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1/13
Inflation, Taxation and Equity: How to Pay for the War Revisited
Author(s): Shlomo MaitalSource: The Economic Journal, Vol. 82, No. 325 (Mar., 1972), pp. 158-169Published by: Wileyon behalf of the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2230212.
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2/13
INFLATION,
TAXATION AND
EQUITY:
HOW TO PAY
FOR THE
WAR
REVISITED'
IN
August and November 1914, 31-year-old Maynard Keynes published
two articles
in
the
ECONOMIC
JOURNAL, claiming that the
First World War
would be
short since
governments would find it hard
to appropriate
the
resources
needed to support the war
[10]. By a
quirk of fate, precisely
twenty-five
years later, Keynes was again
writing
articles on a World War.
Sadder and
wiser, he
determinedly pressed the
need for
long-haul
war
finance
through compulsory savings and
taxation rather
than borrowing and
inflation.
Out of these articles, which
first
appeared in The Times,
came
How
to Payfor
the War [12].
This persuasive little
88-page pamphlet, written
with fervour and
clarity,
is an
explicit exercise in
the macro mechanics of
income
distribution and
inflation. Strangely, the
voluminous
literature on income
distribution
theory
has
given it little
attention.
Indeed, none of the key articles on the
subject even
lists How toPay for the War in
the
bibliography.2 Perhaps
this
is because it was written
largely for laymen, or because
it set out to
answer a
specific,
soon
obsolete question of how the
England of 1939 could best
accom-
plish
a
huge increase in defence output.
Since the
wellspring of Keynesian
exegesis, The GeneralTheory,is content merely to register dissatisfaction with
the
marginal
productivity theory of
income
distribution without supplying
an
explicit alternative,3
the whole body
of work on Cambridge
distribution
theory,
ostensibly shaped in the master's
image, seems at times to
have very
flimsy
grounding.
The
intention here is
to extract
from
How to Pay for
the War
the
simplest
of
Keynesian
income distribution models
and
use
it to
analyse
and
generalise
Keynes' own specific
conclusions on war
finance. From the model there
emerge quantitative
short-run
interrelationships
between inflation, taxation
and equity when, at full employment, an increase in defence spending occurs.
The discussion
can,
of
course, be
set
in
a
framework
much broader than
military
expenditures alone-for
instance, the need
to curtail an import
surplus or boost
investment, both of which
actions increase
aggregate
demand.
One
finding
is
that,
for a
given
defence burden the
differential
incidence
of
even a
'regressive' tax
increase (i.e., the rate of tax
falls with increase of
income)
is
more
equitable
than
that of
inflation.
This means that
according
1
I wish to
acknowledge, without
implicating, the helpful scepticism of
my colleagues
Eitan
Berglas,
Yoram Weiss, Y. Atieh and
the prompt and
precise comments of D. E.
Moggridge
and the
editors.
2
How
to Payfor
the
War is mentioned in
none of the following books and
articles: [3],
[5], [7],
[15], [16], [20], [23].
An
interesting attempt to synthesise
Cambridge and
neo-classical distribu-
tion
theory
is
found
in
[20], with ensuing controversy
in
[24]
and
[21].
3
See
[11], pp. 257-60.
158
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MARCH 1972] INFLATION,
TAXATION
AND
EQUITY
159
to
the
Keynesian
model, inflation
is
much more cruel
in equity terms than
the
most cruel
of regressive taxes. May this explain some of
the
urgency
with
which the wartime
Keynes pursued
his views?
II
Consider
an
economy
made
up of two groups,
workers and rentiers,
whose propensities
(average
and
marginal)
to consume
out of
realised
and
imputed
income are, respectively, U
and
V, where U > V.1
The
Key-
nesian, or as
it is sometimes
called widow's
cruse distribution
theory,
asserts
that for a given ratio
of aggregate
non-consumption
spending
(investment
+
net
exports + public
defence and non-defence
spending)
to
output,
which ratio we shall call gt, there is a unique distribution of income between
workers
and rentiers which will equate aggregate planned savings
with
aggregate
planned non-consumption
demand.
