OTHER LIABILITIES OF THE EXCESS-PROFITS TAX

In addition to taxing efficiency, subsidizing waste, encouraging wage and price inflation, repressing business expansion and discouraging new ventures, the excess-profits tax has other serious faults. Following are some of the worst of them:

1. The tax is difficult to apply and administer. Ascertaining the tax liability is usually time-consuming and costly both to business and the Government. At least four Secretaries of the Treasury have criticized the excessprofits tax on these grounds. That determination of liability under the tax is difficult is illustrated by the fact that 5 years after repeal of the World War II excess-profits tax there still were over 25,000 cases in liti gation between taxpayers and the Internal Revenue Bureau.

2. By its very nature the tax produces inequities. In taxing as excess profits those earnings above 83 percent of the average in the base period it penalizes companies which had an unfavorable base period earnings record due to strikes, material shortages, newly starting business, product changes or any number of other reasons. It also produces inequity in failing to allow for great differences in risk with the result that the successful risky venture is penalized at the time it should be rewarded. So-called relief provisions often provide little or no relief to individual concerns.

3. The damage to small-growing businesses caused by the excess-profits tax goes even deeped than stopping growth. Numerous cases came to light during the aforementioned Senate Small-Business Committee hearings and State chamber of commerce surveys showing that the excess-profits tax coupled with inadequate depreciation allowances and inflationary prices precluded necessary replacement of equipment, to say nothing of expanding facilities. Continuation of this situation can only result in failure or sale of such businesses to larger concerns which have adequate financial resources to carry on. Thus the longrun effect of the tax is to foster monopolies. As the latest annual report of the Senate Small Business Committee pointed out.

"Our tax policies seem to contradict implicitly or explicitly the Government's operations in other fields. While Congress passes laws and appropriates funds for the strengthening and administration of antitrust and antimerger laws, present-day taxes seem to be prime motivators in erecting obstacles to healthy competition."

EXTENSION OF EXCESS-PROFITS TAX NOT JUSTIFIED

The faults of the excess-profits tax are many-even more than are discussed in this bulletin. Whatever need there may have been for its use as an economic control measure certainly no longer exists. As a net revenue producer its value is questionable. So, weighed in the balance, its continuation cannot be justified. But its expiration on June 30 will provide the eagerly awaited opportunity for American business to grow again and create the jobs needed by our increasing population.

STATEMENT BY MISSOURI STATE CHAMBER OF COMMERCE ON EXTENDING THE EXCESS-PROFITS TAX

Any extension of the excess-profits tax inevitably would have a discouraging effect on the expansion plans of Missouri business.

A survey of some, 2,200 small-business members made by the Missouri State Chamber last year, revealed that high taxes had caused 51 of these small businesses to make cutbacks in expansion plans amounting to about $3,807,500 which meant the loss of an estimated 1,0061⁄2 jobs for Missourians. This illustrates the effect which tax legislation can have on business.

Certainly the psychological effect of even a so-called temporary extension of the excess-profits tax would be to shake business confidence. Tax sources which do not have such a discouraging effect on business expansion and new ventures by taxing efficiency should be relied upon to balance the budget if spending cannot be reduced sufficiently.

We believe that expiration of the excess-profits tax on schedule will provide an incentive to business expansion, thus creating new jobs and markets. This in turn will increase revenue from other sources.

The CHAIRMAN. Are there any questions?

Mr. JENKINS. Mr. Chairman, I want to add something. Mr. Laylin, as he always does, has presented a very lucid and very satisfactory statement. I had a chance to read his statement in advance, and he dwells on this proposition which has been stressed by many about the $800 million. He indicates very clearly that that is not a definite, set figure, and certain conditions might cause it to fluctuate very severely, and that it is not a good, strong, tenable argument for the continuation of this legislation.

That is all, Mr. Chairman.

The CHAIRMAN. Thank you very much.

Mr. LAYLIN. Thank you, Mr. Chairman.

The CHAIRMAN. The next witness to be called at this time is Mr. Don G. Mitchell, chairman of the board of Sylvania Electric Products, Inc. If you will give your name, Mr. Mitchell, and the capacity in which you appear, and the names of your associates, for the record, we will be pleased to hear you.

STATEMENT OF DON G. MITCHELL, CHAIRMAN, BOARD OF DIRECTORS, SYLVANIA ELECTRIC PRODUCTS, INC., NEW YORK, N. Y.; ACCOMPANIED BY F. CLEVELAND HEDRICK, TAX COUNSEL, AND ALFRED C. BONI, CONSULTING ECONOMIST

1› Mr. MITCHELL. Mr. Chairman and members of the House Ways and Means Committee, my name is Don G. Mitchell. I am chairman of the board of directors of Sylvania Electric Products, Inc. I appreciate your allowing me to come on ahead of those who were scheduled to come on ahead of me, and I appreciate their courtesy in agreeing to it, also.

