In closing I would like to thank this committee for the wonderful work it is doing and for giving me an opportunity to present my case, which I do not think is too atypical.

The CHAIRMAN. We thank you very much for your appearance here and the information you have given.

Are there any questions from the members? Apparently not. We appreciate very, very much your appearance.

Mr. GLENN. Thank you.

The CHAIRMAN. Is Mr. Robert T. Sheen, president, Milton Roy Co., Chestnut Hill, Philadelphia, Pa., here? Apparently, he is not here. Mr. Oscar H. Ahnberg, vice president, R. T. Collier Corp., Los Angeles, Calif. Mr. Ahnberg, if you will give your name and the capacity in which you appear for the record, we will be very glad to hear from you.

STATEMENT OF OSCAR H. AHNBERG, VICE PRESIDENT, R. T. COLLIER CORP., LOS ANGELES, CALIF.

Mr. AHNBERG. I am Oscar H. Ahnberg, vice president of the R. T. Collier Corp., a California corporation with its offices in Los Angeles, Calif.

This corporation was organized in late 1944 and engaged in the processing of waste byproducts from the oil refining and the fruit canning industry in the area. This was an extremely difficult time to get started because of the shortages in labor, material, and the delay in construction of facilities. As a result of these conditions, the company operated at a loss from 1944 up until 1949. Since 1949, the sales of the company have more than doubled, which required additional working funds for the necessary increase in inventories and the carrying of accounts receivable for the customers.

Inasmuch as the company operated at a loss during the years mentioned above, there were no base period earnings available for the determination of an excess-profits credit. However, the company did qualify under the growth formula and this, together with the credit for invested capital did provide a modest excess-profits credit. This formula is fine as far as it goes, but it makes no provision for expansion which is necessary if any business is to survive. Sales have doubled since 1949, but the profits from these additional sales are in reality new profits from new operations and should in no sense be considered as excess profits. The excess-profits tax does not recognize this fact and consequently all of the additional earnings were and are now subjected to the full impact of the normal tax, surtax, and the excessprofits tax. In this connection the company paid during the years 1951-52 approximately 68 percent in taxes on all net income. In 1953, the company will be taxed at the maximum rate of 70 percent if the excess-profits tax is extended to December 31, 1953.

At the present time, we are using in the ordinary conduct of our business money that we owe for taxes. In effect, we are living on income which we hope to get during 1954 to pay the taxes which are accumulating during 1953. God help us if we don't get that income. While no one objects to paying high taxes to protect the national security, the excess-profits tax is unfair in that it strikes hardest at small business, at new business, and at any business that tries to grow. Under this law, it is extremely hazardous to start a new business even

though the potential returns are such that the investment is considered as venture capital under calculated risks. It is impossible for a small company to prosper and grow, and yet the very foundation of our economy is based on continued growth.

We have not been financially able to pay any dividends on our common stock since the inception of the company. Yet we are faced with the situation that a silent, but vigilant and remorseless partner, who owns no stock, has not invested one penny in our business, is empowered to take, and takes, 70 percent of our earnings. It is not difficult to see who goes broke first.

If industrial growth is to keep pace with the increase in population and the need for additional goods, then business must be given a fair shake. Continuation of the excess-profits tax does not meet this requirement, but rather serves to put a severe penalty on successful management.

The excess-profits tax should be permitted to expire as scheduled. I thank you.

The CHAIRMAN. We thank you very much, sir, for your statement. Mr. AHNBERG. Thank you. I should like to express my appreciation for the opportunity of appearing here.

The CHAIRMAN. Your information will be very helpful.

The next witness is Dr. William A. Peterson, Short Hills, N. J. Doctor, if you will give your name and the capacity in which you appear for the record, we will be delighted to hear

you.

STATEMENT OF DR. WILLIAM H. PETERSON, SHORT HILLS, N. J.

Dr. PETERSON. Chairman Reed and members of the committee, my name is William H. Peterson. I am a professor of economics at the Polytechnic Institute of Brooklyn, an engineering college. My purpose today is to present testimony before this committee, not as a member of an organization adversely affected by the excess-profits tax but rather as a private American citizen and a professional economist. My position is clear: I am opposed to the extension of the excessprofits tax.

