1920        1921        1922        1923

Dollar Index               3198        2927        1488         891
Wholesale                  3218        3607        1756         911
Cost of Living             4091        5235        3529         1496

Source: Cohen, p.39.

It would have been wise to think in terms of foreign exchange prices for tax purposes. This disparity may explain why the situation was difficult, and why there was confusion in the minds of the German authorities about what should be done; it is, however, hardly a reason for the failure of the Government to act. The breakdown of the paper money price system should be an incentive for a return to a stable currency rather than anything else.

Fifthly, the Government finds itself in the peculiar position of having to recognize its own errors and of disowning its own currency. By refusing to accept paper money or by stressing the fall in its value, the State is denying the worth of the same paper money whose circulation it is at the same time trying to enforce in the community. Some German felt than an energetic tax policy would defeat its own purpose in driving the monetary depreciation still further. Although it is not possible to prove this proposition conclusively, the writer believes that a tax policy, unless it is definitely of a prophylactic character, will intensify distrust in a currency. If this is so, tax policies, unless they are carried out at the initial stages of an inflation process, are necessarily ineffective. It might be noted that we differ in this country from either Germany or France in the sense that we have devalued our currency first. The writer is acting on the assumption that an inflation in this country will be preceded by a further voluntary decrease in the gold content of the dollar. If this is true, it is hardly expected that immediately afterward steps in the opposite direction will be taken by the same agency that originally depreciated the currency. This aspect of the problem is one that offers a field for ample discussion and at the same time very little evidence.

Finally, with respect to the German situation, it is clear that Germany was throughout the crisis continuing to do the very things that were causing the inflation. The attempt to make payments abroad, the attempt to subsidize the sabotage of the Ruhr invasion, and the continuous exchange of Treasury short-time paper for marks were the factors that were causing the inflation to proceed at a rate independent of any movement generated by the initial impetus itself. There was simply no question in Germany of stopping these excesses, and the tax policy would have had to be of colossal magnitude and superhuman administration to cope with the situation as it existed. We are taking for granted that a counter-inflationary policy in this country will not have to face a similar situation.

There are two additional outstanding reasons that may be considered actual or physical obstacles in the way of effective policies. The first is the fact that the machinery of democratic Government was unable to meet the demands of an anti-inflation fiscal policy. Our own experience during the current depression will help to convince the reader that slow-moving parliaments, drawn-out adjudications, and rigid and inefficient budgetary procedures are not the weapons with which to attack acute fiscal crises. The young German Republic, jealously guarding its newly-won powers, could not think of instituting the effective control or the financial dictatorship necessary to deal with a situation as dynamic as an inflation. Every more taken, as well as every step omitted in Germany until the final 1923 reform, clearly showed this aspect of the situation. The second feature is the fact that once the fatal mistake of taking piece-meal steps was instituted, it was practically impossible to follow the proper course. Students of the situation in Germany agree that the problem of currency contraction must be attacked thoroughly and at once. However, following the particular reforms taken at various times in 1919, 1920 and 1921, the German Treasury was justified in its desire to await the results of each particular reform before conceding defeat and starting anew. With the time lags associated with the fiscal policy, there can be no delay for prognostic tests.

The conclusions concerning the absence of an effective tax policy in German are that the fault lies in the direction of political leadership and was the result of psychological rather than any actual economic or physical obstacles. Nothing has been said that shows that the German Government could not have tried to cope with the situation. It is doubtful whether a LAISSEZ-FAIRE policy on the part of the Treasury was justified merely because it feared an enhancement of the currency deterioration of its own policy. In view of the fact that our silver and other policies, which may be considered inflationary, were made for political reasons, the political obstacle in the way of the adaption of a counter-inflationary program in this country should not be overlooked.

