pute in this Committee or elsewhere, there is, following every agency named on the list, a number, a symbol and another number providing official reference that qualifies each agency for a place on that list.

The appearance of a named agency on that list only stipulates that in some way that agency has exceeded constitutional limitations and invaded the private areas of activitiy which were, by the design of the Constitution, prohibited to government. The fact of that intended prohibition is clearly established by the 9th Amendment which provides that: "The enumeration of the Constitution of certain rights, shall not be construed to deny or disparage others retained by the people."

The founding fathers attempted to make doubly sure of this limitation upon your powers by the terms of the 10th Amendment which provides that "The powers not delegated to the United States by the Constitution, nor prohibited by it to he States, are reserved to the States respectively, or to the people."

Despite these safeguards, however, we have this vast array of federal agencies' operating powers which were never delegated to government by the people, and exercising rights not enumerated.

The general dilemma of our time is your quest for revenue with which to maintain these illicit empires, which have already taken over forty percent of the land area and an estimated twenty percent of the industrial capacity of this nation without any Constitutional authority for doing so.

The people yearn for tax reform-true tax reform-and pray that you at long last will take steps designed to provide it by simply stopping the financing of these lands and enterprises which exist without constitutional authority. Adequate evidence exists to indicate that fully half of the federal revenue each year finds its way, through your appropriations, to the maintenance and growth of these unauthorized activities. This is an amount greater each year than the total amount of federal individual income taxes collected.

Your own reports show that, even in war, the civil functions of the federal bureaucracy demand and get greater increases in appropriations each year than the true military expenditures for national defense.

At the 1958 Tax Reform Hearings in the House of Representatives, I presented a summation of a highly objective analysis of the projected budget spending under the 1959 budget which was then before you. It was ignored, but the subsequent developments have confirmed every factor therein. I again present this summation, together with a comparable summation of the potential savings under the 1967 budget, showing a very similar pattern. Because of the ultra conservative basis of these computations it is doubtful that any overstatement will be found therein.

I am certain each of you know of these gigantic potentials for true tax reform. You may not agree in all details but you can not successfully contest the facts because they are too evident for denial.

There are, as you well know, hundreds of ludicrous but tragic examples of bureaucratic incompetence. There was the abortive political effort to raise Abaca in Central America, and the more disastrous political idea of mining low grade nickel in Cuba. There is the continuing program of compelling American farmers not to produce sugar which, as a side result, sentenced Cuban farmers to a lifetime of peonage to tyrants there. There was the ridiculous Eskimo Housing program-only slightly more ridiculous than the rest of the housing programs spawned here in Washington at the cost of countless billions of American tax dollars, and resolving nothing.

There is the thoroughly silly story of the steam-heated railroad tunnel in Alaska, and the bureaucratic effort to corner the world's tin supply which ended in disaster for us, and produced the turmoil in Bolivia that ended in a Communist take-over of that unhappy land. There is also the current mania for financing a road through Asia which the U.S. Army Engineers are building at our expense for our Communist enemies.

There is an endless variety of such amazing and unauthorized dissipation of the productive energies of the American people-your people. They want it stopped. It is the first necessity for producing true tax reform on the heroic scale that will grolify you, our nation and our people for centuries to come. It can be done by just living according to our Constitution. Vast numbers of people, all across this broad land, are gathering in support of the Liberty amendment, which is designed as the best possible instrument for restoring the Constitution to full force and effect, and compelling government to live within its organic law.

It is a tragic commentary that the people are coming to believe it necessary to forcibly apply the principles of the Liberty amendment to reapply the rule of of law upon those who represent us in government. It would be much more to the point, and infinitely more desirable in every way, if you, our leaders in gov ernment, would approach the great problem of tax reform from this traditional and truly basic viewpoint. The tremendous problems which confront you will rapidly diminish if you do this, and stop the insane spiral of spending by our bureaucratic empire builders.

What does the future hold? By the arbitrary imposition of the tax and spend philosophy which has destroyed countless nations, we can go deeper into the morass of tumult, conflict, rioting, burning, right into the agony of revolution in the eternal struggle of power and plunder. I am sure all of us want to prevent that.

Our people prayerfully hope that your Committee will find the way, in these tax reform hearings to restore the tranquillity and equity of just and equal law under the Constitution. We pray you will finance only constitutionally authorized functions of government, leaving all else to the sovereign states and the free people of this great land.

