we ought to respect and certain kinds of State requirements that we should not respect.

Mr. NORMAN. Does not the present provision penalize the States where the younger people are required to support older adults? In those States there is no way that a younger adult can set up a Clifford trust and make the income of the trust includible in the gross income of the older relative who receives it, is there?

Mr. BRANNON. Certainly; he can give him the money.

Mr. NORMAN. I know, but I'm asking about setting up a trust.

Mr. BRANNON. He can set up a trust and abandon the control over the trust, make it a 10-year trust and make it one that qualifies as a separate trust and not Clifford trust.

Mr. NORMAN. The Clifford-type trust, no matter if it qualified in every other respect, if the younger adult who set up the trust has the obligation to support the older adult who received the income, then the younger adult is taxable on the income; is that not true?

Mr. BRANNON. That is right.

Mr. NORMAN. There is no way for him to set up a Clifford trust and have the income taxable to the recipient whom he has a legal obligation to support?

Mr. BRANNON. Yes.

Mr. NORMAN. Does that not penalize the settlor, in the States that do have those provisions?

Mr. BRANNON. Let me try to describe the problem in this way so it will be clear just what we are talking about.

This is the intent of the trust provision that is involved here. If I owe Mr. Gibb here $1,000, say this is a personal debt that I borrowed from him one time, and if I should set up a trust in which I have control of who gets the money each year, I tell the trustee to whom to pay it. If I am in the position to tell the trustee to pay Mr. Gibb $1,000 to cover my debt to him, this is really a use of my own money and that $1,000 is my income despite the fact that it was not actually paid to me.

Now, similarly, with regard to other kinds of obligations, if I set up a trust in which I control who gets the money and I can say to the trustee, "You pay it to someone to whom I owe money," then by discharging those obligations I have gotten the benefit of the money and I should include it in my income.

In effect, what you are arguing here is that there are certain kinds of obligations that a State might impose such as an obligation to support a parent which we ought to ignore. This gets into a rather complicated matter. Which State obligations are good ones and which ones are doubtful ones; which ones should we ignore and which ones should we not ignore?

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It seems a systematic thing is to follow the way the State wants to set its obligations. If they want to require the children to support parents, this is their business and we should treat this as an obligation. Mr. NORMAN. Thank you very much, Mr. Brannon.

Senator SMATHERS. Mr. Brannon, in conclusion, the Treasury position is that they don't want to make any tax change at this time. Mr. BRANNON. That is right.

Senator SMATHERS. And, therefore, that it is not so much this particular phase of the tax law, but you just don't want to make any at this time because the Government needs the revenue.

Mr. BRANNON. No. We also think that making tax changes or providing particular benefits to people who contribute to the support of their aged relatives is unwise.

Senator SMATHERS. It is not the position of the Treasury that they are against young people contributing to the support of their parents, is it?

Mr. BRANNON. No.

Senator SMATHERS. All right.

Thank you very much, Mr. Brannon. You have done a good job. You have stimulated our thinking. We appreciate your time and effort as well as that of your associates.

Senator SMATHERS. Our next witness is Mr. Ernest Giddings who is the director of legislation, the American Association of Retired Persons, National Retired Teachers Association.

Mr. Giddings, we are delighted to have you.

Would you introduce your associate for the record, please, sir?

STATEMENT OF ERNEST GIDDINGS, LEGISLATIVE REPRESENTATIVE, NATIONAL RETIRED TEACHERS ASSOCIATION AND AMERICAN ASSOCIATION OF RETIRED PERSONS; ACCOMPANIED BY ALAN MERCILL, LEGISLATIVE ASSISTANT

Mr. GIDDINGS. Yes.

Mr. Chairman and members of the Senate Special Committee on Aging, my name is Ernest Giddings.

I am the legislative representative of the National Retired Teachers Association and the American Association of Retired Persons. Accompanying me is Mr. Alan Mercill who is the legislative assistant of our organization.

We are here today representing our combined membership of approximately 1 million persons age 55 and older. Our associations are nonprofit and nonpartisan and we are dedicated to helping older persons help themselves and each other toward independence, dignity, and purpose in their later years.

We appreciate the opportunity to explore with your committee any proposals for possible legislative action which may be of concern to both the person over age 65 with inadequate income and to the son or daughter under age 65 who may make a financial contribution for the benefit of an aged parent.

We believe in the traditional American principle of filial responsibility. Specifically, we believe that the son or daughter as an earner and taxpayer should be encouraged but probably not be compelled to assume part of the support of a needy father or mother.

Since a substantial part of our membership is between the ages of 55 and 65 and since many of them have needy parents age 75 and older, we have a special concern for the well-being and fair tax treatment of both groups.

I would like to talk about the case for increasing the income test to $1,200 for claiming relatives over 65 as dependents.

We believe the Congress should seek legislation to reward and encourage the taxpayer to contribute to the support of needy older relatives. The following example shows how the Federal Tax Code now discriminates against the taxpayer who does support older relatives and how it, in effect, rewards the taxpayer who does not so contribute.

Example: Taxpayer A is a 55-year-old man with a 55-year-old wife and a mother and father, both of whom are 80 years of age. Taxpayer A had $6,000 of earnings for 1965, from which he contributed $200 a month (total for year: $2,400) to the support of his parents. The only other income of his parents during the year was a small pension received by his father, the total of which for the year was $700.

In computing his Federal income tax for 1965, taxpayer A qualified for three personal exemptions: one for himself, one for his wife, and one for his mother. He could not claim a personal exemption for his father since his father had over $600 of income.

The facts in the case of taxpayer B were identical in every respect to those of taxpayer A, except that taxpayer B made no contributions to the support of his parents, preferring to spend the money on himself and his wife and to force his parents to seek public assistance or assistance from private charities. He, therefore, qualified for two exemptions: one for himself and one for his wife.

