The Revenue Act of 1938 simplified the sliding scale and provided for three rates. Assets held for less than 18 months were taxed as short-term gains at 100 percent; assets held between 18 and 24 months were considered long-term gains and taxed at 66 percent; and assets held for more than 24 months were taxed at 50 percent. The Revenue Act of 1942 divided long- and short-term gains by a six-month holding period and provided that only 50 percent of long-term capital gains would be taxable. The Tax Reform Act of 1976 lengthened the holding period defining long-term capital gains and losses from six months to nine months in 1977, and to one year in 1978 and future years. A strong argument favoring the expansion of the capital gains deduction is inflation. In many instances capital gains merely reflect the inflationary spiral of our economy. What appears to be a gain in the amount of dollars over a given period of time is merely a reflection of the decreasing value of the dollar invested. This is a monetary gain which does not represent an actual gain and should not be taxed. The rate of capital gains taxation should be reduced proportionate to the length of time a capital asset is held, with the reduction being gradual and continuous. Expansion of the capital gains deduction would encourage greater capital formation through equity investment. CONCLUSION The American economy is faced with a major need for capital which we cannot continue to ignore. It is important that our tax policy be remolded to encourage capital formation. We must apply those principles in our taxing system that promote the modernization and expansion of our productive facilities. The other highly industrialized nations understand these principles and are applying them. If we are to continue to improve our standard of living, reduce unemployment and solve our inflation problem, we must adjust our tax policy to favor capital formation. To encourage capital formation the Chamber urges these changes in the tax laws: a prompt capital cost recovery system, a permanent 12 percent investment tax credit, tax rate reduction for corporations and individuals, elimination of the inequity of the double taxation of corporate earnings, and reduction in the rate of taxation for capital gains based on the length of time an asset is held. STATEMENT OF JOHN H. PERRY, JR., PRESIDENT, NATIONAL DIVIDEND I thank the Chairman and the Committee for the invitation and opportunity to talk about the National Dividend Plan and how it relates to the critical task before this Committee and the Nation: the need to restore the vitality of capitalism to achieve economic growth and full employment. The need in our economy for additional formation and investment of capital is great and growing. Some have estimated our capital needs between now and 1985 at nearly $5 trillion.' However, the decline in the rate of growth in investment in plant and equipment is expected to continue." At the same time, the number of Americans participating in capitalism through investment in corporate stock has declined steadily for the last several years. Public tax and fiscal policies have a dramatic impact on the private economy. Instead of benefiting, such policies may hinder the formation and investment of the capital necessary to provide economic growth and jobs. My own involvement with these concerns goes back many years. In 1964, I authored a book entitled The National Dividend, which is a structural reform of our taxing and spending system designed to eliminate the present double tax on earnings realized in corporate form; to broaden the base of stock ownership and participation in the profits; and to place some effective restraint on the growth of government. It was my belief at that time, and still is, that we not only must eliminate the bias against capital investment resulting from the present double tax on corporate earnings, but that we must also bring more people into direct participation and understanding of the free enterprise system. These steps would slow, and perhaps reverse, the growth of the public sector at the expense of the private. 1 James H. Evans, New York Times, January 23, 1977, p. 14. 2 Congressional Budget Office. Sustaining a Balanced Expansion, August 3, 1976. John H. Perry, Jr., The National Dividend, Ivan Obolensky, Inc., New York, 1964. Since 1964, the National Dividend Plan has continued to be refined and has been subjected to extensive analysis by noted economists, business leaders and others. Exhibit A contains a bibliography of the published studies and commentaries to date. In 1970, a feasibility report was prepared by a major independent consulting firm and plans are currently underway for further analysis by the use of econometric models. Presently, work on the National Dividend Plan is being carried on by the National Dividend Foundation, Inc., which is a nonprofit, private operating, research and educational foundation, devoted to the independent, objective evaluation of the existing corporate tax