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LIBRARY
ROOM 5030
.JUL °'-W7fi
TREASURY DEPARTMENT
The Department of theJREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
/
November 3, 1975
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3.2 billion of 13-week Treasury bills and for $3.3 billion
of 26-week Treasury bills, both series to be issued on November 6, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
26-week bills
maturing May 6, 1976
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing February 5, 1976
High
Low
Average
Price
98.601
98.577
98.584
Discount
Rate
Investment
Rate 1/
5.535%
5.629%
5.602%
5.71%
5.81%
5.
Price
97.098
97.058
97.072
Discount
Rate
Investment
Rate 1/
5.740%
5.819%
5.792%
6.01%
6.10%
6.07%
Tenders at the low price for the 13-week bills were allotted 42%,
Tenders at the low price for the 26-week bills were allotted 50%
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Boston $
46,295,000
New York
' ,917,620,000
Philadelphia
53,185,000
Cleveland
61,740,000
Richmond
41,380,000
Atlanta
53,470,000
Chicago
339,190,000
St. Louis
48,265,000
Minneapolis
29,510,000
Kansas City
38,290,000
Dallas
32,105,000
San Francisco. 329,120,000
TOTALS?^,990,170,000
Accepted
$
40,680,000
2,387,720,000
53,185,000
58,580,000
41,380,000
53,425,000
184,260,000
44,265,000
26,350,000
36,500,000
30,105,000
244,640,000
Received
Accepted
$
76,645,000 $
54,645,000
3,976,005,000
2,655,005,000
33,355,000
8,355,000
101,170,000
31,170,000
54,045,000
42,035,000
29,990,000
27,990,000
341,290,000
159,780,000
30,050,000
26,050,000
41,170,000
31,170,000
23,025,000
20,025,000
19,710,000
15,710,000
337,280,000
229,280,000
$3,201,090,000 a $5,063,735,000
$3,301,215,000b
a/Includes $ 534,045,000 noncompetitive tenders from the public.
b/Includes $ 209,245,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
The Department of theTREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE ON DELIVERY
ll:oo A.M. EDT
NOVEMBER 3, 19 75
II
CONTACT:
STEVEN SARLE
964-2042
REISSUE OF THE TWO-DOLLAR BILL
Secretary of the Treasury William E. Simon today
announced the reissuance of the $2 bill as a Federal
Reserve Note, Series 19 76. The new note will be issued on
April 13, 1976 (Thomas Jefferson's birthday), and will
feature an engraving of Thomas Jefferson from a portrait
painted in the early 1800fs by Gilbert Stuart. The back
of the note will incorporate a rendition of the "The Signing
of the Declaration of Independence", painted by John Trumbull
during the post-Revolutionary War period, and which now hangs
in the Trumbull Gallery at Yale University.
James Conlon, Director of the Treasury's Bureau of
Engraving and Printing, estimated the new $2 note will result
in a savings of $4-7 million per year in printing of $1 notes.
An average of 1.6 billion one dollar notes are printed
per year, which accounts for 55-60 percent of the total
volume of currency printed. The new $2 note is expected to
replace about one-half of the "ones" in circulation over a
period of the next several years. Conlon emphasized that the
new note would be printed in sufficient volume, 400 million
per year, to assure wide availability. This production volume
is sixty times greater than the average annual production of
the previous $2 U.S. note, last issued in 1966.
The two-dollar bill was first issued as U.S. currency in
1862, and in subsequent years the bills were issued under a
variety of authorities as U.S. Notes, Silver Certificates,
Treasury Notes, and National Currency, using a number of
different portraits. A relatively small number of $2 notes
were produced annually until August 10, 1966, when the
Treasury Department announced that the printing of the bill
would be discontinued.
WS-442
(Over)
- 2In his announcement today. Secretary Simon stated
that "the American people are the key to the success of
this program. The reissue of the $2 bill can add a new
convenience to our currency system and help in reducing
the cost of government."
"While the design of the new note is consistent with
the nation's bicentennial", the Secretary added, "it is not *
solely a bicentennial commemorative, but rather the twodollar bill fulfills a permanent and practical role in the
use of American currency. Additionally, as two-dollar bills
gradually come to be substituted for ones, fewer pieces of
currency will need to be carried by individuals and small
cash transactions will be greatly facilitated."
John Warner, Administrator of the American Revolution
Bicentennial Administration said, "With the reissue of the
$2 bill bearing the portrait of Thomas Jefferson and the
signing of the Declaration of Independence we continue
to reaffirm our pride in this document -- the touchstone
for the definition of America. The circulation of this
new bill during our 200th anniversary year of the signing
of the Declaration of Independence will serve as a continuing
reminder to all of the courageous men who gave us a legacy
which we now pass on to Americans in our Century III."
The authority to determine the denomination and design
of all U.S. currency is given to the Secretary of the
Treasury through the Federal Reserve Act as passed by
Congress in 1913.
oOo
mDepaltmentofiheTREASURY
VASHINGTON, D.C. 20220
TELEPHONE 964-2041
FACT SHEET ON THE $2 BILL
Monday, November 3, 1975
The new $2 Federal Reserve Note will feature an engraving
of Thomas Jefferson on the front and a rendition of the
John Trumball painting, "The Signing of the Declaration of
Independence" on the back.
The new bill will bear the signatures of William E. Simon,
Secretary of the Treasury and Francine I. Neff, Treasurer
of the United States.
225,000,000 of the new $2 bill will be available for issue
by Thomas Jefferson's birthday (April 13, 1976) with an
annual order of 400,000,000 available before July 4, 1976.
Issuance of the $2 note will result in Federal Government
savings of $4-7 million per year over the next several
years due to the gradual replacement of approximately onehalf of the existing $1 notes. One-dollar notes currently
account for 55-60% of U.S. currency produced annually.
Issuance of the $2 note will result in a total savings to
the Federal Reserve System of approximately $27 million
(in 1976 dollars) over the next 5 years (FY 1976-FY 1981).
The new note will be issued by the Federal Reserve System
and available to the public from commercial banks on
Tuesday, April 13, 1976.
The most recent issue of the $2 bill was the 1963A series
U.S. Note featuring Thomas Jefferson on the face and
Monticello on the back. The last printing of this bill
was in May, 1965, and it was officially discontinued in
August, 1966, due to lack of public demand. At the time
of discontinuance, $2 bills represented only 1/3 of 1 percent
of the total currency outstanding.
Previous production volume of the $2 bill was approximately
6 million pieces of currency annually.
The history of two-dollar denomination dates back to 1776.
It has been issued in various forms as Treasury notes,
Silver Certificates, National Bank currency and U.S. Notes.
The Secretary of the Treasury is authorized to determine
the design and denomination of currency by the Federal
Reserve Act (12 USC 418) of December 23, 1913. The $2
denomination is specifically authorized by PL 88-36 of
June 4# 1963..
WS-44^
-oOo-
WA
The Department of theJREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
November 3, 19
QUESTIONS AND ANSWERS
ON THE $2 BILL
WS-444
:
Why is the $2 bill being reissued?
A: As identified in the Harvard School of Business
study on the feasibility of a $2 note, there is
an apparent opportunity for the productive use
in commerce of a currency denomination mid-range
between the existing $1 and $5 notes. The Bureau
of Engraving and Printing was prompted to make
its original proposal for the reintroduction of
the $2 note in 1969 by its recognition of the
disproportionate frequency distribution of
denominations produced. The $1 bill represents
approximately 60% of the total number of
currency pieces produced annually. In addition
to providing a mid-range denomination between the
$1 and $5 notes to reduce this distribution skew,
the opportunity for substantial savings was
identified through the reduction in the total
number of currency notes required. Other nations
utilizing the decimal system, such as Canada and
Australia, have successfully utilized the $2
denomination. The Harvard study supported the
selection of the $2 denomination as appropriate,
based on public preference for this denomination.
Q: Whose signatures will appear on the new bill?
A: As required by law, the signatures on the $2 bill
will be those of the Secretary of the Treasury,
William E. Simon, and Treasurer of the United
States, Francine I. Neff.
Q: What will be the series date of the new bill?
A: The series date will be 1976.
Q: Will the new $2 bill be a Federal Reserve note
or a U.S. Note?
A: As with other currency issued today, the new
bill will be a Federal Reserve Note. The only
current exception to this policy is the $100
bill, which is issued as a U.S. Note to meet
statutory requirements.
2
What is the difference between the Federal
Reserve Note, the U.S. Note and the Silver Certificate?
The basic differences in these notes lie in the
Congressional authorizations and the original
obligations of the U.S. to holders of the
currency. Legal tender or United States Notes
were issued as oversized notes on March 10, 1862.
The familiar size U.S. Notes are printed today
only in $100 denomination. Silver certificates,
authorized by Congressional Acts of February 28,
1878 and August 4, 1886, were redeemable in
silver and were last issued in 1957. Federal
Reserve Notes were authorized by the Federal
Reserve Act of December 23, 1913.
Is the $2 bill intended to become a permanent
addition to our currency?
The $2 note will be a permanent, useful part
of American currency and will be printed in
sufficient volume to assure its availability.
When and where will the new bill be available?
The new note will be available at commercial
banks nationwide on April 13, 1976.
Who will be issuing the $2 bill?
As with all currency, the $2 bill will be issued
by the Federal Reserve System which will supply
individual banks throughout the country with
sufficient numbers of the new bill to meet public
demand.
Will there be a limit on the number of new bills
a person can buy from a bank?
There will be no limit on the sale of $2 bills.
Who designed the new bill?
The Treasury's Bureau of Engraving and Printing
designed the new $2 note.
3
What considerations were involved in the design
of the back of the new note?
Several designs of the $2 bill back were
prepared utilizing renditions of the original
painting. Optimum security design considerations
include the opportunity for sufficient geometric
lathe engraving in borders and the aesthetic
presence of unprinted areas for visibility of
distinctive fibers. In addition, aesthetic
considerations include the preference for
"fade-out" treatment of subject matter in lieu
of frame vignettes. In order to include these
desired features and to maintain adequate subject
size of the vignette within the limitations of the
existing banknote dimensions, it was necessary
to "crop" the vignette rendition of the painting.
Who painted the original of the Jefferson engraving?
The Jefferson engraving is based on a portrait
painted in the early 1800's by Gilbert Stuart.
Why was not a portrait of a minority member or
a woman chosen for the face of the new bill?
In response to the preponderance of recommendations
that a new $2 currency note should have a
Bicentennial theme, it was determined that the
Signing of the Declaration of Independence
epitomized the birth of our Nation and was
therefore the most appropriate vignette for
the back design. Thomas Jefferson is universally
recognized as the author of the Declaration of
Independence and, accordingly, the use of his
portrait on the face design was judged most
suitable in the relationship with the back
vignette. The fact that the Jefferson portrait
had been used on the earlier $2 U.S. Note contributes
to the desirable familiar association by the
public of a currency portrait and denomination.
Other possible subjects for the face portrait
were considered, including Martin Luther King
and Susan B. Anthony. None of the alternative
choices are as appropriately and consistently
associated with the Bicentennial theme as is
Thomas Jefferson.
4
Q:
Who painted the original of the painting which
is represented on the back of the new bill?
A: The engraved vignette on the back of the $2
note is based on a painting of the Signing of
the Declaration of Independence by John Trumbull.
The original work was done by Trumbull during
the post-Revolutionary War period; he later was
commissioned to reproduce the painting in the
Capitol Rotunda in Washington, D.C. The only
perceptible difference between the painting
and the mural is that in the painting the
foreground figures appear to be seated on a
wooden platform, while in the mural the platform
appears to be covered by a rug. The original
painting is now in the Trumbull Gallery, Yale
University.
Q: Why will the $2 bill be accepted by the public
now when it was not accepted before?
A: The Harvard Business School study, which included
a nationwide Harris poll, clearly indicated that
the public would be receptive to the new $2 bill.
Previous lack of acceptance was primarily due to
the relatively small number of bills available.
Q: What will prevent people from confusing the $2
bill with other bills?
A: The size of all U.S. currency notes is the same
and provides additional counterfeit deterrence
in requiring the user to inspect the security
printing to determine denomination. Each
denomination, however, is repeatedly identified
on the note in numerical and lettered description
as well as by the familiar association of face
portraits and back vignettes. Accurate
identification of the denomination of any U.S.
currency note, therefore, requires only that the
user inspect each note visually. Just as current
denominations are not confused with one another,
there is no anticipated confusion associated
with the $2 bill.
5
Is the $2 bill being issued to commemorate the
Bicentennial?
The $2 note is being issued in conjunction with
the Bicentennial; it will, however, be issued
in the years subsequent to the Bicentennial and
thus will be an important part of our permanent
currency system and not simply a Bicentennial
commemorative.
How much money will be saved by issuing the
$2 bill?
The results of a projection of currency costs
with and without the $2 bill for an extended
future period show that total savings to the
Federal Reserve System as a result of the
introduction of the $2 bill will amount to
approximately $34 million over the next five
years (FY 19 76 - FY 1981). Expressed in terms
of 1976 dollars, the savings would be approximately
$27 million.
How many two-dollar bills will be printed
by April 13?
More than 225,000,000 two-dollar bills will be
printed by April 13, 1976.
How many $2 bills are being printed?
225 million $2 notes will be available for issue
by Thomas Jefferson's birthday (April 13, 1976) with
a current annual order of 400 million available
before July 4, 19 76.
How many new bills will be printed each day?
During initial production, 11 million $2 bills
will be printed per day.
How long will it take to print the first $2 bill?
The total preparation time for any new denomination
takes seventeen weeks. Printing of a note
involves one day each for the face, back and
overprinting.
6
Did the Bureau of Engraving and Printing
have to install new equipment to print the new
bill?
No new equipment is required to print the
new note.
What kind of press machine will be used in
printing the $2 bill?
Four plate mono-colored intaglio.
Why was the $2 bill discontinued in 1966?
The bill which was discontinued in 1966 was
the $2 United States Note, part of the limited
currency required by statute to be issued by
the Treasury Department (now satisfied in full
by the issuance of $100 United States Notes).
In 1966, approximately 6 million $2 U.S. Notes
were produced annually; the total currency
requirements at this time approximated 2-1/2
billion notes per year. Consequently, the
bill was a statistical rarity which precluded
reasonable opportunity for familiarity or
circulation by the public.
How many old $2 bills are still outstanding?
There are approximately $135,288,000 of $2
bills outstanding from all previous issues.
Are any old $2 bills being held by banks?
No $2 bills are currently being held by any banks.
When were the $500, $1000 and $10,000 bills
discontinued and why were they stopped?
The $500, $1000 and $10,000 bills were
discontinued with the 1934 series. They were
held mainly by banks and clearing houses for
inter-bank transactions. Though generally
available to the public, they were not in demand,
as most purchases of this size are accomplished
by check or credit card.
7
What was on the back of the old $2 bill?
The 1963 A series bearing Jefferson on the
face and the signatures of U.S. Treasurer,
Kathryn Granahan and Secretary of Treasury
Henry Fowler, had a view of Monticello and
the motto "In God We Trust" on the back.
Which bills are currently being printed in
the U.S., and what portraits appear on them?
Denomination Face
$1
$5
$10
$20
$50
$100
What is
Back
George Washington Great Seal of the U.S.
Abraham Lincoln
Lincoln Memorial
Alexander Hamilton U.S. Treasury
Andrew Jackson
White House
Ulysses S. Grant
U.S. Capitol
Benjamin Franklin Independence Hall
the life-span of a $1 bill?
The average life for the $1 and $5 bills is
18 months and three years, respectively.
Old bills are returned for destruction by
incineration or marceration (pulping).
How many old bills are taken out of circulation
each day?
Except for a modest annual growth in currency
needs of approximately five percent, the Bureau
of Engraving and Printing considers its average
daily production of between 11-12 million pieces
of currency to be for replacement.
What is the $2 bill currently worth as a
collector's item?
The Treasury Department does not set a collector'
value for any currency or coin. The numismatic
value of the $2 bill is determined by the
collectors' current marketplace price. The
reissuance of the $2 bill is not expected to
affect the value of any notes now held by
collectors.
Is there any plan for a "collector's" or special
numismatic issue?
The numerous complexities involved in manufacturing,
packaging and adjustment of issuing procedures
within the time frame available preclude any
practical consideration of such a "special"
issuance. There is every reason to believe that
the interests of serious numismatists will be
well-served by the long-standing collecting
practices relating to the standard issues of
currency.
What kind of impact will the new bill have on
our economy?
There will be a positive impact on the U.S.
economy since every American, by demanding and
using the $2 note, can participate in lowering
government costs.
Are prices expected to rise in conjunction with
the $2 bill. For example, will $1.85 items now
cost $2.00?
Commercial pricing is not generally predicated
on the availability of a new currency. The $2
bill does not alter the consumers' capacity to
purchase but it will increase efficiency as twos ,
are gradually substituted for ones.
Will the issuance of the new bill have an effect
on coinage circulation?
Since the $2 note will gradually be substituted
for $1 notes there is no anticipated effect on
current coinage circulation.
How much will it cost retailers to accommodate
the $2 bill to their cash registers?
There are no net incremental costs to retailers
in this case, as the adjustments are minor and
will result overall in less currency handled.
Major business machine manufacturers indicate
that the Canadians, who also have a $2 bill,
utilize cash registers identical to those used
in the U.S. with no difficulty.
9
How will banks benefit from the use of the
new bill?
By using the $2 bill, banks will be allowed to
handle fewer pieces of currency and will
subsequently have lower costs.
What steps are being taken to prevent
counterfeiting of the $2 bill?
The new note contains the same high degree of
engraving excellence and security features
that are present in all other currency series.
It is, therefore, no more or no less susceptible
to counterfeiting than any other current note.
Have any members of Congress received a $2 bill?
No members of Congress have received an advance
issue of the new bill.
oOo
The DepartmentoftheJREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
w\J
iS7
November 3, 1975
HISTORICAL NARRATIVE
ON THE $2 BILL
WS-445
76
The $2 denomination enjoys a rich tradition in American
history. The $2 bill originated on June 25, 1776, when the
Continental Congress authorized issuance of $2 denominations
in Mbills of credit for the defense of America." Under this
authority, 49,000 bills of $2 denomination were issued.
During the Civil War, a July 11, 1862, Act of Congress
permitted the $2 denomination as U.S. Currency, and it reappeared in subsequent years as over-size U.S. Notes, Silver
Certificates, Treasury notes and National Currency using a
number of different portraits, including Alexander Hamilton,
James B. McPherson, Winfield S. Hancock, William Windom, and
George Washington.
In 1928, the more familiar size $2 U.S. Note with the
portrait of Thomas Jefferson, third U.S. President and author
of The Declaration of Independence, was issued.
The most recent printing of the $2 denomination was the
1963-1963A series of U.S. notes last printed in May 1965 and
officially discontinued by the Treasury Department on August 10,
1966. At that time, low levels of public demand were cited as
the primary reason for discontinuance. These low circulation
levels have subsequently been attributed to the low production
levels of the bill, which was printed solely to help meet
statuatory requirements for approximately $320 million of U.S.
Notes. The total volume of the $2 bill was $139,321,994 on
June 30, 1966, or approximately one-third of one percent of
total outstanding currency; these low production levels helped
create an image of scarcity to the general public. The general
unavailability of the bills combined with historical superstitions, resulted in increased Government costs of handling,
printing, distributing and destroying these "oddities."
The 1963 Series A note, which was most popular in New
England and some western states, bore Jefferson on its face
and Monticello on the reverse. It was a U.S. Note and bore
the signatures of then Secretary of the Treasury Henry Fowler
and Treasurer of the United States Kathryn 0. Granahan.
Since 1966, and particularly in the past eighteen months,
there has been increasing interest in a $2 note as expressed
by Congress, the American Revolution Bicentennial Administration
(ARBA), the general press, the public, the Federal Reserve System
and collectors. Various bills have been introduced in Congress,
usually calling for a specific design or commemorative issue.
On September 30, 1970, ARBA unanimously proposed reissuance of
a $2 note with a Bicentennial design (Ref. Transcript of Proceeding, Advisory Panel on Coins and Medals, p. 232, 9/30/70).
The Director of the Bureau of Engraving and Printing, responsible
- 2-
77
for the printing of all U.S. currency, first proposed reissuance
of the $2 note in 1969 to achieve cost savings through a
reduction in the printing volume for $1 b l " ! ; / " i 0 H J e J ^ J y
groups and task forces composed of members from the Treasury
Department, Federal Reserve System and Bureau of Engraving and
Printing have studied the $2 note situation. I n " J " ^ 6 ; ' " I J '
the Fediral Reserve commissioned a study by a group of Harvard
Business School graduate students to evaluate the marketing
feasibility of reissuing the $2 bill. This s t ^ d y ! 9 c 7 P ^ ^ f t ^ n
May 1975, found no latent public demand for the $2 denomination,
but did find that if reissued in substantial quantity the public
would use the note. The study also noted that public superstitions" and misconceptions could be easily overcome. Retailers
and bankers indicated support for the note if it is J"u e J "*
sufficient quantity to meet demand, if it is demanded by the public
and if it is issued as a permanent part of the circulating currency
(Copies of the Harvard study Executive Summary available upon
request to Mr. Steven Sarle, Department of the Treasury, Main
Treasury Building, Office of Public Affairs, Washington, D.L.,
20220, telephone (202)964-2042),
Based on the results of these various reports and increased
public interest, the Secretary of the Treasury believes it to be
in the best interest of the American public and economy to reissue
the $2 bill. The average annual requirement for $1 notes is 1.7
billion pieces of currency or 55-60 percent of all currency requirements. By supplanting one-half the face value of the annual
requirement for $1 notes with $2 notes, the Treasury can save
substantial manufacturing costs. The amount to be saved is
estimated to be $35 million over the next five years (FY 1976
through FY 1981) or $27 million in 1976 dollar-terms. Savings to
the Bureau of Engraving and Printing and the Federal Reserve
System will result from reduction in sorting, printing, maintenance, storage, custody, shipping, destruction and improved
space utilization at the Bureau.
A Bicentennial design was selected to help maximize public
acceptance and interest, though the new note is not simply a
commemorative issue. The Treasury plans to issue 400 million notes
per year to assure sufficient volume as a circulating medium and
intends that the $2 note become a permanent part of our currency.
At these levels of production the $2 note will provide great
convenience to the American people by accommodating the decreased
purchasing power of $1 bills due to worldwide inflation since
1966 and allowing the public to carry fewer $1 bills. It is the
Treasury's hope that these consumer conveniences, combined with
potential cost savings and the appealing design of the new note,
will assure its acceptance by the public.
The
new
note
will
be
produced
from
steel
intaglio
engraving
measures
on
ject
similar
the
plates,
back
to
2.36"
all
master
using
x
other
5.90"
die.
the
denominations
on
same
Printing
the
green
master
will
and
ofadie,
U.S.
be
black
accomplished
and
currency.
inks
the as
back
used
The
from
2.18"
face
on 32
all
x5.61
sub- M
/ /
other currency. The face design, featuring a portrait of
Thomas Jefferson painted in the early 1800's by Gilbert Stuart,
incorporates the principal features of the previous $2 U.S.
note, with a change in designation to Federal Reserve Note.
A Federal Reserve Bank seal will supplant the numeral "2" on
the left, and Federal Reserve Bank identification numbers will
be added. As required by law the note will bear the signatures
of William E. Simon, Secretary of the Treasury, and Francine I.
Neff, Treasurer of the United States. The Series date will be
1976.
The back design of the $2 bill is completely new. The
vignette is surrounded by a geometric lathe border with the
ribbon title and denominations in bank note Roman lettering.
The words "In God We Trust" appear at the bottom center in
Gothic lettering, and the title "Declaration of Independence
1776" is in Roman lettering in the center of the lower border.
The engraved vignette on the back of the $2 note is based on the
painting, "The Signing of the Declaration of Independence" by
John Trumbull. The vignette on the $2 note differs from the
original painting in that production, security and aesthetic
considerations required dropping six figures from the rendition;
the six appeared on the extreme left and right hand borders. The
original work was done by Trumbull during the post-Revolutionary War
period. He later was commissioned to reproduce the painting in
the Capitol Rotunda in Washington, D.C. The only perceptible
difference between the painting and the mural is that in the
painting the foreground figures appear to be seated on a wooden
platform, while in the mural the platform appears to be covered
by a rug. The original painting is now in the Trumbull Gallery,
Yale University.
The Secretary of the Treasury has authority to determine
denomination and design of all currency. The $2 note does not
require legislation since it already is authorized as a Federal
Reserve Note or U.S. Note by the Federal Reserve Act of 1913.
Federal Reserve concurrence has been received since they actually
distribute all currency. Numerous questions have been raised
relative to changing the color, size or shape of the $2 note. The
continuing monochromatic, single color face and single color back
design of United States currency in all denominations is based on
established technical judgment of the optimal counterfeit deterrent
values in this technique. Similarly, the uniform size of all
denominations of U.S. currency contributes to its security in requiring users to inspect the bill before use to determine denomination.
It is critical that the public understand their wide acceptance and use of the new note will save the government money and
colorful
eliminate
that
indicated
the new
superstitions
the
that
note
previous
today's
will problems
be
of
educated
produced
folklore
public
of regarding
scarcity.
in ample
will quantity
not
The
thebe
Harvard
$2deterred
bill;
so as
study
if
to
byanythe
- 4thing, they add to the mystique and charm of this bill.
Bankers and retailers have indicated varying degrees of
concern over potential teller confusion, change-making errors,
forms changes and the need for minor retraining of personnel.
However, they have all indicated they could easily accommodate
a new $2 note given sufficient lead time (usually 3-4 months),
a substantial volume of bills produced and wide public acceptance.
Major business machine manufacturers anticipate no problems in
accommodating the new note with existing equipment; Canadian
merchants, who use the same cash register equipment as is used in
the U.S., have no problems in accomodating the $2 billProduction plans call for the Bureau of Engraving and Printing to commence printing in February and have 225,000,000 $2 notes
available for issue by Thomas Jefferson's birthday (April 13, 1976)
and a yearly order of 400,000,000 notes available before July 4,
1976. This production schedule of 11 million notes per day will
assure availability at each of the Federal Reserves 39 distribution points in time for public release on the date of issue.
The Treasury is planning a broad public introduction aimed
at informing all Americans of the benefits and permanence of the
new $2 note. Major trade, professional and consumer association/
organizations are being asked to actively support the reissuance
in the public interest and to help educate their constituencies.
The public is the key factor in the circulation of coin and
currency. Banks order specific denominations and block of currency
from the Federal Reserve to meet their business and individual
customers* needs. When a coin or bill is not popular, it is simply
returned through this mechanism to the Federal Reserve Banks. These
market dynamics clearly indicate that the public must recognize
the importance of using the $2 note in everyday transactions. By
demanding this note, every American can participate in reducing
government costs.
oOo
Detailed History of each prior $2 bill released
U.S. NOTES (LEGAL TENDER ISSUE) LARGE SIZE
Series Date
1862
1869
1874
1875
1878
1880
1917
I°l2i Description Authority for Initiating
No Record
14,408,000
11,632,000
11,518,000
4,676,000
28,212,000
317,416,000
Alex. Hamilton
Thorn. Jefferson
Reason for Discontinuance
Act of Congress 7/11/1862
3/3/1863
ft
Replaced by Series 1869
" 1874
tf
ft
ft
Authorized by Secretary
Treasury William G. McAdoo
t,
l g 7 5
it
1 8 7 8
"
1880
t,
1 9 1 ?
Replaced by Small Size Currency
TREASURY NOTES
1890
§ 1891
24,904,000
James B. McPherson Act of Congress 7/14/1890
No Record Available
SILVER CERTIFICATES
1886
21,000,000
1891
1896
1899
20,988,000
20,652,000
538,734,000
Winfield S.
Act of Congress 8/4/1886
Hancock
tt
tt
William Windom
it
Allegorical Vig.
tt
Geo. Washington
"
»•
Replaced by Series 1891
No
tt
tt
tt
tt
^cord
tt
1896
1899
Available
FEDERAL RESERVE BANK NOTE (NATIONAL CURRENCY)
1918
68,116,000
Thorn. Jefferson Federal Reserve Acts of 1918 No Record Available
NATIONAL BANK CURRENCY
First Char- Not Avail.
ter Period
(No Series)
1,381,205
(Series 1875)
Allegorical Vig. Act of Congress
2/25/1863 § 6/3/1864
tt
tt
Replaced by Series 1875
No Record Available
UNITED STATES NOTES (SMALL SIZE)
Series Date
Total
Description
Authority for .Initiating
Reason for Discontinuance
Portrait of Thorn. Secretary of Treasury-Intro- Replaced by Series 1953
Jefferson
duction of Small Size Currency
1928 thru
1928G
430,760,000
1953 thru
1953C
79,920,000
tt
Introduction of 18 Subject
Plate
1963 thru
1963A
18,560,000
tt
Introduction of 32 Subject
Plate
it
tt
tt
1963
Lack of demand by the lunlii
- ^
Federal law 18 U . S . C 5 0 4 permits illustrations of paper m o n e y in black and white of a size less than % or m o r e than 11/2 times the size of
the genuine obligation for n e w s w o r t h y purposes in books, journals, newspapers or albums. Other reproductions are strictly prohibited.
Federal law 18 U.S.C. 5 0 4 permits illustrations of paper m o n e y in black and white of a size less than % or m o r e than 11/2 times the size of
the genuine obligation for n e w s w o r t h y purposes in books, journals, newspapers or albums. Other reproductions are strictly prohibited.
*
The DepanmehtoftheJREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
37
November 3, 1975
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3.2 billion of 13-week Treasury bills and for $3.3 billion
of 26-week Treasury bills, both series to be issued on November 6, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED 13-week bills : 26-week bills
COMPETITIVE BIDS: maturing February 5, 1976
High
Low
Average
Price
Discount
Rate
Investment
Rate 1/
98.601
98.577
98.584
5.535%
5.629%
5.602%
5.71%
5.81%
5.78%
maturing May 6, 1976
Price
97.098
97.058
97.072
Discount
Rate
Investment
Rate 1/
5.740%
5.819%
5.792%
6.01%
6.10%
6.07%
Tenders at the low price for the 13-week bills were allotted 42%,
Tenders at the low price for the 26-week bills were allotted 50%
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
46,295,000
Boston
$
New York
' ,917,620,000
53,185,000
Philadelphia
61,740,000
Cleveland
41,380,000
Richmond
53,470,000
Atlanta
339,190,000
Chicago
48,265,000
St. Louis
29,510,000
Minneapolis
38,290,000
Kansas City
32,105,000
Dallas
San Francisco. 329,120,000
T0TALS$4,990,170,000
Accepted
$
40,680,000
2,387,720,000
53,185,000
58,580,000
41,380,000
53,425,000
184,260,000
44,265,000
26,350,000
36,500,000
30,105,000
244,640,000
Received
$
76,645,000
3,976,005,000
33,355,000
101,170,000
54,045,000
29,990,000
341,290,000
30,050,000
41,170,000
23,025,000
19,710,000
337,280,000
$3,201,090,000 a $5,063,735,000
Accepted
$
54,645,000
2,655,005,000
8,355,000
31,170,000
42,035,000
27,990,000
159,780,000
26,050,000
31,170,000
20,025,000
15,710,000
229,280,000
$3,301,215,000b
a/Includes $ 534,045,000 noncompetitive tenders from the public.
bylncludes $ 209,245,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
?7>
CONTACT:
FOR IMMEDIATE RELEASE
GEORGE G. ROSS
202/964-5985
November 4, 1975
UNITED STATES-UNITED KINGDOM AGREEMENT
REACHED ON NEW INCOME TAX TREATY
The Treasury Department today announced that delegations
from the United States and the United Kingdom have reached
agreement on a new income tax treaty to replace the convention
now in effect.
The new convention reflects changes that have taken place
in the British tax laws as well as developments in the Model
Convention prepared by the Committee on Fiscal Affairs of the
Organization for Economic Cooperation and Development (OECD).
The treaty establishes rules for the taxation of business, personal service, and investment income earned by residents of one
country from sources in the other. The treaty provides also for
non-discriminatory tax treatment and reciprocal administrative
cooperation.
Under the proposed new treaty, the United Kingdom will pay
a tax credit to United States investors in United Kingdom corporations with respect to the advance corporation tax collected
in the United Kingdom, in the case of dividends paid by a corporation resident in the United Kingdom to a United States corporation which controls 10 percent or more of the voting stock
of the United Kingdom corporation, the payment by the United
Kingdom will equal one-half of the credit which would be payable
to an individual resident in the United Kingdom, less 5 percent
of the aggregate amount of the dividend and the tax credit. In
the case of other United States shareholders, the payment will
equal the full credit payable to an individual resident in the
United Kingdom less 15 percent of the aggregate amount of the
dividend and the tax credit.
WS-454
- 2 The United States will reduce its withholding tax on
dividends going to corporate investors resident in the United
Kingdom and owning 10 percent or more of the voting stock of
a United States corporation to 5 percent. The treaty will limit
the United States withholding tax on dividends paid to other
United Kingdom shareholders of United States corporations to
a maximum of 15 percent. The existing reciprocal treaty exemption from withholding for payments of interest and royalties
will continue to apply.
Although not incorporated in
pated that the United Kingdom
States branch banks operating
same footing, with respect to
banks.
the convention, it is anticiwill take steps to put United
in the United Kingdom on the
foreign tax credits, as British
The treaty is expected to be signed before the end of the
year and the text released shortly thereafter. If approved
,
by the two governments in accordance with their constitutional
procedures, the treaty will take effect, generally, on January 1,
1975.
o O o
^Department of theJREASURY
HINGTON, D.C. 20220
TELEPHONE 964-2041
iU
*r
FOR RELEASE AT 4:00 P.M.
November 4, 1975
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $6,500,000,000 , or
thereabouts, to be issued November 13, 1975,
as follows:
92-day bills (to maturity date) in the amount of $3,200,000,000*
or
thereabouts, representing an additional amount of bills dated August 14, 1975,
and to mature February 13, 1976
(CUSIP No. 912793 YT7 ) , originally issued in
the amount of $3,101,440,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,300,000,000, or thereabouts, to be dated November 13, 1975,
and to mature May 13, 1976
(CUSIP No. 912793 ZG4) .
The bills will be issued for cash and in exchange for Treasury bills maturing
November 13, 1975,
outstanding in the amount of $5,802,140,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,984,440,000.
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their face amount will be payable without
interest.
They will be issued in bearer form in denominations of $10,000,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Monday, November 10, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
multiples of $5,000.
Tenders over $10,000 must be in
In the case of competitive tenders the price offered must
be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
(OVER)
39
/
-2-
securities and report daily to the Federal Reserve Bank of New York their positi
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.
Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on November 13, 1975, in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing November 13, 1975.
ment.
Cash and exchange tenders will receive equal treat-
Cash adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954. the
amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notic
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from any Federal Reserve Bank or
The Department of theJREASURY
WASHINGTON, D.C. 20220
IN
TELEPHONE 964-2041
CONTACT: GEORGE G. ROSS
202-964-5985
November 4, 1975
FOR IMMEDIATE RELEASE
THE UNITED STATES AND INDIA
HOLD DISCUSSIONS ON AN INCOME TAX TREATY
The Treasury Department today announced that representatives of the United States and India held preliminary
discussions in Washington October 16 and 17 to consider
entering into an income tax treaty. Representatives of
the two countries plan to meet in India in the Spring of
1976 to begin formal discussions of a proposed bilateral
income tax treaty.
At present there is no income tax convention between
the two countries.
The proposed treaty is intended to prevent double
taxation and to facilitate trade and investment between
the two countries. It will be concerned with the tax
treatment of income of individuals and companies from
business, investment, and personal services, and the
procedures for administering the provisions of the treaty.
The l!modelff income tax treaty developed by the
Organization for Economic Cooperation and Development
will be taken into account along with recent U.S. treaties
with other countries, such as the treaty with Norway, which
entered into force in 1972 and the treaties with Trinidad
and Tobago and Japan, which entered into force in 1971 and
1972, respectively.
Persons wishing to make comments and suggestions about
the discussion to be held with representatives of India
should submit their views in writing before December 1, 1975
to Charles M. Walker, Assistant Secretary of the Treasury,
U.S. Treasury Department, Washington, D.C. 20220.
This announcement appears in the Federal Register of
October 29, 1975.
#
WS-455
#
#
#
artmfnloflhttREASURY
N.D.C. 20220 ,
TELEPHONE 964-2041
II
FOR RELEASE ON DELIVERY
STATEMENT OF DAVID MOSSO
FISCAL ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE FEDERAL ELECTION COMMISSION
NOVEMBER 4, 1975
Mr. Chairman, and members of the Commission, I am pleased
to appear at these hearings to present the views of the Treasury
Department on the priority of payments from the Presidential
Election Campaign Fund.
One of the Treasury roles in the administration of the
Presidential Election Campaign Fund is to make payments to
candidates and political parties upon certification by the
Federal Election Commission. Under optimum conditions, the
Treasury would make all such payments immediately and in full.
Before making any payment, however, the Treasury is required
to determine whether the resources available to the Fund will
be sufficient, at the final windup of a campaign and at intermediate times, to make payments in accordance with priorities
established by law. It is conceivable that the resources may
be insufficient. Potentially, therefore, the payment function
could involve some significant priority decisions.
The law establishes three priority classes:
Priority 1 — Payments for nominating conventions.
Priority 2 — Payments to general election candidates.
Priority 3 — Payments to primary election candidates
(matching funds).
Within each of these three priority classes, the law is silent
about priorities among payments for nominating conventions, it
is explicit and clear as to intent about priorities among payments
to general election candidates, and it is explicit in part but
unclear as to intent about priorities among payments to primary
candidates.
WS-452
- 2 The administration of payment priorities is complicated
by the fact that certifications of payments to primary candidates,
the lowest priority, would usually come first in time? by the
fact that such certifications might be spread unevenly over a
period of some seven months or more? and by the fact that entitlements of new party candidates would not be determinable until
after the general election.
The prospect of having to make some of these priority
decisions during the 1976 presidential campaign shapes up like
this. There is presently $62 million in the Presidential
Election Campaign Fund, derived from fiscal year receipts as
follows:
FY 1973 $ 2.4 million
FY 1974
FY 1975
FY 1976 (2 months)
27.6
31.7
.3.
$62.0
If designations on tax returns were to continue at about the
same rate as last year — and I want to say emphatically that
I am not making a forecast, I am only setting up a hypothetical
situation for illustration — then another $30 million or so
would be added to the Fund by the end of the campaign, a total
of $90-95 million.
Assuming that the two major parties and their candidates
elect to use public financing, almost $50 million would need
to be set aside for nominating conventions and general election
candidates (priorities 1 and 2), leaving $40-45 million for new
parties that might qualify (priority 2) and for primary candidates
(priority 3). That would about cover payments to eight primary
candidates at the full limit of public funding, the limit being
$5 million per candidate plus an inflation factor. This
hypothetical potential would be reduced to the extent of any
new party entitlements, and would be reduced or increased
commensurate with variations in actual revenues, the number
of primary candidates, and the level of individual primary
candidates ' entitlements.
- 3 Another minor uncertainty is that all of the statutory
limits on campaign payments are subject to an inflation factor
which is not determinable until the Department of Labor certifies
the increase in the consumer price index over the base year of
1974. This certification will not be available until some time
after payments should begin in early January 1976.
Let me turn now to the questions that the Treasury must
resolve in administering the payment function in the event that
the system of priorities becomes an important consideration.
I want to preface this part of my statement with a commitment
on the part of the Treasury to work closely with the Federal
Election Commission in this matter and to give full consideration
to the Commission's views both as to principle and to practice.
I mentioned earlier that the law spelled out the priority
of payments to general election candidates. Section 9006(d) of
the Presidential Campaign Fund Act directs the Secretary of the
Treasury to withhold from payment as much as necessary to assure
that the eligible candidates of each political party receive
their pro rata share of their full entitlement. We have no
problem in principle with this provision. There is, however,
a practical problem of how to estimate the amount to reserve
for.new parties, for which entitlement is established by the
final election results. This is one of the critical points on
which we would solicit the views of the Commission. If a reserve
is^necessary, a low estimate would reduce the amount available
for general election candidates. A high estimate would reduce
ther amount for primary candidates.
Payments to primary candidates present other problems.
A simple pro rata system would be difficult to apply because
of uncertainty as to the number of potential candidates and
the amount of matchable contributions that each might raise.
If we were to reserve enough money to cover all contingencies,
the early campaigners might be kept in doubt to the point of
handicapping their campaigns.
- 4 This may be why Section 9037(b) of the Presidential
Election Campaign Fund Act seems to emphasize more of a firstcome, first-served principle of distribution. I emphasize the
word "seems" because the intent of Section 9037(b) is not all
that clear. And if you think about a strict application of
a first-come, first-served principle, you have to doubt that
such a principle would be equitable in some circumstances.
For example, assume that the Treasury determined at the
beginning of a campaign that $10 million would be available
for primary candidates, and that there would probably be ten
primary candidates. Assume further that the first certification
from the Commission was for two candidates at $5 million each.
Strict application of a first-come, first-served principle
would exhaust the fund availability even though other candidates
might be close to qualification, and building steam. On the
other hand, strict application of a pro rata principle would
require reservation of $8 million for the estimated potential
certifications, making only $1 million available to each of
the two qualified candidates when the possibility, even
probability, existed that much of the $8 million would never
be claimed. Clearly, equity must lie between these two extremes.
Accordingly, we would like to take a middle course, giving
heavy weight to actual certifications but not foreclosing
probable claims of later starters. We see no present way that
this can be reduced to a simple formula. We would welcome the
suggestions and advice of the Commission in this connection.
That concludes my statement, Mr. Chairman. I will be
glad to respond to questions.
oOo
INGTON, D.C. 20220
TELEPHONE 964-2041
Contact:
FOR IMMEDIATE RELEASE
Robert E. Harper
634-5377
ss-
NOVEMBER 5, 197 5
TREASURY SECRETARY SIMON NAMES STINSON OF NATIONAL STEEL
CHAIRMAN OF U. S. INDUSTRIAL PAYROLL SAVINGS COMMITTEE
George A. Stinson, Chairman and President, National Steel
Corp., Pittsburgh, is named Chairman of the 1976 U. S. Industrial Payroll Savings Committee by Secretary of the Treasury
William E. Simon.
Since its formation in late 1962, the Committee -- composed
of chief executives of leading industries -- has sparked the
sale of U. S. Savings Bonds through the Payroll Savings Plan.
Stinson will succeed Gabriel Hauge, Chairman of the Board,
Manufacturers Hanover Trust Co., New York. He will be installed as 14th Chairman at the annual meeting of the Committee
in Washington next January 23. Stinson has been the 1975 Steel
Industry Chairman.
In appointing Stinson, Secretary Simon said -- "It was the
best news of the day to know that you have agreed to be our
1976 Chairman of the U. S. Industrial Payroll Savings Committee.
Your acceptance of this most important volunteer position assures
us a
^ continuation of the outstanding leadership which has made
the Committee a vital force in the management of the public debt
and in promoting the stability of our economy."
The mission of the Committee is to stimulate systematic
saving through the regular purchase of Series E Bonds by employees
nationwide. Employers will be urged to sign up at least half
of all workers not now participating in the Payroll Plan; also
to obtain an increase in allotment from at least half of those
now enrolled.
Stinson is a strong believer in the economic aims of the
Bond Program. "It is to everyone's benefit to support a program that furthers fiscal stability and, at the same time, encourages personal thrift, as do Savings Bonds. The nearly $67billion in outstanding Bonds turns over less than half as often
WS-450
( over )
- 2as the marketable debt, thereby greatly aiding the Treasury's
debt management efforts. Simultaneously, Americans who purchase Bonds reap the rewards of a good interest rate, certain
tax advantages and one of the easiest and most convenient methods
of savings ever devised."
Stinson was born in Camden, Ark., on February 11, 1915. He
earned an AB degree at Northwestern University in 1936, and was
a member of Phi Beta Kappa. He was graduated from Columbia
University in 1939 with a JD degree. He was admitted to the
New York Bar that year, and served as legal assistant to the
Presiding Judge of the U. S. Tax Court, Washington, until 1941.
In the latter year, he joined the Air Corps. During his four
years of service, he attained the rank of Lieutenant Colonel and
was awarded the Legion of Merit.
In 1946, he joined the New York law firm of Cleary, Gottlieb,
Friendly and Hamilton. In 1947 and 1948, he served as Special
Assistant to the U. S. Attorney General, returning to his law
firm thereafter. Stinson has authored several books and treatises on legal subjects, is a member of the Bar in New York and
Washington, D. C , and a member of the American Law Institute.
Stinson joined National Steel in 1961, as Vice President and
Secretary. He was elected a Director in August 1963; President
in December 1963, and Chief Executive Officer in February 1966.
In May 1972, he became Chairman of the Board.
He is active in many steel industry, business and educational
activities. He is Chairman of the International Iron and Steel
Institute, and past Chairman and Chief Executive Officer of the
American Iron and Steel Institute. Stinson is a Director of the
National Bank of Detroit, the Pittsburgh National Bank, the
Mutual Life Insurance Company of New York and the Hanna Mining
Co. He is on the Executive Committee of the Allegheny Conference on Community Development and the Board of Trustees of the
University of Pittsburgh. He was a member of the President's
Commission on International Trade and Investment Policy, in
1970-71. He has received honorary Doctor of Laws degrees from
West Virginia University and Bethany College, and a Doctor of
Humanities from Thiel College.
Stinson and his wife, the former Betty Jane Millsop, have
three sons -- Thomas M., 23, Peter T., 19, and Joel M., 18 -and a daughter, Lauretta Alice, 20. They reside in Edgeworth,
Pa.
oOo
Tie Department of theJREASURY
/ASHINGTON, D.C. 20220
TELEPHONE 964-2041
77
FOR RELEASE ON DELIVERY
REMARKS OF SIDNEY L. JONES
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
PRESS BRIEFING ON NATIONAL ECONOMIC ISSUES
LOUIS ROOM, NORRIS CENTER, NORTHWESTERN UNIVERSITY
EVANSTON, ILLINOIS
NOVEMBER 5, 197 5
I. Background
A.
At yearend 1974 some analysts believed that the
sharp deterioration in economic activity would
continue—creating a world-wide depression
comparable to the traumatic experiences of the
1930's. Others argued that economic recovery
would begin by mid-year if three fundamental
adjustments could be achieved:
(1) inventories could be liquidated rapidly
enough to stimulate new production;
(2) "real" incomes could be restored to encourage
personal spending; and
(3) employment would begin to rise so that consumer
confidence could be strengthened and unemployment reduced.
B. During the first quarter of 1975 real output of
goods and services continued to decline at a seasonally adjusted annual rate of 11.4 percent but economic
conditions were already beginning to shift back toward
the long-term potential growth rate of 4 percent each
year.
C. In the second quarter the real GNP began to rise at
an annual rate of 1.9 percent. This improvement was
based largely on improving personal consumption.
D. In the third quarter a strong surge of real growth
occurred at an annual rate of 11.2 percent.
WS-4 51
-2E.
Each of the three fundamental adjustments required
for recovery have occurred—
(1) The liquidation of inventories that had
accumulated in 1974 has been largely completed
except for manufacturing. As a result, new
orders began to rise in April and total
industrial production turned upward in May.
This turnaround has been a major factor in
the economic change that has occurred.
(2) The rate of inflation declined from the doubledigit levels of 1974 to the 6 to 7 percent zone.
Although the pace of price increases is still
excessive—the improvement that has occurred
and the tax relief provided in the spring resulted in real personal disposable income
gains in the second quarter after more than a
year of declining purchasing power. Personal
spending increased rapidly as a result.
(3) As a result of improving economic activity,
employment began to rise in April and has
increased over 1-1/2 million workers since then; the
"lay-off" rate has declined steadily since
January; the number of hours worked has increased;
overtime work has increased; and the total unemployment rate has declined from a peak of 9.2
percent in May to 8.3 percent in September.
II. The announcement of the preliminary GNP figures for the
third quarter indicates the following economic developments:
A. Total real GNP increased at a very sharp rate of
11.2 percent—far above the sustainable target of
4 percent. About one-half of the gain resulted from
the inventory swing which is nearing completion.
Gains of this magnitude are not expected to be
repeated and the real GNP will probably increase at
a lower average annual rate of 7 percent over the
next several quarters before dropping back to the
long-term path in 1977. That rate of recovery will
still be substantially above long-term targets but
well below the figures just reported.
-3The key element in the recovery has been the
strength of personal consumption which increased
at an 14.1 percent rate in nominal dollars or 7.0
percent in real terms during the third quarter.
Durable goods sales—including, the improved automobile sales--led the improvement but outlays for
nondurable goods and spending for services also
increased rapidly. The near-term outlook for
recovery is dependent on continued personal consumption gains and that is why it is so important
that inflation be better controlled.
Gross Private Domestic Investment has been the major
weakness in the economy for some time. During the
third quarter the situation apparently stabilized
as business spending for plant and equipment leveled;.
off after declining in earlier quarters. Business
investment is expected to increase over the nearterm if personal spending continues and anticipated
profit improvements materialize. Spending for
residential construction has increased over the past
six months as new starts have risen from a trough
of 980 thousand starts (annual rate) in April to
1,250 starts during the third quarter. These figures
are still far below the average annual demand for new
housing starts of approximately 1.9 million units,
but at least the severe declines experienced in late
1973 and throughout 1974 have finally been reversed.
The third major category of GNP—government spending—
has provided anticipated stimulus to the economy.
1. During FY 1975 (just ended at mid-1975) the
Federal budget increased from $268.4 to $324.6
billion, an increase of $56.2 billion or 21
percent. During FY 1976 the Federal budget
is expected to report another large increase.
For Fiscal Year 1977 Federal budget outlays of
at least $370 billion are anticipated. If
actual outlays do rise to that level, that would
represent an increase of $45.4 billion, or
14 percent.
^d
-42. During the past two fiscal years then, outlays will
have increased from—
FY 1976 $370.0 billion
FY 1974 $268.4 billion
$101.6 billion or 38 percent
3. It should also be emphasized that part of these
spending increases represent temporary increases
in certain transfer payments resulting from the
severe unemployment caused by the recession. For
example, unemployment compensation benefits have
risen from $6 billion in FY 1974 to over $20 billion
in FY 1976. However, the bulk of the spending
increases are spread across traditional government
spending programs and will result in new levels of
spending which will continue to grow over the coming
years.
4. As a result of the upward momentum of government
spending—part of it temporarily exaggerated by
the recession—and the loss of tax revenues caused
by sluggish business activity, massive Federal
IP
deficits have been recorded—
Deficit
FY 1974 $ 3.5 billion
X.
tc
FY 1975 43.6 billion
n
Last decade—FY 1966--FY 1975—deficits were reported
in nine of the ten years and totaled $148.7 billion.
In addition, net borrowings for various Federal
programs not included in the Federal budget totaled
an additional $149.7 billion during that single
decade. Therefore, Federal claims on the general
pool of savings have totaled one-third of a trillion
dollars over the past 10-year period.
-55.
Current estimates of the deficit for FY 1976
are in the $70 billion zone. The final figure
will depend upon actual government spending,
decisions on tax legislation initiatives and
the pace of the business recovery in determining future tax revenues. However, it is unlikely that the FY 1976 deficit will be lower
than the estimated figure and there is some
risk that it might be higher.
E. The outlook for FY 1977 is also ominous. Even if
the President's proposal for a spending ceiling of
$395 billion is accepted, the budget outlays will
continue to increase rapidly—up about 7 percent—
and a deficit of $40 to $44 billion would occur.
If this relatively optimistic result were to actually
occur, we would still have accumulated a deficit of
over $150 billion in three fiscal years (FY 1975,
$43.6 billion; FY 1976, $70 billion; and FY 1977,
$40 to $44 billion).
III. SUMMARY
Based on the rising pattern of most economic statistics
since April, it does appear that a turning point in the economy
occurred sooner than expected and that the initial pattern of
recovery has been somewhat stronger than anticipated. This
does not mean that everything is fine or that there will not
be numerous economic disappointments over the coming months.
Inflation in the 6 to 8 percent zone and unemployment of
about 8 percent is still a most unsatisfactory combination of
statistics although improvement is occurring in both categories
At this stage of the recovery it is crucial that economic
policies contribute to a sustainable recovery, particularly
the control of inflation.
oOo
FOR RELEASE UPON DELIVERY
REMARKS OF THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION
NORTHWESTERN UNIVERSITY
EVANSTON, ILLINOIS
WEDNESDAY, NOVEMBER 5, 1975, AT 10:00 A.M.
The Politicization of Economics
Today, as never before, economic policy has become
intertwined with national and international political concerns.
For some, the emotions and concerns of the political arena have
distorted the economic realities of the marketplace, and there
appears to be a growing willingness to sacrifice economic
principles for the sake of political gains. For this reason
a growing number of policy makers are placing blame for our
economic problems on the operation of natural market forces.
Thus, we hear cries for "national economic planning," for
intensive governmental regulation, for government allocation
of natural and financial resources. To adopt such policies
would, in my view, be a sure step toward the destruction of the
most prosperous and successful economy in history, and as
important, it would place basic freedoms in jeopardy. At this
time, leaders, both in and out of government, have a particular
responsibility to relate both domestic and international policy
to the maintenance of human freedom.
WS-453
43
- 2I am not suggesting that we defend our economic system
for the sake of defending the system.
Rather, I believe it's
important to identify the benefits that have been derived
from such a system and the dangers inherent in altering it.
In this process, we must avoid engaging in rhetorical debate.
Instead, we must address the legitimate problems of all the
countries of the world openly and pragmatically.
However,
what we say, or suggest, is as important as what we do. As
such, the United States must not be without ideological
underpinnings.
We do have a system that we believe in -- it
is based on private enterprise and the freedom of the marketplace.
We must be flexible and tolerant of other people's
needs.
However, if we enter international forums without an
economic ideology, if we are "systemless," we cannot hope to
emerge from those forums with a system we can live with.
In order to appreciate fully the task ahead, let us
examine three critical international economic areas.
As we
determine the policies that should be pursued in energy, in
commodities and in investment, it is important to begin to
identify the costs involved in altering our private enterprise
system in terms of the sacrifice to human freedom.
As important
we must seek an international policy that is complementary to
our domestic policy.
President Ford has pursued a domestic
economic policy that is based on greater utilization of the
free market.
His proposals in energy which call for deregulate!
of prices of oil and gas, his concern for escalating .levels of
- 3federal spending, his veto of the farm bill and his opposition
to credit allocation all illustrate the orientation of our
domestic policy. We must strive to transform such a national
approach into an international policy.
Energy
No subject illustrates the interrelationship between
politics and economics more graphically than the field of
energy. Internationally, the pricing decisions of the oil
producing countries are political, rather than economic,
in origin. Domestically, in response to political considerations, we have created major obstacles to the efficient
market allocation of energy by regulating the price of
natural gas and by manipulating the pricing and distribution
system for oil.
Can we minimize the political influences in such a highly
charged area? Perhaps not entirely, but we must work with
other consuming countries and strive for harmony with the
producing countries. In order for this to happen, there must
be greater understanding by both consumers and producers of
each others' needs:
-- Consumers must understand the desires of the producers
for diversification of their economies and for higher standard
of living for their population.
-- Producers must understand that the rapid rise in oil
prices has placed a great economic burden on all consuming
nations, developed and developing alike.
- 4The necessary understanding will not occur, in an
atmosphere where economic principles are freely traded for
momentary political leverage. Our objective should not be
the destruction of OPEC through the creation of a politically
oriented counter cartel. We will succeed only if we can
create the objective conditions which will bring about an
expanding supply of energy at market prices. Notice that
I said "market prices" --we should not be seeking to shift
price decisions from one set of governments to another, but
rather to ensure that the market can set the price for oil.
At a time when OPEC has the ability to increase prices
unilaterally, we should not be pursuing a policy of
confrontation, calling for economic embargoes or counterembargoes. Such statements may have political appeal, but
analysis shows that such policy will not work if attempted
unilaterally by the United States. Most OPEC imports that
come from the United States could be readily replaced with
imports from the other major industrial countries.
Therefore, no embargo would be effective without the
full cooperation of all consuming countries. Principally
because of the economic consequences, it is highly unlikely
that such coordinated measures could be undertaken.
It is only by analyzing and discussing the underlying
economic impact of oil pricing that producers and consumers
can act in the best interest of each. The producers must
understand the impact that the rapid rise in the price of oil
- 5has had on the economies of the world -- economies which must
remain viable and strong if the producers are themselves
to grow and prosper.
Not enough discussion has occurred relating to the
consequences of oil price increases on non-oil exporting
countries. For instance, the oil price rise itself added
about $11.5 billion to the import bill of the oil importing
developing countries. The magnitude of this increase in
oil prices can be appreciated by noting that it is equal to
all the official concessional aid disbursed by industrial
countries to LDCs in 1974. Aid flows from OPEC countries last
year amounted to about $2.5 billion, which offset less than
25 percent of the increased oil costs of these countries.
The net deterioration on current account for the developing
countries with OPEC amounted to $8.5 billion, even after
including increased trade with OPEC and aid flows. Illustrating
such economic facts is the only effective defense to price
increases in the short term.
Don't misunderstand what I am saying -- cooperation does
not mean abandoning our principles. The United States must
not be afraid to take positions we believe are right. We
object to the current economics of oil pricing and we must be
willing to state our position clearly. OPEC has repeatedly
cited a loss of purchasing power and the cost of imported goods
as justification. Our analysis shows that since June 1964,
37
- 6-
average OPEC government revenues have risen by over 900 percent
while the price of their imports from the U.S. have only
increased by 75 percent.
Further, a significant amount of
the loss of any purchasing power can be traced directly to
oil price increases.
Recently, OPEC decided to increase prices again.
Such
action is not justified economically and will not serve in
their own long-term interests.
It could hamper the fragile
process of recovery for the rest of the world and will impose
additional burdens on U.S. consumers.
The impact will again
be felt severely by developing countries.
As important,
it will surely lead to greater consumer solidarity and more
rapid efforts to develop alternative supplies.
This visible reminder of OPEC's continuing control over
oil prices reemphasizes the need to regain control of our own
destiny.
The long-term answer lies in the development of a
sound U.S. domestic energy policy.
Unfortunately, we have
been without a comprehensive energy policy for too long.
The
result has been to make us reliant on foreign sources to the
extent of forty percent of our petroleum needs and vulnerable
to the will of others.
If we hope to remove this current vulnerability, we must
face some fundamental facts.
We must not only seek to conserve
energy, but we must also adopt policies which will increase
supplies, and pricing policies are critical.
If there is a
major lesson to be learned from our past energv policies, or
- 7 -
# /
the lact of them, it is that a system of patchwork government
regulations and short-run measures designed to head off
specific crises leads to more patchwork regulations and
short measures -- not to a viable energy policy that will
produce energy efficiently at the lowest prices to consumers.
Some of these impediments we are already all too aware
of. You do not increase investment in the energy industry
by broad brush Federal mandates for breaking up energy companies
and prohibiting them from developing and competing in additional
raw and refined energy supply sources. You also do not stimulate
long run additional supplies of crude oil and natural gas by
holding their prices below the competitive market level -although, this does encourage excessive consumption and hence,
shortages of these scarce natural resources. Nor do you
encourage investment in coal, our most abundant energy resource,
by flip-flopping on environmental regulations for mining it and
burning it. We have got to establish rational, predictable
policies, so that private investors will have some idea where
to put their dollars, and the requisite energy supplies can be
produced. This, plus a rational policy of encouraging energy
conservation in the shorter term is the only way we can
seriously hope to become independent of the OPEC oil cartel.
It will require massive amounts of captial to develop the
necessasry energy resources and competitive market prices
are the only effective way to bring forth such capital. We
must also be willing to take the necessary steps to remove
37
- 8governmental impediments which have discouraged increased
production of energy
It is, of course, important to recognize that a "pure"
free market for oil is fantasy as long as OPEC controls as
much supply as it does.
However, we still have the choice
to seek policies that will move us closer to government
control or farther from it. As we assess the choices, we
should remember that history has time and again shown us that
no individual or group of individuals can allocate resources
more effectively or more efficiently than the marketplace.
We must instead attempt to establish the conditions for the
maximum return to the private market for an industry which
in recent years has experienced further and further
incursions by the government sector.
Commodities
Just as in the energy area, the subject of commodities
illustrates the importance of not allowing political
considerations to dominate economics.
United States policy
must be flexible enough to adopt changes where necessary to
improve the operation of the market.
The basic ingredients
of our commodities policy are as follows:
First, there must be increased investment in the resource
area, especially in the LDCs.
During the 1970-1973 period,
80 percent of new exploration investment for non-fuel minerals
was made in four developed countries.
Although only private
- 9investors can ultimately supply the investment funds that
are required, we believe the World Bank can play an important
role in facilitating investment in LDCs, through its
International Finance Corporation (IFC). We believe that the
capital of the IFC should be increased from $100 million to
$400 million. We do not want the World Bank to replace
private sector initiative but rather to complement it.
As important, however, will be efforts by the countries
themselves to improve the investment climate by removing
impediments inherent in tax policies, nationalization and
expropriation policies and restrictive tariff and non-tariff
barriers.
Second, we are concerned about sharp fluctuations in
the export earnings of the developing countries. We believe
that compensatory finance for export earnings shortfalls
should be made more easily available. We do not believe
that a new international organization, such as the Lome
Convention, is called for, but rather that the International
Monetary Fund's present compensatory financing facility should
be liberalized.
Third,,- the solution to commodity problems does not lie
in establishing high-fixed prices and attempting to maintain
their value through indexing. Although it is often overlooked,
the rich countries produce more raw materials than the poor.
Of total world exports of nonfood, nonfuel raw materials, the
industrial countries supply about 70 percent. Any indexing
scheme would probably benefit the rich countries more than
the poor.
Fourth, any generalized system of commodity agreements,
aimed at fixing prices would be counterproductive. Instead,
we should look at proposals only on a case-by-case basis.
We have done this with tin, and we are now willing to sign
the International Tin Agreement. This decision should not
be interpreted as a willingness to sign price fixing agreements
for all commodities, for this agreement does not contain a
direct price fixing provision.
As we proceed on a commodity-by-commodity basis, we
should bear in mind that agreements, where they have been
tried, have not been very successful. The coffee agreement
broke down when prices pierced the agreed ceiling. The
wheat agreement is not operative, and the sugar agreement has
no economic provisions. One basic reason for this is that
producers have seen such arrangements as a means of raising
prices, not achieving greater stability. Nonetheless, instead
we are preparing to participate in discussions of problems
relating to various commodities, such as copper, iron ore and
manganese. Such discussions would be aimed not at reaching
agreements relating to price, but rather on improving the
efficiency of the market.
In this way, we can provide leadership toward improving
the workings of international commodities' markets. We need
not agree, or even appear to agree, with demands to completely
change the way in which these markets function.
Investment
A third area that calls for greater emphasis on economic
principles is investment policy.
Both developed and developing
countries must renew their commitment to an open trading
system and a positive climate for the free flow of resources.
The transfer of wealth to the oil producing nations has
precipitated a worldwide reappraisal of national policies
with respect to foreign investment.
In the United States,
there have been persistent political demands that we abandon
our traditional policy of not interfering with the free movement
of international capital and impose restrictions either
selectively on OPEC or generally.
We have rejected such an approach.
The basic reasons for
our policy are:
First, that there is no threat to the world or the U.S.
economy presented by the increased investment capabilities of
the oil producing nations.
Neither our experience so far,
nor our estimates of future OPEC accumulations justify fears
of domination of our industries.
Second, existing laws provide us with adequate authority
to protect our national security and other essential national
interests.
Third, the investment policies being pursued by the oil
producing countries do not warrant a change in our policy.
They have no desire to control our companies.
They realize
12
- -
S3
that the investment decisions they make now are their
insurance for the future. Therefore, they will be seeking
safe, long-term investments.
Fourth, on the whole, the benefits that result from foreign
investment in terms of increased jobs, additional tax revenues
and more competitively-priced goods and services far outweigh
any potential danger.
Many of our best known companies are
owned by foreign investors, and their behavior does not differ
from domestically-owned firms.
The ownership of these companies
has not altered the way in which they function -- they still
must abide by our laws, and they still must compete in our
marketplace.
It is what a company does, not who owns it, that
is important -- and that applies whether the owner is from
France, Kuwait or the United States.
Once again, it's important not to let economic realities
be distorted by political rhetoric.
Instead, we must avail
ourselves of the rare opportunity to maintain a policy which
is at once principled and profitable -- leading through example
by not interfering with investment in this country and by
continuing our efforts in international forums to break down
all barriers to investment and capital flows.
Conclusion
I have touched on only a few aspects of the international
economic issues we face. We have learned in the past that
this world demands much of the United States.
challenged again.
Now, we are
This time the focus of the challenge is on
the international economic system we have been central in
building.
At a time of turbulence, uncertainty and conflict,
the world still looks to us for a protecting hand, a
mediating influence, a path to follow.
Most of all, it
sees in us a tradition --a tradition that is based on
the inherent worth of every human being.
We must not forget that all of our political endeavors
are ultimately judged by one standard -- how well we can
translate our actions into human concerns.
The effort we
make in the years to come will be a test of our ability to
maintain man's freedom.
And that freedom can only be
preserved if we can minimize governmental control. Each
intrusion of government takes economic freedom away from
the individual.
As we address critical policy issues with the nations
of the world, we must frankly acknowledge our different
perspectives and then try to build on what can unite us.
What we say now is fundamental.
If for political reasons
we agree now, or appear to agree, with demands for a new
economic system, it will be impossible for us to justify on
economic grounds our desire to preserve our system later.
We must strive for a new level of political wisdom that will
permit, in fact require, that economic principles be supported
for the good of all.
o 0o
ederal financing bank
WASHINGTON, D.C. 20220
November 5, 1975
FOR IMMEDIATE RELEASE
Summary of Lending Activity
October 16 - October 31, 1975
Federal Financing Bank lending activity for the period
October 16 through October 31, 1975 was announced as follows
by Roland H. Cook, Secretary:
The Bank made the following advances to borrowers guaranteed
by the Department of Defense under the Foreign Military Sales
Act:
Date
Borrower
Amount
10/17 Government of Korea
10/21
Government of China
10/24
Government of Brazil
$2,202,200.00
295,000.00
705,599.50
Interest
Rate
Maturity
8.035%
8.046%
7.946%
6/30/83
9/30/83
10/1/83
The FFB made the following loans to the Tennessee Valley
Authority:
Date
10/20
10/31
10/31
Amount
Interest Rate
$ 30,000,000
300,000,000
200,000,000
6.213
8.485%
5.827%
Maturity
1/30/76
10/31/00
1/30/76
TVA used the proceeds from the October 31 borrowings to
repay $380 million of maturing notes with the Bank and to
raise additional funds. The October 20 borrowing was all new
money.
On October 22, the FFB purchased the following 10-year
debentures from Small Business Investment Companies at an
interest rate of 8.255%:
Amount
Borrower
Inverness Capital Corporation of Virginia
Small Business Investment Capital, Inc. of Arkansas
United Business Capital, Inc. of Oklahoma
$500,000
500,000
300,000
These debentures are guaranteed by the Small Business Administration.
WS-4 56
(over)
- 2On October 23, Amtrak, the National Railroad Passenger
Corporation, prepaid $60 million against Note #6, which is
a $130 million line of credit dated September 30, 1975. A
balance of $70 million remains outstanding under the line
of credit which matures December 30, 1975.
The FFB made the following loans to utility companies
guaranteed by the Rural Electrification Administration:
Date
10/20
Amount
Borrower
$3,500,000
South Mississippi
Electric Power Association
Interest
Rate
Maturity
7.691%
10/24/77
10/20 Associated Electric
Coop, Inc.
5,000,000 7.691% 10/20/77
10/31 Oglethorpe Electric
Membership Corporation
2,136,000 8.298% 12/31/09
Interest payments are made quarterly on the above REA loans.
On October 24, the Bank purchased $5,315,000 of notes from
the Department of Health, Education, and Welfare. The Department
had previously acquired the notes which were issued by various
public agencies under the Medical Facilities Loan Program. The
notes purchased by the FFB are guaranteed by HEW. The terms
of the purchases were as follows:
Maturity
Interest Rate
Amount
$1,885,000
3,430,000
8.312%
8.320%
7/1/99
7/1/00
On October 30, the Student Loan Marketing Association rolled
over a $25 million note maturing with the Bank. The interest
rate on the new loan is 6.55%. The maturity is October 19, 1976.
Federal Financing Bank loans outstanding on October 31, 1975
totalled $15.9 billion.
oOo
* Department of theJREASURY
>HINGTON,D.C.2Q220
TELEPHONE 964-2041
i W S
LiULi U
FOR IMMEDIATE RELEASE
37
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION
CHICAGO, ILLINOIS, 11:00 A.M. NOVEMBER 5, 1975
Good morning, ladies and gentlemen. I am very pleased to
join the rest of our Treasury team here today for these briefings. This is the first of these forums sponsored by the
Treasury Department, and we are anxious to make this as helpful
and as responsive to your needs as we can.
All organizations are guided by a set of policies, whether
they be explicitly stated or implicitly understood. The Federal
Government is no exception. Throughout its vast network of
activities, there literally are thousands of policies which
influence the way in which we in the Executive Branch direct our
affairs. I will not try to review all of these policies with you
this morning. Rather I have chosen five major economic policy
areas and will talk briefly about current developments in each.
They are: government spending; tax policy; monetary policy;
regulatory reform; and international economic policy.
Government Spending
One element contributing to our economic difficulties has
been the extraordinary rise in government spending over the past
fifteen years. As a reference point, in Fiscal Year 1962, the
Federal budget exceeded $100 billion for the first time in history.
In FY 1971 it exceeded $200 billion; in FY 1975, $300 billion; and
with little restraint and no new programs, it will exceed $400
billion in FY 1977. In fifteen years time, Federal Government outlays have roughly quadrupled.
I have never tried to conceal my concern with the increasing
control over our economic affairs that such government spending
implies. In FY 1965, outlays in the Federal budget accounted for
about 17 percent of GNP; by FY 1975 this percent was almost 25
percent. Government spending simply is growing at a faster rate
than the underlying economy which supports it. More and more,
economic decision making is being taken out of private hands,
where we believe it is most efficiently and responsively handled,
WS-463
and placed in the hands of government.
37
The rise in Federal Government spending not only has
outstripped the growth in the economy but it has surpassed
the growth in revenues, thereby bringing record budget deficits.
In FY 1975 the budget deficit was $43.6 billion; and this year
it will be almost $70 billion. These deficits require Treasury
financing which in turn places significant strains on our
financial markets. Over the past ten years, the Federal Government (including the off-budget agencies] has borrowed over a
third of a trillion dollars. Last year, four out of every five
dollars in long-term capital markets (excluding housing) were
borrowed by an agency of the Federal Government. Because many
medium sized and smaller private borrowers are being crowded
out of the financial market, it is little wonder that we are
experiencing high inflation and high interest rates--interest
rates which are adversely affecting housing and small business
to name only two sectors.
The most pressing goal of fiscal policy must be to bring
the spiraling growth of government spending under control. The
President's expenditure and tax cut program, which calls for
limiting FY 1977 spending to $395 billion instead of the $423
billion projected, is a positive step toward this goal. Even with
this program, government spending will rise by about $25 billion
from FY 1976--an increase of 7 percent. Thus, the program is not
a massive or indiscriminate slash in spending, as some allege,
but rather is a necessary first step in restraining the rapid
growth in outlays. The President has explained that acceptance
of this program would also be a major step toward balancing the
budget within three years.
I think the need for such economic discipline was well
stated by Joan Beck in a column in last Friday's Chicago Tribune.
She talked about the impact of a rising Federal budget on each
of us, and the fact that $1 billion in expenditures--the amount
we now spend in a single day--represents a $14.06 contribution
Tax
Policy
by the
average American household. She concluded that "the
average family just can't afford the Federal Government any more."
The other facet of fiscal policy is taxes, and here I wish
I wholeheartedly agree.
to comment on two dimensions. The first is the President's expenditure and tax cut proposal as it relates to taxes for individuals and corporations. The second is a whole package of tax
reform measures proposed by the Treasury which have been or are
being considered by the House Ways and Means Committee.
- 3The benefits arising from the President's program for
operating the government more efficiently would be distributed
to the American people in the form of tax cuts. Three quarters
of the approximately $28 billion would go to individuals, with
the balance going to business. For indiviudals, the bulk of the
benefits would go to people earning under $20,000 a year--in
other words, the Nation's working people. The personal income
tax package consists of: an increase in the personal exemption
from $750 to $1,000; the replacement of minimum and maximum
standard deductions by flat amounts of $1,800 for a single taxpayer and $2,500 for a married couple; and, finally, reductions
in the tax rates.
For business, the tax cut proposal calls for a reduction
in the corporate tax rate from 48 percent to 46 percent, a
lowering of the total taxes paid by small businesses on the
first $50,000 of taxable income, and for making permanent the
10 percent investment tax credit. In addition, there is a sixpoint program ito provide tax relief to electric utilities.
These measures should result in greater incentives to business
for capital formation. In turn, more capital investment should
lead to greater productivity and more and better jobs on which
we can base a sound and durable economic recovery.
By making permanent the tax cuts and expenditure restraints,
an element of stability can be introduced into fiscal policy.
With greater stability, uncertainty will lessen and people and
companies will be better able to plan ahead. We will return to
the American people a greater degree of economic decision making
ability. They are able to decide what is best for them, and
competitive markets are best able to respond to these desires.
Such moves will also help to dampen the inflationary expectations
which are now so widely shared among the people. The inflationary
psychology is a key part of the forces behind inflation, and I
do not believe we can change that psychology until the government
begins to moderate its spending and other excesses.
Over the long-term, the Administration is 'still actively
seeking adoption of a plan presented this summer for the
integration of personal and corporate income taxes--that is,
making more equal the tax treatment of interest payments involved
with debt financing and of dividend payments involved with equity
financing. This proposal is specifically designed to encourage
greater savings and investment; it is also the only major proposal
of which I am aware that seeks to correct the imbalance between
corporate debt and equity by encouraging greater reliance upon
equity financing. The fact that almost every other major industrialized nation has adopted such a plan should be borne in mind
year.
as debates over corporate income tax integration continue next
- 4-
&i
The second dimension of tax policy involves a major tax
reform bill now before Congress. The major areas considered
thus far by the House Ways and Means Committee are (1) tax
shelters, (2) tax simplification and (3) taxation of foreign
income.
With respect to tax shelters, the Administration has
recommended a two-pronged approach: a limitation on Artificial
Accounting Losses and a Minimum Taxable Income. The former is
designed to deal with problems arising when tax accounting
rules permit a mismatching of deductions and expenses so that
early start-up or accelerated deductions create "artificial"
losses that shelter unrelated income. The Ways and Means
Committee basically has adopted our approach and applied it
to real estate, farming, oil and gas operations, motion picture
films, and equipment leasing. The Committee has gone somewhat
further than we think necessary in restructuring alleged tax
shelter abuses in professional sports.
