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ration. I am a member of the Federal Tax Forum. I have written several articles on taxation and for many years my activity has been entirely within the orbit of taxation.

I appear before this committee as a member of the taxation committee of the National Retail Dry Goods Association, by which I have been authorized to make known the views of that association and its membership with respect to H. R. 4790.

The National Retail Dry Goods Association is a trade association whose membership represents upward of 7,500 retail stores throughout the United States and its Territorial possessions. The annual sales of members of the association aggregate over $10,000,000,000, which is about 10 percent of all retail sales in the United States, including food and automobile sales. Seventy-eight percent of the sales of the members of the association are made by small stores at the community level.

In number of stores and in amount sales, the small retailer far outranks the large retailer. The number of persons employed by our membership. exceeds 600,000. Our member stores serve every type of community in the land and our membership’s opinion is truly representative of the views the citizens of our Nation have with respect to the legislative proposals before your committee.

The taxation committee of the National Retail Dry Goods Association has functioned for more than 27 years with unusual continuity in its membership and during that time has consistently adhered to the policy of making such fiscal recommendations to congressional committees concerned with national revenue as were calculated to serve the best interests of the whole economy rather than the interests of any special group.

We are completely in sympathy with the basic principles which underlie H, R. 4790 and, with the reservations hereinafter noted, support the bill and recommend its enactment into law. The bill, in our view, is a step toward the achievement of reform long needed in national taxation.

It is considered opinion of the taxation committee of the National Retail Dry Goods Association that the type of tax program which would best serve the needs of the Nation at this time is one which provides for

1. The essential functions of the Government;
2. A strong and adequate national defense;
3. Provision for the retirement of the national debt;
4. Implementation of the national foreign policy; and

5. Encouragement to the domestic economy as to assure the achievement of our national welfare.

To accomplish these objectives, Federal expenditures must be drastically curtailed. Areas of inefficiency, duplication of functions, and inconsistency existing in the administration of national affairs must be eliminated. The Government, our biggest business, must operate at least with the efficiency demanded for the survival of any business enterprise.

Above all, to achieve such ends, the Federal Government's power to tax must now be so wisely exercised as to bring about greater productive effort and cooperation by all our people to preserve our very national existence.

It is acutely recognized that there can be no substantial reduction in the Nation's tax bill unless the level of Federal expenditures is drastically reduced. Federal expenditures must be cut.

In this connection we recommend to your committee the budget analysis prepared by the Committee on Postwar Tax Policy appearing in their booklet entitled "A Tax Program for a Solvent America (1947)," which presents a budget of $31,577,000,000, indicating a possible reduction in the President's budget of approximately $5,000,000,000.

A reduction of at least $3,000,000,000 in the President's budget appears to be definitely possible. Reductions in the budget is the job of Congress. It is no easy task. Entrenched bureaucracy will be loud in its protests and in its demands for the maintenance of planned expenditures.

Congress, as the elected representatives of the people, must determine what are the essential services of the Government. All overlapping and wasteful activities can be eradicated only if Congress strikes at the cause by cutting appropriations demanded by the Government's departments and by reducing tax revenues.

We have specific recommendations which we respectfully submit in the earnest belief that they will be of assistance in formulating a sound tax progrem. Our recommendations will specifically indicate the few points with respect to which our views differ from those contained in H. R. 4790 and the reasons for such divergence.

The individual income tax: The high tax rates presently in effect with respect to individual's income has a repressive effect upon production, in addition to being a deterent to the development of new enterprises.

We in the retail field have long been hopefully looking forward to a reversal of the conditions which exist in the markets. We had hoped that markets characterized by scarcities and unbalance, by shoddy and inferior goods and by perpetual shortages, would be relegated to the past.

Instead, however, more and more frequently we are confronted with the unassailable fact that it is economically unsound for manufacturers of many commodities to produce needed goods to the uttermost of their capacities.

To achieve the volume of production necessary for our domestic economy and for the requirements of our foreign policy requires twoand even three-shift plant operations in many productive industries. Accelerated operations take their toll not only of human energy but of the machines and tools with which industrial plants are equipped.

