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made at home, and so on. In such instances the Treasury must determine whether the tax liability is that of an employee or a self-employed person, and the individual will not know whether he is liable for the lower rate of the employee or the higher rate of the self-employed until a decision has been handed down by the Treasury. As a rule, urban self-employed business men are hesitant to employ legal services and accountants to present their cases to the Treasury and courts; hence there is a greater likelihood of injustice and uncertainty from the self-employment tax than under the income tax.

9. The self-employment tar introduces the dangerous special income tax principle.-Relying upon the benefit principle the net-earnings tax appears to be innocuous. It is, in effect, however, a special income tax, with its own proportional rate structure, which at any time could easily be consolidated into the Federal income tax, now based upon the ability-to-pay principle. Since the personal income tax with its progressive rate structure is highly correlated in its yield to the business cycle, it has been supplemented by productive proportional rates levied as commodity taxes. With the present widespread public demand for repeal of these commodity taxes, the Federal tax system becomes still more treacherously allied to the whims of the business cycle, with embarrassingly low yields during a depression. Standing alone, the self-employment tax violates the ability principle by taxing, not at higher rates, but, by additional rates, those in the lower income brackets. Thus as commodity taxes are repealed, the fiscal needs of the Treasury could be met by raising the rates of the self-employed tax, violating still further the ability principle and stressing the benefit principle of taxation. Special taxes on incomes received from such sources as rents, interest, profits, and professional incomes with added rate structures certainly fall within the provision of taxing incomes “from whatever source derived," and seem altogether as logical as singling out the “net earnings of the self-employed." The present Congress must foresee direction taken by the self-employinent tax.

10. Ulterior purposes of the self-employment tax must not be overlooked.-Extended coverage causes 4,500,000 more persons to look to the Federal Government for so-called social security. Under Bismark, Prussia established a social-insurance system, including sickness, accident, old-age, and disabilit insurance. He became the unquestioned leader of state socialism in Germany. He once stated that "for reasons of state," he was interested in the welfare of the wording classes, and spoke of social insurance as a “bribe.” When workers look to the state for social security they more willingly fight for that state. German experience has already proved the validity of this political doctrine, since militarism before World War I was strengthened by centralization of political power in Germany. Likewise, under the Wiemar Republic in 1927 Hitler made an appeal to peasants, professional groups, and small-business men stating that they should resent exclusion from the benefits of unemployment insurance. Around this nucleus he gained political strength for fascism. It was based upon a centralization of power. The present bill in a somewhat similar manner by extending coverage to the self-employed becomes a step causing more persons to look to the Federal Government for national and social security. But the German people found to their sorrow that social-security laws did not guarantee social security. At present there is no intention whatsoever, in our responsible political circles, of moving in the direction of totalitarian government, whether fascism or communism, but equally there is little room to doubt but that centralization of power is gained by compelling small-business men to join a compulsory social-insurance program. This becomes a stepping stone to power that might advantageously be used by power-seeking minorities. Xenophon once said: "Those who do not learn their history must experience it!"

11. Unless extended to cover all self-employed, the self-employment tar becomes inequitable and discriminatory.-H. R. 6000 imposes a tax on monfarm selfemployed persons. According to the report of the House Ways and Means Committee on the Social Security Act amendments of 1949 (p. 9) so difficult were the problems of administration that it was considered un desirable to extend coverage of the self-employed in 1939 "until the administrative agencies had further experience with coverage of employees in industry and commerce," but that now “practicable administrative procedures for coverage of the self-employed have been developed.” Despite this progress, the committee has been unwilling to include certain professional classes, farm operators and workers. Apparently the committee considers it “practicable," on administrative grounds, to extend coverage to nonfarm self-employed persons, but impracticable to include other self-employed groups. This policy places expediency before «quity. It would be the course of wisdom to avoid discriminatory taxes on some self-employed until such time as equitable taxes could be applied to all farmers and profes. sional groups which are also self-employed.

The administrative problems would mount rapidly if the present provisions covering 4,500,000 nonfarm self-employed were extended to include 28,106,000 rural-farm population by 1955, including about 2,461,000 over 65 by 1955 and as many as 3,488,000 persons over 65 in the rural-farm population by 1975. Since your committee has already heard statements pointing out existing defects in social-security administration, it is unwise to plunge blindly into extended cov. erage on the scale that would be required if all self-employed persons, nonfarm, farm, as well as professional groups, were embraced within the provisions of the present bill. Mr. Doughton, on October 4, 1949, wisely pointed out: "More. over, the inclusion of large groups of people who do not desire social-security coverage would make most difficult the administration of the system" (Con. gressional Record, October 4, 1949, p. 14021).

