REVENUE REVISION OF 1951 THURSDAY, FEBRUARY 22, 1951 HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, Washington, D. C. The committee met at 10 a. m., pursuant to recess, in the Ways and Means Committee room, New House Office Building, Hon. Robert L. Doughton (chairman) presiding. The CHAIRMAN. The committee will come to order. The first witness this morning is Mr. John C. White, counsel of the New York Cotton Exchange and the American Cotton Shippers Association. Will you give your name, and the capacity in which you appear, to the stenographer? STATEMENT OF JOHN C. WHITE, OF THE LAW FIRM OF FULBRIGHT, CROOKER, FREEMAN & WHITE, HOUSTON, TEX., COUNSEL FOR THE NEW YORK COTTON EXCHANGE, THE AMERICAN COTTON SHIPPERS ASSOCIATION, AND THE NEW ORLEANS COTTON EXCHANGE Mr. WHITE. My name is John C. White, and I am a partner in the law firm of Fulbright, Crooker, Freeman & White, of Houston, Tex., and Washington, D. C. I appear here as counsel for the New York Cotton Exchange and the American Cotton Shippers Association. I should also say that the president of the New Orleans Cotton Exchange called me yesterday and asked me to make this statement also on behalf of the New Orleans Cotton Exchange. They wish to record their opposition to any lengthening of the long-term capital-gains holding period and to the proposed increase in the rate. I wanted to say, Mr. Chairman, that it is particularly appropriate to consider this question of taxation of capital gains and speculative profits on George Washington's Birthday. He himself explained that the secret of his success lay in the fact that new lands could be bought which, comparatively speaking, are to be had cheap, and which rise in fourfold ratio. He realized close to half a million dollars from the purchase and sale of Ohio lands, and participated in all sorts of other enterprises in the Potomac Valley. His fortune approximated $5 million at his death, and it arose from investments and speculative real estate against rising values. Mr. MILLS. And no income tax. Mr. WHITE. And no income tax. I do not know what Mr. George Washington would have said had he contemplated having to turn over 371⁄2 percent of this money to the Government. 79120-51-pt. 2—13 735 As an attorney interested in taxation, I have had the opportunity of following tax legislation since the Revenue Act of 1928, at a time when only the present chairman was serving on this committee. The question of whether a tax on capital gains is a desirable means of raising revenue has been argued ever since. The opposition of the exchange and the association to the Treasury proposals is based upon the conviction that it will reduce rather than increase revenue. We think it is established by the past history of the tax that high capital-gain rates both restrict investment and deter realization of profits which have arisen. Any lengthening of the holding period will seriously hurt the cotton. markets. While it is possible to trade in future-delivery contracts in a delivery month more than 12 months off, that is unusual. Even a 6-month holding period has its disadvantages; and, as this committee pointed out on page 60 of its report on the 1950 Revenue Act, prevents sales at times when they would tend to stabilize the market. If a 12-month holding period were required, the earliest delivery month which an investor could buy, when the cotton exchanges are able to reopen, will be March 1952. The Department of Agriculture, the National Cotton Council, and the whole cotton industry are working hard to get a 16-million-bale crop for 1951. In our attempts to work out of the present price-ceiling difficulties, we have found that producers are seriously concerned as to what the price level of cotton may be next fall. No one thinks that any such crop will be secured at a price level less than 40 cents or $200 a bale. This means that 16 million bales will represent $3,200,000,000, which merchants and mills must buy and finance next fall. That job cannot be done unless the speculator is actively in the market in the fall months to take the hedges of merchants and mills. A very substantial portion of that interest is dependent upon the possibility of paying the existing capital-gain rates. Banks will find themselves extended by the necessary financing of merchants and mills, and certainly they will not undertake it unless their borrowers are fully hedged. The market for the farmers' cotton during the harvesting period could accordingly be very seriously hurt, and the Government might even find it necessary to support prices, It would then lose both the tax revenue from speculative gains and the amount it expended in price support. Unlike farmers, merchants, and mills, speculators are not compelled to enter the cotton market. Even under the present rates, lawyers engaged in tax practice constantly run into trades which are abandoned because of the resulting tax liability. Every experience has shown that as