bulk of all income in the United States goes to families "in the middle" who cannot escape paying a proportionate share. Taxpayers with an adjusted gross income between $5,000 and $15,000 accounted in 1960 for 58 percent of all income and paid 55 percent of the Federal individual income tax. The steeply graduated rate schedule makes for a sharp progression between the upper and lower end of the scale, but yields only small revenue. A flat 20-percent rate on the reported income in 1960 would have brought in 87 percent of the actual yield. It has been estimated that the tax rates over 50 percent yield less than $1 billion, out of a total yield between $40 and $45 billion annually, and rates over 65 percent slightly over one-quarter billion.

Labor compensation and welfare payments accounts for a steadily growing share of all personal income-presently 78 percent-while the share of dividends and business income has been shrinking. Less than 10 percent of all personal income in the country accrues to individuals and families in the $25,000 a yearand-up category. A government that claims 25 percent of its citizens' income, as the Federal Government now does, cannot get a major share of its revenue from an upper class that receives less than 10 percent of all personal income. Only a small share of the Federal taxes is paid by the rich, simply because there are not enough of them, and very little of the State and local taxes is paid by the poor. Most of the taxes in the United States are eventually paid by the great mass in the middle of the income scale.

That Federal personal and corporate income tax rates are too high, repress economic growth, and cause unemployment is now generally recognized, and the President has proposed to reduce their rates. Because the Federal Government has been using income taxes up to and more likely beyond-their bearing capacity, State and local governments rely more heavily on sales and property taxes. The claim that those taxes are sharply regressive has been disproven by several studies which showed that both types of taxes are about proportional through much of the income range and regressive only at the two extreme ends; in top and bottom brackets they slightly alleviate the heavy progressivity of the Federal personal income tax.

The property tax, which plays such a major role in the school finance picture, has been more often and more bitterly assailed than any other tax: by the taxpayers because it is too big and rises too fast and by the school forces because it is too little and rises too slowly; by some because it is restricted and by others because the restrictions are not tight enough; by some because assessments are too low and by others because they are too high. The real curse of the property tax which primarily accounts for its unpopularity is that, in contrast to almost all other taxes, it is not hidden but out in the open, clearly labeled by purpose. What is more, it identifies the official who is doing the taxing. Such relationships are veiled or obscured for sales and income taxes, particularly at the Federal level. The trouble with the property tax is that the taxpayer knows that he is paying it, what he is paying for, and who is taxing him.

That property tax revenues do not respond to economic expansion and grow too slowly is disproven by the record: Since World War II collections of property taxes have increased 291 percent, of all other taxes combined only 121 percent. A similar relationship prevailed in prior periods except during war and depres sion. One reason for the rapid increase in property tax collections during the postwar period: contrary to what is widely believed, national wealth has been growing more rapidly than national income.

Homeowners, who in the national average pay approximately one-third of all property taxes, have understandably been complaining about ever bigger tax bills. It is not widely realized that the homeowner offsets a substantial part of his real estate tax against the Federal income tax because (a) local taxes and mortgage interest are deductible items; (b) imputed income on his equity is not taxable. The homeowner's net burden is far less than the amount he actually pays. A $4,000-a-year man who is married, has two children, owns a $10,000 home with a $9,000 mortgage, and pays $140 in real estate taxes, saves $103 on his Federal income tax. If his mortgage totals only $4,000, he saves $89. In other words, he recoups 64 to 74 percent of his real estate tax by a reduction in his Federal income tax. Savings in other brackets are comparable. In an appendix to my book, "Taxes for the Schools,' ," which contains a comprehensive

30 The Institute for Social Science Research, Washington, 1960.

chapter on property taxes, I showed several examples of income tax offsets by homeowners in various income brackets. I am attaching a copy to this statement.

