Now, that, in brief, is the way in which this reinvestment depreciation proposal works. We think that that would meet our problem just as would the construction reserve proposal that we presented before the Smathers subcommittee. We would not anticipate that both of those would be made applicable to the railroad industry, but we certainly hope that one of them will be made available to us to help us meet this very critical situation. If we are to keep pace, we have simply got to find ways and means of replenishing our capital facilities and going ahead and keeping up with technological advancements. Mr. Chairman, I commend to the committee the serious consideration of these proposals. And I appreciate the opportunity of presenting them to you today. The CHAIRMAN. Are there any questions of Mr. Prince? Mr. Eberharter. Mr. EBERHARTER. One question occurred to me while you were speaking, Mr. Prince. How do you take into account the improvements in the quality of the products that are made? For instance, would there be consideration given for that? A freight car is certainly worth a lot more than it was maybe 20 or 25 years ago. We have better freight cars now. Would that not be taken into account? Mr. PRINCE. As I understand it, it would not specifically be taken into account. This reinvestment depreciation does not require replacement in kind. It is to encourage and enable industries that are facing this problem to make capital improvements. We recognize that actually you might want to come up with a wholly different facility now to do the job that was formerly done by something else. And it would be very difficult, I should say, to try to measure whether the new facility was precisely the same as the older facility. And I do not think that that is taken into account. Mr. EBERHARTER. Then you have to replace all the old equipment with entirely new equipment of a different type and kind? Mr. PRINCE. Yes. Mr. EBERHARTER. You could make all the rolling stock of the modern type that is embraced in your proposal? Mr. PRINCE. That is correct. From the standpoint of management, it would not make sense for us to replace it with a car on the style of the older car. However, the index factor, I would think, would take into account some of these differences, the improvements that you speak of. I must confess I meant to do it before I started, but I am not a tax expert, and I come before you humbly because you said that these hearings would be broad and general hearings dealing with the tax policy. And some of the details of it, I am afraid, would probably have to be referred to the tax experts. Mr. EBERHARTER. Thank you. The CHAIRMAN. Mr. Prince, I have said to other witnesses who have appeared on depreciation that I recognize that there are problems in the area affecting not only the railroad industry but other segments that our overall economy faces as well, in view of the factors including inflation that have gone into the creation of a higher price for the replacement. However, it occurs to me that this suggestion-it is not only your suggestion, but the suggestion of others made earlier in the hearing-is really an oversolution of the problem that exists in that it seems to ccord you treatment beyond your needs. What I am getting at is this. This suggestion is even far more liberal, as I view it, than 5year rapid amortization. I have a little difficulty also I am just being frank with you-in using the Internal Revenue Code for purposes of trying to overcome the effects of inflation with respect to depreciation; because, if we once start doing that in the code, there is no limit to the instances that can be justified for similar treatment. I do hope that it may be possible for us within a limited time to find some solution that all of us will deem to be satisfactory to this very complex problem that all our businesses face. For example, the spokesman of one industry told me that one of their primary difficulties is that they cannot accumulate the money that is needed to modernize their equipment in order to maintain competition with a similar product coming from other parts of the world where through foreign-aid programs we have given to those foreign manufacturers the most modern equipment. Certainly when our own Government has created the situation, if it has, we should consider some correction. Recognizing the problem I am not certain that we have had suggested to us a satisfactory solution as yet. I hope we can, however, develop a solution. Mr. PRINCE. Í appreciate the frankness of the chairman's remarks. And as I say, we did present to the Smathers subcommittee the proposal that we thought was tailored more particularly to our needs. But this proposal being before you, it would treat the same problem and would provide a remedy that would be quite adequate for us in this field. We think that the proposal we presented to the Smathers subcommittee is probably one that is better adapted to meet our particular