STATEMENT OF CLARENCE A. JACKSON, VICE PRESIDENT, INDIANA STATE CHAMBER OF COMMERCE, INDIANAPOLIS, IND.; ACCOMPANIED BY GARNER M. LESTER, PRESIDENT, NATIONAL TAX EQUALITY ASSOCIATION, CHICAGO, ILL.; ALBERT W. ADCOCK, GENERAL COUNSEL, NATIONAL TAX EQUALITY ASSOCIATION; HOMER E. MARSH, DIRECTOR OF RESEARCH, NATIONAL TAX EQUALITY ASSOCIATION; LEONARD J. CALHOUN, OF HARTER & CALHOUN, ATTORNEYS AT LAW, WASHINGTON, D. C.; AND JOSEPH J. O'CONNELL, JR., OF CHAPMAN, BRYSON, WALSH & O'CONNELL, WASHINGTON, D. C.

Mr. JACKSON. My name is Clarence A. Jackson, of Indianapolis, Ind.

The CHAIRMAN. Will you have the gentlemen with you give their names for the record also?

Mr. LESTER. My name is Garner M. Lester, and I am president of the National Tax Equality Association of Chicago. My home is at Jackson, Miss.

Mr. O'CONNELL. Joseph J. O'Connell, Jr., lawyer and member of the firm of Chapman, Bryson, Walsh & O'Connell of Washington, D. C. The CHAIRMAN. In what capacity do you appear?

Mr. O'CONNELL. I represent the National Tax Equality Association. The CHAIRMAN. Who is the next gentleman?

Mr. ADCOCK. I am Albert W. Adcock, general counsel for the National Tax Equality Association.

Mr. MARSH. My name is Homer E. Marsh, director of research, National Tax Equality Association.

Mr. CALHOUN. My name is Leonard J. Calhoun of Harter & Calhoun, Washington attorneys, and I have been retained by the National Tax Equality Association.

Mr. REED. Mr. Saxon, did you give your name?

Mr. SAXON. Professor Saxon of Yale. I testified yesterday.

The CHAIRMAN. Very well, Mr. Jackson, you may proceed in your

own way.

Mr. JACKSON. As I said, my name is Clarence A. Jackson; I am executive vice president of the Indiana State Chamber of Commerce and I happen to be a member of the board of directors and executive committee of the National Tax Equality Association. However, it is for the National Tax Equality Association that I am today appearing before you as a witness.

I would like for you to know that I am not a Johnny-come-lately in the fight for tax equality. During the 7 years I was tax collector for the State of Indiana, I was personally tremendously interested in joining with others, particularly the Indiana Farm Bureau, in closing as many tax loopholes as we could on the State level.

My full statement on the subject of the revenue to be raised by taxing the untaxed on the Federal level and the consequent elimination of tax subsidized competition is before you. It is a comprehensive review of the whole field of partially and wholly tax-exempt business corporations.

To conserve the time of the committee, I am not going to read the full statement, but I do wish to summarize briefly the four cardinal points and principles that are involved in this controversy.

The first point I want to emphasize is the amount of tax revenue now being lost to the Treasury. We have estimated, and we believe accurately, that the Treasury could obtain more than $1 billion if the business income of all presently tax-exempt profit-seeking corporations were taxed. A list of the classes in which these corporations fall and the amounts to be obtained by fully taxing them is found on page 29 of my testimony.

We have, in addition to the estimate of our research staff, an estimate made wholly independently by Mr. Ralph Burgess, a former member of your Joint Tax Committee staff and a former member of the Treasury staff. This will be presented to you by Mr. Burgess who will be prepared to answer you in detail as to the various items. While his estimate varies in detail, his figure of the total taxable income approximates that of our own staff and substantiates the fact that tremendous revenue is being lost.

The contention that taxation of the tax-exempt corporations would raise only a few million dollars is, we submit, predicated only on the arbitrary and, we feel, unrealistic rulings of the Treasury Department that a large portion of the net earnings of the tax exempts cannot be regarded as income because of the method of distribution of these true net earnings. Their loophole to escape taxation is to label the profits they distribute as patronage dividends, refunds, returned overdeposits, returned savings, et cetera, et cetera, et cetera. We believe that the opinions of such outstanding attorneys as Roswell Magill, former Under Secretary of the Treasury and a recognized authority on the nature of taxable income; Robert H. Montgomery, nationally known expert on corporation income taxes, and Joseph J. O'Connell, Jr., former chief counsel of the Treasury, who was introduced to you and who will be appearing before you as a subsequent witness, amply disproves these contentions. Dr. O. Glenn Saxon, professor of economics at Yale University has already told you that they have taxable economic income.

