PAGENO="0001" PRESIDENT'S 1967 TAX PROPOSALS HEARINGS BEFORE THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES NINETIETH CONGRESS FIRST SESSION ON THE TAX PROPOSALS OF THE PRESIDENT CONTAINED IN HIS MESSAGE TRANSMITTED TO THE CONGRESS AUGUST 3, 1967 AUGUST 14, 15, 21, 22, 23, 24, 25, 28; SEPTEMBER 12, 13, AND 14, 1967 PART 1 Contains August 14, 15,21, 22, 23, 24, and 25 Printed for the use of the Committee on Ways and Means U.S. GOVERNMENT PRINTING OFFICE 83-349 WASHINGTON: 1967 Porrsale by the Superintendent of Documents, 13.5. Government Printing Office Washington, D.C. 20402 * Price $1.00 PAGENO="0002" COMMITTEE ON WAYS AND MEANS WILBUR D. MILLS, Arkansas, Chairman CECIL R. KING, California HALE BOGGS, Louisiana FRANK M. KARSTEN, Missouri A. S. HERLONG, JR., Florida JOHN C. WATTS, Kentucky AL ULLMAN, Oregon JAMES A. BURKE, Massachusetts MARTHA W. GRIFFITHS, Michigan GEORGE M. RHODES, Pennsylvania DAN ROSTENKOWSKI, Illinois PHIL M. LANDRUM, Georgia CHARLES A. VANIK, Ohio RICHARD H. FULTON. Tennessee JACOB H. GILBERT, New York JOHN W. BYRNES, Wisconsin THOMAS B. CURTIS, Missouri JAMES B. UTT, California JACKSON E. BETTS, Ohio HERMAN T. SCHNEEBELI, Pennsylvanin HAROLD R. COLLIER, Illinois JOELT. BROYHILL, Virginia JAMES F. BATTIN, Montana BARBER B. CONABLE, Ja., New York GEORGE BUSH, Texas WILLIAM H. QUEALY, Minority Counsel II LEO H. lawis, Chief Counsel JOHN M. MARTIN, Jr.. Assistant Chief Counsel PAGENO="0003" CONTENTS PART 1 1967: Page Monday, August 14 1 Tuesday, August 15 113 Monday, August 21 219 Tuesday, August 22 257 Wednesday, August 23 313 Thursday,. August 24 341 Friday, August 25 377 PART 2 Monday, August 28 393 Tuesday, September 12 485 Wednesday, September 13 639 Thursday, September 14 691 Material received for the record 723 Message from the President of the United States entitled "Taxes" (H. Doe. 152, 90th Cong., first sess.) 1 Press release dated Thursday, August 3, 1967, announcing public hearing on President's tax proposals 7 Background material on President's tax proposals issued by the Treasury Department: Explanation of President's proposal for a tax surcharge of 10 percent_ 8 Tax tables showing effects of 10 percent tax surcharge 10 Corporate current tax payment proposals 11 Figures on the recommended continuation of excise taxes on auto- mobiles and telephone service 13 Draft of bill and technical explanation of "Surcharge Tax Act of 1967"_. 32 STATEMENTS BY GOVERNMENT OFFICIALS Budget, Bureau of. the, Hon. Charles L. Schultze, Director 40, 113 Council of Economic Advisers, Hon. Gardner Ackley, Chairman 48, 113 Federal Reserve System: Martin, Hon. William McChesney, Jr., Chairman, Board of Gov- ernors 691 Hayes, Alfred, presideat, Federal Reserve Bank of New York 717 Treasury, Depattment of the: Fowler, Hon. Henry H., Secretary 13, 113 Surrey, Hon. Stanley S., Assistant Secretary for Tax Policy 194 PANEL DISCUSSION (ECONOMISTS) Eckstein, Otto, professor of economics, Harvard University 486 McCracken, Paul, Edmund Ezra Day University professor of business administration, the University of Michigan 495 O'Leary, James J., chairman of the board and chief economist, Lionel D. Edie & Co., Inc., New York City 504 Pechman, Joseph A., director of economic studies, the Brookings Insti- tution 518 m PAGENO="0004" IV CONTENTS Reierson, Roy L., senior vice president and chief economist Bankers Page Trust Co., New York N.Y 525 Saulnier, Raymond J., professor of economics, Barnard College Colurn- bin Tjrnversitv 544 Ture, Norman B National Bureau of Economic Research Inc 552 Turner, Robert C., professor of business economics and public policy, Indiana University 563 PANEL DISCUSSION (BUSINESSMEN) DIllon, C. Dough~1 Dillon, Read & Co., New York, N.Y 658 Roosa, Robert V., partner, Brown Bros., Harriman & Co., New York - - - 663 Saunders, Stuart T., chairman of the board, Pennsylvania Railroad 639 Weinberg, Sidney J., Goldman, Sachs & Co., (read by Mr. Stuart T. Saunders) 656 Wriston, Walter B., president, First National City Bank, New York 660 `STATEMENTS OF PUBLIC WITNESSES American Bankers Association, Jack T. Conn, president, and Charls E. Walker, executive vice president 393 American Federation of Labor and Congress of Industrial Organizations, George Meany, president 313 American Life Convention, Arthur S. Fefferman, director, economic analysis, and Kenneth M. Wright, vice president and chief economist, Life Insurance Association of America 327 Andersen, Arthur, & Co., John Mendenhall, partner, and director of taXes.. - 370 Bryant, F. Leonard, Manufacturing Chemists Association 359 Bullen, George S., legislative director, National Federation of Independent Business 239 Chamber of Commerce of the United States: Madden, Carl H., chief economist 257 Winter, Walker, vice president, and chairman, taxation committee....- 257 Committee for Economic Development, Frazar B. Wilde, chairman 349 Conn, Jack T., president, American Bankers Association, and Charls E. Walker, executive vice president 393 Connolly, John L., chairman, Federal finance committee, Council of State Chambers of Commerce 446 Council of State Chambers of Commerce, John L. Connolly, chairman, Federal finance committee 446 Crehore, John Davenport, Washington, D.C 335 Davidson, John C., president, Tax Council 301 Fefferman, Arthur S., director, economic analysis, American Life Conven- tion, and Kenneth M. Wright, vice president and chief economist, Life Insurance Association of America 327 Ferguson, Courtland D., president, Fighting Taxpayers Association 367 Fighting Taxpayers Association, Courtland D. Ferguson, president 367 Freedom Inc., E. S. Hall, chief engineer and secretary 332 Graham, Harry, legislative representative, National Grange 476 Gullander, W. P., president, National Association of Manufacturers 219 Hall, E. S., chief engineer and secretary, Freedom Inc 332 Heisler, Kenneth G., executive director, National League of Insured Savings Associations 306 Hicks, W. B., Jr., executive secretary, Liberty Lobby 338 Hoffman, Raymond A., Illinois State Chamber of Commerce 309 Illinois State Chamber of Commerce, Raymond A. Hoffman 309 Institute on U.S. Taxation of Foreign Income, Paul D. Seghers, president.. 242 Investors League, Inc., William Jackman, president 384 Jackman, William, president, Investors League, `Inc 384 Jackson, Donald W., executive secretary, Tennessee Taxpayers Associa- tion, Inc., and member, policy committee, National Taxpayers Con- ference - 380 Kust, Leonard, vice president and general tax counsel, Westinghouse Electric Corp 243 Liberty Lobby, W. B. Hicks, Jr., executive secretary 338 PAGENO="0005" CONTENTS Life Insurance Association of America, Kenneth NI. Wright, vice president and chief economist, and Arthur S. Fefferman, director, economic Page analysis American Life Convention 32~ Machinery & Allied Products Institute, Charles W. Stewart, president~_ - - 416 Madden Carl H. chief economist, Chamber of Commerce of the United States 257 Manufacturing Chemists Association, F. Leonard Bryant 359 Meany, George, president, American Federation of Labor and Congress of Industrial Organizations Meudenhall John, partner, and director of taxes, Arthur Andersen & Co~ - 3' 0 Mitchell C. R. chairman legislative committee, U.S. Savings & Loan League 387 Mortgage Bankers Association of America, Robert H. Pease, treasurer and member, executive committee National Association of Home Builders: Rogg, Nathaniel, executive vice president 460 Silverstein, Leonard, tax counsel 460 l~\Tjener, Leon N., president 460 National Association of Manufacturers, W. P. Gullander, president 219 National Association of Retired Civil Employees, Clarence M. Tarr, president 37~ National Federation of Independent Business, George S. Bullen, legis- lative director 239 National Grange: Graham, Harry, legislative representative 476 Newsom, Herschel D., master (read by Mr. Harry Graham~ 476 National League of Insured Savings Associations, Kenneth G. Heisler, executive director 306 National Taxpayers Conference, Donald W. Jackson, member, policy committee, and executive secretary, Tennessee Taxpayers Association, Inc 380 Newsom, Herschel D., master, National Grange (read by Mr. Harry Graham) 476 Patman, Hon. Wright, a Representative in Congress from the State of Texas 341 Pease, Robert H., treasurer and member, executive committee, Mortgage Bankers Association of America 456 Rogg, Nathaniel, executive vice president, National Association of Home Builders_ 460 Seghers, Paul D., president, Institute on U.S. Taxation of Foreign Income- 242 Silverstein, Leonard, tax counsel, National Association of Home Builders~ - 460 Stewart, Charles W., president, Machinery & Allied Products Institute__ 416 Tarr, Clarence M., president, National Association of Retired Civil Employees Tax Council, John C. Davidson, president 301 Tennessee Taxpayers Association, Inc., Donald W. Jackson, executive secretary, and member, policy committee, National Taxpayers Con- ference 380 Tenzer, Hon. Herbert, a Representative in Congress from the State of New York 287 U.S. Savings & Loan League, C. R. Mitchell, chairman, legislative com- mittee 387 Walker, Charls E., executive vice president, American Bankers Association, and Jack T. Conn, president 393 Westinghouse Electric Corp., Leonard Kust, vice president and general tax counsel 243 Wiener, Leon N., president, National Association of Home Builders - - - 460 Wilde, Frazar B., chairman, Committee for Economic Development 349 Winter, Walker, vice president, Chamber of Commerce of the United States, and chairman, taxation committee 257 Wright, Kenneth M, vice president and chief economist, Life Insurance Association of America, and Arthur S. Fefferman, director, economic analysis, American Life Convention 327 PAGENO="0006" VI CONTENTS MATERIAL SUBMITTED FOR THE RECORD GOVERNMENT OFFICIALS Ackley, Hon. Gardner, Chairman, Council of Economic Advisers: Page Chart 1. Changes in total GNP and final sales 52 Chart 2. Relation of nonfarm stocks to total final sales 54 Chart 3. Private homebuilding 56 Chart 4. Business capital outlays 57 Relation of corporate GNP to total and private GNP 205 Fowler, Hon. Henry H., Secretary, Department of the Treasury: Draft of bill and technical explanation of "Surcharge Tax Act of 1967"~ 32 Estimated net administrative budget receipts, present law, in the fiscal year 1968 63 Estimated net administrative budget receipts in the fiscal year 1968 (assuming President's tax program) 32 Repayment of foreign obligations to the 13.5. Government 114 Table 1.-Comparison of 1963-66 tax liability and 1967-68 tax liability under proposed tax increase for illustrative taxpayers (single individual) 31 Table 2.-Comparison of 1963-66 tax liability and 1967-68 tax liability under proposed tax increase for illustrative taxpayers (married couple, no dependents) 31 Table 3.-Comparison of 1963-66 tax liability and 1967-68 tax liability under proposed tax increase for illustrative taxpayers (married couple, 2 dependents) 32 Technical explanation of "Surcharge Tax Act of 1967," and draft of bill 32 U.S. net gold transactions for foreign monetary and domestic industrial and artistic uses (1960-67) 139 Schultze, Hon. Charles L., Director, Bureau of the Budget: Table 1.-Categories of major change in January estimates of 1968 administrative budget expenditures 47 Table 2.-Major changes in 1968 administrative budget expenditures by agency 47 Table 3-1968 civilian administrative budget expenditures based on actions and developments to date by type of controlability 47 Surrey, Hon. Stanley S., Assistant Secretary for Tax Policy, Treasury De- partment of the Treasury: Derivation of the individual income tax base from Department of Commerce estimates of personal income, 1965 196 Detailed breakdown of certain items included in personal income but not in adjusted gross income 196 Interest on State and local government bonds, 1962 195 PUBLIC Abel, I. W., president, United Steelworkers of America, telegram dated August 4, 1967, to Chairman Mills 755 Adelman, R. P., director of taxation, Celanese Corp., letter dated August 22, 1967, to Chairman Mills 753 Air Transport Association, Stuart G. Tipton, president, letter dated August 31, 1967, to Chairman Mills 765 Akin, Paul B., president, Laclede Steel Co., letter dated August 23, 1967, to Chairman Mills 750 Alan Wood Steel Co., Harleston R. Wood, chairman of the board and president, statement 747 Aluminum Co. of America, E. A. Vaughn, vice president and controller, letter dated August 29, 1967, to Chairman Mills 746 American Electric Power Co., Inc., Donald C. Cook, president, statement.. 753 American Farm Bureau Federation, John C. Lynn, legislative director, letters dated September 15, 1967, and August 24, 1967, with enclosure, to Chairman Mills 760 American Federation of Labor and Congress of Industrial Organizations, George Meany, president: Appendix I-AFL-CIO proposal: 6 percent surtax-family of four (income from wages and salaries) 321 PAGENO="0007" CONTENTS VII PUBLIC-Continued American Federation of Labor and Congress of Industrial Organizations, George Meany, president-Continued Page Appendix IT-AFL-CIO proposal: 8 percent surtax-family of four (income from wages and salaries) 321 Appendix ITT-AFL-CIO proposal: 10 percent surtax-family of four (income from wages and salaries) 322 Appendix IV-Approximate amount of additional revenue-Alterna- tive A 322 Appendix V-Approximate amount of additional revenue-Alterna- tive B 322 Appendix VT-Approximate amount of additional revenue-Alterna- tive C 322 Surcharge on family of four 318 American Retail Federation, Eugene A. Keeney, executive vice president, letter dated August 29, 1967, to Chairman Mills 758 Armco Steel Corp., C. William Verity, Jr., president, statement 748 Associated Retail Bakers of America, William A. Quinlan, general counsel and Washington representative, letter dated September 21, 1967, to Chairman Mills, with resolution attached 758 Association of American Railroads, Thomas M. Goodfellow, president, letter dated September 13, 1967, to Chairman Mills 765 Association of Equipment Lessors, Harvey Granat, president, letter dated September 11, 1967, to Chairman Mills 737 Automobile Manufacturers Association, Inc., Thomas C. Mann, president, letter dated August 18, 1967, to Chairman Mills 735 Bach, G. L., Stanford University, tax policy statement (signed by 320 economists of various universities) 631 Barker, C. Austin, partner-economist, Hornblower & Weeks-Hemphill, Noyes letter dated August 14, 1967, to Chairman Mills 792 Barlow, Joel, Covington & Burling, letter dated August 26, 1967, to Chair- man Mills Beirne, Joseph A., president, Communications Workers of America, letter dated September 5, 1967, to Chairman Mills, with statement attached Boyd, Howard, chairman of the board, El Paso Natural Gas Co., telegram of tax policy dated August 18, 1967, to Chairman Mills signed by 22 American businessmen 658 Bratt, Elmer C., director, Business-Economics Center, Lehigh University, letter dated August 29, 1967, to Chairman Mills, with attachment 786 Bryant, F. Leonard, Manufacturing Chemists Association, statement concerning proposed amendment to section 6655 364 Burns, Arthur F., National Bureau of Economic Research, statement- - - - 768 Byars, James A., chairman; Governmental Affairs Committee, Columbus, Ga., chamber of commerce, letter dated August 10, 1967, to Chairman Mills 742 Calvert, Gordon, executive director and general counsel, Investment Bankers Association of America, letter dated August 18, 1967, to Chair- man Mills Celanese Corp., R. P. Adelman, director of taxation, letter dated August 22, 1967, to Chairman Mills 753 Collier, Robert P., dean, College of Business and Social Sciences, Utah State University, letter dated August 7, 1967, to Chairman Mills, with attachment 782 Columbus, Ga., Chamber of Commerce Governmental Affairs Committee, James A. Byars, chairman, letter dated August 10, 1967, to Chairman Mills 742 Communications Workers of America, Joseph A. Beirne, president, letter dated September 5, 1967, to Chairman Mills, with statement attached_ 755 Cook, Donald C., president, American Electric Power Co., Inc., statement- 753 Crehore, John Davenport, Washington, D.C., National sales tax-a work- able plan, pamphlet 795 Dechant, Tony T., president, National Farmers Union, letter dated August 15, 1967, to Chairman Mills, with resolutions attached 761 DeWoif, A. J., president, National Machine Tool Builders' Association, letter dated September 13, 1967, to Chairman Mills 738 PAGENO="0008" VIII CONTENTS PUBLIC-Continued Dingell, Hon. John D., a Representative in Congress from the State of Page Michigan, letter dated August 18, 1967, to Chairman Mills 725 Dolan, Terence P., financial and recording secretary, and Gerald A. Ryan, president, Uniformed Firemen's Association of Greater New York, telegram dated September 12, 1967, to Chairman Mills 746 Du Boff, R. B., Department of Economics, Bryn Mawr College, letter dated September 12, 1967, to Chairman Mills 636 Du Pont, E. I., de Nemours & Co., Inc., Elastomer Chemicals Department, Alastair Rutherford, manager, market analysis, letter dated September 18, 1967, to Chairman Mills 785 Duvall, D. C., president, Wheeling Steel Corp., letter dated August 22, 1967, to Chairman Mills 752 Eddy, George A., Alexandria, Va., statement 830 Eisner, Robert, professor of economics, College of Arts & Sciences, Depart- ment of Economics, Northwestern University, letter dated September 12, 1967, to Chairman Mills, with attachment 637 Ellis, Otis H., attorney, Society of Independent Gasoline Marketers of America, letter dated September 12, 1967, to Chairman Mills 764 Finch, C. C., Washington, D.C., letter dated August 4, 1967, to Chairman Mills 832 Foegen, Dr. J. H., professor of business, Winona State College, letter dated August 14, 1967, to Chairman Mills 781 Funk, David G., economist, John Hancock Mutual Life Insurance Co., letter datedAugust 10, 1967, to Chairman Mills 789 Gelwick, Allen G., Jr., certified public accountant, letter dated August 23, 1967, to Leo H. Irwin, chief counsel, Committee on Ways and Means - - - 826 Gonzalez, Hon. Henry B., a Representative in Congress from the State of Texas, letter dated September 12, 1967, to Chairman Mills 730 Goodfellow, Thomas M., president, Association of American Railroads, letter dated September 13, 1967, to Chairman Mills 765 Granat, Harvey, president, Association of Equipment Lessors, letter dated September 11, 1967, to Chairman Mills 737 Gray, George 0., consultant, International Economic Policy Association, letter dated September 12, 1967, to Chairman Mills 735 Greenwald, Douglas, chief economist, McGraw-Hill Publications, state- ment 626 Guill, Ben H., congressional liaison, letter dated August 23, 1967, to Chair- man Mills, transmitting statement of National Automobile Dealers Association 736 Haack, Robert W., president, New York Stock Exchange, statement 733 Hailstones, Thomas J., dean, College of Business Administration, Xavier University, letter to Chairman Mills 773. Heinkel, Fred V., president, Midcontinent Farmers Association, letter dated August 29, 1967, to Chairman Mills 762 Heller, Walter W., University of Minnesota, tax policy statement (signed by 320 economists of various universities) 631 Huston, Charles L., Jr., president, Lukens Steel Co., statement 751 International Economic Policy Association, George 0. Gray, consultant, letter dated September 12, 1967, to Chairman Mills 735 Investment Bankers Association of America, Gordon Calvert, executive director and general counsel, letter dated August 18, 1967, to Chairman Mills 734 Keeney, Eugene A., executive vice president, American Retail Federation, letter datedAugust29, 1967, to Chairman Mills 758 K~llv, Hon. Edna F., a Representative in Congress from the State of New Y~rk, statement 72~ Kust, Leonard, vice president and general tax counsel, Westinghouse Electric Corp., Thinking Ahead-Tax Speedups and Corporate Liquidity, by Joseph E. Miles, from the Harvard Business Review, July-August 1967 247 Laclede Steel Co., Paul B. Akin, president, letter dated August 23, 1967, to Chairman Mills 750 Long, H. Owen, Ph. D., head, Business Administration, Division of Social Studies, Pensacola Junior College, letter to Chairman Mills 779 PAGENO="0009" CONTENTS PUBLIC-Continued Page Lukens Steel Co., Charles L. Huston, Jr., president, statement 751 Lynn, John C., legislative director, American Farm Bureau Federation, letters dated September 15, 1967, and August 24, 1967, with enclosure, to Chairman Mills 760 McGraw-Hill Publications, Douglas Greenwald, chief economist, state- ment 626 McKinney, George W., Jr., vice president, Irving Trust Co., letter dated August 14, 1967, to Chairman Mills~_ 794 Mann, Thomas C., president, Automobile Manufacturers Association, Inc., letter dated August 18, 1967, to Chairman Mills 735 Manufacturers Association of the City of Bridgeport, Conn., Harmon E. Snoke, executive vice president, letter dated August 11, 1967, to Chair- man Mills 738 Manufacturing Chemists Association, F. Leonard Bryant, statement con- cerning proposed amendment to section 6655 364 Meany, George. (See American Federation of Labor and Congress of Industrial Organizations.) Meskill, Hon. Thomas J., a Representative in Congress from the State of Connecticut, statement 731 Metro-Goidwyn-Mayer, Inc., statement 763 Midcontinent Farmers Association, Fred V. Heinkel, president, letter dated August 29, 1967, to Chairman Mills 762 Minish, Hon. Joseph G., a Representative in Congress from the State of New Jersey, letter dated August 10, 1967, to Chairman Mills 727 Mott, William C., executive vice president, United States Independent Telephone Association, letter dated September 8, 1967, to Chairman Mills, with attached resolution and editorial 742 National Association of Business Economists membership survey on tax increase and economic outlook 629 National Automobile Dealers Association, statement, transmitting letter dated August 23, 1967, from Ben H. Guill, congressional liaison, to Chairman Mills 736 National Bureau of Economic Research, Arthur F. Burns, statement - - - 768 National Farmers Union, Tony T. Dechant, president, letter dated August 15, 1967, to Chairman Mills, with resolutions attached ~61 National Machine Tool Builders' Association, A. J. DeWolf, president, letter dated September 13, 1967, to Chairman Mills i38 National Tax Equality Association, Vernon Scott, president, letter dated September 14, 1967, to Chairman Mills 159 Neweomb, Robinson, Robinson Newcomb Associates, to Chairman Mills 638 New York Chamber of Commerce Committee on Taxation, staternent.. - - `39 New York Stock Exchange, Robert W. Haack, president, statement 733 Patman, Hon. Wright, a Representative in Congress from the State of Texas: Text of H.R. 12250, a bill to provide for the issuance of nonnegotiable United States bonds to finance certain defense expenditures for the duration of the hostilities in Vietnam and for other purposes 348 Yields on long-term Government bonds, 1939 to present 345 Peat, Marwick, Mitchell & Co., certified public accountants, Leon 0. Stock, letter to Chairman Mills 791 Pechman, Joseph A., director of economic studies, the Brookings Institu- tion, statement on tax policy (signed by 320 economist of various universities) 631 Peterson, Richard L., assistant professor of economics, Department of Economics, Southern Methodist University, letter dated September 15, 1967, to Chairman Mills 772 Quinlan, William A., general counsel and Washington representative, Associated Retail Bakers of America, letter dated September 21, 1967, to Chairman Mills, with resolution attached 758 Reid, Hon. Charlotte T., a Representative in Congress from the State of Illinois, statement 728 Risch, William H., certified public accountant, letter dated August 18, 1967, to Leo H. Irwin, Committee on Ways and Means 827 PAGENO="0010" CONTENTS PUBLIC-Continued Rutherford, Alastair, manager, market analysis, Elastomer Chemicals Page Department, E. I. du Pont de Nemours & Co., Inc., letter dated Sep- tember 18, 1967, to Chairman Mills 785 Ryan, Gerald A., president, and Terence P. Dolan, financial and recording secretary, Uniformed Firemen's Association of Greater New York, telegram dated September 12, 1967, to Chairman Mills .746 Saunders, Stuart T., chairman of the board, Pennsylvania Railroad, statement of principles with 455 signatures of members of the business community 646 Scherr Turnico, Inc., L. T. Smith, financial vice president and treasurer, letter dated September 12, 1967, to Hon. Ancher Nelsen, Member of Congress with covering letter dated September 15, 1967 732 Schwengel, Hon. Fred, a Representative in Congress from the State of Iowa, statement 726 Scott, Vernon, president, National Tax Equality Association, letter dated September 14, 1967, to Chairman Mills_. 759 Shapiro, Dr. Sherman, professor of economics, College of Business Admin- istration, University of Illinois, letter dated September 8, 1967, to Chairman Mills 782 Shere, Louis, professor of economics, Department of Economics, Indiana University, letter dated September 15, 1967, to Chairman Mills 771 Smith, L. T., financial vice president and treasurer, Scherr Tumico, Inc., letter dated September 12, 1967, to Hon. Ancher Nelsen, Member of Congress with covering letter dated September 15, 1967 732 Snoke, Harmon E., executive vice president, Manufacturers Association of the City of Bridgeport, Conn., letter dated August 11, 1967, to Chairman Mills Society of Independent Gasoline Marketers of America, Otis H. Ellis, attorney, letter dated September 12, 1967, to Chairman Mills 764 Somers, Harold M., dean, Division of Social Sciences, University of California, Los Angeles, letter dated August 26, 1967, to Chairman Mills, with article from Los Angeles Times attached 766 Spangler, Miller B., director, oceanics project, National Planning Associa- tion, letter dated August 11, 1967, to Chairman Mills 793 Stahl, Richard W., Forest Hills, N.Y., certified public accountant, state- ment 828 Stempel, Morton, manager of market planning, Standard Packaging Corp., letter dated August 14, 1967, to Chairman Mills 792 Stock, Leon 0., Peat, Marwick, Mitchell & Co., certified public account- ants, letter to Chairman Mills 791 Stoner, Henry, Avon Park, Fla., letter dated August 5, 1967, to Chairman Mills 832 Summers, Gary W., letter dated August 15, 1967, to Committee on Ways and Means 826 Tax Foundation-Special report, "Controllability of Fiscal 1968 Expendi- tures" 177 Tax policy statements: Telegram from Howard Boyd, chairman of the board, El Paso Natural Gas Co., dated August 18, 1967, to Chairman Mills, signed by 22 American businessmen 658 Signed by 320 economists of various universities, circulated by G. L. Bach, Stanford University, Walter W. Heller, University of Minne- sota, and Joseph A. Pechman, The Brookings Institution 631 Signed by 455 American businessmen, submitted by Stuart T. Saunders, chairman of the board, Pennsylvania Railroad 640 Tenzer, Hon. Herbert, a Representative in Congress from the State of New York: Letter dated January 13, 1967, from Paul F. Preston, analyst in public finance, Legislative Reference Service, Library of Congress 292 Letter dated August 22, 1967, from Samuel M. Jones, Deputy As- sistant to the Secretary, Office of the Secretary of the Treasury_ - - 288 Report from Washington entitled, "H.R. 3803 Seeks To Reduce the Oil Depletion Allowance" 298 Thompson, Hon. Frank, Jr., a Representative in Congress from the State of New Jersey, statement 726 PAGENO="0011" CONTENTS XI PUBLIC-Continued Tipton, Stuart G., president, Air Transport Association, letter dated Page August 31, 1967, to Chairman Mills 765 Towle, Lawrence Mi., Department of Economics, Trinity College, letter dated August 7, 1967, to Chairman 1\'Iills 780 Turner, Robert C., professor of Business Economics, Graduate School of Business, Indiana University, letter to Chairman Mills 638b Uniformed Firemen's Association of Greater New York, Gerald A. Ryan, president, and Terence P. Dolan, financial and recording secretary, telegram dated September 12, 1967, to Chairman Mills 74~ United States Independent Telephone Association, William C. Mott, executive vice president, letter dated September 8, 1967, to Chairman Mills, with attached resolution and editorial 742 United Steelworkers of America, I. W. Abel, president, telegram dated August 4, 1967, to Chairman Mills 755 Vaughn, E. A., vice president and controller, Aluminum Co. of America, letter dated August 29, 1967, to Chairman Mills 746 Verity, C. William, Jr., president, Armco Steel Corp., statement 748 Westinghouse Electric Corp., Leonard Kust, vice president and general tax counsel, Thinking Ahead-Tax Speedups and Corporate Liquidity, by Joseph E. Miles, from the Harvard Business Review, July-August 1967 247 Wheeling Steel Corp., D. C. Duvall, president, letter dated August 22, 1967, to Chairman Mills 752 Wojtyla, Henry L., letter dated August 22, 1967, to Chairman Mills, with statement attached 789 Wood, Harleston R., chairman of the board and president, Alan Wood Steel Co., statement 747 PAGENO="0012" PAGENO="0013" PRESIDENT'S 1967 TAX PROPOSALS MONDAY, AUGUST 14, 1967 HOIJSE or REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Wilbur D. Mills (chair- man of the committee) presiding. The CHAIRMAN. The committee will please be in order. The purpose of the hearing this morning is to receive testimony from officials of the administration and from the interested public on the President's tax proposals contained in his message to Congress of August 3, 1967. Without objection a copy of House Document 152, which contains the President's message of August 3 on this subject, will be made a part of the record at this point, along with a copy of the press release which was issued on August 3 announcing the hearings. We will also include at this point a copy of an explanation which was issued by the Depart- ment of the Treasury on the tax proposals. (The information referred to follows:) [House of Representatives, Doc. No. 152, 90th Cong., first sess.] TAXES MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING RECOMMENDATIONS FOR TAXES To the Congress of the United States: THE HARD AND INESCAPABLE FACTS Behind the accounts that make up the Nation's budget lies the pursuit of America's :responsibilty and purpose at home and abroad. As we enter this new Fiscal Year, the Congress and the American people should have an up-to-date report on the state of the budget, and on the steps that must be taken to protect the national security and to sustain the health and vitality of this Nation. Last January we submitted our budget for Fiscal 1968. In that budget we estimated: -Expenditures of $135 billion. -Revenue of approximately $127 billion, including income from a 6% surcharge on corporate and individual taxes effective July 1. -A resulting deficit of about $8 billion. Since then much has happened to change these prospects. For several weeks, I have reviewed with my advisers the entire economic and budgetary situation. I have consulted with leaders of the labor, farm, and business communities. As a result of that review I am submitting today a financial plan for America's continued economic well-being. No President likes to report a significant revision in the Nation's budget est1~ mates. Treasury, budget and economic experts tried to be as realistic as possible 1 PAGENO="0014" 2 PRESIDENT'S 1967 TAX PROPOSALS in the estimates they made late last year. Ydt, no task is more formidable than to try to predict-over 18 months in advance-a budget of around $135 billion and its related revenues for 200 million Americans. The Nation now faces these hard and inescapable facts for fiscal 1968: -Expenditures are likely to be between the .January budget figure of $135 jjillion and $143.5 billion-as much as $8.5 billion higher-depending upon the determination and ability of the Congress and the Executive to control expenditures. -Revenues are now estimated some $7 billion lower than in January, even with a 6% tax surcharge. -These changes in the January budget estimates would result in a deficit of $23.6 billion. -Without a tax increase and tight expenditure control, the deficit could exceed $28 billion. And that does not include an estimated $700 million higher cost of interest on the public debt that such a deficit would involve. A deficit of that size poses a clear and present danger to America's security and economic health. If left untended, this deficit could cause: -A spiral of ruinous inflation which would rob the poor, the elderly, the millions with fixed incomes. -Brutally higher interest rates and tight money which would cripple the home builder and home buyer, as well as the businessman. Interest rates have already turned up sharply despite the relatively easy money policy of the Federal Reserve System. -An unequal and unjust distribution of the cost of supporting our men in Vietnam. -A deterioration in our balance-of-payments by increasing imports and decreasing exports. This Congress and this Administration must not accept so large a deficit. Under these circumstances, we must choose between two alternatives:. 1. The deficit could be accepted and totally financed by additional borrow- ing, which itself would drive up interest rates, or 2. The deficit could be reduced by rigidly controlling expenditures, raising as much money as possible through increased taxes, and then borrowing the difference. The first alternative would be fiscally and financially irresponsible under present conditions. The second alternative is the only way to maintain a strong and healthy economy. America in its strength and wisdom must choose to travel a responsible fiscal and budgetary course. That is why I present for your judgment and action a fiscal program that is sensible and sound. There are two essential elements to this program: -expenditure restraint, to which this Administration is committed and which I urge upon the Congress. -tax measures to increase our revenues. FISCAL 10f38 EXPENDITURES The budget for Fiscal 1968, submitted six months ago, estimated expenditures at $75.5 billion for the Defense Department and Atomic Energy Commission, and $59.5 billion for our civilian programs. These estimates may now have to be revised upward by as much as $8.5 billion: -$2.5 billion for civilian programs. -$2 billion for reduced sales of participation certIficates. -$4 billion for defense. 1. Civilian Ea~penditvres The estimate of non-defense spending for Fiscal 1908 has already increased by $1.5 billion. This increase stems from two sources: -First, a number of essential activities were temporarily deferred in fiscal 1967 as part of our fight against inflation. Early this year inflationary pressures had been brought under control. Some of these deferred funds already voted by Congress were released in late February, and again in March and April, particularly to help homebuildimig. This added $600 million to Fiscal 1968 expenditures. These releases included funds for the purchase of low cost home mortgages ($500 million), construction grants for health and education facilities ($30 million), and the construction of dams, flood control projects, and other public works ($20 million). PAGENO="0015" PRESIDENT'S 1967 TAX PROPOSALS 3 -Second, the January estimate of expenditures is up by $900 million pri- marily because of Increases in programs whose payments are ficeed by law and over which the President has no discretion-such as payments to the States for public assistance and health programs ($250 million), farm price supports ($400 million), and Federal contributions to Medicare. ($150 million). In addition, the Congress is still considering important legislative measures which will vitally affect Fiscal 1968 expenditures. Although we are already a month into the new fiscal year, 10 of the 13 regular appropriation bills have not yet been enacted. No one knows what the total of those appropriations to be voted by Congress for this fiscal year will be. We do know, however, that the Congress is considering a bill which would raise civilian and military pay by more than $1 billion above the Administration's 4.5 percent pay proposal. The $1 bifflon extra pay raise is equivalent to the yield of a 2 percent tax surcharge and comes directly out of the pockets of American taxpayers. These items alone would increase civilian expenditures by $2.5 billion above the budget submitted in January. Moreover, the Congress, in actions by one or the other House, has reduced by over $2 billion the authorizations I requested for the sale of participation cer- tificates. Failure to restore these authorizations as appropriations bills move to final passage would add still further to the budget deficit. Therefore, I urge the Congress to exercise the utmost restraint and responsi- bility in the legislative decisions which are yet to come and to make every effort not to exceed the January budget estimates. The Executive Branch pledges to take every proper action within its power to reduce expenditures in the January budget. But our discretion is limited. Of the $61 billion now estimated for non-defense expenditures, more than two- thirds is not subject to an Executive reduction. Consider these facts: -More than $30 billion wifi be spent on programs under. which payments are definitely fixed by law or otherwise mandatory-such as interest on the public debt (over $14 billion), veterans' compensation `and insurance pen- sions ($5 `billion), public assistance ($4 billion), farm price supports ($2 `billion), medical payments out of the general revenues (over $1 bil- lion), legislature and judiciary (over $350 million). -More than $15 billion will be spent to complete contracts or obligations entered into in prior years, such as the purchase of mortgages under earlier commitments and the completion `of construction begun in 1966 or 1967. * -An additional $8 billion is spent by the pay of Federal employees in civilian agencies other than the Post Office. Substantial reductions are not possible in these expenditures without bringing to a halt many essential activities such a's law enforcement and the Nation's air navigation system. Another $1 billion will be spent if the 4.5 percent civilian and military pay increase I recommended is enacted. After taking account of these items, and allowing for a reduction of more than $5 `billion in total expenditures-achieved through the sale of financial as- sets-this leaves only $12 billion of outlays over which the President has discre- tion in the year ahead. Even here, many indispensable programs `are involved: for example, medical supplies `and equipment for veterans' hospitals, equipment for the U.S. Coast Guard, grants for construction of civilian hospitals. Reductions in spending will not be easy, for the budget submitted in January was already lean. But I pledge to the Country `and the Congress that I will make every possible expenditure reduction-civilian and military-short of jeopard- izing the Nation's security and well-being. As the Congress completes each appropriation bill for Fiscal 1968 expenditures, we will examine at once, very, very earef wily, the results of those `actions, and determine where, how, and by how much expenditures under these appropria- tions can be reduced. I am directing each Department and Agency head to review every one of his programs, to identify reductions which can be made and to report to the Director of the Budget in detail on the actions he is taking to put those reductions into effect. But action `by the Executive Branch alone is not enough. It will achieve nothing if every time the Executive Branch saves a dollar, the `Congress adds another dollar-or more-to the expenditures recommended in my January budget. PAGENO="0016" 4 PRESIDENT'S 1967 TAX PROPOSALS All actions we take to reduce Federal spending mu.st-and will-be carefully and compassionately weighed. For we cannot turn our backs on the great pro- grams that have been begun, with such promise, in the last three and one-half years. And we cannot now postpone-at a much higher economic and human cost later-the urgent task of making the streets of America safe from crime and chaos and rooting out the underlying causes of unrest and injustice in our land. Nevertheless, we must move with determination to assure that those for whom these programs were beg-un are not robbed by the inflation that would accompany an unacceptable deficit. 2. Defense Ecupenditures I have concluded, after considering the recommendations of Secretary Mc- Namara, the Joint Chiefs of Staff and General Westmoreland, that I should authorize an increase of at least 45,000 in the number of men to be sent to Vietnam this fiscal year. This Nation has taken a solemn pledge-that its sons and brothers engaged in `the conflict there shall never lack all the help, all the arms, and all the equip- ment essential for their mission and for their very lives. America must-and will-bonor that pledge. It is for this reason that expendi- tures for Vietnam-subject as they are to the variable demands of military operations-may now exceed our earlier estimates. The Department of Defense has been a pace-setter in the Federal Government for efficiency and economy. Still, any organization that has so greatly expanded in so short a time is bound to have some areas in which further economies can be achieved or less essential expenditures stretched out. I have asked ~S'ecretary McNamara, therefore, to conduct a searching review of all defense ecupenditures and to withhold all suck ecupenditures that are sot now essential for national security. By such action we will try to hold total defense expenditures as near as pos- sible to the level budgeted in January. However, the history of war teaches one clear lesson: the costs of conflict can never be precisely estimated nor fully fore- seen. Thus, the possibility remains that defense spending in fiscal 1968, based on present plans, may exceed the January budget by up to $4 billion. FISCAL 1968 REVENUES The Fiscal 1968 budget submitted in January projected revenues of approxi- mately $127 billion, including income from the tax measure I proposed' at that time. Since January, revenue estimates have been revised downward by a total of about $7 billion: -$800 million as the result of Congressional action in restoring the invest- ment credit and accelerated depreciation earlier than the budget had assumed and more generously than the AdministratiOn had requested. -$1.3 billion because of lower corporate profits and $00 million because of lower personal income than projected six months ago. -$3 billion because of a decrease in estimated yield from existing income tax rates and $200 million because of a decrease in the estimated yield øf gift and estate taxes and customs. -$600 million because of a reduced estimate of miscellaneous receipts such as stockpile sales ($450 million) and offshore oil revenues ($80 million). -$800 million because of a later effective date for the surcharge on personal income taxes than recommended last January. A PROGI~AM TO INCREASE OUR REVENUES Just as we must take determined action to control expenditures, so we must take `action to increase our revenues if we are `to avoid an unsafe and un- manageable deficit in the fiscal year ahead. The three point tax program here presented is shaped to provide the fairest' and least disruptive means of `sustaining-without inflation-America's `unprece- dented period of uninterrupted prosperity, now in its seventy-eighth month. 1. A speed-up of corporate tacs collections, as recommended last January.- Beginning January 1, 1968, corporations would pay their estimated tacoes on the basis of 80% of their liability, rather than 70%. PAGENO="0017" PRESIDENT'S 1967 TAX PROPOSALS 5 Over a 5-year period, small corporations, as well as large, would become cur- rent in their tax payments, in the same way as individual proprietors already are. This acceleration in collections should yield'$800 million in additional revenues for Fiscal 1968, somewhat more in subsequent years. 2 Uontinuation of excise taxes for the immediate future -The 7% manufac turer's excise tax on automobiles is now scheduled to fall to 2% on April 1, 1968, and to 1% on January 1, 1969. The drop to 2% should be postponed to July 1, 1969, and the drop to 1% should be postponed to January 1, 1970. The 10% excise tax on telephone service is now scheduled to fall to 1% on April 1, 1968, and to be eliminated on January 1, 1969. The drop to 1% should be postponed to July 1, 1969, and the tax should be eliminated on January 1, 1970. Extending these excise taxes would provide additional revenues of $300 million for Fiscal 1968 and more than $2 billion for Fiscal 1969. 3. Surcharges on corporate and personal income taxes.- -A temporary surcharge of 10% should be placed on corporate income tax liabilities, effective July 1, 1967. -A temporary surcharge of 10% should be placed on individual income tax liabilities, effective October 1, 1967. These are .surchárges On taxes, not on incomes. They wOuld expire on June 30, 1969, or continue for so long as the unusual expenditures associated with our efforts in Vietnam require higher revenues. These surcharges are four percentage points `higher than recommended in January. But they are vitally necessary to provide some of `the additional reve- nues this Nation must have. Altogether, the new surcharges will yield $6.3 billion in revenues for Fiscal 1968, and `somewhat more in Fiscal 1969. Under this proposal: -A family of four with an income of $10,000, now ordinarily paying a tax of about $1,100 will pay at most an added tax of $9.25 a month. -Those American families whose incomes are `below $10,000-3 out of every 4-will pay less than this amount. -The 16 million taxpayers in the lowest income brackets would be com- pletely exempt from the surcharge. For example, a married couple with 2 children, with an income of less than $5,000 a year, would pay no sur- charge. -The one `out of every four American families who now pay no income tax would be unaffected by the surcharge. Let us be clear about the significance Of this tax surcharge. If Americans today still paid tax'es at the rates i'n effect when I `became President, a little over three and one-half years ago, they would be paying this year over $23 billion more than they are paying now. Now your Government is asking for a return of substantially less `than half of these. tax cuts that I `recommended and the Congress overwhelmingly passed in the last three years. This is necessary to give American fighting men the weapons, equipment and the help they need, to hold the budget deficit within limits and to continue our education, health, poverty, urban and other vital programs. For three out of every four American families, `the burden of this'increase will be between a few cents and $9 a month. That is a small burden, a small incon- venience, compared `to what is borne by our, men ,in arms who put `their lives on the line in Vietnam. A SOuND AND HEALTHY ECONOMIC ADVANCE These tax recommendations, taken together, would raise $7.4 billion In Fiscal 1968. These. added revenues-combined with the steps that `the Congress and the Executive can and should take to control expenditures-will reduce the deficit to manageable proportions. If, working together, we can `avoid `an excessive pay increase, and provide the recommended authorization for sale of participation certificates, the deficit could be reduced to a range between $14 and $18 billion, depending upon our ability to hold down expenditures. Last January, we concluded that higher taxes in Fiscal 1968 would safeguard our prosperity. Present economic prospects reaffirm that judgment. It is the unanimous judgment of the President's advisers that the fiscal pro- gram we are recommending is consistent with a sound and healthy economic advance during the year ahead, without tight money and soaring interest rates. 83-349-67-pt. 1-2 PAGENO="0018" 6 PRESIDENT'S. 1967 TAX PROPOSALS THE COSTS OF INACTION Failure to act promptly on these tax proposals and to restrain unnecessary spending could have the most serious consequences: -The Nation could face a return of strong inflationary pressures and an intensified wage-price spiral-which could rob the poor, the elderly, the millions with fixed incomes. We would lose our opportunity to make prog- ress this year toward one of our most urgent objectives: price stability. -An excessive expansion of domestic markets could again quicken the flow of imports to the United States, while rising costs and prices cut into our exports. The position of the dollar as the key element in the world's financial system could be impaired. -The resulting distortions in our economy could ultimately endanger the prosperity that generates the jobs and opportunities our men returning from Vietnam have the right `to expect. -Spiraling interest rates and severely tight money would return. What the Government does not raise through taxes the Government must borrow. That `additional borrowing would be imposed on financial markets already strained by the unprecedented demands of private borrowers and State and local governments. Long term interest rates are already near their peaks of late last summer, and short term rates `have begun to climb. Without a tax increase, I am informed by Ohairman Martin that nothing the Federal Reserve System could responsibly do could avoid the spiraling of interest rates. As interest rates rose, a starvation of mortgage funds would throw `housing into a new depression before it had even recovered from the last one. Every other borrower-but most of all the small businessman and farmer-would bear the cost of our fiscal irresponsibility. A failure to raise taxes would not avoid the `burdens of financing a war. For these burdens are inescapable. But, instead of sharing those burdens equitably and responsibly-as an income tax surc'harge would do'-4nflation, tight money, and shortages would tax the American people cruelly and capriciously. The con- sequences `of that irresponsibility would haunt America and its people for years to come. CONCLUSION Some may hear in this message a call to sacrifice. In truth, it is a call to the sense of obligation felt by all Americans. Americans in Vietnam stand in, and brighten, the light of a proud tradition. They give their service, and some give their lives, for their country-and for us. To this point, America has served them well by `supporting them unstintingly to the last of their needs while building a strong and prosperous Nation at home. I urge you to remember the following. Last year: -Real wages were the highest in history-and the unemployment rate reached the lowest point in 13 years; -Total after-tax real income of American families rose five percent; -Oorporate profits after taxes reached an all-time peak, up nine percent last year; -Net income per farm increased more than 9 percent, even after adjusting for the higher prices farmers paid; -Our Gros~ National Product, valued in constant prices, advanced 5.8 percent. These gains were achieved without either runaway inflation, or the imposition of the wage and price controls which have been the condition of American life in every conflict of this century. In significant part, this was the result of responsibility and restraint exercised by the businest, farm, and labor communities. The current situation summons those groups `as never before to maintain~ that responsibility in their wage and price decisions. It summons all Americans to respond with that dame responsibility in the challenge of their own lives. The inconveniences this demand imposes are small when measured against the contribution of a Marine on patrol in a sweltering jungle, or `an airman flying through perilous skies, or a soldier ten thousand miles' from home, waiting to join his outfit on the line. PAGENO="0019" PRESIDENT'S 1967 TAX PROPOSALS 7 There are times in a Nation's life when its armies must be equipped and fielded, and the Nation's busLines~ must still go on. For America that time is now. The Nation'S unfinished agenda here at home must be pursued as well. The poor must be lifted from the prisons of poverty, cities must be made safe and livable, sick and undernourished bodies must be restored, our air and water must be kept clean, and every hour of our future must see new opportunities unfold. Thi~, then, is the story behind the facts and forecasts, and the recommendations I submit today. Last January I told the Nation: "I wish I could report to you that the conflict in Vietnam is almost over. This I cannot do. We face more cost, more loss, and more agony. For the end is not yet. I cannot promise that it will come this year-or come next year. Our ad- versary still believes, I think tonight, that he can go on fighting longer than we can, and longer than we and our allies will be prepared to stand up and resist. "Our men in that area-there are nearly 500,000 now-have borne well the `burden and the heat of the day.' Their efforts have deprived the Communist enemy of the victory that he sought and that he expected a year ago. We have steadily frustrated his main forces. General Westmoreland reports that the enemy can no longer succeed on the battlefield. "I must say to you that our pressure muSt be sustained-and will be sustained- until he realizes that the war he started is costing him more than he can ever gain. "I know of no strategy more likely to attain that end than the strategy of `ac- cumulating slowly, but inexorably, every kind of material resource'-of `labori- ously teaching troops the very elements of their trade.' That, and patience-and I mean a great deal of patience." Those words are even more true today. The test before us as a people is not whether our commitments match our will and our courage; but whether we have the will and the courage to match our commitments. I urge the Congress to respond to the fiscal challenge that faces the Nation. I hope that in the National interest you will act promptly and favorably upon these recommendations. LYNDON B. JOHNSON. THE WHITE HOUSE, August 3, 1967. [PRESS RELEASE, THURSDAY, AUGUST 3, 1967] CHAIRMAN WILBUR D. MILLS (D., ARK.), COMMITTEE ON WAYS AND MEANS, ANNOUNCES PUBLIC HEARINGS ON PRESIDENT'S TAX PROPOSALS Chairman Wilbur D. Mills (D., Ark.), Committee on Ways and Means, today announced that public bearings on the President's tax proposals would begin on Monday, August 14, 1967. The details of the President's proposals are contained in his Message which he transmitted to the Congress today. Copies of this Message will be avtdlable in print at the Committee Office, Room 1102 Long- worth House Office Building, }~riday morning, August 4, and will be mailed to all persons requesting to be heard. Lead-Off Witnesses.-Chairman Mills stated that the first witnesses to appear at the hearings, which will begin on Monday, August 14, will be Secretary of the Treasury Henry .H. Fowler and Budget Director Charles L. Schultze, and possibly other Government witnesses. The hearings will continue on Tuesday, August 15, and then will be suspended for two clays, Wednesday and Thursday August 16 and 17. The hearing will resume on Friday, August iS. It is hoped the Government testimony will be completed by that date t~nd tha~t public wit- nesses can begin on Monday, August 21. Cut-Off Date for Requests to be Heard.-The cut-off date for requests to be heard is not inter than the close of business Tuesday, August 15. The requests should be submitted to Leo H. Irwin, Chief COunsel, Committee on Ways arid Means, 1102 Longworih House Office Building, Washington, D.C. 20515. Witnesses will be advised as promptly as possible after the cut-off date as to when they have been scheduled to a~ppear. Time Allotted for Hearing.-The limited time available requires that all per- sons and organizations with the same general interest designate one spokesman to represent them so as to conserve the time of the Committee and the other PAGENO="0020" 8 PRESIDENT'S 1967 TAX PROPOSALS witnesses, prevent repetition and assure that all aspects of the proposals can be given appropriate attention. The Committee will be pleased to receive from any interested organization or persons a wi~itten statement for inclusion in the printed record of the hearing in lieu of a personal appearance. These statements will be given the same full consideration as though the statements had been presented in person. In such cases, a minimum of three (3) copies of the statement should he submitted by the close of business, Wednesday, August 23, 1967. Contents of Re quests to be Heard.-In order to eliminate repetitious testimony and to properly schedule witnesses, it will be necessary for the request to be heard to specify (1) the name, address, and capacity in which the witness will appear; (2) the list of persons or organizations the witness represents and in the case of associations or organizations, their total membership and where possible a membership list; (3) the amount of time the witness desires in which to present his direct oral testimony (not including answers to questions of Committee Mem- bers) (4) an indication of whether or not the witness is supporting or opposing the proposal or proposals on which he desires to testify; and (5) a topical outline or summary of the comments and recommendations which the witness proposes to make. If a prospective witness has already submitted a request to be heard on any of the subjects covered by this hearing, the request should be re-submitted furn- ishing the above information and otherwise conforming to the rules set forth for conducting this hearing. Written Statements-In the case of those persons who are scheduled to appear and testify, it is requested that 60 copies of their written statements be sub- mitted 24 hours in advance of their scheduled appearance. If it is desired, an addi- tional 60 copies may be submitted for distribution to the press and the interested public on the witness' date of appearance. Persons submitting a minimum of 3 written statements in lieu of a personal appearance may also, if they desire, submit `an additional 60 copies of `their statements for distribution `to the Committee Meutbers and the interested depart- mental and legislative staffs, pending `the printing of the public hear'ings, which will include such statements along with the oral testimony of those persons who appear in person. An additional 60 copies may be submitted for the press and the interested public, if it is desired. Format of All Written Statements-To more usefully serve their `purpose, all written sta'tements (those for the purpose of personal appearance and `those submitted in lieu `of a personal appearance) should contain- (1) a summary of comments and recommendations, and (2) subject headings in their main body. TREASURY DEPARTMENT, WASHINGTON, AUGUST 4, 1967 BACKGROUND MATERIAL IN PRESIDENT'S TAX PROPOSAL The attached material constitutes background on the tax proposals in Presi- dent Johnson's message on the State of the Budget and the Economy, delivered to the Congress Augus't 3, 1967. Included in the attachments are: -Material on the 10 percent surcharge proposal as it affects individuals and corporations; -Tax tables, showing the effects of the surcharge on individuals and on corporations; -A description of the acceleration of corporation tax collections; -Details of the continuation of excise taxes on automobiles and telephone service. EXPLANATION OF PRESmENT'S PROPOSAL FOR A TAX SURCHARGE OF TEN PERCExT The President's recommendation to increase taxes is a `temporary surcharge of 10 percent on personal income tax liability and 10 percent on corporate income tax liability. The surcharge provides an exemption for low income individuals and families. It is a 10 percent increase in the tax liability otherwise due, not 10 percent of `the taxable income. PAGENO="0021" PRESIDENT'S 1967 TAX PROPOSALS 9 The proposal would make the surcharge effective October 1, 1967 for individ- uals and effective July 1, 1967 for corporations. The President has recommended that the surcharge remain in effect until June 30, 1969, or continue so long as the unusual expenditures associated with our efforts in Vietnam require higher revenues. `Under this proposal: -A family of four with an income of $10,000, now ordinarily paying a tax of about $1,100, will pay at most an added tax of $9.25 a month. -Those American families whose incomes are below $10,000-3 out of every 4-will pay less than this amount. -The 16 million taxpayers in the two lowest income brackets would be com- pletely exempt from the surcharge. For example, a married couple with 2 children, with an income of less than $5,000 a year, would pay no sur- charge. -The one out of every four American families who now pay no income tax would be unaffected `by the surcharge. INDIvIDUALs This is h'ow the surcharge would apply to individuals: -Since the surcharge would be effective on October 1, 1967 and thus be effective for `Only one-fourth of the year 1967, the rate of the surcharge for that year would be 2.5 percent of the tax for the entire year. If the tax on an individual for 1967 would be $1,000 under present law, for the income of the entire year the surcharge would raise this tax by $25, to $1,025. -Since the surcharge would be in effect for all `of the calendar year 1968, the surcharge due on calendar 1968 tax liability would be the full 10 percent. On a tax of $1,000 which the individual would otherwise owe, the surcharge would come to $100 or 10 percent. Exemption The exemption from the surcharge covers taxpayers whose taxable income falls entirely within the first two brackets of the individual income tax. Generally speaking this exemption would exclude from the surcharge all single persons with taxable incomes of $1,000 or less after deductions and exemptions and all married persons with taxable incomes of $2,000 or less ,after deductions and exemptions. In terms of specific tax liabilities, single returns having $145 or less tax, joint returns having $290 or less tax, and head of household returns having $220 or less tax would be exempt. As an example, married couples with two children with earnings of less than $5,000 per year and single people with earnings of less than $1,900 per year would not be subject to the surcharge, assuming the use of the minimum standard deduction. The exemption will cover about 16 million taxpayers, or approximately one- sixth of the 98 million total of all taxpayers. Of the 16 million who will not be subject to the surcharge, approximately 5 million are single individuals and 11 million are married taxpayers. CORPORATIONS This is how the surcharge would apply to corporations: -For calendar year 1067, the surcharge for corporations would be higher than for individuals because of the earlier effective date, July 1-for corporations. -For corporations whose taxable year coincides with the calendar year, the surcharge for calendar year 1967 will be 5 percent of the tax for the entire year (as against 21/2 percent for individuals) since the surcharge would be effective as of July 1 and thus would apply for half of the calendar year. -The full 10 percent surcharge would apply for 1968. -For corporations whose taxable year does not coincide with a calendar year, the rate of the surcharge would be determined on the basis of the number of days in the corporations' fiscal years that fall within the period during which the surcharge is in effect (July 1, 1967 to June 30, 1969). The liability to which the surcharge applies is the tax liability before allowance of the investment credit and the foreign tax credit. A calendar year corporation with profits before tax of $100,000 will pay an additional $2,075 in 1967, and an additional $4,150 in 1968. PAGENO="0022" 3 1c~ ~ ~ ~ ~ ~- HI~ ~ 00 `-(OC~C~3 00(~0000WN~q -4 :z0 C) C) -3 Ci, 0 m 2 H -<-4 m -< C,)> -2 `~0 - > 2 W C-I 111 -< -u m ~ 22 C. ~ 0 -a 0 C,, C -I >< 4~G440~4444q 00000 U~F~) 00000 00000C)C) o (00000(0 ~0N~-' -Jc0w-~J00 00~00 ~r-)ro~e 00 ~ c0~-4-J0) 0000 `-Jf0 ~N3 -`0) ~C0 C-S) - - C0N~-~- 4~ (000 N~ c~n ~ ~-J--JC,) 0000 2 ~ 3 e-r) C) -~ > 3C)~5_ I ~2CD 2 o *~10 ~- -n ~ - ~ ~ 33 3 ~ C,, cri ~ ~ CDCD 00 33 00 13 ~ ~ ~i,CI) ~ ->< CD~ri, ~ 35 0 r~ c~0. ~ ~> ~ 0 ~ (DCD ~ ~ ~ ~ Ci) ~ 00P-b ~` m2 ~ CD 0 ~ ~ 00 ~ CD' ~ ~ 0k,, ~ 0)> P-be C) `-`.~` ~ -~ ~ S ~-< ~ ~ ~,- 0~ Ci) 0) 30 -I 3 -4 ~0 ~ - C) ~ ~ >< ~1~' ~ C,) Cf2~ ~ m P-I~'1 -r~ 0 -4 00C ~p. 00-J~u 000) -J00 ~-~1(00) -4 ~ 000000(00000000000 COFOO) PAGENO="0023" PRESIDENT'S 1967 TAX `PROPOSALS 11 TABLE 3.-COMPARISON INCREASE OF 1963-66 FOR ILLUSTR TAX LIABILITY AND ATIVE TAXPAYERS' ( 1967-68 TAX MARRIED COU LIABILITY UNDER PROPOSED TAX PLE, 2 DEPENDENTS) Wage income 1963 tax2 1964 Tax Act 1966 tax2 decrease ~ 1967 tax 2 Tax increase over 1966 tax3 1968 tax 2 Tax increase over 1968 tax4 $3,000 $65 $61 $4 $4 (6) $4 Q) $5;000 420 130 290 290 (5) 290 (5) $7,500 877 191 686 703 $17 755 $69 $10,000 1,372 258 1,114 1,142 28 1,225 111 $12,500 1,901 334 1,567 1,606 39 1,724 157 $15,000 2,486 424 2,062 2, 114 52 2,268 206 $20,000 3 800 640 3,160 3,239 79 3,476 316 $25,000 5,318 906 4,412 4,522 110 4,853 441 $35,000 9,037 1,508 7,529 7,717 188 8,282 753 1 Proposed tax increase of 2.5 percent of the tax in 1967 and 10 percent in 1968 which does not apply to single returns with taxable income of $1,000 or less and joint returns with taxable income of $2,000 or less. 2 Tax liability computations assume minimum standard deduction or deductions equal to 10 percent of income which ever is greater. Tax liability'from optional tax table where income is under $5,000. 3 1967 tax minus 1966 tax. 4 1968 tax minus 1966 tax. ~There is no increase in 1967 or 1968 for a married couple whose tax at 1966 rates is $290 or less. * * * TREASURy DEPARTMENT, WASHINGTON, AUGUST 4, 1967 CORPORATE CURRENT TAX PAYMENT PROPOSALS In his August 3 Message on the Budget and the Economy, the President recom- mended two proposals relating to corporate current payments of tax, effective for 1968 tax years. Under the proposals there would be: -Elimination over a 5-year period of the present exemption of the first $100,000 of corporate tax liability from the requirement of payment on a quarterly estimated basis. This change would put corporations on the same current tax basis as an unincorporated proprietor, who must now, make estimated tax payments based on his entire liability. -An increase from 70 to 80 percent that a corporation's estimated tax for' any given taxable year must bear to its' final tax liability. The 80 percent requirement is now applicable to those individuals who are required to estimate `their tax liabilities. Revenue resulting from both proposals would be $800 million in fiscal year 1968 and $400 million in each of the succeeding fiscal years. The proposals do not in- crease the actual tax liabilities of any corporation. EFFECTS OF PROPOSALS Under present law, corporate taxpayers are required to make estimated tax payments only with respect to their estimated tax liability in excess of $100,000. They are not required to make any estimated tax payments on their first $100,000 of estimated tax liability, and if their annual estimated tax liability is $100,000 or less, they are not required to file a declaration of estimated tax. The first proposal places all corporate taxpayers on a current tax payment' basis with respect to their entire tax liability.'This result would be achieved under the proposal by providing for a gradual elimination of the $100,000 exclusion over a five-year period, beginning with taxable years 1968. The provision gears tax payments more closely to accruals of tax liability and to current developments in the economy. The second proposal raises from 70 to' 80 percent the percent of the tax liability that a corporation may pay in estimated tax by installments without incurring a penalty. The 70 percent rule was instituted in the 1954 Revenue Act, and has not been revised since as respects corporations. The proposed change to 80 per- cent conforms to the percentage now required to be paid by individual taxpayers,. as established by legislation enacted in 1966. PAGENO="0024" 12 PRESIDENT'S 1967 TAX. PROPOSALS HOW. THE PROPOSALS WORK Payment of First $100,000 of Estimated Taco The proposed change would require a corporation to file a declaration of esti- mated tax for a taxable year if it can reasonably be expected that its tax liability for the year (after taking into account credits) will exceed $40, the figure pres- ently applicable to individuals. As indicated above, the present exemption for all corporations is $100,000. The proposal would involve a new definition of "estimated tax" (which is the basic amount subject to payment by installment) reflecting the removal of the existing $100,000 exemption over a fiveyear period. During the transition period, a corporation, in determining the amount of its estimated tax liability, would be permitted to exclude an amount equal to the applicable: "exclusion percentage" multipiiedby the lesser of (1) $100,000, or (2) theamOunt which the corporation estimates as its income tax for the year less theestimated amount of its credits. The "exclusion percentage" would be defined as follows: If the declaration is for a year beginning in- The "exclusion percentage" is- 1968 80 1969 60 1970 40 1971 20 In the case of taxable years beginning after 1971, there would be no special exemption. . . As an example, a corporation which estimates its income tax less credits for 1968 to be $80,000 would be entitled to an estimated tax exclusion of $64,000 for 1968-80 percent (its exclusion percentage) times $80,000. Its estimated tax liability would, therefore, be $16,000. If the corporatiOn estimates its in- come tax less credits for 1968 to be $120,000, its estimated tax exclusion would be $80,000 (80 percent times $100,000) and its estimated tax liability would be ~40,000. Increase from 70 to 80 Percent Respecting Amount of Estimated Taco which Corporations Must Pay in Installments Under present law, a corporation is not subject to penalty for an under-payment ~of estimated tax if its payments equal or exceed those which would be required on the basis of estimated tax liability of 70 percent of actual tax liability. The proposal amends the current law to raise the 70 percent figure to 80 percent. This conforms the percentage for corporations to that now applicable to individuals. HISTORIC BACKGROUND Prior to 1950, corporations were permitted to pay income taxes, in four quar- ~terly installments, in the year following the taxable year. Thus, for a calendar year corporation, the tax for 1948 was payable in four equal installments during 1949. The first legislation designed to accelerate corporate tax payments (the Mills plan) gradually advanced payments, beginning in 1950, to two 50 percent pay- ments in the third and sixth months following the taxable year (i.e., March 15 and June 15 for calendar year corporations). In 1954, a five-year transition plan spread over the years 1955-1959 was adopted to effect a partially current payment of the estimated tax. When fully effective, a calendar year corporation paid 25 percent of its estimated tax in excess of $100,000 on September 15 and 25 percent on December 15 of the current taxable year. The balance was payable in two installments the following March 15 and June 15. The Revenue Act of 1964 provided for a further gradual acceleration of esti- mated corporate tax payments which, by 1970, would have required corporations to be on a totally current payment basis as to tax liabilities in excess of $100,000; that is, payments equal to 25 percent of the estimated tax (over $100,000) would have been due on April 15, June 15, September 15, and Decem- ~ber 15 of the taxable year. (Fiscal year corporations must make estimated pay- ments by the fifteenth day of the fourth, sixth, ninth and twelfth month of their fiscal years.) The Taco Adjustment Act of 1966 accelerated the 1964 plan by requiring that the transition to current status (for tax liability in excess of $100,000) be achieved with taxa~ile years beginning in 1967. Thus, for taxable years beginning in 1966, ~the April 15 and June 15 installments were increased to 12 percent of the esti- PAGENO="0025" PRESIDENT'S 1967 TAX PROPOSALS 1~ mated tax. For taxable years beginning in 1967,25 percent payments were required on the April and June payments. For all taxable years beginning in 1967, there- fore, full current payment of estimated corporate taxes, to the extent in excess of $100,000, will have been achieved. * * * TREAsURY DEPARTMENT, WAsHINGTON, AUGUsT 4, 1967 FIGURES ON THE RECOMMENDED CONTINUATION OF EXCISE TAXES ON AUTOMOBILES. AND TLELPHONE SERVICE The President today recommended postponements of reductions in the 7 percent manufacturer's excise tax on automobiles, and the 10 percent excise tax on telephone service, for the period covered by the temporary surcharge. For manufacturer's excise tax on automobiles, the President recommended. that: -The scheduled drop to 2 percent on April 1, 1968 be postponed to July 1,. 1909; -The scheduled drop to 1 percent on January 1, 1969 be. postponed to January 1, 1970. For excise tax on telephone service, the President recommended: -The scheduled drop to 1 percent on April 1, 1968 be postponed to July 1,. 1969; -The scheduled elimination, now set for January 1, 1969, be postponed until. January 1, 1970. (See also proposed language and technical explanation of proposal at p. 32.) The CHAIRMAN. Our first witnesses will be officials of the administra- tion. We have with us today the Secretary of the Treasury, the Honor- able Henry H. Fowler; the Director of the Bureau of the Budget. the Honorable Charles L. Schultze; and the Chairman of the Council of Economic Advisers, the Honorable Gardner Ackley. Let the Chair say at this point that it is generally recognized that members of the White House staff and the Council of Economic Ad- visers do not normally appear at hearings before legislative commit- tees, but the Chair specifically requested that in this instance an. exception be made so that Mr. Ackley could be with us this morning. If it is agreeable with the committee, and in order that the adminis- tration may have the opportunity of presenting its direct case to the committee in full without interruption, I would suggest that each of the gentlemen at the witness table be permitted to present his full statement before we members of the committee ask questions. Is there objection? None is heard. I will ask the Secretary of the Treasury to be our first witness this morning, Director Schultze our second witness, and Mr. Ackley to speak third. Mr. Secretary, we are always pleased to have you before the com- mittee. We regret exceedingly the circumstances that bring you here on this occasion. It is not a very popular subject matter, but we do ap- preciate having you, anyway. You are recognized, sir. STATEMENT OP HON. HENRY H. POWLER, SECRETARY OP THE TREASURY Secrefrtiy FOWLER Thank you Mi Ch~urman %nd members of the committee. Thank you for the opportunity to appear before you in support of the fiscal program recently announced in the President's message. This program includes both tax measures to increase our rev- enues and action by the Congress and the executive branch to restrain,. PAGENO="0026" 14 PRESIDENT'S 1967 TAX PROPOSALS cut, and control expenditures so as to reduce the prospective deficit in fiscal 1968 and thereafterto manageable levels. Mr Chairm'in, I will not read the entire statement before you I will particularly cut short the detailed discussion of the' details of the `tax program because I think they are widely known and perhaps they would.corne up for more technical discussion later.. The CHAIRMAN. However, your statement in that regard will be in- chided in the record, Mr. Secretary. Secretary FOWLER. Thank you. I appeared before this committee in May to.ask for borrowing authority needed tofinance a war. In order to keep the use of that borrowing au'thority to proportions compatible with our national economic and financial health, I appear today to ask for taxing `authority for the same purpose and to plead `through this committee to the Congress that it join with the President in making every possible expenditure reduction-civilian and military-short of jeopardizing the Nation's security `and well-being. We are engaged in a costly conflict in Southeast Asi'a with no clear prospect of any early ending. But it is a temporary cost and surely one day will terminate when the enemies of freedom conclude that the price of aggression is too high. Thi's unusual `and temporary cost must be financed in a manner con- `sistent with preserving sound, balanced, economic growth without in- flation at home. Fiscal responsibility means differing things in differing circum- stances. In a wartime context it must include the courage `and `willing- ness to raise the money th'at is as necessary as the guns, planes, and material needs of our forces in Southeast Asia. In current circumstances fiscal responsibility means that in financing the special and temporary costs of Vietnam we should obtain as much from temporary tax revenues `as economic conditions permit. However, it does not mean, under present circumstances, that we should try to eliminate the entire deficit by a tax increase-by a sur- charge not of 10 percent, but by one of nearly 50 percent. Fiscal responsibility also means that we should hold down and re- `strain expenditures th'at can be canceled or postponed without damage to our national interest. It does not mean attempting the impossible- the elimination of t'he deficit solely by reducing expenditures. The course of fiscal responsibility is the program outlined by the President; namely, reducing the deficit "by rigidly `controlling ex- penditures, raising as much money as possible through increased taxes, and then borrowing the difference." After an intensive examination of all the facts `available to us, my colleagues here and others in the Cabinet have advised and recommend- ed to the President that the prompt temporary imposition of a 10-per- cent surcharge on both corporate and individual income t'axes, except for individuals in the lower income brackets, is a necessary and equi. `table financial measure. We have concluded that this proposal, supplemented by a speedup of corporate tax collections and a temporary deferral of scheduled excise tax deductions, is not only consistent with the objectives of sustained growth, high employment, and price stability, but necessary if these objectives are to be successfully pursued. PAGENO="0027" PRESIDENT'S 1967 TAX PROPOSALS 15 Let me now set forth the basic overall reasoning that led us to the conviction that the President's program represents the best choice of fiscal measures that the present circumstances permit. The Director of the Budget, Mr. Schultze, will cover the budgetary and expenditure aspects of the President's program in depth, and the Chairman of the Council of Economic Advisers, Mr. Ackley, will deal in some detail with the economic aspects of the program. I will also discuss some of the financial reasons for the program and explain how the tax measures would be implemented and how they would affect taxpayers. I want to emphasize that we have arrived at these views on the basis of what the President termed "the hard and inescapable facts." What are these hard facts? First, our special Vietnam costs are now being incurred at a rate in excess of $22 billion per year. These costs are at levels that call for more financing from current tax revenues-by a temporary surcharge of as much as economic conditions permit. Second, without this temporary surcharge, our budget deficit in the current fiscal year would increase to unacceptable levels. This statement is based on the original January budgetary levels of revenues and the expenditures for Vietnam and all the other defense and civilian programs, and on the developments outlined in the President's message which make it necessary and realistic to revise the expenditure esti- mates upward and the revenue estimates downward. Third, despite the Federal Reserve System's continued application of a policy of monetary ease, resulting in a substantial expansion of the Nation's money supply and credit, we are witnessing a return of long-term interest rates to levels near their peaks of late last summer. Recently, short-term rates which had moved steadily downward since last fall, have reversed their direction and have begun to move back up. This temporary surcharge is therefore necessary to avoid the risk of excessively high interest rates and limited credit in particular sectors, such as housing. To the extent that the Federal Government must finance its growing deficit by borrowings on the credit markets rather than pay for its additional expenditures by additional revenue raised through the sur- charge, Government borrowing will increase the pressure on these markets and contribute to high interest rates and the risk of inequitable and damaging imbalances in credit availability-even assuming a con- tinuation of the recent high rates of growth of money supply and bank reserves. The imposition of the tax surcharge is prompted by these hard facts of the current cost levels of the hostilities in Vietnam, the current level of the budgetary deficit that is being incurred, and the current levels of interest rates and credit conditions in both the long- and short- term areas. This conclusion does not involve guesswork. Given these facts, the only valid reason for failing to impose this temporary surcharge would be a solid conviction that it would be inconsistent with preserving sound, balanced enocomic growth. Although a temporary surcharge was included in the fiscal 1968 budget program to be effective July 1, it is wise for both the Presi- PAGENO="0028" 16 PRESIDENT'S 1967 TAX PROPOSALS dent and the Congress to take this final decision when the course of economic developments accompanying the inventory readjustment in progress indicated that the impact of a tax increase would be bene- ficial rather than harmful. We are now of the unanimous view, and that view is confirmed by the overwhelming preponderance of economic fact and opinion, that any real danger of an economic downturn is past. Indeed, the out- look, given the scale of Federal, State, and local public expenditures and private demand, is for a substantial rate of growth in the period~ ahead-with the debate being confined to exactly how rapid the growth will be. This provides the fourth and final reasons for a temporary sur- charge. We view the surcharge as a measure of insurance against the risk that, without this program of combining a temporary tax increase with expenditure restraint, the levels of growth would give rise to unacceptable inflationary pressures. This development would take a toll of our economic balance and stability or be curbed by excessively high interest rates and tight money that would provide an unhealthy unbalanced economy, ill adapted to a smooth transition to peace with prosperity. I. WHY WE NEED THE TAX INCREASE 1. To meet the special cost of Vietnam Now let me develop some of these reasons. We need the tax increase, first, to meet the special costs of Vietnam. I am sure that so long as hostilities are continuing in Vietnam no member of the committee would want or has wanted to deny the' finances necessary to permit our fighting men to do an effective job. In the fiscal year 1966, the special Vietnam outlays that followed upon our national decision of late July 1965 added $6.1 billion to our' administrative budget expenditures. However, due mainly to the accelerated growth of our economy, revenues climbed by $11.6 billion, so that we were able to close out the fiscal year 1966 with an administrative budget deficit of only' $2.3 `billion, which was $3 billion below the $5.3 billion forecast in the original submission of the budget in January 1965. The original estimate for special Vietnam costs in fiscal 1967 as: submitted in the January 1966 budget, was $10.5 billion, more than~ a $4 billion increase over fiscal 1966 costs for that purpose. Accordingly, the T'ax Adjustment Act of 1966 was recommended and shortly enacted. It provided an additional $1.2 billion of revenues: in fiscal 1966 and an additional $4.6 billion in fiscal 1967, by accelerat- ing collections and deferring scheduled excise tax reductions. That act did not involve any increase in individual or corporate liabilities. In the latter part of the calendar year 1966 it was apparent that the special costs of Vietnam in fiscal 1967 would be nearly double those originally estimated in the January budget. `This reflected the rapidly increasing scale of hostilities and the fact that, with these hostilities likely to continue, it had become necessary to plan and budget for the continued conduct of hostilities on `a substantially increased scale through fiscal 1968. PAGENO="0029" PRESIDENT'S 1967 TAX PROPOSALS 17 A special supplemental appropriation for defense in the amount of $12.9 billion was, therefore, requested in last January's `budget message. A surcharge of 6 percent on both corporate and individual income taxes to last for 2 years, or for so long as the unusual expenditures associated `with our efforts in Vietnam require `higher revenues, was recommended to become effective at the beginning of fiscal year 1968. immediate imposition last January of thi's surcharge was not re- quested because of the temporary period of slack in the economy resulting from fiscal and monetary restraints previously imposed and the inventory readjustment. Now, however, inventories have been substantially readjusted, and the course of the economy is heading upward. I thu's come to the hard, inescapable fact that the special costs of Vietnam are now being incurred at a rate-in excess of $22 billion- that calls `for a temporary increase in the tax liabilities of individuals and corporations to meet a portion of those costs. 2. To hold down the deficit We need also this tax increase to hold down the deficit. We could, of course, turn away from the course of responsible actions and attempt to meet our financial obligations without resort to a tax increase. Consider for a moment what this would mean in terms of the size of the deficit that would result., The `budget for `fiscal 1968 submitted last January estimated ex- penditures at $135 billion-$75.5 billion for the Defense Department and Atomic Energy Commission, and $59.5 billion for civilian pro- grams. As the Director of the Budget will detail, these estimates may `be exceeded by as much as $8.5 billion-$2.5 billion for civilian pro- grams, $2 billion for a possible denial by `Congress of the authority to sell participation certificates in the amount included in the January budget, and $4 billion for defense. In addition, with no tax increase and with expenditure at the higher end of these contingencies, outlays for interest on the public debt would also rise, by up top erhaps as much as $700 million. The President has pledged to take every proper action to avoid an increase of this magnitude. But as he pointed out in his message to Congress, action by the executive branch `alone is not sufficient. The outcome will also depend on congressional action with respect to appro- priations and mandatory spending requirements. Turning to the receipts side, since last January revenue estimates have been revised downward by approximately $7 billion: $800 million as the result `of congressional action in restoring the in- vestment credit and accelerated depreciation earlier than the budget had `assumed. $1.3 billion `because of lower corporate profits. $300 million because of lower personal income than projected 6 months ago. $3 billion because of a decrease in estimated yield' from existing income tax rates and $200 million because of a decrease in the estimated yield of gift `and estate taxes and custOms. $600 million because `of `a reduced estimate of miscellaneous receipts such as stockpile sales ($450 million) and offshore oil revenues ($80 million). S800 million because of a later effective date for the surcharge on per- sonal income taxes than recommended last January. PAGENO="0030" 18 PRESIDENT'S 1967 TAX PROPOSALS The budgetary conse4uences of these revised estimates of revenues and the expenditure contingencies outlined would imply a deficit of $23.6 billion. In the event no tax increase was enacted, and in the absence of tight expenditure control, the deficit could rise to $29 billion (including $700 million for the higher interest cost on the public debt that such a deficit would involve). On the other `hand, with tight expenditure control and with the tax increase programs, the deficit can be kept within a range of $1~ to $18 billion. Chairman Ackley will develop in detail the broad economic conse- quences that are presented by a choice between these two alternative courses of action. 3. To avoid excessiveZy high interest rates and tight mone~j We also need this tax increase to avoid, excessively high interest rates and `tight money. I cannot stress too strongly my deep concern about the pressures that would be exerted on the money and credit markets by the borrowing requirements associated with a deficit in excess ofa $14- to $18-billion range. Tie credit markets can accommodate a Federal deficit of consider- able size. But, given present private demands for credit; an outsized Federal deficit, such as would result without the proposed taxrise and expenditure restraints, cannot be accommodated without severe dis- ruption to the credit markets, sending interest rates sky `high and shutting off the flow .of credit to sectors such as the home mortgage market and small business. Some people may ask why we have to raise taxes and hold back spending. Why can't we borrow more? Isn't the TJ.S. Government's credit good? These questions come naturally because none of us likes to raise taxes or reduce or deny funds for many worthwhile programs. The fact is that we must choose among alternatives: one is to raise taxes and reduce expenditures to the maximum extent possible, and then. borrow the rest; the other is to go much deeper into debt through very heavy borrowing. It is my particular assignment today to explain why unlimited re- course to borrowing would be risky and unfortunate in~ the present financial situation Some may also ask "What `tbout World War IT, wasn't there very heavy recourse to borrowing then ~" The answer is that there was such recourse then, but it was undërtakOn only in conjunction with widespread direct controls (complete allocation of rnateriaJ~ and f a- cilities; price, wage, and salary controls; direct credit controls) that limited activities not directly related to the war effort. Even with these measures there was a substantial inflationary~. cost. In the current situation we have avoided those rigid controls, and also avoided the milder controls of the Korean period. We propose in the present situation to follow general fiscal and monetary policies that continue to make it possible to avoid rigid direct ocntrols. Now let us consider our financial markets and the demands on those markets. To see how the pieces fit together, we need to ook at the whole range of demand and supply factors. Concentration on just one part of the whole picture will not do. This rundown, Mr~ Chairman, may be a bit elementary and even PAGENO="0031" PRESIDENT'S 1967 TAX PROPOSALS 19 tedious, but I think it is so important to keep the whole credit market picture in mind that it is worth going over this with some care. On the demand side, the major components are the business sector, the consumer sector, and government. Businesses borrow to expand their facilities and for working capital, such as to finance inventories. `Consumers borrow chiefly to finance home purchases and for an increasing variety of consumer goods and services-such as cars, vacations, college expenses. Governments borrow to finance their cash deficits, which arise when the net outpayments from spending and lending programs are not covered by tax `and other revenues. On the supply side, the main sources of credit are the banking sys- tem, other financial institutions, and savings generated in the busi- ness and consumer sectors. Two of these sources deserve special men- tion because of their strategic importance. The banking sector, including the central bank, is a kind of balance wheel which can be permitted or encouraged to supply increasing amounts of credit, or discouraged from so doing by the availability of reserves provided through the central bank. The `other highly strategic sector is the direct supply of credit from individuals. It is strategic because its variations up or down are' closely related to net pressures on the markets and on interest rates. Normally, the volume of credit supplied directly by individuals is small. Most in- dividuals place their savings with thrift' institutions which, in turn, lend these funds to borrowers. This is known as financial intermedia- tion. When this individual sector is called on to supply a substantial amount of credit directly, rather than through savings institutions or other intermediaries, it is usually a sign of market pressure. This normally occurs when demand is rising very strongly and borrowers are more interested in getting their money than in the rates that they have to pay for it. That is what happened in 1966. With credit demands running strong, and supplies limited, interest rates on open market paper kept rising until willing investors could `be found-~which'in many cases invloved the withdrawal of funds from thrift institutions and direct investment by individuals in high-rate market paper. ` ` The halt in bank credit growth thrust further demands on individ uals. Credit demand's had no place else to go, once the banks and other financial intermediaries `could not handle any more.' Either the de- mands could be met by the residual sector-individuals-or they could go unmet In the process of sorting out the demands `that would' be met and those that would not be met, interest rates last summer reached the highest levels in severaJ decades Starting a little less thin a ye'ir ago, there was a dramatic turn for the better in the credit markets, reversing some of the forces that had produced earlier strains, but leivmg some sc'iis ~tnd vl\id recol lections. ` The factors making for a change included the temporary suspension of the investment tax credit, a reduction and rearrangement of Federal demands on the credit markets, ho'l'dbacks in Federal spending pro- PAGENO="0032" 20 PRESIDENT'S 1967 TAX PROPOSALS grams, legislation and administrative action to restrain the fierce competition for consumer savings, and a Federal Reserve move toward easier Reserve availability. By early 1967, credit market pressures relaxed further, as eco- ii omic growth abated, monetary policy eased some more, and the Presi- dent's fiscal program announced in January proposed a tax surcharge to begin in fiscal year 1968. Easier `credit was evident in terms of both availability and cost. The Nation's money supply expanded at a 6 percent `annual rate in the first half of this year, while total bank credit has grown at an annual rate of about 11 percent. The discount rate was reduced from ~½ percent to 4 percent, and the prime bank lending rate from 6 percent to 5½ percent. Yet, in the face of this expansionary monetary policy, long-term interest rates, which `had turned down from their peaks of last August and September to substantially lower levels through March, have more recently moved back up and reached levels uncomfortably close to last summer's peaks. Indeed, for some types of government and corporate bonds, current rates are as high as those of a year ago. The decline in short-term rates from last year's peak levels proceeded into June, and extended to more than two full percentage points on some types of securities. In recent weeks those rates have also bottomed out, however, and moved back up as much as a percentage point- although they remain well below last year's peaks. A major cause of the rise in long-term rates since March is the huge volume of borrowing by corporations and `by State and local govern- ments. New capital issues by corporations in the first 7 months of 1967 were a record $13.5 billion, up 23 percent from the similar period in 1966-which had been a recordbreaking year. If one excludes private placements by corporations and looks just at public offerings, which have a greater immediate market impact, the volume of new issues was $7.2 billion in the first half of this year, against $8 billion in all of 1966 and $5.6 billion for all of 1965. To a considerable extent, this heavy pace of offerings has reflected a desire of corporations to take advantage of the greater credit avail- ability to rebuild their liquidity and reduce their dependence on the banking system. Last summer, even some of the largest corporations found their access to bank credit limited, and this experience is still quite memorable to corporate treasurers. States and municipalities have also borrowed very heavily, and for somewhat similar reasons-making up for some postponements of bor- rowings last year and seeking to obtain some money needed now or in the future while it is currently available. New tax-exempt issues by State and local authorities came to $8.8 billion in the first 7 months of this year, up about 28 percent from a year earlier. There is an additional market factor that seems to be impelling this headlOng rush to borrow, even at current high rates. Many of these corporations and governmental authorities are said to be pushing their borrowings because they fear that a greatly increased Federal Govern- ment deficit will produce still higher interest rates and tighter condi- tions of credit availability in the months ahead. And they are apparently concerned that big Federal Government demands might cthncide with an increasing buildup in private de- PAGENO="0033" PRESIDENT'S 1967 TAX PROPOSALS 21 mands that would revive inflationary pressures, in turn boosting spending and income and eventually stimulating still greater credit demands.. The fact that this can happen against a background of expansiOnary monetary policy has been demonstrated~ clearly in recent weeks and months. So it is no answer for those who inveigh against high interest rates to call for easy money unless they are ready to see higher taxes or unless they are willing to take the risk of a serious inflation. A special reason for prompt action to cut. the prospective Federal deficit is the desirability of encouraging the current uptrend in home- building and the increased availability of money in the mortgage market. Last year the mortgage market was starved for funds and home- building went through the wringer-particularly as thrift institutions lost funds to higher paying open market paper and bank deposits. This year, traditional mortgage lenders have experienced record inflows of funds. Some of this inflow has been used to rebuild depleted liquidity, but the availability of mortgage funds has also improved greatly. Yet there can be no complacency about this improvement, for since this spring, rising interest, rates on corporate securities have tended to attract some funds from thrift institutions into these securities rather than into mortgages. The recent rise in short-term rates, if it goes much further, could pull savings funds directly out of the thrift institutions. These developments raise the possibility of a new strin- gency in housing credit. We do not present the proposed tax surcharge as something that will cut interest rates immediately and sharply, or eliminate all the problems that have faced the financial markets, the mortgage market, or homebuilding in the past 2 years since the Vietnam escalation began. Even with a tax increase, there will be a sizable Federal deficit, and sizable competing demands from the private sector. But a tax surcharge will reduce the size of the Federal deficit and the size of Federal borrowing needs. It will help assure a continuation of expansionary monetary policy, and it will reassure borrowers and lenders that there is no need for a renewed scramble for funds or runup of interest rates. It could well turn the tide in the credit markets, calm down the pre- cautionary borrowing and produce freer flows of funds at more reason- able rates of interest. We have discussed the recent role of certain key private sector demands on the credit markets, but it is particularly important, in weighing the need for fis~al action, to look at the Federal Government demands. Consider these facts rela~tive to Federal credit demands on the private sector in the fiscal year ended June 30, 1967: The total outstanding volume of Treasury securities, Federal agency securities, and participation certificates increased by slightly under $10 billion. :. But Government investment accounts increased their holdings of these issues by $11.6 billion, and the Federal Reserve added $4.5 billion to its holdings. 83-349--67--pt. i-3 PAGENO="0034" 22 PRESIDENT'S 1967 TAX PROPOSALS Thus instead of exerting a net credit demand on the private sector, Federal credit market operations actually supplied over $6 billion to the private credit markets through net repayment of debt. Even after making an adjustment for the $5 billion decline in the Treasury's cash balance over the fiscal year, there was still a net repayment of credit from the Federal sector to the private sector. The picture in this current fiscal year will be different. It will not be a question of net repayment of credit by the Federal Government to the private market, but of how large a net demand might he made on those markets. Illustrative of the possible Federal credit demands, suppose that the administrative budget deficit in fiscal year 1968, with the proposed tax measures enacted, is $14 billion. Adding together the increases in Treasury debt, Federal agency debt, and participation certificates, there would be an increase in out- standing obligations of some $20-$21 billion. Making rough allowance for purchases by the Government investment accounts and Federal Reserve, the net demand on the private sector might be around $10-$12 billion. (This $10-$12 billion net demand for the full fiscal year should not be confused with the estimates recently reported for prospective Treasury borrowing in the July-December 1967 period; the latter esti- mates, which anticipated market borrowing of $15 billion in Treasury issues and possibly $2 billion in participation sales, included a sea- sonal component which would be reversed later in the fiscal year when a seasonal surplus of revenues over expenditures is anticipated.) Without the proposed tax measures, the Federal sector's net de- mands on the private credit market in the fiscal yea.r 1968 would be $7.4 billion greater. Moreover, added financial requirements could raise, as they did in 1966, from further demands on Federal credit agencies, because of tightened credit conditions in the private sector. The total of Federal credit demands on the. private se~t.6r. without tax action, could thus reach $20 billiou. or exceed it. if expenditures ran to the higher side of the range of contingencies now contemplated. Moreover, the difference between net Federal credit demands on the private sector on the order of $10-$12 billion, or on the order of $20 billion or somewhat. more, depending mainly on the presence or absence of tax action, does not tell the full story. For along with swollen Fede.raJ credit demands, the: failure to hold down the budget deficit would create an ii~fl.ationa..ry environment, in which private credit demand could soar, and in which it would be more difficult to continue an expansionary monetary policy, a.nd that would cut down on total available supplies of credit. Thus private credit demands, in the absence of a tax surcharge, would be hit in three ways-by the enlargement of Federa.l credit demands, by a swelling of the private demands themselves, and by the curtail- ment of total credit supplies. The net result would be a vastly different set. of credit market con- ditions, imposing a very substantially heavier net demand for funds that could not be met by institutional lender~, and that could be met only in part by the residual sector made up mamly of individuals. PAGENO="0035" PRESIDENT'S 1967 TAX PROPOSALS 23 One can only conjecture about the precise pattern and sequence of events through which tightened credit conditions would envelop the market in the absence of a tax increase, but last year's experience might provide some guidance. One could expect, for example, that as the Treasury and Federal agencies came to market in greater and greater volume, higher rates would have to be paid to draw in additional investors. Increasingly, the funds might be drawn from the thrift institutions that are the mainstay of the mortgage market. In the meantime, corporate borrowers, would bid rates up, and at- tract investment from institutional lenders that have the flexibility to shift among government securities, corporate issues, and mortgages. Banks might well face insistent business demands to draw on credit lines, while lessened reserve availability kept a tighter lid on the banks' total portfolio, so that less could be put into Federal Government secu- rities or tax-exempt issues even at steeply higher interest `rates. Along with the mortgage market, and State and local government borrowers, other borrowers with relatively limited bargaining power and limited flexibility of alternative credit resources would also be likely to suffer disproportionately at t.he hands of tightened credit con- di tions-including small business and farmers. It would be a case of "pay up or do wit.hout," and perhaps a case of "doing without" even for those willing to "pay up" to a considerable extent. It would be she.er hypothesis to guess what heights interest rates might have to scale in the grim process of sorting out the credit de- mands that would be met, and those that would not be met, but the pres- sures would clearly be there, in the absence of tax action and tight expenditures control action, to push rates substantially higher than they are now. One need look only around the world, even `at highly industrialized countries, to see government bond yields of 7 percent or more-and indeed of more than 8 percent during mu'ch of last yea.r in Germany. Rates on prime industrial bonds in the United Kingdom have ranged as high as 8 percent as recently as a year ago, and these yields touched 9 percent in Germany. These, I submit, are not tolerable conditions for the United `States. I have dwelt at some length on the importance of the.. propose.d tax increase, for the performance of financial markets and interest rates, because to my mind that is a key reason for its enactment. With the proposed tax increases, and tight expen'diture control, the net demand can be held to tolerable proportions that the credit markets can handle, given a reasonably supportive monetary policy climate. `Without the tax increase, we are convinced that the credit markets could not finance the resulting deficit-except at the cost of sharply reduced availability of credit to meet private demands, and sharply increased intere.st ra.tes. Since Chairman Ackley is going to cover, Mr. Chairman, in detail the problem surfaced in the next pages dealing with "To protect healthy economic' growth and price stability," I will omit their treat- ment here. PAGENO="0036" 24 PRESIDENT'S 1967 TAX PROPOSALS (The material, referred to here, deleted from Secretary Fowler's prepared statement follows:) 4. To protect healthy economic growth and price stability As I have already indicated, my judgment as to the necessity for the tax in- crease program is based on hard fact. I believe the hard evidence we have at hand clearly indicates that the economy is now on an upward course and that an economic recession is not in the picture. Let me cite juSt a few of the factors I Ihave in mind: The growth in final sales (to consumers, to government, and to business for in- vestment other than in inventories) in the first six months of this year ex- ceeded the growth in the corresponding period of 196l-$31 billion compared to $24 billion. The growth of total GNP has been held down, of course, by the inventory read- justment. Considerable readjustment has taken place. Business inventories grew at an annual rate of only one half billion dollars in the second quarter of this year, which is the lowest inventory growth in six years. A return to normal inventory growth will contribute to a faster rise in GNP. ~Personal income rose $3.7 billion in June, the largest rise in the past five months. As personal income has risen, retail sales have become more buoyant. Also the personal savings ratio which has been abnormally high in recent quarters is showing signs of returning to a more normal level. New construction generally has strengthened and residential housing starts have been rising strongly from the low point reached late last year. Total manufacturers' new orders for June rose for the fifth consecutive month, to $46 billion, the highest since the record level of September 1966. Order backlogs are again beginning to rise, and in June reached the highest level so far this year. The unemployment rate dropped back to 3.9 percent in July after rising to 4 per- cent in June; the unemployment rate in all categories of workers either declined or remained unchanged. The unemployment rate for married men dropped from 2 percent in June to 1.8 percent in July. From these and many other related facts which Chairman Ackley will develop in detail in his statement, we conclude that from an economic viewpoint a tax increase is an appropriate and desirable measure. Moreover, it is the best insurance we have against the possible development of an inflationary spiral. I do not argue that excessive growth of demand is the only factor causing prices to rise. But it has been and could again be a major factor, and the one factor that could produce a rapid upward spiral. The restraining influence of the tax increase will thus contribute to stabilizing the level of prices. 5. To protect oi~r baZa'rtce of pay~r&ents Mr. Fowi~nn. A fifth reason for this tax increase is to protect our balance of payments. The tax increase will encourage the sound, balanced economic growth that is most favorable to our balance-of-payments positions. Over the period 1961-64 when C-NP rose on the average by. about 6 percent per annum (money terms), the U.S. trade surplus increased almost $2 bil- lion, from $4.8 billion in 1960 to $6.7 billion in 1964. Without the tax increase, we run the risk of faster, less well-balanced growth, and increased inflationary pressure. As events of the last 2 years have demonstrated, this can lead to a substantial increase in imports. In 1965 and 1966, when the gross national product rose at annual rates of between 8 and 9 percent, imports rose by about 15 percent and 18 percent, respectively-far more than exports-with the result that our trade surplus deteriorated steadily from $6.7 billion in 1964 to $4.8 billion in 1965 and to $3.7 billion in 1966. Expressed as a percentage of the gross national product, imports rose from 2.9 percent, on average, in 1961-64 to 3.1 percent in 1965, and 3.4 percent in 1966. PAGENO="0037" PRESIDENT'S 1967 TAX PROPOSALS 25 Exports over the 2 years 1965 and 1966, taken together, continued to grow reasonably well despite higher cost and price increases than in the preceding period. How much better they would have done in the absence of excessive demand here, we do* not know. We do know that in order to increase our trade surplus we must not Only hold im- ports to a reasonable level but we must keep our exports uompetitive over the longer run. The tax increase contributes to this by reducing upward pressures on our costs :and prices.' In:the'flr~t half of `this y~ar, our trade surplus has, in fact, improved from the low annual rate of $2.9 billion in the fourth quarter of 1966 to an annual rate of $4.5 billion in the second quarter of 1967. We must not permit a new outburst of exc~ssive demand to interrupt `this trend. The recently strengthened interest equalization tax and our volun- tary Federal Reserve and Commerce programs will help hold capital outflows within reasonable limits. To summarize then, on why we need a tax increase: It is necessary to fulfill our obligation to finance the special cost of Vietnam in a responsible way. It is needed to hold down the size of the deficit to acceptable limits. It is needed to avoid th'e return of monetary stringency and high in- terest rates wi'th their distorting and unfair impact on the economy, particularly in the homebuilding sector. It is appropriate in relation to our current and prospective economic situation `and insures against the danger of a spiralling of prices. Without the tax increase our balance-of-payments position will, suffer. II. THE TAX INCREASE PROGRAM To produc'e the needed revenues the President has proposed a three point program: I will omit the detail of those proposals since they are familiar to members of the committee. (The material, referred to here, deleted from Secretary Fowler's pre- pared `statement follows':) A temporary surcharge of 10 percent of tax liability (not 10 percent of taxable income) to be placed on corpoi~ations and on those individuals with tax liability above an exemption level. To be effective October 1, 1967 for individuals, and July 1, 1967 for cor- porations. To remain in effect until June 30, 1969, or continue so long as the unusual expenditures associated with our efforts in Vietnam require higher revenues. A speedup in `corporate income tax collections. A postponement of the scheduled excise tax reductions on automobiles and telephone service during the period of the temporary surcharge. 1. The surcharge forn-b of tax i~ivjrease Mr. Fowi~n. I will make a comment about the surcharge form of the tax increase. In recent years there has been considerable expert discussion about the form that `a temporary tax increase should take. We `have concluded from that discussion that an across-the-board sur- charge is generally the most appropriate method. A surcharge is simple to~ administer and' easy for the taxpayer to understand. It is relatively prompt and predictable in its impact. It causes mimmal disturbance to the existing pattern of relationships PAGENO="0038" 26 PRESIDENT'S 1967 TAX PROPOSALS among taxpayers, and this seems fair and sensible for a moderate, temporary, emergency increase. A surcharge is in line with the recommendations of the Subcom- mittee on Fiscal Policy of the Joint Economic Committee. In the spring of 1966 the subcommittee held hearings on the subject of tax changes for short-run stabilization, which were a thorough and com- prehensive investigation of the subject. The committee agreed that a uniform percentage addition to, or subtraction from, corporate and personal income tax liabilities, to be effective for a stated period, best satisfied the criteria for short-run stabilizing revenue changes. It was in the light of these compelling considerations that a general surcharge-modified to avoid imposing additional tax burdens on in- dividuals in the very lowest income brackets-was decided upon as the major measure in the President's program. I want to make quite clear that the choice of the surcharge form to meet a temporary need by no means implies a turning away from the need for achieving important permanent structural changes in the tax system. Indeed, as the President stated in his economic message, he will be sending a message proposing comprehensive tax reform later in this session. Both in timing and objectives, however, tax reform should be. dis- tinguished from the present temporary surcharge recommendation. The surcharge is needed now for revenue. Expeditious action is essen- tial if it is to achieve its purpose. It is a temporary measure and not a permanent part of our revenue structure. The central issues for con- gressional concern are the size of the needed increase and its timing. The tax reform message will require more deliberate consideration since it involves proposals for permanent structural changes and some redistribution of tax burdens in the interest of a fairer sharing of the load. Its basic objective is not to raise revenue but to correct a number of inequities and abuses in our tax system. Tax reform is a~ job that very much needs to be done. I hope your committee will be giving its consideration to the President's reform recommendations in the months ahead. I move now, Mr. Chairman, over to page 46 in my statement in the middle of the page. (The material deleted from Secretary Fowler's prepared statement follows:) 2 Effect of the surcharge on indivuluals The 10 percent surcharge would be effective for individuals as of October 1, 1967. There has been some confusion about what the 10 percent applies to. For clarity, let me repeat that the surcharge percentage applies to the tax liability of the individual-not to the individual's income. A surcharge equal to 10 percent of the tax liability the individual would otherwise incur under present law would, of course, equal a much smaller percent of the individual's income. Thus, a mar- ried couple with two dependents with a wage income of $10,000 and taking typi- cal deductions, would have a tax of $1,114 under present tax rates, and a 10 per- cent surcharge would amount to $111. But this $111 is only. slightly more than 1 percent of the family s income The selection of the October 1 date-3 months later than the recommended starting date for corporations-reflects certain practical considerations involved in changing the current payments required to be made by individuals Increased withholding rates for wages and salaries could not feasibly be put into effect at PAGENO="0039" PRESIDENT'S 1967 TAX PROPOSALS 27 a much earlier date because of the time required both by the Internal Revenue Service and employers to prepare and implement new withholding schedules. It is generally desirable to keep down the slippage of time between the effective date for a tax increase and the date on which increased withholding becomes effective, in order to avoid necessitating large payments by inthviduals when they file their final returns. Concretely, the surcharge would apply to individuals as follows: Since the surcharge would be effective October 1, 1967, and thus be in effect for only one-quarter of the year 1967, the rate of the surcharge for that year would be 2'/~ percent of the tax for the entire year 1967.1 If the tax on an individual for 1907 would be $1,000 under present law, the surcharge would raise this tax by $25 to $1 025 Increased withholding rates incorporating the surcharge wOuld go into effect October 1, 1067, so that individuals with wages or salaries would remain on a current payment basis. Since the surcharge would be in effect for all of the calendar year 1968, the surchai-ge due on calendar year 1968 tax liability would be the full 10 percent. On a tax of $1,000 which an individual would otherwise incur, the surcharge would come tO $100 or 10 percent.1 Persons of restricted means should not be required, even in times of emergency, to sacrifice already minimal standards of living. Consequently, the proposal provides an exemption for such persons. The exemption from the surcharge covers taxpayers whose taxable income falls entirely within the first two brackets of the individual income tax.2 Generally, this exemption would exclude from the surcharge: All ~ing1e; persons with taxable incomes of $1,000 or less after deductions and exemptions; all married persons with taxable incomes of $2,000 or less after deductions and exemptions; and all heads of households with taxable in- * comes of $1,500 or less after deductions and exemptions. In terms of specific tax liabilities, single returas having $145 or less tax, joint returns having $290 or less tax, and bead-of-household returns having $220 or less tax would be exempt. In terms of total earnings, married couples with two children with earnings of $5,000 or less per year and single people with earnings of less than $l,tiOO per year would not be subject to the surcharge, assuming the use of the minimum standard deduction. The exemption will cover about 16 million taxpayers, or approximately one- sixth of the 98 million tOtal of all taxpayers. Of the 16 million who will not be subject to the surcharge, approximately 5 million are single individuals and 11 million are married taxpayers. The effects of the proposal may be iilustratedby applying the proposed sur- cha.rge to a married couple with two dependents using typical (10 percent of income Or minimum standard deduction) deductions: With $5,000 earnings, their tax will be unchanged (and still $130 lower than they would have paid in 1963). With $10,000 earnings, their tax will rise $28 in 167 and $111-or $9.25 a month-in 1968 (their 1968 tax will still be $147 less than they would have paid in 1963). With $20,000 earnings, their tax will rise $79 in 1967 and $316-$26.34 a month-in 1908 (their 1968 tax will still be $324 less than they would have paid in 1903) Since the bulk of American families-three out of every four-have an in come below $10,000, they will be paying less than $9.25 a month, down to only abOut $2.50 a month. 3. Effects of the surcharge on corporations The 10 percent surcharge would apply to corporations, effective July 1, 1967. Thus, for calendar 1967 the surcharge would be higher than for individuals because of the earlier starting date. For corporations whose ta~able year coincides with the calendar year, the surcharge for calendar year 1967 would 1 The surcharge applies to the present law tax including the tax on capital gains. 2 A special provision will also insure that persons* receiving retirement Income qualifying for the retirement income credit will maintain their present parity for income tax purposes with recipients of social security benefits. * PAGENO="0040" 28 PRESIDENT'S 1967 TAX PROPOSALS be 5 percent (compared to 2% percent for individuals) since it applies for one-half the year. The full 10 percent surcharge would apply for 1968. For corporations whose taxable year does not coincide with: a. calendar year, the rate of the surcharge would be determined on the basis of the number of days in the corporation's fiscal years that fall within the period during which the surcharge is in effect (July 1, 1967-June 30, 1969).' A calendar year corporation with profits b:efore tax of $100,000 will pay an extra $2,075 in 1967 and 1969, and an extra $4,150 in 1968. 4. Revenue effect of the $urcharge The revenue effect of the surcharge will be to: Increase fiscal year 1968 receipts in the Administrative Budget by $6.3 billion. The increase in receipts from individuals amounting to $4 billion. The increase in receipts from corporations amounting to $2.3 billion. 5. The speedup in corporate tax collections Two steps are recommended to place corporations on the same current tax payment basis as individuals. Beginning January 1, 1968, corporations would pay their estimated tax liability on the basis of 80 percent of estimated tax liability, rather than 70 percent as under present law. Corporations would then be on the same percentage basis that individuals, sole proprietorships, and part- nerships have been on since the beginning of this year. The second proposal to bring corporations to a current estimated tax payment basis is to eliminate, over a five-year period commencing January 1, 1968, the $100,000 of tax exemption from estimated tax payment requirements. By this measure, all corporations, small, medium and large, will gradually be placed on the same current tax payment basis as individual proprietors andpartnerships. The five-year transition period assures that the change to a current tax payment basis will be accomplished in an orderly and balanced manner. All corporations, regardless of size, can plan for steady implementation of the system, and will not have to catch up to a totally current basis in any one year. The 80 percent requirement would add about $400 million revenue in fiscal year 1968. The transition to current payment for the first $100,000 of corporate tax would add about another $400 million revenue in fiscal year 1968 and equivalent amounts in each of the ensuing four fiscal years. These proposals are logical extensions of the transition to a current payment basis for corporations reflected most recently by the Tax Adjustment Act of 1966, and are appropriate responses to the obvious need to align corporate pay- ment rules with those applicable to noncorporate taxpayers. 6. The postponement of the scheduled excise tao reductions Under present law the excise tax on passenger automobiles is scheduled to drop from 7 percent to 2 percent April 1, 1968, and then to 1 percent January 1, 1969. The excise tax on telephone service is scheduled to drop from 10 percent to 1 percent April, 1968, and then to zero January 1, 1969. It is appropriate in the light of our revenue needs that these scheduled reduc- tions be deferred for the period during which the proposed surcharge is in effect. Since these excises are currently in effect, deferment of their reduction is a relatively simple matter administratively for business firms and the govern- ment. Moreover, the burden of these taxes is widely dispersed over the popula- tion and does not rest disproportionately on a narrow segment of the community. The proposal Suspends the above scheduled reductions until July 1, 1969, and January 1, 1970, respectively. The additional revenue derived would be approxi- mately $300 million for fiscal year 1968 and approximately $2.5 billion for fiscal year 1969. Mr. FOWLER. The revenue effect for fiscal 1968 of the President's three-point tax program as a whole, then is to increase receipts by $7.4 billion: $6.3 billion from the surcharge. $800 million from the speedup of corporate collections. $300 million from the deferral of scheduled excise tax reductions. `Thus a corporation with a November 30 fiscal year would apply a proportionate sur- charge rate to its 1967 fiscal year determined as follows: 10 percent multiplied by a fraction the numerator of which Is 153 (the number of days in the taxable year after June 30, 1967) and the denominator of which Is 365, or approximately 4.2 percent. PAGENO="0041" PRESIDENT'S 1967 TAX PROPOSALS 29 Assuming the President's tax program is enacted, total receipts for the administrative budget for the fiscal year 1968 are estimated at $122.5 billion. A breakdown of this revenue estimate is attached to the statement. The size of the deficit, would depend upon the final level of expendi- tures. Higher expenditures affect the deficit directly, of course, but also indirectly through their impact on private incomes and thereby on Federal revenues. Were expenditures to fall in the high end, of the range, for example, revenues would rise by perhaps as much as a billion dollars. In summary, the President's proposal provides needed revenues by balanced and equitable means: The speedup in estimated tax payments for corporations brings this sector of business into parity with unincorporated businesses. The effect of postponing the schedule.d excise tax reductions is dis- persed widely over the population. The surcharge is a temporary measure designed for relatively simple implementation and termination, which applies progressively in the same manner as our basic income tax liability, but appropriately exempts those who, because of low incomes, should not be required to shoulder this additional responsibility. CONCLUSION Mr. Chairman and members of the committee, in conclusion I end on a point with which I began. Based on the hard facts we all face, the President's program for combining a tax incre'tse with expenditure reduction to diminish the deficit and the extent of Go~ ernment borrowing represents a sound fair, and fiscally responsible choice of the alternatives open to this committee, the Congress, and the American people. Admittedly, no one likes to pay additional taxes even for a tempo- rary period. The President does not like to recommend an increase in taxes; the Secretary of the Treasury and his colleagues do not like to plead for an increase in taxes; we know this committee does not like to ask the House of Representatives to vote an increase in taxes. All of us-President, administration officials, this committee, and the House-have proven alert and anxious to reduce the Federal tax burden on the American people. We have done so, and in recent years this policy of Federal tax reduction has meant substantial savings for the American taxpayer. In 1962 the investment tax `credit was passed. In 1964 the most sig- nificant reductions in personal and corporate income taxes in history were voted. In 1965 excise taxes were removed on over 200 items. It has been my privilege to espouse all of these measures before this committee. As a result of these reductions initiated in the Congress by this committee despite, constantly rising State and local taxes, Americans enjoy a lower tax burden than any major industrial country in Western Europe-and this includes taxes levied at all levels of government, Federal, State, and local. Figures collected by the Organization for Economic Cooperation and Development show that as a proportion of total national produc- PAGENO="0042" 30 PRESIDENT'S 1967 TAX PROPOSALS tion, French `citizens paid 38.5 percent in taxes; Germany 34.4 per- cent, Italy, 29.6 percent; United Kingdom, 28.6 percent; and the United States 27.3 percent. As the President said in his message: If Americans today still paid taxes at the rates in effect when I became Presi- dent, a little over three years ago, they would be paying this year over $23 billion more than they are paying now. The enactment of the proposed surcharge would temporarily take individual tax rates less than one-half way up to the 1963 levels. Attached to my statement are tables showing precisely how much better off taxwise each individual taxpayer will be in 1967 andLl968 even with the temporary surcharge, compared to his income tax lia- bility in 1963. For a little more perspective on what the surcharge means for the individual taxpayer, let me point out that t;he surcharge: In the aggregate, would amount to only 1 percent of individual in- come before all taxes. Would place a far lesser burden than the tax increase of the Korean war, when the average increase in tax rates was the equivalent of about a 28-percent surcharge. Would be in no way comparable to the increase in tax burden in World War II when the ratio of income tax to total personal in- come rose from 1.3 percent to10.8 J?ercent, resulting from increased rates, reduced exemptions, and rising incomes. This was a 730 per- cent increase, starting from a very small base. For the corporation, the surcharge will be an increase of 10 percent compared to an average rise of 52 percent during the Korean war. In World War II the effective rate on corporations due to a combination of rate increases and the excess profits tax resulted in effective rates that were higher by 174 percent. Now once again armed conflict involves our security. As the Presi- dent said: There are times in a nation's life when its armies must `be~ equipped and fielded, and the nation's business must still go on. `For Ameriác that time is now. The time has come when we must levy a temporary tax to defray a portion of the cost of `the conflict in Southeast Asia and thereby for- ward the Nation's business. The Nation is determined to see those hostilities terminated, but only under conditions consonant with a `future for peace and freedom that offers no reward for Communist aggression or its cult of violence and subversion. This is an occasion to recall the statement of a great American of another day, Justice Oliver Wendell Holmes, who said,~' "Taxes are w'hat we pay for civilized society." We cannot share the sacrifices our brave men are making in the field. But we can meet the fiscal challenge at home. We can provide the additional `taxes that will help hold the budget `deficit within limits conducive to the maintenance of a `healthy, balanced economy, well fitted for the eventual transition to a peace with prosperity. It is my firm conviction that, however unwelcome to Americans as taxpayers, the President's program is in the best interest of those same Americans-. PAGENO="0043" PRESIDENT'S 1967 TAX PROPOSALS 31 As consumers who want price stability. As wage and salary earners who have or seek jobs in an eco- nomy characterized by sustained and steady growth rather than boom and bust. As businessmen whose lifeblood is credit and steady expand- ing demand from confident customers. As homebuyers and farmers to whom ever higher interest rates, tight money, and increased costs are far more cruel than taxes. As poor, elderly, or living on a fixed income to whom a spiral of inflation is ruinous. As flghtingmen who dream of returning someday to a job, an education, and a home. Members of this committee share with the Secretary of the Treasury the special responsibility of seeing to it that the bills of the Govern ment are paid-whether out of borrowed money or revenues I hope you will share with me the conclusion that the prompt en- actment of the President's tax proposals is a necessary and indispens- able part of a program of fiscal responsibility. (The tables referred to follow:) TABLE 1.-COMPARISO * N OF 1963-66 INCREASE FOR~ TAX LIABILITY AND ILLUSTRATIVE TAXPAY 1967-68 TAX ERS' (SINGLE LIABILITY UNDER PROPOSED TAX INDIVIDUAL) Wage income 1963 tax 2 1964 Tax Act 1966 tax 2 decrease 1967 tax 2 Tax increase over 196 1966 tax3 Tax increase 8 tax 2 over 1966 tax4 $1,000 $62 $46 $16 $16 (5) $16 (2) $1,900 224 77 147 151 $4 162 $15 $2,000 242 79 163 167 4 179 16 $3000.. 427 94 333 341 8 366 33 $5,000 818 147 671 688 17 738 67 $7,500 1,405 237 1,168 1,197 29 1,285 117 $10,000 2,096 354 1,742 1,786 44 1,916 174 $12,500 2,887 489 2,398 2,458 60 2,638 240 $15,000 3,787 633 3,154 3,233 79 3,469 315 $20,000 5,900 982 4,918 5,041 123 5,410 492 $25,000 8,324 1,342 6,982 7,157 175 7,680 698 $35,000 13,778 2,151 11,627 11,918 291 12,790 1,163 1 Proposed tax increase of 2.5 percent of the tax in 1967 and 10 percent in 1968 which does not apply to single returns with taxable income of $1,000 or less and joint returns with taxable income of $2,000 or less. 2 Tax liability computationsossume minimum standarddeductionor deductions equal tolO percent of income whichever is greater. Tax liability from optional tax table where income is under $5,000. a 1967 tax minus 1966 tax. 4 1968 tax minus 1966 tax. a There is no increase in 1967 or 1968 for a single person whose tax at 1966 rates is $145 or less. TABLE 2.-COMPARISON INCREASE FO Wage income OF 1963-66 R ILLUSTRAT 1963 tax2 TAX LIABILITY AND IVE TAXPAYERS' (MA 1964 Tax Act 1966 tax2 decrease 1967-68 TAX RRIED COUPL 1967 tax a LIABILITY UNDER P E, NO DEPENDENTS) Taxincrease over 1966 1968 tax2 tax3 ROPOSED TAX Tax in- criase over 1966 tax4 $2,000 $122 $64 $58 $58 (3) $58 (5) $3,000 305 101 204 204 (5) 204 (3) $3,600 413 119 294 301 $7 323 $29 $5,000 660 159 501 514 13 551 50 s7;soo 1,141 227 914 937 23 1,005 91 $10,000 1,636 294 1,342 1,376 34 1,476 134 $12,500 2,213 382 1,831 1,877 46 2,014 183 $15,000 2,810 475 2,335 2,393 58 2,569 234 $20,000 4, 192 708 3, 484 3, 571 87 3,832 348 $25,000 5,774 978 4,796 4,916 120 5,276 480 $35,000 9,601 1,604 7, 997 8, 197 200 8, 797 800 iproposed tax increase~of 2.5 percent of the tax in 1967 and 10 percent in 1968 which does not apply to single returns with taxable income of $1,000 or less and joint returns with taxable income of $2,000 or less. a Tax liability computations assume minimum standard deduction or deductions equal to 10 percent of income which- ever is greater. Tax liability from optional tax table where income is under $5,000. a 1967 tax minus 1966 tax. 4 1968 tax minus 1966 tax. I There is no increase in 1967 or 1968 for a married couple whose tax at 1966 rates is $290 or less. PAGENO="0044" 32 PRESIDENT'S 1967 TAX PROPOSALS TABLE 3.-COMPARISON OF 1963-66 TAX LIABILITY AND 1967-68 TAX LIABILITY UNDER PROPOSED TAX INCREASE FOR ILLUSTRATIVE TAXPAYERS' (MARRIED COUPLE, 2 DEPENDENTS) 1964 Tax Wage income 1963 tax2 Act 1966 tax2 Tax 1967 tax2 increase 1968 Tax tax2 increase decrease over 1966 tax3 over 1966 tax4 $3,000 $65 $61 $4 $4 (3) $4 (5) $5,000 420 130 290 290 (3) 290 (5) $7,500 877 191 686 703 $17 755 $69 $10,000 1,372 258 1,114 1,142 28 1,225 111 $12,500 1,901 334 1,567 1,606 39 1,724 157 $15,000 2,486 424 2,062 2,114 52 2 268 206 $20,000 3, 800 640 3, 160 3, 239 79 3,476 316 $25,000 5,318 906 4,412 4,522 110 4,853 441 $35,000 9,037 1, 508 7, 529 7, 717 188 8, 282 753 1 Proposed tax increase of 2.5 percent of the tax in 1967 and 10 percent in 1968 which does not apply to'single returns with taxable income of $1,000 or less and joint returns with taxable income of $2,000 or less. 2 Tax liability computations assume minimum standard deduction or deductions equal to 10 percent of income which- ever is greater. Tax liability from optional tax table where income is under $5,000. 3 1967 tax minus 1966 tax. 4 1968 tax minus 1966 tax. There is no increase in 1967 or 1968 for a married couple whose tax at 1966 rates is $290 or less. Estimated net administrative budget receipts in the fiscal year 1968 (assuming President's taa program) Billions Individual income taxes $70.5 Corporation income taxes 32. 7 Excise taxes 9.1 Estate and gift taxes 3.0 Customs - 2.0 Miscellaneous receipts 5. 2 Net administrative budget receipts 122. 5 UNDERLYING INCOME ASSUMPTIONS, CALENDAR YEAR 1967 Gross national product 783. 0 Personal income 625.0 Corporate profits 80.0 Mr. FOWLER. Thank you.. The CHAIRMAN. Mr. Secretary, we thank you. (The draft of the bill and technical explanation, prepared by the Department of the Treasury, requested to be placed in the record by Chairman Mills follows:) A BILL To amend the Internal Revenue Code of 1954 to impose a temporary surcharge tax, and for other purposes Be it enacted by the senate and House of Representatives of the United states of America in Congress assembled, SECTION 1. SHORT TITLE, ETC. (a) Short Title.-This Act may be cited as the "Surcharge Tax Act of 1967." (b) Amendment of 1954 Code.-Except as otherwise expressly provided, when- ever in this Act an amendment is expressed in terms of an amendment to a sec- tion or other provision, the reference shall be considered to be made to a section other provision of the Internal Revenue Code of 1954. SEC. 2. IMPOSITION OF TAX SURCHARGE (a) In General.-Subchapter A of chapter 1 (relating to determination of tax liability) is amended by inserting at the end thereof the following new part: PAGENO="0045" PRESIDENT'S 1967 TAX PROPOSALS 33 "PART V-TAX SURCHARGE "Sec. 51. Tax surcharge. "SEC. 51. TAX SURCHARGE "(a) Imposition of Tax.- "(1) Calendar year taxpayers-In addition to the other taxes imposed by this chapter and except as provided in subsection (b), there is hereby im- posed on the income of every person whose taxable year is the calendar year, a tax equal to the percent of the adjusted tax (as defined in subsec- tion(c)) for the taxable year specified in the following table: Percent Calendar year Individuals Corporations 1967 2.5 5 1968 10.0 10 1969 5.0 5 "(2) Fiscal year taxpayers-In addition to the other taxes imposed by this chapter and except as provided in subsection (b), in the case of taxable years ending on or after the effective date of the surcharge and beginning before July 1, 1969, there is hereby imposed on the income of every person whose taxable year is other than the calendar year, a tax equal to- "(A) Ten percent of the adjusted tax for the taxable year, multiplied by "(B) A fraction, the numerator of which is the number of days in the taxable year occurring on and after the effective date of the surcharge and before July 1, 1969, and the denominator of which is the number of days in the entire taxable year, "(3) Effective date defined.-For purposes of paragraph (2), the `effective date of the surcharge' means- "(A) July 1, 1967, in the case of a corporation, and "(B) October 1, 1967, in the case of an individual. "(b) Low Income Exemption.-Subsection (a) shall not apply if the adjusted tax for the taxable year does not exceed- "(1) $290, in the case of a joint return of a husband and wife under sec- tion 6013, "(2) $220, in the case of an individual who is a head of household to whom section 1(b) applies, or "(3) $145, in the case of any other individual (other than an estate or trust). "(c) Adjusted Tax Defined.-For purposes of this section, the adjusted tax for a taxable year means the tax imposed by this chapter (other than by this section, section 871 (a) or section 881) for such taxable year, reduced by any credit allowable for such year under section 37 (relating to retirement income) computed without regard to this section. "(d) Authority to Prescribe Composite Tax Rates and Tables.-The Secretary or his delegate may determine, and require the use of, composite tax rates in- corporating the tax imposed by this section and prescribed regulations setting forth modified optional tax tables computed upon the basis of such composite rates. The composite rates so determined may be rounded to the nearest whole percentage point as determined under regulations prescribed by the Secretary or his delegate. If, pursuant to this subsection, the Secretary or his delegate pre- scribes regulations setting forth modified optional tax tables for a taxable year. then, notwithstanding section 144(a), in the case of a taxpayer to whom a credit is allowable for such taxable year under section 37, the standard deduction may be elected regardless of whether the taxpayer elects to pay the tax imposed by section 3. "(e) Estimated Tax.-For purposes of applying the provisions of this title with respect to declarations and payments of estimated income tax due more than 45 days (15 clays in the case of a corporation) after the enactment of this section- "(1) In the case of a corporation, so much of any tax imposed by this sec- tion as is attributable to the tax imposed by section 11 or 1201 (a) or sub- chapter L shall be treated as a tax imposed by such section 11 or 1201(a) or subchapter L; PAGENO="0046" 34 PRESIDENT'S 1967 TAX PROPOSALS "(2) The term `tax shown on the return of the individual for the preceding taxable year', as used in section 6654(d) (1), shall mean the tax which would have been shown on such return if the tax imposed by this section were applicable to taxable years ending after September 30, 1966, and beginning before July 1, 1968; and "(3) The term `tax shown on the return of the corporation for the preced- ing taxable year', as used in section 6655(d) (1), shall mean the tax which would have been shown on such return if the tax imposed by this section were applicable to taxable years ending after June 30, 1966, and beginning before July 1, 1968. "(f) Western Hemisphere Trade Corporations and Dividends on Certain Pre- ferred Stock.-In computing, for a taxable year of a corporation, the fract,ion described in- "(1) Section 244(a) (2), relating to deduction with respect to dividends received on the preferred stock of a public utility, "(2) Section 247(a) (2), relating to deduction with respect to certain divi- dends paid by a public utility, or "(3) Section 922(2), relating to special deduction for Western Hemisphere trade corporations, the denominator shall, under regulations prescribed by the Secretary or his dele- gate, be increased to reflect the rate at which tax is imposed under subsection (a) for such taxable year. "(g) Withholding on Wages-In the case of wages paid after September 30, 1967, and before July 1, 1969, the amount required to be deducted and withheld under section 3402 shall be determined in accordance with the following tables in lieu of the tables set forth in section 3402 (a) or (c) (1).- Tables To Be Used in Lieu of Tables in Section 3402 (a) [Insert Tables 1-6, 8] TABLE 7.-If the payroll period with respect to an employee is annual (a) Single Person-Including Head of Household: The amount of income tax to be with- If the amount of wages is- held shall be- Not over $200 0 $200 to $1,200 14% $1,200 to $1,300 $160+17% $1,300 to $4,400 8177+19% $4,400 to $8,800 8760+22% 88,800 to $11,000 $1,734-F28% Over $11,000 82,350+33% (b) Married Person: Not over $200 0 $200 to $2,200 14% $2,200 to $4,400 $320+17% $4,400 to $8,800 8694+19% $8,800 to $17,700 $1,530+22% $17,700 to $22,000 83,488+28% Over $22,000 84,692+33% Tables To Be Used in Lieu of Tables in Section 3402(c) (1) (b) Minimum Distributions.-Sectiofl 963(b) (relating to receipt of minimum distributions by domestic corporations) is amended- (1) by striking out the heading of paragraph (1) and inserting in lieu thereof the following: "(1) Taxable years beginning in 1963, 1967, and 1968.-", and (2) by striking out the heading of paragraph (3) and inserting in lieu thereof the following: "(3) Taxable years beginning in 1965, 1966, and after December 31, 1968.-". (c) Clerical Amendment.-The table of parts of subchapter A of chapter 1 is amended by adding at the end thereof the following: PAGENO="0047" PRESIDENT'S 1967 TAX PROPOSALS 35 "Part V. Tax Surcharge" (d) Effective Date.-The amendments made by this section shall apply- (1) Insofar as they relate to individuals, with respect to taxable years ending after September 30, 1967, and beginning before July 1, 1969. (2) Insofar as they relate to corporations, with respect to taxable years ending after June 30, 1967, and beginning before July 1, 1969. SEC. 3. RAISING FROM 70 PERCENT TO 80 PERCENT THE ESTIMATED TAX WHICH MUST BE PAID IN INSTALLMENTS BY CORPO. RATIONS (a) In GeneraL-Section 6655(b) (relating to amount of underpayment), and section 6655 (d) (relating to exception), are amended by striking out "70 percent" each place it appears therein and inserting in lieu thereof "80 percent". (b) Effective Date.-The amendments made by this section shall apply with respect to taxable years beginning after December 31, 1967. SEC. 4. PAYMENT OF FIRST $100,000 OF ESTIMATED TAX (a) Requirement of Declaration.-Section 6016(a) (relating to requirement of declaration of estimated tax in case of corporations) is amended by striking out "$100,000" and inserting in lieu thereof "$40". (b) Reduction of Exclusion from Estimated Tax.-Section 6016(b) (relating to the definition of estimated tax in the case of a corporation) is amended to read as follows: "(b) Estimated Tax.- "(1) Definition.-For purposes of this title, in the case of a corporation, the term `estimated tax' means the excess of- "(A) the amount which the corporation estimates as the amount of the income tax imposed by section 11 or 1201(a), or subchapter L of chapter 1, whichever is applicable, reduced by the amount which the corporation estimates as the sum of any credits against tax provided by part IV of subchapter A of chapter 1, over "(B) an amount equal to the applicable exclusion percentage (determined under paragraph (2)) multiplied by the lesser of- `(i) $100,000, or "(ii) the amount determined under subparagraph (A). "(2) Exclusion percentage-The term `exclusion percentage' means- If the declaration is for a tax- able year beginning in- The exclusion percentage is- 1968 80 1969 60 1970 40 1971 20 1972 or later 0 (C) Exception from Addition to Tax.-Section 6655 (d) (1) is amended by striking out the phrase "reduced by $100,000" and inserting in lieu thereof "reduced by an amount equal to the applicable exclusion percentage, determined under section 6016 (b) (2), multiplied by the lesser of $100,000 or the amount of such tax". (d) Addition to Tax for Underpayment of Estimated Tax-Section 6655 (e) (relating to the definition of tax) is amended to read as follows: "(e) Definition of Tax.-For purposes of subsection (b), (d) (2), and (d) (3), the term `tax' means the excess of- "(1) the amount of tax imposed by section 11 or 1201 (a), or sub- chapter L of chapter 1, whichever is applicable, reduced by the sum of any credits against tax provided by part IV of subchapter A of chapter 1, over "(2) an amount equal to the applicable exclusion percentage, (deter- mined under section 6016 (b) (2)), multiplied by the lesser of- "(A) $100,000, or "(B) the amount determined in paragraph (1)." (e) Technical Amendment-Clause (v) of section 243 (b) (3) (C) is amended by striking out "100,000". (f) Effective Date.-The amendments made by this section shall apply with respect to taxable years beginning after December 31, 1967. PAGENO="0048" 36 PRESIDENT'S 1967 TAX PROPOSALS SEC. 5. POSTPONEMENT OF CERTAIN EXCISE TAX RATE REDUCTIONS (a) Passenger Automobiles.- (1) In general.-Subparagraph (A) of section 4061 (a) (2) (relating to imposition of tax) is amended to read as follows: "(A) Article enumerated in subparagraph (B) are taxable at which- ever of the following rates is applicable: "7 percent for the period beginning with the day after the date of the enactment of the Tax Adjustment Act of 1966 through June 30, 1909. "2 percent for the period July 1, 1969, through Dec. 31, 1969 "1 percent for the period after Dec. 31, 1969." (2) Conforming amendments.-Seetion 6412 (a) (1) (relating to floor stocks refunds on passenger automobiles, etc.) is amended by striking out "April 1, 1968, or January 1, 1969" and inserting in lieu thereof "July 1, 1969, or January 1, 1970". (b) Communication Services.-Section 4251 (relating to tax on communica- tions) is amended- (1) By striking out subsection (a) (2) and inserting In lieu thereof: "(2) The rate of tax referred to in paragraph (1) is as follows: "Amounts paid pursuant to bills first rendered- Percent "Before July 1, 1969 10 "After June 30, 1969, and before January 1, 1970 1" (2) By striking out subsection (b) and inserting in lieu thereof: "(b) Termination of Taa~.-The tax imposed by subsection (a) shall not apply to amounts paid pursuant to bills first rendered on or after January 1, 1970." (3) By striking out subsection (c) and inserting in lieu thereof: "(c) Special Rule-For purposes of subsection (a), in the case of communica- tions services rendered before May 1, 1969, for which a bill has not been rendered before July 1, 1969, a bill shall be treated as having been first rendered on June 30, 1969. For purposes of subsections (a) and (b), in the case of com- munications services rendered after April 30, 1969, and before November 1, 1969, for which a bill has not been rendered before January 1, 1970, a bill shall be treated as having been first rendered on December 31, 1969." (c) Effective Date-The amendments made by this section shall be effective on the date of enactment of this Act. TECHNICAL EXPLANATION OF SURCHARGE TAX Acr or 1967 This bill, which is entitled the "Surcharge Tax Act of 1967", has four sub- stantive sections: (1) Section 2 imposes a temporary surcharge on both individual and cor- porate income tax liability at an annual rate of 10 percent. (2) Section 3 raises from 70 percent to 80 percent, the percent of its estimated tax which a corporation may pay by installments without incurring a penalty. (3) Section 4 eliminates, over a five-year period, the $100,000 estimated tax exemption presently granted corporations. (4) Section 5 suspends the schedule for the reduction of the excise taxes on passenger automobiles and telephone services during the period of the temporary surcharge. There follows a more detailed description of each of these provisions. Section 1 of the bill sets forth its title. Section 2. Ta~v Surcharge. (a) Imposition of taw.-Subsection (a) of section 2 of the bill adds a new part to subchapter A of chapter 1 of the Internal Revenue Code which consists of a new section 51 imposing a temporary tax surcharge on corporations and in- dividuals. General Provisions-Subsection (a) of the new section 51 provides for the imposition of the surcharge. The tax is at an annual rate of 10 percent of tax liability (adjusted as provided in section 51(c)) and is effective from July 1, 1967, through June 30, 1969, for corporations and from October 1, 1967, through June 30, 1969. for individuals. For taxpayers who report their income on a calen- dar year basis, the rate of the surcharge for the calendar years involved is as follows: PAGENO="0049" PRESIDENT'S 1967 TAX PROPOSALS 37 Calendar year ~ Rate of tax (percent) -~-- Individuals Corporations 1967 3.5 5' 1968 1969 10.0 5.0 10' 5 In the case of taxpayers who report their income on a fiscal year basis, the rate will be 10 percent for years falling entirely within the effective dates, whereas, in the case of taxable years that straddle either the commencement or termination date, the tax will be prorated depending on the number of days in the taxable year falling within the period the tax is in effect. Low income cxemption.-Subsection (b) of the new section 51 provides an exemption from the surcharge for individuals (other than estates and trusts) whose tax does not exceed that generally applicable to the first two brackets of taxable income. More specifically, the surcharge will not apply to a husband and wife filing a joint resurn if their tax does not exceed $290. It will not apply to a head of household whose tax does not exceed $220, or to a single individual (or a married individual filing a separate return) whose tax does not exceed $145. In the case of a head of household, the exemption level is determined on the basis of the tax applicable to $1,500 of taxable income which is midway between the first two tax brackets of a single individual and the first two tax brackets of a married couple filing a joint return. Tax base on which surcharge is computed.-Subsection (c) of the new section 51 provides that the surcharge shall be computed as a percentage of the tax otherwise imposed by chapter 1 of the Internal Revenue Code, with the exception that it shall not be imposed with respect to the 30 percent tax under section 871 (a) and 881 on nonresident alien individuals and foreign corporations receiving income not effectively connected with a business in the United States. In the case of an elderly person who is eligible for the retirement income credit, the surcharge will be computed as a percentage of his tax liability after subtract- ing his retirement income credit. Similarly, tax liability shall be reduced by the retirement income credit in determining whether such an individual is eligible for the low-income exemption. This treatment is afforded the retirement income credit in order to give it the same effect on the surcharge as the ex- clusion for social security benefits. Tax liability would not be reduced by any other credits in computing the amount of the surcharge. On the other hand, once the surcharge has been computed, it may be offset by credits to which the taxpayer is entitled and which are not absorbed by his regular tax liability. Authority to prescribe composite tax rates and tables.