REVENUE REVISION, 1927-28 HOUSE OF REPRESENTATIVES, Monday, October 31, 1927. The committee met at 2 o'clock p. m., Hon. William R., Green (chairman) presiding. The CHAIRMAN. The committee will come to order. I might say at the opening of the session that a resolution passed both the House and the Senate authorizing this committee to meet in advance of the convening of Congress to consider a revenue bill. Unfortunately in the Senate a motion was made by one of the Senators to reconsider the vote by which the resolution was passed, and he was unable afterwards to get an opportunity to withdraw that motion, which I understand he desired to do. But the intent of Congress was very clearly manifested, that the committee should meet, and in pursuance of that intent I have called the committee together, and, without objection on the part of any members of the committee, we are sitting here informally, in one sense, to do that work, and will consider the same subject and do the same work that we would have done if we had been formally authorized to act by Congress. Mr. GARNER. Mr. Chairman, I think it would be well to call the roll of the committee to show what members are present, and after that I desire to make a statement for the record in explanation with reference to some gentlemen who are not here. The CHAIRMAN. The clerk will call the roll. (The clerk called the roll, and the following members answered "present" :) Messrs. Hawley, Treadway, Bacharach, Hadley, Timberlake, Watson, McLaughlin, Kearns, Chindblom, Crowther, Faust, Aldrich, Garner, Collier, Oldfield, Martin, Hull, Dickinson, Doughton, and Green (chairman). The CHAIRMAN. A quorum is present. Mr. GARNER. I want to say for the benefit of the record that Mr. Carew is not here on account of a death in his family, his father having died on Saturday, I think. Mr. Rainey wrote me a little note last night before he left on the train, saying that his brother-in-law had just died, and that he was going to Illinois and will be back the latter part of the week. Mr. Crisp is temporarily absent, but he will be with the committee to-morrow. The CHAIRMAN. The first witness this afternoon is the Secretary of the Treasury, by whose presence we are honored to-day. Mr. Secretary, if you are ready to proceed, we will be glad to hear you at this time. 73038-27 -2 1 GENERAL STATEMENTS STATEMENT OF HON. ANDREW W, MELLON, SECRETARY OF THE TREASURY, ACCOMPANIED BY HON. OGDEN L. MILLS, THE UNDERSECRETARY OF THE TREASURY. Secretary MELLON. Mr. Chairman and gentlemen of the committee, the statement which I have to present to you is rather lengthy, but it may seem desirable to go into some of the subjects with considerable detail. The statement has been prepared in the Treasury with a great deal of care. I think, inasmuch as my voice is not very strong, and since you are more familiar with the voice of Mr. Mills, I will ask him to read the statement. (Mr. Mills read the statement referred to, as follows:) As an essential preliminary to any program of tax reduction it is necessary to estimate revenue and expenditures not only for the present but also for the next fiscal year. It is further desirable to ascertain, if possible, by eliminating temporary and unusual items, what the normal revenues of the Government are under existing tax laws, given average business conditions. Financial policy to be sound must not be based upon the experience of a single year. We must not be unduly impressed by the revenue results of a year of unusual prosperity or a year of large receipts from temporary sources. In cooperation with the Budget Bureau, the Treasury Department has prepared its estimates, but before presenting them it seems desirable to say a word or two about past estimates, and in order to avoid similar errors in the future to point out the reasons for such miscalculations as have occurred in the more immediate past. The last estimates for the fiscal year 1926 were made just prior to the passage of the revenue act of 1926. By that we mean the last estimate prepared prior to the closing of the fiscal year 1926. As published in the Congressional Record, they showed total internalrevenue collections of $2,612,500,000, whereas actual collections aggregated $2,835,999,892, or, in other words, internal-revenue collections were underestimated by $223,499,892. The return from corporation taxes was overestimated by $55,000,000 and that from miscellaneous internal revenue underestimated by approximately $20,000,000. But the two principal items which contributed to this large underestimate of revenue were individual income taxes, the yield of which was estimated at $603,800,000, whereas collections aggregated $745,392,481, and back-tax collections, which were estimated at $180,000,000, but which reached the figure of $295,982,056. The revenue act of 1926 eliminated about 2,000,000 individual taxpayers; it increased by 50 per cent and 40 per cent, respectively, the exemptions for single and for married persons; it cut the normal tax rates drastically and reduced maximum