THE NATIONAL ECONOMY LEAGUE

A nonprofit organization founded and incorporated in May 1932, to revive the American principle of representative government for the common good, and particularly to secure the elimination of wasteful or unjustifiable Federal expenditures.

The league's present objectives are:

1. To record the facts and arguments for sound Federal finance and distribute to the widest extent within its means "fact-studies" on Government fiscal policies. 2. To reveal raids on the Federal Treasury by self-seeking minorities and pressure groups.

3. To push for a balanced Federal Budget-the only way now to avoid the complete collapse of our national credit, our system of free government, and loss of our civil liberties.

All publications of the league are distributed without charge and are sent to all Members of the Congress. Additional copies of this pamphlet may be obtained upon request. Since such distribution is made possible by voluntary gifts, individual contributions will aid materially in wider circulation and a broader, more effective, educational program, as well as make possible special research projects for which funds are not now available. A convenient form is enclosed for your use.

The National Economy League officers: Ernest Angell, chairman; Duncan M. Spencer, treasurer; Graham D. Mattison, secretary; Harley L. Lutz, consulting economist, H. G. W. Sundelof, executive director; Willard D. Arant, research director.

Executive directors: Copley Amory, Jr., Ernest Angell, Robert O. Bonnell, Ellsworth Bunker, Edwin F. Chinlund, Joseph H. Choate, Jr., Grenville Clark, Allen W. Dulles, A. Crawford Greene, Robert Hale, E. Roland Harriman, Henry R. Hayes, Carl T. Keller, Graham D. Mattison, W. W. Montgomery, Jr., George W. Naumburg, H. Irving Pratt, Jr., Lucius F. Robinson, Jr., Frederick Sheffield, Roger B. Shepard, Paul Shoup, Duncan M. Spencer, E. B. Starbuck, Ray Lyman Wilbur, Westmore Willcox, Jr., Lucius Wilmerding, Mark Wiseman.

The CHAIRMAN. Are there any questions from any member of the committee?

(No response.)

The CHAIRMAN. Thank you very much, Dr. Lutz, for your appear

ance.

Dr. LUTZ. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Bunker.

STATEMENT OF HON. BERKELEY L. BUNKER, UNITED STATES SENATOR FROM THE STATE OF NEVADA

Senator BUNKER. Mr. Chairman, I wish to speak on the subject of mandatory joint income-tax returns. I would like at this time to urge that the action of the House of Representatives be sustained insofar as that body voted to omit a mandatory joint income-tax return provision from the revenue bill of 1941.

One of the oldest and soundest of the laws of Nevada, and of other States with a Spanish heritage, is that which recognizes a married woman as a full partner of her husband, with an equal right to the fruits of their joint labor--this is opposed to the old English common law which made here his chattel and the product of her efforts, and their joint efforts, his sole property.

We in Nevada are proud of our rights under this law, in which we feel equality and social justice are the keynotes. The State of Nevada is happy and willing to assume its share of the taxation necessary to pay for the national-defense program, just as she has been willing to assume her share in every emergency which has confronted the Nation since her admission to Statehood. But she is strongly opposed to a discriminatory tax by which residents of the State would lose the right to file separate returns in keeping with her laws. Even if the revenue involved, which is estimated at some $350,000,000 were tenfold greater, it could little compensate the Government for the sacrifice of sound social principle and the loss of priceless heritage entailed.

May I respectfully call the attention of the committee to the legality of the community property law? The provision for the taxation of the combined income of husband and wife, as though it were the income of one person, violates the fifth amendment of the Constitution of the United States in that it would deprive the taxpayer of his property without due process of law. The tax contemplated by a mandatory joint income-tax return provision is a tax levied upon the husband based and computed upon the income and property of another person, his wife. This practice has been heretofore condemned by the Supreme Court in Knowlton v. Moore (178 U. S. 41) and in Hoeper v. Tax Commission of Wisconsin (248 U. S. 206). With further reference to this subject I mention Heiner v. Donnan (285 U. S. 315), in which it is settled that there is no distinction between the "due process" of the fourteenth amendment and the "due process" of the fifth amendment. I would also like to cite Schlesinger v. Wisconsin (270 U. S. 230), United States v. Baltimore and O. R. Co. (17 Wall 322, 326, 21 L. Ed. 597, 599), Reinecke v. Smith (61 F. (2d) 324, 325), Darcy v. Commissioner (66 F. (2d) 581, 585), and Helvering v. City Bank Farmers Trust Co. (296 U. S. 85).

