400,000,000. Between December 31, 1930, and June 30, 1935, the gross public debt less balance in the general fund increased from $15,700,000,000 to $26,800,000,000.

Mr. HILL. From what date did you figure the increase?
Mr. MCCAFFREY. From December 31, 1930.

This is a process that cannot be carried on indefinitely. Obviously somewhere ahead, if we continue with these deficits, there is a cracking point where United States Government securities will cease to be attractive and our banks, which are now loaded up with them to the extent of 35 percent of their investments, will again be in a difficult situation. Where that cracking point is, we do not know. Some think it will come soon; some, later. The part of prudence requires that we play on the safe side and guard the credit of the United States by balancing its Budget at the earliest possible date.

If this tax plan appeared to be really an effective means for balancing of the Federal Budget, it would be entitled to consideration on its merits, but this program is not one for balancing the Federal Budget and it was not put forth as such. According to the estimates of the Treasury Department the Government deficit for the fiscal year ending June 30, 1936, will be approximately $4,000,000,000. The schedules submitted to this Committee by the Secretary of the Treasury showed estimated revenues ranging from $118,000,000 to $901,000,000 a year. Other estimates fixed the amount of revenue that Congress might possibly obtain by these proposed taxes at around $340,000,000 a year. Obviously, that is not balancing the Budget! It is not even making an important step toward balancing the Budget. Even at the highest estimated yield the Budget would still be about $3,000,000,000 out of balance.

In recommending to this committee that it refrain from proposing any tax program such as has been suggested during the present session, let us suggest very strongly that this country solve the problem of balancing its Budget on the basis of economics rather than under the whip of politics. The fact that such slogans as "Share the wealth" and "Social justice" have a wide appeal to many individuals should not be a sufficient motive to induce Congress to rush into a taxation plan which might mean destruction of wealth instead of distribution of wealth and which, however attractive at the outset, might in the long run mean the denial of social justice.

When we subject our budget to economic rather than political scrutiny it at once becomes apparent that balancing it involves two factors outgo and income. The merchants' association believes that the first logical point of attack is the matter of expenditures. In Government no less than among individuals extravagance eventually spells ruin. Such homely virtues as thrift and economy are not yet outmoded. We believe that both in the ordinary and the extraordinary expenditures of the United States Government there are opportunities for great savings.

The CHAIRMAN. Do you favor the balancing of the Budget by cutting expenditures?

Mr. MCCAFFREY. Yes, sir.

The CHAIRMAN. Now, you have just mentioned the fact that the estimates this year indicated a deficit of $4,000,000,000.

Mr. MCCAFFREY. Yes, sir.

The CHAIRMAN. If you will indicate to us how we can balance the Budget, or how we can make up that $4,000,000,000, you will greatly favor the committee.

Mr. MCCAFFREY. Obviously, you cannot make that complete reduction at one time.

The CHAIRMAN. But you spoke of balancing the Budget by cutting expenditures.

Mr. MCCAFFREY. As far as we can; yes, sir.

The CHAIRMAN. As far as we can, of course.

Mr. MCCAFFREY. I also stated that we recognize that additional taxes are inevitable.

The CHAIRMAN. But you accented the importance of balancing the Budget, and you want to balance it by cutting expenditures. You say that this year there will be a deficit of $4,000,000,000 on account of expenses this year. Now, I want you to show us where we can cut $4,000,000,000 from the expenditures this year.

Mr. MCCAFFREY. It cannot be done; but we want to make a start. The CHAIRMAN. You advocate something that you say yourself cannot be done.

Mr. MCCAFFREY. We should balance the budget by reducing expenditures over a time

The CHAIRMAN (interposing). You say we should do it this year. Mr. MCCAFFREY. No, sir; you misunderstood me.

The CHAIRMAN. You have not shown where we can save one-fourth of it, or where we can save $500,000,000 of it. It would certainly help us if you could show us where the reductions could be made.

Mr. MCCAFFREY. I would be glad if I could.

The CHAIRMAN. I wish you would show us how it could be done. You say that we should do a thing, and I would be glad if you would tell us how it can be done. You carry us to a place, and show us the world, but do not tell us how we can obtain it.

