would all be increased by approximately the same proportion. This would have the effect of giving the highest proportional tax reductions to lower income groups while the absolute cut would rise as you move up the income scale. It would also lower almost everybody's marginal tax rates.❜ Again, it should be emphasized that this is not a completely equitable plan. There is no such thing. I do, however, think it important not to saddle the middle class with another large tax burden hidden by a complex energy program. Since 1967, the average income and employee payroll tax has raised the average tax rate on a typical median family of four from 12.4 to 16.9 percent while lower income groups have received considerable tax relief.

In this testimony I have ignored many important components of the Administration's energy program. Before concluding, however, I would urge the committee to look critically at the proposed oil and natural gas user tax on industries and on its proposed rebate to investors in coal using equipment. Our system contains many strange tax provisions, but I can think of none this strange that would impose a $40 billion burden over eight years. There would be little need for such user taxes if we were willing to go to the world price equivalents for oil and natural gas. If it is believed that there are national security reasons for provoking more conservation than would be forthcoming at this price, then a sensible policy would impose a tariff on imports plus an additional excise tax on domestic production.

The proposed tax has many dubious features. First of all, it is progressive with respect to the size of the firm. A corporation owning five identical plants would pay a higher average energy use tax rate than one with four identical plants. There is no rationale that I can see for such a tax structure. Egalitarians might like this approach if it could be shown that the larger corporation is always owned by richer shareholders or is producing products that are used more by the rich than the poor, but I know of no data that support this kind of generalization.

But perhaps the worst feature of the proposal is the rebate for coal using equipment. It amounts to a subsidy of 70 to 75 percent of the capital cost of such equipment and will result in tremendous waste of coal. Coal may be plentiful but it certainly is not that cheap. To me, it is totally inconsistent for the program to go to great lengths to avoid providing windfalls to stockholders who happen to own oil companies and then to provide a bonanza to those firms who are in a position to convert to coal burning equipment.

Senator HASKELL. Next, from Data Resources, Inc., Dr. Cook and Miss Rogers.

STATEMENT OF DR. ALVIN A. COOK, JR., AND MISS VIRGINIA ROGERS, DATA RESOURCES, INC.

Mr. Cook. I appreciate this opportunity to comment on President Carter's energy proposals, specifically in the context of the tax provisions and the rebate provisions.

President Carter has prepared a farreaching, complex energy plan aimed at slowing down U.S. consumption of energy, especially petroleum, and reducing U.S. dependence on imported oil.

The principal mechanisms proposed are (1) taxes and tax credits to reduce consumption of petroleum and natural gas and switch the U.S. consumption of energy primarily to coal, and (2) rebates to minimize adverse effects on the economy. In our testimony today, we will present the results of some of our studies at Data Resources that seek to measure the energy and economic impacts of the program, and provide some recommendations.

As an indication of the severity of the worldwide energy situation, the administration has advanced the CIA findings on worldwide oil

With more precise data, the matching of the tax cuts and increased direct and indirect energy costs for different income groups might be done more precisely by widening some brackets more than others or by lowering certain marginal rates.

shortages by the 1980's because of low rates of discovery and the potential switch of the Soviet Union from a net exporter to a net importer of petroleum. A recent widely-reported MIT study projects a worldwide energy shortage by the 1980's.

The results of these studies are disquieting in that they fail to adequately incorporate the effects of higher prices paid to suppliers and the economic viability of alternatives such as shale oil at increasing higher prices for petroleum. Yet there is a problem as energy policy presently exists, and in the absence of action, the United States will import increasingly more oil over the next 15 years.

The chances are that OPEC's ability to raise prices will continue to mount. Moreover, the OPEC supplies can be considered insecure. The industrial world is becoming increasingly dependent on the OPEC countries, and, if the United States does not adopt stronger energy policies, our demand in world oil markets could approach the 16 million barrels per day level that the President's plan indicates.

Under these conditions, the potential damage from a future embargo would become immense, much greater than in 1973-74. We have made major progress in repairing our relations with the oil-producing countries, and we have reason to be hopeful that there will be progress toward peace in the Middle East. But we cannot be certain that such progress will be made, nor can we be sure that the OPEC countries will retain their current high political stability over periods as long as 10 or 20 years.

