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This, we think, is the basic issue and one that must receive the attention of the entire committee. In this respect, we feel that H. R. 4790 does not provide adequate relief where it is needed. The basic criticism is H. R. 4790 provides relief in reverse ratio to the order in which the tax burden was extended during wartime. As you know, during wartime, there was an extension, and necessarily so, an extension of the burden of taxation from the higher income brackets to the lower income brackets, with the result that in 1939, the incomes under $5,000, which paid less than 10 percent of the Federal income taxes, pay under the present law something like 55 percent. If you also make adjustment for the increase in prizes which has occurred since that time, the conclusion is emphasized. The group whose real income and living standards are measured today at $5,000 or less--and they are equivalent to those receiving $3,000 in 1939—is carrying over 10 times the share of Federal income taxes paid by the group with comparable living standards in 1939—55 percent compared with 5 percent. I would like to emphasize that point and make sure it is understood. I am making the point that the family with $5,000 now has about the same standard of living, given the rise in prices, as the family who had $3,000 in 1939, and I am comparing the shift in the burden of the taxes in those income groups—$3,000 in 1939 and $5,000 now—to get some guide to the shift in the relative burden of these income groups. I make the point that under the law, as you have proposed it, the increased burden of the low-income families that arose during the war from approximately 5 percent to 55 percent is only very infinitesimally reduced, and that under the law which you have before you as proposed-H. R. 4790—you would still have low-income people below $5,000 paying about 10 times the share that they carried in 1939—50 percent compared with 5 percent. Our basic position is that the law in terms of the income-tax category should be so changed as to begin a significant reversal of this tendency back to the proportionate share that was carried by the lowincome people in 1939. The CHAIRMAN. How much revenue were we raising in 1939 ? Mr. Nixon. Of course, you were raising a much smaller revenue with a much smaller national income, which applied to high incomes and to low incomes. I am not saying, if you will notice, Senator Milliin, you can go back exactly to that 1939 situation, and you will find in our presentation we do not make that proposal. I do not think it is practicable to go back to a 5-percent share. The CHAIRMAN. Let us get one or two more basic facts into the record. Under the bill which is before us, what percentage of the reduction goes to taxpayers of less than $5,000 ? Mr. Nixon. Seventy-two percent. Mr. Nixon. That is one estimate. There is some discrepancy, depending on national income. The CHAIRMAN. You are not contending that the taxes which those taxpayers pay could be shifted to the brackets above $5,000 are you? Page 3
The point that I want to make here is that there is no statistical justification for the statement that new capital is not coming into industry. This is a purely factual question that seems to me should be beyond discussion. The statistics are clear that industry is getting new capital. The CHAIRMAN. Getting indebtedness capital and not equity capital. Indebtedness capital in a period of recession will shut your workers off the pay rolls. Mr. Nixon. I am not sure that equity capital would prevent that. The CHAIRMAN. It might not prevent it, but it might defer it. Mr. Nixon. I was addressing myself to the point you yourself had raised, the question of the impact of the tax structure on investment capital, venture capital. I had made the first point that the present tax schedule does not reduce the spendable incomes of people to such a level as to leave them no margin for investment. I was making the second point that it is not true there has been no new capital coming into industry, and I pointed out the high volume of stocks and bonds that had been purchased in 1947. You made the point that a substantial portion of this was bank loans and bonds, which is correct. In 1947, corporations obtained 68 percent of their new funds from bank loans and bonds, and only 32 percent from stock issues. The point that has been made here is that from 1919 to 1928, only 32 percent was raised through stocks, the same proportion as in 1947, and 68 percent through bonds. As we know, this was not a period in which investment capital, or venture capital, was stifled in this country. The CHAIRMAN. In 1947 and 1946 there was practically no investment in equities. Is that not true? I am not speaking about preferred stock issues, but I am talking about straight equities. Mr. Nixon. I only have the figures here for stock issues. I have not the break-down for the common and preferred stock, but it was 32 percent in total stock issues in 1947. That is the same proportion as characterized our investment market in the years 1919 to 1928. The CHAIRMAN. I think you will find that so far as straight equities are concerned, the amount of equity investment in both 1947 and 1946 was practically nil. Mr. Nixon. The point, of course, about that, is, as Secretary Harriman pointed out, they can get very cheap money at the present time, and under those circumstances, corporation directors are taking advantage of it. The CHAIRMAN. They take advantage of it in part for that reason, and I suggest, Mr. Nixon, in part because they cannot get equity. But you know very well the effect of that is two-fold: In the first first place, it is apt to overextend the credits which the banks give to industry and which in periods of recession must be severely contracted to preserve soundness of the bank, which has a very bad effect on industry. Page 4
Compare with 1939, a married couple enjoys an exemption in terms of goods and services equal to only 23 percent of their exemption in 1939. That is why we are urging that we give exemptions of $1,500 for a single person, exemptions of $3,000 for a married couple, and exemption for dependents of $500. This is below the amount that is necessary to achieve the 1939 equivalent, but we think it is a necessary step in the right direction. Just a word as to the Dingell bill, about which you queried me earlier. We feel that the Dingell bill is a constructive though temporary step in the direction of providing relief where relief is most needed. The CHAIRMAN. I do not remember querying you about the Dingell bill. Mr. Nixon. That is the House minority bill, for the $10. I want to be correct on this. It was introduced by Congressman Dingell, H. R. 4968. The CHAIRMAN. I accept the correction. Mr. Nixon. Well, the concern we have about the Dingell bill is that, as Secretary Snyder emphasized to the committee over there, it is not a definite and unchanging change in the tax exemptions. He proposed it as a temporary adjustment presumably to be dealt with later on. In our opinion, what we need is a readjustment in the exemptions on a permanent basis to give a permanent kind of a readjustment in the exemptions along the lines I have emphasized. The CHAIRMAN. Before you come to your conclusion, may I invite your attention to the fact that about $103,000,000,000 of taxable net income goes to those under $5,000 and about $29,000,000,000 to those above $5,000; and that the net effect of your argument, as I see it, would be an almost complete confiscation of the income of those above $5,000, because we, at the present time, are raising about $21,000,000,000 out of income taxes. Mr. Nixon. I do not think you need to confiscate all the incomes above $5,000 in order to put this kind of exemption into effect. The CHAIRMAN. Let me ask another question. If we should come up here with a bill which would, roughly, distribute the reductions, say, in the neighborhood of 70 percent to those under $5,000 and the remaining 30 percent to those above $5,000, would you rather have that than nothing? Mr. Nixon. That is the bill you have before you, sir. The CHAIRMAN. And I am assuming anything we come up with will carry, roughly, the same percentage of distribution. Mr. Nixon. You asked me that question last year. The CHAIRMAN. Last year you said those in lower incomes would rather have that than nothing. Mr. Nixon. I will give the same answer. I am aware of the fact Mr. Ruttenberg will give you a different answer. The CHAIRMAN. As a result, your people have gone without about 214 billon dollars of income they might have had during the past year. Page 5
3. Now is the time to shift some of the burden of taxation from the shoulders of low-income individuals to the excessively high profits of American corporations. 4. Tax relief now to low income individuals is not inflationary. 5. The present bill, H. R. 4790, now being considered by your committee is only slightly better than last year's H. R. 1, which we then described in President Roosevelt's terms that it was “tax relief for the greedy and not for the needy.” Those are the five basic points which I should like to make today. I think, as Mr. Nixon has so ably pointed out, now is the time for tax relief to low income individuals. The tax burden which they are bearing today is greater than in all history. Certainly, Federal revenues have increased from a level of 4 and 5 billion dollars in prewar days to the present level of 38 and 39 and 40 billion, and even possibly 45 billion, for the coming fiscal year. The revenues are highly needed and highly necessary, and we are not proposing before this committee that the amount of Federal revenue be reduced. On the contrary, we are proposing to this committee that what tax relief results from a reduction in the tax burden on low income individuals be made up for by the imposition of taxes in other fields. Most specifically, that is an excess-profits tax upon corporations; and undistributed-profits tax such as we discussed before the committee last year; a closing of the loopholes in tax-exempt bonds and capital gains, and closing the loopholes in the estate and gift taxes. Unfortunately, in that latter category this committee is broadening the loopholes in the estate and gift taxes by the repeal of the 1942 amendment. I do not want to take up too much time of the committee. I should just like to direct attention for the time being to the basic question about adequate tax relief for low-income individuals. The present exemptions for a family with four is $2,000. The exemptions in 1940 for a family of four were considerably higher than that level. Not only have exemptions in the past 8 years been greatly increased upon low-income individuals, but the tax rates have been greatly increased upon the first bracket tax as well as upon all other bracket taxes. So that presently over one-half of the total individual income tax is borne by individuals with incomes of less than $5,000 a year, while in 1939, only one-tenth, or 10 percent of the burden was borne by those individuals. The major increase in revenue during war years has come from increasing the tax burden upon the low-income individuals. When the war ended following VJ-day, the first move made by the Congress was to eliminate the excess profits tax, which also, by the way, was imposed during the war and was an additional burden upon corporations, but little or no relief at that time was given to the low income individuals. Oh, yes, a 5-percent reduction and elimination of the shift in the method of computing taxes. It amounted to a total change of 5-percent reduction in all income-tax rates. Page 6
