PUBLIC WITNESSES-Continued Smith, Dan Throop, senior research fellow, Hoover Institution on War, Sumichrast, Michael, vice president and chief economist, National Associa- tion of Home Builders, accompanied by Gordon Smith, Miller & Smith, Page 215 Thygerson, Dr. Kenneth J., chief economist and director of the Economics 142 Treptow, Dean, chairman of legislative affairs, Independent Business Asso- 35 Walker, Dr. Charls E., former Deputy Secretary of the Treasury and chair- American Bankers Association, Gerald M. Lowrie_-- American Bar Association, Don V. Harris, chairman, section of taxation__ Chamber of Commerce of the United States, Robert R. Statham, director, 81 440 461 431 451 Financial Executives Research Foundation, Norman B. Ture, president, Norman B. Ture, Inc.-B. Kenneth Sanden, partner, Price Waterhouse General Telephone & Electronics Corp---. 392 Harris, Don V., chairman, section of taxation, American Bar Association__ 461 440 Media General, Inc., Alan S. Donnahoe, president and chief executive 441 National Dividend Foundation, Inc., John H. Perry, Jr., president_. Penick, William C., chairman, division of Federal taxation, American In- Ture, Norman B., president, Norman B. Ture, Inc., and B. Kenneth Sanden, Appendix A.-Communications Received by the Committee on Finance 393 INCENTIVES FOR ECONOMIC GROWTH MONDAY, MAY 16, 1977 U.S. SENATE, SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT Washington, D.C. The subcommittee met, pursuant to notice, at 9:30 a.m. in room 2221, Dirksen Senate Office Building, Hon. Harry F. Byrd, Jr. (chairman of the subcommittee) presiding. Present: Senators Long, Harry F. Byrd, Jr., of Virginia, Hansen, and Packwood. Senator BYRD. Nine-thirty having arrived, the committee will come to order. Before the witnesses begin their testimony, I would like to take this opportunity to welcome each of the witnesses to this first day of hearings before the Subcommittee on Taxation and Debt Management Generally. The hearing today is the first in a series of 4 days of testimony on the topic of incentives for economic growth. [The press release announcing these hearings follows:] [Press release, May 6, 1977] SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT ANNOUNCES HEARINGS ON INCENTIVES FOR ECONOMIC GROWTH Subcommittee Chairman Harry F. Byrd, Jr. (I., Va.), announced today that the Subcommittee on Taxation and Debt Management will hold hearings on May 16 and 17, 1977, and June 131 and 14, 1977, on the relationship between taxation and economic growth. The hearings will begin at 9:30 A.M. in Room 2221, Dirksen Senate Office Building. Senator Byrd stated that the hearings will examine the effect of tax policy upon the growth of the private sector of our economy. Witnesses before the Subcommittee are to focus upon those proposals which they consider as the key to providing for greater business growth and higher employment. Senator Byrd, in announcing the hearings, noted that capital formation proposals were put forth in general terms by the last Administration and were discussed in connection with the Tax Reform Act of 1976. Hearings on this general subject were held early in 1976 before the Subcommittee on Financial Markets of the Committee on Finance. Since then, he said, the Administration has indicated a strong interest in acting on the problem. The Treasury Department plans to submit recommendations in the fall. Senator Byrd stated that Congdess, and the Subcommittee in particular, must become more involved in this subject if Congress is to have a significant role in the formulation of policy in this area. "We need to explore the range of current proposals, focus on those which merit serious consideration, see how they would work, and analyze the ramifications— who's going to be hurt and who's going to be helped," 1 Date subsequently changed to June 15, 1977. (1) In announcing the hearings, Senator Byrd expressed a desire that witnesses concentrate on what they consider to be the two or three most important proposals to encourage economic growth and employment. "One thing to be avoided is for business to present the Subcommittee with a shopping list of proposals." Senator Byrd said that he wants to give special attention to the views of the small business community. "The impact of the current proposals on small businesses, incorporated and unincorporated, should be carefully considered." We ought to immerse ourselves in the specifics of these proposals now, so that the Congress and the Administration will have ample opportunity to study the views presented." The hearings will begin with presentations by Daniel Brill, Assistant Secretary of the Treasury for Economic Policy, and Alan Greenspan, former Chairman of the Council of Economic Advisers, in order to set the stage. The Subcommittee will then hear from spokesmen representing small business and business generally. In the second two days of hearings, the Subcommittee will receive testimony from present Administration officials and leading economists, academicians and "public interest" groups. The following witnesses have been scheduled to testify on the first two days (May 16 and 17): Daniel Brill, Assistant Secretary of the Treasury for Economic Policy; Alan Greenspan, former Chairman, Council of Economic Advisers; Council of Small and Independent Business Organizations; Small Business Legislative Council; National Association of Small Business Investment Companies; American Council for Capital Formation; Securities Industry Association; American Bankers Association; and National Savings and Loan League and U.S. League of Savings Associations. An announcement concerning witnesses for the second two days of hearings will be made in the next few weeks. Legislative Reorganization Act.-The Legislative Reorganization Act of 1946, as amended, requires all witnesses appearing before the Committees of Congress "to file in advance written statements of their proposed testimony, and to limit their oral presentations to brief summaries of their argument." Witnesses scheduled to testify must comply with the following rules: (1) A copy of the statement must be filed by the close of business two days before the day the witness is scheduled to testify. (2) All witnesses must include with their written statement a summary of the principal points included in their statement. (3) The written statements must be typed on letter size paper (not legal size) and at least 75 copies must be submitted by the close of business the day before the witness is scheduled to testify. (4) The witnesses will be allowed 15 minutes for their oral presentation. Written Testimony.