November 27, 1979
Page 33588
Mr. MUSKIE. Mr. President, the statement I am about to make, plus an explanation of these charts behind me, should not take more than 30 minutes unless in the process I get involved in questions or challenges as to my assumptions that would provoke a longer discussion.
Let me make it clear that although what I have to say will reflect upon the merits of the pending measure, my fundamental purpose is to put the bill as it was reported from the committee in the context of projected budget demands in the 1980's. I hasten to say at the outset that no one can predict what is going to happen over the next 10 years. The charts behind me have validity only to the extent that the assumptions are understood and the assumptions are accepted.
But the fundamental purpose is to put this bill, which is pending before us, in the context of some reasonable expectations, or at least expectations that I hold to be reasonable with respect to the decade of the 1980's, without presuming to be an economist and without presuming to be a prophet.
I think such a statement is important because, Mr. President, very simply the windfall profit tax is one of the most important measures this body has ever considered. Its power to generate revenues is unprecedented in our history. From 1789 to 1939 the Federal Government total income for that entire period was $116 billion. The Finance Committee bill would raise $118 billion, and the House-passed bill would almost double that.
These are stunning figures, Mr. President. But numbers alone are only part of this debate. The 1970's are coming to a close. Critical choices lie ahead, choices about the direction our Nation will take in the eighties.
In the course of this debate many of those choices will be made. We will make decisions having a major bearing on the level of Federal revenues for a full 10 years to come. These decisions, in turn, will importantly influence how much we can afford to spend for defense, for new domestic programs, and for the continuation of existing ones.
We will be making decisions affecting how much to invest in the discovery of new oil and gas; we will assign relative weight to the importance of exploration versus the importance of conservation; we will determine how much to depend on oil wells and how much to spend on alternatives.
We will decide to promote a balanced Federal budget, or we will push that goal still further from our grasp.
We will condone the concentration of unfathomable wealth in the hands of a few corporations, or we will opt for a more equitable distribution.
None of us were here to debate the establishment of a national bank or the creation of an income tax. Few of us were called upon to pass judgment on social security. Not many had a chance to consider the wisdom of medicare. But this debate is just as important as any of those. It calls upon us to make choices for our society — choices of truly historic proportions.
First of all, we must decide how much of the $830 billion in oil company profits generated solely by the Government's decontrol of oil prices should be recycled for public use through this windfall profit tax.
Except for the social security tax increase of 1978, the windfall profit tax bill is the first major revenue-raising measure since the Vietnam surtax of more than a decade ago. In all likelihood, it will be the last major revenue-raising bill for the next decade or more.
Raising taxes is always difficult. In fact, amendments will be offered to this bill to repeal most of the social security taxes imposed in 1977. Congress has committed itself in this year's congressional budget and in the Nunn-Chiles-Bellmon amendment to the 1978 tax reduction bill to reduce revenues still further in the coming years.
Another basic question to be decided in this debate is how high and broad the windfall tax can be without discouraging needed oil production.
The discovery and extraction of new domestic oil is among our highest priorities. Tax policies supporting that goal are a reasonable public investment — but not beyond the point of diminishing returns — not when so many other needs compete so fiercely for precious resources.
The House set out to raise and recycle a substantial proportion of the $830 billion of extra revenues the oil companies will receive over the next decade. The equity of recycling these revenues took precedence over other considerations. The Finance Committee chose to forgo about half of the proceeds of the House-passed windfall profit tax bill — giving up $127 billion over 11 years. This was done in the name of production incentives. But the additional oil that will be gained by the changes from the House bill will cost the public anywhere from $54 to $86, or more, a barrel — depending on who makes the estimates for what time period. These costs will be paid in smaller future tax cuts or less public services.
Is it a wise investment to pay $86 per barrel in lost tax revenues — to use a CBO long-term estimate — for every extra barrel of oil the Senate bill would buy? Not if we can achieve the same results at lower public expense; and the plain fact is that we can.
Coal liquification and gasification can produce domestic oil at a cost of $45 to $50 per barrel. Oil shale can do it at $28 per barrel; solar and wind power investments displace foreign oil at a cost of $25 per barrel; biomass programs at $15 to $21 per barrel; cogeneration at $16 per barrel; conservation programs, $15 per barrel; heat pump installations, $14 per barrel; and promotion of existing hydroelectric projects, $6 per barrel.
Mr. President, the balance sheet speaks for itself. Carefully measured production incentives have a vital place in a prudent energy strategy. But there is no place there for a single industry subsidy which cannot pull its weight.
The limits of our resources and the scale of our needs allow no margin for waste.
For fiscal 1980, this bill's revenue fell 75 percent short of what was assumed in the second resolution. That resolution was endorsed by this body 2 to 1.
The Senate committed itself in that vote to raising $2.4 billion which can only be raised by this bill.
The House bill and administration proposal would raise 50 percent more than the Finance Committee bill over the next decade.
Mr. President, this bill simply does not do the job — not in the face of the demands for personal and business tax reduction and for spending increases which Congress will face, and should face, in the 1980's.
For 5 years, since the budget process began, I have stood before the Senate and argued for spending discipline. I do not abandon that posture now.
But even with the most stringent restraints, the years ahead will generate huge demands. Many of those demands have already been mandated by the Congress for energy and defense. Others, like the catastrophic health insurance bill now being marked up by the Finance Committee and the President's welfare reform recently passed by the House appear likely to be enacted in some form next year.
If we enact no new programs beyond those four — if we do nothing to increase existing programs for the next 10 years — if we set the tax machinery to achieve the Nunn-Chiles- Bellmon target and then go home and do not come back till 1989, then the Finance Committee bill will hold the Federal budget at or near the deficit level throughout the next 5 years.
Of course, we may be more generous. If Congress enacts no new spending programs beyond the four already assumed, and merely holds existing ones to the level of inflation, we will lock ourselves into deficit through 1987.
In either case, we will have some surplus in the latter years of the decade. But a comprehensive health insurance program would make short work of that surplus. And no one can predict what further demands our Government will face in the coming decade.
Mr. President, we have mortgaged our future. Without a more productive windfall profit bill, we just cannot make the payments.
