Greedy Government Gezel (Robbery)

A Tale about Taxes

The other day I met a friend who is a large stockholder in General Motors, and he told me a story. A few weeks before, his son had used somewhat excessive strength on the mixing valve in his bathroom and broke the handle off. The local plumber couldn’t repair it, so he ordered and installed a new valve. The valve turned out to cost $22.50. The installation, at $4 an hour, brought the total up to $100.

That sounded steep enough; but it was not until my friend had made some mental calculations that he realized how steep it really was. His income falls into the 90 percent tax bracket. So he figured that in order to acquire the $100 with which to pay this plumber’s bill, he had to receive $1,000 in dividends from General Motors. (For the benefit of the non-mathematical, $1,000 in dividends minus $900 in taxes on them leaves $100 to pay a plumber’s bill.)

But this is only the beginning. In order to pay $1,000 in dividends, General Motors has to earn more than $4,000 before taxes. (General Motors earned $1,502,000,000 before payment of taxes in 1952. It had to pay $943,000,000 in taxes, leaving it $559,000,000 in net income, out of which it paid $362,000,000 in dividends. So for every $1,000 it paid out in dividends, it had to earn $4,149 before taxes.)

But in order to earn $4,149 before taxes, General Motors had to sell $21,570 worth of cars—say eighteen Chevrolets—to its dealers. (GM total sales and income in 1952 amounted to $7,645,000,000.) To sum up, because of cost and tax erosion, in order for my stock-holding friend to replace a bathroom valve, General Motors had to make and sell eighteen Chevrolets.

“So what?” some reader may ask. “If this fellow pays a 90 percent income tax, he must be rolling in it. Don’t expect me to weep.”

The point of the story is not that anyone should stop to weep, but that a few of us should stop to think. The question is not what our incredible burden of taxation is doing to this rich individual or that, but what effect is going to have in the long run on our whole economy—on productivity, wages, and employment.

Obviously a continuation of this rate and kind of taxation must undermine incentives, discourage new business ventures, and even prevent the formation of new capital for such ventures. For every dollar that General Motors paid to stockholders last year, it had to pay $3 to the government (not counting what it collected and paid in excise and sales taxes). The case of General Motors, in this respect, is not exceptional. The Department of Commerce estimates that corporate profits before taxes in 1952 were $39,700,000,000; that out of this the corporations had to pay $22,600,000,000 in taxes, and that they paid out $9,100,000,000 in dividends. In other words, the government took an average of 57 percent of all the earnings of the corporations. And for every dollar that the corporate stockholders got in dividends, the government got $2.48.

Even this does not tell us what the stockholders were able to keep in dividends after paying personal income taxes. A stockholder whose income gets into the top tax bracket of 92 percent can keep only 8 cents out of each dollar of dividends. The government gets the other 92 cents. Adding this to the $2.48 that it has already taken from the corporation gives the government $3.40. In other words, the government gets 42 times as much out of the average corporation as the investor in the top income-tax bracket is allowed to get and keep.

This may seem like a wonderful racket for the government while it lasts. But Congress should not be entirely astonished if it wakes up one day to discover—we hope not too late—that this division of the profits does not furnish the highest incentives for private investment in new enterprises; and that new venture capital has been drying up, with unpleasant effects on wages, employment, and production, and even on government revenues themselves. If we do not want to repeat the present predicament of England, we should not imitate the policies that brought her to it.

[Originally printed in Newsweek on March 30, 1953. Available in Business Tides: The Newsweek Era of Henry Hazlitt.]

From, here.

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