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this legislation and encourage favorable action by your committee in reporting the measure out.

I am sure that with the economic trends we are experiencing in this country that it is necessary for the Federal Government to guard very closely against inadequate unemployment compensation payments. Inadequacies arise either with respect to the amounts paid for unemployment compensation or for the period of time during which a person might receive payments during unemployment. Legislation of the nature before your committee establishes certain standards which would be an assist in maintaining a better economic standard for our Nation's unemployed. Clearly, this in turn is of benefit to the economy generally, and the bill merits favorable consideration because of its impact on the other elements of our country's economy as well as recognizing the needs of the unemployed.

I do believe that it is necessary as a general philosophy for the Federal Government to examine circumstances of this nature with the thought in mind that the general welfare of the country requires favorable action on this legislation. In so many parts of our country today, unemployment compensation is either totally inadequate or the period of time for payments is too limited considering the difficult employment market in some areas of our country.

For the foregoing reasons, I urge favorable action on thsi legislation and sup port of it after the committee has reported the matter out for congressional action.

Respectfully submitted.

IVAN A. NESTINGEN, Mayor.

OFFICE OF THE MAYOR,
Milwaukee, May 12, 1959.

WAYS AND MEANS COMMITTEE,
House of Representatives,
New House Office Building,

Washington, D.C.

(Attention: Representative Wilbur Mills, chairman.)

HONORABLE MEMBERS OF THE COMMITTEE: I desire to express my support for the Federal unemployment compensation standards bill which is known as the Karsten-Machrowicz bill.

While the problem of exhausting unemployment compensation in Wisconsin has not been as great as in other States, there is still something of a problem in this State. In addition, there is the problem of technological unemployment which many Milwaukee workers have felt and which more will feel as automation becomes more and more prevalent. Representatives of employees have told me on several occasions of the problem of the pool of unemployed in their respective unions largely due to automation. They have stated that even with a recovery from the recession of recent months, their union members are not finding work because the output of industry has increased without increasing labor. It will be very difficult to find work for many people owing to the fact that they wil need to be retrained and owing to the fact that new types of industries will have to be established in order to give such people work. In addition, the prospect of shortening the workweek and increasing wages is not very great so that people will not be absorbed by this type of change in the economy.

Consequently, I think that there should be some extension of unemployment benefits and that this can best be done by setting up certain Federal standards which will induce the States to conform to those standards. I, therefore, wish to be recorded in favor of the Karsten-Machrowicz bill which I think is a good beginning in this direction.

Yours respectfully,

FRANK P. ZEIDLER, Mayor.

A STATEMENT CONCERNING THE ECONOMIC FACTORS UNDERLYING H.R. 3547 RELATING TO FEDERAL UNEMPLOYMENT INSURANCE BENEFIT STANDARDS (By Lawrence C. Lockley, Dean, School of Commerce, University of Southern California)

Any modification of our unemployment compensation plans must be approached from the point of view that extensive periods of payment or rates of payment constituting a substantial proportion of the normal wage rates of recipients will in fact do more harm than good to those who are unemployed.

For the last 25 years, we have been attempting to find ways of shielding workers from the dynamics of an industrial economy because they are not always able to take care of themselves. Only some 50 years ago, we were much nearer to the farm, and a consequential proportion of our workers could find shelter and food on the farms of relatives and friends. But as mechanization has come to both agriculture and to industry, individual workers are less and less able to fend for themselves in periods of unemployment, and are less mobile between kinds of work.

In our zeal, and possibly under political pressures, we have attempted to protect various groups by legislative enactment, and by the appropriation of funds for rather direct relief. A penetrating analysis of the effects of such legislation is a highly technical task. Yet certain conclusions can be stated with considerable definiteness.

We have acted on a statement of a series of "economic rights of man" which represent a noble aspiration, but which may not represent accomplishments possible by legislation. We can no more legislate the distribution of a given flow of economic goods and services-that is, a particular level of standard of living— than we can legislate that all couples have happy marriages, or that all people have good health.

