(c) A voluntary savings plan initially will be put to actual use more by the older than the younger; the inevitable consequence will be the relatively short period that revenue is deferred

Due to the economic demands of everyday living in these times, the self-employed individual who has not reached peak earning power will be unable or unwilling to divert much income to retirement savings. In many professional fields, the young man, because of necessary expenditure of time on education and military service, does not commence remunerative activity until an average age of 30 or 31. For a considerable period thereafter his income does not so exceed the initial investments required to establish his practice, and his necessary occupational and family financial commitments, as to allow diverting appreciable amounts of money to retirement.

H. R. 9-10 is a voluntary savings plan and its greatest immediate utilization will be by those individuals who, while now at peak earning power stage, are relatively much closer to retirement age. Thus, there will be only a brief period of postponement of revenue for, after all, the tax is only deferred; it is not canceled. Ultimately the tax is paid by the senior self-employed citizen. And not in every case will the span of his postponed tax represent a long-term revenue loss: the individual who works for himself has a choice of whether to curtail his earning power in old age; often he elects to keep working when he is able. Therefore, it may be shown that-unlike the typical employee-the self-employed, with the aid of the reserve H. R. 9-10 would encourage, will tend to pay taxes in old age on an income relatively consistent with that of earlier years.

(d) The conclusion is that in the first year or two after H. R. 9-10 is enacted the amount of postponed revenue probably will be much less than $100 million annually

An independent tax research organization' estimated the probable revenue deferral under H. R. 9-10. Its conclusion can be summarized:

"In the first year or two after the bill is enacted, the revenue deferment will probably be much less than $100 million; $100 million to $160 million *** represents the ultimate loss after several years when taxpayers have adjusted to the deductibility of retirement deposits. It can also be said that a revenue loss of as much as $400 million would imply an increase of $2 billion in deductions of the self-employed, an amount greater than 1956 saving by all individuals in the form of State and local government securities under the stimulus of tax exemptions of interest on these securities. Indeed, total saving by all individuals in the form of private insurance and pension reserves in 1956 amounted to $7.7 billion. It is therefore hardly conceivable that self-employed persons alone would divert to retirement deposits as much as $2 billion, even under the stimulus of deductibility."

II. H. R. 9 AND 10, A SAVINGS BILL, WILL HAVE A SALUTARY EFFECT ON THE NATION'S

ECONOMY

(a) Additional funds diverted to savings will serve to counter long-term inflation When dollars are removed temporarily from Government spending under conditions that assure simultaneous accumulations of real saving in an amount perhaps five times as large, the result may be a check on inflation. The report of the Subcommittee on Fiscal Policy of the Joint Economic Committee' holds that the basic problem underlying the present inflationary trend is an inadequate level of real savings out of current income. The report states that until higher levels of voluntary real savings are achieved, we must rely on general fiscal and monetary restraints to curb inflation.

In September, President Eisenhower called for more savings. William McChesney Martin, Chairman of the Federal Reserve Board, has frequently said that a shortage of savings by individuals lay at the heart of inflation. Mr. Martin has said that if Americans would spend less and save more, they would help stem rising prices.

Edmund H. Woolrych, a consulting economist and capital markets analyst," argues that H. R. 9-10, from an economic point of view, should be enacted now even if it has the effect of lessening Federal revenues:

'Tax Foundation, Inc., whose report is appended.

The Office of the Secretary of the Treasury, in a letter addressed to the chairman of the Committee on Ways and Means, gave as its lowest estimate $315 million to $430 million. SEC data.

8

H. Rept. 647.

Formerly with Bankers Trust Co.; now associated in Woolrych & Currier, San Diego.

"New forms of savings build up slowly and need to be started immediately if we are to meet the demands of the ensuing 10 years. Even a small increase is important. For example, an additional $1 billion in the 1956-57 capital markets, pressed as they were by lessening general liquidity, would have had a pronounced effect on the long-term interest rates.

"Even a small increase in new savings, such as 200 to 500 million dollars-an amount that might be stimulated within several years following enactment of H. R. 9-10--would tend to have a beneficial effect not only on the rates on this new amount but on funds borrowed everywhere.