The minimum taxable income proposal was designed to deal
with the relatively small number of taxpayers with high adjusted
gross income who pay no or only nominal taxes. The proposal
basically assures that taxpayers cannot utilize a combination
of exclusions and their ordinary deductions to reduce their
taxable income below one half of a broad definition of income.
Although in 1974 the Ways and Means Committee adopted this basic
approach, the present tentative bill makes the existing law more
rigid. It is our feeling that this bill greatly exacerbates the
undesirable features of the present minimum tax. These features
result in an additional tax on capital gains that is imposed
regardless of whether an individual has a substantial regular
tax liability. IVe are urging the Committee to reconsider this
decision.
"Tax simplification" is a name applied to a set of provisions
advocated by the Treasury which mainly affects individuals. The
more important Ways and Means decisions include: an ending of
the specialized tax treatment for qualified stock options;
liberalization and simplification of the retirement income credit
and of the availability of child care and household expense provisions; removal of the complex sick pay provisions; liberalization
of the disability pay exclusion, which currently hurts people with
lower incomes; a change in the deduction of alimony payments to
benefit lower income taxpayers; a limitation on the itemized
deduction for nonbusiness interest; and an ending of the tax
deductibility of an office in the home and of vacation rental
property. As a result of these measures. tax return preparation
will be simplified and made more equitable for most itemizers,
who constitute 40 percent of the taxpayers presently filing return:
- 5-
6/
The Ways and Means Committee has tentatively agreed to
several changes in the taxation of foreign income. Going against
the Treasury position, they increased to a moderate degree the
taxation of Domestic International Sales Corporation, knows as
DISCs. A DISC is simply a firm set up for export purposes which
may defer taxes on overseas earnings. There was some talk in
Congress about repealing the DISC tax provision altogether, which
would impair our Nation's ability to export.
On balance, the measures acted upon in the Treasury's tax
reform bill will lead to a greater degree of tax equity and tax
simplification. This bill represents a major effort by the
Treasury for comprehensive reform.
Monetary Policy
While during the last several months, the growth in the
money supply has been sluggish, the growth over the longer-run
has been well within the Federal Reserve's target growth rate
of 5 to 7 1/2 percent. We must remember that several months
do not make a trend. In June, for example, the money supply increased by over 18 percent, following a rise of over 11 percent
in May. Recent efforts by the Fed have worked to smooth out the
overall trend. As recently as yesterday, Chairman Arthur Burns
stated that the Federal Reserve will continue to pursue policies
supportive of sustained and stable economic recovery.
Regulatory Reform
President Ford has adopted as a principal goal of his
Administration the reform of Government regulation and has
ordered a searching review of all Federal regulatory activities.
The purpose of the review is to eliminate regulations that have
become anticompetitive as well as those that have become obsolete
and inefficient in today's economic environment--regulations that
are contributing to red tape, reduced efficiency, less consumer
choice, higher prices and fewer imaginative ideas. To date, a
rail deregulation bill and a domestic airline deregulation bill
have been sent to Congress, and a trucking bill will be submitted
shortly. In addition, the Financial Institution Act currently is
under review by Congress, and the Senate Banking Committee favorably voted it out of Committee on October 2. Moreover, the Administration strongly supports repeal of fair trade laws, which allow
manufacturers to dictate the retail price for their products, and
has asked for oil and gas deregulation. In addition to these areas
others are being considered.
6 -
Ca
The central thrust of the proposed measures is to have
realistic regulation in those areas where there is a demonstrated
need to protect the public interest, but to leave other areas to
the marketplace. The cleansing forces of competition will assure
greater efficiency and lower prices to the public. By eliminating
arbitrary barriers to entry and by increasing pricing flexibility, the Administration hopes to restore competition in the
regulated sectors of the economy.
International Economic Policy
The one other area I wish to review is international economic
policy. This embraces four subareas: monetary affairs, trade,
developing countries, and foreign investment.
The United States seeks an international monetary order which
is cooperative, liberal and open. Such a system calls for maximum
freedom for international capital flows as a means of promoting
noninflationary growth and prosperity. To assure continued
achievement of these objectives, the U.S. strongly supports initi
atives to keep international monetary arrangements in tune with
the times. In current negotiations on international monetary
reform, we have reached agreement on actions to phase out the role
of gold in the monetary system; and to increase the resources of
the the International Monetary Fund in keeping with the increased
need for resources to support members1 requirements. We also are
confident that in coming months we will reach an important agreement on monetary exchange rates.
I've are applying a similar policy toward international trade.
We reaffirm the American commitment to the free flow of goods
and the concept of the marketplace. Our challenge today is to
resist the very strong pressures for short-term protectionist
solutions to the domestic economic problems which have risen as a
result of the severe worldwide recession. Mutual cooperation,
consultation, and progress in reducing barriers to trade have
become more vital than ever. We have placed particular emphasis on
Multinational Trade Negotiations, wrhere we seek to reduce both
tariff and nontariff barriers to trade as well as negotiate new
rules and procedures to govern trade relations.
With respect to developing countries, the U.S., through
direct loans and grants as well as through the international
development institutions, has actively supported economic development for the last three decades. Although foreign aid is important,
its contribution can only be effective in conjunction with good
local policies. It must be channeled in such a way as to increase
investment, without which there can be no real development. The
private sector, operating under free market conditions, is the
key to mobilizing resources and energies of people. Foreign
private investment is and should be a maior element in the flow
- 7tf
of capital to the developing countries.
A few developing countries do immense harm to the investment climate by expropriations and similar actions. If U.S.
property is taken, we expect under international law that our
citizens receive prompt and adequate compensation, that the
act be nondiscriminatory, and for a public purpose. Similarly,
the flow of credit of all types depends on regular repayment.
The developing countries should not regard debt rescheduling
as a form of assistance. It must be limited to those few
countries which from time to time are unable to arrange new
credits and therefore face the possibility of bankruptcy and
economic breakdown.
The U.S. seeks a world environment in which the private
market determines, to the maximum extent feasible, the allocation
and use of capital in the international economy. We believe that
such a world will be the most efficient and prosperous possible.
Accordingly, the United States follows an open approach with
respect to investment by foreigners in this country and investment by U.S. citizens abroad, subject only to measures necessary
to protect our essential security interests. Moreover, the U.S.
seeks to gain international acceptance of the principles that
foreign investors should be given national treatment--that is,
they should be treated equally with domestic investors once they
are established in the host country; and that governments should
play a neutral role in the investment process, offering no special
incentives or disincentives to inqard or outward investment.
Concluding Remarks
This brings to an end my review of the five important
economic policy areas. Necessarily my discussion of them has
been brief and I do not pretend to have done justice to the many
complexities involved. However, I do hope that we have been able
to be informative and, hopefully, spark a degree of interest in
the important economic issues involved. We are grateful for your
taking the time this morning to hear us out. I now would be
pleased to entertain questions.
0O0
FOR RELEASE AT 4:00 P.M.
November 6, 1975
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for 364-day Treasury bills to be dated November 18, 1975, and to mature
November 16, 1976 (CUSIP No. 912793 ZU3) • The bills will be issued for cash
and in exchange for Treasury bills maturing
Tenders in the amount of $ 2,100 million, or thereabouts, will be accepted
from the public, which holds$l,093million of the maturing bills.
Additional amounts of the bills may be issued at the average price of
accepted tenders to Government accounts and Federal Reserve Banks, for
themselves and as agents of foreign and international monetary authorities,
which hold $
908 million of the maturing bills.
The bills will be issued on a discount basis under competitive and
noncompetitive bidding, and at maturity their face amount will be payable
without interest.
They will be issued in bearer form in denominations of
$10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value)
and in book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Wednesday, November 12, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
in multiples of $5,000.
Tenders over $10,000 must be
In the case of competitive tenders the price offered
must be expressed on the basis of 100, with not more than three decimals, e.g.,
99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their
positions with respect to Government securities and borrowings thereon may
submit tenders for account of customers provided the names of the customers
are set forth in such tenders.
Others will not be permitted to submit
tenders except for their own account.
WS
"459
ft
Tenders will be received without
(OVER)
-2deposit from incorporated banks and trust companies and from responsible
and recognized dealers in investment securities.
Tenders from others must
be accompanied by payment of 2 percent of the face amount of bills applied
for, unless the tenders are accompanied by an express guaranty of payment
by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of
the amount and price range of accepted bids.
Those submitting competitive
tenders will be advised of the acceptance or rejection thereof.
The Secretary
of the Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect shall be
final.
Subject to these reservations, noncompetitive tenders for $500,000
or less without stated price from any one bidder will be accepted in full at
the average price (in three decimals) of accepted competitive bids.
Settle-
ment for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on November 18, 1975, in
cash or other immediately available funds or in a like face amount of Treasury
bills maturing November 18, 1975.
equal treatment.
Cash and exchange tenders will receive
Cash adjustments will be made for differences between the
par value of maturing bills accepted in exchange and the issue price of the
new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954
the amount of discount at which bills issued hereunder are sold is considered
to accrue when the bills are sold, redeemed or otherwise disposed of, and the
bills are excluded from consideration as capital assets.
Accordingly, the
owner of bills (other than life insurance companies) issued hereunder must
include in his Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on original issue
or on subsequent purchase, and the amount actually received either upon sale
or redemption at maturity during the taxable year for which the return is
made.
Department of the Treasury Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the conditions
of their issue.
Copies of the circular may be obtained from any Federal
Reserve Bank or Branch.
he Department of theTREASURY
ASHINGTQN,D.C. 20220
TELEPHONE 964-2041
November 6, 1975
MEMORANDUM TO CORRESPONDENTS:
Attached is the statement presented today by Deputy
Tax Legislative Counsel Dale S. Collinson, before the
Subcommittee on Improvements in Judicial Machinery of the
Senate Judiciary Committee, commenting on the income tax
provisions of the proposed revisions of the bankruptcy
laws.
oOo
WS-457
u
STATE! DINT OF
DALE S. COLLINSON
BEFORE THE
SUBCOMMITTEE ON IMPROVEMENTS IN JUDICIAL MACHINERY
of the
SENATE JUDICIARY COMMITTEE
NOVEMBER 6, 1975
Mr. Chairman and Members of the Subcommittee:
My name is Dale S. Collinson, and I am the Deputy
Tax Legislative Counsel of the Treasury Department. I'
welcome the opportunity to appear before your subcommittee
to comment on the. income tax provisions of the proposed
revisions of the bankruptcy laws.
We have reviewed S. 235 and S. 236, which are the
proposals of the bankruptcy judges and the Bankruptcy
Commission, respectively. The two bills are similar except
that S. 235 does not propose any changes in the Internal
«
Revenue Code.
For the sake of brevity, my discussion will
focus on S. 236 and those proposals which contain the greate
implications for the Federal tax system.
We are aware of the substantial time and effort which
has been expended with respect to these proposals, and
we appreciate the goal of the proposals to provide for
the rehabilitation of the debtor and protecting the interests
of creditors. However, we believe that these goals must be
- 2 -
considered against the need to protect the integrity of the
voluntary assessment nature of the Federal tax system.
The position of the United States in collecting
overdue taxes is not that of an ordinary creditor. For
the most part, the United States is an involuntary
creditor; unlike the ordinary creditor it cannot choose
its credit risks. Moreover, the United States is unique
in the number of delinquent accounts it must collect.
Finally, the amount of its claim may be unliquidated for
a substantial period while tax disputes are processed
through extensive administrative and judicial remedies.
In recognition of the special position of the United
States as a tax creditor, the bankruptcy laws and the
internal revenue laws have long contained provisions (such
as the summary collection procedures, the tax lien provisions, and the bankruptcy priority and discharge provisions) designed to afford the.United States adequate time
and sufficient means to pursue tax claims and to protect
the revenues for the benefit of the general tax-paying
public. It is the taxpayers generally who will bear the
burden of increased taxes if the government is unable
to effectively pursue the collection of tax delinquencies.
We believe that adoption of the proposals invalidating
Federal tax liens, reducing the priority granted to tax
- 3-
claims, and increasing the discharg e^biiit;' of tax
obligations would substantially and seriously undermine
the integrity of the voluntary assessment system.
These
changes would provide an opportunity for complete tax
avoidance and would increase the attractiveness of bankruptcy for both debtors and creditors (other than the
federal government), which can only result in a decline
in tax revenues and taxpayer confidence in the equity of
the tax system.
Under existing law, Federal tax liens are enforceable
in bankruptcy proceedings and operate to protect the
government's interest where such liens have been filed
prior to the filing of the petition in bankruptcy.
Under
proposed section 4-606(a) all Federal tax liens would
be invalid even where the lien notice was filed before the
petition in bankruptcy.
Consequently, all Federal tax liens,
which under current law would rank ahead of priority and
«
general debtors, would share with general creditors except
in the narrow circumstances in which priority is granted
under proposed section 4-405.
This proposal would provide a great incentive for
creditors to force debtors into bankruptcy so as to negate
the effect of existing Federal tax liens and thereby
increase the amounts potentially available for
- 4 -
distribution to them.
Thus, enactment of the proposal
would most probably result in an increase in the number
of bankruptcies and the amount of unpaid Federal tax
liabilities involved in such bankruptcies.
Furthermore, under current law Federal tax liens
which arise or are filed while the debtor is insolvent
and within four months prior to the filing of the bankruptcy petition are not voidable by the trustee as preferences. Under proposed section 4-606(b), the trustee
is entitled to recover any amounts paid or property
transferred by the debtor, whether solvent or insolvent,
within three months prior to the bankruptcy petition to
satisfy a tax liability secured by a lien invalidated
by proposed section 5-606(a). In addition, proposed
section 4-607 provides that the trustee may recover
property of the debtor which was transferred to pay or
secure a Federal tax liability if the transfer was made
while the debtor was insolvent and within three months
prior to the filing of the petition. However, the trustee
may not avoid the transfer if the aggregate value of the
transfer is less than $1,000.
These proposals also provide a great incentive for
creditors to force debtors into bankruptcy for the reasons
which I previously discussed with respect to the lien
- 5proposal.
Like the lien proposal, they can only serve
to increase the amount of unpaid tax liabilities in
bankruptcies since all taxes collected by the Service
within the three-month period prior to bankruptcy would
be subject to recapture by the trustee.
Under current law, taxes which became legally due
and owing more than three years prior to bankruptcy are
dischargeable with certain exceptions. If no notice of
a Federal tax lien was filed prior to bankruptcy, prepetition taxes incurred by the bankrupt and excepted from
discharge are awarded a fourth priority.
Under proposed section 4-405 nondischargeability is
eliminated as a criterion in the determination of priority.
The present priority awarded taxes legally due and owing
within three years of bankruptcy is generally reduced to
only those taxes for which the due date of the tax return
is within one year prior to bankruptcy or thereafter. In
addition, Federal tax claims woiild be entitled only to
fifth priority. The priorities presently awarded for
taxes not assessed for which the taxpayer failed to file
returns, taxes not assessed due to delay resulting from
prohibitions against assessment and collection while a
taxpayer is"following administrative and judicial courses
of action, and taxes not assessed due to a false or
-6-
771
fraudulent return by a taxpayer or his willful attempt
to evade taxes are also subject to these rules.
Under proposed section 4-506, all taxes are dischargeable except for those taxes which I have previously
described as having been given priority, those taxes for
which a return was not filed more than one year prior to
the filing of the bankruptcy petition, and those taxes
arising in the context of a false or fraudulent return or
a willful attempt to evade or defeat the taxes.
We believe that the proposed priority and discharge
provisions will have severe adverse consequences for the
Federal tax system.
The collection'of taxes in bankruptcy
proceedings would clearly be substantially reduced to
unacceptable levels.
The determination and collection of
taxes by the Internal Revenue Service prior to bankruptcy
would be severely restricted due to the inadequate time
allowed for such activities by the proposals.
Many
individuals will be able to easily avoid payment of
prebankruptcy taxes by nonfraudulently understating
their income tax liabilities and filing a voluntary
petition in bankruptcy while administratively or judicially
contesting .these liabilities.
These provisions will thereby create an opportunity
for total and complete tax avoidance which will substantially
impair the reliability of a voluntary assessment system
of taxation.
It will also impair the credibility of
that'system"in terms of equity and fairness in the mind of
the general taxpaying public to which the benefits of
bankruptcy are not immediately available.
It is on the basis of these considerations that we
strongly oppose the proposals with respect to liens,
priority and discharge.
We also strongly recommend against adoption of the
proposal to relieve the trustee in straight bankruptcies
of the duty to file returns and pay taxes.
This is a
burden borne by all other taxpayers and there is simply
no justification for exempting the trustee from these
requirements especially since there has been no prior
opportunity for collection of taxes on such current
income and in view of the fact that all other tax claims
are virtually eliminated from any part in the bankruptcy
proceeding.
The proposals contained in S. 236 also provide for
amendments to certain
Code of 1954.
changes.
provisions of the Internal Revenue
In general, we agree with the proposed
The proposal with respect to section 172 of
the Code which would reduce net operating losses by an
amount equal to the amount of indebtedness cancelled
- 8 -
or reduced in the bankruptcy proceeding except to the
extent it is continued as a capital stock liability is
especially justified since there is no rational basis for
allowing the continued availability of a loss, deduction
with respect to amounts which are conclusively free from
payment."
We also agree with the proposed changes with respect.
to section 312. The proposals in this area would increase
the earnings and profits account or reduce a deficit in
such account to the extent creditors1 claims are cancelled
or reduced. However, this change would not apply to the
extent the debt cancelled or reduced is includible in
income, is used to reduce basis, or constitutes a contribution to capital, or the creditors' interest is
continued by the issuance of stock. These changes are
clearly warranted since the corporation has received a
definite economic benefit from the cancellation or reduction.
The proposals would also reduce* any deficit in earnings
and profits by the amount of the capital amount attributable
to any shareholder interests extinguished in the proceeding,
although in no case would positive earnings and profits
be deemed to result from such eliminated interests.
We also support those proposals which seek to create
equality of treatment between bankruptcy reorganizations
-»-
7£~
and other forms of corporate reorganizations. The longstanding differences in treatment are not justified and
the proposals have adequately undertaken to remedy the
situation. At the same time, we believe that these
changes must be drawn, especially with respect to the
availability of the tax attributes of bankrupt corporations
in the post-bankruptcy period, to prevent their use
for purposes of circumventing the impact of the Federal
income tax laws. Allowing the use of such attributes
only if all of the business that is to be continued goes
to a single successor corporation would be of substantial
assistance in this regard.
4
In summaryj the Treasury Department strongly opposes
the proposed changes with respect to liens, priority, and
discharge. The proposed changes in these areas can only
serve to undermine the system of voluntary assessment which
is crucial to the collection of revenues for the operations
of goveriament. They will substantially increase available
opportunities for tax avoidance and undermine taxpayers1
confidence in the equity of the tax system. Such results
will have serious long-range negative consequences for our
revenue system. On the other hand, we generally support
the proposed changes in the Internal Revenue Code especially
- 10 -
those creating equality of treatment between bankruptcy
reorganizations and other corporate reorganizations.
Thank you for allowing me to testify before your'""
33
77
F O R IMMEDIATE R E L E A S E
STATEMENT OF THE HONORABLE CHARLES M . W A L K E R
ASSISTANT S E C R E T A R Y O F T H E T R E A S U R Y F O R T A X POLICY
O N U.S. I N C O M E T A X CONVENTIONS WITH ICELAND, ROMANIA,
P O L A N D , A N D T H E UNION O F SOVIET SOCIALIST REPUBLICS
B E F O R E T H E SENATE FOREIGN RELATIONS C O M M I T T E E
WASHINGTON, D.C., FRIDAY, N O V E M B E R 7, 1975, 10 A.M.
Mr. Chairman and Members of this distinguished Committee:
I am pleased to appear here today to testify in support of four
new income tax conventions, with Iceland, Romania, Poland, and
the Union of Soviet Socialist Republics.
I will keep my remarks brief, since the technical memorandum
submitted with each of the proposed conventions describes the provisions in some detail. However, I would like to summarize the
general objectives of our income tax conventions, and to make a
few observations on the provisions used to achieve these objectives
in the four conventions before you.
General Income Tax Treaty Objectives
A basic objective of our income tax conventions, as their full
titles imply, is to prevent double taxation of income. But fundamentally, our treaties are also intended to facilitate trade and investment between the United States and our treaty partners. Our tax
treaties play an important role in this respect by providing greater
certainty as to the rules of taxation for foreign business and investment
and by clarifying the inter-action of U.S. and foreign laws; they
eliminate, where appropriate, the need to file tax returns and
to become conversant with the details of the tax laws of more than
one country; they provide a mechanism for bilateral cooperation
by the tax authorities with respect to the resolution of tax conflicts;
WS-458
- 2-
they contain provisions facilitating the exchange of scholars, engineers,
technicians and others; and they seek to achieve tax neutrality with
respect to.the flow of capital. The treaties thereby complement other
efforts by the U.S. to promote free trade and capital movements. At
the same time, they provide a bilateral mechanism for cooperation
between government tax authorities in the administration of their laws.
Our tax treaties basically follow the model prepared by the
Fiscal Committee of the Organization for Economic Cooperation and
Development. This model has served as the basis for hundreds of
bilateral conventions between the O E C D m e m b e r countries. The
United States today has more than 30 treaties in force and a dozen
or more in various stages of negotiation.
Our income tax conventions avoid double taxation by establishing
rules for dividing or assigning taxing jurisdiction between the country
of the taxpayers residence and the country where the income arises
(the country of source). Where there is only a temporary or minimal
presence in the source country, the conventions typically provide for
taxation exclusively by the residence country. Thus, ordinarily business
income is not taxable in the source country unless the taxpayer has a
fixed place of business there, and employees temporarily in the source
state are not taxable on their wages in that state unless they are there
for a substantial period of time. Withholding taxes at the source on
passive income in the form of dividends, interest and royalties are
usually reduced or eliminated under the treaties.
Where a convention permits both countries to tax income, it typically requires the residence country to grant a foreign tax credit for
the source country tax. In addition, the source country tax on
dividends, interest and royalties, where not eliminated by the convention, is generally subject to a m a x i m u m rate which is intended
to ensure that the tax may be fully credited against the residence
country tax.
Our income tax conventions are not designed to alter the U.S. tax
liability of U.S. residents, corporations or citizens. U.S. taxpayers
continue to be taxed according to our law. The conventions are
designed to obtain tax benefits for U.S. corporations and residents
from our treaty partners in exchange for similar benefits which we
grant to their taxpayers.
The conventions also typically guarantee that taxpayers from one
country will not be subject to discriminatory taxes in the other
country. And they provide for administrative cooperation in avoiding
double taxation and in preventing fiscal evasion.
The Convention with Iceland
Let me turn now to the four conventions before you. I will begin
with the convention with Iceland, because it is in nearly all respects
a "typical" U.S. income tax convention, and represents another link
in our network of income tax conventions with our partners in the
Organization for Economic Cooperation and Development. It brings
to 20 the number of our income tax conventions with the other 23
m e m b e r s of that organization.* Unless otherwise indicated, the provisions in the convention with Iceland that I describe are found in
existing U.S. income tax conventions. Also, unless otherwise m e n tioned, the provisions are reciprocal, although it is sometimes easier
to describe them in terms of U.S. taxpayers.
Business income. The convention with Iceland provides that
business income derived in Iceland by a U.S. resident m a y be taxed
by Iceland only to the extent that it is attributable to a "permanent
establishment ' of the U.S. resident in Iceland. The term "permanent
establishment" is defined in the convention. It refers to a fixed
place in which business activity is carried on for a prolonged period,
and excludes temporary or incidental activities.
Income from international shipping and aviation is not subject
to this rule; such income is taxable only by the country of residence,
which is defined as the country of incorporation in the case of a
corporation.
Passive income. Interest and royalties are exempt from withholding taxes by the source country, and the withholding tax on
dividends is limited to 15 percent on portfolio dividends and 5 percent on dividends paid by subsidiary corporations to their parents.
The dividend rates were selected at levels which can normally be
fully credited in the residence country, thus avoiding double taxation.
Personal service income. Under the convention no tax will be
imposed by the source country on personal service income if the
employment there is brief. Specifically, an employee of a U.S.
company m a y be sent to perform services in Iceland for up to six
months without incurring tax liability there. A self-employed
person will become subject to Icelandic tax on income from performing services there if he either stays six months or longer or
maintains a place of business in Iceland for six months or longer.
^Income tax conventions with Spain, Portugal or Turkey have yet to
be concluded.
&
Public entertainers who are self-employed are taxable by the
source country if they remain there longer than three months, or
if they earn for performances there more than $100 per day of
their visit. The somewhat tighter rule for this kind of income is
a compromise similar to that which we have agreed to with some
other countries, virtually all of which maintain the position that
income from such performances should be taxable where the activity
takes place without any minimum period of stay because large sums
can be earned in brief appearances.
The general six month rule is extended in the case of certain
educational exchanges. Teachers, students, trainees, and participants in government sponsored programs are granted periods of
exemption of one to five years, subject to dollar limits in some
cases.
Pensions, alimony and annuities are taxable only in the country
of residence. Social security benefits m a y be taxed only in the
state paying the benefits. The right to tax the remuneration of
government employees is generally reserved to the paying government, with limited exceptions.
••fit
A new provision in the convention with Iceland is Article 20,
which is designed to prevent abuse of the convention by using a corporation to avoid tax on personal service income; the article provides
that under certain circumstances income paid to a corporation for
furnishing personal services will not be protected by the general 9
rule that profits m a y be taxed by the source state only if attributable
to a permanent establishment there.
tf
Nondiscrimination. The convention contains the usual assurances
that neither country will tax those of its residents who are citizens
of the other country, or businesses owned by residents of the other
1:
country, more heavily than its own citizens and locally owned
businesses.
-"nc
Administrative Cooperation. Finally, the Iceland convention provide s"7orHi3mIn^^
between the taxing authorities
of the two states. For example, it provides for consultation to resolve
difficulties, and to adjust tax liabilities and make refunds, where appropriate, in accordance with agreed readjustments of income and expenses.
It also provides for exchange of information to help enforcement of the
of the convention and the tax laws of the two countries, subject to
appropriate internal rules and procedures to protect confidentiality.
-5The convention also provides for limited assistance in collecting
tax on behalf of the other country when that country has reduced its
withholding tax in accordance with the convention, but the benefit is
improperly obtained by a resident of a third country. This provision
primarily benefits the United States which applies the treaty withholding
rate on payments made to an address in a country with which we have a
treaty. In some cases residents of other countries use such an address
to obtain treaty benefits to which they are not entitled. Many other
countries avoid this problem by initially collecting the statutory rate of
tax and then refunding the excess over the treaty rate to persons who
certify that they are residents of a treaty country.
Convention with Romania
Let me turn now to the convention with Romania. Although state
enterprises play a large role in the Romanian economy, there is also
a substantial private sector in which foreign capital is invited to
participate. It is possible for a foreign investor to establish a
jointly owned Romanian corporation with local capital, provided that
the foreign investor owns less than 50 percent of the equity. A tax
of 30 percent is imposed on the profits of such corporations, and
dividends remitted to the foreign shareholders are subject to a 10
percent withholding tax. In many respects Romanian tax principles
are similar to our own and to those of Western Europe. The convention
reflects this c o m m o n ground and differs very little from the convention
with Iceland.
Business income. For example, the Romanian convention contains
the usual rule that a resident of one country m a y be taxed by the other
country on business income only to the extent that the income is
attributable to a permanent establishment in the taxing country. The
convention with Romania introduces an explicit rule which we
think is implicit in most of our existing conventions; it specifically
permits items displayed at a trade fair in the host country to be
sold off at the close of the fair without incurring tax liability to
the host country.
Passive income. The reciprocal withholding rates agreed on
for the m a x i m u m tax at source on dividends, interest and royalties
are within the usual agreed limits. The dividend withholding rate
m a y not exceed 10 percent, the rate on interest m a y also not exceed
10 percent and in some cases is set at zero, and the m a x i m u m rate
on royalties is 10 percent in some cases and 15 percent in others.
-6Personal service income. Personal service income m a y be
taxed by the source country if the recipient stays there longer than
six months, or in the case of a self employed person if he maintains
a fixed place of business ("fixed base") there to which the income
is attributable. Although not in the Iceland convention the "fixed
base" concept is found in the O E C D model and in some other U.S.
conventions. Although not defined, the "fixed base" is the same
as the "permanent establishment" concept but applied to independent
personal service income rather than industrial or commercial profits.
Teachers and students may remain longer than six months -from one to five years depending on the purpose of the visit -- and
continue to be exempt from tax on certain amounts of income.
Entertainers become subject to tax after three months or if their
earnings exceed $3, 000, except that entertainers whose visit is
pursuant to an agreement between the two countries enjoy the longer
six-month exemption.
The convention includes the standard rule that each country will
exempt employees of the other sent to perform governmental functions,
but for activities to qualify as governmental functions they must be so
regarded by both countries. This qualification condition is not necessarily intended to produce a different result from that of our other
conventions, but simply to avoid misunderstanding in a situation
where the role of the state in the two economies differs substantially.
Nondiscrimination. The nondiscrimination article in the Romanian
convention is different from the typical nondiscrimination article.
U.S. citizens resident in Romania m a y not be more heavily taxed
than resident Romanian citizens. This is a standard provision in our
income tax conventions. However, the taxes imposed by Romania
on resident U.S. citizens, or on permanent establishments or subsidiaries owned by U.S. residents m a y not be more burdensome
than the taxes imposed on third country citizens or businesses in
Romania, subject to differences in treatment under special agreements, such as tax treaties. The comparison with other foreign
businesses was thought more appropriate than with domestic businesses given the large role of state enterprises which are subject
to different and frequently heavier taxation than private firms.
Administrative cooperation. Guidelines for administrative
cooperation are also provided along lines similar to those in
the Iceland convention.
-7The Convention with Poland
In the convention with Poland, we were again able to draw on a
substantial area of c o m m o n ground between the two tax systems,
since Poland has retained many of the tax concepts and principles
which are found in the tax systems of western Europe.
The provisions in the convention for treating income from business activities and personal services are very similar to those in
many existing U.S. conventions as well as to those in the proposed
conventions with Iceland and Romania. There is no article dealing
specifically with social security benefits, but since neither country
taxes such income the absence of such a provision is of no consequence.
Similarly, the convention provides for limitations on withholding
taxes at source on investment income which meet our objective
of avoiding any double taxation of such income. Interest is exempt
from tax at source, dividends are not to be taxed more heavily than
15 percent to portfolio investors and five percent to parent companies,
and the m a x i m u m rate on royalties is 10 percent.
The nondiscrimination article parallels that of the Romanian
convention with respect to the special reference to third country
investors.
The provisions for administrative cooperation are also similar
to those I have described. However, there is no article providing
for assistance in collection because it would require Poland to
establish an administrative mechanism which it felt it could not
undertake. The absence of this provision is not believed to create
a practical problem, since it is unlikely that persons resident outside Poland could use a Polish address for collecting U.S. investment income.
The Convention with the Soviet Union
Unlike the tax systems of Romania and Poland, that of the Soviet
Union bears little resemblance to the methods of taxing business
income c o m m o n in western countries. The convention with the USSR
is the first comprehensive income tax convention signed by the
USSR, and we have had to deal for the first time with the interaction
of two widely differing economic systems. The solutions arrived at
are perhaps less unusual than might be expected, but do involve
a broader scope of exemptions than our traditional income tax
conventions.
-8Most business activity in the Soviet Union is conducted through
state enterprises whose profits, after allocations to certain enterprise
funds (e.g., for employee benefits and bonuses), are transferred
to the State budget. This amounts to virtually a 100 percent tax.
Moreover, Soviet accounting concepts are so different from those
c o m m o n to western economies that the tax is not related to net income
as we know it.
With respect to Soviet business activities in the United States
there is a practical problem of determining the taxable income in
the United States of a branch of a Soviet enterprise; it would be
extremely difficult to determine arm's length prices between two
units of a government enterprise, and to obtain the necessary access
to the financial accounts of the enterprise. With respect to U.S.
business activities in the USSR, the issue is to minimize the
prospective tax burden. The USSR does not now impose income
tax on foreign companies carrying on business activities there, but
is studying other tax systems with a view to introducing such a tax.
Therefore, in seeking to achieve reciprocity overall it was considered
appropriate to expand somewhat the scope of exemptions usually
granted under the permanent establishment concept in order to preserve the exemptions now granted to U.S. firms by the USSR.
The convention provides for reciprocal exemption at source of
interest and royalties. There is now no USSR tax on interest or
patent royalties paid to nonresidents. However, since signature of
the convention, the USSR has introduced a withholding tax on
copyright royalties at a rate equal to the foreign rate on such payments to residents of the USSR, from which U.S. residents will be
exempt from the tax under the convention. There is no provision in
the convention regarding taxes on dividends, since there are no dividends paid by enterprises in the USSR.
In the case of personal service income, the convention also provides more situations than usual in which temporary visitors will
be exempt from tax by the host country. In addition to the usual
provisions, the convention provides a 12 month exemption for persons
supplying technical services and a two year exemption for correspondents. The exemption for technicians will be helpful to U.S.
employees sent to the USSR to install equipment purchased from the
United States; there are numerous U.S. employees in this situation
in connection with the vast K a m a River truck foundry.
The two year exemption for correspondents is unique to this
convention and was inserted because it was a matter of great
importance to the Soviet Union. The Soviet Union in general taxes
its citizens employed abroad without a foreign tax credit, and seeks
to avoid double taxation by obtaining exemption in the host country
on a reciprocal basis. In the case of correspondents, most other
-9countries have agreed administratively with the Soviet Union to grant
reciprocal exemption. W e agreed to a limited (two year) exemption
under the convention; it was placed in the letters accompanying the
convention rather than in the body of the convention itself because,
although the letters are equally subject to approval for ratification,
they are less likely to be viewed by other countries as a precedent
for future U.S. treaties.
Like the conventions with Romania and Poland, this convention
also assures that the nondiscrimination rules, as applied to U.S.
firms, will be determined not by reference to the heavily taxed
state enterprises but by reference to the taxes imposed on firms
of other countries doing business in the Soviet Union.
The administrative provisions in the convention are more limited
than usual, due largely to the limited scope of Soviet taxes and business relations. However, the convention does provide for administrative cooperation to resolve difficulties and avoid double taxation. The
United States foreign tax credit for USSR taxes paid by U.S. residents
is available to U.S. residents under the conditions set forth in the
Internal Revenue Code, although it is not so specified in the convention;
as mentioned above the USSR does not give a foreign tax credit to its
residents.
The convention contains two additional provisions not found elsewhere which were added for clarification. It provides that where
income is exempt from tax under the convention the underlying transaction will also be exempt from tax, to provide protection against
turnover and other taxes. The Soviet delegation felt it important to
state explicitly that transactions giving rise to treaty benefits must
be within the laws of the country granting the treaty benefit.
I have been concentrating on the differences between this convention and other recent U G S . income tax conventions. However,
our goal in negotiating the convention with the Soviet Union was the
same as that of all our income tax conventions: to facilitate our
economic and cultural relations by removing tax obstacles to the
flow of people, technology, and capital between the two countries.
W e have tried to take account of special factors, as we do in each
negotiation, but always within the boundaries of sound income tax
policy.
In summary, I urge your approval of these four income tax
conventions, which I believe will establish a mutually beneficial
framework for harmonizing our tax relations with Iceland, Romania,
Poland, and the Soviet Union, and therefore will contribute to
improving our economic relations in a broader sense. I will be
glad to try to answer any questions you m a y have about them.
-0O0-
CONTACT: Jack Plum
964-2615
November 7, 1975
MEMORANDUM FOR CORRESPONDENTS
The attached letter from Treasury Secretary William E.
Simon was sent on November 1 to Rep. Henry S. Reuss, Chairman,
Subcommittee on International Economics of the Joint Economic
Committe.
The letter responds to Rep. Reuss1s request for the
Secretary's reaction to the Congressmanfs September 17 speech
in the House concerning the IMF Interim Committee's agreement
on the role of gold in the world's monetary affairs.
oOo
WS-461
?7
THE SECRETARY OF THE TREASURY
WASHINGTON
NOV 1.1975
Dear Mr. Chairman:
I have studied with interest and concern your remarks
in the Congressional Record of September 17 about the recent
Interim Committee agreement, as well as reports of the hearing
you recently held on the same subject. I appreciate your
support of the portion of the agreement dealing with IMF quotas
and of the U.S. position on exchange rates. .1 am, however,
concerned that your views on the aspects of the agreement relating to gold are strongly critical.
There is no doubt that we share the same objectives of
phasing out the monetary role of gold and putting part of the
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Where we differ is whether the Interim Committee agreement
represents a major step toward achievement of these objectives.
You and some of the panelists at the hearing have expressed
doubts about this and apparently feel that the agreement
represents a major and inequitably distributed increase in
world liquidity; might lead to an increasingly important
role for gold in transactions between monetary authorities;
and means an unfair use of IMF gold for the "greedy rather
than the needy."
I would like to respond to these concerns and explain
why I believe that the agreement, taken as a package, will
put gold on a one-way street leading out of the monetary
system.
Most of the concerns about the agreement rest fundamentally
on the assumption that the agreement represents an effective
major expansion of world liquidity in the form of gold. Based
on this assumption, it is then predicted that there will be a
- 2significant role for gold in transactions between monetary
authorities, a reduction in the need for increases in other
forms of reserves, and a potentially substantial inflationary
impact.
This basic assumption is incorrect, and the consequences
foreseen do not follow. The agreement neither represents nor
implies an important increase in world liquidity.
First, the valuation of gold reserves is not a feature
of the agreement. Countries were free to value their gold
reserves at market-related prices before the Interim Committee
agreement. Only France has revalued its gold holdings, and we
are not aware that any other countries plan to follow suit.
By abolishing the official price of gold in the IMF, strengthening the prospect of future sales of officially-held gold into
the market, and establishing transitional provisions against
future pegging of the price, the Interim Committee agreement
will in fact greatly discourage any uniform treatment of-gold
holdings for official purposes — and thus provides no basis
for a revaluation of official holdings.
Second, the price at which countries may choose to value
the^r gojd balances does not determine their worth as liquidity
— ciidL J<^/ei*Jo oiccntinlly en the price *»-h^t omiin n*> "realized
through gold sales, a very uncertain and shifting price. In
principle, there are two ways in which an increase in liquidity
through gold sales might be realized: sales to the market or
sales to other governments. The first is permissible now and
unrelated to the agreement; the second is highly unlikely to
occur to any significant extent.
— Countries have been free under the existing IMF
Articles to sell gold in the market at any time, and thus
to realize any gains that may be made as a result of the
difference between the official and market prices. Any
real increase in liquidity in the form of gold on this
score has thus occurred as a result of increases in the
market price of gold over the past few years, not because
of the Interim Committee agreement, and any realization
of liquidity through sales to the market will decrease
the size of official stocks. The agreement is irrelevant
in this respect, except insofar as it may have contributed
to the recent decline in the market price of gold.
-~ There is no reason to expect the agreement to result
7?
in a significant increase in transactions in gold among
monetary authorities or in substantial official purchases
of gold from any other source, even though the formal
restraints on such transactions in the IMF Articles will
be lifted. There is a very large element of risk involved
in purchases of gold. There are no provisions for use of
gold in international settlements. Transactions with the
IMF are effectively eliminated. There are few, if any,
indications of interest in the purchase of gold — and,
indeed, important countries are signalling to the world•
that they have no such interest. There is every reason
to expect the "no pegging" provision of the agreement to
be respected.
The latter point regarding official transactions is
essential to an understanding of the meaning of the Interim •
Committee agreement. Even when there was an official price
closely linked to private prices, official gold settlements
were infrequent. The gold market is a highly speculative one,
always uncertain and risky, as reflected by the sharp price .
movements in light of U.S. gold sales, the prospect of IMF
sales, and the possibility of sales by others. The myth of
. a permanently high and rising gold price has been broken., and
Luc JLXO/VS JLHVOJL vt:vx jLii acquirxiiij vjcld, eitli&i. tiij.wuyjii offj-u-icil
settlements or purchases from the market, have become enormous
under the recent agreement. It is highly improbable that any
country or group would assume the risks and costs involved in
attempting to stabilize the market price for gold. Yet
stabilization would be central to any important role for gold
in official settlements. And, since it is the expressed intent
of the IMF membership that gold should be phased out of the
system, the disapproval of the U.S. and others — and knowledge that the U.S. would not participate — will be strong
deterrents to any efforts to reestablish a major role for gold
in official transactions. In addition, the agreement among
the Group of Ten countries provides for possible additional
limitations, restrictions or administrative guidelines which
might be worked out among central banks if future events
suggest there is a need. The U.S. will not hesitate to press
for such provisions if the need arises.
Elimination of an official price for gold in the IMF
Articles of Agreement will, of course, remove the existing
legal restraint on official purchases of gold at higher-thanofficial prices. Nevertheless, elimination of the official
,price of gold Is essential to its demonetization. The concerns
97
raised at the imminence of this step by some who support
demonetization illustrate the nature of the problem, which
has always been to work out an arrangement which would achieve
the long-term objective of phasing gold out of the system
while at the same time enabling those countries for which
gold remains an important part of their reserves to mobilize
their holdings in case of need.
There is clearly a natural tension between these objectives. Some strong advocates of phasing gold out of the system
have urged the establishment of stiff transitional rules on
transactions in gold after the legal restraint is removed,
while other advocates of demonetization have urged the avoidance of any rules, and treatment of gold comparable to any
other commodity. While more stringent transitional safeguards
relating to the circumstances under which monetary authorities
might acquire gold might have been useful, any limits on
transactions beyond the agreed "collective" limit were strongly
opposed by some as representing an unacceptable restraint on
their sovereign freedom. For reasons I have outlined, I am
persuaded that the element of risk and other deterrents to
official purchases of gold make a significant role for gold
in official settlements extremely unlikely. Thus I believe
that the Interim Committee agreement on gold signals, uneauivocaily. the future elimination of the monetary role of
gold. It is noteworthy that the markets appear to have
received that signal and placed that interpretation on the
agreement.
With regard to the second major area of concern — the
agreed uses of IMF gold — I do not share the view that the
agreement is inequitable and favors the wealthy. The developing nations will of course receive the gains on all the gold25 million ounces — sold for their benefit, and will receive
their quota share, about 28 percent, of the 25 million ounces
to be distributed to all IMF members in proportion to quotas*
Moreover, at any realistically imaginable price, the profit
on the amount of gold to be distributed to members according
to quotas would represent a miniscule proportion of world
reserves, and simply could not be regarded as important in
terms of judgments about needed reserve growth in the future.
(Nor, as I have previously indicated, does the agreement
provide a basis for realization of increases in liquidity,
equitable or inequitable, arising from the disparity between
the private and official prices.)
The U.S. could certainly have accepted — indeed, would
have preferred — a solution which did not call for a distribution of one-sixth of IMF gold to members in proportion
97
to quotas, but this was not a practical approach. Such a
distribution is strongly favored not only by some of the
developed nations but by a number of developing countries
as well. It became quite clear in the negotiations that
refusal to agree to any such distribution would have destroyed
any chance to use some IMF gold for the benefit of the
developing nations.
I should mention also the various proposals, for establishment of a "gold substitution" account in the IMF, to
which some of your panelists referred. The U.S. has indicated
its willingness to consider such proposals, but only on the
understanding that they be designed for the purpose of
facilitating a reduction of the role of gold in the system.
Some proponents of a gold substitution account see it as a
vehicle for establishing an IMF-guaranteed floor price and
ready official market for gold, or for changing the distribution of world reserves. A gold substitution account which
put a floor under the price would pave the way for a return
of gold to an important role in the system and would be the
antithesis, of what we seek. The detailed provisions of a
substitution account would make a crucial difference in its
implications. I have not seen any specific proposals to
date that would be both consistent with our own objectives
and workable in a technical sense — and I would not favor
substitution account to be established against U.S. interests
at some future date. We will continue to examine the subject,
but we must be careful to avoid accepting provisions that
would operate contrary to U.S. objectives with respect to
gold.
In conclusion, I am convinced that the Interim Committee
has progressed from words favoring phasing gold out of the
system to action that will accomplish that result. I am not
surprised that the move has generated some concern, for any
new departure must involve some uncertainty. But the existing
situation with respect to gold was not a stable or indefinitely
sustainable one, and the greater risk was that failure to
reach a broad agreement on gold could have led to serious
strains and pressure for action outside an agreed framework.
In my judgment, the Interim Committee agreement is true
to our gold objectives and sets the stage for a comprehensive
9A
settlement of monetary issues, including the crucial issue
of exchange arrangements under the IMF Articles of Agreement. I urge your support, and that of your colleagues,
for this agreement.
Sincerely yours,
'^Sned) Bill S,W
William E. Simon
The Honorable
Henry S. Reuss, Chairman
Subcommittee on International Economics
Joint Economic Committee
Washington, D.C. 20510
FOR RELEASE UPON DELIVERY
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE JOINT ECONOMIC COMMITTEE
FRIDAY, NOVEMBER 7, 1975, 10:00 A.M.
Mr. Chairman and Members of this Distinguished Committee:
I am pleased to appear before you today to review current
economic conditions and policies. My analysis will hopefully
contribute to a better understanding of the economic recovery
now underway and the policy initiatives required for achieving
long-term economic goals regarding inflation, unemployment and
national output. Policy initiatives now under consideration
will affect both the near-term pattern of recovery and the
longer-term outlook for achieving the basic objective of
national economic policy, as set forth in the Employment
Act of 1946: "To promote maximum employment, production, and
purchasing power" through actions consistent with "other
essential considerations of national policy" in ways "calculated
to foster and promote free competitive enterprise and the
general welfare . . . . " The disappointing inflation and
unemployment performance of the past decade indicates the
basic need for a longer-term perspective in setting current
policies. This is a difficult adjustment but if it is not
made, future economic developments will be even more disappointing
and the margin for error will diminish.
Given the basic importance of economic issues in shaping
the future of our Nation, the Joint Economic Committee has a
unique role in influencing the decisions of Congress. I
hope that our joint analysis of the current problems and
policy initiatives will contribute to more reasoned and
effective decisions and I look forward to working with this
Committee toward that goal.
WS-460
- 2-
I.
ECONOMIC BACKGROUND OF POLICY RECOMMENDATIONS
A brief review of general economic developments is a
necessary background for evaluating the specific economic
recommendations recently made by the Administration. In
planning its economic policies for 1975 we believed that
recovery would begin by midyear if three fundamental adjustments
could be accomplished: (1) the unwanted accumulation of
inventories could be liquidated and new orders increased;
(2) "real incomes" of consumers could be restored by reducing
the double-digit level of inflation and initiating tax
reductions and rebates which would stimulate personal consumption;
and (3) employment would begin to increase rapidly enough to
reduce the unemployment rate and strengthen consumer confidence.
Fortunately, these adjustments have been achieved and the
turning point of economic recovery evidently occurred by
April.
During the first three months of 197 5 the real output
of goods and services continued to decline sharply at a
seasonally adjusted annual rate of 11.4 percent, but the
economic situation was beginning to improve as personal
consumption strengthened and the necessary liquidation of
inventories began. Most of the remaining recession weakness
was concentrated in the private investment sector where
residential construction and business investment declined
and a large liquidation of inventories occurred. During the
last three months of 1974 business inventories accumulated
at a seasonally adjusted annual rate of $18 billion in
current dollars. In the first quarter of 1975 the situation
was reversed as business inventories were liquidated at a
seasonally adjusted annual rate of $19 billion. In the
second quarter the pace of liquidation accelerated to a
level of $31 billion before dropping back, according to
preliminary figures, to a rate of $9-1/2 billion in the
third quarter. This massive swing in inventories was a
necessary precondition for economic recovery even though it
did restrict the growth of total GNP early in the year.
Inventory accumulation should become a positive factor in
the near-term outlook.
97
- 3 -
As spring progressed other significant economic improvements
occurred. The annual rate of consumer price increases
dropped from the double-digit level of 1974 to a 6 to 7
percent zone. This improvement, along with the Tax Reduction
Act of 1975 passed in March, resulted in a sharp increase in
real disposable personal income during the second quarter,
following five consecutive quarterly declines. That improvement
in consumer purchasing power stimulated personal spending,
which had already started to improve early in the year. As
these favorable developments pushed final sales above current
levels of production, a runoff of inventories began at the
retail level and spread back through the system. New orders
for durable goods turned up in April and have increased in
five of the last six months and inventory restocking has
begun at the retail level. Total industrial production
bottomed out in April and relatively strong gains have been
reported since then, although the general level of output
has not yet recovered to the pre-recession pace. Exports
also continued to grow, despite the economic recessions in
other nations, and it now appears that a record merchandise
trade surplus will be reported this year.
As economic conditions improved, employment began to
rise again in April and total employment, as measured by the
household survey, has increased 1.6 million workers since
then. The "lay-off" rate has declined sharply since the
beginning of the year and the average number of hours worked
in manufacturing and the amount of overtime hours have
increased. The unemployment rate has declined from 9.2 percent
in May to 8.3 percent in September. While this level of
unemployment is far too high, the improvement in employment
and the increase in the number of hours worked provides
encouraging evidence that the unemployment rate will continue
to decline as the economic recovery proceeds.
- 4 -
The situation in residential construction and new car
sales also stabilized in the spring and moderate improvement
has occurred in both of these basic industries. The seasonally
adjusted annual rate of new housing starts averaged 11/4 million units during the third quarter compared to a
trough of 980 thousand units begun in April. However, the
recent level of housing starts is still far below the underlying
annual need for new residential construction and considerable
improvement must occur in the housing sector. Similarly,
sales of new automobiles have significantly improved over
the relatively low figures reported in late 1974 and early
1975 even though the domestic output of autos remains well
below the record levels of 1973.
The general performance of the economy can be summarized
by the swing in total output of goods and services as measured
by changes in the "real" GNP figures which are adjusted to
remove the effects of inflation. After declining at a
seasonally adjusted annual rate of 11.4 percent during the
first three months of 1975, output increased at an annual
pace of 1.9 percent in the second quarter and then surged
upward at an 11.2 percent rate during the third quarter
according to preliminary estimates. However, over one-half
of the third quarter gain resulted from the inventory swing
which is nearing completion. Therefore, gains of the magnitude
reported in the third quarter are not expected to continue and the
"real" GNP will probably expand at an average annual rate of
7 percent during the next year before gradually returning to
the long-term growth rate of approximately 4 percent.
Nevertheless, the total GNP figures do highlight the aggregate
shift in the direction of the U.S. economy.
The most encouraging aspect of the recent economic
statistics has been the growth of "real" final sales at an
annual rate of approximately 4-1/2 percent during the last
six months. The key element in that solid recovery has been
the strength of personal consumption which increased at a
seasonally adjusted annual rate of 7.0 percent in "real"
terms during the third quarter. Durable goods sales, including
the stronger new car performance, led the improvement but
outlays for nondurable goods and services also increased.
The near-term outlook for sustained economic recovery is
heavily dependent upon continued personal spending gains
which will stimulate continued inventory buying never be
satisfied until the existing levels of excessive inflation
one
and half
underlying
unemployment
ofrate
the double-digit
of
are
inflation
substantially
rate
has dropped
of
reduced.
1974,
tothe
approximately
Even
threat
though
of the
renewed inflation pressures can cause an immediate negative
reaction among consumers and businessmen as demonstrated
last summer when the June and July Consumer Price Index
reports were announced. Since that flurry the various price
measures appear to have returned to the 6 to 7 percent zone
but even that rate is far above our historical level of
inflation and is still a disruptive force in our economy.
Similarly, the current level of unemployment continues to
create serious economic and social problems.
A third serious problem affecting the strength and
sustainability of the economic recovery involves the negative
impact of massive Federal debt financing requirements.
Although some analysts assume that the financial needs of an
economic recovery can be automatically filled, the reality
is that mortgages, consumer debt and business spending for
fixed investment and inventories must compete against
unprecedented Treasury borrowing requirements which will
continue throughout this year and into the future. The
Treasury has announced that it will need to borrow new money
totaling $44 to $47 billion during the second half of
Calendar Year 1975. When these anticipated needs are added
to the $36.1 billion actually raised during the first half
of Calendar Year 1975 the annual total rises to $80 to $83 billion.
This excludes new money raised by the issuance of guaranteed
securities and government-sponsored agencies which we estimate
at $6 billion and $3 billion respectively in the current
calendar year.
We also have substantial refunding requirements. Apart
from the rollover of the $77 billion of privately-held
regular weekly and monthly bills, $23 billion of privatelyheld U.S. Treasury coupon issues will be refunded this year.
The heavy Treasury borrowing requirements have become
the dominant factor in the financial markets at the same
time that private sector needs are expected to increase.
The severity of the recession, particularly the rapid runoff
of inventories, has moderated the private demand for credit,
enabling the Treasury needs to be met, but there is already
clear evidence that some firms have been unable to obtain
desired financing and even successful borrowers have had to
pay historically-high interest rates. The future pace of
the economic recovery will depend upon the availability of
credit across the broad spectrum of economic activity. If
specific sectors, such as residential construction, or large
numbers of businesses who do not have top-level credit
ratings, are unable to obtain necessary financing, both the
strength and sustainability of the recovery will be disappointing.
The impact of such large Treasury borrowing needs resulting
from the deficits must receive greater attention in preparing
- 6 general economic forecasts since we can have only as much
economic expansion as available financing will support.
This was the basis of our warnings about financial disturbances
involving restricted access to funds and rising interest
rates that would result when private borrowing needs generated
by the recovery have to compete against Treasury borrowing.
Unfortunately, financial market developments already indicate
that these problems are occurring.
II. FISCAL POLICY RECOMMENDATIONS
After carefully reviewing the progress of economic
recovery to date and near-term prospects, the President
recently proposed a balanced package of Federal tax and
spending recommendations. We hope that Congress and the
general public will seriously consider these proposals as a
means of sustaining the current recovery and, more fundamentally,
of correcting the long-term pattern of rapidly rising government
spending and chronic budget deficits. The increased spending
and cumulative deficits have increasingly eroded our fiscal
flexibility and created serious economic distortions which,
in turn, have contributed to the unfortunate boom-andrecession sequences during the past decade. We believe that
the President's recommendations provide a meaningful step
toward regaining fiscal control and greater equity by returning
more decision-making discretion to individuals and families
to determine how they will allocate their incomes and personal
financial resources.
The President's recommendations involve two basic
actions: (1) a permanent reduction in Federal taxes totaling
approximately $28 billion in 1976 with three-quarters of the
relief for individuals and one-quarter for business firms;
and (2) a slowing down of the upward momentum of Federal
spending through cooperative efforts of Congress and the
Administration to hold down spending during the rest of this
fiscal year and by establishing a spending ceiling of $395 billion
for Fiscal Year 1977 that begins October 1, 1976. It is
important to consider these actions as a package if we are
to maximize the long-term benefits.
The proposal to establish a spending ceiling of $395 billion
for Fiscal Year 1977 would still result in a large budget
increase of $25 billion, or 6.8 percent, above the anticipated
outlays of $370 billion this year. Therefore, Federal
outlays will continue to rise; our realistic goal must be to
slow down the rapid growth of spending. Unless such action
is taken, spending in Fiscal Year 1977 could increase by
approximately $53 billion without adding any new programs
according to preliminary estimates by the Office of Management
and Budget. This unfortunate surge of spending would result
from the cumulative pressures we have legislated into our
- 7 system. In Fiscal Year 1966 Federal budget outlays totaled
$134.7 billion. In just nine years they doubled, rising to
$268.4 billion in Fiscal Year 1974 (see Table 1 ) . If outlays
actually rise to $370 billion during the current fiscal
year, that would represent an increase of $101.6 billion,
or 38 percent, in just two fiscal years. Therefore, it
should not be surprising that a large Federal budget deficit
of $43.6 billion was recorded in Fiscal Year 1975 and an
even larger deficit of at least $70 billion is expected this
year.
Some analysts have suggested that deficits of this size
are not particularly burdensome if they are compared to the
current GNP totals. This mechanistic view of comparing a
residual figure against the total level of economic activity
ignores the fundamental issues: (1) the increased government
claims against future output; (2) the inflationary impact of
increased Federal spending that occurs if additional claims
are added to total demand when resources are already fully
employed even though the original government spending decisions
may have been made during earlier periods of economic slack;
and (3) the serious disruptions in the financial markets
that result when such massive deficits must be financed.
Some analysts also claim that the surge of government
spending and deficits are only temporary and that more
moderate outlay growth rates and budget balance will return
as soon as economic conditions stabilize. It is true that
part of the budget outlay increases can be traced to the
"automatic stabilizers" that should respond to recession
problems. For example, unemployment compensation benefits
have increased from $6 billion in Fiscal Year 1974 to over
$19 billion this fiscal year. However, a review of the
actual budget figures or the recommendations included in the
First Concurrent Resolution to the Congress prepared by the
Congressional Budget Committees clearly indicates that large
spending increases are occurring across the traditional
programs of the entire Federal Government (see Table 2 ) .
These spending increases cannot realistically be considered
as "temporary" since government programs are rarely eliminated
or curtailed.
It has also been claimed that the President's program
is unrealistic because he has indicated that the slowdown in
the upward momentum of spending should occur across all
existing programs. This is an ironic criticism when the
record of fourteen deficits in the last fifteen fiscal years
or the near quadrupling of outlays from $97.8 billion in
Fiscal Year 1961 to approximately $370 billion this year is
considered. Is it realistic to believe that we will balance
the Federal budget annually or over the economic cycle in
- 8 the future when that disappointing record is examined? Nor
has the full-employment budget concept prevented deficits
from being reported using those definitions. In short,
there is certainly a need for discipline but the guidelines
of the past have not provided the necessary realism.
The President has also emphasized that establishing a
spending ceiling of $395 billion for Fiscal Year 1977 does
not remove the need for discipline in holding down current
government spending between now and October 1, 1976. Last
January the President proposed a budget for Fiscal Year 1976
calling for outlays of $349.4 billion. Since then the bulk
of the budget recisions and deferrals have been rejected by
Congress and numerous spending increases have been legislated.
The President has vetoed many of these spending initiatives
which he considered to be excessive and most of his vetoes
have been sustained. Nevertheless, Fiscal Year 1976 spending
continues to rise steadily beyond the levels he has asked
for. The President is now asking for spending discipline
this year and next year and into the future. In a meeting
with several news media representatives held on October 14, 1975
he commented on the claim that the formal spending ceiling
for Fiscal Year 1977 might imply a relaxation of the discipline
he has asked for during the past year:
"If the Congress is concerned about this, there
is no reason why they can't cooperate in a number of
the authorizations and appropriation bills that they
and I will be considering between now and January 1,
which will have an impact on the spending in the first
six months or nine months of calendar year 1976."
"As a matter of fact, we are probably going to have
that struggle during that period of time anyhow, and our
emphasis will be, as it has been, to hold the line on
some of these spending proposals, whether it is an
authorization, appropriation, or substantive legislation."
"So, in effect, I will be seeking to put some lid
on the second half of fiscal year 1976 spending." (The
White House Briefing by the President, William E. Simon,
Secretary of the Treasury, Alan Greenspan, Chairman of
the Council of Economic Advisers, and James T. Lynn,
Director of Office of Management and Budget for Eighteen
Newspaper Columnists, Office of the White House Press
Secretary, October 14, 1975, pp. 6-7.)
The President has emphatically stated that spending
discipline by the Federal Government must be applied across
the board and has instructed his budget officials to work
toward the spending ceiling goal in developing the Fiscal Year 1977
budget which will be represented in the January Budget Message
to Congress. The Office of Management and Budget is already
working with the individual departments and agencies to determine
16 1
- 9 what spending programs can be moderated. These specific
actions will be indicated in the regular budget publications
in January. And Congress and its Budget Committees will have
the usual opportunities and responsibilities to evaluate and
adjust those budget recommendations. The call for cooperation
in setting a spending ceiling for Fiscal Year 1977 is simply
that — a cooperative effort to introduce a sense of realism
into regaining fiscal control. This approach does not
disrupt the normal budget preparation process of the Executive
Office nor does it usurp or disrupt the functions of the
Congress or its new Budget Committees. Each body retains
the same responsibilities and powers. Setting a realistic
target does not change the ultimate responsibilities; instead,
it provides a necessary foundation for the tax relief recommendations
The second part of the package of recommendations
involves extensive and permanent tax relief action beginning
in 1976. The recommended changes in the individual and
business income tax structure are as follows:
Individual Tax Cuts
$10.1 billion
Increase personal exemption from $750
to $1,000.
Replace $1,300 low income allowance
and $2,000 maximum standard deduction
with flat amount standard deduction
of $2,500 for married couples ($1,800
for a single person)
Reduced tax rates
$ 4 . 0 billion
TOTAL INDIVIDUAL TAX CUTS
$20.7 billion
$ 6.6 billion
Business Tax Cuts
Extension of 1975 corporate rate
and surtax exemption changes
$ 1.5 billion
Permanent extension of investment
credit increase (from 7-10; 40-10
for utilities)
$ 3.0 billion
2% corporate rate reduction (48-46%)
$ 2 . 2 billion
Utilities tax relief previously
proposed (see Annex C)
$0.6 billion
TOTAL BUSINESS TAX CUTS
$ 7 . 2 billion
TOTAL TAX CUTS
$27.9 billion
- 10 -
Source: Office of the Secretary of the Treasury, Office
of Tax Analysis, Revised, October 24, 1975, Note: Numbers
may not add to totals due to rounding.
As indicated, three-quarters of this permanent reduction
would be provided for individuals and one-quarter to business
firms. Even the one-quarter share allocated to businesses will
directly benefit individuals by providing incentives for
capital investment which will create jobs and contribute to
increasing personal income. Capital investment is also needed
to create the productive capacity required if our future
economic goals of lower unemployment, moderate price increases
and improved productivity are to be achieved.
Analysis of the President's tax reduction proposals indicates
the distributional effects which are summarized in Tables 3
through 13. As summarized in Table 3, personal income taxes
would be reduced by $20.7 billion from the $129.4 billion
amount that would otherwise be collected if we revert back
to the 1972-74 tax statutes. The distribution of tax
reductions and the percentage reduction in tax liabilities for
each adjusted gross income class compared with the 1972-74 law
are summarized in Table 3. The specific types of reductions
by adjusted gross income class are shown in Tables 4 and 5.
Comparisons of the President's recommendations with the
Tax Reduction Act of 1975 are summarized in Table 6. The
proposed impact of additional tax relief recommended by the
President on different types of individuals and families is
summarized in Tables 8 through 12. Finally, a comparison of
proposed business tax changes with the 1975 Act reductions
is shown in Table 13. The various tables indicate that the
low- and middle-income categories receive a larger share of
the tax reduction recommended and a larger percentage
reduction of their tax liabilities compared with the 1972-74
laws and the Tax Reduction Act of 1975.
Analysis of the tax changes recommended in Tables 3
through 13 indicates that the President's recommendations
would provide even more benefits to individuals, an additional
$11.8 billion above the relief provided by the 1975 Act
(Table 6) and $2.5 billion additional relief for businesses
(Table 13). We believe that this amount of tax relief will
help sustain the economic recovery now underway, particularly
the strong personal spending, and provide necessary incentives
for increasing future capital investment. We also believe that
the changes are equitable because the reductions are concentrated
in low-income tax brackets where the impact of inflation is
particularly
and
in the
middle-income
tax
brackets
where
alreadythe
paying
bulksevere
of
heavy
tax
taxes
payments
should
areobviously
collected.
participate
Those
whoin
are
I*
- 11 the relief as a matter of equity and to provide incentives
for continuing to work hard to provide for personal and
family financial security. The "progressive" nature of the
tax system is clearly emphasized by minimizing the percentage
distribution of the tax reductions to higher income brackets
(see Tables 3 and 6 ) . In fact, the extremely low percentage
reduction in the tax liabilities of higher-income tax classes
might raise questions about equity and incentives but it was
felt that the proposed distribution of tax relief properly
reflects current needs. Both the 1975 Act and the President's
proposals emphasize the importance of offsetting part of the
debilitating impact of inflation which has significantly
increased the "real" tax burden by pushing tax payers into
higher marginal tax brackets even though the eroding effects
of price increases have held down their "real" gains over
much of the past decade.
In developing this balanced package of proposals we
felt strongly that the fundamental policy requirement at
this time is to regain fiscal control so that the economic
distortions of the past decade can be moderated. We also
believe that the potential benefits should result in tax
relief for the American taxpayer to maintain private purchasing
power and for businesses as an incentive to increase capital
investment to create jobs. Therefore, the two proposals are
inextricably tied together. Action on taxes is obviously
required at this time to avoid reverting back to the 1972-74
tax statutes because the Tax Reduction Act of 1975 was a
temporary law. While it is popular to propose tax reductions,
it would be irresponsible to reduce revenues without simultaneously
considering the difficult job of slowing down spending —
during the rest of this fiscal year and in Fiscal Year 1977.
To act only on tax reductions would increase the enormous
deficit we already face and that distortion would ultimately
lead to even more undesirable inflation and unemployment.
It would be most unfortunate to have excess stimulus in
the form of tax cuts, which are usually popular, without
corresponding action on spending. The lagged impact of
economic policies would lead to unwanted overheating of the
economy if a nine-month gap between tax reductions and the
initiation of necessary spending discipline is allowed to
occur. We have needed budget discipline for some time and
we certainly require it now. The President has repeatedly
acted to hold down spending over the past year and this
effort will continue. The identification of a spending
ceiling for Fiscal Year 1977 would not change that effort
nor would it disrupt the normal budget processes of the
Congress or the Executive Office as they develop specific
spending proposals and legislative decisions within the
general guidelines adopted. What it would do is indicate
- 12 our serious intent to finally take some meaningful action.
The American people would welcome some positive signal that
the Congress and the Administration will cooperate in
strong and realistic actions. The familiar rhetoric of the
past is hardly persuasive when compared with the actual
results of rising government spending, chronic deficits
which vary only in size over the economic cycle, excessive
inflation and economic distortions that lead to recession
and unemployment. The Congress and the Executive Office
have jointly established spending targets in the past and it
is obvious that our serious fiscal situation requires similar
responsible action at this time. We have already talked
this issue to death; the American people want some results.
III. THE ECONOMIC IMPACT OF THE RECOMMENDATIONS
Although economic recovery is well underway there is
concern in some quarters about its sustainability. The
American public, labor and business leaders and other nations
repeatedly express their concern about long-term prospects.
Therefore, the major economic thrust of the President's
program is directed at what we perceive to be the long-term
economic problems confronting the United States. It has two
goals: (1) to slow down the upward momentum of government
spending and eliminate the chronic Federal budget deficits
that have occurred in fourteen of the last fifteen fiscal
years — or, in thirty-eight of the last forty-six years;
and (2) to return more of the decision-making power to
individuals and families in determining how they will use
their income. These actions would help to improve the
efficiency of the economy and the permanent changes would
create additional stability which would enable individuals
and business firms to plan for the future with more confidence.
Turning the basic direction of fiscal policy will not
be easy because of the legislative momentum that has been
accumulated over the years. Budget experts continually
describe the "uncontrollable nature" of most of the Federal
budget which rises each year as the number of programs
multiply and the number of participants in those programs
increase. It is now estimated that nearly three fourths of
the budget is committed to programs for which payment is
required under existing law or contracts. These payments
must be made unless substantive changes in the laws occur.
Government payrolls make up an additional one-sixth of the
Federal budget and the residual one-tenth involves mainly
nonpayroll purchases of goods and services. These facts
make the job of regaining fiscal control difficult. They do
not make
it
Wechange
have
listened
so
many
economists
beginning
describe
any
such why
thing
to impossible.
believe
things
as ancannot
them.
"uncontrollable"
I do not
that
believe
Federal
tooto
many
that
budget
people
there
commitment
are
is
because they all depend upon legislative priorities. I do
believe that there are different priorities and that all
good things are not equally good. There is a solution to
the problem if the Congressional Budget Committee discipline
will require more careful consideration of these priorities
and the elimination or curtailment of ineffective programs
during the annual appropriations process. We must correct
the historical approach of merely continuing existing outlays
so that any new claims are always "add-ons". But for that
process to occur the underlying discipline of economics in
matching priority claims and limited resources must occur.
The Joint Economic Committee can provide that economic
leadership for the rest of Congress.
Although the major thrust of the President's program is
to emphasize long-term goals, a major policy change of this
sort affects the near-term pattern of economic activity as
well. In a $1-1/2 trillion economy, there obviously are
uncertainties in predicting potential changes in economic
activity and the specific impact of fiscal policy recommendations.
In preparing the President's balanced package of policy
initiatives we analyzed the probable course of economic
developments that would result if existing government spending
trends were to continue and if the tax relief provided by
the Tax Reduction Act of 1975 were to be continued in essentially
its present form, except for an upward modification of
approximately $4 billion which is necessary to maintain
existing personal withholding rates. Since the Administration
strongly believes that the existing growth rate of government
spending must be curtailed and that changes in the distribution
of tax relief should occur, a second forecast based on the
President's recommendations was also prepared.
Under either set of assumptions, economic recovery
would move forward over the next year with an annual rate of
growth of real GNP of approximately 7 percent, gradual
reduction of unemployment to the 7 to 7-1/2 percent zone by
yearend 1976 and a continuation of the current pattern of
consumer price increases of inflation 6 to 7 percent over
the next few quarters. Comparing the two forecasts, we find
that under the President's program the quarterly path of
"real" GNP is slightly higher between now and mid-1976 and
slightly lower subsequently as the government spending
restraints take effect. These forecasts are subject to the
usual caveats with respect to forecasting errors, particularly
when the differences are so small relative to the gross
national product. Therefore, the President's program must
be judged in terms of its long-term benefits since economic
forecasts indicate that there will not be significant economic
stimulus or restraint in the immediate future as a result of
the President's policy recommendations.
- 14 IV. SUMMARY
The process of governing is never easy as Members of
this Committee well know. Nevertheless, a challenging set
of fiscal policy decisions must be made in the near future.
The current recovery from the recession is likely to proceed
during the coming months but the long-term outlook for
achieving our basic national economic goals is clouded by
the cumulative pressures of past policy decisions. Although
the issues are stated in economic terms they really involve
the entire political process required to coordinate the
diverse interests represented in our Nation. If we do act
now, we can regain fiscal control and restore balance to the
Federal budget which is requied if we are to stabilize
economic activity and provide the necessary environment for
savings and investment in the future. Positive action on
the President's recommendations could lead to the desired
Federal budget balance, perhaps within three years. If we
do not act now the disappointing record of economic instability
and chronic Federal budget deficits will continue into the
future.
We strongly believe that maximum long-term benefits
will result if we act now to slow down the upward momentum
of government spending, restore balance to the Federal
budget and extend broad tax relief to the American taxpayers
so they can decide how to allocate more of their financial
resources and to businesses as an incentive to increase
capital investment as a means of creating more jobs. This
is all familiar rhetoric which one can listen to every day
coming from diverse sources. However, our actions have
never matched our well-intentioned rhetoric. This gap
results from the extreme difficulty of making decisions on
individual spending programs and tax policies and the compromises
that occur. We believe that the President has presented a
balanced package of tax and spending proposals that make
economic sense by emphasizing longer-term goals. I hope
that you will consider carefully these economic arguments as
the decision-making processes unfold over the next few
weeks.
#
#
#
Thank you.
TABLE
1
FEDERAL BUDGETS
CHANGES IN THE UNIFIED BUDGET OUTLAYS
BY FISCAL YEAR, 1961-1976
(dollars in billions)
^iscal Year• over
Preceding Year
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
Source:
Federal
Outlays
Dollar
Increase
Percentage
Increase
Surplus
or Deficit
$ 97.8
106.8
111.3
118.6
118.4
134.7
158.3
178.8
184.5
196.6
211.4
231.9
246.5
268.4
324.6
$ 5.6
9.0
4.5
7.3
-0.2
16.3
23.6
20.5
5.7
12.1
14.8
20.5
14.6
21.9
56.2
6.1
9.2
4.2
6.6
-3.4
-7.1
-4.8
-5.9
-1.6
-3.8
-8.7
-25.2
+ 3.2
-2.8
-23.0
-23.2
-14.3
-3.5
-43.6
—
13.8
17.5
13.0
3.2
6.6
7.5
9.7
6.3
8.9
20.9
Economic Report of thes President, February 19 75, Table C-64,
P- 324, for years 1961 through 1974 ; 19 75 figure from Final
Monthly Treasury Statement of Rece ipts and Outlays of the
United States Government, for period from July 1, 1974
through June 30, 19 75.
TABU:
2
CHANGES IN BUDGET OUTLAYS BY FUNCTION:
FY 1976 OVER FY 1975
(millions of dollars)
Function
'Y 1975
FY 1976
(2)
(1)
National defense
International affairs
Gene m l science, space, and technology
Natural resources, environment and energy
Ag r i cu I ture
Commerce and transportation
Community and regional development
Education, manpower and social services
Ilea lth
Income security
Veterans benefits and services
I.aw enforcement and justice
Genera1 gove rnment
Revenue sharing and general purpose fiscal assistance
Interest
Allowances
Undistributed offsetting receipts
TOTAL
(lj
Mid-Session
R e v i e w of the
87.4
5.0
4.3
9.7
r.8
12.6
4.6
15.0
27.6
L6
109.1
3
2
7
31
14.1
323.6
1976 B u d g e t , M a y 3 0 , 1 9 7 5 , T a b l e
Change over
FY 1975
Conference Report Recommendation
of Congressional
Budget Committees (3)
FY 1976
I Change over FY 1975
91,
5,
4,
11,
2
17
6.
17
30
128
18
3
3
7
35
1
366.5
-18
+ 4. 1
+ 0. 1
+ 1. 7
+ 0. 5
+ 5. 0
+ 1. 8
+ 2. 9
+ 3. 3
+ 19 6
+1 5
+ 0 .3
+ 0 .6
+ 0 .3
+ 4 .2
+ 1 .4
-4 .4
+ 42.9
90 7
4 9
4 6
11 6
1 8
17 5
8.65
19.85
30
125
17
3
3
7
35.0
1.2
-16.2
367.0
+ 3. 3
-0. 1
+ 0. 3
+ 1. 9
+ 4. 9
+ 4. 05
+ 4. 85
+ 3 .1
+ 16 .2
+ 0 .8
+ 0 .4
+ 0 .6*
+ 0 .2
+ 3 .8
+ 1 .2
-2 .1
43.4
9, p . 1 5 .
(2) FY 1976 Administration estimates from the statement of James T. Lynn, Director of the Office of Management and Budget
b e f o r e the S e n a t e C o m m i t t e e on the B u d g e t , O c t o b e r 2 1 , 19,75, p . 1 1 .
(Y) First Concurrent Resolution on the Budget--Fiscal Year 1976, Conference Report, 94th Congress, Report No. 94-198, May 9,
"
1 9 7 5 , p . 9.
