tax liability of individuals. That plan contemplated the averaging of income over a 7-year period. There are other plans which are designed to accomplish the same objective. One of these is H. R. 126, introduced in the first session of this Congress, which would permit averaging over a 6-year period in certain cases.

We urge you to give careful consideration to the need for some plan of averaging of income. Our committee is continuing its studies of this problem and will be happy to offer detailed comments and suggestions at the appropriate time.

MULTIPLE TRUSTS-RECOMMENDATION NO. 163

Provision should be made for requiring the filing of a combined return by a group of trusts created substantially by one grantor for one beneficiary.

It is possible for a grantor to create a number of trusts with little or no difference in terms but all for the same beneficiary. Each trust is a separate taxpayer and the income involved may be divided among as many taxpayers as the grantor chooses to create.

In addition to obtaining the benefit of lower surtax brackets, this permits avoidance of the throwback rule by keeping accumulation distributions under the $2,000 limit.

We favor legislation which would prevent abuses of the revenue in this area. However, we have strong reservations about the desirability of legislation is broadly drawn as the amendment to section 641 proposed by the advisory group on subchapter J.

The proposed statute would give the Internal Revenue Service carte blanche authority in dealing with multiple trust whether deliberately or innocently formed. Furthermore, there are far too many administrative problems which have been left unanswered.

For instance, no rules are provided for computing the tax "as though the separate trusts were one trust." Likewise, the terms "grantor" and "primary beneficiary" are not clearly defined.

Taxpayers are entitled to as much certainty and clarity as possible in the statute. While we approve the general purpose of preventing fax avoidance in the multiple trust area, we believe that any solution must be reasonably practical in its application.

As previously stated, we plan to submit detailed comments on the advisory group proposal at a later date.

COMMUNITY PROPERTY-RECOMMENDATION NO. 1

Attention should be given to eliminating disparities in treatment between re sidents of community property States and other States. While the Revenue Act of 1948 first eliminated differences for many taxpayers, there are still situations where the tax result may be substantially different depending on whether a taxpayer resides in a community property State or other State. Some, but not all, of the situa

tions are:

Section 270 limits to $50,000 per year the deductible loss from a business where there have been losses for 5 consecutive years. It is possible that the limit may be $100,000 for residents of a community property State.

20675-58-pt. 3- -34

Sections 267 and 318 provide rules for attributing ownership of stock in a corporation. However, the community property concept of an undivided one-half interest may bring the spouse's relatives into the attribution zone, thus working to the disadvantage of the resident of a community property State.

Section 615 sets limits on the amount deductible for exploration expeditures for minerals other than oil or gas. These limits may be double for the residents of community property States.

Section 911 provides an exclusion of up to $20,000 per year for income earned outside the United States under certain conditions. It is possible that this would be double for the resident of a community property State.

Section 1211 (b) and section 1212 provide a limitation of $1,000 per year on the deductibility of net capital losses. It is possible that this would be double for members of community property States.

EFFECTIVE DATES

With a few exceptions, we have not attempted in our recommendations to deal with the question of effective dates. In general, we believe that changes of substance should be made prospective only.

We note, however, that the advisory group or subchapter J proposes that multiple trust legislation be made retroactive in December 1, 1956, and points to the list of substantive unintended benefits and hardships, released on November 7, 1956, as justification therefor.

That list merely mentions multiple trusts as one of the "problems for which no solutions are suggested." We know of no precedent where legislation has been enacted and made effective as of the date on which a loophole was pointed out and suggestions for a cure invited. Such a procedure can only create inequities.

In conclusion, we would like to restate our willingness to meet with your advisers to the extent we can be of any assistance.

The American Institute of Certified Public Accountants is grateful to you for this opportunity to be heard.

We request permission to file this pamphlet of our recommendations as an extension of this statement.

The CHAIRMAN. That permission has already been granted. Are there any questions of Mr. Jensen?

