PRESIDENT'S 1961 TAX RECOMMENDATIONS

MONDAY, MAY 22, 1961

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D.C.

The committee met at 10 a.m., pursuant to recess, in the committee room, New House Office Building, Hon. Wilbur D. Mills (chairman of the committee) presiding.

The CHAIRMAN. The committee will please be in order.

Our first witness this morning is Mr. Seidman on the subject matter of expense accounts.

Mr. Seidman, we recall your previous appearances before the committee and we are glad to have you with us this morning, but for purposes of this record, will you again identify yourself?

STATEMENT OF J. S. SEIDMAN, SEIDMAN & SEIDMAN,

NEW YORK, N.Y.

Mr. SEIDMAN. My name is J. S. Seidman. My address is 80 Broad Street, New York City. I appear for no one. I came to you in favor of the general principles and basic direction in which President Kennedy urges you to in respect of the tax treatment of travel and entertainment expenses. This is such a delicate, sensitive issue that I hope you will indulge me while I make what I feel is a necessary statement of my personal background.

I represent no one. I say this because of the affiliations I do have. I am the immediate past president of the American Institute of Certified Public Accountants. For 10 years I was a member of its committee of Federal taxation, and in the last 3 of those 10 years, I was chairman of the committee. But I do not speak for the institute or the committee, and for aught I know their views may be opposed to mine. I recently accepted the chairmanship of the Tax Committee for the New York Board of Trade. That committee has not as yet met, and so I certainly do not speak for it.

For over 35 years, I have been a partner, and am now senior partner, in the certified public accountancy firm of Seidman & Seidman, an organization with offices in different parts of the country. But I speak neither for the firm nor any of its clients. In fact, my testimony may produce some unhappiness in those quarters.

During the course of my testimony, I'll be making some general statements. I have no desire to overdramatize or exaggerate. Your time schedule necessarily calls for dealing with basic problems in a broad, sweeping way. Please remember that there are many exceptions to every generalization.

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I also want you to know that I do not easily warm up to remedies that call for chopping down a tree if only a branch needs attention. One of your witnesses on Friday is reported to have said, "You wouldn't fight juvenile delinquency by abolishing children." He is of course right. But don't we get nearer to our problem putting the comparison this way: If a child's arm was infected with a poison or a cancer that threatened to spread to the entire system, cutting off the arm, though unfortunate and distressing of itself, becomes a wise preventative.

That is the part that impels me to appear before you. My concern about the tax laws was expressed in an article in last month's Reader's Digest entitled "Let's Get Off the Tax Road to Ruin." I there indicated that unless we overhaul our tax system, we were going to wreck ourselves economically and morally. I think the travel and entertainment expense area is one of the things that beckons for overhaul.

Furthermore, I have my eye riveted to a goal that your chairman, Congressman Mills, says is attainable; namely, that we can get the same revenue from individual income taxes that we now do, but with rates of 14 to 64 percent, instead of the present 20 to 91 percent, if we eliminate certain special provisions from the law or impose desirable restraints. Here again, I think we are brought to the need for taking a hard look at the travel and entertainment expense area.

I think it is important, first, that we get our perspective. If all were well in the travel and entertainment expense world, our tax problems would still be acute. Tax rates, so-called loopholes, tax complexities, and matters of enforcement-these are the major fields that need plowing.

Under so-called loopholes is a broad category known as fringe benefits. Within fringe benefits, travel and entertainment expenses are just one item.

Why, then, all this hullabaloo about travel and entertainment? The answer, in my opinion, is very simple. This is an item that gets wide public exposure. We see it all around us. We hear it all around us. It cannot help but affect our attitudes, our habits, our sense of values.

Now, if all these things were favorably affected, the President would not be knocking at your door, and you would not be conducting this hearing. It is relatively easy to measure the public pulse, because of the way travel and entertainment expenses get around. I would say that on net balance the score in the public mind points to waste, distaste, recklessness, envy, and cynicism.

