The purpose of these hearings is to permit the business community to present their views on what is needed. I hope that the witnesses who will be testifying will avoid the temptation of giving the subcommittee a shopping list of proposals.

Instead, it is the subcommittee's hope that the witnesses will concentrate on the two or three measures that they consider to be the most important in encouraging economic growth and development.

The hearings are designed to present a balanced program of all points of view, including the administration, big business, and the small business community, this latter being of special concern to me. In formulating a tax policy to encourage business investment, it is important that this significant segment of our economy will not be overloooked.

The hearing will begin with the testimony of Mr. Daniel Brill, Assistant Secretary of the Treasury for Economic Policy.

I welcome you, Mr. Secretary; we are pleased to have you and you may proceed as you wish.

STATEMENT OF HON. DANIEL BRILL, ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY

Mr. BRILL. Thank you, Senator. Good morning.

Perhaps, if it meets with your pleasure, I will not read the document that I submitted, but summarize it and leave the opportunity then for us to have a further dialog on some of the issues that are involved.

As I look at the problem of capital formation and the implications for the economy, it seems to me that we are involved in coping with both short run and longer run problems, both of which have at their heart the need for a faster rate of capital formation.

In the short run, we have the problem of a slowing in rate of growth of productivity, a phenomenon that has bewildered many economists, including myself. We do not have the answers for this development. For the longer run, we have the need for a capital base that can sustain a full employment economy, our objective by the end of this decade.

In the short-run productivity problem, all the measures of productivity indicate a very substantial decline since about 1969. If one plotted the growth of productivity over the postwar period, a roughly 3.3 annual growth line would have covered the annual figures very precisely up until 1969. Since then, we have seemed to have been falling far behind the long-term growth trends in productivity.

There have been minor fluctuations reflecting the usual cyclical variations in economic activity, and special developments, such as the impact of the energy crisis, but the problem still remains that we are far below our long term growth trend in this very important aspect of economic activity.

The result has been constant upward pressure on prices, with compensation moving in general at about a 7.5- to 8-percent advance while national productivity has been growing at about 2 percent. This relates very much to the 6-percent underlying rate of inflation, with which we seem to be plagued.

The decline in the rate of growth in productivity has been related to many, many problems-the entrance of less skilled workers into the labor force, the shorter workweek, a number of other factors.

Personally, I think that one of the important considerations-although there is not unanimity among the economic profession on this is the slowing in the growth of capital formation. The figures that we have been able to put together on the amount of capital per worker show that in the past decade the growth in the amount of capital, after correction for inflation, has been somewhat less than half that of the decades preceding the 1970's.

I think that this is one of the important elements in describing why we have had a slowdown in productivity.

Senator BYRD. What are you going to do about that?

Mr. BRILL. If it is true sir, that the problem is in significant measure a slowing down of the rate of growth of capital, then we have to look at everything we are doing in the way of government regulations and laws that inhibits the growth of capital.

Foremost among these, of course, is the tax structure. The question is: What can we do to revise our tax structure in such a manner that it will contribute to capital formation?

The criteria that we have been applying in the Treasury in a mammoth study now underway, on the ways in which the tax structure should be reformed, are: First, simplification, which we feel is a highly desirable objective, to permit individuals to understand what it is that they are being required by their Government to report.

The second consideration is equity-all forms of income being treated equally; all sizes of businesses being treated equally, equitably; different income classes being treated equitably.

The third criterion is that of economic effectiveness, particularly in promoting capital formation.

There have been a number of proposals over the years to modify the tax structure in order to achieve this latter objective. These were spelled out in very succinct form in the report of the Joint Committee on Taxation last year which analyzed the variety of proposals. As I indicated in my prepared statement, sir, this is not virgin territory that we are discussing. This has been very thoroughly studied from a number of perspectives.

The various proposals involve such modifications of the tax structure as: Integration of the forms of returns paid by corporations; equal treatment for dividends and interest payments, or various modifications of this proposal.

There is another class of proposed modifications which have to do with manipulating the investment tax credit which has been changed from time to time by the Congress and possibly could be revised again. Senator BYRD. What is your view as to the present rate of the investment tax credit? Has it got to a point beyond which it would not be desirable to go, the 10 percent ?

Mr. BRILL. Desirable is a hard term to answer. Desirable in the sense: Does it have effectiveness beyond the 10 percent in producing the results claimed?

There is quite a variety of views in the economics profession, as I am sure you are aware, on the efficacy of the investment tax credit.

Senator BYRD. What is the administration's position on the investment tax credit at the current rate?

Mr. BRILL. We feel it should be considered in the context of total reform, not to look at it individually as a separate item, but what role it can play in the context of the total change in the tax structure. Senator BYRD. Do you think it would be appropriate to go above 10 percent?

Mr. BRILL. If there were no other change made in the tax structure— which I do not think is a very realistic assumption-then I think that should be given consideration.

Senator BYRD. You mean to go above it?

Mr. BRILL. Yes, sir. Under the condition that no other change was made in the tax structure.

If, on the other hand, we are looking at the subject of total reform, then I am not sure that I feel that the investment tax credit would be as important a prod to investment as some of the other changes under consideration.

I find it difficult to answer with respect to one form of tax, if we are in the process of discussing a major reform in the tax structure. Senator BYRD. As one who favors the investment tax credit, also as one who originally did not favor it, it seems to me that it is important, No. 1, that we, the Congress and the administration, that we reach a determination as to whether it is wise or unwise to have an investment tax credit and roughly the rate at which it should be, and then begin to leave it alone, rather than to repeal it, put it on, repeal it, put it on, as we have consistently done for years.

Would you be inclined to think that we ought to try to reach a conclusion and then basically leave it alone?

