outlets located in every State of the United States, the District of Columbia, and a few also in Canada. The CHAIRMAN. Mr. Cassedy, can you complete your statement in the 5 minutes that have been allotted to you, sir? Mr. CASSEDY. Yes. The CHAIRMAN. Fine. If any portions of it are omitted in your overall testimony, they will be included in the record. Mr. CASSEDY. Thank you, Mr. Chairman. Mr. Chairman, our members are engaged in business as individuals, partnerships, unincorporated firms, and corporations under the laws of the various States and the District of Columbia where they are located. Many are very small, employing less than 10 employees, while a few are more substantial, employing as many as 100 employees; but all of our members may be classified as typical small-business men with limited capital and scope of operation. Our members buy their automotive merchandise from manufacturers that make and sell products for the automotive replacement market and resell such merchandise to garages, repair shops, service stations, car dealers, fleet operators and other retail trade outlets. In so doing, our members compete not only with other automotive wholesalers, but also with automobile manufacturers, oil companies, rubber tire companies, car dealers, chain stores, mail order houses, and others that sell and distribute automotive replacement products. During the present year it is estimated that there will be more than 65 million automobiles, trucks, buses, and other vehicles on highways and streets. The transportation of officials, laborers, and employees to their place of work in private industry and in Government, children and teachers to their schools, the sick and injured to hospitals, and other travelers for business and receration make it necessary, to maintain our American way of life on wheels, that these automotive powered vehicles be repaired when disabled and kept in good operating condition. To do this it is the function of our members and other automobile wholesalers to provide ready availability of literally hundreds of thousands of different replacement parts for the many different makes and models of automotive vehicles produced during the past 15 or more years and still being used. Obviously, if an automotive wholesaler is to perform this function properly, he must invest his money in a tremendous inventory of automotive merchandise, must tie up his capital in stock on the shelf that is slow moving and rapidly depreciates to the point of no value, becomes obsolete and is unsalable. Thus, obsolescence is an economic factor that is as important to an automotive wholesaler as his operating and marketing costs, in determining the value of his capital resources and the amount of the profit or loss in his business. Our members realize that inadequate capital resources and undercapitalization cause the majority of small-business maladies and failures, and are even more common causes of the failure of a business to grow. In these days of inflation, particularly as to prices, a business may appear to have grown considerably, while in reality it has stood still or possibly regressed. Conservative estimates have been made that inflation is responsible for 5 percent or more of the annual sales increase. Under the present Internal Revenue Code, there is a personal exemption of $600. A similar exemption for small business could work wonders in their profit structures. For example, suppose an automotive wholesaler has a net sales volume of $400,000. Of this amount, it is estimated that 5 percent of $20,000 is due to inflation. If the tax rate is 30 percent, he will have to pay $6,000 for income taxes, even though the business has made little or no profit from its operations. This small business, then, is in a position of having $6,000 less for its capital available to purchase new inventory to replace that sold. The inevitable result is a curtailment of business growth. An idea suggested by one of our members, to compensate for that curtailment of growth, is a revision of the Internal Revenue Code to allow a deduction from taxable income that would compensate for the loss due to inflation. He assumes, as in the previous example, the automotive wholesaler has a capital investment of $200,000, which is a reasonable figure, according to accountants. If he were given a deduction of 3 percent of his capital investment, it would amount to $6,000, which would equal the amount of his taxes, that are due to inflation. If this amount were credited to his income-tax account to compensate him for the inequity of paying taxes when he has made little or no actual profit, but only paper profit due to inflation, his capital position would be considerably improved. I do not know that this idea is novel, or whether or not it has possibly been presented in other forms to you. But we do believe that it is something that should be considered. Capital positions similarly improved for small businesses across the Nation will most certainly result in improved business conditions, and business growth will inevitably follow. It is axiomatic that tax revenues will increase in direct proportion to the success of a growing business. Our members are cognizant of the views publicly expressed by our governmental