If your committee feels that the homeowner should get greater relief, then it might consider the proposal in S. 181 to grant an income tax credit up to $100 for school property taxes. This would either lighten the load of homeowners or enable school districts to boost their taxes without adding a direct burden on their local taxpayers.

If so, it would seem appropriate also to grant tax credits-similar to those I proposed in higher education-to the patrons of nonpublic schools. Such credits could result in very substantial savings for taxpayers. The average cost for one pupil through 12 grades of public school now amounts to about $4,800, in addition to the large capital outlay for elementary and high school facilities. Modest relief through tax credits may cause many more parents to send their children to nonpublic schools and reduce the need for public school funds by several times the amount of the tax credit.

BROADER ASPECTS OF FEDERAL GRANTS-IN-AID

I mentioned earlier that the church and state question has in recent years been in the center of the debate over Federal grants to education, but that there were also other objections which had prevented legislative action. Some of them relate specifically to education, others to the principle of Federal grants-in-aid as such.

Soon after President Truman's Commission on Higher Education (1946-48) advocated a comprehensive program of Federal aid, the Association of American Universities sponsored a commission on financing higher education to restudy the subject. The commission's members included: Detlev W. Bronk, president of Johns Hopkins University; Paul H. Buck, provost of Harvard University; Carter Davidson, president of Union College; Lee A. Du Bridge, president of the California Institute of Technology; J. E. Wallace Sterling, president of Stanford University; Henry M. Wriston, president of Brown University, and others. Its xecutive director was John D. Millet, now president of Miami University. The Commission concluded:

"This commission has reached the unanimous conclusion that we as a nation should call a halt at this time to the introduction of new programs of direct Federal aid to colleges and universities. We also believe it undesirable for the Government to expand the scope of its scholarship aid to individual students. Our position is based on what we regard as conclusive considerations."

9, 31

One member of the commission, President Carter Davidson, explained soon

after:

One broad highway to financial security the members of the commission Fixed unanimously as the 'primrose path the leads to the everlasting bonfire.' This road was named Federal Government support. Some of us at first felt that we should even advocate that the Federal Government should withdraw its support from those areas which it is now already subsidizing, but we finally greed that this step was impracticable and that we would be satisfied if the Federal Government would stop where it now is and give to private initiative the chance to show that it really believes sufficiently in higher education to give It ample support. There was a feeling that increased Government support from Federal sources was not only a blind alley, but also blinded those who traveled

down it." "

The commission feared that expansion of Federal grants-in-aid to higher eduration would jeopardize the institutions' freedom, diversity and independence: Such independence will be threatened if higher education is subjected to further influence from the Federal Government. That influence flowing from resent support is already a cause for concern. Its withdrawal or its unwise administration would produce grave results for our institutions. But in our , as things are now, such exigencies as these can be weathered. We are

1561

Nature and Needs of Higher Education," the report of the commission on financing education. Columbia University Press, 1952, pp. 157-158.

Carter Davidson, "Blind Alleys in College Finance," the Educational Record, April

convinced that they would be fatal were Federal support to be substanially extended." 33

(Emphasis supplied.)

Ten days ago Prof. David McCord Wright presented a parallel presentation to your committee.

That Federal grants would lead to Federal control is being strongly denied by their advocates. But some weighty questions arise. If the basic deficiency is merely lack of resources, why should the Federal Government not render purely fiscal aid and let the presently constituted authorities decide to what programs they should be applied? Why is it necessary to devise 2 dozen programs instead of finding means to increase the revenues of States and institutions and letting State legislatures and boards of trustees decide how to allocate the funds? Why should the Federal Government tell a university that it must spend more on its library, that additional moneys must go toward acquisition of books and construction but not for staff-although staff accounts for at least two-thirds of academic library costs? Why should it tell a university whether and how to run a student work program-that it must be "of substantial educational character," that it must be available only to a student who needs it and is capable of maintaining his academic standing, that it cannot exceed 15 hours for any student in 1 week, etc.? Why should 35,000 boards of educa tion be told to boost maximums and minimums in teacher salary schedules but not necessarily the brackets in between? Why should State and local educational authorities be compelled to use not less than 10 percent-but not more than 20 percent-of the funds for certain specified projects?

