happens quite frequently, particularly in situations where workers are entitled to greater than average deductions for medical care or other deductible expenses.

In fact, there were over 8 million returns filed in behalf of those who did not have to pay any tax on their 1958 income. Almost $800 million had to be refunded to these individuals, of which $666,992,000 represented taxes withheld from wages under the withholding system. Many workers were put to great personal hardship because they had to wait until the spring of 1959 to receive refunds on the excessive amounts of taxes withheld from their wages.

The Treasury Department in the past has not actively supported this proposal for withholding on dividends and interest. It has come around to this point of view only after an intensive educational campaign aimed at persuading income taxpayers to include all their dividend and interest income. The results of that campaign have been discussed with Secretary Dillon. It seems clear to us that education cannot do the job. A more comprehensive program is obviously needed.

We cannot endorse too strongly the President's recommendation that a withholding system be instituted on dividends and interest. We hope that the adoption of this proposal will win swift approval from this committee.

The CHAIRMAN. Mr. Biemiller, we thank you, sir, for bringing to us the view of your organization on this subject matter. We always welcome you back to the committee.

Are there any questions of Mr. Biemiller?

Thank you, sir.

Mr. BIEMILLER. Thank you, sir.

The CHAIRMAN. Mr. Landolt. Will you please identify yourself for the record by giving us your name, address, capacity in which you appear?

STATEMENT OF ROBERT J. LANDOLT, CONTROLLERS INSTITUTE OF AMERICA

Mr. LANDOLT. Yes, sir. My name is Robert J. Landolt. I reside in Louisville, Ky., and I am the current past chairman of the committee on Federal Taxation of the Controllers Institute of America. The CHAIRMAN. We are glad to have you with us today, sir, and you are recognized.

Mr. LANDOLT. Thank you. I feel somewhat, after listening to Mr. Pechman and how optimistic he is about this whole subject, like a skunk in the church social, because I am opposed to this.

Gentlemen, the Controllers Institute of America through its committee on Federal taxation, takes a stand against the administration's proposal to withhold at the source on dividends and interest. The committee was represented last year in numerous meetings and discussions requested by the Treasury Department to develop an educational campaign to secure better compliance with the tax law regarding reporting of dividends and interest on income tax returns. The practicality and expense of withholding was gone into in great detail at those meetings and the groups participating were strongly opposed to the idea. Industry and commerce went to great lengths

to assist the Treasury in its educational program with the result that the Assistant Secretary of the Treasury issued statements to the effect that the program was producing excellant results.

The educational program resulted in more than 75 million specia! notices being mailed to recipients of dividends and interest. This distribution was supplemented by a coordinated information campaign using newspapers, magazines, radio and television. Excellant cooperation was given by tens of thousands of corporations, banks, and individuals.

A test study of tax returns filed after the educational program had been inaugurated showed a substantial increase in the number of taxpayers reporting dividends and interest as well as an increase in the amount of such income. This result was released by the Assistant Secretary of the Treasury, who, in commenting on the results obtained from the educational program, further said:

For those reasons I feel confident that we are following the more prudent course at this time by continuing with renewed effort and vigor the educational and stepped up enforcement program rather than attempting to impose a withholding system with its attendant technical difficulties and hardships on certain nontaxpaying and low income groups.

We think collecting taxes is a function of government and the business community should not be pressed into service as a tax collector, and more especially at its own expense.

The principle of withholding and parenthetically I am talking primarily about withholding on wages and salaries, was adopted under wartime circumstances when patriotism ran high, employment and income was high, and the public generally desired no scandal of tax evasion implying wartime cheating. This particular situation. no longer exists, and yet the Federal Government apparently wants to collect on income as it is paid, even before it is received by the individual and before it can be known that the individual will have an income subject to tax. In the latter case he must become a supplicant asking for the return of his money, subject to the troubles, mistakes, and delays which inevitably occur. From a moral viewpoint this is odd, to say the least.

In the case of withholding on salaries and wages, you will remember the pressures which developed to raise the paycheck after withholding to what it had been prior to withholding. Who can say these same pressures will not arise in the present case.

