Margarine is made under a Pure Food and Drug Administration standard of identity and the yellow coloring, used in or packed with margarine, is so labeled. Butter, cheese and ice cream, however, enjoy special and unique exemption from labeling artificial coloring under the act of 1923.

The effect of the Federal tax and other restrictions on yellow margarine has been to limit that food in production and distribution. In 1946, only 58,000,000 pounds of yellow margarine were produced compared with 514,000,000 pounds of uncolored margarine. A large share of the colored margarine produced was Government-purchased; the Government not paying the tax to itself.

Margarine is denied the use of yellow simply because the butter industry has misused its political power to drive a competitive product off the counter. This is discrimination and a violation of the American principle of fair, openly competitive business.

One of the most unjust points of the Federal law, at least from a monetary value, is the definition of the word "manufacturer." Under the regulations, restaurants, hotels, clubs, charitable institutions, schools, hospitals, churches, and other institutions are all liable to the manufacturers' license fee of $600 per annum and 10 cents a pound tax for each pound colored. There is an exception, "where an institution under the complete control of the United States, or a State or political subdivision thereof, in the exercise of an essential governmental function, colors margarine for use of inmates or employees of the institution."

Mr. Chairman, it is my sincere belief that these regulations are pointedly designed to restrain the free marketing privileges of one group of manufacturers. Such an archaic statute in our modern Federal Code makes it almost as incongruous with free trade as the sight of a mounted cavalryman riding out against a Sherman tank.

In the name of free enterprise, in order that this long ignored discrimination may be corrected, I ask the Senate Finance Committee to incorporate my amendment into the Revenue Act of 1948. The CHAIRMAN. Are there any questions?

If not, thank you very much for coming, Senator Maybank, and giving us this very interesting statement.

Senator MAYBANK. Thank you.

The CHAIRMAN. Mr. Emil Schram is our next witness.

Mr. Schram, will you give your name, address, and business to the reporter?

STATEMENT OF EMIL SCHRAM, PRESIDENT, NEW YORK STOCK EXCHANGE, NEW YORK, N. Y., ACCOMPANIED BY FRANKLIN COLE, PRESIDENT OF FRANKLIN COLE & CO., NEW YORK, N. Y.

Mr. SCHRAM. Mr. Chairman and gentlemen of the committee, my name is Emil Schram. I am a resident of New York City. My home address is 784 Park Avenue. I am president of the New York Stock Exchange.

I wish to express my sincere thanks for your courtesy in permitting me to set forth my views on tax revision.

Recognizing the pressure on the committee's time, I beg leave to submit for the record a pamphlet entitled "Economic Progress: Tax Revision and the Capital Markets."

The CHAIRMAN. We will put it in the record. (The pamphlet is as follows:)

EXHIBIT A

ECONOMIC PROGRESS: TAX REVISION AND THE CAPITAL MARKETS

A TAX STUDY SUBMITTED BY THE NEW YORK STOCK EXCHANGE

(This study represents a collaboration by Emil Schram, president, New York Stock Exchange, and Franklin Cole & Co., economic consultants, October 1947)

FOREWORD

At a time when the defects of our Federal tax structure are becoming more and more apparent, it seems appropriate to focus attention upon one of the most disturbing aspects of present-day economic conditions. I refer to the alarming shortage of risk or equity capital. As I have repeatedly pointed out, we need not fear for the future of our institutions if we, as a people, recognize their weak links and act to strengthen them before it is too late. The fact that there is an inadequate supply of private venture capital, when the demands for such capital have never been greater in history of the country, presents a problem which should have the immediate and earnest consideration of all who have a hand in the shaping of our tax policies.

There has never been such an imperative need for increased production as exists today. There is danger that, in order to expand, industry will have to resort, far beyond the limits of sound policy, to debt financing instead of equity financing. As will be seen, the accompanying study is concerned with the relationship between taxes and the flow of equity capital into productive activities.

The present tax structure has developed over many years on a piecemeal basis. Its development has been influenced not only by the growing need for revenue but by expediency and by the social philosophy of the political party which happened to be in power. The study which is herewith submitted will, I believe, convince any informed and fair-minded person that the existing tax structure is the greatest single deterrent to a healthy flow of equity funds into American business.

In our complex modern economy, action affecting any of its important elements has widespread repercussions, some of which could not have been foreseen. Some taxes which were imposed for the ostensible purpose of raising revenue have had the effect of discouraging risk taking and have restricted the ability of certain groups of individuals and organizations, previously the greatest source of venture capital, to continue to provide such capital. Taxes which have these consequences retard the economic growth of the country.

