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Form W-2 of total annual salaries and income and the tax withheld, and the other forms that are required by the Revenue Bureau.

Other sections of the tax program under consideration also require comment.

CORPORATION INCOME TAXES

ers.

It has been proposed that the tax rate on corporation net income be increased to 55 percent. Such an increase is inflationary in the extreme as is shown in the following illustration:

If the dividend requirement for all corporations is assumed to aggregate $7,000,000,000 for 1 year, then actually the corporations would have to earn $15,550,000,000, from which $8,550,000,000 would be subtracted for the 55 percent tax, leaving a balance of $7,000,000,000 for the dividends to be paid to stockhold

The single tax element, obtained by applying the 55 percent rate to the $7,000,000,000 of income equivalent to the dividends, is $3,850,000,000, which must be supplemented by the amount of $4,700,000,000. Since the combined amount must be obtained through prices, it is apparent that the customers must pay the cost of the $3,850,000,000 tax element as well as the differential of $4,700,000,000. Consequently, it can be stated that customers' prices and the cost of living for 1 year have been inflated to the extent of $4,700,000,000, in addition to which they must furnish the tax cost.

Compared to the 38-percent corporation income-tax rate in effect for 1949, the added burden on customers because of the increase in rate to 55 percent would be $1,190,000,000 for the tax element, but $3,070,000,000 for the differential, the latter being almost $2,000,000,000 greater than the increase in the related tax element, Whereas the total cost of the 38-percent rate would have been $4,290,000,000, almost again as much, $4,260,000,000, must be added to pay the 55percent tax of $8,550,000,000.

In order to overcome that severe inflationary burden on the customers it is recommended that corporations be permitted to deduct the amount of dividends paid to stockholders in arriving at the base of net income that is used in computing income taxes. The taxpayers would be much better off if they themselves would pay whatever increase is being demanded in corporation income taxes.

This method would make the balance of income after taxes and dividends vulnerable to attack by labor, stockholders, customers, and the Government. The effect might be to create voluntary control of prices, and possibly a new scheme for the taxation of excess profits at much higher tax rates.

At the same time the well known complaint about double taxation of dividend income would be eliminated, and all the evils associated with avoidance of double taxation would be dispelled. Avoidance schemes now cost the Government billions of dollars of needed tax revenue. It is time that the trend is reversed so that those evasive tax dollars can once again be channeled into the Treasury.

Specifically, the avoidance schemes include lease-backs from tax-exempt organizations and insurance companies, the generous treatment accorded income from unrelated businesses, and tax-free securities which now escape taxation. In some cases double taxation is turned into double exemption by cleverly changing the methods of operation and financing. With respect to the lease-backs from insurance companies, it appears that the total loss to the Government for 1 year can be placed at $330,000,000, using the 1951 rate of 47 percent.

With respect to the nontaxability of the income from State and municipal securities, a 2 percent tax-free interest rate in the case of a $200,000 taxpayer would be equivalent to a dividend return of 22 percent, based on 1951 income-tax rates. Such an effect is so out of proportion that it is a violation of fair principles of taxation, and if it would not be avoidance of double taxation it could be held to be outright tax avoidance.

The solution calls for proper treatment of corporation dividends so as to eliminate double taxation, and, in all fairness, full taxation without allowances or privileges of all net income derived from the operation of businesses or rental properties, whether received by tax-exempt organizations or by insurance companies.

EXCISE AND SALES TAXES

The proposals to increase certain excise tax rates to 25 percent do not take into consideration the effects and implications of such burdensome taxation, which likewise applies to general sales taxes which have been suggested by certain groups. It can first of all be stated thai sales and excise taxes are undemocratic and have no place in a country which looks upon all citizens as equal. That is so because

unfair imposition of such taxes will prevent lower-income groups from possessing goods or enjoying certain activities, whereas any amount of taxes added to the cost of goods or activities will not prevent their possession or enjoyment by the high-income groups.

