Hon. WILBUR MILLS, Chairman, Ways and Means Committee, SHERMAN OAKS, CALIF., May 24, 1961. House of Representatives, Washington, D.C. DEAR SIR: For business reasons, I am opposed to Secretary Dillon's suggested changes in the Internal Revenue Code. I am particularly opposed to his recommendation to disallow all deductions for business purposes on yacht ownership. I am in the business of selling yachts at the retail level. We operate under the name of Owens-Newport Yacht Sales, and have two locations, the principal one being in Newport Beach, Calif. We are dealers for Owens yachts which are manufactured in Baltimore, Md. Such a change that the Secretary suggests will put our company out of business; it will also put most of the other yacht companies out of business. Sales would be curtailed as much as 75 percent, and thousands of employees in the yacht and boat accessory industry would lose their opportunity to work. The net results of this loss of business and the resultant unemployment would cost the Government more through loss of income tax and unemployment on the one hand than it would gain on the other. It is a very serious thing for the Government to force well-established businessmen to close their doors and take great financial losses on leases, special tools, facilities, fixtures, et cetera, and I feel it is entirely out of tone with the administration's program to build up the national economy. It also invades the businessman's prerogative to determine that the cost of the ownership of a yacht is a greater promotion to his business than could be gained by the same cost of different types of sales promotion. Just the talk in the newspapers on this subject has brought our sales to a standstill in the very beginning of our best selling season. Most sincerely, Mr. LEO IRWIN, Chief Counsel, Committee on Ways and Means, MARTIN POLLARD. NEW YORK, N.Y., June 16, 1961. DEAR MR. IRWIN: It was a pleasure speaking with you on the phone last week. I regret not being in Washington to testify orally at the committee hearings and therefore submit this written testimony which I trust may be included in the record of the committee hearings. I hope this will be of some help in defending the administration's proposals and position. As I mentioned to you I am a businessman in New York City where I own two restaurants, the Right Bank and Cafe Cinema. Both are on the East Side of Manhattan and primarily dependent on business people for trade. Thank you for your kind attention. If I can be of any further aid please feel free to call on me. Respectfully yours, ARTHUR I. BLAUSTEIN. After reading and considering much of the testimony offered before this committee relating to the administration's proposals to limit expense account deductions of businessmen I feel an obligation to speak out in defense of the administration's position. I speak (1) as a businessman who has freely invested and is fully cognizant of the profit motive in a competitive economy; (2) as a businessman engaged in the service field-restaurants-which are located on the East Side of Manhattan in New York and which cater primarily to business people; and (3) as an individual citizen who appreciates the responsibilities to and benefits of a free society. I personally believe that in previous testimony most witnesses have maintained a consistent drone of platitudes, deceit, and false analogy. In essence we have witnessed the self-indictment of the businessman who has thoroughly displayed: an inability to grasp the real problems facing our country, a selfishness unbecoming to individual character, and a marked distaste to bear a commensurate share of the burden in the struggle for progress in an enlightened and free society. He would lead you to believe that the final evening a group of manufacturers can spend $100 per person (tax deductible) for dinner at a nightclub is far worse than the betrayal of the "Last Supper" and that the capitalistic system will lie in ruin the next day when they have to awaken to a ceiling $3 lunch. Expense account listings are marked with misuse, waste, frivolity, and luxury which at times seem to be so obsequious that they become immoral. What is particularly amusing is that practical and realistic evils are righteously defended on theoretical grounds. Without blinking an eyelash the businessman tells you that unlimited expense accounts are necessary in competitive markets, that this is the tool of the trade of a salesman or an executive, who is trying to exercise influence in a purely competitive manner in a pure and simple competitive system. In other words, without this they couldn't sell. This in itself, although not even a valid argument, is false. For we know that 2 months ago a Federal judge in Philadelphia imposed $882,500 in fines on 20 corporations including General Electric, Westinghouse, and Allis-Chalmers. In addition, $109,000 in fines on 36 officers of these companies, and 30-day jail terms on a General Electric vice president and 6 other executives. In the language of the law these companies criminally conspired to divide markets, suppress competition, and charge artifically high prices. Furthermore, has anyone asked how high the expense accounts of these corporations and officials were in the process? One does not have to be a practicing economist to be aware of the fact that the institutional conditions which surround these violations exist in other industries. That it is indeed a general tendency of the larger corporations in this country to diminish the extent and discomfort of price competition. Even the most casual consumer realizes that the steel, automobile, cigarette, chemical, and oil industries alter prices infrequently and simultaneously. So the classic theoretical argument for competition revolves less around the economics of quality and price, but more around the dinner table, the cocktail party, the nightclub, and the theater party. And of course all this should be at government expense. It is labeled public entertainment, and to add to the fact that not only does it help in many cases to stifle competition; I am surprised that the corporations haven't claimed that it contributes heavily to the public morality. What this indicates is that expense account cheating and business malpractices are part of corporate mentality and unfortunately the corporate mentality does not have a conscience with which to deal with this problem. Only individuals have a conscience and the individual in the corporation more often than not relinquishes all responsibility by stating that "he merely was following orders," i.e., not acting as an individual with a conscience, but succumbing to the corporate will. Since