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Full text of "Tax policy and the economy : a debate between Michael Harrington and Representative Jack Kemp, April 25, 1979."

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INTRODUCTION 



The debate between Representative Jack Kemp and 
Michael Harrington took place on April 25, 1979. It 
was sponsored by tjie New York Local of the Democratic 
Socialist Organizing Committee and the Institute for 
Democratic Socialism* 

This is an edited transcript of the debate that 
includes all questions asked of the participants. 
They had an opportunity to review the transcript and 
make corrections. An edited videotape of the debate 
is available from the Institute for Democratic 
Socialism* 

We are grateful to the participants for a stimu- 
lating and thought -provoking debate. We are parti- 
cularly grateful to Leonard Silk for acting as moderator, 
Sidney Hertzberg and Maxine Phillips gave generously of 
their time and talent in preparing the manuscript for 
production. 

Frank Llewellyn 
Executive Director 



MS. VAN BUEIEN: Good evening. My name is Barbara Van Buren, and 
on behalf of the New York local of the Democratic Socialist Organizing 
Committee, we'd like to welcome you to the fourth of our series of Norman 
Thomas public forums. 

We are very fortunate to have a special moderator this evening, 
Leonard Silk, economic columnist for the New York Times . Prior to joining 
the Times , he was a senior fellow at the Brookings Institute. He has been 
with Business Week , serving as an editorial page editor and chairperson of 
the editorial board from 1967. He has taught at Duke University, the 
University of Maine, Simmons College, NYU, Columbia University, and was 
the Ford Foundation's distinguished visiting research professor at the 
Carnegie Institute of Technology. 

Under the Johnson Administration, he served as a member of the 
President's Commission on Budget Concepts. He has written numerous books 
and received numerous honors. Among his more recent books are The Crisis 
of Confidence in American Business , and Economics in Plain English . 

MR, SILK: Thank you very much. It's really a pleasure and honor 
to moderate the discussion by two such able spokesmen. Our topic tonight 
is"Tax Policy and the Economy." 

I don't need to tell anyone in this audience that we've got lots 
of economic trouble these days. Inflation usually heads everyone's list, 
but inflation really is a kind of a general ailment that covers a multitude 
of sins, including some problems that used to be thought of as its opposite- 
slow growth, unemployment, lagging productivity. These are all related to 
the great masquerader, inflation. 

There is a whole set of problems that come together that bear on 
our topic tonight. There is inflation, high taxation, and distrust of 
government. They combine in a witch's brew and people produce different 
solutions. One solution that a number of people have discovered, about half 
the population I suppose, is called cheating. It is people not paying taxes 
not accepting pajnuent for their services or goods in checks, but insisting 
upon green currency, which they then conceal from this government. 

I think that immorality or, if you like, the new morality, as some 
people call it, grows out of inflation and our existing tax system. I 
don't think we have a spokesman for the position that cheating is the best 
of all answers. We have plenty of practitioners, but few champions. 

A second solution to the problem, however, is a conservative one. 
One of our speakers may call it a classical liberal solution. It consists 
to put it very briefly, and not to steal our speaker's thunder, of a reduc- 
tion in the role of government, a reduction in taxes, an effort to let the 
private enterprise system work more effectively to produce better allocation 
of resources, a better growth rate, presumably even a more equitable distri- 
bution of income, certainly more incentive, and a solution to many of the 
problems, by letting a capitalist system work. 



2, 



The champion of that point of view tonight is going to be Jack 
Kemp, who as I'm sure all of you know, is a brilliant young Republican 
Congressman from Buffalo. Once upon a time, he was a brilliant young 
quarterback on the Buffalo Bills. He is widely seen as a rising star 
today in the Republican Party. He is co-author of the Kemp-Roth tax 
cut bill. He has been mentioned frequently by many Republicans as a 
potential presidential candidate or vice-presidential candidate or can- 
didate for the Senate in New York. Mr. Kemp will speak second. 

A third type of solution to this set of problems assailing the 
American economy is a socialist solution, a democratic socialist solu- 
tion. 

There are other kinds of socialist solutions. The democratic 
socialist solution in some ways overlaps what I suppose one might call 
a modern liberal rather than a classical liberal solution. It does not 
say that the answer to the system is to get rid of government or to 
drastically scale back the role of government. It believes that govern- 
ment has a very important role to play in the solution of social problems, 
particularly the problems of the poor, the blacks, the miserable, the 
sick and other disadvantaged groups in the system. It believes very 
strongly in an ethic of social equality. 

Both speakers are enjoined to relate their views, particularly 
to the issue of taxation, and these two views obviously have different 
implications for tax policy. 

Our champion of the socialist point of view, who I'm sure you all 
know, too, is Michael Harrington. Michael Harrington is national chair 
of the Democratic Socialist Organizing Committee. He has been called 
America's leading socialist. His book. The Other America , is widely 
regarded as having ushered in the war on poverty in the Johnson Admini- 
stration. He has been an inspiring leader to many people, including some 
who are not socialists. He's been a political activist and a socialist 
for all sorts of causes and, at the moment, he has become celebrated once 
again for taking the leadership in the opposition to President Carter's 
so-called skintight budget, at the Democratic Party Memphis Mid-Term 
Conference. 

Our first speaker tonight is Michael Harrington. 

MR. HARRINGTON: Thank you. The American economy is in a deep 
crisis. The Keynesian answers of the last generation will not work. It 
is clear that we are operating disastrously below potential and, in all 
likelihood, more disastrously in the near future. We should realize 
what the nation does not — that it is impossible to fight inflation by 
unemplo5nDaent , and it is impossible to fight unemplo5mient by inflation. 

We are in a situation where if we do not get full employment, 
the poor, the most vulnerable people in the society, the black, the brown, 
the female, will suffer, and we're in a situation where it is no longer 



3. 



enough, again, in terms of that conventional Keynes ianism, to simply 
stitriulate demand. We have to be concerned about investment, we have 
to create jobs. 

On all of the issues I have just defined--and you might find it 
strange — Congressman Kemp and I agree. Where we disagree is why we are 
in this situation and what one should do about it. So, let me make very 
clear at the outset this evening, that at no point in my critique am I 
criticizing Congressman Kemp's sincerity, intelligence, bona fides, et 
cetera. All I'm criticizing is his program, and I believe that his 
program, as subjectively well-intended as it is with good values, is a 
program in which private greed masquerades as the public interest; that 
it is a new and sophisticated version of the classic conservative ideology 
in the period of the welfare state, which is the ideology of trickle- 
downdom. 

And I think that the importance of our discussion tonight goes 
beyond two persons, because I think that the Congressman is a very arti- 
culate spokesperson for what is really the central conservative ideology 
of our time. Therefore, I want to treat not simply his views, but also 
the economy in general, what conservatism tells us, and to relate that 
to ways out of our crisis. I want to do that first of all by talking 
about the Kemp-Roth Bill; secondly, by talking about a progressive 
alternative; and thirdly, by relating these tax policies to the economy 
as a whole. 

First, what is the Kemp-Roth Bill? It is a bill that argues that 
we have high marginal rates of taxation in the United States that stifle 
the incentive to work and invest. Therefore, we should cut personal and 
corporate taxes by roughly $100 billion over three years. To give you an 
idea of what that means, in 1981, the Kemp-Roth Bill cut is about 3.6 
percent of the GNP. The Kennedy -Johns on tax cut at its highest was about 
2.2%. The theory is that this across-the-board cut --everybody, the rich 
and the poor get the cut — will stimulate work and investment and so 
enlarge the gross national product that we will recapture the revenues 
we lost by reducing taxes. That's the theory. 

Now, I have many, many objections to the Kemp-Roth Bill. I will 
not go into most of them tonight. We do not have the time. I think, as 
Business Week said this week, that its mathematics is flaky. I think it 
is simplistic and mono-causal. But what I want to do this evening is focus 
on the fact that it's a modern version of trickle-down. To begin with, 
trickle-down does not work in terms of stimulating the economy because 
trickle-down is based on an Adam Smithian type of economy at a time when 
it no longer exists. Secondly, if trickle-down will not stimulate the 
economy, there is something it will do — maldistribute wealth in the United 
States. 

It is said that this tax cut, this increase in after-tax income, 
will stimulate people to work harder. I have several objections to that. 
Let me state three, and then get to the central point on this aspect of 
the problem. 



4. 



Do we really need more work? Isn't it true, as Henry Ford dis- 
covered a long time ago, that one way to get more productivity is having 
people work less, that people who have more leisure time are actually 
more productive? That was the old Henry Ford, who was certainly no kind 
of a radical. 

