not all be lumped into 1 year and taxed at high rates, on the theory of bunching. It should be spread and, as a sort of compromise, some technique such as I mentioned before should be instituted, such as in the 1934 to 1938 law, which would perhaps exclude 60 percent or 70 percent of the gain on the holding of more than 10 years, and would reduce the effective rate of tax on the whole amount.

Mr. BAKER. Mr. Chairman.

Mr. KING (presiding). Mr. Baker will inquire.

Mr. BAKER. As I understand your recommendation, it is that in order to stimulate the economy, you would lower the top rate down to 65 percent and lower the bottom rate by 2 percent. Is that right? Mr. ANTHOINE. I am of two minds on the bottom rate, Mr. Baker. I think that we should either increase the personal exemption somewhat or, in the alternative, we should decrease the rate in the first bracket or split it.

For example, instead of 20 percent on the first 2,000, we might bring it down to about 10 percent on the first $1,000, something like that.

Mr. BAKER. I understood you to say to reduce it 10 percent, which would be 2 percent. You meant to reduce the 20 percent to 10 percent? Mr. ANTHOINE. Something of that order, sir.

As I say, I am of two minds, because perhaps instinctively I do not like the idea of removing people from tax rolls.

Mr. BAKER. That was the next point I was coming to. I am assuming that the reason you recommend the alternative No. 2 of lowering the bottom rate from 20 to 10 percent, rather than raising the personal exemption $100 or something of the kind, would be that it would mean the people would still be taxed.

Mr. ANTHOINE. It would keep them interested, perhaps, in the tax

structure.

Mr. BAKER. So far as I know, this is the first time that that proposal has been made to the committee since I have been on it.

Of course, we are leaving out everything between the 20 percent rate and the very top one. Where is your justification? Is it that bringing the top down and the bottom down would stimulate the economy or what?

Mr. ANTHOINE. I do not suppose that I have any business as a lawyer and noneconomist to tell this committee what the economic effects of taxation are. I must say that in our seminar, Professor Shoup and I have always found it exceedingly difficult to find out just what the economic effects are of particular provisions.

I think one basic reason for bringing the top rate down is that it seems to me that this high progressive rate structure going up above that figure is really borne by a fairly limited number of taxpayer groups. There are so many other provisions in the law to cut the effective rates down.

I might mention that I think in the hearings 2 years ago, the data compiled from the statistics of income for 1952 indicated that the effective rate of tax on extremely high income was surprisingly low, in view of the very high rate structure-that it was somewhere in the order of 50 percent.

Mr. BAKER. You mean in income, revenue?

Mr. ANTHOINE. Yes, sir.

Mr. BAKER. I had those figures the other day. I forget them. It seemed to me that it was around 1 percent of the total, which ac

counted for those in the extremely high brackets. I am not sure. Do you remember offhand?

Mr. ANTHOINE. No; I do not remember those figures, but the revenue derived from the very high brackets is extremely small. It is not really a revenue problem as much as it is a taxpayer equity problem. The amount of revenue that would be lost would be quite small.

Mr. BAKER. As I get the story, in here and other places, almost day by day the feeling is growing among responsible economists that if the so-called recession does not materially improve this spring, there must be tax reduction to stimulate a lagging economy. Witness after witness has said that in here, and that has not been true in recent years.

This plan you suggest would do that, would stimulate the economy. Mr. ANTHOINE. Certainly, I suppose, from the standpoint of additional consumption, the quickest way would be simply to increase the personal exemption by $100 or $200. There, you would put a good deal of funds in the hands of those who spend.

Mr. BAKER. There would not be any particular difference, as far as stimulating the buying power, as I see it, whether you lower the bottom rate from 20 percent to 10 percent or whether you raise the personal exemption $100. It would probably figure out about the same, as far as stimulating the buying of consumer goods.

Mr. ANTHOINE. I do not know what the exact revenue loss differential would be between those two plans, but I am sure that the Treasury has looked into it.

Of course, I think that coupled with this reduction in the high rates, there should be a serious attempt to broaden the tax base and to remove some of the what I would regard as special provisions in the law.

Mr. BAKER. Do you not think that would run into real money, that it would produce real money?

