December 17, 1979
Page 36461
Mr. MUSKIE. Mr. President, I heard the distinguished Senator from Texas announce that he had 78 cosponsors for his amendment, so I gather there is not much point, in terms of prevailing, ,for my saying anything.
Mr. BENTSEN. Except for the eloquence of my distinguished friend from Maine.
Mr. MUSKIE. Mr. President, with respect to the pending amendment, it is obvious, I am sure, to my good friend from Texas, as well as other Senators, that I rise to speak because of its budgetary impact, but I am also going to address the merits of the legislation.
It is clear that the amendment comes highly recommended. Some 78 of our colleagues are cosponsors. Along with the distinguished chairman of the Joint Economic Committee and my good friend from Kansas, they offer an appealing argument.
We are told that the Bentsen-Dole amendment will stimulate economic recovery by creating new incentives for saving and investment.
We are urged to avoid penalizing hard working Americans as they strive to build modest savings accounts.
We are asked to approve a measured revenue loss in the name of economics revival, investment stimulation, tax relief, and much else which is good and holy.
It is an appealing argument and for those who may have overlooked the point, a vote for this amendment would qualify at least for a mention or two on the campaign trail this fall.
Mr. President, there is something here for everyone. And I confess that I can raise just four objections. It will not work. It is not fair. It is not necessary. And as we labor over the next 10 years to balance the budget, provide for the Nation's needs, and plan for substantial general tax cuts, it will leave us $27 billion less to work with.
Apart from those problems, no one could object. And it appears that very few will. But if only for the record, let me elaborate.
This amendment will produce a revenue loss of substantial proportions.
In fiscal year 1981, it would reduce revenues by $314 million. In fiscal 1982, $2.3 billion would be lost. And the total impact from fiscal 1981 through fiscal 1990 is estimated at $27 billion.
To put that in perspective, we will spend more than $2½ billion on agriculture programs during this fiscal year — just a little more than the revenues to be lost in 1982 alone.
Mr. President, as I have insisted time and time again in recent months, a tax cut which undermines our efforts to control inflation cannot be defended in the absence of countervailing benefits which justify it.
Before we have balanced the budget — before we have prevailed in the battle against inflation — we will do the taxpayer an ultimate disservice with tax cuts which are premature in a workable fiscal strategy.
Although a much bigger tax cut than this one is part of our short-range plan, now is not the time.
Let me hasten to add that incentives for saving and investment have a centrally important role in a comprehensive strategy. But the amendment before us now is not a prudent one.
Problem No. 1 — it will not work.
To be effective, this amendment would have to promote new investment and savings on a very large scale. But more than half of the taxpayers already earn more than $200 per year in interest and dividends — or $400 for a joint return.
The amendment is billed as a saving incentive. But it begins by cutting 51 percent of the taxpayers completely off the top. For them there is no incentive — only a tax cut.
Of course, some 27 percent of those who file with the IRS are too poor (or too rich) to have any income tax liability at all. For them there is no incentive. For them there is not even a tax cut.
Needless to say, the 9 percent of American families who fall below the poverty line do not have much experience at all with savings banks and brokers.
Mr. President, this amendment will do essentially nothing to promote new saving and investment on the part of those who could really make a major collective difference.
A full 74.6 percent of the revenues lost under this amendment would have zero impact on saving and investment incentives. The rest could have no more than a modest effect.
And that suggests problem No. 2 — it is not fair.
As if the law of nature were not enough, this amendment will make it a little easier for the rich to get richer. It will do very little to enrich the modest saver.
The level of benefit derived from the new incentive will increase proportionately with the saver's tax bracket.
Those in the lowest bracket who manage to collect $100 in interest and $100 in dividends will be rewarded each year with the princely tax savings of $14.
But for individuals whose income is taxed at 50 percent, that same $200 of income will bring a return of $50 — three and a half times as much. That would just about cover the cost of a subscription to the Wall Street Journal. But somehow 1 cannot see the market exploding.
And if that individual received the $200 of income in interest alone, his tax break would amount to a $100 return.
