I would like to stress the amount of income taxpayers simply fail to report:

Changes in the withholding tax laws could certainly affect the collection of dividends from the stock of large corporations and the interest on bonds of large corporations. This particular instance shows great unfairness, because wages and salaries, at least of the small wage earners, are 100 percent subject to withholding and you will note the evasions favor the large taxpayer.

Mr. Chairman, what I am here today to urge is that Congress raise the individual exemptions from $600 to $700 as provided in my bill, H. R. 7065, or to raise the individual exemption to $800 as provided in my bill, H. R. 7066.

The cost to the Federal Government of raising exemptions from $600 to $700 would be $2.8 billion, and an estimated 4.2 million taxpayers would be absolved from tax liability. An increase in the exemption to $800 would reduce revenue by $5.2 billion and relieve an estimated 8.2 million taxpayers from all tax liability. A family of four with an income of $5,000 would receive a tax cut of $80 under the $700 exemption or a tax cut of about 19 percent. The same family would receive a tax cut of about $160 or 38 percent under the $800 exemption.

Certain very substantial savings would be received by the Federal Government in not having to receive and process a tremendous number of small returns, if such a form of tax relief were given.

To compensate for this lost revenue the country would receive a substantial benefit in additional spending by the little people of this country who would have to spend money received by them in the form of tax cuts. This would stimulate the economy in time of real financial difficulty. Specific reforms that I urge upon this committee are many and could result in greater savings and even greater benefits to the average taxpayer than the two proposals I have just mentioned. The first is, of course, better enforcement of our tax laws. About $3 billion is lost through cheating and evasion.

I urge more stringent provisions affecting capital gains. Show men form companies to produce shows with themselves as major stockholders. They may then sell the corporation to a network or other buyer at a substantial gain. The Tax Court has ruled that such an operation netting $2 million need only pay 25 percent capital gains tax, whereas at ordinary rates the tax could have run close to 90 percent. Similar relief was offered to a famous movie producer who got a big cash settlement from his studio when he retired.

I would urge the committee to devote special attention to the expense account problem. A bar association recently took a vacation to London to attend a convention there. As such, this trip came about as a business expense and was tax deductible; certainly not a legitimate business expense. A Pennsylvania dairy owner and his wife went on a safari to Africa. The cost was about $16,800. It was charged to the dairy as a business expense, because movies were taken which were shown to customers to help advertise milk.

Former Revenue Commissioner T. Coleman Andrews cited scores of cases showing how taxpayers evade income taxes by "living off expense accounts." He added, "I make the unqualified statement that if we should be unable to check that sort of thing then our revenue system will break down." Examples of expense account padding for tax purposes included a trip by the president of two corporations to the Kentucky Derby, Florida vacations, and a honeymoon. A Minnesota auto dealer billed his company for $43,000 worth of personal expenses. Included therein was the cost of school tuition for his sons; $8,000 was charged to his business for a daughter's debut by an executive. A steel broker claimed business expenses of $47,946 for "call girls" and "female entertainers" supplied to his guests. An undertaker charged grocery bills to his mortuary. Many highly paid employees no longer care about wages, it is the expense account in which they are interested.

Another collection of tax favoritisms appeared in the 1954 code, which sought to achieve fairness by spreading new "special benefits" in the direction of business and high-bracket taxpayers. The upper income groups got the benefit of the new dividend credit provisions, repeal of which would mean an additional $260 million to the Treasury. Taxes on annuities were reduced and the raising

of the ceiling on deductible contributions from 20 to 30 percent was particularly interesting.

In this regard, clergymen complain that they receive about 50 percent of the charitable contributions claimed in income-tax returns.

The accelerated depreciation allowance made available under the 1954 amend ments is a form of tax favoritism. Shortly after passage of this provision all lawyers in the Detroit area received a circular from a dealer for Cadillac Motor Car Co. explaining how an attorney could own a Cadillac more cheaply than a Ford under this section. The provisions for increase in authorized percentagedepletion allowance and the provision that permitted writeoff of advertising and research expenses was also favoritism for the large corporation and the upper bracket individual taxpayer.

I would like to cite the tax credit given Western Hemisphere trading corporations, a war measure. A mining company which operated in South America threatened to cut off a strategic import because of corporation taxes. This company received a special benefit in reduction of its taxes from 52 percent to 38 percent. The amendment as drawn was so loose that all United States companies doing export business with Latin America came in under the provision thereof, and the result has been a cost of hundreds of millions of dollars to the taxpayer over the years.

Recently, the President's Commission on Foreign Trade Policy recommended that the same preference be given to all United States firms doing business in the world. Again, American taxpayers are called upon to pay for stimulating private investment in underdeveloped countries.

Other loopholes that this committee might look into are Canadian investmentfund provisions, the provision for multiple trusts and the so-called in-oil payments.

