Mr. WALKER. All right. We will do both.

Senator BYRD. My impression has been, except for some isolated cases, it works out to about 37 to 38 percent.

Mr. WALKER. That sounds about right. That is an increase of 50 percent of what it was over the 25-percent rate in 1978. It is bound. to affect not only capital formation, but the type of instrument used to help capital formation mainly equity stocks, where most of the risk money tends to come from. So, it is doubly deleterious.

Senator BYRD. It has had a negative effect on economic activity. Mr. WALKER. Yes. I would agree with that through the impact it has on whether individuals, particularly high income individuals, will put their money out at risk, because it has lowered the rate of return.

Senator BYRD. When you get to No. 4, I approve of the principle of trying to reduce, possibly eliminating double taxation. Explain to me how that can be done.

Mr. WALKER. Well, sir, there are several ways. When you say you can't get your mind clear on it, you are part of a large group in this country.

Let me say first of all that intensive studies are underway, particularly in the business community and our own Council as to the various approaches to reducing double taxation.

To make my answer short, let me put it this way: There is no question but what a strong case can be made for some of the proposals on an equity basis, because the tax to the individual stockholder finally can become so high, particularly in those cases where corporations and individuals are paying high marginal rates.

Let me just describe two of the plans that are being discussed now and say a word or two about them.

One plan would permit, or grant, a refundable credit to the stockholder on his individual income taxes, for all or part of the corporate taxes paid on his behalf.

There are some in the business community that will support this approach. But to the extent that a large amount of the funds devoted to business fixed investment come out of retained earnings, to grant the entire tax reduction to the stockholder-although there is no 'doubt that over a period of time it will make markets better and it will promote capital formation-in the short run that particular corporation has no more money to invest from retained earnings, which is perhaps the major source of new capital formation.

Senator BYRD. It is not disadvantaged by it?

Mr. WALKER. But proponents of this approach say corporations can, since stockholders benefit from a credit, reduce their dividends and thereby increase retained earnings.

Well, I am not so sure whether corporations can reduce their dividends or not. Tax credits or not, that might be unacceptable to stockholders.

Moreover, much of the common stock in this country is owned by tax-exempt organizations-pension funds, foundations and so on, and they have planned payouts in the years ahead.

The tax credit means nothing to them. They could be receiving a reduced income flow in the form of dividends. You have those problems.

Another approach is to permit corporations to deduct dividends paid in the same manner that they deduct interest on debts. This will have the great advantage of reducing the bias in favor of debt financing and help stimulate equity financing. Also, corporations might share some of that by paying out somewhat higher dividends, but not all of the gain. And so, as a consequence, you will have both a shareholder who wants to buy more stock and you will have the corporation with more to invest.

That is not as politically appealing as the stockholder credit, which supposedly benefits individuals instead of corporations.

Secretary of the Treasury Simon, in one sense you might say with the wisdom of Solomon, sent a proposal up in 1975 that would combine the two. Let corporations deduct half of the dividends paid and let individuals take a credit for 50 percent of the dividend that they receive.

I would not be surprised if something down the "middle," like Mr. Simon recommended, might not be the final outcome.

The only other point I would want to make is that some people have said, well, if we go to an integration plan that "costs" $8 billion-and I put "costs" in quotes, since I say that we can recover these revenues over a period of time-then the business community has to give up something among these other five capital formation proposals. I think that is very wrongheaded. That will not give us the type of net stimulus to capital formation that we need.

This is why I am concerned that the administration is talking about getting this proposal up here so soon. This is an area that is undergoing constant analysis. Everytime we look at it, some new factors come in that have not been considered before.

I do not think we are ready to move in this area at this time. Senator BYRD. You do not think we are ready to move in this area? Mr. WALKER. I do not think we have thought out fully enoughSenator BYRD. You just recommended that we move in this area. Mr. WALKER. I recommend that we do it only in a time frame where we have time enough to think it out. My point was in terms of moving right into it in either June or July. I would still like to get started on all of these as soon as possible.

What is the best approach to integration? That is the question.

