The CHAIRMAN. Would it not be a correct answer to the question which Senator Martin has made to you that your whole thesis showing that the sources of risk capital have dried up indicates that we have reached the levels to which Senator Martin is curious about?

Mr. HANES. I think the stock market itself is an indication of that. There was a very interesting article published in one of the magazines, I think Time magazine, about the last part of January, showing the comparative values of prices of stocks on the New York Stock Exchange.

In many cases, good, sound securities were selling there on the exchange at two and three and four times their earning capacity.

That, added to the other evidence which you have of the accumulation of equity capital which is available for the market but no market is available to absorb it, it certainly is an indication that there are no savings and the tax laws are handicapping our economy to a very marked extent at this time.

Senator MARTIN. Mr. Chairman, I would like to make this observation for the benefit of the committee.

A year or two ago the Heinz Co. which is, as you know, a Pittsburgh concern, and a world-wide concern, offered stock to the public. The new president, as you know, is a very young man, and a great number of folks said: "Well, he has not been able to follow with the same ability as his father and grandfather, because for 75 years it was a concern owned by the family."

Some of us went into it, and we found that the taxes had been so large that they could not make the expansion that their business required without getting new capital, and then they gave the public an opportunity to buy.

That, of course, is fine, but a lot of us were very much worried that probably there was a fine concern getting into financial difficulties. But it was not. Its sales had increased all over the world, and to keep up with those sales, it was necessary to expand, and they could not expand by the old-fashioned method of plowing back in.

Mr. HANES. Senator, you have another glaring example in your State of the same sore of thing that I am talking about, and that is the Gulf Oil Co.

Senator MARTIN. That is right.

Mr. HANES. They needed, as most oil companies do now, a terrific amount of additional capital, and when they got ready to get that capital, they offered rights to their stockholders.

In the old days, when you offered rights to a stockholder, that was always considered a plum, and everybody was delighted when it was offered. They would be delighted today if they had savings to invest if the Gulf Oil Co. should offer them rights to subscribe at several points below the then market.

The immediate effect of that offer was that Gulf Oil Co. stock fell $7 on the New York Exchange, and that was an immediate indication that the stockholder felt it was not a right of which he could avail himself.

That was a glaring case of the evidence.

The CHAIRMAN. Senator Bushfield?
Senator BUSHFIELD. No questions.
The CHAIRMAN. Senator George?

Senator GEORGE. No questions.

Senator BARKLEY. Mr. Hanes, was that drop of $7 a share due altogether to the announcement that rights would be issued, or to the fact that, connected with that, the amount of stock outstanding would be multiplied and therefore the return might be smaller on each share?

Mr. HANES. No, Senator. I think the answer was completely as I stated it first, because even though there would be more shares outstanding that money was going to be invested in highly productive return. So there would not be any dilution of the per share earnings ostensibly, or the management would not have been willing to invest the money. That must be the obvious conclusion.

There was a further drop in the value of the shares on the second day. I do not quite remember the details but I know it was a shocking thing.

Senator BARKLEY. Aside from that, it has been matter of observation over a long period of years that when any company announces that it is going to increase its outstanding stock, the immediate effect is to produce a drop in the value of stocks already issued.

Mr. HANES. That might be true, Senator, if you were paying a stock dividend by increasing your shares.

Senator GEORGE. If you were splitting the stock.

Mr. HANES. If you were splitting the stock, and adding to the shares without adding to the value, that might be true.

But in this case, it was not a case of splitting or of giving stock dividends to the shareholder. It was a question of reinvesting capital in the business which was going to be highly productive, thus not diluting the per share earnings.

That kind of financing in the past, Senator, I think you will find, has resulted in an increase in value of shares rather than a falling off. In other words, those rights were considered to be of great value and sold in open market at a real value.

Senator GEORGE. In this case, the stockholders did not have the cash. Mr. HANES. I would assume that to be the answer.

Senator GEORGE. Not available for that purpose.

Mr. HANES. They said, "Here, we can sell the rights today and get some real cash for them."

So they proceeded to sell the rights. Indeed, the larger stockholders sold all their rights.

Senator BARKLEY. Do we understand from your statement that you advocate the House bill and the reduction of taxes of $6,500,000,000 carried in it?

