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Under the on-the-job provisions the Bureau of Apprenticeship and Training and the employer sign an agreement in which the employer agrees to provide certain training. In over 90 percent of the cases the trainee is an actual employee of the company. The Bureau of Apprenticeship and Training pays the employer for instructors' fees, scrapbooks, training materials, but not any portion of wages of trainees. Here again it should be easy to determine the amount to which the credit may be applied.
3. Wages and salaries of secondary workers in a cooperative work-study program with a secondary school; college; or business, trade, or vocational school.
These expenses should be easy to determine because the co-op program operates through specific agreements between the employer and the school, at both the high school and college levels.
4. Tuition and course fees paid to an institution of higher education or an accredited business, trade, or vocational school.
The definitions of eligible institutions included in this paragraph are taken from the National Defense Education Act, in the case of institutions of higher education, and from S. 600 in the case of business and trade schools.
To administer this portion of the act, the IRS would examine the return to see what institutions received the payments, compare with the list of institutions approved by the accrediting commission listed by the Commissioner of Education, and approve the credit if the institution is listed.
5. Home study course fees paid to an accredited college or correspondence school,
This is very similar to paragraph 4 above.
6. Expenses to the taxpayer of organized group instruction, including class. room instruction, including expenses for the purchase or lease of books, testing and training materials, classroom equipment and related items, and instructors' fees and salaries. More than the first five categories, this is the area where the IRS would have to set some guidelines. The intent here is to cover those expenses which would be eligible for Federal reimbursement were the group instruction contracted for under section 204 of the Manpower Development and Training Act. If the instruction actually were under the Manpower Development and Training Act, the employer could not claim a credit under this paragraph, since his expenses would be reimbursed and thus not expenses “to the taxpayer."
Third, the initial bill contained the requirement that employees remain op the payroll for at least 12 months before the employer could claim the credit. This was objected to on two grounds: First, it would be tedious and expensive to try to keep tabs on each individual employee who was trained for a year thereafter, and the application of the carryback provisions would complicate reporting; and second, certain industries, such as the construction, ski resort, and agricultural processing industries, do not work a standard 12-month year and thus could not make use of the credit.
The obvious way to meet these criticisms would have been to eliminate the employment period altogether. It was decided, however, to reduce it to 3 months, which should in most cases remove the second objection and the second part of the first one.
Fourth, the initial bill would have deprived the taxpayer of credit in the case of an employee who was trained but later fired for good cause. The new ver sion provides that the credit can still be claimed when the employee terminates at his own discretion, incurs disability or death, or is discharged "for reason. able cause based on the behavior of such employee.” This still would prevent a credit to a taxpayer who trained new employees and then laid them off within 3 months. Discharge of an employee because of a slowdown in sales or production would disallow the credit, because such “cause” would not be based on the employee's behavior.
Fifth, a new paragraph was added to make explicit what had been the intent of the earlier bill: that expenses for training managerial, supervisory, human relations, professional, and advanced scientific personnel, and for training in subjects not contributing specifically and directly to such individual's job or prospective job with the taxpayer, could not be claimed in computing the credit.
The intent of this language is to bar credit for such courses as graduate-level mathematics, personnel psychology, advanced management skills, speed reading, plant safety, and art appreciation.
Beyond these five major changes the new bill is essentially the same as the earlier version. A training expense must still be tax deductible under section 162 of the code, relating to trade or business expenses. As before, the credit is appli
cable in addition to the deduction, and in addition to the deduction, and in addition to whatever other credits may be claimed under other sections of the code.
One provision of the earlier bill, repeated in this bill, has caused enough confusion to warrant a detailed explanation. This is the provision, taken verbatim from the investment credit provisions of the 1962 act, for computing the maximum amount of credit allowable. It can best be clarified by means of an example.
The maximum amount of credit that a taxpayer may claim for 1 taxable year is $25,000 plus 25 percent of his tax liability in excess of $25,000.
Suppose a taxpayer has a tax liability to the Federal Government of $125,000 for a tax year.
The maximum amount of credit that he could claim under the act is $23.000 plus 25 percent of the tax liability in excess of $20,000. The tax liability in excess of $25,000 is $400,000-$425,000 to $25,000. Twenty-five percent of this $100,000 is $100,000. The maximum that could be claimed is, thus, $25,000 plus $100,000, or $125,000.
