Dr. Clarence Heer, tax specialist for the President's Advisory Committee on Education, summarized his careful findings on the subject of Federal support for education as follows:

1. From the point of view of all four of the major tests of a good tax systemfiscal adequacy, administrative efficiency, equity, and economic effects-Federal aid for education offers a better method of raising new money for schools than State and local taxation.

2. From the point of view of fiscal adequacy, Federal aid is superior because it places the responsibility for raising new school funds on the level of Government which has the widest range of productive tax sources at its disposal, and which is in the best position to exploit those sources effectively.

3. From the point of view of administrative efficiency, Federal aid for education is to be preferred because it will permit the needed school revenue to be raised by methods which involve less annoyance and expense to the taxpayer, which present fewer opportunities for tax avoidance and evasion, and which entail relatively lower administrative costs.

4. From the point of view of equity, Federal aid for education presents the more desirable alternative because it will place the responsibility for obtaining additional school revenue on the level of government best fitted to distribute its taxes according to the principle of ability to pay. To the extent that public education is a matter of national concern, Federal aid will make it possible more nearly to equalize the burden of maintaining a national minimum of educational opportunity throughout the country. To the extent that education is a State and local function, Federal aid will provide a means of correcting the inequities in the present system of school support which result from the extraterritorial shifting of State and local taxes.

5. Finally, from the point of view of economic effects, Federal aid for education offers the better mode of procedure because the Federal Government has far greater freedom than have the States and localities to select fiscal measures appropriate to given economic and social objectives.65

Present Federal expenditures are quite inadequate to defray the costs of conserving the Nation's natural resources which have been so ruthlessly exploited. Yet the problems of restoring the fertility of much of our soil, reforesting our denuded areas, reclaiming our swamplands, making the most economical use of our waterways, controlling seasonal floods, and reestablishing the wildlife areas of the Nation press insistently for solution. In this process fiscal policy and the tax system can be employed to excellent advantage.

The Federal Government has begun to map the natural resources of the Nation and determine the needs for conservation. Reports concerning our forest areas are typical of the waste and misuse of our resources generally. One-third of the continental area of the United States is suitable for forests. At best, only 2 percent of the timbergrowing area of the Nation is being used intensively. The combination of destructive cutting and fire have destroyed more than 75,000,000 acres of timber-growing areas. Original stands of saw timber have been reduced by more than 75 percent. In the higher grade timber the drain in even a subnormal year is nearly a half more than the annual growth. The report of the Forestry Service concludes:

To meet the real needs of our people with a margin for export and for safety, growth must be nearly doubled. To accomplish this the area under intensive forest management must be increased at least 10 times and that under extensive management at least 3 times. This will require about 75 years of greatly enlarged efforts. * * * Since the time of settlement, timber products such as lumber, worth perhaps $100,000,000,000, have been drained off from the forests with only the most inadequate provision for renewal. * * The annual cost [of

65 Clarence Heer, Federal Aid and the Tax Problem, Advisory Committee on Education, Staff Study No 4, Washington, 1939, pp. 86-87.

CHART 46

TAX REVENUES EXPENDED FOR PUBLIC SCHOOLS

FOR SELECTED YEARS, BY LEVEL OF GOVERNMENT

UNITED STATES, 1909-10 TO 1935-36

SOURCE: FEDERAL AID AND THE TAX PROBLEM, Staff Study No.4, Advisory Committee on Education, Washington, DC., 1939, p. 32.

1,000

500

an adequate program of reforestation] during the next 20 years average about $245,000,000.6°

would

Fiscal policy and taxation are very useful instruments for reforestation. The program embraces a system of benefit payments to farmers for specific adjustment of their land usage, including the withdrawal of woodlands from cultivation, planting of suitable trees and coverage, and their proper care over a period of years. Adequate protection from insects and fire is essential. Forest credits extended by the Government to individuals and cooperative firms, which will include oversight of forest acreage and cuttings, planting, and harvesting according to proper practices, are an integral part of the program of conservation. Finally, the reorganization of property-tax laws and assessments, including in some instances a stumpage-value tax, is necessary to defer the cutting of immature timber.67

Governments have given little attention to the problems of conservation, particularly in relation to fiscal policy and taxation. Yet in any attempt to establish an effective conservation program taxation must be used as one of the instrumentalities. The results of studies now being pursued concerning our natural resources and the cost of a comprehensive program of conservation are uncertain, but it seems inevitable that a far-reaching reorganization of the entire tax structure will be involved.

66 U. S. Forestry Service, A National Forest Economy, June 1939, p. 17 ff.

67 See Fred Rogers Fairchild, Forest Taxation in the United States, U. S. Department of Agriculture, October 1935, for a very comprehensive study of taxation of forest lands.

