More study would be needed to do justice to this great fiscal weapon but one is inclined to pass lightly over the absence of further discussion because of the payment lag, which hinders the usefulness of the tax. The first installment on income taxes is payable 2 1/2 months following the year for which the income is measured. Since we allow quarterly payments, we can suppose that there is a one-year span between the earning of the income and the payment of the tax.

With respect to corporate income taxes, the influence of a lag in business stimulation as against exchange depression and price increases will keep the benefits from mirroring themselves immediately in the corporate balance sheets and their profit and loss statements. The N. R. A is one of several Government agencies that may tend to reduce profit margins by accelerating cost fluctuations and eliminating the lags that act to the advantage of the manufacturer. In general it is not impossible that our present economic philosophy may tend to reduce corporate profits. Corporate policy will be to stress retention of assets and to plough back earnings in order to accumulate capital in tangible or security form. Though the corporate income tax is levied against non-disbursed profits, the influence of the corporate lack of desire to keep its capital stock value up by means of earnings profits will be left. A few nationally known corporations enjoy high prices for their shares today merely because they are known to be pursuing policies that will conserve assets during inflation rather than increase profits. The fact that disbursed profits would fall under the progressive personal income taxes while the undivided earnings which are retained are subjected to only the corporate 13 3/4% rate should be taken into consideration.

The writer has been informed that the Treasury uses wholesale price and physical volume of production forecasts in compiling its confidential corporate income tax revenue estimates. The usefulness of the physical production index is no doubt impaired for inflation purposes because it presupposes some constant relation between costs, prices, and profits; otherwise, the index could not be used for measuring profits. The use of the wholesale price index also must take for granted that definite relations between prices and production and inventories and sales exist. One is inclined to deny that a relation between wholesale prices and corporate profits will hold after the earliest stages of the inflation.

The capital stock and excess profits levies may be treated was being ancillary to the corporate income tax. The other hand the capital stock tax will hit all the capital dilution, and the excess profits tax will be valuable in searching out large and sporadic gains, which certain corporations will enjoy. The present excess profits tax with its 5% rate will not be of much value as a currency contraction tax device, but it will be valuable as the background for further developments. The year lag will ruin the real usefulness of the profits levy; fortunately the capital stock tax will, by virtue of its present payment requirements, have an average lag of only six months.

A feature of the corporate income taxes that determines their yields to a large extent is the provision for treatment of inventories. The use of cost as a criterion will bring much lower revenues to the Treasury than would market evaluation. Our provision might be much more effective if the last word of the phrase "cost or market whichever is lower" could be changed to "higher."

The next group of taxes that are surveyed are the estate and gift taxes. Of the two factors in the yield of the estate tax, the frequency of deaths is hardly subject to inflation influences. It is highly problematical whether the frequency of demises in the upper brackets will show any improvement. The other variable, value of estates, is more subject to boom reactions. The German and French inflations were both characterized by a slow but growing response in the value of securities. Bonds fell slowly, and stocks rose apparently with some hesitation. The recent tendencies to chase after equities on the market at the slightest rumor of inflation show that we may differ with respect to common stock experience, but it is possible that it will be some time before fixed-income obligations begin sliding down. A recent report (Federal and State Taxes -- Report of the Joint Committee on Internal Revenue Taxation 1933, p. 253) indicates that the holdings of real estate mortgages, bonds, insurance benefits, and other fixed yield investments form a large proportion of the bigger estates subject to taxation. Unless the wealthy use their property and credit to change the nature of their assets their estates will suffer more than they will benefit from inflation. But if foreign experience is indicative, the wealthy will better their economic position and will shift the opportunities for losses to the shoulders of the institutions and the lower and middle classes. Gift taxes are not big revenue yielders and will probably not play much of a role in inflation finances, though related transfer taxes will no doubt spring into being.

Estate taxes are payable one year after the death of the decedent, but, according to provisions of the law, the Treasury is given the power to postpone payments, at its discretion, up to six years. The average payment lag now is about two years. There is no reason why this should not be reduced to as close the one-year date as possible, but even if this is done the tax will be useless in combating an inflation.

