Secretary FOWLER. There are other reasons, I think, that, shall we say, more than counterbalance their regressivity, that justify their maintenance. Senator Byrd has referred to the taxes on gasoline as providing the revenues for the highway program. I think the general attitude toward taxes on tobacco and alcohol is that even though they are regressive it is a good thing, as a matter of public policy, to tax these items.

The CHAIRMAN. Senator Smathers.

Senator SMATHERS. Mr. Secretary, I gather from what you say you believe, as others have believed, the reduction of taxes or the increase of taxes can have a vital effect upon our economy and should be used in order to effect that economy, is that correct?

Secretary FOWLER. Yes, Senator. I do think so. Apart from their revenue-raising effect which is the main reason for them, the manner and the amount and the method in which they are imposed can have economic side effects which are of very great importance and which the Treasury and this committee and the Congress have to constantly be aware of.

Senator SMATHERS. As I gather it from your answer to the distinguished Senator from Delaware, you do not believe that our economy is moving into a deflationary period?

Secretary FOWLER. No; I do not believe it is moving into a deflationary period and my own view is that the outlook insofar as it can be reasonably foreseen, seems to me to be a very favorable one for continued expansion. I could elaborate on that, Senator, if it is pertinent to this consideration at this time.

Senator SMATHERS. May I say right there, and I think it is pertinent in this respect, that you have recommended that the Finance Committee and the Senate do not take exactly the same position that has been taken by the House. In other words, we are holding back, I think, as Mr. Surrey said, postponing the decision with respect to the remaining five points of the automobile excise tax until the future demonstrates such is the course of fiscal prudence. It is impossible to forecast the economic situation that far ahead and he said the prudent course of the Nation is to stay with the President's program. I gather from what he is saying and from what you are saying, that you think the economy is in sufficiently good shape at this point that it does not need this extra stimulation which obviously would result if we adopted in toto the recommendation of the House Ways and Means Committee.

Secretary FOWLER. That is right. And I think that also the fact that that impact would be some time off is another consideration. It is a fair reading on what we have said that we think to eliminate the entire tax now would not be a prudent or necessary thing to do in the light of the general economic situation, and this does involve some judgment as to the general economic outlook.

Senator SMATHERS. In other words, you seek to hold back some weapon, so to speak, in the event that the economy should begin to turn downward you could recommend to the Congress which would have the effect in your judgment of turning it back up.

Secretary FowLER. Yes, Senator. We are not coming here today in the posture of a department that is seeking desperately to shore

up anything that looks like a failing economy. We are coming here in a very much of a different posture and that is to take advantage of the flush that we have had in additional revenues even beyond our estimates as recently as January, of a substantially expanding economy, and take advantage of the current outlook to remove a greater slice of the selective excises.

We are in a period of a very long and sustained expansion, and I, for one, think it is the better part of prudence, in a period such as this, for business forecasters and commentators and public officials to look at business prospects and keep a somewhat open-eyed view to find any emerging imbalances or trouble spots and attempt to deal with them to some extent in advance.

The way to deal with a recession is to avoid having it, if you can. Now, I think, therefore, the continued examination of the ways in which we can sustain an expansion is a healthy exercise. I believe it is the duty and responsibility of those of us who are concerned to realize that it is the balanced character of this particular expansion which has given its durability and its sustained effect over a long period of time. The retention of such a balanced character to the expansion requires us to be concerned with seizing additional opportunities to remove obstacles and burdens to further growth such as is exemplified in this bill here, and it is important to have that continued emphasis. It is also important to have the emphasis which Chairman Martin was giving the other day that it is possible to lose an expansion by having it go so far so fast that inflationary tendencies overtake it and in effect it falls forward.

I think both of these points of view are ones that all of us should keep in front of us. It is a very healthy thing to have them, and I, for one, think it is perfectly natural when the economy is catching its breath, following the very large increases in sales and production during the first quarter, that as we return to a more normal growth pattern we recognize this is something which has been fully anticipated.

For my own part I see no reason to question the earlier judgments of economists in Government and I think in business as well, that we see and expect a continued orderly growth as far ahead as one can see with reasonable clarity.