Call the equilibrium
share
of wages in national
income,
at time t, at.
Then:
at
-V
.
(1)
where, by definition,
the consumption-output
ratio
ct
=
1-
gt.2
For each
percentage point
change
in
ct,
the equilibrium
wage
share
changes by
l/(U
-
V) percentage
points, in order
to restore
balance
between aggregate
demand and
output
by transferring
income
to (or from)
the thriftier
rentiers. The closer
U and V are in
value,
the larger the poten-
tial
inequity
required to bring
about
equilibrium
and price stability.
1
/(U
-
V) may
be interpreted
as a full
employment
'distribution-multiplier'
substituting for
the usual 'employment-multiplier.'
To be
complete, the model
must set out
the connection
between
the
composition of aggregate demand and the division of income between wages
and
profits. This necessarily
involves a treatment
of the wage-price
nexus.
Wages
and
prices
have
been
causally joined
in
theory
in a
multitude of
ways,
including Kaldor's
theory of the
firm [8] and
Kalecki's degree
of
monopoly [9].
Keynes'
own method,
related
specifically
to
wartime and
the short run,
was
disarmingly simple.
He postulated
an
institutional
parameter
which
we
shall call
0,
defined
as the percentage
change
in money
1
Keynes held
that rentiers are thriftier
than workers, largely because corporations
tend to
retain, rather than
distribute, profits imputable to rentiers.
". . .
the profits
will largely belong
to companies which will be disinclined, for various reasons, to distribute the bulk of them in higher
dividends but will prefer
in
the circumstances
to save them
on behalf of their shareholders " [12, pt
65]. Rentiers' income
is therefore so defined as to include
undistributed profits.
2
Since
at
equilibrium
planned consumption
and non-consumption spending
must add up to
income
(Y):
Yt=YeaeU+
Yt(l-at)
V+gYe . . . . (la)
Substituting gt
=
1
-
ct,
dividing
through by
Yt
and solving
for at yields (1) directly.
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160
THE
ECONOMIC JOURNAL [MARCH
wages
caused
by
a 1
% change
in
prices.' Owing
to
the
lag
between
prices
and wages, he thought f would
take on values of the order of 0 50 to
0.85.2
It is,
of course, true that in peacetime money wages
rise faster than
prices.
Direct scrutiny of data would thus show b to be almost invariably greater
than one, a result explicitly
excluded below. But this
poses no problem.
Keynes'
parameter
b
aims
essentially to capture the short run impact
of
prices on
money wages, ceteris
aribus,
n a wartime situation. We may con-
ceive of
money wages as rising by some constant
percentage each year, plus
a
fraction of the
percentage rise in prices;
b
can
thus be considered
to
capture the latter
fraction,
without the trend component.
For
a
given fall in the
consumption-output ratio, ct,
the amount
of infla-
tion
v
needed
to
redistribute ncome and restore
equilibrium is:
=
ao
-
at
(2)
at
-
aO
where
ao
is the initial wage share
and at
is
the wage share
after
equilibrium
is
restored.3
If
money wages are rigid, i.e.,
b =
0, the
required
amount
of
inflation is
simply
the
percentage
change (Paasche index) in the wage
share.
It
is important to stress that
v measures the total,
once-and-for-all
ise in
price
needed
to
cut real wages and private consumption
sufficiently
to
accommodate the lower value of
ct. The integral time period over
which
inflation
works to
redistribute income therefore becomes
important.
A
10
%
price
rise
spread over five
years
is
quite different
from the same
price
rise
occurring
in the
space of six
months,
even
though
identical
wage
shares
result.
Furthermore, the longer the time
span,
the less
satisfactory
is the
+-theory
of
wages
and
prices,
and
the more
important
are
the other
neglected
variables
which act
on
money wages.
These
are the bare bones of the Keynesian
distribution model, in par-
ticular
as
expressed
in
How to
Pay for
the
War.
Much
embroidery
can
be
added, without in any way improvingor substantiallyalteringthe substance.
1
Other, later authors
have used a similar
parameter;
see Holzman [6], Maynard
[14] and
Solow and
Stiglitz [20].