If the only reward which such activity, though sorely needed for the support of our standard of living and for the safety of our economic structure, is what virtually amounts to a confiscatory levy, it would be unreasonable to suppose that the effort will be put forth.

Taxes at present rates penalize productivity of labor, management, and capital. The continuance of the philosophy which underlies our present tax structure augers ill for the future of the country. A study by the Reverend Edward A. Keller, C. S. C. for the Bureau of Economic Research of the University of Notre Dame, in an article entitled, “Who Gets Our National Income,” published in Look magazine, March 16, 1948, simply described this evil.

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He points out that:

The American worker gets the tools he uses from individuals who do not spend all of their income for consumer goods and services, but save part of their income and invest it in tools.

In this country, most of the tools were accumulated in the 30 years prior to 1929. During the period 1920–30, the period of greatest expansion in new and better tools, new capital issues average $6,000,000,000 dollars a year.

Most of the savings which made possible these new and better tools, came from those in the income bracket of $5,000 and over. This was possible because the Government did not take their savings in taxes, but permitted these savings to be invested in business.

In 1933, however, a new tax policy was adopted in this country. It was based on the mature-economy and planned-scarcity theory, which maintained that our national economy had too many tools due to a maldistribution of national income by which too much income went to the upper classes, and therefore into savings and not enough into purchasing power.

In line with this theory, the Government adopted the policy of taking in taxes a large part of the savings of those in the income bracket $5,000 and over, and especially those in the income bracket $25,000 and over.

Funds, therefore, were simply siphoned from the private-capital market to the Government. Private investment practically ceased. From 1933 to 1945, new capital issues averaged less than half a million dollars a year.

For the first time in our history, during the period of 1930–40, our economy went backward instead of forward.

The national tool account (capital) fell 19.4 percent from 1930 to 1940. Those who suffered most were the workers, because the result of such tax policy could have been nothing but continued economic stagnation.

This actually was the case. Evidence is the fact that in 1940, after Government expenditure of these savings taken in taxation, the country was still in depression. And there still were 7,000,000 workers unemployed.

It would have been much better if these savings had been permitted to remain in the hands of individuals, to be used to create more and better labor-aiding tools—the vital ingredient of our unmatchable standard of living.

Today the former exponents of the planned-scarcity economy have shifted ground completely; they now advocate an expanding economy, for example, labor's demand for increased steel capacity.

Unfortunately, they do not say where the funds will come from for this “expansion for full employment.” They advocate continuance of the extremely high income taxes on those incomes which in the past have accounted for new tools. And they also demand an icreasing share of profits which today are the important private source of new tools. Therefore they logically must advocate that business expansion be made from Government funds.

This is socialism. One need look no further than Great Britain and France to see what that kind of socialism has done for the working people.

It is most important that immediate action be taken for the reduction of taxes on individual incomes. The tax rates on all income groups should be reduced but with particular emphasis on the tax rates applying to incomes below $4,000.

The percentage reduction set forth in H. R. 4790 is acceptable as a start in the direction of lower personal income tax rates. Eventually the highest rate in the top bracket should not exceed 50 percent.

We urge that the specific exemptions remain at the present levelthat is, $500 for each taxpayer and dependent. H. R. 4790, title II, section 201, paragraph (1) (a) increases the personal and dependency exemptions to $600. The increase of only $100 in such exemptions results in an estimated reduction of $2,010,000,000 (see table XII, Ways and Means Committee report). It is further estimated that approximately 3,500,000 persons will be eliminated from the tax rolls.

We firmly believe that the income tax should be levied on as broad a base as possible. All of the people should be conscious of our fiscal and economic problems. All who enjoy the freedom of liberty afforded


by our system of Government should bear some of the burden of that privilege.

There is a definite need for the awareness of the cost of Government services. The removal of 3,500,000 taxpayers from the tax roll destroys the citizens' sense of responsibility and interest in the efficiency of their Government.

We strongly recommend the adoption of title III of H. R. 4790 relating to the income-tax determination of husband and wife. The eradication of the inequality created by the favorable tax treatment of husband and wife in community-property States is long overdue. In a democracy, all contributors to the revenues of the State should be treated exactly alike regardless of the place they may happen to live.

