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Mr. KREUTZ. That would be so; yes.

Mr. JENKINS. That would be as effective as anything we could recommend.

Now I have just one other question. On the last page, page 14, you say:

As shown by the figures presented and the official reports, savings and loan associations already produce 49.2 percent more tax revenue per million dollars of savings (deposits) than do insured commercial banks.

How does that work, without going into too much detail?

Mr. KREUTZ. A building and loan association as such is a group of partners who have banded together. Their earnings are pooled and distributed among them. They pay taxes on those earnings. The amount of taxes is based upon a 20-percent tax rate for the small person, in which class we would place the building and loan member. Figured at 20 percent, the tax on the dividends distributed to the building and loan associations in 1949 amounted to $5,000 per million dollars of savings accounts or deposits.

In contrast to that, the total amount of tax revenue produced through the operation of insured commercial banks—and that includes the corporate taxes which the banks pay; includes the taxes estimated at 30 percent on the dividends paid by the stockholders of the bank, and a 20-percent tax on the interest on deposits—was $3,300 of taxes per million dollars of deposits.

Mr. JENKINS. Which paid the larger amount of money out, the savings banks of the country or the Federal savings and loan associations? Which is larger, the savings accounts of the banks or of the associations?

Mr. KREUTZ. I do know that the insured commercial banks of the country paid in dividends to their stockholders more than they paid in interest to their depositors. The amount per million dollars of deposits, of course, is much greater for the building and loan associations. The amount of interest paid by the insured commercial banks of the country in 1949 was $328 million, as contrasted to $268 million paid by the building and loan associations. But, of course, the building and loan associations are just a fraction of the size of the commercial banks.

Mr. JENKINS. I believe that is all, Mr. Chairman.

The CHAIRMAN. Is it not true that the faster the building and loan associations expand the more competition they can give the taxpaying banks?

Mr. KREUTZ. No, sir; I should say not. The matter is relative. I should say that size of an association does not place it in a better competitive position. That is to say, a larger association is in no better competitive position, relatively speaking, than the smaller association.

The CHAIRMAN. I know; but, whether large or small, the two come in competition in the same activities, right across the street from each other or as next-door neighbors. They are in competition for the same business, and one pays the tax and the other does not, regardless of size. Does not the one who pays no tax have an advantage over the one who does pay a tax?

Mr. KREUTZ. If we had no building and loan associations in the country, then there would be no competition at all.


The CHAIRMAN. There would be competition among each other. There would be competition with other banks, other loan institutions. That would not eliminate competition.

You would not take that position?

Mr. KREUTZ. No. My point was that, if there were no building and loan associations, the banks would have no competition of that sort. The more associations there are, the greater their assets, the more formidable they may appear to the bank as competitors. We do not think there is real competition between the two. The banks are doing a different kind of business. Building and loan associations are doing a business of encouraging thrift and encouraging home ownership.

The CHAIRMAN. That is commendable. It was brought out here this morning that the commercial banks pay a much lower rate of interest than the savings and loan associations. If there is not a competitive advantage there, why should not one pay as much interest as the other?

Mr. KREUTZ. I wonder if the issue is not a question of whether cooperative movements of this kind are to be killed off in favor of large business owned and controlled by a few who are in it for personal profit?

The CHAIRMAN. That same issue could be raised by every small taxpayer in the land: that if he does not have lower taxes he will be knocked out of business and the activities transferred to larger business,

We do not recognize that in taxing corporations. We tax them on their income, whether large or small. We get more taxes from the larger because their income and profit is much more. We do not excuse a small corporation from paying taxes on the ground that, if he does pay taxes, it will put him out of business. We could not do that; could we? Is that your argument?

Mr. KREUTZ. I tried to make clear that from our studies the building and loan associations, as such, being groups of people who have banded together, do pay into the Treasury a larger amount of tax per $1,000 of their savings than do the insured commercial banks.

The CHAIRMAN. We are not talking about savings; we are talking about profits. Profits are what we tax. Now, if they pay more on their profits than the commercial banks do on their profits from exactly the same business, we would like to know about it, and to whom they pay it and when they pay it.

