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TABLE 4.-Taxable income and interest dividends paid by mutual savings banks
and savings and loan associations
(In billions of dollars]
1 Individual Income Tax Returns, 1956, “Statistics of Income,” tables 18 and 19, pp. 65–66. * Ibid. Interest reported on form 1040; excludes amounts not exceeding $100 per return reported on form 1040A.
SOME CONSIDERATIONS ON THE TAXATION OF CREDIT
John T. Crotean
For the past 50 years the Federal Government and almost all State legislatures have granted an income tax exemption to credit unions. Credit unions, however, pay property taxes, supervisory and examination fees, and depending upon the jurisdiction, other fees and assessments. Credit unions are incorporated as voluntary, self-help organizations, designed to assist their membership in the practice of thrift by accepting the deposits of savings, or shareholdings, which provide a source of low-cost consumer credit to the membership. They may be incorporated either by State or by Federal charter. They are highly regulated, both by law and by supervisory authorities, and operate within closely defined occupational or associational groups. They rely in large part on the voluntary, unpaid work of officers elected by the membership, the treasurer being the only paid official. For the most part credit unions are small. The 18,824 credit unions in the United States at the end of 1958 had 10.5 million members, or shareholders, and total assets of $4.3 billion. The average membership was 560, and average assets were around $230,000. Median assets of Federal credit unions—no median figure is available for Statechartered credit unions—were $76,760 at the end of 1958. While credit unions account for only an insignificant share of the savings of individuals in the financial institutions of the country, they have had a not inconsiderable impact in the field of consumer credit.
EQUITY AND FAIRNESS
Credit unions were designed to express the social ideal of voluntary mutual aid within the organized group, working under safeguards carefully incorporated in legislation. The question of taxation under consideration in this study illustrates the difficulty of expressing social principles in legislation. Of course social conditions may change and an institution designed to meet the problems of one age may fail to meet the challenge of another; or the institution, itself, might lose its pristine vision, and continue under its original form but with the loss of the mystique which once gave it purpose. An examination of its historical origins is essential to an understanding of the modern credit union. Its history impinges on credit union problems of management, finance, and change. This will first be considered.
Although credit union legislation in the United States goes back to the original Massachusetts act of 1909 an examination of the intent of Congress in passing the Federal Credit Union Act of 1934 is pertinent to the question of the tax status of credit unions. Prior to the passage of this act the subject of credit unions received a thorough investigation in a Senate hearing, and the testimony and cross-examination
of the hearing and the reports on the proposed bill by the Senate and the House committees provided extensive source material for the study and consideration of this proposed legislation. Senator Morris Sheppard, the sponsor of the bill, inserted an explanation of the act when he introduced it and Congressman Steagall did the same in the House. Influential Senators and Congressmen from States with credit union experience supported the proposed legislation. No opposition of any consequence was expressed. From the record it can be seen that Congress had presented to it a full explanation of the essential character and function of the credit union.
The proponents of the Federal Credit Union Act visualized the establishment of a national credit system, both as a matter of immediate financial reform—by eliminating the wastes of usury—and as a long-run contribution to economic and social growth—by building mass purchasing power and by educating the consumer in the use of money. Congress looked upon this as a matter of national importance to be met only by a Federal law.
Of course, no one in or out of Congress, in the depths of the depression of the early thirties, could visualize the great changes which have taken place in the American economy following the economic expansion of World War II. Many of the problems which the credit union was designed to solve have persisted, but in the past generation many changes have taken place in the whole area of saving and of consumer credit. To meet these problems of change is, of course, the reason for this committee's study.
The Federal credit union itself has not changed greatly over the past 25 years; it is essentially the same organization which the 73d Congress set up. And as early as 1934—there had been experience with State legislation going back to the original Massachusetts act of 1909-examples of all types of credit unions could be found. Even in 1934 the large credit union-one with more than a million dollars in assets-existed in this country and this was mentioned in the Senate hearing
The broad purpose of the act is found in its title. This was placed in the original bill introduced by Senator Sheppard and was retained through many amendments. This reads as follows:
An act to establish a Federal Credit Union System, to establish a further market for securities of the United States and to make more available to people of small means credit for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the United States. In introducing the act, Senator Sheppard filed a statement to explain the background of the bill. In this statement a credit union is defined:
A credit union is a cooperative bank organized within and in each case limited to a specific group of people, self-managed by officers chosen by and from the specific group in meetings in which each member has a single vote, operating under as strict supervision as do other forms of banking, supplying its members with (1) an excellent system for accumulating savings which enables them (2) with their own short-term money and under their own management to care for their own short-term credit problems at normal interest rates, with all of the resultant earnings reverting to the members as dividends on their savings in the credit union and as surplus *
The Senate report to accompany the bill (Rept. No. 555, March 20, 1934) succinctly sets forth the functions of a credit union :
The credit union does three things for its members : (a) It enables them in good times to accumulate some savings for protection against bad times; (b) It enables them to protect themselves from high rate money lenders and, by making it possible for them to buy and pay cash for things, protects them from installment overcharges, the whole process turning interest overcharges into cash buying power; it solves for its members a problem which, since earliest recorded history, has resulted when unsolved, in usury; and (c) It educates its members in matters having to do with the sane and conservative management of their own money.
In the view of this report*** the problems with which the credit union is concerned are truly national problems which can only be met nationally by a Federal law. This national character of the problems which the credit union was intended to solve was insisted upon in a number of places in the hearings and reports. The argument was based on the contention that a nationwide credit union development would add to purchasing power by diverting millions of dollars which go to usurious money lenders into the purchase of goods. A Federal act would also permit credit union organization on a national scale; at that time a number of States had no credit union act or had defective acts. While the contribution of the credit union to the problem of recovery was stressed, the permanent effects of consumer credit reform and the educative influence of the credit union were also emphasized. In other words, while the anti-usury arguments reflected the traditional welfare orientation of the credit union advocate, the congressional committees which investigated the Act seemed to rest their case more definitely on economic analysis, seeing in the credit union an agency to eliminate economic waste and to build mass purchasing power.
As presented to Congress, the original bill, in title II, permitted the organization of statewide central credit unions, to be composed of both State-chartered and Federal credit unions. Senator Morris Sheppard, the sponsor of the act, envisioned eventually a national system. On page 7543 of the Congressional Record (April 25, 1934) Senator Sheppard stated : Eventually State central credit unions should be permitted to maintain a national central credit union—which could be accomplished only under a Federal law-enabling funds to be transferred from one section to another as the need develops, making possible a maximum national small-loan service.
But title II, the section which provided for Statewide central credit unions, was dropped from the bill. One can only speculate as to what course the credit union development would have taken had central credit unions been permitted. But while the promoters of the act saw ideally the desirability of central credit societies, they were faced with a practical problem, that of securing the passage of the act. The main problem of the promoters of the act was to find an agency to take over the administration of the act. The old-line agencies of the Government—the Federal Reserve Board, the Treasury, and the Postmaster General-were reluctant to have anything to do with the administration of a system of credit unions. Administration was finally placed in the hands of the Farm Credit Administration.