Among the persons who have examined and approved the pay-asincome-tax plan are the following:

Evans Clark, director, Twentieth Century Fund, New York, N. Y. Linus Coggan, vice president, Corn Products Refining Co., New York, N. A. L. Cole, general manager, Reader's Digest Association, Inc., Pleasa N. Y.

Norris Darrell, partner, Sullivan & Cromwell, New York, N. Y. V. A. Johnston, vice president, A. G. Becker & Co., New York, N. Y. Clarence Manion, dean, Notre Dame Law School, South Bend, Ind. Beardsley Ruml, treasurer, R. H. Macy & Co., New York, N. Y. Victor H. Stempf, partner, Touche, Niven & Co., New York, N. Y. W. B. Stokely, Jr., president, Stokely Bros. & Co., Indianapolis, Ind. The CHAIRMAN. There are two other witnesses here. The Senate will be in session at 12. We will have to ask witnesses to come back at 2 o'clock this afternoon.

I would like the members of the committee to be on hand o'clock, so we may have an executive session.

(Whereupon, at 11:59 a. m., a recess was taken until 2 p. m. same day.)

AFTERNOON SESSION

(Pursuant to the adjournment for the noon recess, the hearing resumed at 2 p. m.)

The CHAIRMAN. The committee will come to order.

We will, if possible, finish the list of witnesses for today b going into executive session.

Is Mr. Lapp in the room?

Mr. LAPP. Yes, sir.

The CHAIRMAN. You are Grover W. Lapp?

Mr. LAPP. Yes, sir.

STATEMENT OF GROVER W. LAPP, LE ROY, N. Y.

Mr. LAPP. I am appearing on the subject of paying for the w we go by correct taxation and finance.

We know that wars are paid for, but this would enable us to p we go, continuously.

I would like to read this, if I may.

The CHAIRMAN. Do you wish to use the whole statement you prepared?

Mr. LAPP. I would like to include it all, sir.

It is condensed on the front page and then is given in more in the body.

Now, this is, in general, so different a proposition that it needs explanation. In paying, our proposition contrasts with the pr system of paying only about one-third of the National, State, and requirements for this war with the proposal of paying entire

we go.

It sounds fantastic, I know, to begin with; but my argumen think, are perfectly logical, and instead of writing off two-thirds deficit in financing, which will be practically ruinous, this propos take care of it through cash at the time.

Senator CONN ALLY. All of it is sales tax?

Mr. LAFP. It is all by income tax, sir; not by sales tax.
The CHAIRMAN. All right, you may proceed.

Mr. LAPP. I will begin with my condensed statement or summarization, following the same with my more detailed statement to which it pertains.

PAYING FOR WAR AS WE GO BY CORRECT TAXATION AND FINANCE

The attached memorandum is the outcome of many years of analysis of traditional views and practices in the field of taxation and finance. These critical times require a new, adequate, basic plan for handling the problem of financing the war without destroying civilian production.

The background cause of derangement in our economy is the unfairness of exchange among individuals, enterprises, and Government. Insolvency and unemployment result.

Unfairness and loss in exchange are due to erroneous handling of the two fundamental relations by which we serve each other.

The first continuing violation of our trade relations is the use in exchange of bank credit money that was never before received for delivering anything to anybody. If borrowers of new bank credit take, say, 1 percent of the values being bought, our market is 1 percent unfair, enough to throw a certain large number of marginal individuals and enterprises into a loss and failure and unemployment.

The second way we damage our economy is by taxation of property and savings. We should tax the net income from current production of solvent people. Taxation of the transactions of marginal concerns forces another large group to suspend production and discharge producing, self-supporting, taxpaying people, who then must be supported on relief by additional taxes.

At this time Government is confronted by a broken down exchange rigidified by price controls. We should have free prices controlling supply and demand, for all values in exchange including wages for labor.

The CHAIRMAN. That is something this committee has nothing to do with; are you going to lead through to a tax system, directly?