The relationship between a corporation and its stockholders or a bank and its depositors is one that much effort has gone into in order to develop an atmosphere of mutual confidence and understanding and to create a market for equity financing. Stockholders, especially, are not in daily contact with the corporation in which they have invested and many misunderstandings arise because of lack of communication. Withholding on dividends would certainly not improve this situation. It is felt that much resentment will arise from dividend withholding with its consequent impact in securing risk capital at a time when the administration is publicly proclaiming the need for economic growth.

The cost of withholding to industry and commerce, as well as the Government, while very considerable at the outset, will inevitably become greater in the future as it becomes possible through electronic data processing to match information returns with tax returns.

According to the Treasury as of last year, this is at least 5 years away and yet information returns are still required and undoubtedly will increase in scope and complexity as the goal is neared of matching those returns with income tax returns. Without the matching of those returns, there can be no real prospect of securing enforcement of the tax laws through audit.

We feel sure that ultimately information returns on dividends and interest will be required on the same basis as is now the case in withholding on wages and salaries. The tremendous amount of work required to do this is beyond the capacity of reporting payers except at a prohibitive cost. This was gone into in great detail in the hearings held last year by the Treasury and should be fully understood. Nothing in the situation now before us changes these hard facts.

Through withholding on interest and dividends where they are not subject ultimately to tax, hundreds of millions of dollars are taken from taxpayers without their consent as interest-free loans to the Government. This works a hardship on those deprived of this income, even though refunds are obtained, since withholding and later refunding will continue endlessly. Many individuals will have to reduce their standard of living under these circumstances. Pension trust and like funds will take a permanent loss of income through a perpetual reduction in total funds available for investment.

Many individuals through ignorance, carelessness, or accident, probably never will receive the refunds due, but even at the best will be put to trouble to secure and file the necessary papers, properly supported, in order to obtain the money right fully theirs.

Elderly people, minors, heirs-at-law involving small estates where stocks are part of the estate, citizens residing abroad on low incomes, as well as many others, will undoubtedly suffer because of lack of knowledge as to their right to obtain refunds or because of other

reasons.

If this proposed law is adopted, then, in the future, State governments, following past history on wage and salary withholding, will adopt similar laws, thus compounding the cost both to business and Government, and resulting in grievous hurt to taxpayers.

Thank you.

Mr. ULLMAN (presiding). Mr. Landolt, we appreciate your bringing us your views on this subject.

Are there any question?

Thank you very much.

Mr. WILLIAM JACKMAN. We are happy to welcome you before the committee, Mr. Jackman. Will you state your name and whom you represent for the purpose of the record?

STATEMENT OF WILLIAM JACKMAN, PRESIDENT, INVESTORS

LEAGUE, INC.

Mr. JACKMAN. Thank you very much, Mr. Chairman. I am William Jackman, president of the Investors League, and if I come here once more, I think you will be charging me an occupancy tax. The organization I represent is a nonprofit organization with thousands of members in every State in the Union.

Mr. Chairman and members of the committee, on behalf of our tho sands of investor members, I am grateful for this opportunity to present the American investor's viewpoint on withholding of dividends and interest.

In the interest of brevity, and in view of the fact that my statement is rather lengthy, I ask your permission to summarize the statement and have included as part of the record my complete statement.

The proposal that dividend credits and interest be withheld is tantamount to the Federal Government asking 15 million shareowners in American economy to lend it money without a single penny of interest.

Although it may not be intended as such, these are police-state methods, inasmuch as those who are not required to pay any taxes are being forced to pay the Government money, which in many cases would be refundable. However, these taxpayer investors would have to wait almost a year to recover their money, at a time during which a great many are dependent on these dividends for vital necessities. On the reverse side of the coin, gentlemen, if any taxpayer has made a faulty refund he is charged interest on moneys owed the Internal Revenue Service.

Withholding of dividend credits would be a hardship that many small shareowners cannot afford-a blow to incentive-are but à few of the resultant efforts this will produce.

