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. Accordingly, we recommend against any change in present exemptions.

The progressive rates should be lowered with the objective a few years hence being a maximum tax rate of 50 percent or less. We recommend that a start toward this objective be made in the current year by a revision in the present rates, setting the maximum rate at 82 percent and the minimum at 19 percent with appropriate adjustments in the intervening surtax bracket rates. We further recommend that similar rate reductions be effected annually until the top rate has been reduced to 50 percent or less.

This reform, in our view, would help to recreate individual incentives which are being discouraged by continued excessive surtax rates. Also, the cumulative effect of the long continued high progressive Federal tax rates on individuals has contributed to the difficulties encountered by many concerns in obtaining equity capital. Shortages of equity capital can be alleviated by reduction of these high progressive rates. This would be of particular benefit to small and newly starting businesses, for it would minimize the necessity of borrowing funds for capital purposes. In fact, we know of no better way to relieve the tax problems of small businesses, nor to stimulate what appears to be a lagging economy.

We believe that the present tax rates on incomes of corporations are conducive to inefficiency and are detrimental to the achievement of maximum production and employment. They restrict the ability of many corporations to pay the current dividends demanded to attract investments by shareholders, to reserve the funds needed for paying dividends in years of low income or losses, and to finance greater production and employment. They also place a heavy burden on equity capital and invite borrowing, with its attendant strains on the financial structure.

The tax rate on corporate income should be reduced to the preKorean level at the earliest possible date. As a start toward that end, we recommend that the combined normal and surtax rate be reduced at least to 50 percent on July 1, 1958, the date on which the combined rate is scheduled to go down to 47 percent under present law.

I have called these recommendations a consensus of the organizations for which I speak. Some of them have particular views which differ slightly but not materially. Arkansas, Maine, Indiana, Florida, Connecticut, and Virginia endorse specifically the Sadlak-Herlong bills, and four of these have, I believe, given testimony or filed statement to that effect. Pennsylvania has testified and Kansas has filed a statement. All of these, however, have joined in approval of the testimony which I have given. Ohio, for which I am also commissioned to speak, has adopted a resolution substantially as follows:

That such reduction be affected by reducing the rate of income tax presently levied against the lowest bracket of the income-tax schedule rather than any increase in personal exemptions or credits.

That similar consideration should be given to the reduction of the rates above the first bracket, including a reduction of the maximum rate.

That there should be no amendment of the existing Federal law relative to the rates of corporate income taxation.

In addition to this oral presentation on income-tax rates, I would like to submit for the record our views on some other matters which

come within the scope of these hearings. These views have been incorporated in a policy statement entitled "A Program on Federal Spending and Taxation" which has been endorsed in whole or in major part by all but 1 (Mississippi) of the 29 member State and regional chambers of commerce in the council. We submit them at this time with the thought that present provisions on some of the matters we cover may be considered by your committee with a view to revision this year.

Excerpts from this policy statement follow:

The administration and Congress are to be commended for alleviating somewhat the double taxation of dividends by the 1954 legislation. But the small relief granted still leaves an onerous amount of double taxation.

The inequalities arising in the double taxation of dividends, first as corporate and later as individual income, should be alleviated to lessen the present discrimination against the income from equity capital and to encourage the assumption of business risks by those with available funds. Latest Treasury statistics show that almost half of the recipients of dividends have incomes under $6,000. No other type of income is exposed to double taxation, and there is no sound economic reason for penalizing dividend income, in comparison with interest on loans, wages, salaries, and other income, in this manner.

After computing the taxes on their incomes, including taxable dividends received from domestic corporations subject to the income tax, shareholders should be allowed to deduct from their taxes a credit for the payment of corporate taxes on the income paid out in dividends. The percentage allowed as a credit presumably would be at least the initial rate for individual incomes. The complications of refunds could be avoided by providing that the credit allowed should not in any case exceed the total tax liability.

The proposed method of alleviating double taxation applies the principle recognized in Federal income taxation before 1936, when the undistributed-profits tax was adopted. Up to that time, dividends were partially exempt from the individual income tax. The remedy for double taxation suggested here is supported widely by businessmen and tax authorities.