EXTENDED COVERAGE, LIBERALIZATION OF BENEFITS AND INCREASED COSTS OF

GOVERNMENT

1. The history of veterans' pensions serves as a guide to the future costs of extended coverage and liberalization of benefits.-Veterans' pensions rose from $15,000,000 in 1866 to $174,000,000 in 1913; then to $433,000,000 in 1941 and to $2,085,000,000 in 1948. Pensions for veterans were the forerunner of social security. Although humanitarian motives play a very important role in fiscal policy, the student of economic history of the United States finds the history of veterans' pensions a discouraging aspect of financial history. What has here. tofore happened in the administration of veterans' pensions could be repeated in the history of civilian security. The record is one of waste.

2. Social-security costs should not be isolated, but correlated with other costs of Federal Government.-National, and social, security costs must be added together in order to gain a proper perspective from which to judge the merits of extended coverage and liberalization of benefits. Each possesses what is known in fiscal science as "continuing costs.” Thus the Spanish-American War incurred military costs amounting to $582,000,000, but the continuing costs of that war, as of June 30, 1946, had reached $2,400,000,000. Likewise the national expenditures for war, defense, and related activities between July 1, 1940, and August 14, 1945 (VJ-day), had reached $316,439,000,000, and as of the midcentury point, December 31, 1949, had soared to $471,106,000,000, according to the latest estimates of the Office of the Fiscal Assistant Secretary; while the National Industrial Conference Board's study of America's Resources for World Leadership, based upon estimates made by the War Department, fixed war costs plus continuing costs by 1972 at $700,000,000,000.

According to the estimates made by the Social Security Administration the trust fund, figured at 2 percent, by the year 1990 will reach $91.000.000,000; or, if computed at 214 percent then the trust fund may reach $98,600,000,000. (See Report of Ways and Means Committee, August 22, 1949, p. 35.)

Ignoring all other Federal costs except national security and social security, the total future costs being placed by this generation upon our children compels this Congress to hesitate, and carefully decide, whether this is the proper time to extend coverage, and liberalize social-security benefits.

3. Congress once undertook to guarantee the financial solvency of the socialinsurance system.-In 1943 Congress passed the Murray amendment to safe. guard the claimants under the social-security law, because of the fear that fail. ure to increase pay-roll tax rates at that time might impair the ability of the Treasury to meet these obligations. The present attempt to place the system on a self-sustaining basis is traceable again to possible fears that unless the difference between contributions and benefit payments increases in the near future the long-run obligations will not be met except by the levy of additional taxes paid into the general funds. Although H. R. 6000 in effect now repeals the Murray amendment by increasing pay-roll tax rates, the extended coverage and liberalization of benefits to some extent impairs the future trust fund, when compared with the earlier intentions of raising rates to safeguard that fund at a time when no such extended coverage was contemplated.

Judging from the past, therefore, Congress does not intend to impair the payment of benefits, even though it may load additional taxes upon the Federal taxpayers. By extending coverage and liberalizing benefits these contingent moral liabilities increase sharply. At a time when war activities and war. related activities for the fiscal year 1949 reached $30,684,000,000, and defense costs continue to mount, Congress should not extend coverage that may sometime require heavy subsidies from already overloaded taxpayers. Although one Congress cannot bind its successors, it may establish a widely accepted concept of "rights” to benefit payments that impose future moral obligations that could become impossible to meet, because taxpayers believe other competing claims for their support are more vital to their national security.

The CHAIRMAN. Dr. Eveline Burns! Dr. Burns, we may be able to hear you, but I wanted to make a little inquiry.

Will you be seated? What is the length, approximately, of your statement ?

Dr. Burns. I cover, sir, quite a considerable number of points, in the program. We have made a rather careful analysis of the legislation that is before you.

The CHAIRMAN. I am afraid we will have to suspend at this point, because of the work on the Senate floor. You would have to remain over until Monday, because I do not believe we will be able to have a session tomorrow.

