of controls that we have to operate so that we could compete on a level plain field basis.

Senator BAUCUS. To what degree is the capital problem facing small businesses, the cost of money?

Is it the cost of money or the availability?

Mr. JOHNSON. Right from the moment, it's the cost of money that's doing it.

Senator BAUCUs. More than the availiability?

Mr. JOHNSON. Right, that's right.

Senator BAUCUS. OK.

Mr. JOHNSON. And the availabiilty of money, of course, is aggravated by the outflow of funds out of Montana banks into more attractive invetstments.

Senator BAUCUS. You are getting to my next question, which is, the degree to which availability is a problem. And causes of their lack of availability. Is it the money market funds, is it Treasury bills? Mr. JOHNSON. Right.

Senator BAUCUS. Those are the main ones?

Mr. JOHNSON. I had one banker relate to me he has $50,000 a week going out of his bank to money market mutual funds. That's a pretty rapid outflow. I think it's something that needed to be addressed seriously.

We have concern on the competitive basis within our own banking fraternity. It's turning out more and more that our competition, our nonfinancial institutions, such as the mutual funds, the J. C. Penney, Sears, that type of thing, which have attractive investments coming along.

Senator BAUCUs. Where do the money market mutual fund dollars go?

Mr. JOHNSON. Essentially they are coming out of the banking system, but they are going back into the banking system; but what they are doing, for instance, the funds will come out of our bank and go into the mutual funds, which will be placed in money center banks like Chicago, New York, who in turn for more attractive investments will invest in Eurodollars, which they can make 112 to 212 percent, which they can, say, buy CD's from my bank. I am willing to pay a certain rate which will put the money back into the community, but it's gone until the rates are more attractive in my bank. They won't come back.

Senator BAUCUs. That is rates to your customers?

Mr. JOHNSON. Right.

Senator BAUCUs. Are we going to increase productivity; you have mentioned it on your shopping list. I am curious about what your prescription is.

Mr. JOHNSON. We have hired a consulting firm that is an expert. We are just getting into this, and they are experts in the field in financial institutions, such as commercial banks, and we are now developing statistics within our own shop, relaying them to this consulting firm who will report to us what our productivity is based on, either a tier group or a norm within the industry, and particularly as it affects the upper Midwest and the Northwestern States. That is the place where this company operates.

So, we expect to get, I am talking about people now and their productivity. I think this will be beneficial in us examining our own productivity in our own place.

Senator BAUCUs. Let me turn to you for a minute, Bob, and maybe Terry and Abe can answer this too. We sent you a summary of the basic bills that have been introduced in this Congress, with respect to changes in tax policy that would help small business. My question really is, which of those bills make the most sense from Montana's viewpoint? I am wondering whether that might make more sense to big business or maybe a little less sense, just like your views as to which ones make the most sense from our perspective here in Montana.

Mr. OAKLAND. I think the Capital Recovery Act is most important to small businesses. I touched on that in the depreciation of buildings, equipment, and that type of thing. I don't think there's any doubt about that. I would like to say a word about your question concerning productivity, because I think it's involved with this. I think that this country needs a sizable tax cut, because that's what's wrong with productivity. Why would people invest or why would people work when they are being given every incentive not to. Their savings are taxed. Senator BAUCUS. But less now than before.

Mr. OAKLAND. Their earnings.

Senator BAUCUs. The first $200 of interest was exempted from Federal tax by the Windfall Profit Tax Act that was just signed this past week.

Mr. OAKLAND. $200, the way we are going will be enough to go to a show in another year and a half. Their savings are being taxed. Their earnings are being taxed to the point that it's just not productive for them to really go out and work. That's why business is not investing, and that's why people are not producing, in my estimation.

I think the important one is here. I didn't understand exactly, but I think maybe I do, the one concerning the indexing of corporate and individual income taxes. I hadn't heard about up to $500,000. I think that's badly needed. Then the one you mentioned concerning the depreciation schedules being removed. That is badly needed.

Senator BAUCUs. Do you both, Abe and Terry, just agree, would that be your same order?

Mr. BASS. Pretty much so.