The taxpayer then adds up his allowable employee training expenses. Case A: Suppose his training expenses amount to $2 million. Seven percent of $2 million is $140,000. Since this is in excess of the maximum allowable$125,000, the most the taxpayer could claim would be $125,000. Case B: Suppose the figure for allowable training expenses is $1 million. Seven percent of $1 million is $70.000. Since this figure is less than the maximum allowable, the taxpayer would claim the full $70,000.
I think this explanation will make clear how the maximum amount of the credit is computed. In no case, of course, would the credit exceed 7 percent of the allowable training expenses. It can easily be seen that a firm would have to spend about $357,000 on allowable training expenses to claim a $25,000 credit. Only the largest firms will find it necessary to compute the maximum amount, since the great majority of taxpayers will not have allowable training expenses in excess of the $357,000 figures.
Before closing, Mr. President. I should like to recapitulate some of the reasons Why job training by private industry is preferable to equivalent institutional job training programs.
First, job training by private industry minimizes the necessity for Government intervention and regulation in the economy. Instead of taking money in taxes, paying a number of bureaucratic middlemen, and spending the difference on public programs, the tax credit method gives a true incentive to business to accomplish the same ends much more efficiently. The Government does not need to get into the business of screening instructors, determining curriculum, supporting trainees, and other such appendages of Government-run programs, beyond the point of assuring that useful training is, in fact, being imparted by the employer. Federal-State complications, elaborate placement procedures, and general administrative problems are largely avoided. It is interesting in this connection to note that the British Government, faced with the identical problem in 1963, chose to promote job training through private industry instead of setting up an elaborate Government-operated program. The British Industrial Training Act of 1964 vests responsibility for organizing job training programs with joint labor-management boards, one for each major industry, which use the proceeds from a payroll tax to support training programs conducted by the employers.
Second, the great majority of those trained by private business are actually employees on the payroll
. A number of studies, notably that by Prof. Richard Cloward of Columbia University's School of Social Work, reported in the January 1965 issue of American Child, have shown that the motivation of an unskilled and unemployed person to complete a training program bears a direct relation to his perceived chance for obtaining employment promptly at the conclusion of his training. Much of the dropout problem in such institutional programs as the Job Corps and the Manpower Development and Training Act are traceable to a sense of discouragement and uncertainty felt by the trainee with respect to his job chances after training. When the trainee has been positively assured that he will be hired for a given job if he satisfactorily completes the training, the chances that he will abandon the program decrease drastically. One of the most pitiful spectacles to me, Mr. President, is the spectacle of a man who has completed a Manpower Development and Training Act institutional program, only to find that there are no job openings for him in his area.
When private firms are responsible for the training, however, the trainee is almost invariably
either hired at the beginning or given a firm promise of employment when his training is complete. Recognition of the importance of this concept is included in the provision of the Human Investment Act that the trainees must be on the payroll for at least 3 months after their training for the taxpayer to claim his tax credit.
Third, when private industry trains a man it invests in him. That investment is made with the expectation that the trainee can contribute to the company's productivity as an employee following training-else it would be difficult to justify the expense to the stockholder. Thus there is a built-in bias in favor of the employer giving top quality training, carefully designed to prepare the trainee for a position for which a worker is needed. It would make little sense for a firm to train men and women as a public service project, and then see its investment wasted because the company has no appropriate job openings. Speaking on this point, Prof. William Faunce of the Labor and Industrial Relations Center of Michigan State University has said, “A retraining program which did not involve retraining with respect to specific job openings is not a meaningful retraining program.” Here training by private industry has a great advantage over Government-run programs.
Fourth, the instructors in on-the-job training programs are directly involved in the latest day-to-day developments in the field. Unlike instructors schools, they are in the forefront of innovation and technological change, and thus can give, by and large, more up-to-date instruction to trainees.
Fifth, private industry can train workers on the latest models of machines without investing in new equipment for the purpose. Faced by the rapid pace of innovation in many training fields, schools too often are left with the choice between trying to train people on obsolete equipment, or obtaining new equipment, with a resulting increase in the cost of the training program. This fact accounts for a large part of the cost savings that can be realized by utilizing the resources of private industry for job training.