2 "6
Wages
and
other
costs
will chase prices upwards, but
nevertheless prices will
always (on
the
above assumptions)
keep 20 per
cent ahead. However
much wages are increased, the act
of
spending these wages
will always push prices
this much in
advance " [12, pp. 66-7].
On pp.
20
and 37, Keynes asserts
that
f =
0
5 at the start of 1940, and
on p. 71 he claims that
during the
First
World
War,
f
= 0-85; these two numbers are not strictly comparable,
in
view
of the inflation
which preceded
he First World War.
Solow and Stiglitz
use a parameter k, similar
in
meaning
to
k,
and
assert:
"
Some econometric studies
suggest
that
k
may
be less than
one half"
[20, p.
545].
For a full bibliography
and a sceptical view
of the wage-price
lag, see Cargill
[1].
3
Let
vf
be the percentage rise in prices required to bring at to its equilibrium level as defined by
(1). From
the definition
of
k,
it follows that
money wages
rise by i+% while money income
rises
by
iT% since at full employment
real income
is constant. Let
Wo
and
Y0 be total
money wages
and money incomes, respectively,
at time 0.
Then:
a=W (1
+
ov)
=ao(
+ ) . . .
. .
(2a)
Solving
(2a) for vf yields (2).
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1972]
INFLATION.
TAXATION
AND
EQUITY
161
Keynes gives
a step-by-step
verbal
account of how
the model works on
pages
65-8,
too
lengthy to
quote in
full.
The following
passage must
suffice:
"
The only
condition
for
the success
of inflation
in restoring
equili-
brium is that
prices should
rise relatively
to
wages to
the
extent necessary
to divert
the right
amount of working
class
and other incomes into
the
hands of the
profiteers
and
thence
into
the hands
of
the Treasury,
largely
in the
form of
taxes and
partly
in the
form
of extra
voluntary
savings
by the
profiteers
"
[12,
p. 67].
III
As suggested
by the above
quote, to
be useful
for
shaping policy,
rates
of tax must
be added to the
model.
U
and V were
defined
as propensities
to consume out of before-tax income. Therefore, if u and v are propensities
to consume
out
of
disposable
ncome,
for
workers
and
rentiers respectively,
and
t,
and
t,
are
the respective
rates of
tax on wages
and profits,
it is
true
that:
U u
(I
t
and V-~
v(1
-
G)
.
.(3)
Under
some
conditions,
sales
taxes and
income
taxes are
completely
inter-
changeable
in this
model.
Consider
an
incremental
before-tax
pound
of
wage
income,
to which
an income ax of rate
t.
is applied.
After taxes,
1
-tu
remains, of which u (1
-
t.) is consumed. Now let tu be an equal rate of
tax,
this time applied
to consumption
pending.
Out of
an
incremental
wage
pound,
u is spent
on
gross
(tax
included)
consumption,
and net (tax
deducted)
consumption
is
(1
-
t.)
u,
the same as
under the
income
tax. The key assump-
tion,
of
course,
is that
the
propensity
to
consume
is
independent
of the manner
in
which
taxes
are imposed.
Since
saving
is
more
worth while
at the
margin
under
a
consumption
tax,
compared
with
an income
tax,
this
assumption
is
not tenable
over
the long
run.
For
the
short
run
analysis
undertaken
here, however,
it
can
be reasonably
assumed
that, from force
of
habit,
u and
v are invariant
with
respect
to
how
taxes are
applied.
Substitute
(3)
into
(1):
at
u(-ct
-
v(l
t)(4)
t
t__
_ _ _ _ _ _ _ _ _ _ _
The mechanism
required
for
exposing
the inter-relationship
between infla-
tion,
taxation
and
equity,
consisting
of
equations
(2)
and
(4),
is now
com-
plete.
Three
propositions
present
themselves:
1
(1) Any
tax increase,
whether on workers
or
rentiers,
raises
the
net
(after-tax)
wage
share.
