whether this problem will be intensified if something is not accomplished in the estate tax area?

Mr. ULLMAN. Let me say, Mr. Chairman, the more you dig into the small business world in America, the more you recognize that this is right near the head of the list in order of priorities.

Mike McKevitt's group-and I understand he will testify-has completed polls which indicate that this is at or near the top of the list.

The White House Conference on Small Business, as you have already indicated, have indicated the magnitude of the problem. The organization that originally engaged me, the Western Forest Industries Association, is made up of a lot of small lumber groups. This is the most-Bob Spence, of course, is one of them. This, among all of those groups, is the most pressing issue that they have: How to maintain that business from generation to generation.

They have concluded that under existing law it is virtually impossible to do that. The alternatives are either to disband and in some instances in the forest industry they have to do that.

That involves a tremendous impact on payroll and economy or to consolidate with large businesses. That trend toward consolidation has accelerated in large part because of the estate tax problem that they all face.

Mr. NATT. Mr. Chairman, in the newspaper industry—and I am relying on my memory, but the equation-there are about 1,750 daily newspapers in the United States. That number has been relatively constant over the last 40 years, 35 years.

In the past 25 years, the proportion of those that are independently owned-they used to be something on the order of about 70 percent, and about 30 percent were in groups. Those numbers have reversed in the last 25 years.

The overwhelming number of daily newspapers are now in the hands of groups as opposed to individual family kinds of ownership. I think inflation is part of that, but also Federal estate taxes-have played a very significant part in that, changing that equation around. I would not want to swear that those numbers are accurate, but that is roughly close, relying on my faulty memory.

Mr. NOWAK. Fine. Thank you very much.

Mr. Spence, I wonder if you could comment on or elaborate on the effect that inflation has on bracket creep in the estate tax rates?

While you think about that for a second, I note in 1916 in looking at the size of taxable estates, the rates ran from 1 percent to 10 percent; and before you reached 10 percent you were up to $5 million. To take a middle figure, at $1 million, taxable estate, in 1916, you would have had a 6-percent tax, and under today's tax rates you would be in the 41-percent bracket. I think that is an indication of where we have come.

With that, could you comment?

Mr. SPENCE. I would be glad to, Mr. Chairman.

I think the wood products business is a prime example of how the estate tax has wrought chaos upon a good segment of the

industry base of the United States. In the last 10 years inflation and the paper value of our assets has increased tremendously. We do not consider that necessarily as real growth or return. We only consider it as a dramatic increase in our paper value, which is subject to the taxation rates under the current law.

My brother and I have been involved in our family corporation for about 25 years, but in the time that we have been involved, the ownership has been held by my father, and prior to my grandmother's death, partially held in her estate. We have incurred one tax already at the death of my grandmother.

We have not been able to transfer the ownership of the corporation at a rate equal to the inflation rate that has occurred on our asset base to the younger generations in our organization, so if something should happen to my father in our case, the taxation rate we would incur would be in the 70-percent bracket. My brother and I would find ourselves, instead of having a paper asset, a real liability to the Federal Government.

A substantial liability that we have been pulling our hair out about because we do not see any way to pay the burden and continue running our business. The implications and the concerns that I have run across, and the reason that I am here today and am working with Mr. Ullman, are huge. We were concerned about the reception we would get in dealing with the estate tax issue because there is a sort of Robin Hood concept in America that has existed for a long time. Inflation has certainly turned that around. A millionaire today is not what a millionaire was in the past. Myself, I am classified as a millionaire because I have paper assets that say I am a millionaire. In terms of liquidity, that is questionable. It has created a huge problem for us. We have an obligation and I consider myself responsible in running our business to invest in that business to try to continue to make it competitive and be a viable enterprise within the industry I am engaged in.

The ability for us to do that leaves us in between a rock and a hard place, because for every dollar that I invest back into the business, I have a tax liability. If you project out the inflation rates, that could be more than that dollar that I leave in the business. So, on the other hand, I am motivated not to invest in my business. That is what has happened to a large segment of the society today.

I think it is probably one of the principal reasons why the United States has lost its productivity edge in the world markets, because we do not have the medium size, small business operators staying in capital-intensive businesses the way we used to.

They sell out, they sell out to the big companies; the big companies become huge and do not have the efficiencies of scale and operation that we have in our businesses.

In many ways we act as a mirror for those large companies. Without those mirrors, they have no standard to gage their performance by. In the timber industry we are constantly watched by the larger companies that operate around us for our ideas because we react in new markets, we react to technology changes, and we react to a wide variety of things that stimulate the industry and

give it a vibrant, competitive, continuing operation and make for a productive enterprise.

We have had a continual horror story in terms of cash flow disbursement. We went to our attorneys and our accountants. We spent and have spent huge sums just trying to figure out the current law and how it applied to different situations that developed.

Initially we bought life insurance on members of our corporation, but the tax attorneys and the accountants informed us that the life insurance, if it was owned by the corporation, would be taxed under the estate tax laws. So we were incurring, if we had life insurance on my father, for example, and the corporation owned the insurance policy, we would incur a 70-percent tax rate on that life insurance.

To go buy insurance at his age bracket, it became neglible and nonproductive.

We then changed the ownership of that policy around to where my brother and I owned the insurance policy on my father's life, but to get the dollars to pay for that insurance policy we had to increase our incomes in the corporation. That took more dollars that we wanted to invest in our business out, put us in higher tax brackets, so that we were paying a higher percentage to the Government anyway up front, and in essence we incurred a double taxation.

It was a continual struggle all through the efforts we have gone through with our accountants and lawyers. A very demoralizing struggle, very nonproductive struggle, and one that I believe must be dealt with today to turn the situation around in the United States.