Sixth, by training the trainee in the context of an actual job situation, private industry provides a more realistic preparation for continued employment. The trainee is spared the oblem of making what may be a difficult adjustment from a simulated to an actual worksite. To many trainees at the bottom end of the ladder, the prospect of regular employment with a company is a strange and bewildering experience. To have to adjust to this situation at the moment of maximum subconscious anxiety—just when training in an institutional program has been completed-puts an additional psychological burden on the worker, which may be retlected in poor performance. This factor does not apply, of course, in the case of longtime workers who are merely changing from one line of employment to another via retraining. In the case of a hard core unemployed person, however, it merits consideration.
Seventh, on-the-job training has conclusively proven to be more economical than the equivalent institutional training. Experience of the Bureau of Appren. ticeship and Training in comparing per hour costs of trainees in institutional and in on-the-job training programs shows that where the average cost of the former runs over $5 per hour, the latter cost the taxpayer only 55 cents per hour. Even when the wage of the trainee, paid by the employer, is added on, it is still obvious that the on-the-job programs are more than twice as economical as the school programs.
Eighth, on-the-job training is adaptable to any size training class and to any location, urban or rural. Institutional classes are limited to minimum numbers which may not exceed the required number of workers in a given occupation. Institutional facilities are not often available at all in rural areas: private business, however, can design programs for even one trainee-small firms with one apprentice in training are not uncommon. In fact, as of spring, 1962, more than half of the apprentices surveyed in a national survey conducted by the Labor Department were employed in establishments with fewer than 100 workers.
Last, but not least, there is what I believe to be an important philosophical advantage in job training by private industry. Increasingly the advocates of radical change urge upon us a new reliance on Government-most commonly the Federal Government-for the cure to society's ills. Far too often, in my opinion, Congress has succumbed to these entreaties, while tending to ignore or belittle the great resources of the private sector of our economy. Passage of the Human Investment Act would, I believe, add new emphasis to the undeniable fact that the principal source of America's strength today has not been Govern
ment, but the American system of free enterprise, the most productive known to man since the dawn of history.
This fact is recognized clearly by the Republicans here in Congress. Today, under the leadership of the distinguished Representative from Missouri, Thomas B. Curtis, 44 Republican Members of the House are sponsoring legislation identical to the Human Investment Act I am now introducing in the Senate. I am grateful that so many respected Members of the other body have received this tax credit approach to job training by private business with such enthusiasm. I hope the architects of the Great Society, both in Congress and the executive branch, will give the most earnest consideration to the principle embodied in the Human Investment Act in the months ahead. Speaking for myself, I pledge my wholehearted willingness to cooperate with the administration and the majority in producing legislation of this kind to harness for the improvement of America's vital labor skills nothing less than the might of America's great free enterprise system itself.
TECHNICAL EXPLANATION OF HUMAN INVESTMENT ACT OF 1965 This measure is patterned after the investment credit provisions added to the tax law by the Revenue Act of 1962. It is analogous to that provision in almost every respect.
The Revenue Act of 1962 provided a credit against taxes for investment in certain depreciable property. The credit amounted to 7 percent of the qualified investment. There were, however, top limits of the credit measured by so much of the tax liability as does not exceed $25,000, plus 25 percent of the tax liability in excess of $25,000. Tax liability in this frame of reference meant the tax imposed without reference to personal holding company or accumulated earnings increments less credits against tax already provided for by law (foreign tax credit, dividend credit, tax exempt interest, and retirement income credit).
in the case of a husband or wife filing a separate return the top limit is measured in terms of $12,500 of tax liability instead of $25,000 except where the spouse of the taxpayer has no qualified investment for or no unused carry back or carryover credit credits for such earlier investment to that tax year. The effect of this limitation is to put the same limit on sole proprietorships and partnerships as would be imposed on corporations.
Affiliated groups must reduce the top limit available to them individually by apportioning the top limit among the members of the group. Once again, this provision provides that related corporations or business groups shall get no more than the credit allowed single business entities.
A carryback and carryover are provided for any year in which the credit exceeds the limitations imposed. The excess is carried back to each of the 3 taxable years preceding the unused credit year and carried over to the 5 taxable years following the unused credit year. However, the top limit applies to the amounts allowable for credit for those carryback and carryover years. For example, if the tax credit for 1969 exceeded the limitation for 1969 by $10,000 then that $10,000 could be carried back to 1966. If, in 1966 the credit allowed amounted to $25,000 and the top limit for that year was $30,000 only $5,000 of the $10,000 carryback could be applied to the tax year 1996. The remaining $5,000 of unused credit could be applied to the 1967 tax year if there was any leverage between the credit for that year and the top limitation.
