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domination if it so chooses. This is the prerogative of Congress under the commerce powers of the Constitution.

One needs only to look at recent legislation, including such items as the Occupational Safety and Health Act, recent pension legislation, the Civil Rights Act and their expanded focuses since 1964, the clean water and air bills, significant changes in accounting practices and securities regulations and a myriad of other issues upon which the Congress has acted that give one an understanding of the scope of congressional control over corporate form and practice. To ascribe all of the societal deficiencies cataloged in the first chapter to the corporate impact is to deny that the commerce power of Congress exists. Mr. Nader and group are wrong in this assumption.

A second major consideration of his research is that bigness is bad. Economics of scale are glossed over and it's assumed that because a corporation somehow or other manages to become one of the 700 largest corporations in the country, it must, therefore, be guilty of all sorts of evils and sins against the public good. Nothing could be further from the truth. The fact is, of course, that capital intensive industries, such as steel, transportation, automobiles, and others virtually require a huge size in order to operate efficiently. The fallacy that bigness is somehow or other bad is a fundamental defect of the study, and I might add a pervasive attitude in some sectors of economy today, but it's one of the premises on which Mr. Nader bases his entire work.

Senator HARTKE. Is bigness per se good!
Mr. Smith. I think that it very definitely can be. It's a sign of
Senator HARTKE. Can't bigness be bad?
Mr. SMITH. Yes; it can.
Senator HARTKE. All right.

Mr. Smith. Perhaps the most aggravating aspect of this study is the failure to recognize what the corporate form of business enterprise has been able to accomplish and what the problems which society has encountered are because of these attacks on that corporate form. The system of free enterprise guided capitalism which is currently the primary pattern in Western civilization allows this country to create over 1 million new jobs every year. Now there isn't any other complex form of society in an atmosphere of freedom of choice where that claim can be made. If one takes the period since the end of World War II, several conclusions are readily apparent just from looking at the employment figures for that period.

Employment in the Federal Government has been flat. Employment in the military services has been declining. Employment in State and local governments has been increasing. But most of all, the private sector has been responsible for creating untold numbers of new jobs to meet the growth in population which has been the pattern in this country.

Senator HARTKE. Is that true in the manufacturing establishment?

Mr. SMITH. I think that there is a general shift away from manufacturing enterprises in this country into the services industries.

Senator HARTKE. Isn't it true that the curve in employment in the manufacturing industry is on a steady, downward curve and has been since 1946?

Mr. SMITH. I'd have to go back and check that. I think at least it's been flat. It may have been declining.

Senator HARTKE. Yes. In other words, the manufacturing sector is not supplying the new jobs. It's in the service industries where the new jobs are coming

Mr. SMITH. That's entirely possible.

Senator HARTKE. Isn't it true, also, in the service industries, as far as they're concerned, that primarily their wage scale is substantially lower than the manufacturing sector?

Mr. SMITH. I'm sorry. I'm not familiar with any studies that have drawn that conclusion. I would also say that the service industries include a large number of very small service establishments. You don't find enterprises such as the manufacturing industries themselves that have been successful in conglomerating large numbers of services except, of course, in the finance industry, in insurance, and bankingthese kinds of service establishments obviously do provide increasing numbers of jobs and at good wage scales.

This means that businesses and companies have grown sufficiently to provide the extra jobs that are needed to keep a growing population supplied with sources of income.

Now these jobs didn't just happen. These jobs were created because forward thinking managers, directors, and stockholders were willing to risk considerable amounts of capital in order to create the jobs that would be necessary to build new goods and services. The key here is on risk. If corporate managers and stockholders were not willing to assume the risk required, jobs could not be created. It's just that simple. Now the reward for risk taking is salaries paid to management and dividends paid to the stockholders.

Let's speak about this issue of risk briefly. Many people of Mr. Nader's philosophical persuasion tend to think of the stock market as a continually growing institution. Nothing, of course, could be further from the truth. There have been long periods of growth in the stock market but there have also been sharp and precipitious declines in the values of stock which effectively wipe out fortunes and destroy many corporations in the market process. One need only look at recent history to see the impact of the very steep decline in the value of corporation stocks in the last few years. When the stock market drops by a matter of 30 to 40 percent over a relatively short period of time, this means that the stockholders of all kinds, including large financial institutions such as mutual funds and pension plans, experience a very severe loss. The fact that these funds may be managed by professional investors does not allow them the option of controlling the market forces which dictate reductions in stock values.

