porations get away without paying taxes. We know the corporations do not really pay the tax. They are surrogate collectors for the Internal Revenue Service. The corporate tax is borne by people.

Unless you could move toward an effective phaseout of the corporate tax and if there is going to be some sort of integration proposal, I think that the Simon approach, among all that I have seen, combining the dividend deduction and the stockholder credit, may have the most merit.

At the same time, I would again emphasize that to me, even the Simon plan, if put in in full at the estimated cost using the old system of revenue estimating, $15 billion or so, if the argument is made that there has to be an offset by raising business taxes in other ways, I would say no, I would not be in favor of it. In fact, I don't think it would "cost" anywhere near that amount-if anything.

Senator BYRD. Thank you very much, Dr. Walker. This has been very interesting and enlightening and we appreciate it.

Mr. WALKER. Thank you, sir.

Senator BYRD. The next witness is Dr. Michael Sumichrast of the National Association of Home Builders, accompanied by Mr. Gordon Smith of Miller and Smith, McLean, Va. I welcome both of you gentlemen. You may proceed as you wish.

STATEMENT OF DR. MICHAEL SUMICHRAST, NATIONAL ASSOCIATION OF HOME BUILDERS; ACCOMPANIED BY GORDON SMITH, MILLER & SMITH, INC., MCLEAN, VA.

Mr. SUMICHRAST. Thank you very much. My name is Mike Sumichrast. I am the vice president and chief economist for the National Association of Home Builders.

Just as a short background, I used to be a home builder. I built houses in Australia, New Jersey, Pennsylvania, Ohio, West Virginia. My training was in industrial engineering in Europe. I got a master's degree and Ph. D. degree at Ohio State University in economics. Mr. Gordon Smith is really substituting for his partner, Dave Miller, who is the president of the Northern Virginia Home Builders Association. Mr. Gordon Smith is one of the new breed of builders. He has an MBA from Harvard University and has been actively engaged in construction for the last 3 years in the Washington area.

I want to thank you for giving me the opportunity to present my views in this discussion here today. Some of the things that I am going to say are not necessarily the NAHB policy, but rather my own.

I will limit my discussion to construction, particularly residential construction. I think this is what you would like me to do.

You asked us to concentrate on two or three major, important issues, and I will touch on these. First, let me just state for the record, when you look at the total new construction as measured as value put in place, you can see we were able to capture a smaller and smaller share of the gross national product since the Second World War. Its share is actually even less than it was in the twenties and in the period to just prior to the Second World War.

Since total construction is the largest single portion of private investment, the same thing has happened to that sector. The gross investment was close to 19 percent in 1949, only 14.2 percent in 1976.

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Total construction accounted for 10.4 percent in 1929 and dropped to 10.6 percent in 1960 and 9.6 percent in 1970 and 8.7 percent in 1975 and 8.5 percent last year. It was able to capture a smaller and smaller part of the GNP.

Residential construction shows the same trend: 6.3 percent share in 1950; 5.4 percent in 1955; 4.5 percent in 1960; 4.3 percent in 1965; 3.2 percent in 1970; 3.6 percent in 1975; and 3.5 percent in 1976.

The point here is simply that our problems are not necessarily of short duration, but long and of a persistent nature. One of the reasons that the share of the gross private domestic investment and housing and construction has declined is the Government, led by Federal, State, and local government, has taken a larger share of all the goods and services we produce.

The other reason is we have less and less incentive to put money into structures.

There are three items I wanted to mention. One is that probably the most important thing you can do is to provide some degree of stability in construction. This, of course, can only be done if we can obtain better control over the forces of inflation.

Why is this so important to us in construction? Well, first of all, investment in construction is generally long term. Investment in a shopping center goes for many years; investment in a rental project never goes for months, it goes for years, even decades.

To complete a project from conception to actual occupancy takes at least 3 and as much as 6 years.

The uncertainty which we are faced with during the period of this time provides an enormous amount of difficulties in costing up the project, in getting sufficient equity capital, in making it a successful business proposition.

