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A more important reservation to the view that budget balance can be achieved without an amendment is that insofar as we are moving toward balance, it is because inflation conveniently increases taxes at a more than proportional rate.

As I am sure you all know, individual income taxes increase approximately two-thirds faster than the rate of inflation, according to the Joint Committee on Taxation. This is because people get pushed into higher tax brackets and because they are forced to pay taxes on illusory income.

What can be more absurd than requiring some individual earning a maximum of 532 percent interest on a passbook savings account when inflation is 13 or 14 percent to pay taxes on that interest as though it were income. Unfortunately, this is precisely what is happening to many old people in Iowa and elsewhere who cannot put their money into real estate or gold or long-term certificates of deposit.

Because inflation increases the real tax burden on the American people, we, in Congress, have been able to maintain the illusion that we are more fiscally responsible than we actually are. In fact, it has often been argued that Congress actually has an incentive to keep inflation going just because it increases taxes without the necessity of legislative action.

Unfortunately, despite periodic tax cuts, most Americans are paying a much higher percentage of their income in taxes than they did in previous years.

I am including at this point in my statement a table prepared by the Joint Committee on Taxation which shows that a family earning the median income in 1965 would have paid 9.5 percent of its income in social security and Federal income taxes.

[The table referred to follows:]

FEDERAL INCOME AND SOCIAL SECURITY TAXES FOR A FAMILY OF 4 WITH $17,105 IN 19761

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1965. 1966. 1967. 1968. 1969. 1970 1971. 1972. 1973. 1974. 1975 1976. 1977. 1978 1979. 1980 1981

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$8,272 8, 509 8, 754 9, 122 9,612 10, 181 10,618 10, 969 11,651 12, 929 14, 111 14, 925 15, 888 17, 105 18, 918 20, 678 22, 456

7.4 7.6 7.8 8.7 9.3 8.8 8.7 8.5 8. 5 8. 2 8. 7 8.8 9.3 9.8 9.7 10.3 10.8

933

$174
277
290
343
374
374
406
468
632
756
825
873

$789
926

975
1, 137
1, 265
1,270
1, 325
1. 401
1,627
1,819
2, 059
2, 181
2, 400
2,713
2, 998
3, 391
3,924

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995 6 1,063 1, 234 1, 308 1, 471 1,678 1, 838 2, 123 2, 431

929 1, 035 1,160 1, 268 1,493

151 15.9 159

17.)

1 Assuming that income changes as does the consumer price index'and that deductible expenses are 23 percent of income The CPl is assumed to rise by 10.6 percent in 1979, by 9.3 percent in 1980, and by 8.6 percent in 1981.

2 Including a $55 surcharge.
8 Including a $81 surcharge.
1 Including a $22 surcharge.
5 Including a $118 tax rebate paid in May 1975.
Source: Joint Committee on Taxation Aug, 2, 1979.

In 1965, the median family earned $8,272 per year. By 1981, the median family will need $22,456 per year just to have the same purchasing power. But the 1981 family will pay 17.5 percent of its income in combined Federal taxes. Thus, although its gross income keeps pace with inflation, the median family's real disposable income has declined and will continue to decline unless we act by stopping inflation and cutting taxes.

This brings me to an important reservation I have about an improperly drafted balanced-budget amendment. The problem is that à budget can be balanced two ways, by raising revenue or by lowering spending Although I supported a balanced budget, I would be forced to oppose

a efforts to do so by raising taxes, whether it is done explicitly or implicitly through taxflation.

For this reason, I would prefer to see a balanced budget amendment combined with tax indexing and a spending limitation feature, because, after all, it is the growth of both spending and taxes which people are concerned about.

Furthermore, I think that a balanced budget amendment should be drafted so as to not preclude necessary tax reduction. It is my belief that a reduction in tax rates does not necessarily lose tax revenue in the long run. Conversely, an increase in tax rates may not necessarily increase revenue. This is because tax rates have incentive effects.

If people are discouraged from working, producing, investing, and saving because high tax rates do not provide them with an adequate return, then this will ultimately shrink the economic pie and produce less revenue.

On the other hand, a tax rate reduction will increase the incentive to work, save, invest, and produce. Thus we will ultimately end up with more revenue than we would have had if taxes were not cut.

