admits they are not losing money but by relocating in Alabama they can make more money.

I might make the footnote that the Government is involved in this move. They are being helped by interest-free bonds that are being floated to pay for the plant facility they will occupy there.

There are Government funds to train the new personnel because they will not move the old personnel from the plant in Detroit to Alabama. In the process the pension plan is abandoned. Even though these plans that we have in both of these locations are funded in the best sense of the word, as we all know, all of the past-service costs cannot all be paid at one time.

They have to be amortized and paid for over a period of 30 years into the future. Every time a new piece is added to that pension plan the cost of that plan is funded 30 years into the future, because the total cost of the past service is impossible to be swallowed by any enterprise at one time and I don't care whether it is General Motors or any small company with which the union may deal.

Not many pension plans are abandoned or folded up. That is why it is possible to handle by a very small tax on the unfunded liabilities of existing plans. It is possible to guarantee and underwrite the pension. benefits that have been legitimately negotiated of all pension plans and remove this particular affliction from the back of American workers. There is presently in S. 4, of which we have high hopes of passage as far as the other body is concerned, and I am sure when it comes to the House it will be a major problem for the Ways and Means Committee, and we would hope for most sympathetic consideration for this very problem.

The very fact that it is small means that it can be handled. The Federal Deposit Insurance Corporation to which our proposal is analogous could not possibly work if half of the banks in America were to fail

tomorrow.

The Federal Deposit Insurance Corporation is a successful system precisely because only a few banks at any one time are ever in difficulty. But the existence of the FDIC gives a confidence and a strength to the banking system that could not otherwise be.

We would like to see that same principle which has been so successfully worked now for almost 40 years in FDIC applied to the private pension supplemental system which now involves several billions of dollars.

Mr. Chairman, those two questions-the reform of the social security taxation system identifying certain loopholes to get the revenue but using it specifically for the purpose of making substantially less regressive the social security tax system and the other, the pension reinsurance problem which would, of course, be a tax upon existing pension funds and not be a tax requirement of the American taxpayer. [The prepared statement follows:]

STATEMENT ON TAX REFORM BY LEONARD WOODCOCK, PRESIDENT, UNITED AUTOMOBILE, AEROSPACE AND AGRICULTURAL IMPLEMENT WORKERS OF AMERICA (UAW) MARCH 12, 1973

I am pleased to have the opportunity of appearing before this Committee to discuss the subject of tax reform. A genuine, thorough-going reform of our tax system has long been needed, and events in the past few years, in spite of the partial reforms of 1969, have worked on balance to increase that need.

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The changes made in 1969 were far from adequate. The Joint Economic Committee has been told that the overall effect from the reforms was a revenue gain of only $285 million from individuals and $350 million from corporations. This was but a tiny fraction of the potential revenue that was then escaping, and since then new loopholes have been opened up, especially for corporations, which will far offset these gains.

In addition, since 1969 there have been substantial cuts in corporation taxes and individual income taxes-the latter the most progressive form of taxation we levy-but these have been accompanied by as great or greater incerases in regressive federal payroll taxes, largely for Social Security (including medicare). The Social Security tax combines two highly regressive features. It takes a flat percentage of covered earnings, as much from the poor as from the rich, and there is a ceiling on earnings covered, so that those earning above the ceiling pay no Social Security tax at all on the excess amount. These two features combined mean that the poor must pay a far higher percentage of their earnings in Social Security tax than do the wealthy.

A few figures tell the story. Between fiscal 1969 and the 1973 estimate, receipts from individual income taxes rose by $12 billion, or nearly 14 percent. In the same period, federal social insurance taxes and contributions rose by $24.6 billion, or over 61 percent. Corporation income taxes in the same period actually fell by well over $3 billion.

Another factor is that while federal revenues (excluding the trust funds, of which Social Security revenues form the greater part) have held relatively level, state and local taxes have risen sharply, and again these latter are generally much more regressive levies, such as sales taxes and property taxes. (While it is true that the President's proposed revenue sharing is supposed to assist state and local governments with their burdens, the fact is that many of them feel that the budget would shift to them greater burdens than the revenue sharing proposal will cover. Many officials fear that their tax rates will have to rise still higher.)

