Secretary CHAPMAN. Yes, that can be done, Senator. We have a pretty full record of that, and that will be broken down according to the four or five agencies in the Department. I will break that down for you. (The information referred to follows:) PAD. DEPA DMA. DFA. 1 Interior Department-data on accelerated tax amortization 1 [Amounts in millions of dollars] Administration Total. 1 Applications received as of May 5, 1951. Certain portions of the amounts involved may have been referred to different agencies than those shown for recommendations. Recommendations and denials as of May 10, 1951. 2 Exclusive of $2.1 million recommended without any amortization percentage. 2 No percentage recommended. Secretary CHAPMAN. Now, Senator Maybank asked me a question a moment ago that did not fully answer. I got off on to another question, and I do want to answer fully. You asked me about my opinion and my position here concerning some of these amortizations. The CHAIRMAN. You say you have five billion in front of you? Secretary CHAPMAN. Yes. And you asked me about the rate. The CHAIRMAN. You have got to get it out of the earth before you can manufacture it in the city. Secretary CHAPMAN. Mr. Chairman, my position has been a little different on this matter, and I will take my criticism now rather than take it later, because I want to get mine over with early. I would be criticized Senator BRICKER. You do not think you will thereby be relieved, do you, permanently? Secretary CHAPMAN. I am not thinking of the permanent relief as I am of getting the job done that is vital before us." Senator CAPEHART. I think that will be one thing where you use the term "maintenance.” Secretary CHAPMAN. Well, that seems to be a sustained question. I have been one of those who had some tendency to want to hold down the amount of tax amortization, feeling that with these incentives we were giving in other areas, such as loans, contracts, and so on, I would want to keep the amortization amount as low as I reasonably could. In answer to Mr. Harrison's memorandum to me of March 3, 1951-I sent back to him a memorandum outlining my views-I am not going to read the whole memorandum, but I think it would be very helpful to you to get a clarification of exactly what I think. The CHAIRMAN. Without objection, we will print the entire letter in the record. Secretary CHAPMAN. I would be very pleased if you would. This clarifies my position, exactly the position I have taken on these amortizations. The CHAIRMAN. In summary, what did you say about it? Did you think it ought to be kept down as you stated, because loans and other things enter into the picture? Secretary CHAPMAN. Let me read you one page, which I think will summarize it. Even if all the short-term tax on cost of accelerated amortization is eventually recouped, such amortization will amount to a tax-free loan to applicants. Should taxes rates be reduced after the defense period, as we hope they will be The CHAIRMAN. As they were last time. Secretary CHAPMAN (continuing). The cost of accelerated amortization would be measurable by the difference in tax rates. In either case, it is imperative in the public interest that the cost of accelerated tax amortization be held to a minimum consistent with getting the present job done. In line with this approach, it has been my policy to determine rates of accelerated amortization consistent first with a reasonable postemergency economic value of the new facilities; second, need for new facilities in relation to programed expansion; and, third, utilization of all other available expansion tools. As a result of working with the several deputy administrators, programs have been and are being developed and examined in the light of the various expansion tools best suited to the purpose. In the field of accelerated tax amortization, we are developing a series of ranges of rates for numerous industries. In some of the early cases, the criterion was only how much less than 100 percent would be acceptable to the applicant. We are now approaching the problem from the other end; namely, what is the minimum amount of amortization over and above normal depreciation which is justifiable in order to get the job done? Senator BRICKER. Is that not about the only criteria you could use? It seems to me that is fundamental and inherent in the law. Secretary CHAPMAN. That is what I thought, and that is the way I feel. That is why I would like my full explanation to be put in the record, if you do not mind, because I have gone into detail on that and studied it. (The letter referred to follows:) DEPARTMENT OF THE INTERIOR, Hon. WILLIAM H. HARRISON, Administrator, Defense Production Administration. MY DEAR MR. HARRISON: I am transmitting herewith, for your consideration, a statement commenting upon the Defense Production Administration memorandum of March 1, 1951, describing the administration of the accelerated amortization program to date. In this statement, we have attempted to put accelerated amortization in the setting of the particular expansion needs of this emergency period, to analyze the cost implications of the high level of percentages so far established, to analyze, further, the basic reasoning underlying these high percentages, and to relate accelerated amortization functionally to the other available expansion devices. Our position, as expressed in this statement, is in favor of a significant lower ing of the level of percentages for new facilities having a reasonable prospect of postemergency economic value, for a relation of accelerated amortization actions to programed expansion, and for an integrated utilization of all of the expansion tools. In forwarding this statement, I am fully aware of the fact that the recommendations of this Department, on individual applications referred to us for processing, have been generally in line with the pattern of percentages originally established by the National Security Resources Board for the steel industry and thereafter extended to certain other industries. However, because of my concern with this problem I have admonished each of the defense administrations under my jurisdiction to program their needed expansion as carefully as possible and to be more conservative in their recommendations of percentages of accelerated tax amortization. In some instances I have requested restudy of recommendations which have come to me in the interest of reducing the rates. We have expressed our concern with this problem to members of your staff. I believe it is necessary now that we make sure that the program is as soundly and conservatively based as possible and I therefore urge your serious consideration of these comments as you are crystallizing the policy which will guide all of us in making recommendations concerning accelerated tax amortization, as well as the use of other forms of financial assistance, such as direct Government loans, guaranteed loans, and guaranteed purchase contracts. Sincerely yours, OSCAR L. CHAPMAN. Secretary of the Interior. Enclosures. COMMENTS OF THE INTERIOR DEPARTMENT ON DPA MEMORANDUM RE AMORTIZATION OF EMERGENCY FACILITIES UNDER SECTION 124A OF THE INTERNAL REVENUE CODE, MARCH 1, 1951. INTRODUCTION Government policy conceives the current emergency to be one requiring an immediate and substantial increase in military strength and the maintenance of that strength against any military eventuality over an indefinite period of time; the assurance of the essential productive capacity needed to support