We are not asking that we be exempted from a tax. We believe there should be a tax; but we believe it should be designed to incorporate current situations, not situations that existed back in the early days when the tax was first put into effect.

Mr. NOWAK. Thank you very much. I think your example really illustrates the problem very well. I want to thank you for your testimony.

Mr. Marriott?

Mr. MARRIOTT. Thank you, Mr. Chairman.

Mr. Ullman, good to see you again. I appreciated your testimony. Why don't we just face the facts that the estate tax is a bad deal? It shouldn't have been put in to begin with. It is not raising any money. It isn't addressing the concentration of wealth, never did, that in trying to penalize the so-called boys, we are really penalizing the small ones, like the gentleman to your left, and that the big people know how to solve the estate tax problem anyway.

They are not paying estate taxes. The consumers are paying them. Even big, so-called big businesses are owned mostly by small people who own stock. There are some superwealthy people, but as one who used to deal in estate taxes and insurance and estate planning, we had all kinds of gimmicks to solve the estate tax problem for the big boys.

So who are we kidding here? Why don't we just eliminate it? As I understand it, the $500,000 level exemption under the current law eliminates about 97 percent of all the estates anyway,

from estate taxes, so while we are fiddling around here with 6166 and 303 redemptions and different definitions and all of this nonsense, why don't we just eliminate the tax to begin with and get on with it?

Mr. ULLMAN. Well, Mr. Marriott, you can make a good case for what you propose.

When you look back at the whole history of our Government, it is clear that the effort was made to prevent families in perpetuity accumulating wealth. I think that you have to understand that there is deeply ingrained in America, the desire to prevent that kind of unlimited continuity of wealth. That was the purpose of the estate tax laws.

Now the situation has changed. We can no longer justify the level or kind of estate taxes that we have imposed. They must be modified. Politically there is no way that you can eliminate the estate taxes nor do I think at this time that it would be desirable, but you certainly must make changes to ease the burden. We think what is being proposed in our bill, the bill introduced by Mr. Bafalis and Mr. Pickle, does the right things to meet the needs of our time in our economy. It reduces rates significantly. I think we have come to the time, both in investment income and estate tax situations, where you cannot justify taxing more than 50 percent. We should also increase the initial exemption, and in our bill we do it in the form of a credit up to $600,000.

That alone will eliminate an awful lot of the small-the real small farmers and businessmen from paying any estate taxes, but even when you do those things and increase the annual gift allowance, you still are faced with a critical situation with small busi

ness.

We started out by recommending that we have an exclusion of at least $15 million altogether for qualified, closely held businesses. We found little support among the professionals on the Hill, the staffers, Treasury, and so on.

So we moved to a 50-percent valuation, taking into account the illiquidity of small businesses, which has been the rule, and then applying a 50-percent formula so that the qualified, closely held business would pay estate taxes at the reduced rates on 50 percent of that valuation.

We think that will allow the continuity of small businesses in this country.

Even the President now, who recommended total elimination of the estate tax system, is recommending less than we are proposing. We hope he will support our program.

I think our effort in this Congress is to get the maximum that is achievable.

We think the provisions in our bill are achievable. I think we can get over half of the Members of the House to support it. Mr. MARRIOTT. Did I hear you say that you originally supported a $15 million exemption?

Mr. ULLMAN. Yes. I met with Mr. Spence and his group and we decided that if you have a $15 million exemption for a qualified, closely held business that that would be the most desirable approach, and I think that they feel it would still be the most desirable. Now, after talking with all of the groups involved and the

people, the professionals involved, we feel that the 50-percent formula has a much better chance of being enacted.

Mr. MARRIOTT. Isn't there now a $500,000 exemption with a 15year payback provision for small businesses and farms?

Mr. ULLMAN. Not for small businesses. That was a farm mechanism that we put in the law in 1976. It is a special evaluation formula. It has not been very effective or very workable.

In this bill we clean that up, but I think almost everybody is moving toward our more simplified approach to the problem, where a qualified, closely held business, farm, small business, is eligible for a 50-percent valuation.

Mr. MARRIOTT. If the chairman doesn't mind, I want to see if I can get this in my mind as to what the bill does that you are promoting.

If a small businessman or a farm has a $2 million estate, it is worth $2 million, just the farm or the small business itself, what is your bill going to tax?

Mr. ULLMAN. If the ownership qualifies under our closely held business formula-and we assume it would-

Mr. MARRIOTT. Qualifies as a small business.

Mr. ULLMAN. If it is a qualified small business under our definition, and the valuation as determined by the IRS for estate tax purposes is $2 million, after taking into account the illiquidity of the small business, then we, under the provisions of our bill, for estate tax purposes, that would be reduced by 50 percent, so the

Mr. MARRIOTT. To $1 million?

Mr. ULLMAN. To $1 million. That is right.

The tax would be levied on $1 million rather than $2 million. Mr. MARRIOTT. Why not just have-Mr. McDade and I and some of our colleagues on this side have been promoting the idea that what we ought to have is a $2 million exemption for small businesses and farms-something similar to your $15 million exemption.

Why not just have a $2 million exemption with an 8-year recovery and let it go at that? Why isn't that better than what you are doing?

Mr. ULLMAN. I think Mr. Spence could answer that question. We have 30 or 40 small businesses that we specifically examined in the group that we represent, and that would give them only a minimum benefit.

It used to be that you had lumbermills, for instance, that were valued at $1 to $5 million. That isn't true any more. A minimum lumbermill is $20 million.

They are closely held. These are all family operations.

The $2 million exemption would not help them. We felt that a $15 million one would.

I think if you approach the overall problem of small business in this country, that a 50-percent valuation, which is a very simple formula, would do more for the small businesses of this country.

Mr. MARRIOTT. Under your provision, you get the 50-percent valuation on top of the marital deduction or before?