The Townsend Crusade

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THETOWNSEND

CRUSADE

AN IMPARTIAL REVIEW

of

THE TOWNSEND MOVEMENT

and

THE PROBABLE EFFECTS OF THE

TOWNSEND PLAN

THE COMMITTEE ON OLD AGE SECURITY

of theTWENTIETH CENTURY FUND, INC.

NEW YORK

1936


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C opyright, 1936, by

T w entieth C entury Fund, I nc.

PRINTED IN THE UNITED STATES OF AMERICA

All rights reserved. No part of this work

may be reproduced without permission by

the Twentieth Century Fund, Inc., except

by a reviewer who quotes brief passages

in a review of the book.


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CONTENTSPage

Chapt er I. The Townsend Movement 5

TheOrigin of the Idea 5

Congressional Hearings 7Popular Strength of the Movement 9

Centralized Control 12

Poll of American Institute of Public Opinion 14

Chapt er II. Whatthe Townsend Pl an Proposes 16

Claims of the Advocates of the Plan 17

Acceleration of Business Through Forced Spending 19

Ch apt er III. W h at W o u l d Pens ions Co st ? 21

1. Pensions Under The Townsend Plan 21

The Cost of Pensions 22

The Cost of Administration 23

2. Pensions of Smaller Amounts 26

Cost of Pensions Under Various Conditions 26

Ch apt er IV. T h e T o w n s e n d T axes 28

1. Minor Taxes 29

2. The Transactions Tax 29

The Volume of Transactions 30

Shrinkage of Transactions 31

The Yield of Taxes 333. Effects of a Transactions Tax 35

Who Pays the Tax? 36

European Experience with Turn-over Taxes 37Effect on Prices 38

Conclusions About the Transactions Tax 40

Ch apt er V. E f f e c t sof Pens ionso n Busin ess 43

1. The Myth of Velocity 43

The Crux of the Townsend Argument 44

Saving vs. Spending 45


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4 CONTENTSPage

Only Fiat Money Would Increase Velocity 48The Limitations of Plant Capacity 49

2. What Happens to Employment 50

Ch apt e r VI. T h e Co mmi t t e es Repor t 53

1. Effects on National Prosperity 54

2. The Transactions Tax 55

3. Effects on Employment 584. Effects on Relief 59

APPENDICES

A. T h e O r ig in a l T o w n s e n d Pe t i t i o n 63

B. T h e Revised M cG r o a r t y Bi l l 64

C. Pr o babl e N umber of Pe n sio n e r san d Cost o f Pe n s i o n s 71D. E st imat ed Pr esent an d Fu t u r e T o t a l Po pu l at io n ,

Pe r c e n t age o v e r 60 y ear so fage an d Pe r c e n t age o v e r

65 y ear so fag e 73

E. E st imat ed Yie l d o ft h e Su ppl e me n t ar y T axes Pr o po sed

in t h e M cG r o a r t y Bi l l 74

F. E st imat ed G r oss V al u eo f T r an sac t io n san d E st imat ed M a x i mu m T h e o r e t i c a l Yie l d o fa 2 per c e n t T r an sa c-

t i o n s T a x , 1929 an d 1934 76

G. Pr o babl e E f f e c t o fa 2 per c e n t T r an sac t io n s T ax o n

t h e Re t ai l Pr ice sof Sel ec t ed Pr o d u c t s 88

H . E x t r a c t sf r o mThe Townsend Plan 90

I. Pr o babl e D i r e c t E f f e c t o n Un e mpl o y me n t o f Re t i r e -men t o n $200 M o n t h l y Pens ions o f C it i z en s o v e r 60

y ear so fag e 92


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Chapter I

THE TOWNSEND MOVEMENT

O proposal put before the American people in recentyears has had so wide an emotional appeal nor has so

quickly enlisted vast multitudes of devoted followers as hasthe Townsend Plan. Although originally advanced as aneconomic measure the fervor of the Plans adherents hasendowed it with many of the attributes of a religious cause.

In December 1933, when the petition to Congress for oldage pensions of $200 a month to be financed by a transactionstax was first circulated, Dr. Francis Everett Townsend was an

unknown physician. Within a little over 2 years, he hadbecome the leader of an organized movement claiming, ac-cording to the New York Timesof April 5, 1936, more than3,500,000 paid members, who have contributed to the causeapproximately $1 million,a movement powerful enough tobe recognized as a definite political factor, and pledged to

active participation in the coming congressional campaigns.No economic scheme which awakens such swift response ona scale of such magnitude should be unsympathetically orlightly dismissed. The plan merits analysis, first to appraisethe statistical soundness of the claims made for it and then todetermine the probable effects of its adoption. Even if the

Townsend Plan does not survive a friendly study, the move-

ment should be recognized as an expression of faith, widelyshared in this country, in the economic possibility of provid-ing adequate security in old age. The faith does not dependon the plan, however much the plan may have stimulated it.The belief in security in old age can well be called the mostwidely shared social doctrine in America today.

The Origin of the Idea

Dr. Townsend, then already retired and living near LosAngeles, lost most of his savings in the crash of 1929. So did

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6 THE TOWNSEND CRUSADE

many other elderly persons. Dr. Townsend had to resume

the practice of medicine and was employed to supervise thecare of indigent elderly persons in Long Beach. He is not aneconomist, but the plight of his patients set him to thinkingof some way which would save elderly persons from penuryafter devoting their lives in the main to rearing families. Healso had thought about taxation, and had come to the con-

clusion that a tax on property was a social error, and that itwould be better to make taxation invisible and generalthrough an extension of the sales tax. These two lines ofspeculation came to a focus in the idea of a large pension forall persons over 60, to be paid out of the proceeds of a trans-actions tax.

He relates that he was finally moved to do something

about it by the sight of three old women sifting through thecontents of a garbage can a picture which provoked him intoindignation to the point of profanity. With a few dollars ofhis own money he ordered printed copies of the original peti-tion for $200 pensions, and advertised for volunteers to circu-late them. This original petition, reproduced in Appendix A,

is the foundation of the Townsend movement. He beganwriting articles for the local newspapers, and within a fewweeks 90 per cent of the voters of the district had signed thepetition to their congressmen. The work soon overwhelmedhim and he rented deskroom in a real estate office. Heappealed to an old friend, a real estate dealer, Robert E.Clements, to join him. Mr. Clements at first demurred, be-

lieving the $200 pension too high. But Dr. Townsend con-vinced him and they, with Walter L. Townsend, organizedOld Age Revolving Pensions, Ltd., incorporated in Californiain February 1934, on a nonprofitmaking basis. The peti-tions were already circulating in other parts of the country,and within a few months the campaign to organize Townsend

Clubs throughout the nation was launched.The growth of the movement was fast. It is beside the

purposes of this discussion to raise the point that unscrupulouspersons in some districts seized the opportunity thus presented


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THE TOWNSEND MOVEMENT 7

to make money for themselves. This does not materially

reduce the significance of the fact that within 14 months itwas claimed by its supporters that the Plan had the backingof 3,000 Townsend Clubs, an average of nearly 7 to each con-gressional district in the country, the clubs at that time havinga minimum membership of 100, and a maximum up to 1,700.

Congressional H earings

Congressmen found themselves inundated with Townsendpetitions, and while they were inclined to be more perplexedthan anxious, in February 1935 they brought Dr. Townsendbefore the House and Senate Committees then studying thesocial security bills. Here Dr. Townsend told about hismembership, estimating an average of 150 in each club, or

450,000 paid supporters, and predicted that 30,000,000 signa-tures would be obtained to petitions for enactment of theplan.

Here, too, he unfolded his economic philosophy. He beganwith the contention that it is folly to practice an economy ofscarcity in a world of abundance, and followed this with theargument that his plan would take 4,000,000 old people outof employment and so make jobs for the unemployed. Heclaimed that by concentrating purchasing power in the handsof old persons not only would they be given a life of plenty,but giving it to them would speed up the turnover of money,create new purchasing power, and so build up the nationalincome to undreamedof heights. Before these Committees Dr.

Townsend underwent exhaustive crossexamination. Mostof the technical questions he passed on to assistants. Thestatistical basis of the plan was analyzed, and while it becameclear that the leaders in the Townsend movement had onlyskimmed the surface, in their studies, it also was clear thatcongressmen, too, did not have available a thorough studyof business transactions, and could no more than guess whatthe yield of a transactions tax would be.

