persons, which means nothing on lower bracket incomes (below $4,000), involves progressively more and more dollars of tax savings to each couple in the upper brackets, another reason why the per cent of income taken by taxes in the upper income brackets is not as high as one might expect.

“Those receiving entrepreneurial incomes are given several additional loopholes ... Those owning oil properties can take 27.5 per cent depletion allowances year after year. Capital gains are taxed only 25 per cent [now 26 per cent – T.N.V.] after but a six months’ waiting period. Businessmen can split the income from their business several ways simply by making their wives, infant children and relatives ‘partners’ – though they may be called upon to prove that they did not do so simply for tax avoidance purposes. Executives can receive compensation in the form of stock options subject only to the rate on capital gains rather than the full income tax rates. And so on.”

In other words, there are very few opportunities for legal tax avoidance in the lower income brackets. The worker’s tax is withheld at the source and unless he has incurred unusually heavy medical expenses or some similar permitted deduction he pays 100 per cent of his income tax obligation. The worker cannot carry back or forward his “losses” that may have arisen due to unemployment, but the owner of capital can. The worker cannot deduct “business expenses” which the average businessman does to the full limit of what he can get away with. In fact, deduction of business expenses for entertainment, travel, etc., has reached such scandalous proportions that virtually every businessman has established charge accounts with restaurants, night clubs, etc., to “prove” that he spent the sums deducted as business expenses. That he also feeds and entertains himself while actually or theoretically promoting business is apparently outside the administration of the tax law. There can be little doubt that the amount of tax avoidance that occurs through the one device of “business expenses” amounts to billions of dollars.

The upper income individual can pose as a public-spirited person, and incidentally on occasion promote his own business interests, by making his 15 per cent contribution to charity. The lower income person simply does not have the means, nor does he as a rule possess the economic, social or political motives for such contributions. Related to this eminently respectable tax-dodging device is the legal evasion granted to the creators of trust funds, which not only avoids current income taxes but permits fortunes to be passed on to heirs with a notoriously minimum amount paid in estate taxes. The adroit use of gifts and gift taxes, it should be noted, is an integral part of this type of tax avoidance. The low amount of gift and estate taxes, observed earlier, and their decline since 1948 would undoubtedly prove to be a more profitable source of Congressional inquiry, in terms of added income to the government, than even the corruption in the Bureau of Internal Revenue.

There are many other legal loopholes. The excess profits tax, in particular, is so full of loopholes that it is practically a joke. So overt is the loophole situation that when President Truman signed the Revenue Act of 1951 on October 20th, he was constrained to say:

“Furthermore, this legislation does little to close the loopholes in present tax laws, and in some respects provides additional means by which wealthy individuals can escape paying their proper share of the national tax load through such devices as excessively liberal ‘capital gains’ provisions, family partnerships and excessive depletion allowances on oil and gas and certain mineral properties.”

It should be obvious that the function of legal loopholes is not primarily to provide additional business for accountants and tax lawyers. Legal avoidance of taxes is part of the system by which the ruling class perpetuates its wealth and power. The tax laws are admittedly rigged in the interests of business. Elimination merely of obvious legal loopholes would by itself raise sufficient revenue to have made unnecessary the increases in the income tax under the Revenue Acts of 1950 and 1951. It must be emphasized that legal tax avoidance amounts to billions upon billions of dollars and that the bourgeoisie is virtually the sole beneficiary of such largesse. Not the lower income groups but the upper income groups are under-taxed!

In addition to tax avoidance, there is tax evasion, which is presumably illegal. States Kreps:

“Opportunities for tax evasion are similarly much more abundant in the upper income brackets than in the lower. Evasion is next to impossible where employers or fiduciaries make reports and act as collecting agencies in withholding taxes at the source, i.e., for wage earners, pensioners, public employees, etc. These have no chance to under-report their income [but the New York World-Telegram and Sun of December 10, 1951, reports that the government had warrants out on October 31st for more than $96 million owed by employers as tax delinquency on workers’ payroll deductions – T.N.V.]. But note [in Table V] the types of income on which under-reporting occurred in 1946.”

If the data in Table V are indicative of what normally transpires, 14 per cent of income tax net income is evaded by failure to report the legally correct amount. Which income levels are guilty of such evasions? Obviously, the upper income groups, for only 71 per cent of entrepreneurial income, 37 per cent of interest payments, 76 per cent of actual dividends paid, and 45 per cent of rents received, appeared on income tax returns. Income from these sources goes overwhelmingly to the upper income groups. Even in the case of wages and salaries, where there is a five per cent under-reporting, amounting in 1946 to $5 billion, or 25 per cent, of the total of $20 billion unreported, much, if not most, of the under-reporting would undoubtedly be traceable to the upper income groups.

