The CHAIRMAN. The committee will come to order.

The purpose of this hearing is to give the committee an opportunity to examine the present status of development of employee stockownership plans in the United States and to ascertain what additional legislation is necessary to promote this concept and accomplish the expansion of each individual's access to stock and capital ownership.

The broadening of stockownership, thereby permitting each citizen to acquire a capital interest in America's corporate might, will have a significant effect on many of the economic problems which plague America. If we are ever going to curb the economic inflation which seems to bedevil us, we must find some way in which to encourage each man and woman to become more productive in his and her job. Providing each individual an ownership share in his employer, making him a partner with his employer in the profits which his labor generates, can provide us with an excellent step in that direction. However, as long as we continue to have excessive concentration of stockownership in the hands of too few individuals, we will never be able to give each working American such a share in America's economic future.

The broadening of stockownership through ESOP's, or through a general stockownership trust, such as that proposed by Senator Gravel, should help us to accomplish this end.

Finally, the use of an employee stockownership plan will stimulate the formation of capital and help us bridge the projected gap of $1.5 trillion in new capital over the next decade.

Today, we are going to receive testimony from several employers which have, through ESOP or some related program, provided their employees with an ownership interest in their companies. These employers have expressed positive convictions regarding te beneficial effects which this sharing of ownership has provided for each employer and its employees. Their testimony should do much to dispel the negativism which has been expressed by "doubting Thomases" who argue that such a program is meaningless.

In addition, we will be looking at several pieces of legislation which are designed to promote the broadening of stockownership and receiving testimony regarding this legislation and other legislative changes which might be made, and which will further promote the concept.

Tomorrow, we will be conducting an oversight function and reviewing the ways in which Federal agencies have dealt with employee stockownership plans and employee owned companies.

At this time I would like to introduce into the hearing a written statement by Senator Wendell R. Anderson of Minnesota regarding the ESOP concept. Senator Anderson and Senator Gravel are cosponsoring S. 3241, the employee stockownership plan bill which I introduced several weeks ago and which we will consider and discuss in hearings today.

[The material referred to follows:]

SENATOR WENDELL ANDERSON'S COMMENTS ON S. 3241, THE EXPANDED EMPLOYEE STOCK OWNERSHIP ACT OF 1978

It is with great pleasure that I have joined with 'Senator Long as a co-sponsor of his proposed Expanded Employee Stock Ownership Act of 1978. History will recognize this legislation as a landmark in advancing the cause of democratizing ownership-sharing in our free enterprise system among rank-and-file workers.

While over 2,000 corporations have already adopted ESOPS and TRASOPs, I feel confident that the added incentives provided under this legislation will prove irresistable to those within business and labor circles who still stand on the sidelines of this progressive step forward. Expanding ownership participation among workers, within a framework that victimizes no one yet benefits everyone with a stake in the productiveness of our economy, is simply an idea whose time has finally come.

While I support and recognize the practical significance of all of the measures contained within this bill, I think that two features in this bill deserve special attention: the first aimed at reforming our inheritance system, and the second designed to point to a wholly new direction in reforming and restructuring our tax system. Both of these reforms are based on strengthening the institution of private property in corporate capital and both will encourage the broadening of future ownership opportunities on a more equitable and democratic basis.

Many Americans have attacked our inheritance laws. Some say it is confiscatory. Others say it does nothing to decentralize the ownership of large accumulations of wealth. In Minnesota in 1974, we were the first state in the union to reconcile both positions. In 1974 I was privileged to have signed into law a measure that passed both houses of the Minnesota legislature, almost without opposition, to make ESOPs the equivalent of charitable foundations for purposes of estate, gift and income taxes. Several prominent Minnesota businessmen have indicated that they will revise their wills to take advantage of this new option as soon as similar federal laws are enacted. Other wealthy Americans have agreed to do likewise. I am pleased that Senator Long and other sponsors of this legislation will now make it possible for affluent taxpayers to make gifts to qualified employee trusts in order to reconnect the ownership of already-accumulated capital with a broader base of private individuals, namely productive workers of whom some have contributed to the building of the donor's fortunes. This is undoubtedly the most progressive advance in our inheritance policies in at least a century.

Safeguards have been added to insure that the donor or his relatives cannot benefit from the stock donations, and currently existing ESOP laws and regulations insure that annual donations will be equitably spread among all employees participating in the ESOP. To the extent dividends on donated stock are passed through the employee trust, they become an immediate source of a taxable second income to employees, a noninflationary way to raise the earnings of employees which this bill will also encourage, as I will describe below. In addition, allocations of property donated to employee trusts become retirement estates for employee beneficiaries and their heirs, reducing some of the pressures on today's hard-pressed retirement systems and the Social Security System.

On the other hand, donations to employee trusts would deprive the Government of no revenues since such contributions made to charitable organizations are already exempt from taxation. While profits from donated income-producing property are frequently accumulated tax-free within most charitable organizations, by connecting these profits and assets to individual employees through their trust accounts, this income and property become added again to the government's tax base. From a tax standpoint, therefore, the government can only come out ahead.

