If, in an attempt to protect the incomes of our people, we hold down taxes and as a result, the cost of living rises, we shall have taxed them just as surely as if we had levied on them directly-and we shall still have the inflated costs of defense to pay later from taxes.

An all-out tax program will build public morale in an all-out defense program. By reducing the necessity for borrowing, it will strengthen confidence in the impregnable fiscal position of the Government. By contributing to the control of prices, it will help prevent the demoralization which would result from inflation. By distributing the defense burden fairly, it will help unite the Nation. It will make all the people equal partners in sharing the cost of the defense of our country.

The CHAIRMAN. Senator Walsh, do you wish to ask the Secretary any questions?

Senator WALSH. Mr. Secretary, does the Treasury Department recommend the excess-profits-tax provisions of the House bill?

Secretary MORGENTHAU. Not as they passed the House.

Senator WALSH. Are you going to submit to the committee a substitute form of levying excess-profits taxes?

Secretary MORGENTHAU. We will be glad to if we are asked to.
Senator WALSH. You have such a plan?

Secretary MORGENTHAU. We have such a plan.

Senator WALSH. I do not care to ask any more questions now. The CHAIRMAN. Senator La Follette?

Senator LA FOLLETTE. I think not.

The CHAIRMAN. Senator Barkley?

Senator BARKLEY. Mr. Secretary, you comment here on the joint. return made by husband and wife and I gather from your statement that you still advocate the compulsory joint return by husband and wife as first carried in the House bill.

Secretary MORGENTHAU. With the one slight proviso that I added. Senator BARKLEY. You take the position that the base is to be lowered among the lower-income taxpayers in the country and that this joint return ought to be included?

Secretary MORGENTHAU. That is right.

Senator BARKLEY. Are they necessarily connected?
Secretary MORGENTHAU. No.

Senator BARKLEY. In the letter of the President to Mr. Doughton, he urged the elimination of the joint return; did he not?

Secretary MORGENTHAU. No. Has somebody got his letter? I did not mean to be so contradictory.

The CHAIRMAN. He urged the liberalization of the joint return, by a liberal treatment of the earned income of the two.

Senator WALSH. The committee has the letter before them.

The CHAIRMAN. We have it here, Mr. Secretary. Would you like to have it?

Secretary MORGENTHAU. Thank you. I have a copy of it. Senator BARKLEY. Of course, it is generally estimated that without the joint return it results in a loss of some $300,000,000.

Secretary MORGENTHAU. Would you mind, Senator, if I just read a paragraph from the President's letter?

Senator BARKLEY. No; go ahead.

Secretary MORGENTHAU. I am reading from the President's letter:

I am sure that I make it clear that the Treasury Depertment does not approve of mandatory joint tax returns except on the condition of granting substantial

relief to earned income of husband and wife. In this I heartily concur. But the committee draft leaves out the proviso altogether.

In other words, we were for the mandatory joint tax returns with the proviso and the President backed us up in that position.

Senator BARKLEY. Were the terms of the liberalization or the details of it set up by the Treasury?

Secretary MORGENTHAU. We presented them before the Ways and Means Committee.

Senator BARKLEY. Frankly, I have not been enthusiastic about the joint tax return, whether mandatory, or whether it carried a provision such as you susggest for this reason, and I would like to get your reaction to this; in nearly all the States over a period of years the legislatures have liberalized the laws with respect to separate ownership of property and rights of women in the control and ownership of property. In other words, all the States, through their laws, in the last generation, have constantly sought to free women from the domination of the husband in the control and ownership of her property. Now, I have felt and I feel yet that this provision, especially as it was carried in the House bill, before the House eliminated it, and I am not so sure that it would not, even under your suggestion, have a tendency to break down that independence and that liberalization of the State law with respect to the ownership of property by women and the control of property by women independent of their husbands, which has been the object of nearly all legislation in the past 35 or 40 years. What is your view about that?

Secretary MORGEN HAU. Unfortunately, a great many wealthy people have taken advantage of that, the men have transferred their property to the women in order to escape paying their fair share of the taxes, with the result, we estimate, that if that privilege were taken away, the Treasury would gain about $258,000,000. The privilege which has been extended to them over this time, as I say, has been abused.

Senator LA FOLLETTE. May I interrupt there, Senator?
Senator BARKLEY. Yes.

Senator LA FOLLETTE. Have you any estimate, Mr. Secretary, on what percentage of the present income taxpayers would be asked to pay the additional revenue? If you or Mr. Sullivan could answer that, would appreciate it.