At present income levels, assuming that the same degree of under-reporting holds true, the difference between “actual” and “reported” money income would exceed $30 billion rather than the $20 billion shown for 1946. On the basis of 1951 income tax rates, especially in view of the fact that tax evasion is concentrated in the upper income groups, elimination of tax evasion due to under-reporting of incomes would add well over $5 billion in tax revenue to the Federal government. This is without reference to cases of fraud where there is a deliberate failure to report income that arose illegally and was not entered on books of account but usually remitted in cash transactions. Nor has any attempt been made to assess the amount of income tax evasion due to the keeping of deliberately fictitious books. Likewise, the data on under-reporting of incomes have nothing to do with the amount outstanding in delinquent taxes, which the Bureau of Internal Revenue admits totals over $632 million (New York Times, December 11, 1951).

Whether income tax evasion due to bribery of tax officials would add significantly to the amount of revenue the government should be collecting, we do not know. Perhaps the present Congressional investigation will throw some quantitative light on the picture. One thing is certain, however, and that is that it is not the low-income groups that bribe and corrupt government officials. The best proof that under-reporting and evasion of taxes among the upper income group are costing the government billions of dollars annually in lost tax revenues is to be found in the reported decision of Secretary of the Treasury Snyder to require the individual auditing of each taxpayer’s return in the $25,000 and over bracket rather than the sampling technique used for the mass of income tax returns.
 

DECEPTION IN TAX MATTERS now extends to the government’s official press releases. All official Washington releases on the Revenue Act of 1951 stated, in effect, that: “The bill increases the tax on most individual incomes by 11.75 per cent.” Whereupon, the average citizen concluded that, if his income remained the same, he would pay only 11.75 per cent more in Federal income tax in 1951 than he did in 1950. He was also led to believe that his 1952 tax would, barring a further increase in tax rates, be about the same as in 1951. This particular fraud was exposed in an article in the New York World-Telegram and Sun of November 20, 1951, based on an analysis supplied by Fred S. Peabody, for 20 years a special agent in the Income Tax Bureau and now an accountant and tax expert. A selection of cases to portray the actual impact of the Revenue Act of 1951 on individual income taxes is shown in Table VI.

“You’ll notice,” states the article, “that some really do pay only about 11 per cent. The fellow who has to struggle with a net $50,000 income gets off with that.

“‘But simple arithmetic,’ said Mr. Peabody, ‘shows that for 1951 the increase over 1950 is much greater than the 11.75 per cent announced in Washington. Most persons will pay between 16.75 and 18 per cent.’

“What Mr. Peabody emphasizes is that the percentage increase cited on passage of the new tax bill last October was ‘apparently based on the increase in tax to be withheld from wages beginning Nov. 1, instead of on the increase in tax you will pay for the full 1951 year.’

“The gimmick was the sizable credit which everybody was allowed on the tax paid last spring on part of his 1950 income ...

“‘The Revenue Act of 1951,’ Mr. Peabody explained, ‘eliminated the 13 per cent credit allowed on the first $400 of tax granted under the 1950 law. So it is obvious that the percentage increase over the 1950 rate is at least 13 per cent of the first $400 of tax.

“‘It is believed that the loss of this 13 per cent cut affects a large majority of taxpayers. The rest lost a reduction of 9 per cent under last year’s law.

“‘As the increased rates ... did not become effective until Nov. 1 their full effect won’t be felt until next year. Then most persons will pay between 27.25 and 28.25 per cent more than they would have paid on the same income at 1950 rates.’”

Thus, the real impact of the new tax increase is on the workers and lower middle classes and won’t be felt until March 15. At that time, those who have regularly been receiving sizable refunds because too much has been withheld will find that they get little or no refund, while others will find that they have to pay substantial additional sums to the government. The impact on March 15, 1953 on 1952 incomes will be even greater, as indicated, without any further increase in the income tax.

There is no need to cite the increases in excise taxes on liquor, cigarettes, gasoline, etc., or other regressive features of the Revenue Act of 1951. The facts are there for all who wish to take an unbiased look at them. It is frequently argued, however, that regardless of justice, etc., it is necessary to increase taxes more heavily on the lower income groups because that is the only way to reduce consumption of consumer commodities that are draining materials away from war output, and that inflation cannot be prevented without mopping up the “excess income” of the low-income masses. Both arguments are basically false, as Kreps demonstrates.
 

“THE THIRD FALLACY requiring exposure to facts,” observes Kreps, “is the notion that 60 per cent of the people must do 60 per cent of the consumption.” As exposure of this tendentious argument in favor of increasing taxes on the lower income groups, in order to restrict consumption and thereby save critically needed materials, he offers the evidence contained in Table VII, submitted by Professor Musgrave in testimony before the Joint Committee on the Economic Report.

Comments Kreps:

“Those getting less than $3,000 (representing 54 per cent of the spending units) buy only 26 per cent of the durable goods, only 27 per cent of the liquor, 28.8 per cent of all goods at retail excepting food, and make only 31.3 per cent of all consumer expenditures.

