Mr. HUMPHREY. Mr. President, before we complete Senate action on the foreign aid bill, I wish to comment on the work of our voluntary American aid program. The American people, out of their generosity and compassion, are contributing a tremendous amount of effort and money to a vast program of voluntary foreign aid. Unfortunately, too few people understand how closely this voluntary foreign aid is geared in with our Government-sponsored programs of economic development administered by the Agency for International Development.

My attention was called recently to a pamphlet published by the Voluntary Foreign Aid Service in the Agency for International Development entitled "AID and U.S. Voluntary Agencies-A Growing Partnership." That "growing partnership" theme exemplifies what Congress had in mind in directing through our Foreign Assistance Act that the services and facilities of voluntary nonprofit organizations be used to the maximum extent practicable in furthering the purposes of the act.

Let me read to you a forward in that pamphlet from David E. Bell, the capable Administrator of the Agency for International Development:

This pamphlet tells a story in which Americans can take pride. Through these humanitarian activities the historical concern of Americans for their fellow men is demonstrated by effective action overseas. These American voluntary agencies have pioneered in foreign assistance and we are indebted to them for their initiative, for their energy, and for their devotion.

Through the Agency for International Development and its predecessors, a firm and growing partnership between these voluntary organizations and Government has been fostered. While scrupulously observing the nature and independence of these private groups, substantial Government resources have been made available to them to further their activities abroad in the fields of material aid, services to refugees, technical assistance and self-help.

This partnership has a quality that Government aid alone cannot achieve. It is a force of enduring strength and fellowship that binds together our people and the friendly peoples of other countries and furthers and strengthens the peaceful objectives of the free world.

I want to commend the Agency for International Development and, particularly, its Voluntary Foreign Aid Service, for stimulating this cooperative effort between the U.S. Government and the U.S. voluntary agencies which serve humanity overseas. Today 53 of these agencies are working with the Agency for International Development-AID-in

material aid and relief programs, selfmaterial aid and relief programs, selfhelp efforts, and refugee assistance. These agencies are maintaining around 600 American citizen representatives overseas at their own expense, supported by public contributions and are employing between 4,500 and 4,800 local employing between 4,500 and 4,800 local personnel. This is a valuable voluntary contribution to our total national effort to help underprivileged people in developing countries. I just hope that the American people, whose generosity is making such effective work possible through these voluntary organizations, will realize the necessity for providing similar support in behalf of the Agency for International Development as the partner in many of these oversea propartner in many of these oversea programs.

Deep concern with the plight of the poor, the homeless, the oppressed, has always been in the American tradition. The typical American may be hardheaded, but is also warmhearted.

Our people are mindful of the Biblical injunction: "And now abideth faith, hope, and charity, these three; but the hope, and charity, these three; but the greatest of these is charity."

We seem to be aware that charity begins at home, but there it does not end.

To learn the full story of this voluntary foreign aid program rewards us with a feeling of intense pride in Americans.

A few days ago, I read the 1962 report of the commodities and funds sent of the commodities and funds sent abroad by the American people through abroad by the American people through their voluntary agencies for the relief of distressed people. We are all familiar distressed people. We are all familiar with these organizations, such as CARE, Church World Service, Catholic Relief Services, and the American Jewish Joint Distribution Committee.

I was so impressed by what these agencies are doing that I want to share agencies are doing that I want to share the report with you. This report shows that the U.S. voluntary agencies registered with AID, sent overseas during 1962 a total of more than $275 million worth of commodities and funds. This is approximately 14 percent more than during 1961. The commodities shipped consisted of foods, including those made available to the agencies under Public Law 480, clothing, textiles, and all kinds of supplies-educational, vocational, and

agricultural.

We find the agencies sent 45 percent more commodities and funds to Africa in 1962 than in 1961, 37 percent more to Latin America, and 7 percent more to the Far East. In only Europe and Near

East-South Asia were there decreases.

President Kennedy recognized the value of the voluntary foreign aid effort when he designated the week of April 9, 1963, as Voluntary Overseas Aid Week. In the official proclamation he said:

I would like to emphasize that I do not believe our assistance programs abroad, especially those that involve the distribution of food, could possibly be effective unless we had the very wholehearted cooperation of the voluntary agencies.

This participation between the American people and the National Government and the people and the National Government and the voluntary agencies, the various religious and other charitable organizations, really represents I think, the best aspirations of our country. I think it reminds us of the old injunction about feeding those who are

hungry, visiting those who are sick and caring for those who are in prison.

