PURPOSE OF INVESTIGATION Senator SALTONSTALL. The long and short of it is that the purpose of renegotiation is to get agreement between the Government and these contractors, is it not? Mr. ROBERTS. It is, sir. Senator SALTONSTALL. And it is not fair to the contractors, who are individual citizens bidding on Government jobs which are low-priced in any event, in a lot of instances, not to have this renegotiation performed promptly in order that they may know where they stand. Mr. ROBERTS. It is, sir. Senator SALTONSTALL. Also, from the Government point of view, if the profits of the contractors are exorbitant, in order to make new contracts they ought to know what the proper amount is. Mr. ROBERTS. That is correct. Senator SALTON STALL. So that this Board, perhaps more than any other board ought to be able to do its work promptly. CONTRACTOR-CREDIT PROBLEMS Mr. ROBERTS. I think there is another point I would like to mention, if I may; that is, that a businessman has credit problems and if he has an exposure to renegotiation unsettled, he cannot deal satisfactorily with the banks from whom he is seeking credit for performance of his daily operations. Senator SALTON STALL. Now, the House makes a comment about inefficiency on your part. Did you see that comment? Mr. ROBERTS. We did see that, Senator. We did not like it, in short. STUDY OF OPERATING PROCEDURE Mr. ROBERTS. We have instituted a careful examination of every operating procedure that we have. We have had a meeting of our regional board members in Chicago with the members of the present Board here in Washington. We discussed the methods that we are following, asked them for suggestions to improve efficiency, cut down our procedures, wasteful procedures of any kind if there were any, and we expect that after coming through that careful examination, we will be able to state flatly that we are operating in the most efficient way we know how to run it. We believe we are doing that today. Senator ELLENDER. Is it your view that the mere existence of this Board will probably act as a deterrent to contractors asking, presenting a contract that would mean more profits for them, greater profits? Mr. ROBERTS. Senator, we are convinced of that fact. We think the very existence of renegotiation is a substantial deterrent to the charging of high prices in the first instance. Senator ELLENDER. Have you come across many cases in which your representatives have found no excess profits? Mr. ROBERTS. Yes, sir. Senator ELLENDER. What percentage, about? Mr. ROBERTS. I believe of the very small number of cases, the one thousand five hundred-odd that we have completed, that 11 percent of them have been cases where we determined excessive profits to exist. Senator ELLENDER. Now, the next question is, What are you able to say about whether or not that percentage is increasing in which you find less? Mr. ROBERTS. We can state flatly that percentage is increasing. Senator ELLENDER. Which substantially is your view of it that you have just expressed. Senator SALTON STALL. Thank you, gentlemen. Mr. JENKINS. You may proceed, sir. Mr. MEAD. A summary of our recommendations is as follows: 1. That a scant 1 percent be salvaged from carryover of 81 billions of current Defense Department authorizations which would produce revenues of 810 million. 2. That procurement functions of Defense Department be coordinated to eliminate excessive and unnecessary costs, good examples of which we have in our own plants, and are unknown but significant amounts. 3. That Budget of United States for year ending June 30, 1953, be revised to show a realistic figure of possible refunds of excessive profits under Renegotiation Act of 1951, because figures shown therein are probably understated. In conclusion, we hope from the facts submitted to you your committee can concur in our findings that an extension of the excess-profits tax is unnecessary and unwarranted. Mr. JENKINS. I want to compliment you on your statement. I think you have a very logical and convincing statement. The facts and figures at the end of it are very persuasive. Mr. MEAD. Thank you, Mr. Chairman. Mr. JENKINS. The next gentleman is Mr. R. W. Wortham, Jr., executive vice president of The Southland Paper Mills, Inc., of Lufkin, Tex. You may proceed, sir. STATEMENT OF RICHARD W. WORTHAM, JR., EXECUTIVE VICE PRESIDENT, THE SOUTHLAND PAPER MILLS, INC., LUFKIN, TEX., ACCOMPANIED BY K. W. COOKE, CONTROLLER Mr. WORTHAM. My name is Richard W. Wortham. I am executive vice president of the Southland Paper Mills, Inc., of Lufkin, Tex. This company manufactures newsprint paper, and in addition, a small quantity of paperboard. First, let me express our appreciation for the opportunity to present to this committee our views on the subject of extending beyond June 30, 1953, such an unjust and stupid form of taxation as the excessprofits tax. At the outset, I would also like to make clear that we profess no expert knowledge as to whether or not the revenue that would be obtained by extending this method of taxation will be needed by the Government. Our premise is that in case such revenue is required, then it should be obtained by an equitable and just method of taxation, a small increase in the normal corporation tax rate, for example. The original concept of excess profits tax was as a means of recapturing by the Government some of the unusual, and perhaps excessive, profits earned from the manufacture of wartime or in recent years, defense-products used by the Government. This principle