Nixon, Connally & Shultz on Value Added Tax and Tax Simplification

4:38:39President, this presentation that you're about to see has been designed to give you an overview of the various proposals and tax initiatives that are under consideration throughout the administration.
4:38:53Its purpose is not to make recommendations to you.
4:38:56Rather, it is to give you a general description of the proposals and set forth their costs, and to address itself to considerations on either side of the question.
4:39:07You will have a memorandum that will go into these initiatives in very great detail, containing one or two papers on each, mostly prepared by the Treasury, but some prepared by others, so that if you want to go back into any specific one, you'll have the information available.
4:39:27These initiatives fall into four major categories from the point of view of policy objectives.
4:39:32And the first of these categories
4:39:36policy-objected areas.
4:39:37It has to do with where we might find it was determined that we needed additional revenue.
4:39:45In this area, we're going to talk primarily about evaluated tax.
4:39:50The second category relates to initiatives for social and other purposes.
4:39:55One of them is a proposal that would provide property tax relief.
4:40:00Another proposal to liberalize the tax treatment of child care expenses.
4:40:05The third will direct itself to a problem that I know you've considered at length, the growing tuition burden of private education at the primary, secondary, and higher levels.
4:40:16And the fourth initiative in this category is an effort to address itself to the problem of the regressive nature of the payroll tax under Social Security.
4:40:28The third general category is
4:40:31addresses itself to the problem of tax simplification.
4:40:36What to do about that growing burden of complexity in the tax reforms, in the tax forms.
4:40:43And finally, the fourth category are tax initiatives with regard to stimulating the economy.
4:40:51One that addresses itself to encouraging capital investment, either through investment tax credit or further liberalization of depreciation.
4:41:01A second, the fall of crack has spent some time on, can we encourage research and development expenditures by some tax changes?
4:41:10And finally, it's become an old chestnut, should we do something next year, I've decided not to do anything this year, with regard to the acceleration of personal income and excise taxes.
4:41:24I'd like to say that all of these individual initiatives
4:41:29can be taken together with the exception of tax simplification.
4:41:34They are not usually exclusive with that single exception.
4:41:38If you were to go the simplification route, you could not very well use the tax initiatives that rely on tax credits or tax deductions from a personal income.
4:41:54Starting with category number one, the value-added tax,
4:42:00Your task force on business taxation in 1969 said that if the government had to go to additional revenues, taxes for additional revenues, that they would recommend against income taxes as a source of additional revenues, and would urge the careful consideration of a value-added tax.
4:42:23With the 73 budget in a deficit position of $7 billion on a full-on basis of $14 billion on an actual basis as projected, and with the possibility that you might want to get additional revenues for new initiatives, it would seem that it's time at least to look again at the value-added tax.
4:42:48First, what is it?
4:42:51It's a tax that each producer of a product pays as the product goes through his hands on the value that he has.
4:43:04Ultimately, it is passed along to the consumer.
4:43:08But, unlike the sales tax, it's hidden in the production costs.
4:43:14It's a very broad-based tax, so it allows the raising of large amounts of money with relatively low rates
4:43:22It can be designed to impact on the consumer rather than on the investor, and therefore it's not restrictive of investment and economic growth.
4:43:33And because of the gap,
4:43:35It is relatively beneficial as compared to something like income tax with regard to our exports.
4:43:41Under the gap, you may rebate the value-added tax on exports and charge it on imports.
4:43:48That, incidentally, is exactly what our trading partners in Europe do.
4:43:52The problem with the value-added tax is that by its nature, it's regressive.
4:44:01You can design some of that out of it, but not all of it.
4:44:05It imposes another layer of taxation on the economy with another layer of administrative costs.
4:44:12And it adds on its imposition a one-time increase to the cost of living.
4:44:17Treasury estimates that a 4% value-added tax would balance the cost of living by 3.5% at the time it was introduced.
4:44:29And finally, if it does make available large amounts of revenues with a very low rate, it could well increase the pressure of radiation standards.
4:44:38It's interesting that the value-added tax you find in the alliance between the labor unions and the Wall Street Journal, people like Joe Barr, Orrick, of the Chamber of Commerce, and the Committee for Economic Development.
4:44:57Now, any number of
4:45:00of specific designs to be developed for a value-added tax.
4:45:04The Treasury has come up with one largely to facilitate your own consideration of the concept of the tax.
4:45:13They have a single-rate tax broadly charged on consumption items.
4:45:21They were funded for individuals with gross incomes up to $8,500 in order to eliminate a good portion of the regressivity.
4:45:30You'll note that under this design, in the fourth column, the tax is not regressive up to about the $8,000 level, but from there on it quickly gets fairly regressive.
4:45:46They would apply it to every consumption item, including drugs and foods, medical and legal services, but would exclude
4:45:56Residential rentals would rent on the same basis as home ownership.
4:46:00Religious welfare and educational activities.
4:46:04And they would also exclude interest to the extent that it...
4:46:11If you have this kind of tax, designed as the Treasury has suggested, for every 1% of evaluated tax, you raise about $5 million in narrative expenses.
4:46:25So the 4% tax is $20 million.
4:46:30The major consideration seems to be that we have to, you have to, get to this problem at this time.
4:46:38He is the first to do what he wanted about this budget in 1973.
4:47:09for you to collect records.
4:47:11That, of course, excludes our own legislative process.
4:47:15The Treasury, by virtue of the work they've already done, say that if you were to give them a go-ahead now, and this month is the latest date that they believe this schedule will be kept, if you were to give them a go-ahead now, that they would be in a position to have the necessary information for you to announce it in the State of the Union.
4:47:39That it would go to the Congress beginning of next year, and that they would be ready, and the Congress would be ready, to impose the tax starting July 1 of 1972.
4:47:51Obviously, both from a legislative point of view and from their own point of view, that's a fairly optimistic schedule.
4:48:00But it wouldn't be a realistic and indefensible schedule if the decision wouldn't be made then.
4:48:06Resumably, an option could be kept open by sending to them, start your own work now on the value-added tax.
4:48:12Problem there, of course, is that that has to be done rather broadly in the department.
4:48:18Apologies, John, but no doubt the information that they were working on a value-added tax would get out.
4:48:24Of course, the final consideration...
4:48:31And there's a very good consideration for the politics of it.
4:48:35What would that proposal do as we begin the next year?
4:48:40How would the Hill handle it?
4:48:42The legislation was put to them.
4:48:44Charlie Walker wrote a great coaching memorandum, as you may remember.
4:48:48It was given to you six months ago on this subject, suggesting that he felt that the Hill would use it in a way that would not get you revenue, but would be very considerable tax.
4:49:01That is a review, Mr. President, of much of the information on the value-added tax that was given to you in December of last year.
4:49:07More work has been done by the Treasury.
4:49:10We can go into a bit more detail if you wish, but for real, it seems to be the crux of this question is do we wish to begin now to put ourselves in a position to propose a balanced budget next year?
4:49:26The second...
4:49:30The first of these are those taxes which will encourage property tax relief.
4:49:41Property taxes will encourage property tax relief.
4:49:51are used to raise the great bulk of the revenues at the local level.
4:49:55You'll note here that property taxes are used to raise almost $30 billion out of $46 billion at all local government levels, and for education, $13 billion out of about $50.5 billion in school district rates.
4:50:13They are particularly harsh on the low-income homeowner.
4:50:18You'll see how aggressive this is.
4:50:20The percent of the income of the people below $6,000 is a very substantial burden.
4:50:29As high as 10% of those whose income is up to $2,000.
4:50:35From $6,000 on, it levels out and is not aggressive.
4:50:42You know the problems of administering a property tax, the problems of assessment, on human assessments, even within one unit.
4:50:53The property tax has become...
4:50:56More of a burden in recent years is that in the last five years it has been used to provide $37.5 billion, close to $25 billion, five years ago, and particularly on residential property, which is the lower line.
4:51:15It's gone up from 1% in 1953 to 1.8% in 1967.
4:51:18The corporations clearly have done a good deal better than that with the raise in their property tax rate from 1.7 to 1.8 from 1943 up until now.
4:51:31So the homeowner-resident has borne a very heavy burden.
4:51:54The property tax in this country is considerably higher as a percent of national income than any other country except Canada.
4:52:05You see that we're 4.3%, they're 5.2%.
4:52:07The United Kingdom comes close behind us at 4.2%.
4:52:10Germany, France, are way back in the bank.
4:52:16That probably relates to the fact that they rely more heavily on evaluated tax.
