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Now, we are happy to give our support to the method included in section 34 of the bill as a first step in dealing with this problem.
Our program is concerned with the fundamentals of tax philosophy, and rests on the belief that the fairest tax system is the best tax system; and that fairness in taxation assures the least impediment to individual initiative and advancement, to maintenance and expansion of the Nation's productive forces, and to the continuous achievement of the maximum levels of economic well-being for all citizens.
One of the fundamental criteria which our program lays down for determining tax policy is that "tax rates should be moderate at all points." While changes in tax rates, except for postponement for 1 year of the 5-percentage-point reduction in the corporate rate scheduled for April 1, 1954, are not provided in H. R. 8300, I think it important to note that many of the problems and inequitable situations with which this bill deals stem in large part from excessive rates of individual, corporate and death taxes. Such rates provoke resistance and evasion; they lead to burdens on some which are ruinous; and they induce wasteful use of human resources in the search for mitigating devices. Above all, such rates are a serious threat to the preservation of a competitive economic system in which everything depends on adequate rewards for individual ambition and initiative.
I emphasize these points, Mr. Chairman, as background for endorsing and commending the objectives, first stated in the President's January tax message, and since repeated by him, by Secretary Humphrey, and by other leaders in the Congress and the administration, that, after this tax legislation has been enacted, "further reductions in expenditures can be applied to our two objectives of balancing the budget and reducing tax rates."
I will now address myself to specific provisions of H. R. 8300.
The corporate rate: Section 11 postpones to April 1, 1955, the 5-percentage-point reduction in the corporate tax scheduled to take place on April 1, 1954. We accept this postponement, on the basis of revised policy initiated at a meeting of our taxation committee on March 26 and approved at a meeting of our board of directors on April 14. However, we strongly urge that there be no further postponement.
We are well aware that the revenue gained during the next fiscal year from extension of the corporate rate is approximately the same as will be lost under other provisions of H. R. 8300, many of which can have little effect on incentives and capital formation.
The House Ways and Means Committee states in its report that this bill will "reduce tax barriers to future expansion of production and employment.” On the whole, we concur, but we do wish to point out that these tax reforms are in no way a substitution for the rate reduction job which lies ahead. The following statement from the House report merits the most sober reflection:
The restrictive effects of the present law on economic growth have been obscured and somewhat offset during the past decade by the inflationary pressures of the war and postwar periods.
Experience under the tax laws and rates in effect since World War II indicates that economic growth and expansion cannot be expected in the future, in the absence of substantial moderation of the tax burden where it penalizes economic motivation and where it taxes away the potential sources of new capital. This conclusion has been well
documented in a study entitled "Major Tendencies in Business Finance," prepared by the research department of the National Association of Manufacturers. This careful analysis of business financial experience since World War II shows that excessive corporate and individual rates have been, and will be, a serious impediment to our long-term economic development. Summary conclusions from the study are attached as exhibit B.
Depreciation: Section 167 dealing with depreciation represents, within present budgetary limitations, a commendable step in the direction of liberalizing depreciation allowances and reducing the number of disputes in this area. While it stops short of returning authority to management to deduct the cost of depreciable property in accordance with its judgment as to useful and competitive life, which would mean repeal of Treasury Decision 4422 and Bulletin F, we believe this goal might be within reach after a few years of operation under a more liberal policy.
However, we do suggest a few changes in section 167 to better implement the intent, without seriously affecting revenue. These are discussed in exhibit C, and are summarized as follows:
(1) Remove arbitrary restriction on use of depreciation methods, and specifically provide for use of the sum of the digits” method as well as the straight-line and declining balance methods.
(2) Provide terminal writeoffs and a minimum depreciation allowance under the declining balance method.
(3) Allow a variance of 25 percent–instead of 10 percent-from Internal Revenue determinations of useful life of property.
(4) Permit application of the new rules to property completed after December 31, 1953, regardless of when begun.
Now, the accumulated earnings tax: In regard to the accumulation of earnings beyond the reasonable needs of a corporation, we are happy to note the nominal shift in the burden of proof provided in section 534. We say “nominal” because the parenthetical clause "together with facts sufficient to apprise the Secretary or his delegate of the basis thereof” included in section 534 (c) could be used to nullify this shift in burden of proof. We therefore strongly advocate the deletion of this parenthetical clause.
