form of excess profits taxes would be spread over a wider base, and the rate to raise the same amount of money would be about 6.3 percentage points lower than the rates that have to be used to raise that same amount of money under the proposal in the bill as it comes to you. Senator WALSH. The Treasury is of the opinion that their proposal would reach a larger percentage and more of the manufacturers or producers of defense materials than the House provisions?

Mr. SULLIVAN. Yes; and beyond that and perhaps of more importance, Senator Walsh, is the fact that it would reach a greater amount of the profits of those concerns who are now being lightly tapped by the present excess-profits tax bill.

The CHAIRMAN. You would not actually reach any more of the direct defense profits, because for the most part your defense work is done by highly capitalized corporations which are on the invested capital basis now.

Mr. SULLIVAN. That is true, although there are outstanding examples the other way around. In the main, that is true.

The CHAIRMAN. Yes.

Mr. SULLIVAN. I think you asked me for some figures.

The CHAIRMAN. Yes.

Mr. SULLIVAN. Would you like those now, Mr. Chairman?

The CHAIRMAN. Yes.

Mr. SULLIVAN. On the returns that were received?

The CHAIRMAN. Yes.

Mr. SULLIVAN. I think I should preface this statement by reminding you that the amendments to the excess-profits tax passed very shortly before March 15.

The CHAIRMAN. Yes; and you gave them an additional time.

Mr. SULLIVAN. And because of that the Commissioner felt obliged to give very liberal extensions in the filing date to corporations, and for that reason the picture is not clearly set forth, is not nearly as complete at this time as last year we hoped it would be. The report I now give you deals with the excess-profits tax returns received in the Internal Revenue Bureau through July 17, 1941. There were a total of taxable returns of 10,468. Of this number, 3,583 used the invested-capital method and 6,885 used the average-earnings method. Roughly speaking, those who used the average-earnings method outnumbered those who used the invested-capital method about 2 to 1. Senator CONNALLY. Were those mostly small corporations that used the invested-capital method?

Mr. SULLIVAN. We can give you the break-down by size, too, Senator Connally. Now those 6,800 who used the average-earnings method reported excess-profits taxes of $135,000,000, whereas the 3,500 using the invested-capital method reported excess-profits taxes of $35,000,000. In other words, that ratio is almost 4 to 1.

Senator CLARK. Mr. Sullivan, what would be the result in the way of additional revenue if you retained the rates of the pending bill and then went to the Treasury's method of invested capital?

Mr. SULLIVAN. I think you might want to lower the rates, Senator. Senator CLARK. I say, what would be the effect in the revenue if you did retain the rates of the pending bill and then went to the Treasury's method of invested capital?

Mr. SULLIVAN. The increase in revenue would be substantial.
Senator CONNALLY. You would lose a lot of money?

Mr. SULLIVAN. No; we would make a lot of money.
Senator CLARK. It would be a tremendous increase?
Mr. SULLIVAN. That is correct, sir.

Senator CLARK. Will you make an estimate of that?
Mr. SULLIVAN. We can and will insert it in the record.
(The figures referred to are as follows:)

Estimated increase over yield of the present law of the Treasury excess-profits_plan using H. R. 5417 tax brackets and rates compared with estimated increase due to H. R. 5417, at levels of income estimated for calendar year 1941

Treasury Department, Aug. 9, 1941, Division of Research and Statistics.

Senator CONNALLY. You would make a lot even on the reduction of the 8-percent rate?

Mr. SULLIVAN. Yes.

Senator CONNALLY. I thought you wanted to reduce that.

Mr. SULLIVAN. We do, but you see under the present law some companies that are making 30, 40, and 50 percent are not subject to tax if they made that amount during the base period. I have a further résumé of these returns if you would like to have them, Mr. Chairman.

The CHAIRMAN. Yes; I would be very glad to get them.

Mr. SULLIVAN. This through June 30. The total number filed and that were taxable, 11,845; nontaxable, 79,000. The estimated totals that we will expect when the year is over to have received, 88,000 nontaxable excess-profits-tax returns and 13,400 taxable returns.

The CHAIRMAN. What do you estimate it will yield? The total yield of excess-profits taxes?