THE BALANCED BUDGET

The period 1930-40 will probably be remembered in fiscal history as the era of the great struggle over the "balanced budget." The issue formed the core of the conservative attack upon the New Deal. One school of thought held that unless the budget was balanced immediately, disastrous inflation, financial panic, and deepened depression would result. To this group only a savage pull on the belt, a tightening up to the point where expenditures would not exceed the drastically curtailed revenues of the depression period, would suffice. Herbert Hoover, able exponent of the balanced-budget philosophy, said in his message to Congress at the beginning of the most severe year of the depression:

*

*

The appropriations which I recommend be made for the fiscal year ending June 30, 1934, * * provide for a temporary reduction in the rate of pay of Federal personnel, * * * and for other purposes, * * * effecting an additional saving of $55,000,000, and amending certain laws providing for benefits to veterans, producing a further saving of $127,000,000 I earnestly recommend to the Congress that there be no further grants of legislative authority for appropriation for Federal-aid highways until the financial condition of the Treasury justifies such action * The estimates for public works * for 1934 show a marked reduction below the appropriations for 1933 * * In spite of the large reduction in expenditures, the revenues under existing laws are expected to fall short of providing sufficient money to avoid a further increase in the public debt in the fiscal year 1934 by about $307,000,000. To meet this situation I recommend that the Federal tax on gasoline * * * be continued;

* that the manufacturers' excise taxes now imposed on certain articles be extended and in part replaced by a general uniform tax (excluding food). I have been advised that the annual yield of such a general tax at a 24 percent rate would be approximately $355,000,000.68

Herbert Hoover summed up his position in a concluding statement on the 1933-34 budget as follows:

A large excess of expenditures with consequent increase in the public debt is anticipated for the current fiscal year.

Such a situation cannot be continued without disaster to the Federal finances. The recommendations herein presented to the Congress for further drastic reductions in expenditures and increased revenues will serve to prevent a further increase in the public debt during the fiscal year 1934 only if Congress will refrain from placing additional burdens on the Federal Treasury.

I cannot too strongly urge that every effort be made to limit expenditures and avoid additional obligations not only in the interest of the already heavily burdened taxpayer but in the interest of the very integrity of the finances of the Federal Government.69

Much water has gone under the bridge since these pronouncements were made. Even though President Hoover insisted that the budget must be balanced to prevent economic instability, the average annual deficit, excluding debt retirement, for 3 years of his administration (1931-33) was $1,591,000,000. The advent of the New Deal and the relief program in 1933 brought the average annual deficit for the

Message of the President of the United States Transmitting the Budget for the Fiscal Year Ending June 30, 1934, Washington, 1932, pp. VI, VII, VIII, and XI. "Ibid., p. XVII.

period 1934-38 up to $3,037,000,000.70 The range in deficits during the spending-program period was from $4,550,000,000 in 1936 to $1,384,000,000 in 1938.

The theory underlying the unbalanced budgets of the period since 1933, in contrast with that which motivated Hoover in his attempt to keep income and outgo balanced yearly, is that economic conditions do not observe calendar dates but rise and fall in cycles of depression and prosperity of varying intensities and duration. In this modern day when Government policy and the private business economy are inextricably bound together for better or for worse, it is essential that the fiscal policy of the Government be dovetailed with the needs of the national economy. Thus, the services and aid of Government are sought in times of economic stress more than in times of widespread prosperity. But these are precisely the times when tax collections fall off and funds available to aid the people are smaller than in prosperous periods.

To attempt to balance the Federal Budget in such times is to weaken the very forces depended upon to keep the economy from skidding further into depression. Hoover's proposals for balancing the 1933-34 Budget are an excellent example of this effect, for he not only attempted to reduce expenditures by cutting the pay rolls and otherwise limiting mass purchasing power on which the economy depended, but he proposed to further curtail purchasing power by the imposition of a general sales tax whose regressive effects would have been felt by business generally and by the masses of consuming citizens already suffering most from the depression."1

A cyclical budget has been in use in the Scandinavian countries for some time, with conspicuous success in Sweden. It requires that Government fiscal policy operate to compensate for oscillations in the private sector of the economy. On the downswing of the cycle, Government activity is increased in order to moderate and offset the decline in business activity; on the upswing Government activities are tapered off to permit the private sector of the economy to achieve its fullest measure of success. Budgets are purposely unbalanced during the downswing of the cycle, when purchasing power must not be destroyed by increased tax collections, large borrowings are paid out through public works and Government activities in order to maintain economic well-being. Then, as the private sector of the economy recovers, income and other profit taxes are increased, revenues grow as the national income mounts, and emergency expenditures for relief and public works are reduced, so that the excess revenue is devoted to the payment of the national debt.

This description fits the financial operations of many of the most successful private business concerns, for private business operates its capital structure on a long-term basis. The day of continually balanced books in private corporations has long since passed, and the requirements of modern business life are such that period book balancing is essential. Yet, the very businessmen who engage in such sound business practices deplore the same procedure by the Federal Government.

70 National Industrial Conference Board, Economic Record, August 1939, p. 71.

71 Gerhard Colm, The Basis of Federal Fiscal Policy, Taxes, Commerce Clearing House, Chicago, Ill., June 1939, discussed the theory of the balanced budget, saying, in summary, "If sound fiscal policy is defined as one consistent with sound economic policy, then no principle of public finance has been violated so much as the dogma that 'sound' fiscal policy requires a balanced budget."