We have accepted the responsibility, for the Federal Government, of maintaining a suitable economic climate. This acceptance was made by means of the Employment Act of 1946. Under this act, the Government's fiscal actions maintain conditions under which employers are able to offer broad employment opportunitites.

It is clear that some direct payment to individuals from public funds is necessary. We have always had to support those among the aged who could not support themselves. We have had to support the incapacitated. We cannot, however, support broad groups of workers from public funds except during transitional periods without doing the economy great harm and reducing their future opportunities.

It must be remembered that we are not living in a land of vast accumulated consumer goods. The elements of our standard of living come to us as a flow of goods, as those commodities are extracted, processed, or manufactured. Even our large and accumulated surpluses of agricultural products are not at a consumable point, but must be processed and distributed before they are ready for consumption. Steady rates of employment bring a smooth flow of consumer goods for the support and sustenance of our people.

Goods cannot be created by legislation. What can be created is new money. Thus, unless every payment to individuals (for home relief, for unemployment compensation, for military pension, for compliance with certain agicultural programs, or whatever else) comes from taxes levied against individuals, such payments either depress business or contribute directly and greatly toward continued and increased inflation.

Let me try to explain this statement-which is almost a truism to economists. Funds used for the payment of various programs of consumer support must come from: (1) Taxes against business, (2) taxes against the individuals, or (3) the creation of new money by the Federal Government. Taxes against business add to the cost of doing business, and this militates against profit expectations, and discourages business expansion. In fact, such taxes may help to eliminate marginal businesses. Insofar as possible, we should rely on normal business activity to support our economy and ourselves; therefore, we should attempt to avoid taxes which discriminate between businesses, or taxes which fluctuate. We should keep our tax levy against business as modest as our needs will allow. It is well known that business profits constitute a small percentage of sales, ranging typically from around 1 percent to rarely more than 5 percent. The fact that we have as large a volume of profits in the United States as we have is due to the large number of companies contributing to the whole. Business profits are a small part of our gross national product. We have no great pool of resources here to draw upon.

The taxation of individuals brings about what economists call transfer payments. The consumption possibilities of one family are decreased by the amount transferred to another family for its consumption. And again, we have no great pool of wealth handy for taxation among the so-called rich. In 1956, the last year for which I have a report on individual income tax returns (Federal), I find that only 2.02 percent of those returning tax reports had adjusted gross incomes of over $15,000. I am aware of the fact that people put their poorest

foot forward in income tax returns, but the fact does remain that we have no wealthy class. In 1956, those receiving more than $15,000 earned approximately 13 percent of the aggregate. (These figures constitute income before deductions.)

We face the fact that we must support many of our expanding programs of Federal aid by the creation of new money, and thus by a direct inflation of our currency.

In the case of unemployment compensation, we have a considerable history to guide us to the conclusion that widespread unemployment is not to be alleviated by direct consumer payments. From the start of our great depression until the beginning of our business in munitions when war broke out in Europe, we tried sincerely and consistently to cure a depression by the direct payment to consumers. It was not until payrolls started with increased manufacturing activity that unemployment disappeared. In the meantime, a different course from ours had brought various European countries through the depression more rapidly. It was not a matter of direct support of consumer expenditures abroad, but of the earlier attempt to get employers busy enough to increase employment. The same conclusion is valid today. When we substitute government (Federal, State, or local) payments for wages, we do nothing to improve a condition which has led to unemployment.

Let us consider why unemployment arises. The immediate answer is simple and broadly true: The employer cannot produce enough revenue in carrying on his business to meet his costs in a competitive market. He has no choice but to curtail the extent of his operations. Any tendency toward inflation which will make it more difficult for him to do business will postpone his ability to rehire workers. Our most constructive step in relieving unemployment is to improve the business climate so that employers will be able to offer employment on a broad front.

Fundamentally, unemployment benefits should be regarded as a form of temporary aid to workers during a transitional period. Their extension over a longer period of time turns them into a form of "home relief" and makes them a method of long-term protection for people who have become unemployable. Their institution at rates not far below going wages for many workers makes them a substitute for work. First hand inquiry will show that many workers-particularly those who are not the major wage earners of families-already plan on a period of unemployment each year.