But, in effect, the major relief at that time was given to corporations through the elimination of the excess-profits tax. In this past year, the burden as a result of the increased cost of living has been very great upon the low-income individual. Therefore, we are proposing to this committee that instead of the kind of tax relief as included in the Knutson bill, H. R. 4790, exemptions be increased to a level of $3,000 for a married couple, $1,500 for a single individual, and the maintenance of the present exemptions of $500 for each dependent. This would reduce the tax revenue by $6,500,000,000. It would eliminate from the tax rolls some 20,000,000 taxpayers. It would have a great effect upon stimulating a consumption economy as contrasted to the investment economy and venture capital economy which you discussed in some detail with Mr. Nixon. I should like at this point to direct myself specifically now at the advisability of reducing taxes upon low-income individuals at this time. That is, we would go further to propose that these increased exemptions apply only to those individuals with incomes of less than $5,000. Those with incomes above $5,000 would continue to maintain the present exemption, of course, with an attached provision to take care of those at $4,999 and $5,001 and on up, but exemptions would apply only to the low-income individuals. That proposal, the reduction in revenue resulting from it, would be compensated for by the imposition of an excess-profits tax similar to the one we had in the war, slightly lower in rate of tax and slightly higher in rate of exemption to give protection to the small-business men and the small corporations of under $25,000 net income. You immediately raise the question if you impose a tax upon corporations and do not reduce the tax upon the dividend recipients; that is, the major recipients of dividends and high-income people, if you do that, you destroy all of the initiative to expand capacity in America, to make room for the 700,000 additional workers which come upon the scene each year, and you destroy the initiative for individuals in high-income brackets to invest their money in equity capital. I recall the figures you read into the record, Senator Millikin, on venture capital. They were contained in the report of the House Committee. I should like to call your attention to the figures in the Federal Reserve bulletin for last month. The Federal Reserve Board bulletin points up the total equity capi‘tal on page 208 of its February bulletin. It shows that the total stocks and bonds of corporations, new capital now, not refunding, excluding refunding, total capital from bonds and stocks in 1947 was $4,700,000,000. This is broken down into $3,500,000,000 for bonds and notes; $1,200,000,000 for stocks. This level of $4,700,000,000 for equity capital, both bonds and stocks, new capital, compares to $3,500,000,000 in 1946. 1.3 billion in 1945, and there was not another year since 1938, with the exception of 1941, when there was as much as $1,000,000,000 in new corporate bonds and stocks. Page 7
The CHAIRMAN. It takes a larger reserve position to maintain $132,000,000,000 of taxable income than it does to maintain $15,000,000,000. Mr. RUTTENBERG. It ungestionably does, sir, but it is at that precise point I should like to say there is a question as to whether the present cash liquid asset reserve position of America is higher than necessary to continue an economy of $132,000,000,000 of net taxable income. The CHAIRMAN. I suggest it is not higher than necessary if you have no equity market and must get your expansion out of those reserves. Mr. RUTTENBERG. I should like to point cut. sir, it is nnt nuite fair to compare that $15,000,000,000—is that the figure for 1939 ? The CHAIRMAN. The exact figure was $15,803,000,000. Mr. RUTTENBERG. To compare it with the $132,000,000,000 now, because you will realize, sir, in 1939, the exemptions in our personal income tax were such as to reduce the amount of net income available for taxation as against the current day when the exemptions are much, much lower. The CHAIRMAN. Mr. Stam invites my attention to the fact these figures are before exemption. Mr. RUTTENBERG. Net income before exemptions? , Mr. RUTTENBERG. If that is true, I would withdraw what I said. I would like to have a chance to check the figures. I take your word for it, of course. Senator Johnson. May I ask Mr. Ruttenberg if he finds any necessity at all for expansion in our industrial machine here? Mr. RUTTENBERG. I think, sir, there is no question but that we need expansion in many areas in our economy. We ought to increase steel capacity from the present level of 91 million to at least 100 million tons of ingot capacity. We also must increase the available capacity of natural gas which flows through pipe lines to cities like Detroit, and in order to do that, we need steel capacity. We need to expand electric and power facilities in this country. We need all this expansion if we are going to have our eyes set on the ultimate goal of full employment and full production. Senator JOHNSON. That is what I had in mind. The other question: How are you going to get this expansion? How are you going to finance it? Mr. RUTTENBERG. I do not think that the tax structure is standing in the way of that expansion. I do not think that even the officials of the United States Steel Corp., or the American Iron and Steel Institute, who are saying they will not expand capacity more than 21/2 million tons in 1949, are saying—and I have never heard it-it is the tax structure which is keeping them from expanding that capacity. They are saying, on the contrary, sir, the reason they are not expanding steel capacity is they have no hope in the future. They are saying that in the future there will not be as great a need for steel as there is today. And it is that philosophy which I am challenging here today. It is that philosophy of lack of faith in America's future. If they had faith in the demand for steel in 1952, 1953, or 1954, they would not hestiate today, regardless of the tax structure, to expand capacity, as is Page 8
In other words, for the benefit of splitting that income, they have to assume some burdens, Mr. RUTTENBERG. That is right. The CHAIRMAN. You would deny them the benefit that flows from the split and fasten the burden on them? Mr. RUTTENBERG. Put the argument in reverse, sir. You are doing just that thing for the 36 States-giving them a benefit without assuming the responsibilities of community law. The CHAIRMAN. That is entirely right. The CHAIRMAN. You are entirely right. We are talking about equalizing. If you start to impose the joint return on communityproperty States, you are not equalizing and are not doing justice. You reverse that and say by giving the rest of the States the right to split when they do not assume the burden of community-property States, that is an injustice. I suggest the rapid extension of the community-property States makes this more or less of a theory, and I believe the Federal Government can take a practical look at it and say, “Let's get this done." Mr. RUTTENBERG. I am sorry to see the tradition of Congress in considering this thing ever since 1921 is now being reversed. Since 1921, the Congress has been considering the problem of requiring mandatory joint returns, and in various revenue acts have attempted to do it. As a matter of fact, in 1942 they tried to do it and lost by 1 vote in the committee. If I am not mistaken, Senator George, you were chairman of the committee then. Senator GEORGE. It was a very close vote. Mr. RUTTENBERG. I say the tradition is being changed now, and why is it being changed at this point? The change means tax relief to the high-income individuals who are most able to pay. I say it is unfortunate the shift has been made in that regard. The CHAIRMAN. Do you mind if I put something in the record here about the justice of this thing? Mr. RUTTENBERG. Certainly. The CHAIRMAN. Let us test the relation of income taxes paid per dollar of income by taxpayers in different brackets. I am talking about a single person with no dependents, with net income before exemption. The $5,000-income man pays 10 times as much as the $1,000. Let us make a shift and relate it to the $5,000 man against the upper bracket. The $10,000 man pays 3 times as much as the $5,000 man. Page 9
Secretary HARRIMAN. This is part of my argument, sir, and this only relates to the question of what would have happened if the consumer had had more money. I fully recognize that Government expenditures are equally inflationary with other types of expenditures in similar catégories, and I am not dodging that at all. I am only discussing what would have happened if the consumer had had greater income at this time. It is leading to the argument that Government income should not be reduced, in my judgment, at this time, and the surplus should be used for debt retirement. Senator GEORGE. Mr. Harriman, are not Government expenditures more inflationary! Mr. HARRIMAN. No; I would think they would be exactly similar to private expenditures in the same category. Senator GEORGE. In the same category, but you have a different sort a of an operator. Can you not see that they are more inflationary in your commodity markets? Has it not been so for months? Secretary HARRIMAN. The volume of Government purchases in certain areas have added to the prices. Senator GEORGE. I am not speaking of the volume. I am identifying the operator in your market, and when the Government gets into your commodity market, you see what happens. You see it every day. Secretary HARRIMAN. I would think that by and large it is generally the volume of purchases that affects prices rather than who buys. Senator GEORGE. I would think, by and large, they would ultimately do it, but I cannot escape the conviction myself that when Government goes into business on a large scale, as in your commodity markets, your inflationary influence is definitely greater than if it was just simply left to your private trading. Secretary HARRIXAN. Senator, I would not have thought so. There are two cases which I would like to distinguish. One is grain, where the Government has been a very large buyer for shipment abroad. But take meat, where the Government has not been involved in most of the categories of meat, and your meat prices have been the most troublesome of all. Senator GEORGE. They have, but the minute you moved the grain up, you moved your meat prices. Secretary HARRIMAN. It has been the demand for meat, sir, which, in my judgment, has affected the prices of meat. Senator GEORCE. The demand for it, but also the scarcity of grains and high prices of grains, which very definitely affect the meat prices from your local farm community up. Secretary HARRIMAN. Your lack of corn has, to some extent, affected , this year's volume of certain categories of meat, but it is the demand that makes the price of meat. Senator GEORGE. It is the demand ? Secretary HARRIMAN. If people did not buy the meat, and there was a surplus of meat. regardless of what it cost to produce, your meat prices would go down. It is not the cost of production, it is the demand, in my judgment, which has caused the meat price rise. The CHAIRMAN. You would not contend, Mr. Harriman, the cost of producing the meat has no relation to the price? Page 10