At the outset, let me state my conviction that my opposition to the ill-conceived excess-profits tax-may I interject at this point that when I say ill-conceived, I believe that renegotiation of war contracts presents a far more expedient and efficient and fair way to take the socalled profits out of war. But the excess-profits tax hits war and nonwar contractors simultaneously, which obviously is not scientific.

I would like to register my opposition, also, to the heavily progressive income tax as well.

My opposition is probably one of expediency, for in the final analysis we here today are not dealing with causes but with symptoms. These vicious taxes, bad as they are, are symptomatic of an even greater problem.

That problem is, Can our Government, supposedly a government of limited powers and a free society, live within its income? In the past 20 fiscal years ending this June 30, only 3 of those years-1947, 1948, and 1951-show an absence of a deficit. The administration now predicts continued deficits to at least fiscal 1955. Hence, the first order of business of the Government ought to be to cut expenditures drastically and courageously.

Mr. MASON. Amen! Good work!

Dr. PETERSON. I would like also to add at this point, if I may, that the administration seems to be giving us a Hobson's choice. Either we continue the evil tax, they say, or we worsen our possible defense. Let me say as a former lieutenant in the United States Navy that there is much ground for eliminating waste and inefficiency in the Armed Forces. I know that from firsthand. I also would like to quote, if I may, Lord Acton's famous advice that if the military had their way they would fortify the moon.

My reasons for opposition to the excess-profits tax are:

1. The administration claims that the expiration of the excess-profits tax would mean a severe revenue loss of $800 million in fiscal 1954. This claim, I submit, is open to question.

While the excess-profits tax, as a source of revenue, would be nonexistent if the present law is allowed to expire, it does not follow that the Government would be out $800 million. As we have witnessed in the case of the recent whisky excise increase to $10.50 a gallon with its resulting falling off of that excise revenue, it is my contention that the excess-profits tax has long since operated under the law of diminishing returns, that the excess-profits-tax law has destroyed far more potential revenue than it has brought in.

Impressive evidence has already accumulated before this committee attesting to the heavy depressant effect of the excess-profits tax upon investment and industrial expansion, which in turn reduces Government receipts from regular corporate returns.

2. One of the worse defects of the excess-profits tax is its inflationary effect. When companies find themselves in the 82 percent excess-profits-tax bracket, they are faced with 18-cent dollars in effect. A spending spree becomes a "bargain." Beardsley Ruml points this out in his Management and the Excess-Profits Tax when he said that these cheapened excess-profits tax "dollars in the economy, even if every one of them is prudently used, are unquestionably in some measure an inflationary influence."

Moreover, excess-profits tax encourages debt and discourages thrift. The typical corporation can frequently reduce its excessprofits tax by borrowing money and thus increasing its capital. Such a condition is possible where the tax saving more than offsets the interest cost. Interest is deducted from profits for tax purposes anyway. Thus, borrowing may be feasible only because of this tax-avoidance feature.

May I again add that this corporate artificially induced borrowing has provided a source of unnecessary competition with corporate borrowing, and I believe that this is at least a contributory factor to the fact that Government bonds, the present 34 issue, is selling below par. In other words, the administration is bringing about this competition by forcing corporations frequently to borrow, reducing the available capital for the Government, despite, I submit, the 314 percent new interest rate.

Hence, excess-profits tax is double taxation, a tax on corporations, confiscating their rightful earnings, and a tax on consumers, who must pay higher inflated prices. You can almost argue that it is a case of triple taxation if you count corporate taxation as double taxation. In other words, the corporations pay a tax on their earnings first on their regular corporate income tax return, and then

the owners of the company have to pay a tax on dividends that they` receive.

3. Excess-profits tax makes a recession more likely. It seems incongruous that, on the one hand, the administration readies a socalled antidepression plan and revives Council of Economic Advisers to help keep the economy on an even keel while, on the other hand, the administration stultifies capital formations and business expansion through an excess-profits tax.

This situation is further aggravated by the prevalent feeling held by businessmen and consumers that the imminent truce in Korea and the railroad cutback (however weakly) Federal expenditures will lead us to a recession.

Business psychology is of such nature that it can contribute to an upturn or downturn in business. If the profit outlook is generally good, businessmen generally invest, and thereby expand payrolls. If the profit outlook is generally bad (and excess-profits tax helps to make it bad) businessmen generally contract their activities. The present volume of corporate debt is abnormally heavy at this time and it represents a fixed overhead which makes the present high business equilibrium a most delicate one. Break-even points, as a whole, have never been higher. Corporate debt has, of course, been exaggerated by the inability of firms to plow back earnings, the earnings having been confiscated by excess-profits tax.