The attainment of an expanding economy requires an ever-increasing flow of venture capital into jobmaking enterprises. Individuals should be encouraged to invest their savings in productive private enterprises by lowering the taxes on their incomes, alleviating the double taxation of dividends, and treating capital gains more favorably. The tax rates on long-term capital gains should be reduced, and, eventually this tax should be eliminated.

Capital gains and losses, whether short or long term, should be offset against each other.

The deduction of capital losses, in the interests of equity, should be allowed on the same basis that capital gains are taxed.

The Kansas State chamber would substitute the following for the last paragraph:

The deduction of capital losses, in the interests of equity and to encourage venture capital, should be allowed in full against ordinary income as well as capital gains.

Business management can best determine the propriety of a particular method of depreciation and obsolescence in any given case. With

in the limits of sound and consistent accounting, business management should be allowed to exercise its discretion in the choice of the method and the rates of depreciation and obsolescence. This privilege should be granted by a legislative clarification and liberalization of the depreciation policy, over and beyond the commendable improvements introduced in 1954, for the guidance of the Bureau of Internal Revenue and the taxpayers.

A wider latitude in the allowance of depreciation and obsolescence would encourage the developoment of new enterprises, the promotion of new products, and the expansion of production and employment. It also would eliminate much needless and costly bickering over tax liabilities and many inequalities arising from administrative practices. Little revenue results from including 15 percent of intercorporate dividends in taxable corporate income and imposing a penalty tax of 2 percent on consolidated returns. These discriminatory devices should be abandoned. Corporations should have the option of filing consolidated returns without paying a tax penalty. Such returns usually present the most accurate statement of the income of a corporate group.

Most small enterprises are unincorporated, and both the individual and the corporate income-tax rates must be lowered if small enterprises are to be organized and prosper. No feature of this tax program has been more intensively studied. In fact, our whole program has been formulated with the needs of small, as well as medium and large, business in mind.

The principle of lower tax rates for small-income corporations is recognized in the law. It would be preferable, instead of imposing graduated rates on corporate income, to tax all corporations in a nondiscriminatory manner at a flat, moderate rate. This desirable reform may be accomplished by substantial and continuing reductions of corporation taxes as fast as revenue requirements will permit.

Other features of the tax program recommended here will benefit small business. Unincorporated enterprises, as well as corporations, will benefit from more reasonable allowances for depreciation, and the reforms advocated in taxing capital gains, estates, and gifts.

The reductions proposed in the rates of the individual income tax also will encourage the growth of small proprietorships and partnerships, which are now highly important elements in the competitive

economy.

The problems of small business have received so much attention because it is desired to encourage the creation and expansion of small concerns as a means of preserving a competitive system of free enterprise. The greatest possible contribution of small enterprises to production and employment is required if the Nation's economic goals are to be realized.

The Kansas State chamber does not agree with the second paragraph under this topic, which calls for the taxing of all corporate income at a flat, moderate rate eventually.

In recent years the rate of the Federal estate and gift taxes have been carried to excessive heights with relatively little revenue obtained. The purpose of these taxes is largely regulatory rather than revenue-producing, and they should be abandoned. As a start toward getting the Federal Government out of the estate-tax field, the maxi

mum rate should be reduced to not more than 50 percent with corresponding reductions in all other rates. The gift-tax rates should not exceed three-fourths of the estate-tax rates. By appropriate technical amendments, the estate and gift taxes should be made consistent with the Federal income tax to the end that the duplicate taxation which now exists may be eliminated. Proposals for the integration of the estate and gift taxes should be rejected.

The Georgia State chamber feels that complete Federal withdrawal from this source of revenue would create inequities and competition among the States. It does approve allocating a greater share of the overall estate and gift taxes to the States.

All organizations engaging in business in competition with private enterprises should be taxed similarly with such enterprises. The exemption from Federal taxation of Government-financed enterprises, cooperatives, and other so-called non-profit organizations that engage in various production, commercial, financial, and other business activities in competition with private concerns is not only unfair but, also, in this era of high Federal taxation, places heavy handicaps on the private-enterprise system. Moreover, it denies to the Government additional sources of revenue.