"This bill is desirable therefore quite apart from its purpose in mitigating an existing tax inequity because it would induced capital accumulation in an era when new capital is greatly needed. The self-employed comprise a valuable potential reservoir of new savings-a reservoir that cannot be fully utilized until the limitations of the present tax structure are altered.

"It was formerly believed that an increase in the interest rate would call forth savings enough to meet the demand for capital. This is no longer correct. if indeed it ever was, now that savings have become institutionalized and depend heavily upon contractural agreements such as insurance and retirement systems. "To achieve voluntary savings is becoming more and more difficult. We must create new institutions or create new forms through which funds can flow into the capital markets if we are to satisfy the free world's ever-expanding demands.

"In this connection, the Canadians and the British are ahead of us in encouraging new forms of saving by removal of tax inequities against the selfemployed."

(b) The Federal Government will realize revenue from corporate investment of the additional funds diverted to institutionalized savings

New funds diverted by the self-employed to savings as a result of H. R. 9-10 will for the most part be invested with banks, insurance companies and other corporate commercial savings institutions. They in turn will employ these funds in profit-making investments. Any realized profit will be taxed by the Federal Government at corporate rate of 52 percent.

Thus, while some Federal revenue from taxation of individual income at the lower rate is deferred, the Treasury will realize some new revenue at the higher corporate rates. To the extent this is true there will be an offset to any current revenue loss.

III. EXISTING LEGISLATION DISCRIMINATES AGAINST THE SELF-EMPLOYED BECAUSE IT GIVES THE SELF-EMPLOYED NOT EVEN A FRACTION OF THE SEVERAL RETIREMENT BENEFITS GRANTED TO THE EMPLOYEE

The purpose of II. H. R. 9-10 is to encourage the establishment of voluntary pension plans by self-employed individuals. This would be accomplished by affording such individuals a tax deferment on a limited portion of their income set aside for their retirement. Under existing law such tax deferment is taken by employed persons whose employers have established so-called employee pension plans meeting certain statutory requirements. However, since self-employed individuals cannot be their own employees, they cannot qualify under existing legislation.

It will be recalled that the Social Security Act, which sets up a compulsory system of old-age pensions, originally applied exclusively to employed persons. Later it was extended to most self-employed persons. H. R. 9 and 10 would similarly extend the principle of the supplemental private retirement savings plan to the self-employed.

(a) The employer-employee relationship derives substantial tax advantage under the law, over the self-employed, in three principal areas: Pension plans, stock options and accident and health benefits

Pension plans, stock bonus, and profit-sharing plans, and accident and health benefits constitute three major fringe areas of compensation to the employee on which income tax is exempted or deferred. The compensation therein consists of contributions made by the employer to whom they are tax-deductible. Thus utilized, the tax laws enable the employer to share the tax advantage thus gained with his employees, his shareholders and in the market place. A

To some extent, this would stimulate jobs and the output of goods.

professional partnership, the farmer or the unincorporated business is not thus favored.

By 1956, pension and profit-sharing plans were covering an estimated 14 million employees, enabling them to defer the payment of tax on a portion of their compensation to lower or nontaxable brackets following retirement. Further, various fringe benefits escaped tax entirely.

The annual contributions to retirement programs, both private and public added up to more than $13 billion in 1956. That sum represented the combined payments by employers and employees into funds to provide the benefits under the various plans. It was equivalent to about 4 cents out of every dollar of total personal income before taxes last year-or approximately $200 for everybody employed in the civilian working populations.

Some idea of the magnitude of the tax shelter erected for the employer-employee relationship follows:

It is significant to note that nearly 61 percent of the total annual contributions shown above was paid by employers.

It is estimated that at the start of 1956, nearly 25 million persons were covered by old-age pension plans, including both private and government plans and including nearly 2 million annuitants already on the receiving end of pension payments. These figures included the Armed Forces, but excluding them, the total covered was 21,500,000 including 1,790,000 actual annuitants.

Excluding the members of the Armed Forces, the number of active employees enrolled in pension plans was just under 20 million, which was about 40 percent of the number of employees in civilian, nonagricultural establishments last year, then just under 50 million. By 1956 the total of civilian employees enrolled in pension plans was up about 50 percent from the end of World War II and was 4 times the total at the end of 1935.

