Indexes of sales of Sylvania Electric Products, Inc., all manufacturing companies, electrical machinery companies, and 21 television companies, 1938–50, inclusive

Excludes sales of the Colonial Radio and Wabash Corps. and divisions.

Source: (1) Company data; (3) and (5) U. S. Department of Commerce, Office of Business Economics. 1938-48: National Income, 1951 ed., pp. 190-191; 1949-50 Survey of Current Business, July 1952, p. 23; (7) Moody's Investment Service, Moody's Manual of Investments, Industrial Securities, Standard & Poor's Corp., Corporation Records.

Percentage increase from 1946 to 1950 in sales of picture tubes for Sylvania Electric Products, Inc., and the picture-tube industry and production of television sets for the television industry

Source: (1) Company data; (2) 1946: Derived by multiplying the number of television sets produced in 1946 by the ratio of total shipments (and interplant transfers) of cathode-ray picture tubes in 1947 to the number of television sets produced in 1947. Cathode-ray-tube shipments are reported in the Census of Manufactures, 1947; television-set production is reported by the Radio Television Manufacturers Association. 1950: Radio-Television Manufacturers Association's report of television sets sold adjusted upward to reflect the sales of companies not reporting to the association; (3) Radio-Television Manufacturers Association.

Gross value of plant and equipment for Sylvania Electric Products, Inc., and for 15 television companies, 1940 to 1950, inclusive

Source: (1) Company data; (2) Moody's Investment Service, Moody's Manual of Investments, Industrial Securities; Standard & Poor's Corp., Corporation Records.

Mr. JENKINS. The committee will stand adjourned until 1 o'clock. (Whereupon, at 12 noon, a recess was taken until 1 p. m., of the same day.)

AFTERNOON SESSION

Mr. MASON (presiding). The committee will come to order. We will continue the hearings on the President's request for the continuation of the excess-profits tax. I believe the next witness on the regular list-we went out of order a little bit this morning-is Mr. Robert Morris, Ferguson-Lander Box Co., Aurora, Ill.

Is Mr. Morris present? Come forward, sir. I have given your name and address to the reporter.

STATEMENT OF ROBERT MORRIS, FERGUSON-LANDER BOX CO, AURORA, ILL.

Mr. MORRIS. Our company is probably the smaller of most companies of the businessmen who have preceded me. I am not positive just what is "small" business, but I think we are.

May I briefly give you our background. Four years ago we formed our corporation and bought the assets of a corporation that had been in business since 1912. The corporation whose assets we purchased was going downhill, and had only 14 employees and annual sales volume of $288,000. Since then our volume has gone to over $1 million, with 60 employees on our payroll.

In spite of this apparent success we are beginning to wonder whether the Government wants younger men to start a business, to increase employment, increase national output. It takes initiative and sacrifice to obtain capital with which to start a business and hard work to make it successful once it is started. A discouraging roadblock to growth, the excess-profits tax, has been put in our way by the Government. You have heard many broad statements in the testimony preceding mine. Permit me to give you a specific case with rounded dollar figures.

In considering our figures please bear in mind that we have not had any Government business in our 4 years of operation to date. We are strictly civilian. In 1951 our first really profitable year which reflected the hard work, plenty of sales and production effort, of the new management, we came up with a profit on operations of $66,000 before income taxes. This profit was based on a sales figure of $860,000 for that year. The actual cash tax we had to pay the Government for the year 1951 came to $40,000. Just to rub it in a little the Government also required us to produce 35 percent of that cash payment the first quarter of the year.

Bear in mind we had only been in business 3 years by that time. After we had finished paying the Government $40,000 in cash for our 1951 efforts we as a young corporation were left with $26.000 net profit on $860,000 worth of sales, or 3 percent net profit on production that reflected the efforts of 51 employees for the year 1951. That is the number we had on our payroll in 1951. Public utilities

with little risk are permitted generally to make that much or more on sales.

