EXCESS PROFITS TAX EXTENSION

MONDAY, JUNE 1, 1953

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D. C.

The committee met, pursuant to call, at 10 a. m., in the main hearing room, Hon. Daniel A. Reed, chairman, presiding.

The CHAIRMAN. The committee will begin public hearings on the President's recommendation to extend for 6 months the excess-profits tax. We have the pleasure this morning to hear, first, from Hon. George M. Humphrey, the Secretary of the Treasury, who will be followed by Hon. Rowland R. Hughes, the Assistant Director of the Bureau of the Budget.

It is a pleasure to welcome you here, Mr. Secretary. Will you give your name for the benefit of the record, and the capacity in which appear? We will be delighted to hear you.

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STATEMENT OF HON. GEORGE M. HUMPHREY, THE SECRETARY OF THE TREASURY

Secretary HUMPHREY. My name is George M. Humphrey. I am Secretary of the Treasury.

Mr. Chairman, it is a great pleasure for me to be here to talk to your committee and to give your committee the benefit of our views about this problem. You have been very kind to us indeed in the past, in our many meetings that we have had, and it is a pleasure to be with you here today.

The CHAIRMAN. Thank you.

Secretary HUMPHREY. I appreciate this opportunity to appear before you. I have this statement, a written statement, that I will read if you do not mind. I think that will be the best way to start it. Then I will be glad to try to answer any questions that you might

have.

The CHAIRMAN. You may proceed in your own way, Mr. Secretary. Secretary HUMPHREY. The immediate problem is the extension of the excess-profits tax for 6 months through December 31. I am here to urge this extension in spite of the fact that I dislike the excessprofits tax and think it is a bad tax.

The basic problem is that of national security-which means military security and economic security. The country must be kept safe from aggression from abroad. And further inflation must be stopped and the dollar must be kept sound to provide a solid base for a healthy economy. Military security and economic security are the chief re

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sponsibilities of the Nation. They must take precedence over everything else.

A few financial facts will show just what we are up against.

Last January the budget filed for the fiscal year 1954 showed total estimated receipts of $68.7 billion and expenditures of $78.6 billion, with a prospective deficit of $9.9 billion. On the basis of our present information, it appears that revenue receipts will be $1.2 billion less than had originally been estimated for that year. This would make the deficit $11.1 billion.

In his message of May 20 to the Congress, President Eisenhower showed a reduction of $4.5 billion in the proposed expenditures; this would bring the projected deficit down to $6.6 billion. I personally am disappointed that we have not been able to make greater reductions in expenditures.

I had hoped until a few weeks ago that it would be possible to cutback Government spending fast enough to justify a reduction in individual-income taxes and the end of the excess-profits tax on July 1. Unfortunately, that is not possible.

I am confident that further cuts can be made as the year progresses. But I am also satisfied that the reductions now proposed are all that can be made safely at this time.

We live, as the President has said, in an age of peril. The danger of an atomic Pearl Harbor is real. Reductions in defense spending must be made only after full account is taken of all the security factors involved. We can, in time, secure more defense for less money. Action to date gives me confidence that this result can be accomplished.

In business, a management can drastically cut back on some activity and later rebuild it if the original cut turns out to be too large. On matters affecting national security, we cannot take this risk. The chance for second guessing may never come. Much though we dislike the level of Government spending and taxation, we are not willing to gamble with the Nation's defense by too rapid cuts in defense outlays which might leave us open to attack.

There is a second gamble we cannot take. With a deficit of $6.6 billion, it is not safe to gamble with the country's economic security by making immediate cuts in taxes. This would simply increase the deficit, again build up inflationary pressures and further postpone the time when a sound economy, sound money, and a balanced budget can be attained.

The projected deficit of $6.6 billion for fiscal year 1954 is after taking into account four major tax reductions which are scheduled to occur under present law during the year. The sequence of these reductions was fixed by legislation adopted some time ago, without reference to the military or economic situations which might exist when the tax cuts were to become effective. A sensible financial plan cannot possibly be made now out of such a schedule in view of present conditions. At the start of the next fiscal year, that is, on next July 1, the excess-profits tax expires. This will involve a loss of revenue of $2 billion in a full year and $800 million in fiscal 1954.

