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wage earners into higher marginal tax brackets forcing them to pay out a larger share of their income in taxes than they would in the absence of inflation. The tax consequences of inflation on capital is even more far-reaching.
6. Inflation inflicts a tragedy on future generations. As sure as we exist at this hour, the day will come when inflation will have to be brought under control in one way or another. The consequences of continued inflation, without firm restraints quickly, will be tragic.
If we do not take the necessary steps, future generations will be saddled with the problem. We must face up to the real causes of inflation and quit trying to correct the situation by treating the results. Otherwise we will not be able to retain our freedom and pass on a country to our children and their children that is economically sound and economically healthy.
Having discussed the real issue and the impacts of inflation, we now turn to the real causes of inflation. When all factors, circumstances, and conditions are considered, we must conclude that the Federal Government is primarily to blame for the inflationary trend that has prevailed, and for the fiscal trouble in which the Nation finds itself. This has resulted from a vigorous pursuit of certain political philosophies, the perpetuation of an enormous and exploding bureaucracy, failure to be tough enough in the control of the money supply, and the belief that we can spend ourselves out of trouble without having to pay for it.
One of the main causes of inflation is continuous deficit spending on the part of the Federal Government. The practice merely puts more money in the hands of consumers than the country has earned in production, and siphons money from capital investments that would create more jobs and produce more goods. The money put in the hands of consumers is spent for consumer goods and services, which drives up prices without any corresponding increase in supply.
To stop the runaway inflation, we must reduce Federal expenditures and balance government outlays with government income.
While the philosophy was employed beginning in the 1930's, by 1960 the Congress went overboard in embracing the Keynesian economic theory which very simply provides for cranking up the economy during a recession by spending extra money that the government doesn't have. In so doing, the Congress created so many social programs during these years which, if continued, have to be funded, and it hasn't been politically expedient to levy additional taxes on an already overtaxed electorate to finance these programs.
In the fiscal 1979 budget of about $500 billion, outlays of $370.2 billion or 75.0% were considered "relatively uncontrollable”. “Relatively controllable” outlays amounted to $123.2 billion or 25.0%. A high percentage of the uncontrollable portion of the budget consists of social, health, welfare, education and income security programs which often are referred to as “entitlements". The Federal Government has “educated" people to expect these entitlement programs, and it will be difficult to reduce their cost.
However, unquestionably, some such programs as well as others can be scaled down and by eliminating waste, reducing our enormous bureaucracy, and prudent scrutiny of the real purposes of government, we should be able to bring the Federal budget into balance.
It would be somewhat unfair if we did not at least mention some other causes of inflation, which causes will need to be dealt with at an early date, but not necessarily through a Constitutional amendment. All, however, can be traced directly to the Federal government. We would be glad to elaborate if called upon to do so, but basically the other causes are these:
1. The continuous and substantial growth in the money supply.
Following this discussion, we repeat again that the primary solution for spiralling inflation is to restore fiscal responsibility in the Federal Government which requires the reduction of Federal expenditures, requires the balancing of Federal expenditures and Federal income, all of which means balancing the Federal budget. In our opinion, assurances of this program require an amendment to the Constitution of the United States and not just a serious of new statutes which can be changed by majority vote of both Houses of the Congress.
As the committee knows, quite a number of resolutions have been proposed by members of the House of Representatives and by members of the United States Senate. They vary considerably, but all those to which we refer would propose a Constitutional amendment. There are some 70 resolutions in the House with over 200 sponsors and co-sponsors, and at least 15 in the Senate with some 30 sponsors and co-sponsors.
While sympathetic with a number of the approaches that have been made, the NCA looks with most favor on SJR-93 by Senator Armstrong, and HJR-408 by Congressman Rousselot. We do feel there should be some additions to this resolution, including several sections contained in SJR-56 by Senators Heinz and Stone.
Therefore, the NCA submits the proposal for a Constitutional Amendment that embraces the following summarized provisions:
1. In any fiscal year the total expenditures by the Federal Government shall not exceed total revenue.
2. Expenditures shall not include outlays for redemption of obligations and revenue shall not include money derived from the issuance of obligations.
3. Any surplus of revenue over expenses in a fiscal year shall be applied toward the reduction of the national debt.
4. The first provision above shall be suspended in any year when the United States is at war.
5. The first provision above may be suspended by a vote of \ths of the members of each House of the Congress and approved and signed by the President, or, if not approved and signed by the President, approved by a vote of 3rds of the members of each House of the Congress.
6. In any fiscal year, the Congress shall reduce the rate of taxes to offset the effects of inflation. Inflation shall be measured by the difference in the increase from the previous year between the Gross National Product expressed in current dollars, and the Gross National Product expressed in constant dollars.