Mr. HANES. I beg your pardon, Senator?

Senator BARKLEY. Do we understand from your statement that you are advocating the passage of the House bill carrying a $6,500,000,

000 tax reduction?

Mr. HANES. I am advocating passage of a tax bill, Senator, with a good, healthy reduction in it, and I am willing to leave the amount of that reduction to the good judgment of this committee and the House Ways and Means Committee.

Senator BARKLEY. The House bill carries that amount.

Mr. HANES. That is right.

Senator BARKLEY. Assuming that sort of bill were enacted, have you any information that would enlighten us as to what proportion of

that tax reduction would go into new investment and what proportion would go into the purchase of consumer goods?

Mr. HANES. No, Senator; I have no figure on that available. All I can say in answer to that is that I would suppose, and I would believe it to be sound judgment, that this present tax bill as passed by the House should be somewhat reduced.

I think the present tax bill calls for a little more reduction in taxes than I think ought to be given at this time.

But the distribution of that reduction in taxes, as I pointed out in my statement, is not going to be any huge sum to anyone. The $15,000a-year man will get a reduction of about 45 to 48 percent in his tax bill. Senator BARKLEY. To what extent, in your judgment, would the release of half of that sum, as a rough guess, in the purchase of consumer goods, affect prices.

Mr. HANES. I do not belong to the school, Senator, that thinks the taxpayer does not have brains enough to handle his own money.

Senator BARKLEY. I do not think that is involved here, Mr. Hanes. Mr. HANES. I do think it is involved, because I say this: The average taxpayer today has no savings. He cannot save anything out of his income. It is just a physical impossibility, as you gentlemen here can testify yourselves.

I say the average taxpayer granted that relief is not going to go out and squander that relief on foolish things, nor go into the highly competitive market to run the price up on himself.

I think the wise fellow, who has the ability to earn $15,000 a year, is going to put aside something for the rainy day, which he has not been able to do for the last 5 or 6 years.

Senator BARKLEY. Is it your judgment that the proportion of burden upon the lower income-tax brackets, which is way down below your $15,000 a year, to use as an example, the 3, 4, and 5, and below 10, is proportionate?

Mr. HANES. Yes, sir.

Senator BARKLEY. I can remember the time when $10,000 was looked upon as an enormous income, and now it is not quite that way.

But, taking the lower-income brackets and connecting that up with the cost of living, the difficulty of purchasing the necessities of life, do you think the lower-income brackets are bearing a disproportionate share of the total burden as compared to the higher brackets?

Mr. HANES. Senator Barkley, I do not think so, and I will tell you why I do not think so.

If you are going to raise anything like 37 to 40 billion dollars in taxes. in this country, you have just got one place to go to get it, and there is no place else, and that is in the wage earners and the salary workers. You cannot get it out of the high-income groups because it does not exist there.

If you tax the high-income groups to the ultimate limit, in my humble judgment, you could get a few, maybe $800,000,000 more if you took it all away from them, but that is a pittance when you are talking about $40,000,000,000.

But I say to you that wages and salaries of employees, which amounted in the last year to approximately $170,000,000,000 out of a total of $196,000,000,000 is where you must go if you are going to raise the revenue you are trying to raise.

It is arithmetic. It is not philosophy. You cannot get it where it is not, and it is in the low-income groups.

Senator BARKLEY. Do you have any figures showing how much the total tax receipts were paid by people with an income of less than $5,000 a year?

Mr. HANES. I have not those figures right here, but they are available in the Secretary of Treasury statement before the Ways and Means Committee. It is all very clearly set forth where that income is. Senator BARKLEY. I will not take the time now. I thought you might have it in mind.

The CHAIRMAN. Senator Barkley, do you mind if I give you the rough division?

Senator BARKLEY. No; do not make it too rough, though.

The CHAIRMAN. The estimated tax liability under the present law for persons with net income before personal exemptions and credit for dependents of less than $5,000 is $11,965,000,000 out of a total of $21,280,000,000.

In other words, $11,000,000,000 for those under $5,000 and the balance between 11 and 21 for those over 5.

Senator BARKLEY. You say before exemptions and allowances?
The CHAIRMAN. Yes.

