Mr. COHEN. Yes; we have a new schedule, Senator, and it is designed, as we said in our statement, to asure that at no point in the scale would the tax on single persons be more than 20 percent greater than the tax on married persons with the same income.

Senator MCCARTHY. The effect of that is to bring about rather substantial tax reductions when you get above $10,000 of income? At the bottom of the scale the difference is not very significant.

Mr. COHEN. I have a chart here that illustrates it, if I might show it

to you.

This chart, Senator McCarthy, shows, for various income levels, the additional percentage tax which a single person would pay in relation to a married person of the same income. You will see that under current law, at a level of about $25,000 a single person pays more than 40 percent additional tax as compared with the tax paid by a married couple with the same income. That would be substantially true also under the House bill for single persons under age 35.

Under the House bill, single persons 35 and over would follow this yellow line and at one point would go slightly above 20 percent, but there would be a very substantial difference between the single person under 35 and the single person over 35.

The green line on this chart is what we would propose. The single person would never pay a tax of more than 20 percent above what a married couple would pay on the same income. That would be true for persons under 35 as well as for persons over 35.

Now, the major effect, as you indicated, is in the middle income brackets. There is relatively little effect at the bottom of the scale and relatively litle effect when one goes to the $250.00 or $500,000 level.

Senator MCCARTHY. Thank you, Mr. Cohen. Those are the only questions I have now.

The CHAIRMAN. Thank vou, Senator McCarthy.

Senator Anderson, I believe, wanted to ask some questions.

FOUNDATIONS

Senator ANDERSON. Could you tell me why you are concerned about a foundation owning 20 percent or more of a business if it is not engaged in self-dealing and distributes all of its income for charitable purposes? Mr. COHEN. Your question relates, Senator, to the reason why we have provisions requiring private foundations to divest themselves of control of private corporations.

Senator ANDERSON. Yes.

Mr. COHEN. I can best summarize it by saving that we think that the tax exemption is given to private foundations and the deduction is given for estate and income tax purposes to the contributors because foundations will be devoted exclusively to charitable and educational operations. It seems to us that when they are in control of operating businesses, and particularly when they are in control of a number of operating businesses, they necessarily become involved in the management of those corporations.

One way to prevent this might be to say that you could not have an interlocking relationship, that the persons operating the corporation would have to be different persons from those that are controlling the

foundation. Therefore, those who are in charge of the foundation would be devoting themselves exclusively to the selection of the beneficiaries of the charity or to determination of grants. They should not be involved in the management of the business.

We were concerned because it is not the same as interlocking directorates in public corporations. In private organizations this would be a very difficult thing to determine because even though the persons may be different, they would be friendly, presumably. Thus, it would not be satisfactory simply to say that the donor, if he is the president of the corporation, could not be on the board of trustees of the foundation. He could have his secretary, his lawyer, his banker, his broker, or his golfing companion, on the board of trustees of the foundation. Rather than go in that direction, we decided to limit the percentage of the voting stock which the foundation could own. We distinguish between voting stock which permits the foundation management to control the private corporation, and nonvoting stock which would not give it that opportunity.

We thought that, in general, we could permit up to 20 percent stock ownership without difficulty and permit an additional 15 percent, or up to 35 percent, if there is not, in fact, control by the foundation of the operations of the business corporation.

Senator ANDERSON. Thank you. But Sears, Roebuck has a very heavy investment in stock ownership of a pension fund. How would this apply?

Mr. COHEN. This provision would not apply in that case because it applies to foundations and not to pension funds.

Secretary KENNEDY. Sears' pension trust is owned and controlled by the employees because they vote the stock and it is not controlled by the company.

The CHAIRMAN. Senator Jordan?

Senator JORDAN. Thank you, Mr. Chairman.

7-PERCENT INVESTMENT TAX CREDIT

I would like to talk a little bit about the repeal of the 7-percent investment tax credit. As I understand, the 7-percent investment tax credit was inaugurated in the early 1960's to stimulate the formulation of new plant and new facilities for production. There is no doubt about it, we have quite a different situation now. We have an overheated economy. But it is quite possible that this situation can change again. Did you give any consideration to the suspension of the 7-percent tax investment credit rather than the outright repeal which you recommend?

