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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?
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 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
estimate and reduce the unemployment, you'd liave a surplus of $15 billion. That's all economics. I don't mind discussing it with you. I think that it's fine. I think it has some bearing upon the point. But the question that I'm directing to you—and I think that the National Association of Manufacturers is going to have to address themselves to—is there have been some abuses. There have been some illegal practices. There have been some absolutely disturbing elements in the American society for which there is no definite appropriate relief under the present law. Now the best that we have so far, as Mr. Hills' statement says, the best thing to do is to go ahead and expose this to the public view.
Mr. SMITH. Exactly right.
Senator HARTKE. But there is no mechanism at the present time to even require that type of exposure that happened on the Gulf case. What happened is it was leaked out and then it came out to the public view.
I'm asking, assuming that we are going to continue the corporate structure, what is their responsibility in this society?
Mr. Smith. I can define it reasonably concisely. It's to make the best possible product at the lowest possible price. Second, it's to try to show a profit. Third, it's to account in its own corporate practices for growth that will allow an increase in the number of jobs. Fourth, it's to take into consideration in all of its corporate activities all of the factors that have an impact on that corporation and on which that corporation has an impact. That includes public concerns and every other concern that is addressed in increasing volume in the board room.
Senator HARTKE. Go right ahead.
Mr. Smith. One of the biggest problems with today's study of the corporate enterprise is a misconception about what the corporate director is or ought to be and what the nature of the corporation is. In substance, the corporate accountability research group would have the American corporation participate in some kind of collegial decisionmaking process in a democratic institution. Now I have been exposed to collegial decisionmaking processes for a long time and, believe me, they are utterly unworkable. Some of the most archaic structures in the world are colleges and universities. They are terribly inefficient. The collegial decisionmaking process is great if you're not trying to make current decisions on current issues and do so expeditiously. If you've got time to agonize ad nauseum, at great length over how many angels can dance on a head of a pin, then collegial decisionmaking is entirely appropriate.
In order to accomplish this goal of the collegial decisionmaking process, the boards of directors would be restructured to create permanent professional directors whose salaries would be established by the corporate chartering act, each of whom would presumably be charged with the duplication of the management responsibilities presently given to the corporate management.
Mr. Chairman, the corporate enterprise is not and, in my opinion, should not become this style of institution. First of all, executive decisionmaking in corporations today is not, should not, and must not become collegial decisionmaking in any sense. Moreover, for the very reasons that Mr. Nader cites in the deficiencies of foreign corporate structures, the identification of directors with special constituencies effectively hamstrings the board's operations. More importantly, it hamstrings the professional judgment of the corporate managers.
Under the proposed grand design for corporate structure there would be a virtual duplication of the present management process at the board of directors level. This is impossible of attainment in the large corporation and to maintain otherwise is sheer folly.
Mr. Chairman, I think perhaps the most important thing for this panel to recognize is that what is being proposed here is not merely some patchwork process of strengthening governmental regulatory agencies powers. What is being proposed by Mr. Nader is a basic restructuring of the economic system of the United States. The justification which he proposes for this is increased efficiency in the market process and the inability of the present governmental agencies through understaffing and underfundings to enforce adequately the laws which are available on the books.
Now neither of these basic proposals justify the kind of massive overhaul of the market process which is being proposed. If antitrust statutes are being violated, then staff the appropriate agencies with sufficient staff and give them sufficient funds to do the jobs with which they are charged. If there are suspected deficiencies in other requirements of the law, such as corporate reporting responsibilities, then certainly the governing statutes and regulations should be reviewed. To say, however, that the entire economic process needs an overhaul in order to accomplish these somewhat narrower goals is entirely incorrect.
Mr. Nader's paradigm is certainly ambitious, to say the least, but can the country live with it? It would be well to examine the consequences of implementing some of these proposals before drawing any conclusions about their desirability.
There's a long and detailed explanation there about the impact of cutting corporate advertising in order to effectively reduce demand. Let me encapsulate it thusly. If Mr. Nader and the Corporate Accountability Research Group were successful in effectively reducing consumer expenditures by changing the kinds of corporate advertising and were able to do so by perhaps as much as 5 percent, there would be a resulting decline in national income, no matter how you measure it-net national product, gross national product, or whatever-of about 8 percent. The impact of a decline of that magnitude on the job market, on employment, on investment opportunities, on the Government tax base and everything else would be insufferable and completely unacceptable.
We have discussed what happened to employment trends and population trends and I don't think it's necessary to go
back over that. Suffice it to say that this Government has made their commitment to full employment an important one since the Employment Act of 1946, and I would suspect that any device that would have the effect or the impact of changing that commitment would be unacceptable. A splintering up and a division, a deconcentration of corporations, would have that impact.
Apart from the defects in his personal views as the great social architect of our time, part of the defects from which this study suffers
are caused by Mr. Nader's misconception of what a corporate director is and does. He has selected isolated abuses among a limited number of companies and draws the faulty conclusion that all corporations must be that way. I would like to suggest that there is a much more accurate and better balanced viewpoint of directors in the May 15, 1976 issue of Forbes magazine. Copies have been provided for your consideration. There are articles in there about well-managed corporations, about problems in corporations, about Gulf Oil, about some of our former congressional colleagues, for instance, Martha Griffiths on page 115, who has written an article entitled "Politicians Just Don't Understand.” Now I think that's simplistic. I think politicians do understand and I think they do understand very well that if corporations can't make a profit, then the corporation cannot survive. I commend this issue to you very highly.
For instance, the article on "Active, Yes; Running Things, No," on page 108, where Mr. Wary of Ingersoll-Rand offers his approach; Textron, Bill Miller, and his approach to his board of directors and how they operate that major conglomerate; and I think you will find that there's a much more balanced viewpoint on how the corporate structure operates, what the role of the corporate director is, and why the changes that are creeping into the board room now are a much more satisfactory approach to the problem than legislative dicta would be.
Perhaps the best explanation of what a board of directors is was voiced by T. William Miller in his article, "Invitation to a Board Meeting." He describes the board of trustees as a council of peers for chief executives strong enough to seek that advice. Other directors indicate that they see their roles as that of policymakers but not as managers. Mr. Nader's model would have the board of directors second-guessing all of management's decisions and effectively acting as some kind of watchdog. Attitudes in a corporation board room have changed very significantly since the revelations of Watergate and nowadays corporate directors are demanding and receiving a great deal more information than ever before and the policy decisions which are made by boards of trustees are made after a great deal more soul searching and definitive explanation than has ever been the case before. To now substitute a Federal bureaucracy for this council of peers would fundamentally change the nature of the American corporation in a direction which is not desirable.
Specifically, this committee announced that its purpose was to address the broad issues of corporate rights and responsibilities. If Mr. Nader's model on the nine areas of corporate social responsibilities is used as a starting point, and I strongly suggest that they are most inappropriate, one might wonder what possible goals expansion of Government involvement could accomplish. There are already such a plethora of laws and regulations to conform to that corporations are becoming overburdened with staffs whose interests are external to the central issues of providing quality products at the lowest possible prices.
For instance, under his very first title of employee welfare, one might list the Fair Labor Standards Act; the Wagner, Taft-Hartley, and Landrum-Griffin Acts; the Occupational Safety and Health Act; the Employees Retirement Insurance Act; the Hobbs (Antiracketeer