tax expenditures use budget resources in the same way that direct expenditures or net lending do. In most cases, the special tax provisions are alternatives to direct expenditures or net lending to achieve the same purpose. The Annual report of the Secretary of the Treasury for fiscal year 1968, which was issued this week, contains for the first time a detailed description and discussion of these tax expenditures and estimates of the amounts involved. To bring this material up to date, the Treasury staff has prepared an analysis of tax expenditures related to the budget for fiscal year 1970 which I am submitting as a supplement to my statement. The revenue costs of the special tax provisions are presented alongside the budget outlays. This makes it possible to get a more complete picture of total government expenditures for various functions. You may be surprised to find that tax expenditures approach or even surpass the budget outlay for certain functions. The purpose of this special analysis is to present information which will help us to use budget resources most effectively. We can obtain more efficient use of resources by the Federal Government if explicit account is taken of all calls upon budget resources. In this way the importance of different budgetary objectives and the effectiveness of alternative uses, whether through direct expenditures, loan subsidies, or tax expenditures, may be fully understood, examined, and re-evaluated periodically. I should inject a note of warning at this point. As the Committee knows, the whole subject of tax expenditures is highly controversial and the figures presented in this Treasury report are themselves certain to be controversial. The figures may vary depending on the assumptions used, and we do not claim that our figures and assumptions are the last word. Perhaps the Committee might want to have its staff analyze this document-perhaps in conjunction with the staffs of the Joint Committee on Internal Revenue Taxation and the Appropriations Committees. The staff of the Treasury will be pleased to cooperate. Many of the provisions in the Tax Code are virtually the same as appropriations and should be considered by the Congress as they review the various Federal programs. Let me turn now to four areas where I believe there is urgent need for action by the United States or by those nations whose economic future is closely linked with our own. THE NEED FOR TAX REFORM We have an income tax system which has demonstrated its strength-$128.3 billion of revenues expected in fiscal year 1970-and its flexibility. The income tax is one of our country's strongest assets, and we must strive to improve it and perfect it. Our income tax system needs major reforms now, as a matter of importance and urgency. That system essentially depends on an accurate self-assessment by taxpayers. This, in turn, depends on widespread confidence that the tax laws and the tax administration are equitable, and that everyone is paying according to his ability to pay. We face now the possibility of a taxpayer revolt if we do not soon make major reforms in our income taxes. The revolt will come not from the poor but from the tens of millions of middle-class families and individuals with incomes of $7,000 to $20,000, whose tax payments now generally are based on the full ordinary rates and who pay over half of our individual income taxes. The middle classes are likely to revolt against income taxes not because of the level or amount of the taxes they must pay but because certain provisions of the tax laws unfairly lighten the burdens of others who can afford to pay. People are concerned and indeed angered about the high-income recipients who pay little or no Federal income taxes. For example, the extreme cases are 155 tax returns in 1967 with adjusted gross incomes above $200,000 on which no Federal income taxes were paid, including 21 with incomes above $1,000,000. Judging from taxpayers' letters to the Treasury, I would say that many people are upset and impatient over the need for correcting these and other situations which demand our attention. In this connection, I should point out that the 10 percent surcharge has made many taxpayers more aware of the inequities in our present tax system and more demanding that reforms be adopted. I believe public confidence in our income tax system is threatened and that tax reform should be a top priority subject for the new Administration and the 91st Congress. As you know, we at Treasury have been working on tax reform proposals for more than two years, and they are now ready. They will be turned over to Secretary-Designate Kennedy and, upon request, to the Congress. I feel that the enactment of major reforms to substantially improve the fairness, simplicity, and neutrality of our income taxes are essential to continue and strengthen public confidence in our tax system. THE NEED FOR RESTORING THE UNITED STATES TRADE POSITION The international trade position of the United States is rapidly deteriorating. It is essential therefore that we make a forceful policy response to restore our trade account to a position of strength. Short of this, we will find a continuing upsurge apparent in the country. The answer to our trade problem does not lie in an overhauling of our tax system through the introduction of a value-added tax either in addition to or in lieu of our present taxes. The adverse domestic effects of such a move would far outweigh any small trade advantage which we might gain. What we might well consider instead is our own system of border adjustments, encompassing both a tax on imports and a payment to exporters. The level of these