As you know I have long been a stanch advocate of emphasizing the people-to-people approach to foreign aid, which is a program of channeling aid through voluntary associations to the greatest extent possible.

This ground swell of voluntary activity did not develop overnight. The service of the American people to the needy is a tradition based on belief in the dignity of man. It truly exemplifies the JudeoChristian spirit of caring for the less fortunate, and sharing our own material blessings with them. This has been a significant part of our American heritage from the days of frontier neighbor helping neighbor erect his log cabin or barn to the great present-day record of huge sums contributed overseas annually through voluntary associations and foundations for the purpose of wiping out crippling disease, improving educational opportunities, and in other ways dedicating part of our material substance to the cause of our fellow man's well-being.

World War I and its aftermath of human suffering gave special impetus for giving aid to the distressed. Relief work, begun in 1914 following the invasion of Belgium, was continued in the Central and Eastern States of Europe after the armistice, and continued throughout the famine in Soviet Russia in 1923.

Voluntary effort was again stepped up in the early years of World War II. In the wake of the Nazi invasion of Poland, a flood of emotional appeals to aid the victims engulfed the American people. Hundreds of hastily organized war relief committees developed as country after country became involved in the conflict. In order to maintain its neutrality, it became necessary for the U.S. Government to regulate economic relations with belligerent countries. In 1939 Congress passed the Neutrality Act. As a result, all American voluntary relief agencies, with the exception of the Red Cross, which has its own congressional charter, were required to register with the Department of State if they were engaged in the collection of funds from the American people for relief in belligerent countries.

On March 13, 1941, the President appointed a committee to examine the whole problem of foreign war relief. This committee's findings led to the esControl Board to regulate the oversea shipment of war relief supplies by voluntary agencies.

tablishment of the President War Relief

ernment and the voluntary agencies was This arrangement between the Govcontinued after the war. In May 1946, the Advisory Committee on Voluntary Foreign Aid was established by direction of the President "to tie together the governmental and private programs in the field of foreign relief and to work with interested agencies and groups." The Committee is attached to the Agency for International Development.

At present AID and the agencies registered with the Advisory Committee are jointly exploring ways of better coordinating their programs to achieve common objectives in the total U.S. effort.

This is in line with the congressional mandate in the Foreign Assistant Act of 1961:

The President, in furthering the purposes of this act, shall use to the maximum extent practicable the services and facilities of voluntary, nonprofit organizations registered with, and approved by, the Advisory Committee on Voluntary Foreign Aid.

These voluntary agencies are carrying on programs of material aid, services to refugees, and technical assistance and self-help projects. Material aid serves people in times of emergency-earthquake, flood, fire, typhoon, or famine, as well as during periods of dislocation caused by war and political oppression. The agencies minister to disaster victims with food, clothing, medicine, blankets, and other relief supplies, continuing their aid until the stricken are able to provide for themselves.

By registering with AID's Advisory Committee, voluntary agencies receive from the U.S. Government Public Law 480, foods plus reimbursement for oversea freight costs on these foods as well as on their own relief supplies. It costs about $4 million of U.S. Government funds to ship overseas an estimated $80 million worth of voluntary agency supplies. Thus, every dollar spent by the Government to transport these supplies is multiplied nearly twentyfold in terms of the value of goods delivered overseas to people who need our help.

Let us look at some specific ways in which the voluntary agencies are helping the needy overseas and thereby strengthening our foreign aid and foreign policy.

On a small island which was seriously overcrowded, the problem of assisting a great number of impoverished hungry refugees was staggering. Many of the refugees were able and eager to work but few found employment. Large numbers were helped by an imaginative, practical supplemental feeding project, made possible by an ingenious noodlemaking machine devised by voluntary agency representatives and manufactured on the island. The noodles are made from Public Law 480 flour, cornmeal, and dried milk.

Refugees in a self-help work project for relocated Koreans on the southwest coast of Korea had just staked out their hard-won land reclaimed from the Yellow Sea by means of a dike they had built, when a typhoon struck.

The typhoon breached the dike, threatening to destroy it and to flood the precious land intended for rice for rice planting. Instead of giving up in discouragement, the refugees worked night and day to repair the dike.

Kerosene-soaked rags on the ends of sticks made flares for their all-nightlong labors. With no modern earthmoving equipment available, they used picks and shovels, and carried earth to small railway cars in hods suspended from A-frames on their backs.