The entire Federal tax structure is in need of reappraisal and revision. It is beyond the scope of this study to discuss many of the aspects of possible tax revision, to which Congress no doubt will be giving attention shortly, such as, for example, an increase in the base of individual tax exemptions; the elimination of the present tax advantages which many of the residents of community-propertylaw States now have over the residents of other States; the revision of estate and gift taxes, and other proposals.

The venture-capital problem falls into two parts: The flow of such capital, and its proper function. The flow of venture capital can be stimulated by a reduction in surtax rates, by relief from the double taxation of dividends, by granting married couples in all States the option of dividing their combined incomes for tax purposes, and by an improvement in the capital gains and losses provisions. Once it is possible for the groups which, traditionally, have provided venture capital, to accumulate funds out of current income, it is then necessary that venture capital be put to work. This is the second major part of the problem.

We are aware of other tax studies and assume that a number of changes in the tax structure will be made. Our recommendations concern, particularly, the phases of tax revision which we believe to be of strategic importance in connection with venture capital.

As the result of our study, we make the following recommendations:

1. The maximum effective tax on long-term capital gains should be reduced to 10 percent, and individuals should be permitted to offset their losses against ordinary income to the extent of $5,000 each year.

2. A credit should be granted to individuals against dividend payments, the extent of this credit to be related to other changes in the tax structure. Our recommendations have the advantage of simplicity and we believe that the tax structure, so changed, will serve the ends desired, namely, an increase in the flow of venture capital, and the investment of such funds in equity interests. The problem, as we have stated, has two parts. The first, in effect, concerns the quantity of savings, and the second, the use of such savings.

It is not intended to imply that alternative changes in the taxation of capital, gains or in the treatment of double taxation of dividends are without merit; but, without changes along the lines which we hereinafter discuss, the prospects for economic growth appear to be threatened to an extent which is not generally realized. EMIL SCHRAM, President, New York Stock Exchange.

CHAPTER I. BACKGROUND

In our economy, investment decisions made by individuals and business corporations are of the utmost importance to the general welfare. There are two chief reasons for private investment's strategic role in our economy. First, the volume of investment is one of the principal factors in determining the level of employment and national income. Regardless of the direction of investment-whether it be in the form of additions to existing concerns, or the establishment of new enterprises-it has a multiple effect. It may be likened to the ripples in a pool. Experience indicates that attempts to sustain a high level of national income and employment through demand for consumer goods are unsuccessful. Large private domestic investment (capital formation), made up principally of new construction and expenditures on producers' durable equipment, is necessary, since these in turn stimulate employment and consumption. In the recovery of 1936-37, for example, private domestic investment averaged approximately only $8,000,000,000 a year after allowing for changes in business inventories, with the result that, despite efforts to maintain mass purchasing power, national income failed by a considerable margin to reach the level of the late twenties.

Private investment performs a second major task in the economy. This function, which went almost unmentioned during the depression years, is to add to the stock of capital, thereby contributing to the raising of the standard of living. Public works, no matter how useful in stimulating employment temporarily, only rarely take a shape which raises the material comfort of the average citizen. When the Government enters into productive undertakings it encroaches upon fields where private enterprise would or should be operating. Recently there has been growing awareness of the consequences of the failure of the stock of capital to expand since 1929. A healthy capitalist society, judging by past experience, should devote 20 percent of its productive forces, measured by national income, to the formation of capital.1

We turn now to a brief consideration of the evidence that, for the first time, during the decade 1931-41, the private economy of the Nation stood still and its growth was arrested. According to a recent study, there has been accumulated out of savings in the United States some $300,000,000,000 of reproducible wealth other than household goods, measured in 1929 prices, from the beginning of the settlement of the Colonies.

Dr. Kuznets has estimated that as of 1879 the accumulated total amounted to only about $36,000,000,000. In the succeeding five decades the total grew steadily, by increasing increments, and in the decades from the beginning of this century through 1929 the increase averaged more than $50,000,000,000 per decade. In the decade ending January 1, 1929, the increase amounted to approximately $70,000,000,000. In the next 10 years, however, the increase dropped to only 8.4 billion

1 Kuznets, S., National Products Since 1869 (1946), 53-54. 2 Noyes, C. R., The Prospect for Economic Growth, 37. American Economic Review, 13 (1947). Hereafter referred to as Noyes. (Dr. Noyes is president of the National Bureau of Economic Research, Inc.)

dollars, and since there was an increase of 10.5 billion dollars in 1929 alone, the remainder in reality was a period of retrogression. The following table is reproduced from the Noyes article:

Dr. Noyes states, with reference to this startling and disconcerting charge: "It appears that, for the first time in our recent history, and possibly for the first time in our entire history, the process of growth in reproducible wealth has practically ceased for an entire decade. Moreover, at this writing 7 years has already passed out of the current decade which will end January 1, 1949. If the guesses made as to 1944 and 1945 turn out to be justified, there has been no growth in 'nonwar' reproducible wealth for the first 7 of the current 10 years."

