REVENUE REVISION, 1932

WEDNESDAY, JANUARY 13, 1932

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS.

The committee met at 10 o'clock a. m., Hon. James W. Collier (chairman) presiding.

The CHAIRMAN. The committee will be in order.

Gentlemen, we have assembled to-day to open hearings on the proposed new tax bill, in order that we may raise additional revenue to meet the deficit and current expenditures, as well as to take such steps as we can toward balancing the Budget.

We have the Secretary of the Treasury before us this morning to give us his suggestions, and we will be glad to hear from you, Mr. Secretary.

GENERAL STATEMENTS

STATEMENTS OF HON. ANDREW W. MELLON, SECRETARY OF THE TREASURY, AND HON. OGDEN L. MILLS, UNDER SECRETARY OF THE TREASURY

Secretary MELLON. I have with me a prepared statement, and, if I may, I will ask Mr. Mills to read it. I think that you all have copies of it.

The CHAIRMAN. Without objection, that may be done.

Mr. Under Secretary, we will be very glad to hear from you, sir. Mr. MILLS. Mr. Chairman, and gentlemen of the committee, a fundamental thought which I wish to present to you is that current receipts and expenditures of the Government should be brought into balance for the next fiscal year beginning with the coming July, so as to put an end at that time to any further increase in the public debt. This is essential not merely for maintaining unimpaired the credit of the Government, but also for reinvigorating the entire credit structure of the country.

The greater part of the present fiscal year has already elapsed and it is impossible to avoid a large deficit for this year. To cover, for the balance of this fiscal year, all expenditures already authorized and appropriated for, as well as those called for by the administration's special emergency relief program, will probably require increase in the public debt by $1,500,000,000, less any amounts to be derived in the current year through additional taxation. The administration is determined, with your cooperation, to arrest this borrowing process on June 30 next. I am confident that the attainment of this objective will have the full support of Congress.

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Under existing conditions the task of bringing our Budget into balance is by no means an easy one, and involves not only self-denial but some measure of sacrifice. Yet, it is possible to attain this objective if we address ourselves resolutely to the task of drastically reducing expenditures, refusing to take on additional obligations save those that are absolutely necessary, and by drawing on available resources through increased taxation.

I can not overemphasize the importance of retrenchment. Without real economy there can be no balanced Budget. We are fully justified in calling on the people to make further sacrifice in order to supply their Government with adequate revenue, but we are only justified in making this call if at the same time we eliminate every unnecessary expenditure and see to it that just as enforced rigid economy prevails in every home in the land, so must it be observed in every operation of the Federal Government.

As pointed out in my annual report to the Congress, we closed the fiscal year with a deficit of $903,000,000. Without making allowance for increased revenues, through recommended legislation, we are confronted this year with a prospective deficit of $2,123,000,000, and it is estimated that expenditures will exceed receipts by no less than $1,417,000,000 in the fiscal year 1933. This situation is due on the one hand to increased expenditures, and on the other to a precipitous decline in receipts from taxation.

Of the increase of approximately $500,000,000 in expenditures in 1932 as compared with 1930, approximately $350,000,000 is attributable to estimated increases in expenditures for construction activities largely of an emergency character. It is estimated that the Veterans' Administration will require $984,000,000, an amount which is $231,000,000 more than in 1930. This reflects an increase of $88,000,000 required to meet loans to veterans on adjusted-service certificates exclusive of the $112,000,000 anticipated in 1931 and one of $143,000,000 for military and naval compensation and services to veterans. The postal deficit will be $103,000,000 larger. These increases are somewhat offset by decreases in amounts required for service of the public debt and for refunds of taxes and customs duties. It should be observed that almost half of our budgetary requirements are due to service of our public debt and to pensions and other allowances to our veterans.

The following figures tell the story of what has happened to our revenue from taxation much more completely than any words. Customs receipts fell from $587,000,000 in the fiscal year 1930 to $378,000,000 in 1931, and are estimated at $410,000,000 for 1932. Current corporate income taxes declined from $1,118,000,000 in the fiscal year 1930 to $892,000,000 in 1931, and are estimated at $550,000,000 for the current fiscal year. Individual income tax collections fell from $1,061,000,000 in the fiscal year 1930 to $730,000,000 in the fiscal year 1931, and are estimated at $370,000,000 for 1932. Miscellaneous internal revenue collections fell from $628,000,000 in 1930 to $569,000,000 in 1931, and to an estimated $544,000,000 in 1932.

And I may interpolate here to say that the reason for the apparent stability of the miscellaneous internal revenue taxes is due almost entirely to the great stability shown by the revenue derived from the tobacco tax.

The truth of the matter is that our revenue system rests on a comparatively narrow base and that our tax receipts are susceptible to the widest variations in accordance with variations in business conditions. This is particularly true of current individual income-tax collections, the instability of which is further accentuated by the wide. variations in gains and losses derived from the sale of so-called capital assets.

