effective December 31. I think I am expressing correctly his statements of this morning. Mr. SIMPSON. Thank you, sir. The CHAIRMAN. Possibly if the Secretary cannot do it, we can up here. Mr. HUGHES. That is another story. The CHAIRMAN. Is this not true: that while your tax rates are high, and they are usually passed on, that is inflationary when it goes into the prices of what the consumers pay for what the corporations produce? Mr. HUGHES. I believe that very definitely. The CHAIRMAN. And if you take the 10-cent-store people and they find their sales are falling off and their profits going down, do they raise the prices of everything to try to recoup it? Mr. HUGHES. Not as a general rule, although it has been done in some cases-in gas stations, for example. The CHAIRMAN. What do they do as a rule? Mr. HUGHES. They cut prices and increase volume. The CHAIRMAN. And that immediately picks up their sales and then they begin to make a profit. That is exactly what will happen when you follow the plan we have for H. R. 1, to give tax relief, and let the iniquitous tax that everyone has indicted here worse than any criminal-it reminds me of a story of a lawyer at home who sometimes imbibed a little, who was before the court. The court said, "Do you know of anything in the law by which your client can escape?" And he said, "Yes, sir; I do. There is a little chink in the common law that is worn smooth by the scoundrels that have escaped through it." Mr. HUGHES. I hope we can find that chink for every one of us. The CHAIRMAN. I want to say, Mr. Hughes, you made a very fine. statement. We appreciate your appearance here and that of your associates. Mr. HUGHES. I have enjoyed being with you very much, sir. The CHAIRMAN. The committee stands adjourned until 10 o'clock in the morning. (Whereupon, at 3: 45 p. m., the hearing was recessed, to reconvene at 10 a. m. Tuesday, June 2, 1953.) EXCESS PROFITS TAX EXTENSION TUESDAY, JUNE 2, 1953 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met, pursuant to recess, at 10 a. m., in the main hearing room, Hon. Daniel A. Reed, chairman, presiding. The CHAIRMAN. The committee will come to order. This is the second day of public hearings conducted by the Committee on Ways and Means on the President's recommendation to extend the excess-profits tax for 6 months. Today we are scheduled to hear testimony from 15 witnesses who come to us from industry to advise us as to their experience under this law. The first witness we have the pleasure of welcoming is Mr. Elisha Gray, president of the Whirlpool Corp. of St. Joseph, Mich. Mr. Gray, will you come forward? We will be very glad to hear your testimony and have you explain these charts of yours. Will you state your name for the record and the appearance here? purpose of your STATEMENT OF ELISHA GRAY, PRESIDENT, WHIRLPOOL CORP., ST. JOSEPH, MICH. Mr. GRAY. My name is Elisha Gray. I reside in Bentor Harbor, Mich. I am president of the Whirlpool Corp., of St. Joseph, Mich., which manufactures home laundry equipment. We manufacture home laundry equipment for the American housewife, that is, washers, driers, and ironers. It is a privilege for me to appear before this distinguished committee of the Congress. I appear before you in opposition to the proposed extension of the excess-profits tax. My company, and I am sure that this can be said for the overwhelming majority of American business, wants to pay its fair share of the taxload which the Congress determines is necessary for the security of our country. We wholeheartedly agree with the administration's policy of balancing the budget as fast as possible, and of creating a stable dollar, but we disagree with this detail in method suggested to achieve these goals. It is my understanding that the regular corporation normal and surtax will produce in calendar 1953 approximately $22 billion, and that the excess-profits tax which is being considered for extension would produce about $800 million for the last 6 calendar months of this year. I understand, also, that approximately 50,000 growing companies pay this excess-profits tax, that is, 12 percent of all taxable 35078-53-6 73 business corporations. In other words, 1 out of 8 of our businesses have grown greatly in the last 6 years and, therefore, they are asked to pay 82 percent on their growth business. The issue before us, then, is simply this: Is it fair and, more importantly, is it wise or sound fiscal policy, to raise this $800 million by taxing, at an almost confiscatory rate, the one small segment of American business that embodies the best promise for our future prosperity? Let's look at this 12 percent of the business economy. There are the businesses which have grown substantially since 1946. They've grown because they have been vigorous. They have been dynamic. They have been willing to take risks. They are the companies which have developed new products that are really wanted. They are, in the main, small companies. These are the companies which have opened up new jobs. Not It is from these companies that this $800 million is to come. from the old and the well-established but from the young, the small, the new and growing companies. No tax was