trust with uncounted money? What about some concepts there where you have some certainty of employment there for your employees as well, where there is a pride and you want to pass it on? I would like to take them into account too.

Mr. ROEMER. Absolutely.

I thank the gentleman for his comments.

I would close by saying that one can make some esoteric economic arguments as to why these taxes were ever established under the general philosophy that the population of the world was increasing at an ever growing rate and that the size of the wealth was pretty static relative to population growth and we needed to redistribute and keep transferring so there would be something for everyone. But the economy of West Germany shows us in a nation where over the last 10 years they have lost population and yet managed to increase their personal position in terms of economic wealth, that we do not need to take the assumption of the old days, that the population of the world will expand and grow and grow.

In fact, it will not at some point in the not too distant future. In fact, we will be looking in this country at a fairly static population.

So the old shibboleths of the old days, and the esoteric arguments no longer hold water.

I urge you to show us an accumulation of facts from your members that we take this thing and do something about it.

Mr. McKEVITT. You have a good point about Germany. One of our members was over there a few years ago and asked how they handled estate taxes. The German got very insulted and thought it was none of his business. Through interpreters and dialog he realized Germany didn't have this tax on the business. He thought he was prying into his own personal situation.

He was dumbfounded to find out Germans don't even engage in this.

Mr. ROEMER. Thank you.

Mr. NOWAK. Mr. Weber.

Mr. VIN WEBER. I would like to begin by keying onto something Mr. Roemer mentioned here. It is only very indirectly and I suppose somewhat esoterically related to our discussion today.

When you talk about world population figures, I notice the United Nations issued figures last week that rejected their old figures on resource demand because they have at last faced up to what they describe as the long term, unavoidable decline in fertility rates beginning in 1965.

I think that your point was an interesting one there.

Mr. ROEMER. It is television.

No, I am out of order, Mr. Chairman.

Mr. VIN WEBER. We have probably talked this over about as much as we can.

I would just like to add, Mike, if you and your association do do a study on the impact of the estate tax, cost of collection, who actually pays it, I would also ask you, as I asked Mr. Ullman, to try to look into what other revenues are foregone by the Government when people spend large amounts of time, energy, and money avoiding the estate tax, because they just don't avoid the estate

tax, they avoid the capital gains tax, the corporate income tax, individual income tax.

My guess would be that the estate tax may not make the Government much money at all when all is said and done.

I would like to have you take a look at that.

Mr. McKEVITT. OK.

Mr. VIN WEBER. In conclusion, in my own mind I think from what we have heard and said today, there is a pretty strong case for repeal of the estate tax, just based on the impact of that tax itself.

There is one element we haven't brought into it which, in my mind, is the ultimate reason why the estate tax shouldn't exist. If I can expound for a minute, this isn't really a question.

We proceed under the assumption that the only force in our economy which is standing in the way of this horrendous concentration of wealth is the tax policies of the Federal Government. That just is not true.

In truth, the estate tax, even for whatever impact, it may have, is a relatively minor force in maintaining a pluralistic economy, a vibrant, democratic economy, if you will.

I am sure that the amount of estate taxes, even if you accepted $6.9 billion as the amount of money that goes into the Treasury from the estate tax every year, that does not begin to compare with the amount of money that an average wealthy person may lose on bad investments, or a business that goes bust, or any of the normal workings of a free economy.

Just my own point of view, I don't think we need to fear this inordinate, ongoing, never ending concentration of wealth with or without the estate tax, because the kinds of economy we have in this country encourages people to take risks, some of them pay off, some don't.

But from generation to generation, it pretty well levels off.

A free economy is much greater protector of the average man's good, in my judgment, than anything the Federal Government can do and the estate tax is probably the best example of that.

Thank you for bearing with me.

Thank you for being with us.

Mr. NOWAK. Thank you very much. Again our gratitude to the NFIB and Mike for coming here today.

Hopefully we will be able to work in the future on this subject and establish more specifics as we go along for the best record we can possibly prepare.

Mr. McKEVITT. We will see if we can't come up with a survey format, if you would like.

Mr. NOWAK. Fine. Thank you very much.

Our next witnesses were to be the National Family Business Council. However, I have been informed Mr. Wolf was taken ill this morning. We will, however, admit the statement that was going to be presented in total in the record. We wish Mr. Wolf a speedy recovery.