Mr. LAPP. Sir, the idea depends on that, somewhat; and I promise you that I will get right to it.

The CHAIRMAN. That is not within our jurisdiction, to deal with that subject matter.

Mr. LAPP. The next paragraph, I think, will show you what I mean, sir.

Two further calamities now threaten us, namely, general sales taxes and 40 billions of new bank credit. Resist these at all costs.

We can straighten out the situation by confining taxes to net income and stop using inflationary bank credit. Taxes should be collected currently as earned. When we expect taxes, taxation is statesmanship.

We can pay fully for war as we go, without bonds and bank credit. Nobody would be ruined by income taxes since cost of production and tax-free subsistence would always be exempted. Taxation spells wisdom. ·

Although the income tax is relatively recent, it can properly bear the entire burden. The beneficiaries of the regime have the greatest stake in its survival. They should be made to pay out right without

future compensation through bonds. After war, either bon prosperity.

This simple program is offered to the Government as a p for correct economic behavior. Political expediency will soon de

it.

I will now read to you the detailed memorandum to which I referred in my introductory statement just given.

Physical supplies and services and men necessary to carry peace or in war are provided as we go. There is no putting the future the production of the things we actually use up. cash for war, physically.

W

The problem is, how to pay cash financially. Everyone! that it would be desirable to collect the taxes and pay immed for any projects we vote to carry on. That is the realistic way for the individual or for the Nation.

Senator CONNALLY. May I ask a question?

Do you seek now to get other money by income taxes, net ing Mr. LAPP. Yes, sir.

Senator CONNALLY. At what rate?

Mr. LAPP. At what wage rate?

Senator CONNALLY. Yes.

Mr. LAPP. What the rates are after the committee has take individual expenses and cost of production for enterprises. W vote anything up to 100 percent.

Senator CONNALLY. The cost of production for enterprise-by what do you mean?

Mr. LAPP. The cost of production for goods and services by ness enterprises

Senator CONNALLY. You could then take 75 percent of the incon 80 percent?

Mr. LAPP. Yes, sir; you see, of their net amount--that is, afte cost of production.

Senator CONNALLY. Yes?

Mr. LAPP. You can take anything up to 90 or 95 percent.
Senator CONNALLY. That, is the gist of your plan?

Mr. LAPP. Yes, sir; but the reason follows.

Our Congress is given the privilege and responsibility of hol the purse strings. Congress also has the power and the duty to to keep something in the purse.

The puzzling question is how to collect taxes in the amounts requ to pay currently for an all-out national effort. Most people inclu legislators are sure it can't be done. The outcome of this ana is to prove that we can collect enough tax revenue without resor either to bonds or to inflationary bank credit.

We can't get enough from taxes because we now try to collect i impossible way.

The major source of taxes, National, State, and local, has al been a levy on savings and property, on transactions, sales, ex and pay roll. In recent years taxes on net income have properly to be the largest single item of revenue.

In this analysis it is found that the tax on net incomes only is practical way to finance the war and to command the entire resou of our country. Following are the reasons for abandoning all fo

of sales, transactions, and property taxes and concentrating our attention on the net income tax.

All forms of sales and transactions taxes we may call sales taxes. A sales tax is a capital levy. It is literally a deduction from working capital taken before the ascertainment of loss or gain and taken from individuals or from enterprises even if they are insolvent or below the subsistence level. Legislators have a well-founded reluctance to the imposition of sales taxes. They should not yield to pressure in the direction of greater sales taxes and they would be able to resist if we can develop a practical taxation principle under which we can collect adequate revenue to command all the men and material that can possibly be devoted to Government activities.

The maximum effort that can be devoted to Government will occur if we have full employment of all people capable of productive work at such hours as to produce maximum product and then allow for each person a minimum for physical subsistence at full operating vigor.