structure within the United States, its impact upon incentives and growth within the American economic system, and the methods of expending revenues. The National Dividend Plan represents a serious approach to improving the U.S. corporate tax system from a broad, public policy point of view. While dealing with the present bias against capital investment and job creation inherent in the current double taxation of corporations and shareholders, the National Dividend Plan seeks also to deal, through the electorate, with the broader problems of economic misunderstanding, voter apathy, productivity, growth of the public sector, and economic equity. Implicit in the National Dividend Plan is the promise of economic growth and a higher level of employment. A detailed economic analysis of the National Dividend Plan is contained in the testimony of Dr. Martin R. Gainsbrugh before the Committee on Finance in March 1976.5 Briefly described, the National Dividend Plan as presently contemplated would involve the following: One: Integration of the corporate and shareholder taxes would be accomplished by imposing a single tax solely at the corporate level at a rate not to exceed 50 percent. That tax having been paid, the earnings would not be taxed again when distributed as a dividend to shareholders. Two: Corporate tax revenues would be paid directly into a National Dividend Trust Fund and distributed quarterly as a dividend to the voting public on a per capita basis. Much like a national profit-sharing trust all registered voters would participate directly in the profits and losses of the free enterprise system. The National Dividend is estimated at $500 to $750 per voting adult.5b See also note 16. Three: There would be a moratorium on any new Federal expenditure programs while the National Dividend was being phased-in over five years. Each year, an additional one-fifth of the corporate tax would be paid to the Trust. This would permit the National Dividend to be financed out of growth in the econ omy without reducing any existing expenditure programs. See testimony of Dr. Gainsbrugh, cited above. Four: When fully effective, the National Dividend would be reduced in relation to the amount of the Federal deficit so that only "profit" net of any increase in the deficit would be available for distribution to the public as a National Dividend, thus involving the public in debt management. Obviously, the basic elements of the National Dividend Plan are in the forefront of tax policy today. Elimination of the double tax on corporate earnings has already been undertaken in Europe and Canada, and may be proposed by President Carter for consideration here. There has already been enacted a limited version of an Employee Stock Ownership Plan (ESOP) which channels part of an employer corporation's tax liability into the purchase of stock in the company for the employees." While the ESOP is confined to employees of the corporation, the Treasury has in the past proposed tax incentives to broaden stock ownership more For example, The Conference Board sponsored a three-day seminar on the National Dividend Plan at Airlie House, Virginia, in 1971. See M. R. Gainsbrugh. The National Dividend Plan, Pro & Con, The Conference Board, New York, 1971. More recently, on April 20, 1977, the National Dividend Plan was the subject of a seminar of the Harvard University Public Affairs Forum. 510435 Ironwood Road. Palm Beach Gardens, Florida. 5a Hearings. H.R. 10612. Committee on Finance, 94th Cong., 2nd Sess., Part 3, March 29, 30 and 31, 1976, at pp. 1357-1384. 5b Thid. Amendments to the law in 1975 and 1976 provided an additional one and one-half percent investment credit if deposited in a trust to purchase stock in the company for the employees. The effect of the ESOP is to distribute to the employees a portion of the employer's profits that would otherwise be paid in tax. generally, particularly by lower and middle income persons Various mechanisms have been suggested for conditioning increased spending on an increase in tax revenues or, conversely, for conditioning tax cuts on a corresponding decrease in the deficit.' The establishment of Budget Committees' in both Houses of Congress is itself a reflection of such an attempt. We believe, however, that the National Dividend approach has special merits. As an integration device, imposition of a single tax at the corporate level is incomparably simpler than all other integration techniques which have been proposed, and when combined with distribution of the National Dividend, can be made to achieve a result similar to the two-tax "gross-up and credit" method being considered by the Treasury. The details of achieving integration under the National Dividend Plan are discussed in a succeeding section. More important, however, are the two unique features of the National Dividend Plan: distribution of the corporate tax as a per capita dividend giving virtually each adult a direct monetary interest in productivity and profits; and the effective