The federal graduated income tax, a debate; the constructive and rebuttal speeches of the representatives of the University of Chicago in the thirteenth annual contests of the Central debating league against Northwestern and Michigan, January 20, 1911

Front matter

Avery Architectural and Fine Arts Library Gift of Seymour B. Durst Old York Library

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The Chicago Debating Teams

Foreword

This debate is published with the .confident feeling that it presents a comprehensive and up-to-date survey of both sides of the Graduated Federal Income Tax. The question is not a new one, but has been debated many times. Some of these debates have been published and are meritorious, notably that of Iowa State University, 1910. The Chicago debaters, while taking advantage of the experience of others, have gone further than any, and have given a new form to many elements of the question. They have treated it as a live issue, of present interest, and have given it a quality of freshness that may surprise those who think it is a dry subject. The fact that the negative case lost is not a proof of its weakness, but is explainable on other grounds — without detracting from the credit due our victorious opponents. It should be remembered that the negative lost in all three debates.

It will be observed that the affirmative and negative arguments do not directly answer one another. This is because the affirmative was given against Northwestern, and the negative against Michigan. The speeches are given as actually spoken, so far as possible. Although the points of one side do not meet those of the other as here given, yet it is believed that practically the whole ground is covered, and that, in any debate, substantially the same arguments would necessarily be used, though the order might be changed.

This is true in particular of the negative, whose analysis of possible methods of collection, all reducing, to self-assessment, seems calculated to answer any plan the affirmative could bring up. The affirmative discuss here only the degressive type of tax, graduated downward, and omit the progressive type, graduated upward, believing its difficulties insurmountable.

CHARLES F. McELROY,

Debating Coach.

The University of Chicago, February 1, 1911.

Introduction

The Central Debating League

The Central Debating League comprises the Universities of Chicago, Michigan and Northwestern. Originally it included Minnesota also, and held its first contests in 1899. Each school chose one team, which paired off in semi-final debates in January of each year, the winners meeting in April for the championship. In 1906 Minnesota withdrew, and the League was reorganized on the triangular basis. Each school now selects two teams, taking opposite sides of the same question. The affirmative team remains at home, while the negative team visits. The care given to preparing the case and training the men in the Central Debating League has set a standard of excellence recognized throughout the country.

The Debates of 1910-1911

On January 20. 1911, the Chicago negative team journeyed to' Michigan; the Michigan negative went to Northwestern; while the Northwestern negative came to Chicago. In each instance the affirmative won, and, as a corollary, each negative lost, making a triple tie for honors. The same thing happened two years ago, except that at that time victory perched on the negative banner.

At Chicago the debate was held in Leon Mandel Assembly Hall, and was presided over by Dean James P. Hall, of the University of Chicago Law School. The Chicago speakers, advocating the affirmative, were Edward E. Jennings, Lew McDonald, and Paul M. O'Dea. The Northwestern speakers, defending the negative, were Jay L. Chestnutt, O. E. Reinhart, and Raymond Pruitt. In the rebuttal speeches Northwestern kept the same order, while for Chicago. Mr. O'Dea spoke second and Mr. McDonald last. The judges were Judge Edward O. Brown, of the Illinois Appellate Court; Professor John M. Clapp, of Lake Forest L'niversity; and Hon. S. S. Gregory, of Chicago.- Their verdict was unanimous for Chicago.

The debate against Michigan was held in University Hall, Ann Arbor. Mich., and received special honor in the presence of Governor Chase S. Osborne, who presided. While waiting for the judges' decision he made an appeal to the debaters to use their oratorical powers in the interest of the various reform measures now before the people. The Chicago speakers were Merrill I. Schnebly, Albert F. Mecklenburger. and Arthur P. Scott, on the negative. Michigan's debaters on the affirmative, were John Gutknecht, Benjamin H. Reck, and Robert J. Curry. In rebuttal the Chicago order was unchanged, but every Michigan man had a different place. Mr. Reck spoke first. Mr. Curry second, and Mr. Gutknecht third. This was a piece of skillful strategy, whose success vindicated its wisdom. The judges were ex-Attorney General F. S. Monnett. of Columbus, Ohio; Hon. Charles F. Coffin, of Indianapolis. Ind.; and Hon. Jackson W. Sparrow, of Cincinnati, Ohio. They gave a solid vote for Michigan.

