who can be trained and educated in the issues that exist, men who will have enough imagination to ask questions, and send cases back to the field to have questions answered questions on issues that do not appear in the revenue agent's report at all. I guarantee that you will increase your deficiencies very substantially, and I guarantee that you will decrease many of your present refunds.

I have confined my remarks to the issue of extension of the excessprofits tax. I realize that your committee is looking toward a comprehensive review of the tax system next year. I trust, however, that certain necessary income-tax amendments-those which should not be delayed until next year-can be added to the Internal Revenue Code in any event.

Now, Mr. Chairman, I think that is about all I have to say, except one thing that might help. Back in December I gave an address in which I made an analysis of the fiscal situation confronting this country, and I might stick that in the record for whatever use you want to make of it.

(The data referred to by Mr. Alvord follows:)

FACING A FEW FISCAL FACTS

Summary of an address by Ellsworth C. Alvord for delivery before the California State Chamber of Commerce on December 4, 1952

The new administration will inherit from the Truman regime the following fiscal facts:

(1) EXPENDITURES FOR 1953

As of the beginning of this year, outstanding appropriations aggregated $152.9 billion. As of September 30, $136.1 billion were still unexpended. No one knows how much has been obligated. The Defense Department alone had unexpended appropriations of $96.8 billion, most of which has been or is being obligated, and doubtless is asking for more than $45 billion for 1954; $142 billion was available on September 30 for foreign military and economic aid. The military will spend at least $25 billion during the first 6 months of 1953.

Mr. Truman promised to spend $79 billion this fiscal year, but he never has appreciated the inefficiency of his assistants. Furthermore, he quite overlooked the fact that he might not be in office during the last 5 months of fiscal 1953. It is my present guess that aggregate expenditures for fiscal 1953 will not exceed $75 billion.

(2) RECEIPTS FOR 1953

Your Treasury will take in about $69 billion this fiscal year (plus so-called trust-fund receipts of about $9 billion). And what a mess your tax system is in. Mr. Truman has exhausted every available means of revenue, has succeeded in socializing all incomes, has denied to you the opportunity to save for the future, and has taxed you during his tenure as President more than the aggregate of all taxes paid to the Federal Government since 1789.

(3) DEFICIT FOR 1953

There will undoubtedly be a budget deficit for fiscal 1953-but not in the amount of $10.3 billion as estimated by Mr. Truman. Again, he forgot to realize that his tenure might be temporary. It is my present guess that the budget deficit will not exceed $6 billion, and that there will be no actual cash deficit.

(4) PUBLIC DEBT DURING 1953

On November 24 the public debt stood at $267.3 billion-only $7.7 billion below the $275 billion statutory limitation. At the end of July, $86 billion of the debt was held by the banks-$23 billion by the Federal Reserve System and $63 billion by the commercial banks. $17 billion is in 90-day bills. In addition, $26 billion of other debt matures within the next 7 months. And savings bonds are being cashed faster than they are being bought.

(5) NATIONAL INCOMES AND INDUSTRIAL ACTIVITY

On the encouraging side, national income is presently at the rate of $288.2 billion. Gross national product is at the unheard-of figure of $344 billion. It is my guess that both will continue to increase during 1953.

(6) EXPIRING TAXES

The presently scheduled expiration of existing taxes will reduce revenues by about $8.5 billion. These decreases include expiration of the excess-profits tax on June 30, 1953; reduction of the individual income tax on December 31, 1953; reduction of the corporate normal tax and various excise taxes on March 31, 1954; and the decrease in capital gains rates for individuals on October 31, 1953, and for corporations on March 31, 1954. Of course, the full effect of these reductions will not be felt until fiscal 1955. For the fiscal year 1954, beginning next July these scheduled tax reductions will probably not reduce revenues by more than $3 billion.

The fiscal policies of the Truman administration are easily summarizeduoncontrolled spending, inflation, and socialism through taxation. The present administration has been most successful. That is the meaning of the figures on appropriations and expenditures which I have read to you. Government officials no longer speak of how many expenditures are planned for the year. Instead they speak of how much spending can be accomplished during the year. The paved road to socialism in America has been founded upon high taxes and socialized incomes. The only difference between this version of socialism and outright socialism is that, while incomes have been socialized, management has been compelled to retain responsibility.

The outstanding example of present tax policy is the excess-profits tax. It is severe, arbitrary, and fantastically discriminatory. By its very nature it restricts research and development, prohibits progress, penalizes growth, and prevent competition. If continued long enough it will eventually compel all businesses to come to the Government for aid. But the excess-profits tax is not the only danger. The ordinary income-tax rates on individuals and corporations are so high that they have the same effect. It is not by lack of foresight that the socialists promise security from the cradle to the grave and ask you to give them control over the education and health of your children.

