By reason of the lack of equity capital, we have seen an alarming increase within the last 2 years in bank loans, increases so alarming that the Chairman of the Federal Reserve Board came to Congress and asked for legislation giving him more control over them.

That increase in bank loans is far more inflationary than any conceivable tax reduction in the hands of the individual would be.

I do not mean to say the bill is inflationary, but I hope to clear that point up later.

But we are denying equity capital to the corporation. The corporation must go elsewhere. The one place to go is the bank, and they are borrowing from the banks. That is not too sound a procedure from every point of view.

So that we find our source No. 1 practically gone.

Source No. 2 is the funds of the corporation itself. You have a mass of statistics before you showing that the funds of the corporation itself are woefully inadequate to meet the job that must be done in the future.

If we are going to progress, and if we are to become strong, we must continue with new plants, new facilities, new equipment, extensive research and development, new products, new territories, new markets, precisely as America has grown from the very beginning.

In this connection, I might say if I were to do one constructive job with respect to the use of corporate profits, I would either amend section 102 effectively so as to remove the fear of retaining profit, or lay it aside entirely for 2 or 3 years.

It frightens only the smaller man and compels him to distribute more than he should.

Use of undistributed profits is highly essential for this year and next year, and all years to come.

Now, let me assume that corporate profits, funds available within the enterprise itself, are insufficient.

We have seen that happen in the past, and we know exactly what will happen. The smaller businessman will come first because he is the man who is hurt first and will insist upon another RFC.

That man will insist upon the use of Government funds to finance him, and we all know the expected consequences of such financing. That is the only way that business is financed-private sources outside of the corporation, and in that the available equity capital has practically disappeared.

Funds of the corporation itself are not adequate.

We either must finance industry privately or we must make up the deficiency through the Government.

In addition to the controls which the Government must impose, just think of the effect upon our surplus if we must engage in several billion dollars of financing.

I think that is the important point I desire to make.

Do not be surprised if large funds are not immediately available from private sources if the bill passes. I can assure you that practically none will be available if the bill does not pass.

I am also confident that just because the American people will realize we are headed toward a sound Federal Government, toward sound Federal financing, and toward sound taxation, a very substantial amount in the hands of the individual will be available for investment in equity capital of enterprises old or new.

Let me answer, for just a minute, if I may, the comment of the Secretary of Commerce in which he states that these tremendous profits of the corporations in 1947, and anticipated for 1948, make it inadvisable to reduce taxes.

First, as Senator Hawkes says, watch the balance sheets pretty carefully. You will find a very substantial amount of the $17,500,000,000 so-called profits after taxes represent paper profits.

You will also find inadequate funds even at the present rate for the replacement of inventories and the expansion of business.

Let me just make one more point on that.

The most reliable estimate I have seen shows that if volume, which today is the primary factor in corporate profits, a tremendously increased volume, greater volume than we have ever had in the past, decreases by but 12 percent, all corporate profits are wiped out.

Let me discuss now the issue of inflation and its relation to tax reduction.

I am convinced that tax reduction in this bill, or a greater tax reduction, which I hope will be forthcoming next year, will have definitely no inflationary effect.

It seems to me that the argument of the Secretary of Commerce was somewhat like the argument which the administration representatives made back in 1942 about the so-called inflationary gap.

That concept of an inflationary gap was busted exactly 100 percent within a few days after they came out with it, and this is the first time I have heard an argument which smacked of the same inflationary-gap concept.

Let us take the smaller-income group. We know that today a large number of the smaller-income group do not have enough money left after taxes to pay living expenses and to buy those things which they want, which we in America believe are necessary.

They are borrowing for it. Obviously, the relief which they get in the bill will go in large part to pay off debts and in large part to avoid debts. It is not going to stop the buying or increase the buying.

A large part will go into savings.

The CHAIRMAN. Is it not obvious that if you buy out of the proceeds of a loan you are spending money just the same?