There is the capital gains shelter. In 1950 came provisions (which were subsequently liberalized) enabling employees to realize capital gains via the stock option. The old Tax Code provided for capital gain treatment of lump-sum distributions from pension and profit-sharing trusts deriving from the employee's separation from service. The Revenue Act of 1951 excluded from any tax at the point of distribution of the lump sum that portion thereof that represented net unrealized appreciation in securities of the employer corporation. The 1954 Code extended capital gain treatment of lump-sum distributions made as a result of the death of the employee after separation from service and to lump-sum distributions under plans funded through annuity contracts without a trust.

There is the estate tax shelter. When a beneficiary other than the executor receives an annuity or other payment deriving from employer contributions and distributed under a trusteed or nontrusteed qualified pension, stock bonus, or profit-sharing plan, no estate tax is payable thereon.

Thus, while the self-employed pays income tax at top surtax rates on all income, coupled with full exposure to the estate tax, his employed neighbor can look forward to the receipt of pension plan income at low tax rates upon retirement, and with no estate tax on the amounts deriving from employer contributions still payable to his beneficiaries following his death. And there is nothing to prevent a valuable stock option coexisting with a growing interest in an employer-financed pension plan.

Nor need retirement any longer constitute a day of reckoning for the employee whose tax on his employer's contributions to the pension fund was theoretically

deferred to the retirement period. If, for example, at the age of 65 he no longer has earned income, and his total income (including social security receipts) is $3,300 per annum, the double personal exemption coupled with the standard deduction and the new retirement income credit results in no tax payable. When the wife attains age 65 the retirement income can reach $4,000 per annum, without any tax being payable.

The last substantial one-sided advantage accruing to the employed is the employer accident and health plans. If an employer voluntarily establishes an accident and health plan, the employee may be reimbursed for all his medical expenses and those of his spouse and dependents-and this compensation is not taxed. The same is true for amounts received for bodily injury to the taxpayer, his spouse, or a dependent. In addition, if under the plan the employee receives compensation during his absence from work on account of personal injuries or sickness, such receipts are excludable from gross income up to $100 a week. If in order to fund this plan the employer makes payments to an insurance company or otherwise, such payments do not constitute taxable income to the covered employee.

IV. ENCOURAGEMENT OF INDIVIDUAL ENTERPRISE VITAL TO THE NATION'S PRESENT WELFARE AND FUTURE SECURITY WILL DIRECTLY RESULT FROM THE ENACTMENT OF THIS LEGISLATION

The self-employed are in the last analysis small business people. Business failures approximated 7,600 in 1952. It has been estimated that such failures will approximate 14,000 for 1957. Although these amazing figures certainly do not comprise solely unincorporated self-employed businesses, the unincorporated business is generally a small organization and the characteristic of any small business is its relative inability to withstand financial stress.

The self-employed have practically no opportunity whatever to establish any reserves recognized by the Office of Internal Revenue, even if there is a surplus to put into a reserve. Yet the history of earnings of the self-employed indicates conclusively that they are particularly vulnerable to the ups and downs of busi ness and to the oppressive effects of rising interest rates and shrinking capital markets.

The self-employed must continuously regenerate his income. For the most part, those who work for corporations or for the Government can count on some compensation ever payday. In a corporation the employee no longer dreads incapacitation because of illness or work stoppage. The sole proprietor, on the contrary, when unable to work is unable to generate income. And this occurs both during times of illness and in the declining years.

In the typical self-operated business, as compared with salaried employees, the hazard is multiplied many times by the fixity of costs and expenses. The worst that can happen to an employee is that he can be let out with no termination pay and no continuing compensation whatever. The sole proprietor cannot get off so easily. He has his fixed expenses which must continue. If there are no others, there is the rent. The dentist or the barber cannot close the office if business declines or if he is unable to work at full efficiency; his liveli hood consists of performing his services. The farmer is in an even worse position with help to employ, taxes to pay, and the mortgage to meet.

Motivated alike by his need for self-reliance and his sense of isolation from the benevolent tax shelter erected for others against old age and disability, the selfemployed has been a bastion of the fine old art of thrift. He tries to save. In 1950, among urban families, the self-employed were far more thrifty than all the others.10 In 3 of the 4 income groups analyzed," the savings of the selfemployed were significantly higher than those of all others. (The self-employed in the income class under $4,000 probably included victims of business failure which accounts in a large part both for the low income and the considerable amount of dissavings.)