^
Table 3
Income Distribution of President's Tax Reduction Proposal
at 1975 Levels of Income as Compared to 1972-74 Law
Adjusted gross '
income c:lass \
(billions of dollars)
Tax liability :
Proposed
based on
:
1976 tax
1972-74 law
liability
Tax
reduction
:
Percentage
distribution of :
: tax reduction
Percentage
reduction in
tax liability 1/
0 -
$5,000
2.0
0.8
1.2
5.9
61.2
$5,000 -
10,000
14.1
9.1
5.0
24.0
35.3
10,000 -
15,000
23.1
17.6
5.5
26.6
23.8
15,000 -
20,000
23.7
19.5
4.2
20.2
17.7
20,000 -
30,000
28.0
24.7
3.3
16.0
11.8
30,000 -
50,000
16.9
15.9
1.0
5.0
6.1
50,000 - 100,000
12.1
11.7
0.4
1.8
3.2
9.4
9.4
0,1
0.4
lf0
129.4
108.7
20.7
100,000 +
Total
Office of the Secretary of the Treasury
Office of Tax Analysis
1/ Based on unrounded liability figures.
Note: Detail may not add to totals due to rounding.
100
16.0
October 8, 1975
Table "4
Income Distribution of the Components of the President's Tax Reduction Proposal
at 1975 Levels of Income as Compared to 1972-74 Law
(millions of dollars)
Components
Adjusted Gross
Income Class
$
0 -
$5,000
$1,000
Personal Exemption
Standard Deduction Change
Rate Reduction
Total
515
608
102
1,225
5,000 - 10,000
1,908
1,961
1,098
4,967
10,000 - 15,000
2,548
925
2,040
5,513
15,000 - 20,000
2,056
342
1,788
4,186
20,000 - 30,000
1,867
154
1,287
3,308
30,000 - 50,000
802
31
204
1,037
50,000 - 100,000
330
5
48
383
100,000 +
80
1
10
91
6,580
20,711
TOTAL
10,105
Office of the Secretary of the Treasury
Office of Tax Analysis
Note: Detail may not add to totals due to rounding.
4,026
October 7, 1975
Table 5
Comparison of Individual Tax Cuts in President's
Proposal and in Tax Reduction Act of 1975
President's Proposal
Standard deduction 4.0
$1,000 personal exemption
Rate changes
TOTAL
$ billion
10.1
6.6
20.7
Tax Reduction Act of 1975
Standard deduction 2.5
$30 personal exemption credit
Earned income credit
Housing credit
TOTAL
Office of the Secretary of the Treasury
Office of Tax Analysis
5.3
1.5 1/
p.6 ~~
l5T0
October 6, 19
1/ Includes the refundable portion of the earned income credit.
Table 6
Income Distribution of President's Tax Reduction Proposal
at 19 75 Levels of Income as Compared to 197 5 law
Proposed
1976 tax
liability
Tax Liability
based on
19 75 law 1/
Adjusted gross
income class
(
Tax
reduction
billions of dollars
1.2
0 - $5,000
Percentage
: Percentage
distribution of : reduction in
tax reduction 2/:tax liability 2
0.8
0.4
percent
)
32.3
3.3
5,000 - 10,000
11.5
9.1
2.4
20.4
21.0
10,000 - 15,000
21.1
17.6
3.5
29.6
16.5
15,000 - 20,000
21.9
19.5
2.4
20.5
11.0
20,000 - 30,000
26.8
24.7
2.1
17.5
7.7
30,000 - 50,000
16.6
15.9
0.7
5.6
4.0
50,000 - 100,000
12.0
11.7
0.3
2.4
2.3
9.4
9.4
0.1
0.6
0.8
108.7
11.8
100.0
9.8
100,000 - +
120.5
TOTAL
(Revised October 24 / 1975)
Office of the Secretary of the Treasury
Office of Tax Analysis
1/ Includes effect of changes in the standard deduction, the $30 exemption credit; the home
"~ purchase credit, and the nonrefundable portion of the earned income credit. The refundable
portion of the earned income credit is treated as an expenditure item.
2/ Based on unrounded liability figures.
MOTE-. Detail may not add to totals due to rounding. Minor differences may arise in totals
appearinq
on
other
-tables
due
to
the
different
methods
used
in
estimating
these
i n c oo m e
^
Table 7
Income Distribution of the Components of the Tax Reduction Act of 1975
at 1975 Levels of Income as Compared to 1972-74 Law
(millions of dollars)
Adjusted Gross
Income
Class
$
Standard
Deduction
Change
0-$5,000
502
Tax Reductions
Earned
Income
$30 Credit
Credit
Home
Purchase
Credit
Total
Tax
Reduction
Refundable
Portion of
Earned Income
Credit (Outlays)
Tax
Reduction
Plus
Outlays
835
890
1,725
223
298
29
5,000-10,000 1,062
1,190
250
53
2,555
10,000-15,000 374
1,505
0
144
2,023
2,023
15,000-20,000 527
1,079
0
156
1,762
1,762
20,000-30,000 240
824
0
176
1,240
1,240
30,000-50,000 46
257
0
68
371
371
50,000-100,000 8
75
0
19
102
102
100,000 + 1
15
0
4
20
20
TOTAL 2,760
5,243
279
Office of the Secretary of the Treasury
Office of Tax Analysis
Note:
Detail may not add to totals due to rounding.
625.
8,908
1,113
2,778
10,021
October 7, 1975
Table 8
Tax Liabilities for Family with No Dependents,
Filing Jointly with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
gross
inocme
$ 5,000
Tax Liability
1975
: Proposed
1972-74
law 2/: 1976 law
law
$ 322
$ 170
60
$ 262
$ 110
658
492
335
323
157
10,000
1,171
1,054
800
371
254
15,000
2,062
2,002
1,750
312
252
20,000
3,085
3,025
2,780
305
245
25,000
4,240
4,180
3,950
290
230
30,000
5,564
5,504
5,328
236
176
40,000
8,702
8,642
8,444
258
198
50,000
12,380
12,320
12,080
300
240
7,000
$
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
~~
rroposed
Reduction from
1972-74
1975
law
law
ji
October 6, 1975
if standard deduction exceeds itemized deduction, family uses
standard deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase
Credit.
J/3Table 9
Tax Liabilities for Family with 1 Dependent,
Filinq Jointly with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
gross
income
Proposed
:
Tax Liability
:
Reduction from
: 1972-74 : 1975
: Proposed : 1972-74 : 1975
:
law
:
law 2/: 1976 law
law
:
law 2/
$ 5,000
$ 207
$ 73
0
7,000
526
386
10,000
1,028
15,000
$ 207
$ 73
190
336
196
938
640
388
298
1,897
1,807
1,535
362
272
20,000
2,897
2,807
2,530
367
277
25,000
4,030
3,940
3,660
370
280
30,000
5,324
5,234
4,988
336
246
40,000
8,406
8,316
8,054
352
262
50,000
12,028
11,938
11,630
398
308
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
October 6, 1975
If standard deduction exceeds itemized deduction, family uses
s.tan.dard deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase
Credit. Also assumes that taxpayer is not eligible for the
Earned Income Credit. Taxpayers maintaining a home in the
United States for a dependent child are eligible for the
Earned Income Credit (EIC) if they earn less than $8,000.
If eligible for the EIC under 1975 law, taxpayers with earned
income of $5,000 would have no tax liability and would receive
$227 in direct payments from the Government. Taxpayers with
earned income of $7,000 would have tax liabilities of $286.
Table 10
Tax Liabilities for Family with 2 Dependents,
Filing Joint Return with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
gross
income
Tax Liability
1975
: Proposed
1972-74
law 2/: 1976 law
law
Proposed
Reduction from
1972-74
1975
law
law 2/
$98
$0
60
342
126
709
485
401
224
1,732
1,612
1,325
407
387
20,000
2,710
2,590
2,280
430
310
25,000
3,820
3,700
3,370
450
330
30,000
5,084
4,964
4,648
436
316
40,000
8,114
7,994
7,664
450
330
50,000
11,690
11,570
11,180
510
390
$ 5,000
$98
$0
7,000
402
186
886
15,000
$0
*
10,000
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
"~
October 6, 1975
If standard deduction exceeds itemized deduction, family uses
standard deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase
Credit. Also assumes that taxpayer is not eligible for the
Earned Income Credit. Taxpayers maintaining a home in the
United States for a dependent child are eligible for the
Earned Income Credit (EIC) if they earn less than $8,000. If
eligible for the EIC under 1975 law, taxpayers with earned
income of $5,000 would have no tax liability and would receive
$300 in direct payments from the Government. Taxpayers with
income of $7,000 would have a tax liability of $86.
1/1
Table 11
Tax Liabilities for Family with 4 Dependents,
Filing Joint Return with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
gross
income
Tax Liability
1972-74
1975
: Proposed
law
law 2/: 1976 law
$ 5,000
$
o
$
o
$
proposed
Reduction from
1972-74
1975
law
law 2/
o
$
0
$ °
$
170
0
7,000
170
0
0
10,000
603
372
190
413
182
15,000
1,402
1,222
965
437
257
20,000
2,335
2,155
1,816
519
339
25,000
3,400
3,220
2,830
570
390
30,000
4,604
4,424
4,008
596
416
40,000
7,529
7,349
6,896
633
453
50,000
11,015
10y835
10,280
735
555
Office of the Secretary of the Treasury
Office of Tax Analysis
October 6, 1975
1/
If standard deduction exceeds itemized deduction, family uses
standard deduction.
2/
Assumes that taxpayer is not eligib le for the Home Purchase
Credit. Also assumes that taxpayer is not eligible for the
Earned Income Credit. Taxpayers ma intaining a home in the
United States for a dependent child are eligible for the Earned
Income Credit (EIC)if they earn les s than $8,000. If eligible
for the EIC under 1975 law, taxpaye rs with earned income of
$5,000 would have no tax liability and would receive $300 in
direct payments from the Government . Taxpayers with income cf
$7,000 would have no tax liability and would receive direct
payments of $100.
Table 12
Tax Liabilities for Single Person Without Dependents,
with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
rroposea
~
ReriiirMan from
1972-74
1Q79-7A
1975
law
law 2/
Adjusted
gross
income
Tax Liability
1975
: Proposed
1972-74
law 2/: 1976 law
law
$ 5,000
$ 490
$ 404
$ 307
$ 183
$ 97
7,000
889
796
641
248
155
10,000
1,506
1,476
1,227
279
249
15,000
2,589
2,559
2,307
282
252
20,000
3,847
3,817
3,553
294
264
25,000
5,325
5,295
5,015
310
280
30,000
6,970
6,940
6,655
315
285
40,000
10,715
10,685
10,375
340
310
50,000
15,078
15,048
14,725
353
323
Office of the Secretary of the Treasury
Office of Tax Analysis
October, 6, 1975
1/
~~
If standard deduction exceeds itemized deduction, family uses
standard deduction.
2/
Assumes that taxpayer is not eligible for the Home Purchase
Credit.
//f
Table 13
A Comparison of the Liability Effects
of the Tax Reduction Act of 1975 and the
President's Tax Cut Proposal on Business Income 1/
(1975 Levels of Income)
Tax Reduction President's Tax:
Act of 19 75 : Cut Proposal :
(..
$ billions
[ncrease the corporate surtax exemption to $50,000
with a 2 percentage point reduction
in the normal tax
Increase the rate of
the investment tax
credit to 10% 2/
Change
)
-1.5
-1.5
-3.3
-3.0
+0.3
I percentage point
reduction in the
corporate surtax
—
-2.2
-2.2
Jtilities tax relief
previously proposed
—
-0-6
-0.6
-7.2
-2.5
tfIN credit * — *
TOTAL
-4.7
)ffice of the Secretary of the Treasury
Office of Tax Analysis
Revised October 24, 1975
./ These figures show the difference between 1972-7 4 law liability
and the two tax programs as applied to calendar 1975 income.
!/ The Tax Reduction Act of 1975 included an additional one percent
investment tax credit where that additional credit is used in
conjunction with an Employee Stock Ownership Plan (ESOP). The
President's proposal does not include this credit.
OTE: Detail may not add to totals due to rounding.
Less than $50 million.
neDepartmentoftheJREASURY
\SHINGT0N, D.C. 20220
TELEPHONE 964-2041
73^
FOR IMMEDIATE RELEASE
November 10, 1975
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3.2 billion of 13-week Treasury bills and for $3.3 billion
of 26-week Treasury bills, both series to be issued on November 13, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing February 13. 1976
High
Low
Average
26-week bills
maturing May 13, 1976
Price
Discount
Rate
Investment
Rate 1/
98.668
98.643
98.651
5.212%
5.310%
5.279%
5.37%
5.47%
5.44%
Price
97.264
97.213
97.228
Discount
Rate
Investment
Rate 1/
5.412%
5.513%
5.483%
5.
5.77%
5.73%
Tenders at the low price for the 13-week bills were allotted 12%.
Tenders at the low price for the 26-week bills were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
Received
District
$
38,525,000
Boston
,375,205,000
New York
32,430,000
Philadelphia
77,650,000
Cleveland
27,860,000
Richmond
53,900,000
Atlanta
325,705,000
Chicago
55,860,000
St. Louis
38,275,000
Minneapolis
48,630,000
Kansas City
45,980,000
Dallas
San Francisco 199,525,000
TOTALS$5,319,545,000
l
Accepted
$
37,525,000
2,511,845,000
32,430,000
66,890,000
25,860,000
47,900,000
166,005,000
39,050,000
27,275,000
46,630,000
39,700,000
159,125,000
Received
$
44,040,000
4,335,905,000
38,760,000
120,160,000
23,375,000
26,155,000
286,095,000
35,525,000
50,250,000
24,210,000
15,520,000
268,025,000
$3,200,235,000a/ $5,268,020,000
Accepted
$
41,040,000
2,745,905,000
13,760,000
100,160,000
16,375,000
21,655,000
108,085,000
23,525,000
45,250,000
21,210,000
15,020,000
148,025,000
$3,300,010,000 b/
J Includes $501,895,000 noncompetitive tenders from the public.
\l Includes $194,735,000 noncompetitive tenders from the public.
/ Equivalent coupon-issue yield.
Xs
Department of theJREASURY
INGTON, D.C. 20220
TELEPHONE 964 2041
73/
FOR IMMEDIATE RELEASE
November 11, 1975
52-WEEK BILL AUCTION RESCHEDULED
The auction of $2.1 billion of 52-week Treasury bills
maturing November 16, 19 76, scheduled for Wednesday, November 12, has been cancelled by the Treasury. A new auction
of bills, also in the amount of $2.1 billion but maturing
one day earlier, on November 15, 19 76, will be held on
Thursday, November 13.
Settlement for the new bills will be on Tuesday,
November 18, the same day as originally scheduled for the
earlier bill issue. The proceeds of the bills will be
used to refund maturing bills and to raise new cash. Details
of the offering are stated in a separate release.
The change in the maturity date of the bill was made
to insure that the Treasury would be able to arrange for
delivery on Tuesday even if the temporary debt limit is
not extended beyond Saturday, November 15. By law, bills
cannot exceed one year from issue to maturity. If the
debt limit bill now before the Congress is not enacted by
Saturday, $2.1 billion of one-year bills dated November 15,
1975, and maturing November 15, 1976 will be issued to a
Government account. These bills will be delivered in
turn on Tuesday, November 18, to purchasers in Thursday's
auction.
The action was taken as part of a contingency plan for
assuring the consummation of the sales of all Treasury
securities previously auctioned or offered for sale, including the 13- and 26-week bills announced today for auction
on Monday, November 17.
oOo
WS 466
w Department of theTREASURY
SHINGTON, D.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
November 11, 1975
AMENDMENTS TO TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, amends its invitation
for tenders dated November 6, 1975, for 52-week Treasury bills.
The closing hour for the receipt of tenders for the 52-week Treasury bills
to be delivered November 18, 1975, has been postponed to 1:30 p.m., Eastern Standard
time, Thursday, November 13, 1975. The maturity date of the bills has been changed
to November 15, 1976, and the period from settlement and delivery to maturity will
be 363 days.
The details of the amended public notice inviting tenders are:
The Department of the Treasury, by this public notice, invites tenders for
Treasury bills to be delivered November 18, 1975, and to mature November 15, 1976
(CUSIP No. 912793 ZU3),
a period of 363 days.
The bills will be delivered for
cash payment and in exchange for Treasury bills maturing November 18, 1975.
Tenders in the amount of $2,100 million, or thereabouts, will be accepted
from the public, which holds $1,093 million of the maturing bills.
Additional amounts of the bills may be issued at the average price of
accepted tenders to Government accounts and Federal Reserve Banks, for themselves
and as agents of foreign and international monetary authorities, which hold
$908 million of the maturing bills.
The bills will be issued on a discount basis under competitive and
noncompetitive bidding, and at maturity their face amount will be payable
without interest.
They will be issued in bearer form in denominations of
$10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value)
and in book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Thursday, November 13, 1975. Tenders
will not be received at the Department of the Treasury, Washington.
must be for a minimum of $10,000.
$5,000.
Each tender
Tenders over $10,000 must be in multiples of
In the case of competitive tenders the price offered must be expressed
on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions
may not be used.
Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their
(OVER}
/24
positions with respect to Government securities and borrowings thereon may
submit tenders for account of customers provided the names of the customers
are set forth in such tenders.
except for their own account.
Others will not be permitted to submit tenders
Tenders will be received without deposit from
incorporated banks and trust companies and from responsible and recognized
dealers in investment securities.
Tenders from others must be accompanied
by payment of 2 percent of the face amount of bills applied for, unless the
tenders are accompanied by an express guaranty of payment by an incorporated
bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for $500,000 or less without stated
price from any one bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids.
Settlement for accepted tenders in
accordance with the bids must be made or completed at the Federal Reserve Bank
or Branch on November 18, 1975, in cash or other immediately available funds or
in a like face amount of Treasury bills maturing November 18, 1975. Cash and
exchange tenders will receive equal treatment.
Cash adjustments will be made for
differences between the par value of maturing bills accepted in exchange and the
issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax return, as ordinary gain or loss, the difference between the
price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity durfc
the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the conditions of
their issue.
Copies of the circular may be obtained from any Federal Reserve
Bank or Branch.
777?
Contact: L.F.Potts
Extension 2951
November 11, 1975
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES TENTATIVE MODIFICATION
OF DUMPING FINDING ON TUNERS (OF THE
TYPE USED IN CONSUMER ELECTRONIC PRODUCTS)
FROM JAPAN
The Treasury Department announced today a tentative
determination to modify a finding of dumping in the case
of tuners (of the type used in consumer electronic
products) from Japan so as to exclude therefrom Tokyo
Shibaura Electric Company, Ltd., under the Antidumping
Act, 1921, as amended. Notice of this decision will
appear in the Federal Register of November 12, 1975.
A finding of dumping with respect to tuners from Japan
was published in the Federal Register of December 12,
1970.
The Federal Register notice of November 12, 1975,
will state in part the finding that, with the exception
of three sales for which duties in a de minimis amount
were assessed, all sales by Tokyo Shibaura Electric
Company, Ltd., for a period of over two years from the
date of withholding of appraisement (Federal Register
notice of April 16, 1970) have been made at not less
than fair value, and that written assurances have been
received that future sales of tuners to the United
States will not be made at less than fair value.
Imports of tuners from Japan during 1974 were valued
at roughly $7 million.
*
WS-464
*
*
FOR RELEASE AT 4:00 P.M.
November 11, 1975
'
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $6,600,000,000 , or
thereabouts, to be delivered November 20, 1975, as follows:
93-day bills (to maturity date) in the amount of $3,200,000,000, or
thereabouts, representing an additional amount of bills dated August 21, 1975,
and to mature February 19, 1976
(CUSIP No. 912793 YU4), originally issued in
the amount of $3,201,985,000, the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date), in the amount of $3,400»000»000» or thereabouts,
of bills dated November 15, 1975, and to mature May 20, 1976 (CUSIP No. 912793 ZH2).
The bills will be delivered for cash payment and in exchange for Treasury bills
maturing November 20, 1975, outstanding in the amount of $5,903,955,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $3,748,360,000.
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their face amount will be payable without
interest.
They will be issued in bearer form in denominations of $10,000,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern
Standard time, Monday, November 17, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
multiples of $5,000.
Tenders over $10,000 must be in
In the case of competitive tenders the price offered must
be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
(OVER)
-2securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
Others will not be permitted to submit tenders except for their
own account.
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others, must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust companyPublic announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on November 20, 1975,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing November 20, 1975.
ment.
Cash and exchange tenders will receive equal treat-
Cash adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notice*
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from any Federal Reserve Bank or
/37
FOR IMMEDIATE RELEASE
STATEMENT OF THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
WEDNESDAY, NOVEMBER 12. 1975, 9:30 A.M.
Mr. Chairman, I am here today to urge prompt
action by your Committee to increase the temporary
limit on the public debt. First, I want to express
the profound regrets of the Secretary of the Treasury
whose plan to attend this hearing was pre-empted by
a request of the President that he be available for
consultation on other urgent matters before the
Administration.
As you know, the present temporary debt limit of
$577 billion will expire at the end of this week on
November 15, and at that time the statutory limit will
revert to the $400 billion permanent ceiling. It is
absolutely essential for the responsible fiscal
management of our Government that the Congress approve
an extension and increase in the debt limit, and that
your Committee again approve our specific requests as
you did in June to:
(1) increase by $10 billion the amount of
Treasury bonds that can be issued without regard to
the 4-1/4% ceiling;
(2) extend the maximum maturity of Treasury
notes to 10 years from the present 7 years, and
(3) remove the statutory ceiling on the
savings bond interest rate.
WS-465
- 2 The House is expected to pass today H. R. 10585 to
raise the debt limit temporarily to $595 billion
through March 15, 1976.
This amount should be sufficient to meet the
Treasury's financing requirements in that period.
Essential as this legislative process is here today,
one cannot help but be concerned by the events that
surround enactment of debt limit bills. That concern
is that the debt limit has become a barrier to
effective fiscal management causing intermittent
artificial crises over the Government's ability to
pay its bills. Even more important, the debt limit
as a part of the Second Liberty Bond Act under the
jurisdiction of other committees complicates the
important new congressional budgeting process.
As you know, on October 29, the House failed to
pass H. R. 10049 to provide a debt limit of $597 billion
temporarily through March 31, 1976. The defeat of
that bill was the second defeat of a debt limit bill
within the last 6 months. Looking at the record,
it is not at all clear why the House defeated the
debt limit bill reported to it originally by the
Ways and Means Committee, or for that matter,
whether any debt limit bill would have been enacted,
regardless of amount or duration of the temporary
limit.
The American people must be confused by the
presumption that a vote against the debt limit bill
is a vote for lesser Federal spending and debt.
The only way effectively to curb spending, as you
know so well, is to make the difficult and complex
choices among program alternatives in the congressional
budget process. In fact, a limit on Federal spending
would be the more appropriate action as the President
has indicated, and the Administration strongly supports
the new congressional budget process. We are encouraged
to see that the Second Concurrent Resolution in the
fiscal year 1976 budget is nearing completion. While
this budget does not have the force of law until next
year, the review of the budget this year in the perspective
of overall targets has been a useful discipline.
- 3Many Secretaries of the Treasury have appeared
before this Committee and the Ways and Means Committee
on debt limit legislation. Over the years, a concensus
has developed that, while the debt limit is useless as
a tool to control Federal spending, the debt limit
hearings have at times had the positive aspect of
providing a forum for discussion of the Federal
budget and the management* of the Federal debt.
The Treasury supports such meaningful dialogue on
fiscal matters. It is clear, however, that it should be
done in a setting that is divorced from the crisis
atmosphere of an immediate need to extend the
Government's borrowing authority. The only positive
note in recent debt limit hearings is this Committee's
recognition of the need for more flexibility in debt
management in the rates and maturities permitted by
statute.
With the imminent expiration date for the debt
ceiling, it is unrealistic to attempt to modernize
Section 21 of the Second Liberty Bond Act. However,
in the near future, the Congress should debate and
review this act. Ideally, Section 21 should authorize
the Secretary of the Treasury to borrow to meet
budget requirements and provide adequate cash operating
balances. This would not give the Secretary of the
Treasury discretion to conduct the Government's
financial affairs irresponsibly. Such a proposal
would place the responsibility for setting budget
totals and the debt limit, which is an integral
part of the totals, with the congressional budget
committees and the Congress as a whole.
This proposal would provide a sensible framework
for the Congress and the public to review Federal
spending, debt management and the economic situation.
The American public, if our Treasury mail is any
indication, is concerned about the forces behind
huge deficits and about the impact of Federal financing
on the availability of credit in general. We must turn
our attention more fully to the basic issues.
Treasury debt management is an area in which this
Committee has long been expertly involved. In June,
you expressed approval of legislative changes to
give the Secretary of the Treasury more flexibility
- 4 to offer longer-term marketable debt and to change
the interest rate on United States Savings Bonds to keep
that rate more consistent with current rates for
competitive instruments.
The Treasury continues to have a tremendous
financing task in the second half of fiscal year 1976.
Unless we have some leeway to issue long-term securities,
we will risk causing extreme congestion in the short
and intermediate term maturity areas of the Nation's
financial markets. In its refunding this month,
the Treasury used the last of the $10 billion current
exception to the 4-1/4 percent interest rate ceiling
on bond issues. We now have no authority to issue
any marketable Treasury securities maturing in over
7 years. It is even more imperative now than it
was in June that legislation be enacted that will
enable us to have access to all sectors of the
markets to minimize distortions in any one maturity
area.
As you know, the House Budget Committee has
reported the Second Concurrent Resolution on the
budget for fiscal year 1976, which calls for a
$72.0 billion deficit. The Second Concurrent Resolution
reported by the Senate Budget Committee includes a
$74.3 billion deficit for fiscal year 1976. Off-budget
agency financing, mostly through the Federal Financing
Bank, raises the Treasury's borrowing requirements by
an additional $14 billion above the amount needed to
finance the budget deficit in the current fiscal year.
In the first half of fiscal year 1976, Treasury
borrowing from the public will total about $47 billion
of which all but $7 billion has been done or announced
through today. We estimate the budget deficit for the
July-December half at about $43 billion, with a further
$4-1/2 billion of off-budget outlays and nearly $11 billion
of maturing coupon issues. This implies that about
$58-1/2 billion of new issues, apart from regular
weekly bill rollovers, will occur in the JulyDecember period. In the second half of fiscal year
1976, the Treasury must borrow $40 to $45 billion
from the public and refund $15-1/2 billion of coupon
securities, raising total issues -- again excluding
bill rollovers -- to between $55 and $60 billion.
- 5Mr. Chairman, Members of the Committee, the financial
markets are beset by the pressures of heavy Government
financing. Continued economic recovery will be hampered
by the impact of massive Federal debt financing. Although
some analysts assume that the financial needs of an economic
recovery can be automatically filled, the reality is that
mortgages, consumer debt, and business spending for fixed
investment and inventories must compete against unprecedented
Treasury borrowing requirements which will continue through
this year and into the foreseeable future.
The future pace of the economic recovery will depend
to a large extent upon the availability of credit across
a spectrum of economic activity. If specific industries,
such as residential construction or the large numbers of
businesses which do not have top credit ratings, are unable
to obtain necessary financing, both the strength and
sustainability of the recovery will be affected. The
impact of such large Treasury borrowings must receive
greater attention in the preparation of general economic
forecasts. This was the basis of our earlier concerns
about the financial disturbances of restricted access
to funds and rising interest rates that would result
when private borrowing needs generated by the recovery
have to compete against Treasury borrowing. Unfortunately,
financial market developments already indicate that these
problems are occurring.
Our strategy is to minimize the disruptive effects
of the Treasury financing job. This requires that we
have debt management flexibility.
We have already taken some steps by reducing our
emphasis on the short-term bill market --to limit the
risk that excessive amounts of short-term Treasury debt
will lead to a rise in all short-term interest rates with
the accompanying adverse economic and financial consequences
that we experienced in 1966, 1969-70, and again in 1973.
Despite our continuing efforts to provide a degree of
relief from pressures on the very short-term portion
of the market, the average length of privately-held
marketable Treasury securites has dropped to
- 62 years, 6 months, with a consequent compression of
Treasury maturities. The charts included in my
statement show the concentration of short-term
Treasury coupon maturities that have been issued
and are projected for the period between December 1974
and December 1975.
*
We have little room to maneuver within the
7-year area. This might seem tolerable for a time,
but the build-up of maturities which have to be
refunded will add to the volatility of markets
and could be a seriously disturbing matter for
other borrowers and for our financial institutions.
Mr. Chairman, I urge your Committee and the
Congress to provide the Treasury with increased
flexibility to offer securities in all maturity
areas. Specifically, I request that you again
approve the measures which the Committee approved
in June.
Extension of the maximum maturity of Treasury
notes from 7 years to 10 years will arrest the decline
in the average maturity of the debt and reduce the
concentration in short-term issues. An increase in
the Treasury's bond issuing authority is a very
logical extension of the proposal to lengthen the
maximum maturity of Treasury notes. We have just
used the last of the current $10 billion exception
to the 4-1/4 percent ceiling, and we now have no
authority to issue any securities maturing in more
than 7 years.
In its report on H. R. 10049, the House Ways and
Means Committee stated that it had not provided the
flexibility requested because:
"The Committee believes that there are
dangers in encouraging a substantial shift
to longer maturities in the public debt
structure at the present time. Long-term
interest rates have not been as responsive
as short-term rates of interest to the
decrease in economic activity since the
beginning of 1974. While greater Federal
- 7participation in the longer maturity
market would tend to lengthen the average
maturity of the public debt in the hands
of the public, it could also mean higher
long-term interest rates."
This statement overlooks the fact that continued
dependence on short-term 'borrowing also creates
serious hazards. The availability of short-term
construction financing is as important as permanent
financing. Deposit flows to financial institutions,
particularly savings and loan associations, are far
more sensitive to the competition of short -term Treasury
obligations than to the competition of longer-term obligations.
This is clearly understood by the thrift institutions themselves.
The weight of practical and experienced market
advice is that we should offer securities in all
maturity areas to minimize the risk of an adverse
impact on any particular sector. Unless we can
offer securities in all the maturity ranges to a
wide range of investor interests, debt management is
made more difficult and the ultimate cost of financing
our deficits is likely to be increased. Obviously,
this means informed market judgments are called for at
the time of any financing, and our choices should not be
restricted by inadequate authority to issue the
most appropriate range of securities.
Indeed, if we are forced to concentrate entirely
in the short areas, then, as economic recovery
progresses, the problems of the Federal Reserve will
be greatly complicated, as they attempt to moderate
the inevitable pressures for rapid growth in the
Nation's money supply.
I also want to emphasize that Treasury's offerings
of long-term 20- to 30-year bonds, as well as our one
offering of 15-year bonds, have been successful and
constructive for markets. The market has accepted
them. It now anticipates them, and they are readily
absorbed into the financial structure where they
provide a standard of value not only for our own
securities, but for agency, corporate, and the
municipal markets as well.
- 8The third debt management measure is removal of
the 6 percent rate ceiling on Savings Bonds. The
purpose, of course, is to allow the rate on Savings
Bonds to be changed more promptly from time-to-time
in recognition of changing financial circumstances,
and to provide greater assurance to the small
investor, who is our biggest purchaser and holder
of Savings Bonds, that his Government will give
him a fair rate of return on this investment.
Mr. Chairman, Members of the Committee,
Savings Bonds account for more than one-fifth
of the total privately-held Treasury debt, and the
average Savings Bond stays outstanding longer than
the average marketable security. Savings Bonds are
a great source of stability in debt management. It
is a program that we cannot do without.
There is a huge debt management job before us.
We need your help and Congress can help immeasurably
by giving us the additional flexibility we need to do
the job.
Attachments
0O0
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1976
Based on: Budget Receipts of $298 Billion,
Budget Outlays of $370 Billion,
* Off-Budget Outlays of $14 Billion
($ Billions)
Operating
Cash
Balance
With $3 Billici;
Mar",in for
Con t ing e: \ ^'j^s
Public "Debt
Subject to
Limit
-Actual
1975
June 30
7.6
534.2
July 31
4.2
' 539.3
August 31
3.6
548.7
September 30
554.3
October 31
563.1
-Estimated-
November 30
6
565
568
December 31
6
572
575
January 31
6
573
57,'.
February 29
6
JO J
58S
March 31
6
599
602
April 15
6
610
61.3
April 30
6
599
60 V.
Hay 31
6
609
61/
June 15(peak)
6
616
6T
June 30
6
610
613
1976
D.
i'*UVi -inlu'i
/ ,
J '•' / l!
December 31, 1975 est.
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
i$Bil.
1977
6h
4
2V
0
6
4h
2
0
6
420
4.3
3
J
21
1.5 Ul.5 • ? ? 1 8
Ui
6.0
3J 3.0 „ 3.0
1 5 -19
7?"
JL
I
1978
J.5
>
1979
18
2.8
•
1.7
2
°
,,
•
B 8 I A SE O IN
J F M A M J J
M
D
J F M A M J J A S O N D
N e w issues Calendar Year 1975.
A Treasury bills (in 2 year cycle slot).
Office of the Secretary of the Treasury
Offif' M Debt Analysis
E23 Refunding of 2 year note maturing December 31, 1975
and $1.5 billion cash.
November 12.19751
December 31, 1975, con't.
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
$Bil.
SBil
2
1.4
0
1985
2-
1986
02-
1987
020204202-
i i
1988
1989
1990
2-
1991
2r
o1-
2.5
I
1.1
rf
042020 —
2-
2001
2002
i
2
1992
2.1
1993
r
2003
27
I
i
02r
2004
I
02|0^
1994
0-
J F M A M J
2000 is *
.6
J A S O N
D
2005
7
J F M A M J J A S O N D
5 5 N e w issues calendar year 1975.
* Reopened
November 12 1975-3
December 31, 1974
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
$Bi
$Bi
6
4
2
0
1979
2*
I
1980
1976
™
42-
"•
4-0
I
1.7
I
I
1
5.0
I
1.1
1.6
I
1982
4.4
06:
4
2
2.3
1981
4-
1977
t
0
I
11111 i Ii
o
6
4.1
1.7
!
3.3
1978
I
2.5
I
1983
4.6
1.2
19841.0
J F M A M J J A S O N D
J F M A M J J A S O N D
* F F B bills (in 2 year cycle slot).
• Treasury bills (in 2 year cycle slot).
(.)"•• P
<x-et,1'
0 " c e - of Uetjt A".i
.
!">< ' " '
I
l-.lbU'
Novemboi 12. 1975-2
December 31,1974, con't.
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
$Bil.
2
0
2:
$Bi
1.4
1986
.3
02020204202042-
1985
1987
r
1988
1989
oi2V
2h
1990
2.6
1991
1992
2.2
02-
1993
0—
20-
1994
J A S O N D
1995
.6
1996
1997
1998
1999
2000
2001
0
2
0
2002
2h
2003
0
2h
0
2
0
2.0
.4
1.2
0^i
0^-
I
J F M A M J
210
2
0
2-
2004
2005
J F M A M J J A S O N D
N vo-'-np. 12 l?/5
TELEPHONE 964-2041
SHINGTON, DX. 20220
j7/d
November 13, 1975
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S 52-WESK BILL AUCTION
Tenders for $2,100 million D f 52-week Treasury bills to be issued to the
public, to be delivered November 18, 1975, and to mature November 15, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price
High
Low
Average -
93.980
93.911
93.940
Discount Rate
5.970%
6.039%
6.010%
Investment Rate
(Equivalent Coupon-Issue Yield)
6.36%
6.43%
6.40%
TOTAL TENDERS FROM THE PUBLIC RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS
District
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$
26,175,000
3,298,820,000
38,710,000
107,740,000
48,905,000
18,870,000
411,890,000
18,720,000
15,675,000
21,805,000
20,085,000
311,075,000
$
19,475,000
1,447,900,000
23,710,000
42,740,000
6,105,000
10,370,000
317,270,000
2,720,000
6,675,000
11,805,000
14,585,000
197,075,000
TOTAL
$4,338,470,000
$2,100,430,000
The $2,100,430,000 of accepted tenders includes 30% ef the amount of
ills bid for at the low price and $73,910,000 of noncompetitive tenders
rom the public accepted at the average price.
In addition, $1,142,800,000 of tenders were accepted at the average price
rom Government accounts and from Federal Reserve Banks for themselves and as
gents of foreign and international monetary authorities.
WS-472
te Deportment of theJREASURY
SHINGTON, D.C. 20220
TELEPHONE 964-2041
/¥/
FOR IMMEDIATE RELEASE
Contact: Herbert C
Extension 8256
November 13, 1975
Shelley
TREASURY ANNOUNCES TENTATIVE MODIFICATION
OF DUMPING FINDING ON
LARGE POWER TRANSFORMERS
FROM THE UNITED KINGDOM
Assistant Secretary of the Treasury David R. Macdonald
announced today a tentative determination to modify a finding of dumping in the case o f large power transformers from
the United Kingdom under the Antidumping Act, 1921, as
amended. Notice of this dec ision will appear in the Federal
Register of November 14, 197 5. A finding of dumping with
respect to large power trans formers from the United Kingdom
was published in the Federal Register of June 14, 1972.
The Federal Register Notice of November 14, 1975, will
state in part that, for a period of over two years from
the Finding of Dumping, sales by Ferranti, Ltd., Hawker
Siddley Electric Export, Ltd., and Parsons Peebles Transformers, Ltd., have not been at less than fair value, and
that assurances have been received that future sales of
large power transformers to the United States will not be
at less than fair value.
WS-470
For Release Upon Delivery
STATEMENT OF
WILLIAM M. GOLDSTEIN
BEFORE THE
SENATE SELECT COMMITTEE ON SMALL BUSINESS
AND THE SUBCOMMITTEE ON CAPITAL MARKETS
NOVEMBER 13, 1975
Mr. Chairman and Members of the Committee and Subcommittee:
My name is William M. Goldstein, and I am the newly
appointed Deputy Assistant Secretary for Tax Policy of the
Treasury Department. I welcome the opportunity to appear
before you to comment on certain aspects of the taxation of
small business. Because until very recently I was engaged
in the private practice of law and heavily concerned with
the tax and financing problems of small and medium-sized
business, I may from time to time draw upon such experiences
in stating my views on the issues at hand.
At the outset, it appears that we must discuss certain
definitional matters in order to create the proper frame of
reference. In his testimony before the Committee last
February, Assistant Secretary Hickman, as you will recall,
attempted to place certain parameters upon the description
of small business. We have also supplied the Committee and
Subcommittee with an Appendix containing certain statistical
information prepared by our Office of Tax Analysis which
presents information based upon various categories of
business determined by reference to assets, sales, and
income. In my remarks today, however, I would generally
hope to be somewhat less specific and refer to certain
general categories of businesses in which we understand you
have the most interest.
WS-467
- 2In my remarks, I propose to deal with four such categories of business enterprises - (1) small business; (2)
start-up business; (3) medium-sized business; and (4) large
business. I shall begin by attempting to define broadly
these categories and then proceed to discuss certain tax
considerations affecting each of them in turn. Finally, I
would like to discuss certain pending legislative proposals
which are intended to aid lfsmall business'1 andto suggest
briefly some other types of assistance which might merit
further consideration.
For purposes of today's discussion my concept of a
"small business" is the privately owned, local producer of
goods and services. A typical company would have net sales
(that is, sales less cost of goods sold) of less than
$100,000. As you are aware, the great preponderance of such
businesses are proprietorships and partnerships, but there
are also a reasonable number of Subchapter S and regular
corporations.
Perhaps the best way to understand the definitonal
approach I am striving towards this morning is to look at
the goals or ambitions of the owners of the businesses in
question. Thus, in the small business category, we find the
owner-operators who derive from their businesses their
principal source of livelihood; their goal is simply to
improve that livelihood. For example, the goals of the
owner of the neighborhood dry cleaning establishment or
restaurant or small grocery store might be to expand his own
operation, to make it more profitable and, perhaps, to open
one or two more locations.
Taken together there may be at least 10 million of
these enterprises but their primary importance lies neither
in their number nor in the share of private business production they account for, although such share is not inconsiderable in terms of output or in terms of their role as
consumers of the output of other business enterprises. The
prime importance of these small businesses does lie in the
tangible expression they give to the ideals of freedom and
individual choice which our society cherishes. It is these
small businesses upon which we rely for personalized goods
and services which lend spice and variety to our lives. It
is these small businesses and the start-up businesses to be
mentioned hereafter, and particularly the opportunity to
establish one, which assures us of the maximum likelihood
that new ideas will get a fair trial and that the economic
7/77
- 3.needs of particular communities will be met. New ideas and
less-than-national needs may not be recognized by the
bureaucracies of large businesses or get lost in committees.
Small businesses are the humanizing element of an economy
and it has been and will be a matter of concern to Congress
and to the Administration that no inadvertent burden be
imposed on this element of the private business sector.
The second category of business of present concern is
the "start-up business.
That is, the individual or group
of individuals with an "idea," whether technological,
marketing, or otherwise, which they believe if properly
nurtured can form the basis of either a medium-sized or
large corporation at some future date. Obviously, the early
stages of such companies as Xerox and Polaroid come readily
to mind. Unlike the small businesses just discussed, these
start-up companies may not even be in operation and may not
be providing anyone's livelihood, but the goals of their
founders are considerably more ambitious. There seems
little doubt that it should be a national policy to encourage and foster the creation and development of such
enterprises.
The third category, the "medium-sized business,"
without attempting to be too specific, would seem to have
net sales of between $1 million and $20 million and "assets,"
as defined in the Appendix, of roughly three-fourths of
these amounts; i.e., a business which is clearly out of the
fledgling stage but is not a major factor on the national
scene. Such businesses may be (1) privately owned, (2)
owned by a relatively small group of purchasers who have
acquired their stock in "private offerings," (3) owned
partially by subsidiaries of larger corporations, or (4)
registered with the Securities and Exchange Commission but
not listed on a major stock exchange. Indeed, they may have
had their initial "public offering" but see no near term
possibility of further financing of this type; indeed, the
"market" may actually be depressing the "value" of their
stock. Using the "ambition" analysis, the owners of these
mediumrsized companies have the desire either to grow within
the rather broad category described above or to move into
the next category of the large business enterprise.
The fourth and final category--"large business"--is
perhaps the easiest to recognize. It is the few thousand
corporations which qualify as major national business
organizations. Typically they are listed on major stock
- 4
/«r
exchanges and have substantial foreign operations. They
borrow money in the public bond market, issue commercial
paper and have multi-million dollar lines of credit from
syndicates of major banking institutions; they belong to
major trade associations and are well represented in their
dealings with both State and Federal governments.
I would like to turn now to the major tax considerations which presently affect the operation and growth
prospects of the four classes of corporations described
above. Put another way, I would like to examine how Federal
income taxes affect the realization of the goals or ambitions which the owners of each class of business have set
for themselves. Since each of these enterprises, in one way
or another, is interested in growth and profitability, we
must consider whether our current system of taxation is a
hindrance or a stimulant to achieving these goals. Since,
in turn, the problem of capital formation is in many instances
a prerequisite to such desired growth, it will be of particular importance to see how our system of taxation affects
the problem of capital formation in the business enterprises
under consideration.
Looking first at the class of businesses which I have
described as "small," it would seem that the owners of such
businesses are virtually indistinguishable from wage or
salary earners in the $10,000 to $20,000 annual income
classification. Even if such businesses are incorporated,
no significant corporate tax is paid due to the offsetting
of corporate income with salaries and bonuses.
This is not to suggest that such businesses do not have
any tax problems. The burden of State and local franchise,
capital stock, sales, property, gross receipts, and income
taxes, and Federal and State employment taxes, unemployment
compensation premiums, etc., may be among the most significant burdens these businesses face. With regard to
Federal income taxes, although the actual payment of dollars
to Washington may not be very significant, the time and
expense involved in keeping the necessary records and
filling out a myriad of prescribed forms may boggle the mind
of the small businessman.
In our view, the most appropriate tax relief for the
proprietors of the type of business now under consideration
would be the enactment of the President's program for
individual tax cuts. That is, the proprietor, partner, or
- 5shareholder-employee of a small business who nets $15,000
per year of adjusted gross income from his enterprise will
find his Federal tax burden most expeditiously lightened by
a basic cut in the effective rate of tax he pays with his
Form 1040 each year.
It should be noted that the proprietors, partners, and
shareholder-employees of small corporations who have adjusted
gross income from their small businesses which is precisely
equal to that of wage-earners and salaried employees are
nevertheless generally favored over the latter type of taxpayer under the practical administration of our present tax
system. That is, even the really small businessman takes
opportunities to realize untaxed income in the form of
deductible travel and entertainment expenses and company
cars, to defer the taxation of economic income through some
use of accelerated depreciation and to further defer taxation through the understatement of closing inventories.
Similarly, even the smallest corporation, if profitable, can
take advantage of such tax benefits as plans to pay the
medical expenses of its shareholder-employees with pre-tax
dollars.
There is no doubt that the small businesses we are now
discussing have the need for increased capital in the form
of both debt and equity. Our conclusion, however, is that
the payment of Federal income taxes is not a material factor
in sucn companies! ability or lack of ability to raise this
type of capital. Simplification of the tax laws, mitigation
of the overall tax burden on these businesses and the
general tax relief proposed by the President seem the most
helpful steps to be taken with regard to these small businesses at this time.
Turning to what I have described as a start-up business,
it is likely that there will be no payment of Federal income
taxes, and hence no burden at all, at least as they are
starting up. Indeed, the goal of most of these companies is
to some day be in the position of having to pay some Federal
income taxes. In addition to the techniques described above
with regard to tax minimization by business enterprises
which are not available to the wage or salary earner, the
start-up company would typically be in a position to use the
section 174 election to deduct research and development
expenses, claim depreciation deductions on its pilot plant
(perhaps including additional first year depreciation) and
to deduct
the
initial
marketing
and advertising
costs
associated
with
a new
business
enterprise.
As you have
recognize
- 6in the past, a more likely problem for the start-up enterprise may be its inability to carry forward its Federal tax
losses for a long enough period for them to become useful.
As I see it, one of the most significant problems of
the start-up business is its lack of access to capital
markets. In this connection the pattern of State and
Federal regulation of the issuance of securities plays a
major role. For example, I can cite the case of a type of
new business which your Committees appear to be most anxious
to encourage - i. e. , a company that appears to have invented
a turbine engine which is more efficient than present
automobile engines and which contributes less pollution to
the atmosphere. The company had raised a relatively modest
amount of money to finance its initial operations by selling
its securities in several "intrastate" offerings. In order
to place it in a position to proceed with further financing
on a proper basis, this company would have had to incur
substantial expenses, including the cost of a rescission
offer to all shareholders. Only at that point would it have
been in a position to raise new equity capital with all the
costs attendant to that effort, particularly when viewed as
a percentage of the dollars raised. Obviously this example
goes beyond pure tax considerations, but I thought this
matter should be highlighted in the interest of aiding small
business.
Similar problems exist in connection with the raising
of capital by start-up companies through borrowing. In
addition to the risk, or apparent risk, of lending to such
companies, the cost of investigation and administration by
lending institutions is very high in relation to funds
disbursed. It is far easier to simply add $500,000 to the
line of credit supplied by a banking syndicate to a major
company than to investigate and supervise five $100,000
loans to start-up companies.
There is at least one area where sound tax policy and
new tax legislation may prove helpful to start-up companies.
This is to make the tax consequences of investing in such
companies more favorable to anyone so inclined. Also, by
increasing the flexibility of tax-oriented forms of business
organization, start-up companies can be made more attractive
as investment vehicles. I will have further remarks in this
area at the end of my presentation.
JJ/f
I turn now to what I have previously described as the
"medium-sized" business. Although this group has perhaps
received less attention than it should from the tax-writing
Committees of Congress and the Treasury Department, it is
arguable that the companies in question may be among the
most important with regard to capital formation and the
future growth and vitality of our economy.
At the outset, it should be recognized that many of the
owners of these medium-sized businesses which are privately
held are very wealthy people. This is not to suggest that
these companies are not in need of careful consideration
where tax equity is concerned; it is merely to approach the
problem with our eyes open. Put another way, a closely held
corporation with between $1 million and $5 million in net
sales which reports more than $50,000 in taxable income will
usually do so only if the principal shareholder-employees,
and in many cases their children and favorite nephews, are
all drawing salaries which bring them well into the 50
percent tax bracket. Indeed, with the enactment of the 50
percent maximum tax on earned income, and with the unreasonable compensation test of Code section 162 as the only
limitation, it makes very little sense for a privately owned
company to pay corporate income tax at the rate of 48 percent
and still run the risk of further taxation of its accumulated
earnings upon the payment of dividends or the ultimate sale
of the corporate stock. Parenthetically, of course, the
bracket considerations favoring the pay-out of large corporate salaries also have a negative effect on capital
formation.
Medium-sized corporations have additional opportunities
for tax minimization in addition to those discussed above.
First of all, if privately held, they may elect to be taxed
under Subchapter S and thereby avoid the corporation income
tax altogether. Such corporations are likely to have enough
income and need for capital equipment that they can take
significant advantage of the investment tax credit; in
addition, the fact that they can offset the first $25,000 of
their taxable income in full through such credit permits
them a potentially fuller realization of such credit, at
least on a percentage basis, than larger corporations.
The surtax exemption is in itself a substantial tax
benefit to those corporations whose taxable income does not
greatly exceed the surtax dividing line. That is, even
after paying substantial salaries, contributing to pension
- 8and profit sharing plans, paying for group term insurance
and the medical expenses of shareholder-employees, and
playing year-end games with inventories, a corporation which
has $100,000 in taxable income will only have a Federal
income tax bill of $34,500; and this in turn would be
further reduced to less than $5,000 if such corporation
purchased property in that year which qualified for the
investment credit and cost $300,000.
Incidentally, if your Committees are skeptical about
whether the tax minimization techniques just described are
in fact used by privately owned medium-sized business, I
could share with you numerous experiences in which the
owners of such companies have explained to me how the
$100,000 of apparent earnings for tax purposes should
"really" be viewed as $300,000 or $500,000 by a potential
acquiring company if Uncle Max was taken off the payroll,
the credit cards and Cadillacs were turned in and the
inventories were properly valued.
On the other hand, even after all the techniques
described above are fully utilized in the case of a privately owned corporation, or in the case of a relatively
small publicly owned corporation which needs to maximize
corporate earnings, the corporate income tax does become a
most substantial burden as taxable income rises above the
levels just considered. Indeed, as the tables in the
Appendix show, corporations with assets of $2,500,000 to
$10,000,000 pay Federal income tax at the effective rate of
36.7 percent. Thus, at the larger end of the range of what
we have generally described as medium-sized corporations,
the Federal income tax is a very considerable burden indeed.
There are several significant consequences of this
burden. First of all, it is the most obvious manifestation
that our system of taxation impinges most heavily upon
business earnings, and particularly upon the earnings from
business capital. Because of the extra burden on capital
held in corporate form, investors who naturally look for the
highest yield will turn to corporate equity investments only
if the after-tax return compares favorably with the aftertax earnings of other types of investments. Put another way,
a corporation subject to corporate income tax at the effective rate described above must be substantially more productive in the use of its capital on a pre-tax basis than
other competing forms of investment such as unincorporated
real estate or oil and gas operations. This system of
double taxation of business earnings should long since have
been discredited; as you well know, most modern, industrialized countries have by this time fully or partially eliminated any tax which resembles our Federal corporate income
tax.
Having noted the burden of double taxation, it is not
surprising to find that medium-sized businesses face serious
problems in capital formation, both with regard to debt and
equity. For example, we are submitting herewith statistical
information which illustrates debt to equity ratios in
various classes of business enterprises. As one might
suspect, the medium-sized companies seem to be at a relative
disadvantage in terms of raising money through the issuance
of indebtedness. Although modified in degree, the basic
reluctance of bankers to lend to medium-sized enterprises
derives from the same factors previously noted when discussing loans to start-up companies.
With regard to the access to the equity capital markets,
the experience of recent years has made it clear that the
ability to raise this type of capital in the case of a
medium-sized enterprise depends upon the general state of
the market. As I observed in my law practice, in 1968 and
1969 almost any start-up or medium-sized company could go to
the equity market, regardless of its merit, whereas for the
past 3 years no such company could arouse any investor
interest, also regardless of its merit. The fact that the
equity capital market and its managers tend to over-react on
both the up and down sides is most severely felt by the
medium-sized company which lacks an established method of
providing a regular in-flow of equity capital.
One important consequence of the difficulties experienced by medium-sized companies in raising debt and equity
capital is the continued trend to mergers and acquisitions.
Too often the cycle, even after an initial, successful
public offering, ends with the sell-out to the large company
when it is time for the second major infusion of capital.
Speaking simply about what must be done, the obvious
answer is to facilitate capital formation by the mediumsized company. The most significant step in accomplishing
this would be to eliminate or substantially mitigate the
impact of our Federal corporate income tax. As you know,
the Treasury has proposed a program of integration, as part
of its overall program of capital formation, which combines
- 10 a corporate deduction for dividends paid and a credit to
shareholders for corporate income taxes paid by their
company. We urge upon you the need to recognize the wisdom
of this legislation as a benefit not only to the largest
class of corporations but also to those companies which I
today have classified as "medium-sized" but which under
traditional tests have long been within your field of
interest under the classification of "small business".
In the absence of integration, there are still some
meaningful steps which can be taken to facilitate the growth
of the medium-sized business enterprise. Some of these
encompass the same type of statutory changes which would
benefit and make more attractive the start-up businesses
discussed above. A further development which could prove
most beneficial would be a widely accepted and widely used
version of the employee stock ownership plan which will
shortly be discussed in more detail by other representatives
of the Treasury Department. Finally, simplification of the
Internal Revenue Code and its administration will benefit
medium-sized corporations as well as the smaller companies.
For example, in the area of pension and profit sharing
plans, we would hope that regulations containing model plans
which would be automatically acceptable to the IRS could be
adopted so that such plans could be effectively implemented
by business enterprises without unnecessary administrative
delays and substantial expenses for legal fees and consulting services.
Turning to the large corporations which must be viewed
by you for purposes of comparison, it seems most significant
to comment upon the frequently heard remark that such
corporations pay a lower effective rate of tax than the
medium-sized corporations discussed above. The tables in
the Appendix indicate that any such apparent advantage is
not present when the treatment of foreign source income is
properly taken into account. Put another way, the apparent
advantage of the largest corporations in terms of the
effective rate of Federal income tax largely disappears if
their world-wide income tax burden is compared with their
world-wide income or if their United States income tax is
compared with their United States income. For example, in
1970, of the largest 100 corporations 82 had positive net
income; the effective rates of tax paid in such year by 59
of these 82 corporations (excluding only petroleum and paper
and
lumber
weredescribed.
44.1 and 45.1 percent, respectively,
on companies)
the bases just
-11 -
If Is
Another distorting factor which has led to some misapprehensions in recent years has been the inclusion in the
"averages" of some very large corporations in terms of
assets and sales which have had large losses and hence have
paid no tax at all. Finally, as the tables in the Appendix
indicate, the largest corporations do realize greater
benefits from the investment credit than their medium-sized
counterparts.
Since they are not the principal subject of our concern
today, I will say no more about large corporations other
than that they also suffer from the discrimination in our
tax system against business income and income from capital.
Once again, our recommended solution in terms of making our
corporate enterprises competitive on a world-wide basis is
the integration of the corporate income tax.
I would like to turn now to the concluding part of my
remarks which deal with certain changes which can be made in
the Internal Revenue Code to encourage the establishment and
growth of start-up and medium-sized businesses. Although,
as I indicated previously, many of the problems of such
businesses in the capital formation area must look to
solutions outside of the tax area, we should certainly
proceed with any tax law changes which might prove helpful.
The changes I have in mind are largely familiar to you and
are not dramatic. Rather, they tend to make the operation
of the tax laws somewhat simpler or produce a more sensible
result in certain factual situations. These changes may be
described as "technical," but this does not mean that they
would not be significant.
It is appropriate to focus attention on the set of
small business proposals commonly referred to as the BibleEvins Bill. We will shortly submit for the record a lengthy
report which the Treasury Department has prepared on this
Bill, which was introduced in the House this year as H.R. 237.
As the report shows, some of these proposals seem to us to
be helpful and others do not. I am briefly going to discuss
several of these proposals in order to illustrate the nature
of the areas where changes would be meaningful. I will then
discuss one new idea which might prove helpful to certain
small businesses trying to raise equity capital.
Under present law, most taxpayers can carry net operating
losses back 3 years and forward 5 years, offsetting income
earned in the carryover years. The issue of whether this
- 12 carryover period is adequate for taxpayers generally raises
many hard questions. One point of which we feel relatively
sure is that this period is too short for small businesses.
This is especially true for start-up businesses which have
substantial start-up costs and which do not expect to show a
profit until some years down the road. In 1971 the Treasury
sponsored legislation which would have provided a 10-year
carryforward for individuals and for corporations with no
more than 250 employees, 250 shareholders, and $1 million of
equity capital. Last year the House Ways and Means Committee tentatively decided on a similar measure, but never
reported it out to the House. The Bible-Evins Bill would
also create a 10-year carryforward for small businesses as
defined in the Small Business Act. While the terms of these
three proposals are not identical, there appears to be a
consensus on the basic idea, and we intend to continue
efforts to see it enacted.
A court once noted that the rules governing the taxation of partnerships are at least as complicated as those
governing corporations. Indeed, my tax law professor
skipped the entire chapter on partnerships on the grounds
that if he could not understand the subject, there was no
reason to expect us to.
Under present law there may be an unfortunate tax consequence when a partner dies. At death, the partner's
taxable year closes; income received subsequently is taxed
to his estate or heirs. However, the partnership's taxable
year does not close when one of the partners dies if the
partnership continues to operate as before. Thus, unless
the partner dies precisely at the close of the partnership's
taxable year, the partnership's taxable year will end after
the partner's last taxable year. Because a partner includes
his share of partnership income in the year within or with
which the partnership's year ends, the partner's share of
the income earned prior to his death will nevertheless be
taxed to his estate. This result may seriously distort the
income of the partner's last year and the estate's first
year. It can be avoided, but only with careful tax planning
and only under certain economic circumstances.
The Bible-Evins Bill would permit the personal representative of a deceased partner to elect whether to have the
partnership year with respect to the deceased partner end on
or after his death; in the absence of an election, the
partnership year would end on his death, thereby avoiding
the result I just described. Permitting this type of
flexibility was recommended by the American Bar Association
almost 20 years ago. The Treasury Department supported this
proposal when it was discussed last year by the Ways and
Means Committee. Like the loss carryover measure, it was
tentatively agreed to but never reported out.
Under subchapter S of the Code, a corporation may elect
not to be taxed as a corporation but instead to have its
shareholders taxed approximately like the partners of a
partnership. In 1969 the Treasury Department submitted an
extensive series of recommendations designed generally to
make the election more widely available, easier to comply
with and generally more attractive. A number of these
proposals are incorporated in the Bible-Evins Bill.
Present law limits the permissible number of shareholders to ten and allows only individuals and estates to be
shareholders. The reason for these restrictions was that
the Congress was dealing with a novel concept, had the small
partnership in mind as a model and had to draw the line
somewhere. However, we now believe that these restrictions
are too narrow. The Bible-Evins Bill would increase the
permissible number of shareholders to 15 generally and to 25
in the case of corporations in existence for at least 5
years. It would also permit grantor trusts, voting trusts,
and trust created by wills which hold the stock for not more
than 60 days to be shareholders. These changes would make
the on-going operation of subchapter S corporations more
flexible and may give the subchapter S corporation greater
potential as a vehicle for attracting capital.
Secondly, subchapter S corporations are now forbidden
from having "passive" income such as rents, dividends, and
interest account for more than 20 percent of their gross
receipts. Originally, this limitation was necessary because
subchapter S corporations could participate in pension
arrangements on terms more favorable than those open to
self-employed individuals. Since the H.R. 10 limitations
were imposed on subchapter S corporations in 1969, this
limitation is no longer necessary. The Bible-Evins Bill
would retain the 20 percent test in modified form--i.e., the
subchapter S election would be terminated only if tHe
corporation exceeded this limit both in its current year and
in one of the 3 prior years. The Treasury Department
believes that this test should be eliminated entirely.
-14 -
/3S
A third area in need of revision is the rules dealing
with losses. Both a shareholder of a subchapter S corporation and a partner of a partnership face the limitation that
they may deduct their share of losses only up to the amount
of the adjusted basis of their interest in such entities.
However, in the case of the partner, any excess of the loss
over basis is allowable as a deduction when such excess is
restored to his partnership capital account--for example, by
his making an additional capital contribution or by failing
to withdraw all of his distributive share of partnership
profits in a subsequent year. In the case of the Subchapter
S shareholder, on the other hand, such excess is not carried
over to future years but is lost forever. The Bible-Evins
Bill would remove this inequity by entitling the subchapter
S shareholder to partner-type treatment. The Treasury
agrees with this change subject to the proviso that the
right to the deduction upon the restoration of basis should
not be transferable from the shareholder who incurred the
loss.
The foregoing items are examples of the types of
legislation with narrow but nevertheless significant aims
whose usefulness has been recognized but which has, for one
reason or another, never been adopted. We hope that these
hearings will create the momentum necessary for them to be
acted upon.
I would also like to present another matter for your
consideration. Code section 1244 creates a category of
stock which, if sold at a gain, produces capital gain but
which, if sold at a loss, produces ordinary loss. The
corporation issuing such stock must be below a certain size
and must issue the stock pursuant to a special plan. Only
taxpayers who are individuals are entitled to the benefit of
section 1244, and the maximum amount of losses which can
receive ordinary loss treatment is $25,000 in any one year
($50,000 for married individuals filing jointly).
So far as we know, the only attention section 1244 has
received in recent years has been with regard to its dollar
limitations. The Bible-Evins Bill, for example, would raise
the annual loss ceiling to $50,000 for a single individual
and to $100,000 for married couples filing jointly and would
modestly increase the permissible corporate size limitations.
The Treasury is studying this provision to determine whether
or not such an expansion of section 1244 is desirable and
will shortly state its position.
- 15 -
7$
In addition, we are considering whether or not investment in section 1244 stock should be made available to
all taxpayers. This would permit the owners of small
businesses to seek financing not just from individuals with
funds to invest, but also from corporations, partnerships,
and trusts. There would have to be a corresponding amendment of the accumulated earnings tax provisions to the
effect that the reasonable needs of a business will include
the ownership of section 1244 stock. The possibility of
abuse should a corporation own section 1244 stock in a
fellow member of a controlled group of corporations would
also have to be considered. The requirement that section
1244 stock be issued pursuant to a special plan, a rule
which has served mainly as a trap for the unwary, might well
be simplified.
We understand that Senator Bentsen just introduced a
new bill which includes many of the points just discussed.
Obviously, in general, we wish it well. We understand that
such bill also includes a requirement that the Treasury
Department study the LIFO method of inventory accounting
with a view towards simplifying such method to make it more
easily usable by small businesses. We are presently engaged
in a variety of regulations and rulings projects involving
the LIFO method which hopefully will result in a more
workable system for all businesses. As you know, the
Treasury Department favors the use of the LIFO method as the
most realistic method of accounting in this inflationary
economy. We will be happy to proceed with the study under
any terms mandated by Congress.
Needless to say, there are many other proposals outside
of the Bible-Evins Bill for easing the tax burden of small
business. Upon examination, many of these seem ill-suited
to accomplishing their purported ends. On the other hand,
we are always willing and anxious to explore new ideas and
you may be assured of our prompt response to any such ideas
coming from your Committees or elsewhere.
We are submitting with my statement today an Appendix
containing statistics developed by our Office of Tax Analysi
which we think you will find helpful in comparing the tax
status of small, medium-sized and large businesses. By and
large, the tables in the Appendix supplement data supplied
to you on prior occasions by our Department.
It has been a great pleasure for me to appear before
you today, and I thank you for the opportunity.
1*7
Statistical Appendix
General description of data and terms used.
All data are extracted from 1972 tax returns which were sampled
by the Statistics Division of the Internal Revenue Service for their
regulars statistical reporting function published annually as Statistics
of Income: Corporation Income Tax Returns, The sampling procedures
employed are described in these annual volumes which also present
tables of sampling variability.
In order to achieve a greater degree of homogeneity within the
asset classes reported herein, the so-called "zero asset" returns
have been deleted. "Zero asset" corporations are those in liquidation,
or bankruptcy, as well as U.S. branches of foreign corporations, for
which financial statements filed are either literally "zero" or
incomplete summaries of financial and operating magnitudes.
Additionally, data for corporations engaged in mining, agriculture
and fisheries, finance and real estate, and those which were unclassifiable are not reported here. These exclusions were made for the
reasons that the industrial classification resulted in extreme heterogeneity and that, for small businesses, excessive sampling variability
masked underlying relationships.
In all other respects the basic data are the same as those which
will be published in standard format by the Internal Revenue Service.
Summary and description of tables:
A. Debt-equity ratios, by asset size of corporations, selected industries.
One important indicator of the way business firms are financed is
the ratio of debt to equity, or the ratio of creditors1 claims against
the assets of an enterprise to the residual claims of shareholders. In
order to construct the asset-size classification system, and for computation of the debt-equity ratios presented, an adjustment was made to
individual corporation balance sheet information.
Since every business firm is, to one extent or another, an extender
of trade credit or a receiver thereof, this credit was "netted-out."
That is, if accounts receivable plus notes receivable within one-year
were exactly equal to accounts payable and notes payable within oneyear, both the balance sheet total assets and liablilities were reduced
by the amount of the credit, the remainder being the net assets employed
in the business which must be financed by long-term debt or by owners1
equity. If trade credit extended (accounts and notes receivable) exceeded trade credit received (accounts and notes payable), the trade
A-2
credit received was subtracted from both the total assets and liabilities,
In this instance, a portion of the net assets employed in the business
is net trade credit extended, presumably necessary to carry out the
business function of the enterprise. Finally, if trade credit received
exceeded trade credit extended, trade credit extended was subtracted
from both total assets and liabilities. In this instance, a portion of
the assets employed is financed by trade credit received, which then
becomes a part of the total debt financing of assets employed in the
business. It is this adjusted asset figure for the corporation which
is used for size classification purposes. Similarly, the adjusted total
liabilities and net worth figure (equal to adjusted assets) is the basis
for computing the debt-equity ratios within asset-size classes.
It should be noted that within each industry-asset-size class, the
debt-equity ratio is a ratio of aggregates of actual debts and equities
of the individual firms, not an average of individual firms1 ratios.
Within each of the industry categories reported, debt-equity ratios
tend to decline with asset size. Corporations engaged in construction
and services have generally higher debt-equity ratios than the others;
corporations engaged in manufacturing have generally lower ratios.
Although time did not permit classification of these same firms by
size of business receipts, given the close relationship between business
receipts and size of assets employed within a given industry, it is
highly probable that the same patterns of decline with increasing size
as measured by business receipts would hold.
B. Earnings per dollar of assets employed:
The total product of business enterprise, the value of goods and
services produced during a year, represents purchases of materials and
supplies from other firms, payments for labor services and a gross
return to the assets (capital) employed. When depreciation is deducted
from the gross return to assets, the remainder is herein called "earnings."
Earnings thus defined differ from conventional measures of "taxable
income" or "net income" in the following ways:
(a) "Earnings" are inclusive of charitable contributions, which
are deductions from income for tax purposes. They are included in
earnings because charitable contributions are a conscious dispostion
or allocation of the income flow from assets which is encouraged by the
lax laws, not a cost of employing capital.
(b) "Earnings" are inclusive of Federal corporation income tax
liability. The value of enterprise product is determined in the market
place; it is the prices paid for this product which determines income
shares of the factors which produce that product. Since some of the
income share to capital is paid as interest to creditors, who then are
31
subject to income tax, the only consistent measure of total earnings
from assets partially financed by debt is one which treats all income
claims before income tax.
B-l Earnings per dollar of assets employed, officers1, compensation included.
Corporate officers are simultaneously shareholders, particularly in
the bulk of all corporations which are owned and controlled by one person,
his family, or a small group of associates. In this event, an indeterminate part of the compensation paid such officers is most likely a
share of the income flow from assets allocable to equity. Lacking a
basis for estimating the portion of officers1 compensation which may be
regarded as earnings of the assets employed, the "earnings" in this
table are inclusive thereof. In the following table, "earnings" are net
of officers1 compensation.
Within each industry group, earnings per dollar of assets employed
tend to decline with asset size.
B-2 Earnings per dollar of assets employed, net of officers1 compensation.
Naturally, exclusion of officers1 compensation reduces the measure
of earnings more for smaller enterprises than for the very largest, since
the connection between ownership and control is highest among the small.
As a consequence, earnings per dollar of assets employed declines more
slowly with size.
C. Taxability of corporations of different sizes.
Since taxable income as defined in the Tax Code differs substantially
from economic income, and because of statutory special deductions, surtax
exemption, the alternative tax rates on capital gains, tax credits, and
other special provisions, the apparent effective rates on income of U.S.
corporations may vary substantially among industries and sizes of firms
in any year. In addition, some corporations may elect to be taxed
essentially as partnerships under Subchapter S. Effective tax rates
have been computed for those industrial divisions which are accorded
"normal" tax treatment, i.e., for which certain special provisions
such as percentage depletion, reserves for bad debt, and capital gains
are relatively unimportant. In addition, income of Subchapter S
electors is omitted since it is untaxed at the corporation level.
Similarly, corporations without net income in the study year are excluded
since their losses do not lead to reduction in tax in the same year.
The overall conclusion that emerges from the pattern of effective tax
rates is that when size is measured by total assets the tax rate is
smallest for the smaller-sized corporations. The average rate increases
as firms become larger, at least up to $25 million of assets. Lower
rates of tax for the remaining 1.6 percent of corporations, which are
A-4
largest in terms of net assets, are primarily due to the treatment
of income from foreign sources. Foreign income is included in the
denominator of the reported tax rates, but the foreign income tax
paid ari accrued is eliminated from the numerator; thus the reported
ratio is reduced. When adjustment is made to separate income from
foreign sources, or to add foreign taxes paid to total tax, the apparent
lower rates for giant corporations disappear.
The results of the tax studies reported here strongly suggest that
average effective corporation income taxes do increase with the size of
corporations when size is measured by total assets.
C-l Effective corporation income tax rates, by asset size of corporations.
selected industries:
The definition of "effective tax rate" employed here is the ratio of
"tax liability after credits" to "net income" which is measured by total
receipts less total "ordinary and necessary" business deductions plus
contributions to charity (which are regarded here as uses of income
rather than offsets to income) . By this definition, net income includes
a number of items which are not fully subject to tax. Among these are
(1) interest on tax-exempt bonds, (2) dividends received from other
corporate entities, (3) taxable income of related foreign corporations
and (4) contributions to charity. In addition, net income by this
definition is before deduction for carryforward of prior year net
operating losses and for statutory special deductions. The effective
tax rates in the table may be lower than the statutory normal and surtax
rates, therefore, because the income definition is more inclusive than
that of the tax Code. The rates are also reduced by the investment,
foreign, and WIN tax credits, and by the lower alternative rate on longterm capital gains.
The relative importance of these various tax-reducing provisions
among several industries may be seen in Table C.l by comparing tax rates
in each column. However, despite variations in tax rates among industries,
the tax rates within every industrial class increase with corporation
size until at least the smallest 93 percent of firms are accounted for.
The principal reason for the lower tax rates for smaller firms is the
surtax exemption. The fact that net operating loss carryforward is a
larger share in the income of smaller firms also contributes to the result.
£=2 Effects of foreign and investment tax credits, all industries:
When taxes are measured before foreign tax credits, the foreign
tax credit is shown to have little effect except in the four highest asset
classes, which contain the largest 5 percent of firms. Therefore, one
may regard the measures of effective tax rates presented in Table C-l as
not seriously biased by their inclusion of foreign-source income, and the
exclusion of foreign income taxes paid, except for these large corporations,
The tax reducing effect of the investment credit is virtually constant except for the three lowest classes, which receive little benefit
from it.
C-3 Alternative measures of effective tax rates for 82 of the largest
U.S. corporations, by asset size. 1970:
The importance of adjusting for foreign-source income when comparing
"big-business" to smaller corporations, is shown by a separate study of
tax returns of the largest U.S. non-financial corporations. These data
are from an analysis of the 1970 tax returns for 97 of the 100 largest
corporations included in the Fortune 500 list of U.S. corporations. 1/
Of these 97, fifteen did not have net taxable income in 1970, and they
are excluded.
The first two columns of tax rates in Table 3 illustrate the problem
of mismatching U.S. taxes with measures of income which include foreign
source income. In the first column, taxable income is as defined as in
the Internal Revenue Code. This column is comparable to rates presented
in Tables C-l and C-2 (although the definition here is slightly less
broad). The second column includes in income a number of income items
not fully subject to U.S. tax. This column shows clearly that the low
effective tax rates often reported for largest class of corporations are
largely due to the relatively great importance in that class of certain
low-taxed industries.
The effect of subtracting foreign source income from the base may
be seen from comparison of columns two and three. Column three is
derived by subtracting from income all foreign source income that is
subject to income taxation by other countries. This adjustment brings
the average effective tax rates for all industries except petroleum,
paper, and lumber to 45.1 percent—near the statutory rate.
Another appropriate measure of effective tax rates for corporations
with foreign-source income is to add to U.S. tax liability those income
taxes "accrued, paid and deemed paid" in other countries and to compute
this as a fraction of world-wide economic income. The resultant rates
are shown in Column (4) . They will be smaller than those in Column (3)
for most corporations because U.S. tax liability will be incurred for
foreign source income whenever income tax rates are lower in the country
where income originates. (This also explains why the rate may exceed the
statutory U.S. rate in Column (3) and (5).)
1/
The 1970 returns are the latest available for which the necessary
foreign source income and foreign taxes paid and accrued data items
are tabulated. The 1972 data elements will not be processible until
late December, 1975.
A-6
Columns (5) and (6) show the effect of treating the investment tax
credit as a direct subsidy rather than as a reduction in tax liability.
Since it is clear that the tax credit is an incentive measure rbther than
a refinement of income definition, it may be appropriate for purpose of
these comparisons to calculate effective rate as "tax liability before
investment credit" divided by income plus the subsidy represented by the
credit. This method is used in computing Columns (5) and (6).
D. Income status of owners of capital.
In the Federal tax system, income from capital is taxed partially at
the source—if the source is incorporated enterprise equity--and when it
is realized by the owner of capital. In these tables, two related statistical descriptions of the comparative "taxability" of business income are
presented. In both, the data are from a sample of individual tax returns
constructed to be representative of the 1975 tax return f iling population.
