REDUCTION OF INDIVIDUAL INCOME TAXES TUESDAY, MARCH 2, 1948 UNITED STATES SENATE, The committee met at 10 a. m., pursuant to adjournment, in room 312 of the Senate Office Building, Senator Eugene D. Millikin (chairman of the committee) presiding. Present: Senators Millikin (chairman of the committee), Brewster, Bushfield, Hawkes, Martin, George, Barkley, Connally, and Lucas. The CHAIRMAN. The hearing will come to order. The first witness is Mr. Hanes. Mr. Hanes, will you please come forward? Will you give your full name and occupation? STATEMENT OF JOHN W. HANES, FORMER UNDER SECRETARY OF THE UNITED STATES TREASURY, NEW YORK, N. Y. Mr. HANES. My name is John W. Hanes. My address is 1 Broadway, New York City. The CHAIRMAN. You were formerly connected with the United States Treasury? Mr. HANES. I was; yes, sir. The CHAIRMAN. What was your position with the Treasury? Mr. HANES. I was First Assistant Secretary and later Under Secretary of the Treasury. The CHAIRMAN. Proceed, please, Mr. Hanes. Mr. HANES. Mr. Chairman, I am appearing here today in response to a request from the chairman of your committee, and the views I express are my own. Senator BARKLEY. You used to be here with the Treasury, but what is your present connection? Mr. HANES. I am at the present time chairman of the finance committee of the United States Lines Co. Senator BARKLEY. Thank you. Mr. HANES. First, I would like to mention a matter which concerns me deeply. This is the general confusion that is evident in the public mind concerning the tax-reduction bill now before your committee for consideration. The impression has been spread that, for the most part, the individual income-tax payer will go scot free under this bill and that all income-tax payers are being given huge tax reductions. This bill has been labeled as a major tax reduction measure, but nobody has brought out the fact that the tax reductions proposed will, in fact, not go very far toward bringing our people back to anywhere near a peacetime basis. Admittedly, we may never return to such a basis, but I believe it would be worth while to examine the facts for a moment and see just how small a step toward prewar tax levels this bill brings us. For instance, take as an example a married man, with two dependents, who has a net income before personal exemptions of $15,000. In 1939 his tax was $831. By 1941 his tax had been tripled to $2,475. Through successive increases in 1942 and 1943 his tax was brought up to a peak of $4,265. Under the present bill his tax would be $2,320, or about equal to his 1941 tax and three times his 1939 tax. When we consider that inflation has lowered the value of the dollar by at least 40 percent during the war and postwar period, we see that the tax reductions proposed in H. R. 4790 will do very little toward restoring the living standard of a man with the $15,000 income to the prewar level, or even to the level of the early war years. I am attaching hereto a table, exhibit A, which gives the effect of these changes for a $5,000, $10,000, and $15,000 man. (The table mentioned will be found on p. 100.) In considering this problem of tax reduction, naturally the first question which confronts us is, "Can we afford a tax cut?" Last spring, when Congress was considering the question of tax reduction, I wrote a letter to your chairman, Senator Millikin, and to Senator George, expressing my belief that the Federal Government would show a very substantial surplus for the 18-month period, January 1, 1947, to June 30, 1948. You may recall that at that time the Treasury was estimating a deficit of 2.3 billion dollars for the year ending June 30, 1947, and a small surplus of 200 million dollars for the year ending June 30, 1948. I predicated my statement on the assumption that the Congress would reduce Government expenditures materially for the fiscal year 1948. On that assumption I stated my belief that the surplus for the 18 months beginning January 1947 and going through fiscal 1948 would be between $9,000,000,000 and $11,000,000,000. The President has since declared that Congress reduced expenditures by $1,500,000,000, a figure which, for sound reasons, has been disputed in many quarters. The President also stated that total expenditures for the current fiscal year will be higher than originally estimated in the Budget document. Nevertheless, the Treasury has three times found it necessary to revise their revenue estimates upward. The actual result was a surplus of $750,000,000 instead of a deficit in the last fiscal year, and the anticipated surplus for the current fiscal year has now been increased from $200,000,000 to $7,500,000,000. It seems that this estimate is also too low. Thus the officially estimated surplus for the two fiscal years-last year and the current year-will total $8,250,000,000. This is far above the amounts I would have expected under the high expenditure levels of this year and last. My forecast, however, was far more accurate than the figures used by the