[Mr. Wolf's prepared statement follows:]

PREPARED STATEMENT OF STEVAN A. Wolf, General MANAGER, LETTY LANE Co., WESTVILLE, N.J., AND CHAirman, Governmental AFFAIRS COMMITTEE, NATIONAL FAMILY BUSINESS COUNCIL, ALSO REPRESENTING NATIONAL SMALL BUSINESS ASSOCIATION

My name is Stevan A. Wolf. I am General Manager of our family business, the Letty Lane Company of Westville, New Jersey, and I am Chairman of the Governmental Affairs Committee of the National Family Business Council. I am also the Chairman of the Legislative Action and Policy Advisory Committee of the National Small Business Association. The National Small Business Association has requested that I also present this testimony on its behalf.

Mr. Chairman, I appreciate this opportunity to present our views on needed revisions in the federal estate and gift tax laws.

The National Family Business Council is a nonprofit membership association that is dedicated to the survival and well-being of family-owned enterprise. Membership in the National Family Business Council is composed of individuals, firms and corporations engaged in family businesses and those interested in the well being and perpetuation of family-owned enterprise. The Council provides an organization through which common business interests of family-owned commercial enterprises can be promoted and improved. Its current primary legislative objective is the elimination of unreasonable estate and gift tax burdens on family-owned businesses.

HISTORY OF ESTATE TAX

The federal estate tax was enacted in 1916. The purpose of the tax was to prevent unreasonable accumulations of wealth in the hands of a very few persons. The tax was never intended to discourage or prevent the perpetuation of family-owned businesses nor was the tax intended to be a revenue producer.

The estate and gift tax is among the smallest of federal taxes collected. It produces only 1.23 percent of the total revenues of the federal government. Eliminating it entirely would probably produce a greater increase in federal income taxes by encouraging profitability among those burdened by the tax.

Today's estate tax is a far different tax from what was intended in 1916. It is what we refer to as the "family business tax." It preys on the widows and children of those whose lifetime efforts have gone into the building of family enterprises. It is no longer just a tax on the wealthy. It taxes many in the middle-income brackets.

PROBLEMS WITH PRESENT ESTATE TAX

The Tax Reform Act of 1976 provided for a marital deduction for property passing from a decedent to a surviving spouse of the greater of $250,000 or one half of the decedent's adjusted gross estate. The Act also provided an unlimited marital gift tax deduction for transfers between spouses for the first $100,000 in gifts, and thereafter the deduction allowed is 50 percent of the interspousal lifetime transfers in excess of $200,000.

Although the 1976 Act made improvements in the law, we are of the opinion that transfers of property between spouses before or after death should not be taxed. This so-called "widow's tax" should be eliminated. This would be a first step in allowing some consideration to be given to the working heirs who would ultimately take over the family business on the death of the second parent. We would favor making such an unlimited marital deduction optional.

The estate and gift tax as it now operates discourages savings, investment and productivity. In effect, it penalizes the widows and children of those decedents who took the risks of being in business for themselves and working throughout their lives to become profitable. This disincentive to success results in fewer jobs, reduced productivity, and adds to economic decline.

NEED FOR ACTION

We are in a period of history when this country is suffering from a dramatic reduction in productivity. While the average American worker produced between 2 and 3 percent more each year after World War II, in the past decade that growth in productivity has declined and then stagnated.

We are in an era of historically high rates of inflation and unprecedented interest rates. The rate of unemployment is running over 7 percent. We are encountering difficulties competing with other countries in auto sales. Our housing industry is in deep trouble. Many businesses are suffering from economic decline. Add to this that government has overtaxed the American taxpayer, and it all adds up to the need for action.

The Congress has before it major legislation to encourage capital formation. An added reason for our current economic and productivity problems is the way we discourage_profitability by taxing the lifetime efforts of businessmen and women. President Reagan has pledged to seek changes in the federal estate tax to alleviate its unfairness to family-owned businesses and farms.

The present estate and gift taxes are a destructive force. While not their purpose, they can destroy the family unit. What has been built as a lifetime income and pension for the husband and wife of a family-owned business can be broken apart by the estate tax and destroyed forever.

EFFECTS OF INFLATION

Double-digit inflation has pushed the estates of small business into higher and higher estate and gift tax brackets. While the real value of assets in many instances has remained the same, the inflationary spiral has demanded higher taxes through bracket creep. As in the case of the income tax, the movement into higher brackets has resulted from the unfair impact of inflation.

We favor an increase in the tax credit and a reduction in the rates of the estate and gift tax. We are of the opinion that the estate and gift tax credit should be increased to allow up to $1,000,000 to pass to heirs and beneficiaries tax free instead of the present $175,625. We also advocate a reduction in the estate and gift tax rates from the present maximum of 70 percent, to a maximum of 30 percent. Both of these changes would serve to help correct the inflationary injustices of the present law.

NEED FOR LIQUIDITY

Today's estate and gift tax is unnecessarily complex. The result is that the super wealthy have access to tax experts who can assist them in avoidance schemes, while those of moderate means are paying a very high portion of what is an unfair and burdensome tax. If the law is to remain on the books, the law should be simplified and those in the lower brackets eliminated from the tax entirely.

