During the past few years, billions of dollars have been expended through the Federal National Mortgage Association, Public Housing Administration, and the Veterans' Administration, through direct loans to veterans, in an effort to meet the home-financing needs of our country. The cost to the Federal Government of making up a deficit in home financing is many times greater than any estimated increase in tax revenue which could be brought about by changing the tax provisions of savings and loans. Other consequences of reducing reserves in savings and loans through taxation: Lack of reserves is the only cause of savings and loan failure, and such failures undermine public confidence and create a depression-type psychology. Furthermore, 90 percent of the assets of the business are insured by the Federal Savings and Loan Insurance Corporation, and when the reserves of such associations are deficient, the Insurance Corporation must make up the difference. The Insurance Corporation, in turn, has a pipeline to the Treasury, Public Law 576, 1950, in the amount of $750 million. Proposal to limit dividend deduction is unfair and undesirable: From time to time it is proposed, as in H. R. 8737, to permit the deduction of only those dividends which are 3 percent or less. Under this proposal, an association paying 32 percent or 4 percent, as the majority are now doing, would be taxed on the upper portion of the dividend. It is well known to the committee that no other corporation taxpayer is required to pay tax on the cost of interest. Commercial banks have always been allowed a full deduction on the interest paid to their depositors. Such a limitation would have the undesirable effect of reducing dividends and discouraging savings, the prime weapon against inflation and the sole source of funds for the home financing done by savings and loans, the largest suppliers of home credit. The proposal to limit dividend deduction has the further disadvantage that it in reality attempts to achieve a supervisory objective through the taxation process. While it is true that banks are limited to a 3 percent interest rate, the limitation is totally unrelated to taxes and is no valid precedent. Savings and loans are producing a substantial volume of tax revenue: The total Treasury revenue produced by the savings and loan business is a combination of direct taxes and taxes paid by the receivers of dividends and has rapidly increased. Assuming an average income tax level of only 20 percent, the lowest bracket, for the holders of savings accounts, the tax revenue from this source has increased from $72 million in 1951 to $240 million in 1957, or an increase of 333 percent in just 6 years. Total estimated tax revenue from banks from 1951 to 1956, the latest figures available, increased from $691 million to $1.054 billion, an increase of 52 percent. Tax revenue produced by savings and loan associations compares favorably with other financial institutions: The total tax revenue produced by savings and loan associations for every $1,000 of assets actually exceeds the total Federal tax produced per $1,000 in assets by commercial banks and life insurance companies. The following table, based on official figures for 1956, indicates a total Federal tax receipt of $5.02 per $1,000 of savings and loan assets, compared to $4.87 for commercial banks, and $3.06 for insurance companies. (The table referred to is as follows:) Comparative tax analysis of insured commercial banks, life insurance companies, and savings and loan association members of the Federal Home Loan Bank System, year 1956 Mr. BUBB. Many commercial bank organizations support the present savings and loan tax provisions: While some commercial bank representatives have been critical of the savings and loan tax formula, they by no means represent the thinking of all or even most commercial bankers. On the contrary, many banking organizations feel that the savings and loan tax provisions are proper and that the only change needed is an adjustment in the commercial bank tax provision. A statement filed with the Senate by the Reserve City Bankers Association requesting an increase in the reserves for bad debt allowance for commercial banks said, as follows: The alternative congressional course of reducing reserves allowed mutual savings banks and savings and loan associations would not appear to be in the public interest as the reserve ratios, at least in relation to loans, would not appear excessive in relation to possible losses in any future depression. An advisory committee to the Senate Banking Committee on Recodification of Financial Laws, composed almost entirely of commercial bankers, filed a report on all phases of banking and savings and