sold to the Government. They were just good cookies and the public bought enough of them that over the last 4 years the new cookie oven has worked a great deal of overtime to supply the demand.

So here we have a perfect textbook illustration-the American businessman with foresight and initiative estimates what the public wants, takes a great risk in order to furnish it, finds that he has guessed right, and now, what happens to the profit that is supposed to be his reward?

From 1950 to 1952 $100,000 of that profit has been taken by the excess-profits tax. To ordinary corporate taxes-which now take 50 percent of every dollar of corporate income-no one would object. But the excess-profits tax is the real crusher. It, of course, increases taxes to 82 cents of many dollars of the company's income. The company gets no relief from the tax. It has no new product. It has no base on which to claim a return because it is only a small company built on sweat, not other people's dollars. The overtime operation of the company's oven is far more a cause for worry about premature obsolescence than a source of gratification.

One of the many painful consequences of the tax has been to rob the company of the cash which it has to have in order to operate. Additional production means that the company has had to have new trucks at $6,500 apiece. There is now on order a new packaging machine for $35,000 which must be had in order that production can be maintained in a difficult labor market. New weighing machines have been obtained. And all of these things must be financed somehow out of new money for there are no old machines which are depreciating to provide their own replacement. Working capital requirements, too, are greater. Despite the fact that the borrowing for the 1949 expansion was ultimately refinanced as a mortgage upon the company's property there have been times since then when the company was trying to operate on $10,000 working capital when it should have had $75,000.

The serious effect of this evaporation of cash through paying taxes can be illustrated by the company's position at April 25, 1953, the last date for which I have figures. At that time the company had $150,000 in cash and tax anticipation notes against an existing liability of that moment of $183,000 for Federal and State taxes and obligations due officers who had been obliged to leave money in the business because of cash shortages. If sums which have had to be spent for capital adjustments are restored the company would have a net working capital of about $70,000-much less than it had before this expansion began. Is not the $100,000 of excess-profits tax paid a fair measure of what the owners of the business might have expected as a decent return for the risk they took in guessing what the public wanted?

Put another way, 4 years after this good guess $40,000 still remains due on that part of the company's mortgage which represented the original borrowing to finance plant expansion. In 4 prosperous years the company has been able to pay off only $60,000 of this money it borrowed to put up the oven.

There is not the slightest question that the company's working position would have been vastly better in 1953 if the 1949 expansion had never been undertaken. Unless there is a better reward for risk than this, businessmen will stop taking risks.

It is true, of course, that the company's surplus has increased but a company cannot eat its surplus. It lives on its cash and the life of this company over the last 4 years has been most difficult because excessprofits tax precluded the accumulation of cash.

Further expansion, of course, has been entirely impossible. Capital has not been accumulated even to repay the price of the last expansion. One excellent opportunity to buy another company could not be seized. Far from thinking about expansion the owners have been tempted more than once to sell the whole business to a big company with a large base income against which to balance current profits and so in a position to retain a larger percentage of earnings. It seems odd that under the impact of the excess-profits tax it becomes more attractive to sell a successful small business than to keep it.

These are the effects of the excess-profits tax upon Perfect Foods: (1) The cash shortage which that tax has been largely responsible for producing has made operations acutely difficult over a 4-year period when one might have expected them to be a pleasure.

(2) The accumulation of cash capital has been impossible. (3) Expansion alike has been impossible.

(4) The company is not attractive for the loan of capital, once more, because no one can see when earnings can be accumulated at a rate sufficient to repay it.

For 4 years after a typically American vision this company has been handicapped, almost strangled, by the excess-profits tax. It is not one of the companies supposedly fattening on war which are the objects of the tax. It has not profited from the war economy in any way. It is a small business that took a big risk, now being penalized by a tax aimed at someone else.

That penalty will continue as long as the excess-profits tax continues or it can be lifted now if the tax is not extended.

That is respectfully submitted.

Mr. MASON (presiding). You say the tax is aimed at somebody else. I think that is a very, very lucid statement because the tax is supposed to be aimed at war profiteering, to take the profits out of war, but it is such a blunderbuss approach that it hits an awful lot of innocent people who are struggling to get along. Is that not about it?

