basic underlying problem is the present Federal tax system which is steadily slowing up our economy by drying up venture capital that we need for growth.

Additional working capital can come from only two sources: (1) Savings, whether the savings be those of individuals or retained earnings, or (2) new capital.

Most stockholders of Minnesota are reluctant to seek new capital even if they can find it. Most of them invested dollars of the 1920's, the 1930's, or the 1940's in their businesses. They are not usually interested in bringing in 1958 dollars. They went without dividends in many instances for many years. They naturally want to profit by the investments they have made in the past. It can only be accomplished by a tax system which will permit it.

Then if there are inadequate savings and yet a decision to seek new capital, we find them turning to bank credit. It is obvious to all that when bank credit is used instead of savings that inflation results. With inflation have come restrictions on bank credit to hold inflation down. So the economy is again slowed. And as production is slowed, not only is business hurt, but the people who work for business are hurt even more for it is they who gain the most from greater production, more jobs, and increased living standards. And the Nation as a whole loses strength on all fronts-economic, scientific, and military. In Minnesota a great shift of population has been going on since the Second World War period, and in recent years the shift has been accelerating. New hybrid seeds, new fertilizers, new farm machinery, new developments by our scientists in our agricultural colleges and new techniques in farming have resulted in a situation where the farmers themselves are plowing under about every fourth farmer. Farms are getting bigger and are being operated more productively with fewer and fewer people. Population of the cities is growing tremendously as young people, and many older people, leave the farms and select the cities for their future. Very close to half of the entire population of the State now live in Minneapolis and St. Paul and the seven counties of which they are a part, or contiguous to.

The nonfarm job opportunities have not been sufficiently large to absorb all surplus labor in Minnesota and the situation has already become difficult, and will become acute unless something can be done to improve the availability of risk capital for Minnesota's industries, particularly the small ones, thus enabling them to carry out expansion

programs.

The principal limiting factor in Minnesota today that is curbing industrial expansion in the nonagricultural industries has been the lack of adequate savings--both on an individual and a corporate basis.

We believe that the job of income tax reform is too big for piecemeal, year to year action. Enactment of a long-range plan for income tax reform makes just as much sense as long-range spending authority for military weapons.

Small and medium sized companies are simply not going to be able to create the new jobs needed for our growing population with 52 cents out of every profit dollar going to Washington. The incentive just isn't there. If the business loses money, the owners lose their investment. If it makes money, 52 cents of every profit dollar goes to Washington, and 7.3 cents goes to St. Paul. There simply is not enough opportunity to secure retained earnings or savings for ade

quate growth. Many companies find it impossible to even replace machinery and equipment with the inflation and increased cost that occur between the purchase and replacement period.

Piecemeal corrective tax legislation to rectify these situations is not the answer. A patchwork to aid special groups evades basic principles. Industry and business are indivisible. It cannot be divided into small and large. What is large in one business is small in another. Special aid for one group as opposed to another is not only unfair it won't solve the problem. Under free enterprise business is a team operation. If so-called big business expands, thousands of smaller employers whether they be suppliers or sellers likewise profit. And if a medium-sized business expands, every retailer on the street benefits. And if small business grows, all the economy in the area gains. It is a team effort.

Risk capital usually supplied by individuals built Minnesota industry, mining, forestry and all other business. Men willing to risk their savings on an idea were able to do so under a system where tax laws did not take away so much that there was little opportunity to gain if they were successful. That is what built the industries of Minnesota that now give employment to hundreds of thousands of men and women.

It is many years since we in Minnesota have seen an instance of a company growing from humble beginnings to stature as one of our leading industrial establishments. We have had a few who started 20 or 25 years ago but those were companies who received initial support from people of their day who still had some substantial private money to invest.

To us, H. R. 6452 (commonly called the Sadlak-Herlong bill) which is now before your committee, comes as close to a practical and realistic means of accomplishing tax reform to all business, large, medium and small, and to individuals, wealthy, middle class or poor, as we have seen develop in all the years this tax problem has harassed our economy.

Undoubtedly it is not perfect-it is not a complete cure-all for all of the inequities which may exist. But it appears to be a fair, fundamental approach to the problem.