Beyond these fiscal issues, the Finance bill raises basic concerns about the very nature of our legislative process. Already, some 75 percent of the Federal Government's budget is "uncontrollable" in any given year. Trust funds and other entitlements which we have already acted upon in the vote on the Magnuson amendment, and for that I wish to thank the overwhelming majority of my colleagues in the Senate who supported that amendment — would have restricted our ability to rank priorities, assign resources, and manage the business of Government.
The power of the purse is the power of discretion — the power to make choices. It is the cornerstone of congressional authority. Entitlements and trust funds are cracks in that foundation, and the Finance Committee bill, instead of eliminating those cracks that would be created, would drive in another wedge.
I have raised some fundamental points about the scope of this legislation and the shortcomings of the recommended bill.
Its emphasis on production incentives buys little additional oil at very high cost to the taxpayers. Cheaper alternatives are neglected.
Its enormous potential for raising revenues is barely approached and it leaves us unprepared for the expenses which lie ahead.
Its consequences for the budget and appropriations processes are unfortunate and ill-considered.
But there is another question before us — a question of justice and equity which cannot be plotted on graphs.
Through 1990, new oil company revenues derived from decontrol will amount to some $830 billion — more than the gross national product of all but a handful of sovereign nations. And more than 90 percent of that stupendous wealth will be under the control of relatively few private interests.
Mr. President, we are talking about nothing less than the character of American society in the decade of the 1980's.
OPEC and decontrol will make those profits possible. But the individual consumer will pay the price.
I do not stand here to advocate raising taxes just for their own sake. The consumers of this country will pay the higher oil prices whether or not we tax the resulting oil company revenues.
The issue is the equitable distribution of these revenues.
In the late 19th century, enormous private fortunes were made in the development and exploitation of new technologies and natural resources. Railroads, chemicals, steel, and oil made many a millionaire.
Then as now, Congress confronted a fundamental choice. Should unrestricted riches and power be left to the whim of a few corporate giants, or should such influence be tempered and contained?
Should this vast new wealth be left to private gain, or should a portion be tapped to build a stronger society?
Our predecessors made their choice. The income tax, new labor laws, the breaking of the trusts, and other innovations were revolutionary in their time.
The choices we will make are of a similar order.
It has been said that behind every great fortune, there lies a great crime. Well, that is probably an overstatement. Unless we limit the private exploitation of this great fortune — unless we secure the bulk of its benefits for the taxpayers who produce it — no industry will bear the blame, the responsibility for that will be entirely our own.
Mr. President, with respect to the merits of the pending tax bill, what we do about it, what we do to generate more public revenues using it as a vehicle, is for us to decide — individual Senators voting individually.
The question that I ask you to consider is whether or not your votes on that subject properly take into account, in your judgment, the budget demands of the 1980's as we have posed them very conservatively on these charts.
There is nothing magical about them. And I repeat, I would be the first to suggest that 10 years from now, looking back upon these charts, we will find that they had given a very inaccurate picture of the 10 years that had expired. But budget decisions of the magnitude that we are asked to consider, tax measures of the magnitude of the one which we have before us, ought to be placed in some way in the perspective of the demands that we are going to face in the next 10 years.
I will not be here at the end of the 1980's. Many of you may be.
But in any event, what we are talking about is that a revenue-raising measure can impact importantly upon the facts underlying these charts. Those facts are the national needs which the charts reflect. Some needs perhaps are ignored because they are yet unanticipated. So you must look at these charts as to whether or not the decisions we make on this revenue bill are relevant and adequate to the problems that we should try to foresee through somebody's eyes. These are my eyes, given the assistance of staff who have been helpful to the Senate and to the Congress over the 5 years of the budget process in trying to assign numbers to problems, and numbers to the actions that we take. It is the best we can do.
I hesitate to do it because, perhaps as much as anybody in this body, I know how inaccurate this year's charts may look next year. That is the nature of the science of economics, if you can call it a science.
But let us take this chart on my right, if you will. You will see it is divided into outlays, revenues, surplus, or deficit. We made the projections beginning with fiscal year 1980 through 1990, 11 years.
These outlays, described as current law, reflect our projection of outlays if they simply continue present programs adjusted for inflation only when required by existing law. In other words, only indexed programs under current law take inflation into account, even at the present 13-percent level. All other actions to offset inflation are discretionary with the Congress and we assume, for the purposes of that line, that discretionary inflation will not be permitted; that we will deal strictly with current law.
What is current policy? Current policy is the same as the first line, except for one thing. It adjusts for inflation whether or not required by law. That is the difference between the two.
One other comment on current law and current policy. These outlays, for the purposes of projection, have been adjusted to include the congressional commitments to real growth in defense, to 1980 energy legislation — even though it has not finally become law — to the House-passed welfare reform, and catastrophic health insurance.
In other words, we have included only that new spending, which clearly seems to have a likely prospect of being enacted into law and thus becoming current law at the beginning of the decade.
We are making this analysis as though it were current law. So we have written that in here. We think that is a realistic thing to do. Current policy also reflects those same assumptions about outlays.
With respect to the economic assumption, inflation is assumed to decline to an average of 6 percent for 1983 through 1990. The present 13 percent annual rate, we assume, will decline to an average of 6 percent. That, I would submit, is a conservative and cautious figure. We would like it to be better than that. It could conceivably be worse, although if it is worse than that for that long a period, God help us.
But, in any case, we have made that assumption and you can change it, if you do not like 6 percent. That is an arbitrary kind of a figure. We are hoping that we will find the policies of restraint on the part of Government and on the part of our citizens in their private economic behavior to get that rate down at least to 6 percent.
The rate of 6 percent inflation is accompanied by a rate of 3 percent of real growth. It would be very nice if we are able to sustain that kind of growth for that whole period. I have not adopted a more pessimistic assumption because we are, of course, trying to work for healthy economic policies that will produce a healthy economy. But I think it is a prudent projection to make for real growth.
Nominal GNP, which includes real growth plus inflation, is projected on a steady growth trend of 9 percent a year beginning in 1983.
Those, then, are the economic assumptions. Anybody else's may be just as good or better. I would like the Members to understand those, and I would be willing to get into a discussion of what a departure from those assumptions might do to the budget figures. Such departures obviously could affect the budget figures.
With respect to revenues, revenues for fiscal years 1980, 1981, and 1982 are those contained in the Senate-passed second budget resolution that we adopted just last week for fiscal 1980, but they are adjusted to include the windfall revenues generated by the Finance Committee bill as it came out of committee.
