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"We believe serious consideration should be given to the development of a longterm tax program. The magnitude of the national debt makes it imperative that our national fiscal policies be handled prudently. Long-range plans should be made for the gradual reduction of the national debt. However, the debt retirement should be handled in such a manner as to promote a stable price level and a prosperous economy which, in turn, may necessitate adjusting both the amount of revenues and the volume of expenditures of the Federal Government with reference to levels of employment and national income.

"The tax rate should be high enough to balance the budget under normal business conditions and allow for gradual reduction of the national debt, with increased payments during periods of great prosperity. Prompt but temporary reduction of the lower-bracket personal-income-tax rate within certain limits during periods of low business activity should be provided for. In any event, a tax program should be adopted which would not increase tax rates during periods of depression or lower them unduly during periods of prosperity.

"The personal income tax should be the major source of revenue for the Federal Government. We favor keeping the personal income-tax base as broad as practicable through the retention of low exemptions and the avoidance of a general Federal sales tax. All self-supporting persons should make a direct contribution to the support of government. Income from all future issues of Federal, State, and local government bonds should be taxed as other income is taxed. The personal income-tax rate should be high enough, together with Federal revenues from other sources, to meet the expenses of government and gradually reduce the national debt, without destroying the incentive for greater business activity and production.

“Individuals should be permitted to average their incomes over a period of years for tax purposes. Such a procedure would treat farmers and others with widely fluctuating incomes more fairly.

"We recognize that if full employment is maintained, the bulk of the jobs must be provided by free enterprise. Therefore the following recommendations are made pertaining to corporate taxes. The corporation should be exempted on that portion of its annual earnings distributed to the stockholders as dividends, where such dividends are taxed in the hands of the stockholders. A reasonable proportion of corporation earnings retained should be taxed at the rate used in the first bracket of the personal income tax. The balance of any amount retained should be taxed at a rate sufficient to encourage, but not to compel the distribution of earnings. Corporation taxes should be put upon a pay-as-you-go basis, similar to individual income taxes at the present time. Proper safeguards must be developed, if the foregoing recommendations are adopted, to prevent abuses in tax avoidance by the corporate form of business. We favor the principle of carrying forward and back, losses to be offset against gains for a reasonable period of time.

"Federal excise taxes should be limited largely to amusements and taxes on the so-called luxury goods, including alcoholic liquors and tobacco. The transportation tax and the tax on communications should be repealed.”

A brief word of explanation of this resolution, which was adopted less than a month ago by farmer leaders from all over the United States, is in order. You will notice the resolution is divided into two parts. The first part expresses our position pertaining to immediate problems in the field of taxation. We then state what we believe to be a sound long-term tax program. My remarks will be confined chiefly to the tax problems immediately at hand. At the appropriate time we will be glad to go into more detail on our long-term tax program.

The tax policy of the American Farm Bureau Federation is an important part of an over-all program to add greater stability to our general price level and to our domestic economy. Farmers are deeply concerned regarding the consequences of deflation, which has always followed inflation. Following the inflation of World War I, farmers suffered a long period of disparity between the prices they received for their products and the prices they had to pay for commodities used in production and family living. They feel that one of the major problems facing our domestic economy is that of bringing about conditions which will lessen the magnitude of booms, and especially the severity of depressions. With this thought in mind farmers are willing to forego some temporary relief from taxation, with the hope that at the appropriate time our tax and fiscal policies can be used to prevent unreasonable declines in business activity and

prices. With a Federal debt in excess of $256,000,000,000 and an annual budget many times higher than the prewar level, there can be little doubt that the prudent handling of fiscal and tax policies will be of greater importance than ever before.

The American Farm Bureau Federation believes that now, during a period of inflation, is not the time for any material reduction in income-tax rates. We feel that now, with high production and high prices, is the time when tax receipts should be maintained and the national debt should be reduced as rapidly as possible. We feel that the time will come when a reduction in taxes can be a real stimulant to encourage greater production under the private-enterprise system. Farmers realize that this is not a popular position to take, but may I assure you that when the appropriate time comes our organization will be appearing before you urging tax reduction.