-Subsection (d) of the new section 51 provides that the Secretary of the Treasury or his delegate may compute composite income tax rates incorporating the surcharge and prescribe regulations setting forth modified optional tax tables computed on the basis of such composite rates. The composite rates may be rounded to the nearest whole percentage point. If the Secretary or his delegate exercises his authority un- der this subsection, he may require taxpayers to use the rates and/or tables he has prescribed. Moreover, if he prescribes optional tax tables incorporating the surcharge, the usual rule that a taxpayer with less than $5,000 of income may take the standard deduction only if he uses the optional tax tables will be waived in the case of a taxpayer who is eligible for the retirement income credit. This special rule is to reflect the fact that the effect of the retirement income credit on the surcharge cannot be accurately incorporated into the optional tax tables, with the result that those claiming the retirement income credit will almost universally use the regular tax computation. Under these circumstances, without the special rule,. most taxpayers claiming the retirement income credit would be precluded from using the standard deduction. Estimated tax.-Subsection (e) of the new section 51 contains provisions con- forming the estimated tax provisions to the new surcharge tax. Under present law, corporations are required to pay estimated tax only with respect to taxes imposed by section 11 or 1201 (a) or subchapter L (relating to insurance com- panies). The new subsection (e) (1) provides that any surcharge that is attrib- utable to a tax imposed under these sections or subchapter shall, for estimated tax purposes, be treated as a tax imposed under these sections or subchapter and, therefore, subject to estimated tax payments. Paragraphs (2) and (3) of the 83-349----67----pt. 1-4 PAGENO="0050" ~38 PRESIDENT'S 1967 TAX PROPOSALS new subsection (e) provide that, in the case of the option under which indi- viduals and corporations may pay their estimated tax on the basis of their prior year's tax liability, this prior year's liability shall be adjusted to reflect the surcharge tax. Under the provisions of the new subsection (e), corporations would be re- quired to reflect the surcharge in their first estimated tax payment due more than 15 days after the bill is enacted. For individuals, the surcharge would have to be reflected in the first estimated tax payment due more than 45 days after the enactment of the bill. Western Hemisphere Trade Corporations a'nd dividends on certain Preferred stock.-The following two provisions of the Internal Revenue Code provide a special deduction with respect to certain income which has the effect of reducing the corporate tax rate applicable to that income by 14 percentage points. These provisions are: (1) Section 922, relating to the taxable income of Western Hemisphere Trade Corporations; and (2) Section 247, relating to dividends paid by a public utility on its pre- ferred stock. Section 244 provides a reciprocal deduction with respect to amounts received as dividends on certain preferred stock of a public utility. In order to maintain the 14 percentage point differential under these sections, subsection (f) of the new section 51 provides that the computation shall be adjusted, under regulations prescribed by the Secretary of the Treasury or his delegate, to reflect in the reg- ular corporate tax rate the surcharge imposed under the new section 51. New withholding tables.-Subsection (g) of the new section 51 sets forth new tables for computing the amount of income taxes to be withheld from wages paid on or after October 1, 1967, and before July 1, 1969. These tables reflect an in- crease in the withholding rates of 10 percent. (b) Minimum distributions by foreign subsidiaries-Subsection (b) of ~ection 2 of the bill amends section 963 (b) (relating to receipt of minimum distributions by domestic corporations from their foreign subsidiarh~s) to provide for the use of a minimum distribution table reflecting the surcharge. The new table is to be used for taxable years beyinning 1967 and 1068. It is the same table that was ap- plicable for taxable years beginning in 1963 when the corporate tax rate was 52 percent (the pr~sent corporate tax rate including the additional surcharge is 52.8 percent). (c) Clerical amendment.-Subsection (c) of the new section 51 makes a clerical amendment to reflect the addition of the new Part V imposing the surcharge. (d) Effective date-Subsection (d) of the new section 51 provides the effec- tive dates for the surcharge. These dates are explained in the discussion under subsection (a) of the bill. Section 3. Increase From 70-80 Percent the Amount of Estimated Tax Which Corporations Must Pay in Installments. Under present law, a corporation is not penalized for an underpayment of esti~ mated tax if its payments equal or exceed those which would be required on the basis of estimated tax liability of 70 percent of actual tax liability (less $100,000). Section 3 of the bill amends section 6655 to raise the 70-percent figure to 80 per- cent. This conforms the percentage for corporations to that made applicable to individuals beginning in 1967. This change would be effective for taxable years beginning after December 31, 1967. Section 4. Payment of First $100,000 of Estimated Tax. Under present law, corporations are required to make estimated tax payments only with respect to their estimated tax liability in excess of $100,000. They are not required to make any estimated tax payments on their first $100,000 of estimated tax liability and, if their annual estimated tax liability is $100,000 or less, they are not required to file a declaration. Under section 4 of the bill, the $100,000 ex- clusion would be repealed over a flve-yeai~ period. More specifically, subsection (a) of section 4 of the bill would amend section 6016(a) to require a corporation to file a declaration of estimated tax for a tax- able year if it can reasonably be expected that it,s tax liability for the year (after taking into account credits) will exceed $40. As indicated above, the present exemption level is $100,000. Subsection (b) of section 4 of the bill amends section 6016 (b) to provide a new definition of "estimated tax" (which is the basic amount subject to payment by iiTstallment) reflecting the removal of the existing $100,000 exemption over a five year period. During the transition period, a corporation, in determining the PAGENO="0051" PRESIDENT'S 1967 TAX PROPOSALS 39 amount of its estimated tax liability, would be permitted to exclude an amount equal to the applicable "exclusion percentage" multiplied by the lesser of (1) $100,000, or (2) the amount which the corporation estimates as its income tax for the year less the estimated amount of its credits. The revised subsection (b) of section 6016 would be define the term "exclusion percentage" as follows: The "exclusion percentage" If the declaration is for a year beginning in- is- 1968 80 11969 60 1970 40 1971 20 In the case of taxable years beginning after 1971, there would be no special exemption. As an example of the transition rule, a corporation whidh estimates its income tax less credits `for 1968 to be $80,000 would be entitled to an estimated tax cx- elusion of $64,000 for 1968; 80 percent (its exclusion percentage) times $80,000. Its estimated tax liability would, therefore, be $16,000. If the corporation esti- mates its income tax less credits for 1968 to be $120,000, its estimated tax exclu- sion would be $80,000 (80 percent times $100,000) and its estimated tax liability would `be $40,000. Sitbsection (d) of section 4 of the bill amends `section 6655 (e) to reflect the repeal of the $100,000 exemption in the provisions for determining whether, and j:f so, to `what extent, an addition to the tax should be imposed for underpay- ment of estimated tax. The same transitional rules apply. Thus, for example, assume a corporation's tax return for the taxable year ending December 31, 1968, indicates an income tax liability of $150,000. To utilize the exception provided in section 6655 (d) (1) permitting estimated tax payments to be based on the prior year's tax, such corporation would be required to pay for 1969 an estimated tax of $90,000, `computed a's follows: 1968 Income Tax Liability $150, 000 Less: $60,000; 60 percent (the exclusion percentage for 1969) times $100,000 60, 000 Total 90, 000 Subsection (3) of section 4 of the bill amends section 243 (`b) (3) (C) (relating to estimated tax exemption for members of an affiliated group) to reflect the repeal of the $100,000 exemption. Subsection (f) o'f section 4 of the bill provides that the amendments made by this section shall apply to estimated tax payments for taxable years beginning after December 31, 1967. Section 5. Postponement of Certain Excise Tan Rate Reductions. (a) Passenger Automobiles-Under present law an excise tax of 7 percent of the `selling price is imposed on the sale by the manufacturer, producer, or im- porter of passenger automobiles. This `rate is scheduled to be reduced to 2 per- cent on April 1, 1968, then to 1 percent after December 31, 1968. Subsection (a) of Section 5 of the bill suspends this schedule of reductions for the period during which the temporary surcharge will be in effect. Thus, the present 7 percent rate will remain in effect until July 1, 1969. A rate of 2 percent will apply to sales between July 1, 1969, and December 31, 1969, with a 1 percent rate applying to all sales after December 31, 1969. Conforming amendments are made so that floor stocks refunds will apply on the corresponding date of each reduction. (b) Communication S~ervices.-Under present law, an excise tax of 10 percent is imposed on amounts paid for local and long distance telephone service (includ- ing teletypewriter service). A reduction of the rate to 1 percent is scheduled to apply to amounts paid pursuant to bills rendered on or after April 1, 1968, with the tax scheduled to terminate entirely as to bills rendered on or after January 1, 1969. Subsection (b) of Section 5 of the bill suspends this schedule of reductions for the period during which the temporary surcharge will be in effect. Thus, the present 10 percent rate will continue to apply until July 1, 1069, at which time the scheduled reduction to 1 percent will take effect. The tax will terminate on January 1, 1970. A conforming amendment makes corresponding changes in the dates applicable under the special rules established under present law to adjust ::for billing practices. PAGENO="0052" 40 PRESIDENT'S 1967 TAX PROPOSALS (e) Effective Date.-Subsectjon (c) of section 5 of the bill provides that the amendments made by this section shall apply as of the date of enactment of the bill. The `CHAIRMAN. Mr. Schultze, we will hear you next. STATEMENT OP HON. CHARLES L. SOHULTZE, DIRECTOR OP THE~ BUREAU* OP THE BUDGET Mr. SCHULTZE. Thank you, Mr. Chairman and' members of the com- mittee. In his August 3 message, the President p~roposed a series of' measures which call for difficult decisions on the part of `both the exec- utive and the Congress. But while they are difficult, they represent the exercise of responsibility-a responsibility which cannot be avoided if the economic and social health of the Nation is to be maintained. As the President pointed out, failure to take action to raise taxes: and reduce expenditures would produce a fiscal 1968 budget deficit which is clearly unacceptable-unacceptable for four basic reasons: 1. A deficit of $25 to $3Q billion, with its implications for both Federal and private borrowing, would place such a burden on the Nation's money and capital markets that sharply rising and record- high interest rates would swiftly follow. Even at these high prices,~ credit-and particularly credit for home `buyers-would `become less' and less available. The recovery in homebuilding from last year's set- back would surely be choked off, and indeed, reversed. Over a period'~ of a year we could well lose half a million sorely needed new houses. From the standpoint of economics, social need, and equity, there is no excuse for laying on one selected sector of the economy such a dispro- portionate burden of financing our efforts in Vietnam. 2. An administrative budge't deficit of $25 to $30 billion-with its' corresponding national income accounts deficit of $15 to $18 billion- on t'op of `an economy which is already in the neighborhood of full' employment could hardly fail to generate substantial inflationary' pressures. No one can forecast the precise wage and price consequences: of such a deficit, or the specific sect'ors of the economy where it would eb most severe. But inflationary consequences there would surely be. And once the interaction of rising prices on wage demands and of' wage increases on prices is started, it simply cannot be stopped quickly by fiscal action which comes too late. 3. A $25 to $30 billion deficit would adversely affect our balance of' payments, encouraging a rise in imports and discouraging our ex- port's. Again, no one can give an accurate estimate o'f the magnitude' of this effect. But its direction is clear. 4. Finally, failure to act responsibly would worsen the major social' problems of our cities and fo many `of our poorer citizens. While the' very poor are not the primary buyers of new homes, they are affected' by a slowdown in new home construction. A slackened pace of new home construction tends to reduce vacancy rates, raise rents, and block the upward movement of the poor into bet'ter houses. Many of the' poor live on fixed incomes-welfare payments or small pensions- whose purchasing power is eroded by rising prices. The investments' of State and local governments in much-needed public facilities are retarded when interest rates rise sharply and credit becomes scarce.. PAGENO="0053" PRESIDENT'S 1967. TAX PROPOSALS 41 These are. indirect,, but nevertheless real consequences which could well follow from failure `toadopt responsible fiscal action. The President's program of action calls for both tax. increases and expenditures restraint. There have been,, and. will, I am sure', continue 1o be a number of voices raised to demand that the necessary action be concentrated `solely on the expenditure side. Action by both the Congress and the executive to reduce and restrain expenditures is indeed called for. I shall discuss this in more de.tail `at a later point. But it should be-and as a ~matter of fact I think it really is-clear to all, `that. expenditure reduction's. `alone simply cannot accomplish the needed fiscal restraint. In fiscal 1968 there are some $21 billion of immediately controllable civilian expenditures, of which $8 billion represents payrolls and $1 billion, the proposed' military `and~civilian'pay raise. To suggest that, in addition to the cuts which will have to be made in this total under the President's proposals, a further' $ul/2 billion could be. found in lieu of the requested tax increase does not, 1 `submit, constitute a respon- :sible or realistic approach to the problems we face. In short, I believe the President's proposals, which offer a combina- ition of expenditure restraint and tax increases, represent a desirable and meaningful solution to the situation which confronts us. ,Let me turn now to a more `detailed analysis of 1968 budget expenditures. CURRENT 1968. BUDGET ESTIMATES Before getting to the `figures themselves, I would like to explain briefly the basis for the current estimates. Basis for current estimates First of all, since final action on appropriations and legislation in this session of the Congres.s is far from complete, the present esti- mates can take specific account of congressional action only in a few instances-those where both HOuses have acted' on `a measure. Where neither body or one body alone has taken action to date, we are con- tinuing to use the January estimate. However, where it is no longer possible for a measure to become effective on the date proposed in last January's budget, we do assume slippage in the effective dates of relevant legislation; this is the case, for instance, with respect to the `President's recommendation for iostal rate increases, for which `we are now estimating effective dates beginning October 1, 1967, rather than July 1, 1967. Second, the estimates take account of the latest actual experience with respect to `agency spending rates and uncontrollable factors affecting the expenditure estimates. Third, the current revisions reflect amendments to the original' .a.ppropriation recommendations and legislative proposals included in `the budget last January. Administrative budget expenditures The January budget estimated administrative budget expenditures `for fiscal 1968 at $135 billion. Since then, actions by the executive branch and the Congress plus certain changes in uncontrollable pro- gram workload have occurred which `will raise `expenditures b'y $1.5 PAGENO="0054" 42 PRESIDENT'S 1967 TAX PROPOSALS billion. In addition, a number of contingencies have appeared which could cause further substantial changes; in expenditures. I. Actions and developments to date.-Changes in administrative budget expenditures from actions and developments since Janu- ary are now estimated, as I said, at $1.5 billion. These changes are shown in table I, the next page in your testimony. They fall into four maj or categories: First, there is an addition of $600 million for programs previously deferred in accordance with the President's anti-inflation message of September 8, 1966. In late February, and again in March and April, as inflationary pressures eased, and after extensive discussions with Members of Congress, some of the funds which had been withheld were' released. The earlier-than-anticipated releases were mainly for the new pro- gram for purchases of low-cost housing mortgages, which had been specifically provided by the Congress last year. Second, we are now faced with an estimated increase of $900 million for programs in which payments to individuals or groups are set by law and are, therefore, relatively uncontrollable. Of this amount $4Q0 million is for higher farm price, support payments by the Commodity Credit Corporation. This increase is due primarily to revised estimates to crop yields for feed grains and soybean consumption. We also antici- pate an increase of $300 million above the January budget estimate in grants to States for public assistance-reflecting changes in State laws and a more rapid acceptance of medicaid than had been anticipated. As this committee well knows, the Federal Government provides, un- der th~ law, a specified proportion of Sta.te cash and medical assistance payments. As States liberalize their eligibility standards and as they begin to participate in the medicaid program, Federal expenditures for public assistance are automatically increased. Another $200 million increase is due to Federal contributions to medicare, as the number of participants in the supplementary medical program have exceeded expectations. Third, congressional actions completed or almost completed are esti- mated to result in an increase of $100 million in 1968 expenditures. More costly legislation for veterans' benefits has been passed by bot.h Houses of the Congress than was proposed in the January budget. This raises estimated outlays by $100 million. In addition, the later effective date now assumed for postal rate legislation will add another $100 mil- lion to net budgetary costs. These actions are partially offset., however, by a reduction of $100 million based on appropriation actions com- pleted or nearly completed to date. As you know, appropriation reductions in a given fiscal year do not usually lead to expenditure reductions of the same amount in that same fiscal year. Part of the~ appropriation changes affect expenditures in subsequent years. And some appropriation reductions are purely ac- counting changes which have no effect. on expenditures. For example, in the three appropriat.ion bills enacted to date, appropriations were reduced by $145 million which will 1e~d to a fiscal 19G8 expenditure reduction of $103 million on our best estimates. Or again in all of the civilian appropriations bills passed by `the House to date, appropria- tions were reduced by $1,650 million with a fiscal 1968 expenditure effect of $660 million. PAGENO="0055" PRESIDENT'S 1967 TAX PROPOSALS 43~ Fourth, a net decline of $100 million will result from lower expendi- tures on international financial transactions, partially offset by a rise in outlays for domestic loan programs. Table 2, attached to this statement, shows by agency the major changes I have just described. II. Contingencies.-Let me turn now to some contingency elements. In considering the expenditure outlook for 1968, there are a number of contingencies which must be explicitly recognized, but whose precise outcome cannot be forecast at the present time. 1. Defense e~penditures.-In a war situation, military requirements~ tend to change, and accurate prediction of those changes~ long in advance is virtually impossible. As a consequence, we must be prepared for additional defense expenditures in support of our combat forces.. One illustration of changing requirements was the President's recent decision to authorize an increase of 45,000 in Ameri~an troops dc- ployed in Vietnam, over and above the number incorporated in the January budget estimates. At the same time, however, the President has directed Secretary McNamara to review all defense expenditures and to reduce or defer those not now essential for national security. The Secretary is conduct- ing this review, and all efforts will be made to offset to the greatest extent possible the potential increase in Vietnam outlays over the amounts budgeted in January. Neither the magnitude of the increases for Vietnam or the amount of offsetting savings can be accurately predicted at this time. The net change in defense expenditures, however, should range from zero to an increase of $4 billion, taking into account both the increases and the offsetting savings. 2. Federal employee pay raises.-As you know, the President pro- posed a 4½-percent pay raise for Federal civilian and military em- ployees, effective October 1, 1967. The $1 billion cost of this proposal was incorporated in the January estimate of budget expenditures. The pay bill now being considered by the House Committee on Post OfficeS and Civil Service would provide a larger percentage. increase, an earlier effective date, and other changes which, when extended to mili- tary as well as civilian employes, would ad an additional unbudgeted' $1 billion to fiscal 1968 expenditures. 3. Participation certiflcates.-The Congress in the Participation Sales Act of 1966 authorized an expansion of the existing participa- tion sales program to cover additional types of Federal programs. As part of that act, it was provided that the volume of participation sales made each year by the Federal National Mortgage Association would be authorized in appropriations acts. The January budget pro- posed total sales of $5 billion of participation certificates and requested the necessary authorizations. In appropriation actions to date by one or the other Houses of Con- gress, the requested authorizations for participation sales have been reduced. These reductions, if sustained by the actions of the full Con- gress, would result in some $2 billion less participation sales during fiscal 1968 than estimated in the January budget docume.nt. Proceeds from participation sales are credited to the revolving funds~ of various Federal credit programs and reduce net budget expendi- tures for these programs. Consequently, if participation sales are $2 PAGENO="0056" 44 PRESIDENT'S 1967 TAX PROPOSALS billion below the January estimates, by reason of failure to enact the inecessary authorizations, total budget expenditures will exceed the January budget by $2 billion. 4. Interest on the public debt may increase over the January budget estimate, to the extent that expenditures rise toward the high end of the range of possible contingencies or revenues fall below those now estimated. The resulting increase in the deficit would lead to increased Federal borrowing requirements and higher market rates of interest- ~both of Which would increase interest costs on the public debt. If these contingencies should turn out on the high side, expenditures would exceed the January budget by $8.5 billion: $4 billion for defense; $2 billion for lower participation sales; $1.5 billion for increase in uncontrollable expenditures, that I discussed earlier; and $1 billion for the additional pay rise. In turn, these higher expenditures, coupled with failure to enact the proposed tax measures, would cause interest costs on the public debt to rise substantially, by perhaps $700 million above the January budget estimates. Decisive action on the part of the Executive and the Congress, how- #ever, can hold these contingencies well below the $81/2-billion total. In the case of both military and civilian expenditures, we are launching a program to identify and put into effect maj or expenditure reductions designed to offset, to the maximum extent possible, those unavoidable increases which do occur. I will describe that program at a later point in my testimony. By its actions on pay and participations certificates, the Congress can also contribute to this effort. Expenditure restraint is an essential part of the fiscal program which the President has recom- mended to the Congress. ADMINISTRATIVE BUDOET REVENUES AND THE DEFICIT Turning now to administrative budget revenues and the deficit, :Secretary Fowler has presented to the committee revised estimates of revenues for fiscal 1968, and discussed the revenue yield of the tax proposals. ~\Tith no tax increase, without action to reduce expenditures, with :military spending rising the full $4 billion discussed earlier, and with the revised revenue estimates presented by the Secretary, the budget deficit could range up to $29 billion. On the other hand, adoption of the President's tax proposals, com- ~bined with expenditure restraint on the part of both the Congress and the Executive could reduce that deficit to a range of $14 to $18 billion. If, as one example, the Congress holds the civilian and military pay raise to the level proposed by the President, and authorizes the full amount of participation certificates requested in the January budget; :and if reductions in civilian expenditures are made sufficient to offset fully the $1.5 billion increase now in prospect; and if military outlays should rise by the $4 billion I mentioned earlier, total administrative budget expenditures in fiscal 1968 would be $139 billion-$135 billion as forecast in the January budget plus $4 billion of added defense spending. Under these circumstances, and with the enactment of the President's tax proposals, revenues are estimated at $123 billion- slightly higher than the $122.5 billion noted by the Secretary in his PAGENO="0057" PRESIDENT'S 1967 TAX PROPOSALS 45 testimony, since this estimate takes into account the impact on private incomes, and therefore on tax revenues, of the added military expendi- tures. The deficit under these conditions would be $16 billion, $139 billion.ex~enditure, $123 billion revenue. We believe a range of $2 billion on either side of this deficit esti- mate represents a reasonable allowance for contingencies. . On the one hand, military expenditures may not rise by the full $4 billion. The $4 billion is not a forecast but the higher end of a range which prudent planning must take into account in view of the uncertainties of a war situation. Moreover, the executive branch will bend every effort `to make the civilian expenditure reductions larger than the $1.5 billion necessary to offset increases now in prospect. On the other hand, addi- tional pay increases or lower participation in sales authorizations could force expenditures above the $139 billion level, leading to a deficit higher than $16 billion. The $14 to $18 billion range, therefore, reflects. a realistic appraisal of the situation as we now see it. EXPENDITURE REDUCTION5 We have begun a concerted effort to achieve every reduction and de- ferral which can reasonably be made in order to lower nondefense ex- penditures. We are determined to cut more than the $1.5. billion, which would offset the release of 1967 withheld funds and the uncontrollabl& increases in CCC, public assistance, and other outlays. Such a cut would. bring civilian expenditure&-exclusive of changes in participation. sales and in the President's pay proposa.ls-back to the $59.5 billion level estimated in the January budget. Our actual reduction `target is larger than that-we are aiming at a cut of over $2 billion-as a means~ of holding civilan expenditure below the January estimate. Such an expenditure reduction would require cuts in obligational authority and program levels of some $4 billion. Whether we will be able to achieve our target fully, I cannot predict at this time. But we are setting our sights high in order to insure significant reductions,, when the actual results are all in. The outcome will, of course, depend in part upon congressional action on the budget, as well as upon our own efforts. We have already set machinery in motion so that as each appropria- tion bill is enacted, it will be carefully reviewed by the agency involved to see what can be done to contribute to this interim goal. We believe this is the most effective way to accomplish .this first step toward our objectives. Until the Congress acts, it is impossible to determine the base from which reductions can be achieved. The final result will come from a combination of congressional action on appropriation bills and other legislation and executive branch action to economize, defer, cut back, and stretch out expenditures from the amounts that would be feasible under the appropriations enacted. An intensive review is already underway in the major agencies for which appropriations have thusz far been enacted; namely, Treasury, Post Office, and Interior. The job will not be easy. As the President pointed out in his tax message, and `as the members of this committee know, the opportunity for si~rnficant discretion in the level of budgetary outlays in the year ahead is very small; only $21 billion lies outside `the areas of national PAGENO="0058" 46 PRESIDENT'S 1967 TAX PROPOSALS defense and relatively uncontrollable programs or commitments. As I said earlier, about $8 billion of this represents the Federal payroll ~t present pay rates and an additional $1 billion is the cost of the military and civilian pay raise recommended by the President. Most of the reductions must come in the remaining $12 billion. As you can see, this means that the reductions would have to amount to well over 10 percent of controllable programs. Nevertheless, we will identify and carry out such reductions. A breakdown of the budget into controllable and uncontrollable expenditures is attached to my `statement as table 3. Compared to 4 years ago, Federal expenditures, apart from Viet- nam, have indeed risen. But they constitute a smaller, not a larger, share of the Nation's economic activity. In 1968, even if we realize only $1.5 billion in civilian expenditure reductions out of our $2 billion plus target, non-Vietnam expenditures will constitute only 14 percent of the nation's gross national product. This compares with 16 percent in fiscal 1964 and 161/2 percent in the last half of the 1950's. I realize on the basis of past experience, that some members of this committee `are not sympathetic to the participation sales program. If I exclude those from the calculations, non-Vietnam expenditures in 1968 would `still be only 141/2 percent of our national economy in fiscal 1968 corn- pared to the 16 percent in 1964 and 161/2 percent in the late 1950's. Even if we add Vietnam outl'ays to the total-at the level budgeted in January-the 1968 share of Federal expenditures in the national economy would be about 162/3 percent, only a shade above the ratio in the I alter half of the 1950's when, of course, there were no Vietnam expenditures. Finally, if military expenditures should rise the full `$4 billion discussed earlier, the Federal sh'are of the national economy would increase to 17.2 percent of GNP-about the same as iii 1955 and 1959, and far below the 21 percent reached during the Korean war. In short, Federal expenditures `outside of Vietnam have indeed risen over the past 4 years-risen to meet the growing workload generated by an expanding population and to help meet some of the Nation's major problems in health, education, urban development, and poverty. But the rise has been held within reasonable bounds. As `a share of our national economy, Federal outlays outside of Vietnam have been reduced over the past 4 years. During fiscal 1968, as a part of the President's overall fiscal pro- gram, we shall be applying still further restraint to Federal expendi- ~tures. This can and must be done, in view of the situation which faces us. In summary, Mr. Chairman, I believe the President has proposed a responsible combination of measures to prevent an excessive budg- ~etary deficit. Both expenditure restraint `and tax increases' `are called `for. Neither will be easy. But the pain of both is far less than the con- ~sequences, for all Americans, of failure to act. Thank you. , ` ` ` ` PAGENO="0059" PRESIDENT'S 1967 TAX PROPOSALS 47 (The tables referred to follow:) TABLE 1.-Uategories~ of major change in January estimates of 1968 administrative bndget ewpenditures [In billions] Effect of earlier release of some 1967 deferred activities +$O. 6 Low-cost housing program +. 5 Other, including construction by the Corps of Engineers and the Department of Health, Education, and Welfare +. 1 Relatively uncontrollable changes under existing law +. 9 Farm price supports +. 4 Public assistance grants to States +. 3 Medicare trust fund payments +. 2 Effect of completed or almost completed congressional action +. 1 Veterans' benefit legislation +. 1 Slippage of postal rate increase by 1 quarter +. 1 Appropriation actions completed -.1 Other -. 1 Reestimates of rates of outlay in some programs, mainly loan ac- tivities of the Departments of Housing and Urban Development and Agriculture +. 4 Reestimates of financial transactions for Export-Import Bank and international financial institutions -. 5 TABLE 2.-Major changes in 1968 administrative bndget erpenditnres by agency [In billions] January budget estimate, total $135. 0 I. Major changes from actions and developments to date: Housing and Urban Development-Mainly effects of tightening money market on mortgage purchases. and earlier release of amounts deferred in fiscal 1967 for low-cost housing +. 7 Health, Education, and Welfare-Mainly additional payments' to mediëare trust funds and public as- sistance grants (cash payments'and medical assist- ance) +. 5 Agriculture-Mainly Commodity Credit Corporation, caused by higher farm price support payments for feed grains and soybeans +. 4 Transportation-Mainly, for the supersonic transport (covered by contingency allowance in January) -i-. 1 Veterans' Administration-Mainly more liberal leg- islation for readustment benefits, pensions, `and ~death gratuity payments +. 1 Post Office-Mainly slippage of effective date of pro- posed postal rate increase from July 1, 1967, to Oct. 1, 1967 -i-. 1 Office of Economic Opportunity-1967 budget amend- ment for expanded summer programs... -~. 1 Corps of Engineers-Mainlv effect of earlier resump- tion of work on construction deferred in fiscal 196'L_. ` +. 1 International financial institutions-Conversion of maturing IMP notes (which were recorded as ex~ penditures when issued) to letters of credit (under which expenditures are recorded only when funds are actually paid out) 4 Export Import Bank-Lower level of loan disburse ments, net -. 1 All other ` -.1 Subtotal 136.5 PAGENO="0060" 48 PRESIDENT'S 1967 TAX PROPOSALS -5. 3 1.0 8.0 11.7 - 61.0 II. Range of possible contingencies: Defense expenditures-increase up to 4, 000, 000, 000 Excess Federal pay raise-increase up to 1, 000,000, 000 Participation sales-increase up to 2, 000, 000,000 Interest on the public debt-increase up to 700, 000, 000 TABLE 3.-1968 civilian administrative budget expenditvres based on actioi~s and developments to date by type 01 controllability [In billions) Relatively uncontrollable civilian expenditures: Major programs: Interest $14. 2 Veterans' pensions, compensation, and insurance 5. 0 Public assistance grants 4. 4 Farm price support (000) L 1.9 Postal public service costs arid revenue deficit (existing law) 1. 0 Health insurance payments to trust funds 1. 1 Legislative and judiciary .4 Other 2. 3 Total, major programs 30. 2 Payments on prior contracts and obligations 15. 3 Relatively controllable civilian expenditures: Sale of financial assets Proposed pay increases Personnel compensation Other Total The CHAIRMAN. Thank you, Mr. Schultze. Mr. Ackley, you are rec- ognized, sir. STATEMENT OP HON. GARDNER ACKLEY, CHAIRMAN, COUNCIL OP ECONOMIC ADVISERS Mr. ACKLEY. Mr. `Chairman and members of the committee, al- though tradition has generally restricted congressional testimony by th.e Council of Economic Advisers to appearances before the Joint Economic Committee, the importance o~f the proposals before you justifies an exception to that practice. I am here, on behalf of my two colleagues as well, to register our strong support for the President's tax proposals. Secretary Fowler and Director Schultze have covered well the budg- etary and financial aspects of the situation. I do not intend to repeat thei.r discussion. Rather, since great interest has been expressed in the economic impact of the proposed program, I shall expand on what they have said about the `economic `outlook with and without the Presi- dent's program. Let me summarize at the outset the points I shall make. 1. Federal budgetary'policy has :b~n highly stimulative so far in 1967. It would remain highly stimulative if no action is taken to in- crease'tax rates and to restrain expenditures. 2. Fiscal stimulus was appropriate and constructive in the first half of this year. Along `with an easing `of moneta~y p6licy, it helped gen- erate `a rapid growth of final sales-~the combined spending of con- sumers, governments and of business for fixed urn estrnent-in the f'ice of `an unprecedented drop in inventoryinvestment. PAGENO="0061" PRESIDENT'S 196,7 TAX PROPOSALS 49 3. Continuation of this strong stimulus, however, would be appro- priate oniy if inventory investment were likely to plunge into a sharp and prolonged liquidation, or if final sales were likely to level off abruptly. 4. Recent economic developments are inconsistent with either of these bearish possibilities. Current evidence clearly indicates that most of the drag of the inventory adjustment is behind us and that final sales are continuing to advance briskly. Economic growth has resumed and the economy is picking up speed. 5. The time has arrived for a rnov~ment of fiscal policy toward restraint in order to safeguard prosperity. Prompt enactment of the President's tax proposals would assure healthy economic growth, guarding against a new disruption of financial markets, preserving our opportunities for an improved price performance, protecting our international trade surplus, while permitting a solid advance of more than $50 billion in our gross national product over the next year. THE STATE AND FUTURE OF BUDGETARY POLICY Most economists regard the national income accounts budget as the best measure of the impact of Federal fiscal transactions on the flow of private incomes, spending, and production. As so measured, the Federal budget has moved dramatically in a stimulative direction during the past year. In the first half of calendar 1966, it was in surplus at an annual rate of nearly $3 billion. In that period, the Federal Government was subtracting more from private incomes through tax receipts than it was injecting into the stream of private purchasing power through income-creating expendi- tures. In the first half of this year, however, the budget was deeply in deficit at an annual rate of $13 billion, registering a swing of $16 `bil- lion over the 1-year period. The annual rate of expenditures rose $25 billion over the year. Defense purchases dominated the picture, grow- ing nearly $15 `billion. Social insurance benefits, reflecting the initiation Of medicare, ac- counted for more than half the nondefense advance. Meanwhile reve- nues grew by a little more than $9 billion, reflecting changes both in taxe rates `and `in the economy. In particular, the drop in corporate profits put a dent of $2 billion to $3 billion in tax revenues. The current rate of deficit, and the recent swing in the deficit, repre- sent a potent fiscal stimulus, by any standard of `comparison. At no time previously since the Korean war has the Federal budget on national income `account `been actually-or even potentially-in deficit under high-employment economic conditions. Durmg the Korean war, the peak deficit rate for any half-year period was $51/2 billion-about the same as the recent $13 billion rate when viewed in relation to GNP. In the absence of tax action, we could not count on a decrease in the national income accounts deficit over the year ahead. Indeed, at the upper end of the range of expenditure contingencies, the deficit would actually increase to a rate well above $15 billion. On the other hand, with the tax increase and the efforts to cut back expenditures recommended by the President, and with the healthy PAGENO="0062" 50 PRESIDENT'S 1967 TAX PROPOSALS growth of revenues that will accompany a solid economic advance, the annual rate of deficit should `be around $3 to $5 billion by the end of fiscal 1968. There are times when a large imbalance of Federal spending over Federal income helps to `balance the total economy, by offsetting a large imbalance of private income over private spending. If private investment is especially weak or significantly weakening, if private desires to save are unusually strong or rising sharply. if credit-financed expenditures are depressed as the result of a highly restrictive monetary policy, then total demand will need the support of a Federal deficit in order to reach prosperity levels. But hist~ory certainly tells us that, n'iost of the time, a large and maintained Federal deficit under conditions of high employment will strain the capacity of the economy and generate inflationary pressure. The wisdom of a tax increase as economic policy can be rejected only if one is confident that private demand is and will remain unusually sluggish. Only in that event could the economy take a persistent massive fiscal stimulus over the year ahead without becoming over heated. THE STATE AND FUTURE OF ECONOMIC ACTIVITY Demand was indeed sluggish in the early months of 1967, and the stimulus of fiscal policy helped to right the balance and to maintain the forward motion of our unprecedented 6'/2-year period of pros- perity. But demand has already gained in vigor, and the evidence over- whelmingly rejects a forecast `of sluggishness for the year ahead. The economic conditions of 1967 are rooted in the developments of the past several years. In 1964 and the first half of 1965, we enjoyed a rapid and healthy advance fueled by the large fiscal stimulus stem- ming from the Revenue Act of 1964. The tax cut added mightily to consumer and business purchasing power. And this extra purchasing power flowed into markets for goods and services, creating jobs and addiing to wage and profit incomes. ~\Tith the excise tax reduction of mid-1965, fiscal policy continued to be moderately stimulative, appropriately aiming for further progress toward the target of full employment. In the summer of 1965, however, `the decision to increase our mili- tary forces in Southeast Asia began to place a marked and unforeseen fiscal stimulus on top of our previous budgetary plans. PAGENO="0063" PRESIDENT'S 1967 TAX PROPOSALS 51 As a result of the extra defense expenditures and orders, and of the sharp psychological reaction of private spenders to the prospect of a continuing defense buildup, we experienced a period of hectic economic advance in late 1965 and early 1966. The economy was exceeding rea- sonable speed limits and the brakes had to be applied. They were applied-both through monetary policy and through the tax measures recommended by the President in January 1966 and promptly enacted by the Congress in March. The overall pace of eco- nomic advance was brought down to a reasonable rate by the spring and summer of last year. But business investment demand forged ahead, seemingly immune to the restraining policy actions. The capital boom called forth ever- larger doses of restrictive monetary policy, placed intolerable burdens on financial markets, generated strong upward pressures on wages and prices in capital goods industries, and contributed to a huge upsurge in imports. The Presidents fiscal program of last September 8 turned the tide of interest rates and ftnancial pressures. The capital boom was finally brought to a halt by a combination of forces-the suspension of tax in- centives which Congress enacted last October, the direct and indirect impact of tight money, the more moderate pace of overall economic activity, and the related relaxation of inflationary psychology. The brakes worked. Inflationary pressures were brought under con- trol. But the natural consequence of the restraining policy measures was a period of economic advance at a slower-than-ideal speed. In ~he fourth quarter of last year, demand leveled off but produc- tion continued to increase. In particular, many manufacturing firms stepped up their output, looking for a further growth of their markets which did not materialize. As a result, there was a massive accumulation of inventories of un- sold goods in the closing months of 1966, which led to cutbacks in in- dustrial output early this year. The inventory adjustment dominated our economic performance in the first half of 1967. This is illustrated in chart 1, which shows recent quarterly movement of total gross national product, and of "final sales"-that is to say, gross national product excluding inventory investment. PAGENO="0064" Chart I. o#~we~i#iawz #PeT/~ ~Eil 02 ~rJ TOTAL $BILLIONS, CHANGE* 20 15 I0 5 0 1966 1965 * CHANGE FROM PREVIOUS QUARTER; SEASONALLY ADJUSTED ANNUAL RATES. SOURCE: DEPARTMENT OF COMMERCE. PAGENO="0065" PRESIDENT'S 1967 TAX PROPOSALS 53 Over the past two quarters, the total production sold to final users- consumers, homebuyers, government at all levels, business for fixed in- vestment, and net sales abroad-rose by a rapid $15½ billion a quarter, as shown by the lighter bars on the right. Incidentally, Mr. Chairman, these figures are based on revisions of the second quarter gross national product estimates which the De- partment of Commerce is releasing this morning. This rate of advance exceeds the increase in buying by final users in any single year in our history. In only two previous quarters since 1951 has the growth of final sales been greater. Both of those are quarters which appear on the chart. However, during the first two quarters of 1967, the production that went into additions to inventories fell by $18 billion, giving us a net gross national product gain of only $13 billion for the first half of the year. The recordbreaking swing in inventory investment did not send the economy into reverse only because final sales were advancing so vigor- ously. And the strength of final sales, in turn, owed much to the stimu- ins of fiscal policy and the easing of monetary policy. The rapid increases in Federal outlays showed up directly in an $8 billion gain in the annual rate of Government purchases over these two quarters, nearly all for defense; these expenditures and higher social insurance benefits supported consumer incomes and thereby indirectly contributed to the $16 billion annual-rate rise in consumer spending over the half year. The relaxation of monetary policy per- mitted a $2 billion gain in homebuilding. Thus, the large stimulative swing of the Federal budget (and of monetary policy) helped to minimize the swing in economic activity. PROSPECTS FOR THE MONTHS AHEAD On any reasonable assessment of the evidence, one must conclude that the drag of the inventory adjustment is largely behind us. If inventory investment simply remains at the second-quarter level, it will stop retarding the growth of total production. Gains in gross national product would then fully match the increases in final sales- a marked change from the situation in the first two quarters of the year. Moreover, if inventory investment remains close to zero-as it was in the second quarter-and if the growth of final sales is maintained at the same rate as in the first half of the year, the relation between inventories and final sales would be completely back to normal for the economy as a whole at the end of 1967. This hypothetical calculation is shown by the broken line in chart 2. 83-349-67-pt. i-5 PAGENO="0066" Chart 2. REL4T/~2~V OF/Jt~#K4RA15T0CL~ 10 /22T4% T/,V,4L «=4//3" PERCENT * 24 NONFARM STOCKS AS PERCENT OF TOTAL FINAL SALES 21 _ 1963 1964 1965 * BASED ON SEASONALLY ADJUSTED DATA IN 955 PRICES. SOURCES: DEPARTMENT OF COMMERCE AND COUNCIL OF ECONOMIC ADVISERS. 23 22 CI) CI) CC CS 0 C CI) CI) 1966 1967 PAGENO="0067" PRESIDENT'S 1967 TAX PROPOSALS 55 The ratio of total nonfarm inventories to total final sales (expressed in constant prices), rose sharply in the latter half of 1966, after having remained virtually unchanged for some years. But the ratiO has been moving down in the first half of 1967, as shown on the right. Although the ratio remains high, balance can readily be restored through the growth of sales rather than through any significant actual decline of stocks. The latest figures for the month of June show that firms were actually, on balance, reducing stocks in June. That liquidation has now fully restored a normal balance between stocks and sales in retail and wholesale trade. There are a number of areas in manufacturing where inventories remain very high relative to sales. This is especially true where the customers of manufacturing firms have themselves been adjusting inventories and, hence, curtailing their purchases from manufacturers. Now that retailers and wholesalers have made their adjustment, manufacturers should experience strengthened demands. With im- proved markets, manufacturing output should resume its advance and manufacturers' inventory-sales ratios should decline. Some net liquidation of inventories could continue for another month or two. But it cannot be reasonably projected for very longinto the future. Inventory investment will bottom out in the second half of the year. And, after touching bottom, inventory investment should begin a gradual climb toward its normal prosperity rate of about $7 billion. In the first half of 1968, an inventory rebound should be an important stimulative force. There is every reason to expect further good gains in consumer spending. After reaching an abnormally high peak in the first quarter of 1967, the consumer saving rate has begun to decline, although it is still well above its normal level. Over the past 5 months, retail sales have advanced an average of 1 percent a month. Evidence of a housing rebound has been similarly convincing and encouraging. As chart 3 indicates, both expenditures on new residential construction on the bottom page and permits for new dwelling units have been rising steadily this year. PAGENO="0068" 56 PRESIDENT'S 1967 TAX PROPOSALS Chart 3. PIP/V4TE llOAfEBU/tD/#O MILLIONS OF UNITS* 1.5 I.0 .5 * SEASONALLY ADJUSTED ANNUAL RATED; NONFARM ONLY. SOURCE: DEPARTMENT OF COMMERCE. They still have a long way to go, merely to return to levels that were normal prior to the mortgage famine of 1966. Growing consumer incomes and rapid family formation should generate sufficiently strong housing demand in 1968 to bring homebuilding up to-and beyond- its 1964-65 pace. So long as mortgage funds remain available, homebuilding should be a key propelling force in the economy's advance over the coming year. The other major sector of private demand, business fixed invest- ment, is not likely to be a particularly stimulative force. But neither should it be a drag on. overall production. NEW HOUSING UNITS AUTHORIZED ~::l,!~l! RESIDENTIAL $ BILLIONS* 30 25 20 CONSTRUCTION EXPENDITURES PAGENO="0069" PRESIDENT'S 1967 TAX PROPOSALS 57 As chart 4 shows, businessmen have planned a gradual upturn in their investment for the second.'half of the year. Chart 4. 811$/iW'SS OIP/K41 OUTLAYS $ BILLIONS* QUARTERLY, ANNUAL RATES PLANT AND EQUIPMENT - EXPENDITURES *SEASONALLY ADJUSTED. SOURCES: DEPARTMENT OF COMMERCE AND SECURITIES AND EXCHANSE COMMISSION. These are based on the Commerce-SEC survey of May of this year. In interpreting this evidence, it should be recognized that firms have scaled down somewhat their earlier plans for investment, and this scaling down could continue. On the other hand, the restoration of the investment tax incentives may have, some upward impact on plans. The chart also shows on the bottom' panel the recent sustained recovery in new orders for nTachin- 70 65 60 55 50 45 5.5 j~J ANTICIPATED MONTHLY TOTALS MACHINERY AND EQUIPMENT 5.0 4.5 4.0 - NEW ORDERS - / /J ....../"~> ~ SHIPMENTS 3.5 ~._I~_I~I I I I I I I I I I I I I I I 1965 1966 1967 PAGENO="0070" 58 PRESIDENT'S 1967 TAX PROPOSALS ery and equipment, which have now advanced for .4 straight months and are now running ahead of shipments. . - All of this adds up to the verdict of a buoyant economy in which the pursuant of a highly stimulative fiscal policy would be inappro- priate-indeed, perilous. I have far more confidence in this overall judgment than in any quantification I can offer of just how fast the economy is likely to advance and just where the gains will take place. Nevertheless, this committee may be interested in a sketch of our current numerical projections. Assuming no major disruptions from strikes or develop- ments abroad, our estimates for the next two quarters show the follow- ing, if Congress were to reject the President's tax proposals. 1. Spending by State and local governments should rise about $4½ billion, maintaining its steady and stable upward trend. 2. Spending by the Federal Government should rise between $3 and $6 billion, depending on defense contingencies and on congressional decisions regarding the Federal pay bill and other key civilian issues. 3. Housing should rise about $31/2 billion provided funds remain available. 4. Plant and equipment spending should essentially remain on its high plateau. But, in the absence of a tax increase, it could rise by $1 billion. 5. Given these gains and the growth of incomes they would generate, consumer spending would rise by between $16 and $18 billion. 6. Inventory investment should begin its recovery, rising by $1 to $2 billion. Even at the lower end of this range of these estimates, the increase in gross national product would be $29 billion. At the upper end the $35 billion advance would nearly match the hectic pace of gain between the third quarter of 1965 and the first quarter of 1966. If unchecked, the pace of advance would accelerate in the first half of 1968, as investment in plant and equipment and inventories responded to booming sales. This would be too rapid a pace of growth, inconsistent with the stability of interest rates. It would give renewed momentum to the wage-price spiral and eliminate any hope for a return to price sta- bility. A growth in gross national product of about $50 billion over the next year would approximately keep pace with the growth of our pro- ductive capacity, enabling us to add to real output at a rate of about 4 percent a year, after correction for the built-in price increase that. we must expect. Since we have a small margin of excess capacity today, we could welcome a rate of growth slightly above that pace. But we certainly could not welcome-indeed, we cannot safely tolerate-a growth of as much as $60 billion or more. With the President's tax program, our projections show good pros- pects for realizing a growth in the neighborhood of $55 billion over the next year. Prompt enactment of a tax increase will both moderate the growth of purchasing pow-er in the fourth quarter, and prevent the development of inflationary expectations. It would assure that the recovery of homebuilding is not aborted by tight money, and that recent welcome gains in our international trade surplus will continue. The assessment of the outlook I have presented is broadly in ac- cord with the judgment of most expert forecasters today. We have PAGENO="0071" PRESIDENT'S 1967 TAX PROPOSALS 59 tested and challenged our own views against the bearish opinions held by a small minority of the profession. Frankly, I find it hard to ma.ke sense of a diagnosis of persistent sluggishness over the coming year. To accept it, one has to believe either that inventory investment will plunge into sustained and mas- sive liquidation or that growth of final sales will slow down abruptly in the months ahead. Such a forecast seems clearly at odds with the evidence I have pre- sented on inventories, retail sales, homebuilding, investment plans, and orders. It also flies in the face of a number of facts I have omitted- such as the recent pickup in employment, the acceleration of personal income gains, and the advance of construction contracts. In short, there is nothing to suggest that a powerful fiscal stimulus is called for in order to support healthy economic growth. On the contrary, the maintenance of such a stiniulus is most likely to under- mine our prospects for balanced prosperity. THE PROSPECT FOR PRICES With a tax increase, growth of production in the coming months would not place serious strain on our productive resources. But even tinder these conditions the general price level will continue to rise in response to inflationary forces which were set in motion during the rapid expansion of late 1965 and early 1966. Wage demands of both organized and unorganized workers have been spurred by the cost-of-living increases of the past 2 years. And while labor markets are not as tight as last year, there are still short- ages of well qualified workers in many occupations. These are particularly marked in medical care and other profes- sional services, construction, and repair and maintenance services. The recent temporary decline in manufacturing employment has been more than offset by the continued rapid expansion of employment in trade, services, finance, and government-especially St ate and local. Under these pressures average hourly compensation in the private nonfarm economy rose at an annual rate of over 6 percent in the first 6 months of 1967-far exceeding the normal increase in labor pro- ductivity. The recent pattern of union settlements has been around 5 percent a year. Even with unemployment rates remaining around the 3%-percent level of the past year and a half, we can expect a gradual relaxation of wage pressures. The mobility of our labOr force and the expanded public and private training programs are better adapting the effec- tive supply of labor to the demand. Productivity gains will be larger as the rate of production accel- erates. Nevertheless, unit labor costs will surely increase during the com- ing year. With expanding demand, most employers will find it pos- sible to raise prices to compensate for higher costs. The price level will continue to rise, though somewhat more slowly than last year. But the more rapid rise in demand that would occur without a tax increase would sharply accelerate the rate of price increase. New pres- sures on raw materials supplies, new shortages of labor, and renewed tightness in capacity utilization would add a new surge of. price in- creases on top of those already in prospect. Responsible public policy cannot permit this. to happen. PAGENO="0072" 60 PRESIDENT'S 1967 TAX PROPOSALS FEDERAL REVENUES AND TAX CHANGES The current economic situation and the prospective economic devel- opments, just reviewed, make it clear that the economy can "take" a tax increase without endangering prosperity-indeed, that a tax in- crease is necessary to restrain an otherwise excessive economic advance which could generate strong inflationary pressures. Under these circumstances the tax increase would clearly yield more revenues-not less, as some have contended. It could yield less only if it threw the economy into a recession, so that the effect of the higher tax rates was more than offset by a reduction in the tax `base. There surely have been times when that could be the effect of a tax increase. The proposition that-in a weak economy-higher tax rates can produce less revenues rather than more is, of course, the counter- part of the proposition that-in such an economy-a tax reduction can increase Federal revenues by stiulating a strong economic advance. If our economic situation tod'ay were that of 1962 and 1963-or of the 5 or 6 previous years-we should indeed again be considering a tax cut rather than a tax increase. In late 1962 and 1963, unemployment was high, utilization of plant capacity was low even though new in- vestment was adding only very slowly to capacity, prices were under no pressure, and the prevailing business sentiment was that the weak economic expansion that had begun in early 1961 had about run its course. Under those conditions a tax cut could and did put idle re- sources to work and expand the revenue base dramatically. But that is not the situation of the economy in 1967 or its outlook for 1968. We are operating at or `below 4 percent unemployment and, with a tax increase, we will continue to make full use of our resources. Under these circumstances, fiscal restraint will slow down the growth of demand, to keep it within the growth of our ability to produce. This is precisely why we want it. But it will only slow it down not turn it around. Under today's conditions, a tax increase will yield substantially larger, not smaller, revenues. The higher tax rates will `be applicable to an expanding tax base. The revenue estimates which the Secretary of the Treasury has given you take account of that prospect. Without a tax increase, the tax base would, of course, expand even more rapidly. But the extra expansion would consist mainly of higher prices for the same volume of production. Federal revenues would rise, but the real purchasing power of those revenues would not. `The extra revenues would be paid in inflated currency, its value impaired by rising prices for what the Federal Government buys. Without a tax increase, the cruel and unequal bite of tight money and high interest rates would impose some restraint on the growth of demand and the inflation of money incomes. But the additional reve- nues generated `by that kind of restraint would not flow to the Gov- ernment. Rather, they would ffow to those who have money to lend. We must not forget that-whenever the econom.y is operating at or close to full use of its productive resources-increased Government expenditures cannot fail to be paid for by a slower growth of real income in the private economy. Extra production to meet the needs of the Government must necessarily be matched by lower producti'on to meet private needs. PAGENO="0073" PRESIDENT'S 1967 TAX PROPOSALS 61 The question is only whose needs will be left unsatisfied, and by what mechanism the resources will be diverted from private to Gov- ernment use. I think we would all agree that it is better that the re- sources be diverted to the Government through taxation rather than though inflation or monetary stringency. As the President's message pointed out: "A failure to raise taxes would not `avoid the burdens of financing a war. For these burdens are inescapable. But, instead of sharing those burdens equitably and re- sponsibly-as an income ta.x surcharge would do-inflation, tight money, and shortages would tax the American people cruelly and capriciously. The consequences of that irresponsibility would haunt America and its people for years to come." The President has proposed a responsible course of action to meet the needs of the period immediately ahead. I am sure we all wish it were not necessary to raise taxes, even temporarily. And I know there will be bitter complaints about the specific expenditure reductions that the Congress and the President will find it necessary to make. But we must not lose our perspective. Over the past few years we have been able simultaneously to reduce taxes by far more `than `they are now being raised, and at the same time to undertake major new programs to meet the needs `of the American people; and I am con- vinced that we can continue on this course in `the years ahead. There are two reasons why it has been possible to combine lower tax- es with `the initiation of important new programs in the areas of educa- tion, health, cities, pollution, and the attack on poverty and distress. The first reason is that a major and continuing effort has been made to control Government costs, increase efficiency, and `to prune down older programs where needs are now less urgent. The second and more important reason lies in the unequaled power of our essentially free and private economic system t:o `enlist `the ener- gies, the skills, the imagination, the enterprise, and the ingenuity of American workers, businessmen, farmers, investors, scientists and engineers, inventors, promotors, lenders, and all who participate in this incredible complex of activities we so casually refer to as "the American economy." The growth of our `ability to produce goods, services, and incomes continues ap'ace, and shows no limits. In that perspective, I am confi- dent that we can `look forward again to a trend of lower, not higher, tax rates-which will still produce the growing revenues needed to finance the farsighted public programs the American people want and need. The `time will again come when a responsible fiscal policy presents the welcome opportunity for tax reduction. We will hasten that time if we now take the responsible fiscal action of temporarily raising taxes, as the President ha's proposed. Thank you. The `CHAIRMAN. Thank you, Mr. Ackley, and without `objection those charts and tables attached to your statement will appear in the record at the points indicated in your statement. Gentlemen, I have a few questions that I would like to propound. to all three of you. First, Mr. Secretary, do you have a chart that we can include in the record of what your estimates of revenue will be on th~ basis of your PAGENO="0074" 62 PRESIDENT'S 1967 TAX PROPOSALS best judgment `at the present if none of the proposals presently before the `Congress for additional revenue is enacted? Secretary FOWLER. Mr. Chairman, I can give it to you orally as follows. The CHAIRMAN. All `right, sir. Secretary FOWLER. We have calculated, as my statement indicates and as the table which is attache'd to it indicates un'der the heading "Estimated Net Administrative Budget Receipts in the Fiscal Year 1968 (assuming the President's tax program) "-that is the very last sheet in the statement-that under the proposed legislation revenues would be $122.5 `billion. (The CHAIRMAN. That is with `the tax bill'? Secretary FOWLER. That is with the tax bill as proposed. Now, if you deduct the tax package you would subtract $7.4 `billion from that total giving you receipts without the tax package of $115.1 `billion. Now, that is without taking into account, Mr. Chairman, the fact that there would `be some increase in receipts under present law because income levels would be higher with no increase in taxes. As Chairman Ackley has indicated, we think most of this would be in the form of price increases, but, nonetheless, taking into account that feedback factor from no taxation you would add $1.3 billion to the $115.1 billion, which would give you $116.4 billion, taking into account the element of feedback. Further the January budget proposed other legislation, principally the diversion of part of the excise tax on automobiles to the Beauty-Safety Trust Fund, which would decrease administrative budget receipts by $0.5 billion. If this were not enacted, budget receipts would be $116.9 billion. The CHAIRMAN. All right. Refresh my recollection, Mr. Secretary, on what the estimates of revenue were in the budget estimated in January for the 1968 fiscal year. Secretary FOWLER. Mr. Chairman, I can take you through, if you want to at this point, a reconciliation of the current estimates which are in the table attached to my statement and those we had in the January budget. The CHAIRMAN. All right. First of all give me the figures, will you, which included a 6-percent surcharge effective Just 1 last. Secretary FOWLER. $126.9 billion. The CHAIRMAN. The net effect then is a difference of around $10 billion on the basis of what you gave me just prior to this question, $116.9 billion versus the $126.9 billion? Secreary FOWLER. Yes, sir. The CHAIRMAN. Will you break that down, because that is a rather sizable difference. I understand of course it included in part tax in- creases which amounted to what? $5.4 or $5.5 billion? Secretary FOWLER. $5.5 billion in the January budget. The CHAIRMAN. For the fiscal year, and that would leave then about a $4.5 billion variation in our estimates? Secretary FOWLER. I would take each individual item in the January budget revenue estimates and give you a reconciliation of it in this context. The CHAIRMAN. If you will do that I think it will~be helpful for the record. PAGENO="0075" PRESIDENT'S 1967 TAX PROPOSALS 63 Secretary FOWLER. As I said, our current estimate for the fiscal year 1968 receipts is $122.5 billion assuming a 10-percent income tax sur- charge effective July 1, 1967, for corporations and October 1 for in- dividuals. This current estimate is $4.4 billion below the January budget estimate of $126.9 billion, which assumed a 6-percent surcharge effective July 1 for both corporations and individuals and a recon- ciliation of these two estimates using the figures consistent with the estimates given in the President's tax message will follow: First, on individual income tax the January estimate, which is contained `in the budget on page 58 of the January budget `book, was $73.2 billion. Re- visions have been made in that estimate bec.ause of (a) a reduction in the marginal rate because of calendar 1966 experience amounting to $3 billion. Since that is a sizable item I know you will want. me to detail the reasons for it. The CHAIRMAN. That would be $3 billion off of the $73.2 billion? Secretary FOWLER. That is right. The marginal rate experience of calendar 1966, in our judgment., now justifies a recalculation of the yield. The current estimate of personal income assuming the January budget expenditure level for the period affecting the fiscal 1968 re- ceipts is approximately $2 billion less than the January estimate. The CHAIRMAN. What does that make it now? $71.2 billion or $70.2 billion? Mr. SOHNEEBELI. $70.5 billion. The CHAIRMAN. What I am trying to get to, Mr. Secretary, is what is your estimate now compared to your $73.2 billion of revenue from individuals. Secretary FOWLER. There are five factors and I come out with a $70.5 billion figure, which is the figure contained in the attachment to the statement. The CHAIRMAN. $70.5 billion. Oh, yes, I'm sorry I interrupted you. Secretary FOWLER. $70.5 billion. Now, first you deduct from the $73.2 billion `the $3 billion which is a reduction in the marginal rate because of the calendar 1966 experience. The CHAIRMAN. Mr. Secretary, that $70.5 billion includes, does it not, the enactment of the 10-percent surcharge effective October? Secretary FOWLER. Yes, sir. The CHAIRMAN. What are your estimates now of individual taxes to be paid in this fiscal year without considering a tax increase? Secretary FOWLER. I would have to supply that for you. (The following table was received by the committee:) Estimated net administrative bvd get receipts, present law, in the fiscal year 1968 Biilion8 Individual income taxes $67. 0 Corporation income taxes 30. 3 Excise taxes 9.3 Estate and gift taxes 3. 0 Customs 2.0 Miscellaneous receipts 5. 3 \et budget receipts present law 116 9 Fifect of proposed legislation other than tax program - 5 Net administrative budget receipts with no tax `action 116.4 PAGENO="0076" 64 PRESIDENT'S 1967 TAX PROPOSALS The CHAIRMAN. If you will, supply it for the record at this point. Secretary FOWLER. Yes, sir. Suppose I take you through the calcula- tions and get us from the $73.2 billion to the $70.5 billion and then I will comment on each individual one. You would deduct from the $73.2 billion $3 billion because of the change in the estimate of the yield by reason of our marginal rate ex- perience in calendar 1966 which I will explain later; second, a reduc- tion in the personal income assumption. The January budget assumed personal income for calendar year 1967 of $624 billion. For comparability this must be adjusted upward by approximately $3 billion to $627 billion because of the July 1967 revisions in the national income accounts by the Department of Com- merce. The current estimate of personal income under those revised adjusted accounts of $625 billion is $2 billion below the revised Janu- ary estimate of $627 billion which at the marginal rate we are now using of 151/2 percent would reduce the receipts by a further $300 million, so in addition to the $3 billion of reduction you would add an additional $300 million of reduction because of lower incomes than we previously estimated. The CHAIRMAN. Let me see if I follow you. In January we. estimated personal income subject to the income tax of $624 billion? Is that what you are saying? Secretary FOWLER. That is right. The ChAIRMAN. What do you estimate now that income to be for purposes of the 1968 fiscal year? Secretary FOWLER. Well, you have two adjustments up, one, the Department of Commerce adjustment up to $627 billion. We think the income is less because incomes have been less in the first 6 months than originally estimated and we would deduct $300 million from our rev- enue estimates to take into account that lower level of income. The CHAIRMAN. You would end up in your own estimates with, say, $623.7 billion? Secretary FOWLER. Mr. Chairman, I am going to ask Mr. Schultze to see if he can try this. Mr. SCHULTZE. Let me try, Mr. Chairman. The CHAIRMAN. I know it is hard to get over to me. Mr. SOH~LTZE. We started in January with $624 billion as the esti- mate of personal income on which individual income tax receipts were based. However, in the intervening period the Department of Com- merce has revised the previous statistics. The result is that our figure of $624 billion, if it were put on the basis of the current GNP statistics, would be $627 billion. So, in effect, we are saying that our January estimate was based on calendar 1967 personal income of $627 billion, even though that isn't the number you will see printed in the budget, the difference being recent revisions in the background statistics. We are now estimating $625 billion in personal income. That is a $2 billion reduction in the estimate used to calculate the 1968 revenues. If you apply a 15'/2-percent marginal tax rate against that $2 billion you will find it comes out to $300 million. This is the $300 million the Secretary referred to as the reduction in estimated personal income tax collections on account of a revision in our estimates of personal income. The CHAIRMAN. Now, in January when we had an estimate of $624 billion what percentage did we apply there? PAGENO="0077" PRESIDENT'S 1967 TAX PROPOSALS 65 Secretary FOWLER. We applied a 19-percent marginal rate. I will come td that in a moment. . The CHAIRMAN. And 19 against, the $627 billion or $625 billion? Secretary FOWLER. This is the revision of that marginal rate, Mr. Chairman, that provides the substantial reduction in the revenue estimates on individual income. The CHAIRMAN. So it is now 151/2 percent you think? Secretary FOWLER. That is right. The CHAIRMAN. Fifteen and a half in place of 19. That makes a difference then in your revenue estimates of what amount? Secretary FOWLER. The factor for reduced yield is $3 billion and because of the' lower personal income with the new marginal rate we add $300 million to the figure. `The CHAIRMAN. So it is $3.3 billion then that we would take off of the $73.2 billion. Secretary FOWLER. That is right. Now, then, you have two more factors. The delay in the enactment of the 6-percent surcharge on individuals from July 1, 1967, to October 1 reduces receipts by another $1 billion. However, as a fourth figure the increase in the surcharge from 6 percent effective October 1, 1967? to a 10 percent effective on that date would increase receipts by $1.6 billion. The CHAIRMAN. You then add back `to the subtotal that $1.6 billion'? Secretary FOwLER. Right, and the total reduction in fiscal 1968 receipts in this individual income account is $2.7 billion, which sub- tracted from the $73.2 billion figure in the January budget gives you the $70.5 billion in the new estimate. The CHAIRMAN. Let's look to the. area from which we get our next Jargest return. Secretary FOWLER. The corporate side. The CHAIRMAN. Corporate income. Secretary FOWLER. The January estimate in the budget was revenue from corporate income tax of $33.9 billion. The CHAIRMAN. Let's start out, if you will, on what prediction was of corporate profits in calendar 1967 from which we were to get revenue? Secretary FOWLER. $83 billion. The CHAIRMAN. $83 billion. Secretary FOWLER. Yes, sir. The CHAIRMAN. With a return of $33.9 billion in revenue. Secretary FOWLER. That is correct. The CHAIRMAN. All right. Secretary FOWLER. Now certain revisions have been made. First, a restoration of the investment credit before January 1, 1968, reduces receipts by $800 million. Second, there has been a decline in corporate profits from the estimated levels in the January budget. The CHAIRMAN. What are those figures now, Mr. Secretary? Secretary FowLER. We are now using, as indicated in the attach- ment to my statement, an estimate of $80 billion. The CHAIRMAN. $80 billion. Secretary FOWLER. Yes, sir. The CHAIRMAN. You think that is a pretty good estimate? Secretary FOWLER. Yes, sir. The CHAIRMAN. I have been using a little lower figure. PAGENO="0078" 66 PRESIDENT'S 1967 TAX PROPOSALS Secretary FOWLER. Well, you get differences of opinon about this. The CHAIRMAN. Most of the opinion that I have heard is anywhere from 75 to 79. Mr. ACKLEY. Could I make a point there, Mr. Chairman? The CHAIRMAN. Yes, Mr. Ackley. Mr. ACKLEY. This morning the Department of Commerce released the second quarter figures for corporate profits. The first quarter figure, which we previonsly had, was $79 billion. The preliminary estimate for the second quarter shows an increase-a modest one- $79.2 billion. And our economic projections do call, as the Secretary said, for further increases over the year ahead. The CHAIRMAN. You better get that information out pretty quickly because it is a little more optimistic than some of the statements made to me by corporate executives. Secretar.y FOWLER. Because of this increase in the estimates the decrease in revenues from corporate income is $1.3 billion. The CHAIRMAN. Is that in addition to that $800 million? Secretary FOWLER. Yes; it is additional to the $800 million? The CHAIRMAN. That means then that you have present corporate revenues estimated at $31.8 billion? Secretary FOWLER. No, sir. There are some more factors that have to be figured in to be complete. The CHAIRMAN. All right. What are they? Secretary FOWLER. A decrease in the basic yield of the surcharge due to profit declines. We estimated in the January budget that the 6-percent surcharge would incerase receipts by $200 million in fiscal 1967 and $1.3 billion in fiscal 1968. Late enactment of the surcharge means that $200 million that we estimated we would collect in fiscal 1967 will now be collected in fiscal 1968 and the total 1968 effect estimated in January then with the present timing would be $1.5 billion rather than the $1.3 billion I have given. At the current estimated levels of corporate profits the 6-percent surcharge is estimated to yield $1.4 billion. Compared with the Jan- uary estimate this is a reduction of $100 million. The CHAIRMAN. That is to come off then. Secretary FOWLER. That is to come off. Now, the delay in the enact- ment of the surcharge noted, however, will increase, as I have said, the fiscal 1968 receipts as compared with the January allocations be- tween 1967 and 1968 by $200 million, so you put a plus $200 million. Now, the increase in the surcharge from 6 to 10 percent results in an increase in receipts of $900 million. NOw, I come to the factor of rounding. The above figures computed in millions of dollars when totaled necessitate a rounding adjustment reducing receipts by $0.1 billion. We would put that adjustment in by reducing another $100 million, so that the total reduction in fiscal 1968 receipts on this corporate side is $1.2 billion, and you take that $1.2 billiOn from the January estimate of $33.9 billion and you get the total contained in the table on the statement Qf $32.7 billion, which is the now current corporate revenue estimate. The CHAIRMAN. Now, again, I am trying to find out, Mr. Secretary, in the corporate area as well, what the amount would be of corporate PAGENO="0079" PRESIDENT'S 1967 TAX PROPOSALS 67 taxes paid based upon corporate profits in 1967 if there is no tax in- crease enacted. Secretary FOWLER. I will supply that for you, Mr. Chairman. (The information referred to appears on p. 63.) The CHAIRMAN. All right, we would want this information just as we asked for it with respect to individual income taxes. Secretary FOWLER. Now, on the excise tax, the January estimate was $8.8 billion. That estimate has been revised because of the proposed extension of present rates on automobiles and telephone excises by $300 million, so you find the figure $9.1 billion which is the current esti- mate contained in the table attached to the statement. The CHAIRMAN. Do you have a division there? What part of that goes into the general fund? Secretary FOWLER. All of it, sir. The CHAIR1~IAN. This is the general fund you are talking about. Secretary FOWLER. Yes, sir. The CHAIRMAN. Is this exclusive of the highway trust fund? Secretary FOWLER. Yes. The CHAIRMAN. This is exclusive of that? Secretary FOWLER. Yes, sir. The CHAIRMAN. We are talking here solely about the general fund. Secretary FOWLER. About. the general fund. The CHAIRMAN. All right. Secretary FOWLER. Now, on estate and gift taxes the January esti- mate was $3.1 billion and the actual figures in fiscal 1967 turned out to be $100 million less than estimated, so we revised the fiscal 1968 estimate downward by the same amount; namely, $100 million. That gives you your current estimate of $3 billion, which is the figure now contained in the table. On customs the January estimate was $2.1 billion. The actual receipts in fiscal 1967 proved to be $100 million less than estimated so we re- vised the fiscal 1968 estimate downward by the same amount., $100 million, and that gives us a current estimate in the table attached to the statement of $2 billion. Finally, miscellaneous receipts, the January estimate was $5.8 bil- lion and that estimate has been revised downward by $600 million principally because of an estimate of reduced receipts from stockpile sales of $450 million and on offshore oil of $80 million. The total reduc- tion in the January estimate of $600 million gives us our current esti- mate of $5.2 billion. The total of those items is $4.4 billion which deducted from the January estimate of $126.9 billion gives our current estimate of $122.5 billion. Mr. Chairman, I would like to explain this marginal rate matter, which is complicated but has such an important bearing on the major factor of reestimating that has come into the picture since our last discussion. I now address myself to the $3 billion item which is important in this reduced estimate of receipts. The actual fiscal year 1967 receipts when finally totaled up and released, as you will recall, in July indicate that the calendar 1966 individual income tax liability was about $2.2 billion below the January estimate. PAGENO="0080" 68 PRESIDENT'S 1967 TAX PROPOSALS The difference in these estimates arises principally because of the marginal rate. Now, the marginal rate, as you are familiar with, is the year-to-year change in the individual income tax liability as a percent of the change in individual income. It appears to have been about 14.1 percent for calendar 1966 rather than the 19.2 percent marginal rate that we used in making that calculation last January. Now, since the calendar 1966 tax liabilities are a principal bench- mark for computing the calendar 1967 tax liabilities and the consequent fiscal 1968 individual income tax receipts, this $2.2 billion reduction lowers the fiscal 1968 receipts by the same amount. Then there is the fact that it becomes necessary in the light of the analysis of the re- turns that finally came in in April, May, and June to revise the mar- ginal rate used in the estimate for the calendar year 1967. We are now assuming a marginal rate for calendar year 1967 of 15.5 percent, which gives a decrease in the marginal rate below that used in January for calendar 1967 (as well as for calendar 1966) of 3.7 percentage points. Now, with the change in the personal income adjusted to a tax basis from calendar 1966 to 1967 we have estimated this decrease of 3.7 percentage points in the marginal rate would reduce the added yield in 1967 from the rise in personal income under the individual income tax by $1.3 billion. This $1.3 billion due to the reduction in the mar- ginal rate for 1967 added to the $2.2 billion reduction in the calendar year 1966 liability, which is the base for our 1967 estimate, means a total reduction in the level of fiscal year receipts of $31/2 billion. The current stock market performance gives some reason, however, to increase the yield of the tax on capital gains by $500 million, so the net effect of these various adjustments gives you the decrease of receipts of $3 billion for the fiscal year 1968. We think this is the proper estimate to use now in the light of the experience we have~ had with the 1966 calendar receipts, and with the derivation of a more accurate marginal rate on the basis of those proved figures. What has happened is that since 1963 this marginal rate had been moving upward. It is the crucial factor in our estimating process on individual income, and after being stable at around 10 to 11 percent for a period of years it commenced to rise, from 10.8 percent in 1963, to 14.3 percent in 1964, and to 17.2 percent in 1965. So last December in arriving at our January estimates for the fiscal year 1967 we used a projection of what had been that very steady trend of an increase in the marginal rate and used 19.2 percent for the cal- endar year in question. The committee will recall, I think, that in the estimates of in- dividual income tax yield for 1964, 1965, and 1966 we had been regu- larly underestimating by very substantial amounts, and one of the factors in the underestimates for these previous years was that we were using a marginal yield which was always lagging behind what in fact proved to be the case. So having seen this trend moving upward from the 10.8 percent figure in 1963 to the 14.3 percent in 1964 and the 17.2 percent in 1965 we followed that trend line conservatively and used a 19.2-percent rate. Now, with the 1966 calendar year figures coming in and our ability to derive an accurate determination of what the actual marginal rate wa's in 1966, which was well below the estimate of it, we have now PAGENO="0081" PRESIDENT'S 1967 TAX PROPOSALS 69 made an adjustment and used a 15'/2-percent figure which is about in between the 17.2 percent for 1965 and the 14.1 percent which proved to be the case in 1966. The CHAIRMAN. Mr. Secretary, all of this adds up to the fact that your estimates for fiscal year 1968 were developed with the feedback you referred to. What was that figure, $116.9 billion? Secretary FOWLER. 116.9; yes, sir. The CHAIRMAN. And in the fiscal year just ended our revenues ac- tually were $115.8 billion. Secretary FOWLER. That is correct, sir. The CHAIRMAN. We have an increase there of $1.1 billion in reve- nues without any adjustments in the tax structure. Secretary FOWLER. That is right. The CHAIRMAN. We recognize that in the 1967 fiscal year as a re- sult of the speedup of corporate taxpayments we really borrowed money for 1967 that would have been paid in 1968 without that action. Secretary FOWLER. That is right, sir. The CHAIRMAN. Normally, however, our revenues have risen at a higher pace in the past few years than is indicated here by this $1.1 billion difference, plus the allowance for the amount that we took from 1968 into 1967 fiscal year. How do we explain that? Secretary FOWLER. Because, as Chairman Ackley has outlined and as we have discussed, the very, very rapid rate in increase in corporate profits which marked the previous years and the resulting yield in revenues will not characterize calendar year 1967. We have already agreed that the $83 billion is no longer an appropriate estimate and in the light of the downturn in corporate profits in the first quarter we are revising our corporate profit figures accordingly. So we have two very substantial factors reducing the rapid movement of increasing revenues from the corporate side-one, the loss of the impact of the acceleration that I think is in excess of $4 billion, and the reduction in corporate profits before taxes. Instead of an increase in corporate profits before taxes which has characterized the previous years we are now confronted by a reduc- tion in corporate profits before taxes. The CHAIRMAN. And in spite of that fact you think it advisable that taxes be increased? Secretary FOWLER. Yes, sir; because of the general economic outlook that we have ahead in the terms that Chairman Ackley ha.s indicated, and because the alternative that I see of not doing this and of depend- ing entirely `on borrowed funds to meet this deficit would entail risks for the economy and the financial affairs of the `country that would be unacceptable. The `CHAIRMAN. Mr. Director, let me address a question to you if I may. As I understood your presentation, the outer limits of your estimates of expenditures out `of the general fund of the Treasury `would now be $143.5 billion? Mr. SOHULTZE. `Correct, sir, plus-if that occurred-some addi- tional `allowance for interest. The `CHAIRMAN. I understand. There would have to be added to that figure the $700 million. Mr. SCHULTZE. Correct; yes, sir. S3-349------67-pt. 1-6 PAGENO="0082" 70 PRESIDENT'S 1967 TAX PROPOSALS The CHAIRMAN. So that it would be $144.2 billion as I hurriedly added here if all of the contingencies you referred to come into existence. Now, revenues then $116.9 billion would have to be subtracted from that to arrive at the deficit and that would be $27.3 billion? Mr. SCHULTZE. Correct, sir. The CHAIRMAN. How do we get this $29 or $28 billion? Mr. SOHULTZE. The Secretary may want to speak to your question, but I think the major part of the difference is that the revenue figure the Secretary first gave you of $115.1 billion did not allow for the effect of a feedback. The CHAIRMAN. I see. Mr. SOHI~TLTZE. In order to explain the figures simply, the effect of a feedback on revenues was left out. The CHAIRMAN. I see. Those who write most about the proposition of increasing taxes and express their opposition to it, Mr. Director, would have us first cut back on the expenditure side if I properly read their letters. We started in 1965 fiscal year I believe it was or maybe it was 1966-correct me-with a January estimate of $97.5 billion. Mr. SCH~5LTZE. I believe you are referring to the first estimate of fiscal 1965 expenditures which were $97.9 billion. The CHAIRMAN. This was the estimate brought to us I believe in January. Mr. SCHULTZE. January of 1964. The ChAIRMAN. Which would have been for the 1965 fiscal year, would it not? Mr. SOh-IhJLTZE. Correct, sir. The CHAIRMAN. And the actual spending was under that I believe, as I recall, about $96'/2 billion. Mr. SCHIJLTZE. That is correct, sir. The CHAIRMAN. All right. Now I want you to take your time and tell me how a rate of spending of $96.5 billion in 1965 has reached an outer limit of $144.2 billion in 1968. Take me through the programs, if you will, and let me know where this increase has occurred. Mr. SCHL-LTZE. Yes, sir. May I do that in the following way? The CHAIRMAN. You do it in your own way so I can understand it. Mr. SOHULTZE. What I would like to do for ease in presentation is to assume the additional $4 billion in military expenditures. The CHAIRMAN. Oh, yes, I want you to get to the figure of $144.2 billion which we said was your estimate of the outer limit. Mr. SOHULTZE. And, additionally, the $11/2 billion increase that I outlined in various civilian programs. The CHAIRMAN. Right. Mr. SCHULTZE. Not allowing, for the moment, for expenditure cuts, or additional pay, no PC's, to go through the items, and then we can adjust `the final result. The CHAIRMAN. Right. Mr. SCHULTZE. If I do that, I would `be starting with $140.5 billion. That is the number I will go to and then adjust up to the higher figure if that is all right with you, Mr. Chairman. The CHAIRMAN. That is fine. PAGENO="0083" PRESIDENT'S 1967 TAX PROPOSALS 71 Mr. SCIItJLTZE. That means there is an increase of $44 billion be- tween fiscal 1965 and fiscal 1968. The CHAIRMAN. Yes, sir. Mr. SCHULTZE. Of that $44 billion, assuming the additional $4 bil- lion military spending, there would be an increased $29.7 billion for the Department of Defense-of the total rise of $44 billion, $29.7 billion is for the Department of Defense, including military assist- ance. The CHAIRMAN. That is the difference between what we had in 1965 and what we may have in 1968. Mr. SCHULTZE. The difference between 1965 and 1968, plus the $4 billion. The CHAIRMAN. Which we may have in 1968? Mr. SCHULTZE. Correct. In turn, of that $29.7 billion, $3.8 billion would be exclusive of Vietnam. The remainder is for Vietnam-allo- cating the extra $4 billion to Vietnam-leaving us $14.3 billion for all other expenditures outside of the Defense Department and mili- tary assistance which, as I said, is included with the Defense Depart- ment. The CHAIRMAN. Incidentally, does that include the Atomic Energy Commission? Mr. SCHULTZE. It does not. I am doing AEC separately because you may wish it separately. The CHAIRMAN. All right. Mr. SCHtrLTZE. Turning now to the $14.3 billion, let me first go through some of the major items and then come down to individual programs. The CHAIRMAN. All right. Mr. SCHuLTZE. Of the $14.3 billioii, economic assistance to Vietnam accounts for $0.5 billion, and interest on the public debt for another $2.7 billion. The CHAIRMAN. $2.7 billion. Mr. SCHLTLTZE. Correct. Pay increases during the interevning years, except for those already included for the Department of Defense, account for $1.9 billion. Public assistance, including both cash and medicaid, increases by $1.4 billion-cash assistance is about $300 million of that and medical assistance is the remaining $1.1 billion. Then there is veterans' compensation and pensions, $500 million; payments to trust funds for medicare-this is for the supplementary medical insurance and for the uncovered who are paid for by general revenue-$1.1 billion. Now, combining interest, pay in civilian agencies, public assistance, veterans, payments to the medicare trust . fund, and economic assist- ance in Vietnam, the total increase for these items comes to $8.1 billion if I have done my addition correctly. Mr. CONABLE. How much is the economic assistance to Vietnam? Mr. ScI-ruiirzE. There is an addition of $500 million on account of economic aid to Vietnam. Apart from the $8.1 billion, then, there is $6.2 billion for all other programs and I will now break that down- The CHAIRMAN. All right. Mr. SCIWLTZE (continuing). In terms of its major components. First., the Department of Health, Education, and Welfare, exclusive of public assistance which I have already talked about, is up by $4.3 PAGENO="0084" 72 PRESIDENT'S 1967 TAX PROPOSALS billion. Let me give you some of the components of this $4.3 billion: Elementary and secondary education, $1.4 billion; higher education, $1 billion; other educational outlays-adult literacy and the like- $300 million; so the increase since 1965 in education is $2.7 billion out of the $4.3 billion. In health it is $1 billion. That brings us to a total of $3.7 billion for education and health and leaves other HEW programs at $600 million. That exhausts the $4.3 billion. The CHAIRMAN. What are these others, Mr. Schultze? Mr. SCHULTZE. Mr. Chairman, I would have to supply that for the record. The CHAIRMAN. Put it in the record at this point, if you will. Mr. SGHULTZE. Yes, sir. (The information referred to follows:) The major changes in expenditures between fiscal year 1965 and the current estimate for 1968 for the Department of Health, Education, and Welfare, other than those listed by Mr. Schultze above, are: Amounts (billions of dollars) Vocational Rehabilitation Administration (largely grants to the States)__ +0. 2 Grants for maternal and child welfare +0. 2 Payments to trust funds for military service credits +0. 1 All other (Food and Drug Administration, etc.) +0. 1 Total increase, 1965 to 1968 +0. 6 Mr. SCHULTZE. Next, outside of HEW, for the Office of Economic Opportunity there is a $1.6 billion increase in expenditures between fiscal 1965 to fiscal 1968. The CHAIRMAN. $1.8 billion? Mr. SCHULTZE. A $1.6 billion increase from fiscal 1965 to fiscal 1968 for the Office of Economic Opportunity. For Housing and Urban Development, the increases are essentially in three categories: First, there is $600 million for public housing, urban renewal, and community facilities combined. Another $600 million is the expenditure estimate for fiscal 1968 of the low cost hous- ing mortgage purchase program enacted last year by the Congress. This is $600 million for expenditures from the $1 billion of special funds which, you will recall, were made available for the Department of Housing and Urban Development. FNMA purchases of mortgages, primarily for low- to moderate-income housing, and outlays for college housing, are the primary elements of the remaining $1 billion. These three categories give us a total for HUD of $2.2 billion-gross of participation certificates, which I will come back to. The CHAIRMAN. The total of this is in excess of $6.2 billion. Mr. SCHULTZE. That is correct, because I have some reductions. The GHAIRMAN. I see. Mr. SOHnLTZE. I am giving you these figures gross of participat~on certificates and then I will come back and deduct the impact of par- ticipation certificates. Next, the Vcterans' Administration, apart from compensation and pensions, shows an increase between 1965 and 1968 of $700 million larg~ly for two major items, the GI bill of rights and medical care, covering expansion of hospital beds and upgrading of medical services in the veterans hospitals. PAGENO="0085" PRESIDENT'S 1967 TAX PROPOSALS 73 Next, all of our natural resource programs, which would include water resource investment, the Corps of Engineers and the Bureau of Reclamation, the Park Service-primarily for recreation, the Forest Service, and water pollution control, all of these natural resource programs together add up to about a $700-million increase over 1968. I can furnish a breakdown for the record. I don't have it handy. The CHAIRMAN. All right. We will ask you to do that, too. (The information referred to follows:) The major changes in expenditures between fiscal year 1965 and the current estimate for 168 for Natural Resources programs are as follows: Amounts (billions of dollars) Department of the Interior (land and water programs) : Bureau of Recla- ination; Bonneville, Southeastern and Southwestern Power associations; Office of Saline Water; Federal Water Pollution Control Administration and Bureau of Land Management +0.2 Corps of Engineers +0.2 Department of the Interior (recreation programs) : Bureau of Outdoor Recreation and National Park Service +0. 1 Department of Agriculture: Forest Service +0. 1 Tennessee Valley Authority +0. 1 All other (largely Department of the Interior) +0. 1 Total increase, 1965 to 1968 +0. 7 NoTE-Detail does not add to total due to rounding. Mr. SCHULTZE. Finally we have the Export-Import Bank, up $400 million and the space program, up $200 million. Now, from that I de- duct the following: an increase of $3.7 billion from 1965 to 1968 in the sale of financial assets, primarily, but not solely, participation cer- tificates. This assumes the full authorization and sale of the participa- tion certificates assumed in the January budget. Finally, all other agencies taken together come to minus $300 mil- lion. Now, that includes a number of increases and decreases, all or most of which are small, but they net out to a $300 million decrease. Now, within the figures I have given you, there are in individual programs a number of ups and downs. Clearly the ups outnumber the downs, but there are buried in all of these agency totals some decreases as well as the increases I have mentioned. I have netted them out in large amounts. The CHAIRMAN. how does the estimate for the Department of Agri- culture compare with 1965? Mr. SCHULTZE. I will talk in terms of expenditures, actually, since all these figures are expenditures. The CHAIRMAN. That is right. Mr. SHULTZE. Commodity Credit Corporation expenditures are re- duced between the 2 years by about $400 million and other agriculture programs are up- The CHAIRMAN. Does that result from sale of assets or from actual cuts in the rate of spending? Mr. SCHULTZE. Let me check. May I? The CHAIRMAN. Oh, certainly. Mr. SOHULTZE. Gross of asset sales, the Commodity Credit Corpora- tion is down $400 million and other programs are up $500 million. The CHAIRMAN. That is what I thought. Mr. SOHIJLTZE. Gross. of asset sales. PAGENO="0086" 74 PRESIDENT'S 1967 TAX PROPOSALS The CHAIRMAN. What can you say, Mr. Schultze, about reductions? Mr. SCH~TLTZE. Let me mention one I forgot, if I might. The Atomic Energy Commission is down $240 million. The CHAIRMAN. What can you say about reductions in existing pro- grams accompanying increases that the Congress has voted through establishing the new programs that you have enumerated? Mr. SCHIJLTZE. May I list about eight or nine items? The CHAIRMAN. All right. Mr. SCHLTLTZE. First, in the Department of Agriculture within the Commodity Credit Corporation, quite apart from changes in crop yields, there is a reduction in the transportation and storage costs of commodities, both because of a reduction in unit cost through ration- alization of the program and because of lower stocks, particularly with the voluntary ~rogra.ms we have had. This has reduced cx- pei~ditures by approximately $400 million over the period. Secondly, again in the case of the Department of Agriculture, ap- proximately $150 million was saved by converting the direct farm housing loan program to a guarantee program. Next, in the public facilities program of HTJD, because of the in- crease in new programs, that public facility loan program has been reduced from $73 million to $30 million. Again, because of additional funds available for metropolitan planning, the public works planning advances of the Department of Housing and Urban Development have been reduced from $20 million to $9 million. We have reduced, particularly during the period of Vietnam, the ship construction pro- gram in the maritime agency from 17 ships to 13 shops. The expendi- ture implications of that action are spread out over 3 or 4 years, but they amount to somewhere between $6 and $10 million per ship and we reduced the level from 17 to 13. Next, the Coast Guard, another case in point, has reduced its re- quirements by some $15 million because of changes in search and rescue operations. The Atomic Energy Commission, as I noted, has some increases but these are more than offset by decreases, so that the AEC is down in total by $240 million over the period. In addition, there were about eight other items that we proposed reductions on last year and we were not, successful in convincing the Congress to give them to us. I list in particularly the impacted school- aid program, amounting to some $2.00 million; the agricultural con- servation program, involving some $130 million; and a reduction for agricultural research stations of a small amount for construction. We also proposed reductions of $70-some million through user charges which come into the budget to finance meat inspection and other agri- culture programs, and some $70 million for the special milk program, some $30 million for the school lunch program, and some $11 million for the land-grant colleges. These we proposed. None of them did we get, but they are in addi- tion to the items I have mentioned. And, finally, these figures do not include explicitly the cost reduction efforts in the Department of Defense, nor in the civilian agencies, which essentially simply reduce budgetary requirements as you go along through the years. What I am saying is that all of the figures are basically netted out. Expenditures would have been a good bit higher had it not been- PAGENO="0087" PRESIDENT'S 1967 TAX PROPOSALS 75 both in defense and civilian agencies-for specific cost reduction efforts, improving productivity, and the like, which are simply buried in all the figures as we have gone through the last 3 years. There are a number of examples. In terms of moving toward com- petitive as opposed to negotiated contracts, both in NASA and DOD, hundreds of millions of dollars of savings are involved in that. To give another example, the Social Security Administration, states that use of an automated system for computing adjustments in benefits un- der social security has reduced expenditure requirements by some $20 million. Savings like these are scattered all the way through the budget, but they are not identified separately since they are built into the budget. The CHAIRMAN. You have gotten over into the trust funds there; have you not? Mr. SOHULTZE. That is correct; yes, sir. The CHAIRMAN. There have been a number of increases, of course, in the payments from the trust funds. Mr. SOHULTZE. Would you like those, Mr. Chairman? The CHAIRMAN. I want to talk about those, but we do have a quorum call. Could you gentlemen be back here at 2 o'clock? Secretary FOWLER. Yes, sir; Mr. Chairman. The CHAIRMAN. Without objection then we will recess until 2 o'clock. (Whereupon, at 12 :52 p.m., the committee recessed to reconvene at 2 p.m., the same day.) AFTER REGESS The committee reconvened at 2 p.m., I-Ton. Wilbur D. Mills (chair- man of the committee) presiding. The CHAIRMAN. The committee will please be in order. Mr. Schultze, while Mr. Ackley is getting to the table, pick up where you were before and tell us about the increases in the trust funds as well, which also are supported by taxation. Mr. SOHULTZE. Yes, sir. Let me start with two global numbers, and then break them down. From fiscal 1965 through fiscal 1968, on the basis of current estimates, trust fund receipts have increased by $17.5 billion and trust fund expenditures by $16.3 billion. Let me give, then, the major components of the $16.3 billion. First OASI-old-age and survivors insurance-has an increase of $6.5 billion. Let me explain the basis for that. For purposes of making the estimate, this includes the administration's social security bill, but with a January 1, 1968, effective date, rather than the July 1, 1967, date originally projected. For disability insurance, the increase is $900 million. The hospital insurance trust fund which did not exist in 1965, has estimated ex- penditures of $3.7 billion in 1968. Expenditures for supplementary medical insurance trust fund, which of course, also did not exist in 1965, are estimated at $1.6 billion in 1968. The unemployment trust fund shows a decline of $500 million, since unemployment is, of course, lower than it was in fiscal 1965. Railroad retirement is up $255 million, and I think rather than read all the rest of them, I will give just the remaining major items. The CHAIRMAN All right Mr. SCHULTZE. Federal Employees Retirement Fund, $650 million; secondary market opei ations of the FNMA Trust Fund, $744 million, PAGENO="0088" 76 PRESIDENT'S 1967 TAX PROPOSALS the Highway Trust Fund, $90 million. Then with all the rest the total adds up to $16.3 billion. The CHAIRMAN. All right. Let me direct your attention now a little beyond 1968, if I may. On the basis of the breakdown which you gave us, Mr. Schultze, with respect to the items of increase and the total of our spending in 1968, would you say with the Vietnam war still going on it would be safe to assume that our rate of spending in the fiscal year 1969 would not be less than it is in 1968? Mr. SGHULTZE. That is right. It would be safe to assume that. The CHAIRMAN. Yes. If we have no tax bill, we are not, therefore, faced with the temporary situation insofar as our deficit is concerned. If we have a deficit of some 25 to 29 billion this year, and still have no tax bill in fiscal 1969, we might have as much deficit then, or more? Mr. SOHULTZE. You could very easily; yes, sir, that is right. I obviously don't want to be in a position to try to forecast 1969 expenditures now, but clearly, you are correct in terms of the general magnitude. The CHAIRMAN. There are some built-in increases in all of these programs. Mr. SCHTJLTZE. That is right. The CHAIRMAN. And if the Vietnam situation continues, it might result in us having a deficit without a tax bill of an even greater amount than we anticpat.e now for fiscal 1968. Mr. SOHULTZE. Well, I would say that there are two things you have to take into account. There is the normal growth of revenues, on the one hand and there are the built-in increases in expenditures, including ~hat might be necessary in Vietnam, on the other. I see no reason to think that, without a tax bill, there would be any :najor reason to reduce that estimate. The CHAIRMAN. What disturbs me so much is this-that if we are :~ot very careful, these built-in increases, these things that go with the ~rogram as it proceeds from year to year, may well increase by an amount equal to or greater than the amount that we get from the increase in the base of the tax, the tax revenue. Now we have not allowed that to happen, and I am sure you will point that out. But with the Vietnam situation on our hands, nobody can predict what that may lead to. Certainly, we know there are some built-in increase in our domestic programs. Mr. SCHIJLTZE. That is right. But I would not want to leave the 1111- pression that the built-in increase in domestic programs is equal to the iiorrnal rate of growth in revenues from an increasing tax base. Never- theless, it is there and would take up a part of it. The CHAIRMAN. That is right and if the Vietnam situation costs more, why the combination of the two could take itidl up. Mr. SCHULTZE. That is right. The CHAIRMAN. And we still end up with a i~ry sizable deficit. Mr. SCHULTZE. Yes, sir. The CHAIRMAN. Now I have had considerablereservation about this proposition as all three of you know from our coin~ersations. In the light of all the demands that are being made by people for additional Federal services-problems . within- our cities, this drive presently underway for Federal sharing, of `revenue, and things of that kind-I don't think we should hold out to. the American people that our condition is such at this time that a tax increase can be temporary. PAGENO="0089" PRESIDENT'S 1967 TAX PROPOSALS 77 Mr. SCHULTZE. Might I comment? The CHAIRMAN. Oh, I want you to. Mr. SCHULTZE. It seems to me that in the context of Vietnam being temporary-and I obviously am not in a position to put a period of time on the word "temporary"-but it seems to me, Mr. Chairman, that in that sense, this tax increase is temporary. You would recall in the figures that I cited this morning, the increase in defense expendi- tures including the $4 billion, if I remember the figures correctly, was something like $29 billion over the past 4 years-3 years, excuse me-of which Vietnam acounted for all but about $3 to $4 billion. If you look at the tax increases that we are asking for over and against that increase, you will notice that the tax increases are sub- ~tant.ially less than the size of the Vietnam expenditures. This is neither, at this point, to justify or not justify the tax in- creases, but to provide some idea of the magnitudes involved. Con- cersely, therefore, when Vietnam, as ultimately it will, does conclude, there will be substantial expenditure reductions which can be applied against removing the temporary tax increase. It is not as if, in other words, we were asking for a tax increase equal to Vietnam. If we had asked over the period for a tax increase equal to the size of Vietnam spending, when Vietnam ended, we would then have no room, in a sense, to allow for any other expenditures to grow. But., rather, the size of this temporary tax increase is substantially less than the magnitude of the Vietnam costs that we are facing, so I don't think I would want to draw as pessimistic a conclusion as you do about the temporary nature of the tax increase. Again, remembering also, I am not trying to predict ai~y kind of t.iming on Vietnam. I obviously can't do that. The CHAIRMAN. Maybe it is because we sit in different positions- Mr. SCHuLTzE. It may be, sir. The CHAIRMAN. -that I would be a little bit more pessimistic about the temporary nature of the proposed surcharge than you, but I remember that we had some tax increases in connection with the Korean war. I remember, too, how long it was before we got. rid of them, and that was not your fault. You were not the Director of the Bureau of the Budget then, and I am not. by any means criticizing you. I am just stating a fact. Mr. SCHULTZE. No, sir; but again, if I might, I would like to make two points with respect to that. You will recall that in fiscal 1954 there were significant tax decreases as Korean expenditures were reduced. The CHAIRMAN. Oh, yes. We did reduce some of them. We did not take off all the excises, however. Mr. SCHITLTZE. And as I said, what we have here is an increment of $25 to $30 billion on account of Vietnam, and taking all of these tax proposals together, amounting to $7.4 billion, it seems to me, putting these two in context, that when Vietnam is over, and those kind of expenditures are over, even allowing for some rebuilding of defense inventories, there would be substantial room, so that this tax increase clearly could be labeled "temporary," in the context of Vietnam being temporary. Secretary FOWLER. Mr. Chairman, I would just like to add one com- ment to that. I think the force of what the Director has said is supple- mented by the form that this particular tax increase takes. PAGENO="0090" 78 PRESIDENT'S 1967 TAX PROPOSALS I would agree that there are always risks involved with taxes being carried on. But one of the very purposes of the fiscal subcommittee, of the Joint Economic Committee, was to arrive, at a form of a tax which would be clearly directed for temporary purposes, and it is the form suggested by that committee which we are now proposing. The refer- ences that the President has made in both his state of the Union mes- sage and in t.he current message, indicate that, bot.h in substance, in the figures Mr. Schultze has described, and in the form of the tax it- self, that there is less danger of its be.ing continue.d as a permanent feature of our system. The CHAIRMAN. I am not arguing with you about what your inten- tion is. I know that is your intention, Mr. Secretary, but I was stating that when we increased some of the taxes for the Korean war, we kept them on, and I remember very well having made the argument, time after time, a.s a member of the committee and later as chairman of the committee, that we could not allow these to expire because our deficit situation was such that we needed the revenues. I can't avoid the feeling as I look to the future, even with peace in Vietnam, that we may well find ourselves not developing revenues as fast in the future under our present system as requests will be made for additional services from Washington. That was our problem immediately following the Korean war, as I remember the figures. But anyway, perhaps that is too philosophical, and perhaps what we are saying today will be wrong as we look back on it later. Mr. SCHULTZE. May I make one other point, I think, to put that in perspective, and I am sorry I don't have the exact numbers to give you on this, but there is a difference between the buildup of military expenditures this time and for Korea. If my memory serves me, prior to Korea, we had defense expendi- tures on the order of, I think; about $13 to $15 billion a year, and the increase for Korea was not just to fight in Korea, but because of what it taught us about what we had to do with our defense posture. As a consequence of that we built up in the war period and ever since, a substantially higher defense budget, so that the amount. that. you could come down after Korea, it seems to me, looked at in general terms, was significantly less than would be available if we came down the whole $25 to $30 billion now, because we have a much bigger defense base in a sense. So one of the reasons, I suspect. for the continuation of some of the Korean taxes for a long period of time., would not really be relevant., I think, for the period after Vietnam, where you are facing quite a different situation. The CHAIRMAN. Mr. Ackley, let me turn to you and direct a~ few questions, if I may. My concern, as I talk to you, is about the long range implications of what we are asked to do. There is no question if one looks merely at a fiscal year that one would say that a deficit of the size that you and others at the table have stated is not in the best. interests of our economy now. What economic effect, in the long run, do you envision as a result of the action that is suggested today? How much do we reduce the ability of the private sector to go for- ward? How is that translated on down the road into gross national PAGENO="0091" PRESIDENT'S 1967 TAX PROPOSALS product and profits, expansion, utilization of equipment, and employ- ment? Mr. ACKLEY. Mr. Chairman, I gather you are directing your ques- tion not to the immediate situation, but to the longer run situation. The CHAIRMAN. That is right. Mr. ACKLEY. And it seems to me that the principal impact of the program that the President suggested, on both the side of taxes and expenditures, must then be evaluated in terms of its impact on the basic growth rate of the American economy. Mr. Chairman, I do not see this program as having a serious and lasting impact on the growth rate of the American economy. The tax increase that is requested is one which does not restore tax rates, on the average, close to the levels which prevailed prior to 1963, and the increases are temporary in character. At the end of my statement, Mr. Chairman, I indicated my own confidence in the growth potential of the American economy, and in the possibility that we can. count on a renewal of the trend toward lower tax rates. The impact of this tax increase on our long term growth rate would be found, I suppose, first in its possible impact on the level of invest- ment expenditures. We have had, of course, a very high level of in- vestment expenditures, a rapidly increasing level, for the past 3 years, and we don't anticipate that investment expenditures would under any circumstances expand substantially further in the next year or two. `We have some catching up to do with the growth of our capital stock which has been put in place, that is currently being put in place. So I don't see that the action that is proposed has a significant impact on our basic ability to produce, in the short run or in the long rim, Mr. Chairman. We have an expanding labor force, a rapidly expanding one. We have initiated in recent years important programs to improve the qual- ity of our labor force. through expanded programs of training, health and basic education. Even though the further expansion of those pro- grams may have to be curtailed, because of the current fiscal emer- gency, t.heir existing levels are such that they will continue to con- tribute importantly to the increasing productivity of our labor force. and to our ability to produce in the years ahead. The CHAIRMAN. Mr. Ackley, let me ask you, too, for the moment, just to forget the budgetary situation, and look to the present economic situation. Not what you expect will happen, but what our present sit- uation is. If that were to not change, if it were not to improve, would it then still be wise to have a tax bill? * Mr. A0KLEY. I find that a difficult question to answer because I am so convinced that we have already evidence of the factors which will, which have begun to, lead to a greatly improved and strengthened economic situation. The CHAIRMAN. I want to discuss those factors with you as we go on here but I sometimes wonder if we do not impose upon you and others when we expect you to tell us what is going to happen. Let us try to divorce from our discussions momentarily what we think will happen 3 months, 6 months from now, and look to see what we know the situation is today-face up to these known facts, and then decide whether or not it would be best on the basis of what is known to have a PAGENO="0092" 80 PRESIDENT'S 1967 TAX PROPOSALS tax increase or not have it. Then we could, of course, argue among ourselves and make our judgments about what will happen as we look to the future. On the basis of the existing situation, however, is it so exuberant, so buoyant now that we could with a great deal of con- fidence expect to do no harm to the economy if the situation remained for a period of some 6 to 12 months as it is today? Mr. ACKLEY. It seems to me the facts of today include all those fac- tors which will inevitably create `a rising level of output and incomes in the year ahead. I certainly agree with you that the task of trying to forecast eco- riomic conditions for a period ahead is a difficult and dangerous one, and one which none of us has fully perfected. I submit, however, Mr. Chairman, that it is impossible in any case to have an intelligent economic and fiscal policy without some kind of a forecast. If we had the conditions of a boom today, which would appear to make a tax increase appropriate, we still would have to be acting with at least the implicit assumption that those boom conditions would be continuing and one can never be confident that boom conditions will automatically continue by themselves. They have disappeared in the past. Thus a forecast is always necessary in evaluating a fiscal pro- gram. It seems to me the key known fact about the present and recent eco- nomic situation is the one I stressed in my testimony this morning: namely, that the level of demand by final users-consumers, govern- ments, business for plant and equipment, and home buyers-has been advancing rapidly in each of the past two quarters, by $15 billion, and that all of the evidence we have suggests the continuation of that kind of an `advance. So that it would be a dangerous step to raise taxes today only if one had some reason to suppose `that the inventory adjustment which has so greatly held down the advance of production in the first half year, would continue. Now that is the forecast which it seems to me is the speculative forecast. It is one that I would find it very hard to support. I think, in other words, that the facts of today include all of the forces that have been and are operating in `the economy, and that those factors of today do support the view that the economy will be `able to take the tax in- crease without danger to its health. Secretary FOWLEII. Mr. Chairman, could I add one word to that? Turning from the general economic picture to the `strictly financial picture, the picture in the financial markets, one can say, without too much fear of contradiction from those familiar with those markets, that those markets will tend a lot more to stability and to the kind of a balanced picture that we all want if we raised more of the money out of current revenues than if we borrowed the total in the market. So looked at from the specialized, but highly important, aspect of the situation in the financial markets, even though the economic factors that you and the chairman have been discussing might not be decisive one way or another, from where I sit, it is preferable, greatly prefer- able, to meet a substantial part of this borrowing demand out of in- creased taxes rather than to borrow the en'tire amount. PAGENO="0093" PRESIDENT'S 1967 TAX PROPOSALS 81 The CHAIRMAN. Mr. Ackley, let me get back to the details, if I may, of the factors that determine where we go and to what extent. Let's look at the plant and equipment expenditures first, and check and see if my figures are right. In 1965 to 1966 these expenditures increased from about $52 billion to $60.6 billion. That was an increase of about 16½ percent. I remember last fall a survey that indicated in 1966 they might increase by at this point as much as 17 percent, but it actually turned out, I think, to be about 161,4. I understand that based upon anticipation surveys plant and equip- ment expenditure figures for 1967 is estimated at $62.4 billion. Mr. ACKLEY. That is right. The CHAIRMAN. Now that would be an increase of 67 over 1966 of 2.9 percent. Mr. ACKLEY. Roughly 3 percent. The CHAIRMAN. Yes. The percentage increase the next quarter over the corresponding quarter last year appears to be decreasing, 6.3 per- cent in the first quarter to 1.3 percent in the fourth quarter. Is that about right? Mr. ACKLEY. It looks about right, Mr. Chairman. The CHAIRMAN. All right; does this substantial drop in percentage increase of plant and equipment expenditures suggest any concern as to inflationary pressures from this sector of the economy? Mr. ACKLEY. No, sir;. I don't think it does. I think we are happy that the plant and equipment boom which went so far and so fast in the past 2 years has come to an end. Indeed, that was the objective of the measures which the President proposed and Congress supported last fall. As I reviewed this morning, our expecta- tion is for essentially a plateau in plant and equipment expenditures in the next half year, and only moderate advance thereafter. This is an expectation with which we should take satisfaction rather than other- wise. The CHAIRMAN. If we do the combination of things which are sug- gested in this tax proposal, insofar as the effect on profits and moneys retained after taxes are concerned, are we likely now to turn this small percentage increase in the fourth quarter into a negative figure, bear- ing in mind that the tax is to go into effect as of the 1st of July of this year? Mr. ACKLEY. Mr. Chairman, the plant and equipment survey to which you referred anticipates an increase in the level of expenditures on plant and equipment between the second and fourth quarters of $2 billion. Our own view is that we should be more conservative than that, and in the analysis I gave you this morning suggested that we were not counting on that much of an increase. If it did not occur, the gain from 1966 to 1967 would be somewhat less than the 3 percent which is now predicted. Your question was whether the enactment of the tax increase would further reduce the growth of plant and equipment expenditures. The CHAIRMAN. In the fourth quarter? Mr. ACKLEY. In the fourth quarter. The CHAIRMAN. It was in the fourth quarter that I noticed the rate of growth of about 1 3/10 percent. PAGENO="0094" 82 PRESIDENT'S 1967 TAX PROPOSALS Mr. AOKLEY. My answer to that, Mr. Chairman, would be that undoubtedly this would be one of the large number of factors that might have some impact on investment spending. I would point out, however, that the President proposed in January a 6-percent surcharge on corporate profit, effective at midyear. So the only new piece of information is the proposed 10 percent rather than the 6 percent. It was with this recommendation already on the books that manufactur- ers, and other businessmen, when surveyed last May, reported the investment plans which we have been discussing. I would point out also that the string of advances in new orders for machinery and equipment, shown in the chart; which I referred to this morning, indicate that the advance in new orders for machinery and equipment has continued, along with the heating up of the dis- cussion of the tax increase. And I would point out that in June, the Dodge Index of Construction Contracts again shows very strong in- tentions by businessmen to build new plant. With the background of the proposed tax program, with the back- ground of lower operating rates, reduced industrial production, and so on, that we have had in the early part of this year, I think the record reflects the confidence by businessmen-demonstrated in a number of other ways, too-that indeed the economy is strong, and will remain strong, and that the tax increase, when enacted, will not throw it into a recession which would make new capital expenditures redundant. The CITAIRMAN. Let me turn next to the index of industrial pro- duction. I believe it stood at 159 last December. 1 believe it was 158.1 in January of this year. Mr. ACKLEY. Right. The CHAIRMAN. 156.4 in February, 155.5 in May, 155.2 in June. Now this had been declining. Will you have any expectations that this will show a sharp increase soon, and if you do, how much? Mr. ACKLEY. Mr. Chairman, the decline in the index of industrial production is the best reflection of the drag of the inventory adjust- ment on our economy. The inventory adjustment is concentrated in manufacturing-in the goods area of our economy. You can't build up inventories of services, and the drag of the inventory adjustment is clearly visible in what has happened to manufacturing production. Even with that inventory adjustment, the decline in the industrial production index has been fairly modest. It seems to me that all the evidence suggests the fact that the inventory adjustment is substan- tially completed. Moreover, the evidence we already have on employ- ment and hours, and production of specific products, also strongly suggests to me that the July index of industrial production will show an appreciable upturn. The CHAIRMAN. What do you think it will be? Mr. ACKLEY. I would not want to predict, Mr. Chairman, but I could easily guess on the basis of what we have seen happening to total man-hours, and to production of specific commodities, that it could be up half a point, or even a point. The CHAIRMAN. It would not be then even back to what it was last December? Mr. ACKLEY. Oh, no. PAGENO="0095" PRESIDENT'S 1967 TAX PROPOSALS 83 The ChAIRMAN. When do you anticipate that we will get back to the 159 of last December? Mr. ACKLEY. We are getting down into a degree of detail into which I would prefer not to get. But I would certainly think that, by the end of the year, the industrial production index would be above the level of the end of last year. The CHAIRMAN. In other words, we can be certain now that we can enact this tax increase without further depressing this production index? Mr. ACKLEY. As you yourself have suggested, Mr. Chairman, we can never be certain. But it is surely the overwhelming probability, based on all the evidence that we have. The CHAIRMAN. A closely related item is the utilization of plant capacity. in manufacturing industries. It is my understanding that the percentage of capacity utilization was close to 90 percent, in all of the quarters last year. Is that about right? Mr. ACKLEY. Yes, Mr. Chairman. It reached a peak in the second quarter of almost 91 percent. The CHAIRMAN. Yes. Now this year, however, I understand the plant capacity utilization was 87 percent in the first quarter, and 84.7 percent in the, second quarter. Does this unused capacity suggest fur- ther room for utilization without fear of inflationary pressures? Mr. ACKLEY. Yes; I think it does, Mr. Chairman. There is room for an increase in the rate of utilization of plant capacity without putting excessive pressures on our plant and equipment resources. I think we do have to recall that this index is a manufacturing in- dex, and therefore, subject to the same limitations as were relevant to the index of manufacturing production. This is where the inventory adjustment has occurred-in manu- facturing industries. For our whole economy, while the industrial production index declined about 2 percent from the fourth quarter of last year to the second quarter of this year, total production of all kinds, in constant prices, actually grew. Not much, but by about a half percent. And in fields other than manufacturing, output has been growing substantially. We don't have any index of utilization of capacity in these other areas, but it must have been holding up very well. The CHAIRMAN. You don't have a fear, then, that the tax increase might further decrease plant utilization? Mr. ACKLEY. The kind of economic outlook that I was describin this morning, even with the tax increase, would be consistent instea with some rise in the utilization rate in manufacturing. Just as manufacturing has suffered the brunt of the inventory adjustment, so will it benefit most from the recovery. With the recent trend of new orders for manufacturing production going up each month of the past five, and already almost back to its ailtime peak of last September, with manufacturing shipment rising in the last 2 months, it seems to me that the outlook is for a moderate and gradual pickup in the operatmg rate. I would not preclude the possibility of some further immediate decline in the rate of utilization in manufac- turing. But certainly for the longer pull, an upturn is coming. PAGENO="0096" 84 PRESIDENT'S 1967 TAX PROPOSALS However, we certainly do not expect nor would we want the operat- ing rate to get back to the almost 91 percent level of the second quarter of last year. This is too high an operating rate-an operating rate at which our resources were under pressure, and with which we had sharply rising prices. But I would expect that a year from now the operating rate will be higher than it is today, and at a level consistent with a healthy balance between demand and production. The CHAIRMAN. Let me shift now to another area, new construction. I know that this is an area where we have all been speaking in terms of improvements. Let me ask you, however, if these higher levels are not more or less directly connected with Government construction and expenditures? Mr. ACKLEY. I don't think so, Mr. Chairman. Public construction as I recall the number, has been essentially on a plateau all of this year, so far, and the substantial recovery in construction has been basically in private construction. First of all, residential construction. As my chart 3 this morning in- dicated, it has been recovering steadily at a rather promising rate dur- ing the first half of the year. Industrial and commercial construction did decline into the first half of this year, but that decline has been stopped, and industrial and commercial construction is now stable or rising. The CHAIRMAN. I have some figures that commercial, industrial, and other construction in June of this year was down about $2 billion below the figure for June of 1966, $24.2, compared to $26.6. Mr. ACKLEY. Commercial, industrial construction, Mr. Chairman, as I have it here, at seasonally adjusted annual rates, June of last year was $13.7 billion, and in June of this year, $12.8 billion. The CHAIRMAN. You don't have a table before you then that has commercial, industrial, and other construction? Mr. ACKLEY. And other? The CHAIRMAN. Yes. Mr. ACKLEY. I have a column for "other," which we can add to- gether. The CHAIRMAN. Please add them together. Mr. AOKLEY. The "all other" was $12.9 billion in June of 1966, and $12.9 billion in June of 1967. The CHAIRMAN. What I am getting at then is this-we had a level this year in April, did we not, of 25.7, for the total? Mr. ACKLEY. Yes, that is the figure both for May and for June. The CHAIRMAN. Why is this slippage between April and May? I mean, between April and June? Mr. ACKLEY. Actually, Mr. Chairman, total private nonresidential construction was up slightly from April to June-from $24.9 billion to $25.7 billion. The CHAIRMAN. That is right. Mr. ACKLEY. Industrial and commercial construction reached a peak of $15.1 billion annual rate in January, an alltime peak, dropped to $12.5 billion in April, and since then, seems to have again been moving up, which I think would be expected to continue. Restoration of ac- celerated depreciation could be an important factor in this area. The CHAIRMAN. All right, now we did have some problem then of slippage in commercial and industrial. When we look on the other hand PAGENO="0097" PRESIDENT'S 1967 TAX PROPOSALS 85 at Federal, State, and local construction, you note that in June of 1967, the figure is 26.3 billion, and in June of 1966, it is 23.1. So what I am. getting at is this. That most of the increase, as I viewed the statistics, is in the area of Federal, State, and local construction, and we don't see the improvement in the commercial and industrial areas. Mr. ACKLEY. I am not sure I caught your numbers, Mr. Chairman. The ones I have for Federal, State, and local for last June of $23.1 billion for Federal, State, and local. The CHAIRMAN. That is what I said. Mr. ACKLEY. It rose to a peak of $27 billion in February of this year, and then declined to $26.4 billion. It has been essentially on a plateau for the first half of this year. The CHAIRMAN. 26.4, is that about right? Mr. ACKLEY. I believe the revised figure for June is $26.4 billion. The CHAIRMAN. Now is there any indication, however, that we need fear inflationary pressures in the area of private construction? Mr. ACKLEY. Mr. Chairman, unfortunately this is one of the most inflationary segments of our economy. For a combination of reasons, as you know. The CHAIRMAN. It looks to me like it is, when you look at Federal, State, and local construction, but when you get out of that part; of con- struction- Mr. ACKLEY. I was speaking in terms of inflationary pressures as they are reflected in the cost of construction, which has indeed been rising rapidly due to a combination of factors. I hope there is no great inflationary pressure in the outlook for the construction industry. We do expect a very healthy continuing re- covery in residential construction, if we avoid cutting off the funds by renewed tight money crunch, which indeed, as the Secretary sug- gested this morning, could very effectively cut off the recovery of housing construction. With the improved level' of residential construction' that we expect and I think we have every reason to count on, we still should be able to maintain reasonably healthy conditionsin the construction industry. The CHAIRMAN. Now let us turn, Mr. Ackley, to business inven- tories. The net accumulation, as I understand it, reached its peak in the fourth quarter of 1966. At that time, we had' a net accumulation of $18.5 billion on annual basis. The first two quarters of this year, while accumulations continued, the accumulations were at lower rates, being $7.1 billion in the first quarter, $2.1 billion in the second quarter. And I understand that for the month of July, maybe it was about a zero rate of accumulation in inventories. Mr. ACKLEY. Mr. Chairman, the figure- The CHAIRMAN. June, I am sorry. Mr. ACKLEY. The figure for the second quarter has been revised downward from $2.1 to $0.5 billion. That is part of the revision that was announced this morning. In other words, in the second quarter, inventory accumulation was very close to zero. Included in that revision are the new data for June, which show a net decumulation of almost half a billion dollars. 83-349-67--pt. 1-7 PAGENO="0098" 86 PRESIDENT'S 1967 TAX PROPOSALS The CHAIRMAN. Now that being the case, what does this substantial decrease in inventory accumulation suggest that business is thinking? Does it mean that business is not yet anticipating inflationary price rises in inventory stocks? Why would business allow this situation of decumulation to almost liquidation in the field of inventory to happen, if the business community was convinced that it was faced with an in- flationary price spiral? Or is there an explanation? Mr. ACKLEY. Mr. Chairman, I think the explanation lies as I tried to suggest this morning, in the fact that in the latter months of last year, as you yourself pointed out, accumulation was very excessive. Businesses have been adjusting to this excessive accumulation of last year by reducing their rate of production relative to their irate of sales, and engaging in very little further accumulation, particularly in the second quarter. 1 don't think business is-I hope business is not expecting an acutely inflationary situation, which will make them scramble for goods. I do expect that with the continued uptrend in final sales, business will grow into its inventories, which in manufacturing are still some- what excessive. As my second chart this morning suggested, if the rate of increase of final sales merely continues in the second half at the same rate as. in the first half, and no further accumulation occurs, to say nothing of no decumulation, the ratio between stocks and final sales would be restored to normal by the end of the year. The CHAIRMAN. What effect does a tax increase have, in your oph~ ion, on this present pattern? If we enact a tax increase, would it have the effect of again causing business to accumulate, or would it have the effect of causing business to liquidate? Do we know? Mr. ACKLEY. I don't think the tax increase by itself, Mr. Chair- man, is a decisive factor at all. I think the actua.l adva.nce in the econ- ómy and the expe~ted future advance, along with the existing inven- tory situation, are the important factors that will determine whether business accumulates inventories or merely leaves them where they are for awhile. The prospective continuing advance in final sales suggest that busi- ness will be wishing, before long, to resume inventory accumulation. Sales will have grown in relationship to the existing stock, and they will thin be in a position to want to rebuild inventories. The CHAIRMAN. Will you pardon us? I understand that this is a vote rather than a quorum call, and if we may suspend for about 10 or 15 minutes, we shall be back. (Whereupon, a brief recess was taken.) The CHAIRMAN. The committee will please be in order. Let there be order in the room, please. Mr. Ackley, this past Saturday's business and financial section of the New York Times carries a piece stating that total manufacturing and trade inventories declined in June, as you pointed out, the first month they declined in something like 6 years. The total drop was, according to this, $468 million seasonally ad- justed, divided almost equally among manufacturing, wholesale, and retail. PAGENO="0099" PRESIDENT'S 1967 TAX PROPOSALS 87 Now, to me, this indicates `a continuation of the negative side of the trend I referred to earlier. To you, is it negative or positive? How do you view this? Mr. ACKLEY. For the past period, when it was occurring, the drop in rate of inventory accumulation was obviously negative in its im- pact. It was a drag on production. It reduced current output and employment and income. But for the future, it seems to me that this rapid drop is indeed the most healthy aspect of the whole situation. The fact that the inventory adjustment has gone so rapidly and so smoothly means that we have eliminated a very large part of the prob- lem of the excess inventories that accumulated last year. We have set the stage for the kind of recovery we want. Th CHAIRMAN. Which reaJly were excessive to not only normal cir- cumstances, but our own best economic results. Mr. ACKLEY. Yes indeed. The CHAIRMAN. Those enormous accumulations of last year? Mr. ACKLEY. Yes, sir. The CHAIRMAN. The sales this year have been relatively low, and it might well be that there still is a substantial excess of inventory to work off. Do we know about that? Whether or not there still is the need to work off additional excess inventories? Sales in some areas have been lower. Mr. ACKLEY. Yes, Mr. Chairman, sales have been themselves de- pressed by the inventory adjustment. If we take the ratios of inven- tories to current sales for wholesalers and retailers, they are now back to essentially a normal level. For manufacturers, the ratio of inven- tories to sales is still high, although it has been declining for the last couple months. That ratio, which is really the crucial point, is affected both by the change in stock and by the change in sales. The `CHAIRMAN. Well, this article states that there might be some further liquidation of inventories during the remainder of the year. `Mr. ACKLEY. I suggested in my testimony, Mr. Chairman, that it, would certainly not be impossible that we might have another couple of months of inventory liquidation. But I certainly do not expect liquidation through the rest of this year. Indeed, we should be having accmnulation again by the end of the year. The CHAIRMAN. And the imposition of the additional tax, you say, would have no effect. Mr. ACKLEY. Only as it has an effect on the general economh~ environment. The `CHAIRMAN. Now, let's go to retail sales. Here you point to re- tail sales as an area of the economy showing `improvement; do' you not? Mr. ACHLEY. I am sorry? The `CHAIRMAN. I say you point to the rise in retail sales now as an area of improvement in our economy; do you not? Mr. Aciw~v. Yes, indeed. The last 5 months have shown very strik- ing improvement in retail sales. The CHAIRMAN. May was over May of 1966, June was over June of 1966, and so on. I have not seen anything on July, yet. Do you have figures on July? PAGENO="0100" 88 PRESIDENT'S 1967 TAX PROPOSALS Mr. ACKLEY. Yes, sir; the preliminary figures for July were re- leased, I believe, last Thursday; they showed an increase, a prelim- inary figure, of 1 percent over the very large increase which had been shown in June. Over the past 5 months retail sales are up 5 percent. The CHAIRMAN. Let me ask you about that, though, in some detail. In May of 1967 our sales were over May of last year by 5.8 percent. Then in June of this year, they were only 4.3 percent over June of 1966. Now you say July sales in 1967 are over July of 1966 by what percent? Mr. ACKLEY. Over July of 1966 by 5.4 percent. The CHAIRMAN. By 5.4 percent. Back more nearly to what they were for May over May. Mr. ACKLEY. I don't have the year over year comparisons for each month before me, Mr. Chairman. The CHAIRMAN. What I am getting at there was this decline in the percentage increase in June, over June of 1966, compared to the per- centage increase in May of 1967 over 1966. And I just wondered if that is the situation, wherein we find any buildup of inflationary pres- sures on the basis. of no greater percentage increase than we seem to be having in sales? A whole lot of that difference between 1967 and 1966 is reflected, is it not, in price changes, not in units? Mr. ACKLEY. If we look at retail sales in July, which were up 5.4 percent over July a year ago, we must recall that 5 percent of that gain was j~ist within the past 5 months. However, I agree. we have to recog- nize that retail sales adjusted for price change would be up by less than that. Now, in making, that adjustment.we have to remember that we can't use. the Consumer Price Index, which includes services, because serv- ice prices have riseumore rapidly than goods. The rise in July of prices, of goods sold iii retail stores was about 2 percent. overall above a year ago. So that roughly 31/2 percent of the increase over a year ago in. retail salesis real, and perhaps. 