Turning to France, we find that there is a wealth of negative experience. This is very similar to what our conclusion might be regarding the German story. However, in the latter country the inflation was so severe as to obscure the results of such steps as were finally taken. In France, while there was an absence of the real acute panic (except perhaps for the summer of 1926), we find that the Government took few steps that might be termed anti-inflationary tax policies. In each instance we can profit only by the obvious mistakes rather than by the results of constructive policies. One might assume that French experience would be valuable in showing the behavior of normal taxed during periods of rapidly rising prices. This is, however, hardly possible. The notorious inefficiency of French tax administration makes it difficult to eliminate the influences of evasion and other factors not directly related to the inflation. Especially, the French had not risen even to their usual law level of administration. As in Germany, many of the results can be attributed to maladies of infancy rather than inflation. Furthermore, the constant legislative process turned out a rapidly-moving kaleidoscope of tax legislation. It is impossible, except for the simplest excise taxes, to trace the effect of a specific policy before some new one modified it.

The French never got beyond the stage of trying to meet their inflation, brought about the Government deficits, except through general tax reforms. There were no attempts at tax programs that had the earmarks of counter-inflationary motivations. Even among the proposals that have come to the writer's attention there are none that can compare with "Goldenwertungs" policy of Germany. This must in no manner be construed as a criticism of the French action, since the drastic German taxes were not instituted until the situation had moved far below the levels ever reached in the French depreciation. A few minor exceptions to the above general statement must be made with respect to the policies pursued by the French tobacco, match, and other monopolies. These were run on a business basis, and the monopoly charges were constantly modified to follow rising costs and prices. (Haig, page 106). As has been stated before, it is evident the Governmentmental undertakings of a private, commercial, or industrial character have a splendid chance of holding their own or of sharing in the booms of inflations. In general, foreign experience with Government -- owned telephone and telegraphs, and salt -- and other mines is favorable. We have seen that the alcohol monopoly was one of the earliest bureaus of the Reich to adopt a same policy.

The French projects for the Law of August 3, 1926 mention sweeping indirect taxing powers, a reduction of income, inheritance, securities and transmission taxes, and have in general some earmarks of an anti-inflationary tax program. It is the most laudable tax reform that the French instituted. A few other isolated instances in the French fiscal history might be mentioned. Bokanowski proposed in March 1924 a plan for the pre-payment of taxes. His idea called for cheques-contribution to act as receipts for tax payments made in advance of their actual collection date. An observer (Schmitz, page 23) believes that this plan, had it been adopted, would have been effective in stemming the tide.

It is problematical whether the turnover tax (impot sur le chiffre d'affaires) instituted in 1921 should be considered as a conscious anti-inflationary policy. Most likely it should not. The tax grew from a yield of 1,897,457,000 frcs in 1921 to 7,459,558,000 frcs in 1926, (Shoup, page 346) and represented in the latter year 20 per cent of total State revenues as compared with 5 per cent for 1920 (not a full year) and 11 per cent for 1921. The history of the tax shows, however, that there was no real correspondence with prices and turnover once the price increase really became serious. In spite of the fact that the average rates gradually were increased from 1 to 1.77 per cent, the tax during the latter years of the inflation did not behave so well as might be expected. An interesting study by Shoup shows that from 1924 on the actual yield continued to fall with a progressive acceleration below an ideal yield estimated from rates, prices, and turnover. The table below shows this clearly.

Per Cent by Which Actual Yield Fell below Ideal Yield (Based on Tax Rate, Wholesale Price Level, and Index of Industrial Production)

1924                       1st quarter                        3%
                           2nd "                              3
                           3rd "                              7
                           4th "                              6

1925                       1st "                              9
                           2nd "                              5
                           3rd "                             12
                           4th "                              1

1926                       1st "                              6
                           2nd "                             25
                           3rd "                             27
                           4th "                             21

Source: Shoup. p. 60

If one is satisfied that the evasion element is constant throughout, these figures may contain some evidence for the belief that the yields of the turnover tax lag behind rising prices and turnover, and that the lag becomes really serious just at the time the tax should be most helpful. The German turnover tax was a failure and reenforces the writer's belief that the efficiency of a sales tax in a period of rising prices has been overrated. Of course, the Shoup figures may indicate a progressive growth of evasion, which might have lessened with more efficient administration. Another possibility is that the breakdown expresses itself in a form of evasion, or, what is also possible, the breakdown of the administration can be traced to the inflation. The failure of the turnover tax must also be considered with that of the other taxes. The position of the French turnover levy in relation to business or price indices is far more encouraging than that of any other major tax of the French system.