Mr. ALVORD. Just the same precisely, Senator, and you are increasing bank deposits.

Bear that in mind.

I might even take one more step. The spending of $40,000,000,000 a year is more inflationary than all the tax reduction you could conceivably give.

The CHAIRMAN. You probably observed that Secretary Harriman admitted as far as incentive capital is concerned, people buy just as much goods with money they borow at the banks as they would with equity capital.

Mr. ALVORD. Yes, sir.

The CHAIRMAN. So the inflationary angle disappears as far as that is concerned.

Mr. ALVORD. It does, and I am glad you have reached that conclusion, because it is the only conclusion which conceivably can be reached.

Let me mention for just a minute the argument that funds must be used to retire the public debt.

I do not want to get into an argument upon statistics, except to say probably the estimates we made last year were quite a bit more accurate than those the Treasury made.

I think the estimate which Mr. Stam and the joint committee made, which are in the House-committee report on the pending bill, are far more correct, and have proved to be far more correct than the estimates of the Treasury.

But, in any event, we have for the years 1948 and 1949 a minimum of $16,000,000,000, and probably as much as $20,000,000,000, available for debt reduction or tax reduction.

I cannot believe that people who are familiar with the fact of the reduction of the public debt are going to insist that 16 to 20 billion of the debt be reduced in 2 years.

I should think they would be much more interested in making certain that we maintain a national income in excess of $200,000,000,000 and maintain a national output of $240,000,000,000 to $250,000,000,000 so that we will have resources with which America can amortize our public debt in a sensible, orderly way, and at the same time reduce

taxes.

If those who insist upon reducing the public debt would realize the effect upon the public debt of merely a slight recession, or even a more serious depression, with all the effect upon our receipts and a concurrent effect upon the demand for expenditures and upon our expenditures, they would, I say, argue not for a 16 to 20 billion dollar reduction, but for a sound and sane America under which the public debt can be properly controlled and managed and paid.

The House bill does not go nearly as far as we hoped it would. I think if the two bills last year had not been vetoed, we would have had another tax-reduction bill this year which would give us still a further step toward a peacetime tax system.

The CHAIRMAN. It is apparent now, I suggest, that we could have had a reduction last year and would have had the surpluses which we predicted at that time.

Mr. ALVORD. Without any question, Mr. Chairman.

As a matter of fact, I am tempted to cite your estimates as rather conservative.

You will recall-and I am relying on my memory only-that the Secretary of the Treasury was insisting on a national income of $167,000,000,000 for the basis of his estimate. And I think you said, "Suppose we go to $175,000,000,000 or $180,000,000,000.”

Now, our national income is at a very definite trend upward which, as far as I can see, is continuing and will continue throughout 1948. It is $210,000,000,000 now as compared with $202,000,000,000 just a few months ago, and I see no signs at all of the curve starting the other

way.

That is the basis of the estimates in the House committee report. I think they are rather conservative in suggesting that we will have an average in the year 1949 of $200,000,000,000.

I think you are going to have more than that.

So I think their estimates are probably low.

If I were to leave one message with you, it would be to insist this bill is followed by other bills.

Corporate taxes must be reduced.

Double taxation of corporate profits must be eliminated or at least alleviated.

We must remove the penalty upon consolidated returns and eliminate the tax on intercompany dividends.

The capital-gains tax is far too high. It must be reduced, and the corporate income rate, I trust, next year will come down to 33 percent together with more relief in the hands of the individual.

I would like to see in this bill, and I am confident it will cost nothing in revenue, and the stimulus will be tremendous, the very simple rule which I think the American people would accept without question: No person should be compelled to work in peacetime for his Government more than half his time.

Write a 50-percent ceiling into the bill, and then you will see some effect on risk capital and effect on enterprise and on initiative and on ambition.

I think the spur resulting will far more than offset any estimated losses which probably would lie somewhere between $200,000,000 and $300,000,000 on paper.

I want to go outside the bill for just a minute, if I may, to impress upon you the importance of that which must be done.