The construction industry generally does not operate well during a period of high inflation. Housing functions only well in a climate of stability.

During the past 55 years we have witnessed 13 major cycles in which the decline in construction was more pronounced than the decline in GNP.

One of the reasons why the share of gross private domestic investment declined-and construction and housing dropped-is that expenditures increased for all three levels of government-Federal, State, and local. Combined, they take a much larger share of all goods and services we produce than ever before.

Another reason is that we have less and less incentive to provide equity capital for construction. Now, let me elaborate on these issues. Probably the most important issue facing construction is its instability. This carries with it implied risk and discourages investment.

An assessment of the latest two cycles shows that residential construction bore as much as two-thirds of the overall decline in the economy. Thus, the burden was heavily thrust upon one section of the economy-residential construction-although this economic activity accounted for only 4 to 5 percent of the GNP.

The second major issue of capital discouragement in construction centers on Government intervention and regulations. Here the greatest contribution your committee can make is to stop this trend now and make a commitment to try to reverse it. Government intervention has

become oppressive: Businessmen find it extremely difficult to function. Government regulations are so costly that they now account for the single largest item of cost increase in housing.

Let me briefly show how this impacts on our industry.

Fifteen years ago in February a group of us purchased a private airport in the Midwest.

We had it annexed to the city, rezoned and models were opened in mid-June. The first 50 families moved in before the end of the year. The cost of the finished lots was about $2,200-$2,500; or approximately 14-16 percent of the sales price. Streets were FHA specs, with 8-inch concrete base, 2 layers of 12-inch asphalt, curbs and gutters, driveway aprons, and 4-foot public walks.

There is no possible way that this would be done again in such a timespan. Three to four years would be a more likely period now. Time is money and the consumer is paying for that.

There is no way you could do this today for less than $18,000-$20,000 per lot.

There are some other things which impact cost and the need for capital.

Risk in building has increased. It is no longer a foregone conclusion that we can build a project or, for that matter, a house. The uncertainty, as well as the waiting and the redtape, costs money.

Local jurisdictions see real estate as a natural target for taxation to solve their fiscal problems. Most of them are in trouble and now they collect revenues up front, before the development starts.

Environmental costs are adding an enormous burden on the ultimate consumer. If people knew what this does to prices, they would revolt.

Probably the most damaging part of the environmental cost, one which we here in Washington are so intimately familiar with, is the sewer moratoria.

This restricts the supply of usable lots and has doubled, tripled, or quadrupled the prices of lots.

This happened at the time when demand for housing was much higher than ever before. The new generation of postwar "babies" is now in the age group where they are ready to settle down and buy a home.

And, they are stunned, confused, and outraged at prices. And, they should be.

For potential customers higher prices mean higher down payments, higher monthly payments, and a higher share of their disposable income for housing. This, of course, is bad news for young first-time buyers. But, it's also bad news for homeowners or renters.

The third major issue facing the construction industry is closely connected to the first issue of instability. It has to do with the inability to tap the capital market for investment needs.

Why is this?

Mainly because a typical builder does not have the benefit of stable earnings such as most large corporations can provide. He is subject to wild swings and his profit and loss statement reflects this element quite well. His "tract" record, upon which lending institutions base their decision to lend or not to lend, cannot and will not demonstrate a good solid straight line of good returns.

This issue may sound peripheral to this hearing, but let me show you why I think that it is quite pertinent.

We are now running a good rate of housing production. Much of this is compensation for the period of 3 bad years which experienced the deepest housing cycles since the Depression.

This high level of activity, of course, will not continue. For one thing we will have higher interest rates and this alone will retard housing starts.

But, more importantly, the structural shifts of capital incentives to build new subdivisions already guarantees a shortage of suitable finished lots.

This is because suppliers of money for land and land development are not available. For instance, the large and significant contribution of REITS in the mid-1960's is no longer there.

