served as an excuse for all kinds of punitive taxes and all kinds of tax reduction schemes. That is, one school of thought would take away in taxes 100 percent of a man's earnings over the national income average of about $1,400 per capita; the other school would either abandon the income tax or levy on income the same tax percentage, regardless of the amount of the income.

Fortunately, up to this time, the Congress has adopted neither of these extreme courses, but has attempted to adopt a schedule which, while at times steeply graduated, has, with possibly some exceptions, left the taxpayer a reasonable sum after the payment of his income tax as a reward for his labor, knowledge, and ability. Thus his efforts and his incentive to employ his talents usefully have been fostered. In my opinion, the surtax schedule proposed in the pending bill in many instances passes the danger point and will not leave the taxpayer sufficient reward to give him the proper incentive. The Revenue Act of 1918, enacted in a similar period, imposed unprecedently high income taxes and yet this proposed revenue bill of 1941 far exceeds the rates of tax imposed by the 1918 Act. In fact, every person with a net income of over $2,300 pays more tax under this bill, and many as much as 80 percent more. The total income tax on a married man with no dependents under the 1918 act and under the pending bill is shown by way of comparison in the following table:

Comparative income-tax table, Revenue Act of 1918 and proposed revenue bill of 1941

The figures given can be more readily visualized by the following chart which shows graphically the percentage of increase in taxes proposed in this bill on incomes up to $140,000 over the taxes imposed by the War Revenue Act of 1918. It is apparent from the table and chart submitted that either the measure of ability to pay was all wrong in 1918 or it is all wrong now, for the increases are entirely inconsistent. From the figures given, it is clear, for example, that a married man with a $6,000 net income under the bill is deemed to be able to stand a tax increase of 74 percent over his 1918 tax, one with a $10,000 net income an increase of only 40% percent, and one with a $40,000 net income an increase of over 831⁄2 percent.

It is urged, therefore, that the surtax schedule be more carefully studied and the increase made more consistent throughout the whole schedule.

PERCENT INCREASE IN TAX 1941 (PROPOSED) OVER 1918

3. Earned income relief.—The present law merely retains the principle of a differentiation between the tax on earned income and on investment income without giving any adequate relief. For example, a married man with a net income of $10,000 from salary under the proposed bill pays an income tax of $1,166, while a married man with a net income of $10,000 from investments pays an income tax of $1,196.80, a difference of only $30.80. In fact, the maximum difference in tax on earned income and unearned income is only $48.40, on account

of the provision in the law which stipulates that not more than $14,000 of income shall be considered as earned income. It is believed that this difference in tax is entirely inadequate.

In examining the relative financial status of the man with $10,000, received from salary, and of the man with $10,000 from investment income who does not work, I believe that it is fair to assume that the man with the $10,000 of investment income would have approximately $200,000 of capital. This means that he does not have certain of the out-of-pocket requirements which serve to drain the income of the salaried man. Roughly comparing the two situations, I have calculated that the man with investments has left about $3,000 per year after necessary living expenses, while the salaried man has only $400.

It seems clear from the above that the man on a salary is at a distinct disadvantage compared to the man with investment income, and has substantially less ability to pay. The man with investment income has ample funds to meet emergencies. The man on a salary has no such security. Moreover, and most important, it becomes under the proposed tax rates very difficult for a man starting with no capital and his only income from salary to build up any substantial capital. It is believed, therefore, that consideration should be given to an earned income relief which, at least up to a net income of reasonable size, should reduce surtaxes as well as normal taxes.

4. Exemptions for dependents.-The existing law and the proposed bill allow an exemption (that is, a deduction) of $400 for each dependent child under the age of 18 years.

When such a dependent becomes over 18, the exemption is automatically removed. However, it is at this very time in the case of a child attending college that the expenses of the parent in maintaining such child are the greatest. It is believed, therefore, that in the interest of equity, consideration should be given to providing that the exemption of $400 for a child should be allowed up to the age of 21, provided such child is attending college.