The individual income tax rates are planned to go down at the beginning of next January by amounts ranging from about 10 percent in the lower and middle brackets to between 1 percent and 2 percent

in the highest brackets. This will involve a loss of $3 billion on a fullyear basis and $1.1 billion in fiscal 1954.

On April 1, 1954, the normal corporation tax is to be reduced from 30 percent to 25 percent, with the surtax remaining at 22 percent. This will reduce the total regular rate on the bulk of corporate income from 52 percent to 47 percent. It will mean a loss of $2 billion in a full year, with only a small loss in fiscal 1954.

At the same time, April 1, 1954, various excise taxes are also scheduled to be reduced, for a loss of $1 billion on an annual basis and $200 million in fiscal 1954.

These reductions all add up to $8 billion for a full year and $2.1 billion for fiscal 1954.

Two things are wrong with this schedule of tax reductions. First, with a deficit of $6.6 billion, no immediate tax reduction can be safely made. And second, there are many inequities and hardships which occur from various provisions of the several tax laws. These affect many corporations and a great many individuals. In the present situation, it does not seem fair to let the first reduction benefit only a relatively small group of corporations at least 6 months ahead of any relief for any other taxpayers.

Individual income taxes need to be reduced. There are many defects in the excise taxes and many inequities affecting both corporations and individuals under many provisions of the tax laws which need to be corrected. Much though I dislike the excess-profits tax, it should not be singled out as the only one for special treatment now.

On the basis of all of these facts, and taking into account the need for maintaining military security and economic security, the President has made the following recommendations to the Congress concerning immediate tax legislation. In his message to the Congress of May 20, the President said:

(1) The excess profits tax should be extended as now drawn for 6 months beyond its present expiration date of June 30. This action seems necessary in spite of the fact that this is an undesirable way of taxing corporate profits. Though the name suggests that only excessive profits are taxed, the tax actually penalizes thrift and efficiency and hampers business expansion. Its impact is especially hard on successful small businesses which must depend on retained earnings for growth. These disadvantages of the tax are now widely recognized. I would not advocate its extension for more than a matter of months. However, under existing circumstances the extension of the present law is preferable to the increased deficit caused by its immediate expiration or to any shortterm substitute tax.

The scheduled expiration of the tax in June would be misleading in its consequences. It would simply mean that the tax would be applied at half the full rate, 15 percent, to all of this year's business income. Therefore its bad effects in penalizing efficiency and encouraging waste will continue through this year in any event. The extension of the tax through December 1953 would maintain the full 30 percent rate for the entire year and would produce a gain in revenue of $800 million in the fiscal year 1954.

(2) The reduction in the regular corporate tax rate from 52 percent to 47 percent, now scheduled to go into effect on April 1, 1954, should be rescinded. A continuation of these extra five percentage points on the corporate tax will bring in about $2 billion a year, about the same amount as will be lost annually by the expiration of the excess profits tax at the end of this calendar year.

Though a 52 percent corporate tax rate is too high for the long run, the budget will not now permit a reduction in both individual and regular corporate tax rates. A reduction in individual taxes must come first, for the benefit of the entire economy.

(3) The increase in the old-age insurance tax from 1 to 2 percent on both employees and employers, now scheduled to go into effect next January 1, should be postponed until January 1, 1955.

The old-age and survivors trust fund has now reached almost $18 billion. Receipts at present tax rates are currently well in excess of expenditures. The further addition to the fund which would flow from the projected tax increase is not required. * * *

(4) The wide variety of existing excise rates makes little economic sense and leads to improper discrimination between industries and among consumers. Specific proposals for a modified system of excise taxation will be included in the recommendations for tax revisions that will be submitted to the Congress next January.

The reductions in excise taxes, which would take place next April 1 under present law, should be rescinded pending the development of a better system of excise taxation.

(5) I believe that a reduction in personal income taxes can and should be made effective next January 1. This reduction will amount to about 10 percent on the lower and middle incomes, graduating down to between 1 and 2 percent on the highest brackets. While this reduction is in accordance with existing law, it would have been impossible to accomplish on the basis of the previous administration's budget without additional deficit financing with its resultant inflationary pressures. A reduction will be justified next January only because of reductions in proposed expenditures which the present administration has already been able to make and because of additional economies we expect to achieve in the future.

