cept by giving society a sense of participation in the system. But it does so without changing the equity position of existing or future owners, and there is no transfer of ownership.

It would shift, over the next 5 years and we propose that this plan be phased in over the next 5 years $60 billion or $70 billion more from the public sector to the private sector for individual choice and decisionmaking. It does something we think that the GSOP does not do, and that is that it spreads the risk over the entire corporate community so that the individual participant does not have to suffer the loss as a result of the decisions of the trustees with respect to stock purchases. And finally, it is relatively simple to implement and administer using the existing corporate tax framework.

I would like to close by applauding Senator Gravel, because he has surfaced perhaps one of the most critical needs in our society through the GSOP concept-one that has to be dealt with, and it has to be dealt with soon. That is, we must have a society that perceives the survival of its economic system to be in its own self-interest.

GSOP, ESOP, National Dividend, all work in that direction and I applaud Senator Gravel for his enthusiastic work in this field and the work of this committee with respect to ESOP's.

Thank you, Mr. Chairman.

Senator GRAVEL. Thank you for the endorsement. I have no questions. Thank you very much.

The CHAIRMAN. Thank you very much, Mr. Buxton. I was delighted to receive the testimony of all the witnesses who spoke today; it is gratifying as a Senator to receive testimony about something that really works. The committee will stand in recess until 9 tomorrow morning.

[The prepared statement of Mr. Buxton follows:]

STATEMENT OF JOSEPH T. BUXTON, III, EXECUTIVE DIRECTOR OF THE
NATIONAL DIVIDEND FOUNDATION, INC., RIVIERA BEACH, FLA.

Mr. Chairman and members of the Committee. Thank you again for the invitation to testify. My name is Joseph T. Buxton III. I am the Executive Director of the National Dividend Foundation, Inc., which is a tax-exempt educational and research organizations located in Riviera Beach, Fla. For many years, the Foundation has been engaged in fundamental economic and social research directed toward methods for preserving, revitalizing, and making more productive and equitable the American market economy.

Our research has, to a significant extent, focused on both the causes and the consequences of the following interrelated phenomena: increasing inflation, ever larger tax burdens, spiraling growth in the size of the public sector in relation to the private, the lack of any effective restraint on the Federal deficit, and the continuing decline in the rate of growth in productivity and capital investment. While there are other factors which bear on this complex set of interrelationships, we believe that the single most important is identified by the subject of today's hearings before this Committee-the need to broaden the base of participation in the profits of a free enterprise economy that result from increased productivity and output. In other words, we see the lack of a personal stake in economic growth as a principal cause of the individual citizen's continued reliance upon government (both Federal and State) for services and sustenance which, in turn, leads to higher taxes, larger deficits, growing government, and resulting inflation.

1 The Foundation publishes in the public interest periodic monographs and a bimonthly digest of opinions on these and related subjects. In addition, the Foundation supports independent research on issues related to fiscal and tax policies and on the role of incentives

The Employee Stock Ownership Plan (ESOP) provisions of present law, Senator Gravel's proposal for a General Stock Ownership Plan (GSOP), and the National Dividend Plan (NDP) which the Foundation has researched, are all directed toward this fundamental need. We believe that both the ESOP and GSOP techniques will in a significant degree help alleviate the same fundamental concern which underlies the National Dividend Plan: a worry about the decline of capitalism, and a fear that it may finally be overwhelmed by a bloated bureaucracy due to a majority of voters who no longer see themselves as having a direct stake in the profit system.

If few people are proprietors, entrepreneurs or shareholders, the majority of voters will have less interest in preserving the system. We see indications of that presently and in the recent past. The large number of citizens who merely receive wages and salaries from an employer, and the ever growing number of people who merely receive governmental transfer payments or other public assistance, do not normally perceive the profits of productive business enterprise as the ultimate, and indeed only, source of those wages and payments. Nor are they as likely to be concerned about increased deficits and inflation if they see themselves as benefitting more from deficit expenditures and other causes of inflation than from the entrepreneurial capital investment system inflation damages. On the other hand, if, under systems such as ESOP, GSOP, or NDP more individuals perceived themselves as having an interest in capitalism, and in fact 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. There should, in that event, be a majority constituency for, not against, profits and economic growth, and a majority constituency against, not for, ever growing public sector expenditures and deficits. There should be significantly fewer grounds for a misperceived dichotomy of interest between capital and labor, or between the ordinary individual citizen and so-called "corporations", which today are too often misunderstood as being inanimate, distant, and sometimes, even sinister creatures, separate and apart from everyone else. Instead, there would be an obvious and widely understood identity of interest between the individual and all productive business enterprise.

