Senator BYRD. What is the administration's position on the investment tax credit at the current rate?

Mr. BRILL. We feel it should be considered in the context of total reform, not to look at it individually as a separate item, but what role it can play in the context of the total change in the tax structure. Senator BYRD. Do you think it would be appropriate to go above 10 percent?

Mr. BRILL. If there were no other change made in the tax structurewhich I do not think is a very realistic assumption-then I think that should be given consideration.

Senator BYRD. You mean to go above it?

Mr. BRILL. Yes, sir. Under the condition that no other change was made in the tax structure.

If, on the other hand, we are looking at the subject of total reform, then I am not sure that I feel that the investment tax credit would be as important a prod to investment as some of the other changes under consideration.

I find it difficult to answer with respect to one form of tax, if we are in the process of discussing a major reform in the tax structure. Senator BYRD. As one who favors the investment tax credit, also as one who originally did not favor it, it seems to me that it is important, No. 1, that we, the Congress and the administration, that we reach a determination as to whether it is wise or unwise to have an investment tax credit and roughly the rate at which it should be, and then begin to leave it alone, rather than to repeal it, put it on, repeal it, put it on, as we have consistently done for years.

Would you be inclined to think that we ought to try to reach a conclusion and then basically leave it alone?

Mr. BRILL. I think the problem with varying the investment tax credit is the uncertainty that it induces in the business community in making investment decisions.

Senator BYRD. That is very important.

Mr. BRILL. It is indeed.

I faced that problem myself in trying to estimate the prospective return on an investment to a company with which I was affiliated, with respect to what the after-tax return would be, given the various possibilities that might prevail with the investment tax credit.

On the other hand, I think the important issue, Senator, is whether we are considering one tax in isolation or considering a total package. It is our hope that, no later than this summer, we will be able to present to the Congress a complete package in which the investment tax credit can be viewed in the context of a total change in the entire system.

Senator BYRD. Let me ask you this. I realize this could vary from business to business, but looking at business as a whole which is the more important, the investment tax credit or a more liberalized depreciation rate?

Mr. BRILL. Looking at it from the viewpoint of business, it would depend upon whether we are dealing with a capital intensive. industry

Senator BYRD. That is right. Recognizing the differences in businesses, but in order to reach a broad approach, what would be the most helpful to most businesses?

Mr. BRILL. I would think of an option that falls outside of the particular range that you just indicated, that would be a reduction in the corporate rate overall as probably being the most important contribution that tax reform can contribute to the business sector.

Senator BYRD. I think that is a very important point that you raise. Do I take it from the way that you answered the question, then, that if there were to be a reduction in the corporate rate, that both the investment tax credit and a more liberalized depreciation schedule probably would not be considered?

Mr. BRILL. We are not at the stage where we say we have the finished package, even combination of packages. But that is what we are looking at, alternative combinations. If we can combine in one package a set of tax reforms which will achieve certain objectives such as more equal treatment of various sources of income and a reduction in the overall rate for corporations and individuals, then other specific measures, such as an investment tax credit or juggling of depreciation allowances become less valuable to both the recipients and to society as a whole.

It is a matter of trying to visualize what is most useful in the context of combinations that become a specific package.

Senator BYRD. I take it, then, that the prime consideration in developing this package, the prime consideration, is to reduce the overall tax rate?

Mr. BRILL. Our consideration is economic effectiveness in addition to simplification and equity. By economic effectiveness, we mean particularly the extent to which a given tax structure will enhance the possibility of getting greater capital formation.

Senator BYRD. You are talking now about the corporate income tax? Mr. BRILL. Corporate and individual income tax.

Senator BYRD. In this context, we are really dealing now with the business tax. What I was trying to get your viewpoint on was what could be done in the corporate field?

I realize, of course, that it would work hand in hand with what is done in the individual field, but am I correct in assuming from your earlier statement that, insofar as business is concerned, the contemplated tax package will be built around a reduction in the corporate rate?

Mr. BRILL. At this stage of our study, I would say this has a very high priority. Whether that will turn out to be the keypoint in the final package as it is presented-it is much too premature for me to be able to predict that.

We think of the various incentives and methods of approaching the problem of inducing a higher rate of business investment that a reduction in the total rate has very great economic potential.

Senator BYRD. What two or three steps could Congress take to be the most effective in encouraging capital formation?

Mr. BRILL. Are you including in that, sir, what Congress does about the tax package or are you talking outside of the area of taxes? Senator BYRD. I am speaking primarily in the tax field.

Mr. BRILL. It would seem to me that the adoption of a tax structure by the Congress of a tax structure that is going to have the characteristics of inspiring capital formation and having a degree of stability that is now being changed with each new session of the Congress,

I feel this would be very important, a major contribution in establishing the kind of environment that the businessman can plan in.

Overall, you realize that most major capital projects that an average business is contemplating requires planning and investment over an extended period. It would be very difficult to plan if first one is not sure by the time the project is onstream what the tax framework would be under which the income generated by this new plan will be taxed. I think that the ability to plan in a more certain framework is very important for business. That applies also to the general environment. You asked whether I had reference to action that Congress could take outside the field of taxes. I think that it is first and foremost important to establish a sound economic environment so that businesses feel that by the time the equipment that they have put in place is producing, there will be markets for the products that they are producing. That involves congressional actions to help stimulate the economy but also congressional support of actions that will diminish the rate of inflation.

Senator BYRD. How important is our fiscal policy?

Mr. BRILL. This is what contributes to the environment in which businessmen feel that they can plan ahead. I think President Carter's determination to achieve a balanced budget by fiscal year 1981 is an important element in establishing the environment that should be reassuring and establish business confidence.