Mr. KREUTZ. I wonder if I might compare a building and loan association with the trust department of the bank. A bank manages a trust department and manages trust funds which are loaned out in one form or another, and earn interest. The bank, as the trustee, then distributes the earnings which it receives to the beneficiaries of those trusts and sometimes will distribute 3 percent perhaps, whereas that bank is paying its own depositors only 1 percent or 14 percent. It might be said that the bank's own trust department, the activity of its trust department, is in competition with its own savings-deposit business.

The CHAIRMAN. We are talking about loans, about the interest paid by building and loan associations, and what they do with the profits.

79120_51–pt. 2-21

Mr. KREUTZ. The profits are distributed, sir.
The CHAIRMAN. They are not all distributed.

Mr. KREUTZ. They are all distributed except the amounts which are necessary to take care of expenses and losses.

The CHAIRMAN. That is true, but if they make profits, whether they hold them or whether they distribute them, why should they not pay taxes like others in exactly the same kind of transactions, exactly the same kind of business? That is what I cannot understand. Now, nobody here wants to put the building and loan associations out of business, but I do not see why they should have a competitive advantage and not be taxed by the Government, especially in this emergency when other institutions with whom they compete are asked to pay increased taxes.

Mr. KREUTZ. We think they do pay the tax, for the building and loan association is an association owned by a group of people who get all the profits made by the cooperative undertaking and they pay the tax on what they receive; they pay the tax on the net profits.

The CHAIRMAN. When they get it, if and when.
Mr. KREUTZ. Yes.

The CHAIRMAN. What if they do not get it? Suppose they get out of the association, what becomes of profits and the money they had in the institution? It is still left there; is it not?

Mr. KREUTZ. They will withdraw their share of the distributed earnings. They do not sacrifice their share of the distributed earnings.

The CHAIRMAN. I understand with respect to distributed earnings, but what happens to the profit that has not been distributed? They do not get anything more than they put in, no matter how much has been accumulated. That would be part of their profit. They do not get it, because it has not been distributed. It is in reserve, but they do not get it at all, and there has been no tax paid on it.

Mr. KREUTZ. As I stated, the insured associations of the country at the end of 1949 had reserves of 6.9 percent of their assets. Those reserves, in relation to the need to building reserves in accordance with the studies made by the Federal Savings and Loan Insurance Corporation, as set out in the letter of the Corporation, to which I have referred, are not excessive. In fact, we would like to see them build even larger reserves.

The CHAIRMAN. The banks pay pretty liberal salaries; do they not? It was brought out here this morning that an officer of a savings bank in New York receives a salary of $60,000 a year. In the Government salaries are not so high. Yet, taxes were not paid out of the earnings of the corporation of which he is the head.

Mr. KREUTZ. Generally speaking, these associations pay very small salaries, relatively speaking.

The CHAIRMAN. They have to compete on the market for employees. They would have to pay as much as other people; otherwise they would not get help.

Mr. KREUTZ. As far as clerical help is concerned; yes. But we have found from studies that executive officers of associations by and large were paid below the standard rates around the country. Maybe it is the love of the work they are in. That is the result of the studies.

The CHAIRMAN. Other taxpavers are necessarily going to have their taxes increased, and these tax-free organizations, as far as their profits before distribution are concerned, no matter how large, should pay the Federal tax.

Mr. KREUTZ. The laws of the various States and the Federal laws all require that these associations retain a certain portion of the earnings in a reserve account.

The CHAIRMAN. I know, but the laws require other banking institutions, the commercial banks, to do that. They are all required to maintain reserves. Both the Federal laws for national banks and State laws for State banks are very rigid with respect to reserves being retained for the protection of depositors. The depositors come in ahead of the stockholders. The depositors are protected under the law. There is no protection for the stockholder. He takes the risk.

Mr. Mason?