Figures for state and local tax revenues are not available beyond fiscal 1971, but between 1969 and 1971 their revenues from property taxes rose $7.2 billion, or by 23 percent, and from sales taxes rose $6.7 billion, or by 25 percent, while federal personal income tax receipts actually fell by $1 billion and corporation income tax receipts fell by nearly $10 billion.

Even taking into account that corporation income tax payments, and probably also personal income tax payments, are more affected by changes in the general level of economic activity than are sales and property tax payments, it is nevertheless clear that since 1969 there has been a significant shift from the progressive personal income tax and the more nearly flat-rate corporate income tax to the regressive taxes such as social insurance, property and sales taxes. In short, tax "reform" to date has had the net effect of shifting tax burdens from the rich to those in the middle and lower income brackets. Our federal tax system has been following a course toward greater inequity rather than toward greater equity as among taxpayers, and this inequity has been compounded by the shifting of a larger part of the tax burden from federal taxes toward state and local taxes.

PROVIDING FUNDS TO MEET DOMESTIC NEEDS

A real tax reform at the federal level now could do much to redress these inequities, but it could also do much more. It could provide a means of increasing revenues substantially to meet our many domestic needs, without requiring any general tax increase which would add to the burdens of millions of American families who already, and quite justly, feel themselves to be grievously overtaxed.

The problem of our domestic needs is one which can no longer be pushed aside. For nearly a decade now, almost every aspect of our public well-being has suffered neglect from the concentration of our money, energies and goods on prosecuting the war in Indo-China. Now that our involvement in this unhappy war is apparently coming to an end, it is a major responsibility for us to turn our eyes homeward to the necessities of our own people.

One major casualty of the war in Vietnam has been the war against poverty at home. In that war we have not only failed to make continuing progress, but are now faced with demands by the Administration that many of the weapons forged against it be cast aside.

But it is not only the war against poverty, the ghettos and the slums that we are losing. We lack effective programs to deal with the growing host of problems which affect virtually all our people-pollution of our air and water, the tangled traffic which increasingly overcrowds our highways and our city streets alike, the lack of adequate educational facilities for our children and of adequate health care for those of all ages, even in the face of rapidly escalating costs. And these are only some of the most pressing deficiencies.

ADMINISTRATION'S FISCAL STANCE THREATENS OUR ECONOMIC HEALTH

At the same time the Administration refuses any tax increase to meet these needs, cuts off essential programs already in existence and effectively blocks the will of Congress through the use of the veto or the impounding of funds already voted. And the proposal for a $12 billion cut in the deficit for fiscal 1974, if put into effect, will have a restrictive effect on the economy which may well choke off the current expansion, if it does not produce actual recession as similar fiscal swings did in the period 1958 to 1960 and 1968-69. It should be pointed out that never in our history, except immediately after World War II when a cut in government spending was offset by a release of pent-up private savings, has a fiscal swing of this magnitude failed to result in a recession. Even if the economy is not plunged into actual recession, we may well fear that the proposed budget will result in yet another period of economic stagnation and growing unemployment.

Nor is this our opinion alone. As reported in the Wall Street Journal of February 27 last, many business economists who up until a few weeks or months ago had been anticipating a continuation of the current expansion through this year and next year at least, even though at a moderated pace, are for a variety of reasons now fearful of a sharper than expected slowdown late in 1973 or in 1974.

If this should take place, an increase in government spending will be necessary not only to provide the programs our society needs but to provide a needed stimulus for the economy in 1974. This would be about the time when increased revenues from a tax system reformed this year would begin to provide the means of financing such increased spending.

Justified uneasiness over the fiscal stance of the present Administration is pertient to the question of tax reform, because the Administration in presenting cutbacks in spending as the only alternative to tax increases, is in effect refusing to consider the third possible course of financing needed programs through effective tax reform. We would agree that any across-the-board tax increase is undesirable now, because the majority of the people at middle and low income levels are too heavily burdened already. But a tax reform, which would merely require those who are carrying far less than their fair share of the burden to assume their proper share, would hurt no one except those who have so far been the beneficiaries of unfair tax advantages.