Once the need for a national energy program is postulated, the nature of the program falls into place rather quickly. There is no way to reduce the volume of U.S. oil imports without confronting households, businesses, and governments with substantially higher oil prices. Thus, in one way or another, the price of oil has to be allowed to increase. Were we to rely entirely on the market alone, the incomes of Thus, in one way or another, the price of oil has to be allowed to increase is politically unacceptable, then the increase in oil prices must be partly achieved through a system of excise taxes, either levied on the producers or the consumers. That is the heart of the President's program.

The negative economic impact grows mainly out of the higher prices, and there cannot be a meaningful energy program which does not impose these costs on the economy. The Congress can improve the proposals, but there is no way to significantly reduce the costs to the economy and still accomplish the energy goals.

I will summarize briefly some of the results that Dr. Eckstein, Virginia Rogers, and I put together immediately after the President proposed his program. At that time, we assumed that the Government would return to the economy the full amount of the purchasing power that the energy taxes would withdraw. Since the President's announcement, further details have become available on the fiscal intentions of the program.

Table 1 shows the revenues to be collected by the program, the tax expenditures paid out in the form of investment credits, and the tax rebates designed to restore purchasing power. That information shows that the fiscal plans are a good deal more complex than the initial announcement indicated. The energy revenues will be used to

finance a wide variety of expenditures that can be considered to be energy-related but many of which would have to be incurred anyway. The Federal Government is making handsome provision for any energy-induced increases in its own costs, including such obscure effects as the extra escalation costs of social security and food stamp programs, but is showing no comparable concern for State and local governments or the private sector.

Thus, it is no longer possible to assess the full fiscal impact of the energy program; one must examine the general fiscal policy of the Government, a fiscal policy which now pivots on the goal of budget balance by 1981.

Table I also shows that the fiscal magnitudes of the program are quite large. Even if the gasoline tax is not triggered, the revenues collected over the 8 years 1978-85 equal $35 billion, or $17 billion per year. Various energy-related budget expenditures equal $50 billion, or an average of $6 billion per year. The miscellaneous tax expenditures, the investment tax credits, are $1.5 billion a year. Tax rebates, which principally would be energy-motivated reductions in personal income taxes, would equal $9 billion a year. If the gasoline tax were to be triggered, the magnitudes would become much larger.

The gasoline tax could actually accumulate to approximately $153 billion a year by 1985. These are the figures that were released by Secretary Blumenthal recently in a press release.

What about the economic impacts? The energy program raises three big questions: First, what would it do to shortrun economic performance? Second, will it seriously change longrun growth aspects? Third, will it achieve the energy goals?

Senator HASKELL. Before you get into that, let me ask you a question. I should have also addressed this to some of the earlier witnesses. There have been some people who say that you have inflationary impact when you collect these taxes which have the effect of raising prices throughout the economy. Then those people say you have a second inflationary impact when you give all that money back. Therefore, the President's program is extremely inflationary. Would you comment on that? I am not saying necessarily that these are my views. I have heard them.

Mr. Cook. In effect, if you increase energy prices you do, in fact, raise the energy price level. The effect of giving the money back to consumers raises the level of consumer spendable income. This increase in consumer income increases the purchase of goods and services and increases the level of GNP.

In effect, there could be some increase in inflationary pressures due to giving the money back, but when a proper rebate scheme of reducing the physical amount of energy purchased, because of higher per unit costs, and increasing purchases of other nonenergy goods and services is, in the long run, to offset the higher prices with the maintenance of purchasing power and to maintain consumer welfare. The administration holds that the effect of its energy program on the economy would be essentially neutralized and in fact would be mildly stimulative. We do not think so. We think that the rate of increase in inflation would be greater than the rate of increase to the

purchasing power. Thus, in total, consumers and the economy would be slightly worse off.

Senator HASKELL. Thank you. Go ahead.

Mr. Cook. In terms of the shortrun impacts-and I think here the question you just asked needs to be looked at in terms of the short run and long run-there are many institutional factors in the economy that prevent the complete interaction of the rebates to work their way through the economy so that the effects would be more adverse than in the longer run, after the economy has had a chance to absorb the new relative prices to reestablish consumers' purchasing

power.

