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APPENDIX B

COMMUNICATIONS RECEIVED BY THE COMMITTEE EXPRESSING AN INTEREST IN THESE HEARINGS

STATEMENT OF SENATOR MARK O. HATFIELD

Mr. Chairman, thank you for this opportunity to provide a written statement in support of S. 3241, a bill which would strengthen the incentives for creating Employee Stock Ownership Plans (ESOP's). ESOP's can play an important role in reducing the growing economic and social problems facing the country today and this legislation would certainly further that objective.

Since 1973 I have been supportive of the usage of ESOP's to provide immediate financing for industry, while providing an opportunity for employees to participate directly in the profitability of their employer.

I was the sponsor of an amendment to revitalize ConRail through the usage of ESOP. This was a situation in which increasing federal subsidies were not sufficient to prevent continued deterioration and future labor-management conflicts. The railroad crisis was one more example in which a bankruptcy of leadership and vision led to a vacuum in the corporate sector. This vacuum led to increasing government power and controls and more costly bureaucracies. My amendment signeled an end to this trend and provided an opportunity to revitalize the Northeast Rail Corporation by allowing employees an opportunity for direct participation in the profitability of ConRail.

Since that time, the Senate has taken additional steps to encourage the use of ESOP's. These steps have demonstrated continued Congressional commitment to the concept of expanded employee stock ownership. These bills include the Employee Retirement Income Security Act of 1974, the Trade Act of 1974, the Tax Reduction Act of 1975 and the Tax Reduction Act of 1976.

I have been supportive of the efforts to encourage the utilization of ESOP's and I am in support of this bill before the Committee today. ESOP is not a new concept, but it is possible that certain barriers in the U.S. tax laws have hampered its adoption by business. The bill before the Committee today is one more effort to remove barriers to its usage. However, there comes a point where an idea or concept must sell itself on the marketplace of ideas. That is the fundamental nature of the free enterprise system. I believe Congress has reached a point where additional Congressional action to amend U.S. tax laws could be considered a subsidy to companies who chose to use ESOP as a form of financing. Therefore, future changes in the law must be scrutinized to assure that free market forces can operate fully and freely in determining if ESOP is an idea whose time has come.

The bill before this Committee is indicative of Congressional commitment to ESOP and the growing interest of companies in using this format to expand ownership and acquire financing. By increasing the available tax credit to 2 percent, provided an equivalent ESOP contribution is made, and discontinuing the one-half percent contribution for employers who already have adopted an ESOP, Congress will be encouraging the expansion of stock ownership which will result in a more stable economy.

Even though we express the doctrines of free enterprise with great zeal, capital stock ownership remains as concentrated in the hands of a few as ever before. In many ways this country is very poor. The great majority of citizens in this country have a net worth of less than $10,000, with no hope of being able to participate in and enjoy the presumed benefits of U.S. prosperity. The owning of stock, a traditional means for the citizens of this country to contribute to and receive benefits from the prosperity of the U.S. economic growth, is becoming concentrated in the hands of a few. There has been an 18% decline in ownership of stock by individuals in the past eight years. The role of stock in

financing development has diminished, as its contribution to financing has dwindled to less than one percent.

Another indication of the economic stagnation within the American economy is the control of capital stock and assets. Although the United States has experienced a tripling of its wealth since 1925 and this amount will more than likely double by the end of this century, control of capital stock has not changed significantly in the past fifty years. One-half of all the wealth in this country is still controlled by 5 percent of the population. At the other end of the spectrum, 12% of the population have a net worth of less than $1,000. This pattern will not change unless something can be done to expand stock ownership.

Many persons entering the job market today or exiting it after many years are not receiving any lasting benefits for their efforts. Individuals must work to meet daily living needs with little hope of accumulating wealth and enjoying the economic prosperity of this nation. These persons would not need the charity of the U.S. government and they would be able to have adequate income without the assistance of the federal government if stock ownership was expanded. In turn, the nature of the U.S. economy could be substantially strengthened if ownership were to be expanded.

