As the law now stands, our credit falls short of such an equitable credit by about $6,400,000 per year.

The figures recited and the facts relating to our acquisition of the Portsmouth assets clearly demonstrates the inequity of the excessprofits tax as applied to Detroit Steel. But that is not all. Also during the latter part of the base period we created in New Haven, Conn., a complete new rolling-mill operation. We did so because of anticipated profitable operations there.

We were absolutely correct in our appraisal of the profit potential. However, our timing was very bad in this instance, too, because this operation was not completed in time to contribute to the base-period experience. It has made a handsome contribution to our increased sales and so-called excess-profits net income during the past 32 years. We believe ours is a situation which requires specific consideration under a general relief provision. We recognize it is impossible for your committee and the Congress to write a tax statute such as the excess-profits-tax statute without creating some inequitable situations. We therefore consider that it is the duty of your committee and the' Congress to provide for specific consideration of the inequities that might be created and to provide for the elimination of such inequities through the means of a general relief provision.

I will not attempt to propose the specific language of such an amendment, as adequate language has already been submitted to your committee by one of your members, namely, Representative Simpson, in House bill H. R. 610, introduced January 3, 1953.

In summary, it is the firm conviction of the management of Detroit Steel that the best interests of the country will be served by termination of the excess-profits tax on June 30. However, if the tax is to be extended, it most certainly is the obligation of each and every member of the committee to see to it that a general relief provision be enacted to eliminate gross inequities such as exist in our specific case. The CHAIRMAN. That concludes your statement?

Mr. YODER. Yes, sir.

The CHAIRMAN. It is a very fine statement.

I am sorry about your proposal for relief, but the Secretary of the Treasury is very much opposed to any relief measures being attached to any of the excess-profits tax.

Thank you very much.

Are there any questions?

Mr. EBERHARTER. I would like to ask on what technical point could you not get credit for the excess-profits tax of Portsmouth Steel? Would you explain it briefly?

Mr. YODER. Under one section the selling corporation has to liquidate, thereby insuring, I presume, that there could not be any double use of that credit. In this instance Portsmouth Steel has never used the credit. Neither one of us has had advantage of it.

Mr. EBERHARTER. They could use it.

Mr. YODER. They could.

Mr. EBERHARTER. But they have nothing to use it with, no facilities whatsoever?

Mr. YODER. That is right. We contend, inasmuch as we now own all of those facilities which contributed to that credit, that it should more logically rest with us than with them.

35078-53-34

Mr. EBERHARTER. It would seem logical if they have no way of using the credit.

Mr. YODER. Legally if they engage in business, the credit is theirs and could be used. It is just one of the many inequities you encounter when you set up a tax of that character.

Mr. EBERHARTER. Thank you.

Mr. KEAN. What has happened to Portsmouth Steel? Is it still making steel?

Mr. YODER. It is not carrying on any business activities at all. Their assets are limited to cash and securities.

Mr. KEAN. In other words, the majority stockholders are continuing it as a sort of a holding company, and if they liquidate, there would be certain taxes they would have to pay?

Mr. YODER. They would like it to continue as a holding company. The CHAIRMAN. Mr. Mills will inquire.

Mr. MILLS. I do not want to dampen the ardor of the witness, but I question very much whether he would actually get relief under a section 722 provision if we had one.

The committee has looked very carefully, on several occasions, into this very problem you present to the committee. It is a perplexing one as to what to do when a corporation continues to exist after the corporation has disposed of its assets, and when there is no tax-free transfer. It is a problem as to what to do, but I question in my own mind you would get the relief you want if we did enact a section 722. Mr. YODER. Mr. Mills, the whole thing could be handled very nicely by letting this law expire on June 30.

Mr. MILLS. I thought probably your only relief would be in the expiration of the law.

Mr. YODER. We present this case because we think we have been penalized through no fault of our own. Maybe there are problems. You just cannot by legislation cover every situation that may come to pass, but you certainly can avoid the discrimination by taxing one corporation at higher rates than another in the same business doing the same volume of business and making somewhat the same profit by getting rid of the law.

Mr. MILLS. Don't misunderstand. It is not this committee that originated the idea of extending the tax.

Mr. YODER. I realize that.

The CHAIRMAN. Are there any other questions?

We thank you very much.

The next witness is Mr. Ellsworth C. Alvord of Alvord & Alvord. We are glad to welcome you here. You at one time had a very important connection with this committee. Please give your name and capacity.

STATEMENT OF ELLSWORTH C. ALVORD, APPEARING ON BEHALF OF ALVORD & ALVORD

Mr. ALVORD. My name is Ellsworth C. Alvord, of Washington, D. C. Mr. Chairman, if I may, I would like to follow prior practice and file my written statement for the record and then cover just a few points extemporaneously.

