just looking at the way the facts have tended to go in the past few years. Nevertheless, a better plus now than last Fall: That's good and pleasant.

3. Real Capital Expenditures.-In 1976 we innovated the idea of asking our respondents to indicate how much they thought capital expenditure prices would increase in the coming year. That permitted us to talk about real changes in capital spending in 1976 rather than to talk about just the nominal changes. This year we again asked industry to indicate how much capital goods prices would rise, i.e. indicate how much 1977 capital goods prices would increase. In the following tabulation we compare increases in capital goods prices for 1976 with those projected for 1977.

Industry does not expect, for all practical purposes, the rate of inflation in capital goods to change in 1977 as compared with 1976.

Here, then, are the figures for real capital goods expenditures in 1977 as compared with 1976. The 1976 figures are the most recent estimates. The 1977 figures are, obviously, the results of our survey:

In 1976 the real volume of private capital expenditures declined about one percent. This meant that capital goods put in place added nothing to the growth of the economy in 1976.

In 1977 current plans by private industry call for an increase of about 7 percent in real capital expenditures. Capital goods will add to the economic expansion in 1977 and are coming through just when they are needed.

The figures for the details in "All Industries" are not nearly as reliable as the aggregate and should be used cautiously and with circumspection, but it seems fair to say that durable goods expenditures are going to increase materially in 1977.

As Gabriel Heatter used to say, "There's good news tonight" and these figures are good news.

APPENDIX D-1

RINFRET ASSOCIATES, INC., INTRAOFFICE MEMORANDUM, JUNE 9, 1977

To: Pierre A. Rinfret.

From: Barry Molefsky.
Re Capacity Utilization.

1. Final results of RAI's April 1977 Capacity Utilization Survey are now available. This survey was conducted between May 2, 1977 and June 6, 1977. Responses were received from corporations with roughly $400 billion in total assets, representing 56 percent of the survey sample. This level of response is somewhat higher than normal.

2. Operating rates for the manufacturing sector as a whole in April 1977 rose to the second-highest level ever recorded in the history of RAI's survey. For the most part this rise was due to an extraordinarily large increase in the motor vehicle industry's capacity utilization.

Automakers report that in April 1977 they were operating at 116 percent of potential. This is 20 percentage points above the January 1977 rate and 22 points above the year-earlier rate. The Federal Reserve Board reports that output of motor vehicles and parts expanded at a compound annual rate of 35.2 percent between January and April 1977. Capacity pressures evident in RAI'S survey make it unlikely that production can increase further. In all probability, output will decline in coming months.

The iron and steel and stone, clay and glass industries also recorded sharp increases in operating rates between January and April 1977. The rise in stone, clay and glass utilization represents a snapback from depressed activity due to natural gas shortages this winter. The increase in iron and steel operating rates from 67 percent in January to 84 percent in April is also due in part to a recovery from weather-induced shutdowns. But strong activity in the industry's customer markets probably accounts for a larger part of this gain. Auto, appliance and business equipment production have all recorded strong gains in recent months. The iron and steel utilization rate reported in RAI's survey is virtually identical with the capability utilization rate reported by the American Iron and Steel Institute (AISI). The AISI series has been increasing since April and reached 89 percent in the last week of May 1977. Rising demand for steel products has permitted manufacturers to increase prices. Between January and April 1977 the Wholesale Price Index for iron and steel has risen at an annual rate of 7.3 percent.

The nonferrous metals industry recorded a relatively minor increase in capacity utilization to stand at 89 percent in April. This is slightly below the recent peak rate of 92 percent recorded in October 1976.

3. Capacity utilization in the nondurable goods sector was unchanged from the 86 percent recorded in January 1977. Since July 1975 softgoods operating rates have fluctuated between 86 and 89 percent. Food and beverages is the only industry in this sector to experience a large change in operating rates: utilization increased from 79 percent in January 1977 to 87 percent in April. This gain is a return to the levels which have generaly prevailed in RAI's survey. January's dip was undoubtedly due to weather-related shutdowns.