ever given a more misleading label than this excessprofits tax. If this tax were characterized correctly as the 82-percent tax on growth, I seriously doubt if the law would ever have been passed in the first place. I don't need to elaborate that we already have on the statute books two laws which very effectively siphon off any unreasonable profits which are derived from military production-the Contract Renegotiation Act and the price redetermination legislation. I can testify from personal experience that these two laws do the job effectively. You will observe from the figures that follow that the excess-profits tax is a tax primarily on growth. To emphasize the absurdity of the excess-profits tax in its practical application today, and not to be facetious, I would ask you, Would it not make more sense to draw lots to determine who should pay this $800 million? By the law of chance, at least, 7 out of 8 of the growth companies would still have an opportunity to grow. Such a proposal to draw lots, absurd as it is, is still less objectionable, to my mind, than for the Congress to extend the law which everyone, including the supporters of the extension, admits to be unjust, unfair, unworkable, and unwise. Plainly, there are already many alternative ways to raise an additional $800 million from business if it is already needed. You gentlemen know these ways and you are perfectly competent to enact them if you deem it necessary. I venture, however, that you cannot conceive of a way more unsound from everybody's point of view than an 82-percent tax on growth. In this matter the Congress should not bow to expediency. It is never too early to rectify a profound tax injustice. We are, all of us, sensitive to the possibility of a softening in business which will result in possible unemployment. The nearest thing to an insurance policy that this country could take out to prevent this softening from happening is to let our growth companies grow. As an example of what the excess-profits tax can do to a business, may I show you how it affects my company, the Whirlpool Corp., of St. Joseph, Mich. We have been in business for a long time, but until World War II we were a relatively small sompany. Our real growth began only after the war, through the development of our automatic washers and dryers. During the 3 years of the excess-profitts tax, 1950 to 1952, and the highest corporate income tax in history, we looked prosperous on the books. We took in $285 million. We paid out $257 million. Our stockholders received $4.2 million. We showed a net profit before taxes of $28 million. Actually, with all those dollars, we were capital poor, because the need for operating funds to run the business had increased by $32 million. How could this happen? Our capital needs has expanded by increased volume and larger employment. We needed more working dollars for expanded customer credit, for additional materials for production, for increased factory facilities, and for extra operating cash. Our difficulty is simply this, a head-on collision between our expanded need for capital and a tax system that does not leave us with enough retained earnings to finance the increased volume of our business without going heavily into debt. It works like this: Let us assume that we do about $60 million worth of sales. In our operation we have averaged to net 10 percent profit before taxes on sales, so our profit would be $6 million. Under the existing tax system we would not be in the excess-profits tax bracket. After we had paid our normal corporate income tax of 52 percent, there would be left $2,880,000 for payment as dividends to our stockholders and as retained earnings for the business. Now look at the other side of the medal. We are a vigorous and dynamic company. Let us assume as was actually the case in 1952, that we double this volume and do $120 million of sales. What have we really accomplished? Having doubled the volume of sales from $60 million to $120 million, we have realized another $6 million of profit before taxes. And therein lies the rub. It is this additional $6 million in profit on our growth sales which puts us in the excess-profits tax bracket. So we must now pay a tax of 82 percent on this added growth. Where have this leave us? After modest dividends to our stockholders, we have left only $700 thousand of seed corn to plow back. How do you carry $60 million of growth sales on $700 thousand? Try to put yourself in my position. Am I justified in permitting my company to continue its growth? Is it prudent management to want my company to go forward as a vigorous, dynamic, and competitive business when under the excess-profits tax additional growth can only weaken the business? Let me show you how this works. Now I would like to refer to these charts. In so doing, I may miss the script slightly. This chart indicates our situation in 1949 when, despite the growth of our business, we could still finance ourselves largely through our retained earnings. We have shown in the left-hand corner column our need for funds, the money needed to run the business; and it is divided into two sections-plant and equipment. That is, the factory buildings and ma |