Mr. President, this is petty gilt polishing masquerading as populism. Those in the 50-percent bracket need no $100 incentive to invest their resources. Those in the lowest tax bracket need a good deal more than $14.
Problem three — it is not necessary.
The Senate has only recently passed legislation to effect significant changes in the regulation of financial institutions. The House has passed a similar measure, and eventual enactment seems assured.
Very simply, that legislation will accomplish the same ends which this amendment addresses — and with none of the unfortunate implications.
It would permit the establishment of "NOW" accounts nationwide. It would allow for automatic transfers between checking and savings accounts. It would encourage the financial regulatory authorities to raise the ceiling on interest rates as economic conditions permit.
In short, it would help small savers to realize higher returns on savings — effectively accomplishing the very objectives which the Bentsen-Dole amendment entails. It would do so without the loss of a single tax dollar — and without the unfairly favorable treatment of the well to do which is inherent in the pending amendment.
Mr. President, if I may be permitted to quote back the gospel of some of those who support the amendment, the free operation of credit markets is far preferable in this instance to the use of the tax code as a legislative tool.
In closing, let me underscore another important aspect of the issue now before us. The Congress has adopted a budget plan which calls for revenue gains and for a balanced budget in 1981. It is a plan which also calls for a $55 billion tax cut as a legislative tool.
Adoption of the Bentsen-Dole amendment will undercut that plan and ignore that comprehensive commitment. In the business of economic forecasting, no one can be sure of what the future holds. But we can be sure that this amendment would cut into the amount which will be available in 1982 for that general tax reduction. We can be sure that it would constrain the Finance Committee's ability to weigh the merits of existing tax incentives in the face of demands for new ones.
There is an old combat story about the soldier who bragged of cutting off an enemy's arm.
"Why didn't you cut off his head" someone asked.
"Because someone had already done that."
Mr. President, we have to cut off the head of inflation before we go home to boast about appendages.
This amendment will no doubt be welcome news to many. Few of us would turn down a few extra dollars. But we would be happier by far with a little less inflation.
Mr. BENTSEN. Mr. President, I ask unanimous consent that Senator BUMPERS be added as a cosponsor of this amendment.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. JAVITS. Mr. President, I yield myself 3 minutes.
Mr. President, I have heard with interest, and always with respect, the argument of the Senator from Maine.
Mr. President, the Chinese have an expression, every journey starts with the first step. That is what we are taking here.
Mr. President, it is absolutely essential, because the fall in productivity growth of the U.S. industrial machine and the dearth of investment capital, especially for small business, is so severe, and our rate of savings is so far behind that of other major industrial countries — it is about one-third of what it is, for example, in Japan — that we have to find a means to encourage this activity.
Mr. President, we on this side have every right to have great pride in this amendment because it was first raised by the 41 Republican Senators and incorporated in the Senate Republican economic policy statement, promulgated on July 26, 1979. I quote from page 5 of that declaration, recommendation No. 2 under the heading of Capital Formation and Productivity:
2. As an incentive for greater savings and investment, a savings interest exclusion should be provided and the present dividend exclusion from federal personal income taxes should be expanded.
The Republican policy statement was developed by a task force of Senators, which I had the honor to chair. Immediately operative on this particular recommendation was that part of the task force called the Group on Capital Formation and Productivity, of which Senator PERCY and Senator DANFORTH were the spokesmen, with Senator PERCY now one of the principal authors of this amendment.
I want to emphasize for my colleagues on both sides of the aisle what I said repeatedly as chairman of the task force: Our declaration on economic policy was, and is, no partisan rhetoric, and what the Senate is doing today confirms that statement.
I am deeply obliged to Senator BENTSEN, who took up the cudgel for this amendment, both on the floor, and in the committee — in the commitee himself, and on the floor with Senator PERCY — for taking it up and making it bipartisan. I am delighted to see our agreement on it.
This savings exclusion is not the end; among other things, we Republicans have called for accelerated depreciation as a major tax incentive for capital investment to modernize U.S. industrial plants, and for tax credits to encourage greater research and development. As we chart a course through what will be extremely perilous times ahead, Senate Republicans will continue, individually and collectively, to put forward the same kind of imaginative ideas that must be considered if our country is to survive and prosper in the decade ahead.