Senator BARKLEY. Why before? Because what he pays is after that?

The CHAIRMAN. Let us take the figure after personal exemptions and credit for dependents. Tax liability under the present law is $11,987,000,000 for those having income under $4,000, out of a total of $21,280,000,000 for those having under and over $4,000 a year.

Senator BARKLEY. Would you mind preparing a blue print of that and filing with the hearings. You read the same figure there before and after, $11,000,000,000. It cannot be quite that.

The CHAIRMAN. It does work out.

Senator BARKLEY. Maybe we can have it explained a little better when we get into that.

I did not want to go into it now.

I thought that possibly Mr. Hanes had it on his mind and it might be · helpful, but we can get the exact figure before we get through the hearings.

The CHAIRMAN. I respectfully suggest it is reasonably clear that those under $4,000 meeting your test after personal exemptions and credit for dependents paid $11,000,000,000 plus. Those with $4,000, and over $9,000,000,000 plus, making a total of $21,000,000,000.

Senator BARKLEY. What was the figure you first read there before making these exemptions and allowances?

The CHAIRMAN. The figure was $11,965,000,000 for those under $5,000. There is a slight change.

Senator BARKLEY. A change in the basis.

The CHAIRMAN. Yes, and $9,000,000,000 plus for those over $5,000 out of a total of $21,000,000,000 plus.

What I first read was net income before personal exemptions and credit for dependents, and the base changes there from $5,000 to $4,000.

Senator BARKLEY. That is all I want to ask.

Senator CONNALLY. May I ask a question, Mr. Chairman?
The CHAIRMAN. Certainly.

Senator CONNALLY. Mr. Hanes, a while ago, you cited this Gulf Oil Co. transaction.

I understood you to say the company offered the rights to purchase at about $7 per share below the regular market. Is that correct?

Mr. HANES. No. I said the stock fell about $7. It was offered below the market.

Senator CONNALLY. Exactly. That is what I am getting at. The Gulf Oil Co. valued its own securities, or property, at less than the market. There is nothing remarkable about the fact that other people in the market would naturally drop down to that figure, is there, in their purchases?

Mr. HANES. I think you have a misunderstanding there of just what happened.

I wish I could remember the figures, but let us assume the market was at $70 a share, when they offered the stock at $60. I think it was a little higher than $70, but they offered it at $60, we will say, or $61.

The immediate effect of that offering was the stock dropped about $7 a share on the floor of the exchange the first day.

Senator CONNALLY. That is what I mean. I suppose the buyer thought, "Well, if the Gulf Oil Co. does not think its stock is worth over $60”–

Mr. HANES. That is not the way it works, Senator.

Senator CONNALLY. I know it did work that way. You said it did. Mr. HANES. We just do not understand each other.

Senator CONNALLY. You said immediately the stock was offered on the market, the market dropped, did you not?

Mr. HANES. I said exactly that.

Senator CONNALLY. If I were going to buy it, and the company itself said it was not worth but $60, I would not want to give them $70. Mr. HANES. You have it your way, Senator.

Senator CONNALLY. That is very satisfactory.

Now, Mr. Hanes, when a company, we will say, has a high profit and a high income but owes a lot of debts, do you believe that is a good time to pay some of those debts?

Mr. HANES. Yes, sir; I do, Senator. The same with the Government. Senator CONNALLY. That is right. And when the country is prosperous and has a big income, can it not bear high rates of taxation better than in a period of depression and hardship?

Mr. HANES. Yes, Senator; that is obviously true, but I thinkSenator CONNALLY. Do not "but" too much, because you said it is obvious.

Mr. HANES. I want to qualify it with another statement, if you will permit.

Senator CONNALLY. Go ahead.

Mr. HANES. I want to say, in times like this, when we are having great business activity and prosperity, we should be preparing for the time when conditions are not going to be quite so good.

Senator CONNALLY. That is right. That is sound.

Mr. HANES. And I say this to you: You are not accumulating savings rapidly enough today to take care of the 600,000 or 700,000 people who are candidates for jobs each year.

If your present rate of employment of 60,000,000 people stayed exactly the same for the next 10 years, and there was no change in

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