Show 4A Sunday Morning- - of the international situation Is that we should give serious attention to our future fiscal position and redouble our efforts to attain recovery High national income and a sound position are essential to adequate national defense It Is against this background that we reexaminb our WASHINGTON May 27 UP) — Secretary Morgenthau’s prepared testimony on tax revision before th house vag and means committee follows Tax proposals cannot be discussed comprehensively except in relationship toour whole national and fiscal position We are now in the midst of a world situation which imposes on this government a special responsibility We must demonstrate that a democratic government has the power and the flexibility to sunive a and chaotic crisis prolonged world conditions with the strength of its free institutions unimpaired Preservation of our democratic form of government over a long period of years requires in my opinion a fiscal program whiih has a four-fol- d (1) objective Promotion of free enterprise and private investment (2) attainment of full business recovery (3) maintenance of our public finances in a eound and unassailable position and (4) a just distribution of tax burdens and a more equitable distribution of national income fiscal program fundamental objective of sound finance clearly Is a balanced budget There Is of course no good reason why taxes must A exactly balance expenditures in each specific year any more than in each month each week or each day There are periods during which sound fiscal policy call for an excess of outgo over income and others when it calls for an excess of income over outgo Inescapable Burdens In a depression that there will Successful of democ- operation racy demands that all four objectives be eolidly linked together When we consider any specific our fiscal pro- In change it Is Inevitable be deficits Rev- enues decline at the same time that the federal government is called upon to assume inescapable social and economio burdens If however deficits are too long continued the depressive effects of uncertainty tend to make recovery more difficult The sequel to deficits in emergencies should be surpluses during years of prosperity That was and is one of the broad purposes of seeking to raise the national income to a high level thus assuring revenue great enough not only to end the deficits which began In 3031 but also to reduce the public debt In carrying out our fiscal policy It would be helpful to have machinery which would more fully coordinate our efforts It is not the prerogative of any administrative department to make suggestions to the legislative branch of the government for the conduct of Its work but I am sure that you would wish me to be frank in suggesting ways of surmounting difficulties which I believe now attend the joint efforts of ths ways and means and finance committees and the treasury de- Must bo Linked gram we must satisfy ourselves that the change makes for a better and not a worse distribution of tax burdens and of national income that the change promotes and does not retard business recovery and that the change makes easier and not more difficult progress toward the establishment of a balanced relationship between revenues and expenditures Full attainment of these objectives is difficult at best It is made more difficult by a new and ominous development in world affairs — the armament race now gripping the Important nations of the world Great Britain in the present fiscal year is spending $3 000000000 on military expenditures or almost 60 per cent of its national budget France is devoting over 40 per cent of its national governmental expenditures to the same purpose Italy 60 per rent Germany probably 80 per cent Japan over 70 per cent and it is reported that Russia has just authorized an increase of about 60 per cent in budget allowances for armament These huge expenditures are being financed The race largely by borrowing is becoming more intense and there is no end in sight In this connection it Is interesting to note that in our budget for thl fiscal year expenditures for national defense are About 3J per cent of total expenditures For us these developments present the danger that they may partment If for Instance the waj and means and appropriations committee of this house and the finance and appropriations committees of the senate could meet each session as one joint committee on fiscal policj to consider the over-aaspects of the expenditure and revenue programs simplification and greater effectiveness would result ll Hie budget act of 1921 set up a procedure for the orderly formulation by the executive of fiscal proposals and for their submission to the congress as a unified budget No comparable procedure has been set up m congress for revenues and exconsidering penditures together as two interrelated aspects of a single problem I hope this committee will agree with me that some such innovation would improve the efficiency of the government By providing for a preliminary legislative consideration of the over-apicture of appropriation and revenue measures it would give congress a broad perspective of the slate of the governments finances and permit a better ordered coordination between the executive and the legislative branches in this field This joint committee would in involve us in increased cost for national defense here and that they nmy result in momentary instability abroad and disruption of our commerce the consequences of whiih we cannot fully ll predict No proper solution of anv major problem facing this government today can be achieved without full consideration of the impact on our country of the present ipternational crisis The unmistakable implication Salt £akc tribune Hljc SCHUBACH’S FAMOUS $100 ENSEMBLE effect ba a lens through which all appropriation and revenua sued subject to federal and state income tax laws That part of this recommendation dealing with government salaries I am pleased to note has already been incorporated into law 3 In my statement of March 24 1939 I presented for your con- measures could be viewed in relationship both to what the nation needs and to what the nation can afford This committee should have continuous life for the purpose of actively studying fiscal problem between as well as during session of congress The treasury department would of course cooperate In this work to the full extent that the committee de- sired legislation to make it impossible In the future to Issue any more securities old-ag- i Thus far I have dealt with the financial problems of the federal We must regovernment alone member however that with the best conceivable federal fiscal plan in operation we still would have touched less than half of the tax problem which confronts the nation Almost 60 per cent of the total tax revenues of the country are collected by state and local governments fect t Before specifying the tax provisions which I believe deserve your special attention at this time I wish to emphasize the importance of maintaining the present revenue in any tax revisions which may be made We must not forget that one of the important objectives of our fiscal program is to approach a balance between revenues and expenditures For this season any tax reductions must be offset by tax Increases In the last five year we have given aerioua atudy to the probcreated lem by federal-stat- e tax conflict The sain problem hail been recognized by our It is my belief that predecessor we should take steps without delay to make these studies effective Sees Loophole Another example is found in the capital stock tax and the related excess profits tax Under the present law the capital stock tax is based upon a declared capital atoik value which th taxpayer may revise every three years The declared value may be any figure that the taxpayer desires to submit regardless of the actual value of the stock The excess profits tax applies to profits In excess of 10 per cent of such a declared value The taxes are thus not really taxes on the value