they sell, to say nothing of expenses incurred in securing the orders and later making deliveries. These dealers pay their own expenses and we have no control over this subject and no ability to control it if we wanted to. The nature of the relationship of these people to our business precludes any possibility of control of any of their activities, however much we might desire to do so.

Most of them sell in spare time only and with a few exceptions they are people who have never been engaged in the conduct of a business that requires the keeping of books or other accounts, and such a thing as accurately figuring profits from sales would be completely foreign to them.

The setting up of a formula for determining their profits as a basis for determining taxes would be pure guesswork. Is the collection of taxes by guess a legal procedure?

To make even an estimate of the profit on an order, each item on the order would have to be figured separately and all figures on the order such as credits, transportation, et cetera, would have to be considered in the calculations.

The resulting estimated profit-which we know would not be accurate would have to be further reduced by the dealer's selling expenses, and the value he placed on his time which is devoted to selling our line, eliminating the time he devotes to the sales of other lines. It is impossible to determine such expenses. If some magic formula should be set up to fix the dealer's profit which is subject to the tax, we would then have to prepare a social-security card record—name, address, social-security number, et cetera-record this figure, calculate the tax involved thereon, and enter the tax.

During the course of a year we would have to prepare over 60,000 different social-security records and make approximately 150,000 postings of the dealers' estimated profit and the tax applicable to this figure. This is at the rate of approximately 600 postings per day— that would be the equivalent of a pay roll of 600 people each daythis after all the preponderous accounting previously done. As previously mentioned, 20,000 dealers stopped buying from us in one 4 months' period. Thousands of these records would have had one posting only of the estimated profit on which the tax is based and the amount of tax. Assume, for the sake of illustration, that the dealer's net profit on a $12 order is 30 percent, or $3.60. We would be required to charge on the dealer's bill the amount of 5 cents, and we would be required to pay an additional 5 cents. Please consider the figuring incident to such a transaction.

Many thousands of these social-security records covering dealers who reorder would reflect taxes of less than $1 per year, not per quarter.

The cost to the Government as well as to this company of administering such records would be many, many times the amount of taxes involved.

Should this bill be passed as written, these dealers, who are not employees, would be wrongfully so classified, resulting in either our having to go out of the direct-selling business or be compelled to set up a new system of doing business which would make it so expensive that the new system would not be worth undertaking.

It would take an army of field supervisors and a terrific increase in our office administrative costs to properly supervise these dealers and

record their earnings when they are working in practically all of the various States.

Because of the nature of our business, orders must be completely processed each day so that the dealer may secure his merchandise promptly and make delivery to his customers. This prompt service to dealers is of vital importance to the successful operation of our business.

The details required for social-security records would slow down our flow of orders to the extent that good service to customers would be impaired-with the resulting loss of business.

Furthermore, if we had to operate on an employee basis, we would have to screen out all marginal operators (those who buy infrequently or in small amounts) and history has proven that if this has to be done, the profit disappears. We would have a heavy increase in expenses and a drop in volume of business which would be destructive. And we mean by "destructive" that our business would be destroyed. To arbitrarily put these dealers on an employee basis would destroy the opportunity of thousands of housewives to augment their husbands' incomes, as well as many unemployable persons who are small producers and need supplemental income.

The Nation is now experiencing a definite decline in sales and an increase in unemployment. Our experience over many years shows that as unemployment increases, more people turn to direct selling as a means of livelihood. Since there is no unemployment in house-tohouse selling, there is always an opportunity to make some money.

What about the minimum wage of 75 cents per hour now required under Federal law for all employees?

Should these dealers be classed as employees, they would logically come under Federal and State minimum-wage laws. Every dealer, whether part time or not, would have to be cut off if their volume of business is not sufficient to justify the payment of minimum wages. This would mean that when things finally settle down there would be considerably less than one-half of our dealers and salespersons selling Blair products. The minimum-wage element alone would precipitate a condition that would without question mean the total destruction of our way of doing business.

Should these dealers be classed as employees, our company would have to comply with State foreign corporation laws, eventual estab lishment of tort liability, compliance with the States' workmen's compensation laws, again adding another new force of office employees as well as the payment of insurance premiums under tort liability and under workmen's compensation laws.

Should these people be classed as employees, the various States having withholding provisions in their income-tax laws, similar to the Federal withholding-tax laws, would add further and unreasonable burden of compiling data and accounting, all of which would be unreliable.

Should the proposed bill become law and our self-employed Blair dealers be classed as our employees, we would be unable to determine the taxable earnings of the dealers as a basis for establishing the amount of tax we should pay and the amount to be charged to the dealers for future collection when and if he pays his bill.

