STATEMENT OF GEORGE D. BAILEY, CERTIFIED PUBLIC
ACCOUNTANT, DETROIT, MICH.

Mr. BAILEY. My name is George D. Bailey. I am a resident of Detroit, and I am a certified public accountant. I appear wholly in my own behalf. I have come to endorse President Eisenhower's fiscal program, not because I like the excess-profits tax but because I like. even less the reduction of income taxes until the fiscal program seems to be more in balance. I regard as highly important the moving toward a balanced budget as quickly as possible. That, in brief, is why I came.

Secondly, because of my tax background, I do want to suggest one point with respect to the excess-profits tax that can be put in, I think, next year and not require amendment this year. It is to give to this excess-profits tax what was given to the one in the last war, the carryback provision in the first year after the excess-profits tax expired. With the tax rate as high as it has been, it is important that it not be isolated by years, but that the carryback provisions protect the immediate year after the expiration of the tax. That is included in my statement and does not need to be expanded here.

The CHAIRMAN. Just a moment. That is, you are in favor of the extension of what is known as an unfair, immoral, destructive type of tax, injurious to the expansion of existing business, and the development of small business, to strengthen our economy. Is that your answer?

Mr. BAILEY. Well, I would not characterize it that way. As I said, I do not like the excess-profits tax, and I am not here to defend it. But I do think sound fiscal policy is the primary need.

The CHAIRMAN. But that is not the history of balancing the budget during the 1920's and it was not during the 80th Congress. If they want to balance the budget, they have a release business from the tax stranglehold which is retarding business growth and stifling revenues. Mr. BAILEY. Well, I thought it was producing revenue.

The CHAIRMAN. It is not producing revenue, not in the way it is curling the development and expansion of business. We simply differ, that is all. I did not want to sit here quietly and say that I agree with you.

We thank you for your appearance, Mr. Bailey.

Mr. BAILEY. Thank you.

(Mr. Bailey's prepared statement follows:)

STATEMENT OF GEORGE D. BAILEY ON THE EXCESS-PROFITS TAX

My name is George D. Bailey; I live in Detroit; I am a certified public accountant, a partner of Touche, Niven, Bailey & Smart, and have been practicing public accounting since before 1913. Accordingly, I have watched the impact of income taxation on our economy and on business over the entire span of modern income taxes.

I am here for the purpose of endorsing the general principles of President Eisenhower's tax plan, particularly his principle of slowing up the elimination of the emergency taxes until greater progress has been made in balancing the budget.

I believe that the present taxes on income are too high, but I think the advantages to the economy from a sound fiscal policy outweigh any particular benefits that might come from the reduction in this calendar year of excess-profits taxes or individual income taxes.

I quite agree that the excess-profits tax is not a good tax. It does have inequities which are accentuated by the high rate of tax though some of the apparent inequities are modified by relief provisions. I also believe that the normal and surtax rates on corporations are too high and have a deterrent effect on development of business enterprises. These high normal and surtax rates on corporations also accentuate the inequities that exist in those taxes. rates also should be reduced as soon as budgetary conditions permit.

These

I am convinced that there is both a will in the administration and in Congress, and an ability, to progressively cut expenses, and I am quite willing to accept the judgment of the administration that the income and outgo can be balanced by June 1954 on the basis of requirements that can now be foreseen.

As long as such a large proportion of the Government's income is received from taxes on corporations, it is essential that the principles and tax rates not be such as to weaken or retard business development. This suggests that the inequities in ordinary personal and corporate taxes be worked out through a comprehensive revision of the Internal Revenue Code which I understand is under way.

In addition, your committee might well consider reinstating a principle which existed with the last excess-profits tax law, when there was a period of 1 year after the elimination of the excess-profits tax for which any unused excessprofits credit, which would have existed for that year, became usable for refund of excess-profits tax paid in the preceding 2 years. This provision in my opinion, saved many companies from failure. A similar provision might well be included for the calendar year 1954. As the statute now stands, an unused excess-profits credit for only half of 1953 can be used for a refund of excessprofits taxes for 1952. An extension of this privilege into 1954 applicable to 1953 would cushion the effects of any important business adjustment.

I have come here on my own account because I believe an orderly tax reduction in line with a sound fiscal policy is to be preferred to earlier tax adjustments that contemplate a large deficit for this period.

