you this has had even more impact on the bond market than some ide Advanced in the form of a piece of paper known as a tax bill from the House Ways and Means Committee in the House, and that is the tationary situation.

It has been driving down the value of bonds and really doing a on their salability in the market. So I do not think that this is a attributable to the House Ways and Means bill.

Mr. MCCANN. That may be true, Senator.

However, I think that evidence has indicated as late as this afternoon that other market areas, being relatively stable, there was that impact in that very, very short period of time and this, of course, is a clear indication as the market goes as to what is taking place, and you can examine it rather closely at that point to decide what has triggered that change.

Under these circumstances, and the people in the field more verse in it than I am-I am only on the receiving end of the thing, but I am concerned about it, don't get me wrong by any means the people versed in this field clearly indicate this was the underlying cause. Senator MILLER. You are not going to tell us that before the House acted on this bill over there that the municipal bond market was not in deep trouble, are you?

Mr. MCCANN. Oh, no, I do not mean to indicate it was not in deep trouble. Let us put it this way, it was not quite as deep.

Senator MILLER. I'll agree with you, and what the House bill did was to add insult to injury.

Mr. MCCANN. That is correct, no question about it.

Senator MILLER. I think we can agree on that.

I only point out, my only point is, that I feel rather strongly about the reaction of the general taxpayer. I do not want to see that reaction go to such an extent as to do away with capital gains, which some of them want to do. I do not want to see it go to such an extent that they are going to have a tax on municipal bonds, as some of my colleagues. especially over in the House on the Joint Economic Committee, have advocated for some years, always over my vigorous protests, but you have got a number of people thinking that way, and some of them even talking about a subsidy, and I do not want to go to the extent of a taxation subsidy approach because of the potential, as the Governors pointed out.

But I do not know how we are going to handle this problem. If you have any suggestions on how to avoid taxpayers picking up the papers and reading where some people have got large incomes without pay ing any tax on it, I would sure welcome it because that is the question posed here. It may be that the collective judgment of the Congress may be that we will let them continue to pick up newspapers on that.

Mr. MCCANN. One answer I can give you, Senator, I can give you the question, of the several individuals that you have mentioned who have been able to avoid taxation, and as to what is the exact breakdown, and I am talking from the municipal end of it, or to what extent do they have municipal holdings.

They may be insignificant, nonexistent for that matter, and yet it is the idea of throwing out the baby with the dirty water, I'm afraid. Senator MILLER. I think Senator Baker made a good point on this the other day, you might have heard him. He indicated that he was

questioning the hardness of the evidence of the Treasury backing up its figure of $35 million. I do not know where they got it, and the suggestion has already been advanced that we might include a box on the tax return form where you have to show the amount of your municipal bonds to permit the Treasury to get the hard evidence. So there is merit to that.

I appreciate your responses very much.

Thank you very much.

The CHAIRMAN. Thank you, gentlemen.

(Hon. Paul J. Manafort's prepared statement follows:)

PREPARED STATEMENT OF MAYOR PAUL J. MANAFORT

The Connecticut Conference of Mayors strongly opposes Federal taxation of interest on municipal bonds. This exemption is essential, if municipalities are to provide, badly needed public facilities and to prevent further deterioration of their serious financial condition.

Municipalities in Connecticut, as in other States, are trying hard to meet the pressing needs for schools, streets, sewers, and other public facilities. These needs are greatest in the older cities, which are attempting to catch up with years of neglect, and in the suburbs which must adjust to new growth.

The interest on bonds for such facilities is one of the largest items of local government expense. Interest on each million dollars of bonding costs us about $500,000 over the life of our 20-year bonds. Every rise in the interest rate adds to our local tax burdens, and impairs our ability to provide essential public facilities and services.

Connecticut's cities and towns face mounting costs daily. Debt service costs for urgently needed public facilities are already staggeringly high.

In Connecticut, for example, municipalities completed $60 million in school construction projects last year-projects taking care of some 35,000 additional children. The interest on these schools alone will be roughly $15 million to the cities and $15 million to the State. Add to that the libraries, roads, police stations, and other facilities we have built and need to build, and the cost is immense. These costs are difficult enough for cities to meet. Taxation of municipal bonds will result in higher interest rates. Wall Street municipal bond experts advise us that communities now paying from 5 to 62% will have to pay 8 to 82% interest to compete with corporate bonds. Communities with weaker financial structures-including some of those with the most difficult problems-may have to pay as much as 10 or 11%. Municipal bond experts advise us that fear of the legislation before your committee has already caused a 1% increase in the rate at which municipal bonds are now selling.