What has that to do with taxes? Is a tax law the place to cope with public morals? Grim realism in this particular area tells me that the answer is "Yes." But you don't need me for that. You have already had ample testimony from President Kennedy, the Treasury, and from Representatives of different segments of our economy, advising you that these expenditures are pretty much geared to tax deductibility.

That brings us to the tax law. The basic rule is that ordinary and necessary business expenses are deductible. Personal living expenses are not. You have heard testimony of how deductible travel

and entertainment expense and nondeductible personal living expense get confounded to the detriment of the Treasury.

I would like to deal, first, with entertainment expenses. Entertainment sure has become ordinary. We are all here because it has become much too ordinary. It has been described to you as a way of life. At times, it is an ugly way of life. The important question is whether it is a way of life that gives those indulging in it the right to require taxpayers, not participating, to pick up a share of the tax. In the last analysis, that is what is really involved. A deduction for one taxpayer means that every other taxpayer has to pony up that much more, since the revenues to run the Government must be met. How about entertainment as a necessary expense? You have heard testimony that without it some businesses will decline and that the entertainment industry itself may wither away. I would like to express a different view.

Entertainment is competitive. The case for entertainment being necessary largely goes out of the window when not provoked by competition. One business tries to outdo the other in appealing to buyers, suppliers, or prospective personnel.

I have the feeling that way down deep, if business in general could get out from under the whole process and let merit rather than entertainment prevail, business would welcome doing so. An albatross would be removed from its neck.

Listen to the findings of the Joint Economic Committee in a report last year:

Business expense accounts have been carried to such extremes that as much as $5 to $10 billion of personal income now escapes taxation. Moreover, these practices feed on themselves by setting up pressure for more generous allowances among competing firms. These practices are among the most glaring injustices now tolerated by the law.

Competitive entertainment is obviously a costly process. At times, it is an embarrassing process. It can be a sickening process. Tax deductibility has been an important impetus. It can even be a sickening process. Nondeductibility can be an important brake. Since nondeductibility would apply to all competitors alike, it would, in my opinion, instead of hurting, make for wholesomeness of business and competition in the finest tradition of a free market.

How about the entertainment industry itself? Would it collapse? There is only one field that I can talk about with any degree of familiarity, and that is the theater. That stems from the fact that, as an avocation, for over 25 years, I have been an active "angel" of Broadway shows.

I love the theater and want to see it grow. I have interested myself in the welfare of the theater. I am chairman of the committee on economics of the theater for the board of standards and planning for the living theater, which is part of the American National Theater and Academy, a congressionally chartered organization.

I give you this as my personal opinion. One of the finest things that can happen to the theater is to eliminate tax deductibility of entertainment expenses, because then the theater will go back to the public. The public has not been able to compete with tax deductibility. The public despairs about getting good seats for hit shows, because so often the seats are gobbled up at premium prices by care

free tax-deductible spending. The public has, therefore, been increasingly "off" the Broadway theater.

And so it is my opinion that, instead of fearing for the theater, the elimination of the tax deductibility for entertainment will prove a wonderful boon to the theater. I have the feeling that, in varying degrees, the same happy result will be enjoyed by other branches of the entertainment industry.

But, suppose I misjudge the situation. Suppose some businesses will suffer. You, as the Federal Congress, concern yourselves with the national scene. You ask yourselves what will be the overall situation if deductibility of entertainment is eliminated.

In my opinion, it will have these results: entertainment expenses will go down. To that extent, more money becomes available for other things and other people for purchases and services, for investments, for attracting customers by price reductions, for stockholders, for taxes, if you will. These other things, in my opinion, are more constructive and productive expenditures than for entertainment. The Nation as a whole, therefore, comes out ahead.

