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Fifth, the new independent retirement accounts raise serious regulatory problems, for which we need to know the total financial situation of those who use or plan to use them. The effect of such accounts on capital markets and industrial expansion will depend on the alternative investments available to those who are starting or about to start such accounts.

Sixth, people's informatiton about the 1976 Tax Reform Act, whether they understand it, and their actual or expected adjustments to it, can warn us of problems in advance. In particular, the combination of Federal estate and gift taxes into a single tax and the raising of deductions to discourage the creation of complex trust forms change many of the rules. Yet, if there is a growing group of affluent households for whom these changes are salient, monitoring their effects before they show up in the estate tax returns is obviously important. Official records for some legal forms may be available, but we need to know their relationship with the total household situation and the extent to which many other households are on the verge of such changes. In spite of overwhelming support by economists for very high estate or inheritance taxes, such taxes have never been very effective in this country. Some information on the attitudes and behavior of people with accumulated wealth may tell us why.

Seventh, various complex forms of ownership, such as trusts, have developed and probably increased in numbers. They make official statistics inadequate for assessing changes in wealth distribution. Studies of official records of each type of trust or foundation do not get at their relationships with the whole picture, nor the motivation and purposes of those involved. Only direct interviewing of individuals is likely to reveal the way in which sophisticated methods of holding and transmitting wealth are developing and being planned. I might add that many people believe you only need to talk to experts, but our earlier studies indicate that although people listen to experts, they make up their own minds, and the experts don't always know what their own clients are planning to do.

Since Government policies have differential effects on different kinds of assets and debts, we need data on the distribution of components of net worth and the extent to which they appear together. Major components, such as home equity, savings deposits, common stock, real estate, debts, may differ greatly according to the income or age or total net worth of the households involved. Effects of tax policies, and our evaluation of them, will also depend on how the assets were accumulated and why. We know that households differ greatly even at the same income level in their rates and forms of saving, but what is crucial here is the process of saving over extended periods leading to accumulated wealth. It matters whether the accumulation came largely from savings out of earnings, capital gains, inheritance, or very profitable businesses. Interpretation of wealth distributions and understanding of the system depend on data so that we do not rely on unsupported currently rampant theories about the importance of background, luck, success, or thrift.

It should be apparent from this list of policy concerns and the related data needs, that we need more than the simple dollar facts on

the distribution of wealth and its components. We must know how it has been accumulated and by whom and what its owners plan to do with it. Indeed, a focus on precise wealth data is unwise because we probably cannot secure such data without prohibitive cost. One reason there have been no studies of wealth has been a feeling that the data collected would not be sufficiently precise. If you want a perfect set of data on the distribution of wealth, that is probably true. I think this fear is overdone, particularly because household knowledge of assets has been increased since our earlier methodological studies by the system of reports to IRS and to the recipients of the amounts of interest and dividends paid during the year, and by the vesting and information requirements of the recent Pension Reform Act. On the other hand, valuation of assets requires supplemental information from households because market prices have become so unstable. Data on current yield are also needed, since a falling price-earnings ratio is a precise indicator of loss only if the individual sells the stock.

There have been no comprehensive data on the distribution of household wealth since two studies in the early sixties, one by my own Survey Research Center, University of Michigan, and the other by the Federal Reserve Board. We at Michigan have collected survey data on some components since then, and the 1972-73 Consumer Expenditure Survey done by Census-BLS contains some asset and debt data in the context of a focus on accounting for income sources and uses. We have also asked some questions about people's expected retirement benefits, which are a special form of wealth and a rapidly changing one. And the Internal Revenue Service has distributional data-by tax returns rather than households-on income from assets— rent, interest, and dividends-which one might inflate to estimate asset values. You can blow up those incomes to make estimates of wealth, but such data would exclude unrealized capital gains, funds channeled into independent retirement accounts, accrued private and government pension rights, increased equity in owned homes, and earnings of trust funds. Separate estimates of these other components would not tell us whether they accrued to households with a large amount of other assets.

With the many recent changes in tax laws and in the behavior of financial markets and asset values, and with the combination of inflation and unemployment, people face many new situations, and we cannot infer their behavior from the past. We must find out what their experience has been and what they have done and will do about it.