The chart following shows the comparison I have just described.

Comparison of taxpayers A and B

Standard deduction.

600

600

Federal income tax for 1965, assuming that neither itemized deductions. Percentage of income available for spending on taxpayer and wife which was required for paying Federal income taxes..

I should point out that in the first column, the second item shows the amount of earnings available for spending on the taxpayer and wife of Taxpayer A because he has contributed $2,400 to his father and mother. This shows in the first column, the fifth item, his Federal income tax as $552, but probably the important point is the last one in that column showing that he therefore has spent 15.3 percent of the amount of money available to him and his wife for the payment of his income tax. In column B that figure is 11 percent.

Now the recommendation that we would make is to correct this situation.

Recommendation No. 1: The Congress can provide a degree of tax equity to Taxpayer A in the above example by changing the income test to permit the dependent to earn $1,200 without loss of his dependency status.

Such a revision in the Tax Code would result in Taxpayer A counting four personal exemptions. His Federal income tax in this case would then be $450, which would be 12.5 percent of the total income which would be available for the use of himself and his wife.

Permitting earnings of $1,200 by the over-65 dependent should encourage him or her, to greater effort at self-support and independence,

an important incentive and one which should not be overlooked by the Congress. We therefore urge the Congress to so amend the Tax Code as to permit a dependent older relative to earn up to $1,200 without loss of his status as a dependent.

Recommendation No. 2: An alternative to recommendation No. 1 would be to retain the present $600 income limitation but permit the taxpayer to count the dependent relative over 65 as two exemptions instead of one. The tax result would be very similar if not identical to the benefit granted in recommendation No. 1 above.

Now I would like to take up the case for amending the Internal Revenue Code to permit deduction by a taxpayer of his payments for medical expenses of a relative over 60 who had less than $1,200 of income during the taxable year, even if the taxpayer did not contribute as much as one-half of the support of the older relative during the year.

At present, the Federal income tax statutes discriminate against taxpayers who pay the medical expenses of their needy elderly relatives but who are prevented by technicalities from deducting such expendi

tures.

Example: Taxpayer A is a 40-year-old man with a 40-year-old wife, and a mother and father, both of whom are over age 60. Taxpayer had $6,000 of earnings during 1965, from which he contributed $1,000 during the year for the support of each of his parents (total, $2,000). All of this amount was in the form of payment of medical expenses of his parents.

His parents had incomes of $1,100 each during the year, which they expended for their own needs. Therefore, his contributions did not amount to more than half the support of either parent during the year, and he was thereby prevented from claiming them as exemptions on his return or deducting medical expenses paid in their behalf.

Taxpayer B is a 40-year-old man with a 40-year-old wife. His parents are wealthy and consequently he did not make any contribution to his parents during the year from his $6,000 annual income. This chart illustrates the points I have made.

Federal income tax for 1965, assuming that neither itemized deductions. Percentage of income available for spending upon taxpayer and wife which was required for paying Federal income taxes..

$600

$600

$658

$658

Mr. GIDDINGS. Item 2 in the first column is the $4,000 of earnings available for spending by taxpayer A and his wife.

The last item in column 1 shows that he must use 162 percent of the income he has available for spending upon himself and his wife to pay his income tax.

Out of this comes recommendation No. 3.

The Congress can correct the inequity shown in the above example by amending the Internal Revenue Code to permit taxpayer A to de

duct the medical expenses he paid for his 60-year-old father and mother even if he, taxpayer A, did not contribute as much as onehalf the support of his father and mother during the year.

Taxpayer A in the example would take the $2,000 medical deduction instead of the standard deduction. As a result, his Federal income taxes would be 10.5 percent of the remainder of his earnings after contributing the $2,000 in medical expenses to his parents. This would compare favorably with the 11 percent of taxpayer B shown just above.

We would urge the Congress to amend the tax code as proposed in the preceding paragraph.

Now I would like to comment on two recommendations for the committee of a different nature.

Under existing tax law, the taxpayer is not permitted to claim an exemption for his older relative if the older relative's gross income is more than $600 for the year, even if his adjusted gross income is less than $600.

Activities such as farming, businesses, and renting of property produce income only after an outlay of expenses. Since upkeep, maintenance, and other expenses determine the net amount available for use of the owner, gross income is not a fair measure, we believe, of dependency of the older relative.

The taxpayer with an older relative whose income is from dividends, interest, or wages receives favored tax treatment under the present law, since gross income and adjusted gross income are much more likely to be the same than is the case in which the income is from rents, farming, or businesses generally.

The discrimination does exist and should be eliminated. We, therefore, urge as our recommendation No. 4 that the Congress amend the Revenue Code to relate the income test for claiming exemptions to adjusted gross income rather than to gross income, as is required under existing law.

Recommendation No. 5: We believe that Congress should establish by law a special savings bond for the specific use of taxpayers who may wish to assure a specified interest income for an older relative, without granting away the title of ownership of the bond itself.

Such a bond, designed to serve a specific need, would have the following characteristics: (1) be redeemable by the owner at his decision; and (2) interest would be paid to the older relative and taxable to him, and not to the taxpayer owner.

Establishment and administration of this proposal would seem to be relatively simple in comparison with some of the alternatives under study as methods of rewarding taxpayers for their contribution to older relatives.

As a conclusion to these comments, we believe that tax justice and equity to both the taxpayer under age 65 and his dependent relatives over 65 should be subjects for careful study and early action by committees of the Congress.

At the same time, we who represent NRTA and AARP wish to take this opportunity to say to your committee that the major and overriding need of a majority of older Americans is simply more spendable income. For several millions of older people the problem

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