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The CHAIRMAN. We will now have Mr. Louis Kelso. We very much appreciate Mr. Kelso testifying at this point.

Would you please take the stand, sir? As one member of this committee, Mr. Kelso, let me express my appreciation to you for the tremendous contribution that you have made and the pioneering work that you have done in the interests of employee stock ownership. We are, in many respects, holding these hearings here because of the work you have done in the area. At least, as far as this Senator is concerned, that is the case. We are pleased to have your statement.

STATEMENT OF LOUIS O. KELSO, KELSO & CO., INC. Mr. Kelso. Mr. Chairman, I appreciate very much being invited to testify today. I have with me Miss Patricia Hetter, who is coauthor of Two-Factor Theory: The Economics of Reality. This is one of the books that really helped get the whole subject out into the open.

Let me say that we were a lone voice crying in the wilderness until vou, Mr. Chairman, took an interest in the subject. You might say that it's becoming a significant subject in public affairs dating from that moment.

I congratulate you upon the bill that has now been introduced by yourself and is pending before this committee, which would increase the investment tax credit from 11/2—well, 2 percent if matched—to 2 percent whether or not matched, and permitting 1 percent of that to be based upon covered compensation if that amount is larger than 1 percent of the investment credit.

Many firms—engineering firms, accounting firms, advertising firms—are of a type which is people-intensive, not capital-intensive. They have not been able to take advantage of the investment tax credit and this provision seems to remedy a great bias in favor of the capitalintensive companies.

I particularly would like to comment on the deductibility of dividends paid into the employee stock ownership plan. In many of the financings that we have been intimately involved in, the difference between success and failure really turns upon the deductibility of those dividends, because it is not just the payment by the company into the ESOP, but the dividend power of the stock that is purchased that makes the financing feasible.

Inasmuch as the bill appears to permit dividend deductibility to apply to both common and preferred stock, I believe it to be an extremelv helpful and advantageous provision to be added to the law.

Similarly, the provision with respect to giving the ESOP the status of a public charitable corporation under the personal income tax law, the personal gift tax law, and the personal estate tax law, will, I believe, result in clearing up one of the really confused areas in American economic affairs.

A great leader, a great inventor, an entrepreneur can found a company today and pay his employees the going rate of compensation and even put in an employee stock ownership plan (ESOP) and build rather significant ownership into them. But at the end of his life he may wind ur. as a citizen down in Florida did recently, with $5 billion worth of capital ownership in his own name.


Now, in that case, he really has only two choices in disposing of his wealth. He cannot take it with him-otherwise, I think he probably would. But his only practical earthly alternatives are to leave it to the Government could be positively expressed by giving his estate to those foundations distribute their largesse on the basis of need, not on the basis of economic input; therefore, they are not economic institutions at all. If a man in Mr. MacArthur's position were able to set up an employee stock ownership plan, a multicompany plan or a series of plans, his natural disinclination merely to turn his estate over to the government could be positively expressed by giving his estate to those employee stock ownership plans or a multicompany plan. This alternative would very materially, very spectacularly, increase the wealth of the thousands of people who helped make him rich. This alternative expresses a sense of fairness, a sense of reciprocity. It is a way of extending hope to the whole American people, of demonstrating that the system really is designed to work for all of them and not just a few of them.

Obviously it is a revenue-raising measure as well, because when wealth goes into the ESOP, it goes back into the tax system. If you make the employee richer, you make him a better income taxpayer; you make him a better property taxpayer; you make him a better gift taxpayer; you make it less likely that he will be asking for welfare payments, or public support, or more social security or anything of the sort. So I think it is an extremely admirable provision.

I am economic advisor to the national association of ESOP companies (NAEC), which is a national organization of the key people, normally the chief executive or the chief financial officer, of ESOP companies. That organization, in pooling its members, has found each of these provisions to be of great importance, ones that will increase their enthusiasm for their employee stock ownership plans, and increase their

use of such plans. Senator Gravel's proposal to increase the limit of deductibility from 25 percent where you have a combined ESOP and fixed contribution ESOP, or money purchase ESOP, to 50 percent of covered payroll will, unquestionably, make many employee acquisitions of businesses and many ESOP's possible that are now not possible. I think it is safe for Congress to trust the board of directors of a company and its executives not to give away the store. They are not going to do any. thing that impairs the workability of the corporation—its ability to continue to do business effectively.