In addition, in 1982 they reflect the $55 billion tax cut which the second budget resolution assumed for that year.
Finally on the revenue line, Members will remember we adopted the Nunn-Chiles-Bellmon amendment to the tax bill of 1978 which requires that revenues decline as a share of GNP; we have cranked that in here. So revenues are projected to decline in accordance with that policy from 20.5 percent of GNP in fiscal year 1983 and fiscal year 1984 to 20 percent in 1985 and 1986, and 19.5 percent thereafter.
In other words, the revenues line projects the big tax cut of $55 billion in 1982 and periodic cuts to get revenues down 19.5 percent by 1990.
We are trying to assume in these charts, wherever we can, the long-term implications of what Congress has already done or what Congress is about to do so the parameters of the long term projections can be seen.
With those assumptions, we can see what happens with current law and current policy. The pluses indicate surpluses and the minuses indicate deficits.
Now, Mr. President, let me take you to this other chart, which has a lot more red on it than I like to see. Members will want to ask why.
That chart, in a very real sense, is a pictorial reflection of the numbers I have already tried to outline for you.
First of all the congressional budget, the one we have just adopted in the Senate. That looks pretty strong, but there are some things it does not include. It does not include the total amount of the energy spending that we have approved. Mr. President, you will remember last week we approved the Williams fuel assistance program. We approved $1.6 billion in fiscal year 1980, $3 billion for 1981 and $4 billion the next year; those last two figures are not fully reflected in the congressional budget projections because they were adopted after the conference on the congressional budget. So that is not included.
Also, the other two items that I mentioned on the first chart are not included, catastrophic health insurance and welfare reform. So the line looks pretty hopeful.
Now, let us say we adopt current policy on the basis of the revenues shown on the first chart. In other words, that the budget just keeps up with inflation for all programs, whether indexed by law or not. As can be seen, we would be in deficit until 1988 with no new spending, no new programs other than those already described, and assuming the windfall profit tax as it came out of committee.
To avoid that picture we would either have to increase taxes sometime between now and 1988 from some other sources, or we would have to reduce spending, including those uncontrollables which are 75 percent of the budget. That is the choice we would have if we do not use the present revenue measure as a way of avoiding it.
That picture is bad enough, but I added the third line. The budget process has been in effect since fiscal year 1976 and we have tried to hold spending down, and I think the congressional budget line on this chart shows that the Congress has. It is not easy to prove the case in precise dollars, but I think the sense of restraint has made itself felt, and is felt, in the numbers. But nevertheless, the budget has grown in real terms during the seventies, above inflation and population growth.
So if we project the same trend for the eighties that we established in the seventies, nothing more, the chart shows what would happen — a deficit until 1990 and into the 1990's.
You can give whatever substance to that you wish, Mr. President, depending upon your own awareness of Congressional spending habits, which are triggered often by emotional responses from our constituents who are faced with problems. Whatever the justification, however right, this line reflects congressional habits even as they have been disciplined in the seventies, projected into the eighties.
The middle line reflects what we would do if we simply tried to continue present programs, not adding to them but adjusting for inflation, and having added, of course, catastrophic health insurance, welfare reform, and some additional energy spending.
This is the picture as I see it. Is it too alarming to be real? I do not believe so. Is it an accurate picture of what will actually happen? I would not pretend that. But I think it comes close enough to the risks that we face with respect to budget policy, tax policy, and economic policy so that we ought to look at it, modifying it in such ways as our own individual judgment suggests. If you think the underlying assumptions about inflation and unemployment are off, make your adjustments.
If you think that the Congress can cut current spending, and will, then adjust that figure accordingly. If you think that Congress will not yield to the temptation to respond to surges of emotion and pressure from our constituents for new spending, whatever our good intentions, then discount.
But if you want to look at the experience of the last 6 years, Mr. President, and the analyses that we have available to us now that we did not have available to us 6 years ago — from excellent people, the Congressional Budget Office and the Budget Committees — these analyses are important enough, are significant enough, are relevant enough, so that all of us ought to take them into account. That is all I ask.
The budget process, in the last analysis, is a method for us to inform ourselves, as a Senate and as a Congress, on what is going on, what is happening, so that we can make wiser decisions. I present this only for information from a perspective which reflects some judgments I have already made personally, obviously; I cannot do otherwise. But if you change my assumptions or moderate those judgments and substitute your own, I think the picture is something like this. It cannot be dealt with easily.
We talked about the social security trust fund earlier. How much the picture on that has changed since we legislated the increase in the tax rates and the base — that was in 1977 — how much that picture has changed, because inflation proved to be worse, not better, than we projected in 1977. I am projecting inflation at 6 percent, which is not much different from that 5.7 percent we predicted in 1977, and it turned out to be 13 percent.
So I say to my good friends in the Senate, I hope this is useful. I did not put it together to be alarmist. We tried to put it together as realistically as we could, and there are a lot of missing pieces of information that we shall get as the years unfold. But we have to make decisions before the years have unfolded.
Mr. SARBANES. Will the Senator yield for a question?
Mr. MUSKIE. Yes, I do yield.
Mr. SARBANES. Mr. President, first, I want to say I think the Senator from Maine the chairman of the Budget Committee, has done a distinct service to the Senate to place the consideration of this enormously important piece of legislation, with all the implications that it has for the future revenues of the Government, in the context of these projected future budget demands for the next decade. As he has pointed out, one may differ with the assumptions, accept them, or change them, but I cannot see any way of changing them in a realistic direction that gives one a more optimistic view. In fact, I, think I would probably argue to the contrary, that changes that would probably be warranted would give an even more pessimistic view in terms of where we are going with the budget demand and, therefore, would draw an even stronger lesson with respect to what we perhaps should be doing with respect to this legislation.
On these assumptions, I want to be very clear: The inflation rate that is assumed throughout, I take it, is 6 percent, is that correct, if we wish to maintain—
Mr. MUSKIE. I wish to modify that, if I may. The projected inflation rate will decline to 6 percent by 1987. Obviously, that will not change overnight, so it sort of phases down. I could suggest several scenarios for the phase-down, simply for illustrative purposes, but it will not, unfortunately, be 6 percent here, 1983. It may not reach 6 percent until here, 1988.