The refugees, working without wages, were supplied through a U.S. voluntary agency with Public Law 480 cornmeal, flour, and cooking fats.

In a north African country, where unemployment is high and training facilities are meager, a voluntary agency,

on the basis of a careful survey of the economic situation and the labor market, economic situation and the labor market, has provided vocational training for young men and boys to meet the pressing demand for auto mechanics, welders, carpenters, electricians, and for young girls to be trained in garment making.

Six voluntary agencies are carrying on child feeding programs in 17 Latin American countries under the "Operation Ninos" program of the Alliance for Progress. The program is currently feeding more than 9 million Latin American children and by August 1964, an estimated 11.5 million Latin American estimated 11.5 million Latin American children-or 1 out of 3—will benefit from "Operation Ninos."

One voluntary agency, organized specifically to serve children, in keeping with its emphasis on working with families rather than with the one child in the family group alone, has provided, in addition to clothing and personal articles for the child, household utensils and supplies from which the child's whole family benefits.

These examples indicate that the agencies relate their services effectively to the conditions of life of the people they serve. They are flexible and imaginative. They recognize the importance of teaching and training people within their own setting and seek ways of showtheir own setting and seek ways of showing people how they can improve their way of living by helping themselves.

If one looks closely at voluntary effort, several new trends are apparent. The first of these is the development of closer relationships with organizations and institutions already present in the countries where the agencies are working. The voluntary agencies are uniquely suited to cooperative effort at this grassroots level because of the personalized way in which their help is given. alized way in which their help is given.

Another new development in voluntary foreign aid is the use of excess Government property made available to registered voluntary agencies under the foreign aid legislation of 1961. Recently, excess metalworking, laboratory, electrical and electronic equipment, and office machines have been released to a voluntary agency for its vocational training schools in Iran, Tunisia, Morocco, and Israel. A quantity of excess wool and cotton clothing with an acquisition value of approximately $10 million is being made available by the U.S. Government to certain voluntary agencies and the American National Red Cross for use in their programs in developing countries and for refugees and victims of natural disaster.

Another trend is the growing awareness on the part of voluntary agencies of the problems faced by people moving from rural to urban areas, paramount among which is the search for a livelihood.

U.S. voluntary agencies are especially well fitted to deal with these problems since similar shifts of population have taken place in our history causing similar hardships. Several agencies are developing urban community services, cooperatives, and housing programs to cope with these problems.

Also apparent in voluntary agency activity is the formation in developing

countries of oversea councils or coordinating committees made up of representatives from U.S. voluntary and Government agencies, international organizations, local groups and the host government. Such groups afford an opportunity for an exchange of ideas and cooperative pursuit of common goals.

One final trend is closer cooperation between the Government and the voluntary agencies. A conference held in Washington in November 1962, arranged by the American Council of Voluntary Agencies for Foreign Service, is an example of this trend. Those attending included representatives from 21 Council member agencies, 26 guest organizations, the Agency for International Development, the Advisory Committee on Voluntary Foreign Aid, Department of State, Food for Peace, Department of Health, Education, and Welfare, Office of International Housing of the Housing and Home Finance Agency, Inter-American Development Bank, Intergovernmental Committee for European Migration, Pan American Union, and the U.N. Bureau of Social Affairs.

The conference promoted an exchange of views on a possible expanded role for the voluntary agencies, specifically with reference to U.S. voluntary agencies' participation in the Alliance for Progress.

While the trend is toward partnership between the voluntary agencies and the Government, it is a partnership of equals. The Government insists the agencies maintain their status as private independent groups supported by the free gifts of the American people. Only as such can they express the real concern of the American people for those in need. The American Council of Voluntary Agencies for Foreign Service has perhaps expressed it best of all:

Because of the organic structure of these voluntary associations, rooted in the good will of millions of constituents who support them, the organizations in the voluntary sector have a twofold impact: On the people overseas whom they benefit, and on the people at home whom they represent. Out of this arises a relationship between peoples of an abiding nature.

It is through the voluntary agencies Americans are finding expression for a philosophy of concern central to our American way of life, resulting in a unique mobilization of personal effort and cooperation around the world to serve the cause of freedom.

TRANSACTION OF ADDITIONAL ROUTINE BUSINESS By unanimous consent, the following routine business was transacted:

APPOINTMENT BY THE VICE
PRESIDENT

The PRESIDING OFFICER (Mr. INOUYE in the chair). Pursuant to a request of the State Department that a Member of the Senate be designated by the Vice President as an observer at the Food and Agriculture Organization of the United Nations at the conference to be held in Rome, Italy, on November 16December 3, 1963, the Chair, on behalf

of the Vice President, designates the Senator from Iowa [Mr. MILLER] to act in this capacity.

