and low-cost foreign competition is very substantial, amounting to $161 in the case of a Japanese small grand piano. By maintaining the tax on musical instruments we are making it harder for U.S. working men and women to get and keep jobs in this industry, because the excise tax increases the price differential on American-made goods as compared with lower priced foreign instruments. Elimination of the tax on musical instruments will decrease the competitive advantage of low-cost foreign products over U.S. musical instruments, thereby increasing U.S. employment and sales. E. It induces cost-push type of inflationary pressure One of the desirable standards of taxation presented at the committee's compendium was the avoidance of the cost-push type of inflationary pressure caused by price increases in excess of the amount of the tax-in other words, pyramiding the tax at the retail level. The musical instrument tax, because of the traditional retail percentage markups on which so many costs are based, is an excellent example of cost-push-type inflation. With retailers operating at 40percent markups on selling price, the excise tax is marked up at the retail level for compensation and rentals based on percentage of sales, which is the usual method of determining these significant costs. As a result, the tax affects the consumer price level at 166 percent of its revenue yield. F. It distorts consumer's choice against a desirable national goal As stated in the committee's compendium, an inherent limitation of selective excise taxes is the distortion of consumer choices. Since there is no tax on books, paper, paints, art supplies, modeling clay, and other items needed for private instruction and home study in other subjects, why should there be tax discrimination against music? Professor Due pointed out in advocating repeal of the tax on musical instruments that this tax "applies to an activity which society seeks to encourage." G. It is a regressive tax Professor Musgrave told this committee on June 15 that excise taxes tend to be regressive. The musical instrument tax is imposed upon items of outlay which decline as a percentage of income as the income level rises. The result is that lower income families pay a higher proportion of their limited income for the excise tax on musical instruments. Professor Musgrave recommended that primary emphasis for removal of excise taxes be placed in the area of "appliances and other consumer outlays beginning with those items that are particularly regressive." Musical instruments fall directly in this class. Interest in music and musical education is not limited by income bracket, for music as part of national culture is not a luxury. For example, guitars, the second most popular instrument, cut across income groups, and sales are disproportionately higher in sections of the country and among families with lowest per capita income. The children in the school bands and orchestras in every city in the United States come from young families in what is popularly called the age of acquisition-families buying homes and appliances on time and trying to make their salaries cover the costs of children, education, and expanded family needs. Below are the statistics on specific products which show that between 70 and 86 percent of the musical instrument business is done with families making under $800 a month. Specified figures on a survey of 2,281 piano customers sampled from different piano manufacturers in different geographic areas showed the following results: A tabulation of income statistics of organ purchasers shows the same pattern: Income: Under $4,000. $4,000 to $7,000_ $7,000 to $10,000_ Subtotal___ $10,000 and over.. Percent 7 39 33 79 21 H. The elasticity of demand for musical instruments is high and repeal will not represent a loss in national revenue The great obstacle to the sale of musical instruments has been the inability of the family with children to stretch its budget to meet this additional expenditure. It has been an unfortunate and all too recurring an experience to those of us who sell musical instruments at retail to find when all the factors necessary for a sale-home, children, and desire-were present, except money, that the sale is never made. The 1961 detailed survey conducted of 2,281 piano customers discussed above, showed that 69 percent of the people who did not purchase pianos stated that the reason for their failure to purchase was the cost of the instrument. Furthermore, while 42 percent of the prospective purchasers had incomes of less than $400 a month, only 16 percent of the actual buyers were in this income category. The importance of price to demand is increased in musical instrument sales in that the young family not only faces the cost of the instrument, but also the cost of the music lessons. The excise tax, 10 percent of the retail price, therefore tends to prevent children, particularly from lower income groups, from participating in music. Families with children where the father is from age 25 to 44 constitute the major market for musical instruments. These are the families with the lowest average incomes of the different age groups-85 percent making under $10,000 a year and 58 percent making under $7,000 a year. These are also the families with an average of almost three children, with many pressing needs for larger homes, food, clothing, etc., with under $5,000 in liquid assets and spending annually more than they receive. The 45-54- and 55-65-age groups have the highest proportion of income and assets, but by this age the children are grown. These people do not ordinarily buy musical instruments. Our industry wrestles with this problem on a day-to-day basis. Inability to produce the money needed to pay the price is the reason over 70 percent of the musical instrument sales are made on the installment plan. Traditionally, these terms have been limited to 2 and 3 years, but considerably increased business has recently been generated by the use of 4- and 5-year contracts on some instruments. This is another indication that if we can reduce price, or at least the monthly payments, we can increase business