I think that this is a part of the area outside the specific field of tax structure that I had in mind.

Senator BYRD. I certainly agree with that. I think that is very important.

I have been concerned that, while the administration rhetoric has been about a balanced budget, the recommendations of the Administration have been to increase spending substantially over what it was prior to the new Administration's taking office.

It seems to me that you are going in two different directions at one time.

Mr. BRILL. It looks at the moment as though our budget deficit for the current fiscal year will be running anywhere between $15 and $20 billion below the last full fiscal year of the preceding administration.

Senator BYRD. Let us come to fiscal 1978. You will find that it will be the second highest, or maybe the highest, in history. It will be substantially above this year's, will it not?

Mr. BRILL. As the figures now stand, yes, it will be above this year, but it will be below the $66 billion deficit in fiscal year 1976.

Senator BYRD. By a hair, $65 billion versus $66 billion-$64.65 billion, if you want to be precise. That is what Congress has just passed last week.

Mr. BRILL. As I recall our specific unified budget number was $58 billion. I do not have that with me at the moment, but that was the number, I think, that Mr. Lance was using.

If I am in the right range-and I am checking on it-it was $58 billion. That was the official projection for fiscal year 1978.

Senator BYRD. Is that the figure that the Congress passed last Friday?

Mr. BRILL. No, sir.

Senator BYRD. All right. Is that not the figure that you are likely to get?

Mr. BRILL. When you say the Congress, I did not realize that it had gone through both committees.

Senator BYRD. The conference report on the budget was approved Friday. It is a very high figure.

In developing this tax package that you are speaking of, Mr. Secretary, how much input will business and private individuals have in revising the tax package?

Mr. BRILL. We hope that hearings such as this will provide us with the background. We will be having hearings with various groups. We have a Small Business Advisory Committee to the Treasury which will be meeting with our tax officials.

We very definitely want to get as much input as we can from all

groups.

Senator BYRD. What is the timetable for submitting the proposal? Mr. BRILL. The original timetable was to submit the report to the Congress by October 1. We are accelerating that. I do not have a specific date. It will be some time during the summer, or very early fall. We cannot, at this juncture, pinpoint the date.

Senator BYRD. One of the reasons for concern is over adequate capital in the energy area. Can you supply the committee with estimates of the cost to our economy of the various parts of the President's energy program?

Mr. BRILL. The cost to the economy, did you say?

Senator BYRD. Yes.

Mr. BRILL. In broad terms, yes, it is possible for us to evaluate. As you may know, the estimates of the package as a whole is that it would have relatively small effect on our real gross national product, because the taxes raised by one element of the program are very often rebated to the economy through another set of actions, so that the net impact should be minimal.

There will be some impact on prices because the program does rest on using the market mechanism to reduce consumption of our most convenient, but least producible, sources of energy; oil and gas.

But I can provide you with some estimates of what this involves. Senator BYRD. The estimates which I have seen have varied a great deal. President Carter had one estimate and Mr. Lance had a substantially higher estimate.

One of the Members on the Senate floor had a greater and higher estimate.

Of the two, what is yours?

Mr. BRILL. I do not happen to have my file with me on that subject, but as I recall, my estimate of the impact on the price measures, if that is what you are referring to, is the one that has had the widest variety of estimates. The energy package without the standby gasoline tax. will probably add 0.3 to 0.4 percent to the price index over the next 2 to 211⁄2 years, and then drop back somewhat.

If, in that period, the gasoline tax were triggered, that would prevent the fallback at the end of this 2-year period and the price measures would continue to contribute to roughly less than 0.5 percent per annum to the price index.

Senator BYRD. Does the administration view the capital formation proposals as a means to solve an economic problem; namely, the problem of too low capital to achieve our goals, or a means to work out some form of tax reform?

Mr. BRILL. We regard tax reform as a partial solution to the economic problem. Our interest in particular forms of the modification of the tax structure is to achieve an answer to the problem of why we are not getting enough capital.

Senator BYRD. How much emphasis would you place on the need to encourage personal savings as part of a capital formation package?

Mr. BRILL. The experience I have had in studying the problem of personal savings suggests to me that there is not very much that can be done directly to encourage a higher level of savings in total. It is possible, through various incentives, to induce a change in the form of saving, but not through various tax measures, to change the total amount of savings.

That has been the experience in this country. It also has been the experience in most other countries. What induces the change in the total volume of savings is what really happens in the total economy, not as a result of specific tax measures.

Senator BYRD. Could you supply for the record the depreciation rates for the major industrial nations?

Mr. BRILL. Yes, sir.

[The following was subsequently supplied for the record:]

Average declining-balance depreciation rates for manufacturers in five major industrial countries

Senator BYRD. Realizing that the administration is not prepared at this time to make its recommendations on the subject, could you outline what you feel to be the alternative choices the administration will have in putting together this package?

Mr. BRILL. The alternatives from which to choose are extremely wide, because this is an area in which there has been very extensive work and analysis done, both in the Congress and in the administration, and by individual economists.

I believe that the broad categories of modification of the tax structure were laid out in the report prepared by the Joint Committee on Taxation last year in which they listed as I recall, six major areas of possible change.

The first one was the possibility of integrating dividend and interest income, the integration of the corporate and person tax in part or in whole.

The second was a more specific technique of the investment tax credit.

The third was the adjustment of the depreciation allowances. The fourth general approach was reducing the corporate tax rate. The fifth, as I recall, was the possibility of applying the price indexes to adjust the value of capital to take account of inflation.