a corporation operates on the contractual ethic of cavea emptor it thereby compromises the general societal ethic, i.e., those morals to which others in society must conform. It therefore becomes the solemn obligation of the legislative body of a government to act in order to preserve the general standard of ethics of the people as a whole. During the oral testimony to the committee, individual businessmen stated that their particular business and specific areas would suffer from legislation. But to do justice to divergent views let us examine some of these claims. One morning last month the New York Herald Tribune carried a front-page story relating how one witness portrayed the future of midtown New York as that of a ghost town or desert if Congress enacted legislation. I have spoken to hundreds of people in my restaurants and many other individuals in the same business as myself, who feel completely the opposite. They believe that today midtown New York is a ghost town especially for New Yorkers-that in the biggest city in the world, with a large literate and cosmopolitan middle class, most New Yorkers rarely habitate the midtown area. They feel that as a direct result of the tax-free expense account money spent the whole style of the theater, nightclub, and restaurant have radically changed. The average New Yorker who did eat out two times a week or who went to the theater once a week, now, does not choose to compete economically with those armed with expense ac counts. In the theater in particular there exists not only false economic competition, but a self-feeding system of its own creation that is ruining business. The result of this is a vicious cycle; the majority of plays being produced are musical comedy extravaganzas completely devoid of any content. This seems to be quite fitting for the businessmen who have stated in previous testimony that their aim is to entertain clients, i.e., if you make them happy you can sell them. As it happens though, the average New Yorker who was a theatergoer is either too sophisticated for this or perhaps cannot quite see paying an exorbitant price. The truth is that New Yorkers are still going out and spending money. Only now they are being more selective. They are attending off-Broadway theaters and repertory groups which have multiplied by the dozens. They are going to neighborhood theaters to see good movies. If the Broadway theater collapses it will not be the fault of expense accounts being reduced; it will be because they have created their own monstrosity, that of bad theater, devoid of any character, for ridiculous prices. Now for the restaurant industry. There are those who would have you believe that it is the responsibility of the Government to allow its citizens to indulge and wallow in extravagance far beyond the means and perspective of the individual, for the sake of business competition. I even recall one noted restauranteur who told this committee that at his restaurants there is a ratio of one waiter for every two customers. One could literally imagine this as the perfect "hog utopia." Why not every businessman having a personal barber, manicurist, and cushionman at Government expense? There are no limits as to how we might gorge ourselves. Essentially I believe, though it is not for myself or this committee to apply value judgments as to how an individual should conduct his personal affairs; it is very much within the authority of this committee to establish reasonable values when it involves money which is being deducted from taxes due the Government. Two customers to every waiter becomes even more ludicrous when we consider the ratio of students to classrooms, or clinics to patients, or middle-income housing units to families, or students to teachers. In the same breath the individual who informs us of the waiter ratio then tells us of the inevitable unemployment problem among waiters if expense accounts are limited. Again we are faced with the thesis of accepting a falsely contrived system. If those people who spend ridiculous sums ceased their extravagant consumption and went to more reasonable restaurants there would certainly be more jobs available at the other restaurants for the waiters. Admittedly the ratio would no longer be 2 to 1, perhaps it would be 6 or 8 to 1. But, I do not believe it would be a mean challenge to a waiter to receive $3 from eight people for an hour's service than to receive $12 from two people. This would create a decent competitive market in the restaurant business as a whole, not a drain for conspicuous and wasteful consumption. Again, I do not wish to make a value judgment of an individual's right to spend his life's earnings for one meal if he so desires. That is his business and if there are restaurants which wish to maintain exorbitant prices that is their business. But when it involves tax money there should be reasonable standards within the bounds of societal norms and customs. I recall a particular occasion in one of my restaurants when a young crowd of teenagers came in and ran up an unusually high check. At the end of their stay one of the youngsters came forth and offered me a corporate credit charge given to him by his father. He became quite upset when I told him that we weren't on that credit plan and said that he'd (1) never return and (2) in the future go to a better place. I think that this is an excellent example of the implicit moral decay of those who misuse credit cards. Unfortunately the children of doctors, teachers, and even Congressmen, unarmed with credit cards, never get to see the inside of "better places." And this is not an isolated incident, for many times we've been presented with charge cards by youngsters bearing the name of their fathers' corporations; and this also holds true for wives who lunch out with friends. In conclusion, let it be said, that although the case is very strong, one need not rest solely on moral, ethical, social, or psychological arguments for curbing business deductions. For in competition with the Communist world, the United States is threatened with a real economic battle. We must meet this international challenge with healthy economic growth at home. Growth calls for capital formation. In order to build roads, factories, and machinery, as well as schools, hospitals, and homes, resources must be diverted to these projects from current consumption. Although individual freedom and economic efficiency must be maintained through a free price system in a context of private property, those who reap the profits must share the responsibility of the burden in a free society. The price of being an American has gone up. Those who have been guilty