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pany on the life of * a self-employed individual * * * [subject to certain specified limitations]." The bill provides that ** * * if the policy provides for life insurance protection, that portion of such premiums which (under regulations prescribed by the Secretary or his delegate) is properly allocable to the cost of such life insurance protection shall not be deductible *

To estimate the revenue eflect of this bill requires first determining the amounts that might be deductible under existing conditions and second determining any increase in payments to retirement plans as a result of the stimulus of deductibility. Such deductibility might be regarded as equivalent to a higher interest rate on this particular form of savings.

First, as to amounts that currently might become available for deductibility disregarding the stimulus of deductibility to this kind of savings. In 1955. life insurance and annuity premiums amounted to 3.8 percent of disposable personal income. Payments for annuities, both group and individual, amounted to only $1.3 billion out of total life and annuity premiums of $10 billion (1956 Life Insurance Fact Book, p. 50). Of course, part of the premiums for life insurance would also be eligible for deductibility as retirement deposits. But even if as much as half of life insurance premiums might become eligible, total deductible payments could hardly exceed 2 percent of disposable personal income.

The stimulus provided by a higher effective rate of interest on such savings would produce some increase in this form of savings. However, past evidence suggests the conclusion that a shifting in the form of savings on this account, and an increase in total savings, would be relatively small. Thus higher rates of interest in recent years seem to have had relatively little effect on the rate of aggregate personal savings. It as been shown by Butters, Thompson, and Bollinger in Effects of Taxation on Investments by Individuals (Harvard Graduate School of Business Administration, 1953), that exemption of interest on state and local government securities has had a relatively small effect on holdings of these securities even by individuals at high-income levels.

It may be concluded that on the average the self-employed would put no more than 2 or 3 percent of their incomes into deductible retirement deposits. With a total income of $27.5 billion this would mean at a maximum added deductions of $500 to $800 million.

The average tax rate on taxable income (after deductions and exemptions) in 1955 was 23.5 percent (percentage of total tax to taxable income, Fiscal Facts for 1957, p. 22). This average somewhat understates an average rate applicable to changes in income. But it is notable that nearly 80 percent of all Federal income taxpayers are subject only to the first bracket rate. A marginal rate on adjusted gross income would be about 90 percent of a marginal rate on taxable income (exemptions do not affect changes in income and tax). As a result, we can use 20 percent as an average rate applicable to changes in adjusted gross income. At this rate, a change of $500 to $800 million in allowable deductions would mean a revenue deferment of from $100 to $160 million.

This represents the ultimate loss after several years when taxpayers have adjusted to the deductibility of retirement deposits. In the first year or two after the bill is enacted, the revenue deferment will probably be much less than $100 million.

On the basis of the above rate, 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 exemption 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 (SEC data). 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.

KEEPING UP WITH THE JONESES The old saw about "keeping up with the Joneses” has a new twist; Just about the time you catch up with them, they refinance. Actually, it can be well-nigh impossible to catch up with the Joneses at all-if Jones is a typical employee and you are one of the ten million individuals in America who works for himself.

Let's take an example: 2 neighbors, 1 named Jones, I named Smith. Each is 45 years old. Each has a wife and two children. Each is a pharmacist. Jones is employed by a well-known pharmaceutical company. Smith owns and operates his own corner drugstore. Each makes $6,000 a year before taxes. Each pays the same amount of taxes. Yet Jones winds up with the equivalent of $1,404 more each year than Smith because what isn't showing in Jones' tax return is the legally "hidden" compensation from his company that will provide him with $150 a month beginning at 65, for the rest of his life.

The law allows Jones' employer to set up this retirement plan for him with tax-deductible dollars. The law does not require Jones to declare this compensation as a part of his taxable income but that same law bars Smith from setting up a tax-deductible pension plan. Why? Because Smith runs his own business and the law does not permit the self-employed to deduct anything for his old age.

Let's see how just one item-the pension plan-in what is popularly called the "fringe benefit package” can provide Jones with nearly a 25-percent tax advantage over neighbor Smith plus the assurance of a guaranteed retirement income over and above social security.

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Gross annual income..
Exemptions and standard deductions.
Taxable income.
Income tax,
Net spendable

dollars.
Untared additional compensation employer-paid contribution to pension plan to
provide $150 a month for life beginning at 65.

Net actual annual compensation, spendable and deferred..