surtax rates from 40 per cent to 20 per cent; it doubled the limit of income to which this earned-income provision applied. It was very naturally anticipated that these changes would result in a considerable loss of revenue. In its report the Ways and Means Committee estimated a reduction of $46,000,000 in normal tax, over $98,000,000 in returns from the surtax, and a further loss in revenue of $42,000,000 due to increased exemptions. As a matter of fact, however, the individual returns filed for the calendar year 1925 showed a larger tax return than did those for 1924, the total (net income) tax returned increasing from $704,000,000 to $734,000,000. The Treasury Department had always contended that lower rates would be more productive than the very high rates which prevailed, but neither the Treasury Department nor the Congress had anticipated such an immediate increase, an increase which was, of course, greatly accelerated by the rising tide of prosperity. Had the reductions contained in the 1926 act been applied to the 1924 returns, the tax would have been over 30 per cent less than that actually returned for 1924. Back tax collections exceeded the estimates by approximately $116,000,000. The CHAIRMAN. I think these last two sentences in your statement are very important and should receive careful consideration by the committee: Had the reductions contained in the 1926 act been applied to the 1924 returns, the tax would have been over 30 per cent less than that actually returned for 1924. Back tax collections exceeded the estimates by approximately $116,000,000. There is also the further fact that at the time that taxes on individual incomes were reduced, it was after the incomes had been earned upon which the taxes were assessed. In other words, at the time the incomes were earned they did not know whether the tax was going to be reduced or not. Mr. MILLS. On the other hand, the increase in revenue was due, largely, to income from the sales of capital assets, and it is a very real question, it seems to me, whether, in view of the vast increase in the number of those transactions, the decrease in your rates had not already been anticipated in 1925. I think that is something the committee should bear in mind. The CHAIRMAN. I am glad you spoke of that, because I think that is a very important matter. There was a very large increase which resulted from the sale of capital assets. Mr. COLLIER. May I ask a question? The CHAIRMAN. Yes. Mr. COLLIER. I would like to know, if you can answer me offhand, for the purpose of this comparison, the difference between the back tax collections of 1926 and 1924 as applied to 1925. Mr. MILLS. I think there was an increase. There has been a steady increase in back tax collections, which culminated in 1927, when we collected $331,000,000. Mr. COLLIER. Then a good deal of this 30 per cent is due to the increase of back tax collections before that? Mr. CHINDBLOM. I would like to ask that the statement of the Secretary be printed in full, without these interruptions, and that the questions and answers be printed subsequent to the statement itself that is, that the statement itself be printed just as we have it before us at some point in the record. Mr. COLLIER. I would like to know what this percentage would have been had the back tax collections been eliminated in both estimates. Mr. MILLS. The 30 per cent, Mr. Collier, I may say, did not include back tax collections. I asked Mr. McCoy to apply the 1926 rates to the 1924 income, current income as reported for the calendar year 1924, and he told me that had the 1926 rates been applied to 1924 incomes we would have collected 30 per cent less, exclusive of back taxes. Mr. COLLIER. That is what I want to find out, because that is something we can not determine with definiteness. Mr. MILLS. The back tax item does not figure in the 30 per cent. The CHAIRMAN. I think the suggestion of Mr. Chindblom is a good one. The chairman set a bad example. Mr. COLLIER. I think these questions are helpful. Mr. CHINDBLOM. I think so, too, but I think the discussion might well occur after the statement has been read. (Mr. Mills continued the reading, as follows:) In October, 1926, after the new act had been in force for about nine months, the Secretary of the Treasury submitted estimates for the fiscal year 1927. In those estimates the return from the corporation income tax was estimated at $1,120,000,000. Actual collections aggregated about $1,125,000,000, or underestimate of $5,000,000. Individual income-tax returns were estimated at $820,000,000, whereas actual collections aggregated approximately $763,000,000, or an overestimate of $57,000,000. Back taxes were estimated at $250,000,000; $331,000,000 were actually collected or an underestimate of $81,000,000. Miscellaneous internal revenue was estimated at $619,000,000, whereas actual collections aggregated $646,000,000. The total internal-revenue taxes were estimated at $2,809,000,000, and actually $56,000,000 more than the estimate were collected. But had there not