on that. A lot of people feel that we did not do a very good costbenefit job on OSHA, and it got out too fast. And the training is not very good, and we are spending too much time moving fire extinguishers. And you know the old story about the OSHA inspector who says, that banister should be on the left-hand side and 6 inches lower. So you move it, and all of your employees fall down the stairs, because they are used to it on the right.

Well, we do have some problems with that. In principle, it is correct. But we do know it is taking a tremendous amount of investment capital. Pollution control, of course, is the same thing, and all I am saying is, it is going to make it tougher for the firm in the future, regardless of how much capital it can accumulate. So, compounding the problems of inflation and taxes, we have got this problem, too. As far as specific recommendations, I did not prepare any.

Mr. FIELDING. Well, we have some, Senator Hathaway. I do not know whether we have the time to go into them. I would be glad to list some of the suggestions that we have, if time permits.

Senator HATHAWAY. Why do you not start listing some of them, and then you can submit some to us that we could incorporate in the record?

Mr. FIELDING. One of our suggestions is the graduated corporate income tax rate with a maximum of 45 percent; and then also, this would apply to individuals. The maximum tax rate on individuals from earned income would be 45 percent. The 30-percent requirement would be thrown out; the 30-percent penalty would be thrown out. Graduated investment credit, so that the individual who buys a small amount of goods gets a greater percentage of the credit. Increase the first-year depreciation, so that the small buyer gets a greater share of the increased first-year depreciation-optional cash basis for all taxpayers of any inventories of less than $200,000 a year-credits for undistributable tax on unincorporated business. We would like to see the Small Business Committee investigate indexing the tax structure. We think the payroll tax requirements, tax deposits, are very discriminatory against the small businessman. These should be changed. He does not have enough time to make his deposits, and he is always being penalized.

We think there should be a committee for tax simplification for small business. We think the subchapter S quagmire could be very easily solved if we could just treat subchapter S as a partnership. We have got plenty of regulations dealing with partnerships. There is no reason why we cannot treat them the same.

Another thing we run into are the effective dates of our laws. We have an effective date in the code, and I think the Pension Reform Act is a very good example of this. We have had effective dates; we have had regulations that have not come out; we do not know what the effective dates mean. We feel that the effective date should be 1 year after the regulations come out, so we can understand what we are doing.

Retirement income credit should be increased. The individuals who previously were subject to retirement income credit no longer get it because their social security credits go up so high. Net operating loss carryovers—no reason why a company has to be restricted to 5 years in the future. It should be an indefinite time.

Those are some of the suggestions we have, Senator.

Senator HATHAWAY. Fine. Thank you very much. Thank you, Mr. Chairman.

Senator BENTSEN. Do you have any idea, any estimates, of what that would mean in loss of tax revenue? That is the first thing Treasury hits us with when we talk about something like that.

Mr. FIELDING. Yes, we do. We would be glad to submit that.
Senator BENTSEN. I would like those estimates.

[The material referred to follows:]

NATIONAL FEDERATION OF INDEPENDENT BUSINESS 1975 TAX REFORM PROPOSALS

FIRST PRIORITY

I. Graduated Corporate Income Tax Rates

II. Graduated Investment Credit

III. Increased First Year Depreciation

IV. Optional Cash Basis

V. Undistributed Taxable Income of Unincorporated Businesses
VI. Indexing the Tax Strucuture

VII. Payroll Tax Deposits

SECOND PRIORITY

VIII. Committee on Tax Simplification for Small Business

IX. Sub-Chapter S Corporation

X. Effective Dates

1. 22 percent of the first $25,000 of taxable income and 48 percent on all income in excess of $25,000.

2. For 1975 the rates were temporarily reduced.

B. Proposed structure

1. Taxable Income and Rate:

$0 to $9,999-10 percent.

$10,000 to $19,999-$1,000 plus 15 percent of excess over $10,000. $20,000 to $29,999 $2,500 plus 20 percent of excess over $20,000. $30,000 to $39,999-$4,500 plus 25 percent of excess over $30,000. $40,000 to $49,999 $7,000 plus 30 percent of excess over $40,000. $50,000 to $59,999-$10,000 plus 35 percent of excess over $50,000. $60,000 to $69,999-$13,500 plus 40 percent of excess over $60,000. $70,900 to $79,999-$17,500 plus 45 percent of excess over $70,000. 2. Proposed rates would apply for 1976 and subsequent years.

C. Supporting arguments

1. The income which a small coporation retains (income less taxes on income) is vital to its continued existence. Increasing this retained income through realistic tax relief will enable these corporations to have sufficient working capital to remain in business and acquire more capital goods to insure a healthy existence. Based on the 1970 income statistics, the comparative schedule disclosed the fact that 600,000 (82 percent) of the corporations paying income taxes that year had taxable income of less than $30,000. In todays economy the present two-tiered tax structure is inequitable when it is applied to the small corporation.

2. A graduated corporate income tax would bring corporate taxation more into accordance with the principle of the ability to pay, which has long been in effect for individual income taxes.

D. Estimated revenue loss

1. Based on 1970 corporate income statistics, the estimated revenue loss would be approximately 3 billion dollars. (See attached comparative schedule).

A. Present Structure

II. GRADUATED INVESTMENT TAX CREDIT

1. A percentage of the cost of acquisition of capital business goods and manufacturing facilities is allowed as a credit against the purchasers tax liability: (a) Property with a useful life of:

(1) less than 3 years-0.0 percent.

(2) 3 years but less than 5 years-2% percent.
(3) 5 years but less than 7 years-4% percent.

(4) 7 years and over-7 percent.

2. This credit applies to all entities whether it is sole proprietor, partnership, sub-chapter S corporation, or a regular corporation.

