IMPACT OF THE TAX SYSTEM ON FRIDAY, APRIL 13, 1984 U.S. SENATE, SUBCOMMITTEE ON OVERSIGHT OF THE IN- Washington, DC. The committee met, pursuant to notice, at 9:39 a.m. in room SD215, Dirksen Senate Office Building, the Honorable Charles Grassley (chairman) presiding. Present: Senator Grassley. [The press release announcing the hearing, the prepared statement of Senator Grassley, and the report from the Joint Committee on Taxation follow:] [Press Release No. 84-133, April 2, 1984] FINANCE SUBCOMMITEE ON OVERSIGHT OF THE INTERNAL REVENUE SERVICE SETS HEARING ON IMPACT OF THE TAX SYSTEM ON PRODUCTIVITY AND ECONOMIC GROWTH Senator Charles E. Grassley (R., Iowa), Chairman of the Finance Subcommittee on Oversight of the Internal Revenue Service, announced today that the Subcommittee will hold a hearing to examine the impact of the Federal income tax system on productivity and economic growth. The hearing will be held on Friday, April 13, 1984 at 9:30 a.m. in Room SD-215 of the Dirksen Senate Office Building. "Too often we in Congress undertake revisions of the tax code, whether major or minor, without considering the effects of those revisions on the overriding goals of the tax policy to raise revenue in a way that promotes economic efficiencies, savings, productivity, and stable growth," Senator Grassley stated. "It is my intention to conduct a series of hearings that take a larger view of the Internal Revenue Code and how it is administered, beginning with this examination of how our tax laws relate to our productivity performance and economic growth." Senator Grassley noted that "witnesses should be prepared to address such productivity issues as how the structure of the Internal Revenue Code and its administration by the IRS affects the ability of some taxpayers to use tax preferences effectively to control their tax liability: a situation that may adversely affect national productivity. In addition, witnesses may address the potential for gains in productivity performance from major changes of the tax system." STATEMENT OF CHARLES E. GRASSLEY The hearings that we begin today are potentially of great importance to the U.S. economy, to the role of our Nation as an industrial competitor in the world, and to the American worker and taxpayer. Dramatic changes have occurred in social and economic conditions in this country and elsewhere in the past few decades. One important change has taken place in American business and industry. According to some measures and to some observers, productivity has fallen in the U.S. economy. By productivity, I mean output per hour in the nonfarm sector. We are not here today to examine the issue of productivity. Rather, as the Subcommittee of the Senate Finance Committee charged with Oversight of the Internal Revenue Service, we are here to begin a searching inquiry to determine whether the Internal Revenue Code has kept pace with the vast change of the past few years and decades. Specifically, we want to know how the Code affects productivity, and whether the Code affects it for the benefit or the detriment of the U.S. economy. The Internal Revenue Code has always played an important role in the conduct of business in this Nation. Many, if not most, key business decisions are based on the tax consequences. Should an employer enlarge or contract the workforce at a critical point in the tax year? Should a manufacturer or vendor allow inventory to accumulate or to be depleted? Should an industrial firm obtain capital to construct or purchase new plant or equipment? These and many questions like them are answered by top management and ownership daily in this country, and the answers often depend on tax advantages or disadvantages. Despite the importance of the Internal Revenue Code, little is understood about its effect on business decisions. Little is understood, in short, about the effect of the Code on the productivity of the American worker. Finally, little is understood about the role of the Code in the volatile and rapidly changing environment that exists in American business and industry today, an environment influenced by technological innovation, worldwide competition, and many other factors. The Subcommittee hopes that the series of hearings beginning to day will provide the Senate and the American people with the kinds of information, ideas, recommendations, and insights that will help us to determine the best tax structure for the coming years. We may learn that the present system actually inhibits productivity. We may also learn that alternative systems may be available that could greatly stimulate productivity and help to insure American's pre-eminence in the world economy. Whatever we learn in these hearings, we must be ready to consider fundamentally new ways of evaluating these interrelationships, including new ways of taxing the workers and businesses in this Nation. We must keep our minds open about the possibility that a new road, difficult though it may be to build, may be in the best interest of this Nation. The Subcommittee is privileged today to hear from seven distinguished observers of the tax system and the economy. They are drawn from the Federal Government, private industry, the financial community, and academe. I look forward to hearing from these witnesses. The first witness is the Honorable Charles E. McLure, Deputy Assistant Secretary for Tax Analysis at the Department of the Treasury. Welcome, Mr. McLure. The next witnesses are Mr. John M. Albertine, President, American Business Conference. Mr. Luis Granados, Managing Director, The Employees Stock Ownership Association. Mr. Robert J. Genetski, Vice President of the Harris Trust and Savings Bank of Chicago. Dr. Richard W. Rahn, Vice President of the United States Chamber of Commerce. Dr. Paul Craig Roberts, the William E. Simon Fellow in Political Economy at the Center for Strategic and International Studies and former Assistant Secretary of the Treasury for Economic Policy. Dr. Norman B. Ture, President of the Institute for Research on the Economics of Taxation and former Under Secretary of the Treasury for Economic Affairs. Mr. Barry Bosworth, Senior Fellow, Economic Program, at the Brookings Institution and former Chairman of the White House Council on Wage and Price Stability. Mr. Jerry J. Jasinowski, Executive Vice President and Chief Economist of the National Association of Manufacturers. Dr. Herbert E. Striner, Professor of Business Economics in the College of Business Administration at the American University. BACKGROUND MATERIAL RELATING TO TAX SHELTER TRANSACTIONS, AND BROADENING THE INDIVIDUAL INCOME TAX BASE Material From Prior Publications of the Staff of the JOINT COMMITTEE ON TAXATION Prepared for the Use of the SUBCOMMITTEE ON OVERSIGHT OF THE of the COMMITTEE ON FINANCE At the Subcommittee Hearing on April 13, 1984 April 12, 1984 INTRODUCTION This document is prepared as background material for the use of the Finance Subcommittee on Oversight of the Internal Revenue Service at its hearing on April 13, 1984. The hearing is on the impact of the Federal income tax system and tax administration on productivity and economic growth. The xeroxed material in this document is from two prior Joint Committee on Taxation staff pamphlets. The sections entitled "Overview of Tax Shelters, "Summary of Income Tax Provisions Designed to Limit Tax Shelters," and "Economic Analysis" are from the 1984 staff pamphlet entitled "Proposals Relating to Tax Shelters and Other Tax-Motivated Transactions" (JCS-5-84, February 17, 1984). The section entitled "Study of 1982 Effective Tax Rates of Selected Large U.S. Corporations" is from the 1983 staff pamphlet of the same title (JCS-57-83, November 14, 1983). Also included is a separately attached 1982 Joint Committee Staff pamphlet entitled, "Analysis of Proposals Relating to Broadening the Base and Lowering the Rates of the Income Tax" (JCS-36-82, September 24, 1982). |