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 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. We 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 decade. 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. The consequences of reduced productivity growth for our standard of living over the long run are great. As an example, in 1981 the American economy produced approximately $12,780 worth of output per capita. Had productivity growth continued at the 1948-67 rate for the following fourteen years, output per capita would have reached $16,128 in 1981, 26 percent higher than its actual value. There are many causes for the slowdown in productivity growth since 1965. Higher energy prices, regulatory changes, lagging research and development spending, reduced opportunities for technical innovation, the changing composition of the labor force and changing worker attitudes, as well as reduced capital formation, are responsible for the decline in productivity growth. Many of these causes of the slowdown cannot be reversed through government policies. Certainly, the government is limited in what it can do to influence cultural attitudes toward work. Likewise, the government could not have done much to offset the rise in energy prices. Changing the rate of capital formation may well be the principal way in which Federal economic policy can affect productivity growth. Tax policy is a primary vehicle through which Federal policies can dramatically affect capital formation. The individual income tax extracts a portion of the total return to the investor and the corporate tax reduces the return that corporations receive on new investments. As a consequence of this tax-induced divergence between private and total return to investment, too little investment takes place. This suggests that measures both to reduce the anti-capital tax bias and to increase incentives for saving and investment are needed. Results of Recent Cuts in Capital Gains Taxes Prior to 1969, there was a long period of relatively favorable long-term capital gains tax treatment; in 1969, however, major increases in capital gains taxes were considered and enacted. Throughout the 1969-1977 period, additional tax changes were made which were unfavorable for investors. A dramatic shift toward pro-capital formation tax policy occurred in 1978 when Congress reduced the excessive taxation of capital gains which was inhibiting saving and investment. That year, the maximum capital gains tax was cut from 49 percent for individuals (including the interaction of the old maximum and minimum income taxes) and about 31 percent for corporations (including the minimum tax) to 28 percent for both. The 1978 capital gains tax reduction was the first of a series of changes which progressively reduced tax rates on individual capital. Other important steps include the reduction in the top rate on investment income from 70 to 50 percent, which eliminated the distinction between earned and unearned income, the expansion of Individual Retirement Accounts, the lowering of estate taxes, and the 25 percent reduction in marginal income tax rates in 1981-83 which also |