I urge repeal of the so-called Singer Sewing Machine provision, which permits United States companies doing business abroad to spread credits they received for taxes paid to foreign governments over an 8-year period resulted in savings to Singer and other companies of about $5 million in taxes for each year.

I also respectfully urge the committee to pass a provision similar to the bill which I offered last January, which would amend the corporate income tax laws to reduce the normal rate of tax from 30 percent to 22 percent and to raise the surtax from 22 percent to 32 percent, and to raise the surtax exemption from $25,000 to $50,000. This would result in a substantial benefit to small corporations. Tax relief will be received in varying amounts by almost all corporations earning under $525,000 a year. Reductions of about 26.7 percent will go to corporations earning less than $75,000 a year. The loss to the Treasury would be small, on the order of $150 million a year.

This last proposal would help overcome the problem that small business has faced in its competition with the giants of the industry. Small businesses will be better able to finance their expansion from their profits, where large firms can either secure money for expansion by plowback of retained earnings or by securing capital from loans from banks and insurance companies.

Unless Congress acts to protect the little fellow, both individual and corporate, George Humphrey's prediction of a hair-curling depression may very well become a frightening reality. I strongly urge this committee to report legislation including the provisions I have recommended today to act as a strong stimulus for business without loss of valuable revenue to the Federal Government in a time when we need money for rockets, missiles, and defense.

Mr. DINGELL. Mr. Chairman, I believe each and every member of this committee is very much concerned, as I am, with the general state of the economy today. Economists have told us that our present rate of growth from 1953 to 1957 has been about 22 percent a year. The same economists tell us that our economy must grow at the rate of about 3 percent a year to provide food, fiber, opportunity and jobs for our people, and for each new group of births which come in the course of the year. Each year, we add about a million new citizens to our population.

At the present time, I am informed by no less an authority than the Secretary of Labor that the unemployed are about 4 million. This is the official figure, and in point of fact does not really reflect the real unemployment, which is probably at least a million higher.

In my own city of Detroit, unemployment is on the order of 130,000 people, over 8 percent of the work force. The State of Michigan has probably 200,000 or more unemployed, about 7 percent of the workers are out of work. Forty-five major cities in the United States have a similar situation.

Mr. Chairman, I was particularly interested awhile back to see an article appear in the U. S. News & World Report entitled, "The Story of 267 American Millionaires." I have heard a great deal of comment by certain groups in this country that the income tax is unduly burdensome to those in the higher brackets, yet the U. S. News & World Report, which is calculated to be read and to be read with favor by people in that economic bracket, said that the average American millionaire pays only about 50 percent of his income in taxes, as contrasted to the 91 percent that he is supposed to pay.

The reason for this, Mr. Chairman, is the tremendous number of favoritisms for the upper brackets which have been written into the law during the last few years. I know that the Chair and many of the members of the committee feel as I do, that income taxation should be on the basis of the ability to pay. It should not be on the basis of special interests and favoritism.

Specifically, Mr. Chairman, I respectfully urge today that the committee should consider favorably my bill, H. R. 7065, which would raise the individual exemption from $600 to $700, and my bill H. R. 7066, which would raise the individual exemption to $800.

I do not urge this committee merely to report out those two pieces. of legislation without doing something to compensate for the loss of revenue which would result from such an action. But I do have some specific recommendations for recouping revenue.

The first of these is more strict and stringent enforcement of existing tax laws.

that 262 billion, estiThe recipients of this Another expert esti

I was very interested the other day to see mated, did not even show up on 1956 returns. money either forgot it or failed to report it. mated that tax evasion is supposed to run at a rate of 10 percent of all reported income.

I was further interested to see that, as shown in the little table appearing on page 2 of my statement, taxpayers simply fail to report 5 percent from wages and salaries; 13 to 25 percent from dividends; 55 percent of rental income; and farm income, 612 percent.

Mr. MASON. May I ask the chairman where those figures come from? Mr. DINGELL. I got them from an article by Mr. Jack Steel, who was quoting a Mr. Pechman, who is supposed to be one of the outstanding students of this particular field of American taxation. Mr. MASON. Not in my book.

The CHAIRMAN. Is that Joseph A. Pechman that you are talking about?

Mr. DINGELL. Yes, sir.

I am sure Mr. Mason will understand that there is room for honest difference of opinion here.

Mr. MASON. That is right.

Mr. DINGELL. The cost of raising exemptions to $700 a taxpayer would be $2.8 billion, and about 4.2 million taxpayers would be removed from the rolls. The increase in exemption to $800 would result in

about $5.2 billion loss and an estimated 8.2 million taxpayers would be absolved from tax liability.

This would tend to restore very substantially the graduation which existed in the income tax, Mr. Chairman, particularly when certain of what I call tax favoritisms are removed, the first of which is the so-called accelerated depreciation, which was incorporated in the 1954 amendments.

Mr. Chairman, I found that right after that particular provision was passed, I received a notice, along with all other members of the bar in the city of Detroit, advising me that I could now own a Cadillac automobile more cheaply than I could own a Ford automobile, by reason of the passage of this specific tax favoritism.