This
implies
that the
inequity
attendant
upon
an
expanded
defence
effort,
and
subsequent
inflation,
can
be offset
even
l
All of the
following
propositions
are
easily proved
by
deriving
the
net
(after-tax)
wages
share
with
respect
to
tu
and
tv,
and
using (4).
No.
325-VOL.
82.
M
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162 THE
ECONOMIC JOURNAL
[MARCH
by a tax
increase falling solely upon
wages. A nominally
regressive
tax may
therefore be highly
progressive, in terms of its effect
upon the
functional
income distribution. This
applies even to a sales tax im-
posed on essential goods bought largely by workers.
There is a simple verbal
explanation for
this proposition. Inflation
restores
equilibrium by, in effect, taxing
cash from the
pockets of
workers
and transferring it
to the already
well-lined pockets of rentiers.
On the other
hand, taxes, even those
imposed on workers
alone, con-
fiscate income without
transferring t to rentiers. Clearly,
restoring equili-
brium through increased
leakage is more
equitable than restoring it
through
income transfer.
(2)
Increased taxes on workers
may
raise
the net
wages
share to a
greater or lesser extent than an equal tax increase on rentiers, depending
on
whether
at(1
-
t,)
is
greater
or
less
than (1
-
at) (1
-
ta).
Para-
doxically, this means that
higher taxes on
workers may actually
raise
the
net wage
share
more
han
an
equal percentage point rise
in
taxes on
rentiers, although this is not
always the case.
(3)
An
increase in taxes
on workers is always more
effective
in
curtailing
inflation
than an
equal
tax
increase on rentiers. This is
self-evident, and stems
from the assumption that workers
consume
proportionately more
of their
incomes than
rentiers.
The
above
propositions are graphed and
summarised in Fig. 1. For a
given ct,
each
curve
represents
some war
finance
plan
and its
implied
level
of
inflation, which,
in
turn, depends
on
q.
Successively lower curves
result
from
finance
plans which rely
more and more
heavily
on tax
increases.
Along
a
given curve,
the
net
wages
share is
constant.
Thus,
the more
tightly wages are linked to
prices,
the
higher is the
amount
of
inflation,
without
any offsetting improvement
in
equity.'
This
explains,
perhaps,
why Keynes
was
so
vehement
about
the
need for
wage
restraint, as
witnessed
by the following passages:
"
.
a
demand
on the
part of the Trade
Unions
for
an
increase
in
money
rates of
wages
to
compensate
for
every increase
in the
cost of
living
is
futile, and greatly to the
disadvantage
of
the
working
class.
Like the dog
in the fable, they lost the
substance in gaping at the
shadow.
It is true
that the better
organized
sections
might
benefit at
the
expense
of other
consumers. But
except
as
an
effort
at
group
selfishness,
as a
means
of
hustling
someone else
out
of the
queue,
it is a
mug's
game
to
play.
In their minds and
hearts the leaders of the Trade Unions know
this as well as anyone else. They do not want what they ask. But
they
dare
not
abate
their demands until
they
know what alternative
policy
is
offered
"
[12, pp. 6,
7].
1
Contractual
linking
of
wages
to
prices
is
widespread
in
Israel
and at times has deterred
the
government
from
much
needed
increases in
indirect
taxes,
since the result would have been auto-
matic
wage
increases and
spiralling
inflation.
The next
episode
of
this sort
will
be
in
1972,
at
which
time
a
value
added tax will
be
imposed.
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7/13
1972]
INFLATION,
TAXATION AND
EQUITY
163
"But
what a ridiculous system with
wages and prices chasing one
another
upwards in this
manner in World War I No
one benefited
except
the profiteer. The
seeds of much subsequent trouble
were sown.
And we ended up with
a National Debt vastly greater in
terms of money
than was necessary and very ill distributed through the community"
[12,
p. 73].
Pure Inflation Finance
ir (?/ )
Small Tax Increase
Large
Tax
Increase
0
FIG.
1. Inflation
(Tr)
as a Function of Wage-Price
Parameter
(0)
for
Various Policies.
IV
In
conclusion,
let us return the
offspring
to
its
parent,
and use the model
to
analyse
How
to
Pay for
the War.
