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and 'Utility Commissioners, the American Watershed Council, the Joint Council of Engineers, the National Association of Electric Contractors, and others.
Gentlemen, we believe that the freedom of the press, speech, and petition, and the right to propagandize are all essential to the process of assuring the continuation of our democratic society, but we do not believe that freedom of speech and petition should carry with it sanction permitting the monopolistic elements in the electric utility industry, the so-called private power companies, to carry on an unlimted propaganda campaign and lobbying program at the expense of the consumer, taxpayer, and Federal Government.
We believe that it is basically and fundamentally wrong for these giant electric utility monopolies to saddle millions of dollars annually in cost-plus advertising propaganda and direct and indirect lobbying costs onto absolutely helpless rate payers, including the rural electric cooperatives. Although it may sound like an Orwellian twist, it is true that the rural electric cooperatives are forced through their rates to pay for the very propaganda expenditures that is being used against them.
Perhaps I can say it best by referring to a concrete example. Recently we received a copy of a Saturday Evening Post brochure, circulated by the Curtis Publishing Co. in 1956. The preface tells us that this brochure is a consolidation of ads carried in the Saturday Evening Post for electric companies advertising program. Further it tells us that “ by the end of 1956 the Post had carried 169 electric companies advertising program advertisements—more than any other major publication." They are reprinted here to show how one industry, advertising its cause consistently and persistently, has been able to help shift the great weight of public opinion.
Continuing, the brochure tells us that "electric companies advertising program advertising is designed to win public support for the independent electric light and power companies. Most people 15 years ago favored Federal public power. Today, the balance has swung in favor of the electric companies."
We believe, gentlemen, that any objective person who analyzes this booklet would conclude that many if not the bulk of the ads displayed are neither ordinary and necessary expenditures, nor do they bear a reasonable relationship to the business activities in which the enterprise is engaged. These ads do not propose to sell more electricity. They are not good-will ads; rather they are lobbying and propaganda ads for the promotion or defeat of legislation, or political purposes, and/or the development or exploitation of propaganda and furtherance of matters in the area of political controversy.
One other example will suffice, I think, to point out what I am driving at. During the first session of the 85th Congress the Public Works and Resources Subcommittee of the Committee on Government Operations issued a report entitled “Private Electric Utilities Organized Efforts To Influence the Secretary of the Interior.” In this report it was pointed out that five private power companies charged up to the rate payers and not the stockholders the cost of the pamphlet entiled "The Federal Power Program, Its Background, Growth, and Consequences.” The pamphlet, the committee report argued, was prepared to influence the policies of the Department of Interior, and not to carry out the ordinary and necessary business activity. These costs were charged as a business expense, and therefore such costs were deductd from gross revenue before the computation of Federal income taxes.
Under this same investigation, the committee turned up the fact that another propaganda pamphlet, "Turn on the Lights,” sponsored and paid for by 59 private power companies, was charged up as a cost of doing business; therefore paid for by the rate payers, and by the same token reduced the Federal revenue.
We do not know over the years how many millions of dollars have been spent directly and indirectly by private power companies for propaganda advertising and lobbying, but we do feel—and the law, the way it has been interpreted to me, seems to clearly indicate—that these expenditures cannot legally be charged up as a cost of doing business. Obviously about half the cost of the private power companies' annual lobbying and propaganda campaign is borne by the taxpayers, for these companies deduct the total cost as an expense of operations before taxes; that is, before the payment of corporate income profits taxes. A great service could be done for all taxpayers and consumers of electric power if this committee were to instruct the Internal Revenue Service to investigate the charge we have made here, and if our contentions prove correct, not only could a great wrong be rectified, but in addition Federal revenues would be increased.
While I am on this point of advertising, I would like to discuss one other matter. In 1956 the class A and B private power companies spent some $123 millions for alleged sales promotion, all of which has been claimed as an electric operating expense. This amount was used, ostensibly, for such purposes as institutional advertising, displays, publicity, and commercial and industrial and residential promotion programs. According to the private power company logie, this expense would be justified for the purpose of creating a demand for elec tric power, and such being the case, i. e., that such advertising is necessary and proper, the expense should be borne by the rate-paying public and not by the stockholders.