of capital stock or on excessive profits Their major defect Is that they operate very erratically The tax liability they impose depends on the taxpayer a ability to forecast profits for tha next three years as well as upon tha amount of profits actually realized during each of the three years lorecastlng Is Hazardous Firms Hardest lilt Specific Questions Thu far I have talked about two fiscal matters of great imLet me turn now to portance more specific questions of federal New enterprises and the capital goods industries are especially subject to wide fluctuations in earnings As a second example I should also like to mention the questions of tax exempt securities and surtax rates in the higher brackets These two questions should be considered together taxation Review Proposal I desire first to reiterate two tax recommendations which the president has already made nnd a suggestion which the treasury has Forecasts of earnings are particularly difficult to make in the case of new businesses and those with unstable incomes such as the capital goods industries with the result that taxes imposed on such businesses are at time inordinately high There Is a third category of tax problems now being widely discussed which raises questions of tax equity The treasury has already worked on those problems and if your committee desires our staff could continue these studies in collaboration with the committee possibly with a view to action at a later session An example is the limitation now placed on the deduction of corporation capital losses I ndcr the present law an excess of capital losses over capital gains can be deducted from income only to the extent of $1000 In th consideration of possible changes In the parts of ths tax structure just mentioned it is essential to bear in mind that moat of them would result in reductlohs g In ths capacity of the tax system I have already the importance of not emphasized Tax exemption of securities is highly inequitable and tends to surtax nullify our progressive rates Most persons subjet t to the high surtaxes have sizable holdings of governmental securities which yield them an income free from federal income taxation while oilier person entirely escape the high surtaxes in this presented1 1 In his budget message of Januaiy 3 1939 the president recommended that congress extend the miscellaneous internal revenue taxes which under existing law will expire In June and July and maintain the current rates of thos taxes which otherwise would be reduced in June 2 In his message of Janusry 39 1939 the president recommended legislation making all government salaries hereafter earned and Interest on all government securities hereafter is Such a program can be developed only through long continued study and it cannot be statio but must be adapted to changing condition But tho general lines along which federal taxation should develop in the future pear to be quite clear ap- We ought to increase th part played by direct taxes that can be made to take account of differences in the abilities of individuals tp support the government This means that we should endeavor to minimize the use of manufacturers' excises and other commodity taxes which tend to bo shifted directly to consumers putting the emphasis on taxes based on capacity to pajf Such revision would facilitate coordination of federal with state and local taxation In conclusion permit me to say that one of the major tasks we have before us is to do everything we can to promote lasting business recovery With this still Uppermost in my mind I would like to repeat now with the same deep conviction what I said in November 1937: "The basic need today Is to foster the full application of the driving force of private capital We want to see capital go Into the productive channels of private industry We want to see private business expand " s 'kow One of th objective which the law sought to attain was to prevent the avoidance of the personal income tax through the retention and accumulation of earnings by corporations This is still an important and to my mind a sound objective The law in its present form does not attain it Since th Income tax on corporations of which th undistributed profits tax la a minor segment expires by its own terms at th end of this year your committee should deal with this problem The treasury of course stands ready to work with you on it Cautions Heedless Steps If tax revision were confined to tax reductions the resulting uncertainty as to O’ir future fiscal position would Injure and not help business We should take no step which the public may Interpret as moving away from the objective of a balanced budget In discussing the elements os features of the tax system which I you may wish to reexamine should like to classify them roughly Into three groups The first group includes features which have been characterized as likely to hinder business expansion and investment One such feature is the absence of provision In our income tax laws for carrying over net business losses to be deducted from business profits of future years The profits or losses of each year are considered without reference to those of any other year In consequence a business with alternating profit and loss now pays higher taxes over a period of years than does a business with stable profits although the average lneome of the two firms may be equal I suggest that congress create a small temporary national commission to report to congress as soon s feasible on the various aspects of intergovernmental fiscal policy and propose a plan for the solution of the problems involved Such a commission should be made up of men of ability who command the highest who possible public confidence are familiar with fiscal problems but who will represent the public at large rather than particular governmental units and Overlapping competing taxes have grown in number and sue as both federal and state governments have sought new Grant-in-airevenue d are being demanded of the federal government In increasing amounts The results of this fiscal situation are Increasingly unsatisfactory to both state and municipal governments and to the federal government and more and more burdensome to taxpayers The recommendations of such a commission should assist us In achieving a more orderly relationship between the federal state and local fiscal s stems relative distribution of th tax burden between broad groups of taxpayers and especially should not place additional burdens upon consumers Th subjects I have discussed are for the most part confined to a limited segment of th tax system I do not consider them as constituting an adequate program of tax revision not change th This having been accomplished first It Would then be fair and logical to reexamine the question of whether the present surtax rates on very large ncomes may not be so high that they discourage the limited number pf individual subject to them from taking normal business risks In a second group are features of our tax system which have been referred to as "tax Irritants ” As an example I would mention the undistributed profits tax In its present form this tax Is unimportant and does not accomplish the objectives of the original proThe tax produces little posal revenue and has little effect on business It has acquired prominence as a psychological irritant largely because of the widespread and emotional criticism which has been directed against It sideration four alternative rate e insurance conplans for tributions during the next three years Even though a comprehensive revision of the tax structure may not be feasible at this time that fact in my opinion should not restrain your committee from giving serious attention to removing from the tax law any manifest inequities or other de- 23 1939 May manner Tax exemption also operates as magnet which pulls persons subjei t to high income taxes away from investments in private business We should bv all means pass a r U A Uir''ifS- - '‘4 'Cities! 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