It is entirely possible if the committee wants him and if the Secretary can come, that we might have him at a later date but he cannot come on the 10th or 13th because of the schedule for those days which has been filled.

Mr. MACHROWICZ. Mr. Chairman, I wouldn't ask for that if it hadn't been quite the consensus of opinion that confusion has been added rather than any light given to this subject so far as the testimony today is concerned.

Mr. CURTIS. Mr. Chairman, why don't we wait and see what the Secretary says in his letter?

Mr. MACHROWICZ. It is much easier to say something in the letter when you are not able to question him than when he is present, as you know.

The CHAIRMAN. We can decide before the hearings are concluded whether we want him to come to the committee or not.

Mr. MACHROWICZ. I might say I received further information that I would like to refer to. Since the State of New Hampshire has been stated as the one great scene of progress, the maximum benefit in New Hampshire is $32, its average is $69, and the maximum is only 46 percent of the average wage. Now, the Department says and the President has recommended that it be 60 to 66% percent. I don't quite see how you got the State of New Hampshire into this. You certainly haven't given us any enlightenment with that example.

Mr. O'CONNELL. The President's standard is that the great majority of the people shall receive half of their pay. I think our indication and detail from the New Hampshire figures is that more than half of the claimants

Mr. MACHROWICZ. More than 46 percent.

Mr. O'CONNELL. 46 percent.

Mr. MACHROWICZ. Well, Mr. Chairman, I don't think we will get very far so I will

Mr. O'CONNELL. I think we can straighten that out because I don't think the question is exactly accurate, but I think we can support our claim.

Mr. MACHROWICZ. That is all, Mr. Chairman.

The CHAIRMAN. Mr. Alger will inquire, Mr. Secretary.

Mr. ALGER. Secretary O'Connell, I want to ask your counsel or your reaction to some elemental economic logic, as I understand it. Any additional cost on the businessman, the employer, will necessarily be transferred on the consumer, is that not correct?

Mr. O'CONNELL. Yes; it is.

Mr. ALGER. This is elementary?

Mr. O'CONNELL. Yes. If there are additional costs prices eventually reflecting this cost will seem to reach the consumer.

Mr. ALGER. So this will result in higher prices?

Mr. O'CONNELL. Yes.

Mr. ALGER. Higher prices, I judge-you correct me if I am wrong— will mean a lesser consumer purchasing power?

Mr. O'CONNELL. I think that the effect in money is actually too small to reflect on prices.

Mr. ALGER. But it is a matter of degree. It would not be for you or me to say it is too small. It might be not too small to a man paying the higher price. I think to the wage earner we might not say. You

and I, it may be inconsequential. Anyway, there will be a higher

cost!

Mr. O'CONNELL. It would be increased cost which could lead to higher prices.

Mr. ALGER. All right. Put it your way. I am not sparring with you. I am trying to get at elementary facts.

Mr. O'CONNELL. I am not sparring either.

Mr. ALGER. I know you are not. All right. We are very concerned in this particular measure with limited or reduced purchasing power because of people not having wages. We want to help them. Is that not correct?

Mr. O'CONNELL. Yes; I think that is correct.

Mr. ALGER. Now we are talking about, then, about reduced purchasing power. It is a question now of whose reduced purchasing power? As I see it, whether it is the man who is out of work, we want to help now and certainly we want to help him, or whether we want to reduce everyone else through the higher prices that necessarily must result because of the unemployment we have in this case. Let me ask you, since economically I believe this is correct, what we are really doing now, then, as I see it, is redistributing the consumer purchasing power as an aid to some who need it now because of loss of income at the expense of others. In other words, we are redistributing the risk, is that not correct?

Much as the entire idea of insurance and economically everyone buys insurance, everyone who is participating pays in a certain amount. What we are doing is redistributing risk.

Mr. O'CONNELL. I think actually from the economic point of view it is quite possible that the smaller employers may be the employers who get the greater benefit from continuation of income to the unemployed worker. The main advantage, it seems to me, of an unemployment check or unemployment insurance is that it continues a person's ability to carry on in part at least his regular personal economic life and this, of course, means that he maintains his purchasing at the level, whatever level he can support and probably as much of that goes to the smaller employer as goes to the larger.

Mr. ALGER. I wouldn't disagree with that. It still reduces the purchasing power of the consumer so.

Mr. O'CONNELL. The actual effect of these increases on the total tax bill according to our estimates is about seven-tenths of 1 percent in covered employment.

Mr. ALGER. Any figures you have of that type that would show the impact upon the average wage earner across the country in his purchasing power I am sure we ought to have as part of this hearing. Mr. O'CONNELL. I will be glad to submit that.

Mr. ALGER. I would like permission, Mr. Chairman, that that be included at this point. In order to be fair about it, include this elementary economics as I see it. We need to recognize that everyone is affected by prices. I guess everyone ought to be equally protected and in having continued wages, then are they?

Mr. O'CONNELL. To the limit of practicality. In philosophy, yes, everyone to some degree.

