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Mr. Smith. Yes, sir; Senator. I am just coming to that. At the last session some committee of Congress was charged with the responsibility of looking into the question of all these veterans' payments. I do not know what they did about it. I never saw any report on it.

Senator HARRISON. They are still considering the question.
Mr. Smith. Well, they worked on it.
Senator HARRISON. They are still considering it.
Senator GORE. Yes.

Mr. Smith. I believe that the original agreement that was made in the time of President Wilson with our soldiers was the fairest and squarest that was ever made between any country and soldiers that served it during the war probably in the history of the world. But it has been these recent bills that followed afterwards adding on new burdens. I do not believe anybody is entitled to any money from this Government that can not show that the disability then is directly traceable to his service to the country in time of war.

The CHAIRMAX. We have nearly $1,000,000,000 of that kind of expenditure of the Government now.

Senator GORE. $3,000,000 a day.

Mr. Smith. I think it ought to be cut out. I do not believe that a man that 10 years after the war is all over-who never left this country, who went down to camp and got the benefit of regular living down there, and had his teeth all filled and his flat feet corrected, if he had flat feet, and had all the acid taken out of his system by good, regular living and good food-just because he gets hit by a taxicab 10 years later, I do not think that we ought to take care of him forever.

The CHAIRMAN. If it were only a taxicab, or accidents, it would be quite different, Governor. But they do not stop there.

Mr. Smith. If he is hurt, they take him to the doctor's. They write the prescriptions in some foreign language and they have some way of finding out that no matter what is the matter with you, it can be traced back to a war.

Senator GORE. I know of an instance in my State that occurred about three years ago where a man was out driving a pair of mules, and he was supposed to be in his cups more or less, and the mules ran away, broke his leg, and you and I and the people in this room are paying taxes to pay him an allowance.

Nir. Smith. Well, I believe it ought to be cut out.

Now, prohibition. I would certainly be opposed to congressional action on the make-up of State conventions. That ought to be left to the States.

Senator GORE. Well, you do not think Congress has any power to regulate or even indirectly to meddle with those conventions, do you, Governor?

Mr. Smith. Well, it is a sharp question. The Constitution says, "by conventions of the people. There are a great many lawyers that think that Congress can define what a convention is and how it is to be made up.

Senator GORE. Congress can submit amendments to the States and the States ratify them. I do not think, and I do not want you to admit that Congress has any power on earth to meddle with those conventions, directly or indirectly. It is a State convention pure and simple.

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The CHAIRMAN. There would be such a howl, Governor, that would come from all over the Union that it would cease immediately.

Mr. Smith. What I am a little bit afraid of is that Congress may amend the Constitution in this respect, as it has in many others, without the consent of the States. I hold that Congress amended the income tax law. I was the leader of the assembly and Senator Wagner was the leader of the senate in the New York State Legislature when the income tax of the United States was ratified by New York State, and it had never been ratified if the people in that State thought the Congress was ever going to define income. But Congress has done it. I believe they have amended the Constitution with the consent of the United States Supreme Court.

Senator BARKLEY. Regardless of whether the Congress has the power in the submission of the amendment to conventions to prescribe the methods of holding the conventions and the qualification of delegates thereto, we have not attempted it in this resolution. And presumably it is to be left to the States.

Mr. Smith. I thought I read in the paper that there was something either introduced or going to be introduced as to how the conventions are set up. If what you say is true, Senator, why I withdraw it. I read it in some paper.

Senator Walsh of Massachusetts. There was a proposal made by former Attorney General Mitchell Palmer along the lines you indicated.

Senator HARRISON. That matter is behind us. It is up to the States.

Mr. Smith. Good.

Senator Walsh of Massachusetts. Senator Wagner says that Congressman LaGuardia was going to introduce a bill to the effect that you read about.

Senator BARKLEY. Suppose the legislatures of a number of States deliberately refused to call conventions to pass on it at all, would you think then that if Congress had any power to make any law about it that it ought to do it?

Mr. Smith. No; I would not like to see Congress interfering with the sovereign right of a State. There were some States did not ratify the eighteenth amendment.

