The CHAIRMAN. It is the weekly benefit plan. Mr. GUERNSEY. The weekly benefit plan; yes. Senator MARTIN. There are quite a number of fraternities that also have an insurance benefit, and particularly the funeral benefit, and I wondered whether that included those. Mr. GUERNSEY. It would if the payments are made weekly. The CHAIRMAN. Thank you very much, Mr. Guernsey. Mr. GUERNSEY. Thank you, Mr. Chairman. (At the request of Senator Butler, the following tables are inserted in the record:) EXHIBIT D.-Social-security versus railroad-retirement monthly survivor benefits-a comparison 175 percent of the primary insurance amount for first child and parents. EXHIBIT E-FOUR TIMES 12 PERCENT EQUALS 6 PERCENT One rail worker pays 6-percent railroad-retirement tax. One industrial worker pays 12-percent social-security tax. Therefore, one rail worker pays as much tax as the combined tax of four industrial workers. Social security provides four industrial workers and their families with retirement and survivor benefits as compared to railroad-retirement benefits received by one rail worker, for whom there are no family benefits until after his death. Social security versus railroad retirement tax rates and monthly benefits—a Source: Rail Pension News, published by the National Railroad Pension Forum, Inc., Chicago, Ill. The CHAIRMAN. The next witness is Dr. Ernest H. Hahne, president of Miami University, of Oxford, Ohio, and member of the board of directors of the Cincinnati Federal Reserve Bank Branch. Will you have a seat, please, sir? What particular phase of the proposed bill do you propose to cover? STATEMENT OF DR. ERNEST H. HAHNE, PRESIDENT, MIAMI UNIVERSITY, OXFORD, OHIO, AND MEMBER, BOARD OF DIRECTORS, CINCINNATI BRANCH, FEDERAL RESERVE BANK Dr. HAHNE. Mr. Chairman, it is my intention to speak briefly about the self-employment tax and the relationship of the extended coverage to the general costs of government. I am interested in those two phases primarily because I have taught public finance at Northwestern University for 26 years, and I speak primarily as a person interested in the tax aspects of the bill. The CHAIRMAN. We will be glad to hear you. I was simply inquiring on behalf of some of the Senators who may be required to go to the floor. Dr. HAHNE. I realize the time limitations, Mr. Chairman. The CHAIRMAN. We will be pleased to hear you. Dr. HAHNE. I will be as brief and succinct as I can under the circumstances. The CHAIRMAN. You are dealing with what to my mind is an important issue in this legislation, and that is the self-employment problem, including the self-employment tax. Dr. HAHNE. I am attempting, sir, to not duplicate what you have already heard, but to pick out the self-employment problem and focus my attention upon it. The CHAIRMAN. Yes, sir. Dr. HAHNE. My first proposition is that we are trying to levy a self-employment tax, and in doing it, we are introducing into our tax system a new type of tax. The Ways and Means Committee report in August last year specified that unless the net earnings from self-employment amount to more than $400, and are less than $3,600 a self-employed person does not pay a self-employment tax on the income, and he receives no credit for old-age and survivors insurance benefits. So it is that specific thing, Mr. Chairman, that I am interested in. Dr. HAHNE. Now, the reason that I call it a specific tax and speak from the point of view of one who is interested in public finance is that it has a base, that is to say, from $400 income to $3,600. In the second place, it has a method of computation, which is specified definitely in section 211. And in the third place, it has a rate which is specified in section 1640. I will not enumerate those rates, Mr. Chairman; you are so familiar with them. In the fourth place, it has exclusions from gross income. And in the fifth place, it allows deductions from gross income, and therefore has all the characteristics of an individual tax. Now, my third proposition is that it is not a payroll tax. It more closely resembles, in my opinion, a personal income tax with a $400exemption and a $3,600 maximum. And therefore, being at the present time, according to H. R. 6000, levied upon urban self-employed, it must be regarded as essentially a tax that classifies the urban selfemployed businessmen as an employee. Psychologically, sir, it reduces him from an ordinary entrepreneur with the standing of a businessman to a wage earner. My fourth proposition is that this tax is not a contribution, in the sense that the present taxes levied under the Social Security Act are: because it possesses an element of legal compulsion, as distinguished from economic compulsion. And if the self-employed persons wanted the benefits that were proclaimed by the sponsors of the bill, they would, as Mr. Benson pointed out, seek inclusion in this act voluntarily. And therefore the element of compulsion is present. I will not go any further into this statement. I am assuming, Mr. Chairman, that the printed statement may be included in the record. The CHAIRMAN. Yes; we would be pleased to have your entire statement included in the record. Dr. HAHNE. In that way we can be brief at this juncture. My next proposition is that this self-employment tax differs from the pay-roll tax in that it cannot be shifted. Here is a small-business man; and this tax is levied upon his net earnings. And it so defined in the Act. Consequently, unlike a payroll tax, which enters into the costs, as computed by lawyers and accountants, it is not shifted, and therefore the small-business men fall in a little different position than the ordinary concern that pays both the pay-roll tax of the employers and the employees. My sixth proposition is that the burden of the self-employment tax falls most heavily on marginal enterprise. Very frequently these businessmen are operating very small stores of various sorts, they are highly competitive, and they would prefer to work for themselves rather than become employees in larger concerns. They have very smal capital invested. And in many instances it seems to me that by forcing them to pay a self-employment tax