Senator OVERTON. May I ask a question?

The CHAIRMAN. Yes, sir.

Senator OVERTON. I think you probably touched on the main objection to capital gains, that it interferes with investment and reinvestment. For instance, I have a home, say, which I built in 1910 ; I bought the land very cheaply and I built the home cheaply compared to what it costs today. I want to get another home, a more modern home. If I sell my old home I have to pay a heavy tax to the Government and then invest in a new home at a cost which is a great deal more to get the same results that I would have if I had been able to build a modern home at the prices that prevailed at the time when I originally built my old home.

At the same time I acquired some land. If I go and sell the land and sell it at the increased value and profit I have to pay 25 percent to the Government.

Now then, I start out by losing 25 percent of my money on hand and I want to invest in something else. If I invest in something else, I realize, if I want to sell that later on, I have another tax to pay. I would like to get your reaction to that suggestion as to whether or not it does interfere with investment and reinvestment?

Mr. COURTS. Definitely and positively. If a man owns a piece of property, any kind of an asset, it brings in income; that is, most of it does. Now the income is taxed and if he gets ready to change that investment and exchange the property, I do not see why there should be a tax on it.

Now I say this that practical politics, that you have to have some tax because the people do not understand it but we certainly ought to have a tax that would permit people to use their judgment and exchange this property as they see fit and in the process of doing so, it would bring more money into the Treasury than they are doing now because they are not getting much.

Senator ÖVERTON. That does not mean that I am opposed to capital gains tax. I am a small man, you are referring to the individual. That is the most serious objection I have to it as far as I am concerned, personally.

What is the use of my selling at a profit to reinvest in another piece of property that I would like when I have to pay 25 percent to the Government and then probably that takes all of the profit out of the new investment.

Mr. COURTS. I beg your pardon, sir, I am afraid I did not give you the proper answer. I did not understand it exactly.

I think this: If you came to the point of thinking that this piece of property no longer served your purpose, it was not as safe as what you wanted or the city that that piece of real estate is located in has changed and you may feel the necessity to come out of that area, the chances are that you would keep it anyhow rather than pay the tax. Why should you have a tax structure that will keep a man from doing what his ordinary judgment would tell him to do? It is a burden where you have to have some taxes, but at least put it where it is not in th class of being a back-breaking burden.

I will close now. I do not want you gentlemen to think that I am unduly alarmed but I think it is time to be alarmed that when American business is at its best, making the highest profits in all its history that we still cannot supply risk capital. If they cannot supply risk

capital when their earnings are good, they certainly will not get it when the earnings are gone.

If we have money managers able enough to manage this country, and I think there are a few who think they can and if you can manage it to where you will not have depressions, fine, but even at that the fact is that to have money to buy American industry the money is not available. Somebody has to own it and the individuals cannot buy.

I know that the opinion is pretty well crystalized for the tax bill this year, this is a late hour. I do want to say that I certainly think we ought to have a tax bill something along the lines of the House bill, what they call the Knutson bill. I am not a technical tax man and whether the provisions are worked out properly I do not know, but we ought to have a bill. The time is short and we are too late about having the bill. It will be a step in the right direction, however.

I think the proper solution will be this 50 percent limitation but at least let us take the step in the right direction in bringing back individual initiative and the possibility for individuals to own American industry and while we are about it, let us tack on this small matter your capital gains tax, let us reduce that rate to half of what it is. Doing that is not going to cost the Treasury any money, it will bring more money in.

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Senator OVERTON. I am making an income. I pay a tax on that nd I cannot avoid that, I am bound to pay it, but I do not have to pay the capital gains tax and I do not have to pay that tax whether it be real estate or stocks or what. I just keep my property and the Government does not get that money.

Mr. COURTS. Yes, sir; but suppose the House next to you burned up and suppose some neighbors

Senator OVERTON. I am talking in your favor.

Mr. COURTS. That is right, you have to keep it.

Senator OVERTON. When I make money from my efforts I have to pay an income tax on it above a certain limitation.

Mr. COURTS. That is right.