As I said earlier, I think it is futile to apply the traditional Keynesian medicine to the economy in the form of more Government spending and increased money growth. The people have learned their lessons too well and immediately discount the value of such actions by translating them directly into inflation.

However, I think that properly structured tax cuts can still do a great deal to stimulate the economy; not in the Keynesian sense of giving people more dollars to spend, but by increasing the rate of return to working, saving, and investing.

I would certainly hate for us to get into a situation in which a balanced-budget amendment to the Constitution precluded Congress from passage of a tax cut aimed at increasing productivity and investment, such as the Capital Cost Recovery Act, at a time such as now when productivity is growing at a negative rate.

In conclusion, I will just say that I remain a supporter of the balanced budget concept. I believe that it is important that this be written into the Constitution, both as a permanent check on congressional largesse and as a statement of commitment to stopping inflation.

However, I am very concerned that we do not move toward budget balance by raising taxes, since I feel that this will ultimately make us worse off than if we had kept taxes lower and run a deficit.

Thank you.

My preference would be to have a balanced budget amendment include tax limitation or tax indexing features and/or spending limitation. I realize that this will be difficult to accomplish and still keep any proposed constitutional amendment short and simple.

I suggest that perhaps the committee might consider drafting several amendments which could be considered by the Senate separately or together. I look forward to early consideration of such constitutional amendment or amendments.

And thank you, Mr. Chairman, for the audience.
Senator Bays. Thank you very much, Senator Jepsen.

I know how busy you are, and we appreciate your taking the time to be here with us.

I will waive any questions. I know you are busy. If anything comes up, we can put it in the record in writing, if that is all right with you.

We now have a panel of very distinguished witnesses that have : significant amount of expertise in the area that we are studying.

Dr. Alan Greenspan of Townsend-Greenspan in New York, of course, had the distinction of being the Chairman of the Council of Economic Advisers under President Ford. Mr. Richard W. Everett, vice president of the Chase Manhattan Bank; Dr. Philip Saunders, a distinguished professor of economics at Indiana University.

There has been a great deal of discussion on the floor of the Senate and some criticism directed at the chairman of this subcommittee for not having a constitutional amendment out. We have held several hours worth of hearings.

So far you are looking at the only Senator who has listened to all the witnesses. I know how busy everybody is, but I wish others would have the chance to get some firsthand knowledge that we are making available to the Senate and to the committee so we can reach an intelligent decision on this subject.

Why don't we just start out here. I don't know what the proper order is.

Dr. Greenspan, why don't you start out here, if the other gentlemen have no objection.

TESTIMONY OF ALAN GREENSPAN,

ALAN GREENSPAN, TOWNSEND-GREENSPAN ,

NEW YORK, N.Y.

Mr. GREENSPAN. Thank you very much, Mr. Chairman. It is a pleasure to appear before this committee to testify on proposals to mandate a balanced budget through a constitutional amendment.

Most economists, myself included, do not favor such an amendment. However, it would be shortsighted of the Congress not to recognize that, while the growing pressures for such an amendment may be mistaken in form, they are a reflection of the increasing concern of the American people that the U.S. Congress cannot come to grips with the problem of chronic Federal budget deficits and the inflationary pressures they support. The advocacy for a constitutional amendment, I believe, is largely symbolic. It is a proxy to do something on the fiscal front.

But there are more appropriate and effective responses than a constitutional amendment mandating a balanced budget. Such an amendment, should it come to pass, would, in fact, not achieve the

a

very purposes which those advocating it desire. It, in itself, will not prevent the growth in government and leaves open and, in fact, creates, the likelihood that budget balancing would be achieved more through increasing taxation than through curbing expenditures.

Moreover, the Congress cannot readily control the actual budget deficit in the short run, say, a year. Except for small parts of the budget, the levels of expenditures in the short run are determined either by entitlement programs or previously committed funds for which scheduled payments to private contractors are relatively fixed.

Hence, the level of outlays in the short run is, to a substantial extent, outside the realm of executive or congressional discretion.

Similarly, the Congress sets a tax rate structure which means that the level of Federal receipts largely becomes a function of the level of taxable incomes generated. Notwithstanding those who believe that the Federal Government can fine tune the economy, taxable income levels, at least in the short run, remain outside the discretion of government. Finally, even where considerable discretion does exist, outlays often are unpredictable—the surprising outlay shortfalls in recent years being a clear case in point.