The setting up of a system of unemployment compensation which can be used as an alternate for wages inevitably decreases the effectiveness and productivity of our labor force.

Our present consideration of H.R. 3547 is urgent, because it tends to confirm as policy several steps which could work against our long-run economic stability and against our long-run opportunities for employment.

In the first place, this bill decreases State control over unemployment compensation, and increases Federal control over it. This step makes the point of control more remote from the areas where the difficulties lie. Federal control is likely to be uniform for wide areas. It is difficult to adjust to the varying conditions in the several States. The fact that qualifications for unemployment compensation coverage and rates of compensation and periods over which compensation is now paid differ among the several States is to be taken as a reflection of differing conditions. It seems unwise to make a Procrustean bed of a particular formula for unemployment compensation.

A greater degree of Federal control is likely to be more rigid. We should not want a degree of rigidity which would be the means for a year-by-year increase in the amount of compensation. Yet as the particular legislation is framed, it seems likely to move upward on the crest of each new wave of inflation. Such a machine for augmenting inflation will do vast harm to the working people of this country.

A final specific point bearing on the language of the Kennedy bill is that it puts a premium on improvidence by the several States. Those States which have husbanded their funds most capably are the ones which will derive the least support from the Federal fund for unemployment compensation. It is significant that the most vocal support for the bill comes from those States which have had the broadest types of "welfare" programs.

We have, in this country, a ready sympathy for distress, and are prone to rush to help when we know of those suffering from misfortune. I must reemphasize the fact that we cannot legislate conditions into being. We can legislate prohibitions, requirements, and appropriations. We can levy taxes. But

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legislation cannot make the less competent workers readily employable, nor can it directly inspire the less successful employers.

When we consider this bill, I feel we should decide that we must treat a disease, not its symptoms. Under the direction of the Employment Act of 1946, the Federal Government is already required to attempt to manipulate credit conditions so as to maintain a high level of business activity. Additional legislation which will handicap the Government in this activity wll be of disservice to the people.

Legislators are placed in an extremely difficult position when welfare legislation is placed before them. Since all of us acquire our necessities through the use of money, it seems to most people that all they need is more money to have more of what they want. They feel that their elected representatives should vote for bills which-directly or indirectly-give them more money. Yet few Senators or Representatives are unaware of the degree to which inflation threatens the solvency of our economy. The United States could have a runaway inflation. If an increase in the rate of our inflation is imminent, the Kennedy bill will add to that rate.

I feel that a major modification of this bill is in the public interest, and that unemployment compensation should remain as fully as possible a matter of State rather than Federal function.

Hon. WILBUR D. MILLS,

AMERICAN BAR ASSOCIATION,

Chairman, Committee on Ways and Means,
U.S. House of Representatives,
Washington, D.C.

SECTION OF TAXATION, Washington, D.C., April 13, 1959.

DEAR MR. MILLS: Referring to my letter to you of March 23, 1959, and the compilation enclosed therewith entitled "Recommendations as Adopted by the House of Delegates-Annual Meeting-Los Angeles, Calif., August 27-28, 1958" (referred to in the said letter as the "1958 Compilation"), I would like to call attention in connection with the current hearings before the Committee on Unemployment Compensation to our recommendation XII in said compilation which would amend the definition of "employer" in section 3306(a) of the Internal Revenue Code of 1954. For your convenience reference, pages 19 through 21 of the said compilation, setting forth the proposed amendment and the explanation therefore, are attached hereto.

I respectfully urge that the said recommendation be considered by the committee and incorporated in the record if consideration of section 3306 is within the scope of the hearings.

I shall be glad to furnish additional copies to the clerk of the committee if they are desired.

Sincerely yours,

LEE I. PARK, Chairman, Section of Taxation.