Secretary HARRIMAN. Yes. The standard of living is, by and large, higher than it has ever been. But we have seen that with full employment there are demands on products which are beyond what had been foreseen, and I must confess it is very encouraging to see what can be done to increase the standard of living of our people when we have full employment. It will take some time before we get production in certain categories of products up to the point where we can satisfy the demands of our consumers with full employment. The CHAIRMAN. Going to the next step, then, the consumer spends his dollars for many items not in scarce supply at all, and he might spend some of them for some items in scarce supply. Is that correct? Secretary HARRIMAN. That is correct. The CHAIRMAN. And does not the Government do the same thing when it retains his dollar? Secretary HARRIMAN. When it spends the money, not necessarily when they retain the dollar. The CHAIRMAN. When it spends the money. Secretary HARRIMAN. If it uses surplus Government income to reduce the debt, it is deflationary. The CHAIRMAN. And when you get into that, I suggest, Mr. Secretary, you get into a very delicate field where you can pull your props very easily out of your own economy. In fact, I think it is the general consensus of governmental opinion that, perhaps, the ambitions which prevailed a year ago, let us say, for a very massive, quick debt reduction no longer prevail, and it is now realized you can produce a harmful contraction of credit if you redeem those bonds from places where they form a credit base. Secretary HARRIMAN. So far, Mr. Chairman, it is my judgment we are still in the inflationary period. What has happened so far to commodity prices in primary markets is helping correct the existing unbalance, rather than indicating a dangerous situation. In my judgment, tax reduction should be retained for a period when we are in a deflationary period rather than at the present time. That is my personal judgment. The CHAIRMAN. Let me ask you this question, Mr. Secretary: I take it, then, it is a part of your philosophy that the Government, as a matter of policy, is warranted in taxing the citizen on the theory that during certain periods of time it can spend his money better than he can spend it himself? Secretary HARRIMAN. No, sir; that is not my theory. The CHAIRMAN. I think it follows from what you have said, Mr. Secretary. Secretary HARRIMAN. No, sir. My view is that during periods of inflationary pressures the Government should extract from the economy as much as possible in order to reduce the debt. We must reduce the debt, and we must pay off our debt over a period of years, and the time to do it is during inflationary periods, in one of which we are now. I certainly believe that during an inflationary period the Government should limit its expenditures to the minimum that it can and still effectuate our basic policies. Page 11
The CHAIRMAN. Do I get the end point at which you have been driving so far, that taxes should not be reduced because if they were reduced it would increase the margins of savings which might be available for investment? Secretary HARRIMAN. No. It would increase the inflationary pressures and would add to the great demand for goods. The CHAIRMAN. Is it not your theory that you would increase the margins of savings out of which there might be capital to do the things which you think would be bad to do? Secretary #ARRIMAN. It is not clear that savings would result. As I have said before, the indications are that the consumer would spend more money, which, with the present volume of goods, would simply mean the same amount of goods would be bid for at higher prices. I resume with the text at the top of page 11. It might be added that à shiit in the form of investment—that is, from producers' durable equipment and inventories to construction—probably would be desirable, for the reason that we have been making good our deficiencies in the former more rapidly than in the latter. But for the present all forms of investment are in sharp competition for the available supply of materials, labor, and other resources. I shall review for you the evidence that we have on the current plans of business for capital expenditures, and on the size of the orders for capital equipment which manufacturers have on the books. Our available data, computed from reports by business concerns, reveal that business expects to spend 4.1 billion dollars on plant and equipment in the first quarter of 1948. While this is about $300,000,000 less than the estimate for the fourth quarter, it is well above the average for the four quarters of 1947. The drop from the fourth quarter of last year is of a seasonal nature, reflecting the slackening in the winter months. The first quarter estimate is more than one-fourth above the total in the opening quarter of 1947. We have under way at the present time a survey of the intentions of business concerning their capital expenditures for the full year 1948. The returns are not in yet, but when they are received we shall be glad to make them available to this committee. Senator BYRD. What were the total expenditures for capital investment in 1947? Secretary HARRIMAN. About $20,000,000. That is in table 1–19.9 billion. Senator Byrd. What do you estimate the total for 1948 to be? Secretary HARRIMAN. I have said that we are reviewing that, and we do not have the data at this time. I simply indicated that the first quarter is 25 percent ahead of the first quarter of last year, although it is somewhat lower than the last quarter of last year, the latter decline being seasonal. As I say, we have under way a survey of the intentions of business for the full year of 1948, and when the returns are in, I shall be glad to make them available to the committee if desired. Senator BYRD. Do you think it will be more or less than 1947? Secretary HARRIMAN. I cannot answer that question until we get the figures. I can only say that the estimates for the first quarter, which we have, are higher than the first quarter of last Page 12
The CHAIRMAN. Do not the railroads afford a textbook example of the danger of increasing the indebtedness of corporations out of proper relation to the equity capital? Secretary HARRIMAN. During the thirties, the overbalance or the large percentage of bond indebtedness as against equity capital was, of course, one of the reasons which contributed to the difficult financial position of the railroads. The CHAIRMAN. Is it not correct to say, Mr. Secretary, that with very few exceptions there is not an important railroad in the United States that has not been in and out of receivership, principally due to the cause that it could not meet fixed charges involved in its fixed indebtedness? Secretary HARRIMAN. If you go back to all time, I imagine that is true. I have been out of the railroad business for nearly 8 years, and I do not recall the history as well as I used to. But, generally speaking, most railroads have been in and out of receivership. The CHAIRMAN. The thing that puts a railroad or anybody else into receivership is because it cannot meet fixed indebtedness, is it not? Secretary HI ARRIMAN. Yes. Very few railroads were not able to pay their operating expenses. It was the capital charges. The CHAIRMAN. That is applicable to any business in tough times. Secretary HARRIMAN. That is correct. The CHAIRMAN. If they cannot meet their fixed charges, the banks take over. Secretary HARRIMAN. That is correct. The CHAIRMAN. Coming down to your net issues by type of security, I invite your attention to the fact that there was an increased issue of $1,000,000,000 in 1946, and a decrease to $900,000,000 in 1947. All of these figures are net! The CHAIRMAN. Preferred stock $300,000,000 in 1946, $100,000,000 in 1947. Bonds and notes, $1,000,000,000 in 1946, and $2,800,000,000 in 1947. Is that last item not a significant indicator of the substitution of indebtedness for equity capital? Secretary HARRIMAN. May I turn to table 8. It shows the historic percentages. The comparison of prewar and postwar stock issues, total new issues, between 1919 and 1928, all corporations, the percentage of equity financing was 32 percent. In 1929, you remember we had very high interest rates and a very high stock market. Stocks were selling on a fantastic basis. Senator Lucas. We had a high mortality rate, too. Secretary HARRIMAN. After the end of 1929, but during 1929, the stocks were selling at a very low rate of return and on a highly speculative basis. There were a lot of conversions. Between 1930 and 1941, 25 percent; 1946 was 42 percent; and this year was 26 percent. Mr. Meehan, do you know what proportion of those telephone convertible debentures were converted in the last few months? Mr. MEEHAN. One-sixth of the December 1946 issue has been converted. Of the December 1947 issue, we only have the figures for Page 13
