Inflation, Taxation and Equity: How to Pay for the War Revisited

Author(s): Shlomo Maital

Source: The Economic Journal, Vol. 82, No. 325 (Mar., 1972), pp. 158-169
Published by: Wiley on behalf of the Royal Economic Society
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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 to Pay 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 accomplish a huge increase in defence output. Since the wellspring of Keynesian
exegesis, The General Theory, 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 distribution theory is found in [20], with ensuing controversy in [24] and [21].
3 See [11], pp. 257-60.
158

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INFLATION, TAXATION AND EQUITY

MARCH 1972]

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 Keynesian, 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 potential 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):

Substituting gt

ct,

V+gYe
.
.
.
Yt=YeaeU+
Yt(l-at)
dividing through by Yt and solving for at yields (1) directly.

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(la)

160

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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, ceterisparibus,in a wartime situation. We may conceive 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 inflation v needed to redistributeincome and restore equilibrium is:
=

ao - at
at

(2)

- 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
rise 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 particular as expressed in How to Pay for the War. Much embroidery can be
added, without in any way improving or substantiallyaltering the substance.
1 Other, later authors have used a similar parameter; see Holzman [6], Maynard [14] and
Solow and Stiglitz [20].
2 "6Wages 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 precededthe 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
Solving (2a) for vf yields (2).

(1 + ov) =ao(

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(2a)

INFLATION.

1972]

TAXATION

161

AND EQUITY

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 equilibrium 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,
of tax must be added to the model.
to consume out of before-tax income.
to consume out of disposableincome,
and t, and t, are the respective rates
that:

u(I

to be useful for shaping policy, rates

U and V were defined as propensities
Therefore, if u and v are propensities
for workers and rentiers respectively,
of tax on wages and profits, it is true

t and V-~ v(1 - G)

.(3)

Under some conditions, sales taxes and income taxes are completely interchangeable in this model. Consider an incremental before-tax pound of
wage income, to which an incometax 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 consumptionspending. 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 assumption, 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):
atat

u(-ct

_ _

v(l

_ _ _

_ _

_ _

t)(4)
_ _

t__

The mechanism required for exposing the inter-relationship between inflation, taxation and equity, consisting of equations (2) and (4), is now complete.
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.

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162

THE ECONOMIC JOURNAL

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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 imposed 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, confiscate income without transferringit to rentiers. Clearly, restoring equilibrium 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). Paradoxically, this means that higher taxes on workers may actually raise
the net wage share morethan 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 automatic 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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INFLATION,

1972]

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-consumption spending in the United Kingdom. Although a good portion of the
required resources could come out of the excess capacity left over from the
The
depression, some had to come at the expense of private consumption.
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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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 improvement. Even if they did, the gain in accuracy would be somewhat
offset by a loss of elegance, since equation (2) would no longer hold. However, we ought not to minimise the many statistical and theoretical difficulties 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 incomes 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 constant, 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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INFLATION,

1972]

TAXATION

165

AND EQUITY

remaining C242million 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
andInflationUnderAlternateWar
FinancePlans *
Finance Plan.
1. Pre-war

Parameters.
c = 077
u = 096
v = 0081
tu=

tv=

2. Wartime:
(a) KEYNES' PLAN

(b)

PURE INFLATION

(C) INFLATION &

ADDED SAVING

Net
profits

Workers'
real

Rentiers'
real

share.

share.

cons'n.

cons'n.

0519

0 329

2420

1290

0*505

0295

2370

815

Amount of
inflation.

ir

0-04

028

c = 0-56
U = 0 82
v = 0-49
tu-= 005
tv = 0*37
u =
v =
tu =
tv =

Net
wages

0-96
0-81
004
0*28

u = 0-82
V = 0*49
004
tt=
tv = 0*28

Not Feasible

0-458

0*377

2137

1048

l075

0
05
075

2%
4%
8%

0
05
075

0
05

14%
32%
93%

* For source of data, see Appendix, Table Ia.

might be expected from looking at the numbers themselves (Keynes' tax

proposals would have raised the net rate of tax on workers from 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
propensityto consume of the rentierswas above this [(0.81) (1- 0 28) = 0.58].
No amount of income redistribution in favour of the rentiers, through
inflation, would have restored equilibrium.
What in fact was Britain's wartime economic policy and to what extent
did it reflect the concepts and proposals set 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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budget, which explicitly adopted as official orthodoxy the idea that the
inflationary gap would in the end be closed either by taxation or by inflation, and that the former was much superiorto 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 compulsorysavings 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 Payfor 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 Payfor the Warwas in large part
responsible [22].
SHLOMO MAITAL

Tel-AvivUniversity.

