tions in my prepared statement that seek to simplify the Treasury proposal and one way in which they seek to simplify it is for property passing to the wife.

Dick says in his proposal the additional estate tax should apply to property passing to the wife. To me, that defeats the entire point of the marital deduction. You tell her she can get it free of estate tax and then you hit her with an additional estate tax because it contains appreciated property.

The Treasury proposal would have exempted from the tax on gains at death, property that passed to the wife. It would let her take the old basis so the gain would be taxed when she died.

To me that is the way to deal with the problem. The Treasury then went on to say that they wanted to reallocate and recompute everybody's basis so you would not be leaving the property that had a low cost to your wife just to save the tax.

I think that is an unnecessary complication. If you drop that out, the Treasury proposal becomes much simplier and is still fair to the wife.

Mr. COVEY. Bear in mind, first, I said I would recommend a marital deduction of the greater of $250,000 or one-half of the adjusted estate.

I also said I am reducing transfer tax rates. When I combine the reduction in transfer tax rates with the unlimited marital deduction at the $70,000 to $100,000 exemption, bear in mind that means there is going to be no basic estate tax on any estate that is $300,000 or less. Therefore, even if the entire amount is subject to the AET or the additional estate tax, that AET is simply not going to be much more than the estate tax would be today if we had just the marital deduction for one-half of the adjusted gross estate.

Dave, on the other hand, said do not liberalize the marital deduction. He will not go as far as I will. He will go up to $100,000 and one-half. I am going past him on that level.

My real reason for trying to have the AET across the board, is simplicity. I wish this committee would take this into consideration when it gets into this area.

It did not take it into consideration on the income tax throwback rules and we have a hornet's nest on cur hands right now.

It is a hornet's nest on something that will not work. Let's look at this sensibly. The sensible way to do it is stay away from interedependent computations and stay away from things people don't understand. If you are going to exempt the marital deduction property from the capital gains tax at death, you are going to run yourselves into.an interedependent computation of the capital gains tax at death and the basic estate tax in many, many cases.

I don't want to take the time of the committee to explain this. I am sure if you go back and talk to your staff you will see this is so.

This is the reason why the AET is applied across the board-so it is simple to apply. I have not heard anybody suggest that the AET is not the simplest way to handle this problem.

You may not agree with the result but it is the simplest way.

Then I get back again to what I said before: If there is a real problem en lock-in-and I think there is a problem not so much with the closely helds because there you can't unload at all-then solve the problem.

I will grant what Bart says and there is great validity to what Marvin says. There is a liquidity problem with these kinds of situations but that is not so with the man with listed stocks and bonds.

There is no problem. He can unload them. If you want to get at that problem, take Congressman Broyhill's approach. Let him sell during lifetime and let the capital gains tax be a credit against a man's

estate tax.

In order to produce fairness, make him add back into his taxable estate at death the amount of the income tax that he paid on those capital gains.

If you will do it that way you will create the incentive to sell. I regard Dr. Brannon's suggestion for the incentive to sell being ordinary income treatment at death, and making it worse that way at death, as ludicrous.

With the residence that went up from $3,000 to $60,000 are you going to subject the residence to a ordinary income tax on $57,000? What is the social advantage of that? I just don't see it.

Mr. BURKE. Dr. Brannon is recognized.

Dr. BRANNON. First, I want to comment on this last point Mr. Covey made about the capital gains tax at death. I suggest that you take a look at some figures which I put down in the statement, particularly page 7 where two basically identical cases are worked out, two individuals with the same starting situations and the same consumption pattern but they follow different savings policies so that one has all ordinary income under savings and the other just has appreciation.

It turns out that the difference in their estates at the present time is enormous. Even with the capital gains tax at death you will find that the capital gains gets the deferral. That is, there has been value which has been implicitly received over the years.

It has been generating more income over the years but the tax is postponed to death. Even putting a capital gains tax at death, you will find from these numbers that the fellow who follows the appreciation invest strategy is very, very much better off than the guy who pays ordinary income taxes during life.

