entitlement program grants, cost about $45 billion per year.

Even a ten

percent reduction of these programs would save $4.5 billion annually.

To make the budget cuts more fair, Congress should also make spending cuts in harmful programs, overgenerous programs, and subsidies to business and the wealthy. Many of these reductions would have to be made in programs that are currently considered "sacred cows." But Congress must act immediately on these "sacred cows" if we are to make genuine progress on reducing the federal budget deficit. What follows is a sampling, not an exhaustive list, of programs that ought to disappear as soon as possible.

Congress ought to immediately repeal the Davis-Bacon Act. This monument to big labor costs taxpayers billions of dollars by inflating federal construction costs. Under the Davis-Bacon Act, construction projects undertaken with federal funds must pay "prevailing wages." Of course, prevailing wages are defined in such a way as to force payment of nearly the highest wages in the area. Absent Davis-Bacon, contractors would of course have to pay prevailing Otherwise, no one would work for them. This requirement also serves to raise unemployment, because workers must be paid more under the Davis-Bacon Act provisions, thus fewer workers are hired.

wages.

Subsidies to business and commerce should be eliminated. The Congressional Budget Office estimates that on-budget outlays for business subsidies, not including agriculture subsidies, are approximately $7 billion.

Congress should begin by abolishing subsidies for the maritime industry, which cost over $400 million per year. These subsidies line the pockets of American shipbuilders, ship operators, and union sailors. According to the Congressional Budget Office, American shippers currently have operating expenses that are 50 percent more than foreign carriers. At a time when many American union members have to take pay cuts to compete in a newly deregulated

market or to meet foreign competition, it's unfair that the federal government continues to subsidize inefficiency in the maritime industry.

Other actions should be taken to reduce Export-Import Bank aid, curb Small Business Administration loans, Rural Electrification Administration loans and loan guarantees, and Farmers Home Administration loan subsidies.

Congress should take steps to abolish agriculture subsidies as soon as possible. In fiscal year 1983, farm price supports accounted for approximately 10 percent of the $200 billion budget deficit. Congress could reduce these subsidies by cutting the price support levels by one-third per year so that they are eliminated within a three-year period. Better yet, it could abolish them overnight.

The federal government looks foolish paying farmers not to produce. Already cartoonists and satirists are urging Congress to pay them not to work. A serious deficit reduction must stop this policy.

In recent years many people have complained about how the federal government worked at cross purposes concerning cigarette smoking. It was spending money encouraging people not to smoke cigarettes while subsidizing the production of tobacco.

A similar, more reprehensible situation occurs on an even larger scale with other agriculture programs. The federal government is paying farmers not to produce food while giving money to people so they can afford to buy food. Other federal policies driving up staple food prices make the deficit worse, and make it more expensive for consumers to purchase food.

Procedural Reforms

The tendency for government to take an ever greater share of the national income is common to many countries with representative government. In spite

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government spending.

of many promises to the contrary, no leader has succeeded in actually reducing There is a reason for this uniform failure. It is not a coincidence. A distinct political bias, an institutional defect, exists in our system in favor of deficit financing and excessive spending.

This bias can only be corrected by a constitutional amendment limiting deficits and taxes such as S.J. Res. 5, the Balanced Budget-Tax Limitation Amendment. This amendment passed the U.S. Senate by a 69 to 31 vote last

August.

Through the efforts of the National Taxpayers Union, 32 of the required 34 state legislatures have made application to Congress to call a limited constitutional convention for the sole purpose of drafting a balanced federal budget amendment. In view of the record federal budget deficits and Congress's continued reluctance to approve the Balanced Budget-Tax Limitation Amendment, I am confident that we will be able to obtain the final two states needed for

action within the next 14 to 15 months.

Passage of this amendment is critical if we are to restore long-term federal fiscal responsibility.

In summary, Congress must take a new look at all federal spending programs. On the surface, many of these programs appear to be good. But the proper question which Congress should now ask is "can we afford this program now?"

Unless strong actions are taken to curtail spending, federal budget deficits will continue to grow.

The CHAIRMAN. Well, I certainly share your view on tax indexing. It seems to me that ought to be about the best thing you could tell your workers-if there is a cost-of-living adjustment you don't get a tax increase. I have always thought that unions really ought to support indexing. Is there any shift in your position?

Mr. CANTOR. No, sir. I think from the day it was proposed we have been opposed to it.

There are several aspects of our objections. First, I remember the days of "fiscal dividends." But, now we have structural deficits.