Another point to be considered is that these taxes applied at fixed rates ignore the only fair method of taxation, which is based on the ability to pay by means 01' progressive rates as the level of income increases. That means that if a person having net income of $2,500 pays $250 excise taxes for certain goods, the rate of tax is 10 percent, whereas a person with $100,000 net income would pay a rate of only one-fourth of 1 percent for the same goods. In comparison, the proposed income-tax rates are 26 percent for the former individual and 91 percent for the latter individual.

The confiscatory nature of these taxes when combined with income taxes should indicate how impractical they are. In effect a system of double taxation is created by applying an income tax to earnings and an excise tax on goods purchased with those earnings. In the case of a $200,000 taxpayer subject to the highest proposed income-tax rate of 95 percent, the payment of 25 percent excise tax on goods costing $1,000 would mean that the combined tax rate on that $1,000 of earnings would be 120 percent (exclusive of a possible 2 or 3 percent sales tax in certain States). In other words, that taxpayer would have had to earn $1,000 to pay for the taxable article he purchased and in addition $1,200 to pay the taxes. That paradox ultimately results in inflated costs and prices. A special provision of the tax law fixes a limit of 90 percent to the tax liability covering all taxable income, but that tax limitation is ignored by the superimposition of the excise taxes.

Vigorous protest must be made to the objectionable proposal to increase excise taxes on musical instruments and sporting goods from 10 to 25 percent. It seems decidedly un-American to demand such distasteful, unwholesome, and hardship levies upon the youth of this country who will be the principal victims of this taxation without representation. Perhaps the theory is that boys and girls should have guns instead of baseballs and violins. And on the other hand, a wealthy person could purchase a $2,500 mink coat or a $5,000 diamond necklace and be subjected only to excise tax of 20 percent. Such treatment must be considered hly discriminatory.

GENERAL

The threat of extreme taxation combined with extreme living costs demands serious thought and consideration. Sanity and calmness should prevail in working out a solution to the problem of how to pay for the enormous expenditures that have been thrust upon the country; but there never should be a time when we must engage in panic programs. It is of the utmost importance to the preservation of the American way of life to set up a tax system which is sound and equitable and which will not cause a breakdown of our financial and economic structure.

Therefore, it is recommended as follows:

1. The Congress must accept the duty of carefully reviewing all appropriations in order that all extravagance and nonessentials can be eliminated without equivocation.

2. It is not essential that the budget be balanced by means of a pay-as-you-go theory. There is no obligation to bestow on future generations a paradise on earth. The present period of stress may yet evolve into everlasting joy in the future. Those who follow may appreciate liberty and freedom so much more if they are compelled to pay for a portion of the cost.

3. To keep our equilibrium and maintain our system of free enterprise it should be the task of the Joint Economic Committee and the Joint Committee of Internal Revenue Taxation to place a ceiling on taxes at the various levels of income and a floor under the income a person may retain.

The CHAIRMAN. The next witness is Mr. Paul O. Peters, research consultant, Washington, D. C.

Will you give your name and address to the reporter and the capacity in which you appear?

STATEMENT OF PAUL 0. PETERS, RESEARCH CONSULTANT,

ARLINGTON, VA.

Mr. PETERS. I am Paul O. Peters. I live in Arlington County, Va., and I have my office at 606 National Union Building, Washington, D. C.

The CHAIRMAN. How much time will you need, Mr. Peters?
Mr. PETERS. About 10 minutes.
The CHAIRMAN. Do you think you can keep within the 10 minutes?
Mr. PETERS. I will try to, sir.

I want to compliment you gentlemen for your patience in staying here long past your lunch hour.

The CHAIRMAN. You may proceed.

Mr. PETERS. I am sure you have copies of my statement. I will try to summarize my statement.

I have stated that I do not appear here representing anyone and I have presented this statement to show you gentlemen that we have been perhaps negligent in the past in not levying enough taxes to have a balanced budget in the years when we could have had a balanced budget.

For example, in this table it shows that in the year 1939 we took 7.13 percent of the national income for taxes. Had we taken 5.47 percent additional national income, a total of 12.6 percent, we could have eliminated the deficit in 1939.