The provision for taxing separate incomes as joint income would effect an unconstitutional usurpation of the States' power to regulate property. A requirement for the filing of joint income-tax returns in effect would state that one of the incidents of the ownership of property by a married person is that the spouse of such person shall be taxed thereon. This is an assumption of the power of the State to regulate the ownership of property, and such assumption of power is unconstitutional, under the tenth amendment, which provides that "the powers not delegated to the United States by the Constitution, nor specifically prohibited by it to the States, are reserved to the States respectively, or to the people."

The term "incomes," as used in the sixteenth amendment, never contemplated the inclusion of a wife's income in her husband's taxable income. In furtherance of this point I refer to Eisner v. Macomber (252 U. S. 189), Blair v. Rosseter (33 Fed. (2d) 286), Noel v. Parrott (15 Fed. (2d) 669, 671), and Towne v. Eisner (242 Fed. 702, affirmed 245 U. S. 418).

The theory underlying a provision making mandatory joint tax returns is that the legal rights of the separate spouses to their separate incomes are to be ignored and that the joint income is to be treated as available to meet the family obligations imposed upon the husband. This assumes a status which is contrary to the laws that exist in most of the States as well as to the experience of the average couple where both have means.

And further, by making mandatory the filing of separate incomes jointly and thus placing many couples in surtax brackets, the proposal amounts to a penalty tax on marriage. This is a definite reversal of what has always been encouraged, and for this reason higher taxes have been placed on single persons in the way of lower exemptions, and so forth. Never before has anyone thought of reversing this procedure and taxing marriage. By the Government's offering a premium to individuals who remain or become unmarried, in effect, a social problem of the first order would thus be presented.

We in Nevada are fully cognizant of the great problem confronting the Senate Finance Committee in the necessary creation of a tax bill which would bring in sufficient revenue for our defense program so vital to our national life. The committee deserves sincere commendation for its honest and diligent work in this respect.

But in facing all emergencies that come to our country we must ever bear in mind that there can be no letting down of the ideals and principles of the constitutional rights on which our Nation was founded.

May I again urge consideration of these views, which Nevada presents unanimously.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

There is a witness here, I understand, who wants to get away. We will call the next witness somewhat out of order.

Mr. W. J. Salmon. Do you wish to file a statement?

Mr. SALMON. Thank you very much. Could I read it? It will take me only 5 minutes.

The CHAIRMAN. Yes.

STATEMENT OF WALTER J. SALMON, NEW YORK, N. Y.

Mr. SALMON. Mr. Chairman and gentlemen of the committee, my name is Walter J. Salmon. My address is 11 West Forty-second Street, New York City.

I am fully aware of the tremendous task which faces this committee, and also of the fact that the demands upon your time are almost unlimited. I deeply appreciate the opportunity to appear. I shall take only a few minutes to present to you one problem which seems to be of particular importance just now, and to suggest a partial remedy. I know you will give it most careful consideration.

I have been actively engaged in the real-estate business in New York City for about 45 years. At the present time I am managing and operating a number of office buildings in what is called the midtown

section, in the neighborhood of Fifth Avenue and Forty-second Street. In most cases the properties are held under long-term leaseholds, which in turn are held by various corporations. I am appearing on behalf of those corporations and on my own behalf. However, I know that many other businesses and many other businessmen have a similar problem.

Many people, I think, are under the impression that the operation of a large office building in New York City is a safe and certain way to make money. You gentlemen probably know, at least by hearsay, and I know from sad experience, that this is not the case. It is unfortunate, of course, but true, that what we call the American "profit" system is in reality a "profit and loss" system. No one has yet devised any method of guaranteeing profits. I regret to say that the business in which I am engaged has proved an all too striking example of that rule.