The record of Federal grants-in-aid in such fields as public welfare, highways. urban renewal, etc., shows that Federal administrative agencies gradually tighten their controls-and that this often comes about when certain abuses occur or policy disagreements arise between Federal and State officials, as inevitably they must. Such parallels are too close to be overlooked.

Some have questioned the need for Federal grants-in-aid generally and expressed doubt about the asserted inadequate fiscal capacity of State and local governments to meet their educational and other responsibilities. On the other hand, it has been claimed that State and local tax sources are inflexible and do not expand as rapidly as those of the National Government. ("The whole is greater than the sum of its parts.") But State and local revenues have been growing at a much faster rate than Federal receipts in the period since the end of World War II-as they had always done in prior periods except during shooting wars. Now it is being asserted that State and local govern ments have exerted such an effort by quadrupling their income while Federal revenues only doubled that they have exhausted their fiscal capacity and will henceforth have to rely more heavily on the National Treasury. We may assume that if State and local revenues had not climbed so steeply, this would have been advanced as proof that the States lacked the power to do it. It appears that no set of facts can convince those who prefer Federal grants-in-aid to States' self-financing.

Federal grants to the States have long been climbing steeply:

Source: Bureau of the Census, "Historical Summary of Governmental Finances," 1957 "The Budget of the U.S. Government for the Fiscal Year 1964," special analysis H. There are now about 100 such programs in operation and many more are being asked for and considered. The President's education message alone proposes 13 new programs. With amounts tripling every decade, it can easily be see that within not so many years the National Government would control all activi ties of State and local governments, if this trend continued. That would de stroy the balance of power which the Founding Fathers tried to assure by diffusing power among several levels of government. It would concentrate all authority in the Central Government, which is what the authors of the Consti tution tried to prevent from happening.

33 Op. cit., pp. 158-159

It is hard to deny that the rapid expansion of the National Government in the feid of domestic public services is changing the aspect of our system of government and converting it from a federal to a unitary centralized type.

President Kennedy and Budget Director Kermit Gordon have stated that Federal nondefence spending has been rising at a slower rate than population and prices or gross national product. However, a comparison of the 1964 budget with Federal operations 10 years earlier shows that Federal expenditures for domestic functions grew much more rapidly than other factors. On a per capita basis and in 1962 dollars, Federal spending for domestic purposes grew 141 percent, while personal consumption grew only 13 percent.

Federal expenditures in 1954 and 1964 (proposed) and related data (consolidated cash statement)

* National defense, international relations, veterans services and benefits, interest on the national debt. Sree "U.S. Budget, 1964," Economic Report of the President, 1963, Economic Indicators.

It required 160 years-from 1789 to 1948 for Federal spending for civilian purposes to reach $7 billion. It took only another 16 years, from 1948 to 1964, to boost it another $46 billion. If this rate of progression continues for another 20 years, almost all resources will be flowing through the National Government by 1904.

I would like to conclude with one other consideration. Congress and the Presi-dent are gravely overburdened by their present workload and often lack the time to study in sufficient detail such intricate but fateful subjects as weapons systems, space exploration, or developments in some 114 foreign nations. There are not enough hours in the day for the adequate study and consideration of matters of national defense, international relations, plus hundreds of domestic sheets Senator Hubert H. Humphrey demonstrated in a recent article the d for lightening the workload of Congress." It seems to me that the effecfive way in which this could be done is for Congress to refrain from devoting bstantial part of its time to matters which can be dealt with by State legislators, local bodies, and private institutions and organizations. To the extent to which financial aid may be deemed necessary, it could be provided by purely Awal methods, such as tax credits, tax reallocations, or monetary, noneararked grants, rather than by a multitude of programs which will eventually ad to a monolithic system of government.