Senator BYRD. Do you think the administration is going to recommend one of these proposals?

Mr. WALKER. The indications are that they favor a stockholder credit approach.

Senator BYRD. From a realistic point of view I took that to mean that they would probably recommend a $100 credit, or something like that

Mr. WALKER. I do not think that is what they have in mind. As Secretary Blumenthal said-incidentally, in his appearance on "Issues and Answers" on Sunday, he made an interesting statement; the press has not paid much attention to it.

Secretary Blumenthal was taken up by reporters who noted that the President said in his recent press conference that his total tax package would be balanced, it would not lose any revenues. Does that mean, Secretary Blumenthal was asked, that any rate reductions will be offset by rate increases?

It was very encouraging when he answered, no, it does not mean that at all. There are some taxes that can be cut-I would say primarily business taxes-which would actually generate revenues. This indicates that Secretary Blumenthal is going to do something that this committee in general, and Chairman Long in particular, has recommended for a long period of time that the Treasury in its revenue estimates of tax actions, take into account feedback, or the stimulative impact on incomes and profits.

Still, so much of the talk is that if we're going to have $8 billion in integration with stockholder credit, or whatever, business has to give up $8 million or so, or a large portion of that, in depreciation, the tax credit, or what have you. That is very disturbing and would be highly counterproductive.

Senator BYRD. It may be disturbing but I am frank to say I do not see Congress taking each of these five points and acting on each of these points.

Mr. WALKER. I do not either. I will say this to you. When the administration comes up with its proposals and it gets to hearings the American Council will be here with specific recommendations.

I would like to see the Congress start moving in all of these areas. You do not see the Congress doing that. I do not see the Congress doing that. But in order to set priorities I want to know what sort of integration program they propose. I want to know what they want to do about depreciation.

Senator BYRD. Yes.

On the integration proposal, I was rather startled to read a headline that the Americans for Democratic Action recommended the elimination of the corporate income tax. When I read the fine print, I find that they want to charge the stockholder with a total profit of the corporation. What that means is that a person, whether a widow or whomever it might be, normally would be entitled to $300 in dividends which she has been paid, but she is charged by the Internal Revenue with having received $1,000 in dividends.

I do not believe that that is going to encourage investment. It is going to make it impossible for many people to own any securities. Mr. WALKER. I had exactly the same reaction when I picked up the paper.

Senator BYRD. They knew what they were doing.

Mr. WALKER. They knew exactly what they were doing.

Senator BYRD. Not only the high income taxpayer. As I visualize it, it would play havoc with anybody, regardless of what tax bracket they are in.

Mr. WALKER. It would play havoc, there is no question there. There are probably a few individuals that may be at a break-even point. On balance, it would play havoc.

That emphasizes how difficult it is to get a handle on this whole integration thing when you have several different plans floating around.

Senator BYRD. You have boiled it down to two or three plans, with the third plan being a combination of the two.

Mr. WALKER. I think that is a realistic range. Unless you could put into effect now a long-range plan aimed at phasing out the corporate income tax-people say, oh, my goodness, you want to let the cor

porations get away without paying taxes. We know the corporations do not really pay the tax. They are surrogate collectors for the Internal Revenue Service. The corporate tax is borne by people.

Unless you could move toward an effective phaseout of the corporate tax and if there is going to be some sort of integration proposal, I think that the Simon approach, among all that I have seen, combining the dividend deduction and the stockholder credit, may have the most merit.

At the same time, I would again emphasize that to me, even the Simon plan, if put in in full at the estimated cost using the old system of revenue estimating, $15 billion or so, if the argument is made that there has to be an offset by raising business taxes in other ways, I would say no, I would not be in favor of it. In fact, I don't think it would "cost" anywhere near that amount-if anything.

Senator BYRD. Thank you very much, Dr. Walker. This has been very interesting and enlightening and we appreciate it.

Mr. WALKER. Thank you, sir.

Senator BYRD. The next witness is Dr. Michael Sumichrast of the National Association of Home Builders, accompanied by Mr. Gordon Smith of Miller and Smith, McLean, Va. I welcome both of you gentlemen. You may proceed as you wish.

