Revised Program (Continued from page 3) allowances. Failure to withhold on dividends and interes: is an invitation to dishonesty that should be ended. 5. A means of reviewing erroneous of illegal IRS giveaway rulings. During the past decade, the Internal Revenue Service, by erroneous or illegal administrative rulings, has excused wealthy individuals and firms from paying billions of dollars in taxes they would otherwise have owed. That, in itself, is bad enough. But, even worse, the IRS has been largely successful in exempting itself from court review of "giveaway rulings" for the benefit of special interest claimants. "Giveaway rulings" are those that lose revenue, as contrasted with rulings that raise revenue; revenue raising rulings are already subject to court review. - Bureaucrats make mistakes like everyone else, and that's why government agency decisions including revenue raising rulings are routinely reviewed in court. There is no justification for a different practice in the case of "giveaway rulings" that lose revenue. One way to insure objective review of giveaway rulings is creation of a Taxpayer Protection Agency (see point 1, above). Another is to give ordinary taxpayers judicial "standing" to challenge giveaway rulings in court. In that way, erroneous rulings that lose money will be subjected to judicial review, just as revenue raising rulings now are. Alternatively, the staff of the Joint Committee on Taxation could be expanded to review revenue losing rulings, so that Congressional oversight of the rulings process would no longer be sporadic and haphazard. In one or another of these ways, the current practice which permits the IRS to give away money with no review by anyone must be ended. 6. Improved federal-state tax cooperation. The federal government has done nothing to implement the provisions of the Revenue Sharing Act of 1972 which were designed to provide federal assistance to state governments in collecting state income taxes. The federal collection program was intended to make state tax return filing easier for individual taxpayers and to save millions of dollars in state revenue that is now wasted on duplicative tax administration efforts. The Internal Revenue Service should take steps promptly to issue the regulations needed to get this program underway, and should actively cooperate with the states in their tax administration programs. In addition, the federal government should help the states to establish a coherent national policy regarding the state taxation of interstate activities. Among other things, action is needed to prevent double taxation of the same income in different states, due to differences taxing formulae, residency rules, and the like. Federa' activity in this area should involve listening, negotiating and mediating. For the time being, the federal rois should be to provide a forum in which conflicting state interests can resolve their differences. At present, the federal government is doing virtually nothing along these lines. At a minimum, clear responsibility for this work should be assigned within the Treasury Department. If TAX CUT BILL BECOMES LAW you are married and use the standard deduction when you fill out your tax return, you will probably like the changes made by the Tax Reduction and Simplification Act of 1977, which recently became law. But if you are a single person earning more than $13,750, the new law will be hard on your pocketbook. The tax cut bill increases the standard deduction to a flat $3,200 for married persons, in place of the old standard deduction which ranged from $2.100 to $2,800. Single taxpayers will now have a standard deduction of $2,200, rather than one that ranges from $1,700 to $2,400. Thus, 2 million single taxpayers earning more than $13,750 will find their taxes raised an average of $54 by the tax "cut" bill. The flat standard deduction, plus other changes, will allow taxpayers who take the standard deduction to add up their income and then immediately turn to the tax tables to figure out their tax. Most of the addition. subtraction, and division required by this year's tax forms will therefore be unnecessary next year. Bill Adds More Tax Gimmicks The tax cut bill also contains a number of provisions opposed by Taxation with Representation, especially the so-called "jobs credit." The credit is so complicated that it is impossible to describe it adequately here. In general, it is a prime example of trying to do good things through the tax code, and ending up with a subsidy that merely pays people to do what they were going to do anyway. Thanks in good part to our efforts, Congress finally eliminated the tax shelter aspects of the jobs credit to which we had objected earlier (see the TWR Newsletter for May 1, 1977). But the credit remains a wasteful tax gimmick, which is not likely to create many new jobs except for tax lawyers and accountants. Senator BYRD. The next witness is Dr. Pierre Rinfret, a noted economist and we are very pleased to have you, Doctor. You were here several years ago and you testified before another subcommittee that I was chairman of. I am very pleased to see you today. I have read your testimony and a good deal of hard work has gone into its preparation. We are very grateful to you. STATEMENT OF PIERRE A. RINFRET, PRESIDENT, RINFRET ASSOCIATES, NEW YORK, N.Y. Mr. RINFRET. Thank you, Senator, for inviting me to testify and for the privilege and honor of being here with you. I would like to say good morning to you, sir, and good morning to Senator Packwood. I have submitted to you, in response to the request of the subcommittee under the Legislative Act of 1946, a written statement of the work that we have done in regard to your question on incentives to economic growth. What I would like to do is briefly summarize some points that I have not put in the statement because a brief statement cannot include