Mr. SARBANES. What is the inflation rate being assumed in the first part of the 19808?
Mr. MUSKIE. In the first 3 years, the assumptions are those underlying the second congressional budget resolution. The projected inflation rate is 7.9 percent in 1980, 8.5 percent in 1981, and 7.8 percent in 1982. One possible scenario thereafter is for the rate to drop to 7.1 percent in 1983, down to 6.8 percent in 1984, maybe rise to 7 percent in 1985, and down to 5.5 percent in 1986, because these cycles tend to be 3 or 4 years in length. Whereas, after the second concurrent budget resolution, we projected flat rates. In other words, we used a secular trend rather than a cyclical projection, because you cannot pinpoint the cycles and our current expansion is longer than the typical expansion. So, we just projected flat rates across the board.
Mr. SARBANES. The second assumption I wanted to ask about is the real growth in defense. Is that the 3-percent figure?
Mr. MUSKIE. It was 3 percent in 1980, 5 percent in 1981 and 1982, as the Senate voted, and then 3 percent thereafter: a flat rate.
Mr. SARBANES. So that those Senators or any Senator who may seek a higher figure than those figures in real growth terms is, in effect, contributing to an increase in the deficit unless he takes a position on this windfall profit tax bill to bring higher revenues, finds some other tax source for higher revenues, or finds some expenditure program that can be cut. Otherwise, that position would contribute to an enlarged deficit. Would that not be the case?
Mr. MUSKIE. The Senator is correct and that is the corner into which each of us is being painted, whether our priority is defense, or programs for the aged or for the young, or whatever.
Mr. SARBANES. The same thing, of course, would be true in the health insurance field, because the Senator's assumption is limited there to catastrophic only and does not encompass the possibility, which many support, of a comprehensive national health insurance program.
Mr. MUSKIE. Exactly.
Mr. SARBANES. I thank the Senator. Mr. President, I repeat what I said at the outset, that I think this exercise is enormously important in placing the consideration of this bill in a broader perspective. I think the Senator has brought that to the attention of the Senate so that none of us has the excuse later of looking back and saying, "Oh, if we had only had called to our attention then or pointed out what the implications of the decisions we were making were going to be."
As I understand it, earlier in the presentation, the point was made that the taxes raised by this bill, as reported by the Committee on Finance, as short as that falls of what the House has passed, but even in that limited version, the windfall profit tax produced by this bill are less than the total spending of the National Government from the founding of the Republic until 1939. Is that correct?
Mr. MUSKIE. It is about the same, I believe — roughly the same.
Mr. SARBANES. So that we are making some very fundamental decisions here today in terms of the future course of the whole range of national policy which is encompassed within the budget in terms of the expenditures and the revenues. Unwise decisions here will haunt us for years and years to come.
Again, I thank the Senator for bringing it so pointedly to our attention.
Mr. MUSKIE. I thank my good friend from Maryland.
Mr. President, I have tried to anticipate some questions that Members may ask concerning these charts, or the underlying assumptions. So I have three pages of questions and answers to those questions that Members might find of interest in reading the RECORD, as well as a more complete table which illustrates the results of the assumptions I have made. I ask unanimous consent that those talking points and the table be printed in the RECORD at this point.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
SUPPLEMENTARY TALKING POINTS ON ECONOMIC ASSUMPTIONS FOR THE 1980's
I. Question. How do you justify the assumption of 9 percent average annual growth in nominal GNP from FY 1983 onwards?
Answer. This is a projection of a secular trend; the economy can be expected to cycle irregularly around it. The trend was built up as follows:
1. Labor force can be expected to grow at 1½ to 2 percent per year, productivity at 1½ to 2 percent per year and the length of the work week to decline by ½ percent per year. This implies growth of real GNP of 3 percent per year, consistent with a constant unemployment rate.
2. Inflation has been an increasingly serious problem for the U.S. economy as the JEC noted in its report last summer. But we have assumed that this situation does not deteriorate further. After the last episode of sharply increasing energy prices in 1973-75, the inflation rate fell back below the double-digit rate but enough inflation was built into expectations to hold the underlying rate of inflation to 6 percent or slightly higher for the 1975-77 period. We have assumed a repetition of that pattern that the current inflation rate (the GNP measure) can be brought down gradually from 9 percent over the past year to an average of 6 percent for most of the coming decade.
3. Three percent real growth and 6 percent inflation implies 9 percent growth of nominal GNP.
4. Unemployment is projected in the Budget Resolution to average 6½ percent in fiscal 1982. Because we are projecting real growth after that time equal to "potential" growth, we are assuming that the unemployment rate will average 6½ percent through the rest of the decade.
That is pessimistic. If we can make progress in curing our structural labor market problems we could achieve a lower unemployment rate without worse inflation. A rate of 5 or 5½ percent might be the right number. That could imply reducing the budget deficits shown on the charts by about $25 billion in the latter half of the decade — so the "current policy" ("budget keeps up with inflation") budget would come into balance in 1985 rather than 1987. That is the most significant effect of alternative plausible assumptions on the story about budget deficits.
II. Question. If a 5 percent unemployment rate is a better target for the 1980's, how might it be achieved?
Answer. If the private economy is strong — strength in investment more like the 1960's, continued strong consumer spending, improved exports and only infrequent and mild recessions — the unemployment rate could be reduced and the budget deficits would be about $25 billion lower as noted above. But, if the private economy were weaker, it might require fiscal stimulus to keep the unemployment rate declining to reach and then sustain the 5 percent target. In that case, deficits would be as large or larger than those shown in the "budget keeps up with inflation" line.
III. Question. Suppose inflation remains worse than the average of 6 percent that is projected. How would that affect the budget projections?'
Answer. Higher inflation adds both to outlays and to revenues — but the effect on revenues is larger. If inflation were to be 1 percentage point higher than assumed, the budget deficit by 1987 would normally be about $25 billion lower. This implies that the deficits for 1986 and 1987 in the "budget keeps up with inflation" line would tend to disappear. But we must remember that inflation puts extra demands on the budget when we are committed to real growth in defense spending. So we would not have much budget margin in those years even with higher revenues.
IV. Question. Suppose we have a tax cut in 1980 or 1981, in contrast to the assumptions In the Budget Resolution. How would that affect the outlook for the decade?
