The CHAIRMAN. Without objection, the committee will adjourn until 10:30 Monday morning in this committee room.

(The following statements are submitted for the record:)

STATEMENT OF WM. L. CLAYTON, OF ANDERSON, CLAYTON & CO., HOUSTON, TEX., AT THE HEARINGS ON REVENUE LEGISLATION OF THE COMMITTEE ON WAYS AND MEANS OF THE HOUSE OF REPRESENTATIVES

I am Wm. L. Clayton, associated with Anderson, Clayton & Co., of Houston, Tex. I wish to address my comments solely to the exemption from corporate income taxes presently accorded to cooperatives.

This exemption has, as I understand it, been a specific part of the Internal Revenue Code since 1921. The code provisions assuring this exemption even in the case of earnings retained by stock-issuing cooperatives were, I am informed, added in 1926.

I refer to these dates not because I intend now to argue the considerations which originally prompted the exemptions but because I wish to question whether those considerations are applicable in this year 1951.

I assume that the Congress originally had two different sorts of consideration in mind when granting such exemption. It is, I think, worth while to give separate thought to them.

The first consideration was presumably the idea that cooperatives were mutual societies of active members and that any "income" involved in their operations belonged to the members rather than the societies as such. It is, in this connection, interesting to recall that the Code section beginning, then as now, with the words "Farmers', fruit growers', or like associations," originally went on as follows: "organized and operated as sales agents." The present wording is “organized and operated on a cooperative basis."

The difference in wording is, I think, significant. The typical modern cooperative is not a "sales agent" operating only for the separate account of the individual producer according to the established laws of agency. It is instead an entity, separate and apart from its members. It is usually organized as a corporation, and as such is possessed of the power to hold property, to incur debt, to contract, to sue and be sued-all in its own name. Its corporate attributes include limited liability. Its management is responsible not to the individual members but to a board, which is elected periodically. This board has the power, among other things, to decide, wholly without reference to the individual members, what part of net earnings shall be paid out as dividends and what part shall be retained in the business.

These are the very aspects of separate identity which distinguish an ordinary commercial corporation from its shareholders. They are regarded as justifying the imposition of one tax upon the income of the corporation itself and of another tax upon the same income when received by the shareholder as dividends. In the eyes of the law two parties—the corporation and the body of shareholders— are involved.

If, now, the logic of two taxes holds for the ordinary commercial corporation it must, the evidence being the same, hold for the cooperative also. Nor is the logic denied in this latter case by the assertion that the cooperative is a "non-profit" organization—that it works not for itself but for its members. It can equally be said that the ordinary commercial corporation works not for itself but for its shareholders. What is truth in the one case is truth in the other also; what is legal fiction for one is legal fiction for both.

This brings me to what I regard as the heart of the matter. I said in beginning that the Congress, in its first grant of tax exemption to cooperatives, was presumably moved by two different sorts of consideration. The first was, I am supposing, the legal theory I have just discussed. The second, I am again supposing, was a matter of public policy-a sense that here was a type of activity which should, in the public interest, be encouraged by according favorable tax treatment.

The formulation-and the review-of public policy in matters like this must, I take it, have regard for two different considerations, namely, the present state or condition of the activity to be encouraged, and the cost of such encouragement. One might, for example, well conclude after examination and study of some type of activity that encouragement, while desirable or even necessary for the activity's survival, was just too costly to be given serious consideration. In this present matter, my own examination and study has persuaded me that tax exemption

for cooperatives fails to meet either test: it is, whatever may originally have been the case, no longer necessary or even desirable, and it has become prohibitively costly.

First, the cooperative movement in this country is no longer a struggling, experimental movement standing in permanent need of support. A press release of the Farm Credit Administration dated October 2, 1950, reported for the 1948-49 marketing season an aggregate business volume of some $9.3 billion on the part of 10,075 farmers' cooperatives. Whatever the reason, whether it be tax exemption in the past or a natural development in the changing circumstances of our Nation, cooperatives are now a well-established and a substantial part of the economy. The movement has experience, "know-how," and organization; it has had ample opportunity to "shake down" and to perfect any distinctive contribution it has to make to our productive or distributive system. If it has such a contribution to make, as it may, the cooperative movement should now be able to meet the test imposed upon all he rest of us: the ability to compete upon an equal basis.