Mr. SULLIVAN. I am afraid that no figure I could give you, Senator, would be helpful, because there are now outstanding, or there were as of today, August 8, 4,200 extensions. Now many of those are very large concerns.

The CHAIRMAN. You haven't any way of estimating that?

Mr. SULLIVAN. We can. I mean we can go to the financial journals and get financial evidence of their invested capital and their earnings, but it is not going to be at all an accurate picture, and I am afraid it would not be helpful to you.

The CHAIRMAN. Under the House bill, of course, you would increase the total number of excess-profits-tax returns?

Mr. SULLIVAN. Very appreciably.

The CHAIRMAN. You estimate the House bill will now produce from excess profits in fiscal 1942 how much?

Mr. SULLIVAN. $1,198,000,000 increase over existing law. That is on calendar year 1942 liability.

The CHAIRMAN. You mean calendar 1941?

Mr. SULLIVAN. On the liability at calendar year 1941 estimated levels of income; that is correct.

The CHAIRMAN. Yes.

Mr. SULLIVAN. Only about 45 percent of which we will probably collect in fiscal 1942.

Senator BYRD. You said you had some figures about the smaller corporations, as to whether they used the invested capital or average earnings methods.

Mr. SULLIVAN. Yes.

The CHAIRMAN. If the estimated yield on the calendar year 1941 under existing rates holds good, how much would it be?

Mr. SULLIVAN. $1,026,000,000, sir.

The CHAIRMAN. That would make a total from excess profits then of how much?

Mr. SULLIVAN. $2,224,000,000.

The CHAIRMAN. From excess profits?

Mr. SULLIVAN. That is correct, coming from the provisions of the present law and the proposed changes in the pending bill.

The CHAIRMAN. And assuming the estimate under the present rates holds good for the whole year?

Mr. SULLIVAN. We always assume that, sir.

Senator CONNALLY. Are you finished, Senator George?

The CHAIRMAN. No; I want to ask him another question. I notice your particular criticism, Mr. Sullivan, is on the $5 use tax on automobiles.

Mr. SULLIVAN. Yes, sir.

The CHAIRMAN. You very well stated objections, which of course are obvious. I suppose the House had in view this thought, had it not, that this tax would be paid only by those people who were able to own or possess an automobile and that it would carry a certain tax consciousness all the way down as far as those users went?

Mr. SULLIVAN. Oh, yes, sir; and I think that their thinking on that, so far as that objective was concerned, was correct, but now if we are to reduce the personal exemptions to $1,500 for married couples and $750 for single persons

The CHAIRMAN (interposing). We would get into that same class of owners.

Mr. SULLIVAN. That means, Senator, that a single individual who earns $14.43 a week will pay an income tax.

The CHAIRMAN. He will pay an income tax if the base is decreased. Mr. SULLIVAN. Yes.

Senator WALSH. If he has an automobile he would pay $5 more. Senator BYRD. He would pay about $1.

Mr. SULLIVAN. $1, that is right, but we are reaching down far enough to get hold of almost anybody who has an automobile, I think. Senator BYRD. May I ask Mr. Sullivan some questions? What percentage of the smaller corporations use the average-earnings method for computing the excess-profits tax and what percentage use the invested-capital method?

Mr. SULLIVAN. I do not know how helpful these figures are. You remember I said there were 3,500 corporations that used the investedcapital method. Of that 3,500, 2,800 were under $20,000 of excessprofits income. Of the 6,800 reporting by the average-earnings method, 4,800 were under $20,000 excess profits net income.

Senator BYRD. You did not get my question. What I want to know is what percentage of the smaller corporations use the average-earnings method for computing the excess profits and what percentage use the invested-capital method.

Mr. SULLIVAN. I will figure the percentage for you.
Senator CONNALLY. Are you through, Senator?

Mr. SULLIVAN. Just a minute. There is a misunderstanding as to the Senator's question. When you say the smaller corporations, you mean the corporations with small assets? The figures I gave you were on the basis of small excess profits net incomes. Now, do you want that on small corporate assets?

Senator BYRD. Yes.

Mr. SULLIVAN. Small companies?

Senator BYRD. Reasonably small companies.

Mr. SULLIVAN. Would it be satisfactory if we gave that to you later?

Senator BYRD. Yes.

Mr. SULLIVAN. Have we got it, Mr. Blough?