Mr. ABRAMSON. I have a pretty special interest, from the point of view of the real estate industry, in S. 1435, which is the Capital Cost Recovery Act. In the "sketch" it is suggested that it excludes that "accelerated" recovery for residential real estate. At first I assumed that meant personal residences. On a closer examination, it's all residential income property.

Now, I would suggest that, for a number of reasons, some of which we have already heard, there is going to be a lesser provision of single-family dwellings nationwide. We are going to continue having new household formations however, by people who are still living at home this year. As social policy, we should not provide a disincentive, relative to other investments, for the development of any kind of residential real estate. I would certainly like to see all residential real estate stay on an even basis in terms of any incentives that might be provided.

On the 10-5-3 plan itself, I am very impressed, but I am not convinced I understand the method of coming up with the suggested $50 billion cost. I certainly don't think that this plan would increase productivity, which is the answer to another question; it's a completely different impact. But some kinds of more basic and fundamental reform is probably called for in the area of depreciation, especially for properties which are in productive use-as against more "passive" investment properties. I would probably not be one of those persons that would wear a 10-5-3 button. I would like to see the question stay open. But there are some pretty fundamental issues involved, especially for the businessman. What you are doing is lowering your basis faster, so you are setting yourself up for a greater gain sooner, and this can mean a shift in taxation rates from 50 percent to 28 percent, for example, and really can allow you to benefit greatly on a cash-flow basis. I would like to see that whole cost-of-capital-cost-recovery issue examined in a more fundamental way, over a longer period of time.

There is a little bit too much enthusiasm, as far as I am concerned, on the "10-5-3" proposal. I haven't had anyone that's wearing one of those buttons, be able to explain the act to me yet.

The other bill that hasn't been talked about, on the issue of "subchapter S" corporations, is Senate bill 2168. I agree with the people that proposed the bill, that 15 investors is too few to give that a capital formation potential in any meaningful way today. On the other hand, the idea of raising that to 100 investors will put me in fear of our creating something that would get a bad name in a hurry. In other words, maybe that kind of capital formation, taking place with that many people, would be more appropriate in the area of securities. I think it could get a bad name, because if you get 100 investors and the enterprise "goes bad," a lot of the participants are going to claim they were sold a security, and they are going to be in an area that is already susceptible to the use of other vehicles; a limited partnership, as an example.

This opinion is personal; I am not even sure that 15 is too few. One hundred is too many, however, and I think maybe 30 to 40 investors seems to be the size of group that someone in my position could put together without getting into the kind of "due diligence" and "disclosure" problems that could and should impact on a group as large as 100.

Senator BAUCUS. Bob, when you spoke you were distressed as we are all with the 22-percent floor-plan interest. You wanted to say, if I understood you correctly, that high-interest rates generally are not the way to fight inflation; is that correct? Do you think there is a place for tight monetary policy to help put the brakes on inflation, or do you think there's no place at all? That is really the question. Or do you feel there should be some kind of selective interest-rate policy?

Mr. OAKLAND. Probably some form of credit policy needs to be had, but I said that I feel high interest is inflationary. I think I said that. I was in your office last October, and I still feel that way, because to this point, every businessman is trying to cover his costs, and his costs do include that 22.5-percent interest. He has to try to cover his cost, and until he goes broke, he is going to continue to try to do that. So, that is going to cause prices to rise, he has to cover those costs.

You had asked a question a moment ago and, not of me, but I would like to say, you asked about the problems of high interest or nonavailability of money.

Senator BAUCUS. Right.

Mr. OAKLAND. Which is the

Senator BAUCUs. Greater problem.

Mr. OAKLAND. In our business we are really faced with both, because in our flooring costs, we are paying the high interest to carry our inventories. And in sales we are curbed by a State usury rate of 12.83 percent, so that money is really disappearing. Many dealers throughout the State are without any type of financing. Their customers have to go try to find the money someplace by themselves. The dealer is completely out of the business, cannot help his customers buy, and we need immediate relief from that. I understand that there's a bill in the House, at least, to set aside temporarily State usury laws, but it does not affect automobile dealers as it is presently written, as I understand it. If we could get some immediate relief there, it would certainly help automobile dealers who have no place to turn to finance an automobile.