Some of you familiar in detail with the excess-profits tax might ask why we didn't take advantage of a relief section applicable to new corporations. Under act section 474, code taxable acquisitions, new part IV, it was determined that because we bought the assets of an old corporation we had to take their tax base even though we were an entirely new corporation and the old corporation was completely liquidated before we bought the assets. Section 474 says:

A corporation which before December 1, 1950, acquired the properties of another corporation in certain taxable types of transactions may be required to compute its average base period net income in accordance with new part IV, which is retroactive.

In our case, a corporation acquiring business properties in a transaction to which part IV is applicable, we were not able to use any of the alternate or substitute base period income computations provided for in the so-called relief section of the law. In its final version part IV apparently requires a purchasing corporation to compute its earnings credit only by use of the general average method which we are forced to do.

Returning to our specific case. After giving the Government $40,000 in taxes leaving only $26,000 for ourselves, due to the excess-profitstax bracket which we were thrown into, or 82 percent, we have not paid any dividends since the start of this company, not only for 1951 the case year used as an example, here but even for 1952 when we had an equally good profit before taxes. Every nickel of our profits was plowed back into the business.

Where did our profits and cash go in the business? Bear in mind we are over a million dollars now. Quadrupling a business in a little less than 4 years requires an increase in many items such as inventory, both raw materials and finished products, larger accounts receivable, more cash for payrolls each week.

If we work harder to make another $1,000 before taxes, EPT takes $820 and leaves us $180 for further expansion. Here is what most people do not realize: To make another $1,000 before taxes requires additional sales of $15,000 which means increased accounts receivable of $1,250 monthly, increased raw material inventory of $625 monthly, increased labor of $260. Bear in mind that the Government allows us $180 with which to accomplish this.

You cannot grow, gentleman, in that way. That is not all, in order to properly expand, we must invest money in new machinery, new buildings, and possibly a little research. The only way a small growing company can do this is from profits which our Government takes away at an 82 percent rate.

Let's analyze our 3 percent profit on sales if some of you think that a "fair" return. When talking percentages it depends upon the base to which you are applying percentages. Obviously with a $1 million sales corporation speaking of 3 percent is speaking of a lot of money, about $3 million; 3 percent to our sales, or $26,000, isn't speaking of very much money. Unfortunately the machinery manufacturer

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charges the same dollar price on his machines to the small as he does to the large corporation. He doesn't sell on a percentage basis.

We pay cash and the same amount of money as the big man does. The banker and the private investor has no incentive to loan nor invest in a small corporation because there is no possibility of dividends if you are a private investor, and little possibility of a banker being repaid his principal out of earnings because as demonstrated, a small corporation cannot retain enough earnings after taxes to pay back the loan.

As a young corporation we do not object to paying regular normal taxes and surtaxes on the same basis as well-established large corporations. As a young corporation we do object to being penalized for our efficiency and our aggressiveness, by the EPT. We are prevented from growing properly not because of lack of an efficient operation but because the EPT prevents us from acquiring capital through our own profits. Somewhere along the line you who determine taxes must say, "We have got to do something to encourage small new business because that makes big businesses." Allowing EPT to die is a step in that direction.

Of course we must have taxes but let's not have a discriminatory excess-profits tax which prevents aggressive "little brother" businesses like we are from growing up to be as big as its "older brothers," who through age have fat tax bases.

Our story is typical of thousands of other small American businesses which ask help from nobody, which are willing to pay an equal share of taxes with other corporations, but we do groan and protest the discriminatory EPT which is an excessive taxload to growing business.

Included in this testimony are two letters from friends of mine who are presidents of corporations employing about the same number of people we do and enjoying about the same sales volume. I would like to read one of them. Bear in mind that not everybody can get away from their small business to come down here. I thought with your permission I would solicit letters from people in equivalent situations. This letter is written by a man who is president of a chemical company in Chicago. It is in Newridge Chemical Co. He starts out by saying:

DEAR BOB: As you know, we are a small chemical manufacturing company, having been granted a charter by the State of Illinois, on April 16, 1945. It was necessary, during the first few years, to attempt to get the business established on a sound basis to acquire new customers-to build up the business. Fortunately, this we were able to accomplish.