It is useful to compare and contrast the various techniques that have been advanced for achieving a broader base of participation in productive business enterprise. Our research indicates that, to a significant extent, the ESOP provisions of present law, the GSOP provisions proposed by Senator Gravel, and the National Dividend Plan as developed by the Foundation can be viewed as different versions of the same thing. There are, of course, differences, but many of the fundamental concepts are much the same. All three in varying degrees eliminate one layer of the present double tax on corporate income; all three involve a type of profit-sharing system that over time creates new entrepreneurial interests; and all three in whole or in part create these new entrepreneurial interests by permitting corporations to distribute, directly from the source of profits, varying amounts of corporate tax that otherwise would be paid into the Treasury and subjected to the public expenditure process. All three provide the individual with a stake in the system.

The ESOP program encourages corporations to share the profits of the firm with its employees. Employees do in fact become part owners through the purchase of stock in their employer-corporation. This is accomplished by using both the concepts of after-tax cost and leverage through borrowing. Employers are permitted a deduction for contributions to a trust for the employees. The trust, in turn, invests in stock of the employer-corporation. Frequently, the trust will have borrowed funds from a bank and already have purchased stock in the employer corporation. The employer-corporation then makes annual deductible contributions to the trust in amounts sufficient to pay off the debt. Because the employer-corporation's contribution to the trust is deductible and the trust is tax-exempt, no tax is paid on the earnings which are contributed to the trust until there is a distribution by the trust to the employees. On on that portion of the corporation's earnings, there is no double tax. Earnings which are distributed on stocks owned by the trust are, however, taxed twice-once at the corporate level and once when distributed by the trust to the employees.

Obviously, in the case of an ESOP, 48 percent of the deductible amount the employer contributes to the trust for the employees represents an amount the

employer would have paid to the Treasury in taxes. Instead of paying it to the Treasury, the employer-corporation in effect has distributed a portion of its corporate tax to the profit-sharing ESOP trust for its employees. Moreover, in the case of an investment credit ESOP, the employer-corporation is allowed an additional 12 percent investment tax credit provided he contributes the tax saving to the ESOP trust for employees. Therefore, again the Internal Revenue Code in effect directs the employer-corporation to distribute to the ESOP trust that portion of the corporate tax otherwise payable to the Treasury.

Our research and analysis indicates that Senator Gravel's GSOP proposal is a logical extension of the basic ESOP concept. Whereas, an ESOP is confined to and covers only the employees of a particular corporation, Senator Gravel's GSOP, as we understand from S. 3223, would extend a similar technique to all citizens of the United States or, alternatively, to all citizens of a particular state or a political subdivision of that state. The other principal differences between ESOP and a GSOP appear to be as follows. First, the GSOP trust could invest in a wide variety of stocks and securities of many different corporations instead of being confined to the stock of a particular employer-corporation, as in the case of an ESOP trust. A second difference is that, unlike an ESOP trust, a GSOP trust does not receive contributions from corporations and therefore, would not rely on contributions to pay off debts incurred to purchase stock. Instead, being an instrumentality of the Federal or State government or of a political subdivision, the GSOP trust would be empowered to issue tax-exempt debt.' Thus, in effect, it would utilize the credit of the state or poltical subdivision to borrow funds with which to buy stock. A third difference is that dividends paid by a corporation on stocks owned by a GSOP would be deductible by the corporation paying the dividend.

In that respect, as stated in S. 3223, the GSOP concept would be a substantial step in integrating the corporate tax. The double tax on corporate earnings would be fully eliminated on income received by the GSOP trust. In effect, a corporation of which the GSOP was a shareholder would be permitted to distribute to its GSOP shareholders all or part of the corporate tax it would otherwise pay to the Treasury.