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We feel that if the maximum amount is to be applied to the reduction of the national debt, Government expenditures should be reduced to a minimum. All nonessential Government expenditures should be eliminated, and all other expenditures reduced to the minimum necessary for good government, essential world aid, and adequate national defense. The present world condition dictates a budget much higher than most of us would like

This necessitates even greater than normal scrutiny of all governmental expenditures.

The national debt of over 256,000,000,000 cannot be taken lightly. Drastic debt reduction, not merely token payments on the debt, would have significant effects in reducing the inflationary pressures we are now experiencing. If we cannot materially reduce the debt now, during the greatest period of peacetime prosperity we have ever experienced, how are we ever going to reduce it under more normal conditions? At the present time we are giving a great deal of consideration to military preparedness. Is not a greatly reduced national debt also essential to keep this Nation in a strong position to meet any eventuality?

Our organization feels that two changes should be made immediately in the tax program, which would mean some reduced revenue to the Federal Government. In order to deal equitably with all citizens of like taxpaying ability, for Federal income-tax purposes, the privileges now extended to married couples in States with community-property laws should be extended to give all citizens equitable treatment in all Federal individual taxes. We feel that this is a matter of equity which should be corrected. It is understood such a change would probably necessitate some revisions in other Federal taxes as they relate to the States now having community-property laws.

We likewise feel that the Federal tax on transportation and communications should be repealed. While this is in the nature of an excise tax, it is a tax upon business which if repealed would tend to permit the lowering of prices on many essential commodities. We favor 'limiting Federal excise taxes largely to amusements and taxes on so-called luxury goods, including alcoholic liquors and tobacco,

At the present time we are opposed to any change in the existing tax laws which would eliminate large segments of our population from the responsibility of paying personal income taxes. We believe it is a good policy to keep the tax base as broad as practicable and have all self-supporting people conscious of the fact that they make a direct contribution to the support of the Federal Government.

It is realized that the foregoing statement is not one that will receive widespread popular acclaim. Selfishly, we would all like to pay lower taxes. The farmers who unanimously adopted this resolution have a deep sense of responsibility in trying to bring about conditions which will prevent some of the undesirable experiences they have had in the past. They are willing to forego a temporary gain with the hope of obtaining the long-time objective of greater stability in prices and in our domestic economy. We earnestly hope that this distinguished body, to whom farmers must look for the final development of sound national policies, will give very careful consideration in the near future to the development of a long-term tax program. The tax program should be coordinated with our monetary and fiscal policies and designed to promote a free economy under the private-enterprise system, which will produce an everincreasing standard of living and prevent the disastrous depression periods which we have experienced in the past.

STATEMENT BY ALLEN M. BERNSTEIN, PRESIDENT, BERNSTEIN-MACAULEY, INC., ECONOMIC RESEARCH, FINANCIAL AND INDUSTRIAL CONSULTANTS, NEW YORK, N. Y.

Tax reductions, per se, are unquestionably desirable. But revisions in tax laws, whether upward or downward must be considered in relation to their effect on the general economy,

At the present moment, we are in a period of inflation. Inflation is a manifestation of a plethora of money and a paucity of goods in relation to the money available for their purchase. The result is, obviously, high prices. Could we, overnight, materially increase production, we might bring money and goods into balance. But a substantial increase in production from present levels in a short time, is for many reasons, impossible.

We have, then, but one other alternative, namely, to reduce the supply of money. But to reduce personal income taxes now would only serve to increase the purchasing power of all classes of the general public. This again would have the tendency to increase prices of all goods—necessities as well as luxuries. The individual would benefit little from his tax savings, if they be dissipated in higher prices for goods that he must, or desires, to buy.

Yet, the demand for tax reductions is now so insistent that some means must be found that will satisfy the national wish but which, at the same time, will not add fuel to the inflationary fire. We, therefore, suggest the following:

(1). A reduction in personal income taxes, approximately according to the schedules outlined by Congressman Knutson.

