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COMMITTEE ON WAYS AND MEANS,

H. C. SMITH OIL TOOL Co., COMPTON, CALIF., January 3, 1958.

New House Office Building, Washington, D. C.

GENTLEMEN: It is our feeling that strong reforms are needed at this time in order to insure a workable tax structure in the future. The following paragraphs represent our recommendations for reforms to be instituted by your committee.

TREATMENT OF SMALL BUSINESSES

It is our feeling that the present-day small corporation, under the current 52 percent corporate rate, is at a distinct disadvantage in attempting to compete with larger corporations as to company growth. More specifically, the larger corporation possesses a far sounder woking capital position, is able to invest a great deal more in research and development, and thereby implements its own growth. The situation is compounded as the larger corporation can now avail itself of an expense writeoff of all research and development expenses and has its working capital position augmented by the tax savings.

PAYMENT OF TAX-DECLARATION OF ESTIMATED TAX

Future scheduled payments for corporate declarations will require that 25 percent of a current year's tax be paid in September, another 25 percent in December, and 50 percent the following March. This has the effect of taxing the income of a corporation and requiring payment before the corporation's net income for the year is determinate. It is very obvious the effect these advanced payment requirements will have on the working capital of smaller corporations.

DEPRECIATION METHODS

Although the 1954 Revenue Act allowed accelerated depreciation, which has been beneficial on new capital equipment acquisitions, all corporations are still saddled by a very outmoded and unrealistic Bulletin F. This publication, which designates the useful life to be assigned various corporate assets, should definitely be brought up to date commensurate with current operating conditions. Present depreciation allowances should give effect to economic depreciation or replacement cost and thereby adequately fund asset replacements. Due to the fact that the depreciation allowances are so unrealistic, when replacement actually takes place, funds that are set aside for expansion are dissolved in replacement. What we need and need most urgently is to overhaul the system from top to bottom-cleaning out the inequities, introducing more flexibility, removing the contradictions. What we need, in other words, is thoroughgoing tax reform. There has been little question for years but that the height of income tax rates is the crux of the problem. Only when we have lower tax rates will we be rid of the special privileges and tax dodging that high rates create. Only when we have lower tax rates will management and investors be free to make decisions on the basis of business factors and not of tax lures.

What we need is a tax plan designed, not to release inflationary spending power, but to reinvigorate productive work effort.

Very truly yours,

HERSCHEL C. SMITH, President.

GUNTERT & ZIMMERMAN CONSTRUCTION DIVISION, INC.,
Stockton, Calif., December 24, 1957.

HOUSE WAYS AND MEANS COMMITTEE,

Washington, D. C.

(Attention: Mr. Leo H. Erwin.)

GENTLEMEN: I welcome the opportunity to be able to present our tax problem to you.

The detrimental effect of the present tax burden has be borne only because of the feeling of respect, appreciation, and responsibility for our employees and faith in the future and our form of government.

Were it not for this faith, I would go out of business and sit upon the proceeds and wait for more appreciation of my ability and use of my funds. This attitude of faith is by no means unique in me; you have but to look about you to see it everywhere in this country. Our people do not live riotously but

turn their major efforts and gain to building. Gain made for the most part goes back into our operations whatever they might be. The farmer puts more land into production, the shop man, be it a small machine shop, manufacturer, or shipyard, puts in new tools and/or increases his plant. The supplier of material, be it steel or women's clothing, increases his inventory and distribution system.

Business people know that there is no middle course; either you go ahead or you go backwards.

The impact of our present tax rates, the consequences, and the action we must take are known to us; it is only our faith in the future that has sustained and detained us.

Again, there can be no middle ground. We must grow individually and as a country or we go backward-with no place for our expanding population to be gainfully employed and absorbed.

It should be noted that the firms about which comments are made are individually owned and are not companies whose stock is held by and offered to the general public. The individually owned corporations or closely held corporations do not have access to public funds for expansion, but depend upon their own earnings or contribution by their owners (stockholders).

There follows:

I. Example of the practical impossibility of growth from normal gains at our present tax rate in our supply business (steel, wire rope, transmission equipment, etc.).

