The issue of whether and how we ought to tax large fortunes upon the death of the second-to-die of a wealth-holding couple seems to have gone away recently, but this report to the federal government in 1915 ("Final Report of the Commission on Industrial Relations") from a Commission created by a 1912 Act of Congress, provides some interesting and timely reading nearly 100 years later -- and not just for questions related to the estate tax, but for economic justice and stability in general. Those who have seen the film "Inside Job" will also find some interesting items below. (While initially I wanted to share the David Lloyd-George quote, the length of this post grew some: it was difficult to pick starting and ending points. This starts on page 23.)
This sense of tension and impending danger has been expressed by numerous witnesses before the Commission, but by none more forcibly than by Mr. Daniel Guggenheim, a capitalist whose interests in mines and industrial plants extend to every part of the country.
Mr. Guggenheim. There has a great deal been done. If it were not for what has been done and what is being done we would have revolution in this country.
The sources from which this unrest springs are, when stated in full detail, almost numberless. But upon careful analysis of their real character they will be found to group themselves almost without exception under four main sources which include all the others. These four are:
2. Unemployment and denial of an opportunity to earn a living.
3. Denial of justice in the creation, in the adjudication, and in the administration of law.
4. Denial of the right and opportunity to form effective organizations.
1. Unjust Distribution of Wealth and Income.
The conviction that the wealth of the country and the income which is produced through the toil of the workers is distributed without regard to any standard of justice, is as widespread as it is deep-seated. It is found among all classes of workers and takes every form from the dumb resentment of the day laborer, who, at the end of a week's back-breaking toil, finds that he has less than enough to feed his family while others who have done nothing live in ease, to the elaborate philosophy of the "soap-box orator," who can quote statistics unendingly to demonstrate his contentions. At bottom, though, there is the one fundamental, controlling idea that income should be received for service and for service only, whereas, in fact, it bears no such relation, and he who serves least, or not at all, may receive most.
This idea has never been expressed more clearly than in the testimony of Mr. John H. Walker, President of the Illinois State Federation of Labor:
The workers feel this, some unconsciously and some consciously, but all of them feel it, and it makes for unrest, in my judgment, and there can be no peace while that condition obtains.
In the highest paid occupations among wage earners, such as railroad engineers and conductors, glass-blowers, certain steel-mill employees, and a few of the building trades, the incomes will range from $1,500 to $2,000 at best, ignoring a few exceptional men who are paid for personal qualities. Such an income means, under present-day conditions, a fair living for a family of moderate size, education of the children through high school, a small insurance policy, a bit put by for a rainy day — and nothing more. With unusual responsibilities or misfortunes, it is too little, and the pinch of necessity is keenly felt. To attain such wages, moreover, means that the worker must be far above the average, either in skill, physical strength, or reliability. He must also have served an apprenticeship equal in length to a professional course. Finally, and most important, he or his predecessors in the trade must have waged a long, aggressive fight for better wages, for there are other occupations whose demand for skill, strength and reliability are almost as great as those mentioned, where the wages are very much less.
These occupations, however, include but a handful compared to the mass of the workers. "What do the millions get for their toil, for their skill, for the risk of life and limb? That is the question to be faced in an industrial nation, for these millions are the backbone and sinew of the State, in peace or in war.
First, with regard to the adult workmen, the fathers and potential fathers, from whose earnings, according to the "American standard," the support of the family is supposed to be derived.
Between one-fourth and one-third of the male workers 18 years of age and over, in factories and mines, earn less than $10 per week; from two-thirds to three-fourths earn less than $15, and only about one-tenth earn more than $20 a week. This does not take into consideration lost working time for any cause.
Next are the women, the most portentously growing factor in the labor force, whose wages are important, not only for their own support or as the supplement of the meager earnings of their fathers and husbands, but because, through the force of competition in a rapidly extending field, they threaten the whole basis of the wage scale. From two-thirds to three-fourths of the women workers in factories, stores and laundries, and in industrial occupations generally, work at wages of less than $8 a week. Approximately one-fifth earn less than $4 and nearly one-half earn less than $6 a week.