4:52:26We attempt to give some help to the homeowner on his property tax by allowing a deduction from his federal income tax.
4:52:33However, the people we're most concerned with, the ones who bear this cost most heavily, don't idolize their income tax return, and so they don't get a deduction.
4:52:4358% of the people aren't using the standard deduction now, therefore don't get a benefit for the deduction of property taxes, and 70% in 1973 will be using the standard deduction, so they don't get any benefit on this basis.
4:53:02You can make a point, you can make a argument, that the administration has tried to relieve the burden of the property tax by its revenue sharing proposals.
4:53:12In fact, you have said that one of the hopes is that local governments will not rely as heavily on the futures they have in the past on the property tax for their revenues.
4:53:24If more, if you wish that more be done
4:53:29The following possibilities are suggested.
4:53:34One, there could be additional federal support, primarily for education, coupled with a condition that the support would only be more than coming if there was some reduction of property taxes or a distance added for increasing them.
4:53:54Or if that kind of a formula was not appropriate, the additional funds could be given with encouragement, verbal encouragement, that they be used not for new services, but rather to replace property taxes.
4:54:12If new revenues aren't available for this purpose, it's possible that the special revenue sharing for education distribution formula could be adjusted.
4:54:24As of now, the formula provides 10% to be allocated by the secretary.
4:54:31I understand that's only $300,000.
4:54:35$300 million.
4:54:3710% to be passed through for type A children impacted A, and 80% which is distributed on a formula that includes the number of disadvantaged children, impact A type B children, and total school age children.
4:54:54We could add to that, either with new money or without new money, a new part of the formula which would require that more money be given to those states and localities who rely less heavily than the average on property tax for their income.
4:55:19Another possibility would be for the Congress to designate
4:55:24this additional money for property tax relief, but not to include it in the morgue.
4:55:32Frankly, I think the latter is wishful thinking.
4:55:35I think they have to take the money and then decide on their own way as to how they're going to raise local taxes.
4:55:43Either approach, of course, would have a pass-through to the local level,
4:55:51Additional conditions that could be added for giving money to local tax units would prescribe a property tax standard, and that could be based on either village stealing, above which a state could not go, or a locality could not go over to get federal funds, or some percentage of taxpayer income.
4:56:16Frankly, either of those, and this, to some extent, conflicts with the philosophy of revenue sharing.
4:56:22What we said with revenue sharing is that we're giving this money to the state and local government, and that they're free to determine for themselves how they're going to spend it, how they're going to run their affairs otherwise.
4:56:34Now we're saying we'll give you this money if you do certain things according to the federal schedule.
4:56:41If we wish to do something about property taxes other than through federal revenues, but rather through a direct federal action,
4:57:07That could be done on the basis of a tax credit.
4:57:17Unfortunately, if you just give an open-ended tax credit, one, it's too expensive, and B, it would tend to encourage property taxes, and the states will feel that everything they tax through a property tax would be reimbursed through a credit from federal income tax.
4:57:35The Treasury has suggested, as one standard which would avoid that, a proposal for a $200 property tax per taxpayer.
4:57:47And as you see, this is an enormously expensive proposal.
4:57:50It would cost $6 billion in revenues.
4:57:52That's because there are so many people who would be affected.
4:57:55Almost 40 billion people would get any reduction.
4:58:00There is some regressivity in this with...
4:58:07The amount's up to about $7,000 a year, fairly sharply regressing.
4:58:11In favor of this, it's easily administered.
4:58:18Everybody knows what a tax credit is, and it's a simple thing to administer.
4:58:24On the other hand, to the extent that you want to simplify the tax form, this goes right in the other direction.
4:58:33It would seem that
4:58:35Either of these are alternative initiatives that can be taken by the administration if they want to get out of this difficult problem of property taxes beyond the fact that we're relieving to some extent through revenue sharing the burden of education and other expenses on the states.
4:58:52It's interesting that Governor Milligan in Michigan has suggested in his state that the state take over all education expenses
4:59:01and that there would be no property tax allowed at the local level for education expenses.
4:59:07To pay for it, to raise the additional revenue, he's proposing an increased income tax on the individuals, and at the same time putting them on a back, suggesting a value added tax, which of course would be paid initially by the corporations, but eventually by the facility.
4:59:25The third area in this
4:59:29for social purposes that we addressed ourselves to.
4:59:34What to do about liberalizing the tax treatment of child care expenses for the working parent.
4:59:42Currently there is a law in effect.
4:59:45It has been since 1954.
4:59:46It grants a deduction of $600 for one child and $900 for one or more.
4:59:52And it phases out at $6,000 for people who earn
4:59:57$6,000 or less, very seldom itemize their return, and therefore very few people take advantage of this opportunity.
5:00:05In fact, the last thing is that the Treasury has chosen that only 150,000 people in 1973 would use this, costing only $15 million.
5:00:15HCR 1 would go a little further.
5:00:19It would increase the deductions.
5:00:23and it would substantially raise the level at which the deduction is phased out.
5:00:29A lot of people, by virtue of the complexity, by virtue of the fact that they don't itemize, will not use it, and the total cost of this, then, will be at least $75 million, and will benefit only 900,000 people.
5:00:45The Treasury has a different approach.
5:00:50They suggest that
5:00:52Every, an additional exemption, an additional personal exemption is automatically given to any employed taxpayer with a child under 13 and a working spouse or no spouse.
5:01:07They suggest that this be phased out between the $10,000 and $15,000 left.
5:01:14This would very, very much broaden the impact of this deduction, obviously, whether you itemize it or not, you get it.
5:01:22It would just be an additional exemption.
5:01:25As a result, of course, the cost would go up very substantially, $400 million, but it would also cover almost 4 million taxpayer families.
5:01:37Now you can go beyond that, if desired, impacting more families with a great deal more money.
5:01:45George Hill's here, I don't think I have it necessarily detailed.
5:01:50The arguments on this, the obvious argument in favor of it, is that for the working family you should do what you can to encourage them to increase the family income.
5:01:58And if you can make provision for child care expenses,
5:02:04The mother can go out and work.
5:02:06On the other hand, the argument has been made that it is preferable not to encourage mothers to leave home and leave their small children.
5:02:16If you wish to move in this direction, these are, that is, the alternative that seems to us available and one the Treasury has developed to the greatest degree.
5:02:32I am under
5:02:34tax initiatives for social purposes, directs itself to federal income tax relief for tuition costs.
5:02:43The burden of private education at the primary and secondary and higher levels continues to go up very substantially.
5:02:57There has been continued discussion in the Congress of Health Care about the desirability of some kind of relief for tuition costs.
5:03:07In designing a program to grant this relief, there's any number of variables that can be considered.
5:03:15Should it be for just primary or primary-secondary or primary-secondary and higher?
5:03:21Should it be a credit or a deduction?
5:03:22Should it be a phase-out?
5:03:24Should there be
5:03:26A reimbursement for those people whose credit and taxes aren't at the level of the credit.
5:03:34A possible proposal that the Treasury has worked out would provide a $200 flat credit for full-time students in colleges and secondaries.
5:03:46and then accredit only for actual expenditures up to $200 for full-time students in private primary schools.
5:03:53The reason for that is that there are no tuitions in secondary and higher educational institutes of less than $200, and yet there are many, particularly in religious-affiliated schools at the primary level where the tuition is less than $200.
5:04:08For people who...
5:04:12for whom the credit would be more than the tax actually paid, there would be a refund.
5:04:18The effect of this proposal, as you can see here, would be $2.5 billion a year, $1.4 billion for higher education only, and $1.1 for primary and secondary.
5:04:31The number of people who would benefit would be something over 6 million people, 4 million alone from primary and secondary, but there would be some overlap.
5:04:42You could just add 3.8 million and 6 million.
5:04:45With the average savings going up slightly between the very low levels and about $15,000, going up more facetiously after that, going more sharply after that,
5:05:00That could be taken care of by a phase-out of the debt and the complexity of the tax without saving much money in order to treasure it.
5:05:12The obvious benefits of this kind of an effort are that it contributes to the diversity in education that this administration supported.
5:05:20It had a lot of political appeal.
5:05:23A version has passed, I believe, in one of the houses.
5:05:28On the other hand, the Treasury recommends against this, giving it, as usual, credits and deductions, increasing the complexity of the tax form.
5:05:39In addition, incidentally, your 68 task force on education recommends against it, as did the Association of American Universities' primary commission.
5:05:51The Treasury's other feeling about this is that the tax law now does give some benefit to the parent who has children in public and private schools, in that they have an exemption of $750, and that as of 1973, $1,750 will be exempt from income tax.