Now to the reasons for this particular interest/dividend income exclusion. First, providing this exclusion of $200 individual/$400 joint is necessary on the ground of equity. Persistent, endemic inflation, in the double-digit range this year, is literally wiping out the benefits of savings for millions of Americans. The mathematics of 5½ percent interest when prices are rising by over 10 percent per year, mean that interest is erased, and even some principal is eroded. Moreover, and this is of major importance, we then tax the illusionary "earnings."
Consequently, a taxpayer in the 20-percent bracket, who has $3,000 in a savings account earning 5½ percent per year or $165, in effect sees all of the purchasing power of his interest, and a comparable amount of his principal, wiped out by 11-percent inflation. But beyond even that, his interest of $165 must be reported, and is taxed at the applicable rate.
If our recommendation, as it is now incorporated in the pending bill, becomes law, however, our hypothetical taxpayer's $165 would be excluded from taxation.
So, Mr. President, a compelling case in favor of the amendment can be made on the ground of equity; of fair play for the millions of small savers who are the backbone of investment support for our U.S. productive machine, and who are urgently deserving this relief.
Mr. President, equity for the poor is also at issue here. The essence of this capitalistic society will be its success. The fact is that if we are successful, we shall most help the poor. The poor will not be helped by an unprosperous, chronically depressed United States, constantly suffering from lack of investment capital and lack of increase in productivity, for increased productivity is the only thing which improves the standard of living on an absolute basis. The fact is, Mr. President, that while we were substantially increasing our productivity until we ran into the serious recession of 1973-74, we had cut down the number of poor in this country from something in the area between 15 and 18 percent to 11 percent, which is what it is today. Capital formation is the way, Mr. President, to make the most permanent progress in this kind of society.
Mr. President, I understand that some have said that we need not do it this way; that we could accomplish the same objective by removing the present antiquated regulation Q limitations on interest payments. But that is not happening: we have passed such a bill in the Senate, of course, but the House has put our conferees on notice that the Senate bill is broader in scope than they may be prepared to accept. So we may not see regulation Q ceilings eliminated any time soon.
As I have said on the fuel assistance appropriation, we must act while we have the chance because, if we do not, the savings deficiency will proliferate and no relief will be forthcoming.
Another compelling argument for our position in this matter is that the present U.S. tax system imparts a heavy bias in favor of consumption and against saving. During these extraordinary times, we need to redress that imbalance, which is leading to heavy consumption spending and inadequate savings to meet the long-range capital needs of our country in the decade immediately ahead.
According to Business Conditions Digest, the monthly publication of the U.S. Department of Commerce, the personal savings rate for the third quarter of 1979 was down to 4.1 percent. The trend seems to be inevitably downward, and may very well be exacerbated by continued inflation.
Meanwhile, the Japanese and the Germans save 25 and 13 percent of their incomes, respectively.
If we are going to generate the capital we will need in the next decade to stimulate productivity ; to modernize and expand our present productive capacity; to get inflation under control; and to expand real wages and profits, we really must act to encourage greater savings and less personal consumption.
Now I am cognizant of the arguments that have been made by some of my colleagues that there is not much incentive in a $200 exclusion and that we will be providing 'a windfall for those who have been earning that much interest anyway. That is a very static analysis, however, because it does not take account of the response of those who may be encouraged to save more or draw out less of their savings because of the existence of the tax saving.
Furthermore, I believe the incentive effect and the equity aspect go hand in hand — why else would the savings rate presently be so abysmally low? Once we remove the inequity associated with taxing illusory savings account interest income, we will, I suspect, have eliminated a significant existing disincentive to save, and the result can be increased personal savings.
Mr. President, by way of summary I wish to say that I believe our people deserve and need this tax relief, they need it urgently as a matter of fairness. and it can help to balance the spending- saving equation by providing an important new motive for personal saving. In addition, Mr. President, it is the same proposition the Republican side adopted as its own in July of this year, and I hope the Senate will adopt the amendment and fight for it in the conference on this bill.
