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In view of the widespread support for indexing, and given its obvious benefits, it is difficult to understand how it can be opposed on economic grounds. ERTA was approved by the U.S. House of Representatives on July 29, 1981 by a decisive vote of 238-195, with 48 democrats voting for the President's bill. Yet today, just two years later and 17 months before indexing is to take effect, it is facing strenuous opposition.

USBIC believes that the basis for efforts to repeal indexing,
and resistance to the idea of extending indexing to capital gains,
is an unwillingness to accept fiscal discipline by the Congress.

Indexing is a means to ensure that real tax revenues are consistent with real economic growth. To the extent that nominal capital gains represent simple inflation in asset values, no additional real capital is created and taxation of those gains erodes our capital base. We must index the basis of productive assets so that the inflation component will not be subject to tax.

If revenues to the U.S. Treasury are restricted to the actual growth in the nation's economy, rather than the fictional growth attributable to inflation, the beneficiaries of inflation, Congress and the carnival of special interests tied to entitlements and other largesse, would become accountable to the tax payer once again. It is no wonder that the opponents of indexing resort to the red herring of larger budget deficits between 1985-1988. (claims have been made of an additional $90 billion in the deficit for this period if indexing goes into effect)

Doomsday talk of higher and higher deficits is the first tactic of the tax-and-spend advocate. Big deficits will indeed be a serious problem for the U.S. economy for at least the rest of this decade, but deficits happen not because the government fails to collect sufficient revenue, but because it continues to spend too much.

Even at that, deficits are directly related to economic growth. We have just seen our economy grow at a rate of 8.7% for the second quarter of 1983, the strongest pace since the 1st quarter of 1981. The Office of Management & Budget has lowered its projections of the deficit for fiscal 1984, from $190.2 billion to $179.7 billion, as well as for the out-years through 1988.

USBIC believes that real economic growth is the best hope for
ameliorating the deep and traumatic economic problems caused
by the recession of 1981-82. We believe that real growth can
only be sustained if consumers, producers, and investors are
confident that the labor they perform and the risks they take,
in short, enterprise, will not be penalized by the hidden tax of

Tax reduction, the centerpiece of ERTA, is the only effective
means available to the American people by which to impress upon
Congress the need to reduce federal spending. Without ERTA's
indexing feature, and without the extension of this approach
to capital gains, federal revenues will continue to increase
from bracket creep, notwithstanding the recent tax reduction
features enacted by Congress. This is the legacy of inflation,
as well as the greatest economic threat for America's future.

USBIC concurs with Senator Armstrong that the Consumer Price Index is an unreliable measure of inflation in its present form. There is a consensus among economists that reference to the GNP-deflator would be a more accurate index.

USBIC, therefore, specifically endorses the indexation of the tax on capital gains to the GNP-deflator.

We commend Senator Armstrong and other members of this Committee for their iniative in this area of economic policy and thank you for inviting USBIC to express the views of its members in this forum.


Mr. BLOOMFIELD. Mr. Chairman and members of the committee, I am Mark Bloomfield, the executive director of the American Council for Capital Formation. I am pleased to be here today to urge enactment of S. 1600 introduced by Senator Armstrong, which would index the basis of capital gains for inflation and address a very real problem in the taxation of capital, that is, the mismeasurement resulting from inflation.

Mr. Chairman, tax policy is a primary vehicle through which the Government can dramatically affect capital formation, the saving and investment necessary to stimulate productivity growth, restore real income gains, and provide for job creation.

Congress took a dramatic step forward in procapital formation tax policy in 1978 when it reduced the excessive taxation of capital gains. Skeptics at that time said it would do little for capital formation and it would do much to erode Government revenues. On both counts they have been proved dead wrong. First, the economics. We have two historical periods to compare. There is the period 1969 to 1977, where we had increasingly higher capital gains and a bad investment climate. There is the period subsequent to the 1978 capital gains tax cut to the present, where we had lower capital gains and a better investment climate. What happened? In the latter period, venture capital, new stock offerings, the value of corporate equities blossomed. Why? We again restored the reward for risk taking and investment.