Answer. Tax cuts in 1980 would be most likely to occur — and only be warranted if — the economy deteriorates. The combination of a weaker economy and a tax cut would almost certainly destroy the prospects for a balanced budget in fiscal 1981. (Even with our current assumptions, we only have room to cut taxes by about $10 billion in FY 1980 without causing a deficit in 1981.) Assuming a reasonable recovery, however, the picture for 1982 and later years would not change perceptibly. We are already assuming a $55 billion tax cut in FY 1982 and we would be advancing the date or part of that tax cut.
If taxes are cut in FY 1981, to offset the fiscal drag in that year from inflation and social security tax increases, we would have a smaller surplus or a deficit in that year but the budget picture might be slightly better later in the decade because we would get unemployment to a somewhat lower level sooner. The effect on the outyears might be to lower the deficit (or raise the surplus) by about $20 billion.
The basic story is unchanged: only reasonable economic strength, restraint on budget outlays and a reasonable contribution from windfall profit tax revenues will achieve and maintain budget balance in the mid-1980's in view of foreseeable budget demands.
V. Question. If 9 percent nominal GNP growth is a reasonable GNP projection before the windfall profit tax, is it not the case that the tax will reduce GNP growth?
Answer. That would be true for most taxes. But in the case of a windfall profit tax, several things need to be noted:
1. We cannot consider the windfall profit tax, oil price decontrol and spending the proceeds of the windfall profit tax separately. They are a package. And, as a package, they are likely to have a small net simulative effect.
2. This effect does depend on structuring the tax so as not to destroy investment incentives. That can be done. Given such a tax — through which we can recycle the higher oil company revenues — and given a gradual increase in domestic oil supplies, as a result of decontrol, real GNP should be higher later in the decade than without the total program.
3. But, note that this does not happen right away. Decontrol and OPEC prices put a drain on the economy now and at least through 1980, with or without the windfall profit tax.
Mr. MUSKIE. Mr. President, I thank my colleagues for their attention. I know this is not a pleasant subject, but I take my children aside from time to time and try to lay out similar charts with respect to our household finances. Not that I would be inclined to compare the Senators with my children but my children are just as irresponsible as some of my colleagues are from time to time.
Mr. MATSUNAGA. Will the Senator yield?
Mr. MUSKIE. Yes, I yield to my good friend from Hawaii.
Mr. MATSUNAGA. Mr. President, I join the Senator from Maryland in commending the Senator from Maine for his excellent presentation and for giving fair warning to the Senators as to the budget situation in the 10 years ahead of us. As a member of the Committee on Finance, I must say the forecasts in the Senator's charts overlook the chief objective the Finance Committee had in mind; the Finance Committee in drafting the crude oil windfall profit tax bill sought to meet the current and the projected energy shortage in the next decade. The bill encompasses the incentives which the committee members believe would bring about greater production of alternative sources of energy, and end our dependence on foreign oil.
If this objective is achieved, the budget projections will certainly improve. So, while it appears in the Senator's charts that a calamitous budget situation may occur in 10 years, perhaps as the years go by, as the Senator noted in his excellent statement, things may change for the better.
It is my hope as a member of the Finance Committee that once we cope with the energy crisis, the general economic conditions will improve. Things will look brighter. Then as the situation unfolds in the next several years, we can devise or find other solutions to meet the budget situation.
I once again wish to thank the Senator from Maine for his excellent presentation. His presentation made me feel as though I were back in school.
I do appreciate the great effort he has made in presenting his budget forecasts for the edification of Senators who are not members of the Budget Committee.
Mr. MUSKIE. I thank my good friend from Hawaii.
Speaking of going to school again, for a year when I was taking the bar examination in Massachusetts and Maine, I taught as a substitute teacher in the schools of my hometown as I read the law.
It got so I taught every day without knowing what the subject was until breakfast that morning.
I remember teaching in junior high school a class in American history. After a couple of days, I gave them an examination. Virtually all of them failed.
I confessed my disappointment to them and suggested that perhaps it was due to my inadequacy as a teacher. So I told them that I would give them exactly the same test 2 days later and I would give them the higher of the two marks.
Well, almost 50 percent of them failed the second time.
I hope that what I have had to say is not too much like my teaching experience.
I concede that things can change. But the limits within which we can expect change without making policy designed to create the kind of change that circumstances may require is like wishful thinking.
I do not question the thoroughness and the thoughtfulness and the commitment of the members of the Finance Committee. I do not envy them their job. I watched from the sidelines as they went through the exercise of writing this bill. It was a monumental bill. It required monumental effort to put it together. So I do not challenge that at all.
As a matter of fact, it was not until we prepared this analysis, once the Finance Committee completed its work, that we were able to see it in this perspective. I did not have this perspective as they were proceeding through their exercise.
I am not saying this is the ideal revenue bill within which to meet the budget demands of the 1980's. But it happens to be the one that is before us.
I cannot foresee another major revenue raising bill coming before the Congress in the next 10 years, once we have completed this one with whatever result. I cannot see the economy escalating its strength to the point where a stronger economy would serve some of these requirements. I just do not see those kinds of changes. I would like to see them come about. I would like to see them happen.
I would like to go to bed at night and hope the good Lord will find a way we have not been able to find to solve these problems.
We have been looking at social security. We expected when we acted on that bill in 1977 that we were taking care of that problem until the turn of the century. Now we are beginning to wonder whether we did. And, if we did not, the options left to us for dealing with that problem — which I do not even reflect in these charts — are pretty limited.
The longer we postpone the day of reckoning, the tougher will the problem become, not the easier.
We have had a bad decade, and my good friend from Hawaii knows the bad news in our political system of one kind or another. We like to think the sun ought to come up bright, without a cloud in the sky, one of these mornings.
But these are real problems. They may differ in detail as the years come upon us, but I think this is a fair reflection of what we ought to be guarding against to the extent we can.
I am not against being optimistic. I am certainly not going to judge my colleagues in the Senate on any moral grounds with respect to our votes on the pending bill. Each of us will make his own decision. But I do not think we can ignore this analysis.
Mr. President, I yield to my good friend from Wyoming.
Mr. WALLOP. I thank my colleague from Maine.