REFERENCES

1. Thomas Cargill, " An Empirical Investigation of the Wage Lag Hypothesis,"

AmericanEconomicReview, Vol. LIX, No. 4 (December 1969).

2. S. B. Clough and C. W. Cole, EconomicHistoryof Europe(Boston: Heath, 1958).

3. P. Davidson, Theoriesof AggregateIncomeDistribution(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 Distribution Theory," AmericanEconomicReview,Vol. XXXIII, No. 2 (May 1953).

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INFLATION,

TAXATION

AND EQUITY

167

6. F. Holzman, " Income Determination in Inflation," Reviewof Economicsand

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 Theoryof Capital (New York: St. Martins
Press, 1961).
9. M. Kalecki, Theoryof EconomicDynamics(London: Allen & Unwin, 1956).
10. John Maynard Keynes, " War and the Financial System " and " The Prospects 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 Payfor 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 EconomicStudies, Vol. XXIX

(1962).

16. P. Riach, " A Framework for Macro Distribution Analysis," Kyklos, Vol.
XXII, No. 3 (1969).
17. Joan Robinson, CollectedEconomicPapers, 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," QuarterlyJournal of Economics,Vol. LXXXII,

No. 4 (November 1968).

21. R. Solow and J. Stiglitz, " Reply," QuarterlyJournal 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? " QuarterlyJournal of Economics, Vol.

LXXXIV, No. 1 (February 1970).

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[MARCH

THE ECONOMIC JOURNAL

2.

1.

(e) (d) (c) (b) (a)

TOTAL

Keynes' PRE-WAR
WARTIME:
higher
higher saving
output
increase
sumption
increased Plan
in real
compulsory
taxes
saving spending
non-con- income,
voluntary

3,055

+425

110 taxes.
Net

+50

160

2,630 income.
Gross

LOW

2,895

Net
2,520 income.

INCOME

100

GROUP.

Data
525

+200

+225

. Saving

Used
in

Real

See

($C

2,420

2,370

sumption.
con-

notes

TABLE

million)Ia.
below. 2,620

974

+400

+350

Constructing

Gross
2,220 income.

624

Net
taxes.
HIGH

1,646

831

+325

+200

Net
1,596 income.

INCOME

306

GROUP.

. Saving
Real

1,290

815

sumption.
con-

2,490

5,675

1,140

1,350

+825

4,850

spending.
sumption
Non-con-

TOTAL.

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Table
L*

INFLATION,

1972]

TAXATION

169

AND EQUITY

Sourcefor Data, Table Ia.

Page numbers refer to How to Pay for the War. Data are in C millions.
A.

Notes.

Annual Income.
Above$i250.
Below $i250.

PRE-WAR.

2,630

1,560 + 36 From p. 82. Income of charities,

+830 + 14 $50, is imputed to the above-;J250
group and is split between net
-220
income (36) and taxes (14) according to the prevailing pre-war tax
rate of 28% (see below).
2,220

(2) Tax rates:

Net taxes
Gross income
Rate of tax

110
2,630
0 04

624
2,220
0-28

From p. 82.

(3) Propensities to consume:

Net income
Saving
Consumption
Consumption . Income

2,520
100
2,420
0-96

1,596
306
1,290
0-81

From p. 82. It is assumed that the

36 of net income imputed to the
above-/?250 group from charities
is all saved.

(1) Net income

+ Taxes

2,520
+390
-280

-Transfers

Gross income

B.

WARTIME

(Keynes' Plan)

(1) Net income

+ Taxes
-Transfers

Gross income
(2) Tax rates:
Net taxes
Gross income
Rate of tax
(3) Propensities to consume:
Net income
Savings:
Pre-war
Added voluntary
Added compulsory

1,646
+ 1,194
-220

3,055

2,620

160
3,055
0-05

974
2,620
0-37

See above.

2,895

1,646

100
+200
+225

306
+200
+325

The added 400 in voluntary savings

which Keynes assumes (p. 23) is
split equally among the two groups.
Total deferred earnings of 600 were
proposed, reduced to 550 by " concessions " (p. 36), and allocated
225 and 325 between the two
groups.

--

Total
Consumption
Consumption .- Income
(4) Non consumption
spending:
Pre-war investment
Pre-war public
consumption
Added wartime spending
Less: Sales of assets
abroad
Less: Depreciation not
made good
Wartime non-consumption
spending
Non-consumption spending
Output

Added wartime income of 825 is

divided as 425 and 400 between the
two groups (p. 37). The "rich"
would pay an extra 350 in taxes;
the " poor," an extra 150, offset
by an added 100 in subsidies (p. 37).

2,895
+540
-380

831
845
0 49

525
2,370
0 82

Source:pp. 79, 23.

290
+850
+ 1,850
-350
-150
2,490
044 (=2,490/5,675)

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