Simon for Savings

To encourage Americans to save and invest more of their incomes, Treasury Secretary William Simon last week proposed a sweeping change in the U.S. tax system: meshing reductions in corporate and personal income taxes to eliminate all "double taxation" of dividends. (At present, a company pays tax on its profits, then sends some of the remaining money as dividends to stockholders, who pay tax on it as part of their personal incomes.) Testifying before the House Ways and Means Committee, Simon said that his plan would eventually give corporations and individual investors tax cuts totaling $14 billion, starting with a $2.5 billion reduction in 1977. The economy would benefit, said Simon, because the scheme would "permit industry the funds needed for industrial expansion."

The Simon plan would work this way: corporations would receive a tax deduction equal to about 50% of the total amount of dividends they paid out each year. The individual stockholder would report as income not just his dividends, but his share of the company's total profit; however, he would then get a credit representing his share of the tax that the company had already paid. The net effect of this dazzlingly complex change would be to wipe out all taxes on dividends for a stockholder whose personal income tax bracket is 50% or less. The resulting savings, Simon argues, would be a powerful incentive for individuals in all brackets to spend less and invest more of their incomes, thus supplying the economy with badly needed new capital.

Few experts doubt that the U.S. needs to invest more of the national income. Its rate of investment, currently about 15% of gross national product, is one of the lowest in the industrialized world (TIME, July 28). But many liberals doubt that Simon's plan is the right way to go about it. Joseph Pechman, a member of TIME'S Board of Economists, says that the Treasury Secretary's proposal "by and of itself will have very little impact on total savings." Pechman contends that Simon's plan should be considered only as a part of a broader tax reform package--one that would make up the $14 billion loss of revenue to the Treasury by raising the yield from other taxes.

Slim Chances. Democrats on the Ways and Means Committee last week objected strongly to Simon's emphasis on lowering corporate taxes. Said Chairman Al Ullman: "I just simply cannot adjust my thinking to a reduction of corporate rates that would shift the burden further to the individual taxpayers." Another criticism is that Simon's proposed reductions for individual taxpayers would make the tax system less progressive, by giving the biggest benefits to upper-income people, who own more stock and collect more dividends than individuals in the lower brackets.

Simon concedes that his program "is not good politics," and its chances of being adopted by the present liberal Democratic Congress are slim. Still, his proposal should stimulate public debate on a long-neglected issue: how to trigger a faster rate of capital accumulation that would enable the U.S. to finance the myriad private and public investments it must pay for in the next few years.

This file is automatically generated by a robot program, so viewer discretion is required.