II. THE INDIVIDUAL INCOME TAX (a) Rate reduction and range of progression. Following the scheduled rate reduction as of January 1, 1954, the first emphasis should be on narrowing the range of progression and the second on further reduction of the first bracket rate. The first step in narrowing the range of progression should be a 25-percent reduction of the progressive element of each bracket rate. As budget requirements permit, there should be additional percentage reductions of the progressive element, and further reductions of the first-bracket rate. The goal should be a limited range of progression. The proposed constitutional amendment outlined in section VII sets a range of 15 percentage points whenever the topbracket rate exceeds 25 percent. (b) Personal exemptions.-There should be no increase in personal exemptions, as such action would further narrow the base of the individual income tax, concentrate the burden of the tax on fewer citizens, and postpone perhaps indefinitely the opportunity for rate reduction. (c) Double taxation. The present high tax rates on individual and corporate income intensify the impact of double taxation. Resolution of this problem should have high priority in the list of needed tax reforms. (d) Withholding. The extension of withholding of tax to forms of income other than wages and salaries would cause serious hardships to thousands of small-income recipients by collection of money as taxes when there is no tax liability in fact, and hence should not be authorized. (e) Installment payment date. The time for payment of the fourth installment on the declaration of estimated tax should be extended from January 15 to January 31. III. ESTATE AND GIFT TAXES Estate and gift taxes should be removed from Federal use. Pending such action, rates of tax should be reduced, levies on transfers between spouses should be eliminated, and the rules of application should be designed to avoid hardships or inequities to estates consisting principally of stocks of closely held corporations. 6 In addition, the following rules with respect to survivors annuities under pension should be adopted: (1) The value of pension benefits and any death benefits paid to a survivorbeneficiary through exercise of a joint and survivor annuity option, under any qualified or previously qualified pension plan, should not be subject to estate tax. (2) There should be no gift tax by reason of the employee exercising his right under a qualified or previously qualified pension plan to choose a joint and survivor option. IV. EXCISE TAXES (a) Excise-tax law, regulation, and administration should be designed to achieve equity consistent with revenue goals, and to minimize enforcement and compliance burdens and costs. (b) Except for the alcoholic beverage and tobacco taxes, the present system of Federal excises should be replaced by a uniform excise tax preferably at the manufacturers' level to be levied on all end products of manufacture, including those produced and sold by any Government owned or operated facility, except food for human and animal consumption; drugs; seeds, fertilizers, insecticides, fungicides, and defoliants; books, pamphlets, and music in raised print used exclusively for and by the blind; and religious articles. There should be no other exceptions to the end-product rule not required as a matter of administrative procedure. This replacement should be made as quickly as possible, but no later than April 1, 1954, the time when the excise tax increases included in the Revenue Act of 1951 are scheduled to expire, and the rate should be set so as to maintain the existing level of excise tax revenues.' (c) The rates of tax on alcoholic beverages and tobacco should be reduced to those in effect prior to the last World War II increases. 5 Revised April 14, 1954. 6 Revised April 14, 1954. Revised February 5, 1954. V. REFORMS AFFECTING ALL TAXPAYERS In addition to the specific recommendations relating to particular taxes, there are matters of concern to all taxpayers, whether incorporated or not, which should be included in a general program of recommendations. These are presented here. (a) Business net income.-Greater recognition should be given to the results of business accounting in the determination of business net income. That is, where management is following accepted, standard accounting procedures, modified consistently in some cases to reflect the taxpayer's own operating experience, the results should be conclusive as to the net income. (b) Depreciation.-There should be establishment of adequate and realistic provision for depreciation and obsolescence. TD-4422 and bulletin F nullify this principle and should be rescinded as soon as possible in favor of a policy which will eventually authorize the taxpayer to deduct the cost of depreciable property in accordance with his judgment as to its useful and competitive life. The depreciation claimed by the taxpayer, if computed in a consistent manner, shall be accepted, unless the Government proves that it has no reasonable relationship to the useful and competitive life of the property. To minimize the short-run impact on revenue, this goal could be achieved by a series of steps. Nothing in the foregoing shall be construed as denying the taxpayer the right to deduct accelerated amortization of emergency facilities. In moving toward the goal set forth above, there should be no arbitrary restriction on the use of depreciation methods. Specifically, provision should he made for use of the "sum of the digits method" as well as the declining balance and straight-line methods. 