2: percent of it would be price increase.. I may add, that if one examines the composition of. the change in retail sales over the past year, it strengthens the view that we have seen a strong performance in the last few months. For most categories of retail sales, the increases over a year ago are quite striking,, and they.. are particularly striking in the `areas. which might be thought to reflect consumer confidence. Take for example, durable goods-furniture, `appliances,, automo- biles. Compared with a year ago, automotive sales in July were up almost 10 percent, the sales of retail automotive group. Furniture and appliances, almost 7 percent. The small gains; on the other hand, are in such things as food. Food store sales in July were.only 1.7 per- cent above a year earlier. There are clearly some special factors there that I `am not sure I understand. But certainly where consumer confidence might seem to be at stake, as reflected in these figures, certainly gives evidence of strong consumer buying patterns. In considering the performance of retail `sales, I think we have to recall that the consumer saving rate so far this year hasbeen abnor- mally high, although it has begun to drift down. `Certainly we `a.re not PAGENO="0101" PRESIDENT'S 1967 TAX PROPOSALS 89 likely to face a further increase in the saving rate. Bather, one would expect that the saving rate `would return to its normal level, which is rather consistently lower than currently. The CHAIRMAN. It `has gone-it is going on a level of better than 7 percent all of this year, as a percent of personal income. Mr. ACKLEY. The saving rate in the first quarter was 7.3 percent. With the revisions which `were made this morning, the second quarter was 6.7 percent. The CHAIRMAN. But ordinarily, it is less than 6 percent; is it not? Mr. ACKLEY. I would think for the last 3 years, it has averaged just `below 6 percent. The CHAIRMAN. Just below 6. Now let us go to the unemployment rate. In the forepart of 1966, we were at about 3.9. During the latter part the rate increased gradually until we got down to about three and a half, did we not? Mr. ACKLEY. It dipped to three and a half in November, although that was sort of a freak. The CHAIRMAN. Maybe so, but we did actually get down to a very low rate in November. Mr. ACKLEY. Yes, sir. The CHAIRMAN. Now from that time until June of this year, the unemployment rate has gradually gone up, has it not? Mr. ACKLEY. It was 3.7 in January and February, 3.6 in March, 3.7 in April, 3.8 in May 4.0 percent in June, and then dipped to 3.9 in July. The CHAIRMAN. Is this a big enough change anywhere along the line to indicate any shift in the direction of the unemployment rate-that we would expect it to go back down-or does this indicate that it may continue to fluctuate and go up one month a little higher than the month before? What can we predict with respect to the direction of it, on the b'asis of what we know about it now? Mr. ACKIJEY. The unemployment rate is a product of two things, both of which are somewhat difficult to predict. One is, of course, employment and the other is the labor force. The labor force has been growing rapidly and undoubtedly will continue to grow, but so has been employment, and so will it. Our judgment would `be that the unemployment rate ought to be moving at least slightly downward in the year ahead, even with the tax recommendations. Without the tax recommendations, it probably would move down slightly further. The CHAIRMAN. Mr. Ackley, is there any possibility now that the converse of w'hat took place in 1964 might take place in 1967? With respect to employment rates and unemployment rates, if we enact this proposal? Now I remember one of the arguments made for reducing taxes in 1963 and 1964 was the rate of unemployment then in existence. I think it has been clearly demonstrated that the tax reduction at that `time played a part, at least, in bringing up our rate of employ- ment and reducing our rate of unemployment. Now is there any fear that if we sh'ould adjust taxes upward, our unemployment rate might also go up during the remainder of this year, and in 1968? PAGENO="0102" 90 PRESIDENT'S 1967 TAX PROPOSALS Mr. AOKLEY. Given the expectation that one has about the growth of the labor force, which although it is erratic from month to month or even over a 6-month period, and the expectation of the employment gains that would be associated with the production gains we antici- pate, I would not expect that there is danger of a rising unemploy- ment rate over the next year. Now it may fluctuate and it could go back up to 4, next month. It is erratic from month to month. We had anticipated that the unem- ployment rate would rise to 4 percent by the middle of the year, and said so. And in fact, it did. The inventory adjustment cut back manufac- turing employment, and this obviously had to be reflected in the unem- ployment rate. Our expectation for the year ahead is an unemploy- ment rate in the range that we have had for the last year and a half, somewhere around 33/4 percent, and that is the expectation with the adoption of the proposed tax. The CHAIRMAN. One of the arguments advanced in favor of in- creasing taxes is the rise in prices. We frequently have heard that pointed to as an area of justifying its requiring an additional tax increase. Now it is true, is it not, that the consumer price index of 115.6 in May of 1967 is above the 112.6 in May of 1966? There was an increase of about 3 percent? Mr. ACKLEY. Yes, sir. The CHAIRMAN. In that period of time? Mr. ACKLEY. Yes and the figures for June show a further increase, although the same year-over-year advance as in May. The CHAIRMAN. Now let's look at the figures. How much of `this increase, total of this increase between May and May that we just referred to occurred between May and December of 1966? And then how much of it has occured this year? Mr. ACKLEY. I am not sure that I can give you percentages between May and December. I can give it to you June to December or Decem- ber to June. The CHAIRMAN. I think the increase from May to December was from 112.6 to 114.7. An increase of 2.1 points, while the increase this year, at least through May, to 115.6, was an increase of nine-tenths of a point. Mr. AOKLEY. Well; yes, sir, and in June it increased another four- tenths to 116. The CHAIRMAN. Have you any figures on July? Mr. ACKLEY. No, no figures yet for July, Mr. Chairman. The CHAIRMAN. This next area is an area I know less about, but I want to get into it, and that is the argument that is made that if we don't have a tax increase, our money supply will be such and the impact of our borrowings upon the money markets will be such as to bring about a very inflationary situation. Now I know full well the problems the Secretary `of the Treasury has. I have been trying to help him for a long, long time to better manage his payments of Government obligations and public debt- with some degree of difficulty I might add in getting my colleagues in the House to go along. PAGENO="0103" PRESIDENT'S 1967 TAX PROPOSALS 91 I still am not at a point where I feel I could convincingly explain to anybody the connection between tax rates and interest rates. I have more difficulty understanding that than any part of this ~whole argument. I am thinking of what I consider to be-I am glad I am not running it-some pretty bad management of the affairs of the Fed- eral Reserve last year, when the Federal Reserve was proceeding to make money and credit available at an annual rate of increase of almost 7 percent over 1965 up until May of 1966; then very suddenly, the Federal Reserve just cut off all increases, and almost caused a money panic sometime late last year. Now this year, with our economy going at less than an exuberant pace, the Federal Reserve makes avail- able mcreased money and credit again, at an annual rate of something between 9 and 10 percent, say, whatever the figure is for the first 6 months of this year. Then, I am told that there is a direct connection between what happened last year with respect to interest rates on money and a deficit that the Government was incurring and the lack of a tax rate increase-it is a little hard for me to believe. Mr. Martin is going to be before the committee sometime before we get through. I am going to he interested in learning exactly why there was, for a period of months, a great percentage rise in money and credit, and suddenly, it was cut off and equally suddenly turned on again, in February or January of 1967. It seems to me, just applying commonsense to it, that the supply of money and credit should he regulated a little bit more evenly than that. Now you can say whatever you please, but get me straight on this. How was it that monetary controls did not have any affect for a while, and then when the effect was felt, the responsibility for adjusting to it was passed to the Congress? How are Members of Congress to judge the need for tax restraint against last year's pattern of monetary controls? Sometimes I think that we get the buck passed to us unduly. I know that when it is passed to us we can't pass it to anybody else. Mr. ACKLEY. Mr. Chairman, may I begin by saying that I have not at all times agreed precisely with the actions that the Federal Re- serve has taken with respect to the management of our monetary pol- icy. Yet I think we must recognize that monetary policy is designed to play a stabilizing role, one in which it does try to moderate move- ments that are in the wrong direction and support those that are in the right direction for the economy as a whole. The Federal Reserve, as early as December 1965, moved-prematurely, in the administra- tion's judgment-to a policy of restriction, and yet it is a remarkable fact that in the first half of 1966, the money supply, narrowly defined, did grow at 41/2 percent annual rate, followed by a decline at about a 1-percent rate in the second half of 1966. In other words, it took `a while from the time that the Federal Re- serve decided that restrictive measures were appropriate before they had any impact on this particular measure; namely, the supply of money. This, of course, is only one evidence of monetary policy and the ef- fects of monetary policy. The most significant impact from the stand- point of the economy is the availability of bank credit and the `level of interest rates. PAGENO="0104" 92 PRESIDENT'S 1967 TAX PROPOSALS And again, bank credit was not effectively restricted in the first half of 1966, although the Federal Reserve was attempting to pursue a restrictive policy. But the restriction on the growth of bank credit also began to bite severely in the second half. So the return to the easy money policy, which the Federal Reserve began to make last fall, as early as October or November, has been significant and important. Indeed it is one of the factors which has permitted the very substantial revitalization of our housing industry which we have seen since the low point of last October. As I said, I don't claim nor, I am sure, will the Federal Reserve claim, that its record on timing or on the extent to which its instruments of control have taken hold of the situation is perfect. Yet I do believe that they have attempted to use monetary policy-as I think it was intended to be used-as an instrument of stabffizfttion- leaning against the wind and trying to curtail inflationary pressures by restricting the availability of credit to the economy, and trying to support an advance when advance is appropriate. I think it must be recognized that the easy money policy which the Fed moved to late last fall has been an important factor in maintaining momentum during the first half year while we were going through the inventory adjustment. Secretary FOWLER. Mr. Chairman, I would like to add one word to that. The CHAIRMAN. I wish you would, Mr. Secretary, because I want to get straight on this connection, the connection, if you will, between interest rates and tax rates. Secretary FOWLER. Well, this focuses on the always difficult but al- ways necessary problem of effecting the right kind of mix between fiscal and monetary policy because these are two arms that attach to a single body and the movement of one as related to the other affects the whole. First, let me say that I will not attempt to speak for Chair- man Martin of the Federal Reserve Board. He will be here to speak for himself. But I think it is no secret in the light of the announcement that was made last week when the President's message went up that at this particular time the entire Federal Reserve Board, and the Secre- tary of the Treasury, and the Director of the Budget, and the Council of Economic Advisers are all unanimous in the view that the best mix for the economy in the period ahead is a mix that would include some additional measure of fiscal restraint that would come from an increase in taxes and a reduction in expenditures rather than, if this expansion needs to be restrained in the period ahead, a dependence on monetary restraint. That is why in my statement on page 25 I stressed that- For along with Federal credit demands, the failure to hold down the budget deficit would create an inflationary environment in which private credit demand could soar, and in which it would be more difficult to continue an expansionary monetary policy, and that would cut down on total available supplies of credit. So as we see this in the period ahead, to the degree that the addi- tional restraint is necessary, and we think it will be in the light of Chairman Ackley's presentation this morning, we believe that it is desirable to press down on the fiscal side, as it were, leaving the mone- tary side relatively, not perhaps entirely, free. I can't speak for what action they would find it necessary to take, but the more action we take PAGENO="0105" PRESIDENT'S 1967 TAX PROPOSALS 93 on this side, the less you would have to turn to the efforts to hold down the expansion of credit and to turn the money supply, you might say, in a different direction. Whatever may have been our diffrences in the past, I think, frankly, as I have indicated before this committee, they had primarily to do with timing. I think we were all agreed at the beginning of 1966 that a cornbina- tion of both fiscal and monetary restraint would be necessary in that period. Now, in this period ahead as the economy is emerging from the period of the inventory readjustment that Chairman Ackley has out- lined, and all the signs are toward a period of expansion, we are as one in our view that the right mix of fiscal and monetary policy is one that includes the tax increase, which, therefore, diminishes to that degree the necessity for the Federal Reserve System to move to a restriction- ist policy or a degree of restrictionist policy in the monetary field. The CHAIRMAN. Mr. Secretary, as I say, I don't know much about this relationship because I have not made any real study of monetary policy, but I think anyone, whether he has studied it or not, would agree completely with your observation that we are better off if we h'ave the proper mix of the two policies than if we don't have it. What I am trying to get to is how do we know that we can have the proper mix of monetary policy if the difference in our deficit is only reduced by $7.4 billion, which is the amount of tax revenue effect of this bill in the 1968 fiscal year? Are we certain that the Federal Reserve, on the other hand, would not do again in this year or in 1968 what they did in the year 1966, and if they do it again, might we not expect about the same consequences to occur? Secretary FOWLRR. I think that is the question, Mr. Chairman, I will have to defer and leave for the Chairman of the Federal Reserve Board. The CHAIRMAN. I am going to question him when he gets here. Secretary FOWLER. I can't speak for them on that. The CHAIRMAN. I am going to ask him some questions when he gets here because I just don't know whether or not to try to sell the tax bill on the basis that the Federal Reserve is g-oing to do what you and I might think to be the right thing on their policy. I am a little con- cerned about it. Mr. ACKLEY. I have asked you all these questions-and I am now a step in tax policy on the basis of what we think may happen and to find out where the inflationary pressures may be as we look to the future. Certainly I hope that as we look ahead this time we are doing it with a higher degree of accuracy than on other occasions. I am not talking about you in the past, but of occasions in previous years when some of our projections have missed the market pretty badly, going back as far as 1948. I am always a little concerned about taking through-for the reason that I have wanted to get to the components that is why I have asked you so many questions about it. This is one of the things, however, that is being used apparently as justification for this action. When one looks at the situation that the Secretary of the Treasury describes and the Director of the Bureau of the Budget, naturally I end up with the conclusion that something should be done. Now, Mr. Director, you remember when we did what I think now was a mistake and suspended t.he 7-percent investment credit. You PAGENO="0106" 94 PRESIDENT'S 1967 TAX PROPOSALS think we restored it in the wrong way, so maybe we are even in that respect. The President undertook to suspend certain governmental spending programs, and I suppose that from the minute he made the announcement until the matters were restored he had somebody visit- ing him every day asking for the restoration of some part of that spending program. Is there any thought that, regardless of what the Congress can do- since the Congress apparently is overly authorizing again, we are going to repeat the process. Congress authorizes a project, and then we authorize certain expenditures. In a sense, we really don't appro- priate any more. Is there any real possibility that if taxes are in- creased that we can expect the rate of spending for the fiscal year 1968 not to be greater than that initial $135 billion estimate in the January budget. Mr. SOHULTZE. I would have to break my answer to that into two parts, Mr. Mills. First with respect to civilian expenditures, I would say there is first a good possibility and, in fact, we are aiming at reduction of civilian expenditures below the level estimated in Jan- uary. By that I mean there is a good chance for making cuts sufficient not only to offset the increases from the releases we made earlier this year and from the public assistance and other uncontrollable increases, but trying to cut somewhat below. That is No. 1. No. 2, in turn, I can't at this stage indicate how the entire defense picture will come out, balancing both the potential increases and the decreases. But if I leave out the defense picture, and I look to the actions which the executive will take, then I can say there is a good possibility-I can't guarantee it 100 percent-that civilian expendi- tures can be reduced below the January estimate, because that is what we are setting our target at. Clearly, Mr. Chairman, this has to be taken in the context of the two other items that I spoke of: one, the pay bill, the extent to which that is passed and takes effect with amounts over and above the President's recommendations, and, sec- ondly, the authorizations for sales of participation certificates. But those apart, on the civilian side we will be shooting for reductions of more than $2 billion. In turn, you will recall, I indicated we had expenditure increases facing us of $1% billion. The reductions we are aiming at are greater than $1i/2 billion. That is what our target is, that is what we are shooting for, Mr. Chairman. I can't, of course, speak on the pay question or the participation certificates in terms of what the Congress will ultimately do. The CHAIRMAN. Mr. Director, how soon do you think there will be some positive information about what might be done in this area? Mr. SCHULTZE. Mr. Chairman, we are, as I indicated in my testi- mony, sending instructions to each agency giving them a cut target, as soon as their appropriations bills are passed. At that time we will ask them to review their expenditures to see how they could come down to that target. I can't predict when the appropriation bills are going to come through or exactly how rapidly we will get responses from the agencies, but we will be moving as fast as we can in terms of getting the bills, looking at them, and getting instructions out to agencies, getting their submissions back to us, and coming to agreement on a specific cut. I cannot give you a date on that. We are doing it as soon as we can. PAGENO="0107" PRESIDENT'S 1967 TAX PROPOSALS 95. The CHAIRMAN. These things I am talking about would have to be other than merely suspensions or delays because if that was all we would do we might compound our situation in 1969 )ust as we ~have compounded it in 1968 to the extent that expenditures were delayed in 1967. It just seems to me like we are going to have to find some way to bring about reductions on the spending side to coincide and go along with increases in revenues if we are to make any impression here- Mr. SCHULTZE. I agree, Mr. Chairman. The CHAIRMAN (continuing). And get any acceptance by the Amer- ican people of a tax increase. Mr. SCHiJLTZE. I agree, Mr. Chairman. I might point out that in the effort we are going through and will be going through we are doing two kinds of things, both straight reductions and deferrals. Let me point out that, with respect to the deferrals, it does not auto- matically mean when you defer something you add to expenditures in the succeeding year. For example, if you defer a start of a public works project from fiscal 1968 until fiscal 1969 you reduce expenth- tures in both of those years, because the second year of spending on a public works project tends to be relatively large and so you move that into 1970. So we are looking both at reductions and deferrals. What happened this year is not that the deferrals in fiscal 1967 them- selves are adding to 1968 expenditures, but rather that when we made up the budget in January we did not have in mind the release of those deferrals, and that is what now causes increases, not the deferrals themselves. The CHAIRMAN. I see. Gentlemen, I want to thank you. You have been very helpful in responding to my questions. Mr. Byrnes. Mr. BYRNES. First, Mr. Secretary, let me ask a procedural question: Has a bill been presented to the committee as yet? Secretary FOWLER. Mr. Byrnes, I don't think the bill has been pre- sented to the committee, but our staff has been engaged in preparation of one and would have it available for the committee whenever it is your wish. Mr. BYRNES. The primary reason I ask is that not only are we con- fronted with a decision on increasing taxes, but also whut form any proposal will take. We have sent out invitations to public witnesses to appear beginning next Monday. They will find it difficult to talk about particular details if a bill is unavailable, and we may be deprived of their views on teclmical problems that may be involved. Secretary FOWLER. Mr. Brynés, I will be glad to submit a bill with the techrncal explanation f'or the record at any time that you would like to have it. The CHAIRMAN. Any time you are ready, Mr. Secretary. I think today or tomorrow will, be fine. Secretary FOWLER. I tried to cover in my statement the broad outline of the nature of the bill, but you do need the bilT. Mr. BYRNES. In broad outline it is a proposal for a tax increase. Due to the time the committee will devote to the technical aspects and the complications that develop, the bill should be made public if we are to have the views of all interested individuals before we get into executive sessions. Secretary FOWLER. Yes, indeed. ` PAGENO="0108" 96 PRESIDENT'S 1967 TAX PROPOSALS Mr. BYRNES. While they are still welcome to appear. Secretary FOWLER. I will supply copies this afternoon. The CHAIRMAN. Without objection, depending upon what further disposition is made of it, we will include it in the record, Mr. Secre- tary, in connection with your remarks. (The information referred to is on p. 32.) Mr. BYRNES. I think, Mr. Chairman, that copies should be made available for the public- The CHAIRMAN. They will be available. Secretary FOWLER. Right. The CHAIRMAN. Mr. Secretary, why don't you, if you have your bill ready, just release it and send us a copy of it. We will have available addition'al copies for release here for the public so the public may have the opportunity of going over it. Secretary FOWLER. All right, sir. Mr. BYRNES. Fundamentally, we are here because we have either a $29 billion deficit or a $27.3 billion deficit. It is fundamentally the deficit that brings you here, isn't it? Secretary FOWLER. Yes, sir. Mr. BYRNES. Let me clarify a point. You have discussed two fig- ures-$29 billion and $27.3 billion. What causes the difference in these figures, Mr. Director? Mr. SCHULTZE. The basic difference is that the $29 billion is ar- rived at by thtaling up the potential expenditure increases and the potential losses in revenue from revised estimates that the Secretary went through. If you do that, you get to the $29 billion. Mr. BYRNES. What is left out when you get the $27.3 billion? Mr. SOHULTZE. That is what I am coming to. At the same time if you have expenditures that high, there would be an impact back on the economy in the form of higher profits and incomes which would raise tax revenues slightly. Most of the $1.8 `billion represents that feedback effect. Mr. BYRNES. In other words, an expenditure level under the present estimates of revenue which would produce a $29 billion deficit would have a feedback producing more revenue than you are presently contemplating? Mr. SOHIJLTZE. That is correct, by an amount which we roughly calculate as $1.3 billion. This is partly a presentation problem ad- mittedly, Mr. Byrnes, in totaling up expenditures and revenues which could add to the $29 `billion deficit. It is simpler to present figures on each side without talking about the interaction between the two, but there would be some relatively slight interaction between them. Mr. BYRNES. We are really talking about a $29 billion deficit, be- cause you can't crank in a feedback unless you have the expenditure. Mr. SCHULTZE. I agree, sir. Mr. BYRNES. You are faced with an expenditure that produces a $29 billion deficit based on current revenues. Mr. SCHULTZE. That is, if just expenditures went up, on the basis of current estimates of expenditures plus contingencies, that is what you would get. Mr. BYRNES. That is, assuming expenditures increase according to your current projections. Mr. SOHULTZE. In terms of the problem we are looking at. PAGENO="0109" PRESIDENT'S 1967 TAX PROPOSALS 97 Mr. BYRNES. All right. I haven't heard of feedbacks used in quite this way before. The idea apparently is that we should he careful not to cut too much or we will have a bigger deficit because we will elim- inate the feedback. Mr. Sdllur~TzE. The feedback is a relatively small proportion of the gross increases. Mr. BYRNES. It seems to me that is the fundamental point. I am not going to be worrying about cutting back on expenditures just because it might eliminate some feedback. Mr. SCHULTZE. I fully agree. Nobody was arguing that. Mr. BYRNES. We better achieve the cuts in expenditures that pro- duce a $29 billion deficit first and then worry about the feedback later. Mr. SOIIULTZE I fully agree with that. Secretary FOWLER. I think we ought to talk in terms of $29 billion. It is easier conceptually. Mr. Byiu~s. Then I think we can all discuss the problem on the same basis. Secretary FOWLER. That is right. Mr. Byiu~n~s. Now, at what level do you consider a deficit significant enough to require concern about cutting back expenditures? Earlier this year some of us stated that the projected budget deficit presented a serious situation. We talked about it again in May and June when we had the debt ceiling increase. As I gather, Mr. Secretary, your request for a tax increase is predi- cated on three general categories or areas. One is the Vietnam situa- tion. I assume that the Vietnam aspect is more of a moral issue than it is anything else-the sharing of sacrifices. Secretary FOWLER. I think it is that and more. Mr. BYRNES. You are certainly going to provide every assistance to the boys in Vietnam regardless of whether or not you get a tax in- crease, aren't you? We are going to provide this assistance regardless of the method or combination of methods we use to provide the necessary financing. Secretary FOWLER. That is right. Mr. BYliNES. It seems to me that it isn't a matter of the boys in Vietnam saying, "Boy, I hope Congress votes a tax increase or we may not have any ammunition tomorrow." Secretary FOWLER. No, I don't think that is the case. I think it is more than that, however. It is trying to handle the financing of this special, and we hope temporary, expense in a manner that is con- sistent with the maintenance of a healthy economy. Mr. BYliNES. The war effort isn't the only item that is figured in the $29 billion deficit projection, but it is one of the expense items that goes in? Secretary FOWLER. Yes. Mr. BYliNES. You are not going to change that expenditure by the tax increase, so I am assuming that the Vietnam rationale used here is for moral and historical reasons. We have always increased taxes in times of war. Our fiscal needs required this, but we also did it on the basis, it seems to me, of all of our citizens sharing in the sacrifice. This rationale had a moral basis, and I assume that is what you are advancing here. PAGENO="0110" 98 PRESIDENT'S 1967 TAX PROPOSALS Secretary FOWLER. No; in addition to the moral problem that you have properly referred tO, there is the conventional wisdom that when you have a special temporary expenditure of the magnitude that this expenditure has now come to be it seems wise to pass special tax measures to fund at least a portion of that special temporary expense out of current revenues. It is a sensible way of dealing with a special and temporary expense. Mr. BYRNES. Then last year, when you knew that Vietnam expenses were accelerating by some $10 billion-practically doubling-would have been the time to propose a tax increase if you wanted the increase to coincide with the additional temporary expense. Secretary FOWLER. Mr. Byrnes, I tried in my statement in discussing the special costs of Vietnam to indicate that we did in early 1966 relate the additional $4 billion-plus increase over the fiscal 1965 cost to the Tax Adjustment Act and that when it appeared, as my state- ment indicates, later on in the year that the expenses in Vietnam would be double the $10 billion, we did decide that it would be neces- sary to try to fund some additional portion of that. That was the genesis of the 6-percent surcharge request, but given the condition of the economy, the inventory readjustment Chairman Ackley has described, which was then facing us, the additional tax increase to meet that part of the cost to that degree was scheduled for a July 1 date rather than a January 1 date. Mr. BYRNE5. So you can have some increase in temporary costs with- out asking for a tax increase. But I don't think this rationale leads either one of us down the right road. Another item you mentioned as the basis of the tax increase is the inflationary pressures that will result if we don't have a tax increase and cut back expenditures. I am glad to see that you have generally tied the tax increase to ex~enditure reductions in your statement. Secretary FOWLER. Oh, much more than that, Mr. Byrnes. Concep- tually, they are wedded. Mr. BYRNES. I want to go intq that and see how closely they are tied together. One of the reasons for this tax increase is inflationary pres- sures that this kind of a deficit produces; is that correct? Secretary FOWLER. The pressures that running this kind of a deficit could produce given the kind of an economy that we have today. Mr. BYRNES. All right. The Chairman has explored the economic indexes in some detail in order to determine whether a tax increase is appropriate to the state of the economy. I would like to read from a letter I received from a Member of the other body and get your gen- eral comments on it. It says: If we leave out the food component of the Consumer Price Index (on the ground that it is subject to its own particular cycle and not general demand) then prices have risen more this year than they did in the same period last year in spite of the fact that the demand is not nearly as strong as it was in 1966. The basic reason for this phenomenon is that services constitute the major element of the price increase in both years, especially medical care. Medical care has been going up for many years, and most other services tend to rise with wage rates. I can see very little relationship between price increase and general demand, at least in the short run. Yet it is widely cited as one of the principal reasons for tax action. Actually our economy is not operating at or near capacity. Capacity utilization is down to 85 percent. Unemployment is at four percent and the work week is the lowest in six years. Our economy could withstand a sub' stantial increase in demand without overextending itself. PAGENO="0111" PRESIDENT'S 1967 TAX PROPOSALS 99 If these assertions are correct, and I gather they are because they coincide with the indexes that the Chairman cited, why can't the economy withstand a substantial increase in demand without over- extending itself? Secretary FOWLER. I have the same letter, Congressman Byrnes, and I can just shorten this by telling you how I replied to it. Mr. BYRNES. Yes; that would be fine. Secretary FOWLER. I certainly agree with your point that there is not a perfect relationship between demand growth and price movement, as evidenced by the fact that consumer prices, other than food, have increased more this year than in `the first half of 1966 de'spi'te a slow- ing down in the growth of demand. At the same time, however, we must recognize that the influence of demand does work in part with a lag effect, so that price developments this year are partially a reflec- tion of rapid demand growth in 1966. Moreover, the transmission to retail prices of the higher level of wholesale prices which developed `during 1966 has certainly been facilitated by the continued basic strength of demand forces. Indeed, the growth of final sales during the first half of 1967 has been greater than in the corresponding period in 1966. It seems to me, therefore, that the greater part `of wisdom lies not in downplaying the importance of demand factors, bu't in remaining aware that the problem of price stability may be seriously aggravated by a renewed upsurge of demand and by shaping our fiscal measures accordingly. The temporary tax increase program recommended in the President's message will, I believe, contribute to price level stability and be quite compatible with a generally strong economy. I want to emphasize that I consider the temporary tax `increase as a necessary nieasure to finance the special costs `of Vietnam, to keep our Federal deficit to within tolerable emergency limits, and to hold down interest rates and prevent a recurrence of monetary stringency. Incidentally, by averting a sharp rise in interest rates, the tax increase will make a specific and direct contribution to keeping down the cost of mortgage financing which you cite as a major element in the price increase of 1966 and 1967. Mr. BYRNES. Maybe the individual who wrote the letter will be more satisfied with that reply than I am. Secretary FOWLER. I doubt it, Mr. Byrnes. Mr. BYRNES. How much of a demand can the economy take? If you do everything that you talk about in your statement, we ,are appar- ently going to have a $14 to $18 billion deficit. The pressure of a $29 billion deficit is certainly greater than a $14 or $18 billion deficit, but if we are on the verge of great price pressures, why are you `dealing with partial measures? Secretary FOWLER. No; I think you underscore, Mr. Byrnes, by that question the importance of having the full 10 percent on the time schedule indicated because- Mr. BYRNES. But why is what I am asking you. Secretary FOWLER. I think it is what is needed. Of course, there could be some debate about whether or not a 12-percent or a 14-percent tax could be more appropriate. We recognize that there is a `range here of uncertainty about expenditure estimates, but we think that the 10-percent increase is the appropriate one, certainly if the expendi- PAGENO="0112" 100 PRESIDENT'S 1967 TAX PROPOSALS tures come out at the lower end of the range. If there are changes in e~penditures, they will affect the economy, but we believe that, given this range, 10 percent represents a realistic appraisal of the range with which we are dealing and that it is the appropriate percentage of sur- charge to ask for. I am not happy that there may still be pressures on the money market, as a result of our borrowing in the market that I described, but we believe that $7,400 million reduction in those pressures is a very meaningful and desirable measure. Mr. BYRNES. This is the other aspect of your rationale underlying this recommendation. This argument is based on moneary policy and the effect on interest rates of having to go into the market and bor- row. I want to get into that also. But what I am trying to bring out now is that in January, when we were faced with a $10 billion projected deficit, you talked about a 6-percent surtax effective July 1. Very little effort was made by the administration to meet that deadline, and I don't know that Dr. Ackley can have much confidence that the tax increase recommended by the administration was coloring their judgment. It would seem to me that the business community ignored it, just as almost everyone else did. Certainly the administration forgot about it after they put it in the budget message. In May, Mr. Secretary, you were telling us you didn't know when you were going to have the bill or when you were going to ask us to act on it. So I can see the business community saying, "Well, we at least don't have to worry about a tax effective on July 1." Secretary FOWLER. I think I said at the time, too, that I liked to argue my case when I thought the facts and the evidence would be more strongly accumulated in support of it, and I believe that time is now. Mr. BYRNES. So you are here now. Secretary FOWLER. With reference to your comment about the dif- ference between 6 percent in January and 10 percent now and the fact that we still have a substantial deficit- Mr. BYRNES. I am talking in terms of something definite. In Janu- ary you were faced with an $8.1 billion dc~ficit-even with a 6-percent surtax effective July 1. Now you are looking at a budget picture showing a projected $29 billion deficit. What is the relationship? Secretary FOWLER. We are now trying to put together a tax increase and a series of measures that Mr. Schultze has described that would bring this deficit down to a range of between $14 and $18 billion depending upon the outcome of some of the imponderables that are described in the President's message. Now, I think your question really goes to why, having proposed a 6-percent tax increase in order to hold the deficit down to $8 billion in January, we are willing to accept a deficit of $14 billion now, and I have several comments on that. First, I would say that the first half calendar year 1967 economic slowdown was somewhat greater than we had earlier estimated and because of what has happened in the first half of this year, we estimate a somewhat larger deficit and lesser revenues in fiscal 1968. We don't PAGENO="0113" PRESIDENT'S 1967 TAX PROPOSALS 101 think it necessarily follows from that that there has to be a dollar-for- dollar increase in the tax bite. Secondly, we were contemplating in January a social security pro-. gram which had a stimulus which, in the light of what I generally understand is the program that this committee would report, would call for somewhat lesser stimulus from the social security side. Mr. Byiuqii~s. You are talking about last January 1. Secretary FOWLER. Yes, and also frankly we had hoped that the easy money policy followed by the Federal Reserve Board would result in lower interest rates than have proved to be the case in intervening months, and therefore we haven't gotten as much stimulus from that side as was hoped for in January. The effective date of the surcharge means some slippage in revenues and increases the deficit, but that does not necessarily change the amount of the fiscal restraint when the tax is in effect. Indeed, in light of the increase from a 6-percent surcharge to 10 percent, taking all these factors into account, we don't welcome but we think we can try and live with a deficit of a higher magnitude. Let me add that that doesn't mean at all `that there is not a very vast difference between trying to live with a $14 billion deficit and a $29 bil- lion deficit. It is that other prospect and that other alternative that we think is impossible. Mr. Bn~~s. I think that what probably has some people on this committee worried-and I know it has me worried-is the ability with which you can judge the next 6 months on the basis of looking at the difficulty you had in the 6 months that just passed. The economic slowdown was, you say, greater than you anticipated. What if the economic upturn is slower than you anticipate? Then what will be the effect of this proposal? Those are the questions, Mr. Secre- tary, that give us real trouble. Secretary FOWLER. I think that the direction is reasonably clear. It is going to be up. Whether it is going to he moderately up or whether it is going to be up with heavy inflationary overtones, there is cer- tainly considerate room for discussion. We think, however, that the safe course and the prudent course is to take the measures recommended and thereby minimize the risks that would be entailed for the general tone of the economy if the course of expansion should prove to be highly expansionary. The proper objective here, it seems to me, is to try to reach a good cruising speed and avoid the risk of overheating and going at too high a rate. Mr. BYRNES. One of the reasons underlying this recommendation is the monetary problem created by going to the market to finance this kind of a debt, and the impact it has on interest rates. Is that not correct? Secretary FOWLER. Yes, sir. Mr. BYRNES. Let's see how we are going to reduce the $29 billion deficit so that you only have to go to the market to finance $14 to $18 billion. This bill calls for a $7.4 billion tax increase, is that correct? Secretary FOWLER. $7.4 billion. Mr. BYRNES. $7.4 billion. So that gets you down to a $21.6 billion deficit. 83-349-67-pt. 1-S PAGENO="0114" 102 PRESIDENT'S 1967 TAX PROPOSALS Secretary FOWLER. Mr. Byrnes, we can do this with different arith- metic. I think it makes it easier to calculate, if you start from the notion that you are not going to have a deficit of this magnitude and you are going to try to deal with the problem without this heavy increase in the cost of carrying the debt, the $700 million that is re- ferred to in my testimony and Mr. Schultze's, which is part of the $29 billion, and start from the $28.3 billion figure. Mr. BYRNES. $28.3 billion. What is the billion dollars you have taken out? Secretary FOWLER. $700 million for additional interest cost. Mr. BYRNES. Is that the difference in the interest `cost attributable to a $29 billion deficit rather than a $14 billion deficit? Secretary FOWLER. The computation is based on the fact that there would be a much higher average debt during the year on which you would have to pay interest and the fact that it does involve some as- sumption about interest costs being somewhat higher than they would be if you didn't have to put that amount of pressure on the market. We are using in the computation, Mr. Byrnes, a $14.1 billion as interest cost, if that helps you. Mr. BYRNES. Let's take the $28.3 billion figure. If we take off the $7.4 billion for the tax increase we have $20.9 billion. Let's find out where we go from there. First, though, let me ask whether the budget information that you gave us this morning is the result of the revised budget calculation, Mr. Schul'tze, that you were undertaking at the direction of the Joint Economic Committee and which we also asked for in May? Mr. SCHTJLTZE. Yes, sir; in effect, although clearly in terms of com- ing up before this committee with a request for a tax increase we would have done it in any event. But you are quite right, it was also called for by Senator Proxmire and the Joint Economic Committee. Mr. BYRNES. This is the revised budget picture. The basic revision here seems to be on the revenue side rather than containing detailed revisions on the expenditure side. Mr. SCHULTZE. It seems to me I gave a good bit of detail. Mr. BYRNES. You gave us the billion and a half expenditure in- crease, but you gave us that during the debt hearings without any details. Mr. SOHULTZE. I gave you $600 million of it, Mr. Byrnes. The other $900 million is new. In addition, I diddetail the specific contingencies that do face us in `addition to that $li/2 billion. Mr. BY1~NES. Didn't you indicate a $700 million increa'se in defense expenditures in May and a release of $600 million in funds previous- ly witheld-for a total `of $1.3 billion. Isn't that th'e same figure you are still talking about? Mr. SCHULTZE. Correct, except that the $700 million, you may recall, at that time was simply an indication of some room for estimating error around the January budget figure. That is the way I indicated it. Now I am stating that with respect to `defense it could range up to $4 billion. Mr. BYRNES. Does that include the $700 million? Mr. SCHLrLTZE. Yes, sir; that would `include the $700 million. Then, in addition to that, I am saying on the civilian side there would be a $11/2 billion increase, including the $600 million I gave you PAGENO="0115" PRESIDENT'S 1967 TAX PROPOSALS 103 earlier plus $900 million, primarily in the areas of CCC, public as- sistance, and payments to the medicare trust fund. Those three items I spelled out in addition today, so I have gone `through in detail `the $11/2 billion for civilian programs. I then listed a number of contingencies in other areas, up to $4 billion on defense, the pay bill, the participation certificates, and, finall~, as you will recall, the possibility of higher interest payments on the public debt if all these contingencies turned out unfavorably. Mr. BYRNES. Yesterday, on a television show called "Issues and Answers," the Secretary suggested, if I understood you correctly, Mr. Secretary, that we were going to sort of handle this' deficit, by borrow- ing half of it, providing 25 percent through reductions in expendi- tures, and another 25 percent by the tax increase. How are you going to get the $7.4 billion reduction in expenditures? What are we going to reduce from? Are we going to be reducing from the pay increase that you are talking about the Congress adding to the budget, or `are we starting out with what the budget estimates were? Secretary FOWLER. In the $28.3 billion that we started out with there was a billion dollars for `an `additional civilian pay increase that is under apparently very serious consideration in Congress and discussed in the President's message and in the Director of the Budget's state- inent. We would hope to avoid that additional billion dollars added on to the deficit. If it is avoided it would bring you down to a deficit of $19.9 billion. Then we have e~pre.ssed the hope and desire, although the House has voted against it, that the Congress would give us the authority to have the additional $2 billion of PC authorizations. Mr. BYRNES. All right. Let's stop right there, Mr. Secretary- ~Secretary FOWLER. I thought we would stop. Mr. BYRNES (continuing). For a moment. I don't want to get into this endless circle on the participation certificates. Secretary FOWLER. I was going to say, then, I was going to turn it over to Mr. Schultze to describe where we go from there. Mr. BYRNES. You can turn it over now if you want, but let's talk about the PC's. Secretary FOWLER. He always helps me out on that. Mr. BYRNES. You are talking about $2 billion? Secretary FOWLER. Yes. Mr. BYRNES. If we repealed the legislation which restricted your use of PC's would that reduce by 1 penny the amount of money you had to go to the market to get? Secretary FOWLER. No, sir. Mr. BYRNES. Then how can that ever reduce monetary pressures created by the Federal deficit? Secretary FOWLER. It doesn't. Mr. BYRNES. Not one bit, does it? It doesn't reduce your deficit one bit, does it? Secretary FOWLER~ Yes, sir. "Mr. BYRNES. Oh, only in the budget arithmetic that you base on these fiscal gimmicks. The figure that the ,President puts in a message does not in itself have anything to do with the pressures that led you to come here arid ask for a tax' increase, does it? `Whether that budget PAGENO="0116" 104 PRESIDENT'S 1967 TAX PROPOSALS deficit is $27, $29, or $31 billion, the way you handle PC's would not make any difference in the amount of money you must take from the market. Secretary FOWLER. Yes, sir; Mr. Byrnes, it makes quite a difference because as these figures get bandied about there are psychological reverberations from them and if you talk about the way we have been keeping our books traditionally and have kept them for a long time and if you talk about a $18 billion deficit rather than a $20 billion deficit it has some impact. I can't measure it. You can't measure it. No one can measure it, but it is still there. Mr. BYRNES. You are talking about a psychological impact. Secretary FOWLER. Yes. Mr. B~ru~u~s. Look at it from a practical standpoint. A. tax increase of $7.4 billion reduces the deficit from $28.3 billion to $29.9 billion. Assume that Congress has refused to enact a pay raise exceeding by a billion dollars what the President budgeted for. That would leave a $19.9 billion deficit. Congress has either refused to go above the Presi- dent or the President has vetoed it, and let's not forget about that potential- Secretary FOWLER. We won't. Mr. BYRNES (continuing); If you are so concerned about this. Mr. SCIUJLTZE. We are concerned. Mr. BYRNES. Let's not put all of the responsibility up here. There is equal sharing. Anything that becomes law has to have the Presi- dent's signature unless we override it; isn't that correct? Secretary FOWLER. That is correct. Mr. BYRNES. So our calculations have a $19.9 billion deficit. No mat- ter what we do with PC's, you would have to finance the $19.9 billion, by which expenses exceed revenues. Secretary FOWLER. The Government would have to go to the mar- ket for an amount that would include either Treasury borrowings or PC sales. Mr. BYRNES. Right. The amount you have to go to the market for and the resulting monetary problems aren't going to be reduced at all by using PC's to make it look like you are spending $2 billion less than you actually are. Secretary FOWLER. That is where we part company a little bit. I think if you use the word "psychological," you say it makes no practi- cal difference. I don't know what practical means. I know what psycho- logical means and I think it would be desirable and I will urge, as I have urged, that we have the authority to market this additional $2 billion of PC's. Mr. BYRNES. I thought you were concerned about the additional $700 million in interest costs that we can reduce by reducing the deficit. But you insist on borrowing money through PC's, which carry the highest rate of interest. That I can't understand. If what we are on is an econ- omy drive, and I hope we are, then I think we ought to save on interest costs by borrowing in the most economical way. Mr. SOHULTZE. Mr. Byrnes, with that logic we would have taken our guaranteed student loan program and converted it to direct Gov- ernment lending. It is admittedly cheaper to take our student guaran- teed loan program and convert it to direct Government lending `be- cause the Treasury can borrow at a cheaper rate than you can borrow from a bank. PAGENO="0117" PRESIDENT'S 1967 TAX PROPOSALS 105 Mr. Byi~i~s. Is that any reason to use PC's to borrow directly at a higher rate of interest? Mr. SOHIJLTZE. Mr. Byrnes, the logic is there. If you believe the Federal Government should finance everything it does through the Treasury because the Treasury is cheaper- Mr. BYRNES. We are trying to reduce this deficit. At this point we are $19.9 billion in the hole, and the Secretary says, "You would help us reduce this deficit if you will let us borrow money by selling partici- pation certificates"-paying higher rates of interest on them. I say it does not reduce anything. Mr. SOHtTLTZE. Mr. Byrnes, we are trying to come down from the $29 billion or $28.3 billion deficit to a $14 or $18 billion range and you are quite right that $2 billion of this reduction has a minimal impact on the market, although, as the `Secretary says, it should have some psychological impact. So in the total range we are talking about, it is admittedly true that $2 billion of the difference has a much smaller impact on the market compared to the rest of the difference. That is quite true. Mr. BYRNES. I must say that shifting from direct borrowing to participating certificates bearing higher interest rates is a great effort to cut back on expenditures. Secretary FOWLER. This is something we have been over time and time again. I would `oniy say I still see `a difference between regular borrowing to finance current expenditures and PC's to finance repay- able loans. Now, there is `a difference. Maybe we can't quite agree as to what the difference is, but there is a difference. It is a psychological difference and a meaningful difference. Mr. BYRNES. But regardless of what we do with PC's, you are going to go to the market for $2 billion, aren't you? Secretary FOWLER. Either that or through the Treasury. Mr. BTYRNES. Right, so the maimer of handling PC's doesn't change the amount you are going to the market for, does it? Secretary FOWLER. Not a bit. Mr. BYRNES. It doesn't change any of the problems that are created and which you pointed out to us in your statement at some length, Mr. Secretary, the problems of credit and- Secretary FOWLER. You can just write off pages 13 through 28 of my statement as far as this $2 billion is concerned, but they are very, very applicable to the $7.4 billion involved in this tax increase. They are also very "applicable to the billion of additional for the `pay bill. They are also very applicable to any expenditures that are reduced beyond that. Mr. BYRNES. The PC's have some relationship to the pay bill? Secretary FOWLER. No; I say those pages from 13 to 28, you and I can agree that they have no particular `applicability to the PC's. Mr. BYRNES. All right. That is some progress. Let's see what we are going to do next, then. I don't really know how to `record this $2 billion attributable to PC's in our calculations. Secretary FOWLER. In the deficit, `the way we keep our books, it is dawn to $17 billion. Mr. BYR~s. You are still going to have to borrow $19.9 billion but Y9u. want me to put it down in the table as getting you down to $17.9 billion. I disagree with that, but for purposes of discussion, let's get together again `at $17.9 billion. PAGENO="0118" 106 PRESIDENT'S 1967 TAX PROPOSALS Mr. SCHULTZE. Rather than disturb that I won't make a comment. I was about to comment. Mr. BYRNES. All right. This is the point at which the Secretary is going to turn it over to you, anyway, so now let's find out what we do with the $17.9 billion. Mr. SOHtJLTZE. He is so generous. Mr. BYRNES. The Secretary told the public yesterday we were going to cut expenditures by about the same amount as we were going to increase taxes-around $7.4 billion. Mr. SGHULTZE. That is correct. Mr. BYRNES. Was this $2 billion included in that, Mr. `Secretary, that you were going to cut expenses? Secretary FOWLER. Oh, yes. Mr. BYRNES. That is real good. Now we see it; now we don't. Let's find out how we are going to get rid of the other $5 `billion of expendi- tures that are apparently cranked into this $28.3 billion. Mr. SOHULTZE. I think `the way to put that is the following, Mr. Byrnes. We take the budget and break it into two parts, civilian and defense. Essentially, as I have indicated, we will be setting up reduc- *tion targets `for civilian expenditures of something over $2 billion. In addition, Secretary McNamara will be looking at areas in his budget to find ways to post~pbne, defer, and reduce expenditures to the extent this can be done without getting our defense posture in the wrong situation. it is in that are'a that we are trying to aim for the $4 billion additional that `Secretary Fowler talked about. Mr. BYRNES. You don't know `where yet? Mr. SCHULTZE. No. I can give you some indications. Do you want to take, for example, some of the defense areas? Mr. BYRNES. I would like to ask you about defense expenditures. It is my understanding that the Comptroller of the Defense Depart- ment, in testifying before the Appropriations Committee last Thurs- day, `was still holding firmly to a Defense Department budget `of $71.3 billion. Mr. SCIIULTZE. $73.1 billion, which is what was in the budget. Mr. BYRNES. Right, $73.1 billion, which is the figure that was con- tained in the January budget. Mr. SCHULTZE. That is correct, $73.1 billion. What the Comptroller was saying was just what I said in my testimony today and I will detail some of these for you now. Mr. BYRNES. He was saying something a little different. You said that defense expenditures will be between zero and $4 billion in excess of the $73.1 billion in the January budget, didn't you? Mr. SOIrnLTZE. That is correct. Mr. BYRNES. And he was saying no- Mr. SCIIULTZE. I read the transcript, or at least that part of it which had to do with this colloquy, and Mr. Anthony was saying that in terms of making a firm prediction he could not predict any part of the zero to $4 billion range. He was saying, in terms of a firm prediction, at the moment he would stick with the $73.1 billion. He indicated, and I have indicated, that there are contingencies involved here-both plus and minus-which could net up to as high as $4 billion. This is what he said and I said. PAGENO="0119" PRESIDENT'S 1967 TAX PROPOSALS 107 Mr. BYRNES. You are suggesting that you will have as much as $4 billion in additional defense expenditures, but that this will be offset to an extent by savings you are going to make. This figure of $4 billion that you cranked into this $28.3 billion projected deficit actually turns out to be a cutback? Mr. SCHULTZE. I think you are putting words in my mouth. Mr. BYRNES. I am asking you if that is what this $4 billion is about. Mr. SCIIULTZE. No, sir; I won't say it that way. What I would say is that taking into account both reductions and the possibility of avoid- ing some of these contingency increases you can get that much out of the $29 billion. I am not saying we call those changes economies, or savings, or anything else. What I am saying is that if you rack up the contingencies that face you, you have several ways of avoiding them. One, you can reduce expenditures. Two, you can hopefully avoid some of the contingencies which require you to reduce expenditures as an offsetting basis. That is the way I would say it. Mr. BYRNES. Then, this is simply avoiding a contingency. Mr. SOHTJLTZE. And also reductions. Mr. BYRNES. These contingencies were included in your computa- tions in order to create the $28.3 billion figure. Mr. SOHITLTZE. No, sir. Mr. BYRNES. Or to reach the 28.3 billion. Mr. SOHULTZE. Mr. Byrnes, I just want to make sure the record reads correctly. It wasn't cranked in in order to reach some predeter- mined $29 billion. It was put down as an evaluation of what isfacing us. I just want to make sure the record reads right on that. We didn't start out with $29 billion and say how do you get there? Mr. BYRNES. We better set the record straight. I am trying to find out where you are cutting back on expenditures. The public was told just the other day that there is going to be an expenditure reduction. I want to pinpoint that expenditure reduction so the people can know the nature and size of it. It appears that all you are doing is adding contingencies to the expenditure side and then claiming a savings when you cut back or eliminate the contingency. Mr. SOHULTZE. Sorry, Mr. Byrnes. Those are your words. I think what the Secretary was saying and what I am saying is that we are facing contingencies on both the revenue and the expenditure side which at the other end could add to a $29 billion deficit. We are saying by a combination of tax increase and trying to avoid some of those con- tingencies and reducing expenditures we can bring it down to a range of $14 to $18 billion. The upper end of that range would mean we were not very successful in avoiding some of the contingencies. That is essentially* what this says. Mr. BYRNES. All right. We got down to $20.9 billion by taking off the $7.4 billion. That is the tax increase. Mr. SOHULTZE. That is correct. Mr. BYRNES. That will be reduced to $19.9 billion if Congress does not enact pay raises exceeding the President's budget by $1 billion. Mr. SCHULTZE. Right. Mr. BYRNES. And for your bookkeeping purposes-~and I would underline "bookkeeping purposes"-we take another $2 billion off for PC's. You are down to $17.9 billion. PAGENO="0120" 108 PRESIDENT'S 1967 TAX PROPOSALS First, how much of a reduction do you hope to get through the PC's? Second, where will you get the next reduction-will you in- crease `and decrease defense by $4 billion and call that a savings? Mr. SCIItJLTZE. I `am saying in the civilian area we are going to set up expendi'ture reduction targets exceeding, this amount, but to be conservative, let's put down $2 billion. Mr. BYRNES. They are going to be set up in the future? Why aren't they established now? The Senate Appropriations Committee is cur- rently `adding to appropriation `bill's tha't have been passed by the House. Why don't you give them `the benefit of your `advice, and a'ssi'st them in remaining within the Hou'se action on the appropriation bills? Mr. SOHULTZE. Mr. Byrnes, the Congress has now been in session for 7 months. We h'ave three appropriation bills completed. If we c'ame up to `the C'ongress wi'th `a completely new set of appropriations, in terms of a long list of amendment's and `supplementals, first I am sure the Congress would be here till Christmas. We do not believe that this would be the way to get the cuts made. Secondly, if we came up with that list o'f cuts during the period in which some bills have passed the House, some have passed `the Senate, some are `still in committee- in which bills are in `all different `st'ages-we are fairly sure that we simply w'ould not get them done. This is the reason we `are proceeding as we are-'as soon `as the appropriations are enacted, we will give each `agency a target to hold back within those appropriations. Mr. BYRNES. Mr. Director, do you really think the Appropriations Committee would get upset if you brought in `a rescission bill? You don't hesitate on supplementals, `and a rescission bill should be possible. Mr. SCHIJLTZE. Mr. Byrnes, you may be right. Far be it for me to put my judgment about what might happen in Congress ahead of yours. All I might do is point out to you the experience of last year when we did send up a number of cuts, about eight or nine of t'hem, many of them involving fairly large amounts of money, and we did not get a single one of them. Now, people said, "You are unrealistic. You should not expect them to get through the Congress," and the like. Mr. BYRNES. But you also got some you asked for, didn't you? Mr. SCHULTZE. That is correct, we did, and we held back on most of those, not all of them, but most of them. Mr. BYRNES. You held back on them? Mr. SOHULTZE. Yes, sir. Mr. BYRNES. If you didn't get the money, how could you hold back on them? Mr. SCHULTZE. I am saying the ones we did. Mr. BYRNES. I am talking about the cutbacks the Congress did give you. Mr. SCIIULTZE. I misunderstood you. That is correct. In some areas we did not. Mr. BYRNES. If you balance `them together, they may have come out even. Mr. SCHIJLTZE. On balance there was `a $21/2 billion rncrease m expenditures last year from congressional action. Mr. BYRNES. $2'/2 billion? Mr. SCHULTZE. $21/2 billion increase in terms of congressional action last session. Mr. BYRNES. Is that appropriations or expenditures? PAGENO="0121" PRESIDENT'S 1967 TAX PROPOSALS 109 Mr. SOHULTZE. Expenditures. I am talking about expenditure changes in terms of the impact of appropriations and authorizations on expenditures. This I presented to the committee in January when I was up here. We offset a lot of that increase by our cuts. Mr. BYRNES. God bless you. Mr. SdnimTzE. All I am saying, Mr. Byrnes, is I realize you dis- agree with me, but in looking at this thing coldly in terms of how one gets expenditure cuts, our experience has been that if we try to make a lot of revision in the middle of the appropriation process we would end up much worse off than doing as we are planning to do. Mr. BYRNES. You are going to wait until after the Congress acts? Mr. SOHULTZE. We are going to take action bill by bill as we get the bills. We will be giving each agency a reduction target as soon as its appropriation bill comes through. We are not going to wait and do nothing until whenever it is that the final last appropriation is in. We are not going to do that, but as each bill comes through, we will give the agency a target. We may have to adjust the targets later, both plus and minus, because of unanticipated events, but that is what we will do. Mr. BYRNES. You have to wait until you get the appropriation bill before you give them a target. Mr. SCHULTZE. There are actually two parts to the process. First, those agencies which already have appropriation bills have been given targets, and have been asked to review their expenditures and make recommendations as to how they would reach it. That covers a very small part of expenditures so far this year. Secondly, to every agency I have sent a memorandum of instructions indicating that we will ask them to make reductions and that between now and the time they get their appropriation bill they should avoid to the maximum extent possible any commitments which will make the reduction difficult. Mr. BYRNES. What I don~t understand is why we are told that the Congress increased appropriations and expenditures this year by- Mr. SCHULTZE. Last year, 1967. I wasn't saying this year. Mr. BYRNES (continuing). By $2 billion above what last year? Mr. SCHULTZE. $2.5 billion more than the budget recommendations. Mr. BYRNES. By $2.5 billion above the budget recommendation. Yet we have no less a person than the Vice President pointing out that it is Congress that is responsible for the riots and the unrest because they haven't appropriated enough money. We haven't been spending enough. Now we are told that we spend more than the administration was proposing. Mr. SCHIJLTZE. No, sir; I just think you have to distinguish last year from this year. There was a difference in terms of the net end results. Mr. BYRNES. No, these speeches charged that the conditions would not have existed, that they would have been eliminated, and people could have used them as a justification for the riots. Those conditions would not exist if Congress had only done in the last few years what the administration apparently wanted them to do. Mr. SCHULTZE. No, sir. Mr. BYRNES. We were too frugal. PAGENO="0122" 110 PRESIDENT'S 1967 TAX PROPOSALS Mr. SCIIULTZE. The oniy thing that I can refer to on that is my un- derstanding that we are talking now about a number of bills this year, not last year, the rat extermmation bill, the model cities bill, and others. Mr. BYRNES. Is tha.t what is causing the riots? Mr. ScnuI~TzE. I am not saying anything about causality. I am simply saying the bills in question were the Teachers Corps, and the rat extermination, and model cities bill particularly. Mr. BYRNES. We didn't give you what you wanted in 1967 for the Teachers Corps if I recall correctly. Mr. SCITULTZE. That is correct, not completely. All of these are relatively small in terms of money. They do not involve large amounts of money. Mr. BYRNES. We still spent $2 billion more than you wanted us to spend, but we didn't spend enough. Mr. SCHULTZE. That refers to the impact of authorizations and appropriations by the Congress last year on expenditures. A lot of that we didn't spend. I am not saying we spent that much more. I am saying what the situation would have been if we carried out the final result of congressional action. Mr. BYRNES. I am wondering why you don't seek the help of Con- gress before these appropriations bills are passed. Why put the entire burden on the Departments? Mr. SOHtTLTZE. I am saying, Mr. Byrnes, in a number of areas the Congress can clearly help us. I am not suggesting they can't. All I am suggesting is that it is a matter of judgment-and I admit it is judg- ment-that if we want to get the cuts, the way to delay and make sure we don't get the cuts, or at least get less of them, is to send up in the middle of the appropriation process a whole new list of appropritaions. Mr. BYRNES. But we have to act on a tax bill. You say, "wait and we will show you some expenditure reductions." So far, I haven't deter- mined where the actual cutting is going to take place. You simply indicate that you hope to do it. After Congress gets through, you are going to tell the department not to spend all the money Congress gave them. Mr. ScHULTZE. Except it isn't that vague and it isn't that much of simply a hope in that sense. It isn't a question of just telling the de- partments not to spend so much money. This involves setting specific targets and going through the appropriations, account by account and line by line, and reevaluating and cutting them. Mr. BniwEs. You are going to cut $2 billion. Mr. SOHULTZE. Our target is actually slightly over $2 billion. I can't guarantee down to the decimal point exactly how much we are going to make of that. We are going to aim for $2 billion plus. That is our target; yes, sir. Mr. BYRNES. I checked with some of the members of the appropria- tion committee this noon, and they are under the impression that the House has not cut the appropriation bills by at least a billion dollars. Now, of course that could be restored in the Senate. I know that. Mr. SCHUL'rZE. Let me elaborate on that for you, if I may, Mr. Byrnes. Let me break just the House action for the moment down into two parts and appropriations, civilian and military. PAGENO="0123" PRESIDENT'S 1967 TAX PROPOSALS 111 In all of the civilian apppropriations bills passed by the House to date-there are 11 appropriations involved for 1968 so far-the appro- priation cut was $1,650-odd million. The expenditure impact of that in fiscal 1968 will be $650 million-the impact of the House action. Now in the Senate some small amount of that has been restored in actions taken to date. In addition, on the civilian side, not in the appro- priation area, actions or failure to act have added several hundred million dollars to expenditures in terms of an increase in the veterans' bill above the President's recommendation and the delayed date on the postal rate increase, so you might say that, net, in terms of the actions the House has taken on appropriations and authorizations where we know that they will have an impact on expenditures you might come out somewhere in the $400 million area of decreases. Secondly, on the military side, the House appropriations bill cut $1.3 billion from military appropriations, which will have an expendi- ture impact of $500 million in 1968. This is one of the items that we think is going to help us, we hope, end up not at the higher end of that $4 billion range, but maybe we come out better than the $4 billion. This would be in part because of the Congress. I am not here to say that this year the Congress is generally adding to our budget if we stay away from the participation certificates and the pay raise. Mr. BYRNES. If we include the civilian expenditures you hope to achieve, the $28.3 billion figure is down to $15.9 billion. Is that correct? Mr. SOHULTZE. Yes, sir, $15.9 billion, that is correct. Mr. BYRNES. Where is the next cut? Is defense all that is left? Mr. SOH1JLTZE. We are trying to find cuts in defense. 1 cannot. guar- antee them, but they involve a combination of avoiding some of the increases and finding offsetting savings. In the defense area all I am saying is that this is the range we are in. This is why we gave you a $14- to $18-billion range rather than a specific number because I can't sit here and give you a specific number on defense any more than any- body could at any time during any other war. Mr. BYRNES. It sounds great. I was really quite enthusiastic when I heard of the Secretary of the Treasury's statement that we would bal- ance the tax increase with corresponding reduction in expenditures. That has certainly gone up in a puff of smoke. Secretary FOWLER. Let me read what I did say so we will have it all, at any rate. "Well, it was thought on the high side that 10 percent was an appropriate level in the light of the changes that had occurred since we made the original 6-percent recommendation. Of course, there is no magic in any particular combination of figures. The President's rough approach to meeting this deficit, which could run as high as $29 billion or $30 billion, is to meet it by about a 25-percent tax in- crease, which is $7.1/2 billion, 25-percent reduction in expenditures that might otherwise occur, and borrow the remaining 50 percent. "Now, those figures could vary. We believe that the best mix as we see it today, the most feasible mix, is the one that is within the reach and within grasp that we could count on, which would imply $71/2 bil- lion of additional revenue in this fiscal year." Mr. ScHULTzE. To look at this another way, Mr. Byrnes, there is $2 billion of that which you don't agree with, I realize, but in getting at that figure, you add a $2-billion-plus civilian expenditures reduction, $2 billion for PC's, $1 billion for avoiding a pay increase bigger thau PAGENO="0124" 112 PRESIDENT'S 1967 TAX PROPOSALS proposed, and if we get the tax increase and avoid these other items, you add $700 million in interest costs avoided, bringing you up to $5.7 billion. Now, we are trying to do what we can in the defense area to get more, to get up to that $7'/2 billion. Mr. BYRNES. As I have said many times, a $29 billion deficit puts us in a fiscal mess. I said this dismal situation needed attention in three ways: expenditure reductions, tax increases, and some borrow- ing. I thought that a balanced approach was being recommended, that realistic measures were being proposed instead of simply paying lipservice to expenditure reductions. I hoped that we were actually going to do some belt-tightening, but frankly your testimony does not give, me any assurance that this is going to happen. Mr. SCHtJLTZE. Mr. Byrnes, let me give you an example. On the one hand, the increase in taxes that we are asking for is approximately calculated on incomes and on the average is about a 1-percent take on personal income. If you look on the expenditure side and take the civilian expenditure reduction target of $2-plus billion, that is going to have to be accomplished in the area where we can make reductions in terms of controllable expenditures-where we don't have payments locked in by law or payments under prior contracts. In that area, the reduction that is going to be over 15 percent, and I don't consider this in most of those programs a mm r effort. Mr. Bnu~u~s. A 15-percent reduution? Mr. SOHULTZE. Yes, sir. In the first place, you start with about $21 billion of expenditures that you can get your hands on this fiscal year. Mr. BYRNES. Yes, you say, "We are only going to deaJ with 20 per- cent of the budget, and we are going to cut that part bl 15 percent." Sure, this sounds like a large reduction. Mr. SCHULTZE. No, not only sounds big, Mr. Byrnes. Mr. BYRNES. I don't know what basis this provides for the Secre- tary's statement that the taxpayers are going to pay about 25 percent toward cutting down this deficit and the Government will achieve a similar amount through expenditure control. Mr. SCHULTZE. It is a matter not just of what the executive branch is going to do, but asking the Congress to cooperate. Mr. BYRNES. I am sure that is the impression that the American people got listening to it. Mr. SOHIJLTZE. Not the way the Secretary read it back to me. Mr. BYRNES. The language is in the hearing. The CHAIRMAN. Without cutting you off, gentleman, we may resume our questioning in the morning. If there is no objection, the commit- tee will reconvene at 9 :30 in the morning. If you gentlemen will, please be with us at that time. (Whereupon, at 4:50 p.m. the hearing adjourned, to reconvene at 9 :30 a.m., Tuesday, ,July 15,1967.) PAGENO="0125" PRESIDENT'S 1967 TAX PROPOSALS TUESDAY, AUGUST 15, 1967 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 9 :30 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Wilbur D. Mills (chair~ man of the committee) presiding. The CHAIRMAN. The committee will please be in order. Mr. Burke? Mr. Bu1u~E. Mr. Secretary, the American public is quite concerned about the statements of General Charles de Gaulle who is going throughout the world advising all the countries what they should do, and I noted in your statements. yesterday that this total tax bill will ask the taxpayers of America to pay approximately $7.4 billion. Yesterday I checked the debt outstanding owed by the De Gaulle government to the United States and the total debt as of yesterday was approximately $7.1 billion. Do you think there could be some ef- fort made on the part of the administration to contact General de Gaulle and ask him to get up some of this money that he owes the United States which would in turn relieve the taxpayers of some of the burdens that they are carrying as a result of the debt owed to us by France? PURTHER. STATEMENTS OP HON. HENRY H. POWLER, SECRETARY OP THE TREASURY; HON~ CHARLES L. SCHULTZE, DIRECTOR OP THE BUREAU OP THE BUDGET; AND HON. GARDNER ACKLEY, CHAIRl\~AN, COUNCIL OP ECONOMIC ADVISERS Secretary Fowu~R. Congressman Burke, let me deal with that in terms of World War I debts and World War II debts and Marshall plan post-World War II debts. With regard to the later category, post-World War II debts, the French Government has lived up to the payment schedule that was arranged at the time those loans were made, and, indeed, has prepaid portions of that debt over the last 4 or 5 years in a debt prepayment practice that is mutually advantageous. With regard to the World War I debts, which make up most of the $7 billion outstanding that you refer to, a moritorium was entered into in the early 1930's and since that time, although these obligations are in my judgment legal obligations outstanding, debts owed by these respective countries to the United States that are valid and binding, various efforts in the early 1930's and subsequently to explore repay- 113 PAGENO="0126" 114 PRESIDENT'S 1967 TAX PROPOSALS inent have been met by the position, as I understand it, of the French Government that they would not repay any of this debt unless the rep- aration payments that were due France from Germany as a result of World War I were inaugurated at the same time, so that all of those concerned with the moratorium that was entered into in the early 1930's would assume that obligation. I have an analysis of this situation in much greater detail which I would like to present and enter into the record. I don't happen to have it with me, but I will be glad to bring it down. It will give you and others interested a more complete and detailed picture of the situa- tion involving these World War I debts. (The following analysis was received by the committee:) REPAYMENT OF FOREIGN OBLIGATIoNs TO THE U.S. GOVERNMENT In its effort to halt the loss of gold the Administration has given special atten- tion to the potential contribution of debt repayment,. Virtually all of the loan agreements and settlements made with foreign countries since the beginning of World War II established fixed amorization schedules which call for regular pay- ments over a period of years. We expect both principal and interest on post-World War II obligations to be paid in accordance with these schedules, and with rela- `tively few exceptions these payments are being made. Our receipts from such payments exceeded $800 million in 1966. Only in a few cases has it become im- possible for debtor nations to meet scheduled payments, making it necessary to negotiate a rescheduling of the obligation. Some of the loan agreements provide for postponing payments under certain circumstances. Where disputes arise resulting in payment delays, efforts are made to reach agreement in order that payments may be resumed. There have been a few instances, notably in the case of the Republic of China and the USSR, where it has not yet been possible to reach agreement involving comprehensive settlement of World War II Lend-Lease and related accounts. (The USSR is making payments, on Lend-Lease items which were in production or storage in the United States before V-J Day.) We have also made clear to the governments of nations in strong. financial positions that we welcome repayments in advance of the scheduled due dates. As' a result, the United States has received supplemental payments totaling $2.96 billion since 1959. The situation is different ~v~ith respect to World War I debts. Most govern- ments fulfilled their commitments under their World War I debt agreements until the depression. Debtor governments' stopped making payments in 1932, follow- ing the expiration of the one-year moratorium on debts `owed `to the United States negotiated by President Hoover in an effort to mitigate the effect of these debt obligations on Europe's economic health. Finland is the only' country which is presently meeting its obligations `iii full. Some' `of the other countries which still have world W'ar I debts outstanding have made token payments since the early 1930's, `but no payments at all have been m'ade since the beginning of World War II. While the countries which have large World War I obligations to the UnIted States have never denied the juridical validity of their debts, there is a view widely accepted `among them that the payment of these debts should he depend- ent on reparation' payments by Germany. Resolutions of the problem of govern- mental claims against Germany arising out of World War I was deferred "until a final general settlement of this matter" by the London Agreement of 1053, to which the United States i's a party. The Government of the United Sttaes has never recognized that there was any connection between the World War I obligations of those countries and their reparations claims on Germany. While the London Agreement ,would not prevent the United States from raising, on a bilateral basis, the question of payment of any of the debtor countries' World War I obligations (except in the case of Germany), it must be recognized that any effort on the part of the United States to collect these obligations would undoubtedly raise the problem of German World War I reparations. From the practical viewpoint, thereofre, there does not seem to be any possibility of reaching an agreement on repay- meat in the absence of `an over-all settlement of tile World War I reparations problems, with its wide-ranging political ramifications. PAGENO="0127" PRESIDENT'S 1967 TAX PROPOSALS 115 The French hold to the generally prevailing view with regard to their debts to the United States. They not only have been servicing debts incurred after World War II regularly but have paid more than $880 million in advance of the due date. As of June 30, 1967 France's obligations to the United States, exclusive of World War I debts, were roughly $300 million. France's World War I debt derives from cash advances administered by the Treasury Department pursuant to the Liberty Bond Acts from sales of surplus property after the War. On April 29, 1926, the United States and France entered into an agreement to fund these,obligations which on that date were fixed at $3.8 billion plus unpaid interest but this agreement was not ratified until 1029. This agreement was negotiated on the U.S. side by the World War Foreign Debt Com- mission chaired by the Secretary of the Treasury. The Agreement provided for the issuance of bonds in the principal amount of $4,025,million repayable over a period beginning June 15, 1926, and ending June 15, 1987. It was further provided that interest on the bonds payable semiannually would be 1 percent beginning June 15, 1930 and that the rate would gradually increase over the amortization period, finally reaching 3% percent during the last twenty-two years. The rate applicable from June 15, 1965, was to be 31/2 percent. France made payments of principal and interest on these obligations up to June 15,' 1931. After the Hoover Moratorium of 1931-32, the French Chamber of Deputies on December 14, 1932, adopted a resolution which "deferred" the interest payment due the next day. The French have made no payments on interest or principal since the moratorium. Statistical bulletins published by the French Ministry of Finance do not now include these obligations in the listing of French external debt. The World War I indebtedness of the Government of France due and unpaid as of June 30, 1967 was $5,077 million, including $2,091 million of the principal sum and $2,986 million on interest arrearages. Unmatured principal was $1,773 million. No payments have been made since 1931. The total obligation which might be `said to have been outstanding on June 30, 1967, including both matured and unmatured principal and interest a rrearages to that date, was $6,850 million. Mr. Btmici~. As I understand that moratorium, it was granted under the administration I believe of the `late and beloved President Herbert Hoover. Secretary FOWLER. That is correct. Mr. BURKE. That moratorium was supposed to last for 1 year. Secretary FOWLER.' Yes,' sir. Mr. BURKE. But apparently even under the leadership of General de Gaulle this moratorium is going to last in perpetuity. `Secretary FOWLER. It shows no signs to me of any likely thawing out. Mr BURKE Just one other question, Mr Chairman The CHAIRMAN. Mr. Burke, let'me ask the S cretary if he will make that information available to the members `as well as for the record. Will you supply such copies? Secretary FOWIJER. Yes. The CHAIRMAN. Yes. Mr. BURKE. Mr. Secretary, last year approximately 155' Members filed bills to correct the' inequities in the moving expense problem and this had nationwide support. It is an inequity that has to be corrected and I was wondering if you would have any objections to having that included in this tax bill. S6cretary FOWLER. Congressman Burke, w'e recognize that this moving expense problem is an important issue and pressing for many of those concerned. We have been studying your bill, your proposal, and it has indeed many appealing and interesting aspects. However, it does not involve some tax policy issues which, in view of previous experience with this ~problem, will need careful exploration. The President will be submitting some proposals for tax reform later PAGENO="0128" 116 PRESIDENT'S 1967 TAX PROPOSALS in the session for more deliberate study, as he stated in his economic message last January. These proposals will deal with the permanent structural features of our tax system which in our judgment need early attention. In view of the fact that this surcharge proposal, as I have stressed in my statement, is one that calls for prompt action, we believe that it would be more appropriate to consider the substantive revision of the treatment of moving expenses in a series of equally important matters in connection with the changes in the tax structure, changes which will be proposed shortly. Mr. BURKE. Just looking at it froan a practical point, in view of the rough road that I can see for this bill-4n fact I doubt if any members of this committee are committed at this time to support it, and many of us ha~ve many, many reservations about it-don't you think that the administration might look at this in a little more practical way and put some improvements in this tax bill that might gain a little bit of support for it. Right now I can see a very rough road ahead and I am merely bringing this to your attention and to the attention of the adminis- tration because there are many things that will have to be done with this tax bill before it can go through and this is just one of the ways I am trying to lighten your load, Mr. Secretary. Secretary FOWLER. I don't think you would be lightening the load by adding to it. In this particular case instead of picking up revenue, the end result would be to lose revenue and I `am much more interested in seeing the members of this committee and the Members of Congress face up to the present proposals that are in front of them. As the President has stated, they should be voted up or they should be voted down. The uncertainty that is hanging over the financial markets and the economy as a result of this present situation is one that should be disposed of and I don't think it would be wise to compound that uncertainty by involving, these hearings and this bill with a. number of permanent changes in the structure of our tax system which experi- ence has always proven are going to take many, many months to consider and dispose of. Mr. BURKE. I don't think there is any member of this committee that won't face up to his responsibilities and I think it is `about time that the Treasury faced up to its responsibilities as far as moving expenses are concerned. This is one `of the most unfair parts of our tax structure and it has received a great deal of attention all around the country, and they have been ignoring it for the last 4 years and I think we might have the administration face up to some of its responsibilities and correct some of the glaring inequities that are in the law and possibly this might be the place `to do it rather than the promise of something that is going to happen in the land of never- never. We are getting late in the session `and there are some of us who are concerned about this moving expense bill that feel that, while we might get it before the committee and might have a hearing on it, time will run out, and this being a tax bill, and of course you people can do what you want to do about my suggestion, but I think if you want to help the road and lighten the load all the way through you PAGENO="0129" PRESIDENT'S 1967 TAX PROPOSALS 117 will put in something. here that will show the taxpayers that you are not oniy concerned about reaching down into their pockets and taking their money out of them, but also by putting in something there that will correct the inequities and the unfairness in the law as far as the moving expenses are concerned. Secretary FowI~R. Mr. Burke, let me just say that, and I don't want to let your statement go without comment, I don't enjoy or take any pleasure in reaching down in the pockets of the taxpayer and extracting more money. I have other more pleasurable things I would like to be doing. As I said to the committee yesterday, it have been a strong pro- ponent of the policy of tax reduction whenever the circumstances permit it, and there have been in the last few years instance after instance of the readiness of the Treasury and this administration to espouse a policy of tax reduction which has resulted in the most sig- nificant series of cases of lightening the load of the American taxpayer in the history of the income tax system since it was inaugurated. However, we all have our responsibilities to think not only about the American taxpayer as a taxpayer, but also in his other roles, as I indicated yesterday, as a consumer, as a farmer, as an employee, as a retired person living on income, as a businessman whose life blood is availability of credit. We have to think of our citizenry in all these other capacities and, we believe, that looked at in that aspect for the reasons indicated yester- day, there is a great deal niore involved in this particular bill or pro- posal than simply reaching down into the pockets of the taxpayer. We think it is a very necessary measure to assure economic stability and growth and prosperity which hare now lasted for about 78 months, and unprecedented period of time, and we want to continue that period of prosperity and growth and we believe that it would be seriously menaced if the proposals before this committee were not promptly considered and enacted. Mr. BERKE. I agree with a great many of the statements you have made and I might point out that some of the arguments that have been used here yesterday were the same arguments we used to reduce the taxes, and they seemed to be presented yesterday, almost in toto as the arguments, when you look back at the hearings, ~to reduce taxes. Apparently some of the people in these statements here included the same statement and the same reasons for reducing the rates as they are now for increasing them. In other words, they were to correct the' recurring deficits in the Federal budget. They were going to correct the problem of obsolete plant and unused plant and equipment capacity. They were going to correct the problem of the balance-of-payments deficit, and there were many reasons given here at that time in 1963 and the same reasons were given yesterday. I am a little bit confused about just what the' real reason is for this tax increase and whether it ` is necessary because in reading over the `statements made on advocating the reduction in taxes and then reading the statements made by the three of you yesterday they almost con- ~curred. ` ` 53-349---67--pt. i-9 PAGENO="0130" 118 PRESIDENT'S 1967 TAX PROPOSALS On one hand they said, "Well, this is going to help the economy. This is going to get us on the right road. This is going to correct the deficits." This was going to do all this when you were advocating a reduction in taxes and now we find that the same arguments are being used for an increase. We are sitting here as ordinary men, and not being an economist I am concerned about some of the statements that have been made here. In fact, I recall one of the economists that appeared here and I asked him the question what would happen if we reduced the taxes and in- creased Federal spending and the economy continued on a decline, `What would you do then?" He said, "Well, I would come in again and recommend a further cut in taxes and increase the spending." That seemed to be the theme at that time. Now, this isn't the theme that was presented to us yesterday and I would like to know where the change is and why. Secretary F0wLER. I think it is a very good question, it is a very pertinent one, and one that we receive frequently. I would like to try my hand at it. Chairman Ackley covered it in some depth in his statement yesterday. But as I look at it-I was here in 1963 before this committee advocating the tax reduction bill as an answer to the economic problems of the time and I felt very strongly then and feel very strongly now that the reduction of overly high tax rates at that time was a desirable, and proper, and necessary measure to move the U.S. economy out of the state of relatively sluggish growth which had characterized the economy for the previous 5 years or so. Now, since 1963 the situation has changed markedly. For the last three and a half years the underlying economic and financial picture has been quite different. In late 1963 when this com- mittee was considering that tax reduction program, although there had been, I would call it, a very moderate expansion, the economy was still underemployed and the growth in demand which had character- ized the early years of the expansion, 1961 and early 1962, was becom- ing sluggish. Indeed the unemployment rate was about five and a half percent, and business fixed investment was only a little more than 9 percent of the national output, despite the fact that the year before there had been the investment tax credit, and the change in the de- preciation practices which was encouraging to investment. The growth in the U.S. economy and output still lagged far behind what was necessary for a full use `of our resources and indeed the rates that characterized the economies of other comparable industrialized countries. Now, three and a half years later we face an entirely different en- vironment. We have had during this period of three and a half years since the enactment of the tax reduction act a very dynamic, fast growing economy in which for the greater part of that time the unem- ployment rate has been steadily reduced until it reached 4 percent or fractions thereunder. The range was between three and a half and 4 percent and it has fluctuated in that area for the past year and a half. In some of that period of time there have been some shortages, particularly of sinfled PAGENO="0131" PRESIDENT'S 1967 TAX PROPOSALS 119 labor. Business: fixed investment which had been fairly static during the 5 years up to 1962 and 1963 has surged well up in the intervening years, and despite some recent tapering that we are familiar with by reason of our suspension of the investment credit, is still nearly 10½ percent of national output as against 9 percent 3 years ago and that is a very much more favorable level. Indeed, every year a large amount of new industrial capacity is coming into the economy and productive capacity is expanding at a rate of between five and a half and six and a half percent a year, whereas prior to 1963 it had been relatively static. Again we have the problem of interest rates which I referred to yesterday, which at that time were on a much lower scale and which in the past year have reached 40 year highs and after falling back slightly in the winter are now climbing again. Growth in U.S. output in recent years has been very rapid and at times has pushed hard against our productive potential and created inflationary strains, moving us out of the period of relative price sta- bili'ty~ that characterized 1959, 1960, 1961, 1962, 1963, and 1964. We think, therefore, that the main danger for the economy as it looks ahead is not the sluggishness or that slack that, characterized the years preceding 1963, but the danger of inflationary pressures on prices and of excessive demands in the credit market, and that a temporary tax increase during the period where there is this heavy additional demand on the budget-in excess of $22 billion a year for the costs of Viet- nam-can be in a sense partially compensated for. Congressman Burke, that in a short way is the difference in the ra- tionale of why a tax cut in 1963 was the right proposal and why a tax increase, indeed a moderate one on a temporary basis, is the appro- priate step at this time. Mr. BURKE. I just have two more questions to ask of you. I am not going to belabor that point and I will accept ydur statement although I don't agree with it thoroughly. Actually what the administration is doing is requesting a restora- tion of some `of the cuts that me made in 1963. In other words, looking over this chart of taxes the people will be asked to pay, the individuals will still be paying a lower tax under this tax proposal than they were before the cuts were made in 1963. Is that true? Secretary FOWLER. They will be paying a lower tax than they `were paying before the cuts in the act of 1964, that is right Mr. BURKE. In reference to corporations `where we' reduced the tax from 52 percent to 48 percent, how will `this line up there with the 10 percent surtax? Will the corporations be paying less taxes than they were prior to the 1964 act? . ` Secretary FOWLER. Slightly more. I think about 52.7 or 52.8 per- cent, between 52 and 53 percent Mr. Buiuci~. Mr. Ohairman, that is all I will ask for now. The CHAIRMAN. Mr. Byrnes had not completed his inquiry at the end of the session yesterday. Mr. Byrnes. Mr. BYRNES. Mr. Secretary, these questions are without prejudice or prejudgment. of `what we should' do with respect to the `overall matter of tax increase. Do I get the impression that you feel that Congress is champing at the bit to increase taxes? PAGENO="0132" 120 PRESIDENT'S 1967 TAX PROPOSALS Secretary FowL~n. No; I think Congress is perhaps as reluctant to pass judgment on this tax increase proposal as the Secretary of the Treasury was to propose it. I have been through a long and tortured period of consideration of it and I can well imderstand that the mem- bers of this committee and the Members of Congress want to have a more complete understanding of the reasons for the proposal than can be arrived at in just a few days of consideration. Mr. BYRNES. I asked that because I wonder how you arrived at a timetable calling for an effective date for individuals of October 1, particularly in view of the withholding tax obligation that w~ impose on every employer in the country in regard to compensation he pays his employees. Secretary FOWIJER. Well, Congressman Byrnes, it is a very tight timetable that is contemplated by that proposal and we would be certainly the first to recogmze that normally the Internal Revenue Service starts printing the forms for the coming year around the first of September. It usually takes a month or some slightly lesser time to reshape the withholding tables that would have to be devised re- ;sponsive to any decisions of the Congress and place them in the hands of employers for withholding purposes. We recognize those time factors. That is not the primary reason. The uncertainty that will exist until a decision is taken on this par- ticular question is the matter of primary concern for moving promptly to disposition of this proposal. A secondary consideration is the hope that, whatever happens here, that it could be geared into not too much of a delay in the normal time schedules that call for the distribution of these forms in the early part of the year. Mr. BYRNES. Well, it seems to me that the committee, Mr. Secretary, has the obligation not to impose impossible burdens, particularly on people that are acting as tax collecting agents for the Government. It seems to me that the administration has a similar obligation. I am just wondering what is within the range of reasonableness? Assuming the decision is made to have a tax increase on individuals) what is an appropriate timetable for establishing an effective date. Frankly, I think that an October 1 date is impractical as it is already August 15 and Congress isn't champing at the bit to pass this bill. Statements I have heard from members of the House and of the Senate Finance Committee don't give me any feeling that Congress will be enthusiastic about passing a tax increase bill before Labor Day. An effective date of October 1 is just completely impractical. If you have some information to the contrary, I would like to have it because I may be wrong. Secretary F0wLER. Our information, and I have not personally, but nw staff has been very concerned about this problem, is that employers ne~ed about 10 to 15 days after the ratification of new rates to make the necessary changes~ in the mechanical equipment and the ma- chiriery that is normally employed in effecting the new withholding. Mr. BYRNES. I don't want to interrupt. I want you to finish that. Secretary F0wLER. Just that point, and then a second point is that with the introduction of new withholding, a slippage of some period of time from the effective date of the law and the introduction of the new withholding tables would not make a very great deal of PAGENO="0133" PRESIDENT'S 1967 TAX PROPOSALS 121 difference as far as the individual taxpayer is concerned. It would decrease somewhat the amount of overwithholding in the case of some. it would increase the amount of underwithholding in the case of some. But I don't believe that a slippage of a few weeks between the effective date of the law, presumably October 1, and, let's say, the putting into effect of the new withholding rates on November 1 would be too difficult. You see, the way this increase would work, Mr~ Byrnes, is that the increase for individuals fOr the calendar year 1967 really amounts to only two and a half percent. What you are really doing, if the effective date is October 1, is saying that one-quarter of the 10 percent becomes effective on the entire year's taxes, a two and a half percent increase. ~[r. BYRNES. Are you suggesting that if the effective date of the. tax increase is October 1, the law might provide that the higher withhold- ing wouldn't begin until November 1? You would just forget about the 1 month of withholding? Secretary Fowi~n. No, that would be made up in the final payment for the individual. Mr. BYRNES. The individual. Secretary Fowi~n. Yes. Mr. BYRNES. Well, I am still correct. You are assuming that you would not withhold for the increase attributable to 1 month. Secretary FOWLER. That is right. Mr. BYRNES. There would be no withholding on that. Secretary FowLER. That is correct. Mr. BYRNES. So you wouldn't have the two different schedules of withholding. Secretary FowInE. No, that is right. Mr. BYRNES. Let me ask you, Do you know how many employers there are in the country that are withholding? I imagine it is a large figure. Secretary FOWLER. I don't have that. I can supply it for the record, Mr. Byrnes. I don't have it in mind. (The following information was received by the committee:) There are approximately 4 million employers withholding income taxes from employees. Mr~ Byii~-rs. I wonder how many of those employers have com- puterized their operations. I think the Treasury and the. Government too often assumes everyone is a big operator with computers and that a change in the withholding tables and their obligations in connection with each of their payrolls is a minor inconvenience. You suggest that employers need only crank the new tables into their machinery. I wonder how many of the employers that are going to have an additional expense because of this proposal have computers that they can crank this information into. In order for these, employers to make the necessary changes in 10 or 15 days they will have to put their. entire bookkeeping staff to work. Secretary FowLER. I don't think it is that serious. Our information about this, of course, and our experience is primarily based on the changes that occurred in the schedules in connection with the 1964 tax. PAGENO="0134" 122 PRESIDENT'S 1967 TAX PROPOSALS Mr. BYRNES. They ~ere given time to make the necessary changes, Mr. Secretary. They weren't confronted with a tax proposal contam- lug an effective date only a month and a half from the time the first hearing was held. Secretary FOWLER. I don't think there was a very long interval be- tween the final enactment of that bill when it became law and the new tables were issued and their incorporation into a new withholding. Actually the change in the new withholding can be started just as soon as the Internal Revenue Service is sure what the new rates will be. If it should develop that there is no difference between the House and the Senate, I am being presumptuous here that we would have a bill, the Service could begin the transition to the new rates without waiting for the conference or the enactment. Now, that transition to the best of our experience runs roughly like this. It takes about 9 days to print up the new folder, the new circular. Actually in 1964 it took 5 days, but the circular was smaller, 32 pages then. The Service now tells us it would take about 9 days. At the same time advance notice can be sent to the employers advising them to start preparing for the new withholding rates. We would take about 2 days to distribute the circular to the Service centers, about 3 days to label them and put them in the mail, and about 2 days for delivery to employers, and. then assume enactment at this point, the remaining time, 10 to 15 days, we think is adequate for the employers to incorporate the new rates and notify the employees. If there were not a different schedule in the Senate action and the House action on rates, then from the time of the Senate action to the effective date of the new withholding, somewhere between 26 and 31 days would be required. Mr. BYRNES. In order for the new withholding tables to be effective in October, the Senate would have to take action in conformity with the House within the next 2 weeks. Secretary FOWLER. No; I would say that as a practical matter what we are looking at is action by the Congress in the latter part of Sep- tember, hopefully the rates change to be effective as of October 1, with the new withholding tables and rates to be in operation as of Novem- ber 1 or within 25 to 30 days after the date that the rates appear to be fixed as a result of congressional action. Mr. BYRNES. Dr. Ackley, on page 13 of your statement you list a number of consequences to the economy if Congress were to reject the President's proposal. I wonder if you could tell us what the situation will be if the tax proposal is adopted. It is going to change State and local government spending? Mr. ACKLEY. No, sir. I think we would have to go through these one at a time and substitute a somewhat different assumption about the growth of spending by sectors, depending on the passage of the tax bill. Mr. BYRNES. What about State and local spending? Would that be changed? Mr. ACKLEY. I should think not. Mr. BYRNES. What about spending by the Federal Government? Mr. AOKLEY. I should think again that would not `be changed by the action on taxes. PAGENO="0135" PRESIDENT'S 1967 TAX PROPOSALS 123 Mr. BYRNES. Housing would rise, you say, about $3½ billion if we reject the President's tax proposal, provided funds remam available. What will the housing situation be if we pass the tax bill? Mr. ACKLEY. I would not think it would be changed materially within the second half of 1967. Mr. BYRNES. You say: "Plant and equipment spending should essentially remain on its high plateau," if we have no tax increase. But you also say that "in the absence of a tax increase, it could rise by $1 billion." Mr. ACKLEY. Yes. Mr. BYRNES. I am not sure that is on a consistent basis with your other predictions. Mr. ACKLEY. With the tax increase, somewhat less. Mr. BTniwEs. Your prediction assumes no tax increase. You start your various predictions by saying: "If Congress were to reject the tax proposals" those consequences would ensue. Concerning capital spending you say: "Plant and equipment spending should essentially remain on its high plateau. But, in the absence of a tax increase, it could rise by $1 billion." Mr. ACKLEY. What I am effectively trying to say is- Mr. BYRNES. Capital spending will be less if we pass the tax in- crease, is that it? Mr. ACKLEY (continuing). That in either case we don't expect much of a boom in plant and equipment. With the tax increase maybe it would be a half billion dollars, maybe nothing, but in any case some- -what lower. Mr. BYRNES. It will be less if there is a tax increase? Mr. ACKLEY. Right. Mr. BYRNES. In No. 5 you predict: "Given these gains and the growth of incomes they would generate, consumer spending would rise between $16 and $18 billion." With a tax increase what would consumer spending be? Mr. ACKLEY. It would be affected in the fourth quarter by the higher tax liabilities and withholding and would rise perhaps a couple of billion dollars less. Mr. BYRNES. About $2 billion less? Mr. ACKLEY. I am not trying to be precise but in that range; yes, sir. Mr. BYRNES. Well, the difference would not be too significant, would it? Mr. ACKLEY. Within the second half of 1967 the tax increase would have only moderate effects on the growth of total spending. The more important effect would be in the first half of 1968. Mr. BYRNES. In No. 6 you predict, again, on the assumption that `Congress rejects the tax proposal, that "Inventory investment should begin its recovery, rising by $1 billion to $2 billion." What if we pass the tax increase? Will that eliminate the rise? Mr. ACKLEY. This would not depend directly on the tax action, but it would, indirectly. To the extent that expansion of plant and equip- ment spending and expansion of consumer spending were slowed down you might get somewhat less recovery of inventory investment. I am not trying to make the case that in the second half of 1967 the difference would be major with or without the tax increase. Ex- PAGENO="0136" 124 PRESIDENT'S 1967 TAX PROPOSALS pansion would be reduced somewhat. Instead of expansion in the range of $29 billion to $35 billion, perhaps it would be $25 billion to $30 billion. Mr. Byiuo~s. Do the various figures in these predictions relate only to the last half of calendar year 1967? Mr. AoKn~Y. Mr. Byrnes, as suggested in our testimony there are estimates for the next two quarters. Perhaps that phrase is mis- leading. I was referring to the change between the second and fourth quarter of 1967. I then point out that this pace of advance would accelerate in the first half of 1968 in the absence of the tax increase. Mr. BYRNES. Other than the pace of advance in plant and equip- ment and in consumer spending- Mr. ACKLEY. Plant and equipment spending, consumer purchases, and inventory investment would all be higher without a tax increase. In the case of housing, passage of the tax bill would assure easier monetary conditions, and this means stronger housing. On the other hand, passage of the tax bill and the effect on income would tend to reduce somewhat the growth of demand for housing. But this isn't likely to balance the monetary effect. Mr. BYRNES. Thank you, sir. That is all. Mr. ULLMAN (presiding). Mr. Secretary, when you were here before the committee early in the spring on the investment tax credit bill I asked you whether we might not be in the same situation this fall with respect to our money and interest rate problem that we were last August and September. I don't recall what your answer was but you didn't seem to indicate any great degree of concern. Aren't we about where we were a year ago with respect to the money supply and interest rate problem? Secretary Fowi~rn. Certainly not, with regard to the money supply. The money supply and the expansion of bank credit represent a start- ling contrast to a year ago. Mr. ULLMAN. Why is it that if we have this money supply situation in hand interest rates haven't come down? Secretary FOWLER. Because there has been such a tremendous demand for credit, as I tried to outline in my comments yesterday. Mr. TJLLMAN. We are on the horns of a real dilemma and although your testimony and the testimony of Mr. Schultze and Mr. Ackley have been very instructive, I am not satisfied that we have pinned the problem down to the satisfaction of the members of the committee or to the satisfaction of the Members of Congress or the people of the country. If the economy is not strong enough or if it is not stronger than we think is reasonably safe for the future, then I don't see how we can justify the tax increase in line with the basic philosophy that we laid down 3 years ago when we reduced taxes in order to stimulate growth. Now, there seems to be some doubt as to where we now are in the economy. My judgment would be that the economy is strong, possibly stronger than it should be in some of its elements and therefore a tax increase might be justified; but I believe I am a minority of this corn- mittee in that judgment. PAGENO="0137" PRESIDENT'S .1967 TAX PROPOSALS 125 Last year my concern was-and I expressed it to you time and time again-that we were witnessing an overexpansion in the corporate seg- ment of the economy. We were too strong by far on corporate invest- ment. This is what created the financial crisis that caused you to take action in September which should have been taken about 3 months be- fore because all of the flags were up much earlier. I think that when you took action in September you generally agreed that the problem was overexpansion in the corporate segment of the economy. .. . Now, in looking at the tables in the back of your statement on busi- ness capital outlays I think that, for instance, in shipments of machin- ery and equipment we saw that rapid rise from early 1965 to late 1966, but with respect to shipments of machinery and equipment there Ihas been very little dropoff. Is that not right? Mr. ACKI2EY. Yes; that is correct. It has been more or less on a plateau since September. Mr. TJLLMAN. And that is at a relatively high basis, is it not? Mr. ACKLEY. It is on a historically high basis, yes. Mr. TJTLLMAN. The problem in establishing this balanced economy is that we have to keep a balance between the purchasing power of the people and the productive capacity of our plant, in order to keep a healthy growth; is that not right? Mr. ACKLEY. Yes. There is room for some fluctuation in the relative emphasis as among consumer goods, housing, plant and equipment, and Government expenditures. But essentially that is correct. We can't have large imbalances between the growth of purchasing power and growth of industrial capacity. Mr. TJLLMAN. And one of the danger signals in any economy would be an overexpa.nsion of plant capacity; is that not right? Mr. ACKLEY. It could under some circumstances; yes, and we were worried about that last year. Mr. ULLMAN. And that was a great problem, was itnot? Mr. ACKLEY. It was, indeed. Mr. ULLMAN. In looking at both of these charts on business capital outlays in plant and equipment expenditures we saw a very slight dropoff. But, according to this chart, the plant and equipment expendi- tures today are higher than they were at the peak last September or hst. October. Mr. ACKLEY. You are referring to the shipments of machinery and `equipment? Mr. ULLMAN. I am referring to your chart on business capital out- lays and you don't have it numbered. Secreta.ry F0wLER. I think the broken line is "anticipated." Mr. ULLMAN. The broken line is "anticipated," but the releases of the Commerce Department as of yesterday certainly would tend to confirm that anticipated broken line, would it not? Mr. AGKLEY. I am not sure that we have better information today on total plant and equipment expenditures. I would point out that there is a difference between the top and the lower panel. The top one includes plant expenditures. The lower one refers oniy to machinery and equipment, and plant expenditures have been down somewhat :more in recent months than machinery expenditures. PAGENO="0138" 126 PRESIDENT'S 1967 TAX PROPOSALS Mr. ULLMAN. But even on plant expenditures according to this chart your judgment is that they are approximately at the same level today that they were at the peak last summer? Mr. Aoxn~y. Essentially, yes. Mr. UI~i~&N. And insofar as machinery and equipment are con- cerned your chart would indicate that they are even higher today with respect to shipments than they were last September. Mr. AOIcLEY. Yes, sir. Shipments were slightly higher in June than they were last `September. Mr. ULLMAN. The basis of our problem of course `was the new orders. When we suspended the investment tax credit new machine tool orders dropped off rapidly. When you came before us early this year to restore the investment tax credit I questioned the `wisdo'm of doing it and I think the only justification was the serious threat of recession `in the country. You `did not prognosticate that `that was the situation. You had' other reasons for presenting the bill. Secretary FOWLER. Congressman TJllrnan, what we were concerned with last fall `and what we were concerned with this `spring is a greater degree of stability in the growth of plant and equipment ca'pacity. The cause of concern was the pace at which plant and equipment expendi- tures had proceeded last year up to the time of the `September pro- gram, not the fact that it was increasing. It was the very rapid pace' of the increase of, as I recall, about 16 or 17 percent in the year 1966 that was the cause for concern. It wasn't, at least in my view, the level `of plant and equipment ex'penditures that had been reached. It was the gradient or the rate of the very rapid expansion, the `boom in that particular sector, that was creating an imbalance in the economy. I think t'hat is no longer the case. Mr. AOXLEY. I think it `is relevant to point out that the capacity of the machinery and equipment industries to produce new machinery' and equipment is also expanding. There `has `been `heavy investment by that Industry itself in equip- ment, so that `its ability to produce capital goods has also expanded.. Even though total shipments ha've merely leveled `off, the pressures on the capacity of that industry have substantially eased. They have con- tinued to recruit and train labor. They put into effect extensive train- ing programs. They `have expanded their own capacity by investing themselves `in additional plant and equipment so that we now have the situation of reasonable `balance in the machinery industries. Mr. ULLMAN. Why can't you economists develop a meaningful rela- i'ationship between proper plant expansion and the purchasing capacity of the public so that we can have meaningful guidelines to follow in exercising our tax policy? What I am basicaly getting to, as you well know, is the balance be- tween putting the weight of this tax increase on the corporate economy as against the individual purcha~ing power. I don't know why we think it should be across the bo'ard. I don't think that it should be weighted heavier on corporations because that' might be an easier political `thing to do. I think th'at we should be able to make a judgment according to where the pressures on the economy are and whether corporate expan~ion is proceeding too rapidly or' whether it isn't. PAGENO="0139" PRESIDENT'S 1967 TAX PROPOSALS 127 The justification for suspending the investment credit was that corporate expansion was too rapid. We of course put it back into effect much earlier than January 1968 because we were afraid that maybe the dose was too big. I didn't completely concur in that judgment. But today it seems to me that we have the same situation as last year and are in danger of overexpansion in the corporate economy, whereas real individuaj income has not gone up correspondingly. Would you comment? Secretary Fowi~n. I would like first to say that there has been a sharp change in that respect in the last year just in terms of corporate profits. Personal income has gone up steadily and indeed has been on the same steady course it has for some years, but corporate profits have leveled off, have fallen back, as reflected in our revenue estimates. The concern that you voice that there is a great inducement in the present level or movement of corporate profits to a new investment boom does not seem to me to be a very real danger. Mr. TJLLMAN. Wasn't there a story in this morning's press with re- spect to mudi higher corporate profits? Secretary FOWLER. No, I didn't see anything about their being much higher. It seemed to me the story was that the drop in corporate profits that had been characterizing the recent quarters had now bottomed out and there was a $200 million increase on a $79 billion base. Mr. ULLMAN. But what are you talking about? You are talking about $80 billion, which is a rather high corporate profit picture historically, is it not? Secretary F0wLER. Oh, yes, yes. So is personal income. Everything ishigh. Mr. TJLLMAN. Because there was some decline in corporate profits I think the tendency in these hearings has been to look at the trend for the past 6 months and not to look at the real level that we are operating on. The level of corporate profits is at an ailtime high with the exception of the peak of September of last year, is that not right? Secretary FOWLER. Yes. Mr. ACKLEY. Yes, it is, but the flattening of corporate profits that began in the first quarter of last year has materially changed the relative income share since that period. Let me give you just a couple of numbers that I happen to have be- fore me. If we go back to the second quarter of 1965, and I pick that only because it was a period immediately before. the beginning of the defense buildup in Vietnam, from the second quarter of 1965 to the second quarter of 1967 corporate profits before taxes are up less than 5 percent. Over that same period-from the second quarter of 1965 to the second quarter of 1967-total compensation of employees, all em- ployees, is up 1~ percent, and total individual income is up nearly 17 percent. Mr. ULLMAN. Is this real individual income? Mr. AOKLEY. No, these are all in terms of money magnitudes rather than real. I don't know how one deflates corporate profits. If we apply the same deflator-the cost of living index, say-to all of them it would reduce them all correspondingly. PAGENO="0140" 128 PRESIDENT'S 1967 TAX PROPOSALS If you choose to deflate corporate profits by some different price index than that which you apply to personal income, then you could get some slight relative difference, but it couldn't change the picture materially. Mr. TJLLMAN. Let's look at the money problem and pin the basic responsibility as to the source of the pressures on the money market. Give me some figures with respect to the corporate expansion in the money market, the municipal governments, and so on. Where are the pressures basically coming from? Mr. ACKLEY. I think Secretary Fowler's statement yesterday con- tamed some of the most important numbers on that. Secretary FOWLER. The key figures in this area were discussed on page 19 of my statement where I said: A major cause of the rise in long-term rates since March is the huge volume of borrowing by corporations and by state and local governments. New capital issues by corporations in the first seven months of 1967 were a record of $13.5 billion, up 23 percent from the similar period in 1966-which has been a record- breaking year. If one excludes private placements by corporations and looks just at public offerings, which have a greater immediate market impact, the volume of new issues was $7.2 billion in the first half of this year, against $8 billion in all of 1966 and $5.6 billion for all of 1965. If you want some comparable figures on the borrowing by State and local governments, wait just one moment and I will give you our most recent breakdown. Mr. TJLIJMAN. This is a very substantial increase in corporate expan- sion in the money market, is it not? Mr. ACKLEY. Yes; it certainly is. Mr. TJLLMAN. It is even more startling than last year, is it not? Secretary FOWLER. Let me give you the State and local now. It is onpage 20: States and municipalities have also borrowed very heavily, and for somewhat similar reasons-making up for some postponements of borrowings last year and seeking to obtain some money needed now or in the future while it is currently available. New tax-exempt issues by state and local authorities came to $8.8 billion in the first seven months of this year, up about 28 percent from a year earlier. Mr. TJLLMAN. That is up 28 percent. Secretary FOWLER. Yes; with the other up 23 percent. Mr. ULLMAN. What is it up in the corporate area? Secretary FOWLER. I just read that- New capital issues by corporations in the first seven months of 1967 were a record $13.5 billion, up 23 percent from the similar period in 1966. Mr. ULLMAN. Exactly the same amount of increase- Secretary FOwLER. Twenty-eight percent in State and local govern- ments and 23 percent in corporations. Mr. TJLLMAN. Twenty-three percent in the corporate sector. What part of this expansion in the money market has gone into increased plant capacity and what part has been merely a juggling of financial bookkeeping? Secretary FOWLER. I don't think we can give you any precise break- down on what these borrowings have been used for. I did say in my comments yesterday that to a considerable extent, although we can't identify the precise quantity, this heavy pace of borrowings has re- flected the desire of the corporations to take advantage of the credit PAGENO="0141" PRESIDENT'S 1967 TAX PROPOSALS 129 uvailable to rebuild their liquidity and reduce their dependence on the banking'system. The memory of last summer still remains and I think corporate treasurers have tended to adopt a policy of rebuilding their cash. position-certainly in some cases and to some extent in connectiou~ with particular issues of securities. . Mr. TJLLMAN. What is the trend today? This is important in my mind. Does it seem to be slacking off in either the corporate area or the municipal area? . Secretary FOWLER. I can't say so. There is usually, I think, in the last half of the year some seasonal type of slackening. As far as the basic thrust of it, I see no signs of change. I think a great deal depends upon what happens here. Mr. TILLMAN. Aren't interest rates actually going up on almost a day-to-day basis in all of these departments? Secretary Fowr~u. No. Mr. TJLLMAN. Municipalities are paying ~ percent for tax-~x~mpt bonds. Secretary FOWLER. Not on a day-to-day basis but the general, trend has certainly been up in the long-term field since early spring, since March, I believe, to pick a given month, and the trend downward in short-term interest rates bottomed out in June and it has since moved up. I think in the recent period there has *been a little bit more of a sense of stability about interest rates. A good deal more questions are being raised as to whether under currei~t conditions they have reached stability, but I must repeat again .a great deal depends upon what hapepns on this particular set of tax proposals and what the out- look is for Federal borrowing in the `market. Mr. ULLMAN. Let's pursue the high-interest-rate problem just a bit further. You have authority to issue 7-year notes, have you not? Secretary FOWLER. Yes, sir, as of July 1. Mr. ULLMAN. Have you contemplated doing this? Secretary FOWLER. We think about it. Mr. TJLLMAN. What interest rates, in your judgment, would you have to put on a 7-year note in order to get it marketed? ` Secretary Fowi~iui. Mr. TTllman, I just don't like to answer a question like that `when we have a financing shortly ahead of us. Mr. TJLLMAN. I appreciate that too, but the newspapers are saying it wOuld have to be 51/2 percent in order to' market a 7-year note. Secretary FOWLER. I don't believe I would want to comment or con- jecture on what the rates would `be. `Mr. ULLMAN. I reluctantly agreed to extending the definition of "notes" to 7 years; but if you have to offer them,at 5l/2-percent interest rate you ought not go into the market. I think if interest rates are this high we have to stay out of the long-term market regardless of the problems that it creates. The Federal Reserve Board and others are going to have to take more stringent action than we have in order to make sure that it doesn't hapnen. Getting `back to the problem of a balance between purchasing power or capacity and corporate profits, we must satisfy the people on two counts. The first is that they are better off now than they were 3 years ago wi'th respect to real individual income. PAGENO="0142" 130 PRESIDENT'S 1967 TAX PROPOSALS Translate your figures into real individual income. Also recognizing that the labor force and the number of people are expanding, I would like to get a figure that would be indicative, of an individual's situation, with respect to his reai income 3 years ago as against today. Can you give me that kind of a figure? Mr. ACKLEY. I can give you I think most of what you are seeking. We publish each month in "Economic Indicators" a figure called per capita disposable personal income in 1958 prices; that is, in constant prices. That figure has continued to advance. For example, in the second quarter last year per capita disposable income-that is after taxes-was $2,302. In the second quarter of this year it was $2,388. I don't have quarterly figures going behind that. But the advance has been steady and uninterrupted except for a brief period of stabil- ity in the first part of 1966. Mr. ULLMAN. If I read the figures correctly back in 1965 third quar- ter it was $2,258, is that right? Mr. ACKLEY. That is right. Mr. TJLLMAN. And it is $2,388, the second quarter of 1967. What kind of a percentage increase is that? Mr. ACKLEY. It is again somewhere between 31/2 and 4 percent, just roughly, over the past year. Secretary FOWLER. Mr. Ullman, I could give you some figures here on percentage changes from June 1966 to June 1967 if you wanted to jot them down. Mr. TJLLMAN. Yes. Secretary FOWLER. JR total personal income, plus 7 percent. Mr. TJLLMAN. Is this seasonally adjusted? Secretary F0wLER. Yes, they are. It is a table I have prepared on real income. Mr. ULL1~IAN. Give me the figures then. Secretary FOWLER. Total personal income, 7 percent. In total wages and salaries, 6.6 percent. Mr. TJLLMAN. This probably is not adjusted to price increases? Secretary FOWLER. I am going to give you the OPT thing at the end so that the adjustments can be made. Mr. TJLLMAN. All right. Secretary Fowi~a~. In wages and salaries in manufacturing, 3.7 per- cent; in wages and salaries in distribution, 6.9 percent; in wages and salaries in service industries, 9.4 percent; and in wages and salaries in Government, 10.6 percent. And now the OPT the consumer price index, 2.7 percent, I think ap- plied to those figures I have given you, would give you roughly your picture on real income. Mr. ULLMAN. You would reduce real income by 2.7 percent? Secretary FOWLER. Roughly. Mr. ACKLEY. 2.7 from each. Mr. TJLLMAN. The increase is no~ substantial in manufacturing wages and salaries which i~ the big area; it is not? Mr. ACKLEY. Manufacturing is one that accounts for roughtly 25 percent of total nonagricultural employment. Mr. TJLLMAN. Would the total wage and salary increase of 7 per- cent be adjusted to 5 percent? PAGENO="0143" PRESIDENT'S 1967 TAX PROPOSALS 131 Mr. ACKLEY. Substract 2.7. It would be roughly 4.3 percent. Mr. ULLMAN. I don't think you people are the best salesmen in the world. Let's turn to table 3 of your testimony, Mr. Secretary, in which you compare tax liabilities in 1963 against these proposals to get at the other side of the coin. `The second thing we have to tell the individual is that they are paying less taxes now than they were 3 years ago because I think there isn't one person in 10 that believes that he is. I haven't talked to anybody yet who has recognized that he has a tax reduction. Secretary F0wLER. There are other taxing jurisdictions, Mr. TJll- man. There are State governments and local governments, and this table is concerned with what this committee and the Finance Corn- mittee and the Congress and the administration have been doing in `the field of Federal taxes. Mr. TJLLMAN. That is right because their total tax bite probably has increased; has it not? Do you have figures on that? Secretary Fowi~n. I don't have figures on that. Mr. IJLLMAN. I wish we did because the individual doesn't differ- entiate too much between who he pays the taxes to, but adds up his total tax bill and it is pretty high. Mr. ACKLEY. I think it should be pointed out that this disposable income that I was using is after all taxes, Federal, State, and local, and it has continued to rise even in constant prices. Mr. TJLLMAN. They are after all. That is very important. Mr. ACKLEY. I should point out that people's judgment of their tax load is influenced by the fact that at the same time as tax rates have fallen their incomes have been rising, so that the man who is now paying tax at a given income level is comparing his taxes with sev- eral years ago when his income was also lower. Mr. TJLLMAN. But these figures you gave me are after all taxes, in- cluding property taxes; is that right? Mr. ACKLEY. Yes, that is right; after all taxes. Mr. ULL~tAN. You are sure of that concerning those figures Mr. Fowler gave us? Mr. Aoiu~i'x. The figure I quoted are after all taxes. Disposable per- sonal income is after income and payrool taxes, the direct taxes. When you deflate, you take out the effect of the indirect taxes because they are reflected in prices. Mr. TJLLMAN. Is that true of the figures- Secretary FOWLER. Mine were not in terms of disposable income. It involves that qualification. They were before taxes. Mr. IJLLMAN. Then that leaves me confused because I was relying on the Secretary's figures and I would like to know how to adjust those. Mr. ACKLEY. We do not have income after taxes by specific groups in the population. Mr. TJLLMAN. We have a 4.3-percent increase. There might very well have been a greater increase than that in taxes, so if we are talking about after taxes there might very well be a reduction in individual in- come today. Mr. ACKLEY. No; the figures which the Secretary gave you I think were 7 percent for total personal income before correction for price increase, about 4.3 percent for personal, income after price increase, `uid the figure I gave `~ou earlier for per cipita income in constant PAGENO="0144" 132 PRESIDENT'S 1967 TAX PROPOSALS prices show an increase of 3.7 percent ftom second quarter to second quarter, and that is after taxes. Mr. TJLLMAN. Getting back to this table, Mr. Secretary, the other thing that we are going to have to be able to demonstrate to the peo- ple is that they are actually paying less taxes. You should have an additional column at the end which indicates the adjusted amount of decrease in taxes between 1963 and now after taking into considera- tion your tax proposals. Let's get down this chart very quickly and compute that additional column because I think it is quite important. I want to know about the person who has a $3,000 income. Let's. take the married couple with two dependents, which, I think, is an average American family. With a $3,000 income how fnuch less taxes will he be paying after this tax increase that you are proposing than he was in 1963? Let's do that with each one of these columns. How much less will this family with a $3,000 income be paying after the increase than they were in 1963? Secretary FOWLER. Well, with the $3,000 income he would be pay- ing $65 in 1963 and $4 now. Mr. IJLLMAN. There is an actual- Secretary FOWLER. Decline. Mr. ULLMAN. The difference is $60 to $61. Secretary FOWLER. $61. Mr. TJLLMAN. After the tax increase he will still be paying $61 less than he was in 1963. All right for $5,000 income. How much less is it? Secretary FOWLER. $130 less becau~e there is no effect of the sur- charge to be calculated in those first two categories. Mr. TJLLMAN. So the person making $5,000 will not have a tax in- crease under this proposal and will, in effect, be paying $130 less on the same income than he was in 1963? Secretary F0wLER. That is correct. Mr. ULLMAN. Let's go to the $7,500 column. How much less? Secretary FOWLER. Mr. Schult.ze has been doing some calculating here. Let him give you the figure. Mr. SOIJULTZE. Let me run these down for you. I hope my arithmetic was correct. I did it in a hurry. The $7,500 man will end up paying $122 less. The $10,000 man will be paying $147 less. The $12,500 man will be paying $177 less. The. $15,000 man will be paying $218 less. The $20,000 taxpayer will be paying $324 less. The $25,000 man will be paying $465 less, and the $35,000 taxpayer will be paying $755 less than he was paying in 1963. Mr. TJLLMAN. After a tax increase of 10-percent surcharge taxpayers will still be paying those amounts less in each category than in 1963? Mr. SCHtTLTZE. Yes. Mr. ULLMAN. This is a very important thing to get across to the peo- ple who are being taxed because as of right now I see no favorable sentiment whatsoever among the American people, but a great deal of misunderstanding because they think that their Federal taxes are higher and this is an additional increase. I am taking too much time and I am going to hurry with just a few questions. Mr. Director, what will be the increased receipts, on an annual basis, from your proposal? You have told us $7.4 billion, but this is not PAGENO="0145" PRESIDENT'S 1967 TAX PROPOSALS 133 on an annual basis. What are we talking about with respect to an an~ nual increase? Mr. SOHULTZE. I think the Secretary has that figure. Secretary FOWLER. You are talking about the full-year effect. Mr. ULLMAN. Yes; and I would like to have justthe 10 percent too.. I would like to have the full package and then just the 10 percent. Secretary FOWLER. Well, I can give it to you for the 10 percent readily.. For the full package it would take a little more computing.. Mr. ULLMAN. We don't want the acceleration because that is a one- shot thing. We just want the 10 percent. Secretary FOWLER. Well, now, in calendar year or liability, or do you want it in collections on a fiscal year basis? Mr. ULL]SIAN. Liability, full-year effect? Secretary FOWLER. Liability, full-year effect? Mr. TJLLMAN. Yes. Secretary FOWLER. About $9,270 million, computed at calendar year 1967 income levels. Mr. ULLMAN. $9.27 billion will be the Secretary FowLnR.That is a rough figure. Mr. 1IJLLMAN. And that iS just limited to the 10 percent, a liability based on a full-year annual basis.? Secretary FOWLER. That is right. Mr. ULLMAN. Then when you are talking about $7.4 billion you are only talking about the effect- Secretary FOWLER. $6.3 billion is the surcharge component of the $7.4 billion. Mr. ULLMAN. You are talking about $6.3 billion then for the fiscal 1968, and for fiscal 1969 you would be talking about $9.27 billion, be- cause the acceleration will not be effective in fiscal 1969; is that right? Secretary FOWLER. No, we are talking about calendar 1968. When you talk about collections, about what comes to us-you see you asked for it in terms of tax liabilities. That means the liability of the tax-.~ payer. Now, if you turn to the question of how it comes to us in terms of collections I have to give you a different figure. Mr. TJLLMAN. Give us the figure for fiscal 1968 and fiscal 1969. Secretary FOWLER. About $6.1 billion for fiscal 1968, again corn-. puted at calendar 1967 income levels, and $8.7 billion for. fiscal 1969.. Mr. TJLLMAN. That is without acceleration.? Secretary Fown~n. That is right. Mr. TJLLMAN. With. acceleration those figures are $7.4 billion, and what for fiscal 1969? Secretary FOWLER. Well, you wouldl have a much larger take from the extension of the excises in fiscal 1969 because there is only about~ $300 million that would come into the Treasury in fiscal 1968 as a. result of the extension of the excises from April 1 on. In fiscal 1969 from the excise extension there would be about $21/2. billion. Mr. ULLMAN. In other words, collectionwise it would be a little under $9 billion for fiscal 1969; is that right? Secretary FOWLER. No, it would be $8 billion,, a little fflc~re than $8~ billion from the surcharge, and. $2.5 billion actually different on the~ excise. 83-349-67-pt. 1-10 PAGENO="0146" PRESIDENT'S 1967 TAX PROPOSALS 134 Mr. TJLLMAN. We are talking close to $11 billion. Leave the excises ~out and give me the 10 percent and the acceleration because the excise is not a new tax. Secretary Fowu~ai. It is just the maintenance at present rates. Mr. ULLMAN. Give me the figure for fiscal 1969 with respect just to acceleration and the surcharge. Secretary F0wI4ER. I have given you the best I have on the surcharge. The acceleration drops down from $800 million to $400 million in ~fiscal 1969. Mr. ULLMAN. So, in effect, we are just above $9 billion in actual col- lections. Secretary Fowu~n. That is right. Mr. TJLLMAN. Mr. Secretary, looking at the economy, and I have reg- istered my concern to you about it as well as the tax package, you indicate that you want the corporate and the individual rate increase to be the same. You have indicated, however, in your tax package some difference because you have imposed a different date on each one of them. You ~certainly must recognize that there are some dangers in corporate ~expansion or you wouldn't have made that part retroactive to July and put at later date on the individual tax. Secretary Fowr,en. No; I think that the application of the retro- nctive principle to corporate taxes is more compatible with practice and with the administration of the tax. There has been a general expectancy I think on the part of corporations that there would be a surcharge. As far as the administration and collection of the tax as of July 1 with corporations, I don't believe it would impose any undue hardship, whereas with the individual I think it has not been custom- ary in the past and not a welcome suggestion to impose a retroactive tax. Mr. IJLLMAN. Mr. Secretary, I want to get your expression of opinion with respect to the general monetary policy that must be followed even with the tax increase. Would you not say that even assuming a 10-percent tax increase, that we must maintain a continuing policy of monetary ease, at least at the levels that we have today, if we are to keep the economy in balance and keep from having another financial crisis of the kind we had last September? Secretary Fownui. Mr. Ullman, I have tried to indicate in my state- ment that one of the primary reasons in my judgment for the sur- charge proposal, and for the efforts to hold down expenditures and reduce them, is to enable the Federal Reserve System to follow the policy of monetary ease it has been following since last fall. I think that that is an important objective for us to seek and to achieve. It is one of the primary reasons I think it is important for the Congress and the administration through the taxing arm, and the Congress and the administration on the other side of fiscal policy, the expenditure side, to create and maintain a situation in which the Federal Reserve System can do its job properly and, consistent with its responsibilities, carry forward a policy of monetary ease. Mr. TJLLMAN. You are concerned about the trend toward higher and higher interest rates, are you not? PAGENO="0147" PRESIDENT'S 1967 TAX PROPOSALS 135 Secretary FOWLER. I have been. I have been for very long standing. I think that it would do us all good to remember and look back and read the variOus statements that have been made about high interest rates `all last year on the floor of the Congress, the statements that *were made in the President's message last September about his con- cern at that time, the statements `that were made in his economic mes- sage this `year. All of that concern that has been voiced' in the past is very relevant to this decision that now confronts you. Mr. ULLMAN. I appreciate' that but I also look at the picture of increasing interest rates and see the possibility of having another `financial crisis on our hands in the future. Secretary FOWLER. Mr. IJilman, I think the significant thing is that `here there has not been an `increase in interest rates accompanied' by .a policy of monetary, restraint, but, on the contrary, a resumption of `an upward trend in interest rates in both the long-term and now the short-term area at a time when, and in conjunctiOn, with. a policy of monetary ease which has very, very definite hallmarks. For example take the amount'of money supply that has been created. Actually this year the rate of growth in money supply through July `is about at a 7-percent seasonally adjusted annual rate. The rise for all of 1966 was 1.9 percent. Bank credit has been substantially expanding, and yet `despite all `that, you have had this upward trend in interest rates which reflects `the demand situation for money in the market. Mr. ULLMAN. I haven't been critical of the Fed because I have been in perfect agreement. I think it would have been disastrous to do any- `thing else. I think their policy, as the chairman has indicated, in 1966 was a disastrous one, but now this is where you come in ~with your `part of the program. Let me express my opinion. Just the passage of the 10-percent sur- charge is not going to be an answer to high interest rates. I hope it will be helpful, but a lot of other things are going to have to be done. Secretary FOWLER. Holding down Federal expenditures is very "important. Mr. TJLLMAN. Yes, and I am sure that you are going to do that to "the maximum extent possible, but I think it has been pretty clear here "that you can't solve this problem that we have before us by just cut- ting expenditures. Secretary FOWLER. Absolutely, you can't. This tax bill is indispens- :able. Mr. TJLLMAN. This year in the two items of defense costs and in- terest rates, we have a `total expenditure of approximately $95 bil- `lion. That was the amount of the total budget in 1965; wasn't it? Secretary FOWIJER. Pretty close. Mr. TJLLMAN. For only two items, defense `and interest rates, we were `spending-what was the whole budget 3 years `ago? This is a serious situation. I think that we `have no alternative but to pass the tax in- crease. The kind of balance we put on it we have to decide by taking a little closer look at the statistics, but whatever amount of the debt you have to finance on the market, I would hope that `to the maximum extent possible you would use the devices that will keep the `pressure off :the private market. Secretary FOWLER. I don't know what devices you have in mind. PAGENO="0148" 136 PRRSIDENT'S 1967 TAX PROPOSALS Mr. TJLLMAN. I would hope you would use the trust accounts and that the Fed would expand its holding to `the maximum extent possible. Secretary FOWLER. There are very definite limitations on the extent to which you can use the trust accounts. That depends upon the inflow of cash to those trust accounts and that is something over which we have no control. Mr. ULLMAN. I would hope you would use them to the maximuiu extent possible. Secretary FOWLER. We always have used them to the maximum extent. We have to invest that cash as it comes in interest-bearing securities. There is no limitation there. Whatever comes in we will iflvest. Mr. ULLMAN. I would hope that through whatever influence you have on the Fed, you would continue to encourage the policy of increasing the Fed's holdings of Government securities. They should also use whatever devices they have in the discount window with the banks to keep credit growth from becoming inflationary. It is my judgment that these things can be done, but the interest'. rate situation is of such a serious nature that it is something that is `goiirgto require a great deal of attention by a lot of people to keep from developing into a future money pattern. Secretary FOWLER. I think when Chairman Martin is before you,. you will have, of course, a full opportunity to go over this with him,, but just let me say I don't think there is any magic in how we can. handle this problem of `high interest rates without this tax bill. There is no magician afoot that can do it without the risks that have `been pointed out if we have the kind of expanding economy with all these .pressures'thatt are on it in the period ahead. Mr. ULLMAN. Thank you very much. Mr. Curtis. Mr. CtmTis. Thank you, Mr. Secretary, I can understand what `I regard as some confusion on the part of my colleagues who have been interrogating you regarding the theory that an increase in tax rates' will bring in `more revenue, when in 1964 we proceeded on .a different economic theory; namely, tha't lower rates would increase revenue. I think it becomes important to review what was the real economic theory followed in the tax cut of 1964. It `was not the theory of. new' economics, which called for continuing increases in Federal expendi- tures of about $5 `billion a year (which was occurring) on the theory' that aggregate `demand had to be increased. We followed the converse theory-that a cut in tax rates would' increase the tax base, that is, economic activity, and that simultaneous' expenditure restraint would prevent inflation or high interest rates.. The figures are `there for anyone to look at. The 1964 expenditure' level was $97.8 billion. In 1965 it was $96.5 billion. Actually, we cut a little in Federal spending. Now, strangely enough, this point has been overlooked. `But it bears' directly on whether increasing tax rates, which I think are too high right now, will actually increase revenues, cut back on .the..base, name- ly. economic activity, so that `revenues will .bereduced. I appreciate very much Mr. Ackley's analysis of. the. economic situ- ation because that is our attempt to measure the tax base. Just as I argued in 1964' that we had to `hold Federal. expenditures,. ~ I. argue PAGENO="0149" PRESIDENT'S 1967 TAX PROPOSALS 137 today that the only c,onceivable way you are going to get an increased revenue from an increased tax rate is by holding down or cutting back on some of these expenditures already in contemplation. I doubt that this would work today, however. Now, in the three papers presented here I am pleased about one thing-the rhetoric calling attention to the economic damage that can come through high interest rates. But 1 think it has now been brought out that right now, without the tax increase or anything else, with fiscal 1967 just finished, we are back at interest rates comparable to those in 1966, which were the highest that we had since the end of World War I. We are not just talking about the impact of this com- ing deficit; we are right in the middle of economic harm resulting from the last deficit, namely, these high interest rates. The rhetoric is excellent in regard to the economic damage of infla- tion, but I would point out, as Mr. Ackley did point out, we are talk- ing about something we alraeady have, entirely apart from what this deficit for 1968 might produce. The Consumer Price Index went up by 0.4 last month, and by Q.3 the month before, did it not? I would pause here a moment to ask whether you do not feel that this inflation is more cost-push-resulting possibly from the inflation of 1966-and not so much demand-pull inflation? Mr. ACKLEY. Yes, I would certainly agree that the increase in prices of recent months has been largely from the cost side and not because of excessive demand. Mr. CtIRTIS. We have further labor-management contracts that are coming up for negotiation. I might say that to a large degree, the im- petus behind the Federal pay raise is the impact on Federal employees from the 1966 inflation. Consequently some of this increase that we see on the expenditure side is merely people trying to compensate for the impact of inflation that has already occurred and inflationary forces presently in existence. In the area of the deficit in our international balance of payments, the rhetoric, in my opinion, was not quite as good. I would like to have seen a better discussion of the dangerous situation we are in in this area. Now, at this point I would like to pause a moment to discuss a point not yet developed. First, do we now have the second quarter figures for this year on our international balance of payments? Secretary FowI~R. They have not been announced as yet. They are scheduled to be released by the Department of Commerce tomorrow. Mr. CuRTIS. Because certainly the figures for the first quarter of 1967 were most alarming on the liquidity basis. I am reading from the Economic Indicators on page 25. It was minus $2.176 billion, which is a considerable rise. What is even more disturbing was the deficit on the official reserve transaction, the measure that the administration had requested us to use in estimating international balance of pay- ments; a whopping minus $7.288 billion. No one from the administration, to my knowledge, has ever com- mented on it. I think there are some explanations for the tremendous size of that. Of course, part of it was the unnatural in a sense or atypi- cal figure for 1966 which was a plus $225 million, but I wonder if you would comment now. PAGENO="0150" 138 PRESIDENT'S 1967 TAX PROPOSALS It seems to me that we have a very serious, if not critical, situation in these figures for the first quarter unless the second quarter-I don't know what they are going to show-balances this off in a very radical: way, but would you comment on the problem? Secretary FOWLER. Mr. Curtis, first, you have hit a number of points.. With regard to the other measure of balance of payments, the official settlements basis, as you yourself observed, the surplus in that measure in calendar year 1966 was the result of flows of funds in some measure which were unnatural and not expected to last. You will find that in all the comments that we have made on that particular phenomenon we went on to say we expected to see that reversed during the coming year, and we think that that is actually what has been happening and. that when the official settlements figures for 1966 and 1967 average out: you will probably find that there is not any greatly different trend over all between that picture and the picture you get on the liquidity deficit.. Mr. CURTIS. The only comment I would make, of course, and I know you realize it, is the figures of $7 billion, though, is so immense it is going to take all sorts of adjustments even to bring that down, be- cause our previous figure on an annual basis, the highest, just reading from this table was $3.4 billion and then $1.3 billion, $2.7 billion, $2: billion, $1.5 billion, and $1.3 billion. There we have this most unusual one of $7.2 billion. Secretary FOWLER. A lot of it was the recovery of the pound in. that period. A lot of it was the flowback of funds that had been brought into the United States- Mr. Ctmrns. Short-term. Secretary FOWLER. In 1966. Mr. CURTIS. Funds which many warned last year could not be counted on. I don't think you were, but I know that I felt a strange silence on the part of the administration in not joining in the warning. Secretary F0wLER. I did, Mr. Curtis. Mr. Ctnrns. You did personally. I agree with that. I say the over- all picture. But, at any rate, the minus $7 billion is so large that it is going to take an awful lot of- Secretary FOWLER. That is an annual rate, Mr. Curtis. Mr. Cuiu'is. I understand. *Secretary FOWLER. I don't think you should project a first quarter where there has been a marked flowback of funds from this unusual situation last year. I don't think you should imply that that is going to go on. Mr. CURTIS. I am not. I am simply saying that it is so large that you are going to have to do a lot of ex~planation to bring it back be- cause even on the liquidity basis, the first quarter deficit is running. at an annual rate of minus $2.1 billion, compared to $1.3 billion in. 1966 and 1965. Secretary FOWLER. On the liquidity basis the figure for the first quarter was up from what we had hoped it would be. We had hoped it would hold and perhaps decline from the $1.4 billion level of the deficit last year, and the $1.3 billion in 1965, but the fact of the matter is that the foreign exchange costs of our operations in Southeast Asia have substantially increased and just the direct foreign exchange costs in Southeast Asia account for by far the major portion of that liquidity deficit. So confronted by the financial and physical prob- PAGENO="0151" PRESIDENT' S 1967 TAX PROPOSALS 139 lems that we have here today in connection with the regular financing of the Federal Government we do point to the budget expenditures in excess of $22 billion that are incurred in this year. We also have to point to the upward of $11/4 billion of foreign ex- change costs as compared to the foreign exchange costs in the early part of 1965L Mr. Cuirns. No; I appreciate the reasons for it. Secretary FOWLER. Let me add one other thing to complete this. Mr. Cuirns. Yes. Secretary FOWLER. I think we should also note that during this year there has been a very sharp drop in the outflow of gold compared. to previous times, even despite the Middle East crisis. Indeed-I will supply these things precisely for the record-but were it not for our sales for domestic use of gold, jewelry, and other purposes, $2 million worth, we would have virtually complete stabilization in the first half of this year as far as our gold outflow is concerned. (The following table was received by the committee:) U.S. NET GOLD TRANSACTIONS FOR FOREIGN MONETARY AND DOMESTIC INDUSTRIAL AND ARTISTIC USES (1960-67) [In millions of dollarsj 1960 1961 1962 1963 1964 1965 1966. January to JUne 30, 1967 With foreigners For domestic uses -1,669 -35 -820 -55 -833 -57 -392 -69 -36 -89 -1, 547 -118 -4311 -1411 -3 -62. Totals -1,703 -875 -890 -641 -125 -1,664 -571 -65 Notg: Figures may not add due to rounding. Mr. Cui~TIs. I certainly hope you are not getting confidence count- ing on from that figure, because dollar holdings or claims against gold~ still remain and keep us in a very precarious position. Secretary FOWLER. I think those increases in dollar holdings, for~ just one example, are being put to very good use in the Euro dollar~ market. Central banks and others, private institutions are finding a. very good use for those dollar holdings at the current time.. Mr. Cin~ris. Mr. Secretary, according to some reports, the increased. dollar holdings put you in the position of a beggar when you repre- sent us abroad, because of these holdings against the United States,. the fact that our gold holdings are so low, and serious talk of the devaluing of the dollar. Secretary FOWLER. Not from any responsible source. Mr. CunTIs. Oh, well, I would say from many responsible sources.. I do not happen to agree with them any more than I think you agree with them, but the reports are certainly from responsible sources. In fact, many responsible sources say that we have devalued in devious ways. I share their point of view. Let's not pass off the critics as irresponsible. Secretary FOWLER. Just on that particular point, let us note once again that the value of the dollar has been maintained over the past 10 years, over the past 5 years, even years when we have been engaged in this extra strain in Vietnam, better than any other country in the PAGENO="0152" 140 PRESIDENT'S 1967 TAX PROPOSALS world except Guatemala and El Salvador, and one other country that I can't recall offhand. Mr. CURTIS. Mr. Secretary, we have to be better because we are the world's banker. Secretary FOWLER. Of course. Mr. Curms. And if we go down, the whole system of international `exchange goes down, so I don't think this is a way of dismissing these criticisms that are directed by responsible, not irresponsible, people. I again say I hope that we are not in this kind of position. I note that just the other day, and this is news media terminology, respon- `sible people in Great Britain are now talking about devaluing the pound, and certainly the dollar is very closely allied with the pound. But let me come to specifics. I started my remarks by saying I was sorry we lacked more and better rhetoric on the dangers involved in the deficit in international payments, comparable to the rhetoric on the dangers that come from high interest rates and inflation. But this administration has done nothing about foreign expenditures, governmental expenditures abroad. Even with the Vietnam war commitment we are spending abroad in the area of foreign aid, in the area of development loan funds, and just the other day the administration reiterated its policy of sub- stantial military commitments in Western Europe. Secretary FOWLER. Mr. `Curtis, I can't accept the statement, and I don't think that we wanted to take the time to go into it-we did it here just a couple of months ago in connection with `the interest equali- zation tax. There has been a great deal done. There has been a great deal of effort exerted in this area with some results, not as much as I would like to see, insofar, as our balance of payments is concerned. I will just refer to the statements that were made here in some detail on the interest equalization tax. Mr. CURTIS. On these things,' Mr. Secretary, I am going to get the record on domestic' expenditures. We are' not interested, or I am not, in words and rhetoric. I can read the figures and the figures demon- strate quite clearly to me the administration has done nothing; quite the contrary, it has continued to increase our commitments in foreign aid, and I am including development loan funds, Public Law 480 funds, and military funds. Although you yourself recognize that our commit- ments have gone up in Vietnam, yet there has been no compensating cutback by the administration in these other programs. I am not talking about words. I am talking abou't dollars. Secretary FOWLER. Mr. Curtis, perhaps we could leave it this way: That you `and I will both agree with all of our hearts and minds that the balance of payments is a serious problem and that is why, among other reasons, we need a tax increase and that is we are here. And I hope that given the emphasis you have `been giving to the seriousness of the problem, to `the concerns that ~are voiced in various, as you call them, responsible quarters we can agree on this. I am concerned about the balance-of-payments problem, and one of the primary reasons for this tax increase is to avoid a deterioration in our trade situation and to keep us on the course that we have resumed since last fall of having that trade surplus expand. PAGENO="0153" PRESIDENT'S 1967 TAX PROPOSALS 141 You are very familiar, I know from your experience with the Ken- nedy round-and I followed a number of your writings with great interest in that field-you know that this is a very competitive world we live in insofar as trade is concerned and that the avoidance of exces- sive demand is a serious element, that the threat of excessive demand to our balance of payments would be a serious threat, and that it is very definitely related to our prdblem here today. Mr. Cuirns. There we certainly are in full agreement, but the ques- tion before us right now, the tax increase, greatly effects the balance of payments. If your theories are correct when we talk of the tax increase itself, then you are right in my judgment in referring to balance of payments. Likewise if my theories are correct the tax increase also effects the balance of payments and we would possibly be applying the wrong remedy. I would like to say one thing further on this international balance of payments. Our trade surplus (exports over imports) is our great asset in the international balance of payments but as I have tried to point out, exports depend upon private investment abroad and the administration by restricting private investment abroad is restricting the very area that needs expansion. I won't pursue that subject further at this point. Secretary Fowu~n. No, because I think the figures on the very rapidly increasing scale of private investment abroad, even in recent years, would show that both in net outflow and in gross plant and equip- ment investment by American concerns abroad it has grown at a very sharply increased rate. As I recall it, the gross plant and equipment investment level has grown from around $2 billion a year in the early part of this decade to a level now approaching $10 billion a year, so there is no paucity of U.S. growth in investment abroad. Mr. CtTRTIS. We are always talking in relative terms. I would say there is because the return on this investment abroad is the other plus in our international balance of payments and this is an excellent port- folio as well as being tied with our exports, so it has increased as has everything else. As you all have observed, this society and economy of ours has con- tinued to increase, so we are always dealing in bigger figures. We must seek the relationship between them. In this area, I think what we do or don't do becomes quite important. Now, the fourth item of our concern on the economy is the employ- ment figures and unemployment. I grant that 4 percent or 3.8 percent,. 