Mr. COLLIE. Mr. Chairman, may I attempt to respond to that? Mr. BURKE. Yes.

Mr. COLLIE. I said in my opening remarks what I thought was an answer but Dr. Brannon has skipped by it, that is, the two men in his illustration on page 7 of his remarks consciously have different objectives. One chose to invest in something that gave him ordinary income during his lifetime that he could do with as he wished.

True, it is on this assumption that he had ordinary income taxes. during his lifetime. Dr. Brannon said we must not have the Government telling a man what he should do by the income tax laws, and I agree.

But, this man had the conscious choice of being able to invest in something that gave him ordinary income. He had liquidity from this ordinary income that he got. He had diversification.

The other man who invested in a so-called growth stock, chose to shoot craps a little bit differently. Incidentally, we have always assumed through here that everything goes up. In our experience there are a lot of them that go down and nobody has really explained how

But, assume it goes up. This particular investor, this particular individual chose to lock himself in, have an illiquid position, chose not to have diversification, chose all of the disadvantages of that particular

course.

So he comes out with a different result in the end. It does not bother me when the two men based on their own economic philosophy go two different ways and they may wind up ultimately with two different amounts of dollars.

Dr. Brannon says you have so much investment income which he reinvests. He simply assumes he reinvests it, I suppose, in saving aecounts, that he does not get into anything that might go up, too.

But that particular man chooses to put it in a savings account: he wants the liquidity, he wants the safety, he wants the assurance of those dollars there.

That is a whole different approach to the situation of the other man, so, consequently, to have a different tax result is not unreasonable. Mr. BURKE. Mrs. Griffiths has another appointment but would like to make an observation before she leaves.

Mrs. GRIFFITHS. I would like to discuss the marital deduction.

I think Professor Westfall and Mr. Covey's suggestions are equally bad. I see no reason whatsoever why a woman should not inherit any property of her husband free of any tax. The basic fallacy in my opinion of everybody so far is a man who saved $300,000 or $400,000 really did earn that all by himself and save it, any woman who could not have spent that over 25 or 30 years is not really doing right as a

woman.

The truth is she helped save that money in my judgment and there is absolutely no reason in the world why the Federal Government should step in at his death and take 1 cent of that money.

In your suggestion, Professor West fall, for instance, where you are magnanimously going to give her $200,000 if she had three children and were 47 years old-suppose the man were 50 and she was 3 years younger than her husband, which is the usual situation--at 47 she inherits $200,000 and has three children approximately college age.

If she invested the $200,000 at 5 percent, which would be a pretty good investment, she is only going to get $10,000 a year. How could you put three kids through college today on $10,000 a year?

You coudn't. If one of the children got sick and arrives in a hospital, the doctor is going to send out for a Dun & Bradstreet report. It is not going to be a $10,000 pension when he looks at the income. They are going to locate the $200,000 and the fee will be accordingly based on the $200,000.

In my opinion, I would throw in the other $100,000. When we get to this part of the bill. I am not going to waste time asking men like you questions or the men on the committee.

I am going to call up their wives. You are sitting there presuming to give away the husband's money or tax his money.

It is not his money. It is partly her money and, therefore, I think that the Federal Government can wait until she is dead before they step in and take anything.

This has been brought very forcefully to my attention time after time after time. In one of the recent cases some friends of ours,

where the wife had worked very hard during the marriage, had a garden, canned and so forth, and so on.

She was amazed when her husband died that he left her half a million dollars. She was 68 years old. She had a problem getting the money together to pay the tax and she paid it. She said, "If I live, I am going to spend the rest of it.”

I hope she does. She intelligently bought a Mark IV about 10 days after he died.

Mr. COVEY. This is one of the difficulties I have with Dave's expansion but I don't think it goes far enough.

Mrs. GRIFFITHS. Yours doesn't either.

Mr. COVEY. I added the $250,000 and the exemption, so I get 90 percent of the decedents who file estate tax returns out and he gets out about 55 percent.