A survey of French tax legislation during the post-war period shows that efforts were made solely in the direction of attempting to assure more revenue from normal taxes and customary tax techniques. The movement of wholesale prices in the period from 1923 to 1926 was such as to merit serious consideration of taxes that eliminate time lags and possess the other requisites of counter-inflationary levies. The French wholesale price index shows the following increases.

(January 1913 = 100)

                           1923        1924        1925        1926

January                     387         495         514         631
February                    422         544         515         634
March                       434         499         513         629
April                       415         450         513         648
May                         407         459         520         685
June                        409         465         543         736
July                        407         481         555         834
August                      413         477         555         767
September                   424         486         554         784
October                     421         497         570         747
November                    443         503         603         682
December                    459         507         630         624

     Source: Schmitz. pp. 79-80. The price index is derived from
figures compiled by the Statistique Generale of France, the
Statistisches Reichsamt of Germany, and the London and Cambridge
Economic Service.

Reliable monthly figures of French expenditures and revenues are not available, but the yearly totals will serve to indicate that the price rise was making it difficult for the French to eliminate deficits. Even for 1925 and 1926, when the "Special Budget of Recoverable Expenditures" through which the French had been pouring out billions in the hope of the recovery of reparations payments from Germany had ceased to be a major item in the expenditure total, the ordinary was not covered by current revenues. There was certainly no dearth of taxes. Annual expenditures and revenues for the 1920-1926 exercices are given below:

         Expenditures                           State Revenues from
(Ordinary, Extraordinary and                           Taxation
Special Recoverable Budgets)

                        (In Millions of Paper Francs)

1920          52,409                                     18,291
1921          43,778                                     17,839
1922          37,427                                     20,848
1923          37,944                                     20,919
1924          41,214                                     25,375
1925          34,186                                     29,771
1926          40,931                                     38,074

     Source: Haig, pp. 400-421

The French policy, until Poincares final drastic efforts stopped the progress of the inflation, was to make the market for Government securities more attractive. When the public refused to purchase the National Defense Bons the fatal policy of interchanging bonds and currency between Government agencies was adopted. The impression gained from the tax discussion and legislation is that the sole objectives of the Finance Ministers and the legislators was to bolster the market for Government securities. Only after the 1926 panic, was serious consideration given to the question of eliminating a need for further borrowing. The outstanding tax reform show the disregard of the peculiarities imposed by price boom. The double decime (20 per cent increases on all tax rates) passed in 1924 ranks low on the list of counter-inflationary devices. Not until July 1926 did any of Caillaut's numerous proposals, including his Contribution nationale et exceptioneller, have any other than general tax reform. Even Louchner's proposal of December 8, 1925 with its drastic reform affecting the agricultural tax, the business profits tax, the valeurs Mobilieres tax, the transmission tax, and the general income tax, meant nothing more than a general increasing of the rates.

Since is known that the process of inflation in France came to an end before a complete collapse of the currency occurred, it should be made clear that the tax system did not play the decisive role in the "saving" of the franc. The experts who made their report in July 1926 did not show any exceptional knowledge or ability with respect to the taxation angle of their problem. (Haig, p. 149). The Tax Law of August 3 contains Poincare's tax program, and it is remarkable in its basic tax philosophy which differed from that of any other post-war French tax reform. It was a splendid counter-inflationary measure in that it stressed immediate revenue. Taxes were imposed with the emphasis on the prevention of evasion rather than on an adherence to the loftier equity and justice theories. Some direct taxes were lowered in order to allow for a concentration of effort on indirect levies. Those direct taxes that were raised were those that offered few opportunities for evasion. The projet submitted by Poincare did not suffer the usual fate of emasculation undergone by the other Ministerial programs in the Parliament.