Also, I think a key factor here is that indexing does put an end to automatic stabilizer in the economy. When the economy would overheat every once in awhile, the tax structure would automatically come in and cool things off.

Now, I think we have a situation where we are already relying much, much too much on monetary policy for economic management. Indexing would increase such reliance even more.

Also, there is a big difference between indexing wages by cost-ofliving indexes and indexing taxes because you are trying to preserve "real" purchasing power, not "real" tax burdens.

So what happens when you index the tax structure is that it really increases the purchasing power of the higher income groups much more than it increases the purchasing power of lower income groups, even though in percentage terms of tax burdens the result is different. I think it is an entirely different issue, and I think workers are better off without an indexed tax structure. And I think, as important at this point is the fact that indexing has not gone into effect yet. That is something going for repealing it right now. I think all here at least agree to a need for deficit reduction. What better way of doing it than to have something repealed that hasn't already taken effect?

As I understand the figures, there is a lot of money to be saved in not letting indexing go into effect. Now, that is a purely pragmatic advantage.

The CHAIRMAN. Well, we had a proposal from Senator Wallop, Senator Danforth, and Senator Boren to reduce the indexing but also the COLA to CPI-minus-3. I guess on the House side Carroll Campbell and Jim Jones had a CPI-minus-2. But I assume you are opposed to the COLA side of that one.

Mr. CANTOR. Again, Senator, as Mr. Hutton pointed out, there is a kind of logic-a King Solomon's logic-we will cut the baby in half. I don't understand the logic to a dollar-for-dollar linkage of budget cuts with tax cuts. It sounds like a logical symmetry, but it doesn't make sense to me.

The CHAIRMAN. Well, it's probably not going to go anywhere, because there is opposition from the President and the Speaker on that.

Mr. CANTOR. A COLA on a benefit program, and a cost-of-living on taxes, to me, are entirely different things.

The CHAIRMAN. What about Mr. Keating. In the package we have been looking at—and again, I don't suggest it is going to be the one that is going to pass this committee, if any passes this committee-according to our figures we have about $13 billion in loophole closings, compliance, and eliminating abuses. The Treasury es

timates it to be even $18 billion. You don't have any objection to closing tax loopholes, do you?

Mr. KEATING. Well, as we have said in previous testimony to the committee, we would rather see the revenues used from loophole closings to reduce tax rates across the board, so that we not only attack loopholes but make the loopholes less valuable in the future. The CHAIRMAN. Right.

Well, I don't disagree with base broadening. I think that's what we have in mind, to try to continue to lower the marginal rates. But at the same time, if there are abuses in the code, they ought to be corrected just as we correct abuses, or try to, in Pentagon spending or food stamps or anything else.

Mr. KEATING. Well, I think if Congress acts to reinterpret the law or clarify the law, that's one thing. But I think some deductions, especially those on schedules A, B, and C for individual taxpayers, are quite valuable to them in keeping their tax burden from rising faster than inflation, which it has been doing over the last 15 years.

So I am not supportive in general of closing loopholes as a method of raising revenue.

I would say, though, that if Congress does raise revenue, that is probably the least harmful way to do it.

The CHAIRMAN. Well, in my view it is a positive thing to do. I mean, most working people can't shelter their income; but a lot of people in upper income areas and many big businesses can work it around so that they don't pay any tax at all. And that's not a fair system.

I think everybody ought to be on sort of a level playing field. These are recommendations of the administration, so it is not Congress trying to package up something to frustrate the administration or anyone else.

But some loopholes-it all depends on how you determine them. My loophole might be your tax incentive, or whatever.

I guess the question I would ask is, one would do nothing but spending cuts, and the other one would essentially have a tax package. But you both want to reduce the deficit. We had the Chamber of Commerce yesterday, who has pretty much the same view; or at least the person who was here who said he represented the chamber had pretty much the same view as Mr. Keating: Get spending cuts, but don't do anything on the tax side.

Now, you all know neither side has enough votes to have their way. There are not enough votes here to cut spending and close loopholes to get the deficit down, and there are not enough votes to raise taxes. Now, is it better for organized labor to do nothing than try to work out some compromise? How many people are going to lose their jobs if the economy starts to deteriorate in 1985? Isn't it better to get a little of each? Otherwise, Mondale may have to do it in 1985, if he is your candidate.

Mr. CANTOR. I think you know very well that we have always been willing to compromise.

The CHAIRMAN. Well, you have. I have worked with you on a number of areas.

Mr. CANTOR. But quite frankly, at this juncture, the equity issue is, fundamentally, Mr. Chairman, the 1981 Tax Act. I think most