If the national interest in science is to be best served it would seem that the nature of scientific effort and the fact that "the secrets and treasures of Nature are hidden in the most obscure and unexpected places," would favor a policy which would place no unnecessary restriction on the activities of the scientists who are working on the staffs of the nonprofit exempt scientific organizations.

INCOME FROM INDUSTRIALLY SPONSORED RESEARCH

Questions have been raised in some quarters as to the exempt status of earnings received by nonprofit scientific organizations from research performed for industry. This has produced much of the confusion which has been apparent in the use of the terms "basic" and "applied." This confusion appears to have resulted from a failure to distinguish between the work of the scientist and the disposition of the results of that work. Scientific research is scientific research because of the nature of the subject matter, the competence of the scientist, and the methods which he employs. This is true regardless of what, if anything, may be done with or as a consequence of the results of the research. This is also true regardless of the origin of the support which enables the scientist to do the research.

It has already been noted that, while approximately two-thirds of all research performed by the nonprofit exempt scientific research organizations of this country is supported by Government, a portion of the research performed by these organizations is supported by industry. A substantial part of this research is done under arrangements that grant to the sponsoring unit full propriety right in the results of the research. There is also a part of such research the results of which are freely available to the public. In discussing whether income received from such industrially sponsored research should be exempt from Federal income tax, failure to distinguish between the nature of the work and the disposition of results has caused some to go so far as to state that work the results of which are not freely available to the public is therefore not scientific. Others, similarly confused, have classified the industrially sponsored research as not scientific because the results of the work are given direct and specific application; to them research that is not so applied is the only kind of research that can be classified as scientific.

It is very important to avoid this confusion. The central question to be answered is: How extensive should the exemption be in order best to serve the national interest? As has been suggested above, the answer to this question can most usefully be answered in the law by defining the term "scientfic" as used in the exempting provision.

The public benefit arising from research by scientific organizations the results of which are not immediately available to the public and are vested in or controlled by a unit of industry, is a question separate from the question whether work is or is not scientific. This question seems to have some relation to the situation which exists in exempt churches, hospitals, and schools. Churches, hospitals, and schools are and have long been regarded by the Congress as institutions meriting exemption from taxes because of their extraordinary contribution to the general welfare. It should be noted that it is the individual worshiper who personally and immediately benefits from the practice of religion; it is the individual patient who immediately and personally

benefits from the operation of the hospital; it is the individual student who immediately and personally benefits from the conduct of a school. Through these individual beneficiaries the contributions to the general welfare of religion, education, and hospital care are transmitted. The fact that the immediate beneficiaries are individuals does not seem to have been considered at any time as a reason for questioning the basic finding that these activities are of such public interest as to merit exemption from taxes.

When is scientific activity in the public interest? There seems to be no doubt but that scientific activity by nonprofit scientific organizations, the results of which are freely available to the public, is sufficiently important to the national interest to merit tax exemption. Whether such scientific activity, the results of which are not immediately available to the general public, also merits the privilege of tax exemption is a question which should be dealt with.

The question is complex. Available alternative answers are several. In view of the fact that no individual can profit from income of nonprofit organizations, it can be said that all research income of nonprofit scientific research organizations should be exempt as long as the work which earns the income is truly scientific. It can also be said that only that income which is earned by research, the results of which are freely available to the public, should be exempt. The choice between these answers may depend upon the extent to which the part of the research which is supported by industry is desirable in maintaining and developing the capabilities of the scientists who staff the research institutes. Since the essential requirement for research is a variety of problems, and the cross-fertilization of many minds, there would seem to be some reasonableness in the view that the research institutes should be permitted to accept industrial projects without penalty.

In "Science and Public Policy," a report to President Truman by John R. Steelman, Chairman of the President's Scientific Research Board (Aug. 27, 1947, vol. 1, p. 37) the Government was urged to provide a favorable climate for expansion of industrial research facilities through tax incentives and other methods. This report also emphasizes the urgency of rapidly extending scientific knowledge in the national interest and points out that scientific discovery is not only indispensable to defense but is also the basis for continually strengthening and expanding our domestic economy and our foreign trade.

In Chemical and Engineering News (vol. 33, No. 29, July 18, 1955), Raymond H. Ewell of the National Science Foundation analyzes the data which were then available on the role of research in economic growth. His conclusions seem to be relevant to the question we are now considering.

Research and development conducted during the preceding 25-year period contributed $40 to $80 billion to the GNP ($365 billion) in 1953. These figures are intended to be portions of the GNP which would have been absent if no research and development had been conducted after 1928. They are intended to represent net contributions to the national product after making allowance for all displacement, duplications, and so forth. They do not represent simply increments to industrial sales; the corresponding sales increments would be much higher than these.

