How to Pay for War by Keynes - Penalties of Debt Borrowing

8/10/2019 How to Pay for War by Keynes - Penalties of Debt Borrowing

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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3/13

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.



4/13

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).



5/13

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



6/13

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.



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.



8/13

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



9/13

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



10/13

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).



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).



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.



13/13

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)

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