Mr. LIDSTONE. With the Senator's permission, I will deliver to the subcommittee a more formal revision of my remarks. I again apologize for the inability to do so in the short time given me.

Senator Pell. Thank you. In other words, will it be different from the statement you made?

Mr. LIDSTONE. It will be, shall we say, tied in a little more specifically with the bills.

Senator PELL. We would like the record really to show more the remarks as you made them.

Mr. LIDSTONE. It will be made more formal than my remarks. Senator PELL. The record will be adjusted. I was struck with the point you made, the use of a credit instead of a subsidy. I have noticed the increasing popularity of the 7percent credit which is dealing with the investment credit to Thailand, countries abroad.

I can see it being used for more and more things, and I am wondering if it is not going in direct contravention to the desire we all have to simplify the Revenue Code, and I wonder if you would enlarge that as a tax lawyer, if in faet we should try to achieve the same objective through subsidy rather than use the tax credit?

Mr. LIDSTONE. Senator Pell, as you have indicated, the tax credit provisions are already extremely complicated. The definitional and interpretative problems have become incredibly difficult and, with further extension, will become even more complicated. Yet it is and will become a popular device to encourage people to move in a desired direction because stimulus is directly given to the purchase of capital equipment or investment abroad, et cetera, through the 7 percent credit which is, indeed, a direct benefit to business as an immediate return on the investment while depreciation, however rapid it may be, allows the business to recover its costs.

I feel that there should be there is no longer any valid basis for my friends in the Treasury Department or my friends in the academic world to object to the extension of the credit device to practically anything that one wishes to encourage.

My comment, Senator Pell, was directed to the fact that when the income tax rate on successful corporations was at 52 percent or even during the excess profits tax years when the tax ranged between 65 and 80 percent, so that the employer had a relatively small amount of the cost of training programs, it is difficult to see any evidence that there was ever any serious interest in training programs which were not compensated in full by the Government or, as in the case of utilities, where I think, as a matter of a public policy, they are forced to have well-trained employees.

My concern is that I do not really believe that a 7-percent credit will be a sufficient financial inducement to persuade employers to institute training programs when the income tax rate is reduced to 48 percent. A 7-percent credit, assuming that it will all be usable by the emplover, that is assuming that it is not tied into the invecment credit

, will bring the full benefit to 55 percent, which is not much differerit than what we had for many years--apart from the excess profits tax years--when there was little interest in training programs.

I seriously doubt that the financial inducement of the 7-percent credit would be sufficient. I might also point out that I was on record


of doubting whether the 7-percent credit in the capital industry was itself sufficient, but at that time I did point out that I thought that the psychological impact, particularly in the large corporations, that the shareholders would be saying, “Why do you not use this credit?" would probably have more of a benefit than the financial aspect of the investment credit.

I think that this was the cycle, or at least the experience that I have had with clients that I advise for tax purposes. It was pressure from within as opposed to the financial advantages. The psychological pressure then turned into another pressure, that is, the sale of used equipment at lower prices.

As a matter of fact, you may recall that it was only 1 year after the enactment of the investment credit that the law was changed in order to achieve its full impact of the incentives offered to business by the investment credit because at the outset, the 7-percent credit was deducted from basis for depreciation purposes.

I cannot see any statistical or other record that the investment credit really caused much of an increase in the sale of capital equipment, because we have been in a period of rather significant prosperity and of desires to cut costs, to automate, et cetera. The investment credit

, I believe, merely encouraged people to do what they were going to do anyway. I think that the use of the tax credit device in a training program

is. indeed, an ingenious method of accomplishing a desired result of encouraging employers to institute and expand training programs. I have a feeling that subsidies are terribly hard to justify except in specific Government contracts.

I believe that the whole system of the tax credit is probably going to be expanded, Senator Pell. The only other alternative would be to allow taxpayers a 150-percent deduction for training expenses,

and this I do not think is fair to taxpayers who are unable to justify their own training programs.

Senator Pell. Why would it have to have 150, why could it not be 100 percent?

Mr. LIDSTONE. 100 percent, 200 percent

Senator PELL. Why would it not be simpler with a straight deduction?

Mr. LIDSTONE. Anyone who has a training program now has a straight deduction. It is a straight deduction. What we are now trying to do is to give a benefit to taxpayers who have training programs. We are now saying that you will have a deduction plus a return of 7 percent actual cash. Senator Pell. The deduction would remain in these bills?