Commercial banks are also out of the land acquisition and land development business. Just recently three of the largest homebuilding companies were told by their boards to stay out of the land development business and concentrate on building homes on finished lots. Why is this happening? Because:

1. Land and land development requires a large amount of capital. 2. The returns on investment in land are too low.

3. The risk is too large.

4. Turnover of capital takes too long-one can get a faster return by building homes or, for that matter, putting it in the savings and loan associations.

As a result, there is little or no capital available for future land development. The only viable alternative is FHA title X. I believe they made less than a dozen of these loans last year.

Finally, there is investment in rental units. I have written two articles on this subject which I would like to include in my testimony. Put simply, the private rental units face major, longterm, and mostly unsolvable, problems.

The underlying factor to all that I have said is instability. This is the function of inflation which in turn is fueled by the inability of our Government to live within their means, as well as an unstoppable proliferation of Government bureaucracy. And this occurs at all three levels, Federal, State, and local. They control not only our pockets, but just about everything we do. Today our industry is being increasingly regulated by decrees dreamed up by bureaucrats who are, in fact, accountable to no one.

The inability to provide surpluses in the Federal budget makes it impossible for the construction industry to have access to sufficient amounts of investment capital. We cannot compete with the Federal Government.

Let me just end up by saying that the reason why I see less and less capital flowing into the construction area in addition to what I have already mentioned. I see no way in the United States in my lifetime to get the private rental market back to where it was in the 1960's. There are too many disincentives we have created over the last 10 years which make me believe that we will not ever build a million private units as was the case in the early 1970's. You will be very lucky if you can get one-half of it.

I foresee a situation 10 years from today where Government will build half of the rental projects.

Senator BYRD. What did we build last year?

Mr. SUMICHRAST. We built 374,000 units.

Senator BYRD. What do you expect this year?

Mr. SUMICHRAST. 448,000; 100,000 of these are section 8 subsidized housing.

That is all, Mr. Chairman.

Senator BYRD. Thank you, sir.

If I may summarize your comments, you feel that, No. 1, the most important thing that the Congress can do is to bring about a stability. In order to do that, steps must be taken to control inflation.

Mr. SUMICHRAST. That is correct.

Senator BYRD. It gets back to really, while it is not your only problem, your No. 1 problem and most important problem is the question of inflation.

Mr. SUMICHRAST. That is correct. You cannot have a mortgage rate of less than 8, 9, 10 percent with 6-percent inflation. With 6- or 7percent inflation, obviously you are talking about very high mortgage rates for the consumer to pay.

Senator BYRD. My own view is, the way the Government is running deficits now of 6 or 7 percent you are not going to have any 6- or 7percent inflation. You are going up to 11- or 12-percent inflation.

Mr. SUMICHRAST. The Government should be repaying debts rather than be creating debts, I agree.

Senator BYRD. We have with us Mr. Gordon Smith whose partner, David Miller, is president of the Northern Virginia Home Builders Association. We are very glad to have you.

Mr. Smith, how are things developing in northern Virginia?

Mr. SMITH. Mr. Chairman, I am Gordon Smith. I am substituting for my partner, David Miller.

We are finding, I suppose, in microscopic terms what Mr. Sumichrast has painted a broad picture of. We are finding it difficult to accumulate capital in our industry. I would echo the problem of the extreme fluctuations that occur in our industry. I think they are magnified by the fact that a Federal Government tends to smooth out the business cycle through monetary and fiscal controls which are magnified in our particular industry. When the Federal Reserve tightens up money, this affects our buyers very drastically. It affects our ability to borrow, and we go through massive fluctuations in the business cycle where most other industries-automobiles, for example. If they fall off by 20 percent, everybody gets upset. Our industry falls off by 60 to 70 percent in the same cycle.

It becomes very difficult to plan under those circumstances, and as a consequence, our organization today is planning on a very short-term planning basis. We do not go into long-term projects.

We are anticipating that some time in the future there will be another downturn. We do not know exactly when. We want to make sure that we are very liquid when that occasion occurs. Therefore, we will not buy large land projects. We will not expose ourselves which, I think, from a business point of view and from the point of view of the economy as a whole, is really bad to do. We should be planning for