Sales for the fiscal year ended October 31, 1939, amounted to $410,000, on which a very modest profit of $9,850 before taxes was realized. This was reduced to a net after taxes of $8,050, or 2 percent of sales. Despite the fact that the company was unable to obtain any war work, through our unceasing efforts the sales showed a steady increase during the 6-year period ending with the October 31, 1945, fiscal year. However, although the sales had risen to an annual volume of $681,600, increased costs of materials and labor, together with continued high competition, held the profits down to $36,100, or 5.1 percent before taxes, and $22,400, or 3.3 percent after taxes.

Sales and profits increased substantially for the fiscal years ended in 1946, 1947, and 1948, due to the continued efforts of our sales force and the inflationary trend. The sales reached a peak in 1948 of $1,394,000. However, the profit margin was greater for the 1947 fiscal year, amounting to $124,000, or 9.9 percent before taxes, and $62,300, or 6.5 percent after taxes. Even this result, the best for this entire period, was far from excessive.

Although the sales for the fiscal year ended October 31, 1949, again showed a large increase over the previous year, totaling $1,570,000, the profit margin slipped badly. These percentages amounted to 1.6 percent before taxes and 1.2 percent after taxes. This decrease was attributable to the fact that in 1948 we made substantial investments in new high-speed equipment, and most of the year 1949 was spent in learning to properly operate this equipment.

During the fiscal years ended October 31, 1950 and 1951, a great effort was made to improve our profit margin, which had suffered so badly from the increases in labor and material costs, purchases of much-needed new equipment, and the addition of certain fringe benefits for our employees. Despite steady increases in our gross business, these efforts did not begin to bear fruit until the fiscal year ended October 31, 1952, when on sales of $2,081,000 the company realized a profit of $181,496 before taxes, which amounted to a moderate 8.7 percent of sales.

However, inasmuch as we were not fortunate enough to make substantial profits in the difficult base-period years of 1946, 1947, 1948, and 1949, the Federal Government said these profits were excessive, and the company paid $122,000 in income taxes, leaving $59,465, or 2.9 percent, with which to pay the owners a small return on their investment and to strengthen and expand our business so as to give maximum security to our employees.

Again, it should be pointed out that at no time during this period did the company have any war or defense contracts or subcontracts. All business received was on a highly competitive basis, and any increase in sales and profits was due entirely to improvements in operating procedures and increased selling efforts.

During this 14-year period the company invested $387,300 for machinery and equipment and building improvements, or an average of $27,700 each year. This was certainly not excessive, but merely the minimum that any prudent businessman would spend to maintain a modern and efficient plant. Dividends of $93,000 were paid during this period, or an average of $6,600 per year, which represents only 0.6 percent of sales.

In view of this conservative financial policy, it would be reasonable to believe that the company's working capital position should have

improved. Unfortunately, this was far from the case. The current ratio at October 31, 1939, was 1.91; reached a high on October 31, 1944, of 3.54; and declined to the ratio at October 31, 1952, of 1.66.

Gentlemen, it is very apparent from this that, although we have been running at top speed, we have in fact been going backward. To further point out the effect of the present high taxes, it has been necessary for us to borrow $100,000 in order to meet the first 2 accelerated payments of our October 31, 1952, tax bill, which has further reduced our working capital position.

From the foregoing, it becomes quite clear that, regardless of what was originally intended, the present excess-profits tax law places an intolerable burden upon the small growth company. In many cases, due to the great difficulty in accumulating additional working capital out of earnings and the limited borrowing capacity of a small business, the only financial salvation is to become absorbed by a large corporation. The large corporation, even when subject to excess-profits taxes, will find little difficulty in improving its working capital because of its vast borrowing power, both of a sort- or long-term nature, and its ability to obtain funds through the issuing of additional capital stock.

It is not felt that the story of our company is in any way unique, but that it represents a very serious problem facing the majority of small, struggling businesses under the present unrealistic tax structure. It does not seem reasonable that a company is permitted to retain less of the present lower-valued dollars than the higher-valued dollars retained in the base period years.

It also seems unrealistic to base the calculation of excessive profits on past performances rather than analyze current operations to determine their excessiveness. Certainly the Renegotiation Act is adequate to protect against profiteering on war and defense contracts.

Therefore, companies whose business is in no way attributable to the war or defense effort, but who through their own efforts are able to increase sales volume and profits, should be permitted to retain a reasonable percentage of these profits. This, I believe, is the very foundation of our American system of free enterprise which has enabled us to reach our present position of supremacy in the industrial world today.

The present excess-profits tax is unfair, unreasonable, and inequitable, as it does not treat all taxpayers on the same impartial basis. It permits one taxpayer experiencing abnormally successful operations during the base period to retain a large portion of its profits during the current taxable years; whereas, another taxpayer with an extremely low margin in the base period may be permitted to retain an even smaller percent of his profits, owing to the increased volume of his business and therefore increased dollar profits.

In closing, it should be pointed out that the days of low taxes are probably gone forever. However, if in the interest of national security and a balanced budget, it becomes necessary to collect larger revenues, this should not be done through excess-profits taxes of the present kind, but through renegotiation of Government contracts and subcontracts to recapture excessive profits and prevent war profiteering and through the use of higher base rates or a broader tax base which would affect all taxpayers alike.