leaders regarding the need for huge increases in our defense spending. We are fully in agreement with the proposition that our Government should spend what is needed to protect our Nation, but despite inevitable increased expenditures in light of today's world conditions, we believe a reduction in taxes is feasible. Documentation now exists of governmental waste and inefficiency through overlapping of Federal functions and duplication of effort in virtually all areas of governmental activity. We believe that this waste and inefficiency can be eliminated through adoption of more of the recommendations of the bipartisan Hoover Commission for reorganization of the governmental agencies. We understand that over 60 percent of these recommendations have not yet been adopted. We believe that many unneeded items in our defense budget can also be eliminated. Moreover, it is our bleief that the present high combined corporate income tax rate and the steeply progressive individual income tax rate are serving to prevent an adequate flow of venture capital into new and expanding business; that the present income tax rates are oppressive, unfair, and discriminatory; that they penalize hard work, discourage initiative and ambition, restrict capital formation, destroy industrial vitality, and frustrate business achievement. Specifically, we believe that a reduction in the tax rates would revive our economy, would stimulate production, sales and consumption of products, and would result in an increase in the national income over and above our normal economic growth. During past sessions of Congress many bills have been introduced that dealt with the subject of taxation, but in our opinion the principles in the Sadlak-Herlong bills, H. R. 6452 and H. R. 9119, provide a definite, orderly, and sensible plan for the reduction of corporate and individual income tax rates by curtailment of governmental expenditures and by taking the reductions from the increased revenues of our normal economic growth during the next 5 years. In other words, we endorse the Sadlak-Herlong bills as being the best of numerous solutions that have been offered for our problem. We think that it is a realistic tax reduction program. It comes closest to fulfilling needed tax reform of all those that we have studied. The individual income tax rates in each bracket would be reduced, the lowest bracket being reduced from 20 to 15 percent and the highest bracket being reduced from 91 to 42 percent. The corporate income tax rate would be reduced from 52 to 42 percent. Under the present tax laws, an automotive wholesaler corporation with a $40,000 taxable income in 1957 would pay 30 percent of $40,000, or $12,000, plus 22 percent of $15,000, or $3,000, making a total of $15,300. Under the Sadlak-Herlong bills, the same corporation will pay: For 1958: 28 percent of $40,000, or $11,200; and 22 percent of $15,000, or $3,300, making a total of $14,500 and a saving of $800. For 1959: 26 percent of $40,000, or $10,400, and 22 percent of $15,000, or $3,300, making a total of $13,700 and a saving of $1,600. For 1960: 24 percent of $40,000, or $9,600, and 22 percent of $15,000, or $3,300, making a total of $12,900 and a saving of $2,400. For 1961: 23 percent of $40,000, or $9,200, and 21 percent of $15,000, or $3,150, making a total of $12,350 and a saving of $2,950. For 1962: 22 percent of $40,000, or $8,800, and 20 percent of $15,000, or $3,000, making a total of $11,800 and a saving of $3,500. The total tax saving of this 1 automotive wholesaler corporation during the next 5 years under the Sadlak-Herlong bills, in the event there are no postponements of the effective dates of reductions, would be $11,250. It is estimated that there are approximately 12,000 automotive wholesalers. On this basis, if it is assumed that one-third are corporations with an annual taxable income of $40,000, the combined tax saving of this small segment of 1 industry during the next 5 years would be $45 million. Thus, the effect of the enactment of legislation containing the principles of the Sadlak-Herlong bills would stimulate the flow of new capital into new and expanding business, replacement of inventory, machinery and equipment, additional employees, debt retirement and a broader scope of operation. Such legislation would pave the way to a sound national economy by bringing into balance Government spending and tax revenue, would discourage inflation, would create more incentive for constructive work and thrift, and would give the taxpayers some relief from an unreasonable tax burden. In conclusion, the Motor & Equipment Wholesalers Association recommends: 1. That inefficiency and waste through unnecessary governmental spending, overlapping of functions, and duplication of effort be elimi nated by adoption of more of the recommendations of the Hoover Commission. 2. That the Internal Revenue Code be revised so as to allow a business an exemption, in the form of a deduction of 3 or more percent of its capital investment, or otherwise to compensate for the progressive increase in the cost of inventory each year and the inequality of paying taxes when the business has made little or no actual profit, but only paper profit due to inflation. 