there will have to be a substantial expansion of conventional on-thejob training.

Employers will have to hire these young people without all of them having fulfilled formal education requirements and train them for the kinds of jobs they can do.

Senator KENNEDY of Massachusetts. And along that line, are you suggesting that the tax credit is a means to stimulate?

Dr. MIERNYK. Yes; I feel that the tax credit is important because it would provide an incentive to employers. Employers in general, I suspect, feel that they have to look after their own affairs rather than those of society, so you do need some financial incentive for them to participate in these programs, but I would think that a concomitant of that and a necessary one-is a careful review of hiring standards to make sure they are not blocking out of the labor force many youngsters who can become productive workers.

Senator KENNEDY of Massachusetts. Senator Pell?

Senator PELL. No questions.

Senator KENNEDY of Massachusetts. I want to thank you, Professor, very much for coming here before the committee and giving us your testimony and also responding to questions.

Dr. MIERNYK. Thank you, sir.

Senator KENNEDY of Massachusetts. We certainly appreciate it. Our final witness this morning, Mr. Herrick K. Lidstone, of Battle, Fowler, Stokes & Kheel, of New York City.

I know Senator Javits wanted to say some words of welcome and introduce him to members of the subcommittee. He does not have to introduce him to the acting chairman, because the acting chairman was a student of his years ago. We are delighted to have him here. Senator Pell?

Senator PELL. If I might add my own word of welcome, too, to an old friend and as far as the Senator's business partner, I hope Mr. Lidstone's other ventures will be more profitable than the one we engaged in.

STATEMENT OF HERRICK K. LIDSTONE, OF BATTLE, FLOWER, STOKES & KHEEL, NEW YORK, N.Y., ACCOMPANIED BY BARBARA GRAY, EXECUTIVE ASSISTANT

Mr. LIDSTONE. Thank you for your kind words, Senator Kennedy and Senator Pell.

I am here as a result of an invitation which was extended to me through the American Foundation on Automation and Employment. As both Senator Kennedy and Senator Pell know, I am primarily a tax lawyer and, therefore, I should explain that my law partner, Theodore W. Kheel, who is an officer and member of the foundation, has asked me to testify because of the tax implications of on-the-job training bills previously introduced by Senator Javits, S. 2343 and Senator Prouty, S. 1130.

I must confess that just a while ago I became aware of Senator Prouty's most recent introduction of S. 2509, an extensive revision of S. 1130. Although S. 2509 has faced some of the problems raised by me, my comments, of necessity, are primarily limited to S. 1130 and

S. 2343.

Mr. Kheel, at least until this morning, was attending and participating in a seminar on automation in Denmark and I know that he would like to have me extend to the subcommittee his appreciation for the hearing in which the views at least my views-on behalf of the foundation, will be received.

I would also like to apologize to the committee for the absence of a prepared statement, but I received word of the invitation only last Friday and I was out of town Monday.

With the subcommittee's permission, I should like to state that I am accompanied by Miss Barbara Gray, who is the executive assistant of the foundation, and who has spent a great many hours yesterday trying to put my tax jargon into jargon that is acceptable to the labor and employment field.

The two earlier on-the-job training bills of Senator Javits and Senator Prouty represent, so far as I can see, the first serious legislative effort to encourage private industry to analyze the skills which its employees should have and to provide the employers and employees with the opportunity to promote these skills while the employees are gainfully employed.

As a tax lawyer whose interests and good fortune have led him to become an adviser to a number of American businesses which have expanded abroad, I have had the opportunity of watching the rather amazing results achieved in foreign countries through formal employee training programs actually organized by American business for employees.

As a result of my vicarious experiences in training programs for foreign employees and of a number of years of discussions with economists and businessmen in this country as to the skills which are required in modern business, I have wondered why even some of the companies which have been so successful in foreign training programs have not established similar programs for domestic employees.