Secondly, in American society today, isn't one of the ways that 
we might deal with a recession by a reduction of work, work-sharing, a 
reduction of the work week? 

Thirdly, one of the things that all of the scholarly literature 
about income tax tells us is that we don't really know the impact of 
income taxes on work. That is to say, if you lower taxes and give people 
more income, there are two things they can do — work less or work more. 
They have more money to permit them to work less. They will make more 
money by working more. But we have no evidence of which option they 
will take. 

But, finally, the real point I want to raise is that Mr. Kemp's 
proposal is based on an Adam Smithian image of the economy. Frankly, 
most workers have no control over how much they work. Can you imagine a 
HAW worker going up to the foreman and saying, "I'd like to work more 
this week?" UAW had to wage a bitter struggle against compulsory overtime 
which was only partially successful. The point is that we are not in a 
Adam Smithian economy in which individuals determine their income by 
working more hard or less hard or what -have -you. We are in an economy 
where most people are forced to work on the basis offered them by the 
corporation. That is the reality. Therefore, to talk about a work incen- 
tive for most Americans is to ignore the fundamental economic and social 
realities of the society. 

More important, will Kemp-Roth, by increasing the wealth of the 
rich, thereby stimulate them to invest, create jobs, increase productivity 
and help the economy in general? That is the theory. 

That, too, is based on an old-fashioned notion of investment in 
this economy. Investment in the American economy is not primarily a 
function of rich individuals. It has now become a highly social, collec- 
tivized and bureaucratic process. 

Let me just give you a few of the figures. I take them from the 
Survey of Current Business and from the Federal Reserve Bulletin. 

In 1977, personal savings were $66.9 billion, corporate savings 
were $120.9 billion. Personal savings went into mortgage and savings 
banks, not into productive and wealth-producing investment. Pension funds 
in 1977 had $62 billion of investment. We are not in the kind of an 
economy where you take rich individuals and give them an incentive. We 
are in an economy where the decision about whether to invest is made by 
huge institutional collectives, corporations, pension funds, insurance 
companies and the like. But let's suppose that that objection somehow 
gets answered. Even if the corporate rich did have this ability to invest 



5. 



in increased productivity, would they? Here is another one of the 
simplistic assumptions of Kemp-Roth: it is that if people had money, 
they would necessarily put it into productive investment. I have to 
remind you of a very profound capitalistic truth: they would do it only 
if they're going to make a lot of money out of it. 

Let me give you an example of what I mean. September 18, 
1978, a Business Week article pointed out that big corporations now 
hold a record $80 billion pile of cash, enough for a gigantic capital goods 
boom, but a lack of confidence in the national and international econanic 
outlook keeps them from investing the cash. If you have an economy plagued 
by structural problems of inflation and unemployment, and you give rich 
persons money, they are not going to invest. They are going to do what 
the New York Times pointed out the rich are doing right now. They are 
hedging against inflation by buying rare stamps, rare violins, houses, 
by putting money into tax dodges. To assume that simply creating more 
after-tax income will motivate the rich to invest is wrong. 

But one thing Kemp-Roth will do: it will further maldis tribute 
wealth. An AFL-CIO analysis points out that under Kemp-Roth, less than 
three percent of the taxpayers at the top would get 23.5 percent of the 
dollar benefit. Less than three percent would get seven times their weight, 
and the 50 percent at the bottom would get 17.2 percent. It would not work 
to stimulate the economy. What it would certainly do is give less than 
three percent of the people more than 50 percent of the benefits. The fun- 
damental problem with trickle-down is that it will not work. It uses 
individual incentive in an increasingly collectivist and corporate- 
dominated economy, and it will not work to increase either labor output 
or investment. 

Second, does this trend mean that I'm for the present tax system 
as it exists? Of course not. It's terrible. It is, as Jimmy Carter 
rightly said, a disgrace to the human race. But the problem with it is 
not as Congressman Kemp usually says, that it's confiscatory; the problem 
is that it is not progressive; it's as Pechman and Okner pointed out, 
proportional. And the problem of the state and local tax system is that 
it is incredibly regressive. 

Therefore my proposal is not to retain the status quo; my proposal 
is, one, to give a tax cut to the overwhelming majority of the American 
people, and to finance that by asking, demanding and legislating that the 
corporate rich pay their fair share. And, two, not simply to take the 
dividends we would get from a moderate adjustment in the tax system and 
distribute them in the form of tax cuts, because I believe we need social 
spending. 

What good is it to have a tax cut so you can go spend your tax dollar 
on an inflated medical system that gives you less good care every year? How 
about spending some of the tax cuts on a decent health system? Two aspects 
to a good tax program are that we honor in practice what we proclaim in 
theory — that people pay according to their ability to pay; and that we use 
some of the funds thus captured by a much more equitable system to improve 
social services for the majority. 



T 



Finally, let me agree with Congressman Kemp— investment is 
critical. You can't just play around with demands for economies, I 
agree. But let me take an example— energy. Carter is now deregulating 
energy. He is deregulating energy to have the producers produce more. 
But there is a gimmick here; new oil and gas has been deregulated for a 
long time. Oil interests had a license to go out and make as much money 
as they could, all along. Therefore, deregulation is truly going to 
create windfall profits, but there is no hard evidence that it will lead 
to more American oil wells. And, secondly, will that price bonanza for 
corporations cut the consumption of the mass of people? No, it won t. 
Do you know why? Because in this society we have a systematically waste- 
ful transportation system constructed according to corporate priorities. 
If you confront average Americans with higher gasoline prices at the 
pump, they're going to pay them and suffer. There is no alternative in 
this country because our social investments in transportation have been 
so unplanned and so irresponsible. 

Now, the corporations come around with a Kemp -Roth type argument, 
saying "We will give you some of the windfall and we'll plough it back 
for you." They are always doing things for you. These corporations have, 
for example, at times ploughed back the oil profits, as in department 
stores. But let's assume they really do plough it back for energy. Do 
you want Exxon to design the solar energy system? I say no. 

In conclusion, I'm delighted that Congressman Kemp is dragging the 
Republican Party into the 1960's, but I point out to you that this is 
the 1980' s. We are not in an incentive Adam Smithian type of economy; 
we are in this gigantic, bureaucratic, corporate and collectivistic economy. 
What we need are redistributive policies to raise funds for both tax cuts 
and for investment— tax cuts not for the rich but for the majority of the 
people, including the working people and the poor, and investment that 
will fund the social needs we have to meet. There is no incentive in the 
world that is going to get a private corporation to go into the South 
Bronx and build decent solar energy of an appropriate scale. The only way 
we are going to do that is if we take social monies raised by a progressive 
tax system and do it for ourselves. Therefore, we indeed have to have 
supply-side economics, but the real name of supply-side economics is 
democratic planning and democratic planning for social needs. 

Thank you. 

MR. SILK: Thank you very much, Mr. Harrington. 

Our second speaker tonight is Congressman Jack Kemp of Buffalo. 

CONGRESSMAN KEMP: Well, I share the pleasure that Mr. Silk has 
expressed earlier, in being here this evening and in participating in 
this debate, particularly with Mr. Harrington, who is such an articulate 
spokesperson for the redistribution of income theory. 



?• 



Let me say at the outset that I believe in one premise, basically, 
that's been expressed by Mr. Harrington: we need a more equal or a more 
just society. Our means to that end are somewhat different. Mr. Harring- 
ton is talking about equality of result, while I am going to talk about 
equality of opportunity. The redistribution of income that Mr. Harrington 
is talking about redistributes your income not to other people or theirs 
to you, but funnels it through the corporate state in Washington, D.G., 
which happens to be the biggest monolith in the world. 

We do share a belief in full employment without inflation. Mr. 
Silk and I were talking a little bit earlier and agreed we have come almost 
full circle. As Mr. Harrington said in his opening remarks, the Keynesian 
theory doesn't work. Unemployment and slow growth are no answer to infla- 
tion, and certainly we've learned in the last ten years that inflation is 
no answer to slow growth or unemployment. So the Keynesian theory has 
really been shattered; their consensus has been shattered and another 
consensus is growing to replace it — about how to solve the problems facing 
the American people, encouraging the growth and prosperity they are 
demanding and certainly deserve. They want higher standards of living in 
terms of quality as well as quantity^ The rest of the world is also 
looking to us for some type of economic and political model to replace 
the failed Keynesian model. 

Mr. Silk said earlier that he's getting some strange advice these 
days. Some people are saying ease up on the money supply, while the 
Keynes ians are talking about reducing the money supply and tightening up 
more so we can whip inflation. 

