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7 The Tax Review 1 (1946)

handle is hein.tera/tafoutaxt0009 and id is 1 raw text is: THE TAX REVIEW Copyright, 1946, by Tax Foundation, New York, N. Y. THE CASE FOR A BALANCED BUDGET IN the Tax Review for December, 1945, the relation of the balanced budget to the volume of employment and production was considered. The conclusion reached there was that an adequate approach to the problem of long- range economic variations involves a much wider area than that of fiscal policy, and that we should not seek to offset the mistakes made in one field by juggling and manipula- tion in some other field. It was also emphasized that the existence of a large budget, requiring the imposition of heavy taxes, would be likely to have seriously depressing effects upon the incentives to employ workers and to pro- duce goods. These effects would naturally be more pro- nounced under depression than under boom conditions. In proportion as the taxing and spending are lessened, the depressing effects are lessened. It is in order now to examine further the viewpoint that the maintenance of a balanced budget under a considerable variation in economic conditions would, in itself, be a depressing influence. Ordinary economic logic suggests that budget balance would be a wholesome and stimulating influence, particu- larly under the prospects which now confront the nation regarding the volume of debt and of debt service to be carried. The balanced budget would be an assurance against further inflationary policies and pres-ures, and against such doubts as might otherwise develop regarding the future value of the debt and the currency. It would also be an assurance against any large volume of government made work and against the threat of extensive government competition with private enterprise through the making of so-called investments or otherwise. The principal argument that is advanced against the policy of budgetary balance is, that under it purchasing power will be insufficient to absorb the product of reason- ably full employment. Hence support has developed for some sort of government action to assure equalization of production and spending. Two lines of such action have been advocated. One is deficit operations for the purpose, primarily, of supplying the people with more money to spend. The other is a program of taxing and borrowing I Second of a series of three articles. aimed at forcing the available income into use. The first proposal rests on the hypothesis that the productive process will simply not generate enough income with which to absorb the goods and services produced. The second pro- posal appears to recognize that there is income enough, but assumes that some of it will remain idle unless driven into the open by government action. The popularity of the doctrine that purchasing power will be less than the amount required to absorb the goods produced, unless supplemented by inflationary deficits, must be ascribed to reasons other than economic analysis. If we look at the way the economic process works, we find that all production involves costs; that is, goods are not and cannot be produced without involving cost pay- ments. These payments are made to the workers, to the suppliers of materials and machinery, and to those who provide the capital. By and large they are an important determinant of the value of the goods produced. That part of the return to capital which is known as profit is not a direct and immediate element of cost, but it is well un- derstood that in the long run the value must include a return of this sort which Js accepted as satisfactory, in view of the risks involved, or capital supplies will not be forthcoming. Since the costs incurred by producers con- stitute income to others, including the compensation of the producers or managers themselves, and since the costs bulk so large as a determinant of the value created, it would appear that the act of production always creates income for someone, somewhere. The aggregate of the incomes so created should normally tend to equal the aggregate value of the goods produced. Various reasons have been given in explanation of the assumed deficiency in purchasing power. One implication, which can be traced at least from Rodbertus, is that pur- chasing power is insufficient because the workers do not receive, as wages, an amount equal to the full value of the goods produced. The full equation of income against goods, however, must include not only wages and salaries, but all other forms of income. The wage controversy is frequently stated in terms which ignore the importance I VOLUME VII No. 1 JANUARY 1946

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