EXCISE TAXES 23. Transportation tax: We favor complete repeal of the 3 percent tax on the transportation of property. 24. Broad-base exercise tax: We are opposed to any form of broad-base excise tax. SOCIAL-SECURITY TAXES 25. Increased social-security taxes and benefits (Forand bill): We oppose proposed increases in social-security taxes and benefits. We urge the most earnest consideration of our views by the members of your committee and by your staff, as you begin your arduous task of examining the multitude of proposals for tax reform which are now before you. Respectfully submitted. ROBERT E. CARTER, Chairman, Governmental Affairs Committee. STATEMENT OF KANSAS STATE CHAMBER OF COMMERCE The Kansas State Chamber of Commerce is a voluntary, nonprofit business organization with 2,750 business and individual members representing all phases of the Kansas economy. Through its affiliated memberships, it represents some 45,000 Kansans. GENERAL PRINCIPLES Among the basic beliefs to which this organization subscribes is that the Federal budget must be balanced, and that resort should not be had to deficit financing in time of peace. We also recognize the imperative need to take care of essential defense requirements. At the same time, however, the well-being of our economic system must be protected. Military defense will be of little avail if excessive taxation is permitted to weaken our economy and destroy our capacity to produce to meet the needs of our citizens. For this reason, we consider a moderate and stable tax structure to be of primary importance. It is necessary not only to preserve what we have but to permit the growth necessary to provide job opportunities for an expanding population. To this end: (1) The present excessive burdens of both corporate and individual income tax rates must be relieved, and (2) inequities in present tax laws must be eliminated. TAX RATE REDUCTION (1954 CODE, SECS. 1, 11) We believe that necessary tax revenues could be raised if the Congress would institute a planned program of progressive reduction in income-tax rates. The present rate of natural growth of the economy, plus the impetus to business resulting from such a plan would more than offset the reduction in rates. With regard to the individual income tax we believe that in order to secure the greatest possible popular participation in the cost of government, consistent with equity, a policy of low exemptions should be continued and the maximum rate should be lowered to 50 percent or less. Pending further action to reduce the corporate income-tax rate, we are opposed to further extension of the present rate beyond July 1, 1958. DOUBLE TAXATION OF CORPORATE EARNINGS (SEE 1954 CODE, SUBTITLE A, CH. 1 SUBCH. B, PT. VIII) There is no moral justification for taxing the same earnings twice, first to the corporation and again when divided among the owners of the corporation. To eliminate this inequity, corporations should receive deductible credits against taxable income for dividends paid. This should be achieved by an annual increased percentage of dividends paid being allowed as a credit until fully deductible. CAPITAL GAINS AND LOSSES (1954 CODE, SEC. 1211) Similarly, in the interest of equity and to encourage venture capital, we recommend that the deduction of capital losses be allowed in full against ordinary income as well as capital gains and that the tax rates on long-term capital gains be adjusted so that the maximum effective rate, now 25 percent, be kept in line with the starting rate on individual incomes. NET OPERATING LOSS DEDUCTION (1954 CODE, SEC. 172) Greater recognition to the problems of business should be given through extension of the 5-year net loss carryforward to 7 years, retaining the 2-year net loss carryback. DEDUCTION OF AMOUNTS SET ASIDE FOR RETIREMENT (SEE 1954 CODE, SECS. 401-404) Another item which we feel represents an inequity is the difference in the tax treatment of the officers and employees of corporations from that accorded the proprietor of a small business or the professional man. In the case of a corporation, it is possible for the corporation to set aside in a qualified trust certain amounts to be paid to the officer or employee after his retirement. The corporation receives a tax deduction for these amounts and they are not taxable to the employee until received in the form of a pension after he retires. The proprietor of a small business is not eligible for this treatment. We recommend that Congress pass legislation permitting the individual to deduct, within specified limits, amounts set aside for retirement purposes. PENALTY TAX ON CONSOLIDATED RETURNS (1954 CODE, SEC. 1503) Tax laws should not restrict or penalize sound business practices. For this reason, we recommend that the 2 percent penalty tax on consolidated returns be repealed. DEPRECIATION (1954 CODE SEC. 167) There is probably no single item which produces as much disagreement between the taxpayer and the revenue agents as the question of the amount of depreciation allowable as a deduction for tax-return purposes. This question involves method of depreciation, salvage value, and estimated life. We believe that these matters are properly those of management and that, within the limits of sound and consistent accounting, business management should be allowed to exercise its own discretion in these matters. We believe that the administration of tax law as it relates to depreciation does not reflect the intent of such law as enacted by Congress and evidenced by committee reports preceding such legislation. In summary, we recommend: 1. A balanced budget-no deficit financing in peacetime. 2. A planned program of progressive reduction in income-tax rates. 3. Elimination of double taxation of corporate earnings. 4. More equitable treatment of capital gains and losses. 5. Extension of net loss carry forward to 7 years. 6. Legislation permitting individuals to deduct, within specified limits, amounts set aside for retirement purposes. 7. Elimination of 2 percent penalty on consolidated returns. 