If labor is worthy of its hire-so is money. After all, gentlemen. it is investors' money that provides the tools of production. It may be lightly argued that since there is now a withholding from wages that there likewise should be a withholding on dividend income. It is not that simple. Wage withholding takes into account the payee's tax bracket; the income from wages is not taxed twice as is the case of the small investor. First the corporation is taxed, then the recipient. The 20 percent withholding would be applicable to the smallest amount, even though the recipient of the small amounts would be at a disadvantage as against the larger shareowner who eventually would be required to pay a percent higher than that withheld. Let us take the case of a husband, 75, and his wife, 72, who have retired before the present provision for the self-employed to come under the Social Security Act. They have no form of pension or social security.

Throughout their fruitful earning years, they managed through self-discipline and frugality to save an amount to care for themselves in their old age, without burdening family, friends, or swelling the dole role. Their sole income is from accumulated savings. These savings are invested in publicly held corporations. Their sole income is derived from dividends. Their income is approximately $3,500 annually, with double exemptions because of age, with proper deductions for taxes on their home, State tax, contributions, medical expenses, and so forth, which grows increasingly with their advanced age. They have no income tax liability.

Now, gentlemen, consider their plight. Under the proposal to withhold 20 percent on dividends, just what do they use for paying monthly bills?

Obviously, they must go into debt or sell something, thereby reducing their meager income. As we have said it would be a considerable time before any refund would be forthcoming. Meanwhile, $700

would vanish from their funds. Invested in an ordinary savings bank, this $700 would yield 3 percent-and $21 would pay for a lot of groceries.

Would they collect interest? Would it accrue from date of dividend payment? Let us assume that they receive 125 dividend checks annually. Many corporations pay quarterly. The payor would have to itemize them and since all would not be payable on the same date, he would have to itemize such withholding on his tax return. These returns then must be audited by the Internal Revenue Service. Multiply this by 15 million returns and it looks like a monumental task.

Obviously, gentlemen, all fairminded Americans want to see leaks in the tax collection system dammed up. But they must be dammed while the taxpayer is not dammed. The problem then must be resolved in favor of a method which will recover the maximum amount, with the least expense, yet must be fair to all taxpayers.

One class of income should not be singled out. It is academic that the Treasury receives a report on all dividends paid. Is there any reason why the Internal Revenue Service, through extensive spot checking could not uncover the small portion of taxpayers who fail to report dividend income, without in a sense branding all investortaxpayers as crooks?

Thus, the dividend gap is by far the smallest both quantitatively and percentagewise.

If we assume a 20 percent "across the board" withholding on dividends, the maximum amount which the Government would derive-based on the $1 billion estimated dividend gap-would be $170 million. However, the actual revenue yield is likely to be appreciably less than this amount because the effective tax rate on much of the income contained in the gap will be less than 20 percent.

In estimating the revenue yield the following would have to be taken into account: Each person would be entitled to an exclusion from income of the first $50 of dividend income, if this meager relief is not rescinded. Especially for the persons in the two lowest classes this would be a significant factor. The standard deduction of 10 percent presently applicable on income tax returns operate as a floor under deductions for incomes below $10,000, thus in effect reducing the applicable tax rate by 10 percent. The effective lowest bracket rate would be no more than 18 percent.

The dividend credit of 4 percent, also in grave danger of being rescinded, applied to the lower of dividend income after the $50 exclusion, net income after deductions and exemptions, would further reduce the applicable tax rate. In the first category-those having under $7,000 of income-most individuals will fall in the lowest tax bracket. For example, a married individual having an adjusted gross income of $7,000 with two children, filing a joint return and claiming the standard deduction, would be in the lowest tax bracket of 20 percent. After taking into account the standard deduction and the dividend credit, his tax rate on his dividend income could not exceed 16 percent on dividends above $50 for spouse and there would be no tax on the amounts under $50 each. A similar taxpayer with $10,000 adjusted gross income, who would reach a 22 percent bracket before adjustment, would be subject to tax on his dividends at 18 percent of the amounts above $50 and none on amounts below.