Almost 72 percent of our business was done on credit in 1949. And that would mean an added loss to the loss of our charges to our dealers.

We respectfully request deletion in its entirety of subsection 4 of section K of the proposed law, which gives the administrative agencies complete power of determining inclusion or exclusion and also the deletion of any provision in the bill which would make these dealers our employees.

We favor and advocate the extension of social-security benefits to independent dealers, strictly as self-employed individuals.

We ask that the long accepted and usual common law rule defining "employee" continue to be recognized as the determining factor.

We ask that you-not some department of the Government, but you-a Congress of the people, by the people, and for the people, lift from this bill in its entirety that provision which would put a strangle hold upon, and sound the deathknell of, an important industry now enjoying the freedom of the greatest Nation on God's green earth.

Thank you, gentlemen.

The CHAIRMAN. Are there any questions

If not, we thank you very much for your appearance.

Mr. WHITEHOUSE. Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Calhoun?

Mr. Calhoun, you have had long experience in dealing with social security and social-security problems, and in the conduct of the hearings in the House.

Will you please explain to the committee, so that they might get a fair conception of it, how the taxes may be collected on the selfemployed, particularly those smaller people who do not make returns, tax returns, ordinarily?

TESTIMONY OF LEONARD J. CALHOUN, MORGAN & CALHOUN,

WASHINGTON, D. C.-Resumed

Mr. CALHOUN. I would say, sir, that as far as this bill goes it does not affect those with "self-employment income" below $400.

The CHAIRMAN. $400 a year?

Mr. CALHOUN. I believe that is the figure.

The CHAIRMAN. I see. Well, is that a net $400 ?

Mr. CALHOUN. It is the social security net income, which is in general net income from business or profession.

The CHAIRMAN. I understand they have a different definition.

Mr. CALHOUN. That is correct. The bill would add a new subchapter F to the Internal Revenue Code.

Senator Kerr has suggested that I give him a memorandum on the problem of covering persons with relatively small earnings. If you desire I would be glad to give it to the committee in memorandum form, or orally.

The CHAIRMAN. We would be pleased to have you prepare it in memorandum form, if you will, and we will be glad to put it into the record.

We would be glad to have you present it when you have prepared it. Mr. CALHOUN. Yes, sir.

The CHAIRMAN. I believe that under the Federal income tax each taxpayer who earns $600 is required to make a return, is he not? Mr. CALHOUN. That is correct, sir.

The CHAIRMAN. Whether he is liable for any tax or not.
Mr. CALHOUN. That is correct, yes.

The CHAIRMAN. But, as a matter of fact, we know that a lot of people do not make returns.

Mr. CALHOUN. I think, sir, you will possibly, if you cover self-employment, somewhat improve lower income tax returns if people genuinely want social security. In other words, they will have an incentive, if they want protection, to file income-tax returns.

The CHAIRMAN. That is true. But if they are brought under the system whether they want to come or not, they might still elect not to make returns.

Mr. CALHOUN. That is correct, sir.

The CHAIRMAN. However, if they were put on a voluntary basis, then certainly they would come in.

Mr. CALHOUN. That might well be.

The CHAIRMAN. I did not know that you were going to prepare a memorandum, but when you do so, please let us have it so that we may have the benefit of it.

Mr. CALHOUN. All right, sir. I will be glad to do so. (The memorandum to be supplied follows:)

MEMORANDUM RE COVERAGE OF PERSONS WITH SMALL SELF-EMPLOYMENT EARNINGS

H. R. 6000 proposes to cover for the first time, under old-age and survivors insurance, some categories of self-employed individuals. It does this first by imposing a social-security tax on individuals with self-employment income of $400 or more in their taxable year, and second by giving them credits for benefit purposes with respect to the income so taxed. Self-employment income is dif ferent from gross income under the income tax, because self-employment business expenses are taken out in arriving at self-employment income (and also, of course, because there is not included in self-employment income income that is unrelated to the self-employed activities). For this reason it is reasonable to assume that most persons with self-employment income of $400 will have gross incomes of at least $600. But there will doubtless be some persons having self-employment income of $400 but a gross income below the $600 level, and hence exempt from the requirement of filing ordinary Federal income tax returns. In the case of such persons the annual self-employment tax would be .relatively small (varying from $12 to $18 at a 3 percent rate), but this amount, payable at one time, would have a considerable impact on taxpayers whose income averages no more than $34 to $50 per month.