Mr. LIDSTONE. Yes; it would. Indeed, the existence of the deduction is the trouble I pointed out before—and I am sorry that Senator Javits did not hear it—that the company which is receiving significant funds from the Government for instituting a training program under a Government contract is already receiving a 100-percent benefit. Under his bill the credit device as it now stands would give him another 7-percent benefit.

This is a fine benefit to larger firms, but my clients are in the 300 to 1,000 employee level and cannot see sufficiently far ahead to justify either the organization or the continuation of a training program.

Even a marvelous training program which was developed at Government expense for 40 employees under one defense contract was dropped. There was no use for it. The employees are relatively young so there has been


small turnover. Senator PELL. I thank you very much, indeed. Senator Javits? Senator Javits. I would like to ask one question. I notice your emphasis upon clients; they are law clients I assume?

Mr. LIDSTONE. I use this for illustration, sir. I explained that in order to find out a little more about what was currently being used, I canvassed some of my clients, tax clients in the industrial field, to see what they were actually doing in the field of on-the-job training of employees.

Senator Javits. Now, what about the foundation? Do we have any testimony as to its attitude, and if so

Mr. LĪDSTONE. The foundation is in anyway interested in any device, whether it is by subsidy, by a tax credit, by direct schooling, any and every way which will encourage on-the-job training. It is the foundation's view and attitude that training employees on the job institutionally is absolutely vital for the American economy, completely apart from automation. It is absolutely vital to replace, upgrade, and update skills which were caused by either dislocation of business or dislocation of employees because of automation.

Now, to this extent the foundation is behind every activity which can be developed to encourage training by employers and by the Government, by schools, by communities, and every other way.

Senator JAVITS. Are you testifying as to the foundation's position on this legislation? Mr. LIDSTONE. I am testifyingSenator JAVITs. Is the foundation for or against these bills? Mr. LIDSTONE. Sir, the foundation has a provision in its bylaws and charter that it is prohibited from taking specific positions. It will as objectively as possible give information which will assist interested persons, congressional bodies, in doing it.

Let me say this, sir: Individually I am very much in favor of the credit device to encourage on-the-job or other training. My comments, sir, are solely as to strengthening the bills through definition and through elimination of-if the Senator will pardon-the possibility of conflict between the Treasury Department and the Labor Department

. I must also point out the possibility that the 7-percent credit is not in itself a sufficient financial inducement. I do not know enough about psychology to know whether the impetus itself would be there. I therefore, apologize to the Senator for equivocating as far as the position the foundation is concerned. I do not think it would be proper for me as a tax lawyer or anyone on behalf of the foundation to take a specific position. Senator Javits. Thank you, Mr. Chairman. Senator Pell. Thank you, Mr. Lidstone. This is the final witness in this series of witnesses in connection with the bills which are placed before the Finance Committee, and this marks the adjournment of this series. The record will stay open for a 10-day period.

(Whereupon, at 12:30 p.m., the hearing adjourned, to reconvene subject to call of the Chair.)





Washington, D.C. The subcommittee met at 10:10 a.m., pursuant to call, in room 4232, New Senate Office Building, Senator Edward M. Kennedy of Massachusetts (presiding pro tempore),

Present: Senators Kennedy of Massachusets (presiding pro tempore), and Randolph.

Committee staff members present: Stewart E. McClure, chief clerk; Arnold Nemore, professional staff member; and Stephen Kurzman, minority counsel, and Roy Millenson, minority clerk.

Senator KENNEDY of Massachusetts. The subcommittee will be in order.

Today we continue the hearings begun last September on encouragement of on-the-job training. I wish to thank the chairman of the Employment and Manpower Subcommittee, Senator Clark, for permitting me to chair these hearings on a subject that is of deep interest to me and other members of this committee.

The 2 days last year were devoted to testimony on a specific approach to the training problem, namely, the possible use of tax incentives to induce private employers to undertake or expand on-the-job training efforts. I believe the record that we compiled constitutes a balanced evaluation of the tax incentive approach, and should be of assistance to our colleagues on the Finance Committee when they consider the various bills before them.

In sessions this week and next, we hope to study and evaluate the existing on-the-job training program developed under the Manpower Development and Training Act. We plan to look at the program not only with regard to its past performance, and its administrative problems, but also to the future of the on-the-job training in a changing economy.

Specifically, we wish to inquire into the varying emphases given within the program to the different types of clientelle, particularly those most difficult to employ. This also leads us to an investigation of what has been done to utilize on-the-job training to assist us in providing equal employment opportunities. Of concern is the extent to which the program has and can be used to help prepare members of minority groups for employment with employers who have been unable to find qualified minority group workers.

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