These experts emphasize the constitutionality of taxing the full income of tax-exempt corporations before distribution of patronage dividends. They and others have established beyond the shadow of a doubt that the claims the tax exempts use to deny they have taxable income are without foundation, whether in fact, in economics or in law. We believe and we are confident that a vast majority of the American voters will agree and applaud having these loopholes closed as a matter of simple justice.

However, if your committee should report out and this Congress should enact a tax measure which would continue to permit tax-exempt corporations to exclude from their gross income earnings distributed as patronage dividends, rebates, overpayments, and so forth, and so on, its net effect would be zero. It would be no more than a meaningless gesture which would bring little or no additional income to the Treasury and would mean unfortunately a continuation of the bitter fight of the businessmen and taxpayers of this country for tax justice.

It would be commonly recognized that such action was merely an attempt at political deception which would give no real relief from the tax subsidized competition with which taxpaying businesses are now faced.

To sum up this first point, literally billions of dollars of earnings escape tax under Treasury rulings on the fallacious theory that they

are not income to the corporation earning them because they are distributed as patronage dividends. The Treasury, beginning at a time when the taxes had little financial impact, embarked on the false theory of excluding certain income from taxation because it was distributed as so-called refunds. The taxable earnings which are escaping taxes through tax exemption and Treasury rulings have already rolled up into a billion-dollar-a-year tax-escape and are constantly increasing as taxes increase and business expands.

Until the statutory exemption and the Treasury rulings are changed by the affirmative act of this Congress, the injustice will remain uncorrected and the revenue loss will continue. The unfair competition will continue and larger and larger segments will escape from the tax rolls into these loopholes. The businessmen and taxpayers whose economic future is at stake will be forced to continue a relentless battle for tax equality notwithstanding any gectures which may be made to placate them without giving them any real relief.

The second of the four points I wish briefly to summarize concerns the severe effects of tax-free competition. Awareness of this tax escape was forced on taxpaying businessmen when they found that the competitive tax advantage was resulting in taxpaying businesses being eliminated by tax-escaping competitors, through direct purchases, liquidation, or conversion to a tax-exempt form of business.

Businessmen, big and little, found that certain competitors, operating the same size businesses and making the same normal margins of profit, were able to spend enormously larger sums than they were for improving and expanding their facilities and advertising. They found that the source of these funds lay in the fact that these competitors escaped the tremendous Federal income taxes that the fully taxed businessmen were paying.

Just one example: You are aware, of course, that if two competing corporations, one exempt and one fully taxed, earned say $100,000 each before taxes, one would have a net of $100,000 after taxes and the other would have a net of about $40,000 after taxes-a rate of 2% to 1. The competitive advantage is obvious.

In other words, gentlemen, taxpaying corporations found that taxfree corporations were expanding on moneys that they had to pay in income taxes for the support of their Government. During World War II, when the corporation income tax and the excess-profits tax were as high as 80 percent of every dollar that regular corporations earned, the cooperative corporations competing with them were able to keep all of their profits. With no greater earnings, they could expand five times as fast as fully taxed competitors.

Tax policy for years has been based on a wholly false assumption that taxpaying corporations are immune from the unfair competitive advantages accruing to tax-exempt corporatives or other mutuals, whether large processing organizations or mere local marketing associations. This false assumption did little damage when tax rates were nominal, but since the 1930's the high tax rates have been the cause of increasing liquidations and conversion of both large and small taxpaying competitors of the tax-exempts.

The fact has been ignored that these incorporated cooperatives cannot be distinguished from their taxpaying competitors by their economic income or the services which they perform; that from the point of view of financial ability to pay income taxes and service to the

community there is no dividing line between a little local marketing co-op and a little local taxpaying business which engages in the identical business.

| To sum up this point quickly, it is vital that all corporations, be they cooperative, mutual, or private, which create, earn, and distribute income, should be taxed alike on all their income before any distribution is made and regardless of the manner of how it is distributed.

Remember, gentlemen, that the Supreme Court has repeatedly ruled that the earner of the income is taxable on that income regardless of how he may have previously bound himelf to distribute it. In other words, gentlemen, a taxpayer cannot contract away his tax liability. If there were not the rule, we would have no corporate taxpayers.

