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PROPOSED TAX CHANGES-FAMILY OF 4-2 EARNERS WITH ITEMIZED DEDUCTIONS OF 16 PCT OF ADJUSTED GROSS

INCOME

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1 Based on a married couple with 2 dependents, both under 65, whose income consists of the salaries of both spouses evenly divided. If standard deduction exceeds itemized deduction, family uses standard deduction.

? Does not include earned income credit; with credit, figures would be as follows:

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* Employee's share of FICA contributions only. Includes eflects of proposed rate nicrease from 5.85 pct to 6.15 pct eflective Jan. 1, 1977. Also, it is projected that the ceiling on taxable wages will rise to $16,500 in 1977. The 1975 level was $14,100.

increases for households at these income levels are at a maximum because, aside from the general rate increase, they are aflected by the fact that additional wages will be subject to tax.

Note. - Office of the Secretary of the Treasury, Office of Tax Analysis, Feb. 9, 1976.

Secretary Simon. You know people tend to link this arithmetically and it is the right thing to do. If I raise social security taxes and propose a cut in general taxes at the same time, the question is there an offset and what is the offset. There is a slight net plus obviously.

But, really it is two separate points. We have economic policy. Part of our economic policy relates to a cut in Government spending and a reduction in taxes simultaneously. That is going to be stimulative because the budget is still stimulative; and, of course, a tax reduction does add stimulus to the economy.

But No. 2, and importantly as it relates to social security, this is not fiscal or economic policy. The President has proposed an increase in social security taxes on the employer and employee to attempt to take care of the fiscal integrity of the social security trust fund of the social security system. This isn't the final answer let me assure you of this. All we have done with this is subtract A from B. In other words, we have bought some time in raising these taxes. It is just going to postpone the day when the social security trust fund is going to run out but we have to design a permanent solution to this.

Hearings have started this week on how we should fund the social security system, and I hear the familiar cry for general revenues. I frankly am absolutely appalled by this because in my judgment gen

eral revenues should never--and never is a long time-in any circumstance be relied upon to finance the social security system. Social security is a purchased insurance program and not a welfare program. The financing of it has to preserve this vital characteristic.

Where are these general revenues ? This just guarantees massive debts as far as the eye can see if we ever get pulled into that trap. So let's buy this time and then design the system that is permanently going to be financed and not all of a sudden come to another crisis, as we so often do in government, and then make bad decisions under pressure.

Representative HECKLER. As you probably know, Mr. Secretary, there are over 100 cosponsors on the House side of the bill to reform the funding of social security on a one-third employer, one-third employee, and one-third general revenue basis. Now have you done or are you presently doing some studies as to what the impact on the Treasury would be of that proposal because it is not an academic idea. It is gathering momentum on the House side.

Secretary SIMON. Well, is is always easy to go to the Treasury Department and use their general revenues. The fact that we have no general surplus revenues in the Treasury today doesn't seem to bother anybody in the Government. We are not talking about surplus revenues; we are talking about deficits to finance the social security system. The social security system was based on an earned right principle. Now, if you want to dismiss the earned right principle and turn the system into a welfare program, that is up to Congress. I suggest the terrible temptation of continually raising benefits, as has been done in the past, will continue in the future and end up providing misery to the very people we are trying to help; namely, the retirees and all the rest on fixed incomes through the insidious and cruel tax of inflation.

And that one-third share doesn't fool me either. Maybe it will start at one-third but it will not end up that way. It will grow.

Representative HECKLER. Nonetheless, I think it would be important for the Congress to have some facts and analysis of what the impact would be.

Secretary SIMON. Oh, I assure you when I'm called to testify, which I assume will be right after David Matthews, I will have a response to this that will be slightly negative.

Representative HECKLER. One of the problems that I see on the question of social security is the fact that there seems to be some controversy about the urgency of the crisis. The JEC staff estimated that given the economic assumptions of the budget, the surplus and the trust fund, although declining, is estimated to be $23 billion in 1981 under current law.