Senator HARTKE. Is that good or bad?

Mr. SMITH. I think essentially it's great. The market forces are operating on the basis of efficiency and they assign risk values to corporations and they assign risk values to individual stocks.

Senator HARTKE. Mr. Smith, are you telling me that the value of the stocks is directly proportionate to their earnings?

Mr. SMITH. No; I did not say that, but it certainly is a key consideration.

Senator HARTKE. Is it directly responsible to the risk? Isn't it true that you have some of the most fundamentally sound corporations today that are selling way below earnings?

Mr. Smith. That's very—well, the earnings ratios in various industries vary widely.

Senator HARTKE. That's right, and it does not relate itself in any definitive way to either risk or return.

Mr. SMITH. Yes; it does. It relates itself to stockholder expectations and stockholder expectations are a function of earnings and a function of risks.

Senator HARTKE. All right. I hear you. I don't think many people in the economic field would agree with you. Mr. SMITH. I am in the economic field and I would

agree. Senator HARTKE. I understand that.

Mr. Smith. I would agree that someone characterized a comment yesterday that

Senator HARTKE. I would say, Mr. Smith

Mr. SMITH. I've forgotten the source, but yesterday at the American Enterprise Institute seminars on federally chartering corporations, someone used the citation, "if all economists were laid end to end, they would fail to reach a conclusion.” I'm sorry I can't cite the source. Al Sommer.

When the risk becomes too high and investors are not willing to purchase securities, the ability of a corporation to raise the capital necessary to expand production facilities becomes severely limited. This can have very severe long-term repercussions for the economy as a whole.

Senator HARTKE. Wait a minute. Let's come back. Hasn't there been a fundamental change within the last 20 years as to how corporate structures are financed and going from what you call an equity financing to what you call an absolutely debt financing ?

Mr. SMITH. I'm glad you mentioned that. As Rod Hills said yesterday, there is an absolute necessity that dividends be treated the same way that interest is if there is to be a movement back away from this heavy debt structure in industry. The fact is, the corporate profits are already taxed at the rate of 48 percent. They are then taxed as income to the stockholders who receive that profit in the form of dividends. It's a double taxation and the tax laws of this country could solve that very simply if they would allow this double taxation not to take place so that dividends and equity capital could be used instead of debt.

Senator HARTKE. Let me ask you a question. In percentage to the gross revenues in the last 20 years, what's happened to corporate profits vis-a-vis personal taxation-corporate profit taxation vis-a-vis personal income tax?

Mr. Smith. For as long as I can remember, corporate profits have been taxed either at 52 or 48 percent.

Senator HARTKE. I'm not talking about percentages. I'm talking about revenue. That's what the big argument on the floor is all about right now, the question of whether or not the revenue figures in the tax bill are going to come within the budget. That's the whole essence of what's involved.

Well, let me just fill you in. The revenue is probably going to be close to $400 billion and the corporate tax is probably going to be less than $50 billion of that $400 billion. Now it's gone from roughly $30 billion 20 years ago to $50 billion, which is not a substantial increase in amount considering the fact that personal income taxes have gone from $70 billion up to almost over $300 billion,

Mr. SMITH. It's a percentage of total income. How does it relate, Mr. Chairman?

Senator HARTKE. The relation of total income?
Mr. SMITH. That's the key figure, because what's happening-

Senator HARTKE. I would think the relation to total income, the corporate taxes are substantially reduced.

Mr. SMITH. Larger and larger numbers of people are earning more and more money. Higher income levels have generated a broader tax base.

Senator HARTKE. I understand that. But where does the corporation fit? In other words, doesn't it have a commensurate responsibility someplace along the line to share in the obligation to pay the bills, to provide the type of living, or are they simply out here in a situation where they have no responsibility? That's what we're talking about. Part of it is financial. Part of it is in the field of health. Part of it is in the field of living conditions. That's what we're trying to find out.

