The CHAIRMAN. Professor Smithies, you are talking in terms of maintaining a level of revenue, not maintaining the existing system under which that revenue is derived, I take it.

Mr. SMITHIES. Yes.

The CHAIRMAN. Le me ask you this, Professor Smithies: If the Congress should be of the opinion that taxes should be reduced as a means of stimulating the economy some time in the future, during this session of the Congress, what factors should we take into consideration in timing such a reduction?

When and under what circumstances would we initiate the program? Mr. SMITHIES. Under which economic circumstances, you mean? The CHAIRMAN. Yes.

Mr. SMITHIES. You are asking me to imagine what conditions next July will be?

The CHAIRMAN. Let me advance a thought of two so that you might better understand what I mean. It has been suggested to us by some of course, and we have read in the papers where others have made the statement, that if unemployment hits a level of, say, 5 million, that should be a sign to us that we may expect more unemployment and worse conditions if we do not take some action with respect to tax reduction immediately.

Would you agree that the 5 million figure is a factor calling for such action?

Mr. SMITHIES. I would frankly be uneasy, at any rate, much before 5 million, but I think you also ought to pay a great deal of attention to the direction of change, and there is a great deal of difference in getting to 5 and still be going down and getting to 5 and there may be some signs that is the bottom, and there may even be some signs you may get the 5 and be going up, so I would insist that you should pay a lot of attention to the diagnosis of the current direction of change as well as the level of unemployment.

The CHAIRMAN. Is the more important element to take into consideration a fixed arithmetical level of unemployment or is a determination based on all factors and a judgment as to whether or not the economy is moving up or down at the time unemployment reaches 5 million?

Isn't that a more important element to consider?

Mr. SMITHIES. I think that you have said better what I was trying to say myself. You have to have figures and you can't simply rely on a single unemployment figure.

The CHAIRMAN. You and I understand that the estimates of revenue contained in the budget contemplate upswing in the economy rather early in 1958.

Mr. SMITHIES. Yes.

The CHAIRMAN. And it is thought that the impetus that will bring about that upswing in economic activity consists of several things, such as the relaxation by the Federal Reserve of some of the present restraints upon money and credit, the added amount of defense contracts that will be let in this 6-month period versus the last 6-month period, the commencement of a greater number of new housing starts in this calendar year or completion of a greater number in this calendar year than in the last calendar year, and so on. When can we tell and how can we tell that these things that are expected to bring about

an upswing in the economy are actually doing it or are not doing it? Mr. SMITHIES. Frankly, I think the budget message is a good deal too optimistic in the speed at which it expects the upturn to occur, but as I have suggested here, I think it has made the right revenue estimate.

I think you ought to keep on estimating revenues on the basis of a full employment level of income even if you are not going to have it. Secondly, as to when you can tell whether the economy is turning up I must confess I don't think an economist has any magic way for doing that. The best I find I can do is take a volume of charts like the economic indicators as put out by your other committee and thumb through it and look at these seriously and see if significant things like housing permits have begun to turn upward.

The CHAIRMAN. However, the point, Professor Smithies, is this: That if we look to statistics as evidence of what has happened, those statistics are available much later than the event, so that if we are to pursue the course of action in the Congress of using tax reduction as a device for stimulating the economy at a time when the economy needs stimulus, we are almost compelled to do it without any factual basis, are we not?

Mr. SMITHIES. There are some statistics of anticipations as the McGraw-Hill survey of expected construction of capital equipment by businesses, which is a statement of intention. The University of Michigan conducts surveys of consumers expenditures which gives some ideas of intentions to buy durable goods, which is a very critical factor at the present time, so these help to some extent, and also, as we know, there are some statistical series that lead other statistical series. I think with the available information you can at least decide whether things seem to be going down or leveling off. I am not very optimistic about making accurate predictions, however.

The CHAIRMAN. I don't want to pursue this any longer because we have quite a number of witnesses today, but what I am trying to say is this: If there is an upturn in the economy it will be reflected at some point, ahead of the upturn, by the placement of orders by busi

ness.