There are two basic objectives which ESOP addresses. First of all, ESOP provides the company with an additional and cheaper means of financing development. This serves to build a vested and growing property stake for the company, while raising dividend income for stockholders. In addition, technological improvement, once feared, contribute to the retirement income of persons working for a company with ESOP. Secondly, ESOP provides an effective means for employees to become owners of stock and expand ownership of stock in this country. This serves to provide employees with part ownership of the company leading to greater motivation to contribute to the profitability of the company. Under ESOP, their efforts lead to a direct reward through increasing the value and ownership of capital stock. Clearly, both of these advantages con tribute to the economic well-being of the country and its citizens.

Therefore, I encourage favorable consideration by this Committee of this legislation. ESOP's contribute greatly to diversifying capital stock ownership, enable citizens to participate directly in the profitability of their employers and provide a quick financial impetus for companies needing capital infusion. Finally, ESOP's promote economic prosperity for employers and employees, leading to a more stable economy.

REMARKS OF CONGRESSMAN DOUG WALGREN

Mr. Walgren. A loophole in the Tax Reduction Act of 1975 which permitted companies to exclude from stock ownership plans those employees who are covered by a collective bargaining agreement, so long as there was good faith bargaining on pensions, has given management the right to close its stock ownership plans to everyone not in management positions.

Certainly any stock ownership plan offered at the expense of the United States Treasury should include all employees of a company. Each employee should have the right to decide if he wishes to participate in any plan funded by the Government. It is unthinkable that it was the intent of Congress to give special access to management of public funds.

I urge you to included in the Senate tax package a provision to terminate this inequity.

STATEMENT OF CARL A. NORDBERG, JR.

The Expanded Employee Stock Ownership Act of 1978 would provide greater incentives to make ESOP's more attractive to business and thereby expand the number of employees benefitting under ESOP's. However, an inequity of the bill, as under existing law, is that it continues to direct these incentives generally to employees of companies which are consistently profitable. Because many businesses, large and small, old and new, experience cyclical periods of profit and loss, we urge the Committee to make the credit for ESOP contributions refundable. This would eliminate the discrimination in the existing ESOP concept and make these benefits available to substantially all employees rather than to only a selected segment of our national workforce.

Many companies eligible for the proposed increased credit for ESOP contributions will be unwilling to adopt an ESOP because of uncertainty as to when, if ever, the credit will be allowable. New businesses frequently do not incur any tax liability for the first few years of operation because start-up costs exceed income. Established businesses with a long history of success may currently be experiencing or recovering from a period of significant operating losses. For both types of businesses, a credit which is allowable only to the extent of tax liability is not an incentive to adopt ESOP's for their employees. In fact, the risk of not being able to use the ESOP credit would be increased under the bill because only a one year carryover of the credit would be allowed. While both new and existing businesses may temporarily experience losses, the potential for capital appreciation in their stock may be just as great, if not greater than in the case of profitable companies. The adoption of ESOPS by these companies could thus be an important economic benefit to their employees. Witnesses who recently testified before the Committee have shown that, by vesting employees with an ownership stake in the business and future of their employer, the establishment of an ESOP can promote greater employee motivation and productivity which improves the employer's performance. This not only preserves jobs but generates tax revenues.

Because current law encourages the adoption and funding of ESOP's primarily by profitable companies, a substantial segment of the U.S. work force does not share in the benefits of the ESOP concept. The result is that the federal government is encouraging employee stock ownership only for employees of profitable companies, thereby discriminating against employees of many other companies. These latter employees should not be effectively excluded from the ESOP program which was designed to broaden worker ownership of U.S. business. In recent years, there have been several proposals recognizing the discrimination between businesses which exist under a system whereby tax incentives to encourage investment or other objectives are allowable only to the extent of tax liability. This inequity should be remedied under the ESOP program where the goal is to increase stock ownership by employees generally.

The benefits of ESOPS equitably should be made available to the broadest possible spectrum of the U.S. work force. An amendment to S. 3241 to make the credit for ESOP contributions refundable (at the election of the employer) if the credit cannot be used in the tax return for the year the credit is earned, would help achieve that objective. Of course, any employer electing a refund under this provision would forfeit any credit allowable for ESOP contributions. Also, to help limit the cost of a refundable feature to new companies or companies with cyclical profit and loss periods, the election to receive a refund could be limited to five consecutive taxable years. We urge the Committee to adopt such an amendment in connection with its consideration of the Expanded Employee Stock Ownership Act of 1978.