Secretary MORGENTHAU. I hear Mr. Sullivan saying he has got it, so let him answer that.

Mr. SULLIVAN (John L. Sullivan, Assistant Secretary of the Treasury). Exclusive of some 45,000 filing community property returns, the last available figures were about 153,000 men and 153,000 women filing separate tax returns on calendar year 1938 incomes.

Senator LA FOLLETTE. Out of a total of how many, approximately, for the record?

Mr. SULLIVAN. The husbands and wives filing joint returns, I believe, totaled 2,866,000 of which 1,038,000 were taxable returns.

The CHAIRMAN. Mr. Sullivan, could you compile any figures to indicate how much the estimated revenue would be reduced by an allowance of the earned income, or by an application of the earned income?

Mr. SULLIVAN. Yes, sir. We estimate that the mandatory joint return originally provided in H. R. 5417 would yield $287,200,000. The figure of $258,000,000 given by the Secretary is the additional yield

from mandatory joint tax returns at the rates of tax contained in H. R. 5417 if the earned-income credit he recommends is allowed. The CHAIRMAN. $258,000,000?

Mr. SULLIVAN. That is correct, sir.

The CHAIRMAN. Now, may I ask you if you have any additional figures I apprehend it would be rather difficult to be anything like accurate if there were also exempted from the joint tax return property possessed by either the husband or wife at the time of marriage? Would it be possible to get a reasonable estimate?

Mr. SULLIVAN. We do not have that figure, sir. It will be pretty difficult to get a basis for that estimate.

Senator BARKLEY. May I ask this? The Secretary has referred to the fact that many wealthy people escape the payment of taxes by transfer of property to wives. Of course, that only involves the income of such property and in that case, the wife would make an independent return on the property that was owned by the husband.

Mr. SULLIVAN. That is correct, Senator Barkley. The return of income which each would make, would fall into lower brackets of surtax than if a joint return were filed and would therefore be subject to a much lower surtax.

Senator BARKLEY. How much in revenue has the Treasury lost by the transfer of property from wealthy husbands to their wives?

but

Mr. SULLIVAN. I think, from 1932 through 1939, there has been transferred by gifts reported for gift tax purposes $5,000,000,000, we have no way of telling how much of that was from one spouse to another, or what additional gifts were made that were not subject to gift taxation.

Senator BARKLEY. Do you know what the income on that transferred property was?

Mr. SULLIVAN. We have no way of knowing that, sir.

Senator BARKLEY. The tax lost to the Treasury would depend on the income of this $5,000,000,000 worth of property?

Mr. SULLIVAN. That is right and the bracket in which the holders of the property were placed.

Senator BARKLEY. Would you estimate the difference between what the wife would pay on that transferred property and what the husband and wife would pay if they were compelled to make a joint return? Mr. SULLIVAN. We have no way of estimating that, sir, but as I testified a few moments ago we estimate that the Treasury proposal for mandatory joint returns would yield $258,000,000 a year.

Senator CLARK. They would have to pay the gift tax at the time of the transfer.

Mr. SULLIVAN. That is right. The gift tax rates are three-fourths of the estate tax rates, Senator Clark.

Senator BARKLEY. Is it your contention that all of the 153,000 families would be affected by this change in the transfer of property back and forth between husband and wife?

Mr. SULLIVAN. No; that is not correct, sir.

Senator BARKLEY. How many of them would you say have escaped taxes by that method?

Mr. SULLIVAN. I cannot give you that offhand.

Senator BARKLEY. So, regardless of any transfers, regardless of whether they are wealthy or not, 153,000 is the number of those who would be affected by the provisions of the House bill if it was mandatory?

Mr. SULLIVAN. I think it would be a little bit more this year, Senator. Probably about 215,000 families would file separate and community property returns under existing law.

Senator BARKLEY. While I am asking questions-I do not want to take too much time-I wanted to ask the Secretary if he has any estimate on the total national income for 1941?

Secretary MORGENTHAU. Our men estimate somewhere between 88 and 90 billion dollars.

Senator BARKLEY. That is 10 or 12 billion dollars more than for 1940, isn't it? The 1940 income was some $76,000,000,000.

Secretary MORGENTHAU. Yes. That is correct, Senator Barkley. They say right now it is running at the rate of $88,000,000,000, but my men think that before the year is over, it will be over $90,000,000,000. Senator BARKLEY. My recollection is that the total income for 1940 was about $76,000,000,000 and if it is estimated for 1941, it will be $90,000,000,000, that means an increase of $14,000,000,000. Secretary MORGENTHAU. That is right.