I, for one, do not question that ability. My complaint is not that tax exemption permits cooperatives to survive where otherwise they would not, but rather, that it places them in a position where they can be, and increasingly are, predatory. Ours is a growing economy, and it is my hope and confident belief that it will continue to be so. This means that it is a proper function of the individual enterprise--whether private or cooperative to expand. From the viewpoint of the economic system as a whole, having regard for efficiency of operations and therefore for our future standard of living, this expansion should be in some manner proportioned to proven competence in the use of materials, labor and capital. Such is not the case as matters now stand.

The firm with which I have been associated during my business life has been built up, as has the greater part of American industry, by the accumulation and reinvestment of earnings. It owns and operates, among other things, oil mills, and it continues to expand in that field. This is a field in which farmers' cooperatives are likewise active and in which they also expand through the reinvestment of earnings. Let me illustrate one of the consequences of tax exemption by a hypothetical reference to this industry.

Let us say that we operate a mill in an area of increasing cottonseed production. There is also a cooperative mill there. Let us suppose that at the end of a crop year our mill shows somewhat the better results: it has earned $125,000 as against the cooperative's $100,000, both figures being before taxes and before dividends of any character. Let us suppose, further, that each pays a dividend equal to 30 percent of its earnings, namely, $37,500 in our case, $30,000 in the other. The cooperative, being tax exempt, is left with $70,000, which is available for expansion. We, on the other hand, are left with $28,750, for we are subject to a 47 percent tax not on the amount after the dividend but on the full $125,000 earned. In short, with just one difference between us apart from our own greater efficiency, namely, tax status, the cooperative is able to expand 2.4 times as rapidly as we are. With a corporate tax rate of 55 percent the figure would be 3.7.

I do not assert that private enterprise is inevitably more efficient than a cooperative undertaking, though my own experience leaves me quite prepared for competition on even terms. I do assert that a tax provision which permits a situation such as that just described is not only inequitable but bad economic policy. It permits an industry to be preempted by those who, by the test of comparative efficiency, are least able to make effective use of the national resources devoted to the industry.

The word "preempted" may seem too strong, for it may appear that tax exemption would at most permit the cooperatives to acquire an increasing proportion of an industry but never the whole of it. In the literal sense this is, of course, true; but the tax advantage of which I have spoken does more than permit rapid expansion through the construction of new plant facilities. It also provides cooperatives with the funds to purchase existing private enterprises. For example, the March 10 issue of the Cotton Digest reports the sale of the Pinedale Compress & Warehouse Co., of Pinedale, Calif., to the California Cooperative Association. This is not an isolated case; its like is happening constantly, and most frequently the seller is a small, independent businessman.

I particularly wish to point out that, in cases such as this, tax exemption affords the cooperatives two advantages. The first lies, of course, in the tax-free accumulation of investment funds to which I have just referred. The second advan

tage arises from the fact that the cooperatives can appraise a property in terms of its earnings before taxes whereas we, or anyone else subject to income taxes. can calculate only on the basis of earnings after tax. The difference is even now, with the corporate rate at 47 percent, almost 2 to 1. I will leave it to you to judge which—the cooperative or a private enterprise competitor—is likely, ia these circumstances, to be the successful bidder.

You will have observed that I have not, thus far, made specific reference to "plugging a tax loophole." I did have it in mind when speaking earlier of the two different aspects of any such review of policy as is here involved. The first related to the importance of the cooperative movement and in particular to the necessity of fostering it through the preferential exercise of public power; the second aspect which I said should be weighed is cost. In this case, of course, the cost is the revenue lost by reason of the tax exemption. One may speak of this as a "loophole" or he may, as I prefer to do, regard it as cost and ask the question: Can we, in light of all pertinent circumstances, afford it?

I have sought to demonstrate that whatever may have been the case in 1921 or 1926 the cooperative movement is in 1951 quite capable of getting along by itself. In short, I have said it is not necessary to support the cooperative move ment through preferential tax treatment. From this it follows that in my opinion we certainly can't afford the cost involved. One can never afford an unnecessary cost. Indeed, I have urged that as matters now stand the cooperative movement has got beyond the stage of survival and has in some respects become predatory.