5:06:08That's the deal.
5:06:10The money aren't good for every child.
5:06:21That's true every time.
5:06:23Right.
5:06:24That's true every time.
5:06:25The treasuries, nevertheless, as we are, to the parents, children are going to private school, they do have 2,500 bucks.
5:06:34They do if they go to private school, too, as well as education.
5:06:44The fourth social...
5:06:49The tax directs itself to the problem of the impact of payroll taxes on lower middle income families.
5:07:01The social security tax was originally conceived of as a mandatory retirement insurance policy and as such was designed to fall equally on all the people who benefited by that policy.
5:07:19But as the tax grows steeper, both in terms of percentage and goes deeper into the income of each worker, it's becoming considered more and more as another federal tax.
5:07:38We'll see here that it's currently a tax that's set on the first $7,800 of income and scheduled to go almost to 15% on the first $12,000 of income.
5:07:47Clearly that's a very regressive tax as of now.
5:07:51It's regressive most strongly on the people that we are most concerned, that we are concerned with, namely the blue-collar workers.
5:08:02Further, there is a problem that if it is to be considered or if it is considered
5:08:08a federal tax.
5:08:10The fact that it has gone up
5:08:14makes people feel that their taxes have increased, and particularly at the $10,000 level.
5:08:21If you make an assumption for a family of four that all their income is from wages, and they take a standard deduction, and if you make the assumption, which may be available, that the employer's share of the increased taxes is passed on to the worker, and that he doesn't get these wage upgrades, you'll see that
5:08:41Someone earning $5,000 a year between 1969 and 1972 has had a reduction in his income tax.
5:08:47The same can be said for a person earning $20,000 a year, where his income tax is going from $28,800 to $25,600, if you include payroll taxes.
5:08:57But for the $10,000 a year, by virtue of the increase in the Social Security tax, his tax has actually gone up.
5:09:06If you don't agree with assumption number four, and you say that...
5:09:10that the employer swallows the increase in social security tax, and I would think that he probably does for a while, but doesn't over the very long run.
5:09:19But even if you assume that none of that is paid out of the wages of the worker, the $10,000 a year
5:09:27has gotten a very much smaller reduction than has either the 5,000 or the 20,000, and of course that is even more true as the tax schedule goes up beyond $20,000 a year.
5:09:44So there is a problem in Equus here to the extent that this tax is not an insurance premium, but really is a formal federal tax.
5:09:56There are two possible alternatives to attack this.
5:10:00The one is financing.
5:10:01All, of course, are part of the Social Security benefits from general revenues.
5:10:05If we didn't want it to go any further, we could say that from now on the additional requirements will come out of the general revenues.
5:10:11And that, of course, itself would require new taxes.
5:10:15If the new tax was a value-added tax, it would not be quite as progressive as this, but it has a certain progressive nature in its name.
5:10:24The other thing that you might do is to adjust the payroll schedule to pay no Social Security tax on the first portion of the tax.
5:10:34Up to, say, $5,000, and then stretch it much more broadly over the next three levels.
5:10:42This would certainly tend to black out the regressivity of the Social Security tax, but some of it would still remain.
5:10:52The problem here is that there are those who believe Social Security needs an insurance policy to be paid more by those countries.
5:11:00And secondly, the desire to make sure that everybody who benefits makes some contribution to it.
5:11:11The third area, the third policy objective that we have addressed ourselves to is what to do
5:11:20what might be done about simplification of the personal income tax.
5:11:27I don't think anybody has to be reminded as to how complex it is, but this was the 1970 federal income tax form in its most simple form.
5:11:37Anyone who...
5:11:40who has any complexity to his income at all, gets more than this.
5:11:46If you have less than $10,000 of wages, and no other source of income at all, and don't itemize your deductions, at the very least, you fill out page 1.
5:12:01The fact that it's complex is most...
5:12:06clearly proved by the fact that 70% of people preparing income tax returns use friends or professionals, and 58% of people preparing income tax returns get professional assistance.
5:12:26The standard deduction has dropped from 82% in 1944 to 58%,
5:12:34i 1968, and while there was some improvement by virtue of the 1969 Tax Reform Act, it's still going to be 7%.
5:12:44So that will be 30% for the people filling out those forms, itemizing their returns as 23 million returns.
5:12:57With some potency, I think, that...
5:13:01This vast effort to beat the tax code, or to get the most favorable treatment out of the tax code, results in a misallocation of resources.
5:13:11And I think it's also argued with some justice that when individuals take investment actions that are based on their tax effect, rather than on the underlying economic effect, that that too is a misallocation of resources.
5:13:29On the other side, of course, the tax laws are designed to encourage specific social objectives which have been deemed to be desirable.
5:13:39And to the extent that the tax laws are trained to eliminate those social objectives, then we're either going to have to give up on them, or we're going to have to give go to some other form of federal support, such as direct grants.
5:13:57It's also worth noting that tax credits and deductions have been a favored Republican approach to the biological problems over a long period of time, not the least of which was our 1968 platform.
5:14:13The Treasury has suggested in its proposal that any significant tax simplification
5:14:21would have to eliminate the distinction between capital gains and ordinary income.
5:14:26And the reason for that is that much of the complexity goes from trying to establish what is a capital gain and what is ordinary income.
5:14:35It would also, under the Treasury proposal, eliminate all other personal deductions except interest to the extent of investment income received.
5:14:47And if you did that, if you went all the way
5:14:51The result would be that you could reduce the present income tax rates from 14% to 70% down to 12% to 35%.
5:15:00Of course, the 35% is the current level of capital gains tax, so the loss of special capital gains treatment wouldn't be particularly burdensome.
5:15:15It might also provide in this reduction of rates for a small increase in the level below which no taxes are levied.
5:15:26Needless to say, removing all of those special benefits would
5:15:37Before I get to that, I would like to turn to this chart, which indicates that if you were to make these tax reductions, there would be no particular shifting in burden.
5:15:49of the burden of taxes within adjusted income groups.
5:15:53As you see, there are very minor changes there.
5:15:56That is not to say that you wouldn't shift the burden of taxes on individuals within those groups, and those shifts, of course, would be very substantial depending on what kind of directions they take.
5:16:07At the bottom, you'll see that if you take people
5:16:11In the 10,000 to 15,000 income range, while there would be only a very modest $200 million tax increase for everybody in that bracket, 10 million of those people would have decreases averaging $65.
5:16:30for return, and 5 million would have increases averaging $175 per return.
5:16:37So there'd be massive movements within each of these brackets, even though based on all the change.
5:16:42Now, of course, it's right there, in those massive movements, that you would develop a political opposition to this kind of a change.
5:16:53All the charity institutions who rely on deduction-inspired gifts would be against it.
5:17:00The housing industry and presumably suburban homeowners benefit from the deduction of mortgage interest and benefit from the deduction of global property taxes.
5:17:11State governments, particularly those that rely on high income tax rates like New York and California, would presumably be against it.
5:17:20The people who benefit from special capital gains provisions, timber operators, people who own coal deposits, real estate, would be against it, I would guess.
5:17:33Perhaps the most important consideration here, the one that is both most difficult to get a handle on, and the one that might be most important,
5:17:46is to determine whether or not a top rate of 35%, no matter how much income you earn, would be socially acceptable.
5:17:54The current law operates so as to impose an effective top 35% rate on the high income earners.
5:18:04But it screams that with its enormous complexity, this form and the other forms of the high income people still have.
5:18:13And it screens it when it is nominal 70% rate, which only a very few people pay.
5:18:19If the complexity were removed, and if you were to say that the rate is only moving to the very top of 35%, would that be politically and socially acceptable?
5:18:30If not, what would happen is you would just effectively increase the progressivity of the current income tax rates.
5:18:44The first looks towards stimulating capital investment.
5:19:08Either through some action regarding the investment tax credit or liberalized appreciation.
5:19:16Regarding the investment tax credit, the 7% credit was repealed in the 69 Act.
5:19:22The action that the Jew took, and was recently put into effect, has restored 4.5% or about two-thirds of the investment tax credit repealed.
5:19:41If we were to try and increase that now, given the lag in legislation, and then the subsequent lag in terms of stimulating investment, one would guess that there would be some delay, some considerable delay, before it would really be affected with regard to the economy.
5:20:02The revenue loss of any investment tax credit is $600 million per percentage point.
5:20:10If you were to replace the current ADRs with a 7% tax credit, the cost would be about a billion and a half dollars a year.