Six dollars a week — what does it mean to many? Three theater tickets, gasoline for the week, or the price of a dinner for two; a pair of shoes, three pairs of gloves, or the cost of an evening at bridge. To the girl it means that every penny mnst be counted, every normal desire stifled, and each basic necessity of life barely satisfied by the sacrifice of some other necessity. If more food must be had than is given with 15 cent dinners, it must be bought with what should go for clothes; if there is need for a new waist to replace the old one at which the forewoman has glanced reproachfully or at which the girls have giggled, there can be no lunches for a week and dinners must cost five cents less each day. Always too the room must be paid for, and back of it lies the certainty that with slack seasons will come lay-offs and discharges. If the breaking point has come and she must have some amusement, where can it come from? Surely not out of $6 a week.
Last of all are the children, for whose petty addition to the stream of production the Nation is paying a heavy toll in ignorance, deformity of body or mind, and permature old age. After all, does it matter much what they are paid? for all experience has shown that in the end the father 's wages are reduced by about the amount that the children earn. This is the so-called "family wage," and examination of the wages in different industries corroborates the theory that in those industries, such as textiles, where women and children can be largely utilized, the wages of men are extremely low.
The competitive effect of the employment of women and children upon the wages of men, can scarcely be overestimated. Surely it is hard enough to be forced to put children to work, without having to see the wages of men held down by their employment.
This is the condition at one end of the social scale. What is at the other?
Massed in millions, at the other end of the social scale, are fortunes of a size never before dreamed of, whose very owners do not know the extent nor, without the aid of an intelligent clerk, even the sources, of their incomes. Incapable of being spent in any legitimate manner, these fortunes are burdens, which can only be squandered, hoarded, put into so-called "benefactions" which for the most part constitute a menace to the State, or put back into the industrial machine to pile up everincreasing mountains of gold. *
In many cases, no doubt, these huge fortunes have come in whole or in part as the rich reward of exceptional service. None would deny or envy him who has performed such service the richest of rewards, although one may question the ideals of a nation which rewards exceptional service only by burdensome fortunes. But such reward can be claimed as a right only by those who have performed service, not by those who through relationship or mere parasitism chance to be designated as heirs. Legal right, of course, they have by virtue of the law of inheritance, which, however, runs counter to the whole theory of American society and which was adopted, with important variations, from the English law, without any conception of its ultimate results and apparently with the idea that it would prevent exactly the condition which has arisen. In effect the American law of inheritance is as efficient for the establishment and maintenance of families as is the English law, which has bulwarked the British aristocracy through the centuries. Every year, indeed, sees this tendency increase, as the creation of "estates in trust" secures the ends which might be more simply reached if there were no prohibition of "entail." According to the income tax returns for ten months of 1914, there are in the United States 1598 fortunes yielding an income of $100,000 or more per year. Practically all of these fortunes are so invested and hedged about with restrictions upon expenditure that they are, to all intents and purposes, perpetuities.
An analysis of 50 of the largest American fortunes shows that nearly one-half have already passed to the control of heirs or to trustees (their vice regents) and that the remainder will pass to the control of heirs within twenty years, upon the deaths of the "founders." Already, indeed, these founders have almost without exception retired from active service, leaving the management ostensibly to their heirs but actually to executive officials upon salary.
We have, according to the income tax returns, forty-four families with incomes of $1,000,000 or more,1 whose members perform little or no useful service, but whose aggregate incomes, totalling at the very least fifty millions per year, are equivalent to the earnings of 100,000 wage earners at the average rate of $500.
The ownership of wealth in the United States has become concentrated to a degree which is difficult to grasp. The recently published researches of a statistician of conservative views 2 have shown that as nearly as can be estimated the distribution of wealth in the United States is as follows:
- The "Rich," 2 percent of the people, own 60 percent of the wealth.
- The "Middle Class," 33 percent of the people, own 35 percent of the wealth.
- The "Poor," 65 percent of the people, own 5 percent of the wealth.
This means in brief that a little less than two million people, who would make up a city smaller than Chicago, own 20 percent more of the Nation 's wealth than all the other ninety millions.
