But what I have said is my earnest conviction.

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?

Secretary HARRIMAN. I will be delighted.

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

the most talented, hard-working people there are in the world outside of this continent.

If we do not assist in helping them preserve what we call western civilization, and as the result of the forces that are coming from the east they fall under the domination of the Kremlin, we will see a change in the balance of power which is such that this country cannot readily face and hope to preserve its own institutions.

It is all very well to talk about having a defense force which is adequate, but it is utterly impossible for this country to live in an armed camp without changing our institutions.

My interest in our foreign policies is the preservation of America and its institutions.

I do share with the American people the humane desire to save people from starvation, but the basic urge on my part is to face the fact there is an aggressive force in the world and to deal with it today and not leave it until conditions are such that it is unmanageable. I believe that is the road to peace, and I believe we can deal with it today if the policies which have been developed on a bipartisan basis have the support of the Congress and have the support of the Congress promptly.

Time, gentlemen, is running against us, and the weeks of delay are causing very serious repercussions in the world. Every week we wait the situation becomes that much worse.

Forgive me, Mr. Chairman, but the Senator made his statement, and I wanted to make mine.

It does relate to our policy, and I believe the people of this country have got to recognize, if they are to preserve the position of this country and its institutions, that we have a basic interest in the preservation of what is known as western civilization; and that we must make sacrifices today in order to avoid facing a situation which I am afraid would become unmanageable if we do not take the forward steps which have been developed by the support of both parties, and are now before the Congress for action.

Senator HAWKES. Mr. Chairman, I want to ask Mr. Harriman if he would have us proceed any faster than we have been proceeding with this European plan, and proceed without knowing anything about it, because very few people know anything about it.

I saw a poll last Friday of 6,000 farmers, and 52 percent of them knew nothing about the European recovery plan, and they are paying the tax bills the same as the rest of us.

I have always proceeded on the theory the stockholder is entitled to know something about what the directors are doing with their

money.

The other 48 percent in this poll showed they knew very little about it, and yet this great body of the Senate and the Congress has not had the patience and the wisdom to say to the people on a referendum ballot-I hope they can put one on next November-the question of whether they want you and me to give their money away to the point we are doing.

The CHAIRMAN. I think, now, gentlemen, we had better proceed with the inquiry at hand.

Thank you very much for coming, Mr. Secretary.
Secretary HARRIMAN. Thank you.

The CHAIRMAN. Mr. Alvord is our next witness.

Mr. Alvord, will you give your name, address, and occupation to the reporter?

STATEMENT OF ELLSWORTH C. ALVORD, CHAIRMAN, COMMITTEE ON FEDERAL FINANCE, CHAMBER OF COMMERCE OF THE UNITED STATES, WASHINGTON, D. C.

Mr. ALVORD. Ellsworth C. Alvord, attorney at law, Washington, D. C.

I am chairman of the committee on Federal finance of the Chamber of Commerce of the United States.

Mr. Chairman and gentlemen of the committee, as I customarily do, I would like permission to insert in the record a prepared statement upon the pending bill, and then I would like to proceed with my discusison extemporaneously.

Senator GEORGE (presiding). Your statement will be inserted at this point in full, and you may proceed in your own way to develop your views to the committee.

(The statement is as follows:)

STATEMENT BY ELLSWORTH C. ALVORD, WASHINGTON, D. C., CHAIRMAN, COMMITTEE ON FEDERAL FINANCE, CHAMBER OF COMMERCE OF THE UNITED STATES, BEFORE SENATE FINANCE COMMITTEE IN HEARINGS ON TAX REDUCTION, MARCH 9, 1948

INTRODUCTION

One word sums up the insistence of every American citizen today: Strength. To face the future with less than maximum strength is foolhardy. I dismiss the fear that attainable maximum strength may prove insufficient. There is no solution for that. But let us ask whether we are gaining in strength, striving toward maximum strength, an ever-increasing maximum strength. If not, there is a solution for that.

Every one knows that the strength of our armed services does not stand alone; that the strength of the Federal Treasury is not measured by receipts; that our national strength does not rest upon the present strength of our military and our Treasury. Our military and fiscal strength today and for the future are no greater than the underlying strength of our country-the financial and economic and moral strength of its citizens, of industry, agriculture, natural resources, power, and transportation.