From a standpoint of charitable and public policy, this reform to our inheritance policies truly reflects the spirit of the American Dream, the dream that a propertyless immigrant could find in America an escape from wage serfdom and the degradation of dependency on welfare or charity. In America our ancestors came to find a piece of the action, an opportunity to become self-sufficient, a place to find true economic justice. Since the highest order of charity is to help other persons to help themselves, so that they can avoid the need of charity, I feel strongly that helping the wealthy to spread their wealth more broadly among their workers and future generations may someday be recognized as the most noble feature of this most worthy package of reforms. What we did through land distributions under the Homestead Acts, the source of our greatness in agricultural production, we can now provide to our industrial workers through the ESOP and other ownership-spreading reforms. By spreading the direct ownership of income-producing property to working Americans, this change should not only help reduce labor conflict and improve productivity, but will improve the image of the American free enterprise system as the economic foundation upon which all our freedoms and human rights most ultimately rest.

For those who think no changes are needed in our inheritance policies, let me state a few facts.

33-902-78

Total privately held wealth today in the United States amounts to over $3.5 trillion in current dollars, net of liabilities. (See testimony of Professor James Smith of Pennsylvania State University before the Hearings of the House Budget Committee, September 26 and 29, 1977, on "Data on Distribution of Wealth in the United States," p. 175; figures for 1972.)

Most of this wealth is owned by rich people. The top one percent of the U.S. adult population have accumulated close to $1 trillion, representing over 25 per cent of the total wealth and over 50 percent of all personally owned corporate stock in America. By their ownership of half of all corporate equity, one can say that the top one percent of the population literally controls all corporate assets in the United States. The richest one percent also hold over one-third of all bonds and virtually 100 percent of tax-free municipal bonds. In addition, the top one percent have 91 percent of personally held trust assets, one beneficial way for wealthy people to transfer wealth from one generation to another. (Testimony of Prof. Smith, Budget Hearings, p. 9.) In contrast, the net worth of the average American over the age of 20 was $3,536 in 1972, while 24 percent of Americans were below $1,000 in net worth. (Budget Hearings, pp. 177, 180.)

Much of America's wealth is passed along to heirs about once every generation, roughly every 25 years. Thus, about $140 billion changes hands each year, $40 billion from the richest one percent alone.

If through changes in our inheritance laws, such as the ESOP reform we are proposing, wealthy people could be given the additional option to distribute portions of their estates free of estate and gift taxes to less wealthy Americans, particularly to workers who helped create these fortunes, it would create a significant and growing direct ownership stake in our free enterprise system for millions who own little or no equity today. To illustrate, if the wealth passed on by the richest one percent each year could be spread more equitably, say in individual chunks averaging $10,000 each, then a growing base of economic security could be built into 4 million to 5 million Americans yearly, or 100 million to 125 million new ownership-sharing opportunities over the next generation, from previously accumulated wealth alone.

In the light of these facts and the opportunities they present to healing old wounds within our social fabric, the proposed reform to treat the ESOP as a means to deconcentrate large holdings of wealth is truly a modest step in the right direction.

The second feature of this bill which should be highlighted is the provision making dividends 100 percent deductible (like wage and interest payments under present laws) for purposes of corporate income taxes, if they are paid out on a current basis to the workers on stock held in their individual ESOP or TRASOP accounts. Thus, corporations would be encouraged to pay higher dividends as a means of increasing the annual earnings of their employees, which would be taxable like wage earnings. This could be a step toward the general deductibility of dividends at the corporate level, thus eliminating at the source much of the problem of capital gains (to the degree appreciated stock values stem from retained earnings) and the protests over the double taxation of corporate profits. It is a good step toward the integration of corporate and personal income taxes, one of the goals of most tax reformers. This could also lead toward other steps toward making the tax system more simple to understand and administer and vastly more equitable.

But most important, forcing or encouraging corporations to distribute their profits through dividend deductibility would encourage corporations to finance their growth externally through new equity issuances. And this in turn would induce them to look more closely at the classical ESOP as a new market for their new equity issuances. Thus, through their ESOP, employees of a company would be able to buy large blocks of newly issued company stock, using credit secured by future profits of the corporation. Ideally the credit for acquiring growth equity to be spread among the employees through their ESOP should be repayable with the tax-deductible dividends earned on the newly issued stock, as well as through the use of employer cash contributions as under present ESOP law. I would urge the cosponsors of this bill to add this change.

By encouraging the deductibility of dividends, Congress will be adding a major incentive for capital creation, potentially much more significant for increasing investment rates and therefore productive jobs in the private sector than the investment tax credit and other traditional subsides to capital formation. What makes this move more interesting for liberals and conservaties alike is that this deduction would not be a subsidy in any traditional sense, but rather a move

toward genuine tax reform. It is a way to make the capital creation process and tax reforms to accelerate private sector investment rates begin to work for working Americans. Only through ownership-sharing can workers gain a direct vested interest in the profits and productive capital that tax reform can generate. Considering the trillions of dollars industry will need in the decades ahead, it is hard to conceive of a more politically practical approach to meeting these capital growth needs than by cutting workers in on a piece of the action.