5:20:22The Treasury feels that any further stimulus through legislative action in this area is desired.
5:20:29The right way, though, is to change legislatively the
5:20:36current depreciation schedules to change to be even further than they have by executive action.
5:20:45We asked the Treasury if they would consider what other general liberalizing changes like the ADRs might be possible.
5:20:54And they have made their review and find that there's nothing else they can do in the general sense with executive action.
5:21:04that any broad channel change now would take legislative action.
5:21:09We've also asked them to look at the special industries to see what could be done there.
5:21:15And they propose to invite in industries where they believe some improvement in the depreciation laws can be made, and thereby some additional stimulation of the economy could be effected.
5:21:27The first of those, as you know, is the movies.
5:21:29They have made very significant progress in the discussion of the industry, and they would hope to be able to announce something in the near future.
5:21:37They've asked the leasing industry, and they're pretty big purchasers of equipment, and they are making suggestions as to what would be appropriate to stimulate additional investment there.
5:21:49The railroads, as a result of your request, have been in to talk to the treasurer.
5:21:54The railroads have asked for three actions, one through legislation, two through the administrative action.
5:22:02The Treasury believes one of those administrative actions must be by legislation, and they support one of these administrative actions.
5:22:09They're continuing their discussions with them to see where they can be helpful in this area, and they'll look not only to these three industries, but to other industries that might have what can be done to give additional stimulation to the economy.
5:22:25The second...
5:22:27has to do with what can be done in the area of research and development expenditures.
5:22:34Here, as you know, Dr. McCracken sent you a memorandum in which he proposed three areas of action.
5:22:42One, that there be a tax credit at 7% for research and development expenditures.
5:22:52Two, that there be considered the
5:22:57the creation of an industrial research foundation like the National Science Foundation, which would make grants in this area looking towards the application of existing scientific knowledge, and three, that the Treasury work on the elimination of impediments to research in the present tax law, which relates to patent sales, etc.
5:23:21Going to the first one,
5:23:26The estimate made by the CPA is that this tax credit will cause a revenue loss of about a billion dollars, but that it will generate twice that amount of research and development expenditures, and that it would put to work 30,000 people, mostly in the scientific and engineering fields.
5:23:53The Treasury, in its view of this, has...
5:23:57in addition to John's view of tax credits in general, has the specific objection that when you give a tax credit, you give it to all the people who are already doing research and development, and that the bulk of that credit doesn't result in any additional expenditure in the desired line, that it's difficult to administer,
5:24:24Because the break between research and research and development expenditures and expenditures for various types of market research and certain repairs, etc., is difficult for them to determine.
5:24:36So the Treasury would not support this approach, but rather would go toward an effort that would be based on direct federal expenditures, grants, etc.,
5:24:53There is a committee, President Berksheim, representatives of the Treasury, and others who are continuing to study this matter.
5:25:00They don't have their point-out paper in us yet, and when they do, we'll perhaps be in a position to come up with more definitive recommendations.
5:25:09The final possible tax initiative is one that has been...
5:25:15It's been very much considered and rejected for this calendar year, but at least it's one that is still available for next year, given where desired, namely bringing forward to January 172 the individual income tax reductions now scheduled for January 173 and the excise tax reductions.
5:25:40Also, there is a possibility of abolishing on January 172.
5:25:43You ought to be able to tell them on taxes.
5:25:46Most of the recommendations go to the first two.
5:25:51As you see, they don't involve a very substantial amount of money.
5:25:55$900 million in fiscal 72 and $1 billion in fiscal 73.
5:26:00The various considerations here are too well known to bear repeating.
5:26:05The key, obviously, is keeping an eye on the economy as we progress to determine whether the current position should be revised.
5:26:16Those are the initiatives that have been or are being considered
5:26:24I'd like to remind you that the tax simplification initiative is inconsistent with those that relate to personal income tax credits or deductions.
5:26:38If it were decided that additional revenues were desired, if it were decided that you wish to put forward a balanced budget on the actual basis, and therefore needed 14 or more billion dollars, the value-added tax as designed by the Treasury goes to 4%.
5:26:57If we started now, if we were lucky, even if we weren't, we could creditably say
5:27:06That will be scheduled to produce another 20 billion dollars next year.
5:27:12That, of course, would result in a 6 billion dollar surplus, which would be available for the initiatives that have been discussed here this morning, or perhaps were discussed yesterday.
5:27:26An example of how that six billion dollars could be used, would be additional relief, or additional funds for education, of two and a half billion dollars, the child care expense proposed by the treasury, of four hundred million dollars, the tuition credits, which is basically the two hundred dollar credit, of two billion two, that's a little less than the previous chart, and
5:27:56A tax credit for grants for research and development totaling about a billion dollars.
5:28:04The result will be a balanced budget, some new initiatives.
5:28:10Mr. President, that completes the presentation of the various initiatives that are currently under consideration.
5:28:27The first reaction to me is that I'm really getting what I have to find.
5:28:40It's totally impossible from a political standpoint to value added tax for the purpose of...
5:28:54We're going to raise taxes through value-added taxes, and then for a few million dollars, things that you haven't fixed.
5:29:04What I had in mind, the only way that a value-added tax will have any spillability in my account, and this is some place, John, where you probably just get stupid with treasuries.
5:29:16The treasury people, and having been somewhat of a tax lawyer in my time,
5:29:23They're all the same, are always supposed to do really anything.
5:29:30They have a vested interest in the way it's done.
5:29:33They can't bring themselves to thinking in revolutionary terms.
5:29:38And that half-assed tax evasion we had last year, which I should have vetoed, was a political disaster.
5:29:45Economically it was not good.
5:29:48Bragging about the fact that we removed people from the tax rolls, of course we shouldn't have done that at all.
5:29:55That was all people should pay attention to.
5:29:59And all it really did was simply to punish a great deal, a number of people that were potentially our friends, and bollocked up the whole business to a fairly well.
5:30:16But that was the treasure.
5:30:18Now, what I'm getting at is this, and it
5:30:24We either make a massive move or not.
5:30:30I mean, this Mickey Mouse stuff is not working.
5:30:33When I say Mickey Mouse, I keep it right here.
5:30:36So we're going to, everybody's, I guess the people jumping up and down because we're providing for more, wanting for daycare centers.
5:30:45That's going to be a great, that's going to be a hell of a political asset if everybody deducts something because their kids are in a daycare center.
5:30:53That's just like taking people off the tax rolls 100 years before.
5:30:56It's no good.
5:30:57It's great for the social worker and all the rest, you know, who have been pushing that kind of stuff for us along, and pushing it for reasons that are quite selfish.
5:31:07But I don't mind that.
5:31:08It's not pushing for political reasons.
5:31:10We know it doesn't have any political moxie at all.
5:31:14And the only one that I've moved there that has any political moxie is the tax creditor.
5:31:20for deduction and or credit for educational institutions.
5:31:26That, of course, is one that would be a mixed bag, too.
5:31:31If you're talking about, for example, higher education, it really has to do with all...
5:31:41They're not just tuition colleges.
5:31:44They're public universities now.
5:31:46Most people have a lot of money.
5:31:48Our purpose is not to be some private institutions alive.
5:31:52As far as our institutions are concerned, our purpose here is to enable people to honor the public trust, to have a little self-respect, to pay for their kids to the higher education.
5:32:04In the primary area, of course, it's all together to gain.
5:32:08There, it should go only to those
5:32:15for those who send their schools and their kids to primary schools and pay tuition.
5:32:24Because there, they in fact are saving the taxpayer, other taxpayers, from the burden of educating their kids.
5:32:32That is totally understandable.
5:32:36Now, what you really have to think of here in terms of value-added assistance is, or anything else, is students.
5:32:46Think of it in terms of a very great shift in the whole tax approach, in other words,
5:32:55If you're going to put a value add-on, right, they say, well, we'll put on 4% in order to get $20 billion in there, but before we can balance the budget, then we'll have $3 or $4 billion for the purpose of pulling out some of these things, investing in tax credit and the rest.
5:33:11That'll be, that's from a political standpoint, they're raising taxes and the other stuff is out in the playbook.
5:33:20On the other hand, if you move in a dramatic way, dramatic way, to...
5:33:24to substitute value-added tax for what is really a very aggressive tax, the income tax in many areas, and move and act.
5:33:35or if the property tax is concerned to move in effectively on that, then you might have a chance for it to sail.
5:33:45Let me put it another way.
5:33:47There is no chance for this kind of stuff to sail that you put up here today.