In
1939, Keynes
foresaw
a
war-propelled doubling
in
real
non-consump-
tion
spending
in the United
Kingdom.
Although
a
good portion
of
the
required
resources could
come
out
of
the excess
capacity
left over
from the
depression,
some
had to
come
at the
expense
of
private consumption.
The
incidence
of
this cut in
consumption upon
rich and
poor
was
at the core of
the war finance controversy, and the central
concern
of How to
Payfor
the War.
Keynes
said
that
while
real
output
could
rise
by
a maximum
of
/825
million,
non-consumption spending
would
rise
by /J1,350
million, meaning
that,
other
things equal, private
consumption
had to fall
by
J525
million.'
1
Keynes actually
forecast added
annual wartime
spending
of
/1,850 million,
f350
million of
which would be
offset
by
sales of
assets abroad and
150 million
in
"
depreciation
not made
good."
See
the
notes
to Table Ia.
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164 THE ECONOMIC JOURNAL [MARCH
He
proposed a war
finance
plan which included higher taxes, increased
savings (both compulsory and voluntary), a cheap ration of necessities,
family allowances and a post-war capital levy. This would both free the
needed resources and preserve or even improve equity.
Based on data in Table Ia (appendix), the parameters implicit in the
Keynes plan may be calculated. Since Keynes discussed not the functional
(wages
and
profits)
income distribution but
the global one, with &250
annual income as
the
dividing line between 'poor' and 'rich,' defining at as
the gross wages share is semantically and conceptually inaccurate. Such a
division implies an improbable savings function with a sharp kink at the
,C250
mark. This
savings
function can be
regarded
as an
approximation
to
a more accurate one that would obtain if a finer division of income classes
were used. The data in How to Pay for the War do not permit such an im-
provement.
Even
if
they did,
the
gain
in
accuracy
would be
somewhat
offset
by a
loss of
elegance,
since
equation (2) would
no
longer hold. How-
ever, we ought not to minimise the many statistical and theoretical difficul-
ties inherent in the assumed
identity between
functional
income distribution
and an arbitrarily categorised global income distribution. The ensuing
calculations should be
regarded
less
as
firm
projections
than as
illustrative
of
Keynes' macro-distribution theory. With
this
caveat in mind, henceforth
'
wages
share'
will be used in
place
of 'share in
income of those
with
incomes
under
C250 per annum.'
Table I contrasts Keynes' war finance plan with pure inflation finance
and the Keynes plan
minus
increased taxes.
If
adopted, Keynes' plan
would have
placed
the bulk
of
the
real burden
upon
those with
annual
in-
comes
above C250. Specifically higher
income
groups' consumption
was
to fall
by more than
a
third,
by C475 million, while that of poorer groups
was
to
fall
by C50 million. (The
two
sums,
of
course, add
to
C525m.)
Since the
f50
million can
be regarded
as the
poor's
share
of
'depreciation
not made good,' the poor's real consumption of goods and services would be
reduced not at all.
For
0
=
05, the plan
would have
implied only
4%
inflation
during
the course of
the
war
and,
if
money wages
were
held con-
stant, only 2% inflation.
This
coincides,
more or
less,
with
Keynes'
own
projection. He seemed to imply that apart from higher import prices, the
adoption
of
his
plan
would
eliminate
any price
increases.
In absolute
terms, Keynes proposed
tax
increases
totalling only J400
million,
less
than half the
proposed
rise in
voluntary
and
compulsory savings.
From
Table
I, however,
it is
clear how
important
a role
the
higher
taxes were
to play in distributing fairly the C525 million war burden and curtailing
inflation.
If
that
part only
of
Keynes' plan calling
for
added
savings
were
implemented,
the net
wages
share
(after-tax wages/total income)
would fall
by
about six
percentage points,
the net
profits
share
would
rise
by
about
five,
and,
more
important,
the
larger part
of the
real
defence
burden
would
fall
upon
the
workers, cutting
their real
consumption by f283 million,
with
the
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1972]
INFLATION,
TAXATION AND
EQUITY
165
remaining
C242 million falling
upon rentiers.