Section 102 of the code, the so-called undistributed profits tax, further penalizes corporate saving and it, too, has forced firms to borrow.

I would like to adhere, too, that the inability of corporations to plow back earnings worsens the possibility of a depression because it removes from corporations one of the best sources of capital for expansion. Our labor force is expanding at the rate of 700,000 a year and if you assume that it takes $10,000 of capital for each worker, it therefore follows that the corporate economy would need about $7 million annually to keep up a steady rate of growth in the economy.

Mr. MASON. If the gentleman will yield there a moment, Ford built up his empire by plowing back his profits during the years when the Federal tax was 1 to 4 percent. Would it be possible for any company to build up into a Ford empire today with our present tax system?

Dr. PETERSON. I doubt it very much.

The CHAIRMAN. I started to say that I thought possibly your $7 million was rather modest. I thought it required more than that; are you referring to just taking care of the annual-growth factor?

Dr. PETERSON. Yes, I am; and I might further qualify it by keeping in mind that the $7 million I refer to applies largely to the industrial side of the economy.

The CHAIRMAN. Yes.

Dr. PETERSON. Not taking into account the agricultural, financially. The CHAIRMAN. Of course, Doctor, the required venture capital, we will call it, to take care of that runs into many, many millions of dollars, because it requires not only $10,000 to give each man a job, but in some industries it runs to as much as $40,000.

Dr. PETERSON. That is correct. The $10,000 I used was an average figure. In the meat-packing and petroleum industries it runs as high as $50,000 per worker.

The CHAIRMAN. Thank you very much.

Dr. PETERSON. Excess-profits tax continuation, even for 6 months, can only worsen this entire situation. But an obvious stimulant to forward-looking optimistic business psychology would be removal of the excess-profits tax.

May I also add that I think it is ironic that our NATO allies, Great Britain and Canada, have used this device of removal of the discriminatory and excessive taxation as a device to keep up high business activity, whereas we have not seen fit to do so.

4. Excess-profits tax tends to misguide production and leads to waste and inefficiency. In this respect it is little different from the Transportation Act of 1920. This act provided for a 6-percent limit on profits for class I railroads and a recapture clause permitting weaker roads to share in profits over 6 percent. That is, the weaker roads could share in the profits of the profitable roads. In short, the efficient were forced to nurture the inefficient.

But most efficient roads found it more convenient not to make excess profits over 6 percent. Potentially, excess profits were frequently curbed by wasteful expenditures. For example, there were a lot of railroad ties that were torn up unnecessarily even though the life of those ties would have continued for a long time. Ultimately the recapture clause was repealed. I believe in 1933. The parallel to excess-profits tax is inescapable.

5. Excess-profits tax hits hard at all businesses, large and small. In his testimony before this committee on June 1, the Secretary of the Treasury said, "Furthermore, most of the tax (excess-profits tax) was paid by large companies." This statement I submit is misleading. Reference to table I (attached) shows that large companies pay most of the regular corporate tax, too, let alone excess-profits tax. Table I also shows that a striking correlation exists between the income-tax spread and the excess-profits-tax spread, and thus excessprofits tax is obviously not respectful of corporate size. In other words, gentlemen, I got the impression when I read the testimony of the Secretary that he was implying that only big companies are paying the tax, that if small companies pay it, they are paying only a very small and perhaps insignificant part of that tax. But reference to this table would show that the correlation of taxes, both of the excessprofits tax and the regular corporate profits tax, shows a very close similarity. In other words, that the small companies are paying their proportionate share of the tax.

It is altogether true that large companies do pay most of the tax, but I submit that the burden of the tax is just as hard on the small companies who are anxious to grow, as it is on the big companies. And, as a matter of fact, excess-profits tax represents an effective barrier to small firms anxious to grow. For an administration professing to help small business, excess-profits tax is an anomaly.

6. Excess-profits tax is incompatible with the free-enterprise system. One of the most important functions of profit is to direct production as determined in the market place. But excess-profits tax distorts profits and hence mitigates the market place as a director of economic energy. The Government in effect backs a hidden economic com