But, when we examine the facts, we find that nearly every area of the United States is hungry for power, and that there is a constant demand to increase power output. Private power company plant and equipment investment continues to increase year after year. The electric power business is by far the fastest growing major American industry, doubling its use about every 744 to 10 years. Perhaps a portion of this expenditure is justified where there is a need to compete against natural gas, for instance, but perhaps, as some commissions have ruled, such a large expenditure should not be charged wholly to the consumers. No doubt much of these expenditures were incurred for institutional advertising in one form or another, appliance merchandising programs, goodwill advertising programs, and in some cases advertising for a rate increase. I do not wish to infer that some of these expenditures are not justified, but I do wish to suggest that perhaps inquiry into the whole area of advertising expenditures in the regulated monopoly industries should be investigated with the idea in mind that at least some of such costs be borne by the stockholders out of their net income after the payment of Federal income taxes, and should not be borne by the rate payers.
LIBERALIZED DEPRECIATION AND ITS EFFECT ON FEDERAL REVENUES As we all know, in an economic sense, corporate depreciation accounting has significance only as it relates to the level or amount of taxable income. To the degree that corporate depreciation deductions can be increased within any taxable period, the revenue of the Federal Government will be reduced. It obviously follows that any provision made in the tax laws affecting the amount set aside for depreciation will likewise have an effect on the amount of revenue collected by the Federal Government.
There is no need to relate at this time a detailed history of the various changes that have been made in the income tax laws as they affect depreciation accounting for tax purposes. Suffice it to say that ever since 1934, when, as a result of the disclosure that business corporations were evading taxes through manipulation of depreciation schedules and accounts, and the Internal Revenue Service countered by adopting uniform straight-line depreciation rates, big business in general has been agitating for a change in the law to liberalize depreciation for tax purposes.
When, during World War II and the Korean war, corporate business became aware of the effects and potentialities of wartime accelerated amortization (sec. 168 of the Internal Revenue Code), its demands for a permanent and wholesale revision of the Internal Revenue Code became more and more persistent. It was this accelerated amortization principle which provided the idea that served as the basis for the proposal presented and enacted into law (sec. 167 of the Internal Revenue Code provides two additional methods of depreciation accounting for tax purposes). Under these new methods the corporate tarpayer can elect a declining balance method of depreciation at double the straightline rate or the sum of the years digits method in place of the conventional straight-line method. These two new methods of depreciation allow the same total deductions over the service life of the asset as the straight-line method. but differ from the straight-line method by providing much larger writeoffs in the early life of the asset. For example, under the declining balance method, approximately 40 percent of an investment can be written off during the first quarter of its useful life and approximately two-thirds during the first half.
At the time of introduction of this liberalized depreciation amendment (section 167) it was recognized, as I shall point out in more detail below, that, if passed. it would have substantial effects on the tax collecting ability of the Federal Government for, to a large degree, this liberalized depreciation provision acts in much the same way as does the accelerated amortization provision used in connection with the construction of defense facilities.
was apparent because of the fact that even theugh under the accelerated amortization provision the deferred portion of taxable income retained by the corporation granted an accelerated amortization certificate would eventually be paid back, a revenue lag would still result, and to fill this gap the Government would have to borrow additional funds. The extent of this lag and its consequent cost to the Federal Government, leaving completely aside the fact that the corporations fortunate in obtaining these certificates were receiving an interest-free loan, was pointed out by the former Secretary of the Treasury, Mr. Humphrey, in his testimony before the Senate Finance Committee when s. 1795 was under discussion during the first session of the 85th Congress.
As reported by the then Secretary, through 1956 the revenue lag resulting from the accelerated amortization program probably exceeded $5 billion; in addition, as a result of this revenue lag the interest cost to the Federal Government will amount to some $3 billion.
Also of interest and significance in connection with the accelerated amortization program, and applying equally as well to the liberalized depreciation amendment, Mr. Humphrey pointed out that under the rapid amortization program there inevitably will be dislocations and unfair advantages between whole industries—and individual companies within an industry.
In principle what was reported by the former Secretary of the Treasury concerning the economic effects of section 168 of the Internal Revenue Code was well-known before the congressional debate began on the amendments to the code in 1954. And surely we can assume that Mr. Humphrey or at least his staff was aware of the economic consequences of a general across-the-board liberalized depreciation amendment to the code, for in effect the passage of section 167 of the code merely perpetualized the accelerated amortization provisions of the code.
In spite of this knowledge and in the name of "stimulating private investment,” the administration working through its spokesman, Mr. Humphrey, appealed to the Congress in 1954 to enact a perpetualized fast-tax depreciation provision. In support of this proposal, Mr. Humphrey argued that "* * * the purpose is to stimulate * * * plant expansion and modernization * * * and by providing less restrictive rules than at present for writing off the investment in machinery or plant will encourage modernization and rebuilding of more efficient plant equipment.” And, as we know, the administration had its way.