President as a basis for his two vetoes of last year's tax bills passed by large majorities in both Houses. The size of the errors in Treasury estimates does not leave room for much faith in the estimates now put forward by the administration for the current fiscal year and for the fiscal year 1949. At the President's budget seminar in January, Secretary Snyder is reported to have said that the revenue calculations were based on a level of personal incomes of $192,000,000,000. Later, the Secretary stated that the estimates were based on personal incomes of "about $200,000,000,000." According to the reports of the Department of Commerce, personal income in the third quarter of calendar 1947, the first quarter of the present fiscal year, was at an annual rate of $200,400,000,000. The rate in October was $204,400,000,000, and in November it was $204,900,000,000. On February 12, the Department of Commerce issued a statement giving the December figure as $209,700,000,000. These figures indicate that the Treasury estimate for fiscal 1948 is once more too low and that we may expect a surplus larger even than the estimated $7,500,000,000. In fact, at the hearings before the Ways and Means Committee, a Treasury staff member stated that, if personal incomes totaled $205,000,000,000 for the year, we might expect an increase in revenues of $1,100,000,000 (p. 91). The evidence since December indicates that this level of incomes is still being maintained. For instance, in the budget, the President estimated that income taxes withheld by employers would increase this year over last year by 13 percent. The increase up to December 31, 1947, was 17 percent. Therefore, the increase in the last 6 months of this fiscal year would need to be only 10 percent to meet the President's figure. Senator BARKLEY. Would it disturb you, Mr. Hanes, if I asked a question there? Mr. HANES. No, sir. Senator BARKLEY. In connection with that, you have probably seen the statement issued within the last 2 weeks by the Department of Commerce that the national income for last year was $197,000,000,000. Mr. HANES. Yes, sir. Senator BARKLEY. How do you reconcile that? Mr. HANES. That is the average. Senator BARKLEY. You are speaking now of what would happen if all the months were as good as December? Mr. HANES. That is right. I think the Department gives a figure by months, and I can give it to you if you like. Senator BARKLEY. I do not care about it by months. Mr. HANES. The average figure was $197,000,000,000, and the last figure in December was $209,000,000,000, which, of course, was about $10,000,000,000 higher than the average for the year. The CHAIRMAN. Is it not also correct, Mr. Hanes, that, in estimating the revenue for fiscal 1949, the trend of the last few months of 1948 is a very highly important factor? Mr. HANES. Yes, sir; very indicative. However, the Treasury statement of February 26, the latest available, shows that the increase since January 1 over the comparable period last year is thus far actually 152 percent. In February income-tax withholding collections are running 17 percent ahead of February of last year. On January 31, at the end of the first 7 months of the current fiscal year, net budget receipts were nearly 114 billion dollars ahead of the corresponding period last year. Monthly receipts from withholding taxes during this 7-month period have averaged nearly 120 million dollars more each month than last year. Knowing that the March payments will reflect the increased income of corporations during 1947 over 1946, and will thus exceed last year's payments, we may confidently expect that revenues in the current fiscal year will substantially exceed the President's estimates. With consideration of these factors, it seems evident to me that the total receipts for the fiscal year 1948 will reach 47.5 billion dollars. Under the present expenditure estimate of 37.7 billion dollars, this should leave a surplus for the current year of 9.8 billion dollars. The President estimated revenues for the next fiscal year, 1949, at 44.5 billion dollars and the surplus at 4.8 billion dollars. The staff of the joint committee, in the House Ways and Means Committee report on H. R. 4790, raised this estimate to 47.3 billion dollars, a figure which seems conservative. The reasons given in the report appear to me to be sound, and there is no question in my mind that this revenue level will be reached or even exceeded. Thus the 1949 surplus would be 7.6 billion dollars, if we assume that the President's expenditure proposals remain unchanged. But the Congress has now voted to hold expenditures in the next fiscal year to 37.2 billion dollars, a reduction of 212 billion dollars below the President's figure. If the Congress should succeed in this intention, the surplus for next year would be 10.1 billion dollars. Within these surplus figures, a total of 19.9 billion dollars for the two fiscal years, there is evidently ample room for tax reduction. The question of whether we