With the advent of the excess-profits tax, all of our plans for growth and expansion had to be curtailed and have lain dormant since that time. Our socalled base period for the determination of this tax, came during the years we were attempting to get the business started. Thus we were left with the equivalent of no base, and have had to use the minimum permissible exemption of $25,000 * * * paying an excess-profits tax on everything over this minimum. Certainly, "excess-profits tax" is a misnomer and, in a large majority of cases such as ours-has resulted in preventing expansion and in killing incentive. The right of any individual to start a business and, by hard work, make it grow as much as possible, is certainly an inherent American principle.

If the revenue from this tax is so essential, would it not be much better to increase all corporate taxes by 1 percent to 1.5 percent to offset the loss and remove this victim discriminatory tax, which even the proponents of its extension term "a bad tax."

That the removal of this tax would result in an actual loss of revenue seems to us rather doubtful. The expansion then possible for many small firms such

as ours will result in more employment, larger sales, greater profits, and very probably a greater tax return to the Government at normal rates than the present confiscatory rates.

We sincerely hope something will be done to prevent this extension.
With kindest regards, yours very truly,

NEWBRIDGE CHEMICAL Co.,
T. E. SHINE, President.

I would like to read 1 or 2 paragraphs from the other letter. It is the Automatic Screw Machine Products Co., also in Chicago. This is written by the president. He says:

First let me say that we are definitely small business employing about 60 people manufacturing hex steel nuts. We are a closely held family-type enterprise. We are trying to grow without resorting to borrowing money or selling stock to others. In recent years the excess-profits tax has made the attainment of this objective difficult to say the least. Recently I calculated that we had to produce and ship a trainload of some 30 cars of our product in order to earn enough, and keep enough of these earnings to buy one simple tapping machine. About 2 years ago I read an article by Beardsley Ruml, I believe it was in Dun's Review, which did much to clarify my thinking in the proper way for a company to operate under the excess-profits tax. I recall one statement to made that everyone paying an excess-profits tax was probably guilty of mismanagement of his affairs. It was in his opinion the duty of a company to spend these 18-cent dollars lavishly, even wastefully, if there was any chance of long-term reward resulting from the spending. Whereas the excess-profits tax forbids us in a sense to put profits from our expanding enterprise into machinery, buildings, and equipment, in other words, into real wealth, it urged us to spend our money on the more ephemeral things such as customer entertaining, advertising, experimentation with markets, adventures into the field of employee benefits of a questionable value. Thrift, efficiency, good management, high morale, these were penalized whereas their opponents were rewarded by the workings of the tax

We live and grow by virtue. We rot and decay by lack of it. The excessprofits tax destroys virtue and promotes moral corruption by the way it offers its prizes to the corrupt and its punishments to the virtuous. I say let's get rid of it as fast as possible.

Now, let's get back to my remarks which I would like to address to you from here in, not in detail of my own company, but just as an interested citizen who believes in the healthy moral structure of his country as well as the financial structure.

The excess-profits tax automatically expires June 30. The majority of thinking people, businessmen, legislators, profesional men, farmers, and plain citizens, find no good points in this excess-profits tax law. Spokesmen for the present administration are perhaps the best witnesses. The President himself has confessed that the excess-profits tax is a tax on "thrift and efficiency" and Mr. Taft has declared it "vicious." In a national broadcast June 3, Mr. Humphrey, speaking with the President and other Cabinet members termed the excessprofits tax "inequitable." The reasons are well known-the excessprofits tax levies what amounts to 82 percent tax on corporate earnings that rise above a so-called normal level and such a rate, in my opinion, is close to confiscatory.

With excess-profits tax the Government presumes to determine what normal profits should be, which is part and parcel of the same philosophy that holds that it, the Government, can manage wages and prices, excess-profits tax is not so much a revenue measure as a profit control measure, and it is at least ironical that the Government should with one hand dispense with price and wage ceilings, as it recently did, while with the other hand continue profit ceilings.