everything that we have done or our findings. Senator BYRD. Your complete statement will be published, and you may summarize as you wish. Mr. RINFRET. Thank you, Senator. First of all, what I have attempted to do is concentrate, as per your request, on several factors which I think are the most important factors for incentives for economic growth. I have concentrated on, No. 1. The uncertain principle that applies today in the development and utilization of capital. No. 2. What inflation is doing to capital recapture in the United States. No. 3. The attitude of large business regarding the small businessman or the small entrepreneur in the United States. I might point out, and I say this intentionally, that the subject of capital and capital formation is an area in which I probably concentrated my professional life for approximately 26 years. The organization that I was with in 1951 produced the first comprehensive survey of capital investment plans of American industry that was ever produced. Five years after that, we innovated the first survey of foreign capital expenditure plans by private industry and, simultaneously with that, we developed the first 5-year spending and expansion programs of the electric and gas utilities of the United States. These were, I might point out, a first. Eight years ago, we instituted the first financing survey of private capital expenditures in the United States and we innovated the first pollution control survey of private industry in the United States. In 1974, in what I think of as a major breakthrough in technical information, we innovated the first quarterly survey of capacity utilization in the United States. The reason I am reciting that is that I think I have a very different view of businessmen than most people do. I have long said to my professional colleagues that the finest economists in the United States are not economists, but business leaders, and over the 26 years that I have worked with American industry and, I might point out, American labor, the American business leaders are, in fact, superb analysts of the business economy. They have an uncanny perception of what lies ahead, not only for their industry, but for the economy. They tend to be very objective in their evaluations. Some are cold blooded. Finally, and most discouraging, generally their capabilities and their knowledge of the American business economy are largely ignored and, if not ignored, are denigrated. I have always believed, if you want to know something about industry, we ought to stop doing academic, intellectual, computerized, mathematical type research and just go out and talk to the people who are making the decisions. If you would put me in a school of economics, sir, I would say you would put me with the institutionalist school that says, why do we not ask the decisionmakers why and how they make the decisions that they do. That is what I have done in order to respond to the questions that this committee has posed. We have asked industry what they think their problems are, what they think the solutions might be, and I would like to make a few points to you which I did not include in my written statement but which I must admit, also, I am very pleasantly surprised about. We went out and surveyed approximately 90 major organizations covering diverse segments of the American economy, covering almost every major industry in the United States. We met with the chief executive officer of each organization and members of his staff. We did this from approximately May 10 to June 10, 1977, and it was done either by my senior staff or myself. One of the things I heard most frequently was this: Be reasonable in your testimony, do not ask for special favors, do not ask for special treatment. We are targeted enough as it is. Do not ask for anything special for private industry. Industry's second point was this: We do not make decisions on the basis of an investment tax credit or a DISC credit. We make our investment decisions on the basis of the economic factors, not the tax treatment. Of course, we take advantage of the tax laws. We would be foolish not to, but we do not make our decisions on the basis of the tax laws of the United States. I must say when I heard this from company after company and argued it and debated about it, I must admit I was surprised. I would like to pose you a paradox. We could argue that there is a capital shortage in the United States. We could argue that there is not a capital shortage. The answer is that there is, and that there is not. If we look at the net cash flow of American industry, that is, retained earnings plus depreciation going back to 1947, we see that from 1947 to approximately 1970 or 1971 American industry spent all of its cash flow, that is, retained earnings plus depreciation for new plant and equipment. No question that the two lines over the 22-year period would go hand in glove, line for line. Beginning in 1971, cash flow has grown more rapidly than capital expenditures. Given the results of our own survey of capital spending plans in 1977, which are very similar to those of the Department of Commerce, we came to the conclusion that American industry in 1977 would spend approximately $139 billion for new plant and equipment, a 15 percent increase over 1976; inflation accounts for approximately 7 percent of that and approximately 8 percent is a gain in what you might call the real volume. The most fascinating thing about that figure is that it is $40 billion too low. American industry, we estimate, in 1977, will have approximately $180 billion of cash flow and will spend $139 billion on new plant and equipment. In every year since 1971, cash flow has exceeded capital expenditures, and yet we sit here and discuss what we need to do to get American industry to spend more money for plant and equipment and why we need to produce more capital formation in the