What exactly have been the consequences? First of all let me question what I consider to be a rather dubious assumption made by those who championed such legislation, and that is that such an amendment would serve as a stimulus for capital expansion. A survey of 167 corporations, conducted by one of the most reputable economic research agencies (The National Industrial Conference Board) revealed that 45 percent of these corporations planned to use the new depreciation methods; 20 percent were undecided, and 35 percent planned to retain the straight-line method at least temporarily. However, most significantly, of the 45 percent that planned to use the new methods, two-thirds were not influenced to increase their total investment. In other words, only 15 percent of the corporations surveyed reacted positively to this incentive, while the other 30 percent were simply going to enjoy a windfall subsidy.
Now let us examine the extent of this subsidy. First of all, we must recognize one important difference between liberalized depreciation and accelerated depreciation. Accelerated depreciation is a once-and-for-all proposition. After the 60-month deferral period the corporation must pay back the deferred taxes to the Federal Government. But under the liberalized depreciation provision of the code, assuming continued expansion of capital facilities or even only replacement, as Senator Douglas pointed out, the so-called deferral will never be paid back.
Although there are wide discrepancies between some of the various estimates made of the subsidy which will accrue under section 167, and of the consequent loss in revenue to the Treasury, it is of more than passing interest to indicate the magnitudes involved. One estimate reported by Senator Kerr places the loss to the Treasury at over a billion dollars a year for a period of 20 years. Senator Douglas estimates that the tax burden of corporate business will be reduced by $1.55 billion a year. Prof. E. Cary Brown estimates that the eax deductions between 1954 and 1973 will amount to $125.7 billion, and that, at a 50 percent average business tax rate, this would mean a revenue loss of $63 billion for the period, or $3.15 billion a year. In one industry alone, the private power company_sector of the electric utility industry, it has been estimated by some of the Federal Power Commission staff that the subsidy
accruing to the private power companies compounded at 6 percent will amount over a 20-year period to some $18 billion.
And all of these estimates do not take into account the fact that additional revenue will be lost to the Treasury due to the fact that additional funds will have to be borrowed at the going rate of interest in order to make up the continuing revenue loss.
Added to all this is the probability that monopolistic big business will be the primary beneficiaries of this tax subsidy, thereby increasing their financial and monopolistic hold on the country and further destroying the competitive structure of the economy. As two well-known economists, Profs. Horace M. Gray and Walter Adams, have pointed out:
** * * Big business will get most of it. Since it (sec. 167) applies only to new investment, it favors concerns characterized by high capitalization, readily available capital through retained profits, rapid growth, technological innovations, and established market positions. Since it is realizable only as a deduction from net income, its value depends on the coincidence of high investment, high profits, and high taxes. This combination of circumstances exists more generally among large, dominant firms than among small ones. The fact of monopoly power alone may be a decisive determinant, since a firm that has an established position in the market and a significant degree of control can use that control to develop new outlets for capital investment.” 1
I do not point these facts out as an argument completely against the subsidization of business, if after careful analysis the subsidy is deemed to be needed and, further, if the granting of such a subsidy will assure the continuation of what remains, at least, of our competitive economic structure.
It seems, however, on an analysis of the records, that no careful consideration was given concerning the short- or long-run effects of rapid depreciation on either the revenues of the Federal Government, the structure of the economy, or the distribution or concentration of economic power.
Given the facts as presented above, the following analysis seems valid and pertinent. Business is currently operating below capacity; in some instances 20 to 30 percent below capacity. It has been characteristic in our economy that business will not expand its capital equipment unless the necessary market outlets are available. Therefore, it follows that any incentive granted to provide increased capacity through tax incentives under such an economic situation will provide nothing more than a subsidy without the commensurate increase in capacity.
In conclusion of this part of my discussion, gentlemen, I would like to say that under most situations I would object to the granting of subsidies to provide plant and equipment expansion. However, given the fact that such a subsidy program is in operation and the presumed reasons for instigating such a program, the current facts indicate that not only will the Government, at a time when increased revenues are desperately needed, lose substantial revenues, but that the assumptions made in support of such a subsidy program are not valid.
For these reasons, I would suggest that this committee and the Congress review the background and effects of rapid depreciation provisions of the Internal Revenue Code, for I believe that the facts will all point to the obvious conclusion that section 167 of the code should be repealed.