3 percent unemployed, looks good for a peacetime economy, but I have been pleading for a number of years to not mix apples with oranges. This is not a peacetime economy. You have 600,000 additional young men who otherwise would be in the labor force in the armed services. You have at least double that amount in defense plants. Incidentally, inasmuch as a good portiOn of those young men are abroad, this bears on the balance of payments, so I think you have to add probably at least 1 or 2 percent to our unemployment figures to relate these figures to a peacetime economy. I think unemployment is an important factor, particularly struc- tural unemployment, among certain groups, like the Negroes, where the rate is approximately 20 percent. PAGENO="0154" 142 PRESIDENT'S 1967 TAX PROPOSALS Mr. Ackley, in your exchange with Mr. Mills yesterday you men- tioned about the figure going down to 3.9 from four points last month, but our average hours per week in June continued to decline where it is now 40.2. 1 don't think we have seen a cessation of this decline yet. Mr. ACKLEY. Yes, Mr. Curtis, we have. Mr. ~JtrR~ns. You agree this is an important indicator to look at? Mr. ACKLEY. Yes. In July, however, the average hours did turn up, not only in manufacturing, but in other areas as well. Mr. CURTIS. What was the total? I don't have that figure. All I have is the July issue of Economic Indicators. Mr. ACKLEY. In July the average hours in manufacturing increased to 40.3. In contract construction they rose from 37.2 to 37.5, in retail trade from 35.5 to 35.6. So that in the areas in which we have data on average hours it has begun to reverse the downward trend. Mr. CURTIS. It still is not a strong figure. Mr. ACKLEY. No, it is well below a year ago, Mr. Curtis. Mr. CuRTIs. And, of course, I am looking at the trend, as I know you are. Mr. Secretary, the fifth item in our list of objectives-after (1) avoid high interest rates; (2) cope with inflation; (3) unemployment; and (4) deficits in our balance of international payments-is to avoid a recession or a slowdown. Now, I would use the word "slowdown" to describe the economic situation we are in today. In your revision of revenue estimates for fiscal 1968 you moved down from a January revenue estimate of $126.9 billion by about $10 billion, did you not? Am I right in that? Secretary FOWLER. No, revised it down by $7 billion. Mr. CrniTIs. You revised it down to $7 billion. How did I take off the figure? Secretary FOWLER. I think the figure that Mr. Mills asked me for was a figure without any tax increase at all. Mr. CURTIS. That is what I am talking about. Secretary FOWLER. And $126.7 billion contemplated a 6-percent in- crease. Mr. CURTIS. In other words, without any tax increase you revised the $126.9 billion downward by how much? Secretary FOwLER. $7 billion. Mr. CURTIS. By $7 billion. The point I am getting at is that $7 bil- lion is a reflection of the economic situation which didn't turn out as anticipated. Am I not correct? Secretary FOWLER. No; only in certain particulars. I give the break- down of the $7 billion, as you know, Mr. Curtis, in the statement. Mr. CURTIS. Yes, I have that. Take corporate revenues. Secretary FOWLER. The decline in corporate revenues, is one reflec- tion of that and the decline in personal income which we estimate will reduce our revenues by $300 million is another reflection of a slacker first 6 months, than we had contemplated. Mr. CURTIS. Yes. Of course, that points up a very key point. In con- sidering a tax rate increase the only reason for its being proposed is on the assumption that it will increase revenues. That is correct, is it not? PAGENO="0155" PRESIDENT'S 1967 TAX PROPOSALS 143 Secretary FOWLER. That is right. Mr. CURTIS. And the other factor is the tax base, which is our eco- nomic activity, and we can see just from this little downturn our fail- ure to move forward what can happen to revenue estimates there. Secretary FOwLER. I think the corporate one is very meaningful. I wouldn't count the $300 million because of the lower personal income than projected 6 months ago as being significant-I think that was the accompaniment of the inventory readjustment. that has gone faster in the first 6 months than we calculated. Mr. CURTIS. What about estate tax? Secretary FOWLER. That is $100 million. Mr. CURTIS. You listed, a group of these items and miscellaneous. Secretary FOWLER. $200 million on estate and gift taxes and cus- toms. Mr. CURTIS. But don't you relate these to the base, the economic ac- `tivity in the society? I remember we used to-and still do-use a sort of rule of thumb that for every $4 to $6 billion GNP increase, we could count on about a billion dollars' additional revenue. Secretary FOWLER. That is that marginal rate problem. Mr. CURTIs. I am going to get to that. Nonetheless, it demonstrates `the' basic point that tax revenues depend upon rate and base and if `the rate of any tax is too high you can cut in on the base. This puts us at a point of diminishing returns. I felt in 1964 we were clearly there. I think we still are there. I think 4hat we could embark upon a program of tax rate reduction, Federal income tax rate reduction, for the next 20 years and proba'bly end up on a gradual basis of cutting back with more revenue by increasing the base, provided- Secretary FOWLER. I have said the same thing, Mr. Curtis, on recent occasions and I agree with you on that principle. Mr. CURTIS (continuing). Provided we don't cut a way through the impact of high interest rates and inflation in this process. Secretary FOWLER. You and I have the same philosophy and point of view on that. Mr. CURTIS. I know we share a common view on a number of thmgs, as much as we have differed on and probably do on this present eco~~ nomic picture. This is what is worrying a `lot of us, as to what we can expect. I still think that if we could get Federal expenditures down we could get more revenue by increasing or decreasing the tax base rather than the other way around, but certainly believing in that theory we have to study very carefully what the converse would be of increasing these tax rates at this particular time. This could have a deleterious economic impact. Secretary FOWLER. Mr. Curtis, we did not recommend that the rate `be increased as of January 1 in response to just that feeling that there `is a time and a season for everything and we think that the time and the season was not appropriate for a tax increase in January, but that the time and season now in mid-August is appropriate' for us to con- sider it. Mr. Cumns. I agree with time and season, but I want to get these `other questions first. The area where there is discipline is in expendi- PAGENO="0156" 144 PRESIDENT'S 1967 TAX PROPOSALS tures. This for some reason or other doesn't seem to be part of this tax exercise as far as the administration is concerned. At least they won't say it openly. Mr. SCHULTZE. They said it as openly as it can be said, Mr. Curtis. Mr. CURTIs. Let me put it this way. They certainly did not. It was our motion to recommit the 1964 tax bill with instruction to hold. expenditures to $97 and $98 billion that brought expenditure restraint into the picture. Mr. SOHULTZE. Because we didn't believe that was a responsible action. Mr. CURTIS. But you went ahead and talked the other way and pushed the new economic theory of Dr. Heller that it was increased demand that was necessary, that if you cut back Federal spending to compensate for the tax rate increase you would not produce the desired stimulus. Then the administration, and I certainly took the floor of the House and elsewhere to praise the administration in those days, actually held to those levels, but it is important to realize that that is what happened. It was not increased expenditure. It was holding the level of expenditures that made the tax cut of 1964 successful and therefore is something we have to look to in talking about tax rate increase in 1967 because this is in context not of expenditure restraint but of an expenditure increase of almost $20 billion last fiscal year and a pro- jection that might go up as much as another- Mr. SOHULTZE. $81/2 billion. Mr. CIniTIS (continuing). $18 billion. Well, there is $126 billion and a possible $144 billion, another $18 billion. This is the exercise that I think we have to look at. Now, the administration said apparently in the budget message of January that the $8.1 billion deficit was acceptable, according to your rhetoric. That was an acceptable level and could be financed by new bonds. Now we come along and are told that this $8.1 billion figure, which,. incidentally, ought to have been, for better understanding, $18.6 bil- lion because in your budget figures were $5.5 billion in increased revenues from the proposed tax increase- Mr. SOHULTZE. That is right, and we were instructed to do what we did by the Budget and Accounting Act of 1921. Mr. CURTIS. I am not talking about- Mr. SCHULTZE. I realize you don't have to abide by that act, but we do. `Mr. CURTIS. We have had enough public debate on it and I know what has been reported in the news media. The Congress doesn't know this and didn't know it, although people like myself have tried to say it and then we would get no backing. But the answer is in the facts, which are that this was $5.5 billion built in and $5 billion for partici- pation certificate sales which also reflect how you finance a deficit, so we had a $18.6 billion deficit. These are my estimates of what you are recommending, that we finance $5.5 billion from new taxes, $5 billion from sale of capital assets, and $8.1 billion from new debt securities. So now we have moved from $18.6 billion to where you are saying that you want an additional-what is it-$2 billion from taxes, $5.5 billion, and $7.4 billion Is that right? PAGENO="0157" PRESIDENT'S 1967 TAX PROPOSALS 145 Mr. SCHULTZE. That is not exactly comparable because you lose :almost a billion dollars on the later effective date for the personal sur- charge than recommended list January, but the net difference between the two is- Mr~ CtmTIs. I am talking about financing. I see what you mean. Mr. SOITULTZE. I am saying the net difference is about $2 billion; you are correct. Mr. Cuwris. You were going to get $5.5 billion from the tax increase as proposed in January. Mr. ScrnirirzE. And now we are estimating $7.4 billion; you are cor- rect. All I am saying is the net difference isn't entirely on account of the change in rates. Mr. CURTIS. It is close enough so that we are within $0.1 or $0.2 bil- lion. In other words, if I use the $7.4 billion, I get a $1.9 billion addi- tional amount that you are going to finance through tax. Mr. SCHULTZE. Taking everything into account; fine. Mr. Ciurns. OK. Now, in participation certificates (PC's) you say that if you abandon the $5 billion- Mr. SCHULTZE. No; we haven't abandoned it, Mr. Curtis. In listing a number of items that the Congress could add to the deficit this was one of them, that is, the impact of the House action on the PC authorization. Mr. CURTIS. I am talking about the original budget. You had $5 billion in it. Mr. SCIIULTZE. Correct. Mr. CURTIS. I try not to argue with rhetoric. Mr. SOHULTZE. No; I just wanted to get it clear. Mr. CURTIS. You have changed that figure. It is no longer $5 billion. Mr. SCHULTZE. No, sir. Mr. CURTIS. It is how much? Mr. SCHULTZE. May I explain it? Mr. CURTIS. Yes, sir. Mr. SciruLTzE. If the Congress gives us the full authorization, we would plan to go ahead and use it. Mr. CURTIS. You couldn't use $5 billion, though? Mr. SOHULTZE. Why not? Mr. CURTIS. Could you? Mr. SCHULTZE. If the Congress- Mr. CURTIS. You have a problem of selling, and so forth. Mr. SCHULTZE. Oh, I agree. It would depend on what happens during the year, but we see no reason to change our plans at the moment. Mr CURTIS If Congress hasn t given ~ ou the authority, you are coming here and asking us for a $7.4 billion increase. Now tell me, what are your realistic plans for the sale of participation certificates? Are they $5 billion or what? Mr. SCI-rnurzE. I would like to tell you. Mr. CURTIS. Yes, sir. Mr. SCHULTZE. Our plans so far as the executive is concerned at the moment are to sell $5 billion. Now, as you know, these participation certificates have to be authorized in appropriation acts. If we look at what the House has done to appropriation a.cts so far this year, it has reduced that authority to the point where if its action stands up in the full Congress-throu~h the Senate and in conference-our participa- tion sales would be $2 billion lower. PAGENO="0158" 146 PRESIDENT'S 1967 TAX PROPOSALS Mr. CURTIS. $2 billion. So it would be $3 billion. Mr. SCIIULTZE. That is correct but I am not at this time predicting that. We are hopeful of getting the full authorization. Mr. CURTIS. If you don't have the power to sell these in a way doesn't this cut back on the expenditures that would otherwise be financed bythem? Mr. SOHULTZE. No, sir; this $2 billion reduction would not result in an expenditure cut. Mr. CURTIS. Not psychologically? Mr. SOHULTZE. We have no cases that I know of in which the level we are talking about, the $2 billion cut, in and of itself would change the level of program activities. There are `some programs in which the level of activity depends in part on the level of PC sales; however, this is not the case with respect to the $2 billion we~ are talking about here. Mr. CURTIS. Couldn't it change it because these are increased ex- penditures? Mr. SOHULTZE. That is correct, we have estimated some increases in these programs. Mr. Cuirns. That you `are `counting on to finance through this sale.. You could take this as we take the trust fund and in effect say to the agencies that are counting upon these revenues from these sales to finance it, "Look, our source is `diminished," just as we did with the~ highway trust fund. Why can't we cut expenditures in this area to make up this differ- ence? Mr. `SCHULTZE. What I am saying, Mr. Curtis, is just taking `the level at which the House action, for example, has authorized PC's, there would still be funds available `as `authorized `by th'e Congress in prior substantive and/or appropriation acts to `carry out the lending activity of the programs concerned `at the level indicated in the `budget even if we didn't get that $2 billion in PC sales authority. Mr. CURTIS. I understand that but can't the administration cut back, talking about areas in which you are going `to cut back. Mr. SCHULTZE. Yes, sir. Clearly these programs will be among the' areas which we will examine and I am sure they will take their share of cuts. Excuse me. I didn"t understand your question. iWe would have the authority to make `th'e expenditures for the lend- ing programs. Bu't you are quite right. These will be `among the ones that we will look at in our efforts to reduce expenditures. Mr. CURTIS. I would think this would be `a go'od way. If you cut back $2 `billion from your $5 billion to $3 billion in what you are going~ to sell, cut back $2 billion, or request agencies to cut `back here until we get over this hump, then it wouldn't make any difference. Mr. SCHULTZE. No, sir; I don't agree with that because what we would do would be to take the total expenditure `cut and look at where' it ought to be assigned in terms of priorities and technical feasibility, rather than linking it mechanically in some way or other to the PC's. Mr. `CURTIs. I am n'ot talking about that necessarily. There are all sorts of ways of doing it. When you have to `cut believe me you can, when `there is a will to do it. It means that some of these cuts will `be in good programs, but if your rhetoric on the damage that can come to this' economy from further inflation-I emphasize "further"-and from' further increased interest rates, is meant, then it `behooves us to d'o this; PAGENO="0159" PRESIDENT'S 1967 TAX PROPOSALS 147 I think you will all agree that, if inflation does come more than it has, it is a meat ax cut that cuts your welfare program, your defense ex- penditure,that cuts all programs across the board, right? Mr. SCHULTZE. Mr. Curtis, that is precisely why in making up this fiscal program the President included expenditure cuts as part of it. Many desirable programs are undoubtedly going to have to be cut. We are going to have to balance off, in other words, the gains on the overall fiscal side against the gains from a particular program. We agree on that. I think where we disagree is with the magnitude. Mr. CURTIS. Or the specifics. I remember last year trying to get from the administration where this $3 billion cut was that you told us and they turned out to be deferments, not cuts at all, and 1 never could find out even then where they were. Mr. SCHULTZE. Mr. Curtis, as a matter of fact all through those discussions-and I stress, all through those discussions-we indicated that those would be deferrals and reductions. There is absolutely noth- ing wrong with deferrals, Mr. Curtis. They simply stretch expendi- tures out during periods in which there is inflation. Mr. Ctnms. I am not talking about that being a deferral. I am for deferrals too but when we are talking about cuts and in the context we were talking about, no one thought we were talking in terms of 6- month deferrals. I can assure you of that and the Republicans and the Congress didn't and whether we were right of wrong- Mr. SOHULTZE. All I can do is use the English language. Right now when I am talking about making reductions- Mr. CURTIs. I am more interested in figures than the English lan- guage, I will tell you right now I am more interested in figures. I am tired of the manner in which the English language has been used by this administration. I want the figures. Mr. SCIIULTZE. Last year we indicated we were going to cut $3 billion in terms of fiscal 1967 effect, and that is what we did except for about $100 million that resulted from releases. In other words, the releases did affect 1967. We made those cuts. I would have urged you to have been with me before the House and Senate Public Works Committee in their hearings on highways to get some idea of how real those cuts were. Mr. CURTIS. This is an example of this kind of chicanery. That had nothing to do with general revenues. That had to do with the highway trust fund and you know it. Mr. SCHULTZE. Of course I know it. Mr. CURTIS. Well, we are talking about the administrative budget. Mr. SOHULTZE. Fine, let's shift to the administrative budget. Mr. CURTIS. Let's don't keep shifting from one to another as you did before on trust funds. This whole exercise that we are engaged in here relates to the administrative budget, not trust funds. Mr. SCHULTZE. This particular exercise does, sir. I thought we were talking about last year's cuts and you didn't think we had cut. Mr. CURTIS. I am talking about last year's too. That was an exer- cise on the administrative budget, and did not have anything to dG with the trust funds. Mr. SOHULTZE. Excuse me, Mr. Curtis. I don't like to prolong this argument, but at all stages of this exercise we told you we were con- sidering highways as part of the cutback. We were looking at Federal PAGENO="0160" 148 PRESIDENT'S 1967 TAX PROPOSALS programs in terms of cutting off the inflationary pressure in the economy. If you look at what happened to highway prices, after an increase in construction bid prices of about 13 percent in the period of 2 years before the deferrals, they went down and stayed down. I think this was a very valid part of the 1967 cutback exercises. I don't see why we have any argument about that. I don't under- stand that. Mr. CURTIS. The reason we have an argument is that I have been trying to fight the battle for the administrative budget cuts because we are concerned about general revenues here. The Ways and Means Committee has just put aside what we are going to do about the high- way trust fund. We have a serious imbalance there. We have been spending 5 to 6 months this year on the social security trust fund which has plenty of problems itself. But this exercise and the debt ceiling and the invest- inent credit has to do with our general revenues. Mr. SCHULTZE. I fully agree and that is what we are talking about this year, the administrative budget. I was simply trying to set the record straight on last year's exercise. Mr. CURTIS. The rhetoric of this administration is we have exercised expenditure restraint and you say you are doing it, but notably this is in context of an expenditure level of $77 billion as recently as 1960, and here we are to a projected possible $144.2 billion in fiscal 1968. The figures go: 1961, went up to $82 billion, 1962, $87 billion; 1963, $92.6 billion; very interesting, $5 billion increase; 1964, $97.7 billion and then we had, thank goodness, a classical theory of taxes and eco- nomics prevailed and the expenditures for fiscal 1965 were $96.5 bil- lion, but then all our efforts went in vain because in fiscal 1966 we went up to $107 billion. In other words, you took the $10 billion jump in 1 year instea.d of taking it $5 billion and $5 billion. Mr. ScnULTzE. There was a war, Mr. Curtis. Mr. CURTIS. Oh, go on. Wait a minute. You talked about the war as costing a smaller percentage of GNP in the area before and this is a fair statement, but then when you ever get into one of these things you want to talk the other. I am simply saying these are the figures. Then the next year it went up $20 billion just about, to $125.7 bil- lion. Now this is in context of the language that you used of expendi- ~ture reform or restraint and, frankly- Mr. SOIIULTZE. Let'stake a look at this. Mr. CURTIS. The figures are there~ Secretary FOWLER. We never use expenditure restraint in terms of the cost of Vietnam. Mr. Cmrns. Oh, I didn't say you did and I have been one who, inci- dentally, feels we well might take a look at that. That shouldn't be a sacred cow, by the way, but certainly we can talk in terms of defense; namely, Western Europe, and why in the name of heaven we don't revise our policy there, but the administration won't even discuss these items with the Congress. They just go ahead and say that they want more money and that they are exercising expenditure restraints and we are supposed to take your language, not your figures. PAGENO="0161" PRESIDENT'S 1967 TAX PROPOSALS 149 I won't take your language. I want to know what unacceptable levels are. I want to talk about what we can reduce in some of these areas. Secretary FOWLER. Why don't you take the figures on the percent- age relationships to GNP? Mr. CURTIS. That is a very interesting one too and the Federal Gov- ernment is one of the few institutions in our society that hasn't shown a decrease. Take farming, agriculture. Every other sector shows pro- cluctivity increases. Mr. SCIIULTZE. It has to add to a hundred, Mr. Curtis. Mr. CURTIS. Well, there are more sectors. You had no television during the Korean war. You had no space. You know the answer to that. As this economy grows you get new sectors that never were in the economy before. Mr. SOHIJLTZE. Quite correct; including education and things like that. Mr. CURTIS. And education is certainly one of the most important and- Mr. SCHULTZE. You share our belief, Mr. Curtis. Mr. CURTIS. I wish I could share your figures a~ well as your belief. Getting over to these areas of expenditures, Mr. Schultze, you simply sta.te without proof that these expenditures are uncontrollable. I don't know a Government contract that doesn't have a termination clause in it; do you? Mr. SCIIULTZE. That is correct; I agree. Mr. CURTIS. Why are these uncontrollable? Mr. SCIIULTZE. They are uncontrollable because we don't believe, except in very exceptional circumstances-and there are cases where it does happen-we should abrogate the contracts and pay the penal- ties and thereby increase the cost to the Federal Government. Mr. CURTIS. This isn't an abrogation. Many times contracts in pri- vate enterprise are cut back because- Mr. SCHULTZE. We don't consider it good public policy. Let me put it that way, then. Mr. CURTIS. In other words, you don't think it is serious enough to do anything about these things. That is it really. Mr. SCHULTZE. We think it is serious enough to do things when we think, in term of priorities, they ought to be done. Mr. CURTIS. Yes, but you won't share your discussion of priorities with the Congress. Mr. ScHULTZE. Mr. Curtis, I talked to Mr. Byrnes at some length about that. Mr. CURTIS. You put all of these over here, Mr. Director, and say these are uncontrollable. Now you have admitted that they are con- trollable, but your argument is, for public policy, we shouldn't do it and that is a fair statement, but then Congress should be involved in this public policy. They are controllable, aren't they? Mr. ScI-ruLTzE. Mr. Curtis in the sense that legally we can violate those contracts- Mr. CURTIS. It isn't a violation. Mr. SCHULTZE. Yes. Mr. CURTIS. It is not a violation when you have those clauses. 83-340-67-pt. 1-il PAGENO="0162" 150 PRESIDENT'S 1967 TAX PROPOSALS Mr. SCHULTZE. You are quite correct, Mr. Curtis. I agree that legally we can abrogate the contract, you are quite correct. Mr. CURTIS. Or you can stretch it out. Mr. SOUIJLTZE. Oh, we are doing that. Mr. CURTIS. You still won't put this in the list of uncontrollabies. Mr. SCHTJLTZE. What I am saying is that what we do is take the items that are just beginning,, for which we have contracts coming up. In other words, if you notice in most of the public works programs, the deferrals occur when the contracts are renewed. What we do is stretch those contracts out. What we don't want to do is take a con- tract that is only partly completed and cancel it, except under very exceptional circumstances. Mr. Cm~TIs. My point is that none of these items should be called uncontrollable. Every one is subject to review and when you present this to this committee and just say, "Well over here is something we have no control over," this is what I am quarreling with. I can agree on some of these that for good economic and other reasons you might want to cut those back, but I remember that this committee a few years ago decided to cut back even on contracts in-being in the highway progra.m in order to let our revenues catch up with us. I thought that was good. You say you already are doing some of it but then- Mr. SCHULTZE. No, all I am talking about is that on contracts in public works where there are renewals we do stretch them out. Mr. CURTIS. You are not looking over the ones that are in-being now to see where you might- Mr. SOHULTZE. To cancel them before the end of the contra.ct? Mr. CURTIS. Why not? In World War II we cut back on practically all public works, didn't we? Mr. SCHULTZE. We are not in World War II. Mr. CURTIS. We cut back on practically all public works. Mr. SCHULTZE. Yes, we did. We cut back this year too. Mr. CURTIS. Not the way you did in World War II. I am only illustrating the point that to some degree you can easily go to the people involved in public works, Congress. Just as you are going to the taxpayers through us and saying you want more money out of them, you could go to these people in public works because of t.his tight squeeze of a war and say, "We are going to have to cut back some of these programs," right? Mr. SCHULTZE. May I explain, Mr. Curtis, how we do it, if I might? Mr. CURTIS. Sure. Mr. SCHULTZE. That is precisely what we did in this year's budget on public works. Last year, I think, in the Corps of Engineers, adding what we proposed and what the Congress added on, there were 60 some new starts. In this year's budget we put in nine new starts. In addition, we took all the projects that were ongoing a.nd stretched them out as mueh as we could. We did not cancel contracts when they were under- way, but we did stretch out where we could. This is what I am saying. Mr. CURTIS. Each time, Mr. Schultze, you say, "As much as we could." I respect your judgment, but what I am saying is the Congress has a right to be in on this policymaking. So do the people. PAGENO="0163" PRESIDENT'S 1967 TAX PROPOSALS 151 What you think is "as much as we could" may be different from what others think and we may think that inflation and high interest rates are more serious even than the rhetoric in your statement and if it is, then "as much as we could" is either not an accurate ~phrase or one that is the very bone of contention here. Mr. SCHULTZE. Mr. Curtis, there are two parts to that. With respect to the public works program, for example, the Congress in the appro- priations bill this year did have a chance to cut those nine new starts out. They didn't. They added starts. Mr. CURTIS. Now I am going to say something about this because I have listened to the rhetoric of the President and the rhetoric here about blaming Congress for these things. As soon as we had a chance to look back at the budget we urged the President to pull it back and submit a recision bill and not ask the Congress for all these things. The President has not done that. He has continued to ask the Con- gress for it and in many of his message.s and his speeches, `he has whetted the appetites of the people for these very programs so that then, when Congress may not go along, he still can talk this way. Furthermore, the President can veto appropriations bills. Mr. SCHULTZE. He did, Saturday. Mr. CURTIS. Yes, he did and I was glad he did, although I was very interested in why he picked a pigeon like that one, but he can veto an appropriation bill. They have been vetoed before and they can come back here to Congress. But instead of that the President tries to create the impression among the people that it is Congress who is responsible for higher spending. I tell you it is the President who has been whetting the appetites of the people for all of these things that have created the pressures on the Congress and I say this as one who votes against these bills as you probably know and has to bear the brunt of going back home to my people who say, "Well, aren't you interested in our welfare," and I say, "Yes, I am and that is why I have voted against them." But I can't get enough of my colleagues to go along. This President. hasn't turned the White House lights off symbolically as he once did.. He is going to his farm down in Texas every weekend. That is the symbol today. Mr. SCHULTZE. Just a minute, Mr. Curtis. There is absolutely no reason for that with respect to what we are talking about here today. Mr. CURTIS. There certainly is. Mr. SCIIULTZE. If the President occasionally after working 19 hours a day, 7 days a week, decides to go to Texas once, Mr. Curtis, I think it is a pretty ill thing, then, when that is thrown out in the heat of any tax debate as something to do with legislation; we shall all economize. Mr. CURTIS. You can have your opinion, but I point to your state- ments here and the various statements by the President blaming the Congress for these things. I was speaking symbolically when I com- mented that President Johnson seems to have given up turning the lights off in the White House at night. You try to take it as a personal attack. I am talking symbolically. Mr. SCHULTZE. I am sorry. Excuse me. It was a symbolic nonpersonal attack. . PAGENO="0164" 152 PRESIDENT'S 1967 TAX PROPOSALS Mr. CURTIS. You can interpret it any way you choose, but I am try- ing to get across the thought that the President has done nothing either in exortation or specifics to encourage the Congress to cut back on expenditure programs and appropriations. Let's get to some more specifics. Mr. SOIIULTZE. Mr. Curtis, might I have 1 minute to answer your former question? Mr. CURTIS. Yes. Mr. SGIIULTZE. The President, as a matter of fact, has talked long and vigorously and seen congressional leaders of both sides of the aisle, for example, with respect to the pay bill to try to avoid that $1 billion add-on going into the budget. Secondly, the President in all these expenditures- Mr. CURTIS. Has he said he will veto it? Mr. SCIIULTZE. Mr. Curtis- Mr. CURTIS. I am being specific. If he would say, "1 will veto this" I don't think the bill would come up to him, but has he said it? Mr. SOIIULTZE. Mr. Curtis, the President has indicated pretty clearly how unacceptable this bill is, but you are trying to tell me and the President precisely what kind of tactics ought best to be used. Your judgment may be right. Mr. CURTIS. Yes, I would like to suggest that. Mr. SCITULTZE. Of course you do, but at the same time I don't think we are here to deal with a specific tactic as to how one gets a particular bill. That is your particular evaluation. Mr. CURTIS. But, Mr. Director, when we deal in generalities we bog down in rhetoric, so let's deal in the details of this pay bill, which the President has said that the Congress shall not pass. I have already pointed out one of the unfortunate things is that the 1966 inflation has created some of the impetus for this pay increase bill (just as it is behind increased wage demands in the private sector). As I see it, the last place that the Government or anyone should econ- omize is on the living standard's of the people. Mr. SCHULTZE. But we are not economizing on the living standards `of the people. We proposed a four and a half percent increase. We are not suggesting that that be withdrawn. What we are simply suggesting is that the additional `billion dollars not be enacted. Mr. CURTIS. I am suggesting that if we want to get through to the Congress on this and other areas the President make it clear that he would veto such a bill. He should also make it clear on some other `spending programs that he would veto some of those but, above all, he should come to the Congress with a recision of some of these pro- posals he made in the budget we got this January. Mr. SCHULTZE. I had some discussion yesterday with Mr. Byrnes on that point. The Congress has already been 7 months in session and we have three appropriation bills enacted. To come up now with a whole series of new appropriation bills, it seems to me, would end up keeping the Congress here until Christmas or beyond and we would very likely have far less cuts than if we do it the way we are now planning. Mr. CURTIS. If this matter is as serious as you three have presented it, and I think it is, then Congress can well be in session until Decem- ber to do it. If it is this serious and I think it is, and the President PAGENO="0165" PRESIDENT'S 1967 TAX PROPOSALS 153 knows how some of us feel about these expenditures, he should and would come in and revise his figures. We have been asking this for months. The Joint Economic Com- mittee, all 20 members, including 12 Democrats, said in our March joint statement that $5 billion should be cut out of nondèfense ex- penditure areas at that time. It isn't too late to start. cutting. It wasn't too late for you to come in and ask for a tax increase so I am saymg it isn't too late for the President not only to cut back, not just in rhetoric, but also come in and share the information with the Members of Congress. One of the areas you mentioned that was in this uncontrollable area was agriculture. Mr. SCHULTZE. Just the price support part of it. Mr. CURTIS. That is pretty good. Regarding the price support. pro- gram, you said, "We are now faced with an estimated increase of $900 million for programs in which payments to individuaJs or groups are set by law and are, therefore, relatively uncontrollable." Mr. SCIIULTZE. Relatively. Mr. CURTIS. I emphasize "theref ore, relatively uncontrollable." "Of this amount, $400 million i.s for higher farm price support payments by the Commodity Credit Corporation." Secretary Freeman by a purely administrative decision on March 31 raised the price support for soybeans from $2.25 to ~2.50 per bushel. It is clear that this is what caused the soybean acreage to jump and was responsible for the almost 1 million bushel crop just estimated by USDA, the largest on record. This is within the "relatively uncontrollable" area of expenditure, is it not? Mr. SCI-IULTZE. On the March actions you are quite correct that in the price support area you can, to some limited extend, depending on how the law is set up, change those prices. You will recall, for example, at the same time the Secretary reduced the wheat acreage in order to get this down. Mr. CURTIS. I was coming to that. Mr. SCIIULTZE. May I point out this is the precise reason we used the term "relatively uncontrollable expenditures." There are areas in here in which the basic part of the program is indeed uncontrollable under existing law. Admittedly, you can manipulate it on the side, hut in terms of classifying programs one place or the other this is where we put it and advisedly used the term "relatively uncontrollable." There is a little one could do, but not very much. Mr. CURTIS. Certainly you didn't have to increase the $2.25 to $2.50, and you probably would have saved $100 million. Mr. SOHULTZE. No, sir; not on soybeans. Mr. CURTIS. `Well, Mr. Freeman again by administrative decision permitted the plowup of this year's planted cotton acreage when it looked like it was going to make a good crop, paid. Government cotton plants, and then in this land planted soybeans so that our surplus of soybeans would be and has been larger, meaning more cost to the Gov- ernment, or takeoff time of CCC. . ~. Mr. SCHULTZE. Just about offset by the decrease in cotton, in fact more than offset because cotton is (Town. PAGENO="0166" 154 PRESIDENT'S 1967 TAX PROPOSALS Mr. CURTIS; The point is whether you agree with my criticism, this is surely a controllable item and any administration that is embarked upon an austerity program should certainly have been looking into this particular area. Mr. SOIIULTZE. All I am saying, Mr. Curtis, of that whole list, if *you look at it, veterans pensions, public assistance grants, public Service cost- Mr. CURTIS. I looked at them in detail. I will get to them. Mr. SCIIULTZE. What I am saying is that almost all cf these expendi- tures are uncontrollable. You have to classify them one place or the other. Since they are basically uncontrollable we put them in that cate- gory. I can't deny that on the margin in certain of theni. you can manipulate, but there is a very small amount of room to do that under existing law. Mr. CURTIS. We will let the record speak for itself. I have a bill in, by the way, to remove the price support on wheat and small grains and T think you probably could save about $2 billion, not in the immediate fiscal year, but a sizable sum like that. Actually the Secretary of Agri- ~uiture increased both the wheat and feed grain allotments before planting time for this year's crop and has produced--- Mr. SOHULTZE. The wheat was decreased, Mr. Curtis. Mr. CURTIS. I said the amount of grain allotments before planting was increased. Mr. SCIIULTZE. I don't understand that. I'm sorry. That one I don't understand because I do recall the decision which would decrease wheat. Mr. CURTIS. Wheat and corn production-I have the Agriculture Department's figures here-would be at an alltime high according to the USDA. August crop estimate, 1.~ billion bushels of wheat, 4.7 billion bushels of corn. This is an administrative decisions. Mr. SCHULTZE. That is a crop figure, yes, sir. What I am saying is that this summer the Secretary of Agriculture in setting the advance acreage decreased the wheat allotment. The yield went up in wheat. Mr. CURTIS. This is what I once described as the New Frontier waltz, two steps forward in the dark and then one step backward under the spotlights. The net result is one step forward, and this is not expend- iture control. If you are doing this kind of a dance it is easy to see how you can go from a $77 billion expenditure level to $144 billion, if this is the definition of expenditure restraint. Mr. SOHULTZE. Mr~ Curtis, again what I said before was that basi- cally under present law these payments are uncontrollable. You can, on the margin, change them a little bit, and particularly in the price sup- port area-I can't deny that-but they are classified as relatively un- controllable, which they are. Mr. CURTIS. The answer is, and it is a very obvious one, is that we need someone in the administration who thinks they are controllable and will do something about them in this area and in other areas. Mr. SOHULTZE. For the whole set of farm programs, over the past 5 years we have done precisely that. If you look at CCC price support programs, even there the expenditures this year will be $400 million less than they were in 1965. Mr. CURTIS. I am quite familiar with it. On the payroll, you have that in an area that can't be reduced. PAGENO="0167" PRESIDENT'S 1967 TAX PROPOSALS 155 I remember several years ago the Jensen amendment, which I thought was an excellent one. It simply said for every four vacancies that occurred in the normal turnover in Federal employment you could only fill one. This perhaps is a crude way of getting total employment down, but it is also possible through productivity increase, if the Gory- ernment would ever think of it in these terms, to reduce the Federal payroll, but the Federal payroll has continued to expand. Since there is Federal payroll in almost every area, I don't regard this as an uncon- trollable item. Mr. SCIIULTZE. Look at the table on the last page of my statement. You will find personnel compensation classified under "relatively con- trollable." `What I did indicate in my text was that it is much more dif- ficult to reduce expenditures in this area than it is in the remaining controllable expenditures, but I have personnel compensation down under "controllable." Mr. CURTIS. I again point out in defense I don't think the figure cited can be the entire saving, because if we will move in this area, I think probably we will get more military dollars. Foreign aid is a clear area for cutbacks in these times even though I happen to favor the theory of foreign aid. The interest equalization tax is restricting private investment abroad, and this administration has asked for increased soft loans, from the development loan banks, which are not really loans in my judgment. I voted for the Asiatic Bank because I think properly disciplined this is a better way. But the point I am trying to make is that this is not an area where there has been a cutback. It has increased. Mr. SCHULTZE. Again let's go back to 1965 to compare it and take foreign economic assistance administered by AID. Two things have happened. Expenditures in Vietnam by AID have risen, admittedly, some $500 million plus. In all areas other than Vietnam, AID expenditures have decreased by about $150 million. In addition they are much more closely tied than they were previously to U.S. exports. This is not fully effective, we realize that, but it is as effective as we can make it. Mr. CURTIS. And also there is a great misconception deliberately perpetrated on the American public by AID that this aid is actually tied, the specific project, to build a school or a road with purchases from the United States. This is tied to what that country would be buying in the United States whether there were an AID program or not. That doesn't mean I object necessarily to the tying, but I just want to make it clear, it any rate, in foreign aid, AID is only part. There is the Development Loan Fund, and I again say the soft loans are thinly disguised grants, and Public Law 480 grants, and disposal of military surplus. Mr. SCHULTZE. May I make two points on that, Mr. Curtis? Mr. Cmmrns. Yes. Mr. SCHULTZE. The Development Loan Fund is in AID and is in- cluded in the numbers I cited. Mr. Cuirns. On Development Loan Fund bank and the Asiatic Bank. Mr. SCTIULTZE. I know of no Development Loan Fund bank. I thiflk you may be talking about 1DB, the Inter-American Development Bank. PAGENO="0168" 156 PRESIDENT'S 1967 TAX PROPOSALS Mr. CURTIS. I meant the 1DB. Mr. SCHULTZE. I want to make sure it is clear that the Development Loan Fund is in AID. Mr. Cuirris. But the point is that we frequently take only one seg- ment of the foreign aid program. Secretary FOWLER. Mr. Curtis, just to correct that, the interest equal- ization tax does not apply to less-developed counties. They are ex- empted under that and it applies only to developed countries so there is a consistency between the interest equalization tax and the AID pro- gram in that regard. Mr. CUR'rls. That is a fair point to make. I would go further in my discussion to point out that although that is a valid point to make, I don't think the point will hold up- Mr. SCHULTZE. Mr. Curtis, may I- Mr. CURTIS. Yes. Mr. SCIIULTZE. I would like to put this in context. You can go down through some 1,500 appropriations and I guess we could have a debate as to the merits and priorities of each appropriation. I think the most essential element is the fact that, as I Pointed out in my statement, first, outside of Vietnam Federal expenditures are taking a smaller and smaller share of our gross national product, having fallen from 16 percent of GNP in 1964 to 14.8 percent of GNP in 1965, the year we started with here, down to 141/2 percent now, even when I exclude PC's, since I realize you don't agree with our PC's. In that context, we have chosen what, I believe, is a middle ground between those who feel the answer to all the problems of this country is just spending more Federal money, and, on the other hand, those who feel that any increase in Federal expenditures is somehow wicked. We think we have taken a reasonable middle ground and like anyone on middle ground we, of course, get hit by both sides. We can argue about the priorities of each program if you want, but I would like to do it in the context of that overall framework which, I think, is a meaning- ful measure of what has happened to expenditures. Mr. CURTIS. I am sure you would like it in that context because you might win it because the context itself overlooks a number of basic points. No. 1, although this is a criterion, and an important one (expendi- ture as a ratio of GNP), what really we have to get to is what should the optimum ratio be. We have been dealing in ratios since World War II and, I think, it is about time we started dealing in ratios over a longer period of time or project our minds into the future to see what these optimum ratios should be. Furthermore, most important, gross national product is only a measure of economic activity. We have forgotten our wealth statistics. Gross national product, if it reflects misguided economic activity, could actually be eating up our wealth. Mr. SOHULTzE. There is absolutely no indication that I know of from any of our statistics that in some sense our wealth is not appro- priately keeping up or is not in line with gross national prouct. Mr. Curtis, if I might- Mr. CURTIS. Well, you made a statement. I just want to correct it. Mr. .SCHULTZE. Go ahead. Mr. CURTIS. The subcommittee of the Joint Economic Committee on Economic Statistics held hearings in this very area. and I hate to inform PAGENO="0169" PRESIDENT'S 1967 TAX PROPOSALS 157 you that the Federal Government has declined in its wealth position in relation to its debt. Mr. SCHULTZE. The Federal Government? Mr. CURTIS. The Federal Government. Mr. ScHULTZE. I am sorry, I thought you were ta.lking about the Nation's wealth as a whole. Mr. CURTIS. No, no. The Nation's wealth has increased very well. Mr. SCHULTZE. There is a very good reason for that, if it is so, Mr. Curtis. Mr. CURTIS. But the Federal Government is in trouble. Mr. SOIrnLTzE. Let me give you one reason. Over the last 4 or 5 years, the major strategy of this administration, which you might disagree with, has been to shift investment from primarily brick and mortar into investment in human resources. If you look at any chart on Federal spending you will find that public works spending and brick-and- mortar investment, which is the kind of investment that goes into the wealth statistics, has increased very little compared to the increase in investment in education, training, and health, which are not capitalized in the wealth statistics. Mr. CURTIS. I have been using that argument of yours for years. Mr. SCHULTZE. I realize that, so any wealth statistic is misleading in that sense because it doesn't take those investments in human re- sources into account. Mr. `CURTIS. The point is any of those education statistics have to be placed in context with others to understand them. Mr. SGHULTZE. I fully agree. Mr. CURTIS. And my criticism of the administration and the presen- tation of Mr. Ackley on the economic situation is that we have had presented only certain statistics, which are important, valuable, but we have `to relate them to other equally valuable and important sta- tistics. What I have said about wealth is only to get it in there. What you have said is a fair `comment. NOw I have to go over on the floor. I `want to close this discussion on the basic point-at least in my mind-whether or not there has been sufficient, if any, expenditure control that would make a tax increase actually productive of revenue. I don't think there is enough data that has been presented to this committee for us to make any judgment on this question. If we are going to have a deficit of around $30 billion, frankly, I don't think it makes any difference what the mix is among the sale `of capital assets, increased revenues from taxes, or new debt securities. I think that the very size of the deficit is going to create `the dam'age, whatever happens. I think this deficit has to be within the range of $15 billion. I think we might talk rn terms of `what amount o'f additional tax revenues could be obtained `t'hrough possibly increasing rates, but, until we get t~o that level of deficit, these exerci'ses here don't mean very much. Mr. SOHULTZE. Mr. `Curtis, the whole point of the program is pre- cisely to `make sure th'at that `deficit does not reach $30 billion, but gets to the $14 to $18 billion range. Mr. CURTIS. Yes, according to what you all want to say, but not giv- ing the figures that I think are important to understand this., I think your expenditures have to be revised and cut `back radically, even PAGENO="0170" 158 PRESIDENT'S 1967 TAX PROPOSALS good programs. The President h'as to come out and tell the Congress and the people that we are in serious economic trouble and that we have to cut back on even important programs. He has not said that. Mr. SCHULTZE. He has, and we are going to have to cut `back. Mr. CURTIS. Then give us the detail. Let him start out by announcing that he will veto the Federal `pay raise that you complain about, th1s additional billion. Let him veto an appropriation bill. Let him go up and revise some of his requests. Until that is done, though, Mr. Director, I don't think I could advise any of my colleagues in the House, and certainly not the people, that a tax rate increase would help us to meet these problems. 1 think it would aggravate the situation. I think it would hurt it. I think it would damage your situation instead of helping it. Mr. SCHULTZE. Mr. Curtis, I have gone through, both yesterday with Mr. Byrnes, and today with you the reasons for having presented the expenditure cuts the `way we have. I would make one theoretical point a'bout the `need for expenditure reduction. There is no question of that need. But it isn't the expenditure reduction in and of itself which makes the tax increase get you more or less revenues. That is the point I wanted to make. Mr. CURTIS. I think it does. There is our difference possibly. That is what I argued on the 1964 tax cut. I said in order for that tax cut to produce more revenue, which it did, at lower rates we had to hold expenditures down, and that is why I am trying to get the dialog back to where I think `the disagreement lies. The new economists keep talk- ing about aggregate demand and I argue that aggregate demand isn't the problem. Mr. SCHtTLTZE. The new economists at this table, at least-I am not going to designate which of the three of us are new economists- Secretary FOWLER. I am not an economist, period. Mr. CURTIS. No one wants to admit it these days. I am trying to find out who they are now. Mr. SCHULTZE. In any event, the key point of the new economics is it is symmetrical. The new economics doesn't argue-I don't know whether I should set myself up as a spokesman for the new eco- nomics-but the new economics does not argue that under any and all èircumstances the answer to our problems is increasing aggregate demand. Precisely one of the reasons we are here today is to say that without this fiscal program of `the President we run the danger of aggregate demand being too high, and more particularly through `that, interest rates rising far too high. So here is a set of new economics and I know of no new economist who says the answer to every problem regardless of what it is is increased aggregate demand. When the patient has a chill there is one medicine for him. When the patient has a fever there is another medicine, even though in both cases you `try to keep him healthy and growing. Mr. CURTIS. And as long as he is growing you give the medicine to apply to chills as well as to apply to a fever. But I think what is wrong has been aggregate demand and deficit financing have been the answer to all these `things, and I think now we have come to a point where we realize the answer when new economists ask what is wrong with debt. We must learn to relate the debt to the economic activity (tax base) and wealth holdings of the society. PAGENO="0171" PRESIDENT'S 1967 TAX PROPOSALS, 159 This is where we are and I think that your presentation here is mainly rhetoric about cutting expenditures. I think that we have to have the hard figures. Otherwise I don't think that this tax increase would produce more revenue. We are already going to have the damage from the previous inflation. These inflationary forces are still with us, as well as the high interest rates. These are creating real problems and the greatest danger of all in my judgment is the international balance of payments which is aggravated by our domestic picture. I think these are times that call for real frugality and the President has to show us the way. If he doesn't lead us, if he lets the Congress drift, and then blames the Congress, as I interpret what he is doing, then things are just going to continue to get worse. Mr. ULLMAN. Mr. Secretary, can you be back at. 2 p.m. Secretary FOWLER. Yes. Mr. TJLLMAN. And Mr. Director? Mr. SCHuLTZE. Yes. Mr. ULLMAN. The committee stands recessed until 2 p.m. (Whereupon, at 12 :41 p.m., the committee recessed to reconvene at 2 p.m., the same day.) AFTER REGESS (The committee reconvened at 2 p.m., Hon. Al IJilman presiding.) Mr. TJLLMAN. The committee `Will come order. Mr. Schneebeli, you may proceed. Mr. SCHNEEBELI. Mr. Secretary, for my information, will you give me the amount of money in tax income that will be forthcoming in various percentages, from 5 percent to 10 percent in both personal and corporate tax? Secretary FOWLER. On a 5-percent surtax, 6-percent surtax, and 7 and 8? Mr. SCHNEEBELI. Yes, for personal and corporate so that we might make up our mind as to `what area we might settle on. Secretary Fowta~. I can give you the figures now on the 10, 8, and 6 scale. I don~t have them on 5,7 and 9. Mr. SCHNEEBELI. Will you give me on 6, 8 and 10 on personal and corporate? Secretary FOWLER. I can give it to you in terms of liabilities, that is as it applies to the taxpayer or in terms of collections. Which do you prefer? Mr. SCHNEEBELI. Treasury income. Secretary FOWLER. I will take collections. That will be in terms of fiscal years. Mr. SCITNEEBELI. Yes. I would like to have it for fiscal year 1968, the complete year. Secretary FOWLER. The fiscal year 19~8. Then I will take fiscal year 1969. We don't have economic projections for fiscal 1969 and the figures I will give you are based on calendar year 1967 incomes. Mr. SCHNERBELI. Thank you. Secretary FOWLER. Fiscal year 1968, at 10-percent surcharge, indi- vidual tax increase in individual tax collections, $3,850 million; cor- porations, $2,250 million. Mr. SCUNEEBELI. This is 1968? Secretary FOWLER. That is right. PAGENO="0172" 160 PRESIDENT'S 1967 TAX PROPOSALS Mr. SCHNEEBELI. I thought it was more or less a 2-to-i ratio. Secretary FOWLER. You see the effective date on individuals is October 1. Mr. SCHNEEBELI. Yes, but in 1968 is effective- Secretary FOWLER. But the fiscal year 1968 we collect on the basis of- Mr. SCHNEEBELI. I was referring to calendar year. Go ahead. Secretary FOWLER. For fiscal year 1965 an 8-percent surcharge on individuals would be $3,080 million. A little over $3 billion. Corpora- tions, $1,800 million, or a total of $4,880 million. On the 6-percent surcharge, individuals, $2,310 million; corpora- tions, $1,350 million. Mr. `SOHNEEBELI. That is fiscal 1968. How about fiscal 1969? That would be for the full year. Secretary FOWLER. The 10-percent surcharge on individuals, $6,420 million; corporations, $2,320 million. A total of $8,740 million. Individuals, on the 8-percent surcharge, $5,130 million; corpora- tions, $1,860 million. Total of $6,990 million. On the 6 percent surcharge, individuals $3,850 million; corporations, $1,395 million; or total of $5,245 million. Mr. SCHNEEBELI. Now as to corporations, is this tax surcharge fig- ured before or after the investment credit? Secretary FOWLER. According to the bill that has been drafted and is now available, it will be applied before the investment credit. Mr. SCITNEEBELI. So the investment credit will be then on 90 percent? Secretary FOWLER. No. It keeps the investment credit constant at the 7 percent level. Mr. SCHNEEBELI. Seven percent before the surcharge? Secretary FOWLER. Yes. If you did it the other way, it would change the effective impact of the investment credit to a 7.7 percent investment credit. Mr. SCUNEEBELI. Now this total of 10 percent for fiscal 1969, which is about $8.74 billion, would still be less than one-third of your antici- pated deficit for fiscal year 1968, would it not? Secretary FOWLER. That is correct. Mr. SCHNEEBELI. In view of the fact that there does not seem to be too much conviction on the part of many people that we are going t.o have an outstanding rise in our economy in the next 6 to 1~ months, is it worth the gamble to put a 10-percent surcharge on corporate taxes and on individuals income, risking a possible downturn in business which is entirely possible, in order to bring in less than one-third of the deficit? Is this considered a good gamble? Secretary FOWLER. Congressman Schneebeli, two comments: No. 1, we don't find that large a number of people who think this is going to produce a downturn. I realize it is very easy for someone to find a reason not to vote a tax increase. But I do not believe that when the committee has assembled a solid body of economic and financial opin- ion that is available from those who make a specialty of these things, whether they are in public life or in private life, that you will find that sharp a division of opinion. There will be those certainly who will be apprehensive and con- cerned, but I doubt that you will find many who will flatly predict, solidly and with the conviction that we have here, that this is going PAGENO="0173" PRESIDENT'S 1967 TAX PROPOSALS 161 to produce a downturn-who will be willing to take the other side of it in a responsible way. Secondly, I think you have to look at the alternatives. What are going to be the consequences of not voting a tax increase designed to reduce this deficit and bring it into reasonably manageable propor- tions? I think you also have to look at the conjunction of the ta.x increase with the efforts that are made to reduce and hold down expenditures. It is the combination of these two prongs of the program which put an entirely different phase on the magnitude of the extent to which the Federal Government would have to go into the market to borrow, add pressures to the market, and which put an entirely different phase on the future pattern of stimulation to the economy from the deficit on the NIA account that would be steadily trending down during the course of the 12 months ahead, according to Chairman Ackley's testi- mony yesterday, rather than a constant heat on the boiler from a con- stant or increasing NIA deficit from the second quarter figures all through the next year or 18 months. Mr. SCHNEEBELL I agree with your second statement. With regard to your first statement, I would like to make a comment from some other areas of concern. The First National City Bank in its August monthly economic letter says, "The administration continues to express optimism about the strengthening of the economy. Business management by and large are not as cheerful as either Washington or Wall Street about ceo- noinic expansion surging forward. Corporate profits remain depressed in the second quarter." A July statement by the Bank of America- Secretary FOWLER. May I comment on that for just a moment, the First National City Bank? Mr. SCUNEEBELI. Yes. Go ahead. Secretary FOWLER. I have all of those statements. I will be glad to bring you a compilation if it will be of any interest to you, of the statements of many of these banks. I think that you will find the solid conviction of the officials of the First National City Bank of New York is that this tax increase should be voted. Now, whatever side comment may be made in the monthly letter, that is the convictiçn I think you will find of those people who are in charge. Mr. SOHNEEBELI. I said I agree with your second premise tha.t from a monetary and fiscal viewpoint that we should probably have a tax increase. But from the point of view of the effects on the business economy I said I don't wholly agree with you. I don't think Mr. Ackley made a selling statenient as far as I am personally concerned. That is why I am reading from this statement baying this tax increase may not have the beneficial effect or may even have a detrimental effect. Secretary F0wLER. What was said in that letter, and I think the whole letter ought to be read to get the full context, is a perfectly obvious observation. If you are in the steel business which has been going through a substantial inventory adjustment in one of the vari- ous lines of manufacture where your customers, rather than buying from you at the pace at which they sell, are using up, reducing their PAGENO="0174" 162 PRESIDENT'S 1967 TAX PROPOSALS inventories, if that is all you are looking at-and that is the tendency of people who are ill the manufacturing sectors where the inventory adjustment has been most sharply felt-you would have some of the questions that are voiced there, based on your experience of the last 6 months. Again, if you are looking at the scale of corporate profits and you see corporate profits decline and taking into account what was said this morning, that they seem to have bottomed out and now there is a slight increase at least in the second quarter over the first quarter, which I think puts somewhat of a new- Mr. SCHNEEBELI. Resulting in $200 million. Secretary FOWLER. That is right. But the fact that they don't keep going down which was the gen- eral expectation of a lot of people who were just looking at that side of the picture. If you read the corporate statement reports in any of the publications as they come out one by one over the last 2 or 3 months, you would have gotten, I think, the picture that corporate profits were going to plummit downward again in the second quarter. Well, they didn't. So what I think you gentlemen have to do is to look, as we have tried to do, not at just one facet of this problem, not just at the past, not just at what happened in January, February, and March and April, but what is happening in May, June, and July, and what seems to be in the cards for the months ahead, and look at all of these particular elements in making a judgment as to whether or not the economy is going to go forward. All I say is, I guess there are different publications, anybody can read them, but most of those I read which reflect pricate opinion say that it is behind us. Mr. SCHNEEBELI. If I may refer to two others, Mr. Secretary. The man who occupied Mr. Ackley's position 10 years ago says there is a distinct risk that a hike of 8 to 10 percent Federal surtax might bring a downturn in business, according to Raymond Saulnier. Also Mr. Martha Gainsburgh, senior vice president and chief economist of the National Industrial Conference Board, shares that same feeling as to what effect the 10 percent surtax will have on the business economy. I would say that the letter from the First National City Bank is not localized as to any particular industry or any particular firm. I think it was trying to evaluate the viewpoints of industry in general up to this point. Secretary FOWLER. Mr. Schneebeli, I neglected to bring-I bring too many black books, but I have one big black book back at the office re- flecting the views of some of the gentlemen you mentioned and a num- ber of others on this particular question. Just let me say that I think when these views are all collected and in the hands of the committee, you will find a fairly overwhelming consensus, which was reflected in an outstanding business publication, Business Week, iu its business outlook section as early a July 8, this comment: By midyear economists usually have a pretty good fix on how the full year will shape up. But right now there is still a wide spread on expectations for business in the second half of 1967. There is almost universal agreement that there will be no recession. There is also a consensus that business will pick up for the rest of the year and into 1968 also. But there are sharp differences on the speed of the pickup and how well various areas of the economy will do. PAGENO="0175" PRESIDENT'S 1967 TAX PROPOSALS 163 Now that is roughly what I tried to reflect in my statement yester- day as being the general state of outside opinion. Mr. SCHNEEBELI. As I state, to a lot of the members of our coin- mittee there is this question which still may be open in our minds as to exactly what effect on the business economy this proposed tax might have. I would like to ask you something in another area. Yesterday on the wire this fact was noted: Union workers in the building trade registered their largest quarterly wage increases in 19 years during the second quarter of 19ti7, according to Labor De- partment statistics. The wage scale average rose 3.9 percent between April and July of this year, bringing average wages to $4.85 an hour. This statement, coupled with the unusually high demands being made by the IJAW on the auto industry, would indicate that if there is going to be any inflation outside of the fiscal area we are talking about, it certainly is in the matter of wages. I am wondering what the administration is doing in trying to keep down these huge increases in wages when they are reported to be the largest increase in any quarter in 19 years. Mr. ACKLEY. Mr. Schneebeli, you are certainly correct that wage increases, particularly in the construction industry, have been exceed- ingly high and that current demands by other unions are also high, although certainly not as high as in construction. I think the record of the administration on this is very clear. We have stated repeatedly and as strongly as I know how that this is a serious problem, and that wage increases are exceeding the productivity gains in the economy and are a source of upward pressure on prices. We have urged repeatedly, the Council, the Secretary, the President, restraint by labor, as well as by business, in wagemaking and price de- termination. Obviously these appeals are not fully responded to in the private community. We have no legislative authority or other au- thority to set ceilings. We do not want such authority. We have made our views, I think, very clearly known thout the seriousness of this problem and have urged the maximum degree of cooperation be achieved from the private community. Mr. SCHNEEBELI. Has the administration taken any public position with regard to the TJAW demands insofar as it would affect inflation and affect the economy? Mr. ACKLEY. It has not taken any specific public position on the TJAW demands, no. It has taken a public position on the general question of the size of wage increases. Mr. SOHNEEBELI. In our discussion of the economy and inflation, and the problems we have in trying to raise taxes in this area, do you not think that this huge increase we have had in these wages in many areas is a matter of grave concern and should be dealt with probably a little more forthriffhtly and publicly? Mr. ACKLEY. Mr. ~chneebeli, the opinions of the administration have been expressed in various ways, both in public statements I have referred to and in private meetings with leaders of the labor and business communities. One seriously doubts as to the tactical effectiveness of the Govern- ment making specific statements about particular pending labor dis- putes which can often exacerbate rather than help the situation. PAGENO="0176" 164 PRESIDENT'S 1967 TAX PROPOSALS Mr. SCHNEEBELI. I would like to say that the White House is doing a good job in making its position clear with regard to Federal pay increases. I think they have done a very excellent job. I hope they stick with it. Secretary FOWLER. Mr. Schneebeli, I would like to point out that the President in his message sending up this particular measure did comment and say that, "The current situation summons those groups"-referring to business and labor comrnunities-"as never be- fore to maintain that responsibility in their wage and price decisions." Now, I think, as was said here this morning, to some extent these high wage demands are symptoms of the increasing price levels that have transpired over the last year or so. The tax increase proposals and the program that is before this committee involving the tax in- crease and an effort on the part of both Congress and the adminis- tration to reduce expenditures is designed to hold back and to fight inflation which is one of the causes of these extravagant demands. If inflationary pressures are allowed to continue to grow, the spiral that we would all be concerned about will become an increasing spiral and our opportunity and our chance to come back to the pattern of relative price stability that characterized the period 1959 through at least 1964 would be delayed-we want to work back to that kind of pattern. Mr. SOHNEEBELI. I realize this is not your province, Mr. Secretary, this matter of these huge wage increases, but nevertheless they cer- tainly have an impact on what we have been discussing in the last few days on our fight on inflation. It seems to me the administration might be a little more vigorous in trying to keep these. inflationary wage increases from coming into being. Secretary FOWLER. I would agree that there is a direct relation- ship between these two, as the President's message has indicated. The emphasis on both the avoidance of excessive demands, which is an inflationary force, and the avoidance of wage price changes that are destabilizing are two prongs of the same problem; namely, the drive for price stability. Mr. ACKLEY. Could I comment briefly on the subject which Mr. Schneebeli raised about the forecasts of economists with respect to the impact of the tax proposal? I think the views of the economists and others on this are in the process of being revised rather drastically just within the past few days or weeks as additional information becomes available. For example, at noon today, the Commerce Department released figures in personal income. They are rather striking. Previously pub- lished preliminary figures on personal income for June showed a gain of $3.7 billion in personal income from June over May. This was the largest personal income gain since January. That has now been revised upward substantially to a $4.4 billion gain for June. Preliminary figures for July show a further increase of $4.5 billion for July. The total increase in those 2 months alone of $8.9 billion, practically $9 billion. At an annual rate that would be almost a $54 billion gain. This compares with the gain in the 4 months from January through May of only $7.8 billion. PAGENO="0177" PRESIDENT'S 1967 TAX PROPOSALS 165 Mr. SCHNEEBELL I believe there is more of this fiscal income going into debt repayment and savings than there was earlier this year. So possibly the total difference may not be going into the economy. Mr. ACKLEY. Certainly the rate `of personal saving has been high, but it has also been declining. Mr. SOHNEEBELI. I understand the rate of personal saving is higher than it was the first of the year, percentagewise. Mr. AOKLEY. On `the contrary it has declined from the first to the second quarter, appreciably. The CHAIRMAN. Mrs. Griffiths. Mrs. GRIFFITHS. I would like `to ask you if the deficit is $29 billion this year, what percentage is that of the budget first, and secondly of the estimated gross national product. Mr. SCHIJLTZE. If the deficit were $29 billion, you would have expenditures of $144.2 billion, which would make the deficit, I will guess, roughly 18 percent of the budget. I haven't done the arithmetic. Mrs. GRIFFITHS. How much is that of the gross national product? Mr. SCHULTZE. $29 billion on a round number of $800 billion of GNP. That is around 3½ percent. Mrs. GRIFFITHS. What was the highest previous deficit in any one year? Secretary FOWLER. Leaving `out World War II? Mrs. GRIFFITHS. Yes. In 1958. Secretary FOWLER. In fiscal 1959. I think the ratio u-as about 2.4 percent as against what Mr. Schultze has computed here would be about 3% percent. iMirs. GRIFFITHS. What was that in gross national product? Secretary FOWLER. 2.4 percent. Mrs. GRIFFITHS. What do you say it would be now? Mr. SCHTJLTZE. It would be, if you had the $29 billion deficit, approximately ~½ percent. Mrs. GRIFFITHS. Approximately how much? Mr. ScIrnLTzE. Approximately 3½ percent. Mrs. GRIFFITHS. Why can't a wealthy nation bear that kind of debt? What are we really talking about? Mr. SOIIULTZE. May I start on that? I think this question really involves two points. First, relatively moderate changes in the balance between income and expenditures either in the Federal Government or in the private sector, can affect the economy with a fairly heavy impact precisely because it is an imbalance between revenues and expenditures. In other words, its impact on the economy cannot just be measured in terms of its own size, because it, in turn, affects incomes in the private sector of the economy `and thereby spending, which further affects income. And that does have a multiplier effect and drives the economy much harder than you would think by `simply looking at the size of the deficit alone. Secondly, if the economy were running in the neighborhood of full employment, relatively marginal gains above full employment can give you significant price pressure, just as an economy opera'ting at 51/2 to 6 percent unemployment is an economy with a good bit of stagnation, even though it is only 2 percentage points below the full employn'ient rate. 83-349-67-pt. i-12 PAGENO="0178" 166 PRESIDENT'S 1967 TAX PROPOSALS So, in terms of performance of the economy, in terms of what drives it, relatively moderate changes in this balance between income and expenditures can result in a good bit of drive. rfhe second point is that this is also true in the credit markets. Relative to the total amount of funds to be borrowed perhaps this amount may not seem large, but as an incremental amount on top of that to be financed, it can really have a big impact on interest rates just as a relatively moderate inflationary pressure can drive prices up by 3, 4, 5 percent. Now, that is not Brazilian inflation, no, but it is far more than we want. So then, in summary, modest amounts of deficits can have fairly big impacts. Those impacts can give us pretty bad performance from the point of view of U.S. goals, maybe not in terms of a South American economy, but in terms of U.S. goals t.hey give us pretty bad perfor- imince in terms of interest rates and prices. Mrs. GRIFFITHS. What is the mean average wage? Mr. ACKLEY. Hourly or annual? Mrs. GRIFFITHS. Annual. Secretary FOWLER. 2.6 percent on the ratio of GNP to the deficit in 1959. 1 said about 2.4. It is 2.6. Mr. ACKLEY. Average weekly earnings in manufacturing in July were $113.24. Mrs. GIiiFFITHs. What about the rest of the country? You don't have anything close to $5,000 as the mean average wage, do you? Mr. SCHULTZE. I admit I may be answering too quickly, but I am almost positive the mean average wage would be over $5,000. (The following information from Mr. Ackley, was received by the committee:) The Department of Commerce publishes estimates of average full-time annual earnings of employees. In 1966, this figure was $5,954 in all industries, 7,016 in construction, $6,647 in manufacturing, $7,786 in transportation, and $2,247 in agriculture. Mrs. GRIFFITI-IS. How much? Supposing it is 6, half the people then are drawing less than that, aren't they? Mr. SCHULTZE. Yes. Mrs. GRIFFITHS. How much less money are they going to have to spend if this tax bill is enacted as you suggest? Mr. SCIHJLTZE. In the first place, a man with a wife and two chil- dren with an income up to $5,000 will not have a penny less than under current tax laws, because the bill is written to give an exemp- tion to such a family. A single person, for example, with $1,900- Mrs. GRIFFITHS. Would have $4 less. Mr. SCHULTZE.The family man earning $5,000 would have nothing less. This tax proposal would not take anything from him. A man with a wife and two children would lose nothing because the exemp- tions from the proposed surcharge go up to that $5,000 level. So the proposal would not take a penny from him. As a matter of fact, in terms of real purchasing power, we think he will be better off because we will avoid some price increases which would otherwise occur. I can't prove that mathematically, but we are sure that will be the impact-to hold prices down. So, in terms of purchasing power, he will end up better off. PAGENO="0179" PRESIDENT'S 1967 TAX PROPOSALS 167 Mrs. GRIFFITHS. At $25,000 how much less? Mr. SCHULTZE. The Secretary's statement, on the last page, shows that at $25,000 the total impact of the tax, when it is fully effective- in other words, on 1968 tax liabilities-would be $441 less than at l)reSeflt. Mrs. GRIFFITH5. At $25,000 those people are not really going to delay what they are going to purchase. They may put less money in the bank, so that you will have less money to lend. Mr. SCHULTZE. Mr. Ackley may want to comment further on this, but what you are after is the spending rate of additions to income at that $20,000 to $30,000 income range. On the basis both of my wife's buying habits, and perhaps more appropriately, on the basis of studies which have been done, the indications are that the spending portion of that extra income is still quite significant. I don't know what num- bers would come out, but the marginal rate is still quite significant. Any study which has been run will show it is quite high, although I can't give you a specific percentage. Mrs. GRIFFITITS. If this tax is enacted, what effect is it going to have oii wage negotiations? Since the auto companies will have less money will they be more willing to resist wage demands and since the unions know that they have somewhat less money will they withdraw de- mands? Mr. ACKLEY. If I may start the answer to that, the impacts are several. One, of course, is the direct impact of the additional tax on the profits of the corporations which makes them all the more resistant to wage increases, and the impact of the knowledge of that on the unions. I think the more important anti-inflationary impact of the tax action is in avoiding the kind of labor market shortage, excess demand situa- tion, in which businesses are competing with each other to find addi- tional workers and willing to do whatever it takes to get them. It is a climate in which they know they can easily raise prices to cover the cost of excessive wage increases. It is a climate in which the cost of living is rising more rapidly and the workers feel the need to get larger wage increases to keep up with the cost of living. Employers recognize that. The whole climate of negotiations is affected by the state of the economy. Mrs. GRIFFITHS. You have already told me it is not going to have any effect at all on half of the persons. Secretary FOWLER. No; I think up to $5,000. Sixteen million out of 98 million taxpayers would be exempt from the surcharge. That is our computation of the effect of the exemption from the surcharge of those in the two lower brackets-a little over 16 million out of 98 million taxpayers. Mrs. GRIrFrms. It seems to me, frankly, that the new economics is running into old politics. It was hard enough to sell my district on the idea that if there was a tax cut we could pay our bills better. This was back when the first tax cut was offered. Now I am going to have to go back again with your suggestion that we increase taxes to start paying our bills and stop inflation. In the first place, I don't think this is enough to do anything in the face of the problem. PAGENO="0180" 168 PRESIDENT'S 1967 TAX PROPOSALS Mr. SCHULTZE. May I make one comment on that, Mrs. Griffiths? It is not a very fancy analogy, but in a colloquy with Mr. Curtis earlier this morning, I pointed out that when a doctor is treating a patient, whether the patient has a chill or fever, he still has the same objective, which is restoring his health. You treat a chill and you treat a fever differently. In 1964, when the economy had a chill, it was true that tax reductions on top of an economy with a high unemployment rate, with very low pressure or no pressures, as a matter of fact, in the labor market, could generate activity sufficient so that you built up a tax base to get you more revenues than you started with. Right now the problem is not a chill, but a fever. One measure of that fever, and, I admit, only on.e, is the fact that without the combined expenditure and tax program of the President, on a national income accounts basis, you would be running a deficit of something in the neighborhood of $15 to $18 billion on top of. an economy which is al- ready in the neighborhood of full employment. That is almost bound to generate a fever, even though nobody can predict precisely what parts of the body the fever might affect most. So I think it is perfectly legitimate to say that the same economics which told you when the economy had a chill you needed a tax cut would now say you need a tax increase. The only way, the only possible way, in which a no-tax-increase situation could bring you more revenues would be one in which at this stage of the game you started to get inflationary increases in income, and that certainly we do not want. I would say it is no more difficult to explain about treating the economy with different medicine when the ills are different than it is the human body. A good doctor does not necessarily give the same pill, no matter what kind of situation the patient is in. Mrs. GRIFFrrH5. We never did pay the bills with the last cut. Secretary FOWLER. There is another part of this picture. I tried to stress yesterday that the cost of the conflict in Vietnam has now reached such a proportion-that is $22 billion or in excess of that amount- that according to the experience we have had, such a special temporary cost of war-you might put it in those blunt terms-we customarily try to defray by tax increases not dollar for dollar, not in any complete way, but pay a substantial part of the bill out of current revenues. People will recall that in the Koeran war, individual taxes were increased not equivalent to the 10-percent surcharge but a 28-percent surcharge. Of course, the tax increases that took place in World War II are not comparable in any sense because it represented a whole funda- mental change in the income tax structure. But it is, I think, a fact of fiscal life that when you have a temporary special cost that is not a permanent pa.rt of your picture, you try to defray at least a portion of that out of extra earnings if you are an individual. In the case of a government, the customary and natural thing to do is to pay part of that cost by increasing taxes. Now, history may prove me wrong on this, but as to this question: "Are we going to get more revenue out of this increased rate ?" I think the answer is, "Sure, we are, given the economy in the State it is in today." The only time I think history will prove in our experience that an income tax increase did not yield substantially increased revenues was in the depression period when there was a tax increase in the early 1930's. PAGENO="0181" PRESIDENT'S 1967 TAX PROPOSALS 169 It reacted contrary to the conventional expectations of the time. If we were in a recession or if we were threatened to be in a recession, we would not be here counseling with this committee to impose a tax increase. We did not recommend that it be imposed as of January 1 because we had some concern about what the economy would do in the early months of this year. I can say to you with all conviction that we have kept a very con- stant watch on the movement of the economy since the President's message went up. Now we come to you not in April or May, but in the light of the current developments, with the full conviction that the danger of any downturn is now well behind us, and that the real prob- lem of the economy and our financial system is the threat of com- pounding the inflationary thrust by a continuance of a highly stimu- lative fiscal policy that would put undue pressure on the money mar- kets which would result in ever higher interest rates. Mrs. GRIFFITITS. Thank you. Thank you, Mr. Chairman. The CI-IAIRMAN. Mr. Watts? Mr. WATTS. Did I understand you a few minutes ago, Mr. Ackley, to say that the wages had gone up $4.4 billion in June and that you anticipated that it would be $41/2 billion in July? Mr. ACKLEY. That was not wages. That was total personal income. It included wage income and all other kinds of income. Mr. WATTS. Did it include corporate income, too? Mr. ACKLEY. Personal income includes corporate dividends. There was a small increase of two-tenths of a billion dollars in dividends in June and three-tenths of a billion dollars in dividends in July. Mr. WATTS. I am amazed that there was that much steam going ahead. Of course, that does not cover all of it if it does not cover corporations, does it? Secretary FOWLER. We did comment this morning, Congressman `Watts, that the decline in corporate profits in the last quarter of last year and the first quarter of this year, apparently has bottomed out because of a report which came out of the Department of Commerce yesterday, reported in this morning's papers, that the second-quarter profits are going to be slightly, $200 million in excess of first quarter profits. Mr. `WATTS. Then there is an upturn in not only the personal income but the corporate income. Secretary FOWLER. At least you can say the downturnin corporate profits for this second quarter has flattened out. Mr. WATTS. I did not anticipate this kind of increase. Did you at the time you made up the budget? Secretary FOWLER. This kind of increase in personal income? Mr. WATTS. Yes, to this extent. Mr. ACKLEY. Yes, I think we have been counting on a substantial improvement in personal income. The figures for June and July are indeed rather large. But, I think, they are most relevant here as syinpto- matic of the fact that the economy has begun to advance more rapidly and that the upturn we have expected in January has indeed arrived. Mr. WATTS. Do you expect this to continue throughout the rest of the year? Mr. ACKLEY. We do indeed. PAGENO="0182" 170 PRESIDENT'S 1967 TAX PROPOSALS Mr. WATTS. At about the same rate? Mr. ACKLEY. I tried to indicate in my statement yesterday some rough ideas of the magnitudes of expected advance. Measuring in terms of gross national product, as developed this morning with Mr. Byrnes, with the tax increase we expect an increase in gross national product of something over $25 billion between the second and the fourth quarters of this year. Mr. WATTS. Between the second and fourth quarters. That would cover two quarters, would it not? Mr. ACKLEY. Yes. And with the tax increase, from second quarter of this year to the second quarter of next year the increase in gross na- tional product might be in the neighborhood of $55 billion. Mr. WATTS. If personal income continues at the same rate that would be in the neighborhood of $48 to $50 billion a year, would it not? Mr. ACKLEY. Yes, if you simply extrapolated the increase from May to July it would be in that kind of magnitude which is undoubtedly higher- Mr. WATTS. Would that be within the bounds of reason? Mr. ACKLEY. No, I think one would not extrapolate that same in- crease. Mr. WATTS. What do you anticipate will be the increase on a yearly basis at the rate it is going now? Mr. ACKLEY. If we take from January to July, the increase in per- sonal income was something a little less than $17 billion. Certainly it would be a larger increase than that in the second half. Mr. WATTS. You have $9 billion in 2 months according to your state- ment, have you not, sir? Mr. ACKLEY. That is right. Mr. WATTS. There will be taxes paid on all that additional income, will there not? Mr. ACKLEY. Yes. This is certainly before taxes. Mr. WATTS. In other words, if you had an increase of $40 billion in a year, the tax on that was 20 percent that would be about $8 billion. Mr. ACKLEY. The average rate of taxation on personal income is less than 20 percent. Mr. WATTS. About 18, is it not? Secretary FOWLER. The figure is 15½ percent for personal income adjusted to a tax basis. Mr. WATTS. Can personal income continue to go up without cor- porate income following it to a certain degre.e? Mr. ACKLEY. We are certainly predicting that corporate profits will be rising over the next year. Mr. WATTS. I am just wondering if you have taken into considera- tion this extra income you are going to derive from these additional wages that have gone up so fast and the corporate profits which are going to go up in determining your need. Mr. ACKLEY. Yes, I think the answer is clearly yes, that the fore- casts we have made of revenues are based on the expected path of the economy. Mr. WATTS. Your forecast of revenue was based on the rate of increase in June of $~~/2 billion and July of $4% billion and at that rate for several months? PAGENO="0183" PRESIDENT'S 1967 TAX PROPOSALS 171 Mr. ACKLEY. Our view would be that an increase in gross national product in the neighborhood of $55 billion for the second quarter next year over the second quarter this year would be associated with a gain of something like $45 billion in personal income. Mr. WATTS. Have you calculated what taxes you would get on this in making your determination? Secretary FOWLER. That is right. They are reflected in the revenue estimates I gave. Mr. WATTS. What amount of money did you allocate to these in- creases? Do you have that? Secretary FOWLER. I don't think it is computed exactly on that basis. Mr. WATTS. How much did you compute the revenue for this year over the last fiscal year? Secretary FOWLER. `We came in, Congressman `Watts, with an esti- mate in the January budget of $126.9 billion. Mr. WATTS. What is that? Secretary FOWLER. We came in with the January budget with a computation of revenue of $126.9 billion. Mr. WATTS. Income? Secretary FOWLER. Revenue from all sources. Mr. WATTS. What did you come in with the year before? Do you remember? Secretary FOWLER. Do you want the estimate we made or the actual? Mr. `WATTS. The figure for the year before that you were using when you gave me $126.9 billion. Secretary FOWLER. This January? Mr. WATTS. You said you estimated in January or figured in Jan- uary that your revenues would be $126.9 billion. Secretary FOWLER. At that same time we gave you an estimate of revenues for fiscal 1967, of $117 billion. It actually emerged at $115.8 billion as of June 30 when we settled our books. Mr. WATTS. In other words, this $126 billion you are talking about is for fiscal 1968, is that correct? Secretary FOWLER. That is right. Mr. WATTS. And for fiscal 1967 what did you estimate it at? Secretary FOWLER. We estimated in January that fiscal 1967 figures would produce $117 billion. In actual fact it was $115.8 billion. Mr. WATTS. You were short? Secretary FOWLER. That is right. Mr. WATTS. You estimated about $9 billion difference between fiscal 1967 and fiscal 1968? Secretary FOWLER. That is right.. That assumed a 6 percent tax increase. Mr. WATTS. What I am trying to say is, if your gross national nrod- uct is going to go up $55 billion in the course of the year, I don't know how much taxes you expect to get out of that.. I guess you probably did take in a good part of the $55 billion, whatever ou realized, in taxes on it. But I am astounded at the growth that is evidenced in the wage field. I am just wondering if that was taken into consideration in arriving at your needs. You say it was. PAGENO="0184" 172 PRESIDENT'S 1967 TAX PROPOSALS Mr. SCHULTZE. One way to look at that, Mr. Watts, is that in the Secretary's statement he says that we are assuming for the current calendar year a $625 billion personal income figure. Now, to get $625 billion means that personal income between the first half and second half of the year has to go up about $20 billion at annual rates. Mr. WATTS. I have to go and answer a rollcall, but I wish you would put in the record, Mr. Secretary, the percentage of gross national product for 1967 and 1966 that was paid in taxes and rationalize that with your estimate of gross national product this time and figure out what amount of taxes you would have. Will you do that, sir? Secretary FOWLER. Yes, sir. (The following information was received by the committee:) There have been several legislative and administrative actions which have affected receipts in varying amounts in the three fiscal years, 1966, 1967, and 1968. To compare the three years, they must be first adjusted to a common base. Any one of the three years could be taken as the base. In the explanation which follows, the mid-year, 1967 has been used as the base and 1966 and 1968 ad- justed to it. The adjustments to achieve comparability are: [In billions of dollars] Adjustments to fiscal 1967 base In 1966 In 1968 1. Acceleration of corporation payments (1964 and 1966 acts)__ 2. Speed up in collections of withheld income and excise taxes (administra- tive) 3. Revenue act of 1964 (corporation income tax) 4. Excise taxes (1965 and 1966 acts) 5. 1966 act (indw~dual) 6. Suspension and restoration of investment credit 7. Proposed 1967 tax program 8. Other proposed legislation (safety-beauty trust fund) +2. 0 +4. 1 -.6 +3 -. 5 -. 5 +. 1 +. 5 +1. 0 -. 3 -7.4 4-. 4 Total adjustments 4-. 6 -1. 5 The cemparison of the 3 years would then be: [Dollar amounts in billions] Fiscal year 1966 1967 1968 1. Total administrative budget receipts 2. DedUct miscellaneous receipts, primarily nontax receipts $104.7 $115.8 $122.5 -5.2 -6.2 -5.2 3. Total tax receipts 4. Adjustments for comparability 99.5 109.6 117.3 +0.6 +1. 5 5. Tax receipts, adjusted 6. Gross national product 100.1 109.6 115.8 715.3 763.1 809.0 7. Tax receipts, adjusted as a percent of GNP 13.99 14.36 14.31 1 Average for fiscal year 1968 with a gain of $55,000,000,000 from the 2d quarter of calendar year 1967 to 2d quarter of 1968. The CHAIRMAN. Mr Battin. Mr. BArrIN. Mr. Secretary, as I understood from your statement, the only reason the surcharge method was used rather than a straight per- centage increase was for simplidity of administration. Is that correct? PAGENO="0185" PRESIDENT'S 1967 TAX PROPOSALS 173 Secretary FOWLER. No, I think there were a number of other factors that entered into it, Congressman Battin, or were alluded to. I tried in a rather generalized way to incorporate, you might say, by reference as a part of our reasoning the report of the Fiscal Subcommittee of the joint Economic Committee last March, and there were a number of criteria or standards developed in that report for a temporary tax increase or tax reduction. While I think simplicity is one of the factors that should be stressed, I think that there are a number of other elements. This approach minimizes the arguments that always arise and take up a great deal of time and effort as to changing the structure of the tax system. It takes the tax system as we have it and applies the surcharge with a minimum of disturbance to the existing relationships among taxpayers and, therefore, has an appeal as being fair, sensible, tnoderate, and tem- porary. In the light of that entire range of considerations in that report, we felt the surcharge approach was the right one. Mr. BATTIN. It was easily identifiable, you say with a temporary increase. Secretary FOWLER. That was one of the things I mentioned yester- day. I think it was in a colloquy with the chairman. It stands out on the form in such a way that it is going to be properly much more sus- ceptable to elimination after the cost factors; that is, the cost of hos- tilities in Vietnam have passed. Mr. BATTIN. I do not understand the figures you gave yesterday. I don't understand the logic that applies. Maybe you can help me out.. In the 1966 fiscal year we had an administrative budget deficit of $2.3 billion. Secretary FOWLER. That is correct. Mr. BATTIN. Then in 1967, just ended, we had an $8 billion deficit. Secretary FOWLER. $9.9 billion. Mr. BATTIN. Now, in the fall of 1966, which would have been the last half of the 1967 fiscal year, is when we had the high interest and the tight money and inflation. Secretary Foivi~m. It was really characterized by tightness more in the late spring and summer, more or less terminating in September and October with the new program that came in. Actually there was a very marked reaction and the peak of interest rate movements turned down shortly after the introduction of that program, inclucliimg the action of this committee last fall. Mr. BAITIN. That was the suspensiOn of the investment credit. Secretary FOWLER. The investment credit suspension and the an- nouncement of the expenditure control program and the new policing on our part of entry into the money market by Government agencies other than the Treasury. Mr. BATTIN. Also about that time there was an announcement that there would be no further sale.of participating certifiCates. Secretary FOWLER. That was part of that third element of the program. Mr. BATTIN. Now, this is where your logic breaks down. Then you are stating that without the tax there is going to be about a $29 billion deficit for this fiscal year, but with the tax somewhere between $14 and $18 billion deficit- . . PAGENO="0186" 174 PRESIDENT'S 1967 TAX PROPOSALS Secretary FOWLER. No, it is with the tax and the various elements of expenditure restraint that were identified by Mr. Schultze in his testimony at some length, I believe in a colloquy with Mr. Byrnes. Mr. BATTIN. Mr. Schultze was saying-at least this morning-that every effort was going to be made by the administration to override the action the House took in the sale of participating certificates which would indicate your going to have to go back into the market at some time during this fiscal year to do some financing in order to take care of the deficit. Secretary FOWLER. If we don't sell participation certificates we have to sell Treasury securities. It is the same magnitude whether you use the PC's or not. Mr. BATTIN. There is a little difference in perhaps the saleability of interest paid. That is not the point. The point is that last year where you had to finance the 9.9 deficit in the 1968 fiscal year, you are going to have to plan to finance $14 to $18 billion. I think this would be really a far more difficult thing to do than was done last year and I don't see where you are going to be able to control the interest and the inflation and the tight money? Secretary FOWLER. Let me say there is one major difference between the state of the market last year and this year which we are very anx- ions to preserve, Mr. Battin. It is very important to have it and that is a monetary policy of relative ease-the fact that bank credit is being expanded in substantial amounts and that the money supply is being increased at a substantial rate, around 6 to 7 percent compared to last year's rate of 1.9 percent. So, we would hope, while I think my state- merit does not put any optimistic gloss on the problem that con- fronts us, with the deficit at the range indicated, nonetheless we think it is a lot more tolerable and a lot more manageable at that level than would be the case if it were at the higher levels of $28, $29 billion. Mr. BATTIN. Now, anticipating a $14 billion deficit does that mean that sometime before the 1st of June 1968, we will have to raise the debt limit again? Secretary FowL~. Let me give you these elements. The debt limit that is applicable to the fiscal year 1968, as you recall, is $358 billion. We are of the clear opinion that a deficit of $14 to $18 billion, which is the range we are seeking here would fit under that limit because it was set high enough to cover some of the very contingencies that we have now under consideration, that have either come to pass or seem likely. A deficit of $29 billion I do not believe could be accommodated under the debt limit. To the extent that a bigger deficit was due to a short fall in PC sales it would not use up the leeway under the limit because of the modification in the limit that is :proiiided but I do not want to imply in anything that I say the debt limit is the reason we are here urging the tax action or expenditure control. The present limit applicable to fiscal 1968 could accommodate defi- cits for that year which we believe are clearly excessive in the view of the financing burden on th.e market and the inflationary potential in the economy. As for the maximum deficit that would get us under that limit I think a precise figure would depend very much on timing patterns within the fiscal year. and how much of the "deficit" mieht be due to short falls in PC sales. I would hate to give you a hard estimate but I think any time the deficit got anywhere substantially above $20 PAGENO="0187" PRESIDENT'S 1967 TAX PROPOSALS 175 billion we would begin to be concerned about the problem of staying within the debt limit. I said in the very early part of my statement, Congressman Battin, that the real purpose of coming here is to keep the use of the borrowing authority that the Congress did provide to much lesser proportions. These proportions, we think, are a lot more compatible with the economic and financial health. Of course, the borrowing authority is there and the Treasurer usually wants to be in a position to borrow or get it out of revenues. Now, my distinct preference is to to hold that deficit down because I think to borrow up to the limit that would be permissible given the economic facts that we have been discussing the last few days, is the wrong course to take. Mr. BATTIN. We reinstated the 7-percent investment tax credit be- cause I believe we felt that the business community was slowing down and something had to be done to get that picking up again. Now, how do you equate giving somebody a 7-percent investment credit and then turning around and putting a 10-percent surcharge on their earnings? Does that have any counteracting effect to the point where maybe we should talk about some other action by the committee rather than just a surtax? Secretary FOWLER. I don't think so because I think the investment credit was there as a permanent part of the law to begin with. It was suspended last September in the special circumstances that were indi- cated. I think it served its purpose, as Chairman Ackley's testimony and the study of the charts indicated this morning. There is no. longer the excessive escalation in the rate of plant and equipment expenditures that characterized the period of a year ago. It has flattened out. Indeed it could edge up some in the period ahead, without causing great con- cern. Therefore, having made a commitment at the time we suspended the investment credit that when the conditions to which it was ad- dressed had passed we would restore it, I think having made good that commitment I do not personally see a real connect.ion between that and the action we are taking here on taxes. I realize that there are those who will dispute that but to me they are two entirely different propositions. Mr. BATTIN. What effect might this have as an offset? Here is a credit on the one hand and on the other hand a tax. Is there a loss here for the people who are in a position to take advantage of the 7 per- cent? I realize they are applied to dividends. One of them was capital investment. The other comes out of the earnings. How much of an incentive might it be for business now to take the 7 percent where they perhans delayed building or equipping their plants because they wauted to offset income? Secretary F0wLER. I don't believe there would be very much con- nection between those two in that regard. I think the decisions on whether to purchase new plant and equipment, thereby giving rise to the 7-percent investment credit, involve a much larger and different group of considerations than simpTy taking the tax advantage and profit advanta~e or the cash flow advantage. For one thing we must remember on the cash flow side of the picture the marked acceleration in corporate tax collections which has characterized recent years. The revenue from that drops off appreciably, about $4billion or more, so an excess of $4 billion drops Out of the receipts structure. PAGENO="0188" 176 PRESIDENT'S 1967 TAX PROPOSALS Now, that main period of acceleration is behind us. So there will be some better cash flow pictures on the part of companies that have been undergoing that acceleration process. Therefore, I do not. believe that they will be the same motivation or purpose in just using the in- vestment credit for the sake of having a credit on taxes. Mr. BATTIN. Mr. Schultze, you probably remember a period before the Appropriations Committee on the 1968 budget when you had a colloquy with Congressman Cederberg of Michigan and Congress- man Jonas of North Carolina, I guess I will have to paraphrase, on on the phantam savings where some credit was being taken for cuts or savings in the budget and in fact on money which had been appro- priated. What brings this to mind is that now we are talking about cutting spending of the executive agencies. Are we talking about real dollar savings, money that has been ap- propriated, or are we talking about something that was not appro- priated? Mr. SCHULTZE. I recall the colloquy. I think you are referring to a sum of about $500 million, or something like that. Mr. BATTIN; No; it dealt with something between $4 and $7 billion. Mr. SCHULTZE. Then I am sorry. Let me reconstruct the situation that I am fairly sure you are referring to. Last year in September be-fore this committee we indicated that we would make savings in a number of ways. In particular I mentioned two of them. One was that where the. Congress had authorized acldi- t.ional sums for new programs we would not come un and request an appropriation for them. Secondly, we would, once appropriations had been made, reserve, im- pound, use whatever word you want., some of those sums and not spend them. We did both. Of the $2.6 billion savings in the administrative budget, a:bout $500 million-I don't remember the exact number- resulted from not sending up appropriations in cases where the Con- gress ha.d increased the authorization for new programs over the budget recommendation. Now, the situation this year so far is quite different than last year with a few exceptions. In general we are not faced with the situation, as we were last year, of the Congress authorizing new programs, $4 to $5 to $6 billion above our budget. Consequently the question of our not coming up with appropriations to finance those new programs does not arise. Hence, the $2 billion-odd savings I am talking about for this year basically comes from the Congress itself cutting appro- priations below our budget and/or the administration, to the extent that Congress does not do that, saving from those appropriations themselves. Either way, to the extent that Congress does cut, we have to do less and I will be happy for their cooperation. Mr. BATTIN. Incidentally, this appears on page 40. Mr. SCHTJLTZE. I remember . this colloquy in which Congressman Cederberg and Congressman Jonas said it was not legitimate for us to claim the savings of $500 million. I pointed out that we had al- ready told the Congress we would get the savings in three different ways. Mr. BA'rrIN. What I am trying to point out here is that the effect the savings that we are talking about, you are not going to reciuest appropriations but you are actually going to cut down on money which has been appropriated. PAGENO="0189" PRESIDENT'S 1967 TAX PROPOSALS 177 Mr. SCHULTZE. And/or. I say to the extent that Congress itself cuts some of these appropriations, both of us, between us, would do this in terms of appropriations that are not spent. Let me add, of course, that to the extent in future weeks or months the Congress does add additional authorization over and above the administration's recom- mendations, then we would as a general proposition not necessarily come up and ask for the full appropriation, but that is separate from anything I have said so far. I have not counted that in the $2 billion. Mr. BATTIN. I have one other question. I have a special report of the Tax Foundation which was prepared recently concerning the control- lable and uncontrollable items in the budget. I would ask for unani- mous consent that they appear at this point in the record. The CIIAIRMAN. Without objection, it is so ordered. (The special report on controllability of fiscal 1968 budget expendi- tures follows:) TAX FOUNDATION-SPECIAL REPORT CONTROLLABILITY OF FISCAL 1968 BUDGET EXPENDITURES Analysis Rebuts Claim that 1968 Budget is Relatively Uncontrollable `The budget message, of the President for the fiscal year 1968, transmitted to Congress in January, contends that major cuts cannot be made in the estimated $135.0 billion~ of Administrative budget expenditures "without serious impair- ment to vital national oibjectives." In support of this contention the message identifies various uncontrollable areas to show that only $14.9 billion-or 11 percent of the total-may be considered as "controllable." And it goes on to suggest that even this relatively Controllable area includes certain "indispensable" programs. On the other hand, sources within and outside the Congress have been calling for `su'bstt~ntial reductions, of from $3 billion to $6 billion, in expenditurss for fiscal 1968. Demands for spending reductions of this magnitude obviously run counter to the contention of the budget mes~sage that almost 90 percent of these expenditures are beyond effective control. Claims as to the controllability or uncontrollability of the budget expenditures of `course, vary with the' assumptions on which they are based. The budget mes- `sage, for example, marks down the entire eXpenditure for national defense ($75.5 billion) as "uncontrollable." However, while Vietnam requirements obviously introduce an element of uncontrollability the great emphasis placed upon the Defense Department's cost reduction program suggests that other areas of de- fense spending are susceptible to control. In recent testimony before the `Committee on Appropriations of the House of Representatives, Budget Director Oharles L. Sc:hultze, while presenting a `break- down supporting the "relatively uncontrollable" viewpoint set forth in the `budget message, also acknowledged that "there is no `such thing a~s an absolutely uncon- trollable expenditure." This Special Report presents an analysis of the projected fiscal 1968 adminis- trative budget expenditures, by factors which influence annual Congressional con- trol, in an effort to provide some information on posSibilities `for budget reduc- tions. While it is impossible, `lacking detailed information in some area's, to be preci'se in arriving at such estimates, thi's analysis su'ggests that a~s mu'c'h its $55 `billion of estimated expenditures for fiscal 1968, or roughly 40 percent of the total, may be classified as "relatively controllable"-i.e., su'bject to poSsible reduction's by the Congress (or the Executive). Relatively Uncontrollable Eapenditures There are areas of Federal expenditures which are not readily susceptible to annual Congressional control through the appropriation or legislative process- or which at best are subject to very limited control. Table 1, on the following page, summarizes these relatively uncontrollable areas, grouping them according to the factor which influences the degree of Congressional control. Detailed informa- tion on the programs and items involved in each of these categories is set forth in the series of tables which appear at the end of this report, pages A-I through A-16. A brief explanation of the "relatively uncontrollable" areas summarized in Table 1 follows: PAGENO="0190" 178 PRESIDENT'S 1967 TAX PROPOSALS Expenditures from Obligational Authority of Prior Years.-Of the $135.0 bil- lion of administrative budget expenditures projected for fiscal 1968, the budget documeht reveals that $39.3 billion will be made from spending authorization already provided by Congress, in previous years. While no breakdown of these expenditures from "carry-over balances" or prior approprations and other au- thorizations is available, they do represent the largest area of "relatively uncon- trollable" expenditure. The accumulation of these huge carry-over balances-estimated to total more than $125 billion at the start of fiscal 1968-reflects one major limitation upon Congressional efforts to exercise annual control over Federal spending. Although Congres:s is being requested to approve almost $144 billion of new spending authorizations for fiscal 1968, only $95.7 billion of this authority is expected to be spent in that year, with the remainder to be expended in later years. Technically, these carry-over balances are subject to rescission by the action of the Congress; such rescissions, however, have been infrequent. Contributions to Trust Funds, Payments of Claims, Payments Required by Treaties, Etc.-Items covered in this category represent fixed charges growing out of commitments established by statute or by treaty or agreement, which the Con- gress is, in effect, obligated to approve. It is estimated that such fixed charges will total about $9.5 billion in fiscal 1968. Examples of such expenditures include payments to the social security trust funds for health insurance to the aged, veterans' compensation and pensions, and the contributions of Federal agencies to the civil service retirement fund. These expenditures are detailed in Table A, beginning on page A-i. Expenditures Under Permanent and Indefinite Authorizations.-About $14.7 billion of estimated fiscal 1968 expenditures will be made from permanent author- izations of various types, which become available without requiring specific annual Congressional action. Such arrangements are entered into to meet the annual requirements of certain Federal statutory obligations and commitments. The largest item in this category, of course, is the estimated $14.1 billion to be required in fiscal 1968 for payment of interest on the public debt. More detail on this type of relatively uncontrollable expenditures is set forth in Table B, beginning on page A-4. 3. Expenditures to liquidate contract authorizations (see table C, A, p. A-i for detail) 9, 519 Balance relatively controllable expenditures 55, 648 TABLE 1.-Federal budget expenditures by factor influencing annual congressional control, fiscal year 1968 [Millions] Factor Amount Total administrative budget expenditures $135,033 Deduct relatively uncontrollable expenditures: 1. Expenditures from obligational authority of prior years' 39, 328 2. Contributions to trust funds, payments of claims, and payments required by treaties and international agreements (see table A, p. A-i for detail) 9, 519 3. Expenditures under permanent and indefinite authorizations (see table B, p. A-4 for detail) 14,660 4. Expenditures to liquidate contract authorizations (see table C, p. A-7 for detail) 8, 646 5. Expenditures under "open end" programs (see table D, p. A-9 for detail) 6, 399 6. Expenditures of Government enterprises (public enterprise re- volving funds) (see table E, p. A-il for detail) 833 Total, relatively uncontrollable expenditures 79, 385 Balance relatively controllable expenditures 55, 648 `This item appears in table 8, P. 48, Federal Budget for fiscal 1968. No breakdown by agency or function is available; thus there exists some overlap of the amount shown for item 1, in the totals shown for items 2 through 6. PAGENO="0191" PRESIDENT'S.1967 TAX PROPOSALS 179 Ecopenditures to Liquidate Contract Authorizations-In fiscal 1068 about $8.6 billion will be required to meet payments due under contractual obligations pre- viously entered into. Such expenditures are largely outside effective annual control through the appropriation process. Expenditures to liquidate contract au- thorizations are detailed in Table C, page A-I. Ewpenditnres Under ~S'o-called "Open-End" Proqrains.-Under certain types of Federal programs expenditures are largely governed by formulas established by statute, or in some cases are affected by economic or other conditions. The best example of a program involving expenditures governed by a statutory formula is the $4.2 billion public assistance grant program. Certain agricultural expenditures, on the other hand, can be affected by economic or weather con- ditions. Expenditure requirements for such programs (identified in Table D, beginning on page A-9) often cannot be accurately estimated in advance. Under such statu- tory commitments, however, Congress has at best only a very limited opportunity to control the annual rate of expenditure. In fiscal 1968 expenditures for these "open-end" programs are expected to total $6.4 billion. Ecopenditures of Government Enterprises.-Certain Federal Government opera- tions-such as housing programs, mortgage purchases and guarantees, other lend- ing programs, certain power operations, etc-are carried out through govern- ment corporation or revolving fund operations. Expenditures under such pro- grams are reflected in the administrative budget on a net basis. These programs are governed through basic statutes, or in some cases are affected by economic or other conditions in the flow of their disbursements and receipts. In the practical sense, Congressional control over the expenditures of these operations is restricted primarily to general limitations upon certain of the agencies' administrative expenses. Table E, beginning on page A-il, sets forth the gross disbursements and re- ceipts, and the net expenditures, of these government enterprises. In fiscal 1968 the net expenditures of these activities total only an estimated $.8 billion, sub- stantially below the amounts reflected in the total budget expenditure in other recent years. Primarily tihs lower net expenditure results from the increased use of the participation sales device, under which participations in pools of Feder- ally-held loans are sold to the public and the proceeds are counted as an "offset" against other expenditures. Comparisons With Previous Fiscal Years The data provided in Tables A through E, appended to this report, include not only the amounts of "relatively uncontrollable" expenditures under the listed programs for fiscal 1968, but also comparable figures for the fiscal years 1966 and 1964. While the basic issue is the extent to which estimated fiscal 1968 ex- penditures may be susceptible to possible control and reduction, these compari- sons are of some interest in order to reveal the increases in areas of expenditures which, under the concept used in this analysis, are considered to be "relatively uncontrollable." Reducible Areas As shown in Table 1, this analysis suggests that, after deducting the total of $79.4 billion of "relatively uncontrollable" expenditures discussed here, the bal- ance of $55.6 billion-or approximately 40 percent of the estimated expenditures ($135.0 billion) in fiscal 1968 may be considered relatively "controllable." There is admittedly some question as to this "controllable" total, primarily because of questions involving defense expenditures. However it is equally clear that the total of "relatively controllable" expenditures includes more than $30.0 billion of nondefense spending which appears to be susceptible to control and possible reduction. PAGENO="0192" 180 PRESIDENT'S 1967 TAX PROPOSALS TABLE A-CONTRIBUTIONS TO TRUST FUNDS, PAYMENTS OF CLAIMS, AND PAYMENTS REQUIRED BY TREATIES AND INTERNATIONAL AGREEMENTS [In thousands of dollarsj Organization unit and program Fiscal year 1968 estimated 1966 1964 Department of Defense: Military operation and maintenance, claims, Defense Department of Labor: Wage and Labor Standards, claims and expenses, employees' compensation Treasury Department: Bureau of Accounts, claims, judgments, and relief acts Independent Offices: Foreign Claims Settlement Commission Total claims Payments Required by Treaties and International Agreements Department of Defense: Civil, Ryukyu Islands: Administration Construction of power systems Pretreaty claims Department of the Interior: Public Land Management, Office of Territories, Trust Territory of the Pacific Islands Department of State: International organizations and conferences: Contributions to international organizations Missions to international organizations International conferences and contingencies International tariff negotiations International Conference for Water for Peace International commissions: International Boundary and Water Commission, United States and Mexico: Salaries and expenses Operation and maintenance Construction Chamizal settlement American sections, international commissions International fisheries commissions Facilities for International Pacific Halibut Commission Other: Payment to the Republic of Panama Independent offices: Veterans Administration: Grants to the Republic of the Philippines ____________ ____________ __________ Total payments required by treaties and international agreements_ Contributions to trust funds and other retirement payments Department of Defense: Military, military pecsonnel, retired pay, Defense_ 2, 010, 000 1, 591, 097 1,209, 447 Department of Health, Education, and Welfare: Social Security Adminis- tration: Payment to trust funds for health insurance for the aged Payment to trust funds for military service credits Department of Labor: Manpower Administration, unemployment com- pensation for Federal employees and ex-servicemen Department of State: Administration of foreign affairs, payment to Foreign Service retirement and disability fund Department of Transportation: Coast Guard, retired pay 48, 250 Independent Offices: Veterans Administration: Veterans service-connected compensation 2, 429, 542 Veterans non-service-connected pensions 2, 037, 049 Other veterans benefits and services 81, 409 Civil Service Commission: Annuities under special acts 1,344 Government payment for annuitants employees health benefits_ 1 74 Payment to civil service retirementand disability fund Railroad Retirement Board: Payment for military service credits___ 17, 839 Miscellaneous:' Agency contributions to civil service retirement and disability fund~ Agency contributions to employees health benefits fund Agency contributions to employees life insurance fund Total contributions to trust funds, etc 9, 229, 327 Grand total 9, 519, 302 30,000 23,338 19,421 55,160 55,634 48,515 5,164 1,305 91, 629 38,895 1,853 119,720 31, 896 8,924 108, 756 10,899 5,907 20,300 99,503 2,741 2,080 115 714 2,051 7,546 404 1,840 1,930 14,829 10,932 4, 000 408 9,000 25, 576 16, 593 109,350 94,376 3,700 3,334 2,025 1,885 115 834 200 851 855 1,985 1,965 16,300 15,616 3,560 14,263 650 473 2,300 2,063 350 1,930 1,930 1,625 198, 346 326 258 165,853 156,288 930,631 105,000 65,000 94,647 152,514 45 40,636 34,152 2,221,453 2, 157, 600 1,910,281 1,743, 103 82,555 60,500 1,487 1,723 29,220 24,300 67,000 62,000 16,558 1, 140,000 1,097,453 979,941 189,115 139,801 132,585 62,400 57,982 52,426 7,320,995 6,610, 294 7,606,568 6,875,338 1 Items in thin category are included in the regular Salaries and Expenses appropriations requests for each contributing department or agency. Bureau of the Budget advises it is not possible to break these totals down to properly determine the individual department or agency contribution. PAGENO="0193" PRESIDENT'S 1967 TAX PROPOSALS 181 TABLE B-EXPENDITURES UNDER PERMAN ENT AND NDEFINITE AUTHORIZATIONS [In thousands of dollarsj Fiscal year Organization unit and program 1968 1966 1964 estimated LEGISLATIVE BRANCH Library of Congress: Oliver Wendell Holmes devise fund 34 18 34 DEPARTMENT OF AGRICULTURE Consumer and Marketing Service: Perishable Agricultural Commodities Act fund 966 828 835 Removal of surplus agricultural commodities 175, 000 117, 745 239,611 Commodity Credit Corporation: National Wool Act 44, 700 38, 178 72, 937 Forest Service: Expenses, brush disposal 9,600 8,943 8,255 Roads and trails for States, national forests fund 17, 160 14, 204 12, 001 Other forest service 43, 653 35, 972 30,725 DEPARTMENT OF DEFENSE-Civil Corps of Engineers: Civil: Payments to States, Flood Control Act of 1954 1,928 1,959 1,719 Hydraulic mining in California debris fund 172 174 f 18 Maintenance and operation of dams J 148 Miscellaneous: Wildlife conservation etc., military resorvations 191 149 61 DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE Office of Education: Colleges for agriculture and the mechanic arts 2,550 2,550 2,550 Promotion of vocational education 7, 161 7,161 7, 117 Public Health Service: Retired pay of commissioned officers 12, 000 7,259 6, 150 St. Elizabeths Hospital: Salaries and expenses 8,810 10,023 8,631 DEPARTMENT OF THE INTERIOR Public land management: Bureau of Land Management 75, 750 68, 989 63, 086 Bureau of Indian Affairs: Claims and treaty obligations 161 197 190 Other 6,624 6,640 6,578 Office of Territories: Internal revenue collections for Virgin Islands 10,000 10,406 7,042 Fish and Wildlife and Parks: Bureau of Commercial Fisheries: Administration of Pribilof Islands 2,000 2,391 2,389 Promote and develop fishery products 7,000 5,681 5,273 Payment to Alaska from Pribilof Island funds 400 589 Bureau of Sport Fisheries and Wildlife: Federal aid in wildlife restoration 18,500 16,770 16,019 National wildlife refuge fund 3,500 1,936 2,532 National Park Sorv~ce: Other 117 108 Water and Power Development: Bureau of Reclamation Other 3,583 3,389 4,614 DEPARTMENT OF STATE Administration of Foreign Affairs: Replacement of passenger motor vehi- cles sold abroad 395 260 Educational exchange 400 489 450 TREASURY DEPARTMENT Office of the Secretary: Miscellaneous 16 37 13 Bureau of Accounts: Interest on uninvested funds 15,287 13,988 10,719 Bureau of the Mint: Minor coinage profits and silver profit fund 1, 500 1, 802 1, 222 Internal Revenue Service: Refunding internal revenue collections, interest 87,200 103,696 88,409 Internal revenue collections for Puerto Rico 52,000 51,764 44,962 U.S. Secret Service: Contributions for annuity benefits 600 543 426 Interest on the public debt 14,050, 000 12, 013,863 10, 665, 858 INDEPENDENT OFFICES Federal Power Commission: Payments to States under Federal Power Act~. 103 71 96 Gonoral Services Administration: Real property activities exponses, dis- posal of surplus real and related personal property 1, 000 772 994 Total expenditures under permanent and indefinite authorizations~ 14, 659, 666 12, 548, 790 11, 309, 815 83-349-07--pt. 1-13 PAGENO="0194" 182 PRESIDENT'S 1967 TAX PROPOSALS TABLE C-EXPENDITURES TO LIQUIDATE CONTRACT AUTHORIZATIONS Legislative branch: Architect of the Capitol: Extension of the Capitol Expansion of facilities, Capitol Power Plant Acquisition of property construction and equipment, additional House Office Building Funds appropriated to the President: Military assistance Department of Agriculture: Agricultural Stabilization and Conservation service: Agricultural conservation program Cropland conversion program Forest Service: Forest roads and trails Department of Commerce: Transportation: Operating differential subsidies State marine schools Department of Housing and Urban Development: Metropolitan development: Open space land programs Demonstrations and intergovernmental relations: Low-income hous- ing demonstration program Department of the Interior: Public land management: Bureau of Land Management: Public lands, development roads, and trails Bureau of Indian Affairs: Education and welfare services Road construction Fish and wildlife and parks: National Park Service: Parkway and road construction Department of Transportation: Federal Highway Administration: Bureau of Public Roads: Forest highways Public lands highways Inter-American Highway National Highway Safety Bureau: State and community highway safety program { Department of Defense: Military operations and maintenance, Army_ -- [In thousands of dollarsj Organization unit and program Fiscal year ~- 1968 (estimated) 1966 1964 232 509 876 750 3,017 10,386 10,987 800,000 1,058,083 225, 876 209, 516 110,500 101,009 213, 563 7,097 58,913 200, 000 1,700 57, 800 2, 000 186,628 203,037 1,838 1,409 8,387 5,130 1,337 803 710 3,500 2,764 124,708 19,000 38, 000 103,902 18,821 37,186 89,020 14,970 33,703 { -~: ggg } 31,304 33,277 { -~8:~~ } 11,290 4,710 9,000 4,955 1,813 100,000 -100,000 7,050, 000 4,524, 056 8,645,977 6,312,444 679,651 Total, expenditures to liquidate contract authorizations PAGENO="0195" PRESIDENT'S 1967 TAX PROPOSALS 183 TABLE D.-EXPENDITURES UNDER "OPEN END' PROGRAMS-PRIOR CONTRACTS AND AGREEMENTS [In thousands of dollarsi Organization unit and program Fiscal year 1968 estimated 1966 1964 Funds appropriated to the President: International Financial Institutions: Investment in inter-American development banks 79, 500 50,000 Subscription to International Development Association 122,000 61,656 Alaska programs: Transitional grants to Alaska 5,433 19,430 Public works acceleration: (prior approval) 88, 168 331,820 Department of Agriculture: Soil Conservation Service: Great Plains conservation program 17, 200 13, 591 11, 882 Agricultural Stabilization and Conservation Service: SugarActprogram 90,031 87,685 87,071 Conservation reserve program 125, 000 150, 993 289,933 Emergency conservation measures 12, 915 13, 190 3, 393 Cropland adjustment program 90, 000 5, 592 Consumer and Marketing Service: Payments to States and possessions 1, 750 1, 750 1, 500 Food stamp program 193, 000 69,491 Department of Defense, Civil: Cemeterial expenses 19, 300 16,246 14, 967 Department of Health, Education, and Welfare: Office of Education: School assistance in federally affected areas 421,600 409, 593 334, 289 Expansion and improvement of vocational education 233, 290 131, 594 33,959 Vocational Rehabilitation Administration: Grants for rehabilitation services and facilities 301, 870 152, 521 84, 287 Grants for correctional rehabilitation study 1, 000 260 Welfare Administration: Grants to States for public assistance 4, 188, 000 3, 527, 534 2, 944,052 Assistance for repatriated U.S. nationals 471 343 396 Assistance to refugees in the United States 51, 276 30, 220 42, 566 Department of the Interior: Public land management: Bureau of Indian Affairs: Menominee educational grants 44 132 Bureau of Land Management: Oregon and California grant lands 12, 200 18,898 7, 598 Range improvements 1,420 1,347 1,240 Fish and wildlife and parks: Bureau of Commercial Fisheries: Federal aid for commercial fisheries research and develop- ment 4,002 615 Anadromous and Great Lakes fisheries conservation 1,000 Bureau of Sport Fisheries and Wildlife: Appalachian region fish and wildlife restoration projects - 599 51 Anadromous and Great Lakes fisheries conservation 1, 000 Federal aid in fish restoration and management 6,810 6, 675 5, 906 Justice Department: Federal Prison System: Support of U.S. prisoners_ - 4, 500 4, 815 4,270 Independent offices: General Services Administration: Real property activities: Payments, public buildings purchase contracts 2,350 3, 306 5, 168 Veterans' Administration: Readjustment benefits 417,200 42, 115 68,998 Total, "open-end" programs 6, 399, 184 4,782, 070 4, 404, 513 PAGENO="0196" 184 PRESIDENT'S 1967 TAX PROPOSALS TABLE E.-EXPENDITURES OF GOVERNMENT ENTERPRISES (PUBLIC ENTERPRISE REVOLVING FUNDS) FISCAL YEARS 1968, 1966, 1964 [In thousands of dollarsj Organization unit and program Gross dis- 1968 estimated Actual net expenditures 1966 1964 Gross Net bursements receipts expenditures Funds appropriated to the President: Expansion of defense production: Revolving fund, Defense Production Act 84,187 63,349 20,838 -151,995 90,883 Military assistance: Foreign industry sales fund 350, 000 350, 000 -89, 948 Economic assistance: Alliance for Progress: Development loans_ 464,815 14,815 450,000 290,896 112,580 Development loans revolving fund 680, 000 30, 000 650, 000 626, 756 566,728 Development loan fund (liquidation ac- count) 79,087 34,000 45,087 50,147 201,984 Foreign investment guarantee fund 116 12,458 -12,342 -9,825 -4,831 Office of Economic Opportunity: Economic opportunity loan fund 36, 091 14, 956 21, 135 29, 565 Department of Agriculture: Commodity Credit Corporation: Price support and related programs 5,027,333 3,475,746 1,551,587 1,345,243 3,174,895 Federal Crop Insurance Corporation fund 40,704 41,063 -359 10,496 -819 Farmers Home Administration: Direct loan account 422, 578 906, 713 -484, 135 -31, 352 56, 129 Rural housing direct loan account 36, 019 198, 126 -162, 107 12,289 100 Rural housing insurance fund 469,480 483,945 -14,465 31,408 Emergency credit revolving fund 68, 863 72, 527 -3,664 18,684 -9, 138 Agricultural credit insurance fund 726, 841 734, 269 -7, 428 87, 534 42, 461 Department of Commerce: Economic development assistance: Economic development evolving fund 22,739 98, 460 -75,721 -7,949 -46, 069 Ocean Shipping: Federal ship mortgage insurance fund 57 5,883 -5,826 1,554 6,907 Vessel operations revolving fund 255,929 255,985 -56 3,350 -1,572 War risk insurance revolving fund 1,068 1,198 -130 -152 -185 Department of Defense-Civil functions: The Pana- ma Canal Company fund 139,019 144,564 -5,545 -4,310 2,074 Department of Health, Eudcation, and Welfare: Food and Drug Administration: Revolving fund forcertification 3,100 3,100 -235 -111 Public Health Service: Operation of commis- saries 237 240 -3 13 -3 Social Security Administration: Bureau of Federal Credit Unions fund 6, 383 6, 326 57 -44 117 Office of Education: Student loan insurance fund 913 1,210 -297 Higher education loan fund 49,854 101, 362 -51, 508 Department of Housing and Urban Development: Renewal and housing assistance: Urban renewal programs 829,347 359,922 469,425 356,720 235,012 Rehabilitation loan fund 23, 560 1, 560 22, 000 1, 830 Low rent public housing 526,550 251,550 275,000 236,746 149,206 Housing for the elderly or handicapped fund 83,527 107,405 -23,878 49,902 29,092 College housing loans 396,655 1,658,786 -1,262,131 312,359 219,334 Metropolitan development: Public works planning fund 19, 110 9, 110 10, 000 8, 887 7, 077 Urban mass transportation fund 110,310 310 110,000 18,660 195 Publicfacilityloans 65,614 89,247 -23,633 29,087 43,716 Revolving fund (liquidation programs)__ 445 1,131 -686 -3,891 -1,799 Mortgage credit: Federal National Morgtage Association: Communitydisposuloperationsfund_ 4,135 13,950 -9,815 -3,964 35 Federal Housing Administration fund__ 1, 000, 624 984, 176 16, 448 191, 189 -43, 442 Lounstosecondarymarketoparations 1,400,000 1,400,000 91,820 -66,360 Special assistance functions 509,660 324,660 185, 000 -313, 525 -141,925 Management and liquidation func- tions - 238,074 473, 574 -235,500 -114, 120 -138, 359 Participation sales fund: Aids to private housing 84,000 115,100 -31,100 -56,035 Veterans readjustment benefits_ 103,800 121,900 -18,100 -63,225 Advancement of business 85,900 113,230 -27,330 -9, 859 Interior Department: Public Land Management: Bureau of Indian Affairs: Revolvingfund forloans 3,058 2,063 995 -399 5,094 Liquidation of Hoonah housing project fund 6 3 3 -2 Office of Territories: Loans to private trad- ing enterprises -103 Mineral Resources: Bureau of Mines: Helium fund 57,473 30,257 27,216 19,282 9,794 PAGENO="0197" -410 -2,436 -59 151 135 339 -22,013 3 3 20 167 3,729 -51 42 531 -161 2,290 5,490 -10,051 -13,926 -35 -324 -255, 423 -248, 097 1 1 146,071 124,310 45,500 5,862 12,291 65,150 48,043 47,000 -71 940 2, 488,991 4, 510, 192 PRESIDENT'S 1967 TAX PROPOSALS 185 TABLE E.