Mr. MCCAFFREY. I will come to that more definitely later on.
The CHAIRMAN. I hope so.

Mr. MCCAFFREY. Where shall such savings be made? That is a matter for study and most serious consideration by those who have all the records of the Government at their disposal. Considering the ordinary expenditures, we know, for instance, that in 1929, exclusive of debt retirement, they amounted to about $3,300,000,000. We have not yet been able to obtain a separation of the ordinary from the emergency expenditures in 1935, but we do know that the Treasury's estimates for 1936, made, I understand, last January, indicate general expenditures, exclusive of debt retirements, of nearly $3,800,000,000. This is $1,000,000,000 in excess of the actual figure for 1934 and close to $500,000,000 above that for 1929. Would not this fact alone indicate that some savings are possible in the so-called general expenditure of the Government?

When the $4,000,000,000 appropriation for public works was under consideration the Merchants' Association advised Congress that in its judgment the amount was larger than could be wisely expended in a single year and asked that it be reduced. We believe that the events which have since transpired have justified the correctness of that conclusion. The delays in making allotments from this fund and the changes in the plans would indicate that the expenditure of $4,000,

000,000 could not be prudently administered in a short time. Is it not likely that savings are possible here? We in New York hear of repeated instances where people prefer to remain upon public relief rather than to take private employment. That is a situation which must be corrected, if we are to restore ourselves to a normal, economic existence.

Are there other ways of saving money? We would like someone to make real investigation of the number of employees on the public pay rolls today and determine whether they are all needed. We would like someone to determine whether Government salaries are fairly related to the salaries received by those who are paying the taxes. But above all the Merchants' Association believes that the Government should refrain from undertakings unnecessarily competing with private industry which can attend to them better and more efficiently. If Government will get out of industry and stop competing with private industry, private industry will be in a position to absorb many of the unemployed.

Action along the lines above indicated should be the first step in balancing the Budget. It should be taken at once. When that has been done consideration can legitimately be given to the taxation necessary to make up whatever deficit remains. That we must have relief for those without employment goes without saying; but when that relief extends to the point of preventing any of these people from taking steps to help themselves it is uneconomic. We must furnish an incentive to work, not an incentive to idleness. The Merchants' Association believes that when a tax plan is drafted for what should be its only conceivable purpose, that of balancing the Federal Budget, it should embody the following principles:

1. Any tax plan should spread the tax load fairly over all who are able to pay, in order to encourage tax consciousness and a feeling of responsibility toward the Government and interest in its adminis tration. In this connection we would like to commend for the study of this committee the report on the British tax system, submitted to Mr. Doughton and Secretary Morgenthau last November by a special committee headed by Mr. Magill.

Britain has made long strides toward the restoration of economic stability. While her wealthy people have been taxed heavily, her entire population has helped to bear the load. In our judgment the situation in the United States is so serious that it is going to require some sacrifice on the part of everybody. The United States may certainly profit in devising its own future course by studying how Great Britain has worked out the problem.

2. The tax plan should be of a nature that will not retard the development of private industry to which we must look for the reemployment of those employables who are now out of work.

3. Tax plans should be of a nature that will offer the least possible obstacle to investment of capital in those enterprises offering the greatest possibility of absorbing the unemployed.

4. The tax plans should be so constructed that they will not, in seizing the wealth today, destroy the sources of income to which Government has been accustomed to look for its revenues.

If the committee examines the program which has been presented, it will find that it does not conform to these principles.

1. Consider for a moment the proposed corporation tax. In penalizing mere size, without regard to investment, rate of profit, or number of shareholders, it would operate with the greatest unfairness and decrease the amount available for distribution by those very corporations which have the largest number of small shareholders. The additional load on the earnings of these corporations will tend to decrease the value of their bonds held by the banks and insurance companies and private investors. In short, this plan will impair business confidence when every attempt should be made to increase it. It will tend to limit investment in those channels which offer the greatest possibility of providing private employment.