To summarize, the so-called direct group of the Federal taxes, comprising the personal and corporate income taxes, estate and gift taxes, capital stock and excess profits levies (yielding over one billion dollars in the fiscal year 1934), do not present a particularly happy picture. The yield aspect is uncertain, but no doubt exists as to the payment lags. A Treasury that has no cash balances and wishes consistently to avoid borrowing in any form will be thankful for the existence of any other taxes except those mentioned. Without exception our system lacks those taxes that are the best counter-inflation devices. We have no gross income tax, no not fortune or capital levy, and no way of taxing unrealized capital gains except in the event of death.

Liquor and tobacco taxation yielded close to $700,000,000. out of a total of $2,672,000,000. (internal revenue only) in the past fiscal year. It is difficult to see how the yields from these taxes will benefit from an inflation.

Alcoholic beverage taxes have a few features pointing to the conclusion that returns will fail to keep pace with monetary depreciation. Our chief source of liquor revenues is beer, and beer consumption will undoubtedly fall off since it is peculiarly sensitive to lower class difficulties. The quality of the liquor in this country hardly points to its use as commodity popular as a store of value. Even with our currency severely depreciated nobody abroad will ever drink our present liquor. There may be a decline in imports (due to exchange depreciation), which will not be matched by a corresponding increase in purchases of domestic products. We import because of our inability to satisfy certain demands with or own beverages rather than because of price factors. Naturally whatever rise in prices occurs will not affect our specific taxes.

On tobacco equally, we find that specific taxes that will benefit solely form turnover increases are levied. Only the cigar taxes are classified according to price. In addition to the fact that these represent but a small proportion of total tobacco tax returns, the upper limit of 15 cents for cigars makes it a specific tax after that level is reached. There is no reason to assume that tobacco consumption will increase, and, even though we may increase our export possibilities, it is clear that our inability to tax exports will prevent this factor, if it materializes, from becoming a benefit to the Treasury. (At this point it might be stated that the possibilities of an export boom are exaggerated. In addition to the competitive currency warfare already mentioned, the device of protective tariffs against depreciating currencies are too well known and likely to be used against this country. They are already in effect in some nations).

If tobacco is used by tobacco companies, as it undoubtedly will be, as a commodity store of value, the fisc will derive no benefit. Our tobacco taxes are levied only on removal of the product for sale.

In alcohol and tobacco excise taxes more than a quarter of Federal tax yields are represented. They will not in their present form keep pace with the inflationary movement. The Treasury can, however, derive whatever consolation it desires from the fact that both liquor and tobacco tax collections are prompt and offer no lag. Solely the minor wine spirit levies are not payable immediately.

(We are dispensing with a discussion of the processing taxes since the earmarking of receipts excludes them from the Treasury in -- and outflow in the sense that specific use is made of the yields regardless of their amounts. The processing taxes are specific levies, and an inflation will hardly increase their yields beyond the point where they will exceed the A. A. A. idea of what farmers' benefits will be. Furthermore, the A. A. A. intends receipts to lag behind payments. This aspects of the problem, which implies borrowing, will not be discussed although it has a bearing on inflation finances.)

Some twenty manufacturers' excise taxes, levied against the sales of manufacturers, producers, and importers, yielded $390,000,000. in the past fiscal year. This group may represent one of the few assets belonging to the Treasury during an inflation. The automobile, brewers'' wort and malt, camera, candy, electrical energy, gun, firearms and shells, furs, jewelry, radio, refrigerator, sporting goods, and toilet preparation taxes are all ad valorem. They yield about one-third of the entire revenue from this tax category. The greatest source is represented by the specific gasoline and lubricating oil levies. The position of the combustion engine in our economy gives the impression that there will be a response in fuel sales if there is any boom at all. Two of the favorite commodities sought after for asset preservation purposes, furs and jewelry, are also represented in this group. These taxes all require payment within a month after sale.

These taxes cover a wide variety of durable goods and commodities and one major service product. While one is tempted to be optimistic about the fertility of these levies, there are a few influences pointing in the other direction. We cannot forget that, though most of the taxes are ad valorem, these yield not more than one-third of the total from this group. The present economic program is full of legislation and other decrees restricting production. Much of the boom in the products subject to taxation may never materialize. The taxes are levied only once during the trip of the product from manufacturer to consumer, and their contracting powers are decreased by the fact that the base cannot benefit from the elaborate manufacturer-retail sale price spreads, which are characteristic of inflations. Perhaps the real value of this group lies in the fact that it sets a precedent for sales and turnover taxes, which unfortunately must appear on the scene during inflation.

