between those quarters transfer payments rose by an annual rate of $1.9 billion , against which must be set an increase in personal social insurance contributions of $0.5 billion ; federal personal tax payments fell by $3.4 billion , while state and local tax payments rose by $0.3 billion . the fall in federal personal tax payments and the rise in transfer payments were more than enough to offset the fall in personal income before tax and transfer , disposable income rising by $1.0 billion . although the level of personal income before tax and transfer in the second quarter of 1954 was the lowest reached in the recession , disposable income was higher than the pre-recession peak , as was consumption . although small changes from quarter to quarter as shown in the national income accounts must be treated with caution because of the statistical discrepancy , there is every reason to regard as correct the view held at the time in official circles that disposable income and consumption expenditure for goods as well as services was being well maintained despite the recession . as long as this was so the attempt to reduce inventories would succeed and before long inventory liquidation would have to come to a halt , with a consequent increase in total demand and production . the danger was that the fall in incomes caused by the reductions in output made in order to reduce inventories might lead to such a drop in consumers &apos; demand that the attempt to liquidate inventories would fail , leading to another round of cuts in output . the cut in incomes resulting from the fall in defence expenditure could intensify such a spiral . but in the early months of 1954 there was no sign of such a development . retail sales of non-durable goods rose steadily , the total in each month except March being above that for the corresponding month in 1953 , and in April equalled the previous high point ( July 1953 ) . sales of consumers &apos; durable goods were below the 1953 levels throughout 1954 , but in February and succeeding months were well above the low point of December 1953 and January 1954 . the movements of disposable income and retail sales indicated that the fall in production and in incomes derived from it was not causing a deflationary spiral , so that it was likely that the combination of reduced output and stable sales would run down inventories fairly quickly . it was reasonable to reach this conclusion in March or April 1954 . the above conclusion indicated that the consumption sector of the economy would be able to get by with the tax reduction already enacted , with the reduction in excise tax rates just to be on the safe side . the administration &apos;s approach was cautious ; in March and April 1954 definite evidence that the trough of the recession had been reached was not yet available and there were no grounds for believing that recovery had begun ; the risk of a deflationary spiral still existed . the administration decided to take the risk , which indeed did not appear a large one , in order to avoid risking the inflation that might develop once recovery was well under way if the tax reduction could not be reversed quickly . while it was quite legitimate to argue that the risk of inflation should have been accepted and tax rates reduced , it can not be justifiably asserted that the issue was whether any attention at all should be paid to consumption ; talk about a massive transfusion of purchasing power implied that the consumption sector of the economy was in a much worse state of ill-health than it really was . the main tax bill of 1954 , that to enact a new internal revenue code , was a measure of revision and reform . indeed , the slow , deliberate progress that it had made since its inception in 1952 suggests that its coinciding with a recession was fortuitous , though had there been inflation serious enough to make any tax reduction undesirable it could presumably have been held over for a year or so . the majority of the ways and means committee stated in their report on the bill : this bill is a long overdue reform measure which is vitally necessary regardless of momentary economic conditions and should not be confused with other measures which may be , or might become , appropriate in the light of a particular short run situation &amp;hellip; . there was no reason why a tax reduction should not have been added to the reforms if the economic situation rendered this desirable . the most contentious provisions were the dividend credit and the more liberal depreciation allowances . the latter provided that the taxpayer might use the sum of years digits method of computing depreciation , or declining balance at double rate ( i.e if the asset had a life for tax purposes of 10 years the annual allowance would be 20 per cent of the value not yet written off ) . the new formulae for computing depreciation allowances were to apply only to depreciable assets acquired after the act had come into force , and thus were evidently intended as a device for encouraging investment rather than as an improvement in the equity of the tax system . the administration proposed that the first $50 of personal income from dividends should be exempt from tax in 1954 and the first $100 in subsequent years , and that the taxpayer should be allowed to deduct from his tax liability 5 per cent of his income from dividends in the first year after the act had come into force , 10 per cent in the second year , and 15 per cent in the third and subsequent years . the bill reported by the ways and means committee ( H.R.8300 ) followed the administration &apos;s recommendations except that the credit of dividends against tax liability was limited to 10 per cent . the dividend credit had no relevance to the immediate economic situation ; it was supported on grounds of equity , as a means of providing relief from the double taxation of dividends . the minority report of the ways and means committee denounced the dividend credit as an indefensible discrimination in favour of unearned income and as embodying the trickle down approach to tax reduction . the changes in the