has been confirmed before this committee by Secretary Humphrey. Our company has in the past and is now manufacturing only normal peace-time products which are highly competitive. A brief history of our company seems to be in order at this time. Our company was formed in 1937; our original mill was built in 1939 and came into production in January 1940. It was a pioneering venture for never before had newsprint been made commercially from the coniferous woods of the South. It has been a successful venture and a timely one. A new source of newsprint came in just when Scandinavian shipmentse were cut off by the war, and just when the demand or consumption of newsprint in this country started an unprecedented climb-reaching the astounding total of 6 million tons in 1952. In 1946, when equipment again became available, our company embarked on an expansion program which doubled our original pro duction. The new equipment was started on production in mid-1948, but due to the complexities of such equipment and process, it was 1949 before any reasonable capacity could be reached. In other words, 1949 was the first full year of operation of these new facilities. 1949 was the only year within the "base period" defined in the excess profits tax law during which we received anything near normal income from the expanded production. Thus, we came to be what has since become popularly known as a "growth" company. Newspaper accounts of these hearings indicate that you have been made fully aware of what, in general, "growth" companies have suffered under this shameful method of taxation. In particular, we beg indulgence to show you what it has done to our company. The following table speaks for itself. (The table referred to follows:) Additional net income equals 19100 of 1 percent return on the added investment. $2,808, 683 2,787, 167 1 21, 517 Mr. WORTHAM. In that table, we have taken such items as investment in plant equipment and timber land, gross sales, gross income, Federal income, and excess-profits tax, the tax rate, net income, and wages and salaries. In the first column, we have taken the yearly average over the base period, in the second column, we have taken for the same items the average for the years 1951 and 1952. Comparing those years and those items, we show an increase in investment of $11 million, and an increase in sales of $6 million, an increase in payroll of $985,000, an increase in gross income of $2,800,000, an increase in Federal tax of $2,787,000; or an increase in net income of only $21,500 on an increased investment of $11 million. The additional net income equals only nineteen one-hundredths of 1 percent return on the added investment. While the table speaks of actual experience to the end of 1952, there is another point which seems pertinent to our discussion. In 1949, when this country was faced with a drastic newsprint shortage, we began the study of still further expansion of our plant and newsprint facilities leading to an increase of at least 50 percent of our then existing capacity. This study, including cost of the project was not completed until 1950, by which time the excess-profits tax was imposed. What did we then face? It was an additional investment of $15 million with an increase in net income-after taxes including excess profits tax-of only $625,000 per year, or barely 4 percent on the additional investment, which would only cover the interest on the borrowed capital. Need I add that we did not proceed? Earlier in this discussion I made the statement that our business is not only a peacetime operation but also a highly competitive one, with approximately 80 percent of the newsprint used in this country coming from Canada and Scandinavia where excess-profits taxes do not exist. I must again beg your indulgence to point out, by the use of another table, the injustices and discrimination created among competitive companies by the excess-profits tax. For comparative purposes, I shall use another newsprint company of size and production comparable to ours, and for the sake of anonymity I shall refer to it as X company. Figures used are taken from our respective annual reports. X company was built in 1948 and 1949 and began producing in early 1950. In the preceding table, we have used the investment in plant and facilities, gross sales, gross income, Federal taxes, the tax rate, and the net income. We have taken an average of those items over the years 1951 and 1952. X company will show an investment of $30 million against our investment of $20 million. The gross sales of X company are $19,200,000, our sales are $19,148,000, a difference of only $52,000. Gross income of X company was $4,484,000. Our gross income for the same period was $7,583,000 or a difference of $3,100,000. Federal taxes for X company were $2,321,000, our Federal taxes were $4,067,000. They paid a tax rate of 52 percent, we paid a tax rate of 61 percent. And the net income for X company was $2,163,000 and our net income was only $2,846,000. In other words, we had a gross income of $3,100,000 more than X company and we had only $800,000 increase in net income. X company's gross income was 59 percent of ours, and X company's net income was 73 percent of ours. At this point, I feel constrained to remark that it seems an oddity of our Federal Government that it can, on the one hand, not only guarantee but insist on, by threat of prosecution, free competition in our industrial system, and, on the other hand, by use of such a wicked process as the excess-profits