Mr. ANTHOINE. I do not think that we are talking about a great deal of revenue, overall, probably. Of course, the big revenue is derived from the low-income brackets, as dramatically illustrated by the effect of simply increasing the exemption by $100.

Mr. BAKER. I have one other question. I am tremendously interested in the estate tax problems. You have made quite a study of that, of course, have you not?

Mr. ANTHOINE. I have spent some time on the estate tax and on the gift tax. There was a very good Treasure study in about 1947 on correlation of the gift and estate tax laws with the income tax, to arrive at a more coherent picture.

Mr. BAKER. The estate taxes produce only 1.2 percent of the revenue, which is small. It seems to me that one of the most eminent problems before this committee is to do something about the estate taxes. I suppose other witnesses will pursue that.

That certainly would be in the same category as the original proposition, as your proposal to lower the top bracket down to 65 percent on the idea that that is confiscatory, punitive, or a deterrent to enter prise.

Mr. ANTHOINE. I think that again, only those who are in the unfortunate position of not having capital gains and other gadgets are

the ones who are being stuck with these high rates. I think that some professional men and high wage earners are in the position of paying these high rates. I think that it would be useful to bring them down.

Indeed, if you applied the theory of this special schedular type of taxation, you would put in the law some form of earned income credit, which we had before. It is extremely expensive to the revenue, and that is one of the reasons, I am sure, that the Treasury has not suggested going back to an earned income credit. But there is something to be said for a credit to the man who derives most of his income from the sweat of his brow. There is certainly a matter of depletion in the human frame that might properly deserve some recognition.

Mr. BAKER. Thank you verymuch.

Mr. KING. Mr. Kean will inquire.

Mr. KEAN. As I understand, you want to split the bottom bracket, and I am thoroughly in accord with that idea. In fact, in the 80th Congress I introduced an amendment to the law which would have split the bottom bracket, and I think at that time it would have been 15 percent for the top bracket. That amendment was approved by this committee and approved by the House. It went over to the Senate, and the Senate took it out on the basis of the difficulty of withholding the tax.

If you had a provision in which the first $1,000 had only a 10percent tax, where would you withhold?

Mr. ANTHOINE. I know. That is a point that I thought about last night, as a matter of fact. The withholding problem becomes intense in that low bracket.

Mr. KEAN. That is what stopped the provision I had from going through, because the Democratic Treasury at that time objected. I also took the question up with the Republican Treasury 2 or 3 years ago, and again they were worried about what they were going to do about the withholding tax.

I have a bill prepared now which will do the same thing, split the lower bracket, put the lowest bracket at 18 percent, and the next $1,000 at 19 percent, and so forth, which would result in about a 10 percent cut for the average industrial wage earner in New Jersey.

But again, maybe you could withhold all right at 18, but if you withheld at 10, think of all the refunds that would arise, creating a difficult situation.

Mr. ANTHOINE. You are right. There would be a considerable flood of refund claims.

Mr. KEAN. That is the difficulty that arises.

The CHAIRMAN. Are there any further questions?

If not, Professor Anthoine, we appreciate very much the information which you have given the committee. Thank you, sir, very much.

Our next witness is Dr. Harry Kenneth Allen.

Dr. ALLEN. Will you please come forward and identify yourself for the record by giving your name, address, and the capacity in which you appear.

You may have a seat if you desire, Mr. Allen.

STATEMENT OF HARRY KENNETH ALLEN, DEPARTMENT OF ECONOMICS, UNIVERSITY OF ILLINOIS, URBANA

Mr. ALLEN. Mr. Chairman and members of the committee: My name is H. Kenneth Allen. I am a professor of economics at the University of Illinois. I am here today upon the invitation of the committee.

I have prepared a written statement, copies of which I deposited this morning in the main office of the committee.

Before I proceed, I should just like to correct one point in my identification. I am listed here as chairman of the Department of Economics. While I did serve in that capacity for 5 years, since the first of September of last year I have been devoting full time to teaching and research.

The

I should like to make suggestions pertaining to four topics. primary suggestion, to which reference has already been made in the discussion this morning, pertains to the case for tax reduction as a counterdeflationary measure, if the unemployment figure should reach the level of 5 million.

