Whether we are going to be able to convince most Americans that certain things have to be done or not is the real test that we will face in these coming months.

I find nothing in the President's energy message that encourages me to believe that we are going to do anything more than demagog an issue that has been demagoged for 6 years, that I know of. We first started talking in 1971 about putting together an energy policy.

During that period of years, our dependency on foreign sources of supply has grown steadily. Now we are importing about 50 percent of the oil that we use. We use to talk about how serious it would be if we had another embargo.

At that time, the time of the last embargo, we were importing about a third of the oil that we used. Today, we are importing about half of it. The balance of payments problem has become very serious. It has taken a lot of money out of this economy and it contributes, significantly, I think to the overall rate of inflation.

I am one of the few politicians who say we ought to decontrol gas and oil. I think that it would be better to create more American jobs.

I need not underscore the dependence of industry upon oil and natural gas. Everyone who went through last winter knows perfectly well what happens to jobs where there is no fuel.

Yet, because the oil companies have a very bad name, because everyone knows everyone in the business wears a black hat, it is a very easy thing for politicians to get up and demagog this issue and say, we are going to keep a cap on oil prices because we do not want to hurt poor people.

Senator Long tells a good story about the lady who came into the little grocery store and wanted to buy a dozen eggs and she asked what they cost. The merchant said they are 40 cents a dozen, and she said, the merchant down the street sells them for 30 cents a dozen. He said, why don't you go down there and buy them?

She responded that the fellow is out of eggs, and he says-the merchant with whom she is talking-well, if I were out of eggs, I would sell them for 20 cents a dozen.

I like to tell that story. I do not tell it as well as Senator Long does, but it needs to be told because that is exactly what we are doing in energy.

We can talk about how we are going to keep the prices down. We have done a good job doing that. We have also done an excellent job of curtailing domestic production.

There are those persons that recognize that oil and gas are finite resources. The thing we fail to consider is the volume of sedimentary rock that exists on the Outer Continental Shelf, the rock which has not been explored in the lower 48 States, the reserves, and the potential for oil and gas development that we have in Alaska. There is a whale of a lot more of cubic miles of sedimentary rock yet to be explored.

I have no doubt at all but that we are going to run out. I do say that there is enough potential there for development if we will give this domestic industry the encouragement that it needs. That means a chance to make a profit and the expectation of the profit. We can

minimize our dependence on these foreign sources of supply to give us the leadtime we need to get on with some other forms of energy that can make up the difference.

I say this now, because not only is there the chance of another oil boycott, but there is also the great danger, and a growing danger, with the emergence of the Russian Navy as the No. 1 force in this world and the far greater number of Russian subs than there are American subs. American vessels will become particularly vulnerable to the Soviet presence in Africa, because Russian subs are moving down both sides of that continent.

If their subs were not enough to pose a real threat to that tanker fleet which has to go around the Cape of Good Hope every 15 minutes, because 15 percent of the Free World's petroleum sources are in the Persian Gulf area, they will have a land base there too. There is no doubt at all that they can control the sea lanes for a thousand miles.

So I think it is an extremely serious situation. I think we have been demagoged on the tax issue. We have done everything but recognize that if we want to increase the standard of living-you pointed this out very clearly in your testimony here-we must give workers a tool, and we have not done it. We have not put investments back into industry comparable to the number of new workers that we have placed in industry.

And whether or not--I think Peter Jay summarizes it very well— whether or not we can rise to that degree of objectivity which will give us the opportunity to make the right choices remains to be seen. It is sure a longtime past the time when we can afford any demagoguery. There will be plenty of it floating around there in the next few months.

Mr. Chairman, I share your view about how important it is to put money back into industry so that we can continue to achieve our objectives.

Whether we can do that or not is the test.

Thank you for your testimony.

Senator BYRD. Thank you, Senator Hansen.

Senator Packwood?

Senator PACKWOOD. Mr. Brill, on page 3 of your statement, you refer to the greater productivity increase in the last decade to 1.5 percent. Is that true that is the worst, or the lowest, productivity increase for any of the industrialized nations of the world, including Germany and Japan?

Mr. BRILL. I am not sure offhand. I have a feeling in this decade that it would probably rank at the bottom, but not necessarily as the worst.

Senator PACKWOOD. Could you give me the figures on that? I am under the impression that it is the worst, including Great Britain. Mr. BRILL. That is the exception I had in mind. Perhaps with this time period, you are right. I can find out.

Senator PACKWOOD. If you could get them to me personally, I would appreciate it.

[The following was subsequently supplied for the record:]

TABLE. TRENDS IN MANUFACTURING PRODUCTIVITY IN THE MAJOR INDUSTRIAL COUNTRIES, AVERAGE ANNUAL RATES OF CHANGE

Source: U.S.Department of Labor, Bureau of Labor Statistics, Office of Productivity and Technology. Based on estimates for 1975.

Senator PACKWOOD. Thank you, Mr. Chairman.

Senator BYRD. Just one or two brief questions, Mr. Secretary. We might as well put in the exact figures we have on the deficits.

The OMB estimates for fiscal 1978 projects a deficit of $57.9 billion which is the figure you gave. The congressional budget resolution which was approved last week projects a deficit of $64.65 billion, which can be rounded to $65 billion for fiscal year 1978.

Now, you have mentioned integration of personal and corporate income tax. How would that be done, if that is to be one of the recommendations?

Mr. BRILL. There are a number of alternative ways of proceeding with integration. One way is to simply attribute to individual taxholders all of the income of corporations, just pass it through to them as though corporations were comparable to noncorporate enterprises. Senator BYRD. Am I correct, is that not what the AFL-CIO has recommended?

Mr. BRILL. I do not know their recommendation, sir.