of false, conspicuous or contrived consumption at Government expense must now bear some of the weight. The businessman can no longer be treated as the sacred cow in a capitalistic society. For just as the proverbial Nero watched Rome burn, the businessman in our country must stop fiddling the song of selfinterest and see a little farther than his nose. EXPENSE ACCOUNTS The administration asserts there are abuses in the expense account and related areas and proposes, among other things, to deny generally the deduction for entertainment expenditures. We strongly disapprove abuses in any area, but enactment of the Treasury proposal will deny deductions which clearly are legitimate business expenses. We have not, of course, seen the statutory language which Treasury thinks will accomplish the desired objectives. We do feel, however, that it is possible to eliminate most or all of the "abuses" which exist without interfering with legitimate business operation-and by "abuses" we mean the deduction for tax purposes of personal living expenses under the guise of business expenses. It is not possible to be specific until we have seen the statutory language which would carry out the Treasury's objectives. The language of the recommendations in this connection indicates that the Treasury Department is seeking to get rid of the bad apples by cutting down the entire tree. We believe it is appropriate, when dealing with business expense legislation of the type proposed by Treasury, to ask for the immediate adoption of legislation similar to that proposed in H.R. 640, introduced by Congressman Boggs, and H.R. 925, introduced by Congressman Byrnes, dealing with expenditures for legislative purposes. These bills would provide, in substance, that lawful expenditures which are ordinary and necessary business expenditures shall not be disallowed merely because they seek to influence the passage or defeat of legislation. We think such expenditures should be made deductible whether or not legislation is enacted dealing with expense accounts, because the denial of such deductibility results in the use of the tax laws to curb the right of petition. The CHAIRMAN. We go to the subject matter of fire and casualty insurance companies and our first witness is Mr. Houston. Mr. Houston, for purposes of this record, will you identify yourself by giving us your name, address, and capacity in which you appear? STATEMENT OF CHARLES T. HOUSTON, GENERAL MANAGER, AMERICAN RECIPROCAL INSURANCE ASSOCIATION, KANSAS CITY, MO. Mr. HOUSTON. Yes, Mr. Chairman, I will. Mr. Chairman and gentlemen, my name is Charles T. Houston and I am general manager of the American Reciprocal Insurance Association, with offices at 1115 Commerce Building, Kansas City, Mo. This association consists of 15 reciprocal insurance exchanges throughout the country, at which thousands of individuals, business firms, and corporations exchange contracts of indemnity to protect their property against fire and casualty hazards. I appear here today to state the views of the members of the association regarding the recommendations submitted by the Honorable Douglas Dillon, Secretary of the Treasury, and the provisions of H.R. 6659, introduced by Congressman Boggs, and H.R. 6660, introduced by Congressman Baker, which were indorsed in principle by the Secretary. We are opposed to the recommendations of the Treasury Department and to those bills because they would tax nonprofit reciprocal insurance underwriting as though the subscribers at a reciprocal exchange were a corporation engaging in the insurance business for profit. THE NATURE OF RECIPROCAL INSURANCE Since the Treasury recommendations would treat reciprocal insurance as a corporate business enterprise, in complete disregard of its true nature and purpose, I believe it is first necessary to consider the facts of this form of underwriting and point out its sharp contrast with corporate insurance. Reciprocal insurance is an interchange of contracts, by which the contracting parties assume obligations to indemnify each other on the occurrence of specified events involving loss or damage. There is no corporate or joint responsibility for issuing the insurance contracts or assuming liability. The individual parties do all of the contracting and assume all liability. There is substantial difference between this form of insurance and any other, particularly insurance underwriting by stock corporations. Reciprocal insurance originated in New York, approximately 80 years ago, when a group of merchants agreed among themselves that each would assume an obligation to indemnify the others against losses of their property from certain hazards, the principal one being fire. The objective was to provide insurance protection and service for themselves at actual cost. Each of those merchants was exposed to hazards common to all of them, and they were searching for ways to obtain maximum insurance service at costs less than the charges of corporate insurers. Although 80 years have intervened since this small beginning of reciprocal underwriting, the fundamental principles remain the same, and the objective continues to be insurance service and protection at actual cost. It is appropriate to point out that none of those original parties to reciprocal contracts were, or planned to be, in the insurance business. They simply sought a low-cost method of spreading their risks among a sufficient number to assure that the impact of a loss would not be disastrous to any of them. The same is true of reciprocal insurance today. The reciprocal plan of underwriting is the most direct way that the insurable losses of one may be shared by many. It is the purest form of insurance, being simply a method of spreading loss through an interchange of contracts of indemnity. There is no insuring corporation or other form of entity. The contracting parties are both insurers and insureds. The parties severally agree to assume a share of the risks of the other parties. The basic consideration is the agreement that each contracting party receives protection from each of the others in the same manner that he has agreed to provide protection for the others. There are various benefits, such as specialized loss-prevention services to those exposed to common hazards, but the one of dominant importance here is that insurance protection is provided at actual cost. There is no profit motive in the transactions at a reciprocal insurance exchange, and no profit is realized. On the contrary, the objective is to minimize the cost of protection. Thus the proposed treatment of reciprocal exchanges as corporations for profit ignores the essential nature of their operations. |