7. Any bill or resolution to increase taxes must be approved by a yths vote of each House of the Congress and signed by the President or, if not signed by the President, approved by a vote of 23rds of each House of the Congress.
8. Any bill having the effect of reducing taxes may become law after it is approved by a majority vote of both Houses of the Congress and signed by the President or, if not signed by the President, approved by a srds vote of both Houses of the Congress.
9. In each of the first five fiscal years following the ratification of this amend ment, total federal government grants to the states and local government sub divisions shall not be a smaller percentage of total federal outlays than the average percentage in the three fiscal years prior to the effective date of this amendment. Furthermore, the Federal Government could not require that states or local government subdivisions make up for reduction in grants that may occur in the five years following the effective date or may occur in years thereafter.
10. The provisions of the amendment shall take effect in the first fiscal year beginning after the date of ratification.
11. Congress shall have power to pass necessary legislation to carry out the intent of the amendment.
12. Provides for enforcement of the provisions of the amendment by 1 or more members of the Congress in action brought in the United States District Court naming as defendant the Treasurer of the United States, who shall have authority over outlays and expenditures by any unit or agency of the United States Government.
We submit to the Committee that a great deal of thought and investigation has gone into the preparation of these views and comments. We urge serious consideration be given to the foregoing proposal and we hope the Committee will act favorably and with dispatch to propose a meaningful Constitutional Amendment to the full Committee at the earliest possible date.
In the meantime, since the ratification of an amendment may not be accomplished in a short time, we feel the Congress should take necessary statutory steps to balance the Federal budget at a limited level of spending which would mean the provisions of the Amendment would virtually be in effect upon ratification.
For the National Cattlemen's Association, I thank the Chairman and the members of the Committee for their kind attention to the views and comments contained in this statement.
Senator HEFLIN. We have Lewis K. Uhler, president of the National Tax Limitation Committee, Washington, D.C., and Dr. W. Craig Stubblebine, director, Center for the Study of Law Structures, Claremont Men's College, Claremont, Calif.
Come forward, gentlemen. However you would like to proceed, please do.
TESTIMONY OF LEWIS K. UHLER, PRESIDENT, NATIONAL TAX
LIMITATION COMMITTEE, WASHINGTON, D.C.
Mr. UHLER. Senator, I am Lewis K. Uhler, president of National Tax Limitation Committee, also attorney and businessman. I come before the committee concerned as a citizen. I would like to make just a very brief statement for the record.
Inflation rages; the prime interest rate stands at a record high; the stock market is buffered by uncertainty; the dollar's integrity is being assaulted in the money markets of the world.
Americans can no longer plan intelligently for their own futures. Americans, as well as our friends abroad, are demanding that something be done, and they are looking to the Congress to do it, because it is the spending and tax practices of the Government of the United States that lie at the heart of the problem.
As Congressman, Giaimo, chairman of the House Budget Committee, said on the House floor on October 25:
Mr. Speaker, I have resisted efforts in this Congress this year on balance the budget amendments and on spending limitations, but I say to this body that this Congress cannot control itself in spending money; and I am seriously going to look at legislation which will put a spending limitation on the amount of money which this Congress has got to pass.
From some quarters we are being implored to put a lid on prices and wages. Others want special subsidies. Still others want restrictions on trade, controls on foreign investors in the United States, and so forth.
I implore you not to be caught up in the quick fixes—they only compound the problem. I suggest that there is only one way that you can signal all Americans, and the rest of the free world, that we mean to clean up our act—and that is to vote for an amendment to the U.S. Constitution that will impose a no-nonsense but responsible limit on the spending power of the Government of the United States--a limit that will assure control over inflation and that will reduce over time the share of our earnings and wealth flowing to the Federal Government.
Such an amendment is the Federal spending limitation amendment, Senate Joint Resolution 56.
Do you really mean business—that is the question. Or will you be content with some cosmetic response to the malaise that grips America and the free world. I assure you that those who have bid the price of gold to unprecedented heights will not be fooled by some legislative legerdemain. They will respond only to substance, not form. They and the nearly 80 percent of Americans who are fed up with inflation, excessive Government spending, waste, corruption, inefficiency and the high taxes these produce, are waiting for a signal that you are really serious. Only a commitment to constitutional control, not more statutory pledges to "do good” or set spending “targets” will be persuasive.
I suggest to you that a vote by this subcommittee for the Federal spending limit amendment will be a shot of fiscal sanity heard around the world. With this one act you will begin the restoration of confidence in the Government of the United States and our dollar. You will
return to Americans the only thing they must have to perpetuate a free and responsible society, the capacity and willingness to save and invest and to plan intelligently for their own futures and those of their children to dream their individual dreams with a sense of certainty as to the outcome.
