HOUSE WAYS AND MEANS COMMITTEE,

APPLETON, Wis., January 18, 1958.

Washington, D. C.

GENTLEMEN: I understand that your committee is now holding public hearings on general taxation, and as I have some suggestions for raising money by additional taxes (which in my opinion should have been imposed long ago) I decided to write your committee and outline them in detail.

My first suggestion is to put a tax on all soft drinks, and the amount of this tax, in my opinion, should be patterned closely after the present tax on beer, and if the sales of soft drinks are any criterion, it would appear to me that this tax should raise many hundreds of million of dollars of additional revenue. A tax on soft drinks I realize has always been a "sacred cow" as far as both the Democratic and Republican administrations are concerned. This tax was first suggested during the second Roosevelt administration, but for reasons known to some of the older members of your committee, it was dropped very suddenly, and has never been brought up since.

Soft drinks, as we all know, are not a necessity to life, and are therefore in the category of luxuries. If anyone objects to paying the tax, all they have to do it to stop using them, and as is the case with cigarettes and other nonessential items that are presently taxed, life would go on as far as they are concerned, as usual. It would, therefore, be a tax that would have no appreciable effect on the economy of the country, and would affect only the manufacturers and consumers of soft drinks. Since however the manufacturers of beer have been taxed heavily for years and have managed to survive, it shouldn't be much of a hardship for the soft-drink manufacturers to absorb this tax, which as I said before, is a tax on a luxury drink that is not essential to our well-being. My second suggestion covers a change in the Government's method of handling the taxation on dividends. My idea regarding this has stemmed from my own experience with securities I hold in companies in Canada. No doubt your committee is entirely familiar with the fact that the Canadian Government has a law which requires all companies to deduct 15 percent from every dividend check sent to domestic and foreign security holders, and as corroboration of this statement I am attaching hereto for the committee's use some dividend slips received by me from the Mexican Light & Power Co. on which you will note the 15 percent deduction is made from each and every dividend check mailed me.

When I was in New York to attend a railroad directors' meeting in December 1957 I discussed this Canadian tax with a prominent attorney from Toronto, Canada, and he told me that this tax had been in force in Canada for years, and that as far as he knew, there has been very little opposition to it from Canadian security holders, particularly, because it plugged the leak that all Governments experience from investors, who do not report all or any of their dividends in their income-tax reports, and also it enables the Canadian Government to tax dividends going out of Canada to foreign holders of securities.

As far as the United States is concerned, the papers have been full of accounts for years of American citizens who have moved to Puerto Rico, Cuba, Mexico, Switzerland, and other foreign countries, to get out of paying taxes on dividends on American stocks they own, and this tax would not only recover some of the tax rightfully due the Government from these people, but it would also catch other security holders in the United States who have not been reporting all or part of their dividend income. For American owners of securities who honestly report all of their dividend income, this withholding would cost them little or nothing, as full credit can be taken by them for these deductions in their income tax reports.

My third and last suggestion, and what I consider the most important one, is that the Government should immediately place a user tax on barge lines, which up to now have had free use of the inland waterways of the United States, in competition with the railroads, who not only own and have to pay for all maintenance expense in connection with their own rights-of-way, but who also have included in their general taxes a portion of the taxes that are levied to maintain these free rights-of-way for the barge lines. Can any fair-minded citizen justify the use of free waterway facilities to a corporation or company organized for profit, just like the railroads and other transportation agencies are, when it annually costs the Government hundreds of millions of dollars a year to dredge channels in these waterways, and also to build and maintain locks, bridges, and any number of other expenses necessary to keep these waterways in navigable condition?

20675-58 pt. 242

The user charge on barge lines has been recommended in the Weeks Cabinet Committee's report on transportation, and also has been recently approved by the President. It affects only a small segment of the transportation industry, but has a very vital effect on railroads that parallel the waterways used by the barge lines. It has always been a great mystery to me how the small number of interested parties controlling these barge lines have been able to succeed, year after year, in preventing the enactment of a user tax for these facilities. One of the important waterways used by barge lines is the Mississippi River and its tributaries, with a connection through the Chicago Drainage Canal to the Great Lakes, and I read in the papers some months ago that plans are being drawn right now for additional lock facilities on the waterway from Chicago to St. Louis, which the Army engineers estimate will cost over $114 million. No doubt this is one of the pork-barrel items that has been included in the 1958-59 budget recently submitted to Congress.