Dr. Townsend found himself under attack from others thancongressmen, all of whom assured him that a 2 per cent tax


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on transactions would not yield enough to pay more than a

fraction of the $200 pensions. It bespeaks his own good faiththat he was willing, even eager, to get at the facts. Heapproached one of the best known foundations for scientificeconomic study in the country, asking that a study be made ofthe plan. He was told it would cost $15,000, which wasmore than he had available. So he called upon a wellknownNew York banker and asked him to put up the $15,000. The

banker declined, but talked to him at length about the eco-nomic consequences of the plan. As a result of this confer-ence, Robert R. Doane, Director of Research of AmericanBusiness Surveys, was employed by the Townsend organiza-tion to study the statistical basis of the plan, and appearedbefore the Senate Committee. Mr. Doane as a witness did

not endorse the plan, and agreed that the yield of the transac-tions tax at first would not be large enough to pay $200 pen-sions. He did, however, predict that it would create anincrease in the volume of business.

Dr. Townsend by this time had begun to change his time-table for the plan, and told the Senate Committee that itwould need perhaps 2 years before the mere clerical work of

registering all pensioners could be completed. He proposed,however, to start paying $200 pensions to all over 75, and toexpand the plan to include the rest of those over 60 as businessincreased in volume and so increased the yield of the tax.His own belief in the plan did not abate and if the 2 per centtax would not yield enough revenue he was ready to double

the tax rate.One result of the criticism encountered in the hearings andfrom other quarters is that the original Townsend Plan bill,introduced in the House by Representative John S. McGroartyof California, was changed in several respects. The revisedbill, introduced April 1, 1935, instead of providing flat pen-sions of $200 a month, limited the total sum to be paid inpensions to the amount collected through the specified taxesand provided that the tax receipts, after administrative ex-penses have been deducted, be distributed to qualified pen


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sioners on a pro rata basis, not exceeding $200 per month.The text of this bill is given in Appendix B.

But, in spite of the dawning realization by Dr. Townsendand his colleagues that the plan if adopted would not workas at first conceived, they still believe in its principles andthat it will ultimately function so as to pay the pensionspromised. The modification of the McGroarty Bill, and theknowledge that the plan could not be launched with immedi-

ate $200 pensions for all persons of 60 or over, is not stressedin the organization of new clubs. Many of the Townsendfollowers are completely unaware of the difference betweenthe $200 pension plan as originally proposed and the revisedMcGroarty Bill. The original petition, reproduced inAppendix A, has never been altered and is still widely used.It is designed for presentation to congressmen and requeststhe introduction in Congress of two bills, one to obligate thegovernment to pay every citizen without a criminal recordwho has attained the age of 60 years a monthly pension of$200, on condition that the recipient will retire from businessand will spend the pension within a month; the second, toimpose a federal transactions sales tax calculated at a rate

sufficiently high to produce the revenue necessary* * to paythese pensions. In fact, the $200 figure is still prominent inall the Townsend literature and much of the political force ofthe movement still lies in the idea that the plan will work asDr. Townsend first conceived it.

Popular Strength of the Movement

The development of the movement in its first 2 years is ahistory of phenomenal growth. Since the appearance of Dr.

Townsend before the Congressional Committees a year ago,the organization of Townsend Clubs has progressed at the rateof a 100 or more a week, according to him, and the number ofclubs is now about 7,000. He himself now estimates 3,500,000

supporters, though he has not opened his books so that thefigures can be substantiated. TheTownsend N ational Weekly,the organ of the movement, had a circulation of 75,000 a year


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ago but reached a peak circulation claimed to be 2,000,000.This is a paper which grew out of theCrusader, started twoyears ago in Long Beach. TheWeeklysells for 5 cents a copy.

The paper was owned by Dr. Townsend, Mr. Clements and oneminority stockholder until recently when, it was announcedat the hearings, Clements sold his interest to the others. Ifit earns enough Dr. Townsend intends, he says, to devote theprofits to building Townsend Centers for the use of his clubs,

which are to be like Carnegie Libraries, with additional socialactivities. He speaks of his ambition to erect a few of thesecenters in the near future.

Politically, the Townsend movement did not receive seriousattention until last December. In Oregon, where it is strong,the recall was applied to Howard Merriam, a state legislator,who had refused to vote for a legislative memorial to Con-gress endorsing the plan. Rumors crept into the newspapersthat Senator Borah was friendly to the Townsend organiza-tions in Idaho, though the Senator subsequently repudiatedthe plan and came out for a $60 pension. Congressmen com-plained of the number and tone of letters from advocates ofthe plan. But the movement was still consigned to the

crackpot zone by political observers and the larger news-papers.Then came the special election for a congressman in the

Third Michigan District, where Verner W. Main, running asadvocate of the Townsend Plan, defeated four opponents inthe Republican primary, and then won the election by a two

to one plurality. That same thing is going to happen allover the United States whenever the issue is raised com-mented Congressman Usher L. Burkick of North Dakota asreported in theNew York Timesof December 19th.The significance of the Townsend issue in this special elec-

tion has been hotly disputed. But it is undeniable that Mr.Main won the nomination as supporter of the plan. In the

district are 30 Townsend Clubs, with a membership of some8,000. The national Townsend organization concentratedits forces in the district. Dr. Townsend, Mr. Clements,


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and H. H. Schwinger, the regional director from Chicago,

made speeches, and other speakers were brought in from theDetroit and Chicago headquarters. Mr. Main was notfavored by the Republican organization, and at least two ofhis Republican opponents were in better standing with theparty. He was the only one to endorse the plan, and he wonthe nomination. Having won it, his election was clinched,as the district has not elected a Democratic Congressman since

1898. After his nomination the Republicans could not re-pudiate him without losing the seat. The State Committeemet the problem by supporting Mr. Main as a Republicanwhile denouncing the Townsend Plan. Governor Frank D.Fitzgerald, who had promised to speak for the Republicancandidate in the district, kept his word, but opposed the

Townsend Plan in his speech. Senator Vandenberg of Mich-igan, who had promised to speak, was called away to Wash-ington, but from Washington denounced the Townsend Plan.Congressman Earl C. Michener of the Second MichiganDistrict, however, endorsed the Plan. It can be said that Mr.Main owes his nomination to his endorsement of the Town-send Plan, but his election as a Republican was a foregone

victory without the Townsend issue.If there are 7,000 Townsend Clubs with a membership of

3,500,000 organized by congressional districts, as Dr. Town-send claims, the organizations give him the balance of powerbetween the two parties. That is, if one candidate of eitherparty endorses the Plan and his opponent does not, the Town-

send sentiment may decide the election.It appears from recent announcements in the press that the

idea of a third national party, which, until a short time ago,was frankly entertained by the promoters, has been abandoned.The leaders never expected to gain enough support to ensurethe passage of a Townsend bill at this session of Congress, buthave confined their efforts to the nomination and election ofcongressmen pledged to support the plan. They expect towield the balance of power in many districts and have an-nounced that they expect to elect 150 congressmen this fall.


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The number of congressmen already pledged at the time of acanvass, the results of which were published by the Town-send N ational Weeklyin December, 1935, was 39.The strength of the movement in the Far West is obviously

much greater than in the Middle West and South. In Oregon,a poll of editors taken by thePortland Oregonianshowed thatthe plan was expected to be the leading issue in that state inthe coming election. Most of the editors, according to a

dispatch in theNew York Timesof January 12, 1936, said thescheme had greater strength than any similar movement everto arise in the Northwest. ** The dispatch continues: Nearlyeverywhere in Washington, California, Oregon, Idaho, Ne-vada and Colorado the pension movement is said to havesufficient strength to pick and choose the congressionalvictors.

Centralized Control

The Townsend organization has been very efficiently builtup around the central control of the national office. Statearea managers who are appointed by national headquartersin turn appoint district organizers. State area managers are

under contract and bond to national headquarters and districtorganizers are under contract to state area managers. Theduty of the organizers is that of signing up new members andsetting up local clubs. When 100 members have been enrolledlocal groups may receive a permit from the national office andare recognized as a club. The request for the permit is signed

by the newly elected officers and advisory committee of theclub and by the club organizer or state area manager.These local clubs then elect members to the congressional

boards, so called because they represent the clubs withincongressional districts. A nominating committee, of whichthe chairman is appointed by the state area manager, names aslate of 7 or more candidates who are then voted upon by club

delegates at the district convention. Each congressionaldistrict board then elects a member, other than the districtorganizer, to sit on the state board.


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The unprecedented growth of the Townsend movement isproof of the efficiency of the plan of organization. The local

units are pledged to adhere strictly to the tenets and rules ofprocedure issued by the parent organization, and the constitu-tion provides that any club must immediately surrender itsnational charter, its records and funds on demand to thenational office by the state area board.The purposes of the clubs, as stated in Article II of the

constitution, are:Section 1. To promote by all legal means the enactment by Congressof the Townsend Plan into law as quickly as possible.