BILL INTRODUCED

A bill was introduced, read the first time, and, by unanimous consent, the second time, and referred as follows:

By Mr. MUSKIE:

S. 2307. A bill to amend the emergency loan authority of the Secretary of Agriculture under subtitle C of the Consolidated

Farmers Home Administration Act of 1961 to authorize such loans in areas where credit is not otherwise available because of serious economic conditions for farmers or ranchers; to the Committee on Agriculture and Forestry.

(See the remarks of Mr. MUSKIE when he introduced the above bill, which appear under a separate heading.)

LOANS TO CERTAIN FARMERS OR RANCHERS SUFFERING BECAUSE OF SERIOUS ECONOMIC CONDITIONS

Mr. MUSKIE. Mr. President, I introduce, for appropriate reference, a bill to amend the loan authority of the Secretary of Agriculture to authorize Farmers Home Administration emergency loans for areas where credit is not otherwise available because of serious economic conditions.

The Aroostook County, Maine, potato industry is in difficult financial straits. Agriculturally, Aroostook is suffering from the economic disability of continuous low potato prices, resulting from a national oversupply. As an area of substantial unemployment, industries and communities within the county have received benefits under the Area Redevelopment Administration and accelerated public works programs. However, the continuing and growing need for farm credit still exists. The Maine office of the Farmers Home Administration has done an excellent job in meeting the farmers' needs, but at present FHA's credit extension capabilities are limited. This additional lending authority is essential if the credit needs of the industry are to be met.

Since I am certain that other agricultural areas are faced with similar difficult economic conditions, I ask unanimous consent that the bill lie on the table through December 1, in order that my colleagues may have an opportunity to join me in sponsoring the bill.

The PRESIDING OFFICER. The bill will be received and appropriately referred; and, without objection, the bill will lie on the desk, as requested by the Senator from Maine.

The bill (S. 2307) to amend the emergency loan authority of the Secretary of Agriculture under subtitle C of the Consolidated Farmers Home Administration Act of 1961 to authorize such loans in areas where credit is not otherwise available because of serious economic conditions for farmers or ranchers, introduced by Mr. MUSKIE, was received, read twice by its title, and referred to the Committee on Agriculture and Forestry.

AMENDMENT OF FOREIGN ASSISTANCE ACT OF 1961-AMENDMENTS (AMENDMENT NO. 320)

Mr. LAUSCHE LAUSCHE submitted submitted amendments, intended to be proposed by him, to the bill (H.R. 7885) to amend further the Foreign Assistance Act of 1961, as amended, and for other purposes, which were ordered to lie on the table and to be printed.

STATEMENT OF ROGER A. FREEMAN, SENIOR STAFF MEMBER, THE HOOVER INSTITUTION ON WAR, REVOLUTION, AND PEACE, STANFORD UNIVERSITY, BEFORE SENATE COMMITTEE ON FINANCE Mr. DIRKSEN. Mr. President, on November 6, Dr. Roger A. Freeman, senior staff member of the Hoover Institution on War, Revolution, and Peace, Stanford University, appeared before the Finance Committee on H.R. 8363, the Revenue Code of 1963. Many members of the committee have commented on the statement made by Dr. Freeman. In view of the exceptional quality of the statement, I ask unanimous consent that it appear in full in the RECORD.

There being no objection, the statement was ordered to be printed in the RECORD, as follows:

STATEMENT OF ROGER A. FREEMAN, SENIOR STAFF MEMBER, THE HOOVER INSTITUTION ON WAR, REVOLUTION, AND PEACE, STANFORD UNIVERSITY, STANFORD, CALIF., ON H.R. 8363 (REVENUE ACT OF 1963), BEFORE THE FINANCE COMMITTEE, U.S. SENATE, NOVEMBER 6, 1963

In the course of the past 2 years a broad consensus seems to have been reached that what this country's economy needs is lower taxes. Organizations of labor and of business, wide sections of the public, many Members of Congress, and even most economists appear to concur in this general proposition. Most of the disagreements which almost always arise when tax revision is proposed concern the "how" of tax cuts more than the "whether." They tend to focus on the type of the suggested tax relief and on rather than on the acknowledged fact that the circumstances accompanying the action the American economy is not likely to develop its full growth potential as long as it is loaded down with its present tax burden. Disagreements may be grouped under three major headings:

(1) How should tax relief be allocated by income classes? Should it be concentrated

in the lower brackets so as to boost consumer spending? Or, should it aim primarily to stimulate incentives and investment by more sharply lowering high personal tax rates in the medium and upper ranges and by reducing the corporation tax rate?

