I find that in connection with section 6C0 of the revenue act of October 3, 1917, the Assistant Secretary of the Treasury has approved a ruling of the Commissioner of Internal Revenue (T. D. 2739) which holds that the tax imposed by said section upon the sale of automobiles and other enumerated articles is not applicable to such articles when normally exported. It seems to me that the two taxes, while of a somewhat different nature, are both in essence taxes on sales of certain products as such, subject to the same reasoning as respects the distinction between export and domestic sales. Unfortunately, however, the Commissioner of Internal Revenue has not yet ruled that the tax provided for in section 406 of the act of 1916 should be computed on the basis of domestic sales only. For this reason, I think it desirable to bring to the attention of your committee the effect of this tax provision as at present applied, with the thought that perhaps it will be found advisable to insert a clause in the present bill specifically exempting export sales from the imposition of the tax in question. As an instance of the possible working of such a provision, if this is not done, I may cite the case of a very large manufacturer of cigarettes in this country, whose total output is exported, not a single cigarette being sold in this country. The tobacco consumed and the labor and materials used in the manufacture of the cagarettes are entirely domestic, and the industry is therefore one that might be considered a very desirable adjunct to this country. The larger part of the company's output is sold in China, where it is meeting very strong competition from Japan, one of the big disadvantages of the domestic company being the increased cost of transportation. The price at which the cigarettes may be sold to the average Chinese consumer is, as you can readily imagine, one that allows of a very slight profit, and this small profit is only overcome by the amount of sales.

If the present provision in the revenue bill under consideration by the Finance Committee should go into effect, this company would have to pay at the rate of 6 cents for every thousand cigarettes or fraction thereof exported, or in the neighborhood of $100,000 per annum. This additional burden is so great that it might be the cause of transplanting the industry from this country to China or some other country where the taxation is not so heavy. In the event that such should happen we should not only lose a very profitable portion of our export business and a, market for a large part of home-grown tobacco and six or seven thousand employees, but also the revenue resulting from the operations of the company in the nature of stamp taxes, income taxes, and other tax charges. I appreciate that this is an extreme instance, but it seems to me that the effect of this tax on our total export business is likely to be quite considerable.

As of possible interest in this connection, I hand you herewith a copy of Commerce Reports, issue of August 22, 1918, and call your attention to the article on page 720 thereof, which indicates the competition from Japan that our manufacturers of tobacco and tobacco products are already meeting in China.

Mr. MARTIN. There is one paragraph that I would like to read from the Commerce Reports (reading):

INCREASING TRADE IN JAPANESE TOBACCO.

(Excerpt from Japan Advertiser of July 18, transmitted by Consul General George

H. Scidmore, Yokohama.)

The tobacco trade of Japan in China and some other Asiatic countries is believed to have a fair prospect in spite of formidable competition. The rate of increase since the war began is apparently a support of this belief.

The export of Japanese tobacco is principally made through a company organized for that purpose and the principal market is in China and the South Pacific. Leaf tobacco has been so far favored by foreign buyers, but the shipment of cigarettes is increasing rapidly, and sometimes Chosen has to be drawn on to make good the shortage in domestic goods.

As to the prospect it is said by a tobacco man that in China the BritishAmerican Tobacco Co. holds a controlling position with its offer of better

tobacco, and Japan seems to have no chance to improve its position, but the prolongation of the war is seen to be in favor of Japan. With the further reduction in space for tobacco, foreign goods will come on the market less actively and Japanese goods may wedge in. Japanese hope that in a year or two Japanese tobacco will hold China's market eqully with foreign goods; that it may even outrival foreign goods.

The CHAIRMAN. Is there any other gentleman who desires to be heard this morning?

Senator DILLINGHAM. Mr. Chairman, I would like to submit this letter from the Estey Organ Co., to be copied into the record. The CHAIRMAN. Very well.

(The letter referred to is here printed in full, as follows:)

Hon. W. P. DILLINGHAM,

United States Senate,

Washington, D. C.

ESTEY ORGAN Co., Brattleboro, Vt., September 4, 1918.

MY DEAR SENATOR: Will you permit me to state a few facts and opinions in reference to the proposed tax of 10 per cent on the selling price of pipe organs? Pipe organs, as you know, are to a very large extent installed in churches and are an essential part of the public worship.

The usual procedure in the purchase and installation of a pipe organ is a long process, ordinarily beginning with agitation among the members of the church for improved musical worship, resulting in a subscription and campaign among the members for the raising of funds. Sometime early in the process the manufacturer of pipe organs is consulted and a fairly definite plan is mapped out as to the requirements of the church and the fund to be raised to meet that requirement.

I will not burden you with attempting to go into the details of this, as undoubtedly you understand it, having had experience probably in this matter. In short, a fund is usually raised and an organ bought accordingly.

Pipe organs are manufactured and sold on a very small margin of profit. Our experience, extending over many years, has shown us that there is considerably less than 10 per cent profit over the net cost of production and at the present time it is a very difficult matter to make cost and price meet. In many instances, owing to increased cost of material, our experience shows a decided loss on individual sales.

It is evident that the manufacturer can not carry a 10 per cent tax on the selling price of an organ and it will have to be ultimately passed on to the public, and in view of the way funds are raised for the purchase of organs, it seems more than likely that a tax of 10 per cent will practically kill the organ business in this country during the war, as it would be most difficult to go back to the communities and get them to raise additional funds under present conditions. A very large proportion of the skilled craftsmen employed in the production of church organs are men advanced in years. The majority of our best mechanics are men of from 50 to 60 years and over. These men can not readily adapt themselves to other work.