It's not been too long since that was the Republican policy of 
Mr. Ford, whose budget raised taxes to cause austerity and slow growth 
through which we were supposed to fight inflation. I don't buy the premise 
or the label given to me by my distinguished adversary tonight, that of 
classical conservative. I don't know exactly what label you might want to 
put on me. It really doesn't matter. I just want to come up with an 
answer or share in reaching the answer to how we get off a road which is 
leading to disaster not only for the rich but for the poor, and for the 
middle-class, for everybody, because we are one nation, one family, one 
people. We must find solutions to our problems that bring everybody along. 
And I suspect it is far better than making the rich poorer, to make the 
poor wealthier. 

Now, to that end I'd like to share some thoughts I have about the 
subject, and I look forward to answering questions and getting into a lively 
debate with Mr. Harrington. 

People respond to rewards. Mr. Harrington says we are not in the 
age of Adam Smith. Of course not. The world is much different than in 
1776 when the Wealth of Nations was published, but I happen to think it's 
a straw man to reason that therefore reducing the tax rates of the American 
people in order to encourage economic activity and economic growth is some- 
how just an old trickle-down theory propagated by conservatives; for one 
thing, they didn't have income taxes in Smith's day; and, frankly, it has 
been the conservatives who have resisted reducing tax rates. 



A Business Week editorial says that any reduction in the tax rates 
automatically leads to a deficit and that deficits must be financed by the 
Federal Reserve, and that this leads to inflation. The basic conservative 
ideology in America, since Herbert Hoover, has been to balance the budget 
first, slow down the economy and whip inflation. Maybe some day in the 
hereafter we'll get around to putting some incentive into the economy and 
people back to work. 

Now, Mr. Harrington asks you to believe that the American people and 
people in general do not respond to rewards and incentives, because this is 
not 1776. I accept the fact that it's 1979, but I do not accept his 
premise. Many things have changed, but human beings have not lost the 
desire to improve their lot. 

Ellen Goodman, an outstanding journalist in the Washington Post, 
recently wrote a very interesting article. I thought so, as a parent of 
a son going to college, and I think people who have children in college 
can sympathize with her point when she says, 'Ve all know families who saved 
for a decade to send their kids to college. A college diploma these days 
costs about the same amount as a Mercedes-Benz. Of course, the Mercedes 
lasts longer and has a higher trade-in value. But the most devoted parent 
can be infuriated to discover that a neighboring couple who spent its income 
instead of saving, is now eligible for college financial aid, while they 
are not." 

She said, "To the profligate go the spoils." 

But let me conclude the point she makes. She said, "The hard part 
is to create policies that are neither unkind nor insane. It is, after all, 
madness not to reward the kind of behavior we want to encourage. If we want 
the ranks of the savers to increase in this massive behavior-modification 
program called society, we have to give them the rewards, instead of the 
outrage." 

Since 1071, world-wide inflation has combined for the first time 
in history with steeply progressive tax codes, all designed basically to 
redistribute income, yet it seems they have not achieved their purpose, as 
Mr. Harrington has very ably put it. These have done nothing but discourage 
workers and savers, investors and producers, men and women of ambition who 
create enterprises, who design new products, who leave the corporate world 
and start independent enterprises to compete with some of the giants. All 
of these people have been discouraged by a system in which you can produce 
your way only up into higher and higher tax brackets--and even if you don't 
produce your way into higher tax brackets, you can stand still and the U.S. 
Congress and the federal government will inflate you into higher tax brackets- 

Let me give you an example. A person making $15,000 in New York 
State in 1967 would have been taxed at the federal level at 22 percent. The 
consumer index doubled in 11 years. So, in 1978, you would have needed 
$30,000 before taxes to match the purchasing power of $15,000. But your 
tax bracket would have gone from 22 percent to 32 percent. Now, at seven 
percent inflation, prices will double every ten years, and that's optimistic 
by President Carter's standards. Those are his wage and price guidelines. 



9. 



With a hypothetical seven percent inflation rate in the next ten years, 
by 1988, it will require $60,000 to match a $15,000 1967 income. But 
even if your pre-tax income matches the pre-tax income of 1967, you will 
be in a 55 to 60 percent marginal tax bracket and this is only the 
federal tax. That is outrageous, to push people up into points of income 
tax progressivity at which the rewards for their human effort are steadily 
reduced. And I think it is not only an outrage in Ellen Goodman's terms, 
it's an outrage in terms of the hopes that we have for the type of an 
economy that could reach full employment without inflation. 

I don't think it's classical conservative philosophy to suggest 
that you can have full employment without inflation. I've heard many of 
our own "conservative** presidential candidates, and also presidents in 
both parties, incidentally, say that the price we pay for the profligacy 
of past generations in America of spenders, is a little unemployment. 

The distinguished former chairman of the Federal Reserve, Arthur 
Burns, has said recessions are good for the economy, that they help squeeze 
inflation out of the private sector and lower interest rates. Alfred Kahn 
has said the American working men and women cannot look forward to any 
increase in their standard of living as long as President Carter's wage and 
price guidelines are being complied with. Barry Bosworth says that in the 
next four or five years, the American working men and women must not look 
forward to any increase in their wages. 

There are certain things upon which our economy, north and south, 
developed world or less developed world must operate, and it revolves 
around this word "incentive." Lowering aggregate taxes by $100 billiori 
to shovel money out into the economy and hope thereby to stimulate demand 
or cause more consumption or trickle-up or trickle-down is not the goal 
of Mr. Roth of Delaware or Mr. Kemp of New York. It is not our purpose to 
increase money out in the economy. 

The real reason we want to reduce the tax rates, those marginal tax 
brackets, for all the American people is to break down the barrier that 
exists between reward and effort. The purpose of reducing the tax rate is 
to increase the rewards for more productive effort after taxes, not for 
only one class of people — and I don't even talk about it in terms of class — 
because the hope of this country is that people have the mobility to con- 
tinue to aspire and climb the ladder. I think that really is the genius 
of the system. Mr. McGovern found that out in the 1972 election when he 
offered a tax cut for everyone earning less than $16,000 a year. Of 
course, 65 percent of the American people in 1972 earned less than $16,000 
a year, and you would have thought that would have been a very popular 
idea. He dropped drastically in the public opinion polls after he came 
out with the "demogrant" proposal. He was asked why after the election, 
and he said, "You know, I never realized that in America there were so many 
people earning less than $16,000 a year who some day hope to earn more 
than $16,000 a year." Today as you aspire to achieve more for yourself or 
your family, for a college education, a home, or to dispose of your earnings 
as I think you have a perfect right to, you find yourself discouraged by 
the fact that you are only moved into a tax bracket which was at one time 
reserved for only the wealthy. 



10. 



I agree that the rich should pay more taxes. I submit to you 
they're not paying more taxes today because, frankly, you are not going 
to get anybody to earn more taxable income for the privilege of paying 
70 percent to the federal government. 

Sweden tried to tax Ingmar Bergman 100 percent on one of the 
movies he made in 1967, but he escaped taxes by moving out of the country. 
Not only did Sweden lose the product of his genius and intellect Und 
ultimately it is ideas that motivate men and women to advance themselves) 
it also lost the revenues that they would have gained had they taxed hxm 
at a more reasonable level. 

The way to tax the rich, the way to lure people out of the cash 
economy, which Mr. Silk referred to, is to immediately reduce the steep 
tax progressivity of the economy. This idea cannot be sxmply dismissed 
as "conservative" or "liberal." President Kennedy advocated a reduction 
of the tax rate in 1963 by 30 percent. He also wanted to cut the capital 
gains rate and cut the corporate rate. President Kennedy is not thought of 
as an arch-conservative, but he did, I believe, help move this country 
towards full employment without inflation. I don't know whether his tax 
cut was 2.4 percent and whether Kemp -Koth was 2.2 percent of the GNP. 

Frankly, I don't care about GNP. It's a macro -economic statistic 
that doesn't explain why people go out and save, why taxi drivers and men 
and women in factories in my home of Buffalo, New York, are finding that 
overtime in New York state or working on Saturdays is taxed close to 50 
percent. Not only does that increase tension between labor and management, 
not only does it raise the cost of employment, not only does it reduce the 
amount of jobs that can be created, not only does it reduce the rewards 
for effort, whether it's in a factory or a small businessman or woman, ^ 
but it deprives government of revenues that are necessary to do the socially 
desirable things that Mr. Harrington and I can sit here and debate for a 
long time. 

If you want a more just, a more equitable, a more prosperous 
economy, then we should restore incentive, and only one way to do it is 
to reduce the tax rates on the American people. 

MR. SILK: Thank you, Mr. Kemp. 