The CHAIRMAN. Would you agree, Mr. Secretary, it is dangerous tendency! Obviously, if it is a dangerous tendency, it has to be stopped or it will become dangerous. Secretary HARRIMAN. It is a natural tendency for corporations to borrow when they can borrow very cheaply, and certainly if it continues, if there is an unbalance between debt and income, it becomes a dangerous situation. I pointed out earlier that at the present time only 8 percent of the income of corporations is taken by interest payments, today, whereas in 1929 it was 23 percent. The totals on debt: Taking 1930, which was the peak, $61,000,000,000 of long term debt of all corporations whereas in 1947 it is $53,000,000,000. In total indebtedness of all kinds, it is about 112 as against 107. The corporations reduced their debt from $110,000,000,000 in 1943 to $99,000,000,000 in 1945. The CHAIRMAN. Let us have the income levels for the years you are comparing. Secretary HARRIMAN. I have not got the income levels. The CHAIRMAN. Would it bother you unduly if they were supplied, and in connection with reading that, you read us the income levels? Mr. MEEHAN. Do you want the national income, Mr. Chairman? The CHAIRMAN. That will be all right. Secretary HARRIMAN. In 1929, when our national income was $87,000,000,000, the total debt was $107,000,000,000, whereas in 1946 our national income was $178,000,000,000 and our corporate debt was $102,800,000,000. The CHAIRMAN. What relevancy does that leave to your figures? Secretary HARRIMAN. I thought you asked for the national income. At a time when we are on a very much higher basis of business activity, our debt situation is not substantially different than it was in the period of very much lower business activity. The price levels, also, of course, were quite different. The CHAIRMAN. I believe this would be a good tme to ask you to bring your theories in relation to what may happen around here in the way of a tax reduction bill. I think we agreed earlier in the day, at least it would be implied from what we discussed, as far as the reduction going to the lower income brackets is concerned, we cannot count on that as a source for risk capital. Is that correct? The CHAIRMAN. As to the effect of any reduction tax bill passed here, the reduction that goes to the lower brackets would not constitute a source for risk investment capital, would it? Secretary HARRIMAN. No. The CHAIRMAN. So it follows, then, we have to look to the middle and upper income brackets for that. Secretary HARRIMAN. And to corporate savings. The CHAIRMAN. It has been predicted, and I am not taking the liberty of setting any figure, when finished we will have a tax-reduction bill somewhere, say, in the order of $4,500,000,000, something like that. Page 14
A more important difference between the cost of investment funds today and in the twenties lies in the trend of interest rates. Although interest rates have gone up moderately in recent months, they are still low in historical perspective. Corporate bond yields currently average 3.1 percent as compared with 7.0 percent in the early twenties, 5.2 percent in 1929, and 3.8 in 1939. Commercial loan rates charged customers by banks in principal cities now average 2.2 percent as compared to 2.8 percent in 1939 and much higher rates in the twenties. Lower rates, of course, are paid by large, well-established firms, while new and small concerns typically pay higher rates. It is rather striking that the average rate paid on the very substantial amount of term loans extended by banks—that is, loans with maturity over a year—is slightly less than 2 percent. Such loans were virtually unknown prior to the mid-thirties. If we turn to table 9, we will see what I said of the ratio. You take the bond yield of the first column and the dividend yield of the second column. "You will see that the latter in January was 5.4 which does not differ much from the ratios up to the middle twenties. After that, of course, we went into the bull market. On the basis of earnings, you will see the ratio of 11.3 today is the same as last year, and in the middle twenties you have comparable figures. In the bull market, of course, they sold on a very much different basis. The CHAIRMAN. Mr. Secretary, cannot a strong argument be made that the current dividend yield on common stocks in their ratio to price indicates that people are not interested in equities? Secretary HARRIMAN. If you compare the current period with the recovery period in the middle twenties, you will see that the present dividend yield in relation to the market value is not much different than it was for the average between 1922 and 1926. You have to get to 1927, 1928, and 1929 before your dividend yield was lower in relation to price. From the standpoint of earnings, you will see the recent ratio is the same or about the same as between 1923 and 1926. So that your price today in relationship to dividend and earnings is much the same as it was between 1923 and 1926. So, it does not lend color to the idea that stocks are selling at a very low basis, compared to their dividend yield and earnings. The CHAIRMAN. Do they sell at a low basis in relation to the low interest rates you are speaking of? Secretary HARRIMAN. In relation to the low interest rate, yes. The CHAIRMAN. So that people have a choice of going in for low interest rates or taking these equities! Secretary HARRIMAN. Yes. Secretary HARRIMAN. There is a large amount of savings that is going into insurance policies and increasing assets of insurance companies which are going into bonded indebtedness, I resume from my statement, page 21. While the adjustment of the premiums on Government long-term bonds and the advance in the short-term rates have resulted in some adjustment of yields, the general policies with respect to the management of the public debt have not been changed. I comment on this only briefly since the officials responsible for these matters have already presented their analyses and views to the Congress. My point is that, insofar as the availability of funds for the needs of business is concerned, the changes in money markets have influenced the rate structure only in a slight degree. The changes do not alter the general picture of low costs for borrowed capital. Page 15
facturing of goods, and delivery of goods, which take a lot of time. Is that not correct? Secretary HARRIMAN. That is certainly correct as far as business expansion is concerned, and investment in capital developments. I have been trying to show that we are on a high level of capital investment at the present time, and therefore at the moment there does not appear to be any danger in that area. Mr. CHAIRMAN. I would like to say that I, of course, am very strongly of the opinion that we are in an emergency period in this country, both in our relations to the world as a whole and in our inflationary pressures at home. I do feel this is a very definite year of decision on the part of the American people in terms of whether they will undertake the responsibilities which I believe are in the interests of the American people in the world situation, which will require substantial sums of money. And I do, of course, think it will add to our inflationary pressures. At home, I think we should guard against a boom-and-bust period which would have a serious effect not only upon our own position but upon our position in the world. So, what I am saying is, in light of my feeling that we are in a very in the history of our country, and therefore, I really must earnestly say I do not think it is a year to reduce taxes. I think, for one, as a taxpayer, it is better for all of us to pay our taxes for this year and to have its attendant effect of giving to the Government the money needed for programs proposed to Congress, and not to add to our inflationary pressures at home. It will mean the deferment of the fulfillment of the desires of many of our people for many of the things they want, but in relationship to the events in the world that are taking place, I thing it is wise for us to go through that period. We are in a period that is not quite comparable to war, but we are in a period where there are definite forces at work which may well lead to this country facing a very dangerous situation in the next few years. So, I say this because I am not dealing entirely with the economic situation in this country. Although part of it is that, the other part is the whole situation. I think we must be strong at home as well in order to face the situation abroad. The CHAIRMAN. I agree entirely with what you said, except I do not believe you brought tax reduction into relation with it. The great mass of people in this country, I suggest to you, sir, have homely economic philosophy and homely philosophies as to foreign 'affairs. They do not go through these intricate economic minutes with which we concern ourselves with at these hearings. If you want to sustain the things you are talking about, I respectfully suggest the best way to do it is by this dramatic way, if you please, of letting the American people know we are solicitous about their pocketbooks as we are about the pocketbooks of people abroad. Secretary HARRIMAN. Sir, I am not interested in the pocketbooks of people abroad per se. The CHAIRMAN. I understand that. Secretary HARRIMAN. What I am interested in is world stability and the preservation of the free institutions which we all believe in. Page 16
But what I have said is my earnest conviction. I When you have got a period where corporations are making $17,500,000,000 net after taxes, and Senator HAWKES. May I ask the Secretary to interrupt there? Cut that in two, and take a little more off, and then you will have reality. Secretary HARRIMAN. You can figure whatever way you want. Senator HAWKES. You have a 40-cent dollar, and have got replacement charges. Senator Lucas. Mr. Chairman, I would like to let the witness finish his answer, if he is going to make another speech. Senator HAWKES. Would the witness mind? Senator HAWKES. I want to tell you the American people are overlooking something. We had an explosion and a fire, and we have just replaced a building, and it has cost us over three and one-half times the cost 20 years ago, and the people are forgetting that. I beg the pardon of the Secretary for interrupting him. Secretary HARRIMAN. One of the reasons why construction costs are so high is that so many people are bidding for the available labor and material, and they are out of line with what even today should be those costs. Senator HAWKES. Mr. Chairman, may I ask the Secretary how they are going to help that if they stay in business? Secretary HARRIMAN. They cannot help it, but we can, certainly. I think we can help by not adding to any inflationary pressures which exist today. If I may say this: I do not, in spite of what many of my business friends whose judgment I respect believe, withdraw what I say. I still earnestly believe what I have said. I do not see any indication there is a diminution of incentives at the present time. There are these very large earnings of which I have spoken. It is perfectly true that in the future, in my judgment, there must be tax reduction and tax adjustments in which depreciation allowances should be taken into account in relation to what may be the permanent base for those replacements. But I see no indication in the economy that business is not expanding at as high a rate as our economy can justify today, and we would go into a greater boom than we are in today if there were more incentives. You may look upon our interests in the world as a humane interest. That is involved, of course, in all the people of America and what they are doing. But I am looking on the programs which have been proposed as the basic self-interest of the United States, and I would not want to see, or be party to, policies which would turn the people of western Europe over to the domination of an aggressive force which is coming from the east. Russia is a country of 180,000,000 people that are backward, that have no ability to produce as we or the people of western Europe have. If you add to the domination of Russia, eastern European countries, that have higher standards than Russia but still are backward compared to the western Europe, some 80 million people, is what you have. But in western Europe, you have 260 or 270 million people who are Page 17
