JANUARY 30 (legislative day, JANUARY 27), 1958.-Ordered to be printed Mr. SPARKMAN, from the Select Committee on Small Business, submitted the following REPORT I. INTRODUCTION A. HISTORY The Federal tax system and its impact on the small-business segment of the American economy has always been considered by your committee to be a significant factor in the economic health of the country. From its inception, your committee has made suggestions and recommendations to correct or modify unfair or discriminatory provisions in our tax laws. In 1952, the Subcommittee on Taxation of the Senate Small Business Committee undertook a study of the effect of Federal taxation on small business. The subcommittee held a series of hearings in seven cities throughout the country and received testimony from 121 witnesses. The full committee unanimously adopted the Taxation Subcommittee's findings and recommendations in its report to the Senate 1 in the 1st session of the 83d Congress. Many of the committee's recommendations were adopted, in whole or in part, in the Revenue Code of 1954. These changes were of benefit to the whole economy— so far as they went. Since that last study, your committee has become increasingly aware that, for various reasons, small business has not been sharing in the general prosperity of the country. First, recommendations of our earlier report not acted upon have, during the intervening years, resulted in more acute problems. Second, certain new provisions of the 1954 Internal Revenue Code have proved to be discriminatory and detrimental to smaller businesses. Third, changed economic circumstances [i e., tight money] have uncovered problems not clearly delineated before this time. For these reasons, your committee deter18. Rept. 442: Tax Problems of Small Business, Senate Small Business Committee, 83d Cong., 1st sess. mined early in 1957 that a complete study of the problems of small concerns relating to Federal taxation was required. B. PURPOSE OF THE STUDY The purpose of these hearings was dual in nature: (1) to discover what, if any, ills of small business were caused or contributed to by the Federal tax system, and, (2) to develop corrective legislation to alleviate the problems found to exist. They were intended to give smallbusiness men across the country an opportunity to diagnose their own ills and join together to help prescribe a cure. The committee set out to recommend adjustment to the tax structure, where discrimination was found to exist. At all times, equal treatment for all business, regardless of the form of organization, has been its prime aim. C. SCOPE OF THE STUDY The study has been limited to an examination of Federal taxationlaw and administration-and its effect on the small-business segment of the economy. Suggestions were made to look into other areas, but your committee determined that a careful investigation, circumscribed in this way, would be most valuable. In the fall of 1957, hearings were conducted in the following 14 cities: Phoenix, Ariz., September 16; Los Angeles, Calif., September 18; Milwaukee, Wis., December 10, 1957. These areas were chosen as representative both in economy and geography. Some 293 witnesses appeared personally before the committee, and another 163 offered written testimony for the record. Persons active in retailing, wholesaling, manufacturing, and service industries appeared. Lawyers, economists, business consultants, bankers, accountants, and other professional men and women acquainted with the matters being investigated also testified. Your committee feels that this combination of practical and professional testimony has been extremely valuable. Many of the witnesses appeared upon invitation of the committee. Persons were invited to testify so that there would be a representative cross section of the business community. In addition, as many people who volunteered were permitted to appear as time allowed. All persons unable to appear personally were invited to submit their views in writing for the record. II. NEEDS OF SMALL BUSINESS At the outset your committee wishes to congratulate the many witnesses who gave testimony-both oral and written in the course of this study. There is little evidence in the record of narrow, unrealistic, or selfish statements. Most of the witnesses expressed their recognition of the Government's continuing tax needs and responsibilities. The opinions and suggestions were made in the light of a responsible understanding of the facts. Many of the statements involved a great deal of study and all took the time of their authors in their preparation. The representatives of small business who testified did not ask for favors. One witness stated the thought in this way: It is the responsibility of the leader of a business to set up an atmosphere that is conducive toward bringing out the best production and personal initiative in his employees. I think that the Federal Government should do the same. America was built on the free-enterprise concept; and I personally feel we can accomplish far more if we'll direct some of our effort toward working together as a team, to create more wealth for the economy, and to make our businesses more successful by attracting additional equity capital. Let's solve this tax problem by a positive, enlightened selfinterest approach." It was said by a witness at the first hearing in Phoenix, Ariz., that any business must "grow or die." This thought echoed throughout the hearings as the basic problem facing small business today: How to acquire equity capital for necessary growth and expansion. Your committee has for some time been cognizant of small-business financing problems. Historically the usual manner of financing growth of new or small concerns was through retention of earnings. During and since World War II, with the high tax rates, this means of financing has become extremely difficult and in many cases impossible. Although this gap in the need for growth capital for small business has long been known, in the past few years the problem has become increasingly acute. The general prosperity after World War II was a time of easy credit and plentiful money, but even during this period small business was unable to fill the need for growth and expansion through borrowing. With money becoming tighter and its cost dearer, the first to feel ill effects is the Nation's small-business man who is low on the credit totem pole. Thus, during the past 2 years borrowed growth funds have not been available at any price for many small businesses. Thus, there was no substitute for the historic supply of growth funds for small business-retained earnings. Many were the witnesses who complained of an inability to keep up with an expanding market simply because of an inability to obtain the necessary funds for plant production or inventory expansion. These people have proved that they can compete with the best that bigger concerns can produce, but, unlike their larger competitors, Hearings: Tax Problems of Small Business, Senate Small Business Committee, 85th Cong., 1st Sess., pt. II, p. 819 (Wayne Field). Ibid., pt. I, p. 25 (Hilliard Brooke). See footnote 1, p. 1. they have not the ability to grow with their expanding markets. There follows the statement of a typical witness: We have not been able to retain enough earnings in the business to hold our place in the industry, in the economy, and among our competitors. This is in spite of the fact that our company has not been able to pay any cash dividends but has paid in income taxes $107,847.47 during the past 9 years and all earnings have been retained in the corporation." Growth is important in real terms and in dollars. Because of the expansion of the economy, one must grow merely to maintain the same relative position. Further, because of the inflation of the past two decades, it takes dollar growth, because of the decreasing value of the individual dollar. Since our tax system is based on dollars and does not account for inflation in other than a limited extent, both of these factors work to require more dollar investment to stand still relative to that market. There is often no choice but "grow or die." This primary need for equity financing, which has become increasingly more acute, has accentuated a need for equality of treatment in the application of the tax structure. Many sections of the tax code and practices of the collectors, which, now more than ever, discriminate against smaller concerns, must be corrected. There is a real need to permit all business the same opportunity under our taxing system. It is generally felt that taxes are a depressant to all business. One witness said: The tax structure sets up blocks in our economy which include the following: 1. Tends to depress incentives. The investor seeks taxfree income (State and municipal government bonds) or income at minimum tax (capital-gain investments; also investments benefiting from depletion, depreciation, or amortization tax deductions). Such maneuvering tends to hold down activity in the economy, thus minimizing taxable revenue. High personal income taxes tend to discourage maximum abilities of individuals. 2. Prevents growth of business through squeeze on working capital and limitations of development of operating facilities. Timely acquisition of facilities to meet changes in processes and materials may be prevented. Tends to prevent elimination of inefficiencies in plant operations in meeting rapid rise of costs. 3. Prevents adequate return to stockholders, particularly where funds are needed for working capital and plant development. 4. Financing through lending institutions can be adversely influenced, thereby further limiting working capital in an endeavor to obtain full use of plant facilities. 5. Maximum employment cannot be obtained in the face of blocks mentioned above. 'Hearings: Tax Problems of Small Business, Senate Small Business Committee, 85th Cong., 1st sess». pt. III, p. 1385 (Herman Williams). LIFO method of pricing inventory provided by sec. 472 of Internal Revenue Code of 1954. |