“On the other hand, those getting over $4,000, comprising only 27 per cent of the spending units, buy 54 per cent of all durable goods, 50.5 per cent of the liquor, 51.2 per cent of all goods sold at retail excluding food, and account for 48 per cent of all consumer expenditures. It is the spending of those getting over $4,000 that must be curbed if a major frontal attack is to be made on the problems of restricting consumption.” (Italics mine – T.N.V.)

The apologists for the bourgeoisie also like to argue that it is the low-income masses who are responsible for the inflationary pressure generated by excess demand. The masses, they claim, hold the bulk of savings. This “hot” money, they assert, will be used to push up prices unless the tax collector relieves the mass of the population of “huge” savings. Nothing could be further from the truth. The overwhelming portion of personal savings has always been concentrated in the hands of the upper five or ten per cent of the population.

Writes Kreps:

“Actually, the amount of United States Government bonds and savings and checking accounts held by the majority, that is, the 26,000,000 consumer units getting less than 12,700, is only 27.1 per cent of the total. In so far as there is a ‘hot money’ problem with respect to E-bonds in 1950 or 1951, it is for the most part a middle and upper-income bracket problem. They are the only groups that have any substantial quantities of E-bonds or other liquid assets left. The lower income groups have for the most part sold theirs.

“In 1949 more than half the population failed to save a dime. In fact, on balance, their dissaving has continually increased though, of course, there still remain a minority even in the lowest income brackets that manage to save despite the fact that the majority do not. On the other hand, the savings of the top tenth have increased so much that in 1949 their net savings exceeded the total of all net savings in the country. In other words, on balance, the lowest 90 per cent in the income scale saved nothing.”

Moreover, adds Kreps,

“... since V-J Day, about twelve-and-a-half million spending units have parted with all the savings bonds they owned ... In short, ‘hot money’ in large amounts is primarily not a mass-income bracket, but an upper-income bracket phenomenon.”

The workers and lower middle classes, thus, were not responsible for the orgy of consumer buying following the outbreak of the Korean war. On the contrary, it was the bourgeoisie and upper middle classes, the only ones with the income, savings or credit to permit widespread advance buying and hoarding, particularly of durable goods, who built up private inventories in precisely the same manner as businessmen accumulated huge inventories. While inflation is inherent and permanent under the Permanent War Economy, as we have previously demonstrated, the engine of inflation is always and necessarily the accumulation and expenditure of surplus values on the part of the bourgeoisie.

We need not be particularly concerned with Kreps’ conclusions, for his position is the traditional one of the liberals and intellectuals. As such, it will receive brief comment below. His case against heavier taxes on mass incomes, however, is most cogently made. It is well to have the data before us when evaluating the position of the various classes with respect to taxation.

“... any new tax falling on those getting less than $3,000 will cut production much more than it will cut or divert consumption.” In support of this contention, which is based on the fact that “tens of millions of families have had their budgets so cruelly cut by inflation that minimum standards of health and productivity are being eroded away,” Kreps offers the following income analysis, which we present below as Table VIII.

“To be sure,” states Kreps, “economic literature abounds in controversies concerning the ‘efficiency level’ of consumption or the level of ‘minimum needs.’ Thus, for example, the minimum health and decency budget currently published by the Bureau of Labor Statistics is one so high that even at current high levels of national income, nearly three-fourths of the population fail to attain it.

“Yet in quantitative terms even that budget hardly seems luxurious or excessive. It provides, for example, that a man can buy a top coat only once in ten years, that his wife can have only one new cotton street dress a year; that her wool dress has to last five years. The family can buy a low-priced car only once every 15 or 16 years. Other durable goods such as cook stoves, refrigerators, washing machines, vacuum cleaners, sewing machines, have to last 17 years or longer. In quantitative terms, such a budget level seems a considerable distance removed from luxury consumption, yet at 1950 prices the income estimated by the Bureau of Labor Statistics as necessary to finance this standard of living is $1,630 for a single person, and $2,330 for a married couple.

“In order to be highly conservative, the figures in Table VIII have been computed on a basis more than one-third lower than the BLS figures ... Even on this basis, as the table clearly indicates, the tens of millions of families and single individuals who receive less than $2,000 a year come short by many billions of dollars in obtaining the income necessary for efficiency consumption and productivity. As a defense measure, incomes not higher than efficiency levels ought to be kept inviolate and not further lowered by general sales taxes or general manufacturers’ excise taxes.

“Table VIII likewise indicates where the money in excess of such, a minimum may be found. Of the total of roughly $44.5 billion in 1948 that may have been available in excess of minimum need, $17.2 billion, or 40 per cent was in the hands of persons with incomes of $10,000 or over; another 22 per cent in the hands of persons receiving over $6,000 but less than $10,000; more than 23 per cent in the hands of persons receiving over $4,500 but less than $6,000; and less than 8 per cent in the brackets below $3,000.”

 
Part VI–B

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