Now is the time, it appears to me, that the Government should make an "agonizing appraisal" (with apologies to Mr. Dulles for the use of this expression) of every free or subsidized service it renders its citizens, companies, or corporations, and appropriate legislation should be promptly drafted and passed to charge the full cost to the beneficiaries of these services. It should not take the Congress very long to make a comprehensive check of this matter, and there is ample time for proper legislation to be drafted and passed at this session of Congress to eliminate these expenses from the cost of operating our Government. The President, many members of the Cabinet and also Members of Congress have been stating repeatedly that the American taxpayer will have to expect to make sacrifices until our Defense Establishment has been built up to equal or surpass the Russians, so to start with the fair way to put everyone on an equal basis is to require them to pay the full cost of building and maintaining any services or facilities that they are now obtaining free and at other taxpayers' expense.

These user charges should be enacted regardless of all of the pressures that will be brought to bear on Congress to exempt certain facilities.

The people who are directly benefiting from governmental installations or services that are subsidized should be the first ones to come forward and agree to pay their fair share of the cost of these subsidized services, and if they aren't, they are neither patriotic nor willing to help their Government in the present crisis.

It is high time that the days of the “free rider” on the Government are ended. I feel so strongly about the suggestions outlined in this letter that I will be glad to appear personally before your committee to discuss them more in detail and will come to Washington to testify on any date you may designate. Respectfully submitted.

Hon. WILBUR D. MILLS,

JOHN M. BALLIET.

BROOKHART, BECKER & DORSEY, Washington, D. C., February 21, 1958.

Chairman, Committee on Ways and Means,

House of Representatives, Washington, D. C.

DEAR MR. CHAIRMAN: You are more familiar than anyone in the country with legislative tax inequities under which the self-employed now labor. Recent months have witnessed a parade of individuals and organizations in the selfemployed category supporting numerous legislative proposals designed to allevi ate some of their present tax burden.

While this letter is primarily directed toward the adoption of a workable taxaveraging formula, I wish to record my endorsement of the several approaches to tax equality for self-employed now being considered by your committee.

In this connection, I warmly endorse H. R. 9 and 10, which would establish voluntary retirement savings at a level reasonably approximating the prevailing relationships between employers' contributions, the amount of the employees'

compensation, and the amount of the employees' benefits in pension plans approved under section 401 and related sections of the Internal Revenue Code. I also endorse the provisions of S. 3194 and a companion bill, H. R. 10617.

Of principal interest to people in the fields of entertainment, science, and athletics is H. R. 126, the Curtis bill, which provides a workable formula for equitable tax averaging. I believe, as does the author of this bill, that, while it is well drafted and usable, its primary purpose could well be to stimulate study and analysis, possible resulting in modification or alteration of its recommended formula.

The recitation of the many bills now pending before your committee to alleviate the plight of self-employed is dramatic evidence of the need for early and effective legislation to aid this vast cross section of Americans. The selfemployed, compared with the civil servant or the corporate employee, appears on the horizon as the forgotten man.

I appreciate that there are many considerations bearing upon your committee's decision to adopt a certain legislative approach to the problems of the selfemployed. I also realize that, within the large class of self-employed, certain categories have dissimilar income problems. A majority of the self-employed have in common the problem of fluctuating incomes. This is true to a certain extent among farmers, lawyers, and others. However, among entertainers, authors, and athletes, widely varying incomes are the rule rather than the exception. This fact has prompted many authorities to emphasize adoption of a workable tax-averaging formula. Such a formula would immeasurably aid the entire field of self-employed and have a singularly salutary effect on the performing artist and professional athlete.

The need for this legislation is recognized within the Treasury Department. However, the Department is presently opposed because it assumes that revenue receipts would thereby be reduced. I fully appreciate that your committee, and the Treasury Department, must find an answer to this vital question of the revenue impact.

There has been, to date, no economic survey by either Government or individuals designed to answer this question. I am, therefore, encouraging a study of the problem of revenue reduction incident to averaging of earned income among entertainers and athletes. I expect that, within the near future, there will be available testimony by a distinguished economist as to the effect of tax averaging on Federal revenue.