a sufficiently strong and growing economy to enable us to carry a heavy defense program for an unlimited period with minimum controls upon the economy during the long term; and the imposition of such economic restrictions and controls during the short term as are necessary to permit the needed increase in the output of military supplies and the needed expansion of facilities for military and essential civilian production to be achieved as quickly as possible. In this respect, the current emergency differs from the early World War II period when the country was preparing rapidly for a global war. Then, the objective was to convert all possible capacity to military production, to provide any additional capacity needed for that purpose, and to do both as quickly as possible at whatever temporary impairment of the domestic economy might be necessary, consistent with a short-term, all-out national effort. The current emergency differs from the early World War II period further in that there was considerable more flexibility and elasticity in the economy at that time than there is today. The country was then emerging from a period of relatively low economic activity; its productive facilities were by no means fully employed. Before Korea, on the other hand, the country's productive facilities were virtually completely utilized for civilian production. To sustain that high level of economic activity and, at the same time, to provide the facilities needed for military production puts a heavier premium upon facilities expansion now than in 1941 and a particularly heavy premium at this point of time in the present emergency upon an extensive facilities expansion program. Accelerated amortization is concededly a necessary and useful facilities expansion device, but it does not follow that it should be relied upon as the principal expansion tool for achieving broad facilities expansion, as under the present policy. This policy, which has resulted in an average of 72.5 percent of the cost of the facilities already certified being subject to accelerated amortization, it is submitted, will lead to excessive cost to the public.1 It is to be noted that the Special Committee Investigating the National Defense Program found that, with reference to facilities valued at $6 bilion for which 100 percent necessity certificates were issued during World War II the cost of the war could have been reduced by $3 billion (S. Rept. 440, pt. 6, 80th Cong., 2d sess., 1948, pp. 233-234). 2L 10ned veel and aluminum famlities, freight cars, and taxe sce z a fair di assume that a full employment economy Will ero Cut *L Te The farla fr wih ameierated amortization is being sought appear to cost will be financed, for the short run, out of tax revenues. If the total investment in facilities certified over the next few years amounted, say, to $30 billion, which is not considered at all unlikely, the short-term loss of tax revenues could therefore approximate $13 billion. While the average percentage for amortization may decrease and some of the firms receiving amortization may not be subject to the excess profits tax rate, these considerations tend to be offset by the probability of a significant increase in the total investment for which accelerated amortization will be sought, as further applications are filed, as well as by the likelihood of an increase in the effective tax rate. The foregoing cost estimates, of course, do not take account of postemergency tax recoveries, nor of the interest cost to the Government on the funds thus made available to industry during the emergency, at a rate of about 2% percent. For facilities having postemergency economic value, accelerated amortization is an interest-free "loan," repayable in part after 5 years. If the useful life of the facility is long, for either civilian or military purposes, and the tax rate drops substantially after 5 years, the amount repaid will be low. If the life is short and the tax rate remains high, the amount repaid will be greater. In the past, the tax rate has traditionally dropped after war emergencies, but, even if the tax rate does not decline after 5 years, the public will bear the cost of interest on the tax payments postponed during the emergency--a factor of very real value to the firms receiving accelerated amortization. Thus, with an effective tax rate of 77 percent during the emergency, and an average postemergency tax rate of 45 percent, only 58 percent of the "loan" (equal to more than 43 percent of the investment in facilities assumed to have an average useful life of 25 years) would be repaid; if the average postemergency tax rate were 55 percent, 69 percent of the loan would be repaid. Including the cost of interest, the total cost to the public would be 29 percent of the amount of the total investment involved if the postemergency tax rate were 45 percent, and about 21 percent if the postemergency tax rate were 55 percent. At the lower rate, the total long-term cost of the estimated investment of $11.5 billion involved in the applications already filed would amount to more than $3 billion; at the higher rate, the total long-term cost would amount to about $2.5 billion. If the total investment involved in facilities certified over the next few years amounted to $30 billion, the total long-term cost would be almost $9 billion (at the lower rate) and more than $6.5 billion (at the higher rate). Although the long-term cost to the public must be weighed against the shortterm cost, the short-term cost should not be minimized by undue emphasis on the lesser, long-term cost. Under a pay-as-we-go tax policy, the short-term loss of revenue must, of necessity, be compensated for by increasing the already heavy tax burden of the people as a whole-i. e., by shifting the tax burden of a relatively few corporations to other taxpaying segments of the. public. Moreover, if accelerated amortization is included in prices as well as for tax purposes, it could have a significant inflationary effect as well, at a time when inflationary pres sures are otherwise inordinate. AMORTIZATION AS AN INCENTIVE The high percentages being granted for amortization are the results of using accelerated amortization as an "incentive," rather than as a means of compensating for genuinely accelerated expiration of economic utility, the same in character although more rapid in rate than normal depreciation for tax purposes. Certainly, it is expected, and the Congress assumed, that the Government should compensate industry for unusual risk occasioned by abnormally short economic utility of needed new facilities due to postemergency economic conditions or unusual costs. This is especially true of facilities for the production of military end items. But even for many of the facilities producing military products, total cessation of the emergency will not necessarily entail complete loss of their economic value. For those facilities, on the other hand, whose products are used in identical form for both civilian and military purposes, cessation of the emergency may entail no loss at all, and generally where this is true no specical incentive should be needed over and above fair compensation for unusual costs, if any. Some of the new facilities for the production of such products may be less economic than the older facilities, but the converse will frequently be The likely effect of the present amortization policy will be to cut the tax rates for corporations receiving necessity certificates at least in half. |