Only with strength can we meet our international obligations; maintain our national income above $200,000,000,000; maintain annual production at about $250,000,000,000; provide and maintain jobs and pay rolls; attract private capital into wealth-producing activities; provide the essentials of sound government; put the brakes on increasing prices and inflation; create and not kill the opportunities which have given us the strength to win two World Wars and can produce the strength needed to survive them; prevent serious reductions in our standard of living, and avoid the serious consequences of a depression. If we are to become progressively stronger, if our paths and our policies are to lead toward maximum strength, an ever-increasing national strength for tomorrow and the future:

(1) We must cut Federal expenditures drastically each year until we have a Federal Government we can afford; and

(2) We must reduce tax burdens this year and every year until our tax load is no greater than we can afford to carry.

In discussing the pending bill for a reduction in taxation, I shall deal broadly with four points: First, why taxes must be reduced; second, the feasibility of tax reduction at the present time; third, the form of the immediate bill; and fourth, the desirability of further revision of revenue laws at an early date.

1. Why taxes must be reduced

Adequate and convincing evidence already is before you as to the adverse effects of the present high level of taxation. Argument is not necessary on the subject. Scarcely anyone would contend that present taxes are not seriously sapping our strength and destroying initiative and incentive. Opposition to a reduction usually is based on such grounds as the alleged necessity of a high level of expenditures, possible inflationary effects of the release of more purchasing power to taxpayers, desirability of devoting all surpluses to debt reduction, and the large dollar profits of business. None of these arguments offers a valid reason for tax burdens which are undermining and threatening our system of free enterprise.

The official budget estimates of Federal revenues run not far below the wartime peak, although hostilities ended 21⁄2 years ago. The higher estimates accepted by the Committee on Ways and Means are above the wartime peak of revenues. These estimates tell the story of a weight of taxation not only far above any period of peacetime but little if any short of the all-time high burden upon our taxpayers. It is well in this connection to note that the revenues from direct taxes on individuals have been steadily rising until they exceed one-half of our total revenues.

Reasonable reductions of tax rates and removal of harsh and inequitable provisions of revenue laws do not necessarily or probably mean decreased revenues. Past reductions of rates have operated the other way. The reduction of surtaxes after World War I and more recent lowering of other rates produced increased receipts.

Direct taxes on individuals are estimated officially to yield in the next fiscal year about 13 times the amount of the last year before our entrance into World War II. Direct taxes on corporations will yield 41⁄2 times as much revenue. Net budget receipts will be about 6 times as great. Comparisons with earlier years would be even more striking as revenues then were considerably less than in the fiscal year just before our entrance into the war.

A high peacetime level of expenditures of course demands a high level of taxes. Some have sought to make it appear that we have done well in reducing expenditures by 60 percent from a war peak of 100 billion dollars to around 40 billion dollars. I would point out, however, that in a comparable period after World War I expenditures were cut by more than 80 percent from a war peak of 18.5 billion dollars in the fiscal year 1919 to 3.4 billion dollars in 1922.

True, the world situation today is much more portentous than after World War I and our obligations vastly greater. Nevertheless, there is no justification for the present level of expenditures.

Our expenditures must come down. There is widespread and justifiable belief that it is possible to cut them substantially and still meet the necessary obligations of the present period of world chaos and unavoidable domestic costs.

The current tax problem has two major aspects, one, as it creates hardships for individuals; and, two, as it affects adversely the entire economy. The two are interwoven. A lightening of the burden upon individuals would release some of the pressures which are impeding the effectiveness of our private entreprise system.

Obviously, any tax reduction measure must be designed to afford a fair maesure of relief for those in the lower income classes, many of whom have exhausted their savings and are being forced to borrow to buy essential consumer goods. I do not believe that the moderate reduction in taxes which is proposed would result in an orgy of inflationary spending. On the contrary, additional funds would go to pay debts or for cash payments where buying on credit otherwise would be necessary. Considerable savings would also result. Furthermore, greater takehome pay resulting from a decrease in tax obligations would lessen the need of higher wages to keep pace with advancing costs of living. Advances in wages, involving an increase in unit costs in industry, are clearly inflationary.