Secretary SIMON. Well now, can I stop you there and ask-
Representative HECKLER. If I might just ask a question?
Secretary SIMON. OK.

Representative HECKLER. Why should the Congress thus embark on changes which would increase the surplus to $68 billion in 1981 ?

Secretary SIMON. Right now I think my numbers are accurate but I don't have the social security stuff with me-our trust fund is about $44 billion. In 1981 it is projected at $23 billion, that is only 2 months—that is 2 months' reserve.

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Now, if we have another recession and we are going to have another recession someday—that 2 months will be depleted extremely rapidly. And that is what I am talking about the crisis when it occurs.

I don't think, Congresswoman Heckler, you would disagree with me, or any other of the people that are making studies like this, that the trust fund is going to run out. We may disagree on the day. Whether it is 1985 or 1986 or 1981 in my mind isn't terribly important. The actual date just lends to the urgency of doing something about it now.

But then we must also look at the longer run. We must look at a time when we are going to have more people retired. We must also consider the assumptions people are making on the fertility rate in the future and its impact on the system. In other words, we must look at how many people are going to be working in our economy to support these retirees, to fulfill these promises that we continue to make to the people. We must also look at what the real earnings increase is going to be. And I would hope that all of these questions are going to be asked very searchingly by the Members of this Congress because I think we have real problems as we look ahead 25 and 50 years. I know what folly that is, Representative Heckler, suggesting we look ahead like that into the long term because we seldom do.

Representative HECKLER. I understand my time is up, Mr. Secretary, but I will say that young people in my district are now questioning whether they should contribute to the social security fund, because of the fear of having the fund absolutely bankrupt by the time they would be able to draw benefits. That fear is growing in acceptance to the point where there is almost an attitude of panic about this question.

Secretary SIMON. Well, I have had young people ask me that question, Congresswoman Heckler, and I tell them I believe that, as far as social security and the future is concerned, that we will act with uncharacteristic wisdom and put the system on a sound financial basis in the future. Representative HECKLER. Thank you. Representative Long. Thank you very much. Senator Proxmire. Senator PROXMIRE. Mr. Secretary, we welcome your statement. I am glad you got some strong documentation here where you say “total government spending averaged about 35 percent of our GNP in 1975, compared with 27 percent in 1960 and 21 percent in 1950." And then you document that with charts and you point out the enormous increase in personnel working for the Federal Government.

Secretary Simon. And State and local governments, too.

Senator ProxMIRE. Yes, the State and local increase has been the most spectacular and one of the biggest reasons for this great increase that you point to. It is good to have this brought up to date. The figures I have seen go back to 1930 where, of course, the increase is even more spectacular. I think at that time, 10 percent of our GNP was Government and now it is 35. The difficulty is the momentum.

Now, I think this is very sound. I am glad you are hitting away at it. The problem I have here, however, is that if the administration is going to take the position that we have to hold down the increases in Federal spending—and I think it is a sound position—then it

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seems to me they should come forward with a program to encourage the private sector to expand and to expand vigorously. Just yesterday, the Chairman of the Federal Reserve Board said he was going to lower his monetary goals to 412 percent. And of course in the last 6 months, the increase in the monetary supply has been low. It is true that interest rates have gone down, but it seems to me that if we are going to have the Federal Government follow a policy of eliminating jobs, or of at least not providing jobs for people who are out of work, then the only way you can make this work realistically is to have a program that really enables the private sector to take off in an effective way. We must have a housing program, a monetary program, as well as tax incentives. I don't see that in the administration's agenda, and I don't see that in your statement, although, as I say, it is a very good statement and a very responsible statement. But, I think your statement indicates we are going to idle along at an unacceptable pace. You know as well as I do, if that happens, two things are likely to result: One is that this Congress is going to increase spending sharply and override the Presidential vetoes; and the second thing is we are going to have a President in 1977 who is not going to fool around and we are really going to have a Federal spending takeoff.