As is well known, many income recipients are not required to file a return
because their reportable incomes fall below the legal minimum for their
filing status—single, married, head of household. As a consequence, "factor
incomes" reported in the tables are understatements of national totals,
particularly in the case of wages and salaries. Moreover, since the likelihood is greater that non-filers have personal service incomes rather
than property income, the tables tend to understate the greater proportion
of personal service incomes at the low end of the income distribution.
It should also be noted that notwithstanding the labelling of "interest1
in the tables as income from capital, a considerable, but indeterminate,
fraction of reported interest income receipts originates in the nonbusiness
sector, as service of government and consumer debt. However, while the
magnitude of interest income receipts may be overstated, the distribution
of the receipts is probably unaffected.
A related problem exists with respect to proprietorship income. In
this case the amounts reported include not only a return to the proprietor s
equity in his business, but also his personal service income as a manager
of the enterprise. Again, although the amount of proprietorship income
is overstated by an indeterminate amount, the distribution is probably
not severely affected. To the extent it is, business incomes of proprietors
at the low end of the income distribution are more greatly overstated.
D-l Distribution of returns reporting items of factor incomes by form
of income and size of taxpayer's income.
These percentage distributions show that income from capital in
various forms is far less frequently reported by taxpayers than personal
service incomes and that receipt of income from capital is more concentrated
among the higher income taxpayers.
A-7
Returns reporting partnership and Subchapter S corporation^ income
receipts are the forms of income that most frequently go to high income
individuals; among property incomes, interest most frequently accrues
to low income individuals. Wages and salary items are least frequently
reported by high income individuals.
D-2 Distribution of factor incomes, by form of income and size of
taxpayer's income.
This table distributes the amounts of the several forms of factor
incomes by size of the recipient's total income. These show that the
income from ownership of capital is far more "concentrated" among high
income taxpayers than wages and salaries, and given the progressivity of
income taxes, the capital income share becomes more heavily taxes than
personal service income. Subchapter S corporation incomes are most concentrated, interest incomes least concentrated among the forms of income
from capital.
E. Distribution of corporations, by industry, taxpaying status, and asset
size.
Corporations classified as deriving the major portion of their
receipts from trade were most numerous in 1972; corporations engaged in
transportation least numerous.
Using 2.5 of assets as the upper-limit for small corporations—
since this is generally the limit reached by Subchapter S corporations—
within industry concentration of small business is highest in the services
industries, lowest in manufacturing.
2/
Subchapter S corporations are those corporations owned by 10 or fewer
persons whose stockholders elect to have the corporation's income taxed
essentially as proprietorships. Consequently, Subchapter S corporations
accrue no corporation income tax liability.
Table A
Corporate Debt-Equity Ratios for Selected Industries for Firms with Net and Without Income by Asset Class, 1972
Asset class
(thousands)
:
:
$2,50010,000
: $10,000- : $25,000:
25,000 : 100,000
:
:
Over
$100,000
$2550
$50100
$100250
$250500
19.34
2.23
1.41
1.13
.91
.80
.81
.62
.58
.62
.69
Services
3.73
1.96
1.39
1.42
1.71
2.33
2.52
2.17
1.87
1.82
1.34
Construction
7.13
2.58
1.61
1.38
1.70
1.75
1.79
2.22
2.38
2.13
1.17
Transportation
3.98
2.06
1.52
1.41
1.20
1.43
1.40
1.36
1.36
1.46
1.19
Wholesale and
retail trade
5.15
2.06
1.48
1.10
1.00
1.06
1.20
1.16
1.19
1.09
1.08
Manufacturing
Office of the Secretary of the Treasury
Office of Tax Analysis
$5001.000
$1,0002,500
$25
Under
November 12, 1975
i
oo
Table B-l
Earnings Including Compensation of Officers, per Dollar of Assets, for Corporations With and Without Net Income by Asset Class, 1972
Asset class
(thousands)
$250500
.35
.28
.24
.22
.18
.16
.14
.12
.10
1.03
.53
.29
.19
.13
.11
.09
.09
.09
.07
85
.53
.40
.30
.23
.19
.16
.13
.09
08
.05
.42
..26
.26
.23
.18
.15
.13
.11
.10
,08
.05
.15
.12
$2550
$50100
.49
.39
2.42
Construction
Transportation
Manufacturing
Services
Wholesale and
retail trade
: $500: 1.000
:
:
$1,0002.500
:
:
$2,50010.000
: $10,000: 25.000
: $25,000: 100.000
'
Over
t $100,000
$100250
Under
$25
12
,49
.34
.29
.24
.21
.20
.17
Office of the Secretary of the Treasury
Office of Tax Analysis
.09
November 12, 1975
Income = total receipts - total deductions + interest + officers' compensation + charitable contributions
<$\
Table B-2
ions With and Without Net Income by Asset Class, 1972
Earnings, Excluding Compensation of Officers, per Dollar of Assets for Corporat
Asset class
(thousands)
Manufacturing
Services
Construction
Transportation
Wholesale and
retail trade
Under
$25
:
:
$2550
:
:
$50100
: $100250_
:
• *»°- • »-- : >;-r- : s-jgr : 'SttTHg-s- '• .•£&,
.11
.12
.13
.10
09
.11
.07
12
.06
07
10
.07
.06
99
.07
.06
.08
.08
.09
.02
.09
.07
-.04
.08
.05
.08
.06
.09
.06
.09
.09
.09
-.03
.09
.05
.09
.09
.07
.07
.09
.05
.11
.12
11
-.07
.11
.09
.10
11
.07
07
.04
-.13
2.12
.00
November 12, 1975
Office of the Secretary of the Treasury
Office of Tax Analysis
Income
= total receipts - total deductions + interest + charitable contributions
>
i
Table C-l
Effective Tax Rates (P.ercent) for Taxpaying Corporations with Net Income, by S ize of Assets, S elected Industries, 1972"
Industries
i
Under
$25,000
:: $25:: 50,000
: $50: $100: 100,000 :250,000
: $250:500,000
:
$500000,000
1,
Over
:$1:,000,000- :$2:,500,000- :$10 ,000,000--:$25,000,000- :
: 2.,500,000 :10,,000,000 : 25 ,000,000 :100,000,000 :$100,000,,000:Average
All industries
Tax Rate
No. of firms
13.3
162.3
16.4
114.4
19.5
154.4
22.6
215.2
28.0
124.8
32.7
75.3
36.0
46.1
36.7
26.6
34.4
9.2
32.5
6.1
28.5
2.9
30.o|
937.4j
Manufacturing
Tax Rate
No. of firms
9.9
10.4
13.8
16.5
17.7
15.1
20.6
24.3
29.6
18.3
35.4
13.8
38.9
10.8
41.1
6.5
40.9
1.4
40.5
.9
31.9
.6
33.9
112.6
Construction
Tax Rate
No. of firms
11.2
13.3
17.4
8.3
17.7
12.6
21.4
17.6
28.0
9.7
31.6
6.1
36.6
3.6
37.3
1.6
36.7
.2
38.0
.1
31.4
.02
31.6
73.0
Trade
Tax Rate
No. of firms
12.1
36.3
16.1
35.2
20.6
53.4
24.1
80.7
24.3
47.5
34.0
28.5
36.9
15.6
36.3
5.7
32.0
.8
29.4
.4
36.7
.1
32.6
304.4
Transportation
Tax Rate
No. of firms
15.0
5.8
14.1
4.5
16.0
6.2
17.9
7.9
26.2
4.4
32.6
2.6
34.7
1.6
36.4
.8
39.2
.2
34.2
.2
34.3
.2
33.9
34.6
Services
Tax Rate
No. of firms
14.9
58.5
17.4
24.7
19.6
23.3
23.3
22.9
27.8
10.6
31.5
5.1
32.0
2.8
34.8
1.2
37.4
.2
33.2
.1
33.4
.04
29.2
149.5
Office of the Secretary of the Treasury
Office of Tax Analysis
November 6, 1975
-Assets and number of firms in thousands.
Effective tax rate = U.S. corporation income tax liability after credits/total receipts - "ordinary and necessary" business deductions + contributions to charity
>
i
Table C-2
Effect of Tax Credits on Effective Tax Rates for All Taxpaying Corporations by Size of Assets, 1972*
: Under : $25:$25.000 : 50.000
: $50:100.000
: $100- : $250: 250,000 : 500,000
: $500: 1,000,
:$1,000,000- :$2,500,000- :$10,000,000-:$25,000,000-:
Over
:
: 2,500,000 :10,000,000 : 25,000,000 :100,000,000 :$100,000,000: Average
36.0 36.7 34.4 32.5 28.5 30.0
Tax after credit 13.3 16.4 19.5 22.6 28.0 32.7
Tax before foreign
tax credit
13.3
16.5
19.5
22.7
28.1
32.7
36.1
37.0
35.2
33.9
37.6
35.6
Tax before foreign &
investment credit
13.8
17.5
20.9
24.5
30.1
35.0
38.3
39.0
37.0
35.9
40.9
38.4 ,-
Office of the Secretary of the Treasury
Office of Tax Analysis
November 6, 1975
*See notes to Table C-l.
<s-\
Industry type
01 - Computers & business
machines
02 - Motor vehicles
Table C-3
Alternative Measures of Average Effective Tax Rate (percent) for 82
Corporations Among 100 Largest U.S. Corporations, by Industry, 1970*
Effective tax rates, percent
Measures of tax liability
U.S. & foreign
income tax
U.S. income tax after credits
paid or accrued
Measures of income
Presumptive
Presumptive
Presumptive
No. of companies
Taxable
world-wide
domestic
world-wide
(Excludes corp.
economic income
economic income
IRC
economic income
w/o taxable income)
(4)
(3)
(2)
(D
3
: U.S. and foreign
U.S. tax before :
tax before
investment credit: investment credit
Presumptive dom. presumptive worldeconomic income :wide econ. income
+ invest, credit : +invest, credit
(5)
(6)
26.5
25.9
46.9
47.2
47.1
•v 47.3
31.1
30.5
45.1
45.6
46.6
46.6
03 - Aero-space
5
38.4
36.7
43.4
40.5
46.3
43.1
04 - Metal fabrication
4
33.4
29.7
38.3
38.7
40.6
40:5
05 - Food and related
products
11
41.6
40.5
46.6
46.0
46.9
46.4
06 - Drugs, Chemicals, &
related products
13
36.5
34.4
44.3
42.8
45.7
43.9
07 - Electrical & electronic products
7
39.3
35.8
48.2
41.6
50.1
43.2
08 - Conglomerates
7
29.9
27.0
42.7
41.8
43.2
42.1
09 - Miscellaneous
4
38.1
36.6
42.9
42.0
43.9
42.9
10 - Petroleum
16
12.8
8.9
13.6
33.9
15.8
35.0
11 - Paper and Lumber
7
21.3
20.6
26.4
25.3
30.1
28.3
All industries
82
28.0
24.4
35.2
40.4
36.7
41.4
All industries except
petroleum and paper
59
33.5
32.0
45.1
44.1
46.3
44.9
Office of the Secretary of the Treasury
Office of Tax Analysis
*See accompanying text for definition of tax and income measures
October 31, 1975
Table D-l
Distributions of Tax Returns by Form of Factor Payment Reported, by Adjusted Gross Income Class of Recipient, 1975
Item
All taxpayers.
%
Cum. 7„
Number of returns
in thousands
Sole proprietorships
%
Cum. %
$84,999
Partnerships
%
Cum. 7o
$7,344
Subchapter S
corporations
Cum. %
7o
$3,273
Dividend income
Cum. %
%
$789
Interest income
:
Cum. %
7,
$12,043
AGI of recipient :
Under $5,000
30.3
30.3
20.8
20.8
13.2
13.2
11.7
11.7
11.7
ll.7
17.8
17.8
5,000 -
10,000
24.2
54.5
19.0
39.8
10.3
23.5
5.7
17.4
16.9
28.6
20.4
38.2
10,000 -
25,000
38.6
93.1
42.6
82.4
40.6
64.1
39.9
57.3
46.7
75.3
49.7
87.9
25,000 -
40,000
5.1
98.2
11.7
94.1
20.5
84.6
22.6
79.9
15.9
91.2
8.9
96.8
40,000 -
75,000
1.4
99.6
4.6
98.7
11.2
95.8
14.1
94.0
6.6
97.8
2.5
99.3
75,000 -
150,000
.3
99.3
1.1
99.8
3.5
99.3
4.8
98.8
1.8
99.6
.6
99.9
150,000 -
500,000
.1
100.0
.2
100.0
.7
100.0
1.1
99.9
.4
100.0
.1
100.0
.1
100.0
++
100.0
++
100.0
500,000 - 1 500,000
-H-
100.0
++
100.0
++
100.0
1,500,000 - 5 000,000
++
100.0
-H-
100.0
++
100.0
++
100.0
++
100.0
-H-
100.0
5,000,000 and over
++
100.0
-H-
100.0
++
100.0
++
100.0
-hi-
100.0
++
100.0
Office of Tax Analysis
November 12,1975
-M-Less than .1 percent.
>
i
^ *
Table D-2
Distributions of Factor Incomes Reported in Tax Returns, by Form in which Paid, by Adjusted Gros s Income Class of Rec ipient; 1975
Wages and salaries
: Cum. 7,
7.
Item
• Sole proprietorship
:
: Cum. 7,
%
:
$50. 1
$782 .0
Amount of income (billions)
'•
Income from capital
Subchapter S
Partnership
corporations
:
:
Cum. 7.
Cum. %
%
%
:
:
:
Other
corporations
: Cum. 7.
%
:
7.
Interest
; Cum.7.
$46. 1
$20.0
$4.1
$16.2
:
:
AGI of recipient:
Under $5,000
6.7
6.7
-2.4
-2.4
-13.0
-13.0
-14.6
-14.6
1.1
7.2
11.0
11.0
5,000
10,000
17.1
23.8
7.7
5.3
3.5
-9.5
2.7
-11.9
7.3
14.5
17.4
28.4
10,000
25,000
58.1
81.9
36.7
42.0
30.1
20.6
19.0
7.1
27.7
42.2
39.1
67.5
25,000
40,000
12.2
94.1
27.9
69.9
30.7
51.3
23.8
30.9
15.4
57.6
15.6
83.1
40,000
75,000
4.1
98.2
20.9
90.8
30.0
81.3
29.4
60.3
16.4
74.0
8.9
92.0
75,000
150,000
1.4
99.6
7.9
98.7
13.9
95.2
23.5
83.8
12.3
86.3
4.7
96.7
150,000
500,000
.4
100.0
1.2
99.9
3.8
99.0
13.8
97.6
9.4
95.7
2.6
99.3
.1
100.0
.5
99.5
1.3
98.9
2.6
98.3
.5
99.8
.2
100.0
500,000 - 1,500,000
-H-
100.0
1,500,000 - 5,000,000
++
100.0
-H-
100.0
.1
99.6
.6
99.5
1.4
99.7
5,000,000 and over
++
100.0
++
100.0
.4
100.0
.5
100.0
.3
100.0
Office of the Secretary of the Treasury
Office of Tax Analysis
-H-
100.0
November 12, 1975
Totals may not add because of rounding.
^Includes returns with and without net income
-H-Less than .1 percent.
i
Table E
Percentage Distribution of Corporations by Size of Total Assets According to Taxpaying Status; Selected Industries; 1972
Asset classes
(thousands)
Wholesale and retail trade:
Non-Subchapter S corporations
With and without net income
With net income
Subchapter S corporations
With and without net income
With net income
Services:
Non-Subchapter S corporations
With and without net income
With net income
Subchapter S corporations
With and without net income
With net income
Manufacturing:
Non-Subchapter S corporations
With and without net income
With net income
Subchapter S corporations
With and without net income
With net income
Contract Construction:
Non-Subchapter S corporations
With and without net income
With net income
Subchapter S corporations
With and without net income
With net income
:Total no,
of corps,
Under
$25
$2550
$50100
$100250
441,900
304,400
18.9
11.9
14.3
11.6
17.7
17.5
23.3
26.6
12.6
15.6
7.4
9.4
4.0
5.1
1.5
1.9
.1
.1
103,400
70,300
23.9
17.1
18.2
16.6
20.6
21.8
22.8
26.3
9.6
11.9
3.6
4.1
1.1
1.4
.2
.2
*
*
241,537
149,531
45.7
39.1
15.1
16.5
14.3
15.6
13.3
15.3
6.0
7.1
3.1
3.4
1.7
1.9
.7
.8
.1
.2
47,179
28,503
48.0
42.4
16.9
17.7
14.4
16.7
12.8
15.1
4.6
4.9
2.0
2.0
1.1
1.0
.2
.2
*
*
165,600
112,600
15.2
9.2
11.0
9.3
14.0
13.4
20.2
21.6
14.5
16.2
10.3
12.3
8.1
9.6
4.7
5.7
1.0
1.2
28,900
19,400
25.8
18.7
14.5
21.8
20.6
21.8
22.0
25.8
10.0
12.1
4.6
6.1
2.2
2.8
0.4
0.5
*
*
116,239
73,031
26.0
18.3
12.7
11.3
16.0
17.2
20.5
24.2
11.4
13.3
6.8
8.3
4.0
4.9
1.9
2.1
.3
.3
.1
.1
*
*
28,063
18,852
31.1
25.6
13.8
14.6
20.1
19.3
19.1
22.2
9.3
10.9
4.2
4.5
1.8
2.1
.6
.8
*
*
*
*
*
*
25.4
16.7
14.1
13.0
16.7
18.0
20.4
22.9
10.2
12.7
6.2
7.6
3.7
4.8
1.9
2.4
0.5
0.7
0.4
0.5
0.5
0.7
28.7
21.8
23.0
24.1
15.0
15.3
22.7
26.4
6.2
7.5
3.3
3.6
0.9
1.1
0.2
0.2
*
:
Transportation:
Non-Subchapter S corporations
56,100
With and without net income
34,600
With net income
Subchapter S corporations
11,900
With and without net income
7,300
With
net
income
Office of the Secretary of the Treasury
Office of Tax Analysis
•Less than
:. $250: 500
: $500: 1,000
: $1,000: 2,500
: $2,500; 10,000
: $10,000- :$25,000- : Over
: 25,000
:100,000 :$100,000
*
.1
*
*
*
*
*
0.7
0.8
0.4
0.6
0
0
0
0
0
0
0
0
lNovemper 12 l"973~
.1 percent
*S^
Earnings Per Dollar of Assets for Various Sizes of Manufacturing
Corporations With and Without Net Income, 1972
$25,000$50,000
of Assets
$.389
Non-Subchapter S Corporations
$100,000$250,000
of Assets
$.264
$.201
$500,000$1,000,000
of Assets
$.212
$.103
i^$.024^
$.022
$.014
Wl$.025;
rWTW
»••»!
$2.5 Million$10 Million
of Assets
$.160
$ 1 0 Million
$ 2 5 Million
of Assets
$.136
$.021
$25 Million$ 1 0 0 Million
of Assets
$.019
igx^iiiSi3$.020
$.118
$.012
$.021
bssm®.
^$.052
sjsj^a^^
] Compensation of Officers
I Interest
Corporate Tax
Dividends and Retained Earnings
tk
Percentage Distribution of Earnings for Various Sizes of Manufacturing
Corporations With and Without Net Income, 1972
$25,000$50,000
of Assets
Non-Subchapter S Corporations
$100,000
$250,000
$500,000$1,000,000
of Assets
104.3%
48.6%
76.1%
m&^^.3%8m.
1 1 . 1 1 1 1 1 ' •J 'J'
5.4%
3.8%
J
•i. i i11 f
H
V777777777;777/>77/,
14.0%
7?/////3//s.
\
\ Compensation of Officers
fc-££S-g£;i \nterest
E$$=^^^ Corporate Tax
$2.5 Million
$10 Million
of Assets
$ 1 0 Millions'Million
of Assets
$25 MillionSi 0 0 Million
of Assets
10.2%
17.8%
Earnings Per Dollar of Assets for Various Sizes of Manufacturing
Corporations With Net Income, 1972
$20,000$50,000
of Assets
$.632
Non-Subchapter S Corporations
$100,000$250,000
of Assets
$.379
$500,000$1,000,000
of Assets
$2.5 MillionSi 0 Million
of Assets
$.203
$.019
$.023
$.021
III111111111111111111 n
M$V062f^
I
$ 1 0 Million$ 2 5 Million
of Assets
$ 2 5 Million$ 1 0 0 Million
of Assets
|036$J70__$019
$.145
$.012
$.019
I Compensation of Officers
] Interest
Corporate Tax
Dividends and Retained Earnings
\ ^
Percentage Distribution of Earnings for Various Sizes of Manufacturing
Corporations With Net Income, 1972
$20,000$50,000
of Assets
Non-Subchapter S Corporations
$100,000$250,000
of Assets
$500,000$1,000,000
of Assets
$2.5 Million
$ 1 0 Million
of Assets
$ 1 0 Million$ 2 5 Million
of Assets
40.3%
3.0%
3.6%
1>++++±+*UUU
.8.396*5
W777771
fc^^
I
l Compensation of Officers
E$gfi£SgS3 Interest
^ ^ ^ ^ $ $ ^ Corporate Tax
7.6%
17.7%
8.4%
$25 Million$ 1 0 0 Million
of Assets
11.2%
10.6%
\n1
FOR IMMEDIATE RELEASE
November 14, 1975
TREASURY SECRETARY SIMON NAMES JEANNA D. TULLY
AS ASSISTANT TO THE SECRETARY AND DIRECTOR OF REVENUE SHARING
Treasury Secretary William E. Simon has announced his
intention to appoint Jeanna D. Tully to serve as Assistant
to the Secretary and Director of the Office of Revenue
Sharing for the Treasury Department.
Mrs. Tully replaces Graham Watt, who resigned August 2.
The Office of Revenue Sharing was established in January, 1973
and since that time has distributed more than $20 billion in
federal funds to more than 39,000 state, county and local
governments.
Mrs. Tully, 36, comes to the post after serving as
Special Assistant to the Director, Office for Civil Rights
in the Department of Health, Education and Welfare since 1973.
Mrs. Tully has had a broad background in the business
world. She operated an independent realty and investment
business in Phoenix and Scottsdale, Arizona for several years
and managed public relations and contract negotiations for
several large U.S. firms, including Fanny Farmer Candy Shops
and Mingolla Machinery in Concord, New Hampshire.
As Assistant to the Director, Office for Civil Rights
for the past three years, Mrs. Tully has directed a national
effort to disseminate HEW's policy of complaint negotiation
and investigation. In this capacity, she established and
directed a program for ensuring nondiscrimination policies
in multi-million dollar HEW programs supporting public radio
and television broadcasting. She toured the country in this
effort and has done extensive public speaking to public
interest groups, federal agencies, and to the United States
Congress.
WS-474
- 2 She W as born in Concord, New Hampshire ^ e d u c a t e d at
St. Margaret's School in Waterbury, Katherine Gxbbs School
in Boston, and the University of New Hampshire.
Mrs. Tully resides in McLean, Virginia with her three
sons.
0O0
FOR IMMEDIATE RELEASE
November 14, 1975
CHARLES A. COOPER LEAVES TREASURY TO SERVE
AT WORLD BANK POST
Charles A. Cooper, Assistant Secretary of the Treasury
for International Affairs since August 2, 1974, leaves that
position effective November 15, to serve full time as United
States Executive Director of the World Bank. He has served
in the dual capacity as Assistant Secretary and Executive
Director since appointment to the latter post by President
Ford last June.
In addition to serving full-time as Executive Director
to the World Bank, Mr. Cooper will, at Secretary Simon's
request, continue as his Special Assistant and as his Deputy
during forthcoming negotiations on a proposed fifth replenishment of the International Development Association.
Texts of an exchange of letters between President Ford
and Mr. Cooper, concerning Mr. Cooper's resignation as
Assistant Secretary,are attached.
WS-473
D E P A R T M E N T <DF T H E T R E A S U R Y
WASHINGTON, D.C. 20220
ASSISTANT SECRETARY
October 31, 1975
Dear Mr. President:
I hereby submit my resignation as Assistant
Secretary of the Treasury to be effective November 15,
1975, if that date meets your,convenience. This will
permit me to devote more time to my responsibilities
as U.S. Executive Director at the International Bank
for Reconstruction and Development. International
negotiations are now getting underway concerning the
refinancing of each of the three financial institutions
of the World Bank Group -- the Bank itself, the
International Finance Corporation, and the International
Development Association. The outcome of these negotiations will be critical to the future operations and
policies of these important institutions. In these
circumstances, I believe that as the U.S. Executive
Director of the Bank I must be in a position to give
these issues the attention they require.
At Secretary Simon's request, I will continue to
serve as a Special Assistant to him and as his Deputy
during the forthcoming negotiations concerning the
proposed fifth replenishment of IDA.
I have very much appreciated and enjoyed the
opportunity of serving you and your Administration in
my Treasury capacity. Many of the problems I have
dealt with at the Treasury have involved one or another
aspect of U.S. relations with developing countries. I
am looking forward to continuing to serve your
Administration in this challenging area.
Sincerely yours,
(Signed) Charles A. Cooper
Charles A. Cooper
The President
The White House
/
/
/
THE WHITE HOUSE
Washington
November 13, 1975
Dear Mr. Cooper:
I have your letter of October 31, and it is with deep regret
that I accept your resignation as Assistant Secretary of the
Treasury, effective November 15, 1975, as you requested.
As Assistant Secretary of the Treasury for International
Affairs, you have made important contributions to the development of the international economic and financial
policies of this Administration. I understand, however,
the need for you to devote full time in the critical period
ahead to the heavy responsibilities to which I appointed
you last June, that of United States Executive Director of
the World Bank. You bring to those duties the ability,
experience and dedication which will enable you to play a
key role in both the formulation and implementation of
United States policies toward that important institution.
As you leave your Treasury position, I also note your
acceptance of Secretary Simon's request to continue to
assist him and in particular to serve as his Deputy during
the forthcoming negotiations on the proposed fifth replenishment of IDA. I am grateful for your past service, and
needless to say, pleased that your talents will continue to
be put to use in another important assignment in my
Administration. You have my very best wishes for the
future.
Sincerely,
(signed) Jerry Ford
The Honorable Charles A. Cooper
Assistant Secretary of the Treasury
Washington, D. C. 20220
FOR RELEASE AT 12:00 NOON E.S.T.
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BRIGHAM YOUNG UNIVERSITY STUDENT BODY
PROVO, UTAH
FRIDAY, NOVEMBER 14, 1975
President Oaks, Distinguished Guests, Members of the
Student Body of Brigham Young University:
Thank you very much for your kind invitation to visit
your University. Everyone tells me that you are preparing
to trounce the University of Utah in Saturday's big game, and
I wish you the best of luck. I am also told that you have
a special way of penalizing the opposition out here in Utah:
for every ten yards they gain, they have to give one yard back
to the Church.
Today, I would like to talk with you for a few moments
about another challenge that faces us all: how to deal with
a rapidly changing way of life. An ancient philosopher once
observed that "there is nothing permanent except change."
This observation has always been accurate, but it is particularly
pertinent today. Why even the failure to read one day's
newspapers or to watch the evening news on television can
literally leave you several Cabinet members behind.
In the four years that each of you will be here at this
University and in the two years that some of you will spend in
missionary work, amazing social and scientific developments will
be taking place around the globe. And they will come at a rate
guaranteed to cause what has popularly become known as
"future shock." It is up to each of us to deal with this new
reality in the best possible way. Some of you will choose an
area of specialization and make that your career. Others will
dedicate yourself to creating a strong family life. It is
obvious that the spectrum upon which you can imprint your
achievements is infinite.
But what I am here to state is that regardless of what
path you choose, you all have the ability and obligation to
influence not only the speed but the direction of change.
Each of you is called upon to determine the shape and character
of our world, and that process begins now while you are in
college.
WS-471
7K
At the entrance to this immensely impressive campus, I
noticed a sign that echoes my convictions. "Enter to Learn —
Go Forth to Serve." That expression is a noble one, but it
also raises some important questions: Enter to learn what?
Go forth to serve whom?
Your academic studies here will range from anatomy to
zoology. There is little that I can add to the usual advice
concerning your studies except to make this point: You will
discover in every field of endeavor that the world is very
different now than what it was when your parents were in
school; indeed, it is already very different from when you
were in high school. Few people foresaw only a few years ago
that oil-producing nations of the Middle East would suddenly
rise to world power, that the United States would be engulfed
in the worst economic difficulties in years, or that a President
of the United States might resign from office. Rapid change
has come not only in the economic and political spheres but
in others as well, as environmentalists have begun to study
possible limits to industrial growth and scientists fathom
more deeply the use of the world's resources.
It is important that you learn and understand about the
contours of these changes in our civilization, but it is
perhaps even more important that you learn a more fundamental
lesson: How to cope with change and become the master of it.
Some of the leaders of our society argue that because we are
living in a new age, we must adopt new values and new lifestyles. I would urge upon you instead that before you make
such a choice, you re-examine the old values and the old
lifestyles.
The progression of Western life has not followed an even,
upward course — it has certainly had its zigs and zags —
but over the years certain values have endured and stand
ready to serve you now during an age of turmoil and confusion. Beliefs in a higher being and in the dignity of man,
the primacy of the individual over the State, love of family
and of mankind — these are the foundation blocks of our
civilization.
The second issue raised by the sign at the entrance to
your campus -- that is, the issue of going forth to serve —
is equally important. At this stage of your lives, you are
not expected to have all of the answers, but you are expected to ask many of the right questions. Go forth to serve
whom? Serve how? Serve where and how long? Each of these,
I can assure you, will demand a lifetime of action and periodic re-evaluation.
/
/
/
Each of us serves in some way. Our relations with our
family and friends inevitably casts us in the role of influencing their lives. The question is whether we serve as a
positive force or a negative one. And the question also is
whether we are willing to stretch our horizons to the limit,
learning to be of service not only in the home and church
but also in the community and the Nation.
Serving the country has become one of the great challenges of our time. Many of our public leaders in Washington
labor long hours, and not one of them has ever received a
dozen long-stemmed roses with a card reading "Thanks, The
United States of America." They usually receive more complaints than compliments, because we all know how hard it
is to please all of the people all of the time. But let me
assure you: Just as the work may often be thankless on a
day-to-day basis, the rewards of knowing you are helping
your fellow countrymen are greater than the pleasures of a
handshake, a dozen roses, or a plaque on the wall. Patriotism
in times of peace is a quiet blessing without neon lights.
Its supporters usually remain nameless. As the late Adlai
Stevenson described it, "Patriotism ... is not short, frenzied outbursts of emotion, but the tranquil and steady
dedication of a lifetime."
In recent years there has been an unfortunate groundswell
of people who shirk their responsibilities to come to the aid
of their country. People have lost much of their faith in
government at all levels, nationally as well as locally.
Many of our brightest young people have dropped out altogether.
There is a widespread feeling of frustration, of skepticism,
and even of despair. As a result the Nation suffers because
leadership at all levels finds it increasingly difficult to
meet the needs of our day.
Even more disheartening, the refusal of people to serve
others destroys the commitment to others which is a cornerstone of America's greatness. Such withdrawal from public
service and the mood of cynical despair will not destroy the
Nation overnight, but the corrosive mood may eventually erode
the strength of our public institutions and our desire for
social, economic, political and spiritual progress.
Our history books show us that nations begin to fail
when their citizens lose their interest in the Nation's welfare. The late Historian Arnold J. Toynbee believed that the
decline of the great nations of the past can be directly attributed to a lack of spiritual faith during changing times.
The Roman Empire lasted almost six hundred years. If you had
been alive then, would you have been able to imagine the end
of
ing
self-confidence
they
the
to
represent
the
Roman
fissures
Empire?
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-4-
America is only two hundred years old, quite young when
compared to the longevity of ancient Rome. Yet in those two
centuries we have significantly changed the world through the
contributions of our scientists, our investors, our artists,
our laborers, and all those who have dedicated their lives to
serving the public good. Can you imagine all that we can create
in another 4 00 years? Inventors say, close your eyes and imagine
the world as it might be. I would add: open your hearts and
your minds and then go forth in the great pioneering spirit
of the past to create the new world as it might be.
I am deeply troubled today because I believe that many of
the troubles we have in this country are of our own making—and
that not enough people have yet awakened to the dangers we are
continuing to create for ourselves.
Let us ask for a moment: What has made this a great
Nation? What has made people across the globe talk about the
American Dream?
Has it been the land and our natural resources? To be
sure, we have been blessed with an abundance of resources, but
in the Soviet Union we see a land mass that is much larger than
our own, is equally well endowed, and yet the Soviet land yields
a much smaller harvest of goods to its people. Today the Soviets
turn to the United States for the grain they so badly need.
-3JT
Does our secret lie in the talents of our people? To be
sure, we are blessed with one of the largest and most talented
populations that the world has ever known, but in China today
we see a population that is four times as large as our own,
whose civilization was developed far in advance of our own, and
n
yet today their standard of living is far below ours.
Our land and our people, then,'have both been essential
parts of the American story, but they are not the whole story.
A third ingredient—the ingredient that is missing in the Soviet
Union and China, the ingredient that has always made us differenthas been our commitment to human liberty.
For two hundred years people have streamed to our shores
in search of freedom—freedom of religion, freedom of speech,
freedom of the press, freedom of assembly, and freedom to seek
their fortunes without fear or favor of the Government. Each
of these freedoms was planted firmly in our Constitutional soil? (
each grew and—in a phrase you know well—"blossomed as the rose.
But each has become such a familiar part of our landscape that
I wonder whether we know take them too much for granted.
J77*
There is nothing plastic or artificial about freedom, nor
is there any guarantee of its permanency. As Dwight Eisenhower
once said, "Freedom has its life in the hearts, the actions, and
the spirits of men, and so it must be daily earned and refreshed—
else like a flower cut from its life-giving roots, it will wither
and die."
Early in this century the idea began to take hold in the
United States that the problems of our society were growing so
large that individuals could no longer cope with them. Instead,
people began asking the Government to assume responsibility for
solving our problems—and to do things for them that they once
did for themselves. Government gradually became a beneficent
protector against the evils of modern day life.
That trend sharply accelerated during the 1960's as we
were promised that through the powers of Government, we could
fight a land war in Asia, create a Great Society, achieve permanent prosperity, abolish the business cycle, eradicate pollution,
and put a man on the moon—all at the same time. It just couldn't
be done, even ,by the most powerful nation on earth.
What the 1960's has left us is a residue of disillusionment and distrust. The grand promises of the 60's have become
the broken promises of today. Young people in particular have
soured on politics and politicians — and I can't say that I
blame them.
:
. '3
In my work at the Treasury Department and in the energy
field, I have also found that the decade of the 1960's and on
into the 1970's has also left us with a very unhappy legacy of
economic problems — potentially ruinous inflation and extremely
high levels of unemployment.
There is no question in my mind that one of the chief
villains of our economic trouble has been the enormous growth
of the Federal government itself in recent years, growth that
was witnessed:
— A quadrupling of the Federal budget in just 15 years;
— A string of 16 budget deficits in 17 years;
— And a doubling of the national debt in just 10 years time.
Of course, the energy crisis, food shortages, wage and
price controls and the like have contributed significantly to
higher and higher rates of inflation and unemployment. But the
underlying momentum has been built up by the excessive economic
policies of the Federal Government for more than a decade.
/
/
/
The tragedy of such misguided policies is that they were
sold on the mistaken notion that they would help the poor, the
elderly, the sick and the disadvantaged. Yet when those policies trigger inflation and unemployment, who gets hurt the most?
The same ones the politicians claimed they were trying to help the poor, the elderly, the sick and the disadvantaged.
Even more fundamentally, the decade of the 1960's accelerated the trend toward Big Government and the diminishing of
economic and personal freedoms in the United States. The Federal Government has now become the most dominant force in our
society: It is the biggest single employer, the biggest consumer, and the biggest borrower. Fifty years ago, Government
at all levels spent 10 cents of every dollar spent in this
country. Today it spends 33 cents of every dollar, and if
current trends prevail, it will be spending as much as 60 cents
of every dollar by the year 2000 — when most of you will be in
the prime of life. When Government exercises such enormous authority in our economy, it also exercises control over many of the
economic decisions of its citizens — and when economic freedom
disappears, you can be certain that your personal and political
freedoms will not be far behind.
The inextricable relationship between economic freedom and
personal freedom is sometimes overlooked by those who constantly
seek to expand the powers of government, but it is plain to see
in countries such as the Soviet Union and China today. It "was
also plain to our forefathers. Let me read to you from letters
3v
that Thomas Jefferson wrote to three of his friends:
•Ic
— "I...place economy among the first and most important
of republican virtues, and public debt as the greatest of the
ai
dangers to be feared."
— "I am not among those who fear the people... To preserve
their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy andliberty, or profusion and servitude."
— "If we can prevent the government from wasting the labors
of the people, under the pretense of taking care of them, they iwtf
become happy."
Those were the thoughts of Jefferson, and they are as relevant now as they were then.
It distresses me today that America has wandered so far
from its original moorings. Our society is in a state of apparent
drift and the direction is not encouraging.
/
/
/
To me, looking at our economic problems, the answers
are relatively clear. We are now in the midst of a healthy
economic recovery, and we know what to do to make it lasting.
It won't be easy and it won't be fast; the sins of a decade
cannot be paid for by a year of penance. But we can do it if
we have the wisdom and the courage.
In applying our economic remedies, incidentally, our
Government could well heed the example of the LDS Church.
I am impressed by the fact that you built your magnificent
new Washington Temple totally without the benefit of a mortgage — a temple which costs over fourteen million dollars!
Your church meeting houses are going up at the rate of two a
day, and none of them is encumbered with a mortgage. Your
aversion to debt is highly admirable. Our Federal Government,
to the contrary, is so deeply mired in debt that over the past
10 years its agencies have been forced to borrow over $350
billion — a third of a trillion dollars — from the private
money markets. If that money had not been borrowed by the
Government, it would have gone into many highly productive
uses — housing, plants and equipment, new jobs, and a long
list of other worthy ventures.
-^ We must strive to reduce our chronic budget deficits in
Washington, to begin living within our means and to scale down
our mounting demands on the Government. Please do not misunderstand me: There are many good and noble goals that the
Government must continue to serve. It would be foolhardy to
dismantle many of the programs now in place. But the time has
come to show a greater sense of moderation and self-restraint,
learning to trust more to our own ingenuity and initiative and
less to those in positions of official power.
- To accomplish these great goals of the future, I would
suggest, we urgently need a continuing infusion of fresh new
blQpd in our political and economic systems — young men and
women who understand both the glories as well as the mistakes
of the past, who have a sense of the enduring values of our
civilization, and who share an ardent desire to shape a better
world for themselves and their children.
We must draw upon young people from every walk of life —
rich and poor, East and West, professionals and laborers. And
surely in the forefront of those who can serve this Nation
well are members of your Church — young men and women who can
master the changes in our society because they are firmly
anchored in a lasting set of beliefs.
i"T"
The Mormon record of public service in government has
always been highly impressive. Members of your Church have
served with distinction in almost every branch of the Government — from the House of Representatives and the Senate, to
most departments in the Cabinet, to the Federal Courts. David
Kennedy, who was one of my predecessors at the Department of
the Treasury and so kindly introduced me today, has served this
Nation with keen intelligence, foresight and integrity. We
need more men and women of his calibre in the government.
Brigham Young went West to find a safe place for Mormonism;
now you are needed to go East again to ensure that your own
ideals will have a world in which to be safe.
Some critics claim that the familiar institutions of
family, church, schools, and democratic political processes
are no longer pertinent in today's atmosphere of change. To
the contrary, they are even more important than ever and
represent our only real hope of overcoming the confusion and
cynicism that pervades every layer of our society.
As the ancient philosopher Mencius stated
2,000 years before Thomas Jefferson and John Adams, "The
men of old, wanting to clarify and diffuse throughout the
empire that light which comes from looking straight into the heart
and then acting, first set up good government in their own
states; wanting good government in their own states they first
established order in their families; wanting order in their
families they first disciplined themselves; desiring discipline
in themselves they first rectified their hearts."
We must become personally involved to preserve and
strengthen the virtues of our civilization. Families will
not be strengthened unless we care enough to make them better.
Churches will not provide spiritual leadership unless they
affect the lives of people who are participating in their
programs. Our schools will not produce educated and committed
graduates unless students and teachers participate more effectively. Finally, our democratic political institutions will
not function effectively unless there is increased personal
involvement. In the Congressional elections of 19 74 only 37
percent of the Nation's eligible voters participated. The
media and pessimistic leaders constantly tell us that respect
for public leaders and institutions has fallen to very low
levels and that people feel that withdrawal is the only proper
response. This approach, of course, is the worst thing that
could happen. If the American people withdraw from public
affairs we will never be able to correct the mistakes of the
past or solve the problems of the future.
/ f t
In years to come I do not want the last third of this
century to be remembered as a time of lost opportunities and
lackluster leadership in America. I want this time to be
recalled as the era when our energy was equal to the emergency
and our commitment equivalent to the challenge. This is not
a call to the complacent but a challenge for the concerned.
I urge you to take up this challenge, to dedicate yourself
now to go forth and serve your fellow man.
Thank you.
#
#
#
#
#
79/
FOR RELEASE SUNDAY
NOVEMBER 16, 1975
CONTACT: O.H. Tomkinson
(202) 964-5927
OLD $10,000 GOLD CERTIFICATES THROWN AWAY IN
WASHINGTON, D.C., FIRE, ARE VALUELESS, AND
A TRAP FOR THE UNWARY
Washington, D.C.-The effects of a fire in downtown
Washington nearly 40 years ago are still being felt at the
U.S. Treasury Department and making some persons unhappy.
According to O.H. Tomkinson, Deputy Assistant Commissioner
for Banking and Cash Management in the Treasury's Bureau of
Government Financial Operations, the fire occurred shortly
after midnight on December 13, 1935, in the Old Post Office
Building at 12th Street and Pennsylvania Avenue, N.W., in
Washington. At that time the building was used by the General
Accounting Office to store old government records, including a
number of paid and cancelled $10,000 gold certificates. The
firemen threw some of the records in the street, and an unknown
number of the certificates was carried away by onlookers.
The fact that they are "order gold certificates" leads
some persons who have acquired them to believe they are negotiable.
They are not, Mr. Tomkinson said.
Since the fire, more than 250 of the certificates have been
recovered by the Treasury Department. Several of the certificates
are received each year from persons who find them tucked away in
their possessions or among the effects of deceased individuals.
The Treasury must confiscate the certificates because they are
government property. Possession of the certificates is illegal.
A more serious problem is that, although the certificates
are worthless, an unsuspecting person or even a bank will sometimes accept one as if it were money. In 1973, for example, a
man purchased a gold certificate from another person for $9,000
and then was able to receive $10,000 for it from an Ohio bank
teller.
The particular certificates involved are of a type known
as "order gold certificates," meaning that gold coin in the
amount of the certificate had been deposited in the Treasury
payable to the order of specific parties. Authorized by the Act
of March 14, 1900, the $10,000 certificates were issued until
1925 and the last of them was redeemed in 1933. They were
different form circulating gold certificates in that endorsement
WS-462
was required to pass ownership. Banks used them for the most
part to transfer rights to gold between other cities. They
were redeemed by the Treasury in gold--and, since paid, were
retained by the General Accounting Office as official records
of the transactions.
Anyone possessing any of these certificates should turn
them in to the nearest office of the U.S. Secret Service.
Attachment: Copy of "order gold certificate."
0O0
This is a copy of a gold certificate, an unknown number
of which fell into the hands of the public following a fire in
downtown Washington, D.C., in 1935. They are valueless, the
Treasury says, and should not be confused with a negotiable
instrument.
79/
FOR IMMEDIATE RELEASE
November 17, 1975
WILLIAM M. GOLDSTEIN
APPOINTED DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
Secretary of the Treasury William E. Simon today
announced the appointment of William M. Goldstein as Deputy
Assistant Secretary of the Treasury for Tax Policy. Mr.
Goldstein succeeds Mr, Ernest Christian, who resigned the
post on July 5, 1975.
Mr. Goldstein serves as Deputy to Assistant Secretary
Charles M, Walker, who has principal responsibility for
formulation and execution of United States domestic and
international tax policies.
Mr. Goldstein's duties will pertain to the development
of tax legislation, treaties, regulations and published
rulings.
Prior to joining the Treasury Department, Mr. Goldstein
was a partner with the law firm of Morgan, Lewis and Bockius
in Philadelphia from 1967; from 1961 - 1967, he was an Associate
with the firm. In addition to this position with Morgan, Lewis
and Bockius, Mr, Goldstein has been Director and Secretary of
several public companies, including MDC Corporation (1964-1975),
Rehab Corp, (1969-1973), Transdata Corporation (1969-1972) and
Stratton Growth Fund (1973-1973).
Mr, Goldstein graduated magna cum laude from Harvard Law
School in 1960, and also graduated from Princeton University
in 1957 with an A.B, degree from the Woodrow Wilson School of
Public and International Affairs.
Mr. Goldstein has published many articles and portfolios
and has been a frequent lecturer and a teacher in the field of
Federal taxation; he has also served as a committee chairman in
the American Bar Association Section of Taxation and is a member
of several other professional associations.
Mr. Goldstein was born in Philadelphia, Pennsylvania on
August 28, 1935, and is married and has three sons.
WS-^475
oOo
i$s
FOR IMMEDIATE RELEASE November 17, 1975
AMENDMENT TO TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
amends its invitation for tenders dated November 11, 1975,
for weekly Treasury bills.
The issue date of the 182-day bills shall be November 20,
1975, instead of November 15, 1975, as stated in the
November 11 announcement.
No other changes are being made in the terms of the
public notice inviting tenders for the weekly bill offering
which was issued on November 11, 1975.
oOo
IVS-476
7 7. a ft 3737)3
? W <j7~
3, 97* %>
>Departmen
ioWMEASURY i
TELEPHONE 964-2041
1INGT0N, D.C. 20220
m
November 17, 1975
'OR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3.2 billion of 13-week Treasury bills and for $3.4 billion
E 26-week Treasury bills, both series to be issued on November 20, 1975,
ire opened at the Federal Reserve Banks today- The details are as follows:
\NGE OF ACCEPTED 13-week bills
DMPETITIVE BIDS: maturing February 19, 1976
Price
HigLow
Average
Discount
Rate
98.625 a/
98.613
98.617
5.440%
5.487%
5.471%
Investment
Rate 1/
5.61%
5.66%
5.
26-week bills
maturing May 20, 1976
Price
97.078 b/
97.059
97.070
Discount
Rate
5.780%
5.817%
5.796%
Investment
Rate 1/
6.05%
6.09%
6.07%
i/ Excepting 1 tender of $100,000
)/ Excepting 3 tenders totaling $650,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted
39%
)TAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
29,395,000
Boston
$
New York
4 ,534,575,000
58,610,000
Philadelphia
101,885,000
Clevel ind
25,300,000
RicVnc id
36,740,000
Atl^ 1
315,135,000
Chi^ , )
53,825,000
St. Louis
36,020,000
Minneapolis
60,370,000
Kansas City
45,435,000
Dallas
San Francisco_ 369,560,000
T0TAL$ 5 > 666 > 850 >0°°
Accepted
Received
Accepted
$
28,595,000 $
27,575,000 $
6,575,000
2,597,795,000
4,629,585,000
3,100,585,000
58,610,000
6,370,000
6,370,000
46,885,000
78,885,000
13,780,000
24,300,000
41,430,000
10,830,000
35,260,000
11,005,000
9,005,000
137,335,000
279,470,000
82,905,000
33,175,000
36,450,000
15,450,000
24,620,000
35,370,000
8,370,000
58,030,000
37,320,000
23,350,000
27,435,000
17,800,000
7,800,000
128,445,000
289,815,000
115,005,000
$3,200,485,000c/$5,491,075,000
$3,400,025,000 d/
/includes $ 466,995,000 noncompetitive tenders from the public.
/includes $152 250 000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.
WS-480
Review of
ECONOMIC AND FINANCIAL
DEVELOPMENTS
199
November 17, 1975
DISPELLING THE GLOOM OF RECENT ECONOMIC FIGURES
The challenge to the vigor and longevity of the recovery that has
been posed by the latest batch of economic statistics — those for
unemployment, new orders, retail sales and wholesale prices — would
appear to be flimsy at this time.
Rather than casting doubt on the economy's progress towards
recovery now and in the period ahead, these latest figures —
especially the price statistics — more than anything else reaffirm
the need for concern for a proper balance in economic policy
between nurturing a continuation of the expansion and curbing
excessive rates of inflation. v That would appear to be the message
of the latest statistics.
What seems to be very questionable is the interpretation that
"stagflation" — sluggish or no real growth combined with accelerated
inflation — might have emerged in October because both the unemployment rate and wholesale prices rose more than expected.
However, close analysis of these, and other statistics to which
weakness has been imputed, reveals that temporary or. special
circumstances affected the outcome. And, where some slow-up did
occur, this developed subsequently to very large and probably
unsustainable (as well as undesirable) rates of increase.
Indeed, any period such as the past quarter, which in the aggregate
scored an 11% annual rate increase in real GNP — the largest in
20 years — almost always has been followed in the post-war experience by more moderate advances.
More than any other statistic, the rise in the October unemployment
rate to 8.6%, up 0.3% from September, generated doubt about the vigor of
the recovery. But much, if not all of that increase, reflected a conjunction of several types of statistical and other difficulties: the specific
type of seasonal adjustment that was used; an unusual October phenomenon
of a large group of re-entrants into the labor force; and, perhaps some
sampling variability.
Unemployment Rates
seas. adj.
Standard
"multiplicative"
Additive
Residual
8.4
8.3
8.6
8.3
8.2
8.3
8.3
8.2
8.1
1975:
August
1 September
1 October
For Official Use Only
The unemployment results
that were calculated by
use of the usual standard
seasonal adjustment process in the household
survey yielded an October
unemployment rate that
appeared less reliable
than in former years.
Last May a sharp rise in
the unemployment rate also appeared unusually affected by the seasonal
adjustment process, as have some other months in 1975. (A so-called
"multiplicative" method is used in the official statistics. Briefly,
that method is based on averages of eight years or so of percentage
changes between any two months. In October, when the seasonal factor
for unemployment dropped sharply, the effect of dividing unadjusted unemployment by this much lowered seasonal factor raised seasonally adjusted
unemployment considerably .)
By comparison, two other equally valid concepts — the "additive"
or the "residual" methods of seasonal adjustment resulted in little
change, or even a decline in the overall unemployment rate for October,
as the table on page 1 shows.
• A second factor contributing to the October rise in the unemployment
rate was the spurt in re-entry of persons, especially women, into the
labor force. This factor of re-entry typically grows more powerful
when the economy is on the upswing. As job opportunities appear to
be more available, persons who might not otherwise bother looking for
a job become more inclined to enter the labor force. This marginal
attachment by some to the labor force contributed unduly to the
October rise in the unemployment.
• Abstracting from this partly subjective influence, is a concept of
the employment rate — defined- as the number of persons employed as a
percent of. the so-called noninstitutional population of 16 years and
over. In contrast with the rise in the unemployment rate, the employment rate in October remained unchanged from September.
• Finally, sampling variability may have been a factor in the October
rise in the unemployment rate, though this applies to the figures of
any month in this survey. The Labor Department indicates that a
statistically significant change must amount to more than two-tenths
of one percentage point in the unemployment rate. On this basis, a
possible interpretation is that a statistically significant change of
only 0.1% occurred in the October unemployment rate as calculated by
the official method.
Contrasting with the household survey results were those from
nonfarm establishment payrolls, typically, a more reliable statistical
undertaking. On the basis of this survey, the doubts concerning the
vigor and duration of the economic expansion would not gain support.
The number of nonfarm jobs rose 217,000 in October, only moderately less
than the rise of 252,000 in September. Of special importance was the
increase of 108,000 jobs during October in the cyclically sensitive
manufacturing sector.
Indeed, October registered employment gains in more than threefifths of the 172 component industries in the nonfarm economy,
- 3 -
though this was somewhat less than the three-fourths of August and
September. This widespread diffusion of employment increases contrasts
with much smaller rises back to last winter, when less than onefifth of these industries were registering employment advances.
These widespread employment gains combined with a relatively unchanged
workweek in nonfarm industries to generate a large advance in the total
manhours worked in the economy during October.
As a result, industrial production again increased in October,
while not-yet-available personal incomes probably will register a
large expansion during that month.
Moreover, the manhours advance suggests that real GNP in the fourth
quarter of 1975 was off to a very good starting rate of gain. Indeed,
if the October rate of manhours advance showed no further improvement
during the rest of the quarter — and that would appear unlikely — it
indicates that real GNP in the fourth quarter would advance at least in
the neighborhood of 3 1/2% to 4% at annual rate. But this would make no
allowance for gains of productivity which surely will occur.
Adding a
conservative estimate of productivity gain in the neighborhood of 2 1/2%
to 3%, results in an estimate of advance in fourth quarter real GNP in
the 5 1/2% to 7% range, as shown in the chart.
Real G N P and Final Sales
% Change, Annual Rate
IV
. 1974
P projected October 1975 rate
I
1975
The recent figures
for new orders and capital
goods spending intentions
also require careful analysis, which, in fact, disspells the gloom that they
might otherwise generate.
Following five consecutive
monthly advances, new orders received by durable
goods manufacturers eased
0.8% in September from
August. But, the orders
picture is brighter than
that — because steel
ordering had been swelled
in August as efforts were
made to avoid the October
1st price increase. If
steel orders were deducted
from the total in both
August and September, new
orders rose 0.4% in September. That would have made
the sixth consecutive
month of increase.
3^
With respect to capital goods spending, the latest McGraw-Hill survey
conducted in October indicated a 9% rise in planned outlays during
1976 over 1975. Prices were expected to increase by a similar
magnitude. Consequently, real capital goods spending in 1976 would
show no change. However, the experience of this survey shows that
expected outlays typically understate the rise in cyclical expansion,
especially those surveys made in the fall. This understatement could
amount to as much as 5 percentage points. Therefore, real capital
goods outlays might be expected to advance considerably next year.
The September and October figures on retail sales also appear to contain some gloomy aspects. Though retail sales rose 1.0% in October, this
is only 0.5% over the average third quarter level. (Moreover, the October
rise follows a decline of 0.9% in September.)
But, some slackoff in
the rate of advance of retail sales might have been expected in view of
the 16% annual rate increase that had developed during the first six months
of 1975. Surely, this was an unsustainable rate and the process of readjustment might have been expected. Probably some difficult statistical problems
also are involved in the estimation of these figures (as rather "large revisions in the past would indicate).
Two interpretations of these latest retail sales figures are possible.
One is that they might be revised upward. The second interpretation
might be that the generation of incomes from production, which has
been proceeding at a very high rate, is providing a reservoir of
spending power which will be soon reflected in rising retail purchases.
In other words, the very high saving rate which is implied by the large
growth in incomes and in slowed spending will return to a more normal
range, accompanied by vigorous consumer spending.
By and large, recent figures relating to real growth in the economy
indicate some slowup, but nothing that would suggest aspects of an "aborted"
recovery. Indeed, the most troublesome aspect of the recent figures is the
apparent acceleration of price advances that was revealed by the October
wholesale price index. The principal current economic problem would appear
to be that capacity gaps are rapidly narrowing in a number of areas, especially materials producing industries. So-called "gaps" of actual to
potential GNP and the several measures of capacity utilization in manufacturing would appear to be poor indicators of safety valves against inflation.
To a degree, acceleration in the rise of wholesale prices might be represented
as a confirmation of increased pressures on resources which have developed
during the ongoing economic expansion. It further confirmed that the
expansion does carry with it some peril on the price front and that the
balance between fostering economic expansion and curbing inflation rates
will need to remain in the forefront of consideration in economic policy
making.
Reviewer: Liebling
OFFICE OF THE SECRETARY OF THE TREASURY
OFFICE OF FINANCIAL ANALYSIS
MONEY MARKET AND LONG-TERM INTEREST RATES
Percent
Percent
Monthly
12.0
12.0
Prime
Commercial Paper
11.0
Weekly
11.0
Corporates
(3-4 months)
(Aa new)
10.0
10.0
^"•t
^••••.•%*
/"•N./
9.0
9.0
Corporates
(Aa new)
8.0
8.0
\
:
\
'«••
Prime
Commercial Paper
y
(3-4 months)
\ / U.S. Governments
•
%%
AT***
H
V
\t* \
7.0
7.0
6.0
U.S. Governments
i
• /'
y
(Long-term)
/
6.0
(Long-term)
••••
•'/I
5.0
4.0
5.0
/
./ J \
4.0
Month
*•'-.,'
3-H Bills
Treasury
3.00
Latest average through
November 14,1975
J
3.0
i i l n
1972
3-Month
Treasury Bills
1973
ji
i i I i i 11
1974
1975
0
t I I 1 1 I I I I I I I ill I I ill I I I 1 I I I till I llll I l l I I I ill I 1 l h
M
A
M
J
1975
J
A
S
O
Mill I II
N
D
ECCrOMIC AND
1. Seasonally adjusted
Latest Period
Production,
income, and
sales
Gross national product ($bil.) 1/
'75-111
Personal income (Sbil.) 1/
Sept.
Wage and salary payments ($bil.) 1/
Sept.
Corporate profits before taxes ($bil.) 1/75-11
Industrial production, FRB 2/
Oct.
New orders, durable goods mfrs. ($bil.) Sept.
Shipments, durable goods mfrs. ($bil.) Sept.
Retail sales, total ($bil.)
Oct.
Employment
Civilian employment (mil.)
Unemployment rate (%)
Oct.
Oct.
Construction Total new construction ($bil.) 1/
Sept.
Private housing starts, total (thous.) A/Sept.
1/sept.
InternationalExports ($mil.) 3/
Sept.
transactions
General imports ($mil.)
Sept.
Merchandise trade balance ($mil.)
9§ept.
Bal., current acct. & long-term capita «=*75-II
Official reserve transactions balance 9/'75-ni
/'75-III
Commercial
bank
statistics
>
REFERENCE
Leans and investments ($bil.) 4/
Loans ($bil.) 4/
Money supply ($bil.) 5/ 6/
Time deposits (Sbil.) 5/
2. Not seasonally adjusted
Oct.
Oct.
Oct.
Oct.
Auto production excl. trucks (thous.)
11/14
Electric power, seasonally adjusted 2/ H/Q
Price indexes
Raw industrials 2/
Wholesale prices 2/
Consumer prices 2/
Banking
Loans, large reporting banks ($mil.)
Fed. Res. govt. sec. holdings ($mil.)
"Free" reserves ($mil.)
Treasury gold stock ($mil.) 7/
Securities,
average
yields
Treasury 13-week new bill rate (%) 11/10
Treasury long-term bond (%)
11/14
Moody's seasoned Aa corporates (%)
11/14
New Aa corporates, Treasury est. (%)
11/14
Moody's seasoned Aaa municipals (%)
11/13
Bond Buyer's new munic. bond index (%)8/11/13
Previous
Period
Year
A:o
1497.8
1440.9
1416.3
1270.3
799.2
113.3
116.5
42.3
43.4
50.0
1255-9
792.3
101.2
116.0
42.7
42.5
49.5
1178.0
767.7
139.0
124.8
46.2
44.8
45.8
85.4
85.4
8.6
8.3
86.3
6. G
130.2
1240
125.9
1268
133.3
1157
9165
8189
1611
4923
8996
7961
1035
-673
-1616
8399
8696
-297
-2302
719.7
498.8
294.0
445.8
716.1
494.9
294.7
440.7
692.3
507.2
281.6
412.1
976
Latest Week
or Month
Production
&
Previous
Period
118
Year
A
9?
169.6
155
164.1
161
168.6
155
11/11
Oct.
Sept.
180.2
178.9
163.6
178.5
177.7
162.8
198.8
170.2
151.7
- 11/5
11/12
11/12
11/12
281,772 277,957 297,265
84,692
79,564
77,164
10
835
-851
11,599
11,599
11,567
5.279
7.17
8.98
9.27
6.62
7.43
5.602
7.17
8.96
9.27
6.74
7.52
7.880
6.92
9.16
9.17
6.05
6.55
1/ Seasonally adjusted annual rate. 2/ 1967«100. 3/ Excluding military aid shipments.
4/ Last Wednesday of month. 5/ Daily average. 6/ Demand deposits adjusted and currency
outside banks. 7/ Excludes gold in Exchange Stabilization Fund. 8/ 20-bond index.
V
(Smil.)
ftft OF
wtmeatollheTRlASURY
sl, D.C. 20220
T E L E P H O N E 964-2041
/78<>
,,,. •
c^5
REMARKS BY T H E H O N O R A B L E JOHN M . P O R G E S
U.S. EXECUTIVE DIRECTOR, INTER-AMERICAN D E V E L O P M E N T BANK,
BEFORE T H E SIXTY-SECOND NATIONAL FOREIGN T R A D E CONVENTION,
THE WALDORF-ASTORIA, N E W YORK, NEW- YORK, N O V E M B E R 18, 1975.
I am happy to talk with you this afternoon about the work of the
Inter-American Development Bank, focusing on how this work relates to
the process of capital formation for economic development in Latin Am
In particular, I want to explain a new complementary financing program
which we are initiating.
Let me begin, however, with a brief summary of the Bank's history
and operations. As its name indicates, the Bank is concerned with prov
longer term financing to accelerate the economic development of its m
countries. It was founded in 1959 and was, in fact, the first of the r
development banks based on the World Bank model. Presently, its capita
stock is owned by 24 western hemisphere countries, including the Unit
States, Canada and 22 Latin American and Caribbean countries. Total
subscribed capital is $5.9 billion. In addition, the Bank has mobilize
concessional lending and administered resources amounting to $4.5 bil
There are, however, two exercises now going forward which will
increase these figures by $6.1 billion to a total of $20.1 billion. I
referring to the expansion of membership to include 11 European count
and Japan, and an increase of the capital and concessional contributi
of current members. Both measures, by the way, are now before the U. S
Congress for approval of our participation which, I hope, will be rapi
1VS-469
-2-
<PZ>7
Secretary Simon has emphasized the political and economic
importance of the Inter-American Development Bank. On July 29, in
testimony before a subcommittee of the House Banking and Currency
Committee, Secretary Simon called the Bank "A central institution of
the inter-American system, a framework for cooperation having
considerable economic and political significance to the United States."
From the point of view of the governments of Latin America and
the Caribbean, the IDB is the primary channel of development assistance.
In my own travels throughout the hemisphere, I have always been
impressed by how aware local government officials are of the Bank's work.
This awareness has been translated through extensive press coverage into
better public understanding of the Bank1 s role and its impact on economi
development in the hemisphere. I would like to give you an idea of what t
impact has been.
As of August 31 of this year, the Bank had made 860 loans, totalling
more than $8.0 billion. These loans involved projects in aggregate worth
more than $27.0 billion. In other words, the Bank helped its borrowers in
mobilizing $19.0 billion of their own domestic or other resources. By wor
closely with borrowing governments we have tried to direct this money to
economic sectors as well as to programs which have important social benef
For example, on a cumulative basis fishing and agriculture have re-
ceived 22.8% of our resources; electric power 20.3%; and transportation a
communications, 18.6%. Other areas of concentration have been industry
and mining (14.4%) and sanitation (10%). In terms of currencies of commit-
ment, more than $4.8 billion has been in U.S. dollars, $1.3 billion in oth
member currencies and more than $800 million in non-member currencies
of Western Europe and Japan. Of total loan commitments of $8.0 billion,
actual disbursements or pay-outs have now reached $4.7 billion.
This flow of capital assistance is impressive not only because
of its own volume but also because of its catalytic effect in stimulating
other investment flows. For example, I can cite our work in providing
potable water, electricity and roads. These infrastructure projects have
permitted a movement of private funds, both foreign and domestic, into
areas which would not have been possible before. The governments of
Latin America know that there are important indirect as well as direct
benefits from our loan program.
At the same time, however, there is not widespread understanding
of these matters within the United States. This lack of understanding app
not only to the work of the IDB but also to other international lending
institutions such as the World Bank and the Asian Development Bank. By
way of illustration, I would like to indicate how both business and labor
this country benefit from the work of the Bank through the procurement
of goods and services. On a cumulative basis, it is estimated that IDB
lending has financed $1.0 billion of U.S. exports and generated 36,500
man years of employment. In addition, the Bank's administrative operations
in the United States have produced 43,000 man years of U.S. employment.
These aspects of our activities are not well known. More public
acknowledgement is needed.
Let me turn now to the subject of capital formation. From its
inception, the Bank has emphasized the need for full mobilization of
private capital flows to Latin America. More advanced than Asia and
Africa, the countries of this hemisphere have reached the point where
they can effectively use increasing amounts of foreign capital.
The emphasis on private capital is reflected in the Agreement
which established the Bank. In Article I of our Charter, our first purpos
is "to promote the investment of public and private money for development
purposes." In the same section of the Charter we are enjoined to "encoura
private investment in projects" and further on "to cooperate as far as p
with private sources supplying investment capital." In Article III, Sect
of the Charter, the Bank is specifically permitted to raise funds for it
in private capital markets. From the first we have relied on the sale of
to carry out our lending program. These bond issues have been based on th
high quality of the Bank's loan portfolio and the callable capital subsc
by all the member Governments, including the United States. At the presen
time, the Inter-American Development Bank has bonds outstanding which
amount to more than $1.2 billion. These bonds are denominated in the
major currencies of Western Europe and in Japanese yen, as well as in
United States dollars. There has been a wide acceptance of these bonds.
They are in the portfolios of institutions and individuals throughout the
industrial nations of the world.
>3
There is now the advent of Bank membership by Europe and Japan
and the addition of new inter-regional capital. Backed by the financial
strength of these countries, the bonds of the Inter-American Development
Bank, which have a AAA rating, should become even more attractive to
potential investors. Clearly, the bond issues of our Bank have been
a primary pathway for private capital entry into Latin America. This
will continue in the future.
We have also made very successful but limited use of sales of
participations in our ordinary capital loans. This has involved the resale
to commercial banks of the early maturities of certain of our loans. These
have been sold without recourse and at our ordinary capital lending rate.
However, given the high interest rates which have prevailed in capital
markets over the last several years, these participations at the lending r
rate of the Inter-American Development Bank have not been attractive to
potential investors.
In the past we have also used parallel loans to supplement our own
lending levels. Most frequently, the parallel loans have come from
commercial banks and export promotion agencies in the United States or
other industrial countries. We have, for example, guided our borrowers to
other financial institutions where they may obtain additional financing an
ciled with them on what the terms might be. In some instances we have play
a broker's role and joined with the borrower to help him present applicati
- 6to other lending agencies and to provide information to the potential
lender on financial and technical aspects of the proposed loan. This
approach has been particularly successful in large electric power project
As I indicated a moment ago, the capital needs of Latin Ame rica
and the Caribbean countries are much beyond our own lending capabilities.
Moreover, the character of our lending to Latin America is also shifting
more and more applications are received for financing manufacturing,
energy and petrochemicals as well as basic infrastructure. These kinds of
projects are especially well-suited to participation by private capital a
attractive to potential investors.
Consequently, following two years of study, the Bank is now moving
forward with a new form of complementary financing. We have recently
made one presentation on the subject to commercial and investment bankers
and are hopeful of an excellent response from the banking community. I ha
material available for you on this program but I want to touch on some of
key aspects.
To begin with interest rates and maturities: What we are looking
for is money available at commercial rates for the intermediate term, i.e
7-10 years with adjustable rates set at an established spread above LIBOR
(London Inter-Bank offerred rate) or the U.S. prime rate.
The complementary lending would be part of the IDB loan and would
be approved by the Board of our Bank in the normal manner. Since it is pa
of the IDB loan, the rate, although on commercial terms, would be relative
more favorable to the borrower than financing he could obtain on his own.
3>4?
The complementary financing is, in effect, a participation without recourse
but at a varying rate of interest which follows commercial rates. There is
some discount expected for added safety since the complementary financing
element is part of the IDB's loan. On this point, I want to emphasize that
almost all of our loans have government guarantees or are made directly to
governments or to government agencies. There have been no defaults on thes
kinds of loans since the Bank was established 15 years ago. In addition, t
would also be a commission fee for the services performed by the Bank as
collection and disbursement agent and as supervisor and administrator of
the loan project.
This arrangement, in the judgment of our Bank officials, offers a
number of advantages to all three participants: For the borrower, it means
additional sources of financing. For the lender, it means (1) more opportu
for lending at commercial rates, (2) the consequent follow-up business and
broader opportunities in the borrowing country, (3) reduction of risk thro
the participation of an international lending institution like the IDB. F
the IDB, it means the possibility of financing a broader selection of proj
including those on a larger magnitude than we have usually done in the pas
We have already approved one of the complementary financing projects
and projects using this same general formula are in the offing. Not only
commercial banks but also investment banks and other institutional investo
have indicated interest. Variations of the formula are possible for the fu
including, for example, equity participations. Management contracts may re
sult from the participation of foreign enterprises in financing and this w
entail the transfer of technology and management skills, a theme of which
we have heard so much recently.
In short, I think that complementary financing is a very attractive
way to encourage participation of private capital from the industrial
nations in thoroughly evaluated projects which have excellent rates of retu
Latin America and the Caribbean, because of their relatively advanced over-
stage of economic development, are natural areas in which to start this new
approach to financing. The fact that there are well-established and fully-
functioning executing agencies means greater benefit and very effective ut
of the additional inflow of capital which is envisaged.
By way of conclusion, I want to reiterate how importantly we regard
the Bank's relationships with various parts of the business community.
From your perspective, procurement spending from our lending operations
results in contracts awarded and employment generated. From our point
of view, sales of bonds and parallel lending activities involve commercial
banks and others in our work and increase the effectiveness of our program
for economic and social development.
In addition to the complementary financing I have just described,
there are other ways in which we can cooperate. What comes to my mind
immediately as a major opportunity is the need to increase food production
through expanded use of fertilizers, higher yielding seeds and application
of business method. I think we can open up a whole new area for joint
participation for the bank and business in the agri-business field. I would
welcome suggestions from you on how we can cooperate with you in this or
other ways.
0O0
731
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE RICHARD R. ALBRECHT
GENERAL COUNSEL, DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE SELECT COMMITTEE ON AGING
NOVEMBER 18, 1975, 10:00 A.M. EST
THE IMPORTANCE OF GENERAL REVENUE SHARING
TO OLDER AMERICANS
Mr. Chairman, I am pleased to have the opportunity to
testify before you today. During the current vacancy in the
Office of the Under Secretary I have been given general
supervisory responsibility within the Treasury Department
over matters relating to General Revenue Sharing.
After a careful review of revenue sharing, the Administration has concluded that the program should be renewed
in its present general form. H.R. 6558, the Administration's
proposal, would continue this successful, innovative approach
to Federal fiscal assistance for five and three-quarters years
after the expiration of the current program at the end of 1976.
We believe that renewal legislation should be enacted soon.
State and local governments are already planning their FY 1977
budgets and they need to know if they can continue to count
on receiving shared revenues.
This Committee is making a valuable contribution to the
Congressional consideration of GRS renewal through its
examination of the program's impact on older Americans.
Before addressing myself directly to the concerns of these
hearings and the Committee's resolution of September 11, 1975,
I shall take a moment to make some general comments about
revenue sharing.
Since General Revenue Sharing was enacted in October 1972,
it has made available over $20 billion to States and communities throughout the Nation. These funds have done much
to strengthen the viability of our Federal system of Government, a system that is predicated on the shared exercise of
powers and responsibilities. A strong working partnership
WS-477
- 2 among Federal, State, and local government is necessary if
our democracy is to respond effectively to the needs of our
citizens. The General Revenue Sharing program has been the
foremost of a number of recent initiatives to improve the
way in which the governments in our system can work together
to meet these needs more effectively. Revenue sharing
combines the efficiency of the Federal revenue raising system
with the experience and the accountability that comes from
allowing locally elected governments to set priorities for
their own States and communities.
When support was growing for the enactment of the
current revenue sharing program, our State and local governments were struggling with inadequate and regressive tax
resources to meet the mounting demand for services being
placed upon them. While Federal categorical aid programs
of various types were available, they did not provide a help
for many of the problems facing local governments. Federal
grants often did not go to support basic services, such as
sanitation or fire protection, where help was often needed.
At the same time, the then available Federal aid programs had
the effect of making recipients adjust their own priorities
by assigning importance to areas where grant money was available. An additional burden often present was the need to
match the Federal contribution with State and local funds.
These characteristics of the aid programs that existed prior
to revenue sharing produced a stifling effect on the creativity
and accountability of State and local governments. In enacting
General Revenue Sharing, Congress wisely concluded that a new
type of generalized, "no-strings" Federal assistance was
needed, along with categorical aids, block grants, and other
Federal assistance programs, to get us back on the road to a
sounder Federalism.
The revenue sharing funds distributed over the three
years the program has been in existance have helped States
and communities maintain vital public services and stabilize
the crushing burdens of taxes — often real property and
sales taxes that fall particularly hard on low income families
and the elderly.
There are many worthy, specific objectives to which the
Congress might try to give priority by redesigning the GRS
program. However, it would not be an easy matter to get
agreement on which goal or goals should receive preference.
Even if we could, placing restrictions on the use of shared
revenues would seriously limit, if not destroy, the special
373
- 3 advantages of the program. There are other Federal assistance
programs and transfer payments intended for the solution of
specific problems. By providing generalized, "no-strings"
Federal assistance, revenue sharing serves a different
purpose.
Has the enactment of revenue sharing led to a reduction
in Federal categorical aid programs for the aging? Not at
all. In fact, Federal categorical aid to the elderly has
greatly increased since October of 1972 when revenue sharing
was enacted. The funding of categorical programs authorized
by the Older Americans Act has risen from $44.7 million in
FY 1972 to $245.58 million in FY 1975.
Similarly, Federal outlays for health care for the aged
(those 65 and over) and for income security benefits, as
identified by the recent Special Analyses of the Budget of
the United States, have increased markedly. Outlays for the
financing and direct provision of hospital and medical
services have risen from $8.57 billion in FY 1970 to
$13.54 billion in FY 1974, and to an estimated $15.98 billion
in FY 1975. Income security benefits to the aged as identified
in the Budget, excluding medicare and medicaid payments which
are included in the health, services outlays noted above, have
grown from $29.36 billion in FY 1970 to $53.60 billion in
FY 1974, and to an estimated $62.12 billion in FY 1975. It
should be noted, of course, that a portion of the outlays in
both the health care and income security categories are for
the programs partly financed by contributions made by beneficiaries during their working years.
These statistics indicate that the Federal Government
during this decade has continued to direct ever greater
resources to the well-being of our older citizens. The
coming of GRS has accompanied this increase, rather than
leading to any cutback in categorical or other assistance.
Information derived from the Actual Use Reports
submitted by recipient governments to the Office of Revenue
Sharing indicate that 3% to 4% of GRS allocations are being
spent in the category of "Social Services for the Poor or
Aged" — primarily for operations and maintenance purposes,
as opposed to new or capital spending.