Ve are disappointed also to find that section 531 continues to apply the penalty tax to all accumulated taxable income, as defined in section 535. We recommend that the penalty tax apply only to that part of undistributed income which is proven to have been unreasonably accumulated.
Declaration of estimated tax for individuals: We recommend that sections 6073 and 6153 be amended to extend the filing date of the final declaration of estimated tax, and payment of the fourth installment on the declaration, from January 15 to January 31, which is the final date for placing W-2 forms in the hands of employees.
This would enable and indeed encourage many more taxpayers to file final returns in January in lieu of amended estimates. Paperwork would be reduced for both taxpayers and the Government, the Treasury's workload would be spread more evenly, and there would be some offset for the delay in revenue receipts which will result from extending the final return date from March 15 to April 15.
The provisions of H. R. 8300 dealing with corporate organizations, acquisitions, and separations, have created great concern in business
circles, as they would serve to prevent legitimate transactions which, in many cases, would result in business and job expansion. Our views on this subject are set forth in exhibit D. Our overall recommendation is that the provisions in question be amended to permit without tax the legitimate reorganization of corporate structures by statutory merger, consolidation, or by practical merger and liquidation, without reference to the size of the corporations involved. In this connection,
. there should be no discrimination against corporations which are not "publicly held," as defined in the bill.
Moreover, to the extent that the bill when revised and perfected changes present rules for corporate reorganizations, parties affected should have the opportunity to elect in respect to any 1954 transactions whether they shall be taxed under the provisions of the 1939 code or the 1954 code.
Preferred stock bail out: There is attached a short statement, exhibit E, on section 309 dealing with redemption of nonparticipating stock. We strongly recommend that the penalty tax not apply to stock issued for adequate consideration.
As a minimum, we believe that section 309 (c) must be amended so that the presumptive issue date of January 1, 1954, applies only to stock issued for an inadequate or for no consideration.
Redemptions of stock to pay death taxes: Section 303 of the bill supplants section 115 (g) (93) of the existing code, enacted in 1950 to prevent death taxes from forcing the liquidation at a loss of closely held family corporations.
However, the protection afforded by the original provision, and included in the pending bill, does not extend to situations where there is, after the death of the owner, a substitution of stock for the stock owned at the date of death. To make the law consistent with its avowed intent, it is recommended that section 303 be amended to apply equally to substitute stock held in the decedent's gross estate. A fuller explanation of this proposal is included in exhibit F.
Accrual of real property taxes: Section 461 (c) represents a desirable step toward the determination of taxable income in accordance with generally accepted accounting principles. However, in making the new rule for accrual of real property taxes mandatory, a taxpayer who has been keeping his books in accordance with existing law may entirely lose his deduction for real property taxes during the transi
This situation, and alternative solutions, are explained in exhibit G.
Reserves for estimated expenses: Section 462 also brings tax accounting into closer conformity with generally accepted accounting principles. It leaves open the question, however, whether a taxpayer would be allowed to deduct actual expenses during the transition year, as is provided in present law for bad-debt reserves.
This section should be clarified so as to leave no doubt on this score. A fuller explanation is given in exhibit H.
Penalty taxes on intercorporate dividends and on consolidated returns: For many years, nearly all business groups, including the NAM, have recommended elimination of the tax on 15 percent of intercorporate dividends and the 2-percent penalty tax on consolidated returns.
The President's tax message proposed removal of these penalty taxes over a 3-year period, but such removal is not provided in H. R.
We do not see how the purposes of this legislation can be accomplished without the complete elimination of injustices of this character. We therefore recommend that the President's proposals be carried out.
In this connection, the purpose of allowing a credit for intercorporate dividends is defeated in the case of corporations having a net operating loss. The result is that the corporation pays tax on 100 percent of the dividends received in the loss year. As explained in exhibit I, we recommend elimination of this discrimination against corporations with fluctuating incomes which receive dividends from other corporations.
Prepayment of corporate taxes: Mr. Chairman, I now come to a provision which is of the most serious concern to many corporations; namely, the requirements of declaration and payment of estimated tax provided in sections 6016, 6074, and 6154. It is conceded that these provisions would not be harmful in the case of corporations whose working capital position is such that they are able to set aside tax accruals in cash and perhaps buy tax anticipation certificates.