been such a large increase in back-tax collections, the estimate would actually have been some $25,000,000 too high. I think those figures are very significant, Mr. Chairman, in view of the prevailing public notion that, in so far as the current revenues are concerned, the Treasury estimates have been consistently on the low side. Turning now to the question of surplus, we find that the surplus for 1927 exceeded the estimate by $252,000,000. This is accounted for by an increase of $102,000,000 in total receipts and a decrease of $150,000,000 in expenditures. The committee understands that in so far as expenditures are concerned, the figures are furnished by the Bureau of the Budget and they are not subject to review by the Treasury Department. On the receipts side the increase is accounted for by two itemsan increase of $81,000,000 in back-tax collections and an increase of $57,000,000 in receipts from the railroads on account of the realization of capital assets. The increase in these two items more than offsets an overestimate of current revenue. If the items going to make up the surplus be analyzed, it will be found that 65 per cent of the surplus of $635,000,000 is due to receipts on account of the disposal of capital assets, back income-tax collections in excess of internal-revenue refunds, and other items of a fast disappearing or nonrecurring character. Without these special and nonrecurring items, which aggregated $414,000,000, the surplus would have been $221,000,000. This is likewise true of the fiscal year 1926. The surplus that year was $377,000,000, but exclusive of net back tax collections and receipts from capital assets of a nonrecurring character, the surplus only amounted to $162,000,000. In 1926 back tax collections, less revenue refunds, amounted to $113,000,000 and in 1927 to $214,000,000; receipts from railroad securities amounted in 1926 to $36,000,000 and in 1927 to $89,000,000; receipts from Federal farm-loan bonds and other minor securities amounted to $34,000,000 in 1926 and $63,000,000 in 1927; receipts from the War Finance Corporation assets amounted to $19,000,000 in 1926 and $27,000,000 in 1927; receipts from the capital-stock tax, which was repealed in 1926, amounted in the year 1927 to $8,000,000; receipts from the sale of surplus war supplies amounted to $13,000,000 in 1926 and to $8,000,000 in 1927; while the surplus was further increased to the extent of $5,000,000 received from a judgment of the court relating to the naval oil lease. All told, the receipts from these items of a nonrecurring character amounted in 1926 to $215,000,000 and in 1927 to $414,000,000. One of the principal items that has caused errors in past estimates is that of back taxes. In the fiscal year 1927 back tax collections on incomes alone were underestimated by $81,000,000, whereas internalrevenue refunds were overestimated by $35,000,000-which was largely due, of course, to legislation enacted at the last session of Congress these two items accounting for an error in the estimates aggregating $116,000,000. The Treasury Department has made every effort to ascertain prospective back tax collections and probable refunds, but there seems to be no test which will determine accurately future yield. Accordingly, it seems wiser to segregate back tax collections and internal-revenue refunds and present them in a separate part of the estimate as items more or less speculative in character. After the close of the fiscal year 1929, with the closing of all of the cases arising under the excess-profits and other war taxes, it is reasonably certain that there will be a falling off in back tax collections. In presenting the estimates of probable total revenue, the revenue from temporary sources that must disappear in the course of the next year or two is likewise presented separately. In this connection it should be noted-and I want the committee to note this particularly that whereas $169,000,000 will be received on account of principal and interest of loans made under sections 207 and 210 of the transportation act in 1928, the revenue from this source will drop to approximately $24,000,000, or a falling off of $145,000,000, in the fiscal year 1929, and after that little or no revenue is anticipated under this head, as only $49,000,000 principal amount of railroad obligations will be left out of the $230,000,000 held on June 30, 1927. This item and a difference of $87,000,000 in estimated net back-tax collections more than account for the difference of $181,000,000 between the estimated surplus for 1928 and that for 1929. I am submitting herewith two tables. The first shows for the fiscal years 1928 and 1929 estimated current or normal receipts, extraor dinary or temporary items, total receipts exclusive of temporary items, expenditures as estimated by the Budget Bureau, estimated surplus exclusive of extraordinary revenue items, and estimated actual surplus. The second table shows the principal receipt items of a temporary character for the fiscal years 1926, 1927, 1928, and 1929. |