I have always thought that we could look to the durable goods industry, to the machine and die-tool industry, and those industries that tool other industries for further expansion, and reach some conclusion as to whether or not there is to be greater activity in the future or less activity in the future.

I have tried to make some study among the people in the machine and die-tool industry and in the durable goods industry as to whether or not they are receiving additional orders at the moment that might be reflected in some increased activity 3 or 4 months from now and and some additional job opportunities 3 or 4 months from now.

I find a complete lack of any increase in the amount of orders going to those industries and they are the industries most sensitive to a change for the better. Is that your experience?

Mr. SMITHIES. Yes, I frankly don't see any signs at the moment, but I am not prepared to commit myself to the view that things are just going to get worse.

The CHAIRMAN. No. I am talking about the timing of this upswing which we are told will happen.

I

Mr. SMITHIES. As I said, I think the Budget is very optimistic. just don't believe there is going to be an upswing in the next couple of months or so. That is why I put my date on to July.

The CHAIRMAN. However, you do take the position that the Budget takes that the recession or downturn that we are now in is of arbitrary nature?

Mr. SMITHIES. Yes. This depends on some differences with the budget. I expect that national security expenditures are going to be considerably greater than those anticipated in the budget.

The CHAIRMAN. However, you and I both know, especially you as a consultant in connection with the Rockefeller report, that these things that we are beginning now in the area of defense have a long lead time so that we cannot expect any immediate economic resurgence as a result of the placing of orders for these things for which our technology is in infancy, isn't that true?

Mr. SMITHIES. I think there are a lot of things can be done that have not a long lead time. For instance, these cuts of military perconnel that I have referred to in my statement don't need a long lead time. They could be reversed very quickly. I think new construction of SAC bases could be started very quickly and so I think there are many things that need to be done in the military field that don't have a long lead time and I don't advocate that we should use military expenditures as a depression-curing device.

When we have a depression there is no reason why they shouldn't be speeded up when we need them for defense purposes, and I think there is a great deal of speeding up that could be done next year if a determined effort were made to do it, and this could make all the difference in the recession picture, but I certainly don't anticipate things will be looking very bright and rosy by next July. I think by then you may be able to tell whether things seem to be going up again or whether things are continuing to go down, but that is the most I expect by next July.

The CHAIRMAN. Professor Smithies, you have made a very significant observation in connection with the many others that has not been pinpointed by others in their testimony and that is that if we do use tax reduction in this session of the Congress or at any time for purposes of stimulating the economy, and that is in order for it to have stimulating effect within a given year it is necessary for us to make adjustments in the withholding rate. Otherwise we create nothing more than a psychological climate; we do not create more purchasing power.

Mr. SMITHIES. Yes, you may get many of the results at precisely the wrong time.

The CHAIRMAN. I say otherwise we don't create more money in the hands of the consumer or investor.

Mr. SMITHIES. Yes.

The CHAIRMAN. Thank you, sir, very much.

Are there any further questions?

Thank you very much for coming to the committee and giving us the benefit of your thinking.

Mr. SMITHIES. Thank you, sir.

The CHAIRMAN. Our next witness is Mr. Alger B. Chapman.

Mr Chapman, please come forward, sir, and give us your name, address, and the capacity in which you appear, for the benefit of the record.

Mr. KEOGH. Mr. Chairman?

The CHAIRMAN. Yes, Mr. Keogh

Mr KEOGH. Before Mr. Chapman begins his testimony I should like to be permitted to commend him to this committee as the distinguished former president of the New York State Tax Commission, in which capacity he served with credit and distinction for some years. Mr. CHAPMAN. May I say, Mr. Chairman, that that was during a Republican administration up in New York.

Mr. KEOGH. I hope the record will note that I purposely avoided any reference to that.

The CHAIRMAN. Mr. Keogh, we know that you always avoid any reference to political matters.

STATEMENT OF ALGER B. CHAPMAN, ESQ., CHAPMAN, WALSH & O'CONNELL, WASHINGTON, D. C.

Mr. CHAPMAN. My name is Alger B. Chapman, and I am a member of the firm of Chapman, Walsh & O'Connell, with offices in New York.

The CHAIRMAN. Mr. Chapman, you do appear here at the invitation of the committee?

