income tax in fiscal 1954 dropped only $600 million. There was further relief to individuals at the beginning of fiscal 1955 through provisions in the Internal Revenue Code of 1954.

The amount of relief was estimated at about $700 million for the 1955 fiscal year and revenues fell off just about that amount to $28.7 billion. Thereafter, however, revenues from the individual income tax rose rapidly to $32.2 billion in 1956 and $35.6 billion in 1957. A further rise is expected in the present fiscal year.

After the expiration of the excess profits tax and the adjustments in the corporate-tax structure provided in the 1954 tax revisions, receipts from corporate taxes fell off over $3 billion to $18.3 billion in fiscal 1955. But in fiscal 1956 corporate income-tax receipts rose by $3 billion and there was a further increase of over $200 million in fiscal 1957.

The record of tax reductions and subsequent revenue growth in Canada is similar to that in the United States, except that it is more striking because of the frequency of the tax cuts made since the end of World War II. In each of the 5 fiscal years 1945-46 through 1949-50 taxes were reduced with 4 of the reductions being over 10 percent. Nevertheless, revenues remained at a remarkably stable level with only modest variations from year to year.

Two Korean war tax increases raised Canada's revenues to a $4 billion level in the 1952-53 fiscal year. Since that year there have been 2 tax cuts of 5 percent or more and some lesser cuts. The aggregate reductions total $894 million during the 5 years since 1952-53 but revenues have risen from $4 billion to an estimated $4.8 billion in the current year.

The point we wish to make here is not that reducing tax rates automatically assures an increase in revenue. We fully recognize that revenue increases at fixed tax rates are dependent on economic growth and/or inflation. But we are firmly convinced that tax reductions of the right kind do have a profound effect on sustaining economic growth. Moreover, they are particularly helpful in stimulating the economy during a period such as the present when business activity is slowing down.

We believe strongly that the tax reductions of January 1, 1954, and the tax revision of 1954 helped materially in turning around the recession which started in the fall of 1953 and ended in the summer of 1954. We are equally convinced that tax rate reductions at this time would have a similar effect on the current recession.

With this background I now offer for your consideration our specific proposals on income-tax rate adjustments for 1958.

The sharp progression in present tax rates on individual incomes is costly to the economy through its adverse effects on incentives and on capital formation. Yet the progressive element in the rates is a poor source of revenue. The 20-percent base rate on all taxable income produces well over 80 percent of the revenue from the individual income tax. Only the remaining 16-18 percent is obtained from the progressive portion of the total rate which now ranges up to 91 percent. The present progression so rapidly approaches complete confiscation that if the Federal Government took all of every individual taxable income above $26,000 a year, it would add only about 112 percent to its present total tax revenues.

In order to secure the greatest possible popular participation in the cost of Government, consistent with equity, a policy of low exemptions should be continued. Accordingly, we recommend against any change in present exemptions.

The progressive rates should be lowered with the objective a few years hence being a maximum tax rate of 50 percent or less. We recommend that a start toward this objective be made in the current year by a revision in the present rates, setting the maximum rate at 82 percent and the minimum at 19 percent with appropriate adjustments in the intervening surtax bracket rates. We further recommend that similar rate reductions be effected annually until the top rate has been reduced to 50 percent or less.

This reform, in our view, would help to recreate individual incentives which are being discouraged by continued excessive surtax rates. Also, the cumulative effect of the long continued high progressive Federal tax rates on individuals has contributed to the difficulties encountered by many concerns in obtaining equity capital. Shortages of equity capital can be alleviated by reduction of these high progressive rates. This would be of particular benefit to small and newly starting businesses, for it would minimize the necessity of borrowing funds for capital purposes. In fact, we know of no better way to relieve the tax problems of small businesses, nor to stimulate what appears to be a lagging economy.

We believe that the present tax rates on incomes of corporations are conducive to inefficiency and are detrimental to the achievement of maximum production and employment. They restrict the ability of many corporations to pay the current dividends demanded to attract investments by shareholders, to reserve the funds needed for paying dividends in years of low income or losses, and to finance greater production and employment. They also place a heavy burden on equity capital and invite borrowing, with its attendant strains on the financial structure.