Dr. Burns. I would like to come down again, of course. I would be very glad to do so.

The CHAIRMAN. We are very sorry to put you to that necessity, but I am sure that all of us must go to the floor of the Senate this afternoon.

So I suggest that you come back on Monday, and we will be able to hear you then.

Dr. BURNS. Thank you. I prefer to do that.
The CHAIRMAN. Mr. Argo, I will have to make the same statement

to you.

STATEMENT OF R. K. ARGO, PERSONNEL DIRECTOR, ALABAMA

MILLS, INC., BIRMINGHAM, ALA.

Mr. ARGO. Senator, it will be impossible for me to be here Monday, but I would like to submit my statement for the record, if that would

suit you.

The CHAIRMAN. Yes. And suppose you tell us what points you cover in your statement. Then you may offer your statement for the record.

Mr. Argo. Well, I cover several points, including disability coverage and the definition of "employee. The CHAIRMAN. You are not in the life insurance field ? Mr. Argo. No, sir.

The CHAIRMAN. You may have a seat if you will, there, and if you wish to make any oral statement in connection with your brief, we will be very glad to hear from you.

Mr. ARGO. I would be glad for the statement to stand.
The CHAIRMAN. It fully covers your position?
Mr. ARGO. Yes, sir.

The CHAIRMAN. For the purpose of identifying yourself, you are Mr. R. K. Argo of the Alabama Mills, Inc., Birmingham, Ala.?

Mr. ARGO. Yes, sir.
The CHAIRMAN. And what are your mills? Textile mills?
Mr. ARGO. Yes, sir.
The CHAIRMAN. Cotton textile mills?
Mr. ARGO. Yes.

60805_50—pt. 3

The CHAIRMAN. Very well. We will be glad to have your statement, and we will put it into the record. We regret that we cannot hear you orally this morning. (The prepared statement of Mr. Argo follows:)

STATEMENT OF R. K. ARGO TO THE SENATE FINANCE COMMITTEE ON THE SOCIAL

SECURITY ACT (H. R. 6000) I am R. K. Argo, personnel director of Alabama Mills, Inc., Birmingham, Ala., chairman of the social-security committee of the Alabama State Chamber of Commerce, a member of the social-security committee of the Associated Industries of Alabama, and a member of the legislative committee of the Alabama Cotton Manufacturers Association. Today I am presenting the views of the above-mentioned associations.

H. R. 6000Extension of coverage.Old-age and survivors' insurance coverage would be extended to add approximately 11,000,000 new persons to the 35,000,000 persons now covered during an average week. The groups add d to the system under the bill are as follows: Nonfarm self-employed with some exceptions; employees of State and local governments : domestic servants in a private home; employees of nonprofit institutions; agricultural processing workers; Federal employees not covered under any retirement system; Americans employed by an American aircraft outside the United States; employees and self-employed in the Virgin Islands (about 5.000) and,

if requested by the legislature, in Puerto Rico; and salesmen. It seems to be the opinion of most business groups that universal coverage extending even beyond the groups proposed to be covered by H. R. 6000 is fundamentally desirable. This position contemplates the establishment of old-age and survivors' insurance as a basic minimum floor of protection for all gainfully employed. It is our feeling that, unless universal coverage was recommended, there would be the danger of another wholesale and costly revision of the program at a later date in order to give other groups a new start. However, the basic reason for recommending universal coverage is that all gainfully employed people must be made to realize, through the taxing device, that social security is not a give-away program, and that everyone who works for a living ard who expects to receive benefits from the Government must pay his share of the cost while gainfully employed.

We strongly recommend that steps be taken to diminish or to terminate any Federal participation in State old-age pension programs now jointly financed by the State and Federal Governments in the field of public assistance. With uni. versal coverage of OASI, the Federal Government should retire completely from public assistance. H. R. 6000 is dangerous in that it proposes more rather than less Federal money for public assistance. If this view prevails, the political manipulation by certain States which throws more and more of the burden onto the Federal Treasury and reduces the State's responsibilities for old-age pensions will be accelerated rather than diminished.