STATEMENT OF JOHN J. Ross, GENERAL MANAGER, TAXES, GULF OIL CORP.

Gulf Oil Corporation supports the enactment of the Expanded Employee Stock Ownership Act of 1978 as a means of encouraging the adoption of new Employee Stock Ownership Plans (ESOPs) and the maintenance and funding of existing ESOPS by employers. Gulf established an ESOP, beginning with its 1976 taxable year, pursuant to the provisions of the Tax Reduction Act of 1975. At the present time, approximately 25,000 Gulf employees, substantially all of its U.S. employees, are participating in the ESOP.

We believe that the major provisions of S. 3241 are very meritorious. Increasing the credit for ESOP contributions to two percent of the qualified investment will promote greater funding of ESOPS resulting in more meaningful benefits to employees. This approach is much more desirable than the complex and administratively burdensome provisions of current law allowing an additional 2 percent credit for employer contributions matching employee contributions. The alternative one percent of pay provision should encourage the adoption of ESOPS by labor intensive businesses.

The inclusion of provisions for ESOPS in the Internal Revenue Code will in(crease the public perception of ESOPS as a more permanent program. Temporary provisions—particularly where they involve employee benefits-represent an un

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employer. If I am correct, and if collective bargaining is required with respect to such plans, a small minority of organized employes could affect the provisions of such a plan as applied to all of an employer's employes. Such a result would be highly unsatisfactory, not only to an employer, but also to its other employes. Also, two bargaining groups could take diametrically opposed positions with respect to a particular "416 plan" provision. The attendant managerial dilemma would be impossible to resolve.

Proposed section 416 (a) (6) (A) requires that an amount equal to one-half of the additional tax credit claimed by an employer be contributed in newly-issued shares of employer stock. If an employer were required to bargain, again perhaps with a minority of the covered employes, as to the magnitude of its contribution under a "416 plan", it would, at the same time, be compelled to bargain with respect to the number of its authorized and issued shares. Certainly, the latter has always been, and should remain, a management prerogative I sincerely feel that the stringent requirements for the qualification of a "416 plan", combined with the fact that an employer will be subject to civil penalties under proposed section 416 (a) (11) for failure to meet those requirements, renders a mandatory bargaining requirement unnecessary with respect to "416 plans".

My final concern stems from the fact that S. 3241 does not directly authorize the amendment of an existing plan to a form that will comply with the requirements of proposed section 416.

If, after analysis of S. 3241, other employers share my concerns, it is quite possible that "416 plan" adoption will not proceed at the pace proponents of the stock ownership plan concept would desire. I believe that this possibility could be eliminated by certain minor revisions to proposed section 416(a) (15). I have caused to be prepared, and am attaching for your consideration, a revision of that section. I believe, that the revision overcomes the problems that I perceive in a fashion that is fully consistent with the intent of your proposed legislation. I would be happy to discuss the contents of the attachment with you or with appropriate members of your staff.

Sincerely yours,

Enclosure.

C. J. GAUTHIER.

(15) Notwithstanding any provision of this title to the contrary, employes who are included in a unit of employes covered by a collective bargaining agreement between any employe representative and one or more employers and who satisfy the minimum age and service requirements, if any, established by the plan (including any existing plan amended to meet the requirements of this section), shall not be excluded from eligibility under the plan, unless the employe representative, within 10 days of written notification by the employer to the employe representative of the establishment of a plan, declines coverage for employes in the unit by written notice to the employer. It shall not be an unfair labor practice within the meaning of section 8(a)(5) of the National Labor Relations Act, or any other provision of that Act, for an employer to refuse to bargain collectively with an employe representative with respect to (i) the establishment by the employer of a plan meeting the requirements of this section; or (ii) the terms and conditions of a plan or trust agreement forming a part thereof should the employer notify an employe representative of the establishment of a plan. Where the employe representative declines coverage, section 410 (b)(2)(A) shall apply.

STATEMENT OF FRANK ALTMAN

The major issue of economic policy facing the United States today asks a fundamental question: what measures can be used to strengthen capitalism? The system needs a dose of good old-fashioned economic growth. Debate on this issue has recently focused on fiscal policy, and more specifically, on tax measures to engender capital formation.

