The Republican. [volume] (Oakland, Md.) 1877-current, 1953-06-18
A Tale About Taxes
BY HENRY HAZLITT

is a large stakeholder in General
Motors, and he told me a story. A
few weeks before, his son had used
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 S22.50.
The installation, at 81 an hour,
brought the total up to 500
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 80 per
cent tax bracket. SO he figured
that in order to acquire the 500
with which to pay this plumbers
bill, he had to receive $1,000 in
dividends from General Motors.
Cor the benefit Of the non-mathe-
NAUTICAL, $1,000 in dividends minus
5000 in taxes on them leaves 500
to pay a plumbers bill.)
But this is only the beginning.
In order to pay 81 900 in dividends,
General Motors has to earn more
than $4,000 before taxes. General
Motors earned 81 SOP, 100000 be-
fore payment of taxes in 1852. 1t
had to pay $943, 100000 in taxes,
leaving it $3.50, 100000 in net in
come, out of which it paid $685.
100000 i'm 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 be-
fore taxes, General Motors had to
sell S21, $50 worth of cars-say
eighteen Chevrolets-to its dealers.
(GM total sales and income in 1852
amounted to $7!G45,G ,G99} To
sum up, because of cost and tax
erosion, in order for my stock
holding friend to replace a bath
room valve, General Motors had
to make and sell eighteen Chevro-
lets.
$50 what?" some reader may
ask. of this fellow pays a 90 per
cent income tax, he must be roll
ing 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 it 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 I'M
dermine incentives, discourage new
business ventures, and even pre-
vent the formation of new capital
for such ventures. For every dollar
that General Motors paid to stock
holders last year, it had to pay So
to the government (not counting
what it collected and paid in eX-
else and sales taxes.)
The case of General Motors, in
this respect, is not exceptional.
The Department of Commerce es-
Inmates that corporate profits be-
fore taxes in 1852 were $39, 70O,-
100000; that out of this the cor
porations had to pay $22,600,000,-
600 in taxes, and that they paid
out $9,100,000,O0O in dividends. In
other words, the government took
an average of 81 per cent of all
the earnings of the corporations
And for every dollar that the cor
porate stockholders got in divi-
bends, 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 stakeholder whose
income gets into the top tax
bracket of 80 per cent can keep
only s cents out of each dollar of
dividends. The government gets the
other 90 cents. Adding this to the
$2.48 that it has already taken
from the corporation gives the
government $40. In other words,
the government gets AZ times as
much out of the average corpora
ton as the investor in the top in
come 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 in
vestment in new enterprises; and
that new venture capital has been
drying up, with unpleasant effects
on wages, employment, and pro
duction, and even on government
revenues themselves. If we do not
want to repeat the present predica.
ment of England, we should not
initiate the policies that brought
her to it.-Reprinted from News.
wepk MAGAZINE March 70 1873