restraint on deficits achieved by reducing the National Dividend by increases in the deficit. These two elements of the National Dividend Plan go directly to the fundamental concern underlying all proposals for integrating the corporate tax, broadening stock ownership and the like: worry about the decline of capitalism and a fear that it may finally be overwhelmed by the combination of a bloated bureaucracy and a majority of voters who no longer have any direct stake in the profit system. If few people are proprietors, entrepreneurs or shareholders (directly, or indirectly through stock ownership), the majority will have less interest in preserving the system. Recipients of earned compensation or government benefits do not normally perceive profits as the ultimate source of wages or transfer payments. Nor are they as likely to be concerned about increased deficits and inflation if they see themselves as benefiting more from the causes of inflation than from the entrepreneurial system it damages. On the other hand, if under the National Dividend Plan the majority in fact did have an interest in capitalism, and shared directly in its profits and losses, the opposite attitude should exist. The prevailing public, and hence political view, would be to act in a manner best calculated to increase productivity and profits. In summary, the National Dividend Plan is designed to provide new incentives for capital formation, and to increase citizen interest in the vitality of the private enterprise economy by introducing the principles of broader capitalism into public policy related to the taxation of corporate enterprises in the United States. From a philosophical standpoint, the National Dividend concept is neither of the right or left, nor a purely economic, social or political proposition. Instead, it is a total concept combining sound economics, political reality, and social concern. The National Dividend Foundation, earlier this year, completed an extensive public opinion poll testing public reaction to the concept of the National Dividend. In a two-week telephone survey by Sindlinger & Company of Media, Pennsylvania, from February 17-March 2, 1977, 2,377 persons over the age of 18 in all parts of the 48 contiguous United States were polled. Nearly half-48.2 percent— immediately favored the concept of the National Dividend. This represented a projected 73.7 million adults. Almost three in ten did not like the Plan, and a quarter-22.6 percent-had no opinion. However, the implications were clear that there may be enough discerning persons answering "don't know" to give the concept a clear majority among all adults. In a separate mail survey of individuals generally familiar with the National Dividend Plan, the Foundation found that of 444 respondents, 30.6 percent considered NDP a moderate proposal and 30.0 a conservative proposition. The balance had no opinion or found NDP to be a liberal plan. More import, however, was the finding that over 65 percent of those responding to this survey felt the NDP would be effective in building public support for our private economic system and would increase productivity in the United States.. 7 In 1975 and 1976, the Ford Administration proposed a Broadened Stock Ownership Plan which provided a tax deduction for the cost of purchasing up to $1,500 of stock each year. Among such proposals are a constitutional amendment requiring a balanced budget, and a statutory amendment that would automatically impose a surtax in an amount sufficient to wipe out any deficit. See S.J. Res. 26, 95th Cong. A constitutional amendment may not be a realistic expectation, certainly not within a reasonable time period. Congressional Budget Act of 1974. In a recent column in The Washington Star, syndicated columnist and nationally know author Michael Novak summed it up this way: "The NDP offers a neat compromise between those who recognize that a better life for all must be paid for out of earned income, not out of printing press money-and those who recognize that limits must be set on government activities NATIONAL DIVIDEND: AS A TECHNIQUE FOR INTEGRATING THE TAXES Imposition of a single tax solely at the corporate level has substantial merit as a technique for integrating the corporate and shareholder taxes and is incomparably simpler than any of the three other principle methods of integration. These methods are (1) to allow the shareholder a credit for the corporate tax on the portion of earnings distributed, i.e., the so-called "gross-up and credit" method; (2) to allow corporations to deduct the amount of dividends paid; and (3) to tax all corporate income directly to the shareholders, whether or not distributed, with a withholding tax paid by the corporation which is creditable by the shareholders. The NDP single tax method of integration can be made to achieve almost the same result as the "gross-up and credit" method. In effect, dividends are excluded from tax under both methods of integration. Imposing a tentative tax on the shareholder