Now what about Uncle Sam's coffers? The Government predicted in 1978 that there would be a $2 billion raid on the Treasury. What happened? After 1978 when tax rates were reduced, revenues went up. Actual taxes paid on capital gains were up by more than $2 billion in 1979, the first year of the lower capital gains rate. Up again in 1980, and in 1981, actual revenues from capital gains were still substantially higher than in 1978, the last year of the old lower


Economists, however, also compare actual revenues with what would have happened if the tax laws had not been changed. In a January 1983 paper commissioned by the ACCF: Center for Policy Research prepared by Dr. Jerry Auten, a former Treasury consultant on capital gains, capital gains taxes actually paid under the new law were compared with taxes that would have been paid under the old law. What did Dr. Auten find? He found that in 1979 revenues were more than $1 billion higher; in 1980, almost $2 billion higher; and in 1981, again over $1 billion higher than they would have been under the higher old capital gains rate. Given the benefits to capital formation also to Uncle Sam's Treasury, much more needs to be done. We still tax capital gains much more harshly than our major industrial rivals. Much needs to be done, including S. 1600. S. 1600 is long overdue because it would insure that tax would be paid on real, not inflated, capital gains.

Dr. Martin Feldstein, the current Chairman of the Council of Economic Advisers, in a 1978 study, found that in 1973 Americans actually paid taxes on more than $4.5 billion of nominal gains. But

after adjusting the nominal gains for inflation, these Americans paid taxes on nearly $1 billion of losses. In his 1983 study, Dr. Jerry Auten found that taxpayers paid taxes on $25 billion of nominal gains from stock transactions between 1971 and 1975. But after adjusting for inflation, these taxpayers paid taxes on $420 million of losses, with the problem most acute for taxpayers in lowor middle-income categories. Enactment of S. 1600 is good tax policy for three reasons. First, at a cost of very little additional complexity, real tax rates would be in line with intended statutory ones. Second, while there is good news on the inflation front, the battle against inflation is far from over. And inflation at even modest levels causes capital gains to be mismeasured. And, third, since the critics were dead wrong about the revenue impact of the 1978 capital gains tax cut, I suggest that the revenue numbers that were cited earlier by the Treasury Department could also be wrong, and that S. 1600 could raise revenues rather than lose them.

I would also like to add that S. 1600 is only one of a number of measures we support to move our country in the direction of a zero tax on capital gains. Other items to be considered include reducing the holding period, bringing the corporate rate down to the maximum rate for individuals, and, finally, reducing rates for both individuals and corporations further.

Senator ARMSTRONG. Thank you very much. It was an especially interesting statement and I am grateful for the statistical documentation that you have provided. I have underlined some portions of your statement that I am going to try to bring to my colleagues' attention as forcefully as I can.

[The prepared statement of Mr. Bloomfield follows:]

Statement of Mark A. Bloomfield, Esq., Executive Director, American Council for Capital Formation before the

Subcommittee on Taxation and Debt Management

of the

Senate Committee on Finance

August 1, 1983

Mr. Chairman, and Members of the Committee, my name is

Mark A. Bloomfield.

I am the Executive Director of the

American Council for Capital Formation. I appreciate the opportunity to present the views of the American Council on S. 1600. Introduced by Senator William L. Armstrong, S. 1600 would index the basis of certain assets, primarily corporate stock and real property, for inflation.

The American Council for Capital Formation is an association of individuals, businesses, and associations united in their support of government policies to encourage the productive capital formation needed to sustain economic growth, reduce inflation, restore productivity gains, and create jobs for an expanding American work force.

Mr. Chairman, officers of the American Council have appeared often before your Committee over the years as you studied legislation affecting saving and investment.

applaud the efforts of this Committee in bringing to the attention of your Congressional colleagues and the American public the critical relationship between capital formation and economic growth. This Committee has played a leadership role in the development of legislation to set the stage for renewed growth in productivity, real income gains, and expanded job opportunities..


We are pleased to appear before you again in support of legislation we deem vital to capital formation. S. 1600, introduced in the first session of the 98th Congress by Senator Armstrong, and its companion bill in the House of Representatives, H. R. 3651, introduced by Congressman Bill Archer, address a very real and continuing problem in the taxation of capital--the mismeasurement resulting from inflation. By indexing the basis of certain capital assets, S. 1600 and H. R. 3651 provide a solution to this problem in an equitable and efficient manner.

The Need for Greater Capital Formation

Past government policies, especially tax policy, have discriminated in favor of consumption and against saving and investment, thus slowing the rate of capital formation. In addition, since the pretax return to capital investment exceeds the aftertax return, the level of capital formation is lower than it would otherwise be. Yet, the experts tell us that increased capital formation can reverse some of the slowdown in productivity experienced in the United States over the last


Productivity growth fell rapidly during the 1970's. Between 1948 and 1967, the growth rate of productivity (as measured by output per hour in the private business economy) was 3.1 percent, compared to 2.3 percent between 1967 and 1973 and only 0.3 percent between 1973 and 1981.

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