The tax rate on corporate income should be reduced to the preKorean level at the earliest possible date. As a start toward that end, we recommend that the combined normal and surtax rate be reduced at least to 50 percent on July 1, 1958, the date on which the combined rate is scheduled to go down to 47 percent under present law.

I have called these recommendations a consensus of the organizations for which I speak. Some of them have particular views which differ slightly but not materially. Arkansas, Maine, Indiana, Florida, Connecticut, and Virginia endorse specifically the Sadlak-Herlong bills, and four of these have, I believe, given testimony or filed statement to that effect. Pennsylvania has testified and Kansas has filed a statement. All of these, however, have joined in approval of the testimony which I have given. Ohio, for which I am also commissioned to speak, has adopted a resolution substantially as follows:

That such reduction be affected by reducing the rate of income tax presently levied against the lowest bracket of the income-tax schedule rather than any increase in personal exemptions or credits.

That similar consideration should be given to the reduction of the rates above the first bracket, including a reduction of the maximum rate.

That there should be no amendment of the existing Federal law relative to the rates of corporate income taxation.

In addition to this oral presentation on income-tax rates, I would like to submit for the record our views on some other matters which

come within the scope of these hearings. These views have been incorporated in a policy statement entitled "A Program on Federal Spending and Taxation" which has been endorsed in whole or in major part by all but 1 (Mississippi) of the 29 member State and regional chambers of commerce in the council. We submit them at this time with the thought that present provisions on some of the matters we cover may be considered by your committee with a view to revision this year.

Excerpts from this policy statement follow:

The administration and Congress are to be commended for alleviating somewhat the double taxation of dividends by the 1954 legislation. But the small relief granted still leaves an onerous amount of double taxation.

The inequalities arising in the double taxation of dividends, first as corporate and later as individual income, should be alleviated to lessen the present discrimination against the income from equity capital and to encourage the assumption of business risks by those with available funds. Latest Treasury statistics show that almost half of the recipients of dividends have incomes under $6,000. No other type of income is exposed to double taxation, and there is no sound economic reason for penalizing dividend income, in comparison with interest on loans, wages, salaries, and other income, in this manner.

After computing the taxes on their incomes, including taxable dividends received from domestic corporations subject to the income tax, shareholders should be allowed to deduct from their taxes a credit for the payment of corporate taxes on the income paid out in dividends. The percentage allowed as a credit presumably would be at least the initial rate for individual incomes. The complications of refunds could be avoided by providing that the credit allowed should not in any case exceed the total tax liability.

The proposed method of alleviating double taxation applies the principle recognized in Federal income taxation before 1936, when the undistributed-profits tax was adopted. Up to that time, dividends were partially exempt from the individual income tax. The remedy for double taxation suggested here is supported widely by businessmen and tax authorities.

The attainment of an expanding economy requires an ever-increas ing flow of venture capital into jobmaking enterprises. Individuals should be encouraged to invest their savings in productive private enterprises by lowering the taxes on their incomes, alleviating the double taxation of dividends, and treating capital gains more favorably. The tax rates on long-term capital gains should be reduced, and, eventually this tax should be eliminated.

Capital gains and losses, whether short or long term, should be offset against each other.

The deduction of capital losses, in the interests of equity, should be allowed on the same basis that capital gains are taxed.

The Kansas State chamber would substitute the following for the last paragraph:

The deduction of capital losses, in the interests of equity and to encourage venture capital, should be allowed in full against ordinary income as well as capital gains.

Business management can best determine the propriety of a particular method of depreciation and obsolescence in any given case. "With

in the limits of sound and consistent accounting, business management should be allowed to exercise its discretion in the choice of the method and the rates of depreciation and obsolescence. This privilege should be granted by a legislative clarification and liberalization of the depreciation policy, over and beyond the commendable improvements introduced in 1954, for the guidance of the Bureau of Internal Revenue and the taxpayers.

A wider latitude in the allowance of depreciation and obsolescence would encourage the developoment of new enterprises, the promotion of new products, and the expansion of production and employment. It also would eliminate much needless and costly bickering over tax liabilities and many inequalities arising from administrative practices. Little revenue results from including 15 percent of intercorporate dividends in taxable corporate income and imposing a penalty tax of 2 percent on consolidated returns. These discriminatory devices should be abandoned. Corporations should have the option of filing consolidated returns without paying a tax penalty. Such returns usually present the most accurate statement of the income of a corporate group.