Senator BARKLEY. In the total income.
Secretary MORGENAHAU. That is right.

Senator BARKLEY. Now the point in my mind is this, to try to reach the source of that $14,000,000,000 increase in income.

Secretary MORGENTHAU. Yes.

Senator BARKLEY. Now, to what extent has that $14,000,000,000 increase been distributed among the low-income taxpayers who would be affected by a lowering of the base?

Secretary MORGENTHAU. This is just my own opinion, without consulting anybody-I do not think it has had time to get down to most of the really low-income people yet.

Senator BARKLEY. So that any tax bill that increases the tax of the low income brackets, who have not participated as yet in this increase of $14,000,000,000 would be, of course, an additional burden upon them, who have not been compensated by the increase which we are talking about, is that true?

Secretary MORGENTHAU. As I say, I haven't got the exact figures. It takes quite a while for this increase of national income to reach the people at the bottom of the ladder.

Senator BARKLEY. The 31⁄2 billion dollars that this bill is supposed to raise over and above present taxes then, is only about one-fourth of the total increase in the national income?

Secretary MORGENTHAU. Yes.

Senator BARKLEY. It seems to me that if there is any way to arrive at levying this tax where the increased income is going to benefit people, it ought to be done, instead of assuming that the $14,000,000,000 increase is being spread out over the whole population and therefore, we would be justified in taxing the small-salaried man who does not now pay an income tax or who does not pay as much as he would before any increased schedule.

Secretary MORGENTHAU. Eventually it will reach everybody in proportion to his earning power.

Senator BARKLEY. Well, it will not reach the salaried man unless his salary is increased by reason of increased income.

Secretary MORGENTHAU. Yes; it will hit him the hardest.

Senator BARKLEY. It will not reach him at all, if the price of his living expenses is to go up without any increase in his income.

Secretary MORGENTHAU. That is right.

Senator WALSH. Is there any better way of reaching a portion of that increased income than through the excess profits tax?

Secretary MORGENTHAU. I do not know any at the moment, I mean other than these six suggestions which I made here today.

Senator BARKLEY. Do not you think that people who are not engaged in defense work and whose profits are not to be increased, even indirectly, by the defense program, ought to bear their share of this burden, as well as everybody else? In other words, the tax ought not to be limited simply to those who are making direct profits out of defense activities? The general increase in income to some extent, benefits a lot of people who have no contract with the Government, who are not engaged in the manufacture of defense articles.

Secretary MORGENTHAU. That is right.

Senator BARKLEY. And any tax based simply upon an increase growing out of defense contracts might let a lot of people escape who will share in this increased income?

Secretary MORGENTHAU. That is perfectly right.

Senator CONNALLY. May I ask him some questions? Is it my turn now?

The CHAIRMAN. Yes. There is no particular order in which the committee members may ask questions.

Senator CONNALLY. Somebody suggested you were going down the line. I am willing to accept my humble place when it is reached. Mr. Secretary, I am sorry I was not here when you started.

Secretary MORGENTHAU. I am sorry, too.

Senator CONNALLY. I hope to be here when you end.
Secretary MORGENTHAU. Are you participating in my end?
Senator CONNALLY. Well, if it is the right end, I will.

Secretary MORGENTHAU. Thank you.

Senator CONNALLY. I noticed you were on page 8 and then Mr. Sullivan was reaching his climax on it when I came in, about the jointincome return. He said something about billions of dollars of property had been transferred in recent years from husband to wife, ostensibly to evade the payment of a heavier tax. I suppose that was your implication, was it not, Mr. Sullivan?

Mr. SULLIVAN. The question was, How much property had been transferred?

Senator CONNALLY. I see here you say:

Furthermore, in at least eight States of the Union, Federal income taxes are made substantially lower than in the remaining States because the local law permits the splitting of income between husbands and wives.

Have you any reason to believe that a State like mine, that adopted the community property as early as 1840, had in mind the avoidance of a tax in 1941 by the adoption of the community-property rule? Secretary MORGENTHAU. I doubt whether they were that farsighted.

Senator CONNALLY. Well, if they had known who was running the Treasury in 1940, they might have been that farsighted.

What I am talking about is, you seek to pick out eight States here and make them more or less the goat and credit them with putting the idea in these rich States like your own of swapping back and forth to avoid taxes. As a matter of fact, the community-property rule was more or less an inheritance from the Roman law, the civil law,