foot forward in income tax returns, but the fact does remain that we have no wealthy class. In 1956, those receiving more than $15,000 earned approximately 13 percent of the aggregate. (These figures constitute income before deductions.) We face the fact that we must support many of our expanding programs of Federal aid by the creation of new money, and thus by a direct inflation of our currency. In the case of unemployment compensation, we have a considerable history to guide us to the conclusion that widespread unemployment is not to be alleviated by direct consumer payments. From the start of our great depression until the beginning of our business in munitions when war broke out in Europe, we tried sincerely and consistently to cure a depression by the direct payment to consumers. It was not until payrolls started with increased manufacturing activity that unemployment disappeared. In the meantime, a different course from ours had brought various European countries through the depression more rapidly. It was not a matter of direct support of consumer expenditures abroad, but of the earlier attempt to get employers busy enough to increase employment. The same conclusion is valid today. When we substitute government (Federal, State, or local) payments for wages, we do nothing to improve a condition which has led to unemployment. Let us consider why unemployment arises. The immediate answer is simple and broadly true: The employer cannot produce enough revenue in carrying on his business to meet his costs in a competitive market. He has no choice but to curtail the extent of his operations. Any tendency toward inflation which will make it more difficult for him to do business will postpone his ability to rehire workers. Our most constructive step in relieving unemployment is to improve the business climate so that employers will be able to offer employment on a broad front. Fundamentally, unemployment benefits should be regarded as a form of temporary aid to workers during a transitional period. Their extension over a longer period of time turns them into a form of "home relief" and makes them a method of long-term protection for people who have become unemployable. Their institution at rates not far below going wages for many workers makes them a substitute for work. First hand inquiry will show that many workers-particularly those who are not the major wage earners of families-already plan on a period of unemployment each year. The setting up of a system of unemployment compensation which can be used as an alternate for wages inevitably decreases the effectiveness and productivity of our labor force. Our present consideration of H.R. 3547 is urgent, because it tends to confirm as policy several steps which could work against our long-run economic stability and against our long-run opportunities for employment. In the first place, this bill decreases State control over unemployment compensation, and increases Federal control over it. This step makes the point of control more remote from the areas where the difficulties lie. Federal control is likely to be uniform for wide areas. It is difficult to adjust to the varying conditions in the several States. The fact that qualifications for unemployment compensation coverage and rates of compensation and periods over which compensation is now paid differ among the several States is to be taken as a reflection of differing conditions. It seems unwise to make a Procrustean bed of a particular formula for unemployment compensation. A greater degree of Federal control is likely to be more rigid. We should not want a degree of rigidity which would be the means for a year-by-year increase in the amount of compensation. Yet as the particular legislation is framed, it seems likely to move upward on the crest of each new wave of inflation. Such a machine for augmenting inflation will do vast harm to the working people of this country. A final specific point bearing on the language of the Kennedy bill is that it puts a premium on improvidence by the several States. Those States which have husbanded their funds most capably are the ones which will derive the least support from the Federal fund for unemployment compensation. It is significant that the most vocal support for the bill comes from those States which have had the broadest types of "welfare" programs. We have, in this country, a ready sympathy for distress, and are prone to rush to help when we know of those suffering from misfortune. I must reemphasize the fact that we cannot legislate conditions into being. We can legislate prohibitions, requirements, and appropriations. We can levy taxes. But 39678-59-72 legislation cannot make the less competent workers readily employable, nor can it directly inspire the less successful employers. When we consider this bill, I feel we should decide that we must treat a disease, not its symptoms. Under the direction of the Employment Act of 1946, the Federal Government is already required to attempt to manipulate credit conditions so as to maintain a high level of business activity. Additional legislation which will handicap the Government in this activity wll be of disservice to the people. Legislators are placed in an extremely difficult position when welfare legislation is placed before them. Since all of us acquire our necessities through the use of money, it seems to most people that all they need is more money to have more of what they want. They feel that their elected representatives should vote for bills which directly or indirectly-give them more money. Yet few Senators or Representatives are unaware of the degree to which inflation threatens the solvency of our economy. The United States could have a runaway inflation. If an increase in the rate of our inflation is imminent, the Kennedy bill will add to that rate. I feel that a major modification of this bill is in the public interest, and that unemployment compensation should remain as