Senator NELSON. Thank you very much for taking time to come. Of course, I have not had the chance, nor have any of the other members, to look at your tax impact project report. But, it looks to be

Mr. BIXLER. Excuse me, Mr. Chairman, could I just highlight a couple of things which stood out when I saw the report yesterday for the first time? (I had known about the project being underway, but had not seen the results.) If, for example, you look on page iiiSenator NELSON. What page?

Mr. BIXLER. Roman numeral iii. It is in the beginning before the Arabic numbers start. There it talks, for instance, about the employment effects, if the 10-percent investment credit were made permanent. In the first year it would equate out to about 80,000 jobs, and in over 5 years, it would result in approximately 1,170,000 more jobs.

This is not to say that we asked the tax managers of these businesses how many jobs a permanent 10-percent investment credit would create. Instead, we asked them what would be the tax impact on their own firms, then ran their replies through this whole econometric model to obtain this kind of answer. For more detail on other results may I refer you to page 1. (That page does not have a number, but is called Findings of the Project). Right below is table No. 1 which shows that while Federal tax receipts would go down sharply in the first 3 years, by the fourth year the reduction would be small and by the fifth year Federal revenue would actually start to gain. Accordingly, while the net impact over a 5-year period would be a revenue loss of $5.3 billion, there would be a gain in real investment on the order of $24.5 billion, and increased employment of approximately 1,170,000 persons, which seems like a pretty good result for that amount of revenue change.

All the way through, each of these tables evaluates the impact of a particular change in tax policy, asking if the asset depreciation range were repealed, what would the effect be all the way through in the 5-year cumulative totals? At least to me it seems to produce quite different answers than those which arise when you simply read the Treasury estimates as to what will be the revenue change in the first year of the 17 possible alternatives covered by the Tax Impact Project Report.

No one would want to claim as a first effort that every detail will be correct, but I think the study gives an important new indicator of trends and interrelated effects.

Senator NELSON. Of course, you know there are many who argue that the investment tax credit is quite unnecessarily wasteful in the sense that you get your 7 or 9 or 10 percent of tax credit on investment you intended to make anyway. That is to say, how much are you losing in taxes in order to induce that marginal expansion of investment that would not have occurred that year?

I remember when we first dealt in the 1960's with the investment tax credit. An attorney for one of our very large corporations in the country, who is a friend of a friend of mine, simply said: "We will be very happy to have it, but we have our investment plans laid out for the next whatever it is, 5, 6, or 7 years, and we are going to get a lot of money out of it. But, this is not going to expand, detract, or affect our investment in capital goods at all."

So, in this case you give a very large tax break to a company in which the management side of the company was saying privately it was not going to affect their investment. Now, there would be others where the credit might expend investment. There is a certain amount of investment that is going to be done, maybe 90 percent of it is going to be done with or without investment tax credit, or 95 percent. But, if you had your choice between an investment tax credit or an adoption of a different depreciation schedule, which would you chose? Now, I do not have a specific one in mind; I do not know the impact of all the alternatives. We did talk with some Canadian experts respecting what was adopted there. Canada allows, as I recall, something like 50percent writeoff the first year, and then the next 50 percent written off at the discretion of management, over I do not know how many more years. The whole thing was totally in the control of the company, and they were allowed 50 percent the first year and 50 the second year if they wanted to take it. Or they could stretch it out in any way if that was in their advantage.

Now, if you had your choice, which one in your judgment would do the most good for small business?

Mr. BIXLER. Now, this is a personal opinion because we do not have a policy of the National Association of Manufacturers on this.

Senator NELSON. I understand. I do not expect you to be speaking for anybody but yourself.

Mr. BIXLER. In our own case, since we are in a technology-based business, we essentially need to be making more capital investments along the line. I think now that a permanent 10-percent investment credit would be most desirable for us, but I certainly recognize that the present depreciation or capital recovery system is not adequate. New equipment costs so much more than it used to and we need so much more of it to maintain our market position that we recognize we are not getting nearly enough cash flow from depreciation to meet our needs for new investment. So, you are giving me a Hobson's choice that is indeed difficult.

However, if we had a simple and adequate cost recovery system, there would not be as much need for the investment tax credit

Senator NELSON. Because you would be recapturing your investment much more quickly, and therefore

Mr. BIXLER. Yes, and we would have the option to do it at the time the recovery worked best for our particular enterprise. But again, if we did not have such high corporate rates, and if we did not have the depreciation system that now is in the law and the regulations, we might well not need the investment credit to the same extent. But all that is a hypothetical situation.

Mr. MASSA. Mr. Chairman, I would like to comment, too, on the point that you made about subjective judgments as to whether the investment tax credit, for example, created any new investment or stimulated any new investment that would otherwise not have taken place. I should point out, so that there is no misunderstanding, that his survey and these results are basically mathematical calculations on the change in capital, the change in available capital.

