inflation which would have been inevitable if the money had been
first drawn out of the banks and then re-deposited with them "
(Leffingwell) .
In its decision of the momentous credit questions arising
during the war, the Government steered a middle course, avoid-
ing the mistakes which characterized the Civil War financing
in the United States and much of the European financing during
the World War. One set of critics urged much greater reliance
upon short-time debt. Another set urged long-time bonds,
" sold over the counter," at interest rates high enough to keep
the bonds at par when the inevitable post-war reaction set in.
The Government took the intermediate course, utilizing but not
abusing the patriotism of the people on the sound assumption
that no rate of interest could have been sufficiently high to
float these huge issues on a commercial basis alone. And its
use of anticipatory short-time certificates was designed not
only to prevent money stringency during the war, but to keep
some pressing war debt current for extinguishment in the pros-
perous time which usually follows the termination of a great
war. " No administration could have resisted the pressure for
reduction of taxes and increase of expenditures if the war debt
at its maximum of $25,300,000,000 had been funded, and it
had subsequently appeared that taxes and salvage would more
than meet current expenditures. The time to pay down a war
debt is immediately after the war " (Leffingwell). With the
depression that set in in 1921, the Government introduced
successfully the device of selling notes running from three to
five years along with the more temporary Treasury certificates.
And the same middle course was taken, with the results already
stated, between the proposals to exempt Government obligations
entirely from taxation and to subject them to all Federal taxes at
full rates; between those who counselled " conscription of
wealth " and those who would have paid practically the whole
cost of the war with credit devices of one kind or another. One
mistake, the issue of Government paper money, was wholly
avoided, and bank credit utilized in its place. But every effort
was employed to draw the borrowings from actual savings and
to get Government securities as rapidly as possible out of the
banks into the hands of investors. These efforts succeeded; on
June i 1921 (according to reports from banks transacting over
40% of the commercial banking business of the country), less
than $600,000,000 of the long-time debt of $15,271,000,000
outstanding, only $186,412,000 Victory notes (out of $4,022,000,-
ooo outstanding) and $184,086,000 Treasury certificates (out of
$2,572,000,000 outstanding) were pledged with these banks as
security for loans and discounts.
The management of the credit operations of the war was not
without its shortcomings. The preferential discount rate for
loans secured by Government obligations may have been a
mistake; perhaps, too, much use may have been made of bank
credit and not enough use of taxation particularly of taxes
on the consumption of luxuries and on incomes of the moderately
rich; and it seems unquestionable that, owing to inability to
gauge the exact time and amount in which the subscriptions to
the Liberty loans would be paid, there was an overlapping of
Treasury certificates and of bond subscriptions, with the result
that the Treasury balance throughout the war was unnecessarily
large. But these errors and defects were of secondary impor-
tance. The smoothness and efficiency with which the credit
machinery worked during the World War particularly in
contrast with its inefficient management during the Civil War
indicate that in essentials the credit policy of the Government
was sound and its administration remarkably efficient. The
response of the people to the call for bond subscriptions, the
cheerfulness with which the heavy war taxes were borne, and the
absence of even a temporary breakdown in the credit mechanism
with which the war was financed, were all admirable.
State and local finance were affected in unexpected ways by the
war. At the beginning of the decade under review, state Government
n particular was undergoing an unusually rapid expansion ; and both
state and municipal expenditures were increasing nearly twice as
rapidly as those of the Federal Government. The tax burden, in the
case of the state and local Governments, was increasing but not so
rapidly as expenditures; increasing deficits were the rule; and the
public debt both in total amount and per capita was increasing. The
situation at the beginning of the decade and the principal financial
movements throughout the decade are suggested in Tables II.
and III. It should be noted that the Federal expenses or cost pay-
ments in Table II. do not include payments made for the purchase
of obligations of foreign Governments; and that the per capita
statistics quoted m Table III. represent net expenditures and
revenues after deduction of working credits and tax refunds.