Since I am primarily a taxman, and in order that my appearance before you today might give you some completely up-to-date information about the employment practices of what will be termed small-to-medium-sized businesses, I reviewed with a number of industrial clients over the weekend the nature and extent of their actual on-the-job training. I regret to say that almost without exception the industrial firms with which I discussed this question have no formal training programs below the managerial and supervisory levels. The only exceptions relate to training for Government contract work or to meeting specific safety precautions.

One example furnished me to illustrate on-the-job training related to a particularly complicated, negotiated Government contract in which the company was faced with the choice of diverting already skilled manpower from its normal business operations or hiring and training new manpower. For three reasons the company chose to hire new manpower and to train them:

The first reason was that the considerable amount of leadtime between the awarding of the contract and the actual beginning of production on the contract permitted the introduction of a training program. The second was that the product was such that the Government contract required stringent safety precautions which could be taught only through a training program.

The third was that, because it was a negotiated contract, the employer was fully reimbursed for the training program and the efforts that went into it.

Of course, when the costs of training programs are compensated as preproduction costs in Government contract work, it is almost impossible not to justify the initiation of a training program. Yet, I regret to say that this particular company has since terminated its training program and does not expect to renew it.

So far as I have been able to check, in the short time available to me, I could find no other evidence of any other blue collar or nonsupervisory level training programs, except limited activities involving safety precautions or instructions in the use of new tools, special clothing and the like.

The many firms I contacted during the last weekend would qualify as "small businesses" and the results are the same as those which have unanimously been reported by the few authors who have written on the subject. Years of experience have led me to various conclusions and questions.

The first is: What is the best way to encourage industry to participate actively in training programs? Should it be the so-called stick technique which, in some way, forces an employer to do something, or the carrot technique, that is, rewarding them for doing what they probably should do?

Since I am personally opposed to punitive systems, I have been reluctantly considering whether training programs should be developed through subsidies or indirectly through the tax system. Obviously, the subsidy method is the most practical and efficient way to encourage the employer.

But the Senate bills of Senator Javits and Senator Prouty have obviously chosen the tax benefit route. Although there may be a number of objections from theoreticians to using the tax system as a tool for a social benefit, I do not believe that such objections can be given any practical, theoretical, social, constitutional, sociological attention. Our tax system has so often been used to benefit or to discourage various activities that even the legitimate complaints of the purists seldom merit serious consideration.

Nevertheless, when one seeks to use the tax system-whether it is as a credit or a deduction or a capital gain-as a tool to encourage or to discourage something, the user must conform to the technical standards required of tax legislation into which it may be difficult to fit social and economic goals such as those of encouraging employee training programs.

Thus, within the two bills, S. 1130 and S. 2343, unless the definition section is considerably amplified and clarified, the purposes of the bill can become frustrated because of the obvious differing attitudes of the Internal Revenue Service and the Department of Labor and the sponsors of the bills. S. 2509 appears, on the surface at least, to have gone far to eliminate this technical objection.

Let me give you a specific example: Neither S. 1130 nor S. 2343 makes it clear whether employee training program expenses would include the wages or the salaries paid an employee who was actually attending the program. Yet not to do so would very seriously lessen their value as an encouragement to well-organized, formal training programs which will be used to upgrade or update employees' skills.

The reverse side of the same coin is, should a tax credit bill to encourage employee training programs give the benefit of a tax credit to those employers who are being fully compensated, under Government contracts, for instituting a program? These bills do that.

A second conclusion is that few small businesses feel that they have either the time or the resources to justify formal training programs; and even restricted programs can be financially justified only to a very limited extent. In other words, small business normally believes that it cannot predict sufficiently in advance either increases or changes in its manpower needs and skills to justify the introduction of a formal training program. This inability of small- to medium-size businesses to predict future manpower needs and skills leads to pirating of trained personnel from other companies when a need for a new skill or an increase in trained manpower arises.

In their present form, the Senate bill will do little or nothing to reduce the pirating of trained, experienced manpower. Furthermore, the relatively limited benefits which small business can possibly realize probably would not justify what, as a taxman, I would apologetically characterize as a bureaucratic intrusion of the Labor Department's approval of specific programs and methods into an already highly complicated tax system.

