cial banks, then you are going to have a different picture entirely than if you compare savings deposits in the one with the savings deposits in the other. You will find that the savings deposits in the commercial banks pay at least as much, and probably more than the savings deposits in the building and loan association. You cannot compare the total deposits in commercial banks with the savings deposits in a build ing and loan association.

Mr. KREUTZ. It is very difficult to allocate a portion of the earnings of a bank to one department or another from the reports that are published. However, we did attempt to break down the demand deposits as against the time deposits of banks and the ratio, as you probably know, is about 1 to 3; that is, 75 percent of the total deposits are demand deposits, and then we attempted to divide the amount of tax paid by the banks into that same ratio and the tax paid by the stockholders on their stock at the same ratio. We come out, as a result of those figures, with some figures which are not so favorable to building and loan asociations but which are still more favorable. These were hastily made and I would want to do a little further checking on them. This would show a tax produced by the savings deposits of banks of $4,726 per $1 million as against $5,000 produced by building and loan associations.

Mr. MASON. But the savings part of the commercial banks and the savings part of the building and loan associations are very close together, $4,700 against $5,000, if you have segregated the savings accounts in the commercial banks from the other accounts.

That is all, Mr. Chairman.

The CHAIRMAN. If there are no further questions, we thank you for your appearance and the information you have given the committee.

Mr. KREUTZ. Thank you, Mr. Chairman.

The CHAIRMAN. The next witness is Mr. William E. Webb, Jr., vice president of the North Carolina Association of Insurance Agents, Statesville, N. C., representing the State Associations of Insurance Agents.

Please give your name and address and the capacity in which you appear to the stenographer for the benefit of the record.

STATEMENT OF WILLIAM E. WEBB, JR., VICE PRESIDENT, NORTH CAROLINA ASSOCIATION OF INSURANCE AGENTS, REPRESENTING STATE ASSOCIATIONS OF INSURANCE AGENTS

Mr. WEBB. My name is William E. Webb, Jr. I am a local insurance agent of Statesville, N. C. I am appearing on behalf of the North Carolina Association of Insurance Agents and similar organizations located in 23 other States representing approximately 16,744 insurance agents. A complete list of the State associations is attached to my statement setting forth the membership of each.

The CHAIRMAN. I might say that Mr. Webb's home and place of business is Statesville, N. C., in the district I represent.

his father have been in the business for quite a while. He is a man of high character and outstanding business integrity.

Mr. WEBB. Thank you very much, Mr. Chairman.

About 50 percent of these agents sell mutual insurance as well as capital stock insurance. Nevertheless, they are wholly in favor of

imposing the same tax burden on mutual fire and casualty insurance corporations as are imposed on capital stock fire and casualty insurance companies.

Insurance agents for capital stock fire and casualty insurance companies are vitally affected by the income-tax treatment of the mutual fire and casualty insurance corporations. As corporate tax rates increase, the tax advantage of the mutual corporations becomes greater. With an excess profits tax in operation, the tax advantage enjoyed by the mutual corporations is almost great enough to offset their payment of policyholder dividends. We insurance agents do not see how our companies can continue to meet mutual competition when the mutual corporation can use the tax they don't pay to pay these dividends.

The Congress made a very commendable attempt to remove the tax advantage of the mutual corporations in the 1942 Revenue Act. This committee is to be especially complimented for its effort to impose full taxation on both the underwriting profits and the investment or banking profits of mutual fire and casualty insurance corporations. The issue was finally compromised by the Congress. It departed from our traditional concepts of net income to levy what in effect is a gross income tax on the mutual corporations which recognize the collectivist philosophy of the policyholder dividend. At the time, however, the mutual insurance corporations insisted that the gross income formula would yield substantially the same amount of tax as the capital stock company formula. No one could disprove that contention at the time although representatives of the capital stock companies insisted that it would not produce tax equality.

Now, 8 years later, we have sufficient experience to prove that the mutual formula does not begin to impose the same income tax burden on the mutual corporations as the capital stock formula imposes on the stock companies. This disparity will be further aggravated by the imposition of excess profits taxes which are inoperative on companies which are permitted to pay tax on income remaining after distributions. Any corporation that can reduce its taxable income through the deduction of policyholder dividends, dividends to shareholders, or patronage dividends can avoid having excess profits and thereby effectively escape the payment of excess profits taxes. It is a well known fact, in the industry, that few mutual fire and casualty insurance corporations paid excess profits taxes during World War II. This disparity in the Federal tax treatment of the stock and mutual fire and casualty insurance corporations is without legal or economic justification, and should be corrected by requiring both types of corporations to pay Federal income taxes on the same statutory basis. The insurance agents, whom I represent, see no need for two sets of tax laws to measure the relative ability of the mutual and stock fire and casualty insurance corporations to pay taxes. Both types of corporations operate in a profit and loss economy. The mutual contention that by reason of its mutual operation it has no profits from its underwriting business is a perversion of the "nonprofit" philosophy that has permeated the "do gooder" thinking since Karl Marx penned the Communist Manifesto and Das Kapital.