In the first place, it is a program of gradual tax reduction. It would not disrupt the economy or the flow of revenue to the Government. Neither would it shift the tax burden from one class of taxpayers to another as would many well-meant but inadequate bills now before your committee.

This tax plan would provide lasting tax relief to all businesses and to all individuals on a gradual, planed, and fair basis. Also, and important for reasons with which the committee needs no explanation, the bill provides for postponement of its provisions in case of national emergency;

We understand that there have been efforts to divert attention from the crippling rates of progressive income tax that exist under our present system, to which small-business men and other individual taxpayers are subjected by use of a statistical device or theory which produces what is called an effective rate of tax.

This device is based on an apparently presumptuous allegation that various deductions, exemptions, and credits to which taxpayers are now legally entitled are in conflict with common justice, and that the

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real measure of an income taxpayer's burden is the relation of his total tax to his total income without regard to such deductions, exemptions, and credits.

This approach fails to distinguish between normal income and what is known as capital gains. As every property owner who has sold property for a higher price than he paid for it knows, the money from his sale does not put him in position to buy property in excess of the value of that which he sold. To the contrary, his ability to buy new property is diminished by the amount of the capital gains tax which he must pay on the gain from his sale. Thus, it is not correct to consider such a gain as an addition to a person's income.

However, in placing emphasis on so-called effective rates, those who advocate steeply progressive rates of income tax always include capital gains which are taxed at the maximum rate of 25 percent-with income taxed at various rates up to 91 percent.

To make this matter more specific, it has been testified before this committee that the effective rate of tax for the relatively few people in the over $1 million group is only 53 percent. Actually, the correct figure is 75 percent when capital gains-which are not income-are eliminated from the figures. Both the 53 percent and the 75 percent are derived from data in the same official document, Statistics of Income, compiled by the Treasury Department.

The use of alleged effective rates of tax, as a statistical device, is of course intended to camouflage the crippling effect which steeply rising rates of income tax have on work incentives, and in decisions of unincorporated businesses as to whether it is worthwhile to invest more money in order to make more income. It is clear that every such decision is made on the basis of the taxpayer's top rate of tax, that is, the rate of tax which he would pay on earnings from additional effort or investment.

Underlying this approach is the obvious design to keep American citizens generally from understanding that steeply progressive rates of income tax through the middle and higher brackets are completely inconsistent with the moral and economic aspects of human effort. It is inherent in the philosophy of nonsocialist, free America that a man who works harder and abler is entitled to the rewards of his extra effort or ability. On what basis, therefore, can it be justly claimed that such individuals should then be penalized by their government by paying increasingly high rates on their extra earnings?

This matter is of special importance to the small-business men of Minnesota, whether they be in farming, in retailing, manufacturing or other activity. It is obvious that the Federal tax system which would suit them the best is one which spreads the tax burden fairly without exacting excessive penalties for their enterprise and willingness to run the hazards of self-employment instead of working on someone else's payroll. The same observation applies to scientific and professional people of every description who engage in private practice.

There is another phase of these charges of loopholes by which it is alleged that some taxpayers evade their fair tax burden that we want to comment upon quite bluntly.

All of the major provisions involved have of course been arrived at after open hearings before your committee in which consideration of all the economic and accounting factors were involved. To us

out here it seems like a reflection on the integrity of your committee to have witnesses appear before you charging what amounts to a breach of good faith with the American public in the enactment of such provisions.

There is every reason why such provisions should be reviewed by your committee from time to time, and in many cases it is conceivable that the committee would find reasons to modify existing law. However, it is obvious that witnesses stressing loopholes are not so much interested in changing present law as they are in diverting attention from the urgent need for thoroughgoing reform of the income tax rate structure.

The unreasonableness of the general allegation is best illustrated by the inclusion in the provisions listed of income splitting, which accounts for a very large proportion of the revenue which it is claimed is lost from so-called loopholes.

Income splitting was adopted overwhelmingly by the Congress in 1948 as a means for equalizing the situation between States following the common law and those following the community property concept of property ownership.

In the latter States, income of husband and wife is automatically divided equally and hence is subject to tax rates applying to the two halves instead of to the total. The income-splitting provision provides the same opportunity for married people in non-communityproperty States to split their incomes in order to enjoy the advantage of paying the lower tax rates which apply to divided instead of total income. What is it that people who go around screaming loopholes have against marriage? We approve of it highly in Minnesota.