Mr. SPROGELL. This corporation, sir, certainly was in the range of fire.

Mr. MASON. If there are no questions, we thank you, sir for your

statement.

Mr. SPROGELL. Thank you, gentlemen.

Mr. MASON. The next witness is Mr. Franklin T. Sweet, the Di-Noc Co., Cleveland, Ohio.

STATEMENT OF FRANKLIN T. SWEET, VICE PRESIDENT, THE DI-NOC CO., CLEVELAND, OHIO

Mr. SWEET. Mr. Chairman and gentlemen, my name is Franklin T. Sweet. I am the vice president of the Di-Noc Co., of Cleveland. With your indulgence, sir, I would like to make one or two preliminary remarks that do not appear in the statement. Is that all right? Mr. MASON. That will be all right.

Mr. SWEET. First, I believe our case is very simple. It is nothing more than the story of a struggling small company that in 1950 began

to earn profits commensurate with its net worth, only to have the bulk of these profits taken away by excess taxes on profits. We are paying to the hilt, 69 percent. Secondly, we have attached with this very brief statement that I will read a copy of our 1950 annual report. This is for statistical purposes as an example. You will note included in the center of this statement a graph showing the progress of sales for the past 16 years. That will tell you our story more than anything, I believe.

With these points in mind, I respect fully submit a brief statement by the president of our small corporation. We certainly appreciate the opportunity to present to the committee our views on the excessprofits tax, and the manner in which it affects our company as well as others of similar size.

I would like briefly to outline pertinent information about the size and nature of this company in order that you might more clearly evaluate the effects of the law in our operation.

This company was organized in 1923 as a small chemical company, manufacturing a new type all-lacquer transfer. We had an original capital of $18,000 and our place of business was the basement of one of the founders. For many years we were successful, based on small capital, and this continued until the depressed general conditions in 1930 which resulted in decrease in profits.

At that time we had started to develop a new type lacquer transfer reproducing wood grains for application to the interior of automobile instrument boards and for many other uses. This development work was expensive and with conditions prevailing at that time, the company continued to suffer losses to the extent that in 1936 we were in serious financial difficulty. We had loans from the Federal Reserve bank, short-term loaus and second mortgages on equipment held by certain individuals.

Early in 1937 the company's financial structure was reorganized and we were able to sell as a public offering an issue of common stock which enabled us to put our finances in sound condition and to invest in new equipment and working capital. We then developed a sales promotion program which resulted in sales and profits showing a steady increase until 1941.

The entrance of this country into World War II resulted in the termination of nearly 90 percent of our company's business which was largely in the automotive radio and furniture industries. The company had highly specialized personnel and equipment for the production of an unusual process and had no metal-working equipment of any kind. Therefore it was very difficult to convert our facilities to wartime use and substantial losses were incurred in 1942 and 1943. During this period our research laboratory was busily engaged in finding a product that would fit into the war effort and with the facilities available at that time, were able to produce an airplane insignia acceptable to both the Army and the Navy. We also developed certain photographic materials suitable to war requirements. The company made a relatively small profit on these products but just about the time we reached volume production the war ended and the results of most of our efforts were in vain. Also, it was then necessary to devote most of our research facilities to the development of products for use in peacetime economy.

For the 13 years ending 1949 and commencing 1937-the time the company was refinanced-the total sales were approximately $12,

400,000. The net income after taxes for this entire period was $235,000, or an average of $18,000 per year. Net earnings were less than 2 percent of sales and less than 3 percent of the average net worth of the company. During this entire period, total dividends to common shareholders amounted to $52,000, obviously a very low return on the amount invested.

Due to the developments mentioned above, this company was able to do a volume of sales for the excess-profits tax years, ended December 31, 1952 of approximately $6.700,000 and with a resulting substantial increase in profits before taxes. However, this increase was caused only in very small part by manufacture of war goods and I venture to say that less than 11 percent of our total volume of business at the present time is directly or indirectly from contracts for the defense effort.

We believe the above facts very well illustrate the unfairness of the excess-profits tax law as applied to this company. Expensive development of new products was mostly incurred during nonexcess-profits tax years. Many of the large companies spent considerable amounts for research, advertising, new-project development, et cetera, during the excess-profits tax years with the result that the net cost to them was very materially reduced and our company, being a small-growth company, is very much at a disadvantage in competing with those not affected by the excess-profits tax.