POTENTIAL SAVINGS RUN TO TENS OF BILLIONS

We have not been able to obtain an up-to-date, overall study of the amount that could be obtained through a thorough-going tax reform, but it has been estimated that in 1972 the amount of additional revenue from individual income taxes alone would have been about $50 billion, and estimates, partly made by UAW technicians and partly from other sources, indicate a potential revenue gain from corporations of something over $10 billion.

The net revenue gain from a sound tax reform program would, of course, be less than the gross additional amount received from corporations and individuals through the proposed measures to enlarge the tax base, because the gross amount would be reduced by such other measures of equity as offsetting the additional charges which some reforms would place on low and middle incomes, going beyond that to ease the total burden on such incomes, and shifting some of the present tax burden from such regressive levies as property and sales taxes.

On the other hand, the above figures do not include significant further savings which could be made by paring excess fat off spending by the Department of Defense. However, since that is a subject apart from tax reform, we shall make no more than passing references to it when we come to compare new spending proposals now emanting from the Pentagon with some of the programs which the Administration proposes to cut back.

In any case, we believe there is plenty of room within the present tax system to provide the funds which will meet our domestic needs and shift the unjust burden of taxes now carried by those least able to pay, without the need to impose any general tax increase. To do so would restore justice and equity to the tax system and base it, as it should be based, on ability to pay.

I think I should remind the Committee that in 1969 the late Walter P. Reuther, who was then president of the UAW, made a substantial statement to you, and I would ask the Committee to reread it. You will find many of his proposals repeated in this statement, because the UAW has not changed its stance, and much that members of this Committee agreed should be done at that time remains still undone.

I now propose to turn to specific inequities in the present tax system.

INEQUITIES FAVORING CORPORATIONS

As we indicated earlier, the shift of the U.S. tax burden to the poor has brought tax relief for corporations. The biggest tax cuts for business are two provisions of the Revenue Act of 1971, the Investment Credit and the Accelerated Depreciation Range. Under the former, a credit against the federal income tax is allowed equal to 7 percent of qualified investment. Under the latter, corporations are permitted to defer their taxes by charging depreciation at higher rates than were previously allowed on investments that already have been made, in effect getting an interest-free loan which will be indefinitely perpetuated as future investments claim the same deferment. In fiscal 1974, these loopholes will reduce federal revenues by an estimated $6.7 billion. The Administration sold them to Congress as necessary instruments to stimulate investment and pull the country out of the 1970 recession. But while we know the extent of the tax cut they represent, just how much net investment was generated by these "trickle down" schemes has not been and probably cannot be measured. With over 20 percent of capacity still idle, it is very likely that much new investment has been for purposes of modernization. Newer and more modern plant and equipment may lower costs of production, but if more efficient facilities reduce these costs by enough to pay for themselves, firms should have been expected to invest in them to begin with. If they do not, it does not make sense for the government to offer special benefits to induce investment which would otherwise be judged uneconomic. In fact, in September 1971, shortly after President Nixon had proposed revival of the Investment Tax Credit under the new name of a “Job Development Credit,” the New York Times announced that it had made a survey which indicated that the proposed measure "appears more likely to increase corporate profits than to create additional jobs for unemployed workers next year."

The report went on to point out that most business firms would reap extra profits from the tax credit even without increasing their investment, because it would apply to equipment already ordered and to machinery that would have been ordered even if the tax credit had not been announced. It could also have pointed out, but did not, that even companies which reduced their investment would still reap the benefit of the tax credit as applied to that investment which they did make.

The facts are that businessmen do not invest money simply because they have it in hand, but rather because market prospects at a particular time and place indicate that the investment will produce an acceptable profit. And if the prospects do so indicate, then even those without sufficient liquid assets of their own to command can usually obtain what is needed from the money market.

DEPLETION ALLOWANCES

A fat giveaway to some corporations which was only partly reduced in 1969 results from the special tax treatment of depletable resources. This means primarily special favors for the oil and gas industry, though some other industries based on depletable resources do get favored tax treatment also. These corporations saved an estimated $325 million in fiscal 1971 by charging off intangible drilling costs-essentially those costs other than the cost of drilling equipment-as a current rather than a capital expense.

