issue comes up and people say, oh, but that will create a deficit, that will cause inflation. Well, do we really mean it or don't we? Do we mean we want high, full employment or do we mean that objective is way down the list after we have reduced the deficit and inflation? Chairman LAFALCE. Some would argue the best thing we can do to reduce unemployment is to bring about some correction in the exchange rate-some people would argue that by lowering the value of the dollar vis-a-vis other currencies, and the best way to accomplish that is to reduce the deficit. Professors Tobin and Klein both called for a tighter fiscal policy. They did not get into the components of what that tighter fiscal policy should be. I think both did say, though, that increased taxes or increased revenues-which could be not increased tax rates, but reduction of tax expenditures-would be an appropriate way. You talked about if we could eliminate a MX missile, for example, what good purpose that might be put to, et cetera. Mr. EISNER. Yes; but I don't advance those as means of reducing unemployment. I believe the MX missile is a monstrous squandering of resources and adds to our insecurity. And that is, partly, but not entirely economic judgment. But that is not a method of reducing unemployment. I would say, for example, if you are going to cut defense expenditures as I think you should, you may be taking away jobs in defense industries. One thing to do is be prepared with programs that will increase employment generally and elsewhere. I think that the easing of monetary policy is essential. I doubt that Professors Tobin and Klein would disagree with that. When we say we want a better mix, we don't mean we want to reduce total demand. And we have to be very careful about that. An important way of improving the exchange rates would be an easier monetary policy. It is tight monetary policy, tied with the budget deficits, in the opinion of most knowledgeable economists that has caused the very high value of the dollar. Because we run the big deficits, we keep monetary policy reasonably tight, and that gives us high interest rates which makes us very attractive as an investment for foreign ers. So they pour their money in to get dollars to invest in our securities, in our assets, with high returns, and that raises the price of the dollar. Chairman LAFALCE. Let me ask you or any others-what would you think if I were to advocate the elimination or limitation of certain tax expenditures as a way to broaden the tax base and reduce the deficit in order to help the economy, in order to reduce unemployment. For example, elimination or curtailment of the investment tax credits, changing the accelerated cost recovery system, some semblance of real life as opposed to the artificial life, whatever properties there might be, et cetera. Mr. EISNER. I am very much in favor of that. I have been advocating that for a long time. I am thoroughly delighted by the Treas ury's tax proposals. I just hope the administration will really back them, particularly these business programs. I think that would be a movement in the direction of efficiency in the economic system, efficiency in the investment decisions. Chairman LAFALCE. What if we did it in a way that was not revenue neutral, but in a way designed specifically to raise revenue, therefore, not lowering the individual or corporate brackets, et cetera, but simply eliminating or curtailing some of the tax expenditures, particularly on the corporate side? Ms. BARRETT. Getting back to this question of the budget driving everything, it seems to me that what we have heard from the bishops in the pastoral letter is that that ought not to be the case, we ought to be deciding- Chairman LAFALCE. What ought not to be the case? Ms. BARRETT. That we ought not to let the budget deficit drive the discussion. That what ought to be driving the discussion is first what is the appropriate unemployment target; second, which public goods do we want. That is, which goods do we want the Government to provide as opposed to the private sector to provide? And among the public goods which of those we want. And then figure out how to pay for it. But how to pay for it is the final part. Chairman LAFALCE. That is what I was getting at-how to pay for it. I was suggesting one way of paying for it, which would have the effect of reducing the budget deficit, but with the goal of paying for the goods, would be the elimination of certain tax expenditures. Ms. BARRETT. Mr. Chairman, let me just take it one step further. I agree with my colleague about the particular tax expenditure eliminations you were talking about. But in general we need to reevaluate the whole tax system to look at the incidence that it has, the redistributive consequences of it, and decide whether we like that. But just cutting out a tax expenditure in order to raise the tax base is not the best reason for cutting it out. Chairman LAFALCE. No. But one good step ought not to be criticized because it is not ten good steps. I couldn't agree with you more. But I don't think there is any disagreement with me, either, on that point. Ms. BARRETT. I think several of us that have advocated in other testimony tax increases-I personally feel that the high employment deficit is much too high. But that is a separate issue from how to stimulate the appropriate rate of economic growth, which could be done with a number of different mixes of monetary and fiscal policy and a number of different mixes of foreign trade sector versus the domestic economy. Ms. SAWHILL. Mr. Chairman, if