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It is not necessary to enter into a detailed discussion of the budget figures, which already have been fully explored before your committee.

It is sufficient to refer to estimates of surpluses. The President's budget indicated a surplus of 7.5 billion dollars in the current 1948 fiscal year and a surplus of 4.8 billion dollars in the 1949 fiscal year.

The staff experts in Congress have predicted a level of receipts in the fiscal year 1949 which would increase the surplus to 7.6 billion dollars, without any reduction whatever in expenditures. It appears probable that receipts for the current 1948 fiscal year also will exceed estimates.

Thus, in the judgment of experts whose forecasts in the past have stood up better than those of the Treasury, the aggregate surplus in the two fiscal years of 1948 and 1949 should amount to more than 15 billion dollars without any reduction whatever in expenditures.

If Congress reduces expenditures in the fiscal year 1949 by 2.5 billion dollars, the aggregate surplus for the 2 years would be at least 17.5 billion. The surplus for the 2 years may well be 20 billion dollars.

The Director of the Budget presented to your committee a rather gloomy picture of the outlook for expenditures in the fiscal year 1950. It was his view that the total in that year might be even greater than the 39.7 billion dollars in the President's budget for 1949.

I am unwilling to believe that it is necessary to spend anything like 39.7 billion dollars in 1949, or as much or more in 1950. The most effective way to stop excessive spending is put less money in the till. But even granting the validity of the viewpoint of the Director of the Budget, it would appear that the margin of receipts over expenditures would remain substantial if business should continue at a high level.

Such figures as I have cited are sufficient to show that a substantial reduction in taxes should be possible at the present time and that a reduction in the debt of 2 or 3 billions or more also can be made during the fiscal year 1949.

Larger cuts in both taxes and the debt would be assured by rigid economy at every possible point in the enactment of appropriation bills for 1949. Inasmuch as taxes, Federal, State, and local, are now absorbing more than one-fourth of the national income, they represent one of the most potent elements in the inflationary price structure. A reduction in expenditures would be the greatest possible contribution to the checking of inflation.

The theory that all surpluses should be devoted to a reduction in the public debt is completely fallacious. While a reduction in the debt is desirable both as a means of reducing the interest burden on the taxpayers and moderating inflationary influences, too rapid a program in this direction might contract credit excessively and thus have troublesome deflationary effects. Competent testimony has already been offered to your committee that a reduction in the debt by more than a few billions could be hazardous.

Furthermore, there are difficulties which make it impossible to obtain the full counterinflationary benefits from retirement of bank-held debt and accompanying shrinkage of bank deposits. The monetary supply in the form of demand deposits and currency in circulation is greater today than at the peak of the debt 2 years ago, despite a reduction of the gross debt since that time by $25,000,000,000 and the marketable debt by $37,000,000,000. This is due to the expansion of credit on the basis of reserves obtained by the banks in payment for maturing Government securities or for long-term securities which they have sold and the Federal Reserve banks have bought in the course of supporting the market price. An inflow of gold also has contributed to new reserves in the banking system and thus provided an additional obstacle to a reduction in the monetary supply.

Balancing the advantages of tax reduction against the difficulties and hazards attending debt reduction, it seems obvious that maximum benefits to the economy would come from a substantial cut in taxes, accompanied by a substantial curtailment of the debt.

Furthermore, those who would use all surpluses for retirement of debt forget that a recession would seriously reduce our revenues. A return to deficit financing and an increase in the debt would be unavoidable.

In fact, continuance of a high level of production is essential. Tax reduction offers the best and only insurance of an orderly reduction of the debt over the years. III. Form of the immediate tax-reduction bill

The committee on Federal finance of the Chamber of Commerce of the United States would prefer a somewhat different tax-reduction bill than that passed by the House of Representatives and now before your committee. However, the objectives of the bill are similar to those sought by the chamber. The lightening of the burden on individuals in all brackets is the first essential.