II. Example of the net recovery from dividends by an individually owned corporation.

III. Example of the effect of taxes and ination on our manufacturing business (ships, dredges, cranes, etc.).

We make the following suggestions for tax revision: 1. Eliminate tax on corporate dividends.

Elimination of tax on corporate dividends will (1) eliminate the present double tax on income from corporations, (2) encourage investment in corporate stock, (3) encourage reinvestment of gain in same or other ventures, (4) foster productivity, for increased productivity comes from new developments which stem from new ventures.

2. Permit the following tax relief to corporations (and other business): (1) No tax to apply on any earnings used for reinvestment for capital needs.

Relief of tax on needed capital for expansion will free capital for growth and development. Funds available for expansion and growth will have been doubled. Increase in investment in modern tools and methods increases the productivity of men from whence stems our raise in living standards and ability to produce.

(2) Depreciation expense to be taken on present fair value (established by appraisal) rather than original cost.

Depreciation relief will (a) permit the replacement of obsolete equipment, (b) reduce the forces of inflation by reduction of costs, (c) increase of productive capacity, (d) increase buying power, as buying power actually increases only as the productive ability of manpower is increased.

Present depreciation allowance preclude the ability to replace equipment without added capital investment. Under the present tax rates and system, the availability of capital has been eliminated.

(3) Inventories may be computed on original cost of units stocked.

The present approved method of inventory evaluation forces tax payment on inflation of values without possibility of recovery. An item of inventory which cost $1 in 1945 can now only be replaced by an outlay of $4 and tax is assessed on the increase in value.

(4) Maximum tax rate of 25 percent.

Maximum rate of 25 percent would leave sufficient after taxes to encourage investment and permit growth. Present rates are such as to be confiscatory, as is evidenced by examples given.

To engage in business is to engage in a constant and continuing gamble. Capital funds are constantly and continually at risk to maintain continuance of operation, yet taxes are assessed and collected for over half of the current earnings. It is like engaging in a game of crap with the "table" taking half the recovery from each roll when the winnings have been left in the pot.

(5) No death or inheritance tax on corporate stocks. Taxes on estates containing stock tend to seriously disturb and even force liquidations and bring to an end the productivity of a company. The known unavoidable future effect of these taxes on individually or closely held companies is detrimental to their continuance, for as a man or a group of men come to the end of their useful life span, their efforts are turned to some form of avoidance of tax instead of healthy continuation of their business. In summary, the strength and ability of our enterprises are the sustenance of our people as well as the strength and ability of this country. Individually or closely held enterprises contribute and constitute a major portion of this sustenance, strength, and ability. This type of enterprise is and has been unique in its contribution to the general welfare and progress.

The continuation of the present tax burden and unavailability of natural growth capital will cause this type of business to be starved from existence. Tax relief will ultimately cause greater yield in tax revenue, for the relief will cause increases in investment and employment which are the base of our tax

revenue.

The impact of retrenchment by business due to taxes can affect available tax funds to a far greater extent than the change in tax recommended. Individually or closely held companies along with many others, "pulled in their horns" when it was publicly announced that no tax cut could be expected. Since then steel mill production has dropped off nearly 50 percent; our jobbing business on sales of steel is off 60 percent.

Remember the goose and the golden egg.
Respectfully submitted.

R. M. GUNTERT, President.

EXPLANATION, EXAMPLE I-LACK OF ABILITY FOR NORMAL GROWTH

SUPPLY BUSINESS GUNTERT & ZIMMERMAN SALES DIVISION, INC. Volume of $1 million of sales value was used simply to establish a common denominator. The figures used are pro rata based on our books and reflect maximum conditions of gain and minimum conditions of cost and necessity for funds. Growth of 10 percent was shown, for that has been the minimum we experienced. This growth is normal and can be considered as natural and/or inflationary; either have the same ultimate effect.

Profit of 8 percent net before taxes is the best net we have experienced and it is above the national average on this type of business.

Investment requirement items and additional requirements for growth are based on reasonable economic use of capacity of employees and facilities which we accomplish.

1. Cash:

(a) For payroll and overhead costs, increases in direct proportion as demand increases or as inflation effects.