In order to be able to handle the increased volume resulting from development work, it was necessary for the company to eliminate any possible unnecessary expense and in order to provide working capital and payment of taxes, borrow from the bank $400,000 for operations. Our company is a small one, employing less than 200 people. We believe that the present excess-profits tax has been a very definite hardship; limiting our development and expansion and preventing a fair return to our shareholders. We believe the excess-profits tax law is a bad law. It is discriminating; it is unfair; discourages incentives and encourages extravagance; punishes small corporations, and is an unjust piece of legislation. It does not permit small companies the proper accumulation of funds to replace obsolete and wornout equipment.

In conclusion, we wish to state for the record that we are heartily in favor of a balanced budget and know that it is necessary to balance the budget to bring this country back to a sound, normal basis. We also realize that additional money must be found to meet the obligations incurred by the former administration but we do believe there are simpler, much easier and sounder ways of getting it than by the use of the excess-profits tax. It is universally agreed by practically all economists and business people that if the excess-profits tax law is allowed to expire it will be an added incentive to business which will be returned to the Government in the form of taxes greatly in excess of the amount which they will receive as a result of the present law. Be that as it may, we respectfully recommend that in order to provide the additional funds necessary to meet commitments, the normal corporate tax be raised from 52 percent to 54 percent and that the excessprofits tax law be allowed to expire as of June 30, 1953.

We are attaching, herewith, a copy of our annual report for the year ended December 31, 1952, and would like to call attention to the chart showing the trend of our business since 1935.

(The report referred to was filed with the committee.)

Mr. MASON. Does that conclude your statement?

Mr. SWEET. Yes, sir.

Mr. MASON. Are there any questions?

If not, we thank you for your statement, sir.

The committee will now recess until 1 : 15 this afternoon, when we will conclude the testimony of those scheduled for today.

(Whereupon, at 11:50 a. m., the committee was recessed, to reconvene at 1: 15 p. m. the same day.)

AFTER RECESS

Mr. JENKINS (presiding). The committee will come to order. Mr. Logan, we will be very glad to hear from you.

STATEMENT OF GARRETT LOGAN, ATTORNEY FOR AND MEMBER OF THE BOARD OF DIRECTORS OF THE FRANKS MANUFACTURING CORP., TULSA, OKLA.

Mr. LOGAN. Mr. Chairman and members of the committee, the privilege of appearing before the committee to present my views on the extension of the excess-profits tax law is indeed appreciated.

My name is Garrett Logan. I am a lawyer residing at Tulsa, Okla., and appear before the committee as attorney for and as a member of the board of directors of the Franks Manufacturing Corp., 2801 Dawson Road, Tulsa, Okla., which is a manufacturer of portable oil field servicing and rotary drilling equipment. It is, I believe, typical of many young American manufacturing companies, and for that reason I want to outline the effect of income and excess-profits taxes upon its growth and development.

Franks began operations in a rented machine shop in 1931 with a cash investment of $4,000 and the firm belief that it could develop, produce, and sell to the oil industry a new type truck mounted and truck powered well servicing winch. After struggling through the depression years it began to make profits in 1936.

During 1936 and the succeeding 3 years the company used its fund in developing a new portable drilling rig and a truck mounted telescoping derrick unit. As a result, the years 1936 through 1939 showed only nominal profits. That was because of the expense of development of new equipment.

By early 1940 the trade began to accept the first of the newly developed products, the portable drilling rigs. The company obtained substantial orders. But it did not have plant capacity to take care of its business. So it borrowed money for plant additions. But at the end of 1940, Congress passed an excess-profits tax law retroactive to January 1, fixing as the base period the very years during which the company showed nominal profits because of its development program. At the end of the year, taxes had taken so much that the corporation had little left, certainly not enough to pay for plant additions.

The next year the company enjoyed a good business, but was unable to overcome the tax handicap and had to borrow extensively from banks to provide minimum working capital requirements and cover the unpaid portion of its increased plant facilities program.

The years 1942 through 1945 were typical of the experience of many other small manufacturing plants during the war years. Franks

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