righted works. We believe, however, that the public also has a great interest in this question because of the effect of taxation upon the professional authorship and upon the quality and quantity of published material which can be made available for study, research, public information, recreation and cultural improvement.

Copyrights and patents are two of the very few forms of property specifically provided for in the Constitution of the United States. Article I, section 8, of the Constitution gives the Congress the power "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;". The purpose of this constitutional provision was obviously to promote the public welfare by encouraging inventors and writers to carry on their work. The patent and copyright laws of the United States spell out the details of the property rights conferred upon inventors and authors and in general give the author, playwright, and composer a sound and salable title to his creative work for a limited period of years.

As members of this committee well know, however, with the great growth of income and estate taxation it is not gross income which counts in these times, but the income that remains after taxes. In this respect, we believe present Federal tax law has gradually evolved so as to discriminate against income from copyrights as compared with income from other forms of property. Thus the constitutional encouragement of authorship by grant of the copyright privilege is to a considerable extent being nullified by the tax laws.

It is necessary here to give some attention to the special characteristics of the income derived from copyrights and to the way in which professional authors earn their living in order to see clearly the special impact upon them of the present tax laws. We are concerned here not with the writer who is in a salaried position or who is paid on a regular monthly basis, and whose tax problems are substantially those of any salaried employee. We are rather concerned with the author who is an independent businessman devoting himself to the creation of a special class of property-copyrighted literary works-and whose income is derived from the exploitation of this property. Several points need to be borne in mind. First, this is an extremely speculative enterprise. A particular novel, if it happens to be a "best seller" and to be the choice of one of the major book clubs and the subject of a motion picture, can be very remunerative, but for every novel that reaches this level of success there are many dozens-indeed hundredsof relative failures which return only a slight income to the author in compensation for the several years of work that may have gone into their production. In the second place, for most American writers several years' work and preparation necessarily go into the creation of a single major piece of writing. The income from one successful book is hence his compensation for several years of otherwise unpaid effort. The income from his successful book must also repay him for the years that have been devoted to the preparation of books that in the outcome were unsuccessful, just as the returns from a single successful oil well may have to cover the expenses of many unsuccessful test drillings.

In the third place the income from a successful book is concentrated in a very short period of time. Few novels, even the most successful, sell actively for more than 1 to 2 years. The sale of movie rights generally comes simultaneously with the peak sale of the novel itself and so does any book club income that may be received. The income from certain types of copyrighted matter, for example, textbooks and standard musical compositions, are spread more evenly over a longer period of time, but in general a characteristic of almost of all copyrighted income is its concentration in very short periods separated by long periods with little or no income.

Finally, since the author is an independent businessman with no company. provided disability or sickness insurance, with no guaranteed annual income, and with no company-financed pension or retirement plan, the income he receives from his widely spaced successes must not only reimburse him for the years that went into their preparation, but must also provide the capital to finance him while he is working on his next book and with the means to set aside savings to protect him against the contingencies of illness or disability, to provide for the education of his children, and to provide for his own retirement and old age.

What the author of copyrighted material needs to enable him to meet this situation without the necessity of abandoning professional authorship to seek other means of support, and without the risk of becoming a burden upon the state, is in essence three things:

1. A means of spreading peaks of income over the periods in which they were actually earned and for which they must actually provide support for the author. 2. The termination of certain discriminations against copyrights as a class of property, so that when an author realizes a bona fide capital gain from disposing of a copyright he will be able to treat it for tax purposes as any other kind of property owner is able to treat a similar income from the sale of his property.

3. A means of deferring tax liability on sums set aside to provide pensions or annuities comparable to that enjoyed by employees who participated in company sponsored pension plans.

In all three of these cases authors and other creators of copyrights are presently discriminated against-obviously without deliberate congressional intention-by various aspects of the tax laws.

SPREADING OF INCOME

The Congress has recognized the special need of the author to have some means of spreading his income for tax purposes, and has provided that both inventors and writers may spread or average their income over a period of time if the invention or the copyrighted work took 2 years or more to complete and if 80 percent of the income derived therefrom was received in a single calendar year. There is, however, a discrimination against authors as compared with inventors in that the income received from a patent may be spread over a period of 5 years and that received from a copyrighted work may be spread only over 3 years, even though it is probable on the whole that a longer period of time goes into the creation of a typical copyrighted work than into the creation of a particular patentable idea of an individual inventor. In addition to this discrimination the congressional intent with respect to authors is in large degree frustrated by the 80 percent requirement. The income from a successful book is concentrated within a relatively short period, usually not more than 24 months. However, it is rare that so much as 80 percent falls within a single calendar year. This is particularly true since the typical publishing season and principal theater season runs from fall to spring, thus normally dividing the peak income between the latter half of one calendar year and the first half of the succeeding year. Relatively minor changes in the language of the spreading provision could greatly increase its effectiveness in achieving the purpose intended by the Congress.