Taxpayers have been promised a revision of the administrative provisions of the internal-revenue code for years and years and years. And it has never been forthcoming.

A bit here and there, quite true, but a real job has not yet been done.

The chairman of the Committee on Ways and Means has assured us there will be a second bill this year which, I trust, will deal with the reorganization provisions and make them workable, the liquidation of corporations, and personal holding companies, and make them workable; a large number of things, many of which are in the socalled Magill committee report, and others in the record of the Committee on Ways and Means.

If the Committee on Ways and Means passes that bill, I trust this committee will take immediate action on it and be sure it is enacted before the end of this session of Congress.

There is one item I might mention to you, which I think could well be attached to one or more of the smaller bills pending before this committee without necessarily attaching it to this bill.

A bill passed the House just the other day affecting the revenues. It is very important and not too technical a matter.

Come back to section 722. I am going to talk on behalf of the Commissioner on Internal Revenue.

You will recall under section 710 under certain circumstances, by virtue of reduction of taxes under 722, you could defer payment of a portion of taxes.

Now we are up against a peculiar situation. If the Commissioner acts on 722, and a loss is less than the deferred payment, or if he denies the entire claim, the statute may run on collecting the amount of the deferred tax.

Statutory provision would be quite simple, but the Commissioner should be given power to assess the amount of the deferred tax, notwithstanding his action on 722 and notwithstanding the running of limitations on the so-called standard issue.

72605-48- -30

I think that is rather important and I hope the Treasury will urge you to include it in the first bit of legislation in which some of these administrative things can be included.

Let me sum up generally.

If we are to step firmly and insistently toward this strong America, I want to urge two things. These are not the only two things, but we are talking only on fiscal matters today.

I would like to urge two things: No. 1. Reduce expenditures drastically below the $40,000,000,000 level.

Federal fiscal strength requires a lower level of expenditures-and this means (a) a determination by the Executive to curtail; (b) closest scrutiny by the Congress of each and every proposal, and the adoption by the Congress of more effective controls and procedure; (c) a scrapping, at least for the present, of all new, nonessential functions; (d) a refusal to expand existing functions; (e) a postponement of authorized projects, insofar as possible; (f) a thorough review of our grants-in-aid policies and practices; (g) a business-like reorganization of our Government, to eliminate waste and duplications; (h) an increase in the efficiency of Government personnel by placing appointments and promotions upon merit and not upon politics and political contributions; and (i) we must learn to live within our income, and within a moderate income.

Expenditures can be and must be reduced. We are not a $40,000,000,000 Government unless we do it through the inflationary processes that everybody dreads.

Two: Enact the bill before you, and each year so far as you possibly can continue to cut taxes until we get a total tax load which the American people can afford to carry.

The CHAIRMAN. Any questions?

Senator GEORGE. No questions.

The CHAIRMAN. Thank you very much.

Mr. ALVORD. Thank you, gentlemen.

The CHAIRMAN. We will meet at 2:30 in the District of Columbia committee room in the Capitol.

(Whereupon, at 12: 55 p. m., the committee recessed to reconvene at 2:30 p. m., in the District of Columbia Committee room, this same day.)

AFTER RECESS

(Thereupon, at 2: 30 p. m., at the expiration of the recess, the committee reconvened in the District of Columbia Committee room, Capitol Building.)

The CHAIRMAN. The committee will come to order.

Is Mr. Button here?

Mr. BUTTON. Yes, sir.

The CHAIRMAN. We are taking you somewhat out of order, Mr. Button. Dr. King, who was to proceed you, has not arrived.

STATEMENT OF RALPH W. BUTTON, ON BEHALF OF NATIONAL RETAIL DRY GOODS ASSOCIATION

Mr. BUTTON. Mr. Chairman, and members of the Finance Committee, my name is Ralph W. Button. I am employed as manager of the Tax Department and am Assistant Secretary of Allied Stores Corpo