Each of these three sources have been used in the past, and I am confident that this committee will insist that the third source be avoided if it is at all possible. We can use all the statistics which the Secretary of Commerce has given you, the Secretary of the Treasury has given you, and that are in the Budget, but it comes down to a very simple matter. For example, if we turn to table 9, which the Secretary of Commerce gave you, if those figures represented figures after taxes, we would not be here today. For example, he shows that dividend yield in 1948 for January was 5.4 percent. I might indicate that those figures cannot possibly be figures with respect to all common stocks. I expect they are figures with respect to a so-called list of 100 industrials. Let me analyze it just a minute. Suppose, Mr. Chairman, you and I decided to put a thousand dollars into a corporation. The managers of that corporation convinced us that the corporation could make 10 percent on that thousand dollars and could make it with some regularity. We would be just a little bit gullible if we accepted the regularity for the entire future, but we do see prospects of 10-percent profit. That gives us $100. Now let me assume that the corporation is one which will pay a 38-percent tax; $38 of that $100 immediately goes to the Treasury; that gives us $62. . Let me assume, which is very contrary to sound business practice, and very contrary to accepted practice, that the corporation distributes to you and me that entire $62. Normally it will not. It would distribute maybe half, maybe 60 percent, and maybe 70 percent. But for purposes of my illustration, I would like to keep it a little bit simple. It distributes the entire $62. How much do we have left after taxes? The point I want to make is it is the dollars after taxes which will attract equity investment, investment in bonds, or any other type investment, just as it is on the dollars after taxes with which we support our families and our churches and our charities. Assuming that you and I were small individuals, about $12 of the remaining $62 would be taken; so that 50 percent of that enterprise earnings, in case our net incomes were not in excess of $2,000, would be taken in tax. As we go up the brackets we find that more than 90 percent will be taken in taxes. If we were to have $5 left out of a hundred, or $50 left out of a thousand, just think how long it takes us before we get our capital back. If a minimum of 50 percent goes for taxes it would take a long time. Exactly as you said, Mr. Chairman, it is not the $2,000-a-year man who places his funds into productive enterprise. It is the larger income group. It must be. So, we are faced with two situations. Page 18
I do not want to get into an argument upon statistics, except to say probably the estimates we made last year were quite a bit more accurate than those the Treasury made. I think the estimate which Mr. Stam and the joint.committee made, which are in the House-committee report on the pending bill, are far more correct, and have proved to be far more correct than the estimates of the Treasury. But, in any event, we have for the years 1948 and 1949 a minimum of $16,000,000,000, and probably as much as $20,000,000,000, available for debt reduction or tax reduction. I cannot believe that people who are familiar with the fact of the reduction of the public debt are going to insist that 16 to 20 billion of the debt be reduced in 2 years. I should think they would be much more interested in making certain that we maintain a national income in excess of $200,000,000,000 and maintain a national output of $240,000,000,000 to $250,000,000,000 so that we will have resources with which America can amortize our public debt in a sensible, orderly way, and at the same time reduce taxes. If those who insist upon reducing the public debt would realize the effect upon the public debt of merely a slight recession, or even a more serious depression, with all the effect upon our receipts and a concurrent effect upon the demand for expenditures and upon our expenditures, they would, I say, argue not for a 16 to 20 billion dollar reduction, but for a sound and sane America under which the public debt can be properly controlled and managed and paid. The House bill does not go nearly as far as we hoped it would. I think if the two bills last year had not been vetoed, we would have had another tax-reduction bill this year which would give us still a further step toward a peacetime tax system, The CHAIRMAN. It is apparent now, I suggest, that we could have had a reduction last year and would have had the surpluses which we predicted at that time. Mr. ALVORD. Without any question, Mr. Chairman. As a matter of fact, I am tempted to cite your estimates as rather conservative. You will recall—and I am relying on my memory only—that the Secretary of the Treasury was insisting on a national income of $167,000,000,000 for the basis of his estimate. And I think you said, “Suppose we go to $175,000,000,000 or $180,000,000,000." Now, our national income is at a very definite trend upward which, as far as I can see, is continuing and will continue throughout 1948. It is $210,000,000,000 now as compared with $202,000,000,000 just a few months ago, and I see no signs at all of the curve starting the other way. That is the basis of the estimates in the House committee report. I think they are rather conservative in suggesting that we will have an average in the year 1949 of $200,000,000,000. I think you are going to have more than that. If I were to leave one message with you, it would be to insist this bill is followed by other bills. Corporate taxes must be reduced. Page 19
He points out that: The American worker gets the tools he uses from individuals who do not spend all of their income for consumer goods and services, but save part of their income and invest it in tools. In this country, most of the tools were accumulated in the 30 years prior to 1929. During the period 1920–30, the period of greatest expansion in new and better tools, new capital issues average $6,000,000,000 dollars a year. Most of the savings which made possible these new and better tools, came from those in the income bracket of $5,000 and over. This was possible because the Government did not take their savings in taxes, but permitted these savings to be invested in business. In 1933, however, a new tax policy was adopted in this country. It was based on the mature-economy and planned-scarcity theory, which maintained that our national economy had too many tools due to a maldistribution of national income by which too much income went to the upper classes, and therefore into savings and not enough into purchasing power. In line with this theory, the Government adopted the policy of taking in taxes a large part of the savings of those in the income bracket $5,000 and over, and especially those in the income bracket $25,000 and over. Funds, therefore, were simply siphoned from the private-capital market to the Government. Private investment practically ceased. From 1933 to 1945, new capital issues averaged less than half a million dollars a year. For the first time in our history, during the period of 1930–40, our economy went backward instead of forward. The national tool account (capital) fell 19.4 percent from 1930 to 1940. Those who suffered most were the workers, because the result of such tax policy could have been nothing but continued economic stagnation. This actually was the case. Evidence is the fact that in 1940, after Government expenditure of these savings taken in taxation, the country was still in depression. And there still were 7,000,000 workers unemployed. It would have been much better if these savings had been permitted to remain in the hands of individuals, to be used to create more and better labor-aiding tools—the vital ingredient of our unmatchable standard of living. Today the former exponents of the planned-scarcity economy have shifted ground completely; they now advocate an expanding economy, for example, labor's demand for increased steel capacity. Unfortunately, they do not say where the funds will come from for this “expansion for full employment.” They advocate continuance of the extremely high income taxes on those incomes which in the past have accounted for new tools. And they also demand an icreasing share of profits which today are the important private source of new tools. Therefore they logically must advocate that business expansion be made from Government funds. This is socialism. One need look no further than Great Britain and France to see what that kind of socialism has done for the working people. It is most important that immediate action be taken for the reduction of taxes on individual incomes. The tax rates on all income groups should be reduced but with particular emphasis on the tax rates applying to incomes below $4,000. The percentage reduction set forth in H. R. 4790 is acceptable as a start in the direction of lower personal income tax rates. Eventually the highest rate in the top bracket should not exceed 50 percent. We urge that the specific exemptions remain at the present levelthat is, $500 for each taxpayer and dependent. H. R. 4790, title II, section 201, paragraph (1) (a) increases the personal and dependency exemptions to $600. The increase of only $100 in such exemptions results in an estimated reduction of $2,010,000,000 (see table XII, Ways and Means Committee report). It is further estimated that approximately 3,500,000 persons will be eliminated from the tax rolls. We firmly believe that the income tax should be levied on as broad a base as possible. All of the people should be conscious of our fiscal and economic problems. All who enjoy the freedom of liberty afforded Page 20