5:33:51None.
5:33:52And we just forget it.
5:33:53If we put that under something, then it's the only one that I think would have any political moxie in it.
5:33:59Political moxie would be the one.
5:34:01that deals with possibly with the education that may the property taxing, although it's too complicated for people to understand that, is that from the economic standpoint, maybe something from the investment tax credit research and the rest, but we can work on that.
5:34:20Those we can do for other reasons and political, of course, but if you're going to go for a new tax
5:34:30The only way you can sail is to have a revolutionary change in the old tax.
5:34:36In other words, to think in those terms.
5:34:39So maybe we want a 20% value-added tax, and as a result of that, wow!
5:34:44Income tax, the whole structure of taxation in the country has changed.
5:34:50Now, what Treasury has done here, and the Treasury and your people too, and I know what they've done, they're thinking of what is possible.
5:34:58And it is true that what you've done is popular.
5:35:00These are things that if we were thinking of getting anything through, this is about what you might have a chance to get through the next Congress.
5:35:09The next Congress doesn't do anything with taxes.
5:35:12They're not going to pass it.
5:35:16In my opinion.
5:35:17They back it to something.
5:35:19It's highly, highly, it has great foot.
5:35:23What we're really thinking up here is to present to the country a new approach to taxation.
5:35:29I mean, that's really what I'd like to see.
5:35:32And then, put in the whole bag.
5:35:35In other words, what I'm really talking about is the iffy.
5:35:40Rather than basically because you have been being totally responsible.
5:35:45That's a very responsible presentation.
5:35:49But from a political standpoint, it's nothing.
5:35:52Except for these little things that we mentioned.
5:35:55Understanding that that's your job, you should be responsible.
5:35:57You and your people, we are a great credit for being so responsible.
5:36:01Treat your people all responsible.
5:36:03At the present time, there is a need in this tax field for you to do something with this goddamn thing.
5:36:11You see somebody with a problem.
5:36:18Well, anyway, whether it's that or anything else, it really comes down to the point where, well, the only thing that's going to appeal to people is something that says, thank God, they're thinking big, they're thinking bold, this is something really new.
5:36:38Well, they're going to add, they're going to find a way to balance this, they're going to add another kind of impact, value-added tax regime.
5:36:46And then maybe, maybe we might get 200 bucks for sending the kids to the daycare center.
5:36:55No sale.
5:36:56Won't sale.
5:36:56Never.
5:36:57That's my opinion.
5:37:01The property tax part of it might sail some, except there, there again, it has to be considerably more dramatic.
5:37:10I don't think this time we're interested in putting up in the next Congress something that basically is a half-assed sort of tinkering with the present system.
5:37:22Most people think the present system is lousy.
5:37:25I think it's lousy.
5:37:27And I'd like to see one tax man, just one, come in and say, start with a proposition.
5:37:32I think it's lousy.
5:37:34I'd rather start writing new.
5:37:36This is what we ought to do.
5:37:38And that's an approach I'd like for them to take.
5:37:40Well, Mr. President, I think you have the basis.
5:37:42I understand what you're saying.
5:37:45I'm not sure we've gotten through to you.
5:37:47There's a proposal up there for tax money for kids.
5:37:51The manner in which it is presented believes the dollar substances there are, but believe me, it is a major change in the tax system of this country.
5:38:00It is a tax simplification that anybody can fill out.
5:38:04Now, you can change those figures any way you want to.
5:38:07Now, if you take the tax simplification and the value-added tax in conjunction...
5:38:13You've got a revolutionary change in the tax system.
5:38:17It would raise the tax-to-value-added charge.
5:38:19It's better if you just take the value-added use for every percent of the value-added taxes to the polls.
5:38:26On the basis of which we've done this, you've got about $5 million, $5.1 billion.
5:38:31Well, that range can run all the way from $3.5 to $7 billion, depending on what you want to include and what you want to exclude.
5:38:38But let's just take the $5 billion.
5:38:40If you want to put it on the $10 billion, I mean the 10% value added tax return, it's high, probably, initially.
5:38:48But, suppose you wanted to add 50 million, you can touch that 50 million and divide it on a tax certification basis, on any way you want to.
5:38:57You can dramatically reduce taxes on the tax certification point with the head up there.
5:39:02You've got, what, partially exempted for 1,250 bucks?
5:39:06That goes up to a total of, before you start paying it, $48,000 plus the personal exemption.
5:39:13So I'm slightly on this question.
5:39:15But we're talking about here, the last tax reform act, pays $6,500 for specific bills, $700 for expensivation.
5:39:21And I think this is a hell of a deal on the tax simplification part, even on the computations that you had, 12%.
5:39:31No.
5:39:32Here, you're talking about a sentence of $1,250 a piece for a family of four, a sentence of $4,000.
5:39:39This one on the simplification was $1,600.
5:39:43$2,400 for a married couple.
5:39:46And that's $1,500 for every person, $1,200 for a married couple, $1,600 for a single person.
5:39:51That's your exemption alone, and $4,000 in exemptions.
5:39:55So, when you talk about increasing your exemptions, just to have a loan, $750, $1,600, this is a major change.
5:40:04That is all.
5:40:05It is a dramatic change, but if you take a simple case...
5:40:39We don't want these people to have these deductions.
5:40:59Well, that's fine.
5:41:00But no matter if you make the many changes in your tax structure, you're going to step on somebody's toes.
5:41:07Now, the real weakness, the standpoint of your philosophy, I think, is that to make that swing, to make it work at all, on the taxes of the kitchen, you have to abolish the capital gains structure in the tax system.
5:41:24Therefore, to make it palatable and all, you have to bring your top rate down to about 35%.
5:41:29Now, as we pointed out, this raises a fundamental question.
5:41:37If you bring the top rate to 35%, is this politically or socially acceptable?
5:41:42Or, if you assume you can get it back, what that means is it gets right back up to 70%, and then you've lost all the advantage.
5:41:50But, uh...
5:41:52These are risks that you have to take.
5:41:55I would say that the principal people that would be concerned about this are obviously those who have a special dispensation for tax laws, and these are those with duplicities and insidious of all kinds, whether it's timber, clay, oil, gas, and so forth.
5:42:09You'll have a lot of special interests that won't like you, but it is a radical change.
5:42:20It's something that doesn't go into effect overnight.
5:42:23Once it's passed, you have to give people a chance to rearrange their portfolios, to restructure their business lines in a way that takes into account the new tax returns.
5:42:39So you have to have an interlocking time for people to gear in.
5:42:47The whole basis of the profit-sharing plan
5:42:51Is that the whole country?
5:42:53That's the capital country.
5:42:54Mobile was only geared for personal use.
5:42:57For personal use.
5:42:58For profit trading, please.
5:43:02The profit-sharing funds are all based on the premise of the tax preference that they get on it, because you pay only a capital gains tax on the entire distribution at the time you receive it, rather than taking this income.
5:43:16That's already in the process of changing under the 1969 Act.
5:43:20You have a problem with the state of local bonds, which have always been taxed and sent, and you have to keep that in mind.
5:43:27You wouldn't need a proxying plan nearly as much with your top bracket as 35%.
5:43:31The real problem is...
5:43:37We have back a 35% level.
5:43:38You can see that to some extent by the fact that you don't have to change the income generated by any portion of the tax bracket out there.
5:43:49But we have it obscured now.
5:43:52People don't know that.
5:43:54The real rates go to 70%.
5:43:55Very few people, I'm sure, pay at that top bracket.
5:44:00They don't pay much at that top bracket.
5:44:02If you put it out just as coldly as this would,
5:44:06Could it possibly survive in this country?
5:44:10Not over a long, probably not over a long period.
5:44:12There's only one other basis of weakness for this simplification, and that is that you bring your personal rate down to 35, you leave your corporate rate at 48.
5:44:22But this could be solved too, if you want to pursue it.
5:44:26But as I say, the tax simplification was evaluated tax.
5:44:33You couldn't have a much more dramatic change.
5:44:37I like to say, if I was provided to take your value-added and put it in what I mean, rather than talking about it in terms of, say, 40% in terms of...
5:44:49You can't do any of the big things without having a big, big value-adding tax.
5:44:56That's right.
5:44:56If you take 6%, we just say that's $30 billion.
5:44:59If you take $30 billion and just scatter it around through your 5 to 15 group, and you've made an enormous change in their taxes.
5:45:12How do you deal with the next morning's deadline, which says Nixon cuts rich man's tax in half from 70 to 35 percent, and makes up for it by stocking the poor with a sales tax?
