can earn high wages by producing more and better goods at less cost. Our tax program has two objectives: (1) revision to reduce hardships on individuals and barriers to incentive; and (2) reduction of excessively high taxation as rapidly as it is justified by cuts in Government spending. About 70 percent of all we spend is for security. We have made some savings in this area, and we will make more, but no one wants to endanger our security by cutting expenses unwisely. The only way the Government can save money is to reduce its spending. This means either reduction of people from the Government payroll or buying less material, which, in turn, means that the people who produced that material are temporarily out of work. The dollars that are saved in Government spending reduces work for the man who used to get those dollars. So that big reductions cannot be made quickly without seriously dislocating the economy. As we cut Government spending, we must return to the people in tax cuts as we are now doing-the billions of dollars of Government money saved, so that it can then be put to making new jobs for the people who previously received their income from Government spending. People who have been making things for the Government for killing must, in this period of transition, now get jobs making things for living. Those who were making tanks and guns must now make washing machines and automobiles. A great transition must take place. To have real prosperity in America, we cannot stimulate consumer buying alone. Large tax cuts to millions of individuals just to buy consumer goods is not enough. Millions of people in this country earn their living making heavy things-big lathes, generators, heavy steel, and machinery that consumers do not buy. Such things are purchased by investors. Our tax program not only returns billions of dollars to consumers but also seeks to stimulate the investment of savings to buy the products of heavy industry-in the production of which so many millions of Americans get their livelihood. This administration is opposed at this time to any further tax cuts than those proposed in this bill. We are particularly opposed to any increase in personal exemptions, for two simple reasons: First, we cannot stand any further loss of revenue. An increase in exemptions of $100 would cost about $2.4 billion. An increase to $1,000 would cost nearly $8 billion. * Secondly, it would entirely remove millions of taxpayers from the tax rolls. The President said, in his broadcast, that "the good American doesn't ask for favored position or treatment. ** Every real American is proud to carry his share of the burden. *** I simply don't believe for one second that anyone privileged to live in this country wants someone else to pay his own fair and just share of the cost of his Government." When a further reduction in taxes is justified, it should be made by reducing the rates. The CHAIRMAN. Mr. Secretary, I would remind you that the 80th Congress took about 7 million taxpayers off the rolls. Having participated in that, I have no shame about that. Senator HOEY. At that time, Mr. Chairman, it also increased exemptions of those over 65 from $600 to $1,200. The CHAIRMAN. That is right. Senator HOEY. Which accounted for some of the $7 million taken off taxes. The CHAIRMAN. No one escapes taxes in this country. You pay all of the taxes that there are, State taxes, city taxes and hidden taxes. But they are no less clearly demonstrable because they are hidden. The average American is paying, perhaps, a fourth of his income in taxes of one kind or another. Secretary HUMPHREY. There is no doubt, Mr. Chairman, that taxes must come out of the cost of things. There is no doubt of it. On the other hand, the whole problem with respect to taxation is two things: First, how much money do you spend? The only real way to reduce taxes is to reduce spending. When you decide how much money you are going to spend, then the only other question there is with respect. to taxes is how do you fairly distribute that burden? Senator MARTIN. Mr. Chairman, the big taxpayer in America is the consumer. Secretary HUMPHREY. It has been suggested that the current economic situation requires some type of tax action different from that proposed in this tax revision bill." Just what is the status of our economy at the moment? There is frequent discussion about unemployment and how things are turning down. We can be mislead about how bad business really is and how much pickup can be made. This doesn't mean that I do not realize that a man who is out of a job is in serious trouble. I do not discount his difficulties in any way. This administration is concerned to see that everyone who wants to work can have employment. But let me call your attention to these plain facts: In January and February of this year, there were more people employed in America than in any January and February in the whole history of this country, except in January and February of last year. In January of 1953 there were 60.8 million people employed, and in February of 1953, 61 million. In January of this year, there were 59.8 million employed, and in February, 60.1 million. I repeat this. Except for one year-1953-January and February of this year had more people employed than any January and February in our history. Some economic indicators show downward trends in comparison with this same time last year, which was he highest year in our history. The index of industrial production is down 8 percent; civilian employment is down a little, as we have said; and the gross national production is down about 1 percent. Yet, construction is running ahead of 1953. Business plant and equipment plans for 1954 are at a very high level. Personal income is running a very little higher than a year ago. And the general price level has been exceptionally stable. Some people, fearing further downward trends, ask when the Government is going to get "in" and do something about it. The fact is that the Government is always "in." There are so many things that the Government does-or does not do-that have a very real bearing on the state of the economy. There are many things that the Government has already done; things recommended which are now before the Congress; and things which the administration has proposed either for the future or for action by executive agencies, all of which have and will help strengthen our economy. First, in things already done, we should look at an area of Government action very close to us at Treasury-the area of flexible debt. management and monetary policy. The Federal Reserve Board-with its responsibility for monetary policy-reduced reserve requirements of member banks substantially as early as last June to make sure that there would be no bar to the proper volume of bank credit necessary to a growing economy. The Federal Reserve has purchased short-term Government securities in the market, to increase bank reserves, for a considerable period. The rate at which bankers can borrow from the Federal Reserve was reduced early in February. Treasury debt management also has been a positive factor, and Government interest rates have fallen to the lowest point in many