situation, which is a critical one, gentlemen, at the present time. The CHAIRMAN. I know it must be considered a critical problem for some railroad presidents to suggest to us that the Federal Government buy this equipment and lease it to the railroads for use. Mr. PRINCE. I think that is just an indication of how serious they think it is, as you say. The CHAIRMAN. You may be tending toward Government ownership of railroads if you take that initial step. I hope some alternative can be found. Mr. PRINCE. That was not an industry proposal, Mr. Chairman, you understand. The CHAIRMAN. I know. I understand that. I said some railroad presidents made that suggestion. Are there any further questions or comments of Mr. Prince? If not, sir, we thank you for bringing to us your suggestions and those of your industry. Our next witness is Mr. Clarence D. Laylin. We are glad to see you back before the committee. _We recall your previous contributions to our hearings in the past. For the purpose of this record, will you give your name, address, and the capacity in which you appear. 20675-58-pt. 3- 69 STATEMENT OF CLARENCE D. LAYLIN, COUNSEL FOR THE OHIO CHAMBER OF COMMERCE AND MEMBER OF THE FEDERAL FINANCE COMMITTEE OF THE COUNCIL OF STATE CHAMBERS OF COMMERCE Mr. LAYLIN. Thank you, Mr. Chairman. My name is Clarence D. Laylin. I live in Columbus, Ohio. I am counsel for the Ohio Chamber of Commerce and a member of the Federal finance committee of the Council of State Chambers of Commerce. I appear in behalf of the council and also for the Ohio Chamber of Commerce. The CHAIRMAN. Mr. Jenkins would like recognition, Mr. Laylin. Mr. JENKINS. I want to say, Mr. Chairman, for the benefit of the members who may not know Mr. Laylin as well as I do, that Mr. Laylin is beyond question one of the most prominent and widely known lawyers in the State of Ohio. I know his testimony will be straight and truthful. Mr. LAYLIN. Thank you, Mr. Jenkins. I appear in behalf of the Federal finance committee of the Council of State Chambers of Commerce and for the Ohio Chamber. As you know, the council is a federation of autonomous State and regional business organizations. As matters stood when these hearings were set, all but 1 of the 29 member organizations had subscribed to a statement of principles in the field of Federal finance, prominent among which was insistence upon the necessity and practicability of lowering the rates of the individual and corporate income taxes. In the meantime, events have occurred which seemed to the council's committee to make it imperative that the constituent organizations be given an opportunity to review their respective conclusions. This has been done, and I am thus enabled to present to you a consensus of the present thinking of at least 23 organizations from which replies have been received. A list of these is furnished for the record; reserving, if I may, the privilege of adding others whose responses may be received before the record is closed. (The above-mentioned list follows:) Alabama State Chamber of Commerce Missouri State Chamber of Commerce Montana Chamber of Commerce New Jersey State Chamber of Commerce Empire State Chamber of Commerce (New York) State of Oklahoma Chamber of Commerce Of course, the two principal circumstances which have induced this reexamination are, first, certain developments in the field of national defense, which seems to call for increased expenditures on ballistic missiles and the like, and superficially point in one direction; and, second, a perceptible shrinkage of the economy, which seems to us to accentuate the reasons for tax reduction which we believe have existed for some time, and which point in the other direction. We believe that the task of your committee involves an appraisal of each of these, and a balancing of one against the other. This is what we have tried to do. And we have concluded that serious consideration should be given now to make at least a start toward significant Federal tax revisions. While what we recommend will cause some temporary loss of revenue, we believe it is imperative for the long-term good of our economic system, and budgetwise can be justified on two premises one relative to expenditures and the other to revenues. The need to improve this Nation's defense posture does not necessarily imply a larger Federal budget; nor even a greatly enlarged defense budget. There are numerous programs in the budget which rank in a descending scale of priority in relation to defense. Some are desirable and essential; others are merely desirable; and some are of highly questionable desirability or need. The question of priority also applies within the defense budget which provides for equipment and activities ranging in priority from critical need to the obsolescent and wasteful. Through examination of priorty values, our organizations have often pointed out areas of potential savings aggregating billions of dollars in past budgets. We believe that there is