(2) Should rate reduction be linked with a structural reform broadening the tax base? of the various deductions, exemptions, exShould we narrow or eliminate some or many clusions or credits and thus recoup part of the revenue lost by rate cuts? Or is the most urgently needed tax reform a lowering of rates which should not be jeopardized or delayed by tying it to other changes of a highly controversial nature?

(3) Should a tax cut be accompanied by corresponding action on the outgo side of the budget or at least a restraint on future expenditure growth? Or would a curb on public spending nullify the economic benefits

of tax relief?

The President's proposals and the bill before your committee appear to take a clear stand on these questions:

(1) The President proposed to reduce the aggregate tax liability of persons in the lowest income bracket by 40 percent, with the relief gradually declining to 9 percent in the highest income bracket. He recommended to cut corporate tax liability by 8 percent (lowering the rate from 52 percent to 48 percent) but to advance payment dates and thus to defer cash relief for several years.

Revisions approved in the House of Representatives would not change these results significantly. The aggregate tax liability of persons in the lowest personal income bracket would be reduced 38 percent from the present level, and of those in the highest bracket, 13 percent, with relief in the intermediate brackets somewhere in between.

This means that H.R. 8363 as passed by the House would make income taxes more steeply graduated and primarily augment consumer purchasing power.

(2) The President did not propose to eliminate or reduce any of the major exclusions, deductions, or exemptions which now account for most of the vast difference$228 billion in 1960-between personal income and taxable income. Of the 16 structural changes with a revenue consequence in the personal income tax bill approved by gains and 8 in revenue losses. The net the House, 8 would result in revenue revenue gain would add an estimated 1.2 percent to prospective tax receipts; rate changes would reduce revenues by 20 percent. In other words, structural changes would be relatively minor and not broaden the tax base significantly, if at all.

(3) Amendments proposed in the Ways and Means Committee and in the House itself which would have conditioned the rate cuts upon restraints on increased spending failed by narrow margins. Thus H.R. 8363, as it now stands, reduces taxes but does not require corresponding action on the expenditure side.

In my testimony I propose to discuss these three major issues and shall try to evaluate whether the provisions of the bill, as approved by the House, are likely to have the hoped-for impact on the rate of economic growth and on unemployment.

My conclusions may be summarized as follows:

(1) The tax cuts proposed in H.R. 8363, which are estimated eventually to total $11 billion, will provide long-needed relief to many persons. They will also give our economy a "shot in the arm" but are not likely to stimulate the rate of economic growth as powerfully as a tax cut of that magnitude could if it were designed primarily to promote growth rather than serve other ends. I question seriously whether the bill, as it now stands, will have a major and lasting impact on unemployment.

(2) Many improvements could and should be made in our tax structure. But the most

urgently needed tax reform is a sharp cut in rates which ought not to be encumbered at this time with other revisions. Some of the structural changes in H.R. 8363 may hinder rather than advance economic progress.

(3) Cutting taxes at a time of heavy budgetary deficits without commensurate action to bring expenditures under firmer control may temporarily produce some favorable results. But it will, in the long run, prove to be self-defeating.

(4) Some public purposes can be served better by cutting taxes than by enlarging expenditures. One example of this is higher education which could be most effectively helped by the grant of tax credits for certain educational expenses and contributions.

This statement is divided into four sections:

I. How should income taxes be cut?

II. Should rate cuts be linked with tax reform?

IV. Can tax credits help higher education more effectively than grants and loans?

I. HOW SHOULD INCOME TAXES BE CUT? The broad consensus that income taxes are too high is of recent origin. To be sure, business groups and some economists have been contending ever since the end of World War II that excessive tax rates are repressing economic growth. But numerous other economists and labor unions have generally denied it. About 10 years ago Roy Blough, former Treasury official and member of the Council of Economic Advisers, wrote that "the pessimists who have continued to forecast the destruction of industry by high taxation have been faced instead by an expanding economy."1 The late Randolph E. Paul, former General Counsel of the Treasury Department, told the Joint Economic Committee of Congress in 1955:

"Certainly, history fails to support arguments that high taxes have a ruinous effect upon the economy. I do not like high taxes myself, but I am obliged nevertheless, to admit that work and investment incentives have remarkably survived the high taxes of the last 20 years, and that venture capital is not lacking today after a long period of high taxation."

