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Many corporations give their top executives the right to buy stocks in the corporation at a price below the open market quotation.

In the past, this difference between the market price of the stock at $100 and an option to buy at $50 was taxed at the normal individual income-tax rates.

However, the present law, as amended in the Revenue Act of 1950, permits this profit to be taxed at the so-called capital-gains tax rate of 25 percent.

For example, if a corporation wants to give one of its $30,000 a year executives a $20,000 cash bonus, such a cash bonus would be subject to the normal individual income-tax rates. That tax would amount to $12,000. If the corporation wants to take advantage of the stock options under this new tax bill and give to the executive the equivalent of the $20,000 cash bonus in a stock option, the executive would save $7,000 in taxes.

Wage earners do not benefit at all from this option clause.

In order to benefit one's income before exemptions must be in excess of $15,000.

The repeal of this provision would increase Federal revenue by another quarter of a billion dollars.

(8) Life insurance companies: The Revenue Act of 1950 imposed a retroactive tax on life-insurance companies for the years 1949 and 1950. This was just a stop-gap provision, as Secretary Snyder indicated in his testimony to this committee a few days ago.

Serious consideration should be given to the enactment of provisions which would keep life-insurance companies from enjoying unjustified special treatment. This is an extremely involved and complicated problem, but, if properly tackled it could produce additional revenue needed by the Government.

Each and every one of these tax loopholes represents a concession either to big business or to wealthy individuals. The failure to close these loopholes will lose for the Federal Government between 41 and 5 billion dollars of revenue. But revenue not thus collected must be collected elsewhere.

It appears that because the common folk have less political influence than corporations and wealthy people, they are to be forced to pay a greater proportion of the tax bill than they can reasonably afford.

The continuation of tax loopholes makes the wealthy still richer at the expense of the mass of Americans. This is iniquitous and intolerable. Congress will be remiss in its responsibilities to the mass of its constituents if it fails to close these loopholes even if the well-off object.

There will be no equality of sacrifice if these loopholes are continued on the statute books at the same time as the Congress imposes higher taxes upon the low- and middle-income individuals.

CORPORATION TAXES

The excess-profits tax should be strengthened. I have already made reference to table No. 2 which points up the high levels of corporate profits. You will note on this table that corporations in the fourth quarter of 1950 had profits after taxes at the annual rate of 26.7 billion dollars, or more than 25 percent greater than the previous peak of 1948.

These excess profits should be taxed at an 85 percent rate at leastand to achieve this purpose the excess-profits tax legislation passed by the last Congress should be amended immediately.

The exemptions permitted to corporations are too high. Instead of taking the best three of four years from 1946 to 1949, as the allowable tax base now permissible under the law, corporations should be required to take their average profits for the entire 4 years from 1946 to 1949 as their tax base.

Many loopholes and concessions granted in the excess-profits tax should be tightened. We must remember that an excess-profits tax is anti-inflationary. I developed this point at considerable length in my testimony last year before this committee on November 17, 1950.

I pointed out at that time that an excess-profits tax rate of 85 percent is anti-inflationary, because corporations knowing that they could keep only 15 cents on every dollar of increased sales would be less inclined to increase prices.

However, this is in contrast to a straight increase in the corporate tax rate, which is proposed by Secretary Snyder, from 47 to 55 percent. A straight increase means that corporations would retain 45 cents out of every dollar. When a corporation contrasts this possibility-of retaining 45 cents as against retaining 15 cents on every dollar-it obviously is more inclined to push prices up under the first condition than under the latter.

A straight increase in corporate normal and surtax rates is desirable at the same time that the excess-profits rate is increased. The last type of tax is particularly useful as an anti-inflationary device, and it must not be weakened in favor of the first type. Both should be strenghtened and combined to increase tax revenues and to prevent large-scale profiteering as the result of the mobilization program.

If companies and corporation have increased their profits considerably over the base period, there is no reason why these increased profits should be taxed at only the normal and surtax rates. They should be taxed at an excess-profits-tax rate—an excess-profits-tax rate based upon a considerably lower exemption than that provided in the Excess Profits Tax Act of 1950.

To accept the recommendation of Secretary Snyder, which is to increase the normal and surtax corporate rate, is to say that any corporation, regardless of whether they increased their profits over and above the base period, should be subject to paying higher taxes. Or still another way to look at it would be to say that corporations deriving large increases in profits over the base period should be taxed at no greater rate than those corporations showing no increase in profits over the base period.

It is for these reasons that we think one must simultaneously close the loopholes in the excess-profits tax at the same time that we increase the normal and surtax corporate rates.

We think considerably more revenue than that suggested by Secretary Snyder should be raised now from corporations. If the excess-profits tax is strengthened, and loopholes tightened, and surtax and corporate rates increased as suggested, we feel that at least 8 to 9 billion dollars can be raised from this source. We believe that corporate profit levels in 1951 will be in excess of the $43,000,000,000

estimated by Secretary Snyder in his testimony-probably in the neighborhood of $47,000,000,000.

In the face of this level of corporate profits, we believe that at least 8 to 9 billion dollars more in corporate taxes can be raised and still leave corporations with 17 to 18 billion dollars after taxes, which is still a substantial profit.

INDIVIDUAL INCOME TAX

We believe that taxes upon individuals can be increased by 344 to 4 billion dollars through increasing the progression of income tax brackets by an average of four percentage points. Secretary Snyder has suggested that the rates on individual income taxes be increased by four percentage points on each bracket. We believe that this is unfair and inequitous.

We believe that individuals with incomes of less than $4,000 should not have their tax increased above present levels, that individuals with incomes between $4,000 and $5,000 should not have their tax increased as much as individuals with higher incomes.