While it is beyond the scope of our testimony as permitted by this appearance the members of the National Retail Dry Goods Association firmly adhere to the belief that several additional revisions in the tax structure should be considered in the interest of a sound fiscal program. The corporate income tax: We are not recommending any reduction in the normal and surtax rates on corporations at this time. While we believe that corporate rates are too high, revenue requirements will not permit a reduction in both personal and corporate rates.

It is hoped, however, that in the near future it will be possible to reduce corporate rates and to introduce a system whereby the double tax on corporate net income is eliminated.

There are, however, certain revisions of the income-tax law which should be made at this time.

(a) The 15-percent tax on dividends received by one domestic corporation from another should be repealed. The taxation of intercorporate dividends represents triple taxation of the same income.

It is often necessary for corporations to organize and do business through subsidiary companies. The tax laws should not discourage the expansion of business enterprises in this manner. The dividends received eventually flow to the stockholders as dividends.

(6) We recommend the elimination of the 2-percent penalty for filing consolidated income tax returns. There should be no penalty for an integrated business filing one return. A consolidated statement of accounts is recognized as essential for the proper presentation of the operating results of a particular business.

(c) There has been and is a great deal of confusion concerning the administration of section 102. Many small businesses depend largely upon the retention of earnings for plant expansion and improvement, development of new products, and the creation of reserves to provide

for lean years.

The fear of section 102 has caused many boards of directors to pay out more dividends than they honestly should. The managers and directors of corporate enterprises are the best judges of the needs and future needs of the business. A revenue agent in the field cannot be the best judge. Under the present law, the burden of proof is upon the taxpayer to prove that earnings and profits were not improperly retained.

We urge that

1. The burden of proof should be upon the Commissioner of Internal Revenue that profits have been unreasonably accumulated.

2. The tax should apply only to that part of section 102 net income which has been unreasonably accumulated.

3. Dividends paid within 75 days after the close of the taxable year, may, at the taxpayer's election be deducted in computing section 102 net income for such year.

(d) It is recognized that with a budget running into the $30,000,000,000, that excise taxes are a necessary part of our tax structure. Nevertheless, we believe that it is feasible and possible to return to the status of excise taxes existing before 1942, except for taxes on tobacco and alcoholic beverages.

(e) We place particular emphasis on the repeal of the tax on transportation of property. This particular tax is pyramided many times throughout the distribution system. This tax enters into the cost of the real necessities of life such as food, fuel, and clothing. It is another item in the high cost of living, the repeal of which would enure to the benefit of the consumer. We, therefore, recommend that excise taxes be reduced to the rates in effect prior to 1942 except for tobacco and alcohol.

(f) Under the present law, net operating losses in any one year may be carried back and applied against the two immediately preceding years and the balance of the unapplied loss may be carried forward for two immediately succeeding years.

We recommend that the net operating loss carry-forward be extended to 5 years and the net operating loss carry-back be discontinued.

5 The determination of tax liability for both the taxpayer and the Government is difficult since past tax years must be kept open for long periods of time.

Conclusion: The enactment of H.R. 4790 into law with modifications we urge upon your committee will encourage our people to put forth greater productive effort so urgently needed. It will release to creative purposes wealth and energies which have been heretofore forced into nonproductive channels.

We hope that this bill is but the first step toward the achievement of a sounder fiscal policy than the one we have pursued for the last 16 years. We also hope that the enactment of this bill into law will quickly demonstrate the national advantage of policies which encourage the creation of wealth by releasing and

stimulating venture capital. We confidently anticipate the benefits which will ensue from the enactment of this bill will clearly point up the wisdom and feasibility of further tax reduction.

The CHAIRMAN. Are there any questions, Senator?

Senator GEORGE. You say you would relieve 3,500,000 there. The increase in deduction will relieve about 6,500,000. But that does not argue against your point; it argues for it

Mr. BUTTON. That is right.
Senator GEORGE. The fact that there are more.

Mr. BUTTON. I did not see any publication of the number of people that would actually be reduced.

Senator GEORGE. About 6,500,000.

Mr. BUTTON. I made a mathematical calculation of my own as to the possible number.

The CHAIRMAN. Thank you, very much.

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