adjustments would be unrelated to our domestic tax system. The rates would be set at whatever level is necessary to achieve our objective-a healthy trade surplus. This system should be established under the strict control of the General Agreement on Tariffs and Trade or other appropriate international body. THE NEED FOR ACTION ON THE SDR FACILITY I would urge the member nations of the International Monetary Fund that have not yet completed action on the Special Drawing Rights Facility to do so promptly. Their ratification of the Proposed Amendment to the IMF Articles of Agreement establishing the SDR Facility will bring closer the day when the world will be assured of an adequate growth in monetary reserves. The SDR Facility will be created when 67 member nations having 80 percent of the weighted votes in the Fund have ratified the Amendment, and when members having at least 75 percent of the quotas in the Fund have deposited with it an instrument of participation. The United States completed action on the SDR Facility last July 15. However, as of January 10 of this year, only 29 members of the Fund having 472 percent of the total votes had ratified the Proposed Amendment. After years of intensive negotiations, nations have neared establishment of a method for creating the monetary reserves needed by a rapidly growing world economy. We are near the goal of the most important reform in the international monetary system since the Bretton Woods Agreement of 1944. I earnestly hope that other nations and their governments will make it possible for the world to reach that goal within a period of weeks or months. THE NEED FOR SUPPORT TO MULTILATERAL DEVELOPMENT INSTITUTION I am also deeply concerned about two items of unfinished business in the field of multilateral development finance. Both-the replenishment of the International Development Association and the provision of special funds for the Asian Bank-involve institutions that I have been intimately involved with over the years. What we in the United States do in regard to these two institutions can have a profound effect on the well-being and the very lives of millions among the two-thirds of the world's population that has little to possess and still less to hope for. As a freshman Congressman, I helped write the legislation for our participation in IDA. I have seen it in action in the field, in Asia in 1963 and in Africa in 1967. I know it is capably guided by the World Bank under Robert MaNamara's sure hand. IDA is, most importantly, serving in a growing way the primary function we had in mind in the late 1950's-it is mobilizing a greater share of development resources from the other advanced countries. It is putting these resources to work in an efficient and effective manner. Eighteen other countries put up a total substantially greater than our own. Our share in the effort has been reduced from 43 percent at the outset to 40 percent currently, meaning a cumulative transfer of the burden of about $150 million. The contribution proposed for the United States $160 million in each of three years will have no adverse effect on the U.S. balance of payments, because we have obtained internationally agreed safegards to ensure this. But the entire IDA replenishment package cannot become effective unless the U.S. makes its contribution. I consider it of the highest urgency for the Congress to demonstrate again its consistent attitude of bipartisanship toward IDA by acting on the legislation that has been re-introduced in recent days. While IDA's operations are world wide, those of the Asian Bank are concentrated in the area of the world that has been torn by intense conflict and wracked by human misery for all too many years. In December 1965, I was privileged, along with Eugene Black, to sign the agreement establishing the Asian Development Bank, thus placing us firmly on the path of constructive multilateral development in Asia. Many members of the Congress and Congressional staff members participated actively in the events leading up to the creation of the Asian Bank. It is now in being, with a distinguished staff and with an effective loan and technical assistance program moving forward. However, the Bank needs additional resources-beyond its regular funds for conventional lending-for special lending programs on favorable terms in fields such as agriculture and transportation. The new budget proposes a $25 million U.S. contribution to Asian Bank special funds in 1969 and 1970, and I consider this action, already long delayed, as crucial to Asia and our total interests there. These funds will help to encourage regional cooperation and peaceful development in southeast Asia. Like our IDA contribution, we would be putting up only a monority share; Japan and other advanced countries will bear the major burden. And this contribution, too, will have no adverse balance of payments effect since it will finance U.S. goods and services. I sincerely hope that both these vital programs will promptly receive the Congressional support they deserve. I am submitting with my statement for the record a set of charts with the heading "The Fiscal Program for 1970 in Perspective." These charts set forth the economic rationale for the financial plan which President Johnson recommends to the 91st Congress, and I would like at this time to review them with you. (The material referred to follows:) Effect of Tax Action on Budget Deficit Fiscal Years 1969 and 1970 Chart 5 Net Federal Borrowing From or Repayment to the Public Chart 6 Federal Debt Held by the Public as a Percent of Gross National Product Real Gross National Product After the Recession Troughs of 1954 and 1961 |