Section 2. To maintain the democratic spirit and form of governmentin these United States, working individually and unitedly to this end.

Section 3. To use every possible effort, after the Plan has been enacted intolaw, to insure its provisions being carried out, for the benefit of all thepeople.

The extent to which the whole organization has beendominated by its National Headquarters was demonstratedat the National Convention of the Townsend Plan in Chicago,October 2427, 1935. Here a resolution was passed:

Be I t F u rth er R eso lved, That the political policy in the coming campaign

shall be fixed by National Headquarters after consultation and advice withregional officers and state area and congressional district boards and that thefinal right of the endorsement and support of any particular candidate orcandidates must rest with the National Headquarters whose approval ofany candidate shall carry with it the full Townsend support, and shouldpreclude any Townsend Club or organization or officer supporting anyoneelse or giving their endorsement thereto.

This meant that the central office could directly control thevotes of the several million club members.The reorganization of the movement and inauguration of a

board of directors, although announced, on March 31, 1936,as a step toward a more democratic management, still leavecontrol primarily in the hands of Dr. Townsend. This boardof directors is responsible only to the leader and not, through

a selective process, to the membership of the clubs. The newplans include the election by the club in each state of membersto serve on the National Advisory Committee to counsel with


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Dr. Townsend and the Board of Directors and to take backto their respective states thematters and policies agreed upon.

Supplementing the organization of Townsend Clubs is theTownsend National Legion with offices in Washington, thepurpose of which is to protect and defend the TownsendNational Movement and the public against all infringementof the rights, purposes and principles of the Townsend Plan,and to further its aims. Members agree to contribute $1.00per month to the National Townsend Movement for at leasta year and loyally to support the national movement and lead-ers. The Washington office has announced that the Legionnow has about 10,000 members.

Poll of the A merican I nstitute of Public Opinion

That the movement is stronger in Oregon than elsewhere is

indicated by the poll taken by the American Institute ofPublic Opinion, published January 12, 1936. In 6 states, thevote for $200 pensions comprised the following per cent of allballots: Oregon, 25.2; California, 13.7; Washington, 12.8; inMichigan it was 6.2 and in Maine 6.4.The poll of the American Institute, however, suggests that

estimates of Townsend strength may be greatly exaggerated.A large majority of those ballotted voted for governmentpensions, 89 per cent yes, 11 per cent no;but only 3.8 percent voted for $200 pensions; which had received 6 per cent ofthe vote in a similar but smaller poll in February 1936. Thepension most frequently favored in the poll was $30 per monthfor single persons and $50 for married couples. It is signifi-

cant that many sections of the country favored pensions largerthan $30 and $50. New England asked $50; so did the Moun-tain States, New York, Pennsylvania and West Virginia,while the Pacific Coast asked $60. The majority favoredpensions at the age of 60, the Townsend figure, rather than 65as in the Social Security Act. In all districts, the majority

preferred to have pensions for a man and wife over 60 less thantwice the pension of a single person. Commenting on thereturns, Dr. George Gallup, Director of the Institute, concedes


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that the Townsend movement at the time of the poll had thebalance of power in Oregon, California and Washington, andthat it might achieve the balance of power in the MountainStates.

It is undeniable, however, that the Townsend movementis a manifestation of a widespread and persistent demand foradequate provision for the aged and that there is a real possi-bility of the election in November of a considerable number of

congressmen pledged to the plan.


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Chapter I I

THE Old Age Revolving Pensions Plan is embodied inthe official bill of the Townsend movement (H.R. 7154.

See Appendix B), introduced in the House of RepresentativeApril 1, 1935, by John S. McGroarty of California. This isthe second bill. The first (H.R. 3977) was introduced byMr. McGroarty January 16, 1935, but the Townsend leadersfound it necessary to modify the bill in important ways afterthe hearings of the Congressional Committees on the billwhich later was passed as the Social Security Act.

It is important to note the differences between the two bills.The first bill provided:

1. A $200 monthly pension to every citizen 60 years of age and over whohas not been convicted of a felony.

2. A 2 per cent tax on gross dollar value of each business, commercialand/or financial transaction, the President being empowered, at his discretion, to increase the tax to not more than 3 per cent or to lower it to

not less than 1 per cent.3. All wages and salaries for individual services are exempted from the taxprovisions.

4. Pensioners may not follow a gainful pursuit, and shall agree to spendin this country all of the pension within 30 days.

The second bill provides:

1. Monthly pensions to all qualified citizens 60 years of age or over, of nospecified amount, but not to exceed $200; the taxes collected, after accumulation of a reserve fund and payment of administrative expenses to be distributed pro rata among qualified pensioners.

2. The following taxes:

a. A 2 per cent tax on gross dollar value of all transactions.

b. A tax on all incomes equal to one tenth of the income tax collectedunder the Revenue Act of 1934.

c. A tax of 2 per cent on all property acquired by inheritance.

d. A tax of 2 per cent on all gifts of the value of $500 or more.

3. Salaries and wages are not exempted. Taxable transactions include therendering and performing of services for monetary or other commercially

WHAT THE TOWNSEND PLAN PROPOSES

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WHAT THE TOWNSEND PLAN PROPOSES 17

valuable consideration. Taxes on salaries and wages are to be deductedfrom wage and salary payments and to be collected from the employer.

4. Supplementary provisions:a. The annuity is payable to any person whose net income from other

sources is not more than $2,400. Persons with an income of less than$2,400 may receive pensions sufficient to bring up their incomes tothe amount they would have received pro rata, provided they undertake to spend their total monthly income within a month.

b. Taxes collected are to accumulate for 4 months after the act goes intoforce, before any pensions are paid. Then the amount collected in

the first month is distributed in the fifth month, the amount collected in the second month is distributed in the sixth month, and soon.

c. The annuity is forfeited if the recipient engages in any gainfulpursuit, maintains unreasonably and unnecessarily any able-bodiedperson in idleness, unreasonably employs any person or pays salaryor wages in disproportion to services rendered, or fails to spend themonths pension within the month in which it is received.

The chief differences between the two measures are, first,that the provision for a flat $200 pension is dropped, and in-stead the proceeds of the transactions tax and other taxes areto be divided pro rata among qualified pensioners; and second,that wages and salaries, not taxed in the first bill, bear thefull 2 per cent tax in the second. These changes were made

to meet criticism of the first bill that the tax yield would beinsufficient to pay $200 pensions and that a definite require-ment to pay such pensions would lead inevitably to currencyinflation. The second bill provides increased revenue byincluding payment of wages and salaries in taxable transac-tions and by adding 3 supplementary taxes and it aims to

avoid inflation by limiting the amounts disbursed to the sumscollected.

Claims of the A dvocates of the Plan

The advocates of the Plan insist, however, that althoughinitial revenues may be inadequate to pay $200 pensions, theforced immediate spending of such pensions as can be paid willsoon increase the volume of transactions and the yield of thetaxes to a point where the maximum pensions can be paid.As a matter of fact the official pamphlet of the organization,


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The Townsend Plan, does not place old age security as the pri-mary purpose of the plan. The principal claims are that the

Townsend Plan will restore national prosperity without in-flation through rapid and continuous and compulsory circu-lation of existing money in trade channels, sufficient in volumeto immediately restore maximum buying power and normalconsumption of every form of manufactured goods, foodproducts and professional services,*and that it will provide

immediate employment for all in the vocations for whichthey are fitted and trained at a standard living wage to whichthey were formerly accustomed and to which they are en-titled/

It is also claimed that the plan 44will greatly reduce presenttaxes through the abolition of almshouses and homes for theaged and that it will assist to keep in balance the budgetby enabling the government to discontinue the present wasteof funds through insufficient and inefficient present reliefactivities and to discontinue military pensions to veterans of60 years and over.Then comes the consideration of the aged expressed in these

words: The Townsend Plan will set in motion the first

nationwide mutual retirement plan ever devised wherebyevery individual creates his or her own retirement fund andwill intelligently plan for the care of the aged, retiring themin comfort and happiness as they reach the age of 60, thusgiving free rein to the use of their talents for the benefit of*posterity.

The officials of the Townsend movement also make specificclaims as to the effect of the plan on unemployment. By re-moving old persons now holding jobs into the leisure class,they expect to place 4,000,000 younger persons into the re-linquished jobs. Then, through the acceleration of businessthrough forced spending, they expect to create another 8,000,000 jobs, on the theory that each $2,400 a year spent creates

work for one person. Thus they anticipate opportunities forwork for about 12,000,000 unemployed persons. In other words,they are going to do away with unemployment altogether.