The fact of the matter is that the properties of which I have personal knowledge have an almost unbroken record of losses for over 10 years. Up to about 1929, conditions in the business were fairly stable. It was possible to rent a fair percentage of the available space, not all of it, but enough in some cases at least, to produce a modest profit. Since the early thirties, however, the situation has been entirely different. General business, as we all know, fell off alarmingly, and that was, of course, a very important factor. A more specific factor, affecting particularly those of us who operate in the midtown section, was overbuilding. I can cite as an example which will be familiar to all of you—the Radio City development. Magnificent as that development is, I do not think it can be successfully asserted that it was economically justified, that the additional space which it provided was required in that area. Those interested in that project had, and still have, unlimited resources. Losses would not matter so much to them as they would to the rest of us, who had devoted what capital we had, and all our efforts over a long period of years, to the development and maintenance of less extensive projects.

The typical method, and usually the only available method, of financing an office building in New York has been to borrow money on the leasehold, and then repay the loan out of future profits. Where there have been losses, the operators have usually had to finance those losses themselves. That has been our situation. We have had to dig deeply to keep our enterprises going, and the only reason why we did it, the only justification for doing it, was the hope that sometime in the future there might be some profits available with which we could recoup at least a portion of our losses.

We have now come to the point where it is possible to say that some very modest profits may perhaps be made in the next few years. The improvement in general business conditions has brought that about. How much of that is due to the impetus of the defense program, and how much of it will disappear in the post-war depression, are questions on which I cannot comfortably permit myself to dwell. I can only go on the assumption that we cannot look forward to good business permanently.

The principal point I want to make before you today is that it is utterly unfair, in such a business as ours, to measure the taxes for any single year on the basis of the results of that year alone. As I have

said, we have had large losses for many years. Such profits as we may make in the next few years will not be true profits, obviously, until we have recouped our losses. If we recoup one-tenth of our losses we shall be very happy.

For businesses which are fortunate enough to show profits year after year, measuring the income of each year separately is fair enough. Few businesses are that fortunate. I can think of many, other than my own, in which it is altogether unrealistic to measure income on a year-by-year basis. For example, it usually takes a long time, and much expense, to develop a patent. If it is sold in one year, the income does not really all belong in that year. The building of a dam, or a bridge, or a subway, may require many years. If payment is made only upon completion it should not be treated as income only of the year of completion. Lawyers are often engaged upon cases for many years, receiving their fees only when they finish. They do not earn that income only in the year in which it is paid. These are only a few examples.

If the man who develops a new patent cannot charge his expenses and losses against the proceeds which he finally derives from it, he is paying income taxes without having any real income. The same is true of the builder who is paid only in a year other than the one in which he incurred his expense. The lawyer who is paid in one year for work extending over many pays much higher taxes than his neighbor who might make the same aggregate amount over a number of years. In our situation, if we cannot first recoup our losses, we will be paying taxes although we have no real income.

I am not a tax expert, but as a layman I can see the necessity for requiring annual income returns and annual tax payments. It is much more convenient, from the administrative standpoint, to do it that way. On the other hand, also as a layman, I know that our Federal tax system is supposed to have as its foundation the principle of "ability to pay. This principle is a sound one, of course, and it is much more important than any rule of convenience which requires measuring income by short, fixed periods.

Congress has already recognized this. Before 1932, the revenue acts permitted us to carry over losses for 2 years. We did not have this privilege from 1932 to 1939, but it was restored in 1939. I understand also that a number of special situations have been taken care of. A builder with a long-term contract can spread his income over the term of the contract. A lawyer spending more than 5 years on a case can spread his fees over those years.

These provisions are all beneficial. However, they afford no substantial relief in those situations in which relief is most necessary. For example, in our business, which has gone through over 10 years of losses, we can recoup only a very small fraction of those losses under the present 2-year net-loss carry-over provision. Again, a business which has suffered a very heavy loss in one year may be unable to offset that loss fully in the next 2 years. On the other hand, the more fortunate business, which has moderate losses in not more than 2 years, can offset its entire losses.

I want to urge upon you, as a practical solution of the problem, a 5-year carry-over of net operating losses and net long-term capital