8 (c) Major repairs, etc.—Taxpayer's consistent policy of expensing major repairs, intangible research, development and exploration costs, tools, jigs, dies, and fixtures, shortlived capital assets, and the like should be accepted for tax purposes. (d) Current reserves.-Reasonable additions to reserves created to fulfill future obligations arising from current operations, such as reserves for product warranty, cash discounts, self-insurance, inventory losses, and advertising commitments, should be recognized for tax purposes." (e) Depletion.—The high levels of production and consumption of our natural resources impose a heavy burden of exploration and development upon our extractive industries. The policy of percentage-depletion allowances should be continued. (f) Capital gains and losses.-Experience with capital-gains taxation proves that the revenues produced are not commensurate with its discouraging and harmful effects upon production and the investment and reinvestment of risk capital. Pending the complete elimination of capital-gains taxation, it is recommended that (1) The rate of tax be reduced; and (2) Excess of capital losses over capital gains should be deductible. The maximum tax benefit should be limited to the maximum rate applicable to longterm capital gains. (3) Relief provision with respect to disposition of business assets should be so amended as to allow its benefits to apply to self-insurors in whose respect casualty losses largely sterilize the benefits.10 (g) LIFO. The last-in, first-out (LIFO) method of inventory pricing should be modified to provide for the use of cost or market, whichever is lower. Whenever the market value is lower than LIFO cost at the end of a year, this lower market value should become the new LIFO cost base for the succeeding taxable year. (h) Retroactive taxation.—A retroactive imposition of increase of taxes cannot be justified under any circumstances, and is vigorously opposed. (i) Tax favoritism.— (1) Federal taxation of all competitive enterprise should be fair and equal, and no tax favoritism should be shown any competitive group, whether it be private, corporate, cooperative, or association. (2) In the case of corporations not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual, the Federal income-tax exemption privilege should be eliminated with 8 Added April 14, 1954. Revised April 14, 1954. respect to that part of their net income which is derived from the actual operation or management of business enterprise. (j) Income from foreign sources.-The reduced tax rate now afforded to Western Hemisphere business income should be extended under similar terms and conditions to business income from all foreign sources." 10 VI. THE ADMINISTRATION OF THE TAX LAWS (a) Treasury interpretative regulations shou'd be submitted, before promulgation, to the Joint Committee on Internal Revenue Taxation for comment and criticism. (b) To the limits of practicality, obligations and rights of taxpayers should be established by the Congress in the statutes. Both statutes and necessary suporting regulations should be designed to improve the administration, collection, enforcement, and appellate procedures for the purpose of minimizing and penalizing tax evasion and corrupt practices on the part of taxpayers and their representatives and of Government officials. (c) Such laws and regulations should not penalize or harass conscientious taxpayers by presumptions of guilt, unreasonable burdens of proof or by onerous information and recordkeeping requirements. VII. CONTROL OF THE FEDERAL POWER TO TAX BY CONSTITUTIONAL AMENDMENT (a) The most conspicuous case of excessive tax rates and the inequality resulting therefrom is in the income taxes. The 16th amendment to the Constitution was ratified by the States in 1911 and 1912 on the assurance of its proponents that the rates of tax on income would never be excessive. These assurances have not been kept. On the contrary, Federal rates of tax on income have been advanced to exorbitant levels, in consequence of which the Federal tax structure is seriously unbalanced; thrift, initiative, and enterprise are heavily penalized; the survival of the middle-income groups is threatened by the leveling-down process; and the long-range capacity of the economy to provide jobs and advance its standard of living is endangered. Moreover, the discriminatory rates of income tax have created a dangerous disunity among taxpayers, have had a serious effect on taxpayer morale, and increasingly encourage a general disrespect for tax laws and administration. In view of these conditions, the time has come to impose a limitation, by constitutional