Mr. KEAN. Of course, Mr. Gray, you would expect to have that little green fellow on your chart grow to more than the thousand people now employed if your plan is satisfactory and you go ahead with it, would you not? Mr. GRAY. I think so. I think the product is going to employ eventually about as many as we have in our washing-machine business. Mr. KEAN. Following out what Mr. Mills was saying about employment, if you do decide the conditions are such that you can go ahead, you hope that little green fellow will grow as big as the yellow fellow? Mr. GRAY. He will come along; yes, sir. Mr. KEAN. Now, as far as your tax situation is concerned, from this yellow sheet here it shows you paid $9,400,000 in taxes. Are those all Federal taxes or do you include other taxes? Mr. GRAY. Those are Federal income taxes. That is the 52 plus the 30. Mr. KEAN. You state that to continue the excess-profits tax for 6 months would amount to about a million and a half? Mr. GRAY. About that, sir. Mr. KEAN. In other words, you are paying approximately six million four in the ordinary corporation tax and about three million in the excess-profits tax? Mr. GRAY. Yes. I think actually about two six. Mr. KEAN. That is approximate. You do come to the ceiling figure. Mr. GRAY. Yes, sir; we will be at the ceiling of 70 percent this year. Mr. KEAN. Therefore, in your case you do not quite get that 82percent hurdle because you are at the ceiling anyway, and those companies that hit the ceiling price only have a 70-percent hurdle. In other words, as you go up and you do not quite hit the top, you have that 82-percent hurdle. When you have already got there, there is only a 70-percent hurdle. Mr. GRAY. Yes. Mr. KEAN. I am talking about the fellow that sees no objection owing to the tax to wasting money and says, "What is the use?" Mr. GRAY. Well, no, if he does waste some, it comes off the top of the deck. Mr. KEAN. The whole thing is only 70 percent overall. If you are in this situation covered by that 70 percent, it does not hit the 82? Mr. GRAY. Yes; but as our figures come out we are about that point. Last year it was 68. Now it will be 70. So for practical purposes we have to consider that every waste, every dollar we waste, the Government loses 82 cents. Mr. KEAN. I do not think that is quite true. The reason I am bringing it out is because I think it is one of the ridiculous things that the excess profits tax does. Mr. GRAY. You mean if you got careless enough it would only cost you 70 percent? Mr. KEAN. That is right. Mr. GRAY. Yes, but you have to have a tremendous base growth in order to get into that position. Mr. KEAN. Yes. The CHAIRMAN. Any other questions? Any questions here? We certainly thank you for a very fine statement. It is a splendid demonstration with your charts as to the invalidity and the bad char acter of the tax that is almost criminal as against the expansion of industry. Thank you very much. Mr. GRAY. Thank you, Mr. Chairman. The CHAIRMAN. The next witness is Mr. Walter Ditmars, president of the Gray Manufacturing Co., Meriden, Conn. Mr. Ditmars, we are very glad to see you here. If you will give your name and capacity in which you appear for the record, we will be delighted to hear you. STATEMENT OF WALTER DITMARS, PRESIDENT, GRAY MANUFACTURING CO., MERIDEN, CONN. Mr. DITMARS. Thank you, Mr. Chairman. This is the first time I have appeared before a committee like this. I will try to be as brief as possible. My name is Walter Ditmars. The CHAIRMAN. You may be seated, Mr. Ditmars. Mr. DITMARS. I am president of the Gray Manufacturing Co., formerly the Gray Telephone Pay Station Co. of Hartford, Conn. Our company manufacturers the Audograph dictation machine which I have here beside me, and also other electronic equipment based almost entirely upon our own research and development. This Audograph dictation machine is a post-World War II product. I appear before your committee today, Mr. Chairman, to ask that you allow the excess profits tax to expire as scheduled on June 30. I speak with great reluctance. No one has more sympathy than I with the desire of this Congress and of the national administration to balance the budget. No one wishes more than I to avoid the inflationary pressure of excessive Government spending and of resulting unbalanced budget. I also believe no one is more willing than I on the board of directors of our company to accept personally and of the company our fair burden of the Nation's necessary tax load. But the very essence of our tax system is that it shall be fair, that it shall be based upon share and share alike, and that it shall be nondiscriminatory. I might also add that every