All this can be brought about by the adoption of proper financial arrangements. That is, we must levy all taxes on current net income and we must maintain stable money. These two requirements comprise all the machinery by which we have any exchange relations between individuals and enterprises and Government. With rigidly stable money and with the taxation of net income only we can exact from each in extreme emergency everything above a bare subsistence without ruining anybody nor any business enterprise.

Senator CONNALLY. Mr. Chairman, I wonder if it would be possible for the witness to put the statement in the record?

Mr. LAPP. Gentlemen, I would like to make this statement

The CHAIRMAN. I asked the witness in the beginning if that were possible.

Mr. LAPP. This is something that is different, and if you get hold of this idea, to whatever extent it is incorporated, the actual program will be helpfully benefited.

Senator CONNALLY. We understand that.

Mr. LAPP. Now, we are faced with a ruinous prospect-—

Senator CONNALLY. The reason I made that suggestion is, you have given us the idea.

Mr. LAPP. I am afraid I have not, as yet, sir.

Mr. BARKLEY. You are afraid we do not have the idea?

Mr. LAPP. It has taken me 12 years of intensive study.
Senator CONNALLY. We do not have 12 years to give to it.

Mr. LAPP. I have it here, if you will bear with me.

The CHAIRMAN. If you will shorten it: if you will get down to your direct proposal, so far as the facts are concerned, then you can put in whatever you may wish in the record-you may put the complete statement in the record.

Mr. LAPP. Sir, it is not just in the form that I could pick it out like that. I think, considering the importance of the idea, it is extremely brief; and I would like to really go through it so that your minds could just hit on it in a moment or two.

We are rapidly approaching the time for all-out devotion to national purposes. The thing must be done through definite amounts of stable money by which all values are exchanged and precisely

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measured. We have for a dozen years and more in a time o suffered a chaotic situation to grow worse because of our to establish these two indispensable conditions necessary for a or for a war economy.

On the crumbling base of a broken-down peace economy w find ourselves face to face with the stark reality of carry national burden several times as heavy as the peacetime loa broke us down. We are witnessing the onrush of a host of scale problems.

It is not fair to charge our congressional committees wi responsibility of financing the war and arm them only wit credited methods. Collecting capital levies from insolvent and enterprises through sales taxes helps to ruin and extingui tax sources even in peacetime and cannot provide adequate r for war. Responsible people on our finance committees do no to collect an important part of wartime revenue by sales This fact gives telling evidence of the destructive effects of al transactions taxes that impede the process of production ar change, ruin producers, and cause unemployment.

The necessity of selling bonds in an endeavor to entice f amounts from the holders of untapped liquid income indicates that it is considered inexpedient economically as well as polit to collect the full amount of sales taxes. If we had a meth collecting adequate amounts of income we would not have to to giving part of our citizens through loans a creditor hold o country in its time of peril.

We may collect from current income a maximum of $30,000.0 out of a $60,000,000,000 budget. This means we have agreed to go the purchase of $30,000 000,000 worth of goods and service let our Government buy that much with our earned money equivalent of which we have produced and have not cons This is presumably all we can be made to surrender by taxation induced to contribute as savings by patriotism in return for bor

So far we have considered earned money that exists for value has been delivered. So far we are fairly realistic and do fractional damage to the lowest fringe of our economy.

But we still have 30 billions to collect from some place for we shall take a second $30,000,000,000 worth of goods and ser All this after we have contributed all we thought we could. shall we get this last 30 billions?

As a last resort we go to the credit bank for the deficit. I complete failure to finance our projects when we ask the bar issue to our Treasury some 30 billions of promises to pay mon return for some more bonds. The sad effect of this practice inflate the bank-deposit money we use in exchange which raises p in a time of active trade. The extra prices we all pay makes costs jump up so the Government buys less with our hard-earned

money.

I

The small income is to a large degree taken to pay sales taxes economic ruin overtakes marginal producers. The terribly des tive results of inflationary credit should make us pause and fi more practical way to finance the war program.

These well-known dangers should scare us into a proper hand of our present threatening situation. We should support and