* * *

On the basis of the studies made by Dr. Kuznets, and estimating 1944-45 to have been the same as 1942-43, we get the following picture: in the period 193145, nonwar capital consumption has exceeded nonwar gross capital formation by 9.5 billion dollars.

We believe that a close relationship exists between our tax structure and the rate of growth or retrogression in our capital assets. If our capital assets fail to show a healthy growth, our standard of living will suffer. It is our opinion that certain aspects of our present system of taxation must be corrected if our basic wealth is to continue to expand in the future.

CHAPTER II. PROJECTIONS OF DEMAND FOR CAPITAL

Estimates of the economic system's need for capital in the future have been made independently on a variety of bases. Some, like the recenty Twentieth Contury Fund study, have been merely estimates of what would be the required investment to support a projected minimum standard of living. Other estimates turn upon the anticipated demand for investment funds necessary to preserve a "normal" relationship between gross capital formation and gross national product.

Although forecasts cannot be accepted as blueprints, a number of carefully prepared estimates all point to large capital requirements. A Federal Reserve Board study, on the basis of a gross national product in current prices of 225 billion dollars in 1948, arrived at capital expenditures of 23.1 billion dollars during the period 1945 to June 30, 1948.* The following is a break-down of Mr. Dirks' data:

3 Twentieth Century Fund, America's Needs and Resources (1947), 381-383. Dirks, F. C., Private Capital Requirements at 16. Board of Governors of Federal Reserve System, Washington, D. C. Postwar Economic Studies, No. 5, September 1946. The projection was for manufacturing and mining corporations only.

The total excludes inventory requirements, and embraces 2.7 billion dollars of expenditures for Government-owned facilities. This study does not include residential construction, the great need for which is common knowledge. Another estimate for all industry arrives at a postwar capital shortage of $50,000,000,000.* The Brookings Institution economists, W. E. Atkins, G. W. Edwards, and H. G. Moulton, in their study of the capital markets, conclude that "The requirements for capital funds in the early postwar years will be vastly greater than those of the stagnation period of the thirties."" They go on to say:

"Looking forward over the next 3 years, three factors will make for still further expansion in capital requirements. First, we are now in the midst of still further advances in wage and other costs which will necessitate larger supplies, of funds for pay-roll and other working-capital purposes. Second, an unusual volume of replacements of worn-out and obsolete plant and equipment is necessary-all of which will have to be constructed on the new high-cost basis. Depreciation reserves that seemed adequate on the low-cost basis of the thirties are not now likely to prove sufficient for the needs. Third, a vast expansion program is indispensable to further economic progress and higher standards of living. This expansion, whether in housing, in transportation, or in manufacturing, will have to be carried out on a very much higher cost basis than that which prevailed before the war."

It is not necessary that we deal with the future entirely, for expenditures on new plant and equipment are currently being made by American business at an estimated rate of approximately $16,000,000,000 annually. The tabulation below shows the extent of the expansion by important classes of industry.

Expenditures on new plant and equipment by United States business,1 1939–472

1 Excluding agriculture.

1939

1940

1941

1942

1, 930

2, 580

3,400

2,760

380

560

680

410

280

440

560

280

1, 040

2 Figures for 1939-44 are Federal Reserve Board estimates based on Securities and Exchange Commission and other data. These figures do not agree precisely with the totals included in the gross national product estimates of the Department of Commerce. The main differences lie in the inclusion in Commerce figures of certain outlays charged to current account.

3 Estimates for the third and fourth quarters of 1947 based on anticipated capital expenditures of business. 4 Includes trade, service, finance and communication.

NOTE.-Figures are rounded and will not necessarily add to totals.

5 It should be noted that Mr. Dirks arrived at his total expenditures not by application of past relations of capital expenditures to gross national product, but after allowing for the trend toward the decreasing proportion of industrial activity in the gross national product. Ibid., at 6 on this point. See also Clark, Colin-The Economics of 1960 (1944). 6 Abbott, Dr. C. C., Financing Business During the Transition (1946) at 6, Committee for Economic Development.

'Regulations of the Security Markets (1946) at 13.