Senator BYRD. The Americans for Democratic Action? Have they recommended that?

Mr. BRILL. I do not know.

Senator BYRD. What is your view on that?

Mr. BRILL. We are right in the midst of studying that. I am not in a position where I could express a view, a preference, for one or the other.

Senator BYRD. I am not asking for your view as to a preference. I would like to have your view as to whether or not that is a logical thing to do.

Mr. BRILL. Yes; it is logical but it has certain deficiencies in it, because it does raise problems for individuals who will find themselves being taxed at a rate on income that they have not received.

Senator BYRD. Is that fair?

Mr. BRILL. NO; I do not think that it is fair. One has to be sure that individuals have the income in hand in order to pay the taxes that are being levied on them.

Senator BYRD. The average corporation pays what percentage of its profits in dividends?

Mr. BRILL. Roughly in the 30's.

Senator BYRD. A person, whether it be a man, widow, or whomever it might be, who owns shares of stock in that corporation, would be paying a tax on 100 percent, yet would be receiving a dividend of only 30 percent.

Mr. BRILL. As I say, one of the deficiencies in that approach is that an individual would be paying taxes on income accrued, but not necessarily paid to him.

Senator BYRD. In your judgment, is that a sound approach?

Mr. BRILL. No. You asked whether it was logical. I said that there is a logic to it. I am not saying that it is equitable or fair.

Senator BYRD. I gather from what you say that you personally do not regard it as a sound approach?

Mr. BRILL. Under that criteria, requiring people to pay taxes on income they have not received, no, I do not regard it as a fair approach. Senator BYRD. The Americans for Democratic Action, Senator Long tells me, have advocated that approach. I agree with you. I do not think it is fair or reasonable at all.

Mr. BRILL. I find it rather difficult myself to be in that position. Senator BYRD. If a person, whoever it might be, owns a share of stock, you tax him on 100 percent of the profit of that corporation, yet they receive only a 30-percent dividend. I do not know how you will get people to buy stock on that basis.

What other approach would there be?

Mr. BRILL. There is the possibility of allowing corporations to deduct, to treat dividends the same as interest.

Senator BYRD. What do you think of that?

Mr. BRILL. It answers one objective. It makes it equally advantageous for a corporation to finance through equity as against debt. That has been a problem.

I think I indicated in my paper one of the problems of financing through debt. We have created a debt-heavy financial structure that inhibits the kind of venture capital approach that we need in our society.

We are not accustomed to debt-equity ratios of the kind you find in some other societies, like Japan, where, for entirely different reasons, they are able to finance in a 25 or 30 to 1 debt-equity ratio. That is not acceptable here.

We find it has resulted in a tilt of the tax structure toward debt financing, and is indeed an inhibiting factor on the formation of capital. Therefore, an action that would move payment of dividends and interest into closer consonance would be favorable from the viewpoint. of aiding the corporate balance sheet.

Senator BYRD. How else can you integrate?

Mr. BRILL. There are a number of variations where, instead of requiring or instead of permitting the dividend payment to be deducted by the corporation and treat it simply as you would interest expense. There is the approach of allowing the individual to receive the dividend, but then have a tax credit for the amount of the tax that the corporation has paid.

Both of these approaches have technical problems. Both of them have some advantages. I am not technically proficient enough to indicate which is preferable, but I think that the basic objective of both

approaches is to make the payment of interest and payment of dividends a more equal choice by corporations under the tax code.

Senator BYRD. One final question.

What three steps in the tax field do you think Congress should take to be the most effective in encouraging capital formation?

Mr. BRILL. When our proposals are submitted to the Congress, I would hope they will be given very thorough examination. But I think the general approach that we are taking should be encouraged. That is the desire to develop a tax structure which will be conducive to capital formation.

Senator BYRD. That is broad. Could you not give us two or three concrete suggestions that you think would be the most concrete ways that we could achieve that?

Mr. BRILL. Yes. I really think that hearings such as those you are conducting right now are very important to get all the views-and there are contrary views.

I alluded earlier to the fact that economists are not in agreement. That is not unusual; economists generally are not in agreement, but there are many people who have different views, not only economists, businessmen, labor leaders, agricultural leaders. All of them have their views on what is best, not only for their own group but their views on what is needed for the country.

I think we should be getting these views, getting them on the table and getting an assessment of how various alternatives can meet the objectives, keeping in mind that there are multiple objectives; the objective of simplification and equity have to be balanced with economic effectiveness.

Senator BYRD. I think so. That is the objective of these hearings, to be helpful-helpful to the committee and to the administration and the Congress-in formulating new programs and policies in the tax field. I might point out that I have found my talk with you in my office tremendously interesting. You devote a great deal of attention and time to your mail. As a result, you realize that there is a great diversity of viewpoints throughout this great country of ours.

I just want to commend you for the many hours and the tremendous amount of time that you do put on your mail. I spend much time on my mail. It encourages me to know that you, in your position as Assistant Secretary of the Treasury, find it helpful.

Mr. BRILL. It does, sir.

Senator BYRD. Thank you very much, Mr. Secretary. [The prepared statement of Mr. Brill follows:]

STATEMENT OF THE HONORABLE DANIEL H. BRILL, ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY

Mr. Chairman and Members of this distinguished committee: It is indeed a privilege to appear before this Committee today to lead off a discussion of the problems of incentives for economic growth, particularly incentives to increase the rate of capital formation so essential for sustaining economic growth.

In addressing these issues, we all recognize, of course, that we are not invading virgin territory. The problem has been the subject of intensive examination by economists, lawyers, business and labor leaders and by officials in the Executive and Legislative Branches of government over an extended period.

Having followed the course of these discussions over the years, from several different perspectives, I am encouraged by the growing coalescence of views on