The third debate, held at Northwestern, resulted in a victory for that school's affirmative team over Michigan's negative by a vote of two to one.

The Chicago Debaters

Edward Jennings is a graduate of Wayland Academy. Beaver Dam. Wis. \\ hile there he won the Newton Oratorical contest and represented Wayland Academy in a debate with Carroll Academy. At Chicago he was a member of the Literature college debating team and the Sophomore debating team. He won the Junior Extempore contest in 1909. Member of the class of 1912, Arts College.

Lew McDcnald is a graduate of the Hopkinton, Iowa, high school and of the State Teachers' college. He took part in debates against the State Normal school and the State Agricultural college. He also won first place in several school medal contests. He is in his second year in the Law department at Chicago.

Paul M. O'Dea graduated from the Springfield, Missouri, high school in 1905, and from Drury College in 1909. While at the latter institution he participated in debates against Arkansas University and Washington University, and was class orator. He was a member of the Varsity championship team that defeated Michigan in 1910. President of the Freshman class in the Law School.

Merrill I. Schnebly, of Peoria, 111., prepared at the Peoria high school. He graduated from Bradley Polytechnic Institute in the class of 1909. While there he was on the Bradley debating team against Eureka College. He is now a member of the Senior class in the College of Arts, and a Freshman in the Law school.

Albert F. Mecklenburger, of Okolona, Mississippi, prepared for college at the Okolona high school. He graduated from the University of Mississippi in the class of 1907. He represented his University in the. Gulf States Oratorical contest, winning first place. He is at present a Senior in the Law school of the University of Chicago.

Arthur P. Scott, of Evanston, prepared for college at Lewis Institute, and graduated from Princeton University. He was a member of the University debating teams there against Harvard and Yale, and was valedictorian of his class. He is at present a graduate student in the department of history in the University of Chicago.

The Delta Sigma Rho

The Delta Sigma Rho, under whose auspices this debate is published, is an honorary fraternity composed of debaters and orators who have competed in inter-university contests. It has chapters in about a dozen of the leading schools of the country. The chapter of the LTniversity of Chicago keeps in close touch with the debating situation. Its members are willing and valuable aids to the coach during the preparation for each debate, while its general oversight goes far to stimulate and sustain debating interest among the students. In promoting this publication, the chapter hopes it is initiating a regular series of printed debates for Chicago, to be brought out each year.

Honor to Whom Honor is Due

Thanks and appreciation are due to Prof. Alvin S. Johnson, of the Economics Department, for advice and criticism in the shaping of the affirmative case; to Mr. H. P. Chandler, Instructor in Debating; B. Samuels, H. G. Moulton, M. F. Carpenter and D. E. Carlton, all A 2 P men, for assistance and criticism in the training of the men; to Paul M. O'Donnell and J. W. Hoover, of the ASP, for active aid in the publication of this book; and to Miss Cora M. Gettys and Miss Clara S. Roe for co-operation in the use of the library facilities.

The Debate

(The Michigan debaters, on the affirmative, proposed to apply the Enqlish income tax system to the United States, but raising the limits. Incomes below $5,000 mere to be exempt, incomes between $5,000 and $15,000 to be taxed on a graduated scale and incomes over $15,000 at a uniform flat rate.)

(The Chicago affirmative plan is to tax incomes between $2,500 and $20,000. While modeled on the English plan, its adaptation to American conditions is pointed out. The Michigan debaters contented themselves ■with saying they would use the English system.)

EDWARD E. JENNINGS, FIRST AFFIRMATIVE.

Our question means that Congress should levy a tax upon incomes, so graduated that small incomes are exempt ; moderate incomes bear a low rate, and larger incomes bear a higher rate of taxation.

This question is of immediate interest. An amendment to the Federal Constitution is now before the various states. Six states, including our own state of Illinois, have already ratified this amendment and the chances are that most of the rest of the states will do the same.