He cited approvingly a statement that "the higher our taxes go, the more we have left for investment and consumption," and asserted that "the bark of our individual income tax is much worse than its bite." 2

The AFL-CIO proclaimed as recently as September 1960 in its handbook on Federal taxes that "the period of high taxation that has prevailed for the last 20 years has also been a period of very high income, savings and investment, indicating that there has been little if any loss of incentive."

In his bestseller "The Affluent Society," John Kenneth Galbraith advanced the proposition that the level of taxation should be substantially raised: "The community is affluent in privately produced goods. It is poor in public services. The obvious solution is to tax the former to provide the latterby making private goods more expensive, public goods are made more abundant." The Galbraith thesis was expanded in books by Francis M. Bator of MIT, Frederick C. Mosher of the University of California, David Demarest Lloyd, and others. Alvin H. Hansen, emeritus professor of political economy at Harvard, wrote in his book "Economic Issues of the 1960's" only 3 years ago: "If we are to meet at all adequately our growing public needs, we shall, I believe, need higher taxes."

4

The demands neither for higher nor for lower taxes were able to rally broad support. Many economists, and probably a majority at the time, agreed with Harvard economics professor, Arthur Smithies, who told the Joint Economic Committee of Congress in 1957 that "the problem in the tax area is tax reform rather than tax reduction.” 5

1 Roy Blough, "The Federal Taxing Process," New York, Prentice-Hall, 1952, p. 464. 2 Randolph E. Paul, "Erosion of the Tax Base and Rate Structure," Federal Tax Policy for Economic Growth and Stability, papers submitted by panelists appearing before the Subcommittee on Tax Policy, Joint Economic Committee, 84th Cong., 1st sess., 1955, pp. 297 ff.

3 Boston, Houghton Mifflin Co., 1958. 4 New York, McGraw-Hill, 1960.

5 "Federal Expenditure Policy for Economic Growth and Stability," hearings before the Subcommittee on Fiscal Policy of the Joint Economic Committee, 85th Cong., 1st sess., 1957, p. 354.

tain structural changes the President emphasized that the resulting revenue gains and losses would offset each other, that "the tax system must be adequate to meet our public needs," and that it was necessary "to maintain the revenue potential of our fiscal system." In his news conference of March 1, 1961, the President reaffirmed an earlier statement that he would suggest sources of revenue to finance the new spending proPresident announced that he would submit posals he was sending to Congress. The a more comprehensive tax reform program to the next session of Congress and proclaimed his confidence in the existing tax system: "This message recognizes the basic soundness of our tax structure."

Within slightly over a year, however, the tax structure fell from grace. In his television address of August 13, 1962, the President charged that our tax structure "is a drag on economic recovery and economic growth, biting heavily into the purchasing power of every taxpayer and every consumer." The rates, the President said, "are so high as to weaken the very essence of the progress of a free society-the incentive for additional return for additional effort." Four months later, speaking to the Economic Club of New York, the President stressed "the accumulated evidence of the last 5 years that our present tax system, developed as it was during World War II to restrain growth, exerts too heavy a drag on growth in peacetime-that it siphons out of the private economy too large a share of personal and business purchasing power-that it reduces the financial incentives for personal effort, investment and risk taking."

more than modest rates. Nor do available historical studies give us conclusive evidence of a positive relationship between low taxes and fast economic growth.

Such comparisons, derived from inadequate statistics which lack uniform concepts, are admittedly crude. But even more refined analysis, wherever it is possible, yields no convincing proof of the growthretarding effect of a heavy overall tax burden.

What the Government collects in taxes it usually spends and thus substitutes for the have done. Whether investment by Governspending which otherwise taxpayers would ment is as productive as by individuals or business-or more or less so-is highly controversial, with the answers more firmly rooted in political philosophy than in economics. It seems to me that at this stage of our economic knowledge the proposition that the overall level of taxation (other factors being even) has a negative impact on the rate of economic growth is a hypothesis, which many of us believe to be correct but which so far we have been unable to prove. Most likely there is a level beyond which taxes become injurious to the economy. But we do not know just what that level is.