It does not seem to me that it is an exaggeration to assume that church organs are to a certain extent essential to the national welfare and interests of the public, on account of the use to which they are put.

I would not think of making a protest against a tax of musical instruments in general, but I believe church organs should not be placed in this class.

I do not know whether you would care for a schedule of figures, showing cost of production and selling prices. but if it would be of any benefit, I shall be glad to supply them. Of course I would have to make the figures up from my own experience, as those would be the only ones available to me.

I shall greatly appreciate your bringing this matter to the attention of the Committee on Finance when they are considering the new revenue bill.

I am, very respectfully,

J. E. ESTEY.

The CHAIRMAN. If there is no one else who desires to be heard, the committee will stand adjourned until to-morrow at 10.30 o'clock a. m. (Whereupon, at 12 o'clock noon, the committee adjourned to meet at 10.30 o'clock a. m. to-morrow, Tuesday, September 10, 1918.)

TO PROVIDE REVENUE FOR WAR PURPOSES.

TUESDAY, SEPTEMBER 10, 1918.

UNITED STATES SENATE,
COMMITTEE ON FINANCE,
Washington, D. C.

The committee met, pursuant to adjournment, at 10.30 o'clock a. m., in the committee room, Senate Office Building, Senator F. M. Simmons presiding.

Present: Senators Simmons (chairman), Smith, Thomas, Jones, Gerry, Nugent, Penrose, Lodge, McCumber, Smoot, Dillingham, Townsend.

The committee resumed consideration of the bill (H. R. 12863) "to provide revenue, and for other purposes."

The CHAIRMAN. We will hear Mr. A. F. Thomas this morning. Mr. Thomas, whom do you represent?

INCOME TAX.

STATEMENT OF MR. A. F. THOMAS, OF LYNCHBURG, VA.

Mr. THOMAS. I represent no particular interest in this matter. Senator PENROSE. To what phase of the bill do you address yourself?

Mr. THOMAS. The income tax.

Senator PENROSE. Are you an attorney?

Mr. THOMAS. No, sir.

Senator PENROSE. In what business are you?

Mr. THOMAS. I am interested in manufacturing.

Senator PENROSE. What kind of manufacturing?

Mr. THOMAS. The manufacture of wagons. Mr. Chairman, in looking over the list of distinguished Senators who compose this committee, I feel particularly fortunate in having such a forum in which to present my cause. I can not undertake to impress you with authority, but shall try to appeal to your reason, to your sound judgment, to your common sense, to your patriotism, to your democracy and. your republicanism, because those two terms in their general sense are synonymous.

I shall crave the indulgence of this committee for permission to present the matter I have in hand in an uninterrupted way. Senator THOMAS. How much time do you want?

Mr. THOMAS. I think it will take about an hour and a half.

The CHAIRMAN. We can not allow you that.

Mr. THOMAS. I am perfectly willing to begin the reading and leave the committee to decide as to the time.

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The CHAIRMAN. We have not thought of giving any one person any such time as that. We would not get through these hearings in six weeks if we did.

Mr. THOMAS. I am perfectly willing to accept the judgment of your committee in that matter. If your committee thinks proper to stop me at any time, I am entirely willing to stop.

The CHAIRMAN. I think, in view of what you have said, that it would be better for you to fix a time, because we would not want to interrupt you in the middle of your discussion. We want to give you ample opportunity to present your views concisely, and you will present them more concisely if you are limited than you would if you thought you were going to have an hour and a half.

Mr. THOMAS. As I said before, I am here

The CHAIRMAN. I do not think we can hear you more than half an hour. That is as much time as we have given anybody.

Senator THOMAS. How many of these gentlemen present expect to be heard to-day? We have quite a number of gentlemen present and they may be here for the purpose of being heard to-day. If that is the case, Mr. Chairman, we can not give anybody half an hour.

The CHAIRMAN. I have requests here from only six.

Mr. THOMAS. I have devoted a great deal of time to the study of this question. I have taken up the governmental and economic sides. of this question, and I have not yet met anyone who is familiar with the income-tax question who thinks it can be presented in 20 minutes. Senator THOMAS. I may say that some of the members of this committee have devoted a few hours of their time, during the past four years, to studying this question, and also in paying tax under it, so we know a little something about it ourselves-just a little, not much. Mr. THOMAS. I have not the slightest doubt that you know a great deal about it. At the same time, I have these views, and if the committee wish to hear me, I should be very glad to present them.

Senator PENROSE. I assume the gentleman can be permitted to file a brief.

The CHAIRMAN. That has been stated repeatedly.

Senator PENROSE. But it is ridiculous to expect the committee to listen to any one man an hour and a half on any phase of this bill. If we did, it would take six years to get through with it.

The CHAIRMAN. Of course, Mr. Thomas, as Senator Thomas has just said, the committee understands something about this, and we do not wish an academic discussion of this question. We want a practical discussion of the bill as we find it written, your objections to it, or your advocacy of any particular part of it, and we think that if you will make an effort to condense your views you can probably say in substance everything that you want to say to us in half an hour; and that is all we want-a direct, concrete statement of your views.

Mr. THOMAS. Mr. Chairman, if you will allow me, I think I could present what I want to present in the time we are taking in discussing the whys and wherefores of it.

The CHAIRMAN. I will give you half an hour from this time, and we will try not to interrupt you any more.

Mr. THOMAS. I will take that, and just let the committee decide at the end of the half hour whatever they wish to do.