This figure represents the portion of funds that
recipients report spending on social services exclusively
for the poor or aged. There are other programs and projects
o2/</
- 4 which benefit the poor and the aged, and other citizens as
well, which would not be listed on use reports in the
"Social Services for the Poor or Aged" category.
Different patterns of expenditure, including the shift
of more funds into the social services category, may emerge
as citizens and governments become more familiar with GRS
and become confident of the continued availability of funding.
There are indications that governments are devoting smaller
portions of their allocations to capital projects and more to
finance day-to-day operations now than they were at the beginning of the program.
The Administration on Aging has informed the Treasury
Department that as a result of the advocacy activities of
State agencies on aging, an additional $855,000 in revenue
sharing funds were directed toward programs for the aging
between July 1, 1974, and February 28, 1975. On the sub-State
level, area agencies on aging are reported to have directed
$5,228,293 into such undertakings during the same period.
These advocacy or pooling activities, whereby State and area
agencies encourage State and local governments to use available
resources to solve the problems of older Americans, are e
supported by grants made under Title III of the Older Americans
Act of 1965, as amended in' 1973.
Citizen participation has always been a goal of revenue
sharing. As older citizens and the groups representing them
become more familiar with the workings of the program, as
well as of their State and local governments, they should have
increasing success in influencing expenditures by those governments, including their GRS funds. As State and local officials
become more certain about the continuation of revenue sharing,
they should be more willing to direct funds to recurring
social expenditures.
Mr. Chairman, there are a number of other indications
that the aged, as well as the poor and minorities, benefit
appreciably from the General Revenue Sharing program.
First of all, it is important to remember that the
presence of shared funds releases other State and local
resources for social programs. A study being conducted for
the Administration on Aging has found some local governments,
especially those receiving large revenue sharing payments,
utilizing local funds that are freed up because of the availability of shared revenues for new or expanded social programs.
- 5 -
3^
A National Science Foundation-sponsored survey of State
administrators found that 29% of those questioned believed
that the availability of GRS funds resulted in more funds
for social programs.
A second indirect benefit is that revenue sharing funds
are raised through the relatively more progressive Federal
tax system rather than from State and local sales and
property taxes. When the receipt of General Revenue Sharing
funds permits tax reduction or stabilization, the elderly,
who are more likely to be on fixed incomes, are particularly
benefited. There have been instances where specific reductions
in property taxes for the elderly were made possible by revenue
sharing.
There is another way in which the revenue sharing use
report statistics on social services for the poor and aged
fail to measure the true impact of the program in meeting the
needs of older citizens. Spending assigned to such use
categories as public transportation, health, recreation,
social development, and for other purposes, may be of significant benefit to older citizens. The considerable use of GRS
funds for capital expenditures also can have this impact.
Several examples are reflected in Planned and Actual Use
Reports noted in a study by the National Clearinghouse on
Revenue Sharing:
• Public transportation — bus service for the elderly
(Cedar Rapids, Iowa).
• Recreation — air conditioning a senior citizens
center (Cedar Rapids, Iowa).
• Social development — expansion of a senior citizens
center (Pasadena, California).
• Health — neighborhood health programs (Denver,
Colorado, and San Antonio, Texas).
• Libraries — a mobile library program (Memphis,
Tennessee).
Finally, I would urge the members of the Committee, when
considering the use of shared funds by local jurisdictions,
not to overlook the fact that many local recipients do not
have the authority to provide social services because
3/<*
- 6 responsibility for such lies at the county and State levels.
On the whole, both States and the Federal government play
significant roles in the financing and provision of many
social services and Actual Use Reports suggest that States
do use a larger part of their GRS funds for social purposes.
Before concluding, Mr. Chairman, I would like to cite
several additional examples from Office of Revenue Sharing
records of expenditures of revenue sharing funds that
benefited the aged:
• Lebanon County, Pennsylvania — The largest single
GRS expenditure for FY 1973 was for enlarging the
county home for the aged.
• Montgomery County, Pennsylvania — In FY 1973,
$672,089 was expended for a county geriatrics
center; $3,700 for the Human Services Council which
coordinates activities of various organizations aiding the aged and the poor; and $1,800 for a Senior
Adult Activity center.
Ti
• Clay County, Iowa — $4 0,000, about one-fourth of the
FY 1974 shared funds, was spent for medicine and other
support of elderly Clay County residents in nursing
homes in surrounding counties.
;f{
• Freeport Township, Illinois — The largest GRS
expenditure for FY 1974 was for a nutrition program
for the poor and the aged.
• Charlotte, North Carolina — $50,000 was used from
GRS funds to subsidize bus transportation for the
elderly.
• Fort Worth, Texas — GRS made possible a property
tax exemption for senior citizens.
• Richland County, South Carolina — The local Council
on Aging received $3,000 of GRS funds.
• Dallas, Texas — $5,000 a month for three months from
the city's GRS allocation was used for a "Meals on
Wheels" program.
3^7
- 7 •
Burlington, Vermont — Revenue sharing funds paid for
the renovation of a building to serve as a senior
citizens center.
• Dubuque, Iowa — Over $10,000 went to a voluntary
agency which provides educational courses for the
elderly, transportation to and from doctors' offices
and clinics, and a "Meals on Wheels" program.
Mr. Chairman and members of the Committee, I have sought
to make three basic points about the importance of General
Revenue Sharing for older Americans. First, revenue sharing
was designed to provide unrestricted Federal assistance to
State and local governments to meet locally identified needs.
If it is to continue to serve this purpose successfully, it
cannot be targeted to special goals. Other Federal aid
programs are designed to serve specialized roles. Second,
there are extensive Federal financial resources directed toward
the problems of the aged, and these have continued to grow
since the enactment of GRS. Third, our older citizens derive
a great deal more direct and indirect advantage from this new
form of Federal assistance than the basic use report data
indicates.
It has been a pleasure to be with the Committee today to
offer the Administration's views on this important matter.
We hope that we will have your support for the renewal of
General Revenue Sharing
oOo
FOR IMMEDIATE RELEASE
R E M A R K S O F T H E H O N O R A B L E C H A R L E S M. W A L K E R
ASSISTANT S E C R E T A R Y O F T H E T R E A S U R Y F O R T A X POLICY
B E F O R E T H E NATIONAL FOREIGN T R A D E COUNCIL
N E W Y O R K CITY, TUESDAY, N O V E M B E R 18, 1975, 3 P.M.
I am pleased to appear before the National Foreign Trade Council.
Many of Treasury's best "customers" are represented here, and it is
important that you who are engaged in foreign trade understand our views
on current tax issues relating to international trade and investment.
There are a great many of such issues at this time. For the most
part, however, I will limit myself to the three main is sues--the foreign
tax credit, deferral, and DISC. I will discuss each of these issues
in turn.
The Foreign Tax Credit
The basic concept of a tax credit system is that the country in which
business activity is carried on should have the first right to tax income
from that activity, even when the activity is carried on by a foreigner.
The foreigner's home country also taxes the income, but only to the
extent the home tax does not duplicate the tax of the country where the
income is earned. The duplication is eliminated by the foreign tax
credit.
The basic foreign tax credit is neither a tax loophole nor an incentive to invest abroad. It is merely part of a system of allocating
primary taxing jurisdiction to the government within whose borders
the income is earned. As you know, U.S. companies are taxable on
their worldwide income. Our tax credit system does not reduce the
total tax bill of U.S. companies below the amount they would have paid
if the income had been earned here. Rather, they are excused from
paying U. S. tax on foreign income only to the extent that they have
paid an equivalent tax on that income to a foreign government.
WS-483
-2There have been cries from some for the elimination of the foreign
tax credit. The disaster which would befall American industry in such
an event is too obvious to require any time here. Let m e just say
that cooler heads have prevailed, so far at least.
Although the basic concepts of the foreign tax credit are sound,
there are technical problems with our present foreign tax credit
system. The major issue in the present system arises out of the
desire of taxpayers either to average or not to average (depending
upon the circumstances) the income and the taxes of high tax and
low tax countries.
At present, taxpayers m a y compute their foreign tax credit under
either the per-country limitation or the overall limitation. Under
the per-country limitation, the foreign tax credit is applied to the
taxes and the income of each country separately. Where taxes in
a given foreign country exceed the U.S. tax on the income from
that country, that excess is not creditable. Where another foreign
country's taxes are less than the U.S. tax on the foreign income
from that other country, the taxpayer will have additional tax
to pay to the United States. When there is a loss in a particular
country, that loss can reduce U.S. taxes on U.S. income, even if
there is income in other countries with respect to which no U.S. tax
is payable because of the foreign tax credit.
Under the overall limitation, the taxpayer aggregates all his
foreign income and all his foreign taxes. If the foreign taxes do not
exceed the U.S. tax on the foreign income, then the entire amount of
foreign tax may be taken as a credit. The overall limitation permits
the taxpayer to average out high foreign taxes with low foreign taxes,
but does not allow foreign losses to reduce U.S. taxes on U.S. income,
unless there is an overall foreign loss.
The option which a taxpayer selects depends upon his forecast of
income, expense and foreign tax rates in his foreign operations. If
the taxpayer anticipates losses in one foreign country, and profits in
another, the per-country limitation m a y be preferable, because it
enables him to offset the loss against his U.S. income, while claiming
a credit for the taxes paid in the other country.
If the taxpayer
anticipates profits in one country which has an effective income tax
rate above 48 percent and profits in another country which has an
effective income tax rate below 48 percent, the overall limitation
m a y be preferable.
s
7
The opportunity that taxpayers now have either to offset foreign
losses against domestic income or to average high and low foreign
taxes has given rise to demands for revision of our foreign tax
credit system.
The 1975 Tax Reduction Act focused on this opportunity as it has
benefited the international oil companies. The overall limitation
posed a particular problem in the oil area because the tax systems
of the O P E C countries impose very high taxes which have many of
the characteristics of royalties. The opportunity for the oil companies
to average these taxes with low taxed shipping or refining profits
under the overall limitation was reduced substantially by the provision
limiting the m a x i m u m rate of foreign tax that can be taken into account
on the extraction of oil abroad. The Treasury Department would have
eliminated this averaging altogether by setting the m a x i m u m rate at
48 percent. Congress was somewhat more generous, setting a m a x i m u m
rate of 52.8 percent for 1975, 50.4 percent for 1976, and 50 percent
thereafter. However, in another respect, Congress went further
than Treasury proposed; Congress virtually eliminated the opportunity
for oil companies to offset foreign losses against U.S. income, by
repealing the per-country limitation for oil income. In addition,
Congress came close to going much further. When the bill was considered in the Senate, the Senate overwhelmingly approved a proposal
to deny foreign tax credits to oil companies altogether.
The Tax Reduction Act has not put an end to criticism of the
foreign tax credit. The several other proposals contained in the 1974
Ways and Means Committee Tax Reform Bill appear again in the 1975
Ways and Means Committee Tax Reform Bill and we cannot forget that
the Senate voted to end the foreign tax credit for oil companies.
The main Ways and Means proposal is to eliminate the per-country
limitation for all companies. The reason given for this proposal was
to prevent foreign losses from offsetting domestic income, except in
the case of an overall foreign loss. This is not the only problem with
the per-country limitation, however.
The per-country limitation inevitably creates difficult administrative
problems. The primary problem is the difficulty of providing adequate
source rules. For instance, under present law, dividends paid by a
foreign corporation are deemed to have a source in the country where
the corporation is incorporated. Thus, under the present per-country
limitation, income from various foreign countries can be channeled
into a subsidiary located, say, in Bermuda, and a credit would be
M
granted for the taxes paid in the various other countries from which
the Bermuda corporation derived its income. A s a consequence,
the same averaging of taxes as occurs under the overall limitation
can be achieved under the per-country limitation. To make the percountry limitation operational, at least in a theoretical sense, it
would be necessary to undertake a wholesale revision of the source
rules. Even if that were accomplished, the Internal Revenue Service
would have an extremely difficult job auditing returns based on such
rules.
Because of these technical problems with the per-country limitation, the Treasury Department has not objected to its repeal.
It seems entirely rational to look at foreign income in the aggregate as one basket of income and domestic income as another basket.
In this day of increasing concern with multinational corporations,
foreign tax adjustments of transactions between sister corporations
operating abroad are also increasing. This m a y well give rise to
the taxation by two or more countries of the same income without offsetting adjustments. The overall limitation provides some measure
of relief to American firms caught in such a bind.
The Ways and Means Committee bill also includes a foreign loss
recapture provision. This provision was proposed by Treasury in
slightly different form in 1973, but we support it in its present form.
W e view this as a technical change to eliminate an unintended benefit.
Under present law, a U.S. taxpayer can use foreign start-up losses
to reduce U.S. tax and then pay no U.S. tax on subsequent foreign
gains because of the foreign tax credit. In such a case it is only fair
for the U.S. to recapture the tax lost during the start-up period.
The Ways and Means bill also would provide a capital gain adjustment to the foreign tax credit. W e view this as a technical improvement,
and we support it. Capital gains are subject to lower U.S. tax, and it
is logical that foreign capital gains should receive a correspondingly
lower foreign tax credit limitation. Similarly, we view the full grossup for less developed country dividends as a desirable simplification,
eliminating an inefficient preference in our tax laws.
The Ullman proposal, which is not in the Ways and Means bill,
to limit each country's creditable tax to 50 percent represents an
intolerable complexity which we strongly oppose. Basically, the
Ullman proposal has the same theoretical underpinnings as did the
limitation in effect from 1932 to 1954, that is, the lesser of the
per-country or the overall limitation, but with a little slippage
permitted toward the overall limitation. However, the administrat
problems this proposal would create are a nightmare.
Elimination of Deferral
Let me turn now to the proposed elimination of deferral. More
precisely, the proposal is to tax currently the undistributed income
of foreign subsidiaries.
In our view this proposal is not acceptable, for a number of
reasons. It would place American business abroad at a competitive
disadvantage compared with the firms of other countries doing
business in the same market, including those firms which are
indigenous to the country involved. At present, a United States
owned enterprise operating in a given country pays the same taxes
that local firms pay and that firms of third countries pay. They are
all in the same competitive position insofar as the income earned in
that country is concerned, as long as the profits remain in "corporate
solution" and are used in that business. But if the profits are
transferred to the parent company in the United States, then U.S.
tax is imposed. This seems to us an equitable and appropriate state
of affairs. Tax burdens of American businesses abroad are equal
to the tax burdens of their competitors so long as profits remain
abroad, and the total tax bite on foreign income is equal to the total
tax bite on domestic income when profits are repatriated.
Moreover, the current taxation of the undistributed income of
foreign subsidiaries would probably produce relatively little additional
revenue for the United States ultimately. If such a proposal were
adopted, foreign countries could be expected to take steps one way
or another to increase the tax burden on U.S. corporations. W e
should not underestimate the skill and ingenuity that can be exercised
to bring this result about. For instance, there are in a number of
developing countries provisions now in effect designed to "sop up"
the foreign tax credit granted by the United States to its taxpayers.
The elimination of deferral would accelerate the tendency in this
direction in short order. In addition, the mere payment of dividends
by foreign subsidiaries would increase the foreign tax burden
substantially.
It is also important to note that elimination of deferral would have
an important effect on the attitude of developing countries toward the
United States. Even today there is widespread criticism among
developing countries that United States taxation of foreign income
when received as dividends has an adverse effect on their efforts to
promote investment and the reinvestment of profits. They often
grant tax reductions as an incentive to induce investment in their
country. They are very upset when they see those reductions result
in increased tax liability to the United States. At present, we can
reply to such criticism that the U.S. tax does not apply so long
as profits are retained by the foreign corporation, and that, in fact,
our policy tends to reinforce their incentive measures. If deferral
were eliminated, we would have no rational defense against the
criticism directed at us. This problem should not be dismissed
lightly. It is clear that developing countries have learned how to
coordinate their efforts and it is likely that responses would be made
which would be far more unpalatable, even to critics of existing law,
than the present state of affairs.
There is also the difficult administrative problem of modifying the
U.S. tax liability of foreign corporations with minority interests and
the problem of securing the distribution of profits by such companies
in order for the U.S. tax to be paid.
There is, finally, the audit burden that would be imposed on the
Internal Revenue Service as a result of the addition of thousands of
corporations to the audit list, many of which are now paying taxes
equal to or higher than the tax imposed in the United States.
The Ullman proposal, which is not in the Ways and Means bill,
that deferral be eliminated with respect to 50 percent of the earnings
of foreign corporations would entail all the complexities, and then
some, that complete elimination of deferral would involve. From
an administrative viewpoint therefore, the Ullman proposal is even
less tolerable than complete elimination of deferral.
In our view, the best argument of those who wish to end deferral
has been that subpart F has not been strong enough to end the abuse
cases. For the most part this argument is no longer valid, now
that subpart F has been substantially tightened by the Tax Reduction
Act. If there is any remaining problem it is in the area of tax haven
manufacturing corporations and runaway plants, and the proper
response is to adopt our 1973 proposals in this area. Even this
response m a y be too much at this time, as we all are still trying
to digest the Tax Reduction Act changes.
DISC
DISC is a very controversial program. It has vigorous
supporters, and it has vigorous detractors. The Treasury
Department is among its supporters.
DISC stimulates exports. DISC is important for our balance
of trade and our balance of payments. It creates jobs in the United
States and adds to our gross national product. During the time
DISC has been in existence, United States exports have grown from
$44 billion in 1971 to some $118 billion in 1975. Obviously, all
of this growth cannot be attributed to DISC. The growth reflects
worldwide trade expansion, exchange rate adjustment, varying
inflationary movement, and so on. But part of the growth is due
to the incentive of DISC. Most estimates of the DISC part of the
growth range between $4 billion and $6 billion.
DISC creates jobs. With more goods exported, more goods
must be produced, and more people are employed to produce them.
The direct DISC-related employment stimulus is in the order of
300,000 additional jobs.
DISC effectively neutralizes the provisions in foreign tax laws
which tend to encourage United States businesses to establish plants
abroad or to encourage additional export efforts in competition with
U.S. exports.
The repeal of DISC would be particularly unfortunate at this time
when employment is down and costs are high. It would increase our
present problem of capital formation by raising the taxes on capital
at a time when they should be lowered. It would hit the hardest those
companies who have been doing the most to help our export efforts.
It would bring to a halt the G A T T proceedings, before we get a chance
to shine the spotlight on the export incentive practices of foreign
countries.
The Ways and Means Committee decided not to repeal DISC.
However, they moved to restrict the DISC benefit in two unfortunate
ways. First, they would take away DISC benefits for the export of
certain goods. Specifically, the Tax Reduction Act of 1975 has already
made natural resources ineligible for DISC. The current bill would add
to the disqualified list agricultural products not in excess supply and
military equipment.
??7
Second, for companies with profits in excess of $100,000, the
Committee would restrict DISC benefits to sales in excess of 75 percent of average sales during a base period.
The first change, the disqualification of certain items from DISC,
reflects a Congressional desire to remove the export stimulus from
the export of goods believed to be undeserving of stimulus. This
effort produces hardship for those companies exporting those items.
The hardship is made particularly difficult by the lack of adequate
transitional rules for those companies previously exporting the nowdisqualified items.
The second change, the movement to an incremental approach,
has some theoretical justification. The approach was considered
seriously during the development of the DISC legislation in 1971,
at a time when income on incremental DISC sales would have been
100 percent deferred, rather than 50 percent deferred. However,
any incremental approach involves the problem of selecting the base
period. The problem is similar to that posed by excess profits tax
legislation. Inevitably, any base period will lead to unfairness. The
new entrant will have an undue advantage, and the company with
declining sales will have no incentive to slow the trend.
Other Issues
There are other issues concerning international trade and investment raised by the Ways and Means Committee bill which time does
not permit m e to discuss. This has been a busy and exciting year
for those of us interested in tax reform in general and for tax reform
in the foreign area in particular. The Treasury Department is also
engaged in an active foreign tax treaty program, and a lot is happening
in that area. If there is an opportunity to do so, we m a y be able to
get into some of these matters during the question period later on
today.
Thank you very much.
-oOo-
7^
Contact: Herbert C. Shelley
Extension 8256
November 18, 1975
FOR IMMEDIATE RELEASE
TREASURY ISSUES DUMPING FINDING WITH RESPECT TO
ELECTRIC GOLF CARS FROM POLAND
Acting Assistant Secretary of the Treasury
James B. Clawson announced today that he was issuing
a dumping finding with respect to electric golf cars
from Poland. The finding will be published in the
Federal Register of November 19, 1975.
On June 16, 1975, the Treasury Department determined
that electric golf cars from Poland were being, or
likely to be, sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended.
On September 16, 1975, the U.S. International Trade
Commission advised the Secretary of the Treasury that an
industry in the United States was being injured by reason
of the importation of electric golf cars from Poland
sold, or likely to be sold, at less than fair value.
After these two determinations, the finding of dumping automatically follows as the final administrative
requirement in antidumping investigations.
During the period of September 1, 1974 through
August 31, 1975, imports of electric golf cars from
Poland were valued at roughly $5 million.
*
WS-482
*
*
*
a
RELLASL
AT 4:00 P.M.
November 18, 1975
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
> series of Treasury bills to the aggregate amount of $6,600,000,000 >
ireabouts, to be issued November 28, 1975
or
as follows:
90-day bills (to maturity date) in the amount of $3,200,000,000* or
ireabouts, representing an additional amount of bills dated August 28, 1975
to mature February 26, 1976
(CUSIP No. 912793 YV2 ) , originally issued in
amount of $3,201,720,000, the additional and original bills to be freely
erchangeable.
181-day bills, for $3,400,000,000, or thereabouts, to be dated November 28, 1975
to mature May 27, 1976
(CUSIP No. 912793 ZJ8 ).
The bills will be issued for cash and in exchange for Treasury bills maturing
ember 28, 1975, outstanding in the amount of $5,905,675,000, of which
ernment accounts and Federal Reserve Banks, for themselves and as agents of
eign and international monetary authorities, presently hold $2,539,095,000se accounts may exchange bills they hold for the bills now being offered at
average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and nonDetitive bidding, and at maturity their face amount will be payable without
Brest. They will be issued in bearer form in denominati:. »s of $10,000,
,000, $50,000, $100,000, $500,000 and $1,000,000 (maturit;/ value), and in
c-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
•thirty p.m., Eastern Standard time, Monday, November 24, 1975.
ers will not be received at the Department of the Treasury, Washington.
i tender must be for a minimum of $10,000.
iples of $5,000.
Tenders over $10,000 must be in
In the case of competitive tenders the price offered must
xpressed on the basis of 100, with not more than three decimals, e.g., 99.925.
tions may not be used.
Banking institutions and dealers who make primary markets in Government
•79
(OVER)
securities and report daily to the Federal Reserve Bank of New York their position
with respect to Government securities and borrowings thereon may submit tenders
for ac
unf of customers provided the names of the customers are set forth in
such tenders.
Others will not be permitted to submit tenders except for their
own account.
Tenders will be received without deposit from incorporated banks
and trus
companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on November 28, 1975,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing November 28, 1975 .
ment.
Cash and exchange tenders will receive equal treat-
Cash adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the new bills,
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954, the
amount of discount at which bills issued hereunder are s~-d is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notice
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from any Federal Reserve Bank or
FOR RELEASE ON DELIVERY
STATEMENT BY THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
BEFORE THE
SUBCOMMITTEE ON TRADE
OF THE HOUSE COMMITTEE ON WAYS AND MEANS
NOVEMBER 18, 1975
11:00 A.M.
Mr. Chairman:
I am David R. Macdonald, Assistant Secretary of the
Treasury for Enforcement, .Operations and Tariff Affairs.
I have with me today Peter 0. Suchman, Deputy Assistant
Secretary of Treasury for Tariff Affairs, Leonard Lehman,
Assistant Commissioner of the U.S. Customs Service, Salvatore
E. Caramagno, Director, Classification and Value Division,
U.S. Customs Service, and Lynn Barden, attorney with the
Office of the General Counsel, Treasury Department.
It is a pleasure to appear before the relatively new
Subcommittee on Trade of the Ways and Means Committee.
We are fully cognizant of the burden placed upon the full
Ways and Means Committee by proposed income tax legislation,
as well as other complex and high priority legislative matters,
and we are therefore that much more appreciative that this
Subcommittee has taken time to conduct these hearings.
WS-478
773/
_2.
We look forward to many more such appearances in the
future and we hope that some of them may be for the purpose
of considering H.R. 9220, the Customs Modernization Act,
co-sponsored by you Mr. Chairman and by Mr. Conable. I note
with satisfaction that the Subcommittee announcement of these
hearings indicates that further hearings on H.R. 9220, as
well as on other aspects of Customs administration will be
scheduled for a later date.
The subject of today's hearing concerns Customs appraisement of imports of automobiles as it relates to the pending
investigations of automobile imports under the Antidumping
Act of 1921 (19 USC 160). As you know there are eight such
cases pending, involving imports from Belgium, Canada, France,
Italy, Japan, Sweden, the United Kingdom and West Germany,
which
include products of thirty-one different manufacturers.
In 1974 imports of these products amounted to $7.5 billion.
Two petitions were received which resulted in the
initiation of these investigations.
One was received on
July 8, 1975 and covered all of the eight countries mentioned
above.
A second received on July 11, 1975 concerned importa-
tions from the United Kingdom, Italy and West Germany.
Because of the position taken at that time by various
spokesmen for the domestic industry, to the effect that imports
were not a contributing cause of the then depressed state of
the U.S. auto industry, we found that substantial doubt existed
with respect to injury and the matter was referred to the
3*1
-3International Trade Commission on August 8, 1975 (as provided
for in Sec. 321 of the Trade Act of 1974, which amended
Section 201 (c) (2) of the Antidumping Act). A determination
was made by the ITC on September 8, 1975 that it was not
able to find "no reasonable indication of injury." Our
investigations therefore continue.
At this point it might be useful for me to explain in
some detail how Antidumping procedures work. The Treasury
has 30 days after receipt of a valid petition within which
to make a preliminary inquiry and decide whether or not to
initiate a formal investigation (Section 201(c)(1) of the
Act, as amended). Regulations promulgated under the Act set
forth what information is necessary to constitute such a
petition. The law requires that for "dumping" to occur
there must be present both sales at less than fair value,
and injury or threat thereof to a U.S. industry. Therefore,
a petition must give evidence both as to differential pricing
and injury or threat thereof as a result. Once we are
satisfied that sufficient information on both these factors
has been presented, an Antidumping proceeding notice is
published, which marks the opening of a formal investigation.
Treasury conducts only the inquiry into the alleged
sales at less than fair value. The ITC, under the Act, must
decide on the question of injury and that is why the Treasury
refers the case to the ITC during the preliminary stage if
337
-4the information on hand during this first 30 day period
creates a substantial doubt as to the existence of injury.
Treasury has no other role in the injury phase of the case
other than to ensure that evidence of injury is present,
and the full injury inquiry by the ITC follows the Treasury
price investigation.
The price investigation usually takes six months to reach a
preliminary determination
/following publication of the proceeding notice. In complicated cases we may take up to nine months to complete this
part of the inquiry (Section 201 (b)(2) of the Act as
amended).
As I mentioned, our purpose is to determine whether
sales at less than fair value are or have been occuring.
A determination of sales at less than fair value does not
require a comparison of import prices with the price of
competing domestically manufactured goods. What is compared
home
normally is the/market price of the goods with the price
of the same merchandise for export to the U.S. In certain
circumstances where home market prices are non-existent
or inappropriate either export prices to third markets, or
constructed value are used. All of these prices are of
course subject to various adjustments so that the two are
comparable -- we back out differences in transportation
costs, tariffs, taxes, levels of trade, and so forth so as
7133
-5not to be comparing apples and oranges.
What we want is
the ex-factory price for both sales.
At the conclusion of this six (or nine) month period
in normal cases a tentative decision as to the existence of
sales at less than fair value is made.
an order is issued
If it is positive
withholding appraisement on the merchandise
entered on or after the date of publication of the order.
(Section 201 (b)(1)(B), as amended).
This means that addi-
tional duties may be assessable on imports as of that date if the final finding is affirmative, even though the final dumping finding may be some months off.
There is then a 3-month period during which
an opportunity
is afforded interested parties to submit views on Treasury's
tentative finding.
At the end of that 3 months, if the final
sales at less than fair value determination is positive
then the case goes to the ITC for a three month injury inquiry.
If the ITC finds the existence of injury, or the threat
thereof, a final dumping finding is published and dumping
duties are assessable on all unappraised entries entered
"not more than one hundred and twenty days before the question
of dumping was...presented to the Secretary..." (Section
202(a) of the Act, 19 USC 161). This is a very important
provision for the issue under discussion here and I shall
return to it shortly.
The auto cases are presently in the six, or nine month
price investigation phase.
Notice of the investigation was
published on August 8 and our tentative sales at less than
at the latest
fair value decision is due in either February or/May,
depending upon whether complications develop. Customs
Service personnel in the field are just now receiving
pricing data from the manufacturers concerned, and will
shortly begin on-the-spot verification procedures so that
we can begin to analyze the information. It is obviously
too early for me to have any basis for a judgment as to
what that data will show, nor would it be appropriate for
me to voice any opinions on the matter.
While these antidumping inquiries are proceeding, the
liquidation of entries of autos from all major manufacturers
has been suspended, for unrelated reasons for some time.
These reasons concern 1) cost of production verification,
2) the resolution of certain legal issues, and 3) with respect
to imports from Canada, the receipt of certain documentation
in connection with duty-free importations under the Automotive Products Trade Act. The cost of production verifications
involve extensive foreign inquiries. These inquiries have
been underway for some months and are expected to be completed
by November 30, 1975.
33^
The major legal issue to be resolved with respect to
all automobile entries is the manner of determining the
amount of profit to be used in calculating the cost of
production (the agreed basis of appraisement).
In the
past the record has not established as a matter of fact
that there was a profit usual in the trade that was
different than that realized by the individual manufacturers.
This matter has now been raised again and is under study.
The so-called "old law" or "final list" (19 USC 1402)
provides the statutory basis for making these calculations.
Automobile imports are valued for Customs purposes under
this statute.
1402 (f) states that
the cost of production
of imported merchandise shall...include "(4) an addition for
profit...equal to the profit which ordinarily is added, in
the case of merchandise of the same general character,"
if such exists and is different than that added by the given
manufacturer, and if it is not less than eight percent.
Resolution of this issue at this time necessitates findings
on a country by country basis, of which automobiles are of
the "same general character."
Although we have been appraising
automobiles for years this issue continues to arise for various
reasons.
For instance, while there is information on auto-
mobiles which are imported into the United States, Sec. 1402
(f) (4) requires that we also consider automobiles that are not
produced for export in the country of manufacture.
Also, the
number of models and the volume of production constantly vary.
It is further possible that this problem may defy total
solution in some instances and that we may have to use
individual company profits. To reiterate, it is not an
easy task to establish a -'usual profit" in the automobile
industry of a particular country.
The valuation statute requires that value be determined
as of a point in time before entry which would allow for the
manufacture of the automobiles and their subsequent shipment
to the United States. There are daily importations of automobiles arriving in the United States. It is obvious that
information required to appraise these entries cannot be
updated on a daily basis. It is doubtful that any manufacturer could supply this information and certain that the
Customs Service could not assimilate it in any meaningful
manner which would allow for the orderly liquidation of
entries. These periods of time in which cost data are to be
updated must be established, which would not place an unreasonable burden on either manufacturers or Customs and still
adequately protect the revenue. To further complicate matters,
it appears that these updating periods will not necessarily
be the same for each manufacturer of automobiles. In the
past, updating of information was usually done on an annual
basis. We are in the process of determining whether this is
the best way to adequately protect the interests of the U.S.
With respect to one manufacturer, Volkswagen, it must
also be determined whether certain labor related costs are
unusual.
Unusual costs are not included in a determination
of cost of production.
At this time we cannot speculate with respect to other
issues which may arise as a result of foreign inquiries
which are still open. However, inasmuch as we expect to
complete all foreign inquiries by the end of this month we
will shortly be in a position to attempt to resolve outstanding issues with the importers and exporters concerned.
At this point I believe it would be useful to relate
these two ongoing procedures to each other and see how they
can impact imports of autos.
As I've already mentioned, under the Antidumping Act,
Section 201 (b)(1)(B) as amended, withholding of appraisement
is usually ordered at the time a tentative SLFV determination
is made, affecting entries on or after that date. However,
the Secretary may order withholding to affect entries up to
120 days before the date of publication of a proceeding notice.
This would mean that duties would be assessable on entries
in these cases beginning about April 8, 1975 instead of
February or May 1976.
As a matter of policy, the Treasury has not used this
retroactive authority. Withholding has always been effective
as of the date of publication of the notice ordering withholding of appraisement. This is the practice followed today
by all our major trading partners.
A separate issue is raised by Section 202 (a) of the
Antidumping Act, which provides that dumping duties be
assessed, where appropriate, on imports unappraised at the
time of any final dumping finding, which were entered up
to 120 days "before the question of dumping was...presented
to the Secretary" (in this case March 8, 1975). I want to
make clear that this provision operates independently of
the discretionary authority in Section 201. Automatically
under 2 02, all unappraised entries on the date of a dumping
finding are subject to additional duties if they entered on
or after that day 120 days prior to receipt of the petition.
It is because of the operation of this provision that the
pending inquiries under Section 1402 could result in assessment of dumping duties on up to an additional 14 months of
entries.
Two questions are therefore present: First — should
any
the Secretary exercise his discretion and make/eventual withholding order retroactive to all entries beginning on
April 8, 1975?
Second — should the Customs and Treasury intentionally
delay liquidations by leaving unresolved these unrelated
valuation issues so as to have affected automatically all
entries after March 8, 1975, by any dumping finding?
We presently believe the answer to both the questions ought to
be no, but at the same time I am grateful for the opportunity
presented by these hearings so that we can engage in a useful
-11-
^9
exchange of views on this complex yet extremely important
matter.
As a matter of pure self interest for the U.S., it
appears to us that the Secretary ought not to exercise the
discretionary "retroactive" authority of Section 201.
Neither the U.S. or our trading partners have ever initiated
the practice of imposing dumping duties retroactively, even
though both we and they have the authority to do so. Other
nations would construe such an action as a change in U.S.
policy toward a more restrictive use of our antidumping law
and would in all probability feel released from the restraint
they have heretofore exercised not to apply their remedies
against our exports retroactively. And, of course, their
reactions might go beyond modification of their antidumping
procedures. Furthermore, I would question whether it would
be consistent with traditional American ideas of fair play
to suddenly change the rules for the taxpayers concerned —
it is the importers who are liable here -- without prior
communication of such a radical departure from past policies.
Taxpayers should be able to reasonably anticipate their
liabilities.
With regard to the second alternative, intentional
delay in liquidating entries subject to 1402 inquiries,
the same points apply. Intentional withholding of liquidation
would be viewed as a discretionary action, creating an unjustified impediment to trade. It has always been our policy
to liquidate entries in an orderly and expeditious manner.
There is no reason to deviate from this policy at this
time. The difficulties that resulted in suspension
of liquidation in this instance had nothing to do with
dumping, but with the endemic vagaries of the valuation
statutes and we should not exact unexpected duties for
statutory difficulties which we allow to exist.
Certain points regarding our tentative thinking ought
to be clear.
First, liquidation will not affect any possible
Customs penalty situations. The statute of limitations
for assessment of applicable penalties runs from the date
of entry or "discovery", whichever is later.
Second, we would be prepared to appraise and liquidate
in a manner which would protect the revenue and yet be reasonable and defensible under the statute. If outstanding valua-
tion issues are not resolved, we would of course not liquidate.
Third, speedy resolution of these issues will largely
depend upon acceptance by the taxpayers here, that is the
importers, of the governments position interpreting the
statute and applying it to the facts. We feel that any U.S.
taxpayer ought to have the option of settling an outstanding
tax matter by accepting the government's position.
Fourth, in large part resolution is dependent upon the
receipt and verification by Customs of the data necessary to
37/
-13calculate "cost of production". To the extent foreign
manufacturers drag their heels in producing that data, the
possibility of liquidating these entries before any dumping
finding is lessened. We would, of course, not proceed in
any case where the full disclosure necessary is withheld.
I apologize for the length and detail of this statement,
but this is a complex issue and a full understanding of what
is involved is important. We feel that intentional action
by us to depart from long established policies in order to
magnify the effect of these antidumping proceedings would
risk a major confrontation with our trading partners and
endanger unnecessarily the thousands of jobs in this country
dependent upon exports. Furthermore, such action would
place an unjustifiable burden on the taxpayers concerned.
One final point. If this case illustrates nothing else
it is that the old valuation statute, 19 USC 1402, the "final
list", has outlived its usefulness. In the case of automobile
appraisements were it not for the existence of the old value
law and the final list, in no case would these appraisements
have been less than invoice value. Under the old law where
related party transactions occur we must use the cost of
production to determine value. Under the new law, 19 USC 1401,
if the transaction price fairly reflects the true market value
we can accept that price. Therefore, we would avoid this
anamolous situation where the invoice price exceeds the value
for Customs purposes, the cost of production. Under the new
-i4-
37^
law we would use the higher, invoice price. Furthermore,
the tremendous information gathering burden on Customs,
often not related to the transactions involved, and often
resulting in the collection of less revenue would be removed.
At an appropriate time, I believe it would be useful
for this subcommittee to address itself to the issue of
devising an up-to-date valuation system.
We stand ready to
engage in any such study with you and other interested parties.
0O0
37-3
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE RICHARD R. ALBRECHT
GENERAL COUNSEL, DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE SELECT COMMITTEE ON AGING
NOVEMBER 18, 1975, 10:00 A.M. EST
THE IMPORTANCE OF GENERAL REVENUE SHARING
TO OLDER AMERICANS
Mr. Chairman, I am pleased to have the opportunity to
testify before you today. During the current vacancy in the
Office of the Under Secretary I have been given general
supervisory responsibility within the Treasury Department
over matters relating to General Revenue Sharing.
After a careful review of revenue sharing, the Administration has concluded that the program should be renewed
in its present general form. H.R. 6558, the Administration's
proposal, would continue this successful, innovative approach
to Federal fiscal assistance for five and three-quarters years
after the expiration of the current program at the end of 1976.
We believe that renewal legislation should be enacted soon.
State and local governments are already planning their FY 1977
budgets and they need to know if they can continue to count
on receiving shared revenues.
This Committee is making a valuable contribution to the
Congressional consideration of GRS renewal through its
examination of the program's impact on older Americans.
Before addressing myself directly to the concerns of these
hearings and the Committee's resolution of September 11, 1975,
I shall take a moment to make some general comments about
revenue sharing.
Since General Revenue Sharing was enacted in October 1972,
it has made available over $20 billion to States and communities throughout the Nation. These funds have done much
to strengthen the viability of our Federal system of Government, a system that is predicated on the shared exercise of
powers and responsibilities. A strong working partnership
WS-477
among Federal, State, and local government is necessary if
our democracy is to respond effectively to the needs of our
citizens. The General Revenue Sharing program has been the
foremost of a number of recent initiatives to improve the
way in which the governments in our system can work together
to meet these needs more effectively. Revenue sharing
combines the efficiency of the Federal revenue raising system
with the experience and the accountability that comes from
allowing locally elected governments to set priorities for
their own States and communities.
When support was growing for the enactment of the
current revenue sharing program, our State and local governments were struggling with inadequate and regressive tax
resources to meet the mounting demand for services being
placed upon them. While Federal categorical aid programs
of various types were available, they did not provide a help
for many of the problems facing local governments. Federal
grants often did not go to support basic services, such as
sanitation or fire protection, where help was often needed.
At the same time, the then available Federal aid programs had
the effect of making recipients adjust their own priorities
by assigning importance to areas where grant money was available. An additional burden often present was the need to
match the Federal contribution with State and local funds.
These characteristics of the aid programs that existed prior
to revenue sharing produced a stifling effect on the creativity
and accountability of State and local governments. In enacting
General Revenue Sharing, Congress wisely concluded that a new
type of generalized, "no-strings" Federal assistance was
needed, along with categorical aids, block grants, and other
Federal assistance programs, to get us back on the road to a
sounder Federalism.
The revenue sharing funds distributed over the three
years the program has been in existance have helped States
and communities maintain vital public services and stabilize
the crushing burdens of taxes — often real property and
sales taxes that fall particularly hard on low income families
and the elderly.
There are many worthy, specific objectives to which the
Congress might try to give priority by redesigning the GRS
program. However, it would not be an easy matter to get
agreement on which goal or goals should receive preference.
Even if we could, placing restrictions on the use of shared
revenues would seriously limit, if not destroy, the special
37r
advantages of the program. There are other Federal assistance
programs and transfer payments intended for the solution of
specific problems. By providing generalized, "no-strings"
Federal assistance, revenue sharing serves a different
purpose.
Has the enactment of revenue sharing led to a reduction
in Federal categorical aid programs for the aging? Not at
all. In fact, Federal categorical aid to the elderly has
greatly increased since October of 1972 when revenue sharing
was enacted. The funding of categorical programs authorized
by the Older Americans Act has risen from $44.7 million in
FY 1972 to $245.58 million in FY 1975.
Similarly, Federal outlays for health care for the aged
(those 65 and over) and for income security benefits, as
identified by the recent Special Analyses of the Budget of
the United States, have increased markedly. Outlays for the
financing and direct provision of hospital and medical
services have risen from $8.57 billion in FY 1970 to
$13.54 billion in FY 1974, and to an estimated $15.98 billion
in FY 1975. Income security benefits to the aged as identified
in the Budget, excluding medicare and medicaid payments which
are included in the health,services outlays noted above, have
grown from $29.36 billion in FY 1970 to $53.60 billion in
FY 1974, and to an estimated $62.12 billion in FY 1975. It
should be noted, of course, that a portion of the outlays in
both the health care and income security categories are for
the"programs partly financed by contributions made by beneficiaries during their working years.
These statistics indicate that the Federal Government
during this decade has continued to direct ever greater
resources to the well-being of our older citizens. The
coming of GRS has accompanied this increase, rather than
leading to any cutback in categorical or other assistance.
Information derived from the Actual Use Reports
submitted by recipient governments to the Office of Revenue
Sharing indicate that 3% to 4% of GRS allocations are being
spent in the category of "Social Services for the Poor or
Aged" — primarily for operations and maintenance purposes,
as opposed to new or capital spending.
This figure represents the portion of funds that
recipients report spending on social services exclusively
for the poor or aged. There are other programs and projects
- 4 which benefit the poor and the aged, and other citizens as
well, which would not be listed on use reports in the
"Social Services for the Poor or Aged" category.
Different patterns of expenditure, including the shift
of more funds into the social services category, may emerge
as citizens and governments become more familiar with GRS
and become confident of the continued availability of funding.
There are indications that governments are devoting smaller
portions of their allocations to capital projects and more to
finance day-to-day operations now than they were at the beginning of the program.
The Administration on Aging has informed the Treasury
Department that as a result of the advocacy activities of
State agencies on aging, an additional $855,000 in revenue
sharing funds were directed toward programs for the aging
between July 1, 1974, and February 28, 1975. On the sub-State
level, area agencies on aging are reported to have directed
$5,228,293 into such undertakings during the same period.
These advocacy or pooling activities, whereby State and area
agencies encourage State and local governments to use available
resources to solve the problems of older Americans, are
supported by grants made under Title III of the Older Americans
Act of 1965, as amended in' 1973.
Citizen participation has always been a goal of revenue
sharing. As older citizens and the groups representing them
become more familiar with the workings of the program, as
well as of their State and local governments, they should have
increasing success in influencing expenditures by those governments, including their GRS funds. As State and local officials
become more certain about the continuation of revenue sharing,
they should be more willing to direct funds to recurring
social expenditures.
Mr. Chairman, there are a number of other indications
that the aged, as well as the poor and minorities, benefit
appreciably from the General Revenue Sharing program.
First of all, it is important to remember that the
presence of shared funds releases other State and local
resources for social programs. A study being conducted for
the Administration on Aging has found some local governments,
especially those receiving large revenue sharing payments,
utilizing local funds that are freed up because of the availability of shared revenues for new or expanded social programs.
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3?/
A National Science Foundation-sponsored survey of State
administrators found that 29% of those questioned believed
that the availability of GRS funds resulted in more funds
for social programs.
A second indirect benefit is that revenue sharing funds
are raised through the relatively more progressive Federal
tax system rather than from State and local sales and
property taxes. When the receipt of General Revenue Sharing
funds permits tax reduction or stabilization, the elderly,
who are more likely to be on fixed incomes, are particularly
benefited. There have been instances where specific reductions
in property taxes for the elderly were made possible by revenue
sharing.
There is another way in which the revenue sharing use
report statistics on social services for the poor and aged
fail to measure the true impact of the program in meeting the
needs of older citizens. Spending assigned to such use
categories as public transportation, health, recreation,
social development, and for other purposes, may be of significant benefit to older citizens. The considerable use of GRS
funds for capital expenditures also can have this impact.
Several examples are reflected in Planned and Actual Use
Reports noted in a study by the National Clearinghouse on
Revenue Sharing:
• Public transportation — bus service for the elderly
(Cedar Rapids, Iowa).
• Recreation — air conditioning a senior citizens
center (Cedar Rapids, Iowa).
• Social development — expansion of a senior citizens
center (Pasadena, California).
• Health — neighborhood health programs (Denver,
Colorado, and San Antonio, Texas).
• Libraries — a mobile library program (Memphis,
Tennessee).
Finally, I would urge the members of the Committee, when
considering the use of shared funds by local jurisdictions,
not to overlook the fact that many local recipients do not
have the authority to provide social services because
- 6 -
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responsibility for such lies at the county and State levels.
On the whole, both States and the Federal government play
significant roles in the financing and provision of many
social services and Actual Use Reports suggest that States
do use a larger part of their GRS funds for social purposes.
Before concluding, Mr. Chairman, I would like to cite
several additional examples from Office of Revenue Sharing
records of expenditures of revenue sharing funds that
benefited the aged:
• Lebanon County, Pennsylvania — The largest single
GRS expenditure for FY 1973 was for enlarging the
county home for the aged.
• Montgomery County, Pennsylvania — In FY 1973,
$672,089 was expended for a county geriatrics
center; $3,700 for the Human Services Council which
coordinates activities of various organizations aiding the aged and the poor; and $1,800 for a Seniorr
Adult Activity center.
m
• Clay County, Iowa — $4 0,000, about one-fourth of the
FY 1974 shared funds, was spent for medicine and other
support of elderly-Clay County residents in nursing
homes in surrounding counties.
ri
• Freeport Township, Illinois — The largest GRS
expenditure for FY 1974 was for a nutrition program
for the poor and the aged.
• Charlotte, North Carolina — $50,000 was used from
GRS funds to subsidize bus transportation for the
elderly.
• Fort Worth, Texas — GRS made possible a property
tax exemption for senior citizens.
• Richland County, South Carolina — The local Council
on Aging received $3,000 of GRS funds.
• Dallas, Texas — $5,000 a month for three months from
the city's GRS allocation was used for a "Meals on
Wheels" program.
33/
• Burlington, Vermont — Revenue sharing funds paid for
the renovation of a building to serve as a senior
citizens center.
• Dubuque, Iowa — Over $10,000 went to a voluntary
agency which provides educational courses for the
elderly, transportation to and from doctors' offices
and clinics, and a "Meals on Wheels" program.
Mr. Chairman and members of the Committee, I have sought
to make three basic points about the importance of General
Revenue Sharing for older Americans. First, revenue sharing
was designed to provide unrestricted Federal assistance to
State and local governments to meet locally identified needs.
If it is to continue to serve this purpose successfully, it
cannot be targeted to special goals. Other Federal aid
programs are designed to serve specialized roles. Second,
there are extensive Federal financial resources directed toward
the problems of the aged, and these have continued to grow
since the enactment of GRS. Third, our older citizens derive
a great deal more direct and indirect advantage from this new
form of Federal assistance than the basic use report data
indicates.
It has been a pleasure to be with the Committee today to
offer the Administration's views on this important matter.
We hope that we will have your support for the renewal of
General Revenue Sharing
0O0
£&
The Heads of States and Governments of France, Federal Republic
of Germany, Italy, Japan, the United Kingdom of Great Britain and
Northern Ireland and the United States of America, met in the Chateau
de Rambouillet from 15th to 17th of November, 1975, and agreed to
declare as follows:
1. In these three days we held a searching and productive exchange
of views on the world economic situation, on economic problems common
to our countries, on their human, social and political implications,
and on plans for resolving them.
2. We came together because of shared beliefs and shared responsibilities. We are each responsible for the government of an open,
democratic society, dedicated to individual liberty ana social
advancement. Our success will strengthen, indeed is essential to
democratic societies everywhere. We are each responsible for assuring
the prosperity of a major industrial economy. The growth and stability
of our economies will help the entire industrial world and developing
countries to prosper.
3. To assure in a world of growing interdependence the success of
the objectives seo out in this declaration, we intend to play our own
full part and strengthen our efforts for closer international cooperation and constructive dialogue among all countries, transcending
differences in stages of economic development, degrees of resource
endowment and political and social systems.
k* The industrial democracies are determined to overcome high
unemployment, continuing inflation and serious energy problems. The
purpose of cur meeting was to review our progress, identify more
clearly the problems that we must overcome in the future, and to set
a course that we will follow in the period ahead.
5. The most urgent task is to assure the recovery of our economies
and to reduce the waste of human resources involved in unemployment.
In consolidating the recovery it is essential to avoid unleashing
p)
additional inflationary forces which would threaten its success.
The objective must be growth that is steady and lasting. In this
way, consumer and business confidence will be restored.
6. We are confident that cur present policies are compatible and
complementary and that recovery is under way. Nevertheless, we
recognize the need for vigilance and adaptability in our policies.
We will not allow the recovery to falter. We will net accept another
outburst of inflation.
7. We also concentrated on the need for new efforts in the areas
of world trade, monetary matters and raw materials, including energy.
8. As domestic recovery and economic expansion proceed, we must
seek to restore growth in the volume of world trade. Growth and
price stability will be fostered by maintenance of an open trading
system. In a period where pressures are developing for a return to
protectionism, it is essential for the main trading nations to confirm
their commitment to the principles of the CECD pledge and to avoid
resorting to measures by which they could try to solve their problems
at the expense cf others, with damaging consequences in the economic,
social and political fields. There is a responsibility on all
countries, especially those with strong balance cf payments positions
and on those with current deficits to pursue policies which will
permit the expansion-of world trade to their mutual advantage.
9. We believe that the multilateral trade negotiations should be
accelerated. In accordance with the principles laid down in the
Tokyo declaration, they should aim at substantial tariff cuts, even
eliminating tariffs in some areas, at significantly expanding
agricultural trade and at reducing nontariff measures. They should
aim at achieving the maximum possible level of trade liberalization
therefrcm.
We uropose as our goal completion cf the negotiations
in 1977.
10. We look to an orderly and fruitful increase in our economic
relations with socialist countries as an important element in progress
in detente, and in world economic growth.
We will also intensify cur efforts to achieve a prompt conclusion
of the negotiations now underway concerning expert credits.
11 • With regard to monetary problems, we affirm our intention to
work for greater stability. This involves efforts to restore greater
stability in underlying economic and financial conditions in the world
economy. At the same time, our monetary authorities will act to
counter disorderly market conditions, or erratic fluctuations, in
exchange rates. We welcome the rapprochement, reached at the request
of many other countries, between the views of the U.S. and France on
the need for stability that the reform of the international monetary
system must promote. This rapprochement will facilitate agreement
through the IMF at the next session of the Interim Committee in
Jamaica on the outstanding issues of international monetary reform.
12. A cooperative relationship and improved understanding between
the developing nations and the industrial world is fundamental to
the prosperity of each. Sustained growth in our economies is necessary
to growth in developing countries: and their growth contributes
significantly to health in cur own economies.
The present large deficits in the current accounts of the
developing countries represent a critical problem for them and also
for the rest of the world. Thie must be dealt with in a number of
complementary ways. Recent proposals in several international meetings
have already improved the atmosphere of the discussion between
developed and developing countries. But early practical action is
needed to assist the developing countries. Accordingly., we will
play our part, through the IMF: and other appropriate international
fora, in making urgent improvements in international arrangements
for the stabilization of the export earnings of developing countries
and in measures to assist them in financing their deficits. In this
context, priority should be given to the poorest developing countries.
13. World economic growth is clearly linked to the increasing availability of energy sources. We are determined to secure for cur
economies the energy sources needed for their growth. Cur common
interests require that we continue to cooperate in order to reduce
our dependence on imported energy through conservation and the
development of alternative sources. Through these measures as well
as international cooperation between producer and consumer countries
responding to the long-term interest of both, we shall spare no effort
in order to ensure more balanced conditions and a harmonious and steady
development in the world energy market.
lU. We welcome the convening of the conference on international
economic cooperation scheduled for December l6. We will conduct
this dialogue in a positive spirit to assure that the interests of
all concerned are protected and advanced. We believe that industrialized
and developing countries alike have a critical stake in the future
success of the world economy and in the cooperative political relationships on which it must be based.
15. We intend to intensify our cooperation on all these problems in
the framework of existing institutions as well as in all the relevant
international organizations.
;her Distribution:
apartment Heads
FOR IiHIEDIATE RELEASE
NOVEMBER 17, 1975'
OFFICE OF THE WHITE HOUSE PRESS SECRETARY *)^3
THE WHITE HOUSE
PRESS CONFERENCE
OF
HENRY A. KISSINGER
SECRETARY OF STATE
AND
WILLI All E. SIMON
SECRETARY OF THE TREASURY
ABOARD AIR FORCE ONE
SECRETARY KISSINGER: The overall purpose of the
meeting was to bring together the leaders of the industrial
democracies at a time when their economies were in various
states of recession.
When it was proposed, it was suggested that these
leaders ought to meet to give confidence to their peoples
and to convey to their peoples the sense that they were in
control of their future and were not simply waiting for
blind forces to play themselves out.
So we thought it was a matter of great importance,
one, because for two years we have been maintaining that
the political and economic cohesion of the industrial democracies was central to the structure of the ncn-Comnunist
world; secondly./ because we believed that the interdependence
of these economies makes isolated solutions impossible;
and, thirdly, because we believed that there were a number
of concrete issues on which work had to begin and in which
common action was important.
We spent a great amount of effort within our
Government to prepare for this meeting and there are always
many stories when there are disagreements in the Government,
but this has been an unusual occasion, an unusual way in which
all the departments working together worked out common
positions, common philosophies,and achieved the basic proposals
that were put before the other leaders.
When this conference was called, I think it is
safe to say that some of our friends wanted to use it as an
occasion to blame us or at least to imply that their
economic difficulties could be solved primarily by American
efforts,and others may have had the idea that especially in
the monetary field it could be used to bring about rapid
solutions in which the heads of Government overruled the long
negotiations that had gone on.
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But as the preparation developed, I think a more
sober spirit grew also and one of our themes was that
economic recovery was meaningless if it started another
spurt of inflation and that what we had to aim for was
stable growth.
The second theme we had to get across is that the
American economy was doing well and that, therefore, the
concerns of other countries that our recovery was too slow
for their own was unjustified.
Thirdly, we had a number of areas,specific ideas,
on how the interdependence of these countries could be carried
out in the field of trade, in the field of economic relations
with the Socialist countries, in the field of monetary affairs,
in the field of energy and in the field of development.
The discussions took place in a really unusually
harmonious spirit. The fears which some of us had that the
others would bring pressure on us to accelerate what we
tnink is a well-conceived economic program proved unfounded,
and after the President made his extensive intervention of
the first day, explaining our economic program, the other
countries substantially accepted this and indeed se.emed to
be appreciative of it.
I think this was a very important event because it
meant that they had more confidence that in looking ahead to
their own future they could count on steady growth in the
United States,and since everybody agreed that a substantial
percentage-of the recession was psychological, I had the sense
that a consensus emerged that this confidence that developed.
in our ability to handle the economic problems was a very
major factor.
In fact, the confidence of the leaders in this
process was shown by the fact that they would talk about
general principles and then turned over the drafting to
either iiinisters or experts and that the leaders only spent
about an hour on the declaration.
At first we didn't want any declaration because we
were afraid that we would spend our whole time drafting it
and it didn't turn out that way, and that was important.
In the field of trade, there was an agreement first
that the negotiations on the multilateral trade negotiations
should be completed next year. Secondly, a commitment by
all of the countries there to bring about a substantial
reduction of trade barriers, including in the agricultural
field, and no attempt to hide behind community mandates or
other obstacles.
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There was also an agreement to accelerate or to
foster negotiations concerning export credits. Bill will
talk about the agreements in the monetary field which put
an end to a debate of years about the nature of the floating
• system and the relation between floating and stability which
should end in January in an agreement that should at least
put the field of international finance on a more stable basis
than it has been in a long time.
In the field of energy, there has been an agreement
to cooperate closely or actively on the alternative sources
and on conservation, and I believe this will show up in the
program of the International Energy Agency which is in the
process of being negotiated, and which we hope to conclude
by December 15.
In the field of development, we identified the balance
of payments deficits of the developing countries or their
current account deficits as one of the major problems on
which we would work jointly, but we also pointed out that
there is a close relationship between that and the action
that is taken with respect to oil prices. So we believe
that the consuming countries are in an excellent position for
the beginning of the talks en international economic
cooperation that are beginning in the middle cf December.
And we agreed to work together in all existing institutions.
To sum up, this unusual meeting of the heads of
Government of the countries that between them produce 7C
percent of the world trade represented a commitment to the
conception that our economic problems were long-term, that
there were no quick fixes to them, that they required a
steady cooperative effort, that their political relationship
affected their economic relationship and that their economic
relationship in turn assisted their political cooperation.
And so the free countries vindicated the concept
of their interdependence and laid out a program and a method
for cooperation which we hope will accelerate the recovery
of all of the peoples as well as their cooperation with the
less-developed countries for the benefit of everybody.
But I think Bill ought 'to explain the monetary
agreement because that is perhaps the single-nost significant:
thing that happened there.
SECRETARY SIMONs There is no doubt that it was a
significant agreement reached between the French and the
United States which,I believe and most everyone believes,
is going to pave the way for agreement at the Interim Committee
on Overall Monetary Reform in January. I think that the
agreements that we have reached are a fair and balanced
compromise. Neither side won nor neither side lost.
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33&
Each has protected its very critical national
interests in a spirit of cooperation. We have sought to bring
a coAvergence of views and this is important. What we are
trying to do is build and expand on these areas of convergence,
and as we succeed in doing this, the whole world community
at large is going to benefit from this.
Now I think that the disparity of views of the
past few years between the French and the United States in
particular on various amendments to the articles of agreement
have obscured the deep mutuality of interest to return to
stable economic and financial conditions in_ the world and
more orderly and stable exchange rates and that is very
significant because this instability that we have had
contributed as well as resulted from tremendous institutional
financial strains.
Also, the instability created great problems for
many of the countries in the world in taking care of the
erratic price movements and setting economic policies and
restoring stable growth in their own economies.
Now having said this, because one must look at the
fundamental cause of the problem before we can begin to look
for any of the solutions,which is important, it has been
clear that the French and the United States share some
fundamental agreements on the monetary system, there is no
doubt about that. We both agree that the diversity of
financial arrangements, the floating system, if you will,
has served us well under the present circumstances. It is
actually necessary to take care of the stresses and the
strains that have been brought about by the severe inflation,
recession and, of course, the extraordinary oil increase.
So having identified the causes, we then must set
about in curing the fundamental problems of this economic
instability and, therefore, the Communique, as it said, dealt
with two aspects of the monetary issue; one, the operational
and, two, the reform of the system.
On the operational side we have reached an understanding that to achieve durable and meaningful stability
in the underlying economic and financial conditions, we have
to provide for mutually cooperative and conciliatory policies
among ourselves, but that national domestic economic policies
must indeed be compatible. The world economy has suffered
from all of the ills that I have spoken about and the underlying problem remains with the severe inflation and, of
course, the recession which was caused by this inflation.
On exchange markets,we are going to deal with
erratic movements in exchange rates which, of course, create,
again, an instability. Erratic movements can be defined as
movements that have no underlying economic reason. Ours is
not an attempt to peg any of the currency rates at artificial
levels, but there are erratic movements in financial markets
on occasion that are not directly attributable to fundamental
economic events, and at this point intervention policies will
becoas mutually cooperative and compatible to smooth out
these;-instable periods.
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Q How is that stability going to be brought about?
That is,how is this operation going to work?
SECRETARY SIMON: Well, in two ways. One, I think
a session that was heavily devoted, as Secretary Kissinger
said, to the economic aspects of the world's problems today,
the needed policies — cooperative as well as individual —
that are required for a return to stable economic and
financial conditions are at the foundation of the answer to
your question.
As far as the consultations and the mechanisms
that are going to be established for smoothing out, there is
going to be greatly expanded consultative mechanisms throughout
the world done on a more orderly basis, on a more daily
basis, if you will, by both the central banks, of course,
who do this today, as well as the deputies to the Finance
Ministers and the Finance Ministers themselves.
There will be more constructive meetings of the
Finance Ministers to deal specifically with this issue.
Q Will there be a standing committee of some
kind to advise intervention at a given point?
SECRETARY SIMONs No, the make-up of this committee
has not been set yet but we have many standing committees.
We have the Interim Committee, which is the old group of
20 and the group of 10 which will meet and direct itself
right to this issue in December in Paris..
Q The mechanism has not been set up yet, I mean
the mechanism has not been designed as to how this consultative
process will go forward?
SECRETARY SIMONs The mechanism has been designed
in the Memorandum of Understanding that the French and the
United States initialed today and that the other Ministers
who attended this session and were briefed fully on this are
in general agreement, but until we bring all of the interested
and affected parties together,we cannot say that this is going
to be totally acceptable,although I believe it will be.
SECRETARY KISSINGERS It is safe to say that there
will be a much expanded discussion or consultation among the
Finance Ministers and their deputies as a result of this.
Q Mr. Secretary, as long as we have
some video tape left, let rne ask you
what you think this conference means
American. Does it mean more jobs or
how?
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still got
in realistic terms
to the average
lower prices, and if so,
SECRETARY KISSINGER: Well, if this conference
contributes to an acceleration of economic recovery worldwide, which it is intended to do;
if it contributes to a
lowering of trade barriers, as it is intended to do? and to
greater financial stability, then it will mean more jobs,
perhaps lower prices, better control over inflation and a
degree of cooperation among the industrialized nations,that
will benefit every American.
Q When is this millennium going to come about?
How fast will this process take effect?
SECRETARY KISSINGER; We have made clear that it is
a long-term process and we are not ever going to be able to
say that on the next day a dramatic change occurred, but
I think that the hopeful processes that are already going
on car. be accelerated by the results that occurred here.
The major theme of this meeting was that we have got a
long-term problem, that we are not trying to make quick
fixes but that we can get a stable, steady growth on the
long-term basis.
Q This mechanism that you speak of and that you
can't tell us about, does it have to do with the Federal
Reserve Board and the central banks?
SECRETARY SIMON: Certainly the central banks are
the intervention mechanism and will continue to be, yes,
but it is also going to involve, as it always has, the
Finance Ministers of the various countries, but a formal
mechanism of where the deputies will also be used in this
formal consultative process and the consultative process is going
to be broader than it ever was before, bringing in more nations,
more affected,interested nations into the process.
Q Mr. Secretary, early this year the dollar had
quite a plunge. Had this system you envisage been in effect
then, would the dollar have plunged in relation to other
currencies the way it did?
SECRETARY SIMON: Well, our dollar declined, as
it often does, in response to several factors: one, an
outlook for lower interest rates which is a fundamental
factor in a country always, and, of course, the New York City
problem and the fears of some potential international problem
related to it as well. I would consider factors like this of
a temporary nature and not of a fundamental nature.
Q Speaking of New York City,.what did you tell
the European leaders about President Ford's —
SECRETARY SIMON: I was not asked by any of my
counterparts. I asked them questions as to what they thought
if indeed they had any reason to believe there would be a
problem that I had not thought of before and basically
briefed them on the whole situation because I felt that they
were interested, which indeed they were, but they didn't
cite any significant problem.
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a
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Q
Did they seem to be somewhat reassured by
the presentation that you and the President made on the
problem of New York City?
.SECRETARY SIMON: Well, as I spoke to then, they
seemed to be reassured that the situation was indeed well
in hand at this point.
Ci You believe it is well in hand then?
SECRETARY SIMON: Well, I have been away for several
days, as you know, so I have to wait and get back. I still
have not seen the total agreement and been able to study it.
I have oeen too busy doing what I have been doing.
Q Do you think that the Federal Govern::^nt
is going to have to do anything to guarantee the short-tern
bond roll-over problem?
SECRETARY SIMOLT: I don't think that anything that
comes under the heading of a bail out as far as the present
bondholders are concerned or the note holders is in the
cards, no. 3ut then, again, the City-3tate program that has
been put up restructures and restructures all the notes that
are held so that would not be required.
You know, you asked Henry a question about the
process we went through here at the economic summit and it
reminded ne of the perhaps overused word these days of
interdependence, and it was brought up and very forcefully
brought up in this meeting that the world communities
indivisible, recognizing that national economic policies are
certainly important, yes, but today this inter-relationship
in the world communities and in the economic and financial
area in particular must be better understood by each of
us. Our policies must be mutually supportive where indeed
they are compatible ana meetings like this bring about better
understanding of what our policies are in the United Ctates
and indeed what the policies are in the European community
and in Japan and these are major, these are significant steps
to agreeing about the permanent durable prosperity that we
wish to provide for all of our peoples.
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SECRETARY KISSINGER: A good example is that at all
of our previous meetings this year with European leaders, as
I said earlier, there was an undertone that we v/ere not doing
enough. I think that after our presentation on Saturday that
topic never emerged again and everyone was more discussing
how we could support each other's efforts.
Q What is the compromise since I understand that
the central bank has been intervening on the floating dollar?
I mean what compromise did we actually make? Is it on the
basis of his consultation?
SECRETARY SIMON: Yes,indeed. You know there is a
danger and there are those — of course one never knows how
people view agreements but there are those who believe that
designed intervention policies mean a zone or a ban or
fixed rates of some kind and that is not the case, but it is
going to be a formal mechanism that is aimed not at setting
any currency at an artificial rate that would contravene the
market forces but one that moves in erratic fashion not
related to underlying economic activity.
Q Mr. Secretary, Mr.
about what would have
when the dollar first
new mechanism. Would
Cormier has asked you before
happened back in the spring of this year
declined and then recovered under this
those swings have been reduced?
SECRETARY SIMON: I think it is difficult at this
point for me to recall any way, Paul, all of the conditions
that were extant at that time and suggest what would have
occured as far as this consultation method because this is
not only the United States that is going to be reporting and
giving their judgments on the market conditions but all of
the countries involved in this process.
Q So this would be
market committee of
how to intervene in
take an ad hoc view
in private?
a process much like the open
the Federal Reserve when it determines
U.S. monetary markets; that is, they
of the economy and make some judgments
SECRETARY SIMON: No, I would not say there is
anything ad hoc about this operation at all. As a matter cf
fact, it is designed so it will not be ad hoc in nature,
that it is going to be daily monitoring of all of these
markets with an exchange of information that is going to give
the officials in the United States a greater fundamental
knowledge about what is going on in all of the currencies of
the world.
MORE
Q
There will be no automatic criteria for
decision?
SECRETARY SIMON: No, absolutely not. That will be
done on the judgments of the Finance Ministers and the
central bankers, the ultimate judges of this issue,of the
fundamental aspects of the issue at that time.
Q Okay. Will they take a vote and the vote will
be binding or will each country retain sovereignty?
SECRETARY SIMON: No, no, no. There is no vote or
binding in these areas whatsoever. That would really be
impossible and indeed unfair and unworkable. This will be
done just the way that the central bank and ourselves and
the Treasury decide there should be intervention now. We
work together and we usually can agree when indeed it is needed.
Q But if the U.S. Government, for example, does
not believe it is appropriate to intervene, it believes that
fundamental forces are at work and let us say the French
Government or some combination of other Governments believes
that these are erratic fluctuations, then there is a
stand-off and the United States would not intervene?
SECRETARY SIMON: If that occasion arose, you are
correct, we would not intervene.
Q What response did you find to your offer —
the U.S. offer — for other countries to invest in our
energy projects, including OPEC?
SECRETARY SIMON: Well, I think it is too early to
tell.
Henry.
SECRETARY KISSINGER: Well, I think the other leaders
considered that one of the most interesting parts of the
President's presentation and they asked a number of questions
about how it would work and what vie had in mind, and I
would say that they all agreed that that was one of the
most significant proposals, but it has to be worked out by
experts.
Q You met with Mr. Callahan during the sessions
and did you discuss the problem of seating at the energy
meeting in December?
SECRETARY KISSINGER: I also met with Sauvagnargues.
You mean membership or seating?
MORE
Q
Membership.
SECRETARY KISSINGER: Only in the most general way.
Mr. Callahan explained his point of view to me. As for that
matter ^auvagnargues did explain his' opposite point of
view to me. Our position is that this is primarily a
matter between the United Kingdom and the European community
in which the United States will not play a principal role,
Q Do you see ..this causing any problem with the
starting of that neeting or do you see a solution?
SECRETARY KISSINGER: A number of compromise solutions
have been proposed. I don't want to put any one of them
forward. There is going to be a European summit on December 2
and we hope that it will be worked out on that occasion.
Q Has there been any discussion on nuclear nonproliferation of the peaceful plans?
SECRETARY KISSINGER: Not as such, no.
Q Mr. Secretary, on the basis of your Pittsburgh
speech and some other indications, I think some of us have
the idea that the American delegation went to Rambouillet
hoping that out of this would evolve some continuing machinery
for consultation and the Communique speaks only of using the
existing machinery. Did we abandon some idea here?
.. SECRETARY KISSINGER: You have the machinery that
was set up under the monetary arrangements in which the
Finance Ministers will be in almost daily contact and there
are many other organizations* There was an agreement that
the Governments concerned would work cooperatively on all of
these problems and so there was no formal machinery set up
except the one that grows out of the monetary group and
since the monetary arrangement is exactly the group we
envisage to begin with, there wasn't any sense of setting up
another one with a different hat.
Q Was there any talk about another meeting of this
sort a year from now?
SECRETARY KISSINGER: Yes, there was talk of another
meeting and the leaders will stay in touch with each other
depending on conditions. If the conditions get critical,
they will meet earlier. If conditions take the form that .
are now predicted, then they will meet some time during the
course of the next year — within a year, roughly.
MORE
J63
Q Could you gentlemen*tell us what role Mr. Shultz
and Dr. Burns played in the monetary agreement? We were told
there were two months of negotiations behind the scenes on this
point and they made a promise.
SECRETARY SIMON: Arthur Burns plays a very active role.
Arthur attends all of the interim committee meetings with me,
the G-10 meetings and the G-5: meetings that we hold so he is
obviously actively involved in the mechanism,both in setting our
policy back in the United States as well as in negotiations that
I conduct. But Arthur is always, as I say, with me as far as —
Q He is?
SECRETARY SIMON: Of course he is. Yes, indeed.
Q What about Shultz?
SECRETARY SIMON: Well, as you remember George Shultz,
I took oyer from George so this is a continuation really of the
negotiations that George carried on when he was Secretary of
State but other than the preparations of the meeting with the
private citizen group that George Shultz worked on, he had no
active area of involvement in the negotiations on the monetary —
SECRETARY KISSINGER: But he was never Secretary of
State. (Laughter)
SECRETARY SIMON: That is a freudian slip.
Q He had no contacts with his former Finance
Minister colleagues who are now heads of state?
SECRETARY SIMON: Sure, George is very close on a personal
basis to both Chancellor Schmidt and President d-Estaing and
he sees them and talks to them frequently.
Q Did he talk to them as part of this meeting?
SECRETARY SIMON: I doubt —
SECRETARY KISSINGER: I think the correct explanation ~
tftere was a group of private experts connected with their
Governments that meet actually less on the monetary question
than on the other issues. The reason we did it on that basis
was because one didn't want to bring the heads of Government
ogether if there was not some sense that something significant
would be achieved. So we designated George Shultz to attend
nese informal meetings that gave us a sense where the other
overnments were going. I repeat, the monetary matters were
really negotiated primarily by the Treasury Department and
Y Ed Yeo, but the other issues were in a preliminary way
explored by a group, which George Shultz attended in a private
capacity but still in close touch with Bill and myself and
the President.
MORE
3
12 Q
But did he meet or talk with Mr. Giscard and —
SECRETARY KISSINGER: The process went like this.
The idea of this sunstit came up first in a vague way at a
meeting that I had with Giscard in May.
It was then put
forward .in a more formal way at Helsinki by Giscard to the
President. At that point we decided that we would send
somebody around, not quite an official, to give us his judgment of whether it would be worthwhile 'and George Shultz
went around to see Giscard, Schmidt, Wilson,and reported to us
afterwards that ho thought there was a good basis for a summit
and only after we had that report did we make the decision to
go ahead.
*c -
We wanted to avoid a situation in which the summit
would-deal with only one problem* say, exchange ratesf and only
a set of demands made on the United States by the others and
>*hen George Shultz was reassured by that, then the President
decided to go ahead and removed it into formal governmental
draxmels*.. ,
THE PRESS: Thank you.
END
<DepartmentoftheJREA$URY
1INGT0N, D.C. 20220
TELEPHONE 964-2041
3^3
FOR IMMEDIATE RELEASE
CONTACT:
JACK MONGOVEN
964-8191
November /Q , 197 5
INFLATION AND RECOVERY OUTLOOK, NEED FOR BUSINESS
SELF-EXAMINATION ARE FEATURED
IN TREASURY PAPERS
"A solid economic recovery has been under way since April'1
ind the expansion "should be sustainable if government policies1
ivoid disruptive policy adjustments during the current transition
stage," Sidney L. Jones, the Treasury Department's Assistant
Secretary for Economic Policy, has written in the November issue
)f Treasury Papers.
Critical factors in the outlook, Jones said, will be the
>ehavior of consumer spending, which accounts for about two-thirds
)f the GNP, business investment and the pace of homebuilding.
In a report on long-term inflation trends, H.I. Liebling, a
'reasury senior economic adviser, saw "a significant reduction
n the inflation rate" although, he said, a recent upsurge in
rholesale prices "refutes the concept that no peril on the price
'ront would emerge with too rapid an economic expansion."
Unchecked inflation could create a society in which "the
reedoms we once enjoyed will be nothing more than a page in our
istory," Treasury Secretary William E. Simon warned in another
rticle.
In excerpts from a speech to the Associated Press Managing
ditors Association, Simon said inflation was not only the nation's
ost fundamental economic problem but that it has far-reaching
olitical and social consequences as well. People who feel trapped
y prices gone out of control, he warned, may turn to government
or relief, thereby threatening "the very survival of large areas
f the private sector."
Blaming unwise government fiscal and monetary policies for
enerating inflationary pressures, the Secretary declared, "It is
ime to put our economy back on a sound, steady footing so that
eople may have lasting jobs and lasting hope for the future."