Mr. President, I would first like to ask a question, regarding the revenue projections provided on the middle line on the right-hand chart. Does the Budget Committee include in those revenue projections the anticipated increases from the corporate and personal income taxes as a result of decontrol?
I ask this because those are very substantial revenues and they are similar to estimates I saw earlier that did not include it.
Mr. MUSKIE. Yes they do. The revenue projections reflect the policy assumptions I have already described and, in addition, the economic assumptions I have described. To the extent inflation drives up revenue, as we assume it will in the early years of that decade, that is reflected here.
At the same time, the policy decision to reduce revenues as a portion of GNP is also
implemented.
Mr. WALLOP. I understand that. One of the items the Finance Committee was looking at was a side-by-side comparison of not only windfall profit revenue, but the increase in revenues that were attendant solely to decontrol.
The reason I ask is because those figures look quite similar to those I saw that did not include those rather substantial increases in net income tax revenues to the Treasury resulting from decontrol.
Mr. MUSKIE. These figures do include those increases. I would be glad to take a look at the side-by-side comparisons to which the Senator refers.
Mr. WALLOP. I think it might be interesting for all of us.
I appreciate very much the pattern of information which the Senator has provided. I think he would agree with me that any projections 10 years outward are a bit like looking at Merlin's crystal ball.
The pattern, I understand, particularly the bottom line on the left-hand chart, is perhaps the most predictable line of all of them because it displays a known pattern of congressional spending behavior. Congressional spending is probably less subject to change than is the economy in a variety of circumstances.
Mr. MUSKIE. Having lived through this particular year, I say to my good friend, when the economic picture in September, at the time of the second budget resolution, was so much different than that on May 15, at the time of the first budget resolution, I am not one to underestimate this pattern.
Mr. WALLOP. I was simply suggesting that one of the arguments that keeps coming to the fore is the so-called $938 billion of official revenue.
One of the misassumptions in the joint tax revenue proposals is that there is going to be only $87 billion of cost of production, which is subtracted from the nearly $1 trillion worth of increased production. Anybody who knows anything about the oil business would know that that was an extraordinarily absurd figure. In fact, undoubtedly, it could not be justified.
The problem comes from taking present costs of producing energy and projecting that through the next 10 years, as though decontrol had no effect en the cost of producing energy. It is going to cost more to produce as they pay more for their barrels of diesel to run their drilling rigs and more for electricity and more for transportation in and out of the oil fields; $87 billion out of $1 trillion is a rather modest cost of production figure.
I suggest that the true cost of production was overlooked in those figures.
Mr. MUSKIE. The $87 billion figure, I understand, was a JCT figure and not a CBO figure.
Mr. WALLOP. I did not hear that.
Mr. MUSKIE. I understand that the $87 billion figure on the cost of producing this oil is a JCT figure.
Mr. WALLOP. It is.
Mr. MUSKIE. It is not a CBO figure.
Mr. WALLOP. No, it is not a CBO figure. But the nearly trillion dollars in induced profits that everybody is talking about, which comes as a result of decontrol and which is or is not going to be taxed, depending on the points of view, is nearly a trillion dollars worth of new money. I am sure nobody would have trouble finding investors to invest at those odds.
I am saying that one of the assumptions as to the amount of money that it is going to cost the companies as they produce more oil as a result of decontrol is fallacious — how fallacious, the Senator from Maine and I and the Joint Tax Committee could argue. But certainly nobody would believe that is less than I suggest. The increased cost of production is probably closer to a couple of hundred billion dollars, not $87 billion.
Mr. MUSKIE. Yes. Of course, there are other variables.
Mr. WALLOP. There are. That is why I am saying that the whole business of looking at 10-year projections is a shaky proposition.
Mr. MUSKIE. As the Senator knows, if we were to conclude that because there are many variables, we should make no effort at this kind of projection, we would be doing ourselves a disservice. I think the Senator is raising legitimate questions.
Mr. WALLOP. The point I am making is that the picture may not be as dark and gloomy as it is sometimes painted.
Mr. SARBANES. Mr. President, will the Senator yield on that point?
Mr. WALLOP. I yield.
Mr. SARBANES. I want to make sure that I follow this.
Even conceding the point the Senator from Wyoming is making — and it has an air of reasonableness to it — I do not see what effect that has upon the analysis he has just been given.
Mr. WALLOP. It has an effect on what preceded the analysis, in terms of what the Finance Committee bill sought to do.
I quote Senator RIBICOFF yesterday in his eloquent defense against the Bentsen amendment, in which he said that the Finance Committee never viewed this bill as a revenue-raising measure but as an energy measure. I think that was a responsible way to proceed, because both Secretaries of the Treasury who testified said the same thing, as have both Secretaries of Energy and as has the President.
I am pointing out that the trillion dollar figure that is widely trumpeted so evil is not going to be the figure that accrues to the oil companies.
Mr. SARBANES. I have listened to this exchange, and I have not heard the trillion dollar figure used at any point with respect to the presentation we have just heard. That is what I do not understand about the point the Senator is trying to make now.
Mr. WALLOP. Had the Senator been here all during the exchange, he would have heard all that preceded this. The Senator from Maine was describing these profits in terms of unfathomable riches. I believe he used the figure $900 billion.
Mr. MUSKIE. No. The figure I used was $830 billion.
Mr. WALLOP. Bringing out the point that projections to 1990 are too far out
Mr. SARBANES. The Senator's point, as I understand it, is that he takes the trillion dollar figure and subtracts from it not $87 billion, which the presentation has done, but, as I understood him to say a moment ago, $200 billion
Mr. WALLOP. $938 billion in the joint tax figure.
Mr. SARBANES. The point is that the companies will have $700 billion, rather than $900 billion.
Mr. WALLOP. That is not true. That is the reason why I questioned the middle line there.
It is not as though that money is going to go untaxed into the pockets of the oil companies. There are corporate income taxes, plus whatever amount of windfall profit tax Congress ultimately elects. So it is not all going to go into their pockets.
It is a tax ultimately that the public is going to pay, whether it is the production tax or as a crude oil tax.
If it is used to finance, as one sentence the Senator from Maine suggested we are going to do, a national health bill, the public is going to pay that, through a sacrifice in its ability to find energy.
It is the public's money, and the public is entitled to some kind of decision on how it should be raised.