The CHAIRMAN. We thank you very much, Mr. Williams.
Mr. MASON. Mr. Chairman.

The CHAIRMAN. Mr. Mason.

Mr. MASON. I like the tone of your voice. You talk as if you meant it. That is the kind of witness I like to have before me.

You stated in essence that because of a very bad base period when you made $180,000 profit, you had to give Uncle Sam $120,000 and you kept only $60,000, which is paying Uncle Sam for your efficiency and your aggressiveness and your effectiveness in conducting a competitive business. You paid him $2 for the privilege and you keep 1 out of every 3. That is your picture, is it?

Mr. WILLIAMS. Thank you very much. We radically changed our methods in 1948. If you will look at the schedule, you will see we spent over $200,000 in new equipment. We could not get people right out of a blue sky to operate that equipment. Therefore, during 1949 to digest that new equipment, we made very little profit. That is what we are suffering from.

The CHAIRMAN. Thank you very much for your statement.

The next witness is Mr. E. H. Mundy, treasurer of the Sturgis Posture Chair Co., Sturgis, Mich.

STATEMENT OF E. H. MUNDY, TREASURER, STURGIS POSTURE CHAIR CO., STURGIS, MICH.

Mr. MUNDY. My name is E. H. Mundy, and I am treasurer of the Sturgis Posture Chair Co.

Please add the name of the Sturgis Posture Chair Co. to the long list of those manufacturers who oppose the extension of the excessprofits tax.

According to the news releases, you have heard enough testimony concerning the terrible damage this unfair tax imposes on growing businesses. In our case we have been forced to borrow to the limit and double our outstanding stock by sale for new money to have anything with which to keep our plants modern and our growth even moderate.

A new angle I would like to present, and perhaps not too new, is the effect of this tax on management. Please sit with me at my desk during these years of excess-profits tax. Every problem is studied with this tax a principal consideration. We continually ask the question, how can we legally spend money which in any way will promote the future welfare of the company when this tax is finally removed?

We expand our advertising, hire additional engineering personnel to develop and improve our line, and finally last year decided that new and better distribution could be established by cutting our prices way below OPA ceiling. Last year our sales were about the same as the year before in the number of chairs, but our dollar sales were reduced from $3,100,000 to $2,790,000; our gross profit before taxes from $87,000 to $24,000; and our Federal taxes from $55,000 to $7,500.

At a cost to our stockholders of only $16,000 and to the Government of $47,000 in taxes, we strengthened our sales position very materially. If there had been no excess-profits tax, we might well have expected to earn as much as the year before, or $87,000. At the 52-percent corporation tax rate, the Government would have received $45,000 in taxes instead of $7,500, an increase in total tax of $37,500.

Management today must be alert to every situation that can improve the ultimate and long-range benefit for the stockholders.

I know from discussion with others, by watching the tremendous increase in advertising, and even by reading advisory services, that we are not alone. All businesses subject to this tax are taking every possible advantage of spending 18-cent dollars in those legal ways to obtain some residual value. We look at expenses that way.

I believe strongly, gentlemen, that American business will actually return more tax dollars to the Treasury without this unfair tax than with it, and that totally unjust taxation cannot be supported by the requirement for additional revenue and maintain the faith of the people in its Government, and that to allow this tax to remain law, even for a short time, will do serious damage to the future ability of American industry to expand and care for an increasing labor supply. Further, I want to call your attention to the fact that the burden of continuing this tax as a new tax law falls completely on this administration, which pledged to voters last November a reduction in taxes, not a new tax burden. This would be a new tax burden, for the old administration passed the excess-profits-tax law to die June 30, 1953. It should die on schedule.

If, however, for the purposes of political expediency, you find it necessary to have a new excess-profits tax, then I have a suggestion to make. Tax experts go on past experience; management looks ahead. A full year rate of 20 percent instead of a half-year rate of 30 percent would cause management to look well to costs in the last half of the year and might well produce more net revenue to be collected in 1954 than would the extension of this tax in its present form.

Thank you.

The CHAIRMAN. Thank you very much. That is a very fine statement. We are glad to see you people taking an active part in the industrial development of our country. We agree with you that this excess-profits tax has a strangulating effect on the development of business.

Mr. MASON. I want to compliment you on the brevity of your statement and the fact that you have opened your heart and said you are beating this vicious excess-profits tax and at the expense of the Government. That is exactly what they are all doing. These full-page ads I see in the newspapers testify to that fact, that the companies would be paying more in their regular corporation tax if they did not have to pay this excess-profits tax.

Mr. MUNDY. We think so.

Mr. MASON. You have given a very specific instance of that and I am very glad to get it.

The CHAIRMAN. Thank you, sir, for a very excellent statement.

The next witness is Mr. F. C. Steffens, vice president of the National Rejectors, St. Louis, Mo.

STATEMENT OF F. C. STEFFENS, VICE PRESIDENT, NATIONAL REJECTORS, ST. LOUIS, MO.

Mr. STEFFENS. I have a very condensed statement of our corporation to submit. It will take me a few minutes to read it off. I think it is self-explanatory.

I would like to point out that our corporation was founded in 1936, and it has never replaced any other business. It has not gone in competition with any existing business. It has been instrumental of