Now I would like to introduce Dr. Craig Stubblebine, one of the principal economists who has advised and counseled with us for a number of years, and a principal architect of the Federal spending limit amendment.
TESTIMONY OF W. CRAIG STUBBLEBINE, DIRECTOR, CENTER FOR THE STUDY OF LAW STRUCTURES, CLAREMONT MENS COLLEGE, CLAREMONT, CALIF.
Mr. STUBBLEBINE. Mr. Chairman, I am William Craig Stubblebine, Von Tobel Professor of Political Economy at the Claremont Men's College and the Claremont Graduate School, and, as well, director of the center for the study of law structures at the Claremont Men's College, Claremont, Calif. In an effort to save time Mr. Chairman, I suggest that my printed
I statement be inserted in the record and I shall proceed with the summary statement.
Senator HEFLIN. It will be so ordered.
I would also request permission of the Chair to supply at a later time a typographically corrected copy. The copy I have with me I saw for the first time this morning. It was typed while I was absent from my office.
Senator HErlin. Certainly.
As you may have observed, the prepared statement is a mediumlength explication of the proposed Federal spending limit amendment. In addition to exploring the more sweeping issues, it also provides a section-by-section analysis of the words and phrases of the proposed amendment.
Let me, for a moment or two, refocus our attention from a particular to the universal. In short, the proposed Federal spending limit amendment would impose a realistic limitation on total Federal outlays. That limitation is in keeping with the best of the American democratic tradition, government of the people, by the people, and for the people.
At the core of the proposed amendment is section 1, which states that total outlays of the Government of the United States during any fiscal year shall not increase by a percentage greater than the percentage increase in the nominal gross national product during the last calendar year ending prior to the beginning of such fiscal year.
In essence, the citizens of the United States will be assured that their Federal Government will not spend more than a reasonable amount of the gross national product created by their labor. At the same time, the Congress of the United States will be able to carry out its traditional responsibilities to establish spending priorities and to administer the public will.
The remainder of the amendment mainly facilitates this assurance to the citizens of the country. There are incentives to the Congress to
wage war successfully on inflation, protection against the sudden termination of State programs, urging to reduce the national debt and, of course, provisions to allow expenditures in times of national emergency
All the same, constitutional change is indicated only when the electorate perceives that the outcomes under the current Constitution are or will become at variance with its wishes. For a people whose roots lie in limited government, the developing anger over the financial burden of the public sector suggests a change is in order.
Furthermore, Mr. Chairman, the proposed Federal spending limit amendment as drafted is an appropriate response to the explicit and quasi-constitutional changes which have taken place in this century.
The 16th amendment, adopted in 1913, represents explicit constitutional change. That amendment removed from the Constitution the severe restraint on Federal revenue provided by the Founding Fathers. Even as it was being ratified, there was little appreciation of the tax burdens which would come to characterize American life scarcely 50 years later. Seers at the time who prophesized tax rate in excess of 20 percent were hooted into silence.
In addition, at least two quasi-constitutional changes have taken place.
First, there has been a change in attitude regarding the appropriate range of Federal responsibility. As late as the 1950's, the Congress justified aid to highway construction and to education in terms of national defense-the National Defense Transportation Act and the National Defense Education Act. Such justification in terms of the basic Federal responsibility to provide for the national defense would be considered an anachronism in the 1970's.
Second, there has been a change in attitude regarding Federal deficit financing. Even into the 1950's, deficit financing was considered acceptable only in time of war. Peacetime deficits were taken as clear evidence of the fiscal irresponsibility on the part of the Congress. Whether or not the evidence remains as clear today, planned deficits in years good or bad signify congressional rejection of the fiscal rule which served America for the greater part of its life.
With erosion of these fiscal disciplines, understood by and adhered to by the founders of this Nation, no one should be surprised that the Congress has been unable to exercise the restraint necessary to secure a return to and to maintain stability. The problem lies in the institutional setting which has emerged in the face of constitutional changes.
Before examining this institutional setting, we may look at some data in table I, which you will find on page 4. During the 20-year period from 1959 to 1978, total Federal, State, and local Government spending grew from 34 percent to 40 percent of U.S. personal income as measured on a calendar year basis.
The central explanation for this growth lies in the coalition characteristics of representative government. As focal points in the budgeting process, legislatures are under constant pressure to provide more of each Government service. At the same time, they are under pressure to reduce the total burden of taxes.
In this process, the legislator is as much prisoner as master. To secure the votes of his fellow representatives on matters of interest to his own constituents, he must surrender his votes in support of