much in the 1959 budget that is less essential at this time than an equivalent dollar value of wise tax revision. We hope that the Congress will agree with us again as it did in large measure last year when it reduced materially appropriations requested for 1958. A proposal to reduce income taxes in a specific manner is usually accompanied by an estimate of the revenue loss that would be incurred if the proposal were adopted. The estimate, however, is often based on the assumption of a continuance of the present income base against which the tax rates are charged. Such estimates do not, or at least should not, imply that revenues in the succeeding fiscal period will actually be reduced by the stated amount. There is substantial evidence from the history of past income tax rate reductions that revenues in the first year after the reductions are affected some, although less than the indicated tax cut, but that the loss is soon made up by an increase in total income. This is borne out by the revenues from the individual income tax following the rate reductions in 1924, 1925, 1929, 1946, and 1954. The one instance during this period when the estimated revenue loss from a tax cut was not quickly regained was the reduction of 1948. Substantial percentage cuts in the normal tax rates on individuals were made in 1924, 1925, and 1929, and the surtax rates were reduced in 1924 and 1925. There was no significant change in corporate tax rates during this period. On January 1, 1954 individual income-tax rates were reduced with a savings to taxpayers in the amount of $3 billion. This cut affected 6 months of the fiscal year 1954 but receipts from the individual income tax in fiscal 1954 dropped only $600 million. There was further relief to individuals at the beginning of fiscal 1955 through provisions in the Internal Revenue Code of 1954. The amount of relief was estimated at about $700 million for the 1955 fiscal year and revenues fell off just about that amount to $28.7 billion. Thereafter, however, revenues from the individual income tax rose rapidly to $32.2 billion in 1956 and $35.6 billion in 1957. A further rise is expected in the present fiscal year. After the expiration of the excess profits tax and the adjustments in the corporate-tax structure provided in the 1954 tax revisions, receipts from corporate taxes fell off over $3 billion to $18.3 billion in fiscal 1955. But in fiscal 1956 corporate income-tax receipts rose by $3 billion and there was a further increase of over $200 million in fiscal 1957. The record of tax reductions and subsequent revenue growth in Canada is similar to that in the United States, except that it is more striking because of the frequency of the tax cuts made since the end of World War II. In each of the 5 fiscal years 1945-46 through 1949-50 taxes were reduced with 4 of the reductions being over 10 percent. Nevertheless, revenues remained at a remarkably stable level with only modest variations from year to year. Two Korean war tax increases raised Canada's revenues to a $4 billion level in the 1952-53 fiscal year. Since that year there have been 2 tax cuts of 5 percent or more and some lesser cuts. The aggregate reductions total $894 million during the 5 years since 1952-53 but revenues have risen from $4 billion to an estimated $4.8 billion in the current year. The point we wish to make here is not that reducing tax rates automatically assures an increase in revenue. We fully recognize that revenue increases at fixed tax rates are dependent on economic growth and/or inflation. But we are firmly convinced that tax reductions of the right kind do have a profound effect on sustaining economic growth. Moreover, they are particularly helpful in stimulating the economy during a period such as the present when business activity is slowing down. We believe strongly that the tax reductions of January 1, 1954, and the tax revision of 1954 helped materially in turning around the recession which started in the fall of 1953 and ended in the summer of 1954. We are equally convinced that tax rate reductions at this time would have a similar effect on the current recession. With this background I now offer for your consideration our specific proposals on income-tax rate adjustments for 1958. The sharp progression in present tax rates on individual incomes is costly to the economy through its adverse effects on incentives and on capital formation. Yet the progressive element in the rates is a poor source of revenue. The 20-percent base rate on all taxable income produces well over 80 percent of the revenue from the individual income tax. Only the remaining 16-18 percent is obtained from the progressive portion of the total rate which now ranges up to 91 percent. The present progression so rapidly approaches complete confiscation that if the Federal Government took all of every individual taxable income above $26,000 a year, it would add only about 112 percent to its present total tax revenues. |