Capital Formation Newsletter
December 1996, Vol. 21, No. 6
ACCF Center for Policy Research:
Center Forum Highlights Outlook for Tax
Restructuring and Social Security Reform
Message from the Chairman: Tax Reform in the
20th Century by Charls E. Walker, Chairman, American Council for Capital
Formation
ACCF and Center Directors Hold Annual
Meeting
Center
Forum Highlights Outlook for Tax Restructuring and Social Security
Reform
Stronger U.S. economic growth is essential if "baby
boomers" and subsequent generations are to have adequate living
standards in retirement, according to scholars participating in
the ACCF Center for Policy Research's most recent forum, Tax
Policy for the 21st Century. This forum, held December 5
at the National Press Club, featured new research on "What
Causes Economic Growth?" by Professor J. Bradford De
Long of the University of California at Berkeley; "Social
Security Privatization, Saving Incentives, and U.S. Economic Growth"
by Dr. Sylvester J. Schieber of Watson Wyatt Worldwide;
and "The Private Pension System: Is It Ready for the Baby Boomers?"
by Professor John B. Shoven of Stanford University.
In addition, a panel of experts from academia and the private sector,
including the Center's Chairman, Charls E. Walker,
Professor Dale W. Jorgenson of Harvard University,
Dr. Rudolph J. Penner of Barents Group, KPMG Peat
Marwick, Dr. Joel L. Prakken of Macroeconomic Advisers,
LLC, and Dr. Barry K. Rogstad of the American Business
Conference, addressed basic issues in fundamental tax reform at
the symposium.
Keynote Speakers
The Honorable Charles W. Stenholm (D-TX), a founder
of the Conservative Democratic Forum and a senior member of the
House Budget Committee, and the Honorable Judd Gregg
(R-NH), a prominent GOP advocate of social security and private
pension reform, gave the keynote addresses for the Center's forum.
Speaking at the breakfast, Congressman Stenholm stressed the need
to focus on the long-term problem of inadequate U.S. saving. "If
we are truly interested in raising the saving rate, then we need
to look at the total budget," he said. The Texas congressman
also noted that, "If tax reform is to be successful, we must
examine every aspect of the tax system, including social security,
which is the highest tax many people pay." He added that the
"Blue Dogs," a coalition of conservative and moderate
House Democrats, are likely to continue to press for a change in
the consumer price index (CPI) in the 105th Congress. "If the
CPI has been overstated, then it should be adjusted," Stenholm
said, adding that any legislated change in the CPI would need bipartisan
support.
Senator Gregg, addressing the luncheon, called for bipartisan participation
in the debate on social security, as well as in any changes to the
CPI. "We need leadership from the White House on these issues,"
he said, adding that the recent recommendations by the commission
studying the CPI could promote an informed and productive debate
on the issue. "But," Senator Gregg said, "unless
the White House is willing to take on the issue, Congress probably
won't move." He also outlined the legislation he is cosponsoring
with Senator Bob Kerrey (D-NE) to address the problems faced by
the social security system. The legislation includes an adjustment
in the CPI. "Our legislation should serve as a starting point
for the debate in Congress on the social security system,"
Senator Gregg said.
What Causes Economic Growth?
Dr. J. Bradford De Long, associate professor of economics, University
of California at Berkeley, reviewed how different government policies
affect economic growth. While his findings indicate that the ability
of economic policies to affect growth depends greatly upon which
of the various "visions" of economic growth one adopts,
three conclusions appear quite strong and robust. First, there is
reason to believe that the U.S. economy invests too little, that
persistent budget deficits are damaging, and that, especially in
times of inflation, the tax system is badly tuned to provide incentives
for investment and growth. For example, the existence of the AMT
weakens the power of whatever investment incentives have been put
into place. The AMT has come close to creating an entire alternative
tax system for companies that have highly cyclical businesses and
capital-intensive production processes. To the extent that these
are the firms whose investment carries external benefits that we
seek to boost, creating tax benefits does no good unless accompanied
by a parallel change in the AMT. It makes no sense to create tax
incentives to boost investment while simultaneously creating an
entirely different, higher-rate tax system for high-investment companies.