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WHAT THE TOWNSEND PLAN PROPOSES 19

A cceleration of Business through Forced Spending

A study of the Townsend Plan, if it is to meet the claims ofits supporters, must focus on the contention that the forcedspending of pensions will result in the rapid circulation ofmoney in such a volume as to restore purchasing power andcreate new purchasing power on an everascending scale. Itdoes not suffice to demonstrate that a 2 per cent transactionstax will not yield enough to pay $200 a month to 8,000,000

or 10,000,000 persons, or anything like that amount. This,to the Townsend leaders, is not the point, or rather they havegiven up making it the point. Their first contention, onwhich the plan rests, and which has to be true if it is to work,is that it establishes a system of forced spending which stimu-lates business without abatement. This is set forth in the

Townsend pamphlet without the infiltration of the slightestdoubt, and is somewhat more cautiously affirmed by RobertR. Doane, the statistician employed by the Townsend organi-zation to appear before the Senate Committee in February1935. Mr. Doane, in his testimony before the Senate Com-mittee, estimated the possible increase in the volume of tradeat 25 per cent a month for the first few months, after which it

would be at a decreasing rate. A continuation of thisstimulated volume of trade, he went on, could be expected,under normal conditions, until the revenue derived from thetax could mount to $26 billion per year, but that would bein the future.

An analysis in the official booklet, The Townsend Plan, pur-

ports to demonstrate that the monthly volume of transactionswould increase 5 times, or from $13 billion to $64 billion,within 8 months after the beginning of pension payments.The booklet states: Our premise is that the annuities paid,will, when expanded, accelerate trade and credit through 10times the amount of the annuity. The transition of thiscommodity dollar may be compared with the banking processof ten to one. One dollar liberated into channels of trade willsoon liberate 10 credit dollars during a period of financialconfidence.


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Leaving this as the central principle to be examined, the

further contention is made in this analysis: Under our capi-talist system all expenditures eventually find their way intothe income accounts of our corporations and financial institu-tions. Therefore no hardship from a practical application ofthe Townsend Plan is expected to reflect on any one class ofour citizens. As the tax is paid only in relation to transac-tions, the largest taxes will be paid by the largest incomegroups; the smallest taxes by the smallest income groups. Inour opinion the plan is equitable to all.


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Chapter I I I

WHAT WOULD PENSIONS COST?

1. Pe n s i o n s U n d e r t h e T o w n se n d Pl a n

A LTHOUGH the Townsend organization has abandonedi \ its original claim that $200 monthly pensions could be

paid at once out of the proceeds of a 2 per cent transactions taxthis amount is still the ultimate goal. It is necessary, there-fore, to determine how many persons would be eligible forsuch pensions and what the total cost would be.

Dr. Townsend told the Congressional Committees that hebelieved that 7,500,000 would be the number to apply for thepension but that he was willing to accept 8,000,000 as a cor-rect figure. This, however, is undoubtedly too low.

According to a Census estimate, the number of persons 60years and over in 1935 was 11,710,000, of whom about 600,000aliens would be ineligible for pensions. It is not possible tomake an accurate calculation as to how many of the 11,110,000 citizens would be ineligible because they had incomes

of more than $2,400, or, in the case of married couples,family incomes of more than $4,800. The Brookings Insti-tution has made estimates of income distribution for thepopulation as a whole for the year 1929, but not for differentage groups. It is found that even in that year of prosperity,less than 9 per cent of all families had incomes of $5,000 a

year or more, and only 10 per cent of single persons hadincomes more than $2,500 a year. The average income ofolder workers undoubtedly is less than that of the youngerand middleaged group, and incomes in 1935 were generallymuch lower than in 1929. But without introducing theseconsiderations, reasonable estimates can be made of thenumber of persons who could be qualified to receive pensions

of $200 per month.As shown in Appendix I, the total of 11,110,000 citizens

over 60 years of age included 3,763,000 who were employed.

21


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Of the latter number at least 3,228,000, and probably a larger

number, were earning less than the pensions they wouldreceive if they gave up their jobs. This group, together with1.230.000 women over 60 years of age married to workerswith incomes of less than $5,000, or a total of 4,458,000,would qualify for pensions. In addition, as shown inAppendix C, there were 6,007,000 persons over 60 years ofage who were neither employed nor married to employed

persons. Virtually all of these, including a small propor-tion with income from property or investments who couldreadily assign this income to relatives, would also be eligible.Accordingly, at least 10,000,000 and probably as many as10.500.000 persons would be able to meet all the qualificationsto receive $200 monthly pensions. In other, words it appears

that on the basis of an income test as suggested in theMcGroarty Bill at least 10,000,000, or 85 per cent of the11.710.000 persons 60 years of age and over, would be eligiblefor pensions of $200 per month.

The Cost of Pensions

The cost of paying pensions of $200 per month to all

eligible citizens over 60 years of age, under the simple incometest prescribed in the McGroarty Bill, therefore, would beat least $24 billion and probably more than $25 billionannually.

It has frequently been pointed out that this representsnearly half of the national income estimated by the Depart-

ment of Commerce at $48.6 billion in 1934. It would benearly twice the $13.5 billion total expenditures of federal,state and local governments for 1932, as estimated inFinancialStatistics of State and L ocal Governments1932 (Washington,1935).The Townsend proposal, therefore, is to give to the 10,

000,000 or so qualifying pensioners, representing about 8 percent of the entire population of the country, about half ofthe total national income, leaving the other 92 per cent ofthe people to get along on the other half.


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WHAT WOULD PENSIONS COST? 23

If the burden of supporting the aged seems, in the light ofthese current figures, to fall heavily on the remaining popu-lation, it is well to consider how much heavier the burdenwould be in the future when older persons will form a largerproportion of the total population than they do today.

Persons 60 years of age and over now number approxi-mately 11,710,000, or about 9.2 per cent of the total popula-tion. As shown in Appendix D, it is estimated that by 1945

the number of persons 60 years of age and over will be approx-imately 15,710,000, or about 11.4 per cent of the estimatedtotal population of 138,030,000. By 1955 there would be20.380.000, or 14 per cent of the total, and by 1965 about24.980.000, or over 16 per cent of the total population. If,in accordance with current estimates, 85 per cent of all theaged over 60 should qualify for pensions, the number of pen-sioners and the annual cost of $200 monthly pensions can beestimated as follows:

Although with the increasing population the nationalincome will undoubtedly increase, the burden of paying thesepensions to the nonproducing aged would become increas-ingly heavy on the working population.

The Cost of A dministration

If pensions of this amount were to be paid with the require-ment that the entire payment to each pensioner be spent forconsumption purposes within the month a considerable costof administration in addition to the cost of collecting thetax would be incurred. It has been freely stated by criticsof the Townsend Plan that it would be impossible to

administer it. This alleged non possumusis based on the dif-ficulty of collecting a general transactions tax levied on mil-lions of separate business transactions, and on the labor that

194519551965

Number of Pensioners

13.345.00017.323.00021.233.000

Cost

(Billions)$32.041.651.0


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would be entailed in checking the expenditures of 10,000,000or more pensioners. If the Plan were going to achieve theresults claimed for it, if it were going to create a multiplyingprosperity and end all depressions for all times, its adminis-tration would hardly be found beyond mortal ingenuity.Hence no argument is going to be made against it on accountof the administrative problems raised. It is, however, wellto know approximately how much the administration

would cost.The usual estimates of the cost of administering social in-surance schemes, based on the experience of foreign countries,is 10 per cent of the sums collected. This 10 per cent is arough average applying to many types of social insurance andis most unsatisfactory as a basis for estimating the costs ofany given plan, particularly of any plan as complex and in-volving as enormous sums as the Townsend Plan. An attempthas been made, therefore, to estimate the administrative costsof the Townsend Plan on the basis of the various clerical andadministrative procedures involved in collecting the money,paying pensions and checking expenditures of the pensioners.The Townsend Plan or any plan of oldage pensions would

require first of all certification of the date of birth of appli-cants. An income test would also be necessary in order todetermine whether the applicants income is less than $200a month or less than the average amount available for pen-sions. For the initial group of 10,000,000 pensioners thecost of making these examinations, as estimated by personsfamiliar with similar administrative problems, would be notless than $5.00 per pensioner or $50 million. Inasmuch asthis income test would probably have to be applied to theexisting group of pensioners each year, this would be anannual cost. An additional annual charge of $5 millionwould be incurred in certifying date of birth and income forapproximately 1,000,000 persons reaching 60 years of age

each year.It is almost impossible to estimate what the administration

of the provision requiring expenditure of the entire pension


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within a month would cost and, irrespective of the cost, itwould seem almost impossible to insure complete compliance.