(2) The taxpayer, however, would pay the full amount of the present tax, but would receive, from the Government, bonds to an amount equal to the tax reduction, payable in not less than 1 year and in not more than 5 years, bearing compound interest at the rate of 11/2 percent per annum.

(3) The time of redemption after 5 years would be left to the discretion of the Congress, but must be within the 5-year period.

(4) The bonds would be nonnegotiable, nontransferable, and could not be used as collateral. The proceeds of the bonds, at the time of redemption, would only be payable to the original holder, except in the event of death, payment-at the option of the heirs—could be demanded immediately or held until the bond is redeemed.

(5) The Treasury would obligate itself to redeem from commercial banks, an amount of debt equal to the amount of tax refund bonds issued. The funds for such redemption would be available from the temporary overpayments of the taxpayer.

Briefly, this plan is offered as a substitute for the Knutson plan, the Truman plan, and Mr. Baruch's suggestions.

Other pepole, as well as ourselves, have stressed the fact that a reduction in income taxes at this time would be dangerous, in view of the inflationary effects that greater spending power would have. This is unquestionably true, but we must realize that if there be no personal income tax reduction, the amount of suggested savings will be paid to the Government, and if the Government spends the money, the effect on the general economy-in the final analysis will be the

While the Government does not spend the money directly for food and low-priced clothing, the “velocity” of money spent by the Government is, obviously, as rapid as that spent by the individual, and the mere existence of the money, or deposits—has its potential effect upon the price structure.

Nor can we agree that tax reductions at present to provide capital either for equity financing or other types of financing are desirable. To stimulate plant expansion in a period of inflation only adds to the cost of materials. Plant construction, started a year ago, has cost far more than anticipated. And frequently; plant expansion undertaken in boom periods stands empty and unused when completed, for by the time the building is ready for use, the boom has “bust."

As a matter of fact, we doubt whether the important buyers of equities are dependent upon the cash savings from reduced income taxes for equity investment. These are, obviously, investors whose annual income is from $10,000 to $100,000

Naturally, our clientele are in these groups, and they have had for almost 2 years a very substantial amount of cash, Government bonds, and shortterm tax-exempts awaiting equity investment. But in view of the high prices for

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commodities and manufactured goods, and the inflated buildings costs, we have not felt justified in advising investment. It is unreasonable to expect that personal tax reduction will, in itself, change the picture. And we have reason to believe that most investment counsels' clients are in the same position as are ours.

On the other hand, we are entirely opposed to an increase in corporate taxes, either for the reasons given by Mr. Truman or Mr. Baruch. Most financial writers are in accord. However, there is one important fact that, it would seem, not only they but both Mr. Truman and Mr. Baruch have overlooked. A very large part of the profit of corporations is evidenced by expanded inventory carried at inflated prices or by plant expansion erected at exorbitant costs. In spite of the small dividents paid out in relation to earnings, there has been a decrease in net cash. If prices and dollar volume remain high, the necessity for additional tax payments would only impair the cash position of corporations further.

If prices should break, there will be no “excess” profits—possibly for a period, no profits at all. And if there is one thing that would deter investors from again entering the equity market, it would be additional corporate taxes.

Further, a combination of enforced savings and reduction in Government debt is unquestionably deflationary. But also unquestionably, some deflation at this time is not only desirable but necessary. It is entirely possible that such deflation may bring about a cost of living of the worker to an amount at least equal to the Truman-suggested $40 a year reduction in taxes, but in addition, his cost-of-living savings would be capitalized for future use.

It would seem that this plan would accomplish tax reductions so urgently demanded without the probable inflationary effects of such reduction. It would bring about compulsory savings, with normal savings banks' interest. It would allow the Congress, after 1 year, whenever it deemed additional public purchasing power necessary, to prime the pump without recourse to additional borrowing. It would deprive the Government of immediate income of approximately $5,000,000,000 and thus force economies of a like amount.

