Ever since 1902, Japan has been elbowing, shoving and browbeating in the Far East, with the result that to-day the Japanese domains, mostly taken form China and Korea, are nearly five times as extensive as they were in 1894, and more than 67 million non-Japanese are more or less under the yoke of Japan. From Japan's point of view, were the steps that have led to such an empire a mistake?

If Japan is to be allowed to continue in this career, the answer must be, for a while, that it has not been a mistake. Japan has got most of the things she sought and is in a fair way to get vastly more by similar means, including the command of the Pacific.

If Japan is not to be allowed to continue in her imperialistic career, if the Washington Conference is to discuss "accomplished facts," if Japan is to be made to set her prizes free, then it must seem to Japan as though her efforts of the last thirty years have been a colossal misexpenditure.

Be that as it may, the greatest loss to Japan is that by her deeds during the last twenty years and more she has made it difficult for the peace loving world to put trust in her. Given all the good will in the world toward her, good sense will demand that Japan be safeguarded from her established tendency to err from the path of peace on to the field of war.

But what is the solution? What alternative to her chosen career can be offered Japan?

THE

A POSSIBLE SOLUTION

HE solution of Japan's problem may be stated in one word: Industrialism. Japan has before her the examples of England, Belgium, and Holland, all more densely populated than she is, all producing a much smaller proportion of the food they consume than does Japan. Yet the peoples of England, Belgium, and Holland all enjoy a much higher standard of living than do the Japanese.

Importing raw materials, turning them into manufactured products and exporting the products-industry and commerce, in short-have been the essential means whereby England, Belgium, and Holland support their much denser populations in better circumstances than does Japan.

Industry and commerce require raw material, efficient labor, adequate capital, land and sea transport, managerial brain, and adequate markets. Japan could have the markets of the East and a considerable part of those of the

West. She will not claim that she has not adequate brains. Her railroads are excellent and the fact that her merchant fleet is the third largest in the world evidences its adequacy. Of capital she has or can obtain enough if it is assured security and profit. Of cheap and efficient labor she has an overabundant supply. But she claims lack of raw materials; and she further claims that in order to be sure of raw materials she must own the areas on the continent of Asia whence she would draw them.

Has Japan never realized that the Open Door doctrine was set up in the Far East as a "safeguard for the world principle of equal and impartial trade with all parts of the Chinese Empire"? Trade means both exports and imports. The Open Door Doctrine promised all the world equal freedom to sell goods throughout China and to buy materials there— in short, to trade.

Realizing this, and realizing the attainments of the industrial nations, the conclusion seems inevitable that the full acceptance and enforcement of the Open Door Doctrine and the peaceful industrialization of Japan will solve the problem presented by her population and will assure her of prosperity commensurate with that of England.

This would result in Japan's taking a position in the front rank of the nations who are constructors instead of destructors, who enjoy the good will of the world because they advance the civilization and wellbeing of the world instead of inviting its destruction by such crimes against civilization as Germany perpetrated in 1914.

In other words, the Washington Conference is an opportunity offered to Japan to arrange with the peace-loving industrial nations of the world-who are also its strongest powersthe means whereby Japan can cast off safely her mediæval imperialism and step up into the ranks of the powers who, through industry and commerce, have made themselves the moral and material leaders of the world.

At bottom the first task of the Washington Conference will be to persuade Japan that imperialism does not pay in the long run; and she will have to be persuaded of this in the face of the vast profits she has gained through wars since 1894. The present status of what once was imperial Germany should be an impressive warning. The drear picture of degraded Deutschtum as a background to the arguments of the white powers at Washington may con

vince Japan that whoever lives by the sword will die by the sword.

THE ALTERNATIVES

[F WE can convince Japan that it is best for

her to abandon imperialism, and if Japan can prove that she has cast imperialism from her, then and only then will it be safe to limit armaments by agreement.

If Japan is not convinced, and if she decides to continue the Pan-Asiatic campaign she is carrying out, it will be a tremendous help to her to have naval armaments limited most drastically. This seeming paradox needs explanation. It is this: we cannot prevent Japan from doing anything she may want to do to in Asia if we have not got large naval forces. On the other hand, Japan does not need a big navy in order to continue dismembering China and bringing Asia under her aegis. Consequently, to limit naval armaments would be to give Japan a free hand in Asia. From this it follows that it is neither right to Asia nor safe for us to limit armaments until we are certain that Japan has abandoned her imperialistic policy.