Even if only a perfunctory investigation of expenditures wereinvolved the enforcement of this provision would obviouslyrequire a large number of investigators. Consultation withexperts on administration indicates that at least a half dayand possibly a full day of an investigators time each monthwould be needed to check the expenditures of each pensioner.Thus, with 10,000,000 pensioners, at least 200,000 investi-gators, working 25 days a month, and possibly 400,000 wouldbe needed. If the average annual salary for this staff were$2,000 the average annual cost would be between $400million and $800 million.The cost of maintaining records and preparing and mailing

10,000,000 checks each month to pensioners after the system

were well organized and functioning satisfactorily wouldaverage 5c. per check, making a total of $500,000 per monthor $6 million per year.

Since the transactions tax is to be collected on a monthlybasis, the collection would involve the receipt, inspection andchecking of monthly returns from all vendors of goods and

services, including 6,000,000 farmers, a large number offamilies employing domestic servants, and more than 2,000,000 business and professional concerns. In the aggregate,monthly returns would total at least 9,000,000. Consulta-tion with tax and administrative authorities indicates thattax collection would cost at least $1.00 and possibly as highas $2.00 per return. The monthly cost of collecting the tax

would thus be not less than $9 million and perhaps as high as$18 million, or between $108 million and $216 million peryear.The total cost of administering the Townsend Plan, there-

fore, would be well over $500 million and might exceed $1billion a year. The expression of administrative costs in

terms of sums of money involved has little significance, asmentioned above. However, it is worth noting that thesecosts might mount to from 10 to 25 per cent of the $4.2 bil-


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lion estimated as the probable yield of a 2 per cent tran-sactions tax. Variations would depend on the care and ac-

curacy in enforcing the tax provisions on all transactions andin checking the records of expenditures.

2. Pe n s i o n so f Smal l e r A m o u n t s

The cost of paying and administering pensions of $200 amonth, as contemplated by advocates of the Townsend Plan,

would be in the neighborhood of $25 billion per year, anamount nearly half as large as the present national incomeand, as will be shown later, greatly exceeding the yield of thetaxes proposed in the McGroarty Bill. In view of the wide-spread interest in the question of old age security and thedemand for pensions as generous as our resources can afford,consideration should be given to the probable cost of pensionson a more modest scale.

Cost of Pensions Under V arious Conditions

The number of pensioners under various plans will dependupon the pensionable age prescribed, the size of the pensionto be paid, and the conditions under which pensioners may

qualify. Obviously if pensions of $200 a month were offeredto all persons over a given age, or even to those satisfyinga simple income test or an employment test, the number ofeligible pensioners would be much larger than if more modestpensions were to be paid only on the basis of a strict meanstest which would disqualify all those with any resources orwith relatives able to support them. If pensions of $100were offered, the number who would qualify would be lessthan the number qualifying for $200 pensions and the costwould be less than half what it would be if the larger amountwere paid. As shown in Appendix C, the number of personsover 60 years of age who would qualify for $100 pensionsunder an income or employment test would be approximately

9,000,000 as compared with nearly 10,500,000 with $200pensions. The cost of $100 pensions would be about $11billion and of $200 pensions, more than $25 billion.


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If pensions of $30 were paid to single persons over 60 yearsof age, and of $50 to married couples the amounts most

frequently mentioned in the poll of the American Institute ofPublic Opinion the number of pensioners would be approx-imately 6,000,000 and the annual cost would be only $2billion. This is on the assumption that all pensioners over 60years of age who were not employed would be eligible for thesemodest pensions without undergoing a means or income test.

The cost of pensions would be reduced considerably if theage limit were raised to 65. Nearly 7,500,000 would qualifyfor $200 pensions and nearly 6,500,000 for $100 pensions. Costswould be about $18 billion for the larger pensions, and $8billion for the smaller. Pensions of $30 for single persons and$50 for married couples over 65 years of age, would cost only$1.5 billion annually. The estimated number of persons who

would qualify for pensions of these smaller amounts would beabout 4,000,000 on the assumption that all those employed areearning at least $50 a month and that all those not employed,except spouses of the employed, would be eligible for pensions.

If pensions were paid purely on the basis of citizenship andage, irrespective of employment, income or means, which

would be the simplest plan administratively, the number ofpensions and cost would of course be greater. Thus, 11,110,000 citizens would qualify with a 60year age limit, and $200pensions would cost $26.6 billion, $100 pensions more than$13.3 billion, and $30 and $50 pensions, $3.7 billion.

If the age limit were set at 65, it is estimated that 7,188,000persons would qualify. Pensions of $200 would cost $17.3billion; $100 pensions would cost $8.6 billion and paymentsof $30 to single persons and $50 to couples would cost $2.4billion.These estimates of the cost of pensions of varying amounts

are important not only in their relation to the yield of theproposed Townsend taxes, to be discussed in Chapter IV,

but also in relation to the broader question of the amount ofoldage security which our economy can afford and the meansfor financing this social obligation.


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Chapter I V

THE surprise of the Townsend Plan as originally proposedwas its unabashed assumption that $24 billion a yearcould be raised from a tax on business transactions. A tran

actions tax was a new idea to the general public, and theTownsend advocates gave a startling figure of the volume ofbusiness transactions, which created the impression that herewas an untapped and wellnigh unlimited source of revenue.

Taking a sum of $1,200 billion from an official estimate madefor the Federal Reserve Board of debits to individual ac-counts in 1929, the Townsend leaders assumed that this ac-

tually was the sum total of business transactions. Had theybeen correct, a 2 per cent tax on this amount might yield $24billion a year or enough to pay $200 a month pensions to10,000,000 persons, approximately the number above 60years old who would be eligible to receive it.

Unfortunately for the Townsend Plan, 4debits to individual

accounts do not represent the total of business transactions.In fact, bank debits, which are checks drawn against the ac-counts of individuals and corporations, are far in excess ofthe sum total of transactions as defined in the McGroartyBill. Transactions are defined as payments for all kinds oftangible and intangible goods and services, while bank debitsinclude an enormous number of payments and transfers offunds which are not transactions as defined in the bill andwhich would be wholly exempt from the tax. One of thelargest of these items, running into many billions of dollars,which is expressly excluded from taxation under the bill, isinvolved in the making and repayment of loans. Bankdebits also include checks drawn by corporations and indi-

viduals in effecting a transfer of their funds from one bankto another, interfamily transfers of funds, payments of char-itable contributions and the cashing of checks drawn for

THE TOWNSEND TAXES

28


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THE TOWNSEND TAXES 29

currency. On the other hand, a considerable volume oftransactions is carried on with cash and is not fully reflectedin bank debits. Clearly bank debits cannot be regarded aseven an approximate measure of the volume of transactionswhich would be taxable under the bill. Apparently eventhe Townsend advocates accept the fact that the volume oftransactions and the yield of the tax will not approximatetheir original estimates, for the present bill provides for 3

additional taxes.

1. M i n o r T ax es

These new taxes are of minor importance, however, fortheir yield is negligible in relation to the amount of moneyrequired for pension payments. The proposed additional tax,equivalent to onetenth of the amount of income tax payableunder the Revenue Act of 1934, would have yielded addedrevenue of only $125 million in 1935, as shown in Appendix E.If this provision had applied to the 1929 income tax$250 million would have been collected, and in 1934, only$82 million. The 2 per cent tax on estates and inheritanceswould have produced only $77 million in 1929 and $45 million

in 1934. The yield of the tax of 2 per cent on gifts in excessof $500 can be roughly estimated at $18 million in 1929, $6million in 1934 and $22 million in 1935. Therefore these3 taxes would have produced only $345 million in 1929 and$143 million in 1934. Their combined yield may be liberallyestimated at a maximum of $200 million in 1935.

2. T h e T r an sac t io n s T ax

Since the revenue which would be produced by these minortaxes is microscopic in relation to needs, the main factors tobe considered in examining the Townsend Plan are the volumeof transactions and the yield of the transactions tax and theargument, or one might better say the mystic belief, of the

Townsend leaders, that the revolving* *feature of the Planwill speed up the velocity of business turnover and so buildup the national income to undreamedof heights. If the tax


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yield would not suffice to pay higher pensions than now areobtainable under the Social Security Act, and if the forcedspending of the Plan would not in fact increase businessactivity, the Townsend movement would evaporate as quicklyas the truth about it reached the public. The Townsendleaders now are ready to admit that the yield of the transac-tions tax at the present level of business is not enough to pay$200 a month pensions to the aged. But they still count on

the effects of the forced spending of pensions which theyexpect to increase the volume of business until the tax yieldwill be sufficient.

The V olume of Transactions

In view of the fact that bank debits furnish no gauge ofbusiness transactions, it becomes necessary to arrive at anindependent estimate of the actual volume of transactions inorder to ascertain the yield of the tax.