The Federal stamp taxes are another series of levies that should stand up. The stock market and other security transfer activity will certainly broaden the base for some of the stamp taxes. The security transfer stamp taxes are specific, but only small gains may be expected as the bulk of the shares move from the 4 cents to the 5 cents category. The new capital stock issues and trading in futures should both enjoy increases, which may top the list of inflation gains. In general the entire stamp tax group, except perhaps the playing card levy, should act admirably. It is regrettable that they are estimated to yield only sixty million during the current year -- approximately the same amount as for the last period.

There is a group of miscellaneous taxes of unimportant revenue value. Most of those (like the oleomargarine levy) are motivated by non-fiscal aims. Among those worthy of mention are the telephone, telegraph, and radio message taxes; these have a graduated specific tax (telephone) and an ad valorem levy (telegraph). The yields of the admission, check, and club dues taxes likewise would benefit. The same way be said for the pipe line and safe deposit rental tax. The latter 10% levy might give the Treasury an interest in the national treasure boards. All these revenues are payable within one month after the creation of the tax liability.

The writer is particularly hesitant about guessing the effect of an inflation on customs duties. The general inflation formula calls for their falling off. At the same time they are the first payments that the Treasury can ask for and get in a non-depreciated medium or its paper equivalent. This will probably be true of the specific rate duties. Since we collected three hundred and thirteen million from customs in 1934, it is important that all efforts be made to bolster these revenues.

At various places in this memorandum mention is made of the influences that may prevent a fall in imports. We possess specie in large amounts, we may not be an isolated country with an inflated currency, we have a favorable balance of trade (the effect of a capital flight on this is problematical), and we shall have constant access to foreign exchange funds since foreigners are attracted by the lure of our common stocks. Also our present policy is to foster trade through reciprocity treaties, which pay no attention to monetary factors. The writer suspects that the behaviour of our foreign trade during an inflation will follow a new and unprecedented course. The extent of our optimism is not great enough for us to assume that customs duties will act as a counter-inflationary device.

Before leaving the brief analysis of the Federal tax system, mention should be made of the specific assignment of revenues. Fortunately these are not a feature of Federal finances in this country as they are in France and in our States. (The processing taxes are not considered here a feature of the regular fiscal system). The individual fluctuations of dedicated revenues have proved almost fatal for some State finances during the past few years. During a period of rapidly rising prices, fluctuations of certain tax yields are more accentuated than during depressions. Instead of having certain services deteriorate while others benefit to an undue degree, it is desirable to give the Treasury the advantage of being able to average revenue yields from all sources. The present administration and its advisors appear to be sympathetic towards benefit notions. These are closely aligned with specific assignments, and the further development of the benefit movement is regrettable from many points of view in addition to that of inflation financing.


Beyond a general rise of prices, a fall in exchange rates, flight from capital, and certain kinds of accelerated turnover, the course of an inflation is conjectural. The behaviour of the Federal tax system is merely a question of probabilities. Nevertheless, our conclusion is that the taxes as a whole show all the earmarks of probable failure during inflation. Time lags are abundant between the stage of tax imposition and collection, ad valorem taxes are few and there is no possibility of an immediate Federal share in export booms, retail price rises, or rapid business turnover. Furthermore, we receive a minimum of our revenue in the form of prices, fees, and tools. We have as yet no important Federal industrial or commercial enterprises, Post-office receipts, which probably will respond to an aggressive postal fee policy if it is pursued, are likely to continue to incur deficits that the general fund must pay. The Panama Canal tolls and some others of a similar nature will not have much effect on the state of the Federal finances one way or the other. The non-tax revenues of the semi-private economy type are well adapted to inflations, and their absence adds to the poor sensitivity of our system. Further, weaknesses of the Federal tax structure will be indirectly exposed when the suggestions for an effective anti-inflation policy are made below.

At this point it might be well to summarize why there is a pressing need for a vigorous Federal tax policy in the event of an approaching or an actual inflation.

(a) The Federal tax system is in danger of breaking down as a current revenue source in the event of an inflation. The present arbitrary balance between current revenues and non-emergency expenditures will not be tenable.