Mr. PERCY. Mr. President, I appreciate the comments of my colleague. When I first introduced the Small Savers Incentive Act with the cosponsorship of Senator DANFORTH, we presented it to a Republican policy committee luncheon. It received enthusiastic support. Subsequently, a bill was drafted which all 41 Republican Senators supported and the Small Savers Incentive Act was title I of the overall package.
It appeared during the course of the long colloquies we had on this on the floor of the Senate, in an attempt to bring up this legislation, that the Committee on Finance would really have to take this back in order to get it cleared. There was no ability to get legislation approved for a vote on the floor of the Senate unless the Committee on Finance took a look at it.
Senator LONG then agreed to call a meeting of the Finance Committee and, together with Senator DOLE, the idea was thoroughly discussed. The Senator from Texas took the initiative there to reduce the amount to $200 ($400 on a joint return), to move it back from 1980 to 1981 so there would not be a point of order from the Budget Committee. But, unlike the original amendment which the Senator from Illinois sponsored with the distinguished Senator from Texas, it only applied to savings account interest. This particular bill now includes both dividends and savings.
I extend deep appreciation to my colleague from Texas for taking into account the necessity of creating equity markets and, therefore, encouraging investment in equities by giving exclusion to dividends as well as to savings.
I do, also, express my appreciation to my distinguished colleague, the ranking minority member of the Senate Finance Committee (Mr. DOLE) for working closely with Senator BENTSEN and Senator LONG on this.
I am pleased, therefore, to join Senator BENTSEN in offering this amendment to encourage personal savings and investment.
This proposal is the result of the Senate Finance Committee's consideration on November 29 of 11 savings and investment incentive proposals, including an amendment which Senator BENTSEN and I introduced, on November 16, to the windfall profits tax bill and one introduced by Senator DOLE, which I also supported.
At the suggestion of Senator LONG, both of these amendments were withdrawn so that the Finance Committee could study them and other proposals pending before the Senate to encourage savings and investment. By a vote of 15 to 2 the Finance Committee reported a compromise proposal.
This compromise, which has 78 cosponsors, 37 Democrats and all 41 Republicans, will exempt from Federal income tax $200 per year ($400 on a joint return) in combined interest and dividend income starting in calendar year 1981.
For some time, I have been concerned about the low rate of savings in this country. On July 19 of this year, I introduced the Small Savers Incentive Act, S. 1542. My bill provides a $500 exclusion for both interest and dividends if $400 is reinvested. The $100 exclusion for interest income, like the existing exclusion for dividends, would be allowed regardless of reinvestment.
I am aware that some believe this compromise proposal will not encourage savings and investment, but will simply provide a "windfall" to taxpayers who already save and invest. There are others who believe this proposal does not go far enough, that we should exclude higher levels of interest and dividend income.
To both of these groups, I say my original proposal addresses these criticisms with a larger exclusion for both interest and dividends and the requirement that they be reinvested.
The pending proposal, however, is a compromise. It is an important first step in reducing the penalty our tax system inflicts on savings and investment.
Mr. President, the savings rate in the United States is the lowest of the major industrialized nations. Because personal savings and investment are major sources of business investment capital, this low rate of savings is a crucial economic problem.
Eminent economists have testified that this amendment will work. According to Michael J. Boskin, professor of economics at Stanford University—
It is a sensible first step on the road to gradual reform of the tax disincentives to saving in our current tax system.
Another noted economist, Michael K. Evans of Evans Economics, Inc. of Washington, D.C., believes this amendment will increase personal savings in this country by billions of dollars. Says Mr. Evans :
Estimates of the elasticity (of savings) vary widely, but a reasonable figure would be 0.2. In other words, a rise in the rate of return from 3½ to 5 percent, or a 43-percent increase, would raise savings by approximately 8.6 percent.
That comes to about $2.4 billion.
Mr. President, I believe it is imperative that the Senate act now by approving this limited exclusion for both dividends and interest income. This action by the Senate will pave the way for consideration of other measures which are vital to a sound economic program for the future.
This amendment is a cornerstone of such a program and for that reason, it deserves the support of every Senator in this Chamber.
Several Senators addressed the Chair.