5. Alimony.-Under existing law and the proposed bill, a spouse who pays alimony is not allowed a deduction for such payment in his or her return. On the other hand, the spouse receiving the alimony pays no tax. This situation leads, under the new rates now proposed, to exceptional hardship. It may be possible, in fact, for a man having a substantial income and paying substantial alimony to have nothing left after payment of the tax. This is, of course, because he has to pay tax on all of the income which he enjoys and also has superimposed upon his income the alimony paid to the wife. It is suggested, therefore, that the committee should provide for the inclusion in gross income of the payee such alimony payments and exclude such payments from the gross income of the payor. As an optional suggestion, if legal questions are raised, it is suggested that a man pay a tax on his own income, reduced by the amount of alimony payments, and then pay a tax on his wife's income insofar as it consists of such alimony payments in an amount computed on the basis that the alimony payments were the entire net income of a single person.

6. Custodian's fees.--For many years the Bureau of Internal Revenue allowed custodians' fees, investment counsel fees, and reasonable management expenses in connection with handling personal as well as real property, to be deducted from income in arriving at taxable income. These deductions, in the case of personal property, are now being disallowed as the result of a court decision. It is believed that these expenses should be allowed by the law, since they are as necessary in the production of the income which is taxed as in the case of any other expenses in connection with the production of income. 7. Excess-profits tax on new or recently formed corporations.-The Congress has wisely provided, in the law now in force, for two optional methods of computing the excess-profits tax-namely, the invested-capital method and the average-earnings method. Both of those methods are retained in the pending bill. These two methods give reasonable treatment to a great number of corporations which would otherwise suffer exceptional hardship if only one method were provided for.

Neither existing law nor the pending bill, however, provides for any consistent treatment of new or recently formed corporations which have relatively low capital and are either completely or partially denied the use of the average-earnings method because they were not in existence during any or a part of the base period.

Our whole American philosophy demands the encouragement of new businesses and equal rights to them in comparison with rights enjoyed by the old. In fact, many sound reasons can be advanced why new companies should have some special measure of advantage during the first few years of their existence over the rights enjoyed by their seasoned competitors.

Since under existing law and the provisions of the pending bill new or recently formed companies are denied the use of the average earnings method or secure very inadequate treatment thereunder, it is suggested that such companies be entitled to oompute their average earnings base by using the first 4 years of their existence as a criterion or such lesser number of years (including the taxable year) if they have not been in existence for 4 years. If it is thought this might open the door to profiteering, then it could be provided that only a certain percentage of the average earnings be allowed in computing the average earnings credit.

Much is said about taking the profit out of war and out of the defense program. This is meritorious to a certain extent, and still we must keep alive the profit motive. For example, everyone knows that nothing is more important than supremacy in the air, and yet what is the use of asking a man to put money into a new airplane plant if he takes all the risk but can only receive negligible profits after taxes?

In my judgment the developing aviation manufacturing industry is so important to this country in many ways that it should be especially classified and opportunity deliberately afforded the struggling smaller units to retain a substantial portion of their present abnormal earnings for purposes of future development.

8. Reversal of excess-profits credit.—I have prepared and submitted a special memorandum on this and the following point in behalf of Republic Steel Corporation. I respectfully refer the committee to this memorandum for my strong views on these points.

I strongly urge that the proposal to reverse credits be eliminated.

9. Special 10-percent tax. The pending bill imposes a special 10-percent penalty tax on corporations using the invested-capital method of computing excessprofits tax. (See memorandum in behalf of Republic Steel Corporation.) I strongly urge that this tax be eliminated.

10. Qualified component corporation.-On account of a technicality in the law which is believed to have been left in by mistake when the Senate revised the House bill (second revenue bill of 1940), a corporation which forms a wholly owned subsidiary during the base-period years and then dissolves it during the base period cannot include the subsidiary's earnings with its own in computing its average earnings during the base period. Inasmuch as this treatment seems inconsistent and is believed to have resulted from a mistake, it is hoped that the committee will see fit at this time to remedy the matter by changing the definition of a qualified component corporation so that the date specified in the law would be January 1, 1940. (See sec. 740 (c).)