(b) For accounts payable, increases in direct proportion to increase in sales volume, as they have a uniform mark-up and volume increase is by dollar value (whether from increase in unit sale or by inflation of price). 2. Accounts receivable despite every reasonable effort still hold at about 60 days of sales volume in our type of business and investment must be proportionately increased as sales volume increases (whether volume increase is by units sold or inflationary price increases).

3. Inventory must be increased to maintain service and justification of existence (which in this business is the utility of time and place). You can't do business from an empty wagon. As volume increases so must inventory, so long as reasonable turnover is being effected. We have used four turns, which is good for this type business, and as basis. Inventory investment demand can come from increase in units sold or inflationary price increases.

4. Fixed assets must be increased to take care of increased demand of growth. There is yet another problem here, for if proper increase or replacement is delayed, your costs begin to advance due to increased handling costs, and so forth, and profit marign drops. Also, the type of tools and facilities are of fairly long life and when worn out cannot be replaced for the original capital investment.

EXAMPLE I.-Lack of ability for normal growth-Supply business, Guntert & Zimmerman, Sales Division, Inc.

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NET RECOVERY FROM DIVIDENDS OF INDIVIDUALLY OWNED CORPORATIONS

Example II shows the effect of taxes and inflation on an individually owned or closely held corporation, if income is taken as a dividend. Please recall under example I that inflation is a cause of demand for increased investment as well as increased sales.

The amount of inflation at 5 percent shown is arbitrary and for purpose of example only. Actually, the demand of inflation has been in excess of 5 percent (nearer 10 percent) making an even worse picture.

Company ownership by an individual is quite normal-a greater percentage of corporations are closely held than are publicly owned.

Individuals who own closely held corporations are generally in high individual tax brackets.

The tax on high individual incomes does not account for a major portion of the tax revenue.

The owners closely held corporations account for a major portion of investment, expansion, and new products so necessary to our country's growth.

The present individual rates are so high as to be discouraging to investment. It has been argued that inflation is in itself an increase in value of a business. This is a fallacy; for value, no matter how inflated, reflects only replacement cost of units already possessed. Business further suffers by tax on the inflated values.

EXAMPLE II.-Net recovery from dividends of individually owned corporation

Sales volume___.

Net recovery 8 percent (before taxes).

Net after taxes-

$1, 000, 000

or

Taxes (52 percent)-.

Less: Demand for investment due to inflation 5 percent (arbitrary).
See example I-$66,720 required for 10 percent.

Net left for distribution___

Taxable to individual at my average 60 percent----

Net recovery for investment of $667,200.00=% of 1 percent-----

If no inflation encountered and no growth made, net left for distribution____.

Individual tax 60 percent---.

80,000

41,600

38, 400

33, 360

5,040

3, 024

2,016

38,400

23, 040

Net recovery for investment of $667,200.00=2.3 percent_--NOTE. See explanation preceding.

15, 360

EXPLANATION, EXAMPLE III

THE EFFECTS OF TAX AND INFLATION ON OUR MANUFACTURING BUSINESS

Guntert & Zimmerman Construction Division, Inc.

The main investment in our business is in plant and facilities.

The net recovery after tax is such that it is insufficient to keep up with the requirement for reinvestment necessary to retain our productive ability. Company owns plant and facilities having replacement cost of approximately $2 million.

The nature of this work we do is construction of odd and unusual special machinery and small ships, cranes, dredges, tugs and barges.

The work is sporadic by nature, and not always balanced as to type so that our facilities are never working to capacity in all branches and at times are almost completely idle. All of the facilities are necessary.

We do a volume of approximately 1% to 21⁄2 million dollars per year and are most fortunate if we can net 10 percent.

To be able to replace our facilities when they wear out or become obsolete, we need to be able to write approximately 10 percent of the replacement cost per year as depreciation.

By virtue of original costs, we are only permitted to recover one-seventh of this replacement value. Inflation has increased replacement cost almost 400 percent.

Our net recovery after taxes is insufficient to replace the loss of value in our equipment by age, obsolescence, and use, to say nothing of getting any recovery on any other part of the investment beyond the tools and facilities.

The effect of the deficiency shown in the example is that ultimately we shall be driven out of business for lack of ability to replace our tools and facilities and obsolescence to the extent that we are no longer competitive.

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