-EXPENDITURES OF GOVERNMENT ENTERPRISES (PUBLIC ENTERPRISE REVOLVING FUNDS) FISCAL YEARS 1968, 1966, 1964-Continued [In thousands of dollarsj Organization unit and program Gross dis- bursements 1968 estimated Gross Net receipts expenditures Actual net expenditures 1966 1964 7 438 -431 4,116 2,360 1,756 350 -30 7 -506 66, 887 1,225 2,988 -1,763 -4,416 -196 57,958 18,363 39,595 60,615 95,123 113,275 -46,388 26, 200 -26, 200 15,612 21,022 -5,410 1,055 326 84 -1,200 304,487 308,087 -3,600 -2,217 -7,435 6,699, 256 5, 455, 038 1, 244,218 888, 196 577, 699 700,000 -700,000 29 12,091 14,354 16 13 6 -2,263 10,485 7,630 -300 1,216 Interior Department-Continued Fish and Wildlife and Parks: Bureau of Commercial Fisheries: Federal ship mortgage insurance fund_ Fisheries loan fund Water and power development: Bureau of Reclamation: Continuing fund, Fort Peck project_ - - Upper Colorado River Basin fund Bonneville Power Administration: Revolv- ing fund Southeastern Power Administration: Re- volving fund Southwestern Power Administration: Re- volving fund Virgin Islands Corporation: Operating funds__ Department of Labor: Manpewer Administration: Farm labor supply revolving fund Advances to employment security account_ Post Office Department: Contributions to the postal fund Postal rate increase Department of Transportation: Federal Aviation Administration: Aviation war rick insurance revolving fund Federal Railroad Administration: Alaska Rail- road revolving fund St. Lawrence Seaway Development Corporation: Development fund 7, 330 Treasury Department: Office of the Secretary: Liquidation-Federal Farm Mortgage Cor- poration R.F.C. liquidation fund Civil defense program fund Bureau of Accounts: Fund for payment of Government shipment losses Bureau of the Mint: Mint operating fund Office of the Treasurer: Check forgery insurance fund Department of Defense-Military: Defense production guarantees Laundry service, Naval Academy Independent offices: Veterans' Administration: Canteen service revolving fund Direct loan revolving fund Loan guaranty revolving fund Service-disabled veterans insurance fund_ Soldiers' and Sailors' civil relief Veterans reepened insurance fund Veterans special term insurance fund Servicemen's group life insurance fund_ -- Export-Import Bank of Washington fund Farm Credit Administration: Revolving fund for administrative ex- penses Short-term credit investment fund Banks for cooperatives investment fund__ Federal Home Loan Bank Board: Revolving fund Federal Savings and Loan Insurance Cor- poration fund Home Owners Loan Corporation fund Small Business Administration: Business loan and investment fund Disaster loan fund Tvnnessee Valley Authority: Tennessee Valley Authority fund Appropriations and nonpower proceeds_ - - U.S. Information Agency: Informational media guarantee fund 1, 809 154 152 70,333 750 1 -32 -162 -183 169 92, 346 747 24,928 28,128 -3 200 809 822 -13 60,138 60,180 -42 -106 -207 178,300 295,010 -116,710 -658,953 -32,303 372, 346 696, 560 -324, 214 15, 723 76, 498 12,090 10,790 1,300 -529 -712 15 7 7 8 23 10,165 42,339 -32,174 -18,324 14,914 44,798 -29,884 -27,577 -15,955 119,075 119,040 35 -134 1,719,862 2,084,521 -364,659 -385,023 -701,784 3,231 3,231 1,000 200 800 7,500 -7,500 18,981 1,177 529, 806 108, 660 502, 993 19,241 318,223 561, 002 37,946 392, 343 -260 -317,046 -31, 196 70,714 1,483 1,384 - 99 25,427, 476 24, 594, 528 832, 948 Total expenditures,public enterprise funds - PAGENO="0198" 186 PRESIDENT'S 1967 TAX PROPOSALS Mr. BATTIN. I have and then I will yield the floor. First of all I have two questions. One, I was interested in your statement on page 13 that you made this morning, I think Mr. Byrnes questioned you about the items you have listed and what would happen if the tax did not go into effect. One of your assump- tions really laid me low. That is your assumption that there will be no major interruptions from strikes. The Labor Department and everybody else across the country, business people, are preparing for strikes. I don't know how we can assume with all the contracts that are up this year that there are not going to be some major strikes. Let us assume there were some strikes how would that affect the itemiza- tion that you have there? Mr. ACKLEY. I think the effects to which we were referring here were unusually large and lengthy strikes. We have had, of course, a number of strikes this year. The number is higher than in a great many years. Mr. BATTIN. The copper industry. Mr. ACKLEY. The rubber industry was on strike for more than 2 months. Mr. BATTIN. The automobile industry going out. Mr. ACKLEY. We have so far avoided a rail strike and I trust we will. The effect of a prolonged strike in a major industry such as automobiles would undoubtedly be to put a temporary dent into in- comes and production and it would begin to show up in the statistics. The primary effect of that would be to defer production and expendi- tures to a later period when the `strike was over. This could, as some- times has happened in the past with major strikes, create difficult problems of too fast a spurt in demand, and inventory movements that are disturbing to the economy. I don't think one would say that it would make the difference be- tween an advancing economy and one- Mr. BATTIN. Then I don't understand why you made the assump- tion. Mr. ACKLEY. A major prolonged strike in the automobile industry, for example, which would affect all producers instead of a single one, if it lasted several months, could undoubtedly delay the rise in ex- penditures and incomes. The reference here was to `gain in the second half of the year and some of those gains would be deferred into the first half of next year. Mr. BATTIN. Then I will go to the last area. I have been on the com- mittee for 3 short years and there does not seem to be any certainty in tax recommendations that are made. Nobody has determined whether or not as a Federal Government we have certain fixed policies relating to taxation. Would it be fair to say that we are using this method of surtax and the shutting on and off of an investment tax credit, as a means of economic control or direction of the country? Is that a fair statement or is it just a `ghost I see somewhere? Mr. ACKLEY. I think it is certainly fair to say that the tax recom- mendations have taken account of the economic situation, as I think they properly should. I think there has been something of a false specter raised, the notion that we should delicately adjust taxes all the time to achieve some kind of objective of steady economic growth. I think that is a greatly exaggerated notion. I for one have never felt PAGENO="0199" PRESIDENT'S 1967 TAX PROPOSALS 187 that any economist or any government was able to predict the course of private demand with such certainty that it could use taxes to do this kind of so-called "fine tuning" to which you refer. Mr. BATTIN. The reason I ask is that it seems to me in early 1961 or 1962 there was a request or speech by President Kennedy, sug- gesting that he should have some authority to raise or lower taxes within a fixed limit in order to control economic conditions as they might present themselves. That authority, of course, was not given. Mr. ACKLEY. The request for it has not been repeated. Mr. BArL'IN. Yes. The thing I am wondering about-whether it is repeated or not-is that you continue to present piecemeal tax legis- lation to accomplish that. You said certainly it has to go into your thinking in order to make the recommendation. Mr. ACKLEY. I think we have to remember that the period of the last couple years and currently is one of a major defense effort in Southeast Asia which has posed very unusual problems for the econ- omy. It has contributed certainly to the capital boom last year which did seem to require the very special measure of the suspension of in- vestment credit and subsequent reinstatement. It was responsible for the Tax Adjustment Act of 1966, which added appreciably to revenues. Certainly it is very much associated with the present tax proposals. Secretary FOWLER. Mr. Battin, could I for the record indicate that, for example, in 1950, the Revenue Act of 1950, during the Korean war, increased individual income tax rates and corporate tax rates on larger incomes and made minor excise tax increases. Increased revenues at that time were estimated to be about $4.6 billion. The Excess Profits Act of 1950 imposed a surcharge of 30 percent on excess profits of corporations and raised the corporate surtax rates by two points. The estimated revenue gain was $31/2 billion. In 1951 the Revenue Act of 1951 increased individual income tax rates and corporate rates reduced the base period credit for excess profit tax purposes `and imposed some new excise tax rates and increased the rates on some existing excises. The increased revenues were estimated to be about $5.4 billion. It is not unusual in a special emergency to have these special financing measures associated with war. Mr. BAITIN. The only thing I would say by way of argument, if you want to call it that, is that the President's tax message proposed this 10 percent surcharge. I thought he made it quite clear that he intends to continue programs which had no association with the war in Vietnam, that had been started, I think, in the last three and a half years. We are being `asked not to make a special tax to support only our commitment in Vietnam but I think he quite clearly said in the mes- sage we are `being asked to finance programs that were started in the last three and a half years as well as the war in Vietnam. I think that this is what gives many `of us great concern. Mr. SOHULTZE. I will make two points on that. As you will recall, part of the President's program is also a reduction in expenditures. This does not mean abandoning these programs to which you refer, but it does mean reducing across the board. Secondly, I would point out that one way to look at what we are asking for is that we have estimated Vietnam expenditures running~ about $22 million this year, depending on the precise outcome, coin- PAGENO="0200" 188 PRESIDENT'S 1967 TAX PROPOSALS pared to no defense expenditures for Vietnam in fiscal 1965. We are asking, of that $22 billion, $7% billion in taxes-not on top of a tax system which has been unchanged for the past 5 years, but on top of a tax system in which taxes have come down substantially. So in effect we are not even asking for taxes equivalent to the cost of Vietnam, but taxes which account for only about one-third of the cost of Viet- nam-not more than but only one-third. And these taxes, in turn, would only restore something like 40 percent of tax cuts given earlier. So it is not a case, looked at in terms of the long-run fiscal strategy, of taxing fully for Vietnam and taxing on top of that for additional programs. We are asking in this case for roughly one-third of the Vietnam expenditures. Mr. BATTIN. You might find, Mr. Director, it is like a good many things, whether it is a 1-percent tax, 10 percent or 25 percent, it is a tax. Mr. SCHULTZE. Yes, sir; I fully agree. Mr. BATTIN. I sometimes think that it would be better to ask for all you need to begin with because the pain and the penalty that goes along with it is just as great. The CHAIRMAN. Mr. Gilbert. Mr. GILBERT. You have the job and business of trying to convince the Members of Congress of the necessity of the proposed surcharge tax. We on the other hand catch a lot of flak back home from our citi- zens on the street. My wife is a prime example of the average citizen. She says to me, "Why do we need a tax increase? Employment is high. Unemployment is down. Business is booming. Things are relatively good." I wonder if we could have an explanation in nontechnical terms, if possible, as to the necessity for this tax increase? How do you explain it to people? Secretary FOWLER. I tried, perhaps ineffectively, Congressman Gilbert, in the conclusion of my statement to say that the average American must look at this tax increase not just in his role as a taxpayer but in the other roles that he has in our society. I would think that as a consumer your wife and my wife and all of us are very concerned with price stability and they would be anxious for you and your colleagues on the committee to adopt policies that would be designed to restore the relative price stability that seemed to characterize the period from roughly 1959 through 1964 and early 1965. I would think that many of your constituents would think of them- selves primarily in terms of their jobs, jobs they hold. jobs they want to have, and perhaps many of them are too young to remember the days of boom and bust and perhaps many of them have gotten more or less used to taking for granted the fact that for the last better than six and a half years we have had a fairly constant pattern of expan- sion in which jobs have been created at a very, very remarkable rate and that while the economy has moved faster at some times than at others the rate of growth cluriiig that period in the job creating capacity of the economy have been quite remarkable indeed. Therefore those that have jobs or those that are being educated and trained to seek jobs would be interested in the kind of economic policies that would assure a steady continuation of that expansiomi at a cruis- ing speed rather than an excessive expansion which would be bound to be followed by something in the nature of a recession. PAGENO="0201" PRESIDENT'S 1967 TAX PROPOSALS 189 As a businessman-certainly we heard a great deal last year about the overall problems of corporate liquidity or to put it in commonplace terms, the need to have credit and to have it readily available. When they wanted to go to the bank and borrow and their busmess was good they did not want to be turned down because there was not any credit available there. The Congressional Record is full of comment about the unavail- ability or the tightness of credit or the excessively high interest rates that were of concern. Similarly I think a busmessman wants to think of his customers as confident. lie is worried always about his market. That raises the question, is the kind of an economy that will come about as a result of this program that is before you, both the taxing part and the expenditure control part, designed to give confidence tO purchasers from business whether they be consumers or other busi- nesses. Then we have to think of ourselves as home buyers. You have to think of the young family that wants to borrow money and take on a mortgage and assume an obligation for 20 or 30 years to provide a home. Now, both the availability of credit and the interest rates that would have to be paid are of great concern to that individual and that family. Now, finally those that are elderly, who live on a fixed income, who are on relief, who are very poor, who have limited resources that are not readily expandible. They are not even taxed by and large, the great body of the elderly and the retired and the poor. But inflation is an indirect form of taxation and therefore their interest in this tax bill it seems to me is a very positive and direct one. Now, this is the best I can do. I am not skilled in relating to con- stituents why this is necessary but I think if you can get them to look at themselves as citizem~s in all these other capacities rather than just look- ing out here how much more is going to be taken out of my paycheck, that is the only way that we can bring this home to the American peo- ple as to the necessity and desirability of it. Now of one thing I am sure, that if this tax bill is not passed and you have a situation and next year in which the economy gets out of control and gets badly overheated and interest rates go beyond the very high levels that they are now, and you have the kind of shutoff of availability of credit, for example, in `housing and in `small business and to the farmer whose very life blood is credit, there is going to be a great deal of question about why we did not do something in the fall of 1967 about this situation. Mr. GILBERT. Would you think that if you increase taxes at this point you are going to be taking a great deal of money out of the hands of the consumer? Secretary FOWLER. Taking not a great deal but some; yes. Mr. GILBERT. Would you not think that would have an adverse ef- fect on retail trade? Secretary FOWLER. It will `have the effect we think, and this is a matter of judgment, of keeping the steady increase in the volume of purchasing at levels that can be satisfied by the productive capacity of the economy and avoiding the price inflation that would otherwise he likely to occur if the volume of that market grew excessively. PAGENO="0202" 190 PRESIDENT'S 1967 TAX PROPOSALS Mr. GILBERT. I heard the testimony and I have read that the ware- houses are now empty or about to be emptied. Don't you think that would put a brake on the purchasing of this merchandise for the warehouse if you were going to have this tax increase? Mr. AOKLEY. That I covered in some detail yesterday and also in response to some questions this morning. Certainly there was an excessive buildup of inventory last year, but a great deal of that correction is already behind us. Certainly, as far as distributors are concerned, both retailer and wholesalers, inventories are now back in normal relationship to their sales. So that we are not concerned at this point about the danger of the excessive overhang of inventories. Mr. GILBERT. A fellow who has a retail business is certainly con- cerned about it, if he is going to see a drop off in his income. Mr. ACKLEY. As I suggested, the level of retail inventories is quite back to normal by any reasonable standard. As the retailer sells more he is now going to have to replace it by ordering more from his sup- pliers. All we are talking about is slowing down the otherwise po- tentially too rapid growth of his sales so that his growing orders to his suppliers can be accommodated out of the productive resources that we have. Mr. GILBERT. I am sorry, I just do not follow that argument. Maybe I am a little dense. Mr. ACKLEY. The fact is that our economy is a most productive one and its productivity-its ability to turn out goods and services-is growing all the time. But there are limits to our ability to produce an ever-increasing stock of goods for consumers and businesses and governments. What we are concerned with is the possibility, the very dangerous possi- bility, that with the extra stimulus from the Federal budget the growth of demand for goods and services will push against our ability to sup- ply them, create the inflationary pressures and high-interest rates that we have seen. We are trying to avoid that situation. The fact is that if the Gov- ernment has to take more out of the economy to supply the men in Vietnam that reduces the growth in production available for the civil- ian economy. You have to keep the flow of consumer purchasing power in proportion to the available supplies of goods. That is what this is about. Mr. GILBERT. You face a breakdown in the civilian economy. Secretary FOWLER. Congressman Gilbert, let me see if I can put it to you in this light. In the Korean war I happened to have been concerned with the mo- bilization process as Director of Defense Mobilization for some time and prior to that the Defense Production Administration. I was also with the War Production Board in World War II. Now, in those periods, we to same extent relied upon monetary and fiscal policy but `at that time we relied primarily upon the imposi- tion of direct controls on the economy which took the form of alloca- tions and priorities and indeed consumer rationing in World War II and direct wage controls, direct price controls and credit controls. You could not borrow money for this or that, or you were limited directly in the use of credit. PAGENO="0203" PRESIDENT'S 1967 TAX PROPOSALS 191 In the Korean war we did not have actual rationing but we had pretty substantial use of those same instruments. Now in this particular situation we are trying to do without them. The retailer that you are speaking of, if he is old enough to remember the situation in World War II and the Korean war, the real question for him is whether he wants the economy stabilized during this period by a combination of fiscal and monitary policy or whether he is will- ing to take his chances on either inflation, roaring inflation, or a return to some kind of control mechanism. We believe by and large the alternatives of the using of the fiscal and monetary policies is the one that is best for the American economy and that the American people will prefer it, particularly those whose memories are long enough to remember those other periods. Mr. GILBERT. It is not because of any shortage of goods that you are trying to prevent the producing of more goods, is that right? Secretary FOWLER. We are trying to keep employment and the use of plant and the creation of additional plant in some kind of reasonable relationship with the demand *through these fiscal and monetary measures. Mr. GILBERT. I have no further questions. The CHAIRMAN. Mr. Betts. Mr. BETTS. I do not have any questions but I did want to make a couple of comments. Maybe I will be laboring the point. The concern I have here is that I just don't find anything I can really come to grips with. I notice you use the words "expenditure control." I would be much more comforted if you used the words "significant expenditure reduc- tion." Secretary FOWLER. Could I give an example of the two. I think with the pay raise I am talking about expenditure control. In cutting out some of the items in the budget that Mr. Schultze is talking about that is expenditure reduction. One is controlling an in- crease to a moderate pace, 41/2 percent rather than 8 percent, and the other is an actualelimination of an activity. Mr. BETTS. What I am getting at is that it just seems to me if this war in Vietnam is serious enough to warrant a 10-percent surtax on the American people, it is really. serious enough to cut where it hurts. As Mr. Curtis said, "go after some of the sacred cows." For example, I hear general statements about these expenditure cuts but nothing that seems to be bold enough to really excite me. For in- stance, I am advised there is $10 billion unexpended in the foreign aid account. Secretary FOWLER. How much? Mr. BETTS. $10 billion. Mr. SOHtTLTZE. That sounds high. I will have a number in a moment. Mr. BETTS. In the pipeline. I may be off a few billion dollars. Mr. SOHULTZE. There are substantial amounts primarily. We have to distinguish on this between moneys which have been made avail- able by the Congress and not obligated or contracts let-that is rela- tively small-and moneys which have been made available by the Congress and contracts let and goods under order. The latter is the big part of the unexpended balance. Mr. BETTS. That does not impress me. I will tell you why. PAGENO="0204" 192 PRESIDENT'S 1967 TAX PROPOSALS I understand that when Secretary Husk was before the Appropri- ations Subcommittee he said that these funds could be shifted and changed by the Department to other purposes than originally intended. If there is $10 billion accumulated it seems to me we could easily suspend foreign aid for 1, 2, or 3 years and use the money that is in the pipeline. Mr. SCHuLTZE. Again, after the moneys have been appropriated by the Congress but before contracts are let they can be shifted around. Of course, once you sign contracts and make commitments, then you can't shift them around. Now the total amount you are talking about, the amount in AID for economic assistance, which was avail- able but not contracted for, was $800 million. Mr. BETTS. Could these be the same kind of contracts you were talking to Mr. Curtis about this morning that could be terminated? Mr. SCHULTZE. I must confess I am not familiar with the particu- lar penalty clauses. I am sure there are probably legal means to ter- minate them. Mr. BETTS. Coming from an agricultural area and at a time when we are talking about shortage of food supplies it just seems to me that all the worn out agricultural programs could be phased out. I am just throwing that out. It is a tremendously important area. It would not hurt to explore it.. I am not convinced that we have to have a $5 billion space program appropriation. It seems to me if we are at war certainly that can be cut down at least $2 billion. Mr. SCIUJLTZE. In my statement and in later questioning I did indi- cate that in terms of expenditure reductions or deferring worthwhile projects until la:ter, just not going ahead with them now, we are aiming to reduce by $2 billion or more. That is going to mean, and it is bound to mean, tha.t there are a num- ber of areas or desirable programs we are simply going to have to cut back. In that sense I agree with you. That is the whole point. We are not anxious to do this any more than we are anxious to raise taxes. This is painful but we are going to do it. Mr. BETTS. That is encouraging. It seems to me it should be done. It would be impressive to me if you said you were recommending a $2 billion cut in the space program, were recommending a phaseout of the agricultural programs, and were going to suspend the foreign aid program for 2 or 3 years. A constituent of mine called me this morning about a 1-Ieadstart pro- grain. He told be that out of $138,000 that had been allotted to this par- ticular Headstart program, $75,000 was for administrative purposes in a local office and the teachers were paid $560 a month for four and a half hours a day teaching. I am not blaming you, Mr. Ackley, or the Secretary of the Treas- ury but I am just throwing that out as an example of some of the areas that are just right for cutting and cutting where it hurts because it is important. Until somebody shows me where we are going to cut, and specifically how much we are going to cut, I am not going to be impressed with a general statement we are going to try to cut $2 billion. PAGENO="0205" PRESIDENT'S 1967 TAX PROPOSALS 193 We on this side have been talking about that for a long time and have been outvoted. It looks like this is the day of reckoning. Mr. SCHULTZE. May I make two points. First, you will recall that last year we indicated we were going to cut, defer, delay, and postpone expenditures. I did come back to this committee-and it is incorporated in the record of the debt limit hearings in January-with about a 20-page list specifically showing item by item what we had done. We are going to cut. But in order to get started, rather than pro- posing appropriation amendments and rescissions in the midst of an appropriation process, which is well along, and keeping Congress here for another 6 months, we have decided to take the appropriation bills as they come through in final form and cut from there. Hopefully the Congress will cut some also. But then, between what the Congress cuts and what we can get at later, we will take this money out. As the appropriations come up item by item-we have set up specific machinery to do it and they are now being reviewed-all the appropriations that have come through ai~ being reviewed for targets the agencies have to cut to. Mr. BETTS. I wish it had been started last January when the tax cut caine up. Now we are in a jani over this salary increase of Government em- ployees. The message came from the President recommending a sa1ai~y increase. Mr. SCIaULTZE. Yes, sir; we are still recommending it. Mr. BETTS. When these recommendations are made, pressures build up and things get out of control. Mr. SCHULTZE. Again, Mr. Betts, I realize we disagree on some of this but we are trying to walk a middle ground. It is necessary to keep, hold and maintain Federal employees who do their jobs well. We can't let them fall behind. So we did send up a pay increase and that pay increase was a 41/2-percent increase. What we are now asking is for the Congress not to go beyond that. We are trying to walk a middle line here and be responsible in terms of attracting Federal employees who do a good job, and it is necessary to pay them an appropriate amount. On the other hand, we do not want to see the Congress add to the proposal. The bill now being considered in the Post Office and Civil Service Committee would go well beyond that proposal. Mr. BETTS. I understand. I commend you for the position you have taken up until now. I think we should have been aware of the risk we run when we try to take the middle ground. It would have been better to send up a message recommending 2 percent. Mr. SCHULTZE. I am beginning, to think, `Mr. Betts, you may be right. For a number of years the pay proposals caused a hassle between the executive and the Congress every year. So, we decided to go on the principle of comparability. Now we have not achieved that. We are trying to achieve it. In a way you are right. What happens is that we send up a pay message which is based on that principle and then we argue from there on up. So maybe you have a point. PAGENO="0206" 194 PRESIDENT'S 1967 TAX PROPOSALS Mr. BETTS. It just seems to me that if this is serious, and you say it is, then this is the time to have a get tough policy on expenditure reduction. I see no indication of that in your presentation. The CHAIRMAN. Mr. Vanik. Mr. VANIK. Mr. Chairman, I see that Secretary Fowler has had to leave for another appointment, so I shall propound my questions to Assistant Secretary Surrey. The CHAIRMAN. Very well. Mr. VANIK. Mr. Chairman, I consider tax justice one of the hall- marks of good civilization. I think that there is a definite relation- ship between the underdeveloped countries of the world and those that have a more equitable tax structure. The people of my district will rebel at any kind of tax increase, but they will rebel more about things that throw them out of line. They complain about cases they read where people with large amounts of income escape taxation. In your opinion, does the surcharge tax method have any effect upon our search for tax equity? Mr. Stmiu~r. It has this effect. If one is looking for a method of increasing taxes on a temporary basis, that is as fair and equitable as possible considering the existing structure, then the surcharge method accomplishes that result. That was the finding of the Subcommittee on Fiscal Policy of the Joint Economic Committee. If, on the other hand, you ask, does the surcharge method in and of itself do anything to cure what some people will call defects, depending on one's particular point of view, then the answer would have to be no. On the other hand, as the Secretary indicated in his statement, the matter of structural defects in the law which should be corrected on a permanent basis, corrected for all time, is something that he thought certainly should be dealt with and indicated the President was send- ing a message up to that subject later in the session. The Secretary indicated that the subject matter was so different that the two should be dealt with at different times. Mr. VANIK. If we adopt the surtax, does this expand or contract the advantage of income tax deduction or exemption to those who enjoy these privileges? Does it widen the gap? Mr. Smuu~r. I think it about leaves the system essentially where it is today. Mr. VANIK. Those people with exempt income or with good deduc- tions are better off and the rest of the people are paying more. Is that logical? Mr. SURREY. To the extent that the tax rates have been slightly increased it would do that. Mr. VANIK. I would like to ask if it is possible to determine how much personal income in dollars avoids taxation through the exempt income route? Do you have any idea on that? PAGENO="0207" PRESIDENT'S 1967 TAX PROPOSALS 195 Mr. SURREY. I think we would have to submit it for the record. Mr. VANIK. Break it down any way you like. Mr. SnuREY. I think we would have to submit it for the record. By exempt income, I gather you are not talking about that amount which is relieved of tax because of personal exemptions or matters of that nature. Mr. VANIK. I think if the figures were available, it would be help- ful in all categories-those people who are exempt because of low in- come and those who are exempt because they have a special kind of income. Also give us some idea as to the amount of exemption related to the kind of income. I might add that I hope that would include the foreign tax credit and some other types of investment that are made which give people special benefit. I would like to also ask, does your office have any figures as to the total amount of income that avoids taxation because of the exemption on State and local bonds? Do you have that figure? Mr. SURREY. Yes, we will put that figure in the record. (The following information was received by the committee:) BiWons Assuming no change in realization of gains the additional revenue from: Changing the holding period for a long-term capital gain from 6 months to a year would be $0.4 Eliminating the preferential rates on capital gains would be 5.0 Assuming no change in level of mining activities or other industry changes removing percentage depletion would increase revenues by 1. 5 Millions Amount of tax exempt interest reported 1y corporations in 1963 1,456 Amount of Western Hemisphere trade deductions reported by corporations in 1963 250 INTEREST ON STAT E AND LOCAL GOVERNM ENT BONDS, 1962 Money income class Number of consumer units Dec. 1962 (millions) Percentage of consumer units with tax-exempt interest Average tax-exempt interest 1 Percentage of tax-exempt interest received by each income group Oto $30002 16.3 (3) $1 4 $3,000 to $5,000 11. 4 (3) (3) (3) $5,000 to $7,500 12. 2 (3) (3) 1 $7,500 to $10,000 9. 0 1 4 8 $10,000 to $15,000 6. 2 (3) 1 1 $15,000 to $25,000 2. 0 2 16 7 $25,000 to $50,000 - 5 6 129 15 $50,000 to $100,000 . 2 22 1, 185 42 $100,000 and over4 (1) 66 2,356 22 Total 57.9 (3) 8 100 I Average is for all consumer units in the income class, including those with no tax-exempt interest. 2 Includes units with deficits. 3 Less than 50,000 or 0.5 percent or 50 cents. 4 There were 27,174 tax returns in 1962 with adjusted gross incomes over $100,000. Source: Federal Reserve Board, unpublished data from consumer survey. PAGENO="0208" 196 PRESIDENT'S 1967 TAX PROPOSALS Detailed breakdown of certain items included in personal income but not in adjusted gross income 1 Billions 2(d) Other types of income included in personal income but not in ad- justed gross income $14. 1 (1) Inventory valuation adjustment, non-farm, non-corporate busi- ness -. 4 (2) Change in farm inventories in excess of tax return data . 9 (3) Tax-exempt military pay and allowances 2. 3 (4) Excess of interest accrued over interest paid on United States savings bonds . 6 (5) Tax-exempt interest income . 6 (6) Property income received by fiduciaries, but not distributed to beneficiaries 2. 6 (7) Property income received by nonprofit institutions 1. 4 (8) Excluded sick pay .4 (9) Excluded dividends .9 (10) Excluded business expenses 2. 6 (11) Excluded moving expenses . 1 (12) Excluded contributions to retirement plans by self-empioyed___ 0 (13) Bad debt adjustment . S (14) Depletion and oil well drilling adjustment . 2 (15) Gain on sale of livestock, timber and real estate 1. 1 1 Source: Unpublished data from the Office of Business Economics, Department of Com- merce. Includes all components of personal income not in adjusted gross income except transfer payments, other labor income,, and imputed income. Derivation of the individual income tao~ base from Department of Commerce estimates of personal income, 1965' Billions 1. Personal income $535. 1 2. Portion of personal income not included in adjusted gross income 100. 1 (a) Transfer payments (except military retirement pay) 38. 3 (5) Other labor income (except director's fees) 18.2 (c) Imputed income2 29. 5 (d) Other types of personal income3 14. 1 3. Portion of adjusted gross income not included in personal income 31. 3 (a) Employee and self-employed contributions for social insurance ~ 13. 2 (b) Net gain from sale of capital assets 10. 0 (c) Other types of income 8. 1 4. Total adjustments for conceptual differences (2) - (3) 68. 8 5. Estimated adjusted gross income of taxable and nontaxable individuals 466. 3 6. Deduct: Non-taxable and non-reported adjusted gross income 57. 0 7. Equals: Adjusted gross income of taxable individuals 409.3 8. Deduct: Deductions of taxable individuals 63. 1 (a) Standard deductions 15. 7 (b) Itemized deductions 47. 4 Footnotes at end of table, p. 197. PAGENO="0209" PRESIDENT'S 1967 TAX PROPOSALS 197 Derivation of the indivhlual income ta~ base from Department of Commerce estimates of personal income, 1965 1-Continued Billions 9. Equals: Net income of taxable individuals $346. 2 10. Deduct: Personal exemptions of taxable individuals 91. 9 11. Equals: Taxable income of individuals 254. 3 Source: United States Department of Commerce, Office of Business Economics and United States Treasury Department. 1 Items (1) through (5) were obtained from the Office of Business Economics, Depart- ment of Commerce, based on 1966 personal income estimates. A table incorporating 1967 revisions of the personal income estimates is expected to be published in the near future. Items (7) through (11) will appear in the Internal Revenue Service publication, Statistics of Income, 1965, Individual Income Tax Returns. Noncash items such as imputed interest and rental value of owner-occupied homes. Includes inventory items, interest accruals on United States savings bonds, interest on State and local obligations, depletions allowances, income of tax-exempt organizations, income retained by fiduciaries, tax-exempt military pay and allowances, as well as allow- able exclusions for sick pay, dividends, business and moving expenses, etc. Employee contributions for social security, railroad retirement, Government pensions, etc. Includes taxable pensions and annuities, net operating loss deduction and miscellaneous sources of income. Mr. VANIK. Are your records in such a condition that you can tell us, for example, how many people hold a hundred thousand dollars of such bonds, how many would hold $10,000 or less, how many would hold $500,000 of such bonds or over a million dollars? Mr. SURREY. I don't think our records would show that because the holding of tax-exempt bonds is not reported on tax returns. We would make estimates based upon whatever other general information we have and we could have a figure on the overall amount of interest that is involved and its impact on the tax system. Mr. VANIK. Then today you would not be able to tell us whether any taxpayers or how many taxpayers would compare to the case of the Dodge widow who had $5 million of annual income tax free? You could not tell us anything about that? Mr. SURREY. We could not tell you with that precision; no. We will try to see if we have anything on that based on State income tax ic- turns. We will check on that. Mr. VANIK. Is there not some way that your office should be looking into these areas? I can see the special reasons for having tax-exempt bonds. I am not questioning that. But perhaps we have come to a time when we ought to put a ceiling limit on the amount of such tax-free income that any one individual taxpayer can have. Otherwise, it puts that taxpayer in a completely special class. I think if we are going to sell our people on a tax increase, and I believe we must, we have to show that we are making some reasonable effort to develop a greater degree of justice in our tax system. If some people can make $5 or $10 million a year and pay not a penny in taxes, certainly something is wrong and ought to be corrected before we enact any new taxes on our people. Mr. SURREY. The Secretary went into that point. Mr. VANIK. I don't recall he went into this point. 53-349----67-pt. l-14 PAGENO="0210" 198 PRESIDENT'S 1967 TAX PROPOSALS Mr. SURREY. I think he did. He basically agreed with the need for tax reform. He said tax reforms is a job that very much needs to be done. Mr. ~/ANIK. I heard that. Yes; he said that. Mr. SURREY. That is the same thing. Mr. VANIK. You see, at this very moment we are talking about a tax bill and the people of America have a tax consciousness right now that has never been more acute. They are paying more in local taxes, they are paying higher sales taxes. Now we are coming with a pros- pective surtax, and they are alarmed. They are at this moment con- cerned not with a promise about some reform but about some achieve- ment. I think we ought to be taking steps in this direction in order to meet this argument, in order to sell, in order to make it possible for the taxpayers to accept the surcharge at this time. Mr. SURREY. I think the Secretary in effect really did indicate very strongly in his statement that the President will be sending a message proposing comprehensive tax reform later in this session. That is the first step. I would assume the second step is in his words, "I hope your com- mittee will be giving its consideration to the President's reform rec- ommendations in the months ahead." Mr. VANIK. I have been awaiting some of these reforms since I came to Congress some 13 years ago. We have been a long time getting around to it. I feel that this is an appropriate time. Certainly I think before we can act intelligently upon the surcharge issue we ought to have some concern about the untaxed income of America. It relates to this problem. The President said if you have another or better method, think it up, produce it. I think we ought to try to meet that challenge. We can't do it without he cooperation of your office giving us these figures, which I think are essential in our determination. As I take it, you will provide an estimate of the aggregate amount of tax-exempt income through tax-free bonds and you will endeavor to in some way or another indicate how they are held from whatever sources you have. It seems to me that it would be almost appropriate to add on the tax return a line for "any other income which you believe not subject to tax." This would be a great relief to many taxpayers who have income they may not be sure about. It seems to me that would serve a very useful purpose. If a taxpayer reported this, it might clear the doubts in his own mind and at the same time provide your office with very valuable information concerning the extent and the amount of untaxed income in America. There may be other areas of taxation that you do not know about and that your office has not awareness of. I think maybe we ought to have some way of characterizing and tracking down these areas of untaxed income if your office will do that. While you are at it, I would appreciate the record providing the amount of money that might be raised in taxes, the revenue gain, if we were to make capital gains a 1-year capital gains period instead of 6 months. There is a lot of reason to consider that. PAGENO="0211" PRESIDENT'S 1967 TAX PROPOSALS 199 I think we might also have some estimate by your office as to what such a capital gains tax might produce by way of added revenue pius some idea as to what might be gained or what is lost through the various depletion allowances or investments abroad. I think to round out the package we might also have in the record the amount of reve- nue we lose on the stock option device. I think it is terribly unfair to permit some taxpayers to pay taxes on their compensation at capital gains rates instead of ordinary rates like all the rest of us. I think if these things were in the record, it might pave the way and provide us with information that we ought to have in connection with this bill and with the proposal for tax reform which the President says you are working on. Mr. SURREY. We will put these in the record to the best of our ability. (See p. 195.) Mr. VANIK. Thank you very much. The CHAIRMAN. Mr. Broyhill. Mr. BROYHILL. First of all I would like to direct a parliamentary inquiry to the Chair. In view of the fact that our opposition has proposed a surcharge, a lot of Members of the Congress are going to be retired by their con- stituents if they vote for this bill. My question is, Mr. Chairman, would an amendment be germane that would permit liberalization of the congressional retirement system? The CHAIRMAN. The gentleman has stated a parliamentary inquiry, but would he permit the Chair to take this under advisement and not rule on it right now? Mr. BROYHILL. Mr. Schultze, it seems like the Federal employees have been the whipping boy here on cutting expenditures. I will admit that I am somewhat prejudiced insofar as their welfare is concerned. I think this is representative government. But I am wondering if we can in the final analysis actually economize as much as we think we are economizing in that particular area by not providing salary increases comparable to some of the positions in private industry. I know that there is an increase in the cost of Government employ- ment, but I don't think we can avoid it. I think the mere fact that we have the increase in the cost of living, that we have expanded the Gov- ernment services and increased the number of employees, that within itself is causing an increased cost. I don't see how we can possibly econ- omize by refusing to pay our employees what similar people in private industry are receiving. I don't think any business or industry could do that. We hear that every time a proposal comes up for an increase in pay of Federal employees, a half billion dollars, billion dollars, or $2 bil- lion, yet we could not avoid the increase. We may have postponed it for ~ months. We may have changed the percentage one or two points. But the reason why we have to have the pay increase is because of the in- crease in cost of living, not because it may be politically expedient to put through a pay increase. Mr. SCHULTZE. Mr. Broyhill, as you know, what we have done this year-by we, I mean the administration-is to submit a pay bill which, on a scheduled basis over 3 years, brings Federal employees up to so- called comparability, based on the BLS surveys of what private in- dustry workers m equivalent occupations, and so forth, are earning. PAGENO="0212" 200 PRESIDENT'S 1967 TAX PROPOSALS Nbw, this is an attempt to balance the considerations that you indi- cated, which are certainly real considerations. As I indicated to Mr. Betts, we have to take those into account-to balance pay considera- tions on the one hand, with our fiscal requirements and fiscal needs, on the other. This is why we submitted, and I realize there is a controversy over it, what we thought was a fair and reasonable increase with a spe- cific point in the bill relating to the next 2 years so that over the 3-year period we would get to the comparability standard of the Salary Reform Act. What we are asking the Congress is to stay with that recommenda- tion in view of the fiscal problems which are facing us. It seems to me this is a responsible and reasonable course to pursue. Iii view of the fact that we are coming up here to ask the American taxpayer for addi- tional taxes, at the same time we have come forward with a reasonable but not excessive pay increase. Mr. BROYHILL. I believe that we can save a great deal more money by a little better management control of the personnel structure and making certain that there is adequate work for the employees. Then we can effect the economies that we are talking about. Mr. SCHULTZE. Mr. Broyhill, in a Federal Government with 2.9, almost 3 million, employees, far be it from me to say that in every part of the Government that we have effective personnel management. Obviously we don't. At the same time we can point to impressive accomplishments in department after department in terms of productivity, in terms of getting more work out of the same nun~iber of employees, or in terms of workloads increasing faster than the number of employees. We are at great pains, and I can't say always suceessfuily, in case after case to do this. For example, to take one which is close to home, the Bureau of Accounts in the Treasury has a record of productivity increases which can't be matched, I think, by private business going. The Veterans' Administration Life Insurance Office, the Social Security Adn'iinistration, I can go right down the line. We obviously can have a lot more improvement. I am sure you can point to cases where we have a lot to do. Mr. BROYHILL. I would like to pass on what employees have told me over the period of the last 15 years. Now the three-step proposal, would that in your opinion bring the Federal employee up to comparability? Mr. SCHULTZE. It is calculated to do that, yes, sir. Mr. BROYHILL. Are you stating that they are not up to comparability at this point and that the 4~/2 percent this year- Mr. SCHULTZE. Primarily in the upper grades. If you look at the lower grades-I must admit it is very disturbing to me, disturbing al- though understandable-the fact that it is the upper grades that the gap between private pay and Federal pay is the largest, but all the pressure for the increases, as you know, Mr. Broyhill, comes at the lower grades. I don't think before this committee I need to go into that too muchfurther, but it is a disturbing fact. Nevertheless, you are correct that particularly in the grades above 7, 9, and 11, there is a gap, but we have a proposal and we have sub- mitted that to Congress to close that gap. We have closed it a good bit in the last 4 years, but still some remains. PAGENO="0213" PRESIDENT'S 1967 TAX PROPOSALS 201 Mr. BROTITILL. I agree over a period of years on a couple of occa- sions we did decompress it somewhat but that was politically unpopu- lar because we were granting an increase to the higher grades. I don't think I am a hostile member, as far as you folks are concerned and as far as this proposed tax increase is concerned. I have said on many previous occasions that I don't see how we can stand a $28 to $30 bil- lion deficit. We have just got to do something about it. I thought the Secretary of Treasury made a very fine statement and the four points he made as to why we could not afford a $28 to $29 billion deficit were very sound. I think he can add a fifth point, and that is fairness to future genera- tions. Why should we pass on the cost of our problems today to them? But I have been somewhat alarmed, frankly, by the response of my constituents. I have received more letters, and this is only part of them, in opposition to the proposal than I believe on any other matter in my 15 years in Congress. It is spontaneous. I directed the parliamentary inquiry at the chairman, facetiously, of course, due to the fact that we are getting some resistance from the peo- ple we represent. Here is an excerpt from one of these letters which emphasizes what I was directing at the chairman: DEAR i\f a. BR0YHILL: I am glad to oppose the President's tax surcharge. I would resent paying an increased tax necesitated by an irresponsible President and irresolute Congress. While I feel that your own record is a good one, I quite frankly don't feel that I can give my support or vote to any Member of Congress who passes this tax legislation. As I understand, Congress is designed to reflect the will of the majority of the citizens. I hope it won't be necessary to elect an entirely new Congress to accomplish this. Here is another letter signed by five different people with five dif- ferent addresses. They are all in the same neighborhood. No, there are a couple in Alexandria. We are very much opposed to the proposed tax rise. As of now we are scarcely making ends meet. Most of us work a five-day week, some of us work a six-day week. We have no extra money to rob Peter to pay Paul. To us it is feasible to arrange for recipients of welfare checks to earn their keep. This would also tend to relieve the taxpayer. There is no excuse for the able-bodied man or woman to live off the income of others. This would serve a two-fold purpose. People who work eight hours day or night are too tired to go out looking for trouble. These letters run right along in that line. I fiuicl that the opposition to a tax increase is not the lack of regard for the inflation problem, Mr. Surrey, and the other points that the Secretary made earlier, although that particular aspect is difficult to explain to a lot of people. They are not indifferent to fiscal responsibility. Their resentment all through these letters is toward needless pro- grams, what they consider are needless programs and wasteful programs. The Secretary pointed out that there was going to be a $7~/2 billion cut in expenditures along with the $71/2-billion surcharge, and this was most encouraging. But I might add the explanation Mr. Schultze has given has not been completely acceptable to members of the committee. We cannot quite gather from what you have stated, Mr. Schultze, that this does result in a direct cut iii the spending that these people are talking about. They can't see that these cuts are actually being made. PAGENO="0214" 202 PRESIDENT'S 1967 TAX PROPOSALS There is nohing that you have stated so far that covers the area that President Johnson is talking about. When he went on television and talked about riots, he made a very fine statement for the first 5 or 10 minutes that riots should not be tolerated. But then he turned around and vented his spleen at Congress for not voting more of the programs. Now he was, in effect, saying that Congress was not spending enough money or appropriating enough money or was not liberal enough in enacting some of these programs that would curb the riots. These are the programs that my people are talking about, programs that are being conducted over here in Washington right now, ones where they employ former convicts and agitators, people who go out and harass the police, giving them positions of great responsibility and high pay. These are things that people resent. I believe if you come forth with items where you would be making cuts in those areas, and I realize when you say $20 billion in an area where cuts could be made, I don't think we have to cut $71/2 billion, I think the mere fact that we were cutting back and not rewarding these people for not going to work, I think this would gain the support of the people we represent. Mr. SCHULTZE. Could I make several points with respect to that? First, you are quite right, you can't take $21 billion and take $~~/2 out of that. I have said before, in terms of a specific number, that we are aiming to get $2 billion out of that. Point No. 2, of course you are aware that this committee itself has been looking at the whole welfare system, and one of the items as I understand it-I am not fully familiar with the committee's bill, but I believe there is a major emphasis on work and training for welfare cases which I think is really the direction in which to go. Third, and I am sure we will disagree to some extent on the em- phasis here, but it seems to me in terms of riots and in terms of the problems in our cities one has to take an approach, as the President has done, which is a blend, on the one hand, of firmness and, on the other hand, realizing that there are some serious problems to which we must give attention. I think what we are facing now is a very difficult problem of bal- ancing out our fiscal requirements on the one hand, and thereby the need for expenditure cuts, with a careful attempt on our part to place those cuts in the lower priority programs. You and I may disagree on what some of those lower priority programs are. But our aim here is to balance off, on the one hand, what we want to do in terms of the problems that the American people are faced with, the specific prob- lems in the cities, and, on the other hand, the inflation problem that we are faced with. It is a difficult thing to do, but we are going to do it. Finally, it seems to me with respect to the particular program you are referring to in the District of Columbia, it is not my bailiwick, but I think one has to think about the fact it is a lot better to have people doing constructive work in a situation where they can do constructive work than to have them footloose and creating more trouble. Mr. BROYHILL. There is no question along that line. I think the reason for that, Mr. Schultze, is that here is possible the primary difference in the philosophy. That is the Republicans are not as com- PAGENO="0215" PRESIDENT'S 1967 TAX PROPOSALS 203 passionate or not as tolerant or as concerned about the welfare of the poor or downtrodden as the members of the other party. Mr. CONABLE. Will the gentleman yield? That is his own interpre- tation of the Republican's position. Mr. BROYHILL. That is not my interpretation. That is what is charged by the other side. But it is not the real difference between the two parties. Our differences are on the question of fiscal responsibility, what is the role of the Federal Government in trying to solve these problems. I think it is important that we try to bring up these matters when we discuss the tax increase that the American people are object- ing to. I am getting letters also, I will admit, urging increases in some of these programs. I think we need more help from the President and the `administration in proposing cuts in some of `these programs. They should let the American people themselves know that there is a great deal of waste going on in them. I just received the other day a report from the Alexandria Chamber of Commerce on a survey of their members. The first 32 employers, members of the chamber, who returned the questionnaire reported they had over 240 jobs available in the city of Alexandria. Twenty-five of them were in the city of Alexandria gov- ernment itself. Twenty in the Virginia Electric & Power Co. These peo- pie were complaining because they could not get people to fill the jobs. When I made that announcement yesterday on the floor of the House we got some calls from the Office of Economic Opportunity saying the jobs were in Alexandria and the people in Washington can't get over to the suburbs to fill the jobs. I have asked the board of trade for the same type of survey because we know there are jobs in Washington that are going begging. My question at that point, Mr. Ackley, is if we could get more attention directed to the jobs and get the people who are now living on Federal welfare to take these jobs, not only would it reduce the cost of the welfare program and poverty program, but would it `also not increase the gross national product? Mr. ACKLEY. There is no question about that, Mr. Broyhill. As the President has frequently expressed it, our responsibility ought to be to get the people who are taxeaters into the category of taxpayers. A whole range of programs has, of course, been developed to try to train people and to get them ready to fill productive jobs. The problem is not entirely that of training. Obviously there are some problems of motivation as well. Some people just don't want to work. Certainly your objective and mine would not differ at all in terms of the desirabil- ity, from an economic standpoint, social standpoint, and every other, of trying to get people who are not working on the job wherever they are capable of doing it. There certainly are many people who simply don't have the requisite skills to fill the jobs that are open. The whole business of trying to measure the total number of job vacancies is a very difficult one and the Department of Labor has been struggling with it for a long time. I think there is the prospect if adequate budgetary funds were made available for a comprehensive continuing survey of job vacancies it would be useful not only in terms of the placement activities of the Bureau of Employment Security but also as a measure of the pressures on the economy. We would support very much an improvement of our job vacancy data. PAGENO="0216" 204 PRESIDENT'S 1967 TAX PROPOSALS Mr. BROYI-IILL. I do believe that if we could have more evidence of the fact that the administration does intend to make cuts in many areas that we have discussed it would be a lot easier for some of us who would like to support this bill to support it and not have to allow for any liberalization of the congressional retirement system. Now, I have one more question. Mr. Surrey, do you know offhand or does any member of your staff know offhand whether the SNCC organization, is a tax exempt organization or tax exempt foundation? Mr. SURREY. I do not know offhand. I would have to check that. Mr. BROYHILL. The reason I asked the question is that there was an article in the Washington Post this morning written by Mr. Jack Nelson of the Los Angeles Times which reported that a two-page article in the latest bimonthly publication, of the SNCC organization on the Palestine problem was a condemnation of the U.S. policy. "The article accused the U.S. Government of working with Zionist groups `to support Israel so that America may have a toehold in that strategic Middle East location, thereby helping white America to control and exploit the rich oil deposits of the Arab nations.' "The article included photographs of alleged atrocities against Arabs back in 1956 as well as the recent uprising or conflict. It was just a general article in con- demnation of American policy and the country of Israel. The program director of the Students Non-violent Coordinating Committee acknowledged that the source of some of this material was Arab embassies. I think this is a serious situation because if the orga- nization is disseminating foreign propaganda certainly it should be required to register under the Foreign Aid Registration Act, and certaJnl it should not be receiving contributions which would be considered tax deductible. I would appreciate if you would find out whether they are receiving it and whether in view of this action they should continue to receive it under present law. Mr. SURREY. I will check into that, Mr. Broyhill. (See p. 210.) The CHAIRMAN. Mr. Conable. Mr. CONABLE. Mr. Chairman, you have been very patient. I will he nerfectly happy- The CHAIRMAN. Let me say to you, you have been very patient. Mr. CONABLE. I will be perfectly happy to have my questions an- swered for the record if the question of time is such that it should be that way. My first question is to Dr. Ackley. Somebody told me once, I don't know who lie was, but presumably he was wiser than I am, that a cor- porate income tax is in effect~ oneS of the hidden taxes, to a substantial extent particularly in time of cost pressure. An increased cost of doing business is implicit in an increased corporate tax. In such a situation the corporate income tax is probably passed on to the consumer. Has there been any analysis in the light of the. present economic situation as to what extent the 10~pevcent corporate surtax will simply wind up as additional tax against the individual citizen of America, adding to the impactS of the individual income tax surtax? Mr. ACIcLEY. This is a question on which economists have been long divided and on which it is extremely difficult to get evidence. There are theories of taxation which do imply that at least~ in the long rtm some part of the corporate income, tax is shifted forward in the form PAGENO="0217" PRESIDENT'S 1967 TAX PROPOSALS 205 of prices. Attempts to measure this or to determine it have been on the whole, I guess, inconclusive. I think most tax theorists, and per- haps Secretary Surrey could comment on this, will agree that in the short run very little of the corporate income tax is shifted forward. Mr. CONABLE. Is it not more likely to be shifted if it is a general tax than it might be if it were as a result of a tax reform, such thing as the 7-percent investment tax credit, which has an unequal impact on corporations in competition with each other, depending on their capital structure? Again, income tax, surtax, for corporations is one that afflicts all businesses alike. May I ask what percentage of the business of this country is done by corporations? Are there any statistics available in this respect? Certainly that has some impact on the extent to which this corporate surtax is passed on? Mr. ACKLEY. I am sure there are such statistics. I am not sure I can give them to you by memory. It certainly is a very large fraction of the business, certainly in manufacturing. Much less so in services and agriculture and so on. But we can furnish for the record the percent- age in each of the main areas. Mr. CONABLE. I am concerned about this because part of the testi- mony we have had here has been that the inflation under which the country has been suffering in recent years has been at least in sub- stantial part due to a cost squeeze and not necessarily to an over- abundance of money. If we are in a period of reduced margins, and the first quarter's corporate returns indicate that, then it makes it all the more likely that the corporate surtax is going to be passed on to the individual, does it not? Mr. ACKLEY. Again I think I would insist that in the short run, there is very little evidence that an increase in the corporate income tax, particularly a temporary increase, would in fact directly raise prices. Mr. CONABLE. Any statistics you can give on that I would appreciate. I am interested in the economics of it. I am new here in the group and somewhat naive about economics. Mr. ACKLEY. Roughly two-thirds of the private gross national product is produced in corporate business. (The following table was received by the committee:) RELATION OF CORPORATE GNP TO TOTAL ANO PRIVATE GNP [OoIIar amounts in billionsj Percent which Period Total Private Corpo- rate corporate GNP is of- GNP GNP1 GNP~ - Total Private GNP GNP 1963 $590.5 $532.4 $335.0 56.7 62.9 1964 632.4 569.4 361.3 57.1 63.5 1965 683.9 616.1 312.5 57.4 63.7 1966 743.3 666.7 429.6 57.8 64.4 1967: 1st half 3 770.7 687.4 443.2 57.5 64.5 1 Private GNP is total GNP less compensation of general Government employees. 2 Corporate GNP is the gross value added by all corporations. 3 Seasonally adjusted annual rates. Source: Department of Commerce. PAGENO="0218" 206 PRESIDENT'S 1967 TAX PROPOSALS Mr. CONABLE. Here is another question I believe will be yours, Dr. Ackley. You will recall we `had some rather shocking statistics on the percentage increase in private bond issues and municipal bond issues in the first half of 1967 over 1966. Those statistics by themselves look rather alarming. Mayl ask you, was 1966 abad year? Mr. ACKLEY. No, as I recall- Mr. CONABLE. Was it a typical year? Mr. AOKLEY. Let us see if we can get some statistics on that. Is your question related to the volume of corporate securities offered in 1966? It showed a very susbtantial increase, over $2 billion over 1965. Gross proceeds of corporate securities offered for cash were just under $16 billion in 1965 and $18.1 billion in 1966. Mr. CONABLE. Has there been `an increase in a fairly straight line or at least a regular progression in corporate offerings in the past recent years? Mr. ACKLEY. There have been fluctuations, fluctuations primarily in the offering of common stocks. If we take bonds and notes- Mr. CONABLE. The issuance of common stock bears only an indirect relation to the interest rate, does it not? Mr. ACKLEY. Certainly 1966 appears to have been a record year in mo'st respects in terms `of offerings of corporate and State and local securities, so that the further increase in 1967 is above an already very high figure. Mr. CONABLE. I wanted to be sure `about that because we were talk- ing about a percentage increase over 1966. We did not know whether 1966 was a big year or not. Perhaps this is for Mr. Schultze. We have been talking about deficits ranging between $16 `billion and $28 billion. We are talking about the net deficit a't the end of the year, are we not? Mr. SCHULTZE. The deficit for the full year. Mr. CONABLE. In other words, in a typical year if we are talking about a S28 billion deficit we have as of April or May in that year a $38 billion deficit, do we not? Mr. SCHULTZE. No, sir; I don't quite follow that. I am sorry. Mr. CONABLE. Don't we have wide seasonal variations in the deficit, to the `extent of $10 billion? Mr. SCHULTZE. My recollection is that what uormally happens in terms `of the debt increase is that you get most of it in the first half of the year. Let me consult on that for a moment-I'm told there is normally a surplus of about $7 billion in the last 3 months of the fiscal year. The CHAIRMAN. If you will yield t'o me, Mr. Conable, bear in mind that the peak in the fiscal year 1967 was set at $336 billion as the limit. The $358 billion on top `of the $336, you see, would serve to take care of a peak sometime during the fiscal year of $358 billion. Would that be $22 billion peak or what? I don't know. That is what the Seeretary said he was going to help us on a. little bit. Mr. SCHULTZE. The last 3 months of the fiscal year you would get a reduction of about $7 billion in the debt. Mr. CONABLE. I want to know what we are talking about. We are not talking abou't the debt ceiling, we are talking about the deficit. Now, if you will refer to the monthly s'tatement of receipts and ex- PAGENO="0219" PRESIDENT'S 1967 TAX PROPOSALS 207 penditures of the U.S. Government, at the end of May the deficit was $18 billion. As of the end of the year the estimated deficit was $9.7 billion. Now, when we are talking about deficits here aren't we talking about the deficit as of the end of that particular fiscal year? Mr. SCHtTLTZE. That is correct. Mr. CONABLE. In other words, the Government is going to have to have a borrowing authority, if the deficit is going to be $28 billion, to cover $38 billion in effect or some increment above $28 billion in any event. If we are talking about a $16 to $18 billion deficit, in effect we are also talking about a borrowing authority of $10 billion above that. Mr. SGIIULTZE. You are quite correct and the debt limit itself takes that into account. As you recall, in setting it both for 1968 and quite explicitly in fiscal 1969, there is a $7 billion swing that is allowed past the end of the year. Mr. `CONABLE. I don't want us to be misled in thinking `we are just talking about the figure that is involved at the end of the fiscal year. We are talking about a borrowing authority substantially above that. Mr. SOHULTZE. By borrowing `authority you `mean debt limit? Mr. CONABLE. Yes. Mr. SGHULTZE. As the Secretary of the Treasury indicated earlier this afternoon, with the deficit in the range of $14 to $18 billion that we have been talking about there would be no problem with the debt limit. He was hesitant to give a very specific figure as to what precise number would trigger off the problem, but it would not be a number within that range because the debt limit takes account of the seasonal swing. Mr. CONABLE. We are talking about a total effect on the economy then which could be substantially greater than the actual deficit. Mr. SOHULTZE. Let me elucidate on that a bit-at least talk about it. I think you have to distinguish between the deficit for the year as a whole, which, to the extent it adds to the debt, has to be financed on out into the future unless you have surpluses later, and a temporary swing which can be financed out of tax anticipation certificates or short-term borrowing. While you are right in getting at the entire financial picture, your point `deals mainly with the seasonal' swing in the debt. Mr. C0NABLE. At least we are going to have to go into `the short-term market to that extent? Mr. SCHULTZE. That is right. Mr. CONABLE. Those are my questions, Mr. Chairman. I am inter- ested in any information that might indicate further ho'w much of the corporate surtax is going to be paid by the individual citizen eventu- ally. It may be something that you just can't get. It may be a matter of theory. If the `theory is incorrect- Mr. SCH1JLTZE. The theory can't be incorrect, there are so many of them. One of them has to be right. Mr. CONABLE. It appears to be incorrect to Dr. Ackley's thinking anyway because he says in the short term it is not going to be passed on to any substantial extent. Mr. AOKLEY. Could I comment briefly on this seasonal questio'n to which you referred. Unfortunately we do not have a seasonally ad- justed administrative budget. We do have a seasonally adjusted na- tional income budget which I think is the most significant measure PAGENO="0220" 208 PRESIDENT'S 1967 TAX PROPOSALS of the pressures on the economy. Without the tax increase that sea- sonally adjusted deficit would be increasing throughout this year with the tax increase it would be not oniy greatly lower but would be trend- ing downward. In my statement I suggested, with the tax increase and with significant control of the growth of expenditures, that by the end of the fiscal year the deficit on national income account might be clown in the order of $3 to $5 billion. Mr. Bush? Mr. BUsH. I have no questions, Mr. Chairma~i. Mr. VANIK. Mr. Chairman? The ChAIRMAN. Mr. Vanik? Mr. VANIK. I have one other question following up the question I had of Mr. Surrey. I would like to know what the reaction of the In- ternal Revenue Service and your Treasury would be if there were another space on the income tax return which would simply say "other income which the taxpayer considers exempt from taxation." Now, if this were placed on the tax return it would be the kind of place for the taxpayer to report his exempt income and also to clear himself with the Internal Revenue Service. In other words, if there is any doubt in his mind he can take his exemption and put it there. That would notify the Internal Revenue Service that the taxpayers considered cer- tain income as exempt. It would also give the Treasury and the Inter- nal Revenue Service a very accurate way of determining the amount of income which is considered exempt. The taxpayer would have an advantage in that it would release him from the danger of fraud for failing to disclose such income if it were a borderline issue. It seems to me it might increase revenues. It also might tell us the extent to which taxpayers are not paying income taxes on their earnings. I have just one other point, Mr. Chairman. Mr. CONABLE. Mr. Chairman, may I ask also, does the committee have any record of people who are going to be testifying later? Are we going to have a substantial number of people from the private sec- tor? I must say my friends at home are saying to me that business is not as good as all that at this point. I hope we are going to have some comparison of what the business community actually thinks of the present state of our economy after which we can then consult further w-ith administration spokesmen. The CHAIRMAN. As the gentleman knows, the time for requests to be heard was fixed as at the close of business today. So far today I under- stand that we have 20 organizations and individuals who are request- ing an opportunity to be heard on this matter. Mr. CONABLE. Are they representative of among other things than the business community? The CHAIRMAN. Yes, business, labor, other segments of the economy. But it is a limited number; 20. Mr. CONABLE. It is always distressing, Mr. Chairman, to find how tremendously reliant we in the legislative branch are on what the exec- utive branch wants to tell us. I think the record shows that sometimes the executive branch does not tell us everything they know. They do not misrepresent the facts; they siniply do not tell us all they know. I am hoping we will have some opportunity for probing the economy be~ yond the specific problen'is that the executive branch has brought to our attention in seeking a tax increase. PAGENO="0221" PRESIDENT'S 1967 TAX PROPOSALS 209 The CIiAnu~rAN. We do not normally invite specific people to testify. We ordinarily have enough who request appearance without our hav- ing to invite them. In this instance we so far only have about 20 organi- zations who have expressed a desire to appear before the committee. Secretary Fowler, in his statement, said, "The tax reform message will require more deliberate consideration since it involves proposals for permanent structural changes and some redistribution of tax bur- dens in the interest of a fair sharing of the load." This is what I ob- ject to. The Secretary further stated "Its basic objective is not to raise revenue but to correct a number of inequities and abuses in our tax system." It seem to me our objective should be to do both things, to correct inequities reaction of revenue because in correcting the inequi- ties I think we can come up with a greater contribution for Federal taxation than we now receive from many sources. I certainly hope some effort will be made to do both things, to provide for greater rev- enues, at the same time that we endeavor to correct inequities. Mr. SURREY. Maybe that was misunderstood, Mr. \Tanik. Mr. VANIK. That is the only way I can read it. Mr. SURREY. Certainly some of the recomrnendatioiis would raise more revenue. Mr. VANIK. The basic objective, it seems to me, should be to raise revenue. Mr. SURREY. Some of the recommendations would correct inequities where taxpayers may be paying more than their `fair share today. The revenue so raised would offset those cases in which taxpayers or groups of taxpayers are paying more than their fair share. Now, the committee will have an opportunity to consider whether the revenue raised from those provisions which tighten up the law should be used to go into the general budget as increased revenues or should be used, as this statement suggests, to take care of those situa- tions in which certain groups of *taxpayers are bearing more than their fair share of the revenue. Mr. VANIK. I think the word "not" should be removed. I think we should try to do both things. Mr. SURREY. I think an opportunity will be given the committee to consider whether provisions that tighten up and increase the tax on those groups who are not paying their fair share should be used in turn to ameliorate the situations of those who are paying more than their fair share. Mr. VANIK. Thank you. The CHAIRMAN. Earlier we had suggested that if the Secretary would produce a bill `carrying out the recommendations that it would appear in the record. I will suggest if there is no objection that it ap- pear immediately following the Secretary of the Treasury's opening statement and that it be followed by the technical explanation which has also been prepared by the Treasury Department. Is there any ob- jection? (See p. 32.) Mr. Surrey, let me ask you a little bit about the bill, itself. We have talked about everything except the bill. As I understand, the bill imposes a temporary surtax on both individuals and corporate income tax liabilities at an `annual rate of 10 percent, that it raises from 70 percent to 80 percent the percentage of its estimated tax which the corporation may pay by installment without incurring a penalty. See- PAGENO="0222" 210 PRESIDENT'S 1967 TAX PROPOSALS tion 4 eliminates over a 5-year period the $100,000 estimated tax exemp- tion which presently determines whether or not a corporation has to make these advance payments. And then section 5 suspends the schedule for the reduction of the excise taxes on passenger automobiles and telephone services during the period of the temporary surcharge. Is that a brief description of the five provisions? Mr. SURREY. Yes, sir. Mr. Chairman, may I just interpolate something here. Cong~ressman Broyhill asked me a question whether SNCC had a ruling which permitted contributions to it to be deductible. We just checked with the Internal Revenue Service and there is no such ruling. There is no ruling permitting contributions to SNCC to be tax de- ductible. As to whether the organization itself has a ruling as an exempt or- ganization we would have to check the field office because those rulings are issued in the field and not in Washington. But there is no ruling that would permit a person making a contri- bution to it to secure a tax deduction. Mr. BROYHILL. The person contributing cannot make a deduction? Mr. SURREY We checked and we know of no such ruling. Mr. VANIK. On that same point I heard a broadcast this morning of H. L. Hunt Industries. It was a political broadcast. Is that tax exempt? It is a program called Life Line. Mr. SURREY. I would have to check. I think that is under considera- tion. This is the substance of the bill, Mr. Chairman. The CHAIRMAN. Actually this is not a surcharge so far as the indi- vidual is concerned of 10 percent over and above what his tax is under existing law? It is not just a 10-percent additional, is it? Mr. SURREY. For the year 1967- The CHAIRMAN. I am talking about the full year. Don't get into 1967. You have your low-income provision. I want you to explain just how it works. You have been referring to the fact that an individual with $5,000 income does not have to pay a surtax. Tell me how it works. Mr. SURREY. The bill itself says that every individual would have his tax increased in 1967 by 21/2 percent, in 1968 by 10 percent. Then there is a specific low-income exemption which says that this increase shall not apply if the tax does not exceed $290 in the case of a joint return and $145 in the case of a single individual. The CHAIRMAN. Because that would be the tax that would apply to the man who has a wife and two children, with $5,000 of gross income. Is that right? Mr. SURREY. Yes. The CHAIRMAN. That is exactly the amount of tax in the case of the man who has the four exemptions including his own and who uses the standard deduction. Now with $295 of tax does he pay 10 percent more? Mr. SURREY. He pays 10 percent more. The CHAIRMAN. Even if it is $291? Mr. SURREY. Yes, sir. The CHAIRMAN. Mr. Surrey, you know that we don't legislate that kind of proposal in this committee. How would we straighten that out? PAGENO="0223" PRESIDENT'S 1967 TAX PROPOSALS 211 We don't penalize a fellow just because he happens to pay $1 more taxes than somebody else does by charging him $29 more. Mr. SURREY. We do in this sense. There are about 15 million taxable returns using the so-called optional tax table. Those people under $5,000 if they want the standard deduction they must use these tables. These tables are so constructed that they are based upon the midpoint of the bracket. The brackets are $50 wide. If your income increases by $1 under these tables your tax can jump up by $9, $10, or $12. The CHAIRMAN. I understand all of that. Mr. SURREY. And people have been filing this way for years. The CHAIRMAN. But not by $29. Mr. SURREY. Not by $29, which is the maximum for a married per- son. But up to $12, and it has been done for years and apparently no one has objected to it. The CHAIRMAN. By the time we get around to wanting it, you had better be devolping some kind of notch arrangement, don't you think? Mr. SURREY. For the year 1967 the notch of course is much lower than $29. The CHAIRMAN. Maybe we can get by without a notch in 167 but maybe we can have a notch in 1968. Mr. SURREY. That is something we can explore with the committee if `they want to explore it. The CHAIRMAN. You can begin to think about it. Tell me about some of the other provisions insofar as they deal with the individual person. Is that the only thing we have to bear in mind on the low-income exemption? Mr. Stnuu~Y. I think so. The CHAIRMAN. Do you have any complications with respect to the tax base on which the surcharge is computed? Mr. SURREY. The only point there that is taken account of is that we thought that the committee would want to keep the present value of the retirement income credit and consequently we did make an adjustment for that. People having the retirement income credit would not lose their treatment compared with social security. This retirement income credit as you know creates a great many complications. This is another one that has to be added to the story of the difficulties of the retirement income credit. But as long as we have it this is something we had to take account of. The CHAIRMAN. What have you done with respect to the retirement income credit itself? Mr. SURREY. We said that the tax would be imposed on the tax liabil- ity after reduction by the retirement income credit. That will leave people having retirement income credit in the same relative position as those who have their social security income excluded. The CHAIRMAN. You have some type of optional tax table provision? Mr. SURREY. The Secretary is given in the draft we submitted to you the authority to determine and require the use of tables incorporating the tax imposed by this measure if he feels that is the best way of han- dling it on the tax return. The CHAIRMAN. Is he permitted to round upward and downward? PAGENO="0224" 212 PRESIDENT'S 1967 TAX PROPOSALS Mr. SURREY. He is permitted to round upward and downward so that you don't have odd cents in the table. The CHAIRMAN. You have rounded up to the next full dollar? Mr. SURREY. That is right. We will discuss this in executive session with the committee and indicate how we plan to do it but presumably we would incorporate the tax increase in the optional table. The CHAIRMAN. You have not made up your mind as to how that should be done yet? Mr. SURREY. It is our feeling this should be done but that is a matter we will have to discuss with the committee. The CHAIRMAN. How do you handle the estimate.d tax? Mr. SURREY. In the case of the estimated tax, with respect to the estimated tax for individuals we simply said that any increase that shall affect the estimated tax for individuals presumably would affect it in January of next year. But the estimated tax would have to be increased accordingly along the lines of the increase in tax liability. The CHAIRMAN. That would apply to corporations as well. Mr. SURREY. Yes. The CHAIRMAN. In making these estimates have you prepared tables to show what the total impact is of the adjustment in the payment from 70 to 80 percent on an estimated basis plus the imposition of the 10-percent surcharge? Mr. SURREY. Yes. The CHAIRMAN. Do you have any corporations at any level paying more than 100 percent of their tax liability in any calendar year? Mr. SURREY. We would, as we do now, in other words, corporations are now finishing up the major acceleration started earlier. The CHAIRMAN. You know what we have done. We have been very, very careful to prevent a percentage increase that might result in over a 100-percent of the tax liability being incurred in any one year. Mr. SURREY. I think for the great mass of corporations that figure will drop even under these changes, considering various prior types of speedups. The CHAIRMAN. It has an effect on the cash flow of course and if they don't have any cash, it forces them to have to borrow more money. Mr. SURREY. Thinking for a moment about raising that 70 percent figure to 80 percent; on the average, corporations appear now to be using about 82 percent. The CHAIRMAN. You mean they are actually paying on the basis of 82 percent of their liability? Mr. SURREY. On an estimated tax basis. The CHAIRMAN. Even though they are only required to pay on 70 percent? Mr. SURREY. Yes. Some corporations will be between 70 and 80 but a great many corporations are already above 80 percent, just voluntarily. So that it is hard to get a table that will cover everybody. Those corporations that are between 70 and 80 would have to go up. But those who are already above 80 would not have to make any change. The CHAIRMAN. You know this committee has always refused to require corporations with less than $100,000 of tax liability to be put PAGENO="0225" PRESIDENT'S 1967 TAX PROPOSALS 213 in the position of paying on the basis of estimates. Is this the same provision that was before the committee last year in that respect? Does it go all the way down to zero of tax liability over a 5-year period? Mr. SURREY. I am not so sure this has been suggested before. The CHAIRMAN. Or do you go all the way to zero? Mr. SURREY. Forty dollars, the same as individuals. This is designed to put corporations on the same basis. The CHAIRMAN. I understand that. I understand the theory of it. I think you know that I was one of the first in getting corporations to pay currently as their liabilities developed in the course of a taxable year, just like individuals, but we stopped at $100,000 of tax liability. Now if you go to $40 you have how many corporations? Mr. SURREY. We have a total number of taxpaying corporations of 700,000. The CHAIRMAN. How many of that 700,000 have tax liabilities over $100,000? Mr. SURREY. Sixteen thousand. The CHAIRMAN. The balance of them then are below the $100,000? Mr. SURREY. Which indicates some pretty sizable corporations from the standpoint of sales and so on are below $100,000 tax liability. The CHAIRMAN. Yes. The very biggest corporations have happened in a taxable year to have a low tax liability. It is not based on the size of the corporation. I understnad that. Be sure now when you come to the executive session of the commit- tee that you have tables which clearly reflect the total impact of the combination of these proposals. When we require them to pay more and pay it sooner, they also will be paying 5 percent more in 1967 because it would take effect the first of July. They will be paying 10 percent more in 1968. But then as you step down and enlarge upon their requirement for payments, making them pick up a part of the tax, not only what was due in the past year but due in the present year, you will find, as we found earlier in consider- ing this matter, that we were placing an excessive drain upon their capital flow. You remember we reduced the Treasury's request at that time to more nearly what we thought was midway between what we wanted to do and what we thought was the fair thing to do. Mr. SURREY. We will have those tables, Mr. Chairman. The CHAIRMAN. Tell me about this business about the Western Hemisphere trade corporation that you brought into this hearing. Mr. SURREY. The Western Hemisphere trade corporation has a pres- ent law to assist them under which their tax rate is supposed to be 14 percentage points below the regular rate of tax. This relationship is maintained. The CHAIRMAN. Are we not increasing the tax on those? Mr. SURREY. We are maintaining the existing relationship that they have. The CHAIRMAN. You are leaving them unaffected by the surtax? Mr. SURREY. Their rate has to go up. It can't go up 10 percent exactly because we still want to leave them 14 percentage points below the higher rate. 83-349--67-pt. 1-15 PAGENO="0226" 214 PRESIDENT'S 1967 TAX PROPOSALS The CHAIRMAN. Are you charging them 10 percent surcharge or not? Mr. SURREY. We are taking 14 points off the new corporate rate in effect. The CHAIRMAN. These types of corporations have always paid 14 points less as a tax rate. If the corporation had to pay 52 percent, these corporations pay 14 points less or 38 percent, they have always been given preferential treatment. I don't Imow why you have to have an exclusion for them here. Why is it that they, like any other corporation, cannot figure their tax and then pay 10 percent more? Mr. Sumu~Y. That would give them a greater advantage than they have today. The CHAIRMAN. Would it? Mr. SURREY. Yes. The CHAIRMAN. You are hitting them harder then? I misunder- stood then. Mr. SURREY. If you just increased their tax 10 percent it would give them a greater advantage than they have today. The CHAIRMAN. You take care of the point. I was fearful that you had not taken care of it. Mr. Sumu~y. We will study the suggestion, Mr. Chairman. The CHAIRMAN. What about the minimum distribution by foreign subsidiaries, how do you treat those? Mr. SURREY. The minimum distribution table is a table that indi- cates what percentage of distribution certain foreign subsidiaries have to make so that they will not have to pay the so-called subpart F. The CHAIRMAN. If this is to go through by October 1, we have to begin thinking now about these technical points. I want you to get you mind on these points and not wait until we get into executive session. Mr. Stnuu~Y. We have used a table for minimum distribution that was applicable when the corporate rate was 52 percent. The CHAIRMAN. You have maintained the comparability. Mr. SURREY. That is right. The CHAIRMAN. What period of time do you say these corporations with $100,000 or less of tax would have to adjust to an 80-percent estimated payment? Mr. SURREY. The suggestion is that it be done over 5 years, 20 per- cent a year. The CHAIRMAN. Beginning when? Mr. SURREY. Beginning in the year 1968, calendar 1968. The CHAIRMAN. With respect to calendar year 1968? Mr. SURREY. Yes. For a calendar year corporation it would be the estimate for that year. The CHAIRMAN. Do you follow the same general pattern in the esti- mating and payment of the tax in the case of these corporations that presently applies in the case of those subjected to the requirement to- day? Is there any difference or are they treated in all respect just as though they had tax liability above $100,000 today? Mr. SURREY. I believe so, Mr. Chairman, because this provision also *applies to those corporations presently over $100,000 in tax who are PAGENO="0227" PRESIDENT'S 1967 TAX PROPOSALS 215 excluding their first $100,000. Consequently the same rules would apply to both. The CHAIRMAN. At present we allow a corporation with tax liability of more than $100,000 to exclude the first $100,000 and then to pay on an estimated basis on that amount in excess of $100,000 because we exclude~ those of $100,000 or less. Just how is that changed in the law? Take that $100,000 away from the $16,000 today that have the privilege of excluding it so that their estimates will be affected not only by the 70 to 80 but by the additional inclusion of the $100,000 of tax liability excluded. Mr. SURREY. What we say is that with respect to the first year which is 1968 you can exclude 80 percent of $100,000. The CHAIRMAN. You go down by 20 percent. Mr. SURREY. That is right. The next year you can exclude 60 percent. The CHAIRMAN. That is done, too, to minimize the combined effect? Mr. Suiuu~y. That is right. Also to smooth out the adjustment over 5 years. The CHAIRMAN. What do you get in total over the 5-year period of additional advance payments through this process? Mr. SURREY. From the gradual elimination of the $100,000 tax ex- clusion we would get $400 million a year. The CHAIRMAN. For each of the 5 years? Mr. SURREY. For each of the 5 years. The CHAIRMAN. Actually then it would be about a $2 billion pick- up over the 5 years. Mr. SURREY. Yes, sir. The CHAIRMAN. And then in the case now of the passenger auto- mobile tax what you are doing is eliminating the April 1, 1968, date for the drop and what date are you putting in? Mr. SURREY. We are putting in June 30, 1969. Congressman Bush corrected us; our draft had June 30. That is an amendment we agreed to. The CHAIRMAN. Now with respect to communications services, you changed that April 1 to the same date? Mr. SURREY. The same thing, June 30, 1969. The CHAIRMAN. Is that effective also by the same provision that applies to the. 10-percent surcharge? In the event the Vietnam hostilities conclude `at an earlier date it is an earlier date? Mr. SURREY. No; the draft we submitted just has the definite date, July 1, 1969. It does not have a different termination date. The CHAIRMAN. In other words, the termination of the Vietnam situation applies only to your 10-percent surcharge? Mr.. SURREY... No; . even the 10-percent surcharge is on a definite basis. The CHAIRMAN. You mean if the Vietnam situation should conclude within 6 months after this is done that these rates would still continue until the termination date? Mr. SURREY. We had assumed that any changes prompted by the duration of the Vietnam hostilities would be reflected in new substan- tive legislation. The CHAIRMAN. It would require an amendment tè the bill that you submitted to carry out `the exact intention that has been expressed PAGENO="0228" 216 PRESIDENT'S 1967 TAX PROPOSALS here at the table that these taxes last for a definite period of time up to June 30, 1969, or the end of hostilities, whichever comes earlier? Is that what you are saying? Mr. SURREY. Earlier or later I guess. The CHAIRMAN. I thought that is what the President had said in his message. Mr. SURREY. I think the President said that this should be for a definite period of time to June 1969. Now if Vietnam hostilities cease earlier or later, the 1969 date would have to be reexamined in the light of the situation with respect to Vietnam. The CHAIRMAN. Are you just getting us in a position in the Ways and Means Committee to have more legislative responsibility here by putting this termination date in anyway? We stopped having to extend all these taxes on an annual basis which we went through for a long time. Can we make it December 31, when Congress won't be in session and be certain then that it is temporary? Mr. Stmm~~. I am not sure whether that would buy absolute cer- tainty. The CHAIRMAN. You are not? Mr. SURREY. No. The CHAIRMAN. You evidently look at it something like I do. There is no such thing as a temporary tax. Mr. SURREY. There is no such thing as absolute certainty. The CHAIRMAN. I think that covers the questions I had in mind. Do you have any questions, Mr. Conable? Mr. CONABLE. No. I just want to say one of the difficulties with hav- ing a contingent termination date is that it would be very difficult to determine when an undeclared war involving several parties actually ends. We would be in trouble if we simply said the termination of this war without having a definite date. The CHAIRMAN. I know from the information that has gone out it might not last as long as this date, that this tax might terminate earlier. That is the impression I got. Maybe I am the only one that did. Mr. SCHULTZE. The nearest thing I know to a kind of specific state- ment on that was in the state of the Union message with respect to the 6-percent when the President stated- The CHAIRMAN. You mean I am that far behind? Mr. SCHULTZE. That is right. He explicitly said: I will promptly recommend an earlier termination date if reduction in these (unusual Vietnam) expenditures permit it. PAGENO="0229" PRESIDENT'S 1967 TAX PROPOSALS 217 Mr. CONABLE. I have one other comment. Your open mind on this legislation has been widely heralded and universally acclaimed. I trust all the concern with the details of en- actment does not constitute any foreclosing of your options in any way. The CHAIRMAN. No, I am just trying to expedite the consideration of it. Without objection the committee will adjourn on this subject matter and reconvene at 10 o'clock on Monday morning, the 21st of August. (`Whereupon, at 5 :40 p.m., the committee adjourned, to reconvene at 10 a.m., Monday, August 21, 1967.) PAGENO="0230" PAGENO="0231" PRESIDENT'S 1967 TAX PROPOSALS MONDAY, AUGUST 21, 1967 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Wilbur D. Mills (chair- man of the committee) presiding. The CHAIRMAN. The committee will please be in order. Our first witness this morning is the president of the National Asso- ciation of Manufacturers, Mr. Gullander. We will ask you to identify yourself first by giving us your name and capacity in which you ap- pear for the record. STATEMENT OF W. P. GULLANDER, PRESIDENT, NATIONAL ASSOCIATION OF MANUFACTURERS Mr. GULLANDER. Mr. Chairman, I am W. P. Gullander, the presi- dent of the National Association of Manufacturers. I am here to speak on their behalf with respect to the proposed tax bill. The CHAIRMAN. We are pleased to have you with us this morning, Mr. Guliander, and you are recognized, sir. Mr. GULLANDER. The economic effect of the 1964 income tax changes well demonstrated that over the long run maximum economic growth and maximum tax receipts result from moderate income tax rates which encourage expansion and risk taking. Because of this, I find myself in a rather uncomfortable position, as I am certain this committee does, in discussing the need for a tempo- rary tax increase. No one can view the present fiscal situation with any degree of satis- faction. And the best t.hat can be said for the alternatives that seem to be ajvailable for correcting it is that some are likely to be less damaging to the economy than are others. Nevertheless, the problem must be faced, and it is my hope that I can contribute something that will be useful to you. In doing so, I have the guidance of a statement prepared by the NAM Taxation Committee; expressing its views On "Government Action in the Cur- rent Fiscal Crisis." This was carefully considered and unanimously en- dorsed by the committee at its meeting on July 11, and I emphasize the date July 11. It was prompted by concern with much the same prob- lems as were brought up by the President in his message to Congress on August 3. The full text of the taxation committee's statement is appended to my testimony and I ask that it be included in the record of these hearings. 219 PAGENO="0232" 220 PRESIDENT' S 1967 TAX PROPOSALS The CHAIRMAN. Without objection, it will be. Mr. G-ULLANDER. We see no reason to doubt the administration's estimate that, in the absence of a vigorous effort to correct it, the Fed- eral deficit will be approximately $29 billion in this fiscal year. And we see no reason to challenge the administration's assertion that a defi- cit of this size would produce a "ruinous" spiral of inflation, lead to a shortage of credit and high interest rates that would severely cripple business activity, and damage further our international balance of pay- ments. These are essentially the same conclusions as were reached in the NAM Taxation Committee statement of July 11. We wish, however, that the President had given more attention, in his message, to the factors responsible for the present crisis. The growth in nondefense spending over the last few years has contributed at least as much to the crisis as has the Vietnam war. I know that much of this may sound like "water over the dam." and that your immediate concern is how best to deal with the crisis that is before us. The bulk of my remarks today will be suggestions for dealing with this immediate problem. But we must also given atten- tion to what led to this situation. Unless we make plans for avoiding a continuation of recent fiscal trends, we may find that any temporary tax increase will become a permanent part of the revenue system. OBJECTIVES Clearly the prospective deficit of $29 billion is economically intol- erable and must be reduced substantially. However, a tax increase that would wholly eliminate the prospective deficit in fiscal 168 would be equally intolerable. It would require, for example, an income tax surcharge of about 50 percent to accomplish this. It is hard to say which would give the worse shock to the economy-the large deficit or the tax increase needed to eliminate it. Reduction in expenditures offers a far sounder method of reducing the deficit and we had hoped that this would occur to an extent that a tax increase would be unnecessary. We fear, however, that the time is past when the problem for fiscal 1968 can be handled entirely in that way, although this is a `time when efforts in that direction should be redoubled. It follows that a program for dealing with the fiscal crisis in the cur- rent year must be in the nature of a compromise. It should involve a substantial reduction in spending, a temporary `tax increase and, unfortunately, acceptance of a sizable deficit remaining after these measures have been taken. T'he administration has suggested `that the objective be a reduction in the budget deficit for fiscal 1968 from the prospective $29 billion to a range between $14 and $18 billion. If fiscal policy is to be planned~ with any sense of perspective;, Congress will need to have some such goal before it. It is n'ot that anyone can regard such a defici't with satisfaction. And certainly repeated deficits of that magnitude stretching into the future would have ruinously inflationary effects. But we must deal first with the problem `of fiscal 1968 under the circumstances that exist, whether we like them or not. PAGENO="0233" PRESIDENT'S 1967 TAX PROPOSALS 221 EXPENDITURE REDUCTION The program presented in the President's message contains, in his words, "two essential elements." These are "expenditure restraint" and "tax measures to increase our revenues." Your committee's direct concern is with the latter, but it can hardly be discussed until we have some idea of what can be accomplished in reducing Government spending. Although the President endorses restraint in spending as an essen- t.ial element in his program, his message contains little that would be helpful to Congress in carrying out such an effort. lie offers only two specific suggestions: Elimination of $1 billion of the proposed Federal pay raise, and restoring authorization of $2 billion in sales of partici- pation certificates. Beyond this he refers only to the "steps that Con- gress and the Executive can and should take to control expenditures." It is important that the President take a major leadership role in developing the means to implement what he recognizes as an essential element in his program. I will return later to this subject of Government economy with a suggestion as to how it may be achieved. For the moment we may note that a massive effort along these lines is absolutely essential. The President himself points out that $1 billion `of expenditure is equivalent to the revenue yield of a 2-percent surcharge coming di- rectly out of the pockets of the American taxpayer. REVENUE INCREASES The President's recommendations for increasing Federal revenues are, of course, the part of his program which most directly concerns your committee. A temporary surcharge of the same percentage on individual `and corporate income taxes is the most equitable and least disruptive way of raising additional revenue for meeting a temporary need. I would like to repeat that sentence. A temporary surcharge of the same per- centage on individual and corporate income taxes is the most equi~table and least disruptive way of raising additional revenue for meeting, a temporary need. The NAM Taxation Committee, in its July 11 statement., recom- mended that: Any tax increase should take the form of a one-year surcharge of a common fixed percentage on all net liabilities for personal and corporate income taxes. We would, however, raise questions about some of the specifics of the President's proposals. First, the surcharge legislation should cover a term of 1 year rather than 2 as proposed by the President and should be made effective on the same date for corporations and individuals. Frankly, what we fear is that the longer this source of revenue remains available, the more likely the Federal Government is to be- come dependent on it. Instead of its `being a means of getting `through a temporary emergency, a longer term could be the means of its be- coming a permanent necessity for meeting the cost of continuing spending programs. In other words, we see a danger that this new PAGENO="0234" 222 PRESIDENT'S 1967 TAX PROPOSALS source of revenue could reduce the pressure for regaining control over spending trends. Second, the surcharge should apply to all income tax brackets. We may grant that it is undesirable to ask persons of comparatively mod- est income to pay additional taxes but it is equally undesirable to ask anyone to pay additional taxes. If, at present, taxpayers pay a proper share of the present tax total, it would seem that they should pay their proportionate share of any surcharge. The most important question is whether it will be necessary to impose a surcharge at a rate as high as the proposed 10 percent. In fiscal 1968, each reduction in expenditures of approximately $600 million would have the same effect on the deficit as 1 percentage point of the surcharge. The terms of this tradeoff seem sufficiently attractive to compel a maximum effort to cut Federal spending. A rough calculation reveals that a cut of somewhat less than $1 billion in expenditures, together with an expansion of the surcharge base by including all taxpayers, would make it possible to reduce the proposed surcharge by 2 percentage points and as mentioned above, each additional expenditure reduction of $600 million would make it possible to reduce the rate by another percentage point. It should be emphasized that a 10-percent surcharge on corporate tax liabilities would mean that the effective rate on all but the smallest corporations would be higher than it had been prior to the 1964 tax reduction. SPEEDtTP OP CORPORATE TAX COLLECTIONS Particularly in the last 2 years, American corporations have been subjected to an acceleration of tax payments which has much the same practical effect on them as a surcharge on their current tax liabilities. The President has proposed two measures which would further speed up corporate tax collections in 1968. He would raise from `TO percent to 80 percent the basis on which corporations make current payments on their estimated tax liabilities. He would also eliminate, over a 5-year period, the exemption of the first $100,000 of tax liability from the requirement for current payment. This form of tax acceleration would hit small enterprises especially hard. We recommend that you do not take such action. As already men- tioned, it is the equivalent of a surcharge during the transition period. Consider the case of a corporation which paid `TO percent of its tax liability for calendar 1967 in that year-leaving 30 percent to be paid in 1968-and then also had to pay 80 percent of its 1968 tax liability in 1968. In effect, it would have to pay an extra 10 percent of a year's tax in calendar 1968. This would be a serious burden to be placed on top of the surcharge you are considering. The burden would be even more serious for many small corporations. A corporation whose tax liability remains consistently below the $100,000 margin would, over the next 5 years, have to pay almost 6 years' taxes. Thus, in effect, you would be subjecting them to a sur- charge of 16 percent on top of any surcharge Congress may legislate. The argument has been made that since proprietors of unincorpo- rated enterprises already pay their taxes on a current basis it is only fair to subject small corporations to the same treatment. But this argu- ment misses the point. The extra burden on the small corporations PAGENO="0235" PRESIDENT'S 1967 TAX PROPOSALS 223 would be the result, not of their being on a pay-as-you-go basis, but of the transitional problem of getting on a ray-as-you-go basis. There would have to be a period during which the small corpora- tions would pay more than 1 year's tax in each year. There was a similar transitional problem for small proprietors when individual taxpayers were first placed on a pay-as-you-go basis in 1944. You will recall that Congress resolved the difficulty by a broad stroke-three- quarters of the 1943 tax liabilities of individuals were simply wiped off the books. But no one has proposed a similar tax forgiveness for small corporations if and when their payments are made current. For 1964 through 1967 the overall speedup of corporate tax pay- ments, exclusive of social security, will amount to at least $12 billion under existing legislation. As many authorities have noted, the result- ing squeeze on corporate cash resources has contributed to upward pressures on interest rates and tightness in the credit markets. An additional speedup would only aggravate these conditions. CORPORATE TAX LIABILITY The administration has recommended applying the surcharge to corporate tax liabilities before allowance of the investment credit and foreign tax credit. The only fair method would be to apply any surcharge to net tax liabilities after allowance of credits. After all, the various credits and adjustments that are made in the calculation of final tax liability were all adopted by Congress for good and sufficient reason. If a tax surcharge must be enacted, we see no justification for the dilution of any such benefits to the tax- payer by applying the surcharge to the liability calculated before taking them into account. The procedure provided in the administration's tax bill would re- sult in a surcharge of more than 10 percent-in some cases much more-on tax liability as presently calculated. For instance, a cor- poration with `an investment tax credit of the 50 percent maximum on its gross tax liability would have its tax increased by 20 percent in- stead of 10 percent. Failure to allow deduction of the foreign tax credit would result in many cases in even greater distortion. If it is your intention to collect increased revenue by a surcharge applied evenly to everybody, we do not see why such a provision should be included. It is our belief that the most appropriate form of tax increase for meeting temporary needs would be a "bottom line" surcharge. By this we mean an additional tax calculated on the last line of the return, by applying a fixed percentage to tax liability as calculated according to existing law. Any other procedure distorts the pattern of relationships among taxpayers. RELATIONSHIP OF THE CORPORATE AND INDIVIDUAL SURCHARGE RATES During discussions both before and after the Presiden't message, the suggestion has frequently been made that the surcharge rate to be applied to individuals should be somewhat less than the surcharge rate to be applied to corporations. I do not know the extent to which this will be given serious consideration by your committee, but in any case, I would like to make some comments. PAGENO="0236" 224 PRESIDENT'S 1967 TAX PROPOSALS In the interest of equity there is no justification for imposing a heavier percentage surcharge on corporations than on individuals. Both the tax history since 1964, and the impact on profits of the recent economic slowdown, suggest that, if anything, there should be greater reluctance to raise corporate taxes than individuals' taxes. At the time of the 1964 tax cut, the reduction was proportionately much less for corporations than for individuals. The great bulk of corporate profits had previously been taxed at 52 percent and this was reduced in two steps to 48 percent-somewhat less than an 8-per- cent reduction. By comparison, the tax reduction provided for indi- viduals averaged close to 20 percent. I am not suggesting that you reconsider a decision made in 1964. But you should give thought to what will happen if every time there is opportunity for a tax cut, corporations are given less than a propor- tionate share and, every time there is need for a tax increase, corpo- rations are burdened with more than a proportionate share. This would mean that any kind of tax change would lead to a greater share of the burden being assigned to corporations. This is one reason we believe you should reject proposals for imposing a higher sur- charge rate on corporations than on individuals. Furthermore, since 1964, the nominal reduction in corporate tax rates has effectively been wiped out by the acceleration of corporate tax collections. This point is sometimes misunderstood, since it is re- garded solely as a matter of the timing of taxpayments, rather than of the magnitude of the tax burden. However, the additional amounts which had to be paid because of the speedup have been a real drain on corporations in just the same sense that they have been real revenue to the Treasury. In fact, in calendar 1967 without a surcharge, large corporations are paying a considerably higher cash tax rate, including the impact of the speedup, than they did in 1963. While most business has yet to receive any actual cash benefits from the nominal reduction in the corporate tax rate enacted in 1964, indi- viduals, by contrast, obtained their benefits promptly on schedule. Now, if the tax cut must partially be reversed, it would hardly seem appropriate to apply a heavier tax surcharge to corporations than to individuals. A final reason for this conclusion lies in the statistical record of what has happened to various kinds of income during the economic slowdown of 1967. In the first half of this year, corporate profits were 6 percent below their level of a year earlier, whereas, personal incomes were 7 percent higher. Corporate profit margins have been declining since the first quar- ter of 1966. It would not make much sense to apply a higher tax sur- charge to this element of income than to others. As our taxation coin- mittee, in its statement of July 11 stressed: Any tax increase should be of such character as to do minimum damage to business profitability and business confidence, since these factors are so vital in deter~mining the general level of employment and economic activity. Of course, one argument we have heard for making corporations pay a higher surcharge rate than individuals is the claim that corporations received a tax break earlier this year when the suspension of the investment credit was terminated. This is surely a specious argument. PAGENO="0237" PRESIDENT'S 1967 TAX PROPOSALS 225 Congress action simply restored what practically everyone conceded to be a normal, natural, and permanent part of the tax system. Admittedly, there was one slight advantage gained by business in the investment credit restoration-advancement of the date that the credit could be applied to a larger proportion of tax liability. But this represented a very small plus compared to the minus of the suspension itself. In sum, we urge most earnestly that you resist all efforts to impose a higher surcharge rate on corporations than on individuals. ORGANIZING FOR GOVERNMENT ECONOMY This completes the suggestions I have to offer on how to meet the liscal crisis which faces the country here and now. Please understand that the most I would claim is that this is the least damaging program for dealing with the situation we are in. I would be r'imiss, however, if I did not add some comments dealing with longer range aspects of the fiscal problem. We should all be de- voting thought not only to the problem of getting through this criti- cal period, but to the questions of why we are in a fiscal crisis and ho~v we can avoid it in the -future. It is clear that we cannot blame present fiscal difficulties solely, or even mainly. nn the Vietnam war. Between fiscal 1964 and 1968, ac- cording to the President's January estimates, cash outlays for defense will have risen 41 percent whereas cash outlays for other purposes will have risen 45 percent. This growth in expenditures is far beyond what can be supported by the normal growth in revenues. If it continues, tax increases will not be temporary bu~ chronic necessities. We will have reversed the deci- sion we thought we had made in 1964 in favor of growth in the private economy as against growth in Government. If this is to be avoided, we must develop a firm determination to curtail growth in Government spending. And, what is a lot more diffi- cult, we must develop an effective method of carrying out such a decision. Consider the present situation. The President's message advocates both "a revenue increase" and "tight expenditure control." The pro- posal for a revenue increase is immediately taken up by the Ways and Means Committee which is responsible for studying it and carrying it to the point of appropriate action. But there is no similar body to which a proposal for "rigid expendi- ture control" is referred for public study and action. The result is that needs for increased revenue are handled. promptly but the same can- not be said for expenditure control. In this context, I would like to re.ad a portion of the statement adopted by our taxation committee at its July 11 meeting on the sub- ject of expenditure control: (1) Congress and the Administration should immediately a program for re- ducing federal expenditures and controlling their future growth. This program should have the following characteristics: (a), It should be carefully planned and organized. The same kind of detailed planning should be applied to achieve economy as is now applied to developing pro- posals that involve spending more money. (b) Specific responsibility for the program should be assigned to definite per- sons in the Administration and to definite members of Congress. Without such an PAGENO="0238" 226 PRESIDENT'S 1967 TAX PROPOSALS assignment, efforts to achieve economy might amount to no more than pious declarations. (c) The program should have the short-run objective of reducing the deficit in fiscal 1968, so as to avoid or minimize the need for a tax `increase. (d) The program should also have the long-run objective of regaining control over the growth of spending in the future. This would require consideration of changes in substantive legislation, as well as appropriations. This long-run effort would be necessary to ensure that any tax increase enacted in 1967 or 1968 would be only temporary and would not be used to support `a permanently higher level of spending. The concept incorporated in H.R. 10520 introduced by Chairman Mills on June 5, 1967, merits support as part of a long-range program to control federal spending. It would establish a Government Program Evaluation Commission comprised of private citizens whose duties it would be to evaluate existing federal programs and make recommendations to the President and to the Con- gress as to their effectiveness, whether they should be continued, and their relative priority. Without a high-level coordinated effort of this nature, proli- feration of federal programs can be expected to continue unabated. We know that the need for Government economy is well recognized among Members of the Congress. But unless an effective means can be devised for translating this into action, there is a danger that any temporary tax increase would become permanent. The relevancy of Government spending to revenue measures has been recognized by this committee on many occasions. Section 1 of the Revenue Act of 1964 came from your committee and was enacted with a declaration of national policy aimed at curtailing the growth of Government spending- To further the objective of obtaining balanced budgets in the near future, Congress by this action, recognizes the importance of taking all reasonable means to restrain government spending and urges the President to declare his accord with this objective. We hope that Congress, in considering a tax increase this time rather than a tax cut, will reiterate that statement in even firmer tones. That is the end of my statement, Mr. Chairman. (The satement referred to follows:) STATEMENT OF THE NATIONAL ASSOCIATION OF MANUFACTURERS TAXATION COMMITTEE GOVERNMENT ACTION IN THE CURRENT FISCAL CRISIS The present state of the American economy in general, and the fiscal situation of the federal government in particular, make this a period of extreme difficulty in the formulation of tax policy. An increase in taxation could delay and impede a resumption of economic growth after the present business slowdown. Profits have `been on a downslide since a year ago, and there has been some impairment of business confidence. A tax increase might make these tendencies worse. But the large federal deficit which appears likely in the absence of a tax increase would also have severely damaging effects on the economy. The reason the country finds itself in this unpleasant dilemma is its earlier failure to exercise control over the growth of federal spending. Non-defense spending has been rising at a faster rate than the revenue yielded by the existing tax system. This continuous growth of non-defense spending is the heart of the nation's present fiscal problems. Any program for dealing with these problems must have as its keystone a concerted and carefully planned effort to regain control over non-defense spending. The immediate situation is that we are threatened with a fiscal 1968 federal deficit which, in the opinion of reliable authorities, may go close to ~30 billion. The necessity for funding a deficit of this magnitude would place severe strains on the nation's credit resources, and raise interest rates to a level which would make it extremely difficult for the private economy to provide capital, partic- ularly in such fields as housing, state and local construction, and business in- PAGENO="0239" PRESIDENT'S 1967 TAX PROPOSALS 227 vestment. Alternatively, if the Federal Reserve System were to expand the credit base so as to accommodate funding so large a deficit at low interest rates, the nation would be subjected to powerful inflationary pressures. The most desirable method of dealing with this problem, of course, would be to eliminate or greatly reduce the threatened 1968 deficit by a cut in expenditures. To control inflation, expenditure reduction is more effective than tax increases which may be passed on in part in higher prices. Without extensive evaluation of programs, Congress and the Administration may, however, be limited at this time in their ability to accomplish an adequate reduction in non-defense spend- ing for fiscal 1968 since much of the spending is a result of substantive legisla- tion passed in earlier years. If this turns out to be the case, an increase in taxation might be considered as "the least of the evils." There is an inherent danger, however, in using a tax increase as a corrective for an excessive deficit. A tax increase might so reduce the pressures for spend- ing reduction, that its end-effect could be to increase expenditures over what they otherwise would have been, rather than to reduce the deficit below what it otherwise would have been. Whatever is done in the present fiscal crisis must guard against such a tendency. At the present juncture, anything that is done, and anything that is not done, involves its own set of risks. But decisions have to be made, and the NAM Taxa- tion Committee recommends the following program for government action during the present fiscal crisis: (1) Congress and the Administration should immediately undertake a pro- gram for reducing federal expenditures and controlling their future growth. This program should have the following characteristics: (a) It should be carefully planned and organized. The same kind of detailed planning should be applied to achieve economy as is now applied to developing proposals that involve spending more money. (b) Specific responsibility for the program should be assigned to definite persons in the Administration and to definite members of Congress. Without such an assignment, efforts to achieve economy mig~ht amount to no more than pious declarations. (c) The program should have the short-run objective of reducing the deficit in fiscal 168, so as to avoid or minimize the need for a tax increase. (d) The program should also have the long-run objective of regaining con- trol over the growth of s~ending in the future. This would require ~onsidera- tion of changes in ~ubstantive legislation, as well as appropriations. ThiS long-run effort would be necessary to ensure that any tax increase enacted in 1967 or 1968 would be only temporary, and would not be used to support a permanently higher level or spending. The concept incorporated in H.R. 10520 introduced by Ohairman Mills on June 5, 1967 merits support as part of a `long~range program to control federal `spending. It would establish a Government Program Evaluation Commission comprised of private citizens whose dutiOs it would be to evaluate existing federal programs and make recommendations to the President and to the Congress as to their effective- ness, whether they should be continued, and their relative priority. Without a high-level coordinated effort of this nature, proliferation of federal pro- grams can be expected to continue unabated. (2) If, after such an economy effort it appears that the nation is nevertheless threatened with the probability of a deficit in fiscal 1968 so large as to be poten- tially damaging to the economy, Congress may be impelled to enact a tax increase. If a tax increase is enacted by Congress, it should be designed in accordance with the following principles: (a) Any tax increase should be clearly labeled "temporary" and should provide for its own termination at the end of one year. A tax increas~ for any longer period would reduce the pressures for government economy, and is therefore undesirable. (b) Any tax increase should be of such character as to do minimum damage to business profitability and business confidence, since these factors are so vital in determining the general level of employment and economic activity. For examp1~e, any further speedup of corporate tax collection~, espe- cially one which is concentrated on small business, `should be avoided at this time. Past speedup of such collections has impaired the cash resources of business for meeting its needs for current operations and expansion. (c) Decision as to the dollar amount of any tax increa;se must of neces- sity be a compromise. It Should be sufficient to reduce the deficit substan- PAGENO="0240" 228 PRESIDENT'S 1967 TAX PROPOSALS tially, but not `so great as to impair the economy. We should not try to make up by a rise in taxes that part of `the `deficit which results from the present economic `slowdown. `Such a `cours~ would be self-defeating. (d) During the period of any temporary tax increase, no fundamental changes in the tax structure `should be made. (e) Any tax inerea~e should take the form of a one-year surcharge of a common fixed percentage on all net liabilities' for perSonal and corporate income taxes. (3)' In undertaking `such a program, Congress should make a firm declaration of its intention to halt the excessive growth of federal spending and to be guided, in `both appropriations and substantive legislation, by that objective. This `will help create `confidence that any tax increase if enacted will in fact he temporary, and thus `minimize its `adversei'mpact on `the econoniy. The absence of assurance on this point would create the fear that such a tax increase i's only the first of a series. At the time of its enactment, the 1964 tax reduction was bailed a's a clea'r in- dication that `henceforth the Nation `would `seek to grow by ~x'pan'sion of the `pri- vate economy rather than by expansion of government. The NAM Taxation Com- mittee i's convinced that this is still the wish of the American people. The pro- gram recommended above i's designed to get us back on that track a's quickly a's possible. If `the economy continues to maintain its growth trend of the 1960's, the over-all `gain o'f federal revenues `should approach $8-$10 `billion per year. `There are many indication's that thi's `revenue gain may he app'ro'priated `for expansion o'f exist- ing programs and adoption o'f new pro'gramls. Taxpayers, who bear the co'st of government and to whom the `gove'rnment turn's When revenue emergencies arise, should insi'st that in the dispo'sition of the expected revenue gain, absolute pri- ority be `accorded to tax rate reduction `when the pre'sent emergeilcy is over. The CHAIRMAN. We thank you, Mr. Gullander. Are there any ques- tions of Mr. Gui lander? Mr. BYRNES. Mr. Chairman. The CHAIRMAN. Mr. Byrnes. Mr. BYRNES. I want to compliment you on a very fine statement, Mr. Gull.and'er. There is one thing that concerns me. You point out that we must be determined to, curtail Government spending. If we provide a tax increase without the assurance of Government spending being cut, don't we remove the pressure t'hat a deficit exei~ts toward, expendi- ture control? Mr. GULLANDER. Mr. Byrnes, I think we cover that in the sense that we recommend' you have only a 1-year tax increase, which leaves the pressure. Second, we are influenced by the magnitude of the deficit which would' have an inflationary effect. And third, part of the pressure on Congress to spend more money than it has comes from people back home and a tax increase would have the effect of at least of making your constituents realize that if you over- spend it starts hurting their pocketbook and not just the person buying Government bonds. Mr. BYRNES. I think you poin't up the dilemma that some of us face. Unfortunately there are some individuals who are not concerned about the $29 billion deficit. Assume we reduce the deficit to $22 billion by a $7-billion tax increase. Since the $29 billion doesn't seem to bother some people, they may advocate moving right back up to $29 billion again. Mr. GFLLANDER. Hasn't the administration, however, put its name on the line here in saying to the American public, "You give me billion in increased revenue and we will find $71/2 billion to cut out of the expenditure side"? Now, the administration is going to have to be judged on the basis of whether that is achieved. PAGENO="0241" PRESIDENT'S 1967 TAX PROPOSALS 229 Mr. BYRNES. We thought that was what the Secretary was suggest- ing. He did suggest prior to his appearance before the committee that 25 percent of the deficit would be eliminated by a tax increase and another 25 percent by expenditure cuts-for a total of 50 percent. But when he appeared before the committee, the billion-dollar potential pay increase above the administration's recommendation was really the only reduction of expenditures that was pinpointed. He talked about needing authorization to sell $2 billion of participa- tion certificates instead of general bonds, but to me that doesn't really cut your expenditure level. It shifts your bookkeeping. While we have heard talk about a need for retrenchment from those who are the mov- ing force in many of these spending programs, the specifics of any re- ductions haven't been provided. I wonder if the specifics won't fail to materialize if these `individuals see $7 billion more in revenue, coming along. Mr. GULLANDER. This was one of the very serious concerns of our committee before they came up with the statement and this was de- bated at great length and it was the size of the budget and the eco- nomic effect anticipated from the buuget that caused great concern. Another consideration, Mr. Byrnes, it seems to me `is tha.t if you curtail expenditures merely to hold down the deficit this is not going to be very influential on people who don't know what a deficit is, any- way, or aren't concerned about the $29 billion, but if you put it in the frame of reference as we did in our statement that for every $1 billion of `curtailed expenditures you are going to reduce this percentage tax increase by 2 percentage point's this hits home pretty clearly. It seems to me if we can get the American public to recognize every time $600 million is cut out of the expenditure side you caii consider a temporary tax rate of 1 percentage point less, that puts more pressure on Congress as well as the administration than merely a statement that if you spend more money you,'are going to have a bigger deficit. Mr. BYRNES. That presupposes, it seems to me, that you are still going to have a deficit of, in the neighborhood of $20 or $22 billion. When you talk about reducing expenditures a billion dollars you are speaking in relatively small terms in the face of a $29 billion deficit. I would rather think in terms of the economic consequences of a deficit of this size in order to reduce the deficit to within manageable proportions. If we. talk only of balancing a potential tax increase with expenditure cuts, we are not going to go very far down the line. Mr. GULLANDER. The pomt I was trying to make is the President asked for 10 percentage points surcharge. He is also asking for a major expenditure reduction. To the extent you get added expenditure reduction and. Congress can force that expenditure reduction, it cuts the 10 percentage points down to 8, or 6, or whatever the figure ought to be. Mr. Byrnes, as I say, I am uncomfortable sitting here talking about a tax increase. I am much more comfortable talking about a tax de- crease. We said we thought we had to be financially responsible and that the $29 billion deficit is intolerable. You have to increase your revenue at least on a temporary basis along with expenditure redac- tion and one `is just as vital as the other. I would agree that the expenditure reduction is more vital than a tax increase because in effect that has a greater impact on improving S3-349----67---pt. 1-iG PAGENO="0242" 230 PRESIDENT'S 1967 TAX PROPOSALS our economic circumstances, and we learned in 1964 as the economy grows Mr. Fowler's revenue grows as well. Mr. Bnuces. I keep wondering whether or not the deficit that we have today may be the tool that will force some expenditure restraints. I worry about eliminating the restraint of the deficit on spending by providing more revenue which in turn reduces the deficit. That is one of the problems that bothers me. I think we are in a mess any way we look at it. Mr. GIJLLANDER. That is right. Mr. BYRNES. How we got out of this mess is a problem. Until there is a real determination to use all the tools available, we can't solve our problems. I get a feeling that the administration wants to pay lip service to one tool: namely, expenditure reductions, while acting on the other tool: namely, a tax increase. I am not sure that we would end up any better off, if we limit ourselves in that way. We might end up worse off. Mr. GULLANDER. I am sure my statement did not imply that we only talk about a tax increase. Mr. BYRNES. That is right. Mr. GULLANDER. Part of the problem is recognizing what is the $29 billion. The American public doesn't know. I was in your State 8 days ago and spoke to a group of college presidents and I said, "Let me tell you what $29 billion is. It is $110 million every working day and it is a million dollars every 4 minutes." That is what $29 billion is. The solution to today's fiscal crisis would be more acceptable, includ- ing a substantial deficit in 1968, if we knew we were going, to have a surplus in 1969 or if our house was going to be in order in 19 ~0. We had a $12 billion deficit under the Eisenhower administration which in terms of today's dollar would be much more, but the following year we had a small surplus so the long-term impact on our economy was not very great. If we follow this deficit with a deficit in 1969 and 1970 are we going to be able to stand the impact? In other words, we have to get this thing under control. But I don't think we can wait just to get spending under control. On a 12- month basis I think the American public is prepared to say, "We will chip in part of this with a tax increase but we expect our repre- sentatives, the people who make up this Government, to find ways to reduce spending." It is no more or less than the corporation board of directors who tells its president, "You have to cut your costs &r we are going to go out of business," and that is virtually the situation we are faced with. Mr. BYRNES. The fundamental impetus toward expenditures reduc- tion and the shift in attitude toward spending must, in the first in- stance, come from the administration. As of this moment in the pro- ceedings, I haven't `become convinced that they are as sincere about cutting back on the expenditure side as they seem to be with respect to the need for a tax increase. That is the problem that I see. If I was convinced of an equal determination in both these roles then I would have much less difficulty as far as this bill is concerned. Mr. GULLANDER. Mr. Byrnes, I think the responsibility is held in three laps. One is the administration you already mentioned. I think one is every Member of Congress and every constituent of that Member PAGENO="0243" PRESIDENT'S 1967 TAX PROPOSALS 231 of Congress back home. I have made speeches from coast to coast in which I have said, "You have to ask your Congressman for reduced expenditures, but you have to be willing to say so even if it hurts Wisconsin, or Florida, or wherever you may be from." So the responsibility is held by all three segments of our society. Mr. BYRNES. I certainly agree, and it is not an easy role, but I think we know where the basic stimulation for most of these programs comes in the first instance. Of course it all gets back to the people in the final analysis. If people insist on a certain course I think normally you find the Congress responsive. Mr. GULLANDER. It is the leadtime. Mr. BYRNES. And the executive also responds, but I don't know that the people have shown complete willingness to do without some of the governmental benefits. Of course you have `to do without if you are going to cut back Government spending. Mr. GULLANDER. Of course a temporary tax increase that they feel on April 15 may convince them `that they have a bigger stake in this problem th'an they hav'e had in `the past. Mr. BYRNES. That is `a point that certainly may strengthen `the case for a tax increase. Thank you very much. Mr. GULLANDER. Yes, sir. The CHAIRMAN. Mr. Burke. Mr. Buiuci~. On page 6 you make note of the fact that: A ten percent surcharge on corporate tax liabilities would mean that the ef- fective rate on all but the `smallest corporations would be higher than it had been prior to the 1964 tax reduction. How does your association feel about just restoring the former tax, restoring the cut that has been made from 52 down to 48 percent, and putting it back up to 52 percent? Mr. GULLANDER. I think we made our point clear here when we said that the surtax should be the same fixed rate for individuals and corporations as well. If you are going to do that then you would go to an eight and a third percent increase and we are saying if you go that direction then that should apply to individuals as well. I think the President having asked for 6 percent initially has led most Americans to believe that the tax increase would be in the neigh- borhood of 6 percent rather than the 10 percent he is now talking about, but if you moved the route that you are talking about that would be an eight and a third percent increase and if you moved in that direction then the personal income tax rate should also go up eight and a third percent. Mr. BURKE. I `think there will be a reluctance on the part of many Members of Congress to raise anyone's taxes, whether it is corpora- tions or individuals, higher than it was prior to the cut. I would like to get some indication from you on how you would feel about having a 52 percent tax instead of the 10-percent surcharge. Mr. GULLANDER. A 52-percent tax, of course, is `the equivalent of an eight and a third percent surtax. I think it important psycho- logically, if for no other reason, and also from an administrative stand- point, that we do `this as a surtax, not `as a change in rates `because at the end everybody makes his calculation and he knows, "This is the price I am paying because I didn't insist on lower Government spending." PAGENO="0244" 232 PRESIDENT'S 1967 TAX PROPOSALS. It should be the same for corporations as well as individuals. Mr. BURKE. There is a question here about what contributed to the deficit. I think we have to be a little bit honest about it that Congress did enact over $16 billion in tax cuts between the corporations, large and small, the individual income tax, the 7-percent investment tax credit, and the repeal of most of the excise taxes. Despite the fact that some of our friends are talking about the mess we are in, there has been a bonus to the taxpayers during the past 4 years. Mr. GULLANDER. One of the economic facts of life we learned as a result of the 1964 tax decrease was when you put more stimulus to in- vest and to expand and to run risks in business, you expand the econ- omy and actually this Government got greater revenue in the form of taxes under the lower rates than I think it would have gotten under the higher rates, so making a mathematical calculation in saying what the income tax take would have been at a 52-percent rate rather than the 48-percent rate is purely that, just a mathematical calculation. It is not in keeping with the facts because the economy would not have moved and rolled forward as rapidly as it did under a 52-percent tax as it did under the 48-percent tax rate. You ask Mr. Fowler and he will give you the same answer. Mr. BURKE. It might be possible to secure an increase in revenue by reducing the taxes instead of increasing them. Mr. GULLANDER. Looking ahead to 1969, 1970, 1971, if we get some control over Government spending and restore the tax rates to what they are today, you should haye enough growth in the economy to produce added Federal revenue to eliminate the deficit in a. very few years; but if we start boosting higher and higher tax rates in order to balance the budget and just keep on spending more money you are never going to get this thing in balance because you will slow down the growth of the economy. It is really the. same problem tha.t a manufacturer has who can maybe make more money selling, his product at 15 cents a. unit than at 20 cents a unit because. of the added volume he gets and the. reduc- tion in costs he achieves. Mr. BURKE. Thank, you. The. CHAIRMAN.. Mr. Schneebehi. Mr. SCHNEEBELI. Mr. Gullander, the automotive industry is faced with a problem in a. couple of weeks in the labor area and we hear some dire predictions that it is going to be a long and costly strike. Now, in `the event that this strike eventuates, and, lasts more than 3 or 4 weeks and causes a severe economic dislocation, what would be the recommendation of your association relative to the surcharge? Would it change its attitude in the event there was a long strike and dislocation? Would that have any influence? Mr. GULLANDER. Let me say I think you have to anticipate if that doesn't happen something else will very likely happen so it will have a bearing. Hitting your specific question, I think this has a great `bear- ing on what tax rate you apply. As we said, we think you should have a surtax, but it should be at a rate which will not slow down the economy. `What you are talking about would justify a move not in the direction of 10 percent, but in the direction of 6 percent because it would have less effect on the economy in total. PAGENO="0245" PRESIDENT'S 1967 TAX PROPOSALS 233 Mr. SOHNEEBELI. You think the surcharge should be tess in the event we have some economic dislocations of the type I have described. Mr. GrTLI4ANDER. I think the surtax should be low enough so you could absorb that kind of deal. Mr. SCUNEEBELI. Or do you think it should be totally deferred Mr. GULLANDER. This is another question as far as the effective date of the surtax, and I think the thing that is more important than the economic dislocation is you have a very practical problem for those who use electronic computers to pay their people and the performance of the computers. The programing is a long-time proposition and I have serious doubts that any date prior to January 1 would be enough time for these cor- porations to even program into their payroll structure a change in withholding taxes. Mr. SCHNEEBELI. You are recommending a deferment until Jan- uary 1 for corporations. Mr. GULLANDER. I am referring to the practical side and practical time from an administrative standpoint in which it could be accom- plished and which in a sense covers your point as well. Mr. SCHNEEBELI. And a strike of any long duration would have an effect you think on the implementation of this legislation. Mr. GULLANDER. I think it would, particularly the size of it. Mr. SCUNEEBELI. Thank you. The CnAni~rAN. Any further questions? Mr. Gilbert. Mr. GILBERT. Sir, I listened very attentively and you talked about a reduction in the budget. Are you ref erring to domestic spending? Mr. GULLANDER. This problem of getting spending under control in the Government is basically no different than getting spending under control in a corporation and getting your costs under control. It is a question of weighing your ilacome and your expenditure and there isn't any department, and there isn't any area, and there isn't any product that shouldn't be examined in the corporate situation to determine how you cut your costs, how you reduce your expenditures. This applies to Government in all aspects. We don't believe that you should curtail the financial needs of Vietnam and not provide the essentials of what they need. But I am sure in the administration, the Defense Department as well us every other department, there is room for economies, not in less effectiveness, not in less support for our troops on the frontlirie, but in the administration, and bearing in mind that Vietnam is a relatively small percentage of the total defense expenditures. So I think the Defense Department should be examined just as closely as any others, not at the sacrifice of our problem in Vietnam, but to assure greater efficiency. The President has talked about perhaps needing another $4 billion in defense. I think this should be looked at very, very carefully. The easiest money to save is the money you plan to spend and haven't yet spent. The hardest money to save is money you are already spending and you must cut back. I think they should all be examined. Mr. GILBERT. What always seems to excite people is that Govern - ment should be operated on an efficient basis as a corporation. Now, I don't think you can equate the private sector, the corporation, and a PAGENO="0246" 234 PRESIDENT'S 1967 TAX PROPOSALS Government operation. One very obviously is a nonprofit organization for the so-called benefit of the people of the entire country. Mr. GULLANDER. But you asked where the cuts should be made and I said I think you should examine all of them, and the priorities have to be determined by this body, your fellow Congressmen, and by the administration. Mr. GILBERT. Of course you realize you have these tremendous prob- lems within our large cities and even our smaller cities. I don't think you would suggest that we cut back on these domestic programs to help these cities. Mr. GULLANDER. Let me say this: That we have two responsibilities to these cities. One is to solve the immediate problem and the other is to make sure that we don't start an inflationary spiral which will damage the citizens who are living in these center core cities more than anybody else. So in an attempt to cure what the problem is today let's make sure we don't create a worse problem for those very same people in the future. Mr. GILBERT. How do you feel that we are going to create a bigger problem for these people? Are we going to cut back on their spending of the moneys they need to rebuild these cities? Mr. GULLANDER. The inflationary spiral would increase the cost of everything they have to buy and reduce their ability to spread their income adequately. Mr. GILBERT. We still have to spend money to rebuild these cities no matter how you are going to cut it, no matter how you are going to slice it. The mayor's conference just in the meeting the other day said that millions and billions would have to be spent to get rid of our slums and ghettos. Mr. GULLANDER. We have to recognize we have three levels of gov- ernment: local, State, and the Federal Government, and it is the responsibility of everybody. We also have to recognize that this is a responsibility of the citizens of the United States and they can't push the whole burden off onto government and the people themselves have to become involved and not lean more heavily on government, and this includes industry and industry management which is moving in this direction. In other words, what results for the administration and this Con- gress is a question of priorities. If you want to spend it on the urban problem, then you better examine more carefully other legislation and cancel some obligations. Mr. GILBERT. In other words, you disagree with President Johnson that our economy is healthy enough to both spend for the war in Viet- nam and for our domestic spending. Mr. GULLANDER. I think we have to learn that when we look at a new African nation we see a very elementary society and we recog- nize very readily there is a limit to what that society can do for itself and everybody can understand it. The same applies to the United States. We are a tremendously huge society, a great big economic machine, but there is a limitation as to what you can do and it requires priorities. We say in the administra- tion of an African country, "You ought to spend your money on agriculture rather than for your presidential palace," or for some other government activity. We have to make those priority choices here as citizens and recognize that this country can't do everything. PAGENO="0247" PRESIDENT'S 1967 TAX PROPOSALS 235 Ultimately it is because the country grows every year. You have to lay out priorities every year. That is why we are getting behind a million dollars every 4 minutes, because we said we can do more than than we can do. If you increase taxes you slow down the economy and we don't benefit, anyway, if you slow it down with a surtax that is too excessive. Mr. GILBERT. Wouldn't you think then we should eliminate the surcharge for the people in the low brackets rather than your state- ment that everybody be taxed? Mr. GULLANDER. There are two aspects to this. One is at the time of the tax reduction in 1964 the people in lower brackets got about a 35-percent reduction in taxes, and I think this was fine. Corporations got about 8 percent and the people in upper brackets got less. It averaged out to about 20 percent for individuals. If the tax structure as it exists today is an equitable one, then the surtax should apply to everybody so everbody continues to bear his proportionate share of taxes. The other consideration is, as I mentioned before, there are 16 million people who ought to recognize through their pocketbook that if the Government is going to do all these things someone is going to have to pay for it. If you say we can do all these things then you must realize they cannot be done within a balanced budget and you can't go very far with a $28-billion deficit. To eliminate the deficit by a tax increase you would have to have a 50-percent tax increase. If you have a 50- percent surtax you could have people paying more taxes than they have income, and this would destroy the economy, as you all recognize. We are obviously trying to do more than we can afford because it would require an increase in taxes of 50 percent to pay our way. Mr. GILBERT. Thank you, sir. The CHAIRMAN. Any further questions? Mr. Conable. Mr. CONABLE. Mr. Gullander, we hear there is some conflict in economic theory, at least according to Dr. Gardner Ackley who was here last week, about the extent to which it is necessary for corpora- tions in periods of fairly tight profit margins, or at least declining profit margins, to pass on a corporate surtax to the individual con- sumers in the country. With about 75 percent of the goods and services in the country being furnished by corporations, isn't it likely that a corporate sur- tax is going to go to augment the burden on the individual working- man who is also having to pay an individual surtax? Do you have any idea to what extent the corporate surtax is going to be passed on in the present state of our economy? Mr. GULLANDER. The answer to your last question I am afraid has to be no, but I can discuss it a bit. This is going to vary by product, by company, by markets. Mr. CONABLE. But it is a general surtax. Mr. GULLANDER. This is right. Mr. CONABLE. It affects all corporations. Therefore, the competi- tive factor is not going to be the same as it might be with the- Mr. GULLANDER. It isn't a surtax on the Japanese, and the Ger- mans, and French, and in the textile industry, for example, we have substantial imports and in steel we have substantial imports. This PAGENO="0248" 236 PRESIDENT'S 1967 TAX PROPOSALS tax is not going to be levied in those foreign countries and therefore in those areas I doubt very much there is capacity to pass it on. In specialities you maybe don't have competition, but in the basic product we have foreign competition and there they are going to be at a disadvantage, yes. In some other product in which you may be the primary producer and be the world leader you may be able to pass it all off. In some others you will find fractions in between. You also find of course the fact that the marketplace is selective in what it does and as the individual consumer faces higher prices he has to make more selections, to establish priorities of what isn't he going to buy. If he starts picking on your product you are not going to pass on that tax because you are worse off losing the business than you are by paying the tax, so in your taxed box of Wheaties or whatever, you are not going to pass it on. There are products which are basically sundries. I am talking about a package of gum or a soft drink which tends to have a fixed price, and you have to find some way of eliminating that price squeeze until you get a jump in price. So some of those will not move ahead. Mr. CONABLE. Then I take it it would be your conclusion as well as Dr. Ackley's that there would be substantial absorption by the cor- porate profit.s of this additional cost of doing business. Is that correct? Mr. GIJLLANDER. Yes, I do. Mr. CONABLE. Thank you. The CHAIRMAN. Any further questions? Mr. GtTLLANDER. May I add to that, however, if the money market gets tighter and tighter because of this huge inflation to be financed by borrowing, corporate profit is going to be reduced and we are going to be paying a higher price for the money we are borrowing if you didn't have a surtax. Mr. CONABLE. The corporations are going to have to continue to make profits and in the long run, of course, anything that increases the cost of doing business is going to have to be paid for by those people who use the goods and services of the corporations, isn't it? Mr. GIJLLANDER. If the market will absorb it. Mr. CONABLE. We are talking about, then, only the short run and when you it will not be passed on to any substantial degree m all probability- Mr. GIJLLANDER. Short run, but a different period of time for every segment. Mr. CONABLE. Yes. The CHAIRMAN. Mr. Bush. Mr. BUSH. Mr. G-ullander, One quick question. Did your group come out with any specific list of cuts? I looked at your statement, and if you were the President and you were asked to cut domestic spendmg immediately, do you have a list of things that would add up to a sub- stantial cut that you could detail for us and by department and by agency? Mr. GULLANDER. I do not, and you may ask the question as to why I do not. Because I am Dot the President. To again refer to a corporate situation, the board of directors is unhappy with respect to the profit performance of the corporation for which it is responsible. It does PAGENO="0249" PRESIDENT'S 1967 TAX PROPOSALS 237 not tell the president, "You have to do this, this, this, and this." They will tell the president, "You have, to get your costs down. You have to get your expenses down and you go out and find out how to do it." The president of the corporation has all the facts to permit him to know where he can cut, where he can cut R. & D., where he can make changes to cut costs, and so forth. The only one in the country who has this available to him is the President of the United States. You know the budget as well as I do, the voluminous size, and this requires a staff of a substantial number of people and strict orders as to what to do, including some arbitrary things only the President can do, plus the fact that Congress can put substantial pressure on him, but for an outsider to tell specifically where to cut, this is not a realistic approach to the problem. Mr. Busn. I am not sure I would agree with that. I think we need some help around here on cutting spending. I agree with your thesis, but I think we need some specific suggestions in this regard because it is one thing to criticize. I find I make the same speech at home that you made, but I find the increasing pressure of people telling me, "OK, where would you cut?" And I think it would be helpful if your group had some recommenda- tions and I am. sure different members do. They can be put out in a rather general form just to give us some direction because I think we are going to have to come up with some specific suggestions if we really want to force the President to cut spending, which I frankly would like to see done. Mr. GTJLLANDER. Only the department heads who are reporting to the President can really identify where to curtail the spending. If the President gives an assigmuent to each department head as to what he has to cut~ the President can't tell where to cut. He can tell them in total as to what to cut, but as to where they must tell him and Congress must examine. You must examine your agricultural program, all your programs, to determine whether or not this is the place to cut. It is a question of pri- orities and the American public have elected Members of Congress to make those priorities and they have elected the administration to make those priorities. Mr. Busii. No further questions. Mrs. GRIFFITH5. Mr. Chairman. The CHAIRMAN. Mrs. Griffiths. Mrs. GRIFFITHS. I would like to say, Mr. Gullander, that really the Federal Government isn't like a corporation at all. There is no com- parison. The Federal Government doesn't have a balance sheet. It doesn't have to make a profit. The Federal Government doesn't even have a memory. So that there is no real way in which it can handle with judgment the naming of priorities. Now, I have been trying to get people on the other side of the aisle for some time to name priorities and say which things they would cut out, but I know that the mere suggestion of cutting out it.ems and putting them in a list would cost millions of votes to anyone who named them, so that it isn't really that simple. Mr. GULLANDER. That is why I said the responsibility is also on the constituents as well as Congress and the administration. Mrs. GIUFFITHs. That is right; and even constituents like you~ PAGENO="0250" 238 PRESIDENT'S 1967 TAX PROPOSALS Mr. GULLANDER. I agree. At least this constituent came forward and said we have to have a tax increase and we don't like it. Mrs. GRIFFITHS. For instance, I had a man come into my office on Friday. He wanted to sell computer parts to the Government. He wanted the Government to purchase not from one blueprint the whole computer, but to buy them in parts, the main part and the peripheral parts and he showed me it would be cheaper, and I agree with him. I used to purchase. But in place of that the Defense Department or GSA is buying computers by sending out to one or two contractors the request. Those contractors draw the blueprints, so what do you do? You buy their computers. If you suggested, and I am going to make the suggestion, that we buy these computers part by part at least one company in this country is going to be madder than a hornet. Mr. GULLANDER. I have been in purchasing in my lifetime as well and some of my suppliers got mad at me, too. You have to get used to that. Mrs. GRIFFITHS. This is a simple example of something that would save millions and yet is not being suggested. But supposing you started suggesting, well, we will cut out these dams, roads, this and that, and so forth and so on. It would become mighty unpopular, so that you have to have a general understanding throughout the country and it doesn't contribute to that understanding, in my opinion, for anybody to say that the Federal Government is just like a corporation. Mr. GULLANDER. I didn't say it was like a corporation. I said the management problem is similar. When you have to curtail expendi- tures the responsibility must rest with management and in a corpora- tion if you have to curtail expenditures the responsibility must rest with management. That is the only comparison I made. Mrs. GRIFFITHS. But even that is not exactly right because manage- ment in a corporation in many cases owns enough stock in that corpo- ration to vote itself into management no matter what, but I tell you we don't own that kind of stock in this corporation. There is somebody else to vote. Mr. GULLANDER. As I said to Mr. Byrnes, I have gone from coast to coast I forget how many times preaching the gospel that the people at home in Michigan, among other places, must write to you and say cut this even though it hurts Ann Arbor, even though it hurts Big Rapids where I was born. Mrs. GRIFFITHS. They haven't been telling me where to cut out any- thing that helps Michigan because I haven't had a single letter like that. Mr. GULLANDER. What is rougher than a $29-billion deficit, a million dollars every 4 minutes? Mrs. GRIFFITHS. But nobody ever writes me and says cut this even if it hurts Detroit. Mr. GULLANDER. That may give them a greater responsibility. Mrs. GRIFFITHS. They all write now and say send the money just to Detroit. Mr. GULLANDER. That is one of the advantages of a surtax, it lets the people in Detroit find out that they must pay at least some part of it. Mrs. GRIFFITHS. They are all mad about the surtax. Mr. GULLANDER. I am too, but I think to be responsible you have to support it. PAGENO="0251" PRESIDENT'S 1967 TAX PROPOSALS 239 Mrs. GRIFFITHS. Thank you. The CHAIRMAN. Any further questions of Mr. Gullander? If not, Mr. Gullander, we again thank you for bringing to the com- mittee your views and those of your organization. We appreciate your responses to our questions. Mr. GULLANDER. Thank you, Mr. Chairman. The CHAIRMAN. `Captain Bullen of the National Federation of Independent Business. Mr. Bullen, we will ask you to identify your- self for our record by giving us your name and capacity in which you appear. STATEMENT OF GEORGE S. BULLEN, LEGISLATIVE DIRECTOR, NATIONAL FEDERATION OP INDEPENDENT BUSINESS; ACCOM- PANIED BY JEROME `GULAN, CONGRESSIONAL LIAISON Mr. BULLEN. Mr. Chairman, I am George S. Bullen, legislative director of the National Federation of Independent Business. I have with me my assistant, Mr. Jerome Gulan. The CHAIRMAN. Glad to have you with us, sir. Do you have copies of your statement available for us? Mr. BULLEN. Yes, I gave them to the office when I came in, 120 copies. The CHAIRMAN. It is here. Go right ahead, sir. Mr. BULLEN. Mr. Chairman, I want to thank you for inviting the National Federation of Independent Business to testify before this committee on a matter which we feel is of the greatest importance to the small business community `of this Nation. The National Federation of Independent Business, founded 24 years ago, now represent's more than 239,000 independents. This means that approximately one out of every 20 small business- men in the country is a Federation member. Our membership is representative of all facets of the business spectrum including retail- ing, wholesaling, manufacturing, and the service trades. A check of membership percentages in each category shows that the composition of the Federation is within a few percentage points of the composi- `tion `of the Nation's entire small business community. Therefore, we feel that we can reasonably say that the views ex- pressed by our members can be taken as a valid cross section of the views of the 4.7 million enterprises comprising the small business community. A few months ago we polled our nationwide membership on the question of a tax increase, asking their opinion on what was at that time the administration's current proposal; namely, a 6-percent sur- charge on corporate and individual taxes. Our members voted over- whelmingly against the idea, with a majority of 90 percent expressing their opposition. For your information we have included the question, showing argu- ments for and against, just as it was put to our members. You can see that only 9 percent were in favor, 90 percent opposed, while 1 percent expressed no opinion. To save the committee's time, Mr. Chairman, I will omit reading the arguments, but I ask that they be included in the statement. The CHAIRMAN. All right. (The information referred to follows:) PAGENO="0252" Copyright, 1967, National Federation of Independent Busnens, Inc. Bullefin No. 317 0 ARE YOU FOR OR AGAINST Congress increas- ing the Federal income tax on corporations and individuals by adding a 6 per cent surtax, effec- tive July 1? For ex,mpfe, a taxpayer owing $1,000 would add $60 (6%) to his' regular tao bill. This increaso would last 2 years or more. Mareced couples with two children and income less than $5,000 and single people with income of $1,900 or less would be exempt feom the BEFORE VOTING ISSUES . . . READ THESE EXPLANATIONS: 1. Argument for the proposal: Proponents say the added 1. Argument against the proposal: Opponents say it is im- revenue is needed to hold our budget deficit within pru- possible to have a "guns and butter" budget, when the cost dent limits and to give our country and our fighting men of both commodities is so expensive. We must support our the help they need in this hour of trial. Problems of the troops. However, there is a limit on how much the tax- cities, air and water pollution, education, crime, social payer can stand. It is clear that a better way to pay for the security, the aged, the poor, cannot be postponed or neg. war would be to eliminate some of the wasteful, domestic 1ected because of a war that drains our country of its man- non-defense spending programs and not ask for an addi- power and resources. This nation is prosperous enough to tional $270 million for the poverty prOgram,. as the Presi- tighten its belt and release a relatively few dollars per dent did. Besides, leading economists agree that now is not person to insure that all Americans receive the support the time for a tax increase certain to have a further de- they need, pressing effect on our already slower growing economy. NO AGAINST VOTE 90% 1% G. U. 5. PAT. orr. rublietted by NATIONAL FEDERATION OF INDEPENDENT BUSINESS Ttts Lorgest tndinidunl M.mburehip of Any Business Oegsnisution in the United Stotes A Non-Prof t Curpaeoricc Washington, D. C. 20005 Area Codo 202, 737-3523 San Mats., Catlfornta 94402- ChIcago, IllInoIs 60626 $"~` f Covlngton, Kentucky 41011 - New York, N. Y. 10019 `noes, That Ocr Narton R.s,sln the Land of Opportunity 1y Oining Smelt Business Fair Ceesidsestlos FOR 1. Fcd'l income tax increase of 6 per cent surtax on corps. and individuals 9% PAGENO="0253" PRESIDENT'S 1967 TAX PROPOSALS 241 Mr. BULLEN. We do not feel that this strong opposition to a tax increase on the part of the small business community should in any way be misconstrued or labeled a "lack of patriotism." We do feel that it is an honest expression of economic reality as seen by this country's small businessmen. They have not been convinced that we can enjoy a guns-and-butter economy. Nor does their vote against a tax increase constitute an outlook of fiscal irresponsibility. Believe me, gentlemen, when I say that the local businessman is among the first to realize the pitfalls and economic chaos resulting from inflationary trends. When the prime interest rate rises to 6 percent, it is the small busi- nessman who must pay 7, or 8 percent, or more. The President, in his August 3 message, predicts dire consequences if this tax increase is not approved. Among his predictions are spiral- ing inflation, higher interests rates, and tight money. Mr. Chairman, the federation submits that the business community is already experiencing these problems. We hear daily of increasing payroll costs, higher wages, greater fringe benefits, high interest rates, and general tight money situations. Minimum wages continue to be driven upward, not by market conditions, but by social pressures and the dictates of organized labor. As the trend continues, we see a slowing economy, rising inventories, a slowup in collections, increasing automation resulting in lesser em- ployment. As a matter of fact, unemployment among the lesser skilled, the youths, the handicapped and the aged seems to rise proportionately with rising business costs. That corporate profits are already declining is not news to the administration. Although we have barely gotten into fiscal 1968, the administration has admitted that these lower corporate profits will be yielding $1.3 billion less in tax revenues than had been anticipated 6 months before. Surely adding a 10-percent surtax to taxes already paid by corpo- rations, both large and small, is hardly the way to stimulate a vigorous business outlook and could well prove disastrous should business de- cide to reduce productivity and employment-thus resulting in still lower corporate profits and an even smaller tax yield. We believe that the adminiStration must first win the confidence of the small business community and the Nation by severely reducing nonessential expenditures before it can expect to ask for and receive wholehearted support in a venture such as is proposed in the Presi- dent's tax message. Unless some drastic measures are taken to curtail nondefense spend- ing, the small business community will not be convinced. So long as Federal tax dollars are being spent on the war on poverty to establish tax free cooperatives which compete with existing busi- ness, they will not be convinced. So long as priorities have not been assigned to the war in Vietnam, antipoverty, space, air, and water pollution, slum clearance, and for- eign aid, they will not be convinced. Mr. Chairman, the members of the National Federation of Inde- pendent Business have made it abundantly clear that they are opposed to this proposed surtax. We feel that the crux of their opposition lies in the fact that they are firmly convinced that our economy will not support both a guns and butter doctrine on an equal basis. PAGENO="0254" 242 PRESIDENT'S 1967 TAX PROPOSALS Therefore, we recommend: (1) The Congress insist that the administration first follow through with its promises to reduce nondefense spending. Actual cuts rather than the promises or assurances are necessary. (2) That some reasonable prognosis be given as to the duration and cost of our Vietnam commitment. Current estimates seems to be running as high as 10 or 20 years, with annual defense expendi- tures already in excess of $75 billion. (3) The Congress not approve any tax increase until after a reasonable period (6 to 12 months) in order to allow the adminis- tration to show its ability to drastically reduce nondefense spend- ing and to prove the effectiveness of such cuts on the budget deficit. That concludes my statement, Mr. Chairman. The CHAIRMAN. We thank you, Mr. Bullen. Are there any questions of Mr. Bullen? If not, we thank you, sir, for bringing to us the views of your organization. Mr. BULLEN. Thank you, sir. The CHAIRMAN. Mr. Seghers, you have been before the committee in the past on several occasions, but for this record will you again identify yourself. STATEMENT OP PAUL D. SEGHERS, PR~ESIDENT, INSTITUTE ON U.S. TAXATION OP POREIGN INCOME Mr. SEGHERS. My name is Paul D. Seghers. I am president of the Institute on U.S. Taxation of Foreign Income. We are here to oppose the Treasury's proposal to impose the 10-percent surtax in such a way as, in effect, to deny a portion of the foreign tax credit allowable under existing law. The Treasury states that the 10-percent surtax is to be imposed on the amount of tax computed without allowance of any investment credit or foreign tax credit to which a taxpayer is entitled under existing law. The effect of this Treasury plan would be to reduce by 10 percent the presently allowable investment credit and foreign tax credit. We cannot believe that your committee would approve this device for imposing a discriminatory tax increase of more than 10 percent on the tax bills of U.S. manufacturers and others exporting U.S. products and bringing into the United States income from abroad. The discriminatory result of the Treasury's plan may be illustrated as follows: Manufacturer A makes no plant investments and brings in no f or- eign income during 1968. Manufacturer B makes plant investments and brings into the United States income from sales of its U.S. products abroad in 1968, re- sulting in allowable investment and foreign tax credits totaling $40,000. If, under existing law, each would pay an income tax of $100,000, the Treasury's plan would require manufacturer A to pay, in addi- tion to its income tax, a surtax of $10,000; and manufacturer B to pay a surtax of $14,000, or 40 percent more than manufacturer A. PAGENO="0255" PRESIDENT'S 1967 TAX PROPOSALS 243 The Treasury cannot deny that this would be the dollar result of its plan. Let me interject here and say this. That if a manufacturer is paying $14,000 more and his tax has been increased $14,000 over the $100,000 he would pay under existing law and you tell him you are only taxing him 10 percent he will tell you you are a darn liar. That isn't 10 percent. That is a 14-percent tax increase or 40 percent more than his com- petitor who is selling domestically only would pay. If the surtax is to be imposed for only a year or two, it would be an incentive to taxpayers to postpone plant improvements and the receipt of income from abroad. These results surely are not desired' by your committee or the Congress. OUR RECOMMENDATION If there is to be a 10-percent surtax it should be exactly that: 10 per- cent added to the amount of tax otherwise payable under existing law- neither more nor less. There are many other discriminatory tax burdens which the Treas- ury has been successful in imposing on U.S. manufacturers selling their products abroad, and thereby further aggravating the annual deficit in our balance of payments. However, we recognize that this is not the occasion to discuss the need for tax reform in this area. At this time we only ask the committee not to impose further income tax penalties on U.S. exports and on the bringing home of income from abroad. I hope that this has made the matter clear and no amount of words can change the fact that the Treasury proposal would increase the tax bill of many taxpayers over the existing law by more than 10 percent, sometimes as high as 20, 25 percent higher than their present tax bill in typical eases. I have made my statement. I hope that if anyone has any questions that you will ask. The CHAIRMAN. Are there any questions of Mr. Seghers? Mr. Seghers, we thank you, sir, for coming to the committee. Mr. SEGHERS. Thank you. The CHAIRMAN. Mr. Kust. Mr. Kust, you too have been before the committee before but for this record we will ask you to again identify yourself. STATEMENT OP LEONARD KUST, VICE PRESIDENT AND GENERAL TAX COUNSEL, WESTINGHOUSE ELECTIUC CORP. Mr. KTTST. Mr. Chairman and members of the committee, my name is Leonard Kust. I am vice president and general tax counsel of West- inghouse Electric Corp. The CHAIRMAN. We are glad to have you with us, sir, and you are recognized. Mr. KUST. Thank you. 1 appear to present the views of my company on the tax surcharge proposed in President Johnson's message on the state of the budget and the economy delivered to Congress on August 3, 1967. PAGENO="0256" 244 PRESIDENT'S 1967 TAX PROPOSALS The surcharge is proposed as a means of combating inflationary pressures on the economy, checking the rise in interest rates, relieving the tightness of money and averting an unequal and unjust distribution of the cost of the war in Vietnam. We are not in a position at Westinghouse to judge the state of the budget as presented by the President, but if the President and the Congress are unable to reduce expenditures we agree that the projected deficit without a tax increase is potentially dangerous for the economy. If taxes have to be increased, we want to be sure that the Congress has before it and takes into account considerations which we feel are germane and important to the decision as to how and when taxes should be increased. PRESENT ACTION SHOULD NOT NEGATE RESTORATION OF INVESTMENT CREDIT We approve of the action taken by the administration and the Congress earlier this year in restoring the investment credit. This timely action, by stimulating modernization and expansion of capacity, will help to avert inflation. We commend the administration and the Congress for this action and urge that no action be taken now which would negate the beneficial effects of the restoration of the investment credit. PRESENT ACTION SHOULD NOT BE TAKEN IN THE PERSPECTIVE OF OTHER ACTIONS ALREADY TAKEN Consideration of appropriate action at this time must also be placed in the perspective of other actions already taken affecting the tax payments of corporations in 1966 and 1967. CORPORATIONS PAID ADDITIONAL TAXES OF $4 BILLION IN 1966 AND $7 BILLION IN 1967 As a result of the acceleration of estimated payments under the 1964 Revenue Act, the Tax Adjustment Act of 1966, and the admin- istrative acceleration in 1966 of the payment date for withheld taxes, corporations have paid to the Federal Government in the fiscal year 1966 $4 billion in additional taxes, about 15 percent of their taxes otherwise payable. In the fiscal year 1967 these actions increased corporate tax pay- ments by $7 billion. Had this increase for 1967 taken the form of a temporary increase in the corporate income tax rate the effect on the cash flow of corporations should have been precisely the same, but to produce the same increase in tax payments the corporate rate would have had to be increased to about 60 percent from the prevailing rate of 48 percent. If such an increase in the corporate tax rate had been enacted I think most people would agree that corporations were making a dis- proportionate contribution to increased fiscal needs. Corporations have made this contribution, unfortunately, for purposes of general recog- nition, in an obscured and less visible way than through a rate increase. But it has produced an identical reduction of the cash of corporations. Considered in another way, the $7 billion increase in the fiscal year PAGENO="0257" PRESIDENT'S 1967 TAX PROPOSALS 245 1967 represented increases of about 23 percent in the tax payments of corporations for that year, measured against total income tax payments of corporations of about $30 billion. Again, one must be impressed by the magnitude of the contribution which corporations have already made to increased fiscal needs. BY CONTRAST INDIVIDUAL TAX PAYMENTS WERE INCREASED BY $1 BILLION IN 1966 AND $1 * 3 BILLION IN 1967 By contrast, the restoration of excise taxes on automobiles and telephones and the increase in individual withholding and estimated tax payments increased individual tax payments by about $1 billion. in the fiscal year 1966 and about $1.3 billion in the fiscal year 1967, an increase of only 2 percent, measured against total individual tax payments of about $60 billion. DISPROPORTION IN THE TAX BURDENS OF CORPORATIONS AND OF INDIVIDUALS HAS DEVELOPED At the time of the 1964 tax reductions the administration made a great point of demonstrating that the action taken was a balanced package in that it reduced individual income taxes by approximately 20 percent and, while the corporate rate reduction by itself was con- siderably less, adding the effects of the 1962 investment credit and depreciation liberalization, corporate taxes were also reduced by ap- proximately 19 percent. This, however, failed to take into account that corporations were required to speed up tax payments which increased their payments by approximately 10 percent a year through 1970. The further speed- up under the 1966 law compressed that annual increase into the fiscal year 1966 and 1967, which, with the speedup of withheld tax pay- ments, resulted in a tax increase; that is, in tax payments, in 1966 of 15 percent and in 1967, as already indicated, of 23 percent. Temporary suspension of the investment credit and accelerated depreciation fnrther increased corporate taxes in 1967. In view of what has transpired, it seems clear that the adminis- tration's apparent recognition of the desirability of balance in its actions affecting the tax burdens of corporatiOns and individuals has nevertheless not prevented a very substantial imbalance from in fact developing. The heavy hand of additional tax burdens which has al- ready been laid on corporations must be kept in mind in deciding on the nature of new tax increases. ECONOMIC CONSEQUENCES OF. THE INCREASED CORPORATE TAX BURDENS The disproportion in the distribution of the burden of the addi- tional taxes required by the Government in the las.t 2 fiscal years to finance the increasing costs of the Vietnam war and domestic pro- grains must be judged not only by the lack of proportion and equity Involved but by its economic consequences. The President's call for increased taxes has as a major objective the avoidance of higher interest rates and tighter money. I think it Is reasonably clear that the acceleration of tax payments of corpora- tioiis in 1966 and 1967 has been very substantially translated into S3-34~)-67-pt. 1---17 PAGENO="0258" 246 PRESIDENT'S 1967 TAX PROPOSALS additional borrowing, which has put pressure on interest rates and on the money market. There is an excellent article in the July-August 1967 issue of the Harvard Business Review which analyzes in depth the effect of ac- celeration of tax payments on corporate liquidity and corporate bor- rowing. With your permission, Mr. Chairman, I would like to submit a copy of this article for the record. The CHAIRMAN. Without objection it will be included at the con- elusion of your remarks. Mr. KIJST. In our own case at Westinghouse the speedup of tax payments depleted our cash in 1966 and in 1967 by $70 million at a time when it was already necessary for us to borrow money to finance modernization and expansion of facilities. It seems perfectly clear that had these additional tax payments not been extracted from us we could have reduced our borrowing by the same $70 million. Given the present state of cash shortages in corporations, any tax increases or further payment speedups will almost certainly be very substantially reflected in additional borrowing, thus, further increas- ing pressure on interest rates and the availability of money. If, on the other hand, increased tax burdens on corporations should be reflected in decreased investment rather than increased borrowing, the purpose of averting inflation by tax increases would not in the end `be achieved. Expansion and modernization of productive capacity as the basic foundation for increasing productivity to support the prosperity of the Nation and the growing commitments of Government is, in final analysis, the best protection against inflation. It seems clear that the speedup of corporate tax payments in 1966 and 1967 now presents a problem. It created a temporary bulge in revenues which we find must now be made up from other sources. It depleted corporations of cash so that they are now less able to absorb a new tax increase without borrowing or curtailing investment, both of which ran counter to the desired objective of reducing the pressure on interest rates and on price levels in general. ANY SURCHARGE ON CORPORATIONS AND ON INDIVIDUALS SHOULD BE EFFECTIVE JANUARY i~ 1968 I do not have the courage to say that given this history, taxes on corporations should not now be increased. Whatever econo~nic wisdom may suggest, political realism would seem to dictate that if individual taxes are to be increased, corporate taxes must also be increased. But certainly they should be increased no more and no earlier. In any event, it seems to us wholly unjust and economically unwise to compound the imbalance that has already been created by imposing the surcharge retroactively on corporations and prospectively on in-~ dividuals. If Congress deems a surcharge necessary, the effective date' for individuals and corporations should be the same. Given the present continuing uncertainty in the economy, that date, in our judgment,. should not be earlier than January 1, 1968. Thank you. PAGENO="0259" PRESIDENT'S 1967 TAX PROPOSALS 247 (The information referred to follows [From Harvard Business Review, July-August 1967] ~PHINKING AHEAD-TAX SPEEDUPS AND CORPORATE LIQuIDITY, BY JOSEPH El. MILEs Acceleration of corporate income ta~r, Social Security, and employee with/voiding payments is squeezing business FOREWORD U.S. corporations have exhaustively examined the implications of the changes that have been made in their tax rates and base and in provisions for writing off capital investments. But they. have paid too little attention, the author says, to the present and potential effects of the acceleration of tax payments which President Kennedy began and President Johnson is continuing. Dr. Miles is Vice President and Investment Counselor of Lionel D. Edie & Company, a New York investment and economic consulting firm, and is a member of the New York ba'r. Acceleration of various direct federal taxes will provide an estimated increase in revenue of $22 billion to $23 billion when it is completed. Additionally, Social Security taxes have been increased about $6.5 billion in the last two years, and even larger increases are in the offing. The Impact of some of these tax changes is fairly certain; others are uncertain and conjectural at this point. Some will dampen the economy; others will stimulate it. One thing is apparent: it isn't the same world as before, and thinking will have to change. This tax speedup has had and will continue to have an important effect on the structure of the business environment, including corporate cash flow, competition, customers' purchasing habits, the level and life of receivables, and the level of demand. Yet, because structural changes do nOt lend themselves to normal business forecasting or corporate routines, many of these tax-induced changes have not been anticipated by corporate executives. This analysis concerns itself primarily with the changes in payment dates on certain taxes and the several increases in Social Security tax rates. (The busi- nessman presumably is fa~miliar with the highly advertised reductions in tax rates for individuals and corporations in 1964 and 1965, the indirect corporate tax reductions represented by shortened depreciable lines in 1962, and the 7% investment credit instituted first in 1962.) I shall stress the substance of these changes and not the form in which they were passed by Congress or have been nroposed by the Administration. The conclusions stated herein are made with the proviso "all other things being equal." This is done not to protect me from bearing the weight of my errors but to underscore the probability that these results Will give rise to offsetting or softening federal legislation. Changes in the tax rates and tax base are understood rather easily. More diffi- cult to grasp is the speedup of payments. President Johnson accelerated the payment dates on a number of taxes w ithout changing rates The attitude of many persons, including many Corporate Officers, to acceleration has bèeñ: We owe it anyway, we pay it a little earlier, so what? For a better understanding of acceleration, let us examine an extreme case. Assume that all taxes are due on December 31 of each year. Then they are ac- celerated and become payable January 1. There is no increase in the rates; the same amount of taxes are due and paid in each year. But only the naive would say that to pay 100% of all taxes for two years in two days is not an increase. Acceleration is in effect a temporary tax increase during the period of speedup. One failing of those who do not view acceleration as a temporary tax increase is that they misunderstand two accounting terms, namely, reserved and funded. Consider federal corporate income taxes. A tax liability arises whenever a corporation shows a profit. Before acceleration, payment of this liability lagged an average of seven to eight months behind the period in which it arose. A cor- poration generally did not put money aside to pay taxes as the tax liability was incurred. True, the amount of the liability was reserved on its books, but it was not fnn4ed. Taxes were paid-and still are paid-from current cash flow and current profits, and not from yesterday's cash and profits~ PAGENO="0260" 248 PRESIDENT'S 1967 TAX PROPOSALS The U.S. corporation operates on cash flow. Accounting conventions tell us that taxes should be charged to the period giving rise to their liability-usually, in practice, the fiscal quarter-but they do not tell us when they are or should be paid. U.S. corporate treasurers are not fools, with taxes due, on average, seven or eight months after their liability arises, they tell the~inselves, "Why fund the money? Analyze cash flow and make sure cash will be available to pay taxes when they fall due, but don't put ~rnoney aside for this in Treasury bills or com- mercial paper at 4% to 6%. Put that money in the business at 10%, 15%, or 25%." CORPORATE TAX ACCELERATION There have been two recent rounds of acceleration of corporate income taxes. I shall examine them in chronological order. JFK roand President Kennedy reduced corporate tax rates, but he stepped up the payment dates. Prior to this, larger corporations paid somewhat under half their income tax in the latter half of the tax year during which the liability arose and paid the greater part in the first half of the following year. The unilaterally imposed quid pro quo for the cut in rates was a gradual move to a modified pay-as-you-go basis by 1971. This was accomplished by having corporations begin paying their federal inc~ne taxes in the quarter in which the liability arose. This acceleration had varying effects on the corporate taxpayer depending on i~is sjze and, more particularly, on his growth rate. EXHIBIT I-EFFECTIVE FEDERAL CORPORATE INCOME TAX RATES (CASH TAX RATES) un percent] Year Zero growth 5 percent growth 10 percent growth 15 percent growth 1963 1964 1965 1966 1967 1968 1969 1,970 1971 52. 00 52.00 51. 38 51.60 51.60 51.60 50.16 50.16 48.00 50. 45 50. 45 49. 93 50. 30 50.48 50.65 49.38 49.49 47.43 49. 05 49.05 48. 61 49. 13 49.46 49.46 48.68 48.85 46.91 47. 76 47.76 47. 44 48. 06 48.53 49.00 48.05 48.31 46.43 Effective federal corporate income tax rates under acceleration are show-n in E~chibit I for various' corporate earnings growth rates. (Hereafter. these will be termed "cash tax rates," meaning income taxes paid during the year divided by taxable earnings during that year. This measure of the actual tax burden on cash flow is better than pairing tax accruals with current earnings.) The exhibit shows the combined effect on taxable income of the "reduction" in rates and of the speedup. It should be noted that taxable income as used here is not what a corporation shows in its annual report to shareholders, but w-hat it includes in its tax return. In making payments on their estimated federal income tax liability, corpora- tioris currently do. not incur any penalty for underpayment if they pay a minimum of 70% of the actual liability. The exhibit assumes that corporations make pay- nients at a 75% level of actual liability, building in a 5% margin for error (75% is also the figure used by the Council of Economic Advisers for this purpose). ExliibU I indicates that there has been no reduction in the actual burden of corporate income tax payments as measured against taxable corporate income. The direct tax reduction (the cut in rates) was indirectly repealed for a period of seven years by means of acceleration of payments. At the same time that acceleration went into effect, however, corporate income taxes were reduced by means of the second phase of the 7% investment credit. The exhibit does not take into consideration the effect of the 7% credit. This is deliberate so as to isolate acceleration and show its unfavorable effects. PAGENO="0261" PRESIDENT'S 1967 TAX PROPOSALS 249 LBJ rounds President Johnson has refined JFK'S tactic of increasing the tax take without increasing the tax rate. Instead of getting to a pay-as-you-go basis by 1971, corporations now must be paid up by July 1, 1967. The impact was greater in fiscal 1967 (federal) than in 1966. The government estimated the new speedup would increase corporate tax pay- ments in fiscal 1966 by an additional $1 billion and in fiscal 1967 by $3.2 billion (since changed to $4 billion). This is on top of the JFK round of acceleration, which added about $2 billion in fiscal 1966 and $2 billion-plus in fiscal 1967. These increases also were concentrated in the latter half of the fiscal year, i.e., the first half of the calendar year. Ewhibit I indicates that the cash tax rate increased in 1966 and again in 1967 under the JFK round of acceleration. So the LBJ round came at a time when the cash tax rate was already scheduled to rise an average three fourths of one percentage point. The Johnson Administration has requested two further rounds of speedups. Heretofore the first $100,000 of corporate tax liability was due the following year and was not included in the estimates subject to quarterly payment. `The President proposes to place these payments on a pay-as-you-go basis by 1972. The cost, primarily to smaller corporations, will be $800 million a year for five years, starting in 1968. Corporations currently filing estimated tax returns are required to pay 70% of their actual tax liability. LBJ proposes to increase the 70% minimum to 80%. Assuming that corporations include the same 5% safety margin, they will pay 85% of their estimated taxes starting June 15, 1968. The Administration esti- mates this as worth $1.6 billion, but a more accurate figure would be $2.4 billion, with $1.8 billion falling due in 1968 and the remainder in 1969. OTHER PAYMENTS SPED UP President Johnson accelerated the remittance of Social Security and individual income taxes withheld by employers by having them remit such taxes faster and more frequently. Prior to June 20, 1966 employers remitted in the middle of each month the accrued liability for the previous month. Since that date employers who~e with- holding of employees' income and Social Security payments plus the employer's share of the Social Security tax, totaled $4,000 per month or more have been required to remit these taxes twice a month. Furthermore, the grace period was reduced from 15 days after the close of the accounting period to only 3. Instead of having use of these funds for an average of 31/2 weeks, employers now have them only half a week. The acceleration brought the federal govern- ment an additional $1.5 billion to $2 billion, as affected employers remitted 12~ months of withholding and Social Security taxes in a 12-month period. On February 1, 1967 the $4,000 minimum was dropped to $2,500. forcing even smaller employers to accelerate these payments. As a rough rule of thumb, com- panies with 30 to 50 employees have been affected by the 1967 acceleration. Fed- eral receipts probably increased by $200 million to $250 million. The Treasury has announced plans to extend the semimonthly remittance sys- tem to much smaller employers. This is expected to be effective by the end of 1967 and will cover companies whose withholding and Social Security tax liabili- ties total as little as $100 per month. FUNDING THE LIABILITY Some corporations, it appears, continued to view each of the various tax ac- celerations as merely payment of a debt-rather than as a one-time increase- until the Johnson rounds made their impact felt. At any rate, many companies have now begun to fund tax accelerations with capital (debt, convertible issues, and common stock), and will continue to do so. Some, `of course, have had plenty of cash and cash items on hand and merely dipped into these. But cash has been in shorter supply. The buildup in inventories during 1966, the money squeeze on the banks, a slow-down in corporate profits, and the con- siderably higher Social Security tax rates since January 1, 1966 have accelerated the shrinkage of corporate liquidity. Capital expenditure programs have eaten into cash reserves as well, and many corporations now raising money did not think they would have to do so until 1968, 1969, or 1970. PAGENO="0262" 250 PRESIDENT'S 1967 TAX PROPOSALS Those corporations that attempt to pay the accelerated taxes from cash flow will lose competitive position, especially if they tighten inventories and receiva- bles. The tax speedup has squeezed, and will continue to squeeze, profit margins and per-share earnings. Corporations funding these liabilities find that overhead costs are higher, reflecting the carrying charges of the debt-which is not backed by an earning asset. To some extent corporations have been forced to pay higher interest rates because funding of taxes has caused their credit rating to deteri- orate. Funding of accelerated taxes with common stock directly reduces per- share earnings. LIKELY IMPLICATIONS Acceleration of the various corporate taxes will add up to $20 billion by the time the proposed round is over. This total consists of: the JFK round through 1967, $7 billion; the LBJ acceleration of corporate income taxes in 1966-1967, $5 billion; acceleration of withholding and Social Security taxes, $2 billion; and the proposed acceleration of corporate income taxes, $6.5 billion. The consequences of funding obligations are not the only effects on businesses. There are others, some of a short-run nature and some more far-reaching. Who wifl pay The burden has fallen and will continue to rest almost entirely on larger cor- porations. Naturally, they must pay their own accelerations. Also they will have to carry part of the acceleration burden of smaller-especially privately owned- corporations, which nsually have a difficult time raising money. The tax speedups eventually will take upwards of an additional $4 billion from the smaller companies. They do not have it and will "borrow" it from larger corporations by paying their bills more slowly, demanding more credit and longer terms, and requiring the larger corporations to carry their inventories. The larger companies' accounts receivables will rise. Those companies that will not or cannot grant more liberal credit terms will be at a competitive disad- vantage. Medium-sized companies The per-share earnings growth of medium-sized companies will probably slow down. The burden of their own accelerated tax payments, as well as the indirect assumption of the burden of smaller companies, will force them to raise capital. Considering their size and the nature of the securities markets, financings on their part are likely to be either convertible debentures or common stock. In either event, future earnings growth will be diluted on a per-share basis, leading to slower market appreciation of the stock and erosion in price/earnings multiples. The s7owdown in 1967 profits Although a slowdown in corporate profits in 1967 is reducing the total tax bill, it is squeezing cash positions even more. The greater the drop in profits, the higher the corporate cash tax rate and the more the squeeze. An approxi- mation of the impact can be obtained by reading Ezhibit I from right to left. For a company whose earnings growth is declining from 10% in 1966 to zero in 1967, the cash tax rate increases from 49.13% to 51.60%. Further funding Although corporate tax acceleration will drop from an estimated $6.5 billion in 1967 to $2.6 billion in 1968 and $1.4 billion in 1969, the tax-induced incre- mental demand for funds will still remain at a high level. Funding of this addi- tional amount, plus $800 million per annum in 1970-1972, will continue to exert some pressure on the money and bond markets. Corporate cash flow I have pointed out that acceleration is equivalent to a temporary tax increase. One of the proposed speedups, the increase in payments of estimated taxes from 70% to 80%, is a permanent one. The resulting tax increase, however, will offset only a small part of the eventual decline in the cash tax rate, as can be seen in i*vhi bit II. The exhibit draws comparisons with 1963, the last year before reductions in the tax rate and acceleration. A 5% margin for error is included in each estimate. After acceleration is completed, the reduction in the corporate tax rate reduces actual corporate income tax payments by an estimated $2.4 billion a year (assum- ing a 5% growth rate in pretax profits). Raising the estimated payments from 70% to 80% reinstates $200 million of the cut. PAGENO="0263" PRESIDENT'S 1967 TAX PROPOSALS 251 EXHIBIT 11.-EFFECT OF INCREASING ESTIMATED TAX PAYMENTS [In percenti . Zone growth 5 percent growth 10 percent growth 15 percent growth 1963 52. 00 50. 45 49. 05 47. 76 75 percent estimate 85 percent estimate - 48.00 48.00 47. 74 47.66 46. 91 47. 35 46.43 47. 06 The increase in estimated payments from 70% to 80% primarily affects large corporations. One might suppose that with lower cash tax payments eventually, the burden on the large companies of indirectly carrying the tax acceleration for the small companies is short-lived. This is not true, however. The cash tax rate will not decline until 1970-and not until 1971 if the Administration should in- crease the minimum on payment of estimated corporate taxes to 90% (which is a real possibility). Furthermore, companies that have about $1,000,000 of pretax income also will feel acceleration of payments on the first $100,000 of their tax liability di- rectly. For a company :that size, such a speedup is equivalent to an increase in the tax rates of 1.5% during the period of acceleration. Standby credit Gorporations will depend on banks for lines of credit to a greater extent than in the past. They must do this, or keep a larger `cash balance against con- tingencies, for several reasons. Almost all corporate income taxes will be due at the time the liability is incurred. Heretofore, when taxes were due 6 to 15 months after the liability arose, it was easier to predict requirements. Predicting the next quarter's earn- ings is often most difficult; and, with the minimum amount due rising from 70% to at least 80%, there would be even less leeway for error in estimated earnings. More important, because future acceleration will squeeze the smaller cor- porations more and more, forcing greater assumption of receivables and inven- tories by larger corporations, the latter must bear much of the burden of periodic 4isruptions in the manufacturing process no matter where they develop. Since many of these problems cannot be forecast in advance, standby bank credit is the easiest and least expensive way to guard against such contingencies. With corporate income tax payments more current, federal fiscal and monetary action should have a more immediate effect on corporate behavior during cyclical upswings. If greater use of bank credit develops, the `monetary authorities will be in an even stronger `position to dampen excesses or spur lagging demand for bank loans. Mergers on rise Mergers will be more frequent in the future, especially `those involving smaller `companies. These companies have felt only one round of acceleration-that on `withholding and Social Security. The really big one will start Jaauary 1, 1968. As they feel this squeeze, and when they cannot borrow, they will be more `inclined to sell out. Smaller utility and telephone companies will `be particularly vulnerable. Medium-sized companies will also be squeezed. Those that are not financially strong enough to absorb the burden of higher inventories and receivables forced on them by the effect of acceleration on smaller compaiiles will either lose posi- tion or merge. Shift in tacc payments Before the speedups, larger corporations paid 62% or 63% of their income tax bills in t'he first half of the year. The JFK and LBJ rounds of acceleration `were concentrated in the first half of the year, increasing the percentage of the tax bill paid by `larger corporations in the first half to a'bout 66% in 1967. With the completion of these speedups and the proposed increase in payment of estimated taxes, however, larger corporations will be paying about 57.5% of their tax bill in the first half and 42.5% in the second bali. (Smaller corporations were paying upwards of 100% of their tax bill in the first half; by 1972 they too will be paying 57.5% in the first half and 42.5% in the second half.) This means that corporations will borrow more in the second half of the year (specifically, on September 15 and December 15) and less In the first half `than they did before. PAGENO="0264" 252 PRESIDENT'S 1967 TAX PROPOSALS Cycl4ca~ compalvie8 A corporation whose operations are cyclical will not be as financially pinehedL during~ business declines as It was in the past, because o~ the lag in tax payments.. The decrease in the rates will also alleviate the cash squeeze. Prior to 1964 a downturn in pretax profits of 15% increased the cash tax rate to 57.7% in the year of the profit decline. After acceleration is over, a 15% downturn will result in a 49.3% cash tax rate. Conversely, during an upswing a cyclical company will not be able to use the lag in tax payments to finance itself as readily as it did in the past. If a company had been in a zero growth period and then registered a 15% increase in pretax earnings, its cash tax rate would have declined from 52.00% to 47.76% prior to acceleration. After acceleration, however, the same circumstances will. cause a decline in the cash tax rate from 48.00% to 47.06%. Growt1~ companic$ The faster the growth in earnings enjoyed by `a company, the less the decline in cash tax rate accomplished by the cut in rates and acceleration. The cash tax rate will decline from 52.00% to 48.00% for a zero growth company, from 50.45% to 47.66% for a 5% growth company, and from 47.76% to 47.06% for a company with a 15% growth rate. Furthermore, the speedup of corporate income tax payments imposes a greater incremental tax burden on the company with faster growth. For example, under the JFK round the average cash tax rate over the period of acceleration declined from 52.00% to 51.21% for a zero growth company and increased from 47.76% to 48.15% for a 15% growth company. The LBJ round was again more oppressive on faster growing companies. An increase in payment of estimated taxes to 90% will offset virtually the en- tire remaining reduction in cash tax rate for the 15% growth company. Local governmei~ts State and municipal governments have discovered the advantages of accelera- tion. Several government units have upped their tax take in this way-New York State and New York City, to name two-and others probably will follow. EFFECTS ON TAXPAYERS Senior management of a company, and especially marketing executives, should be aware of changes in the consumer's federal tax burden and in his "cash flow" as affected by withholding. Sfocia2 security Increases in both the rate and the base for Social Security taxes took place in 1966. Assuming the about half the estimated $6 billion boost effective then was paid by employees, $3 billion was removed from their disposable income. To this should be added the $300 million acceleration of Social Security taxes assessed in 1966 against self-employed individuals. During 1966 Social Security benefit payments increased by $4.8 billion. The net effect was an increase in disposable income of $1.5 billion. The groups paying' more and the groups receiving more do not have the same consumption mix, how- ever, and the effect on a particular company varies according to the markets it serves. The Administration has proposed increases in both Social Security benefits and taxes. As of this writing it is impossible to say exactly what the changes will be; but for the purposes of this analysis, I have assumed that the increases will be enacted as proposed. Even if they are not, the trend is evident, and sooner or later the package will `be passed in some similar form. Increased benefits became effective July 1, 1967; increased rates will be imposed on July 1, 1968. Thus there is a "plus" effect this year and a "minus" effect next year. Social Security tax payments will go up in 1968, 1969, 1971, 1973, and 1974 (with minor increases thereafter). The rises will have different effects. The 1968, 1971, and 1974 boosts are in the base: in 1968, from $6,600 to $7800; in 1971, to $9,000; and in 1974, to $10,800. The 1909 and 173 increases are in the rate, from 4.4% to 5%, and then to 5.55%. The rate increases are the more regressive. We will experience a number of step-ups in rates and base over the next eight years. All will have adverse impacts upon spending-how much depends' on whether the increase is in the rate or the base. Granted, there will also be' step-ups in benefits, but they will come largely in different time periods. PAGENO="0265" PRESIDENT'S 1967 TAX PROPOSALS 253 The scale-up in benefits in the lower income brackets is keyed to $50 jumps in average monthly covered Income, whereas in the upper income brackets the scale-up in benefits is keyed to $100 jumps in income. By more than doubling the base, the Johnson Administration is shifting the cost of Medicare to those in the $6,000 to $10,800 income range. Their eventual benefits from Medicare probably will not be much higher under the proposed changes, but their relative share of the costs of the plan will, in some instances, more than double. Tax wit h1~olding The changes in income tax withholding rates for individuals effected in 1966 were originally estimated to remove approximately $1.2 billion (annual rate) from disposable Income. Recently, the estimate was raised to $1.5 billion. The most significant immediate result for our purposes here is the fact that the individual earning more than $7,500 and owning his own home was substan- tinily over-withheld last year. The federal government was aware of this and provided that such a taxpayer could reduce his 1967 withholding rate by claiming a portion of the excess itemized deductions in his 1967 withholding, so long as they average 18% or more. The net effect is that some homeowners whose incomes range from $7,500 up now have a lower withholding rate and are receiving, or have received, a sub- stantial refund on 1966 taxes. It is to be expected that some of them will put the "windfall" into savings. But many will use it to buy durable goods, especiaily if they decided against purchasing "big ticket" items last year, when their paychecks were smaller because of over-withholding. While an accurate figure for the size of the refund is not available, a fair guess is $2hfflion. Furthermore, this is not a one-time item. Hereafter, the middle-income home- owner will be over-withheld and receive a refund the following year, through probably not as big a one as this year. In past years many of these individuals made the final payment on their income taxes on or before April 15. Now they will be receiving refunds instead at about the same time of the year. It is not inconceivable that this will alter seasonal purchasing patterns. On the negative side, taxes of lower income individuals will be withheld at almost exactly the rate of accrual of their tax liability. Thus they will be receiv- ing much smaller refunds than in the past. (This would be offset, however, by the massive increase in Social Security benefits proposed for July 1, 1967.) Arid the minimum that self-employed individuals and those with substantial investment or "unearned" income have to pay on their estimated income tax liabilities was increased from 70% to 80%. EXHIBIT III. COMBINED SOCIAL SECURITY AND INCOME TAX BURDEN AS A PERCENT OF TOTAL INCOME Income level 1961 1963 1965 1966 1967 1968 1969 1971 1973 1974 $5,000 11.4 11.9 9.3 10.0 10.2 10.2 10.8 10.8 11.4 11.4 ~7,500 12. 6 12. 9 10. 5 11. 9 12. 1 12. 6 13. 2 13. 2 13. 8 13. 8 ~10,O00 14.1 14.4 11.9 13.0 13.1 13.6 14.1 14.7 15.2 15.7 ~15,O00 16.3 16.4 13.8 14.5 14.6 14.9 15.2 15.6 16.0 16.6 `~2O,0O0 18. 3 18. 4 15. 4 15. 9 16. 0 16. 3 16. 5 16. 8 17. 0 17. 5 Note-Assumptions: The toxpayer is married, and he has 2 children. The 10 percent standard deduction is taken for the $5,000 income group and an allowance for 15 percent in itemized deductions is made for the other groups. Combined bur~ten To the consumer, a tax is a tax, regardless of whether it is called an income tax or a Social Security tax. An increase or decrease in one or the other alters his net cash income and changes his attitude toward buying goods and services. The trend of the combined income and Social Security tax burden is shown in Exhi bit III for individuals at several earnings levels, with the proposed increases in Social Security taxes factored in. The relative regressiveness of Social Security taxes is shown by the change in combined tax burden from 1961 to 1963, when Social Security taxes were in- creased. The decline in the combined burden from 1963 to 1965 reflects the two- stage reduction in rates in 1964 and 1965. The total burden moves up most sharply from 1965 to 1969 for, lower-middle income taxpayers; their income tax reduc- tions of 1964 and 1965 will have been wiped out by 1969. PAGENO="0266" 254 PRESIDENT'S .1967 TAX PROPOSALS The schedule indicates a reduction in individual income taxes with some empha- sis on the middle-income group.. The reduction probably will be in a combination of lower rates, particularly in the lower and medium brackets, and changes in the dollar amount of exemptions and/or the standard deduction. An interesting sidelight here is the "cash flow" pattern of the individual tax- payer. Now that withholding rates on individuals are more closely approximating actual tax liabilities and the Social Security base is increasing over `the years, the amount of the salary check will be constant during `the year for most tax- payers. Once the Social Security base is increased to $10,800, considerably fewer taxpayers will enjoy the step-up in cash flow accompanying full payment of Social Security taxes. An even cash flow throughout the year smacks somewhat of a planned budget. Will this tend to increase purchasing on the installment plan by those earning between $6,600 and $10,800-i.e., those individuals most affected by the increased Social Security rate and base? CONCLUDING NOTE Changes in tax rates and payment dates for corporations and consumers have had and will continue to have material influence on the business environment. Acceleration of taxes amounts to an estimated $22 billion to $23 billion, which alone would warrant attention. Because so much of the effect is structural, and because business, when making plans, does not normally concern itself with structural changes, many businessmen will not be aware of them until after they have occurred. Businessmen with foresight, however, will have an opportunity to improve their competitive position. The CHAIRMAN. Mr. Kust, we thank you sir for bringing to the committee your views. Any questions? Mr. Schneebeli. Mr. SOHNEEBELI. Corporations and the business community have been borrowing very heavily in the market in the first 6 to 8 months of this year. You seem to infer that much of the borrowing was brought on by the corporate speedup payments. Would you give us any indications of what percentage to your mind of the corporate borrowing this year was caused by the increased. accelerated payments? Was there a substantial amount? Mr. Kusp. Well, I would have no way of directing Congress to figure, but Secretary Fowler in his statement indicated that corporate borrowing had increased by about $13½ billion, I believe is the. figure that he used, in the first half of 1967. The additional corporate payments that were made in the fiscal year 1967 were in fact made on April 15 and on June 15. This is when the speedups were effective. Well, this additional amount that was paid by corporations in total was $5 billion, and I don't think you can say that $5 billion of the $13½ billion borrowing is to be `attributed to the speedup, but I don't think there is any doubt at all that a very substantial part of the' $131/2 billion is attributable to the fact that the corporations had to hand over $5 billion that was in excess of a normal year's tax pay- ment and this created pressure on cash resources necessitating borrowing. Mr. SOIINEEBELI. Despite this accelerated payment which caused Westinghouse to pay $70 million in 2 years; the Federal revenue was still less than they anticipated, wasn't it? In fiscal 1967, the total Federal revenue was a lot less than anticipated despite the specdup.. Mr. KUST. I think the speedup of course was taken into account. in the original projections. The speedups were certainly there and have remained there, but what they have had to revise their projections on or the results for the year 1967 was because of the declining cor- porate profits which were caused by tax payments. PAGENO="0267" PRESIDENT'S 1967 TAX PROPOSALS 255 Mr. SOHNEEBELI. That $70 million reflected what percentage of your normal tax picture in those 2 years? How much additional was it? Mr. KUST. Our normal tax payments have been on the order of $100 to $120 million, so in 2 years- Mr. SCHNEEBELI. $240 million. Mr. KUST. $240 million; $70 million out of $240 million, almost a third. Mr. SOHNEEBELI. A 30-percent increase in taxation? Mr. KUST. I am just calculating this now. I think I could give you a more precise figure, but it would be on that order, certainly over 20 percent. Mr. SCHNEEBELI. It is in the order of 30-percent increase in pay- ments. I am surprised it was that high. I didn't realize that. Mr. KUST. The figure that I quoted is that for all corporations in the fiscal year 1967 the increase was 23 percent above a normal year's tax payment. Mr. SCHNEEBELI. And how long forward will this go now with the anticipated proposal made by the Treasury of furthering this accel- eration of tax payments? Mr. KU5T. That will affect corporations with income tax payments under $100,000 for 5 years. Mr. SOHNEEBELI. For 5 years? Mr. KUST. And of course the magnitude is not nearly as great as the speedups that have already taken place. Mr. SCHNEEBELI. I would like to ask you what percentage might that be. Mr. KUST. I think the administration estimated $300 million in the next fiscal year, that is, so this would be for 5 years, but it is on that order. Mr. SCHNEEBELI. What are corporation profits this year? $60 billion? Mr. KUST. Corporation profits are estimated at about $80 billion, but tax payments are just over $30 billion. Mr. SOHNEEBELI. Thank you. The CHAIRMAN. Any further questions? If not, Mr. Kust, we again thank you, sir, for your testimony. Mr. KUST. Thank you. The CHAIRMAN. That completes the calendar for today. Without objection the committee will adjourn until 10 o'clock in the morning. (Whereupon, at 11:30 a.m., the committee adjourned to reconvene at 10 a.m., Tuesday, August 22, 1967.) PAGENO="0268" PAGENO="0269" PRESIDENT'S 1967 TAX PROPOSALS TUESDAY, AUGUST 22, 1967 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Wilbur D. Mills (chair- man of the committee) presiding. The CHAIRMAN. The committee will please be in order. Is our colleague from New York, Mr. Tenzer, in the room? Our first witness this morning will be Mr. Walker Winter, accom- panied by Dr. Madden and Mr. Statharn. We welcome you back to the committee this morning in a different capacity from that which you once had. I don't know whether the members of the committee are aware of it or not, but Mr. Winter se~véd as a member of the staff of the Joint Committee on Internal Revenue Taxation some years ago. STATEMENT OP WALKER WINTER, VICE PRESIDENT, CHAMBER OP COM1~EROE OP THE UNITED STATES, AND CHAIRMAN, TAXATION COMMITTEE; ACCOMPANIED BY DR. CARL H. MADDEN, CHIEF ECONOMIST, AND ROBERT R STATHAM, TAXATION AND FINANCE MANAGER Mr. WINTER. It is certainly very kind of you to remember, Mr. Chairman. The CnAIi~rAN. We are pleased to have you with us. Please identify yourself for our record and give us the names of those at the table with you. Mr. WINTER. Thank you, sir. My name is Walker Winter. I am a vice president of the Chamber of Commerce of the United States of America and chairman of its taxation committee. I am also a partner in the Chicago law firm of Ross, H'trdies, O'Keefe, B'tbcock, Mc Dugald and Parsons. I am accompanied by Dr. Carl H. Madden, on my right, chief econ- omist of the national chamber, and by Robert R. Statharn, taxation and finance m'tn'~ger of the chamber Mr. Chairman, the national chamber is grateful for this opportunity to present its views on the President's tax proposals as outlined in his message of August 3, 1967. The proposals have been the subject of constant study since that date by businessmen and business economists. The chamber appreciates the position of the administration in seek- mg a tax increase at this time. It believes, however, that the economic evidencepresently available does nOt indicate that the business resur- 257 PAGENO="0270" 258 PRESIDENT'S 1967 TAX PROPOSALS gence which the administration foresees will occur so soon, nor in the magnitude suggested by the tax surcharge proposal. It is for this reason that Dr. Madden is with me today in order to answer any questions members of the committee may have as to the way the business economists view the current economic situation. The national chamber favorS deferring a tax increase until it is substantially more certain than now that there will be a major up- turn in the economy and inflationary ~pressures are more apparent. We believe it would be ill-advised to attempt to raise revenues by a tax rate increase when such a rate increase might well result in an actual reduction in revenues. UNRELIABILITY OF ECONOMIC FORECASTS The `administration's economic `forecasting in past has not been such as to inspire confidence in considering so delicate a question as a tax increase. The Council of. Economic Advisers' forecast last fall of a `continued investment boom is a case in point. The resulting proposal to suspend the investment tax credit and accelerated depreciation allowances, we `believe, was ill-advised and we so testified at that time. The suspension came at a time when the economy was actually in the midst of a readjustment, involving a sharp decline in housing construction, a substantial rise in the con- sumer savings rate, and a sizable pileup of business inventories. The economic case for the surcharge proposal, as we understand it, rests on the correctness of `the official forecast of economic activity in the near term. A crucial question, therefore, is whether the current rise in the economy is strong enough to withstand a tax increase. We believe additional time and study are needed before this can be determined. TIMING OF AN INCREASE Timing is of critical `importance. `Here, the record since the Viet- nam escalation in mid-1965 does not justify optimism that the timing of fiscal policy moves recommended by the administration can be ac- cepted without question. Last January, as the economy was slowing down, the administra- tion assured the Nation that a just-right budget deficit of $8 billion required a surch'arge increase by midyear of no more and no less than 6 percent to prevent inflation. But even as the 6-percent tax proposal was being considered by the Joint Economic Committee, economic conditions showed that the investment taxcredit shouldbe reinstated. In our judgment, `administration economists, again, have not ac- curately judged the timing and impact of `a tax proposal on economic events. Business economists though generally conceding `that, if the economy is in for a real upsurge in the coming months a tax increase might be needed, generally have held to the view that the expansion in the economy will be slower coming and less ebullient than the ad- ministration has contended. As we understand it, even the economists principally responsible for the 1964 Revenue Act rate reductions have not endorsed the present tax increase proposals. PAGENO="0271" PRESIDENT'S 1967 TAX PROPOSALS 259 Administration economists, in calling for a tax increase, have failed in our judgment to take sufficiently into account the rise in output capacity. Production has risen and the fruits of the investment spend- ing boom of 1963-65 should result, if not impeded, in steady additions to productive capacity. Administration economists have also failed, in our judgment, to take into account the elasticity of the labor force which the overall unemployment rate does not reflect. Finally, and most basically, they have overlooked the damaging effect of a tax increase on consumer and business psychology. The case has not been made that a tax hike is needed to avoid what the President has called the clear and present danger of "brutally higer interest rates and tight money." The conditions for credit markets in 1968 are in the views of the business economists, likely to be quite different from conditions in 1966. This year's expansionary monetary policy has increased the liquid- ity of banks and other financial institutions. The first-half expansion in the Nation's money supply at a 6-percent annual rate, and of bank credit at an even faster 11-percent annual rate, has restored liquidity and brought short term rates to well below last year's peaks. Treasury use of tax anticipation certificates can tap this liquidity, and a rise, to some extent, in short-term rates would be helpful for balance-of-payments reasons without threatening to precipitate another drainage of funds from savings and loan associations into market instruments as happened last year. Dr. Madden can comment on this in more detail if the committee wishes. The proposal for a tax increase cannot be justified as simply a war- time measure. The deficit projected results from both nondefense and defense expenditures. Nondefense expenditures have been increasing as fast, or faster than, defense expenditures. From fiscal year 1963 through fiscal year 1967, nondefense expenditures rose from $39.8 to $55 billion or 38 percent. Defense expenditures rose from $52.8 to $70.7 billion, or 34 percent. TAXPAYERS A~ Wfl~LING TO FACE FISCAL BuRDENS IF NEEDED Taxpayers have always shown their willingness to face fiscal burdens where the need has been demonstrated. But taxpayers have grown cautious of a stop-go economic policy. Their skepticism of Great Society programs has grown this summer in the wake of riots in the cities. No amount of Federal spending can solve all of our problems immediately. Some programs may have to wait until we are again at peace in Vietnam. Priorities must be established. If t.he taxpayers are going to bear an increased tax burden, they have the right somewhere in this discussion to ask also about future tax rate reduction. Burdened by increasing State and local taxes, they are now being asked to bearhigher Federal taxes. Can the country ever hope to live within its revenues? Is it not somehow possible, long-range, to manage on the tax revenues which can be produced under the 1964 rate schedule in an expanding econ- omy? Cannot, perhaps, some hope be held out to taxpayers that we can get back on the road to tax rate reductions-the road we saw ahead ~of us in 1964? PAGENO="0272" 260 PRESIDENT'S 1967 TAX PROPOSALS The national chamber supported the tax rate reductions of 1964 in the face of substantial criticism-for example, the charge by Senator Byrd, then chairman of the Senate Finance Committee, that the cham~ her wasn't being fiscally responsible in supporting this action. We supported the reduction proposals because we thought they provided the shortest road to a balanced budget through increased. revenues. Certainly, as to the revenues, our faith was vindicated. Reve- nues rose from $86.4 billion in 1963 to $115.8 billion in 1967. However, a change in administration policy then followed. Business: and taxpayers in general were-warned about a "fiscal drag" of `billions of, dollars. Immediately spending programs were devised to anticipate this "fiscal drag." Increased revenues have not kept pace with the new spending programs,, and the programs have not been curtailed, despite- the increase in defense needs. `Business, in general, is not persuaded that any future tax revenue- increase will not immediately be swallowed up by new spending pro~ grams-by new demands for Government services. We are told we have reached a crisis. To meet the crisis, it is pro-. posed to impose upon taxpayers a burden of a $7.4 billion tax hike in fiscal year 1968 and approximately. $9 billion in calendar year 1968. - But the crisis is apparently not serious enough for the administra- tion to do more than reduce spending by possibly. $2 billion in the civilian area, maybe $2 billion in the defense area, sell $2 billion ni participation certificates, and try to head off another $1 billion2 in. additional pay boosts. The chamber of commerce believes that if the situation is as serious as the administration contends, and we believe it is, real and immediate major cuts in, nonmilitary spending should be. effected. SPENDING REDUCTION The Nation is faced with a potential administi ative budget deficit of possibly $29 billion. This assumes no tax increase. The deficit poten- tially is greater than for any other year since World War II. The, rise of expenditures is a matter that the administration, with. the assistance of the Congress, can control, if the will is present. Ear- lier in the year, there was a logical solution: Cut Federal spending. The same solution is still there, though the ameliorative impact will be lessened. In January, when the President. first asked for a surtax, the national chamber declared: Reduction of spending for nondefense purposes~-in the maximum amount corn- mensurate with effective and efficient operation of the government-should be the first, consideration. For the period of the present miiitary stringency all less- essential or new spending programs should be decelerated or postponed At the time, neither the administration nor the Congress appeired to be so inclined. In fact,. despite many warning signals, there have been too few examples of fiscal restraint. It. is time -to call `t~ halt to prolific, spending. It is up to the adminis- f-ration to reduce unnecessary or less-essential programs, and to defer' spending where possible. Priorities must be. established. Many worth-. while programs may have t.-o be deferred. The budget can and must be reduced. Emphatic-ally, we do not -agree that only limited a-mounts, mostly in the nondefense- area, -are subject to reduction. Literally, all Federal progTarns should he subjected to- PAGENO="0273" PRESIDENT'S 1967 TAX PROPOSALS 261 ci9Se examination. Some of the choices for cutting back may not be simple, but faced with the alternatives, such decisions must be made. Action in this respect is absolutely'essential. It should be taken with a firm hand. Somehow, spending can be reduced more than the $4 bil- lion the administration has suggested it will recommend for cutting or possible postponement. The national chamber urges the Congress to give prompt considera- tion to legislation introduced by Chairman Mills which would establish a bipartisan Government Program Evaluation Commission. Positive and forward thinking, thisproposal definitely will point us in the di- rection we should take. The Commission would (1) make a complete evaluation of Federal programs-old and new, (2) determine the effectiveness of such pro- grams-in terms of present and projected costs, (3) determine whether these programs should-or should not-be continued, and (4) deter- mine the relative priority a program should receive-in the allocation of Federal funds. The enactment of H.R. 10520 holds great promise. It can be the guide to significant savings and a better allocation of resources. PROPOSED LEGISLATION Mr. Chairman, we would like, to make certain recommendations for changes in the proposed tax increase legislation, if it is de'termin~d that an increase is necessary. What is being proposed without question discriminates against busi- ness conducted in corporate form. it is the position of the national chamber that any tax increase should be borne in like manner by indi- viduals and corporations. Individuals and corporations should be required to pay the same percentage surcharge. Any tax increase should become effective on the same date for both, and there should be no retroactivity. A retroactive feature would have the effect of disrupting corporate planning at a time when many corporations have reduced profits. Formerly, corporations could absorb retroactive `taxes. But the acceleration of corporate income tax payments, which was instituted by various enactments starting in 1950, has greatly reduced the flexi- bility of corporations to, absorb ~unanticipated tax payments of a retroactive nature. Further with respect to acceleration, under the administration's proposal there would `be an elimination over a 5-year period of the $100,000 exemption for estimated tax payments. There would also be an increase from 70 to 80 percent that a corporation's estimated tax for a given taxable year must bear to its final liability. Such a speedup of corporate tax payments will yield only a tem- porary one-tune fiscal gain in Government tax revenue. We are very concerned about the effect this will have on small businesses. It will have' the impact of siphoning off `their working capital. The effect of, this action would be to require corporations to keep large cash balances on hand to guard against contingencies, or to be readily able to resort toborrowing. For some small corporate businesses this might not be possible. ` .` , The increase from 70 to 80 percent with regard to the imposition of the penalty for underpayment of estimated tax also poses problems. 53-349-----67-pt. 1-1S PAGENO="0274" 262 PRESIDENT'S 1967. TAX PROPOSALS It is suggested that this would put corporations on the same footing as individuals. It should be pointed out that corporations often have a more difficult time in estimating~their earnings than do individuals. The individual more often has salary and other income which can ~be estimated with greater certainty. Corporations generally are on the accrual method of accounting and report income before cash is received with which to pay taxes. In order to protect itself, the corporation in estimating its tax must assume some margin of error in order not to have to pay the 6-percent penalty. Byincreasing the 70 to 80 percent, there would be less toler- ance for error, and consequently it can be expected that more cor- porations will find themselves subject to the 6-percent penalty for underpayment. of the estimated tax. We suggest, therefore, that if the change is to be made from 70 to 80 percent, the law should at least provide that the present nondeduct- ible for 6-percent penalty for underestimation in the future paid by corporations be deductible as interest. Also, assuming a change from 70 to80 percent, it is probable that more corporations will overestimate their taxes. By overestimating. a corporation under present law could lose the use of a considerable amount of capital, until a refund could be obtained. Presently, it is necessary to wait until the filing of the final return to obtain a refund. We believe that provisions should be made to permit a refund for overpayment of estimated tax to be obtained prior to the filing of the final return. Mr. Chairman, we have not addressed ourselves in this statement to whether the surtharge, if it is determined that there must be one, should be computed before or after the investment tax credit or the foreign tax credit. We do not have a specific recommendation in this regard. We ap- preci'~te that to most taxpayers the imposition of the surch'irge after substracting the credits is preferred. Other taxpayers would prefer it otherwise. We are also aware of the balance-of-payments implica- tions of the foreign tax question. With regard to the proposal to postpone the reduction of the excise taxes on automobiles and telephone service, if a tax increase is ulti- mately deemed necessary, the chamber will not oppose such a post- ponement. We say this withreluctance, These taxes are discriminatory. Both the businesses affected and the taxpayers bearing their burden have the right to know when these reductions are actually to be made. They have the right to be given a firm date when these taxes will be reduced or will expire SUMMARY Mr. Chairman, the position of the national chamber may be sum- marized as follows: First, we recognize the probability of a major Federal deficit. How- ever, we are not convinced that current economic conditions justify a tax increase at this time. We urge holding in abeyance the enactment of any increase until the Congres can be more certain of a major economic upturn accompanied by inflationary pressures of the nature predicted by the administration. PAGENO="0275" PRESIDENT'S 1967 TAX PROPOSALS 263 If, in fact, an economic boom is not forthcoming, a tax increase would be self-defeating. Second, during the iutervening:'period, Immediate major and:rn,e~n- ingful cuts in spending should be made. The administration must establish meaningful and realistic standards of priority to govern Fed- eral spending. Congress must assist in these efforts. Third, in the event a tax increase is determined necessary, it should apply to individuals and corporations at the same surcharge rate at the same effective date and without retroactive effect. Fourth, the chamber opposes the proposed acceleration of corporate tax payments, particularly for corporations paying $100,000 or less in annual taxes. Fifth, if a tax increase is judged necessary, the chamber will not oppose the postponement of excise tax reductions on automobiles and telephone service. However, any legislation deferring the scheduled reductions of these taxes should have a firm expiration date. Thank you, Mr. Chairman. The CHAIRMAN. Thank you, Mr. Winter. We appreciate your bring- ing to us the views of the Chamber of Commerce of the United States. Mr. Landrum. Mr. LANDRUM. Mr. Winter, I note your statement here as I have noted in most of the statements brought to the committee, and in most of the statements coming to my. attention from people who are con- cerned about this problem who do not appear before the committee, that the first thing we should do is to have a reduction in nonessen- tial Federal expenditures. With that I am' in complete agreement. In: my judgment I think every member of this committee is in complete agreement, but I get sort of vexed with people like yourself and others in responsible places who are knowledgeable and possess quite some degree of expertise in this field saying reduce Federal expenditures, nonessential Federal expenditures, and that is as f'ir as you go You don't ever come up with what it is we can reduce. Then when we start reducing on .programs that affect people back home in the Nation we find the local chamber of commerce, the leaders there, mak-' ing determined fights to have programs for water and sewage expan- sion, for highway expansion and improvement, and so forth. We have the leaders in education and all levels of government asking for in- creases and continuation of these expenditures. `Then we come along and find the doctors~ and~ the nurses and the people concerned about health, `and they want the health expendi- tures continued. They want funds for matching to build iiospitals.~ They want all that continued. As a matter of fact, it seems `to me- `the way I read these things-is that nonessential means that which does not affect me. " ` ` ` Now, what 1 would like to have from people like you is not just a statement to cut nonessential expenditures, but some recommenda- tions as to where these cuts can take place and then we will begin' to get to work, when we have the support from people like you. Mr. WINTER. If I may respond to that, ~Mr." Chairman, I' do not have a satisfactory answer to `your question, one `that satisfies me or Cone that will satisfy you. Our position certainly is that where we PAGENO="0276" 264 PRESIDENT'S 1967 TAX PROPOSALS start is with the $4 billion in cuts that the Director of the Budget has indicated may be possible. Through the balance of this session i think that as the different appropriations bills are considered every effort should be made where possible to effect cuts as I know efforts are being made at this time. That doesn't carry us very far. We have hope that through the type of commission which Chair- man Mills has proposed to be established we can get a sense of di- rection. We think that the administration has to provide a change in direction and a better sense of direction here in this area and estab- lish priorities. I recognize your point. If the money is there the people are going to want it. There is going to be a demand for increased service. If I may make one other point,. I would like if I may to provide for the record-I don't have it now- the specific proposals we made earlier this year for cuts in expendi- tures when we were faced with a budget deficit of perhaps $8: billion. That has to be reexamined and certainly our chamber committees are going to reexamine it. That is the best answer I can give you. Mr. LANDRtTM. Where are those specifics? Mr. WINTER. I don't have them with me. Mr. LANDRIJM. Last night I read a very fine statement by t.he New York Chamber of Commerce Committee on Taxation. They sent down a statement to Chairman Mills to be included in the record which I concluded, after reading, was a very, very fine statement and it had in it a proposal of one-for-one. Applied that would mean one dollar of reduction in nonessential expenditures for each dollar of taxes we~ finally have to lay on top of what we have, if we do enact a surtax bill. But nowhere in that statement could I find any suggestion about where one of these dollars would come from. They give us the formula. and tell us how to apply it. That is simple enough. But the problem is much more complex than that. Now, if you possess, and I say "you" advisedly, meaning the chamber,. the expertise that you have the reputation of possessing, then I think. it is hight time the U.S. Chamber of Commerce, and the. State chamber of commerce, and all these other people that come in here saying cut,. tell us where we can cut and get away with it. I am in favor of it.. I am ready to start cutting and have been. Mr. WINTER. I think there would be. perhaps two responses to that. I think what we can reflect is simply the feeling of the business corn- munity and no matter how many meetings I have gone to over the years: the same plea is there, "I have been burned; I hurt." Maybe the busi- nesman doesn't know how to rectify that situation, but we have to look to Congress for that and particularly for guidance from the admin- istration for that. Mr. LANDRUM. Let me ask you this: How much of the appropriation for elementary and secondary education from the Federal level would. you cut out? Mr. WINTER. I do not have those figures. I'm sorry. Mr. LANDRUM. Would you cut any of it? Mr. WINTER. We did make proposals for that. If I may, I can supply that for the record, but I did not work on that particular project. PAGENO="0277" PRESIDENT'S 1967 TAX PROPOSALS 265 (The information referred to follows:) NATIONAL CHAMBER CALLS Fon $5 BILLION SPENDING CUT The Board of Directors of the National Chamber has called on Congress to cut at least $5 billion from the Administration's request for $144 billion in new spend- ing authority for Fiscal 1968. Noting that the Administration's 1968 budget requests mark an all-time high in Federal expenditures, the Board observed: "While much of the increase is attributed to Viet Nam costs, increased spend- ing is proposed for practically every other area of Federal activity as well It is especially imperative, in this period of enlarged military outlays, that we trim other costs-by eliminating nonessentials, and postponing less essential pro- grams." FOLLOWS STUDY The Board action followed an in-depth study and report on the 1968 budget by the Chamber's Government Operations and Expenditures Committee. The Committee this year concentrated its examination on a limited number of important Government programs. In carrying out this approach, the National Chamber enlisted the assistance of specialists in those areas selected for in-depth review. In addition, Chamber committees held special budget review sessions and an ad hoc Joint Task Force considered the Foreign Assistance program. As a result of this scrutiny, the experts found, for example, that at least $2.1 billion could be cut in six programs alone without impairing national needs. These included foreign aid, the poverty program, rural electrification, public health grants, education subsidies, and urban grant and loan programs. In addition, the Board urged that Congress make a critical review of all spend- ing programs, and based on the detailed information available to it, make cuts wherever programs can be dispensed with, deferred or delayed without harm to the national interest. Said the Board statement: "Recent Senate hearings produced an abundance of evidence of waste and in- effectiveness of costly Federal programs intended to help State and local govern- ments. "Many programs have been cited by Members of Congress as requiring careful scrutiny in an effort to reduce spending. For example, they have raised such questions as: -Should the Federal Government finance research and development activi- ties growing at a half a billion dollars a year, and reaching $17 billion in fiscal 1968? -Should we continue to spend over $5 billion a year on the space program? -Should a billion dollar pay raise for civilian and military employees be granted, notwithstanding the huge war costs and mounting Federal deli- ficits?" The Board noted that judicious pruning, while not easy, is important. "The right decisions are not easy to make. But our economic well-being de- mands that they be made by Congress-and supported by the public-in time of war." CUTS CAN BE MADE The examination of several important programs made by the National Cham- ber refutes the idea that the budget is a barebones budget that cannot be cut. The study revealed ea~ampies of possible reductions. Among them are these: Office of Economic Opportunity (poverty programs) Budget request $2,042,500, 000 Recommended reduction 354,000,000 The major programs designed to combat poverty continue to be characterized by the lack of reliable operational data. Conflicting costs-per-enrollee reports and unsupported claims of achievements create a credibility gap which with one or two exceptions, makes it impossible to reach an informed judgment as to whether the programs should be expanded, curtailed or discontinued. PAGENO="0278" 266 PRESIDENT'S 1967 TAX PROPOSALS Until such time as more reliable information is available any expansion of Job Corps, Neighborhood Youth Corps or the VISTA programs cannot be justified. Accordingly, the Chamber recommends that 1968 obligational authority for these activities be held at present levels. The Administration has requested $470 million for the Head Start program and. plans to allocate $135 million of this amount for "follow-up programs" in the early primary grades. The Chamber recommends an increased appropriation for regular Head Start programs. No funds, however, should be made available for the pro- posed follow-up activities because money for such a program is already provided. for in the Elementary and Secondary Education Appropriation. Even though Head Start has enjoyed some success, the National Chamber con- tinues to recommend that the educational activities authorized under the Eco- nomic Opportunity Act of 1964 should be transferred to the Office of Education. of the Department of Health, Education, and Welfare. The Special Impact program, otherwise known as the Javits-Kennedy program,. was created by an amendment to the Economic Opportunity Act in the last ses- sion of Congress. OED still has not written the administration guidelines for the program and the legislative purpose appears rather amorphous. Therefore, it would be advisable to be cautious in allocating funds to this program until its. performance can be evaluated. Rural Electrification Administration Budget request: Loan Authorizations for Electrification Program._ $314, 000, 000 Recommended reduction 150, 000, 000 The electrification program of REA continues to grow despite the fact that the original goal of electrifying farms has been substantially completed. Rural elec- trification cooperatives are using Federal loans at a subsidized interest rate of 2% to re-loan to their consumers for the purpose of financing the installation of electrical wiring on premises and the purchase and installation of electrical and plumbing appliances and equipment. The subsidized interest rate available to these cooperatives gives them an unwarranted competitive advantage over pri- vately financed financial institutions. The reduction recommended here would help return the program to a level suffi- cient for any remaining rural electrification needs in keeping with the intent of the Act. Economic Assistance (foreign aid program) Budget request $2, 530,420, 000 Recommended reduction 70,305, 000 Economic assistance activities should, in general, not be expanded. Exceptions may be justified regarding amounts required for Viet Nam supporting assistance, development loans and technical cooperation and development grants. A reduction of $70.3 million applied uniformly will hold all other activities to fiscal year 19137 levels. Public Health $ervice Budget request $2, 922, 687. 000 Recommended reduction 300, 000, 000 The budget estimate for the Public Health Service indicates an increase of $315 million over the current year. The record of appropriations granted to the Public Health Service over recent years shows an average annual increase of $250 million in new spending authority. The record also shows that over the period from fiscal year 1962 through fiscal year 1968 appropriations exceed actual expenditures by an average of almost $500 million per year. In fact, it is esti- mated that in each of the fiscal years 1966, 1967, and 1968 appropriations will exceed expenditures by well over $600 million. This constitutes a tremendous backlog of spending authority. In a recent study of the National Institutes of Health made by a distinguished committee of American citizens headed by Dean E. Wooldridge, the committee reported to the President th.at NIH has an important organizational need to strengthen its capacity for long-range planning for determining the optimum utilization of its funds. The backlog of funds accumulating in .the Public Health Service could very well lead to grants and other expenditures for extremely low priority projects. Under these circumstances, an overall reduction of the Public Health Service budget of at least $300 million should be made. PAGENO="0279" PRESIDENT'S 1967 TAX PROPOSALS 267 Office of Ed~tcation Budget r~uest ~_ $4, 054,670,000 Recommended reduction 527, 000,000 There is increasing evidence that the tremendous up-surge in Federal spending on education resulting from programs enacted by the 89th Congress is causing administrative and management problems at all levels of government that have yet to be solved. Likewise, the on-rush of new education and training programs is creating a considerable drain on the Nation's supply of skilled educators and administrators. This is leading to wasteful expenditures and ineffective programs. The time has come to make a thorough evaluation of existing programs to ascer- tain their effectiveness and the ability of the Nation to man them with the kind of qualified personnel needed. We therefore recommend reductions of $260,000,000 in the budget requests for elementary and secondary educational activities. The Chamber recommends that none of the $35,000,000 requested for the Na- tional Teachers Corps be approved. The program is not needed, and even if it were, qualified staff is simply not available. The "temporary" program of Federal assistance for operating as well as con- structing schools in areas overburdened by the children of Federal employees. has drifted along for 16 years, with periodic proposals to the Congress to make the program more equitable and justifiable. Presidents Eisenhower, Kennedy and Johnson have repeatedly recommended a reexamination of this program to limit it to truly "overburdened" school districts, but without avail. The 89th Congress authorized such research, and the Office of Education duly expended appropriated funds therefor in contract with the Stanford Research Institute, to provide objective bases for returning this program to its original purposes. These recommendations were duly forwarded to the Congress by the Adminis- tration, along with appropriately reduced budget requests for FY 1967. The 80th Congress ignored both the research findings and the budget recommendations,. thus conceding that this program is more pork barrel than educational in its justification. We strongly recommend a further review of this program by the 90th Congress, with a view to amend P.L. 815 and 874 in accordance with the research evidence already purchased by tax funds. Such action could reduce this program by $232,000,000. Urban grant-in-aid and loan programs Budget request $1, 807, 850, 000 Recommended reduction 700, 000, 000 The HUD budget for 1968 proposes the expansion of a number of grant-in-aid and loan programs. These programs include Grants for Neighborhood Facilities, Urban Renewai, Urban Planning Grants, Metropolitan Development Incentive Grants, Open Space Land Programs, Grants for Basic Water and Sewer F:a- duties, Grants to Aid Advance Acquisition of Land, Public Works Planning Fund, Comprehensive City Demonstration Programs, Urban Research and Tech- nology, Low Income Housing Demonstration Programs, and Rent Supplements... The record of these programs makes their expansion at this time seriously ques- tionable. The programs are not new. They have had many years in which to prove their effectiveness. The record to date indicates they have not been successful in achieving th~eir primary objectives. Evidence in support of this has been and is being compiled by the Subcom~ mittee on Executive Reorganization, headed by Senator Abraham Ribicoff. This evidenc~ has led Senator Ribicoff to say: "The fact is that the job is not being done. And you can go on and list these programs from now until tomOrrow and still the job is not being done." Senator Ribicoff, after pointing out that we had spent $96 billion on our cities in the last ten years, went on to say that some of these Federal programs were causing the nation to slip further and further behind. Similar evidence relating to the confusion and duplication of Federal programs for cities is being accumulated by investigations conducted by Senator Muskie and his Subcommittee on Intergovernmental Relations. The increasing recognition of the ineffectiveness of programs such as those~ listed above is becoming a major issue. To a large hxtent, this issue is behind cur- rent efforts to design new approaches to solving urban problems-approaches such as revenue sharing, block grants, and quasi public-private approaches. Senate Majority Leader Mansfield has also called for a really thorough evalua- tion of where .the Nation stands with some of these programs. On the basis of this widespread concern, it is highly justified to refrain from expanding these PAGENO="0280" 268 PRESIDENT'S 1967 TAX PROPOSALS programs until the Nation can i~eview them and, hopefully, design new courses of action for solving community problems. For this reason, the above budget reduction is recommended. This would permit most of these programs to meet anticipated current obligations while, at the same time, keep them from ex- panding in a direction that, as is increasingly becoming clear, is not in the Na- tion's best interest. Mr. LANDRUM. New York State, for example, increased its criteria for measuring entitlement to medicaid for a family of four to $6,000 after taxes and busfare and so forth, and some of the representatives from that area are complaining that it costs that State $100 million for us to do that. Would you say cut some in that field? Mr. WINTER. If I may, Congressman, may I defer to Dr. Madden, the economist. Mr. LAN-DRUM .The economist has the answer? Dr. MADDEN. Sir, I think you are making a strong argument for Chairman Mills' program evaluation commission. I think that you have outlined with some eloquence the complicated problem facing the Congress, namely, that in the public interest and in the national interest it is clear to every taxpayer who faces increasing taxes at the State and local as well as the Federal level that some new definition of priorities for Government action needs to be defined, but at the same time these same people representing the interests of their geo- graphical district recognize the value of some desired and desirable Government spending. Therefore, it seems to me that you are making a very strong argu- ment for the appointment, the establishment, of a highly respected commission representing all areas of American life which would advise the `Congress by careful studies, as the bill proposes, so that you would not have this problem that you describe of being of two `minds about cutting spending. Mr. LAN-DRUM. `That would be just great and over the long run I think might prove extremely beneficial to Members of Congress and fruitful for the economy of the country, but we have this problem now, August 1967, and there seems to be some concern that we get rid of it before October. I don't kn'ow whether we shall or not. It would take that long to get a commission such as you suggest selected., and then I imagine it `would take them a few days to make the study, wouldn't it? Dr. MADDEN. Yes, sir. Mr. LANDRUM. So in the long run, yes; it is good. I would like to see some specifics now from organizations such as yours, the National Association of Manufacturers, the local State chambers of commerce, the National Education Association, and the various other organiza- tions that are concerned and interested in receiving the frn~ts of a Federal source. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Schneebeli. Mr. SOHNEEBELT. Mr. Winter, you mentioned that Dr. Madden is with you to discuss with the committee `the way the business economists `view the current economic situation which apparently is different from the evaluation given by Dr. Gardner Ackley, the White House economist. PAGENO="0281" PRESIDENT'S 1967 TAX PROPOSALS 269 Would you develop that theme to a degree of why you disagree with the presentation given the committee earlier? Dr. MADDEN. Yes, I would be glad to. Briefly the difference of view rests on two factors, the timing of the upturn in the economy, how fast it is coming, and, second, how strong it will be in the private sector in forthcoming months. With regard to timing, it has been the position of the average busi- ness economist throughout 1967 that the inventory readjustment would take somewhat longer, a quarter or two longer, than the administra- tion suggested in the Council of Economic Advisers economic report to the President. Second, there is the view among business economists that business investment spending is likely to rise slower than the administration's economists suggest or imply. They don't state specifically, but. suggest or imply, and the reason for this in the eyes of business economists is that profits have declined during this rolling readjustment of the first half of this year and this decline in profits when combined with rising unit labor costs in many industries is likely to produce more caution on the part of business decisionmakers in the field of business invest- ment spending than the administration suggests. Mr. SOHNEEBELI. Dr. Madden, I think the administration said that the business resurgence would be quite vibrant during the third and fourth quarters of this year. We are almost finished wit.h two-thirds of the third quarter and. is there any evidence of any substantial rise during July and August that would indicate support for their thesis? Dr. MADDEN. In my judgment there are indications that the upturn is beginning, but these indications are not as strong as the administra- tion suggests and implies. Mr. SOHNEEBELI. And how much slower do you think this resurgence is than has been explained to us by the administration? They say the third and fourth quarter. What are you referring to in your interpreta- tion of this resurgence, the fourth quarter, the first quarter of next year or what specifically? Dr. MADDEN. Well, I think this is the area of uncertainty which this committee should probe with great care and I don't profess to have a specific and ironclad answer to that question, but I would say that there is some doubt in my mind as to what the effect is going to be on consumer intentions to buy of the proposed 10-percent surcharge itself. I question how that will affect consumer confidence in retail sales of business, first. Number two, I question the impact on business invest- ment spending plans of the surcharge proposal itself. I believe that housing is going to be rising slower than anticipated because of the return of interest rates to the high levels, a 45-year record level of last year in the housing market. Therefore, I can only say that in my judgment there is a question whether this upturn may not move slower than the administration suggests and less strongly. Mr. SOHNEEBELI. Well, let's grant that it may be nebulous at the present time. Is it apt to be a little more clear by October 1? Dr. MADDEN. I think that it is apt to be more clear, yes, by October 1 at the time of the traditional fall season in business which may extend a little beyond October 1, but certainly we will know more on October 1 about this than we know now. There is no question. PAGENO="0282" 270 PRESIDENT'S 1967 TAX PROPOSALS Mr. SOHNEEBELI. That would `be a climate in which to decide this than at the present time. Dr. MADDEN. It would be a better time, yes. Mr. SCHNEEBELI. That is all. Thank you.' Mr. ULLMAN. Mr. Chairman. The CHAIRMAN. Mr. TJllman. Mr. TJLLMAN. Mr. Winter, I get a little bit discouraged with what I call gooneyhird economics. You know the story about the bird that flies backwards because he would `rather see where he has been than where he is going. This committee unfortunately can't indulge in that kind of eco- nomics. In your statement you have indicated that you want to wait until it is substantially more certain than now that there will be a maj or upturn in the economy and inflationary pressures are more apparent. Just last week we had some new figures from the Department of `Commerce. There has been a rather startling and major shift in the economic climate of the country. Almost every indicator that we have been given during this past 10 days indicates a strong upsurge in the economy. If we are going to try and run this country on the basis of what happened 6 months or a year ago (because to be 100-percent certain that is what you would have to do) I think we would be in a pretty sorry mess. That is the kind of thing that leads to major recessions, major ups and downs, that could be disastrous to the total economy. Mr. WINTER. I `believe Dr. Madden will want to expand but the point I do want to make is that if a tax increase is placed in effect and if in fact the result is similar to the downturn in 1959 where the reve- nues dropped off so badly, then what is `the alternative? I think we are in real difficulty but I would like Dr. Madden to respond if that would be satisfactory. Dr. MADDEN. I certainly agree with you if one accepts your prem- ises. However, let me read to you from the editorial in Business Week of August 19, on page 158: As for timing the situation is even less clear. Moreover, the economy has not yet regained its full momentum after the slowdown in the first half of `the year. Industrial output is lower than it was a year ago. Factories are operating at only 83 percent of capacity as compared with over 90 percent a year ago. The average work week has been shortening almost continuously since last fall. Consumers have been saving a relatively high proportion of income's. With this sort of slack in the economy there is a st'rong argument for allowing the business upswing to gain more speed before clamping on new restraints. The figures that you refer to of last week, personal income figures and unemployment figures, naturally are going to rise at the end of a half year of rolling readjustment and it is typical of the beginning of such an upturn in the annals of business cycle history that the upturn in the figures when it first comes is larger than it i's later as the upturn develops, larger in percentage amount, so while some indicators have risen, the question before this committee it seems to me is the very question of how to evaluate the timing of the upturn and the speed of it, and there is in the judgment of competent observers some question as to the strength and the speed of this upturn and, of course, it is the administration's responsibility to make the case for their position. PAGENO="0283" PRESIDENT'S 1967 TAX PROPOSALS 271 Our view is this case has not beenmade. Mr. ULLMAN. In view of the fact that interest rates now are pushing through the ceiling-they are about at the same level as they were last September when we were in a real financial crisis-and add to that the fact that you are starting with that level of interest rates, add to that the prospect of a $29 billion deficit, what in the world do you think is going to happen to the money market if we allow the country to get into that kind of a deficit position? Dr. MADDEN. This again is the question which I think this commit- tee should probe with great care. It is a serious question and an im- portant question, but it is not a question which is likely to be resolved exactly as it appears on the surface. For one thing, the year 1968 in the credit markets is not likely to be similar to the year 1966. In 1966 there is no question about there being a near financial crisis because of the large demand for funds in all sectors of the market and for all maturities in the face of a highly restrictive Federal Reserve policy. In August of 1966 there was a near financial crisis in New York money markets. However, since the fall of 1966, and more partic- ularly in the spring of 1967, the Federal Reserve System has pursued an aggressively easy monetary policy just confirmed by a press report of the Federal Open Market Committee's meeting in May, in this morning's newspaper. As a result of this aggressively easy monetary policy which has seen the money supply rise by an annual rate of 6 percent a year and bank credit by 11 percent a year, we now have corporations, banks, and other financial institutions rebuilding their liquidity and, as they rebuild their liquidity, short-term interest rates have fallen and only recently show any signs at all of rising again. Now, the Treasury is facing $15 billion worth of financing, or was facing at the beginning of this fiscal year $15 billion worth of financ- ing, in the last half of this calendar year, but comments from the bond markets suggest that because of the liquidity position of banks and corporations this $15 billion financing is, in their terms, not awe- some and, although it will certainly be larger than last year by 50 percent, in this particular period it is not outside the experience of the money market for this very half of the year we are now talking about. Now, 40 percent of the large borrowings that have been made in the first half of this year by corporations, according to Securities and Exchange Commission data, have been made for the purpose of re- paying bank loans. Corporate treasurers having been stung by last year's financial near crisis are rebuilding their liquidity positions in order to avoid the kind of shock that they felt as a result of last year's experience, and so it is not clear that in 1968 we need to repeat the experience of 1966. It is not even clear that in 1968 the demand for borrowings by corporations will necessarily be as strong as it is this year, because there is this indication that some of the borrowing, an important part of the borrowing by corporations this year has been anticipatory and ha~ been for the purpose of repaying bank debt, rebuilding liquidity, and reducing to some degree the dependence of the corpo- rations on the banking system. PAGENO="0284" 272 PRESIDETNT'S 1~67 TAX PROPOSALS Mr. TJLLMAN. On that point, isn't it a fact that there is a much heavier picture of corporate borrowing this year than there was last year? Dr. MADDEN. Exactly; and I am saying that this heavier corporate borrowing has been effected this year in anticipation of this deficit which we are faced with and it is not necessarily for the purpose of expanding plant and equipment facilities. Bather, it is to restore the liquidity, the cash position of the cor- porations and therefore it does not necessarily follow from this high demand that in 1968 the corporations will have a similarly high demand for money and therefore the total demand for money in 1968 may not be as high as the administration has implied that it will when it com- pares 1968 flatly with 1966. Mr. ULLMAN. Is there any letup of business borrowing in the mar- kets today? All I see is an acceleration. Your argument might make some sense to me if I saw any indication whatsoever that there was any downturn, but it isn't there. Now, you talk about the business profits dropping. Certainly they dropped. But where are they? Are you saying today they are at a low' figure compared to 3 or 4 or 5 years ago? The only time in recent years that profits were higher was last year.. If you take the peak off of last year they are almost at an all-time high and yet you are saying that `business is in a marginal condition. I have never seen :business in a healthier condition than it is today,. looking at the total picture. Dr. MADDEN. I think you are absolutely right in saying that busi- ness is in a healthy condition today. It is certainly true that we have had a remarkable prosperity for `which I think the Nation should. be thankful; but I do not believe that is the issue that is before this committee. The issue that is before this committee is whether business invest.- ment is going to increase next year and whether if it does this will produce a large demand for funds in the money markets, and I am saying our position is that this is a questionable assertion that this. committee should pursue in some depth before it accepts the position that there necessarily is going to be this increase.. For example, profits have declined by 7 percent in the first half' of his year. Unit labor c'osts are rising. It is very unusual for businesses. to expand their plant and equipment spending in the face of profits. that have declined and unit labor costs that are rising. Authorities such as Geoffrey Moore, the research director of the National Bureau of Economic Research, in a recent Wall Street Journal article point out that this is the case, that historically this is unusual. So there is a question whether business is going to expand its invest- ment spending next year and therefore there is a question whether the demand for money in 1968 will be as strong as the administra- tion economists assert that it will be. Mr. ULLMAN. The question that this committee is going to have to face, and this Congress, is which is `the most acceptable alternative facing the country today. The easy thing to do would be to sit on the status quo and wait until there were some `certain answers. Unfortunately in this business there aren't any certain answers. We have to look 6 months ahead rather than 6 months behind, and PAGENO="0285" PRESIDENT'S 1967 TAX PROPOSALS 273 -the alternative danger would be the inflationary pressures building up as they did last year; inflationary pressures growin~ to the point that we would be threatened with another-serious financial crisis and cost- of-living increase- that might very well be disastrous to the economy. That -is the prospect that we have to face. - Now, you have come out, as I understand it, flatly in opposition to ~the tax increase. Is that right, Mr. Winter? Mr. WINTER. At this time, until we get more indication of what the -swing -of the economy is; yes. Mr. ULLMAN. You realize that this could take 6 months. If we don't act now,- if we put it off until next January, the-n we are talking about -a July 1 increase. In my judgment and for what it is worth I think that the tax in- crease that we will impose or should impose would be effective on January 1 rather than retroactive. I think there is some basis for that. Now, what -would be your judgment on that? - Mr. WINTER. I think my judgment would be that if there is to -be. a t-ax increase January 1 would be the time. I think later this year there -should be a better indication whether you a-re going to give a green light --and go ahead with the tax increase in some measure or whether -the indicators indicate that this should not be done. No, I don't think this can wait until next spring or summer or some- thing like -that. I think the decision -h-a-s -to be made later t-his term. Mr. TJLLMAN. Now, Mr. Winter, you compare 1963 with 1967 with respect to expenditure-s. You are ignoring the expenditures of this year, fiscal 1968, whi-ch are already -apparent, in which we are facing a $10 - billion increase in defense expenditures. - - You heard the President and -t-he -Secretary say that they estim'a-t~ $4 billion additional defense expenditures this year. Mr. WINTER. That is correct. - - - - - - Mr. TJLLMAN. With an $80 billion defense expenditure and $1-S bil- hon for interest we will spend $95 billion for defense and interest alone. `With respect to expenditures, every responsible person that we h-ave had before this committee has indicated that you might cut ex- penditures in the d-omestic -area by $4 to $5 billion at the most. - I think it would -be drastic. I think we would have chambers -of - commerce all over t-he country coming in and objecting if we cut this budget by $5 billion. - But when you -are looking at a $29 -billion deficit and can reduce domestic spending by only $5 billion you are -talking about a $24 billion deficit. Are you, the representatives of t-he Chamber of Com- merce of the `United States, coming, here and telling us that we -should allow a $24 billion -deficit to stand without taking some action -by this -tax committee. - - Mr. WINTER. If the alternative is a tax increase which would result in a lessening of revenues we -are not helping the deficit situation. Mr. TJLLMAN. Mr. Winter, the business community could -hardly be - healthier today. The pressures a-re -building up. Are you telling me - that the economy is so weak that a 10 percent increase in taxes -might - throw us into a recession ? Mr. WINTER. In our judgment it would be prudent to wait a while before you make a decision to impose a tax increase. Let's see what the psychological impact of this proposal is -before we go ahead. Beyond PAGENO="0286" 274 PRESIDENT'S 1967 TAX PROPOSALS that I am not an economist. I simply rely :and `have to rely on the~ economists that we have working with us. But that is our judgment Mr. TJLLMAN. Let me just say that I am rather `shocked that the' chamber of commerce of this country with business as strong as it is, about as high a prosperity as `we have ever had in the Nation, is saying that we should take a $25 `billion deficit rather than try to pay as we go. With the people of America making more than they have ever made in the history of the country, with business at almost an ailtime `high in prosperity that we should follow a, policy "of deficit spending, it is saying that we should `take a $25 `billion deficit rather than trying to pay our way. I am shocked that the cham'ber of commerce would take that' position. Dr. MADDEN. I think you are misstating the chamber's position, sir. I think `the chamber is saying in this period when Government ex- penditures `have `been rising at a record pace `throughout a period of unprecedented business prosperity and at a time w'hen taxpayers are paying more in taxes at the Federal, `State and local level, it is time for `the `Congress of the United States to pay `attention to the priorities for Federal spending and not tolerate a deficit of $24 `billion when spending ,can `be cut. `Mr. TJLLMAN. Mr. Landrum attempted to get some priorities from you. We `try to get some priorities from everybody. But you just shift the buck. You won't face up to the i'ssue. We have to. All I am saying is that the best brains that we have had, the people who do face up to the problem, have said `we might cut $5 `bil'lion of Federal spending in the domestic area. I am willing to face up to that, even though, as I said before, your' chambers of commerce all over the country are going to scream to high heaven if we cut that much. Where are you going to make the cuts? You are refusing to face up to that responsibility. I am rather shocked at the testimony of the chamber. Dr. MADDEN. Well, in business when a budget has to be cut it is cut., The CHAIRMAN. Mr. Collier. Mr. COLLIER. I think we ought to get the record straight here, and you correct me if I am wrong., Was it not late in February of this year' that the chamber sent to Members of Congress-I don't know how many-I was one of those who received it-~a very detailed report,. whether I agreed or disagreed in some `or part of the instances, mark- ing where these cuts would be made. Mr. WINTER. That is correct. As I indicated earlier, we can provide that for the record. Mr. COLLIER. So I am at somewhat of a loss here with this colloquy that deals with nonspecifics. They were specific. Mr. WINTER. What we did this year was a little different than we have done before. We looked into certain specific areas to see how' much we thought could be cut. This is when we were faced with an$8 billion deficit, and our result was a recommendation of about, as I recall it, a $2 billion specific' cut and we thought an overall $5 billion cut could be made. PAGENO="0287" PRESIDENT'S 1967 TAX PROPOSALS 275 Other groups have indicated about the same. I couldn't go into any more detail on that now because, as I say, we are faced with a $29 billion instead Of a $8 billion deficit. I think we would want to look a great deal further and we certainly will as fast as we can, but again I say I don't have an answer that satisfies me or that will satisfy someone else as to what cuts can be made. I sat through the colloquy between Mr. Curtis and the Director of the Budget the other day when Mr. Curtis was trying to get a pin- pointing of whether cuts couldn't be made in a particular area, and it is one of the mOst difficult problems to try to pinpoint that, I know, and I think if the Congress doesn't have the facts to work this out, develop it, that the answer is a Commission that can be appointed that can take the time and focus upon spending programs. Now, maybe we can only cut what the Director of the Budget said, $4 billion this year. If that is all we can do, that is a start. 1.~\Te will see what the indicators are a couple of months from now and see what has to be done. If something has to be done the chamber isn't going to be in opposi- tion to it, but we think at this time our position should be withhold action, go slow, and take a look. Don't take precipitous action in this area. Mr. CoLLIER. Significant, too, is; the fact that when those reports came in the Oongre.ss had acted upon one deficiency apprOpriation bill of $11.9 billion and had only one other appropriation bill. Today we have passed 10 of the 13 appropriation bills and consequently this apparently late desire on the part of some to say where do we cut spending comes, I would say, a little bit belated. We had a multi'million-dollar space bill that, desirable as it may be that we' explore space, certainly at a time when we have priority demands there should have been sought a means in this area where we could cut back. I just don't buy some of `the conversation here today of my col- leagues because there is little word that was brought into the con- versaition, the colloquy here earlier, that we saw some of the indicators 2 and 3 years ago. So I say that if the bird was looking ahead then it had developed an advance case of glaucoma because we knew the direction we were heading and there were Members of this Congress who at that time said that we were heading to just the situation we are in today. So I too am shocked, I might say to my friend from Oregon, that we haven't faced up to this problem as we should have in those areas that did not demand priority. I for one, while I appre- ciate the recommendations from any source as any legislator does in dealing with these problems, can also see areas myself where we could have cut back. Yet look, if you will, at the 10 appropriation bills we have passed since that time. Mr. WINTER. In January, `as I indicated on page 5 of our state- ment, we made about as strong a plea as we could for a~ reduction in the nondefense spending. We `thought it was called `for. We have seen little result from that. Mr. COLLIER. And it is going to be very interesting to see whether the little birds that are looking ahead when the next budget comes up here will have an understanding of the economic and fiscal plight into which we find ourselves `today. PAGENO="0288" 276 PRESIDENT'S 1967 TAX PROPOSALS That is all I have. The CHAIRMAN. Mr. Hieriong. Mr. HERLoNG.' Along the lines the gentleman from Oregon was dis- cussing, you have stated here that we will admit that we will be faced with a tremendous deficit this year. We here have to deal in terms of alternatives. We either have the deficit of $29 billion or we don't spend as much money. I think most of you recognize that the money that we are spend- ing today is money that has been appropriated in prior years and how much we cut these appropriations bills this year is going to have very little effect on the size of that deficit, isn't that correct? Mr. WINTER. That is correct, yes. Mr. HERLONG. We are in effect talking about cutting at this point and I am in favor of cutting-goodness knows my record shows it- but we are really locking the barn after the horse is stolen. We are dealing with a lot of homely analogies here today, and I say we are locking the barn `after the horse is stolen. I don't want a tax increase. I don't want it at all. I don't want a tax increase at all, but I prefer it to the alternative consequences. I don't like getting old either, but I certainly prefer that to the alterna- tive, and I think that we are going to be just as dead if we go into the money market for $29 billion as we would be dead physically if we didn't get any older. Mr. WINTER. That may be the alternative which would `be a tax in- crea se. We appreciate that. We think that the time is ripe for a start by a commission or the administration to indicate priorities for spend- ing programs. Yes, they might have to take a few years, but as I say, one principal concern we have is that if you have a tax increase, if it in fact results in additional revenue, we think all of `that is going out in new spend- ing programs. This is not to say that there aren't many programs that could be devised that are extremely important, but you can't do every- thing all `at once. That is our position. If the ultimate decision is that there has to be a tax increase, that obviously is it, the alternatives are what? The alternatives are cer- tainly worse. Mr. HERLONG. I think the Secretary `of the Treasury agrees with you `that if this money in additional tax revenue is spent on nones- sential spending that it will be highly inflationary. He stated that all along. We don't want to do that, and I don't know any control, how- ever, that we in this committee can have over that. What we have to do is face the facts that we have, that we have this deficit and hope that the people `downtown will establish priorities of spending. The President has said that he is going to do some vetoing if we will uphold him. He indicated the `other day if we would hold the line on the increases in the salaries of the Government employees and the postal workers that he would back us up in it, but very few people in the Congress have said that they would vote to uphold a veto. Mr. WINTER. I think the initiative has to come there because, as you say, and I readily agree, ~n a geographic basi~ you have the demands. I. saw a book ~the other day about so big on Federal money and pro- grams available. It only took a few years to develop this rather radical change, or rather substantial change, let,me say'. PAGENO="0289" PRESIDENT'S 1967 TAX PROPOSALS 277 I think the responsibility should be there. It is pretty hard to do. Mr. HIERLONG. The oniy thing that we could do in this committee is to find some method in my judgment to keep from having to go into the money market for $29 billion at this time. We have to do whatever it takes. We hope that the people downtown will do their part. Mr. WINTER. Correct. The CHAIRMAN. Mr. Broyhill. Mr. BROYHILL. Dr. Madden, have you ever heard of the expression in the investment business known as last money in and first money out? Dr. MADDEN. Yes; I have. Mr. BROYHILL. There have been a lot of questions here as to where we should make these cuts in expenditures. That is such a difficult thing to do. Yes; it is politically difficult, but why wouldn't it be a practical approach in the absence of this bipartisan commission that the chair- man has proposed to cut the programs which were most recently inaugurated? Now, this would be the type of program that has not yet become a way of life in the country or a part of a tradition, which makes it ex- tremely difficult to terminate, but such programs as the war on pov- erty which has only been in existence long enough for us to know that it is a wasteful ineffective program. We may even decide to cut the education program. Of course we are all for education. We know that is a rather sacred field as far as cutting expenditures is concerned, but we have been in the elementary and sec- ondary field for just a few months. This is a field that has been tradi- tionally left up to the States and the local communities. We are talking about a temporary tax increase if that word tempo- rary means anything. I have said before that there is nothing more permanent than a temporary tax increase and a temporary building, built in Washington during the war, but if we are sincere about a tem- porary tax increase then why can't we have a temporary cut in these programs which were most recently inaugurated? That is, in the absence of a more sophisticated type of system of cutting back expenditures, just cut the programs most recently put into being; and, furthermore2 stop the totally new programs. We are being admonished constantly by the President because we don't go along with him in creating multibillion-dollar new programs. It has been proposed that we spend billions of dollars in additional funds to eliminate the so-called ghettos, the things that cause the riots in this country. The President was on the television the other day criticizing those who started the riots, a very fine job. Then he turns around and blames it on the Congress because we hadn't spent enough money to get rid of the so-called slums. We were condemned for voting down this $40 billion rat bill when there were already three programs in existence that can do the job if administered properly. So I don't see anything so difficult about finding places to cut spend- ing. I know it is a difficult question for you gentlemen to answer be- cause you are going to step on somebody's toes when you begin to list these various programs. It seems to me that the least dangerous way of cutting back on spending, and we are going to hurt somebody-we are going to have to tighten our belt and it is not going to be politically 83-349-67--pt. i-19 PAGENO="0290" 278 PRESIDENT' S 1967 TAX PROPOSALS popular-but the least destructive way of cutting back is to cut back the programs most recently proposed. Do you gentlemen agree? Mr. WINTER. I think as indicated in the statement here that our approach would be that the priorities must be established. I am not entirely sure that the latest programs are the ones that more readily can be cut. There may be earlier ones that perhaps have far less importance and ought to go first. This, as I understand it, is what the Commission would do. They would evaluate different programs, not just the new ones but the ones, as I say, that have been in for a long time that carry the annual appro- priations, an evaluation and establishment of priorities. I am not sure that this LIFO method is really the answer. It de- pends upon the degree of priority. If the economy won't stand a tax increase, then obviously I think that something like that would have to come to avoid any more extreme measures. Mr. BROYIIILL. I would appreciate any recommendations or sug- gestions from the Chamber of Commerce of the United States as to where specifically these expenditures can be cut, but in the absence of a recommendation I am going to take my own initiative in voting for the cuts and voting down the programs and it will amount to at least $4 to $5 billion that we have been talking about. One of the main reasons given by the Treasury as to why this sur- charge should be enacted is to lessen the dangers of increased interest rates and tight money. Yet a couple of witnesses yesterday, Mr. Gui- lander from the National Assoeiation of Manufacturers and Mr. Kust of Westinghouse, indicated that the accelerated payments of estimated corporate taxes cause corporations to go into the money market and that contributed to the tight money market and high interest rates as much as Treasury borrowing. Do you agree? Mr. WINTER. Yes; and the elimination of $100,000 will have an im- pact, toO. Dr. MADDEN. I quite agree. It will simply add to the total borrow- ing that will be needed if corporations have to borrow for this pur- pose and any additional borrowing will put pressure on the supply of credit, so I think the point is correct. How large a magnitude is involved is a question I couldn't. answer without study. Mr. BROYHILL. If this surcharge goes into effect as proposed by the Treasury it would mean about $400 million additional taxes by acceleratingthe payments that the corporations pay from 70 to 80 per- cent and $400 million by eliminating from the estimated tax payment the $100,000 exemption, and that would mean what amount in sur- charges for corporations; $1 or $2 billion, is it? Mr. WINTER. I think about $2 billion is correct. Mr. BROYHILL. Would the additional taxes, accelerated payments or surcharge, be passed on in the way of cutting back dividends to stockholders, or will the result be more borrowing by the corporations to replace the funds lost out of the treasury? Dr. MADDEN. Whether the corporations would borrow or not would depend on their cash position. Wrhether the. corporations would pass on the tax increases or the additional cost resulting from the accelera- PAGENO="0291" PRRSIDENT'S 1967 TAX PROPOSALS 279 tion is another question which depends on how strong the demand for the products of these corporations is. If the demand for their products is sufficiently strong, then prices will rise and they can recover the cost of the tax increase. If the de- mand for their products is not sufficiently strong, then the only thing that can happen is that profits will fall. Mr. BROYHILL. Then you don't know for certain yet whether this surcharge will necessitate additional borrowing on the part of cor- porations? Dr. MADDEN. Insofar as it constitutes an increase in costs of a cor- poration it certainly seems reasonable to think it would increase the need for borrowing, but it is impossible to estimate how much. Mr. WINTER. Cash certainly is required to pay taxes and adding 10 percent to the tax bill would certainly involve additional money. Dr. MADDEN. Certainly. Mr. BROYHILL. Thank you. The CHAIRMAN. Any further questions? Mr. Battin. Mr. BATTIN. Mr. Chairman, I think maybe the West must be famous for birds. We have the gooneybird economic theory and out where I come from we have a baffle bird. He is one that continually changes his course of flight and nobody knows where he is, but nine times out of 10 he gets lost and doesn't know where he is either. I was amazed to watch the President's Chairman of his Economic Advisers sit before us and go into great detail on economic indicators reflecting the past and projecting the future and based upon these make the recommendation that there be tIle 10-percent surtax. I am a little bit curious as to how we as a committee or the Congress or the business community, having built up through the years a rather sub- stantial storehouse of information on trends and economic conditions, would ever assume that we could just go forward without ever looking back to see where we have been or what might happen under given circumstances and conditions. I think the indicators that were presented to us the first day of these hearings and the ones that have been presented since don't give any clear indication of what might happen in the next two, three, or even four quarters. Would you agree with that? Mr. WINTER. Two, three, or four quarters? Mr. BATrIN. Ahead. Mr. WINTER. Well, I don't know that I projected that far. Cer- tainly the projections at that time indeed to .me did not indicate that the case had been made out for action now. Dr. MADDEN. I read Mr. Ackley's statemeut. It seemed to me that Mr. Ackley did not in his statement formulate propositions about the future, the next three or four quarters, that were very accurate or specific. He stated that the economy was going in for a very strong rise, but lie confessed that lie could not quantify the timing or the speed of that rise, and that is exactly the issue before this committee, in my judgment. Insofar as the tax surcharge bill is an economic measure it rests upon the judgment about the impact of the tax on the economy, so you are quite right the way in which economists attempt to forecast economic PAGENO="0292" 280 PRESIDENT'S 1967 TAX PROPOSALS conditions is by surveys of intentions to buy on the part of consumers and of businessmen. You, of course, have the plans of the Federal Government over the next fiscal year. They have, however, in the past proved inaccurate in part, as, for example, the estimate of revenues was inaccurate to the tune of $7 billion. Mr. BATrIN. I would like to interrupt you there. Again this is a problem of projection. The budget was based upon estimated revenues. Because of circumstances that year those revenues were not realized, netting a deficit in the budget beyond what had been anticipated, but now the point is that Mr. Ackley made what I thought was rather a startling assumption and I would like to have your opinion. He said, assuming that there would be no major labor strikes or problems in the economy in calendar year 1967, then certain things would happen. With all the contracts that are up I find it rather diffi- cult to believe that there will not be any major labor problems in the economy. Would you care to comment? Dr. MADDEN. I would agree with you thoroughly on this point and it is one of the very important reasons for caution on this connnittee's part in making this highly delicate and extremely important decision. The reports from the automobile industry suggest that progress to- ward a settlement there has not been as fast as might be hoped. I believe, if my memory serves me, that about 7 million workers this year are subject to `wage settlement considerations. The pattern for these wage settlements `set as early as the airline mechanics strike in 1966 is unquestionably going to be above the rate of productivity advance in industry, praticularly `as a result of the readjustment in the first `half of this year, so you have a source of cost-push inflation, potential inflation,' here that would not necessarily be reached by the tax decision of this `committee at all, but that `would affect the consumer's a'ttitude toward purchases. I `would like to mention in this connection an article that appears in U.S. News & World Report `for August 28, 1967, on page 31 called, "The Case of the Vanishing Pay Raise." "One example that this magazine gives is a family of `four getting $7,500 a year with a p'ay raise of $375. It lists the proposed increase in Federal income tax at $147, proposed increase in social security tax at $40, the increase in `State and local taxes a't $31 average, for a total tax increase of $218 this year, leavin'g out of the pay raise $157, and `then, `based on U.S. News & World Report's estimate of price rises that might result `from labor settlements in excess of productivity, $181, so that the family's net loss `with `this pay raise of $375 is $24 for the year. We have had this discussion about priorities. Each of us, of course, is a consumer, but most of us, many `of us, are taxpayers, and taxpayers according to reports are becoming more and more dissatisfied generally with the judgment of priorities that lead to the taxes we have to pay, so I think this is a consideration that stems from this automobile and other wage settlement considerations, the problem of what is going to be the impact `of. these wage settlements on prices and in turn `what is going to be the impact of these wage settlements on consumer inten- tions to buy an'd therefore on `the economy. PAGENO="0293" `PRESIDENT'S 1967 TAX PROPOSALS 281 Mr. BATTIN. Generally in this connection we had befOre the com- mittee a while back `a request to suspend the investment t'ax credit. The economy was heating up too fast in the opinion of many and this could cause some serious con'sequences. T'he investment tax `credit was suspended. Then later, earlier this year, we were asked to reinstate the tax credit bea'cuse the economy was becoming sluggish and was not producing the anticipated revenue. Now in the committee today `we are talking about a 10-percent temportary proposed surtax. I asked this of Mr. Ackley and received his opinion or hi's expression, but I am not so sure that there aren't some who `would use the tax laws as a means of regulating the expan- sion or `the reduction of our economy. Would you care to comment on that? Dr. MADDEN. I think `there is no question `at `all that there is a highly influential group of economists who w'ould indeed use the tax laws to regulate the economy in preference to changes in expenditures in the Federal Government. These men argue that expenditure totals `should be set by some judgment of the value of the program and th'at then tax rates should be changed frequently in order to adjust the deficit or surplus to economic conditi'on's. Indeed, as you well know, these people propose to remove the re- sponsibility for individual tax changes from the committees of the Congress and lodge it in the arms of the President of the United States who would make these decisions at his own discretion within a broad guideline. Mr. BATTIN. I have just perhaps one other comment `and it goes to questions that have gone to witnesses, none of whom so far has been an el'ected Member of Congress, as to where cuts should be made. I always had the feeling that the people in the district `that I repre- sent elected me to make those decisions. If I m'ake the wrong one then they have a choice every 2 years as to what they `are go'ing to do about it, but `surely what you might think is a good cut in your own mind and in your own feeling about any given program might not `agree with mine. I would suggest to the members of the `committee th'at today and `during the balance of this week on the floor of the House they have `a great opportunity to make some cuts with the NASA appro- priation bill up `and the authorization for foreign aid. We have a real chance to `aid the President in every way possible to bring down spending in line with his target, `and I promise you as one that I won't shirk my `responsibility. Thank you very much. The CHAIRMAN. Any further questions? Mr. Watt's. Mr. WATTS. I have listened with a great deal of interest to some of the questions that have `been propounded here. I `am inclined `to agree that it would be wonderful, as Mr. Landrum suggested `and Mr. Ull- man suggested, if you could come in with some proposals as to where the cuts ought to be made. I know you did come in with `a program in `the early part of the year. Of course, I don't want `to leave the final decision up to you or to any other group. Mr. WINTER. We `appreciate that. Mr. WATTS. I know where you all want it cut and I know where labor organizations would cut. I know where farmers would cut. While PAGENO="0294" 282 PRESIDENT'S 1967 TAX PROPOSALS I am perfectly willing to accept all of your recommendations, I am going to have to agree with Mr. Battin that the final decision has to be made here and in the Congress because if we allow you alone to decide where the cuts are going to be made I know they are going to be made from a selfish standpoint. If we allow the labor unions alone to make them, they are going to be made from a selfish standpoint. If we allow the farmers alone to make them, they are going to be made from a selfish standpoint, or, whatever the group, it is certainly not going to recommend a.ny cuts where it is going to get hurt particularly. In other words, I found out years ago when I had been in Congress a short time that everybody in the country is for economy except on his and "his'n," and so while I might be willing to accept your recom- mendations to be evaluated, I do agree that I wouldn't want you to have the final say about it because I think I know what would happen. I do think, however, when you come in here and talk about cuts you ought to have been prepared to have brought back with you that list that you sent out in the earlier part of the year and go over it again and review what has happened in the interim. It is easy to talk about a great big cut and a little hard to do some- thing about it. You know how it goes-when you get to talking about a cut, and then you have 50 Governors and 50 States, the mayors and boards, councils of every city, the county judges and the fiscal courts of all counties, and 85 percent of the people in the country, by tele- phone, letter, telegraph and personal visit, constantly haranguing each Member of Congress for more and more and more money. It is very seldom you get a letter that wants less. Once in a while you do, but most of them want more. I have often felt that maybe Congress has done a right responsible job in not answering all the requests, because if we had met every demand for money made on us, while there may be some existing bad financial condition, we would by this time have been over the brink. So when you do come in-while it would have been nice if you could have had your specific suggestions today-I don't merely want to consider your suggestions alone. I want to get everybody's and weigh each one. I didn't ask you a question. I preached a sermon. Thank you. Mr. WINTE1i. I think in the time ahead, too, we must recognize that there will be perhaps after Vietnam-I don't know when-more and more requests from the States for some form of revenue sharing and that is going to have to have a great deal of study. I don't know what the ultimate outcome of that will be. We have just been through a very tedious procedure in Illinois trying to raise taxes, and I can tell you it is very difficult. It is difficult on the Federal level. The CJTAni~rAN. That is one thing you don't have to remind us of, Mr. Curtis. Mr. CURTIs. Mr. Chairman. I want to thank these witnesses for ap- pearing and giving this committee the benefit of their studies and evaluations. I think one of our basic problems here is a fundamental difference in economic philosophy between the new economies, as prac- ticed by this administration, and the economics of people like myself. The administration has been following the theory of moving the econ- omy forward through increasing aggregate demand, through creating Federal deficits, if necessary. This is what I call the new economics. PAGENO="0295" PRESIDENT'S 1967 TAX PROPOSALS 283 With Dr. Heller .a few years ago and members of his school, one of our problems was the absence of any concerii about deficits, and the President's school of new economists still say you don't have to worry about the Federal debt because it is a less percentage of gross national product and so on. I am leading up to the point that we ha.ve reached a critical situa- tion where the administration, as shown by its policies and its wit- nesses' presentation, and as Mr. Ullman has ably stated, obviously just doesn't believe there is anything fundamentally wrong in the deficit itself because they keep talking about "where-would-you cut?" rather than why is a balanced budget necessary. I think you stated, Mr. Madden, that when business finds that they have to balance their budget they just balance it. The difference lies in the fact that the President doesn't think balancing the budget or even approaching a balanced budget is economically necessary. This is a perfectly respectable position, but let the President admit it. I spent last week trying to go over in detail with the Director of the Budget Bureau items where the budget could be cut. Very clearly it can be. The difference lies in the fact that the administration's fiscal experts don't share this concern. Now I am coming to a basic point that I want to pose here. We can just sit here on this committee, and Congress and the executive can just do nothing. If so, I can assure President Jolmson there will be a $7 billion cut in his expenditures in fiscal 1968 of a projected $144 billion; at least $7 billion. It will be a meat-axe cut. It will be the cut imposed by inflation. Last month the consumer price index went up 0.4. If the consumer price iiidex (the measure of inflation) goes up five points, there we have the $7 billion. That comes out of the hide of the lowest income groups in our society, out of the welfare programs and out of the guts of defense in Vietnam. As I understand the administration's theory behind the tax increase, they think that increasing the tax rate will minimize these inflationary forces, but I know no economist who doubts that the inflation that we are experiencing right now, as registered in the consumer price index, is cost-push inflation. This isn't demand inflation. The falloff in industrial production demonstrates this isn't demand inflation. This is cost push. And if it is cost push we can have the unique combination of inflation and re- cession. In fact, we have had inflation and have reached this downturn. You can have less revenues at a higher tax rate. It is the deficit that is going to increase, I would say, this cost push just as much even if it is financed by a tax increase because a.t least the corporate tax be- comes a. part of cost and is passed on, as it has to be, to the consumer in increased prices. WTe have already increased costs through the payroll tax, and social security tax if that goes through. It may be a necessary expenditure, but, nonetheless, this becomes a cost item. Interest rates are part of the cost push, and here there is a. very serious situation. The administra- tion puts that aside aiid says nothing can be done about the interest rates we are paying, an increase of $2 billion from 1966 to projected 1968, from $12 billion to $14 billion. One-half of that is from the increased debt, it is true; but the other half is from increased interest rates. The Secretary of the Treasury PAGENO="0296" 284 PRESIDENT'S 1967 TAX PROPOSALS under my interrogation recognized that we could have saved money on interest rates by removing the 4%-percent ceiling on long-term bonds because for the past 2 years we have had to finance the rollover of this debt entirely in the short-term area, which has increased the cost to the Government. This is certainly not one of these items that is uncontrollable. I would say we are paying about a billion dollars more than we need to in interest rates due to this kind of foolishness. The Demo- cratic leaders of this Congress won't adhere to the Treasury's request to give them flexibility in this area. One request they made which I thought had real merit. Mr. TJLLMAN. Would the gentleman yield? Mr. Cm~TIs. Sure I will yield. Mr. IJLLMAN. The problem, Mr. Curtis, and the reason that your statement isn't right, is the fact that the short-term rates have been so much lower than the long-term rates during the past 2 years and they are still lower than the long-term rates. When you are talking about shifting to long terms now you are talking about shifting into the higher interest rate bracket rather than the low bracket. Mr. Cuinis. We are paying considerably more than 4% percent for interest, but the main point is that it gives flexibility so that you can keep your short-term rates lower. Short-term rates indeed should be much lower than long-term rates. But when the Federal Government had to go into the money market, as it did last year, for $175 billion just to finance the rollover of the Federal debt, when we find that about 50 percent of the Federal debt is now in maturities of 1 year or less, and the average maturity is now below 4 years, 3 years and some months, we begin to see this picture. This also aggravates the money market for the private sector. However, this administration has refused to take any leadership in this area. Now let's get to this business of where you would cut that was passed back to you and has been passed back to me by the admin- istration witnesses. Mr. Mills has made a fine proposal for a commission, but I would observe this. The President if he would and agreed with this theory could call this kind of commission together right now from the leaders of the Congress. The answer is he doesn't agree with this theory. I urged early this year a recision bill. It isn't quite true that the appropriation bills of this particular session have no bearing on the expenditure level. They have a bearing, but it is perfectly true the carryover balances of powers to spend granted by previous Congresses go to make up what the expenditure level for this fiscal year can be and the President has it in his power right now to cut back at least $10 or $15 billion on these expenditure levels. But notably, and I am going to repeat it, symbolically the President has abandoned the role of turning off the lights in the White House and he used that role as symbolism. I am not attacking the President when I point out that this sym- bolism has disappeared. Instead in time of war in Vietnam and war in the cities, if it can be called that, the President symbolizes a nation that can go on as if there were peace everywhere; live as usual; take your weekends. PAGENO="0297" PRESIDENT'S 1967 TAX PROPOSALS 285 Congress can adjourn on Thursdays, of course, as we have been all year, going for a 2-week recess around Labor Day. This is the kind of symbolism that the people see and then wonder, "What is this asking us to put in more money through increased taxes." There is no leadership in the Executive. The Executive in this area has said he can't do anything about expenditure cuts. Well, he can, and the reason he hasn't is that he just doesn't care to. President Eisenhower, when they first set up the space program, looked upon it as requiring a level of expenditure of $1.8 billion projected into the future. The limitation was the number of scientists and engineers in the society, not money. We have been hitting it at over a $5 billion level. You can pay a person the salary of a scientist and call him a scientist, but that doesn't make him one. You can call a person an engineer and pay him the salary of an engineer, but that doesn't make him one. This program of $5.3 billion in space is clearly an area where it could be cut back and improved and in these times certainly needs cutting back. On the defense of `Western Europe, great military leaders like President Eisenhower and others have called upon this administration to cut back on a $2 to $3 billion expenditure. This administration won't even discuss it, but here is an area where clearly we could cut back in defense. Another is atomic energy. I am going down the list again. The de- fense budget itself, just because it has the name of Vietnam on it, doesn't mean that it isn't hiding vast waste. Our Joint Economic Sub- committee this year pointed out the manner in which Secretary of Defense McNamara had made a mockery out of the terms advertised bid and competitive bidding, and the way in which money could be spent more wisely there. I have a bill in to cut approximately $2 billion in agriculture. Secre- tary Freeman says it is a bill presented by a city Congressman. Well, I don't happen to be a city Congressman, but it is the result of years of work of the Joint Economic Committee where we have been trying to study this field of agricultural economics and my work as a mem- ber of the delegation in Geneva and in our GATT conferences. The American Farm Bureau I am happy to say has supported this ap- proach, but, no, this administration keeps on with their agriculture program again as if things were normal. It is a bad program. It is bad for commercial agriculture. It is adding at least $2 billion to these expenditure budgets that, note, don't need to be added. To get into the business of the use of personnel by the administra- tion, one never hears about productivity increases when it comes to the work of the Federal Government. It is just a continued increase of employees with very little real work done on the job of reclassify- ing skills and relating wage rates to skills. Also there is the manner in which the administration rammed through without study the military manpower program based on the draft, which is about as expensive and poor a manpower program as we have. You go down the list and you don't even have to touch the war on poverty to get at least $10 billion, $15 billion out of this budget. Mr. Chairman, for the record the expenditure levels of this Federal Government in fiscal 1960 were $77 billion. The testimony last week PAGENO="0298" 286 PRESIDENT'S 1967 TAX PROPOSALS by the Director of the Budget indicated it might be $144 billion for fiscal 1968. We were not a poor country or a country overlooking the needs of our people in 1960. I want to call attention to a couple of other things. President Kennedy, I remember, in 1960 campaigned saying we have to double the amount we are spending on education in our so- ciety in the next decade. My response was why was he asking us to slow down? We almost tripled the amount from 1950 to 1960. I can tell you that we have slowed down, because Federal money not wise'y spent can drive out private and local money, reduce effort, and this is what we are seeing. At least we should look at this area. In foreign aid and other areas, spending ought to be cut back from a total figure of $5.1 billion to what the Clay Commission recommended, about $1.8 billion. I say this, as one who favors the theory of foreign aid because you can have the Curtis corollary to Gresharn's law oper- ating, namely, that Government money will drive out private. WTe see it in the Alliance for Progress, where the misuse of Government in- vestment has actually not increased private investment, either from the developing society itself, or from American private investment. So there is such a thing as going beyond the point of diminishing re- turns in expenditure polic~~ and this certainly is the issue before this committee. We can go beyond the point of diminishing return in tax policy. The chairman, himself, of this committee, on the floor during the debt ceiling debate, raised the question whether increasing rates would ac- tually produce more revenue. Our tax rates are still too high. We could embark on a program for 20 years of reducing Federal income tax rates if we held our expenditures and increased our revenues through the expansion of the tax base. These are the issues as I see it. I think your tstimony has been on the point. The reason I have, in effect, testthed here was in light of the cross-examination of Mr. TJlhinan. He restated the administration's case quite accurately, in my opinion. I think it is a poor case. I think it is founded on misconceptions of proper fiscal and economic policy, but I certainly want to zero in on this business of cutting back ex- penditures. It is the correct course to take. It can be done. Mr. Mills' pro- posal can be adopted, but cutting expenditures doesn't have to wait for that. If the President believed this he could start exercising lead- ership today along these lines, and Congress could just heave a sigh of relief and support him on it and get this budget deficit down to about $10 or $15 billion. I think we are going to have to have a deficit of that size. In deal- ing with a deficit of that size, it makes sense to talk in terms of what we might do to finance some of it through increased taxes and not have it all go into the Federal Reserve or into the money market. But until the administration agrees with this, I don't think it makes any difference how you finance a $30 billion deficit. The economic consequences and the damage are so great and the burden it is going to put in this cost-push inflationary area is such that we are going to have the meat ax cut of inflation. Thank you, Mr. Chairman. The CHAIRMAN. Any further questions? PAGENO="0299" PRESIDENT'S 1967 TAX PROPOSALS 287 If not, we thank you, gentlemen. Mr. WINTER. Thank you. The CHAIRMAN. Our colleague from New York, Mr. Tenzer, is now in the room. We are pleased to have you with us this morning, Mr. Tenzer, and you are recognized, sir. STATEMENT OP HON. HERBERT TENZER, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP NEW YORK Mr. TENzER. Thank you, Mr. Chairman and gentlemen. Mr. Chair- man, I appreciate this opportunity to appear and testify before you and the other distinguished members of the Ways and Means Com- mittee, on the President's 10-percent tax surcharge proposal. I will also outline my own suggestion for an alternative to raise the same amount of revenue or, should you so decide, to raise twice the amount sought by the administration without costing more tax- payers any more than the President ha.s proposed. At the outset let me say that I oppose the President's proposal for a .surcharge in its present form. I will continue to oppose it un- less it includes provisions to tax the untaxed. By what I mean, the surcharge or equivalent should apply to those whose income is derived from depletion, depreciation, capital gains, and other loopholes and tax-sheltered income, so long as the surcharge remains in effect. By this suggestion I am not proposing a broad change in our tax laws at this time. While a comprehensive reform of our tax laws is long overdue. I realize that this desirable result will require sepa- rate study by this committee. To accomplish this I have introduced in the House, House Joint Resolution 454 to establish a Commission on Unequal Taxation. The Commission would be charged with the responsibility to review the entire tax structur&-the existing inequities-the tax loopholes-and would make recommendations to the Congress designed to equitably distribute the tax burden. Prior to my election to the Congress in November 1964. I was the senior partner of a New York law firm. I have been a practicing attor- ney for 38 years. During this period I served as chairman and a direc- tor of a number of business corporations and of three commercial banks. I have also had extensive experience and investments in real estate. While I have had a wide experience in law, business, banking, and real estate, I am not a tax expert or an economist. I do know that the generally accepted theory of taxation in Amer- ica is that money to be used in the service of all the citizens is justly raised by taxation; that a tax which does not apply equitably upon all or which, applying equitably upon all, is used for the benefit of a few, is unjust. In his first annual message to the Congress on December 2, 1817, President James Monroe said: To impose taxes when the public exigencies require them is an obligation of the most sacred character, especially with a free people. If "taxation without representation is tyranny," then representa- tion without taxation is scandalous. PAGENO="0300" 288 PRESIDENT'S 1967 TAX PROPOSALS Let me cite examples of what I consider as scandalous. The Internal! Revenue Service has informed me that in calendar 1964, there were 35 individual returns filed with adjusted gross incomes of $500,000 and over, and on which no Federal income tax was paid. These returns represented a total adjusted gross income of $75.2 million. The Internal Revenue Service also informed me that in the same year, 24,084 individuals filed tax returns with adjusted gross incomes in excess of $10,000 and paid no taxes. The combined adjusted gross income of these individuals was $523,515,000. I have here, Mr. Chairman, a letter from the Office of the Secretary of the Treasury under date of August 22, 1967, signed by Samuel M. Jones, Deputy Assistant to the Secretary, in which these figures are confirmed. The CHAIRMAN. Do you want to make it a part of the record? Mr. TENZER. I would like to make it a part of the record at this point. The CHAIRMAN. Without objection it will be included in the record. (The letter referred to follows:) OFFICE OF THE SECRETARY OF THE TREASURY, Washington, DXL, August 22, 1967. Hon. HERBERT TENZEB, House of Representatives, Washington, D.U. DEAR MR. TENZER: In reply to your request for information, pertaining to the number of non-taxable income tax returns showing adjusted gross incomes in excess of $10,000, I am providing the information you requested for the year 1964, which is the most recent year for which statistics are available. In 1964, 24,084 non-taxable income tax returns with adjusted incomes over $10,000 were filed with the Internal Revenue Service. The total adjusted gross income of these non-taxable returns was $523,515,000. A table explaining the above is attached. Very truly yours, SAMUEL M. JONES, Deputy Assistant to the secretary. Mr. TENZER. Thank you. It is equally scandalous that certain cm'- porations enjoy unusual special privileges under our tax laws, while most `corporations pay at the rate of 48 percent. One example of the special privileges to which I refer, is that ex- tended to the oil companies. In 1964 the U.S. income taxes of the 22 largest oil companies when taken together reveal these interesting statistics: Year 1904 (combined) Gross profit $5, 179, 036, 000 Federal tax (4 percent of gross) 240, 529, 000 Foreign, some State tax (20 percent of gross) 1, 064, 383, 000 Income after tax (74 percent of gross) 3, 873, 836, 000 It is shocking that the largest oil `companies pay a smaller percentage of their net incomes in taxes `than small businessmen, workers and farmers. The man in the lowset tax bracket pays 14 percent ~f his net income in taxes, while the figures I just mentioned showed that the Federal tax of these 22 companies was 4 percent. I have read the testimony `of Secretary of the Treasury Henry H. Fowler; of Assistant Secretary ofthe Treasury Stanley S. Surrey; and of `Chairman Gardner A.ckley, Council, of Economic Advisers `and others who testified last week before this committee. They presented PAGENO="0301" PRESIDENT'S 1967 TAX PROPOSALS 289 the problem of a $29 billion deficit facing the administration. They explained how they plan to borrow 50 percent, cut 25 percent, and tax 25 percent, to meet the deficit. I have read their analyses of the needs for additional tax revenues. I may even agree wtih their fears about inflation. However, I cannot understand why they have overlooked, as a source of revenue, those who pay no taxes at all and those who do not pay an equitable share of the tax burden. The Secretary of the Treasury in his testimony on page 37 of his prepared statement said as follows: I want to make quite clear that the choice of the surcharge form to meet a temporary need by no means implies a turning away from the need for achieving important permanent structural changes in the tax system. Indeed, as the President stated in his Economic Message, he will be sending a message proposing comprehensive tax reform later in this Session. Both in timing and objectives, however, tax reform should be distinguished from the present temporary surcharge recommendation. The surcharge is needed flOW for revenue. Expeditious action is essential if it is to achieve its purpose. It is a temporary measure and not a permanent part of our revenue structure. The central issues for Congressional concern are the size of the needed increase and its timing. The Tax Reform Message will require more deliberate consideration since it involves proposals for permanent structural changes and some redistribution of tax burdens in the interest of a fairer sharing of the load. Its basic objective is not to raise revenue but to correct a number of inequities and abuses in our tax system. Tax reform is a job that very much needs to be done. I hope your committee will be giving its consideration to the President's reform recommen- dations in the months ahead. However, I am not speaking now of overall tax reform. I am address- ing myself to the present needs and how best to meet them. I do not agree with the Secretary of the Treasury that we must wait for a tax reform message until after the tax surcharge is disposed of. We have had promises of tax reform before. The Democratic platform of 1940 contained the following declara- tion. "To encourage investment in productive enterprise, the tax- exempt privileges of future Federal, State~ and local bonds should be removed." The Democratic platform of 1948 said, and I quote-"We shall en- deavor to remove tax inequities and to continue to reduce the public debt." The Republican platform of 1952-"A thorough revision and codification of the present hodge-podge of internal revenue laws," requires attention. And finally, the late President John F. Kennedy in his special mes- sage to the Congress on taxation, April 20, 1961, said; While it is essential that the Congress receive at this time this Administration's proposals for urgent and obvious tax adjustments needed to fulfill the aims listed above, time has not permitted the comprehensive review necessary for a tax structure which is so complicated and so critically important to so many people. This message is but a first though urgent step along the road to con- structive reform, . . Moreover, special provisions have developed into an increasing source of pref- erential treatment to various groups. Whenever one taxpayer is permitted to pay less, someone else must be asked to pay more. . It will be a major aim of .our tax reform program to reverse this process, by broadening the tax base and reconsidering the rate structure. The result should be a tax system that is more equitable, more efficient and more conducive to economic growth. . PAGENO="0302" 290 PRESIDENT'S 1967 TAX PROPOSALS I would urge the President not to wait with his tax reform message. The taxpayers who are already paying their share want to know what this administration intends to do about those who by tax avoidance procedures, do not pay their equitable share of the tax burdens. They want to know now. The President should send his tax reform proposal to the Congress without delay. Such action will create an air of confidence in the minds of the taxpayers. It will serve to encourage them in giving objective consideration to the Nution's budgetary needs. They will better under- stand what the President's advisers are saying. The proposal which I am making today stems from the fact that I want everyone to share in the Nation's mounting tax burden. I want everyone to contribute to the Nation's obligations at home and abroad. Mr. Chairman and gentlemen of this committee, last Thursday I introduced H.R. 12445, a bill to impose a minimum income tax on cer- tain individuals and corporations with substantial incomes. My pro- posed bill has the following features: (1) Taxpayers with less than $10,000 in actual income will be ex- empt. (2) A minimum income tax to apply across the board so as to reach all tax loopholes and tax-sheltered income, income from tax exempt securities, nontaxed capital gains, excess of percentage over cost depletion and real estate depreciation income. The thrust of my proposal is to tax the untaxed by having them pay a minimum income tax of 10 percent, to remain in effect only so long as the President's surcharge tax remains in effect. I have carefully considered this proposal to establish fairness and equitable treatment among all individuals and corporations. I am not wedded to the text of my bill but to the equity behind the principle. If the principle is accepted, then I am certain that the dist.inguished chairman and members of the House Ways and Means Committee and their tax experts will amend the bill to correct its deficiencies and omissions. One of the individuals who paid no tax in 1964 had an adjusted gross income of $5 million. Under the President's proposal he would not contribute to the cost of running the Government because no matter how you look at it, 10 percent of zero is still zero. I want those with substantial incomes who pay no taxes to con- tribute their just share of fighting the war in Vietnam; fighting the war on poverty, and the battle to clean up and rid the riot potential cities of slum areas. I want them to pay an equitable share of the bur- den of providing education, medical facilities, and building our high- ways, the `benefits from which they share with their fellow citizens. H.R. 12445 (Tenzer bill) is not a tax reform measure. It does not single out any particular tax loophole for reform. It simply requires a minimum contribution to the Nation's tax burden through a mini- mum income tax applied to all income-without regard to exemp- tions, deductions or other special privileges set forth in the Internal Revenue `Code. I fully realize that tax reform cannot be `accomplished overnight; however, the time to start is now. A complete overhaul of our tax laws is urgently needed and will be of long-term benefit to our Nation. PAGENO="0303" PRESIDENT'S 1967 TAX PROPOSALS 291 With the President's tax surcharge proposal intended to raise only 25 percent of the $29 billion riefleit, it seems only fair, reasonable. and equitable that every taxpayer, individual or corporate, should pay something toward the tax revenue needed to prevent unbridled in- flation. Unofficial Treasury Department estimates confirm that my proposal will produce about $7 billion in additional revenue. By spreading the tax burden to those who were previously untaxed, other taxpayers will be assured that the surcharge is only temporary. My proposal can be used as an alternative or as an amendment to the President's surcharge proposal. Under the President's tax surcharge proposal, the law and fixed- income taxpayer, one who earns less than $5,000, is exempt. He may, however, be adversely affected if the budgetary cuts of $7'/2 billion extend to the basic human needs which he requires to sustain himself and his family. The additional tax revenues which my proposal will produce, to- gether with the President's surcharge, will provide sufficient funds to safeguard against budgetary cuts in the areas of human needs such as health, education, and housing. I have already stated to the President, in person and in writing, that I will oppose the surcharge in the absence of some sharing of the tax burden by the untaxed and those who have taken advantage of various tax shelters, legal though these actions may have been. For the long term a complete overhaul of our tax laws is necessary. My proposal will answer the question for the short term and indicate to the taxpayer who will be called upon to pay the surcharge that others of their fellow citizens are not escaping their proportionate share of running the Government. Let the tax and economic experts of this distinguished committee draft a proposal which will equitably distribute the tax burden re- quired by the fiscal 1968 budget. If a just and equitable revenue proposal is desired, then our policy should be, "Everybody pays or nobody pays." The CIiAIR~rAN. Mr. Tenzer, we thank you, sir, for coming to the committee to discuss your idea with us. Any questions of Mr. Tenzer? Mr. Curtis. Mr. Crn~TIs. Simply this, Mr. Tenzer. I welcome your support to get a tax reform bill before this committee. There are many areas that I felt we need to move in on. I would make the observation, though, that I doubt if a tax reform bill is going to end up with as much net rev- enue for the Government. We may get some additional revenue, but some of the taxes or rather the return that you referred to that are paid on taxes need a little fur- ther explanation. Some that you mention I particularly recognize are those that pay no tax because they give all their money to charities. I think our charities are fairly well established as to what the money goes for. Maybe we ought to revise it. Personally, I think if money is spent in this area it is true that it doesn't come to the Federal Government, but it doesn't go to these individuals either. The same thing when you mention big-city problems. Another big area where the people do not pay taxes are those who buy municipal PAGENO="0304" 292 PRESIDENT'S 1967 TAX PROPOSALS bonds, but they are men and women who, of course, are trying to get the most return for their money and they could get a much higher rate of return from other forms of investment. They choose the lesser amounts they can derive from municipal bonds because of its tax- exempt feature. But if your reform were to be enacted, and eliminate that feature, you would be shutting off the source of the financing of schools, sewers, and community facilities. The very expenditures that we are seeking to encourage would involve much higher rates of interest and probably a lot of these projects would go by the board. I only point this out because there is this point that our laws are not as inequitable as they might seem although I again share with you the awareness of the need to look at these areas constantly and I think we do need to look. I hope a bill will get before us and we will zero in on some of these areas, including the ones I mentioned. Mr. TENZER. May I comment on that, Mr. Curtis? Mr. Cm~ris. Yes. I just want to raise the red flag that I don't think you are going to find the juicy sources of revenue that can be derived from closing up inequitable loopholes. Yes, sir. Mr. TENZER. I wish you would have said red light instead of red flag but I think I know what you mean. One of the statements you made was about the man who gives all to charity. Mr. CURTIs. Yes, that is right. Mr. TENZER. Of course, you know that is not the usual case; it is the exception to the rule rather than the practice. Mr. CunTIs. Yes, but the $5 million you mentioned in your state- ment is why I mentioned it. Mr. TENZER. There are others, and I would like to offer for the record a statement from the Library of Congress quoting the Internal Revenue Service about the 35 individuals with $500,000 adjusted gross income or more in 1964. (The information referred to follows:) THE LIBRARY OF CONGRESS, LEGISLATIVE REFERENCE SERVICE, Washington, D.C., January 13, 1967. From: Economics Division. Subject: Nontaxed incomes of more than $500,000. The Internal Revenue Service has informed us that in calendar 1964, there were 35 individual returns filed with adjusted gross incomes of $500,000 and over; and on which no Federal income tax was paid. These returns represented a total adjusted gross income of $75.2 million. A breakdown of the income characteristics of these returns follows: PAGENO="0305" PRESIDENT'S 1967 TAX PROPOSALS 293 Number of returns Thousands of dollars Salaries and wages 19 Business or profession income: Net profit 12 Loss 8 1, 145 14 3,050 Farm income: Net profit Loss 1 8 27 838 Partnership income: Net profit 4 Loss 17 Sales of capital assets: Gain 29 Loss: 0 24 2,625 21,063 0 Sales of depreciable property: Gain 6 24 Loss 0 0 Sales of other property: Gain 0 0 Loss 3 72 Dividends Interest Pensions and annuities 32 33 6 57, 609 2,577 74 Net income from rents 8 Net loss from rents 13 Royalties: Gain 59 193 ~ Loss 1 8 Net income from other sources 0 1,430 Source: Statistics Division, Internal Revenue Service. IRS indicated that, in general, the most probable factors accounting for this income being non-taxable are tax credits and itemized deductions, especially large contributions. For greater detail on this issue, a copy of Philip Stern's, The Great Treasury Raid, is also enclosed. See especially Chapter 1. PAUL F. PREsTON, Analyst in Public Finance. Mr. Crnms. Sure. Mr. TENZER. Let me say this. First of all, my own income, which is partly sheltered by real estate depreciation and capital gains, will be taxed considerably more under my bill than under the President's surcharge proposal, so I am not talking about soaking the rich. I am talking about taxing myself as well. I give substantial amounts to charity, but the foundation provision of the tax laws was originally intended to serve a useful purpose. It has been perverted by some and we ought to look into it in depth and we ought to correct the defects in the system. Mr. Cun~ris. I agree with that. Mr. TENZER. The second point you make was about municipal bonds. I told the President that I had an individual visit me 3 weeks ago over a weekend. This is a man whom I represented over 20 years ago when he and his brother sold the business. He invested all of his proceeds in the sale after paying capital gains tax in tax-exempt securities. 