We are going to have a few questions from me to each of the speakers. 
Then I want to invite any of you who wish to put questions to either of 
them to do so. Each speaker will respond to whatever questions are put to 
him for two minutes maximum, and then the other one will have a chance to 
respond for one minute's worth. After we've had some questions, we will 
give each speaker five minutes to sum up. 

The first question I'tti going to address to Michael Harrington. It 
has to do with the role of government. A great deal of discontent in our 
society, I think you will agree, has been directed at government for its 
solutions or non-solutions to the problems it has tackled, including 
health, education, welfare and almost everything else. Government is 
blamed for having failed to solve problems, yet you seem to believe that 



11. 



it can solve problems. What has the government done wrong, and how can 
its performance be improved, 

MR» HARRINGTON: First of all, there are some things the government 
does very well. I think that the Social Security system, whatever imper- 
fections it might have, is an extremely efficient, valuable system. It 
has made old age much better in the United States of America. I don't 
know any serious political person who wants to do away with it. 

Similarly, although I think Medicare has flaws because of the 
absence of National Health, I think to be over 65 today is better than 
to have been over 65 in 1964. 

Secondly, I think the government does a lot of things abominably. 
Very often government is asked to socialize the wreckage of the private 
sector —Conrail and Amtrak come to mind. After the Penn Central runs the 
railroad into the ground, you ask the government to take over a totally 
unprofitable and wrecked system, and are amazed when it becomes a drag 
on the economy and doesn't work very well. 

Thirdly, and this is the most basic thing I would suggest, I think 
that the government, not because of a conspiracy, but because of the 
relationship of economic and political power in our society, almost always 
follows corporate priorities. I would say that what one has to do is not 
talk about the government but talk about how a government acts in a society 
where it is beholden to pick up the wreckage of the private sector? Is it 
possible for government to be much more democratic, is it possible for us to 
have co-ops and real participation of the people? I think so. 

So what I'm saying is, there is the possibility of a grass roots 
democracy making economic decisions. It's not a sure thing but it's one 
of the things that I think can be done. 

MR. SILK: Mr. Kemp, a one -minute response. 

CONGRESSMAN KEMP: Well, I want to make clear that I don't believe 
that what Senator Roth and I are trying to do, as you suggested, is a 
backlash against government. I think government has a very important role 
to play in assuring survival for people who are indigent, handicapped, 
unfortunate people who are not able to compete, people who need protection 
from natural or economic catastrophes. I share that premise. But we have 
spent 30 or 40 years, given a few years off for the Kennedy experience, 
redistributing income instead of creating it. It seems clear to me that, 
in America, we need some years and decades spent loading the wagon instead 
of only unloading it. We need income growth and income opportunity, 
because there are people today still looking for housing, still looking 
for jobs, still looking for opportunities and for the Administration to 
frustrate this, and for some people in my own party to suggest further 
slowing down the economy, is a big mistake. In fact. Treasury Secretary 
Blumenthal and the White House said the other day that if we can slow down 
housing starts in 1979 to 1.6 million, somehow we can help reduce the rate 
of inflation. Well, how can reducing the supply of housing hold down the 
price of housing? Yet that is the premise of these diehard Keynesians. 
Luckily, some others in power do believe, I think, we should encourage the 



12. 



supply of housing, encourage the supply of energy, and this means removing 
government barriers to production. And government has a role, but it 
should not be a dominant role in our lives today. 

MR. SILK: Thank you, sir. 

The second question I direct to Mr. Kemp. 

The first version of the Kemp-Roth Bill was, as Mr. Harrington 
pointed out, widely criticized, including by some conservative sources, 
for being too wishful in its statistical prognostication. It assumed that 
tax cuts of this size would stimulate enough growth to let all things be 
done, but given the rate at which the government, I mean the economy, was 
operating, there was a serious question about whether you can get the rise 
in productivity large enough to do that, or whether such a cut, such as 
$300 billion in a period of three years -- 

CONGRESSMAN KEMP: How much? 

MR. SILK: No, $100 billion in three years, is that right? 

CONGRESSMAN KEMP: That's--I guess close, I don't know. 

MR. SILK: Yes, 33 percent. 

CONGRESSMAN KEMP: It's 30 percent in the rates over three years 
intended to encourage taxable income growth, so it's hard to put a dollar 
number on it. But I will accept that number before revenue "reflows." 

MR. SILK: Since tax collection amounts to around $500 billion, 
the current rate, it would certainly look as if it would come to 140 or 
150 billion dollars, although with growth admittedly you have a totally 
larger one. We'll speak in nominal dollars rather than in real dollars, 
depending on what one does with the inflation rate. 

Now, the question is--I gather that there's been a response on 
your part and Mr. Roth's, so that there is a Kemp-Roth II, and Kemp-Roth 
II said, "Okay, we've got to worry about government expenditures." If 
there is not a full enough response in real terms from the kind of cuts we 
are proposing, then we will have to restrain government expenditures so 
that cuts in government expenditures or restraints in government expen- 
ditures are not part of Kemp-Roth II. 

My question, finally, is how would you cut the government budget? 
Where do you propose to take the cuts out of the budget that we now have 
and in, roughly, what kind of volume. 

CONGRESSMAN KEMP: Well, I don't want to finance my tax cut with 
unrelated budget cuts, and this makes some of my conservative friends 
upset with me, but I don't want to cut the budget unnecessarily. I don*t 
think the answer to America's problems is cutting worthwhile social pro- 
grams. This is not a Proposition 13 approach. This isn't an attempt to 
take away from government and reduce it to some type of an 18th century 
laissez-faire economy. As I said before, I accept the view that there 



13, 



must be a level of welfare in our society. But on the other hand, with 
full employment and lower inflation, we won't have to spend as much on 
unemployment compensation, welfare, public jobs, cost-of-living increases, 
or forced early retirement costs. I want to make the point quite direct: 
reducing government spending is neither a necessary prerequisite nor called 
for in the Kemp-Roth Bill. But increasing the growth rate of the economy 
will reduce the necessary growth rate of federal spending. Government 
expenditures at the federal level have been growing at 12 percent a year 
in Republican and Democratic administrations, while our economic growth 
rate has been reduced to a remarkable degree. I mean it's almost impossible 
to reduce the growth rate of an advanced economy to the level that the 
United States had done. But we have accomplished a miracle in this country. 
We've slowed down the greatest private enterprise system in the history of 
the world to a level of less than one percent, in real terms over the last 
ten years. 

With so many people trying to enter the workforce, and so few work 
opportunities created, it's no wonder that people demand a growth of 
government. The harder you run, the more you work, the greater you produce— 
you seem to be going backwards--and that's not only felt at the top, it's 
felt at the bottom. I don't want to reduce government expenditures. I 
want to hold down the growth rate of government expenditures. Instead of 
having a 12 percent growth rate in government expenditures at the federal 
level, let's have a seven percent rate of increase in government expendi- 
tures, which seems to me reasonable in a society that wants social improve- 
ment as well as to achieve economic growth. 

Business Week has attacked the Kemp-Roth Bill the hardest, other 
than Walter Heller, who happens to be a friend of mine. Business Week says 
that what's good for business is good for America. Cut the corporate rate, 
or change the depreciation schedules (and I happen to think that would also 
be a wise thing in a highly inflationary economy) , and that will trickle 
down to the worker. What we are saying is what's good for America is good 
for business. The worker is also compromised, both labor and capital are 
hurt today. The men and women of ambition and initiative are compromised 
by the income tax code. It is their high marginal rates that we are trying 
to reduce throughout the code. I would suggest to you that Business Week 
is opposed to it because they're afraid if Congress should reduce the income 
tax rates and give more of the tax rewards to both labor and capital, either 
they won't get the corporate investment tax credit that they want, or there 
will be more competition for General Motors and IBM and Exxon. I happen 
to think that would be very good. 

MR. SILK: Is there a Business Week doctor in the house? If not, 
Mr. Harrington. 

MR. HARRINGTON: Yes. Where would I cut? 

Number one, 1 would love to cut the budget. I would like to cut 
the Pentagon; I think there are billions in there. 

Let me say that there is an absolutely pro-Communist and un-American 
assumption on the part of those who want to raise the Pentagon budget, who 
are assuming that a Russian three percent increase in guns is equal in 
efficiency to an American three percent increase. I don't believe it. 



14. 



Secondly, I would like to cut the tax expenditure budget which, , 

as we all know, is over $100 billion a year. I would like to cut the /] 

handouts to the rich in the 1978 tax law. 

