and consequently the gentleman does not get as much for his money as he did before, as the Government gets its proportion of labor. We have financed our war during the last 12 months in part by direct saving, in part by indirect saving. It is impossible to say to what extent credit has been expanded during the last 12 months. My estimate is that it is expanded by about $2,000,000,000. That means in the last analysis that purchasers of liberty bonds have borrowed about $2.000,000,000 of that banks have bought themselves along with which borrowers purchased something like $2,000,000,000 worth of bonds.

That simply means that the banks have credited either the Government or the individual buyers of these bonds with money, and it was turned over to the Government. The Government has bought goods with it. There is no increased amount of production of goods and consequently it increased the prices. It involves a saving on part of whom, mainly? Of people with stationary incomes. Take a woman of $1,000 income on bonds. You would not think of taxing that woman 30 or 40 per cent, reducing her power to buy goods 30 or 40 per cent. But that is just what happens to her under the policy of war financing, which is in part carried through by means of expanding credits.

That is the woman's contribution to the war. Her power to command the products of labor and industry is reduced through the rise of prices and so, by a process of indirection, inflation will enforce economy, but it enforces it unequally-unjustly. Consequently, it seemed to me that in shaping a policy of war finance it is desirable not only to make certain that there shall be adequate revenue, but also to insure, in so far as may be, that the saving necessary in any case shall be direct rather than indirect through the product of credit expansion and rising prices. And it is from these two points of view that I wish to set forth a variety of measures relating to taxation, and incidentally to borrowing.

So far as the technical features of the income tax and excessprofits tax go, it seemed to me fruitless to undertake to say very much, owing to the fact that those charged with the administration of those laws, the Treasury Department, have not yet handed down their reports. If the experts at the Treasury Department come before you and say that they have been able to determine with a reasonable degree of exactness the invested capital of all the businesses in the United States, then no great modification in the excess-profits tax is needed.

It may be that they can indicate modifications in the law which make an excess-profits tax based upon invested capital feasible and equitable. I am quite unable to express an opinion about that. My own impression is that it is not feasible. If the rates are to be high. the moderate amount of inequality, of unevenness, and uncertainty. does not matter very much. If the rates of taxation are low-if we still had the 8 per cent excess-profits tax of two years ago-it would not so very much matter: in the course of time the whole thing would shake itself down. But when you do have rates running up to 60 per cent, and when it may be a question of increasing those rates, it becomes a matter of very great importance indeed whether the base is entirely or reasonably equitable. My impres

sion is that it would be better to reduce the rates of the present excessprofits tax, and retain it on the statute book with such modifications. as may be brought to your attention and seem wise, and to superimpose upon it a war-profit tax of the English type. The English are now taking war profits to the amount of 80 per cent, and there seem to be no seriously untoward consequences. Why should not we impose an 80 per cent war-profit tax of the English type?

After that has been deducted from profits, impose an excess-profits tax of our present description at somewhat lower rates, and then, in the course of time, perhaps, advance those rates on the American type excess-profits tax. The reason for retaining it is this: The English tax ceases with the war, and we shall need some corporation taxes after this war is over. Consequently, if we can perfect this tax-this system of taxing-it is altogether desirable to do so; but to attempt with this new instrument to get anything like the large percentage of war profits which are taken in Great Britain seems to me probably impossible, or undesirable, because of various inequities. which are likely to occur.

The English war-profits tax has another advantage. It is likely to convince the masses of the people that no one is making much profit out of the war. Various instances have come to my attention in which workmen have asserted that it did not very much matter whether they exerted themselves or not, that the employers were making such huge profits out of the transaction.

That fact of the huge profits which the employers were or were supposed to be making was obscuring in the minds of these men the vital point of the moral efficiency of everyone for the purpose of winning the war.

As to the income tax, it would seem to me that the rates without any question should be sharply advanced on all classes of income up to $500,000 or $1,000,000. In Great Britain an earned income of $10.000 pays at the rate of 25 per cent on the whole amount$2,500. An unearned income of $12,500 pays at the rate of 333 per cent. An income that is in excess of $50,000 pays 52 per cent. There seems to be nothing in the situation of people with comfortable incomes in the United States which lead one to the conclusion that they can not endure and should not endure the same rates of taxation which are being borne on the other side. Doubtless certain technical changes can be made in the requirements of the income-tax law. That action is a matter with which I will not take up your time.