the rates are increased the blocked trades increase disproportionately and revenue losses result. Since in the cotton markets the Treasury proposals would actually represent an increase from present capital-gain rates of 25 percent to the top bracket of the cotton investors' income, it is the serious fear of the industry that it will deter entirely speculation badly needed to handle the 1951 crop and restrict rather than increase tax revenues. What we must have in cotton to make the marketing system effective is a substantial volume of speculative carrying of the crop over a period of from 3 to 9 months. We will not get it if the Treasury proposals are accepted. I might also say that if the provision which you adopted during the last session, of reducing the holding period to 3 months, were adopted again, that would be very helpful so far as our situation is concerned. The CHAIRMAN. Are there any questions? Mr. MILLS. Mr. White, I represent an area that produces a large quantity of cotton, largely an agricultural area; and, therefore, I am interested in the problems which relate to the producers of cotton, primarily, as compared with problems of the speculator or the mill operator, since there are very few, if any, in the area. But I know there is a relationship in the handling of cotton from the producer through the final production at the mill. Is it your contention that the Treasury's proposal to increase the holding period from 6 months to a year will actually, in effect, reduce the price of cotton to the farmer? Mr. WHITE. I think that there is no question about it. The American Cotton Shippers Association is made up of spot-cotton merchants who buy cotton, of course, directly from the farmer. They will unquestionably be compelled to pay less to the farmer for his cotton if the speculator is not operating in New York and New Orleans to take their hedges when they place them in the market. I think that I can give you a very good illustration of the effect just at this moment. The Staple Cotton Cooperative Association, which operates in your area, I believe, also, does a great deal of financing of production. It is requiring its producers, where there is any doubt at all as to their credit, to hedge a certain amount of their prospective production by the sale of futures on the exchanges. Unless there is a speculator there to buy those futures, they receive, directly, less money for their proposed crop. . Mr. MILLS. The two things put together, in your opinion-that is, the ceiling price on the raw cotton and the extension of the 6-month holding period to a year-could quite well bring the price of cotton to the original producer a lot lower than the ceiling price? Mr. WHITE. That is the very distinct fear of the whole producers' group with whom I have been talking. Mr. MILLS. What is the opinion of that group as to what the variation might be, and how much below the ceiling price for 15 and 16 cotton would the farmer get? Mr. WHITE. The support price based on the loan is 30 cents, and the ceiling price, while still indefinite, is pretty well known, is approximately 45 cents. In any event, we expect that the price next fall will be below that 45-cent level. Mr. MILLS. You mentioned 40 cents. Is that the thinking of your group, that it might be 40 cents? Mr. WHITE. That is might be, and should be if we want to get the producers to raise the 16,000,000-bale crop; and, unless that crop is raised, we will be in a far worse situation toward the end of next year than we now are, and that is serious enough. Mr. MILLS. That is my thought; that it will have to be at least 40 cents a pound in order to get the 16,000,000-bale crop. At a 45-cent ceiling, and the period of holding extended from 6 months to a year, will it be possible, in your opinion-and, of course, it is a speculative matter, I know-but would it be possible, in your opinion, for the cotton producers to receive 40 cents a pound for their cotton? Mr. WHITE. It would not. Mr. MILLS. It would not? Mr. MILLS. That is the opinion of your group? Mr. WHITE. It is. Mr. MILLS. That is would be a figure less than 40 cents a pound? Mr. WHITE. Without the speculator making it possible for merchants and mills to handle the crop, and banks to finance it. Banks insist that, before they will loan 85 percent of the value of the cotton, the merchant be hedged; and, unless he has a speculator during the fall to take his hedges, there is no one else in the market for the cotton. Mr. MILLS. Of course, if there is not someone in regular trade channels to take it, the farmer would be faced with a prospective Government loan at 30 cents a pound. Mr. WHITE. Yes. Mr. MILLS. That is all, Mr. Chairman. Mr. KEAN. Of the business of the cotton exchange, how much is done by the speculator who is really making an investment of his capital, and how much is done by those who might be considered to be in the business of speculation, roughly? Of course, also there is a