In an article appearing in Business Week for June 16, 1956, it was demonstrated that although the self-employed were receiving only 16.5 percent of the aggregate income they were responsible for 55.1 percent of the aggregate savings

10 For further development of this subject, see Raymond W. Goldsmith, Study of Savings in the United States, vol. 3, Princeton University Press, 1955.

11 For further information see Irwin Friend. Consumers Expenditures Study, released in 1956 under the auspices of Wharton School of Finance and Commerce in cooperation with the Bureau of Labor Statistics.

among urban families. It is well known that farmers, most of whom are selfemployed, also are frugal citizens.

It is vital to America to encourage self-reliance, individual enterprise and thrift. In the early days of this country, it was men with these qualities who made the Nation great, who drafted the Constitution, who conquered the wilderness and won the West. If we still want to develop this breed, the Government must see to it that each citizen has a fair opportunity to succeed in a career in which he can mostly fully express his talent. His choice should not be restricted, for example, by tax inequities or economic hazards resulting from discriminatory legislation which favors one group over others.

The stimulating drive which, for example, serves to keep the Nation's highly capable self-employed scientists, engineers, and technological specialists mobile and adaptable is the constant need to solve diverse problems in a variety of ways or methods. Such technological versatility is essential to America today. Yet, unless specialists such as these are willing to go on a corporate or government payroll, they must subtract from purely creative endeavor a substantial amount of time and energy to obtain some equivalent of that personal security which is the statutory right of even the shipping room clerk in a corporation.

This is true for all self-employed professional individuals: They must assume many of the risks of business while at the mercy of heavy progressive income taxes which leave no means for establishing reserves adequate to average out the bad years, the catastrophic periods--whether attributable to economics, illness, or old age.

In general it can be said that the Government over the past two decades has evidenced little practical solicitude for individual enterprise.

One effect is that many younger professional trainees today prefer the blandishments of the hiring officer, or the protection of civil service, rather than striking out for themselves. Pension plans and fringe benefits seem more attractice than the risks of career enterprise.

V. CONCLUSION

(1) A discrimination in the tax law cannot morally be perpetuated indefinitely when a just and economically defensible revision of the law is available. H. R. 9-10 would revise the Tax Code to accomplish a long overdue adjustment of this inequity.

(2) Since the Government recently indicated its readiness to foster education and opportunity for those of its citizens who are not merely seeking jobs and job security but rather opportunities involving heavy moral and intellectual responsibilities, let it adjust its tax system in such a way as to reaffirm its faith in individual enterprise, self-reliance and thrift.

(3) Advocacy of H. R. 9 and H. R. 10 in effect is asking endorsement of a limited but essential program of retirement saving through incentives applied to one broad classless area of the economy to which in equity it should be applied. The current and long-term benefits of saving, coupled with the positive values of an incentive to self-reliance, vastly exceed the temporary and slight effect on Government revenue that postponement of a modest amount of current taxes will impose.

APPENDIX

STATEMENT OF THE TAX FOUNDATION, INC., ON REVENUE DEFERRAL FROM ALLOWING DEDUCTIONS FOR TAX PURPOSES OF AMOUNTS PAID BY SELF-EMPLOYED FOR RETIREMENT FUNDS OR AS RETIREMENT DEPOSITS UNDER H. R. 10, SELFEMPLOYED INDIVIDUALS' RETIREMENT ACT OF 1957

With minor qualifications, this bill defines a self-employed individual as any individual who is subject to the self-employment tax. In 1955, total earnings of self-employed subject to the self-employed tax was $27.5 billion (Social Security Bulletin, Annual Statistical Supplement, 1955, p. 7).

The bill defines a "retirement deposit" as a payment in money to a restricted retirement fund (trust or custodian account established under a retirement plan for self-employed individuals) or to a life-insurance company as premiums under a restricted retirement policy. A restricted retirement policy "means an annuity, endowment, or life-insurance contract, or combination thereof, other than a term insurance contract, issued by a life-insurance com