By the terms of that bill the 2 per cent tax is levied uponthe fair gross value of each transaction done within theUnited States and territories.* Gross dollar value is de-fined by the bill as the sum representing the total fair value

of the entire property or service transferred or proposed to betransferred without deducting any amount of encumbranceor offset of any kind. Thus, if a house worth $10,000 butcarrying a $5,000 mortgage were sold, a tax of $200 wouldbe imposed on its full value rather than on the $5,000 whichchanges hands. The term 4transaction**is defined as includ-ing the sale, barter, and/or exchange of real and personalproperty; commissions, interest, fees and other pecuniarybenefit of any kind; also the rendering of any service formonetary or other valuable consideration, including trans-portation by any means, and telephone, telegraph, radio,amusement, recreation, education, art, advertising, and soon; and/or any and all other service of any kind excepting any

single isolated transfer of property of fair gross value lessthan $100 which does not arise or occur in the usual course ofan established business, and excluding any loan, deposit,


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withdrawal from deposit, hypothecation or pledge of prop-erty or money. The bill further provides that the tax shallbe paid by the grantor, vendor or lessor, but that in com-pensation for personal service other than for professionalservice, the person or legal entity by whom such payment ispaid shall deduct the amount of the tax and withhold it outof such compensation and shall make the return and thepayment of the tax.

A careful tabulation has been made for this study of theactual volume of transactions as defined in the McGroartyBill. The results are shown in detail in Appendix F. Inthis table are totalled all recorded transactions, with liberalestimates in the case of the relatively small volume of trans-actions for which no adequate records are available.The total volume of transactions in 1929, according to this

analysis, was about $638 billion, little more than half of thetotal volume of bank debits on which the Townsend leadersoriginally predicated the success of their plan. In 1934, thevolume of transactions is shown to have been $271 billion, alittle more than onefifth of the base needed to yield $200pensions.

Shrinkage of Transactions

But even these amounts do not represent the base uponwhich the yield of the tax could be computed. The imposi-tion of a tax as large as 2 per cent would cause a considerableshrinkage in the volume of certain types of transactions

which normally are carried on with a small margin of profit.In other instances legal evasion of the tax would be possibleby minor changes in the method of doing business, whichwould reduce the volume of taxable transactions. Further-more certain actual transactions such as payments of wagesand salaries of state and local governmental employees, pay-ments of interest on, and sales of, securities of state and local

governments would probably be exempt for Constitutionalreasons. Nor could the Federal government be expected totax itself by collecting a tax on revenues of the postal service


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on sales of its own securities or on interest paid thereon. In

fact the original sale of all bonds, which are technically loans,might be exempted under the act, in which case the volumeof taxable transactions would be still smaller.

On the security and commodity markets, which account forabout onethird of the total volume of transactions in 1929and onesixth in 1934, most sales are made with a very smallprofit margin, frequently as little as onefourth of 1per cent.

Many traders in these markets buy and sell in large volumewith a profit margin so small that it would be wiped out by a2 per cent tax. The tax would therefore do away with alarge amount of speculative dealing, or drive it out of theUnited States, much of it probably going to Canada. Wheth-er the reduction of speculative dealing would of itself have

beneficial results, as the Townsend leaders contend, is besidethe point in figuring the probable yield of the transactions tax.Another effect of the tax, which also would diminish the

yield, would be to impose on business the need for basicchanges in structure and practice. It would bring about avertical consolidation of business firms making finished andsemifinished products, so as to reduce the number of trans-

actions on which the tax would be levied. And it would leadmanufacturers to assume ownership of materials which areto be processed at an earlier or later stage in their preparationfor the retail market; then instead of outright sale of the ma-terial from one processor to another, processors at variousstages would work on a contract basis and be paid a fee. The

tax would then fall only upon the fee paid and not upon thefull cost of the material each time it is processed. This lattermethod of escaping the tax has been very noticeable in France,where much of the processing now is done on a fee basis as aresult of the French turnover tax which is in principle alimited transactions tax. In some countries an attempt hasbeen made, with varying degrees of success, to check this typeof tax evasion by taxing interplant transfers of goods by cor-porations owning several plants.

In wholesale trade where present practice is to a great ex-


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tent outright purchase and resale, the procedure, in order toavoid cumulative taxes on the full value of product, would be

changed to that of handling products on a commission basiswithout change of title. This, too, has occurred on a largescale where sales taxes have been tried.

At any rate, the net result of these various expedientswould be a reduction in the volume of transactions to whichthe tax could be applied, and therefore a lower tax revenue.

The Y ield of Taxes

The estimated shrinkage in the volume of transactions thatwould result from the imposition of a 2 per cent transactionstax is shown in Appendix F. The tax could have been leviedon a base of only $452 billion in 1929 instead of on the $638billion of transactions which actually occurred. The

shrinkage in 1934 would have been from $270 billion to ataxable base of $205 billion. The 2 per cent tax would thenhave produced about $9 billion in 1929 and only $4.1 billionin 1934.Thus the combined yields of all taxes under the McGroarty

Bill would have been little more than $4.2 billion in 1934.

After deducting administration costs of at least $500 million,only $3.7 billion would have been available for distribution topensioners, or about enough to pay $30 a month instead of$200 to all persons over 60.

While the $4.2 billion which Townsend taxes might yieldon a 1934 basis seem insignificant in comparison with the $24billion upon which the Townsend hopes are based, it is asum about as large as the yield of present federal taxes andrepresents about 8 or 9 per cent of the national income. Thisfigure, it must be admitted, bears a much more reasonable re-lationship to the 8 or 9 per cent of the population contem-plated as possible pensioners. It must be remembered alsothat if the $3.7 billion remaining for pensions after paying

administrative costs were distributed only to those qualifyingunder a simple income test the number of persons and percent of the population who would give up jobs and other


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sources of income in order to be eligible would be smaller thanif $200 pensions were paid. As shown in Appendix C about

6,000,000 persons would qualify under an income test formonthly pensions of $30 for single persons and $50 for marriedcouples, and about 9,000,000 for pensions of $100. It is evi-dent, therefore, that at least 7,000,000 persons now have in-comes of less than $40 a month and would qualify for pen-sions of that amount. The total cost of paying these $40

pensions would be $3.8 billion. Therefore, the 2 per centtransactions tax would not yield enough to pay $40 a monthto the 7,000,000 persons who would probably qualify.

Obviously to pay pensions of $200 a month, on the level ofbusiness either in 1929 or 1934, the tax rate would have tobe greatly increased. Dr. Townsend has expressed himselfas ready to double the tax rate. But it would not suffice todouble the rate even on the 1929 level, and of course, it isdeceptive to commend a plan on the 1929 level, since there isno early prospect of the national income rising to the level ofthat year. The 1935 level of business was somewhat higherthan in 1934 the statistics are not yet available but thedifference is not large. At the level of 1934, the transactions

tax would need to be increased from 2 per cent to about 12per cent to yield enough to pay and administer $200 a monthpensions.

One result of such an increase would be to reduce at once allwages and salaries by direct deductions almost oneeighth,an amount which of itself would spell tragedy in the majorityof American families. The tragedy would be intensified bythe increase in the cost of living, probably by onethird toonehalf. Thus, through decreased wages and higher pricesthe standard of life of the masses would sink nearly a third.A further result would be to drive many enterprises into bank-ruptcy, causing unemployment and heavy losses to investors.Such considerations would lead to the rejection of the Plan as

soon as its implications were understood. And they rule outa transactions tax as the magic source of tax revenue capableof producing pensions of $200 a month.


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3. E f f e c t so fa T r an sac t io n s T ax

Even the fact that the general transactions tax might yield$4 billion on the present level of business does not entitle it toconsideration as a possible major source of revenue for reliefand pensions. Reference has already been made to theshrinkage in the volume of transactions which would resultfrom the imposition of a 2 per cent transactions tax. In

addition this tax would have disrupting effects on the struc-ture of commerce and industry.Many types of financial transactions which do not admit of

shifting the tax on at successive steps to an ultimate con-sumer* would become impossible. Trading on the securityand commodity exchanges, a large proportion of which isdone on a small margin, would shrink to such an extent that

these markets could no longer perform their necessary func-tions of providing a continuous market and facilitating theflow of commodities and the investment of savings. Sincesuch transactions are essential for the financing of industryit is likely that the bulk of American trading on organizedexchanges would be shifted to Canada with a consequent un-

employment and impairment of values.The whole process of financing government units and pri-vate enterprises would be hampered or paralyzed. Eventhough the initial flotation of government securities and otherbonds, technically loans, would probably be exempt fromthe tax, subsequent resales would very likely be taxed. A2 per cent tax on government and other lowyield issueswould reduce the return to nearly zero, and in the case ofsome short term securities, to less than zero, and would thusbar the flotation of such issues except at much higher rates ofinterest.