In other cases, however, corporations need all cash available for current working purposes. The operations of many such corporations have already been adversely affected by the speedup in corporate tax payments effected in the Revenue Act of 1950. We do not believe there is any method by which the further speedup can be confined to corporations which would not be financially embarrassed by its application, whether they be large or small.
We don't accept the idea that the elimination from this provision of a certain amount of income satisfactorily solves that problem. Accordingly, we strongly oppose any change in law which would require payment of any part of the corporate tax in advance of the 15th day of the 3d month following the end of a taxpayer's taxable year.
Additional reasons for taking this strong stand are: First, the fact that prepayment would have but slight effect on the amount of revenue received by the Government in any fiscal year, and second, the problem of imbalance in the revenue flow as between the first and second 6 months of the Government's fiscal year can be partially solved by excluding tax anticipation certificates from the statutory debt limit.
As we have previously suggested, the problem of imbalance was intensified by the speedup in corporate tax payments enacted in 1950, and cure should not be sought by compounding the hardship thus inflicted on corporate taxpayers.
This completes my testimony. I have not touched on many of the points included in our specific recommendations—some of which have, and some of which have not, been incorporated in the bill. We believe all of our recommendations are well-founded and merit your sympathetic consideration.
We would not want our testimony, in which we have proposed changes in H. R. 8300, to be construed as any lack of confidence in this legislation as a whole. Our only aim in appearing here is to aid the Congress in arriving at the best possible solutions of some very difficult problems. I hope that this testimony and accompanying material will serve that
purpose. Thank you, sir. The CHAIRMAN. Thank you very much.
(The exhibits of Mr. Maytag follow :)
SPECIFIC RECOMMENDATIONS FROM FEDERAL TAX PROGRAM OF THE NATIONAL
ASSOCIATION OF MANUFACTURERS
(As approved by the association's board of directors October 29, 1953, and
revised February 4 and 5, 1954, and April 14, 1954)
1. THE CORPORATION INCOME TAX
(a) Rate revision. — Although the National Association of Manufacturers has opposed continuation of the 52 percent combined corporate rate beyond March 31, 1954, it now recognizes that some continuation is necessary in view of budget conditions and to permit needed tax reforms. However, the 5-percentage-point reduction in the normal corporate rate which was scheduled to take effect on March 31, 1954, should not be postponed for more than 1 year.
(6) Ercess-profits tax.-So-called excess-profits taxation is now almost universally recognized to be unsound in principle and inequitable in application. With expiration of the present tax on December 31, 1953, such a tax should never again be enacted regardless of fiscal emergencies.
(c) Rates on smaller corporate income.—The present high level of corporate tax rates makes imperative some differential in favor of corporations with small incomes as an aid to the beginning and development of business. To this end, the exemption of $25,000 from surtax in present law is approved, but there should be no increase of this exemption and no further graduation of the corporate tax.
(d) Intercorporate dividends.—The credit for dividends received from corporations subject to the Federal income tax should be increased from 85 to 100 percent.
Computation of the net operating loss deduction should not discriminate against corporations with fluctuating incomes receiving dividends from other
(e) Consolidated returns.—The additional tax of 2 percent on the net income reported in consolidated returns should be eliminated.
(f) Undistributed earnings ( sec. 102).—The policy with respect to retained earnings shoud be changed so as to accept the decisions of management regarding the proportion of earnings to be retained for valid business reasons.
(1) The burden should be upon the Government to prove that the taxpayer was formed or availed of for the purpose of preventing the imposition of surtax rates upon its shareholders or the shareholders of any other corporation, through the medium of permitting earnings or profits to accumulate instead of being divided or distributed.
(2) The tax should apply only to that part of the undistributed net income which is unreasonably accumulated.
(3) Dividends paid within 75 days after the close of its taxable year should, at the taxpayer's election, be deducted in computing section 102 net income for such year.
(9) Payment date. 3—The payment of any part of the corporate tax should not be required in advance of the 15th day of the 3d month following the end of the taxpayer's taxable year.
(h) Profit-sharing and stock bonus plans.—That the tax treatment of profit sharing and stock bonus plans permit recognition of length of service and employee contributions, in addition to wages, as the basis for allocation of employer contributions to participants in such plans.
(i) Corporate reorganization. —Tax law with respect to corporate distributions and changes in corporate organization and ownership should not penalize nor discourage legitimate business transactions.
1 Revised April 14, 1954. 2 Added April 14, 1954. 3 Added February 4, 1954. 4 Added April 14, 1954.