Such excise taxes have two outstanding advantages as sources of Federal revenue: 1. By shifting excise rates, revenues can be varied, as necessary, to balance the budget. 2. In wartime, unimportant production can be held down by elevating taxes on luxuries. Therefore, such taxes should be utilized to whatever extent necessary at any time to avoid borrowing to cover current Government expenses. CONCLUSION I hope that all the members of your committee will give your active support to a movement to amend the Constitution in such a way as to bolster economic freedom, including the right to hold and dispose of property as the owner sees fit, and also to encourage efficiency in the operation of all corporations, to protect in the future outstanding inventors, executives, and thrifty investors from robbery, to keep the way open to the ladder of success and achievement for our future McCormicks, Bells, Edisons, and Fords, and to safeguard yourselves against pressure from groups who are actuated either by envy or by antipathy to the economic freedom which has made America great. I hope you can find time to consider my views. (Whereupon, at 3:15 p. m., the committee adjourned, to reconvene at 10 a. m., February 7, 1958.) GENERAL REVENUE REVISION (Tax Treatment of Contributions to Certain Retirement Funds; and Miscellaneous Subjects) FRIDAY, FEBRUARY 7, 1958 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met at 10 a. m., pursuant to recess, in the committee room, New House Office Building, Hon. Wilbur D. Mills (chairman) presiding. The CHAIRMAN. The committee will please come to order. Our first witness this morning is Dr. Gerhard Colm, who has been invited by the committee to appear. Dr. Colm, will you please come forward and, for purposes of the record, identify yourself by giving your name and address. STATEMENT OF DR. GERHARD COLM, CHIEF, ECONOMIST, NATIONAL PLANNING ASSOCIATION, WASHINGTON, D. C. Mr. COLM. Mr. Chairman, I am Gerhard Colm. I am chief economist for the National Planning Association here in Washington, D. C., which is a nonprofit and nonpartisan organization. I am appearing, however, in response to your invitation today, Mr. Chairman, as an individual interested in these problems of taxation. The CHAIRMAN. We appreciate having you with us this morning, Dr. Colm. We want you to feel free to proceed in your own manner. you desire, sir, to have included in the record your statement and to speak to us orally, that will be entirely satisfactory. If Mr. COLM. Mr. Chairman, I would appreciate if I may be permitted to file this prepared statement for the record, and to outline the highlights of what I feel is pertinent in the present situation. The CHAIRMAN. Without objection, your statement will appear in the record, and you are recognized. (The statement is as follows:) STATEMENT OF GERHARD COLM My name is Gerhard Colm. I am chief economist for the National Planning Association, which is a nonprofit and nonpartisan organization. I am appearing, however, in response to an invitation from the chairman, as an individual interested in fiscal and economic policy. I appreciate the opportunity to present to you some views on tax policy, particularly with regard to suggested revisions in the income and estate tax. With your permission I will deal with a few broad issues, leaving the intricate technical and legal problems to people who have greater knowledge and experience in that field. 20675-58-pt. 364 Present conditions afford a highly opportune time for this committee to consider tax revision. The fact that we are in an economic recession has put renewed steam behind proposals for substantial tax reduction. Some people have proposed that we should not shrink away from tax increases if deficiencies in our international and domestic programs make substantial increases in gov ernment expenditures imperative. Still others have taken the position that this is no time for either reducing or increasing taxes, although some feel that substantial tax revision is possible and desirable. THE BUDGET OUTLOOK Let us first examine the budget as transmitted by the Presdient a few weeks ago. A small deficit is estimated for fiscal year 1958; a small surplus for 1959. Since the deficit and surplus are so small as to be within the usual margin of possible estimating error, we may speak of the budget as being balanced. In the so-called consolidated cash budget there is a small surplus for both years. It is this budget picture which appears to give support to those who hold that no change in the general level of taxes is called for. The Government's expenditure estimate for fiscal 1959 shows a $1.1 billion increase above 1958 in the administrative budget, a $1.7 billion increase in the cash budget which includes the increase in the highway program. This increase in expenditures will be larger if the Congress does not adopt in full the proposed increases in postal rates. In addition, very serious questions have been raised about the adequacy of certain other program recommendations included in the budget. Other legislative committees are now in process of examining the adequacy of the expenditures budgeted for various programs. Meanwhile, this committee is faced with the question: Is it safe to make decisions regarding taxation assuming that the budget, as transmitted, will not be substantially altered? The answer, in part, lies in our desire and our willingness to maintain and advance our international position and our domestic economy. Some believe that it is futile to engage with the