For the very reason just stated we may expect a great outcry from the Japanese in favor of limitation of naval armaments. But there But there will be a further reason for this on their part. Though Japan's population is very poor compared to that of the United States, Japan is spending more than one third of her national income on her navy, whereas we in the United States are spending less than one tenth of our national income on our navy. And furthermore, our wealth is so vastly greater than that of Japan that we could afford to spend more than five times as much as Japan and yet not feel the expense of naval armaments nearly as much as she does now. Of course Japan realizes that any proportionate limitation of armaments would lighten her relative financial burden more than five times as much as it would lighten ours. And conversely, she must realize that an armament race which might not add five per cent. to our taxes would ruin her.

It will be alleged that an armament race would lead to war. But would an armament race lead more surely to war than would a limitation of armaments which would allow an imperialistic Japan a free hand to dismember China and build up such an empire in the Far

East that she could defy civilization—perhaps with the aid of a Prussianized Russia?

The whole matter of the limitation of armaments is subordinate to the essential question and should be considered only as a highly desirable sequel to it. The essential question is: Will Japan abandon imperialism, release her victims, and adopt the life of peaceful industry and commerce through which the other nations represented at the Washington conference have become the leaders of the world? If Japan will not make manifest that she has abandoned imperialism, we must forego the limitation of armaments by agreement for the present; and because of Japan's decision.

But if it remains manifest that Japan chooses to continue on her imperialistic career, then we shall find ourselves confronted by a question vastly more important than that of whether we are going to spend ten or fifteen per cent. of our national income on arniaments. That question is:

If Japan remains imperialistic, shall we abandon our Open Door Doctrine or shall we support it?

If we do not support it, it seems inevitable (1) that a very larger part of the defenseless peoples of the Far East will be brought without mercy under the yoke of Japan, (2) that Japan will monopolize the trade of the Far East, and (3) that Japan will erect an imperialism thereperhaps in conjunction with a Prussianized Russia-that will be a supreme menace to our children's world. Under such circumstances the only factor that could save us from war, or our children from a worse war, would be the liberal element in Japan. The actions of the great Social-Democratic Party in the Reichstag after July, 1914, should be a fair measure of the degree to which we should count on the liberals of Japan for decades.

Under such circumstances, are we irresponsibly to pass on to our children the horrors of a real world war? A war with Asia practically united under the aegis of Japan? Or, will we uphold firmly and fearlessly our Open Door Doctrine, as happily we have our Monroe Doctrine, now and henceforth, because of our sense of present duty to the defenceless of the Far East and because of our highest duty to our children? Uphold it as decisively as Cleveland and Roosevelt upheld the Monroe Doctrine?

T

AHE income tax should and probably will be retained. It was made possible by constitutional amendment which was the outcome of a very long struggle. Any discussion of dispensing with it is academic. It is, of course, only one method of taxing incomes in a progressive society. Practically all taxation is income taxation, that is to say, the various taxes employed, by whatever name called, are merely means of approaching and attacking the income. That method which approaches the income directly is, within limits, the best. What the rate should be is another matter. We now have a normal income tax and surtaxes. The normal income tax rate is four per cent. on the first $4,000 of taxable income, that is, on the first $4,000 after allowances and deductions are made, and eight per cent. on taxable income above $4,000. The surtaxes run from one per cent., on net income between $5,000 and $6,000, to sixty-five per cent. on that in excess of $1,000,000.

In 1919 the aggregate income reported was, in round numbers, $19,860,000,000, and the taxes paid were $1,270,000,000. The average net income was $3,724; the average tax, $238, and the average rate, 6.39 per cent.

The sixty-five people with incomes of incomes of $1,000,000 or more paid $99,000,000; their average net income being $152,650,000 and the average tax $1,523,000, at an average rate of nearly 65 per cent. In 1918, those In 1918, those with an income of $1,000,000 or more paid $109,400,000; their net income being $307,000,000, with an average tax of $776,000, at an average rate of 35.65 per cent. In the same year 43,037 people with incomes of $2,648,000,000 paid taxes of $747,000,000, while 4,382,077 individuals with incomes

of $13,276,000,000 paid taxes of $380,000,000, and 3,013,000

with taxable incomes of more than $5,859,000,000 paid less than $62,000,000 in taxes. In 1919, 56,323 with incomes of $3,343,000,000 paid $884,400,000, while 5,276,437 persons with incomes of $16,516,000,000 paid $385,000,000, and 3,494,613 persons with incomes of more than $6,636,400,000 paid less than $53,000,000.

