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into it than it did as it was written, which quite frequently happens. I would like to say at the outset that we are very much impressed by Secretary Humphrey's statement and share his concern that nothing be done to harm our national economy.

Nevertheless, we feel compelled, because of the impact of the excessprofits tax on our industry, to make clear the effect it has had and the damage it does to national security by retarding the development of machine-tool research, design, and production.

The machine-tool industry is small business. There are at least 20 corporations in the United States, each of which does more business annually than the entire machine-tool industry does at its peak.

Our industry is composed of about 250 companies. A very few of them employ several thousand men, but the typical machine-tool company employs about 260 people.

Yet this industry, in spite of its small size, is exceedingly vital to the prosperity and to the defense of our country.

Every product of modern civilization is made on machine tools or on equipment made on machine tools. Every military weapon required for the defense of this nation requires machine tools for its manufacture.

In World War II, and again in the Korean war, machine tools have been the key to the whole problem of producing for defense.

Military planning in Washington is today centering more and more upon machine tools and the necessity of maintaining this industry in a sound and progressive condition.

I want to emphasize this point at the outset because it is directly related to the question as to whether the excess-profits tax should or should not be allowed to expire on June 30.

In discussing this matter of taxes, I wish to make it clear that we in our industry are completely in sympathy with the announced objectives of the present administration to balance the Federal budget and get this country back on a sound financial basis.

We know that to do this will require large continuing tax revenue. It is our contention, however, that the best interests of the Nation will be served if the excess-profits tax is discontinued as of June 30, and the necessary revenue is raised by taxes that apply with equal fairness and justice to all business.

We object to the excess-profits tax as a method of raising revenue because it is unfair and inequitable in its application.

From your knowledge of the excess-profits tax, you know that an industry which was on the whole prosperous during the years 1946 to 1949 has a high tax base. And industry that was depressed during 1946 to 1949 has a low tax base. So that the industry that was worse off and which made less money has to pay more taxes than the industry that was well off and making plenty of money.

World War II suddenly imposed a tremendous need for machine tools for military production. Under the impact of that urgent necessity, the industry increased its output to a peak of $1,320,000,000 in

1942.

In 1945 the industry's annual volume had dropped to $423 million. When the war ended, the United States Government owned an enormous quantity of machine tools which it had bought for war production. It dumped these machine tools on the market at bargain

prices in competition with new machines being built by machine-tool manufacturers.

Under the impact of that competition, sales of new machine tools fell steadily. They dropped from $334 million in 1946, to $306 million in 1947, to $288 million in 1948, and $240 million in 1949.

When you allow for the decline of the dollar and the resultant increase in prices between the prewar and postwar years, although the figures show that the postwar volume was higher in dollars, in terms of machines produced, the postwar volume actually is lower.

The fact is that in 1949 we were building fewer machine tools than we built in the 10 years before 1939.

Bear in mind that the repression which our industry endured in the postwar years was brought about as a direct result of the well nigh incredible production effort which we made on behalf of the national defense, and the disruption of our postwar market by the war surplus competition of those very same machines we had built to help win the war.

There are many things we wanted to do after World War II. We wanted to reactivate our research; we wanted to make better machine tools ready for tomorrow. We wanted to keep our skilled men together so that we would be ready when another emergency arises. But it was with the utmost difficulty that our companies were able to carry on.

It is a fact that 35 machine tool builders were forced out of business during this period.

What happened was simply this: During the war, chiefly because of the excess-profits taxes, we were allowed to retain only a small part of our earnings. After the war, we were sunk in a depression so serious that our earnings were very slim. We were therefore unable to plow back into our business into research development and new equipment the money required to maintain the machine-tool industry at proper capacity.

Then came Korea. Once more there was repeated a long delay in production of military equipment because new machine tools could not be built fast enough.

The machine-tool tax base for the present excess-profits tax is founded upon four of the worst years that industry ever had by comparison with the general industrial level of the country.

Let me give you an illustration from my own experience how much remains from defense profits for reinvestment tomorrow.

During 3 out of the 4 tax base years, our company operated at a loss. The following figures are our own, for the years 1946, 1947, 1948, and 1949. You would be interested to know that these are not distorted because of some improper performance of our own. We have traditionally done about 1 percent of the machine tool industry's business.

So that if you compare the figures here of our own with those previously given you, you will see that they follow very closely to those figures.

We also follow with the figures showing what happened beginning in 1950, how we increased our volume tremendously in order to meet the demand for the military program. This shows very dramatically the difference between the period which is used as the base for the

excess-profits tax and those last 3 years, with the fourth year, 1953, estimated.

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Now contrast these figures to the record of our company for the 4 years starting with 1950:

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Mr. DOLLE. Another example, with statistics, follows that in my statement. It shows what another company has had happen to them with the various different points brought out by showing the increases of the number of machines in use, the floor area, various things. They are all increases, except where it comes to keeping the profits; that is, the profits after taxes.

Such a picture is a complete reverse of that in other industries. The production of passenger cars, for example, was curtailed during World War II, and the automobile industry earned a substantial profit on its warwork.

Meanwhile, the accumulated shortage of passenger cars built up its postwar market. When the war was over, while the competition of Government-owned surplus machine tools was forcing our industry into the cellar, the automobile industry was cashing in on deferred demand.

I think you will find the chart included in my statement rather interesting. It makes a comparison of the machine and automotive business. It shows how, when the machine tool business was at its peak, the automotive business was down practically to zero during the war years, how, after the war, they came up very rapidly and the machine tool industry dropped down.

