Mr. MILLS. I wonder, though, if when the 1st of January rolls around and some 25 percent of the corporations that pay excessprofits tax find they are paying it in the calendar year 1954, whether they will not complain that we created an inequitable situation from their point of view.

Secretary HUMPHREY. No; but you may find a small minority of companies, some companies that are offset. And I don't know how you can ever get any date that is going to get them exactly the same. But you will get the great majority this way on a fair date.

Mr. MILLS. I will agree you could never pick a date that would equally affect all.

Secretary HUMPHREY. There is just one other thing I would like to bring up that was not touched on. You did not bring it up, but somebody did before. It is about the tax reaching a saturation point, where you run into the law of diminishing returns. I just wanted to point this out at this time. Our income is still going up. The tax take is still going up. It has been going up quite importantly, and the income is going up quite importantly, the amount that is taxed. You may say, "Well, it might go up even further without excessive taxation." I think I could agree to that except for one thing. That is that when you have the employment and business at the peak levels at which they are today, it is very difficult to conceive of anything that is going to stimulate it very much above where it is today. We are up to about as small an unemployment as it is possible to have in this country, and we are up to an extremely high level of business.

So I do not believe that there is much stimulation that you could get by trying to force things much higher, because you are just getting pretty near up against the top.

Mr. MILLS. Mr. Secretary, that causes me to ask you this further question. I think you are exactly right. As I understand the situation, I would agree with you on the basis of what you have said. But I wonder if the situation can remain that way, and if the Government cuts back on some of its orders with business will there not have to be something to take the place of that cutback on the part of the Government in order for business activity to remain where it is today?

And then I ask you the question: Can business remain where it is today, at this high level of activity, with Government cutting back in its orders as we reach a peak in defense spending and still have business hampered and restricted in its expansion and growth through an excess-profits tax?

Secretary HUMPHREY. Well, I think that is a very proper question, and you asked it just right. What we have got to do is, when we do begin to reduce our expenditures below the expenditures we have been making, is to cut taxes so that the people will have their own money to spend.

Now, what we are doing is this: Up to this point the savings that we have been able to make are savings in an estimated expenditure of the budget above the actual expenditures that have been made previously. We are just getting down now, by this $42 billion cut in the budget, in the Truman budget. We get down to about the figure we have been previously spending, around $73 billion a year. So that up to date we have made no saving in the amount of money that the Government is spending, that is going out into the hands of the people, in payrolls and that sort of thing. What we wanted to do is to get

enough income in to help make those payments and then make savings, as I have explained to you I think we can do, and bring those expenditures down, so that by the end of the fiscal year, we will be getting in balance. And what we are doing is gambling to some extent on our own ability to make those savings, by anticipating savings, by making an individual income-tax reduction before the time that we actually have stopped spending the money, do you see?

Mr. MILLS. On the other hand, are you gambling it all on whether or not you will have your tax structure ready by the time you get to the point of savings which you have in mind?

Secretary HUMPHREY. Well, we are actually recommending to you that the individual taxes be reduced the 1st of January.

Now, in order to have that a sound procedure, we have got to make some savings and expenditures before we get to the 1st of January. But we have sufficient confidence to believe that we can do that and will do it.

Mr. MILLS. But you and I know that tax savings to the individual the 1st of January may not be enough inducement to make up for what we have been talking about, if it should happen.

Secretary HUMPHREY. That is quite a lot of money.

Mr. MILLS. I understand it is; but on an individual basis, it does not amount to too much.

Secretary HUMPHREY. What we are doing, Mr. Mills, these two taxes that will expire, the excess-profits tax and the individual tax, on December 31st, if this program is carried through, release $5 billion to the people that they did not have before, that we have got to make up in savings of Government expenditures, to have a balanced budget and to come out even. So it is not chicken feed. It is $5 billion a year.

Mr. MILLS. Mr. Chairman, let me comment for the record that, in my opinion, Mr. Humphrey makes as good a witness as we have had before our committee.

You disarm us, and you leave us in a perfectly helpless position to resist anything that you propose.

The CHAIRMAN. I do not share Mr. Mills' view on that last point. Secretary HUMPHREY. I am sorry, Mr. Chairman.

The CHAIRMAN. I agree on the first point, that you make a great witness.