In summary, the ESOP inheritance law change will add equity to the way in which already accumulated weath is distributed from one generation to the next, and the deductibility of dividends on ESOP and TRASOP stock will encourage greater equity in the manner in which we will finance future growth within our corporate sector. These provisions deserve the support of all people seeking to strengthen our free enterprise economy and to increase our revenue base from added private sector paychecks and dividend checks among our productive work force.

The CHAIRMAN. Any further statements, gentlemen?

Senator GRAVEL. I have no statement.

The CHAIRMEN. I will call, then, as the first witness Mr. A. Dean Swift, president and chief administrative officer of Sears, Roebuck & Co.

We are very pleased to have you with us, Mr. Swift

Mr. SWIFT. Senator, I am pleased to be here.

The CHAIRMAN [continuing]. To hear about the fine contributions that your company has made to better employee-employer understanding down through the years.

Mr. SWIFT. Thank you.

STATEMENT OF A. DEAN SWIFT, PRESIDENT, SEARS, ROEBUCK

& CO.

Mr. SWIFT. My name is A. Dean Swift. I am president of Sears, Roebuck & Co. I am accompanied by Ray Bilger, vice president-taxes at Sears, Ted Bower, tax attorney at Sears, and Frank McDermott, our tax counsel. I am pleased to be here today and tell the committee about our employee stock ownership programs, and in particular, our profit sharing fund's 62 years of experience in investing in Sears stock for the benefit of the fund members. I also would like to tell you about the incentives which are created for employees by being owners of the com> pany. First, I will briefly describe Sears profit-sharing fund.

SEARS PROFIT-SHARING FUND

The Sears fund was created on July 1, 1916, over 62 years ago. From the start, one of its principal purposes was to invest its assets in Sears stock so employees could acquire a proprietary interest in the company, thereby sharing in its earnings as both an employee with an interest in profit sharing, and as an owner. From the very beginning, the rules of the profit-sharing fund stated:

It is intended that, so far as practicable and advisable, the fund will be invested in shares of stock of Sears, Roebuck & Co., to the end that depositors may, in the largest measure possible share in the earnings of the company.

This policy has remained virtually unchanged since 1916. In that first year, 1916, the fund purchased 2.473 shares of Sears stock worth slightly more than $500,000. Since that time Sears stock has been split 386 to 1 reflecting the growth of the company over that 62 year period.

At the end of 1977, the fund owned more than 662 million shares of Sears stock worth more than $1.8 billion. This investment represented approximately 20.68 percent of the company's outstanding shares.

About 70 percent of the assets of the Sears profit-sharing funds are invested in Sears stock. The remaining 30 percent of the assets not invested in Sears stock are invested in a diversified portfolio called "general investments." As of December 31, 1977, the general investments portfolio was valued at approximately $777 million.

As of December 31, 1977, there were approximately 300,000 participants in the fund. Each members can elect to deposit either 2, 3, 4, or 5 percent of the first $15,000 of annual compensation. The company's contribution at present is 6 percent of profits before taxes.

Under our present profit-sharing plan, the company's contribution is allocated to employees' accounts in proportion to their own deposits for the year. The maximum annual deposit any employee can make is $750-5 percent of $15,000, thus limiting the participation of the higher paid executives to $15,000 maximum.

Every fund member receives an annual statement showing the number of shares of Sears stock in his or her account and the dollar value of the account's general investments. Also, each year, members may instruct the trustees of the fund on how to vote their shares of Sears stock at the company's annual meeting.

The fund provides its members with full and immediate vesting. Shares of Sears stock are distributed in kind unless the member requests payment in cash and general investments are always paid in cash on the basis of their market value.

RECENT CHANGES IN SEARS RETIREMENT PLANS

Because Sears stock, like many others in recent years, has either remained stable or declined in price, Sears made a thorough review of its retirement programs. This review culminated last year with substantial changes in our programs. Our pension plan is designed to provide employees with assured retirement benefits in the form of company pensions. At the same time, our profit sharing plan permits employees to continue to participate in the values of ownership of the company's stock.

Our pension plan-which previously had covered salaried employee on their earnings of more than $15,000 annually-was broadened to cover all employees regardless of the amount they earned. Pension benefits were also strengthened and were tied to social security.

In addition, the company's annual contribution to the profit sharing plan was reduced from 11 to 6 percent of pretax profits to compensate partially for the substantial increase in costs of our expanded pension plan. Other changes in the plan were made to decrease the fund's emphasis on retirement security. This was done by easing the fund's rules on partial withdrawals and relaxing the restrictions on total withdrawals while remaining employed.

Under our revised programs, employees will not now have a guaranteed retirement income based on a percentage of their final compensation-part coming from Social Security and the remainder from the pension plan. In addition, retiring fund members will have the sub