The income tax is not a novel, theoretical, nor untried scheme, but it is old and well established. Fourteen foreign nations at present are using some form of an income tax. England has used it for one hundred and ten years. These nations vary in size from the German Empire to little Holland. The rate varies from 2 per cent in Italy to 68 per cent on incomes over fifty thousand dollars in Japan. The amount exempted varies from fifty dollars in Japan to eight hundred dollars in England. The temperament of the people varies from the stolid Swede to the mercurial Frenchman. In short, each of these nations levies an income tax in a form best suited to its own size, needs and the temperament of its people.

Our Federal Government used it as a Civil War measure. Congress again placed it upon the statute books in 1894, but the Supreme Court declared it unconstitutional. The fear of a similar fate prevented its being made a part of the Payne-Aldrich tariff bill, but popular demand forced Congress to submit the Sixteenth Amendment to the states, which would forever set at rest the question of its constitutionality.

We of the affirmative base our case in support of this tax upon three propositions : —

First — We need another tax as a supplement to our revenue system.

Second — This should be a tax on incomes, graduated, and levied by the Federal Government.

Third — Such a tax can be levied and collected beyond the shadow of a doubt.

I. It is my purpose to show that the United States needs another kind of tax. Our present revenue system is deficient in two ways. In the first place it is unstable and inelastic. It has an embarrassing faculty of piling up surpluses at times and giving way to deficits when it is most needed. The Treasurer's report shows a surplus of $111,000,000 in 1907, followed by deficits of $20,000,000 in 1908, $119,000,000 in 1909, and $19,000,- 000 in 1910. Here are three deficits in succession, and President Taft in his recent message predicted a deficit for the coming year. In the twenty years since 1890, according to the Statistical Abstract of 1909, we have had ten deficits and ten surpluses. The surpluses have aggregated over $500,000,000, or $50,000,000 a year. The deficits aggregate $650,000,000 or $65,000,000 a year. With a revenue so fluctuating and undependable it is impossible to make our receipts and disbursements balance. These surpluses and deficits can be estimated with a fair degree of accuracy, but the tariff and internal revenue are so rigid that Congress is powerless to prevent them. But these taxes could be adjusted so as to furnish the major portion of our revenue, and if supplemented by an elastic income tax, Congress, after determining the legitimate expenditures of the Government, could raise the proper amount of money to meet them.

According to statistics from the Department of Commerce and Labor, England by adjusting her income tax keeps her receipts and disbursements within $4,000,000 of balancing. Japan with a protective tariff similar to ours supplemented by an income tax keeps almost an exact equilibrium between receipts and disbursements. The Statistical Abstract shows a surplus of only $4,000 in a budget involving $600,000,000.

Then again, with an income tax supplementing our present revenue system we would have the machinery in operation to meet any emergency that might arise. The slight financial flurry of 1908 created a deficit of $1 19,- 000,000 in 1909. Ten years previous to that the Spanish-American War brought on large financial obligations that the tariff could in no way cope with. In 1862 Congress passed an income tax as a war measure, but it yielded almost no revenue until 1866, after the war was over and the time of greatest need had passed. If we have the machinery of an income tax in operation it .will be possible to expand the rate to meet any such emergency.

II. In addition to this need for elasticity, we need it for justice in the distribution of taxation. The old economic theory of taxation based upon ability to pay has not been improved upon.

Our present Federal taxes are taxes upon consumption. In other words we are taxing people upon what they eat, drink and wear, and not upon their ability to pay. Such taxes are manifestly unjust, because of their burden upon the poor and middle classes. It is estimated that 25,000 people own one-half of the wealth of this country, but they pay very little more of Our Federal taxes than do any 25,000 taken haphazard from the middle class. You and I, members of the middle class, consume as much sugar as does the person with an immense income. Thus we pay our per capita share of the $60,000,000 revenue from sugar, and as a side issue we foster a disreputable and unprincipled sugar trust. The same is true of a high tax upon wool. It takes as much wool for a $30 suit of clothes for you and me as it does to make a $200 suit for the millionaire, and the duty is higher upon the cheaper grades. Cotton goods follow the same rule. The tax is highest on the goods of lowest grade. And so we might continue almost indefinitely to verify the general rule that we must have a high tariff upon articles of common consumption — goods that all the people eat, drink and wear every day in the year — in order to raise the enormous amount of money needed by this Government. Is it any wonder that the Payne-Aldrich tariff bill as a relief measure was an "insult to the intelligence of the common people?" With no other available form of taxation it was necessary to inflict these injustices.