Hence, since current budget deficits largely reflect previous legislation, mandating budget balance may create contradictory law.

The fact that there are technical difficulties in achieving budget balance or expenditure restraint in the short run makes it all the more imperative that we come to grips with the underlying long-term rate of growth in Federal outlays. Unrestrained, Federal outlay growth will soon run ahead of our tax-raising capacity.

It is becoming increasingly evident that we must create a far more effective mechanism to restrain outlay expansion than we have constructed to date.

The basic problem is that, while restraint in total outlays is supported by virtually everybody, when it comes to a specific expendiiures proposal, the short-term benefits to a specific constituency tend to override the long-term costs to the Nation as a whole.

The current services budget estimates for future years invariably indicate that expenditures growth will slow rather markedly. But this is partly illusory since there is an implicit assumption that the Congress will be on vacation 52 weeks a year and will add no new spending programs to the budget.

We often forget that there is a special type of uncontrollable spending which is built into our political system. It derives from the fact that the Congress meets for extended periods each year and that most bills on which committees hold hearings have a significant price tag on them. It is rare that a congressional committee will meet in extended session on an inconsequential budgetary matter unless it has wide political or media interest.

One cannot tell in advance which particular bills will pass or which particular expenditures will be authorized. However, we would not be terribly far off if we specified a certain aggregate level of newly authorized outlays per day of congressional session. This, in a certain sense, is as much an uncontrollable add-on as previously mandated outlays.

It appears, therefore, that the only way in which we can permanently curb a rate of growth in Federal outlays which outruns the revenue-raising capacity of the economy is to impose some form of restraint on outlays which cannot be bypassed by simple majority votes. This would require a constitutional amendment.

I endorse this with great reluctance. Constitutional amendments should not have to deal with technical problems such as those which now confront us on the budget. However, given our institutional structure, I see little hope of achieving the type of restraint that our economy requires other than through the Constitution.

While the constitutional amendment proposals which endeavor to limit expenditures, rather than mandate a balanced budget, skirt some of the obvious problems of a balanced-budget amendment, they, too, have a significant problem associated with them; namely, the criteria against which budget restraint is measured. Any attempt to employ, for example, the gross national product as a measure to guide expenditures growth confronts the obvious problem that the gross national product is continuously undergoing redefinition with respect to inclusion and

coverage. Moreover, estimates, especially preliminary estimates, are subject to revision of as much as a full percentage point. For a $500 billion budget tied to GNP, this implies a potential shift in the ceiling of $10 billion. Remember, a constitutional amendment must be as meaningful 50 years from now as today. Various statistical measures such as gross national product or the Consumer Price Index are not likely to live in perpetuity in their current form.

One may, of course, bypass this technical problem by merely creating a generic basis for expenditure restraint in the Constitution and have congressional enabling legislation specify the elements which would guide that restraint. Such an approach is certainly worthy of consideration and would, if implemented, go a long way toward resolving our Federal budget expenditure momentum.

Another, and perhaps simpler, way of resolving the outlay growth problem is to require that all budget authority, appropriation, er. penditure and credit-guarantee bills be passed by a super majority of, say, three-fifths or two-thirds, rather than a simple majority of both Houses. Such a procedure would avoid many of the problems associated with defining an appropriate constitutional amendment.

It would not, however resolve the problem of defining what, in fact, constitutes expenditures.

I have no doubt that if we restrain what is covered under the current definition of outlay or expenditure by some legal prohibition. the Congress, in its wisdom, will find alternate means to accomplish what it ordinarily would do on the expenditures side.

However, I nonetheless believe that such measures are limited and that while we can never expect a constitutional amendment requiring a super majority on money bills to be fully effective, it clearly would have a major impact on restraining the growth of the Federal sector.

Most of the areas where the Congress is apt to create expenditures bypassing devices are on the tax side, through credits. I do not consider this totally undersirable. We will need periodic cuts in tas rates, and any restraint on expenditure levels will probably exert additional pressure on the Congress to cut taxes in order to avoid excessive budget surpluses.

Pending the passage of a constitutional amendment requiring three-fifths or two-thirds vote on money bills, we might wisely amend

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