There are two items, however, of income which I think deserve consideration. The first is the rental value of houses occupied by their owners. It seems to me highly inequitable that a man who happens to own a house should pay no tax upon the rental value of that house, whereas a man who rents must pay on his entire income. and then provide the rent out of that. Why a man with an income of $10,000 with a $10,000 house, should not be subject to a tax on that rental value just as much as a man with an income of $11,000 who rents a house, is to me incomprehensible.

Mr. GREEN. Right in that connection, how about the man who owns two or three houses which he lives in during different parts of the year-a summer home and a home in town, and so on?

Mr. SPRAGUE. They also should be included, without any question. Another matter of income-tax regulation

Mr. GREEN. Of course, I am referring to those houses that a man occupies for his own use and does not rent out.

Mr. SPRAGUE. Oh, yes; I quite agree. The case is even stronger. Issues of municipal securities should, in my opinion, if by any means it is possible, be taxed, among other reasons because, since we are to have these income taxes for many years, there will be an artificial low price for municipal issues which will stimulate all sorts of unhealthy municipal undertakings. Now, I am not an opponent of municipal ownership of electric lights or street railroads. or other utilities, but I do not think the ownership ought to be forced to occupy a situation under which perhaps a municipality can borrow at 4 or 4 per cent because its securities are tax exempt, whereas the strongest of local utility companies might not be able to borrow at less than 6 per cent owing to the fact that the income of those securities is subject to taxation. It is doubtless true that the existing issues of municipals could not very well be taxed, at least in so far as present rates are concerned; but it seems to me highly equitable to tax new issues.

Of course, I know that there are constitutional uncertainties regarding the matter, but whether in a separate bill or otherwise, it seems to me a matter which ought properly, in the public interest, to be brought to an issue by being put into law.

Mr. CRISP. May I ask this question: Have you given that question any thought, as to whether it is constitutional for the Federal Government to tax securities issued by the various States and municipalities?.

Mr. SPRAGUE. I doubt it very much with reference to the States, and I do not believe in it with reference to the States, The States, at least, seem to be quasi-independent sovereignties. But I can not think of that as true of governmental units which are here to-day and there to-morrow. I can not see any ground for saying that you really could undermine the sovereignty of a State by taxing municipal issues. I know that there are diverse views in regard to the constitutionality of it, but it would seem to me, as I said before. highly desirable to bring the matter to a test. for it is a serious matter of public policy.

Mr. MOORE. Waiving the constitutional question, would you not have to lay that on liberty bonds as well as municipal bonds?

Mr. SPRAGUE. No; because I said "the future issues" of municipal bonds.

Mr. MOORE. Would you not have to carry it to future issues of Government bonds?

Mr. SPRAGUE. Oh, without doubt. I shall come to that in a minute, whether it is desirable to place an income tax on Government bonds

or not.

The equity, in the minds of the people who would be subject to the very much heavier income taxes-tax rates-the excess-profits tax, the war tax, which I have urged, would depend in a considerable degree upon whether we subject the great mass of the people of the United States to taxation in some form or other. I have not heard any man with an income of $50,000 or more object to the amount

which he is paying in taxes, or to a probable increase in the amount, but I have heard numbers say--and although I have no such income I rather sympathize with the view-that it does not seem to them proper and equitable that the great mass of the people in the United States should not, during the course of this war, be subject to certain positive, well recognized taxation burdens; and no one, to my way of thinking, is doing a good service to the mass of the people in urging that they should not be taxed, for, however far you may carry the rates of income taxes and excess-profits tax, you can not possibly raise enough money from those sources to provide $25.000,000,000.

The money which is raised from income taxes and excess-profits taxes largely comes from sources which would have provided funds for liberty bonds. That is not a reason for not taking it by taxation. That is much better for the community, as a whole, to get $5.000.000,000 by means of taxes, than to get that much by additional issues of liberty bonds, but you do not tap sources of income which would not be available for war purposes to any great extent by the taxation of larger incomes, inasmuch as those large incomes would in large part go in liberty bonds.

Mr. LONGWORTH. How much do you propose to raise by taxes this year? How much do you advocate raising?