The PRESIDING OFFICER (Mr. BAUCUS). The Senator from New York.
Mr. MOYNIHAN. I thank the Chair. Mr. President, I rise to congratulate the Senator from Texas for his leadership in this matter and to address two points in the briefest outline, if only to record an aspect of the action we are about to take, which I think has not been fully addressed. That is the impact which this measure will have on thrift institutions.
Now, if there is a classic institution of the American economy and of American democracy, it was the early development of savings banks, followed later on by savings and loan institutions, in which wage earners could deposit savings and acquire property and capital in that way.
Subsequently, through savings and loan associations, it became the means by which wage earners then acquired homes of their own and ceased to be renters and tenants, and so on.
This had a profound effect upon the democratic nature of the American economy, such that in Europe there were great efforts to reproduce it by postal savings banks and government institutions that never quite worked.
It happens, however, that under the impact of world inflation, thrift institutions have been having greater difficulty attracting savings.
As a matter of fact, owing to usury laws, and things like that, we found ourselves in a situation where working persons with small surpluses that they would wish to put into savings were forced to do so at negative rates of interest, a bizarre and clearly an unjust situation.
This amendment, the Bentsen amendment, will reverse that. It will restore an inequity. It will reverse an inequity to small savers. It will significantly strengthen the now threatened and weakened condition of thrift institutions, absent which the strong support of the American people for a free enterprise system might never have persisted.
We might have found ourselves in the condition in which other industrial democracies quickly drifted into with the huge disparities of capital as between individuals and institutions and corporations.
This has something to do with how the country will remain.
I would like to note that just next year, as a second point, the Finance Committee is going to take up the whole question of investment, and investment rates. I hope we will not be simplistic about this. In particular, I hope we will not assume that, clearly, we can increase the rate of capital formation simply by devices that direct capital to activities in which it does not produce, in fact, a very large return.
It is possible that a great deal of the absence, the slow formation of capital in the last quarter century in this country, could reflect a cycle.
There are people who argue it does.
The working out of investment in particular technologies now about exhausted in their innovative capacity and, indeed, to some degree, the utility steel, for example, the failure of any new important technologies to come into the market, seems to have been the case in this economy for the last 15 years.
There is more to capital formation than interest rates. That should be obvious enough.
But I would like to record that when the Finance Committee gets into this question, we will hope to do so at levels of complexity in our analysis that will produce results more than just the automatic assumption that investment institutions can, as such, raise the return to capital, results of productivity and technology.
That is where our problem seems to lie. But that is only an aside.
I rise to congratulate my friend from Texas and to say that the day this bill goes into effect, the savings banks and the savings and loan institutions and security markets and bond markets in this country will, once again, open to small savers an aspect of our economy which has been unique and which, curiously enough, was eroding under the impact of inflation.
This is a great piece of legislation, in the best traditions of American populism.
I do not know that the Senator from Texas wishes to be thought a populist. But on this day, he is, and I congratulate him.
Several Senators addressed the Chair.
Mr. DOLE addressed the Chair.
The PRESIDING OFFICER. The Senator from Kansas.
Mr. BENTSEN. I thank the distinguished Senator and, at times, I am delighted to be thought a populist.
Mr. DOLE. Mr. President, I am pleased to speak in support of the amendment agreed to by the Finance Committee on November 29, which provides a tax exclusion for dividends and interest on savings. The proposal recommended by the committee represents a compromise drawing on several pending bills, and was sponsored by Senator BENTSEN, Senator TALMADGE, and the Senator from Kansas.
We recommend an exclusion from income for interest and dividends of $200 per taxpayer ($400 per joint return). All dividends and all forms of interest on savings would be eligible for the exclusion. This means that interest on conventional savings accounts is covered in order to help the small saver. Interest on other types of savings — certificates of deposit, commercial paper, bonds — are also covered.
Mr. President, I am particularly gratified that the Finance Committee proposal covers dividends received by individuals from domestic corporations. This was a feature of the Dole-Baker-Danforth-Javits-Roth amendment that was suggested as an alternative to the Bentsen amendment to the windfall profit tax. The dividends exclusion is important because it gives us a two-pronged attack on our capital formation problem — through individual savings and through investments in stocks.