Most small enterprises are unincorporated, and both the individual and the corporate income-tax rates must be lowered if small enterprises are to be organized and prosper. No feature of this tax program has been more intensively studied. In fact, our whole program has been formulated with the needs of small, as well as medium and large, business in mind.

The principle of lower tax rates for small-income corporations is recognized in the law. It would be preferable, instead of imposing graduated rates on corporate income, to tax all corporations in a nondiscriminatory manner at a flat, moderate rate. This desirable reform may be accomplished by substantial and continuing reductions of corporation taxes as fast as revenue requirements will permit.

Other features of the tax program recommended here will benefit small business. Unincorporated enterprises, as well as corporations, will benefit from more reasonable allowances for depreciation, and the reforms advocated in taxing capital gains, estates, and gifts.

The reductions proposed in the rates of the individual income tax also will encourage the growth of small proprietorships and partnerships, which are now highly important elements in the competitive

economy.

The problems of small business have received so much attention because it is desired to encourage the creation and expansion of small concerns as a means of preserving a competitive system of free enterprise. The greatest possible contribution of small enterprises to production and employment is required if the Nation's economic goals are to be realized.

The Kansas State chamber does not agree with the second paragraph under this topic, which calls for the taxing of all corporate income at a flat, moderate rate eventually.

In recent years the rate of the Federal estate and gift taxes have been carried to excessive heights with relatively little revenue obtained. The purpose of these taxes is largely regulatory rather than revenue-producing, and they should be abandoned. As a start toward getting the Federal Government out of the estate-tax field, the maxi

mum rate should be reduced to not more than 50 percent with corresponding reductions in all other rates. The gift-tax rates should not exceed three-fourths of the estate-tax rates. By appropriate technical amendments, the estate and gift taxes should be made consistent with the Federal income tax to the end that the duplicate taxation which now exists may be eliminated. Proposals for the integration of the estate and gift taxes should be rejected.

The Georgia State chamber feels that complete Federal withdrawal from this source of revenue would create inequities and competition among the States. It does approve allocating a greater share of the overall estate and gift taxes to the States.

All organizations engaging in business in competition with private enterprises should be taxed similarly with such enterprises. The exemption from Federal taxation of Government-financed enterprises, cooperatives, and other so-called non-profit organizations that engage in various production, commercial, financial, and other business activities in competition with private concerns is not only unfair but, also, in this era of high Federal taxation, places heavy handicaps on the private-enterprise system. Moreover, it denies to the Government additional sources of revenue.

We believe that consumers are entitled to purchase from the sources that most efficiently fill their needs at the lowest prices. But consumers cannot obtain the benefits of free and fair competition among the different types of business if the Government, instead of acting as a referee to make sure that the rules of fair competition are observed, exempts some of the competitors from taxation or extends special favors to them and compels other competitors to operate at a heavy tax disadvantage.

We are not opposed to true cooperation by farmers, consumers, or other groups but we do oppose the resort to tax-exempt forms of business organization and the enjoyment by such groups of special tax advantages for the purpose of avoiding the taxes that must be paid by competing private enterprises. The tax preferentials given to certain types of business must be recognized as a subsidy to the undertakings benefiting from them. If it is our purpose to drive private enterprises out of existence, no surer way can be found than by taxing them heavily while relieving their competitors from similar responsibilities. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you for coming to the committee and giving us your views.

Are there any questions of Mr. Laylin?

If there are no questions, we thank you very much, Mr. Laylin. (The following letter was received by the committee:)

COLORADO STATE CHAMBER OF COMMERCE,

Denver, Colo., February 14, 1958.

Mr. WILBUR D. MILLS,

House Ways and Means Committee,

New House Office Building, Washington, D. C.

DEAR MR. MILLS: We should like to have placed on the record of the hearings of the House Ways and Means Committee, the name of the Colorado State Chamber of Commerce in support of the testimony presented by Mr. Clarence D. Laylin, of Columbus, Ohio, on behalf of the Council of State Chambers, as of February 7.

Respectfully yours,

HOWARD N. YATES, Executive Vice President.