I would urge on the committee very strongly that the expense account features of the law receive very careful scrutiny. A tremendous number of abuses have sprung up in this particular field.

I would also urge, and very strongly urge, repeal of the dividend credit, so-called, for which I feel there is absolutely no justification, either in law or in good morals.

I would also cite to the committee the loopholes which have been written into the law, including the Western Hemisphere trading corporations provision, which permits corporations trading in the Western Hemisphere to receive special treatment in the form of a tax of 38 percent on the corporation instead of 52 percent.

The Singer Sewing Machine provision is another, which permits United States companies doing business abroad to spread credits which they receive from the taxes paid foreign governments over an 8-year period, instead of paying them yearly, which results in about $5 million in taxes, special benefit for each and every one of these corporations.

Mr. Chairman, I also have cited in my statement to the committee a number of other provisions which I feel could use the scrutiny of this committee.

With that, Mr. Chairman, I would like to thank the Chair and each and every member of the committee for this opportunity to appear before you this morning.

The CHAIRMAN. Mr. Dingell, we appreciate your coming to the committee and discussing with us those of your bills which are pending before the committee. We thank you very much, sir, for giving us the benefit of your views on them.

Are there any questions of Mr. Dingell?

Mr. EBERHARTER. I would just like to say that I agree with many of the views that he expressed here this morning.

Mr. DINGELL. Thank you, Mr. Eberharter.

The CHAIRMAN. Thank you, sir.

Mr. DINGELL. Thank you, Mr. Chairman and members of the committee.

The CHAIRMAN. Our next witness is Mr. Walter T. Cardwell. Mr. Cardwell, will you identify yourself for the record by giving your name, address, and the capacity in which you appear.

STATEMENT OF WALTER T. CARDWELL, CHAIRMAN, SPECIAL COMMITTEE ON FEDERAL TAXATION, COMMERCE & INDUSTRY ASSOCIATION OF NEW YORK, NEW YORK, N. Y.

Mr. CARDWELL. My name is Walter T. Cardwell. I am head of the tax department of S. D. Leidesdorf & Co., certified public accountants. I am chairman of the special committee on Federal taxation of the Commerce and Industry Association of New York, and I am appearing today as a representative of the association.

The CHAIRMAN. Mr. Cardwell, would it be possible for you to complete your statement in the 20 minutes that we have allotted to you, sir?

Mr. CARDWELL. Yes, sir, I will have to.

The CHAIRMAN. Without objection, your entire statement and the appendixes will be included in the record, if that will facilitate

matters.

Mr. CARDWELL. I assume the committee members have noticed what we have submitted here.

(The statement and appendixes referred to are as follows.)

STATEMENT OF WALTER T. CARDWELL, CHAIRMAN, SPECIAL COMMITTEE ON FEDERAL TAXATION, Commerce and INDUSTRY ASSOCIATION OF NEW YORK, INC.

My name is Walter T. Cardwell. I am head of the tax department of S. D. Leidesdorf & Co., certified public accountants. I am chairman of the special committee on Federal taxation of Commerce and Industry Association of New York, Inc., and am appearing today as a representative of the association. Commerce and Industry Association is a chamber of commerce having over 3,500 members including all levels of business activity from the small business to the largest. Our special committee on Federal taxation periodically studies and reviews the Internal Revenue Code and proposals for its amendments. We are pleased to have this opportunity to present our thoughts and recommendations concerning the code and sincerely urge your favorable consideration of them.

Last year our association, through its committee, reviewed subchapter C and made a number of recommendations to the Ways and Means Committee and to the Joint Committee on Internal Revenue Taxation. When the advisory group on subchapter C was appointed the recommendations of the association were submitted to it.

The association's tax committee has made a hurried review of the recommendations of the advisory group in the limited time available since December 24, 1957, date of release of its report. In the opinion of the association the short period of time since the release of the report is wholly insufficient for anyone to make an adequate study of the recommended changes and of their effects. Even persons who can devote all of the working hours of the day exclusively to such a study could not complete it in so short a period. The association deplores hasty action taken in connection with matters of such importance to the Nation and recalls its urgent plea to your committee and to the Senate Finance Committee when subchapter C of the 1954 code was in the process of being enacted, that action be deferred to permit time for adequate study of the proposed changes. The subchapter C amendments were released late in the deliberations of the Ways and Means Committee at the time of enactment of the 1954 code and no one, neither the Ways and Means Committee, the Finance Committee, nor the public had adequate time for their study. The report of the Ways and Means Committee accompanying H. R. 8300 (the 1954 code) makes the following statement on page B 19 with respect to subchapter C:

"Due to the complexity of this subject, time has not permitted us to more than analyze these sections on their surface. The comments which we make below appear to us to be well taken. Any legislative changes in this field should be made with caution and with full understanding of their implications. We doubt that anyone can claim that such consideration has been given to this subject."