Senator BARKLEY. I am not speaking about that. Of course we are assuming in the submission of this resolution to conventions that all the States will through legislation provide for the conventions, fix the qualifications of voters and delegates, and delineate districts to be represented by them. But assuming that they did not do it? If we could assume that say 15 or 20 States through their legislatures would not call these conventions, then would you favor Congress taking any action at all, or just leave it suspended in mid air like that?

Mr. Smith. I would leave it right to the States.

Senator BARKLEY. On the theory, then, that the members of the legislature who would refuse to call conventions are responsible to the people, and the people can have their own remedy?

Mr. Smith. That is the answer to it. It is pretty much the same thing as the States that did not act on the eighteenth amendment when it was submitted. They just did not do anything about it. Now, Rhode Island kind of threw it out of the window.

Senator GORE. Yes, it did.

Mr. Smith. I would make another suggestion, that there ought to be a tax plan prepared by conference with the State governors covering tax on liquor in connection with repeal and in the event we get repeal. We do not want to have both the State and the Federal Government rusning right at liquor right away and taxing it so that it won't be any good.

Senator HARRISON. Do you mean the tax won't be any good or the liquor won't be any good?

Mr. Smith. The tax won't be any good. By the time they pay the big high tax on it they will have to make it cheap.

Senator METCALF. And the bootlegger will continue to sell his product.

Mr. Smith. Encourage the bootlegger to keep going because he probably will be under the price of the legitimate fellow if the tax is too high.

The last thing I want to speak of is the balancing of the Budget. I do not know whether that can be done or not. But it is very important, and it would go a great distance toward restoring confidence at a time like this. And if

you

have to resort to it I think we ought to put on a manufacturers' sales tax.

The CHAIRMAN. That is right. Mr. Smith. I really believe we should do it. Exempt from it, of course, food, clothing, and so forth. The man that spends say $1,000 a year, if he paid 1 per cent on it that would not hurt him. It would give everybody a chance to throw in a white chip when we need it to keep the ship going.

Senator BARKLEY. Governor, in that connection, one of the objections raised to the suggestion of the sales tax years ago before it ever became involved in the balancing of the Budget, was that it was promoted for the primary purpose of substituting it for the income tax as the final method of raising money to support the Government. Do you subscribe to that theory if in normal times the question of a mere balancing of the Budget became a side issue or was not serious like it is now—would you favor the substitution of the sales tax as a method of raising money to support the Government in lieu of the present income tax law?

Mr. Smith. I would use it in normal times to make it possible to reduce the rate of tax on incomes. I believe in an income tax. But the present rates are just holding capital down to the earth. Take a man who takes a chance--if he loses, why it is just too bad. Everybody is sorry for him. But if he wins look what happens to him. They come in and take the largest part of it away from him.

Take the man that is fixed in this kind of a position. Back in 1928 and 1929 when we were all sitting pretty on top of the earth he signed a long lease for his apartment; there were not many of them around; rents were high, he wanted the apartment, and he signed a long lease. He has run into the decrease of salary made necessary by the red figures of the concern that he is working for, and the income tax comes along and takes the rest of it away from him. Take my case.

I got $50,000 a year as president of the Empire State Building. I have no other money. I got myself a nice apartment. After I left Albany, after living in a mansion for six years I couldn't see First Avenue very well, so I went over on Fifth Avenue. I signed a lease for $10,000 a year.

Senator GORE. You left the Fulton Street Market?

Mr. Smith. Yes, I left the market. Now, in 1932 with my salary decreased, with the lease still in my lap, the Federal Government and the State together are going to take $10,800 away from me in taxes. Well, lay up the automobile. Chauffeur out of work. If three or four more fellows in the garage follow my example a couple of car washers are laid off. Less gasoline bought.

Less gasoline bought. Less rubber tires bought. It is a kind of a vicious circle. It keeps rolling around and grabs every body.

Take a man to-day that wants to invest his money. The Pennsylvania Railroad says to him, “Here, we are electrifying the lines to Philadelphia. Come in and buy some of our first mortgage gold bonds. Pay you 5 per cent." The fellow looks at him for a minute and says, "Well, it will put people to work, that is true. But the trouble is I don't get 5 per cent. By the time the Government gets finished with me that is down to about 3 per cent. So I think instead of doing business with you I will do business with the Government." So he goes and buys a Government bond and there is no money to build the railroad.

The CHAIRMAN. And no money comes in to the Treasury as taxes. Mr. Smith. No. The Government gets no taxes from him. It is all velvet.

