soars again.

Individual Americans do not benefit from the phantom profits that result from inflation. They have no real increase in their savings or their purchasing power. These illusory profits do not create jobs or wealth. They do increase government revenues while reducing the availability of private capital. They effectively discourage individuals and corporations from committing to long-term investments that are of economic benefit to our nation as a whole.

The effects of inflation-based taxation is insidious. It creates monumental differences in computing a person's real income. An individual who buys an asset for $1,000 and holds it for 10 years, at an annual inflation rate of 7 percent, would realize 100 percent compounded inflation over that 10 years, and if he sold it for $2,000 he would have no real increase in his purchasing power. Yet, he would be taxed on $1,000 of capital gains. Another individual who bought a piece of property for $1,000 and held it for 1 year and 1 day and sold it for $2,000 would be taxed also on a $1,000 capital gain but, again assuming 7 percent inflation, his real income growth would be 93 percent. Our current system of computing capital gains allows him to be taxed on the same basis as the investor who had no real income and had committed his investment for 10 times longer. Where is the incentive for long-term investment? Certainly there is none in this type of situation. The constant plea that every

Member of Congress consistently hears from the business community (and particularly the small business community) is for long term

investment capital.

Capital asset indexing legislation will not protect the public from inflation but it will restore some sanity, consistency and equity to our tax laws, thus continuing the efforts that have been made in the last two years toward these goals. It will protect Americans from government taxation of inflation.

As we strive towards the dual goals of budget reduction and tax reform in this Congress, any tax legislation must be judged by its impact on the government's balance sheet in addition to its basic merit. I want once again to emphasize that we are proposing a purely prospective measure in capital asset indexing. It will not adversely affect tax revenues in current budget projections, particularly if our inflation rate continues at its present low levels. If we are ever going to correct the inequities that inflation wreaks on our tax policies, we should take advantage

of this period of 3 to 4 percent inflation. It will be much harder to act if inflation rates are higher as we have seen

in prior years when this idea was debated.

Capital asset indexing can have a major economic impact in terms of capital formation. We need to act now to add it to the

arsenal of tax incentives that we have been putting into place to revitalize our economy and our nation.

Representative ARCHER. The Congress stood up at that time and acknowledged that the tax increases that were attributable to inflation were unfair to every American taxpayer by allowing their tax burden as a percentage of income to increase without an act of Congress. And I think, following up on the indexation of the individual tax rate, that it is now an appropriate time to carry out this historical beginning into full implementation by including capital asset indexing. This concept was introduced by myself in legislation in 1978, and for the first time, and on July 25 a bipartisan majority of the House Ways and Means Committee adopted and approved that legislation. It went to the floor of the House, and again on a bipartisan coalition basis as an equitable reform, it passed the House overwhelmingly. Unfortunately, it was deleted in the conference committee.

Mr. Chairman, the record should show that last year you passed similar legislation on the floor of the Senate, and you passed it overwhelmingly. Once again, unfortunately, it was eliminated in the conference committee. But the House has now acted and the Senate has now acted to approve this reform concept.

Capital gains indexing would be accomplished in both of our bills by permitting taxpayers to adjust the basis-the cost basis-of certain assets for inflation, using the GNP deflator. Indexing would be permitted for both corporate stock and real property. To provide uniformity with current capital gains tax treatment, it would exclude ordinary income assets, such as inventory, from indexation, and it would be applied only to sales and exchanges of the type of assets that are covered. It would not apply for the purpose of determining depreciation, cost depletion, or amortization. And I think that is important to understand because that would create another complexity. It also does not include debt because that would be a complexity that we believe we should not get into.

No attempt is made whatsoever to retroactively apply this capital asset indexing. I would like to do that, Mr. Chairman, because I think in equity it should be done so that we don't tax inflation. But from a revenue standpoint we recognize, both of us, that it has to be prospective. My bill would make it immediately applicable; yours would delay the prospectiveness until 1985. And I have no strong feelings about that, recognizing that it must be prospective. What we have before us at this time can really, in my opinion, be reduced to a plea for fairness and rationality in our tax laws. It is obvious to me that we have tried to do this over the years, and this is one area where we still have an opportunity to do a great deal more.

We are attempting to set a national policy that inflation will not be taxed, and that Government will not profit from the inflation which it causes and abets. There are no guarantees that inflation will not return, although it is at a very low level today. But we can guarantee that the ground rules would change if inflation soars again. Individual Americans do not benefit from the phantom profits that result from inflation.

I would like to cite an example. If an individual buys a capital asset-land or, say, corporate stock, for example-and pays a thousand dollars for it, and holds it for 10 years at a rate of inflation of 7 percent, compounded, that is 100 percent over 10 years. If that

individual then sells that asset for $2,000 10 years later, the amount of actual purchasing power the individual has is no different than he or she had 10 years earlier. And yet that individual has the pleasure of being able to pay capital gains tax on a thousand dollars of capital income; after paying the tax, being reduced to a position of less purchasing power than they had 10 years earli

er.