can afford a tax cut must thus be answered with an emphatic "yes." Last spring I stated that the general feeling that the debt must be reduced during this period of prosperous business was most wholesome. I agreed with that opinion at that time, and I am still in agreement. However, surpluses of the size that are now in prospect mean that the Government is taxing the people far beyond its needs. I believe strongly that there is sufficient latitude, not only for debt reduction exceeding any amounts anticipated by the administration last year, but for substantial tax reduction. Nor does it seem unreasonable to expect that the Congress can wisely and safely reduce expenditures in the next fiscal year. The Presi dent's budget contains over 5.7 billion dollars of proposed spending which the Congress has not yet authorized. This involves programs on which Congress has not yet expressed its views and, consequently, the opportunity for reducing expenditures is much greater than it was last year. A cut of 212 billion dollars will still leave the budget at a level which amply takes into account the uncertainties in the world situation and America's responsibilities both at home and abroad. In the past few weeks the drop in commodity prices has naturally raised a question of whether we are in for a period of slowing down in business whether this drop was really the first sign of a deflation. I would like to make a few observations on this point. First, the size of these price drops and their effect on the rest of the economy do not warrant drastically revised estimates of Federal revenues, particularly for the current fiscal year ending June 30. Second, so far as the next fiscal year is concerned, if there is to be a slowing down of business, then there is room within the surplus to curtail somewhat the large amounts now available for debt reduction and thus provide sufficient leeway for tax reduction. Third, the most reliable business economists are pretty well agreed that the pattern for 1948 is fairly well set. The CHAIRMAN. Is that fiscal or calendar year? Mr. HANES. Calendar year 1948, I am speaking of. The high volume of business activity and its continuation are largely dependent upon capital expenditures by private industry, and all indications point to about the same amount to be spent in 1948 as in 1947. In this connection the proposal of your chairman, approved by the Foreign Relations Committee, to set aside $3,000,000,000 of the 1948 surplus, to be earmarked for European expenditures in the next fiscal year, provides an additional safety factor or margin which would insure that debt reduction will not be neglected next year. Again looking at the 1949 picture, it may be pertinent for me to quote the statement of Secretary Snyder before the House Ways and Means Committee last spring-hearings on H. R. 1, pages 18-19: If, however, at a future date business should be operating at less than capacity, I believe that it could be stimulated by tax reductions. Such tax reductions should be so designed as both to stimulate business incentives and to increase mass purchasing power on which business prosperity ultimately depends. I believe, therefore, that in any such future revision of the tax system consideration should be given both to decreasing tax rates and to increasing personal exemptions in a manner calculated to distribute the benefits equitably. I believe that H. R. 4790 is precisely the kind of program that meets these requirements of Secretary Snyder. I submit further that now is exactly the right time for stimulating business incentives. I know, from my own observation and experience, that the present tax laws preclude individuals from saving amounts necessary to flow into business to keep the economic ball rolling. I have yet to see more convincing evidence of this fact than the data on liquid savings prepared by the Securities and Exchange Commission periodically. According to the latest quarterly survey of the volume and composition of individual savings, the liquid savings by individuals during the third quarter of 1947 amounted to approximately 2.9 billion dollars, and with adjustments for increased inventories of unincorporated business the amount would be raised to 3.1 billion dollars. What form did these savings take? Principally, individuals increased their holdings of cash and deposits by 2.5 billion dollars. They increased their equity in private and in Government insurance by about 1.6 billion dollars; and there were smaller increases in their investments in savings and loans associations. As offsets, individuals increased their mortgage indebtedness on nonfarm residences by 1.1 billion dollars and reduced their holdings in Government securities to the extent of 200 million dollars. I quote from the study the following very significant conclusion: Individuals' holdings of State and local government securities increased by $100,000,000, while their equity in corporate and other securities increased by $200,000,000. |