868
UNITED STATES
TABLE II. Governmental Cost Payments 1
Voar
States
United Stat
ES
Cities having a pop
30,000
. of over
Total
Per
capita
Total *
Per
capita
Total
Per
capita
1919
1918
1917
1916
1915
$635,370,153
561,000,635
513,063,487
505,399,448
490,707,827
$6.05
5-42
5-04
5-05
4-99
$15,740,132,791
9,312,169,079
2,405,932,009
1,048,225,180
1,047,834,967
$149.78
89.16
23.40
10.36
10.44
$ ,202,323,639
,144,629,589
,081,865,678
-043,594,297
,057,125,696
$34.67
33-35
32-53
32-34
33-92
1 Bureau of Census, Financial Statistics of States, 1919, p. 30.
1 Amounts for the United States represent the total payments of the United States less payments for investments (consisting principally
of obligations of foreign Governments), payments for reduction of the public debt, and the excess of national bank-notes retired over
deposits for their retirement.
TABLE III. Net Expense and Tax Revenue, Per Capita, for All State
Governments and for Municipalities Having a Population
of over 30,000; 1010-9. '
Year
States
Municipalities having a
pop. of over 30,000
Per capita
net expense
Per capita
tax revenue
Per capita
net expense
Per capita
tax revenue
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
_ *
a
t
i
>
$4.11
4.10
4.00
4-25
4-73
$3-74-
3 ^Z
4.06
4.48
5-o6
$25-13
26.04
26.06
26.5,
27-63
26.12
26.10
26.55
.27.48*
$21.64
21.76
22.32
22.16
j
23.16
23-84
24.82
25-I4
27.22'
1 From E. B. Rosa, Expenditures and Revenues of the Federal
Government. Tables 18, 19.
1 Data not available.
1 Computed and inserted by the writer of this article.
It is evident from the tables that the financial operations of the
state and local Governments were affected by the events of the war.
That the expansion of their activities would be checked, was to be
expected; but that the state and local Governments in the face of
the heavy Federal war taxes should seize the occasion to adopt or
approach the policy of " pay as you go " was, perhaps, not to be
expected. Nevertheless this has taken place. City expenditures
per capita were not only less in 1919 than in 1915, but the tax revenue
which was seriously deficient in the earlier year had in the later
year increased almost to the point of meeting governmental costs.
And beginning with 1917, the receipts of the state Governments as
a whole have exceeded their expenses. In 1919, for instance, "31
states " realized enough from revenue to meet all their payments for
expenses, interest ana outlays and to have a balance of $50,192,314
for paying debt " (U.S. Census Bureau, Financial Statistics of States
1919, p. 30). In 17 states there was a deficit aggregating $15,378,246.
Much of the economy has been achieved by discontinuing public
works or improvements or refraining from those contemplated, and
the cost of those public works which have been undertaken has in
increasing degree been met from tax revenue rather than the pro-
ceeds of loans. In 146 of the principal cities, for instance, the per-
capita payment for capital outlays in 1918 was only $7.51 as con-
trasted with $10.18 in 1909. Despite opinion to the contrary,
Government ownership by states and cities has not expanded during
recent years. Public-utility enterprises have developed less rapidly
than other branches of the Government and far less rapidly than
private business. According to official statistics, these public enter-
prises yield a substantial profit over the costs incurred, more than
three-fourths of the net earnings from these sources being credited to
the water departments owned by municipal Governments.
Looking to the revenues of the state and local Governments, the
general property tax was still preeminent in 1921. Nearly one-half
of the total tax receipts of the states and nearly nine-tenths of those
of the cities, were derived from this source. Among the states, the
relative importance of the property tax was slowly declining; but
among the cities, in recent years it had slightly increased. Among
the state Governments, taxes on business had been rapidly increas-
ing and yielded more than half as much as the property tax itself.
With the repression of public improvements, due to the war, both
the absolute and relative yield of special assessments had fallen off.
In general, the drain upon the national income created by Federal
taxes and loans had forced upon the state and local Governments
measures not only of economy but of parsimony, and it is probable
that their efficiency had correspondingly suffered.
Budget Procedure. Methods of financial administration
made substantial progress during the decade under review.
The old and generally inefficient " state boards of equalization "
had in many states given way to central tax commissions
charged with the power and duty not only of securing greater
equality in the distribution of the tax burden but of supervising
the work of local assessors, administering the more important
corporation taxes and usually also the state inheritance taxes.
