Mr. HARWELL. Yes, sir. We have gone on the basis, or we operate on the basis, that our No. 1 concern is to generate new income which gives you the spilloff effect, and the only way we are able to do this in our State is one, by either creating a manufacturing job, which gives you the value added by manufacturing, through agriculture, which we have a very large basis, through tools, and where we have a transfer of funds generated someplace else, and we can bring to Texas or through Government spending, and really in all four of these areas we are pretty well balanced. We have a very good return of Federal funds per taxes that we pay in the State of Texas. In fact, I think we are probably a little more blessed than most, but moving around it within the State is part of the thing, but you have got to start someplace with new-you have to generate some amount of new money. Now, my purpose of being here is to say that with our input-output model, if you come up with some proposals for taxes we would be delighted to run them through our model, and I think we could give you an answer as to what the effect would be. Our State legislature has used the input-output model to determine what effect State taxes would have on the businesses of the State of Texas, and we would be delighted to use this model to at least show you what a proposed new tax, what its effect would be in the State of Texas on both small and large business. We can differentiate. Senator BENTSEN. Thank you very much, Mr. Harwell, We get some interesting results when we ask the Treasury to run models for us. Mr. HARWELL. Well, ours is not a model that was made by estimates. It was made by actually going out on personal interviews, so we do not have something that we have just guessed at. We have got an honest-to-goodness model that gives a true reaction. Senator BENTSEN. I hope that is right. We have had a number of these econometric models give us entirely different results, and I am sure we have very sincere people operating each of them. Mr. HOLT. Senator Bentsen, I think that that multiplier of 2 would be a general ballpark figure for public employment, as well as private employment. Senator BENTSEN. You think it follows through on public employment? Mr. HOLT. Yes. It is the right order of magnitude. It clearly depends somewhat on the particular employment, but, in general, it has to do with the expenditures of the newly hired government workersomebody has to cut his hair, do his laundry, sell him groceries, and so forth. Senator BENTSEN. Do you think it follows the same as it does in private business then? Mr. HOLT. Basically, unless there are subtle, indirect effects. For example, you may stimulate the development of one kind of industry which makes the State more attractive to another kind of industry coming in. Senator BENTSEN. Dr. Eisner, let me pursue one point with you. I know you oppose the graduated capital gains tax. My concern is a lot of people make what, in effect, are tax decisions and not investment decisions, and I look at a situation where a man starts a company and he has a zero tax base virtually and he has worked at it for many years, and then he reaches an age when he would like to retire and he does not want to merge into someone else's company and get their stock, but he would like to sell out. He does not have kids who want to carry it on, and he looks at a situation where he would pay a 35percent tax and then a preference tax would probably run it up to 37%1⁄2 percent, and then if he is in a State like New York or California, it runs up to 42% percent, and what does he do? He says no, I am just not going to take that kind of cut in my estate, so he keeps it and you have capital frozen. I do not think that is good either. I think you ought to have mobility of capital. If you had a graduated capital gains tax, that would give some offset for inflation. Why do you feel it is inequitable or improper to have a graduated capital gains tax? I would like to hear your argument on that. Mr. EISNER. Certainly, sir. I actually, to begin with, believe in the income tax, and I would try to tax all income equally, including the income which accrues in the form of capital gains. I think you have made an excellent point on the problem of inflation, because our capital gains tax is such that we tax nominal capital gains and, where we have inflation, there may be no real capital gains. The economist's definition of income is that which one can consume while keeping one's capital intact, meaning one's real capital, so that adjustment might well be in order in some instances, but I would argue that the lockin effect, the immobility of capital, can best be answered by something which I fear may be impolitic at this time, but is to me, the clearly called for answer, and that is taxing all capital gains, after adjustment for inflation, as if they were income, but taxing them as they accrue, and you can allow businesses or individuals to declare, as best they can, what they consider the gain to be. They do not have to even pay the year it accrues. They can accrue the liability and pay interest on it, but in that way there would be no lockin. I think the difficulty with graduating it—and I think you mean graduating it over time Senator BENTSEN. Professor, I can not agree