Be that as it may, the question of cost stands by itself. The cost consists of the tax which is foregone. This is true for the Treasury, but it is more partic ularly true for the great body of taxpayers, upon whom falls the burden of making up the difference. This burden was one thing in the twenties, when the corporate rate varied from 11 to 13% percent; it is another thing now, when the rate is 47 percent and a proposal is before you to increase it to 55 percent. When tax rates reach this level, every outlay and every source of revenue needs the closest scrutiny. Every addition to the tax rate required to balance the present budget range is in the neighborhood of the breaking point. And the paradox is that the higher the rate of tax, the greater is the competitive advantage of the tax-exempt industries.

How much revenue would be realized by subjecting cooperatives to the same taxes borne by their private counterparts and competitors you can estimate better than I. I have heard references to hundreds of millions of dollars. The amount would certainly be considerable. The question is as much before those who think it necessary and desirable to foster cooperatives as it is before those who think as I do. It is this: Can we in our present circumstances afford it?

I do not, as is by now evident, think there is any justification for this cost. and I accordingly urge you to amend existing tax law in such a way as to subject all cooperative income, whether paid out or retained, to the taxes borne by ordinary corporate income and at the same rates.

Mr. CHARLES W. DAVIS,

ANDERSON, CLAYTON & Co., Inc.,

Houston, Tex., March 15, 1951.

Clerk, House Ways and Means Committee,

1102 New House Office Building, Washington, D. C.

DEAR MR. DAVIS: Thanks for your telegram, I am sorry that I will not be able to appear before the committee in person.

I am now preparing a statement and will send it to you in the next few days. Sincerely yours,

W. L. CLAYTON,

STATEMENT OF JAMES G. PATTON, PRESIDENT OF THE NATIONAL FARMERS UNION. TO THE HOUSE WAYS AND MEANS COMMITTEE, CONSIDERING THE 1951 REVENUE Аст

The National Farmers Union desires to make its position clear on both the so-called tax exemption on cooperatives and on revision of the general tax structure.

The primary purpose of a reconsideration of the tax structure at this time is to raise additional revenue. A secondary consideration is to reduce demand for nonessentials and luxury goods, freeing as much material as possible for military needs without creating inflationary trends. So far as we are advised, there is no general intention to use the Revenue Act of 1951 to alter basic national policy.

I-COOPERATIVE TAXATION

The proposal to tax reserves of farmer cooperatives is not a revenue-raising proposal. The amount that it would return to the Treasury is insignificant and inconsequential. It might raise $20,000,000, but with cost of collection deducted, it would not be a revenue producer of any consequence. It is actually a proposal to reverse a long-established Government policy of aiding farmers to gain equality in the market places through cooperation.

Both State and Federal Governments, realizing farmers' disadvantage in the commercial world because they are many and disorganized, have recognized the need for nonprofit cooperative organizations through which farmers can combine their marketing and buying operations. According to Dr. E. A. Stokdyk, formerly Deputy Governor of the Farm Credit Administration:

"Each of the 48 States now has statutes for the incorporation by farmers of cooperative marketing associations. These statutes have been construed by the courts as desirable and essential for organizations of a nonprofit character dealing in agricultural products.

* *

The best known of Federal statutes recognizing a need for farmer cooperatives is the Capper-Volstead Act. There are numerous other legislative acts recognizing the special nature and need for cooperatives, including the tax exemption for farmer cooperatives in the Internal Revenue Code.

Alteration of the tax status of the cooperatives at this time would, in its effect, be a repudiation of the national and the Nation-wide policy of the States of assisting farmers to achieve equality in the market place without appreciable revenue gains.

It would be extremely untimely, for never before have farmers been up against such large business combinations as today.

The Federal Trade Commission report on interlocking directorships recently released shows startling cartelization of firms which market farmers' products and furnish their supplies.

For instance, International Harvester, Allis-Chalmers, and J. I. Case are interlocked with each other and with two other of the six largest producers of farm machinery through their directorates. Oliver Corp. is interlocked with two other farm-machinery companies and Deere & Co. and Minneapolis-Moline are interlocked with each other.

Four of the largest canners in the Nation are thus tied together.

Armour & Co. is interlocked with the four largest meat packers, and three of the meat packers interlock indirectly with three of the largest bakers. They are also interlocked with General Foods Corp., Standard Brands, and Best Foods.