years. Last July, the Treasury had to pay 22 percent for an 8month loan. In February we paid the same rate for a loan running almost 8 years. And our last 1-year money borrowing was at 15% percent. Ninety-day bills cost close to 21⁄2 percent last June: now they are down to 1 percent. In the current economic enviornment, the Treasury has purposely done its financing in a way that would not interfere with the availability of long-term investment funds to corporations, State and local governments, and for mortgages to homeowners. We want to be sure that plant and equipment, home building, and other construction, all have ample available funds. The fact that construction thus far this year is running so high demonstrates how effective these policies are. We have the Small Business Administration to ease the proper handling of credit in this particular and vital part of our economy. Perhaps the biggest way that the Government is continually in the economy is in this mater of taxes. We have noted that tax cuts effected this year will total $7.4 billion, the largest total dollar tax cut in history. This saving of such huge amounts of money for peacetime use should have a tremendously beneficial effect in stimulating the economy. Some of the things recommended by the administration and now before the Congress which will have considerable bearing upon the economy are as follows: The President has asked legislation to broaden the base and benefits of old-age insurance. This legislation is currently before the House Ways and Means Committee. In the housing bill, which is currently before the Senate, are two administration proposals affecting the building of homes. We have asked that the Government be allowed to change the terms of governmentally insured loans and mortgages as circumstances require. We have asked that a secondary home mortgage market be established. The administration has urged that the highway construction program be increased and a record sum has already been voted by the House. The administration is recommending a positive program for flexible price supports for the American farmer. The President's program is being actively considered by both the House and the Senate. The administration has taken specific actions within the executive departments and with other governmental bodies to do things that will help strengthen our economy. We have recommended legislation to improve unemployment insurance and the administration has asked the governors of the various States to study the possibility of making payment scales more realistic. A committee for State, local, and Federal planning has been appointed and is now at work. The President has asked the Office of Defense Mobilization to redirect its stockpiling program, which will help distressed mining areas. The administration is going ahead with improved planning of its public works programs which can be available for any emergency. Last, but far from least, the tax revision bill which we are specifically considering today, will, upon enactment, have a tremendously helpful effect upon the economy. While it is basically a long overdue tax reform bill, it can help greatly the current economic transition. There are many business projects around the country which are being held up pending final decision of this revision bill. It is imperative that the earliest possible action should be taken. When the bill is enacted, these new or expanding businesses can go ahead with their plans, which will result in the creation of thousands of jobs and the vital expansion of our economy. The CHAIRMAN. Mr. Secretary, I would like to invite your attention to the fact that the administration has taken a favorable viewpoint of reclamation matters. In addition, they have approved a wool bill which will help the wool growers of the West. They have approved a measure on stockpiling, which will help the miners of the West. Secretary HUMPHREY. Thank you very much. We will see that those things are added. The Government is always in the economy. That is one of the facts of life today. But we must remember the fundamental principle that the best government is the least government. It is the citizens of our free economy who, through their initiative and ingenuity, must make sure that we keep moving ahead with higher employment, higher pay, and better living for all. The steps the administration has thus far taken-tax cuts, monetary and debt management operations, as well as the other items outside the fiscal fieldare steps in the direction of restoring more freedom to our economy. And in more freedom in our economy is the strength of our Nationnot only in the current transition period but in the long run as well. Mr. Chairman, with your permission I would ask Mr. Folsom to just run through in detail, but not at any length, these various items, and then I will be pleased to resume, Senator, the discussion of the very important point you brought up and any other matters that we can. The CHAIRMAN. Proceed, Mr. Folsom. STATEMENT OF MARION B. FOLSOM, UNDER SECRETARY OF THE TREASURY Mr. FOLSOM. I am M. B. Folsom, Under Secretary of the Treasury. Mr. Chairman and members of the committee, you each have before you a document giving a brief summary of 27 of the principal provisions of this bill. This document was prepared for your help in studying the various provisions. I think if you will take the document up and go along with me, I can briefly outline it. (The analysis referred to follows:) SUMMARY OF 27 OF THE PRINCIPAL PROVISIONS OF H. R. 8300 (a) Dependent allowance provided (a) Allow the taxpayer to claim as only on the basis of specified relation- a dependent any individual over half ships or legal adoption. No allowance of whose support he provides, regardfor foster children or children awaiting less of the degree of relationship, if the adoption whom the taxpayer supports dependent lives in the taxpayer's home in his home. as a member of his household. (b) No dependency exemption if several people share cost of support and no one provides more than half of cost. (b) Permit people jointly supporting a dependent to decide among themselves that some one of them may claim dependency exemption. Number of taxpayers benefited: 100,000. 4. DIVIDENDS-RECEIVED EXCLUSION AND CREDIT FOR INDIVIDUALS Income is subject to double taxation, once to corporation as earned, and again to individual stockholders when remaining corporate income is distributed as dividends. Correct existing inequity and eliminate double taxation completely on first $100 ($50 in 1954) of dividends received in a year by exemption of that amount from individual income tax. Give partial relief on dividend income above $100 by a 10 percent credit (5 percent in 1954). Remove longstanding obstacle to equity financing. See attached analysis for details. ANALYSIS OF DIVIDEND EXCLUSION AND CREDIT FOR INDIVIDUALS PROPOSAL H. R. 8300 provides for the elimination of double taxation completely on the first $50 of dividends for 1954 and the first $100 for subsequent years by providing that those amounts are to be excluded from the income of the individual receiving the dividends. It gives partial relief on dividend income above those |