How can we reach your ears, your minds, your hearts, and inform you, our leaders, regarding the will of the American people, and inspire you to the task of repairing the sanctuary of the Constitution as the only safeguard to our lives, liberties and property. Surely, the stark, silent but immutable message of the public will be free of oppressive governmental taxing and spending has long been evident to those who will listen. We pray that you will hear these truths, and heed them, and bring about that "rebirth of freedom" for which your people yearn.

STATEMENT OF WALTER N. TRENERRY

STANDING

Your relator appears in his own right as a taxpayer and also as counsel for: Certain taxpayers who have gross incomes of more than $1 million a year and: a. Take part in new, risky, experimental business ventures.

b. Borrow money for many kinds of investments.

c. Carry on a sizeable business in oil and gas exploring, producing, and selling.

SUMMARY OF ARGUMENT

The Hobby Loss, Investment Interest, and Natural Resources sections of H.R. 13270 will keep money back from new business ventures and will lessen tax collections.

The Natural Resources sections also penalize the oil business, which other risks already threaten, and may conflict with established American foreign policy. PART 4 OF STATEMENT OF WALTER N. TRENERRY

Your relator. Walter N. Trenerry, of St. Paul, Minnesota. Attorney-at-Law and Member of the Minnesota Bar, respectfully states to the honorable Finance Committee of the United States Senate:

While he does not favor all additions and changes created in the Tax Reform Bill of 1969 (H.R. 13270), your relator objects only to the matters in Subtitles B and C of Title II, Subtitle A of Title III, and Subtitle A of Title V, which he mentions specifically here.

Your relator does object formally to all the following as unfair and shortsighted:

Title II. Subtitle B: Sec. 213(a) Hobby Losses (Proposed amended Sec. 270 of the Code)

Title II. Subtitle C: Sec. 221 (a) Interest (Proposed new Sec. 163 (d) of the Code)

Title III. Subtitle A: Sec. 302(a) Allocation of Deductions (Proposed new Sec. 277 of the Code)

Title V. Subtitle A: Sec. 501 (a) Percentage Depletion (Proposed amended Sec. 613 (b) of the Code)

I. IS IT WISE TO CHOP DOWN THE TREE TO GET AT THE FRUIT?

The Congress certainly knows that these sections will make their subjectmatter less attractive and will keep Joe and Judy Taxpayer from putting money into them.

While this policy may give Uncle Sam a bigger tax bite from Joe and Judy this year, next year Uncle Sam's choppers will slam together on nothing when they try to bite the former taxpayers Joe and Judy supported.

In other words, giving rough handling to a tiny tiny fraction of taxpayers will cost Uncle Sam money.

Rich men who escape taxation through deductions have to pay those deductions. in cash, to someone who pays a tax on them. The total taxes paid by these someones will be much more than what the single rich man would have paid if not allowed to take the deductions.

Historically, some part of all economic growth has come from people who would not give up, but pushed on, year after year, pouring money into ventures that looked hopeless. Until now the income tax quietly encouraged them. Most of these ventures were hopeless, but some, like the Ford Motor Company, turned out well.

Now the Congress apparently wants to penalize these cheerful optimists who are willing to lose money today in their belief in a sure bonanza tomorrow.

The Congress is admittedly free to make its own tax policy and to pick the objects of taxation; but the way of tax statesmanship is not grabbing and choking to death infant taxpayers of the future.

It is no secret that credit furnishes most of American risk capital. To discourage borrowing for investment, and to discourage putting capital into anything but absolutely safe ventures, could bring premature old age and decay to an economy based on expansion and managed by men trained to push for growth.

II. SPECIFIC SHORTSIGHTED MEASURES

Your relator believes that the hobby loss, investment interest, and natural resource sections of H.R. 13270 will have a strangling effect on the economies of both today and tomorrow.

1. Hobby Loss Limits and Presumptions (Section 213(a) of the Bill, proposed Amended Section 270 of the Code)

This hounding for speedy results, now applying to "an activity" rather than only individuals, hits much harder than Sec. 270 of the 1954 Code. Acting under such pressure, both Joe Taxpayer and The Joe Taxpayer Corporation will necessarily cram their hugest research and development, or expansion, costs into repeated two-year spurts. Whether this will help find new products, or enlarge businesses, or raise more taxes, remains to be seen.