8. Administration of depreciation provisions in accordance with congressional intent. LEO H. IRWIN, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, Clerk, Committee on Ways and Means, House of Representatives, Washington, D. C. DEAR MR. IRWIN: This is in response to your letters of October 29 and December 11, soliciting comments on possible revision of the internal revenue laws. The brevity of my remarks would not justify taking advantage of your invitation to appear as a witness, but I would like to offer them for the record and such attention as they may deserve. One of the advantages of large corporate size is stability of earnings. A company which is diversified as to location, product lines, channels of distribution, sources of material, etc., will suffer fewer ups and downs of profits. It will neither soar as high nor fall as fast as smaller firms. Of course, this particular advantage is only one of many advantages and disadvantages of size, which differs greatly from one branch of industry to another. Akin to the advantage held by a larger over a smaller one-in this one respect-is that held by an older one over a newer one. A firm which is trying to grow up to the right size for its line of business must not only earn a profit, it must also secure capital for expansion. But at this stage of its growth, its profit picture may be too unsettled for it to secure credit; and it must, therefore, depend to a disproportionate extent on retained earnings. But These advantages of size are an inherent part of our economic system. the tax system has, in my opinion, had an important effect in moving the balance of advantage toward the larger and the older firm. An established firm, with taxable income, shares half the gains and half the losses on any given part of its operations. A small or new firm, with no income or only one source, shares in gains but not losses. Lacking a system of perfect averaging, such a firm bears a disadvantage which is not an inherent aspect of capitalist enterprise, but rather an unintended result of high levels of corporate and individual income taxation. This reasoning assumes, of course, what some would deny that the incidence of the corporate and individual income tax is predominantly upon the owners of the enterprise. My reasons for this opinion are briefly indicated in the April 1957 issue of the Journal of Political Economy, and need not be repeated here. I think most economists would agree; many, and perhaps most noneconomists would disagree. We are repeatedly told that income taxes are really passed on to the consumer; that they are therefore inflationary, etc., etc. If these views are correct, then income taxes have no important effect on the structure of methods of American business. In my opinion, this is not true; hence taxes may, at least, have substantial effects. This has, so far, not been proved. Over the long run, we would expect to see industry become increasingly concentrated because of this tax effect. So farwith 1954 statistics-there is no sign of it. This may be because the process works slowly, and our rather crude statistics are not sensitive enough to catch the development in its early stages. But a process which gathers headway so slowly may also be equally slow in being reversed by any congressional action. Hence I would urge—and here depart from the facts to offer a hunch-that the Congress proceed on the assumption that the tax structure is indeed promoting economic concentration, and pose the question of what, if anything, can be done about it. It is clearly out of the question to make any substantial reductions in individual or corporate income taxes. Hence the best we can hope for is some kind of system to ease the burden of taxation on smaller business. This obviously calls for the most careful kind of investigation and drafting, since the possibility of abuse is so glaring. Not being expert, I cannot even offer any assurance that an acceptable scheme can be worked out. But it is definitely worth a try. A remission of taxes is a form of subsidy to small and new business, and we should be clear on what we hope to gain from it in return for the heavier tax burden we are asked to assume. The notion that lower taxes will produce higher revenues in the short run, because they will stimulate business, must be dismissed offhand. The argument that small business deserves support simply because it is small, because it makes for a more healthy political climate, etc., is not convincing. The example of France, where national income is sacrificed to small-business interests, suffices to disprove it. But a policy which would try to offset the disadvantages of small business which result from the tax struc ture would aim to preserve those small or growing enterprises which were efficient enough to survive and grow, absent the side effects of taxes. If even a very small percent of the new or small firms grew to the point where they could originate significantly new products or methods, imitated in time by others, the gamble would be well worth taking, in my opinion. But the difficulties are so great that this objective needs to be kept to the forefront at all times. With thanks for your consideration, I remain, Yours very truly, M. A. ADELMAN. AIR TRANSPORT ASSOCIATION OF AMERICA, Subject: Sections 167, 452, and 462 of the Internal Revenue Code of 1954. Chairman, Ways and Means Committee, House of Representatives, Washington, D. O. DEAR MR. CHAIRMAN: The Air Transport Association of America is composed of substantially all of the scheduled airlines of the United States. Its tax policy committee has carefully reviewed the recommendations for revisions in the Internal Revenue Code of 1954, transmitted on May 29, 1957, to Mr. Colin F. Stam, chief of staff, Joint Committee on Internal Revenue Taxation, by the Controllers Institute of America. Of the recommendations of that institute, three are of particular interest to the airline industry: IX-Depreciation, X-Accounting treatment of unearned income; and XI-Deduction for all ex penses attributable to income of the taxable year. The text of these recommendations is attached to this letter. In view of the general tax revision hearings now being conducted by the Ways and Means Committee, we believe it appropriate at this time to inform the committee of our strong endorsement of these recommendations of the Controller's institute. It is respectfully requested that this letter be included in the record of the current hearings. Very truly yours, J. D. DURAND, Secretary and Assistant General Counsel. RECOMMENDATIONS OF CONTROLLERS INSTITUTE OF AMERICA FOR REVISIONS IN INTERNAL REVENUE CODE OF 