The work of the property assessors had noticeably improved
in recent years, particularly in the cities. In a majority of the '
states, some more or less effective budgetary system had been '
introduced ; and in an increasing number of commonwealths the
county and local divisions were being required to follow a pre-
scribed budgetary procedure. Tax limit laws, designed to check
local expenditures, had in several states been adopted or;
revived in improved form; and their effectiveness was being
studied with great interest by those interested in governmental
economy and efficiency. In the state Governments administra-
tive progress had temporarily taken the path of centralization, >
and the events of the war had greatly centralized the fiscal
machinery of the Federal Government. So far as the tax I
machinery of the Federal Government is concerned, it is apparent
that despite heroic efforts the burden of the war taxes had been
too heavy to permit its work to be kept current; and here, at
least, it was generally conceded that the path of improvement lay
in decentralization. The crowning administrative events of
recent years had been the self-denying ordinance adopted by the
House of Representatives, by which in the future the old appro-
priation committees would be combined in a single committee on
appropriations, and the introduction of a national budget system, -
by the passage of the Budget and Accounting Act of 1921.
BIBLIOGRAPHY. Annual Reports of the Secretary of the Treasury ;
on the State of the Finances, particularly those for 1919 and 1920;
Taxation and Public Expenditures, The Annals of the American
Academy of Political and Social Science, vol. xcv. (particularly
noteworthy as containing E. B. Rosa's Expenditures and Revenues of
the Federal Government) ; Financial Statistics of Cities and Financial
Statistics of States, published annually by the Bureau of the Census,
Department of Commerce; R. C. Leffingwelt, The Treasury's War
Problem (Senate Document No. 301, 66th Congress 2nd Session);
E. L. Bogart, Direct and Indirect Costs of the Great World War (Pub.
of the Carnegie Endowment for International Peace) ; E. R. A. Selig-
man, " The Cost of the War and How It Was Met " (Amer. Econ.
Review, vol. ix., No. 4). (T. S. A.)
IV. TAXATION
The movement by which taxation has supplied, with the
passage of time, an increasing share of the public revenue of the
United States, was accelerated by the events of the decade
1910-20. At its beginning, according to the general financial
survey of the national, state and local governments made by the
Bureau of the Census for the year 1912-3, public expenditures
were met to the extent of approximately 5% from loans, 70%
from taxes, 4% from special assessments, and 21 % from interest,
rentals, departmental or commercial earnings, and miscellaneous
sources. During the World War, borrowing took first place, and
probably not more than one-half of the aggregate public expend-
iture was met by taxes. But in the fiscal year 1920, the Federal
Government began actively to reduce its short-dated debt; and
in that year Federal, state and local revenues were larger than
expenditures. Of these revenues (despite the large amounts
realized by the Federal Government from salvage and other
non-tax sources) taxes supplied over 80% of the total. From the
financial standpoint as a source of revenue compared with
UNITED STATES
869
taxation Government ownership is not gaining in importance.
In the states and cities, the earnings of public service enterprises
shrank in relative, though not in absolute, importance during
the decade; and in the national budget, postal earnings, Panama
Canal tolls and similar receipts have been dwarfed by the huge
tax levies necessitated by the war. Federal taxes, which before
the war were of smaller amount than city taxes, became after it
larger than all state and local taxes combined; and the leading
Federal tax, the income tax, displaced the property tax from its
old position at the top of American public receipts. In the fiscal
year 1913, property taxes supplied over one-half of the revenue
receipts of all divisions of Government, while the yield of income
taxes was comparatively insignificant. In the fiscal year 1920
property taxes produced less than one-sixth, while income and
profits taxes produced at least one-third and possibly as much as
40% of the total taxes collected in the United States.
Federal taxes at the beginning and end of the decade 1910-20
are contrasted in Table I. which portrays statistically the super-
session of customs duties by the income and profits taxes; the begin-
ning of the decline of the tax on alcoholic beverages caused by pro-
hibition legislation a decline which is disguised m the table by the
inclusion of new taxes on non-alcoholic beverages, introduced since
the beginning of the World War; the introduction of the Federal
estate or inheritance tax; and the multiplication of internal taxes
on articles of common consumption. In the past it has been customary
to contrast " direct taxes " such as income and inheritance taxes,
which are supposed to rest in the main where first imposed, with
" indirect taxes " such as those on tobacco and beverages, which,
however collected in the first instance, are supposed to be paid
eventually by the producer or consumer. Interpreted with reserva-
tions, the distinction is serviceable. It will be noted that in 1910
customs, liquor and tobacco taxes regressive taxes on consumers
yielded over 95% of the total tax revenue; while in 1920 the same
taxes augmented by similar taxes on " luxuries," attendance at
amusements, and transportation and insurance, produced only 25 %
of the total. Progressive income, profits and inheritance or estate
taxes produced over 70% of the total in 1920. It is obvious that
the war revolutionized the character of the Federal tax system in
the direction of what has been called " liberal democratic finance."