CAPITAL GAINS TREATMENT

The Congress has undertaken by means of certain provisions of section 1235 of the code to provide a special incentive to inventors in that patents may be sold by an inventor and profits from the sale taxed as a long-time capital gain. This is true whether the inventor is a "professional” inventor or not, and whether the sale is for a lump sum or is for a payment over a period of time based on the actual use of the product-in other words, on a royalty basis. In contrast to this preferential position afforded the creators of patents, the creator of copyrights suffers disadvantages with respect to capital gains experienced by the owner or creator of no other class of property. The author under no circumstances can realize a capital gain from the sale of a copyright, whether it be in the normal course of his business or as an isolated transaction, whether it be in its entirety or for a divisible part of the copyright, and whether it be for a lump sum or for a royalty payment. The Constitution assigns the same purpose to patents and to copyrights and gives them both the same preferential position within the Constitution. There would appear to be no sound reason for not extending to the creators of copyrights the benefits now extended to the creators of patents. There would certainly appear to be every reason not to impose a special disability upon the creators of copyrights that not only does not afford them the special benefits given inventors, but denies them rights available to the owners of property of every other kind.

FUNDING OF RETIREMENT PROVISIONS

In common with all other self-employed professional workers, the author is discriminated against in providing for his own retirement as contrasted with the employee of a corporation. If the corporation sets aside funds to provide for the retirement of its employees on the basis of an approved plan, those funds are not taxed until they are actually disbursed to the employee as retirement income. This wise provision of the Congress has been the basis of now very

widespread arrangements by American corporations that provide for the comfortable retirement of their employees, supplementing the governmental provision made through the social-security system. Probably few tax measures have been as well conveived or as beneficent in their consequences.

The individual author struggling to sustain himself as a private creator of goods in our society has no such opportunity to provide for his retirement. In this situation he is, of course, joined by the attorney, the physician, and the practitioners of many other professions. The disadvantages of not being able to make a tax-exempt provision for future retirement income is particularly onerous in its impact upon the author because the occasional years in which he might otherwise be able to set aside a substantial sum for his retirement are also years in which, as we have previously pointed out, his tax rate is extraordinarily high.

The effect upon the internal revenue from changes of this character would be negligible. The total annual income to authors from copyrights is probably no more than $100 million on which there is now probably a tax liability of no more than $15 million annually. The changes here proposed would remove none of that $100 million from taxation. Their only effect would be to defer or spread out certain tax payment with a corresponding leveling out of tax rates. Even this effect would apply only to those authors whose successful work over the years is paid for in very brief periods of peak income. Probable loss of tax revenue would doubtless be in the neighborhood of one or at very most two million dollars a year initially, which would be reduced as deferred tax income is received.

Small as the effect on tax revenue would be, the social impact of the proposed changes would nevertheless be substantial. Only a handful of men and women in the United States who are without independent means now feel free to devote themselves wholly to authorship. Gladly they would accept the hazards of an occupation whose rewards are rarely large and always highly speculative, if the returns from the occasional and hoped-for success could be used to bridge the unpaid years of effort in between. But the present impact of taxation on peak income, coupled with the ineffectiveness of the present well-intended spreading provisions, makes it all but impossible for an author to sustain himself and his family and provide for his old age even when the works he creates are distinguished and successful. In consequence, almost all American authors are compelled to turn to other, more dependable and regular, but less creative means of livelihood and do such writing as they can in the weary margins of their time. There is no way we can measure the loss to American culture and scholarship from this deadening influence upon creative work, but surely it is grave. This is, of course, an unintended policy; no one has deliberately sought a tax policy that would discourage authorship. But nevertheless we have fallen into a situation in which our tax policies, far from carrying out the constitutional injunction to encourage authorship, act positively to discourage creative writing and intellectual effort as a profession.

No special privileges are sought, but we do make the following recommendations, intended to place authors on the same footing as inventors and as other creators and owners of property:

1. The adoption of improved spreading provisions along the lines recommended at these hearings by the spokesman for the Authors League.

2. Placing copyrights on the same basis as patents so far as capital gains treatment is concerned.

3. The adoption of the legislation proposed by Representative Keogh (H. R. 10), similar legislation to extend to the self-employed the opportunity, within reasonable limits, to make provision for voluntary pension plans.

(The following letters and statements were filed with the committee:)

STATEMENT OF AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS CONCERNING THE JENKINS-KEOGH BILLS, H. R. 9 AND H. R. 10

The American Federation of Television and Radio Artists (AFTRA) is one of the constituent unions of the Associated Actors and Artists of America, a labor union affiliated with the AFL-CIO.

Over a period of years, our union has supported legislation to enable persons to provide for their retirement and old age in the manner contemplated by this

bill. At the time we undertook to support the bill there were no qualified pension plans in the entertainment industry. As a result of collective bargaining agreements consummated in November 1954, between AFTRA and the broadcasting industry, pension and welfare plans were approved and subsequently were qualified by the Treasury Department.

Effective January 1, 1958, a qualified pension plan became applicable to performers rendering services in the radio and television industries who might meet the requirements of the plan.

Since our original efforts on behalf of the bill, it has been amended to exclude from its application employed persons and those who are eligible for pension benefits under qualified pension or profit-sharing plans. Accordingly, the members of AFTRA are no longer covered by the proposed legislation.