S-484
(Over)
J4*»
In another article, Secretary Simon called on the business
community to "put its own house in order" by squaring practice
with principles by refusing Federal subsidies and other forms
of aid and taking more energetic steps to inform the public about
the workings of the American economy.
A Treasury interim report, summarized in the publication,
disclosed that the value of all foreign portfolio investments in
the U.S. may have reached $80-85 billion at the end of 1974.
Treasury Papers is a review of economic policy developments
which is compiled from officials1 speeches, testimony, news
materials and policy studies, and is available on request from
Treasury1s Office of Public Affairs, Room 2321, Main Treasury,
15th Street and Pennsylvania Avenue, NW., Washington, D.C. 20220.
oOo
J
deral financing bank
H
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
Noyember 19, 1975
Summary of Lending Activity
November 1 - November 15, 1975
Federal Financing Bank lending activity for the period
November 1 through November 15, 1975 was announced as follows
by Roland H. Cook, Secretary:
The Bank made the following loans to utility companies
guaranteed by the Rural Electrification Administration:
Date
Borrower
Amount
11/3 Cooperative Power
Association
Interest
Maturity
Rate
$2,005,000
12/31/09
8.259%
4,500,000
12/31/09
8.313
11/7 Central Louisiana
Telephone Company
200,000
12/31/09
8.316%
11/7 Doniphan Telephone
Company
585,000
12/31/09
8.316
11/12 Colorado-Ute Electric
Association
745,000
11/15/77
6.964%
11/4 United Power
Association
Interest payments are made quarterly on the above REA loans.
The Bank advanced $1,974,421.03 to the Government of
Korea on November 7. The loan, which matures on June 30,
1983 and bears interest at a rate of 7.767%, is guaranteed
by the Department of Defense under the Foreign Military
Sales Act.
On November 12, the General Services Administration
borrowed $1,296,793.31 under the Series L $107 million
commitment with the Bank. The interest rate is 8.386%.
ihe loan matures on November 15, 2004.
WS-485
(over)
73
The United States Railway Assoication made the following 1
drawings against its line of credit with the Federal Financing
Bank:
Date Amount Maturity Interest Rate
11/3
$27,000,000
11/24/75
5.771%
11/14 4,000,000 11/24/75 5.628%
The drawings are guaranteed by the Department of Transportation,
Amtrak, the National Railroad Passenger Corporation,
made two drawings against its line of credit with the Bank:
Date Amount Maturity Interest Rate
11/10 $ 5,000,000 12/30/75 5.530%
11/14 35,000,000 12/30/75 5.678%
Amtrak borrowings are guaranteed by the Department of
Transportation.
On November 10, the Bank purchased $370,000 of notes
from the Department of Health, Education, and Welfare. The
Department had previously acquired the notes which were
issued by various public agencies under the Medical Facilities
Loan Program. The notes purchased by the Federal Financing
Bank are guaranteed by the Department of Health, Education,
and Welfare and mature on July 1, 2000. The interest rate
is 8.279%.
The Tennessee Valley Authority borrowed $35 million of
107-day funds on November 12, 1975. The note matures
February 27, 1976. The interest rate is 5.652%.
On November 12, the Student Loan Marketing Association
made the following borrowings:
Amount Maturity Interest Rate
$10,000 11/15/77 7.02%
$10,000 11/26/79 7.52%
The Sallie Mae borrowings are guaranteed by the Department
of Health, Education, and Welfare.
Federal Financing Bank loans outstanding on November
15, 1975 totalled $16.1 billion.
oOo
ADDRESS BY THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
BEFORE THE
GERMAN-AMERICAN CHAMBER OF COMMERCE
CHICAGO, ILLINOIS
NOVEMBER 19, 1975
"IS THE UNITED STATES GOING PROTECTIONIST?"
When I was practicing law here in Chicago, my banker
gave me solid advice. "Never refuse to talk to your
creditors," he said. Mindful of that maxim, I am always
pleased to appear before representatives of a nation
currently the owner of U.S. liabilities of $22.9 billion,
the bulk of which is U.S. Government obligations. I am
especially pleased to appear before the German-American
Chamber of Commerce, for German companies, many of which
are represented here today, are to no small degree
responsible for the favorable balance of payments position
exemplified by that asset figure. A position such as
that could not have been built up except as these companies
introduced into the U.S. market many needed products.
Congratulations are therefore in order to you gentlemen
for helping foster this relationship of mutual benefit.
As we meet today, germs of suspicion threaten to
disease the heretofore close and harmonious trading
relationship of the United States and the European
Community. Recent investigations into allegations of
unfair trade practices initiated by the Treasury Department
and other agencies of the Executive Branch of the U.S.
Government have led a number of Europeans to conclude that
this country is reverting to a policy of protectionism.
I am here today to discuss these actions and the international
and domestic contexts in which they are taken. Accurate
analysis refutes any contention that this nation is abandoning
its long-standing advocacy of a liberalized multilateral
trading system. Indeed, the fact is that profitable
WS-493
international trade remains the keystone of U.S. economic
policy.
376
To set the stage for this analysis, it might be useful
to review the present economic picture in both Europe and
this country.
In the first place, Europe is presently in a state of
economic malaise. European Community real GNP has actually
fallen this year, the current growth rate estimated to be
at -.5%. Unemployment continues to rise, showing a dramatic
increase during the first half of this year in West Germany,
for example, from 3.7% to 5.7%. As Sir Christopher Soames
has said: "The outlook seems more uncertain that at any
time in the past quarter of a century."
Certainly the United States too suffers economic
difficulties. But while distress is shared on this side
of the Atlantic, the United States is actively embarked on
a policy of recovery which appears to be bearing fruit,
although the potential for renewed inflation forces us to
temper our optimism. The European Community, on the other
hand, appears to lack a conviction, rightly or wrongly,
that its member states' economies will right themselves
without U.S. leadership, particularly as that leadership
may manifest itself in increased export orders for the
Community. In essence, the EC appears to be looking to an
American recovery to pull the economies of the nine back
to prosperity.
A second factor that reads on the issue which is thetitle of my speech, is that under the leadership of the
President, the United States has during the last fifteen
months emerged from an internal crisis of grave political
and Constitutional dimensions. A by-product of this
experience has been renewed respect for and emphasis on
the application of the rule of law as written and without
regard to broad policy objectives.
Against this backdrop, the Congress enacted the Trade
Act of 1974. As you gentlemen are aware, this Act authorizes
the Executive to negotiate further reductions in tariffs and
to begin to attempt progress in the discussion of the
reduction of non-tariff barriers. But it also places
stringent standards on Executive administration of
Countervailing Duty Laws and reinforces these standards as
they apply to the Antidumping Act. It further creates
remedies against discriminatory tariffs, subsidies which
penalize U.S. export sales, and other "unfair and
unjustifiable" trade practices, and it loosens the criteria
for affording emergency relief from increased imports
under the so-called "escape clause."
737
Both major elements of the Act — negotiation and
administration — are to be conducted by the Executive under
close Congressional scrutiny. In the sphere of negotiation,
Congress will assume a direct advisory and consultative role,
while reserving the ultimate sanction of veto over Executive
Branch decisions. This contingency of legislative veto is
not unlike that found in Parliamentary systems, but it
differs in one important respect. Since, under the American
doctrine of separation of powers, the application of such a
sanction would not threaten a parliamentary crisis in
government, I would expect that the veto might be more
likely to be exercised here.
Executive action in the administration of unfair trade
practices law is similarly controlled. The mandate of the
Trade Act is clear; it leaves little room for discretion.
Given a valid complaint, the Executive Branch is absolutely
required by law to investigate expeditiously the alleged
unfair practice, testing the facts against specific legal
standards. Allegations of cheese and canned ham importation
in violation of the Countervailing Duty Laws, and of the alleged
dumping into the U.S. of automobiles by manufacturers in
eight countries, five of which are EC members, are examples
of recent complaints which necessarily require investigations
in accordance with this statute's mandate. No official
entrusted by the Congress with this legal mandate will
betray that trust. On the other hand, there will be no
arbitrary application of the law for the purpose of burdening
imports. In addition, this Administration is committed to
the improvement of the mechanical process of clearing
imports and expediting liquidation of entries without
prejudicing the revenue. On August 1, 1975, at the request
of the Administration, Congressmen William Green and Barber
Conable introduced H.R. 9220, the Customs Modernization Act,
designed to automate the entry process by which foreign
products are imported into the United States.
This is not to say that protectionist pressures are
not present from various segments of the U.S. economy.
Equally true it is that pressures somehow to substitute
policy judgments for the clear wording of our statutes are
felt from our foreign trading partners. There appears to
be a constant noise level from all sides which the U.S.
Government officials would do well to acknowledge, but
politely remain impervious to. I believe that U.S. officials
have done so. I believe that a fair reading of Administation
actions
would
lead
impartial
to
thatbythe
current
a
trade
protectionist
officials.
level of
philosophy
investigative
Rather,
it
onobservers
is
the
activity
inpart
the narrowest
of
isconclude
U.S.
not induced
international
sense
attributable to newly imposed statutory time limitations
within which the Executive Branch must now act/ The result
of these time limitations has been a simultaneous investigation of a back-log of five and six year old complaints.
Such a simultaneous assumption of investigations i$y,bound
to create a seiche of activity — one which wouldfiI expect,
ebb in the future•
There is, however, a broader dimension that U.S.
trading partners would do well to note. That dimension, is
that activities deemed by the U.S. Congress to constitute
unfair trade practices, which may have been tolerated by
several Administrations, will no longer be acquiesced in.
Both Congressfand the Administration have embarked on a
policy of assuring fair competition for U.S. companies in
world trade, a policy to which little more than lip service
was given in our salad days of prosperity. As an aside, I
cannot resist pointing out that it is anomalous that Congress
has provided tools for assuring that a market economy will
prevail in international trade, while showing precious little
faith in the market system as applied to purely domestic
matters such as oil decontrol. But that is the subject of
another speech. For now, I can only propose to you that a
policy of ensuring the dynamic of the marketplace, unfettered
by discriminatory practices, government subsidization and
other artificial distortions, is not inconsistent with the
broader policy interest of both the EC, the U.S., and the
other major trading nations in continuing the liberalization
of international trade, on the basis of the equality of
market access. It seems to me to be supportive of that
interest.
>
*
One of the reasons why the Community and the United
States do not seem to speak the same language in the area
of unfair trade practices became apparent to me last week
when I was attending the GATT Negotiations on subsidies and
countervailing duties in Geneva. This is that the United
States and the Community approach the problem of remedying
unfair trade practices from entirely different points of view.
In the United States, a complaint alleging an unfair
trade practice is treated in a quasi-judicial manner with
relatively open procedures and little discretion on the
part of the Administration officials who handle the case.
This procedure is expensive for the litigants, but more
certain in its results. In the Community, on the other
hand, complaints
of thisare
nature
areout
treated
as policy
problems,
and solutions
worked
between
the parties
3 73
on an informal basis without publication of the proceedings
and with broader policy considerations at least influencing,
if not dictating, the result. The representatives of the
EC therefore, superimposing their own policy-oriented system
on our quasi-judicial system, cannot seem to understand why
it is that the United States as a policy matter cannot simply
dismiss complaints specifically alleging unfair trade
practices, particularly in the light of a favorable U.S. - EC
trade balance. Of course, the reason why we cannot is that
our legal system will not allow it.
One of the most worthwhile concepts that you ladies
and gentlemen could explain to your European associates is
this essential disctinction between our respective systems.
This conclusion notwithstanding, a high watermark of
ill-feeling persists in the present relations of the United
States and the European Community, a watermark which has
risen during a decade of unprecedented reduction in tariff
levels. As you will recall, in 1968 the phasing in of
average tariff reductions of 35% began as a result of the
Kennedy Round negotiations. During the period between that
date and the present, it appears to me (and I do not mean
to hold this out as other than a personal observation) nontariff barriers have proliferated throughout the world as
a sort of compensatory shield to newly reduced tariff levels.
The observation that might be made, tentatively, as a
result of these developments is not an economic one but more
of a sociological or political question: Can tariff levels
be reduced to the point where non-tariff barriers spring up
like weeds to take their place? Is it possible that some
minimal frictional effect that tariffs have between
independent and sovereign nations may be desirable in order
to prevent a rush to create non-tariff barriers in times of
economic adversity. I hope this is not true, because, having
been in Geneva all last week during the subsidies/countervailing group meeting of the GATT, I can say that it is going to
be far more difficult to organize a regimen designed to
reduce trade distorting practices that it has been to
negotiate past tariff reductions.
Despite the "atmospheric" pressures which appear to
have created disturbances in our Transatlantic relationships,
I can assure you that our special trade representatives,
Fred Dent, Clayton Yeutter and Bill Walker, are focusing on
the broader foundations which bind us. Both this country and
the EC have based our economic systems on the belief that it
is free enterprise that most effectively creates and enhances
379
the wealth of our respective citizens. In the policy sphere,
therefore, we must address ourselves to resolving issues
consistent with that belief. Unnecessary trade restrictions
detract from the material well-being of the consuming public
of the Atlantic Community. The solution is elimination of
these obstructions. As a representative of the Government
of the United States, I can assure you that just as the
Trade Act of 1974 has increased our assiduousness in
protecting the rights of American producers and workers, so
too has it increased our resolve to reduce these meaningless
frictions and thereby to promote mutually profitable trade
in the future. The Trade Act provides the U.S. negotiating
team with the tools to accomplish this task. They will be
used.
Thank you.
0O0
377
Contact: Herbert C. Shelley
FOR IMMEDIATE RELEASE
Extension 2951
November 20, 1975
ANTIDUMPING INVESTIGATION INITIATED
ON PORTLAND HYDRAULIC CEMENT
FROM MEXICO
Acting Assistant Secretary of the Treasury James B.
Clawson announced today the initiation of an antidumping investigation on imports of portland hydraulic
cement from Mexico.
Notice of this action will be published in the
Federal Register of November 21, 1975.
The Treasury Department's announcement followed a
summary investigation conducted by the U.S. Customs
Service after receipt of a petition alleging that dumping was occurring in the United States. The information
received tends to indicate that the prices of the merchandise to unrelated U.S. purchasers are less than
the prices of such or similar merchandise sold in the
home market.
Mr. Clawson further announced that, on November 17,
the case had been referred to the U.S. International
Trade Commission for a preliminary injury investigation.
The Trade Act of 1974 provides for an ITC preliminary
investigation of injury at the initiation stage when
there is substantial doubt as to whether injury under
the Act exists. If the ITC, within 30 days from the
date of receipt of this referral, determines and advises
the Secretary that there is no reasonable indication
that an industry in the United States is being or is
likely to be injured, or is prevented from being established, Treasury's investigation would be terminated
and no further proceedings would be conducted.
WS-487
(Over)
3
r*2^
Imports of portland cement from Mexico during the
first six months of 1975 were valued at roughly
$1,761,000.
*
*
*
T?
^*
Department of theJREASURY
-IINGTON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE A T 4:00 P.M.
NOVEMBER 20, 1 9 7 5
UNITED STATES AND ISRAEL SIGN
INCOME TAX CONVENTION
Secretary of the Treasury William E. Simon and Israeli
Ambassador Simcha Dinitz today signed an income tax treaty
between the United States and Israel. There is presently no
such treaty in force between the two countries. The treaty
will now be sent to the United States Senate for its advice
and consent to ratification.
Attached is a copy of a Treasury Press Release issued
May 13, 1975, on the occasion of the initialling of the treaty
which was signed today, which decribes the new treaty.
Attachment:
WS-486
WS-302, May 13, 1975
I Department of
HINGTGN,D.C. 20220
theTREASURY
TELEPHONE 964-2041
MAY 13, 1975
FOR IMMEDIATE RELEASE
SECRETARY SIMON AND ISRAEL MINISTER
OF FINANCE RABINOWITZ INITIAL DRAFT
INCOME TAX TREATY
Secretary of the Treasury William E. Simon and
Israel Minister of Finance Yehoshua Rabinowitz today
initialed a draft income tax treaty between the United
States and the State of Israel. As soon as conformed
English and Hebrew translations are prepared, the formal
agreement will be signed, transmitted to the United
States Senate for ratification, and released.
The primary objective of the convention is to
promote economic and cultural relations between the
two countries by removing tax barriers to the flow of
goods and investment and the movement of businessmen,
technicians and scholars. It provides also for
nondiscriminatory tax treatment and reciprocal
administrative cooperation to avoid double taxation
and to prevent tax avoidance.
In general, the convention is similar to the
approximately twenty-five U.S. tax conventions already
in effect. It provides that business profits of a
resident of one Contracting State shall be exempt from
tax by the other Contracting State unless such profits
are attributable to a "permanent establishment", e.g. ,
a fixed place of business, located in that other
Contracting State. Generally, residents of one
Contracting State are taxable by the other Contracting
State on their personal services income only if physically
present in that other Contracting State for more than 183
days during the taxable year. Special rules are provided
for teachers, students and trainees to encourage academic
and scientific exchanges. The convention also establishes
the maximum rates of tax which may be assessed at the
source on dividends, interest and royalty income.
WS-302
(more)
2
1
The convention contains several special provisions
which are intended to clarify the interaction of U.S. and
Israeli tax laws in particular circumstances. It specifies
that for United States tax credit calculations compulsory
loans to the Israeli Government will be treated as income
taxes in the year incurred with appropriate adjustments
to tax upon repayment. Since Israel anticipates a
governmental grant program to stimulate certain types of
economic development, the convention clarifies the
characterization and treatment of those grants for U.S.
tax purposes, generally treating qualifying grants as
nontaxable capital contributions.
Upon ratification by the U.S. Senate, the convention
will take effect on the first day of the second month
following the exchange of instruments of ratification with
respect to withholding taxes, and in the year following
such exchange with respect to other taxes.
-oOo-
y
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE JOINT ECONOMIC COMMITTEE AND
THE SENATE SELECT COMMITTEE ON SMALL BUSINESS
FRIDAY, NOVEMBER 21, 1975, 10:00 A.M.
Mr. Chairman, and members of the Committees:
I am pleased to appear before you this morning to
discuss the capital formation and financing problems of
small business firms. The continued vitality of small
businesses is fundamental to the development of the entire
economy and we need a better understanding of the specific
problems faced by these firms as a basis for preparing
constructive policies.
For some time I have been concerned about the role of
small- and medium-sized businesses. We need an environment
in which existing small businesses can thrive as long as
they provide an economically valuable product or service.
It is also necessary to have a dynamic economy in which new
enterprises can be formed. Without the continual search for
new ideas and better ways of doing things our competitive
system would become complacent and progressively less
efficient. New enterprises are a basic source of innovative
ideas and they serve to continually push the entire economic
system to become more efficient.
While many think of a small business as the exciting
"new idea" company which will evolve into the IBM or Xerox
of tomorrow, the vast majority of small firms are not in
that category. Instead, they serve basic needs in the
community and are likely to remain small. For many communities
the small businessman really represents "business" in an
economic, political and sociological sense. In addition to
fulfilling an economic need, such businesses provide important
outlets for self expression by the individuals involved.
The opportunity to create a new business is one of our most
WS-481
ye
important freedoms, for in many parts of the world it does
not exist. For all of these reasons, I have a strong interest
in the current state of small business.
DEFINITION OF A SMALL BUSINESS
Your letter of November 6 states that it is very
difficult to find a widely accepted definition of small
business. I share this concern. In trying to define a
small business on the basis of such widely varying statistics
as asset size, number of employees, sales, net income, net
worth, dominance in the field, and taxable income there are
many arbitrary assumptions that tend to confuse the economic
significance of the differences identified. There does not
appear to be any universal definition which can be used.
Earlier this year, Frederic W. Hickman, then Assistant
Secretary of the Treasury for Tax Policy, testified at
length on this subject before the Select Committee on Small
Business. He recommended a procedure for defining small
businesses which would rely upon an arbitrary cutoff point
at the level where 90 percent of the firms classified by
some statistic such as value added, sales, or assets would
be categorized as a "small business". A common definition
of this sort would allow different analysts to make generalizations
on the basis of the same set of companies rather than by
using overlapping definitions as is now the case. Such
consistency would be helpful to all who are concerned with
the affairs of small business and about how to evaluate data
pertaining to their performance.
CAPITAL FORMATION
The problems of capital formation, about which I have
testified and talked on repeated occasions in the past, are
a matter of concern for companies of all sizes. The plant
and equipment requirements of large companies are obvious
but the capital investment needs of small businesses are
equally important to their success. Therefore, the importance
of capital formation must be recognized in evaluating the
prospects for small businesses. Economic problems which
restrict capital formation will have a serious negative
impact on small businesses. It is interesting to note from
surveys of small businesses contained in the Quarterly
Economic Report for Small Business, (published by the
National Federation of Independent Business), that inflation
is cited as the single most important problem facing them
today. Equally interesting is the reported negative impact
of inflation on the expansion plans of the small businesses
surveyed. The greater the degree to which inflation was
regarded as a problem by the reporting small business firms,
the less they expected to expand their inventories and
capital assets. As inflationary concerns have declined
somewhat in the last two quarters, the sentiment for expansion
has improved and the pace of business spending on plant and
equipment increased slightly in the third quarter after
declining during the first six months of 1975.
I believe that inflation has been a pervasive problem
in our economy and that it was the basic disruptive force
which caused the severe recession from which we now are
recovering. I am particularly concerned about the restrictive
effects of inflation on capital investment. Indeed, inflation
should be recognized as the major threat to savings and
investment. Inflation first reduces the incentives to save
by eroding the purchasing power of financial assets and then
distorts investment decisions. In my May 7, 1975 testimony
before the Senate Finance Committee, I endeavored to summarize
the record on capital formation and to discuss the dimensions
of the problem.
Briefly, the record shows that:
1. During the 1960's the United States had the
lowest proportion of capital investment to
real national output of the major industrial
countries.
2. Over this same time frame, our record of productivity
growth was among the lowest of the major industrial
countries. In fact, productivity has been a
major concern throughout the postwar period:
from 1948 and 1954 output per manhour in the
private economy rose by 4.0 percent per year;
from 1955 to 1964 it rose by 3.1 percent; from
1965 to 1974 it rose by 2.1 percent; and from
1970 to 1974 it rose by 1.6 percent per year.
Capital investment is a key factor in increasing
productivity, economic growth, and the real standards of
living enjoyed by Americans. This is not to imply that
capital investment is the only factor affecting productivity.
Other factors — new technology, shifts in the composition
of output, the level of capital assets, the skills and
growth of the labor force, the availability of transportation,
communication and other facilities, access to raw materials,
and the stage of the business cycle — affect productivity
7>
and economic growth. However, the rate of capital investment
is basic to the positive development of the other growth
variables.
Our own analysis in the Treasury, together with analyses
contained in a number of other studies (Brookings, Data
Resources, Inc., General Electric, Chase Econometrics,
Professor Friedman, and the New York Stock Exchange, all of
which are summarized in the Appendix table of this testimony),
are remarkably consistent in pointing to the need for a
higher level of capital investment in the decade ahead. The
most immediate capital requirement is to create more jobs
for our rapidly growing labor force. Between now and 1985,
the labor force will expand by approximately 16 million
persons. When we add to this the 3 to 4 million unemployed
people in the current labor force who must be reemployed to
return to reasonably high levels of employment the challenge
of creating the necessary number of new jobs becomes even
more impressive.
A second problem arising from inadequate capital
investment involves the capacity limitations that hold down
economic growth. During periods of economic expansion
specific bottlenecks develop which restrict growth and
result in inflation as the supply of goods and services
falls below the rising demand. Inadequate capital formation
clearly contributed to the serious inflation problems
experienced during the past decade.
Another requirement is for replacement and modernization
of the existing stock of capital. In the 1960's, the United
States used 62 percent of its investment capital for the
replacement of existing facilities compared with only 52 to
54 percent for Canada, France and West Germany, and only
31 percent for Japan. Still another category of investment
needs relates to specific policy objectives: projects
involving new energy sources and conservation; requirements
for environmental control; safer working conditions; and the
provision of more and better housing. And other capital
investment needs will become apparent in the future as our
economy continues to develop. The rapid increase in capital
investment in environmental control and safety oriented
projects reflects the concerns of society about the total
quality of life; however, such investments usually do not
add to the productive capacity of the economy even though
they contribute to the achievement of other national goals.
In such a dynamic economy it is impossible to estimate
our future capital requirements exactly but it appears
that private domestic fixed investment for new plants,
equipment and housing will total $4 to $4-1/2 trillion from
1974 through 1985. This is roughly three times the total
of $1.5 trillion invested between 1962 and 1973. Some
analysts have concluded that it will not be possible to meet
these capital formation requirements. I disagree. I firmly
believe that we are capable of achieving our basic investment
goals if we will follow responsible fiscal and monetary
policies. I have repeatedly emphasized the importance of a
balanced Federal budget over time as a beginning point for
achieving these capital formation goals. Unfortunately, the
Federal Government has reported a deficit in fourteen of the
past fifteen years and a massive deficit is occurring in
FY 1976. The near-term prospects for balancing the Federal
budget are also discouraging. The key point is this:
unless strong action is taken to bring Federal spending
under better control the chronic deficits of the past will
continue and the achievement of our basic capital formation
goals will be impossible. This basic contradiction is
widely recognized but corrective action has not occurred.
If the Federal government fails to provide the proper
investment environment the negative results of higher
unemployment, continued inflation pressures and inadequate
productivity will occur. This is not a choice between
current consumption or investment. It is a choice between
short- and long-term goals. If we do not have adequate
capital investment we will continue to experience higher
unemployment and inflation than we want. Small businesses
will suffer over the longer run if the future growth of jobs
is inadequate and inflation remains excessive.
On the basis of available data, we are unable to say
that the relative capital formation needs of small businesses
are significantly different from those of other businesses.
There is some indication, based on data published by the
Federal Trade Commission, that larger companies have a
higher proportion of fixed assets and a lower proportion of
cash, marketable securities and receivables than do small
firms. (See Table 1) The fact that larger companies have a
higher proportion of fixed assets than do smaller companies
does not necessarily imply that there is any fundamental
difference in the need for capital. One would expect
capital intensive types of businesses to be larger on the
average than less capital intensive types in order to take
advantage of economies of scale and the figures in Table 1
substantiate this view.
If there were no costs associated with obtaining
additional financing and if such financing were always
J^-T
readily available, most companies would want more in the way
of capital assets. The relevant question is whether there
is a gap between the actual desired availability of capital
given the costs of financing, and the actual amount of
capital formation, and whether there is a systematic bias
which favors large companies compared to smaller firms.
PROBLEMS OF FINANCE
One of the factors which is currently restricting the
rate of capital formation is the financial condition of
American corporations — both large and small. Analysis of
debt to equity ratios indicates that corporate balance
sheets have shown signs of deterioration over the past
decade, which is a break from the pattern which persisted in
earlier periods. Debt has increased dramatically, both in
absolute terms and relative to assets and income. Interest
costs have risen appreciably, roughly doubling over the past
ten years (see Chart 1 ) . The combination of increased
debt financing and higher interest rates has resulted in a
decline in the coverage ratios reported by American corporations -that is, the ratio of earnings to interest charges. The
ratio of liquid assets to debt has shrunk. Profits, after
allowing for more realistic accounting procedures, have
declined in both real and nominal terms. As a result of
these developments, there is a serious question about the
potential capability of companies to be able to finance the
capital investment that will be required to achieve our
basic economic goals of reducing unemployment and inflation.
For many years there has been a discernible trend
toward growing dependence by business, both large and
small, on outside funds to finance their growth. As indicated
in Chart 2, the percent of business financing needs raised
externally by nonfinancial corporations declined from
1958 to 1964 and averaged about 30 percent of total needs
during that period. However, that trend was reversed
beginning in the mid-1960's and the proportion of external
financing rose to over 60 percent in 1974. The growing
dependence on external financing really began in the mid-1960's
and has risen steadily since then. This shift in financing
methods from reliance on internal to external sources of
funds follows the pattern of inflation pressures which also
began to accelerate in the mid-19601s. Inflation rapidly
increases the costs of new investments and erodes corporate
profits which are a major internal source of capital for
financing new projects. The distorting effects of inflation
force companies to rely more heavily on external sources of
funds.
Another, and perhaps more important, change appearing
on corporate balance sheets is that the increased emphasis
on external financing has been dependent on debt rather than
equity sources of funds. There are several fundamental
reasons for the shift toward debt: (1) corporate treasurers
have been reluctant to raise new equity capital because the
sale of additional shares of ownership dilutes the earnings
per share and ownership rights of existing stockholders; (2)
In the 1950's and throughout most of the 1960's, the cost of
debt was low relative to the cost of equity; (3) because of
the depressed level of stock prices, the shares of many
companies have had historically low price earnings ratios —
indeed many stocks are selling at prices below their book
values which discourages new equity financing; (4) the
financing costs of arranging new debt issues or loans are
usually much less than the costs of selling new shares of
stock and there is less uncertainty about placement of the
securities; and (5) the use of debt enables the borrower to
deduct the interest payments from earnings before determining
the amount of taxes to be paid. The tax deductibility of
interest payments creates a major advantage in favor of debt
financing and has encouraged the sharp shift in the debtequity relationship. Unfortunately, the emphasis on debt
commitments has made our financial system more rigid and
more vulnerable to economic shocks.
From 1965 to 1974 nonfinancial corporations raised a
total of $267.4 billion of long-term funds. Long-term debt
accounted for 83 percent of that total. The balance sheet
impact of this change was to cause long-term debt outstanding
to rise from $141.4 billion to $362.3 billion over the same
time span — a two and one-half fold increase in just 10 years
time. What this means, of course, is that there has been a
significant rise in debt-equity ratios over the past 10 years.
These have roughly doubled (on the traditional measure) for
manufacturing firms as indicated in Chart 2. The ratios for
smaller-sized manufacturing firms (those with assets of less
than $1 million) have shown an even more pronounced rising
trend, particularly in recent years.
The corporate balance sheet is not only more highly
leveraged and at a higher interest cost, but the average
maturity of the debt is also becoming shorter. Corporate
treasurers will have to make more frequent trips to the
financial markets, but at the same time fewer companies are
finding their securities welcome. The emphasis on quality
by lenders has increased dramatically in recent months so
that today only top-rated companies are welcome in capital
markets for all practical purposes. This sharp shift in
investor preferences started with the financial difficulties
of the Penn-Central Railroad in 1970 and has accelerated
further following the well-published financial difficulties
of New York City, the Real Estate Investment Trusts (REIT's)
and several large companies. Furthermore, record federal
budget deficits, which will total over $150 billion in just
three fiscal years — FY 1975, 1976 and 1977 — will absorb
a large part of the available savings. This is a clear
illustration of the "crowding out" phenomenon I have been
discussing for many months now. Less than prime-rated firms
are facing more difficulty in raising funds as seen in Table
2.
The implication of these fundamental shifts in the
patterns of financing is that the structure of corporate
balance sheets is much more brittle and less liquid than it
was 10 years ago. Furthermore, with heavy demands on credit
markets, especially over the years ahead, there will unquestionably
be less room for some firms, the lower rated and smaller
ones in particular, to get all the funds they need for
expansion.
Obviously there is no simple level where the corporate
financial structure suddenly becomes too illiquid and
inflexible, but at the same time an ever higher burden of
debt commitments relative both to financial assets and to
income is a matter for some concern. Coverage ratios have
dropped sharply over the past decade and operating breakeven
points have risen. This makes companies less able to
withstand even modest-sized recessions. Accordingly, the
potential for bankruptcy has greatly increased across the
entire spectrum of U.S. business. This potential in and of
itself will discourage future investment as lenders become
more reluctant to make long-term commitments and companies
become more reluctant to take on fixed payments of interest
and repayment of debt obligations. Some investments which
would have been undertaken in earlier periods will be passed
over in the future.
With respect to the issue of small business financing,
smaller companies appear to rely more heavily on external
debt financing than do larger companies. In the past,
development capital was available from venture capital firms
which were willing to lend money to growing firms despite
the risks involved. Unfortunately, the supply of venture
capital for small growth-oriented has largely disappeared.
If venture capital is provided lenders often demand a large —
frequently a controlling share — of the ownership position
in the company financed. The future vitality of the entire
economy will be unfortunately restricted if the availability
of venture capital is not restored. This problem is another
negative result of the excessive rates of inflation experienced
in recent years.
Data from the Federal Trade Commission and from our own
Treasury Office of Tax Analysis are shown in Tables 3 and 4
respectively. A comparison on Table 3 of the ratio of debtto-equity with the ratio of long-term debt to equity suggests
that the higher overall debt-to-equity ratios for smaller
companies are occassioned primarily by the more extensive
use of short-term financing. In particular, these companies
rely more heavily on trade credit and, to a lesser extent,
on short-term loans.
With respect to sources of internal financing, we have
run some studies of earnings by size of company. Two tables
are provided: one where the compensation of officers is
included and one where it is excluded. For a smaller company
controlled by the principals, often part of the compensation
of officers really represents a return on investment as opposed
to a return on human capital. In part, this occurs in
order to avoid the double taxation associated with a dividend
payment. It is impossible to speculate on the exact mix of
the two components.
Table 5, which includes the compensation of officers,
shows that earnings per dollar of assets decline as the size
of the company increases. This occurs for all industry
classes. When compensation is excluded, in Table 6, earnings
per dollar of asset increase for manufacturing companies up
to about the $1 million size, after which they fluctuate
abbut essentially the same level. For other industry
classes, the steady state level is reached much earlier. If
one views part of the compensation of officers as a return
on investment, it is not clear that smaller companies earn
less on a relative basis than do larger companies. Therefore,
there is little indication of a systematic bias with respect
to this important component of internal financing.
SOME POLICY NEEDS
The related problems of growing capital investment
needs and the deterioration of corporate balance sheets are
not unique to small-sized business but rather are a difficulty
3*7
confronting all U.S. business firms. Under these circumstances,
the appropriate policy steps should not focus just on the
needs of small business but instead should attempt to help
bring about and sustain an environment which
— will foster greater savings in our economy so
that there will be adequate funds to finance
the capital growth ahead;
-- will encourage businesses to make long-term
investment commitments; and
— will help reverse the growing trend toward greater
corporate illiquidty and debt leverage.
First and foremost, we must have a much greater understanding
on the part of the public on the basic concept of capital.
Capital is the cornerstone of increased productivity, of
higher real wages, of greater job opportunities, of a stronger
competitive position internationally, and of holding down
the rate of inflation. High levels of inflation raise
interest rates, raise the dollar cost of new capital,
discourage investment and weaken our entire financial
structure. Unfortunately, the close relationship between
capital formation and the vitality of the financial markets
is not recognized by many analysts. If we are to have the
kind of sustained economic recovery we desire, including an
increased rate of capital investment, the disruptive impact
of chronic Federal budget deficits must be eliminated.
Second, the government itself must follow policies that
will help eliminate some of the economic and financial
distortions created over the past decade and permit the free
market system to function closer to its potential. Specifically
the federal government must get its own financial house in
order.
The spiraling growth in Federal government spending
must be moderated. The excessive fiscal policies of the
last decade can continue only at the expense of price
stability and economic vitality. This in turn works to the
detriment of capital formation by small and large businesses
alike. More and more, economic decision making is being
taken out of private hands, where within limits we believe
it is most efficiently and responsively handled, and placed
in the hands of the government.
The President's recommendations for controlling Federal
expenditures and for personal and business tax relief is a
positive step toward bringing the spiraling growth of
government spending under control. The inflationary psychology
is a key part of the forces behind inflation, and I do not
believe we can change that psychology until the government
begins to moderate the rapid growth of spending. The longer
run implications of this program for inflation cannot help
but improve capital formation.
Part of the President's program involves tax policy
changes which are designed to provide more incentives for
capital formation. Specific tax cuts contained in the
President's program going to business would include:
— Reduction in the maximum corporate tax rate
from 48 percent to 46 percent.
— Continue the 1975 Act increase in the surtax
exemption (which determines the amount taxable
at rates below 48 percent) from $25,000 to $50,000
of taxable income.
— Continue the 1975 Act in the 20 percent rate on
the first $25,000 of taxable income (the second
$25,000 of taxable income will be taxable at
22 percent rate, with the balance of income
taxed at a 46 percent rate).
— Make permanent the 1975 Act increase in the
investment credit from 7 percent (4 percent in
the case of public utilities) to 10 percent.
— Enact a six-point program to provide tax relief
to electric utilities.
As you requested, we have analyzed the corporation's
income tax and investment credit proposals as they relate
to the size of business. As the program for electric
utilities involves essentially large companies, we did not
make such an analysis. The results for increasing the
surtax exemption to $50,000 and lowering the tax rate
applied to the first $25,000 from 22 to 20 percent are shown
in Table 7, as is the effect of the 2 percent reduction in
the surtax. In both cases, the estimated tax effect is
projected for 1976.
For the surtax exemption proposal, the Table shows that
approximately 38 percent of the total tax benefits will
be realized by businesses with $500,000 or less in assets.
As expected, the bulk of the tax benefits associated with
the reduction in the maximum rate from 48 to 46 percent go
to larger corporations. This is due to the fact that
corporate income is a function of the total assets employed
in the enterprise.
The distribution of the investment tax credit for 1972
by size of enterprise is shown in Table 8. Most of the tax
benefits associated with the investment tax credit are also
concentrated in larger corporations. Small businesses tend
to use less machinery and equipment per dollar of assets
employed than do larger businesses. For one thing, most
small businesses are involved in trade and services, where
fewer fixed assets are used than is the case in manufacturing.
Even in these industries, small companies tend to use
relatively less machinery and equipment than do larger
companies. This may be due to economies of scale.
In addition, small business investment in qualifying
machinery and equipment often tends to be short-lived in
nature, thereby qualifying for less than a full investment
tax credit. Finally, small enterprises more frequently make
investments that are large relative to their taxable income.
This is due to the "lumpy" nature of capital investments by
the small business. As a result, they less frequently are
able to fully utilize the tax credit in the year the asset
is placed in service. For all of these reasons, smaller
businesses realize less relative tax benefit from the
investment tax credit than do larger businesses.
In addition to these tax measures for stimulating
capital formation, the Administration has proposed the
elimination of the withholding of taxes on interest and
dividends paid to foreign investors. We believe that
this will greatly improve the atmosphere for foreign investment
in the United States. In turn this should work to enhance
capital formation.
For long term savings and capital investment incentives,
the Administration still is actively seeking adoption of a
plan presented in my testimony of July 31, 1975 before the
House Ways and Means Committee for the integration of
personal and corporate income taxes. This proposal is
specifically designed to encourage greater savings and
investment. The proposal's major recommendation would
eliminate the inequity and inefficiency which arises from
first taxing corporate income and then taxing individuals
who receive corporate dividends. This double taxation is an
^7
onerous restraint on economic expansion which already has
been eliminated by most major industrial countries. I
believe it is time for the United States to act.
The Treasury proposal is the only major recommendation
that seeks to correct the imbalance between corporate debt
and equity by encouraging greater reliance on equity financing.
By redressing this imbalance the financial markets would be
able to perform more efficiently their task of channeling
the savings of society to the most promising investment
opportunities. Small firms in particular would benefit by
improving their access to the financial markets.
In order to provide a stable environment in which
rational capital spending decisions can be made, government
wage-price control and/or guidelines should be strongly
resisted. While such steps may work for a short period of
time,Mthey ultimately end up causing shortages, distortions
and misallocations of resources in our economic system.
More importantly for capital formation purposes, they
introduce a much greater element of uncertainty regarding
the future return from current investment. The small
businessman has to cope with added problems of whether he
will have sufficient pricing discretion in the future to
assure a fair rate of return on his investment. The small
businessman also has to contend with the possibility of
supply shortages, even if he is willing to pay a higher
price for the items in question.
Finally, unnecessary rules and government reports
should be eliminated and careful consideration should be
given to deregulation efforts to remove existing barriers to
economic efficiency. Government regulations impose costs on
business which ultimately are reflected in higher prices to
the consumer. Furthermore, these costs are usually more
burdensome for smaller-sized business, since they tend to be
relatively fixed in nature. For example, in a company with
only a few employees (and there are literally millions of
such small firms in our economy today) this often means
taking the time of the owner whose efforts are more properly
focussed on the immediate needs of his business. The small
businessman needs to devote his time to increasing his sales
and controlling costs rather than complying with seemingly
endless bureaucratic requirements enforced by distant
government officials who somehow seem to believe that the
country's millions of small companies can afford staffs of
technical experts to fill out the forms and figure out how
to comply with all of the regulations imposed.
All of these policy measures would contribute to
improving the climate for financing by American business and
for capital formation in this country. In the end we must
slightly tilt our preferences away from personal consumption
and government spending toward somewhat greater savings and
investment. We estimate that our capital formation needs in
the decade ahead can be met if savings and investment
increase moderately from about 15 percent of Gross National
Product to almost 16 percent. I might add that these views
are shared by most others who have analyzed the problem.
(See the Appendix Table for a summary of these studies.) In
terms of business fixed investment, this implies going from
about 10-1/2 percent of GNP to 11-1/2 percent.
CONCLUDING COMMENTS
By improving the prospects for capital formation the
current economic recovery will be sustained and long-term
prospects for higher productivity, economic growth, and
rising standards of living will be improved. Most important,
increased capital investment will create more jobs and
expand our productive capability to moderate inflation. It
is not a matter of reslicing the economic pie, but rather
the need to expand the pie so as to benefit everyone. For
the reasons cited earlier, I feel that a major beneficiary
will be small business, particularly when it comes to the
problem of financing.
Thank you, Mr. Chairman, for this opportunity to share
my views with you and the members of these two distinguished
Committees.
#
#
#
WC&ZSR PAID AS A PERCENT OF TOTAL N£T P?ETU
CAPITAL, NO
NCMl eos?po,
1>
1
30
5-74
*
IS4* , tftf i I W
wi m
I 1652 ! ft?4 I
m
nsi mi
m
mi
»&
fw
m
m
m
m
an
m
•CHART 2
3>K
EXTERNAL FINANCING AS A PERCENT 0*
CAPITAL EXPENDITURES BY riONFIflANCIAL CORPORATIONS
PERCENT
70
PERCENT
70
•
65
65
/
60
60
/
•
»
/
55
55
«
/
r
50
50
J
»
45
45
40
40
.A
V\
17\
\/
i
7
v^
J
35
30
/
"
'
25
i
2O
1950
i
i
1 1 11
i
1955
i
I960
i
i
35
30
r
i
•
25
I I . I I
1965
i
i
1970
i
i
i
i
1975
FEDERAL RESERVE BOARD
Percent
60
Dsbt-Equity Ratios
of Manufacturing Corporations
I960
' Firms with M M \ of lesv trwn ore million dolUrs,
Source »«k*JI It.Kli: Cunm.'.sAn. -Quuiteriy financial Report"
1965
1970
1974
i i
—J 20
1979
*
TABLE 1
BALANCE SHEET PERCENTAGES
of SELECTED ASSETS
to TOTAL ASSETS
2nd QUARTER, 197 5
MANUFACTURING COMPANIES
ASSET (In percent of total assets)
CASH
MARKETABLE
SECURITIES
RECEIVABLES
INVENTORIES
NET
FIXED
ASSETS
Under $1 million
11.0
1.0
26.5
23.8
28.6
$1-5 million
7.4
1.3
25.5
29.2
27. 9
$5-10 million
6.5
2.2
23.0
30.5
28.2
$10-25 million
5.7
1.8
21.6
29.5
30.7
$25-50 million
4.3
1.7
20.9
29.8
30.5
$50-100 million
4.0
2.5
20.7
27-6
31.1
$100-250 million
3.8
1.7
18.8
27.1
32.6
250-1,000 million
3.1
1.8
16.8
25.0
33.9
Over $1 billion
2.3
3.2
12.3
17.9
38.3
All sizes
3.6
2.5
16.2
22.3
35.0
SIZE OF
COMPANY
Source:
Federal Trade Commission Quarterly Financial Report
TABLE 2
QUALITY DISTRIBUTION OF PUBLIC STRAIGHT CORPORATE
BOND ISSUANCE (MONTHLY AVERAGES; $ MILLIONS)
Moody's
J
J
%
$
1975 — 1 s t Half
1974
1.973
1972
1971
T
3
J
*
$
TOTAL ISSUANCE
$ 4 92
A a a
7.1.1%
$ 441
33.7$
$ 308
30.05
$ 659
31.9*
$ 996
29.6*
Aa
447
2b.2
347
26.5
321
31.3
670
32.4
942
28.0
A
565
31.9
373
28.5
298
29.0
596
28.8
1161
34.5
Others (incl
non-rated)
269
15.2
11.3
99
9.6
144
7.0
267
7.9
$1773
TOTAL
100.0*
149
$1310
100.0$
$1026
100.0*
$2069
100.
$3366
100.0*
664
35.5*
LONG-TERM ISSUANCE
$ 422
Aaa
27.8*
$
237
23.3*
$
30.8*
302
559
39.4*
32.2
392
27.7
572
30.6
$
$
Aa
413
27.2
327
32.2
A
472
31.1
325
32.0
268
28.5
385
27.2
584
31.2
Others (incl.
non-rated)
213
14.0
126
12.4
80
8.5
81
5.7
51
2.7
TOTAL
SOURCE:
$1520
100.0*
$1015
100.0*
Salomon Brothers Comments on Credit
,
289
$939
100.0*
$1417
100.0*
$1871.
100.0*
21*
TABLE 3
DEBT RATIOS FOR
ALL MANUFACTURING CORPORATIONS
AND FOR THOSE WITH $1 MILLION OF
ASSETS OR LESS
Total Debt/Equity Ratio
All
Under
Manufacturing
$1 million
1959
.24
.32
1960
.25
.34
1961
.25
1962
Long-term Debt/Equity
All
Under
Manufacturing
$1 million
.18
.19
;18
.21
.37
.19
.24
.25
.38
.19
.24
1963
.25
.41
.19
.26
1964
.25
.41
.19
.26
1965
.27
.41
.21
.26
1966
.31
.43
.23
.27
1967
.34
.43
.26
.26
1968*
.37
.45
.29
.27
1969
.40
.46
.30
.29
1970
.44
.50
.32
.32
1971
.44
.53
.33
.34
1972
.43
.53
.33
.33
1973
.44
.57
.33
.37
1974
.42
.58
.31
.35
1975
1st Half
.44
.59
.33
.36
Source:
77.
Federal Trade Commission Quarterly Financial Report.
TABLE 4*
Corporate Debt-Equity Ratios for Selected Industries for Firms with Net and Without Income by Asset Class, 1972
Asset class
(thousands)
Manufacturing
: Under
: $25
19.34
:
•
$2550
2.23
:
'
$50- .,,":
:
100
1.41
TIQF
25Q
!
:
$25(T
500 '
1.13
.91
:
:
$5001.000
.80
:
'
$1,0002.500
.81
:$2,500:
10.000
.62
: $10,000'
25.000
.58
: $25,000: 100.000
.62
:
Over
' $100.000
.69
Services 3.73 1.96 1.39 1.42 1.71 2.33 2.52 2.17 1.87 1.82 1.34
Construction 7.13 2.58 1.61 1.38 1.70 1.75 1.79 2.22 2.38 2.13 1.17
Transportation 3.98 2.06 1.52 1.41 1.20 1.43 1.40 1.36 1.36 1.46 1.19
Wh
r^au\rat 5.15 2.06 1.48 1.10 1.00 1.06 1.20 1.16 1.19 1.09 1.08
November 12, 1975
Office of the Secretary of the Treasury
Office of Tax Analysis
i
,
4
4 , u c ,.aKi„ for 1972 iq substantially higher than that in Table 3 for three reasons: (1) in this table, "debt" is the sum of
*The debt/equity ratios in ^ / f ^ ^ ^ 7 2 ^ ^
more comprehensive than the measure used in Table 3; C 2) in this table, the asset measure is total
S
^
l
^
™
i n w a r d redistribution of enterprises as compared with that in Table 3; (3) the sample of
manufacturing corporations filing tax returns in 1972 is not identical to the sample underlying Table 3.
TABLE 5
Earnings Including Compensation of Officers, per Dollar of Assets, for Corporations With and Without Net Income by Asset Class, 1972
Asset class
(thousands)
Under
$25
$2550
$50- -»
100
$100250
$250500
: $500: 1.000
$1,0002.500
: $2,500: 10.000
: $10,000' 25.000
: $25,000: 100.000
: Over
: $100.000
.39
.35
.28
.24
.22
.18
.16
.14
.12
.10
2.42
1.03
.53
.29
.19
.13
.11
.09
.09
.09
.07
Construction
.85
.53
.40
.30
.23
.19
.16
.13
.09
.08
.05
Transportation
.42
..26
.26
.23
.18
.15
.13
.11
.10
.08
.05
Wholesale and
retail trade
,49
34
.29
.24
.21
.20
.17
15
12
Manufacturing
Services
.49.
*
.12
Office of the Secretary of the Treasury
Office of Tax Analysis
Income = total receipts - total deductions + interest + officers' compensation + charitable contributions
.09
November 12, 1975
TABU- 6
Earnings, Excluding Compensation of Officers, per Dollar of Assets for Corporations With and Without Net Income by Asset Class, 1972
Asset class
.(thousands)
Manufacturing
Services
Construction
Transportation
Wholesale and
retail trade
"sis'
-215
-.13
•
=
$
ll'
^
.00
!
=
?on^
iSfi^
.06
! $T3
1 250
07
i
r
500
^^Z
: 1.000
.09
.11
.12
.13
.12
.11
.10 .
^
:
s
^•00°: 2.500
:
$2,500- : $10,000- : $25,000- :
Ov^T"
; 10.000
; 25.000
: 100,000
; $100.000
2.12
.99
.10
.09
.08
.07
.07
.06
.07
.08
.06
-.04
.02
.09
.09
.08
.08
09
.07
.06
.06
.05
-.03
.05
.07
.09
.09
.09
.09
.09
.09
.07
.Q5
-.07
.04
.07
.10
.11
.11
12
.07
.11
.11
.09
Office of the Secretary of the Treasury
Office of Tax Analysis
November 12, 1975
Income = total receipts - total deductions + interest + charitable contributions
V
^ >BLE 7
Distribution of Proposed Corporation Income Tax Rediu-r ions , for All Corporations and Selected Industry Categories; by Size of Total A
Industry/item
1 industries: 1/
Number of corporations 2/
Tax reduction provided by:
H.R. 10612
Surtax reduced.2 points 3/
Wholesale and retail trade:
Number of corporations 2/
Tax reduction provided by:
H.R. 10612
Surtax reduced 2 points 3/
Services:
Number of corporations 2/
Tax reduction provided by:
H.R. 10612
Surtax reduced 2 points 3/
Manufacturing:
Number of corporations 2/
Tax reduction provided by:
H.R. 10612
Surtax reduced 2 points 3/
Estimated
1976
quantities
2,085,000
$2.0 billion
$2.5 billion
639,000
$300 million
$360 million
402,000
$ 65 million
$ 80 million
229,000
$1.0 billion
$1.3 billion
Asset size (thousands)
$100: $500500
: 2.500
(percent)
All
sizes
Under
$25
$25100
100.0
24.8
30.4
31.5
9.9
2.1
1.1
0.2
100.0
100 "
3.0
0.2
10.3
1.4
24.5
6.2
23.6
9,3
13.3
7.9
20.9
12.8
4.4
62.2
100.0
19.8
33.2
35.3
10.2
1.2
0.J
100.0
100.0
2.3
0.3
12.5
3.2
35.5
18.4
32.5
25.5
9.7
14.7
6.8
14.6
100.0
46.1
29.6
18.9
4.5
0.7
0.1
100.0
100.0
15.2
3.8
23.6
10.6
29.3
22.2
18.4
18.6
6.9
12.4
5.7
17.9
0.8
14.5
100.0
16.8
26.5
34.1
16.6
4.0
1.5
0.4
100.0
100.0
0.9
*
5.3
0.3
18.0
2.0
28.2
5.9
21.9
7.1
20.1
13.3
5.7
71.4
Office of the Secretary of the Treasury
Office of Tax Analysis
$2,50010,000
: $10,000: 100.000
: $100,00C
: and over
November 17, 1975
*Less than 0.05 percent.
1/ Includes industries not displayed here.
2/ Includes corporations with and without taxable income as well as those electing not to be taxed as corporations
theunder
provisions of Subchapter S.
3/ 270 reduction on all corporate income subject to corporation income tax above $50,000.
0.7
23.3
TABLE 8
Distribution of Investment Credit Data, for All Corporations and Selected Industry Categories, 1972
Asset size (thousands)
:
$100$500500
: 2.500
(percent)
$10,000100.000
$100,000
and over
2.4
5.5
5.2
5.7
1.3
9.5
9.4
10.3
0.2
70.0
72.0
70.8
11.4
21.6
19.9
21.5
0.7
11.7
11.3
12.2
0.1
15.0
15.4
16.9
'*
28.0
31.3
32.6
19.3
16.5
16.1
18.0
4.8
19.5
19.8
23.0
0.7
14.1
13.1
13.9
0.1
16.8
16.8
14.3
22.9
24.1
23.8
34.7
3.0
2.9
2.6
18.3
6.3
6.2
6.0
4.7
5.6
5.6
5.9
1.7
11.1
11.2
11.5
0.4
73.4
73.5
73.7
1972
Quantities
(millions)
All
sizes
Under
$25
$25100
All industries: 1_/
Number of corporations 2/
Investment in qualified property
Amount qualified for credit
Credit taken
1.419
71,466
62,073
3,013
100.0
100.0
100.0
100.0
23.8
0.3
0.3
0.1
29.6
1.5
1.3
0.8
31.9
5.4
4.8
4.6
10.8
7.8
7.1
7.7
Wholesale and' retail trade:
Number of corporations 2/
Investment in qualified property
Amount qualified for credit
Credit taken
.442
6,287
5,186
263
100.0
100.0
100.0
100.0
18.9
0.8
0.7
0.1
3.2.3
5.0
4.7
2.3
35.9
17.9
16.7
14.4
Services:
Number of corporations 2/
Investment in qualified property
Amount qualified for credit
Credit taken
.242
3,756
2,722
106
100.0
100.0
100.0
100.0
45.7
2.7
2.6
1.0
29.4
7.6
7.5
6.1
Manufacturing:
Number of corporations 2/
Investment in qualified property
Amount qualified for credit
Credit taken
.166
26,669
23,496
1,374
100.0
100.0
100.0
100.0
15.2
25.0
0.6
0.5
0.2
Industrv/item
*
*
Office of the Secretary of the Treasury
Office of Tax Analysis
*Less than 0.05 percent.
1/ Includes industries not displayed here.
2/ Includes only corporations subject to regular corporation income tax whether or not taxable in 1972
"" Does not include corporations electing to be taxed under provisions of Subchapter S.
$2,50010.000
November 17, 197}
APPENDIX TABLE
ACTUAL AND PROJECTED INVESTMENT AS A PERCENT OF GNP
Average
1965-1974
Gross private domestic
investment
15.1
NYSEi/
16.4
Bosworth
Duesenberry
Carron£/
.
Friedman^/
15.5
15.8
7
G.E.i
15.8
.
Chase
,.
DRl2/ Econometrics 2/
15.7
15.9
Non-residential fixed 10.4 12.1 11.3 11.5 11.4 11.0 11.8
Inventory 1.0 0.3 0.8 0.8 0.4 0.8 0.8
Residential 3.8 3.9 3.5 3^5 4.0 3.8 3.3
1/ The New York Stock Exchange, The Capital Needs and Savings Potential of the U.S. Economy:
Projections Through 1985, September 1974. Figures shown are based on cumulative projections
in current dollars, 1974-1985.
»
2/ Barry Bosworth, James S. Duesenberry, and Andrew S. Carron, Capital -Needs in the Seventies-,
The Brookings Institution, 1975. Figures shown are based on estimates for 1980 in current
dollars from Table 2-12, p. 39 (note the constant dollar 1980 figures in Table 2-11 project
gross private domestic investment as 15.8 percent of GNP).
*,
2/ Benjamin M. Friedman, "Financing the Next Five Years of Fixed Investment" in President's
Authority to Adjust Imports of Petroleum, Public Debt Ceiling Increase; and Emergency Tax
Proposals; Hearings before the Committee on Ways and Means, House of Representatives, January
1975, pp. 710-726. Figures shown are based on 1975-79 averages of current dollar projections
4/ Reginald H. Jones, "Capital Requirements of Business, 1974-85," Testimony submitted to
Subcommittee on Economic Growth, Joint Economic Committee, May 8, 3 974. Figures shown are
based on cumulative projections in current dollars, 1974-1985.
5/ Data Resources, Inc., Summer 1975, "Special Study: The Capital Shortage." Summary table on
inside cover\ 1985 data only, current dollars, standard forecast.
6/ Chase Econometrics August 1975. "The Next Ten Years: Inflation, Recession and Capital
Shortage." 1984 data only, current dollars. Table, page ft\ of 14. No recession run.
rtmentoftheJREASURY
, D.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
II
Contact:
Helene L. Melzer
964-8706
November 21, 1975
ANITA F. ALPERN WINS
FEDERAL WOMAN'S AWARD
Anita F. Alpern, Assistant Commissioner (Planning and
Research), Internal Revenue Service, is one of six winners of
the annual Federal Woman's Award, the Civil Service Commission
announced today.
Miss Alpern becomes the third Treasury woman to receive
the honor in the 15 years it has been bestowed. Dr. Margaret
Wolman SchwaTtz, formerly Director, Office of Foreign Assets
Control and now retired, won the award in 1964; and Esther
Lawton, currently Acting Director, Departmental Office of
Personnel, received the honor in 1969. Miss Alpern had been
nominated by the Treasury Department on three previous occasions.
When notified of her selection, Treasury Secretary William
E. Simon informed Miss Alpern of the pending award and expressed
his congratulations for bringing "this great honor to the Treasury
Department."
The Federal Woman's Award climaxes a 33-year career for
Miss Alpern, who began government service as a P-l (now GS-5)
economist with the U.S. Employment Service in 1942. After 13
interim years as a middle and senior level professional in the
Department of Defense, she joined IRS in 1960 as a management
analyst and became its first woman in a "supergrade" in 1972.
Earlier this year, she became the Treasury Department's first
woman GS-1'8 inthe career-service.
In nominating Miss Alpern for the award, the Department
cited "her distinguished career at IRS and her activities in
behalf of the women's program."
- More -
- 2The Internal Revenue Service, in nominating the Assistant
Commissioner, noted:
"Anita Alpern has developed hew systems and techniques for
analyzing delinquent taxpayers that have had major impacts on
Collection policy emphasis and program direction for some 10,000
employees in 58 districts nationwide.r. She is also the architect
of comprehensive data management and evaluation systems used by
all management levels nationwide in Collection, Data Processing and
Taxpayer Service functions. These represent "firsts."
Since October 1974, Miss Alpern has served as chairwoman
of the Treasury Women's Advisory Committee and was appointed by
Secretary Simon as one of his two representatives to the National
Observance of International Women's Year Committee. In those
roles, she was instrumental in organizing Treasury Women's Day
last June.
The Federal Woman's Award is given annually to six outstanding
career women in the Government service from nominations submitted
by the various Departments and Agencies. Selection is made by
an independent panel of judges to give public recognition and
attention to the many kinds of work that women do in the Federal
service. It is the only such award reserved exclusively for women,
and it is given for contributions and specific accomplishments.
The Awards will be presented at a dinner, December 3, at the
Shoreham-Americana Hotel.
In addition to Miss Alpern, the other winners are Dr. Beatrice
Dvorak, Department of Labor; Dr. Evans Hayward, Department of
Commerce; Mrs. Wilda Martinez, Department of Agriculture; Dr. Marie
Nylen, Department of Health, Education and Welfare (NIH), all of
Washington; and Dr. Marguerite Rogers, Department of the Navy,
China Lake, California.
oOo
2*1
Contact: H.C. Shelley
Extension 2951
November 21, 1975
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES FINAL
COUNTERVAILING DUTY DETERMINATION
Assistant Secretary of the Treasury David R.
Macdonald announced today a final negative determination in the countervailing duty investigation of cast
iron soil pipe and fittings from India. On July 3,
1975, a preliminary negative determination on the subject merchandise from India was published in the Federal
Register. Under the countervailing duty law
(19 U.S.C. 1303) the Treasury Department had until
January 3/ 1975 in which to make a final determination.
Interested persons were given a period of sixty
days in which to comment on the preliminary determination. No comments were received. Accordingly/ this
final determination indicates that no bounties or grants,
within the meaning of the law, are being paid or bestowed
on the manufacture, production, or exportation of cast
iron soil pipe and fittings from India.
Notice of this decision will be published in the
Federal Register of November 24, 1975.
*
WS-489
*
*
]{Department of
SHINGTON, D.C. 20220
theJREASURY
TELEPHONE 964-2041
7"
FOR IMMEDIATE RELEASE Contact: Helene L. Melzer
964-8706
November 21, 1975
ANITA F. ALPERN WINS
FEDERAL WOMAN'S AWARD
Anita F. Alpern, Assistant Commissioner (Planning and
Research), Internal Revenue Service, is one of six winners of
the annual Federal Woman's Award, the Civil Service Commission
announced today.
Miss Alpern becomes the third Treasury woman to receive
the honor in the 15 years it has been bestowed. Dr. Margaret
Wolman Schwartz, formerly Director, Office of Foreign Assets
Control and now retired, won the award in 1964;. and Esther
Lawton, currently Acting Director, Departmental Office of
Personnel, received the honor in 1969. Miss Alpern had been
nominated by the Treasury Department on three previous occasions.
When notified of her selection, Treasury Secretary William
E. Simon informed Miss Alpern of the pending award and expressed
his congratulations for bringing "this great honor to the Treasury
Department. "
The Federal Woman's Award climaxes a 33-year career for
Miss Alpern, who began government service as a P-l (now GS-5)
economist with the U.S. Employment Service in 1942. After 13
interim years as a middle and senior level professional in the
Department of Defense, she joined IRS in 1960 as a management
analyst and became its first woman in a "supergrade" in 1972.
Earlier this year, she became the Treasury Department's first
woman GS-18in the career-service.
In nominating Miss Alpern for the award, the Department
cited "her distinguished career at IRS and her activities in
behalf of the women's program."
- More
77- m
3/
- 2The Internal Revenue Service, in nominating the Assistant
Commissioner, noted:
"Anita Alpern has developed hew systems and techniques for
analyzing delinquent taxpayers that have had major impacts on
Collection policy emphasis and program direction for some 10,000
employees in 58 districts nationwide.7. She is also the architect
of comprehensive data management and evaluation systems used by
all management levels nationwide in Collection, Data Processing and
Taxpayer Service functions. These represent "firsts."
Since October 1974, Miss Alpern has served as chairwoman
of the Treasury Women's Advisory Committee and was appointed by
Secretary Simon as one of his two representatives to the National
Observance of International Women's Year Committee. In those
roles, she was instrumental in organizing Treasury Women's Day
last June.
The Federal Woman's Award is given annually to six outstanding
career women in the Government service from nominations submitted
by the various Departments and Agencies. Selection is made by
an independent panel of judges to give public recognition and
attention to the many kinds of work that women do in the Federal
service. It is the only such award reserved exclusively for women,
and it is given for contributions and specific accomplishments.
The Awards will be presented at a dinner, December 3, at the
Shoreham-Americana Hotel.
In addition to Miss Alpern, the other winners are Dr. Beatrice
Dvorak, Department of Labor; Dr. Evans Hayward, Department of
Commerce; Mrs. Wilda Martinez, Department of Agriculture; Dr. Marie
Nylen, Department of Health, Education and Welfare (NIH), all of
Washington; and Dr. Marguerite Rogers, Department of the Navy,
China Lake, California.
oOo
teDepartmentoUheJREASURY jf
i
TELEPHONE 964-2041
SHINGTON, D.C. 20220
376
FOR IMMEDIATE RELEASE
November 24, 1975
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3.2 billion of 13-week Treasury bills and for $3.4 billion
of 26-week Treasury bills, both series to be issued on November 28, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
26-week bills
maturing May 27, 1976
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing February 26, 1976
High
Low
Average
Price
Discount
Rate
Investment
Rate 1/
98.625
98.614
98.620
5.500%
5.544%
5.520%
5.67%
5.72%
5.69%
Price
Discount
Rate
Investment
Rate 1/
97.034
97.012
97.017
5.899%
5.943%
5.933%
6.18%
6.23%
6.22%
Tenders at the low price for the 13-week bills were allotted 20%
Tenders at the low price for the 26-week bills were allotted
:0TAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Boston
$
52,120,000
New York
- ,550,165,000
Philadelphia
53,090,000
Cleveland
48,720,000
Richmond
51,050,000
Atlanta
43,^10,000
Chicago
578,950,000
St. Louis
57,190,000
27,230,000
Minneapolis
44,135,000
Kansas City
46,095,000
Dallas
San Francisco 817,000,000
TOTALS 6,369,155,000
Accepted
$
31,420,000
2,196,380,000
32,390,000
38,285,000
31,540,000
41,310,000
151,650,000
43,390,000
9,830,000
30,465,000
21,395,000
573,000,000
Received
Accepted
10,620,000
$
24,620,000 $
4,791,080,000
2,794,380,000
62,920,000
43,820,000
156,520,000
89,120,000
83,530,000
25,730,000
21,715,000
17,315,000
299,955,000
65,455,000
47,595,000
29,595,000
68,850,000
34,850,000
32,320,000
24,895,000
24,815,000
7,815,000
530,125,000
257,625,000
$3,201,055,000 a/$6,144,045,000
$3,401,220,000b/
^Includes $ 485,670,000 noncompetitive tenders from the public.
'/includes $ 170,495,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.
WS-490
K Department of theJREASURY
TELEPHONE 964-2041
5HINGT0N, D.C. 20220
November 25, 1975
37
FOR RELEASE AT 4:00 P.M.
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $ 6,600,000,000 > or
thereabouts, to be issued December 4, 1975 >
as follows:
91-day bills (to maturity date) in the amount of $ 3,200,000,00a or
thereabouts, representing an additional amount of bills dated September 4, 1975
and to mature March 4, 1976
(CUSIP No. 912793 YWO ) , originally issued in
the amount of $3,203,280,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $ 3,400,000,00^ or thereabouts, to be dated December 4, 1975,
and to mature June 3, 1976
(CUSIP No. 912793 ZK5 ) .
The bills will be issued for cash and in exchange for Treasury bills maturing
December 4, 1975
outstanding in the amount of $5,805,955,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,222,385,000
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their face amount will be payable without
interest.
They will be issued in bearer form in denominations of $10,000,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
Dook-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
>ne-thirty p.m., Eastern Standard time, Monday, December 1, 1975.
lenders will not be received at the Department of the Treasury, Washington.
tech tender must be for a minimum of $10,000.
multiples of $5,000.
Tenders over $10,000 must be in
In the case of competitive tenders the price offered must
•e expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
factions may not be used.
Banking institutions and dealers who make primary markets in Government
3-491
(OVER)
securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.
Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on December 4, 1975
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing December 4, 1975.
ment.
Cash and exchange tenders will receive equal treat-
Cash adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the new bills,
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notice*
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from any Federal Reserve Bank or
373
FOR IMMEDIATE RELEASE
Contact: L.F. Potts
Extension 2951
November 25, 1975
WITHHOLDING OF APPRAISEMENT ON
WATER CIRCULATING PUMPS
FROM THE UNITED KINGDOM
Assistant Secretary of the Treasury David R. Macdonald
announced today a withholding of appraisement on water circulating pumps, wet motor type, suitable for use in residential and commercial hydronic heating systems, from the
United Kingdom, pending a determination as to whether the
subject merchandise is being sold at less than fair value
within the meaning of the Antidumping Act, 1921, as amended.
This decision will appear in the Federal Register of
November 26, 1975.
Under the Antidumping Act, the Secretary of the Treasury
is required to withhold appraisement whenever he has reasonable cause to believe or suspect that sales at less than fair
value may be taking place.
A final Treasury decision in this investigation will be
made within three months. Appraisement will be withheld for
a period not to exceed six months from the date of publication of the "Withholding of Appraisement Notice" in the
Federal Register.
Under the Antidumping Act, a determination of sales in
the United States at less than fair value requires that the
case be referred to the U.S. International Trade Commission,
which would consider whether an American industry was being
WS-496
(Over)
37/
-2injured. Both sales at less than fair value and injury must
be shown to justify a finding of dumping under the law. Upon
a finding of dumping, a special duty is assessed.
Imports of the subject merchandise from the United
Kingdom during the period February through June 1975 were
valued at roughly $230,000.
*
*
*
>
'
FOR IMMEDIATE RELEASE
'
Contact: R.B. Self
Extension 8256
November 25, 1975
DETERMINATION IN COUNTERVAILING DUTY
INVESTIGATION OF
EC CANNED HAMS AND SHOULDERS
Assistant Secretary of the1 Treasury David R. Macdonald
announced today that a final determination that bounties or
grants exist has been made in the countervailing duty investigation of canned hams and shoulders exported from
European Community countries, but that additional duties
are being waived under the provisions of the Trade Act of
1974. Notice of Receipt of Petition in this case was
published in the Federal Register of January 15, 1975,
and a Preliminary Determination that bounties or grants
exist was published June 30, 1975.
Mr. Macdonald said there have been a series of reductions in restitution payments on canned hams exported
to the U.S. from EC countries from a high of 57 units of
account per 100 kilos in September 1973 to 20 units of
account effective November 10, 1975. Furthermore, he noted,
EC exports of hams to the U.S. have been declining for the
past 2 years. In this period the payments have in total
been reduced from 39C lb. to 15C lb. for canned hams from
the Netherlands. (Payments vary slightly in dollar terms
among the individual member states of the EC.)
Based on these actions, and given the presently
favorable price for hogs in the U.S., and the absence
of aggressive marketing by EC countries of these products,
Mr. Macdonald said that he believes that the concerns
of the domestic industry have been met for now. This
decision follows consultations by the Treasury Department
with other agencies of the Executive Branch, interested
members of the Congress, as well as with representatives
of the U.S. swine industry.
In making future assessments as to whether the remaining restitution payments are having an adverse effect on
the U.S. industry, Mr. Macdonald indicated that the state
of the industry would be evaluated from time (Over)
to time.
_ WS-495
-2-
Among the factors to be taken into account would be
such things as import penetration by EC products, consumption trends in the U.S., profitability of the
U.S. industry, and the cost of input for U.S.
producers, best expressed by the so-called hog-corn
ratio. Under terms of the waiver, countervailing
duties will not be imposed on those canned hams and
shoulders still benefitting from restitution payments
so long as the conditions mentioned above continue to
prevail. Of course, any change in those conditions
would result in consultations with the EC, with the
possibility that further adjustments in the remaining
level of restitution payments might be requested.
Section 331 of the Trade Act under which this action
is being taken, provides that the Secretary of the
Treasury may, for four years following enactment of
the Act, waive countervailing duties otherwise assessable on an import if he determines that adequate steps
have been taken to reduce substantially or eliminate
the adverse impact of any bounty or grant; that there
is a reasonable prospect for successful multilateral
trade negotiations; and the imposition of the waived
duties would be likely to seriously jeopardize those
negotiations. The waiver must be revoked if the basis
supporting the determination ceases to exist. The
waiver is subject to review by the Congress, and a
report setting forth the circumstances and conditions
of this action will be sent to the Speaker of the House
and President of the Senate very shortly.
*
*
During 1974 imports of *canned
hams
and shoulders
from EC countries were $235 million.
$/7
Contact: D.Cameron
Extension 2951
November 25, 1975
FOR IMMEDIATE RELEASE
TREASURY DEPARTMENT ANNOUNCES
PRELIMINARY COUNTERVAILING DUTY DETERMINATION
ON CHEESE FROM NORWAY
Assistant Secretary of the Treasury David R. Macdonald
announced today the issuance of a preliminary determination
that bounties or grants are being paid or bestowed on
imports of cheese from Norway within the meaning of the
United States Countervailing Duty Law (19 U.S.C. 1303).
A notice to this effect will be published in the Federal
Register of November 26, 1975.
Interested parties will be given an opportunity to
submit written views before the Commissioner of Customs
in time to be received no later than 30 days from the
date of publication of this notice. As required under
the Countervailing Duty Law, a final determination will
be issued in the Federal Register by no later than
May 21, 1976.
The Treasuryf s preliminary determination concluded
that the consumer subsidy and basic support subsidy payments made to milk producers, as well as the freight subsidy
program, constitute bounties or grants on cheese exported
to the United States. If a final affirmative determination is made, the Countervailing Duty Law requires the
Secretary of the Treasury to assess an additional duty
on merchandise benefitting from such bounties or grants.
During calendar year 1974 imports of cheese from
Norway were approximately $10 million.
WS-494
oOo
iR IMMEDIATE RELEASE
November 26, 1975
~y/y
TREASURY OFFERS $2.0 BILLION OF 139-DAY BILLS
The Department of the Treasury, by this public notice, invites tenders for
,000,000,000, or thereabouts, of 139-day Treasury bills, to be issued on a
scount basis under competitive and noncompetitive bidding as hereinafter provided.
e bills of this series will be issued on December 5, 1975, and will be an
ditional issue of bills dated October 23, 1975, due April 22, 1976 (CUSIP No.
2793 ZD1) when the face amount will be payable without interest.
They will be
sued in bearer form in denominations of $10,000, $15,000, $50,000, $100,000,
00,000 and $1,000,000 (maturity value), and in book-entry form to designated
dders.
Tenders will be received at Federal Reserve Banks and Branches up to one-thirty
m., Eastern Standard time, Tuesday, December 2, 1975.
Tenders will not be
ceived at the Department of the Treasury, Washington.
Each tender must be for
ninimum of $10,000. Tenders over $10,000 must be in multiples of $5,000.
In
e case of competitive tenders the price offered must be expressed on the basis
100, with not more than three decimals, e.g., 99.925. Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
:urities and report daily to the Federal Reserve Bank of New York their positions
:h respect to Goverment securities and borrowings thereon may submit tenders for
:ount of customers provided the names of the customers are set forth in such tenders.
lers will not be permitted to submit tenders except for their own account.
.1 be received without deposit form incorporated
Tenders
banks and trust companies and
>m responsible and recognized dealers in investment securities.
Tenders from
lers must be accompanied by payment of 2 percent of the face amount of bills
•lied for, unless the tenders are accompanied by an express guaranty of payment
an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
unt and price range of accepted bids.
Those submitting competitive tenders
1 be advised of the acceptance or rejection thereof.
The Secretary of the
asury expressly reserves the right to accept or reject any or all tenders,
-498
in whole or in part, and his action in any such respect shall be final.
Subject
to these reservations, noncompetitive tenders for $500,000 or less without stated
price from any one bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids.
Settlement for accepted tenders in
accordance with the bids must be made or completed at the Federal Reserve Bank
or Branch in cash or other immediately available funds on December 5, 1975.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to accrue
when the bills are sold, redeemed or otherwise disposed of, and the bills are
excluded from consideration as capital assets.