Mr. Jensen, I have qenstions in my mind that I would like to discuss with you, but the lateness of the hour and the fact that we still have other witnesses who desire to be heard this afternoon prevents me from doing so.

We do appreciate the fact that you have made yourself available for this appearance and certainly the recommendations of your group will receive very careful consideration by the committee.

We thank you, sir, for coming to us.

Mr. JENSEN. Thank you very much.

The CHAIRMAN. Our next witness is Mr. Frazar B. Wilde. Mr. Wilde, although we know you quite well and you appear at the invita tion of the committee, for purposes of this record, will you identify yourself by giving your name, address, and the capacity in which you

appear.

STATEMENT OF FRAZAR B. WILDE, CHAIRMAN, RESEARCH AND POLICY COMMITTEE AND PRESIDENT OF THE CONNECTICUT GENERAL LIFE INSURANCE CO.

Mr. WILDE. Mr. Chairman, my name is F. B. Wilde. I am president of the Connecticut General Life Insurance Co. I have spent quite some time as chairman of the Research and Policy Committee.

I appear today at your invitation on the subject of the need for general revenue revision and the directions which it should take. Although I am chairman of the research and policy committees of the Committee for Economic Development, the views I shall express have not been cleared with individual members of the committee. The CED will have a more complete study of tax revision available later in the year.

The plans for these hearings were announced to the public several weeks before the successful launching of an earth satellite by the U.S. S. R. This one event has had a dramatic impact on the thinking of the American people about numerous aspects of our national life. That we will spend more on defense is certain, but it is also clear that much more than direct military expenditures is involved. Among other things, our national security requires continuation of military aid to our allies and of economic assistance to underdeveloped countries; an improvement in the quantity and quality of education at all levels; stimulation of basic research; and increased rewards for teachers, engineers, scientists, members of the Armed Forces, and other personnel in Government.

Many of the necessary programs should be conducted and financed in whole or at least in part by State and local governments; but even with maximum State-local participation, the demands on the Federal Treasury will be heavy for a considerable period of time.

It is understandable, therefore, that our perspective about revenue revision has undergone a substantial change in the short time that has elapsed since this study was formulated by your committee. Whereas just a few months ago there was a realistic expectation that tax reform could be facilitated by a lowering of the burden of Federal taxation, the prospects of tax reduction in the immediate future appear to be slim indeed. While we should pursue vigorously the type of expenditure reduction previuosly recommended by the CED, it may be that our future revenue needs will be at least as great as the present tax rates would yield under conditions of growth, if not greater.

The difficulties of reforming the tax system under these circumstances cannot be overestimated. Tax reform without a reduction in revenue means a change in the incidence of the tax burden. Obviously, this is an extremely difficult thing to do. Indeed, practical politicians may regard it as impossible. But this is precisely what ought to be done.

The people in this country believe that we can enjoy a steady increase in our standard of living and at the same time provide adequately for security. They certainly want it that way. A most vital part of such a formula is a tax structure which encourages and permits growth. Without the help of growth and with the necessity for a large military budget, we face the possibility, if not the probability, that the civilians' standard of living will be curtailed or, at best, will not grow. Furthermore, the fact that this committee deemed it neces

sary to make a thorough review of the entire tax structure is indicative that there was widespread dissatisfaction with many of its features. If tax reform was essential before Sputniks I and II, it is no less urgent now that tax reductions with tax reform must be postponed for the present.

Accordingly, I propose to discuss the problems of tax revision from two points of view; first, what changes should be made in the present structure, assuming revenue requirements will not exceed the prospective yields of that structure in the several years ahead, and, second, what other changes should be made in order to prepare the way for a possible increase in revenue requirements.

REQUIREMENTS OF A SOUND TAX SYSTEM

A basic difficulty that the committee will face in reforming the tax system is to agree on objectives. During these hearings, you will be confronted by a long succession of aggrieved taxpayers who will claim high priority for tax relief. Some of these claims will undoubtedly be justified, but for the most part they will reflect the fact that the present tax system is, in important respects, badly designed from both the economic and equity standpoints. In my view, its deficiencies cannot be remedied by patching here and there. What is needed is a substantial revision and this cannot be done unless there is agreement on fundamentals.

