It is a great privilege to address this meeting of the Waterbury
Taxpayers' Association. Your association has established a notable record
of accomplishment in the public service over many years. I wish it con-
tinued success. As I will explain later, I believe the task of attaining
greater economy and efficiency in government at all levels is one of the
major challenges confronting our nation. Your association is doing
important work along such lines -- it deserves your full and enthusiastic
support.

I propose to talk to you today about government spending and
taxing. My line of argument is a simple one. We must get and keep
government spending under control, and reduce sharply the high tax rates
which restrict enterprise and investment, if we are to achieve full
prosperity and real economic growth. This is a seemingly simple proposi-
tion, and one on which I am sure there would be broad agreement among
those in this room.

However, there would be far less agreement on the part of
academic economists and on the part of many of those who occupy high
positions in the current Federal Administration. Moreover, the record
shows that government spending has been expanding steadily and rapidly,
while little has been done to reduce the high tax rates which have been
with us since the early days of World War II, some twenty years.

## Trends In Spending

Total expenditures by all governments -- federal, state and

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local -- are now running at a rate of close to $170 billion. That works out to just about $900 a year for each person living in the United States. Spending has gone up an average of $51/2% a year for the past decade. But the rise has been accelerating -- the average annual advance in the past five years has been 61/4%. This is significantly faster than the growth in the nation's production, so government has been taking an increasing share of national income and production. Government's share of total production has been moving up towards 30%, as against less than 10% in the 1920's.

What do we get for these huge expenditures -- $170 billion a year? The biggest item is national security -- defense, foreign aid and space -- which accounts for one-third of the total. This is a tremendous burden -- think of what we could do if the $57 billion a year now going for national security could be devoted to peaceful ends!

The next largest item consists of what are called transfer payments. This category accounts for almost 30% of total government spending. It includes interest, government subsidies and welfare activities. Welfare, which covers social security, unemployment insurance, health activities and public assistance, is the major factor in transfer payments. These payments have doubled since 1955.

Expenditures on education account for about 13% of all government spending, and outlays for highways and other public works also weigh in at 10%.

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We have now accounted for more than four-fifths of total government spending -- defense one-third, transfers (mostly welfare) almost 30%, education and public works together over one-fifth. The remainder, somewhat less than one-fifth, or a total of $30 billion, goes for all other operations of government. These include such diverse activities as the farm subsidy program, police protection, implanting historical markers along highways, and checking on your income tax returns.

More than 9½ million civilians now work for governments, and this has been the most rapidly growing area of employment. If recent trends were to continue, then by 1970 there would be approximately one government job for every five jobs provided privately. Instead of advising "Go West Young Man", one would have to say "Go Into Government, Young Man".

## Can Spending Be Controlled?

Can anything be done to check this rapid rise in government spending and employment?

It has been argued, most notably by Dr. Galbraith of Harvard (and recently U. S. Ambassador to India), that we should increase rather than reduce the emphasis in government spending. We coined the graphic term "private opulence and public squalor" to stress the need for more government spending.

I personally would agree that there are many areas where government can contribute to the national welfare, and where government

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spending should increase. Our growing population needs more schools, roads, parks, libraries and other public facilities. In particular, we are probably spending too little on education and too little on making our cities decent and attractive places in which to live and work. Our expenditures on national security must be sufficient to ward off the holocaust of nuclear war and contribute to the ultimate goal of stable world peace.

The broad category of welfare expenditures will probably grow in line with population and incomes. I believe there are very difficult administrative problems in this area -- to be certain, for example, that people do not make careers out of unemployment insurance or public assistance. But the American people clearly want a decent minimum of individual security. In economic terms, the people can have all the security they are willing to pay for through payroll taxes. So long as social security is paid for by taxes which bear on wages, and so long as wage increases including all fringe benefits do not exceed productivity gains, the nation can afford such measures.

However, there are many government programs which seem to me to rank far down on any rational scale of national priorities. In general, these serve the narrow interests of pressure groups, often at the expense of the national well-being. I have in mind many of the subsidies government pays -- to farmers, the merchant marine, veterans, the inland waterways, the users of electric power from federal projects. It is in these areas that federal spending could be cut with results which would add to the national welfare. As an example, the U. S. Department of Agriculture

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now has one employee for every 60 farmers -- twice as many Agriculture Department employees per farmer as in 1950 and more than five times as many as 30 years ago. These facts speak for themselves. Another target should be government programs which no longer serve any useful purpose -- it has been said that if a monument had been erected in the city of Washington for every federal program which was discontinued, the appearance of the city would be little altered.

In realistic terms, I see little chance of much reduction in federal spending so long as national security requirements remain high. But I think it is entirely possible, and highly desirable, to check the rapid rise in spending of recent years. We could hold spending level for a period of a year or so. And our long-term goal should be to keep the rise in spending in line with the growth in our total production of goods and services, so that the share of government does not increase. With a sufficiently vigorous growth in private activities, it might be possible to reduce government's share -- and this is a goal I believe we should seek.

## Tax Revision

Fiscal responsibility, in the sense of getting government spending under control, is very important in considering what can be done about taxes. Our tax system is in urgent need of overhaul. The need is particularly acute at the federal level, but extends throughout the structure. The basic problem with our tax system is that it bears down far too heavily on initiative and investment.