The establishment of the Caisse d' Amortissement and the earmarking of several major revenue sources for its benefit were not negligeable factors in stopping the internal capital flight. The new political set-up was trusted for its ability to balance the budget. Certainly the external stabilization agreements and the definite decision to devalue the franc at a low level were contributory factors in preventing a further price rise. One can, however hardly feel that French experience is encouraging. It shows clearly that a normal tax system can never cope with an inflation. In terms of what happened in France, the delay in passing suitable tax legislation and in consolidating political forces meant wiping out 80 per cent of the currency's external value and severe disturbance of internal debtor and creditor relations. The French story should convince the reader that drastic policies are necessary even when the movements are as subdued and lacking in violence as the were in France.

The general literature of public finances contains little on the relation of taxes to fluctuating economic backgrounds. The current depressions has brought forth several studies in foreign countries and, to the author's knowledge, only two articles in this country (Bullock and Colm. See Bibliography) The studies made abroad pay greatest attention to falling price levels. Leufenburger's study, in which an attempt is made to measure the sensitivity of French taxes to fluctuating economic conditions, is an example of the prevailing emphasis on the depression phase of the cycle. It should be noted that Leufenburger has made a valuable contribution to the tax sensitivity problem by tracing the movements of tax bases instead of yields. This refines the statistical treatment by eliminating the influence of rates and other provisions not affecting the tax base. The only literature on the inflation aspect of the subject that has come to the writer's attention is contained in some German studies. These were written either during or shortly after the inflation and reflect suggestions and criticisms of actual policies being pursued. The material is therefore somewhat influenced by political views, personal opinions, and other biasing factors. On the other hand the studies gain by being written close to the scene and time of action. The following may be considered a summary of the theoretic contributions contained in the literature that the writer has surveyed. It contains some of his own ideas on the subject.

The policies that can be adopted in a use of the tax system in combating inflations are listed. The order of the steps mentioned is indicative of the actual happenings as they occurred in Germany. France, it will be noted, hardly got beyond the first two of the numerous steps mentioned.

1. During periods of slowly rising price levels or in movements of small magnitude, the first measures to be adopted are usually rate schedules or price increases on existing levies. There are always loopholes and leakages on existing taxes, which are tolerated while the state of the finances is healthy and which are plugged during periods of stress. This type of general rate increase and of more efficient administration represents the least effective anti-inflation policy that can be undertaken. It is just one step ahead of doing nothing at all. If we keep in mind the peculiarities of inflation finances, it is evident that rate increases of certain taxes mean very little from the point of view of insuring increased revenues.

2. The next step involves the imposition of new taxes. These can be along general reform lines and may not contain any specific attention to the particular demands of depreciated currency techniques. France dabbled exclusively within this category, and the Germans (with the exception of customs payable in gold) likewise restricted their legislation within this type of activity until well along in 1922. It is difficult to measure the effectiveness of such policies. If the general reforms include, as they did in France, the turnover tax, or, as they did in Germany, capital gain or excess profit taxes, they will naturally be of great aid in bringing current revenues into the Treasury. On the other hand, the adoption of property taxes, inheritance taxes, certain types of net income taxes, and capitation levies will naturally mean a slow or ineffective reaction to rising prices. There is no danger in adopting these taxes other than the fact that they give to the Treasury a false sense of security. After having imposed a handsome array of impressive-sounding taxes, there is a natural tendency to sit back and watch them work. Unless they are by some fortuitous chance armed with provisions that make them effective during inflation, they will mean just so much delay before the next reform will have to be made. We note during the past few years that the breakdown in finances, wherever it occurred, was occasioned by a failure in revenue estimating rather than in revenue yields. Just as the preparation of optimistic estimates fails to admit the possibilities of a further recession in business during a depression, the Government during an inflation can fail to take into account the fact that revenues from these taxes, when collected, will have suffered severely from the progressive depreciation. Even in the mild French case, prices rose sufficiently during one year to cause tax revenues to suffer severe losses. If for some reason a Government institutes the less efficient type of taxes during a period of rapidly rising prices, it should not make the grave error of trying to conceal the true aspects of the situation.