Senator BAUCUs. How much is Federal paperwork a contributory cause to your profit squeeze?

Mr. BASS. We wrote a book on that.

Senator BAUCUs. You can answer that a lot of ways, I know; but one of those ways is: How much as a practical matter, does Federal paperwork affect your costs? Second, you can pull your hair out because you are just so aggravated, but as a practical matter, how much is Federal paperwork a contributory cause to your profit squeeze? Mr. BASS. Can I answer that? In the construction industry, in the people that I represent, there's over 50 forms that are required to be filled out every quarter, and as a result of this, forms for OSHA, Equal Employment Opportunity, the Office of Federal Contract Compliance, and in some cases they hire one person to do nothing but fill out Federal paperwork to answer the questions by the Federal agencies. There was a very good amendment proposed, I believe, it was a Bumpers amendment that called for the validity of regulation, and we have supported that consistently, and we intend to support that amendment. We don't have any hangup with good valid questions being asked, but the repetition in the construction industry is horrendous, and as a result, you have, in your office, or if you don't have in your office, we will send you one, a document that was prepared by our office in Montana and is well over 400 pages which just illustrates the forms necessary to do business in the construction industry in the State.

It is a big factor, and it is an expensive thing. The penalties for failure are horrendous. You drop down in a compliance review, because you don't have the manpower to adequately set up an equal employment opportunity or affirmative action program within your company, and to answer the list now that offers this is 177 questions. You can be barred from doing any work on a Federal project. If you do 1 Federal project and 99 private projects, you can be held up on 99 projects, even though you only have 1 Federal project. The new rules of OFCCP that were announced in the last 60 days, it's a big serious problem, paperwork.

Senator BAUCUS. I asked the question partly because, in the Spring issue of the Montana Business Quarterly, an article by Randall White surveyed Montana businessmen on their attitudes toward regulatory agencies, problems regulatory agencies caused. And, I notice one of the ways they break out the questions is to which kind of paperwork and regulations cause the most problems. The way most people answered that question, and I don't know what the sample was because I really haven't studied the article that closely, indicates that by and far the largest portion of the problem that is concerned with local regulations-like zoning problems, building code restrictions, water and sewage disposal and solid waste, fire codes, parking, landscaping, basically are local problems.

I don't mean, as a Federal official, to try and get off the hook here, but as a practical matter, maybe the construction industry is a little different, but as a practical matter I am just wondering from your experience, collectively, what degree Federal paperwork is useless, but to what degree local and State and so forth?

Mr. BASS. I think one of the things we see by virtue of doing work with minority business firms and new business firms, working with new businesses that enter into the market, they are totally frustrated about filling out forms.

Senator BAUCUs. We all hear that, I am sure the problem is there. Mr. Bass. It is very true.

Senator BAUCUS. Just be honest, how many of those forms reasonably make sense and how many don't, just a guess?

Mr. BASS. Fifty percent.

Senator BAUCUS. Fifty-fifty, OK.

Mr. ABRAMSON. As a real estate broker, I can go a whole year and not fill out any Federal forms except my tax forms, and that is a luxury in this day and age, but all of the people I serve are affected, at least to the extent that time is money, in a negative way; a lot of them, because they don't know how to fill them out. A lot of the forms that are required have been called "CPA and Attorney Relief Acts." One of the concerns that is small in this community, but may be a reason for specialization in my industry in larger markets is that, as an example, for me to lease space to the Federal Government is a task that I am not willing to undertake because of the paperwork. I will not serve the Federal Government in this marketplace, and that is with some experience behind me.

I think that may be a different comment than you are looking for, but that is the only area in which, by my trade, I would have to face Federal paperwork as a certainty.

Senator BAUCUs. I find a lot of contractors by and large, who won't do business with the Federal Government because of late payments and paperwork.

Mr. ABRAMSON. I am not talking about late payments, because I could have mentioned that too: I am talking about the front end. Senator BAUCUS. Do you all agree with that characterization of the problem of paperwork?

Mr. OAKLAND. In the automobile industry, the automobile business, certainly there's a terrific amount of paperwork at the local level, but I think that it's received another publicity, that at the manufacturing