Six of the twelve largest grain mills interlock, 6 of the largest bakeries, and 16 of the largest sugar companies have direct or indirect ties, and these groups in turn interlock with each other.

Farmers have never been confronted with larger combinations of business, either on the marketing side or the buying side, than they are today. More than ever before, they urgently need their cooperatives.

Encouragement of cooperatives is needed. Certainly there should be no reversal of our historic policy which would injure and weaken this needed economic tool of farm people.

II-GENERAL TAX REVISION

In regard to general tax revision, we urge raising the tax rate on corporations and higher-bracket individual incomes.

Corporations are today netting the largest profits in all history. According to the last available reports, corporation income in 1950 was close to $25 billions compared to a net of just $5 billions in 1939. This transcends even the exorbitant profits which corporations made in the year 1948. The profit rate at the present time, we are advised, is running even above 1950. Corporations are almost literally rolling in money, as evidenced by the fact that they are paying

out only a relatively small amount of their earnings as dividends to satisfy stockholders and are retaining a major part of their income. In other words, they are able to pay the highest dividends in history to stockholders and yet retain a major portion of their total profits.

Let us compare the proportion of tax load which corporations are bearing today with the proportion in 1942 and 1943. These years are selected becau→ at that time, as today, a major emergency existed and taxes were revised upward to pay for additional military expense.

In 1942 and 1943 corporations paid 44.1 percent of all Federal taxes. Indviduals paid 31.4 percent through income taxes. Excise taxes accounted for 24.5 percent.

In 1950 corporations were paying only 29.9 percent of total taxes paid. Indviduals will pay 48.8 percent through income taxes. Excise taxes will account for 21.3 percent. Since excise taxes are ultimately paid by the people, the total 1950 share of the tax burden on individuals is around 70 percent, compared to 29.9 percent on corporations.

It is more necessary than ever before that our tax structure be revised with utmost care, and with an eye to ability to pay, because of the inflation of the past decade.

The cost-of-living index at the middle of January was 181.5 compared to a monthly average in 1939 of 99.4. A person with $3,000 income today is little better off than a person with $1,500 income in 1939. The $600 exemption given individuals now is actually not as valuable to them as was the $400 wartime exemption.

We urge your committee neither to lower the individual exemption nor to increase the tax burden on individuals with $3,000 income or less.

It is not intended, in this mobilization period, to worsen the lot of poorer people to deny necessities. Lower exemptions or adding taxes on incomes of $3,000 or less would be a denial of necessities.

The situation of the small farmer, the wage earner, and the small salaried person not protected by a union has become critical. He cannot afford to pay additional taxes without lowering further a standard of living that has already been drastically reduced by price inflation. This would weaken rather than strengthen our productive strength and our democracy.

Farmers as a whole made the lowest net income in 1950 since World War II. Farm net income dropped from $18 billion in 1947 to $13 billion in 1950. Farm gross income stayed up fairly well during those years, but high costs which meant that corporations were exacting higher and higher profits from farmers and other consumers caused net farm income and the net income of other segments of the population to fall.

We feel that individual income taxes in the upper brackets should be increased. The progressive principle of income taxation, levying most heavily against those able to pay, has been working in reverse for the past decade. All our individual income-tax increases in that period have put a relatively greater percentage tax increase on low incomes than on higher brackets. This could now well be adjusted back to the principle of ability to pay.

III-TAX LOOPHOLES

One of the greatest needs in tax revision is to plug loopholes through which large financial interests are getting billions of dollars in tax advantages. The tax law passed by the Eighty-first Congress is, to a considerable extent, a special-interest law handing billions over to favored corporations.

The depletion allowance provisions which allow oil companies up to 50 percent of their net income for depletion of their crude reserves is nothing more nor less than a gigantic subsidy to an already overly wealthy and highly concentrated industry.

If the principle of the oil-depletion allowance is to be used at all, then farmers should be given equally handsome depletion allowance on their land; workers should be given a liberal depletion allowance on a basis of their age, for bodies also wear out-it should be spread on an equitable basis clear across the list of taxpayers. It is our opinion that depletion allowance should be put on a realistic basis, and not be based on a mythical figure conjured up by lobbyists for the special interest involved.

We are apparently repeating a system of double rewards, or subsidies, for big corporations involved in production of military goods which the Truman com