But you do have to deal with bankers and you do have to deal with insurance companies. In many instances, the length of term of loan financing is such that a greater contribution than 25 percent is necessarv, at least in the early years of a financing ESOP's history.

Finally, a very bold step forward is represented, I believe, by Senator Gravel's bill which would authorize each state to set up a general stock ownership plan (GSOP). This is the first of the plans that I had in mind when Mr. Adler and I started proposing applications of the theory of universal capitalism. We did not press its application in the early years following publication of The New Capitalists, the book in which that idea was first advanced, because we thought that growth of the economy could at that time be better promoted by other twofactor financing tools. As expanding economy is the thing that ultimately will help solve our unemployment problem and turn around inflation. To motivate that growth, it is generally desirable to link the acquisition of capital ownership with the performance of a job. Building a more productive economy in order to produce a high general standard of living will be an enormous task.

With that goal in mind, the GSOP did not seem to be as high a priority financing tool as the ESOP. Situations are coming forward now, however, where it is usable. I think the general stock ownership plan is now timely.

As other testimony indicates, Alaska is one such possibility. I believe there are many other potential GSOP applications in the country involving major projects costing multibillions of dollars-for example, rapid transit systems and capital projects intended to achieve self-efficiency in energy--where the GSOP will serve the dual objectives of providing low-cost financing for private enterprise and building broad ownership of productive capital into millions of presently noncapital-owning consumer units.

Thank you very much.

The CHAIRMAN. You have made a good case, those points you have testified to. I think it is worth noting on the point of deductibility of dividend income that it serves a purpose to encourage employees to make investments in the company for which they work, because that encourages productivity, and that is the area where everybody has something to gain. The Nation, the employer, and the employee, the whole free world have something to gain by making this system work.

Nothing makes it work more than productivity, and we ought to encourage the employee if he wants to make an investment, to make it in the activity where he, himself, is devoting its efforts.

Now, through pensions and various other ways, we try to sweeten up the pot, you might say, for those who are working to make the operation succeed for the investors, and I think that it is appropriate that we do something along the lines that you have suggested with regard to deductibility of dividends paid to the employees.

In the last analysis, the company can deduct the wages paid to the employee. Why should not they be permitted to deduct the dividend income paid to the employees into an employee stockownership type arrangement ?

I find a lot of appeal to it.
Senator Gravel

Senator GRAVEL. I would only like to thank Dr. Kelso and associate myself with the introductory remarks that you made concerning Dr. Kelso.

I might state for the record-it is not in my statement that the State Legislature of Alaska after testimony and lobbying by myself and testimony from Dr. Kelso and others, appropriated a quarter of a million to go ahead and set up a GSOP. Now, the success of that GSOP is going to have to be tied to the passage of Federal legislation.

The legislature also passed a directive and appropriated money to investigate the possibility of the State investing in the gas line that has been authorized by the Congress.

Now, if we are not successful in bringing about a GSOP, the State of Alaska is going to make the first move into actual State ownership of these assets. Our choice is very simple, Mr. Chairman. It is very

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critical at this point in time. This is my State and I think it is a harbinger of what other States will be doing.

We are either going to move toward State socialism or we are going to have to be imaginative enough to have a device to venture away from that goal into private capitalism.

So I just wanted to underscore what has been done in the State of Alaska in this regard, and I think the ball is in our court, and I want to thank Mr. Kelso for coming forward for his endorsement.

Mr. KELSO. If I may make one closing comment, I do believe that the destiny of the free world is very much in the hands of this committee right now. Socialism is spreading all around the world. Our neighbors both north and south are becoming more and more closely identified as socialist economies, as are the economies of Europe.