3. The next group of plans might be considered the beginning of the real anti-inflation policy. It consists in the adoption of new taxes specifically chosen because of their responsiveness to the conditions surrounding rising prices and the promptness of their yields. Consideration should be given not only to the tax base but to the measure of the tax and, above all, to the possibility of eliminating time lags between the new tax's going into force and the payment of the actual tax debt.

It is difficult even at this point to make any suggestions regarding the specific taxes that a Treasury embarking upon a counter-inflationary tax policy should choose. Foreign experience has disturbed our faith in what appeared to be the best taxes from a logical point of view. What is recommended here is, therefore, merely an indication of the type of problem that the policy formulator should cope with rather than specific suggestions for individual levies. Percentage levies on retail sales (banderole taxes), special or excess profits taxes on particular/economic transactions, and, to a lesser degree, general manufacture turnover and sales levies come first in mind. Frequent changes in the ownership of wealth (personal property, etc.) offer a field for inter-vivos transfer taxes, other than gifts, which should prove highly lucrative during the boom. Transactions such as these at present escape/effective Federal taxation. It is interesting that a tax of this type steps out of the framework of what is now considered traditional Federal tax methods. In addition to our constitutional restrictions there are certain unwritten principles regarding separation of sources we have tended to follow in the past. The transfer levies mentioned above have usually been associated with state or local stamp or recording fees. Recent federal taxation of a security, real estate, and futures transfers shows that there is a present movement in the opposite direction. During an inflation there will be a complete justification for continuing the stretching out by the Federal Government (within limits of its constitutional power) into what has been previously considered State and local tax territory.

In view of the fact that there is at present an agitation for a Federal sales tax and that the sales tax may be the first type of levy to be imposed in case of drastic revenue needs, a few comments concerning the sales tax will not be out of place. If an extension of the present policy of imposing individual excise taxes is continued, the Treasury should aim its excise taxes against commodities favored as stores of value. Furthermore, we should guard against taxes that merely strike at transactions arising out of the entrance of goods or services into the cycle of business activity. In spite of a rapid goods turnover, much of the production will not enter commercial channels because of the hesitancy of producers to part with goods or to bind themselves to price commitments. Floor taxes, raw materials taxes, and manufacture taxes levied on processing rather than sales, and above, all, inventory taxes, can be highly recommended. If taxes merely requiring payment on withdrawals from warehouses or actual delivery after sales are the only ones imposed, a valuable tax source will be allowed to escape. With respect to the general sales tax, either on retail sales or on turnover, modifications must be made in the minor provisions requiring accounting, payment, and control. The breakdown of the sales tax during inflations undoubtedly can be traced to these features. Suggestions have been made for daily payments, payment through stamps, or the adoption of a forfait basis. Otherwise the link with daily fluctuating prices will be lost. Studies on sales taxes impress the writer with the belief that attempts to refind these levies so as to keep pace with daily fluctuations will defeat the purpose of the tax since administration and prevention of evasion will hardly be possible.