-Other persons interested in presenting their views to the Subcommittee are urged to prepare a written statement for submission and inclusion in the printed record of the hearings. These written statements should be submitted to Michael Stern, Staff Director, Committee on Finance, Room 2227, Dirksen Senate Office Building, on or before July 1, 1977. Senator BYRD. During the past several years, the American economy has been confronted with the unfortunate phenomena of high levels of inflation and high levels of unemployment. There is now a growing concern that American businesses are not making the necessary investments in plant and equipment to sustain the future growth of the American economy and to provide jobs for American workers. This view is backed by statistics which show that, from 1966 to 1976, approximately 19 million workers entered the labor force. Yet during the same period the growth rate in the amount of private plant and equipment has declined. Many proposals are now being advanced as solutions for the low rate of growth in the American economy. These proposals involve changes in our present tax laws relating to businesses. Some of these proposals, if they were adopted, would involve a comprehensive change in our current system. The purpose of these hearings is to permit the business community to present their views on what is needed. I hope that the witnesses who will be testifying will avoid the temptation of giving the subcommittee a shopping list of proposals. Instead, it is the subcommittee's hope that the witnesses will concentrate on the two or three measures that they consider to be the most important in encouraging economic growth and development. The hearings are designed to present a balanced program of all points of view, including the administration, big business, and the small business community, this latter being of special concern to me. In formulating a tax policy to encourage business investment, it is important that this significant segment of our economy will not be overloooked. The hearing will begin with the testimony of Mr. Daniel Brill, Assistant Secretary of the Treasury for Economic Policy. I welcome you, Mr. Secretary; we are pleased to have you and you may proceed as you wish. STATEMENT OF HON. DANIEL BRILL, ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY Mr. BRILL. Thank you, Senator. Good morning. Perhaps, if it meets with your pleasure, I will not read the document that I submitted, but summarize it and leave the opportunity then for us to have a further dialog on some of the issues that are involved. As I look at the problem of capital formation and the implications for the economy, it seems to me that we are involved in coping with both short run and longer run problems, both of which have at their heart the need for a faster rate of capital formation. In the short run, we have the problem of a slowing in rate of growth of productivity, a phenomenon that has bewildered many economists, including myself. We do not have the answers for this development. For the longer run, we have the need for a capital base that can sustain a full employment economy, our objective by the end of this decade. In the short-run productivity problem, all the measures of productivity indicate a very substantial decline since about 1969. If one plotted the growth of productivity over the postwar period, a roughly 3.3 annual growth line would have covered the annual figures very precisely up until 1969. Since then, we have seemed to have been falling far behind the long-term growth trends in productivity. There have been minor fluctuations reflecting the usual cyclical variations in economic activity, and special developments, such as the impact of the energy crisis, but the problem still remains that we are far below our long term growth trend in this very important aspect of economic activity. The result has been constant upward pressure on prices, with compensation moving in general at about a 7.5- to 8-percent advance while. national productivity has been growing at about 2 percent. This relates very much to the 6-percent underlying rate of inflation, with which we seem to be plagued. The decline in the rate of growth in productivity has been related to many, many problems-the entrance of less skilled workers into the labor force, the shorter workweek, a number of other factors. Personally, I think that one of the important considerations-although there is not unanimity among the economic profession on this is the slowing in the growth of capital formation. The figures that we have been able to put together on the amount of capital per worker show that in the past decade the growth in the amount of capital, after correction for inflation, has been somewhat less than half that of the decades preceding the 1970's. I think that this is one of the important elements in describing why we have had a slowdown in productivity. Senator BYRD. What are you going to do about that? Mr. BRILL. If it is true sir, that the problem is in significant measure a slowing down of the rate of growth of capital, then we have to look at everything we are doing in the way of government regulations and laws that inhibits the growth of capital. Foremost among these, of course, is the tax structure. The question is: What can we do to revise our tax structure in such a manner that it will contribute to capital formation? The criteria that we have been applying in the Treasury in a mammoth study now underway, on the ways in which the tax structure should be reformed, are: First, simplification, which we feel is a highly desirable objective, to permit individuals to understand what it is that they are being required by their Government to report. The second consideration is equity-all forms of income being treated equally; all sizes of businesses being treated equally, equitably; different income classes being treated equitably. The third criterion is that of economic effectiveness, particularly in promoting capital formation. There have been a number of proposals over the years to modify the tax structure in order to achieve this latter objective. These were spelled out in very succinct form in the report of the Joint Committee on Taxation last year which analyzed the variety of proposals. As I indicated in my prepared statement, sir, this is not virgin territory that we are discussing. This has been very thoroughly studied from a number of perspectives. The various proposals involve such modifications of the tax structure as: Integration of the forms of returns paid by corporations; equal treatment for dividends and interest payments, or various modifications of this proposal. There is another class of proposed modifications which have to do with manipulating the investment tax credit which has been changed from time to time by the Congress and possibly could be revised again. Senator BYRD. What is your view as to the present rate of the investment tax credit? Has it got to a point beyond which it would not be desirable to go, the 10 percent ? Mr. BRILL. Desirable is a hard term to answer. Desirable in the sense: Does it have effectiveness beyond the 10 percent in producing the results claimed? There is quite a variety of views in the economics profession, as I am sure you are aware, on the efficacy of the investment tax credit. |