In the case of corporate securities the results would beequally destructive. In the first place, the investment bank-

ing and wholesale functions, where operations are conductedon a very small profit margin, would virtually disappear andthose engaged in these activities would have to go out of


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business. The attempt to continue these functions on aprofitable basis by raising the price to the investor wouldresult in prohibitive prices and the market would vanish.Even if corporations were to market their securities directlythe cost of financing would be increased by the 2 per cent taxto be collected from the corporation, and investors wouldhesitate to buy knowing that when they sold the return ontheir investments would be reduced by 2 per cent. Thus the

source of funds for refinancing and for the expansion of bus-iness would dry up and the growth of industrial enterpriseswould be seriously hampered.

Not only would the volume of new issues and of trading insecurities decline. The value of these securities dependspartly on their transferability and partly on the incomeyielded. With both of these impaired by a tax the value ofall such securities would be expected to decline. The samewould be true of real estate values. In other words, a 2per cent transactions tax would bring about a reduction incapital values which would mean actual loss to banks, in-surance companies and all private owners and investors.

Among the immediate results of a 2 per cent transactions

tax in industries involving the production of goods and serv-ices would be the elimination of many intermediate businesstransactions, such as wholesaling and jobbing, and the for-mation of combinations and mergers in order that successivestages of production would take place under one ownershipand thus escape the tax. Large integrated corporationswould be given a great competitive advantage over smallerunits. Aside from the shrinkage in volume of transactionsand the tax base, mentioned above, these changes would causebusiness failures, increased unemployment, and difficult andcostly readjustments.

Who Pays the Taxi

In addition to these effects upon business organization, a 2per cent tax on the gross value of all transactions would be agreat burden on industry, labor and consumers. In the first


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place labor would suffer to the extent of 2 per cent of its in-come, since the tax on wages and salaries would be paid by the

wage earner. The tax on other transactions, obviously,would have to be paid, first, by business enterprise itself, inwhich case profits would be reduced or wiped out or deficitsincreased; or, second, attempts would be made to recover theamount of tax by reducing costs of production, particularly bycutting wages; or, third, the tax would be passed on to con-

sumers in the form of higher prices.The tax could come out of profits only to a very limitedextent. In many industries 2 per cent of gross sales representsa large proportion of profits, and in some cases, such as whole-sale and retail trade, business is done on an average profit ofless than 2 per cent of sales. It is obvious, therefore, thatunless the tax were passed on it would greatly reduce or wipeout profits and as a result would increase business failures withconsequent losses to labor and investors. It is impossible topredict which industries and enterprises would find it possibleto pass on the tax to consumers and which would be forced tobear all or part of it, at least temporarily.

European Experience with Turnover TaxesAlthough several European countries have made use of

general sales and turnover taxes since the World War, nonehas attempted to impose as comprehensive a tax as that con-templated in the McGroarty Bill. European experience,therefore, sheds little light on the results that the tax herediscussed might bring.The European laws, as shown in General Sales or TurnOver

Taxationpublished in 1929 by the National Industrial Con-ference Board, vary widely as to the types of transactions thatare subject to the turnover tax. Wages and salaries, forexample, are usually exempted and such taxes, as a rule, donot cover directly the sales of landed property. Sales of entire

business enterprises, including plants and good will, are taxedin Austria, Hungary and Yugoslavia. Germany exemptsthem because of administrative difficulties, and for fear of


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penalizing advantageous regroupings of business capital.Taxes on sales of securities are not included in the turnovertaxes in Europe but frequently are assessed independently atlower rates.The experience of Germany with its turnover tax is that

the yield is from to 3 times as much as a retail sales tax ofthe same rate. For France, the same figure is given in Haigand Shoups The Sales Tax in the American States(Columbia

University Press, 1934). When in 1920 the French govern-ment adopted the multiple turnover tax to replace the singleturnover tax, it estimated that the average number of turn-overs for each commodity was 5. The estimate proved to betoo high, to the mortification of the budget makers. Usualexperience has been that a turnover tax yields less than ex-pected, not only because the estimates did not allow for thelower prices of materials turned over in the early stages ofproduction but also because ways and means were devised forevasion of the tax by changing methods of doing business andeliminating some of the intermediate transactions. As far asprices are concerned, price changes in Europe have been theresult of so many interrelated factors that it would be impossi-

ble to determine to what extent increased prices have beencaused by the various types of sales and turnover taxes.

E ffect on Prices

Although the burden of sales and transactions taxes, wher-ever tried, is borne by producers to varying extents in different

industries, there is a definite tendency to shift these costs tothe consumer. Data presented inGeneral Sales or Turnover Tax-ationindicate that many business enterprises find themselvesbearing the burden during an initial period of adjustment, butthat in the long run the result is usually a price level some-what higher, though not necessarily by the entire amount ofthe taxes imposed.

In the United States the principal experiments along thisline have been with retail sales taxes. This is the easiest taxto shift to the consumer, but even with these measures expe


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rience in the various states has not been uniform. InThe SalesTax in the American Statesa wide survey was reported with the

following conclusion: In Georgia, owing to the low rates ofthe tax, virtually none of the burden was shifted to consumers.In Pennsylvania, as a result both of the low rate and the shortlife of the tax, shifting apparently was uncommon. Judgingby replies of retailers in New York State, a majority of thesmall retailers have not succeeded in shifting the 1per cent

tax. The 3 per cent tax rate in Illinois, Michigan and NorthCarolina seems to have been high enough to force shifting inmost instances, and under the 2 per cent rate in Illinois abouthalf of the taxable retailers interviewed reported shifting partor all of the tax.

So it is not simple to predict what the increase in priceswould be if the transactions tax of the Townsend Plan were

to be applied in the United States. For the purposes of thisstudy a special analysis has been made of the probable effectof a 2 per cent transactions tax on the retail prices of a groupof selected articles bought by the ultimate consumer. Thisanalysis, the results of which are given in Appendix G, isbased upon confidential data obtained from leading manu-

facturers showing the amount of tax payable on each trans-action involving a change of ownership from raw materialproduction to the final sale. No allowance was made fortaxes on wages, since these are to be borne by the wageearnerand deducted directly from wages, nor for taxes on rents or onthe purchase of new machinery or equipment. But in everycase it was assumed that the tax paid at each step would be

passed on to the next buyer and ultimately to the consumer.The taxes paid and the price increase naturally varied among

different products in accordance with the number of turnoversand the value of materials at early stages of manufacture.

Thus the taxes involved in the production and sale of a loafof bread now selling at retail for 10c amounted to little more

than onethird of 1cent, or 3.7 per cent, because, althoughseveral turnovers are involved, the materials do not acquiremuch value until the later stages of production. A pair of


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mens shoes now selling at retail for $4.00, on the other hand,would involve taxes of 33c and a price increase of 8.3 per cent.The consumer would pay $159 for an electric refrigerator nowselling for $150, nearly $40 for a silk dress retailing now for$37.50, and for a cheap cotton dress, $3.16 instead of $2.95.Retail price increases would be 6.2 per cent for a gallon ofgasoline, 5.8 per cent for a pound of meat and 5.1 per cent fora mans felt hat. No definite conclusions can be reached from

this analysis but it is reasonable to suppose that if the taxwere passed on the consumer would have to pay from 5 to 7per cent more for most articles than he pays at present.

If the tax deductions from wages should result in a wide-spread demand for and realization of increased wages thesegreater costs of production would tend to be passed on to theconsumer in further increases in prices. Under such circum-stances the advance in prices would be still greater than shownin this analysis. In any case the costs would fall heavily onthe wage earner. If the tax on wages remained a deductionfrom wages, the wage earner would pay the costs in reducedwages and higher prices. If wage earners were successful inobtaining higher wages to compensate for the tax deduction,

they would still pay the costs in the form of still higher prices.The net result would be a lower standard of living for wageearners and all other consumers.

It must be remembered, also, that these calculations applyto a tax at the relatively low rate of 2 per cent. A tax ratelarge enough to produce the enormous sums needed to pay$200 pensions would have to be about 6 times as large, or 12per cent, and the consequent increase in prices, decrease inwages and decline in the standard of living would be exceed-ingly drastic and destructive. It would mean that salariesand wages would be reduced, by direct deduction, 12 per centand that prices of most products would increase 30 or 40 percent or even more.