In periods of inflationary danger, even in peacetime, 212 years after the end of the war, we are threatened with such things as price control and rationing: In periods of depression the threat of direct governmental controls is even greater and more insiduous. Unless we promote economic stability by every means possible our whole foundation of free enterprise will be seriously threatened. Grange members saw during the war how huge budgetary deficits poured an excessive amount of purchasing power into our economy. Prices rose to such a high point that we attempted to hold them in check by price controls. For 212 years after the war this excessive purchasing power has continually threatened us with further inflation, in spite of the fact that production of goods and services has been at unprecedented levels. A budgetary surplus just the opposite of a budgetary deficit drains off purchasing power from the economy. If the budgetary surplus is used to retire Government bonds held by commercial banks it serves to contract credit and has the effect of actually extinguishing money, that is, demand deposits. In view of these facts, Grange members have come to certain conclusions. - They are overwhelmingly, and with strong conviction, opposed to any general income-tax reduction at the present time, and as long as inflation is with us. In other words, we favor the largest possible budgetary surplus to retire Government debt under present tax rates and rigid governmental economy. It is high time, 21/2 years after the war's end, that we settle down to a firm and stable price level if we are to maintain a stable and prosperous economy for years to come. It is frequently said that no one is really concerned with inflation. If this philosophy holds sway, there will someday be a rude awakening and a reexamination of the past. Grange members have another reason of equal importance with that of economic stability, for opposing tax reduction at this time. If we are ever to reduce our national debt, we must do so in periods of prosperity. It is a happy coincidence that fighting inflation by fiscal measures is in perfect harmony with our desire to reduce the national debt. Unless we reduce our national debt now when we can, our Government may face a dire crisis when and if a depression should come upon us. If doubt should ever arise as to the ability of our Government to meet its obligations, it might mean the downfall of our form of government. Certainly it would mean disasterous inflation or repudiation. Should a depression come, it is likely that there will be need for deficit financing. The more we reduce the national debt now the stronger the position of our Government regardless of what the future may hold for us. Even if we should reduce the national debt at a rate of 5 billion dollars every year it would still take more than 50 years to retire it. Judging from past experience, we know that deflation or low prices is our problem about half of the time, and in these years the rate of debt retirement will be greatly reduced as it should be. Furthermore we know that even in some peacetime years we may add to our national debt, as we did in the 1930's. And while we hope Page 21
Per capita cost of government
1894. $12. 50 | 1930_ $89. 76 1902 17. 05 | 1940. 135. 79 1913 27. 32 1947 350.00 1923. 74.00 In our fiscal policies we also must take cognizance of the fact that our Federal debt is today about $250,000,000,000. Interest on this debt is approximately $5,000,000,000 a year. It is evident that public finance has attained such proportions that today unsound tax policies could easily cause booms and busts. Even more serious is the fact that today unsound tax policies could bring to us the despair of economic stagnation, the chaos of inflation, the defilement of the integrity of the national debt, and, worst or all, the fall of our form of government and our ideals. It is for these reasons that we strongly endorse the words of the national master when he says, “It would be more statesmanlike if those who are doing so much talking and making so many promises to cut taxes would turn their energies to cutting expenditures and reducing our debt. Cutting income taxes has a strong political appeal among a limited group, but it would be far better to pay our debts while we are able to pay and reduce the dangerous inflationary pressures we are under, rather than to increase such pressures, as cutting taxes instead of debts would do." Because of the tremendous importance of sound tax policies to our national economy and our form of government, every group in America should take upon itself the responsibility of bringing to its members the opportunity to understand the workings of taxation in our economy. Then every citizen would be able to judge for himself whether a certain tax proposal would damage or improve the performance of our system. This is the only safeguard against acceptance of specious arguments and public response to irresponsible political appeals. Our ability to establish such a safeguard may well be the real test of our democracy. At this point we again quote the national master: “Wild statements that reduced taxes would encourage such an expansion in industry that the additional income would actually increase tax receipts are not impressive in light of the fact that business is more prosperous than ever before, and those who can get the location, the equipment, the material, and the labor are already going into business as fast as they can.” Any increase in the national income that might result from lower taxes would be in dollars and only to a negligible extent in goods and services produced-plainly more inflation.
GOVERNMENTAL EXPENDITURES
Resolution No. 47, by Holmes, is covered in the statement below : While Government spending is not a part of taxation, it is directly related to it. In a republic governmental expenditures should be limited to those services necessary to protect the citizens from physical and economic aggression and to permit the citizens to provide themselves with economic, social, and cultural benefits not otherwise satisfactorily obtainable. Whenever an appropriation is proposed consideration should be given not only to the value of the services to be provided or objectives to be attained, but also, in addition, consideration should be given to the possible adverse effect of higher taxes upon the performance of the economy. Every possible effort should be made to gain economy and efficiency in government. A careful examination should be made of all departments of government in order to eliminate useless and unnecessary jobs and even projects. Agencies and bureaus created to provide services for which a need no longer exists should be abolished. We endorse the recommendation of the national master that the various committees of Congress equip themselves with adequate staffs to make thorough and continuing independent studies of all the administrative departments of government. We recommend in addition that the selection of people for these staff positions be purely on the basis of merit and completely divorced from political patronage. Because of the tremendous expenditures for national defense, we recommend that the National Grange urge representatives of our Government in the United Nations to direct their energies toward speedy adoption of a program of world-wide disarmament.
Outlays for foreign relief, reconstruction, and development should be held to a minimum, consistent with recovery and humanitarian considerations. Aid to any foreign country should be contingent upon that country's making a maximum effort to take care of her own people and to attain recovery as speedily as possible.
We recommend the following guideposts for the National Grange tax policy: 1. Taxes should be based on ability to pay and benefits derived and should fall equally on persons in like circumstances. 2. The tax system should impose the least possible restriction upon the expansion of production and employment and the launching of new enterprises and should absorb as little as possible of the buying power of consumers. 3. Taxes should be adequate to meet the cost of government and to maintain confidence in the integrity of the dollar and the public debt. 4. Our debt-retirement policy (budgetary surpluses and deficits) should be coordinated with economic conditions to promote a stable price level, full employ. ment, full production, and an expanding economy. We make the following specific recommendation regarding taxation :
Each State, by constitutional amendment or otherwise, should prevent diversion of highway funds to nonhighway purposes.
1. Averaging of income and carrying forward of losses for a period up to 3 years should be allowed. 2. Personal income taxes should be maintained on a broad base. 3. To discourage corporation farming and large capitalists from acquiring large acreages of farm land, losses on agricultural opertions should be deductible only from income derived from agricultural operations. 4. Equality in Federal income taxation should be established among those States which have community-property laws and those which do not.
1. Because it appears that taxes imposed at death are less likely to have a depressing effect on incentive to enterprise and production and consumption than other taxes, increased revenues should be obtained from this source. 2. The use of trusts and gifts to escape taxation should be investigated and these avenues of escape closed.
Be it resolved, That the National Grange go on record as opposed to any general sales tax, as putting an unfair burden of the costs of government upon the poor, and as supporting only sales tax on special articles of trade such as luxuries, liquor, tobacco, and other nonessentials; and we oppose the use of a graduated tax on cigarettes. Whereas consideration is now being given to the revision of the Federal tax structure for the purpose of formulating a fair and equitable tax policy; and Whereas the imposition of excise taxes on automotive and petroleum products by the Federal Government constitutes unfair and discriminatory taxation and imposes an unfair burden on motor-vehicle owners; and Whereas these taxes were originally imposed in 1932 as temporary measures to provide revenues during the period of the depression and were continued and increased during World War II; and Whereas the emergencies for which these taxes were imposed do not now actually exist and there remains no valid reason for their continued imposition; and Whereas these taxes constitute an invasion of a field of taxation by the Federal Government which properly should be reserved to the States: Therefore be it Resolved, That when Congress moves to reduce taxes the National Grange strongly urges the repeal of all Federal automotive excise taxes, including the Federal tax on automobiles, trucks, trailers, busses, automotive parts and accessories, tires and tubes, and gasoline and lubricating oils.