I may, I have testified recently very much in support of your idea of a revenue-raising, base-broadening type of tax reform. For your information, we have estimated that one could raise $60 billion in additional revenues to apply toward the deficit and, simultaneously, reduce top marginal personal income tax rates to under 40 percent by a reasonable kind of base-broadening reform. Chairman LAFALCE. Thank you. If I had my druthers, I would repeal the investment tax credit and slap a 25-cent tax on gasoline. I think we would go a long way toward reducing the deficit, and with minimal adverse-maybe beneficial effect on the economy. If I had my druthers on taxes, it would be to increase the standard deduction and increase the personal exemption. It is probably the best way of bringing about a better distribution of wealth, too. Why we have not focused in as a party on the import of the standard deduction and personal exemption is beyond my capacity to understand. Do you agree with me on that? Ms. SAWHILL. Not on the last point I don't. And the reason I don't is because, and as you know, the distribution of income has been becoming much more unequal, and I don't believe that is a good way to reverse that trend. And the reason it is not is because it would help everyone, and especially the affluent because the higher your tax bracket, the more the personal exemptions are worth to you. Chairman LAFALCE. I don't agree. Ms. SAWHILL. I make a distinction here between the standard deduction and personal exemptions. Everybody benefits from the personal exemptions. Chairman LAFALCE. But not to the same degree. It is the same dollar amount for everybody. Therefore, the less you make, the more percentage of your income that personal exemption will be, and the more it means to you. Ms. SAWHILL. No. In a 50-percent tax bracket, that personal exemption is worth more to me than if I am in a 20-percent tax bracket. Chairman LAFALCE. If you are married and have three kids, making $15,000 a year, you have $5,000 worth of exemptions. $5,000 of $15,000 is one-third. If you are married and have three kids, make $150,000, you still have a $5,000 exemption, and therefore it is one-thirtieth. So it means an awful lot more to the lower income than it does to the higher income. What is wrong with my logic? Mr. EISNER. Well, your logic is only partially correct. Dr. Sawhill is correct, in that you are correct in that if you have a person with a high enough income, the proportionate saving in taxes is going to be considerably less. But if you really want to help the poor, what you want to do, through the tax system, is not use deductions but use credits. In other words, if you want to help the $15,000 a year man by the same amount as the $150,000 a year man, don't give an exemption, give a credit-whether it is an earned income credit or whatever you want to call it, of $1,000 or $500, and then they will each get the same amount. With an exemption, you are giving the rich person considerably more. In fact, the person that doesn't have any income at all, he is not getting anything. And people down in the low bracket are getting very little. Chairman LAFALCE. All right. I certainly would agree with the preference of the credit over the exemption. But given the fact that we don't have any general credit that is used right now-if we are just using the existing system, what would you do more than anything else to bring about a greater Mr. EISNER. That is one argument. I think the system, the tax system, unless you go to a negative income tax, as Professor Tobin suggested, and Professor Friedman advocated as well some years ago, you are stuck, and you have to be very careful that you don't use the tax system in ways which you can argue are helping a little bit but on the other hand are either second best or making things worse. Chairman LAFALCE. All right. Professor Eisner, was it you who made the study that said we are only getting back about 30 percent on our dollar on the research and development tax credits? Mr. EISNER. On the investment credit, I did some study-and on accelerated depreciation-and we found that we are lucky if we are getting 30 or 40 cents on the dollar back. In other words, for every dollar we lose in tax revenues, we may at best be getting 40 cents in added investment. And then it is questionable whether the investment is efficient. On the tax credit which is up now, and I recommend to the Congress consideration-the R&D tax credit, I think there is good reason to believe that it is ineffective in increasing R&D. What it does do is cause people to call R&D what they were not thinking to call R&D before. You have a huge Treasury loss. The initial estimates were much too low. They are now running to a billion, a billion and a half a year. And I think it is another example of something which was put in perhaps for a good purpose. I think R&D is valuable and should be encouraged, but that is not the way to do it. Chairman LAFALCE. Thank you very much. I want to thank each of you very, very much for contributing to the deliberations of our subcommittee. Your insights have been very, very meaningful. Thank you. [Whereupon, at 1:20 p.m. the subcommittee adjourned subject to the call of the Chair.] APPENDIX ADDITIONAL MATERIAL SUBMITTED FOR INCLUSION IN THE RECORD TESTIMONY THE BISHOPS' PASTORAL LETTER ON CATHOLIC SOCIAL TEACHING AND THE U.S. ECONOMY Submitted ANTHONY PATRICK CARNEVALE to the THE SUBCOMMITTEE ON ECONOMIC STABILIZATION OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS (99) |