The CHAIRMAN. Without objection, it is so ordered. (The statement referred to follows:)

STATEMENT BY ELLSWORTH C. ALVORD ON EXTENSION OF THE EXCESS-PROFITS TAX

INTRODUCTION

Mr. Chairman and members of the committee, I endorse the views of President Eisenhower who, in his message to the Congress, said that the excess-profits tax "penalizes thrift and efficiency and hampers business expansion."

I endorse the views of Secretary Humphrey who, in his testimony before you, characterized the tax as "inequitable” and “iniquitous."

I endorse the views of Under Secretary Folsom, who told you in March that it is "a very bad tax."

I endorse the views of your chairman, who said:

"First. The excess-profits tax is a tyrannous repression of industrial expansion.

"Second. It is a tax on efficiency *

* *

"Third. The tax subsidizes waste and poor management * *
"Fourth. The excessive-tax rate discourages business expansion *
"Fifth. The tax discriminates against small, growing companies * *
"Sixth. The tax is inflationary * * *

"Seventh. The tax discourages investment in business."

I have frequently given this committee my views on excess profits taxes generally and on the specific tax under discussion. No true excess profits tax has ever been devised. None can be. The present law multiplies and accentuates the defects and weaknesses of our prior laws and adds no imporvement. It was intended to impose a confiscatory tax upon normal profits. It does. It is unnecessarily severe, unjustifiably arbitrary, and ruthlessly discriminatory. It was intended to restrict research and development, prohibit progress, penalize growth, strangle small business, shackle the successful, stifle competition, and promote monopoly. It has succeeded-perhaps better than its ardent advocates had hoped.

Our strength and our security depend upon a sound, prosperous, expanding economy. This includes a tax system which permits new businesses, new ventures, new products, new markets, new opportunities, new investments-a system under which we and our children can work, save, grow, develop, progress, and prosper; support our churches, our schools, our charities; help our neighbors; and protect ourselves from our enemies.

For too long we have been on the wrong road, going in the wrong way.

FUNCTION OF AN EXCESS PROFITS TAX

In periods of extreme emergency, it may be necessary to control wages, salaries, prices, and rents. At such times, every effort must be made to control profits. That is the true and only function of an excess profits tax. It is not, and should not be, a revenue measure.

(This committee will recall that the Treasury never attempted to justify the present misnamed law as an excess-profits tax. Secretary Snyder carefully refrained from thus referring to it. He always called it a "profits tax".)

REVENUES INVOLVED

The Treasury estimates that the extension of the present law through calendar 1953 will produce $800 million in additional revenues. I point out:

(1) The present law, with all its vicious provisions, has been a small revenue producer. It was first estimated to produce more than $4 billion a year and now the estimate is only about half this amount.

(2) Increased revenues invariably result from reasonable tax reductions.

(3) The Treasury could lose much more in net revenues than a 6 months' extension of the present law could possibly produce. For example, any appreciable decline in corporate profits (they dropped from $42.9 billion in 1951 to $39.7 billion in 1952), or in indivdual incomes, would more than offset the estimated additional revenues.

(4) Present policies directly affect future revenues-which are as important as present revenues.

(5) The estimate of probable yield seems high, and an estimate of no net yield over the next 2 or 3 years might well be justified.

(6) The cash deficit for the present fiscal year will not be shocking, even though tax refunds have been speeded up to the extent of about $600 million, a most commendable policy.

(7) Many businesses are already forced to borrow from the banks to pay current taxes accruing under present law and increased borrowings may not be possible.

EXPIRATION DATES

The Treasury recommends that the present excess-profits tax (so-called) should expire on December 31 of this year, the date on which the 1951 increases in individual taxes expire. This position seems to overlook the fact that the excess-profits tax became effective on July 1, 1950, while the individual increases, which presently expire December 31, 1953, became effective November 1, 1951.

The Treasury states that the present excess-profits tax really does not expire under present law on June 30 of this year, but continues throughout the calendar year at half rate. This position overlooks the fact that the tax actually does expire for every corporation with a fiscal year beginning after June 30 of this this.

BALANCING THE BUDGET

Everyone interested in stopping inflation knows that the Federal budget must be balanced, that deficit financing must end, and that there must be no delay in getting control of expenditures and in adopting sound fiscal policies. Only the advocates of mild or controlled inflation are in the opposing camp, where they always have been. On the other hand, no student of Federal fiscal affairs has expected the new administration to balance the 1954 budget with $112 billion of unexpended appropriations on the books at the time it took office; with $80 to $100 billion of commitments; with spending programs matching the 1943 cost of World War II; and with deficits variously estimated for this and the next fiscal year in excess of $10 billion each, notwithstanding tax burdens raising $25 billion annually in excess of the highest revenue yield during World War II. It will take more than a matter of months for the new administration to get control of the fiscal affairs of your Government. The administration is to be congratulated and commended for the progress it is making. But no one should expect too much too soon.