loan law, including taxation, but did not recommend any change in the savings and loan taxes. The chairman of the committee, Kenton Cravens, of a St. Louis, Mo., bank, said in a speech on November 25, 1957: Unfortunately, some of the commercial bankers forget that the real objective is adequate reserves and want to achieve a competitive parity with savings associations by reducing their allowable reserves. Personally, I cannot think of a more unsound approach to the problem. I can convinced, however, that the great preponderance of the Nation's farsighted bankers know that the only real answer to the problem is congressional approval of higher allowable bank bad debt reserves. Comment on other views: Now for a few comments on the testimony and arguments of bankers who are opposed to our tax provisions. One of their spokesmen before this committee last Thursday, Mr. Roth of New York, in response to a question by Representative Forand, admitted that an investment of $4,000 in the stock of his bank in 1940 was worth $1,256,000 by 1954. I was in the savings and loan business in 1940. If I had had $4,000 in my savings and loan in 1940, it would have been worth $6,068 in 1954, a mere pittance compared to the million and a quarter value of the bank stock. The explanation is very simple. In savings and loan associations, the people who put up the money, the savers, get the earnings; currently about 312 percent. In banking, the people who put up most of the money, the demand depositors, get nothing; the savings depositors get a modest rate, and the earnings are funneled to the stockholders. You have heard the arguments that because of tax provisions, savings and loan associations are pulling the savings away from the commercial banks. Let me cite figures to the contrary. In 1955, savings and loan associations gained $4.96 billion in savings; banks gained $1.58 billion in savings. In 1957, the associations gained $4.94 billion and banks gained $5.35 billion. While the savings growth in our institutions was showing a slight drop, the savings increase in banks more than tripled. The tax provisions for both institutions were unchanged during that period. It is obvious, then, that factors other than taxes caused this spectacular shift. Here again there is no secret. For years the banks were indifferent to savings, paid little or no return to time depositors, and devoted only minor promotional effort to thrift. Last year they increased their interest rates and advertising. It is interest rates and promotion that cause changes in relative competitive gains, not taxes. Summary: In summary, then, we strongly urge the committee to make no change in the present tax provision, particularly no change which would restrict the opportunity for savings and loan associations to accumulate reserves, to pay adequate dividends and to carry on their services. Thank you very much. The CHAIRMAN. Are there any questions of Mr. Bubb? Mr. Eberharter will inquire. Mr. EBERHARTER. Mr. Bubb, I assume that you read the testimony of Mr. Roth last week before this committee, and the interrogation made by Mr. Keogh of the committee. Br. BUBB. Yes, sir; I have. Mr. EBERHARTER. There was one statement he made which startled me. He said that mutual savings banks, and I think he included building and loan associations, had an accumulation amounting to, in effect, $2,000 million that really belonged to nobody. I just wondered what he meant by that. I think he put it in terms of $2 billion undivided reserves and so forth. He probably means that nobody owned it and that mutual savings were not compelled to pay it out in dividends. What did he mean by that? Mr. BUBB. I don't know what Mr. Roth meant by that statement. It certainly does not apply to savings and loans, I assure you. Mr. EBERHARTER. Do you think it might apply to some extent to mutual savings banks? Mr. BUBB. I doubt it very much. They are next, though, and you might ask them that question. Mr. EBERHARTER. I think I will do that. Maybe Mr. Keogh can answer it. The CHAIRMAN. Are there any further questions? The CHAIRMAN. Mr. Keogh will inquire. Mr. KEOGH. I would like to clarify a point, Mr. Bubb. The fact of the matter is that under the provisions of the 1951 act, which imposed a tax on your type of organization and mutual savings banks, the only tax-free credit you could make to reserves was a reserve for bad debts; is that not correct? Mr. BUBB. That is correct. Mr. KEOGH. So if I am the head of either one of those types of institutions, and my surplus and reserve for bad debts do not equal 12 percent of my deposit liability, I would have to pay tax on any amount I credited to surplus, would I not? Mr. BUBB. That is correct. Mr. KEOGH. Would you