Mr. Mason. Mr. Kreutz, in your statement you told us how well these building and loan associations have functioned, and I will agree with that. You have told us what a great service they have performed, and I will agree with that. You have told us how important they are to our economy, and I will agree with that. You have told us how necessary they are, and I am perfectly willing to agree with that. But on page 8 you tell us that, if a Federal tax were levied, there is apt to be a sharp reduction in dividends, and then you go on to say if that is made it would have to come out of the reserves and that would cut the reserves down below what they should be for safety, and I will agree with all of that. But that is exactly what the Federal tax does to the commercial banks. They cannot pay interest any more on their deposits, a good many of them, and some of them pay a half percent and some of them pay 1 percent. They used to pay 3 percent. Federal taxes have gone up so high in the last 10 years or so that it has made it impossible for them to pay interest. It has also forced them to reduce the dividends they hand out to their stockholders.

Now the Federal tax has to come out of commercial banks on the interest paid on deposits or dividends paid to stockholders. Why should not the Federal tax come out of the interest paid by the building and loan associations to their depositors, to their members, just as well as the other?

Mr. KREUTZ. As we analyze it, sir; it does. The earnings are distributed to the members of the association.

Mr. Mason. Yes; but the earnings of the commercial banks are also distributed to their stockholders, and their stockholders have to pay on their income just like your members have to pay on their income. That is evading the question. The question is: Why should not building and loan associations have to pay Federal taxes, the same as commercial banks, even if it does lower the interest rates that they pay or if it does come out of their reserves? But the State law will not let them come out of that. So what is sauce for the goose has to be sauce for the gander; does it not?

Mr. KREUTZ. The reason is that they are an entirely different kind of creature. They are a mutual institution which is owned by all their members, depositors if you want to call them that, in contrast with commercial banks which are run for the profit of the stockholders.

Mr. Mason. But they are not different creatures in their competitive advantage with the commercial banks; they are the same creature then because they are doing the same work and performing the same function.

Mr. KREUTZ. I can only say to that, sir, as I see it, that you have simply the issue of whether cooperative movements of this kind are to be continued or killed off in favor of a proprietary stock arrangement.

Mr. Mason. Why should a Federal tax kill them off any more than it kills off the commercial banks that have to pay that Federal tax?

I have one or two questions here. Do you agree that the interest received by the building and loan associations on the loans they have outstanding is income?

Mr. KREUTZ. Yes, sir.

Mr. Mason. Then if it is income, why should they not pay the same Federal tax as do the commercial banks or corporations of any kind?

Mr. KREUTZ. It does, to the individual member of the association where the tax is collected.

Mr. Mason. But the tax does not apply to the organization itself, and that is the point that we are trying to make, because to the individuals that get the interest from commercial banks, to the individuals that get the dividends on their stock, they already pay the tax and the organization has to pay it again when the individual gets them. As long as we do it to the goose, we ought to do it to the gander, too.

Mr. Kreutz. The essential difference between the two types of institutions is found in the facts of the report of the FDIC where it is shown the interest paid by the banks to their depositors in 1939 totaled $328,000,000, whereas the dividends paid out to the stockholders, the owners of these banks, in the same year were $354,000,000.

Mr. Mason. That is just simply begging the question on this issue of equal taxes on organizations that compete with each other for business.

I want to ask you this: Is it not true that the building and loan associations do not need to reduce their dividends if Federal taxes are applied and they do not need to take the taxes out of their reserves if Federal taxes are applied, but they probably would take them out of their earnings? Now, your building and loan associations have been expanding by leaps and bounds out of the earnings of the building and loan associations. Why could it not come out of the earnings instead of out of the interest paid to the members or out of the reserves that they are forced to keep?

Mr. KREUTZ. I do not understand, sir, that they have been expanding out of their earnings. They have been expanding because more and more people have been attracted to the facilities which they have to offer and have started savings accounts with them. As they accumulate those funds, then the institutions have more money to lend out, and so they increase in size. That is what has been happening

Mr. MASON. I am afraid that you and I cannot see eye to eye on this thing. I do not seem to be able to get my point across.

That is all, Mr. Chairman.
The CHAIRMAN. Mr. Eberharter.

Mr. EBERHARTER. Mr. Kreutz, according to information furnished this committee in March 1950 by the staff of the Joint Committee on Internal Revenue Taxation, in 1949 the reserves and undivided profits of all operating building and loan associations were $1,100,000,000. Now, not 1 cent of tax has ever been paid on that; has it?

Mr. KREUTZ. No, sir.

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