Further,
depending on i,
the
amount
of inflation
required
to effect the needed
income
distribution
would
be
seven
to twelve times
greater
than under
the full Keynes
plan.
The
marginal impact of his proposed tax increase is thus very large, larger than
TABLE
I
NetShares,
Real
Consumption
ndInflation
UnderAlternate
War
FinancePlans
*
Net Net
Workers' Rentiers'
Amount
of
Finance
Plan. Parameters.
wages profits
real
real inflation.
share.
share.
cons'n. cons'n.
1
ir
1. Pre-war
c
=
077
u = 096
v
=
0081 0519
0
329
2420
1290
-
tu=
0-04
tv=
028
2. Wartime:
c
=
0-56
(a)
KEYNES' PLAN
U =
0 82
v = 0-49
0
2%
tu-=
005 0*505
0295
2370
815 0 5 4%
tv
=
0*37
075
8%
(b)
PURE INFLATION
u =
0-96
v = 0-81
Not
Feasible
0
tu = 004 05
-
tv
= 0*28
075
(C)
INFLATION
&
u = 0-82
ADDED SAVING
V
=
0*49
0
14%
tt=
004
0-458
0*377 2137
1048
0 5
32%
tv
=
0*28
l075
93%
*
For source
of
data,
see
Appendix,
Table
Ia.
might
be expected from
looking at
the
numbers
themselves
(Keynes'
tax
proposalswould have raised the net rate of tax on workersfrom 4% to 5
%
and
on rentiers
from
28%
to
37%).
Given the
prevailing
pre-war
values of
the
parameters, pure
inflation
alone could
not have
freed the needed
resources
to
finance the war.
The
wartime consumption-output
ratio
had to
fall to
0-56,
and the
pre-war
propensity
to consume of the
rentiers
was
above
this
[(0.81)
(1-
0
28)
=
0.58].
No
amount
of
income redistribution
in favour
of
the
rentiers,
through
inflation, would
have
restoredequilibrium.
What
in fact was
Britain's
wartime
economic
policy
and
to what
extent
did it reflect the concepts and proposalsset out in How to Payfor the War?
Only
a
brief,
and therefore
inadequate,
survey
can be
attempted
here.
A
fuller account is found in Sayers
[18].
Lekachman
states flatly
that in
the British Treasury,
the Second
World
War
was
fought
according
to
Keynesian
principles
of
finance
[13, p. 149].
Keynes'
immediate
influence
was felt
in
Kingsley
Wood's
1941
stabilisation
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166 THE
ECONOMIC JOURNAL
[MARCH
budget, which explicitly adopted
as
official
orthodoxy the idea that the
inflationary gap would in the
end be closed either by
taxation or by infla-
tion, and that
the former was
much
superior
to the
latter.
By
then, Keynes
was a member of the Chancellor of the Exchequer's Consultative Council
and
in
a
strong position to plead
for
his own
proposals.
During the course of the
war, tax revenues more
than tripled, owing
to
a
doubling
of income
tax,
a
tough
surtax
levied on
large incomes
and
a
general increase in
direct taxes. Public spending grew
by
a factor of
five,
with
tax
revenues
covering
about half
of
it
[2, pp. 845,
846].
The
"
deferred earnings
"
proposal of Keynes calling for C550 million
in
annual compulsory savings was
adopted only
in
part; the
average
for the
war
years
amounted to less
than
a
quarter
of
the
suggested sum.
But
rationing, price fixing and other direct controls (which Keynes had wished
to
avoid)
brought
about
larger
voluntary savings
than he had
expected
[13, p.
149].
Despite
the
price controls,
there
was
considerable
inflation. From the
fall
of Czechoslovakia to
V-E Day, wholesale prices rose about
70%
[2, p.
848],
attributable in
part
to
higher
import prices.
Dudley
Seers
estimated
that
for
the
same
period,
retail
prices
rose
"just
over
50%
"
[19, p. 320].
This was much less than in the
First World War, when the cost-of-living
index rose from 100 inJuly 1914 to 220 inJanuary 1919.
