company, producing 1 or 2 items, is not able to increase its costs, with the result it loses a share of its volume to its larger competitors. As a result, since 1946 the toilet preparations industry has had more than its share of small companies who went out of business or were forced to merge with larger companies. Thus, in the toiletries industry, high retail taxes by raising the retail price discouraged the purchase of toiletries, stagnated the market for them and helped to get under way a trend toward concentration of economic power in the hands of the larger firms. This has happened at a time of prosperity, in a period when consumer's disposable income was high. I shudder when I think what will happen to the small companies in our field, if there should be a downward turn in our economy. Must we wait until the industry is debilitated, as we did in the case of the movie theaters, before remedying the situation brought on by the retail tax on toilet preparations? Must we tell our small companies that it is the policy of Congress to correct excise-tax inequities suffered by an industry only when it is approaching a state of in extremis? Some sellers have advanced the view that buyer resistance to toilet preparations, inspired by the high retail tax, could be eliminated if the tax was "hidden" by being imposed at the manufacturer's level, Industry leaders have rejected this proposal to deceive consumers as immoral, and we also feel as your committee did in 1941 when it found that experience had proven that under manufacturers' taxes on toiletries evasion is substantial and inequitable competitive situations arise. Prior to 1941, when a manufacturers' tax was levied on toiletries, inequities resulted from the fact that some companies utilized packaging and sales subsidiaries. Companies producing a toiletry and packaging it had to pay tax on the full value of the packaged product. On the other hand, toiletries sold in bulk to other companies for packaging were taxed only on the value of the preparations, with the packaging and merchandising costs excluded. To avoid taxation, producing companies, packaging companies, sales companies, etc., sprung up, with the result extensive litigation was necessary to determine the basis on which the tax was to be paid. The Treasury Department has also concluded that the uniform retail price, as a basis for the toiletries tax, is more equitable to producers and sellers of toiletries with varying forms of business organization.3 Retailers in the beauty and barber shop industry oppose a toiletries tax at the manufacturers' level since it requires prepayment of the tax which ties up their capital, clogs the channels of credit, and reduces the amount of merchandise they can buy at wholesale. Moreover, they realize that a tax imposed at the manufacturers' level will take away from them the relief you granted when you repealed the tax on items they use in rendering professional services. Because excise taxes are pyramided, a manufacturers' tax on toiletries will not bring a reduction of the retail price nor an increase in consumers' purchasing power, which are the ends we seek in urging relief from high retail taxes. Under a manufacturers' tax, the consumer pays a higher price than he would, under a retail tax of equal rate, the Government gets considerably less revenue and wholesalers and retailers, including drugstores and beauty shops, make an additional profit by applying their normal markups to the manufacturers' tax. We support the views expressed by the witness you heard last week, who urged the adoption of the Curtis bill (H. R. 5733) which would replace the manufacturers' tax on cigarette lighters with a retail excise tax. We urge you to reject the proposal that the tax on toilet preparations be imposed at the manufacturers' level. Each year, since 1947, those who have suffered the inequities and discriminations of the high retail taxes were told that budget balancing made it necessary to postpone relief but they were assured that such relief would be granted when the heavy expenditures required for national security could be reduced and the budget balanced. Each year we patiently accepted such promises, endured the tax discriminations, and hopefully looked forward to the following year for tax relief. We have now reached the point where we recognize that the uncertainty of world conditions and the need for revenue which the spenders state is necessary to make us nationally secure could keep the budget in an unbalanced condition for some time. So, we feel that the time is at hand when Congress must Report of Committee on Ways and Means on the Revenue Bill of 1941 (H. R. 5417), H. Rept. No. 1040, 77th Cong., 1st sess.. p. 33. Report of Committee on Ways and Means on the revenue bill of 1941 (H. R. 5417), Press Service No. S-482. Testimony of Sanford H. Bolz, counsel. Cigarette Lighter Manufacturers Association, Inc., before the Committee on Ways and Means, July 30, 1953. correct the inequities and discriminations inherent in selective high retail taxes, regardless of the effect on budget balancing. If expenditures are cut and excise tax relief can be given in fiscal 1955, without unbalancing the budget, you have no problem. You can probably help bring about a cut in expenditures if you let the spenders know revenues will be reduced, as a result of excise tax revision. If relieving the inequities created by selective high excise taxes adds to a budget deficit in 1955 and there should be a decline in business activity, there would be added justification for lowering the excise tax rates since such a budget deficit, plus the increased purchasing power unleashed by reducing the excises, would 'be forces to moderate the economic decline. Repardless of its effect on a budget balance in fiscal 1955, there should still be excise-tax revision to remove inequities by lowering the rates to the point where the power of the excises to discourage purchases, discriminate, decrease purchasing power and curtail production is minimized as much as possible. I offer the following suggestions: 1. Your committee should, at the next session, initiate concrete proposals for the reallocation of sources of taxation between the Federal, State, and municipal governments. The Treasury Department has published the results of its exhaustive study on this subject. Under a plan suggested by Roswell Magill, president of the Tax Foundation, the Federal Government would get out of the excisetax field, except for the regulatory excises on liquor and tobacco, and the States would cease levying income taxes. This plan implements a provision of the 1952 Republican Platform designed to minimize double taxation and enable the various divisions of the Government to meet their obligations more efficiently. However, this long-range plan, which requires the assent of the States, must not be used as an excuse for postponing the correction of inequities caused by Federal excise taxes. 