An interesting suggestion concerning the sales tax as an "emergency brake for credit expansion" has been made by Dr. Colm. (Extracts of the proposal have been published in a letter to the New York Times, January 12, 1934. The proposal itself is contained in the Treasury files). It is Colm's idea to effect a price rise by means of a credit expansion. A sales tax subject to executive control should be imposed and should be ready to check the expansion as the desired price rise is reached. When a certain price level previously chosen is achieved, the credit expansion (presumably through loan expenditure) should be replaced by the yield of a tax. The rates of the tax should automatically become higher as prices rise. Colm believes that only a general sales tax can keep pace with a price movement such as the one contemplated. Finally as the price rise has reached the desired level, the yield of the tax should entirely replace the credit expansion outlay. Colm claims that the tax would not be shifted to the consumer but would curtail business profits resulting from the growing margin between prices and costs. Colm's interesting suggestion is hardly supported by foreign experience, and the writer feels that there has been some undue optimism on the part of this authority as to the efficiency of a sales tax. The writer's fear and distrust of inflation make it difficult for him to approve of any credit expansion that is considered controlled merely because of the existence of a sales tax contracting device. Further discussion of the counter-inflationary tax policy will contain many provisions that should be embodied in some of the new taxes recommended. In addition to those modifications care should be given to a simplification of the tax administration and above all to the avoidance of time-consuming litigations. This is perhaps a reason for preferring changes in the provisions on existing taxes for which the administrative and the legal background is already known to enactment of new and untried levies. It is also important that the question of collection costs and tax administration expenses be considered, because an expenditure retrenchment policy will certainly not be out of place during a currency contraction program. It is questionable whether taxes or rate structures that would involve a large number of taxpayers yielding very small returns should find a place among the proposed levies. The French turnover tax (Shoup, p. 76) is a good example of an unnecessary expenditure outley that could be avoided by more efficient handling of the small taxpayer.

Specifically, in connection with the Federal Government it seems that with the exception of capital gains, excess profit, and sales tax manoeuver, most of the work will be required in changing provisions on existing taxes. The emergency levies now in force but expected to lapse unless reimpose seem well suited to anti-inflationary needs, and when retention is discussed this feature should be kept in mind.

4. Turning to suggestions for modification of existing levies, the most important change that can be recommended is the adoption of an ad valorem basis instead of a specific one wherever this is feasible. The superiority of a percentage over a fixed amount tax is unquestionable and the percentage levy cannot be considered in any respect more inequitable or unjust than a specific tax if the original percentage is fixed at the same proportions as the quantity rate. A change from a specific to an ad valorem basis can be made without any elaborate administrative reforms and should be an immediate point of attack. It is possible to avoid the necessity for the change by requiring payment in equivalents of the non-depreciated currency. This should have even a better effect than the percentage rate, since there is a lag between prices an currency depreciation. This alternative, however, is surrounded with complications and may tend to diminish the returns rather than to accelerate them. A further variation of the ad valorem idea is the employment of depreciation factors, coefficients, or multiple. These are usually associated with tariffs against imports from countries with depreciated currencies. However, their usefulness during the latter stages of inflation were proved in Germany and in Austria where the employment of Entwertungefaktoren was very pronounced. Time does not permit a further discussion of this interesting device. It should be stated, however, that their value lies chiefly in linking taxes to exchange rates rather than to price movements. This is a sound counter-inflationary policy, since the Treasury is given the advantage of anticipating price rises. It appears that in inflated currency nations there is usually a general inverse correlation between exchange rate and the proportion of expenditures covered by taxation. An advantage contained in all the three suggestions mentioned here is that there is no disturbance of the tax base.

5. The use of taxes collectible in kind represents another effective device. When steps such as this are instituted, however, there is no doubt about official recognition of distrust in the currency and a fear of its further deterioration. The technical and administrative difficulties associated with payments in kind as well as the problems surrounding their conversion into purchasing power are great. The use of many taxes following the prices of specific goods, rather than general price levels or some other factor is a very common feature of depreciated currency finances. On the continent the political subdivision, rather than the National Government, have used this device. Rye, wheat, and other agricultural products seemed to be the most popular, but the commodities chosen will vary according to the different circumstances in each Nation. Since prices of individual goods vary widely at different places during the chaos of an inflation, taxes in kind on a national scale will probably prove unsatisfactory. Nevertheless, the NATURA payments should not be removed from the field of eventual practicability.