If anything that has happened since the first of the year, it seems to me that our sights have been a little bit raised insofar as the outlook for continued growth is concerned. Certainly the official forecast of $660 billion of gross national product for calendar 1965 seems solid and maybe a trifle low.

I could go into the various indicators and that most of us are familiar with, but without taking the time of the committee to do that, just let me say that in my judgment these factors together with the additional impetus that is inherent in the bill before the committee here, give ground for solid confidence that our expansion will continue without undue strains on the capacity or manpower.

Senator SMATHERS. May I state right here to you that a member of the staff put in front of me just a second ago the percentage of annual retail sales each month, and the Senator from Louisiana would be interested in this. It shows that in the months of May and June every

year apparently the sales are lower at that particular time than they are at any other time. Here is a history of them and they apparently go up. For example May and June, 6.1 percent; May, 6.6 percent. November they went up to 10.3 percent. October, 10.5 and 10.9 percent. Senator LONG. He might know as much about his business as you do Senator and I would be surprised if he does not.

Senator SMATHERS. I don't know much about his business. All I am saying is that this was provided by the general merchants association of the United States, Merchandising Week, the January 25, 1965, issue, which shows that is what happened. It has got to be retail.

A couple of more questions and then I will let you go.

Mr. Secretary, as I understand it, the real difference in what you want us to do is to go back to the President's recommendation which actually reduces that amount of tax taken off on and the time when it is taken off with respect to telephone and automobiles; is that correct? Secretary FOWLER. Automobiles is the variance insofar as the President's program and the House program is concerned.

Senator SMATHERS. So far as you are concerned the recommendations they made with respect to telephones you are in complete accord with?

Secretary FOWLER. The House is in complete accord with the President's program.

Senator SMATHERS. Can you tell us whether or not the excise tax reduction in this instance with respect to telephones and all others will be passed on to consumers or not?

Secretary FOWLER. I only examined the hearings that were held last summer before the House Ways and Means Committee in which a number of proponents of excise tax reduction or elimination appeared before the committee. Members of the committee were naturally interested in that question of whether the reductions are going to be passed on, and as you might expect the record seems to be rather replete with assurance that, from various persons appearing, that will be the case.

I can't say to this committee that we have any reliable method of assuring the committee that in fact the savings will be passed on. think all we can do is to point to the expressions of intention in those hearings last summer, and observe that the factor of competition in many of these excise tax fields is so intense and the structure of the distribution and manufacturing patterns are such that it seems a reasonable judgment to make that by and large there will be a substantial passing on of the tax reductions. As my statement indicates, and as Assistant Secretary Surrey's indicates, and the House committee indicates in its report, there will be some substantial price decreases in some of these excise taxed items.

Senator SMATHERS. If this tax reduction is to achieve the purpose which you hope that it will achieve, is it a fact that these tax reductions will have to be passed along to the consumer?

Secretary FOWLER. No. I think that there are several objectives that this bill could achieve, and I wouldn't want to place the entire thrust of the position as depending upon whether the reductions are passed on. If the reductions are not passed on through price reductions to the consumer, they nonetheless become available to the businesses, as, for example, to finance further activity, so eventually

part of it comes back to us. But we are very clear that the most beneficial result of this particular bill would be not only to put back into the private sector the revenues that are involved, but also to get this extra dividend that would be involved in price reductions of the taxed commodities which would be a healthy thing in terms of wage-price stability.

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Senator SMATHERS. In other words, to make it clear so that I might understand it, you, as Secretary of the Treasury, however, are hoping or expecting, are you not, that this price reduction is passed along to the consumer?

Secretary FoWLER. Very much so.

Senator SMATHERS. In yesterday's Wall Street Journal there was an article which was of considerable interest to me, at least, showing the growth of the Nation's gross national product and then the growth of the Nation's debt and then the debt as a percentage of gross national product. I don't know whether you saw that or not. Secretary FoWLER. Yes.