Senator OVERTON. But if I can sell my property and get a good profit on it, then of course I pay the Government this capital gains tax. However, if I did not want to pay the tax I would simply avoid the payment of the tax by keeping the property.

Mr. COURTS. That is right.

Senator OVERTON. It is an incentive for me to keep my property and not sell it.

Mr. COURTS. Exactly, that is just what is going on.

Senator OVERTON. I am trying to help you out on that.

Mr. COURTS. What I thought you meant, Senator, was that you would be bullheaded enough to keep it and not use your judgment. Senator OVERTON. I might be.

Mr. COURTS. Just so that you would not have to pay the tax.

The CHAIRMAN. If we are going to have a high wage, good profits, high national level of income in this country, you have to have a high velocity economy, do you not?

Mr. COURTS. Yes.

The CHAIRMAN. Capital gains is a repressive factor against a highvelocity economy?

Mr. COURTS. Yes, sir.

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The thing that concerns me above all is the tremendous debt that we have, Government debt. There are ways to pay it off and one is the orthodox way, to go to work and retire that debt. If we are going to do it that way we have to have unprecedented revenues to do it. Suppose you called in the ablest economists in the country and said, "Now, it takes so much revenue per day for the Government to live." Suppose these economists said to you, "The national economy will stand shaving off 5 percent of the daily commerce for debt."

I am just using that as a hypothetical figure. Suppose they said that 5 percent was the limit. You cannot shave off any more of the commerce, I do not mean the profits. But, the economy will stand that much. All right, you go to work and say, "We will put in a tax structure that will shave off 5 percent," and suppose your daily commerce is $100,000,000. Then, your 5 percent is equal to $5,000,000. Suppose your daily commerce shrunk to $75,000,000. Then to get your revenue you would have to increase the percentage. The economists

have already told you that you will crush the economy of the country, it will not take any more than 5 percent.

I say the answer is not to have $100,000,000 daily commerce but have $200,000,000, then the 5 percent brings $10,000,000; that is the direction in which we have to go. It is simple, we have the resources and the manpower and we have the greatest opportunity that we have ever had in history and there is so much that can be done in this country.

We have projects like the Mississippi flood control and superhighways and any number of things that could be accomplished. The CHAIRMAN. Do not forget reclamation.

Mr. COURTS. That is right.

I say that if we will let this manpower and these resources go under this system that we have had experience with, private ownership and private enterprise, if we let it go and let it have full swing we can run the gross product to a figure we have never dreamed of. You can pour revenues into the Treasury that you never dreamed of.

However, I say again that this free enterprise, the very word, what it means and this private ownership is a very delicate instrument. If something is thrown into the middle of it, it is going to collapse. It is not like a totalitarian state because nothing clogs the wheels of that but the will of one man who says what it is. Free enterprise cannot function that way.

I know I have taken more time than I should, and I appreciate your letting me come here.

The CHAIRMAN. It has been time well spent, and we are glad to have had you.

Your prepared statement will appear in the record at this point as though read and the exhibits attached will also be made a part of the record.

Mr. COURTS. I am appearing before this committee by your courtesy and at the request of the chairman of the Federal taxation committee of the Investment Bankers Association. My firm, Courts & Co., with 20 offices in the Southeast, is engaged primarily in underwriting and distributing securities.

It is our job to find capital, particularly risk capital, to start new business and to expand or rehabilitate existing business. By risk capital I mean capital that represents a share in the ownership of the

business subject to the hazards of the business. Such capital is represented primarily by common stocks.

Risk capital on reasonable terms is no longer available for small business and doubtful for large business. We know business concerns in our part of the country that need risk capital-we are not approaching them because it cannot be supplied.

Enterprising men wishing to start new businesses, men with small, established businesses, come to us and we can offer little encouragement. The demand for risk capital has grown more rapidly than the savings of people.

With this great excess of demand, even capital that exists is not only timid but has no incentive under present tax laws. This means that in spite of present highly profitable operations resulting from unprecedented demand for necessities, there is no confidence in the minds of businessmen and investors.

It follows that present high employment and currently high tax collections are not secure. You gentlemen are in a difficult position-you must continue to provide means of securing unprecedented revenues for the Government Treasury.