Most important, however, is the connection GSOP seeks to make between the body politic and the American economic system-a connection which has been lost as we moved from a society of farmers and landowners to one of capitalists and emplyees.

While GSOP is concerned principally with state and local application, S. 3223 provides for the possibility of establishing a national general stock ownership trust. Clearly, such a trust would provide for the direct participation by virtually all citizens in the ownership of American corporations. Yet, on the national level, is government-sponsored ownership necessary or even desirable in order to provide Americans the opportunity to participate in and to support the profit and loss system? Perhaps not.

The National Dividend Plan, while an extension of the philosophy represented by ESOP and GSOP, contemplates a national profit-sharing trust rather than a national corporate ownership arrangement. Without diluting or in any way impairing the ownership or management prerogatives of American business, NDP represents a vehicle for accomplishing the basic objectives of GSOP on a national scale, but in a vastly more simple and uniform manner. NDP address the need to broaden participation while protecting the property interests of the owners of American industry. At the same time, NDP provides individual citizens with a sense of participation through profit-sharing, and enhances incentives toward greater political participation, actual stock ownership, less reliance on government, and active support for sound fiscal policy.

Under NDP, each corporaiton would annually or quarterly pay into the National Dividend Trust Fund the entire amount of its corporate tax-the the amount it would otherwise pay to the Treasury (just as a corporation might pay into an ESOP or GSOP trust all or part of the amount it would otherwise pay in tax to the Treasury). Instead of being invested in ownership of corporate stock, as in the case of an ESOP or GSOP, the annual tax payment into the National Dividend Trust Fund would be distributed by the trust quarterly or

The ability of the GSOP trust to issue tax-exempt debt can be viewed as the counterpart of an ESOP trust's ability to pay off debt out of deductible untaxed contributions of earnings by the employer-corporation.

3 To the extent the debt was represented by revenue bonds, and not by general obligation bonds, the credit of the government would not, however, be directly involved.

annually per capita to each registered voter as a "national dividend." The national dividend, at approximate current levels of corporate profits, and therefore corporate taxes, would be about $500 to $750 per capita or $1,000 to $1,500 per married couple. Because the corporate tax is a percentage of corporate profits, each voter's national dividend is very much like a special kind of "public" preferred stock-which participates in income, at a stated rate, but, unlike common stock, does not dilute the underlying equity ownership of other stockholders. Participation in the profits and losses of productive corporate business enterprise is the essential characteristic of the national dividend; not any redistribution of existing ownership or wealth. As profits went up, each voter's national dividend would go up; as profits went down, each voter's national dividend would go down. It could be expected that each person would, in a greater degree, be both conscious of and interested in the effect of national policies on corporate profits an would be disposed to pursue policies which would increase productivity, profits, and his national dividend.

This personal identity with and interest in profits and losses is the principal difference from present law respecting corporate profits taxes suggested by the National Dividend Plan. Obviously, today corporations pay a percentage of their profits in tax to the Treasury. They would pay no more if, instead of paying that tax to the Treasury, this amount were paid over to the National Dividend Trust Fund. They might pay less. Currently, much attention is being paid to the perfectly reasonable proposition of feedback revenues-that a tax reduction, such as reduction of the corporate tax rate to some optimum level, would produce greater profits and greater tax revenues than the present higher tax rate applied to a smaller profit base.

Moreover, there is no question that today corporate taxes are distributed to the public, or at least portions of the public. The difference is that, under the National Dividend Plan, those taxes would not first be paid into the Treasury and then he redistributed through the appropriation process to fund an array of Federal expenditures programs. This redistribution process totally obscures the sources of those benefits-the profits of productivity of which the tax is only a percentage and often radically skews the redistribution. Recently, the redistribution of taxes by means of Federal expenditures has been compounded by the addition of even greater redistributional expenditures financed out of Federal debt. Certainly, this process affords no restraint on the ever increasing level of Federal debt and deficits, and by its nature, tends to add to the growth of the public sector.

In contrast, the National Dividend Plan would place a new and self-enforcing limit on Federal debt and deficits. Like ESOP and GSOP, the National Dividend Plan would, in a very basic way, create a new political constituency for fiscal responsibility solely by virtue of creating in a far greater number of voters a direct interest in the profits of productivity. But the National Dividend Plan, uniquely, would go farther.