2. Your committee should act at once to minimize the inequities and discriminations in the Federal excise tax system by substituting a 5-percent retail excise tax on all articles now subject to a Federal manufacturers' or retail tax, excepting those articles to be used in further manufacturing or processing; alcohol, tobacco products, matches, wagering and other articles which do not lend themselves to retail taxation. While this proposal may appear to be a modified form of a general sales tax, I ask the opponents of that form of taxation to remember that most of the articles proposed as the base for the suggested 5 percent retail tax carry considerably heavier rates, at either the retail or manufacturers' level. The retail, rather than the manufacturers' level as the basis for the 5 percent tax is proposed since it will produce 80 to 100 percent more revenue than a 5-percent-manufacturers' tax and, generally, the consumer pays no more, under a retail or manufacturers' tax of equal rate. This is because manufacturers' taxes are pyramided by resellers, at the various levels of distribution, who profit by such tax by adding their normal markup to it. Since there is no price benefit to the consumer under either a retail or manufacturers' tax of equal rate, the Government should benefit from the increase added to the price and not resellers, which can be done by imposing the tax at the retail level. 3. Not knowing what articles would be subject to a general sales tax nor the rate, we take no position on that proposition but we hope that the arguments which will arise as a result of it will not deter correction of the inequities suffered by those selected for heavy 20 percent retail taxation. If the retail taxes are not general sales taxes, what are they? An important part of the American people, particularly the women, have been suffering from a sales tax for 10 years at a rate 6 to 10 times the amount generally applied to general sales taxes. To those who seek allies in their fight against the general sales tax I point out that unless the inequities of high retail taxes are corrected, the industries affected by them will realize that a 2 percent general sales tax is preferable to a 20 percent retail excise tax. If a general sales tax is proposed, we would feel that food, clothing, medicines, and fuel should be exempted and, further, the need to maintain the purchasing power of the low-income groups would require the granting of an additional income tax deduction of $50 for persons having net incomes of less than $2,000. This special deduction would serve as an offset for each beneficiary of payments of a 2 percent sales tax on approximately $500 worth of taxable purchases, or $1,000 for a man and wife. Federal-State-Local Tax Coordination-A Treasury Tax Study, U. S. Treasury Department, tax advisory staff of the Secretary, March 7, 1952. Yours is a difficult task. We ask the Divine Providence to guide you in your efforts to correct the inequities and discriminations in the excise-tax system and to give you courage to do justice where it should be done. NATIONAL HAIRDRESSERS AND COSMETOLOGISTS ASSOCIATION, INC., Mr. JACOB RECK, DEAR MR. RECK: This is to authorize your appearance as the Washington representative of the Beauty and Barbers Industry Legislative Committee. This association joins with the National Beauty and Barber Manufacturers' Association and the Associated Master Barbers in comprising the Beauty and Barber Industry Legislative Committee. As our Washington representative, you will continue your efforts to secure relief from the present 20 percent tax on cosmetics and also to vigorously oppose any attempt to impose the cosmetic tax at the manufacturers' level. We trust that you will keep us advised of your progress in this matter and that you will notify us in the event that we can give you any assistance. Yours very truly, L. A. FREIBERG, Executive Secretary. ASSOCIATED MASTER BARBERS AND BEAUTICIANS OF AMERICA, Mr. JACOB RECK, Mr. EBERHARTER. I notice on page 11 you commence with your suggestions; that is, the actions you would like to have the committee take? Mr. RECK. Yes. I was going to come to that, Mr. Eberharter. 1 am cutting down on some of it because some of the other witnesses mentioned it. Mr. SIMPSON. We appreciate that. The CHAIRMAN. The hour is pretty late. We have been sitting for a good many hours. Mr. RECK. In the beginning, and to hold the interest of Mr. Sadlak and Mr. Simpson, I want to point out that there are 240,000 beauty and barber shops in the country with 750,000 employees. While a previous witness said that all manufacturers want to put the tax at the retail level, all retailers are not in favor— Mr. SIMPSON. I think it is fair to say that there may have been a misconception there. The Association of Manufacturers has asked the committee that if there be an excise tax that it be placed at the manufacturer's level. This evening we had testimony from a number representing retail groups, and they asked that the tax be placed at the retail level with the exception of the last gentleman, who made the suggestion that on toiletries it be placed at the manufacturer's level. Mr. RECK. I wanted to make it clear in the beginning that as far as the beauty and barber shops are concerned, they feel that it ought to be kept at the retail level. In other words, this proposition has zigzagged back and forth tonight. Mr. SIMPSON. My only point is that there is a divergence, and we are glad to have your point of view. Mr. SADLAK. At this point, are you speaking for the consensus for the three organizations you