I have with me Mr. Hedrick, who is tax counsel for our company, and Mr. Alfred C. Boni, who is a consulting economist.

My testimony is very short, in spite of the more or less voluminous material you have before you. Most of that is going to be requested by me to be put in the record, so we have plenty of time before your adjournment.

Sylvania Electric Products, Inc., the company of which I am chairman, is one of America's fastest growing television companies. I very much appreciate the opportunity of appearing before you to give my views as to the desirability of extending the excess-profits tax law, and the facts of Sylvania's situation under this law.

Much has been said and much has been written about the excessprofits tax during the past few years, and especially during the past few months. The tax has rightfully been condemned by businessmen almost universally and by officials of both the past and present administration. It had been condemned as vicious, discriminatory, and unfair, as feeding inflation, as fostering waste and inefficiencies and stifling growth. I agree with all of this. Certainly such a tax should not be extended.

Let me say at the outset that I am wholeheartedly convinced that it is necessary for the national budget to be balanced as soon as praeticable and it is especially necessary that we maintain a sound dollar. However, the last place where we should secure revenue for these purposes is from the extension of a tax which is universally regarded as discriminatory and inequitable. We should not support the exten

sion of such a bad tax even for a short period. The fact that it is applicable only to a relatively small percentage of corporate taxpayers does not justify extension.

A principal inequity of the excess-profits tax is that it subjects taxpayers in the same industry to widely differing degree of taxation. Under the normal tax and the surtax, all competitors are treated substantially alike. Competitors are not treated equally under the excess-profits tax. Quite the contrary. Depending upon various fortuitous circumstances, Company A may very well bear a substantially heavier tax burden than Company B in the same industry.

In any event, as is universally recognized, the excess profits tax bears most heavily on growth companies. These are the very companies which serve the national welfare in providing new jobs and opportunities in our expanding economy. The excess profits tax has made it increasingly difficult for these companies to carry out their function.

Sylvania's experience with the excess profits tax is one of the glaring examples of just how unfairly the excess profits tax can operate on competitors in the same industry and particularly on growth companies. In Sylvania's case, the discrimination is double barreled. Not only is Sylvania discriminated against as a member of the small group of corporate taxpayers bearing the heavy burden of the excess profits tax, but it is further discriminated against because of a technicality in the law. This technicality bars it from the use of the special growth formula credit available to other excess profits taxpayers and especially to members of its industry.

Sylvania is a leader in the fields of television, electronics, radio, and lighting. At present, Sylvania is 1 of the 2 largest television picture tube manufacturers. It is the second largest manufacturer of television and radio receiving tubes, as well as a substantial manufacturer of television sets and various parts for television. Its 36 factories and numerous warehouses and sales offices provide employment for approximately 27,000 people in the following 20 States: California, Georgia, Illinois, Iowa, Kansas, Maine, Massachusett, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Texas, Virginia, Washington, West Virginia, and Wisconsin. The company's policy of decentralization has brought substantial benefits to many communities. Generally, local plants are managed by local people.

I have some charts here which I would like your permission to show at this time, which show clearly the extremely discriminatory nature of the excess-profits tax law as applied to Sylvania.

As the first chart, entitled "Comparison of Sylvania's Effective Tax Rate With Those of Major Television Manufacturers" shows, Sylvania's effective tax rate has been substantially higher than that of any other major television manufacturer-which includes all those with sales in excess of $50 million. The chart deals with the years 1950 and 1951, the only years for which complete published figures were available when the charts were prepared. In 1952, figures for which are now available, Sylvania's earnings before taxes were substantially down due to prolonged strikes in seven of the company's factories. But even with this handicap, Sylvania still paid the highest effective tax rate of any of these companies, except two. Even in 1952, Sylvania's effective tax rate was 42 percentage points higher than

the average effective tax rate of these companies. Furthermore, in the first quarter of 1953, Sylvania was back in top tax bracket.

I might say in explanation, sir, that companies Nos. 1, 2, 3, 4, 5, 6, and 7, in 1951 are not necessarily the same as companies 1, 2, 3, 4, 5, 6, and 7 in 1950, because some of them change their relative positions, but we have listed them so as to keep the order of the chart on the way down.