The CHAIRMAN. The next witness is Mr. R. B. Nichols, president and general manager, the Torrington Co., South Bend, Ind. Mr. Nichols, do you have a statement?

Mr. NICHOLS. Yes, sir.

The CHAIRMAN. Will you give your name and the capacity in which you appear? We will be very glad to hear you.

STATEMENT OF R. B. NICHOLS, PRESIDENT AND GENERAL MANAGER, THE TORRINGTON CO., SOUTH BEND, IND.

Mr. NICHOLS. My name is R. B. Nichols, and I am the president of the Torrington Co., of South Bend, Ind. I am appearing before you to oppose any extension of the excess-profits tax, and to ask for a correction of past inequities.

As a businessman, I am strongly opposed to an extension of the excess-profits tax. As the President himself has said, it is now widely recognized that the tax actually penalizes thrift and efficiency and hampers business expansion-its impact is especially hard on successful small businesses which must depend on retained earnings for growth.

Millions of people voted for this administration because of its promise to reduce taxes; reductions which are desperately needed. In the face of this and in face of the administration's awareness of what the tax does to business, it is unthinkable that the promise will not be honored. The promise should be honored now. The Congress and the Administration should not attempt the justify an extension of this tax by utilizing a subterfuge that it did not promise when taxes would be reduced.

As the law now stands, it is impossible for many companies to retain enough earnings after paying their taxes to be in a sound cash position, much less be able to finance growth. For example, in spite of the highest production rate in its history, my company has had to borrow funds in order to finance a rather modest expansion program.

The Secretary of the Treasury in his statement to this committee. characterized the excess-profits tax as an inequity. I agree with him in that. I hope this committee also agrees with him in this respect and takes the first opportunity to eliminate it.

Another reason, and an important one so far as my company is concerned, why I oppose the excess-profits tax is that it departs from the principle that a tax should operate fairly with respect to all taxpayers and should not produce discrimination as between them. The excess-profits tax as it now stands does discriminate against some companies whose earnings during the so-called base period do not fairly represent their normal earnings.

I am sure there have been many such inequities, but I can speak with authority only with respect to my own company. Briefly, the facts are these:

We manufacture both general and special-purpose antifriction bearings. During our fiscal year which ended on June 30, 1947, at considerable expense, we added a new product to our line.

Ordinarily when any company puts a new product on the market, it sustains a loss on its sales at first, and the full profit potential is not realized for several years. At the outset sales are usually small and costs are disproportionately high. This is particularly true in our case where the introduction of a new product initially takes the form of field experimentation and frequently necessitates redesigning and reworking the product, and revision of production methods. Ordinarily a technical product such as the new product introduced by my company requires at least 5 years of development and promotion before it is generally accepted.

In addition to the usual and expected losses on the early sales of our new product, our company experienced a strike not long after it was introduced. The strike itself lasted 17 weeks, but I estimate that its bad effects on the development and promotion of the new product lasted at least a year.

My company's base period net income was reduced, of course, by the losses we sustained on the early sales of our product. Furthermore, these losses were prolonged and enlarged by the strike. As a result we show a net loss on the sales of the new product in the base period, and our excess-profits credit is not as high as it might otherwise be. Except for the strike it is likely that we would have made a profit earlier on the new product and thus have had a higher base period credit than is now the case.

I am told that there is no provision in the excess-profits tax law as it is now written under which this inequity can be rectified.

It is true that the Congress did recognize the need for providing a more equitable excess-profits credit when a new product was introduced in the base period by enacting section 443 of the code. Under that section a company can obtain relief if it added a new product within the last 3 years of its base period and meets certain other arbitrary tests. If it meets those tests, the company is permitted to recon

struct its base period net income in accordance with a formula provided by the code. However, if the new product was introduced in the first year of the base period, as is the case with my company, no relief is afforded. This is true even though normal development and promotion of the new product was interrupted and delayed by an event which is unusual or abnormal such as our strike.

Apparently the theory of Congress was that 3 years is a reasonable period of growth for a new product and that if this period of growth falls entirely within the company's base period, it is not entitled to any adjustment to its excess-profits tax credit. Like all arbitrary assumptions, this one has serious defects. But aside from those defects, 3 years is certainly not a reasonable period of growth for the sales of a new product if development and promotion of the product are hindered by a strike or some other disrupting event. Plainly, a company in such case should have more than 3 years within which to develop and promote its new product for purposes of qualifying for relief.