How to
Pay for
the War
highlighted
the
lack
of
national income
statistics
so
vital to
shaping policy.
Ten
months
after
Keynes'
articles in
The Times
appeared,James Meade and Richard Stone were set to
work compiling the
needed data
[22]. Today, when
national
accounts series
stretching back
many
decades
are
available,
we tend
to
forget
that
only
thirty years ago,
such
data were
almost
non-existent. Since
then,
the
progressive
elaboration
of
the
national
accounts,
claims
Dow,
constitutes
nothing less
than a
revolution
[4, p.
182].
For
this,
the
author
of
How
to
Pay or the Warwas
in
large part
responsible[22].
SHLOMOMAITAL
Tel-Aviv
University.
REFERENCES
1. Thomas Cargill,
"
An Empirical
Investigation of the Wage Lag Hypothesis,"
American Economic Review, Vol. LIX,
No.
4
(December 1969).
2. S. B.
Clough
and C. W.
Cole,
Economic
istoryof Europe Boston:
Heath, 1958).
3. P. Davidson, Theories f Aggregate
ncomeDistribution Rutgers, N. J.: Rutgers
University Press, 1959).
4.
J.
C.
R. Dow,
The
Management of
the
British Economy, 1945-60 (Cambridge:
Cambridge University Press, 1964).
5.
William
Fellner,
"
Significance
and Limitations of
Contemporary
Distribu-
tion
Theory," American conomicReview,Vol. XXXIII, No. 2 (May 1953).
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11/13
1972]
INFLATION, TAXATION AND
EQUITY 167
6. F. Holzman,
"
Income Determination in Inflation," Reviewof Economics nd
Statistics,Vol. XXXII
(May 1950).
7. Nicholas
Kaldor,
"
Alternative
Theories of
Distribution," Reviewof Economic
Studies,Vol.
XXIII (1955-56).
8. Nicholas Kaldor, " Capital Accumulation and Economic Growth," in F.
Lutz and D.
Hague, eds.,
The Theory
of
Capital
(New York: St. Martins
Press, 1961).
9. M.
Kalecki, Theory f
Economic
Dynamics London:
Allen
&
Unwin, 1956).
10. John
Maynard Keynes,
"
War and the Financial System
"
and
"
The Pros-
pects
of
Money,"
ECONOMIC
JOURNAL
(August
and November 1914).
11. John
Maynard Keynes, The General Theory of
Employment, Interest and Money
(London: Macmillan, 1936).
12. John Maynard
Keynes, How
to
Pay for the War
(London: Macmillan, 1940).
13. Robert Lekachman, The Age of Keynes New York: Random House, 1966).
14. Geoffrey Maynard, Economic Development and
the Price Level (London: Mac-
millan,
1963).
15. L. Pasinetti,
"
Rate of Profit and Income
Distribution
in
Relation to the Rate
of Economic
Growth,"
Review
of
Economic
Studies,
Vol. XXIX
(1962).
16. P. Riach,
"
A
Framework for Macro Distribution Analysis," Kyklos, Vol.
XXII, No.
3
(1969).
17. Joan
Robinson, CollectedEconomic
Papers,
Vol.
II
(Oxford: Blackwell, 1960).
18. R. S. Sayers, FinancialPolicy, 1939-45 (London:
Longmans, Green, 1956).
19. Dudley Seers,
"
The National Product Before and After the War," Bulletinof
the
Oxford
University
Institute
of Statistics, Vol.
X
(October 1948).
20.
R. Solow and
J. Stiglitz,
"
Output, Employment
and
Wages
in the
Short
Run,"
Quarterly
Journal
of Economics,
Vol.
LXXXII,
No.
4
(November 1968).
21.
R. Solow and
J. Stiglitz,
"
Reply," Quarterly
Journal
of Economics,
Vol.
LXXXIV,
No.
1
(February 1970).
22.
R.
Stone,
"
The
Use and
Development
of
National
Income
and
Expenditure
Estimates,"
in: D.
N.
Chester,
ed.,
Lessons
of
the
British
War
Economy.