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If Smith, in order to keep up with the Joneses, were to buy an annuity to provide himself a $150 a month income for life, beginning at 65, Jones and Smith would each have the actual spendable income shown below:

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Net spendable dollars.
Gross Ist-year premium on annual premium retirement annuity.

Net spendable dollars after taxes and after providing for $150 a month retire

ment income plan...

[blocks in formation]

In other words, Smith either will have to be satisfied with a net spendable income of $4,253.97 (while Jones has $5,400) or he will have to somehow increase his yearly income from his drugstore by an additional $1,404.03 before taxes in order to keep up with Jones.

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Gross annual Income..
Taxable income..
Income tax.
Net spendable dollars.
Gross 1st-year premium on annual premium retirement annuity..

Net after taxes and after having provided for $150 a month on which to retire.

$6,000 $7, 404. 03 3,000 4, 263. 62

600 858.00 5,400

6,546.03 0 1, 146.03 5,400 5, 400.00

Actually, if you are self-employed, it is considerably harder than even these figures indicate to keep up with the Joneses. If Jones' relationship with his company is fairly typical, he will pick up in addition to his salary and in addition to his pension benefits one or all of the following security provisions. Contributions by Jones' company for each of these benefits are tax deductible by the corporation and although additional compensation, nonetheless tax-free to Jones :

Paid vacations, sick leave without loss of income, group life insurance, group hospitalization, group medical protection, and long-term salary continuance in case of disability.

It is obvious that the self-employed Smiths cannot begin to catch up with the Joneses. The reason is not hard to find.

The income tax law allows-it encourages—Jones to differ or escape altogether the tax on his fringe compensation, but Smith, the law says, must pay tax on all of his compensation. And with the steeply graduated rates of taxation, the higher Smith's income climbs, the greater the tax advantage enjoyed by Jones.

Mr. DONAHUE. Thank you, sir.

Mr. JENKINS. Mr. Chairman, I would like first to commend the excellent statements presented in support of this legislation. I would also like to compliment my cosponsor from New York, Mr. Keogh, who has worked so effectively and so diligently in behalf of these legislative proposals. The CHAIRMAN. Mr. Keogh will inquire.

Mr. Keogh. Mr. Chairman, I appreciate very much the kind remarks of my distinguished colleague and cosponsor of this legislation and I want to again publicly express to him my appreciation for his continued assistance and inspiration in the work we have been engaged in, making this pending prposal known to the members of this committee, the House, and the Senate.

Mr. Chairman, I would like to commend the chairman of the District of Columbia Bar Association legislative committee and the chairman of the American Thrift Assembly for his expeditious manner in presenting the case here this morning.

I am sure I need not remind the members of this committee that it was not without difficulty that the chairman of the proponents succeeded in reducing to what we think an irreducible minimum the number of witnesses who wanted to appear and testify here this morning to conserve the time of the committee.

We have obtained a number of endorsements and expressions of support from many fine national organizations of businessmen and selfemployed generally, and I would like, Mr. Chairman, to ask unanimous consent that we be permitted to insert in the record at the close of the testimony on the pending bills those endorsements and expressions of support.

The CHAIRMAN. Without objection they will be included.

(The above mentioned endorsers are as follows:) CURRENT ENDORSEMENT OF THE PRINCIPLE OF INDIVIDUAL TAX DEFERMENT FOR

SELF-EMPLOYED RETIREMENT SAVING PLANS

NATIONAL ASSOCIATIONS
American Angus Association
American Association of Medical Clinics
American Association of Small Business
American Bar Association
American Brahman Breeders Association
American College of Radiology
American Dental Association
American Federation of Labor
American Hereford Association
American Hotel Association
American Institute of Architects
American Institute of Certified Public Accountants
American Institute of Chemists
American Medical Association
American National Cattlemen's Association
American Ophthalmological Society
American Optometric Association
American Patent Law Association