say that one of the reasons for that type of provision is to enable those types of institutions to accumulate in exactly the same way as commercial banks accumulate their reserves for losses, a reserve which, in the opinion of the informed people in those industries and in the supervising agencies, is deemed necessary for the protection of the depositors of this organization? Mr. BUBB. That is correct; yes, sir. Mr. KEOGH. And since the average loans made by these types of institutions are generally long-term mortgages, it is not practicable to apply a rule like the 5-year experience losses in the commercial banks? Mr. BUBB. That is correct, and that comes from our experience in the big depression of the thirties. Mr. KEOGH. Now, the only other question I would like to ask you, Mr. Bubb, is, in reference to page 8 of your statement, when you compare the gain in savings, you say banks gained $1.58 billion in 1955 and $5.35 billion in 1957. By that word "banks," do you mean just commercial banks? Mr. KEOGH. I thought you did, but I wanted to make certain that you were not pitting yours against banks generally. Mr. BUBB. No. I happen to be a director of a commercial bank, myself. I was just trying to bring out here that for many, many years the banks did nothing to attract thrift or to get savings accounts. I was trying to show here that the taxation treatment of the two has nothing to do with the competitive thing that you hear all the time between a few bankers and some savings and loan people. The minute they started after savings and started advertising and paying a decent return on them, they got the savings. Mr. KEOGH. I am rather delighted to hear you admit that in addition to being connected with the savings and loan industry, you are also a director of a commercial bank. In your experience, have you ever heard of the existence of captive commercial banks? Mr. BUBB. Yes, I have, sir. Mr. KEOGH. In what connection? Mr. BUBB. I have heard it discussed by the members of our staff there in Topeka. I don't know a lot about it; I will be honest with you. 20675-58-pt. 250 Mr. KEOGH. Do you know any commercial banks that are captives of any savings and loan association? Mr. BUBB. Not in our area; no, sir. Mr. KEOGH. Anywhere? Mr. BUBB. No, I don't. There are no savings and loans that I know that own any commercial banks anywhere. You see, a savings and loan cannot own the stock of a commercial bank or anything else, so far as that is concerned. Mr. KEOGH. The fact of the matter is that the historic philosophy of the commercial banks' business on the one hand and the mutual types of savings banks and savings and loan associations on the other hand are so entirely different that it is illogical to attempt to apply the same rules to both. Is that not correct? Mr. BUBB. That is correct; yes, sir. Mr. KEOGH. Thank you very much. The CHAIRMAN. Mr. Jenkins will inquire. Mr. JENKINS. Is it true that the building and loan companies have been expanding and increasing? Mr. BUBB. Yes, sir. Mr. JENKINS. Practically all over the Nation? Mr. BUBB. Yes, sir. Mr. JENKINS. How does their business compare with reference to the banking business, especially the small banks? Would there be any competition between them and the building and loan as to whether the building and loans are the same as the bank? Mr. BUBB. I think the figures will show that the savings and loans have been a service to the banks as well as building and loan. Mr. JENKINS. That has been my observation in my section of the country. We have a large number of what we call building and loan companies. I have never known any of them to even approach bankruptcy. Mr. BUBB. You have a very, very good showing in Ohio, Mr. Jenkins. Some other States are not as fortunate as Ohio. Mr. JENKINS. In what respects? Mr. BUBB. In the last depression, I mean, with failures. Mr. JENKINS. There must be some difference in the setup of building and loans in some States as against other States. Mr. BUBB. That is true. Mr. JENKINS. The banks, of course, in the United States would be controlled by the Federal Government in all States. Mr. BUBB. The Federal savings and loans are the same in every State, but State-chartered savings and loans differ as to the States. In some States they call them building and loans, some cooperative banks, some homestead associations, but Federal savings and loans are the same from Maine to California. Mr. JENKINS. They have a sliding scale as far as interest they pay: they pay whatever the market will pay? Mr. BUBB. It depends on the area, the supply and demand of money in the area more or less sets the rate. Mr. JENKINS. That is not controlled by the State government or Federal Government? Mr. BUBB. No, sir. |