23.
Sidney
Weintraub,
An
Approach
to
the
Theory
of
Income Distribution
(Phila-
delphia:
Chilton, 1958).
24. Sidney Weintraub, " Solow and Stiglitz on Employment and Distribution:
A
New
Romance with an
Old
Model?
"
Quarterly
Journal
of Economics,
Vol.
LXXXIV, No.
1
(February 1970).
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12/13
168 THE ECONOMIC JOURNAL
[MARCH
TABLE
Ia.
Data
Used
in
Constructing
Table
L*
($C
million)
LOW
INCOME
GROUP.
HIGH
INCOME
GROUP.
Non-con-
Gross
Net
Net
Saving
Real
con-
Gross
Net
Net
Saving
Real
con-
sumption
TOTAL.
income.
taxes.
income.
.
sumption.
income.
taxes.
income.
.
sumption.
spending.
1.
PRE-WAR
2,630
110
2,520
100
2,220
624
1,596
306
2,420
1,290
1,140
4,850
2.
WARTIME:
Keynes'
Plan
(a)
higher
real
income,
+425
+400
+825
output
(b)
increase
in
voluntary
+200
+200
saving
(c)
increased
non-con-
+
1,350
sumption
spending
(d)
higher
taxes
+50
+350
(e)
compulsory
saving
+225
+325
TOTAL
3,055
160
2,895
525
2,620
974
1,646
831
2,370
815
2,490
5,675
*
See
notes
below.
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1972]
INFLATION,
TAXATION
AND EQUITY
169
Source
or Data,
Table Ia.
Page
numbers refer
to How to Pay for
the War.
Data are in
C
millions.
A.
PRE-WAR.
Annual Income.
Notes.
Below
$i250.
Above
$i250.
(1)
Net income 2,520
1,560
+
36 From p. 82.
Income of
charities,
+
Taxes
+390 +830
+
14
$50,
is
imputed
to
the
above-;J250
-Transfers
-280
-220 group
and is
split between net
income (36) and
taxes (14)
accord-
ing to the prevailing
pre-war
tax
Gross income
2,630
2,220
rate
of 28% (see below).
(2)
Tax rates:
Net taxes
110 624 From
p. 82.
Gross income 2,630
2,220
Rate of
tax
0
04
0-28
(3) Propensities to consume:
Net income 2,520 1,596
From
p. 82.
It is assumed
that
the
Saving
100
306 36
of
net income
imputed to the
Consumption
2,420
1,290
above-/?250
group from
charities
Consumption .
Income
0-96
0-81 is all
saved.
B.
WARTIME (Keynes'
Plan)
(1)
Net
income
2,895
1,646 Added wartime
income
of 825
is
+
Taxes
+540
+
1,194
divided
as 425
and 400
between
the
-Transfers
-380
-220
two groups (p.
37). The "rich"
would
pay an
extra 350 in taxes;
Gross income
3,055
2,620
the
"
poor," an extra 150,
offset
by an added 100 in subsidies (p. 37).
(2)
Tax
rates:
Net
taxes
160
974
See
above.
Gross income 3,055
2,620
Rate of
tax
0-05
0-37
(3) Propensities
to consume:
Net
income
2,895
1,646
The
added
400
in
voluntary savings
Savings:
which Keynes
assumes (p. 23) is
Pre-war
100 306 split equally among
the two groups.
Added voluntary
+200
+200
Total
deferred earnings of 600 were
Added
compulsory
+225
+325
proposed,
reduced to
550
by
"
con-
--
cessions " (p. 36), and allocated
Total
525
831
225
and
325 between
the two
Consumption
2,370
845
groups.
Consumption
.-
Income
0
82
0 49
(4)
Non
consumption
spending:
Source:
pp. 79,
23.
Pre-war investment
290
Pre-war
public
consumption
+850
Added wartime
spending
+
1,850
Less:
Sales
of assets
abroad -350
Less:
Depreciation
not
made
good
-150
Wartime
non-consumption
spending
2,490
Non-consumption spending
Output
044
(=2,490/5,675)