great deal of the business which is hedging business, and a very im portant business, but you know what I am trying to get at. Mr. WHITE. Yes. I do not think that you can separate what you might call the man who is in the business of speculation, from the investor, you might call him, in cotton. We do not have that figure. But we do know in the present market, for instance, the speculation is not a very large factor. Our difficulties arise from the fact that the cotton itself is scarce, and that the demand of the mills and exporters are creating difficulties. However, in the fall months when the balance between the crop and the need of the mills is very disproportionate, the speculator must come in in a very large volume to balance that out. As the season progresses and the cotton moves into consumption, the speculator becomes less and less a factor in the market. But we cannot overemphasize the importance of that speculator, whether professional or not, to the movement of the cotton crop. Mr. KEAN. There is no question in my mind as to the value of the speculator in stabilizing the markets, but I do think that a pretty important line ought to be drawn between a man who you might say was in the business of speculating, whose profits, I believe, ought to be considered as regular income, and a man who really is investing his capital. I think that the latter ought to have treatment as capital gains; and the capital-gain rate, I think, is plenty high enough now on that basis, and, in fact, I agree with you that more revenue could be gotten for the Government if the rate were lower. Mr. MILLS. Mr. Kean, would you yield at that point? You will recall that yesterday we had a discussion of the same point with another witness. At the time, I was talking about one situation, and I think that you were talking about another situation, so that there really was not a difference of opinion between us. And I want the record to show that what you have just said is what I failed to say yesterday as representing my own view. Mr. WHITE. Mr. Kean, the cotton merchants, of course, who actually handle spot cotton, are not in, generally, a position to take advantage of the capital-gains tax. Their whole system of operations is based upon a balance of futures against spots, and forward sales against forward purchases, so they are not affected by this directly. But they are convinced that you will not be able to get the speculative impression in the cotton market unless, on the whole, the rates of the tax are kept at about the present level. Mr. MILLS. I have just one other question in my mind. Is this feeling which you spoke of here, about the effect of such action upon the farmer, the producer of cotton, the opinion of any of the farm organization leaders in this field? Mr. WHITE. Yes. You will recall that during the last session of Congress the question of margin control was very active, and on that question the American Farm Bureau Federation and the National Cotton Council expressed their views on this subject along this identical line. Mr. MILLS. Thank you. Mr. REED. Mr. White, I cam in a little bit late, but I have run rapidly over your paper here; and, as I understand, you firmly believe and your group firmly believes that you will get more revenue with a 15-cent rate than you would at 25. Is that right? Mr. WHITE. That is right. Mr. REED. And you feel that the time should be 6 months, or 3 months, or what? Mr. WHITE. Three months, as far as the operations on the Cotton Exchange are concerned. Mr. REED. I offered an amendment here the last time the tax bill was up, to make the rate 16 percent, and Mr. Lynch offered an amendment for 3 months, but both of them were defeated, as you know. Mr. MILLS. Would you yield at that point? I think you will recall that both amendments were adopted by this committee, and they were in the bill when it was sent to the other body, were they not? Mr. REED. Not both of them. Mr. MASON. We made a tentative approval, and then we reversed our action. Mr. MILLS. Was not the reduction in the holding period in the bill as it left the committee? Mr. REED. That was eliminated, as I understand it, in the Senate. Mr. MILLS. That is right. Mr. WHITE. Mr. Reed, you had our active support on both of those amendments, particularly the holding period, which to us is a very serious question. Mr. REED. That is right. Secretary Snyder, in coming before us, and the Administration as a whole, talked about revenue, and I had assumed right along that what they wanted was a system here to bring in revenue. I do not think there can be any serious dispute that the lowering of this rate and the time period would bring in a vast amount of revenue compared with what it was. I think property, not only cotton but property all over this country, is being held, hoping to get some kind of a break on this rate. I know it is true in the matter of timber and farms and homes, and everything else, that it would |