3. The credit is limited with respect to the purchase of used equipment to the first $50,000 of used equipment purchased in a year.

4. The credit, in a given year, cannot exceed the taxpayer's total income tax liability for that year. Any excess may be carried back and/or forward to other taxable years.

5. If the taxpayer disposes of the item for which there has been an allowable tax credit before the end of its useful life, the government recaptures all or a portion of that investment credit.

6. The investment credit for 1975 and 1976 was temporarily increased by the 1975 Tax Reduction Act.

B. Proposed structure

1. Percentage of the cost:

(a) Property with a useful life of less than 3 years, the credit would be 0.0 percent.

(b) Property with a useful life of at least 3 years

(1) 20 percent of the cost ranging from $0 to $4,999.

(2) 15 percent of the cost ranging from $5,000 to $9,999.

(3) (i) 10 percent of the cost ranging in excess of $9,999 if the property has

a useful life of 7 years or more.

(3) (ii) 7 percent of the cost in excess of $9,999 if the property has a useful life of less than 7 years but 5 years or more.

(3) (iii) 4 percent of the cost in excess of $9,999 if the property has a useful life of less than 5 years but at least 3 years.

2. There would be no limitation with respect to used equipment.

3. If the credit exceeded the taxpayer's income tax liability, the difference would be refunded.

4. If the taxpayer disposes of the property before it has been held for at least 3 years, the government would recapture all of the previously allowed credit. Any recapture of credit previously allowed on the costs in excess of $9,999, would be treated the same as it is under the present law.

C. Supporting arguments

1. Graduated rates with emphasis on purchases under $5,000 would help small businesses overcome the problem of raising working capital and accelerate their decision to purchase capital goods.

2. Allowing a full credit on all equipment purchases totalling less than $10,000, and having a useful life of at least three years, will encourage the more current replacement of equipment. Accordingly, if equipment is to be replaced over a shorter life-span, then there should not be a limitation on the investment credit applicable to used equipment. Trade-ins are a vital element of the capital goods industry and used property is purchased more often by small businesses than large corporations.

D. Estimated revenue loss

1. Based on a 1974 NFIB survey which developed a financial profile of its members and assuming that there are approximately 10,000,000 tax-paying businesses in the United States, the following revenue loss statistics can be developed:

(a) 56 percent made no purchases in 1973 equals 5.6 million businesses-no revenue loss.

(b) 25 percent purchased less than $10,000 equals 2.5 million businesses-estimated revenue loss $767 per business equals 1.9 billion dollars.

(c) 8 percent purchased more than $10,000 and less than $25,000 equals 800,000 businesses-estimated revenue loss $1,275 per business equals 1.0 billion dollars.

(d) 4 percent purchased more than $25,000 and less than $50,000 equals 400,000 businesses-estimated revenue loss $1,875 per business equals .75 billion dollars. (e) 4 percent purchased more than $50,000 and less than $100,000 equals 400,000 businesses-estimated revenue loss $3,000 per business equals 1.2 billion. (f) 3 percent purchased more than $100,000 equals 300,000 businesses-estimated revenue loss (assuming average purchase of $250,000) $8,250 per business equals 2.5 billion dollars.

(g) Total estimated revenue loss 7.35 billion dollars.

A. Present structure

III. INCREASE FIRST YEAR DEPRECIATION

1. An additional amount of depreciation is allowed in the year of purchase on all depreciable property having a useful life of at least six years. The additional depreciation is limited to 20 percent of the cost of the first $10,000 of property purchased during the year. This limitation applied to all business entities. However, individuals filing a joint return are allowed a $20,000 limitation. The remaining cost of the assets are reduced by the additional first year depreciation before calculating the normal depreciation for the year.

B. Proposed structure

1. Additional first year depreciation on

(a) 30 percent of the cost of first $5,000 of depreciable property

(b) 25 percent of the cost of second $5,000 of depreciable property, and

(c) 20 percent of the third $5,000 of depreciable property. (In the case of a joint return the 20 percent would apply to the next $10,000 instead of $5,000) 2. No requirement that the depreciable assets have useful lives of at least six years.

3. No adjustment to depreciable basis of assets for the additional first year depreciation for purposes of computing annual depreciation.

C. Supporting arguments

1. An increase in the first year depreciation allowance would help small businesses to overcome the problem of raising working capital and accelerate their decision to purchase capital goods.

D. Estimated revenue loss

1. Based on the assumption that 4.4 million business taxpayers will each purchase depreciable property in excess of $5,000, the estimated revenue loss is 1.7 billion dollars.

2. Included in the 1.7 billion revenue loss, is an estimated loss of $262,000,000 attributable to the calculation of annual depreciation without a reduction in basis for the first year depreciation.

A. Present structure

IV. OPTIONAL CASH BASIS

If inventories are an income determining factor, a business must determine its taxable income on the "accrual" basis. Accounts receivable are included in income, accounts payable are treated as expenses, and the increase in inventory during the year is excluded from cost of sales.

B. Proposed structure

1. Grant every business with an ending inventory of less than $200,000, the option to determine its taxable income on a "cash" basis. Accounts receivable would not be included in income, accounts payable would not be treated as expenses, and the increase in inventory would be included in the Cost of Sales.

2. For a presently existing business using the accrual basis, the conversion would produce a loss, which would be amortized in equal amounts over a 10 year period. 3. The maximum ending inventory of $200,000 would be indexed to the cost-ofliving.

4. A taxpayer would lose this "cash" option when its ending inventory exceeded the maximum for two consecutive taxable years.

5. If a taxpayer voluntarily converts or is required to convert to an "accrual" basis, any income created by the conversion would be amortized over a ten-year period. If there exists any unamortized loss, from a previous conversion to a cash basis, the taxpayer would continue its amortization of such a loss.