¹ It is also stated that the additional output which is due to voluntary mobilization is not a net gain, because some of it will be consumed and not put at the disposal of the government. Also owing to war-time shifts in demand and supply some factors will receive rents—incomes that are not necessary to call forth their supply. Some of these rents will compete with government needs. But since rents are earned in many economic situations and are not confined to war rents, and since all incomes—not merely war incomes—are to a large part consumed, it is difficult for the reviewers to see how the broader aim to eliminate rents and to diminish consumption would lead to the special taxation of war gains.

² In view of the current interest in the relative merits of the two methods some additional remarks may be permissible. Even if we drop the prevention of war gains as our fundamental premise there is something to be said in favour of the base period method because it is less upsetting to the existing distribution of income and wealth. Although that distribution has little to recommend itself from any fundamental point of social justice, a case might be made out that it constituted a legitimate vested interest, sudden departures from which should not be made without good reason. The force of this argument in the sphere of taxation depends on the extent to which legitimate vested interests are being honoured in other fields. In a national emergency they are not in general treated with kid gloves, and there is no reason why they should be so treated in the field of taxation. Provided, therefore, that the invested capital method could be shown to have serious advantages over the base period method, there would be little justification for opposing it.

But a proof that the invested capital method is preferable has not been forthcoming. The fashionable argument that it leads to heavier taxation of “rich” corporations that earn a high return on invested capital makes little sense. The ability-to-pay argument can be applied properly only to individuals, not to business units. There is no reason for believing that people who own shares of corporations that earn high rates of return on invested capital are in general more well-to-do than people who own shares of corporations earning high war profits. It has also been asserted, but not proved, that corporations earning a high return on invested capital, can with a given dislocation to the efficient conduct of their business, afford to pay higher taxes than corporations earning a lower rate of return. In the absence, therefore, of proof that the invested capital method would be more equitable as regards the distribution of income or less harmful to the efficient conduct of production, we are left with a slight preference for the base period method, even if we do not make use of the argument that war gains are undesirable.

³ The reader is invited to turn to page 43 of the book and to verify whether this is a correct interpretation of the argument of the authors who state that excess profits taxes are more restrictive than ordinary profits taxes, because they fall on the margin of enterprise to a greater extent than ordinary profits taxes.

⁴ For lack of space, the reviewers cannot comment on the discussion of certain intricate technical matters relating to the treatment of borrowed capital and of security investments in the measurement of invested capital; and its counterpart, the treatment of interest paid on borrowed capital and income derived from security investments in the measurement of profits.

⁵ Pp. 56-7. This statement implies measurement of war gains in real terms.

⁶ It should be noted that no similar case exists for a general taxation of excess incomes. This point escapes the authors owing to the theoretical scheme which they adopt. They mention excess income taxes and excess profits taxes in the same breath, regarding the former as the ideal and the latter as an approximation to it.

⁷ See Final Report of the Committee of the National Tax Association on Federal Taxation of Corporations (in National Tax Association, Proceedings for Conference of October, 1939, New York, Columbia University Press, 1940).Google Scholar

⁸ There seem to be two other lines along: which the theoretical justification of excess profits and excess income taxes might be attempted. One would define as excessive, and tax specially, incomes that are not necessary to call forth productive effort. The other would argue that ability to pay is not only a function of total incomes but also of changes of income: that to forgo an increase of income one has never enjoyed is smaller sacrifice than to be deprived of an equal amount of income to which one has been accustomed. This might constitute a case for a temporary tax on excess incomes in order to mitigate the pain of transition in times when tax rates have to be raised suddenly and drastically. But these arguments do not seem very promising, and since they are not mentioned in the book they are not discussed in this review.

⁹ Computed on the basis of 1936 capital values, incomes, and tax rates, the estimate is as follows: A steeply progressive levy rising to about 60 per cent would have yielded a gross receipt of 2.9 billion pounds, which if applied to debt redemption would at an average rate of 3½ per cent on government obligations have yielded a gross saving in interest of 97 million pounds. As against this there would have to be offset an annual loss of 41 million pounds of income and 34 million pounds of inheritance tax receipts leaving a net yield of 22 million pounds only.

¹⁰ This conclusion seems to be based on the rather arbitrary assumption that the increments of income are the results of additional investment financed by fixed interest borrowing.

¹¹ These distinctions should not be confused with Mrs. Hicks' earlier categories of deadweight, active and inactive debt (cf. Hicks, U. K. W., The Finance of British Government, 1920-1936 (London, New York, Toronto, 1938), p. 285).Google Scholar

¹² By recognizing that the transfer problem of taxation and interest payments “is bound to raise a certain amount of trouble” (p. 25) the authors show their appreciation of the theoretical nature of the tax problem. It is the more disappointing, therefore, to read in the next sentence that these problems arise because transfer payments “are unlikely to have any particular social purpose at the time when they are made.” To the extent that there exists a problem of detrimental and frictional effects of taxation, these arise, no matter whether the expenditures which they finance are real or transfer expenditures.

¹³ Even this thesis may be doubtful if one considers that a destruction of real capital in times of war may profoundly affect the availability of investment outlets and hence the level of income and employment in the post-war period.

¹⁴ In various stages of their argument the authors do recognize the fact that it is the volume of real capital that is relevant from the standpoint of taxable capacity; however, the impression is inevitable that their argument centres around the increase of private property as the crux of the matter.