On the other hand, an individual could buy an asset for a thousand dollars, hold it for 1 year, and if they had been extremely sagacious in their investment, double their money, and pay the same tax that the individual who had held it for 10 years paid, and yet they would have a real gain because there was only 7 percent inflation during that 1 year. So in equity I think we need to iron this out between investors, and I think we need to encourage the investment in capital assets, particularly toward high risk type business and entrepreneurial businesses. And I believe that our legislation will go a long way in encouraging that.

In addition, I personally believe that we would free up the transfer of a lot of assets that are frozen because people do not want to sell them where they have large amounts of capital gains that have occurred over a period of 20 or 30 or 40 or 50 years. And that would be a very healthy thing for the market. It would increase the volume and, in my opinion, would actually have a great opportunity to increase the revenue rather than to reduce the revenue from capital gains.

If we are ever going to implement this type of legislation, it seems to me that now is the time to do it when we do have a low inflation rate. I think that it is an idea whose time has come. I compliment the chairman for his interest in this legislation, and I intend to pursue it to the greatest degree possible in the House.

I might add as sort of an addendum, Mr. Chairman, that what we are urging here is something that is being picked up in other parts of the world. Canada and England have recently gone in to similar types of approaches for the treatment of taxes on capital assets. And I think it is high time that this country also pursue this endeavor in the name of equity and reform. I thank the chairman. I will be glad to respond to any questions.

Senator ARMSTRONG. We are grateful to you not only for your statement this morning and for your additional observations, but I am especially grateful for the leadership you have shown on this issue. There are a lot of people in and out of the Congress who have been pushing the idea of indexing the capital gains basis, but I don't know of anyone who has been a more forceful advocate of this or who got out in front on the issue earlier than you did or who has done more to bring this concept to the floor.

Victor Hugo said that "greater than the threat of a mighty army is an idea whose time has come." I am hoping that the time has come for this. And the question that I would put to you is a very simple one: How do you evaluate the prospects that we might be able to get this through the House, either as a separate bill or if somehow I could hang it on as an amendment here in the Senate? What are the chances we could get the House to buy something like this?

Representative ARCHER. Well, Mr. Chairman, it seems to me that as far as getting it affirmatively adopted in the House, it probably would have to be part of some kind of packaged tax bill. If you are able to get it passed again in the Senate, inasmuch as the House has passed it-and we do have a record of support in the Ways and Means and on the floor of the House-I would hope that we would have a reasonable chance to hold it in the conference this time, particularly with the economic conditions that exist with low inflation today, and also with the reform concept that says to everyone, Democrats and Republicans, liberal and conservative, that this creates equity between different holders of capital assets.

Senator ARMSTRONG. Well as you know, my colleagues here on the Finance Committee love to put together packages, so we will try and send something that we can buy. And I again thank you for coming this morning.

Representative ARCHER. I wish you Godspeed, Mr. Chairman. Thank you for this opportunity.

Senator ARMSTRONG. Thank you very, very much. We appreciate your coming.

We are next very pleased to recognize and welcome Representative Barbara Mikulski, who I believe is going to testify on the mileage bill, of which she has been a strong advocate and a leading spokesman in the House. And, of course, we will be glad to hear her views on any of the measures that are before us this morning. But, Representative Mikulski, I am aware that you have been beating the drum for this charitable deduction issue in the House, so we are really pleased to have you here this morning and are looking forward to your testimony.

STATEMENT OF HON. BARBARA MIKULSKI, U.S.
REPRESENTATIVE, STATE OF MARYLAND

Representative MIKULSKI. Thank you very much, Senator. And I appreciate the chance of being able to testify in support of the bill, Senate 1579, which you have taken the leadership for here in the U.S. Senate.

As you know, what the legislation does is raise the mileage deduction that a volunteer now takes from approximately 9 cents a mile to 20 cents a mile, which in effect would be the same business deduction that business takes for its mileage deduction. There are those of us who believe that the business of being a volunteer is part of the business of America. Volunteers are a major part of our labor force. Together, they contribute over $100 billion to this Nation, measured in times and services. So when we think about the volunteers we have to think about the candy stripers, the scout leaders, the veterans, the Kiwanis Club, the people who deliver Meals on Wheels, the people who run telethons.

The volunteer's time cannot be measured and should not be measured in time and money alone. We must measure it in terms of the values that they bring to our society, a sense of caring, and a heartfelt motivation to make the world just a better place, the kinds of things you just can't do with your contract with the bureaucracy.