Mr. ALGER. Otherwise we are setting up further inequities.

Thank you, Mr. Chairman. I ask permission, Mr. Chairman, that the figures Secretary O'Connell mentioned about the impact of increased prices appear.

The CHAIRMAN. Without objection that material will appear at this point in the record.

(The information follows:)

It is extremely doubtful that extending the unemployment insurance tax to the firms now excluded by the requirement of four workers in 20 weeks would have any impact on prices. For one thing, their larger competitors are already paying the unemployment insurance tax. The 1,143,000 employees excluded by size-of-firm provisions are well distributed throughout the 34 States which do not cover employers of 1 or more, and in a variety of industries within those States. The larger covered establishments account for the overwhelming proportion of all workers.

Moreover, for the small employers as well as for presently covered employers, the unemployment insurance tax represents a very small proportion of the cost of doing business. Total payroll costs for individual proprietors in the trade and service industries (the predominant industries for small employers) are about 10 percent of the net costs of goods sold and business deductions allowed. Thus, an additional 3 percent tax on payrolls would represent an overall increase in business costs of only about three-tenths of 1 percent. Furthermore, this amount represents a business cost and can be used in figuring income tax liability. The unemployment insurance tax thus represents such an extremely small net addition to the costs of doing business for the small employer that its impact on prices would not be measurable.

Any probable increase in unemployment taxes for employers already covered would also have a negligible impact on prices, since the amount involved is relatively so small a factor in business costs. Increases in the unemployment tax resulting from the increased tax base, or of increased benefits to meet the President's recommendation, would be but a small fraction of business costs. For example, in 1957, total unemployment insurance taxes paid by employers were $1.5 billion, while total wages and salaries in covered employment were $174 billion. Unemployment insurance taxes thus represented only seven-tenths of 1 percent of the wages and salaries of covered workers, excluding other fringelabor costs. It is estimated that labor costs represent about 65 percent of total production costs, thus further reducing the relative significance of the cost of unemployment taxes. Whether or not a tax increase is passed along to the consumer in the form of higher prices depends largely on the interplay of the total cost situation of the employer, the market situation for his products, and the mechanism employed for developing and establishing his prices. It may instead be passed back to the employee in deferred wage increases or absorbed by the employer in profits.

The economics of payroll taxes paid by employers is very complex. Aside from the incidence of the tax, its deflationary or inflationary impact will depend upon a combination of factors. Whether payroll taxes are inflationary or deflationary will depend somewhat on whether it is a period of prosperity or recession. It will also depend upon whether reserves are being accumulated (when the taxes will have a deflationary effect) or whether more is being paid out in benefits than is paid in taxes (which will be inflationary in effect).

Unemployment insurance is usually a counter-cyclical force in the economy: contributions usually exceed benefit payments only during periods of prosperity and inflation; benefit payments are usually greater than taxes during periods of unemployment and deflation.

The CHAIRMAN. No further questions?

Mr. O'Connell, in the event that the committee should desire to have the Secretary himself appear in connection with these hearings we may extend an invitation to him. He gave me the dates of the 10th and 13th as though those were the only dates he might be available. Do you know whether or not his schedule might be such that he could possibly come one day after the 13th, if not on the 13th?

1 For a complete discussion, see "Economics of Social Security," by Seymour Harris (McGraw-Hill Book Co., Inc., New York, 1941), p. 455.

Mr. O'CONNELL. Mr. Chairman, I don't know at this point but we could advise you very quickly tomorrow.

The CHAIRMAN. I would like to have that information by the morning if you will relay it to us.

Let me ask you further, do you have a copy of legislation that would carry out the recommendations that you made to us this morning? Mr. O'CONNELL. I don't have one right here but we have forwarded copies and we could send copies to you, Mr. Chairman.

The CHAIRMAN. Without objection I think it would be appropriate for such material to appear at this point in the record.

(The information follows:)

STATEMENT IN EXPLANATION OF A DRAFT BILL TO REVISE AND IMPROVE THE FINANCING PROVISIONS OF THE EMPLOYMENT SECURITY PROGRAM

This draft bill is designed to revise titles IX and XII of the Social Security Act and the Federal Unemployment Tax Act to provide for (1) the creation of a Federal employment security administration account in the unemployment trust fund into which all Federal unemployment tax collections would be appropriated and out of which all funds for administrative grants and expenses, and transfers to other accounts, would be paid; (2) the authority to make repayable advances to the Federal employment security administration account from a revolving fund created in the Treasury, and the authority to appropriate funds to the revolving fund; (3) the repayment from the Federal employment security administration account of advances to that account and advances to the Federal unemployment account whenever the amount in the administration account is adequate for such purpose; (4) the application of any excess in the administration account above authorized expenses, first to the building up of a balance in the Federal unemployment account equal to 0.4 percent of taxable payrolls or $550 million, whichever is greater, second to the building up of a balance of $250 million in the administration account itself, and third for distribution to the States; (5) the transfer to the administration account of any amount in the Federal unemployment account at the end of a fiscal year which exceeds 0.4 percent of taxable payrolls or $550 million, whichever is greater; (6) the crediting to the Federal unemployment account as a payment against any unpaid balance due on an advance to a State of any excess in the administration account which would otherwise be distributed to such State; (7) a report by the Secretary of Labor every 4 years beginning in January 1963 as to the adequacy of the tax rate and the taxable wage base of the Federal Unemployment Tax Act; (8) the tightening of the eligibility requirements for a State to be eligible for an advance under title XII; and (9) an increase to $4,200 of the taxable wage base of the Federal Unemployment Tax Act.