83-349-67-pt. 1-20 PAGENO="0306" 294 PRESIDENT'S 1967 TAX PROPOSALS Last year he had $170,000 of income, all tax exempt. He came to me to complain about the war in Vietnam and about the riots in our cities and I asked him, "Joe,"-his name isn't Joe-but, "Joe, how much did you pay toward replacing the hardware this Government lost in Vietnam? How much did you pay to improve conditions in the slums of our riot-potential cities ?" and he said, "None." I said, "Well, I am going to propose a bill that is going to make you pay some," and this good friend of mine said, "How much?" I said, "At least 10 percent." He said, "So that means that I would have to pay $17,000, I would gladly pay. Nobody asked me." I don't want to eliminate provisions relating to municipal bond in- come. I don't want to eliminate the tax-exempt bond procedures. When you are asking me to tell my constituent who has to pay $1,000 in taxes, "I want you to pay $100 more to meet the current budget, to meet the exigencies and the needs of our country," I want to turn around to him and say that that man who had the $170,000 income is going to pay $17,000. Everyone should pay something. That is all I want to accomplish. Mr. C1TmT'is. The point is that I think he may not realize it, but he actually is paying something. If he had invested in other forms of investment he would probably be earning, say, $400,000 instead of $170,000. He has foregone this. Mr. TENZER. But that was his choice. Mr. Cuwris. I understand it, but I am simply saying that the net result was that the $130,000 in effect went to the cities of this country to assist them in building these community projects. Now let me point out- Mr. TENZER. It will still go for that, Mr. Curtis. Under my proposal it will still go to them. It will not detract one bit. Mr. CURTIS. I am simply posing the economic problem. I again agree with you that these things need to be looked into. One other thing, because I find this is so frequently misunderstood. The Federal Government under the 16th amendment does not have the power to tax return of capital. We didn't put depreciation laws and depletion laws in there out of choice, but the Constitution forbids us to tax return of capital. Now, it is true tha.t I think we need to look at the way we measure return on capital and depletion and depreciation, but let's don't over- simplify it; or real estate depreciation you mentioned, because in one sense through inflation we actually have been imposing a tax on return of investment to our people, a return of capital investment, so this needs looking into, I must emphasize, but I don't think you are going to find these source~s of revenue that you anticipate because these have not been written completely irrationally. Mr. TENZER. May I comment on that, Mr. Curtis? Mr. CURTIS. Sure. Mr. TENZER. In H.R. 12445 which has been referred to this committee on page 3, section 4, it says: An amount equal to the amount by which the allowance under Section 167 relating to depreciation for real property for the taxable year was greater than it would have been under the straight line method of depreciation when applied to such property for the taxable year. PAGENO="0307" PRESIDENT'S 1967 TAX PROPOSALS 295 Mr. CURTIS. But you can never get more than 100 percent back, sir, and that is the point. This is just getting it back earlier. Mr. TENZER. But may I call to your attention, Mr. Curtis, that there are provisions under our tax laws today under which you get back more than 100 percent. Mr. CURTIS. I think this 7 percent is wrong and I oppose it and said so at the time. Mr. TENZER. Besides the 7 percent. Mr. CURTIS. This was the administration's reform. Mr. TENZER. Besides the 7 percent. Mr. CURTIS. I don't know how that- Mr. TENZER. Let me give you a simple example. You buy a Cadillac car for $6,000 and depreciate 25 percent a year for 4 years. You have gotten 100 percent back. You sell the Cadillac car for $2,000 and pay a capital gains tax on it. The question is, Should the capital gains tax under circumstances when you received 100 percent of your capital back be only 25 percent? Let me give you another example in real estate. Mr. CURTIS. Wait a second. I want to say there you are raising an- other question which is an important one, but a different one. You are now talking about the different treatment of ordinary income from capital gains and here I think we do need to do some work, but again it is a different principle. The CHAIRMAN. Just a minute now. On that particular point, Mr. Tenzer, we have corrected that situation at least-the example of the Cadillac you gave. Mr. Vanik. Mr. VANIK. I just want to say that I think our colleague from New York has made some very worthy recommendations, and I concur in the need for tax reform. But I would like to direct your attention to the fact that the President's recommendation for tax reform spe- cifically said that it wouldn't be primarily directed toward raising increased amounts of revenue, but that it would be directed toward making adjustments that are not discriminatory. I think the President should be urged to try to raise some revenue with his tax reform proposals, and I certainly solicit the support of my colleague from New York in encouraging the President to come up with that kind of a recommendation because I concur that we can raise a substantial amount of tax revenue by tax reform. I might point out that in addition to those commonly known as escape routes which the gentleman has suggested there are many others that are unknown to many of the members of this committee. They haven't yet been made public. We don't make a practice here of looking at tax returns. I think we should look at specimen unidentified tax returns ~o find out new and unusual and extraordinary devices that are not com- monly known. I think that we would probably double our estimates of revenue lost if we were to use this approach to raising revenues in the tax program. Mr. TENZER. Let me say to my distinguished colleague that 1 be- lieve that it would be much easier for this committee, the distinguished chairman and members, to get the information than what I experienced in trying to gather data to study this problem. But I also would like to PAGENO="0308" 296 PRESIDENT'S 1967 TAX PROPOSALS say that if there is the danger of inflation and I am prepared to accept the thesis presented by the distinguished economists who addressed this committee that there is danger of inflation-then I think the President's direction should be to seek additional revenues and to cut the deficit and cut the items necessary to prevent and avoid an un- necessary inflationary spiral. Mr. VANIK. Thank you. The CHAIRMAN. Mr. Collier. Mr. COLLIER. One question. I didn't read H.R. 12445 and conse- quently from what you say here you say taxpayers with less than $10,000 will be exempt from your proposal. Mr. TENZER. Yes, they would pay their normal tax. Mr. COLLIER. They would pay their normal tax. Mr. TENZER. Yes. They might be subject to the surcharge, but if they paid a minimum tax on all of this income that they enjoy from these four sources, which would be 10 percent as a minimum, if they are paying more than that by their regular return they would not be subject to this tax at all. The main thrust of my approach, and I think you will be able to revise it and fashion it to meet the needs, is to see that the man with an income of a million dollars, with the $200,000, with the $400,000 income, who pays nothing, should pay a minimum of 10 percent. Mr. ColLIER. Tinder normal conditions I recognize that your state- ment in that regard is very clear. Let me ask you though in the light of your response to my previous question, just one other question. Are you not suggesting then under this proposal of yours that the single man making $10,000 a year income is in no better position to pay a tax than a married man with four children who is making $11,000? Mr. TENZER. He wouldn't be subject to it either when he takes his deductions. Mr. COLLIER. Then I misunderstood you originally. Maybe we ought to go back and get that straight. You say that the taxpayers with less than $10,000 in actual income would be exempt. Now going that far, and you responded to my question, *then I must repeat that the man who is making $12,000 a year who has four children or five children would then according to your theory be in a better position to make a contribution than the single taxpayer with $10,000. Mr. TENZER. No, the man with the four children would have six deductions and the single man wouldn't have those deductions. Mr. COLLIER. But you say actual income. I only accepted it in that verbiage. Mr. TENZER. Adjusted gross income. Mr. COLLIER. Now that throws a whole new light. In other words, a taxpayer with less than $10,000 of taxable income would be exempt. Mr. TENZER. $10,000 of adjusted gross income plus the four cate- gories set forth in my bill. Mr. COLLIER. With all of these crying needs you are speaking about. Mr. TENZER. Yes. Mr. COLLIER. That is all. PAGENO="0309" PRESIDENT'S 1967 TAX PROPOSALS 297 Mr. TENZER. That is adjusted gross income. If you are shocked by that let me say again that you should be visibly moved by the fact that there were 24,084 income tax returns with adjusted gross incomes over $10,000 filed in 1964, all of whom paid no tax. Mr. COLLIER. I am, but I am merely pursuing this on the basis of the underlying purpose of your bill and that is equity and ability to pay. I am shocked about the other part too, but I just had a double stock with this $10,000 limit. Mr. TENZER. Those under $10,000 would be paying their adequate share of the tax burden by a normal tax return which they would be required to file. Mr. CoLLI]~. Regardless of family status, dependency, and so forth? Mr. TENZER. With all the deductions that they would be entitled to, they are already paying their equitable share. The CHAIRMAN. Mr. Bush. Mr. BUsH. Mr. Chairman, I have several questions, but what is the time? We don't have much time. The CHAIRMAN. We had our second bells. Mr. BUSH. Just briefly, I wonder if the gentleman has figured the inflationary consequences of this tax proposal as it relates to corpora- tions. It seems to me that as I read it if you add the $7.5 billion set from the surcharge and he is talking about another $7.5, most of which comes from corporations, you are really talking about doubling the corporate tax here. Mr. TENZER. Let me say that a 10 percent minimum tax which It propose, I am informed by unofficial Treasury Department sources, would yield $7 billion. It would be $5 billion plus from individuals, and only $1 billion plus from corporations. A 5 percent minimum tax would yield $1.5 billion from individuals, and $100 million from cor- porations. The total amount of taxes collected last year: 1966 taxes paid by corporations was $30 billion. Taxes paid by individuals was $61 billion. Mr. BUSH. Mr. Chairman, as I said I had several other questions but one of them is as it relates to the oil industry because I believe the statement only covers part of the story. The oil industry does pay its fair share of the taxes and I don't think we have time to develop this here but I just didn~t want the record to go unchallenged. I would be glad to continue this discussion with the gentleman at some other time but I don't want this statement to go unchallenged as to an industry that is vitally important to this country. I just regret we don't have time to continue this right now. Mr. TENZER. I think all industry is important to this country. It is just a matter of degree but I will be glad to file, as an exhibit, with the permission of the chairman a statement showing the United States income tax of the 22 largest oil companies for 1962, 1963, and 1964 which shows the gross profit of $5,179,000,000 and Federal tax paid of only $240 million whereas they paid to foreign governments and some States $1,064,000,000. PAGENO="0310" 298 PRESIDENT'S 1967 TAX PROPOSALS (The exhibit referred to follows:) REPORT FROM WASHINGTON, CONGRESSMAN HERBERT TENZEJI, 5TH CONGRESSIONAL DISTRICT, NEW YORK [From the Congressional Record of Jan. 26, 1967] HR.. 3803 SEEKS To REDUCE THE OIL DEPLETION ALLOWANCE Mr. TENZER. Mr. Speaker, on January 25, 1967, I introduced H.R. 3803, a bill to reduce the oil depletion allowance from 271/2 percent to 20 percent at the rate of 21/2 percent annually over a 3-year period. The bill also requires the Secretary of the Treasury to reduce the tax allowance by an additional 50 percent whenever he finds that a substantial part of the tax savings has been used to finance mergers with or to purchase companies in un- related fields. Our Federal budget is increasing and our local village, town, city, county, and State budgets are likewise increasing-often to an even greater degree. Plugging the tax loopholes is our way to equalize the tax burdens among the Nation's tax- payers, corporate as well as individuals. The special privileges under our present tax laws to the oil companies are inequitable and require all other corporations and individuals to carry a greater share of the `tax burden than they should be carrying. It is shocking that the largest oil companies pay a smaller percentage of their net incomes in taxes than small businessmen, workers, and farmers. The man in the lowest tax bracket pays 14 percent of his net income in taxes while in 1965 the 20 largest oil companies paid an average of 6.3 percent of their net incomes in Federal taxes. These companies had a combined net income of more `than $5.7 billion, yet paid only $360 million in taxes. PAGENO="0311" PRESIDENT'S 1967 TAX PROPOSALS 299 ~ E < -U, 0~ C', ~ ~ ~r~C~U'~( 6 ~ gg~ggg~gs~ 0) ~0)N~- (~) ~ C') ç~ C') CO -U, V-U) U) U) cO~ CO C') 0) o ~ c 0 ~C ~ (N ~ ~ (0 CO~ U) (0C' `0CC) CC) - (N (N - (N ~ >c~ ~ C') >< o C) Ci C) E I .2 I ~ I : `0 ` `0 `0 1 ~ d a U, 0 U, U, ~ C~ U, U, U, U, O~ () C.) U) ~ U, PAGENO="0312" U.S. INCOME TAXES OF 22 LARGEST OIL REFINERS (1962-64) `-Continued Rank in size Year Gross profit Federal tax Percent Foreign, some Percent Income after tax Percent States' tax of gross Sinclair 1962 57,936,000 0 0 10,586,000 18 47,350,000 83 1963 71, 036, 000 1,200, 000 0 9, 532, 000 13 62, 704,000 88 1964 66,444,000 23,119,000 0 10,531,000 15 58,736,000 88 Marathon 1962 35, 894, 000 2 2, 200, 000 0 205, 000 . 5 37, 889, 000 105 ~ 1963 50, 058, 000 (3) 0 933,000 1. 8 49, 125, 000 98 ~j 1964 63, 220, 000 (3) 0 2, 844, 000 4. 4 60 376, 000 95 rjs Atlantic 1962 61, 110, 000 0 0 14, 844, 000 24 46 266, 000 75 - 1963 56,747,000 0 0 12,734,000 22 44 013,000 78 ~ 1964 61,081,000 0 0 14,005,000 22 47 076,000 77 ~ Tidewater 1962 35, 191, 000 228,000 . 6 2, 387, 000 6 32, 576, 000 93 1963 42,795,000 263,000 0 3,384,000 8 39 474,000 92 1964 40,508,000 377,000 13.7 4 426 000 11 35705 000 C12 Ashland 1962 24,324,000 6,201,000 25.8 2,799,000 11 15 324,000 63 1963 28,769,000 10,556,000 37.7 104,000 .3 18 109,000 64 `-` 1964 36, 385, 000 9, 672, 000 26, 8 2, 977, 000 8 23, 735, 000 65 ~ Sunray 1962 41,203,000 3,850,000 9.3 1,152,000 2.8 36 201,000 88 ~ 1963 49, 727, 000 6, 533, 000 13. 3 1, 328, 000 2. 7 41 866, 000 85 ~a 1964 29,357,000 27,115,000 0 1,290,000 3.6 35,182,000 100 Pure 1962 27, 680, 000 2 2, 546, 000 0 1, 276, 000 4 28 950, 000 107 1963 28,582,000 21,212,000 0 27,000 .01 29 767,000 106 1964 32,282,000 600,000 .01 164,000 .5 31 518 000 98 Skelly 1962 22,674,000 1,260,000 5.7 250 000 1 21164 000 96 1963 27, 479, 000 3, 025, 000 7. 7 275, 000 4 24 179, 000 89 1964 26,601,000 785,000 1.2 275 000 2 25 551 000 98 o Richfield 1962 36, 615, 000 6, 000, 000 16. 6 0 0 30 615 000 83 ~j 1963 29, 767, 000 1, 300, 000 4. 4 773, 000 2. 6 27 894 000 94 ~ 1964 26, 255, 000 2 629, 000 0 5, 429, 000 20. 8 21, 455, 000 82 Total 1962 4,198,161,000 164,500,000 4 838,891,000 20 3 194 770 000 76 ~ 1963 4, 908, 386, 000 246, 660, 000 5 950, 540, 000 19 3 649 849 000 74 ~ 1964 5, 179, 036, 000 240, 529, 000 4 1, 064, 383, 000 20 3, 873, 836, 000 74 1 Compiled from records of the U.S. Securities and Exchange Commission by the staff of "The 3 Marathon is the only large oil company that has been able to conceal its domestic income taxes Gasoline Letter." Warning-this table is part of the Mar. 21, 1966 issue of "The Gasoline Letter" in the Securities and Exchange Commission files. We phoned Girard Jetton, Marathon's tax chief and may not be reproduced by any means-including office copying equipment-without prior and asked the U.S. figure, but he said it's a secret. Since the firm probably doesn't want to keep written permission of the publisher. Violation of copyright is a Federal offense carrying penalties secret the smallness of its foreign taxes, it's assumed the U.S. tax is small and all of Marathon's from $500 to $2,500. income taxes are listed here as foreign. 2Cr PAGENO="0313" PRESIDENT'S 1967 TAX PROPOSALS 301 Mr. BUSH. And I suggest to the gentJeman that this is only part of the story and what I would like to suggest if we had time to de- velop it is that if you look at the First National City Bank record of cor~orations and their tax burdens, their overall tax burdens related to their *assets, for example, the oil industry bears its share and we can't develop this in 5 minutes but I would be happy to continue the discussion at a later date. The CHAIRMAN. Mr. Tenzer, we thank you, sir, for coming to the committee and without objection the committee will reconvene at 2 o'clock this afternoon. Mr. TENZER. Thank you very much, Mr. Chairman. (Whereupon, at 12 :32 p.m., the committee recessed to reconvene at 2 p.m., the same day.) AFTER RECESS (The committee reconvened at 2 p.m., Hon. Al Uliman, presiding.) Mr. ULLMAN. The committee will come to order. Our next witness is Mr. John C. Davidson. We are happy to have you before the committee, Mr. Davidson. We will welcome your counsel on this matter. Will you please identify yourself for the record and proceed as you see fit. STATEMENT OP 3OHN C. DAVIDSON, PRESIDENT, TAX COUNCIL Mr. DAVIDsoN. `Thank you, Mr. Chairman. I am John C. Davidson, president of the Tax Council. I appreciate the privilege of appearing in these hearings in behalf of the Tax Council. The council is a business-supported organization concerned primarily with encouraging a tax philosophy and structure in harmony with the economics of progress. The second paragraph is directed to Mr. Mills primarily, Mr. Chair- man, but I will read it because I like this paragraph, if I may. To begin with, Mr. `Chairman, may I say we are most mindful `and appreciative that the grim fiscal facts of 1967 have not deterred you and your `colleagues on this committee, the Secretary of the Treasury, and other top policy people, from reaffirming the goal of more and repetitive tax reduction from revenue growth at the earliest possible date. To summarize this statement, our views on the current problem are: First, in the interest of resuming strong and sound economic growth with its yield of new `and `better jobs, corporations should not be `asked to take on a new tax burden which is any larger relatively than is imposed on individuals or, more specifically- (a) the rate of `a temporary surcharge should be the same for corporations as for individuals, (b) the effective date of a temporary surcharge should `be the same for corporations as for individuals, (c) a temporary surcharge should be applied only to the final corporate tax bills; that is, after the foreign tax `and investment credits have been given effect, PAGENO="0314" 302 PRESIDENT'S 1967 TAX PROPOSALS (d) there should not be at this time any further speedup of corporation tax payment, either by increasing the percentage of current payment for liabilities in excess of $100,000, or by be- ginning to require current payment. for liabilities up to $100,000. Second, a temporary surcharge as enacted should be at a consider- ably lesser rate than the 10 percent proposed by the President. Third, a moderate temporary surcharge effective at an early date could be more useful in restraining a new inflation than a larger sur- charge effective at a later date, and would be easier for the economy to digest. Fourth, as a rough guide, it would seem that the executive branch and the Congress should seek to achieve expediture reduction-beyoncl the items mentioned by Budget Director Schultze last week-in the range of the revenues provided by a moderate surcharge. DISCUSSION To some, it. might seem that the views I express are special pleading for corporations, but such is not the case. These views are special pleading to keep the way open for a resumption of strong growth which is the only means for constant addition to the total of high quality jobs in the private economy. Because the President's tax proposals would add more to corporate than to individual tax bills at this time, and because there are some who voice a desire t.o go further than the President, it has seemed important to me to give attention to some fundamental aspects of this problem. The fiscal and economic facts presented to you lest week by adminis- tration spokesmen clearly indicates that the kind of tax increase needed at this time is one which would, because of excess Public demand already present, restrain a growing total demand from catapulting us into inflation while we get back on the track of high level growth. Except as a later result of a new wave of unabated inflation, there was no indication of any fear of excesses developing in business invest- ment spending. To the contrary, the view seemed to he that this spending would continue on its present plateau for a time, in con- trast to the sharp rises expected in personal income and sales. It was conceded that enactment of the program as presented actually would reduce business investment spending by about $1 billion over the last two quarters of this year. If a similar reduction were repeated in the following 6 months, this critical area of spending would be. back to approximately the level of 1966. The major source of new funds to finance business expansion is retained earnings; that is, profits after tax less dividends. Profits pro- vide the inducement as well as the major means for business expansion. Strong economic growth inevitably is paced by good and rising profits. Total corporate profits showed a little improvement in the second quarter, but the annual rate is still about $3 billion behind that for all of 1966 and $5 billion behind the peak rate in the fourth quart.er of 1966. While there is an underlying expectation of improvement in profits as the increase in growth of incomes and sales takes place, heavy wage settlements ha.ng over the marketplace .and we may be facing a. situation in which something has to give. PAGENO="0315" PRESIDENT'S 1967 TAX PROPOSALS 303 Regardless of what may be the trend in profits and business invest- ment spending in the short term, I believe the last thing which should concern us at this stage is fear of too much growth of productive facili- ties over the years ahead. When question is raised about a return to the surging trend of `a year ago, it generally is in the context of an assumption that the actual rate of expansion in facilities was too large for the economy to absorb. Yet, no one claims that we have excess capacity today in the sense that this condition existed after the capital goods boom of 1955-57. When we look at the present balance in in- dustrial facilities, a.nd recognize how quickly rates of utilization could move up to pressure-point levels, it is evident that we did not overbuild in 1966. Thus, it would seem the fundamental problem last year was not that the expanSion rate `was too great in physical terms, but that this rate outran our ability to finance it. As we look ahead, I believe we must consider that the problem is not likely to be one of spending too rapidly for business expansion, but is much more likely to be the ab- sence of available financing adequate to support a growth trend which would be most beneficial for the economy. Any investment in new plant and equipment, whether to modernize or expand, creates better jobs. The question is whether a given expan- sion in overall investment and growth is strong enough to also create an addition to the total number of jobs. What has happened in the man- ufacturing sector of the economy since World War II illustrates the importance of strength in economic expansion to net job creation. You may recall that, after the war, economists and labor force statis- ticians generally thought we would never return to the peak level of manufacturing employment, 17.6 million workers in 1943. However, the 17 million level was exceeded again in 1953, 1956, 1957, `and 1964, although the totals stayed below the wartime pea.k. That peak was ex- ceeded for the first time when the total moved up to 18 million in 1965, but it is interesting to note that the unemployment rate did not drop below 4 percent until manufacturing employment went sailing past 19 million in 1966. `The relation between the growth of jobs `and the growth in produc- tion may be `simply stated. Other factors being equal, the number of jobs will decline when the percentage increase in productivity exceeds the percentage increase in total output; will stay `about the same when productivity and output gains are `about the `same; but will increase in step `as output moves up beyond productivity gains. We need all the productivity we can get `because this is the only means for advancing the value of work and underwriting wage increa'ses without inflation. But, to provide more and better jo'bs, we also need a significantly higher rate of growth in total output. We can expect this condition to be normal hereafter only if profits `are adequate and investment funds are available to induce and sustain vigorous expansion in productive facilities. EQUAL TREATMENT ron CORPORATIONS My foregoing remarks explain our belief that the rate of surcharge, and its effective date, should be the same for corporations as for mdi- vi'duals. I will add further comment here only with respect to the base of the surcharge and further speedup in corporation taxes. PAGENO="0316" 304 PRESIDENT'S 1967 TAX PROPOSALS With respect to the tax base, the application of the surtax to cor- porate tax bills before the foreign tax and investment credits would, in effect, penalize the corporations which are doing the most, in the first instance, to ease the balance-of-payments problem by bringing home income from foreign investments and, in the second, to move us back to an expansion trend in productive facilities which will sustain strong economic growth and provide a bounty of more and better jobs. With respect to further tax speedup, the new proposals come on top of acceleration in payments and remittances which since 1964 has sub- jected the larger corporations to an additional tax of some $14 bil- lion-the equivalent of a surcharge in the range of 50 percent of 1 year's tax bill. An increase from 70 to 80 percent in the requirement for current payment on tax liabilities in excess of $100,000 would for the transition year have the effect of a 10-percent surcharge. With respect to the proposal to inaugurate a 5-year program for putting tax liabilities under $100,000 on a current basis, the result would be the equivalent of `a 16-percent surcharge in each of the years for companies whose liabilities do not exceed that figure. It seems inappropriate that speedup in the corporate area should be justified by reference to current payment of individual tax because of the large forgiveness of tax when the latter was introduced. The importance of retained earnings to new investment and job creation is fully as great for the small firms as for the large ones, and it is a well known fact that smaller corporations have greater difficulty in raising money from banks and other outside sources. In addition, for many small firms, especially in manufacturing and in research and tech- nology, it is difficult to project an annual rate of profit from a current rate because the inflow of new business is not steady. To handle new business as it comes along, such firms must attempt to hold together their forces of skilled and technological workers even though this means recurring red ink in slow periods. There is serious question, therefore, whether there ever will be a good time to apply speedup to small firms, but certainly that time is not now. - A LESSER RATE OP TEMPORARY SURCHARGE The second overall view stated in the summary is that the temporary surcharge as enacted should be at a considerably lesser rate than the 10 percent proposed by the President in his August program. The evi- dent reasons for -this view are the hazard of applying too great a dose of new tax restraint to the private economy at this time, and the con- temporary preference for a much greater effort to reduce and control in the expenditure area. If it be thought that a moderate surchage might be too little even if not enacted too late, there are two further considerations which bear on the size of -the job to be done. The first is that a significant part of the current deficit, perhaps as much as $6 billion to $7 billion, `will be `financed internally within the Government, -primarily `by use of a surplus in the current accumula- tion of trust funds. This consideration affords no reason for com- placency about the ultimate size of the deficit, but it does bear directly PAGENO="0317" PRESIDENT'S 1967 TAX PROPOSALS 305 on both inflationary consequences and on the amount of Government competition with private users of credit for available supplies. The second consideration is that even a moderate temporary sur- charge rwould be of substantial significance as regards release of credit for private use. As an indication of the magnitudes here, the average annual increase in business borrowings from banks for the 5 years ending with 1966 was somewhat over $5 billion, or roughly the annual yield expected from a 6-percent surcharge. EFFECTIVE DATE Mindful of the view that the President's program was sent up too late to permit enactment of a surcharge to be fully implemented by October 1, and believing that his entire program even if justified would be entirely too much to process to enactment in such a short period of time, I yet have not been able to escape the conclusion that if a temporary tax increase is needed, and we believe it is, then the need is current and not prospective. We think the President's program asks too much of taxpayers, first in the extra burden which would be placed on corporations, and second in the rate of surcharge, but we do believe the facts presented to you by Secretary Fowler and Chairman Ackley indicate the need for quick action on a moderate and uniform sur- charge. However, we believe the scheduled termination date should be December 31, 1968, instead of June 30, 1969, as proposed by the President. Expedited enactment of a temporary surcharge would begin the transfer of income from the private to the public sector when the Federal deficit is running at its highest rate, and before demand in the private economy has reached an inflationary level. The old adage "A stitch in time saves nine" is apt as regards both timing and size of a surcharge. EXPENDITURE REDUCTION The President's program indicates a range of tolerance for a deficit in the administrative budget from $18 billion down in the current fiscal year, and his tax program as a whole is designed to close most of the gap between the potential and this tolerable level of deficit. In our opinion, a much greater burden should be placed on expenditure reduction and control. It does seem logical that quick action in moving a moderate surcharge toward enactment would make more evident the major job that remains to be done as regards expenditure reduction and control. As a rough guide, it seems the Congress and the executive branch together should find ways and means of reducing expenditures to roughly approximate the amount of new revenues coming from a tax increase-beyond the items mentioned in the testimony presented by Budget Director Schultze last week. Among other virtues, a balanced program of a moderate temporary surcharge with matching reduction and control of expenditures would provide the best assurance that we will get on with the job of using revenue growth to reduce taxes at the earliest possible time. In conclusion, Mr. Chairman, may I make a general observation? PAGENO="0318" 306 PRESIDENT'S 1967 TAX PROPOSALS CONOLtTSION In the business world, we think it important that corporations be good citizens in every respect including payment of taxes. Recognizing that some temporary increase in taxes is needed, at this time, we, therefore, feel that corporations should pay their share. At the asme time, we hope it will not be overlooked that corporations are run by people, are owned by people, exist only to serve people, and thus in the broad sense are people. The first law of taxation in our time could well be that people cannot escape the burden of taxation by shunting payment and collection responsibility to corporations. In the final analysis, only people pay taxes, and only people suffer the consequences when taxes are unwisely levied or increased or continued beyond the time of necessity. Mr. TJLLMAN. Thank you, Mr. Davidson. Are there any questions? The CHAIRMAN. I just want to apologize to Mr. Davidson for not being here at the beginning of his statement. But I have gone back and read it. We appreciate your appearance here this afternoon. Mr. TJLLMAN (presiding). I want to get your position clear. With respect to the surcharge portion of the President's proposal do you support that part of the proposal? Mr. DAVIDSON. We think the tax increase is necessary and the sur- charge is a proper technique but it should be a lower rate than the President has proposed. Mr. TJLLMAN. Suppose we don't enact it until, say, November 15? Mr. DAVIDSON I don't think the passage of time would provide a reason to increase the rate. I happen to agree if it were done quicker it would be more effective. Mr. TJLLMAN. Do you think we might make it retroactive to July 1? Mr. DAVIDSON. The present program does not propose it-except October 1. I don't think you could enact it in November and make it effective back to July 1. Mr. TJLLMAN. When should we make it effective? Mr. DAVIDSON. I think it should be done effective October 1 at a moderate rate. In view of the entire program I think it would be more beneficial. Mr. TJLLMAN. Thank you. We appreciate having your testimony, Mr. Davidson. You have been very helpful. Mr. DAVIDSON. Thank you, Mr. Chairman. Mr. TJLLMAN. The next witness is Mr. Kenneth G. Heisler. Mr. Heisler, we welcome you before the committee. We will ask you to identify yourself and your colleague for the record. You may proceed as you see fit. STATEMENT OF KENNETH G. HEISLER, EXECUTIVE DIRECTOR, THE NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS; ACCOMPANIED BY WILLIAM P. McKENNA, GENERAL COUNSEL Mr. HEISLER. Thank you, Mr. Chairman. My name is Kenneth C-. Heisler, executive director of the National League of Insured Savings Associations. This is a nationwide trade association serving the savings and loan industry. PAGENO="0319" PRESIDENT'S 1967 TAX PROPOSALS 307 I have with me William F. McKenna, who is general counsel of our organization. Mr. TJLLMAN. We welcome you before our committee, Mr. McKenna. Mr. MCKENNA. Thank you, Mr. Chairman. Mr. HEISLER. I am appearing before you today to present testimony in support of President Johnson's recommendation that the Internal Revenue Code of 1954 be amended to increase taxes. The amendment would impose a 10 percent surcharge on individual Federal income tax liability, to become effective 011 October 1, 1967, and a 10 percent surcharge on corporate Federal income tax liability, to become effec- tive as of July 1, 1967. It would also speed up collection of corporate taxes and continue certain excise taxes at current rates. In his message to Congress on August 3, the President noted that without a tax increase and tight control of Federal expenditures, a large deficit could be anticipated for the fiscal year ending June 30, 1968. Among the probable adverse effects of such a deficit, he listed "brutally higher interest rates and tight money which would cripple the home builder and home buyer, as well as the businessman." He noted that interest rates have already turned up sharply despite the relatively easy money policy being followed by the Federal Reserve System. In the consideration of this legislation, we must clearly recognize that we are faced with a condition, not a theory. The Federal Govern- ment is confronted with the prospect of a deficit of unconscionable proportion. Estimates of this fiscal year's deficit range around $29 bil- lion. Even in an economy as dynamic and diverse as ours, a deficit of this size cannot be tolerated. A firm, straightforward attempt has to be made to bring the finan- cial affairs of the Federal Government within prudent and digestible fiscal housekeeping tolerances. In view of the budgetary conditions that confront the Congress, there are no reasonable alternatives to (1) an increase in income taxes, and (2) a reduction in spending on non- defense programs. Action upon both front~s is required and necessary. Recourse solely to an increase in taxes would be insufficient to attain the objectives desired, unwise as a matter of public policy, and inequitable to the taxpaying public. As is well known to every member of this committee, the thrift and home financing business underwent a painful belt-tightening ordeal last year. It was not of our choice or of our making. We are not anxious to have our 1966 experience repeated to the same degree of severity. Nonetheless, we went through the ordeal and made the adjustments that had to be done, I can assure this commitee that the most objective observers of the America.n social, political, economic, and financial scenes would agree that the thrift and home financing business bore an unduly disproportionate share of the burden in 1966. Thrift institutions basically depend for economic life on the spread between what they pay for money in the form of dividends on savings accounts and what they receive from investing that money in home mortgages. PAGENO="0320" 308 PRESIDENT'S 1967 TAX PROPOSALS By supervisory and tax policy, savings and loan associations are narrowly confined in the type of investments they may select. Their main investments must be channeled into home mortgages. This; type of investment is long term. in nature and. limited in the rate~ of inter- est return. When the dividend rates a savings and loan association must economically pay in order to attract savings funds too closely approach the various usury rates fixed by State laws for interest on mortgage loans, the investment flow from savings and loan associa- tions used to originate real estate mortgages decline. 1-lomebuilding and transfer of homeownership suffer. Such a situation is far less likely `to occur if the Federal Government raises more of the funds it needs by means of an increase in taxes. To the extent it does so, the necessity of Federal Government borrow- ing in the public market decreases, thus removing one of the upward' pressures on interest rates. The interest rate structure then may hope-. fully be expected t.o remain on a lower plateau in a range that can be met by savings and loan association in offering dividend rates on sav- ings that will continue to att.ract'the account holders' dollars. Or~e further restraint to tax income to the Federal Treasury should be mentioned at this time. The present definition of a domestic build- ing and loan association in the Internal Revenue Code of 1954 lists in detail the portfolio limits of investments an association may hold and still qualify as an association for Federal income tax purposes. The net effect of the definition is to prevent an association from making any type of lawful investment that would forfeit its status as a domestic building and loan association. Therefore, the definition does not result in any increase in taxes flowing `to the Treasury tha.t could otherwise occur if a savings and loan association were free to make the investment without forfeiting its status as an association. Savings and loan associations are chartered under the laws of 50 different States as well as under Federal charters. As might be ex- pected, the investments they are authorized to make vary with laws of their incorporating jurisdictions. The national league has suggested that `all savings and loan associations, whether federally or State-char- tered, that have their savings accounts insured by the Federal Sa..vings and Loan Insurance Corporation be automatically defined as bona fide domestic building and loan associations for Federal tax purposes. These institutions would then be in a position to make investments authorized by law that would produce more tax dollars for the Federal Treasury tha.n is now t.he case. At an appropriate time, we hope this committee will give consideration to this suggestion. In any event, the tax proposals made by the President will go far toward producing an appropriate balance between monetary policy and fiscal policy, thereby enabling the savings and loan industry to attract the savings funds required to continued to finance homebuild- ing and homeownership in the United States. The national league urges adoption of the President's tax proposals. Thank you for giving us the opportunity to present these views. Mr. ULLMAN. Thank you, Mr. Heisler. Are there questions of Mr. Heisler? I am a little concerned about your advocacy of a broadening of the definition. What is your `situation today with respect to adequate money supply to handle homebuilding needs? PAGENO="0321" PRESIDENT'S 1967 TAX PROPOSALS 309 Mr. IJEI5LER. Our situation has improved in the last few months from the situation that existed in 1966 and in the first quarter of 1967 due to higher interest rates in other areas that our shareholders were using for investment. Mr. ULLMAN. Do you have adequate money to meet the demand now? Mr. HEI5LER. I suppose there is never adequate money to take care of home building and home financing in the United States in the sense that it could be extended to marginal areas. We are approaching an adequate amount I would say. Mr. ULLMAN. What is the trend? Is your situation getting better on a week-by-week `basis or getting worse? Mr. HEI5LER. Getting better; getting much better. Mr. ULLMAN. The problem as I see it is that if we broaden the defi- nition and allow you to go into other kinds of loans, the homebuilding industry, itself, might very well suffer. Mr. HEI5LER. I feel that the extent to which savings and loans would go into other areas would be gaged by conditions at the time. If there was overbuilding and oversupply of housing, then they would be able to get into other forms of investment. Since the savings and loan insti- tutions are specialists in the home financing field can never see them getting out of that as a primary form of investment as long as they were able to make home mortgage loans. But it would better enable them in times of stringency to tide themselves over and pay a little higher rate of return to their investors so that they would continue to have these funds in bad times and in good times. I would feel that in the future we will have high and low interest rates, they will be variable from time to time. Mr. ULLMAN. Thank you very much, Mr. Heisler. We appreciate having you before our committee. Our next witness is Mr. Raymond Hoffman; we welcome you be.. fore the committee. Will you please identify yourself and your colleagues for the record. You may proceed as you see fit. STATEMENT OF RAYMOND A. HOFFMAN, ILLINOIS STATE CHAM- BER OF COMMERCE; ACCOMPANIED BY NORMAN J. BEATTY, MANAGER, TAX DEPARTMENT Mr. HOFFMAN. My name is Raymond A. Hoffman. I am a partner in Price Waterhouse & Co.-a firm of certified public accountants- and a former chairman of the Federal Taxation Committee of the Illinois State Ohamber of Commerce. I am accompanied by Norman J. Beatty, manager of the chamber's tax department. Mr. IJLLMAN. Mr. Beatty, we welcome you before the committee. Mr. BEATTY. Thank you, Mr. Chairman. Mr. HOFFMAN. This statement is presented on behalf of the Illinois State Chamber of Commerce, a statewide organization with a mem- bership of more~ than 19,600 businessmen in 478 communities in every part of the State of Illinois. The members are engaged in virtually every type of business and range from the self-employed to those associated with some of the Nation's largest corporations. 83-349-----67-pt. i-21 PAGENO="0322" 310 PRESIDENT'S 1967 TAX PROPOSALS The recommendations set forth in this statement were prepared by a special subcommittee and approved by the chamber's Federal taxation committee of 90 members. The Illinois State Chamber of Commerce has long supported fiscal responsibility, a balanced Federal budget, reductions in Federal spend- ing, and reform of the Federal tax structure. For many years, the most basic reform we have advocated has been a reduction in Federal income tax rates to reduce their stifling effect on business. Excessive borrowing as well as excessive tax rates can have adverse effects on the state of our economy. In this context, the Illinois State Chamber of Commerce has adopted the following statement of policy. In view of the situation in Vietnam, extensive disorders throughout the country, and the need to maintain an effective deterrent force to prevent worldwide aggression, the Illinois State Chamber of Com- merce feels that a state of emergency exists in regard to Government financing and that all programs of Federal spending, whether domestic or foreign, defense or space, must be reviewed and reevaluated in the light of existing demands on Government and the current state of our economy and that more realistic priorities should be established to determine which expenditures will be eliminated, reduced, or delayed. We feel that no sound tax adjustments can be considered in the absence of such a comprehensive review. The costs of Government must be financed, but they also must be controlled. Thus, we suggest that any additional tax revenues should be not greater than the amount cut from proposed Federal spending and that any tax increase should be temporary and nondiscriminatory. This statement has not been prepared by a group of analysts or economists. The chamber's Federal taxation committee is composed of independent businessmen, financial officers of large- and medium- sized corporations, tax administrators, and professional men dealing regularly with tax problems. Thus, it is a statement of businessmen from Illinois. Not wishing to be naive, however, this statement was checked with a number of economists associated with business and financial institutions in our State, and we found that it had their un- qualified support. ADDITIONAL TAX REVENUES SHOULD AT LEAST BE MATCHED BY REDUCTIONS IN PROPOSED FEDERAL SPENDING We are well aware that various estimates indicate that Federal spending might exceed anticipated revenues in the current fiscal year by as much as $25 to $30 billion and that to finance a sum of this magnitude through borrowing could well cause excessive inflation and a restriction of credit that would stifle the economy. In finding ways to reduce this gap between spending and revenues, we feel that the first priority should be a reduction in spending. In an attempt to quantify the relationship between reduction in spend- ing and an increase in revenues, we feel that the amount of reduction in spending should at least equal, and preferable exceed, any tax increase. You are aware of many plans and suggestions as to how and where Federal spending can be reduced, such as the detailed PAGENO="0323" PRESIDENT'S 1967 TAX PROPOSALS 311 proposal by the Council of State Chambers of Commerce to eliminate approximately $51/2 billion in spending. We feel the fact that the United States is engaged in a war has not been fully taken into account in our governmental spending patterns. During World War II and the Korean conflict, there was forthright curtailment of governmental functions. While the current conflict may not require equally drastic restraints, some of the priorities estab- lished then may provide a guide to appropriate action under the pres- ent emergency. ANY TAX INCREASE SHOULD BE TEMPORARY AND NONDISCRIMINATORY A surcharge tax is appropriate only if it. is to meet a temporary emergency. It has the advantage of permitting an increase in revenues with a minimum of delay; however, such a surcharge is not the an- swer to every need for additional revenue, and does not eliminate the need for continuous study and review of the Internal Revenue Code to improve the basic tax structure. Should it be determined that an emergency tax measure of this type is necessary, it should be nondiscriminatory and not attempt to in- directly change the proportion of sharing the Federal tax burden. Under the current proposal there is discrimination against business corporations in two regards: First, the use of an earlier effective date than for individuals; and, second, the initiation of a program to fur- ther accelerate Federal income tax payments by corporations. A temporary tax of an emergency nature is not an appropriate de- vice to reassess and redefine the degree of graduation in our tax struc- ture. It can be argued that there is too much or too little graduation in our present system of individual income tax rates or that gradua- tion occurs in the wrong part of the rate schedule. If current concepts of equity dictate changes in the degree of graduation, they should be made carefully on a more or less permanent basis. Such a temporary reassessment of relative equities is proposed in exempting from the surcharge individuals-other than estates and trusts-whose income does not exceed that generally covered by the first two brackets of taxable income. If an emergency exists which justifies a tax surcharge, the responsibility for meeting such an emergency should be shared proportionally by all taxpayers. We sincerely appreciate the opportunity to present these views, and again emphasize that this testimony in behalf of the Illinois State Chamber of Commerce is an attempt to communicate to you the view- points of businessmen in Illinois. I am not an economist, nor is Mr. Beatty, but in the context of our experience we would be pleased to answer any questions that you may `have. Mr. ULLMAN. Thank you very much, Mr. Hoffman. You have brought an interesting point of view to the committee. Are there questions of Mr. Hoffman? Thank you very much, Mr. Hoffman. The committee will stand adjourned until 10 a.m. tomorrow morn- ing. (Whereupon, at 2:40 p.m. the committee adjourned, to reconvene at 10 a.m., Wednesday, August 23, 1967.) PAGENO="0324" PAGENO="0325" PRESIDENT'S 1967 TAX PROPOSALS WEDNESDAY, AUGUST 23, 1967 HousE OF REPRESENTATIVES, COMMTTEE oN WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Wilbur D. Mills (chair- man of the committee) presiding. The CHAIRMAN. The committee will please be in order. We have as our first witness this morning Mr. George Meany, presi- dent of the American Federation of Labor & Congress of Industrial Organizations. Mr. Meany, you have been with us on many occasions in the past when we have had knotty problems before us. We appreciate your coming back on this occasion to give us the benefit of your views and those of the organization you represent. You are recognized, sir. STATEMENT OP GEORGE MEANY, PRESIDENT, AMERICAN FEDER- ATION OP LABOR & CONGRESS OP INDUSTRIAL ORGANIZATIONS; ACCOMPANIED BY ANDREW I. BIEMILLER, DIRECTOR, DEPART- MENT OP LEGISLATION; AND NATHANIEL GOLDFINGER, DIREC- TOR, DEPARTMENT OP RESEARCH Mr. MEANY. Thank you, Mr. Chairman. My name is George Meany. I am president of the AFL-CIO and I am appearing here on behalf of that organization. At the outset, I would like to summarize our views on these issues. We are fully in accord with the President's concept that a temporary war tax is needed. It is our view that the American public generally-. not just the Armed Forces-should share the sacrifice involved in the war in Vietnam. Moreover, we believe that increased tax revenue is needed-in view of the large prospective budget deficit and problems of financing that deficit-to lessen the danger of tight money and very high interest rates, which would depress the socially important home- building industry and related industries. However, we are firmly opposed to the administration's major rec- ommendations of how to increase taxes. It is our conviction that equal- ity of sacrifice should be based on ability to sacrifice. The required temporary tax increase must be fair and equitable. Certainly some sectors of our economy can afford far more in tax increases than others. But the administration's proposals recognize the principle of ability to pay only to a minor degree. 313 PAGENO="0326" 314 PRESIDENT'S 1967 TAX PROPOSALS We believe that the temporary surtax rate on corporations should be at least twice as great as on individuals. Low-income taxpayers should be exempt from any surtax and the temporary tax increase on other income groups should be based on ability to pay. We recommend some degree of taxat~on of excluded income; those large sums that are not now subject to taxation, such as interest on State and local bonds, the excluded half of capital gains and depletion allowances. Moreover, we urge you to give careful consideration to a substan- tial increase in the maximum tax rate of 25 percent on capital gains from the sale of property. In our opinion, Mr. Chairman, .the war tax you are now considering must be fully keyed to ability to pay. We are aware that some people have suggested cutting or halting vital domestic programs as `an alternative to a temporary tax increase. If put into effect, such suggestions could be disastrous and we un- alterably oppose them. We are convinced that America can meet the Nation's obligations in Vietnam, while making progress toward solving its domestic prob- lems. Forward strides on the homefront are essential to the preserva- tion of our free society. America has the human and material resources to achieve both an honorable settlement `of the war in Vietnam and a strengthened social, order `at home.' A TEMPORARY TAX INCREASE IS NEEDED This Nation, Mr. Chairman, could easily finance a greatly expanded domestic program, within the present tax structure, were it not for the war in Vietnam. It is the added cost of men and material for that war which makes'a temporary tax increase necessary. Such tax increase is `a war tax-necessitated by the `sharp rise, within the past 2 years, in the size of our Armed Forces and in military ex- penditures. This tax ri'se envisions `a, degree of sacrifice by the Amer- ican public, not only our fighting men. A tax increase in a war period is not strange to the American people. Although no American hails a tax increase on his income, we have willingly p'aid increased taxes for the defense of freedom in earlier years. I h'ave confi'dence in the goo'd sense of the American people to believe that we will do so again, at present. The need for `a `temporary tax increase rests on sound economic, as well as moral .grounds. National defen'se expenditures have risen $20.5 billion between fiscal year 1965 `and `the year `th'at ended June 30, 1967. They are rising at present. In thi's fiscal year, defense spending is expected to rise an'other $5 billion to $9 billion `and perhaps more. Mainly as `a result `of these rising military expenditures-coupled with the effects on tax `revenue of the recent economic slowdown, due to last year's tight money-the budget deficit is increasing. The `ad- ministrative budget deficit in fiscal year 1967 was about $10 billion- substantially greater `than the modest deficits of the previous 2 years. Now, this deficit looks like it is rising to $20 billion to $25 `billion or more in the year ending June 30, 1968. It is not the existence of `a budget deficit ~vhich troubles us, Mr. Chairman. With remaining problems of unemployment and underem- PAGENO="0327" PRESIDENT'S 1967 TAX PROPOSALS 315 ployment, the Federal Government should be placing somewhat greater amounts of money into the economy's spending stream than it takes out. It is the size and sharp rise of the deficit-and the financing of a large deficit-that does trouble us. I belive it troubles most Members of the Congress, as well. In fact, anticipation of the Government's financing of a large deficit has already affected the money market and interest rates. Many corporations have floated new bond issues in recent months, in an attempt to beat the expected tightening of the money supply and very high interest rates. In the process, interest rates have been rising. The average mortgage rate on FHA insured new homes rose to 6.4 percent in June, for example. The rate on triple-A corporate bonds, in mid-July, was nearly 5.6 percent-higher than last September, when money was very tight. Mr. Chairman, I am no expert in these matters. However, I see many signs of the economy moving up moderately and, hopefully, the pace will be picking up a bit in the months ahead. One does not have to be an expert to know that rising economic activities mean some increase in private borrowing,'as businesses finance the expansion. If the financing of the Government's large deficit, in the coming year, is superimposed on this situation, money will probably tighten and interest rates will rise to new heights. We saw the effects of the Federal Reserve Board's tight-money and high-interest-rate policies last year. Homebuilding went into a deep recession, despite the need for a sharp increase in new and rehabili- tated housing. Related industries, such as lumber and furniture, went into a slump. Tight money `and ve'ry high interest rates, in the year ahead, will probably `achieve similar results `again, The social goal of more and better housing would be thrown for a loss. The economic pickup would be unbalanced, with one sector o'f the economy depressed. Countless numbers `of people would pay the price for such development- consumers, small businesses, farmers, S'tate `and local governments th'at need to `borrow money, as well as workers in affected industries. `Therefore, Mr. `Chairman, we belive that a tax increase is needed to reduce the amount of `the Government's `deficit that will have to be financed in the money market. We do not agree at all `with the propo'sitio'n that the tax increase is required to prevent a classical inflation in the next several months with shortages of goods, manpower, plants, and machines. M'anufa'cturin'g industries are now `operating at about 85 percent of their `capacity, the workweek has been cut down in the past year, there is remaining unemployment and underemployment. Moreover, the labor force is expanding rapidly and new plants and machines are being installed. It would take a very sharp and continu- ing boost of business activity-much sharper than expected in the next several months. If a tax increase is adopted, the overall pace of the economic upturn will probably be slightly slower than otherwise. However, `the eco- nomic advance would be more balanced and it would be more widely shared among the various industries. PAGENO="0328" 316 PRESIDENT'S 1967 TAX PROPOSALS The dangers of tight money, very high interest rates, and an un- balanced economic advance are real and tangible. A tax increase is needed to reduce these dangers and to provide our Armed Forces in Vietnam with as muuh of the best equipment as they need to achieve an honorable settlement of the conflict. THE SURTAX RATE ON CORPORATIONS SHOULD BE SUBSTANTIALLY GREATER THAN FOR INDIVIDUALS The record clearly indicates, Mr. Chairman, that the surtax rate on corporations should be much greater than on individuals. There is no justification for applying the same surtax rate on both corporations and families, as the administration proposes. Only within the past several months, the Congress restored, at the administration's request, the 7-percent tax credit on business invest- ment in new equipment. This early restoration was also more lavish than the original credit. The restored 7-percent tax credit is worth about $2 billion to cor- porations over a full year. It is the equivalent of a $2 billion tax cut on corporate income. However, this special action to reduce corporate taxes was not ac- companied by any action, whatsoever, to reduce taxes on American families. We are fully aware, Mr. Chairman, of the talk about declining profits and a profit squeeze. Corporate profits did decline a bit toward the end of last year and in early 1967, as business activity leveled off. However, the decline was small and it was from very great heights. In addition, profits are rising again, with the economic pickup. Let us look at the record of rising incomes for various groups in the economy between 1960 and the first half of 1967: Corporate profits after payments of taxes skyrocketed 74½ percent. Dividend payments to stockholders soared almost 69½ percent. Total wage and salary payments to all employees in the entire economy increased only 54 percent-reflecting increased employ- ment as well as the wage and salary gains of individual workers. Total after-tax personal income in the entire economy rose merely 53 percent. Weekly after-tax take-home pay of a factory worker, with three dependents increased only 24 percent-and, in terms of buying power, merely 11 percent. That is the record of the past 61/2 years, Mr. Chairman, even after accounting for the temporary and small profit decline of the recent past. Profits have skyrocketed-moving up, far out of line with work- ers' wages. In addition, corporations received a special tax cut only a few months ago. In light of this clear record, we urge the committee to recommend a surtax rate on corporations at least twice as great as on individuals. A 6-percent surtax on individuals should be accompanied by a 12- or 15-percent surtax on corporate tax liabilities. Or an 8 percent surtax rate on individuals should be coupled with a 16 or 20 percent rate on corporations. The surtax rate on corporations should be at least 20 percent if the surtax rate on personal income is 10 percent. PAGENO="0329" PRESIDENTS 1967 TAX PROPOSALS 317 Over a full year, such surtax rates on corporate tax liabilities would raise the following approximate amounts: Surtax rate on corporations and approximate additional reve- nue: 12 percent, $4 billion. 15 percent, $5 billion. 16 percent, $5.3 billion. 20 percent, $6.6 billion. THE SURTAX ON INDIvIDUAL INCOME SHOULD BE FULLY BASED ON ABILITT TO PAY The administration has proposed a flat 10-percent surcharge on the total tax liabilities of all personal income taxpayers with taxable in- comes above $2,000 for joint returns and $1,000 for single individual returns. In effect, this means no surcharge on a family of four with a gross income of $5,000 or less, but the application of the same 10 percent surtax rate on the total tax liabilities of all such families whose in- comes are $5,001 and more. This proposal recognizes ability to pay to a degree-by exempting lower-income taxpayers from the surtax. However, this proposal is unfair and inequitable to middle- and moderate-income taxpayers. For example, under the administration's proposal, a family of four with a taxable income of $1,999-gross income of about $4,990-would pay its regular tax of $290. It would pay no surcharge. Another family of four with a taxable income of $2,001-gross income of slightly over $5,000-would be required to pay its regular tax of slightly over $290 plus the 10 percent surtax, or $29. For the extra $2 of taxable income, it would be required to pay $29 in additional taxes. This is clearly * unfair. Moreover, this proposal also fails to give sufficient recognition to the ability to pay principle as one moves up the income scale. Families with incomes of $6,000 or $10,000 would pay the same 10-percent sur- charge on their total tax liabilities as families with incomes of over $1 million. In addition, the proposal also fails to recognize that the after-tax weekly take-home pay of most groups of wage and salary earners has increased only slightly in the past 2 years. The weekly take-home pay of the average factory worker, with three dep&idents, was $100.39 in June-only 62 cents per week greater than in June 1966 and $3.40 per week above June 1965. Simple application of the 10-percent surtax rate to the total tax liabilities of all four-person families with gross incomes above $5,000 would wash out this average factory worker's gain in weekly take- home pay during the past year and one-quarter of his take-home pay improvement over the past 2 years. A somewhat similar situation would apply to most large groups of wage and salary earners. So, Mr. Chairman, we reiterate our belief that the surtax on in- dividuals must be based fully on ability to pay. Therefore we recommend the following proposal, which we urge you to adopt: Each family filing a joint return would subtract $300 from its tax liability and apply the surtax rate to the remainder. Therefore, lower- PAGENO="0330" 318 PRESIDENT'S 1967 TAX PROPOSALS income families-such as four-person families with gross incomes be- low $5,000-would be exempt from the surcharge. A family with a tax liability of $301, would apply the surtax rate to $1 instead of to the full $301 amount. Another family, with a liability of $700 would apply the surtax rate to $400. Each single individual taxpayer would similarly deduct $150 from his tax liability before applying the surtax. The effect would be similar to what I have just described for families filing joint returns. All taxpayers, except those with low incomes, would pay the same surtax rate. However, with the deduction of $300 for joint returns and $150 for single individual taxpayers, the burden of the surtax would be much more equitably based on ability to pay. Let us take the example of an 8-percent surtax on a family of four. At `a gross income of $5,000 or less, there would be no surcharge. At $6,000, the surcharge would be $12 or 2.6 percent of the regular tax liability. At $10,000, the surcharge would be $65 or 5.8 percent of the regular tax. The surcharge would reach 7.2 percent of the tax liability, or $229, at $20,000 of gross income. SURCHARGE ON FAMILY OF 4 Gross income Present tax 8-percent surtax utter $300 deduction from tax liability Surcharge as percent of present tax $5,000 6, 000 10,000 15,000 20,000 $290 450 1114 2062 3,160 0 $12 65 141 229 0 2. 6 5.8 6.8 7.2 Note: See apps. I, II, and III for detail. If this much fairer and more equitable method of applying a tempo- rary surtax on personal income is adopted, the following approximate amounts of money could be raised over a full year: Surtax rate and approximate additional revenue: 6 percent, $2.8 billion. 8 percent, $3.9 billion. 10 percent, $4.9 billion. We urge you to adopt this method of raising additional revenue from the individual income tax, combined with a corporate surtax rate that is at least twice as great as the rate on personal incomes. THE ABILITY-TO-PAY PRINCIPLE REQUIRES TAXATION OF EXCLUDED INCOME Tax loopholes of special privilege for wealthy families and corpora- tions are numerous and notorious. In 1964, for example, 482 tax returns reported adjusted gross in- comes of $1 million or more-after excluding interest from State and local bonds, half of capital gains, and so on. Yet, 19 of these mil- lionaires paid no tax at all on their 1964 incomes-not 1 single cent. Personal capital gains from the sale of stock, real estate, and other property are in the neighborhood of $20 to $24 billion per year in re- cent years. However, only half of these profits are even listed as in- come, subject to taxation. The top tax rate on personal capital gains is very special-it is 25 percent. In addition, the story is closely similar for the approximately $7 to $8 billion of capital gains of corporations. PAGENO="0331" PRESIDENT'S 1967 TAX PROPOSALS 319 Double depreciation writeoffs of new buildings are wonderful if you are lucky enough to be a real estate investor-or an outrage, if you are an average citizen. These tax-free cash-returns adds up to great fortunes. After the maj or writeoffs are taken, in 7 or 8 years, the building is sold and the top tax rate on the profit is 25 percent. Yet this is not the end. The new owner of the used building writes off the price he paid for it at 11/2 times the average rate. The process goes on and on and the public pays the price in inflated land costs, high rents, and lost revenue to the Federal Government. Fortune magazine once described a typical real estate situation, in- volving a Manhattan skyscraper. On a $2½ million investment, the happy investor made $3.3 million in after-tax profit after only 5 years. In his book on Federal taxes, Philip Stern reports the following developments in 1960: Eight New York real estate corporations amassed a total of $18,766,200 in cash available for distribution to their shareholders. They paid not one penny of income tax. When this $18,766,200 was distributed, few of their shareholders paid even a penny of income tax on it. Despite this cash accumulation of nearly $19 million, these eight companies were able to report to Internal Revenue losses, for tax purposes, totalling $3,186,269. I shall not go on with any more of such details, Mr. Chairman. You are considering a temporary war tax. This is not the time for struc- tural tax reform, with detailed consideration of each loophole. In this connection, we were glad to learn that the administration intends to present its proposals on tax loopholes later this year. However, Mr. Chairman, we believe that this is the right time- when you are considering a war tax-to include `some degree of Fed- eral taxation `on the great amounts of cash-returns that are now ex- cluded from income reported for tax purposes. Major categories of such excluded income are: half of capital gains, income from tax exempt State and local bonds, and depletion allow- ances. These excluded categories of income add up to something like $13 to $14 billion for individuals and families and to about $9 to $10 billion for corporations. To permit such huge categories of income to go untaxed while the Government is imposing a special war tax, would be utterly unfair and inequitable. Therefore, Mr. Chairman, we suggest that once a figure is deter- mined for the surtax rate, that a tax of that exact figure be imposed on excluded income in these `three categories, after a generous de- duction. On the personal income side, we propose that the taxpayer list his income from these three categories, deduct a generous $10,000 and apply the same tax rate as the surtax on the remainder, if any. With a deduction Of $10,000 per tax return, moderate-income tax- payers would be exempted from the tax on excluded income. Moreover, the tax rate would `be much lower than the regular tax rates. Yet a significant portion of excluded income would be subjected to some taxation and additional Federal revenue would be raised at a time when it is needed. On the corporate side, we recommend a similar listing of those cate- gories of excluded income, a very generous deduction o'f $25,000 and application of the same tax rate as the surtax to the remainder. PAGENO="0332" 320 PRESIDENT'S 1967 TAX PROPOSALS The deduction of as much as $25,000 would exclude small corpora- tions, and most medium-sized corporations, as well, from this tax. However, it would subject the excluded income of weathier corpora- tions to a low tax rate-much lower than the 48 percent on reported income. At least part of the revenue potential of excluded income would be tapped. This proposal seems to us to be simple, clear, and direct. It is not structural reform of the detailed problems in our tax system. But it would raise additional revenue, as part of a war tax, by applying a degree of taxation to the large sums that are now excluded from the income tax. On personal income, such taxation, at a 6-percent rate, could raise approximately $350 million. An 8-percent rate could raise about $475 million and a 10-percent rate, something in the neighborhood of $600 million. As for corporate income, a 12-percent tax rate on excluded income, along these lines, could bring about $800 million of additional revenue and a 20-percent rate, approximately $1.3 billion. Approximate revenue potential of taxing excluded income: Personal income tax: 6 percent, $350 million. 8 percent, $475 million. 10 percent, $600 million. Corporate income tax: 12 percent, $800 million. 15 percent, $975 million. 16 percent, $1.1 billion. 20 percent, $1.3 billion. These estimates, Mr. Chairman, are not precise. However, they roughly indicate the substantial amount of revenue that could be raised by placing a small tax, after a generous deduction, on these categories of excluded income. It seems to us that taxation of excluded income should be an integral part of a temporary war tax, if it is to be fair and equitable. In addition, Mr. Chairman, we urge you to give careful considera- tion to a substantial increase in the 25-percent maximum tax rate on capital gains. This special rate is unfair-particularly when the Con- gress is adopting a temporary tax increase to raise additional Federal revenue to help finance a war. In conclusion, let me repeat, we are firmly convinced that a tem- porary war tax is needed. Such tax increase, however, must be fully keyed to the principle of ability to pay. I have tried, Mr. Chairman, to give you, as briefly and carefully as I can, a number of fair and equitable methods to achieve the Presi- dent's objective of raising additional revenue. These alternatives to the administration's proposals are also practical and sound. They would raise from about $8 billion to approximately $13.4 billion of additional Federal revenue over the course of a year. (See apps. IV, V, and VI for detail.) PAGENO="0333" PRESIDENT'S 1967 TAX PROPOSALS 321 We urge you to give these AFL-CIO recommendations your careful consideration during the committee's deliberations in the coming weeks. Thank you. The CHAIRMAN. Without objection, Mr. Meany, the material ap- pended to your statement will be made a part of the record at this point. (The material referred to follows:) APPENDIX I AFL-CIO PROPOSAL: 6-PERCENT SURTAX-FAMILY OF 4 (INCOME FROM WAGES AND SALARIES) Gross income Present tax 1 AFL-CIO proposal 2 Surtax as percent of present tax $3,000 $4,000 $5,000 $6,000 $7,000 s8,00o $9,000 $10,000 $11,000 $12,000 $15,000 $18,000 $20,000 $25,000 $30,000 $40,000 $140 290 450 596 772 ~ 1,114 1,285 1,468 2,062 2,710 3,160 4,412 5~ 876 9,332 $9 18 28 ~ 49 59 70 106 145 172 247 335 542 2.0 3.0 3.6 4.1 ~`-~ 4.6 4.8 5.1 5.4 5.4 5.6 ~ 5.8 1 In addition to $2,400 in personal exemptions, family is assumed to have personal deductions of $600 or 10 percent of gross income, whichever is larger. 2 AFL-CIO proposal calculated as 6 percent of present tax after subtraction of $300 from present tax. APPENDIX II AFL-CIO PROPOSAL: 8-PERCENT SURTAX-FAMILY OF 4 (INCOME FROM WAGES AND SALARIES) Gross income Present tax 1 AFL-CIO proposal 2 Surtax as percent of present tax $3,000 $4,000 $5,000 ss,ooo $7,000 $8,000 $9,000 $10,000 $11,000 $12,000 $15,000 $18,000 $20,000 $25,000 $30,000 $40,000 $140 290 450 596 772 943 1,114 1,285 1, 468 2,062 2,710 3 160 4,412 5, 876 9, 332 $12 24 38 51 65 79 93 141 193 229 329 446 723 2.6 4.0 4. 9 5.4 5.8 6.1 6. 3 6.8 7.1 7.2 7.4 7. 6 7. 7 I In addition to $2,400 in personal exemptions, family is assumed to have personal deductions of $600 or 10 percent of gross income, whichever is larger. 2 AFL-CIO propssal calculated as 8 percent of present tax after subtraction of $300 from present tax. PAGENO="0334" 322 PRESIDENT'S 1967 TAX PROPOSALS APPENDIX III AFL-CIO PROPOSAL: 10-PERCENT SURTAX-FAMILY OF 4 (INCOME FROM WAGES AND SALARIES) Gross income Present AFL-CIO surtax Proposed surtax as tax 1 proposal 2 percent of present tax $3,000 $4,000 $5,000 $140 290 $6,000 $7,000 $8,000 450 596 772 $15 30 47 3.3 5.0 6.1 $9,000 943 64 6.8 $10,000 $11,000 $12,000 $15,000 $18,000 $20,000 $25,000 $30,000 $40,000 1,114 1,285 1,468 2,062 2,710 3,160 4,412 5,876 9,332 81 99 117 176 241 286 411 558 903 7.3 7,7 8.0 8.5 8.9 9. 1 9.3 9.5 9. 7 I In addition to $2,400 in personal exemptions, family is assumed to have personal deductions of $600 or 10 percent of gross income, whichever is larger. 2 AFL-CIO proposal calculated as 10 percent of present tax after subtraction of $300 from present tax. APPENDIX IV Approcrionate amount of additional revenue-Alternative A Tao~ Individual income tax: 6-percent surtax (AFL-CIO proposal)_~ Corporate income tax: 12-percent surtax 15-percent surtax Excluded income: 6 percent on personal income 12 percent on corporate income 15 percent on corporate income_. (NOTE-Total, about $8,000,000,000 to $9,100,000,000.) APPENDIX V Additional revenue $2, 800, 000, 000 4, 000,000, 000 5, 000, 000, 000 350,000,000 800, 000, 000 975, 000, 000 Approximate amount of additional revenue-Alternative B Additional Tao, revenue Inlividual income tax: 8-percent surtax (AFL-CIO proposal)__ $3, 900, 000, 000 Corporate income tax: 16-percent surtax 5, 300, 000, 000 20-percent surtax 6, 600, 000,000 Excluded income: 8 percent on personal income 475, 000,000 16 percent on corporate income 1, 100, 000, 000 20 percent on corporate income. 1, 300, 000, 000 (NoTE-Total, about $10,800,000,000 to $12,300,000,000.) APPENDIX VI Approximate amount of additional revenue-Alternative ci Additional Tao, revenue Individual income tax: 10-percent surtax (AFL-CIO proposal)__ $4, 900, 000, 000 Corporate income tax: 20-percent surtax 6, 600,000, 000 Excluded income: 10 percent on personal income 20 percent on corporate income (NOTE.-Total, about $13,400,000,000.) 600, 000, 000 1, 300, 000, 000 PAGENO="0335" PRESIDENT'S 1967 TAX PROPOSALS 323 The CHAIRMAN. We appreciate your bringing to the committee this discussion of your views. Any questions of Mr. Meany? Mr. Curtis. Mr. Cuirns. Mr. Meany, there is one point of economics in your statement here on page 4. I think I agree with the point you make there. You say: We do not agree, at all, with the proposition that the tax increase is required to prevent a classical inflation in the next several months with shortages of goods, manpower, plants, and machines. I think I share that view with you, but what I see lying behind the inflation we are presently experiencing-the Consumer Price Index went u~ 0.4 last month and the previous ~ months 0.7-is what the economists refer to as cost-push inflation. Would you agree that that is the kind of inflation that we are threat- ened with and actually have right now and have to consider in dis- cussing this Federal deficit? Mr. MEANY. No, I don't think that is any great threat and I think, as far as the classical inflation, that we have learned over the years that that is no threat at all. Mr. CURTIS. Well, classical inflation is demand inflation. As I say, as I look at these indicators I don't think that demand inflation is the thing we need to worry about, but we certainly are having infla- tion right now that is affecting your people very much in the Con- sumer Price Index and it affected them last year. This is one of the bases for your wage demands in the negotiations now underway. Now, I think that we are going to experience a great deal more of this cost-push inflation resulting from this Federal deficit and our handling of it. If the inflation were to amount to as much as 5 percent this year-if it goes at 0.4 a month we would be getting there-we will have a meat ax cut of all Federal expenditures of $7 billion. That is, a cut in defense, poverty programs, and everything else. You will also have your union workers and other wage earners experiencing a similar cut in real purchasing power. I am calling attention to this because you don't direct attention to the kind of inflation which seems to be with us right now. Mr. MEANY. Well, of course we don't feel that that is a serious threat at this time. Mr. CURTIS. Well, it exists. The 0.4 increase in the Consumer Price Index just last month isn't fiction. Now, how does that affect your people? This comes to another question. I think most economists agree that the corporate tax is essentially a consumer tax. The corporation is going to have to pass that tax on in the price of goods and services. If this is true, then your suggestions here would aggravate the cost- push kind of inflation that we have right now. Mr. MEA~rr. Well, you feel that any increase would be passed on to the consumer? Isn't it possible that the profits could be reduced a little or that the stockholders might get a little less? Mr. CURTIS. There is that possibility, Mr. Meany. This has been a debate for years between economists, but I prefaced my remarks by saying I think the agreement is getting to be pretty general that the corporate tax is essentially a consumer tax. The bulk of it is passed PAGENO="0336" 324 PRESIDENTS 1967 TAX PROPOSALS on in the increased price of goods and services, leading to the situation we have today. Mr. MEANY. If you carry that sort of reasoning to its logical con- clusion we shouldn't have any tax on corporations at all. Mr. CURTIS. Oh, no; I think we should. Mr. MEANY. Oh, you do. Mr. CURTIS. Oh, yes. Mr. MEANY. But don't you think prices would come down if we didn't have a tax on corporations? Mr. CURTIs. Oh, that is true, but I just think there is a place for what amounts to a general sales tax at the Federal level, even if we do it through the corporate tax. To some extent, I think, there is an ele- ment of this that prthably does get to the stockholders, the investors, but then this comes to another point on page 5. You point out that profits have skyrocketed, but we have to relate profits going up to money invested, because the amount of capital that has been invested in our society has skyrocketed. Mr. MEANY. You mean profits that were plowed back in? Mr. CURTIS. Partly, and partly new money, but plowing back in has been some of it. However, the thing that I think we have to relate profits to is the amount of equity investment, and the amount of capi- tal invested has ~been at a greater rate than the profits, causing a de- cline in percentage of return per dollar invested over a period of years. It is now climbing back again, but this I think we have to concern ourselves with. Well, I just wanted to examine those points with you a bit to see what you might say. One other thing. On page 3 you say: We saw the effects of the Federal Reserve Board's tight money and high in- terest rate policies last year. Actually an examination of the money situation indicates-it is very interesting-that we did not have tight money then. At the same time we were having these high increase in interest rates, the monetary policy seemed to be one of relative monetary ease, which is `a further complication. Mr. MEANY. Certainly not, Mr. Curtis, in the construction industry. Mr. CURTIS. It is true the money that left did go out of savings and loans and created a very serious problem, a bottleneck problem. One of the disturbing things to me has been the fact that we did have what would be called relative monetary ease `at the same time we had these high interest rates, which I think to a large degree came from the Federal Government's fiscal policies, not the Federal Reserve. Some economists said they we're trying to put all the pressure on monetary policy to try to st.op the inflationary forces instead of at that time using increased taxes as a possibility. Now, it wasn't myself, but that was the dialog at the time. You don't recommend apparently what others seem to recommend, cutting back on Federal expenditures in other than Vietnam war areas. I say that because I think there is some possibility of cutting back defense as well as nondefense. You don't think that is a necessary ingredient to this problem? Mr. MEANT. No; I think I ma.ke it clear there that I think we can pay for the Vietnam war without giving up the very important social PAGENO="0337" PRESIDENT'S 1967 TAX PROPOSALS 325 side of the Federal Government's program which I think is terrifically important. Mr. CURTIs. I wasn't necessarily including that because I notice whenever people like myself do suggest we should cut back in other than Vietnam war expenses they immediately say, "Well, you mean education or poverty." Well, let's just set them aside. Mr. MEANY. What do you mean? Mr. Cuwris. I mean, for example, foreign aid. I mean, for example, agriculture. We are talking in terms of billions, each one of those I have mentioned. Don't you see any reason for cutting back here? Mr. MEANY. That leads to a question of the overall national policy. Can we afford to cut back as a nation in foreign aid? Can we afford to abandon the so-called space race? Mr. CtrnTIS. You are right, it is a question of establishing priorities and that is why I raised the question. I think the greatest priority that faces us is solving this fiscal prob- lem because, as I say, if we do nothing about cutting the size of the deficit-and I don't care whether we finance the deficit through in- creased taxes, through new debt, or through selling off capital assets- I think we are going to have a meat axe cut in every one of these pro- grams, including poverty, education, and defense in Vietnam, through inflation. If the inflation continues at its present rate it would mean a $7 billion cut out of a $144 billion expenditure program. I would argue that what you are saying is right, that we have to consider these on a priority basis, but let's put in as one of the priorities the solution of the fiscal problem. That is why I say that I think it is necessary to cut back in some of these areas. Many of them you and I probably would agree that we hate to cut, but on a priority basis we need to, at least for a year or two. However, you don't recommend anything of this nature, of estab- lishing expenditure priorities with the object in mind of reducing the expenditures from $144 billion. Mr. MEANY. I would like to point out, Mr. Curtis, that we are deal- ing with a measure proposed by the administration which is a tem- porary tax increase. We are not dealing with the whole question of the monetary policy and these other things that you mentioned and I don't know why you think there is certain great significance because I don't specifically recommend cuts in the space or foreign aid. Mr. CURTIS. Simply this: That any fiscal problem has two sides. One is revenue. The other is expenditures. And if you can cut your ex- penditures, then you don't have to tax the people additional amounts. Maybe you still do, but that is why I raised the question of whether or not you felt that cutting expenditures might be preferable to increas- ing taxes. Mr. MEANY. Well, I think I am for cutting any nonessential expendi- tures, but certainly the programs you mentioned I don't think are in the nonessential class. Mr. CURTIS. Well, in other words, contrasting the $144 billion ex- penditure level of this administration with a $77 billion level in 1960, you don't regard anything in the $144 billion as less important in the 83-349-67-pt. 1-22 PAGENO="0338" 326 PRESIDENT'S 1967 TAX PROPOSALS scale of priorities than the fiscal problem that we are confronted with. Mr. MEANY. I think that a great many things have happened since 1960 that we better take into consideration. Mr. Cmrris. We were doing pretty well in 1960, but it is very inter- esting that you think that the things that have happened since 1960 justify a Federal expenditure level of $144 million in contrast to a $77 billion level of the Federal Government. After all, we are talking about a total society, not just what the Federal Government does, but what does the total society do in educa- tion, health, welfare and so on. Mr. MEANY. We didn't have any education expenditures of the Fed- eral Government to amount to anything in 1960. Mr. CuaTIs. We sure did. We were spending more, I might say, per capita in those days than we are now. Mr. MEANY. I don't think. Mr. Cuims. Well, this is `a question to be examined. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Uliman. Mr. ULLMAN. I want to commend you, Mr. Meany, for what I con- sider a responsible paper with constructive alternatives, and obviously you have done a lot of work on it. You are in a position somewhat like that of a Member of Congress. You represent a lot of people, a lot of taxpayers, and what you are recommending is that the people that you represent, many millions of people, will have to dig into their pockets and pay some more taxes, and that I consider is statesmanship and I commend you for it. Now, I presume the reason that you are doing that is because you have looked at the alternatives. Is that right? Mr. MEANY. Yes. Mr. TJLLMAN. And the main alternative you are concerned about is the alternative of the high interest rates `and the tight-money situation. Mr. Mr~NY. Which would come from a large Federal deficit. Mr. TJLLMAN. That is right. Now, you have gone into the tax struc- ture. I think you would be realistic enough `to see the difficulties of trying to include tax revision procedures in `this bill. Mr. MEANY. No, I make that clear that I `don't think we should try to get into the question of tax reform, which we have a great interest in, but I do point out you can get a little more money here without enacting tax reform at this time. In other words, you can get a little out of these present tax-exempt areas. Mr. ULLMAN. Thank you. The CHAIRMAN. Any further questions? If not, Mr. Meany, we thank you, sir, for coming to the committee. Mr. MEANY. `Thank you, Mr. Chairman. (For telegram from Uniformed Firemen's Association, in support of Mr. Meany's statement, seep. 746.) The CHAIRMAN. Mr. Wright and Mr. Fefferman. Mr. Wright, if you will identify yourself and Mr. Fefferman for the record we shall be glad to recognize you, sir. PAGENO="0339" PRESIDENT'S 1967 TAX PROPOSALS 327 STATEMENT OF KEN1QETR M. WRIGHT, VICE PRESIDENT AND CHIEF ECONOMIST, LIFE INSURANCE ASSOCIATION OP AMERICA, AND ARTHUR S. FEFFERMAN, DIRECTOR, ECONOMIC ANALYSIS, AMERICAN LIFE CONVENTION Mr. WRIGHT. My name is Kenneth M. Wright and I am vice presi- dent and chief economist of the Life Insurance Association of Amer- ica. I am accompanied by Arthur S. Fefferman, director of economic analysis of the American Life Convention. Our two associations have an aggregate membership of 349 life insurance companies accounting for approximately 92 percent of the life insurance in force in the United States. These companies also hold over 99 percent of the reserves of insured pension plans in the United States. The prospect of the projected $29 billion budget deficit in fiscal year 1968 is a matter of deep concern to the life insurance business and to millions of its policyholders, beneficiaries, and pensioners. Rising Federal expenditures in both the military and nondefense areas, together with lowered estimates of projected tax recepits, point to a budgetary situation that threatens to go out of controL A Federal budget deficit of the magnitude now projected could produce serious inflationary consequences for the American public, by adding to the already visible trends toward higher prices, wages, and costs in the economy. Moreover, the amount of Treasury borrowing needed to finance such a massive deficit would accentuate the pressures toward higher interest rates, by placing heavier burdens upon financial markets that are al- ready facing record private demands for funds. Under these circumstances, the life insurance business believes it is imperative for the Congress to take fiscal action at the earliest possible time to hold back the strong pressures toward higher interest rates and rising price levels that would result from a Federal budget deficit as large as $29 billion. The life insurance business agrees with the philosophy expressed in the President's budget message on the inflationary dangers of a $29 billion budget deficit: The Nation could face a return of strong inflationary pressures and an inten- sified wage-price spiral-which could rob the poor, the elderly, the millions with fixed incomes. We would lose our opportunity to make progress this year toward one of our most urgent objectives: price stability. We have already witnessed strong tendencies toward higher price levels, stemming from the combined, impetus of an expanding private economy and rising Federal expenditures, including military spending. In spite of the severe credit shortage which developed in the summer and fall of last year, which had the effect of slowing economic expan- sion in the first half of 1967, inflationary pressures toward higher wages, costs, and price levels still persist. A $29 billion Federal deficit, in our view, would produce upward pressures on price levels, with wide-ranging consequences, not only in fiscal 1968 but in the years ahead. Because of its uneven impact upon PAGENO="0340" 328 PRESIDENT'S 1967 TAX PROPOSALS different economic groups, and especially on those living on pensions or fixed incomes, inflation has been rightly described as "the cruelest tax of all." In addition to the hardships that inflation would work upon the do. mestic economy, rising price levels would lead to further deterioration in our balance of payments by worsening our competitive position in world trading markets. In considering a program of fiscal actions to reduce the impending deficit, we would urge the Congress to use a balanced approach, with close attention both to the level of nondefense spending and to the amount of increased taxation that will be needed. In his budget message of August 3, the President has stated that he is "directing each department and agency head to review every one of his programs, to identify reductions which can be made and to report to the Director of the Budget in detail on the actions he is taking to put those reductions into effect." We are hopeful that such a review can achieve significant results, and would urge the Congress to likewise consider the pressing need for cutbacks in the expenditure programs that are currently pending, in the recognition that the inflationary implications of the prospec- tive budget deficit arise from the high level of Federal expenditures and not just from the shortfall of tax revenues. We fully recognize that spending reductions are not easily achieved. However, judicious trimming of less essential programs, along with postponement of public works outlays that are not critical in a high- employment economy, should permit a substantial decrease in fiscal 1968 spending totals. Furthermore, the announcement of specific programs for expense reductions would be of material help in dampening speculative ac- tivity based on anticipated inflation, even if the normal operation of budgetary, legislative, and administrative procedures might mean that much of the savings would not be evident until future budgets. The life insurance business believes that a tax increase is an un- avoidable necessity at this time, and that a temporary uniform sur- charge on both corporate and individual income taxes is an appro- priate approach under present circumstances. We would urge the Congress, in reviewing the administration's tax proposals, to consider the following points: 1. Legislative action on a tax increase should be prompt, in order to correct the present revenue imbalance and also to remove uncertain- ties in the business community and the financial markets as to the na- ture and extent of the tax increase. 2. While we have no way to evaluate a surcharge of 10 percent, as against some other percentage, the general magnitude of the proposed tax increase-that is $71/2 billion in fiscal 1968-appears to be suitable in the present situation, so long as such an increase can be accompanied by reductions in Federal expenditures. 3. In the interest of fiscal equity, it would be desirable for the sur- charge to take effect at the same time and at the same percentage rate, for both corporations and individuals, and at the earliest prospective date. 4. The form of the tax increase should be temporary in nature in order to avoid adverse effects on long-term business planning, and should not be used as a basis for increased Government spending. PAGENO="0341" PRESIDENT'S 1967 TAX PROPOSALS 329 5. The `application of the temporary surcharge should be kept simple and uniform, without the introduction of exemptions or complexities which aim at structural tax reforms. For example, the proposal to exempt individual taxpayers with in- comes falling entirely in the two lowest brackets would conflict with the basic principle that tax burdens should be shared by a broad base of the American public, especially when revenues are needed to cover outlays for the national defense. Furthermore, this exemption would depart from the principle that all people pay the same tax rate on the same bracket of income, and would introduce a structural change in our tax system which should not be attempted in an emergency tax measure not without extensive debate. A major objective of the proposed tax increase and spending cuts is to reduce pressures upon an already overburdened capital market. Failure to reduce the $29 billion deficit now in prospect could lead to spiraling interest rates. The life insurance business believes that early action to correct the budgetary situation is necessary to avoid a recurrence of the extremely tight financial situation which developed in the summer and fall of 1966. However, it does not appear likely that the proposed tax increase wouid bring an actual decline in the present high levels of long-term interest rates, in view of the heavy demands that are in prospect for private long-term financing. Early implementation of the administra- tion's budget proposals would alleviate upward pressures on interest rates by reducing the Treasury's fiscal 1968 borrowing needs to more tolerable amounts. At the same time, it should be pointed out that two features of the administration's tax proposals, though they would trim the admin- istrative budget deficit, would not relieve total borrowing pressures in the capital market by the full dollar amounts involved. First, the proposal to restore authority to issue $2 billion in partici- pation certificates would merely substitute such issues for an equal amount of regular `Treasury borrowing, with no reduction in total de- mands in the financial markets. Second, further acceleration of corporate tax payments would cut into business working capital by an estimated $800 million. However, corporations would seek to restore their working capital by increasing their demands on the long-term capital market. This response would shift pressure onto the corporate bond market and away from the short-term market where the Treasury would otherwise borrow. To summarize briefly, it is our view that a temporary uniform sur- charge on both corporations and individuals is an unavoidable neces- sity to bring the Federal budget under control. Prompt action is also needed to simultaneously reduce Federal expenditures and hold down the deficit in order to lower Treasury demands upon the money and capital markets and curb inflationary tendencies in the economy. Thank you, sir. The CHAIRMAN. Thank you, Mr. Wright and Mr. Fefferman, for coming to the committee and giving us these views that you have ex~ pressed. Are there any questions of these gentlemen? Mr. SCHNEEBELI. Mr. Chairman. PAGENO="0342" 330 PRESIDENT'S 1967 TAX PROPOSALS The CHAIRMAN. Mr. Schneebeli. Mr. SCHNEEBELI. Mr. Wright, in your capacity as an economist I am asking this question. What is your appraisal of which way the economy is trending? We have conflicting testimony that it is going sideways, it is going up with vigor, and so forth. What do you think about which way the economy is going to be going in the next couple of quarters, because this of course will have influence on the committee's decision? Mr. WRIGHT. We thought about this question and this would be our view on the matter. First of all, there is a choice to be faced. Looking ahead it is always difficult to see exactly the trend of the econ- omy, but the choice lies between cutting back on Federal pressures and the Federal deficit that stimulates the economy as against allow- ing such very sizable deficits and dema.nd pressures to run the risk of inflation. Mr. SGHNEEBELI. We recognize this alternative, but, nevertheless, we would like to have some confidence in the fact that the additional taxes are going to be based on a rising economy which is better able to take it and we would not like to think that the taxes would cause a temporary recession because the economy isn't healthy enough to take a tax in- crease. Do you have any analysis of this? Mr. WRIGHT. Yes. Let me approach that in this fashion. While the economy has been rising less rapidly, it is still rising. A good deal of the slowing process has occurred in the inventory field where ad- justments were called for. In the view of a great many economists these adjustments in inventories are now largely behind us and that portion of drag on the economy may not be such a large factor in the next two quarters, the third and fourth quarters. Therefore, our appraisal would be that the economy is essentially healthy and strong. This has been our background in thinking that a tax increase of the magnitude proposed would not tip us into a downturn for the total economy. Let me also point out that if the full proposal of the President is implemented we would still be left with a budget deficit of $14 to $18 billion, which itself is one of the largest deficits we have had for the entire postwar period and a very strong continuing expansionary in- fluence on the economy even at that reduced level. Mr. SCHNEEBELI. Would you say the economy is going upward in the third and fourth quarters? We are already about two-thirds through the third quarter. There doesn't seem to be any robust in- crease that I can see. Mr. WRIGHT. There have been some significant upturns in a number of key areas. I can cite the turn up in industrial production. Housing starts have moved up very strongly. Personal income is continuing to rise strongly. Order backlogs are up in the latest reports. I think that we may now be facing a situation in which easier money, which began some 8 or 9 months ago, is beginning to show quite an effect from the turnaround of last summer and fall, plus the fact that the inventory `adjustments are now not as great `a drag `as `they had been. Mr. SCHNEEBELI. Thank you very much. The CHAIRMAN. Any further questions? Mr. Battin. PAGENO="0343" PRESIDENT'S 1967 TAX PROPOSALS 331 Mr. BATTIN. Several times in your statement you quoted from the President's message to us on August 3. One of the things he said in his message, and the reason I ask this question, is that you throughout your statement emphasize the necessity to couple an increase in taxes with a reduction in Federal spending. I quote the President's message: All actions we take to reduce Federal spending must-and will-be carefully and compassionately weighed. For we cannot turn our backs on great programs that have been begun, with such promise, in the last 31/2 years. I am wondering, based upon the state of legislation at this point in Congress, with the unrest that exists in the country, with the talk about a Marshall plan for the cities of the country, whether you want us to believe that there will be a corresponding reduction in Federal spending? Mr. WRIGHT. I know `this is a difficult problem and our feeling is that `this lies within the province of the Congress and the administration to decide which areas shall receive priority. But I believe that the administration has expressed confidence that there are areas that can be cut, `and I have seen `many `congressional statements that in specific programs further cutbacks would be possible. I think this is a matter of setting priorities. I cannot urge upon you specific areas that should be eliminated or cut, but I think in the post- ponement and deferment of those things that are not so pressing a good deal could be achieved in budgetary savings. Mr. BATTIN. Another area is one `that was discussed earlier in the week. Do you think being faced with a $29 billion deficit would have any, let's call it, pressure on the Executive to hold down spending without any tax increase? Mr. WRIGHT. You mean in the absence of a tax increase? Mr. BATTIN. Yes, just being faced with a $29 billion deficit. Mr. WRIGHT. I think it is bringing that pressure to bear right now. Mr. BATrIN. And you follow the papers as closely as Members of Congress do? Mr. WRIGHT. That's right. Mr. BATTIN. Do you ever see what happens when a cut is made on Capitol Hill of any requested expenditure? I can just think of the other day when the other body made a very sizable cut in foreign aid. The President took the airwaves that night to condemn that body for what he considered a temporary setback. I don't share, I guess, with you the feeling that the administration will, in fact, even come close to dollar-for-dollar savings or even less than that, a three for one, reduction in nonvital expenditures, and this is what gives me great cause for alarm because I think the tax increase without the reduction is doing nothing more than financing the continuation of the present level of spending. Mr. HERLONG. Will the gentleman yield at that point? Mr. BATTIN. Yes. Mr. HERLONG. And this cut that they made over there would have no effect on this year's spending at all because they have over $9 billion in the pipeline that is already obligated? Mr. BATTIN. That is right. Mr. HERLONG. Then it would have no effect. Yet he asked for more to go into the pipeline at a time like this. PAGENO="0344" 332 PRESIDENT'S 1967 TAX PROPOSALS Mr. BATTIN. As we sit here and listen to those of you who come before us and give us your conscientious opinion it becomes a little difficult then for us to have to make the decision, to weigh the evidence coming from here and down the street. I don't know just what to do. Thank you very much. The CHAIRMAN. Mr. Herlong. Mr. HERLONG. On yesterday afternoon the White House called me in connection with this foreign aid bill that is now before the House and asked me if I would go along against making any cuts in this bill, and I said, "Now, I am trying to get your tax bill increase passed and I don't see how you can talk out of both sides of your mouth at one time. You are asking me to vote to spend more on foreign aid than the Senate has voted, and at the same time you want us to increase the burden of people in this country in taxes. Then the next minute you tell us you are going to cut down on unnecessary expenditures." I assume that they consider this as not an unnecessary expenditure, but it won't affect their program any at all if they don't appropriate a nickel in foreign aid this year, and we are trying to hold down on these things. I told them, "I don't see how you can, in good conscience, ask me to vote for more at the same time you are asking me to vote for a tax-increase program. The CHAIRMAN. Any further questions? If not, we thank you, Mr. Wright and Mr. Fefferman. Mr. WRIGHT. Thank you, sir. The CHAIRMAN. Mr. Hall. Mr. Hall, we appreciate having you back with the committee again to discuss this very serious problem. If you will identify yourself for this particular record we shall be glad to recognize you, sir. STATEMENT OF E. S. HALL, CHIEF ENGINEER AND SECRETARY, FREEDOM ThTC. Mr. HALL. Mr. Chairman, my name is E. S. Hall. I am chief engineer and secretary of Freedom Inc., Farmington, Conn. The President's surtax message: Without a tax increase and tight expenditure control, the deficit could exceed ~28 billion. * * * If left untended, this deficit could cause * * * ruinous inflation. Inflation, strikes, riots, Communist guerrilla "wars of liberation" in Cuba, Vietnam, Watts, Chicago, Cleveland, Newark, Detroit-can America be saved? The 10-percent surtax is simple. Figure out your income tax and add 10 percent. Made even simpler by omitting lower income exemption and corporate speedup, it still might collect $6 billion. But that's not half enough to stop inflation, the dishonest tax that steals the value of our dollars. Congress has the power to levy and collect taxes, to pay the debts, to borrow money, to coin money, regulate the value thereof, and of foreign coin. Congress has the power to manage money in a way that would keep the free-market price level stable. Contracts would be valid, and the same pay would buy the same or better living, year after year. Cash, savings bonds, insurance, social security and the like would be worth as much tomorrow as they were yesterday. PAGENO="0345" PRESIDENT'S 1967 TAX PROPOSALS 333 We could save and invest with confidence in the future of the dollar. Govermnent could continue to honor its 1935 commitment to buy gold from, or sell gold to, foreign governments and their central banks at $35 an ounce. Dollars would continue to supplement gold as the inter- national money and good-as-gold capital reserves supporting other currencies and accepted in trade within and between the nations of the world. Congress has the power to maintain free-market price stability, whatever the rate of unemployment or economic growth. Congress has the power; all it needs is know-how and the will to act. There are no legislative panaceas. Our one best hope is a bill to remove the cause of the entire disease. What is the cause of price inflation? Why do prices rise? Because too few are unemployed? Because too many are receiving too-high incomes? Because prosperity is "overheated"? Not primarily. The "new" economists are mistaken. They have managed to extend pros- perity 7 years by deficit spending-that is more than the "old" econo- mists have done by balancing the budget-but economist or not, any- one familiar with elementary algebra knows that- the number of DOLLARS spent = average commodity PRICE the number of units of COMMODITIES paid for and that when Government-by deficit spending of credit created by banks as they "monetize" the bonds-inflates the numerator, dollars, faster than business increases the denominator, commodities, the value of the fraction, price, rises. Money inflation is the primary cause of price inflation. Inflation doesn't just happen; it is a crime committed primarily by Government. Government's responsibility is to adopt the monetary and fiscal policies that will raise the numerator, dollars, at the same rate that business raises the denominator, commodities, to keep the value of the fraction, price, stable. The Federal Reserve, by market operations with Government securi- ties, and by adjusting reserve requirements and interest rates, has been governing the quantity of bank credit, raising or lowering the quantity of dollars in the market. These monetary measures depend on human judgment, not infallible; they may do more harm than good. The administration and Congress, gazing into economic crystal balls, have been trying to raise or cut taxes to cool or heat prosperity, to restrain or promote economic growth, and always to reduce unem- ployment. These fiscal measures, too, depend on human judgment, not infal- lible. What we need is an automatic fiscal governor responsive to price trends, to make the free-market price level stabilize itself. How would you design it? Government commits the crime-inflation by excessive deficit spend- ing-because our income-tax law, the Internal Revenue Code of 1954, as amended, is inadequate. Thousands of pages, an incredible mon- strosity, yet it doesn't even collect enough revenue to prevent inflation. Mr. Chairman and members, our country's in an inflated jam. Only you can save it. Introduce and act on the freedom tax bill. PAGENO="0346" 334 PRESIDENT'S 1967 TAX PROPOSALS A bill to provide a simple alternative to the complex Internal Reve- nue Code letting taxpayers elect which way they pay; to tax the na- tional income-broadest tax base insures lowest rate-the rate adjusted automatically to collect the revenue to maintain free-market price stability; and to untax social security and provide total security. More specifically, `a bill to let employers elect to make employees their limited partners and withhold an incentive tax on profit, salaries, and wages, instead of existing income and payroll taxes, and pay the balance of profit or the loss, partly in *cash dividends declared as usual and partly in business property ownership credited, or charged if a loss, to the partners in amoimts proportional to their respective amounts of money invested-book value-and year's pay. Comparisons made from annual reports show that, in a profitable business, whether you are an employer, an owner of business property, or an employee, the personal owner of yourself, a part of business personnel, you will get your part of profit and may pay a higher tax, yet you will get a take-home raise. No strikes. To adjust the tax rate automatically in repsonse to price trends, and i'ssue limited amounts of new currency-U.S. notes-to balance the budget., reduce the debt, `and restore and then maintain the buying power of the dollar and free-market price stability. No need to "bor- row" money. Cut spending up to $5 billion interest on the bank-held debt. T'o let the needy change from partial to total `security; adequate cash aid added to their other incomes, if any, to enable them to buy food, `clothing, `and shelter, plus payment of all their medical bills, locally administered by social workers and the clergy, and paid directly from income tax revenue. No accounting overhead. Lowest cost. Free- market medical care. Total security. The fighting in Vietnam can st'op Communists but it cannot `stop communism; it is not possible to shoot `or bomb `an idea. N'o `amount of bombing and killing Communists can convince them they are wrong and induce them to quit their "wars of liberat:ion." A right idea could. As Victor Hugo put it, "No army is as powerful as an idea whose time has come." Give us the freedom tax law. Tinder it we can set an, example of strikeless and `steadily growing prosperity. Communists and other Socialists will be left without a mission, left with no "wage slaves" to "liberate," left with nothing "left" to fight for. T'he war in Vietnam and other "wars of liberation" `all the w'ay from Havana and Watts to Newark, Detroit, Washington will subside. We can stop bombing, withdraw our troop's, cut defense spending $20 billion in fiscal 1968, and lead the world toward peace. The CHAIRMAN. Mr. Hall, we thank you, sir, for again coming to the committee and giving us the benefit of your thinking. Are there any questions of Mr. Hall? Thank you, sir. Mr. HALL. Thank you. (For additional statement submitted by Mr. Hall see p. 833.) The CHAIRMAN. Mr. Hicks? Is Mr. Hicks present, Mr. MT. B. Hicks, Jr., executive secretary of t'he Liberty Lobby? Mr. Hicks is not present? Mr. Crehore? Mr. Crehore, if you will give us your name, address, and capacity in which you appear for the record we shall be glad to recogiiize you, sir. PAGENO="0347" PRESIDENT'S 1967 TAX PROPOSALS 335 STATEMENT OP JOHN DAVENPORT CREHORE, WASHINGTON, D.C. Mr. CREHORE. Mr. Chairman and other members of the committee, my name is John Davenport Crehore. I am a voter in New Hamp- shire, residing temporarily at 3824 Porter Street NW., Washing- ton, D.C. I appear as a private citizen, a student of the socioeconomy, with no affiliations, and representing no one but myself. SUMMARY I speak in support of the President's recommendations for increased taxation. Severe cutting of the budget would be truer wisdom than in- creasing taxes to support its extravagance, but I approve of increased taxation because the budget will not be cut to an economically safe level, and because anyway it will be politically wiser to incur the public's displeasure at increased taxation than to stir its rage at lowered doles. In summary my recommendations are the following. I am sorry they do not accord with modern doctrine. However, you will find that for the most part they fit the classical sociological and economic concepts, although lack of time for detail may leave this claim unproved. TELEPHONE SERVICE I urge maintenance of the telephone excise at 10 percent for the period of budgetary imbalance; really poor people don't have tele- phones. A17~OMOBILE TAX I would restore the excise on automobile pleasure cars to 10 percent, applying this also to their tires; and I would increase the Federal tax on gasoline somewhat. Statistically a new car lasts 15 years. Five out of eight million new cars are bought to replace cars which could be kept in service for less than the budget of a new car. Ergo, most new car are luxuries-status symbols. Our country's financial stringency is more threatening than is gen- erally acknowledged; the Government should pinpoint surtaxation on free spenders so long as it won't balance its budget. POSTAGE RATES I would retain the 5-cent first-class rate, and raise lower-class rates on actual weight of advertising material enclosed, increasing present post office differentials. ADVERTISING ON AIRWAVES For revenue, and to avoid further disadvantaging of printed media, I urge taxation of advertising broadcast over public air channels, on the assertion of public ownership, entailing supervisory expense. FOREIGN PROPAGANDA I suggest cessation of free distribution of foreign propaganda. Reasons: Budgetary economy; defense against brainwashing of the populace. PAGENO="0348" 336 PRESIDENT'S 1967 TAX PROPOSALS POST OFFICE ACCOUNTING I urge that strictly standard corporation accounting methods be applied to the operations of the Post Office Department. This would segregate many costs properly chargeable to other governmental en- tities or enterprises, and would enable the Congress to determine, among other things, fair rates of postage for each class of mail. A SOCIOECONOMIC TAX ON ALCOHOL AND TOBACCO I urge increases in taxation upon alcohol and tobacco to the limits presently feasible, with progressive increases periodically into the far future-this program to be kept in conformity with the whole Government's ability to cope with bootlegging. Proceeds: for high- way casualties and cancer. FNMA TRUST PARTICIPATION CERTIFICATES I suggest that "the" $2 billion of these participation certificates hanging over the market be sold as quickly as convenient. As a sociolo- gist I concur in the administration's insistence that there is psycho- political advantage in every lowering of the visible deficit. And as an ex-Wall Street banker I approve the operation which these participa- tion certificates are presumed to implement; namely, borrowing at wholesale to lend at retail-to small businessmen and hornebuilders. The fact that Fannie Mae is not operated in the anticipated manner should not cause it to be hindered in the functions it can be made to perform as was intended, unless its prompt liquidation is anticipated. RETAIL SALES TAX I now respectfully submit for the judgment of the committee a tax plan in which I visualize many benefits, including the saving of $700 million per annum to add to the President's item of $800 million in interest saved, through the collection of one-half the Federal tax revenue on practically a daily remittance basis. This plan, by substituting retail sales taxation for income taxation in the lowest brackets, releases 20 million families from income tax, happily restoring to their pay envelopes the 20 percent now being with- held. It also hands them exemption coupons with which to pay part of the new sales tax. It pays off their State sales tax for them directly to their State treasurer. And it offers many more big and little re- wards, all very simply administered, and very likely to be of great political advantage to the party sponsoring the plan. FIGURES HEREIN ARE TENTATIVE It should be kept foremost in mind throughout this fragmentary outline that every figure cited is tentative. The plan is so flexible that wide variations in percentages, et cetera, will not spoil it but will determine whether application of it will raise, lower, or leave un- changed the total tax revenue. I shall use for illustration the figures I use in my accompanying booklet, "National Sales Tax-A Work- able Plan," obtainable through bookstores countrywide. PAGENO="0349" PRESIDENT'S 1967 TAX PROPOSALS 337 TWENTY MILLION FAMILIES RELEASED FROM INCOME TAX The releasing of 20 million families from income tax is accom- plished `by increasing personal exemption from $600 to $1,500-$6,000 for an average family. The revenue thus missed is collected in a sales tax of 20 percent on the broadest feasible base of retail sales, and on some other sales to ultimate consumers. The poor are spared through issuance, presumably twice a year to all persons, of monthly ration coupons with `total cashable value in a year of $100. This is comparable with the actual value of the $600 income tax exemption. AVOIDING CONFLICT WITH PRESENT TAX SYSTEMS The problem of avoiding conflict with State sales tax systems is solved by payment to every State of a portion of the national sales tax. The portion must be the same for every State. So it will probably be the figure called for for reimbursement of the State with highest sales tax, f'or refraining from collecting it-say 5 percent-one-fourth-out of the Federal 20 percent, leaving 15 percent for the IlLS. Treasury, say $60 billion net. State bureaucracies need not be disturbed; they may be given the Federal sales tax to collect-for a fee. NO CONFLICT WITH FEDERAL INCOME TAX Let it be noted that nothing in my plan conflicts with the income tax system. My only contact with it is in raising personal exemption to make room for sales tax at the bottom of the scale, and in adjusting the income tax rates somewhat in the remaining brackets to ease the impact of the basic 20-percent sales tax. POLITICAL ADVANTAGE The difficulty in comparing the two systems will hide any changes in real impact at any level, and thus will make it difficult for opponents to accuse the Treasury of putting the whole burden onto "the rich"- even if it does so, as expected. I'm sure this plan of mine could be built into immense political capital for the party sponsoring it. We know the public is frantic at the prospect of less cash in pay envelopes next year. One point that can be loudly touted is that this sales tax per se will not raise taxes for anybody one penny; it will be funded for the worker by the money now being withheld from him as income tax, 10 to 20 percent of his earnings. Restored to the weekly pay envelope, ~this will give a big psychological boost to morale. Psychopolitical. CONSERVATIVE TAX PLANS Political scouts are uncovering millions of conservatives in business and the professions w'ho aren't bothering to argue with the reigning liberals, `but who will `defiantly vote against liberal doctrine in 1968. This Orehore tax plan should certainly `attract these sound economists, with its foot in the door against the confiscatory income tax system. PAGENO="0350" 338 PRESIDENT'S 1967 TAX PROPOSALS Vide the increasing weight and number of schemes like the Baker- Herlong plan, liberty amendment, State sharing of Federal income tax, et cetera. If my plan should ever be worked on in consultation with myself an uncountable number of advantages inherent in it would be developed. The booklet describes many more than I have named here-both economic and sociological. ACKNOWLEDGMENT I thank the committee for the invitation to speak; and I hope I may be asked a few questions testing my plan for availability. (For additional material submitted by Mr. Crehore see p. 795.) The CHAIRMAN. Thank you for coming, Mr. Crehore. Mr. Hicks is now present. Mr. Hicks, come forward please. Mr. Hicks, if you will identify yourself for our record by giving us your name, address, and capacity in which you appear we shall be glad to recognize you, sir. STATEMENT OP W. B. RICKS, JR., EXECUTIVE SECRETARY, LIBERTY LOBBY Mr. HICKS. My name is W. B. Hicks, Jr., executive secretary of the Liberty Lobby, 132 Third Street SE., Washington, D.C. The CHAIRMAN. Glad to have you, Mr. Hicks, and you are recognized. Mr. HICKS. Mr. Chairman and members of the committee, I am W. B. Hicks, Jr., executive secretary of Liberty Lobby. I am here to present the views of our 11,000-member board of policy, on behalf of the 170,- 000 subscribers to our monthly legislative report, Liberty Letter. Mr. Chairman, Liberty Lobby is opposed to these proposals. Our board of policy voted overwhelmingly to advocate lower taxes, both in 1966 and in 1967. We feel that our position against a tax increase re- flects the general attitude of the American people, as well. This is not a mere instinctive reaction, either. There are good, sound reasons why the Congress should not raise taxes. The main reason, we believe, is that a tax increase would have inflationary effects that could trigger the very chain of events that the President described so well in his message containing `these proposals: Strong inflationary pressures, intensified wage-price spiral, spiraling interest rates, tight money, and recession in the housing industry. it seems clear to us that the economic advisers who are calling for an increase in taxes are searching for an easy way out of the tight spot we are in as a result of 30-odd years of error. They seem to have grabbed onto an old, standard formula that describes what inflation is, and `by approaching it in a new direction, they hope to solve the inflation prob- lem. You know what the equation is, of course; the one that says: "In- flation is the result `of an increase in the supply `of money and credit relative to the increase in production of goods and services." Now, the new approach is, that they hope to lay a tax on the supply of money and credit, and thereby the magic of algebra will reduce the rate of inflation. It won't work that way. The reason it won't work that way is a simple one: Whatever tax `you attempt to apply to the supply of money and credit is inevitably going to be shifted right onto the half of the equa- PAGENO="0351" PRESIDENT'S 1967 TAX PROPOSALS 339 tion called "production of goods and services" and instead of decreas- ing inflation, the result is increasing inflation. What happens when we apply our income tax increase? Obviously, some taxpayers have but one place to `obtain the money to pay the new tax: They spend less-for awhile. Then they decide to press for more pay to cover `the increased taxes, plus a little extra to cover the higher prices which come with the inflation. They have then managed to shift the burden of the taxes from the "spending" money onto the "produc- tion" money, except for that portion which the producer himself can put into his price structure, as added inflation. Other taxpayers-those with savings-follow a different procedure. T'hey simply dip into their savings to pay the extra tax. Or they buy a little less insurance next year. Eit'her way, they have placed the tax increase directly against the "production" money of the economy, be- cause it is these savings accounts `and insurance policies that provide the "production" capital for the economy. Eventually, nearly all of the tax increase falls onto the capital money supply, the "production of goods `and services." The remainder goes int'o inflation, in either of two ways: (1) Prices are raised as the market will allow, `and (2) interest rates rise, as the `supply of produc- tion money is reduced. Proponents of the tax increase sometimes say that interest rates will rise if taxes are not increased. The fact i's, that if taxes are increased, interest rates will rise as a result. The events just projected will depend on what the Government does with the tax money it collects. If it `should use the money to pay off Government debt outstanding, it would be a case of returning the money to the same part of the economy `from which it came: The capital savings, or "production" money flow. In that case, the effect on the economy would be zero. But we know that this is not what the Government wants to do. On the contrary, the Government is not paying off debt, but expanding it. It is not putting anything into useful production of goods and services, it is spending; using up; consuming. It is consuming at `a rate never before equaled by all the govern- ments of the' world put together. It is even creating a whole new class of nonproductive spenders. Our President has added over half a mil- lion additional employees to the Government payroll, and their maj or service is to channel Government expenditures to additional millions of recipients of taxpayers' funds who are themselves nonproductive spenders. It is proposed to spend an additional $3 billion providing make-work jobs for idle hands in the riot-scarred cities. Perhaps this effort will prove to be socially productive, but in terms of economics, it will not produce goods and services that people want, and are willing to pay for. No, it will simply add that much more "spending" money to t'he inflationary flow. Our Government does not save; it does not invest; it does not pro- duce. It consumes. And it wastes. In the channel at the North Vietnamese Port of Haiphong is a huge, irreplaceable dredging machine. It works 24 hours a day, keeping the channel free `of the mud that threatens to clog up the channel. A single PAGENO="0352" 340 PRESIDENT'S 1967 TAX PROPOSALS well-placed bomb could wreck that dredge, and within weeks, the mud would close off the main source of enemy supplies in Vietnam. Instead, our Government throws away hundreds of millions of dol- lars in planes and bombs on secondary, piddling targets like empty barracks buildings, and the most important, cheapest target of all is declared "off limits." So the Government that wants to spend and spend has only one choice. Take it out in taxes and continued inflation. But inflation means high prices. High prices, high taxes, and high ratings on the Gallup Poll just don't go together. The limit has been reached. It appears to Liberty Lobby that the big spenders are between a rock and a hard place. They might as well face it. The spending will stop, anyway. It might as well be here, it might as well be now. The representative of the people who is first to recognize the new state of affairs and call for the halt voluntarily will be recognized as the friend of the people. We hope that this committee will reject the proposed tax increase. That would be right for the committee, right for the administration, and right for the people. Thank you. The CHAIRMAN. Mr. Hicks, we thank you, sir, for coming to the committee and giving us the views of yourself and your group. Are there any questions of Mr. Hicks? If not, sir, we thank you again. Mr. HICKs. Thank you. The CHAIRMAN. That completes the calendar for today and without objection the committee will adjourn until 10 o'clock in the morning. (Whereupon, at 11:52 a.m., the committee adjourned to reconvene at 10 a.m., Thursday, August 24, 1967.) PAGENO="0353" PRESIDENT'S 1967 TAX PROPOSALS THURSDAY, AUGUST 24, 1967 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Wilbur D. Mills (chair- man of the committee) presiding. The CHAIRMAN. The committee will please be in order. Our first witness this morning is our distinguished colleague from Texas, chairman of the Banking and Currency Committee of the 1-louse, Mr. Patman. We appreciate having you with us and you are recognized. STATEMENT OP HON. WRIGHT PATMAN, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP TEXAS Mr. PATMAN. Thank you, Mr. Chairman. I appreciate the oppor- tunity of appearing before your committee. I shall be as brief as possible. However, I will do my best. The proposed 10-percent surcharge which is under consideration will be an empty gesture unless something concrete is done about in- terest rates. In fact, the President's tax increase would not have been necessary had the Federal Reserve Board performed its duties in the public interest. Unless the Federal Reserve is forced to cooperate with the Federal Govermnent we will almost certainly face the necessity of an even higher tax increase next year. The last interest rate increase caused by the Federal Reserve, which is still having its effects, whether intended or not, will have a devastat- ing effect on certain financial institutions that are vital to thewelfare of this country. I refer, among others, to the savings and loans, the mutual savings banks, and the credit unions. The increase of 371/2 percent imposed by the Federal Reserve Board on December 6, 1965 was a devastating blow to these institutions, and unless direct action by the Federal Reserve to lower interest rates begins immediately, these institutions will be forced to suffer more. In addition to these three institutions being hurt and injured-and some of them destroyed-by the increases, it will cause further dis- ruption the homebuilding industry and make the building of homes more difficult because interest rates will force the charges to be so high that it will discourage homebuilding, as it has in the past. 341 83-349-67-pt. 1-23 PAGENO="0354" 342 PRESIDENT' S 1967 TAX PROPOSALS In addition to that it will force Government rates up for all levels of government. Now, all this presuming that the Federal Reserve will continue to ignore its own duties and keep on imposing higher and higher interest rates. The Federal Reserve has a responsibility, but they have not performed their duties in accordance with their responsibilities. I think, however, the Congress has the greatest responsibility. Con- gress has ignored this issue too long, so that now we are right on the brink of devastation for much of our economy because of these high interest rates. If the Federal Reserve cannot be brought back into line as it should to perform for the public interest instead of the private financial interests, I think the Congress should consider liquidating the Federal Reserve. In the original Federal Reserve Act the process of liquidation is set out as to what will happen if the banks are liquidated, and the law makes it very plain that our first obligation will be to pay the banks back involuntary investment-it is not stock, although they call it stock-to pay back to the banks that involuntary investment which is about $570 million now, and after we do that and meet the other obliga- tions the remainder belongs to the Government. If we are compelled to liquidate the Federal Reserve System the Government would profit by at least $65 billion-$65 billion-which could be paid on the national debt and would put us, of course, in a much better position than we are in right now. Now, this proposed tax surcharge could really be called the Federal Reserve tax of 1967. A substantial part of the money raised through the surcharge must go to pay added interest cost resulting from the December 6, 1965, action of the Federal Reserve. Let me quote from the testimony of Charles L. Schultze, the Director of the Bureau of the Budget, before your committee on January 30, 1967: We estimate that the increasing shortage of credit funds and rising interest rates experienced last year are adding approximately $3 billion to the Federal budget for fiscal year 1967 as a whole. This $3 billion was estimated January 30 and since that time interest costs have continued to climb, so we know that Mr. Schuitze's esti- mate was indeed a very conservative one. The $3 billion mentioned by Mr. Schultze represents only the increase from the December 1965, Federal Reserve action. It does not take into account the tremendous increase in interest rates since President Truman left office in 1952. May I invite your attention, Mr. Chairman, to the fact that I have compiled some figures, obtained from the Federal Reserve, and the Treasury, and the Comptroller of the Currency, and the FDIC, so there is no doubt about the authenticity of the information that I furnish. These figures show that for 14 years, from 1939 through 1952, in- terest rates were very low. You know, back in 1940 I was before this committee and 1 advocated, along with former Senator Robert L. Owen, to pay for the cost of the war, of the part that we could not raise money for otherwise after we had sold all the bonds we could sell, and we had taxed all we could tax, and then the money had to be manufactured, that the Federal Reserve manufacture the money, as it has a right to do, make the loans to the Government without interest, PAGENO="0355" PRESIDENT'S 1967 TAX PROPOSALS 343 and we would pay it back 21/2 percent a year over a 40-year period. That is my proposal now. We can do that. Now, of course the committee didn't see fit to recommend that, but for some reason the Federal Reserve Board resolved not to let the interest rates go above 21/2 percent and from 1939-at that time it had been 21/2 percent~-and never after that did the interest rates go above 21/2 percent until the end of the Truman administration in 1952, in fact, until the beginning of the Eisenhower administration, in 1953. The Eisenhower administration floated two substantial bond issues, one of them 23/8 percent and one of them 21/2 percent, which proves conclusively that the interest rate was delivered at 21/2 percent and below, so it can be done. Those 14 years, 1939-1952, were the roughest years in the history of any country on earth-inflation, deflation, wars, shooting away a quarter of a billion dollars, a half billion dollars, a day on the battlefields sometimes. We had ruinous inflation facing us; we had a terrible depression; we had long lines of hungry people and we had over 10 million unemployed during part of that time, so if the Federal Reserve Board can keep interest rates at 2½ percent and less during a 14-year period as rough as that one they can do it any time and, of course, we all know they can do it any time. That is what they are there for. They have the power to do it and they can do it, but by reason of their failure to do it our interest burden today on the national debt alone is $14.2 billion. Now, $6.7 billion of that is absolutely excessive. It is exorbitaiit. But we are having to pay that extra interest on the public debt be- cause of the action of the Federal Reserve Board. Now, the same proposal that I had back then I have now, to finance the Government's part of the war cost by the Federal Reserve. Now, you can't call that unorthodox unless you call the Federal Reserve unorthodox. You know, for many years at one time the Treas- ury could borrow money from the Federal Reserve directly at the request of the Secretary of the Treasury under terms fixed by him, but after World War II was over this was changed. Now the law reads that the Treasury could still borrow up to $5 billion directly from the Federal Reserve. They did it not very long ago, a few months ago. It is being done right now, so it is the same principle as I am advocating right now to save the ruinous cost of the war. For every billion dollars we borrow, Mr. Chairman, eventually we will pay back $2 billion like it is being run right now. We will pay back $2 billion. Every schoolhouse that is built for a million dollars we will have to pay $2 billion. This is ruining our country. The people can't stand that indefinitely. Our country just can't take it. The truth is we have two govern- ments here in Washington. One government is presided over by elected people like ourselves and the President of the United States who is elected. But the other government is a banker's government operated through the Federal Reserve. They are ruining the banking affairs, and they are running in conflict. We don~t control them. You know, Mr. Eisenhower told Mr. Martin the Federal Reserve was independent and he believed that. Of course it is not independent under the law. There is no law granting them independence, It was never proposed in `Congress that they be independent. It was never dis- PAGENO="0356" 344 PRESIDENT'S 1967 TAX PROPOSALS cussed. No one thought they were independent, but Mr. Eisenhower told Mr. Martin that they were, and when Mr. Kennedy and Mr. Johnson came in and the Fed was proposing to increase interest rates 37~ percent on December 6, 1965, Mr. Johnson, the President, said, "Now, I want to talk to you gentlemen about that. That is going too far. We can't afford that." And so Mr. Martin and others had an appointment to go to John- son City to see the President. They went down there, but the President found out when they got there that what they were going to talk about they had already done in a secret session 2 days before that. Mr. Martin defied the President of the United States. Now, that is the first time that they ever had a direct conflict, a direct confrontation, where the Federal Reserve just told the President of the United States that lie would not prevail, that they would prevail. Now, of course the fault is that the Congress didn't protect the President, didn't give him the power to go to the mat with the Federal Reserve. I-lie is elected by the people. They are not elected. They in effect have lifetime jobs and if they increase interest rates to where it ruins the country nobody can punish them. They are outside of the law so far as any punishment is concerned. The Members of Congress should have this responsibility just like the Constitution says. I haye been here over a period of time when Con- gress was tested, and Congress will come nearer staying by the people against inflation than any group you can find in America, certainly in a better way than the people who are selfishly interested when they can raise interest and collect the interest rates themselves. You know, that i's a position that no person should be in. The people who set interest rates in this country and determine the supply of money should be dedicated public servants, preferably elected by the people, at least have the responsibility to preside over it. WTho is the Federal Reserve under? They don't claim to be under anybody; just themselves. They are operating in a different govern- ment, a banker's government entirely, and I think something should be done about that or we are going to have disastrous consequences by reason of it. Now, on the yield of the interest rates after `the 14 years that I told you about, there is another 14-year period just subsequent to that that I also have the figures for, and without objection, Mr. Chairman, I would like to insert this in the record. The CHAIRMAN. Without objection they will be included. (The information referred to follows:) PAGENO="0357" PRESIDENT'S 1967 TAX PROPOSALS 345 Yields on long-term Government bonds 1939 to present [Percent per annum] Yield 1939 2. 