However, in July 1921 the income and profits taxes were falling off
more rapidly than the indirect taxes on consumption, owing to busi-
ness depression ; there was a recrudescence of protectionism, and a
strong movement to introduce a general sales tax. It seemed prob-
able, at that time, that for the fiscal year ending June 30 1922 indirect
taxes would supply from 30% to 40% of the total tax collections.
The " consumer " would be thus paying no small share of the
national tax bill.
Slate taxes and other receipts during the period 1915-9 for which
general statistics could be obtained are analyzed in Table II. The
net revenue receipts of all states for the year 1919 amounted to
$670,183,918, and the net governmental-cost payments to $635,370,-
153, from which figures the general meaning of the percentages
given in the table may be inferred. In arriving at the " net revenue
receipts," there have been excluded the proceeds of bond issues and
of sale of investments or supplies, refunds returned by reason of
error or otherwise, and bookkeeping items representing transfers
between governmental departments. The term " net governmental-
cost payments " is applied to actual payments for expenses, interest
and outlays, less counterbalancing payments and receipts, refunds
received on account of error or otherwise, and departmental trans-
TABLE I. Tax revenues of Federal Government: 1920 and 1910.
(From E. B. Rosa, Expenditures and Revenues of the Federal
Government.)
1920
1910
Income and excess profits.
Distilled spirits and beverages .
Tobacco
Transportation, insurance, etc.
Luxuries, automobiles, candy,
furs, etc
Estate or inheritance.
Capital stock of corporations,
brokers, etc
Stamps on legal documents
Admissions to amusements
Miscellaneous ....
Total internal revenue .
Customs net revenue after re-
funds, etc
Tax on national bank circula-
tion, net
Postal war revenue .
Total tax revenue .
$3-956,936,003
197,332,105
295,809,355
307,769,841
270,971,064
103,635,563
95,141,732
81,259,365
89,710,525
9,014,694
$20,959,958(0)
208,601,600
58,118,457
2,277,204
85,407,580,251
296,274,230
7,172,598
4,913,000
$289,957,220
323,519,307
3,333,011
$5,715,940,080
$616,809,538
(a) Corporations only excess tax measured by net income.
fers. By " outlays " is meant capital outlays for permanent prop-
erty. With these explanations, the more important developments
in the field of state taxation and finance during the latter half of
the decade may be inferred from Table II. Taxes increased in the
aggregate from $364,543,797 in 1915 to $527,819,167 in 1919, but
the relative importance of taxes among the total receipts decreased
slightly. As a source of state revenue, property taxes were declining
in importance, while business and other licence taxes were increas-
ing. Earnings of public enterprises, together with rents, interest
and charges for highway privileges commercial earnings in their
general character were comparatively speaking stationary. For
the three years 1917-9 state receipts exceeded state expenses by a
substantial margin.
City taxes and the relative importance of other classes of munici-
pal receipts are analyzed in Table III., which is based upon the
revenue receipts of 146 of the larger cities of the United States for
which comparative statistics are available for a period of 17 years.
The net revenue receipts of these cities increased from $439,126,723
in 1903 to $1,103,665,750 in 1919; and the net governmental cost
payments increased from $514,189,206 to $1,113,599,879 in the
same interval. The net revenue receipts thus increased 151 % while
the cost payments increased less than 117%. In 1903 the receipts
constituted only 85-4% of the expenditures, but in 1919 the receipts
amounted to more than 99 % of the expenditures. There is thus no
foundation for the current statement that because they may issue
bonds " free from taxation," American cities have been led in recent
years to borrow unduly.