I attach no importance to the complaint that a very few people pay a greater part of the income taxes and that about three and one-half millions of individuals making returns, with net incomes ranging from $1,000 to $3,000, pay an inequitable amount of taxes. Income must be taken where it is found and should be taken from people in proportion to the sacrifice involved, and it must not be assumed that those with smaller incomes pay practically no taxes. It must not be forgotten that there are other forms of taxation which rest more heavily upon people of moderate incomes, and that these pay their share of such taxes in whatever form they are levied.

It is plain from the figures that the number with higher taxable incomes, and their aggregate taxable amounts, are decreasing, and that these taxes are losing their productivity. This result arises partly from the change in industrial conditions, but more largely, perhaps, from the shifting of investments to non-taxable securities. The surtax rates are based on the amount of taxable income, which, of course, does not include the exempt income. A tax payer, married and with no children, with a taxable income of $100,000, would pay a tax of $31,190. If, however, half of his income is derived from municipal bonds, he would pay only $9,190. The temptation to shift investments to such securities is overwhelming.

It seems clear that we shall not succeed in continuing to secure the results from the higher surtax rates as the law now contemplates. They impose too severe a strain on human nature. They unduly diminish the incentive to expand financial activity. One only has to ask himself what the effect would be on himself if he knew that he had to part annually with nearly three-fourths of his income, no matter how great it might be. No other country has carried the rate to such an extreme.

It might conceivably be worth while to attempt such levies if the administrative machine were perfect, if all citizens were absolutely honest, and if there were no avenues for evasion. The administration of this tax cannot be perfect, all men are not honest and there are not only legal methods of evasion; there are real invitations to evasion. The mere fact that there are outstanding more than ten billion dollars of tax-free municipal bonds and other tax-free securities in which wealthy tax payers are invited to invest and have invested, and that the amount is growing, sufficiently indicates the difficulty of making the plan work. The number of large taxable incomes will further decline. We shall fail to tax the very rich effectively, more by inaction than by the course suggested. It is asserted by Treasury experts that, while the reduction of rates may result in a slight temporary loss of revenues, the ultimate effect will be an increase.

Precisely because I firmly believe in the income tax, in a progressive income tax, in a system progressive as a whole in reasonable and equitable measure, I favor the reduction of our higher supertax rates. I do not believe that, in the long run, we can take through one form of taxation alone-it must be remembered that those with the higher incomes are subjected to many other Federal taxes, such as customs duties and other consumption taxes, not to speak of heavy state and local taxes— as much as 50 per cent. and perhaps not more than one-third. In view of all the conditions, it is clearly misleading, if not merely demagogic, to assert that the suggestion of a reduction in surtaxes is simply a plan to relieve the rich. It is, in fact, nothing more than a recognition of facts-of administrative possibilities, of economic forces, and of human nature.

Certainly, if we are going to make such an attempt, we must greatly strengthen the administration of the law, at a considerable increase in cost. We must also stop the leaks.

We cannot do the latter if we are to continue to face the increasing volume of tax-free securities, and no one can offer any assurance that these can be stopped or that their taxation can be effected. They can be taxed by the Federal Government only by amendment of the Constitution, and I believe that all discussion of this matter is academic. The states will defeat any such measure. They would in any event demand the right, in return, to tax Federal securities, and the remedy would be worse than the disease. The most we can expect, perhaps, is that an attempt through conference of state and Federal authorities may be made to secure uniform action by the states in the matter of tax exempted issues and an effort to place them at least on the same tax basis as Federal issues. Certainly, state leaders must realize that it is highly menacing to promote the existence of a large class of wealthy individuals who, at least in appearance, in considerable measure escape taxation.