amendment, on the Federal power to tax income. This should be done by limiting the power of Congress to impose taxes to a maximum top rate of 25 percent, with power, however, by vote of three-fourths of all the Members of each House, to fix a maximum top rate in excess of 25 percent, if such rate so fixed does not exceed the lowest rate by more than 15 percentage points. There should also be a provision to the effect that the determination of income subject to tax shall be by uniform rules of general application which shall not vary with the size of the income. (b) Such amendment should also deprive the Federal Government of the power to impose death and gift taxes and leave that field of taxation exclusively to the States. EXHIBIT B MAJOR TENDENCIES IN BUSINESS FINANCE1 SUMMARY AND INTRODUCTION The process of business finance in the period since 1945 has posed what seems to be an incomprehensible mystery. On the one hand both businessmen and economists have been deeply concerned over the shortage of venture capital. They have warned that the consequences of this dearth would be either to restrict our economic growth or to pile up a dangerous burden of business indebtedness. On the other hand business has, to all appearances, been through a period 10 Added April 14, 1954. 1 Prepared by George G. Hagedorn, assistant director of research, National Association of Manufacturers, and published in January 1953 as No. 57 in the association's economic policy division series. of unprecedented prosperity and growth. Although business debt has increased, the present level of indebtedness does not seem really serious in relation to other economic magnitudes. The apparent record of business health and business growth in recent years has been so impressive that warnings about "the venture capital shortage" have not been taken very seriously. It has been felt that there could be nothing much wrong with a business system which is able to spend between 20 and 30 billion dollars a year for new plant and equipment. The small amount of new equity investment is (according to this view) perhaps regrettable, but its place has been taken by the enormous sums retained out of profits. The original purpose of the present study was simply to compile the statistical record of the process of business finance, in its very broadest outlines. It was quickly realized that an accurate picture would require certain adjustments and addenda to the generally accepted figures, since customary accounting methods do not make full allowance for the effects of rising prices. The wholly unanticipated results of this analysis was a completely new perspective on the pattern of business finance since 1945. The commonly accepted generalizations turns out to be false or only partially true. The real key to the mystery of business growth amidst a shortage of venture capital lies elswhere than has been supposed. The new conclusions are so important that they have been drawn out of the body of the study, and are summarized briefly here: 1. It is true that business has invested between 20 and 30 billions of dollars annually, in recent years, in new plant and equipment. But, about four-fifths of this amount has been required to replace the capital values currently used up. Only about one-fifth of business expenditures for fixed assets represents net expansion. This hasn't been generally understood, partly because one of the effects of inflation is that allowances made for depreciation in business accounts are less than the actual cost of replacing the capital consumed. 2. It is true that the increase in the book value of business inventories has been at a rate of greater than $10 billion annually in certain years, and has averaged $8 billion annually since 1945. But, approximately half of this increase represents the additional cost of carrying the same physical volume of inventory at a higher price level. Only half represents a genuine increment to stocks of goods held by business. 3. It is true that the retained profits of corporations, as reported, have averaged about $10 billion a year since 1945. But, two-thirds of this reported amount have been needed simply to maintain the tangible assets of corporations since, as a result of the rising price level, adequate provision for such maintenance is not charged in current costs. Only about $3 billion annually have been available from this source for the net expansion of corporate assets. 4. Even this small surplus of undistributed profits has been made possible only at the expense of a reasonable level of dividends. If dividends were increased so as to be the same percentage of national income as in the 1930's, the surplus of profits available for net expansion would be wholly wiped out. 5. The new capital supplied by stock issues has amounted to less than $2 billion annually in the postwar period. 6. The book increase in owners' equities in unincorporated business has averaged less than a billion dollars annually since 1945. This is less than the amount needed to make up for the failure of charges to current cost to provide fully for the maintenance of assets. 