depreciation allowances were criticized on the ground that the fuller use of capacity that would result from an increase in consumption demand would be a more reliable inducement to investment , for since much existing capacity was not being fully used tax relief directed specifically to investment would not have much effect . the proposal for an increase in the individual exemption from income tax had almost unanimous support from the democrats , including Representative Rayburn , House minority leader , and Senator George , the senior democratic member of the finance committee , which made it official democratic policy if anything could . there were also signs of republican support . the administration was sufficiently concerned for the President to make a special broadcast on the subject on 15 March , two days before the bill was due to be debated in the House of Representatives . after stressing the need to encourage investors to buy lathes , looms , and great generators the President expressed hostility to the proposed increase in the individual exemption on the ground that it would exempt a large number of taxpayers from tax liability altogether : when the time comes to cut income taxes still more , let &apos;s cut them . but I do not believe that the way to do it is to excuse millions of taxpayers from paying any income tax at all &amp;hellip; every real American is proud to carry his share of any burden &amp;hellip; . I simply do not believe for one second that anyone privileged to live in this country wants someone else to pay his fair and just share of the cost of his government . the debate on the bill in the House on 17 and 18 March 1954 took the form outlined above , with sundry democratic assertions that since their opponents had decided to something as reckless as to reduce taxation in face of a deficit , it might as well be a more equitable tax reduction . the motion to recommit provided that the dividend credit and the depreciation provisions should be deleted and an increase in the individual exemption to $700 inserted . it was rejected by 210 to 204 , eight republicans voting in favour and seven democrats against . not all of those voting in favour of the motion were voting in favour of a reduction of the income tax ; if the motion to recommit had been carried it would probably have been the end of the bill for the session unless the economic situation were to deteriorate . among those whose votes appeared to be influenced by this consideration were the democrats from Virginia and Representative Cannon . there are signs that the President &apos;s efforts were effective in whipping-in some of the republican stragglers ; one of these , Representative Ayres , said that he had thus changed his mind . when the Senate finance committee opened hearings on the bill on 7 April 1954 Secretary Humphrey held firmly to the position that the measures already taken , plus the stimulation that the depreciation provisions of the bill would give , were adequate to deal with the recession , and that a further tax reduction would be inflationary . the representatives of NAM and the U.S chamber of commerce supported the administration &apos;s position , but the chamber &apos;s representative recommended that personal income tax should be reduced by 5 per cent of liability and that expenditures should be cut sufficiently to make the tax reduction possible without further unbalancing the budget . the trade unions gave vigorous support to the increase in the individual exemption from income tax . Mr Reuther said that there was nothing wrong in the American economy that an increase in the purchasing power in the hands of the American people will not cure . there was also the usual pleading for special relief and grinding of axes ; the general counsel to the national institute of diaper services , Inc , asked that the cost of antiseptic diaper service be made a tax deductible expense . after the end of the hearings the finance committee devoted five weeks to its consideration of the bill , and proposed numerous amendments , none of economic significance in their effect on the revenue . introducing the bill in the Senate of 28 June 1954 Senator Millikin declared that the bill would go part of the way towards restoring normal economic incentives , which was essential since the stimulus given to the economy by abnormal military expenditure was fast disappearing . he emphasized the by then apparent fact that the decline had come to an end , arguing that as a result further tax reduction was not necessary to bring about recovery . Senator George agreed that the recession had not got as bad as had at one time seemed likely ; he therefore proposed an amendment to increase the individual exemption from $600 to $700 , instead of to $800 as he had suggested earlier . although his proposal would increase the deficit in the immediate future , he maintained that there will be a greater deficit if we do not sustain the principles of a sound and expanding economy and that it was more important to balance the home budget than to balance the budget of the federal government . Douglas argued powerfully that the main economic problem at the moment was not lack of productive capacity but lack of effective consumer demand , and that no tax concessions to investment would achieve results if there was no market for the output from the increased capacity . the reasoning which underlay the bill was therefore fallacious ; it would add to private savings , but would do nothing to add to investment , which was being held back by lack of markets . Millikin moved an amendment to provide for a reduction of tax of $20 in tax liability for each taxpayer , a slightly less costly substitute for George &apos;s proposal ; it was ill received by George and his supporters and was rejected by 49 votes to 46 , the vote being on party lines except that Langer voted with the democrats . George &apos;s amendment to increase the individual exemption was rejected by 49 to 46 , the margin of defeat being supplied by the four democrats voting against it , Byrd , Robertson , Johnson of Colorado , and Holland . 