APPENDIX

INCOME TAX RELIEF FOR THE HOMEOWNER

The homeowner, according to a frequently voiced opinion, bears an unduly vy burden of real estate taxes. But some observers of the tax scene believe that the homeowner receives benefits from the Federal income tax which are

Hubert H. Humphrey, "To Move Congress Out of Its Ruts," the New York Times z-zise. Apr. 7, 1963.

denied to the renter, and that in the end the homeowner is, taxwise, better off than the renter.

Here is the bill of particulars. The Internal Revenue Code pronounces a general principle for allowable deductions from adjusted gross income: "Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses" (section 262). But then the Code proceeds to permit the homeowner to subtract from his income a substantial part of his housing expenses: mortgage interest and property taxes (sections 163 and 164). The renter receives no comparable benefits. He cannot deduct the part of his rental which represents property taxes and mortgage interest paid by his landlord. Nor can he omit from his tax return the income he receives from whatever capital he owns and has invested. The homeowner, on the other hand, does not have to report the income on his invested capital-his equity-which he receives "in kind," in the form of rent-free living. These three "loopholes" are believed to cost the U.S. Treasury several billion dollars a year, and to relieve homeowners of a burden which tenants, an economically weaker group, are called upon to bear.1

Two articles which appeared in June 1958 denounced this as gross discrimina tion against tenants. Stephen G. Thompson in "The High Cost of Renting" stated that "tax laws force renters to pay as much as 66 percent more than howeowners for equal accommodations" and that "Federal tax and housing laws conspire against healthy urban growth and maintenance." 2 Bruce Lee Balch in "Individual Income Taxes and Housing" traced the legislative background of the benefit provisions and found:

"It is clear that the deduction for local real estate taxes places an undue burden on tenant. *** The present system of individual income taxes places a heavier burden of tax on a renter than on a homeowner in a similar situa tion. The result is that a renter does not receive as much housing value for a given amount of economic sacrifice as does a homeowner." "

The case seems clear cut and convincing. Table D-I presents illustrative examples of the Federal income tax liability of homeowners and tenants with an income of $4,000, $8,000, and $12,000 respectively, both with small and with large equities. The $4,000-a-year homeowner, in the examples shown, pays $89 to $103 less income tax than a renter in the same income bracket. The $12,000-a-year homeowner is $272 to $285 ahead of the renter. In the six examples in this table, the tenant pays between 16 and 73 percent higher income taxes than the homeowner. The latter's income tax savings equal 64

to 93 percent of his real estate tax. Most of the benefits accrue only to homeowners who itemize deductions on their income tax returns. Deductibility of taxes and interest is not available to those who use the standard deduction or optional tax table.

The practice of itemizing has grown repidly in recent years because of widened deductibility, and in keeping with progress in income and in tax sophistication. The following percentages of all taxable returns showed itemized deductions:

1 See: Randolph Paul, "Erosion of the Tax Base and Rate Structure," Tax Law Review, 1956. Joseph A. Pechman, "Erosion of the Individual Income Tax," National Tax Journal, March 1957. Melvin I. White, "Deductions for Nonbusiness Expenses and an Economie Concept of Net Income," Federal Tax Policy for Economic Growth and Stability, papers submitted by panelists appearing before the Subcommittee on Tax Policy, Joint Committee on the Economic Report, 84th Cong., 1st sess., 1955, p. 353. William Vickery, "Agenda for Progressive Taxation," the Ronald Press, New York, 1947, p. 18.

2 "Architectural Forum," June 1958.

3 National Tax Journal, June 1958.

These and the subsequent data on itemized deductions were taken from: U.S. Treasury Department, Internal Revenue Service, "Statistics of Income, Part I, Individual Income Tax Returns, 1953; 1956; 1957; do. Preliminary, 1958.