I think that is a very interesting chart.

Because of the historic pattern of the industry, the gross assets base is not adequate.

There is a relief provision known as section 446, but it is couched in such terms as to take into account a limited cyclical depression. It does not take cognizance of the extreme depression of this industry in 1946-49. We feel that it does not give the proper relief that the machine tool industry should have.

Apparently the excess-profits tax was set up on the assumption that with minor modification, whatever profit the company was making in the tax base year was normal. This is a basic fallacy. The excess-profits tax gives the large, established corporation an unfair advantage over the small, young, aggressive company.

The product development takes money for research, design, for new equipment, for market promotion. An old, established corporation can get this money from public financing because it has a better tax base. A small company must rely on its earnings to finance its growth and development, and it has a lower tax base.

A further injustice results from inflation. If the tax base year dollar was worth 22 percent more than it is today, fairness would require that the tax base be increased by 22 percent.

Instead, it is 83 percent of the base year earnings.

The excess-profits tax was assumed by the public to be a tax to prevent companies from making excess profits on war contracts. But the public has no conception of the dilemma of the capital goods producers, such as the machine-tool builders, who, because of the Nation's emergency needs, produced themselves out of postemergency markets.

The public does not realize that such companies pay a penalty for defense business in terms of poor business after the emergency is over. In a grave national emergency we cannot produce enough weapons for Government arsenals alone, but must draw upon the vast productive capacity of America's metalworking industries.

As a matter of national defense, they should be equipped with modern, efficient machine tools. The excess-profits tax is the main reason why there is an enormous amount of obsolete equipment in the Nation's plants today.

The excess-profits tax was passed hurriedly in the national emergency. And in the almost hysterical days following Korea, we got wage controls, price controls, profit controls. We have dropped wage controls; we have dropped price controls. Certainly the time has come when we should drop profit controls.

I am informed that the amount at issue in the last half of this year is about one and a half percent of the estimated revenue for the year. It is my opinion that if the excess-profits tax is allowed to lapse on June 30 and Federal income taxes on corporations are placed on a basis applicable to all companies, you will see a resurgence of initiative and enterprise, and business will produce in normal income taxes as much or more than the excess-profits tax.

I have one particular objection to this tax in that it is a tax on efficiency. I have some interesting figures from our own company to show what happened to us, especially in that postwar period. We went through what was about a private depression, similar to that which took place in some of the other industries which went ahead with their normal business during that period.

You will find that only the efficient companies are those who are in the excess-profits-tax bracket. Those companies who are not efficient do not get into those brackets.

So, in concluding, I urge you to let the profits tax law die on June 30 and then take whatever action Congress may deem necessary to secure the tax revenue needed to balance the national budget.

The CHAIRMAN. I want to congratulate you, sir, for your very fine statement. It will be very helpful to the committee, I am sure, in considering this question.

Mr. Powderly, if you will just give your name and the capacity in which you appear, and also the same for your associate, we will be glad to hear you, sir.

STATEMENT OF WILLIAM H. POWDERLY, JR., TAX ACCOUNTANT, OF REED, SMITH, SHAW & McCLAY, APPEARING FOR W. H. STEFFLER, SECRETARY - TREASURER, ROBERTSHAW - FULTON CONTROLS CO., GREENSBURG, PA., ACCOMPANIED BY SAMUEL B. STERRETT

Mr. POWDERLY. My name is William H. Powderly. I am appearing for W. H. Steffler, secretary-treasurer of the Robertshaw-Fulton Controls Co., Greensburg, Pa.

I am a tax accountant with Reed, Smith, Shaw & McClay, Pittsburgh.

With me is Samuel B. Sterrett, of Alvord & Alvord.

Mr. Steffler has prepared a statement which I would like to present before the committee, if I may.

The CHAIRMAN. You may proceed, sir.

Mr. POWDERLY. Robertshaw-Fulton Controls Co. is engaged primarily in the manufacture and sale of devices for the automatic contorl of temperatures and pressures. Its products are broadly divided into oven and water-heater thermostats, automatic pilots, bellows and bellows assemblies.

These devices are integral parts in the products of manufacturers of gas and electric ranges, mechanical equipment such as refrigerating, heating, air-conditioning and ventilating equipment, and in automotive vehicles including passenger cars, trucks and tractors.

The history of the company dates back to 1904 when the Fulton Sylphon Co. was organized at Knoxville, Tenn., to manufacture metal bellows, a device for converting temperatures and pressures into control movements. In 1907, Robertshaw Thermostat Co. at Youngwood, Pa., began production of water-heater thermostats which had been developed in 1900 by Mr. F. W. Robertshaw.

As the gas, electric, and automotive industries grew, new applications of temperature and pressure controls were required. To meet the demand, American Thermometer Co., St. Louis, Mo., was organized in 1914, Grayson Heat Controls, Ltd., at Lynwood, Calif., in 1928, and Bridgeport Thermostat Co., Inc., Bridgeport, Conn., in

1936.

In 1946 and 1947 the above companies merged and formed Robertshaw-Fulton Controls Co.

The electronic recording of temperatures, pressures, and liquids provides a natural expansion of the company's production. In order to acquire a nucleus of designing and engineering skills in this field, it purchased all outstanding stock of the Fielden Instrument Corp.

In order to meet the increasing demands of its customers and to provide adequate facilities for research and development, the company must continue to grow. A new modern research laboratory has been acquired on the west coast and a new laboratory is under construction

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