Accordingly, the owner of bills
(other than life insurance companies) issued hereunder must include in his Federal
income tax return, as ordinary gain or loss, the difference between the price paid
for the bills, whether on original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the conditions
of their issue.
Bank or Branch.
Copies of the circular may be obtained from any Federal Reserve
eDepartmentoftheTREASURY I
TELEPHONE 964-2041
HINGTON, D.C. 20220
\1
f r \
FOR IMMEDIATE RELEASE
November 26, 1975
TREASURY OFFERS $1.2 BILLION OF TREASURY BILLS
The Department of the Treasury, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of $1,200,000,000,
or thereabouts, to be issued December 8, 1975, as follows:
10-day bills (to maturity date) in the amount of $600,000,000, or thereabouts, representing an additional amount of bills dated June 19, 1975,
maturing December 18, 1975 (CUSIP No. 912793 YC4), and
18-day bills (to maturity date) in the amount of $600,000,000, or thereabouts, representing an additional amount of bills dated June 26, 1975,
maturing December 26, 1975 (CUSIP No. 912793 YD2).
The bills will be issued on a discount basis under competitive bidding,
and at maturity their face amount will be payable without interest. They will
be issued in bearer form in denominations of $10,000, $15,000, $50,000, $100,000,
$500,000 and $1,000,000 (maturity value), and in book-entry form to designated
bidders.
Tenders will be received at all Federal Reserve Banks and Branches up to
twelve-thirty, p.m., Eastern Standard time, Friday, December 5, 1975. Tenders
will not be received at the Department of the Treasury, Washington. Wire and
telephone tenders may be received at the discretion of each Federal Reserve Bank
or Branch. Each tender for each issue must be for a minimum of $10,000,000.
Tenders over $10,000,000 must be in multiples of $1,000,000. The price on
tenders offered must be expressed on the basis of 100, with not more than three
decimals, e.g., 99.925. Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their
positions with respect to Government securities and borrowings thereon may
submit tenders for account of customers provided the names of the customers are
set forth in such tenders. Others will not be permitted to submit tenders
except for their own account. Tenders will be received without deposit from
incorporated banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders from others must be accompanied by
payment of 2 percent of the face amount of bills applied for, unless the tenders
are accompanied by an express guaranty of payment by an incorporated bank or
trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids. Those submitting tenders will be
advised of the acceptance or rejection thereof. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all tenders, in whole
WS-497
(OVER)
34/
or in part, and his action in any such respect shall be final. Settlement for
accepted tenders in accordance with the bids must be made at the Federal Reserve
Bank or Branch on December 8, 1975, in immediately available funds.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954
the amount of discount at which bills issued hereunder are sold is considered
to accrue when the bills are sold, redeemed or otherwise disposed of, and the
bills are excluded from consideration as capital assets. Accordingly, the owner
of bills (other than life insurance companies) issued hereunder must include
in his Federal income tax return, as ordinary gain or loss, the difference
between the price paid for the bills, whether on original issue or on subsequent
purchase, and the amount actually received either upon sale or redemption at
maturity during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the conditions
of their issue. Copies of the circular may be obtained from any Federal Reserve
Bank or Branch.
FOR IMMEDIATE RELEASE
FRIDAY, NOVEMBER 28, 197 5
FOR INFORMATION, CONTACT: PRISCILLA R. CRANE (202) 634-5248
The U. S. Treasury Department's Office of Revenue
Sharing issued a new edition of its Regulations today.
Amendments to the Regulations which have been put forward
since 1973 have been incorporated in the new publication.
Individual copies are available at no cost from the
Public Affairs Division of the Office of Revenue Sharing at
2401 E Street, N.W. Washington, D. C, 20226.
All recipient units of state and local government are
being mailed copies of the full set of general revenue sharing
Regulations today.
Since the first Regulations were issued in 1973, amendments have been put forward covering protection against
declines in allocations for governments whose data have
been affected by disasters and elaborating on the nondiscrimination provisions of revenue sharing law.
The general revenue sharing program was authorized by
the State and Local Fiscal Assistance Act of 1972 (P.L. 92-512).
WS-492
(Over)
333
Through the general revenue sharing program, more than
$22 billion already has been paid nearly 39,000 units of state
and local general-purpose government.
Revenue sharing law
authorizes the distribution of $30.2 billion over a five
year period that ends December 1976.
In April of this year, President Ford asked Congress to
act promptly to renew the program past its present deadline.
When he made his request, the President recommended M...that
the Congress act to continue this highly successful and
important new element of American Federalism well in advance
of the expiration date., in order that State and local governments can make sound fiscal plans."
Treasury Secretary William E. Simon has designated
Jeanna D. Tully as Director of the Office of Revenue Sharing.
Miss Tully has served two years in the Department of Health,
Education and Welfare and previously in the private investments sector.
30.
> ^ |
«DepartmentoftheTREA$URY
SHINGTON,D.C. 20220
TELEPHONE 964-2041
December 1, 1975
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3.2 billion of 13-week Treasury bills and for $3.4 billion
of 26-week Treasury bills, both series to be issued on December 4, 1975,
were opened at the Federal Reserve Banks today. The details are as" follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing March 4, 1976
High
Low
Average
26-week bills
maturing June 3, 1976
Price
Discount
Rate
Investment
Rate 1/
98.647
98.593
98.597
5.353%
5.566%
5.550%
5.52%
5.74%
5.72%
Price
Discount
Rate
Investment
Rate 1/
96.987
96.953
96.969
5.960%
6.027%
5.995%
6.25%
6.32%
6.29%
Tenders at the low price for the 13-week bills were allotted 66%
Tenders at the low price for the 26-week bills were allotted 92%
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
1
Boston
5
49,070,000
New York
4,039,050,000
Philadelphia
41,210,000
Cleveland
133,670,000
Richmond
43,445,000
Atlanta
41,455,000
Chicago
329,455,000
St. Louis
59,035,000
31,865,000
Minneapolis
46,970,000
Kansas City
42,200,000
Dallas
San Francisco 489,955,000
TOTALS$5,347,380,000
Accepted
$
38,070,000
2,298,630,000
40,670,000
73,670,000
39,290,000
34,105,000
142,620,000
38,035,000
19,185,000
41,970,000
22,200,000
412,895,000
Received
i
Accepted
22,550,000 $
19,220,000
:• $
': 4,176,610,000 2,670,970,000
68,095,000
51,695,000
.:
:
118,025,000
88,025,000
78,560,000
62,540,000
:
20,225,000
18,725,000
::
289,660,000
205,660,000
:
44,365,000
21,365,000
::
59,700,000
52,700,000
:
.
26,350,000
21,350,000
29,965,000
24,965,000
•
267,965,000
163,085,000
:
$3,201,340,000 a/$5,202,070,000 $3,400,300,000b/
a/lncludes $485,755,000 noncompetitive tenders from the public.
^/includes $182,100,000 noncompetitive tenders from the public.
27 Equivalent coupon-issue yield.
WS-499
hDepartmentoftheTREASURY
ASHINGTON, D.C. 20220
TELEPHONE 964-2041
l
r
FOR IMMEDIATE RELEASE
December 2, 1975
RESULTS OF TREASURY'S 139-DAY BILL AUCTION
Tenders for $2.0 billion of 139-day Treasury bills to be issued
on December 5, 1975, and to mature April 22, 1976, were opened at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price
Discount Rate
Investment Rate
(Equivalent Coupon-Issue Yield)
6.02%
6.08%
6.06%
97.766
5.786%
High
97.742
5.848%
Low
Average 97.752
5.822%
Tenders at the low price were allotted 20%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL
Received
Accepted
$
41,640,000
3,379,585,000
75,255,000
100,300,000
64,225,000
18,265,000
650,125,000
32,850,000
95,100,000
28,255,000
12,855,000
789,620,000
$
$5,288,075,000
$2,001,275,000 1/
1/ Includes $ 81,675,000 noncompetitive tenders,
WS-505
10,640,000
785,585,000
75,255,000
50,300,000
29,425,000
5,515,000
356,875,000
15,250,000
32,600,000
21,255,000
855,000
617,720,000
\e Department of theTREASURY
;HINGTQN,D.C. 20220
TELEPHONE 964-2041
FOR RELEASE AT 4:00 P.M.
December 2, 1975
3?^
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $ 6,200,000,000 > or
thereabouts, to be issued December 11, 1975, as follows:
91-day bills (to maturity date) in the amount of $2,900,000,000* or
thereabouts, representing an additional amount of bills dated September 11, 1975,
and to mature March 11, 1976
(CUSIP No. 912793 YX8), originally issued in
the amount of $3,202,095,000, the additional and original bills to be freely
interchangeable.
182^day bills, for $3,300,000,000, or thereabouts, to be dated December 11, 1975,
and to mature June 10, 1976
(CUSIP No. 912793 ZL3).
The bills will be issued for cash and in exchange for Treasury bills maturing
December 11, 1975, outstanding in the amount of $5,494,825,000, of which
government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,583,300,000.
These accounts may exchange bills they hold for the bills now being offered at
:he average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and non:ompetitive bidding, and at maturity their face amount will be payable without
interest. They will be issued in bearer form in denominations of $10,000,
?15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
>ook-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
me-thirty p.m., Eastern Standard time, Monday, December 8, 1975.
'enders will not be received at the Department of the Treasury, Washington.
^ach tender must be for a minimum of $10,000.
multiples of $5,000.
Tenders over $10,000 must be in
In the case of competitive tenders the price offered must
(
e expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
'factions may not be used.
Banking institutions and dealers who make primary markets in Government
WS<04
(OVER)
33/
securities and report daily to the Federal Reserve Bank of New York their position,
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.
Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on December 11, 1975,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing December 11, 1975.
ment.
Cash and exchange tenders will receive equal treat-
Cash adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notio
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from any Federal Reserve Bank or
3^
FOR RELEASE AT 2:00 P.M.
TUESDAY, DECEMBER 2, 1975
KEIIARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
AT PACEM IN TERRIS IV
WASHINGTON, D.C., DECEMBER 2, 1975
Mr. Hutchins, Mr. Compton, Mayor Bradley and Ladies and
Gentlemen:
In recent years, this forum has distinguished itself as
one of the most stimulating in the Nation, and I feel honored
to participate here today.
My remarks this afternoon will focus primarily on the
international economic policies of the United States and
what we are seeking to accomplish through those policies.
In some quarters, there is an unfortunate tendency to view
those policies as being either irrelevant to the average
family or too esoteric for a layman to understand. I hope
that impression can be corrected, for our foreign economic
policies bear heavily upon the fortunes not only of the
international community but of the United States itself.
Economic events of the last two years have been the
most tumultuous in more than a generation. Most of the
nations of the world have been confronted with brutally
sharp and unanticipated increases in the cost of energy,
inflation of unparalleled strength, and a harsh recession
that has left millions unemployed. Public confidence in the
industrial democracies has been shaken, and relations
between the advanced nations, mostly to the north, and the
less developed nations, mostly to the south, have been
noticeably frayed.
During the 19 20s and 19 30s, the Western World learned
what could happen if their governments were unable to master
the forces of inflation and depression. As human hardships
spread, social and political divisions widened within societies,
civil strife broke out, nations scrambled to regain their
prosperity at the expense of their neighbors, and ultimately
there was war.
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I do not suggest that we are lurching down the same
path today, but it is apparent that the restoration of
economic stability and renewed growth must be a foremost
concern of the international community. Economic security
is the bedrock upon which a structure of world peace can be
built; unless we achieve that security for the world's
people, we will be building on sand.
The United States is acutely aware of its responsibilities
as a world leader, and no nation has been more deeply involved
in shaping a cooperative international economic order — an
order in which both peace and economic prosperity can flourish.
The core of our international economic policy is a dedication
to certain fundamental principles:
To promote a free, cooperative and open order for
world trade and investment;
To avoid beggar-thy-neighbor policies;
To maintain a strong U.S. economy and a sound U.S.
To assist the developing nations in becoming more
economically self-sufficient;
To respond promptly and effectively to structural
changes in the world economy such as the changed energy
balance; and
To seek, in concert with other nations, the development
of international economic arrangements which meet changing
conditions.
In pursuit of these principles, we have worked closely
with other nations to begin developing what we believe to be
realistic solutions to the very serious problems now faced.
There has not been a great sounding of trumpets, but there
has been quiet, meaningful progress on many fronts.
Broadly speaking, the international economic challenges
we face are three-fold: To achieve durable, non-inflationary
growth for the world economy; to utilize the world's natural
resources most effectively; and to find means of promoting
prosperity among the developing nations. Let me address
each of these separately.
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NON-INFLATIONARY GROWTH
The most urgent task that lies before us is to work
together in restoring a broadly based, forward momentum to
the world economy which will provide the foundation for
sustained, non-inflationary growth.
Certainly, the United States bears a heavy responsibility
in this endeavor. You will recall that a quarter cf a
century ago it was commonplace to observe that when the U.S.
sneezed, the rest of the world caught a cold, and when the
U.S. got a cold, the world came down with pneumonia. That is
no longer as true today as it was then. Yet this country is
still the major economic force in the world. With less than
6 percent of the world's popluation, we account for over 25
percent of the world's annual production. Our exports and
imports are each running about $100 billion a year — more
than that of any other single country and more than the
Gross National Product of all but a few countries.
The health of the United States economy thus remains
very important to the economic health of other nations. The
most significant contribution we can make to economic progress
in the world is to restore durable prosperity here at home.
/' President Ford said in his State of the Union address
Inst January: "A resurgent American economy would do more to
restore the confidence of the world in its own future than
anything else we can do."
This does not mean that we must shape our own domestic
policies to suit the particular needs of other nations. We
continue to believe that the solutions to every nation's
economic problems must begin at home. Of course, in a
highly interdependent world, it is essential that nations
pursue a course of close cooperation and consultation in
their economic policies. But international discussions
and international agreements must be a complement to —
not a substitute for — sound economic policies within
each country.
It is axiomatic that the success of American
foreign policy today rests more heavily upon the strength
of our domestic economy than ever before in our history.
337
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Only if our voice reflects effective economic policies at
">ome can we speak effectively in chancelleries abroad.
Only with a growing economy can we maintain a strong national
defense and also afford socially desirable domestic programs.
If we have a strong economy at home, we will be strong abroad.
But if our domestic economy is weak, so, too, will be our
foreign position. Much of what we can do beyond our own
shores thus depends upon what we achieve here at home.
One of the main tenets of U.S. foreign policy which is
especially crucial today is our advocacy of reduced trade and
investment barriers between nations. This country has
traditionally been an outspoken and vigorous proponent of
a free and open international trading community, and our
voice carries a special weight. We know that with fewer
restrictions, international trade could again serve as a
powerful engine for international growth and as a means
of reducing the pressures of inflation.
It will not be enough merely to resist protectionist pressures
at a time of economic stress; we must also push ahead with
our efforts to liberalize existing restrictions. That is
why the U.S. regards the current multilateral Trade Negotiations
as so important. One of the most important understandings
reached at the recent Economic Summit was to accelerate the
pace of those negotiations, seeking to reduce or eliminate
many tariff and non-tariff barriers. We have agreed to try
to conclude those negotiations by the end of 1977.
are alS(
i
l seekin9 better ways to balance the desire
fnr ™tlnde e
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^
P ndence with the reality of growing international
H ' I T ;
" i S C l e a r t h a t w h e n t h e Policies of the
better o f i ^ M d e m ^ r a c i e s * r e mutually supportive, we are
e x 2 ? ^ n n f " -J£enu h G y a r e lnco ™Patible, we all suffer. Our
I h n n ^ H T W l t h " be ^ar-thy-neighbor" policies in the 1930 's
U
econimii ^
° t°Ubt a b ° U t t h e n e e d f o r a h i 9 h degree of
fo? "nnf C O ° P ^ a t l o n a™°ng nations. Yet we are not ready
foverp?™??
' / n d W G m a Y n e v e r b e ' W e w i s h to retain our
under S E S ' ** ° ° t h e r n a t i o n s - The only practical answer
teken w ^ h V i r C U m S t a n c e s i s intensified cooperation, underh oro 1 5 ° , a sense of realism and an understanding of
tne problems of others.
has <,SiLn0rldwi?e recession' the most severe in 40 years,
has shaken many Western institutions to their foundations
3B±
and has threatened to destroy some of the cooperative
international mechanisms which have evolved since World War
II. Fortunately, however, instead of seeking independent
solutions, the reaction of the Western democracies has taken
the form of increased multilateral cooperation, culminating
in last month's economic summit. I believe that during the
past year we have strengthened the framework for economic
and financial cooperation. We have intensified negotiations
to reduce barriers to world trade. At the very moment when
history suggested that trade tensions would be the most
severe, we have signed a new pledge to avoid trade restrictions,
recommiting our nations not to seek solutions to our problems
at the expense of others. We have negotiated a Financial
Support Fund, now awaiting Congressional approval, to assist
the major nations in dealing with external financing problems
brought on by the OPEC cartel. And at our International
Monetary Fund and World Bank meetings here this fall as well
as the Economic Summit, we have reached accord on the three
major monetary issues relating to gold, IMF quotas, and
exchange rates — an accord which I believe has paved the
way to reaching a comprehensive monetary agreement this
January.
All of these measures give substance to the "spirit of
Rambouillet," as it has been called -- to the vow by President
Ford and other world leaders that the recovery will not falter
and there will be no new outburst of inflation. To identify
our mutual problems and to work together in solving them
will demonstrate, as we must, that the industrial democracies
remain the masters of their own destiny.
DEVELOPING THE WORLD'S NATURAL RESOURCES
The difficulties of achieving stable growth serve to
highlight a second necessity — that of accelerating development
of the world's natural resources.
All too often the headlines on resource development are
dominated by two schools of thought:
— First, there are the chronic pessimists who argue
that we are running out of raw materials so that we must
cut back on our standard of living and reconcile ourselves
to paying the economic and political prices demanded by some
producers;
-- Alternatively, there are those who believe that
there can be a prompt government solution to every problem.
They would create a complex system of indexed prices, commodity
agreements, and government trading companies.
333
The trouble with both of these schools of thought is
that they are based on a static concept of the world which
fails to recognize the dynamic nature of current events.
The pessimists have a point. But it is not that we are
in danger of running out of raw materials. Rather it is
that the poor investment climate in many less developed
countries, particularly for extractive industries, has
meant that investment has gone to developed countries even
though the potential for resource production was lower
there. Thus a basic need is to find means to ensure that
capital can be invested where it can be most efficiently
used.
In this respect, a few developing countries inflict an
immense amount of harm upon development in all developing
countries through expropriations and similar actions. The
developing countries need the capital, technology and
management which can flow best from private firms.
Some of the developing countries believe that foreign aid
can substitute for private investment. That is patently
untrue. Indeed, I would argue strongly that foreign aid —
bilateral or multilateral — should not be used to compensate
for a country's unwillingness to adopt sound economic policies
and to establish a healthy, open investment climate. Some
developing countries also believe they can attract private
capital regardless of their expropriation policies or
the resolutions they push through the U.N. This is not the
case either. Private investors are understandably reluctant
to place their funds in areas of high risk; that shouldn't
be much of a surprise to anyone.
The second school of thought -- the interventionist
school — is even more closely attuned to an economically
and technologically stagnant world. Indexation schemes
attempt to freeze price relationships, which quickly leads
to the necessity of controlling production. The producer
becomes more and more detached from real market forces and
thus dependent for his welfare on the artificial pricing
system. The United States has taken the position that it is
willing to discuss commodity agreements on a case-by-case
339
basis, but
agreements
not to fix
ments only
expensive.
let us recognize that the objective of such
should be to combat excessive price instability,
a high level of prices. Otherwise such agreemake the market more inefficient and needlessly
Expropriation, indexation, cartelization -- these are
the false gods of many who seek a New International Economic
Order. They are not the answer for either the developing
nations or the industrialized nations, and the sooner we all
understand that, the sooner we can complete the building of
more solid foundations for worldwide economic progress.
The challenge before us is to find ways to maintain and
improve the basic market mechanisms while limiting the
adverse effects that can sometimes be created in the market.
This was the essence of the plan that the United States
proposed this summer to assist developing countries which
suffer from excessive drops in their export earnings. We
want to help the countries which export raw materials stay
on the road to economic prosperity, but at the same time we
also want to preserve the free market mechanisms which we
consider to be crucial to the health of the entire world
economy.
There has been no more critical deviation from reliance
on the market mechanism than in the field of petroleum. The
prices now charged by the OPEC nations for their oil bear no
relationship to economic realities; they are strictly political
in nature.
All of us know the issue of energy has a direct impact
upon every consumer and every worker in the country -- and,
indeed, upon our national security. Higher costs for energy
have become a major component in our inflationary spiral. In
the last five years, the cost of our dependence on OPEC and
other foreign oil has risen from $3 billion a year to over
$27 billion a year. And today we are even more vulnerable
to an embargo than we were two years ago. It has been
estimated that the last embargo cost the U.S. economy a half
million jobs and the loss of $10-20 billion in potential
growth. Moreover, it strained our system of alliances
perhaps as much as any other single event since World War II.
It is abundantly clear that in order to deal with the
blackmail of the oil-exporting countries, we must accelerate
the development of our own energy resources. We must start
thinking of the energy crisis in terms of American jobs,
homes, food, and financial security. Our economic wellbeing and national security depend upon greater American
control of the American economy.
As long as the OPEC nations think they can treat us
like patsies, thev will. We cannot jeopardize the future by
avoiding tough energy choices today. We must pay the price
necessary to give us command of our own economic destiny.
We have enormous energy resources of our own, but they
are not being effectively utilized because we have erected
one government impediment after another to the domestic
production of oil, natural gas and coal. It is imperative
that the Congressional and Executive branches work ~~re
closely together to dismantle these barriers so that we can
make much more significant progress toward energy selfsufficiency. For consumers, a return to more conpetitive
energy markets would mean slightly higher prices in the
short run, but over the long run, as domestic
production increases t h e payoff will De
very substantial: there will be more energy supplies for
consumers, prices of energy will fall, and most importantlv,
the economic fortunes of our people will no longer be ac the
mercy of those who do not always share our best interests.
ASSISTING THE DEVELOPING WORLD
Those who have been most devastated by the manipulation
of oil prices -- and those who are of critical concern to
us -- are the developing nations.
The United States does not have to feign an interest
in the aspirations of the developing nations. Less than a
century ago we ourselves were a developing nation. Our
interest now in the progress of other nations, as demonstrated
by our record of assistance over the years, is politically,
economically and commercially genuine. We should never
forget that since World War II, we have provided over $110
billion in humanitarian and economic assistance -- an
unparalleled record.
Much of what we have done to assist the developing
world has been governmental in nature -- such ^s-fchePoint 4
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ii^
program, PL-480, and initiation and support for the World
Bank and other international financial institutions. We
have been and remain today the biggest contributor to all
the major international financial institutions. More recently,
Secretary Kissinger and I have put forward additional positive
and constructive proposals for governmental assistance,
including a Trust Fund to make concessional funds available
to the poorest countries; the new IMF facility to provide
compensatory financing in the case of export shortfalls; and
a major expansion of the IFC.
Yet our partnership with tlie developing countries
depends even more heavily on the activities of the private
sector -- the manufacturers, the banks, and all the other
entrepreneurs who have accepted the challenge of doing
business in the developing countries. We recognize the
continuing needs of the poorer developing countries for
official assistance, but at the same time the more successful
developing countries should move away from dependence on
foreign aid to greater reliance on private capital flows to
supplement their own efforts. We have no interest in trying
to dictate the internal economic policies of other nations.
We respect their independence and welcome their respect for
ours. But we are firmly committed to the belief that the
best model for economic prosperity is a system which unites
freedom of commerce with freedom of the individual. And we
are confirmed in our belief by recent history -- history which
shows that the developing nations which have achieved the most
progress have been those which have adopted sound economic
policies at home, removing barriers to trade and investment,
working to reduce inflation, efficiently utilizing their own
resources, and offering private enterprise a safe and secure
home. The record is there for all to see.
In the area of trade, we urge the developing countries
to accept obligations that other countries have accepted,
granting reciprocity and promoting more open trading arrangements. We recognize the need for differential treatment for
poorer countries, but we should work to phase oat such
special treatment as their circumstances improve.
We also believe that as the basis for cooperation
between nations evolves, we must preserve the fundamental
principles -- the principles of free trade and open investment -on which our common prosperity depends. We must seek increased
production and improved efficiency, not just the transfer of
wealth. Foreign aid should not be considered an international
welfare program, but an important element of an international
investment program which can provide a higher standard of
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327
living for every nation. What we're trying to do, in essence,
is to help others help themselves. That, we believe, is a
worthy goal and one that permits the developing countries to
fulfill their desire for self-determination.
We are all aware of the pressures generated for a socalled "New International Economic Order". Certainly,
improvements are needed in the international economy. We
are actively engaged in discussions and negotiations
to improve existing arrangements, and we are confident that
progress will be made. But to the extent that elements of
the New Order conflict with the basic principles of more
open trade and investment, we must decisively reject them.
These principles must remain of fundamental importance
to us — they are, after all, what we stand for as a people.
It seems to me often inadequately appreciated that our
private enterprise system is at the heart of our political
and social freedoms. If we fail to speak out in its defense,
who will? Even though the number of democracies in the
world has dwindled to little more then two dozen, many
responsible leaders in the developing nations still share
our confidence in our principles. They must have the
encouragement of our support, not the discouragement that
would come if we abandoned our own principles.
And let me add this note: some within our own country
say that our principles are outmoded and no longer work. I
couldn't disagree more. Our principles haven't failed us in
the last few years; we have failed to live up to them. The
explosive growth of government, huge budget deficits, accumulating
debt in both the public and private sectors -- these certainly
aren't a reflection of the principles upon which this nation
was built. And we all know that.
To return to the subject at hand, there is one other
proposition that we must also reject as a nation: the
proposition that all of the economic problems of the developing
nations can be corrected simply by ehanqinq the international
economic order. The oil pricing schemes of OPEC and the
impact of the recession have obscured the fact that many of
the developing countries prospered during the last worldwide
expansion, and in my judgment, they will do so in the next.
There is no illusion that is more damaging than the notion
that the aid policies of the industrial nations hold the key
to the economic future of the developing world. What is
true is that our own economic performance can help to create an
^7
environment in which their efforts can thrive. We can and
will continue to be generous in sharing our wealth and our
technology. But today, as in the past, let us recognize that
the economic fortunes of every nation reflect primarily their
own efforts, imagination and determination — not those
provided by a benefactor, no matter how well intended.
CONCULSION
Ladies and Gentlemen: I hope it is clear to you this
afternoon that in its economic relations with other nations,
the United States is firmly committed to several fundamental
policies:
— We are pledged to work with both developed and
developing nations in pursuit of greater prosperity for
mankind;
— We recognize that because our economy is the largest
and most dynamic in the world, we bear a heavy responsibility
to others. We also believe that by far the greatest
contribution we can make to international economic progress
is to follow sound economic policies at home.
— We believe that the world will best be served by
continued reliance upon free economic markets, not markets
controlled by governments or supranational organizations.
--- We seek to promote a free, cooperative and open
wide) lor world trade and investment. Our own doors are
open to investments by everyone, including the newly rich
nations of the oil world, and we favor open investment and
trade policies in other nations as well. We will not swerve
in our dedication to a more open trade and investment order.
— We will also continue to be a staunch friend of the
developing nations. Our interest will not flag. But we
shall also stand firm on our principles. And we shall insist
that friendship runs both ways. The United States does not
serve the cause of progress if it stands idly by while
foreign nations manipulate the prices of raw materials
without regard to economic realities or expropriate the
property of American companies without just compensation.
To become known as "the pigeons of the Western world" would
only create more instability and invite more aggression in
the world.
3^
-12The United States makes no pretext that all of our
international policy decisions of the past have been correct,
yet we believe that the world in which we live, and in which
our children will live, is a better world because we all
have worked together in shaping it. We will not turn inward
or shun our responsibilities. We believe that we are capable
of making a unique contribution to mankind. To hold out to
others the opportunity to join in our progress and freedom —
this must be the promise to which America is always committed.
Thank you very much.
0O0
eDepartment of theTREASURY N |}
TELEPHONE 964-2041
IHINGTON, D.C. 20220
December 2, 1975
MEMORANDUM TO CORRESPONDENTS
The attached address by Treasury Secretary Simon on
international economic issues was delivered in Washington
at 2 P.M. today at Pacem in Terris IV, a convocation on
foreign policy issues sponsored by the Fund for Peace and
the Center for the Study of Democratic Institutions.
oOo
WS-501
377
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS
AND HUMAN RESOURCES OF THE
HOUSE COMMITTEE ON GOVERNMENT OPERATIONS
DECEMBER 2, 1975, 9:30 A.M., EDT
Mr. Chairman, and members of the Subcommittee, I am
pleased to appear in response to your invitation to further
discuss General Revenue Sharing. You and your colleagues
are to be congratulated for the sound and judicious way you
have conducted these hearings. I am happy to be able to
make whatever further contribution I can to these proceedings.
As I stated here on September 25, the Administration
believes that the revenue sharing program has proved to be
highly successful and strongly recommends that it be continued in its present board outlines.
Revenue sharing has contributed to a revitalization of
our Federal system by shifting some resources to those
governments closest to the people, where there is often a
clearer perception of the needs of citizens in many areas
of public activity. Simply put, some tasks are better
performed by State and local governments, instead of being
directed from Washington.
Revenue sharing has placed funds where need exists.
It has given a greater measure of assistance to our hardpressed center cities than it has to their more prosperous
suburbs. It has aided low income States relatively more
than those with higher income populations.
The program has been free of the costly, and often
counter-productive, bureaucratic red tape, often associated
with Federal aid programs. Small and rural communities,
which often benefit little from other Federal assistance,
can participate in revenue sharing without engaging in
expensive and highly competitive !,grantsmanship,r.
WS-500
2
--
3^
The Administration's renewal proposal, H.R. 6558, is
balanced and well reasoned. It offers improvements where
experience has shown change will enhance the program—in
the areas of public participation, reporting and publicity,
civil rights, and allocation of funds.
H.R. 6558 continues a mode of funding for General
Revenue Sharing which assures sufficient certainty to State
and local recipients while allowing for further Congressional
and Presidential review of the program's performance.
Mr. Chairman, I know that you and the members of the
Subcommittee have spent many hours wrestling with proposals
for change in the revenue sharing allocation formula. The
Administration continues to believe that the solution reached
by Congress in 1972 to resolve this complex issue has proven
to be a remarkably good mechanism for distributing shared
funds. There is strong evidence to show that the present
formula succeeds in taking into account the factors of need
and governmental responsibility across this large and diverse
nation. It would be difficult to fashion a new formula that
works as well.
H.R. 6558 does propose one modification in the formula—
lifting the 145? per capita constraint on local entitlements
to 175? in five increments of six percentage points each.
This amendment would direct more money into some needy large
cities without causing a net dollar loss in funding to more
than a handful of jurisdictions now benefitting from the
constraint.
The needs of State and local budgetary planning require
that revenue sharing renewal legislation be approved by the
Congress as soon as possible. Forty-six States and many
local governments, whose fiscal years coincide with the
Federal fiscal year, are now planning their fiscal year 1977
budgets. Those whose fiscal years begin in January will be
doing so next spring. Revenue sharing funds are presently
authorized for only one-half of fiscal year 1977. The Federal
Government will create major planning problems for State and
local governments if it keeps them in the dark about revenue
sharing renewal.
Given the pressing need for action on the extension of
General Revenue Sharing, I urge this Subcommittee, and the
Congress as a whole, to enact President Ford's renewal
measure now. During the five and three-quarter year extension
period contemplated by that proposal, or at the end of that
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$9.5
period when the program is again thoroughly reviewed by the
Congress, adjustments can be made to the allocation formula.
Such an approach will give State and local planners the
advanced information about General Revenue Sharing renewal
that they need. It would also enable the Congress to give
complicated formula alternatives the careful, deliberate
study they require.
The Administration—and all members of this Subcommittee—
are committed to the Federal civil rights standard set forth
in the State and Local Fiscal Assistance Act prohibiting
discrimination by race, color, national origin or sex. Since
the inception of the program, it has been our intention to
ensure that revenue sharing funds are used in a nondiscriminatory manner, and provide equal benefits for all persons.
While this is a goal of great enormity that is yet to be fully
satisfied, the revenue sharing program has made other important
contributions to the goal of equal rights. The program has
extended Federal standards to many additional jurisdictions
and areas of governmental activity not previously covered.
Informational efforts on the part of the Office of Revenue
Sharing have made recipient governments better aware of their
responsibility to provide equal opportunities for all citizens.
Further, the civil rights efforts of other Federal agencies,
such as the Equal Employment Opportunity Commission, and the
efforts of State Human Rights agencies are being strengthened
through exchanges of information with the Office of Revenue
Sharing and through the sanctions that are available if shared
revenues are found to be involved in a program that they are
investigating.
: The Administration has sought additional civil rights
Our renewal proposal would provide the Office of Revenue
staffing for the Office of Revenue Sharing during the past
Sharing with a more flexible array of sanctions to be used
two fiscal years—more staffing than the Congress has allowed.
where needed to achieve compliance. This change is necessary
to assure that the flexibility exists to withhold all or a
part of a government's entitlement. It can be argued that
the existing statutory framework does not permit partial
withholding.
Recently, after carefully considering the comments of
civil rights organizations and others, the Office of Revenue
Sharing issued improved nondiscrimination regulations. This
-if-
$w
is an important step to set forth compliance standards
for recipient governments and affected parties who have
previously not been covered by similar law.
We know that this Subcommittee has heard criticism
that the Office of Revenue SharingTs Civil Rights Enforcement program needs strengthening. We agree. The Office of
Revenue Sharing has already taken a number of steps to
improve the efficiency of its complaint resolution process.
The addition of more civil rights compliance officers to
the staff will help a great deal. Further, the Office of
Revenue Sharing has developed an improved case workload
control system to help keep track of the status of various
cases and to let them know which ones need priority attention
This system also gives the Office of Revenue Sharing the
capability to analyze its caseload from the standpoint of
more efficient utilization of staff.
Other improvements in procedures which the Office of
Revenue Sharing is making are reorganization of its staff;
greater formalization of working procedures; better record
keeping; and improvement of the violation determination
letter which goes to a recipient government found not to be
in compliance.
I call your attention to these initiatives to emphasize
the commitment of the Treasury Department to eliminate
illegal discriminatory use of revenue sharing dollars. The
Office of the Secretary of the Treasury has just completed
a thorough review of the Office of Revenue Sharing Civil
Rights compliance program. This review has carefully considered criticisms raised by various outside studies and
in Congressional deliberations. We will promptly review
what further administrative reforms can be implemented in
an effort to better assure compliance with the Act. We will
report to you on this matter within the next couple of weeks.
Additionally, I stand ready to have Treasury and the Office
of Revenue Sharing work with the Subcommittee to assure that
your concerns in this area are met.
There are two other important ways, aside from its
compliance efforts, in which the General Revenue Sharing
program has benefited minorities and the underprivileged.
We think that decisions about the use of General Revenue
Sharing entitlements, as well as concern that funds not
support discriminatory activity, have lead to greater involvement in community affairs at the State and local levels by
37<r
civil rights organizations. About one-half of the revenue
sharing civil rights compliance cases have been initiated
by organizations. The publicity and public participation
requirements of the Act have focused attention on revenue
sharing spending decisions. They have enabled citizen
groups to get a better perspective on the political processes
in their communities and on where to f:weigh-in" with their views.
Secondly, the Administration is confident that revenue
sharing funds themselves are of much greater benefit to the
poor and minorities than may appear at first glance. We
know that low income States and urban centers receive larger
than average per capita General Revenue Sharing allocations.
States spend large portions of their General Revenue Sharing
funds on education. Social concerns are addressed by some
capital expenditures reported by recipient governments.
Expenditures made in functional areas such as transportation,
health, or environment often benefit the poor and the aged.
Finally, the presence of revenue sharing money frees up State
and local resources for programs to meet human needs.
We believe it is important to improve the effectiveness
of the requirements under which recipients report information
about revenue sharing expenditures to citizens and to the
Federal Government. H.R. 6558 would give more discretion to
the Secretary of the Treasury to prescribe reporting and
publicity requirements that are varied by type of recipient
government. This will make them more informative while not
imposing unneeded burdens on our States and communities.
Reporting and publicity standards are among the few
Federal restrictions attached to use of General Revenue
Sharing entitlements. The Administration is proposing one
additional closely-related requirement: that recipient units
assure the Secretary of the Treasury that a public hearing
or some appropriate alternative means is provided by which
citizens may participate in decisions concerning the use of
revenue sharing funds. This provision, as well as our
proposals in the reporting and publicity areas, will help
the revenue sharing program better accomplish its goal of
bringing government closer to the people.
We think that the changes we are urging in these areas
will serve their purpose without putting an unnecessary
burden on States and on communities of diverse size and with
varied political processes. Strict and pervasive requirements
are contrary to the goals of the General Revenue Sharing
program and would reduce its effectiveness. The program
2M
should not, as some have proposed, be redesigned to
experiment with the traditional rights of our citizens
to local self-government. General Revenue Sharing, which
normally represents a limited portion of the resources
available to the recipient governments, does not have great
ability to serve as an incentive for restructuring the local
government process. In most instances revenue sharing funds
have been conscientiously allocated to meet real needs—
significant needs in such areas as education, public safety,
transportation and health.
I urge that the Subcommittee favorably report H.R. 6558
which would continue General Revenue Sharing as it presently
exists. The program has a continuing role to fill—that of
providing effective, unencumbered, Federal assistance which
strengthens State and local governments so that they can
better meet their own special needs.
Mr. Chairman, I will now respond to the Subcommittee's
questions.
tDepartmentoftheJREASURY
SHINGTON, D.C. 20220
TELEPHONE 964-2041
l
7
FOR IMMEDIATE RELEASE
Contact: D. Cameron
Extension 2951
December 3, 1975
TREASURY DEPARTMENT ANNOUNCES FINAL
COUNTERVAILING DUTY DETERMINATION ON
FLOAT GLASS FROM FRANCE
Assistant Secretary of the Treasury David R. Macdonald
announced today a final negative determination in the countervailing duty investigation of float glass from France. On
June 30, 1975, a preliminary negative determination on the subject merchandise was published in the Federal Register. Under
the Countervailing Duty Law (19 U.S.C. 1303 as amended) the
Treasury had until January 3, 1976, in which to make a final
determination.
Interested persons were given an opportunity to submit
written comments on the preliminary determination. No information has been received that would change the basis for the
preliminary determination.
Accordingly, this final determination indicates that no
bounties or grants, within the meaning of the Countervailing
Duty Law, are being paid or bestowed on the manufacture,
production or exportation of float glass from France.
Notice of this decision will be published in the Federal
Register of December 4, 1975.
* * *
WS-506
FOR RELEASE ON DELIVERY 8:30 PM, EST
WEDNESDAY, DECEMBER 3, 1975
3
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
AT THE
TAX FOUNDATION'S 27TH NATIONAL CONFERENCE
NEW YORK CITY, DECEMBER 3, 19 75
Since history has a habit of repeating itself, I'm sure
I'm not the first Secretary of the Treasury who has reached
the conclusions I want to discuss with you tonight. And no
doubt, I will not be the last. But the time has come for a
little plain talk about a subject that is important to all
of us: our taxes.
The system of Federal taxation which has evolved since
the early days of the Republic is in trouble today.
And after several years of seeking to reform the system,
I am increasingly persuaded that tinkering may no longer be
the answer.
Let me elaborate for a moment about the difficulties of
the tax system.
First, it is readily apparent that the Federal tax
system is poorly structured for a period of rampant inflation.
Millions of taxpayers now legitimately complain that the
extraordinarily high rates of inflation we have experienced
recently have hit them with a double whammy: at the same
time that inflation is eroding their real purhcasing power,
it is also pushing them into higher tax brackets.
Secondly, because of the rapid growth in the size of
government at all levels since the early 1960's, the portion
of personal income that must be paid into Federal, state,
and local tax coffers is rising steadily. Many of you are
familiar with the Conference Board study published this
spring showing that the item which rose the fastest in the
American family budget during the last six years was taxes.
While the general cost of living climbed about 40 percent during
that period, the total bill for taxes — Federal, state, and
local — jumped by 65 percent.
WS-507
f
.37?
Thirdly, it is becoming more widely recognized now that
the Federal tax system is discouraging savings and investment
when we need three times as much investment in the next
decade as the last decade. By taxing corporate profits
twice — once at the corporate level and then at the level
of the shareholder — the United States is imposing a
heavier tax burden on its business enterprises than in most
other major industrialized nations of the Free World. And
by allowing corporations to deduct interest payments on
their debt but refusing to allow deductions for their
dividends, the tax system is encouraging businesses to rely
too heavily upon the debt markets, so that the corporate
financial structure is increasingly unbalanced. Economists
are properly cautious in saying that the way we collect taxes
may not totally determine how much we save and invest.
But the fact is that the share of our GNP devoted to capital
investment over the last 15 years has been lower than in the
economies of any of our major competitors. We have also
had one of the poorest records in terms of productivity gains
and in terms of real income growth. Furthermore, our recent
unhappy experience in terms of high inflation is in part
attributable to past inadequate capital formation.
The Federal tax system has been a major influence on all of
these developments.
Finally, it has become painfully obvious to most
taxpayers that the present tax system is so riddled with
exceptions and complexities that it almost defies human
understanding. No one can adequately assess its basic
fairness. The complexities have reached a point where I'm
not even sure the IRS experts fully understand the system
anymore. How can they when they are dealing with a tax
code and regulations that now exceeds 6,000 pages of fine print?
You may remember the informal survey conducted a few years
ago by an executive
- 3 -
in Atlanta, working in conjunction with The Wall Street
Journal. This executive visited five different IRS centers
around the country, presenting to each of them the same set
of facts about his income and possible deductions and then
asking how much tax he should pay. The result? Five different
answers, varying by as much as $300 in how much he owed.
The offices could not even agree on how many forms he should
fill out.
In these circumstances, it is hardly surprising that
two taxpayers out of every five now seek outside assistance,
usually at some expense, to complete their tax forms. It is
even less surprising that more than three quarters of the
American people now want the tax code changed, and some 50
percent want major changes. There is a widespread feeling
that the system favors the rich at the expense of working
families.
As everyone in this chamber knows, the success of our
tax system rests upon the voluntary compliance of our taxpayers. If there were widespread abuses of the system, we
could not possibly police them. Yet, when people lose faith
in the basic fairness of the system, it almost inevitably
follows that the system itself will falter. In fact, the
rate of compliance has begun to drop in recent years. We
are faced, as former Treasury Secretary Joseph Barr first
observed almost 10 years ago, with an incipient taxpayers
revolt.
The fear of a revolt has not been lost upon Washington,
but so far, I'm afraid, attempts to reform the tax system
have fallen far short of the mark. I say this with full
appreciation of the herculean labors performed by the House
Ways and Means Committee under Wilbur Mills and by the
Administration in securing passage of the 1969 Tax Reform Act.
That act did help to simplify the tax system: some 8 million
low-income taxpayers (poverty level or below) were removed
from the tax rolls altogether, and another 11 million taxpayers were offered greater incentives to use the standard
deduction, avoiding the time and trouble of itemizing their
deductions. Nonetheless, considering all the labors that
went into that bill, it was a great disappointment to those
who were seriously interested in tax reform. If anything,
the 1969 act, like the Revenue Act of 1971, was really more
of a lawyers' and accountants' relief bill. There is still
- 4 -
a decisive need to overhaul the code. I speak with some
feeling on this because nearly three years have passed since
the Executive Branch proposed a comprehensive series of
changes, and most of them are still awaiting final Congressional
action. I know that many Members of the Congress have
shared my frustrations this year as they have watched the
House Ways and Means Committee spend literally thousands of
man-hours on a complex series of changes in the Code, only
to have their efforts watered down at the last minute. As
of tonight, there is a strong possibility that serious attempts
to change the system will be put off until 1976, and possibly
until after the election.
Given these circumstances, I would suggest three major
steps must be considered.
First and foremost, it is now incumbent upon elected
leaders at every level of government to halt the relentless
upward spiral in public spending. By cutting back on the
growth in spending, we can also cut back on the growth in
taxes and thus do as much to alleviate the distress of the
taxpayer as any single reform could ever accomplish. We do
not have financial resources to afford all of the bold new
programs that have traditionally gotten people elected, and
a large portion of our body politic now believes that government has already assumed too much responsibility within our
society. Clearly, as the government has become more pervasive,
the vitality of the private sector has diminished. In an
illuminating article published this fall, the President of
Stanford University argues that the Government has pre-empted
so many responsibilities in education that it is now forcing
many private universities and colleges to the wall. That
same trend prevails elsewhere, and it is the taxpayer -victimized by the very system that supposedly represents him
-- who is forced to pay the bill, either through higher taxes,
higher inflation, or both.
Restraining the growth of public spending is essential
if we are to defuse the taxpayers' discontent. Equally
important, by holding down spending, we will begin to return
to the taxpayer the ability to control more of the economic
decisions that affect his life. The choice about how to
spend his earnings will not be made so often in Washington
but in his own home. That is the essence of economic
2&
freedom, and in a very real sense it is also at the heart of
our political and social freedom.
The proposal that President Ford has made to the Congress
to cut projected spending for next year's budget by $28
billion and to return the savings dollar-for-dollar to the
American taxpayer is a clear recognition of the linkage
between spending and taxes. We have tried every other
technique to restrain spending, and the Congress has turned
a deaf ear. This one, the President believes, may be our
last best hope. Moreover, by lowering taxes, it would help
most taxpayers overcome the effects of past inflation on
their tax liability.
Some economists are arguing that the President should
sign tax cut legislation regardless of what the Congress
does about spending. I am not persuaded by their argument.
Whether or not we enact another tax cut immediately may not
have a significant impact upon our immediate economic hopes;
however, whether or not we bring spending under control and
work our way out of horrendous budget deficits will most
assuredly have a significant impact upon our hopes for the
future. We must finally say no to the apologists for big
spending, rejecting their misguided notions that the Government
can identify, analyse and solve every problem by throwing
more money at it.
A second step that I believe essential is to achieve
fundamental reforms in the way we tax business profits -reforms that will provide a stronger bulwark against future
economic contractions; reforms that will help to redress the
imbalances in corporate balance sheets and broaden equity
ownership; and reforms that will encourage the levels of
savings and capital investment that are so vitally needed
for our future.
Toward these ends, the Administration this summer
proposed to the Congress a "Tax Program for Increased National
Saving." This proposal would eliminate the double taxation
of corporate earnings which I mentioned earlier. I strongly v
believe that this proposal -- which has already been adopted
in one form or another in most of the other major industrialized
countries -- would make a significant contribution toward
financing our capital investment needs of the future. Moreover,
- 6 -
10
it is the only major tax proposal of which I am aware that
comes to grips with the growing imbalance between corporate
debt and equity.
Some observers have asked whether the President's
subsequent request for a cut in taxes, linked to a cut in
projected spending, means that the Administration has shelved
its tax integration proposal. Let me set the record straight:
the Administration stands four-square behind both measures.
We regard the tax cut/spending cut as an item on the immediate
agenda, and we remain hopeful that the Congress will act
favorably on it this year. The tax integration measure is
much more complicated and will require extensive hearings
and debates so that, while we would like to have it passed
quickly, we recognize that in reality it will require more
time to enact. But both proposals still have our whole-hearted
support.
Let me turn now to the third and final step that I
personally believe we should begin considering with regard to
our tax system. This is a concept that has been suggested
from time to time but it has rarely been given serious consideration. It is simply this: to wipe the slate clean of
personal tax preferences, special deductions and credits,
exclusions from income, and the like, imposing instead a
single, progressive tax on all individuals.
I am increasingly attracted to the idea because of its
simple elegance and its basic equity toward all taxpayers.
For years, politicians have been telling us that the
tax system should be used to promote certain economic and
social goals. But should it really? Isn't this precisely
the kind of social engineering that lies behind so many of
our troubles today? What has caused more disillusionment
with government than the failure of government to deliver on
so many of its promises? What has caused more bewilderment
and distrust among taxpayers than the myriad of so-called
loopholes which now litter our tax code?
There have been many studies by responsible organizations
which indicate that if the special deductions and credits,
exclusions from income, etc. are eliminated or drastically
curtailed, we could revise the individual tax rates substantial)
downwards and keep our total income tax revenues at present
levels. Generally, it is suggested that rates could be set
at 10-12 percent at the low end and 35-40 percent at the
3^
high end. Thus a family of four with income of $15,000 might
have an annual Federal tax bill of $1,200; the lowest income
families would continue to pay no Federal income taxes at all;
and wealthier individuals would pay a tax of 35 percent on their
income over $50,000 — no ifs, ands, or buts. Everyone would
pay his or her fair share.
Looking at it another way, if every taxpayer was allowed
the standard deduction under the 1975 law but all other deductions were disallowed and capital gains and tax preferences
were taxed as ordinary income, revenues from the personal income
tax would increase by about $50 billion. Thus, even under this
partial step, personal income tax rates could be cut across the
board by about 30 percent without any loss of revenue.
Obviously, the wealthy taxpayer with income of $100,000
or more who is presently able to "shelter" his income will stand
to lose from this proposal. As noted before, all of this income
would be subjected to taxation at some significant rate rising
to 35-40 percent. On the other hand, the working men and women
of the country — families who earn $10,000 and $20,000 per year
— should benefit through reduced tax burdens. And let us not
overlook the fact that all citizens will benefit through increased public confidence in the tax system.
Developing the precise details of such a program would
clearly involve hard work. Significant political decisions
would also have to be made in establishing the tax rate schedules
which would be applied to the broadened tax base. But innovation
should be encouraged. For example, the idea of a consumptiontype income tax discussed by Assistant Secretary Walker here
today clearly merits further examination.
If we imposed a single, progressive tax on individual taxpayers, what should be done with corporate taxes? There are,
of course, several alternatives that could be considered. My
own predilection would be to press forward with the tax integration plan I mentioned earlier, and then to simplify the corporate tax itself in much the same way as we would the individual
tax. By eliminating preferences and closing loopholes -- that
is, by broadening the corporate tax base — we should be able
to effect a meaningful cut in corporate income tax rates without
any loss in post-integration revenues from this source. Regardless of what form the corporate tax may take, we must bear in
mind that ultimately corporations do not pay taxes:
people do. It is axiomatic that corporations are simply legal
entities. The revenues they turn over to the IRS come either
from their customers in the form of higher prices or from their
employees and shareholders in the form of lower salaries and
lower dividends. In the end, the corporate tax always comes
out of somebody's personal pocket. It never ceases to surprise
me how often that point is misunderstood.
For years we have been talking about tax reform, and the
Executive Branch continually sends up ad hoc measures that
predictably draw the fire of special interest groups and are
eventually overrun or changed beyond recognition by political
opponents. If we truly want tax reform, I say that here's a
place to start.
Let rne emphasize that I am not trying to float a trial
balloon for the Administration. I am speaking here tonight
strictly as a Secretary of the Treasury who shares the frustrations of so many Americans who want to bring greater equity
and rationality to our tax system and who believe that we must
now begin giving much more serious consideration to a tax
system that rests upon the twin pillars of fairness and simplicity
And I must say that I think I am also speaking for
millions cf Americans who are fed up with the current tax
system and want it replaced by one that they can both understand and trust. Indeed, I doubt there is anyone in this
audience who believes that if we could start over again, we
would build a tax structure similar to the one we have
today. As they say, if we didn't have it already, nobody
would ever invent it.
Americans have habitually complained about taxes. Tax
rebellions extend far back in our history. But during most
of our history, the majority of our people have agreed with
Justice Holmes that "Taxes are what we pay for civilized
society."
Let me reemphasize: The success of the American tax
system -- and we should always remember that it has been one
of the most successful in the world -- is that our citizens
voluntarily comply with its requirements. They pay their
taxes because they believe tnat others are also paying their
fair share, and because they are getting their money's
worth.
Over the years, as one new wrinkle has been placed on
top of another, the Federal tax system has come under increasing jeopardy.
pi?
We are threatening to erode basic faith in the fairness
of the system because many people feel that taxes are being
imposed upon them without their consent, that too many of their
fellow-taxpayers are escaping their responsibilities through
dozens of loopholes, and that the code itself has become a
labyrinth of legal double-talk. In short, for the average
taxpayers, the New Deal has given way to the Raw Deal, and
they don't like it one bit.
I think the time has come for some fundamental changes
and far more imagination about what we can accomplish as a
nation if we only overcome our hesitations and fears. Some
critics will tell you that what I am suggesting should be
dismissed as pure politics. The charge of politics is a
poor substitute for thinking. We have been talking and
talking about tax reform for years, but we have yet to act
in a comprehensive way. The question I leave with you
tonight is this: Do we or do we not have the courage to act
on our convictions? It's that simple.
Thank you.
-dOo-
Department of theTREASURY
•IINGTON, D.C. 20220
TELEPHONE 964-2041
37
FOR IMMEDIATE RELEASE
^
REMARKS OF THE HONORABLE CHARLES M. WALKER
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE TAX FOUNDATION CONFERENCE ON
"CAPITAL, TAXES AND JOBS"
NEW YORK CITY, WEDNESDAY, DECEMBER 3, 1975, 2:15 P.M.
"TAX PRIORITIES FOR ECONOMIC AND SOCIAL PROGRESS"
I appreciate the opportunity to talk with this group,
which is so well endowed with people who have given
thoughtful and serious consideration to tax policy issues,
and have had so much practical experience with the day-today operation of the tax code. I am especially pleased to
be joining on this panel men of such well developed and
articulated views on tax policy as Dr. Craig Robert, and
CharIs E. Walker.
As you know I come to the Treasury Department from a
long background in the practice of tax law and a long
interest in the improvement of our tax legislation. During
the last three months, I have been getting a crash course
in the inside functioning of the tax legislative process.
During the few moments of that period in which I have been
not sitting in sessions of the Ways and Means Committee, I
have found it very useful, both in and out of Washington,
to talk to various people interested in tax policy. These
talks have been with people ranging from those with a very
narrowly defined interest to those who are thinking about
the big reform picture. Today I hope you will help me in
my efforts to get some perspective on events in the recent
past and to lay the groundwork for progress in the months
and years ahead.
I use the phrase "years ahead" advisedly. There is
no doubt that tax legislation is importantly influenced by
the relatively short-run problems which dominate the
WS-513
attention of the Congress or an Administration at any one
particular time. This is inevitable and, obviously is
necessary, since many of the important effects of tax
legislation are felt in a relatively short period of time
and are suited to dealing with relatively short-run problems.
I need only cite the Tax Reduction Act of 1975/ with its
objective of short-term economic stabilization as an example.
Other problems of a similar nature are bound to recur and,
for many of these, adjustments in the tax code a^e likely to be
seen as the appropriate corrective instrument.
It may be thought that tax legislation is so much a
matter of conflicting interest that it is foolhardy for any
official to plan too far ahead. In the long run, however,
tax policy needs to be guided by the basic goals of
neutrality, simplicity and equity.
It would, of course, be convenient if we could somehow
wholly separate the taxing function from the choices about
Government involvement — indeed interference — in the
operation of the free enterprise system. Unfortunately
some influence is inevitable. It is obvious that the choice
of tax system will affect the distribution of wealth and income.
Less often recognized is the fact that tax policy can greatly
influence the composition of the national output, and the
allocation of resources, between present and future consumption!
between work and leisure, and among occupations. There is
no such thing as a tax which somehow leaves these allocations
to one side, and simply assesses the necessary burdens in a
purely neutral way. Indeed, the tax system is frequently
utilized for its explicit resource allocating power. For
example, the tax deferral of income from DISCs is intended to
promote exports; the charitable deduction is designed to
encourage the allocation of resources to certain activities
deemed eligible; the five-year amortization of expenditures
for rehabilitating low and moderate income housing is
intended to encourage such activity.
At the same time many important resource allocation
effects of the tax system are by-products, unintended and
often undesirable. Two examples come to mind from areas
not directly connected with the Internal Revenue Code, one
from the social security "tax" system and one from the
unemployment "tax" system.
Current payroll taxes fall far short of adequately
funding the retirement benefit liabilities of the social
security system. At the same time individual workers tend
- 3to regard the social security benefits as a substitute for
private retirement saving, reducing their own retirement
savings accordingly. The net effect of the system thus
reduces private capital formation. Recent estimates by
Professor Martin Feldstein of Harvard University suggest
that the rate of private savings, and hence the long-run
capital stock, are reduced by 30 to 40 percent by this
effect.
In the unemployment insurance system, which is, as you
know, a Federal-State operated system, there is a ceiling
on the unemployment insurance rates paid by employers.
Because of the ceiling employers with greater instability
of employment are subsidized by employers with more stable
employment. Furthermore, and this is an effect of the
benefit provisions, the payment of unemployment insurance
has the unintended effect of raising the level of unemployment. It has been estimated, for example, that the recent
increase in benefits, especially the extension of the
per-iod of coverage, has raised the "equilibrium" unemployment
rate by nearly one percentage point.
There are equally important examples in the Internal
Revenue Code. Is it realized, for example, that the
combination of high individual marginal tax rates along
with the income limitations on the investment tax credit
has the effect it does of promoting a new way of financing
the acquisition of capital assets, that is, by leasing
rather than the outright ownership of these assets; or that
the corporate income tax structure induces corporations
to prefer debt to equity financing; or that the tax posture of an
owner-occupant of housing encourages individuals to hold
a greater share of total savings in this form and therefore
less in a form which is channeled into other kinds of
investment? The Code also has been criticized for unfairly
discriminating between single and married persons in a
manner that is said to encourage couples to live together
out of wedlock in order to reduce their tax burdens. These
examples suggest both the importance and the difficulty of
achieving neutrality.
There are two consequences of the deliberate use of the
resource allocation effects of the tax system. First, it
produces greater complexity; and second, it produces higher
tax rates.
-4-
J4b
One sees all around tortured statutory definitions
of preferred activities and expenditures, buttressed by
incomprehensible regulations and filing instructions
usually requiring rulings and frequently inviting litigation.
Moreover, the consequent reduction of the tax base requires
higher rates on the remainder thus exacerbating the resource
allocation effects and complexity.
I am very concerned, as I am sure are many of you,
about the ever multiplying complexity of the Tax Code,
which puts it beyond the understanding of the ordinary
citizen, threatens our valued self-assessment system, and
undermines its perceived fairness. I think we should add
another "impact statement" to those presently required.
As you know, an environmental impact statement must be
supplied for many of our legislative or regulatory
proposals. Similarly, President Ford has required the
preparation of "inflation impact statements" for proposals
which would have an important effect on the price level or
level of employment in the economy. It seems to me equally
useful to require that a "complexity impact statement" be
filed with each proposed amendment to the Internal Revenue
Code.
I am of course not the first to comment upon the problem
of complexity. Dean Charles 0. Galvin of Southern Methodist
University put it this way:
"The Brookings Institution, the Tax Analysis
Staff of the Treasury, the House Committee
on Ways and Means, the American Law Institute
Project, and Industry and Trade Association
Committees have provided a constant stream
of comment on tax reform, but nothing happens.
Each new Congress piles amendment on amendment;
add to this an avalanche of rulings, regulations,
and cases, and even the sophisticated goggle
in their attempt at any reasonable comprehension.
Furthermore, the expenditure of the intellectual
resources of the nation in this area is enormous;
the best professional and executive talent is
consumed in 'figuring the tax angle1 in what
otherwise could be relatively uncomplicated
business and investment arrangements. Wishfully
the whole dismal enterprise might disappear
into a dank miasmic myxomycetous sump; then we
would be compelled to make a fresh start."
That was seven years ago. I needn't recite for you
the record of non-simplification since then.
Dean Galvin is among those who have urged upon us the
adoption of a more comprehensive tax base. Many who have
thought about directions for improvement of our tax system
agree with him that such base broadening would not only
simplify the tax structure, but also, by greatly lowering
rates, importantly serve the goal of neutrality. A more
comprehensive tax base has, of course, considerable appealon equity grounds. Most resource-directing uses of the tax
system work by exempting from tax, in whole or in part,
certain kinds of income. Inevitably such tax advantages
are more valuable to those with higher marginal tax rates.
As a consequence the progressivity of the tax structure is
diminished, so that we see marginal rates extending tQ 70
percent — with obviously high potential for distortion —
while the effective degree of progression is substantially
less than this would suggest. Obviously some are subject
to-the high rates, and those high rates do very significantly
affect incentives. The appeal of a comprehensive tax base
on equity grounds is its potential for low tax rates
together with real progressivity.
However, I believe the appeal of a broad-based tax,
which is usually thought to lie in its apparent equity,
is at least as great for its potential for minimizing the
inefficiencies introduced by special provision after
special provision. The broad-based tax which has long
attracted the attention of reformers and which in spite
of the many exceptions is still the basis for our Federal
tax system, is a tax on personal accretion, better known
as "income." This is defined to be the value of a person's
consumption, plus the increase in his net worth during the
course of a year.
An important deviation from this principle of taxation
of personal accretion is the corporation income tax. If
our objective is to tax the sum of consumption plus
accumulation of persons, then an ideal tax system would
not have a corporation income tax at all, but would
attribute the income of these entities to their owners.
This principle has wide support and is, of course, embodied
in the Treasury's proposal for the integration of the
corporation and individual income taxes, a step which we
continue to feel extremely desirable in bringing this tax,
which,
like
all taxes
is ultimately
born by individuals,
into the
personal
income
tax structure.
There is another important reason for this change,
of great concern to this Administration and certainly to
the other panelists with me today. I refer to the problem
of assuring the "right" amount of capital accumulation
and the efficient allocation of the nation's capital stock.
fhere is no doubt that the elimination of the excessive
taxation of capital due to the unintegrated corporate
sector will contribute importantly to the economic well
being of the nation.
And now I come to a point on which I hope to obtain
some guidance from this group: should we not examine more
closely some of the capital formation-encouraging measures
heretofore widely endorsed, including endorsement by this
and previous Administrations, and by Congress? I refer
to measures such as the investment tax credit, and
artificially rapid depreciation which have the effect of
exempting capital income from tax. And is not deferral of
tax on savings for retirement inconsistent with broadly
based tax on accretion of individual income? Thus, one can
find incorporated in the Code, and in these measures
attracting increasing interest, considerable evidence that
the underlying principle toward which the system is tending,
is not that of the accretion type individual income tax,
but rather what has been called by Professor William Andrews
of Harvard Law School a consumption-type income tax.
The question on which I would welcome your views is
this: Has the time come to think seriously of replacing
the accretion type income tax with a progressive consumptiontype income tax?
Let me enumerate some of the reasons why this may be
appropriate:
First and most important, an anti-saving bias is an
inherent feature of the accretion type income tax. Income
is taxed at the time it is earned and then the returns on
any savings accumulated from that income are taxed again.
As we now know, the accretion-type income tax results in
a large divergence between the rate of return to savings
ancl the return to real investment in the economy, and we
suspect that the attendant disincentive to the accumulation
of capital is imposing a serious loss on everyone in the
economy. A consumption type income tax would be neutral
with respect to the choice between present and future
consumption, eliminating the tax bias against savings.
- 7Second, while it is debatable whether an accretion
type income measure or a consumption-type income measure
has the greater appeal as a matter of equity, it is
certainly clear that there is much to be said for taxing
a person on the basis of the products of the economy he
uses.
Third, by using a consumption-type income measure,
the many serious problems introduced to the tax system by
inflation, which arise basically because of the difficulty
of measuring accretion type income, virtually vanish.
Fourth, such perennially perplexing problems as the
appropriate treatment of unrepatriated foreign earnings of
U.S. corporations, and the taxation of capital gains would
be completely resolved since there would be no question of
taxing such income until it is translated into consumption
expenditure.
These are but a few of the attractive features of a
consumption type income tax. I think it is important to
emphasize that a progressive consumption-type income tax
does not have a partisan character. There is nothing in
such a basis for taxation which needs to divide liberal
from conservative, Democrat from Republican. For a
consumption-type income tax could certainly be as
progressive a personal income tax system as we choose to
make it.
In our tax legislative process we must resist the
temptation to counteract shortcomings caused by a failure
in concept of one part of the tax system by patchwork on
another part.
This is the path to additional complexity,
economic inefficiency, and perceived inequity. Instead,
we should consider explicitly the question of whether
consumption or accretion-type income represents the
preferred tax base. Has not the time arrived when this
issue should be addressed directly?
I need hardly say that the answer to this question
is not going to be forthcoming immediately, nor can the
serious issues be more than touched upon in a presentation
this brief. I would suggest, however, that it will be
useful to organize our thinking about the tax system in
the coming months and I very much look forward to our
exchange of views. Thank you very much.
FOR RELEASE UPON DELIVERY
^
'
STATEMENT BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
JOINT COMMITTEE ON ATOMIC ENERGY
WASHINGTON, D. C.
THURSDAY, DECEMBER 4, 19 75
Nuclear Fuel Assurance Act of 1975
Mr. Chairman and Members of the Committee:
I am pleased to appear before you to comment on the
Nuclear Fuel Assurance Act of 1975 and, in particular, to
discuss the need for cooperative and temporary assurances
to promote the transition to a private uranium enrichment
industry. Other Administration witnesses have outlined for
you the important role uranium enrichment facilities are
expected to play in meeting our energy independence objectives, the great commercial and economic importance of
maintaining our present comparative advantage and international leadership position in uranium enrichment technology
and the need for a private uranium enrichment industry.
Accordingly, I will limit my remarks today to some general
financial problems involved in establishing a private
enrichment industry.
WS-503
3&
Major Financial Problems in Achieving the Transition
Capital Needs - The uranium enrichment industry is
extremely capital intensive.
For example, the diffusion
plant proposed by Uranium Enrichment Associates is expected
to cost at least $3.5 billion and the proposed commercial
size centrifuge plants, with a capacity of about one-third
that of the diffusion plant, are likely to cost on the order
of $1 billion each.
Therefore, in order to finance projects
of this size, it will be necessary to attract substantial
amounts of capital to the uranium enrichment industry.
The aggregate capital needs of the industry over the
remainder of this century will be dependent on a number of
factors, many of which are difficult to predict accurately.
These factors include the growth rate in consumption of
electricity, the percentage of new electric generating
capacity which will be fueled by nuclear as opposed to coal
or other energy sources, our success in introducing new lesscostly technologies such as centrifuge or laser enrichment,
our success in meeting growing foreign competition, and the
speed with which we resolve the remaining problems in the
nuclear fuel reprocessing industry and waste management.
Depending on one's assumptions with regard to the above
factors, capital investment on the order of $30 to $40 billion
or even higher
2000.
has been projected between now and the year
Given a climate that permits the uranium enrichment
industry to grow and investors in that industry to earn
competitive returns on their capital, the U.S. and foreign
capital markets clearly will have the capacity and incentives
to provide the necessary funds.
Project Risks - The nature and variety of risks faced
by the potential investors and the large absolute size of
the individual projects make a completely private undertaking
for uranium enrichment facilities a difficult task at the
present time. The primary risks relate to the use of technologies that are classified, regulatory and political uncertainties, and the financial difficulties of some of the
utilities which are customers for uranium enrichment services.
In order to attract the substantial amounts of debt
capital needed to finance enrichment projects, lenders would
require some protection against these risks. One technique
which is often used by business to limit their risks is
called project financing. The essence of this type of
financing involves the creation of a separate project entity
which issues securities secured by project revenues. This
contrasts with conventional financing in which the lender
relies more on the general creditworthiness of the borrower
to repay the debt. Although the specific structure of any
project financing is determined by the nature of the project,
there are two concepts which are frequently used in such
financings and which are particularly relevant in the case
361
of uranium enrichment projects.
These are a completion
guarantee and contractual arrangements which require the
users of the project output to assume some of the postcompletion project risks.
To provide a completion guarantee, the providers of
debt capital generally insist that a creditworthy party enter
into a commitment to provide any funds that are necessary to
complete the project or pay off the debt in the event of
non-completion.
To protect against the risk that the flow
of revenues from the project after completion would be insufficient to cover debt service, lenders generally insist
that users of the project's output or service enter into
contracts which, in effect, partially guarantee payment of
debt service.
One type of contract commonly used is a
"take-or-pay contract" in which the purchaser agrees to
purchase output offered by the seller whether he needs it or
not.
Another similar type of contract, known as a "hell or
high water contract", requires the purchaser to pay a minimum
amount sufficient to service project debt and cover certain
other project costs even if the seller
output from the project.
is unable to offer
In most of the presently proposed
projects for private enrichment facilities, it is contemplated
that domestic utilities will be asked to enter into either
one or the other of these types of contracts before a go-ahead
decision is made.
Ample precedent for such arrangements
- 5-
$&r
exists since they were used by the AEC and now ERDA in
selling enrichment services and are often used in other
large, complicated projects to provide necessary assurances
to potential lenders.
Current Assessment of Feasibility of Private Financing
Whether or not a completely private financing for a
uranium enrichment project is possible comes down to the
question of whether or not a sufficient number of creditworthy companies are willing to participate in the project
and assume the various risks previously mentioned.
The risk that revenues from an enrichment project would
not be sufficient to cover debt service after completion can
be mitigated if customers enter into "take-or-pay" or "hell
or high water contracts."
In this way the utility companies
purchasing the project output would help provide assurance
to the lenders that debt service will be met.
Given the feasibility of contractual arrangements which
would cover the major post-completion risks to the lender,
the main remaining financing problem is the question of who
assumes the risk of non-completion of enrichment projects»
Due to the size of the projects, the nature of the risks
involved, and the present financial condition of electric
utilities, it will apparently not be possible to attract a
sufficient number of creditworthy private investors to assume
the completion risks.
The Administration's Bill proposes to
give ERDA the needed authority to provide transitional backstopping by providing certain types of temporary assistance
to private companies in undertaking uranium enrichment projects.
Proposed Types of USG Assistance
It is not possible to predict confidently the precise
type of assistance that will be required in a particular
uranium enrichment proposal.
Accordingly, the Nuclear Fuel
Assurance Act would grant the Administrator of ERDA very
broad authority to negotiate any assistance that he feels is
"appropriate and necessary to ensure the development of a
competitive private uranium enrichment industry" that is
consistent with our national security and the health and
safety of the American people.
However, as provided in the
Bill, any type of assistance would be spelled out in a
detailed contract and the basis for the proposed arrangement
would be subject to scrutiny by the Joint Committee on Atomic
Energy.
In addition to the general authority given to the ERDA
Administrator, the
proposed Act mentions a number of specific
types of government assistance that might be provided,
including:
-- Supplying, and warranting Government-owned inventions
and discoveries in enrichment technology -- for which
the Government would be paid.
- 7-
fl
-- Selling certain materials and supplies on a full
cost recovery basis which are available only from
the Federal Government.
-- Buying enrichment services from private producers or
selling enrichment services to producers from the
Government stockpile to accommodate plant start-up
and loading problems.
-- Assuming the assets and liabilities of a uranium
enrichment project if the private parties could not
complete the project or bring it into commercial
operation.
Each of the above provisions for government assistance
could be used to reduce the risks borne by equity and debt
investors and thus encourage their participation in enrichment projects. Supplying and warranting Government-owned
inventions and discoveries in enrichment technology and
selling certain materials and supplies which are available
only from the Federal Government serve to assure investors
as to the technological feasibility of enrichment projects
and reduce both the risks of non-completion and service
interruptions. The provision for buying enrichment services
from private producers or selling enrichment service to
producers from the Government stockpile could serve several
purposes. An agreement to purchase enrichment services
could provide a stable market for the plant's output during
31/
initial operations when customer needs would be somewhat
irregular and would help assure lenders as to the stability
and adequacy of the project's revenues.
On the other hand,
agreeing to sell enrichment services from the government
stockpile during a limited period could be a useful device
in attracting customers to the private project who need
assurances as to availability of enriched uranium to protect
against start-up delays in the operations of the plant. Such
customers might then be willing to invest in the project or
enter into completion guarantees, or sign long-term take-orpay contracts to assure the adequacy of the project's revenues.
Provision for allowing the assumption of the assets and
liabilities of private uranium enrichment projects if the
venture were threatened with failure protects investors against
many of the risks often covered by completion guarantees,
which are normally required
in project financings. The
provision would protect domestic project investors against
the political and regulatory risks relating to nuclear
moratoria and the issuance of construction and operating
permits.
In addition, it would protect domestic investors
against the risk of not being able to finance cost overruns
and the risk that the plant might not operate properly.
-9 -
pi.
Impact on the Capital Markets
Finally, Mr. Chairman, I would like to comment on the
impact of these proposals on the capital markets.
Any type
of Federal financial assistance resulting in the undertaking
of projects which would not otherwise have been undertaken
will lead to some redirection of resources in our capital
markets.
Such incentives will increase the demand for
capital while having little or no effect on the overall supply
of capital and, thus, will tend to cause interest rates to
rise.
However, we do not anticipate that the proposed $8
billion assistance contemplated by the Nuclear Fuel Assurance
Act will strain our capital markets or have a major impact
on the general cost or availability of capital. Moreover,
the only indicated alternative to this program would be to
have the Federal Government completely finance and build these
projects directly.
Relative to that alternative, the differ-
ential impact on the capital markets of this program will
be small.
However, in order to help minimize the impact on the
capital markets of financing under this program and to
facilitate the management of the Federal debt, we believe it
is essential that the Secretary of the Treasury have the
authority to approve the timing, terms and conditions of
securities issued to finance projects supported by the
government under the Nuclear Fuel Assurance Act.
Prior
approval of the timing and terms by the Secretary of the
Treasury will ensure effective coordination with the management of the Federal debt and will help to minimize the
impact of such incentives on the capital markets.
ERDA has
submitted a proposed amendment to this Bill which gives the
Secretary of the Treasury this authority.
In summary, Mr. Chairman, given the need for additional
uranium enrichment capacity in the early 1980's, our strong
belief that a transition must be made to a private uranium
enrichment industry and the difficulties in arranging
completely private financing for these projects, the Treasury
supports the President's proposed Nuclear Fuel Assurance Act
of 1975,
Mr. Chairman, I would now be happy to answer any
questions you or the Committee may have.
319
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
AT THE
NATIONAL INSTITUTE OF SOCIAL SCIENCES' AWARDS' DINNER
DECEMBER 4, 197 5 — NEW YORK
Mr. Pace, distinguished meir.bers of the National
Insitute of Social Sciences, ar.d Ladies and Gentlemen:
It is with a profound sense of gratitude that I accept:
the award of this society tonight. To be honored in the
city where I have spent most of my adult life and to join
the list of outstanding men and women who have been recognized by this society over the years provides to rr.e and to
my wife Carol, a very special memory. we shall always be
grateful to you for it.
On occasions like these, when brevity is in order, one
is tempted to encapsulate in just a few words many personal
thoughts about our future. Let me do that for a few
moments this evening.