Consequently, what is required is interview studies with households, supplemented by information from official sources with proper safeguards to assure privacy, confidentiality, and informed consent. We must have combined information about total household wealth, together with information about its sources and expected destinations, and even about the sources of information and advice of wealth holders. I might add, if we are concerned with wealth which is already fairly heavily concentrated, a proper sampling of households to do this study is going to require cooperation probably with the Internal Revenue Service, with proper safeguards and probably without revealing anything except this is a sample that has a larger than usual fraction of upper income people in it. It has been done three times in the past, but

given the concern with privacy, the committee would have to think its way through the proper safeguards and procedures to develop the sample so that households are oversampled in the optimal way.

As I said earlier, our early study of the affluent indicated, while they got advice from the experts, they alone made the decisions about management of their assets; so studies of experts are insufficient.

We are currently collecting some survey data on debts and financial assets for the Board of Governors of the Federal Reserve System, with a focus on the use of credit and the role of truth in lending. But those data will not speak to many of the policy issues I have mentioned. Studies of fiduciary returns and asset incomes from personal income tax returns and/or other institutional wealth holders can and should be done, but it is data on the distribution of wealth and its components among individual households that is most needed, together with information on the sources and expected uses of wealth, that will allow informed policy choices.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Morgan follows:]

PREPARED STATEMENT OF JAMES N. MORGAN

Informed policy decisions in many areas require better information than is available now about the sources of large accumulations of wealth, its distribution among households, and about the plans, purposes, expectations, and sources of information and advice of those who hold it.

The need is not from any voyeuristic interest in the lifestyle of the rich, but as an indication of how our economic system is working and how alternative policies in many areas may affect the system and various groups within it. More specifically:

1. The equity of our system is indicated not only by the distribution of income and income differences between groups, but also by the distribution of wealth. Even with substantial inflation and unemployment, progressive taxes and income maintenance programs have maintained an almost constant income distribution, but the same may not be true of the distribution of wealth. A fresh assessment of household wealth and its sources is needed. Gyrating asset values and inflation and high profits can lead to asset accumulations that never appear as taxable income of any household.

2. Individual retirement planning and the management of the social security system, will be affected by people's saving for retirement. Our earlier studies indicated a trend toward polarization into two groups, one with substantial accumulations most of whom expected to retire early, and the other with little beyond social security many of whom feared retirement and only would do so when compelled by poor health, compulsory retirement age, or obsolescence of job skills. We need to know whether this trend has continued. This requires knowing not only about financial assets but also about various accrued retirement rights.

3. There is reason to believe that a substantial number of households are well fixed for their own retirement and that some of them have accumulated already more assets than they could possibly expect to consume during the rest of their lives. What they do with these surplus assets during their lifetimes and where they bequeath their estates are important for capital markets, for monetary policy, for international monetary flows and the balance of payments, and for the creation of new inherited fortunes:

If these assets are used to fund ventures of younger entrepreneurs, they can increase the dynamic growth and flexibility of the country.

If they are used to speculate, they can increase the instability of various markets including the stock market and foreign exchange rates and make it more difficult to achieve proper fiscal and monetary stability.

If these funds flee abroad, our balance of payments can be affected. If they go into philanthropic ventures in large volume, the country should benefit. But the need for new policies to define philanthropy and its tax status is increased, if we want to encourage support for things that are

the distribution of wealth and its components. We must know how it has been accumulated and by whom and what its owners plan to do with it. Indeed, a focus on precise wealth data is unwise because we probably cannot secure such data without prohibitive cost. One reason there have been no studies of wealth has been a feeling that the data collected would not be sufficiently precise. If you want a perfect set of data on the distribution of wealth, that is probably true. I think this fear is overdone, particularly because household knowledge of assets has been increased since our earlier methodological studies by the system of reports to IRS and to the recipients of the amounts of interest and dividends paid during the year, and by the vesting and information requirements of the recent Pension Reform Act. On the other hand, valuation of assets requires supplemental information from households because market prices have become so unstable. Data on current yield are also needed, since a falling price-earnings ratio is a precise indicator of loss only if the individual sells the stock.