Taxes in the United States have shown a consistent tendency to grow, not only in amounts but also in proportion to the economy, as table I shows:

TABLE I.-Governmental revenues (Federal, State, local) in the United States, selected years, 1902-62

1922

1932... 1942 1952 1962

Source: U.S. Bureau of the Census, "Historical Summary of Governmental Finances in the United States," 1959; U.S. Bureau of the Census, "Summary of Governmental Finances in 1962," 1963; Survey of Current Business, July 1963, and supplement, National Income, 1954; (national product for fiscal years 1902 and 1922: Raymond W. Goldsmith Associates, "A Study of Saving in the United States," vol. III, Princeton University Press, 1956).

What happened between 1961 and 1962 to 1902. change from praise of the tax structure to outright condemnation? The hopes which had been held and the forecasts voiced for a faster rate of economic growth and declining unemployment failed to materialize. Gross national product (GNP) which had been predicted to reach $571 billion in 1962 fell short of that goal by $16 billion. Unemployment which had been close to 4 million, or 5.5 percent of the civilian labor force, in 1959 and 1960, did not fall below those levels. A growing number of economists came to suspect that taxes were partly or largely to blame for the unsatisfactory performance of the economy. But much uncertainty remained: Is the damage being done by the sheer magnitude of amounts extracted from the private economy or by the nature of the tax system, by the types and rates of taxes? Does the size of the tax burden repress economic growth?

Many observers hold it to be self-evident that taxes whose total amount equals a large and increasing percentage of a country's national income or product retard economic growth. The proposition is most plausible: The greater a share of their income individuals and businesses must surrender to the tax collecter, the less they have left for consumption and investment. Also, taxes are costs of production, and when recovered in prices, lower a country's competitive standing.

But empirical proof for a negative correlation between the size of the tax burden and the rate of economic growth is hard to come by. Germany, France, Italy, Japan and several other countries bear taxes which in proportion to their national income are at least as high as ours or even higher. Yet, their economy has been growing at a much faster rate. On the other hand, we see many countries which levy relatively light taxes but seem unable to expand economically at

In the fiscal year 1962 the revenues of all governments in the United States-Federal, State, local-equaled 34.1 percent of the net national product, 38 percent of the national income, 39 percent of the personal income. This truly is a large share but it is no larger

than in several countries whose national product has been showing much higher rates of growth than we have been able to achieve.

None of those countries uses a tax system similar to ours. This suggests the question whether the tax tructure, the type of the major taxes employed, could have a more powerful impact on economic trends than the aggregate amounts collected. Does the type of tax structure affect the rate of economic growth?

The American tax system is like no other in the world. All industrial countries levy a graduated personal income tax but none leans on it as heavily as the United States. The mainstay of public treasuries in most countries is a general consumption tax and this is particularly true in the rapidly growing European economies. Personal and corporate income taxes tend to be important but secondary sources of revenue. This does not prove that heavy income taxation necessarily results in slower economic advance and that growth could be speeded up by a shift to consumption taxes. But it does nothing to weaken the suspicion that our economic ills are not entirely unrelated to reliance on ex

tremely heavy income taxes in the United States over the past 20 years.

In his 1963 tax message the President declared that "the largest single barrier to full employment of our manpower and resources and to a higher rate of economic growth is the unrealistically heavy drag of Federal income taxes on private purchasing power, initiative, and incentive."

During World War II the United States was the only belligerent nation not to impose a major consumption tax. Instead, it pushed its income tax rates to near-confiscatory levels. This decision, which also meant that we would raise a lesser share of the war costs through current taxation than our allies, was not rooted in economic considerations but in the governing political and social philosophy. That philosophy continued to dominate policy through the postwar period and resulted in the rejection of all proposals to establish a more even balance between the major types of taxes which are now used in other countries throughout the free world.

To be sure, an unplanned gradual adjustment has been taking place. Between 1944 and 1962 receipts from income taxes in the United States doubled, from all other taxes almost quadrupled. The President's proposals would further slow down the growth of income tax collections, while other taxes are likely to continue increasing at a rapid

rate.

The significant difference between consumption and income taxes is not the base on which they are levied but the fact that the former are more nearly proportionatein some cases regressive-while the graduated income tax is progressive. The principle of progressive income taxation is now employed by every industrial country and is presently not in question. But the schedules which have been in effect in the United States over the past 20 years push progression to an extreme which has had a deleterious effect on incentives, investment and

economic growth. While the proposals of the President and the provisions of H.R. 8363 would tend to deemphasize the relative role of income taxes in our fiscal system, they would also make the personal income tax more steeply progressive than it now is, as table II shows.

