Reduction of Individual Income Taxes

Dr. Roos. On equpiment?

Senator BUTLER. Yes.

Dr. Roos. He may have been correct. But this comprehensive order series for capital goods published by the Index Member Institute went up very sharply on the price break. You see how sharply it rose? [Indicating.] About 20 percent.

There is nothing wrong about that segment of business at present, it looks pretty good.

Senator BUTLER. And I could not escape the feeling that if that situation was general, we were really headed for something. Your chart certainly looks different.

Dr. Roos. If you talked with anybody in the equipment industries in December, he was talking about a decline in new orders. At that time the trend had been downward for about a year. It is just recently that this index has picked up.

The CHAIRMAN. Doctor, were you here during the morning, when we were discussing questions of risk capital, and the relation to that of tax reduction?

Dr. Roos. I was here, sir. I don't know how much I heard, though. Very frankly, I was worried about what I was going to say.

The CHAIRMAN. I think it is fair to say that the burden of the testimony of Mr. Hanes was that the dividends that are coming from the corporations are going into savings, but to the extent that those savings are going into investment, they are going into indebtedness investment rather than into equity investment. And the reason they are going into indebtedness investment is because it is relatively a safe form of investment. The reason they are not going into equity indebtedness is because they cannot get the return after the effect of income taxes for the risk which is taken.

How does that square with your own views?

Dr. Roos. In a general way, I agree. I would explain the problem a little differently, though.

Savings today are fairly large, in the neighborhood of 1011⁄2 or 11 billion dollars, or about 5 percent of personal incomes. Although the percentage is low, total savings are high compared with prewar, even if you allow for the increased price level.

The trouble is that the savings are in the hands of different people than in prewar days. People who have savings today generally do not know how to buy equities or common stocks. Savings today are in the hands of people who deposit them in savings accounts principally, or if they don't put them there, they put them in life insurance or real-estate speculation, because they don't know where else to invest.

The CHAIRMAN. Or well-known utilities.

Dr. Roos. That is correct, sir.

Now, these institutions, the savings banks and the insurance companies, particularly the life companies, are not allowed to buy common stocks. So the savings necessarily go out as debt.

Now, that is not healthy for the economy. I am glad you raised the question, because this committee ought to be concerned about that trend.

If too large a proportion of business expansion is financed by debt, there is no margin for risk, which margin enables industry to take the chances that it must if the economy is to prosper.

The CHAIRMAN. There is a constant impairment of the value of the equity holder in that company. Because you have a rigid indebtedness there which in a period of trouble has first priority not only as to income but as to the capital itself. Is that not correct?"

Dr. Roos. That is correct, sir. That is right.

There is another aspect to that, too. A good part of the savings last year were in the rural areas.

The CHAIRMAN. May I bounce one further thought against you before I forget it?

Is it not apt to make trouble in our banking structure to have too many bank loans that are dependent upon the continuance of high prosperity of business? For the bank's first concern is to protect itself. And when it commences to call in its loans or to make drastic reductions of them, if you cannot finance yourself with equity capital then, obviously the economy is in a very bad way. Is that correct?

Dr. Roos. That is correct. If this trend should continue, there would be eventually set up a condition which would impair bank loans all across the board. The bankers then, willy-nilly, would be in the equity business through foreclosures.

During the depression of the 1930's New York banks owned companies outright. I know of large banks that owned really important companies and had to operate them, had to furnish the management for them.

The CHAIRMAN. One of our highly praised public officials, as I recall it, appeared before the House Ways and Means Committee. He found no fault with our present progressive income tax rates, on the ground that the higher they are, the more it makes a man work to make a living, and therefore we should not disturb that incentive. And that was seriously proposed.

Dr. Roos. I think he must have been dreaming.

The CHAIRMAN. Of course, the logical extreme is to give him nothing and get the maximum amount of work out of him. That was so asinine that I will not ask you to comment upon it.

Senator MARTIN. You make a very interesting statement here, that the economy of the United States is in excellent health except for the present economic and fiscal policies; and then you state that the correction of much of those credit and fiscal policies is in the hands of this committee.

Do you feel that a tax reduction now of 4.8 billion dollars would partially correct the present fiscal and credit policies of the United States.

Dr. Roos. It would correct the fiscal policies, sir.

Senator MARTIN. What effect does it have on the credit policies?

Dr. Roos. I am inclined to believe the bankers are getting a little worried now that maybe they have gone a little too far in credit restriction. I am sure they have. But those kinds of things finally get corrected when you talk about them. And I think the important thing today is the fiscal policy, which is directly in the hands of this committee. That is what I meant.

Senator MARTIN. Doctor, is not the relationship of what we call loans in banks much lower now with respect to the cash position of banks and the amount of Government securities that the bank holds? Is it not much lower now than ordinarily?

Dr. Roos. Yes, decidedly much lower. Because the banks have so many more Government bonds in their portfolios. That situation, incidentally, creates a rather interesting problem.

At the present time when the Federal Reserve Board tries to tighten credit conditions, the banks sell Government bonds. If the Federal Reserve doesn't buy them, the Treasury gets concerned about it. And the two are at each other very quickly.