(b) The present financing policy involves the toleration of deficits for another year or two. The economic and political factors surrounding the expenditures, to which the blame for the deficit is attributed by the administration, give the impression that these outlays will persist in spite of eventual financing difficulties. While the administration finds at present some support for turning these outlays into loan-expenditures, during an inflation any sincere desire to counteract the boom will necessitate substituting current revenues for borrowed funds. There are at this moment some 6 1/4 billion dollars of authorized and unexpended emergency payments on the books which the administration plans to meet by bond issues. These recovery expenditures will be a major reason for more revenue.

(c) The likelihood of a collapse of State and local finances has already been mentioned. The permeation of non-Federal finances with the property tax and property tax psychology will spell disaster. In spite of the sales tax movement, gasoline taxes, repeal levies, and the income tax, the Federal Government will undoubtedly have to step in. The slow moving, cumbersome machinery of local Government will find it difficult to tap new sources at will. The writer believes that an inflation will usher in a one-sided type of integration of National and local finances, which the coordination advocates now are hardly contemplating.

While we have throughout in terms of an extreme inflation, it is unlikely that this country will witness a spectacular inflation without an ample warning period. The initial stages of the German and French depreciations were slow in starting, and the reaction of the currency collapse on the economic system was at the beginning extremely delayed. Still the slightest suspicion of an uncontrollable and progressive deterioration should be the signal for the adoption of a radical counter-policy. The financing problem will not become serious for some time; the ameliorative influence of a small boom on our finances was witnessed in 1933. By the time the pinch of current revenue shortages are felt, the Treasury will have missed its opportunity of taking advantage of the period in which lags are on the side of the anti-inflationary forces. Once the vicious cycle gets fully under way and prices run ahead of the issue of new circulating media, there is a real doubt as to the effectiveness of a tax policy. The Treasury will, at this stage, have to restrict itself to preparing for the inevitable cold shower of stabilization that must follow.

If the Treasury is at all concerned with the dangers of an inflation, it should be willing to go the full way at the early stages. It need not fear the deflationary effect of its aggressive tax policy if it is a factor in eliminating the danger of the vicious type of inflation. The effort to stem the inflationary tide, if successful, will prevent a deflation which would be much greater than any that excessive taxation could induce.

Our own Federal finances offer several opportunities for study in relation to taxation during periods of rising prices. We have the Civil War Greenback Period, the World War, and even more recently the short-lived boom following the change in the Administration. The 1915-1921 period is particularly worthy of further study because many believe that a boom in this country in the next year or two will bear a similarity to our war-time economy. In addition to the fact that the reader is likely to be familiar with the events during these periods, it is clear that the price rises were not so great or sudden as those in the French and German post-war monetary disturbances. Furthermore, in the American cases no radical tax policies were pursued that can in any way be related to the price situation. The boom with which we may be faced would not find much basis for comparison in our own experience. The very fact that we have never tasted a real inflation may explain the eagerness and enthusiasm for it in some high economic quarters.

Foreign experience in relation to inflation and the fiscal system cannot be reduced to terms rendering it comparable with the potential domestic situation not merely because the stories refer to a past period. Though the time may be close in years, since then we have had throughout the world a major economic depression, which has brought with it structural changes in economic, political, and social conditions. To assume, therefore, that the foreign experience is conclusive is to misinterpret the actual state of affairs. Discussion below will be self-explanatory as to the nature of the approach to the foreign material. The writer has dealt only with Germany and France; it would have been well to have made a survey of Austrian, Czechoslovakian, Italian, and Polish experience, had time permitted.

Germany emerged with a total Reich expenditure of 163 billion marks for the war period. During the same time tax revenues were 31.1 billion, long-term borrowing 97 billion and short-term borrowing 35.8 billion. Of the latter figure over 33 billion is represented by currency expansion (Graham, page 7). The year 1919, which marks the terminal of this period, found the wholesale price level at 2.62 (1913 equals 1, Angell, page 365).

The Weimar Constitution gave to the German Federal Government its first real taxing powers. The Reich began the adoption of a series of new taxes and tax revisions, which continued until the final collapse of the mark. The extent to which the inflation behavior of the taxes was influenced by their newness will be difficult to determine. These tax policies were, however, merely accompaniments of the inflation. Undoubtedly the excess of expenditures over revenues (internal) and the foreign exchange transfer problem gave the initial impetus to the currency deterioration. The tax policy, however, did not stem the tide. It is doubtful whether it ever could have.