The outgoing administration has knowingly administered the needle of inflation through deficits and deliberate mismanagement of the public debt. The incoming administration inherits an inflation potential which has only been realized in part. Much remains as a future threat. Financing the public debt through issuing short-term notes to the banks has resulted in the creation of bank reserves which could finance an inflation far worse than the one we now have. And the existence of these reserves has dangerously weakened the credit controls of the Federal Reserve Board.

These are the fiscal facts which you and the new administration must face. The victory on November 4 was not a victory of Republicans over Democrats; or of Republicans and Democrats over socialists, left-wingers, and fellow travelers; or of business over labor; or of business and labor over labor leaders. It was not alone a victory of a leader over a misleader. It was not alone a revolt against war, communism, corruption, bungling, deception, and petty graft. It was a victory of Americans, by Americans, for America.

Much more must be done in fields other than fiscal affairs. I assume successs in those fields-including no additional international crises.

Upon these assumptions I submit a fiscal program for your consideration: (1) Remove fiscal policies from politics.

(2) Restore honesty-ordinary, common honesty-to the administration of our laws.

(3) Get and maintain a balanced budget.

(4) Control of expenditures is the only way we can soon achieve a balanced budget.

(5) After we have gained control over expenditures, then build a sound tax system, which will abandon the socialization of incomes; provide opportunities for youth to build their own futures on the basis of their own earnings; leave enough income after taxes to permit us to live, to encourage us to work, to hold out hope for those who wish to advance; give private investment, in both domestic and foreign undertakings, a return after taxes commensurate with the risks it takes; make it possible for us to provide our own security through our own savings; permit business to expand and develop; encourage new products,

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new industries, new markets-in other words, a system under which we can grow, develop, progress, and prosper.

I have asked you to face the fiscal facts so that you will understand the terrific task the incoming administration has before it. I emphasize again that it will take time to develop plans for bringing the mess under control. Let us all give the new administration our united support. Let us help in solving present problems and in formulating policies for the future. Let us insist upon sound fiscal policies and honest administration. But let us not be selfish. Let us prove that leaders of business can be leaders of America. What is good for America is good for business.

Mr. ALVORD. We have a tough fiscal situation. I don't think anyone can conceivably expect the present administration to balance this budget in fiscal 1954 if he is confronted with these facts. When the present administration took office there were about $120 billion of unexpended appropriations, and somewhere between $80 and $100 billion (I don't know that anybody knows the exact amount) of actual commitments, the money to be spent as contracts are fulfilled. It is pretty tough to meet that situation. I have put that analysis that I made in the address I gave out in San Francisco, Mr. Chairman, into the record. It might help you somewhat in appreciating the problems that are confronting the Treasury Department. That is, I think, all I am prepared to state this morning, Mr. Chairman. I will be happy to answer questions.

The CHAIRMAN. Thank you very much, Mr. Alvord, for your appearance here before this committee.

Mr. Kean will inquire.

Mr. KEAN. Mr. Alvord, I was interested in your mention of the capital gains tax because, as the members of the committee know, I have always taken the position that we could get considerably more revenue by a lowering of the tax. I notice you suggest a 122 percent tax. I think that psychologically, the point at which you could get the greatest revenue would be at 10 percent. Twelve and a half does not quite appeal. If you have a 10 percent tax, it would be a tax that the average person having been used to thinking about 25 and 26 percent would figure that he would be ready and willing to go ahead and carry out the transactions which business judgment leads him to, rather than to consider the tax effect. Twelve and a half percent I don't think would have quite that psychological effect.

Mr. ALVORD. I certainly couldn't quibble, and there is probably much to be said for a 10 percent rate. The point I was trying to make, and did not make very well, is that a very substantially reduced rate, enacted in such a manner that your potential investor will realize that that rate will not be increased over a period of years, is the important thing. Ten percent probably is better than my 122. But even a 10 percent rate will do no good if I as a potential investor fear that next year you may push it right back up to 25 percent, because it is going to be next year, the year after, or 10 years from now, in which I realize capital gains if I am either skillful or lucky.

Mr. KEAN. No Congress could bind another Congress. A 10-percent rate would open up the field of loosening a tremendous sum of money which at present is tied up in securities the people refuse to sell, or real estate or anything else on account of the fact that they have that high tax to pay.

Mr. ALVORD. We do not differ at all, Mr. Kean, I am sure.

Mr. KEAN. I am glad you mentioned that which most witnesses have not mentioned to date, the fact that this excess-profits tax is a tax, to a large extent, on normal earnings.

Mr. ALVORD. And intended to be.

Mr. KEAN. You may remember that when this question came before our committee there was a big fight on that one question, as to whether it would be the average earnings for the 1946-49, or I believe what is in this bill now is 80 percent.

Mr. ALVORD. Eighty-three percent. It was 85 and it shifted to 83 in

1951.