EMPLOYMENT TAXES

XII. To amend the definition "employer" under the Federal Unemployment Tax Act

Resolved, That the American Bar Association recommends to the Congress that, for purposes of the Federal Unemployment Tax Act, the provisions of the Internal Revenue Code of 1954 be amended to define an "employer" as any person having four or more individuals in his employ for some portion of 20 days during either the current taxable year or the preceding taxable year, each day being in a different calendar week; and be it further

Resolved, That the association proposes that this result be effected by amending section 3306(a) of the Internal Revenue Code of 1954; and be it further Resolved, That the section of taxation is directed to urge the following amendment or its equivalent in purpose and effect upon the proper committees of Congress:

SEC. 1. Section 3306(a) of the Internal Revenue Code is amended to read as follows (new matter in italics):

(a) EMPLOYER.-For purposes of this chapter, the term "employer" does not include any person unless on each of some 20 days during either the current taxable year or the preceding taxable year, each day being in a different calendar week, the total number of individuals who were employed by him in employment for some portion of the day (whether or not at the same moment of time) was four or more.

SEC. 2. This amendment shall be applicable to the calendar year 1959 and subsequent calendar years.

Summary

EXPLANATION

At present section 3306 (a) defines "employer" as any person having four or more individuals in his employ on each of some 20 days during the taxable year, each day being in a different calendar week. A majority of State unemployment compensation laws define "employer" to include any person who was an employer in the preceding taxable year. The Federal definition does not include a person who was an employer in the preceding year unless he also meets the tests in the current year. The proposed amendment conforms the Federal definition in this respect with the definition under a large majority of State unemployment compensation laws. It has the effect of reducing the arbitrary significance, under present law, of the timing of an acquisition in a situation where an employer, before the 20th week of the calendar year, acquires the assets or business and employs individuals who were employees, of a person who was an employer in the preceding year.

Discussion

Section 3301 imposes "on every employer (as defined in section 3306 ( a ) ) for each calendar *** an excise tax *** equal to 3 percent of the total wages (as defined in section 3306(b)) paid by him during the calendar year with respect to employment (as defined in section 3306 (c)). ***" Section 3302 allows a credit against this tax for contributions to a certified State unemployment compensation fund, and it allows an additional credit based upon the maximum State tax rate, but not in excess of 2.7 percent. Thus, where the maximum credits are allowable, the effective rate of Federal unemployment tax is 0.3 percent.

Section 3306(b) (1) defines "wages" as all remuneration for employment except remuneration in excess of $3,000 paid to an individual by an employer during the calendar year. It also provides that, if an employer (successor) during any calendar year acquires substantially all the property used in a trade or business of another employer (predecessor), and immediately after the acquisition employs in his trade or business an individual who immediately prior to the acquisition was employed in the trade or business of predecessor, then, for the purpose of determining whether successor has paid taxable wages of $3,000 to such individual during the calendar year, any wages paid to such individual by predecessor prior to the acquisition in the calendar year of the acquisition shall be considered as having been paid by successor.

Section 3306 (b) (1), however, applies only with respect to "employers," and under section 3306 (a) an "employer" is a person who employs four or more individuals on each of some 20 days during the calendar year, each day being in a different calendar week. Thus, if on May 31 successor buys all the assets of predecessor, thereafter operates those assets, and immediately employs predecessor's employees, of the wages paid by predecessor to each of its employees up to $3,000 are considered to have been paid by successor for purposes of determining whether successor has paid each of such employees $3,000 during the calendar year. Predecessor, meeting the definition of "employer" under section 3306(a) is liable for Federal unemployment tax; but he receives credits (up to 90 percent of the Federal tax) for contributions made to a State unemployment compensation fund. Successor, also being an employer, must file a return and pay Federal unemployment tax; but with respect to former employees of predecessor, successor pays only on an amount determined by taking the lesser of $3,000 or the total remuneration paid the employee by both predecessor and successor and deducting the wages paid by predecessor. Successor also receives credits against the Federal unemployment tax (up to 90 percent of such tax). Thus, both successor and predecessor pay at an effective rate of 0.3 percent and together they pay only on the first $3,000 of wages paid to the employee.

If, however, the acquisition occurs on April 30 (before 20 weeks have passed), the result is quite different. Predecessor is not an employer under section

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