5:45:20Richard, Richard, Richard, one of the biggest problems.
5:45:23Richard, one of the problems, and this is the point we've been talking about.
5:45:26You reduce that third tax down 35 percent, and you just leave it sitting out there on the mountaintop for as long as you need it.
5:45:33The only way to reduce the amount of tax and not increase it,
5:45:40The presentation of the tax would be the use of all against property taxes to do, in fact, nationally, what Milligan has done in Michigan, where it's set out to do that.
5:45:51The problem is we don't have the legislative power to get into the state.
5:45:57There are a couple of ways you could do it, though.
5:46:01You could escalate the support of education to the state level by...
5:46:10very strong incentives.
5:46:12You raised a kitty of 20 billion dollars when saved through value-adding, and you made that available to the states on condition that they escalated the support of education to the state level, and adopted state statutes imposing a village limitation on real property taxes.
5:46:36Where denying property tax is the basis for funding education, the way it only is.
5:46:43Yeah, but then they just use it for something else.
5:46:45And what you really need is the millage limitation, which has worked where you've had.
5:46:52And they put that in there as a condition of the grant.
5:46:55With no special levies, you could do it.
5:47:00But it's got to be an absolutely...
5:47:04It's a delicious investment.
5:47:06It's got really a bunch of money.
5:47:09And you've got to have very positive linkages.
5:47:13Prohibiting against increasing property tax in the future.
5:47:19You have to, the only way you can sell a new tax is to reduce the old and so forth.
5:47:27Now, if you were to remove a necessary all-in-the-property tax for not simply a limitation, but a reduction, as we are doing this, and as a result of this property tax is going to be reduced, that is a hell of a political law, which I agree with.
5:47:45I understand as a result of this, we're not going to be able to provide tax credits.
5:47:52But I think what we need, really now, at this point in time, is to really try to get some feel for what you really want to accomplish, what your goals are.
5:48:08The value added tax is a new tax, and it can't be, I agree, it can't be imposed, unless it's in lieu of, or it's hard to reach, it can make up, you can have some freedom.
5:48:22It's a good tax.
5:48:24It's a good tax.
5:48:26It's probably the type of fraud-based tax we all think about.
5:48:30But, assuming you raise, take anything, assuming you raise 30 billion, how do you want to use the 30 billion?
5:48:35Do you want to try to structure it to produce property taxes?
5:48:38If so, we'll look at that.
5:48:39If you want to use it to reduce the buyout to 15, we'll look at that.
5:48:43If you want to use part of it to help the fellow who sent his kids through college...
5:48:50As far as what we modify in terms of taxes and other things,
5:49:13First, I'd like to get at the property tax.
5:49:15I think that has great appeal to our constituents.
5:49:23I think we'd like to take a good crack at that.
5:49:26Now, hold that up, John.
5:49:27Homes are all properties, and I'd like to know if you'd have to get to, if you went to do the ranch land, I think the Marshall Shopping Center, sir, would you?
5:49:37I would think your peers, it's kind of like, it's kind of like, you used to have the, well, the states still have it, you know, the veterans exemption, the veterans exemption for homes, you know, $5,000 or whatever it is, if you're a veteran, for example, property tax, it's that kind of thing.
5:50:00And I think you have enormous, you know, I remember as a veteran, I remembered it very well.
5:50:15Five thousand bucks, you didn't have to pay any property taxes if you were a veteran from California.
5:50:21Isn't that right?
5:50:22No, it's the second area that I think we should really look into.
5:50:27That's the main political issue.
5:50:29And the second area is things that will boost up the economy.
5:50:33I think you've got to look at the investment tax credit.
5:50:36The reason that I think there's, I think I have doubts now that we talked about this, I don't know whether the rest were here, but I've been thinking about this business of first, the investment tax credit or something of that sort seems to me to make sense.
5:50:57But in terms of having any pay-offs sooner, in terms of the research side, the reason I'm somewhat concerned about that, whereas I see it as a long-term goal, is I understand you're not going to get any pay-offs except for the 30,000 or 40,000 technicians and scientists that you employ.
5:51:19You're not going to get any pay-offs for 18 months, is that right, folks?
5:51:22Yes.
5:51:23Yes, I think that's correct.
5:51:25Well, that really isn't going to help the economy at this time.
5:51:28Well, that's something we ought to tackle at a later time, it seems to me.
5:51:33I mean, the reason, the idea of it, is I don't really believe that we ought to take a billion and a half or two billion dollars for the purpose of putting 30,000 scientists and technicians to work.
5:51:47If we're going to do that, we're going to have to build those space platforms.
5:51:54I'm not sure.
5:51:55I feel exactly the same way, plus the difficulty of administration.
5:52:00I have a real question.
5:52:00I think we have to take a little time in trying to really analyze this thing.
5:52:05I do agree with the basic principle.
5:52:06We need more money in the R&D field for the county.
5:52:09As I held this up there, too, there's a great question for parents.
5:52:14I understand as to whether the money would even be going to more research.
5:52:19Yeah, we've got to find out.
5:52:21We have to invest and be able to believe.
5:52:24The other thing is, I would like for trade to protect me to have sent specific industries, as you are doing.
5:52:31The movie thing I raised, I don't give a damn about the movie thing.
5:52:35That's all right.
5:52:37It's all right because of its high visibility.
5:52:39Railroads and these others...
5:52:41go into those, and if there are some things we can do there where it would really help.
5:52:45I'm inclined to think, John, that you can find industries where it really might help you.
5:52:51I don't know.
5:52:52Well, we can.
5:52:53We can.
5:52:54My God, what we're supposed to do with the industry is going to help you enormously.
5:52:58We probably had an agreement on it.
5:53:00Didn't you find what you think?
5:53:03That's not quite so weak.
5:53:05That was because...
5:53:07Well, I know it.
5:53:08I say we thought, we didn't realize the total parameters of the problem, we thought we had it worked out.
5:53:18And then we realized that some of these people were more interested, not in the reruns of old movies, as old movies, but many of them test driver-based ones.
5:53:28is now creating television shows for original productions as news.
5:53:35It's not a residual thing.
5:53:37We had the residual thing worked out for them.
5:53:39They didn't have to hold any reserves, whatever, against their residual income from television.
5:53:47But that doesn't help him, because hell, he's making movies directly for television, for a nation, not to be shown in movie houses.
5:53:55So now we've got to go back and take another look, and here's not my house, because we just didn't know the extent of the problems.
5:54:04But I, it's a, you're working on the railroad problem.
5:54:07Yes, yes, yes.
5:54:08We're working on the railroad problem, and we've got to do some things for the railroad.
5:54:12For your information, the...
5:54:14We roughly calculated that the ADR changes has an impact of tax reduction of approximately 10% for the railroad.
5:54:24They hear it already.
5:54:25Now, they want some things.
5:54:28And we're trying to, and I think we agree with them on a lot of these things.
5:54:34It has to do with their basic rate of road tax and their rate of season, which they've never been allowed to depreciate.
5:54:42And so you get all kind of problems.
5:54:45Up to now we've been letting them replace their rails with the same weight rail, we would say.
5:54:54But what they've been doing is replacing the old rails with a much heavier rail and a lower costly rail.
5:55:00But we've been making them capitalize that additional portion.
5:55:06But I think we can justifiably let them upgrade the road as they go along, and either take it as a repair, or as a debris flight of one or two.
5:55:14Let them charge it off as an expense, or as a good highway treatment.
5:55:28The third area is in terms of the business.
5:55:32The thing is the excise tax on automobiles.
5:55:35I'd like for you to look into that.
5:55:36Look into it in terms of whether the NAND automobile companies, if they get the reduction, are going to give a tax, give a price reduction rather than simply adding to their profits.
5:55:49And if they aren't, the hell will happen.
5:55:51Because they too often play it the other way.
5:55:54The telephone thing, I wouldn't worry about.
5:55:58It ought to be done, but you've got to have a tax, you've got to have a tax, and that doesn't mean anything.
5:56:08It doesn't mean anything in the way of doing the job, and so forth, and so on.
5:56:17It doesn't mean anything in the way of doing the job, and so on.
5:56:21It doesn't mean anything in the way of doing the job, and so on.
5:56:25I don't think that's true, you know.
5:56:27Well, that's the rate they charge, but the excise tax has nothing to do with the rate they charge.
5:56:43Is that right yet?
5:56:45The excise tax is a flat charge.
5:57:22I mean, that's something we can do, we can afford it, but we can't afford it right now.