Second, a good case can be made for turning American economic policy
in the direction of budget surplus and low taxation on investment.
Finally, it is possible to shift the growth path of the American
economy-it would take a big change in policy to do so, and to boost
investment in this country by a few percentage points of GDP. Such
a boost requires substantial, not marginal, changes in government
fiscal balances and toward the taxation of investment. But an increase
in economic growth in the range of 0.3 percent to 0.5 percent of
GDP per year does not seem out of reach.
Respondents on the panel were Dr. Joel L. Prakken,
chairman, Macroeconomic Advisers, LLC, and Dr. Louise Sheiner,
deputy assistant secretary for Economic Policy, Department of the
Treasury.
Social Security Privatization, Saving Incentives, and
U.S. Economic Growth
Dr. Sylvester J. Schieber, vice president, Watson Wyatt Worldwide,
presented his findings on the options to reform social security
and their implications for future retirees, federal fiscal operations,
and national saving. Dr. Schieber, one of thirteen members of the
Social Security Advisory Council, reviewed the three main options
developed by members of the Council to address the problem of financing
social security. Current estimates indicate that the social security
program will have depleted its trust funds by 2029, when benefits
will be running 30 percent over revenues. His analysis suggests
that one of the options developed by Council members, the Personal
Security Account (PSA), would generate the highest benefits on average
as well as the highest rates of return. A concern with the PSA option
is that it generates considerable transition costs. Proponents have
suggested that these costs could be financed with a transition tax
and some transition borrowing. Dr. Schieber also noted that the
PSA option and a second option, the Individual Account option, would
have positive effects on national saving. He concluded that the
PSA plan is the superior option because of its higher rates of return,
higher benefit levels, and potential for creating significantly
greater funding of the basic national security system.
Commenting on Dr. Shieber's study were Dr. Gary Burtless,
senior fellow, Brookings Institution; Dr. Robert
J. Shapiro, vice president, Progressive Policy Institute;
and Mr. William G. Shipman, principal, State Street
Global Advisors.
The Aging Baby Boom Generation: The Impact on Private
Pensions,
National Saving, and Financial Markets
Dr. John B. Shoven, dean, School of Humanities and Sciences, Stanford
University, presented his research on the state of the private pension
system and the role of private pensions in U.S. saving. Noting that
one of the fundamental problems facing the U.S. economy is its low
rate of national saving, Dr. Shoven said that pension funds are
now a very important part of national saving. He stressed that the
long-run outlook for private pensions and the options we face are
very analogous to the outlook faced by social security. That is,
economic and demographic trends are such that the saving and surpluses
the programs are realizing today cannot be sustained without modifying
either benefits or contributions. The sooner these changes are made,
the less dramatic they will have to be. By 2024, according to Dr.
Shoven's analysis, the pension system is projected to cease being
a net source of saving in the economy, which could have major implications
for the future course of interest rates, asset prices, and the growth
of the economy. He also found that government policies towards pension
saving have been very inconsistent. The retirement of the baby boom
generation will put both social security and the private pension
system under great stress. We have no choice but to change social
security and policies toward private pension saving very significantly,
Dr. Shoven concluded.
Mr. Ray S. Crabtree, executive vice president,
The Principal Financial Group; Dr. Thomas S. Neubig,
national director of tax policy economics, Ernst & Young LLP;
and the Honorable Earl Pomeroy, U.S. House of Representatives,
responded to Dr. Shoven's paper. 
The edited papers, comments, and keynote speeches presented
at the Center's December 5 forum will be published in book form
in mid-1997. To reserve a copy, please contact the ACCF Center for
Policy Research, 1750 K Street, NW, Suite 400, Washington, D.C.
20006-2302.
Tax Reform in the 20th Century
By Charls E. Walker, Chairman, American Council for
Capital Formation
Conventional wisdom is often wrong but can be instructive. Take
for example views about tax legislation in the 105th Congress. Already
the "word" is spreading that, beyond a compromise capital
gains cut plus reductions for education and children, tax reform
for stronger economic growth is not in the cards. Some seers go
so far as to strike major tax reform from the agenda for President
Clinton's entire second term.