Table III. describes in figures the more significant movements
among city taxes and receipts during recent years; the material
increase in the relative importance of the general property tax, the
decline of the liquor taxes, the shrinkage in the use of the special
assessment since the outbreak of the war, and the slight decrease
in the importance of earnings of public service enterprises. Expressed
in absolute figures, the total net revenue receipts rose from $21.14
per capita in 1903 to $35.26 in 1919; receipts from the general prop-
TABLE II. Relative importance (percentage distribution) of net revenue receipts and net governmental cost payments of all states:
1915-9. (From Bureau of the Census, Financial Statistics of States, 1919, p. 33.)
Per cent, of net governmental
Net revenue receipts
cost payments repre-
sented bv:
Per cent, obtained from :
Per cent, re-
quired for
-2u
Payments for :
w
Taxes.
in ifi
. ,
__.
meeting :
X%
O,
u
<3
1
Property
is
i
c/)
1
Business and non-
business licence
Special assessment
and special charge
for outlays
Fines, forfeits,
and escheats
Subventions, grant
donations and per
sion assessments
Earnings of genera
departments
Highway privi-
leges, rents, and
interest
Earnings of public
service enterprise
I
1
Interest
.O +->
rt O &
Ts8
" e-
. en
**
8i
r
Expenses of genera
departments
Expenses of public
service enterprises
Interest
CO
>,
jj
3
O
Net revenue rece
1919
50-9
2-O
o-3
25-5
0-7
0-4
2-6
12-3
4-8
o-5
8 1-3
2-9
15-8
85-3
0-4
3-1
II-2
105-5
1918
50-8
2-1
0-4
25-5
o-5
0-4
2-2
12-4
5-2
0-6
81-5
3'2
15-3
84-4
0-4
3-4
n-8
104-1
1917
53'5
2-6
0-4
22-5
0-6
0-4
2-1
12-0
5-3
o-5
82-6
3'3
H-i
83-0
0-4
3-3
13-2
IOI-I
1916
55-5
i-7
o-5
2I-I
0-6
0-4
2-9
"5
5-3
o-5
87-6
3-3
9-1
79-8
0-3
3-o
16-8
9i-5
1915
58-7
o-5
0-7
2O-6
o-5
0-4
1-6
II-I
5-3
0-6
83-9
3-2
12-9
77-2
0-4
2-9
19-4
92-5
870
UNITED STATES
erty tax increased from $12.98 per capita in 1903 to $23.29 in 1919;
and the earnings of public service enterprises rose from $2.42 per
capita in 1903 to $3.61 per capita in 1919. As stated above, the
relative importance of the last class of receipts declined slightly
during the period under review.
TABLE III. Relative importance (percentage distribution) of net
revenue receipts of 146 cities for specific years: ipoj-lp.
(From Bureau of the Census, Financial Statistics of Cities, 1919, p. 55-)
1919
1917
1915
1913
1911
1909
1907
1905
1903
c
0>
bo
66-0
o
.
2-8
3-6
4.4
5-o
5-2
5-9
6-6
5'9
6-3
1-4
i-5
i-5
1-5
i-5
1-5
i-3
3-3
2-3
2-O
2-O
2-O
2-3
2-5
2-2
2-2
.3
I
5-6
7-8
8-5
8-2
8-4
8-4
8-2
7-9
7-6
2 = E
MB 3
O ft
~S!
23
M O
c-o e
4-1
4-0
4-2
4-5
4-6
4'9
4-8
4-7
4-3
.
II
bo
10-2
9.9
IO-O
9.9
10-6
10-9
rt-2
11-4
i
6-4
6-6
6-9
6-6
5-8
5-3
5-8
5-
5-5
The most important aspects of American taxation during the
decade 1910-20 are those connected with the rates and the aggre-
gate burden of taxation. Direct taxes were pushed to a height
thought to be impossible before the war. The maximum rate under
the Federal income tax is 73%, and this is supplemented in some
places by a state income tax which, in Wisconsin for instance, exceeds
at the maximum 13 per cent. Corporations have been subject to
equally drastic taxes. The war profits tax for 1918 was 80% on
profits in excess of a deduction which in the average case only
slightly exceeded 10% of the invested capital ; and corporations paid
in addition a 12 % income tax, a capital stock tax, and state or local
taxes which frequently exceeded (in theory, at least) 2 % of the capi-
tal value of the property of the corporation.
In addition there were miscellaneous Federal taxes important
enough to have produced over fifteen hundred millions of dollars
in the year 1920. This unprecedented taxation placed upon busi-
ness a serious burden, brought about a complexity of law and pro-