The initial 1919 tax reforms contained but one attempt that could cope with the situation. Although the step taken represents an ideal counter-inflationary step, it is questionable whether this was the conscious motivation. Customs duties were made payable on a gold basis. Further reforms during 1919 were the enactment of a tax against corporate business enterprises, a general turnover tax (Unsatzsteuer), and an emergency capital levy. The capital levy was made payable over a period of years and thereby lost all effectiveness as a possible currency contraction factor. It should be noted, in view of the fact that we apparently place great confidence in a turnover tax as a inflationary revenue source, that the German turnover tax was a total failure. Perhaps the low rates imposed, the new administration, and the administrative structure of the tax may partly account for its failure to keep pace with prices and turnover. Since more material is available, we will make a further analysis of the turnover tax with respect to the French levy.

It is clear that in 1919, as in later years, no attempt was made really to cope with the inflation. The Germans apparently placed too much reliance on the two great post-war fiscal engines that were already in force in 1919. Both the net fortunes tax (Reichsnotopfer) and the forced loan (Zwangeanleihe) were nullified by the lag in collection before they ever went into effect. The German financial leadership, the banking community, and the public at large did not become alarmed over the situation until it was too late. Furthermore the Government and the cities were united in their desire to further anything that would prove the impossibility of their paying separations. The Reichsbank, an institution representative of the type that should take the lead in combating the inflation, insisted repeatedly that there was no internal currency depreciation; only an unfavorable external balance was admitted. The new Republic was hardly a place for the exercise of a strong centralized financial leadership. The attempts by some small unorganized groups to call attention to the consequences of the monetary depreciation went down under the strongly organized opposition of German business. Misunderstanding the true effects of inflation on their economic well-being, these business leaders were active in preventing the Government from entertaining the idea of imposing the right taxes at effective rates. Our own business community might profit from a consideration of this aspect. Further comments on the failure of the Germans to act will be made below.

The 1920 tax policy was a general attempt to increase rates all around. A few new sources, such as the capital yield tax (Kapitalertragssteuer), were imposed, but again no attempts were made to cope with the specific problems resulting from the steadily rising price movement. The attempt to impose regular taxes without emphasizing the contracting motive behind the imposition of the new levies raised a clamor for exemptions. The taxes were soon allowing real income along with illusory paper mark profits to escape. By time observers reported a complexity in the tax administration and in the provisions of the laws that made practical collection impossible.

In 1921 the effects of the initial 1919 reform were first felt. Apparently the lag for most of the taxes imposed in 1919 was two years. If we consider that in January 1921 the wholesale price level had already reached 14.4 (1913 equal 1) we can realize that even a doubling of 1919 revenues could hardly be effective at this time. The changes that were made in the tax system in 1921 were all minor ones. Some of these lesser provisions, however, had a devastating effect on the returns of the tax system. For example, one of the changes affected the inventory provisions of the income tax. The original tax considered all increases in the market value of inventories over cost as income. The business community complained bitterly against this provision and on March 24th, 1921 the Reich substituted for the cost basis a market valuation. Just when a market provision was needed most it was abandoned. Three years later, in connection with the major monetary depreciation tax drive a return to a market basis was undertaken. At that time, however, the increments were taxed at only two-thirds of their value for corporations and two-fifths for individuals.

In the second quarter of 1922 attempts were made to stem the recourse to currency printing by means of taxation. A tax on wealth (Vermogensteuer), a tax on capital gains (Vermogenzuwachssteuer), and a tax on circulating capital (Kapitalverkehrsteuer), were passed on April 8, 1922. An alcohol monopoly was instituted in place of the alcohol tax. At frequent legislative sessions the rates on almost all the taxes except certain consumption levies were raised. The consumption taxes were reduced because of the pathetic hardships faced by the lower classes in purchasing necessities. One could hardly expect any of the taxes to be efficient contractive devices since at the time the three taxes were imposed a billion paper marks were printed. A short time later, on July 20, we find the amazing spectacle of a reduction on estate taxes (Nachlasteuer) and on succession taxes (Erbanfallsteuer). We are told (Robert, page 138) that this was a political move to receive the agreement of the conservative element (Volkspartie) to a forced loan. For the rest of the year some minor changes, chiefly the raising and lowering of rates, were undertaken. Just before the close of the year, on December 29, 1922, one of the first real steps towards combating the influence of the progressive inflation on the tax system was made. The control over the automobile tax was conferred on the Minister of Finance. With the permission of the Reichsbank he was permitted to change rates in accordance with the currency depreciation.