Senator SMATHERS. In 1964 it pointed out that the gross national product was $623 billion. The debt was $811 billion, and the debt as a percent of the gross national product was 130 percent which, of course, is the highest level of debt as compared to the gross national product that we have ever had.

As Secretary of the Treasury, are you concerned about this increase in the percentage of the debt and, if so, I would like to hear your comments about it?

Secretary FOWLER. Well, I think that it is quite clear that there can be a rate of increase in private debt that would be nonsustainable and, therefore, destabilizing in its character. I am not prepared to make a judgment that the rate of increase we have had up to now is of such a character. I think we all recognize that, as the country grows and expands and increases, it is natural that the levels of debt, private debt, corporate debt, personal debt, State and local debt, all tend to go up with it.

I think one of the real factors that perhaps the article mentioned, but did not really examine closely, is to what extent at the same time that debt has been increasing has there been increasing savings and increasing level of discretionary income that is available to you and me to spend. If that level of discretionary income is substantially expanding so that we can carry the increased debt as businesses or as individuals, and whatnot, there isn't as much to worry about as it would be if the carrying charges of the debt and the level of the debt were far exceeding the capacity of those that incur the debt to carry it. Senator SMATHERS. All right, thank you, Mr. Secretary.

Senator DIRKSEN. Mr. Chairman, can I ask a question? Is it proposed to have the Secretary back?

The CHAIRMAN. We have 15 minutes.

Senator LONG. Mr. Chairman, as I understand it, Senator Dirksen has to leave shortly.

The CHAIRMAN. Would it be satisfactory for the committee to have Senator Dirksen ask questions?

Senator BENNETT. I will be very happy to yield my turn to Senator Dirksen.

Senator DIRKSEN. Mr. Chairman, I am asking these questions on behalf of Senator Kuchel who is unavoidably away from Washington but he raised some question about the tax on champagne. As I had understood, Mr. Secretary, since the production of wine is one of the major operations in California that they make table wine on which the tax is 17 cents per gallon; is that correct?

Secretary FoWLER. I believe that is the rate.

Senator DIRKSEN. All they do to produce sparkling wine and champagne is to carbonate the same table wine, but the tax on sparkling wines and champagnes is $3.40 a gallon or 20 times as much. Now this tax was put on at a time when foreign wine producers preempted about 80 percent of the American market. I understand today that about 85 percent of the champagne and sparkling wine that is consumed in this country is domestically produced, and that California vintners make the point that that tax could well be dropped to a dollar per gallon on sparkling wines and champagne because actually what it is is $3.40 a gallon on the bubbles that go into table wine. That is what it amounts to. So if there is any logic in this so-called business of feedback to increase business, therefore increased revenue, they believe that they ought to be cut in on this excise tax bill for some of it benefits.

This is an odd line of questioning, coming from one in the corn country where we measure it by gallons as well as bushels, but I am doing this in behalf of the distinguished Senator from California.

Secretary FOWLER. Senator, I have two preliminary comments to make on this problem that you raise and perhaps Assistant Secretary Surrey, who has studied the alcohol and tobacco area very closely in connection with this program, would wish to supplement it. Questions of this sort have been raised on the House side during the course of these deliberations. We have taken the position that we recognize that there are some elements within the method and technique and rates of tax in the alcohol and tobacco areas that ought to be looked into, particiularly as to whether or not the existing rules are equitable to all sectors of the industries concerned.

We have strongly urged that the House committee not at this time include any proposals that would involve a substantial loss of revenue in this particular area, and that we have a chance to study and develop ways and means of dealing with some of the real grievances that various segments, various types of producers, have in terms of the present tax system.

Now Assistant Secretary Surrey has been in meetings with a number of those who are concerned about the way in which a particular tax is levied or the discrimination which they feel it involves to them as to a competitive beverage or competitive form of tobacco. We are not ignoring this by any means but we feel that in view of the desire for speed in getting this particular legislation through, and because we want to keep the revenue picture in a somewhat more prudent area, that we hope that this matter can be deferred.

Senator DIRKSEN. I might say that a bill is pending to effectuate just what I have been saying.

Secretary FOWLER. Yes, sir.