Because of these great defects in our revenue system there is a spirit of discontent with our tariff schedules that cannot be stifled. The voice of the people in the last election was unmistakable. We maintain with confidence that our tariff schedules are going to be reduced. The people will not stand for any one per cent reduction or any other such farce. The demand is for a material and decided reduction. The conscience of the people is awake to the injustice and inefficiency of our present system and a cleaning up is inevitable. Our position is stronger than that of merely stating that our tariff ought to be revised. It not only ought to be revised but it is going to be revised. Such a revision must result in less revenue.

The question therefore arises : Can we get along with less revenue in the future than we have in the past? According to the Department of Commerce and Labor there has been a steady yearly increase in expenditures averaging since 1890 $100,000,000 for every five years. In 1890 our disbursements were $297,000,000, 1895 $356,000,000, 1900 $487,000,000, 1905 $563,000,000, 1909 $662,000,000. It is true that there was a decrease in expenditures of $28,000,000 last year, but this was due partly to the fact that less money was used for improvements than previously and partly to the business administration of President Taft. The field for saving and cutting down expenses is necessarily limited, both in extent and in time, and everyone must concede that we are going to continue to expand and develop. Not only must the constructive work already begun be completed but new demands will constantly arise. We therefore not only will need as much money as we have in the past but we will need a great deal more. Senator Newlands says that we have immediate need of $100,000,000 per year for internal improvements.

How evident, therefore, is our need for reform :

1. With a revenue system utterly devoid of elasticity:

2. With our Federal revenue raised entirely by a tax upon what we eat, drink and wear instead of upon ability to pay ;

3. With an unmistakable demand for tariff revision that will result in less revenue ;

4. With our Government halting before constructive work because of lack of funds;

We maintain, Honorable Judges, that there is a definite and immediate need for an income tax.

MERRILL I. SCHNEBLY, FIRST NEGATIVE.

The question before us is a tax. What are the reasons for any tax? The primary purpose is to raise revenue; the second, perhaps, to regulate. The first question to confront us, then, is, "Do we need the revenue to be raised by the proposed tax ?"

We oppose the income tax upon the ground that it is absolutely unnecessary for revenue. We shall show further that it is not practicable in operation, and will work actual injustice. In proving this, we show also that it cannot be used for purposes of regulation.

An income tax is not necessary for revenue. In the first place, our present system is adequate for immediate needs. In proof of this, we cite the fact that during the last decade, with but three exceptions, every year showed a net surplus of ordinary receipts over ordinary disbursements. The decade as a whole gave the huge surplus of $369,000,000. At the end of the last fiscal year, not counting the extraordinary expenditures of the Panama Canal, there was a surplus of $15,000,000 and a cash balance of $106,000,000. The present year will produce a surplus. Therefore, we see that the past decade has shown a surplus ; the last year showed a surplus ; and the present year indicates a surplus. We go further than this. The next year, it is estimated by the Secretary of the Treasury, we will have a surplus of $50,000,000. Even though our opponents desire to include the expenses of the Panama Canal, there will still be a surplus, as the revised estimates allow but $49,000,000 for both construction and fortification, leaving $1,000,000 to the good.

In the face of these facts, how can it be argued that we require additional taxes? Senator Cummins, one of the most ardent advocates of the income tax, based his support solely upon the ground that it was needed for revenue. He said :

"The senator from Rhode Island stated that we did not need more revenue than will be received at the customhouses. If these conclusions are sound, I for one abandon my proposal for an income tax, for I say without hesitation that if, in securing adequate protection, a revenue is necessarily raised that will meet the reasonable expenditures of Government, then, from my standpoint, it would be an economic crime to levy an income tax."