Allegations in regard to split income, moreover, always emphasize the assumed advantage given to upper income married couples. Actually, the greater advantage under split income does accrue to people in the middle-income brackets, which conspicuously include the smallbusiness man, self-employed professionals and a high percentage of employed people in a State like Minnesota. It would appear that the effort to undermine the split-income provisions is part of an overall design to tax the middle class to a point where we no longer would have middle-class people in America.

Then there are those who advocate an increase in exemptions. They usually base their case on inflation since the last increase in 1948. This thinking disregards the facts that since 1948 Federal expenditures have increased over 110 percent, wages and salaries by over 70 percent, personal income about 60 percent, although the cost of living has gone up only about 17 percent.

These facts must be considered with what we are sure is well known to your committee; namely, that in view of the terrific cost of government, the base of the individual income tax is now too narrow. Principally due to normal exemptions and credits, the tax rates actually apply to only about 40 percent of all personal income. Taking a family of 4, for example, exemptions and credits remove 80 percent of a $3,000 income from the tax base. In a higher bracket, say $25,000, only about 10 percent is removed from the tax base.

An increase in exemptions would not only substantially narrow the base of the income tax by taking millions of taxpayers off the rolls, but also would diminish the amount of income of remaining taxpayers which is subject to tax. This therefore would mean that all income

tax payers would be subject to higher rates of tax than would otherwise by necessary.

Actually, an increase in exemptions is not an equitable method of handing out tax relief, even as among low-income taxpayers.

The present exemptions provide protection to the point of payment of no tax in many cases for families with several children or other dependents whose incomes are in the lower ranges.

The amount of protection is not great for single persons, or even for young couples who would like to build up some savings before beginning to raise a family.

The point is that the greatest relief from increase in exemptions would go to people where the burden of the present tax is relatively light.

In contrast, outright rate reduction such as embodied in H. R. 6452 (the Sadlak-Herlong bill) would spread relief in relation to the present burden of all taxpayers.

Finally comes the question of when this staggering tax burden is to be reduced is important. We have read in the newspapers statements to the effect that if economic conditions get much worse, tax relief must be granted.

Why must we wait until we have a corpse on our hands before we try to revive it?

If the approach to the problem is correct-that of outright rate reduction to all taxpayers, corporate and individual, regardless of total net income with the belief that the economy will thereby grow rapidly and more income will come to the Federal Government and all industry and science will progress more rapidly-and all our citizens share in the growth-and we do believe this then there can be only one time to put it in effect-and that is at this session of Congress. Thank you for your consideration of this statement.

The CHAIRMAN. Is Mr. Harry W. Wolkstein in the room? (No response.)

The CHAIRMAN. Without objection, Mr. Wolkstein's statement will be placed in the record at this point.

(Statement of Mr. Harry W. Wolkstein follows)

STATEMENT ON THE SUBJECT OF INDUSTRIAL DEVELOPMENT REVENUE BONDS BY HARRY W. WOLKSTEIN, CERTIFIED PUBLIC ACCOUNtant and TAX PRACTITIONER OF NEWARK, N. J.

Mr. Chairman and members of the House Committee on Ways and Means, my name is Harry W. Wolkstein. I am a practicing certified public accountant of New Jersey and New York. I am the senior member of Harry W. Wolkstein & Co., a firm of certified public accountants having its main office in Newark, N. J. It is apparent from the conduct of this hearing that this committee is concerned with the equitable distribution of our tax burden and also with ascertaining the extent to which certain incomes may now be escaping income taxation, whereas they should be properly subjected to taxation under existing statutes and regulations.

My statement is largely devoted to the subjects of industrial development revenue bonds and authority bonds, as well as the tax-avoidance plans that are being used under which certain municipal and State governments are subsidizing private competitive industry with a resulting loss of revenue unto other mu nicipal, States, and Federal Governments.

On August 6, 1953, I appeared before your committee and made a statement on Topic 33: The Determination of Taxable Income Inclusions and Exclusions during your hearings on 40 topics pertaining to the general revision of the Internal Revenue Code. As a result of the hearings, this committee recommended and the House adopted section 274 of H. R. 8300.