fully as possible a matter of State rather than Federal function. Hon. WILBUR D. MILLS, AMERICAN BAR ASSOCIATION, Chairman, Committee on Ways and Means, SECTION OF TAXATION, Washington, D.C., April 13, 1959. DEAR MR. MILLS: Referring to my letter to you of March 23, 1959, and the compilation enclosed therewith entitled "Recommendations as Adopted by the House of Delegates-Annual Meeting-Los Angeles, Calif., August 27-28, 1958" (referred to in the said letter as the "1958 Compilation"), I would like to call attention in connection with the current hearings before the Committee on Unemployment Compensation to our recommendation XII in said compilation which would amend the definition of "employer" in section 3306(a) of the Internal Revenue Code of 1954. For your convenience reference, pages 19 through 21 of the said compilation, setting forth the proposed amendment and the explanation therefore, are attached hereto. I respectfully urge that the said recommendation be considered by the committee and incorporated in the record if consideration of section 3306 is within the scope of the hearings. I shall be glad to furnish additional copies to the clerk of the committee if they are desired. Sincerely yours, LEE I. PARK, Chairman, Section of Taxation. EMPLOYMENT TAXES XII. To amend the definition "employer" under the Federal Unemployment Tax Act Resolved, That the American Bar Association recommends to the Congress that, for purposes of the Federal Unemployment Tax Act, the provisions of the Internal Revenue Code of 1954 be amended to define an "employer" as any person having four or more individuals in his employ for some portion of 20 days during either the current taxable year or the preceding taxable year, each day being in a different calendar week; and be it further Resolved, That the association proposes that this result be effected by amending section 3306(a) of the Internal Revenue Code of 1954; and be it further Resolved, That the section of taxation is directed to urge the following amendment or its equivalent in purpose and effect upon the proper committees of Congress: SEC. 1. Section 3306(a) of the Internal Revenue Code is amended to read as follows (new matter in italics): (a) EMPLOYER.-For purposes of this chapter, the term "employer" does not include any person unless on each of some 20 days during either the current taxable year or the preceding taxable year, each day being in a different calendar week, the total number of individuals who were employed by him in employment for some portion of the day (whether or not at the same moment of time) was four or more. SEC. 2. This amendment shall be applicable to the calendar year 1959 and subsequent calendar years. Summary EXPLANATION At present section 3306 (a) defines "employer" as any person having four or more individuals in his employ on each of some 20 days during the taxable year, each day being in a different calendar week. A majority of State unemployment compensation laws define "employer" to include any person who was an employer in the preceding taxable year. The Federal definition does not include a person who was an employer in the preceding year unless he also meets the tests in the current year. The proposed amendment conforms the Federal definition in this respect with the definition under a large majority of State unemployment compensation laws. It has the effect of reducing the arbitrary significance, under present law, of the timing of an acquisition in a situation where an employer, before the 20th week of the calendar year, acquires the assets or business and employs individuals who were employees, of a person who was an employer in the preceding year. Discussion Section 3301 imposes "on every employer (as defined in section 3306 (a ) ) * for each calendar * ** an excise tax * * * equal to 3 percent of the total wages (as defined in section 3306(b)) paid by him during the calendar year with respect to employment (as defined in section 3306 (c) ). * * *” Section 3302 allows a credit against this tax for contributions to a certified State unemployment compensation fund, and it allows an additional credit based upon the maximum State tax rate, but not in excess of 2.7 percent. Thus, where the maximum credits are allowable, the effective rate of Federal unemployment tax is 0.3 percent. Section 3306 (b) (1) defines "wages" as all remuneration for employment except remuneration in excess of $3,000 paid to an individual by an employer during the calendar year. It also provides that, if an employer (successor) during any calendar year acquires substantially all the property used in a trade or business of another employer (predecessor), and immediately after the acquisition employs in his trade or business an individual who immediately prior to the acquisition was employed in the trade or business of predecessor, then, for the purpose of determining whether successor has paid taxable wages of $3,000 to such individual during the calendar year, any wages paid to such individual by predecessor prior to the acquisition in the calendar year of the acquisition shall be considered as having been paid by successor. Section 3306 (b) (1), however, applies only with respect to "employers," and under section 3306(a) an "employer" is a person who employs four or more individuals on each of some 20 days during the calendar year, each day being in a different calendar week. Thus, if on May 31 successor buys all the assets of predecessor, thereafter operates those assets, and immediately employs predecessor's employees, of the wages paid by predecessor to each of its employees up to $3,000 are considered to have been paid by successor for purposes of determining whether successor has paid each of such employees $3,000 during the calendar year. Predecessor, meeting the definition of “employer” under section 3306(a) is liable for Federal unemployment tax; but he receives credits (up to 90 percent of the Federal tax) for contributions