and then allowing him a credit which is never less than that tentative tax is the same as not taxing the dividend at all. The single tax approach of the National Divdend Plan does directly what the "gross-up and credit" does indirectly. Moreover, both methods involve direct cash distributions to individuals of corporate tax payments. Under the "gross-up and credit", every person who owns a share of stock would receive a distribution to the extent his top marginal tax rate is less than the corporate rate. Under the National Dividend Plan, the typical shareholder, plus every other registered voter, would receive a distribution equal to his per capita share of total corporate tax collections. In making the following comparisons, it is assumed that the corporate tax rate is 50 percent and that the maximum individual tax rate is 50 percent." The following Table I compares the single-tax approach of the National Dividend Plan to the two-tax approach with "gross-up and credit" as applied to a shareholder in a 50 percent tax bracket. 1 Under this method, the shareholder's dividend is grossed up by the amount of credit for corporate tax. A tax is then computed on that grossed up dividend at the shareholder's top marginal tax rate. The shareholder then tkes a credit for the corporate tax which may equal or exceed the shareholder's "tentative" tax on the dividend. 2 The shareholder is assumed to be in a 50-percent tax bracket. In this example, the results of the two methods of integration are identical as shown in Table I. Obviously, however, all shareholders are not in a 50 percent tax bracket as assumed in Table I. Many lower income shareholders are, for example, in only a 20 percent tax bracket. Thus, it might appear that under the single tax approach every shareholder's portion of corporate earnings would be subject to a flat tax of 50 percent (i.e., the assumed corporate tax rate); whereas, 10 Reprinted as Exhibit B. 11 This appears to be a reasonable assumption. Serious consideration has already been given in the Congress to applying the 50 percent maximum tax rate on earned income to all income. There would be little reason to maintain a 70 percent rate if dividends were not separately taxed. under the gross-up and credit method, corporate earnings are taxed to shareholders on a progressive basis." 12 To the contrary, as Tables II and III illustrate, when the single tax approach to integration is combined with the second element of the National Dividend Plan the distribution of the corporate tax per capita to every adult registeredthe combined effect is an integrated tax system which is progressive with respect to those shareholders. Within the lower income range, the result would be more progressive than gross-up and credit (see Table III). In Table II, the effective rate of tax on small shareholder A is calculated by expressing the corporate tax ($500), minus the National Dividend ($500), as a percentage of the taxpayer's share of corporate earnngs ($1,000). Obviously, as the taxpayer's share of corporate earnings increases in proportion to the National Dividend, the effective rate of tax increases. See the case of large shareholder B in Table II. Where present, the relative size of dividend income is usually a good measure of the relative size of the shareholder's total income. While there might be a few high income individuals with only small amounts of dividend income. There would be no low income individuals with large amounts of dividend income. TABLE 11.-EXAMPLE OF PROGRESSIVITY OF SINGLE TAX COMBINED WITH NATIONAL DIVIDEND TABLE III.-EXAMPLE OF PROGRESSIVITY OF GROSS UP AND CREDIT METHOD 1 The effective rate of tax is merely the corporate tax, minus the refund, expressed as a percentage of the share of corporate taxable income. In the case of small shareholder A, this is $500-$300÷$1,000=40 percent. NATIONAL DIVIDEND PLAN: BROADENING STOCK OWNERSHIP AND INDIVIDUAL PARTICIPATION IN THE PRIVATE ENTERPRISE SYSTEM One of the critical challenges to the future of the private enterprise system is the lack of public understanding of the system and the individual's role in it. According to the Advertising Council's survey 13 of the public's opinions toward their economic system, it was shown: that less than 1 percent of the general public, and only about 6 percent of the highly educated public, understood fully the functional elements of the American economy; and that 54 percent of Americans favored more government regulation of business. 12 Under the gross-up ond credit method, even though a 20 percent bracket shareholder's portion of corporate earnings would initially have borne a 50 percent tax paid by the corporation, when he gets the dividend taxable to him at a 20 percent rate he gets a credit of 50 percent applicable against his tax on the dividend. The 30 percent excess is a credit against tax on his other income and any remaining excess is refunded to him in cash. 13 Compton Advertising, Inc., National Survey on the American Economic System, 1976. |