Our purpose in submitting this statement is to bring to the attention of the committee the inequality which results from the exclusion of AFTRANS from the benefits of the bill. Although many members will eventually be able to retire with social security and pension benefits, the amounts derived by them will in most instances be inadequate to maintain a satisfactory standard of living. Moreover, persons who qualify under the proposed legislation will be able to make better provision for themselves by complying with the requirements of the bill than can our members having comparable incomes who are deprived of the opportunity to provide for themselves by the exclusionary amendment.

It is our recommendation that all persons, whether the beneficiaries of social security alone or of qualified pension plans as well be permitted to make contributions on their own which would bring up their retirement benefits to the amounts which they would realize under the proposed bill. The law should be amended by adopting a formula which would equate the position of all taxpayers.

STATEMENT OF J. G. HARDEN BERGH, V. M. D., EXECUTIVE SECRETARY, AMERICAN VETERINARY MEDICAL ASSOCIATION, CHICAGO, ILL.

Mr. Chairman and members of the committee, the American Veterinary Medical Association, representing the veterinary profession in the United States, has consistently supported legislation pertaining to the establishment of voluntary pension plans for the self-employed, presenting testimony before the Committee on Ways and Means in 1953 and 1955. Our members have directed us to inform your committee of their desires in this matter. Furthermore, the association has supported the effort of the American Thrift Assembly to obtain equity for the self-employed, that would be realized by enactment of the current Jenkins-Keogh bills.

Knowing that this committee is well versed concerning the provisions of the proposed Self-Employed Individuals Retirement Act of 1957, also regarding the numerous reasons advanced for granting the self-employed limited tax deferments for the specific purpose of establishing old-age pension programs, we will not elaborate on these. Instead, the American Veterinary Medical Association, speaking on behalf of its constituent associations in the 48 States, and in the territories of Alaska, Hawaii, and Puerto Rico, strongly urges the Committee on Ways and Means to report favorably and recommend enactment of H. R. 9 and H. R. 10.

For the information of the committee, we are including as a part of this statement, the text of a resolution which was unanimously passed by the AVMA house of representatives during the 94th annual meeting of the association, Cleveland, Ohio, August 1957:

"Resolution No. 2

"Whereas there are now pending the Congress H. R. 9 and H. R. 10, commonly referred to as the Jenkins-Keogh bills, which bills would grant to selfemployed persons substantially the same tax benefits as are now available to employed persons participating in corporate pension plans; and

"Whereas common justice demands that self-employed citizens of the United States have available to themselves the same tax benefits as are provided for employed persons; therefore be it

"Resolved, That the American Veterinary Medical Association in annual session urge the 85th Congress to enact the said proposal into law; and be it further

"Resolved, That a copy of this resolution be sent to each Senator and Representative and to the Vice President of the United States."

The American Veterinary Medical Association appreciates this opportunity of presenting its views on this matter to the committee.

STATEMENT OF GEORGE H. FRATES, WASHINGTON REPRESENTATIVE OF THE NATIONAL ASSOCIATION OF RETAIL DRUGGISTS, IN SUPPORT OF H. R. 9 and H. R. 10, THE JENKINS-KEOGH BILL

Mr. Chairman and gentlemen of the committee, my name is George H. Frates. I am the Washington representative of the National Association of Retail Druggists, an organization composed of 36,000 small, independent, retail pharmacists practicing their profession in every State of the Union and the District of Columbia. These thousands of retailers own and operate the NARD. Dr. John W. Dargavel is administrative supervisor. He is general manager and executive secretary of the association, with headquarters at 205 West Wacker Drive, Chicago, Ill. My office is at 1163 National Press Building, Washington, D. C. Our statement, submitted today, is patterned along the lines of those who plead with the Congress for tax equalization for independent, self-employed persons. The independent retail pharmacists of our Nation do not ask for Government subsidies in order to operate their pharmacies, to the end that their professional services may be available to the public during the day and far into the night.

Why should a corporation or an individual conducting some other form of a business who hires people, be permitted to defer a portion of taxable income from taxation by setting it up in a retirement fund, when the small, independent, retail pharmacists cannot do likewise? We have been told many, many times by the honorable Members of Congress that "small business is the backbone of the Nation." If this be true, the Congress should overwhelmingly enact H. R. 9 and H. R. 10 into law. These are days of challenge for small business-for the small self-employed person.

H. R. 9 and H. R. 10 would correct a discrimination that has unfairly penalized those who choose to work for themselves rather than for others. This proposed legislation would permit the individual operator to deduct from his total income a fixed percentage or dollar amount on which he would pay no income tax. He would be allowed to invest this money in a pension retirement fund. Only when he used this fund in later years would he pay income taxes on the money.

For further purposes of the record, we reiterate the testimony given before this committee by the Honorable F. Joseph Donohue because his study cites two characters, Jones and Smith, identified as practicing pharmacists.

"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 wellnigh impossible to catch up with the Joneses at all-if Jones is a typical employee and you are one of the 10 million individuals in America who works for himself.

"Let's take an example: Two neighbors, 1 named Jones, 1 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 compen. sation 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 in. come over and above social security.