6. Another device represents the recognition that the Treasury cannot continue to maintain its concern over the keeping of old taxpayer rights, interests, and burden relationships. It is the employment of an estimated or forfait basis for the fixing of the tax debt. The use of the device in connection with a counter-inflationary program is found in attempts to hasten the ascertainment and payment of the tax liability. The device permits the estimating of the value of estates for death duties before these are legally fixed, of plant capacity in order to judge production or manufacturers excise taxes, and of current expenditures to show current income. It forms part of a policy of shooting first and asking questions latter. Instead of giving the taxpayer the benefit of the doubt, the fisc collects all it can and subsequently makes refunds, if any, in a further depreciated currency. Exact/economic status and strict legal attachment to legislative intent are more or less eased off. Justification therefor is found in the emergency character of the situation. If the Treasury has gone so far as to adopt these presumptive indices for the tax levies, it is evident that the sole interest is the collection of more and more revenue. The forfait it usually associated with attempts to lower collection costs and to eliminate trouble with small taxpayers. It is also employed as a means of avoiding multiple taxation in conjunction with general turnover taxes. Another common us is in connection with the anti-tax evasion drives. More recently the device has been associated with attempts to link tax liabilities to extraneous factors. Income taxes based on presumptive expenditure indices are already in force in Belgium, France and Greece. We apparently have not as yet coined a phrase to translate the French forfait or the German Phasen or Pauschal-besteuerung.

It should be emphasized that though steps an devices such as these are associated historically with the final stages, they should be employed at the very beginning of a counter-inflationary tax drive. The measures that one might assume to be effective failed in foreign inflations, and reliance should be placed solely on the policies that appear drastic and intolerable.

7. Actual prepayment of taxes is the next available technique. Thus, the burden of loss through progressive depreciation of the currency is shifted from the State to the taxpayer. Prepayment, it should be repeated, does not involve the mortgaging of future taxes (i. e. Von Papen plan) or any other form of borrowing. The Treasury merely collects in advance the debt for a tax not yet due but certain to go into effect. In order to avoid gross injustices, the tax is usually not collected in full but leaves a margin of safety for possible exemptions and other deductions. This device, adapted to the particular characteristics of each individual tax, is known to have worked on sales, income, and almost every other levy. The prepayment may not only antedate the collection time but in some few cases even precede the occurrence of the event or transaction giving rise to the tax. At such a time it is really more than a prepayment device. The tax often undergoes structural changes that modify the entire nature of the levy. For instance, a prepayment device attached to a tax on withdrawals of commodities from warehouses changes the levy into a floor tax.

8. Another stop that can be taken may be considered as the space equivalent of the above-mentioned time manoeuver. It consists of moving the tax closer to the source of the tax fund. Wage taxes payable by employers, dividend taxes payable by corporations, and commodity taxes payable by the first producer or processor are the type of operations here in mind. The imposition of new and isolated taxes is not contemplated. The changes are made on existing personal income, corporate income, or sales taxes. By giving the Treasury an opportunity to levy a tax against the circulating capital at an early stage of its cycles, the deck is cleared or successive taxation at multiple stages. In a certain sense these devices contemplate a broadening of the tax bases or, if a tax connotation may be employed, digging in at the base of the pyramid. It is evident that moving the tax to the revenue source involves changing burden and other taxpayer or relationships.

9. One of the last available steps is the beginning of the abandonment of the currency altogether. The Government begins to insists on gold or preinflationary valuations. Although the tax rate is kept stable, only gold or its market equivalent in paper money becomes acceptable. This is certainly a real currency contraction device. It cannot be used unless a stabilization act in the near future is planned. In Germany it was certainly an admission that the old valuation would not be reestablished.