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For every dollar of corporate investment in new plant and equipment last year, corporations paid 70¢ in corporate income taxes. Other taxes paid by corporations -- state and local taxes plus other indirect taxes -- were almost 50% greater than income taxes. So total taxes were at least $1.75 for each $1.00 of capital investment. For every dollar paid to corporate stockholders in dividends, corporations paid more than $3.30 in all taxes, and the stockholder paid at least another 40¢ in income taxes. The U. S. tax system hits investment harder than that of any other industrial nation, with the possible exception of the United Kingdom which has also experienced slow growth.

All of these taxes increase costs, making U. S. industry less competitive in world markets and less productive. Taxes repress investment, a prerequisite for economic growth. To be undertaken, a new investment project must earn at least 7½¢ after taxes on the average to justify the risks involved. This means that only projects which offer a return of 15½% before taxes or more can be considered with our present 52% corporate tax. This rules out a vast range of investments which could be undertaken if taxes were lower.

This tax-drag on investment is very important because the nation needs a higher rate of investment. Investment has lagged since 1957 -- we are now investing 20% less per dollar of total output than we did in 1957.

The lag in capital investment is the primary reason for the lag in the nation's economic growth rate since 1957, and for the persistent

high level of unemployment. This investment-lag also explains the
phenomenon of sluggish business which afflicts centers where capital
goods predominate, such as Waterbury.

For full prosperity, jobs for all who are able and willing to
work, and really good business throughout the nation, we need to reduce
corporate income tax rates. All groups in the nation would gain from the
resulting rise in business investment and in job opportunities.

## Personal Income Taxes

Personal income tax rates are also too high. The steep progression of rates discourages initiative and enterprise, while bringing in little revenue. While rates go up to 91%, studies show that the maximum average tax paid in the higher income brackets is around 40%. Because the rate structure is so steep, Congress has created legal ways to minimize taxes, such as capital gains. This has forced successful individuals to devote too much energy to minimizing taxes, as opposed to maximizing their contribution to the nation's economic prosperity and advance. Only about 13% of total federal income tax receipts comes from all the taxable income brackets with rates of 34% or higher -- roughly the $8,000-$10,000 brackets for single returns and $16,000-$20,000 on joint returns. A much lower rate structure above the $10,000 level (or even above the $4,000 tax bracket) would involve little loss in revenue when it was put into effect. And it could increase revenues over a brief period by adding to the incentives to work harder and more effectively. Truly, we are being penny-wise but pound foolish in holding to high individual income tax

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rates in the medium and upper brackets. A rule that the federal income tax should take no more than 50% of any increase in an individual's income would cost little in terms of immediate revenue loss and produce higher revenues in the longer run.

## Fiscal Responsibility

How can we move to cut taxes in a way which will stimulate economic growth while displaying the fiscal responsibility necessary to maintain confidence? Two points are important, and too little understood.

First, a reasonable cut in tax rates has only a momentary effect on government revenues. The reason is that lower tax rates so stimulate business activity that government quickly takes in more revenue from lower rates applied against higher incomes. Experience shows that a federal tax cut leads to no more than a very small reduction in revenues in the first year, and to increasing revenues thereafter.

Second, tax reduction should be combined with restraint on spending. I do not believe spending needs to be reduced by the extent of the tax cut -- to move this way would be to negate a large part of the stimulating effect of a tax cut. But the rise in federal spending must be restrained, and I would hope that spending could be held at about its present level for a year or two.

The combination of tax reduction to stimulate growth and restraint on federal spending could produce a balanced federal budget in an amazingly brief period -- in fact, the period could be as short as 18

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months following the tax cut. In my view, the only good way to get back
to a surplus in the federal budget is to cut taxes to encourage business
and restrain expenditures.

With proper tax and spending policies, I believe business
activity could move ahead in very good fashion through 1964 and perhaps
further. Such policies could lay the groundwork for a period of great
prosperity and growth for the remainder of the decade. In the process,
I believe we could deal with our balance of payments problem and check
the loss of gold. This may well be the most important reason for cutting
tax rates and controlling spending. On the other hand, if no action is
taken to cut taxes, I would be quite concerned about another business
recession late next year, and about a continuation of the sluggish
economic growth which has characterized the past six years.

The tax bill now before the Congress, while leaving much to be
desired, is a step in the right direction. I believe it should be passed.
However, it is only a first step. If citizens can exert effective
pressure on the Congress to control expenditures, then it will be possible
to move on to further reductions in tax rates in future sessions of the
Congress. This is what I believe we as a nation must do if we are to
realize our tremendous potential for economic growth.

While I have talked today mostly about government taxing and
spending policies, I should emphasize the fact that the wisest possible
action in these important fields will not solve all our problems. How-
ever, such action may be needed to create an atmosphere of expansion

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which would make it easier to deal with other problems, and specifically
the balance of payments problem which is perhaps our greatest economic
challenge.

It is my hope, and belief, that the nation will move, probably
more slowly than I would like, to cope with the problem of taxing and
spending, the problems of checking the gold loss, and the other problems
we face. Thus, I take a generally optimistic view of our economic
future.