Incidentally, in that year 1939 the dollar had a purchasing power of 100.2.

If we had taken those taxes at that time, it would have removed a lot of dollars from competition in the market and the dollar might have had even a better purchasing power.

Now in all of these years which I have shown except the war years of 1942, 1943, 1944, and 1945, it would not have worked too great a hardship on the American people to have paid their way on a pay-as

Getting down to 1949, a year in which the national income was reported at $216,800,000,000, a mere increase of 0.84 percent in Federal revenues, computed on the basis of national income, would have given us a balanced budget.

Now I think that a balanced budget is important because every deficit dollar is doubly inflationary because it carries the burden of an interest factor.

I appreciate that the person who recommends new and additional taxes to save our Republic from inflation and disaster will be about as popular as a cockroach in a lunch basket. I feel that it will be no imposition on your time to suggest that taxes for the fiscal year 1952 be geared to production and the national income.

If I may advert for a moment to the economic indicators for January 1951, put out by the President's Council of Economic Advisers, we find that in 1951 the estimated national income will be approximately $280,000,000,000. In 1949 personal consumption expenditures amounted to an average of 178.8 billion dollars. At the present time

you-go basis.

for the last quarter of 1950 personal consumption expenditures are running at the rate of $197,000,000,000. If you are considering additional ways of raising revenue in the form of a national sales tax, a 2-percent tax on personal consumption expenditures will raise $3,940,000,000 in much needed revenue.

Now the Secretary of the Interior just a few days ago issued his annual report, and he pointed out that many of our natural resources were rapidly being depleted, minerals and things of that kind that are irreplaceable. You gentlemen know that by wise conservation methods we can renew our forest resources and save our soil resources, but once these ores are taken from the ground they are irreplaceable. So I suggest to the committee that you review these so-called depletion allowances. Let these corporations and their individuals who are exploiting our natural resources now pay a fair share. That is no more than justice to all the American people.

Then I suggest that you look into the question of public power and see that this power generated in these public power plants have the same kind of taxes that the power generated by privately financed public utilities pays on electrical energy.

There is one more point. In walking down one of the streets in Washington a couple of weeks ago I noticed some very fancy bottles of liquor in a liquor-store window. I went in to find out what this liquor was costing because the bottles in which it was offered for sale were of the very finest cut and etched Bohemian glass, each of which would be a collector's item. I was wondering whether or not they were selling the bottle or selling the liquor. I came to the conclusion after the man told me they were $16.50 a fifth, that Czechoslovakia was selling glassware in this country instead of selling liquor.

I think your committee ought to investigate how much tax evasion comes by that method.

Now we come to the question of tax-exempt organizations. I believe in this critical time that there should be no tax exemptions for any organization engaged in business or commercial activities as a side line or as a source of revenue.

I think that you gentlemen have a terrific burden on your hands and I think you should raise enough money to balance the budget so that this burden will not be heaped on future generations. I do not agree with the last witness. I say that we do have an obligation here in America to preserve a paradise on earth if we can for future generations instead of making them a nation of tax lawyers.

Thank you, Mr. Chairman.
The CHAIRMAN. Does that complete your statement?

Mr. PETERS. Yes. If anybody would like to question me, I shall be perfectly glad to answer.

The CHAIRMAN. If there are no questions, we thank you for your appearance and the information given the committee.

Mr. PETERS. Thank you, Mr. Chairman. (The formal statement follows:)

a

STATEMENT OF Paul O. PETERS, WASHINGTON, D. C. Mr. Chairman and members of the Ways and Means Committee, in appearing as a witness before this august body, I do not pose as an expert, nor do I represent the views of any organization. The testimony and exhibits included in this statement may be classified as personal.

In view of the fact that the Federal Treasury has operated on a deficit basis for 17 out of the last 19 fiscal years, it is apparent that an increase in Federal taxes -during some of the years prior to World War II would have contributed greatly toward a balanced budget in those years, and a substantial reduction in the present public debt with its heavy interest charges.