Through its setting in the Bill the word "hobby" gets a certain sanctification, but the word is misleading and much out of place; the section slams more than harmless men and women tinkering with amusement devices. It would hit Thomas A. Edison if in 1969 he were still working on the incandescent lamp. For some reason Income Tax administrators have never come up with a better distinction between hobbies and business than "If you love it, it's a hobby; but if you hate it, it's business." The Joe Taxpayer who loves doing what gives him his daily bread is, in the Income Tax zoological garden, one with the chimera, the griffon, the phoenix, and the sphinx-a thing of art, but a phantom. From 1939 to 1969 the Congress was willing to allow Joe Taxpayer, as an individual, four years of limitless business deductions and only questioned his economic wisdom if in the fifth successive year he tried to deduct more than the gross income of his venture plus $50,000.

Now, 30 years later, the Congress practically limits both Joe Taxpayer and The Joe Taxpayer Corporation to two years of limitless business deductions and one year of business deductions equaling gross income from the venture plus $25.000.

Rather than cutting the $50,000 allowed since 1939, the Congress ought to raise it to $100,000. Filling the public trough has chopped real values at least this much.

Keeping the public trough filled to politically acceptable levels, incidentally, calls for more and more new taxpayers each year.

In addition to denying relief for inflation damage, proposed new Sec. 270 relies for administration upon the marvelous 20/20 vision of hindsight. When

five years are over, Uncle Sam has the chance to look back and pick out any three of them to attack for impropriety.

Present Sec. 270(b) has vanished and was presumably murdered somewhere offstage, leaving Joe Taxpayer and The Joe Taxpayer Corporation to carry on their natural resource businesses under the perpetual menace of these loss limits.

The inevitable result will be to distort existing business practices-minerals do not conveniently allow themselves to be discovered and made commercia. within fixed limits of time, any more than King Canute could make the tide go back--and to discourage new venturers from entering the field.

Finally, in a country which prides itself on freedom from compulsory selfincrimination, and glories in a presumption of innocence in criminal cases, putting the burden of proving non-tarability on the taxpayer is outrageons The Congress might as well say, "Every person subject to this act is pre sumed to owe at least $100,000 in tax."

When Uncle Sam proves that Joe Taxpayer or The Joe Taxpayer Corporation had business losses of $25,000 plus gross income from the venture in three out of five years, Uncle Sam can rest.

And at that point Joe Taxpayer or The Joe Taxpayer Corporation has no right to challenge the sufficiency of Uncle Sam's evidence. As things stand, the tax is owed unless the taxpayer can wiggle out.

The unhappy taxpayer is forced to engage in a long and expensive lawsuit. in which he suffers further unhappiness from knowing that he is paying the salary of Uncle Sam's lawyer as well as the fees of his own.

Simple morality calls for making Uncle Sam prove that Joe Taxpayer or The Joe Taxpayer Corporation owes a tax; and calls for giving the taxpayer a chance to test Uncle Sam's evidence at one time, before having to prepare and present a costly defense.

As a matter of policy apart from morality, the Congress would be better advised to define what "activity" will allow deductions, and to stop there. In the competitive and costly business world, the chance of keeping a steadily losing business going into an indefinitely deductible future is very slight. At some point even the most virulent tax-hater has to start scratching for income. Every business has its unplanned bad years. To demand bouncing back in three years, or coming up with a commercial product in three years, is petulant; American impatience for quick results.

Does this section mean to penalize branches, divisions, or other parts of large businesses? In a conglomerate, if the razor blade divisions shows a forbidden series of losses, does it matter if the frozen food division shows profit? A possibly unforeseen risk is that this section could put Uncle Sam's best taxpayers in trouble. If General Motors brought out three Edsels in a row, and in addition had to pay taxes out of dwindling cash, the real sufferers would be stockholders, who are also taxpayers, and persons who depend on pensions and profit-sharing trusts holding this stock. The following year Unele Sam would suffer.

Your realtor feels it proper to allow taxpayers to deduct true business losses without limit. The iron laws of economies make unlimited income to support these deductions very unlikely and a business manager is better able to judge "reasonable expectation of realizing a profit" than is the Internal Revenue Service.

Two projects that literally changed the world, but only after repeated trial and error-and deductions-may suggest not trying to interfere with the inventive and business rhythms of mankind.

