At present the national gross product is running in excess of that figure, but it must be maintained. These economists say that this national gross product can be maintained if American industry is willing and able to spend $21,000,000,000 per year for capital expenditure for the next 5 years.

In my opinion industry is willing and needs to make this expenditure, but the undertaking is immense. In 1938 capital expenditures of American industry were not $21,000,000,000, they were 4.7 billions; in 1939, 8 billions; in the boom year 1929, 1212 billions. In the depresison year 1932, the figure dropped to 1.2 billion.

How can this $21,000,000,000 per year be raised? Economists say that about $14,000,000,000 can come from the inside, that is from earnings and reserves for depreciation, that the other 612 to 7 billions must come out of the public markets.

At no time in history have the public markets faced such a task. In the postwar period 1922 to 1927 when our Government debt was about one-twelfth of its present debt and when the public markets were functioning in orderly fashion, only 1.8 billions per year were received by the sale of new securities.

The requirements for the next 5 years are 311⁄2 times that amount. From 1931 to 1940 less than one-tenth of 1 billion per year on balance came from the public markets. From 1941 through 1946 there was no capital on balance provided by the public markets. War production was financed by the Government.

Do we want the Government to continue to finance and ultimately own American industry in peacetime? If so, why have we fought to save Europe for democracy-if so, why the Marshall plan?

Regardless of what these economists say, businessmen know they face the following facts: Depreciation reserves on old plant values are not sufficient to replace plants at present high costs; that capital expenditures have been small the past 12 years; that the peacetime productive plant is pretty well worn; that their needs for risk capial are greater than at any time in history; that the public markets are running at the level of 1901; that the great mass of American people willing to take risks no longer have the funds after taxes to supply the demand for risk capital. Banks and insurance companies, by law, cannot supply it.

There is another demand on these public markets, namely, the demand created by large estates selling common stocks in order to pay inheritance taxes. Some economists say that savings are at an alltime high, but the fact is that the demand for risk capital is at a double-barreled all-time high.

A great part of these savings are in the hands of people with incomes less than $5,000, they are unacquainted with common stocks, and place their savings in banks and insurance companies to become unavailable as risk capital.

Up to some 12 years ago our Federal tax structure permitted a class of people to exist who, by hard work, ingenuity, or luck, or some of all, had incomes in excess of the amounts necessary to live on and pay taxes. This excess found its way into American industry by the purchase of common stocks. This not only supplied risk capital to industry but provided private ownership of industry. The mechanic,

the farmer, the day laborer, the bus driver always had hope of and often succeeded in becoming owners of industry.

Millions of little men bought the shares of stock in companies for which they worked and became part owners. The present Federal tax structure does not permit any such class of people to exist. It makes no difference whether a man has an income of $5,000, $50,000, or $200,000 per year, by the time he has paid taxes and living expenses there is little left to go into industry.

Should this country go into a depression industry in emergency might well have to go to Washington for help meaning an RFC to furnish risk capital. That would mean Government ownership. Is that what we want? Let us make a decision.

Let us see how the present tax structure affects the individual. The -rich man is not being hurt. The rich man has quit. He has accumulated wealth, he can live on it. The little man, the little farmer, the laborer, the garageman, the carpenter, the plumber, these little men who start in business with nothing but the determination to work. sweat, save, and build; the man who starts alone, works alone, saves a little, buys a new machine to increase his production, then employs two or three men, these little men who start operating proprietorships, then partnerships, building out of earnings, knowing nothing about corporate structure; there are millions of them; there are some 3,700,000 tax returns of unincorporated businesses, and only some 500,000 returns of corporations.

It is these little men who are being hurt. They have no chance to build business from profits and they are unable to incorporate because the risk capital is low in supply and has no inducement to go into small business. I suggest the following remedies:

Individual surtax rates: The one over-all shot in the arm to be given industry and individual initiative is to limit the maximum individual surtax rate to 50 percent and do so immediately. Some say this is not practical in an election year.. I disagree.

The Gallup poll, released early this year, showed that the majority of people are not in favor of more than 50 percent of income going in taxes. Current editorials bear this out.

A tax structure created in wartime that takes 86.45 percent of any dollar of income is not helping anybody and is a danger to the national welfare. It promotes abnormal practice, unsound thinking, and dishonesty throughout the land. We see corporations increasing debts to an unsound extent because individuals cannot supply risk capitalwe see private ownership being destroyed; we see businessmen basing every move on taxes, but when they go to lawyers and tax experts they cannot get the answers.

A great mass of citizens spend untold time in trying to figure a way to escape or survive in spite of taxes, in signing returns that they do not understand. This breeds distrust of the finest government in the world. Businesses are providing expense accounts, often padded and wasted. There are black markets and gray markets; there are individuals accepting cash for their services and not returning these receipts as taxable income, and tax evasions are running at fantastic figures. If the surtax rate were limited to 50 percent, based on estimates submitted by the Treasury to Congress, in 1947, it would mean a loss in revenue to the Treasury of less than $850,000,000-about 2.2 percent of total revenue.

No tax expert could ever convince me that this loss would not immediately be more than made up by men jumping to their work with a bang, initiative, and ingenuity, again on the alert to create, to produce, to save, and to invest. The little man could become an owner in industry, the little proprietor could save to build his business.

The American people are a great and generous people; they are willing to go 50-50 with their Government, but they are not going 86-14 except in time of war. Our taxing authorities felt it wise to quickly reduce the wartime 85-percent excess-profits tax on corporations, with the war 3 years over is not it time to apply the same reasoning to the little proprietor and to the individual who owns, finances, operates, and makes the corporations go? Time is running, and running rapidly.