we nullify the very objective of this law by perhaps forcing them to become employees. Because they are marginal-business men. The CHAIRMAN. We are at least forcing them to invest to what we think is wise for them to buy. Dr. HAHNE. That is right, sir. My seventh proposition is that under the guise of social security, the self-employment tax capacity actually promotes insecurity. In times of full employment, the small urban businessman retains hold of his business because he feels that there is more long-run security than he would obtain if he were to go into other enterprises where he would become an employee and perhaps be tied up with strike-infested industries or industries that are more subject to the whims of the business cycle. In other words, in my judgment, this is the straw that breaks the camel's back because it is a tax upon the small-business man. And it is not inconceivable, moreover, Mr. Chairman, that the self-employment tax will cause many a small-business man to abandon his own enterprise and enter the labor market in the areas that are already congested, thereby increasing the in-and-out movement between the insured and the uninsured urban employment, ultimately changing the actuarial basis for the computation of the average monthly wage, or the years of coverage for the benefit payments. And for those reasons, the social-security amendments that are proposed under H. R. 6000 actually may promote, in the long run, insecurity, while designed to aim at security. My eighth proposition, Mr. Chairman, is that the self-employment tax lacks the primary essential of certainty. Adam Smith long ago laid down four essentials of the tax system-equality, certainty, convenience of payment, and productivity. And he placed first and foremost certainty. The reason he did this is that the individual taxayer should know that he was paying a specific tax, but that all other taxpayers similarly situated, too, were paying that tax. And under this bill the rates imposed upon the employee and the selfemployed are different and therefore it makes a difference as to how the taxpayer is classified, as to whether he is self-employed or an employee. Therefore, he may be in and out, sometimes, of the labor market, and both the continuation factor and the increment factor that the bill considers actually take into consideration this uncertainty, and your committee has already heard of the uncertainties that will be involved, Mr. Chairman, by turning over to the Treasury the questions of discretion as to when a man is or is not self-employed. I am not going into that at this juncture because of the pressure of time. My next proposition is that this introduces a dangerous specialincome-tax principle. Now, a special income tax has not been of any particular danger in America, but it has in other countries. And in effect, this is a proportional income tax levied upon the low-income groups, in addition to the progressive rates of the income tax, personal income tax. Therefore, what we are doing is making it possible to add special income taxes from now on for special benefits, because this introduces the benefit principle along with the ability-to-pay principle of the personal income tax. And thereby this bill consolidates the benefit principle with the ability principle, and introduces substantial confusion into the tax system; and as the pressure becomes more and more acute, later on for more and more revenues, we are likely to say, "Let us add particular or special taxes to meet particular costs of Government." That danger, as I say, has not been so important in this country, but it has been important elsewhere. Senator MILLIKIN. Could you say that another phrasing of your point would be that it is bad fiscal policy to tie up your tax system with collections for special purposes? Dr. HAHNE. That is right. Senator MILLIKIN. Just as it is bad governmental policy to tie up a given amount of your revenues for definite purposes, with the result that ultimately all of your revenues are strait-jacketed and you have no fluidity for your general expenditure purposes. Dr. HAHNE. That is the entire difficulty with the benefit principle, where we have our gasoline taxes tied up, for example, simply to roads, improvements, and for no other purposes in the States. We are then handicapped, from the standpoint of fluidity, in the administration of the revenues that the States levy. And I think that same principle would apply, Mr. Senator, to the Federal Government. My next proposition is that we should look at the implications of this self-employment tax. Because, at the very time when we are trying to promote small enterprise and protect and encourage small business, along comes this self-employment tax, and that does not in itself help the small vendor of goods and services. I would like to recall to your attention that when Bismarck established the social-security system in Germany, covering sickness, accident, old age, and disability, he said that "For reasons of state"that is a direct quotation, sir-he was interested in the welfare of the working classes. And he spoke of social insurance as a bribe. And he used the word "bribe." Now, when workers look to the state for social security, they will fight for that state. It was, therefore, a wise policy from the Bismarckian point of view. So, too, when Hitler was seeking power in 1927, under the Weimar Republic, following the leadership of Bismarck, he tried to include the peasants and the small professional groups and the small-business men by telling them that they should resent exclusion from unemployment insurance. And he then won over the small-business men to his support. That became the nucleus for fascism and the totalitarian state that eventuated, and which, I think, is something for which we need now to be on the alert. Now, these are the significant aspects of public finance from the point of view of those of us who are investigating the theories of Adolph Wagner, as directing the policies of Germany. These theoretical origins do not come before Congress as a rule, but the responsibility for laws based upon them is yours. And you should be cog |