We therefore suggest that the first individual income-tax bracket be split in half, and that the present rate of 20 percent for the whole bracket be retained for the first half of the bracket, or the first thousand of taxable income, and that the rate for the second thousand dollars of the first tax bracket be increased to not in excess of 22 percent; and that the 4-percentage-point increase should then be applied to the next two or three tax brackets with the steepness of the progression increasing above this point so as to produce a total of $3% to $4 billion in revenue from individual income taxes.

The proposal which I have made to exempt the first thousand dollars of taxable income from increases and to apply only a 2percentage-point increase to the second thousand dollars would result in a loss of approximately $174 billion of potential revenue. This can be made up by increasing the progression at the higher brackets. Rates in the surtax net income brackets above $8,000 to $10,000 can be raised more than four points in order to make up for this estimated loss.

Individuals who pay taxes in brackets above the first income-tax bracket should be required to pay the 24-percent rate for the entire first bracket. In other words, only those individuals whose total taxable income falls into the first income tax bracket would be privileged to benefit from the 20- and 22-percent rates I have suggested. This would reduce considerably the loss in revenue resulting from not increasing the first bracket tax for everybody.

I think this is a fair and equitable proposal and it is really basically and fundamentally consistent with the principle of equality of sacrifice.

We believe, as I have stated before, that our Federal revenue must be raised by at least the $16 billion needed to balance the budget for fiscal year 1952. This revenue must be raised according to the basic principles of ability to pay and equality of sacrifice. It is the judgment of the Congress of Industrial Organizations that the program for new tax revenues outlined above meets these basic requirements.

(The tables referred to follow:)

TABLE I.- Distribution of personal income and expenditures, 1948

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Highest tenth.
Second
Third
Fourth
Fifth
Sixth
Seventh
Eighth.
Ninth
Lowest tenth

Over $6,000
$1,500 to $6.000.
$3,750 to $1.500
$3,200 to $3,750
$2,840 to $3,200.
$2,100 to $2,840
$2,000 to $2,400
$1,500 to $2.000.
$860 to $1,500.
Under $860

51.6 26.7 21.4 17.8 16.0 14.2 12.5 8.9 7.1 1.8

29.0
15,0
12.0
10.0
9.0
8.0
7.0
5.0
4.0
1.0

8.5
2.1
1.6

7
6

43. 1
24. 6
19.8
17.1
15. 4
14.0
12.6
9. 2
7.6
3. 7

25. 8 14. 7 11.9 10. 2 9. 2 8.4 7.5

2 -.1 -.3 -.5 -1.9

5. 5

4. 5 2. 3

Total..

178. 0

100.0

10.9

167.1

100.0

Excludes income in kind and change in value of farm inventories.

Based on income and savings estimates of Department of Commerce, and on distribution of income and savings estimates in Federal Reserve Board survey of consumer finances.

TABLE II

[Billions of dollars)

Period

Corporate
profits be-
fore taxes

Corporate

profits after taxes

1939 1914 1946 1947 1948 1949 1946-19 average

6.5 24. 3 23. 5 30.5 33.9 27.6 28. 9

5.0 10.8 13.9 18.5 20.9 17.0 17.6

Annual rates, seasonally

adjusted

1950- First quarter

Second quarter.
Third quarter
Fourth quarter

29. 2
37. 4
46.4
48.0

16.0 20.9 25.8 26.7

1 Estimates based on incomplete data; fourth quarter by Council of Economic Advisers.
Source: Department of Commerce (except as noted).
Table III.—Taxes on specific consumption as percent of consumer income, 1938–39 1
Federal

Federal Income class: (percent) Income class-Continued

(percent) Under $500. 3. 0 $3,000-$5,000.

2. 4 $500 to $1,000 2. 9 $5,000 to $10,000

1. 9 $1,000 to $1,500. 2. 8 $10,000 to $15,000.

1. 5 $1,500 to $2,0002. 8 $15,000 to $20,000.

1. 3 $2,000 to $3,000. 2. 7 $20,000 and over.

.8 Source: TNEC Monograph No. 3, Who Pays the Taxes, p. 12.

TABLE IV.— Total expenditures for gasoline for 6 cities in United States, 1947–48

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Table V.- Estimated tax on gasoline and cigarettes, 1947

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Under $1,000
$1,000 to $2,000.
$2,000 to $3,000.
$3,000 to $4,000.
$1,000 to $5,000
$5,000 to $6,000.
$6,000 to $7,500
$7,500 to $10,000
$10,000 and over.

$6.25

4.98 11. 64

8. 19 11.07

$4,000 to $5,000.
$5,000 to $6,000
$6,000 to $7,500.
$7,500 to $10,000.
$10,000 and over.

$23.31

19.95 32.97 20. 16 39. 48

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$0.075
2. 20
4.02
5, 65
8. 28
6. 51
8. 95
8. 11

.

$10.43
17.99
21. 42
17. 22
27.37
22. 68
24. 99
30.94

5

MANCHESTER, N. H., 1947

4
1

RICHMOND, 1947

Under $1,000.
$1,000 to $2,000.
$2,00 to $3.000
$3,000 to $4,000.
$4,000 to $5,000.
$5,000 to $6,000.
$6,000 to $7,500.
$7,500 and over.

Under $1,000
$1,000 to $2,000
$2,000 to $3,000.
$3,000 to $4,000.

62
.08
2. 37
3. 68
5. 18
2.07
10. 26
10. 53

8. 26 11. 13 23. 24 26. 39 23. 24 43. 05 24. 50 28. 35

54 1. 26 3. 52

14. 28
17. 36
18. 20

9
7
6

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