The chamber committee on Federal finance recently approved a report declaring that after reasonable provision for debt retirement there should be such general lowering of the rate schedule as revenues permit. It was urged that immediate action be taken to provide that the total tax liability of any individual should not exceed 50 percent of his taxable net income and that eventually the progressive rates should be lowered so as to provide a maximum aggregate rate of 50 percent, effective at $500,000. The far-reaching effect of such a limitation as a spur to incentive and risk taking would more than offset any estimated loss in revenues.

The provision in the pending bill for an optional splitting of income by married persons in non-community-property States for tax purposes is in accord with a policy approved by the chamber. This action should be taken to recove inequity now existing between such persons and those residing in the community-property States.

There are other amendments to revenue laws which we believe are of sufficient urgency to be incorporated in the immediate bill. Among these is a reduction in the effective rate on long-term capital gains to 1212 percent and reasonable deductions from other income of capital losses in excess of gains.

We also favor immediate diminution and eventual elimination of double taxation arising from levies on earnings of corporations and dividends to shareholders. This could take the form of an appropriate credit to stockholders with respect to dividends received.

We oppose most strongly any peacetime revival of an excess-profits tax. IV. Desirability of further revision of revenue laws at an early date

We recognize that the present hearings are devoted to proposals suitable for inclusion in an emergency bill. Hence, I shall touch only briefly on the desirability of attention by your committee at the present session of Congress to the subject of a general revision of revenue laws to remove inequities of long standing and to improve administration.

We believe that it is vital that any bill for a further revision of revenue laws, which may be reported from the House Ways and Means Committee and passed by the House at this session, should receive prompt consideration by your committee with a view to final action before the adjournment of the preent Congress.

For years a general revision of revenue laws has been needed. For one reason or another it has been deferred. The Treasury Department recognizes the desirability of legislation of this character and has just submitted recommendations on the subject to the House committee, some of which, though by no means all, are meritorious and should be adopted. We hope that nothing will occur to prevent enactment not only of the legislation now before you but also of a more general revision measure during the life of the present Congress.

The chamber committee has prepared comprehensive rerommendations for amendments to technical and administrative provisions of revenue laws. We already have submitted these recommendations to the House Ways and Means Committee and should be glad of an opportunity to present them to this committee.

The multiple taxation of corporate profits should be prevented. The tax on intercorporate dividends should be repealed. The penalty tax upon consolidated returns should be discontinued, and their optional use permitted, and regulations consistent with the clear intent of Congress should be adopted.

Section 102 should be amended to reduce the hazards of the essential accumulation of profits. There should be a complete revision of code sections dealing with reorganizations. The liquidation of corporations should be facilitated. The application of section 112 (f) to cases in which anticipatory replacement is involved should be assured. The existing Treasury position with respect to employee stock option purchase plans should be reversed. The pension trust provisions should be extended to include proprietors and other owners of unincorporated businesses. Revision is urgently needed of several provisions of the Internal Revenue Code, which as now interpreted, cast serious and unwise hindrances in the way of American-owned enterprises in foreign countries. The application of section 131 (f) (1) should be extended to domestic corporations owning 10 percent or more of the stock of a foreign corporation. The existing methods and procedures for determining depreciation deductions allowable stand in crying need of thoroughgoing revision. Provisions similar to supplement

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R should be extended to all involuntary transactions, which should include all transactions necessary or appropriate to comply with regulatory statutes, such as antitrust laws and the banking laws, and with judicial decrees, administra. tive orders, etc. Sections 109 and 727 (g) should not turn on such technicalities as where title passes or contracts are negotiated. In the case of accumulated dividends on preferred stock or interest on securities is received in a single year the tax should be computed as though the income had been ratably received. Commercial finance companies should not be subject to the personal holding company surtax. The growth formula and substitute year provisions should apply in arriving at both constructive and average base period net income. Section 129 should be repealed. The war loss provisions should be amended to eliminate the rule for aggregation of recoveries and should incorporate the tax benefit rule, and other necessary changes. Individuals should be allowed a loss deduction for the full cost of property taken by condemnation.