11. Personal holding companies.-The purpose of the high rates imposed upon personal holding companies is obviously to get at those cases where profits are deliberately not distributed in order to permit an individual to escape high surtaxes. Examination, however, proves that the provision, as now contained in the law, works inequity in a number of situations which do not have this characteristic. It seems clear that it should be rewritten. For example, situations arise where a corporation's net income is taxed at the 75-percent rate anplicable to net incomes of personal holding companies, in spite of the fact that the total amount of this net income is distributed to the stockholders. It would also seem equitable that a parent company holding practically all the stock of a subsidiary company and receiving practically all its income therefrom should not be considered to be a personal holding company, regardless of the fact that it possesses the legal characteristics, since it is really an operating company. There are actual cases where for legal reasons the holding company cannot be dissolved or where practical reasons prevent dissolution, such as financial inability to retire outstanding bond issues. It will be noted that there is no special tax on closely held operating companies.

12. Capital stock tar.-It is extremely difficult for corporations during this emergency period to make any accurate predictions as to their future earnings and still such predictions are necessary in setting their capital stock tax value. It is believed, therefore, that for the next 3 years corporations should either be given the right to revalue every year or at least, following the precedent

established in the past, should be allowed at their option to increase their declared value annually.

13. Excise taxes.-It would seem that some of the small excise taxes which return little revenue and which apply to articles not interfering with the national defense program, might well be omitted when such taxes decrease the taxable net income of the industries affected and thus hardly pay for the cost of administration. For example, a number of taxes, such as those on sporting goods, commercial washing machines, outdoor advertising, and the increased tax on safety deposit boxes, could be eliminated, among others, with very little loss of revenue.

Conclusion.--This memorandum is only intended to point out some of the general and special features which it is believed the committee might well consider in the pending bill. We are strongly of the opinion that our whole tax system needs careful revision. High rates make it imperative that the tax base be fair and be so designed as to prevent discrimination between industries or between different corporations in the same industry.

Respectfully submitted.

LOVELL H. PARKER,

Tax Associate, Guy & Brookes, Washington, D. C.

The CHAIRMAN. Dr. Townsend.

STATEMENT OF DR. FRANCIS E. TOWNSEND, WASHINGTON, D. C., FOUNDER OF THE TOWNSEND NATIONAL RECOVERY PLAN

The CHAIRMAN. Dr. Townsend, you are appearing for the Townsend National Recovery Plan, or just generally on the question of the gross-income tax?

Dr. TOWNSEND. On the gross-income tax. Of course, I represent an organization that is vastly interested in taxation for a specific purpose but, I believe, gentlemen, that, a serious consideration of the gross-income tax at this time, when it is so obvious that the Government must raise enormous volumes of money, will be most profitable, and I want to cite you to the result of a gross-income tax as practiced in the Hawaiian Islands and in the State of Indiana.

Perhaps as good a presentation of the working of the tax as I could give is in the report of Hawaii's gross-income tax, as presented by their tax commissioner of the Territory of Hawaii. So, with your permission, I will read a couple of pages from that report. It is entitled "The Hawaii Gross Income Tax Law From the Standpoint of the Taxing Official."

We, who are the administrators of the various tax laws handed down by the legislature from time to time, fully realize the importance of a tax law such as our gross-income tax law. The numerous complexities and inability to adapt the requirements of each law to the machinery of the tax office, often present a complicated procedure, not only from the administrative standpoint, but also from the taxpayers' angle. Often the requirements of the law are such that the procedure demanded of the taxpayer is confusing to him. Further, it requires considerable time for the average bookkeeper to understand what is desired of him, thereby necessitating additional work and time to familiarize himself with the pertinent information in order that he may intelligently file the necessary reports for his employer.

In cases of this nature, it is obvious that this additional burden placed on the taxpayer is not received with open and outstretched arms. The taxpayer has his own problems in conducting the affairs of his business and more important to him is the worry of making his business pay and be in a sound financial position to meet his bills. Consequently, when additional requirements are demanded of him to comply with tax laws, the seed of antagonism is planted and the spirit of cooperation and good will so vitally essential in