Now, if the Federal Reserve buys all the offerings, then the reserves themselves are increased in the process, and what is a tight credit situation becomes an easy one.

Senator MARTIN. Then you have an inflation.

Dr. Roos. An inflation instead of the deflation the Federal Reserve is trying to achieve. That is what I meant when I said I was not too concerned about Federal Reserve policy. Because it will be self-corrective within a short period of time, if carried much further.

Senator MARTIN. Of course, I do not pretend to be a professional economist, but as I understand it, first you offer securities to the banks and the banks take what they can, and then they go to the Reserve Board. When the reserves fill up it has to come down here, to the Treasury. Then you have an inflationary situation that might become very dangerous.

Dr. Roos. Yes; if you try to tighten the credit too much you may have some real inflation. That is what you are saying, and I agree with you. It is a very dangerous thing to do.

Senator MARTIN. And this is a very bold statement that you are making here relative to the fiscal and the credit policies of the United States: that the economy is in excellent condition, except for that. Dr. Roos. Surely. I meant exactly what I said.

Senator MARTIN. And that is what I was trying to get at: What effect this tax reduction will have.

I might interject this, Mr. Chairman: When I came down here, I felt that all of the money should go on the retirement of the public debt. I have changed my opinion on that. We have gotten into the condition now where we have to have a more or less planned control of it. I hate to see that. I hate to see it so big that that is what is necessary.

But what I am getting at is whether or not this proposed, we will say, 4.8 reduction will also aid the credit situation as well as the fiscal situation.

Dr. Roos. Yes; it will very definitely, sir.

The CHAIRMAN. As I understand it, it aids the credit situation, because by limiting the retirement of the debt you do not contract the credit in the banks. Is that correct?

Dr. Roos. That is right.

The CHAIRMAN. Are there any further questions?

We are very indebted to you for coming and giving us this very instructive talk.

We will recess until 10 o'clock tomorrow morning. And during the morning we will hear a series of Senators on various amendments which they have offered.

I do not know whether we will have an afternoon session tomorrow, but we will try to avoid it.

(Whereupon, at 3: 25 p. m., an adjournment was taken, to reconvene at 10 a. m., Wednesday, March 3, 1948.)

REDUCTION OF INDIVIDUAL INCOME TAXES

WEDNESDAY, MARCH 3, 1948

UNITED STATES SENATE,
COMMITTE ON FINANCE,
Washington, D. C.

The committee met at 10 a. m., pursuant to adjournment, in room 312 of the Senate Office Building, Senator Eugene D. Millikin, chairman of the committee, presiding.

Present: Senators Millikin (chairman of the committee), Taft, Butler, Hawkes, Martin, George, Barkley, Connally, and Lucas.

The CHAIRMAN. The hearing will come to order.

The committee has the pleasure this morning of hearing from Senator O'Mahoney.

Senator, will you proceed in your own way.

STATEMENT OF HON. JOSEPH C. O'MAHONEY, A UNITED STATES SENATOR FROM THE STATE OF WYOMING

Senator O'MAHONEY. Mr. Chairman, my desire is to say to the committee that, in my opinion, this tax bill which is before you will be judged historically because of the effect which it will have upon the system of private profit.

I appear here today urging this excess-profits tax, because I believe that only by such an amendment, and some others which might be suggested, will it be possible to prevent most serious danger to the system. I think everybody realizes today that the great danger to freedom in the world arises from statism, and I think I can show that a failure now upon the part of Congress to proceed as rapidly as possible to reduce the national debt exposes the United States to all the dangers of totalitarianism which have appeared in other countries.

I invite the attention of the members of the committee to the chart which is on the easel, copies of which have been distributed to the members. The significance of the chart is this: It shows that at about 1942, when we were in the midst of the war, the Federal debt for the first time in history exceeded the national income.

Senator O'MAHONEY. Throughout the history of the United States there was no period prior to World War II when the income of the people was less than the national debt. If the Senators will examine the chart for the year 1940, they will see that the Federal debt in that year was less than $50,000,000,000; and yet during the whole period from 1936 on to 1940, economists and financiers and Members of the Congress were shaking their heads in graves despair about the magnitude of the national debt. They were saying that if we continued to pile up debt, nobody could tell what would happen to our system; but

we became involved in the war and as a result we were obliged to permit that debt to be increased fourfold.

If we apply our surplus upon the reduction of that debt, we invite disaster from two points. We face disaster if the national income should fall while the debt remains at this pinnacle.

Yet the national income is in danger of falling. The studies of the Joint Committee on the Economic Report amply demonstrate that in the lower income brackets, our people are now finding it exceedingly difficult to make their income cover the cost of living.

The CHAIRMAN. Would it follow, from what the Senator has said, then we must handle the debt in harmony with the prevention of the falling national income?

Senator O'MAHONEY. I think that this is part of the story of inflation. If we can keep that national income up-and the Senators will observe it is now in excess of $200,000,000,000-then it will be a com