nesses that introduces a type of rigidity. It keeps those funds from flowing back into capital markets where they might be more profitably invested in other industries. Senator PACKWOOD. I want to make sure I understand. You are not suggesting that if you and I go into business and we form a corporation-just a small business-and the first year we lose $10,000 or $15,000, that we get some kind of a subsidy from the Government for our loss? Mr. HOLT. If you wanted to encourage people to go into new businesses, that is the kind of program you might consider. There was a time when the corporation income tax operated in such a way that when you made money, the Government participated, and when you lost money, the Government closed its eyes-you were given a loss carryforward, but you have no way of recovering taxes that you had paid earlier. That obviously was a very negative incentive for people to undertake risky investments. We have to some extent gotten away from that problem through the loss carryback. However, if you want to encourage people to go into risky business more could be done. Since the Government now takes about 50 percent of the profits, for the Government to take 50 percent of the losses essentially puts the Government in partnership with the entrepreneur in terms of risk bearing. You might do that, if you felt that there was a real problem in getting small businesses started. Senator PACKWOOD. It is intriguing. Mr. HOLT. I am not strongly advocating it without further study. Senator PACKWOOD. I have hundreds of friends who I think would take advantage of it. Mr. HOLT. The idea that you are going to risk losing money simply because Uncle Sam is in there losing with you is not a game that you necessarily would want to play if you look at it closely-that still does not make losing money to be good business. Senator PACKWOOD. Oh, no; I agree. Nobody wants to lose money. It would make projecting our Federal Government expenditures very difficult from year to year-assuming we were going to pick up 50 percent of all the losses of new businesses for the first 2 or 3 years they were in business. Mr. HOLT. I am sure that is peanuts in terms of the overall budget. Senator PACKWOOD. I have no other questions. Senator NELSON. Senator BYRD. Senator BYRD. Thank you, Mr. Chairman. May I ask Mr. Holt and Professor Eisner this: What do you regard as the appropriate income tax rate for corporations? Mr. EISNER. I am on record-I hope it does not shock you—I am on record in a "Business Week" article of December 14, that I have offered for the record, as suggesting that the appropriate corporate income tax rate is zero, and I mean that seriously. But that would involve having individuals include in their taxable incomes the share of corporate earnings which is represented by their equity or ownership in a corporation. And that would remove a considerable number of the distorting effects of business taxation. Senator BYRD. You would apply subchapter S to all corporations, is that what you are saying? Mr. EISNER. I would have to be sure I knew precisely the implications of subchapter S. Mr. HOLT. That is what it comes to without all of the restrictions associated with subchapter S. Senator BYRD. May I ask Mr. Holt what he feels would be an appropriate tax structure? Mr. HOLT. I do not consider myself a tax expert, and I am inclined to agree with the point that Professor Eisner made that there are serious questions in terms of distortion in the corporation income tax. But I have not done as much thinking about it as he has, and I am less ready to firmly urge its abandonment. Senator BYRD. If you lay out 50 percent now, and leave it out for the smaller corporations, do you feel that is too high or about right or too low? Mr. HOLT. Well, I am inclined to think, if it is anything, it is too high. Senator BYRD. May I ask Mr. Harwell his view on it? Mr. HARWELL. Well, Senator, I am not a tax expert at all, but I would go along with the concept that if you can eliminate any taxes, I am in favor of them. Senator BYRD. May I ask Professor Eisner this: What do you feel would be the appropriate capital gains tax? 25 percent? 35 percent? More or less? Mr. EISNER. The appropriate capital gains tax, I would argue, would be the income tax rate, with capital gains taxed as they accrue, with adjustment for inflation. But I would suggest that this would mean a considerably lower income tax rate than we have had. The direction-and I am sure that the members of this committee are aware that we have followed in this country is generally an increase in rates, either directly or by letting the effects of inflation bring us into a higher tax bracket. And then at the same time, with people more and more miserable with the higher rates, we exclude more and more income from these rates. We ask special preferences in reductions, whether they are on capital gains or equipment credits or municipal bond interest or one thing or another; and of course, that means, then, that the higher rates which become necessary increase the demand for still more exemptions. If we included all capital gains in taxable income, even if we merely included the realized capital gains-including, as Professor Holt is apt to urge, the taxation of capital gains at death-we would find that we can decrease the rate on all income, including the income from capital gains, to everybody's benefit. Senator BYRD. What do you regard as the two or three major factors in the inflation which we have been experiencing? Mr. EISNER. The major factors in the inflation, I would say, are, first, it is an initial pull from the surge of expenditures way back in the Vietnam war from which we have never quite recovered. Senator BYRD. Federal spending? Mr. EISNER. Yes, Federal spending at that time. But second, I believe that the major push has come from the increases in petroleum prices and the push from the shortages of the supply in agricultural commodities in the last few years. And this has been aggravated by imperfections in markets, regulatory agency action, and other characteristics of the economy, such that there is hardly any downward flexibility. I cannot refrain from adding quickly that given this explanation, I think trying to fight the inflation by reducing demand has been a very misguided action which might well have been predicted to bring on the massive recession that we have had. You do not come back from an inflation due very largely to increased costs of supplying goods and services due to a shortage of supply by trying to reduce demand, and certainly not in an economy where it is notorious that there is relatively little downward flexibility of wages and prices. The particular effect on the economy now has been precisely the huge surge of unemployment we have had. Senator BYRD. How do you feel? Mr. HOLT. I totally agree with that, adding simply one point; that there has been a general inflation of world prices-all commodities, not just agricultural commodities and petroleum-and that, although foreign trade is not of dominant importance in the American economy, this has contributed to our inflation problem. The testimony that I gave to Senator Bentsen's JEC Subcommittee on Growth dealt with some of these aggregate demand issues. And it is also somewhat responsive to the issue that Senator Brock was raising. And if the committee is interested, it might like to include that statement in the record. [The information referred to follows:] 54-397 0 75 10 Statement for the Economic Growth Subcommittee of the Joint Economic Committee UNEMPLOYMENT, INFLATION, AND STRUCTURAL REFORM by Charles C. Holt June 3, 1975 THE URBAN INSTITUTE 2100 M Street, N.W., Washington, D. C. 20037 UNEMPLOYMENT, INFLATION, AND STRUCTURAL REFORM Statement for the Economic Growth Subcommittee of the Joint Economic Committee by Charles C. Holt Senator Bentsen and members of the JEC Subcommittee on Economic Growth, I want to express my pleasure at being asked to testify before you on Manpower Policies to Restore Full Employment. Ralph Smith and I are testifying as individuals and not as spokesmen for The Urban Institute or its sponsors. However, we will be drawing freely on the research of our colleagues Richard Toikka, William Scanlon, and Jean Vanski. Our research has been supported by the Department of Labor, the National Science Foundation, and the Ford Foundation. Ralph Smith will talk about near-term unemployment prospects and I will consider the need for structural change and manpower policy. |