To illustrate the point I have mentioned there follows a table showing the reported national income, the Treasury surplus or deficit, and the added percentage of the national income which the Federal Government would have needed to balance the budget in each of the years from 1931, with estimates for the fiscal years 1951 and 1952.

Year

National income

Net budget

receipts

Surplus (+) or

deficit (-)

Percent of

income needed to balance

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$39, 963,000,000 $1,923, 913, 117
46, 273,000,000 2,021, 212, 943
49, 455,000,000 3,064, 267, 912
55, 719,000,000 3,729, 913, 845
64, 924,000,000 4,068, 936, 689
71, 513,000,000 4,978, 600, 695
64, 200,000,000 5, 802, 185, 636
70, 601,000,000 5, 103, 396, 943
77, 574, 000, 000 5, 264, 663, 044
92, 269,000,000 7, 227, 281,383
122, 232,000,000 12, 696, 286, 084
149, 392,000,000 22, 201, 501, 787
149, 660,000,000 43, 891,672, 699
152, 705,000,000 44,761, 609, 047
178, 200,000,000 | 40,026, 888, 064
198, 700,000,000 40, 042, 606, 290
223, 500,000,000 42, 210, 770, 493
216, 800,000,000 38, 245, 667, 810
236, 200,000,000 40, 166, 835, 915
280,000,000,000 47, 210, 000, OCO
280,000,000,000 70,000,000,000

-$2, 735, 289, 708
-2, 601, 652, 085
-3,629, 631, 943
--2, 791, 052, 100
-4, 424, 549, 230
-2, 777, 420, 714

- 1,176, 616, 598
-3, 862, 158, 040
-3,918,019, 161
-6, 159, 272, 358
-21, 490, 242, 732
- 57, 420, 430, 365
-51, 423, 392, 541
-53, 940, 916, 126
-20, 676, 170, 609

+753, 787, 660 +8, 419, 469, 844 -1,811, 440, 048 -3, 122, 102, 357 -2, 698,000,000

6.84 4.37 7.34 5.00 6. 81 3. 88 1.83 5. 47 5. 05 6. 67 17. 58 38. 43 34. 36 35.09 11. 60

.84 1. 28 1.00

From the foregoing it is estimated that a balanced budget for the fiscal year 1952 will require Federal taxes in approximately 25 percent of the national income estimated to be $280 billion.

A balanced budget is important because our studies reveal that every deficit dollar is doubly inflationary, because it carries an implied interest factor which some day will have to be met by additional taxes.

It is appreciated that a person who recommends new and additional taxes to save our Republic from inflation and disaster will be about as popular as a cockroach in a lunch basket. Since I have been advised that the committee does not care for recommendations respecting technical and administrative changes in the revenue laws, I feel that it will be no imposition on your time to suggest that taxes for 1952 be geared to production and the national income.

In fairness to all, the burden should be as equitably distributed as possible, and this I believe the Ways and Means Committee will seek to do.

Just a few days ago, the Secretary of the Interior issued his annual report for the fiscal year 1950. In it he pointed out that many of our national resources were rapidly being depleted. Our renewable resources of course can be saved by wise conservation measures. It follows, as night follows the day, that those who are responsible for the depletion of our natural resources, placed in the ground by the Creator, ought now to commence paying, and paying heavily for the despoliation they are causing. Likewise those who use the resources of our public land and national forests ought to be taxed upon the basis of production, and I would extend new taxes to those who graze cattle upon the public lands.

I noticed yesterday that the production of electric energy has reached a level of nearly 7,100,000,000 kilowatt-hours for the week ended February 3, 1951. The Wall Street Journal in an editorial on Thursday, February 15, entitled "Illusions About Cheapness” pointed out that the TVA and the Electric Power Board of Chattanooga, Tenn., combined pay about 11.2 percent of their revenues as taxes as compared with a little more than 20 percent paid by privately financed public utilities in the same field. The question of taxing the federaliy owned or federally financed power companies should be thoroughly explored as an additional source of Federal revenue.

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