10. Finally, when the depreciated currency has passed into the stratosphere and there is no hope of its return from these cosmic wanderings the Treasury disowns the currency completely. Taxes become payable in foreign exchange or some other new or non-depreciated medium. This step can hardly be taken unless a deflated currency is already available. It is the final act of a National tragedy.

Views have been expressed questioning the need for an actual carrying out of the tax program. It is implied that a declaration of policy will be sufficiently effective. There can be no doubt that this view is fallacious because the existence of an inflationary psychology is mute evidence for the contention that confidence in the economic policies and promises of the Government has vanished. The analysis of German and French experience will show this one point, if nothing else. To fail to take steps towards an actual increase of current revenues in magnitudes sufficient to act as a currency contracting factor, is to go over into the camp of the money manipulation forces.

In addition to the all-important expenditure control and payment aspect of the program, which is not considered in this memorandum, there are a few other points that might profitably be mentioned. The difficulties experienced in foreign countries with general fiscal legislation and administration seem to show that these factors are extremely important. We have frequently stressed the fact that our present fiscal arrangements allow for severe delays while taxes are formulated, discussed, voted, introduced, administered, adjudicated, and finally collected. Even under normal conditions we are far behind England in this aspect of our budgetary and tax procedures, and in inflations it is especially important that these provisions be changed in order that the effectiveness of taxes should not be entirely lost. Certainly our Federal system would require a radical overhauling in the event of an inflation. Primarily, power must be centralized. In addition the Government must possess the ability to levy taxes to become effective immediately at its discretion. The Administration should have at its disposal the means to meet the new situations as they arise. The breakdown of forecasts and constantly recurring emergencies are the order of the day during inflations. If attempts are made to meet dynamic situations with immobile weapons, results will be poor. Our fiscal system has been created in terms of political liberty and control and has all the earmarks of a system that was not conceived with fiscal problems in mind. The Administration will do well to apply to fiscal problems some of the same type of reforms it has applied to matters like foreign trade, alcohol traffic control, and monetary legislation. Whatever flexibility our budget procedures have applies solely to expenditure. Unless time lags are eliminated, anything that the Treasury does will be merely a recognition of a FAIT ACCOMPLI and can hardly be considered a preventive measure.

It is not necessary to state the exact nature of the powers to be transferred nor to discuss to whom they might be granted. An example of the contemplated change is the previously discussed sales tax, which would be imposed by and for which rates could be controlled at the discretion of the executive. An added feature that makes the concentration of power over fiscal affairs in the hands of an executive important is the fact that inflations give rise to unexpected and non-related phenomena. The conclusion voiced by some students of the problem is that the real task of a successful counter-inflationary tax policy is not one of raising burdens. Generally taxpaying ability tends to vanish, but during the inflation processes, stray tax-paying ability makes isolated and irregular appearances . The tax policy should allow for the ability to tap these sources. We are not totally unfamiliar with a "roving" excess profits tax. The munition taxes in this country and Great Britain might be classed in this group.

The ability to direct tax measures against individual factors is a desirable requisite for a counter-inflationary policy. For example, there undoubtedly will be profiteering in foodstuffs and other necessities, equally, taxation loopholes that cannot wait upon legislative relief will appear. Almost all of the steps mentioned as part of the tax program call for prompt executive action. The tax power must be granted the privileges and mobility of a police force armed for an emergency. What is needed is martial law in fiscal terms. Such a step would not be without precedent and is a further development of action realized during the current depression.

Further steps that will aid the general conduct of fiscal affairs will include a simplification of tax regulations and administration, the elimination or shortening of periods of grace for tax payment delays, effective tax enforcement drives, and the adding of severe penalties, for late or delinquent payments. The toleration of tax delinquency, which has been a feature of local finances in the past few years, would bankrupt the Treasury in a short time during an inflation. It must be stressed again that unless there is a prospect for an immediate deflationary stabilization there will be an extremely strong incentive for delinquency on the part of taxpayers. By tolerating non-payment of tax liabilities, the state finds itself among the unfortunate creditor classes.