Secretary Simon. Let me comment on that. Of course, that is where the debate is, namely, are we doing enough and what is enough? And I really think that we have provided an extensive stimulus already. Again, when we look back to where we were a year ago, we see that. We had Federal outlays, which have been very stimulative, Federal outlays have grown 40 percent in the last 2 fiscal years.

Senator PROXMIRE. That is exactly the wrong course and you should agree.

Secretary SIMON. Oh, I surely do.
Senator PROXMIRE. You are the main spokesman on that.
Secretary Simon. Yes.

Senator PROXMIRE. I am talking about the other side, though. Where is that?

Secretary SIMON. All right, let's talk for a moment about the tax proposals as far as stimulating investment. We have $8 billion for stimulating investment and $20 billion for individuals. That is $28 billion for capital formation and stimulating the economy. We have proposed a permanent investment tax credit at 10 percent. Our utility proposals would assist building in this critical area, and also put people in the construction industry back to work. But, as to the foundation of the tax proposals that we made, in my opinion the most dramatic was the integration of corporate and personal taxes. Most other industrial countries in the world are already doing that and it is time for us to catch up. If we could enact those programs, Senator Proxmire, in my opinion, we would have a private sector that indeed would be stimulated sufficiently to take care of our goals in the future.

Senator PROXMIRE. Well, I appreciate the confidence

Secretary SIMON. Also, I am a believer in markets. And I must admit, and maybe you will take some exception to this, markets are really not markets; they are not a Federal force; they are people.

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There are millions of individual people making decisions and deciding that things are going to be better or things are going to be worse. When you take a look at the recent performance, both in the interest rate sector as well as the stock market and the ability of companies to finance in the equity sector, which has been nonexistent for such a long period of time, there is growing confidence—and I read an article which I must admittedly agree with, and I read it yesterday in one of the newspapers—that the investors now believe that we are not going to, or beginning to believe, that we are not going to overstimulate; that we are going to have a moderate recovery that is going to be lasting; and that we are not going to make the mistakes we made in the last 10 years twice. That gives me some confidence in believing we have the right mix of economic policies, but I can see where there is cause for disagreement. Because, boy, I agree with you—you know, as Irving Kristol said, the beginning of wisdom is to know that the future is unknowable.

Senator PROXMIRE. You see, the best tax incentive programs you can conceive are not going to get any really vigorous expansion in plant and equipment unless the market is there, unless it is there. You can eliminate the corporation income tax and you are still not going to get an increase in business investment in plant and equipment unless they are convinced that they are going to have an expansion in sales. I don't see that in the administration's program.

Secretary Simon. Well, of course

Senator PROXMIRE. You say you are going to get a reasonable expansion in housing. We got that from Mr. Lynn, who estimated 1.75 million housing starts by the end of the year. That is very optimistic. The experts that appeared before our committee don't go that high. And even if they got that high, it would be pitifully inadequate. Our goal is for 2.6 million housing starts a year. So that is far short of what we ought to have.

Housing is an area where we can have 2 man-years of work for every housing start. We need 1 million additional housing starts now. We need that in the private sector. A very, very modest investment on the part of the Federal Government can start this moving in a big way, but there is no program to do it.

Secretary Simon. You know, when you say there is no program-
Senator PROXMIRE. There isn't a program to do that.

Secretary SIMON. In fiscal year 1976, farm and residential credits supplied by the Federal Government will be about $36 billion of mortgage credit. That is a lot of

Senator PROXMIRE. What do you mean supplied by the Federal Government ?

Secretary Simon. Well, farm credit and mortgage credit, FHA, GNMA, FNMA, VA, Home Loan, and all of the other programs.

Senator PROXMIRE. Oh, sure, there is insurance, but these aren't programs to get over the tough stubborn fact that when the typical family goes out to borrow money so they can buy a home, their mortgage rate is 9 percent, plus.

Secretary SIMON. I agree with you.

Senator PROXMIRE. And that is what stops them. If the mortgage rate was 7 percent, they would buy that home and put two people to work for a year. You multiply that by 1 million, and you've got

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