1954 IX. DEPRECIATION We have consistently urged that flexibility of method and rate should be permissible so as to meet the varying conditions of each taxpayer's business. The introduction of new methods in the 1954 code has unfortunately tended to introduce more, rather than less, rigidity. We urge that a taxpayer be permitted to shift methods or rates as his conditions require. Specifically, he should be allowed the automatic right to shift from any of the methods under section 167 (b) (2), (3), or (4) to the straight-line method or to any method under section 167 (a). X. ACCOUNTING TREATMENT OF UNEARNED INCOME Section 452 (repealed by Sec. I (a), Public Law 74, June 15, 1955) pertained to amounts received which have been recognized under prior tax rules as currently taxable income even though such amounts are to be earned over future periods. Basically, that section contemplated that there would be no recognition of amounts received as income so long as there was a future liability to render services, furnish goods or other property, or allow the use of property. That type of provision was essential to conform with good accounting practice and avoid the possibility of a tax being imposed upon the receipt of money which did not rightly, at the time, represent income. On the basis of presently available information, it does not appear that this provision would affect any substantial amount of revenue, and it is recommended that section 452 be restored to the Internal Revenue Code of 1954. XI. DEDUCTION FOR ALL EXPENSES ATTRIBUTABLE TO INCOME OF THE TAXABLE YEAR Good accounting practice requires that there be charged against the income of any year all expenses incurred or to be incurred which are attributable to such income. This principle was recognized in section 462 of the Internal Revenue Code of 1954, now repealed. The report of the Committee on Finance with respect to the repeal bill (H. R. 4725) completely vindicated the purpose and effect of section 462. We strongly urge that the intention of the Committee on Finance to report out substitute legislation be carried out promptly. In this connection, a special problem exists with respect to the accrual of vacation pay. Under rulings which antedated the enactment of the 1954 code, taxpayers have been permitted to deduct vacation payments to be made in the following year despite the absence of a fixed liability existing at the close of the taxable year. When this method of deducting vacation pay was adopted, there may or may not have been a compressing of 2 years' deductions into 1 year, depending upon the circumstances. If the early rulings are withdrawn in 1957, some taxpayers under present law will not be permitted to deduct any amount for vacation pay in 1957. This situation should be corrected by appropriate legislation, preferably by the reinstatement of section 462 or the enactment of a similar provision. We would oppose, however, any proposal which would allow the taxpayer a deduction for estimated expenses to be incurred after the close of the taxable year only at the price of foregoing a deduction for estimated expenses attributable to prior taxable years incurred during the taxable year or subsequently. Hon. WILBUR D. MILLS, Chairman, Ways and Means Committee, AMERICAN MEAT INSTITUTE, House of Representatives, Washington, D. C. DEAR CONGRESSMAN MILLS: The following suggestions with respect to revisions in the Internal Revenue Code of 1954 as presented as the recommendations of the American Meat Institute, the trade, research, and educational association of the meatpacking industry, representing a membership of about 435 meatpackers, sausage manufacturers, and meat processors and wholesalers throughout the country. These recommendations are the result of a study made by the American Meat Institute's committee on accounting of the income-tax laws with special reference to their application to the meatpacking industry. Following are our comments and recommendations: (1) DEDUCTION FOR ALL EXPENSES ATTRIBUTABLE TO INCOME OF THE TAXABLE YEAR The meatpacking industry tends to be seasonal. Hence various items of expense may be incurred at irregular intervals. However, good accounting practice requires that there be charged against the income of any year all expenses incurred or to be incurred which are attributable to such income. This principle was recognized in section 462 of the Internal Revenue Code of 1954, now repealed. The report of the Committee on Finance with respect to the repeal bill completely vindicated the purpose and effect of section 462. We strongly urge that the intention of the Committee on Finance to report out substitute legislation to be carried out promptly. In this connection, a special problem exists with respect to the accrual of vacation pay. Under rulings which antedated the enactment of the 1954 code, taxpayers have been permitted to deduct vacation payments to be made in the following year despite the absence of a fixed liability existing at the close of the taxable year. When this method of deducting vacation pay was adopted, there may or may not have been a compressing of 2 years' deductions into 1 year, depending upon the circumstances. If the early rulings are withdrawn, some taxpayers under present law will not be permitted to deduct any amount for vacation pay in the year of withdrawal. This situation should be corrected by appropriate legislation, preferably by the reinstatement of section 462 or the enactment of a similar provision. We would oppose, however, any proposal which would allow the taxpayer a deduction for estimated expenses to be incurred after the close of the taxable year only at the price of foregoing a deduction for estimated expenses attributable to prior taxable years incurred during the taxable year or subsequently. (2) INVOLUNTARY LIQUIDATION OF LIFO INVENTORIES A number of companies in the meatpacking industry have adopted the LIFO method of accounting for inventories in whole or in part. To them the problem of involuntary liquidation is one of great significance inasmuch as the industry deals with perishable products which cannot be stored for any appreciable length of time, but which must be sold and consumed fairly promptly. Whether or not it is in accordance with his wishes, a meatpacker must regularly dispose of his inventory and attempt to replace it. |