Secretary KENNEDY. Yes, Senator, we did. This matter of tax legislation is not an easy one, and we cannot turn the credit on and off fast enough for anti-inflation and deflation problems.

But apart from that general problem, some of us believed, and I was included in that group, that this tax incentive was not the best flowthrough mechanism in the economy. It does not do the job as well as a general reduction in rates which we are now proposing or a change in depreciation schedules. From the standpoint of encouraging our industry to be competitive with world industry, it does not do the job

because a good part of this tax credit goes for completely domestic purposes, including regulated industries whose rates are geared to their earnings and who pass it on to the public-the railroads, the airlines, et cetera, are a good example of that situation. A general corporate rate reduction would be better, in my judgment.

The other significant point, in the competitive field internationally, is that other countries' tax laws are much different from ours. They put emphasis in a different area, with value added taxes which they can abate with respect to their selling price abroad or charge on the import side. I think we must give consideration to some measure like this that will meet the GATT rules and take care of our competitive situation.

In the last several years, the balance of our trade has changed so drastically that now a large share of our exports come from a very highly sophisticated area where we excel in research and development as compared with the general lines that we formerly had in production. The investment tax credit did not stop that move.

Senator JORDAN. It has been turned on and turned off and turned on again. Various problems of transition arise. Have you given any thought to the problem of transition that comes from an abrupt shutoff?

Secretary KENNEDY. Yes, Senator, we have, and the rules of transition are quite similar to those used when it was temporarily suspended before.

Do you want to comment on the transition rules, Mr. Cohen?

They do give, I think, sufficient leeway to take care of those who are already committed to going ahead with their program.

Senator JORDAN. I wish you would summarize it if you will.
Secretary KENNEDY. Mr. Cohen will do so.

Mr. COHEN. Senator, in the fiscal year ended June 30, 1970, the fiscal year that we are now in, we estimated the revenue increase from the repeal of the investment credit at about $1.35 billion. The ultimate long-term effect when the investment credit is fully repealed, we would estimate it at $3.3 billion. Therefore, the $1.3 billion in this fiscal year would indicate that it has only about 40 percent effect in this fiscal year; 60 percent of it will still be obtained. It indicates that it goes into effect gradually.

I believe that in the next fiscal year, fiscal 1971, that the revenue increase is estimated at $2.5 billion, and that it does not reach the full $3.3 billion for some 8 or 9 years.

Senator JORDAN. So there is a transition period when allowances are made for those injustices that might arise from too abrupt a transition. Mr. COHEN. Yes. Existing contracts or plants, which were more than half completed, or similar situations, will continue to enjoy the in

vestment credit for some time in the future.

In addition, there is a carryover for 5 years, phased out gradually over the 5 years, of all the unused credits. That would apply to equipment which has been installed heretofore but which the companies have not been able to use because their income tax was not sufficiently high to make it available.

Senator JORDAN. As I understand the administration position, you allowed no exceptions whatever. We have a Small Business Admin

istration setup for the purpose of encouraging the formation of small businesses and we try to give them a break now and then in order to keep them competitive, but you would make no exception for allowing small businesses to use this device to make them more competitive.

Mr. COHEN. We would prefer to do anything that is to be done for the benefit of small business by other types of provisions. There are many provisions in the law now favoring small business by way of deductions rather than a credit of this kind.

We think the credit allows more than 100 percent for the investment in the equipment, and it is available only to the profitable concern. I think there are other ways, Senator, of dealing with the matter of small business.

Senator JORDAN. All right.

In this instance you allowed no exception whatever.