American Podiatry Association
American Society of Industrial Designers
American Society of Internal Medicine
American Veterinary Medical Association
American Woman's Society of CPA's
Association of Consulting Chemists and Chemical Engineers, Inc.
Association of Consulting Management Engineers, Inc.
Association of Stock Exchange Firms
Authors League of America
Bureau of Salesmen's National Association
Conference of Actuaries in Public Practice
Engineers Joint Council
Investment Bankers Association of America
Maritime Law Association of the United States
Mobilehome Dealers Association
National Association of Chiropodists
National Association of Plumbing Contractors
National Association of Real Estate Boards
National Association of Retail Druggists
National Association of Retail Meat and Food Dealers, Inc.
National Association of Tax Accountants
National Association of Women's and Children's Apparel Salesmen, Inc.
National Association of Women Lawyers
National Automobile Dealers Association
National Council of Salesmen's Organizations, Inc.
National Federation of Independent Business
National Food Brokers Association
National Funeral Directors Association
National Liquor Stores Association, Inc.
National Live Stock Tax Committee
National Medical Veterans Society
National Shorthand Reporters Association
National Society of Professional Engineers
National Society of Public Accountants
National Sugar Brokers Association
National Wholesale Furniture Salesmen's Association
Public Relations Society of America, Inc.

STATE ASSOCIATIONS
Bar Association of the State of Kansas
Connecticut State Medical Society
Dental Society of the State of New York
Florida Bar Association
Florida Society of Anesthesiologists
Georgia Bar Association
Illinois Agricultural Association
Ilinois State Bar Association
Independent Farmers of Ohio
Insurance Brokers Exchange of California
Iowa State Bar Association
Iowa State Dental Association
Kansas Medical Society
Maryland State Bar Association
Minnesota Bar Association
Minnesota Furniture Salesmen's Club
Minnesota State Medical Association
Missouri Bar, Integrated
Missouri Society of Professional Engineers
Missouri State Medical Association
Mutual Agents Association of the State of New York
Nebraska State Bar Association
New Jersey State Bar Association
New York State Bar Association
Ohio Association of Real Estate Boards
Ohio State Bar Association
Pennsylvania Bar Association
Pennsylvania Society of Professional Engineers

Rhode Island Bar Association
Tennessee Bar Association
Texas Medical Association
Virginia State Bar Association
West Virginia State Medical Association
Wisconsin Society of Certified Public Accountants
Women's Auxiliary to the Medical Association of Georgia
Women's Auxiliary to Medical Society of New Jersey
State Bar of New Mexico

LOCAL ASSOCIATIONS
Association of the Bar of the City of New York
Bar Association of Baltimore City
Bernalillo County (N. Mex.) Medical Society
Boston Bar Association
Buncombe County (N. C.) Bar Association
Central Oregon Bar Association
Chamber of Commerce of Greater Philadelphia
Chamber of Commerce of Metropolitan St. Louis
Charles River (N. Y.) District Medical Society
Cincinnati Association of Consulting Engineers
Cincinnati Bar Association
Cleveland Patent Law Association
Copper County (Mich.) Bar Association
County Medical Society
Craddock Memorial Clinic of Sylacauga, Ala.
Dayton (Ohio) Bar Association
Denver (Colo.) Dental Association
District of Columbia Bar Association
District of Columbia Dental Association
Eighth District Dental Society of the State of New York
Erie County (N. Y.) Bar Association
Garfield County (Okla.) Bar Association
Grand Rapids (Mich.) Bar Association
Glaus Brothers Jewelers of Minerva, Ohio
Harris County (Tex.) Medical Society
Harrison County (Iowa) Bar Association
Hollywood (Calif.) Chamber of Commerce, Inc.
Hudson County (N. Y.) Dental Society
Indianapolis Bar Association
Jefferson County (N. Y.) Bar Association
Joint Handicapped Council, of New York City
Kent County (R. I.) Bar Association
Kingfisher (Okla.) County Bar Association
Livingston County (N. Y.) Bar Association
Lucas County (Ohio) Bar Association
Maricopa (Ariz.) County Bar Association
Medical Society of the County of New York
Medical and Surgical Clinic of Wichita Falls, Tex.
Meriden (Miss.) Real Estate Board
Minnesota Society of Professional Engineers
Monmouth Bar Association (New York)
Needham (Mass.) Medical Society
Newton (Mass.) Medical Society
New Orleans Bar Association
Norfolk and Portsmouth (Va.) Bar Association
Northern Virginia Dental Society
Polk County (Fla.) Medical Association
Rapid City (S. Dak.) Medical Center
Richmond County (N. Y.) Bar Association
Sacramento County (Calif.) Bar Association
Santa Barbara County County Medical Society
Second District Dental Society of New York
Stephens County (Okla.) Bar Association
Southwest Chapter of the Virginia Society of CPA's
Steuben County (N. Y.) Bar Association
Tacoma (Wash.) Bar Association
Tulare County Bar Association

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