tax, deny that industrial system the fruits of initiative, incentive, imagination, skill, frugality, and efficiency-— the essence of competition. From publicity given this subject, one is led to believe that a 6-month extension of this unsavory tax will provide only $800 million in revenue. If that be the case, then why in all decency, fairness, and common sense should not this tax law be allowed to expire and the $800 million, if it is so vital, be obtained by increasing only slightly and temporarily the normal tax rate on all corporations? Each corporate taxpayer would then stand his fair share of the burden, and untold millions of dollars would be released for business expansion with more taxable wealth thereby created. Respectfully submitted for consideration by the House Ways and Means Committee. Mr. JENKINS. That is a very fine statement you made, and we appreciate it very much. Do you have any questions, Mr. Cooper? 35078-53-42 Mr. JENKINS. You have indicated, Mr. Wortham, your story is the same as that of many who have been in here. You started your business and had a very successful business, and your burden has been the excess-profits tax. Mr. WORTHAM. Yes, sir. Mr. JENKINS. That is all. Thank you very much, sir. Diamond Match Co., of New York City, has asked permission to file a statement. Without objection, it will be so ordered. (The statement referred to is as follows:) STATEMENT OF STILLMAN KUHNS, REPRESENTING THE DIAMOND MATCH Co., NEW YORK, N. Y. This statement is submitted in behalf of the Diamond Match Co., whose general offices are at 122 East 42d Street, New York, N. Y. I am a vice president and the comptroller of the company. It now seems to be universally admitted that the excess-profits-tax law is unfair and inequitable in its provisions and operation, and with this we heartily agree. If, however, the law should be extended, we request and urge that as part of any such extension at least one of its discriminatory and inequitable provisions be corrected. Specifically we ask an amendment to correct the limited carryback provision of the law, which has operated to impose an excess-profits tax on a corporation even though its total excess-profits net income for the 3-year period covered by the present law is less than its total excess-profits credits for the same period. This company is not engaged in defense work nor has it benefited from defense contracts. In the latter part of 1950, when for particular reasons the trade had been buying hand to mouth and trade inventories were extremely low, sudden scare buying due to the Korean situation increased the company's sales substantially and this continued into early 1951. As a result, the company paid a substantial excess-profits tax in 1950 and a lesser amount in 1951. In 1952 the results of the prior years' excess buying were felt and the company's income was substantially less than the preceding 2 years. Accordingly, the company paid no excess-profits tax for 1952 and had more than enough unused excess-profits-tax credit for that year to eliminate its 1951 tax under the 1-year carryback provision of the law. The balance of its unused credit for 1952 cannot be carried back to 1950 under the present law and since only 1953 remains and no excess-profits tax will be payable by the company in that year, it loses the benefit of the balance of its unused credit for 1952 and its entire unused credit for 1953. In the excess-profits-tax law recognition is given to the fact that in determining normal earnings a single year cannot properly be used. Accordingly, the law provides for using the total earnings of 3 base years and averaging these out to determine average annual normal earnings. The law also recognizes as a corollary that excess profits cannot properly be measured by a single year and attempts to give effect to this principle by permitting a 1-year carryback and a 5-year carryforward of any unused excess-profits credit. In actual operation, however, the limited 1-year carryback provision violates the principle of measuring profits over a reasonable period to determine the amount of any so-called excess profits; and results in discrimination between corporations having exactly the same total income for the 3-year period and the same base-year credits, by making the amount of excess-profits tax depend upon the particular year or years in which the income of each was received. For example, the total excess-profits net income of our company for the 3 years covered by the present law will be less than the total of our excess-profits credits for the same period, and yet by reason of the limited carryback provision of the present law our company has paid a substantial excess-profits tax for 1950 simply because of the particular years in which it received such income. On the other hand, another corporation with exactly the same total excess-profits net income for the 3-year period and with the same excess-profits credits as our company would pay no excess-profits tax whatsoever if, for example, its income had been evenly divided between the 3 years, or if it had had no excess-profits tax in 1950. We submit that there should not exist this discrimination between corporations similarly situated based upon mere happenstance as to the way in which their income was spread between the individual years. We urge that this discrimination be eliminated and the recognized principle of averaging earnings over a reasonable period be made effective by providing that a corporation shall be |