7. Although business accumulated large amounts of liquid assets during the war years, on balance these have not been drawn on, to any substantial extent, as a source of funds in the years since 1945. Apparently business has considered it necessary (or at least advisable) to maintain a substantial degree of liquidity. 8. The chief source of funds for expansion in the postwar period has been borrowing. Corporate debt has increased from $85 billion at the end of 1945 to $156 billion at the end of 1951. 9. One of the effects of inflation has been to reduce progressively the real burden of the outstanding business indebtedness. Business has borrowed large sums each year, but at the same time the process of inflation has reduced the relative burden of the already existing debt. The net effect has been to make the cumulation of indebtedness tolerable. This of course has occurred at the expense of the creditors of business. These conclusions, taken together, lead to a drastically revised appraisal of the soundness of recent business financial operations. We cannot be as complacent about them as we had thought. The usual incomplete statistical analyses have created an exaggerated idea as to the extent of business expansion and a false idea as to the manner in which it has been financed. The shortage of venture capital has had serious effects on the health of the economy, but inflation has suppressed the symptoms of the disease. EXHIBIT C SECTION 167-DEPRECIATION Section 167 of the bill represents, within present budgetary limitation, a commendable step in the direction of liberalization of depreciation allowance and reduction of the number of disputes in this area. The provisions of the bill are, however, in our opinion still too restrictive in several respects and could be made more practicable without further significant loss of revenue. TERMINAL WRITEOFFS UNDER THE DECLINING BALANCE METHOD Under the declining balance method permitted by the bill, a terminal writeoff of any undepreciated balance is permitted in the year when disposition is made of the last remaining asset of any particular year's acquisition of any class. In order to be able to take advantage of this terminal writeoff, the taxpayer must maintain detailed records of cost and year of acquisition of each asset. Many taxpayers do not maintain, and should not be required to maintain in order to take advantage of the declining balance method, such records with respect to assets of relatively small individual value. In cases where such records are not maintained, however, any particular year's acquisitions must, under the declining balance method, continue to be depreciated, in progressively reducing amounts, ad infinitum. A similar objection can be made to the use of the declining balance method as proposed in the bill in the case of assets for which detailed records of cost and year of acquistion are maintained, in that, as long as a single asset of any year's acquisition remains in service, it is necessary for the taxpayer to continue recording a constantly reducing depreciation allowance which might eventually be measured in pennies. The terminal writeoff provision as presently contemplated must be made less restrictive. The problem could be met in any of several ways, two of which are the following: 1. Any remaining undepreciated balance might be written off in the last year of estimated useful life; 2. A minimum depreciation allowance might be provided under the declining balance method equal to a specified percentage (e. g., 3 percent) of the cost of any year's acquisitions of any class, with possibly a limitation that the minimum allowance might in no case exceed the annual straight-line depreciation allow ance.. "SUM OF THE DIGITS" METHOD Consideration should also be given to permitting the use of the "sum of the digits" method of computing depreciation, which has somewhat the same effect as the declining balance method, but has an advantage over the latter method, particularly as proposed to be applied under H. R. 8300, in that it results in complete depreciation of a group of assets at the end of their estimated useful life. Under the "sum of digits" method of computing depreciation, the digits beginning with 1 and ending with the number of years of estimated useful life are first totaled. Then to compute the first year's depreciation allowance, a fraction is applied to the cost of the assets which has as its numerator the years of useful life and as its denominator the "sum of the digits." The numerator used in the second year represents the years of useful life minus one, and so on. For example, if an asset or a group of assets has an estimated life of 10 years, the numbers 1 to 10 are added together and found to total 55. In the first year ten fifty-fifths of the cost would be written off, in the second year nine fifty-fifths and so on until in the 10th year the remaining one fifty-fifth of the cost would be written off. A comparison of this method with the declining balance method proposed under H. R. 8300 for a $10,000 assets having an estimated life of 10 years is shown below. 45994-54-pt. 3- -33 |