DEPLETION ALLOWANCES FOR MINERALS

I turn now to a discussion of natural resources where you do allow an exception, and I want to probe with you the reason you do this. As I look at the table, you pretty well accepted the House recommendations with respect to depletion allowances for minerals. And yet there are five categories here, five instances where you made no reduction, you accepted the House position on that, and that is with respect to gold, silver, oil shale, copper, and iron ore from domestic deposits. Now, every other mineral is subject to a reduction in depletion allowances of about 25 percent, with these exceptions. You made no exception whatever in the repeal of the 7-percent investment tax credit. Why did you go along with the House, and I grant you these are not exactly comparable situations, but I cannot understand why the House isolated these five commodities from the action of the bill and you accepted their interpretation of it, their recommendations.

Mr. COHEN. Senator Jordan, there was extensive consideration of this in the executive sessions of the Ways and Means Committee, and we had present representatives of the Department of the Interior. These exceptions were made in particular, on the basis of a recommendation of the Department of the Interior that these metals were in short supply or that special incentives were needed at this time.

I think the oil shale is in an experimental state at the present time. Gold and silver are in short supply. Copper is in short supply, and I recall the Department of the Interior recommending to the Ways and Means Committee that there be no reduction with respect to iron ore because of the decreasing deposits in the United States at the present time.

Senator JORDAN. All right. What do we do with a situation like this: lead and zinc are likewise in short supply. Now we have very few silver mines. My State leads the Nation in the production of silver. Silver comes as a byproduct in our State of the mining of lead and zinc.

Lead and zinc are subject to a reduction in the depletion allowance. Silver is not.

Lead and zinc in some applications are competitive with copper. Copper is in short supply. At one time we were the leading country of

the world in the export of copper. Now we are the leading country in the world in the import of copper. But copper and lead and zinc are all noncorrosive metals. They are in competition in a number of instances. How can you reconcile giving one a tax break, one metal, and not giving similar treatment to those metals that might be in competition? Are you not setting up another inequity in this tax reform act that you are recommending?

Mr. COHEN. I do not think anyone intended to set up an inequity, Senator. I am not that familiar with the competitive relationships of zinc or lead with copper. I would be glad to take that up with the Department of the Interior and see what their recommendations would be. We will be glad to consider it further.

Senator JORDAN. Well, I think they should be in the same category. The same rules should apply across the board on metals that have similar characteristics that are competitive in industry. These metals come from the same ore bucket from the bottom of a mine. How are we going to allocate the depletion allowances in a zinc, lead, silver mine under these circumstances?

Mr. COHEN. Senator, we would be glad to consider it further and discuss it with the Department of the Interior, and with you. I am not familiar with the technical aspects of the operations.

Senator JORDAN. Lead and zinc, we are in short supply of lead and zinc. We have to import lead and zinc to this country, the same as we import copper, and they are competitive, and I think they should have the same treatment, whether it is to leave them as they are or whether it is to subject them to the 25-percent reduction. They should have a uniform treatment. That is my plea.

That is all the questions I have today, Mr. Chairman.
The CHAIRMAN. Thank you, Senator.

Let us see, I think everyone has had his second opportunity to interrogate the witness except the chairman.

I do want to ask about this matter. It seems to me, Mr. Secretary, that simplicity is one of the things we are trying to achieve in tax law, and I think Mr. Cohen made the statement, quite correctly so-perhaps it occurred to him on the spur of the moment; he did not use precisely the words he wanted to use that for the most part these 368 pages can at least to some extent be regarded as a subsidy for lawyers and tax accountants to put more American brain to work trying to unravel all of the complexities of the American tax code of the Internal Revenue system and find the loopholes rather than moving in the other direction.

SIMPLIFICATION OF TAX LAW BY INCREASING THE STANDARD DEDUCTION

Now, the one thing that would help make this law less complicated for the average taxpayer, or for a lot of them at least, would be a proposal that was I think originally Chairman Mills' idea that we increase this standard deduction from 10 percent up to 15 percent and put it into effect as rapidly as we can stand the loss of revenue.

Now, the House looked at a situation where about 58 percent of the people were using this 10-percent standard deduction, and they would move that up to about 73.8 percent of the people, by their handling of the low-income allowance and by shifting to 15 percent.