I do want to comment on one thing. That is that unless we make the tax cut well in advance of the so-called cutting of expenditures, it would not be quick enough to pick up the jobs that are necessary if we are going to preserve our free enterprise. The fact, though, is that we have to absorb 600,000 or 800,000 new laborers or employees each year, in order to give them work, and if we do not, we simply create a group who are afflicted with unrest and sometimes become too critical of the Government and get over to the borderland of communism. We do not want that to occur. And I am following the lines of Professor Schlichter and others, who advises that these cuts should come well in advance.

I notice that Canada did not worry about the peril that we are in at the present time, in cutting taxes.

I also note that Britain, who is much nearer to Russia than we are and much nearer to atomic bombs, cut her taxes without any great

comment on the perils of the times, and the same is true with France, and she has been invaded before now and occupied, and she does not seem to be worried, and she cuts.

Another thing, while I am at it: I cannot help but go back to experience and logic. And during the twenties, when we cut four times, we had full employment during that time. We cut four times, and we raised more money than we had raised before with the higher taxes. That was Mr. Mellon's philosophy. And not only that, but we paid a billion dollars a year on the national debt each year for 10 years. And is the 80th Congress worrying about the budget at the present time? The deficit at that time was over $20 billion, and in 2 years, by lowering taxes, we stimulated business to the point where all you have to do is take the figures to see what the result was, but, at any rate, we wiped out that deficit, and we had $5 billion paid on the national debt, and we also had an $8 billion surplus. Now, that system has worked. And I will repeat what I have said before. You will never balance the budget, in my judgment, until you take the shackles off business and let them produce the revenue that will balance the budget.

Secretary HUMPHREY. Well, I will just make this short comment with respect to it. If you go back to the twenties, along in the twenties, the early twenties, you will find that there was a lot of room for business improvement, and it needed a lot of stimulation. It was not at a high level at the time it began. It grew as it went on, but it was not at a high level at that time, which is quite different than it is today.

I think, Mr. Chairman, that I agree entirely with your statement, and I think you are entirely correct that you must anticipate savings and reduce taxes ahead of time. In other words, you must not make your savings first and then make your reduction. I think you must anticipate it and have confidence enough in your ability to catch up with your savings to do it.

But that is a matter of judgment, as to how far you can discount ahead your ability to cut. And that, again, at the present time, brings in something that did not bother Mr. Mellon at all, and I wish to God it did not bother us now, and that is the fear of atomic attack. The CHAIRMAN. Mr. Secretary, I am trying to avoid its bothering you now.

Secretary HUMPHREY. I know; but we have a security problem on our hands today that somewhat limits our ability to cut or to think we can cut as rapidly or as fast as we wish we might. I think the only difference, Mr. Chairman, between you and me is a very little matter of a billion dollars and about 6 months. Otherwise we are thinking along exactly the same lines.

The CHAIRMAN. Yes, sir. A little further than that, I know that it will stimulate industry and bring in more revenue, so that you will balance your budget more quickly than the way you are proceeding. But that is all said in a kindly spirit, and I am basing it on experience and logic, and I do not know of other courses to follow.

Secretary HUMPHREY. It is just a matter of judgment with respect to timing, and I think that is the only place where you and I have any difference of opinion.

The CHAIRMAN. Thank you.

Mr. Curtis, I believe, wishes to inquire.

We want to let you go at 2 o'clock, even if you come back another day.

Mr. EBERHARTER. Mr. Chairman, I have some questions. I do not think we can set any line at 2 o'clock.

Secretary HUMPHREY. I can come another day.

The CHAIRMAN. Would you prefer to go now?

Secretary HUMPHREY. I can wait another 10 minutes, or I can come back another day, whichever you gentlemen prefer.

The CHAIRMAN. I think if it is all right with you and Mr. Curtis, then we will let the Secretary go and come back.

I want to accommodate you in any way that we can, Mr. Secretary. We will let you go and if you can come back in the morning, we will appreciate it very much?

Secretary HUMPHREY. Tomorrow morning?

The CHAIRMAN. Yes.

Mr. EBERHARTER. Will that extend the 10-day period you have allowed for these hearings, Mr. Chairman?

The CHAIRMAN. We will settle that question when we come to it. So we will let you go now.

Secretary HUMPHREY. Until 10 o'clock in the morning?