The table below shows taxes, expenditures, ratio of taxes to expenditures and wholesale prices from 1920 until the end of 1922. It clearly portrays the fact that the Germans had done admirably, if their goal was a collapse of the Treasury. By the end of 1922 the price level had reached 1475 (1913 equals one) and was progressing at a rate that meant that the slightest delay between the time of the fixing of tax liability and the tax payment meant almost the total destruction of the purchasing power of the money received.

Fiscal Year                 Taxes                 Expenditures

                                (In Millions of Goldmarks)


April                         57                        336
May                           93                        636
June                         163                      1,220
July                         220                      1,099
August                       185                        753
September                    193                        894
October                      239                        421
November                     311                        809
December                     508                        891
February                     512                      1,000
March                        525                        945

Total                      3,497                      9,697


April                        409                        899
May                          475                        793
June                         423                      1,043
July                         380                        771
August                       303                      1,023
September                    264                        680
October                      279                        619
November                     238                        537
December                     274                        978
January                      288                        581
February                     274                        483
March                        317                        529

Total                      3,924                      8,936


April                        260                        441
May                          330                        489
June                         305                        408
July                         266                        398
August                       228                        402
September                    146                        701
October                      127                        518
November                     127                        420
December                     119                        710
January                      140                        433
February                      80                        438
March                        127                        886

Total                      2,255                      6,244

Fiscal Year           Ration of Taxes          Wholesale Prices
                     to Total Revenues        (Monthly Averages)
                     or Expenditures %              1913 #1


April                       17.                        15.7
May                         14.6                       15.1
June                        13.4                       13.8
July                        20.0                       13.7
August                      24.6                       14.5
September                   21.6                       15.0
October                     56.8                       14.7
November                    38.4                       15.1
December                    57.                        14.4
January                     71.                        14.4
February                    51.2                       13.8
March                       55.6                       13.4


April                       45.5                       13.3
May                         59.9                       13.1
June                        40.6                       13.7
July                        49.3                       14.3
August                      29.6                       19.2
September                   38.8                       20.7
October                     45.1                       24.6
November                    44.3                       34.2
December                    28.                        34.9
January                     49.6                       36.7
February                    56.7                       41.0
March                       59.9                       54.3


April                       59.                        63.6
May                         67.5                       64.6
June                        74.8                       70.3
July                        66.8                      100.6
August                      56.7                      182.0
September                   20.8                      287.0
October                     24.5                      566.0
November                    30.2                    1,154.0
December                    16.8                    1,475.0
January                     32.3                    2,785.0
February                    18.3                    5,585.0
March                       14.3                    4,888.0


     (1), (2) and (3). Graham, pp. 40-41. "This table is an average
of three sets of figures calculated on the cost of living index,
wholesale price index and dollar index, respectively" (p. 41).

     (4). Angell, pp. 365-366.

The story for 1923 (the mark was stabilized on November 15th) is certainly not encouraging with respect to the effectiveness of a tax policy. It is useless to measure the influence of taxes that cover, as they did for some months in 1923, not more than .09 percent of expenditures. It is a fact that the cost of collection during the latter half of 1923 of all taxes was greater than the revenue received, and had Germany levied no taxes at all she would have had to print less currency! Nevertheless, the 1923 tax legislation is the best example that we have of a program that consciously took into account the existence of a depreciating currency. It was at just the last moment that the Germans finally recognized that the mark was no longer a mark. Until that time no official group in Germany, including the courts, had admitted the collapse.

On March 20, 1923 the famous monetary depreciation law (Geldentwertungsgesetz) was imposed. Has this law been introduced in 1919 or 1920, the German experience might have been different. The basic notion for all the taxes that were imposed by this law was the levy against real values. The much-discussed principles of the "Erfassung der Sachwerte" was finally realized. In addition to several new taxes aimed especially against inflation profits, rates were changed from a specific to an ad valorem basis, depreciation coefficients were introduced, and taxes were made collectable at the sources. Most effective were the measures aimed against tax delinquency. This is one of the most difficult problems of the inflation; for, as the currency depreciation progresses, even the dullest popular mind realizes the advantage of the debtor position. He creditor is so universally handy and so easy to evade as the State. The 1923 German steps included heavy fines for the slightest infraction of tax measures and delinquency penalties ranging up to 30 per cent a month.

