Senator LUCAS. Mr. Chairman, may I interrupt for one question there?

The CHAIRMAN. Surely.

Senator LUCAS. The economist who testified yesterday afternoon testified, as I understood you a moment ago, that $10,000,000,000 reduction on the national debt would be a dangerous thing because of its deflationary effect?

The CHAIRMAN. That is right.

Senator LUCAS. Supposing we had a $10,000,000 surplus, and applied $2,800,000,000 on the national debt, leaving the $7,200,000,000, did he give to the committee what he would do with it?

The CHAIRMAN. He said he would use it for tax reduction.

The burden of his testimony was that if you devote all of this surplus to debt reduction, you are bringing on the very conditions which you wish to avoid; that, therefore, tax reduction is in order.

He had accommodated himself and his theories to tax reduction of the magnitude of $4,800,000,000. When we asked him how he got the figure, he said that was his estimate of probably where we would wind

up.

Senator LUCAS. Assuming now that we came along next year and our national income was running about the same as it is now, and the expert testified that we were going to have a $10,000,000,000 surplus, it would mean we were going to have to come in with another tax bill. The CHAIRMAN. Is the Senator directing his question to me? Senator LUCAS. Yes.

The CHAIRMAN. So far as we can see now, I certainly would favor another tax-reduction bill next year if it appears that we have a $10,000,000,000 surplus and that there is likelihood of a continuance of a surplus of that kind, say, over the next fiscal year.

In other words, as far as I am concerned, since the Senator has asked me, I want tax reduction every time we can make some debt retirement, in the amount that it should be made, and a surplus available for the purpose.

Senator O'MAHONEY. May I say, Mr. Chairman, that that remark prompts me to point out the line of Federal debt on this chart from 1928 to 1930. The facts are that during that period from 1920 to 1930, there were five tax-reduction bills passed, and they were all urged upon the theory that to reduce taxes would increase Federal receipts. As a matter of fact, they did not increase Federal receipts. The line shows that very clearly. When the crash came in 1929, and Federal receipts fell off as a result of it, and national income took that nose dive which is apparent on the chart, then the Federal debt increased again. So, by 1932, we had a national debt in excess of $20,000,000,000, whereas at the end of World War I, the national debt was $26,000,000,000.

Now, I submit that we cannot run the risk of leaving this present terrific national debt at its high level until we know that we have stabilized our system. We know that inflation has not been stopped. Senator Taft just acknowledged that when he said it had been checked. It was checked temporarily perhaps, but prices are once again going up.

If we should have had anything resembling a recession, it seems to me that the outlook is so terribly dangerous that we cannot afford to tinker with it.

The CHAIRMAN. I suggest, Senator, if we are in that danger, the classic remedy, and easily demonstrated remedy as being a sound one, is to restore more purchasing power to the people by tax reduction. Senator O'MAHONEY. There is too much purchasing power now. The CHAIRMAN. The Senator was postulating a depression of dangerous degree, and I was suggesting the classic remedy is to restore purchasing power to the people.

Senator O'MAHONEY. Are we going to restore purchasing power by more Federal spending?

The CHAIRMAN. I am in favor of less Federal spending.

Senator O'MAHONEY. Of course you are, but the classical remedy you suggest is Government spending when you do not have private spending. In other words, as I pointed out, when you do not have private spending as evidenced by private debt, then you have a depression into which the Government must come. That was the classic remedy suggested by President Hoover when he suggested his public works program.

The CHAIRMAN. I am in favor of less Government spending and more spending by the people.

Senator O'MAHONEY. That is what I am in favor of, and that is why I am here today urging the Senator and his committee to take this action, because I say the graduated excess-profits tax which is laid before you here is one which will tend to reduce the prices of the things that the people purchase and thereby maintain purchasing power and thereby make it possible to increase production.

The CHAIRMAN. Since the Senator has said he is in complete agreement with me, I assume he will vote for the tax-reduction bill.

Senator O'MAHONEY. I assume on the same basis that the Senator will vote for the excess-profits-tax bill.

Senator LUCAS. May I ask, Senator O'Mahoney, how much money you expect to recapture from the excess-profits tax under this bill? Senator O'MAHONEY. Let me say to Senator Lucas that the principle of this excess-profits-tax bill is, first, to make it easier on little business and local business. Therefore we have a specific exemption of $50,000.

Senator LUCAS. I know that.

Senator O'MAHONEY. No profit will be taxed, whatever its percentage with respect to invested capital or sales, or whatever the measure may be, if it is less than $50,000.

Then in order to make sure that this will not be a burden upon independent enterprise, I have made the excess-profits-tax credit 135 percent of the normal base, and the base is the same base, the same period, which applied in the wartime excess-profits tax.

Then there is a graduated scale of tax: 50 percent for that part of the excess profit which is in excess of 135 percent and not in excess of 140 percent of normal, plus 75 percent of that portion which is in excess of 140 percent and not in excess of 150 percent; and 100 percent of that portion which is in excess of 150 percent of the normal. The purpose of that graduated scale is to encourage the reduction of prices. I would rather see the prices reduced than to see revenue come in.

The Treasury estimated that the revenue from the excess-profitstax provision which was included in the Dingell bill would be about

$3,200,000,000, as I recall it. If prices were not reduced, under this excess-profits tax, the revenue would probably be in excess of $5,000,000,000; but I am confident that the prices would be reduced, and the facts before us are a clear demonstration that prices could be reduced. I have here a list of the earnings of about 925 manufacturing corporations in 1947 as compared with 1946. This is an advance copy of the statement to be released today by the National City Bank. This shows, for example, the percent of change in some groups— I will not mention the groups, but here is one group: net earnings after taxes in this group in 1947 were 23 percent more than they were in 1946, and in 1946 that same group of companies big, interstate companies were making the largest profits in their history. Here is another group-this has to do with textiles-net income after taxes for this group was 83.7 percent greater in 1947 than it was in 1946.