Mr. SPRAGUE. You are raising a billion dollars more than you anticipated. I believe. In this period of abnormal business and Government activity, I think it is quite impossible to determine how much can be raised, in any event, but the larger the amount that equitably can be raised the better for the community.

Mr. LONGWORTH. Let me ask you, further, do you think that the Secretary of the Treasury overestimates or underestimates the amount that should be raised by taxation for the payment of this $24,000,000,000?

Mr. SPRAGUE. If public opinion can be brought to the point of realizing the advantage of taxation the amount is minimized. That seems to be the whole question. A year ago there were a large number of people who asserted that you could not levy more than a billion and a half in taxes without dampening the spirit of enterprise, drying up the sources of funds for liberty bonds, and various other bogies. You have raised something like four billions, and far from the spirit of enterprise being dampened and checked, it has been necessary to establish a capital issues department to pass upon applications for new uses of capital.

It seems to me clear, from our present experience, that we do not know how much taxation we can endure. The people are prepared to endure any sacrifice, whether it is in taxation or in any other direction, if they are convinced that it is serviceable in winning the war. They are not prepared to endure sacrifices just for the fun of sacrifice. My entire contention is that in the taxes which I am coming to now, if the proposition could be made clear to the mass of the people that this levy of taxation for the war tends to accelerate and mobilize the capital and labor for war purposes, and if you can convince people that that is a fact, they are ready to stand for the taxes, just as they were ready to stand for reduction in the consumption of sugar.

Mr. LONGWORTH. You have not quite given me the information I want. I want to know how much you think it is advisable to raise in taxes, as compared to the amount to be raised by loans?

Mr. SPRAGUE. I should say between twelve and fifteen billions. Mr. LONGWORTH. No; the percentage-the relative percentage. Mr. SPRAGUE. Oh, yes.

The CHAIRMAN. That is, if you had to expend $24,000,000,000 next year, how much would you raise by taxes and how much would you raise by bonds; is that it?

Mr. LONGWORTH. Yes; that is what I wanted to know.

Mr. SPRAGUE. Well, my percentage would vary with the amount. When the total cost of the war was estimated at eight to ten billions of dollars, I believed in raising the entire amount of it by taxation. Now that the amount has gone up to twenty-five billions, I do not believe in that for this simple reason: The higher the rates, the more important it is to be quite certain that your base is entirely satisfactory. That was discussed here a little while ago in a proposition on the net profits, a most vicious proposition, it seemed to me; that you would tax a concern with $10,000,000 of capital making $50,000 just as much as you would tax a little concern of $100.000 that happened to make $50,000, earnings; an impossible situation! You would drive the larger concerns into bankruptcy. Unless I know that a satisfactory base has been worked out with reference to invested capital, I do not know what rate I would want to impose.

Mr. HAWLEY. Suppose a satisfactory base was worked out, what amount would you want to raise by taxation then?

Mr. SPRAGUE. If a satisfactory base was worked out I would say we could take something more than in the present excess-profits tax.

Mr. LONGWORTH. Perhaps I can make myself clearer. I would like to know your views on this: As a broad, abstract proposition, do you not think, in financing a war, particularly a serious war, that the major portion of the total cost should be paid by subsequent generations, and not by the generation that wages the war?

Mr. SPRAGUE. No, sir.

Mr. LONGWORTH. You do not?

Mr. SPRAGUE. Absolutely not, unless with this qualification: If you can insure that as large a percentage of the money you get in by means of bonds will be derived from direct savings as will be the case in taxation, I will agree; but the bond method, as it has been so far conducted, involves such an amount of inflation and rising prices and unequal burdens as between stationary incomes and those that are not stationary, that I would favor keeping down the bond proportion to a minimum; and before I get through I have an alternative proposition, if you prefer loans, which would require direct saving as definitely as in the case of taxation; and you can have your choice, or, as is more likely to happen, I suppose, take neither.

Mr. LONGWORTH. Is your proposition that as much as possible or all of the cost of the war ought to be paid by the present generation, applicable to this country alone, or do you believe in it as a general principle?

Mr. SPRAGUE. I believe in it as a general principle, for the reason that if your taxes are equitable and well distributed I see no reason why any man should be compensated in the future for income which