Provisions limiting the interest on section 722 and carry-back refunds should be clarified to make certain that they cannot be applied to require the payment, or prevent the return, of interest on deficiencies which are offset by such refunds. Capital-gains treatment should be accorded to the receipt by an employee of lump-sum proceeds from the sale, exchange, or release of his rights to future percentage-of-income payments upon termination of employment. The statute of limitations should be amended so that the Commissioner will have a reasonable period of time after final determination of a claim under section 722 to assess any deficiency resulting from a deferment in payment under section 710 (a) (5).

The foregoing are only a few of the many technical amendments which must be made to the Internal Revenue Code.

Mr. ALVORD. I think I said that I appear on behalf of the committee on Federal finance of the United States Chamber of Commerce.

I agree fully with the statement which the chairman made during the testimony of the Secretary of Commerce that this bill is but a step toward what must be done with our tax system.

It is a constructive step and a very necessary step. I am confident that it will convince the American people that the Congress is aware that we cannot continue wartime taxation on into the third, the fourth, and the fifth year after the termination of hostilities and maintain the America which we wish to maintain.

I agree fully with the statement of the Secretary of Commerce that our first obective must be a strong United States. That we must have.

And I agree entirely with the statement of Senator Hawkes, that our present fiscal policies, including the continuation of our high wartime system of taxation, are sapping, and seriously sapping, the strength of America.

Many of the points which I would like to make I have made in the written statement which I have filed with you.

I would like to depart from that just a minute and conecentrate, if I may, on the subject which was discussed at length this morning, finanancing, American industry.

A very simple analysis gives the sources of the funds by which industry may be financed.

There are only three sourecs: one by obtaining money from private individuals, banks, and insurance companies, indivividuals outside the corporation itself, outside the enterprise itself. Persuading John Doe to turn over to you and me and put it into the machinery of production, hoping that we can show him a profit. That is source No. 1.

Source No. 2 is the funds of the enterprise itself, its undistributed profits, its available reserves.

Source No. 3 is the Government.

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.

First, that group which has funds for investment in productive enterprise is dwindling and dwindling and dwindling. In fact, I would suppose there is practically no one today who, after taxes, has money enough to invest out of the current income in productive enterprise.

Most of your investments will come through the use of prior years' savings accumulated in the hands of the individual.

As we go up into the higher brackets, on the basis of dollars after taxes, I think we are perfectly safe in saying that not one single person of the United States can afford to place his funds into a productive enterprise, into equity capital of those productive enterprises.

There is not enough money left after taxes to justify the risk which he takes.

Someone comes to you or me and says: “Let me have a thousand dollars.'

The first thing we ask is: “What chance do I have of getting the $1,000 back?"

So, the risk of the principal is one of our first questions.
And the second is yield.

I do not for a moment suggest that the enactment of this bill is going to entice large sums of money from individuals. I think it will help, and I think it will help solely, as the chairman said, because the investors will say to themselves:

“We know that Congress is not going to continue confiscatory wartime taxes on wealth. We know that our tax rates are coming down. We know the Congress is going to establish and maintain a system which is the true American system, which says that you and I can do whatever work we want, save some money, and invest it if we wish.”

The evidence before this committee and before the Committee on Ways and Means is conclusive, and if you need more, let us just for a minute look at what we call the smaller-business man.

Why are there so many increasing failures among smaller businesses?

Why are smaller businesses liquidating, going out of business entirely

Why are smaller businesses being purchased by larger businesses ? Why are there so many consolidations and mergers ?

Primarily, because even the smaller-business man cannot afford to continue the risk of business based upon the dollars which he gets in profits after taxes.

And if our mergers and consolidations and liquidations continue, you are destroying the very basis of American life.

On top of that, you are doing more to promote monopoly than the Department of Justice can possibly remedy, or that the statutes can possibly remedy.

I am confident that the statements which have been made before your committee, in publications, the opinions of experts, cannot be controverted.

The No. 1 source of equity capital is practically dried up.
So we go to the No. 2 source.

Then, before I go to the No. 2 source, let me point out one fact which I think is a complete answer to the Secretary's statement this morning:

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