The figures also show that with a reasonably equitable division of wealth, the entire population should occupy the position of comfort and security which we characterize as Middle Class.
The actual concentration has, however, been carried very much further than these figures indicate. The largest private fortune in the United States, estimated at one billion dollars, is equivalent to the aggregate wealth of 2,500,000 of those who are classed as "poor," who are shown in the studies cited to own on the average about $400 each.
Between the two extremes of superfluity and poverty is the large middle class — farmers, manufacturers, merchants, professional men, skilled artisans, and salaried officials — whose incomes are more or less adequate for their legitimate needs and desires, and who are rewarded more or less exactly in proportion to service. They have problems to meet in adjusting expenses to income, but the pinch of want and hunger is not felt, nor is there the deadening, devitalizing effect of superfluous, unearned wealth.
From top to bottom of society, however, in all grades of incomes, are an innumerable number of parasites of every conceivable type. They perform no useful service, but drain off from the income of the producers a sum whose total can not be estimated.
This whole situation has never been more accurately described than by Hon. David Lloyd-George in an address on "Social Waste":
That represents the problem of civilization, not merely in this country but in all lands. Some men get their fair share of wealth in a land and no more — sometimes even the streams of wealth overflow to waste over some favored regions, often producing a morass, which poisons the social atmosphere. Many have to depend on a little trickling runlet, which quickly evaporates with every commercial or industrial drought; sometimes you have masses of men and women whom the flood at its height barely reaches, and then you witness parched specimens of humanity, withered, hardened in misery, living in a desert where even the well of tears has long ago run dry.
Besides the economic significance of these great inequalities of wealth and income, there is a social aspect which equally merits the attention of Congress. It has been shown that the great fortunes of those who have profited by the enormous expansion of American industry have already passed, or will pass in a few years, by right of inheritance to the control of heirs or to trustees who act as their "vice regents." They are frequently styled by our newspapers "monarchs of industry," and indeed occupy within our Republic a position almost exactly analogous to that of feudal lords.
These heirs, owners only by virtue of the accident of birth, control the livelihood and have the power to dictate the happiness of more human beings than populated England in the Middle Ages. Their principalities, it is true, are scattered and, through the medium of stock-ownership, shared in part with others; but they are none the less real. In fact, such scattered, invisible industrial principalities are a greater menace to the welfare of the Nation than would be equal power consolidated into numerous petty kingdoms in different parts of the country. They might then be visualized and guarded against; now their influence invisibly permeates and controls every phase of life and industry.
"The king can do no wrong" not only because he is above the law, but because every function is performed or responsibility assumed by his ministers and agents. Similarly our Rockefellers, Morgans, Fricks, Vanderbilts and Astors can do no industrial wrong, because all effective action and direct responsibility is shifted from them to the executive officials who manage American industry. As a basis for this conclusion we have the testimony of many, among which, however, the following statements stand out most clearly:
Mr. John D. Rockefeller, Jr.: 1
Mr. J. Pierpont Morgan.
Mr. Morgan. Not at all I should say.
The similitude, indeed, runs even to mental attitude and phrase. Compare these two statements:
My appreciation of the conditions surrounding wage-earners and my sympathy with every endeavor to better these conditions are as strong as those of any man.
There is none but you and me that has the people 's interest at heart. ("II n'y a que vous et moi qui aimions le peuple.")
The families of these industrial princes are already well established and are knit together not only by commercial alliances but by a network of intermarriages which assures harmonious action whenever their common interest is threatened.
Effective action by Congress is required, therefore, not only to readjust on a basis of compensation approximating the service actually performed, the existing inequalities in the distribution of wealth and income, but to check the growth of an hereditary aristocracy, which is foreign to every conception of American Government and menacing to the welfare of the people and the existence of the Nation as a democracy.
The objects to be attained in making this readjustment are: To reduce the swollen, unearned fortunes of those who have a superfluity; to raise the underpaid masses to a level of decent and comfortable living; and at the same time to accomplish this on a basis which will, in some measure, approximate the just standard of income proportional to service.