Mr. MUSKIE. If there is no tax bill at all, the public still is going to pay the same price with decontrol.
Mr. WALLOP. That is true.
Mr. MUSKIE. That is an important point.
Mr. WALLOP. It is an important point, and I do not deny it.
Mr. MUSKIE. The fact is that if the tax does not produce as much as we projected here because the cost of producing it is more than somebody has assumed, then the deficit is going to be larger, not smaller.
Mr. WALLOP. Nevertheless, if the surplus is used to fund national health, as the Senator suggested might be an obligation, the public is entitled to know that it is paying for that, not a few oil companies.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. WALLOP. I will yield after I make this point. The point has to do with production response.
Mr. MUSKIE. The Senator is speaking on my time, which is fine.
I did not suggest that health insurance should be an obligation imposed on the windfall profit tax.
What I said was that the catastrophic health insurance bill is being marked up in the Finance Committee, and it looks as though it is going to be enacted.
Therefore, in projecting outlays for the decade, I simply included an assumption that catastrophic health insurance would be enacted. I did not say that. therefore, it should be paid out of this bill. As a matter of fact, the whole thrust of this presentation is that it cannot be paid out of this bill.
The Senator from Wyoming has taken what was an analytical statement to assert that I have said that health insurance should be a charge on the windfall profit tax.
Mr. WALLOP. I did not charge that the Senator from Maine said that. I am simply saying that this is a tax; and if it were used to fund something such as the Senator from Maine obliquely suggested was going to be one of the things to be considered, the public is entitled to know that it is paying that, on the back of less energy, because there is a response attendant to it.
I am not suggesting for a moment that there be no windfall profit tax. I make that clear.
Mr. SARBANES. Mr. President, will the Senator yield for a unanimous consent request?
Mn MUSKIE. I yield.
Mr. SARBANES. Mr. President, I think this is very important, in light of the point which has just been made by the distinguished Senator from Wyoming.
I ask unanimous consent to have printed in the RECORD an excerpt from an article published in U.S. News & World Report of November 5, 1979, entitled "Branching Out —The Oil Empires; Ten Oil Firms and How They're Diversified." It sets out the investments being made by major oil companies in non-oil-related fields.
There being no objection, the excerpt was ordered to be printed in the RECORD, as follows:
BRANCHING OUT — THE OIL EMPIRES
Ten oil firms and how they're diversified
EXXON CORPORATION
Coa l— Carter Mining and Monterey Coal.
Uranium, copper, zinc — Exxon Minerals.
Solar energy — Solar Power, Daystar.
Electric motors — Reliance Electric.
Information systems — Vydec Qwip Systems.
Graphic fibers — Graftex.
Real estate — Friendswood Development.
MOBIL CORPORATION
Coal — Mount Olive & Staunton Coal.
Retailing — Montgomery Ward.
Packaging — Container Corporation of America.
Solar energy — Mobil Tyco.
Real estate — Reston Development.
Printing — W. F. Hall.
TEXACO, INC.
Coal, uranium, real estate — Texaco Ventures.
STANDARD OIL OF CALIFORNIA
Coal, uranium, geothermal — Chevron Resources.
Minerals — American Gilsonite (50 percent interest).
Coal — AMAX (20 percent) .
Synthetic fibers — Vectra.
GULF OIL CORPORATION
Coal — Pittsburgh & Midway Coal Mining.
Uranium, chemicals — Harshaw Chemical; Millmaster Onyx.
Shipping — American Heavy Lift Shipping (75 percent) .
Hardware — Hutchinson-Hayes International.
STANDARD OIL. (INDIANA)
Copper — Cyprus Mines.
Solar energy — Solarex (20 percent).
Computer circuits — Analog Devices (15 percent).
ATLANTIC RICHFIELD
Coal, copper, aluminum — Anaconda.
Solar energy — Northrup and ARCO Solar.
Publishing — The Observer (Britain).
SHELL OIL COMPANY
Coal — Seaway Coal.
CONOCO, INC.
Coal — Consolidation Coal.
SUN COMPANY
Coal — Elk River Resources.
Health care — Becton, Dickinson (34 percent).
Shipbuilding — Sun Shipbuilding & Dry Dock.
Real estate — Radnor.
Trucking — St. Johnsbury Trucking; Milne Truck Lines.
Food stores — Stop-N-Go and Mr. Zip.
Electronics — Audio Magnetics.
Data processing — Applied Financial Systems.
Mr. WALLOP. One of the comments made by the Senator was that the Finance Committee chose to forego revenues the House had raised. I again point out that the House, in their assumptions, thought that they had, knew that they had, boasted that they had, and were praised for having raised $105 billion. That is what they assumed and thought they had passed.
It is something of a distortion now to say that they thought they passed a $278 billion bill, because they did not. They did not make the same assumptions as to the price of energy and oil that the Finance Committee made. The Finance Committee assumed that it had a bill of some $35 billion more than did the House.
So to go back and to lay our assumptions on the House of Representatives at the time they passed theirs is probably to distort what was on their minds.
Mr. MUSKIE. I do not think I presume to try to read what was in the mind of the House of Representatives when they passed the tax bill. I find it difficult enough to read their minds when in budget conference with them.
Mr. WALLOP. I understand that. I am simply saying on behalf of the Finance Committee we did not choose to forego revenue that the House thought it had raised. We in fact raised more revenue than they did and knew that we had.
Mr. MUSKIE. If the Senator will yield, I really did not intend nor do I intend to address accusations at the Finance Committee. All I was trying to do was present the revenue implications today of the Finance Committee bill and of the bill the House of Representatives passed, whatever the House of Representatives may have thought it was passing at the time, or whatever the Finance Committee thought it was passing at the time. All I am trying to do is give the Senate the benefit. of the best estimates available to us today. The House bill may have some other shortcomings as the tax bill.
Mr. WALLOP. I understand that. All I say is the House did not think it passed a $278 billion bill.
The only other point that I make is that, and I can understand why, viewing the CBO study — Senator PACKWOOD and others have done the same thing — it was to raise the extraordinary amount of dollars per barrel by what has been done today. It overlooks one paragraph in the CBO study which I think is important. After having produced the production response which everyone quotes and divides into the billions of dollars and says it is going to cost us $50 to $80 to $133 a barrel, they say in that study at page 25 and 26:
Yet it would be incorrect to derive a figure for barrels sacrificed per dollar of tax raised from this cumulative production number. This is because many of the investments that producer revenues from decontrol will finance will be producing considerably beyond the 1980-1990 period.