Whereas taxes are levied on the manufacture and sale of oleomargarine; and Whereas producers and the consuming public have mutual interests in the manufacture and consumption of oleo: Therefore be it
Cutting expenses is an altogether different matter. After 15 years of reckless expenditures, it is going to be difficult to reduce what appears to be a top-heavy governmental structure without impairing some activity which has become essential by reason of great changes brought about by war or other causes. Reductions in inflated Government pay rolls and unnecessary activities should have our strong support, but we should not talk about cutting taxes until savings in expenditures have actually been made and substantial sums applied on debt reduction. Wild statements that reduced tax rates would encourage such an expansion in industry that the additional income would actually increase tax receipts are not impressive in the light of the fact that business is more prosperous and making more money than ever before, and those who can get the location, the equipment, the material, and the labor are already going into business as fast as they can. On the other hand, we must face the fact that most nonmilitary departments of the Government, which were compelled to expand tremendously because of war conditions, have made little or no progress in curtailing their activities, while some have unnecessarily enlarged them. Despite the fact that it is illegal for a Government employee to attempt to influence members of Congress on pending legislation, many bureau chiefs and employees have carried on well-organized campaigns to prevent putting any economies into effect and have gone unpunished, although the law provides specific penalties for the offense. The Congress and the administration itself are faced with very real difficulties in trying to secure economical administration. Government operations are so vast that no one can know what is actually going on in more than a few departments, and must depend upon department heads and bureau chiefs for their information. It is only natural that these officials should be enthusiastic over the possibilities for service which lie within their jurisdiction, “if we only had the money.” There is every urge for expansion, from the messenger to the bureau chief, and it is largely from this service that Congress must get its information. I renew my previous recommendations that the various committees of Congress equip themselves with adequate staffs to make thorough and continuing independent studies of all the administrative departments of government. The members of the Congress should not have to devote days and days to detailed investigations which at best are mostly inadequate. Neither should this responsibility be placed on the Comptroller's Office, which is an administrative unit itself. Its work should be to see that the accounting is adequate and accurate, but beyond this it has no business interfering with the operations of other departments or endeavoring to direct policy decisions with reference to them. Policy matters should be determined by the Congress in the light of its own investigation. Economy would be served if corresponding committees of both Houses would maintain joint staffs for these studies. A few million dollars judiciously invested in this work would pay dividends of several thousand percent. The attack on the tax status of cooperatives is a campaign largely waged by deception and misrepresentation. The cooperative method of doing business by joint employment of an agent to do the buying or selling for the members at cost has long been accepted as a legitimate and efficient method of operation. The patronage refund is the very heart of that method. Most of those attacking the cooperatives say they do not want to put them out of business and are not opposed to the patronage refund, but want to tax the "enormous” reserves which give the cooperatives such an advantage that they are driving other business out of the field. The president of the National Tax Equality Association, however, in his testimony before the House Small Business Committee, makes it clear that the real attack is on the cooperative method of doing business, saying: “The freedom of patronage refunds from tax liability is the main issue of the controversy.” If cooperatives are enjoying special privileges by piling up unallocated reserves, I believe the law should be amended to give equal treatment to all. However, the facts are that the amount of such "evasion,” if it exists, is so small as to be practically negligible. Taxing such reserves would not stop the hue and cry against cooperatives. The real motive is to tax patronage refunds out of business, and with them the whole cooperative system. We should resist this to the limit of our ability.
Percent 13.5 12.0 12. 6 11.6 12.4 11.5 11.3 15.6 16.6 14.9 11.4 6. 5 8.0 7.9 7.9 9.1
1910. 1911. 1912. 1913. 1914. 1915. 1916. 1917, 1918. 1919. 1920. 1921. 1922. 1923.. 1924, 1925. 1926. 1927 1928 1929. 1930. 1931 1932. 1933. 1934. 1935. 1936. 1937 1938. 1939 1940. 1941. 1942 1943. 1944. 1945. 1946.
Millions $7, 352 7,081 7, 561 7, 821 7, 638 7,968 9, 532 13, 147 16, 232 17, 710 15, 908 10, 478 10, 883 11, 967 12, 623 13, 567 13, 204 13, 251 13, 550 13, 824 11, 388 8, 378 6, 406 7, 055 8, 486 9, 595 10, 643 11, 265 10, 071 10, 547 11, 010 13, 894 18, 569 23, 035 24, 187 25, 432 28, 933
Millions $4, 450 3, 915 4, 335 4, 387 4, 516 4, 3955,055 8, 329 9, 6609, 877 8, 368 3, 795 4,850 5, 6085, 560 6, 866 6, 617 6, 314 6, 6876, 741 5, 114 3, 482 2, 285 2, 993 3,531 5,052 5, 361 6, 093 5, 041 5, 262 5, 361 7, 723 11, 286 14, 138 13, 531 13, 711 16, 649
Millions $33,064 32, 490 34, 456 37, 762 36, 367 38, 254 44, 913 53, 360 58, 121 66, 136 73, 393 58, 333 60, 517 70, 675 70, 634 75, 187 80, 396 78, 502 81, 044 85, 954 75, 364 59, 853 43, 605 42, 006 49, 448 56, 398 65, 707 61, 556 66, 41271, 515 78, 364 95, 266 122, 477 151, 358 161. 882 163, 170 167, 176
Percent 22. 2 21.8 21.9 20. 7 21.0 20.8 21. 2 24. 6 27.9 26.8 21.7 18.0 18.0 16.9 17.9 18.0 16.4 16.9 16.7 16.1 15.1 14.0 14.7 16.7 17. 2 17.0 16. 2 18.3 15. 2 14.7 14.0 14. 6 15. 2 15. 2 14.9 15.6 17.3
8.0 8. 3 7.8 6.8 5.8 5. 2 7.1 7.1 9.0 8. 2 9.9 7.6 7.4
8.1 9. 2 9.3 8.4 8.4 10.0
Including Government payments, 1933–46.
Mr. HALVORSON. I would like to say a little more on the matter of equity capital. Not only are the liquid assets of corporations high but even the assets of the higher income people is such that they hold a great volume of governmental bonds and other things like that, and that they could, if they were willing to venture, cash them in and get money that could be invested in stocks. Secondly, we do recognize that equity capital is a serious problem. But we do not like to think-and I think it is unsound—that the only way to keep our capitalistic economy going is to have a class of capitalistic plutocrats. We think if we are going to have a strong democracy we need a lot of capitalists. Therefore we think that every thought should be given to devising ways in which a small saver can invest in equity capital, or make equity investments. For example, investment trusts is one method. It might be that insurance companies should eventually be given authority to invest in common stocks. We know that over the long run, if they could just pull through the downs, they are going to get a higher return on equity investments. 7260548-31 Page 22
The CHAIRMAN. Maybe I misunderstood you. Do you believe that Ꭰ credit contraction is a method of fighting inflation or is it not? Mr. HALVORSON. I believe it is a method of fighting it, yes. I believe that credit contraction is a way of fighting inflation. The CHAIRMAN. Do you remember what happened in the 1920's as far as agriculture was concerned, as to unwise credit contraction? Mr. HALVORSON. Yes. It was not only due to credit, however. I studied that. It was also due to the falling off in the export demand of farm products. The CHAIRMAN. You know what the immediate result was as far as credit operations were concerned ? Mr. HALVORSON. The farmers could hardly get any credit. We have improved that considerably since that time with the Federal land banks, and other institutions. The CHAIRMAN. But if you take out the credit base for these credit institutions they necessarily must contract the credit. Mr. HALVORSON. I do not know how you would take out the credit base. The Federal Reserve System creates excess reserves by going into the security markets and buying Government securities or in some other way to increase excess reserves to the bank. The CHAIRMAN. There are other ways of contracting the credit of banks. You can regulate their credit margins. Another is that you can take indebtedness, Government bonds, out of the Federal Reserve System. Mr. HALVORSON. Yes. It is within the scope of the powers of the Federal Reserve to increase excess reserves of member banks thus giving them more base to expand credit. The CHAIRMAN. Do you believe that they can do that? ? Mr. HALVORSON. In the event of a depression or any indication of a downward spiral, I would say "Yes." The CHAIRMAN. I suspect that we are talking of two different things. Mr. HALVORSON. We have studied this considerably, the farm organizations. We have given considerable thought to it because of the importance, as our members realize, of fiscal policy to national economic stability to their own welfare." The CHAIRMAN. I may say that I have seen results of a poll taken among farmers by one of our Senators, which showed that the farmers in his State, assuming that the poll is representative, are 3 to 1 for tax reduction. Mr. HALVORSON. We have a lot of farmers in our organization, over 800,000 of them, members, Grange members, and in our convention there was not a single bit of sentiment expressed on the floor for tax reduction. The CHAIRMAN. Do you feel that you are competent to say right now how much debt retirement we should have every year! Mr. HALVORSON. I would say that we should have as much as we can, without causing a deflation to such an extent that production and employment falls off. The CHAIRMAN. Are you prepared to say, for example, that the Government could put its entire surplus of 1948, of seven and a half or eight billion dollars, into a debt retirement between now and the Page 23