PRINCIPAL PROVISIONS OF THE BILL

A. The provisions of section 2 of the bill are designed to revise title IX of the Social Security Act.

1. Such provisions would establish a Federal employment security administration account in the unemployment trust fund. All Federal unemployment tax collections would be appropriated to this account and all administrative grants and expenses would be paid or reimbursed out of, and all transfers to other accounts would be made out of, the account. It would thus establish a trust account similar to the trust funds which now exist for OASDI and the Railroad Unemployment Insurance Act.

This proposal for a trust account effectuates the recommendation of the President in his budget message delivered in January 1959. In addition, both the Federal Advisory Council and the Interstate Conference of Employment Security Agencies have endorsed this proposal.

2. Such provisions would direct the transfer from the Federal employment security administration account-

(a) To the Treasury, of amounts necessary to reimburse expenditures for refunds of unemployment taxes;

(b) To the Federal unemployment account, of the amount of advances repaid by a State through additional taxes paid by employers by reason of

reduced credits, and transfer of any excess to the State's account in the unemployment trust fund;

(c) To the Treasury, of the amount of additional taxes paid by reason of the reduced credits provision of section 104 of the Temporary Unemployment Compensation Act of 1958, as amended, and transfer of any excess to the State's account in the unemployment trust fund;

(d) of expenditures authorized by the Congress to be made out of the administration account for grants to the States and the expenses of the Department of Labor; and

(e) To the Treasury, of amounts necessary to reimburse the employment security expenses of the Department of the Treasury.

These provisions are substantially similar to those in the present law except that tax receipts would be paid into, and transferred out of, the Federal employment security administration account, the new trust account established by the bill.

3. Such provisions would direct the Secretary of the Treasury to make interest-bearing, repayable advances to the Federal employment security administration account. Advances to the administration account would be made from a revolving fund created by the bill to which appropriations would be authorized in such amounts as may be necessary to carry out the purposes of the administration account.

Advances to the administration account would not be authorized in a fiscal year if the amount in the administration account at the beginning of the fiscal year equals $250 million, nor would advances be authorized in any fiscal year in an amount which exceeds the amounts authorized by Congress to be expended for grants to the States and the expenses of the Department of Labor. Such an advance would be necessary to establish the administration account and to take care of the administrative expenses during the 7-month period between the beginning of the fiscal year and January 31, when Federal unemployment taxes become due. It is estimated that an appropriation of a repayable advance in the amount of $190 million would be adequate for fiscal year 1960 if the appropriation request of $335,500,000 for fiscal year 1960 is approved. A balance of $250 million in the administration account, authorized by this bill, would provide a margin for future increases in administrative costs and for years in which tax collections were less than necessary expenses.

Advances to the administration account would be repayable with interest when the Secretary of the Treasury, in consultation with the Secretary of Labor, believes that the amount in the administration account is adequate for such purpose. Advances to the Federal unemployment account would also be repayable from the administration account.

4. Such provisions prescribe the method for determining the excess, if any, in the Federal employment security administration account at the end of each fiscal year. These excesses would first be applied to the building up of a balance in the Federal unemployment account equal to 0.4 percent of payrolls taxable under the Federal Unemployment Tax Act or $550 million, whichever is greater. Next, the excesses would be used to build up a reserve of $250 million in the administration account. Any remaining excesses would be distributed to the States' accounts in the unemployment trust fund. The excess for any fiscal year is the excess of the amount in the administration account over the reserve already established in the administration account.

5. Such provisions would authorize the building up of the balance in the Federal unemployment account to an amount equal to 0.4 percent of taxable payrolls for the preceding calendar year or to $550 million, whichever is greater, out of any excesses in the Federal employment security administration account which are determined at the end of each fiscal year.

The $200 million balance now authorized for the Federal unemployment account has proven inadequate. Although once established at the authorized maximum (as recently as the end of fiscal year 1958), the balance in the account is now zero. The account is short about $15,500,000 of meeting a recent request from the State of Pennsylvania for an advance of $112 million. Advances have been made to Alaska and Michigan of $8,265,000 and $113 million, respectively. Delaware, West Virginia, and Oregon are now eligible for advances but applications, if made, could not be met.

The recent experience with States' eligibility for advances indicates a necessity for a higher statutory balance in the Federal unemployment account, and this need may be even greater in the future.