The other chart, entitled "The Present Excess Profits Tax Law Discriminates Against Sylvania," shows that Sylvania's effective tax rate is also substantially higher than that of companies in other fields. This is so whether Sylvania is compared with the electrical machinery group of industries-of which it is a part-the durable goods manufacturing industries, or the nondurable goods manufacturing industries. Sylvania paid out in taxes over 5 percentage points more of its profits in 1950 than the average of electrical machinery manufacturers, and nearly 4 percentage points more in 1951.

The tax burden on Sylvania has been extremely heavy. It has borne a substantially heavier tax burden than its competitors. Consequently, its competitors have been able to finance more of their expansion out of earnings than Sylvania has.

Even though Sylvania has set aside as much of its profits as possible to finance its growth, the profits retained after taxes have proved inadequate to keep it abreast of expanding developments in the electronics industry. New products and processes have been developed in this fast-growing industry, many of them in Sylvania's own laboratories. These have created many opportunities for expansion. Although Sylvania has expanded, it has also been compelled to pass up many opportunities for further growth.

While the excess-profits-tax law is by its very nature discriminatory, in the case of Sylvania it is doubly discriminatory. Because of the peculiar application of the law, Sylvania does not benefit from the growth formula under which many of its competitors in the television industry-set manufacturers and their suppliers-are allowed to compute their excess-profits taxes.

You will recall that when the excess-profits-tax law was originally passed, Congress determined that it would be unfair to tax television companies on the basis of their earnings for the years 1946 through 1949 alone. This recognized the fact that most television companies experienced their growth toward the end of this base period and thereafter. Congress, therefore, incorporated into the law for the benefit of the television companies, section 435 (e) (1) (B), which permits them to determine their credit on the basis of 1949-50 earnings.

Sylvania has been the very type of fast-growing television company for which Congress intended the growth formula provisions. Actually, as the second chart shows, Sylvania is one of the fastest growing television manufacturers. During the years 1946 through 1950, its sales of television picture tubes, the heart of the television set, increased almost 4,000 times-4 times as fast as the industry. Sylvania is 1 of the 2 major television tube manufacturers. It markets approximately 20 percent of television picture tubes sold in the United States.

The chart also shows that according to most other tests, Sylvania has grown more rapidly than the television industry. This is true

whether you measure growth by production capacity, employment, total sales, or, as stated, picture tubes sold.

Sylvania would qualify for the growth formula on the basis of its own experience, if it were permitted to do so. The present law, however, does not permit Sylania to qualify on the basis of its own experience because it liquidated two subsidiaries prior to January 1, 1951. The present law, strangely enough, would permit Sylvania to qualify on the basis of its own experience if the liquidations had occurred on or after January 1, 1951, or if the liquidations had not occurred at all. Sylvania, however, is required to consolidate its own experience with that of two subsidiaries which were liquidated early in 1950. Such consolidated experience barely misses the growth tests of section 435 (e) (1) (B).

After the liquidations, Sylvania operated the businesses acquired from the subsidiaries as separate going business units with adequate separate records. The experience of Sylvania can be segregated after the liquidations just as easily as before the liquidations. Under these circumstances, there seems no conceivable reason why Sylvania should be penalized, and why it should not be permitted to qualify on the basis of its own experience. Undoubtedly, if the draftsmen of the excess-profits tax law had contemplated a case such as Sylvania's, they would have provided for it. I would like to point out, Mr. Chairman, that even if the relief we are requesting is granted, Sylvania would still pay, for 1950 and 1951, a higher rate of tax than any of its major competitors.

Therefore, in addition to our recommendation that the excess-profits tax not be extended, we strongly urge that the excess-profits tax law should be amended retroactively for all years to which it applied so as to permit an acquiring corporation, such as Sylvania, to determine whether it is eligible for the benefits of the growth formula on the basis of its own experience, both before and after the liquidations of subsidiaries.

We have drafted a proposed amendment to section 462 of the excessprofits tax law which we believe will correct the discrimination which I have described. I would appreciate, Mr. Chairman, your making the charts, this proposed amendment, and its supporting memorandum, part of the record.

That concludes my statement, Mr. Chairman. If there are any questions, I will be more than happy to try to answer them.

Mr. JENKINS. With reference to these charts, I think they are printable. We cannot carry all kinds of charts in the record.

Mr. MITCHELL. It is the reproductions which I would like to make a part of the record, please, sir.

Mr. JENKINS. I think we can. Without objection, it will be so ordered.

Any questions?

The suggestion has been made by the gentleman from Pennsylvania that it might be that you would find it to your advantage, in case we cannot print them all, to take out the most salient sections that you want to produce. I suggest you talk with the representative from the Government Printing Office, Mr. Glenn Johnson. Our secretary there can put you in contact with him before you leave.

Mr. MITCHELL. I will do that.