The CHAIRMAN. Your thought is that the Government as such does not set up these so-called productive enterprises, whereas, the citizen, if he is allowed to keep some of his money, will set them up? Mr. HALVORSON. Generally that is it. The CHAIRMAN. How do you reach a figure of 95 percent and say that you would favor a modest tax reduction in case employment should fall below 95 percent of the labor force? Why not 90 or 96? Mr. HALVORSON. Ninety-five percent would mean about 3,000,000 unemployed. Even last summer, while prices were still rising, we had about 2.6 million unemployed. Therefore we feel that that indicates that 2.6 million unemployment would not necessarily reflect a deflationary tendency, probably due to shifts in employment from one business to another, and so on. We feel that at 3,000,000 it means that some people are going to be out of work quite a while, but if it is not more than 3,000,000, a worker by looking around enough can find a job, and that is necessary to bring about adjustment from the contracting enterprises to expanding enterprises, we feel that 3,000,000 is about the figure. The CHAIRMAN. You recognize then that a tax reduction does have a direct effect on employment? Mr. HALVORSON. Yes, sir; certainly. The CHAIRMAN. But if in our judgment we will be putting an anchor to windward, we ought to have the bill ready to go. Mr. HALVORSON. That is right. The CHAIRMAN. And in view of the lag between the effective date of the act and the effective effect of what we are doing, it might be entirely reasonable if we conclude it might be done now. Mr. HALVORSON. I do not think there is any indication in the situation before us that we are facing deflation. I think there would be a rather prompt response to a cutting of taxes, particularly in consumer demand, because many people are on the withholding basis for taxation, if people at the end of this week would get $5 more and go to the stores this week end and buy more things at the stores, that would mean that the factory would receive more orders, and they would hire people to produce more goods. I think that as far as consumers' goods are concerned, the action would be rather prompt. The CHAIRMAN. All expenditures made in the so-called consumer market are not inflationary. Mr. HALVORSON. Expenditures in the consumer markets? Mr. HALVORSON. No. But generally, as far as the price level is concerned, they do have a general effect on the price level. The CHAIRMAN. They might affect meat? But if all prices would fall together, I think farmers would be very happy. They would not like to see their prices fall and none of the others. But, generally, I think that everybody realizes that their savings would go a lot further, and would have a more-lasting effect upon the markets and prosperity of this country, if prices were lower, so that their savings would buy more, would keep production rolling Page 24
Mr. HALVORSON. I say they probably were higher. I did not pay particular attention to those figures when I saw them in the past. But I believe they are still low compared to say the average period of the 1920's. The CHAIRMAN. The significance is that they are increasing. Mr. HALVORSON. Probably so. But a lot of businesses that are inefficient probably should go out of business. The CHAIRMAN. New issues in 1946, 900 million; new issues in 1947, 800 million; new issues in 1946 of preferred stock, 400 million; 500 million in 1947, new issues of bonds and notes, 1 billion in 1946; 2.6 billion in 1947. Mr. HALVORSON. I would like to make another point as to the sale of small businesses and farms. When prices, farm prices are low, incomes are low, the voluntary sale of farms goes down. I think that same thing is true in business. It is when prosperity is here that you get a large volume of transfers of businesses and farms. The CHAIRMAN. Do you believe that the progressivity of income rates should be preserved as we increase taxes? Mr. HALVORSON. As you reduce taxes- Mr. HALVORSON. We ought to maintain progressive taxation, yes. But if we did increase taxes it should probably be the same way as we suggest a reduction in taxes, 5 points for people in the lower brackets, 5 points for those in the higher brackets. The CHAIRMAN. Of course, you understand that your system does not apply progressivity of our tax rate, when we are going up. Have you made any study of the amounts of income taxes which different bracket taxpayers pay in relation to the income dollar? Mr. HALVORSON. I do know that out of around $50,000 a taxpayer pays around half of his income for taxes. The CHAIRMAN. I suggest that you read the record that has already been made. I notice your suggestion that when we decrease we should decrease 5 points all the way along the line. Mr. HALVORSON. Yes. That would give a higher percentage tax cut for the lower income people and a somewhat smaller percentage cut for the higher income people. The CHAIRMAN. That would preserve, if there are inequities in the present rate of progressiveness, that would preserve them and add to them under what you have just said. Mr. HALVERSON. If they are inequities, yes. The CHAIRMAN. Are you content with the present rate of progressiveness? Mr. HALVERSON. Yes. Our members—and I am speaking for them mostly-I think that they are satisfied with the present rate of progressivity in taxation. The CHAIRMAN. You think that the existing rate of progressivity is a wholesome thing for the long-term economy of this country? Mr. HALVERSON. Yes, I do. At least our members do think so. The CHAIRMAN. Thank you very much for your presentation, Mr. Halverson. Mr. HALVERSON. Thank you, sir. Page 25
Mr. KING. It shows, for example, that, in the case of a family of four-a typical American family consisting of father and mother and two children-having an income of $3,000, the marginal tax rate is 19 percent, while the effective tax rate is only 5 percent. Similarly, in 5 the case of such a family having a $10,000 income, the marginal tax rate is 29 percent, but the effective tax rate is only 19 percent. If you will now glance at chart 1-A, you will immediately note that a high degree of inverse correlation exists between the tax rates and the percentage of the national income going to persons in the $1,000,000-and-over bracket. For example, you will note that when, from 1915 to 1918, the tax rates rose sharply the percentage of income going to individuals in this class declined precipitously. Between 1921 and 1925, tax rates were lowered sharply. Between 1921 and 1929, the percentage of the national income going to this class grew tremendously. After 1931, tax rates climbed vigorously and, after 1931, the percentage of the national income received by persons having incomes of $1,000,000 or more remained at a very low level. Does this relationship characterize merely the highest income bracket? If you will turn to chart 1-G, you will observe that it tells much the same story. Evidently, this inverse correlation between tax rates and income is far from being merely accidental. If you will look closely, you will find that there was, apparently, a slight lag between the time when the taxes were levied and the time when the influence of the tax rates upon the incomes of the persons affected reached its maximum. Charts 2-A and 2-G represent in different forms the quantitative relationship existing between effective income-tax rates and the incomes of individuals in the respective income classes. In order to allow for the lag mentioned above, the income figure for a specified year has, in each case, been compared with the average of the effective incometax rates including that year and the 2 years just preceding. We experimented, I might say, with a number of other combinations, and we took the one that gave the best results—that is, the one that yields the highest correlation. On all of these charts, the relationships for the respective years are indicated by circles plotted at the appropriate points. Such an arrangement is referred to by statisticians as a “scatter diagram.” It is so named because the effects of extraneous factors ordinarily cause the items to scatter widely over the chart field. This study is no exception to the general rule. It takes but a glance at chart 2-A, to make it obvious that low tax rates and high percentages of the national income received by persons in the $1,000,000 and over bracket go together, and that low percentages of the national income are associated with high effective tax rates. To aid the observer in visualizing, quickly, the general tendency indicated by the data, a 10-item moving median has been fitted to the plotted points. The moving median is indicated by the heavy line. The moving median has been employed for this purpose because it is the simplest and most effective mathematical device yet discovered for bringing out such general tendencies. It is more reliable than the moving average because the latter is unduly affected by erratic items. It is, of course, possible to fit to the data various mathematical Page 26
HOW INCOME-TAX RATES HAVE AFFECTED
Percentage of the National Income
HOW THE PERCENTAGE OF THE NATIONAL INCOME GOING TO INDIVIDUALS HAVING INCOMES OF $1,000,000 AND OVER HAS BEEN AFFECTED BY THE AVERAGE OF THE INCOME TAX RATES LEVIED FOR THE GIVEN AND TWO PRECEDING YEARS
HOW THE PERCENTAGE OF THE NATIONAL INCOME GOING TO INDIVIDUALS HAVING INCOMES OF $150,000 AND UNDER $300,000 HAS BEEN AFFECTED BY THE AVERAGE OF THE INCOME TAX RATES LEVIED FOR THE GIVEN AND TWO PRECEDING YEARS
12 il 24 28 32 36 40 44 48 52 Effective Tax Rates in Per cent
PERCENTAGE OF THE NATIONAL INCOME $1,000,000 AND OVER BY VARIOUS EFFECTIVE INCOME-TAX RATES AS MEASURED BY THE AVERAGE
PERCENTAGE OF THE NATIONAL INCOME EXTRACTED FROM INDIVIDUALS HAVING INCOMES OF $150,000 AND UNDER $300,000 BY VARIOUS EFFECTIVE INCOME-TAX RATES AS MEASURED BY THE AVERAGE
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What is the percent of increase from 4,000 to 5,000?
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