Today good men are unable to accept greater jobs and greater responsibilities if it means moving from their communities because they cannot incur the expenses of such moves. According to the New York Times' article of January 19, 1947, reflecting opinion of internalrevenue spokesmen, tax evasions are running at over $4,000,000,000 a year. This places wealth and power in the hands of unscrupulous people at the expense of those who are honest. That amount is four times the amount brought to the Treasury by maintaining individual rates in excess of 50 percent.

Capital-gains tax: The present capital-gains tax, bringing insignificant revenue to the Treasury, is having a decided effect on the national economy. I understand the Treasury Department has not made a practice of publishing revenues from this tax. Estimates of these revenues by tax counsel are attached hereto as exhibit F and appear reasonable in view of hearings on the Boland bill in 1942.

Property cannot be sold at a profit to go into new business; 25 percent of the profit goes in capital gains tax, meaning the untried new business must be 25 percent better from the start. Even capital lying idle has no incentive to go into new business because the loss is permitted to apply against ordinary income.

If a man bought a home in 1940 for $10,000, and sold it, in 1947, for $25,000, he would have a tax of $3,750 even if he had to use the $25,000 to buy a new house in a new location where his business takes him. He had no profit in fact but pays $3,750 tax on fictitious gain. Whenever the question of changing an investment comes up, invariably the investor wants to know, "What will the tax be?"

Those who wish to retire from business are generally unwilling to sell the business and pay the tax; young management is unwilling to buy because unable to pay for it out of earnings; this means hired management and absentee ownership, not healthy to our social order. The capital-gain tax accentuates fluctuation in the market for common stocks.

When the market is rising, owners cannot sell stocks held under 6 months as most of the profit would go in taxes. After 6 months 25 percent of the profit would still go, so the supply of stocks coming into a rising market is limited and causes undue rise in prices.

When the market is declining this tax encourages selling and accentuates a down trend. If a man sells stock held less than 6 months his full loss is recognized, so there is added incentive to sell when the market is declining.

There are sound reasons why no tax whatsoever should apply to exchanges of property and sale of capital assets. However, if we must retain this tax the rate on long-term capital gains should be promptly reduced from 50 to 25 percent, resulting in a maximum tax of 1212 percent of the gain. Loopholes now in the law where capital gains taxes are deferred and often reduced should be eliminated.

The above-proposed rate reduction would provide incentive for risk capital, would remove serious impediment to business, would encourage the free flow of investments in commerce into the hands of the most advantageous holder, instead of being frozen in the hands of present owners; would lessen the taxes now often imposed on fictitious gains, and in my opinion would actually increase the revenue to the Treasury. Taxes on proprietorships and partnerships: I have attempted to show that this type of business has no chance to build out of earnings. Further, it has no chance to build reserves for hard times. My own business, by necessity, has been a partnership for some 23 years. In the depression of 1932 we never let one employee go on account of the depression. We had reserves to live on.

Today we have built an organization of splendid young men and young women who are making that business their life career. We know that if a depression came we would have to close offices and cut off employees.

The partners are taxed on all profits from the business at the high individuals surtax rates, leaving no reserves in the business. We have a profit-sharing pension plan for employees, but under the law a partner cannot participate.

There is neither incentive, sound judgment nor fair practice to continue to build an organization of young men and young women when we know full well that reserves cannot be built up to take care of hard times.

There are millions of such businesses penalized because they are operating as a partnership rather than as a corporation The Federal tax structure should be amended immediately so that this type of business can be permitted to fare as well as a corporation rather than be discriminated against and possibly knocked out of business completely.

Partners and proprietors should share in pension trusts just as officers of corporations. There is already a bill in the House, H. R. 5143, dealing with taxes on proprietors and partners. It has great merit, deserves full exploration and consideration.

You gentlemen may well feel that I am an alarmist. It is time to get alarmed when the public markets are unable to supply risk capital to business earning at an all-time high.

It is time to get alarmed when in the midst of apparent prosperity we are sitting on a keg of powder, with a tax structure which coupled with unsound policies of the Federal Reserve System is destroying public markets that can throw business into panic. It is time to get alarmed when the tax structure is such that individuals throughout the land in their effort to survive are forced to unsound thinking and even dishonest practices.

It is time to get alarmed when the tax structure is leading directly to the result that no class of people can exist who by hard work and

ingenuity are able to provide private ownership for American industry.

Looking squarely at this election year, I say that the national issue today is not only the Marshall plan, Russia, Palestine, and Greece; it is "Private ownership or Government ownership of American industry." Industry must have risk capital and in increasing amounts. If individuals are unable to supply it, the Government by necessity must.

It seems to me, in preparing our peacetime tax structure, we must first decide what we want. Do we want a class of people to exist who can own and finance industry, or do we want Government ownership?

The great mass of American people know we face the greatest responsibilities in all history and the greatest opportunities. I believe they are prepared to understand the necessity for change in a war-tax structure, a structure that with slowing demand for necessities could produce panic in the public securities markets, depression, possible change in the form of government, destruction of the national economy, and along with it destruction of national defense.

May I thank you for your patience. I am sincere in these expressions and trust they may have full consideration.

The CHAIRMAN. The exhibits will be made a part of the record at this point.

(The exhibits are as follows:)

EXHIBIT A.-Book values, net working capital per share

Source: Courts & Co., Atlanta, Ga., Securities Research Department, Mar. 6, 1948.