Dr. BURNS. I would think that a reduction in the double taxation of dividends would be very beneficial to the capital investment process. Mr. GRASSLEY. Is that benefit enough to offset the damage that you indicated could result from doing away with the capital gains tax? Dr. BURNS. That is impossible for me to answer. In the first place, I would have to know the magnitude of the one relative to the other; you haven't specified that. But even if you did, I doubt that I could give you a quick answer to the question. I would be fearful that the answer might be in the negative, but I can't give you an answer to your question. The CHAIRMAN. The time of the gentleman has expired. Dr. BURNS. I would move very cautiously on capital gains. We tend to be so sophisticated these days and to think in terms of fine tuning fiscal policy; we ignore our lack of knowledge and understanding. If I were to do anything in this area, I would reduce the corporate tax rate across-the-board, rather than attempt to fine tune, thinking that I know enough to achieve the desired objective. This way you spread the benefits. The CHAIRMAN. The time of the gentleman has expired. [Chairman Burns submitted the following reply for inclusion in the record, in response to a letter from Mr. Grassley of August 1:] I am pleased to respond to the further questions that you raised in conjunction with my testimony of July 29 before the House Banking Committee. Your questions relate to the Nation's primary economic challenge--the necessity of stemming inflation while sustaining an economic growth rate that ensures optimal employment of our Nation's human and physical resources. I hope the enclosed replies will be of assistance to you in your consideration of pending legislation that will have a vital impact on the economy. Sincerely yours, Ана Вни Arthur F. Burns Enclosure Question #1 Will high support prices for farm products have a major impact upon inflation? Will such supports hurt our exportation of these products, thereby increasing our trade and BOP deficits, and weakening the dollar? Answer: Barring major grain crop failures, the farm legislation currently in Congress is likely to cause increases in consumer food prices as well as in Federal spending (because of larger direct payments to farmers), and it may curtail our grain exports. While the direction of these increases is clear and Administration spokesmen have characterized them as manageable, their ultimate magnitude is unknown. In addition, increased Federal disbursements for farm programs are likely to add to the deficit, which in turn would add to inflationary pressures in the economy generally. As a member of the Agriculture Committee, you are well aware that these overall costs must be weighed against the necessity of maintaining a viable agricultural sector in a period of sharply rising production and production costs. With respect to agricultural exports, I should note that the pending farm legislation apparently permits downward adjustments in support levels if it appears that our competitiveness in foreign markets is being impaired. Question #2 It has been said that a realistic goal for full employment is 5-5.5% instead of the previously accepted figure of 4% in a noninflationary economy. With this in mind, how fully must we utilize our industrial plant capacity, in order that the Treasury receive the tax revenues it will require to balance the budget in 1981? (1982). How would you evaluate the figures used to estimate full plant capacity? Answer: The Federal budget could be balanced at many different levels of economic activity--depending on taxing and spending rates--or different industrial-nonindustrial combinations of total output. Therefore, it is impossible to determine uniquely the rate of utilization of industrial plant capacity that is consistent with achieving a balanced budget at some future date. As I indicated in my testimony before the House Banking Committee on July 29, growth in industrial plant capacity has slowed in recent years, both absolutely and relative to the growth of the total capital stock. Because of the relatively slow growth of capital accumulation, capacity utilization rates at reasonably full employment of other resources would likely be somewhat above the rates at past cyclical peaks. At that level of capacity utilization the unemployment rate would be higher than in past periods because of the changed age-sex composition of the labor force. Even so, it would be an extremely fortuitous combination of industrial demands that would permit such a level of capacity utilization without triggering bottlenecks and inflationary pressures. Hence, improved incentives for investment in industrial plant and equipment, especially in the critical industrial materials area, would be most desirable and would improve our chances of achieving a balanced budget and full employment in a noninflationary environment. With respect to the final part of your question, the capacity utilization figures represent the ratios of aggregate production indexes to capacity estimates. Both production and capacity estimates are inexact--the latter more so than the former--so that the derived utilization rates are subject to more measurement error than many other economic time series. |