By compelling the Treasury to redeem bank-held debt, it would reduce the present supply of money and bank deposits by an amount equal to such redemption. At no time would this plan increase the amount of outstanding debt. When tax refund bonds were redeemed, the Government would merely replace the debt through the usual channels to obtain the funds for redemption. Then an increase in band deposits would probably be as desirable as a decrease is now.

I have had a great deal of correspondence and many conversations with bankers and economists on this subject, and on the whole they regard the plan favorably. There have been the usual objections to enforced savings, the lack of assurance that the plan does not in itself guarantee Government economies, and that the fact that savings in the form of bonds accruing from tax savings, might tend to stimulate extravagances in other directions.

It would seem, however, that the public has during the war accustomed itself to the idea of enforced savings, that the fact that the Government would be compelled to use the excess cash received for the reduction of bank-held debt would tend to enforce economies, and that further individual savings could be encouraged by the usual propaganda.

Hence, we would comply with the desire for tax reductions, and insure ourselves to a reasonable extent, for the future, while at the same time reducing our present huge deposits and currency.

(Thereupon, at 1:25 p. m., the committee recessed to reconvene in the District of Columbia Committee room at 3 p. m.)

AFTERNOON SESSION

(The committee resumed at 3 p. m., after the expiration of the recess.)

The CHAIRMAN. The hearing will come to order.

Mr. Gainsbrugh, will you give the reporter your name, address, and occupation.

STATEMENT OF MARTIN R. GAINSBRUGH, CHIEF ECONOMIST, NA

TIONAL INDUSTRIAL CONFERENCE BOARD, NEW YORK, N. Y.

Mr. GAINSBRUGH. My name is Martin R. Gainsbrugh. I am chief economist for the National Industrial Conference Board.

As you know, Senator, I am here in response to an invitation by your committee which was presented to our president, Dr. Virgil Jordon. Dr. Jordon has asked me to testify for him on general business conditions in 1948 and 1949.

Your wire included the statement that there was no intention of questioning on tax policies.

There was a subsequent response from Dr. Virgil Jordan to Mr. Stam, in which there was another limitation; namely, that it was not the practice or policy of the Conference Board to offer forecasts of business conditions by its research staff but that he would be glad to let me come down and report to you what we have found out from our membership.

The CHAIRMAN. We are glad to hear from you.

Mr. GAINSBRUGH. So, with those two limitations in mind, if I shy away from too positive a statement at times, I hope you will understand the necessity for it.

I have no formal statement because with the receipt of your telegram, we began to undertake a survey of the opinion of businessmen associated with the conference board in which we would attempt to get their levels of activity, projected levels, for the first half of 1948 and the second half of 1948.

There has been a great deal of indecision in the last 2 months on business outlook, and we thought that rather than to speculate as to what the course of business activity would be, we would ask business itself to tell us what its wood pile looked like. We have been working steadily at this since the receipt of Mr. Stam's telegram, and we can at least give you today some of the preliminary results of our findings.

I might teil you that the National Industrial Conference Board is a voluntary, private, non-profit-making, fact-finding institution—business research primarily.

We have a membership of about 3,500 business enterprises, both corporate and noncorporate; large, medium, and small in size.

The CHAIRMAN. Are they pretty well scattered over the country?

Mr. GAINSBRUGH. It is perhaps concentrated in the northeast quadrant, but we do have associates in the Midwest and in the far West.

Associated with us also are educational institutions, banks, and life-insurance companies, and some labor unions.

We have been engaged in fact-finding for American industry now for a third of a century.

It is our tradition: One, not to recommend policy; and, two, not to engage in forecast.

And those are the two limitations about which I shall not discuss.

What I have to report is highly optimistic in character, and in order that I am not misinterpreted, I want to first paint perhaps the most fatal backdrop that could be drawn against which my report should be viewed.

I have here the first of a series of charts that I am submitting. This is chart No. 1, which traces the course of consumer prices and wholesale prices for the last century and a half.

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