Tax, I favor its repeal. The reasons for its repeal should be conclusive, even to those who on social grounds favor such a tax. It does not attain even the object such advocates have in view. The best thing about the Excess Profits Tax is its name. It seems plausible to assert that the public shall take a large part of excess profits for governmental purposes. "Excess profits" suggests excessive profits and clearly, men will say, all such should be appropriated. If this is true the tax is not sufficiently inclusive. It is only one form of taxation intended to reach excess business profits. All profits above what businesses require to sustain themselves and reasonably to expand may be regarded as excess profits; but this tax attaches to businesses transacted only on the one form of organization-the corporate form. It applies only to corporations and gets its name from the fact that the law exempts corporate incomes equal to 8 per cent. of the invested capital, plus $3,000. The net income above these deductions and not in excess of 20 per cent. of the invested capital is taxed 20 per cent. and the net income over and above this is taxed 40 per cent. Such is the excess profits tax. The corporation also pays a normal

income tax of 10 per cent. and its stockholders pay supertaxes on its distributed profits. Businesses not conducted on corporate form, but competitive in very many cases with corporations, such as sole proprietors and partnerships, which are more numerous than corporations, do not pay the excess profits tax. They pay the normal income tax and surtaxes on their entire profits, whether distributed or undistributed. The excess profits tax was intended to be an equivalent for the surtax levied upon the undistributed or reinvested profits of sole proprietors and partnerships. But in reality it does not work out this way. It has proved to be inequitable as between corporations and other forms of business. In 1918 members of a well-known partnership paid nearly $1,125,000 more in taxes than they would have paid as a corporation, and all their principal competitors were corporations. As a rule, however, corporations pay a heavier tax. In 1917 a partner in a small business entered the government service, and, for convenience, the business was incorporated. It paid nearly 4 times as much on its earnings in 1918 as it would have paid if it had not incorporated. This tax also works inequitably as among corporations. A conservatively managed corporation is penalized. If, however, it is generously capitalized, its exemption based on the 8 per cent. of its capital will be large and it may escape with little or no excess profits tax.

DIFFICULTIES OF ENFORCEMENT

HE tax is complex and difficult of administration. The process of discovering what the invested capital is, is exceedingly difficult. It involves the necessity of tracing the capital history of the corporation from the beginning, of checking depreciation accounts, of averaging its distribution, and its purchase or sale of inadmissible assets. It is impossible to keep up with the audit of the returns. New ones come into the Treasury faster than the old ones can be taken care of. The Internal Revenue staff would be overburdened if they were all tried and experienced men, but the turnover in the force as a whole is very great and it is constantly losing, especially, its higher and more talented officers.

But the chief difficulty is not so much that of administration, great as that is. It is rather the menace of uncertainty which hangs over the business world. There are claims for hundreds of

millions of dollars for back taxes in the Treasury and it is common experience for the taxpayer to receive a demand for payment of taxes for past years when he thought he was through with the matter and was resting in comparative security. Finally, the tax, like the higher supertaxes, is losing its productivity, and this for two causes: First, the decline in income of the average corporation, and second, the marked growth in invested capital with consequent increased deductions. Its yield in. past years is illuminating: In 1918 it was $2,500,000,000; in 1919, $1,320,000,000; in 1920, $750,000,000; and it is estimated that it will yield for 1921 about $450,000,000.

This tax should be repealed, but it should be replaced. The corporations should not escape the income taxes while their unincorporated competitors continue to be fully taxed. This would, of course, be an absurd outcome. Nobody, who understands the matter, makes any such suggestion. No one proposes to tax heavily other forms of business and to exempt corporations. It is true that many who appear to be somewhat ignorant of taxation seem in effect to propose this. Even the United States Chamber of Commerce seems to have fallen into the error of imagining that this tax might be repealed and something substituted which would yield revenue, but which would not burden corporations. In its questionnaire of July 29th, it asks its members whether they favor replacing the revenues which would be lost upon the repeal of this tax by an increased corporation income tax or by a sales tax, and the vote was 142 to 59 for the latter! Influential leaders in Congress revealed the same lack of understanding.

This tax can not be repeated and replaced unless corresponding reductions are made in the burdens resting on sole proprietors and partnerships. This seems to be the underlying hope in the minds of a considerable part of the business community (especially when it advocates the sales tax), namely, that all businesses shall be relieved of all direct taxes.

The income taxes on businesses should, and doubtless will, stand, but with modifications. To repeal them would necessitate that we resort again practically exclusively to consumption taxes, which as the basis of a tax system, are unsound. Consumption taxes would operate in favor of the well-to-do and would unduly burden those of moderate or small means. The consumption of a man of