I respectfully suggest that the Congress should amend the excessprofits tax law to alleviate the inequitable situation which I have described, as well as the inequities which I am sure must exist in numerous other cases. Such amendments should be made whether or not the tax is eliminated and should apply to all past years, as well as to future periods covered by any extension.

There is attached hereto the language of a proposed amendment to section 443 (a) of the code which, I believe, will make that section operate more fairly.

(The amendment referred to follows:)

Amend subsection (a) of section 443 of the Internal Revenue Code by striking out the comma at the end of paragraph (3) and the balance of said subsection and inserting in lieu thereof the following:

", or that

"(4) During so much of its four immediately preceding taxable years as falls within the 48-month period ending on the last day of its base period, there was a substantial change in the products or services furnished by the taxpayer and the development, production or sale of such products or services was interrupted by events occurring in the base period which are unusual and peculiar in the experience of the taxpayer,

"(5) More than 40 per centum of its gross income or 33 per centum of its net income for such taxable year is attributable to one or more of the new products or services, and

"(6) Its average monthly excess profits net income (determined under subsection (e)) for such taxable year exceeds 125 per centum of its average monthly excess profits net income (determined under subsection (e)) for the taxable years ending within its base period and prior to the taxable year in which the first change to which gross income is attributed for the purpose of this subsection occurred, or, if the portion of the base period which precedes the change in products or services is less than twelve months, for the taxable year in which such changes occurred,

then, in computing its excess profits credit for taxable years under this subchapter which end on or after the last day of the earliest taxable year with respect to which the requirements of paragraphs (1), (2) and (3) or (4), (5) and (6), as the case may be, are satisfied, its average base period net income determined under this section shall be the amount computed under subsection (b)."

Mr. NICHOLS. This language is contained in a bill, H. R. 1982, now pending before this committee. The only change of substance which

this proposal makes in present law is to provide that companies whose development and promotion of a new product were interrupted by an unusual event, such as a strike, occurring in the base period, may qualify for relief on the same terms as those companies which had a normal period of development for their new products. I sincerely believe that this proposal warrants your serious consideration, and I earnestly urge you to consider it on its merits.

I thank the committee for giving me the opportunity to appear before it.

The CHAIRMAN. Mr. Simpson will inquire.

Mr. SIMPSON. I simply wanted to comment, Mr. Nichols, that the situation you so clearly bring to the committee's attention is one which should be corrected. I hope that at some time we may have the vehicle which will permit us to correct that error in the law. I appreciate your coming and telling us about it.

Mr. NICHOLS. Thank you very much.

The CHAIRMAN. Mr. Jenkins will inquire.

Mr. JENKINS. How many people does your company employ?
Mr. NICHOLS. We have about 600 employees.

Mr. JENKINS. About 600 employees?

Mr. NICHOLS. Yes.

Mr. JENKINS. Six hundred? What is the population of South Bend?

Mr. NICHOLS. About 125,000.

The CHAIRMAN. So that when you take and multiply your 600 employees by the members of their families, that is quite a segment of the population.

Mr. NICHOLS. Yes.

The CHAIRMAN. And the payroll is very important to the welfare of that country, is it not?

Mr. NICHOLS. We have a payroll of about $314 million.

The CHAIRMAN. But under the present setup of this excess-profits tax, you cannot expand very much, can you?

Mr. NICHOLS. No, sir; we have not been able to do very much. We have expanded but we have had to borrow the money to do it.

The CHAIRMAN. Certainly. I want to compliment you on this statement. I have already started to underline quite a bit of it for the committee to consider, those parts which I consider very important.

Mr. NICHOLS. Thank you.

The CHAIRMAN. The next witness is Mr. Coates Lear, vice president of the Overseas National Airways, of Washington, D. C. Will you give your name and the capacity in which you appear for the committee. We will be pleased to hear you.

STATEMENT OF COATES LEAR, VICE PRESIDENT OF OVERSEAS NATIONAL AIRWAYS, WASHINGTON, D. C.

Mr. LEAR. My name is Coates Lear. I am a vice president of Overseas National Airways.

Overseas National Airways operates four DC-4 aircraft which, since July 1, 1950, have been devoted exclusively to the Korean airlift. For the period July 1, 1950, through September 30, 1952, the