2. Consider the proposed taxes on estates and gifts. It has already been pointed out to this committee that this tax may easily reach a point where it is absolutely confiscatory and that nonliquid producing properties which are now successful because they are in family management may be broken up and thrown into virtual liquidation in order to settle the Government's accounts.

3. Even in imposing income taxes on the wealthy we must guard against reaching the point of diminishing returns against forcing wealth, otherwise available for investment in productive enterprise, to take refuge in tax exempt securities.

In view of these facts the Merchants' Association asks that Congress refuse to enact any of these plans at this session.

Any action taken this summer, when Congressmen are naturally anxious to return to their homes, must of necessity be hasty action. The matter is so important that it deserves the very best thought that can be brought to bear on it. Deliberations should be calm and as free from political suggestion as anything undertaken by Congress can be.

The basis of the deliberations should be economics. By enacting a hastily conceived wealth distribution plan today we may tear down sources of employment and confidence of investors, which we ought to be building up.

Very earnestly the Merchants' Association urges that the public welfare requires a comprehensive program for balancing the budget rather than haphazard action.

The CHAIRMAN. We thank you for your appearance.

At this point the committee will take a recess until 1:30 o'clock. We have three witnesses on the calendar for this afternoon.

(Thereupon, the committee stood in recess until 1:30 o'clock, p. m.)

AFTER RECESS

The committee reconvened at 1:30 p. m., on the expiration of the

recess.

The CHAIRMAN. The committee will be in order.

The Chair is informed that Mr. James L. Donnelly, of the Illinois Manufacturers' Association, will appear to take the place of Mr. Ray Wantz, of Rockford, Ill. Mr. Donnelly, will you please give your full name and address, and the capacity in which you appear, to the stenographer?

STATEMENT OF JAMES L. DONNELLY, EXECUTIVE VICE PRESIDENT ILLINOIS MANUFACTURERS' ASSOCIATION, CHICAGO, ILL.

Mr. DONNELLY. Mr. Chairman, my name is James L. Donnelly. I am executive vice president of the Illinois Manufacturers' Association, Chicago.

The Illinois Manufacturers' Association is a general industrial organization comprehending approximately 3,000 members-manufacturing industries of all types and sizes, and engaged in the manufacture of a large variety of products; and although what I have to say relates particularly to Illinois, in view of the fact that the manufacturing situation in Illinois is fairly typical of that which obtains in other industrial States, my observations might be regarded as being applicable to industry generally, and particularly in industrial States typified by the State from which I come.

We wish to direct our observations to those features of the tax program now under consideration which relate to increases in the tax rates on the income of corporations.

It is respectfully submitted that the plan to graduate the rate of corporation income taxes upward, solely upon the basis of the amount of income, is unsound and unwarranted for the following reasons: 1. Such plan will operate as a regressive tax.

In considering the effect of this proposal it is necessary that corporations be divided into various classes.

The first class should be the small closed or family corporation, namely, those corporations who have their stock so closely held that frequently it is dominated by one individual. These corporations may have very substantial incomes, and because their stock is held by so few individuals, their income is distributable only among a very few people, and, as a rule, in much larger amounts per individual shareholder than is ordinarily the case with a large corporation. Such corporations are generally operated for the benefit of their individual owners in the same manner as an individual enterprise. Ordinarily there is no market value for the stock of a small corporation, which consequently does not offer an attractive investment to the small or average investor.

The medium-sized corporation usually operates on a conservative basis. The stock holdings are generally held within a particular community and the benefits of the corporation are distributed and derived by that community.

The large corporation usually has many thousands of stockholders, no individual stockholder having control of the enterprise, and, with stockholders situated throughout the United States and in many foreign countries, is comprised of people of all walks of life. The employees of most of our large corporations are likewise stockholders, so that they are interested in the welfare of their particular organization from the standpoint of an employee as well as from that of having a proprietary interest.

To illustrate, an examination of a moderately large corporation indicates that they had a total of 7,200 stockholders, and the average stock holdings per individual were approximately 42 shares; not to exceed 5 percent of the stock was held by any one individual, and not to exceed 14 percent by the family of any individual. The majority