The discussion of how this can best be accomplished forms the greater part of the remainder of this report, but at this point it seems proper to indicate one of the most immediate steps which need to be taken.
It is suggested that the Commission recommend to Congress the enactment of an inheritance tax, so graded that, while making generous provision for the support of dependents and the education of minor children, it shall leave no large accumulation of wealth to pass into hands which had no share in its production. 1 The revenue from this tax, which we are informed would be very great, should be reserved by the Federal Government for three principal purposes:
2. The development of other important social services which should properly be performed by the Nation, which are discussed in detail elsewhere.
3. The development, in cooperation with States and municipalities, of great constructive works, such as road building, irrigation and reforestation, which would materially increase the efficiency and welfare of the entire Nation.
We are informed by counsel not only that such a tax is clearly within the power of Congress, but that upon two occasions, namely, during the Civil War and in 1898, such graded inheritance taxes were enacted with scarcely any opposition and were sustained by the Supreme Court, which held that the inheritance tax was not a direct tax within the meaning of the Constitution. We are aware that similar taxes are levied in the various States, but the conflict with such State taxes seems to have presented little difficulty during the period in which the tax of 1898 was in effect. Under any circumstances this need cause no great complication, as the matter could be readily adjusted by having the Federal Government collect the entire tax and refund a part to the States on an equitable basis.
There is no legislation which could be passed by Congress the immediate and ultimate efforts of which would be more salutary or would more greatly assist in tempering the existing spirit of unrest.
2. Unemployment and Denial of Opportunity to Earn a Living.
As a prime cause of a burning resentment and a rising feeling of unrest among the workers, unemployment and the denial of an opportunity to earn a living is on a parity with the unjust distribution of wealth. They may on final analysis prove to be simply the two sides of the same shield, but that is a matter which need not be discussed at this point. They differ in this, however, that while unjust distribution of wealth is a matter of degree, unemployment is an absolute actuality, from which there is no relief but soul-killing crime and soul-killing charity.
To be forced to accept employment on conditions which are insufficient to maintain a decent livelihood is indeed a hardship, but to be unable to get work on any terms whatever is a position of black despair.
A careful analysis of all available statistics shows that in our great basic industries the workers are unemployed for an average of at least one-fifth of the year, and that at all times during any normal year there is an army of men, who can be numbered only by hundreds of thousands, who are unable to find work or who have so far degenerated that they can not or will not work. Can any nation boast of industrial efficiency when the workers, the source of her productive wealth, are employed to so small a fraction of their total capacity?
Fundamentally this unemployment seems to rise from two great causes, although many others are contributory. First, the inequality of the distribution of income, which leaves the great masses of the population (the true ultimate consumers) unable to purchase the products of industry which they create, while a few have such a superfluity that it can not be normally consumed but must be invested in new machinery for production or in the further monopolization of land and natural resources. The result is that in mining and other basic industries we have an equipment in plant and developed property far in excess of the demands of any normal year, the excess being, in all probability, at least 25 percent. Each of these mines and industrial plants keeps around it a labor force which, on the average, can get work for only four-fifths of the year, while at the same time the people have never had enough of the products of those very industries — have never been adequately fed, clothed, housed, nor warmed — for the very simple reason that they have never been paid enough to permit their purchase.
The second principal cause lies in the denial of access to land and natural resources even when they are unused and unproductive, except at a price and under conditions which are practically prohibitive. This situation, while bound up with the land and taxation policies of our States and Nation, also rests fundamentally upon the unjust distribution of wealth. Land or mineral resources in the hands of persons of average income must and will be used either by their original owners or by some more enterprising person. By the overwhelming forces of economic pressure, taxation, and competition they can not be permitted to lie idle if they will produce anything which the people need. Only in the hands of large owners — free from economic pressure, able to evade or minimize the effects of taxation and to await the ripening of the fruits of unearned increment — can land be held out of use if its products are needed.