Mr. SMITH. I would be willing to wager that corporate taxes in all forms vastly exceed the $50 billion and I would also be willing to wager that probably costs of social obligations of corporations at least equal if not surpass their tax bills. For instance, now I've not done a study on this and I'm talking off the top of my head on research that was done years ago, so don't hold me strictly accountable, but I would be willing to wager that if you collected the cost of social programs in which corporations now engage, such as increases in social security, increases in unemployment compensation costs, pension plans

Senator HARTKE. Isn't social security tax a cost of doing business, a deductible item?

Mr. SMITH. It's a cost of doing business, of course.

Senator HARTKE. In other words, as far as the corporation is concerned, the payment of social security really is the equivalent of in lieu of wages.

Mr. SMITH. It's a cost of doing business and, of course, it's a wage cost. You could consider it that.

Senator HARTKE. Whereas it's different for the individual. It becomes a tax deduction for the corporation but not for the individual. In other words, it's a very simple thing. The corporation is allowed to deduct the cost of the social security payment to the individual in his tax bill. The individual is not allowed to deduct his cost, his contribution. He has it as a deduct from his income, not a deduction from his taxes.

Mr. SMITH. It's a form of insurance.

Senator HARTKE. He is taxed on the totality of his salary and he's not allowed to say when it comes down there, “But I paid social security taxes, so much," and deduct that. In other words, he pays taxes on taxes. Mr. SMITH. That's correct, and I don't think that's right. Senator HARTKE. Well, the corporation doesn't.

Mr. SMITH. Well, the corporation doesn't reap the benefit from the social security programs, Mr. Chairman. When a corporation reaches age 65, it doesn't go on medicare and it doesn't receive any kind of stipend in its old age. The individual does. It's a cost of providing that insurance.

Senator HARTKE. All right. I think that's the heart of the difference. You see responsibility to the corporation. I'm talking about responsibility to people. Go ahead.

Mr. Smith. They are inseparable.

Senator HARTKE. All right. I hear you. Most people don't feel that way.

Mr. Smith. Let's continue with this question of risk for just a moment. When the risk becomes too high and investors are not willing to purchase securities, the ability of a corporation to raise the capital necessary to expand its facilities becomes severely limited. This can have very severe long-term repercussions for the economy as a whole. Let me illustrate and this applies both to the debt and to the equity markets.

In the most recent severe inflationary pressure that this country has experienced, the underlying cause of the inflation was inadequate production capacity, the inability of basic sectors of the economy to produce the goods and services that were being demanded. The money for the purchase of the commodities was there, consumers were willing to buy, but the goods and services simply weren't available because there were inadequate facilities for the manufacture of these goods and services.

Among the industries that suffered severe shortages of production facilities

were the paper industry, the petroleum industry, basic steel, nonferrous metals, and others. The result, of course, was a severe escalation of prices for the existing products. The unwillingness of the managers and the stockholders to expand their production facilities in the short run because of the high elements of risk involved in these kinds of investments and the competition for funds in the capital markets caused by huge Government deficits explain very graphically what the role of risk is in the market system.

For instance, Mr. Chairman, what do you estimate that the Federal deficit will be this year?

Senator HARTKE. Why don't you tell me what the estimate is?

Mr. SMITH. I'm guessing that it will probably be pretty close to $90 billion. This is a demand by the Federal Government for $90 billion worth of new financing. Now that comes out of the capital markets. The capital markets are the source of funds both for the Federal Government and private industry.

Senator HARTKE. What would the deficit be if you had a reduction in the employment rate by 50 percent?

Mr. SMITH. A reduction of the unemployment rate by 50 percent? I haven't the foggiest notion what the relationship to unemployment is and the deficit.

Senator HARTKE. Some of your friends estimate that for every 1 percent unemployment it produces $16 billion worth of revenue. So if you had a 14-percent reduction in unemployment, that would be $64 billion. The estimated President's budget deficit is roughly at $49 billion, if I recall correctly, in this year. So if you take the President's

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