H. R. 6000--Increase in Federal share of public assistance costs.-The bill would strengthen financing of public assistance in all States, and, particularly, would enable States with low-average payments to raise the lerel of payments to needy recipients under the State-Federal program. Federal funds would be made available to the States under the following matching formula :

(a) For old-age assistance, aid to the blind, and aid to the totally and permanently disabled, Federal funds will equal four-fifths of the first $25 per recipient plus one-half of the next $10 plus one-third of the next $15 with a maximum of $50 on individual assistance payments.

(6) For aid to dependent children, Federal funds will equal four-fifths of the first $15 per recipient (including one adult in each family) plus one-half of the next $6, plus one-third of the remainder, with musimums on individual assistance payments of $27 for the adult plus $27 for the first chili

plus $18 for each ad litional child in the family. We strongly urge opposition to further increases in Federal assistance grants to States as provided in H. R. 6000. The glaring examples of abuse and manipu lation by some States of the present inatching formula are undesirable is an pample, the average paid to recipients during August 1949 for public assistance in the State of California was $70.70, as compared to the State of Georgia $20.73.

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This comparison shows the inconsistency of the program. Another illustration : The State of Louisiana recipients were paid during the month of August 1949 an average of $47.08, and for the fiscal year ended June 30, 1949, 810 out of each 1,000 persons 65 years of age and over were on the public-assistance roll. In comparison to this for the same period, in the State of New Jersey, 66 out of each 1,000 persons 65 years or older were on the public-assistance rolls and were paid $48.34.

The present type of unequal matching induces States to increase the number of recipients rather than the average payment. The average payment per recipient can be reduced in the present law with financial advantage to the State. A glaring example of this is the State of Mississippi, which from September 1947 to September 1948 increased their recipients by 13,728 and reduced the average payment to recipients $1.85 ; but, due to the unequal matching, this State, by this increase in the rolls of recipients, realized many thousand dollars more from the Federal level than they had previously done.

We recommend that we return to the original dollar-for-dollar matching for public assistance as the first step to eliminate the Federal Government's participation in this program. We firmly believe that this is a problem which should be handled at the local level without any Federal participation.

H. R. 6000Definition of "employee.”—The new definition, which is effective with respect to services performed after 1949, has four parts. The first part provides (as does existing law) that an officer of a corporation is an employee of the corporation. The second provides that the usual commonlaw rules are to be used to determine whether an individual is an employee. Thus all persons who have been determined to be employees under existing law will continue to be considered employees.

The third part of the definition extends coverage to individuals who perform services, under prescribed circumstances, in seren occupational groups.

The fourth test of employee status differentiates between individuals who are employees and those who are not employees on the basis of a factual considerations and not on the basis of technical legal considerations. Under this test, the status of an individual in the performance of service for any person for remuneration is determined from the combined effect of the following enumerated factors: (1) Control over the individual ; (2) permanency of the relationship; (3) regularity and frequency of performance of the service; (4) integration of the individual's work in the business to which he renders service; (5) lack of skill required of the individual; (6) lack of investment by the individual in facilities for work; and (7) lack of oppor

tunities of the individual for profit or loss. We believe that this test is so broad that any bureau or administrator in Wash- · ington would have the authority to rule in many cases independent contractors could be classified as employees. As an example, the paper industry in our State of Alabama contracts with small independent contractors for logs used in this particular industry. We believe, under this test, the administrator of this act could hold these small independent contractors and their employees to be employees of the contracting company. You can readily see the tax liability that could be imposed.

We recommend that there be united opposition to the proposed revisions in the definition of "employee.” This concurs in the House Ways and Means Committee minority report which said “Paragraph 4 of the definition of employee gives to the Treasury Department virtually unlimited discretion, through authority to extend the definition of employee,' to determine where the impact of the social-security taxes will fall. As a result of this authority, large numbers of persons will have no way of knowing their social-security tax liability until the Treasury determines it for them."

We therefore recommend that existing definitions of employee now contained in the law be retained ; furthermore, with universal coverage, the need for revising the definition of "employee" is no longer of major importance.

H. R. 6000Permanent- and total-disability insurance

Coverage : All persons covered by the old-age and survivors insurance program would have protection against the hazard of enforced retirement and loss of earnings caused by permanent and total disability.

Benefits: Permanently and totally disabled workers would have their benefits and average wage computed on the same basis as for old-age benefits, but no payment would be available for dependents of disabled workers.

Eligibility for benefits: An individual would be insured for disability benefits if he had both (a) 6 quarters of coverage out of the 13-quarter

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