made to a State unemployment compensation fund. Successor, also being an employer, must file a return and pay Federal unemployment tax; but with respect to former employees of predecessor, successor pays only on an amount determined by taking the lesser of $3,000 or the total remuneration paid the employee by both predecessor and successor and deducting the wages paid by predecessor. Successor also receives credits against the Federal unemployment tax (up to 90 percent of such tax). Thus, both successor and predecessor pay at an effective rate of 0.3 percent and together they pay only on the first $3,000 of wages paid to the employee. If, however, the acquisition occurs on April 30 (before 20 weeks have passed), the result is quite different. Predecessor is not an employer under section 3306 (a). He is not liable for Federal unemployment tax, and wages paid to his employees are not attributed to successor. Successor therefore must pay Federal tax on the entire first $3,000 he pays to each former predecessor employee, irrespective of any amount previously paid by predecessor. At the same time successor is generally not entitled to credits under section 3302 equal to 2.7 percent of the entire first $3,000 he pays to each former predecessor employee, since predecessor would be an employer under most State laws and wages paid by him would be attributed to successor and the credits under section 3302 are, in effect, limited to 2.7 percent of taxable wages paid under State law. Successor would therefore pay Federal tax at the full 3 percent rate rather than the 0.3 percent rate which would be applicable if the acquisition had taken place after the 20th week of the year. There would be, in effect, a penalty of 2.7 percent of taxable wages paid in that part of the calendar year preceding successor's acquisition of the assets or business. Enactment of the proposed revision would cause some persons to pay Federal unemployment tax who would not pay under present law. Persons having less than four employees for 20 weeks in the taxable year but who had four or more in the preceding year, as well as those persons who terminate their trade or business before the 20th week of the calendar year, would be "employers" and would pay tax where they would not under existing law. On the other hand, persons acquiring assets or businesses of others before the 20th week of the calendar year would not pay as much Federal unemployment tax as they would under existing law. The following tables indicate results under the revision and existing law, assuming: an employee's weekly wage of $100, a State unemployment tax rate of 1 percent, and an effective Federal unemployment tax rate of 0.3 percent (90 percent credit allowable against full 3 percent rate). TABLE A [Assumes 3 employees for 30 weeks in taxable year and State defines employer to include person who was employer in preceding taxable year] [Assumes more than 4 employees and transfer during the year as indicated, with figures shown for one Predecessor. Total.. Predecessor. Total. employee] Present law Table A indicates that a person who had 4 or more employees in the preceding taxable year but who has less than 4 in the present year would be an employer under the revision where he would not under existing law. As the table indicates, where he has 3 employees, his maximum additional Federal tax for the year would be $27. This would not be true in Colorado, where the maximum additional Federal tax would be $270 because no credit would be applicable in view of the State definition of employer (same as present Federal definition). Table B indicates that predecessor (with employment for only 19 weeks) would be an employer under the revision, and would pay $5.70 Federal unemployment tax where he would pay none under existing law. Successor, however, would pay only $3.30 Federal tax under the revision where he would pay $60.30 under existing law. Additional tax resulting from the revision would be imposed only in one year, the year in which the number of employees first falls below 4 or in which the employer's business is terminated before the 20th week. Mr. LEO IRWIN, UNIVERSITY OF MICHIGAN, SCHOOL OF SOCIAL WORK, Clerk, House Committee on Ways and Means, DEAR LEO: I enclose a copy of our study on unemployment insurance which I hope you will be able to insert in the printed hearings you are now conducting on that subject. Yours, WILBUR J. COHEN, Professor of Public Welfare Administration. SIGNIFICANT FINDINGS ON THE IMPACT OF THE 1957-58 RECESSION IN RELATION TO UNEMPLOYMENT INSURANCE (By William Haber, Fedele F. Fauri, and Wilbur J. Cohen) I. SURVEY RESEARCH CENTER DATA Information from continuing studies by the survey research center of the University of Michigan on the nationwide impact of the recession during 1957-58 in relation to unemployment insurance indicates the following significant findings: Impact of unemlpoyment on families* Eighteen percent of all families in the Nation had one or more family members unemployed during the 12-month period prior to October 1958. In 14 percent of the families the head experienced some unemployment. In additional 4 percent of the families another member experienced some unemployment. Relation of annual unemployment to October unemployment* In the month of October 1958, nearly 6 percent of American families had one or more members unemployed, while an additional 12 percent of families expe *All findings marked by an asterisk are results obtained from interviews with a random sample of 1,323 families taken in October 1958, on a nationwide basis by the survey research center of the University of Michigan. Unemployment in the survey includes all unemployment experience over a 12-month period, in contrast to the monthly Census Report on the Labor Force which measures current only unemployment in a month. It should be noted that the census also publishes annual data on unemployment occurring within a calendar year. |