In other words, we have not attempted to analyze or to determine whether one particular system versus another has any technical or

administrative ease or might encourage or discourage investment in one way or another. What the impact project does is to say, given a change in capital of a dollars, whether it is because of a change in credit or depreciation in the tax rate, or whatever, what would that mean if investment in the economy or capital investment in the economy were changed by that amount. So, the study does not attempt to say that it is because there is a 10-percent investment tax credit necessarily that these particular numbers would be developed. It is because a 10-percent investment tax credit would generate this much additional capital or that repeal would reduce the amount of available capital and that that being worked through the model is what generates the numbers.

We have not attempted in the survey and we do not attempt to reach any subjective conclusions about which particular approach is better or which particular approach is easier to handle or would or would not stimulate more activity. It is basically a mathematical calculation on changes in available capital.

Senator NELSON. The argument for it has been to induce capital investment, not to provide more capital for the company. Both of them provide capital. If you have an accelerated depreciation, it gives you the money more quickly; you have it now, rather than 10 years from now. The investment tax credit also gives you capital. In some places it may and certainly does induce additional capital investment this year that would not have been made until the next or the year after-at least that is what the economists argue. But both devices provide capital for the business, do they not?

Mr. MASSA. That is right.

Mr. BIXLER. Also, a small business can get the capital investment credit by leasing the equipment from someone else and still arranging with the company doing the leasing to allow the user to have the investment credit. That improves the user's capital in the very year that the new equipment is obtained. In other words, if you make a lease-purchaser arrangement for example, for a machine tool

Senator NELSON. You are not just talking about leasing; you are talking about lease purchase.

Mr. BIXLER. Yes, lease purchase, and the option can be with the leasee to take the investment credit. Frankly, in our company, that is the only basis on which we will enter a lease-purchase agreement.

Senator NELSON. Is it for the reason that you get the investment tax credit?

Mr. BIXLER. Right.

Senator NELSON. Well, thank you very much, gentlemen, for your testimony. We may wish to have you back again to discuss the Tax Impact Project Report after we have had a chance to look at it. Mr. MASSA. We will be happy to come back.

Senator NELSON. Thank you, sir.

[Whereupon, at 12:22 p.m., the committees recessed, to reconvene upon the call of the Chair.]

APPENDIXES

APPENDIX I

[From the Congressional Record, June 12, 1975, pp. S10459-S10460]

HEARINGS ON SMALL BUSINESS TAX REFORM

Mr. NELSON. Mr. President, on April 24, 1975, the Select Committee on Small Business gave notice of its in-depth study of the business tax structure. We now announce that the study will move to the state of public hearings on June 17, 18, and 19.

BACKGROUND

Earlier this year, in February, the Select Committee conducted 3 days of hearings on small business tax needs in connection with congressional consideration of the emergency Tax Reduction Act of 1975. As a result of this activity, several small business provisions were incorporated into that legislation, as I have previously reported to this body in a series of statements-CONGRESSIONAL RECORD, February 12, 1975, page S1861; March 10, 1975, page $3488; March 22, 1975, page $4848.

PURPOSE OF THIS STUDY

The objective of the study launched in April ultimately is to develop small business recommendations for inclusion in the omnibus tax reform bill on which the House Ways and Means Committee will begin hearings at the end of this month.

The method we have chosen is a thorough study of the facts and figures which— Demonstrate the special financial and capital problems of small- and mediumsized business;

Show how these difficulties are related to the tax system; and

Indicate how proposed solutions will benefit the economy as a whole, as well as the small business community.

JOINT PARTICIPATION OF FINANCE COMMITTEE

We are pleased that the study will be conducted jointly with the Subcommittee on Financial Markets under the chairmanship of the Senator from Texas (Mr. BENTSEN). Because of this, eight members of the Senate Committee on Finance will be involved. The perspective of that subcommittee, its excellent past work on access to equity capital, and its resources will be valuable in achieving the aims of this study.

FORMAT OF THE HEARINGS

The hearings on June 17-19 are directed toward basic economic issues, such as recession, unemployment, inflation; capital formation and productivity; and specifically how the tax system either hinders or helps the small and independent businesses to cope with these problems. I ask unanimous consent that a list of these topics and witnesses addressing these subjects be included in the Record at the conclusion of my remarks for the interest of all concerned. We are all aware of the major problems in the U.S. economy:

The worst recession since the 1930's;

A jump in the wholesales price index-reflecting the cost of goods for business of 21 percent last year, compared to a consumer price index rise of 12 percent;

Loan delinquencies of consumers at the level of 2.8 percent, the highest rate since 1949; and

A steep fall in profits over the last 12 months which appears to have been most severe for smaller and independent firms.

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