There can be no more complete evidence of the truth of this statement than the condition of the farms of 1000 acres and over, which, valued at two and one-third billion dollars, comprise 19 percent of all the farm land of the country and are held by less than one percent of the farm owners. The United States Census returns show that in these 1000-acre farms only 18.7 percent of the land is cultivated as compared with 60 to 70 percent in farms of from 50 to 499 acres. Furthermore, it is well known that the greater part of these smaller farms which are left uncultivated are held by real estate men, bankers and others who have independent sources of income. More than four-fifths of the area of the large holdings is being held out of active use by their 50,000 owners, while 2,250,000 farmers are struggling for a bare existence on farms of less than 50 acres, and an untold number who would willingly work these lands are swelling the armies of the unemployed in the cities and towns.
A basic theory of our Government, which found expression in the Homestead Acts, was that every man should have opportunity to secure land enough to support a family. If this theory had been carried out and homesteads had either gone to those who would use them productively or remained in the hands of the Government, we should not yet have a problem of such a character. But these acts were evaded; land was stolen outright by wholesale, and fraudulent entries were consolidated into enormous tracts which are now held by wealthy individuals and corporations.
The Public Lands Commission, after an exhaustive inquiry, reported in 1905:
. . . Not infrequently their effect is to put a premium on perjury and dishonest methods in the acquisition of land. It is apparent, in consequence, that in very many localities, and perhaps in general, a larger proportion of the public land is passing into the hands of speculators than into those of actual settlers making homes. . . . Nearly everywhere the large landowner has succeeded in monopolizing the best tracts, whether of timber or agricultural land. 1
To one who has not read the preceding statements carefully, there may seem to be a contradiction in proposing to prevent great capitalists from creating an excess of productive machinery and overdeveloping mineral resources, while pointing out the necessity of forcing land and other natural resources into full and effective use by the people. The two propositions are, as a matter of fact, as fundamentally distinct as monopoly and freedom. The capitalist increases his holdings in productive machinery and resources only because through monopolization and maintenance of prices he hopes to reap rewards for himself or increase his power, while the aim in desiring the full development of land and other resources by the people is that they, producing for themselves, may enjoy a sufficiency of good things and exchange them for the products of others, and thus reduce to a minimum the condition of unemployment.
There are, of course, many other causes of unemployment than the inequality of wealth and the monopolization of land which there is no desire to minimize. Chief among these are immigration, the inadequate organization of the labor market, the seasonal character of many industries, and the personal deficiencies of a very large number of the unemployed. It can not be denied that a considerable proportion of the men who fill the city lodging houses in winter are virtually unemployables, as a result of weakness of character, lack of training, the debasing effects of lodging house living and city dissipation, and, last but not least, the conditions under which they are forced to work in the harvest fields and lumber, railroad and construction camps. The seasonal fluctuations of our industries are enormous, employing hundreds of thousands during the busy season and throwing them out on the community during the dull season, and almost nothing has been done to remedy this condition. It would be difficult to imagine anything more chaotic and demoralizing than the existing methods of bringing workmen and jobs together. Certain measures for dealing with these conditions, which are discussed elsewhere in the report, need to be pushed forward with all possible vigor. But it may be confidently predicted that the unemployment situation will not be appreciably relieved until great advances have been made in the removal of the two prime causes — unjust distribution of wealth and monopolization of land and natural resources.
The most direct methods of dealing with the inequality of wealth have already been briefly discussed and will be considered elsewhere in the report. "With respect to the land question, however, the following basic suggestions are submitted:
2. A general revision of our land laws, so as to apply to all future land grants the doctrine of "superior use," as in the case of water rights in California, and provision for forfeiture in case of actual nonuse. In its simplest form the doctrine of "superior use" implies merely that at the time of making the lease the purpose for which the land will be used must be taken into consideration, and the use which is of greatest social value shall be given preference.
3. The forcing of all unused land into use by making the tax on nonproductive land the same as on productive land of the same kind, and exempting all improvements.
Other measures for dealing with unemployment are discussed under that head on p. 181.
The unemployed have aptly been called "the shifting sands beneath the State." Surely there is no condition which more immediately demands the attention of Congress than that of unemployment, which is annually driving hundreds of thousands of otherwise productive citizens into poverty and bitter despair, sapping the very basis of our national efficiency and germinating the seeds of revolution.
So what would a similar Commission say today?