5:57:28Really, that doesn't, that doesn't want to help newcomer members.
5:57:33I think it is worth considering, it is worth considering the tuition thing.
5:57:40But I think probably, in this instance,
5:57:44Make a hard look at where the real crunch is.
5:57:47The real crunch there is...
5:57:54The area where most of us have not been thinking about, most of us have been thinking about tax deduction and or credit for those who, you know, for college tuition and the rest.
5:58:06At the present time, there probably, we shouldn't be encouraging a hell of a lot of people to go to college.
5:58:11I think I'd rather have the primary schools saying, direct zero and write on a current national crisis.
5:58:17Public and private.
5:58:19No, sir.
5:58:20No, no, no, no.
5:58:21In primary school, private tuition, tuition only.
5:58:24No, sir.
5:58:25In primary school, I just say anybody that's getting to a private school, $200 or whatever it is, what words are something that get away from the college that they can't get?
5:58:40And I say that having long advocated and believing that sometimes it ought to be done, and we still screw around with this.
5:58:48Well, as far as the limit is, maybe the families themselves are talking some credit, but these kids have got so many alumni programs, there's so many opportunities for them to borrow money, to get grants, fellowships, scholarships, the state and federal government said, I just really question that they need to have a lot more help than the college does.
5:59:07The families that bear the burden are the ones that get the back that works.
5:59:20I think the poorer kids have no problem, but it's the middle-income family who drives to send their kids to school and so forth that has a problem.
5:59:31And I realize it would have some appeal, but I don't think that when you're talking about the amount of money that's involved, and that's a hell of a lot, you see 200 bucks, forget it.
5:59:40But on that private, I'm just thinking of frankly how much money we got, what was going to do some good for...
5:59:47Let's fix it for the blue collar Catholic sending his kid to a parochial school.
5:59:53200 bucks a kid.
5:59:54Most of them have got six or eight kids.
5:59:57It makes a difference as to whether or not they live or not.
6:00:00Do you include high school in that?
6:00:04Primary and secondary or just primary?
6:00:08Primary and secondary.
6:00:09And that gets a few Protestants and even Quakers on some secondary schools.
6:00:17Det skjønner vi.
6:00:19Det lønner på avsikkerheten.
6:00:21Mr. President, does this problem on the social security tax bother you?
6:00:26What?
6:00:27The fact that it is regressing payroll tax.
6:00:30I don't think that it does.
6:00:32It is regressing.
6:00:33But I think that kind of, I'm thinking now of what we can afford in the politics of it.
6:00:38I don't think there's any politics in it.
6:00:41I don't think people understand.
6:00:42Maybe I'm wrong.
6:00:43Do you think it's fair?
6:00:45Do you think people are going to say, gee, we're going to do this, do that, about that, then?
6:00:50Because basically it's something that's deducted.
6:00:55What we're getting here, when you get tax credit, there the guy knows he's getting the dough.
6:01:01But if you're just going to change the standard form or whatever it is, you know what I mean, and how much he gets out of this, he doesn't feel it.
6:01:11That's why the property tax is what the guy feels.
6:01:13The tax credit...
6:01:15$200 a person he knows.
6:01:16Correct.
6:01:16Well, let me ask you, I don't know about social security.
6:01:20I'm no expert, I guess.
6:01:21Would you consider it a possibility or any of that?
6:01:24Well, I think it wants to pay off.
6:01:27One that might have some real people is that you tax the debt and income only once.
6:01:35Sure.
6:01:37I think the double taxation of dividends is wrong.
6:01:39I always thought so.
6:01:41If you ever go down that road, of course, there's a hell of a lot of people that will bitch about it.
6:01:48On the other hand, we have to realize that looking to our constituents is something that goes well.
6:01:54Here's part of the problem, though.
6:01:57The American industry, more and more, is going to have a problem in capital.
6:02:02Formation, capital formation, where they're going to get the money.
6:02:05That seems maybe to encourage more private investments in the field.
6:02:11It would be extremely helpful as opposed to coming to the government to say a lot of these things.
6:02:19I have to say that I think in that area, corporate income tax is essentially the cost of doing business just put onto the consumer.
6:02:29It's the net after taxes that they set the price by to get that kind of retirement.
6:02:33Corporate tax means you don't tax the individual and dividend it.
6:02:36That's all I'm saying.
6:02:38I'm not saying change the corporate rate.
6:02:40From a political point of view, does that happen?
6:02:44That's the stockholders.
6:02:45How many stockholders you got in the country?
6:02:4880 million.
6:02:49Through pension plans, through insurance, they don't know that they're stockholders.
6:02:55How many actually pay tax on their dividends?
6:02:58We can find out, but I would say probably 30 million.
6:03:02I wonder.
6:03:03I think that's right.
6:03:04I think there are about 27-30 million individual...
6:03:06They have to pay a hell of a lot.
6:03:08You had all the mutual fund holders and individual stockholders.
6:03:13What were you writing about?
6:03:14We had it up, as you know, it's been up before.
6:03:18It was killed 12 years ago.
6:03:20We've done the translation every day since.
6:03:29They gave a $50 deduction for America's president.
6:03:31They could wipe that out.
6:03:32Was that the 69th act or something?
6:03:34Big solution.
6:03:37What I think now, with regard to the whole value-added thing and so forth, I just don't know, John, what it were.
6:03:46Let's just do some more thinking about it.
6:03:51But I do think that in terms of the value-added thing, I just wouldn't fiddle with it at all.
6:03:58Unless we go for the big play, as you have suggested the big play, that has a very significant impact, so that we can do some very good things.
6:04:12In other words, people sometimes don't even take negative impacts if you're going to do good things with them.
6:04:20Now, if you're going to reduce property taxes, if you're going to reduce...
6:04:28Or, I don't know if you think it's going to be accomplished if you're going to goose up, say, maybe stop creating that kind of business or what you saw.
6:04:39Maybe people will support it.
6:04:41It may be that they, maybe they won't overhand.
6:04:45But, you know, in regards to security tax, particularly when you consider that there are various other payroll taxes that are in the picture,
6:04:59I think there can be a job impact developing on that.
6:05:04In a sense, that would be different.
6:05:07In a sense, when you make it very expensive for an employer to add an additional person to his payroll, that's distinct from working his present force a little bit longer.
6:05:19You tend to stimulate overtime and restrict the amount of employment.
6:05:25That is, an employer says that if he brings a new person on, then he starts paying his payroll taxes on the first dollar of payroll.
6:05:34If he works his existing course a little longer, at least to the extent that people have reached an earnings level on which they no longer pay the social security tax, or the unemployment insurance tax, or the health tax that's been proposed, or various other taxes,
6:05:55then the employer works his existing course longer and doesn't pay any tax.
6:06:01And that's changing the incentives in the labour market somewhat against adding traditional people in favour of working your existing course longer.
6:06:12So I think there's a developing issue that's...
6:06:17just increases as the Social Security and other payroll tax rates increase.
6:06:22It's a different kind of issue than the type that we've been discussing here.
6:06:50Discussions of social security changes and so on.
6:06:53We have been advocating adjusting the tax base rather than adjusting the rate.
6:07:00Nevertheless, you have the impact of this.
6:07:27That is, an employer says if he brings a new person on, then he starts paying his payroll taxes on the first dollar of payroll.
6:07:35If he works his existing course a little longer, at least to the extent that people have reached an earnings level on which they no longer pay the social security tax, or the unemployment insurance tax, or the health tax that's been proposed, or various other taxes,
6:07:56then the employer works his existing course longer and doesn't pay any tax.
6:08:02And that's changing the incentives in the labor market somewhat against adding traditional people in favor of working your existing course longer.
6:08:13So I think there's a developing issue that's...
6:08:19just increases as the Social Security and other payroll tax rates increase.
6:08:24It's a different kind of initiative than the type that we've been discussing here.
6:08:51Discussions of social security changes and so on.
6:08:54We have been advocating adjusting the tax base up rather than adjusting the rate.
6:08:59Nevertheless, you have the impact of this crisis that matters.
6:09:04I'm concerned that there's such a huge amount of the total federal tax take coming from the federal taxes.
6:09:13The comment that I want to make is on the RMB area.
6:09:18not the impact of it more immediately.
6:09:22I think it can be put up, particularly in particular industries, steel industries, textiles, railroads, you mentioned, as giving people a sense of their future, that maybe here is something that we're going to do, and we have some prospect
6:09:44So we see that we really are going to make an impact on these costs.
6:09:48We are going to be able to develop some new products to work on or show on.