Mr. KEAN. Yes. So that the largest part of the revenue under this excess-profits tax comes from normal earnings.

Mr. ALVORD. That is very true. Otherwise you would get hardly any revenue at all.

I might make one more point which I think this committee could well consider. In my opinion, a very large number of business enterprises are compelled to go to the banks to borrow money to pay their taxes. Most of those enterprises have been accruing their taxes and planning on their payment on the basis of the expiraton date in the present law. It is not too sound to borrow to pay taxes, and I question the wisdom of compelling increased borrowing even if it is possible. I might remind you that the so-called Mills bill becomes quite effective next year. Ninety percent of the tax will be payable prior to the 1st of July. It is not always easy, gentlemen, to find cash to pay to the Treasury.

Mr. MILLS. Mr. Chairman?

The CHAIRMAN. Mr. Mills will inquire.

Mr. MILLS. About that point, Mr. Alvord, I would like to have the record show that had I known an excess-profits tax was to come along or a situation was to develop resulting in an excess-profits tax in 1950, I would never have proposed a year or two earlier the more rapid payment of corporate taxes. Certainly it should not have occurred at a time when corporations were faced with the excess-profits tax. The effect of it, as you well know, is to require corporations to pay 110 percent of their tax in the fiscal year, whereas they are paying only 100 percent, still, in the calendar year. It is that 10-percent additional tax at a time when the excess-profits tax is being imposed that has proven rather burdensome to some corporations. I wanted the record to show that I had no notice at the time of the advocacy of the more rapid payment of the tax that the excess-profits tax would follow.

Mr. ALVORD. When I approved your proposition it extended over a period of 5 years. I thought your first proposition was too severe. But when it was extended over 5 years, I thought it was practical and would get money into the Treasury sooner.

Mr. MILLS. It does. It brings about a billion dollars additional into the Treasury in each of the 5 fiscal years involved.

Mr. ALVORD. Thank you, Mr. Chairman, and gentlemen.

The CHAIRMAN. The next witness is Mr. S. R. Christophersen, president, Smaller Business of America, Inc., Cleveland, Ohio.

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

STATEMENTS OF S. R. CHRISTOPHERSEN, PRESIDENT, AND S. S. PARSONS, CHAIRMAN OF THE BOARD, SMALLER BUSINESS OF AMERICA, INC., CLEVELAND, OHIO

Mr. CHRISTOPHERSEN. May I introduce the chairman of our board, who was able to come down with me, Mr. Parsons. He would like to say a few words after I get through, which will be very quick.

My name is S. R. Christophersen. I am president of the Smaller Business of America, Inc. Our offices are in Cleveland, Ohio. We have a statement of policy by Smaller Business of America, which has been prepared by our committees, and I will read it to you. It is very concise and it won't take long.

We have previously gone on record as being opposed to the excessprofits tax and have recommended that it be allowed to expire on June 30, 1953. And now, in review of President Eisenhower's recent recommendation that this law be extended for 6 months to December 31, 1953, we have restudied this law and its effect on small business and have again arrived at the conclusion that the excess-profits tax law must be allowed to expire on June 30, 1953, for the following reasons: 1. This tax prevents small business from expanding. The practical effect of the base-period formula and the invested-capital formula for determining normal profits is simply that for the great majority of small businesses all income in excess of $25,000 per year, but not in excess of $62,500 per year, is taxed at the rate of 82 percent. The 18 percent residue is needed entirely to maintain the higher level of inventories and accounts receivable that result automatically from increased volume of sales. Hence, no part of so-called excess profits is available for plant and equipment expansion.

2. The combined and simultaneous impact of the excess-profits tax and inflation prevents small business from even replacing existing plant and equipment as it wears out. Taxpayers must depreciate their equipment on the basis of original cost. But when the equipment is fully depreciated and about to be scrapped, the replacement cost is double, or even triple, the amount of the original cost. The added cost must come out of profits, but, for the small business, profits in excess of $25,000 per year are almost completely taxed away by the confiscatory rate of 82 percent. Hence, small business is hard pressed even to replace existing equipment as it wears out. In short, small business is hard pressed merely to stay even.

If the United States Treasury, as has been claimed by the executive department, is in need of the revenue that the excess-profits tax would presumably raise, then this additional revenue, and much more, can be raised by the simple device of having normal and surtax rates apply fully to organizations now exempt under section 101 of the Internal Revenue Code.

Further, we urge that every income-earning entity be required to pay taxes in exactly the same manner and on exactly the same basis as regularly organized corporations.

Still further, many of the tax-free or specially privileged tax-exempted organizations operate in direct competition with regular business firms, thereby securing special privileges unfair to regular organized corporations.

I thank you very much for the opportunity of appearing here to present our statement of policy.