Mr. BRILL. I think the problem with varying the investment tax credit is the uncertainty that it induces in the business community in making investment decisions.

Senator BYRD. That is very important.

Mr. BRILL. It is indeed.

I faced that problem myself in trying to estimate the prospective return on an investment to a company with which I was affiliated, with respect to what the after-tax return would be, given the various possibilities that might prevail with the investment tax credit.

On the other hand, I think the important issue, Senator, is whether we are considering one tax in isolation or considering a total package. It is our hope that, no later than this summer, we will be able to present to the Congress a complete package in which the investment tax credit can be viewed in the context of a total change in the entire system.

Senator BYRD. Let me ask you this. I realize this could vary from business to business, but looking at business as a whole which is the more important, the investment tax credit or a more liberalized depreciation rate?

Mr. BRILL. Looking at it from the viewpoint of business, it would depend upon whether we are dealing with a capital intensive. industry

Senator BYRD. That is right. Recognizing the differences in businesses, but in order to reach a broad approach, what would be the most helpful to most businesses?

Mr. BRILL. I would think of an option that falls outside of the particular range that you just indicated, that would be a reduction in the corporate rate overall as probably being the most important contribution that tax reform can contribute to the business sector.

Senator BYRD. I think that is a very important point that you raise. Do I take it from the way that you answered the question, then, that if there were to be a reduction in the corporate rate, that both the investment tax credit and a more liberalized depreciation schedule probably would not be considered?

Mr. BRILL. We are not at the stage where we say we have the finished package, even combination of packages. But that is what we are looking at, alternative combinations. If we can combine in one package a set of tax reforms which will achieve certain objectives such as more equal treatment of various sources of income and a reduction in the overall rate for corporations and individuals, then other specific measures, such as an investment tax credit or juggling of depreciation allowances become less valuable to both the recipients and to society as a whole.

It is a matter of trying to visualize what is most useful in the context of combinations that become a specific package.

Senator BYRD. I take it, then, that the prime consideration in developing this package, the prime consideration, is to reduce the overall tax rate?

Mr. BRILL. Our consideration is economic effectiveness in addition to simplification and equity. By economic effectiveness, we mean particularly the extent to which a given tax structure will enhance the possibility of getting greater capital formation.

Senator BYRD. You are talking now about the corporate income tax? Mr. BRILL. Corporate and individual income tax.

Senator BYRD. In this context, we are really dealing now with the business tax. What I was trying to get your viewpoint on was what could be done in the corporate field?

I realize, of course, that it would work hand in hand with what is done in the individual field, but am I correct in assuming from your earlier statement that, insofar as business is concerned, the contemplated tax package will be built around a reduction in the corporate rate?

Mr. BRILL. At this stage of our study, I would say this has a very high priority. Whether that will turn out to be the keypoint in the final package as it is presented-it is much too premature for me to be able to predict that.

We think of the various incentives and methods of approaching the problem of inducing a higher rate of business investment that a reduction in the total rate has very great economic potential.

Senator BYRD. What two or three steps could Congress take to be the most effective in encouraging capital formation?

Mr. BRILL. Are you including in that, sir, what Congress does about the tax package or are you talking outside of the area of taxes? Senator BYRD. I am speaking primarily in the tax field.

Mr. BRILL. It would seem to me that the adoption of a tax structure by the Congress of a tax structure that is going to have the characteristics of inspiring capital formation and having a degree of stability that is now being changed with each new session of the Congress,

I feel this would be very important, a major contribution in establishing the kind of environment that the businessman can plan in.

Overall, you realize that most major capital projects that an average business is contemplating requires planning and investment over an extended period. It would be very difficult to plan if first one is not sure by the time the project is onstream what the tax framework would be under which the income generated by this new plan will be taxed. I think that the ability to plan in a more certain framework is very important for business. That applies also to the general environment. You asked whether I had reference to action that Congress could take outside the field of taxes. I think that it is first and foremost important to establish a sound economic environment so that businesses feel that by the time the equipment that they have put in place is producing, there will be markets for the products that they are producing. That involves congressional actions to help stimulate the economy but also congressional support of actions that will diminish the rate of inflation.

Senator BYRD. How important is our fiscal policy?

Mr. BRILL. This is what contributes to the environment in which businessmen feel that they can plan ahead. I think President Carter's determination to achieve a balanced budget by fiscal year 1981 is an important element in establishing the environment that should be reassuring and establish business confidence.

I think that this is a part of the area outside the specific field of tax structure that I had in mind.

Senator BYRD. I certainly agree with that. I think that is very important.

I have been concerned that, while the administration rhetoric has been about a balanced budget, the recommendations of the Administration have been to increase spending substantially over what it was prior to the new Administration's taking office.

It seems to me that you are going in two different directions at

one time.

Mr. BRILL. It looks at the moment as though our budget deficit for the current fiscal year will be running anywhere between $15 and $20 billion below the last full fiscal year of the preceding administration.

Senator BYRD. Let us come to fiscal 1978. You will find that it will be the second highest, or maybe the highest, in history. It will be substantially above this year's, will it not?

Mr. BRILL. As the figures now stand, yes, it will be above this year, but it will be below the $66 billion deficit in fiscal year 1976.

Senator BYRD. By a hair, $65 billion versus $66 billion-$64.65 billion, if you want to be precise. That is what Congress has just passed last week.

Mr. BRILL. As I recall our specific unified budget number was $58 billion. I do not have that with me at the moment, but that was the number, I think, that Mr. Lance was using.

If I am in the right range-and I am checking on it-it was $58 billion. That was the official projection for fiscal year 1978.

Senator BYRD. Is that the figure that the Congress passed last Friday?

Mr. BRILL. No, sir.