Soviet Union in a race for the development of, and defense against, superweapons; that it is futile to advance research, education, and training with a view to outrival the Soviet Union. Some believe we would be endangering our own way of life if we accept the Soviet challenge for competitive coexistence. Personally, I believe we have no choice but to face up to that challenge. However, if we are to meet it forcefully and effectively, then some of the proposed programs for defense and nondefense activities may very well be inadequate. Until the appropriate committees and the Congress as a whole have considered the various programs, I do not think it would be wise to regard the expenditure estimates for fiscal 1959 as a firm basis for final judgment. It might, therefore, be prudent, as a preliminary work. ing hypothesis, to regard expenditures for 1959 at $2 to $3 billion larger than the budget estimates. Now let us look at the revenue side of the budget. The President's budget shows a $2 billion increase in revenue, both in the administrative and in the cash budget, with only minor changes proposed in tax legislation. The esti. mated increase in revenue is expected to result from the anticipated upturn in business conditions in the near future. This expectation is based on the hope that three proposed policies will be effective: 1. The relaxation of credit restraints, 2. The promotion of residential construction, 3. The sharp increase in the placement of defense contracts during the first half of this calendar year. The relaxation of credit restraints will have some effect, particularly on proposed State and local capital outlays and on housing. There are however, certain restraining factors as well. Some States are facing financial difficulties which may force them either to increase tax rates or to curtail expenditures. With respect to housing, recent surveys reveal that the economic uncertainty has dampened consumers' intentions to buy. The most important impact on the economy should come from the current substantial increase in the placement of defense contracts. However, under present plans the increases in defense contracts during the first 6 months of 1958 would merely offset the curtailments in contracts placed during the second half of last year. Defense contracts for the fiscal year 1959 as a whole would be about the same as those for the current or last fiscal year. No rise beyond June 1958 is contemplated. (See table I on page 4.) I think it is very hazardous to rely primarily on these temporary increases in defense contracts to bring the downturn to a halt and to stimulate a renewed rise which would be sufficient to yield $2 billion additional revenue in the next fiscal year. GNP would need to increase close to $10 billion in order to yield that amount of additional tax revenue. TABLE I.—Department of Defense military functions contract obligations placed with private industry 1 Projected on basis of first half fiscal year 1959 estimates. Source: Department of Defense and National Planning Association; estimates based on 1959 defense budget program. I am not certain that such an increase in GNP can be taken as a safe assumption if only the credit and fiscal policies recommended in the budget and the Economic Report were adopted. Considering present budget programs and policy recommendations of the administration, I would expect not a balanced budget-as shown in the budget message but a substantial budget deficit resulting from falling revenue owing to the recession. If expenditures should rise 2 to 3 billion dollars above currently contemplated levels without any increase in tax rates, a budget deficit would result also. However, in this latter case with expenditures and tax revenues at somewhat higher levels, resources which at the present time are idle could be used for high priority purposes, and we would, at the same time, be increasing the chances for sustained recovery. An attempt to balance the budget in a period of recession by a drastic curtailment of expenditures or by a substantial increase in tax rates would greatly enhance the likelihood of a serious depression. I agree with the statement made by the President at a recent press conference that under present economic conditions a temporary budget deficit is preferable to a tax rise. Only if expenditures should be stepped up by much more than is contemplated in this discussion, would I recommend consideration of a tax increase as an anti-inflation measure. But what about tax reductions? As I have stated earlier, I do not believe that the combination of a moderate relaxation in credit policy and a small increase in Government expenditures will be sufficient to counteract the recession. Therefore, I would conclude that tax reduction is warranted unless expenditure programs are stepped up. There is also a longer range factor in the budget and the economic policy program on which I should like to comment. I refer to the proposal that certain Federal functions be passed on to the State and local governments. These specific proposals are in my opinion, unrealistic. A much more basic approach to the Federal-State-local problem is needed. In the long run it would be unwise for us to reduce the more progressive and lucrative Federal taxes while we force States and local governments to increase their tax rates. Therefore, in formulating a long-range tax policy, consideration should also be given to the development of revenue needs and resources for the various State and local governmental jurisdictions. |