STATEMENT OF WILLIAM GOLDMAN IN SUPPORT OF H. R. 4566 My name is William Goldman. I am submitting a statement to this committee on behalf of Goldlawr, Inc., a corporation of which I am a stockholder and executive. Goldlawr, Inc., is a Pennsylvania corporation which operates the Erlanger, a legitimate theater in Philadelphia, Pa. In 1957, Goldlawr, Inc., filed an antitrust suit in Philadelphia against the Shubert interests, alleging that they had combined and conspired to monopolize the theater business in the United States, depriving the Erlanger of legitimate attractions as part of the conspiracy.
I am also the principal stockholder and executive of William Goldman Theatres, Inc., a corporation which operates first-run and other motion picture theaters in Philadelphia. This company won a pioneer victory in the antitrust
1 Walter Adams and Horace M. Gray, Monopoly in America, p. 93.
field against the major producers and distributors, before the Government obtained the decree in the suit which it brought against the same defendants. William Goldman Theatres, Inc., is the company involved in the Goldman tax case referred to below.
My statement is submitted in support of H. R. 4566, a bill which would amend the Internal Revenue Code of 1954 so as to provide relief with respect to the tax treatment of damages in antitrust actions. Under the bill, where damages are received as a result of an antitrust action or a settlement, the punitive portion of said damages would be excluded from gross income and the compensatory portion of the damages would be spread back in effect over the period during which the violation is considered to have occurred.
1. THE INEQUITY OF THE PRESENT TAX LAW AND THE NEED FOB BELIEF When the Supreme Court decided in 1955 in the Glensharo Glass and Goldman cases that treble-damage recoveries by plaintiffs in antitrust cases are taxable as ordinary income in the year of their award or receipt, it created a serious deterrent to the prosecution of antitrust violations through private suits. The taxation of the entire treble-damage recovery in 1 year can result in a tremendous tax burden to the successful plaintiff. In this respect, the policy of the income-tax law, as interpreted by the Supreme Court, is at odds with the Court's interpretation of the policy of the antitrust laws.
Recently, the Court stressed "* * * the public interest in vigilant enforcement of the antitrust laws through the instrumentality of the private treble-damage action." Lawlor v. National Screen Service Corp. (349 U. S. 322, 329 (1955)). The Antitrust Division of the Justice Department similarly has taken the view that the private antitrust suit plays an important role in insuring effective antitrust enforcement. For example, in a statement submitted to the Antimonopoly Subcommittee of the House Judiciary Committee on June 29, 1955, Robert A. Bicks, Esq., assistant to the Assistant Attorney General in charge of the Antitrust Division of the Justice Department, pointed out that complaints of antitrust violations are constantly increasing, while prosecuting staffs and appropriations for enforcement of the law, in contrast, have decreased, resulting, he concludes, in a need for increased reliance on private suits. He also pointed out that: "Private actions, however, do more than duplicate Government work. They may adjudicate practices not expressly covered by Government decrees, or they may help close the breach left by necessarily incomplete Government policing of decrees. And most important, private recoveries heighten the financial impact and consequently the deterrent value of both civil and criminal Government actions."
The public function served by the private suit is reflected in the rule of law that a private plaintiff may not recover under the antitrust laws unless he alleges and proves a public, as well as a private, injury. Apex Hosiery Co. v. Leader (310 U. S. 469 (1939)).
On the other hand, the private plaintiff faces great risks and tremendous financial burdens in the preparation and prosecution of an antitrust case. Mr. Bicks cites statistics to show that during the 5-year period from 1947 to 1952, private plaintiffs secured some satisfaction in but 134 of the 423 non-Government antitrust cases terminated in district courts. This means that in only 31 percent of private cases did plaintiffs secure any redress at all. This relatively small proportion of successful suits must be measured against the financial burden of undertaking such a suit. Thurman Arnold, in testifying before a subcommittee of the Senate Judiciary Committee in 1949, described the burdens of the private plaintiff in such litigation as follows: "In my own practice, people keep coming to me from all parts of the country with antitrust claims against some combination of corporations. I tell them that if they do not have $25,000 for the taking of depositions under the Federal rules, at least $25,000 just for costs and transcripts and traveling expenses, that they had better drop the suit. They will find themselves in the middle of the case without any evidence. * * . So in the ordinary case, the ordinary small-business man just cannot bring a suit for treble damages unless he has a very large sum of money or unless the Government does it for him." (Hearing on S. 1910, to amend the antitrust laws, 81st Cong., 1st sess., June 21, 1949, p. 3.)
It undoubtedly happens that many a prospective plaintiff, with a meritorious claim under the antitrust laws, aware of the substantial investment of time and money which he will have to make to prosecute a suit to a successful conclusion, is deterred from going ahead because of the reduction in his statutory reward