with you on that one, I must say. Mr. EISNER. I would feel that graduating over time would, if anything, increase the lockin. That is, once I have held a security for 6 months, except to the extent I want to hold it to leave to my estate, the only advantage of holding the asset longer is, of course, I delay the payment of the capital gains tax if it has gone up in value, and that is a not insignificant gain. But, if we have a situation where I include, let us say, 50 percent of the gain in taxable income after 6 months, 45 percent after a year, and 40 percent after 2 years, and so forth, then at each point of time, I will say, well, if I held it another year I will reduce the rate to less, so I would think that graduating the capital gains tax over time has every likelihood of increasing the lockin, rather than decreasing it. I submit it is an empirical question. You have to analyze it, and you may never know until after the facts are in, but I see no reason a priori that that would reduce a lockin. Mr. HOLT. Senator Bentsen, the biggest lockin effect is the ultimate way of escaping the capital gains-that is to die out from under it and never have to pay. Senator BENTSEN. But, if you have a graduated capital gains tax, you get away from that problem to a degree. Mr. HOLT. Well, the biggest lockin effect is that you may never have to pay it. So, if we change the inheritance tax so that a capital gain will automatically be realized at death, then there is no way of escaping the capital gains tax. You pay it sooner or later, and the only issue is when you pay it. That drastically reduced the lockin effect. Then, you can make a choice as to whether it is desirable to be locked into this particular investment or whether, alternatively, it would be better to diversify. I think that is really not a serious economic problem. When it is a serious one is giving a person an incentive to hold it for 40 years so that finally he dies and never pays the tax at all. Senator BENTSEN. Thank you very much, my time has expired. Senator Nelson, do you have any questions? Senator NELSON. Since this is Finance Committee room, I assume we are following the committee rules, so I will wait. Senator BENTSEN. Senator Javits. Senator JAVITS. Mr. Chairman, I shall be very brief. I am very interested in one area in reading your statement, but I regret that I was not in time for it since I had a meeting this morning. If you would be good enough to follow me, Professor Eisner, it would save a lot of time. On page 11 where you really lay out a program for small business in lieu of the tax reduction, you, yourself, would put your finger on the ball by pointing out that you have to make profits to pay taxes. If you do not make profits, it is peanuts. Mr. EISNER. That is correct. Senator JAVITS. That is true of the equipment tax, it is true of the income tax. But I do not think the income tax is making or breaking small business. So, I am very much in support of amending it and working with my colleague, Senator Nelson, as I have for years. But I like what you are doing here. Now, let us go over that if I may, briefly. One, a tax advantage for giving the youth or another marginal member of the labor force a job. Now, that is a very important concept. Have you drafted anything on that? I have tried and have been defeated in the Senate on this. Not too decisively, but defeated on a tax for taking on additional workers, always concerned about the criterion of what are additional workers. I like the idea of a tax advantage for youth and marginal workers rather than lowering the minimum wage or the youth exemption or whatever it is called, which is very tough and which I am against. I think most of the prolabor members here are against that, too. So, question: Have you actually drafted anything on that score, or would you try your hand on it, as a service to us? Mr. EISNER. I have not drafted a particular proposal for legislation. I have in several writings, which will be put into the record, made the proposal, but hardly in terms that would be direct or useful for legislative purposes. I would be happy to draft a set of options. Senator JAVITS. Would you do that? Mr. Chairman, I ask unanimous consent that those would be included as part of Professor Eisner's testimony. Senator NELSON [presiding]. Yes, we would be glad to receive them. The record will be open for some time. Senator JAVITS. Say in 10 days, is that all right, or 2 weeks? Mr. EISNER. Unfortunately, I am about to go out of the country for 2 weeks on Sunday. Senator JAVITS. How about a month, or 30 days? Mr. EISNER. That is fine. Senator NELSON. May I say, Senator, the staff advised me we will not be printing the record for a month anyway. So if you had it in there by 30 days, it could be included. Would that be possible? Mr. EISNER. Yes, sir. [The material referred to follows:] DEPARTMENT OF ECONOMICS NORTHWESTERN UNIVERSITY EVANSTON, ILLINOIS 60201 July 14, 1975 Honorable Jacob K. Javits United States Senate Dear Senator Javits: I am pleased to submit the "Proposal for a Job Development Credit: A Tax Credit for Investment in Human Capital," which you requested when I testified on June 17 before the Select Committee on Small Business and Subcommittee on Financial Markets of the Senate Finance Committee. |