If we take the returns of individuals with net incomes of $5,000 and over, we find that the aggregate net income returned fell from $16,299,000,000 in 1928 to $10,119,000,000 in 1930, showing a decrease of $6,180,000,000. Of this amount no less than $4,230,000,000, or about 68 per cent, is accounted for by the reduction in net profits in excess of losses, resulting from the sale of capital assets.

Moreover, while in times of depression all incomes show a tendency to fall, this is particularly true of the larger incomes, and the decrease in revenue resulting therefrom is accentuated by the progressive character of our rates, which tend to bring about a relatively more rapid increase of taxes than of incomes in times of rising prosperity and to diminish tax collections more rapidly than incomes in times of deepening depression.

Taxes returned on individual incomes fell from $1,164,000,000 for the calendar year 1928 to $474,000,000 for the calendar year 1930, according to available information. The number of returns of those with incomes of from $5,000 to $10,000 fell from 561,000 to 506,000, while the tax paid fell from $21,000,000 to $17,000,000, or 22 per cent. Of those with incomes from $10,000 to $100,000, the number fell from 360,000 to 252,000, and the tax from $409,000,000 to $208,000,000, or 49 per cent, of those with incomes of $100,000 and over the number fell from 15,780 to 6,152, and the tax from $700,000,000 to $238,000,000, or 66 per cent.

It is sometimes suggested that our additional revenue requirements can be covered for the most part by increasing the income-tax rates applicable to the larger incomes. The justification for such a proposal is that in periods of emergency the doctrine of ability to pay should be pushed to the limit. Leaving aside the economic question involved in drying up, even temporarily, those liquid resources which should be available for restoring the working capital of industry and commerce and reinforcing our credit machinery, a study of the figures leads to the conclusion that the necessary revenue can not be derived from this source. For instance, it is estimated that current collections from individual income taxes during the calendar year 1932 will not exceed $300,000,000, of which a little more than half will be collected during the fiscal year 1932. Of this estimated amount, approximately $210,000,000 is from surtaxes. If we should increase surtaxes by 100 per cent we would collect not more than $200,000,000 additional during the calendar year 1932, and probably the amount would be considerably less. Even if we should triple the surtax rate on incomes over $100,000, which would mean a 60 per cent maximum rate, we would even then from a theoretical standpoint collect not more than an additional $120,000,000 during the calendar year 1932.

It seems to me that while individual income-tax rates, particularly those rates applicable to the larger incomes, can and should be sharply increased, we should at the same time recognize that the weakness in our revenue system is, as I have already stated, the narrowness of the base on which it rests and the needed addition to our revenue can not be obtained without the broadening of that base. We can not simply increase the taxes of the present group of taxpayers. Many not now taxed are very definitely in a position to make some contribution to the support of Government. They should be asked to do so, taking into consideration ability to pay. This basic concept underlies the entire program which the Treasury Department is submitting for your consideration. It must form a part of any program for without it a solution is impossible and it is justified not only by necessity but by equity and sound public policy. In the development of our program many possible forms of taxation were considered. We laid aside all thought of a general sales or turnover tax, not only because generally speaking it bears no relation to ability to pay and is regressive in character, but because of the great administrative difficulties involved and the almost inevitable pyramiding of the tax in the course of successive sales. The objections to a general-sales tax are not in this respect applicable to a tax on selective articles of the character heretofore employed in this country and now recommended.

We have studied the limited manufacturers' or producers' sales tax, which is being administered with a fair degree of success in Canada. There a tax is imposed at the rate of 4 per cent of the manufacturers' sales price or the import value of all goods not exempt which are produced or manufactured in Canada or imported into Canada. It is distinctly not a turnover tax. Retailers are exempt. Indeed the extent of the exemptions is very great, covering thousands of specific items and classes of items. Pyramiding is avoided by a mechanism of licenses and certificates, the effect of which is to collect the tax when the last licensed taxpayer sells to an unlicensed purchaser. The success of the tax appears to be due not only to good administration but to very wide administrative discretion. The tax is passed on and therefore must add to the cost of living.

With some 200,000 manufacturing establishments in the United States, our much more extensive and complicated industrial mechanism, our tendency to set out administrative procedure with almost meticulous accuracy in our statutes, and our reluctance to grant administrative discretion or authority to administrative officers to make final decisions, it is extremely doubtful whether the Canadian sales tax would meet with the success in our country that it has across the border.

We concluded that our immediate needs could best be met by utilizing a known general plan with such changes as might be appropriate in the light of altered conditions rather than embarking on new and untried ventures in taxation. We believe that the necessary relief to the Treasury can be accomplished by giving up for the time the reductions in tax effected by the revenue acts of 1928 and of 1926 and returning to the general plan of the revenue act of