TABLE II.—Reduction in aggregate tax liability by income brackets in the President's proposals and in H.R. 8363 1

marginal taxation makes people work less. This means that a shift away from graduated income taxation may promote greater effort, but that making income taxes more progressive may have the opposite effect.

The proponents of steeper progression base their case on noneconomic grounds. Robert J. Lampman, economics professor at the University of Wisconsin, told the Joint Economic Committee in 1959:

"The principal argument for an egalitarian tax policy is that its favorable consequences, in terms of social and political conditions, outweigh the unfavorable consequences, in terms of an undesirable possible slowing of the rate of economic progress." &

Talking to the American Bankers Association in February 1963, Paul A. Samuelson, economics professor at MIT, took a similar position and stated that, for example, replacing graduated net income taxes by indirect taxes such as Federal excises or valueadded taxes "represented too stiff a price to pay for some extra growth."?

The economic considerations underlying the tax revisions in H.R. 8363 deem inadequate aggregate demand to be the major element responsible for unsatisfactory economic expansion and high unemployment, and regard a lag in personal consumption to be the primary weakness. Personal consumption now accounts for almost two-thirds services equal over one-fifth, and domestic of GNP, government purchases of goods and

investment and net exports the remainder. Tax cuts in the low brackets, it is held, will strengthen the purchasing power of families which are most likely to spend their tax savings quickly. This in turn will cause merchants to increase their orders and manufacturers to enlarge their productive facilities. Thus more money in the pockets of lowincome persons will spur the economy to faster growth.

Some believe that Government expenditures should also be stepped up, and a group of economists suggested in a statement submitted to the Secretary of the Treasury last July that stimulating aggregate demand "can be done by reducing revenues, by increasing Government expenditures, or by

some combination of the two." s

The President declared in his tax message that he did not, at this time, recommend to raise demand by increased Government expenditures and thought that the proposed tax reduction would provide the needed stimulus.

The premise of the tax cut proposed in H.R. 8363, that the major economic lag in recent years occurred in consumption expenditures, is not borne out by the record. A review of developments since 1956-the year before the rise in unemployment began that still plagues us-suggests that consumption as well as Government spending expanded materially while business profits and investment lagged. Between 1956 and 1963 (first half, seasonally adjusted) personal consumption went up $100 billion, Government purchases $45 billion. Corporate net profits increased less than $3 billion; business investment increased $2.4 billion but, if expressed in constant dollars, actually declined.

Over the same period labor income grew $90 billion, transfer payments $18 billion, and the total disposable income $107 billion.

6 "Income Tax Revision," panel discussions before the Committee on Ways and Means, sess., 1959, p. 1198. House of Representatives, 86th Cong., 1st

"Proceedings of a symposium on economic growth, sponsored by the American Bankers Association, ABA, New York, 1963, p. 89. 8 Daily CONGRESSIONAL RECORD, Sept. 30, 1963, p. A6118.

Expressed in constant dollars, labor income increased 25 percent over the past 7 years and personal consumption 21 percent. But business and professional income grew only 3 percent, corporate profits declined 1 percent, and investment in new plant and equipment shrank 5 percent. Government purchases for defense expanded 24 percent and for civilian purposes 55 percent.

If the economy is to be stimulated by Government then it appears that such action ought to focus on the sectors which have been stagnating, business profits and productive investment, rather than on consumption which has continued to expand.

Some observers in recent years have commented sarcastically on what they called the "trickle-down" theory. What we are faced with in the demand to give priority to a boost in consumer purchasing power, it seems to me, is a "trickle-up" theory, and if the laws of physics have any validity then we may assume that a liquid is much slower in trickling up than in trickling down.

Consumption versus investment

The President's Economic Report, January 1963, discussing the disappointing trends in 1962, recognized that "it was therefore the failure of expenditures other than consumption to rise as far as had been expected that

held down the rise in incomes and in turn consumers expenditures" and that "the error then was in the area of business investment, which fell about $8 billion short of the level that had been expected for the year 1962," (p. 15). It is unfortunate that neither that report nor the 1963 tax message drew the obvious policy conclusions.

A comparison of trends in the United States and the countries of the European Economic Community (EEC) throws light on the relationship between growth in consumption and in investment. Between 1950 and 1961 (the latest year for which these statistics are now available) GNP grew 40 percent in the United States, 82 percent in the EEC countries (in constant prices). The EEC countries had very little unemployment; some encountered labor shortages. The significant shifts in economic shares are shown in table IV.