36 1940 2. 21 1941 1. ~ 1942 2. 46 1943 2. ~ 1944 2. 48 1945 2. 37 1946 2. 19 1947 2.25 1948 2.44 1949 2. 31 1950 2. 32 1951 2. 57 1952 2. 68 1953 2. 94 1954 2. 56 1955 2. 84 1956 3.08 1957 3.47 1958 3. 43 1959 4.08 1960 4.02 1961 3.90 1962 3.95 1963 4.00 1964 4. 15 1965 4. 12 1966 4. 65 Average for 14-year period (1939-52) 2.36 Average for 14-year period (1953-66) 3.65 Mr. PATMAN. And from 1953 to 1966 I have the interest rates here during the next 14 years. Interest rates were 50 percent higher just on Government rates alone. Now, a lot of people think that so-called market forces fix interest rates. Well, to some extent that is true, but on our large Government debt, interest rates are fixed by the Federal Reserve. There is no free market in Government bonds. Now, if our Government bond indebtedness was something like $50 billion, possibly the free market forces would operate, but not when the public debt is as big as it is today. I have asked Mr. Eccles that question when he was Chairman; I asked presidents of the Federal Reserve banks that question; and I asked Mr. Martin that question, PAGENO="0358" 346 PRESIDENT'S 1967 TAX PROPOSALS and not one of them has ever said in a huge national debt that there is a free market in Government bonds. There can't be. The interest rate is fixed by the Federal Reserve bank itself. This is something that no one can dispute. The cost of servicing the national debt is `advancing faster now than we will ever be able to catch up with it by passing tax laws. We just can't do it. The Federal Reserve is of course operating in a way just like Robin Hood acted except in reverse. Robin Hood, it is said, would take from the rich and give to the poor. The' Federal Reserve, however, takes from the `poor `and gives to the rich. The Congress of `course is responsible for this and should do something about it. The Federal Reserve Bank of New York runs the Federal Reserve System. These other banks are just like branches. They have no power to amount to anything. They have about 20,000 people working in the Federal Reserve System but the bank of New `York runs the show entirely. None of these other 11 district banks can even make `a condition sta'tement unless the Federal Reserve Bank of New York first gives them the information. Th'ey have all the information. The other 11 Federal Reserve banks don't have any, so it is run by the New York bank. And of course it is suppposed to be under the Federal Reserve Board, or, to be more cOrrect, it is the open market committee, and `the open market committee is composed of the seven members of the Board and 12 presidents `of Federal Reserve banks. Those 19 fellows get around the table and fix the supply of money and determine interest rates. Now, who are these 12? We `will take the one in New York. He is just like all the other 11. He is elected by the directors in that bank. Who are the directors in that bank? Six of them are elected by the banks themselves, by the banks in that Federal Reserve district. They elect six of them and those six can `run the entire show. The other three are appointed by the Federal Reserve Board, and they are not only in `a minority position, but they must have had tested banking experience or the Federal Reserve Board cannot appoint them on that Board. `So, in effect, you have nine bankers running that Federal Reserve Bank of New York. It is the same way in all the other banks. The bankers have the majority of the directors and with this tested bank experience they have in effect `a hundred percent of them now. High interest rates, Mr. Chairman, should concern this `committee a lot `and I know it does. I know the members of this committee are conscientious and sincere and `will do what is best in the public interest, but I invite your attention to the fact that the small businessm'an is going more and more out of the picture. Over the years we have tried to help him. We have arranged to get loans made to the small `businessmen up to an amount that would not let them get into a big business to compete with large business but can compete among themselves. We furnish them a little money to do that, but there is no source of funds for big money. You know, there are a lot of mergers going on and a lot of good people are being displaced, people who have knowledge and ability, and they can go into a business and be in competition with some big concern that is charging too much to the consumers now, but they have no source of funds to go to. ,They have all been wiped out. PAGENO="0359" PRESIDENT'S 1967 TAX PROPOSALS 347 The RFC was the last. It helped a lot of pretty good size concerns, but they have been wiped off the face of the earth and now every one of these big boys you will find, people interested in all the different in- dustries, manufacturing industry and others, all over the Nation on these boards. It is not possible for an independent group to get substantial money from that source to go into business in competition with a big concern. If they could that would help the consumers because it would give us lower prices. The Federal Reserve should assume its responsibility and fix lower and lower rates instead of higher and higher rates. They are going higher all the time. Mr. Chairman, I am available and I will be glad to try to answer any q~uestion that is posed, but I do want to seriously insist that of all times this is one time we have to do something about interest rates. It is absolutely ruining our country. We are paying $14 billion plus every year since William McChesney Martin went into that position in 1951, paying $14 billion a year every year since, $211 billion excess interest, exorbitant interest, in addition to what our country has proven should have been paid and what was done in the hardest times during the existence of the United States of America. If we don't do that we should liquidate the Federal Reserve System. Thank you very much, Mr. Chairman, for the opportunity of ap- pearing before you gentlemen and I would appreciate any considera- tion that you give this matter. My suggestion is strictly in the public interest. Some people say that I am carrying on a vendetta with the Federal Reserve. Of course that is just an excuse. It is not a reason. I have nothing against the Federal Reserve or any person in the Fed- eral Reserve. They have certainly done me no wrong as far as I know, but they have done a great wrong to. the public interest, and that is what I am trying to represent, just the public interest. I don't have it in for anybody. The CHAIRMAN. Any questions ~ Mr. Burke. Mr. Btri~KE. Mr. Patman, I think you have pointed out a real serious problem here in the Nation when we realize that the Federal Reserve is exacting $14 billion a year in interest. Mr. PATMAN. Excess actually. Mr. Buiuci~. And I recall when Mr. Martin was testifying before this committee I asked him if it wasn't possible for the Federal Reserve to exert a little patriotic effort and reduce that charge to the Federal Government. With all the people in this country who are being asked to pay an additional 10 percent surtax as well as corporations, I think the Federal Reserve will have to come to some understanding with the people of America. Fourteen billion dollars a year is too much to exact from the pockets of the taxpayers of this country, and, while I do not agree with everything that you have said, I do agree with you on his part that $14 billion is an exorbitant interest rate to be taking out of the Government. In a period of 20 years it will practically equal the present public debt, and the question is how long can the tax- payers of this country afford the luxury of this $14 billion debt that they are paying to the Federal Reserve System. I think that there are steps that the Federal Reserve could take to reduce this interest charge. PAGENO="0360" 348 PRESIDENT'S 1967 TAX PROPOSALS Mr. PATMAN. Mr. Chairman, may I extend my remarks and insert the bill that I have offered in connection with this, and I would like to have consideration of the subject in connection with this tax bill that you have right now. (The bill referred to follows:) H.R. 12250 A bill to provide for the issuance of nonnegotiable United States bonds to finance certain defense expenditures for the duration of the hostilities in Vietnam, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. The Secretary of the Treasury may issue to Federal Reserve banks nonnegotiable, non-interest-bearing bonds the principal of which shall be repay- able in annual installments equal to 2~/2 per centum of their face value. The principal amount of such bonds isused by the Secretary in any fiscal year shall not exceed the amount by which national defense expenditures for that fiscal year are greater than such expenditures for fiscal 1905. The provisions of section 14(b) of the Federal Reserve Act (12 U.S.C. 355) shall not apply to any obliga- tions issued by authority of this Act. The authority provided by this Act expires upon the determination by the President that the United States is no longer en- gaged in hostilities to protect the independence of the Republic of South Vietnam. Mr. PATMAN. And may I answer briefly what the gentleman from Massachusetts said. The `banks are not responding to the public interest in this war because when we were escalating the war; that is, when they raised the interest rates 371/2 percent, and now they don't want to make loans to deserving students and we need their skills at reasonable rates. They would permit loans `to be made to them at 6 percent interest, but the banks for all practical purposes have gone on strike against the students and they are demanding rates now that would come up to an effective 15 percent `before they will get into this campaign and that is wrong. They are not responding to the public interest. It is the bank's duty to work in the public interest. They are getting the use of the Government credit free. What more could you let them have? In addition to this you have heard about these arms shipments and sales to foreign countries and `that the Export-Import Bank was per- suaded by the administration to make some of those loans. You know why they did? Mr. McNamara said that the big banks would make these lo~tns, they ~s anted to make the lo'uis But w hen it c'lme time for them to make them they refused to make them. And you know the reasons they gave? They wanted to make loans to people who would keep compensating balances with them. Of course that gives them a higher interest rate and they wanted higher rates than the `Government would give.' That i~ the reason they refused to make those loans and that is the re'ason the Export-Import Bank had to come into' the picture and help protect the security of this country by making those loans. So there are two cases just recently where `the banks `have absolutely fallen down on trying to prOtect the public interest. The CHAIRMAN. Any further questions? If not, Mr. Patman, again we thank you. Mr. PATMAN. Thank you very much. The CHAIRMAN. Mr. Wilde? Mr. Wilde, you have been before the committee before. We have always profited from listening to you. PAGENO="0361" PRESIDENT'S 1967 TAX PROPOSALS 349 We appreciate your coming back. If you will identify yourself for the purposes of this record by giving us your name and capacity in which you appear we will be glad to recognize you. STATEMENT OF FRAZAR B. WILDE, CHAIRMAN, COMMITTEE FOR ECONOMIC DEVELOPMENT Mr. WILDE. Mr. Chairman, my name is Frazar B. Wilde. I am Chairman of the Committee for Economic Development; also chair- man emeritus of the `Connecticut General Life Insurance Co. I should like to file with the committee a statement of position on the proposed tax increase and to confine myself to some comments consistent with that statement if that is agreeable. The CHAIRMAN. Without objection your statement will be included in the record and you are recognized to proceed in your own way. (The statement referred to follows:) STATEMENT OF FRAZAR B. WILDE, CHAIRMAN, COMMITTEE FOR ECONOMIC DEVELOPMENT Mr. Chairman, my name is Frazar B. Wilde. I am Chairman of the Committee for Economic Development, as well as Chairman of CED's Subcommittee on Fiscal-Monetary and Debt Management Policy. It is a privilege to appear before this Committee to give you the results of our studies as they apply to the Presi- dent's proposal for expenditure restraint and a temporary tax increase. Almost continuous study over a period of twenty years has led us to conclude that the Federal Government through its taxing and expenditure decisions could help maintain a healthy economy by following what we refer to as a "stabilizing budget policy." This policy is designed to balance the demands of the public and I)rivate sectors with our capacity to produce at stable prices, and to provide incentives and means for increasing productive capacity. The main characteris- tics of this "stabilizing budget policy," which aims not only at economic stability but also economic growth and efficiency, are: That it should aim for a budget surplus to be used for debt retirement under conditions of high employment. This is important because the surplus would add to the funds available for private investment, thereby easing the pressures on monetary policy and promoting steady economic growth. The present budget will produce a very large deficit. That the impact of the budget should vary w-ith the condition of the economy as a whole, being more expansive when the economy is depressed and more restrictive when the economy is booming or inflationary. The present budget clearly does not do this. That the over-all impact of the budget on the economy should not, when combined with appropriate monetary and other policies, he so restrictive as to make attainment of high employment unlikely or be so expansive as to lead to persistent inflation. The impact of the present budget will be inflationary. A "stabilizing budget policy" is achieved when the government sets its ewpendi- ture programs and taw rates so they would yield a moderate surplus under conditions of high employment and price stability. It is independent of conditions at any particular time and it does not depend on correctly forecasting the future trend of the economy. But it does require attention to the surplus or deficit that w-ould result at high employment. A policy that would yield a budget surplus under conditions of high employ- ment will not actually yield a stable surplus in a fluctuating economy. The sur- plus will be larger in inflationary booms. In such booms the surplus can be applied to debt reduction. It can supply funds for investment and in that way it can ease the strain on money and capital markets. But there will be a deficit when eco- nomic activity is much below the high employment level. Financing the deficit will use funds that are not in demand under those conditions and in' that way it can sustain income. These swings will occur automatically with variations in national income and employment because they are accompanied by variations Of tax revenues and certain expenditures, such as unemployment compensation. PAGENO="0362" 350 PRESIDENT'S 1967 TAX PROPOSALS Except in extreme cases of inflation and recession, we believe these automatic swings are the budget's major contribution to economic stability. The deficit now facing us is so large that it is far outside the range of any stabilizing swings which would occur automatically. Deliberate correction of the imbalance in the Federal budget is the chief tool that is now available for restoring the condition of growth at stable prices. We have argued in earlier CED policy statements for agreement in advance between the President and both houses of Congress on a method for quickly enacting temporary changes in tax rates as a way of stopping a recession and promoting recovery or holding back excess demand and averting inflation. This would require devising some means for putting the tax change quickly into effect and for assuring its termination. Time will be wasted in searching for an agreement between the Executive and Legislative branches of government on continuing authority for the Execu- tive to practice a discretionary fiscal policy. For this reason, in a statement issued last December, "A Stabilizing Federal Budget for 1967," CED expressed its preference for a temporary across-the-board tax increase for the calendar year 1967 to the extent necessary to produce the desired balance in the Federal budget. We repeat that recommendation for fiscal 1968 as well. In our December 1966 statement we acknowledged that the outlook for the economy in 1967 was uncertain. A.t the moment there is not much difference of opinion among the experts as to the economic outlook for the remainder of 1967 and calendar year 1968. Most economic indicators point to rising economic ac- tivity. Moreover, unlike the previous fiscal year, the Federal budget for fiscal 1968 is projected to have a $15 billion deficit on National Income and Product Account. We are especially anxious that the government does not pursue policies which heighten the chance that total demand-both public and private-will ex- ceed our capacity to produce at stable prices and thereby add to inflation. We regard inflation as highly undesirable because it erodes the value of long- run, money-fixed obligations, which are so important in our economy. It poses serious hardships for the weaker groups in our society, the older retired people, for example. But it also has a substantial effect on all those who are presently accumulating fixed claims for their ultimate retirement income. Since pension plans comprise a part of compensation for a large portion of the population, the impact of inflation on our economy is widespread. In addition to its socially destabilizing effects, inflation introduces a dis- ruptive element into our economic life. Anticipation of price increases tends to accelerate both inventory accumulation and expenditures for plant and equip- ment. Business firms, faced with the prospect of price increases, tend to pursue policies which only accentuate the demand pressures which cause inflation. These actions result in a rate of expenditures which cannot be sustained over long periods. Thus one of the most pernicious effects of inflation is that it tends to accentuate instability in the form of price increases, bigger increases in demand at times when capacity is over-loaded, and sharper declines in demand and out- put and employment when the speculative character of the demands is realized and the inventory and plant and equipment accumulation cannot be sustained. Rapid inflation brings the worst of both possibilities-accelerating price in- creases followed by substantial declines in output and employment. With the economy operating near the peak of its capacity in human resources and efficient plants, it is especially important that the Federal Government ex- amine its spending plans with extreme care. As we said in our statement in December, "This Committee believes that holding down the rate of government expenditure growth would be preferable to raising taxes as a way of achieving the necessary surplus; temporary tax increases tend to remain in effect and the revenues they generate tend to be absorbed in permanent spending programs." To realize those reductions in spending which are possible, the President must exercise restraint in his recommendations and the Congress must exercise similar restraint in its authorizations. In addition, the President should be free to use his discretion over the timing and amount of expenditures which are controllable by him under law. A review of economic `developments since the acceleration of military activity in Vietnam may be useful to understand our arguments in favor of an increase in taxes and a reduction in expenditures. The rise in the military demand upon the national economy associated with the Vietnam War began in the middle of 1965. By the first quarter of 1967 the value of resources being devoted to military purposes had increased about 40 per cent above the rate of early 1965; part of this increase resulted from rising prices. PAGENO="0363" PRESIDENT'S 1967 TAX PROPOSALS 351 The rise of military production came in an economy whose total output was rising rapidly, so that while the value of defense production rose by about 40 per cent, it rose by only about 26 per cent as a proportion of total output. The defense build-up was superimposed on an economy in which there was some slack, but not very much, and the slack was already being reduced by the expansion then under way. The defense build-up immediately accentuated infla- tionary tendencies which were already in evtdence. The increased production and incomes resulting from the defense expansion caused further expansion of private investment in plant and equipment and in consumption expenditures. Even though real output continued to rise at a substantial rate-5.9 per cent from the second quarter of 165 to the second quarter of 1966-it could not keep up with the acceleration of spending, and the rate of price increase jumped. The absorption of resources for defense was not so large as to slow down significantly the rate of growth of the supply of non-defense goods and services. However, the real output available for non-defense use could not grow as rapidly as non-defense demands were growing, especially as these demands were being stimulated by the defense program itself. Some of the demands could not be met in full, and this raised a problem of priorities-of which demands should be met and which should not. This problem was not met explicitly and positively, at least at first. It was met negatively. The failure to take steps to restrain con- sumption and government non-defense expenditures made it almost inevitable that real investment and net exports (the excess of U.S. exports of goods and services over U.S. imports) would be squeezed down. The impact on net exports came first, partly because the booming, inflating U.S. economy sucked in more imports and partly because the Vietnam operations themselves increased over- seas expenditures. In the second half of 1965 total private fixed investment-in business plant and equipment and in residential structures-continued the rise that had been under way before the Vietnam build-up began. However, after the first quarter of 1966, investment ran into a growing insufficiency of savings, which was later accentuated by the absorption of part of the savings to finance a growing govern- ment deficit. The pressure of investment demand against the supply of savings available for private investment caused interest rates to rise. Higher interest rates restrained total investment, but some kinds of investment were held back more than others. Between the first quarter of `66 and the first quarter of `67, total fixed investment (excluding inventory) declined from $94.5 billion to $90.2 billion (1958 prices, annual rates) and from 14.9 per cent to 13.8 per cent of the real final product. But until the first quarter of 1967 this decline was entirely concentrated in residential construction which fell from $22.3 billion to $16.8 billion. Other fixed investment, mainly business plant and equipment expendi- tures, rose both absolutely and relative to available output throughout 1966. While wage and other cost increases were a factor, the larger part of this decline in construction resulted from the greater sensitivity of residential construction to interest rate increases and from the institutional structure of the financial system, which tended to divert funds from housing as savings become scarcer. In the fall of last year the government made an attempt to shift part of the impact of the shortage of savings on to plant and equipment expenditures by sus- pending the tax credit for business investment. Partly because of this, but partly also because profits had levelled out and for other reasons, business investment declined in the first quarter of 1967. Indeed, the prospective rate of growth of private investment was so reduced that the government restored the investment credit in the spring of 1967. lit sum, it may be said that while the Vietnam effort was not so large as to cause any severe hardship in real terms in the domestic economy, the conse- quences of the policy actions and inactions of the build-up period up to arly 1967 were a degree of inflation and a concentration of the real impacts on fixed invest- ment and on net exports. Obviously, these impacts were not desirable. On any reasonable assessment of the growth of public and private demands for output in the remainder of 1967 and 1968, the supply of saving available to finance private investment after financing a Federal deficit of about $15 billion will leave little room for increases in private investment from current levels. The compe- tition of a large Federal deficit with rising demands for saving to finance private investment will tend to make interest rates high and this will have the effect of holding down private investment. In the first half of 1967, however, monetary and credit developments have been very expansive. Federal Reserve credit has expanded at a 15 per cent rate per annum since December 1966 in contrast with a 10 per cent annual rate from 1964 PAGENO="0364" 352 PRESIDENT'S 1967 TAX PROPOSALS to 1966; total member bank reserves have increased at a 10 per cent rate since December compared with a 4 per cent average annual rate in 1964 to 1966; the money supply has increased at an annual rate of 7 per cent since December 1966 compared with a 4 per cent rate in the period 1964 to 1966. Despite these expan- sive influences the enormous demands for credit swollen by the huge Federal deficit have pushed long-term interest rates to the levels attained in the summer of 1966. Thus the lack of sufficient restraint in the Federal budget has resulted in the worst of several circumstances-interest rates are back at their historic-al highs, and the saving necessary to finance the private investment which will expand our capacity to produce is being absorbed by a huge Federal deficit. Furthermore, the recent rapid increases in bank credit and the money supply point to the prospect of subsequent excess demands relative to our capacity to produce. All of these circumstances call for a concerted effort to reduce Federal ex- penditures and for an increase in taxes. It is for these reasons that we support a substantial tax increase. In supporting a tax increase, we are aware that all economic projections are uncertain. At the currently high level of total private demand, the more stimu- lating the fiscal and monetary policies we pursue, the larger is the chance that it will fall short. The costs of excessive demands are clear and substantial. Pressures for wage increases are already strong and will only be increased by further rises in prices. Monetary policy has been strained to the extreme in late 1966 and it would be unwise to take actions which raise the possibility of the need for another very restrictive monetary policy in late 1967. The balance of payments position of the United States would also be adversely affected by a renewal of inflationary pres- sures. If prices continue to rise, exports will be diminished, and, with delivery times lengthening for domestically produced goods, imports will once again grow sharply. Cost increase, i.e. wage increases, price increases or interest rate in- creases, become institutionalized as a permanent part of the economic structure. For all these reasons excessive demands leading to renewed price inflation in 1967 and 1968 would be most detrimental to both our short-run and long-run objectives. There are undesirable consequences of a level of Federal spending and taxing w-hich results in insufficient aggregate demands, and CED has consistently recog- nized this-most recently by supporting the tax cut of 1964. An obvious and unde- sirable consequence would be unemployment. In addition, the profitability of in- vestment would decline, adversely affecting investment and our capacity to grow If later it appeared that total demand was rising less than is now widely anti- cipated, the depressing effects of insufficient demand could be offset by prompt actions to reduce taxes, to move toward greater monetary ease, and to restore currently deferred but desirable public expenditures. Thus the damages from a too expensive fiscal policy would be substantial while at the moment the risks of potential under-utilization are small, in large i)~irt because of our ability to respond. This strongly suggests that the appropriate fiscal policy for 1967 and 1968 is one which exposes us to only a very small chance that total demands will exceed our capacity to produce at stable prices. It is such a balancing of risks which leads us to recommend: (1) a substantial reduction in presently projected government expenditures; and (2) an across-the-board tax increase of the simplest character that makes no changes in the fundamental tax structure. The swing of the Federal budget from a surplus at an annual rate of nearly $3 billion in the first half of 1966 to a budget deficit at an annual rate of $13 billion in the first half of 1967 represented a fiscal stimulus which we have not experi- enced since the Korean War. If the deficit is maintained at its current rate we run the risks of excess demands and price inflation. But to attempt to redress the balance by taking actions to achieve a moderate surplus in 1968 would overly expose the economy to the risks of recession. It is our firm conviction, however, that over longer periods the path of fiscal prudence is to pursue the often enunciated CED budget rule of setting expenditures and revenues so that at high employment we attain a budget surplus of some $3 billion. Mr. WILDE. To appear before this distinguished committee with a recommendation for a tax increase is an unpleasant duty. The present corporate and personal income taxes are too high for the best growth and success of our society. Reform in the tax structure may be needed, PAGENO="0365" PRESIDENT'S 1967 TAX PROPOSALS 353 but, unfortunately, our present fiscal condition, growing Federal debt, and the need for prompt temporary action make it unwise and impos- sible to consider any important changes in our basic tax structure. We should recall as a matter of record that our economic history shows clearly that in the long run the economy is more efficient and more productive withtax cuts and a lower tax structure than we now have to bear. The reason that the economy is more efficient with lower taxes is no mystery. Our society is made dynamic through the profit motive. If in- dividuals and businesses are allowed to retain a larger percentage of the reward for their skills and the use of capital, the whole society benefits. It is just as fundamental and just as simple as that. Let us remind oi~rselves that tax cuts have proved the way to more employment and growth. This was first demonstrated in the twenties. Failure in 1957 and 1958 to make a tax cut was one of the reasons for our slow rate' of progress. The reduction in taxes in .1964 was an im- portant reason for the development that followed. To argue that we should return to a high tax basis because we once had one is bad reasoning. Why does CED recommend a tax increase in the face of this history? We do it in the context of a present fiscal and monetary situation which i~ compelling despite the harm that high taxes do in the long run. Since the winter of 1965-66 our country ha..s had high employment. Various CED studies since 1947 have concluded `that under such conditions the Federal budget should produce a surplus and not a deficit. Again, under the given conditions by far the better choice is reduction in expenditures rat.her than a tax increase. Neithe.r action has been taken. CED recommended in December 1966 tha.t if the administration and the Congress could not find a way to reduce or postpone expenditures, the unpleasant choice of a temporary tax increase should be made. The tax increase was recommended strongly on a temporary basis with an early terminal date. It was urged that the tax increase be of the simplest character with no changes in the fundamental structure. This action was not taken, and as a result much harm has been done to the economy, especially to the price structure. A tax increase promptly enacted cannot do all the things we need in terms of avoiding further damage to the country. A tax increase may not restrain inflation unless other measures are taken. We are confronted with wage and other cost increases of great dimensions. A tax increase will not guarantee that we will have lower interest rates for the reason that today's interest rates are influenced by the inflationary threat and liquidity preferences and not solely by the supply of and demand for money in the current market. In other words, interest rates, while basically reflecting supply and demand, reflect the deterioration which is possible in the future buy- ing power of money. The relative shortage of mortgage money reflects this as well as the serious increase in land prices a.nd the wage demands of the building `trades, all of which are handicapping housing develop- ment. A temporary tax increase may help but will not solve the problem of the country's balance of payments. Other things must be done. With this catalog of limited gains, why should we advocate a tax increase? We should do it for three reasons. PAGENO="0366" 354 PRESIDENT'S 1967 TAX PROPOSALS (1) It will make whatever deficit we have to handle less than it would otherwise be. This is particularly true if we are courageous in the restraint of expenditures. In the President's message to the Congress on fiscal problems he cited expenditure restraint as the No. 1 item. The Congress is the body that controls purse strings. There are no public expenditures until final action by the Congress. Congress has the power to modify or change legislation on the books. Congress today has a serious responsibility. The public at large, as distinguished from certain pressure groups, expects that it will re- spond in a way which will affect the overall problems of all of our citizens. (2) It would be an act of discipline which our democrati!c society needs to impose upon itself. While this is an intangible, it is of great consequence. We have for some years now accepted the new economics theory that annual balancing of the budget is unrealistic and even un- desirable. It has been the consensus that over time there should be balance and under CED theory some surplus. Unlimited increases in the public debt are not accepted even `by most of the disciples of the new economies. (3) By showing ourselves and the rest of the world that we have the character to impose an unpopular tax increase, we will do much to maintain economic soundness in our affairs and help preserve world faith in our dollar. It may and should help us face up to our other problems, namely, the establishment of expenditure restraint and `determination of prior- ities `as long as we have the war in Vietnam. We are undertaking tre- mendous responsibilities not only in Vietnam but in the rest of the world. We are struggling with important domestic programs. We have to make choices because our economy cannot do all things for all people at this point in time. There are areas of relative prior- ity. These we should determine and `act accordingly. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Wilde, we do appreciate your comments on the matter before the committee. We `appreciate your coming to the com- mittee, Mr. Schneebeli. Mr. SOHNEEEELI. Mr. Wilde, I always appreciate so much getting your testimony. I think your logic is very impressive. A specific question. In the event the 10-percent surtax was approved what time interval would transpire before it would have much effect on either inflation or the tight money market? How long would it have to `be in effect to be of any value? Mr. WILDE. You are asking about the timelag, so called? Mr. SOHNEEBELI. Yes, sir. What is your interpretation of the time lag that would ensue before it could be effective? Mr. WILDE. Well, to repeat, Mr. Congressman, we have two matters to influence the price structures. One is expense reduction, which could be started at almost any time, `and the second one is the impact of with- drawing from the spending stream the 10 percent from individual taxpayers. It probably starts in part pretty soon because people anticipate and buy so many things on time that they might refrain from doing that, so it could start within a relatively short time from the enactment of a 10-percent increase. PAGENO="0367" PRESIDENT'S 1967 TAX PROPOSALS 355 The full impact of it will depend on how much is canceled out by wage increases and other activities, but it would carry on for as long as the law was in effect. However, the exact measure of this pressure I wouldn't be a good enough statistician to be specific about. Mr. SOHNEEBELI. Would it take 3 months? 6 months? Mr. WILDE. I think so. Mr. SCHNEEBELI. You make a statement here on the bottom of page 3under(2): We have for some years now accepted the ribw economics theory that annual balancing of the budget is unrealistic and even undesirable. Whom do you mean by "we"? Not CED certainly? Mr. WILDE. Well, the "we" in this case refers to two groups, specif- ically CED, and broader than that. There is almost a majority of some dimensions in this country among the economists because most of them adopt the Keynesian approach philosophically. They differ in degree. I did mean CED anda somewhat broader group. Mr. SCHNEEBELI. Are you stressing "annual" rather than "cyclical"? Mr. WILDE. Yes. Mr. SOHNEEBELI. You believe in a cyclical balancing of the budget don't you? Mr. WILDE. Yes; we do. Mr. SOIINEEBELI. I am afraid that one sentence might be misinter- preted, but you do believe in a cyclical balance and even a surplus. Mr. WILDE. I do very much. Mr. SOHNEEBELI. I do too. Being from New England I would have suspected that you would too. Mr. WILDE. It is more than that. It is really fundamental. I don't think you can spend yourself through deficits with perpetual success in our kind of a society. Mr. SOHNEEBELI. Thank you very much. The CHAIRMAN. Mr. Conable. Mr. CONABLE. Mr. Wilde, earlier you were here and heard the testi- mony of our colleague, Mr. Patman, and I don't want to put you on the spot about it, but do you feel the market does or doesn't affect in- terest rates? I wonder if you could give us more of your views on that. In your business you have been very much concerned with interest rates I am sure. Mr. WILDE. The interest rate dialog is a very complicated one. The distinguished Congressman from Texas has a certain theory about it. I would wonder very much whether it reflected the `solid facts of life. The idea that man has the power through any institutional instru- ment-ours happens to be the Federal Reserve System-that you can produce through an institution all the money you need for all the ex- pansion that you want to have at a given point of time isn't borne out by history and it doesn't stand up in fundamental analysis. The ability to run a capitalistic society successfully arises out of the production of wealth and the saving of some of it for useful purposes. In the meantime you can generate the so-called paper money credit through the operations of the Federal Reserve to help ease strains, but you can't carry it too far. PAGENO="0368" 356 PRESIDENT'S 1967 TAX PROPOSALS If you go too far your money becomes suspect not only by yourself but around the world and, as 1 have pointed out here, the present in- terest rates of 6 percent plus represent partly the cost of money and partly a hedge against deterioration in the value of that money. This is why money rates are so high in the rest of the world, because they have a more inflationary situation than we do. Here is Europe, an old and strong area in resources, but by their own practices in the past they have an interest rate structure for long-term money that runs around 8 percent today. Yet they are strong countries, but they have been guilty of inflationary excesses, and the public doesn't want to lend money long and nothing that a central bank can do can change this fundamental fact. There are lots of people in this country w-ho think that this is a manmade result to have higher interest rates and a scheme generated by self-seeking bankers anct other financial institu- tions. It is not as simple as that. The CHAIRMAN. Mr. Bush. Mr. BUSH. Mr. Wilde, yesterday Mr. Meany testified before the com- mittee. I am not sure whether you are familiar with his testimony but there was a good deal in the paper on it. Did you have a chance to read any of that? Mr. Wmun. I read the highlights, Congressman, of Mr. Meany's testimony in the paper this morning. Mr. BUSH. My question was what would you say is the major point of difference between what the CED recommends and his testimony yesterday? Mr. WILDE. Probably the major difference is the theory, which I de- plore and regret, that some people have, apparently including Mr. Meany-I am quite surprised-that you can raise taxes in our type of society to very high levels and accomplish economic progress, reduc- tion of deficits, and the payment of your bills currently. All the studies show that the higher brackets produce a minimum amount of money and in the.actual operation of high taxes, whether they are corporate or personal, you get a diminishing return and a lowering of efficiency in our kind of society, and nobody ought to realize it better than the labor folks because they only have to look across the seas and see a great country like England where socialistic theories and taxation, have pushed this nation to a weakened condition. Our tax structure, as I have testified, is too high now for peacetime, but to try to push it up still further isn't good economics and it isn't good public policy. It isn't even fair. Those who contribute the most even in these strange times should have something more, and when you increase personal taxation to more than 50 percent you have a bad psychology and you have an inef- ficient kind of society with people standing around trying to find ways to beat the tax law rather than to pay their taxes or produce more for the country's good. Mr. BUSH. Thank you. The CHAIRMAN. Any further questions? Mr. Curtis. Mr. CURTIs. Thank you, Mr. Chairman. I want to apologize for not having been present when you made your statement, Mr. Wilde. I have had a chance to read it. I was pleased to note the recommendation that you have is twofold-one, substantial reduction in presently projected Government expenditures, and, two, and accross-the-board tax increase. PAGENO="0369" PRESIDENT'S 1967 TAX PROPOSALS 357 *What I am afraid this committee and the Congress is faced with is an administration that wants only a part of that package. They want a tax increase, but don't want to do anything about reducing expenditures. What would be your judgment if we were presented with a situa- tion where there were no substantial expenditure decreases? Do you think a tax increase would be beneficial? Mr. WILDE. Well, I would have to deplore the situation, and as I read the President's message he said this fiscal program starts with expenditure restraint. Mr. CURTIS. He says it in words, but when it comes to figures it just isn't true. He gave us a figure of $135 billion in expenditures for fis- cal 1968 in the January budget message. The testimony of the Secre- tary of the Treasury and Director of the Budget before us when we went into it reveals that that figure now is probably around $144 bil- lion, so lie may talk one way, but this is not expenditure restraint. It is the reverse. In 6 months they revise their expenditure esti- mates for fiscal 1968 from $135 billion to $144 billion. The question with these figures which show no reductions in cx- penditures, but actual increases, is what would a tax increase do? Would that be beneficial? Mr. WILDE. Well, it is obvious that if there isn't expenditure restraint the deficit would be larger and hence the tax increase would be less effective, but it will do some good for the reasons that I have outlined in my short comments here. Mr. CUIiTIS. That is w-hat I was getting at.. I wonder if it does any good to increase taxes. I will put it this way. I was pleased to note- at least I think I note this-that you were saying the size of the deficit itself creates the basic problem. Am I paraphrasing your statement correctly? Mr. WILDE. Yes. Mr. CURTIS. And I agree with that. Then the question is, let's say, it is a $30 billion deficit. You can finance a deficit three different ways in any combination-sale of capital assets, increase tax revenues, or debt financing-but it seems to me that with a deficit the size of $30 bil- lion, the very size is going to create damage, however you finance it. In fact, I can't quite see what difference it makes whether you have a tax increase as part of the financing mix. I think the damage through the sheer size is going to outweigh any consideration like that. At least 1 pose that for your comment. Mr. WILDE. Well, this is an old question that has been raised in many categories, including personal conduct. This is in a very large. theater. I still think that it would be desirable to have a tax increase, pro- ducing $5, $6, $7, or $8 billion, even if we didn't do what our duty clearly calls for, but itis arguable. Mr. Cinrris. I am not talking about duties. I am trying to keep the discussion in the area of economics and concentration what the effect of a deficit that large would be. Now I notice an assumption in your statement that the increase in the tax rates will increase revenues. This is another thing that the committee has been trying to look into. Given the economic climate we have, given the tax rates-and I share your view that they already are too high-will increasing the 83-349-67-pt. 1-24 PAGENO="0370" 358 PRESIDENT'S 1967 TAX PROPOSALS rates actually increase revenues, or might increasing the rates pro-. duce an economic downturn whereby we would end up with less revenue? What about that? Mr. WmDE. This is a fair question which has been posed in the dialog and in the press. There is a very strong consensus that the forces for forward motion cannot be slowed down importantly by a 10 percent or other tax increase. Mr. CURTIS. You think there is a consensus on that? I was not aware of any. I know there are some who argue that, but I also heard others who argue differently. Mr. WILDE. All of the economic forces tend to suggest that we will go forward even if we have a tax increase. It may slow it down, but the reason that CED talks about short- term changes is not fine tuning, but we talk about a 1-year program, for example, so that it has to be debated before the end of 1 year. It can be taken up, of course, by the Congress earlier. Mr. CURTIS. Let me direct one more line of questioning. Is it the theory of the CED that increasing the tax rate would assist in hold- ing down inflationary forces? Is that one of your theories? Mr. WILDE. We feel it would be a contributor to restraint of infla- tion, but not a complete answer. Mr. CURTIS. Well, let me pose this question then, as I posed it to Mr. Meany: It gets back to what I understand the position is of those who question the advisability of the tax increase. We are experiencing inflation right now. In the last month, the CPI went up 0.4. It has gone up 0.3 and 0.3 before that. Most people that I have listened to identify this as cost push inflation, not demand. Now if this is the kind of inflation that we have and with the forces that are already in existence, and we superimpose this deficit on top of it, isn't it entirely possible that a tax increase, which would add to cost, would strengthen the inflationary forces, or at most only have a neutral effect? Mr. WILDE. Well, obviously if all of the cost increases which come along are going to be passed on, if nobody is willing to accept the problems of the country today, you will have a cost-push inflation no matter if you do have a generous-and we do have a very gen- erous-monetary policy. Mr. Cuirns. Yes. Mr. WILDE. In fact, may I say something on that? Mr. CUR~s. Certainly. Mr. WILDE. In my formal statement you will find figures showing the tremendous increase in the monetary supply which the Federal Reserve has permitted and encouraged in 6 months. It is bigger than anything we have had in years. It is really spectacular. Mr. Cuirns. I know that and this is the very point I made to Mr. Meany yesterday where he talked about a tight money. policy, and I said the figures reveal just the opposite, just as you are presentmg. This again points out that this isn't a demand-type inflation. In fact, one of the things with this economic slowdown is that util- ization of plant capacity has gone down, so again I think the eco- nomic problem that faces this committee is what does a tax increase do to a cost push type of inflation. The administration has argued for a tax increase to dampen what PAGENO="0371" PRESIDENT'S 1967 TAX PROPOSALS 359 would be actually a demand-type inflation, which doesn't seem to be the issue. As I understand, some economists have said that they don't think that a tax increase is the proper medicine. Mr. WILDE. Well, of course, Congressman, as you know, finally some- body has to buy something and this is done through money and credit, so if they have less money and credit to buy something, then the cost push will not be as influential, but it will be there. Mr. CuRTIS. But the remarkable thing to me in our economy is the development of discretionary purchasing power. The economists now are following that and measuring it. This is a unique thing, I would say. It is something new in economic concepts. Our previous theories of economics, as I understand, were based on an economy of scarcity. We are moving into a different kind of situation and I would say discretionary income is a pretty good indication of this, so it may be that people will buy in spite of these things. On the other hand, they may not. Savings rates increased notably in the past year or so. I suppose they could increase more. I don't know. Well, I wanted to examine some of these things with you because I certainly appreciate the great work your organization does and your willingness to come before this committee and give us the benefit of your judgment. The CHAIRMAN. Thank you, Mr. Wilde, for coming to the committee again. Mr. WILDE. Thank you, Mr. Chairman and gentlemen. The CHAIRMAN. Mr. Bryant. Mr. Bryant, we will ask you to please identify yourself for the record by giving us your name and capacity in which you appear. STATEMENT OP P. LEONARD BRYANT, MANUPACTURING CHEMISTS ASSOCIATION; ACCOMPANIED BY JAMES MORTON, DIRECTOR OP GOVERNMENTAL RELATIONS; MICHAEL PAN~INI, MEMBER, TAX POLICY COMMITTEE; AND RAPHAEL SHERPY, COUNSEL TO TAX POLICY COMMITTEE Mr. BRYANT. Thank you, Mr. Chairman and members of the com- mittee. My name is F. Leonard Bryant. I am chairman of the board of directors of Hooker Chemical Corp. I am appearing before you today in my capacity as a representative of the Manufacturing Chemists Association (MCA), a nonprofit trade association with 185 U.S. mem- ber corporations, large and small, which account for more than 90 percent of the Nation's chemical productive capacity. The American chemical industry contributes $39 billion to the gross national product and employs nearly 1 million workers. With your permission, I have with me today a few associates. On my right Mr. Morton, director of governmental relations for MCA; on my left Mr. Pancini, a member of the tax policy committee of MCA; and Mr. Sherfy, who is counsel to the tax policy committee. The CHAIRMAN. We are pleased to have you gentlemen here with Mr. Bryant. Mr. Bryant, you are recognized. Mr. BRYANT. Thank you, sir. We appreciate the opportunity to ad- dress you today. I will follow pretty generally the prepared statement PAGENO="0372" 360 PRESIDENT'S 1967 TAX PROPOSALS which was submitted to your committee yesterday with a few remarks in places for clarification. Our association has given careful consideration to the administra- tion's tax proposals made by President Joimson on August 3, 1967. In brief, our recommendations, which will be discussed in detail are as follows: (a) The administration should make a substantial effort to effect a percentage reduction in nondefense spending equivalent to the per- centage of surcharge imposed on the public. This should be done as a corollary measure recognizing the Government's responsibilities as well as the private citizen's, in bearing the cost of war and in lessening the danger of inflation. (b) Any surcharge should have a definite termination date, be kept as low as possible, and should apply equally to individual and corpo- rate tax liabilities. (c) The effective date of a surcharge should be January 1, 1968. (d) A surcharge should be applicable to net tax liabilities after allowance of the 7-percent investment credit and foreign tax credits. (e) No change should be made in the present estimated tax require- ments of corporations, and accordingly the following Presidential pro- posals should be rejected: (1) Elimination of the exemption of the first $100,000 of corporate tax liability from the requirements of payment on quarterly estimated basis. (2) Increasing from 70 to 80 percent the amount of the estimated tax which must be paid in installments during the taxable year. Current economic conditions have had a significant adverse effect upon corporate earnings during the first half of 1967. A recent survey of 528 corporations published by the Wail Street Journal on July 28 disclosed that after-tax profits In the first quarter fell 6.4 percent, and those in the second quarter fell 8.1 percent, below the amounts re- ported in 1966. In the case of our own industry, the chemicaJ industry, first-quarter earnings as reported by the Department of Commerce were $786 mil- lion for 1967 as compared to $847 million in 1966. This represents a decline of 7.2 percent for `the first quarter of 1967 from the first quar- ter of 1966. The figures for the second quarter for chemicals and allied products are not available but from all indications, `this decline in earnings was greater in the `second quarter than in the first quarter. While we realize that in recent `days statistics released by the Gov- ernment indicate `that an up'turn has started in the economy, we do iiot believe that it has yet commenced in the chemical industry. We have just not seen the upturn in the chemical industry. Recently the `top executives from 13 firms producing chemicals, drugs, and cosmetics met with Government officials, including Secre- tary of Commerce Alexander Trowbridge. They informed Mr. Trow- bridge that they did not see `any immediate evidence of an economic upturn. Furthermore, we believe that even though `the economic uncer- tainties are resolved in the fourth quarter on a favorable basis, it is highly unlikely `that corporate earnings for the full year 1967 will attain their 1966 levels, especially in our own industry. PAGENO="0373" PRESIDENT'S 1967 TAX PROPOSALS 361 Substantial increases in State and local taxes, together with a prob- able increase in the social security tax, will further reduce corporate earnings and cash reserves in the future. At the same time we are acutely aware of the sacrifices being made by our servicemen on the battlefields of Vietnam. It is essential that our Armed Forces be provided with all resources which are neces- sary to bring that conflict to an honorable and just conclusion within the shortest possible period of time. Similarly, we recognize that certain prior financial commitments, such as those for ~interest on the national debt and for previously ap- proved projects, cannot be eliminated from present budgets. These commitments, of necessity, create limiting factors on the ability of the administration to curtail spending. Nevertheless, it must b'e recognized that in recent years nondefense expenditures have risen at an alarming rate, and Government civilian employment has substantially increased in the past 3 years. This spend- ing fueled the inflationary fires at a time when industry and labor were being asked to practice restraint. In view of these factors, before any tax increase can be justified, it is incumbent upon both the administration and Congress to scrutinize meticulously current appropriation requests and expenditures in order to eliminate waste and to hold down expenses wherever feasible. In this connection we applaud t.he administration's announced efforts to eliminate $2 billion of expenditures from the nondefense portion of the budget. However, we do not feel that this action goes far enough. As we indicated earlier, the administration should make a substantial effort to effect a percentage reduction in nondefense spending equivalent to the percentage of surcharge imposed on the public. Without specifically terminating some of the projects which have been determined essential on a long-range basis, efforts should be made to extend or defer such projects over an additional period of time in order to draw out, and thus reduce, current expenditures. President Johnson's message of August 3 and the testimony of the administration's representatives last week indicate the dangers inher- ent in creating deficits of the magnitude stated therein. However, the President's proposal for a 10-percent surcharge recognized that a sub- stantial portion of the deficit will remain with us despite the proposed increase in taxes. Our association is keenly aware of the inflationary effect that sub- stantial deficits might have on the economy and fully endorses all efforts directed toward its reduction. It fully recognizes that serious at- tempts act curtailments of expenditures probably will not be adequate to eliminate deficits of the magnitude which the President has pre- dicted and that increased taxation is unhappily necessary. Thus, the Manufacturing Chemists Association would like to take this opportunity to endorse the President's proposal for a surcharge with the following suggested modifications: 1. Any surcharge enacted should be of limited duration with a definite termination date. The economic improvement following the enactment of the tax reductions contained in the Revenue Act of 1964 provides substantial evidence of the economic benefits flow-ing from lower taxes. PAGENO="0374" 362 PRESIDENT'S 1967 TAX PROPOSALS The adverse results which followed the suspension of the invest- ment credit also indicate the severe economic effects which can occur as the result of a change in tax policies. In view of these lessons, it is essential that any surcharge which is enacted provide a specific termination date so that long-range plan- ning for economic growth `and progress may proceed in an unhampered manner. Accordingly, we support the recommendations of those who pre- viously `appeared before you and believe that a 1-year period for the surcharge merits serious consideration. 2. The rate of surcharge must be kept as low as possible. It is reasonable to expect that a `surcharge of 10 percent will have a depressing effect on the economy. To the extent that serious efforts are made to reduce governmental expenditures, the benefits of such reductions should `be applied to the goal of maintaining the surcharge at the lowest possible level. The new tax burden should be consistent with our national goals of financial responsibility and yet continued economic growth. 3. The surcharge should be `applied equally to individual and corporate taxpayers. The availability of resources with which to pay the cost `of t'he surcharge dictates that it's imposition on corporations should not be greater than that imposed on individuals. The recent burdens placed on corporations at State and local levels, coupled with increased payroll tax burdens and speedups of estimated taxpayments, has caused a severe drain on corporate working capital. At present, while individual savings are increasing, it has become necessary for more and more corporations to resort to borrowings to provide working capital necessary to the continued operation of their businesses. To provide a disproportionate burden on corporations could result in severe economic dislocations and should be avoided. T'here is no dou'bt that fairness requires that the proposed surcharge should apply equally to both `corporations and individuals. In other words, tax liabilities of both groups should be affected uniformly. Based upon the tables provided by the Treasury Department in its press release of August 4, it is evident that the proposed surcharge- if enacted at the 10-percent level-would reduce the tax benefits of individuals provided in the Revenue Act of 1964 by approximately half. Providing for a similar surcharge for corporations, however, has the effect of wiping out completely the reduction afforded under the Revenue Act of 1964. 4. The effective date should be January 1, 1968. If this proposed surcharge is enacted, it should be effective only prospectively and should not be effective before January 1, 1968, for both individual and corporate taxpayers. This effective date would permit taxpayers to make orderly plans for the future, taking into account only prospective tax increases. We do not believe that a retroactive tax increase of 10 percent is fair. The postponement would minimize the possibility of additional tax burdens depressing the economy before a full recovery from the economic deterioration of the first half `of this year. PAGENO="0375" PRESIDENT'S 1967 TAX PROPOSALS 363 It is our belief that the key to the success of the Govenment's fiscal program is its timing, and that premature action or over-reaction could knock the economy on its back before it is firmly on its feet. 5. A surcharge should be applicable to net tax liabilities after al- lowance of the 7-percent investment credit and foreign tax credits. Any surcharge should be applied to net tax liabilities, after 7-per- cent investment tax credits and foreign tax credits. We believe this is necessary in order that all taxpayers bear a uniform and propor- tional increase in their U.S. tax burden. Congress enacted numerous tax provisions to provide relief from burdensome taxation or to promote economic or social objectives. In some instances, such relief has taken the form of a tax credit, while in other instances it has been classified as a deduction. A surcharge against gross tax liabilities would reduce the effect of this relief thoughtfully provided by tax credits. A surcharge based upon a gross tax would partially nullify benefits intended to be granted by the 7-percent investment tax credit to cor- porations making additions to plant and equipment. The reasons ex- pressed for the early reinstatement of that credit, and which were so carefully considered by your committee earlier this year, are equally applicable to the necessity for the application of any surcharge on a net tax liability basis after allowance for such credits. Also, for example, dividends received from certain foreign corpora- tions must, under cur~ent law, be grossed up by the amount of foreign taxes applicable thereto (thus creating additional taxable income) and a related foreign tax credit is allowed against the domestic corpora- tion's U.S. income tax liability. Alternatively, a taxpayer may elect to take a deduction for foreign taxes rather than utilize the credit. To apply a surcharge based upon the additional dividend income required to be reported and, at the same time, prohibit the foreign tax credit from reducing the surtax base, would result in a gross inequity, thus converting the surcharge into a disguised tax upon foreign income. A surcharge applied before allowance of foreign tax credits and investment credits also creates the inequitable situation of increasing certain taxpayers U.S. taxes in an `amount in excess of the surcharge percentage applied against other taxpayers. For example, a corporation with a tax liability before credits of $100 (before surcharge) and a foreign tax credit of $20 is liable for U.S. taxatiOn of $80. The application of a surcharge of $10 to the $100 increases the liability of $110. Reduction of such amount by the foreign tax credits of $20 leaves a U.S. tax liability `of $90 which represents not a 10-percent increase, but a 12l/2-percent increase in the U.S. burden. Further, certain domestic corporations are required to pay U.S. in~ome tax on subpart F income or upon minimum distributions from their controlled foreign corporations (electedto minimize the burden- some provisions of subpart F). Since these additional taxes `have already placed such companies at a disadvantage with `foreign-controlled competitors, any `surcharge which is imposed upon this type of income, without allowance for foreign tax credits, would result in a further deterioration of the com- petitive positions of those U.S. companies with foreign operations. PAGENO="0376" 364 PRESIDENT'S 1967 TAX PROPOSALS During the 1960's the United States has been plagued by a con- tinuing deficit in its balance of payments despite various actions taken by the Government to reverse this situation. While it has been recog- nized that in the long run U.S. private investment abroad has had a substantial positive effect on the balance of payments, enactment of a surcharge before allowance of foreign tax credits will have an addi- tional depressing effect on the balance of payments. We are of the opinion that imposition of this temporary surcharge might well result in a reduction in the amount of foreign dividends being remitted to the United States, thus having an immediate adverse effect on the balancB of payments. 6. No change should be made in the present estimated tax require- ments of corporations. The administration's proposal to accelerate payment of estimated taxes should not be approved. If enacted in conjunction with a sur- charge, it will cause an additional strain upon corporate cash re- sources, having a possible adverse effect on the economic condition of the country. Unlike individual taxpayers, most corporations utilize the accrual basis of accounting and are already required to pay taxes prior to the collection of the receivables which created the tax liability. The previous enactments `which presently require corporations to pay esti- mated taxes on a current basis were inequitable in this respect and resulted in extensive corporate borrowings. The present $100,000 exemption and the 70 percent requirement alleviates, to some degree, the inequity of paying the tax before cash from the sales transaction is realized. These provisions must be con- tinued in the law. To even a greater extent, the `smaller members of MICA will find the proposed changes extremely burdensome. Some of these smaller businesses lack the resources required to secure extended bank loans to fund increased tax prepayments before realization of cash. In the event that you do decide to change the 70 percent requirement to 80 percent, we have attached for your consideration, a proposed amendment, with an explanatory note, which would permit the tax- payer to more readily comply with the new requirement. `This would be accomplished by liberalizing the annualization relief provision. On behalf of the Manufacturing Chemists Association, I wish to thank you for the opportunity you gave me to make this presentation, and I urge that serious consideration be given to the recommendations we have made. I would be glad, sir, to answer any questions and my associates would `be glad to help if we can be helpful in any further `way. The `CHAIRMAN. Thank you, Mr. Bryant. Without objection the material appended to your statement will. appear in the record at this point. (The information referred to follows:) ATTACHMENT TO STATEMENT OF MANUFACTuRING CHEMISTS ASSOCIATION CONCERNING PROPOSED AMENDMENT TO SECTION 6655 Among the proposed amendments to the Internal Revenue Code made by the President in conjunction with' a recommended surcharge on income tax was an increase from 70% to 80% of the amount of the corporate tax to be paid in estimated tax installments if no penalty is to be imposed. Presumably, § 26655 PAGENO="0377" PRESIDENT'S 1967 TAXPROPOSALS 365 (d) (3) would also be amended so that a taxpayer relying on this exception in order to avoid penalty would have to pay an amount equal to 80%, rather than 70% of the tax computed by annualizing the taxable income for the appropriate period of the taxable year. In a period of rising corporate income, a corporate taxpayer can be assured of avoiding a penalty either by basing his estimated tax on the tax paid for the preceding year or on the facts shown on the corporate return for the preceding year with the tax computed at the rates of the current year In a peiiod of declining profits, however, where the profits for the current taxable year are virtually impossible to estimate, a taxpayer can adequately protect itself from penalty only by relying on § 6655(d) (3). If it does so, its first installment must be determined by annualizing its taxable income for the first three months and paying 1/4 of 70% thereof. Thus, the taxpayer has a period of 15 days from the close of its first quarter to prepare its accounting statements, to translate hook income into taxable income and to compute its available investment credits and foreign tax credits. Since it is virtually impossible to do this with accuracy in so short a period of time, a. taxpayer will generally make the best possible rough estimate which time allows and pay an amount equal to substantially more than 1/4 of the 70% of the tax based on this estimate to be on the safe side. In the event that the taxpayer is now to be required to pay 80% of the estimated tax, the problem becomes much more difficult. Consequently, it is recommended that if the 70% requirement is increased to 80%, an additional amendment be made to provisions of § 6655(d) (3) (A) which will permit the taxpayer, which finds it impossible to determine its taxable income accurately within the 15 day period between the end of its accounting period and the due date for its estimated tax payment, to make its computation based on the annualized income as at the end of the month prior to the month preceTding the due date. In other words, § 6655(d) (3) (A) should be amended to read as follows: "(3) (A) An amount equal to 80 percent of the tax for the taxable year com- puted by placing on an annualized basis the taxable income- "(i) for the first 2 month or for the first 3 months of the taxable year, in the case of the installment required to be paid in the 4th month. "(ii) for the first 3 months or for the first 4 months or for the first 5 month of the taxable year, in the case of the installment required to be paid in the 6th month. "(iii) for the first 6 months or for the first 7 months or tor the first 8 months of the taxable years in the case of the installment required to be paid in the 9th month, and "(iv) for the first 9 months or for the first 10 m:onths or for the first 11 months of the taxable year, in the case of the installment required to be paid in the 12th month of the taxable year. "(B) For purposes of this paragraph, the taxable income shall be placed on an annualized basis by- . "(i) multiplying by 12 the taxable income referred to in subparagraph (A) and "(ii) dividing the resulting amount by the number of months in the taxable years (2, 3, 4, 5, 6, 7, 8, 9, 10, or 11, as the case my be) referred to in subparagraph (A) ." The CHAIRMAN. Are there any. questions of Mr. Bryant? Mr. Con- able. . . Mr CON~BLE Mr Bry'tnt, I would like to welcome you here to Washington and give you a special greeting from one who also comes from western New York. We heard yesterday. from Mr. Meany and he proposed that the surtax on corporations.be.substantially higher than on individuals. . . . Now, we have read a lot in the paper about how the surtax is going to be equal on both corporations and individuals, and yet you pointed out some things that are golng to increase tax costs for corporations beyond the surtax level. I wondered if the MCA has made any analysis of exactly what per- centage increase in surt.axes the President's proposal would actually bring about? That would be something in excess of 10 percent, wouldn't PAGENO="0378" 366 PRESIDENT'S 1967 TAX PROPOSALS it, because of the speedup, because of the manner of handling of the credits, and so forth? Mr. BRYANT. Without taking into account the speedup, which is really another subject and has affected our cash flow over the last few years, as you know, taking account simply of the suggestion of the President that this be calculated on the gross tax and not on the bottom line, in effect, of the return as the Manufacturing Chemists As- sociation has recommended they did survey what would have happened in 1966 in a number of companies if the tax had been calculated that way and it varied from 11 percent up to nearly 14 percent, probably ranging from 121/2 to 13 percent, as I cited in the example I gave. This is particularly unfortunate with respect to the foreign tax credits in that the companies that will be penalized the worst by this provision actually are the ones providing the most foreign dividends back in this country and therefore making the maximum contribution to our balance-of-payments problem. Mr. CONABLE. Mr. Bryant, I have another question. You referred to the depressed conditions in your industry and also the profit problems you have had and the falling off of profits. The result is your margins I suppose are considerably narrower than they were a couple of years ago. Do you have any estimate at all as to the extent to which this cor- porate surtax is likely to be passed on to the consumers? Mr. BRYANT. Mr. Conable, this is very hard to answer categorically because of course it would depend on the nature of the product in- volved and the nature of the industry, business which was selling. The competition will determine whether it can or not. Mr. CONABLE. Certainly you have a good deal more foreign competi- tion than other industries, which would have some effect. Mr. BRYANT. This is a major effect today because really the competi- tion is intensifying for the chemical industry today and the competi~~ tion has been reflected in the reduced earnings that you have read about in the papers, and some of our problem in the industry has been greatly stepped up foreign competition, which of course will be further stepped up as the effect of the Kennedy round begins to be felt. So that even though chemical companies domestically would like to do something to attempt to, at leaset partially, retain their margins, they will find, especially in commodities, which are the big volumes and therefore will account for most of the business, that it will be very difficult to do so I believe. There may be some specialty situations where there may be price increases `passed on, but in my judgment a very minor amount of it will be recovered by the chemical industries. Mr. CONABLE. In higher prices? Mr. BRYANT. In higher prices, yes, sir. Mr. CONABLE. In other words, this is a corporate tax and not just a hidden tax on the consumer? Mr. BRYANT. Yes. Mr. CONABLE. Ultimately it is going to come out of the consumer, but at least for short term it is going to be paid by the corporations themselves. Mr. BRYANT. This would be my judgment, yes, sir. The CHAIRMAN. Any furtherquestions? Thank you again, Mr. Bryant. PAGENO="0379" PRESIDENT'S 1967 TAX PROPOSALS 367 Mr. BRYANT. Thank you, sir. The CHAIRMAN. Mr. Ferguson, Mr. Ferguson, we welcome anybody who would be the president of a Fighting Taxpayers Association. It sounds like a very aggressive group. Please identify yourself for this record and we will be glad to recognize you. STATEIVIENT OP COURTLAND D. FERGUSON, PRESIDENT, FIGHTING TAXPAYERS ASSOCIATION Mr. FERGUSON. Thank you very much, Mr. Ohairman. A group of Fighting Taxpayers Associations was formed recently because we be- came very seriously concerned about the increases in taxes as levied by the Government. I am president of the Fighting Taxpayers Asso- ciation. I am also president of the Courtland D. Ferguson, Inc., an advertising agency. We have had offices in the National Press Build- ing `since 1932. The Fighting Taxpayers Association has no paid employees. We are strictly a group of people seriously concerned about taxes. The CHAIRMAN. Why don't you have a seat? Mr. FERGUSON. Thank you, sir. The CHAIRMAN. We are glad to have you with us and you are recognized, sir. Mr. FERGUSON. Thank you. As president of the Fighting Taxpayers Association, I am here today to speak a word for the faceless Ameri- can, the American taxpayer who has become merely a number in our computerized society. Briefly, we should like to attempt to bring him back into focus, the man who works for a living, the man who has a family to support, the man who wants to feed and clothe them and give them decent living surroundings, the man who wants to take care `of his family properly and educate his children. This faceless American is now caught up in the throes of taxation heaped upon him by all different levels of government. Govermment has now become a giant octopus that has this man caught in its tentacles. The squeeze is on. Taxes from the Federal Government, social security taxes, sales taxes of all kinds, real estate taxes-think of any kind of a tax man can possibly devise today, and the American~ taxpayer is paying for it. At some point, you take so much money away from the average work- ing man in taxes that he does not have enough left to properly take care of his own family. We oppose this 10 percent surtax because we think that point has been reached. We feel it is time for Government to seek some other solution instead of piling more taxes upon the individual citizens. For instance, Maryland has just doubled its income tax on the aver- age working person by enacting a 2- to 5-percent-graduated-income tax and an `arbitrary piggyback tax of 20 percent, which in Baltimore City is actually 50 percent. This year, in Maryland, a man earning $10,000 per year, with a wife and two children, with this proposed increased Federal income tax, in- creased social security tax, increased Maryland income tax, will have approximately $2,000 taken right out of his paycheck before he ever sees it. When you add all of the sales taxes, real estate property tax, and miscellaneous taxes, direct and indirect, open and hidden, it is esti- PAGENO="0380" 368 PRESIDENT'S 1967 TAX PROPOSALS mated that a man earning $10,000 a year will actually have only $7,000 a year left to support his family: `When you consider that the average working person in the United States will pay 30 percent or more in taxes, we maintain that the time has come to stop increasing taxes at all levels of'governrnent. We have a Federal income tax. Now, this 10-percent surtax is actually a tax on the Federal income tax. In the State of Maryland, we have a State income tax. In making out the Maryland income tax return, we cannot deduct our Federal income tax, and will not be able to deduct the 10-percent surtax. Consequently, in Maryland, we will have a tax on a tax on a tax. Many people are misled about taxes on business and feel that corpo- rations pay all the taxes `on business. Iii most cases the corporations do not have the money to pay additional taxes on business and taxes on business are usually treated as an' additional cost of doing business and passed on to the individual consumer, which means that the indi- vidual really pays those taxes too. The high-tax road ahead can lead only to communism. It is easy enough to be complacent and say, "It can't happen here." But com- placency is only a tranquilizer that clouds the view of the dangers ahead. Communism can happen here and it will happen here if Federal Government, State, county, and city continue to increase taxes and take away from the average working person substance with which to sup- `port his own family. Communism will happen here when we reach the point where taxes are so high that Government has to take all the money a man earns and divide it up. Communism will happen here if we continue to bleed ourselves here at home financially, and abroad militarily. We are living in a national LSD economy. It's crazy. We cannot con- tinue forever to be both the benefactor of the world and the protector of the world and `maintain the American way of life at home. If an individual borrowed money last year, paid interest on it, gave it away, borrowed money' this year, paid interest on it while con- `tinning to pay interest on `the money he borrowed the previous year, and gave it away-~and kept that~ up, year after year, everybody would say he was crazy, and his relatives would claim he was incom- petent to handle his own financial `affairs and have him `put away. And yet the U.S. Government has followed this practice for years, and it lust doesn't work We'should abolish foreign"aid; we should stop giving away what we haven't got. The net result is bad, `anyway. It makes no sense `a't `all to bleed the `average taxpayer, borrow money, pay interest on it, to give foreign `aid `to communistic puppets like Nasser of Egypt-or to give foreign aid ,to Communist countries, or to give foreign aid to countries that `tre making money by shipping supplies to Noith `V'ietn'tm In retrospect, our `foreign policy' has not been good. We fought two wars, gave endless billions `of dollars to France, and we got De Gaulle. If we were `attacked today, who would be our allies? Who would fight for us and with us, regardless of the foreign wars we have fought and the endless billions of dollars that have been given away abroad? In our LSD economy of tod'ay, the `average `taxpayer is beset, be- witched, bothered, and bewildered. When `the Government talks about `a possible deficit of $29 billion, the average man just can't figure out PAGENO="0381" PRESIDENT'S 1967 TAX PROPOSALS 369 what is going on, but he knows something is wrong, he knows that something should be done about it. This 10 percent surtax is nb cure for a $29 billion deficit. We had bet- ter attack the disease itself rather than apply a poultice. The disease is spending what we haven't got. We propose the following for this committee's consideration and for the consideration of the Congress of the United States. First, that a committee be appointed to make an extensive in-depth study of taxes in the United States today, as they fail upon the tax- payer from all directions in all levels of government, to learn just what the average taxpayer is paying in total taxes, to learn what is left for him to support his own family, to learn how far that money will go in support of his family. Let's learn the whole score for the future. Second, that this committee make a great effort to do away with the concept of deficit spending as a national way of life in America. Third, that foreign aid be abolished until such time as we can pay for it out of current tax receipts rather than out of borrowed money. Let's stop giving away what we haven't got. Fourth, that definite action be taken on the reduction of Government spending. It has been talked about for years, but now the time has come to do it. Fifth, that we stop shadowboxing in Vietnam and fight the war to win or get out. It seems as though $2 billion per month and more than 500,000 young Americans is too much of a price to pay for a land that is 10,000 miles away, where we are not even sure what the people themselves actually want, where we may get the same result if we win the war as we got in China. Sixth. As military expenditures have reached such gigantic propor- tions, it is logical to assume that there is great waste in multibillion- dollar purchases made during the year by the Defense Department. Therefore, we recommend that the Congress appoint a standing `Watchdog Committee, similar to the Truman Committee, that will carry on a constant search for waste in military spending. Seventh. As the Federal Government has gotten so big, we recom- mend that a second standing `Watchdog Committee be appointed to survey and study the regular civilian departments of the Government, to keep them from mushrooming in the number of employees and ex- penditures, from year to year. Eighth. We recommend that a third standing Watchdog Committee be appointed to watch over the entire welfare operation, and to en- deavor to see that welfare is not made a lazy man's paradise. but only real help for the needy, that the man who is able to work and where a job is available that he is qualified to fill, that he he made to work for a living as the average taxpayer is working for his living. Ninth. We recommend that a special committee. be appointed to study tax loopholes that may be enjoyed by special organizations, foundations, or groups of investors in special fields, to make sure that each and every one in this country pays his fair share of the taxes- that there are no tax-exempt profit-producing businesses of any kind, favoring any one special group of citizens. It has been truly said, "The power to tax is the ower to destroy." Our organization is founded upon the basic premise that we should fight to hold the line on taxes because we feel this is the only way to preserve the family life of America, to insure the future of freedom in PAGENO="0382" 370 PRESIDENT'S 1967 TAX PROPOSALS this country, to guarantee us that we will not continue to travel the high tax road to communism. We invite you gentlemen of this committee and the Congress of the United States to join us in this fight. Thank you very much. The CHAIRMAN. Thank you, Mr. Ferguson. Are there any questions? Thank you very much. Mr. BETTS. I might just say you are a good fighter. Mr. FERGUSON. Thank you very much, sir. The CHAIRMAN. Mr. Mendenhall. Mr. Mendenhall, if you will iden- tify yourself for our record by giving us your name, address, and ca- pacity in which you appear, we will be glad to recognize you. STATEMENT OP JOHN MENDENHALL, PARTNER, AND DIRECTOR OP TAXES, ARTHUR ANDERSEN & CO. Mr. MENDENHALL. Mr. Chairman and gentleman, my name is John Mendenhall. I am a partner in, and director of taxes for, Arthur Anderson & Co., an international firm of certified public accountants, with home office at 69 West Washington, Chicago, Ill. The CHAIRMAN. Thank you, sir, for coming, and you are recog- nized. Mr. MENDENHALL. With your permission, I would like to submit a written statement for the record and to cover here only its major points. The CHAIRMAN. Without objection that will be included in the record. (The statement referred to follows:) STATEMENT OF JOHN MENDENHALL, PARTNER, AND DIRECTOR OF TAXES, ARTHUR ANDERSON & Co. Mr. Chairman and gentlemen, it is a privilege to be able to appear before the members of this Committee today in order to protest one provision of the recently proposed tax legislation. My name is John Mendenhall, and I am a part- ner in, and Director of Taxes for Arthur Anderson & Co., an international firm of Certified Public Accountants. SUMMARY I protest the provision that appears as Section 4 of the Treasury Department draft of the legislation and which proposes to eliminate, over a period of five years, the $100,000 "floor" under which estimation and prepayment of corporate income taxes is not required. I protest for the following reasons: (1) The proposal is inconsistent `with the policy that led to the original adop- tion of the $100,000 floor in 1954. (2) It will be extremely difficult and expensive for small corporations to file declarations of estimated tax and make prepayments. (3) The penalty for underpayment of estimated tax is an unnecessarily harsh remedy for an honest mistake. (4) Smaller corporations will find it expensive to use the "escape clauses" which are more useful to larger corporations. I am here primarily for two reasons. First, I respectfully protest this provision on behalf of my firm's many corporate clients with annual income taxes of less than $100,000. Secondly, I am here on behalf of my firm itself. Because many of our smaller corporation clients would have to seek our advice on this matter frequently throughout the year, it would be a severe demand on the time of our own professional personnel. The time involved, as well as the cost incurred, would be disproportionate to the importance of the problem. Actually I am here on behalf of almost all U.S. taxpaying corporations, at least a group representing probably from 80% to 85%. This is the group that is affected 1y Section 4 of the Treasury's draft. The Statistics of Income for PAGENO="0383" PRESIDENT'S 1967 TAX PROPOSALS 371 Corporation Income Tax returns for 1962 published by the Internal Revenue Service shows that almost 600,000 corporation income tax returns reflecting tax liabilities were filed for that year. Of this number, slightly more than 487,000, or 81%, showed a combined normal tax and surtax under $25,000. Un- doubtedly, these figures and percentages have changed since 1962, but I'm sure that it is still a fair statement that a very large number of corporations have annual corporate income tax liabilities of less than $25,000 and that an even larger number have annual corporate income tax liabilities of less than $100,000. INCONSISTENT WITH PRIOR POLICY The $100,000 dividing line appeared first in the Internal Revenue Code of 1954, along with the introduction of the system of prepayments for corpora- tions. The report of the Senate Finance Committee issued in connection with the adoption of the new Code (S. Rep. No. 1622, beginning at page 137) contains the following language on page 139: ". . . with the $50,000 exemption in the House idll, the declaration system would leave unaffected 390,000 corporations. It would affect, however, 35,000 corporations, accounting for about ninety per- cent of the corporate tax liabilities. Your Committee's action will exempt an ad- ditional 15,000 corporations from the declaration and advance payment require- ments. The remaining 20,000 corporations, however, account for about 85% of corporate income tax liabilities.. This language was written to explain the action of the Senate Finance Commit- tee in increasing the proposed level for exemption from corporate declarations and prepayments from the $50,000 originally proposed by the House of Repre- sentatives to $100,000. Thus, at that time, 405,000 corporations out of 425,000 were deliberately exempted from the requirement of filing Declarations of Esti- mated Tax and making prepayments. The exemption made good sense, of course, because of the picture on the other side of the coin. The 20,000 corporations who were left subject to the declaration and prepayment requirement accounted for more than 85% of the total corporate income tax. Assuming that these figures and statistics have remained approximately cor- rect, the proposal under consideration takes this shape. You are being asked to approve legislation which would compel over 400,000 corporations to file annual Declarations of Estimated Tax, many undoubtedly requiring also periodic quarterly revisions, solely to accelerate the payment of corporate income tax that probably represents less than ten percent of the total corporate income taxes. This will not produce payment of taxes otherwise uncollectible. It calls only for prepayment. The prescription cannot be renewed. This will increase Government revenues only once, with the effect spread over the five years following enact- ment. The only statement on this subject in the President's message combines the revenue effect of this proposal with the proposal that the penalty level for estimated taxes be raised from 70% to 80% and estimateds $800 million in addi- tional revenues for Fiscal 1968, somewhat more in subsequent years. In any case, once the change is fully effective, assuming no violent fluctuations in overall corporate income or tax rates, collections should revert to normal, but hundreds of thousands of corporations would be left with the recurring annual problem of filing Declarations of Estimated Tax. The cure hardly seems worth the damage to the patient resulting from side effects. The adoption in 1954 of the $100,000 exemption figure was not accidental. It represented the result of a deliberate policy of relieving thousands of corpora- tions from a burdensome obligation that produced only a single non-recurring collection benefit to the Go~ernment. The Senate Finance Ckmmittee Report referred to previously contains some further language explaining the purposes of the provision: "The House bill exempts from the required Declaration of Estimated Tax arid the new tax-payment schedule corporations whose yearly tax liability cannot reasonably be expected to ex~eed $50,000. Moreover, it limits the current pay- ment requirements .to that portion of the tax liability in excess of $50,000. This exemption, which is designed to restrict the application of the new system to a comparatively large group of corporations, has been increased by your Com- mittee .~. ." BURDEN ON SMALLER CORPORATIONS Gentlemen, it would be extremtiy difficult and expensive for smaller corpora- tions, those with income tax liabilities of $100,000 all the way down to $40, to comply with the provisions requiring Declarations of Estimated Tax and cur- PAGENO="0384" 372 PRESIDENT'S 1967 TAX PROPOSALS rent prepayments. Few of them have experienced tax personnel on their pay- rolls, nor do they have the budget experts to provide the necessary information even if they did have the tax experts. I can tell you from our own experience that it is difficult enough for large corporations to estimate their incomes almost a year in advance but at least they have trained budget, tax and accounting em- ployees. In fact, it is difficult enough for most businessmen to have income tax returns prepared and filed after the end of the year, for any corporation, large or small, without having their attention distracted by a Government require- ment that they enter the forecasting field, instead of concentrating on the need to make profits. The ease of collecting prepayments, from the Govern.ment standpoint, should not be allowed to obscure the corporate taxpayer's practical problems with the estimation procedure. ExCESSIvE PENALTY FOE UNDERESTIMATION If this burden is imposed upon the small corporation, the penalty for lack of skill is unnecessarily severe. A poor shot results in an underpayment which causes more than shame for poor marksmanship. This unsteady hand produces a sharply defined penalty of 6% for the period of the underpayment-not a 6% deductible interest charge for an inadvertent "loan" from a gracious G'ov~ern- meat, but a nondeductible penalty more like a 12% simple interest charge. A 6% nondeductible penalty for an honest mistake in estimating something that often is simply impossible to estimate with any accuracy `seems to me harsh and severe. HARD TO AVOID PENALTY Some will say that there is no need to worry about a penalty, even though unnecessarily harsh, since the statutory pattern of estimation offers several ways to avoid penalties, escape clauses, if you will. For example, no penalties will apply, even if the entire target is missed, and not just the bulls-eye, if the estimated tax paid is at least as large as `the actual tax for the prior year. As a practical matter, however, this is small comfort to the businessman whose corporate purse is slim and who cannot afford to overpay estimated tax just to avoid a possible penalty. His company needs every possible dollar of working capital in order to produce an ultimate profit for the year, a goal also necessary for any permanent benefit to the Government. There is hardly any advantage to the Government in unnecessarily stripping him of working capital during the year only `to find that the corporation has been unable to make a profit for the year. This results only in eventual refund `of tax prematurely collected. T'he other major so-called "escape clause" involves predicting the corporate tax with- in, as proposed, 80% of the final actual tax and this is equally unrealistic for many smaller corporations. All escape clauses have the disadvantage of requir- ing the taxpayer to prove his way out of danger. Perhaps the proposed extension of the estimation requirement to smaller cor- porations will be defended on the ground that it already applies to the individual proprietor who is unincorporated. This may be logical to some, but to me it is an application of what I would call the doctrine of "shared misery." If B is, in a sinking boat, should we take A out `of his sound ship and put him into the leaky boat so that both may perish in happy uniformity? There were good reasons for the $50,000 floor originally proposed in 1954. The Senate Finance Committee was sufficiently impressed with them to increase the floor to $100,000 where it `has remained ever since. The reason is simple and the same today, even using the language of 1954, ". . . to prevent the hardships which might otherwise be imposed on corporations which are uncertain as to what their income during the taxable year will be." To impose a recurring annual burden on several hundred thousand corporations in order to accelerate, tempo- rarily, the collection `of a very small percentage of the total corporate income tax just doesn't seem sensible. I urge you not to extend, to hundreds of thousands of corporations, the rule that they must estimate their income within prescribed limits and pay their income taxes in advance. The result would be to raise the crystal ball and the soothsayer to an und'eserved importance and to distract many businessmen from their real occupation which is to create the real earnings' upon which income taxes ultimately must be based. `Thank you. Mr. MENDENHALL. It is a privilege `to be able `to appear before the menThers of this committee today in order to protest one provision of tile recently proposed tax legislation. PAGENO="0385" PRESIDENT'S 1967 TAX PROPOSALS 373 I protest the provision which proposes to eliminate over a period of 5 years the $100,000 floor under which prepayments of corporate income taxes is not required. I protest for the following reasons: (1) The proposal is inconsistent with the policy that lead to the original adoption of the $100,000 floor in 1954. (2) It will be extremely difficult and expensive for smaller corpora- tions to make such estimated payments. (3) The penalty for underpayment of estimated tax is an unneces- sarily harsh remedy for an honest mistake. (4) Smaller corporations will find it expensive to use the "escape clauses" which are more useful to large corporations. I respectfully protest this provision on behalf of my firm's many cor- porate clients with annual income taxes of less than $100,000. Secondly, I protest on behalf of my firm itself. Because many of our smaller corporate clients would have to seek our advice on this matter frequently throughout the year, it would be a severe demand on the time of our professional personnel. The time involved, as well as the cost incurred, would be disproportionate to the importance of the problem. `We know that regarding individual taxes vast sums of revenue come from the lower income tax groups. However, with corporations we know that a rather small portion of the total corporate tax collections comes from corporations paying under $100,000 in tax. All but a small percent of corporate tax revenue comes from the rather small number of corporations showing a tax liability of over $100,000. In other words, the number of corporations earning under $100,000 is amazingly high and these smaller corporations owe a very small portion of the corporate tax collections. In 1954 Congress carefully considered these facts. At that time Con- gress decided on the $100,000 floor rather thaii a $50,000 floor, which was considered. The $100,000 floor placed only 20,000 corporations under the estimated tax system and did not bother the other 405,000 tax paying corporations. Nevertheless, these larger 20,000 corporations subjected to the sys- tem paid 85 percent of the total corporate tax. Congress concluded that the difficulties, which would have been incurred by the other 405,000 smaller corporations under the prepayment system exceeded the bene- fits of accelerating Treasury receipts. Although my statement submitted for the record contains some statistics on this point, the Treasury and your own staff will undoubt- edly have more current information for you to show that these distri- bution proportions are still substantially accurate. Unfortunately, the administration's revenue estimates on their bill to date combined this $100,000 matter with the effect of moving the 70 percent escape clause to 80 percent. So the proposal under consid- eration takes this shape: You are being asked to approve legislation which would compel over 400,000 corporations to ifie annual "Declara- tion of Estimated Tax," many undoubtedly requiring also periodic~ quarterly revisions, solely to accelerate the payment of corporate in- come tax that undoubtedly represents a small percent of the to~;al corporate income tax. 83-349-67-pt. i------25 ` . . ,. . PAGENO="0386" 374 PRESIDENT'S 1967 TAX PROPOSALS That will not produce payment of taxes otherwise uncollectable. It only calls for prepayment. The prescription cannot be renewed. This increase in Government revenue occurs only once, with the effect spread over 5 years following enactment. Once the change becomes fully ef- fecti~ e, `tssuming no ~ iolent fli ctu~tions in o~ er'ill corporate income tax rates or in corporate income, collections should revert to normal, but hundreds of thousands of corporations would be left with the re- curring annual problem of filing "Declaration of Estimated Tax." `1 he cui e h'u dly seems worth the d'tmage to the patient resulting from side effects. Gentlemen, it would be extremely difficult and expensive for smaller corporations, those with income tax liabilities of $100,000 all the way down to $40, to comply with the provisions requiring current prepay- ments. Few of them have experienced tax personnel on their payroll, nor do they have budget experts to provide the necessary information. I can tell you from our own experience that it is difficult enough for large corporations to estimate their income almost a year in ad- vance, but at least t.hey have trained budget, tax, and accounting employees. In fact, it is difficult enough for most businessmen to have their income tax returns prepared and filed after the end of the year with- out having their attention distracted by a Government requirement that they enter the forecasting field, instead of concentrating on the need to make profits. The ease of collecting prepayments . from the Government's stand- point should not be allowed to obscure the corporate taxpayer's practi- cal problems with estimating procedures. If this burden is to be im- posed on small corporations, the penalty for lack of skill is unnecessar- ily severe. A poor shot results in underpayment which causes more thanshame for poor marksman ship. This unsteady hand produces a sharply defined penalty of 6 percent for the period of underpayment, not a 6-percent deductible interest charge for an inadvertentloa.n from a gracious government, but a non- deductible penalty more like a 12-percent simple interest charge. A 6-percent nondeductible penalty for an honest mistake in estimat- ing something that is often simply impossible to estimate with any accuracy seems to me harsh and severe. Some will say that there isno need to worry about the penalty, even though unnecessarily harsh, since the statutory pattern of estimation offers several ways to avoid penalties, escape clauses,, if you will. For example,. no. penalties will apply, even if the entire target is missed, and not just the.bull's-eye,..if the estimated tax paid is at least as large asthë actual tax:for the prior year.'. ~. . As a practical matter, however, this is small comfort to the business- man whose corporate purse is slim and: who cannot afford to overpay estimated tax simply to avoid a possible penalty. His company needs every possible dollar of working capital in order to produce an ultimate profit for the year, a goal also necessary for any permanent benefit to the Government. There is hardly any advantage to the Government in unnnecessarily stripping him of working capital during the year only to find that the corporation has been unable to make a profit during the year. This results only in eventual refund of tax prematurely collected. The other major escape clause involves predicting the corporate tax, PAGENO="0387" PRESIDENT'S 1967 TAX PROPOSALS 375 within, as proposed, 80 percent of final actual tax, and this is equally unrealistic for many smaller corporations. Perhaps the proposed extension of the estimation requirement to smaller corporations will be defended on the ground that it already applies to individual proprietors who are unincorporated. This may be logic to some, but to me it is an application of what you might call the doctrine of shared misery. If B is in a sinking boat should we take A out of his sound ship and put him in the leaky boat so that they may both perish in happy uniformity? Two wrongs never make a right. The reasons for maintaining the $100,000 floor are as valid today as in 1954, when Congress carefully considered this very point. In 1954 the committee reports stated that the floor was set "to prevent the hardships which might otherwise be imposed on corporations which are uncertain as to what their income during the taxable year will be." To impose a recurring annual burden on several hundred thousand corporations in order to accelerate temporarily the collection of a very small percentage of the total corporate income tax just doesn't seem sensible. The result would be to raise the crystal ball and the sooth- sayer to an undeserved importance and to distract many businessmen from their real occupation, which is to create the real earnings upon which income taxes are ultimately based. I hope that our Nation's fiscal situation is not so desperately on a hand-to-mouth basis as to force this burdensome acceleration procedure on small businessmen. Thank you. The CHAIRMAN. Are there any questions of Mr. Mendenhall? We appreciate, Mr. Mendenhall, your coming to the committee and certainly we will take into consideration what you have suggested in the way of amendment. Mr. MENDENHALIJ. Thank you. The CHAIRMAN. Without objection, the committee will adjourn until 10 o'clock in the morning. (Whereupon, at 11:47 a.m., the committee adjourned to reconvene at 10 a.m., Friday, August 25, 1967.) PAGENO="0388" PAGENO="0389" PRESIDENT'S 1967 TAX PROPOSALS FRIDAY, AUGUST 25, 1907 HOUSE OF' REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C. The committee met at 10 a.m., pursuant to notice, in the committee room, Longworth House Office Building, Hon. Wilbur D. Mills (chair- man of the committee) presiding. The CHAIRMAN. The committee will please be in order. Our first witness this morning is Mr. Clarence M. Tarr. Mr. Tarr, please come forward. You have been before the committee on occasions in the past, but for this record will you again identify yourself by giving us your name and capacity in which you appear. STATEMENT OFC'LARENCE M. TARR, PRESIDENT, NATIONAL ASSO- `CIATION OF RETIRED CIVIL EMPLOYEES; ACCOMPANIED BY LUTHER MILLER, FIRST VICE PRESIDENT; AND JOHN A. OVER- HOLT,, G-ENERAL COUNSEL ` ` Mr. TARR. Thank you, Mr. Chairman. My name is Clarence M. Tarr and' I am president of the' National Association `of Retired Civil Em~ ployees. I am accompanied by Mr. Luther Miller on my right, first vice president of the association and Mr. John A. Overholt, general counsel. `, ` ` ` ` I `The `CHAIRMAN. We appreciate having you,Mr. Tarr, and you other gentlemen, before the committee this morning. Mr. TARR. Our association has more than 133,000 members, princi- pally retired civil employees of the United States but including' also some of their dependents and survivors, and widows of employees who died in the service. We have more than 1,000 chapters throughout the United States. We speak for more than' 500,000 retired Federal employees and more' than 250,000 dependents and survivors of former Federal employees. We are also concerned with the welfare of millions of other elderly ,retired citizens who must eke out a precarious existence with incomes only a fraction of those received by persons in their productive years. We speak in favor of the objectives of the President's proposals but urge amendments necessary to the welfare of retired citizens. INFLATION We note that one of. the primary purpOses of the President's plan is to restrain inflation which is the greatest problem of our older people trying to get by on meager pensions and annuities. By official records, 377 PAGENO="0390" 378 PRESIDENT'S 1967 TAX PROPOSALS inflation has forced up the cost of living at the rate of 3 percent per year for the past 2 years, and we know from experience that the prices of things needed most by older people are going up at an even faster rate. In our civil service retirement system, we have a provision for an automatic annuity `increase to match increases of 3 percent or more in the consumer price index, but by the time we get one increase, we are almost due for the next. The annuity increase is always about a year later than the increase in the cost of living. Furthermore, the Consumer Price Index was designed to cover aver- age prices paid by a "worker" and his family whose needs are some- what different from those of a retired individual and his family. One item will illustrate the difference. Drugs, medicines, and medi- cal services and supplies are more necessary for elderly persons than for workers' families, and costs of medical care have shown the great- est increases in recent years. As a result, our people find that annuity adjustments to compensate for increases in the cost of living are both too little and too late. DISCRIMINATION IN INCOME TAX LAWS For these reasons our people are for any down-to-earth program that will halt inflation. At the same time, many of our people are burdened by the present discrimination against retired Federal em- ployees, retired municipal employees, retired teachers and others by the present Federal income tax laws. We have pointed out to this committee on numerous occasions that it is manifestly unfair to exempt retirement income under some sys- tems from Federal income taxes while refusing to exempt retirement income under other systems. The. most striking example is the exemption of social security and railroad retirement annuities from tax while imposing the tax on the annuities of retired Federal workers, retired municipal employees, and retired schoolteachers. In 1954, this discrimination was partially alleviated by a retire- ment income credit of $1,200, which was the amount of the maximum tax-free individual benefit under social security, although less than the corresponding amount under railroad retirement. Later, wheii the maximum annual individual benefit under social security was in- creased to $1,524, the retirement income credit was promptly increased to $1,524. Furthermore, in 1964, the retirement income credit was extended to married couples over 65 years of age to compare with the combined tax-free social security income of a similar couple. This gave a couple over 65 years of age a retirement income credit of $2,286. RETIREMENT INCOME CREDIT Social security benefits were increased substantially in 1965, but there was no corresponding increase in the retirement income credit. Still greater increases are pending as the result of the House approval of H.R. 12080, now pending in the Senate. PAGENO="0391" PRESIDENT'S 1967 TAX PROPOSALS 379 Furthermore, the income base was increased in 1965, and a further increase in this base is pending in H.R. 12080. As a result of these increases, the retirement income credit should be correspondingly in- creased to $1,800 for an individual and $2,700 for a couple in 196i, with a further increase in 1968 to match increases resultmg from H.R. 12080. MEDICAL REDUCTIONS We have another serious tax problem. Through the year 1966, we were permitted to claim as exemptions on our Federal income tax~ returns practically all of our medical and dental expenses, which was very important for persons who have to pay out large sums of money for medical care. This was drastically changed by an incidental pro- vision of the law authorizing medicare, and now we find severe limits to the amount of medical expenses we can claim as deductions. it is true that medicare helps with many of our medical problems, but we have many members who do not share its benefits. You will recall that most Federal employees who retired since July 1, 1960, were specifically excluded from medicare benefits but were not ex- cluded from the change in income tax deductions. Also, there are a great many others who have medical expenses which were not helped by medicare, as for example, the persons who have tremendous outlays for prescription drugs and medicines. These are the people most hurt by the new restrictions on medical deductions. SUMMARY Our members are loyal Americans who have demonstrated their devotion by long careers of public service prior to retirement. They are still loyal Americans willing to bear whatever just burden they must assume for the benefit of their country. If an increase in Federal taxes is best for the country, they will offer up their fair share. In all justice, we should not have to pay more. And so we insist that as full citizens of this land we should not have our taxes increased without first eliminating the present discrimination against us in Federal income tax laws, and restoring to us the medical deductions so necessary to persons in our stage of life. Therefore, we ask. that any bill reported out by your committee include a provision to increase the retirement income credit to equal tax-free social security income, and to restore the unlimited medical deductions for persons over 65 years of age. Mr. Chairman, we thank you for this opportunity to appear and present our views in this manner, and I will endeavor to answer any questions you or other members of the committee may have. Thank you. The CHAIRMAN. Mr. Tarr, we again thank you for bringing to the committee the views of yourself and the organization you represent. Are there any questions of Mr. Tarr? We thank you, sir. Mr. TARR. Thank you very much. The CHAIRMAN. Mr. Donald W. Jackson. Mr. Jackson, if you will give us your name and capacit.y in which you appear for the record we will be glad to recognize you, sir. PAGENO="0392" 380 PRESIDENT'S 1967 TAX PROPOSALS STATEMENT OP DONALD W. 3ACKSON, EXECUTIVE SECRETARY, TENNESSEE TAXPAYERS ASSOCIATION, INC., AND MEMBER~ POLICY COMMITTEE, NATIONAL TAXPAYERS CONFERENCE Mr. JACKSoN. Donald W. Jackson, Nashville, Tenn. I am represent- ing the National Taxpayers Conference, which is an organization composed of taxpayers' associations throughout the country. The CHAIRMAN. We appreciate having you with us, Mr. Jackson, and I guess you observed that you have a Congressman from your district on this committee. We are very proud of him. Mr. JACKSON. We are very proud of him too, Mr. Chairman. We think he is doing a fine job here. The CHAIRMAN. He is. You are recognized, sir. Mr. JACKSON. I am appearing before this committee today not only as executive secretary of the Tennessee Taxpayers Association, but primarily as the spokesman for the executives of a number of similar citizen-research organizations in various States, comprising the Na- tional Taxpayers Conference. My statement has been concurred in by the executives of those state- wide organizations who are listed on the last page of the material I believe you have before you. Mr. Chairman, this committee is considering proposals which are designed to increase Federal revenues in the current fiscal year by an estimated $7.4 billion. The bulk of this increase-$6.3 billion-is to be raised through the proposed 10-percent surcharge on the tax liabilities of individuals and corporations. The decisions taken by this committee on these proposals will in- evitably hold vital implications for the future fiscal policy and direc- tion of the Na~tion. It is in this context that I would like to present to the committee the views of those for whom I appear here today. The tax increase proposals are presented to the Congress and the Nation with the argument that they are an integral part of a balanced fiscal program, needed to finance the Vietnam war and maintain a relatively stable economy-that is to say, tax increases balanced with expenditure restraint to hold a budget deficit (and thus a further in- crease in the national debt.) to what are referred to as "manageable" proportions. There are some who would contest this description of or justification for these tax increase proposals. Our view of the Government's current expenditure policies leads to a contrary conclusion-that this pro- grain may instead be characterized by imbalance, leaning .too heavily on tax increases and. not enough. on stern and firm control and reduc- tion of nonessential, nondefense Federal spending. SIZE AND SCOPE OF THE TAX BURDEN The burden upon the taxpayer is a]ready extremely heavy, despite some tax reduction in recent years. According to figures recently pub- ]ished by the Tax Foundation, Inc., total taxes collected by all levels of government in the fiscal year 1967 amounted to about $3,300 per American family, with Federal tax collections accounting for almost 70 percent of that amount. By comparison, a little more than a decade ago, in 1956, the total taxes collected per family a.mounted to about $1,897. PAGENO="0393" PRESIDENT'S 1967 TAX PROPOSALS 381 It should be noted here too, that the proposed 10-percent surtax on individual and corporate tax liabilities will come on top of another rise in the increasingly burdensome social security tax which the House of Representatives has already approved and which seems cer- tain of early enactment. There have been many tax increases by State governments during the past year. Several States have increased sales and income tax rates. Examples include Ohio, Minnesota, West Virginia, and California. In my own State of Tennessee, the Taxpayers Association supported Governor Ellington and the legislature in a proposal to increase cor- poration income taxes by 25 percent. The tax rate was increased from 4 to 5 percent on net earnings of corporations. Other tax increases were made on gasoline, tobacco, alcoholic bever- ages, and so forth. I cite this to make two points: (1) the taxpayers' associations of this Nation are willing to support taxes when needed, but they also want evidence of restraint on spending programs, and (2) the tax burden on the taxpayer is growing as a result of actions taken by State legislatures. We do not believe that `the Congress and the Executive have ex- hausted every conceivable avenue to re.duce `and limit nonessential spending. This is due at least in part to our failure to live up to the declaration contained in section I of the tax reduction act of 1964, expressing a clear preference for the continued application of ex- penditure restraints. There is but little comfort to be derived from the fact that the 10-percent surtax is proposed on a "temporary" `basis. The fact that it is proposed at all, and `that `the ,tax package also includes proposals `to postpone scheduled reductions in the automobile and telep'hone serv- ice excises, should be a sufficient reminder that where taxes are con- cerned anything is possible-and that while tax increases may be described as "temporary," tax reductions also are sometimes tempo- rary. CONTROL OF FEDERAL SPENDING SHOITLD HAVE FIRST PRIORITY ~1I~ may be that in the final analysis the Vietnam war requirements will make some tax increase necessary. It is our contention, however, that any such decision should be preceded by the most vigorous ef- forts to control and reduce Federal spending, so as to make tax in- creases at this time unnecessary'. Thus we concur in the position taken recen'tly by the distinguished chairman of the Joint Economic Committee, Senator Proxmire of Wisconsin, when he stated: Congress should cut spending before it undertakes a tax increase. If the Government has to allocate more of the' national resources to defense purposes, ws should cut down on the Government's other claims on resources. Why should the Government go on consuming more than ever when it asks the private sector toconsurne less? It is not carping criticism to suggest that we have failed at the national level to establish a system of reasonable expenditure pri- orities. Federal programs proliferate and expand in both scope and cost. `While it is recognized `that expenditure `control is not the primary responsibility of this committee, it is surely not unrelated to the is- sues raised by the pending tax increase proposals. PAGENO="0394" 382 PRESIDENT'S 1967 TAX PROPOSALS As your distinguished chairman himself recently declared: All too little has been said abeut expenditure control and in my judgment, insufficient attention has been paid to it. It is, in fact, one of the most influ- ential factors of all in the shaping of tax policy, whether many like to admit it or not. I have recently heard it reported that between fiscal 1956 and 1967 more than 100 new Federal programs (or major expansions of existing programs) were initiated, and that the cumulative costs of these pro- grams to date, including the amounts requested for the current year, totals a startling $85 billion. A more specific example of the growth tendencies of Federal activi- ties may be provided by pointing to nine new programs established as recently as fiscal 1963; the first year cost. of these programs was only $241 million, but through fiscal 1968 these programs will have gen- crated expenditures of $3% billion. All reasonable persons must recognize that as our population in- creases and as our society becomes more complex the demands for pub- lic services-and therefore spending-increase. There are indeed no limits upon the desires of our people or demands upon Government, but as your chairman, Representative Mills, also suggested recently: This, however, does not justify the perpetuation of programs that have already proved to be unsound or have outlived their former usefulness, and it does not mean that any and every new program must be accepted lock, stock, and barrel no matter how worthy or high sounding its objective may be. It does not mean that we must tolerate ill-conceived experiments which could pass a rudimentary cost-benefit test only if the benefits are measured in such ambiguous terms as "prestige." Calls for expenditure restraint have been heard on many sides in recent months. Indeed it is interesting to note the emphasis upon this in the testimony of the Budget Director and other officials before this committee last week. However, examination of the budgetary actions taken to date- a.nd indeed the official acknowledgments that we may be facing a bucig- etary deficit in the $~9 to $30 billion range-hardly suggests that such demands have as yet been translated into meaningful results. While action on fiscal 1968 `appropriations and other spending au- thorizations is far from completed, tabulation's appearing in the `Con- gressional Record and elsewhere indicate that in the appropriation bills thus far acted upon by the House, reductions of slightly more than $3 billion have been made. About $1.3 billion of this was in De- fense Department requests. `While his totals differ somewhat, it. was interesting to note the Budget Director's testimony to the effect that the reductions made to da.te in the nondefense money measures actually would reduce fiscal 1968 spending by only $660 million, and that even these reductions would be largely offset by other actions requiring increased expendi- tures this year. It appears, therefore, that there is a clear need for more vigorous action in restrain Federal spending, on the part of both Congress and the Executive. EXPENDITURE POLICY DURING KOREAN WAR A major argument for the tax increase is that it is required because of the increasing costs of the Vietnam war. On this point, it is of inter- PAGENO="0395" PRESIDENT'S 1967 TAX PROPOSALS 383 est to compare present expenditure policy with that followed in the somewhat similar period of the Korean war years. In fiscal 1950, national defense spending totaled $13 billion, while Federal expenditures for nondefense purposes (excluding interest) totaled $20.8 billion. By fiscal 1952 defense expenditures, reflecting Korean war costs, had risen to almost $44 billion. Over the same period nondefense spending actually was reduced by nearly one-fourth, to less than $16 billion. The comparable totals for the Vietnam war years, to date, tell a far different story. Defense spending has increased from $52.8 billion in fiscal 1963 to $70.7 billion for the fiscal year 1967. But nondefense expenditures on a comparable basis also have increased-by more than one-third-from less than $30 billion in 1963 to $41.5 billion in 1967. SUMMARY The tax burden continues to increase in spite of the Tax Reduction Act of 1964. An increase in social security taxes seems rather certain, and State and local governments are raising many types of taxes, including personal income, corporate income, and sales taxes. It may be that in the final analysis the Vietnam war requirements will make some tax increase necessary. It is our contention, however, that any such decision should be preceded by the most vigorous efforts to control and reduce Federal spending. During the Korean war, nondefense spending was reduced by nearly one-fourth. On the other hand, during the Vietnam war years, to date, nondefense spending has increased by more than one-third. Mr. Chairman and members of the committee, I appreciate very much to have the opportunity to have presented these views to you today on behalf of the Tennessee Taxpayers Association as well as. similar research organizations in 16 other States. I would be glad to answer any questions. The CHAIRMAN. Without objection, Mr. Jackson, we will include the list of the organizations in the other States which join you in this statement. (The information referred to follows:) This statement is presented on behalf of the following organizations. Each has specifically endorsed the comments included in this presentation. Tennessee Taxpayers Association. North Carolina Citizens Association. Public Expenditure Survey of Wisconsin. Nebraska Tax Research Council. Washington State Research Council. Missouri Public Expenditure Survey. Montana Taxpayers Association. Taxpayers Federation of Illinois. Associated Taxpayers of Idaho. Oregon Tax Research. Utah Taxpayers Association. Citizens Public Expenditure Survey of New York. Ohio Public Expenditure Council. New Jersey Taxpayers Association. Colorado Public Expenditure Council. Connecticut Public Expenditure CounciL . The above statewide organizations maintain research staffs for the purpose of making recommendations to Federal, State, and local officials on tax and spending policies. Each organization-council, survey, federation, or associa- tion-represents interested taxpayers. PAGENO="0396" 384 PRESIDENT'S 1967 TAX PROPOSALS Mr. JACKsON. Yes, sir. The CHAIRMAN. We appreciate your bringing these views to the committee this morning. Mr. FULTON. Mr. Chairman. The CHAIRMAN. Mr. Fulton. Mr. FULTON. I would just like to express my personal appreciation to my good friend Don Jackson for giving us his time and the benefit of his vast Imowledge with reference to taxation. * Don, we are certainly pleased to have you. Mr. JACKSON. Thank you. * The CHAIRMAN. Any further statements or questions If not, we thank you, Mr. Jackson, again. Mr. JACKSON. Thank you. The CHAIRMAN. Mr William Jackrnan. Mr. Jackman, you have been before the committee on other occasions in the past. We welcome you back, but for purposes of this record will you identify yourself. STATEMENT OF WILLIAIV[ rACKMAN, PRESIDENT, INVESTORS LEAGUE, INC. Mr. JACKMAN. Thank you, sir. My name is William Jackman. I am president of the Investors League, a nonprofit, nonpartisan organiza- tion with thousands of individual investors from every State in the Union. Our officers are located at 84 Fifth Avenue, New York, N.Y. The CHAIRMAN. You are recognized, Mr. Jackman. Mr. JACKMAN. Mr. Chairman and distinguished members of your committee I wish to thank you for the privilege of presenting to you our views on the President's proposals to increase corporate and individual income taxes now before you for consideration. The President asks for an individual and corporate income tax sur- charge of 10 percent starting on October 1, 1967 for individuals and July 1, 1967 for corporations. These surcharges would be temporary and expire in June 1969. He also asks for an extension of automobile and telephone excise taxes. The principle reasons given by the administration for these recom- mendations are to head off inflation and soaring interest rates. The proceeds of $7.4 billion presumably would be used to reduce the 1968 Federal budget deficit now estimated at $29 billion (instead of the $8 billions estimated at the beginning of the year.) PROPOSALS WOULD BE INEFI'ECTIVE Gentlemen, it is our opinion, that these tax increases are unnecessary at this time and would prove ineffective. The only way to put our Gov- ernment's financial house in order would be to drastically curtail non- defense Federal spending programs and to defer other ones now under consideration. Every businessman knows that high taxes, just like high wages, are inflationary. They represent costs of doing business, and these increased costs, when they exceed increased próduction, must be passed along in higher prices to the consumer. As regards higher interest rates, excessive Government debt com- petes for the people's savings and naturally forces up interest rates. * This is exactly what has been happening in recent years. In the long PAGENO="0397" PRESIDENT'S 1967 TAX PROPOSALS 385 run, interest rates are controlled by the laws of supply and demand, and not by Government fiat. CUT FEDERAL SPENDING Since 1960 the U.S. population has grown by. only 10 percent. In the same period, the personnel. comprising the civilian bureaucracy of the Federal Government has grown by 25 percent; the cost of Govern- ment payrolls, including military, has grown by 75 percent; the total of all Government. spending has grown by 83 percent; nondefense ex- penditure~s of the Federal Government are up 97 percent. It is obvious that the only sensible step toward curbing inflation and huge deficits, is to cut Federal spending. There is a bill, 5. 538 passed by the Senate in May, now pending before the House. It provides for creation of a Joint Committee on the Budget. It should be passed in our opinion. A NEW COMMISSION NEEDED A more fundamental, additional approach to expenditure control is envisioned in a proposal by the distinguished chairman of this committee, Congressman Wilbur D. Mills. His bill, H.R. 10520 would create a 12-member bipartisan Government Program Evaluation Com- mission, its members drawn from private life, to examine all Federal programs and activities, old, new and projected, and assign priorities among them. The yardstick would be "the fundamental needs and vital objectives of the Nation." The Commission would ask of each program: What is its effectiveness in terms of present and future costs? Should it be continued? If so, at what level of funding? A companion Senate bill, 5. 2032, has been introduced by Senator William Proxmire, Democrat, of Wisconsin, chairman of the Joint Economic Committee. He calls the idea "a fresh look" at Government expenditures, needed to instruct Congress and the President as to how much should be appropriated in a given fiscal year for each Federal activity. . The rationale of expenditure control was outlined by your thairman,. Representative Mills in a speech in late May, before he introduced H.R. 10520. Among his points: After taxes were reduced in 1964, it appeared that the rate of Federal spending had moderated. But in September 1965, the spending rate rose quickly and this year, if certain contingencies occur, the Nation is faced with the prospect of a possible fiscal year 1968 budget deficit of nearly $30 billion-the largest since World War II. Though urgent defense costs account for part of the spending rise, nondefense costs also have risen and this is where controls must be applied. First-year costs of a new program are only part of the story; of more concern is what future costs will be 5, 10, even 15 years ahead. As these rise, they can impose a straitjacket on tax policy and endanger the desired goal of spending controls coupled with regular, frequent and significant reductions in tax rates which will free the private economy. to help solve problems which many people are urging that the Government solve directly. Therefore, priorities must be set on nondefense programs. PAGENO="0398" 386 PRESIDENT'S 1967 TAX PROPOSALS EXCISE TAX REVISION The administration proposals to extend excise taxes on automobiles and telephone services are likewise inflationary. The Federal Commu- nications Commission is trying to reduce telephone rates. Why not let the temporary Korean war excise taxes expire? The same thing applies to automobile excise taxes. Threatened strikes and other factors are going to force up automobile prices. Continuation of the excise tax will force prices even higher. If there is to be an excise tax, which might be a saving grace if applied fairly, it should be a very low rate applied equally to all industry at the manufacturer's level, with the possible exception of food and drug industries. The President estimates that extension of scheduled reductions in telephone and automobile excise taxes would provide additional Fed- eral revenues of $300 millions for fiscal 1968 and over $2 billions in 1969. The $2 billion figure for 1969 seems to us to be a highly ques- tionable estimate. A SOURCE OF NEW REVENUES It would be much more simple to collect such additional revenues by a simple tax reduction. This could be done promptly by enacting H.R.. 8146, a bill introduced on April 6, 1967, by one of your commit- tee members, James B. TJtt. This bill provides for a 50 percent reduc- tion in the maximum tax rate on long-term capital gains, from 25 percent to 121/2. percent. Dependable surveys indicate that if this bill were enacted, the Treas- ury would receive nearly $700 million more than under present rates. If these surveys were updated, they would indicate that the Treasury's increased revenues from this source would be even greater. TIMING WRONG The timing of the President's tax increase proposal seems all wrong. We can as yet see no indication of a big business boom. Ask the steel and auto boys. These are basic industries. Labor uncertainties in the near future are alarming to these industries and could well result in a slump, certainly ndt a boom. CONSIDER THE STOCKHOLDER Under the President~s proposals, the individual who is a stock- holder will be hit double since a 10 percent surcharge on the present 48 percent corporate rate will raise that rate to 52.8 percent or more than it was before the reduction of the old 52 percent rate. The individ- ual will then bear that bite on any dividend distributions. Because so much of personal income is in the lower tax brackets, a relatively small but constant increase in eaeh of the percentages in the several graduated brackets, say by 2 percentage points, might well produce more tax revenue than the higher-sounding 10 percent surcharge. Because inflation is best checked by a tax that reduces consumer income and that bears least heavily upon income likely to be invested, the flat increase in the scale of rates would seem more appropriate economically than the 10-percent surcharge at this time. PAGENO="0399" PRESIDENT'S 1967 TAX PROPOSALS 387 There is talk of making tax `surcharges larger for corporations than for individuals. Just remember that, taxwise, there is no such thing as a "corporation." Corporations are only millions of people pooling their invested savings together. The corporate income tax is one of the Trea:sury's major sources of income. They are paid only out of profits at a rate of 48 percent. The remaining earnings distributed to individual stockholders are then taxed at rates from 14 percent to 70 percent. It is obvious that if the Treasury wants more income, they should go all out to encourage business expansion and creation of even greater profits. Whenever government attacks profits, it is simply attacking itself. As Senator William Proxmire crisply summarizes: The crux of my opposition to the President's 10 percent surtax proposal is that it is dead certain to retard this Nation's economic growth. Gentlemen, our entire Federal tax system must be overhauled. It has become a ho'dge-podge mess. Its policies must be established and controlled by Congress, and not by the executive branch or its bureaus who are `only presumed to enforce our laws `and not to make them. In your tax thinking, gentlemen, just' remember one other thing. There are over 24 million American investor-shareowners whose sav- ings provide the jobs for our workers in industry and produce under our free enterprise profit system, the goods and services that' have given this Nation the highest standard of living in this world. And remember one other thing. This system is called "capitalism." Karl Marx, in his "Communist Manifesto," stated that the surest way to destroy capitalism was to impose a heavy progressive income tax and an even higher inheritance t'ax. We have already gone too far down this road. Gentlemen, yours is a. monumental task. God help you. Thank you so much. The CHAIRMAN. Thank you, Mr. Jackman. We appreciate your bringing to us your views this morning. Are there any questions of Mr. Jackman? We thank you, sir. Mr. JACXMAN. Thank you. The CHAIRMAN. Mr. Mitchell. Mr. Mitchell, if you will for our record identify yourself by giving us your name and capacity in which you appear we will be glad to recognize you. STATEMENT OP C. R. MITCHELL, CHAIRMAN, LEGISLATIVE COM- MITTEE, U.S. SAVINGS & LOAN LEAGUE; ACCOMPANIED BY STEPHEN SLIPHER, LEGISLATIVE DIRECTOR Mr. MITCHELL. Thank you, sir. My name is C. R. Mitchell. I am president of the First Federal Savings and Loan Association in Kan- sas City, Mo. I am also legislative chairman of the Legislative Com- mittee of the U.S. Savings and Loan League.1 1 The United States Savings & Loan League has a membership of 5,100 savings and loan associations, representing over 95 percent of the assets of the savings and loan business. League membership includes all types of associations--Federal and State chartered, insured and uninsured, stock and mutual. The principal officers are Otto Preisler, president. Chi. cago, Ill.; Hans Gehrke. Jr., vice president, Detroit, Mich.; C. R. Mitchell, legislative chairman. Kansas City. Mo.; Norman Strunk, executive vice president, Chicago, Ill.; and Stephen Slipher, legislative director, Washington, D.C. League headquarters is at 221 North LaSalle St., Chicago, Ill.; and the Washington office is maintained at 425 13th St. NW., Washington, D.C. PAGENO="0400" `388 PRESIDENT'S 1967 TAX PROPOSALS The CHAIRMAN. Mr. Mitchell~ you are recognized. Mr. MITCHELL. Mr. Chairman, I have with me this morning Mr. Stephen Slipher, legislative director of the U.S. Savings and Loan League. The CHAIRMAN. We are glad to have you with us, Mr. Slipher, as well. Mr. SLIPHER. Thank you, sir. The CHAIRMAN. You are recognized, Mr. Mitchell. Mr. MITCHELL. Mr. Chairman, we appear before this committee in general support of the administration's proposal for a surcharge on personal and corporate income taxes. Basically, we want to express our concern about the prospect of a $25 to $30 billion Federal deficit in the coming year which could well be the result if corporate and personal income taxes are not increased in the near future. We share the view of Secretary Fowler that a deficit in the area of $25 to $30 billion would be intolerable. Our interest in the tax legislation before this committee stems from the interrelationship of tax policy upon the credit markets in the American economy, in general, and the real estate mortgage market, in particular. Certainly, the developments of the past 2 years make it crystal clear that Federal spending and tax policies determine to a large extent whether the housing industry and the home buyers of America will share proportionately in the supply of credit available in the Ameri- can economy. Two years ago, in mid-1965, the decision was made to escalate the American military effort in Vietnam and the credit markets and, most notably, the mortgage market have been in `a general state of uncer- tainty since that time. As the Members of Congress remember, the strong uptrend in the private `sector of t'he economy in the second half of 1965 produced obvious inflationary measures and `a pattern of rising prices, higher wages, and increased costs of goods of all types. As a first step to counteract inflationary forces, the Board of Gov- ernors of the Federal Reserve System `boosted the discount rates from 4 percent to 41/2 percent and interest rates allowable on time deposits from 4½ percent to 51/2 percent in December, 1965. When this and prohibited steps failed to slow excessive and inflation- `ary demands for credit, the Board of Governors 6 months later took steps to tighten the supply of money and credit available in the econ- omy. The result was the tight money crisis in the late summer of 1966 and the highest short term and long term interest rates in over 40 years. We said `then and we are of `the same opinion today that high interest rates and tight money, alone, fall short of an adequate program to combat inflation. We said `then and we are of the same opinion today that added emphasis on fiscal policies, including higher taxes and reduced spend- ing, though temporarily uncomfortable, is vitally needed when the country is burdened with costly military operations. We said then and we are of the same opinion today that virtually complete reliance on monetary restraints to fight inflation `places an unfair and uneven burden upon the homebuilding industry and upon American home `buyers. PAGENO="0401" PRESIDENT'S 1967 TAX PROPOSALS 389 This disproportionate impact on housing was dramatically under- scored by a Department of Commerce study being released this week. According to the Associated Press (Wednesday, Aug. 23, 1967) the Commerce Department found that the "1966 money crisis' overall impact was `quite small.'" But the press story went on significantly: The Department said that the "shock effect" fell on housing which was under- cut by $2.5 billion or 10 percent of 1966 spending for residential construction. The story goes on to cite numerous other sectors of the economy which suffered little or no restrictions as a result of "tight money." Plant and equipment expenditures actually increased 16.7 percent in 1966. Inventory investment declined only 4 percent because of "tight money." No one can predict with complete assurance that a tax increase will avoid some higher interest rates and continued inflationary pressures in the economy. On the other hand, we are afraid that in the absence of a tax increase or massive reductions in Government spending there will be very high interest rates and a serious, if not severe, inflationary problem as well as great dislocations in the money market. Currently, as every American household is aware, there is already substantial inflationary pressure in the economy with price levels having increased rather rapidly since the first quarter of 1966. If the Treasury has to finance its deficit without the creation of a great deal more credit by the Federal Reserve, the result will be in- tolerably high interest rates, and the cost of sharing the deficit and the cost of our Military Establishment would be borne most unevenly- essentially by those least able to pay higher interest costs-the home owner and the typical American family that uses credit. There has been some concern expressed before this committee that a tax increase of the magnitude proposed by the administration would aggravate the slowdown which became apparent in some phases of the civilian economy early this year. I do not appear before you as an economist, and am not competent to pass judgment on the action of whether a tax increase would trigger a recession that would result in the collection of less in the way of Federal revenue. I do know, however, that a return to very high interest rates will strike another severe blow at the homebuilding industry just at a time when housing industry is beginning to recover from the sledge hammer blows it received last year as a result of high interest rates and the sharp decline of money available for home buying and home- building. So far as the homebuilding industry is concerned and the mortgage sector of the economy, it is clear that a tax increase would have less of a depressing effect than failure to cover at least part of the forth- coming Federal deficit with an increase in income taxes. We commend the efforts of MenThers of Congress to reduce spending. Whether Government spending can or will be reduced $1 billion, $2 billion, or $5 billion is not within my area of knowledge. Even with a reduction of Federal spending and an inOrease in income taxes so that the Federal deficit will be in the range of $15 billion, there would still be extensive competition for the housing market from the Treas- ury. It would not, however, be nearly as. disruptive as a $30 billion deficit or even a $25 billion deficit. PAGENO="0402" 390 PRESIDENT'S 1967 TAX PROPOSALS The mortgage market will require considerably more funds in the second half of 1967 and first half of 1968 than were required during the first half of this year. There was little mortgage loan business in the pipeline in the early part of 1967 because of the drastic cutbacks in loan coimmitments in the second half of last year. `More recently, loan demands in lending volume have improved, and more and more new houses are being completed and coming on the market. To illustrate: From a low monthly volume of $850 million in Janu- ary, lending by savings and loan institutions reached almost $2.3 bil- lion in June. It is interesting and significant, however, that the steady rise in lending was interrupted in July and the preliminary figures for this month indicate a lending volume of only about $1.8 billion. Quite clearly, the recent thrust upward, the long-term rates and short-term rates, is creating a cautious mood among mortgage lenders. We find many institutions reluctant today to expand their loan com- mitments because of apprehension that another bout with severe tight money resulting from the competition of high-rate Government and Government agency obligations may take place in the next 6 to 12 months. Savings institutions which supply the bulk of the funds to the housing market enjoyed favorable savings inflow during the first half of 1967 because short-term interest rates droped almost two full per- centage points from the peaks of last fall and there was also some decline in long-term corporate bond rates. Since the spring of 1967, however, corporate bond, yields have begun to rise rapidly and in the past 2 months have exceeded the record peak yields established last fall. Rarely a business day has gone by in' recent weeks without the appearance of numerous corporate bond issues a.nd yields of 6 percent or more. As for short-term interest rates, they bottomed out in June of this year and since then have `recovered half of the decline recorded be- tween last fall and this June. Thus, the trend in bond long-term and short-term rates is moving upward and with some rapidity. If the Treasury come to the market with demands .to finance the deficit of the proportions indicated .by President Johnson, it will have a staggering impact on the credit markets generally and accelerate the upward trend of `short-term and long-term rates. The year 1966 demonstrated' that the housing industry has plenty of trouble com- peting with corporates for available credit; most certainly it would have even more serious trouble competing with the Treasury for funds. A tax increase of the scope suggested by President Johnson does not mean that there will not be some tightening in money and credits iii the months ahead. What it probably wo~ild do is dampen the threat of' inflation and reduce Treasury `borrowing so that a return to the chaotic tight money conditions of a year ago can `be substantially avoided. We believe that it is `imperative to avoid a new depression in the housing industry and the hazards of major dislocations in the move- ment of capital. We have reached the conclusion that the imposition of an increase in personal and corporate income taxes along the gen- eral lines suggested by the President is the best of the alternatives available for dealing with the situation. PAGENO="0403" PRESIDENT'S 1967 TAX PROPOSALS 391 The CHAIRMAN. Mr. Mitchell, we thank you, sir, for bringing to us the views of the organization you are representing today. Are there any questions of Mr. Mitchell? If not, we thank you, sir. Mr. MITCHELL. Thank you, sir. The CHAIRMAN. That completes the calendar for today and without objection the committee adjourns until 10 o'clock Monday morning. (Whereupon, at 10:51 a.m., the committee adjourned to reconvene, Monday, Aug. 28, 1967.) (Th PAGENO="0404"