In other words, the surtax exemption of $25,000 long ago became little more than a pleasant relief at tax time. It accomplished little in terms of the surtax exemption's original intent. It was in recognition of this fact that Congress acted early this year to raise the exemption to $50,000, and to cut the rate on the first half of that to 20%. That was an important first step. The exemption increase will allow corporations to retain an additional $1.2 billion of earnings, something on the order of $6,500 per company. That amount is insignificant, of course, for a major corporation. But for a small warehousing concern or small manufacturer, that amount means a needed fork-lift or upgrading of a production line.

Much more adequate, though, in terms of achieving the exemption's desired effect, would be to recognize the harsh fact of 400% of inflation since 1936, and to set the exemption for future years at $100,000. Doing so would bring tax rates more into line with current realities. Canada, for example, has already recognized the necessity of a $100,000 exemption. It began a staged increase from $35,000 three years ago and has now reached a surtax exemption of $100,000.

Providing such an incentive for growth does mean a near-term

revenue loss for the government, but that loss is more than repaid over

the long run as more and more companies venture beyond the $25,000 profit level made attractive by current law.

FOOTNOTES

1)

"Small Enterprise in the Economy", Small Business Administration, December 1974.

2)

"Number of Firms by Size of Receipts and Business Form", Department of Treasury, 1970.

3) "Statement of Senator John Sparkman" before the Senate Finance Committee October 6, 1966.

4) "Senate Committee Report", (88th Congress, second session, S. Rep. No. 830 (1964)31). (To accompany H. R. 8363 amending Section 11 of the 1954 Code.)

5)

Conversation with Paul R. McDaniel, Professor of Law, Boston College Law School and the author, April 1975.

6) Correspondence, December 17, 1974, from L. William Seidman, Assistant to the President for Economic Affairs to Fred C. Young, President, Coordinated Planning Services, Inc.

7) Karsh, Norman, Office of Advocacy Small Business Administration, December 1974.

8) Report of Senate Select Committee on Small Business, September 1974.

54-397 O 75 17

INTERNAL REVENUE CODE SECTION 11

(Before Amendment by the Tax Reduction Act of 1975)

EXHIBIT A

Tax Imposed.

(a) Corporations in General. A tax is hereby imposed for each taxable year on the taxable income of every corporation. The tax shall consist of a normal tax computed under subsection (b) and a surtax computed under subsection (c).

(b) Normal Tax.

The normal tax is equal to the following percent

age of the taxable income:

(1) 30 percent, in the case of a taxable year beginning before January 1, 1964, and

(2) 22 percent, in the case of a taxable year beginning after December 31, 1963.

(c) Surtax.

The surtax is equal to the following percentage of the amount by which the taxable income exceeds the surtax exemption

for the taxable year:

(1) 22 percent, in the case of a taxable year beginning before January 1, 1964,

(2) 28 percent, in the case of a taxable year beginning after December 31, 1963, and before January 1, 1965, and

(3) 26 percent, in the case of a taxable year beginning after December 31, 1964.

(d) Surtax Exemptions For purposes of this subtitle, the surtax exemption for any taxable year is $25,000, except that with respect to a corporation to which section 1561 or 1564 (relating to surtax exemptions in case of certain controlled corporations) applies for the taxable year, the surtax exemption for the taxable year is the amount determined under such section.

(1) section 594 (relating to mutual savings banks conducting life insurance business),

(2) subchapter L (sec. 801 and following, relating to insurance companies), or

(3) subchapter M (sec. 851 and following, relating to regulated investment companies and real estate investment trusts).

(f) Foreign Corporations. In the case of a foreign corporation, the tax imposed by subsection (a) shall apply only as provided by section 882.