I think the question here is revenue. If the committee is prepared to say that they are not going to cut into some other area to make up the difference that is going to be lost here because there is going to be a large additional loss—

Mrs. GRIFFITHS. They should not have gotten it in the first place. Mr. COVEY. I was warned about this from somebody at the National Bank of Detroit and about the terminable interest rule and the switch from the present law that requires the surviving spouse to have control over the property to a current beneficial interest rule where the spouse would only have the right to enjoy the income and that would qualify for the marital deduction.

This is the other feature of it. Just speaking personally for myself, I do not like that change. I think if there is property involved, as Marvin said, then she should have the control of that property.

Similarly, coming back the other way-and it is a two-pronged problem-if the wife leaves it to the husband I think we would be better off leaving that control. If we don't leave it in the surviving spouse, we are going to be in some very difficult technical problems because we are going to have the same kind of interest which is both taxable and nontaxable and that is a very difficult position to be put in.

Mrs. GRIFFITHS. I hope you will go along with my amendment when I offer it.

Mr. COLLIE. Welcome to the community property State. We would love to have you as the Congresswoman from Texas. The only thing I would venture to suggest is the variation of your statement.

What if the wife dies first? If, as you suggest, the husband has earned the income and under the Texas law and other community property States laws, half of that is owned by the wife, we believe if she dies first she should have the right to will that half of the property or dispose of it as she sees fit.

It is just as equitable if she by chance dies first in her will the disposition should control because it was earned by the joint efforts of both.

Mrs. GRIFFITHS. I think you are right but I found out a long time ago in politics it is easier to get the easy things through first and I

Professor WESTFALL. I would like to respond to Mrs. Griffiths statement, which does state a very persuasive case for an unlimited marital deduction.

I would comment on two aspects of it.

In the case Mrs. Griffiths described, part of the difficulty was the widow was responsible not only for herself but also for children who were under 21.

The Treasury, in its proposal in 1969, would have provided an additional exemption of $3,000 for each year remaining until an orphan child reached 21.

If that were broadened as I suggested in my statement to cover children who are not orphans, then there would be some additional relief to the widow Mrs. Griffiths describes from the exemption from estate tax for the children based on the number of years remaining until they attain age 21.

The other comment I would like to make is the $100,000 figure is obviously not a magic number, but with $100,000 exemption, an unlimited marital deduction for the first $100,000 and a 50-percent deduction over that level, a widow who receives an estate of $200,000 is likely to be way ahead of a great many widows in the country who are not beneficiaries of an estate of that size.

Mr. BURKE. Since we have had the benefit of the lady's side of the argument, now would be a good time to recess.

The committee is faced with the problem of having to be on the House floor with the interest equalization tax bill. It is not that we are going to have a long lunch hour because we are going to go over to the floor.

If there is no objection, we will recess until 3 o'clock.

Mr. BROYHILL. If there is no objection, I have to leave, too, and I want to ask a question.

In the last colloquy between Mr. Brown and Dr. Brannon, it was indicated that one of the reasons for advocating that capital gains tax on the appreciated property at the time of death is to eliminate the inequity where estates have sold property and paid taxes prior to that. Would not your proposal, Dr. Brannon, wherein you would tax the appreciated value at ordinary income rates, continue that inequity or compound or increase the inequity? Wouldn't there still be an inequity between the estate that was liquidated, property sold prior to death and taxes paid compared to an estate that had not done that?

Dr. BRANNON. It is very difficult to get the exact equivalent in each case, but I think by and large the proposal I make would bring things closer together.

The important thing is when you look at this appreciation, if the asset is not sold, that means the investor has more assets to reinvest.

If I have stock, to go to the extreme of zero basis that has gone up to 100 and if I sell that and pay a 25-percent tax, I can only reinvest 75 and I will get from here on the income on the investment of 75.

If I can leave that alone, I will be getting the income on 100. The deferral is an advantage. The guy who has deferred the maximum all the way to death should pay a little higher tax at that time. Mr. BROYHILL. Would there be more of a certainty of correcting that