There are five principal questions about the short-term economic impact.

INFLATION

DRI's analysis shows that the inflation rate 1976-80, would be raised by 0.7 percent a year. Table 2 summarizes the inflation impact, beginning with the gasoline deflator and all-fuel wholesale price index. The administration has gone to great lengths to phase in the program to avoid inflationary shocks.

The Wholesale Price Index for fuels would be approximately 3.9 percent per year. The Wholesale Price Index in total will be up approximately 1.1 percent a year, whereas, the Consumer Price Index would be up only 0.8 percent per year over and above what it would have been without these higher prices.

BUSINESS FIXED INVESTMENT

The energy program will directly boost business spending for energy conservation. It will require industrial plants and utilities to convert from oil and gas to coal both through regulation and the industrial use taxes, and it will add to construction activity through the incentives and requirements for better insulation and energy conservation.

The program will also boost investment by the automobile industry in order to accomplish the dramatic change in its product, although the previously established efficiency requirements already would have accomplished the larger part of this goal. DRI is using an estimate of $3 billion for those effects by 1980.

To be weighed against these extra outlays are the indirect negative effects of the program. In the very near term, investment will inevitably be held back until the Congress has enacted a version of the program; until that moment is reached, energy-related investments cannot be planned with any sense of security. The solution assumes congressional action by summer.

In the longer run, investment will be reduced by higher interest rates. The Federal Reserve is unlikely to accomodate the extra inflation with a higher monetary target, and therefore, interest rates will be up about 40 basic points. Further, the capital outlays for energy conversion will compete with other investment for company financial resources, crowding out some capacity expansion projects.

DRI's preliminary assessment of the net impact on investment is slightly negative. Construction activity is cut, but equipment purchases

are slightly higher. In general, the real GNP will be down approximately 0.2 of a percentage point per year from 1976 through 1980. Real consumption will be down approximately the same.

AUTOMOBILE SALES

The impact of the program on automobile sales is negative. First, higher prices for gasoline raise the operating costs of a car which somewhat reduces the demand for new automobiles. Further, the higher gas prices affect the total mileage driven, reducing the wear and tear on the automobile stock and reducing the replacement demand.

Here, again, there is some dispute among economists on the effect of the President's program on automobile sales, some arguing, in fact, that automobile sales would rise because of the demand for smaller cars out weighing the effect of the higher gas prices.

Finally and most importantly, the efficiency requirement coupled with the gas-guzzler tax will affect automobile demand in several ways. Gradually stiffening efficiency requirements may accelerate automobile demand in the near term if the buying public really has a strong desire for the larger cars. On the other hand, the rational consumer will be aware of the high and rising gasoline costs, and therefore will weigh the benefit of the greater efficiency. The challenge will be for the automobile companies to turn the mandatory product changes into a marketing opportunity, thereby increasing sales by offering a product that is more desirable in dimensions other than size. Coupling the efficiency standards with the gas-guzzler tax will reduce the price of small cars. This will add to the total volume of unit car sales by making the smallest car even cheaper. Further, the program may strengthen small car sales by domestic manufacturers, slightly increasing their share of this market, if indeed the tax and rebate funds are pooled by manufacturers. Unit sales of large cars, as defined by today's standards, will inevitably decline. Their share of the total automobile market would shrink from this year's 30 percent to 19 percent by 1980.

DRI estimates that the net impact of these considerations is a reduction in sales of about 300,000 units in 1980. This figure is principally based on the effect of the higher gasoline prices on demand, since the efficiency requirement was already an ingredient of the base case solution reflecting inherited policies and the gas-guzzler tax actually may boost unit sales. The dollar volume of the automobile industry will be off by about 5 percent, mainly because of the changed mix of

cars.

There are a variety of other effects on final demands, of course. Higher energy prices will affect airlines and hotels. Compared to the embargo of 1974, the magnitudes are much smaller, of course, since energy prices are already quite high and there is no disruption element.

Housing activity will be shifted in composition. The various incentives to encourage home insulation will lead to a larger volume of alteration work. On the other hand, stiffer building codes will raise