Thirdly, I would like to cut back on federal subsidies to the 
private sector, subsidizing the cost of capital, for example. I agree 
with Robert Eisner of Northwestern, that you could make a very solid argu- | 

ment in the United States that the government has excessively cheapened | 

the cost of capital through accelerated depreciation, and the like. | 

Finally, for once in my life, I would like to see a democratic 
government socialize something profitable. I note from the Tennessee 
Valley Authority that it can be done. So I would like to take the corpor- 
ate rich off welfare, take the Pentagon off welfare, and give the sub- 
sidies to productive public enterprises in a number of areas of great 
social need. 

MR. SILK: Thank you, Mr. Harrington 

Now, we are ready for questions from the audience. 

QUESTION: Congressman Kemp. It seems to me that Mr. Harrington 
leveled two serious charges at your bill. Your response is to raise a lot 
of troubles, to talk about the quality of life, and to talk about infla- 
tion. You deal directly with it, and then you say what we should do. 
Mr. Harrington says that if what we're after is getting things accomplished 
that can be done, your bill won't do that, that you are not offering a 
solution, and he also says that what it will do is a very evil thing. 
I know myself, having made $4,000 in business a few years ago, that it 
would have done no good to lower my tax rate. Maybe I paid ten percent 
in one year and no percent in one year. 

CONGRESSMAN KEMP: I appreciate your question, it's a fair one. 
I would only answer it by saying this. I tried to point out that there 
was empirical evidence to support the contention that lower tax rates mean 
more savings, more investment, a higher level of productivity, and 
ultimately, more revenue, not less. That was the Kennedy experience. 
There is little difference between what Kennedy suggested in the early 60' s 
and what we're suggesting today. It's really not all that great. 

Secondly, every single time a government in this century or in 
earlier centuries has reduced the barrier between effort and reward — 
taxes are part of it, but regulations, paper work, frustration and the 
bureaucracy are also part of it — every single time those barriers have 
been reduced, those countries have achieved higher levels of growth, and 
usually lower inflation. Inflation is not only too many dollars, it's too 
few goods. 

I suggest that with more savings and more investment there will be 
more and better tools coming into the economy with which to produce. A man 
or woman with better tools is more productive, has higher wages and a 
higher standard of living, and that is the history of western civilization. 

MR. SILK: You have a response, Mr. Harrington? 



15. 



MR. HARRINGTON: Yes, very briefly. 

First of all, the Kennedy tax cuts did not take place under circttm- 
stances of high inflation, but under low inflation. That is, under completely 
different circmnstances than today. My argument is that the American 
economy turned a corner around 1969-1970. There are many things involved: 
the international economy is one, the West German and the Japanese for 
example, their competitiveness. But another factor is that the major sec- 
tors of the American economy- -fuel, food, housing and health--have infla- 
tion built into them; that corporations have more monopoly control over 
prices than ever before. Thus there are a whole series of problems that 
clearly distinguish the present situation from the Kennedy situation. 

Secondly, I might tell you that I and many people of the labor 
movement and on the left were critical of John Kennedy for not having a more 
radical tax cut, oriented to social investment rather than private con- 
sumption. 



My final point, and I reiterate because I think it's a very important 
empirical point, is that I see no evidence that giving the corporate rich 
as much money as Kemp-Roth will do is going to get them to invest, unless 
they figure they can make a lot of money. Business Week tells us that there 
are corporations sitting on top of $80 billion of cash and not investing 
it; and my question is, what value is there to give them $90 billion to 
not invest, that is, an extra $10 billion? 

MR. SILK: I want to say a mild cautionary word--please, 
questioners, do not make speeches; ask questions, and let your questions 
be brief. 

QUESTION: Mr. Harrington. I'm a libertarian and I advocate no 
taxes. Frankly, I see no reason why I should pay taxes to help subsidize 
nuclear energy, Pentagon dictatorial policy. Why don't socialists 
advocate a massive tax strike, so that finally we can have some social 
change in this country? 



MR. HARRINGTON: If I thought a massive tax strike would work, I 
might very well have considered it as a tactic. The problem is not taxa- 
tion, in my opinion. Rather, that when taxes are used for pernicious 
things, one fights them politically. But I believe we live not only in a 
national society but in a world society, and I believe, not only in terms of 
morality and justice but in terms of economics and money, that we ignore 
our brothers and sisters at our peril. If we do not live up to our respon- 
sibilities to the people of America and the people of the world, ultimately 
and quicker than we'd like to think, that's going to get us too. 



Secondly, a modern economy requires a public infrastructure and 
transfer payments. There is no other way for it to work. 



Finally, I completely agree with you that some of the purposes 
for which tax money is spent are terrible. But when that is done as in 
the case of the Vietnam War, my argument was organize politically and get 



16. 



a majority to overturn the war. The issue of the war in Vietnam was 
not an issue of tax policy; it was an issue of national justice or rather 
of international justice. So I would simply distingmsh between taxes 
for good purposes and for bad purposes. 

CONGRESSMAN KEMP, The gentleman, if I may answer his question, 
has raised a very important point that I tried to address for a very 
short period of time in my opening remarks: that the incidence of taxa- 
tion is as importance as the burden. How you tax is as important as how 
much. You should be careful that you do not tax people's incentive to 
earn more income or to save or to take a risk. This is going to become 
an economy run by huge existing corporations if we don't do something to 
bring back the men and women who have better ideas and turn those ideas 
into new, small businesses. Seventy percent of all the new jobs created 
in America ten years ago were created by small business, not the Fortune 
500. After the massive tax increases of that decade, the share is down 
to half. So when you talk about the existing income tax, it's a very bad 
tax; it's too high, it's too progressive. I am not advocating abolition, 
but it is illuminating to compare tax approaches in various countries. 
There is no income tax in Bermuda. There is a very steeply graduated tax 
in the poor Caribbean countries. Look at Ghana and the Ivory Coast. 
Impoverished Ghana has very extremely graduated taxes; the nearby Ivory 
Coast is the fastest growing country in Black Africa. It has much lower 
income tax rates. Maybe we can learn a lesson from them. 

QUESTION: Representative Kemp. As a minister I'm concerned about 
the moral tone of things. The rich, it seems to me, in the quest to have 
the American experiment, have never distinguished themselves in general 
for the poor. What would lead you to conclude that this great moral trans- 
formation has now occurred. And the second part of my question is that you 
spoke about dropping taxes for all the American people. Have you dropped 
the idea of lowering taxes for corporations, because you really did not 
speak on that point. 

CONGRESSMAN KEMP: I think I did speak on that point. I suggested 
that this new version of the last Congress's bill called by Mr. Silk the 
Kemp-Roth II or Roth -Kemp, depending on whether you're in Delaware or New 
York, did not address the corporate question because in the President's last 
tax reform message he wanted to cut the corporate rate further than we did. 
But I happen to think the most important step today is to provide incentive 
back into the personal income area, and that's what I have been talking 
about tonight. I'm not talking about reducing corporate tax rates further. 
I think the first step has to be to lift a lot of straw off the back of our 
economic camel. 

Secondly, the noblest charity on the earth is to prevent people 
from needing charity. It seems to me a trans cendant human idea in many 
religions: giving a man a fish feeds him for a day; teaching him how to 
fish will feed him for a lifetime. In that regard, I think we need an 
expanding economy where more people can find jobs that can meet their own 
human needs, can eat with regularity, instead of having to depend on someone 
else's production. Income growth and income opportunity in a growing economy 
also make it easier to meet the needs of the needy. 



17. 



I'm not relying on charity as much as I'm relying on the belief \ 
we can meet many of those needs in the private sector of the economy. 

MR. SILK: Thank you. Mr. Harrington? 

MR. HARRINGTON: I want to clarify something. So everybody under- 
stands, I am for a tax cut and for increasing the personal income of the 
overwhelming majority of the American people. I'm for it. 

We have a dispute as to whether that will have any motivating 
impact on the GNP, to motivate people to work. I don't think whether they 
work more is a decision within their own ability to make. I want to cut 
this tax, but I don't think it's going to increase the GNP, and you have 
to explain to me how an automobile worker or a steel worker or a secretary 
in a secretarial pool will work more by getting more income. I just think 
it is unrealistic. 

Second. Our difference is, I do not want to cut the taxes of the 
rich; I want to increase them. I do not think Mr. Kemp's bill cutting the 
personal income taxes of the rich is going to have a gigantic investment 
effect on the American economy. And my argtiment there is that wealthy 
individuals are not the source of basic investment any more. I am not 
defending this miserable tax system but neither do I want to continue its 
maldistributive characteristics. And I doubt Congressman Roth's economic 
claims and what his tax cut will do. 

MR, SILK: Thank you. Next question, please. 

QUESTION: Mr. Harrington. Are federal personal and income, 
federal corporate tax rates very high and very progressive? 