The CHAIRMAN. Senator Barkley, on the subject of the sales tax taking the place of the income tax, no thought of that ever entered my head.

Senator BARKLEY. I am not talking about the present situation, but there was an objection 10 years or more ago to the sales tax, because it was thought to be projected in the hope that it would some day supplant the income tax.

Senator GORE. We will spend all we can get from both.

Senator HARRISON. It is advocated by some influential people in this country because they want to use it to substitute for the income tax,

Senator BARKLEY. It may be necessary to adopt it as a supplement to the income tax.

Mr. Smith. I believe in the income tax, but I do not believe in the high rates, because I think they are stifling business. If you will go back in your mind and study the history just before the election of President Coolidge in 1924, we had high income taxes. Mr. Coolidge recommended their reduction. Everybody was afraid to reduce them, but they did it anyway, and then he was elected in 1924, and when they saw the tremendous plurality he got in the face of his outspoken recommendation for reducing the rate on incomes, everybody rushed in reducing them a little more, and the direct result was that beginning in 1925, with the inauguration of Coolidge, we went into the greatest era of prosperity the country has ever known.

Senator BARKLEY. The great reductions in the income tax were due largely to the fact that each year we would have a surplus of revenue ranging from $300,000,000 to $900,000,000 a ycar, and, of course, we did not have any right to collect taxes from the people and pile up surpluses.

Mr. SMITH. My theory is that if you put on the manufacturers' sales tax, balance the Budget in the first instance, and hold it there, proper reductions in the income tax brackets can be made. Take the man who goes into a business venture. Suppose he makes $1,000,000. The Government takes about $675,000 of it away from him. So, after he has risked all his money to make $1,000,000, all he gets is $325,000 out of it. With these high brackets it is going to be hard to induce men to go into great projects.

The CHAIRMAN. It has prevented them already. Is that all?
Mr. SMITH. That is all, Senator.

The CHAIRMAN. Thank you, Governor-unless there are some questions some members of the committee want to ask.

Senator CONNALLY. Just one question. I understood the Governor to say that on a $1,000,000 income a man would pay about $675,000 Federal taxes.

Mr. Smith. In New York State.

Senator CONNALLY. That includes both Federal and State income taxes.

Mr. SMITH. Yes.

Senator CONNALLY. We are not responsible for the New York State income tax. That is the State's own business.

Mr. SMITH. I know; but you are responsible for a terrible part of it.
Senator CONNALLY. Not of your own State income tax.
Mr. Smith. No; the total tax.

Senator CONNALLY. I thought the Governor referred to the Federal tax, and I knew he did not want that statement to stand.

Mr. SMITH. No. I referred to both taxes.

STATEMENT OF MARY VAN KLEECK, DIRECTOR, DEPARTMENT

OF INDUSTRIAL STUDIES, RUSSELL SAGE FOUNDATION The CHAIRMAN. Whom do you represent?

Miss Van KLEECK. I am director of the department of industrial studies of the Russell Sage Foundation.

Senator LA FOLLETTE. I ask for order.

The CHAIRMAN. I have asked for it. I wish those present would please let us have order. Proceed.

Miss Van KLEECK. A brief statement of what I believe to be the basic cause of the present depression, as well as the starting point for consideration of legislative remedies, is contained in a report issued by the Bureau of Labor Statistics of the United States Department of Labor. The bureau has made a study of “the relative share of wage earners in the product of their labor, together with the relation between the purchasing power of the wages paid to labor and the value of the products of that labor.”

Senator GORE. What is the name or number of that bulletin?

Miss VAN KLEECK. United States Bureau of Labor Statistics, Bulletin No. 541, Handbook of Labor Statistics, 1931 edition, page 615.

The basic figures were the data gathered by the United States Census over a period of 80 years. From this analysis the following summary was derived:

That the average yearly earnings in manufacturing industries were 76.2 per cent greater in 1899 than they had been 50 years before, that the value of the product per wage earner was 130 per cent greater, that the value added to the raw material as the result of manufacture was 119.8 per cent greater, that the per cent wages bore to the value of product had decreased 23.2 per cent, the per cent that wages were of value of product added had decreased 19.8 per cent, and wholesale prices had decreased 13.1 per cent.

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