STATEMENT OF DR. MICHAEL SUMICHRAST, NATIONAL ASSOCIATION OF HOME BUILDERS; ACCOMPANIED BY GORDON SMITH, MILLER & SMITH, INC., McLEAN, VA.

Mr. SUMICHRAST. Thank you very much. My name is Mike Sumichrast. I am the vice president and chief economist for the National Association of Home Builders.

Just as a short background, I used to be a home builder. I built houses in Australia, New Jersey, Pennsylvania, Ohio, West Virginia. My training was in industrial engineering in Europe. I got a master's degree and Ph. D. degree at Ohio State University in economics. Mr. Gordon Smith is really substituting for his partner, Dave Miller, who is the president of the Northern Virginia Home Builders Association. Mr. Gordon Smith is one of the new breed of builders. He has an MBA from Harvard University and has been actively engaged in construction for the last 3 years in the Washington area.

I want to thank you for giving me the opportunity to present my views in this discussion here today. Some of the things that I am going to say are not necessarily the NAHB policy, but rather my own.

I will limit my discussion to construction, particularly residential construction. I think this is what you would like me to do.

You asked us to concentrate on two or three major, important issues, and I will touch on these. First, let me just state for the record, when you look at the total new construction as measured as value put in place, you can see we were able to capture a smaller and smaller share of the gross national product since the Second World War. Its share is actually even less than it was in the twenties and in the period to just prior to the Second World War.

Since total construction is the largest single portion of private investment, the same thing has happened to that sector. The gross investment was close to 19 percent in 1949, only 14.2 percent in 1976.

92-201 O - 77 - 7

Total construction accounted for 10.4 percent in 1929 and dropped to 10.6 percent in 1960 and 9.6 percent in 1970 and 8.7 percent in 1975 and 8.5 percent last year. It was able to capture a smaller and smaller part of the GNP.

Residential construction shows the same trend: 6.3 percent share in 1950; 5.4 percent in 1955; 4.5 percent in 1960; 4.3 percent in 1965; 3.2 percent in 1970; 3.6 percent in 1975; and 3.5 percent in 1976.

The point here is simply that our problems are not necessarily of short duration, but long and of a persistent nature. One of the reasons that the share of the gross private domestic investment and housing and construction has declined is the Government, led by Federal, State, and local government, has taken a larger share of all the goods and services we produce.

The other reason is we have less and less incentive to put money into structures.

There are three items I wanted to mention. One is that probably the most important thing you can do is to provide some degree of stability in construction. This, of course, can only be done if we can obtain better control over the forces of inflation.

Why is this so important to us in construction? Well, first of all, investment in construction is generally long term. Investment in a shopping center goes for many years; investment in a rental project never goes for months, it goes for years, even decades.

To complete a project from conception to actual occupancy takes at least 3 and as much as 6 years.

The uncertainty which we are faced with during the period of this time provides an enormous amount of difficulties in costing up the project, in getting sufficient equity capital, in making it a successful business proposition.

The construction industry generally does not operate well during a period of high inflation. Housing functions only well in a climate of stability.

During the past 55 years we have witnessed 13 major cycles in which the decline in construction was more pronounced than the decline in GNP.

One of the reasons why the share of gross private domestic investment declined-and construction and housing dropped-is that expenditures increased for all three levels of government-Federal, State, and local. Combined, they take a much larger share of all goods and services we produce than ever before.

Another reason is that we have less and less incentive to provide equity capital for construction. Now, let me elaborate on these issues. Probably the most important issue facing construction is its instability. This carries with it implied risk and discourages investment.

An assessment of the latest two cycles shows that residential construction bore as much as two-thirds of the overall decline in the economy. Thus, the burden was heavily thrust upon one section of the economy-residential construction-although this economic activity accounted for only 4 to 5 percent of the GNP.

The second major issue of capital discouragement in construction centers on Government intervention and regulations. Here the greatest contribution your committee can make is to stop this trend now and make a commitment to try to reverse it. Government intervention has