substantially. Both piano and organ manufacturers have reduced average prices over the past 5 years. The results, demonstrating high elasticity of demand, are shown on the attached graphs. Based on these graphs which reflect our market and our experience, repeal of the tax would increase sales at least 15 percent under similar economic conditions and consumer preferences. This increased volume would amount to $49 million of additional musical instrument buisness at retail. This would produce, after applying "a multiplier and accelerator effect," more than $20 million of additional income tax revenue (the amount produced by the excise tax on musical instruments) from additional corporate profits and new jobs, as well as substantially furthering the cause of musical education. Musical instrument manufacturers can fairly present these figures projecting a higher volume of sales based on 10-percent lower prices, because we have already established prices for our exempt sales, which are 10-percent lower than the prices to nonexempt purchasers. 34-720-64—pt. 4– Adjusted for Consumer Price Index "Bureau of Labor Statistics" III. DISCUSSION OF SPECIFIC CRITERIA SET FORTH BY THE WAYS AND MEANS COMMITTEE In the committee's release of April 13, 1964, five criteria for consideration by witnesses appearing with respect to specific excise taxes were set forth. A. Distribution of tax among consumers by income level This specific question asked by the committee has been discusssed under section II-G. B. Effect of the tax on sales of the industry This has been explained in section II-H. The elasticity of demand is high and the tax inhibits sales, particularly in lower income groups which constitute the major market for musical instruments. C. The extent to which taxed items represent a business cost of other items or services The excise tax on musical instruments, which is passed on to the purchaser and pyramided at the retail level, represents an additional cost on the tools of his trade to the private teacher and performer. This increases the cost of musical education and of musical performance, thereby discouraging what our society and our Federal, State, and local governments seek to encourage. D. The sensitivity of excise-tax revenue to changes in income Musical instruments can be a postponable purchase in times of economic stress and, therefore, sales are affected somewhat by economic conditions. Nevertheless, musical instrument sales are influenced greatly by the number of children between 5 and 14, and they do not necessarily bear a close relationship to changes in national income. When one also considers the small size of the industry (six one-hundredths of 1 percent of gross national product), it is apparent that the musical instrument ax does not make an effective contribution to economic stability. E. Administrative and compliance problems with respect to the musical instrument tax The musical instrument industry is by no means immune to the general problems plaguing all manufacturers who are subject to excise taxes. For example, there are questions and problems with respect to the base on which tax is imposed, and there are also definitional problems of what is taxable and what is not. Since we anticipate that similar problems will be reviewed at length from the standpoint of the manufacturers excise taxes by representatives of industries preceding us in the order of testimony, and since we recognize the necessity of conserving the time of the committee, we will not discuss these general questions further at this time. A specific administrative problem is the application of the statutory exemptions and the use of exemption certificates (schools and churches) where the industry encounters difficulty in recovering taxes paid on sales made in tax periods prior to the ultimate tax-free retail sales. IV. CONCLUSION Congress is deeply concerned with helping the communities of the Nation curb juvenile delinquency and also with encouraging music and other arts. The Federal Government can directly aid children and expand musical growth in the Nation by the repeal of this tax. When President Kennedy established the President's Advisory Council on the Arts, he said: "I am particularly interested in the opportunities for young people to develop their gifts in the field of the arts and also to participate in an active cultural life. The Council will, I hope, examine the degree to which we are now meeting our responsibilities to young people in this area ***. The impact of various general governmental policies and programs on the arts is an area of which I hope the Council will give special attention. This includes such specific fields as tax laws * Be Repeal of the excise tax on musical instruments would greatly enhance the opportunities for young people to develop their musical gifts and participate in the active cultural life which President Kennedy sought for them. Repeal will also greatly encourage the growth of music itself in the United States. cause of the high elasticity of demand based on the limited budgets of the young fathers of this country, we can except to increase sales, employment, and Federal income tax revenues more than sufficiently to offset the loss of excise taxes. In 1941 Congress erected a barrier against music in order to direct materials and manpower to defense work. We ask Congress now remove this barrier to the world of music for our children. Mr. ALEXANDER. The tax on musical instruments was added, as you know, by the 1941 act as a purely temporary measure to try to divert critical materials and manpower to warwork, and secondarily to assist in raising the huge sums of money needed for the war effort. Speaking of this tax and the other excise taxes added by the 1941 act, Chairman Doughton said to the House of Representatives, "Levies of this nature, we feel, are justified only by the urgent need for revenue and should be abandoned as soon as this need will permit." The purposes of this tax on musical instruments have long since been fulfilled, but the parents who buy instruments for their children are still paying it. Speaking for the manufacturers of musical instru |