The national dividend received by each voter would be reduced in relation to the Federal deficit. For example, a citizen could be liable for a pro rata portion of the increase in the Federal deficit over some base period level such as fiscal 1978. Thus, if as projected, each voter's national dividend was $750, and if, for example, the Congress voted new expenditures which increased the Federal deficit by $250 per voter, each person's national dividend would be reduced by $250 to pay for the new debt. One can imagine that there would be much greater restraint on voting for new expenditures and new debt than at present. New debt could, of course, be voted by the Congress. It might be necessary. But the justification for it would have to be much more compelling than at present-at least sufficient to explain to each voter why his national dividend was reduced by $250. Despite the restraint on new public debt and the creation of a new constituency, the National Dividend Plan does not, however, imply any necessary reduction in or dismantling of present public assistance and expenditure programs. It is anticipated that, if the National Dividend Plan were phased in over a 5-year period and we maintained a moratorium on any new Federal programs, the national dividend of $500 to $750 per voter could be financed solely out of growth. See testimony of Dr. Martin H. Gainsborough before the Senate Committee on Finance, in March of 1976. Hearings, H.R. 10612, Committee on Finance, 94th Cong., 2d Sess., Part 3, March 29, 30, 31, 1976, at pp. 1357-1384.

The other feature of the National Dividend Plan is, again, similar to both the ESOP and GSOP techniques. The National Dividend Plan would provide a means

for eliminating the double tax on dividends. While ESOP and GSOP do this to a limited extent, the National Dividend Plan would be more comprehensive. The corporate tax would be imposed and distributed to the National Dividend Trust, but when dividends were distributed, that income would not again be subject to a second income tax. Dividends, whether the "national dividend," or a dividend distributed on stock to the actual shareholders, would be excluded from tax. In recent years, much attention and effort has been devoted to developing various techniques for integrating the corporate and shareholder taxes in a manner which imposes only one tax at a progressive rate on income earned in corporate form. The National Dividend Plan provides a method much simpler than other methods for integrating the corporate tax and is equally in tune with maintaining progressive rates of income tax. The details of this aspect of the National Dividend Plan are set forth in Hearings, Incentives For Economic Growth, Senate Committee on Finance, Subcommittee on Taxation and Debt Management, 95th Cong., 1st Sess., May 16, June 14 and 15, 1977, at p. 420.

Finally, we come to one of the principal reasons for relying on the private sector to provide social progress as contemplated by ESOP, GSOP and the NDP: inflation. Our greatest economic concern today is the uncontrolled and increasingly destructive effect of rapidly rising prices. There is no need here to reiterate the various approaches we, as a nation, have taken in attempting to control inflation. None have worked. All seem to involve various techniques for deflating the economy, and all seem to involve the costs of a declining or slower rate of growth and larger unemployment. The one ingredient in our complex economy we have not adequately dealt with is our lesser rate of productivity. We have tried economic stimulus-largely in the form of Federal deficits-to stimulate consumer demand. We have tried, in limited ways, to take steps to stimulate additional capital formation. What we have not done is to pursue policies which would build a constituency for policies that would stimulate both the labor and capital inputs to economic growth. The answer to inflation is a substantially increased national output based on both these elements.

In our opinion, ESOP, GSOP, and NDP are designed to stimulate productivity and to produce a greater output of our national economy. All three are serious, innovative new approaches which cut across ideological lines.

While ESOP and GSOP reestablish the vital connection between people and profits so essential to the survival of capitalism in a democracy, ESOP involves a base too narrow to enhance broad public understanding and support for the private sector and GSOP, while capable of national application, raises serious questions as to the ownership rights of existing owners and as to the impact on risk-taking by prospective owners. On the national level, it would be our conclusion that the objectives of GSOP could be reached far easier through national profit-sharing, as contemplated under NDP, and this approach should be seriously considered when discussing the proposals proffered under S. 3223.

On behalf of the National Dividend Foundation, Inc., I thank the Committee for this opportunity to testify and for its attention. With the Committee's permission, we will, in a few days, submit for the record a longer technical appendix to our written statement.

[Thereupon, at 11:45 a.m., the committee recessed, to reconvene Thursday, July 20, 1978, at 9 a.m.]