The third point I wish to bring to your attention relates to the double taxation of corporate earnings. Many Members of the Congress, including members of this committee, are on public record as being opposed in principle to this double taxation. If the times and the fiscal requirements of the Government permitted, I and all those whom I represent would join in this opposition. But we are faced with facts, not with a theory-and the fact is that double taxation of thousands of corporations and millions of the recipients of corporate earnings will be continued and probably will be increased.

It is a Treasury ruling, not subject to argument, that every receiver of dividends, patronage or otherwise, is supposed to pay income tax on the full amount of those receipts-except, oddly enough, for persons who receive patronage dividends from consumer corporatives, which is not under discussion.

But when we compare the tax treatment of competing corporations, we find a quite different situation. For these competing corporations are put into two classes: First, those who must pay the Federal income tax on their entire earnings, regardless of the payment of dividends; second, their competitors who are either completely exempt or are permitted to escape the income tax to the extent that they pay patronage dividends.

Gentlemen, I submit that it is completely unfair to impose double taxation on the distributed earnings of one group of corporations and to impose only single taxation upon the distributed income of competing groups. It is unfair to impose taxation on the total income of most corporations and permit certain competing corporations to escape all or substantial payments of income tax.

No policy argument against double taxation makes any sense at all as long as the revenue needs of the Federal Government make it necessary to tax income both to the corporate earner and to the receiver of its dividends.

In view of the fact that we cannot achieve equality by eliminating double taxation we must achieve equality and increase our revenues by applying double taxation without discrimination.

The fourth and last point that I bring to your attention has to do with all the claims advanced by the tax-exempt spokesmen, their allies, and sympathizers with respect to their exemption or partial exemption from payment of full Federal corporate taxes. I have previously mentioned some of these claims. Let me say now that if they claim to be acting purely as agents; or if they claim that they have no earnings because they are distributed to patrons in accordance

with a contractual obligation; or that their earnings do not belong to them because they are refunded; or that patronage dividends are a mere mechanism for making price adjustments-these and all other like arguments can be simply resolved if the Congress will do two things: One, repeal this section of the revenue code which grants exemption to these groups; two, define by law that all business net income earned by any corporation is taxable to the corporation regardless of the manner in which it is distributed or to whom it is distributed.

If you do this, gentlemen, then the businessmen and taxpayers will be willing to leave to the courts of our land the determination of all the points raised by the tax-exempt spokesmen and their lawyers with respect to what constitutes corporate income.

Finally, I want to emphasize to this committee the deep-rooted sense of justice of the American people. We all recognize that there must be tremendous tax burdens. You can count on every fair-minded American to bear those burdens and to pay his full share of taxes as long as he knows that these burdens will fall evenly upon both him, his neighbor, and his competitors. But if these tax burdens are imposed unfairly; if the taxpayer believes that his competitors escape taxes through politically inspired favoritism; if he knows that he is being discriminated against, and as a consequence is suffering economically from political favoritism and perhaps faces the loss of his entire business to them you may expect nothing but resentment, political retaliation, tax avoidance, and a contempt for the Treasury and the Congress that are responsible for such inequalities.

Every income earner, large or small, who is obliged to pay a sizable proportion of his income to support the Government, is likewise resentful when he sees many large and small business corporations escaping payment of their fair share of the tax burden because of political favoritism, while he, his wife and family suffer privation because of their heavy tax burdens. Resentment and contempt are engendered in his soul, knowing that thousands of corporations are escaping taxes on their business income.

After 38 years of unfair tax discrimination in the face of con stantly rising tax burdens, we feel this is the time to stop. The President of the United States has solemnly promised all taxpayers that, when he urged passage of increased taxes, it was to be a fairly distributed tax burden imposed upon every income-producing individual and every profit-making corporation. Today, in addition to common justice, the national emergency makes it mandatory, we think. that the Congress close now every single tax loophole. By doing so now a vast majority of the voters of the country will applaud your action.

Thank you very much, gentlemen.

(The full statement prepared by Mr. Jackson submitted for the record is as follows:)

STATEMENT OF CLARENCE A. JACKSON REPRESENTING THE NATIONAL TAX EQUALITY ASSOCIATION ON THE REVENUE BILL OF 1951

My name is Clarence A. J'ackson. I am executive vice president of the Indiana State Chamber of Commerce and a member of the board of directors of the National Tax Equality Association. I am appearing today as the representative of the latter organization and its 8,000 members, and the 1,600 trade associations