The greater purchasing power for those in the low-income classes would be helpful to the economy as a whole. Scarce goods are becoming more plentiful in many lines and the time is not far distant when manufacturers and distributors will need new markets if they are to maintain present production schedules and a high level of employment. Present heavy taxes simply do not leave a margin in the average budget sufficient for purchase of articles which have hitherto been considered necessities.

The need for tax reduction affecting those in the middle and upper income classes is extremely urgent. It is from the income of these classes that funds for investment in industry must come. The present rates of tax on individual incomes in the middle and upper brackets are so high as both to limit the amount of available savings and to destroy incentive for their investment. No one should be surprised that the source of funds for equity fiancing has dried up.

Present surtax rates are so adjusted that a person whose income reaches $18,000 is affected at that point by a 50 percent rate. If his income rises to $50,000 he reaches a 72-percent bracket. He needs to go only to $100,000 to hit an 86-percent bracket. Income taxes take 50 percent of the entire income of a person at about $50,000, 70 percent at $150,000, 80 percent at $400,000, 84 percent at $1,000,000, and 85 percent at $2,000,000. Such rates are ruinous to incentive and to equity investment.

The impact of taxation is especially heavy upon corporate income which is distributed to individual stockholders. This income is taxed twice, first at 38 percent in the hands of the corporation and then at rates ranging from 19 to 86.45 percent, as the corporation distributes dividends to its individual shareholders.

If the individual income tax rates are applied to the 62 percent balance of corporate income after payment of the corporate tax, there is an additional tax equivalent to from 11.8 to 53.6 percent of the original income of the corporation. The total of the double tax, if assessed against the entire earnings of the corporation, would be the equivalent of from 49.8 to 91.6 percent of such earnings. In the period immediately following the war, liquid assets of corporations were sufficiently large to provide the source for a considerable amount of necessary capital expansion. These assets have been greatly reduced with the result that there is increasing need of new equity capital and also for borrowed funds. The increase in bank credit, which is viewed as an inflationary danger, reflects in large measure a shortage of new equity capital. There would be less need for such borrowing, with its accompanying inflationary threat, if taxes on individual incomes in the middle and upper brackets were reduced sufficiently to increase the supply of savings and provide incentive for their investment in industry. The profits of corporations, to which opponents of tax reduction like to refer, are in considerable part illusory. The high profits in dollars are depreciated dollars which have suffered in purchasing power to the same extent as the income of individuals. Inventory profits loom large in the totals but these are likely to be eaten up in replacements at current prices or otherwise disappear. Furthermore, the very large increase in sales volume has been a major factor in the increase in profits. Actually, the profit per sales dollar has been no greater than in other periods of active business. It has been estimated that a 12-percent drop in volume would wipe out all profits. These facts must not be ignored. We have had some recent warnings in the commodity and security markets of possible downward tendencies which if continued and accelerated could change the status almost overnight from one of apparent prosperity and inflation to depression and deflation. From past experience we should know that the time to check a downward turn is before it begins.

The advice offered from some quarters that we should defer a lightening of the tax burden until a business recession takes place is foolhardy. Rather, we should make the tax cut now and provide the best insurance available against a recession.

II. Feasibility of tax reduction at the present time

Your committee has been told by the Secretary of the Treasury that there is no reason to assume that either receipts or expenditures in the fiscal year 1949 will vary materially from those estimated in the January budget message of the President.

Several witnesses before your committee, however, have already pointed out the manner in which the Treasury in recent years invariably has underestimated revenues. The Joint Committee on Internal Revenue Taxation has submitted estimates of higher receipts than forecast in January. These higher estimates were accepted by the House Ways and Means Committee in connection with the pending tax-reduction measure.

Both Houses of Congress have passed a resolution to reduce expenditures by as much as 2.5 billion dollars from the President's estimates for the fiscal year 1949, and a much greater reduction is probable.

Whether or not we assume that revenues will be greater than previously estimated or expenditures reduced below the budget, taxes can be reduced at the present time without interfering with a reduction in the public debt.