American wishes taxes to produce the necessary revenue for Government without stifling the sources of income to an extent that the law of diminishing returns asserts itself. I am here today, gentlemen, to tell you the realistic and graphic story of a corporation that has been injured to an extent of crippled intiative by the excess-profits tax. We have not only been hurt in competing with other organizations in our particular industry, we have also been prevented from retaining earnings which would allow us to expand production and provide work for more employees. This lowered expansion not only hurts thousands of taxpaying stockholders but also strikes labor, since anything that is detrimental to expansion is necessarily detrimental to the working men and working women who share and benefit from such expansion. Let me brief you on a situation and then present some details. Our company came out of World War II with an established peactime business. During the war we did not advance commercially because we were engaged in war production. A period of accomplishment, by the way, during which we were awarded the Army-Navy "E" three times. After the war we had to develop and produce new products and we did. When we entered the field, our principal competitors were still selling old-fashioned wax cylinders. As recently as a year ago in fact the Government was still purchasing this type of cylinder equipment. Gray spearheaded the competition and our chief competitors were forced to introduce radically redesigned equipment. I just want to point out, gentlemen, that there are 8 of these cylinders that weigh 411⁄2 pounds and this 1 disc that weighs less than an ounce which produce the same amount of work. The Government, I might say, has recognized that and is buying a great deal of this labor-saving equipment. During 1946, 1947, 1948, and 1949, the years against which the excess profits tax credit is calculated, Gray pioneered this new product. Incidentally, gentlemen, we have not raised our selling price since 1948. During these years other companies, long established in the industry, had earnings which gave them larger excess profits tax credits. I might say our biggest competitor has been in business over 25 years in this field. Our next biggest about the same time. After 3 years of operating losses, from 1946 through 1948, Gray achieved a net profit position in 1949. Since then, because of good research and a good product, our business has expanded. This will indicate how our sales have grown in millions: There was a corresponding operating profit and loss pattern during these years. As you see, in the chart we have losses in the first 3 years of this period, a comparatively small profit in 1949, and then in 1950, 51 and '52, the years of the excess-profits tax, our profits before taxes went up. In other words, net profits after taxes were realized from this growth after 1948 and until the excess-profits tax was reenacted. For example, just prior to the 1950 excess-profits tax law our net profit increase was from $151,800 in 1949 to $400,800 in 1950. As soon as EPT was reimposed, however, we found ourselves on a treadmill. Profits in 1951 were up to $406,000. That is $400,850 in 1950; $406,000 in 1951, and 1952 the profits were $409,000. In other words, our overall sales increased from less than $800,000 in 1946 to $11 million in 1952. Considering only the years since reenactment of EPT, the sales increase has been from $4,250,000 to $11,250,000, or an increase of 165 percent. The increase is net profits during this same 3-year period was less than 2 percent. Mr. CURTIS of Nebraska. May I ask at that point, was it an increase percentagewise or in dollar volume? Mr. DITMARS. Both, sir. As you will see, the dollar figures are here on this chart, but the increase in percentage was 165 percent. Mr. CURTIS of Nebraska. That is your increase in sales, 165 percent? Mr. DITMARS. 165 percent in sales. But there was less than 2 percent increase in profit. Mr. CURTIS of Nebraska. Was that before or after taxes? Mr. CURTIS of Nebraska. After the excess-profits tax? Mr. DITMARS. Yes. Mr. CURTIS of Nebraska. I was sure of that, but I wanted the record to be clear. Mr. DITMARS. The question may arise in your minds as to how in the face of such excessive taxes Gray has been able to expand at all. The normal healthy way for a growth company such as ours to expand of course, is by plowing profits back in the business. This obviously we were unable to do to the extent necessary. Our only alternative was to borrow. In 1950 we had only a nominal insurance loan of $195,000 on the cash surrender value of the policies. By 1952, the second