Research and development cannot, of course, claim all the credit for these increments to the national product since production, sales, advertising, engi

neering, management, and other components of industry plan important roles in translating the results of research into products and dollars in the national product column. However, without research these increments to the national product would never have come into being and would have been absent from the national product in 1953 * * *.

The above estimate that $40 to $80 billion of the GNP in 1953 was attributable to research conducted in the period 1928-53 implies that the GNP would have been only $285 to $325 billion in 1953 if no research had been conducted since 1928. These GNP's in 1953 would have corresponded to economic growth rates of 21⁄2 and 2 percent, respectively, during the period 1928-53 instead of the 3-percent growth rate which actually was realized. Or, looked at cumulatively, there would have been a cumulative loss of national product of $400 to $800 billion during the period 1928-53 in the absence of research * * *.

A few paragraphs above $40 to $80 billion was suggested as the portion of the 1953 GNP which could be attributed to research conducted in the period 1928-53. The median annual cost of research and development during this 25-year period was $1.5 billion. Comparison of these figures indicates a return on research investment of 2,700 to 5,400 percent. This may be interpreted as the return in 1 year on 25 years of research or conversely the return in 25 years on 1 year's research. Therefore, the annual return on research investment is estimated at 100 to 200 percent, that is, 100 to 200 percent per year average for a 25-year period. ***

CONCLUSION

Basically the problem of business income of exempt scientific research organizations is a part of the national science program. It is incidentally a tax problem because the Congresses of the past 46 years have seen fit to employ exemption from taxes as a means of encouraging scientific effort.

The continued encouragement of science and scientists appears to be an imperative requirement of national welfare and survival. The events of the past half century, and particularly the past 20 years, have shown that progress in science, as elsewhere, is not inevitable.

The independent nonprofit scientific research organizations have made and are continuing to make a significant contribution toward the satisfaction of the Nation's scientific needs. Their existence, their ability to serve, and their capacity for growth are responses to the invitation to expand scientific effort which has been repeated in our law for almost half a century. Action which would confirm the worth of these organizations and reinforce their ability to contribute to a national science program seems to be indicated.

It is suggested that a desirable disposition of this matter would be accomplished if the exempting statute were clarified by definition of the term "scientific," and if the status of these scientific organizations in respect of the provisions of section 512 were made explicit.

TAXATION OF INCOME FROM FOREIGN SOURCES

Roy Blough, Graduate School of Business, Columbia University, New York, N.Y.

The taxation of income from foreign sources has been the subject of extensive study in recent years, including hearings by your full committee during January 1958 and on two separate occasions by a subcommittee. It would be difficult for me to add much to the large body of material that has been developed by all this study. What I shall attempt to do here is to point up some of the main issues.

My viewpoints in this matter are rather mixed. As a student and teacher of international business problems, I would like to see the activities of my friends in this field grow and prosper. Earlier work in the United Nations impressed on me the great need for developing the economies of the less developed countries. Some 20 years of work in the tax field taught me to examine tax arguments with a degree of skepticism, for the reason that almost all taxpayers sincerely believe they are taxed too high, both absolutely and relatively. Virtually every taxpaying group has urged that a special and selective reduction in its taxes would promote the public interest and would so stimulate business activity that no revenue loss would result for the Treasury. They cannot all be right. In the following remarks I shall try to hold in reasonable balance the different viewpoints mentioned above.

The special policy problems for U.S. taxation of income derived by the business enterprises of its citizens and corporations from activities carried on in other countries arise to a considerable extent because these activities are subject to taxation by two or more taxing jurisdictions. The Congress has continually insisted, correctly, in my opinion, that it has both the legal and the moral right to tax the income from such activities.

A major problem has been that of eliminating excessive double taxation in a fair and equitable manner. To achieve this result, Congress long ago took the unilateral step of protecting U.S. taxpayers from international double taxation through the allowance of the foreign tax credit. In effect, we allow the foreign government the position of priority in taxation, with the result that in some cases the United States collects little or no tax revenue from the overseas operation.

TAX FAIRNESS

The foreign tax credit is based on the concept that tax burdens are fairly distributed among U.S. taxpayers when the same amount of income pays the same total tax, regardless of whether the income is derived from domestic or foreign sources. Such taxation was also deemed to be neutral in its economic impact and to give the maximum play to market forces in determining the location of business investment and operations. The foreign tax credit was viewed in earlier years as being an important concession to foreign-source income