Higher interest rates will mean higher local taxes, bearing most heavily on those who can afford it the least.

The situation is particularly difficult in Connecticut. Our municipalities are straining to find adequate sources of revenue. Yet our cities must rely exclusively on the overburdened property tax. The State of Connecticut pays a smaller proportion of our local costs than in 45 other states. The property tax bears the rest.

The Federal and State governments should be helping cities solve urban problems, not adding to our burdens. It is unfair to single out municipal bonds for "reform" while other tax loopholes continue to exist. We should be getting more financial assistance, instead of being penalized.

We therefore strongly urge you not to include taxation of municipal bonds in the bill your Honorable Committee will report.

A copy of the resolution passed unanimously by the members of the Connecticut Conference of Mayors is attached.

RESOLUTION

Whereas, local property taxes are much too high, and as a result, municipalities are unable to provide all the needed services, and

Whereas, increasing the cost of financing schools, sewers, streets, and other very badly needed public facilities, through taxation of municipal bonds, would aggravate the problem by leading to high property taxes and diminished municipal services, and

33-8650-69-pt. 4- 53

Whereas, the Connecticut Conference of Mayors believes that every American should pay his fair share of taxes, but

Whereas, taxation of muncipal bonds will add further to the financial burden of all municipalities, and

Whereas, it is completely unreasonable to single out municipal bonds for "reform" while many other exemptions, favorable tax treatments, and loopholes will continue to exist, now therefore

Be it resolved that the Connecticut Conference of Mayors vigorously opposes Federal taxation of interest on municipal bonds.

The CHAIRMAN. The next witness is Mr. Irwin Karp, counsel, the Authors League of America.

STATEMENT OF IRWIN KARP, COUNSEL, THE AUTHORS LEAGUE OF AMERICA, INC.

Mr. KARP. Mr. Chairman and members of the committee, I have submitted a statement for the record, and I will try not to repeat too much in my presentation.

I appreciate very much this opportunity to appear before the committee, and I would like to discuss two aspects of the bill which are of great concern to authors, composers, artists, and other self-employed creative individuals.

The first is section 802, which would impose a 50-percent maximum tax rate, and the second is section 301 dealing with the averaging provisions of the Internal Revenue Code.

As to section 802, the authors league supports the section and believes it should be adopted, with one very strong reservation; namely, that as the section is now written it does not apply to authors, composers, artists and other individual taxpayers.

In my prepared statement, I have pointed out that this is probably mere inadvertence. I think that we are simply the victims of semantics. The purpose of section 802, as the chairman pointed out earlier in discussing this with Mr. Surrey, was to apply the limit only to earned income and not to income produced by capital.

However, in drawing the distinction between these two categories of income, the draftsmen of the bill borrowed a definition of "earned income" from section 911 of the Code.

Section 911 deals with an entirely different problem, the taxation of nonresident citizens. There "earned income" was very narrowly defined to include only income from personal services, because in giving an exemption to nonresident citizens in section 911, the Congress only wanted to extend the exemption to those people who actually had to go abroad to earn a living, who rendered services abroad.

Actually, personal service income is not the only type of earned income. People earn their income by various means. Authors and composers, for example, when they are self-employed, do not in the Treasury's eyes receive personal service income but the Treasury recognizes that their income is earned.

Consequently, if section 802 contains only the present definition, and does not include an additional definition, authors and these other people would be excluded from its benefits.

This problem has been before the committee once before in connection with the provisions of the Keogh Pension Act, now section 401 of the Code. There the right to participate was based on "earned income," and the definition was originally borrowed from section 911.

T

As this committee pointed out, it was not its intention to exclude authors and others who earn their income, and it added a further definition to section 401. We respectfully urge the committee to adopt that definition and add it to section 802.

I would like to say a word, if I may, as to why I think the 50 percent limit is important and should be added to the Code. First of all, as the House committee report points out, and as former Secretary of the Treasury, Mr. Barr, pointed out, present rates are extremely high. Mr. Barr terms them "confiscatory." Speaking for authors, I take my reference from a literary magazine, the Saturday Review of March 22, 1969, where at page 25, Secretary Barr said:

Quite possibly the 50-percent maximum rate proposal would be the most significant aspect of tax reform. Ultimately, if the top rates could be reduced to 40 percent or 45 percent, with compensatory plugging of loopholes, then I think there would be a good chance to meet Secretary Kennedy's goal

And he quotes

All Americans in similar circumstances paying approximately the same amount of tax.