3. That a realistic tax reduction program be enacted containing the principles of the Sadlak-Herlong bills which we believe come closer to fulfilling needed tax reform than any we have studied. We thank you for this opportunity. The CHAIRMAN. We thank you, sir, for coming to the committee and giving us the benefit of the views of yourself and your organization. Are there any questions? Thank you, sir. Our next witness is Mr. John J. Wicker, Jr. Mr. Wicker, will you please identify yourself for the record by giving us your name, address, and the capacity in which you appear. STATEMENT OF JOHN J. WICKER, JR., COUNSEL, MUTUAL INSURANCE COMMITTEE ON FEDERAL TAXATION, RICHMOND, VA. Mr. WICKER. Mr. Chairman and gentlemen of the committee: My name is John J. Wicker, Jr. I am a lawyer from Richmond, Va. I am now and have been for a number of years counsel for the Mutual Insurance Committee on Federal Taxation. In that capacity, I represent over 600 mutual fire and casualty companies with millions of policyholders and taxpayers. As you may see from the tabulation of member companies, filed herewith, the mutual committee membership includes mutual companies of all sizes, principally the smaller companies, from all sections of our country. Mr. Chairman and gentlemen, to save the time of the committee, and in view of all that the committee has been through, which I appreciate somewhat-because some years ago I was a member of the finance committee of the Senate of Virginia, and we used to have to sit through many long times on things such as you are going through-I will not read from the charts attached to my statement, but I would like to have them, as well as the lists, included in the record, please. The CHAIRMAN. Without objection, the charts and other appendixes will be made a part of the record. Mr. WICKER. Thank you, sir. (The charts and lists referred to begin on p. 3299.) MUTUALS ARE NOT SEEKING TAX REDUCTION Mr. WICKER. At the outset I want to make this very clear. We are not here seeking any tax reduction, for ourselves or anyone else. Nor are we seeking to shift our tax burden to anyone else. We are here because there has been presented to you what we believe to be a dangerously unsound tax proposal, one that would nearly double the tax burden of over 25 million mutual policyholders, and yet produce no appreciable increase in tax revenue for the Federal Government. NATIONAL COMMITTEE FOR INSURANCE TAXATION IS BASICALLY THE ALLSTATE COMMITTEE On January 14, 1958, a statement urging the adoption of a tax plan was presented to your committee by representatives of an organization calling itself the "National Committee for Insurance Taxation." That committee came into being about 4 years ago to serve as a front for the two Allstate Insurance Cos., which are solely owned by Sears Roebuck & Co. Since this new organization has been and is dominated and controlled and largely financed by the two Allstate Cos., and since the proposed tax plan was first presented by the two Allstate Cos., and since, further, 1 of the 2 speakers that appeared before you recently on behalf of that organization was a high official of Allstate, we will refer to that organization hereinafter as the Allstate committee. ALLSTATE COMMITTEE MEMBERSHIP INCLUDES HARDLY ANY MEMBERS OF NATIONALLY RECOGNIZED STOCK INSURANCE ASSOCIATIONS It is significant, we believe, that with very few exceptions no member company of the Allstate committee is a member of the National Board of Fire Underwriters nor of the Association of Casualty & Surety Companies. These two organizations have long been recognized as the leading trade associations of purely stock insurance companies, and the members of these associations write the great bulk of the stock fire and casualty insurance business. To the best of our knowledge, neither of these associations has indicated any desire for a change in the insurance tax laws, either for themselves or for the mutuals. And, although there are some elements in the present law that we do not like, we are not asking for any changes either. FACTORY MUTUALS AND RECIPROCALS COVERED BY SEPARATE STATEMENTS The mutual committee does not include the 13 companies generally referred to as factory mutuals. Their attitude with regard to their own Federal taxation has already been presented to you. Nor do we represent the interinsurance exchanges, generally called reciprocals, whose position will be presented to you later tody. EXISTING TAX PLANS IN EFFECT SINCE 1942 For the record, may I remind you that mutual fire and casualty companies are taxed under sections 821, 822, and 823 of the Internal Revenue Code as amended. Under these sections mutuals pay taxes each and every year at regular corporate rates on taxable investment income (including realized net capital gains) provided that the tax cannot be less than 1 percent of the sum of taxable investment income and premiums, after deducting dividends to policyholders. The tax exemption for a mutual company, found in section 501 (15) of the code, applies only to the very small companies whose total annual income from all sources (premiums, investment income, etc.) does not exceed $75,000. These very small companies, comparable to the exempt small-income individual citizens, aggregate approximately |