But that is only the beginning. A much greater windfall is the so-called depletion allowance, which is not really a depletion allowance at all but a direct tax reduction. It consists of 22 percent of gross income (price times quantity sold) from oil and gas production up to 50 percent of net income and results in

a greatly reduced effective tax rate for the industry. This is an extraordinary tax benefit, because it permits the tax-free recovery of dollar amounts which are far greater than the taxpayer's original investment in the depletable property. In fiscal year 1971 this item accounted for almost $1 billion of lost federal revenues. According to a study submitted to the Joint Economic Committee last year, this loophole is worse than a waste of the general taxpayers' money. The authors concluded that "it is relatively certain the special tax provisions result in an inefficient allocation of resources, a smaller national income and questionable income redistribution effects."

FOREIGN TAX CREDIT AND DEFERRAL

Two other substantial tax breaks which the oil industry shares with the rest of business are the foreign tax credit and deferral of taxes in foreign profits. Together, these giveaways provide huge financial incentives which in many cases make corporate investment abroad preferable to investment at home. In addition, the various tax preferences for Western Hemisphere trade corporations, less developed country corporations and investment in U.S. possessions provide still further foreign investment incentives.

The foreign tax credit permits corporations to reduce the amount of U.S. taxes they otherwise would pay by the amount of profit taxes paid to foreign governments. This is quite different from the treatment of profits taxes levied by the various states of the U.S. State taxes are treated as deductions, which have the effect of reducing the amount of profits on which federal taxes are payable. This means that every dollar paid in state taxes saves the corporation 48 cents in federal taxes. The credit allowed for foreign taxes saves the corporation a full dollar of U.S. taxes for every dollar paid in foreign taxes (subject to certain qualifications that have only minor effect). In fact, the savings are dollarfor-dollar even on profits taxes paid to foreign local government units, which means that even such taxes are given more favorable treatment than the state and local taxes which are their U.S. equivalent.

In certain cases, the tax credit encourages foreign governments to impose higher tax rates on profits of U.S. subsidiaries than they would in the absence of the credit, thus transferring revenues from the U.S. Treasury to their own. Oil companies, for example, are noted for having been able to convince the governments in a number of oil-producing countries to substitute profit taxes for royalty payments, which are considered an ordinary business expense for U.S. tax purposes.

Under tax deferral, profits of foreign subsidiaries of U.S. corporations are not taxed unless and until they are remitted to the U.S. parent corporation as dividends. They escape taxes forever if they are reinvested abroad. Withholding taxes on dividends levied by many countries further encourage such reinvestment. Even if the profits are ultimately repatriated, taxes on such profits amount, during the period of deferral, to an interest-free loan from the U.S. government which gives the corporation involved considerably more to invest abroad than it would have available for domestic investment if the same profits were brought home and thereby made subject to U.S. taxes.

In terms of their effects on U.S. revenues, the deferral and credit provisions are substantial. In a paper presented to the Joint Economic Committee, Professor Peggy Musgrave estimated that if both provisions were to be eliminated— i.e., foreign taxes were made deductible from income only, and U.S. taxes were applied when foreign income was earned-as much as an additional $3.3 billion could accrue to the federal government.

What are these tax subsidies buying for the U.S. taxpayer? Loss of jobs and a weakened trade balance. The evidence seems to point to the fact that they assist U.S. subsidiaries abroad to compete more successfully with domestic production at home than they otherwise could, and thus tend to displace U.S. exports. While such artificially assisted foreign investment may be profitable to the U.S. stockholder, it is likely to reduce job opportunities and wages for U.S. labor and the governments tax revenue from profits.

The remaining tax concessions referred to above (for Western Hemisphere trade corporations, etc.) amount, in effect, to windfalls for corporations disguised as aids to economic development. U.S. subsidies to the affected countries in the form of direct loans, grants, and technical assistance would probably be far more effective in assisting them to achieve well-balanced development.