Let us examine the word "mutual" since it purports to have some mystic significance whenever the mutual corporations seek to justify their tax advantage. In a broad sense, all insurance contracts are

"mutual" in that the premiums of many pay the losses of the few. It is only incidental that in the case of stock companies the original or subsequently issued capital is subscribed by shareholders while the original capital of mutual insurers is subscribed by members. Subsequent accretions to assets in both cases inure to the benefit and profit of the suppliers of the capital as well as to the policyholders. The capital and reserves of both types of companies are the legal property of the company, in the assets of which, in the one case, the individual shareholders of the moment and, in the other case, the individual policyholder of the moment, have a right in respect of but not a right to. right to. The assets in both cases are liable for the debts of the company and are disposable in the discretion of the directors or managers and not of any individual shareholder or policyholder. Of course, as in the case of a stock company, the surplus of a mutual would be distributable to someone if the corporation should dissolve or liquidate. But for Federal tax purposes the corporation is a taxable entity so long as it exists, and should be required to account taxwise for its profits irrespective of when or how such profits are subsequently distributed to the participants in the corporate venture.

The income-tax laws impose tax upon the taxpayer which earns the profits. If mutual corporations so conduct their business that they distribute earnings back to policyholders as dividends, then under existing corporate tax laws they should not be entitled to deduct such distributions from profits for tax purposes. Our courts have reiterated, time after time, that a taxpayer is free to conduct its business as it sees fit, but in so doing incurs the tax liability which goes with such form of business. Taxpayers, whether stock or mutual or otherwise, should not be entitled to cloak their activities under the guise of "organizations not for profit," in order to gain tax exemption or more favorable tax treatment at the expense of other taxpayers.

Spokesmen for the mutual fire and casualty insurance corporations also argue that they should be virtually tax-free because they in effect operate at bare cost. This line of argument is fallacious. It is a fundamental of insurance that averaging of losses can be effected through the combining of individual risks. The combination of cowerages increases and broadens the intermingling of such individual risks, so that the bare cost of each individual risk cannot be determined.

When a company writes every conceivable type of coverage, from boiler explosion to personal accident, from fire to fidelity bonds and intermingles the results of this underwriting and of these various and sundry cash transactions, it cannot be argued that, as to any single risk, the insurance is written "at bare cost." The term "bare cost" in the case of any insurer can be ascertained only with respect to its total business over a fixed period of time; and an insurer can only arrive at such a conclusion by totaling the losses and expenses over a fixed period of time and calculating the net earned premium income for the period and setting the one against the other. If they are equal, then on the average the premiums were precisely estimated. It would be putting coincidence to too great a test to expect any such

degree of precision in each and every branch of the business written, whether it be fire, automobile, marine, casualty, or surety. There is not sufficient actuarial science in the field of fire and casualty insurance upon which to predict with accuracy the losses that may be experienced. Judgment plays a very important part in the make-up of rates. Unusual events such as the removal of gas restrictions following the last war can send losses sky high in automobile collision claims. It is impossible in such circumstances to anticipate bare cost. Consideration of the time element in insurance contracts likewise confirms the impossibility of ascertaining the bare cost. Policies are written every day in the year and losses occur daily. Not only are policies written that expire any day of the year, but they are written for varying periods, usually from 1 to 5 years. Furthermore, there may be cancellations with different return premium rates, depending upon whether the insured or the company cancels.

An even more violent situation is brought to light when the management of a mutual corporation decides to enter a new field, such as bonding or boiler insurance. To do so means recruiting a highly technical home office and field staff, buying new equipment and generally incurring various expenses. It also means assuming all the business risks of a new venture which management now decides to take. The automobile policyholder, the plate-glass policyholder, the fire policyholder, all must contribute to a new venture, which can have no effect except to raise his "costs" because of this managerial action over which he has not the slightest control. The new capital necessary is not raised in the capital market-it comes out of the current operations. The losses of the new department are intermingled with the profit on the current business. Dividends are declared and distributed on the new accounts, as well as the old, even though the new business is taken at a loss. Thus, the new department and its losses are carried by the other established policyholders.

It is also true that for some risks more is paid than is necessary to carry the class as such, while for other risks less is paid. Thus the surplus paid by some policyholders is offset by the deficiency of others. It should also be noted that it is common practice for mutuals to cede and accept reinsurance to and from other insurers. These are clearly commercial transactions with nonmembers from which gain or loss may result. The gain, if any, will appear in its surplus, part of which may be distributed to policyholders, or held for ultimate distribution or used for other business purposes. All of these distributions, except the true "return premium" represent an arbitrary allotment of profits from a business venture.

The creation of the yearly surplus by a complicated operation of the insurance business is alike whether it is done by stock or mutual insurers. If there is a surplus arising from this complicated business, it arises in exactly the same way by each type of insurer, both stock and mutual, and through exactly the same set of circumstances. The fact that it is distributed in one case to stockholders and in another case to policyholders does not in any way alter the essence

of its creation. To view it otherwise is to place the emphasis of tax liability on the manner of distributing the profit rather than the manner in which it was created which, under the tax law, is the proper test. For these reasons, both the mutual fire and casualty insurance corporations and the capital stock fire and casualty companies should be taxed under the same tax formula.

Let us review at this point how the two tax formulas apply and the amount or degree of advantage they extend to the mutual corpo

rations.

In general, stock companies are taxed on investment incomeusually called banking profits and underwriting profits at the same rate as regular corporations.

Mutual fire and casualty insurance corporations either pay regular corporate taxes on investment income or banking profits only, or 1 percent of gross income including rents, dividends, and interest, less policyholder dividends whichever produces the greater tax. In most cases, mutual tax liability is determined by the I percent of gross so that the mutual corporation's tax liability becomes dependent upon gross income and not upon the existence of a profit. The stock company's tax may vary from zero to 47 percent of its underwriting and banking profits.

To determine the degree of advantage enjoyed by the mutual insurance corporations, I have made a study which is summarized in the attached table which details the business volume the underwriting and investment or banking profits and Federal income taxes paid.

(The table referred to follows:)