MR. HARRINGTON: No. The only rich people in the United States who 
pay a 70 percent tax are rich people so dumb they don't know how to call 
a lawyer or accountant. Look at the figures on an adjusted gross income. 
According to a former IRS chief, if you take adjusted income figures as a 
baseline, you make a small mistake because all these terrific deductions 
have been taken before you get to an adjusted gross income. I invite all 
of you to look at the tax return which the late Vice-^President Rockefeller 
submitted to the Congress when he was being interviewed as to his qualifica- 
tions to be Vice-President. Mr. Rockefeller, in terms of his real income, 
was paying less than the tax of an automobile worker. 

The best book I know on the subject is by Joseph Pechman and 
Benjamin Okner. It presents a tremendous amount of evidence to show that 
the American tax system is in no way progressive; it's proportionate. 
Therefore I think when one talks about the incentive problems of the rich, 
they don't exist. 

A last point. Martin Fe Ids tein from Harvard, whom I disagree with 
about 90 percent of the time, did a very interesting study on inflation, in 
which he discovered that there was one income group whose income was not 
affected by inflation — those people with incomes of more than $100,000 a year. 
What I am saying is that those are the people who always figure out a way 
to index and to beat the game, and that you cannot talk about inflation 



18. 



problems or tax problems at the top; they are simply a figment of nominal 
tax rates which are not real tax rates.. _ 

CONGRESSMAN KEMP: I agree that anybody who pays a 70 percent tax 
is not very bright, and I'm trying to suggest to you, and 1*11 make the 
point for the third time tonight, I don't want to cut his or her total tax. 
I think they'll pay more tax at a lower rate than they will at 70 percent. 
At 70 percent they are encouraged to go into the cash economy, invest in 
tax-exempt bonds, invent tax loopholes instead of better products. They're 
encouraged to go into offshore investment, they are encouraged to leave 
countries. Capital can flow freely across borders despite what Lyndon 
Johnson did at one point, or even Richard Nixon did — trying to stop capital 
from going out of the country. Even if it worked, that wouldn't help the 
less developed world. I want to tax the rich by charging a rate that maximizes 
their incentive to put it back into productive investment where it will 
create jobs and provide more revenue for the government at all levels. New 
York is the best example that I can think of. We have punished both labor 
and capital in New York state to a point where we've reduced the ability of 
our tax base to deal with the social problems. And what happens when the 
tax base declines? Libraries, mental hospitals, our desire to help people 
shrinks. I suggest to you that you also look up in Mr. Pechman's book, and 
also in the Treasury Department, the statistics after President Kennedy 
lowered the 91 percent rate to 70 percent in 1963, or at least he advocated 
it — it was President Johnson who actually got it through the Congress. When 
the 91 percent rate was dropped to 70, the Treasury thought it would lose 
money. The amount of income tax paid by wealthy Americans doubled in two 
years. It doubled because they were encouraged to take this money out of 
the municipal tax-free market where most of their money was going and put 
it back into equities. That's the way to tax the rich, not to push them 
into loopholes or other countries as Sweden and other countries have done. 



MR. SILK: Thank you, Mr. Kemp. Next question. 



QUESTION: Congressman Kemp. Unemployment for blacks is double that 
of whites, and for young blacks it's at least 40 percent. Employers con- 
sider most of these young blacks unemployable because of lack of literacy 
and motivation. How would your tax program deal with that problem? 

CONGRESSMAN KEMP: I'm sorry that the whole debate tonight has only 
been on one bill. There are many things that have to be done. I think we 
ought to take a hard look at a new differential in a minimum wage. I 
think the minimum wage law is a tax against blacks, Hispanics and white 
teenagers getting jobs. If they don't get a job, how can you put purchasing 
power in a black or white teenager who is a marginal producer, who ought 
to be entering the work force in an apprenticeship type of position, the 
same that you probably served in your lifetime, and all of us have served 
at one point or another. The minimum wage law is a hundred percent tax 
against youths getting jobs in the private sector and I believe it dis- 
courages them. 

There are other things that need to be done. I would give incentives 
to small businesses to hire teenagers by reducing the payroll tax for 
those businesses that are willing to hire marginal workers and reducirxg the 
tax rates on the poor to alter the price that is paid between welfare and 
going to work. There is a small businessman in my district who sent me a 



I 



19, 



letter saying that he got a notice from the State Unemployment Commissioner 
that a claimant has refused to go back to work at his business because he 
said he would be losing money by working. He makes more on unemployment. 
This is under the New York State Unemployment Insurance Law. 

Well, when the reward for not working is as high as the reward for 
working, I would suggest that you're going to get more non-workers than 
workers in the world. 

MR. SILK: Mr. Harrington? 

MR. HARRINGTON: Just two points. One is that I'm very leery of 
government programs which offer the private sector various incentives to hire 
the hard-core unemployed. We had a tremendous experience with that under 
Lyndon Johnson. We had the JOBS program, job opportunities in the business 
sector and, unfortunately, what turned out to happen so often was that 
corporations hired hard-core unemployed with the government subsidies when 
they could make money off it and did not when they couldn't. They took the 
subsidies and they got a subsidized worker whom they would have hired anyway. 
I think fundamentally the problem gets back to the fact that this economy 
has turned a corner. We are no longer in the Kennedy era. We are in a 
stagnation era. I believe there is a sense in which, from 1945 roughly to 
1970, there was, so to speak, an underlying boom. It's over now and, 
therefore, we must have radical new departures in American society to get 
full employment. 

Finally, we all know the greatest gains made for minorities in this 
society were during World War II, when unemployment fell to one percent, 
and blacks, women and all minorities made the greatest progress ever made 
in the history of this country. I think our complex problem is not going 
to be solved by tax cuts, but by a full employment economy. Meanwhile, we 
must do absolutely all we can to ameliorate the suffering of the minorities 
and women who are being made to bear the real burden of our present situation. 

QUESTION: Mr. Harrington. Mr. Silk referred earlier to the under- 
ground economy. The figures that I've seen show that it's about $180 billion 
a year, far more than in the last four or five years, than 20 years earlier 
when large marginal tax rates were less. First of all, we really don't have 
any figure about the underground economy for a very good reason. Secondly, 
it exists in dimensions that we cannot ascertain, of course. That it is a 
result in part of tax rates, no question about it. Who works in the under- 
ground economy? 

MR. HARRINGTON. Working people and poor people and middle-class 
people who want lower taxes, and organized crime. Not, however, the cor- 
porate rich. The corporate rich really don't go around trading services 
with one another. Rich carpenters don't trade off with rich plumbers in 
this society. Yes, there is a problem here. Would it be dealt with by my 
radical restructure of the tax code, to make it much more equitable? Does 
this have anything to do with the corporate rich? No. Their tax evasion 
is not something as piddling as getting a house painted or a car fixed. 
Their tax evasion is in the billions of dollars, it's the five and a quarter 
billion that they just got out of the new capital gains deduction. 



20. 



MR. SILK: Thank you. Mr. Kemp? 

CONGRESSMAN KEMP: The term "corporate rich" has been used so 
many times and it's just a straw man, Mr. Harrington because I'm not 
talking about entrepreneurs, I'm talking about individual investors in 
the stock market, I'm talking about small savers, I'm talking about men 
and women who would like to gain some wealth in this society. If we 
lowered tax rates, we could get rid of some of these tax loopholes. 
Professor Peter Gutmann at Baruch College estimates there is a §200 
billion vast subterranean economy. Everybody responds to high rates, 
but in different ways: take the taxi driver two weeks ago who took me 
into town. I said, "How do you exist with the taxes in this city, with 
a family and children in college?" 

He said, "Well, I'm not really paying taxes because I'm not working 
for money, I'm working for cash." That was his way of surviving. He was 
in the underground economy. Those in upper brackets don't pay 70 percent 
because they legally buy tax-free bonds. 

When productive investment is discouraged, people take their money 
and put it into the speculative investment that Mr. Harrington is talking 
about. I think by lowering the rates you will increase the after- tax 
rewards for productive human effort and this nation will respond to real 
growth opportunities. There are entrepreneurs out there, men and women 
of ambition. There are people who want to save and send their children ^ 
to college. One person's savings ends up as someone's mortgage, someone s 
mortgage ends up as some type of capital investment. 

MR. SILK: Thank you. May we have the next question, please? 

QUESTION: Congressman Kemp. A key part of your philosophy is that 
cutting taxes will increase the incentive for a lot of people. Most people 
go out and get a job that pays wages over which they have no control. What 
is the meaning of incentive under those circumstances? 