Congress is indeed poised to enact tax cuts for capital gains, education,
and children. But an accurate four-year forecast of tax legislation
requires the impossible-the ability to "get inside" Bill
Clinton's head. After all, the decision whether or not to move for
major tax reform in the next four years is largely up to the President.
And there are good reasons to believe that Bill Clinton would like
to leave the Oval Office in 2001 with legislation in place that
would reshape the federal tax system to foster the productive capital
formation that is essential for a sustained increase in the pace
of economic growth.
The major reasons for expecting Bill Clinton to work for such legislation
are basically the same as those that drove him to the center to
assure reelection and are now keeping him in the center for his
second term. They include the natural desire of a politician-president
to restore the strength of his party; to anoint his chosen successor,
Vice President Al Gore; and in the process to be the first Democratic
president since the revered Franklin Delano Roosevelt to gain for
his party three terms in the White House. And there may well be
a compelling desire on President Clinton's part to earn a place
in history.
Success in achieving all of these goals
requires
continued economic prosperity in this country.
Even though the nation's economic growth rate is short of its potential,
the prosperity of recent years is impressive. It is no accident. Although
the foundation for a healthy growth rate was inherited from the Bush
Administration, prosperity could not have been sustained in the past
four years if the Clinton Administration had not permitted the Federal
Reserve Board to set its own course. In no small part this reflected
the ability and dedication of his excellent economic team-a group
in the right place, at the right time, with the right advice. Led
by then-Treasury Secretary (and now ACCF director) Lloyd Bentsen,
that team persuaded Clinton in 1993 to reject the advice of the know-nothing
"pols" who wanted to emulate King Canute (who commanded
the tide to recede) by challenging the bond market. The advice instead--which
Clinton took--was to respect Federal Reserve independence and let
Fed authorities do their statutory job. To be sure, Alan Greenspan
and his associates deserve credit for mounting the monetary policies
which were the main factors producing strong employment and modest
growth without significant inflation. But President Clinton deserves
immense credit for keeping White House interference with the Fed,
if present at all, muted, behind the scenes, and thus not destabilizing
to financial markets and the economy.
In addition, the Clinton administration helped sustain prosperity
by fighting off core Democratic constituencies to gain Congressional
approval of NAFTA and the WTO, thus honoring the crucial and growth-promoting
principal of liberal trade. And the Administration worked hard (admittedly
with too much partisan politics involved) to promote U.S. investment
abroad. This investment is a major factor promoting world economic
development, still another important requisite for strong U.S. economic
growth.
However, of the major requisites for sustained prosperity, the Clinton
Administration falls short in three areas. First, the Administration
has failed to push for tax policies which reduce the cost of capital
for new investment. For example, in 1993 President Clinton proposed
a major reform of the corporate alternative minimum tax but did not
continue to urge AMT reform in subsequent years. Second, the increase
in marginal income tax rates in 1993 was misguided. And third, the
Administration has not pursued much-needed reform of U.S. regulatory
and environmental policies to make them more effective and less costly
to consumers and businesses.
Capital formation is perhaps in the long run the most important of
all requisites for strong and sustained economic growth. But there
are now "four more years," which allows time to at least
start and, it is to be hoped, make substantial progress in dealing
with that tough problem. And, although dealing with it requires approaches
from several directions, a massive national savings campaign coupled
with significant reduction in the bias of the federal tax system toward
consumption and against productive investment would be strongly conducive
to progress.
It would therefore be foolhardy to assume now that major tax reform
is dead for the rest of the twentieth century. Bill Clinton has fooled
the conventional-wisdom crowd before.
Do not be surprised if he does it again.
ACCF and Center Directors Hold Annual
Meeting
The American Council for Capital Formation is pleased to announce
the election of the following new board members at its December
5, 1996 meeting:
- James B. Graham, President and Chief Executive
Officer, CyberMark; and
- Carl D. Thoma, Principal, Golder, Thoma, Cressey,
Rauner, Inc. and President, National Venture Capital Association.
The ACCF Center for Policy Research welcomes to its board:
- Thomas D. Campbell, President, Thomas D. Campbell
and Associates.
|
