How Are You Doing Paywise? F. A. Harper

[.216 ] Year Country Yearly pay 1 U.S.A. 5,000 dollars 2 Mexico 50,000 pesos 3 England 2,000 pounds 4 Chile 2,500,000 pesos 5 Turkey 50,000 lira How have you been doing, over the years? And suppose that next years post would be in France where you would be paid 2,000,000 francs. How good an offer is that compared with what you have been getting? Will you accept that offer or not? Need for Common Denominator These questions cannot be answered from the evidence given. Every man knows that. He can know nothing about how well he is doing until after he nrst converts these rates of pay in different currencies into some com plon denominator. He must first find, as best he can, some way to express them all in terms of comparable things he wants that can be bought with each year's pay. If he shuns the task of making such a comparison because of the difficulties it entails, he will never be able to know how well he is doing as the years go by. Unless he does this, he will never find answers to such ques tions. And if he fails to answer them because a common denominator seems to him imperfect, he will continue to live in economic blindness, subjecting himself to serious mistakes as a consequence.

[217 ] The Changing Dollar All this is quite clear when the problem is one of pay comparisons in lira, dollars, and pounds sterling, which we are never tempted to try to compare directly. But when our pay over the years is all in dollars, we compare it directly and thereby suffer a serious illusion about how well we are doing. Suppose you had worked at these rates of pay in the United States over a period of years: Year 1 2 3 4 5 Yearly pay in dollars 5,000 5,200 5,400 5,600 5,800 Since all are expressed in dollars, it seems valid to compare them directly. It appears clear that you have had a steady increase in welfare over the years. But have you? Actually, it may be that you can tell no more about it than if the amounts year by year had been in terms of different currencies, as in the previous illus tration. Suppose, for instance, that there had been a steady inflation of 5 per cent each year. In that event, your pay would have been declining steadily in ""real" terms, after making the dollars comparable in buying power.

Although your pay has been in dollars each year, dol lars change in value. They may be as different, one year [218 ] from another, as the peso of Mexico is from the peso of Chile, or the franc from the dollar. There is no easy way to tell how you are doing year by year under an unstable money system and changing tax rates. In fact, you can't tell anything about it until and unless you first make an adjustment for changes in the worth of your units of money remaining after taxes, with passing time. Income after Taxes The chart and tabulation show a comparison of 1956 pay dollars and 1940 pay dollars for a married person with two dependents. For other years and other tax dependencies the comparison would be different, of course. To illustrate how the chart can be used, assume that you are such a person and that in 1940 your income was $10,000 (base line). Your income in 1956 would have had to be about $24,000 if its buying power after taxes were to be as much as in 1940.

Or to state it another way, pay increases averaging about 6 per cent each year over the previous year would have been necessary, if you were merely to hold your eco nomic position-merely to hold your own in the worth of your pay after taxes, over the sixteen-year period. The $14,000 additional required in 1956, in order to maintain your buying power, was needed to meet the increase in taxes-if inflation is considered as a form of [219 ] INCOME COMPARISONS EQUALIZED AFTER TAXES· *INCLUDING INFLATION TAX 20,000 10,000 5.000 10.000 1940 PAY, DOLLARS SOURCE: Basic in.formation from issues of the Statistical Abstract of the United States and National Income Supplements of the Survey of Cun'e'1IIt Business, United States Department of Commerce. The tax burden on income at each income level was determined by adding the personal income tax at that level to the proportional share of expenditures of government not covered by the personal income tax. This amounts to assuming that, aside from personal income taxes, the process of bargainin.g for goods and services in our economy throws the other costs of government on all income levels in propor tion to their incomes remaining after the personal income tax. Although any such assumption is unprovable, this one seems as reasonable as any other would be.

tax, as seems proper. 1 What we commonly call taxes, both direct and indirect, absorbed some of the increase, but most of it was due to the inflation tax. If you are interested in a 1956 comparison with other than a $10,000 income in 1940, it can be derived in like manner from this same chart. But if you want a compari1 See "The Hiddenest Tax."· The Freeman. October 1954. p. 188. [220 ] son for some other years, or for other than a married person with two dependents, you will have to prepare another similar chart. Laborious? To be sure. But that is another price to be paid for inflation and increasing taxes, before we can know how well we are doing pay wise. We can't eliminate the question by failing to an swer it. 1956 after taxes, in 1940 buying power $ 241 401 802 1,155 1,797 2,747 3,373 7,514 19,290 39,129 INCOME COMPARISONS 1956 AND 1940 1940 after taxes $ 467 778 1,556 2,335 4,001 6,034 7,440 16,676 44,398 132,576 600 1,000 2,000 3,000 5,000 8,000 10,000 25,000 100,000 500,000 $ Earned net income [221 ] EXECUTIVE INCENTIVE As OUR country has developed and matured, we have become increasingly dependent on an active and dy namic industry for our economic growth and prosperity.