How badly he was mistaken, time has shown. Instead of that deficit of $60,000,000, there was a surplus of $15,000,000. Therefore, we certainly do not need an income tax for present revenue.

In the second place, will our present system remain sufficient in the future ? For several years we may expect expenditures to actually decrease. In 1910 they were $2,000,000 less than in 1909 : appropriations for 1911 were $28,000,000 less than in 1910; and, finally, estimates for 1912 are $52,000,000 less than appropriations for 1911. This makes a total reduction of over $80,000,000 in three years.

This reduction is not due to abnormal causes, nor is it a political trick; it is due to the soundest business reasons. It is due simply to the fact that the United States is applying efficiency and economy. For instance : A postal deficit of $19,000,000 two years ago has been entirely wiped out this year ; the Secretary of the Treasury has abolished 400 useless places in his department ; improved methods of collection at New7 York are saving $10,000.- 000 annually in custom receipts, and since the appointment of Collector Loeb, receipts from passengers have grown 100 per cent. Among the further opportunities for economy, President Taft refers to the fact that it costs at Annapolis $309 to collect $1, and at York, Me., $505.

Now grant that after a few years the limit of economy will be reached, and expenses will begin to increase with the growth of the country. With expansion will come increased importations, and, hence, the present system can easily be adjusted to produce revenue corresponding with the needs. Prof. Seligman, the political economist, says :

"So far as considerations of revenue are concerned, it can scarcely be contested that the income tax is unnecessary for Federal purposes. Federal revenues in the past have, in normal times, been derived almost entirely from custom duties and internal indirect taxes. There is no reason why these sources should not suffice for the future."

Deuate : The Federal Graduated Income Tax

But, aside from the question of the tariff, a slight raise of the internal revenue would yield vastly increased receipts. The present rate on spirits is but half of what it is in England. Why not double the tax on beer? It is now 3 cents per gallon. That would mean an increased revenue of $58,- 000,000; and this would not decrease consumption. In 1898, with a tax of $1 per barrel, consumption was 37,000,000 barrels ; in 1900, with a tax of $2, or twice as much, consumption was 39,000,000 barrels, or 2,000,000 barrels greater.

Therefore, we conclude that our present revenue system is adequate for our present needs, and will remain adequate for future needs ; hence, another tax would be superfluous.

Let us see what would be the effect of putting on an additional tax, such as the income tax. The yield of such a measure is estimated by its friends at from $40,000,000 to $70,000,000. Add this sum to our estimated surplus this year of $7,000,000, and we shall have from $47,000,000 to $77,000,000. What do the gentlemen of the affirmative propose to do with this enormous sum? What is its justification? A large surplus is a temptation to recklessness and extravagance, and is actually worse than a deficit.

Perhaps our opponents think this surplus could be avoided by cutting down the tariff. But when we talk about tariff reduction, we deal with something very elusive. The people, at different times, have expected various things to be done with the tariff ; usually they have been sadly disappointed. We believe they were last year. What reason have we to think that there is to be an immediate annihilation of the tariff? Indications are that changes will be made, if at all, schedule by schedule, and these spread over several years. It will be a careful, scientific revision. A Democratic House with a Republican Senate and President will hardly achieve radical revision. The popular position on the tariff question is this : we believe in the principle of protection, but we resent overprotection for the benefit of the trusts at the expense of the ultimate consumer. As Prof. Taussig of Harvard says: "No rational person, even though he were the most radical free trader, would propose to abolish at one fell swoop protecting duties to which a great industrial system had accommodated itself."

Now there is no reason to believe that a reduction of tariff rates will reduce revenue. Many of the tariff schedules are so high that they prohibit imports and yield no revenue. They merely permit the trusts to levy an enormous tribute upon the consumer. Herein lies the evil of the system. No one, I think, complains of the $3.25 per capita tax which he pays to the Government because of a tariff. Take, for example, an old illustration. According to Mr. Schwab, steel rails are made in England at a cost of $19 per ton and laid down in America at $24 plus a tariff of $7.84, or a total of

$31.84. The Steel Corporation makes rails at S12 and, thanks to the tariff, is able to sell at S28. making a profit of 122 per cent. The importations yield to the Government $30,000, but the Steel Trust collects $28,000,000 from the people.