The CHAIRMAN. Yes.

Secretary HUMPHREY. Thank you very much. I appreciate it very much..

The CHAIRMAN. Mr. Rowland Hughes, from the Bureau of the Budget, will be the next witness.

Mr. Hughes, we are certainly delighted to have you here. I feel under great obligations to you, sir, for the fine work that you have been doing with our joint committee in trying to help use revise the code for next year. I would like to have the audience know that you are a prominent New York banker, and that you are here in the patriotic service of your country.

If you will just state for the record your name and your official connection and the object of your appearance, and so forth, we will be delighted to hear you.

STATEMENT OF ROWLAND R. HUGHES, ASSISTANT DIRECTOR OF THE BUREAU OF THE BUDGET, ACCOMPANIED BY PAUL L. MORRI- SON, ASSISTANT DIRECTOR OF THE BUREAU OF THE BUDGET, WILLIAM F. MCCANDLESS, ASSISTANT DIRECTOR FOR BUDGET REVIEW, AND J. WELDON JONES, ECONOMIC ADVISER, OFFICE OF BUDGET REVIEW

Mr. HUGHES. Mr. Chairman, I feel it is a very great honor to be before the Ways and Means Committee because, as you say, I have worked with them and know the work they are doing.

I am Assistant Director of the Budget, and I am here to testify on this bill that you have before you from the Budget's viewpoint. I have with me certain associates, and I will hand the list to the clerk.

Mr. Chairman, I have a statement which, if it suits you, I would like to read, and then we can have any questions and discussion. The CHAIRMAN. That will be perfectly proper.

Mr. HUGHES. Mr. Chairman and members of the committee:

I appreciate the opportunity given me by your invitation to testify before your committee. You are well aware of the general budget situation which faced us in January. I believe it will be helpful as a background for the consideration of the tax questions immediately before you to have some summary of the facts which beset us in refor mulating the budget for the fiscal year 1954 and in planning the budget for the fiscal year 1955. Secretary Humphrey has reviewed with you the fiscal and tax programs as they stand at present-very thoroughly and disarmingly, as the committee, some of them, stated. The Bureau of the Budget is directly concerned with the immediate and future appropriations and expenditures, which are of course the direct cause of the difficulties we are dealing with.

The President in his message has stated:

We intend to continue our efforts to reduce Government spending and to put the Nation's financial affairs on a sound basis. These objections will be pursued in our everyday operations and will chart our course in every budget this administration transmits to the Congress.

And further on:

Substantial reductions have been made already. We are working hard to increase them within the framework of the administration program.

That is the constant and principal objective of the continuing work of the Bureau of the Budget. We know progress is being made and we are confident it will continue. The necessity now is to measure the progress to date against today's revenue needs.

Let us look first at the background of actual and estimated budget deficits during this period of our defense buildup. There was an actual budget deficit of $4 billion in the fiscal year 1952. The budget document sent to the Congress last January by the previous administration indicated deficits of $5.9 billion for 1953 and $9.9 billion for 1954. This totals $19.8 billion for the 3 years. It now seems certain that the revenues on which the estimated deficits for 1953 and 1954 were calculated, were overstated. Making adjustment for estimated lower revenues, the revised figures for 1953 and 1954 would approximate $7.5 billion for 1953 and $11.1 billion for 1954. These deficits, plus the actual $4 billion deficit for 1952, would aggregate about $22.5 billion. Let me emphasize here that the figures that we have been presenting are those of the Truman budget. They represent the situation which had been built up by the previous administration, and take no account of the reductions of expenditures already initiated by the present administration since it took office, or of the congressional actions on the 1954 budget.

The situation before the corrective measures of the present administration is even more disturbing if we look at the possible magnitude of the deficit for 1955 which was looming up as this administration. came into office. If all the tax reductions which are now scheduled by law are allowed to take effect, the loss in revenues for 1955 from such action would approximate $8 billion. Expenditures in 1955, however, would evidently have been only slightly less than in 1954 if the 1954 budget plans for the previous administration were adopted. As a result, the 1955 budget deficit-again predicated on no reduction in expenditures by the present administration and the Congress in the fiscal year 1954 and 1955-would be substantially greater than the deficit for the fiscal year 1954 and could reach the magnitude of $15