represent? Mr. RECK. That is right. On the very last page you will find a specific reference to their opposition to placing it on the manufacturer. Mr. SADLAK. With the exception of my home town barber, he complains to me every time I get there. Mr. RECK. He is against the tax, not where you put it. Mr. SADLACK. Well, he is against both, as he also sells. Mr. RECK. Well, I cannot see why he should be, Mr. Sadlak, because this committee very generously gave that barber relief from the tax on the cosmetics he uses. Mr. EBERHARTER. That was special, too. Mr. RECK. That is right, very special. I am here to talk about the toilet preparations tax which was imposed to curtail production of these items by discouraging purchases of them by consumers, in order to conserve scarce materials and manpower needed in the effort to win World War II. The beauty and barber industry respects and appreciates this committee's efforts in the recent past to correct hardships and discriminations in the excise-tax system. We will ever be grateful to this committee for recommending the repeal of the 20 percent tax on the tools of the trade of barbers and beauticians. I had hoped to skip the next paragraph to save time, but I think that in view of the developments today I should read it. We heard the well-documented case presented to your committee on the hardships suffered by small theaters, as a result of the movieadmissions tax. We commend this committee for recommending repeal of that tax. It confirms our belief that this committee is just and possesses the courage to correct an injurious hardship. We disassociate ourselves from those who complain that the seperate remedial treatment accorded the movie industry is a discrimination against other industries suffering from excise taxes. Such thinking could foreclose any relief for some of the industries suffering most from excise taxes carrying unnecessary, unusually high rates. It would make impossible a selective treatment by this committee of those taxes which bring about the greatest discrimination and hardship. Due to the extensive hearings conducted on excise taxes in 1947 and 1950, your committee is informed of the discriminations against and hardships suffered by sellers, consumers, and producers of the items subject to the 20-percent retail excise tax. In 1950 you recognize the need for relief from these taxes when, in favorably reporting the Revenue Act of 1950 reducing the rates of these taxes to 10 percent, you stated: The present 20-percent retail excise taxes are among the heaviest now imposed. Since they are levied on the retail rather than the manufacturers' price, they are, in fact, anywhere from 30 to more than 100 percent higher than a 20percent manufacturers' excise tax would be. Your committee believes that excise-tax rates of this size are undesirable in a peacetime economy. Unfortunately, the advent of the Korean conflict created another emergency and Congress again had to postpone relief from the retail taxes, which were originally imposed as emergency taxes in World War II, but which have been continued ever since. Others, appearing at these hearings, will fully refresh your memories as to how and why retail excise taxes, carrying a high rate, are unfair, discriminatory, and bad for consumer and business alike. Thus, to save time, I will refer to only sufficient instances of such unfairnesses and discriminations to make understandable the suggestions I will make later for action by your committee, leading to eventual relief. I attended most of the hearings on excise taxes, conducted by your committee in 1947 and 1950, and have sat in on some of those held during the past 10 days. The following arguments against high excise taxes have been heard over and over again by you, as you patiently listened to the statements of many witnesses: 1. They should be used for emergency financing and regulation only during war. 2. Their regulatory effects, in diverting materials and manpower from production of civilian goods to war materials by discouraging the purchase by consumers of taxed items, in order to curtail their production may be justified in wartime but is indefensible in peacetime since, to maintain prosperity and employment, the opposite result is needed, for example, consumers must be encouraged to buy items, not discouraged as they are by high retail taxes. 3. The selection of some, but not all, less essential items for high retail taxation and the exclusion of others, no more indispensable than those taxes, creates inequities and discriminations and makes the Government a party to a system of unfair competition, intolerable and inconsistent with a peacetime free economy. 4. Congress perpetuated the inequities, discriminations, and unfair competition inherent in a limited system of high retail taxation on selected items, initiated by it in World War II when, in 1947, it indefinitely continued such taxes, without broadening the base to include articles in competition with those taxed and no more essential to the public. I have not heard anyone in Congress, the administration, or industry seriously dispute these propositions. President Eisenhower, in his tax message to Congress of May 20, admitted that the wide variety of existing excise rates makes little economic sense and leads to improper discrimination between industries and among consumers. During the past 6 years, there has been a lot of talk about the unfairnesses of high retail taxes on selected items, but like Mark Twain's observation about the weather, "nothing has been done about it." Studies have been undertaken and sincere efforts made to bring relief but those high taxes are still with us. As a result, representatives of the industries affected by these high excise taxes, such as myself, are forced to continue our fight, lest they be perpetuated as a permanent part of our Federal tax system. Over the years, we have appeared before you repeating much of what has been said before but hoping that some new observation we make will spark the fuse of indignation and bring early corrective action. This past session has taken its toll and I admire your patience in giving us a chance to tell our story. Similarly, this past session has meant another one has gone by without relief and we, too, have had |