In the same message, the President referred to the need to revise the whole tax structure

to remove existing inequities *** simplify the needless complications which have developed over the years in tax laws, and generally secure a better balance of tax revenues *** At the same time, we must develop a system of taxation which, to the greatest extent possible, will not discourage work, savings and investment, but will permit and encourage initiative and the sound growth of our free economy.

As you have said on various occasions, Mr. Chairman, the present system has developed in a patchwork manner over many years. It needs a thorough overhauling. We are pleased to know that you have directed your staff and the staff of the joint committee to work on this revision.

We in the Treasury are also hard at work on the same subject. We appreciate the opportunity for cooperation in various ways. We already have set up ten joint committees with representatives of your staffs and the Treasury.

With this statement on the general background, I turn to the President's recommendation for the extension of the excess profits tax, without amendment or modification, for 6 months through December 31, 1953. It should be clear from the President's statement that we disapprove in principle of so-called excess profits taxation. I shall not elaborate on the disadvantages and bad effects of this form of tax. They are familiar to all of us. It will be a relief when the tax is off the books. I want to emphasize that the recommendation is for a 6-months' extension. We would object to any extension beyond that time.

In considering the excess profits tax, it is important to see what corporations pay it. Complete data on returns filed in 1951, for 1950 income, show that 50,200 corporations paid an excess profits tax. This was less than 12 percent of the 424,000 corporations with taxable income in that year. Preliminary figures for returns on 1951 income, filed in 1952, show that the percentage was even smaller in that year.

Furthermore, most of the tax was paid by large companies. The 1950 returns showed a total excess profits tax of $1,385 million. Of this total, $1,234 million were from corporations with net incomes of more than $250,000. This means that only $151 million or 11 percent of the total tax came from companies with incomes below $250,000 each. The incomplete figures for 1951 income show that this same relationship between large and small companies continued in that year. The full details on the 1950 returns are being filed with the committee today.

The significant point to me from these figures is that though the tax is a very serious barrier to growth for rapidly expanding small companies, it does not affect the vast majority of companies. It falls most heavily on profitable large companies.

I want to be sure that my position on this point is clear. The present distribution of the corporate tax burden is bad because of the tax barriers to growth and the tax penalties on efficiency. But for the rest of this calendar year, most of the bad effects are present anyway.

As the President has noted, the expiration of the tax on June 30 would be misleading in many respects. Regardless of the date of expiration, the tax is computed on a full-year basis. Even though it expires on July 1, its provisions are applicable to the rest of the year. The expiration of the tax in the middle of the year simply means that the rate is lower on the income for the entire year. Thus, if a company lost money-here is an example-through June, and made large profits in the last part of the year, it would still be subject through December to all of the peculiar, damaging effects of excess profits taxation on business judgments, even though the tax had supposedly expired some months previously.

Since the vast majority of companies are on a calendar-year basis, the end of the calendar year is the logical time for the tax to expire. I would feel entirely differently about extending the tax even for 1 month into another year.

A while ago I mentioned the fact that we had had to reduce the earlier estimates of tax receipts. For this year, with only a month left, we know that receipts will be at least $1.5 billion below the estimate made last January. For next year the reduction is $1.2 billion. Our figure for next year's receipts differs by only $100 million from that made independently by the staff of your joint committee.

The reductions in estimates do not mean that tax collections are falling off. It just means that the original estimates were too high. Collections this year will be several billion dollars more than in any previous year in the history of the country. Next year, even with the tax reductions proposed in the President's program, receipts will be higher than this year.

The extension of the excess-profits tax for 6 months, without modification or amendment, is a necessary first step toward economic security. It will give us time to get control of the budget. It will help in maintaining a sound dollar. It will make it possible for tax reductions and revisions affecting everyone to take place at the same time next year. It will lessen a gamble with national economic security. We are convinced that this is a sound program. The overwhelming editorial support from all sections of the country is very gratifying.