The proposed tax on self-employment is in general the counterpart of the employee tax presently imposed on earnings from “employment" as defined for social-security purposes. Like the employee tax, it does not apply to income in excess of a specified annual amount ($3,600 under H. R. 6000) and does not apply to income from certain work-for example, from agriculture. Like the employee pay-roll tax, neither liability for tax nor rate of tax is affected by the presence or absence of family dependents.

A principal difference between earnings subject to the social-security pay-roll taxes on wages, and earnings subject to the self-employment taxes, is that wages, no matter how small, are subject to the tax-both the withholding tax and the employer tax-while no tax is imposed on self-employment earnings where the aggregate for the year is less than $400. Indeed, employee taxes are imposed on earnings so small in aggregate that they are ignored for benefit purposes.

In appraising the social-security benefit and tax provisions, as applied to persons with insubstantial earnings over the year or the calendar quarter, it is important that we keep in mind two principal things: (1) Administrative and other practical considerations involved in tax collections, where small

earnings are concerned; and (2) The effect of the exclusion or inclusion of small earnings on eligibility for benefits and on the benefit amounts, in the case of the individuals concerned.

In broad theory, as presently conceived of, old-age and survivors insurance bases eligibility and monthly amount of benefits on earnings, and imposes supporting taxes on those same earnings. Both under existing law and under H. R. 6000 there are limitations on, and departures from, this broad theory. One limitation is that of disregarding for social security purposes any part of earnings above a certain annual amount-$3,000 under existing law, $3,600 under H. R. 6000. This limitation is in general predicated on the, at least originally intended, purpose of the act-to provide only a floor of protection for individuals. OASI was conceived of as a device for reducing the likelihood that an individual's old age or death would result in creating a public relief problem. The maximum earnings counted for benefits are based on the idea that there is no social justification for providing persons whose incomes have been above the specified annual maximum with larger retirement and survivor benefits than are provided individuals and families whose earnings have been at the $3,000 or $3,600 maximum. In dealing with annual wages above this ceiling the tax and benefit provisions are identical. Each excludes the earnings above the ceiling.

This uniformity of treatment does not exist, however, in the tax and benefit provisions dealing with very small earnings. As a matter of fact, the benefit provisions themselves are not uniform in defining amounts of small earnings which shall be disregarded.

EARNINGS THAT ARE DISREGARDED FOR BENEFIT PURPOSES

Under H. R. 6000, "small earnings" are defined in somewhat larger amounts than in existing law, and the variance in amounts to be disregarded for various benefits purposes is also broader.

In determining whether an individual is "retired," "wages" of $50 or less per month are disregarded. In determining benefit amounts of an individual whose average wage and years of coverage are sufficient to make him eligible for some benefits, if his average wage is actually less than $50 per month it is "deemed" to be $50, and hence the actual amount of small average earnings is disregarded, provided, of course, that they are sufficient to afford "eligibility." I shall come to this in a moment. As for a self-employed individual, in determining whether he is "retired," earnings, regardless of amount per month, are to be disregarded unless the aggregate for the year exceeds $600. There are certain other variances between earnings as an employee and as a self-employed person.

Oddly enough, another figure $400 per year, an average of $33.33 per monthis used in defining "year of coverage." Earnings below this figure in a year are ignored, whether from employment or self-employment, or a combination of the two. Under the bill a benefit is computed on the basis of average wages and then increased one-half of 1 percent per "year of coverage." Even more important, the bill reduces benefits in direct proportion to years which are not "years of coverage."

Still other size amounts of small earnings are disregarded for determining eligibility. Eligibility is conditioned on an individual having a sufficient number of "quarters of coverage." In the case of earnings as an employee, if wages are less than $100 in a calendar quarter, these wages are disregarded, but if $100 or more the individual has a quarter of coverage toward eligibility. Thus with less than $100 wages in a year an individual has no quarter of coverage toward eligibility; with amounts between $100 and $200 in a year he can have one quarter of coverage at the most, and may have none; with between $200 and $300 he may have none, one or two quarters of coverage, and with amounts between $300 and $400 he may have none, one, two, or three quarters of coverage, and with amounts of $400 or more, he may have one, two, three, or four quarters, depending on when he receives his pay and the amounts received.

In the case of self-employed persons, it is difficult, if not impossible, to determine the particular calendar quarter in which self-employed income was received, so the bill prescribes a special rule for the self-employed. In this case, $200, but less than $400, in earnings in a year is defined to mean one quarter of coverage; $400, but less than $600, is two quarters of coverage; $600, but less than $800 is three quarters of coverage, and $800 and more is four quarters of coverage. However, in cases where self-employed income is less than $400 it is not taxed or counted for benefit purposes. Less than $400 self-employment income would