CONGRESSMAN KEMP: I represent factory workers around Buffalo, New 
York. Probably 60 to 70 percent of my constituents are factory workers, 
auto workers or steel workers or workers in small businesses; if you take 
the federal tax rate on a salary of $13,000, payroll tax on employer and 
employee, add the State tax rate in New York, and I'll tell you right now 
that the next dollar of income over $13,000 of taxable income m New York 
state will be taxed somewhere between 50 and 51 percent. 

At that point, overtime becomes less attractive. The subterranean 
economy becomes more attractive. Fringe benefits become much more important 
rather than bargaining for wages. It exacerbates tension, it ^^Jf^ens 
strikes. The steel workers went out on strike in Buffalo for a 27 percent 
raise over three years. They deserved more than 27 percent, because a 
27 percent increase over three years at those tax rates is a net loss of 
money for the working men and women of my district. 

It's intolerable to labor, and I'm not suggesting everybody is an 
entrepreneur. But I believe everybody would like to have the opportunity 
to save more of their income, to spend it as they like, to invest it or. 



21. 



t perhaps, as many workers are doing, investing in a company pension. What do 

t you think that is invested in? The stock market. Individual workers are a 

^ tremendous source of capital in our economy. 

p ' 

I MR. SILK: Thank you. Mr. Harrington. 

I- ' ■ ■ 

MR* HAERINGTON: I will just restate my case. I do not think it has 
been at all responded to. That is to say, I'm for cutting steel workers' 
{ taxes. I will match dollar for dollar my passion for giving more income to 

I working people in the United States with anybody in this room. That's not 

' the question. The question is when you cut the taxes, will it have a tremen- 

dous impact on GNP by having that worker work harder and more? And my 
f response is that most working people in the United States work the hours they 

fj are told to work. They are not entrepreneurs, they are not artisans, they 

1: are workers. And it's not simply in the factory. It's true for the typing 

f- pool, it's true for the entire society. And, I repeat, our dispute is not 

p whether we should cut the taxes of working people, which I am for, but 

^ whether the rich will finally pay their fair share. 



MR. SILK: Now, I'm tempted to intervene myself on this point, just 
to clarify the issue. 

This really is an interesting dispute here. Congressman Kemp has 
said a few times that the main reason to cut taxes is to increase incentives 
and to increase production. And hence the whole pile out of which we all 
feed. Michael Harrington has questioned whether incentive will have that 
effect, but there's a way in which it might work, Michael, that doesn't mean 
to accept what Mr. Kemp is saying. But certainly it might be very inter- 
esting for the posit ion- -and I wonder if that is your position- -that it 
would move people out of the underground into the above-ground economy. 
They then would pay taxes at a greater rate because they would report 
income honestly and that would make more income available to the government, 
to deal with problems in the society, so that whether the mechanism is 
different or not, the result, whichever of you is right, will still be 
constructive. 

MR, HARRINGTON: Two things: my answer is simply yes, that is one 
of the reasons I am for more income to the people who are in the under- 
ground economy, who are not the rich, but average, Americans. 

Secondly, I have to qualify that slightly. Most people have a main 
job that they have to go to whether they like it or not and work the hours 
that the boss tells them to work, and then they do a little moonlighting on 
their own off the books. I suspect that's going to be an extremely diffi- 
cult thing to get to, but yes, I think it might have something of that 
effect. However, it is something that will not--again I come back to my 
point — have the economic effect that I think the Congressman claims for it. 

CONGRESSMAN KEMP: May I respond? 

MR. SILK: Certainly. 



22. 



CONGRESSMAN KEMP: I'm not suggesting that people have to go out 
and work harder, or work longer hours. I think it would be far better 
for our society to have the same type of output with shorter hours of work. 
I think most of us want to have a more efficient and effective capital 
stock; that is plant, machinery, equipment, tools and jobs. So that's not 
the debate. The debate is how do you bring into our economy a more 
efficient use of the scarce resource — savings, capital. It's not a dirty 
word, it's someone's pension, it's someone's savings and loan deposit, 
it's someone's earnings; it's someone's paycheck. And people respond to 
reward. Boskin and Feldstein and many others have all pointed out that there 
is a correlation between economic reward and effort, the reward for saving, 
the reward for investment, the reward for entrepreneurial activities, and 
the reward for labor. There was a huge response to savings and invesment 
when President Kennedy lowered the marginal tax rates. People responded. 
But Mr. Harrington has suggested that people no longer respond to rewards. 

The last point I wanted to make is that I am not talking about 
lowering tax rates only for some people, as Mr. Harrington wants to do, 
but for everyone. Why? Because it you just lower the tax rates for some, 
by definition you're raising taxes for others, you're increasing progressivity 
and that may be desirable for you if you never plan to earn more, but 
otherwise every ten percent increase in people's incomes raises tax revenues 
to the U.S. Government by 16 or 17 percent. And you're going to get a revolt 
the likes of which you've never known if you increase progressivity rather 
than decrease it. 

MR. SILK: Thank you. Next question. 

QUESTION: Mr. Harrington. The alleged correlation between produc- 
tivity and the rate of progressivity of the tax structure seems fairly diffi- 
cult to substantiate. For example, I believe Sweden, which has a far more 
progressive tax rate, as Congressman Kemp has pointed out, has had a con- 
sistently higher rate of productivity and growth than the United States. What 
really seems to determine growth and productivity is the rate of capital 
investment. If that's true, then wouldn't it be more logical to orient 
economic policy directly toward increased capital investment rather than to 
use the Kemp-Roth approach? 



I MR, HARRINGTON: Yes. Two words on that. One is that I have to 

I caution everybody about the use of the word "productive." It is one of the 
I most slippery terms now in use. For example, in doing productivity figures, 
I the government does not count any environmental gain as a benefit, but it 
[ counts the cost of getting the environmental gain as a cost. If you look 
I at the productivity figures in the U.S. in the Council of Economic Advisors' 
report in 1979, you discover that productivity went down in the coal mines 
in 1978 by 61 percent. Do you know why? Safety regulations. They don't 
I count in as a benefit of productivity the lives saved, black lung not con- 
I tracted, et cetera. So I'm just saying for an opener that one must be 
' very careful with that concept. I'm just saying that it's one of the most 
dangerous and watery concepts around. 



23. 



i Secondly, I think the Swedes have a terrific proposal to get 

I workers into capital production. It's called the Meidner plan. Every 

> corporation in Sweden at the end of each year would be required to 

t place a portion of its profits, in the form of shares in the company, in^^^^^^^^^^^^^^^ 

an employee-controlled mutual fund. In the United States, some workers 

I simply get pension funds in stock certificates, passively held, that carry 

p no impact whatsoever on the conduct of the company. Under the Swedish 

t plan, workers would be motivated to form capital as a result of having 

t control over the capital that they hold. And I happen to think that 

f that is a direct way of getting to it. 

I 

P And the last point, which is absolutely true, that Swedish produc- 

t tivity is very high. There's an interesting reason why productivity 

f is highest in Sweden in the most advanced industries. The Swedish labor 

p movement has something called a solidaristic wage policy, where the better- 

I off workers utilize their bargaining power to raise the wages of the not 

I so well-off workers. The result is that you actually have the most highly 

t skilled workers being very highly competitive with the workers in the 

t United States. 

I MR. SILK: Mr. Kemp? 

CONGRESSMAN KEMP: I think I agree too. I don't know how Mr. 
I Harrington can agree with a program designed to encourage capital invest- 

ment and then turn around and suggest that in 1979 we should tax or double 
the tax on capital gains, which is one of the chief sources of investment. 
In the 1978 tax reform, a $2 billion loophole, which he considers a tax 
expenditure, was necessary to help stimulate a sagging equity market 
which provides the financial resources to start new enterprises. He finds 
this is somehow wrong. 

Sweden has a very generous investment tax credit — a 40 percent 
investment tax credit during times of low growth. They have lower capital 
gains rates and they have a much faster rate of depreciation on plant and 
equipment. You can depreciate plant and equipment in the U.S. somewhere 
between 12 and 18 years. In Sweden, it's five, and they would like to go 
down to one, but what you're getting is investment dictated by existing 
corporations. And what I'm suggesting is that you can still get investment 
by lowering the personal rates, because you bring back the 
individual men and women who I think are the key and backbone to a growing 
and expanding economy. 

MR. SILK: Thank you, Mr. Kemp. We are now ready for the final 
question from the floor before the suiranations. 