(The list referred to follows:)

Preliminary summary of manufacturing earnings in 1946 and 1947

[Net income is shown as reported-after depreciation, interest, taxes, and other charges and reserves, but before dividends. Net worth includes book value of outstanding preferred and common stock and surplus account at beginning of each year]

The CHAIRMAN. Senator O'Mahoney, might I interrupt you there! Senator O'MAHONEY. Yes.

The CHAIRMAN. When the then Secretary of the Treasury Vinson was before this committee in 1945 in connection with the Revenue Act of 1945, he said:

Clearly repeal of the excess-profits tax will stimulate production. Today we are starved for new houses, new cars, new radios, and the like. The best defense against the use of our wartime savings to build up prices on these scarce items is to remove the scarcities. Production and more production is the key. To this end the elimination of the repressive influence of the excess-profits tax will make a real contribution.

I take it you are in disagreement with that?

Senator O'MAHONEY. Oh, yes. I voted against it at the time because I was in complete disagreement with it. I think, in view of the fact that the representatives of the press are here, I ought to call their attention to this item of increased profits, because this is the one group that I will mention.

Senator LUCAS. Remember they do not vote.

Senator O'MAHONEY. But their editors out in the country, they may vote. I want them to tell their editors that 36 companies engaged in making paper pulp and paper products enjoyed, in 1947, a net income after taxes 88.5 percent greater than their income in 1946. Now tell the business managers of the newspapers who are finding it difficult to get newsprint what the manufacturers of newsprint are makunder the present system.

I could go right down the line, Mr. Chairman. This list prepared by the National City Bank illustrates, from a source which can scarcely be accused of being a wild radical source, that corporate profits have reached the highest level in history.

I have here also the monthly digest of business conditions and probabilities issued by a New York group of management engineers, the well-known firm of Stevenson, Jordan & Harrison, Inc. This was issued February 16. I want to quote this statement:

The facts are that the average percent of net profit to net worth of all corporations was never above 8.4 percent in the period from 1929 to 1943, and averaged about 4 percent; and of all profitable corporations was no higher than 9.3 percent.

And now the average of increase of net income after taxes, which I grant is a different figure, in 1947 as against 1946, is 52.2 percent. Senator GEORGE. Fifty-two and two-tenths percent. Is that all corporations?

Senator O'MAHONEY. No; of these 925 manufacturers.

Senator GEORGE. Just some of them.

The CHAIRMAN. Senator O'Mahoney, as you see it, what happens to those profits? What is the stream of distribution of them after they are made?

Senator O'MAHONEY. Of course, dividends have been vastly increased. The rate of dividends is much higher than it ever was before. Last year extra dividends and increased dividends were issued.

The CHAIRMAN. Were they not passed into the economy for expenditure?

Senator O'MAHONEY. That is right, increasing the money supply at a time when we are struggling against inflation.

The CHAIRMAN. And for savings, out of which risk-venture capital can be obtained?

Senator O'MAHONEY. The Senator realizes, of course, that in lowerincome groups, the people are digging into savings to meet the increased costs.

The CHAIRMAN. That indicates they should have more income.

Senator O'MAHONEY. To me, it indicates prices should be lower, and that is why I have this amendment, sir; because I say to you that when you increase the income without stopping inflation, you invite disaster. Now, reverse that, Mr. Chairman, decrease the prices so that the people can make their present income with their present money supply cover the cost of living, and then you are on the sound fiscal

road.

The CHAIRMAN. Production, of course, would have relation to that. Senator O'MAHONEY. Surely, and does the Senator realize that the index of production now stands at a very high point? The last time I saw it, it was about 188.

The CHAIRMAN. I realize that, and I also realize it will probably have to stand at a much higher point.

Senator O'MAHONEY. And the way to do that is not by decreasing individual income taxes at the sacrifice of cutting the national debt. The way to do that is to provide incentive taxation to encourage investment of private capital.

the

The CHAIRMAN. Yes. We are entirely in agreement on your very last statement.

Tracing these profits to which you have referred, have not a very considerable portion been plowed back into increased plants? Senator O'MAHONEY. Yes.

The CHAIRMAN. And that has the effect of increasing production. Senator O'MAHONEY. Yes.

The CHAIRMAN. And that is highly desirable.

Senator O'MAHONEY. That has been done.

Senator BARKLEY. The dividends distributed to stockholders have not been put back into the plants, as a rule, have they?

Senator O'MAHONEY. I think not.

The CHAIRMAN. I suggest those dividends help to sustain the economy and to the extent that there are savings margin in them, they, too, are available for increased plants and other forms of investment.

Senator O'MAHONEY. Mr. Chairman, I am very grateful to the members of the committee for their indulgence in listening to me for the better part of an hour.

Senator GEORGE. The dividends paid last year amounted to only a little more than $6,000,000,000. whatever may have been earned on the books for tax purposes; $6,500,000,000, or somewhere in that neighborhood, which is in excess of the previous year.

Senator O'MAHONEY. May I call the attention of the Senator to the fact that the United States Steel Corp., in its report for 1946, the report to its own stockholders, explaining its present policy, said that it believed that in times of high earning capacity, the corporation should make the most it could in order to set up reserves for the coming winter. In other words, that paragraph in the report of the United States Steel Corp., to me, was a declaration of their belief that a depression is around the corner and that their increasing prices and increasing profits are for the purpose of preparing for a depression that may come. And I say to you, gentlemen, that the United States and the world cannot stand another depression in the United States.