Between March and the final collapse, a few other tax changes were made. On July 9th power was given to the Finance Minister to raise rates on all taxes in accordance with price movements. Furthermore, the policies expressed in the monetary depreciation law were energetically pursued. For example, the institution of ad valorem taxes was continued and further steps to prevent tax payment delays were taken. Other reform included the imposition of depreciation coefficients on taxes that allowed for a time lag between the ascertainment of the tax liability and that tax payment. Apparently the only thing left in Germany that was not taxed, namely, export trade, finally was made the target for a definite tax. During August, in addition to rate increases and other minor provisions, the Treasury was empowered to demand payment in gold or its paper equivalent. The decree was shortly thereafter made retroactive with respect to tax liabilities outstanding since 1922. The first internal tax that became payable in gold was the agricultural tax (Landabgabe). This was levied in terms of "Wehrbeitrag" (an income tax) at the rate of one and a half gold marks for each two thousand mark liability under the income tax. The alcohol monopoly followed suit and demanded payments in gold or paper equivalent. It is clear that without such steps Germany could have contemplated a stabilization. There was, of course, no gold in circulation. The law was part of a program aiming at a contraction of the outstanding paper currency.

The decrees after the stabilization of November 15th consisted of a revaluation of such taxes as were still on a paper basis and the translations of outstanding tax liabilities into the new medium of exchange. This part of the story, interesting as it may be, concerns the burial of a monetary standard. Our interest lies in the prevention of the disease and the possibility of checking the malady.

Looking back at the German situation it is interesting to survey the reasons that are commonly given for the failure of Germany to cope effectively with the inflation by means of the tax system. This may help in revealing whether effective counter-inflationary tax policies are possible at all. Foremost, it is evident that the Germans failed to comprehend the gravity of the situation. Whether this was a conscious error on their part is difficult to judge. They repeatedly levied taxes payable years following their imposition. They lowered or eliminated effective levies and in general professed to show a thorough misunderstanding of the elements involved. Not until 1923 did the fiscal legislation show any characteristics of an effective inflation tax policy. Looking back at the situation now, it is not difficult for us to say that the Germans did not realize what was going on. It is likely that no country really knows the actual situation until it has a chance for retrospective reflection. Political leaders who follow rather than lead are subject to making the same mistakes as are the masses. They fail to overcome the inherent optimism that is part of every nation when a grave problem is faced. Human psychology prevented a recognition of the gravity of the situation. At least German experience should teach us to be on guard for the symptoms and not be afraid to diagnose and treat the malady.

Secondly, the Germans in their tax policies paid too much attention to the individual needs and misfortunes of the taxpayers. An attempt to carry on with normal tax philosophies through an inflation will destroy any tax system. A tax, in order to be effective, must be drastic to the point of confiscation. The use of tax system as a currency contraction device demands a conscious attempt to deprive citizens of their claims to some of their property in order to save the rest of it for them.

Thirdly, the Germans were apparently pursuing an economic policy that aimed at a lowering of certain prices by means of legislation and decrees. Always anticipating the successful outcome of their price programs they hesitated to disturb them with a tax policy. This price policy was partially imposed at the demand of the elements in the community who were hard hit by the fact that living costs were running ahead of wages. The State that tries to retain, much more increase, its consumption taxes meets with the strong opposition of groups already angered by the rise in prices. The tax gives them an added opportunity to blame the rising cost of living on the Government. German consumption taxes were at ridiculously low levels until the middle of 1923, and even in the drastic monetary depreciation law there was a hesitance to impose certain consumption taxes. Some changes voted in March did not go into effect until September 1923.

The German reasoning was false, since the proper tax policy might have aided rather than hindered the fight against the prices rising more quickly than wages. One need attach little or no significance to this fact except as it shows the type of political opposition that the exponents of an effective counter-inflationary policy will meet.

Fourthly, there was no way of ascribing or measuring real values for tax purposes in the paper money. Some classes and groups in the community still clung to old prices, while others followed foreign exchange rate movements. A great many types of price fluctuations were being watched in Germany. For example, during the period between 1920 and 1923 the collection of paper mark revenues gives the following results in terms of gold wholesale prices and the cost of living index.

Revenue Returns Millions of Gold Marks