Mr. CHAPMAN. I thank you, sir, I do. I am reminded of Harry Rudick's remark that if it were not for the fact that he had been invited, he would not have been here.

The CHAIRMAN. We appreciate very much all of your coming to the committee under the invitation of the late chairman of the committee, and we appreciate that you are representing a public viewpoint, trying to assist the committee with many of its problems.

You are recognized, Mr. Chapman, to proceed in your own way. Mr. CHAPMAN. Thank you.

Before dealing with this so-called prepared statement, I would like to say that from the point of view of a tax lawyer, such things as excessive tax rates and inequities and loopholes, as well as the general confusion and complexity in what we might call our great American tax jungle, are very welcome things Consequently, if any I say here this morning is in the direction of suggesting either tax reduction or simplicity, I am sure it will become rather obvious that I am appearing here in the spirit of amicus curiae, which your invitation has so specifically urged that I do.

I am aware of the fact that there has been a tremendous amount of information presented before this committee in regard to the economic impact of excessive rates of individual and corporate tax on business activity. As a lawyer, I have personal knowledge of the difficulty of individual and corporate businesses conducting their affairs in the present tax climate. I am afraid that many of us lawyers for too long have more or less taken the present tax structure for granted. We recognize the problems of our own clients, but have not given thought to the cumulative effect which such situations, repeated throughout the country, are having on the national economy.

The record already made before this committee has served to bring into focus the extent to which these many situations have affected the health and vitality of our economy. There also has been emphasis on the point that in this particular time in our history we cannot afford

to continue policies of any kind which thwart and harass business activity and place a ceiling on economic expansion.

I also understand that persuasive evidence has been presented to you which indicates that economic growth since World War II under the present tax system has been largely dependent upon inflationary bank financing instead of normal capital accumulation out of current earnings.

I have been somewhat puzzled as to what, if anything, I might contribute to what I believe is already a conclusive case for an immediate and continuing reduction of the excessive rates of individual and corporate tax until a moderate and bearable level of rates is achieved. To get a better understanding of some of the fundamental facts and figures involved in tax rate reform, I have read again the statements of Representatives Sadlak and Herlong explaining H. R. 6452 and H. R.

9119.

Their proposal, as you know, is essentially one to use the revenue increase from economic growth to reduce the tax rates which tend in themselves to impede growth. They estimate that such increase in revenues should run up to $4 billion a year and that their bill would encumber only $3 billion of this total. In other words, under normal economic growth, we could have this kind of tax reform while adding a billion dollars a year to Government revenues.

The budget level would not seem to be a barrier to adoption of the Sadlak-Herlong measure. The Federal budget recently presented to the Congress shows an increase of only $800 million for fiscal 1958 over the estimates released in September, and a further increase of only $1.1 billion in fiscal year 1959. Clearly, therefore, there is no block to tax action in the spending area.

The problem seems to be that temporarily we are not getting the economic growth to produce the $4 billion annual increase in revenue. Looking again at the President's budget, I find that the total revenue increase in the fiscal years 1958 and 1959 is estimated at only $3.4 billion, or nearly $5 billion short of the revenue increase expectations under the Sadlak-Herlong assumptions.

Here, it seems to me, is the crux of the matter. We ought to reduce the rates which impede economic growth, but because of the lag in growth we appear to be short of the revenue margin which would make this possible. Should we wait for the resumption of the typical level of economic growth, or should we adjust the tax structure now in anticipation of such a resumption and in realization of the fact that the present tax structure itself impedes economic growth.

I would favor enactment of the Sadlak-Herlong type of legislation now, with such modification in the scale of tax moderation and with such delay in the date of application as the emergencies of the present situation might require.

I have one matter more which I would like to discuss briefly, which has to do with charitable institutions. It is a problem that does not involve the gain or loss of a penny in Federal revenue.

In 1950, the Congress enacted a comprehensive series of provisions designed to insure that various types of "exempt" organizations were actually operated in accordance with their exempt purposes. It is becoming apparent that one of these provisions, dealing with unreasonable accumulation of income, may operate to thwart, rather than forward, the desirable purposes of many of these organizations.