Marriage is not just a bond between a man and a woman. In a family business it usually results in a partnership. When a member of that partnership dies, it often presents unique problems. The loss of the family member places great burdens on those remaining family members who must carry on the business. It is often difficult to muster the needed courage and strength to carry on the family business in the aftermath of the tragic loss of the father or mother.

A major problem facing heirs of family-owned businesses today is the lack of funds to pay the estate tax. Not only must the heirs face the problems and stress caused by the loss of the principal owner of a family business, but they must almost immediately face the problem of accumulating sufficient funds to pay the estate tax.

INSTALLMENT PAYMENT

The Tax Reform Act of 1976 provided a 15-year period for the payment of the estate tax attributable to the decedent's interest in a closely-held business. Under the Act, the executor may elect to defer the estate tax, but not the interest on the tax, for a period of up to five years and thereafter pay the tax in equal annual installments over the next ten years. To qualify for this treatment, the value of the closely-held business in the decedent's estate must exceed 65 percent of the value of the gross estate reduced by expenses, indebtedness and losses.

This strict 65 percent rule poses problems for family-owned businesses. The principal owner of a family business must always keep in mind the 65 percent rule when making any transfers of ownership in the business. He may wish to give some of the stock to a son or daughter, but if it will reduce his ownership below the 65 percent margin, he will be reluctant to do so. The result can be that the present law discourages adding family members as participants in the family business.

The rule also can have the opposite effect. If the principal owner is slightly below 65 percent, great sacrifices may have to be made by the owner to meet this percentage requirement. In an effort to meet the 65 percent, he may be forced to sell valuable assets at sacrifice prices.

We believe the provisions in the present law for extension of time to pay the tax should be relaxed in the case of closely-held businesses.

We are of the opinion that the installment provisions for closely-held businesses should be broadened so that where the value of an interest in a closely-held business is 25 percent of the value of the gross estate or 35 percent of the taxable estate, payment can be made under the 15-year installment provision.

SPECIAL USE VALUATION RULES

While the 15-year installment provision assists those families that cannot muster adequate funds to pay the tax without resorting to selling a part or all of the family business, it is frequently insufficient. Family-owned businesses are being sold prior to death in anticipation of estate taxes and after death to meet the tax costs. Under such circumstances, small businesses are being forced to sell out to larger businesses, and the estate tax is thereby encouraging the concentration of American business enterprise in the hands of fewer persons.

The special use valuation in the present law has been helpful for estates composed largely of farmland, but the provision has generally not aided those estates of closely-held businesses. We favor a special valuation rule for closely-held businesses that would allow an executor to value a closely-held business for estate tax purposes at 50 percent of market value.

ANNUAL EXCLUSION

Under present law there is an annual exclusion of $3,000, $6,000 where the nondonor spouse consents to split the gift, for transfers of present interests in property for each donee. The Revenue Act of 1942 modified the annual gift tax exclusion by reducing it from $5,000 to $3,000.

Unfortunately the gift tax is often today honored in the breech. The $3,000 annual exclusion is too low and frequently taxpayers are not even aware of the requirement to pay the tax. The annual exclusion should have been increased years ago. We favor increasing the annual gift tax exclusion to $10,000.

CONCLUSION

Mr. Chairman, I appreciate this opportunity to be here today to express the views of the National Family Business Council on the need for changes in the estate and gift tax. May I offer you the services and cooperation of our organization to assist you in any way possible in your efforts with regard to estate and gift taxation. Mr. Nowak. Our last witness this morning will be the National Farmers Union represented here by the legislative assistant, Ruth Kobell.

TESTIMONY OF RUTH E. KOBELL, LEGISLATIVE ASSISTANT, NATIONAL FARMERS UNION

Ms. KOBELL. Thank you, Mr. Chairman.

I am Ruth Kobell, legislative assistant for the National Farmers Union.

We appreciate the opportunity to appear because farmers do make up a major important section of the business activity of this Nation.

I have a prepared statement which outlines some of the contributions which farmers make, both in their productive capacity and in the marketplace and because I recognize you want to finish your hearings by noon. I would suggest that I summarize that statement and make a few points and try to respond to questions.

Mr. NOWAK. Fine. The whole prepared statement will, of course, be entered into the record.

Ms. KOBELL. We believe that family farmers are the most productive structure for producing food and fiber for our citizens and for export overseas.

Family farmers have been disappearing very rapidly for a variety of reasons. We believe part of this relates to the fact that we have had consistently low farm income, so that now farm prices stand at 63 percent of parity. Farmers are faced with inflation in production costs.