There have been no comprehensive data on the distribution of household wealth since two studies in the early sixties, one by my own Survey Research Center, University of Michigan, and the other by the Federal Reserve Board. We at Michigan have collected survey data on some components since then, and the 1972-73 Consumer Expenditure Survey done by Census-BLS contains some asset and debt data in the context of a focus on accounting for income sources and uses. We have also asked some questions about people's expected retirement benefits, which are a special form of wealth and a rapidly changing one. And the Internal Revenue Service has distributional data-by tax returns rather than households-on income from assetsrent, interest, and dividends which one might inflate to estimate. asset values. You can blow up those incomes to make estimates of wealth, but such data would exclude unrealized capital gains, funds channeled into independent retirement accounts, accrued private and government pension rights, increased equity in owned homes, and earnings of trust funds. Separate estimates of these other components would not tell us whether they accrued to households with a large amount of other assets.

With the many recent changes in tax laws and in the behavior of financial markets and asset values, and with the combination of inflation and unemployment, people face many new situations, and we cannot infer their behavior from the past. We must find out what their experience has been and what they have done and will do about it.

Consequently, what is required is interview studies with households, supplemented by information from official sources with proper safeguards to assure privacy, confidentiality, and informed consent. We must have combined information about total household wealth, together with information about its sources and expected destinations, and even about the sources of information and advice of wealth holders. I might add, if we are concerned with wealth which is already fairly heavily concentrated, a proper sampling of households to do this study is going to require cooperation probably with the Internal Revenue Service, with proper safeguards and probably without revealing anything except this is a sample that has a larger than usual fraction of upper income people in it. It has been done three times in the past, but

given the concern with privacy, the committee would have to think its way through the proper safeguards and procedures to develop the sample so that households are oversampled in the optimal way.

As I said earlier, our early study of the affluent indicated, while they got advice from the experts, they alone made the decisions about management of their assets; so studies of experts are insufficient.

We are currently collecting some survey data on debts and financial assets for the Board of Governors of the Federal Reserve System, with a focus on the use of credit and the role of truth in lending. But those data will not speak to many of the policy issues I have mentioned. Studies of fiduciary returns and asset incomes from personal income tax returns and/or other institutional wealth holders can and should be done, but it is data on the distribution of wealth and its components among individual households that is most needed, together with information on the sources and expected uses of wealth, that will allow informed policy choices.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Morgan follows:]

PREPARED STATEMENT OF JAMES N. MORGAN

Informed policy decisions in many areas require better information than is available now about the sources of large accumulations of wealth, its distribution among households, and about the plans, purposes, expectations, and sources of information and advice of those who hold it.

The need is not from any voyeuristic interest in the lifestyle of the rich, but as an indication of how our economic system is working and how alternative policies in many areas may affect the system and various groups within it. More specifically:

1. The equity of our system is indicated not only by the distribution of income and income differences between groups, but also by the distribution of wealth. Even with substantial inflation and unemployment, progressive taxes and income maintenance programs have maintained an almost constant income distribution, but the same may not be true of the distribution of wealth. A fresh assessment of household wealth and its sources is needed. Gyrating asset values and inflation and high profits can lead to asset accumulations that never appear as taxable income of any household.

2. Individual retirement planning and the management of the social security system, will be affected by people's saving for retirement. Our earlier studies indicated a trend toward polarization into two groups, one with substantial accumulations most of whom expected to retire early, and the other with little beyond social security many of whom feared retirement and only would do so when compelled by poor health, compulsory retirement age, or obsolescence of job skills. We need to know whether this trend has continued. This requires knowing not only about financial assets but also about various accrued retirement rights.

3. There is reason to believe that a substantial number of households are well fixed for their own retirement and that some of them have accumulated already more assets than they could possibly expect to consume during the rest of their lives. What they do with these surplus assets during their lifetimes and where they bequeath their estates are important for capital markets, for monetary policy, for international monetary flows and the balance of payments, and for the creation of new inherited fortunes:

If these assets are used to fund ventures of younger entrepreneurs, they can increase the dynamic growth and flexibility of the country.

If they are used to speculate, they can increase the instability of various markets including the stock market and foreign exchange rates and make it more difficult to achieve proper fiscal and monetary stability.

If these funds flee abroad, our balance of payments can be affected. If they go into philanthropic ventures in large volume, the country should benefit. But the need for new policies to define philanthropy and its tax status is increased, if we want to encourage support for things that are

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