When such is available I respectfully ask leave to submit such study to your committee, either through informal conferences or, if you desire, by means of a formal appearance before the committee.

Thanking you for your consideration, I am,

Sincerely,

RALPH E. BECKER.

STATEMENT OF CLYDE T. ELLIS, GENERAL MANAGER, NATIONAL RURAL

ELECTRIC COOPERATIVE ASSOCIATION

Mr. Chairman and gentlemen of the committee, my name is Clyde T. Ellis. I am general manager of the National Rural Electric Cooperative Association, the national service organization representing about 92 percent of the operating rural electric cooperative systems in the country. These cooperatives and a few public power districts serve about 4 million consumers in 43 States and Alaska. The rural electric cooperatives are engaged primarily in the distribution of electricity to farms and other consumers in rural areas. To a large degree, these rural electric cooperatives are dependent on purchased wholesale power supply. This year they will be purchasing well over 20 billion kilowatt-hours of electricity at a cost of some $150 million. Approximately half of this power will be purchased from privately owned power companies at a cost of about $65 million. Our use of wholesale power is doubling countrywide about every

5 years. In keeping with the purposes of this hearing, the purpose of this discussion is to suggest to the committee possible avenues of inquiry, which if explored and taken advantage of could, I believe, lead to an increase in the revenues of the Federal Government at a time when it is imperative that additional funds be found to carry out the civilian and military functions of the Government. In so appearing before your committee, I feel that what I have to suggest, if acted upon, would be of great aid not only to the rural electric cooperatives, which I represent, and to their consumer members, but also to electric consumers throughout the Nation and to every tax-paying citizen and corporation.

PRIVATE POWER COMPANY EXPENDITURES FOR PROPAGANDA ADVERTISING

We have been informed by the Internal Revenue Service that its policy with respect to the deductibility of advertising expenses is this:

To be deductible, advertising expenses must be ordinary and necessary and bear a reasonable relationship to the business activity in which the enterprise is engaged. Furthermore, the Service informs us that it has been its practice not to allow deductions of expenditures where the facts of the case indicate that such expenditures were created or incurred primarily for lobbying purposes, for the promotion or defeat of legislation, for political purposes, for the development or exploitation of propaganda, (including advertising, other than trade advertising), relating to any of the above purposes, or for the furtherance of matters "in the area of political controversy." We do not know of the extent to which this policy is followed but we have not been able to find much evidence of its application.

The Internal Revenue Service also points out that the basis for not allowing such expenditures as deductions before the computation of income taxes is that such expenditures do not meet the requirements of the Internal Revenue Code and regulations as ordinary and necessary and directly connected with the carrying on of the taxpayers trade or business.

Gentlemen, for many years the rural electric cooperatives, the Federal power program, and other types of cooperative activity have been subjected to what we consider and can, I believe, prove to be fraudulent nationwide propaganda attacks by the private power companies and other business organizations which share the same beliefs and prejudices. The costs of these campaigns amount to many millions of dollars per year. In most if not all instances, as recent investigation proved, these expenditures have been charged off as a cost of doing business and therefore a deduction from income before the computation of income taxes. In other words, on the one hand the electric consumers paid this bill. and on the other hand, the Federal Government lost revenue because these expenditures served to reduce the amount of taxable income.

Also, I believe, it would be found upon investigation that the lobbying expenditures of either the private power companies themselves, or one of their “front” organizations are charged up as operating expenses and thereby paid for by the consumer of electric power and deducted from net income before the payment of Federal taxes.

I am sure it is not necessary to point out to this great committee that the so-called private power companies are universally held by the Congress, the State legislatures, and the courts to be not a part of the free-enterprise system but rather public-service agencies of the State, franchised natural monopolies subject to strict regulation.