Therefore, if the Senate and the Congress desire to proceed with the idea of the tax credit or tax benefits, I urge that definitions be written in in order to avoid the redtape and the bureaucratic problems which will arise if the prerequisites for training program deductions are administered by two departments.

Apart from Government-financed programs, I believe that it is well agreed that even large business has relatively few formal blue-collar training programs. The issue which Senate bill 2343, and its earlier counterpart, S. 1130, presents is whether a 7-percent credit will be sufficient to encourage employers to institute new or expanded programs without some other form of Government assistance.

Certainly, there is very little evidence of business interest in initiating such programs while the income tax rate was 52 percent or even during the World War II and Korean war excess profits tax years, when effective rates were 65 to 80 percent. When one adds a 7-percent credit to what will be a top 48-percent tax rate one must wonder if 7 percent is financially enough to justify the cost and effort required before an employer can institute a training program.

In my opinion, a 7-percent benefit is not a sufficient inducement to persuade employers to initiate training programs. However, perhaps the psychology of specific emphasis given by the credit device to training programs may stimulate the programs.

A point which I think requires emphasis is that tax returns and tax information are for the most part held inviolate by the Treasury Department. I believe that the possibility of publicity or open information as to training programs and training methods may discourage even large employers from seeking the benefit of a tax credit if it is necessary to apply for formal approval to the Secretary of Labor.

I believe that most experts in the field of manpower and education, and certainly all the employers with whom I am familiar, would agree with Dr. Miernyk, the previous witness, that broad institutional education should be completed before on-the-job training is commenced.

Yet the very young, particularly those from low-income families, face a dilemma when they are confronted with the choice between a lowpaying, dead end job and finding the financing of some form of technical or vocational training. Therefore, should not an individual who takes a job in order to provide himself with a financial basis, either for further education or for technical or vocational training at night or on weekends, be given an incentive or a tax benefit at least roughly comparable to that which the person who is on a job receives if the additional training he is paying for is required as a prerequisite for his retaining the job?

For example, as you undoubtedly are aware, the schoolteacher, whose board of education requires the continuance of education as a condition of maintenance of employment, receives a tax deduction for this expenditure, but the schoolteacher who wishes to change from being a teacher of English to a teacher of language would not be permitted a deduction.

Therefore, I believe that the Senate bills introduced to encourage on-the-job training should be welcomed by employers, employees and students and by those of us who are concerned with the problem of improving American skills as an indication of a hearty interest on the part of the Congress in encouraging training programs. The emphasis which I have given to certain problems is not intended in any way to detract from the attractiveness of the idea of incentives. I do believe that the proposal contained in the Javits and Prouty bills merits serious study both in this committee and in the Committee on Finance.

My only purpose in raising questions is to indicate:

First, that I believe that the history will show that the financial benefit to be achieved as a result of a 7-percent tax credit is probably insufficient to induce employers to initiate a training program while it will give unexpected windfalls to employers who already have training programs.

Secondly, I believe that it would be far to the advantage of general training and the national defense if, instead of having a broad definition with control in the Secretary of Labor, for the goals of the committee to be written specifically into a tax incentive bill so that the training program costs, techniques, and methods could be administered entirely by the Treasury Department with perhaps the cooperation of the Department of Labor.

Senator PELL (presiding pro tempore). Senator Javits?

Senator JAVITs. I just wanted to thank Mr. Lidstone, especially as he is appearing here in the place of Mr. Kheel, who is a very prominent New Yorker, and representing the American Foundation on Automation and Employment, as well as his own views. That foundation, I would like the record to show, was founded in a most enterprising way by Al Hayes, formerly president of the International Association of Machinists, and by the late John Snyder, who was the president of U.S. Industries and testified before us in a most important way on the future problems of manpower in American business.

I welcome Mr. Lidstone's testimony, which I am sure will be very helpful to us in our deliberations.