We need an exportable, active, aggressive, virulent capitalism in order to have something to offer to those who would adopt socialism as a vote against the capitalism that works for the few but not for the many.

This committee is the committee that is actively creating that.
The CHAIRMAN. Thank you very much, Mr. Kelso.

Let me announce, before I call the next witness, that Mr. Robert Strauss, the Special Trade Representative and the President's Advisor on Inflation for Anti-Inflation Policies, will be our leadoff witness tomorrow.

Mr. Robert Hamrin will testify tomorrow.

Our final witness this morning is Mr. Joseph T. Buxton III, of the National Dividend Foundation, Inc.



Mr. BUXTON. Mr. Chairman, Senator Gravel, I am Joseph T. Buxton, executive director of the National Dividend Foundation.

Before I joined the foundation in 1975, I was a counsel to Newport News Shipbuilding in Virginia and general counsel to a subsidiary, Newport News Industrial Corp.

From 1968 to 1975, I think we saw in this country a significant loss of faith by the American people in the business system. At the same time we saw inflation at the highest that we have seen in peacetime in the history of this country. I think these two are related and they relate directly to what Senator Gravel has proposed in Senate bill 3223, and I would like to restrict my comments to that.

I will not repeat what I have in my written testimony, Mr. Chairman, but I would just like to pass along some observations.

Basically, we are faced today, I think, with two significant problems with our economic system. First, the growing public dissatisfaction with the public sector generally, and I think this was attested to in California. We also see a need to revitalize public confidence in the private sector, which is the only real source for wealth and the earnings necessary to pay for our social progress.

Senator Gravel, through the general stock ownership concept, has recognized both these needs and has sought to reestablish the necessary connection between the public and the economy. He has provided


a mechanism which provides the citizen, either on the State, local, or national level, as I read the proposed legislation, provide the citizen an opportunity for a stake in the system. At the same time, it limits the role of Government.

GSOP, in effect, is the ultimate extension of ESOP. It provides stockownership opportunities for citizens throughout the society. Yet, I would raise one question this morning, and that is: Is actual stock ownership necessary at the national level to reach these objectives? Those objectives being, enlarging the role of the private sector vis-a-vis the public sector, and revitalizing the public's confidence in the national market economy by giving them a piece of the action.

This is a serious question, and I think it should be considered by the committee. The foundation has worked on a similar proposal to Senator Gravel's proposal of the national dividend plan, which I will outline very briefly. It has the same principles incorporated in it as the GSOP concept.

The national dividend plan was described in some detail by Dr. Martin Gainsborough before this committee some weeks ago and last year before the House Ways and Means Committee, and that is available to this committee, if this needs be.

Very briefly, the plan provides for the establishment of not a national ownership trust, but a national profit-sharing trust. Profits generated in the private sector and paid as corporate income tax would provide the basis for the trust.

Our estimates show that this would amount to about $1,000 per household with universal participation, the only criterion being 18 years of age and registered to vote.

The National Dividend Plan also proposed integration of the corporate income tax by elimination of the tax on dividends at the shareholder level and providing for the national dividend itself to be tax free.

The difference between GSOP and NDP is that it has immediate implementing capability. Benefits could be derived almost immediately by the individual citizen. He would immediately have a stake in the system. He could perceive that the profit economy and its survival and policies affecting it would be in his self-interest.

The plan provides for involving the public also in the budgetary process by relating the national dividend itself, the size of the dividend, to the Federal deficit.

If the deficit were to increase next year and we had a national dividend in effect, that increase would be deducted from the individual recipient's national dividend check.

We are not specific on the method to be used except that the concept of relating the budgetary process to the benefits derived under NDP should make for effective budgetary control exercised by the primary sovereign in this Nation, the electorate. Conceivably, a household receiving $1,000 could have it reduced to $250 because of Federal spending. This does not mean we could not have deficits, but it does mean that the Congress would, in effect, have to justify those deficits to the electorate.

In summary, the National Dividend Plan, national profit-sharing, incorporates the objectives of Senator Gravel's stock ownership con

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