6:09:52In other words, this is sort of a component of the total activity that represents a statement that there's a future in this business or in this industry or whatever unit you're talking about.
6:10:06So I think that particularly thinking about some of your remarks yesterday,
6:10:11that there is a tie in there about concern for the future, and hope for the future, and drive to do something about the future between this R&D kind of emphasis, and a kind of immediate attitude to the spirit.
6:10:27Well, if we tie that in and drop it to something you were talking about this morning, it might be an idea that we've got to get us out of here, and so forth.
6:10:37It does also mean
6:10:41I think it's one possible disadvantage.
6:11:03I'm generally sympathetic, but business reaction to, say, an RMB tax credit might be, well, we don't want that.
6:11:15We want the investment tax credit.
6:11:18The business community is almost bugged.
6:11:26If you really want to stimulate the economy, here's another radical idea.
6:11:32We need some guys.
6:11:33We need a whole depreciation schedule in America.
6:11:37It's roughly, it costs you, if you did it the first year, just let them depreciate all their assets the first year.
6:11:44As long as you lost the depreciation schedule, that costs you about $30 million.
6:11:47But you can do it over two years, that costs you $15 million the first year.
6:11:52That's not, maybe that's not a bad idea.
6:11:54Maybe that's a pretty good treadmill for a man to use.
6:11:56For a man to go out and buy any plant or any food that's appreciated to him.
6:12:273, 2, 1, GO!
6:12:36That's the American question about this stuff.
6:12:37It's something that should be heard.
6:12:38That's the tax bill.
6:12:38It doesn't necessarily have to be $2,000.
6:12:39It doesn't have to be $2,000.
6:13:05Or he decided to appreciate it.
6:13:05He knew that our equipment had to be treated in the same way.
6:13:07Honestly, if you talk about, well, we certainly talked about focusing on the aircraft.
6:13:08The only thing that mattered.
6:13:09But he just thought that the aircraft would have an incredibly direct and immediate impact on the aircraft.
6:13:11And he got off the road and stayed late.
6:13:32How else do you ever...
6:14:02Do you think we took people off the tax rolls?
6:14:04I hope it's politically.
6:14:07That's why we had our tax rolls.
6:14:08I don't think that was really considered to be our tax rolls.
6:14:11I think it was.
6:14:13And we're fostering a...
6:14:15The point I make is this, and I think...
6:14:17I'm not concerned about...
6:14:21It's job creation.
6:14:24If you put it in that context, I think it's still... That's not enough to be appreciated.
6:14:33It isn't any bonanza for businesses to say, look here boys, get off your tails.
6:14:38Get your plants to work and put people to work.
6:14:41Just being able to tie it in the back, here's where you get to find your job.
6:14:44That's correct.
6:14:46You have to make it part of the sales.
6:14:50Sales talk.
6:14:52It's part of your whole confederate situation, part of your additional 20 million job.
6:14:56In order to accomplish this goal, we must change the taxes.
6:14:59So that's what we have to say.
6:15:00That's good.
6:15:06Well, I think the great advantage of this kind of substitution is that the value added tax raises lots of money at a very low rate of taxation.
6:15:23And if you can get these very high rates of taxation, even the corporate income tax, which is almost 50%, let alone the individual tax, as soon as you have a very high rate, people manipulate to get around it.
6:15:38And they spend a lot of effort and energy and ingenuity on getting around the high rate.
6:15:42So if you have a tax system that will give you a tremendous revenue at a very low rate, you remove that kind of incentive from the system.
6:15:54Now, Mr. President, the value-added tax, it would be a new thing in this country, but it is a modified sales tax.
6:15:59People are not that opposed to sales tax.
6:16:02I don't know if anybody thinks they are, because they're not.
6:16:07We committed them.
6:16:08I committed the cities to impose city sales tax on the nation.
6:16:13But they committed it to a vote.
6:16:15I said, I better protect your cities.
6:16:17Couldn't impose it otherwise.
6:16:19And on the first go-around, as I recall, the first 100 cities,
6:16:2293% of the taxes on the first rolls.
6:16:25This is people themselves imposing the sales tax on themselves.
6:16:29Not for any specific purpose, but just for general revenue.
6:16:34It's just not that much of a boogie-boo, I don't think.
6:16:38Obviously, nobody likes taxes, but you can't do it unless you have some goodies, some reason to justify it.
6:16:50I think the first priority is what tax modifications can have an effect on the economy.
6:17:05That has to be the first thing, and that's the only responsible position.
6:17:18And then the second is that in terms of credits, deductions, etc., etc., then just those that have, that people can, that are very simple, that people can understand, and that will be considered by the individuals concerned to be a very great value to them.
6:17:41and leave out those things that are too complicated for, even though they may have merit in other ways, for people to understand, or those things that don't help us with the constituency that we need.
6:17:52Now, whether we do any of these things still remains to be seen, we don't know.
6:18:08Yes, that's right.
6:18:09There's one...
6:18:36for the certification plan, but I think we have to start setting the concept in this country that this nation really cannot expect to exist if it gets its cost of government above 35%.
6:18:51I know it's a cost to start setting that, you know, 35% is the absolute ceiling.
6:18:57Sure.
6:18:57Or otherwise, the public sector is getting too big.
6:19:03That's just about what we are now.
6:19:05We were all worse at that point.
6:19:07And maybe we could have sustained on having the personal income of 35%.
6:19:14And I agree with Peter that you might not do it.
6:19:20But somehow we ought to start bringing this into focus that we're bumping into right now.
6:19:25Correct.
6:19:47A lot of intriguing possibilities there.
6:19:50Yes, we really can fashion it about.
6:19:52Either way you want to fashion it.
6:19:55But when you consider the various elements of it, when you consider the possibility of the back edge, if you will consider that, because it has such enormous money involved, the simplification thing, if you consider that between the two,
6:20:10If you've got any other certainties at all, this is all.
6:20:14This is all that we've discussed.
6:20:16How about that?
6:20:17On the simplification side.
6:20:19It should be very simple.
6:20:21It should all have to be.
6:20:32Well, they think it does.
6:20:34A lot of explanations.
6:20:37The percentage of getting help now is unbelievably weird.
6:20:41I know the General Revenue Service Center helped 30 million of them.
6:20:52They gave them free goods.
6:21:01You know, you really threaten the simplification of the CPAs and the coaches.
6:21:08Well, all the CPAs now, they say, you want to know where the real objection is coming from.
6:21:12And you want to know what's best for that simple.
6:21:14They can be the lawyers and the CPAs and the cameras.
6:21:17I know what you're saying.
6:21:19And the employees of the tax collecting services.
6:21:23And you're right.
6:21:24That's why I say there are those that are in the system of trusted interest, and they want to keep them.
6:21:30First, it's difficult to change the system you're in.
6:21:33But second, those that are on the fringes of it, like the lawyers, and we know them well, and the CPAs, they're the worst.
6:21:41I've talked to lawyers, and that's why it's hard for me to have lawyers study the damn thing.
6:21:44They don't cause anything.
6:21:46They just make it worse.
6:21:48Or they complicate it.
6:21:50Well, we can certify it.
6:21:51There's certain risks in here.
6:21:52Yeah, but you certify it.
6:21:56Well, the basic risk is...
6:22:01When you first have to knock out all capital gains, that's the first thing.
6:22:06This is a major step.
6:22:07This is a major risk.
6:22:08But capital gains, those who take them now, are going to be paying for most of them.
6:22:12At least 35 next year, 36 and a half percent.
6:22:14That's the minimum tax.
6:22:17You're going to get the capital gains tax up to 36.5% anyway.
6:22:20Over $50,000 in capital gains.
6:22:22Over $50,000.
6:22:22A lot of people would be losing half a percent of their capital gains.
6:22:26You're right.
6:22:28But nonetheless, you have to outlaw that.
6:22:30You have to get rid of that completely.
6:22:31You have to basically get rid of all of your extensions.
6:22:36So when you two make a step, we go against some of the other things.
6:22:39Then you have a disparity between your corporate rate of 48% and your personal rate of 35%.
6:22:43Well, we can put that personal rate anywhere you want to, except we can't put it at 35% to justify getting away from the capital gains, because everybody, there's a high tax price.
6:22:54I understand the fact that Waller, where he's got a considerable amount of his income on a capital gain basis, so we felt we had to reduce the top level down to 35, so we could say to him, you know, we've made it more.

Nixon, Connally & Shultz on Value Added Tax and Tax Simplification

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Also recorded on July 24, 1971

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