Mr. BLOUGH (Roy Blough, Director of Tax Research, Treasury Department). These figures are for concerns classified by income after normal taxes?

Senator BYRD. What I want to know is whether the small corporations are using the invested capital method or average-earnings method.

Mr. BLOUGH. I think these figures will show that.

Senator BYRD. I want to ascertain the facts about it.

Mr. SULLIVAN. We will be very happy to give you the facts about it, Senator Byrd, they are as follows:

Of corporations with total assets of under $250,000, filing taxable excess-profits tax returns and received in the Bureau through July 17, 1941, 34 percent used the invested-capital method and 66 percent the income (average earnings) method. Of those using the income method, 54 percent used the general-average method and 46 percent the increased-earnings method.

Senator CONNALLY. Mr. Sullivan, may I ask you a question, not on this point? Is there a clause in this bill exempting from tariff duties all articles imported for national-defense purposes?

Mr. SULLIVAN. No, sir.

Senator CONNALLY. Not any?

Mr. SULLIVAN. No, sir.

Senator CONNALLY. There is somewhere a bill that does.
Mr. SULLIVAN. I am sorry, but I was not aware of it.

Senator BARKLEY. Let me ask you this, Mr. Sullivan. It has no relationship to any particular rate or schedule. Let us suppose that instead of trying to raise $3,200,000,000, that we try to raise $4,000,000,000, would you be prepared, would the Treasury be prepared to make suggestions as to where the other $800,000,000 could be raised over and above the $3,200,000,000, both with the joint return in and with it out?

Mr. SULLIVAN. Yes, sir; we would.

Senator BARKLEY. Would you mind doing that?
Mr. SULLIVAN. No; we would be very happy to.
Senator BARKLEY. I would like to have it myself.

Senator DANAHER. Mr. Chairman, on that point, and to make it perfectly clear, the Treasury has not recommended to this Senate committee any new tax or any change in the taxes appearing in the House bill to replace the $300,000,000 lost by the House elimination of the joint return provision.

Mr. SULLIVAN. Yes; I think the Secretary this morning made six specific recommendations as to that, sir.

Senator DANAHER. That are new to us?

Mr. SULLIVAN. That are new to you, and the additional bill which is now pending before you, Senator Danaher.

Senator DANAHER. And were they contained in his recommendations to the House committee?

Mr. SULLIVAN. Some were and some were not.

Senator DANAHER. I asked him if there was any plan, new plan, to tax the income of insurance companies. I notice from your statement at the bottom of page 8 and the top of page 9 a plan to increase the tax on corporation income 5 percent on the first $25,000 of surtax net income and 6 percent on the balance, the increase being intended to reach partially tax-exempt securities which are held by banks and insurance companies.

Mr. SULLIVAN. That is correct.

Senator DANAHER. So there is a new plan on that particular phase, is there not?

Mr. SULLIVAN. Oh, yes; and there have been conversations in the Joint Committee staff, and among my staff, and between the two staffs on the insurance problem.

Senator DANAHER. Yes. I notice the Secretary said "not that he knew of" in answer to my question. I just wanted the record to show that there was a discussion on that.

Mr. SULLIVAN. Those were general discussions. I think the Secretary said he was not prepared to make definite recommendations. Senator DANAHER. Yes.

Mr. SULLIVAN. As a matter of fact, some of the work done by my staff and I think by Mr. Stam's staff-correct me if I am wronghas been done at the request of members of your committee.

Senator DANAHER. Yes.

Thank you.

The CHAIRMAN. Are there any other questions that anyone desires to ask Mr. Sullivan?

Senator BROWN. Mr. Sullivan, would the tax that this bill imposes on motor vehicles, the $5 tax, the tax on bowling alleys, billiard tables, and so forth, be very much like the general property tax imposition in the State of Michigan and in a great many other States in the Middle West? While I presume they would be called excise or occupational taxes, it seems to me they are pretty much in the line of property taxes. I think they are legally and constitutionally sound, but I would like to see a memorandum from the legal department of the Treasury as to the constitutional basis for that kind of a tax. Mr. SULLIVAN. Just those three, sir?

Senator BROWN. Well, any of a similar nature.
Mr. SULLIVAN. We will get it for you.