It is commonly agreed that cost inflation adversely affects capital formation by weakening profits, and concern over this problem has resulted in two concrete proposals: The Steiger Amendment and a Tax Based Incomes Policy (TIP). The Steiger Amendment, which recognizes the problem of lagging return on investment, would accommodate the burden of cost inflation by lowering the capital

gains tax. And TIP would act directly against excessive wage settlements to provide "breathing space" for prices, and an opportunity for economic expansion. By comparison with either of these measures, an Employee Stock Ownership Plan (ESOP) provides a direct incentive for capital formation. Employer contributions to the Plan which result in employee ownership of company stock, form the basis for a tax benefit to the company and, because the tax advantage to (all) shareholders is generally in proportion to the market value of ESOP stock, the plan contains a built-in attraction for capital resources to the fastergrowing segments of the economy. As a fiscal measure it is therefore more specifically growth-related than is a measure which provides a capital gains tax reduction, uniformly, for any firms.

Thus, the advocacy of ESOP as fiscal policy is coincident with the use of taxing power to stimulate growth; but the ESOP approach is qualitatively different from the usual Keynesian measures which find their orientation in static analysis: what Schumpeter once referred to as "bloodless economics". For Keynes, an expansive fiscal policy would act to pull firms' output up along a "U-shaped cost curve" which costs would allow-but with a lag. As Keynes said in his Treatise On Money, this would allow the wealth of nations to be enriched, "not during Income Inflations but during Profit Inflations-at times, that is to say, when prices are running away from costs." So Keynes was a strong advocate of firms' profitability, while postulating a rather fixed, or static relationship between costs and prices.

Interestingly, this thinking is incorporated into the proposal for a Tax-Based Income Policy. TIP assumes the Keynesian cost-price fixity, and would use taxing power to penalize firms and employees where wage settlements were "abovenorm". This would enforce a lag between rising costs and prices, and give profits a chance to grow-a la Keynes-so that noninflationary expansion could ensue. On the other hand, the fiscal policy implied by ESOPS concentrates on the innovative capability for firms to provide the profits needed for expansion. By giving a tax incentive to faster-growing firms whose stock values are rising, the ESOP works to shift capital flows into the more productive areas of the economy, with all the advantages which attend increased investment returns: higher levels of employment and output and, as a by-product of increased production, lesser inflation.

Unlike TIP, which concentrates on bringing wages into line with productivity, the ESOP turns this relationship around so that productivity advances accommodate wages. The difference between these two plans points up the divergent policy implications between the Keynesians and those who advocate a virile capitalism: the Keynesian approach, largely because it is static, ends up relying on government measures to effect the appropriate economics, but reliance on innovation implies the primacy of the entrepreneur.

At this point, it is instructive to note Joseph Schumpeter's prescription for inflation. Speaking 30 years earlier, that great economist stated succinctly that "the best remedy for inflation is an increase in production" ("There Is Still Time To Stop Inflation", Nation's Business, June, 1948). Schumpeter also advocated a policy of credit restriction, primarily in opposition to consumption and in favor of investment. The overall point was to get an increase in the output of goods and services which was greater than the increase in incomes.

Moreover, to this prescription, Schumpeter added a corollary with regard to fiscal policy. While it is true, he pointed out, that reducing the taxpayers' burden leaves larger disposable incomes-and therefore a potential source of further inflation-that outcome would follow only from greater expenditure on consumer goods. On the other hand, if incomes could be canalized into industrial investment "they would exert an anti-inflationary effect because they would finance, in a non-inflationary manner, those industrial requirements that are at present financed by the inflationary method of borrowing from banks." And so, Schumpeter suggested reducing taxes on "the saved part of corporate and individual income" as a consideration for capital formation, and as an important part of an overall policy for winding down inflation. (Nation's Business, June, 1948). This is exactly what ESOP legislation accomplishes-by definition. The employer stock contributions which form the basis for tax deductions are in the nature of capital ownership (not wage or salary compensation). And, because the ESOP taxbreak is in favor of the more dynamic firms, the net effect would be to stimulate production: Schumpeter's "best remedy for inflation". It is time that the ESOP ceased being considered a populist nostrum and looked at as the legitimate fiscal tool which it is in fact.

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