tenant who came over in the late twenties. He had his family farmed the land intensively, with little extra labor-about 10 people in all at peak periods—and today he is an American citizen, owns his farm, and his three sons are all graduates of the University of California. When I visited him, he was selling over half a million dollars' product a year from 231 acres. The intricacy of that farming operation makes our agriculture in most of the United States look simple.

A parallel situation would be the postwar recovery of West Germany. When I saw the destruction of the houses, the factories-whole cities in ruins-like everyone else, even the Germans themselves, I missed completely in anticipating the rate of recovery. We simply could not visualize what would happen in growth, in production, during the next decade, or up to the present. And the reason was that we were putting too much emphasis on steel mills, plants, machinery, railroads, and buildings. We didn't see the human capital-and it was the human capital that went to work.

ALONE ON THE HIGH ROAD?

What does all this mean for U.S. policy? I believe it means that the time has come when we have to understand ourselves, and recognize the predominant role of human capital, human wealth. Somehow we have hit on a productive formula for our own society; and it seems that the Russians also are making large gains on this score. The importance of the role of new physical capital in the Soviet Union is often overstressed. The Russians, like ourselves, have been creating human capital very rapidly; and they have been turning it sharply and directly to economic account-undoubtedly at the expense of values we hold dear in our own free society.

Therefore, as we take a hand and act responsibly in other countries, we should bear in mind that the increase in real earnings, the rise in product that is needed to help the peoples of the world out of their poverty, requires human capital. Whether it be in point 4 technical assistance programs; in activities like the Rockefeller Foundation work in Mexico with hybrid corn; in the work of church groups operating through some 1,600 mission projects in agriculture, education and health in Latin America and elsewhere; or through private business-the transfer and development of new knowledge, new abilities and capacities are the most important contributions we can make. This is where the underdeveloped countries tend to neglect themselves. The great neglect in India, for example, is men. There are now three countries in Africa that are investing more per capita in human resources in this generation than India is. The great emphasis on human capital in Puerto Rico makes it stand out in comparison with other Latin American countries.

We in the United States stand here on the high road, which is indeed well paved with large stocks of knowledge and many developed abilities. This is our good fortune, part of our heritage and history. But is this road for us alone? What about most of mankind, trudging on the low road marked "poverty," working so hard and with so little knowledge? Shall we leave them there, like the lonely cultivator described in Faulkner's "Intruder in the Dust"? "The man and the mule and the wooden plow, which coupled them furious and solitary, leaning terrifically against nothing."

Mr. JACOBS. The documentation that Dr. Schultz and others working in this field are supplying only confirms what most of us have known about the importance of free public education in promoting the growth and development of the American economy. It is unfortunate that many of those who have the future of the economy in their keeping are so insensitive to the importance of education and of the need for keeping our education facilities up to date. However, Congress may share this insensitivity only at great peril to the future of our economic development.

BURDEN ON STATE AND LOCAL GOVERNMENTS HAS GROWN RAPIDLY

Second. As to the myth of State and local economic laxness: The cartoonist, Herblock, has, with his customary genius, put the matter in a nutshell. I have taken the liberty of including in my statement a copy of a recent cartoon which helps to put the case directly and well.

Not having Herblock's genius, however, I have had to have recourse to the statistics to show what has happened.

The fact is that the share of the tax burden which falls on the State and local governments has increased in recent years. In 1946, the Federal share of all taxes collected was 77 percent; in 1957, it had dropped to 67 percent. Conversely, the burden on State and local taxes had increased in this period from 23 percent to 33 percent of the total.

I have attached to my statement a table which shows that, while Federal expenditures for purposes other than war have increased over the years, they have not increased as fast as have population and prices. Thus, the amount spent for nondefense services out of Federal taxes, per capita in constant dollars, has actually decreased, as Federal attention has turned more and more to the costs of war, both hot and cold.

However, the increase in expenditures by State and local governments has been greater than the increase in population and prices. The result is an increase in the share of ordinary expenditures from State and local taxes, in whatever terms these expenditures are measured.

One way of saying it is this: In 1940, 58 percent of the cost of all nondefense services, per capita, was met out of State and local taxes; in 1957, the share carried by these taxes had risen to 75 percent of the total.

As far as public education is concerned, 96 percent of the costs are paid by the State and local governments, while only 4 percent comes from Federal funds.

It seems quite clear that the increase in Federal expenditures has basically not been to meet costs that the State and local governments ought to be meeting, but for other purposes-mainly war.

The burden on State and local governments, however, has increased tremendously, and what is proposed in S. 2 is that the Federal Government assume a somewhat larger share of the total burden, still leaving State and local governments to struggle with by far the major part of the job.

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(The table entitled "Change in Share of Non-Defense Services Paid for by State and Local Taxes 1940 and 1957" follows:)

Change in share of nondefense services paid for by State and local taxes, 1940

Total per capita expenditures, all levels in current dollars.. 107, 580, 000, 000

282, 340, 000, 000

1 President's budget message. Budget expenditures for "Major national security," "International aid," "Veterans' benefits," and "Interest on the debt" are excluded.