United States. I suggest to you it is a paradox, but there is a very simple resolution of the paradox. The most interesting part of the paradox is what I consider some devastating information. We produce, each quarter, a survey of capacity utilization in this country. We have just finished our survey for the month of April on utilization of capacity in American industry. The shocking thing is that in the month of April 1977, we estimate that manufacturing industry in the aggregate was operating within 3 percentage points of its all-time high in 1974, in terms of operations relative to capacity. We are going to run into shortages very soon in this business cycle. There are some critical industries already operating above 90 percent of capacity. In the aggregate, we have problems in manufacturing. So we have this paradox. Point No. 1, corporations have more cash flow than capital investment; this year they are accumulating $40 billion more in cash than they are spending for capital investment. Point No. 2, they are running out of capacity and they know they are running out of capacity. What is holding back investment in American industry? I might say, Senator, that due to you and your committee I have gained new insight into American business behavior. The response to the question of what is holding back investment came as a surprise to us. I think it is a new piece of information and I would suggest to that the key element in American industry's reluctance to invest in the United States despite available cash flow and shortage of capacity is something that is in the hands of the Congress of the United States. you We have, in the United States, what I call the normal run-of-themill business risk. Every businessman is willing to deal with that. He will take his business risks day to day. Those uncertainties to him are a certainty. Now he has a new kind of risk, and this new kind of risk he cannot handle. He does not know what to do about it. The new kind of risk is what I have labeled the legislative uncertainly. The legislative uncertainty, in fact, deals with what Congress is doing to American industry. I would like to read you-I will not read all of them-several quotes from what chief executive officers told us. I might mention that these corporations are giants in American industry. Some of these corporations are so big that they could be separate countries outside the major economic powers in the world. The first quote: The most important deterrent to investment in our industry is the absence of stable, realistic regulations. From one year to the next, we do not know what type of product we will be allowed to build-because of the changing safety, emissions and fuel economy regulations, many of them conflicting, and many imposed so late that waste in investment is the inevitable result. The combina tion of regulatory uncertainty and normal market uncertainty has led us to defer all but the most urgent investments. Senator, I might point out that that is one of the largest corporations in the world. The second quote: The problem today is one of uncertainty, particularly over energy. If a company wants to build a plant today, it does not know how it will be heated. The company cannot get long-term commitments for electricity. Third quote: In 1976, the company was interested in a vital nonferrous mineral which is used in nuclear powerplants This would have been a multimillion-dollar project. The company was very interested in this project and a great deal of management time was spent on it. The project was dropped principally because of uncertainties over the outlook for nuclear energy. Fourth quote: The environment for investment is becoming increasingly uncertain. The future looks scary. Contributing to this uncertainty are Government regulations. The Tris case is a good example of this. First the Government required that Tris be used in children's sleepwear; then it ruled that Tris was unsafe. Senator, I would suggest to you that the legislative uncertainties may be one of the dominant reasons why American industry is not investing its cash flow in the American economy today and I further suggest to you that this contains three elements. First, there is the energy uncertainty. It is forgotten that energy is a major cost of production. There is no energy policy in the United States. I have not been able to speak to any so-called authority who knows what is going to happen to petroleum prices, natural gas prices, nuclear energy, to pollution laws governing the mining of coal, to regulations concerning the interstate and intrastate flow of natural gas, to the electric power available in the Northwest and the Southeast. Business cannot plan with any degree of certainty about the future of the energy industry. I might parenthetically point out that power authorities in the State of Washington have indicated to industrial users that within 3 years they might not be able to supply them with power for such things as aluminum production and other large scale uses of power. Second, there is pollution uncertainty. Pollution controls are an absolute nightmare to American industry. The regulations change from one month to the next. The requirements change from one month to the next. If you put in a series of pollution controls, you do not know whether they will be adequate for new pollution laws that come along. Finally, there is the tax uncertainty. I was privileged to be here when Senator Long discussed the investment tax credit. I think that that is the absolute classic case of tax uncertainty, but he did not cite enough cases. The investment tax credit was implemented in 1962. It was suspended by President Johnson in the fall of 1966. It was reinstated by President Johnson in 1967. It was repealed by President Nixon in 1969 and it was reinstated at the request of President Nixon in 1971, but they reinstated it retroactively. |