Conclusions about the Transactions Tax

The consensus of informed opinion is that general sales


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taxes, limited turnover taxes and general transactions taxesare justifiable only in emergencies, and that they should be

supplemented by steeply graduated taxes on incomes and in-heritances from a fairly low level upwards. Of the 3 kindsof sales taxes, a general transactions tax is undoubtedly themost unsatisfactory since it taxes every sale of goods and serv-ices irrespective of the profit arising from the transaction,and also because, as proposed in the revised McGroarty Bill,

it includes a tax on wages and salaries, and so begins with areduction of the purchasing power of everyone who works.The argument has been made in the official Townsend

pamphlet that the tax falls equitably on the population be-cause those who spend the most pay the most. But this isspecious, because it is not alone the rate of taxation whichdetermines equitability but the rate in relation to ability topay. Two per cent or $40 deducted from a $2,000 incomesupporting a family is a much greater burden on that familythan $400 taken from a family living on $20,000, though therate of taxation is the same. As all but a small proportionof incomes in the United States are less than $2,000 the taxlays a far greater burden on the poor than the welltodo. It

no longer needs to be argued that an equitable tax is one whichtakes into account the ability to pay. This is recognized inthe graduated tax principle. Under the income tax law nowin effect a person with an income of $100,000 pays about 30per cent in income tax, while a person with an income of$1,000 pays nothing. The transactions tax, because it taxesat an equal rate, is more equitable than a poll tax, but it is farless equitable than a graduated income tax.

A general sales or turnover tax, even if wages and salarieswere exempt, would by raising prices reduce the purchasingpower of all money incomes. In so far as sales and turnovertaxes are passed on to the consumer, the argument most fre-quently used against them that the burden is much greater on

the poor than the welltodo is unanswerable. The transac-tions tax of the Townsend Plan thus lays a double burden onthose least able to bear it, first reducing their visible incomes


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inequitably, and then reducing their purchasing power byincreasing the cost of what they buy. This double burden

on the poor is an inescapable characteristic of a transactionstax, and rules it out of consideration unless the purpose servedis valuable enough to justify this serious drawback.

It has been shown that the transactions tax, by the defini-tions of the McGroarty Bill, will not yield more than enoughon the basis of 1934 figures to pay to all persons 60 years of

age or over the oldage assistance of $30 a month provided bythe Social Security Act, or at the most $40 to those who haveincomes of less than that amount. Instead of yielding $24billion on the volume of business of 1929, it would have pro-duced $9 billion; and on the level of 1934 it would have pro-duced about $4 billion. A tax to produce $24 billion wouldhave to be calculated at a ruinous rate of 10 or 12 per cent.Since the tax lays a double burden, one visible, the other in-visible, on all earners, and since it bears more heavily on thosewith small incomes than on those with large, and since it islikely to produce many bankruptcies, the universal transac-tions tax even at the relatively low rate of 2 per cent cannot,despite its large yield, be commended as a major source of

revenue for financing government activities.


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Chapter V

EFFECTS OF PENSIONS ON BUSINESS

1. T h e M yt h o f V e l o c it y

THE Townsend movement is not to be exorcised by any-thing as simple as conclusive evidence that the transac-

tions tax would not yield more than enough to pay $30 or $40a month. The Townsend reply to this is rapid and contin-uous and compulsory circulation of existing money.* ThePlan is a revolving plan, though what there is in a revolv-ing plan that of itself should be expected to stimulate business,the dogma does not make clear. It says that the pensionswould be spent within a month, and that this forced spending

will vastly increase the demand for and hence the productionof goods. The official Townsend booklet already quotedproduces a table, reproduced in Appendix H, showing thepyramiding of business through the multiplication of trans-actions that follow this forced spending. This purports toshow that business would be increased from $13 billion a

month to $64 billion a month, all within the first year.All that should be necessary to refute this reasoning shouldbe to ask what happens then. Carrying on this Townsendtable a year further, the transactions would become more than$500 billion a month, or 38 times more than before the revolv-ing magic began to work. In 5 years, of course, the magicwould lead to still more astronomical gains, and all that the

Townsend advocates can say is that they would turn it offafter the Plan was in operation, and indeed be able to lowerthe tax. But if such wonders were possible it is inconceiva-ble that they should lie in disuse.The fallacy, of course, is this statement: Our premise is

that annuities paid will, when expended, accelerate trade and

credit through 10 times the amount of the annuity. Thetransition of this commodity dollar may be compared with thebanking process of ten to one. One dollar liberated into

43


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channels of trade will soon liberate 10 credit dollars during aperiod of financial confidence.** This assertion is worthy ofperpetuation among economic Americana. Whatever ismeant by this commodity dollar/ * there is no process bywhich a purchase of a dollars worth of goods liberates 10credit dollars. * The 4banking process of ten to one* *referredto in the Townsend analysis is the ratio of bank reserves tobank deposits. On an average, $1 in bank reserves will permit

an expansion of bank deposits by $10 i fthe demand for addi-tional credit exists. But this has nothing to do with therapidity with which bank deposits and cash are turned overin the channels of trade.

But granting for a moment that the Townsend thesis isright, and that a dollar released into the channels of tradedoes increase the volume of transactions by $10, this wouldbe a poor law if it did not work both ways; and each dollarextracted from the channel of trade would then reduce thevolume of transactions by $10 each month. The TownsendPlan collects the tax for 4 months before paying any pensions,and lets the amount accumulate, in other words, withdrawsit from trade channels. In this table $291 million are collected

as a tax and withdrawn from the first months volume oftrade, and if this is multiplied by 10 the volume of businesstransactions would go down $2 billion. By the end of thefourth month the volume of transactions, at this rate, wouldhave fallen from $13 billion to $1 billion. And if the tax wereto be collected and held one month longer there would be no

business whatever!The Townsend Plan provides that after the fifth monthpensions are paid and taxes are collected simultaneously.Any stimulation of business through the rapid spending ofthe pensions would be counterbalanced by withdrawing alike amount of purchasing power from normal trade channels.

The Crux of the Townsend A rgumentIt is well to examine this statement further, for the Town-

send theory is that pensions spent within a month would be


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EFFECTS OF PENSIONS ON BUSINESS 45

more rapidly spent than the funds now disbursed by thecommunity.The Townsend thesis that the money will be turned over 10

times in a month by being paid out in pensions can only beanswered by the statement that there is no conceivable reasonwhy this should happen unless all money that is now spentturns over at the rate of 10 times a month. Ninety per centof business transactions are carried on with checks drawn

against bank deposits. The turnover of bank deposits in allbanks in 1929, the year of greatest business activity in ourhistory, is estimated at 27 times in the year, or 2 times in amonth. In 1935 business had slowed down, and the turnoverwas 15 times in a year, or lj times a month. The cash turn-over,cash being used in onetenth of all transactionsamount-

ed to less than 10 times a year, or less than once a month.There is no basis for the assumption that pensions will bespent more rapidly, on the whole, than most of the moneyspent for other purposes. Since the greater part of the pen-sion money will come out of the pockets of the greater partof the public, and since the greater part of the public alreadyspends its money within the month that it receives it, the

speed of spending pensions will be no greater than most spend-ing without the pensions system. That is, the turnover ofmoney will probably be not more than 134times a month,and not 10 times.The Brookings Institution has calculated for the boom year

1929 the amount of the incomes and savings of various groups

of nonfarm and agricultural families. Even at the peak ofprosperity 80 per cent of all the nonfarm families in thecountry, which had incomes of less than $3,500 a year, re-ceived $29.7 billion. Of this total they saved only $118million. In other words, economic necessity forced themto spend 93 per cent of their incomes immediately for food,clothing and rent. (America s Capacity to Consume, p. 261.)

Saving vs. Spending

It is, however, well to see whether someof the money


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collected in taxes and spent in pensions will not be turnedover more rapidly than if the plan were not applied. Will itcollect in taxes and force immediate spending of money thatotherwise would go into savings? If savings reach tradechannels more slowly than the yield of the transactions tax,there would, in fact, be an increase in the velocity of turn-over of the money collected in taxes from the funds destinedfor saving. It is, of course, not true that savings are funds

withdrawn from circulation which do not ultimately reachtrade channels. The only funds thus isolated and actuallyidle are hoarded money and excess bank reserves, the latterbeing about $3 billion in the United States today.

Savings go through a devious channel before they emergefor the payment of wages and purchase of goods. But theydo emerge. Invested in mortgages, they are spent for buildingconstruction. Money deposited in banks or paid to insurancecompanies is invested by these agencies in securities, but these,whether corporate or government securities, are the mediathrough which savings are transformed into expenditures forplant and equipment, involving purchases of labor and mate-rials, into payments for public works, for salaries and wages

and for all other government expenditures, notably relief.At present the greater part of the securities bought by thebanks are governmen

The Townsend Crusade

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