Where a net operating loss carryback causes an excess of credit over the top limitation the carryback provisions on the excess for that year are not available In other words, where a net operating loss carryback to 1968 from 1963 wiped out or reduced taxable income for that year and a credit for investment in qualified property had been allowed for that year, 1965, the loss of the credit for that year because of its excess over the top limit (which was reduced by the application of the net operating loss carryback) cannot be recouped by a carryback to the 3 tax years preceding 1965, but can only be applied as a carryover to the succeeding 5 tax years. This restriction eliminates the possibility that tax returns would be subject to amendments for a full 6 prior years (3 carryback Fears for net operating loss plus 3 carryback years for unused investment credit).
To this point the Human Investment Act and the investment credit plan of the Revenue Act of 1962 for investment in certain depreciable property are almost identical. Under the Human Investment Act credit against taxes of 7 percent is allowed instead for investment in specified training programs for
employees and prospective employees. Otherwise, the top limitation is com. puted in the same way. The same treatment is accorded married persons and affiliated groups. The same carryback and carryover provisions are made and the impact of net operating loss carrybacks which reduce or eliminate the credit allowable is the same. Unlike the provisions for phasing in the credit for inrestment in property over the first year of the plan, however, a full credit is allowed for training expenses incurred in 1966.
The sole difference of substance between the Human Investment Act and the credit for investment in property is in the nature of the investment or expenditure for which the credit applies.
Under the Human Investment Act there are six categories of employee train. ing expenses toward which credit may be claimed:
1. The wages and salaries of apprentices in registered apprenticeship progams;
2. The wages and salaries of workers enrolled in on-the-job training programs under section 204 of the Manpower Development and Training Act of 1962 ;
3. Wages and salaries of employees who are participating in cooperative workstudy programs involving alternate periods of study and employment;
4. Tuition and course fees paid by the employer to a college or vocational, trade or business school for the training of an employee;
5. Tuition and course fees paid by the employer to a recognized home study school or college for the training of an employee;
6. The expenses to the employer of organized group instruction, including classroom instruction, including the expenses for instructor's salary, books, equipment, training materials, etc.
A credit will not be allowed if
1. The training expenses are not deductible under section 162 as trade or business expenses ;
2. Employees trained are not retained on the payroll for at least 3 months following the completion of training;
3. Prospective employees trained are not hired upon the completion of train. ing and kept on the payroll for at least 3 months;
4. The training is of a managerial, supervisory, professional, or advanced scientific nature.
Exceptions are made in items 2 and 3 above in cases of death, disability, voluntary separation, or firing for cause.
Finally, similar in spirit to the amendment of the investment credit provisions which appeared in the Revenue Act of 1964 and which eliminated a section requiring a reduction in the value of the property, when computing depreciation to the extent of the credit taken, the Human Investment Act in no way reduces or limits the deductibility of expenses of training incurred nerely because a credit is also available based on those expenses. Such qualified expenses remain 100 percent deductible while at the same time a credit against tax in the amount of 7 percent of those expenses is fully allowed.
[From the Congressional Record, Sept. 9, 1965, p. 22400 ff.]
THE HUMAN INVESTMENT ACT OF 1965: A NEW APPROACH TO MEETING THE
CHALLENGE OF UNEMPLOYMENT
The SPEAKER. Under previous order of the House, the gentleman from Missouri [Mr. Curtis) is recognized for 60 minutes.
(Mr. Curtis asked and was given permission for all Members to revise and extend their remarks and include extraneous matter.)
Mr. CURTIS. Mr. Speaker, America's greatest asset is its human resources. These constitute a kind of capital far more important than financial capital or physical assets, machinery, structures and equipment. In the human knowledge and human skills of our population rests a productive strength far more important than plant and equipment. We can be sure that if we were somehow to lose these physical assets the roots of our competitive economic strength would remain intact
Thus today I and 43 other Republican Members of the House of Representatives are introducing the Human Investment Act of 1965. This measure will encourage individual firms—both small and large to train workers to fill the need for