I think that the provisions of 802 are a great step forward in that direction. As the chairman pointed out, because they are limited to earned income, they do not benefit those taxpayers who have a large amount of unearned income, and who are right now, according to the Treasury's tables, paying much less than 50 percent in tax on that income. They would benefit the comparatively few taxpayers who are in the $100,000 and above bracket who actually pay tax at the effective 50- to 70-percent rate.

Authors are usually in that group because they are particularly exposed to high bracket taxation in those few years when they are fortunate enough to make a considerable amount of money. Because they are self-employed, they cannot avail themselves of the tax shelters and deferment plans, that people who own businesses or who are highly paid executives of corporations can take advantage of.

I also think that the application of the 50 percent maximum rate, would remove a considerable obstacle to independent creativity. Actually, the high rates today serve to drive many creative people out of doing independent work and into working as employees-doing the same kind of work but subject to the control of an employer because it is much easier, safer, and more lucrative to work for somebody else, with the rates being what they are today.

The second provision of the act which is of concern to us is section 311 which would modify section 1301 of the Code.

When this committee approved section 1301 in 1964, its report pointed out that the purpose of the section was to permit taxpayers with fluctuating income to pay tax at a rate equivalent to that paid by other taxpayers earning the same amount of income but receiving it proportionately over a long period of time pay. Because authors, athletes, actors, and other people whose income fluctuates widely happen to have their income concentrated in a few years, it is taxed at a much higher rate, and more of it is actually paid in taxes.

In 1964, the Code was amended to permit the averaging of this excess income-to permit a taxpayer whose income in a given year exceeded by a third his average of the preceding 4 years, to pay a tax

on that excess income, according to a formula which, in effect, taxed it as if it had been received proportionately over 5 years-the 4 years of the base period and the current year.

This has helped a lot but it has not met the problem of the individual (such as the author) who labors for many years, 6, 7, 8, or 9 years. and produces a work which in 1 or 2 years earns a great deal of money nor the individual-the author or the athlete or the actor-who spend many years at his profession or at his art, is not successful financially. but suddenly has a period of 2 or 3 years where he earns a lot of money. In the first instance the 4-year base period just does not spread the income over the same period of time that in actuality he spent producing it. We have proposed in our statement to the committee the possibility of adding two alternative base periods so that such a taxpayer could elect a longer period. We propose there be periods of 3,4, and 6 years, but we are not wedded to any particular number of years. A taxpayer could elect the longer period if his income in the current year exceeded the base period by a great amount. In other words, the more that income in a current year exceeds the average income of a longer base period, the more likely it is that it is the product of longer period of work.

Under our proposal, the taxpayer whose income in the current year is at least 20 percent of the prior 3 years could average over those years. The House committee proposed 20 percent for a 4-year base period; we suggested 333 percent.

At the other end of the scale, if his income in the current year were, say, 40 percent-a considerably higher amount-above the average of the preceding 6 years, he could average over the 6-year period.

pose

We think this approach would more closely approximate the purof averaging which is to have a tax rate on this kind of income reach some equivalence with the income tax paid by individuals who earn the same amount over the same period of time but receives it gradually.

Those are the two proposals we submit for your consideration.

The CHAIRMAN. Well, let me see, how many years do you want to average across now? Right now you can average over 5 years, as I

understand it?

Mr. KARP. Over 5 years.

The CHAIRMAN. You take this year and average it with the four previous ones; right?

Mr. KARP. That is right, Mr. Chairman.

The CHAIRMAN. How many do you want to put into that?

Mr. KARP. We propose 6 years plus the current year, which would make a total of 7 years as the maximum period. But with a much higher requirement to elect that longer period. The excess income in the current year must be higher than the 20 percent for the 5-year period. It would have to be 40 percent.

The CHAIRMAN. Right.

Now, give me your example, if you would, please, of the kind of case that you think would require 7 years.

Mr. KARP. I can think, without actually knowing the gentleman's personal financial problems, of an author like William Shirer, who spent almost that much time writing the "Rise and Fall of the Third