The oil schedule yields $12,851 ; yarns, of the cheap variety, valued at less than 30 cents a pound, $132; blankets, valued at less than 40 cents a pound, $385 ; valued from 40 to 50 cents, $377 ; ready-made clothing gives practically nothing. Now if the duty is lowered on these articles, a far greater quantity will be imported, and schedules now yielding almost nothing will be turned into productive sources. This is true of a large majority of the schedules.

Speaking of reducing revenue derived from the tariff, Senator Aldrich says :

"The only way that revenue from the tariff can be substantially reduced is by adopting one of two courses — either by the adoption of prohibitory duties, which will stop revenue, or by placing manufactured articles that will compete with articles produced in this country upon the free list."

Whatever may be our opinion of Air. Aldrich. he is certainly an authority upon the tariff. Therefore, we conclude that any reasonable revision will mean increased revenue.

I have now proved that an income tax is unnecessary for revenue, because our present system is adequate and will continue adequate : that a reduction of the tariff short of free trade will mean an increased revenue : and all forces combined with the proposed income tax would yield an immense surplus, for which no legitimate use can be found.

My colleagues will show that a Federal, graduated income tax will not work, and cannot be made to work.

lew Mcdonald, second affirmative.

PRELIMINARY REBUTTAL

The negative charge us with an inconsistency. The gentleman asked how we are to eliminate inequalities in the present system, and at the same time keep it in operation in connection with an income tax. It is quite evident that indirect taxation is working to the point of exhaustion. The deficits of the last four years indicate that the present sources of revenue are not commensurate with the demands for money. With our Federal expenditures weighing down upon us more heavily from year to year, and the agencies of Federal revenue unable to respond to these needs, the consistency of our position rests on the expediency of getting the machinery of a Federal

[ii]

DEBAfE : The: Federal Graduated Income Tax income tax into operation, in order to meet the increasing needs and at the same time offset the regressive tendency of the tariff, which is bound to be reduced to an industrial basis.

MAIN SPEECH

My colleague has pointed out that the present system of indirect taxation is a tax upon consumption and in no way related to a man's ability to pay.

Since income is the best measure of a man's ability to pay, an income tax is the fairest kind of a tax, and a graduated tax is the best form of an income tax. because it properly distributes the burdens of taxation. It devolves upon me to prove the expediency of graduation. Ability to pay taxes does not increase with the magnitude of the income, but in a peculiar economic ratio which is greater than simple proportion. The French economist. Say, illustrates the principle in this way: He takes two families, one whose income is 300.000 francs, the other 300 francs, and subjects each to a ten per cent tax. An exaction of 30 francs from the poor man not only robs him of actual necessities but of things which occasion most distressing inconvenience. A ten per cent deduction from the rich man's income, leaves him 270,000 francs, enough to more than satisfy every rational want. Quoting Prof. Say's exact words, "A tax in this case which would be simply proportional would be far from just." Continuing he said, "I shall go further and say that a progressive tax is the only just tax."

This is the logic upon which we advocate the graduation of a Federal income tax. With eighty per cent of this country's wealth owned and controlled by 3.000 estates, corporations, and individuals, we contend that we must measure a man's ability to pay, not by the amount of his contribution to the tax fund, but by the surplus left in his possession. This will determine the justice of our rates.

Our plan of graduation is this — we would exempt incomes under $2,500 on the ground that this limit most nearly conforms to the minimum of subsistence in the United States. Incomes between $2,500 and $5,000 should pay a certain rate : between $5,000 and $10,000 a higher rate ; for every additional $5,000 of income we would levy a correspondingly higher rate to S20.000, upon which we would assess our maximum rate. For all incomes above $20,000, we would have a uniform rate for this reason, that above such point the standard of living in this country is practically the same, and to be consistent with a fundamental rule of taxation we must have a maximum limitation, which in this case we place at $20,000. This plan would be graduated downward. We would assess all incomes at the source. Rent is to be collected from the tenant who pays it, dividends from the corporation who declares them. We would assess all incomes at source on the basis of