Assuming that $800 million of new money are involved (12 percent of the estimated deficit), can one weigh the effect of borrowing that amount and the effect of the continuation of the excess-profits tax, and determine which way the scales swing?

Furthermore, it might be well to await the action of the Congress on appropriations for the next fiscal year. It is possible that the Congress may limit next year's spending to less than the present estimate of $74.1 billion. Certainly, it is to be hoped that the administration will succeed in efforts to do so.

POSSIBLE ADDITIONAL REVENUES

In its consideration of additional revenues by increasing tax burdens, this committee may wish to consider sources of additional revenues with no increase in taxes. I suggest the following:

(1) Cut the capital gains rate in half. The damage done to investment policies and attitudes cannot be repaired too soon. The stimulus to private investment and risktaking will soon produce substantial revenues.

(2) Encourage private investment abroad, particularly in those countries which need and want foreign capital. Bilateral treaties can be negotiated without delay, and existing roadblocks (including but not limited to tax barriers) removed. The result if the effort is unsuccessful: No cost to us. The result if the effort is successful: Increased revenues for us; rising standards of living, decreasing poverty, improved health, more contentment, for them; enduring friendships, with lesser risks of revolution, communism, and war, for both of us; available and reliable sources of minerals, materials, and goods we must import; and private investment will be replacing Government aid, a direct saving in dollars for the Treasury.

(3) Determine the deficiencies properly_due under present law and collect them. For years, the Bureau of Internal Revenue has been overlooking issues which involve aggregate deficiencies of very substantial amounts. In addition, refunds have been allowed which should be offset. It is basically a problem of personnel-selection, training, guidance, and supervision. But it is a problem which can and must be solved.

THE ISSUE

The decision of the administration to recommend a continuation for 6 months of the present so-called excess-profits tax must have been based upon policies with which I am not familiar. I am, therefore, not in a position to express an opinion upon them.

The issue presented to this committee is:

Is there any present justification for continuing in effect a tax which is as bad and as vicious as the present law?

I am confident that this committee will meet this issue squarely and will reach the right answer.

DEFECTS IN THE PRESENT LAW

The so-called Excess Profits Tax Act of 1950-the act now under consideration-was rushed through Congress in less than 2 months, in obedience to a mandate imposed on the tax-writing committees. You gentlemen know that you were not allowed enough time to consider and meet the problems and policies. You know that the act was slapped together so hurriedly that it was and is full of provisions the effect of which was not considered. Many of you fought against this procedure but could not prevent it.

Up to this date, this committee has failed to review and attempt to correct the most glaring and unintended defects of the act. In considering the Revenue Act of 1951, you refused to hear testimony on the excess-profits tax. Some of the most pressing problems were eventually corrected by Senate amendments to the 1951 act, but these amendments were necessarily limited and hurriedly prepared.

Again, in 1952, this committee refused to consider excess-profits tax amendments. During the whole year only one bill was passed which contained excessprofits tax amendments. One of these amendments was an attempt to handle the branch loss problem, an amendment which has been helpful but which has proved to be inadequate and uncertain in its application.

This may be the last chance for this committee to make a thorough study of the present law and correct, retroactively, its obvious defects-whether or not the tax is extended.

Without attempting to give you a complete list, or even to list the most important, here are 32 defects in the present law which need correction:

1. The net operating loss deduction is allowed in determining the amount of income subject to excess-profits tax during a particular year. But if the taxpayer has no income subject to excess-profits tax for the year, the net operating loss deduction is not allowed in computing the unused excess-profits credit to be carried over to other years. There is no reason why the net operating loss deduction should not be allowed in one case as well as in the other.

2. An unused excess-profits credit which is carried over to a short taxable year is applied against the income of the short year after the income has been annualized on a 12-month basis. As a result, the unused credit is reduced by more than the amount of the income in the short taxable year, so that the taxpayer loses part of the benefit of its unused credit.

3. Deductions on account of the retirement of bonds are not allowed in determining income subject to excess-profits tax. These deductions clearly reduce net income, and a taxpayer should not be denied them merely because similar deductions by other taxpayers during the base-period years do not reduce their credits.

4. Taxpayers are not subject to excess-profits tax on blocked foreign income which was earned before the excess-profits tax came into effect and which becomes unblocked during an excess-profits tax year. But this treatment is limited to blocked income which meets the technical definition of income from foreign sources. Consequently other income, which does not meet the definition of income from foreign sources, is not excluded even though it was earned prior to the excess-profits tax and its receipt was blocked by a foreign country until an excess-profits tax year.

5. Taxpayers using the $25,000 minimum excess-profits credit and taxpayers subject to the excess-profits tax ceiling are required to forego part of their deductions for interest on borrowed capital, even though they do not obtain any benefit from their borrowed capital in computing their excess-profits taxes. 6. Base-period income is not a fair measure of normal earnings if the taxpayer deducted research and development expenses during the base period and these expenses did not result in increased income until after the base period.