The chemical industry remains the only nondurable industry operating below 80 percent of potential. In April 1977 the industry was running at 79 percent of capacity, four percentage points above the January 1977 level. The relatively large margin of unused capacity results from the industry's substantial capital investment program of the early 1970s. Consistent with this low operating rate has been the relatively small increase in chemical prices. In April 1977 the Wholesale Price Index for chemicals and allied products was only 3.0 percent above the year-earlier level. By comparison, the WPI for all industrial commodities rose 7.3 percent in the same period.

The paper industry reported operating at 91 percent of capacity in April 1977. This is roughly the same utilization rate reported by the American Paper Institute (API). The API rate has since risen above 94 percent. In the past, RAI survey participants have indicated that a 92 percent utilization rate represents maximum efficient operation. To raise utilization rates above 92 percent, papermakers will have to discontinue low-margin items. Shortages of certain paper products may therefore be imminent. Responding to this tight capacity, the Wholesale Price Index for paper has advanced at an annual rate of 9.4 percent during the first four months of 1977.

4. In contrast to the rise in manufacturing, operating rates in the nonmanufacturing sector registered a decline from 70 percent in January 1977 to 65 percent in April. This drop is attributable primarily to a fall-off in electric and gas utility utilization rates. The January 1977 rates had been inflated by severe weather.

5. Conclusion. Capacity utilization, as measured by RAI's survey, has reached a relatively high level. For some industries operating rates are unsustainably high and portend shortages. The situation in the paper industry appears to be

critical. That industry is at or near its production ceiling and shortages later this year are a distinct possibility.

Senator BYRD. The next witness, the subcommittee is fortunate to have today is Mr. Edwin S. Cohen, former Under Secretary of the Treasury. Mr. Cohen has had a distinguished career in Government and the practice of law and the academic community. He is a law professor of the University of Virginia. He is a native Virginian, educated at the University of Richmond, and the University of Virginia. Mr. Cohen is now a practicing attorney in Washington and a lecturer at the University of Virginia Law School.

I am glad to welcome you today.

STATEMENT OF EDWIN COHEN, ESQ.

Mr. COHEN. Thank you, Mr. Chairman. It is a privilege to appear before the subcommittee in connection with its study of incentives for economic growth. The concern over capital formation, and the effect of our income tax laws on its growth, is widespread and has been explained and emphasized by other witnesses.

Secretary Blumenthal in a recent speech referred to the shortfall in the availability of capital for the growing labor force and noted that "if we are to move toward a full employment economy over the balance of this decade, investment in productive capacity will have to absorb a higher proportion of our national output.”

Among the initiatives he stated that the administration would take is "the presentation later this year of a comprehensive proposal for major tax reform, designed to promote business investment to achieve increased productivity."

I shall not attempt to review all the possible changes in the Federal tax structure that could aid in this effort, but shall discuss this morning a proposal currently under consideration to integrate the corporate and individual income tax and related suggestions to tax capital gains as ordinary income.

Double taxation of corporate income, once in the hands of the corporation and again in the hands of the shareholder, seems to me lacking in equity and fairness and inevitably has a dampening effect upon investment in corporate stocks that form the life blood of industry. Philosophically and pragmatically, I would commend to you an effort to eliminate or ameliorate this double taxation, to place incorporated and unincorporated businesses on a par, and to achieve the same level of tax on corporate income whether corporations are financed by equity investment or indebtedness.

I listened earlier to Dr. Rinfret. I gather that those he talked to, business leaders, were not interested in this proposal. This has not been my experience, but I do not want to argue with someone who sold the stocks of his clients in February 1973. I did not have that foresight.

However, I would challenge the statement that he made, that he thought he derived from his discussions with these business leaders, that they made decisions without regard to taxes, although having made those decisions they would take advantage of tax provisions of the law. I would certainly agree, from my experiences as an attorney, over many years-more than I care to remember-that businessmen do