Some of the better-known oganizations and "fronts" which carry on this propaganda campaign for the private power companies include: The National Association of Electric Companies, Edison Electric Institute, the electric companies advertising program (the organization responsible for the fabulously expensive "brain washing" campaign in such magazines as the Saturday Evening Post. Collier's, Harpers, Reader's Digest, and others with ads attributed to "America's independent taxpaying electric companies," as well as television and radio pro grams sponsored in their name), the Public Information Program, the Guaranty Trust Co., Ebasco Services, Industrial News Review of Portland, Oreg., E. Hoffer & Sons, Public Affairs magazine, Bozel & Jacobs, the National Tax Equality Assoication, the National Associated Businessmen, Public Information Committee of the Cotton Industry, the Joint Committee on Taxation of the National Association of Ice Cream Manfacturers and the Milk Industry Foundation, the United States Chamber of Commerce, the Council of State Chambers of Commerce, local and regional chambers of commerce, the Mississippi Valley Association, the National Reclamation Association, the National Association of State Railroad

and Utility Commissioners, the American Watershed Council, the Joint Council of Engineers, the National Association of Electric Contractors, and others. Gentlemen, we believe that the freedom of the press, speech, and petition, and the right to propagandize are all essential to the process of assuring the continuation of our democratic society, but we do not believe that freedom of speech and petition should carry with it sanction permitting the monopolistic elements in the electric utility industry, the so-called private power companies, to carry on an unlimted propaganda campaign and lobbying program at the expense of the consumer, taxpayer, and Federal Government.

We believe that it is basically and fundamentally wrong for these giant electric utility monopolies to saddle millions of dollars annually in cost-plus advertising propaganda and direct and indirect lobbying costs onto absolutely helpless rate payers, including the rural electric cooperatives. Although it may sound like an Orwellian twist, it is true that the rural electric cooperatives are forced through their rates to pay for the very propaganda expenditures that is being used against them.

Perhaps I can say it best by referring to a concrete example. Recently we received a copy of a Saturday Evening Post brochure, circulated by the Curtis Publishing Co. in 1956. The preface tells us that this brochure is a consolidation of ads carried in the Saturday Evening Post for electric companies advertising program. Further it tells us that" by the end of 1956 the Post had carried 169 electric companies advertising program advertisements-more than any other major publication." They are reprinted here to show how one industry, advertising its cause consistently and persistently, has been able to help shift the great weight of public opinion.

Continuing, the brochure tells us that "electric companies advertising program advertising is designed to win public support for the independent electric light and power companies. Most people 15 years ago favored Federal public power. Today, the balance has swung in favor of the electric companies."

We believe, gentlemen, that any objective person who analyzes this booklet would conclude that many if not the bulk of the ads displayed are neither ordinary and necessary expenditures, nor do they bear a reasonable relationship to the business activities in which the enterprise is engaged. These ads do not propose to sell more electricity. They are not good-will ads; rather they are lobbying and propaganda ads for the promotion or defeat of legislation, or political purposes, and/or the development or exploitation of propaganda and furtherance of matters in the area of political controversy.

One other example will suffice, I think, to point out what I am driving at. During the first session of the 85th Congress the Public Works and Resources Subcommittee of the Committee on Government Operations issued a report entitled "Private Electric Utilities Organized Efforts To Influence the Secretary of the Interior." In this report it was pointed out that five private power companies charged up to the rate payers and not the stockholders the cost of the pamphlet entiled "The Federal Power Program, Its Background, Growth, and Consequences." The pamphlet, the committee report argued, was prepared to influence the policies of the Department of Interior, and not to carry out the ordinary and necessary business activity. These costs were charged as a business expense, and therefore such costs were deductd from gross revenue before the computation of Federal income taxes.

Under this same investigation, the committee turned up the fact that another propaganda pamphlet, "Turn on the Lights," sponsored and paid for by 59 private power companies, was charged up as a cost of doing business; therefore paid for by the rate payers, and by the same token reduced the Federal revenue.

We do not know over the years how many millions of dollars have been spent directly and indirectly by private power companies for propaganda advertising and lobbying, but we do feel-and the law, the way it has been interpreted to me, seems to clearly indicate that these expenditures cannot legally be charged up as a cost of doing business. Obviously about half the cost of the private power companies' annual lobbying and propaganda campaign is borne by the taxpayers, for these companies deduct the total cost as an expense of operations before taxes; that is, before the payment of corporate income profits taxes. A great service could be done for all taxpayers and consumers of electric power if this committee were to instruct the Internal Revenue Service to investigate the charge we have made here, and if our contentions prove correct, not only could a great wrong be rectified, but in addition Federal revenues would be increased.