In other words, what they are talking about in addition to achieving production we also achieve reserves which will benefit the country.
Mr. President, I ask unanimous consent that an analysis of the CBO study on how that oil will probably cost us in the neighborhood of $13.50 or $14.50 a barrel be printed in the RECORD.
There being no objection, the analysis was ordered to be printed in the RECORD as follows:
RESPONSE TO ARGUMENT THAT NEW OIL PRODUCED FROM A LOWER WINDFALL TAX WOULD COST $133 A BARREL
(1) It has been argued that the difference between the House and Senate windfall taxes between 1980 and 1990 would be $135 billion, but that the resulting difference in 1990 oil production, according to the CBO, would be but 550,000 b/d. By one calculation, this means that it would "cost" $135 billion to achieve this 1990 550,000 b/d, and this would work out to $133 a barrel.
(2) The above argument and analysis involves a comparison of total windfall tax differences to differences in daily rates of production over the 1980-1990 period.
(3) The proponents of this argument have used the production and revenue estimates contained in the CBO report entitled, "The Windfall Profits Tax: A Comparative Analysis of Two Bills."
(4) In borrowing from the CBO study, they have applied the figures improperly and have failed to take into account CBO's comments at page 25-26 of the same report that such a comparison would be "misleading." The Report elaborates:
"Yet it would be incorrect to derive a figure for 'barrels sacrificed per dollar of tax raised' from this cumulative production number. This is because many of the investments that producer revenues from decontrol will finance will be producing considerably beyond the 1980-1990 period."
(5). Thus the same CBO study correctly contends that a more proper comparison would be between total windfall tax differences and differences between total new oil reserves added. However, CBO did not undertake the more valid comparison in its own study.
(6) If the extremely conservative CBO cumulative production estimates are used and reserve additions are taken into account, the "$133/barrel" cost estimates is reduced to about $45/barrel (approaching current world spot market prices and the cost of substitute energy supplies).
(7) When using the CBO study in this manner, however, it must be recognized that CBO's production estimates are the lowest of all predictions of supply response.
Mr. WALLOP. For example—
The petroleum industry estimates that by the mid-late 1980's the difference in supplies between the House and Finance Committee's bills would be 1.1 million barrels per day rather than 550,000 barrels per day under the CBO study. If this supply estimate is used, the "cost" of the Finance Committee bill is further reduced to about $14.50/barrel — well below the cost of alternative supplies, imported or domestic.
Another recent study by Peat Marwick Mitchell & Co. for the Domestic Petroleum Council estimated that the exemption of newly discovered oil alone from a windfall tax would result in the addition of up to 7 billion barrels of oil reserves between 1980 and 1990. Since the Senate version of the tax differs in other respects from the House version as well, the total difference in addition to reserves presumably would be higher than this figure. Were the total net addition to reserves from the Senate version as opposed to the House no higher than 10 billion barrels, however, the tax expenditure per barrel would be only $13.50.
(7) A relevant calculation must take account of gains as well as costs. Even using the CBO's 550,000 b/d difference for 1990 the effect on world oil prices and hence for U.S. consumers could be substantial. Recent experience suggests that reductions in world oil supplies of perhaps 2 million barrels/day can result in price increases of $10/barrel or more. If a 500,000 b/d change in U.S. production reduces world prices by, say, $2.50/bbl below what they otherwise would be, the daily saving to U.S. oil consumers would be $45 million (18 million b/d x $2.50/bbl) and the annual saving about $16% billion in $1979.
(8) Using differences in production estimates between the Senate and House versions given in the CBO study and using a 7%/yr. inflation factor (to yield numbers comparable to the $135 billion figure), the savings to U.S. consumers between 1980 and 1990 alone from this consideration would be $171 billion. Further savings would accrue from production differences in the 1990's (in the CBO study the production differences grow over time and peak in 1990) , and no account is taken in the numbers from savings to consumers in other countries.
Mr. MUSKIE. I say to the Senator on that point, our figures here allowed 40 percent growth in incremental production after 1990 for the very reason the Senator has cited.
Mr. WALLOP. True. The point I am making is that, in addition to production, we also achieve reserves, and that is something that none of these studies have looked at as the other benefit from decontrol and a reasonable tax.
As the price of energy goes up, the conservation incentives will be there economically of and by themselves without assistance from Congress, though I dare say we will maintain those incentives to accelerate the process. As the price of energy goes up, the production incentives of synthetic fuels will exist of and by themselves on an economic basis. In fact they are there now.
I had a visit in my office from a gentleman whose company is going to build a methanol plant in southeastern Wyoming. This company is looking for no price guarantees. They figure the, economics are guaranteed by existing conditions. They are looking only for loan assurances.
All I am saying is even though those economics arrive in the picture I daresay we will sustain our incentives to get into synthetic fuels, to increase our conservation and to increase a number of other energy production programs as we should. I have no quarrel with that. But the one area where the pinch is likely to come in the early 1980's is in the production of the one fuel we use now and will be using on into the year 2000, and that is oil and natural gas. If we adopted the House-passed version of the tax in addition to the corporate and personal income taxes we will leave only about 7 percent of all the revenues companies collect to be reinvested. As their expenses increase with the price of energy increasing we will put that squeeze to a point where the Nation will be down 2 or 3 percent. Ultimately we will be driving ourselves out of any chance to sustain an even transition to other kinds of fuel we all know is going to take place.
I compliment the Senator on all those. All our projections are a little bit of wizardry. We hope that the most conservative in cost and most optimistic in revenues will all come out. But I think Congress will have ample time to make adjustments in all those taxes and expenditures to achieve, I hope before 1986-87, the balanced budget we so earnestly desire.
Mr. MUSKIE. Is the Senator suggesting we should now settle for a balanced budget for the first time in 1987?
Mr. WALLOP. No; I am suggesting, as I said, that I hope we achieve that a good deal sooner than that.
Mr. MUSKIE. I wish we could write budgets on hope. Certainly hope is not irrelevant.
In any case, Mr. President, I have described the purpose of this presentation, and at this point I yield the floor.