In the 1930's everyone "knew" that men could split the atom but no one could figure out exactly how to do it. By 1939 a General Electric cyclotron made this possible in a small scale.

During 1942-45, with national survival at stake, the "Americans" (Bohr. Einstein, Fermi. Meitner, Szilard) worked at large scale atom-smashing and in 1945 saw their success at Los Alamos, Hiroshima, and Nagasaki.

Estimated experimental time: 12 years.

In the 1830's came the lonely figure of Charles Babbage, working on a mechanical computer that he could never perfect. Nearly a century later, in 1930, Vannevar Bush brought forth a mechanical differential analyzer that did work.

Tinkering with this gadget in the 1930's at M.I.T. and elsewhere led to the analog computer of 1942, used in automatic tracking and leading for the World War II anti-aircraft guns, and which in turn led to the modern electronic analog and digital computers of 1946 and after.

Estimated experimental time: 116 years.

It is safe to say that the taxes paid by those who followed in both these fields outrun by quite a bit all conceivable income tax deductions based on experiments leading to them.

2. Investment Indebtedness Interest Limit (Sec. 221 (a) of the Bill, proposed new Section 163(d) of the Code).

Whether to continue or kill this deduction is a policy matter for the Congress. Your relator feels that this section will hurt the economy by discouraging men and women from borrowing to buy securities of new businesses or securities issued for business expansion.

When this section combines with other sections dealing with capital and capital gains, it reinforces other measures in the Bill which give a clipping to capital. 3. Natural Resources Allowances (Sec. 501(a) of the Bili, proposed amended Sec. 613(b) of the Code)

The Congress has seen fit to lower the percentage depletion allowance for oil and gas to 20% and to limit the use of percentage depletion to production from domestic sources.

After all the publicity there is no doubt that this represents a calculated decision and that the Congress realizes that this may result in lessened American oil and gas investment abroad. The change is sure to have an effect upon an industry long accustomed to the 27.5% rate, applied to production from any area in the world.

Without going into the technical merits and demerits of 27.5% as against 20%, or a domestic base as against a worldwide one, your relator suggests that the Congress might consider some broader policy questions which overlap questions purely of taxation.

These policy deliberations must also take into account two other sharp attacks made on natural resources businesses by H.R. 13270.

One is the limit on "hobby loss" deductions fixed in Sec. 213(a). The other is the limit on personal deductions computed in Sec. 302(a), which uses certain intangible drilling costs, and the excess of percentage over cost depletion, as limiting "tax preferences."

Alt three-lower percentage depletion, lower hobby loss limits, and lower personal deductions-make natural resources less attractive for investment and will discourage spending in this area.

The "hobby loss" section is particularly menacing, in that the realities of mineral exploring usually call for a long period of testing and waiting before anything turns up. Estimating the final cost is usually little better than guesswork. To have to use after-tax dollars until the payout comes is a burden that those able to bear my just as easily decide to forego.

In 1954 the Congress was so concerned about this particular issue that it inserted present Sec. 270(b) of the Code to assure Uncle Sam that needed exploration and development in the oil business would go on.

It is a matter of interest that Amerada Corporation spent at least $20,000.000 in North Dakota before making its first discovery; and it will be a matter of more pertinent interest to see when Alaskan North Slope production brings a profit.

It is particularly the oil business which brings policy questions into play. In 1969 this business is not the happy playground of rich tax-dodgers, as politicians call it, but more a beleaguered giant.

If in fact the Congress had schemed to launch an attack on Pete Petroleum in the year in which he would be most open to one, 1969 would be Y-Year.

In 1969 Uncle Sam and the world have plenty of oil; the black stuff pops up everywhere and has not risen in price since around 1950. As a result Pete has his marketing troubles without facing the other troubles threatening him.

In 1969 the oil-rich world found new riches in the Alaskan North Slope discoveries. Pete has to face the price competition of this oil now, while it is still landlocked in the frozen Arctic.

In 1969 the Athabasca tar sands in Alberta went into commercial production, and the Alberta government has just approved a second extracting and refining unit. This area has oil reserves equal to the total of the whole world's present known conventional reserves. The product comes into Pete's marketing territory and he must reckon with it.

In 1969 Pete has to face the competition of foreign government-dominated companies even in scrambling for leases in Uncle Sam's back yard. Side by side in Texas, or Louisiana, or California, or Alaska, may be Pete, Acquitaine