QUESTION: Mr. Kemp and Mr. Harrington. I'm an employee of a corpora- 
tion that is a Domestic International Sales Corporation or DISC, and that 
: kind of company receives a tax break on the income it earns from exports, 

I: U.S. produced goods. Now, at our particular company, I just want to say 

that I think that tax break has given us such vigor and incentive to go 
ahead and promote those foreign sales than perhaps to devote work time to 
importing. In fact, I would say we've made such considerable money with 
the tax break that we can invest, for example, in a new company, and 
recently created some new jobs. I feel that at our company and perhaps at 
other DISCs, with the tax break we would have more incentive to create more 



24. 



jobs. What would the respondents feel about increasing tax cuts given 

to DISC in view of and in light of the Carter Administration's statistical 

feeling that the DISCs do not have all that great an incentive. 

MR, SILK: Mr, Kemp, do you have a slipped disc? 

CONGRESSMAN KEMP: Very quickly, I don't favor subsidizing exports 
or imports or Lockheed or Amtrak or Conrail or anybody, and I think that 
subsidies are wrong. The tax rates are so high on everybody that the 
rate should be reduced all across the board. And I'm suggesting that just 
stimulating exports by offering DISCs is a very, frankly, a very shallow 
way of doing it. I know it is probably better than nothing, but investment 
tax credits distort investment. They may expand the labor stock but not 
expand the capital stock for no good reason but the taxcode. And you need 
to encourage capital investment. That's not the most efficient way to 
get it. 

MR. SILK: Yes, Michael? 

MR. HARRINGTON: Yes. I'm for abolishing DISCs for a number of 
reasons. Number one, it liberates multi-national corporations from the 
control of the American financial system. It makes the dollar a floating 
entity. It's now totally at the whim of speculation which corporations 
engage in all the time. And, number two, because it allows one of the most 
pernicious aspects of corporate policy to be encouraged, that is to say, 
to run out on American workers without any thought of the social conse- 
quences in the areas you are running out on. I am not in favor of creating 
a protectionist America against the Third World, on the contrary. But I 
am for having a full employment policy that is geared not to the needs of 
multi-national corporations but for the needs of both American and Third 
World workers. And I think that this simply allows corporations to exploit 
and make the best deals for private gains, and I am against the idea of 
private gain. 

MR. SILK: You now have the final question of the evening. Thank 
you. 

QUESTION: Mr. Kemp, Mr. Harrington. One class of people you have 
not discussed is the senior citizen, the disabled. Just exactly what are 
your plans for these two groups? 

MR. SILK: Mr. Harrington? 

MR. HARRINGTON: I think that one of the reasons I have been fighting 
so hard for full employment policy is that we are in profound danger in 
this society, if we don't get full employment, of having the younger genera- 
tion of the employed forced into a generational war against the retired. 
So therefore I would think that as for every group in this society--for 
blacks, for Hispanics, for women, for the environment, for the Third World-- 
so also for the people over 65, the most basic gain is to get the kind of 
economy that can have the kind of a retirement which those people deserve, 
which is not half good enough yet. There are still 15 percent of the 
people over 65 who, according to the official statistics, are poor. To 



25. 



do away with that ounrage, social security should be set so as to provide 
a decent life for everybody, no matter what they did during their working 
lives. And under the circumstances of stagnation, that's going to take 
a lot of doing. 

MR. SILK: Mr. Kemp? 

CONGRESSMAN KEMP: Strangely enough, we totally agree. I couldn't 
agree more with what was just said. Stagnation, slow growth, high unemploy- 
ment and low job creation reduce the tax base and further exacerbate the 
actuarial problem of the social security trust funds. 

Further, these people now out of jobs and on the unemployment rolls 
are further drains— the public sector drains the private sector of its 
resources. It seems to me that senior citizens of America have a tremendous 
stake not only in stopping inflation but encouraging the type of economic 
growth and job creation that will allow for revenues to come into government 
I that will finance assistance, because the social security system today, the 

I retirement benefit you once had or that my parents were on is totally 

t dependent upon the ability of today's work force to expand and to provide 

I the payroll taxes that finance the trust fund. So it is absolutely impera- 

E tive that we have full employment. 



MR. SILK: I want to compliment both speakers before we go into the 
final act of our drama. The final summation, lasting no more than four 
minutes and 59 seconds, goes to Mr. Harrington. 

MR. HARRINGTON: Number one, I call the corporate rich the corporate 
rich because they're not entrepreneurs; they are like landlords who, 
David Ricardo said, grow rich in their sleep. I am for rewarding entre- 
preneurs, not corporate rich. 

I would also say that our tax code is not at all progressive, and 
one of the things that I would like to do is to have very high confis- 
I catory inheritance taxes on large amounts of money because that would make 

I those extra -rich young people work. 



I 



I Thirdly, let me get down to the issues that really emerge here. 

I I am for cutting taxes for most people but not for the rich. I remind you 

' of the figures I gave you. Under the Kemp scheme, less than three percent 

of the taxpayers would get 23.5 percent of the benefits, 50 percent would 
» get 17.2. We would increase maldistribution and that is not justified m 

f* terms of the investment that would come of it. Because, I repeat, 

t' Congressman, this economy does not work on new stock issues any more, it 

I doesn't work on personal savings any more. It's no longer a Horatio Alger 

f economy, and if you give the rich money, they will use it for speculative 

I purposes if they think they can get more money that way. And, I believe 

I therefore that if you want to get at the fundamental problem of the 

society, which is to get a full employment economy, you have to go to 

planned social investment. 

I Final point. I think your heart is often in the right place, 

t amazingly so for a Republican, and I say this without any malice whatsoever. 

I But your economics are not good, that's the problem. You are right. 



26, 

Congressman, denand side economics, that old dream that if we'll just 
I finagle the fiscal and monetary levers, it all will fall in place, doesn't 

work any nore . But in criticizing that obsolete doctrine, you have now 

come up vith another version of it^-'-that all we do is finagle a little 
f tax cut and America will be on the road to full emplo3mient. No way. 

You're right to say that in America today we have to be concerned with 

investinent , But we cannot hire out the investment decisions to rich 
t people, which is essentially what you're proposing to do and why I call 

I it a conservative proposal. We cannot hire that out and hope that they 

will make the right decisions, because all of the evidence that I see is 

that they have not. 

What we need is not tax cuts for the rich, which won't work; we 
do need tax cuts for the society that will work. What we need for the 
I economy to get going again is a planned social economy, and that's the 
I way I see it as a socialist, 

I CONGRESSMAN KEMP: I appreciate the fact that there are many dedi- 

cated people here who desire to achieve the goals that I share. 

I I am from a working family, and my father was a small entrepreneur 

who started a little company and put four boys through college. I in 
turn am putting my children through college. And some day I hope that 
they will be motivated to out and not give up on America. I hope we don't 
give up on the future of the type of men and women building this nation 
and can build it again, I think there is much evidence in the world that 
where the incentives are the greatest, where the money is the soundest, 
where the discouragement is the least, those are nations that are achieving 
a higher degree of employment, a higher degree of social and economic 
justice and lower rates of inflation than the United States. 

I Now, we can talk about theory, and we can talk about the future, 

f and I want a better future, as I think my colleague does. But I don't want 
t it under democratic socialism. I want it under democratic capitalism. And 

I I think the way to expand democratic capitalism is to provide an opportunity 
I for the independent, hard-working men and women of this country to get 
I ahead and you can't get ahead when the harder you work, the more you produce, 

I the greater your savings, you simply end up in an extremely graduated tax 
bracket, I want to cut the tax rates for everybody, and I want equal 
treatment for everybody. Do I want to cut taxes for the rich? No, for the 
14th time, I don't want to cut the tax revenues, I want to expand revenues 
by cutting the tax rates. And I can show you, and I'm sure my colleague-- 
do I have a minute to go? 

MR. SILK: One minute. 

CONGRESSMAN KEMP: Okay. As I pointed out, the only real experiences 
we had in the 20th century with sharply and dramatically reduced tax rates 
were under President Kennedy and Secretary Mellon in the 1920s. Both time 
more revenue came into the government. The deficits contracted, they 
didn't expand, the inflation went down, unemployment went down, and more 
revenue came into the U.S. Treasury, More people were working to earn 
higher incomes instead of being pushed into brackets where they all spent 
their time hiring accountants and lawyers and looking for offshore investments 
and tax-free municipal bonds. You can suggest what you want, but I really 



27. 



believe the way to tax the rich is to get the rate down for thetn, too, 
to a point where they are encouraged to invest, and I think the people 
want to invest today and save, and have a dynamic view of their future 
that transcends the vision of society advocated by my distinguished 
friend and colleague, Mr. Harrington. 

Thank you very much. I'm delighted to be here. 

MR. SILK: Thank you once again to both of our speakers, and 
my thanks to this audience for being very cooperative and very smart. 



-k -k ii "k 



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