2 Reports of the U.S. Department of Commerce, Bureau of the Census: "Historical Statistics on State and Local Government Finances, 1902-1953," table 4, p. 22; "Summary of Governmental Finances in 1957," table 21, p. 35.

3 Direct budget expenditures less revenue from Federal Government; expenditures from insurance trust funds, utility and liquor store expenditures.

4 Computed from Census Bureau data.

Mr. JACOBS. The shift of government costs from the Federal Government to the States and cities has, of course, produced the debt situation that Senator Murray, among others, has described so well. While State and local government incomes increased 119 percent from 1947 through 1957, their bonded debt increased by 182 perIn the same period, Federal revenues increased 81 percent while the debt increased only 7.2 percent.

cent.

FEDERAL TAXES PROTECT VITAL BUYING POWER

Third. The tempest over what States pay in taxes compared with the aid received.

The argument is made against Federal aid for schools that certain States, the so-called rich ones, will get back in Federal aid from the Government less than they will pay in Federal taxes for this purpose. This argument has no merit. It is based on faulty economics and an even more faulty approach to American life. As far as we are concerned, the children of America are the children of all America, and the wealth of America is the wealth of all America. We support Federal aid for education because it is a way of using the wealth of all America for the education of the children of all America.

One misunderstanding is due to the failure to understand how the Internal Revenue Service publishes its figures on tax collections. Those who deal with these figures generally assume that the money collected by each of the Internal Revenue Service tax collectors is paid by residents of the particular State in which the IRS office is located.

This is just not true. An obvious illustration of what is involved is the fact that the people of the District of Columbia pay their taxes to the Collector at Baltimore, Md., and thus the IRS figures show no Federal tax collections at all for Washington.

A much more complicated problem in determining who is taxed for Federal Government costs is illustrated by the alcohol taxes reported as collected in Wisconsin, Indiana, and Kentucky; the tobacco taxes reported as collected in North Carolina, Kentucky, and Virginia; and the automobile taxes reported from Ohio and Michigan.

While only half the money collected in Michigan and Kentucky is paid by the people of those States, the residents of Arizona may have paid twice as much as is reported from that State and the figures for West Virginia and Alabama may report only two-thirds of the money paid by the people of those two States.

Actually, however, States do not pay taxes to the Federal Government. Individual people pay these taxes, whether the State or the Federal Government collects them. To us in the labor movement, it is important to know how these people and especially the low and middle income taxpayers of the Nation-fare under the various State systems, as compared with the Federal tax system.

As is well known, low income families pay a far greater share of State taxes than they do of Federal taxes, and than they ought to have to pay under any tax system. The fact that the State governments depend so heavily on sales and similar taxes while the Federal Government makes use of personal and corporate income taxes means that low income families on an average pay twice as much in State and local taxes as in Federal taxes for each billion dollars of tax collections under these two systems.

According to data made available to Congress in November 1955 by Dr. Richard Musgrave, this is the way it worked out at that time:

How much money would have been paid by each income group for $1 billion collected in taxes-Federal taxes, compared with State and local taxes (1954)

To collect a billion dollars in Federal taxes, Mr. Chairman, we at that time drew from the under $3,000 families $81 million. However for each billion dollars collected in State and local taxes we drew from these same families $155 million.

In other words, to collect any given sum of money, for each dollar these low income families would pay in State and local taxes, they would pay a dollar and ninety cents in Federal taxes, or almost twice as much.

At the other end of the income scale, the over $10,000 group would pay approximately half as much in State and local taxes as in Federal taxes for the same total amount of tax collection.

FEDERAL PROGRAMS ARE BASED ON ABILITY TO PAY

Let us put these facts together as they apply to one of the major States, one which would "put more than it would take," as the popular phrase is, under a Federal aid program for each billion dollars involved in that program. The State of Michigan provides an instructive example.

A calculation of Michigan's Federal tax collections shows that, for each billion dollars collected in Federal taxes, the people of Michigan paid approximately $48 million at the time our study was made.

For each billion dollars of Federal aid for schools that would be distributed on a per-child basis, Michigan would have received approximately $43 million.

If the State of Michigan did not receive this $43 million in Federal aid, it might attempt to raise that amount by State tax collections. Let us assume that the amount would, indeed, be raised by the existing State tax system.

We can now compare the way the tax burden would fall on Michigan residents under these two different approaches to raising the $43 million which Michigan might receive the Federal aid approach or raising the money itself.

You will see, sir, that toward this $48 million collected by the Federal Government in Michigan, the people in the under-$3,000 income group would contribute $4 million. However, if $43 million were raised by the State of Michigan under its existing tax system, these families which would pay $4 million in Federal taxes would pay $72 million in State taxes.

In other words, the burden of the Federal taxes on the under$3,000 income families, would be $32 million less than the burden. of the State taxes collected in Michigan.

Senator MURRAY. I think with that explanation that table is probably clear.

Mr. JACOB. I hope it is.

For States which are proportionately richer in children than they are in dollars, the situation is different. We can show how the tax burden would work out in such a State using Kentucky as an example.

For each billion dollars of Federal tax collections, approximately $11 million were collected from Kentucky when this study was made.