The second topic has to do with the taxation of interest on Government securities. That is the exemption feature which now applies to the interest on Government securities.

The third topic pertains to the double taxation of corporate dividends.

And the fourth topic pertains to two suggestions pertaining to the Federal estate tax, one of which relates to the extension of the 80 percent credit provision to the additional or supplementary tax, as well as to the basic tax as at present, and the other one pertains to a limitation of the allowance for the exemption of gifts and bequests to nonprofit organizations.

Taking up the first topic, that is, the one which pertains to tax reduction as a counterdeflationary measure, I should like to preface my comments by one or two general statements.

One of these is that I believe that the greatest threat in the long run in this country is inflation, rather than deflation.

The second one is that I do not believe that we can solve all the economic problems of the world through countercyclical fiscal policy. There is, however, at the present time, a rather large dark cloud on the horizon of the economic sky. Whether this cloud is going to develop into a severe economic storm or whether it is going to be a kind of mild flurry, such as those of 1948-49 and 1953-54, remains to be seen. On this point, and without casting any reflections upon the business forecasters, because I do have great respect for them, I think the weather forecasters have a better record than the business forecasters. I do think there is a rather strong possibility, however, that the present recession will degenerate into a deeper, more protracted recession than those of 1948-49 or 1953-54. I think it is highly important, therefore, that the Congress be prepared with a plan of tax reduction to be put promptly into effect when unemployment reaches the 5 million level. In my opinion, if it reaches that level, it will be an indication that we are in for more serious trouble, and that unemployment will probably rise to substantially higher levels if nothing is done.

I should also like to emphasize the desirability of coordinating fiscal controls with monetary controls. In the postwar period we

have placed primary responsibility upon the Federal Reserve system in controlling the supply of money and credit, and I believe that within the limitations of the powers available to them, they have done a very good job. We do know from experience, however, that the Federal Reserve system cannot cope effectively with a deep, protracted depression such as we had in the 1930's.

So, if there is a threat of serious deflation, it is especially important that the Congress be prepared to make use of fiscal controls.

With reference to the details, and these are only of a general character, I should think that the first round of tax reductions should be of the order of an average of 10 percent and with particular reference to the individual income taax and the lower brackets of the individual income tax, because it is in those lower brackets that we have the mass consumer power.

If taxes are reduced in the lower brackets, it is the same thing to those people as an increase in their wages, and we know that they will spend most of that increase.

So, as a kind of tentative suggestion, I would suggest something on the order of a reduction of about 3 percentage points in the first bracket, about 2 percent in the second bracket, and 1 percent in a third bracket, which could be cut off at some particular point, such as, say, $50,000 or even $40,000 of income.

In making these suggestions, I do want also to say that there may be a case for reduction of the rates of the individual income tax and of the corporate rates, aside from countercyclical fiscal purposes. I am concerned today with the latter.

I should also like to say that tax reduction, of course, is also highly desirable to the extent that savings can be made through the application of rigid economy in Government. I am taking that for granted in making the suggestions that I have to make.

I think the case for the reduction of the income tax rates, particularly in the lower brackets, is stronger than that for the corporate rates, for this particular purpose, because a part of the corporation tax, we know, has shifted, and if we should reduce corporate rates, there would probably be some lag in reduction of prices, which reflect the shifting of the tax. To the extent that the tax is not shifted, of course, the benefit accrues to the stockholders, and there probably would be some delay in passing this benefit along to stockholders.

In the case of the excises, I think there is a strong case for discontinuing some of the excises, for example, such as the transportation tax on freight, but I know that you are not hearing suggestions primarily on excise taxes at these hearings. In any event, the reduction of excise taxes for countercyclical fiscal purposes would not be as effective, in my opinion, as reduction of income tax rates, because there would probably be a lag between the time those taxes would be reduced and the benefits would be passed on to consumers in lower prices. Anyhow, these purchases are scattered and represent such a small percentage of the consumer's outlays that he would probably not be aware of the effects of the reduction.

I should also like to suggest that tax reduction would not result in a decline in revenues to the extent that might be anticipated as a result of reducing the taxes. That is, to the extent that tax reduction would sustain the economy, tax collections would be higher than they would otherwise be.

20675-58-pt. 261