Let me therefore present to you at the outset what I consider to be the major requirements of a sound tax system in the present setting of domestic and world affairs. Obviously, there is room for differences of opinion; but, unless the differences are reconciled at this level, it will be difficult to discuss intelligently any set of specific proposals.

The first requirement of a sound tax system is that it should avoid seriously repressive effects on work, savings, and investment incentives. Our major weapon in the struggle for national survival is a healthy and growing economy. Unlike totalitarian governments, we rely primarily on a system of monetary rewards to provide the incentives for individual initiative and risk taking. When tax rates are so high as to impair or distort these normal incentives, production and growth are bound to suffer.

In its most recent policy statement on taxes, CED expressed this view in the following terms:

The major deficiency of the Federal revenue system is that it pays too little attention to the requirements of an economy that depends primarily on the free choice of private individuals and businesses for production and expansion. To meet the needs of the future, the tax system should encourage individuals to put forth their best efforts in their capacity as producers, and also encourage them to invest their savings in new and risk-taking enterprises. Because the role of the individual is so crucial in our economy, reward for individual initiative is as important as equality of opportunity.

The second requirement is fairness of relative tax burdens. Equity in taxation has two dimensions: (1) Taxes must be fair as among persons in different economic circumstances; (2) they should bear as evenly as possible on persons in the same economic circumstances. The present tax system as it applies to both business and individual taxes is deficient in both of these respects, primarily because the prin

ciple of progression in the individual income tax has been carried to extremes, and excessive reliance has been placed on the corporation income tax.

A moderate degree of rate graduation in the individual income tax is feasible. But once it exceeds reasonable proportions, taxpayers will seek by legal and extra-legal methods to avoid the impact of the high rates. The numerous preferential provisions in our tax laws which the Congress has deemed necessary to enact provide ample evidence that the present nominal rate structure is not sustainable. It would be far better, in the interest of equity, to lower the rates and to remove many of these special provisions.

The third requirement is that the tax system must provide the needed revenues. When we say that money is needed for defense or for education, we mean that it is necessary to divert resources away from the private sector of the economy to the public sector. Taxes are the price we pay for Government services and, since the demand for Government services is high, taxes must be high.

There may be temporary periods of recession during which receipts will fail to match the expenses of Government, but at high employment levels there is little excuse for deficit financing. Such a policy will lead only to inflation, which not only weakens the forces of growth but also distributes the burden much more inequitably than taxes. As CED has pointed out many times, our tax system should provide sufficient revenues to balance the budget or yield a moderate surplus when times are good.

In fiscal year 1957, when the economy was operating at close to capacity, the Federal budget ran a cash surplus of $2.1 billion. This surplus was too small in relation to the restraint that was required to fight inflation and, as a result, a very heavy burden was placed on monetary policy. In order to lighten the load on monetary policy, our budget surplus at high employment should be higher than the $2 billion we were able to accumulate last year.

Although this is not the time and place to discuss overall fiscal policy, I might add a few words about the implications of the CED budget rule under present circumstances. The decline in incomes and employment which began last fall will undoubtedly reduce budget receipts below what they would have been under conditions of growth. In our view, we should try to balance expenditures in any given year with expected receipts at high employment, which we define as employment of 96 percent of the labor force. If actual revenues fall short of these expected receipts at high employment, say in fiscal 1959, we should not try to curtail necessary expenditures merely to produce a balanced budget.

Since congressional review of the President's budget has just gotten under way, it still is too early to predict with certainty what next year's expenditures will be. But, given the magnitude of the budget submitted by the President and the congressional reaction so far, it seems clear that Federal expenditures are going up. It will be necessary, therefore, to maintain tax revenues at present levels.

I realize, of course, that some people are already recommending a tax reduction this year as a means of arresting the current recession. In my view, it is altogether too early to give any serious consideration to such a move.