You have been asked why all business should be coralled because of abuse by some. The abuse may be by some. The effect of the abuse is on all. Laws come into existence and are needed from just such background. That is the history of the child labor law, the workmen's compensation law, the creation of the Securities and Exchange Commission.

You have been told that the entertainment expense area is a matter of administration, not legislation. In point of fact, I am one who once told you so. I have tried my "darnedest" to hold on to that conclusion, but I am afraid I can no longer do so. Administration does not get to the heart of the problem.

For over 6 years, the Internal Revenue Service has let it be known that entertainment expenses will get special audit attention. I have not seen much evidence of contraction in what is called our expense account economy.

To be sure, administration has been increasingly effective. But administration is necessarily incomplete. We don't have, and probably can never have, the manpower to catch up with all returns.

What this points up is how dependent we are on voluntary compliance. I submit that entertainment expense deductibility is impairing voluntary compliance.

When John Jones sees his neighbor living high, wide, and handsome, because of tax deductibility, and John Jones is not in a position to get into the act, Mr. Jones feels he is entitled to help himself to his own deductibilities or gimmicks. At the very least, Mr. Jones harbors a resentment about the whole situation. His good will about compliance sinks. This is not good for Mr. Jones; it is not good for the fellow with the entertainment expense account; above all, it is not good for the Nation.

I have concluded that there is far more to be gained for all of us in that precious commodity of taxpayer morale, in respect for law, in the financial sinews of our Nation, by wiping out the deduction for entertainment expenses than can possibly be lost in those cases where the emasculation may do some damage.

Nondeductibility is not strange in taxes. Certain interest is not deductible. Net security losses are not deductible. Expenditures for charity or pension funds over a fixed percentage are not deductible. Commercial bribery is not deductible. Expenditures that go strongly against the grain of public policy are not deductible. Entertainment expenses do not offend public policy. But their deductibility has developed an unsavory odor to a large segment of the public. The situation has gotten out of hand because entertainment expense deductibility has overplayed its hand. We have passed the point where administration can stem public reaction.

You have been asked by several witnesses whether it is fair for the Government to share in the profits of entertainment expenses and not in the cost. That situation is always true in nondeductibility. The government shares in net profits of securities but not in net losses. The Government shares in profits on the sale of a residence but not in losses. What all this calls into play is simply whether a case has been made out for nondeductibility.

There are many parts of the tax law that, in my opinion, involve preferential treatment or unfair treatment. I know of none of which the public is so acutely conscious, uneasy, or cynical than expenditures for entertainment. The situation is compounded when, through tax deductibility, the public in the last analysis has to pay for the expenditures, be it in increased prices or increased taxes.

President Kennedy has said it is time to ask not what the Government can do for us, but what we can do for the Government. Eliminating the deduction for entertainment expenses is one thing we can do. From what I have already said, you know that in my view. this will actually turn out to be another thing the Government is doing for us, and that the most direct beneficiaries will be the very businesses that are today burdened with the largest entertainment expenses.

Thus far, I have been talking about entertainment expenses. I would now like to touch on travel.

Travel is a somewhat different animal from entertainment, although at times, the two are concurrently involved. The foundation of travel is sound. The superstructure can get out of kilter. When, because of cushioning by tax deductibility, there is indulgence in flamboyant accommodations, and wining and dining to the hilt, we touch off the same repercussions as with enterainment.

The President's answer to the problem is to tax a per diem limit for accommodations, food, and beverages. That appeals to me as a sound approach. Many businesses already do that on their own.

The law fixes a limit on pension fund deductions. The law fixes a limit on charity deductions. The law fixes a limit on medical expense deductions. In my opinion, it is in keeping that, with all the tax overtones that go with travel expense, there likewise be a limit on its deductions.

There are two items on which I suggest modification in the President's program. Both have to do with detail and not principle.

The first is as to the amount of the limitation. This, of course, a judgment area. The President's figures are geared to two times the allowance to Government people in travel. This is very liberal allowance for business in relation to Government people. But all it