full year of excess profits tax, our bank borrowing reached a record of $885,000. Incidentally, we financed our Government business without any assistance from the Government. This is a story of the Gray Manufacturing Co.'s excess-profits tax experience: (1) Steady increase in sales based upon our own research and development; (2) A corresponding increase in operating profits before taxes; (3) No significant increase in net profits after taxes. It has become customary in discussing figures to use charts. I should like to show you one which illustrates the manner in which our company shared with the Government the operating profits of 1952 which were in excess of the previous year in 1951. This entire pie here represents 100 cents of each dollar. The dark portion indicates that part taken by taxes or 9834 cents. We retained 11/4 cents out of that. To go into the details of that a little more, the Gray Manufacturing Co. virtually doubled its business during the year 1951 to 1952. Sales increased from a gross of about $5,900,000 to about $11,300,000. As a result, our operating profit before taxes was $233,232 greater in 1952 than in the preceding year 1951. After we had paid taxes, however, we had left onlly $2,916 of this $233,232. In other words, and to repeat what I just said, for every dollar of these additional earnings, 1952 over 1951, we were only able to retain 14 cents. The Government took 9834 cents of that dollar. Mr. HOLMES. May I get something straight here? The CHAIRMAN. Mr. Holmes. Mr. HOLMES. You want the record to show that the excess-profits tax out of your $230,000 earnings took all but $2,000 of the earnings of your company? Mr. DITMARS. No; all taxes. Mr. KEAN. What do you mean by all taxes? Do you mean State taxes? Mr. DITMARS. I mean all taxes. Mr. KEAN. That includes State tax, real estate tax and all that? Mr. DITMARS. Yes, it does. The excess profits tax last year took $225,562. 35078-53- -7 Mr. KEAN. What is that percentage, because we are talking about the excess profits tax here, and what the State of Connecticut or what the city of Hartford does is not in our province here. How much of that pie is the excess profits tax plus the corporation tax? It could not take an overall of 70 percent, could it? Mr. DITMARS. No. The total taxes were $925,000. The excess profits tax was $225,000, say 25 percent, 20 percent. Mr. HOLMES. I have one more question. What year was that that you showed $925,000 in taxes? Mr. DITMARS. That was 1952. Mr. HOLMES. Your entire tax bill was $925,000? Mr. DITMARS. Yes, sir. Mr. HOLMES. And the excess profits tax took what? Mr. DITMARS. The excess profits tax was $225,000. Mr. HOLMES. What was your profit return for that year? Mr. DITMARS. $408,000. Mr. HOLMES. After what? Mr. DITMARS. That is after taxes. Mr. HOLMES. After excess profits tax and all? Mr. DITMARS. That is right, after all taxes. Mr. HOLMES. That makes up your $1,200,000? Mr. DITMARS. Well, our total taxes were $925,000. Our excess profits tax was $225,000. Mr. HOLMES. Now, give me again please your total profit. Mr. DITMARS. The total profit before taxes, $1,334,000. Mr. HOLMES. Thank you very much. Mr. DITMARS. Now, may I turn for just a few minutes from this demonstration of the burden of the excess-profits tax and other taxes to a comparison of Gray's situation with that of its competitors to illustrate the discrimination of the excess-profits tax. Both of these competitors had been far longer established in the dictation machine business than we, about 20 years longer. Competitor No. 1 had an income before taxes of $3,700,000. Competitor No. 2, an income of $2,133,900. Incidentally, gentlemen, I am sorry that this chart had to be corrected this morning and we could not get the photostats done in time to give it with the set which you have. They will be given to you later, however. Now, I will take competitor No. 2. They have an income before taxes of $2,133,900. They pay in taxes $932,000. We had an income of $1,334,000, and we paid $925,000. Mr. HOLMES. May I ask you there, what is the difference of your disparity there of your taxes? Mr. DITMARS. About $7,000. Mr. HOLMES. Against an income of almost twice as much. How do you account for that? What concern had an income of $2,133,900 and they paid $932,000 in taxes? Your concern had an income of $1,334,000 and paid $925,000 in taxes. Mr. DITMARS. The only thing I can attribute it to is the fact that they had a much better tax base than we. To read these figures, which of course I do not think you can see from there, this table compares Gray's tax status under the present law with its two prime competitors. Note that whereas these com |