We believe that consumers are entitled to purchase from the sources that most efficiently fill their needs at the lowest prices. But consumers cannot obtain the benefits of free and fair competition among the different types of business if the Government, instead of acting as a referee to make sure that the rules of fair competition are observed, exempts some of the competitors from taxation or extends special favors to them and compels other competitors to operate at a heavy tax disadvantage.

We are not opposed to true cooperation by farmers, consumers, or other groups but we do oppose the resort to tax-exempt forms of business organization and the enjoyment by such groups of special tax advantages for the purpose of avoiding the taxes that must be paid by competing private enterprises. The tax preferentials given to certain types of business must be recognized as a subsidy to the undertakings benefiting from them. If it is our purpose to drive private enterprises out of existence, no surer way can be found than by taxing them heavily while relieving their competitors from similar responsibilities. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you for coming to the committee and giving us your views.

Are there any questions of Mr. Laylin?

If there are no questions, we thank you very much, Mr. Laylin. (The following letter was received by the committee:)

COLORADO STATE CHAMBER OF COMMERCE,

Mr. WILBUR D. MILLS,

House Ways and Means Committee,

Denver, Colo., February 14, 1958.

New House Office Building, Washington, D. C.

DEAR MR. MILLS: We should like to have placed on the record of the hearings of the House Ways and Means Committee, the name of the Colorado State Chamber of Commerce in support of the testimony presented by Mr. Clarence D. Laylin, of Columbus, Ohio, on behalf of the Council of State Chambers, as of February 7.

Respectfully yours,

HOWARD N. YATES, Executive Vice President.

The CHAIRMAN. The next witness is Mr. Walter Maynard. Please identify yourself sir, by giving your name, address, and the capacity in which you appear.

STATEMENT OF WALTER MAYNARD, CHAIRMAN, FEDERAL TAXATION COMMITTEE, INVESTMENT BANKERS ASSOCIATION OF AMERICA

Mr. MAYNARD. Mr. Chairman and members of the committee, my name is Walter Maynard. I am chairman of the Federal taxation committee of the Investment Bankers Association of America. I am also a governor of the New York Stock Exchange and a partner in Shearson, Hammill & Co., a medium-sized securities firm with headquarters in New York and branches in many parts of the country.

The members of the Investment Bankers Association operate in areas of the economy which are extremely sensitive to changes in economic conditions. The businesses of the association's members come under the general heading of small business, in that the median capital of our members is about $225,000, and the median number of employees is about 22. Partnerships comprise a high proportion of our membership. Of the corporations, only an extremely small minority is publicly owned. Our business is to a great extent affected by changes in demand for capital goods, and by changes in interest rates-areas in which swings of great amplitude occur. Our views expressed here reflect the experiences gained from these circumstances. We consider that the most serious single problem affecting all sectors of small business, and the general economic health of the United States, is that of the punitive rate and steep progression in the personal income tax. In addition to proposals for reform in the personal income tax, I will also discuss reform which our association would like to see in the capital-gains tax, dividend credit and pension plans for selfemployed individuals.

It is our belief that personal income tax rates which exceed 50 percent are in essence punitive rather than economic, and that rates exceeding 50 percent produce harmful economic effects which in the long run subtract more from the tax-producing capability of the economy than they directly add in revenue.

The harmful effects of tax rates exceeding 50 percent include the fact that such rates subsidize extravagance, penalize creative effort, and cause a tremendous shift in incentives-away from constructive effort and toward tax avoidance.

In the matter of extravagance, rates in excess of 50 percent in effect cause the Treasury to bear the major part of the cost of every business luxury in which a taxpayer is willing to indulge, ranging from antique Chippendale desks in executive offices, through directors meetings in exotic climates, to reckless advertising expenditures.

Human nature being what it is, it is easy to see that when at any time a taxpayer finds himself in a situation in which he can keep less than half of each additional dollar that he creates, he will be tempted to work less hard. While possibly not unpleasant for the individual, this situation is harmful in an economy which must grow in order to bear the burdens of rising population, international leadership, and the added defense responsibilities which are now being thrust upon us.