The task is simplified if the Government drastically cuts expenses, but, above all, business from whom you collect must be maintained in sound and profitable condition. The latter can be accomplished by changes in the tax structure and rates that will put risk capital into industry and bring increased revenues to the Treasury.

The critical shortage of risk capital is borne out by the fact that common stocks of sound companies are selling today at less than book values, in some cases at or close to net quick assets, attaching no value whatsoever to physical properties. The entire capitalizations of some companies are priced in the public market at only two to five times 1 year's earnings. A list of some such companies is presented hereto marked "Exhibit A."

The day-to-day trading in common stocks provides the market place for new issues of risk securities to supply new capital to industry. The size of that market governs its ability to absorb new issues. The principal public market place for risk securities is the New York Stock Exchange.

For the past 10 years the average annual volume of shares traded on that exchange was less than the shares traded in the year 1901, 61 percent of 1932, the worst depression year of all history, and 60 percent of the so-called normal year 1926.

In 1901 there were less than 70,000,000 shares listed on the exchange; today there are over 1,900,000,000 shares listed. Our country has grown rapidly and tremendously. American industry has grown even more. It is called on to supply not only our own abnormal requirements but a substantial part of the requirements for rehabilitating a major portion of the world.

We are attempting to finance this great American industry of 1948 with a public market the size of 1901. It just cannot be done. Presented hereto as exhibit B is a record of volume of trading on this public market.

Let's examine the disastrous effects on the public market by recent risk-capital financing. On January 2, 1948, Gulf Oil Corp. common stock sold at 754 on the New York Stock Exchange. Shortly there

after it became known the company would have to sell 2,269,050 shares: of additional common stock. The market price of the stock promptly declined to 60. The new stock was offered to stockholders at 51 to induce them to take it. By February 10 the stock was quoted at 5834. This means that Gulf Oil stock declined about 22.43 percent, while the Dow-Jones averages comprising common stocks of 30 high-grade companies declined in the same period only 8.50 percent. It means that Gulf Oil received over $55,000,000 less for its stock on February 10 than the market said it was worth on January 2.

The decline in Gulf Oil stock pulled down the other oil stocks with it, this in spite of the fact that Gulf Oil and the entire oil industry were earning at the highest rate in history. Gulf's high earnings were not sufficient to meet expanding requirements and, when new stock was offered, the public markets were unable to supply the money on reasonable terms. Detail of this financing is presented as exhibit C. Similar experiences of the Texas Co. and Cincinnati Gas & Electric, old-established companies, are presented as exhibits D and E.

The American Telephone & Telegraph Co., whose common shares are widely owned by trust accounts and small investors, including employees and women and children, faced with ever-increasing requirements, has increased the debt of its system to nearly $3,000,000,000. Their recent financing was through debenture debt convertible into common stock. See schedule marked "Exhibit G.".

Now suppose the market for common stocks should continue its present trend so that the above debentures could not be converted, suppose this company should then find it necessary to go to the public markets for hundreds of millions of risk capital-I can tell you that it would smash the market for all public-utility stocks, still worse if that great company should ever have to stop construction.

It won't take much of this sort of thing to produce utter panic in the public securities markets; it won't take much of such panic to spread fear among investors, businessmen, and consumers. It could mean disastrous depression resulting from the present unworkable tax structure and the resulting failure of the public markets to supply risk capital.

An emergency of this kind could mean just one thing. The Government by necessity would have to step in and supply risk capital through the purchase of common stocks in American industry. This would mean Government ownership.

The lack of risk capital is of vital concern to workingmen in all classes. Real wages can be increased only through increased production and increased share in that production. The profits from production are divided among labor, management, capital, and taxes. More production means more profits to divide.

Risk capital going into business provides new, more efficient machinery, increases production, profits, and better jobs. If business is unable to get risk capital, if it has to pay too much for it, then labor will get either less or pay higher prices for necessities and gradually be out of jobs.

Let us examine the demand on the public markets for risk capital in the future. Economists who ought to know what they are talking about tell me that with our unprecedented national debt the gross national product must be maintained at or more than $194,000,000,000 per year for the next 5 years to keep us out of a major depression.