It is important to understand why this matter has been raised now, on the floor of the Senate, and why the distinguished chairman of the Finance Committee agreed to expedite consideration of this issue in connection with the Senate's consideration of the windfall profit tax. There are two basic reasons, but both of them relate to our No. 1 problem — inflation.
Inflation eats away at the value of savings, destroying the real purchasing power of money that people have carefully set aside for retirement or other purposes. Interest on savings does not match the inflation rate, and then the interest is taxed, to boot. The other problem is that, when inflation destroys people's incentives to save, not enough money is available for capital formation. As a result, healthy business expansion and upgrading of equipment, including technological advances, are hindered. Productivity also suffers. The statistics, as we all know, bear this out, and they tell a sad story. Among major industrial nations, we are lagging far behind in the rate of savings, in productivity, in capital formation, and in capital investment.
That is why tax incentives for savings and investment are receiving so much attention right now.
If properly designed, a savings tax incentive can make a double-barreled assault on the twin problems of small savers and businesses in need of capital. For some savers, alternative savings devices, such as savings certificates offered at near-market rates, are beginning to provide assistance. In the long run, they may contribute greatly to solving the problem, although as of now they are still out of reach for many small savers. The capital formation problem is more complex — it requires a general encouragement for shifting from spending to savings and investment. The problem is becoming ever more apparent, as rising mortgage interest rates threaten a slump in the housing industry.
Tax incentives for savings and investment would have another welcome, and extremely important, effect. They could help break the psychology of inflation by diverting people from a "buy-now" attitude. We know that the Government can do the most to restrain inflation by exercising fiscal and monetary restraint. We have done poorly in that area, and without such restraint we cannot hope to control inflation. But encouraging savings and investment will help the process along in a significant way by restoring the balance between spending for present needs and preparing for the future.
It is time to realize that our tax laws, over the past decade and more, have helped swing the balance away from savings and toward consumption. The balance must be restored, so that we can end the inflationary bias that reduces real growth. Virtually every other industrialized country gives a tax break to the small saver, so we can understand why our own savings rate suffers by comparison. To really meet our needs, any tax incentive should apply both to savings interest and dividends. That way we can meet our economic problems head on, and that is what the Finance Committee proposes. We will aid the small saver, we will aid financial institutions, and we will aid businesses and corporations in need of capital for productive growth. We need to do all those things, and we need to do them now. We can do them by enacting a tax incentive for both savings and investment, which is what we offer, and what I urge my colleagues to vote for.
Mr. President, I ask unanimous consent to have a summary of the testimony of Richard S. Lawton, on behalf of the National Savings & Loan League, printed in the RECORD.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
SUMMARY OF THE TESTIMONY OF MR. RICHARD S. LAWTON ON BEHALF OF THE NATIONAL SAVINGS AND LOAN LEAGUE
1. The rate of personal savings in the United States has fallen to 4.1% — the lowest since 1951.
2. Savings rates are more than double the U.S. rate in industrialized nations which have adopted the tax incentive.
3. Our current tax laws have a consumption bias especially in periods of high inflation.
4. In the 1980s we will see housing demand for 2.2 million– 2.3 million new homes per year. Increased savings is essential if there is to be sufficient mortgage credit to meet this demand.
5. A tax incentive for savings will lead to greater savings — thus more capital promotion — greater productivity — real GNP growth — all of which helps to reverse the spiral of inflation.
Mr. DOLE. Mr. President, I know other Senators want to be heard on this matter.
I appreciate the comments of the distinguished chairman of the Budget Committee because I think, as has been customary in the past, he is trying to tell us, very properly, that we may face some pitfalls down the road.
Mr. MUSKIE. Will the Senator yield?
Mr. DOLE. I am happy to.
Mr. MUSKIE. For most of my Senate career, I have marveled at the ability of Senators to rationalize the popular course they have determined to take.
I no longer marvel at it. I accept it as a matter of course.
Mr. DOLE. I say to the Senator, when I first arrived here, I marveled at a lot of things, but I have come to accept many things.