I begin with a strong sense of pride and belief in
our past. The values that have defined our national character
over the years — personal liberty, the work ethic, selfreliance, the supremacy of the individual over the state -~
all strike me as not only the soul of wisdom but the fount
of so much of our progress as a people.
Certainly we have had our troubles and our conflicts
as a nation. But there has been much more that has been
right than has been wrong about America. The degree of
personal freedom and material abundance that we enjoy today
is unsurpassed in man's history.
Yet we unquestionably suffer today from a certain
spiritual malaise. The fears that once existed about an
economic depression have rightfully vanished, but we have
not yet escaped a national mental depression.
I do not pretend to have all cf the answers for rebuilding our sense of confidence and personal satisfaction.
Much needs to be done in every heme, in every church, and
in every community across the land.
I am, however, convinced that to restore public faith
in our democratic institutions -- as we must -- we must
first restore the principles that have been fundamental to
the success of that democracy. And we must have leaders
who not only profess a belief in these principles but have
the courage to follcw them.
In the last 1C-15 years, this nation has drifted far
from its original moorings. Tie relentless surge toward
bigger and bigger government, the continuing inability to
live within our means, the hollow political promises that
we could simultaneously fight a land war in Asia, abolish
poverty, and spend our way to prosperity -- ail of these
have eroded public confidence in cur form of government.
I specifically disagree with those who say that our
economy is in trouble today because our principles have
failed us. Our principles have not failed at all; no, it
is we who have failed to live up tc them.
Where are the true statesmen of our day -- the Andrew
Carnegies, the Elihu Roots, the General Marshalls who have
graced this platform in past years? Where are the men and
women who will swim against the tide, who will say in public
what they so often confide to their friends in private, and
who keep their eyes fixed on the stars?
Certainly, the times often seem to discourage the
emergence of forthright and firm leaders. Certainly it is
easier to accept conventional wisdom and "play it safe." But
I deeply believe that these of us who are blessed with the
opportunity to serve — and that includes most of us in this
chamber tonight — have a moral responsibility to hold ourselves to the highest possible standards: to tell the public
not what they supposedly w^ant to hear but the hard truths
they need to hear; to uphold the time-honored banners of
truth, justice and mercy; and to learn again how to trust in
the goodwill and virtue of others so that they can trust in us.
"Let us," as George Washington once said, "Raise a standard
to which the wise and the honest can repair."
It is in that spirit that I gratefully accept this award
tonight. Thank you.
-0O0-
FOR RELEASE AT 4:00 P.M.
December 4, 1975
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for 364-day Treasury bills to be dated December 16, 1975,
December 14, 1976
(CUSIP No. 912793 ZV1).
and to mature
The bills will be issued for cash
and in exchange for Treasury bills maturing December 16, 1975.
Tenders in the amount of $ 1> 700 million, or thereabouts, will be accepted
from the public, which holds $ 698 million of the maturing bills.
Additional amounts of the bills may be issued at the average price of
accepted tenders to Government accounts and Federal Reserve Banks, for
themselves and as agents of foreign and international monetary authorities,
which hold $ 1,304 million of the maturing bills.
The bills will be issued on a discount basis under competitive and
noncompetitive bidding, and at maturity their face amount will be payable
without interest.
They will be issued in bearer form in denominations of
$10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value)
and in book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Wednesday, December 10, 1975.
Tenders will not be received at the Department ^»f the Treasury, Washington.
Each tender must be for a minimum of $10,000.
in multiples of $5,000.
Tenders over $10,000 must be
In the case of competitive tenders the price offered
must be expressed on the basis of 100, with not more than three decimals, e.g>,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their
positions with respect to Government securities and borrowings thereon may
submit tenders for account of customers provided the names of the customers
are set forth in such tenders.
Others will not be permitted to submit
tenders except for their own account.
Tenders will be received without
WS-510
(OVER)
377
deposit from incorporated banks and trust companies and from responsible
and recognized dealers in investment securities.
Tenders from others must
be accompanied by payment of 2 percent of the face amount of bills applied
for, unless the tenders are accompanied by an express guaranty of payment
by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of
the amount and price range of accepted bids.
Those submitting competitive
tenders will be advised of the acceptance or rejection thereof.
The Secretary
of the Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect shall be
final.
Subject to these reservations, noncompetitive tenders for $500,000
or less without stated price from any one bidder will be accepted in full at
the average price (in three decimals) of accepted competitive bids. Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on December 16, 1975, in
cash or other immediately available funds or in a like face amount of Treasury
bills maturing December 16, 1975.
equal treatment.
Cash and exchange tenders will receive
Cash adjustments will be made for differences between the
par value of maturing bills accepted in exchange and the issue price of the
new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954
the amount of discount at which bills issued hereunder are sold is considered
to accrue when the bills are sold, redeemed or otherwise disposed of, and the
bills are excluded from consideration as capital assets.
Accordingly, the
owner of bills (other than life insurance companies) issued hereunder must
include in his Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on original issue
or on subsequent purchase, and the amount actually received either upon sale
or redemption at maturity during the taxable year for which the return is
made.
Department of the Treasury Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the conditions
of their issue.
Copies of the circular may be obtained from any Federal
Reserve Bank or Branch.
iDepartmentoftheTREASURY
HINGTON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE UPON DELIVERY
3
STATEMENT BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
ON THE FEDERAL BANK COMMISSION ACT, S. 2298
MONDAY, DECEMBER 8, 1975, 10:00 A.M.
Mr. Chairman:
Thank you for the opportunity to present the views of
the Administration on the Federal Bank Commission Act, S. 2298,
which would establish a single supervisory authority to
regulate Federally chartered or insured commercial banks.
First, I would like to explain why the Comptroller of
the Currency and the Treasury are speaking separately and
independently addressing the relative merits of the single
regulatory agency proposal in S. 2298.
The Office of the Comptroller of the Currency is part
of the Treasury Department. The enabling legislation places
that Office under the general direction and supervision of
the Secretary of the Treasury. This general direction
responsibility extends to all duties of the Comptroller
under the Federal banking laws and under other statutes
which are executive or quasi-legislative in nature. Duties
in these categories include office management policies,
staffing, and the development of general policies for the
performance of all Comptroller functions. The extent to
which this directional responsibility is exercised is a
matter of judgment for each Secretary, in keeping with the
public interest. Secretaries of the Treasury have historically
determined that the public interest is best served by allowing
the Comptroller maximum freedom in regulating the national
banking system in accordance with applicable laws.
The Comptroller is, however, totally independent of
the Secretary in the performance of what might be categorized
as his quasi-judicial functions. When the Comptroller of
the Currency makes a quasi-judicial determination in a particula
case, such as passing upon the establishment, organization,
consolidation or merger of a national bank, or the establishment
of a branch bank, his action is not subject to direction by
the Secretary. Since within this regulatory area the
Comptroller is independent, he may on relevant issues offer
WS-509
3V
recommendations or adopt positions which differ in varying
degrees from those advanced by the Treasury. This Committee
can expect to receive from the Comptroller his objective
views on the merits of S. 2298, unencumbered by limitations
created when such activities are carried out under specifically
delegated authority.
The Comptroller's testimony has the benefit of direct
regulatory experience; the Treasury's testimony will be
largely unencumbered by day-to-day regulatory responsibilities.
The proposal before this Committee has a long and
vigorous history. It has been studied in depth by the
President's Commission on Financial Structure and Regulation,
which reported its findings in 1972. In addition, the
subject has been actively debated by members of regulatory
commissions and other spokesmen, and it is difficult to find
the definitive statement in all the recorded debates,
testimony and commission reports and studies.
I have no illusions about making such a statement; but
I want to compliment the Committee on undertaking these
hearings, not only because I have been swamped by the
rhetoric and logic of those who argue both for and against
the establishment of a single federal bank regulatory agency,
but also because I suspect that this is one of those times
that are essential to progress, when the Congress will modify
and improve the regulatory structure.
As you know, the President has made his position and
views on regulatory reform
very clear, and the Treasury
shares the concern that regulation often tends to become an
end in itself and time and again has failed to serve the
best interest of the American public. The logic for a single
agency in a complex of inter-related federal regulation of
the banking system appears persuasive, but the course of
federal regulation, when imposed by a single monolithic
authority has yet to provide a model for efficient and effective
performance.
Imbedded in the history of all U.S. financial institutional
regulatory law, enacted by Congress, is a healthy aversion to
concentration of financial power. Unlike most other industrialized nations, the States of our Union have retained to themselves
the authority to charter and regulate banks within their
borders. Generally speaking, these state powers have been
respected by the federal government. The first
thrust of a single federal regulatory agency would seem to
compromise to some extent the powers of the states because
a bank cannot operate successfully without deposit insurance.
If we have but one federal body both insuring and regulating
- 3 all banks, whether state or federally chartered, there
would inevitably be an increase in federal control and
the role of state regulation would be diminished.
This may be of some importance. Only a little over a
third of the banks in the nation are federally chartered or
members of the Federal Reserve system, and every state is
active in the regulation of commercial banking. I am sure
the Committee realizes that no bank can branch today outside
of its home state boundaries, that in many states banks
cannot branch at all, that bank holding companies are
prohibited in some statos and not. in others and that the
Federal Bank Regulatory authority generally respects such
restrictions when imposed by the states. I am simply stating
these facts to emphasize the interest states have in regulating
banking. Whether the impact of such a regulatory process
is good or bad is another matter because this dichotomy can
be criticized as an extraordinary way of regulating a type
of business where there are clear economies of scale and
public conveniences. It is particularly curious for a country
whose state boundaries have never barred commerce or trade,
that the American banking system has been constrained from
engaging in the regional or national expansion or consolidation
that has characterized almost all American business, including
significantly financial intermediaries that in one form or
another compete with banks. I am referring to insurance
companies, consumer and commercial financial concerns, investment bankers, brokerage concerns, and other firms offering
financial services.
Thus the base of fragmented regulatory authority that
is under discussion today begins with the powers of the
states and that is not addressed in S. 2298 but affected by
it.
Next, I would like to comment generally on the conditions
and changes that have occurred in the industry over time
that are the subject of the regulatory authority proposed
in S. 2298. I think it is well documented that the United
States banking system is quite unique in the Western world
as contrasted with the banking systems of our trading partners.
It is highly diverse in terms of size, functions and numbers,
with over 14,000 banks ranging from very large multi-national
corporations to small local banks serving communities in
almost every town or city. The average deposit size of a
bank in the United States ranges between 10 and 25 million, and
this is actually a very small financial institution. Over
300 or more new banks are usually formed every year while
PI
- 4 -
about the same number are acquired by other banks or disappear
into holding companies. While we frequently hear concerns
expressed about the capital adequacy of the banking system
generally, I want to assure you that typically the American
bank has been required to have a much stronger capital ratio
to deposits or to loans and investments than the banks in
banking systems outside of the United States. Depositor
insurance is an American innovation. Very few countries
provide comparable protection. Checking accounts, as we
know them, are much more extensively used, readily available,
and more subject I.*.) pri.o.: < />m\/ I i l.i en here than in other nations
Americans have greater access to consumer credit both
through the banking system and non-bank financial intermediaries
than most peoples of the world. Perhaps this is the reason
our citizens savings are a smaller percentage of GNP
than in other developed nations. Further, trust services, as
well as many other forms of banking service, are generally
more available here than abroad to the average consumer.
Having viewed the evolution of much of what I have
discussed over 2 5 to 30 years, I would suggest that there
has been significant progress in the development of banking
services. This is probably characteristic of a competitive
industry where there are many small units. It is uncharacteristic,
however, in my opinion for any industry that is subjected to
strong federal and state regulation. I suspect that the
evolution in business and individual demands for banking
services, the incorporation of new technology, and the fact
that major changes in the regulatory structure have occurred
only periodically and then when it appeared wise for the
Congress and the state legislatures to address an important
problem, have been responsible for this rather unusual
result. In other words, significant regulatory change
has evolved in much the same way that the industry itself
has evolved, spurred on by the changing needs of our society.
Some of the most fundamental changes in our regulatory
process were made following the financial disaster that
occurred in 1929. I wish we had the time here to put that
period in perspective. The actions taken then to expand
the regulatory agencies' powers and establish the Federal
Deposit Insurance Corporation were sound. For more than 40
years thereafter, bank failures were uncommon events and
ofde minimis importance to the economy. The strains that
the banking system has undergone in recent years, do not
compare in severity with the problems of the early thirties.
The Federal Deposit Insurance system, in fact, has been so
effective that almost without exception both insured and
uninsured
failure. These
depositors
statements
have not
do not
lostmean
moneythat
in a
I wish
moderntobank_
minimize
#
*
the recent difficulties of the banking system. The
diversification process that gained momentum after the
enactment of the Bank Holding Act in 1966, coming at the end
of the long cyclical upswing following World War II helped cause
a few very large bank failures and affected the liquidity
of many erstwhile strong banks. More importantly these
events lessened the opportunity for all banks to maintain
their normal capital base.
I think these hearings are more important than the bill
before you today because there are many initiatives that I
believe it is appropriate to address. We need to establish
a commonality of examination processes and relate those
processes to the requirements of other regulatory agencies,
such as the Securities and Exchange Commission. We need
to continue to assure that the banking regulatory structure
can manage the technological changes in services that are
envisioned in a society served by electronic payments and
electronic accounting. We need to deal with the question of
why foreign banks operating in the United States are not
subject to the normal, domestic regulatory processes. We
need to assure the public that regulation is adequate,
fair, and flexible enough to preserve the viability of
our financial institutions and reestablish public confidence
in those institutions.
It should be apparent that I do not think this can all
be achieved simply by a consolidation of federal agencies
into one regulatory commission. The Hunt Comission Report
to which I previously referred, envisioned two federal
regulatory agencies. The present interest in the Congress in
granting demand deposit powers to credit unions and savings
institutions requires that the federal regulatory structure
be coordinated, not only in regulatory matters but monetary
policy reasons beyond the provisions of S. 2298.
In summary, Mr. Chairman and members of the Committee,
I can agree with most of the stated purpose of S. 2298 and
specifically the need to address the points raised in your
covering letter, but I do not think that S. 2298 will achieve
all of these purposes. First while the accountability of
bank regulatory authorities to the Congress would be increased,
I seriously question whether the accountability to the public
would improve.
I do not think a single agency necessarily will be
more efficient or economical in operating the regulatory
structure.
It is entirely possible that unsafe and unsound banking
practices could be diminished by the bill's proposals, but
38
I believe this would take place at some considerable expense
to the process of innovation and change that has been
characteristic of the industry.
I do not believe that a single agency will provide
any more expeditious solutions to problem bank cases and the
prevention of failures than the effective interagency cooperation
that now exists when a significant case is identified.
I think that S. 2298 will weaken the dual banking system.
S. 2298 would, of course, provide more uniform application
of the provisions of the Bank Merger Act. On the other hand,
I am not sure that is a total blessing. There are two
federal requirements for bank mergers — approval of the
regulatory authority and approval of the Anti-Trust Division
of the Justice Department, and the latter takes precedent
in all cases. We have the benefit, therefore, of what is
equivalent to a single agency, uniform procedure.
I am persuaded that the conduct of monetary policy when
divorced entirely from supervision and regulation of banks
would be weakened by S. 2298. In that matter, I agree
with the testimony submitted on behalf of the Board of
Governors.
Finally I do not believe that S. 2298 would significantly
improve the industry's ability to meet the challenges of
a changing bank environment. Alternative regulatory
elections is a very human way to keep our regulatory agencies
alert and progressive.
Mr. Chairman, appended to my testimony for the record
are several tables which provide a statistical basis for
comments in my statement. I thank you and would be pleased
to respond to any questions which you may have.
December 31, 1974
Deposit size class
($ millions)
Total deposits
($ millions)
Number
Cumulative
percent of banks
Cumulative
percent of deposits
1.5
Less than 1
219
88
1-2
379
593
2-5
2,287
8,194
19.9
. 1.2
5— 10
3,215
23,70^
.42.1
4.3
10 - 25
4,654
74,710
74.2
14.3
25 - 50
1,957
67,955
87.7
23*3
.50 - 100
,943
64,921
94.2
32.0
100 - 500
656
.133,941
\ 98.7
49.8
99.4
58.8
100.0
100.0
500 - 1000
93.
67,662
4
s
nore than 1000
85 *
Total
14,488 751,230
4.1
0.1
*
\- 309,465
Ofrice of the Secretary of the Treasury
Office of Debt "Analysis
Source: Federal Deposit Insurance Corporation, Board of
*
Governors of the Federal Reserve System and Office
of the Comptroller of the Currency, Assets and
Liabilities Commercial and Mutural Savings Banks,
December 31, 1974.
* 7.^ c:
Less than 0.05 percent
^
s^
Banking Offices"and Deposits of Commercial Banks by Class
Class of bank
National
Number of ;
banks
:
4,710
: Total :
Number of: banking : Percenbranches : offices :
15,788
20,498
47.5
Deposits : r t:_ v.
($billions) :
431.1
D/
Member.State chartered . 1,072
4,209
5,281
12.2
.144.8
19
Nonmamber insured . 8,448
8,632
17,080
40.0
165.8
22.
67
246
0.6
6.6
0,
81
0.2
Non-ember nonrnsured deposit
bank
17 9
Ncninsurec trust companies 72
Total . . 14,48.1
28,709
Office of uhe Secretary of the Treasury
Office of Debt Analysis
* Excludes Banks in U.S. Trust Territories
Source: Federal Deposit Insurance Corporation, Board of
Governors of the Federal Reserve System and
Office of the Comptroller of the Currency,
Assets and Liabilities Commercial and Mutual
Savings Banks, December 31, 1974.
43,190
100.0
**
748.3
103
TABLE VI
STATUS OF STATE BRANCHING STATUTES
U
LP
L
S
N( )
Branching prohibited
Dr.tnr hirr_) pri>hitiit«cJ Init limited facilities permitted
Branching permitted within limited '}«-o-jr^iphic areas
N o geographic branching restrictions N o branching statute but; notation of dc taclo
branching status
f>
&UU
1. Alabama
2. Alaska
3. Arizona
4. Arkansas
5. California
6. Colorado
7. Connecticut
8. Delaware •
9. Florida
10. Georgia
11. Hawaii
12. Idaho
13. Illinois
14. Indiana
15. Iowa
16. Kansas
17. Kentucky
18. Louisiana
19. Maine
"20. Maryland ;
21. Massachusetts
22. Michigan
*
23. Minnesota '-•
24. Mississippi
25. Missouri
26. Montana
27. Nebraska
28. Nevada
29. N e w Hampshire
30. N e w Jersey
31. N e w Mexico
32. N e w York
33. North Carolina
34. North Dakota
35. Ohio
36. Oklahoma
37. Oregon
38. Pennsylvania
39. Rhode Island
40. South Carolina
41. South Dakota
42. Tennessee
43. Texas
44. Utah
45. Vermont
46. Virginia
47. Washington
48. West Virginia
49. Wisconsin
50. Wyoming
Commercial
Bank*
Statv-Char1crel!'~
S & La
L
S
S
L
S
L
S
S
S
S
u*
s
s
u*
L
s
. s
u*
L
L
IP
L
S
S
s
L
L
IT
L
IP
IP
u*
s
L
S
L
L
S
IP
L
ir
S
L
S
s
S
L
MSBs
—
s
—
—
—
s
s
s
s
s
—
S
S
S
—
—
—
—
s
IP
L
L
N(L)
—
—'
—
—
S
L
L
L
S
L
S
S
s
s1
S
N(S)
s
L
S
L
I
N(L)
N(S)
•
—
s
s
L
—
N(U)
—
—
'
•
—
—
—
L
>s
—
L
—
—
S
L*
s
s
L
s
—
S
L
N(—V
u*
s
s
s
s
u*
L
s
s
s
s
s
u
L
N(U)
N(L)
s
L
S
—
•
—
—
' **". ~"-~
s
s
~"~*
N(U)
—~~
N O T E S : 1) Branching permitted via merger, but not da novo
2) There are presently no mutual savings banks operating
in Ohio
3) There are presently no state-chartered S&Ls in Ten- '
nesscc
Source: American Bankers Association, 19
C o m p a r a t i v e P r o f i l e s o f Snail 2nd L a r g e C o m m e r c i a l
D n n k A/
s-
Averagel Balance Sheet of Each Deposit Class
D e p o s i t size
1$ nillirr.r.)
'Vi(T'"2'J : O v e r $1
million ; billion
I'.--rcc_r.t
~$T0-2~5
mi 13 Ion
Over
Assets
C a s h and in c o l l e c t i o n
Fed funds sold and r<r's
Securities
U . S . Treasury & a g e n c y
S t a t e and local
T r a d i n g account
Other
Total-securities
1.9
1.0
761.6
154.3
10.2
5.7
1C.1
3.3
2.8
2.6
268.8
341.5
87.0
21.3
15.2
14.0
C.l
5.7
7.2
i.e
0.5
ill'
718.5
30.0
15.2
Other loans
Real e s t a t e - r e s i d e n t i a l
Real e s t a t e - T u r n
Real estate-Other
To o t h e r financial ..
institutions (including.-foreign)
T o farmers
C o m m e r c i a l loans
To individuals
Other
Total-other leans
1.9
0.5
0.8
328.1
3.7
153.5
10 6
2.6
4.2
7.0
0.1
3.3
0.1
1.3
2.0.
2.7
0.2
456.5
30.1
1,271.5
325.7
179.6
0.4
6.9
11.0
15.0
0.9
9.7
0.6
26.9
6.9
376
9.4
2 t 748. 7
51.6
53.2
1.6
7.2
0.2
Other assets
0.5
Total assets
18.2
34 0 ^
4 ,723 .4
100.0
6.2
9.8
16.1
1,617.7
2,023.1
3,640.0
3s.1
54.0
88.1
34.3
42.1
77" 1
O'.l
413.2
0.5
8.8
Other liabilities
0.5
324.0
2.9
Total liabilities
16.7
4,377.9
9.15
Reserves
0.1
51.0
0.8
1.1
Capital accounts
1J
294 .5
7.7
€.2
Total liabilities, reserves
and capital
10.2
4,723.4
100.0
100.0
Number of institutions
4,654
Liabilities and capital
Deposits
Demand
Time and savings
Total
Fed funds purchased I<P's
1C0.C
J.1
Ell
85
Officii of ttie Secretary of (tie Treasury
'.Office of Debt Analysis
yJ.
Banks: with $25 m i l l i o n ar.d l e s s in deposit? r e p r e s e n t 74 .2 p e r c e n t of bnnkr ^ - —
o f )jankincj d . p o s i L... p.jnkn wi».h over 01 b i l l i o n in d e p o s i t s r e p r e s e n t O.C \
and 4 1 . 2 p e r c e n t ot banking o z p o s i t s .
DATA OM BANK FO^'WI'TONS AN!)
BANK llOUHMC COMVWiY ACOU i:SI TIONS
New Dank Formations;
(Source: FDIC Annual Report, Table 101 c
FDIC Publication "Changes Among Operating Banks and Branches"}
National
Banks
1972
1973
1974
55
... 90
97
State
- Mem);or
Banks
13
26
35
State
Nonmember
Banks
Total
167
216
232
235
332
364
Bank Holding Company, De Novo Formations
(Note.' This catagcr;
is included in total, formations as described in the preceedir.c
table)
1972
1973
1974
National
Banks
State
Member
Banks
State
Nonmember
Banks
22
33
41
4
6
18
13
18
38
Total
39
57
97
x
• --. * -:
FPvB A] )orova l^_of Bank Acq u i s i t i on r. by Hold in a CC^IT^TT: :' OF
:' \ ?."
Includes accTuisition of~e:-:.i st i.ng banhs and D2 Novo ior in a tier, rAn
approximation of existing bank acquisitions can be obtair.cby sublraclfing the totals in Table II".
Total
1972
197 3
197 4
27G
379
307
he Department of theJREASURY
"JHINGTON, D.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
7i
REMARKS OF THE HONORABLE RICHARD R. ALBRECHT
GENERAL COUNSEL OF THE TREASURY DEPARTMENT
BEFORE THE
DECEMBER TAX SCHOOL
IOWA STATE BAR ASSOCIATION
DES MOINES, IOWA
DECEMBER 4, 1975
"TAXPAYER INFORMATION - WHO IS ENTITLED TO KNOW?"
It is a pleasure to be back in Iowa, to have an opportunity to participate in the Bar Association's December Tax
School, and to see some of my old friends from law school.
Ifd like to thank Mr. Hart and the members of the Tax Committee
for extending to me an invitation to participate in this proAs taxpayers we all provide the Federal Government with
much information concerning our private lives and financial
position each time we deal with the Internal Revenue Service.
We expect that this personal information will be held in
confidence. At the same time, as citizens of a democracy,
we demand that our Government conduct its business in the
open so ohat we may decide whether it is acting fairly and
properly. In no Federal agency is fairness and openness more
important than in the Internal Revenue Service. Only through
open administration can we be assured that our transactions
are being treated the same by the IRS as those of other taxpayers. How, then, do we balance the conflicting requirements
of confidentiality and openness in the handling of tax returns
and tax return information by the Government?
One area in which this issue is being debated is in
connection with the issuance by the IRS of private letter
rulings to individual taxpayers. Letter rulings are written
advice from the Internal Revenue Service as to the tax treatment of a specific transaction, usually issued in advance
upon written request from the taxpayer." The taxpayer's request must contain all relevant factual details about the
transaction, and the IRS often asks further questions which
must be answered by the taxpayer prior to the issuance of the
letter ruling.
WS-508
-2Let us say that your client, who has been in the appliance business since World War II, has prospered and built a
successful family corporation. He has a wholesale business
and retail outlets. His son, age 30, joined the family
business after three years as starting quarterback for the
Hawkeyes. While they won only two games in those three
seasons, his name is still magic in the old hometown and he
has been running the retail operation for the last five years.
Father and son own 55% and 45$, respectively, of the business.
The retail business has slowed down recently and the father
decides he wants to get out of active management and retire
with enough to support himself for the rest of his life. Son
wants to keep the business growing, add new retail outlets,
and prove his management abilities. Father doesn't agree
with his son's ideas, so he enters into a memorandum of understanding with XYZ Corporation, a large statewide wholesaler,
to sell the wholesale business to XYZ. Our quarterback tells
his father he wants to keep the retail side. They come to
you and discuss the possibilities of splitting the business
between the two with the father retaining the old corporation,
consisting of the wholesale operation, and spinning off a new
retail corporation to be owned by the son. Father would then
merge the wholesale business into the XYZ Corporation in exchange for preferred stock and debentures in XYZ Corporation.
This would take him out of the management of the business
entirely, but still provide him with an income.
In addition to requesting you to prepare the corporate
documents and to review the acquisition agreement submitted
by XYZ, the father asks you to brief him as to the tax consequences of the proposed transaction. You find from research
of the Code and regulations that the spin-off may be accomplished without gain or loss to the new corporation or to the
son, if there was a good business purpose for splitting the
business, if there was a 5-year business history, and if this
was not simply a device for distributing accumulated earnings
of the old corporation. You also discover that the father's
sale of the wholesale business to XYZ might be accomplished
without recognition of capital gain for the father. However,
the Code and regulations are not completely clear on the
issues, and the tax consequences would be dramatic if you
are wrong. So you decide that advice should be sought from
the IRS in the form of a private letter ruling.
You explain to your clients that they will have to provide the Service with a great deal of specific personal and
$11
-3financial information and detailed information about the.
transaction. This-information is necessary if the IRS is
to issue a binding ruling. Father states that he doesn't
want his entire financial position and personal life spread
all across town and asks you whether the information provided
will be considered confidential by the IRS. How would you
answer him?
Prior to recent court interpretations of the Freedom of
Information Act, private letter rulings, as well as required
rulings and technical advice memoranda, were considered confidential, and the Internal Revenue Service refused to disclose
them or to apply them to anyone other than the taxpayer to
whom they were issued. The basis for the confidentiality was
that the rulings contain tax return information which the
Service is precluded by statute from disclosing to the public.
However, because of the Freedom of Information.Act and
two recent Federal court interpretations of it, this-confidentiality is now in doubt. The Freedom of Information Act,
which became effective on July 4, 1967, requires an agency to
make available for public inspection and copying "records of
an agency and interpretations which have been adopted by the
agency...," with certain exceptions, including matters specifically exempted from disclosure by statute, trade secrets
and commercial or financial information obtained from a person
and privileged or confidential; and personnel and medical
files and similar files, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Two Federal appeals courts have held that a private
letter ruling was subject to disclosure under the Act. The
courts in Tax Analysts & Advocates v. IRS and Freuhauf Corp.
v. IRS determined that the letter ruling was not a privileged
"tax return," the disclosure of which is prohibited by 26
U.S.C. §6103. In the Tax Analysts case the rulings in question were made available to the plaintiff for inspection and
copying after the lower court reviewed them, in chambers, and
deleted material exempted from disclosure by the FOIA.
Based upon the court's decision in the Tax Analysts
case, the IRS would have to disclose your client's name,
along with the name of any other individual taxpayer involved;
the text of the letter ruling, subject to FOIA exemptions;
and all communications to or from the taxpayer in relation
to the ruling. The extent of disclosure ordered in the
-4Freuhauf case has not yet been finally determined, since the
Government has recently filed-a petition for certiorari.
The two courts did differ with respect to the treatment
of technical advice memoranda. In Freuhauf the court held
such memoranda to be open for inspection to the extent intended for issuance to the taxpayer. However, in Tax Analysts
the court determined that these memoranda were part of a tax
return and were, therefore, exempt by statute from disclosure
under the Freedom of Information Act.
In a third case, presently pending in the Federal courts,
Tax Analysts & Advocates is attempting to compel the Internal
Revenue Service to release all private letter rulings issued
since July 4, 1967, the effective date of the Freedom of
Information Act. The IRS has taken the position that most
private letter rulings contain tax return information which
may not be disclosed under the Code, because rulings deal
with transactions reported on tax returns and because rulings
are associated with tax returns. If Tax Analysts & Advocates
is successful, over 160,000 rulings would have to be released
by the Service.
Now enters Congress into the picture. After decisions
were rendered in the two cases I just mentioned, Congress
decided that legislation on this subject was needed, since,
according to the House Ways and Means Committee, "the courts
have not previously been given guidance by the Congress on
these difficult issues in the tax field."
That Committee has included this guidance in the Tax
Reform Act of 1975, H.R. 10612, due to be considered on the
floor of the House this week. If passed by both houses and
signed by the President, the net effect of this legislation
on the disclosability of your client's letter ruling would
be substantially the same as in the Tax Analysts and Freuhauf
cases as to any rulings requested after September 25, 1975.
If this bill is enacted, the IRS would have to open for
public inspection the full text of the determination, including the taxpayer's name and address and the name of the
IRS officer over whose name it is issued. The bill does not
provide for public inspection of all other documents submitted in connection with the ruling; however, the IRS has
agreed to include all essential information in the ruling
itself.
-5The bill does provide that certain information may be
deleted from the text of the ruling, such as commercial and
financial information which, if disclosed, could reasonably
be expected to cause material financial harm to any person;
and information which could reasonably be expected to constitute an unwarranted invasion of privacy if disclosed.
However, the IRS is not required to delete this information
from a ruling unless it agrees to the applicant's request to
do so, or a court determines that the information should be
deleted. The Service may decline to issue the letter ruling
if agreement is not reached with the taxpayer as to the information to be deleted. The bill also provides that information specifically exempted from disclosure by Federal
statute may be deleted.
Applying the provisions of this bill to our hypothetical
situation, it would be up to you and your client to meet with
IRS officials and review the information to be contained in
the letter ruling to determine what should be exempted. If '
both sides agree, your client will be issued a ruling; if
there is disagreement on the disclosure issue, no ruling willbe issued. In the case of a required ruling or technical advice memorandum, the bill does provide for a review by the
Tax Court if there is no agreement between the taxpayer and
the Service as to what portions of the ruling are to be open
to the public.
Other provisions of the bill include the following: The
text of the rulings will, generally, be open for publication
no earlier than 30 nor later than 40 days after issuance by
the Service or a Tax Court ruling. Postponement may be
obtained in certain circumstances for as much as 370 days.
These letter rulings will continue to have no precedential
value.
Prior rulings (those issued between July 4, 1967, and
September 25, 1975) will be disclosed, with identifying details deleted, as soon as practicable and contingent upon
appropriation of funds to cover the cost of preparing the
statements for public inspection.
Finally, required rulings and technical advice memoranda
will be open to the public with all identifying details deleted.
-6-
3M
Let us refer again to our hypothetical situation.
Suppose your client decides that he doesn't want to obtain
a private letter ruling because too many people would then
have access to his personal and financial information. He
asks you what the alternatives are. You point out that he'll
have to report essentially the same information about the
transaction on his Federal income tax return. Your client
then asks who will get to see his return and what will they
see.
"Tax returns" are presently protected from disclosure
by 26 U.S.C. §6l03(a). That term has been defined by the
regulations to include information returns, schedules, lists,
and other written statements which are designed to be a supplement to a return or part of a return. Under a variety of
statutes, regulations, and Executive Orders, tax returns and
tax return information are presently made available to the
following:
1. Officers and employees of the Treasury
Department whose official duties require such
access;
2. Justice Department attorneys and U.S.
attorneys where necessary in the performance of
official 'duties relating to Federal tax administration and for use in any Federal or state tax
litigation if the Federal Government is interested
in the result;
3. The Department of Justice in non-tax
litigation where the Federal Government is interested in the result;
4. Any Federal department or agency acting
in its official capacity, subject to approval by
the Secretary of the Treasury or his delegate;
5. Any official, body or commission lawfully charged with the administration of state
tax laws, upon written request by a state governor;
6. The three tax-writing Congressional committees and any other committees authorized by
Congressional resolution or Executive Order to
inspect returns and return information;
-7-
ffi
7. The President;
8. A stockholder of a corporation, as to
the corporation's return, if he holds 1% or more
of the corporation's stock;
9. Contractors who engage in the photographic reproduction of tax returns and return
information for the Secretary of the Treasury.
10. The Department of Justice insofar as
necessary to determine whether a prospective
juror has been the subject of a tax investigation.
While the statutory and regulatory apparatus controlling
access to tax returns and tax return information has generally
worked very well, the Treasury Department believes that access
to tax returns should be limited, and the American taxpayer
should know with certainty who has access to information
reported on his tax return and the circumstances under which
such access is permitted.
Therefore, Treasury has proposed legislation to ensure
the maximum confidentiality of tax returns and tax return
information consistent with effective tax administration and
the legitimate needs of other Federal agencies to obtain tax
information for law enforcement and statistical purposes and
of states for purposes of their own tax administration.
The proposed legislation would establish a general rule
that all tax returns and related information are confidential
and may not be disclosed except as authorized in the legislation. The definition of tax return information has been
made more specific and detailed under this proposal in order
that any information filed with the Service or compiled by
the Service which relates to a taxpayer's past, present or
future tax liability would be covered.
The principal instances in which tax return information
would be made available to agencies or persons outside the
Internal Revenue Service are as follows:
Specific statutory authority for access to tax returns
by the tax-writing committees of Congress would be continued
as under present law. Other committees would be permitted
access to tax returns only by Congressional resolution substantially in accordance with present procedure. The practice
under which a number of committees have obtained tax returns
pursuant to Executive Orders would be terminated, and control
bf Congressional access to tax returns would be placed in the
Congress itself.
The President and high-level employees of the White House
designated by the President would have access to tax returns
ind tax return information only upon a request signed by the
President personally. This would incorporate into the
statutory limitations those restrictions previously imposed
)y President Ford in Executive Order 11805 of September 20,
L974.
Federal agencies seeking access to tax returns or other
information concerning a taxpayer for law enforcement purposes
zould have to satisfy new statutory criteria which would be
>oth more specific and more restrictive than present law.
Tustice Department attorneys and U.S. attorneys would be
tuthorized access to tax returns and return information of a
>erson who is or may become a party in preparation for tax
.itigation or in an investigation pointing toward tax litigaion. In the case of a third party, tax returns and return
information would be available only if the third party conents, or if the returns or return information has or may have
bearing on the outcome of the possible or actual litigation.
Access to returns and return information by Federal
gencies for use in non-tax law enforcement would be limited
0 Federal proceedings where the United States is a party, and
hen only if the taxpayer himself is a party or consents to
he use, or if the information has or may have a direct bearing
pon the outcome of the proceeding because of a transactional
elationship between the taxpayer and a party to the proceeding.
ccess is also conditioned upon a finding by the Secretary or
is delegate that the requested information could not reasonably
e obtained from other sources. The items of information that
ould be supplied pursuant to a request for a tax check would
5 strictly limited and would be specified in the statute.
The Bureaus of the Census and Economic Analysis in the
apartment of Commerce would continue to have full access to
ix return data for statistical purposes. The Federal Trade
Mnmission would have access to tax return data only to the
397
extent necessary for the preparation of its Quarterly Financial Report. Other agencies could contract for special
statistical studies to be undertaken by the Internal Revenue
Service but would, of course, have to bear the cost of such
studies and would not receive information identifiable with
any taxpayer. In recognition that facility or other limitations might make it impractical for Internal Revenue Service
personnel to conduct all such special studies that might be
requested, provision is made for the Service to contract with
other Federal agencies or persons (which might include the
requesting party) to carry out such studies. Where such contracts are executed, the outside contractor would be fully
subject to all of the safeguards, including the criminal
penalties for unlawful disclosure, that are provided to ensure maximum protection of the confidentiality of tax information.
The legislation also contains provisions respecting
access to tax returns by states and by other persons/ procedures that must be followed in requesting tax information
and in handling tax information, and record keeping requirements respecting requests for tax information and the disposition of such requests. Access to tax returns and return
information would be limited to a state body, agency or commission lawfully charged with state tax lav; administration,
and only for purposes of administration. This information
could be withheld to the extent that the Secretary or his
delegate determines that disclosure would seriously impair
Federal tax law administration.
Finally, any possible application of the provisions of
the Privacy Act of 1974 regarding correction of records and
judicial remedies to any administrative or judicial determination of Federal tax liability- is excluded by this bill.
The legislation would provide for the first time a
comprehensive set of statutory rules governing the use of
tax information and would supersede both the existing tax
law provisions respecting such use and, to the extent applicable to tax returns, the Privacy Act of 1974. The proposed
statutory provisions governing access to these records wcu;J
be more detailed than under present law, under which most
restrictions are contained in regulations or Executive Orders.
This statute would narrowly restrict the discretionary
authority of the Internal Revenue Service to disclose tax
information, and would authorize the Service to withhold
tff
disclosure on a finding that the administration of the Federal
tax laws would be seriously impaired by such disclosure.
There has been substantial Congressional interest in
legislation on the privacy of tax returns. Numerous other
bills have been introduced on this subject, including ones
by Senator Weicker, Representative Litton and Representative
Vanik. It is likely that the issue of tax return privacy will
be dealt with by the 94th Congress.
We believe our proposal represents a responsible approach
in meeting the reasonable expectations of your client that the
disclosure of his personal financial history for purposes of
computing his taxes will not result in use of that information
for a host of unrelated purposes. Our voluntary self-assessment tax system depends on those expectations of confidentiality being met. The American taxpayer, a unique and valuable
phenomenon, deserves no less.
#
#
#
FOR IMMEDIATE RELEASE
DECEMBER 5, 1975
"
Contact: David Lefeve
964-5487 or
964-8079
TREASURY DEPARTMENT CONSUMER REPRESENTATION PLAN
The Treasury Department will give consumers a chance
to comment on its proposed consumer representation plan
through four conferences during the months of January and
February, 1976.
Treasury Department consumer conferences will be held
in Chicago on January 13, Atlanta on January 19, San
Francisco on January 29 and Washington, D.C. in February.
David Lefeve, Special Assistant to the Secretary for
Consumer Affairs, said today that the consumer conferences
are designed to stimulate public awareness and to provide a
mechanism for public response to the Treasury's consumer
representation plan.
The plan, which is designed to ensure greater consumer
input into policy decisions made by the Department, is part
of a program by 17 Federal departments and agencies to
respond to President Ford's directive of April 16, 1975, to
develop procedures whereby consumers will be given a greater
voice in the Federal Decision-making process.
The Treasury consumer representation plan appears,
along with those of each government department and agency,
in the Federal Register of November 26, 1975.
Questions regarding the Treasury consumer representation
plan should be directed to Mr. David Lefeve, Special Assistant
to the Secretary for Consumer Affairs, Department of the
Treasury, Washington, D.C. 20220; telephone (202) 964-5487
or 964-8079.
The consumer conferences will be open to the public.
oOo
WS-512
DepartmentoftheJREASURY ffl
HNGTON, D.C. 20220
TELEPHONE 964-2041
m
FOR RELEASE AT 11:30 A.M.
MONDAY, DECEMBER 8, 1975
STATEMENT OF JOHN A. BUSHNELL
ACTING ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
DEPARTMENT OF THE TREASURY
AT THE ANNUAL MEETING OF THE COUNCIL OF AMERICAS
NEW YORK CITY -- DECEMBER 8, 1975
Economic Development in Latin America
How Fast?
To Where?
I am delighted and honored to have this opportunity to address
the Council of the Americas. Having lived for six of the past
15 years in Latin America and having been continually concerned
with Latin American relations, I can attest to the Council's
service for the peoples of the Americas.
My main theme is the character and direction which economic
development is taking in Latin America. I shall also talk
briefly about access to private capital markets and about the
replenishment of the Inter-American Development Bank (IDB).
I believe that the most rapid economic progress for Latin Amer
and its people can be made by allocating resources through a
market system, by encouraging productive private investment
(both domestic and foreign) and by expanding trade, both
exports and imports. But there is a considerable body of
opinion in Latin America that favors government dominated
allocation of resources, concentration on public investment
and tight government controls on trade. The critical choice
for Latin America between these alternatives is rarely debated
on the economic merits. Economic philosophy has become a
political issue heavily influenced by the "love-hate" image of
the U.S., a desire for solidarity with the so-called "nonaligned," and the, unfortunately large, intellectual influence
of ideologies who do their utmost to discredit private
enterprise and the free market.
Much "of Latin America had been growing rapidly until it was
hit by the oil price hikes, world inflation and recession in
-the past two years. In 1970-73, the region's economic growth
was about seven percent per year. There were strong indications
that several Latin American countries were sustaining the type
WS-511
of growth
that promised to move them into the developed world
within
a generation.
%
(
Although there are significant differences, per capita incomes
are already relatively high. Latin America incomes average
above $700, exceeding $500 in most countries. With a few
exceptions, Latin American countries are middle income
countries, further along on the development ladder than most
of Africa and Asia. In a couple of countries and regions the
.-ji\ie levels of some European countries have been attained.
There is little doubt that the Latin American economies will
gradually recover from the oil shock. The question now is
what direction development in Latin America will take and the
direction will to a large extent determine the rate of growth
over the next decade or two.
Which road Latin America takes is of considerable importance to
the United States. I believe we have the most satisfactory and
productive relations with open-market economies. The spread of
government controlled economies around the world could
eventually cause the U.S. itself to move toward greater government direction and control. In Latin America, with ii;y
^
relatively high income levels and developed institutional b^se,
there is still every reason to hope that the spread of controls'
can be limited and perhaps reversed. And successful, open and
free economies in Latin America could shift the world balance
permanently toward the type of development we favor. One n
should not underestimate the importance of success in one developing country or area influencing developments in other
developing countries.
i
9-
For many years, development in Latin America was assisted by a
substantial flow of private direct investment and then by large
U.S. bilateral aid. These flows, although still important, iare
now secondary to private loans and flows from the multilateral
development banks, the World Bank and Inter-American Development
Bank, Most of these new flows are in the form of loans to the
public sector. Thus, to a degree, the current composition of
lending favors a greater governmental role substituting for the
private market and for private enterpreneurship. I would hope
that in coming years private flows to the private sector,
particularly private direct investment, can play a more
significant role0
L^r^e capital Inflows will be needed to support Latin growth
rates at the six to ten percent levels common before the OPEC
price hikes. Inflows will have to consist largely of nonconcessional capital from private sources . Msreover, what is
needed is an increase in the proportion of long-term private portfolio
-3-
capital and direct investment. Latin America will gradually
have to reduce the degree of its dependence on the short
maturities heavily used to finance deficits during 1974 and
1975 because such maturities would eventually impose a debt
service burden that could not be managed.
Whether reasonably satisfactory levels of capital inflow and
growth are attained will depend primarily on the policies
pursued by each country. While external conditions have an
important impact on the economies of this region, each country's
investment levels, trade, and growth rate will in the future,
as in the past, depend primarily on its own policies. Some
may opt for open economies, receive foreign investment and
other types of foreign capital and grow rapidly. Others may
pursue an inward-looking nationalistic path, restraining
their growth rates.
The policies to obtain needed capital and to expand exports
readily come to mind. Prices should be allowed to serve as
guides in allocating resources, so that capital, domestic and
foreign, can be used most productively. Domestic terms of
trade should not unduly favor industry and the urban sector
as*compared to agriculture. Exchange rates should balance
the supply and demand for foreign exchange. Interest rates
can be used to allocate scarce capital in the most productive
manner.
Prices that reflect relative scarcities, however important,
are not enough. A business climate that encourages private
investment of both foreign and domestic origin is essential
if growth possibilities are to be maximized. The economies
likely to be most dynamic are those in which a favorable
climate for private investment is combined with a price
system that attracts investment into the most productive use.
The investment climate is negatively affected by expropriation
and investment disputes. It has also been adversely affected
by widespread government restrictions and controls and by
uncertainty as to the rules of the game under which investors
operate.
The Latin American scene is mixed. The extent to which the
market is allowed to play its role is limited, more so in
some countries than in others. Nationalistic and socialistic
tendencies in recent years have affected capital adversely in
a number of countries, but in some a more positive attitude
has appeared.
-4Brazil's economic policies have been conducive to capital
inflows and their productive use. The climate in Chile and
Uruguay has recently improved remarkably. Many controls
have been lifted, the economies have been given a decidely
greater market orientation, and the official receptivity
toward private capital from abroad is better.
In general U.S. policy objectives are consistent with the
desires of Latin America. Clearly, Latin America wants
not only to reach higher living standards but to achieve
a greater degree of economic independence. Both of these
objectives are attainable only through an emphasis on
economic growth. Growth satisfies the aspirations for higher
consumption and welfare levels. Growth will lead to greater
diversity of economic activity and greater flows of domestic
savings and investment. There is, however, a paradox
troubling Latin America. To achieve true economic independence,
that is to say, a level of income and savings and a degree of
diversification which puts Latin America on a basis of
equality with developed regions, growth is necessary. But
the most rapid growth is attainable only if Latin America^
pursues policies which tend to integrate it with the world
economy through internationally free and open trade and
investment and such policies are perceived as a sacrifice
of independence.
High investment levels and expanding trade that will
accelerate Latin America's growth are also of interest to
the United States. In 1974, our trade with Latin America
accounted for about 15 percent of our imports and exports.
As Latin America grows, our trade with our neighbors to thefa
South will expand. We obtain a significant proportion of
our raw material imports from the region, and its potential^
from this point of view is considerable. Through its direct
investments, the U.S. already has an important economic stiftCe
in the region. Nearly 14 percent of total U.S. direct investment abroad, about $15 billion, is in Latin America,
representing about 60 percent of U.S. direct investment in
developing countries. Such investment has in the past and
hopefully will in the future continue to earn good returns
for the American economy while serving as a means to develop
Latin America's industry and agriculture and as a vehicle
for the transfer of technology.
What can the U.S. do to stimulate the needed private foreign
investment as well as the flow of private portfolio capital
to Latin America?
-5I believe we should counter tendencies toward expropriation
by taking a forthright stand. Congress has given us
legislative tools. These should be used in an even-handed
but forceful way. I believe that the results will improve
the investment climate in the whole region.
A few countries do immense harm to development in all
developing countries by disrupting the investment climate
through expropriations and similar actions. The developing
countries need the capital, technology and management skills
which are available principally from private firms in '
developed countries. Some developing countries seem to feel
that our firms are so eager to invest in their countries5
that they will invest regardless of the actions these
countries take against existing investments, or regardless of
the resolutions these countries push through international
organizations such as the UN. The losers from such actions
are the people of the developing countries who are denied
'the jobs, higher national incomes, and more rapid over-all
economic development that come with private investment. '" *'
Some developing countries believe that capital and technology
availablie through foreign aid and from the international
development banks can substitute for such private investment.
This is not the case. In fact bilateral and multilateral
public assistance should not be used to compensate for a
country's unwillingness to establish an investment climate
that would enable that country to take advantage of the
resources that would flow through the private market were
the climate conducive to such flows.
Private direct investment should again play a larger role.
At the same time, private portfolio investment, especially
of relatively long-term maturities should also be facilitated.
In this connection there is a distinction between the bank
and bond markets.
A useful method of increasing American bank lending to
Latin America would be to increase the number of banks
involved. One way to accomplish this is through co-financing
arrangements between the World Bank and the Inter-American
Development Bank and commerical banks. Through these
arrangements funds of banks and other institutions may flow
to Latin America, in effect piggy-backed on the analysis,
project development and solid reputation of the development
banks, as Mr. Ortiz-Mena has explained this morning. The
recent IDB co-financing arrangements for a steel project in
Argentina broke new ground because the interest rate of the
commercial
portion
isencourage
a variable
rate
based
the
London
impact
identifying
inter-bank
of the
rate.
opportunities
IDB We
and
World
and
Bank.
ways
this
to
type
expand
of on
imagination
the
development
in
^r
Turning to the bond markets, a working group of the
Development Committee associated with the IBRD and IMF
is currently analyzing LDC access to private capital markets
including constraints on the floating of bonds by
developing countries. This is a complicated issue but it is
already clear there are market imperfections such as the
limited nature of the secondary market which limit developing
country access to this important source of long-term funds.
Also, the developing countries themselves may have to do more
to build their reputation for on-time servicing of debt
before the bond market can be approached effectively for
large amounts of funds. Only the most sophisticated investors
fully appreciate the growing differences in the economic
situation and prospects of various developing countries.
Every headline that reports that the economic situation of
developing countries in general is difficult, every request
of one or a group of developing countries for debt rescheduling,
every change in government with uncertainties on debt servicing
weakens the reception for bonds of any developing country.
Before concluding, let me stress the importance of *
replenishing the resources of the Inter-American Development
Bank. In 1975, total IDB loan commitments will exceed
$1.3 billion. Both the ordinary capital and FSO resources
are virtually exhausted and IDB lending will have to stop
in early 1976 if the Congress does not approve the replenishment
authorization bill. As all of you can appreciate, a halt to
IDB lending would be a serious blow to Latin American development momentum and to our over-all relations with Latin America.
In approaching this replenishment, we considered two basic
factors. First, that several Latin American countries have
advanced to the stage where they do not need highly
^
concessional resources although they need an increased flow
of capital. Second, that appropriations of grant-like,
concessional assistance are increasingly limited by the U.S.
Congress because of the direct budgetary implications. We
tried to structure a package which would in effect trade-off
increased U.S. callable capital guarantees for reduced U.S.
appropriations of concessional contributions to the highly
concessional Fund for Special Operations (FSO) without weakening
the FSO in its support of the poorest countries.
To increase the impact of the FSO in the poorer countries we
have encouraged the more advanced Latin countries to halt
borrowing of convertible currency from the FSO and to make
part of their contributions to the FSO in convertible currencies
that respects
can be used
inwill
the make
poorerthe
countries.
have
agreed. ^ In
some
this
IDB a moreThey
truly
Inter-American
-7Bank. Together with the other members, we have also pressed
to bring a dozen non-regional donor countries into the Bank.
The result is that, even with the U.S. contribution to the
FSO during this replenishment at $600 million compared with
one billion in the last replenishment, there will be
substantially more soft funds available to each of the
poorer countries. At the same time, we have agreed to a much
larger U.S. contribution of callable capital which will allow
a substantial increase in IDB lending at more commercial terms
to the more advanced countries. We have also welcomed the
establishment of a special Venezuelan Trust Fund that has
been accompanied by large Venezuelan contributions to the FSO
for use in the poorer countries.
Over the four year period 1976-79, the U.S. contribution in
the proposed replenishment would be $2,250 million. The
actual cash outlay would be $720 million - - a decline from
our outlay of over $1.1 billion under the last IDB replenishment. Moreover, the United States, while still the most
Sportant donor, would be sharing less of the total burden.
e U.S. share would decline from 48 percent in the 1970-74
replenishment to 30 percent of total new resources to be made
available in 1976-79.
,$e are confident that the proposed package of measures for
"increasing the IDB's resources server; the interest of both
j^atin America and the United States. The IDB's resource
replenishment will be coming up for a vote on the House floor
9^his week.
In summary, I believe Latin America's economic potential is
j*reat, its opportunities excellent. But, each country will
^ave to decide for itself whether to follow open, marketoriented policies, whether it will further the kind of climate
that will maximize investment and its growth potential. Some
countries will take advantage of their opportunities and I hope
the Council will encourage countries to take the road to open
economies with dispersed economic decision-making. I would
like to commend the Council of the Americas for the important
contribution it is making to better understanding of the role
of the private sector, both foreign and domestic. The close
relations you have established with your counterparts in
Latin America will continue to assist in creating a better
climate for investment and to a deeper understanding that
growth and the transfer of technology can easily by stymied
by short-sighted policies ignoring the key role of free
markets and private capital.
\e Department of theJREASURY
SHINGTON, D.C. 20220
TELEPHONE 964-2041
<&?
December 5, 1975
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF $1.2 BILLION
OF 10-DAY AND 18-DAY TREASURY BILLS
The Treasury has accepted $0.6 billion of the $1.7 billion of
tenders received for the 10-day Treasury bills and $0.6 billion of
the $2.0 billion of tenders received for the 18-day Treasury bills,
to be issued December 8, 1975, auctioned today. The range of accepted
bids was as follows:
RANGE OF
ACCEPTED BIDS
High
Low
Average
10-day bills
maturing December 18, 1975
Price
Discount
Rate
99.858
99.854
99.855
5.112%
5.256%
5.220%
Investment
Rate
5.20%
5.35%
5.31%
18-day bills
maturing December 26, 1975
Price
99.751
99.739
99.743
Discount
Rate
Investment
Rate
4.980%
5.220%
5.140%
Tenders at the low price for the 10-day bills were allotted 90%.
Tenders at the low price for the 18-day bills were allotted 3%.
WS-514
5.08%
5.32%
5.24%
1 Of
eDepartment of theJREASURY
IJf
Ml
TELEPHONE 964-2041
JHINGTON, D.C. 20220
December 8, 1975
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.9 billion of 13-week Treasury bills and for $3.3 billion
of 26-week Treasury bills, both series to be issued on December 11, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
26-week bills
maturing June 10, 1976
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing March 11. 1976
Price
High
Low
Average
Discount
Rate
98.585 a/ 5.598%
98.569
5.661%
98.576
5.633%
Investment
Rate 1/
5.77%
5.84%
5.81%
Price
Discount
Rate
96.902 b/ 6.128%
96.889
6.154%
96.894
6.144%
Investment
Rate 1/
6.43%
6.46%
6.45%
a/ Excepting 1 tender of $900,000
b/ Excepting 2 tenders totaling $1,855,000
Tenders at the low price for the 13-week bills were allotted 34%.
Tenders at the low price for the 26-week bills were allotted 6%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
43,395,000
Boston
$
New York
3 ,445,035,000
Philadelphia
34,710,000
Cleveland
47,095,000
34,495,000
Richmond
Atlanta
29,205,000
259,255,000
Chicago
61,420,000
St. Louis
29,175,000
Minneapolis
43,430,000
Kansas City
32,770,000
Dallas
San Francisco_ 286,345,000
TOTALS, 346, 330, 000
Accepted
$
36,395,000
2,310,535,000
34,710,000
47,095,000
32,995,000
29,205,000
149,155,000
44,925,000
20,175,000
41,430,000
29,470,000
126,845,000
Received
Accepted
$
29,925,000 $
10,925,000
« 4,724,125,000
2,542,810,000
•
31,950,000
6,950,000
•:
70,525,000
18,275,000
•
47,620,000
16,120,000
:
28,265,000
25,315,000
318,085,000
55,585,000
:
48,335,000
18,335,000
:
29,565,0007,565,000
:
26,265,000
22,265,000
•
12,845,000
10,845,000
:
782,935,000
565,935,000
$2,902,935,000 c/$6,150,440,000
$3,300,925,000 d/
-'Includes $494,125,000 noncompetitive tenders from the public.
-'Includes $207,245,000 noncompetitive tenders from the public.
J7 Equivalent coupon-issue yield.
WS-521
^H
©
^/
deral financing bank
a> o
WASHINGTON, D.C. 20220
/
FOR IMMEDIATE RELEASE
t
f
Summary of Lending Activity
November 16 - November 30, 1975
Federal Financing Bank lending activity for the period
November 16 through November 30, 1975 was announced as follows
by Roland H. Cook, Secretary:
The Federal Financing Bank made the following loans to
utility companies guaranteed by the Rural Electrification
Administration:
Date
Borrower
Amount
Maturity
Interest
Rate
11/17 Tri-State Generation
'
§ Transmission
Association
$ 2,922,000
12/31/09
8.425
11/17 Tri-State Generation
/
§ Transmission
Association
23,600,000
12/31/09
8.425
11/17 Associated Electric
Coop, Inc.
5,000,000
11/17/77
7.36'7
11/20 South Mississippi
Electric Power
Association
9,125,000
11/28/7
11/21 North Florida
Telephone
Company
4,215,595
12/51/09
8.471
11/24 Cooperative Power
Association
5,686,000
12/51/09
8.522
900,000
11/26/77
".495
11/28
Somerset Telephone
Company
. 436
Interest payments are made quarterly on the above RHA loans.
(over)
WS-520
f-H
^7d
On November 18, the Student Loan Marketing Asssociaton
borrowed $25 million at 6.73% interest. The loan matures
November 16, 1976. The proceeds of the loan were used to
partially repay a $35 million loan maturing with the FFB.
On November 18, the Bank purchased $1,579,000 of notes
from the Department of Health, Education, and Welfare. The
Department had previously acquired the notes which were
issued by various public agencies under the Medical
Facilities Loan Program. The notes purchased by the
Federal Financing Bank are guaranteed by HEW. Final
maturity is July 1, 2000. The interest rate is 8.394%.
On November 19, the FFB purchased the following 10year debentures from Small Business Investment Companies
at an interest rate of 8.205%:
Borrower Amount
Clarion Capital Corporation (Ohio) $2,000,000
Monmouth Capital Corporation (New Jersey) 200,000
These debentures are guaranteed by the Small Business f
Administration.
rt
o
n
The Bank made the following advances to borrowers '
guaranteed by the Department of Defense under the Foreign
Military Sales Act:
Interest
Date
Borrower
Amount
Rate
Maturity
11/21 Government of
Argentina
$626,774.16
8.026
4/30/83
11/26 Government of
Korea
848,924.98
7.981
6/30/83
11/25 Government of
Brazil
613,999.50
8.084
10/1/83
On November 24, the US Railway Association rolled over
Note No. 3 in the amount of $167,679,173.63, borrowed
$2,096,301.19 to cover the interest due on that day, and
borrowed $1,424,525.18 in new money. The interest rate
is 5.886%. The loan matures February 23, 1976. Note No. 3
is a $296 million 91-day renewable line of credit with the
FFB. USRA borrowings are guaranteed by the Department of
Transportation.
(over)
<£//
On November 24, 1975, the Bank advanced $2,517,144.28
under a June 1, 1975 agreement with the National Railroad
Passenger Corporation and others to finance the purchase
of 25 GE diesel electric locomotives. The agreement provides
for serial repayments with a final maturity date of December
31, 1988. The rate of interest, set at the time of the
agreement, is 7.92%.
On November 25, 1975, the Bank advanced $1,056,927.71
under a November 25, 1975 agreement with the National
Railroad Passenger Corporation and others to finance 26
GE electric locomotives. The agreement provides for
serial repayments with a final maturity date of July 15, 1989.
The interest rate is 8.375%.
The Department of Transportation guarantees the repayment
of advances under these agreements with Amtrak.
On November 25, the FFB purchased a $500 million 5-year,
Certificate of Beneficial Ownership from the Farmers Home
Administration. The maturity is November 25, 1980. The
interest rate is 8.27% on an annual basis.
On November 26, the Tennessee Valley Authority borrowed
$165 million from the FFB at an interest rate of 5.816%.
The note matures February 27, 1976. The proceeds of the
loan were used to repay a $120 million note maturing with
the FFB and to raise new funds.
Federal Financing Bank loans outstanding on November 30,
1975 totalled $16.7 billion.
oOo
REMARKS BY THE HONORABLE WILLIAM E. SlnOiJ
SECRETARY OF I HE IREASURY
DELAWARE REPUBLICAN DINNER
WILMINGTON, DELAWARE
DECEMBER 8, 1975
BILL ROTH, PETE DU PONT, HERMAN BROWN; AND LADIES AND
GENTLEMEN: . ,.
WHEN PETE DU PONT FIRST ASKED ME TO JOIN THIS GATHERING
TONIGHT, HE TOLD ME THAT THE REPUBLICAN PARTY ORGANIZATION
IN DELAWARE WAS ONE OF THE BEST IN THE NATION — BUT HE
NEVER TOLD ME HOW WONDERFULLY ENTHUSIASTIC YOU ARE.
I AM
DEEPLY GRATEFUL FOR YOUR WARM WELCOME, AND I HOPE THAT YOU
ENJOY MY VISIT AS MUCH AS I HAVE ALREADY.
T CAN'T TELL YOU HOW GOOD IT IS TO BE AMONG SO MANY
FRIENDLY FACES.
As MY GOOD FRIEND ABE BEAME WILL TELL YOU,
THIS IS THE FIRST TIME IN MONTHS THAT I'VE BEEN ABLE TO COME
so CLOSE TO NEW YORK CITY AND HAVE MY SECRET SERVICE AGENTS
RELAX.
WHILE THE TOUGH STAND TAKEN ON NEW YORK CITY WAS, I
«
AM CONVINCES, THE RIGHT POSITION TO TAKE BECAUSE, AMONG
q/3
- 2 OTHER THINGS, IT PRODUCED RESULTS, IT WASN'T DESIGNED TO
ENDEAR ME TO THE LOCAL CITIZENRY. ONE FELLOW FROM NEW YORK
WROTE ME A FEW WEEKS AGO TO-REMIND ME THAT THE FIRST SECRETARY
OF THE TREASURY, ALEXANDER HAMILTON, HAD BEEN BORN OUT OF
WEDLOCK. "I WANT YOU TO KNOW," THIS FELLOW WROTE, "THAT AS
FAR AS 1 AM CONCERNED, HAMILTON CERTAINLY WASN'T THE ONLY
TREASURY SECRETARY WHO WAS A REAL BASTARD."
SO IT'S GOOD TO BE AMONG FRIENDS, AND ESPECIALLY
AMONG
FRIENDS WHO UNDERSTAND HOW IMPORTANT IT IS FOR THE REPUBLICAN
PARTY TO BE, ABOVE AND BEYOND ANYTHING ELSE, A PARTY THAT
STANDS FOR SOMETHING — NOT A PARTY DEDICATED TO PARTISANSHIP
BUT A PARTY DEDICATED TO PRINCIPLES.
THAT'S ONE OF THE REASONS 1 so READILY ACCEPTED THE
INVITATION TO COME HERE TONIGHT: BECAUSE I BELIEVE THAT THE
REPUBLICAN LEADERSHIP THAT YOU HAVE SENT TO WASHINGTON -BILL ROTH AND PETE DU PONT — ARE FIRMLY COMMITTED TO THE
0
- 3-
?/?
PRINCIPLES THAT MUST GUIDE THIS NATION INTO THE 21ST CENTURY.
DELAWARE IS AFFECTIONATELY KNOWN ACROSS THE LAND AS THE
FIRST STATE IN THE UNION; I KNOW THAT YOU MUST BE PROUD THAT
YOUR.ELECTED LEADERS ARE ALSO AMONG THE FINEST IN THE
COUNTRY.
As WE LOOK AHEAD TO THE CAMPAIGNS O- 1976, IT IS
APPARENT THAT BY FAR AND AWAY THE NUMBER ONE ISSUE NEXT"YEAR "
WILL BE THE STATE OF THE NATIONAL ECONOMY, VOTERS WILL
RIGHTFULLY BE ASKING WHICH PARTY CAN BE THE BEST STEWARD OF
THEIR ECONOMIC AFFAIRS. I THOUGHT I MIGHT OFFER A FEW
OBSERVATIONS TO YOU TONIGHT ABOUT WHAT I FORESEE FOR THE
ECONOMY AND WHAT THE FUNDAMENTAL ECONOMIC ISSUES MUST BE.
WHENEVER ANY GOVERNMENT OFFICIAL FROM WASHINGTON
BEGINS TO TELL YOU HOW MUCH HE'S DONE FOR YOU LATELY,
YOU'D BETTER HOLD ONTO YOUR HATS -- AND YOUR WALLETS TOO.
IF THE GOVERNMENT WERE REPORTING ON THE FATE OF'THE TITANIC
AS ONE CRITIC SAID, THE GOVERNMENT PRESS RELEASE WOULD SAY
THAT "THE TITANIC HAS JUST STOPPED IN MID-OCEAN TO TAKE or; A
FRESH SUPPLY OF ICE." THERE'S MORE TRUTH TO THAT STATEMENT
THAN MOST OF US WOULD CARE TO ADMIT.
HAVING SAID THAT, HOWEVER, I MUST ADD THAT FROM MY
VANTAGE POINT, THE IMMEDIATE PROSPECTS FOR THE ECONOMY ARE
MUCH MORE ENCOURAGING THAN SOME ECONOMISTS HAVE RECENTLY
SUGGESTED. I AM THE FIRST TO ARGUE THAT WE hAVE SOME
SERIOUS HURDLES UP AHEAD AND I WILL DISCUSS THEM IN A MINUTE,
BUT LOOKING AT THE PROSPECTS FOR THE NEXT YEAR OR SO, I WOULD
HAVE TO SAY THAT I AM OPTIMISTIC. INDEED, I THINK THE RECOVERY
NOW UNDERWAY IS ON TARGET. BUT LET US REMEMBER THAT THIS IS
THE MOST DELICATE STAGE OF A RECOVERY ~ THE STAGE WHEN, IN
THE PAST, WE HAVE SO OFTEN MADE OUR WORST MISTAKES, TRYING
TO SPEED UP THE PROCESS TOO RAPIDLY. UNDOUBTEDLY, OUR FISCAL
AND MONETARY POLICIES IN THE MONTHS AHEAD WILL BE FACING NEW •
TESTS OF RESPONSIBILITY.
^
WHEN PRESIDENT FORD TOOK OFFICE, AS YOU WILL RECALL,
HE INHERITED THE HIGHEST INFLATION RATE IN OUR PEACETIME
HISTORY — 14 PERCENT ~ WHI'CH, AS EVENTS PROVED OUT, WAS
DRIVING US TOWARD A VERY SEVERE RECESSION. BY EARLY THIS
YEAR, UNEMPLOYMENT ROSE TO 8.9 PERCENT.
4/?
- 5SINCE THAT TIME, THE INFLATION RATE HAS BEEN CUT IN
HALF. \A MILLION JOBS HAVE BEEN CREATED. UNEMPLOYMENT HAS
BEEN REDUCED TO 8.3 PERCENT.- AND THE GNP IN THE THIRD
QUARTER REGISTERED ONE OF THE BIGGEST QUARTERLY GAINS INMODERN TIMES. I'HESE ARE ALL VERY SO.ID ACCCM?_I SHMENTS, AND
1 THINK THAT PRESIDENT FORD CAN JUSTIFIABLY HE PRCJB OF
THEM.
WE DID, AS YOU KNOW, EXPERIENCE SOME DISAPPOINTING
RESULTS IN THE OCTOBER FIGURES FOR UNEMPLOYMENT, INFLATION
AND THE LEADING INDICATORS. BUT 1 WOULD CAUTION AGAINST
READING TOO MUCH INTO THE STATISTICS FOR ONE OR TWO MONTHS,
INEVITABLY, AS THE RECOVERY CONTINUES, THE NUMBERS WILL GYRATE.
BUT ONE MONTH'S FIGURES DON'T REVERSE A GENERAL TREND. YOU
KAY REMEMBER THE FLURRY OF CONCERN THIS SUMMER WHEN WE HAD
A COUPLE OF ROUGH INFLATION FIGURES: CONSUMER CONFIDENCE SAGGED,
THE STOCK MARKET SANK, AND SOME OF THE "CHICKEN LITTLES" SHRIEKED
*
THAT THE SKY WAS FALLING.
- .6 -
7 [7
IT DIDN'T, OF COURSE, AND TODAY THE RATE OC INFLATION IS
SUBSTANTIALLY BELOW THE FIGURES OF THE SUMMER.
THERE ARE TWO IMPORTANT IDEAS TO BEAR IN MIND AS THE
RECOVERY PROGRESSES:
FIRST, WE' SHOULD REMEMBER THE RATTER:; OF RECOVERIES IN
THE PAST. SOME OF THE ECONOMISTS IN THE TREASURY DEPARTMENT
HAVE BEEN STEADILY CHARTING THE COURSE OF THIS RECOVERY
AGAINST FOUR OTHER ONES WE HAVE HAD OVER THE LAST 20 YEARS.
THE RESULTS INDICATE THAT BY MANY IMPORTANT MEASUREMENTS THIS
REOCVERY IS PROCEEDING AT A BETTER PACE THAN THE OTHERS.
COMPARING THE INCREASES IN RETAIL SALES, WORKHOURS IN
MANUFACTURING, AND GROWTH IN EMPLOYMENT, WE FIND THAT THE
STATISTICS THIS TIME ARE ALL BETTER THAN THE AVERAGE RESULTS
OF THE PAST RECOVERY PERIODS.
SECOND, AS MENTIONED EARLIER, WE SHOULD REALIZE THAT
THIS IS A VERY DELICATE POINT IN THE RECOVERY CYCLE ~ A POINT
0
WHERE PEOPLE SOMETIMES
- .6 -
?ff
IT DIDN'T, OF COURSE, AND TODAY THE RATE OF INFLATION IS
SUBSTANTIALLY BELOW THE FIGURES OR THE SUMMER.
THERE ARE TWO IMPORTANT IDEAS TO BEAR IN MIND AS THE
RECOVERY PROGRESSES:
FIRST, WE SHOULD REMEMBER THE PATTERN OF RECOVERIES IN
THE PAST. SOME OF THE ECONOMISTS IN THE TREASURY DEPARTMENT
HAVE BEEN STEADILY CHARTING THE COURSE OF "THIS RECOVERY
AGAINST FOUR OTHER ONES WE HAVE HAD OVER THE LAST 20 YEARS.
THE RESULTS INDICATE THAT BY MANY IMPORTANT MEASUREMENTS THIS
REOCVERY IS PROCEEDING AT A BETTER PACE THAN THE OTHERS.
COMPARING THE INCREASES IN RETAIL SALES, WORKHOURS IN
MANUFACTURING, AND GROWTH IN EMPLOYMENT, WE FIND THAT THE
STATISTICS THIS TIME ARE ALL BETTER THAN THE AVERAGE RESULTS
OF THE PAST RECOVERY PERIODS.
SECOND, AS MENTIONED EARLIER, WE SHOULD REALIZE THAT
THIS IS A VERY DELICATE POINT IN THE RECOVERY CYCLE — A POINT
0
WHERE PEOPLE SOMETIMES
BECOME FRUSTRATED WITH THE PACE OF THE RECOVERY AND INSIST
THAT THE GOVERNMENT POUR ON THE COAL, TWICE IN THE LAST
DECADE WE HAVE SUCCUMBED TO SUCH PRESSURES, AND EACH TIME
THE STOP-GO BEHAVIOR HAS ULTIMATELY LEFT US WORSE OFF THAN
BEFORE, NOW WE MUST RESIST THE SIREN SONGS Or NEW, HIGH_V
EXPANSIONARY POLICIES, RECOGNIZING THAT THEY LEAD DOWN THE
PATH TO MORE INFLATION AND POSSIBLY ANOTHER RECESSION,
SO THIS IS A TIME WHEN I WOULD URGE THE SKIPPER 0- THE
SHIP TO HOLD "STEADY AS YOU GO", WE MUST ACT WISELY AND
PRUDENTLY; IT WILL TAKE TIME TO REMEDY THE YEARS OF POLICY
MISMANAGEMENT IN WASHINGTON; INDEED, WE CANNOT PAY FOR THE
SINS OF A DECADE WITH A SINGLE YEAR OF PENNANCE,
BASED UPON EVERYTHING WE KNOW TODAY, THE ECONOMY SHOULD
CONTINUE TO MOVE UPWARDS, ACHIEVING AN AVERAGE REAL GROWTH
RATE OF 7 PERCENT BETWEEN MID-1975 AND MID-1975, WE EXPECT
UNEMPLOYMENT TO CONTINUE ITS DOWNWARD PATH TOWARD 7 PERCENT
BY THE END OF 1976. INFLATION SHOULD
/ M
ALSO CONTINUE TO MODERATE, AVERAGING APPROXIMATELY 6 PERCENT
DURING 1976. AND BASED UPON HISTORICAL EXPERIENCE,
PARTICULARLY THE LAST FOUR RECOVERIES, WE SHOULD EXPECT THE
CURRENT RECOVERY TO CONTINUE THROUGH 1976 INTO 1977 AND
PROBABLY BEYOND.
I SAY ALL OF THIS, OF COURSE, CONTINGENT UPON THE - • - -
- 8 "•
Jl?
ABSENCE OF OUTSIDE SHOCKS TO OUR ECONOMY. IF ANOTHER OIL
EMBARGO WERE UNEXPECTEDLY THRUST UPON US, A_L EETS WOULD 3E
OFF. THE VERY FACT.THAT OUR ECONOMY REMAINS SO VULNERABLE
TO THE BLACKMAIL OF FOREIGN NATIONS SHOULD 5E A MATTER OF
GRAVE CONCERN FOR ALL OF US. -
MY COMM.ENTS ON THE ECONOMY ALSO ASSUME THERE IS NO
GREAT LOSS OF CONSUMER CONFIDENCE. THERE MAY BE A TENDENCY
IN AN ELECTION YEAR TO TRY TO FRIGHTEN THE AMERICAN PEOPLE
INTO BELIEVING THAT THE ECONOMY IS THE FINAL THROES OF A
HUGE COLLAPSE BECAUSE OF REPUBLICAN MISMANAGEMENT. I DON'T
THINK ANY OF US NEED TO INVENT A "GOOD NEWS MACHINE" TO
COMBAT THAT SORT OF POLITIKING, BUT I DO THINK WE HAVE A
RESPONSIBILITY TO TELL IT STRAIGHT TO THE PEOPLE OF THIS
COUNTRY. SURE, WE HAVE OUR ECONOMIC PROBLEMS; WE ALWAYS
WILL. BUT THIS NATION IS STILL INCREDIBLY STRONG,
POWERED
BY THE MOST DYNAMIC AND MOST PRODUCTIVE PRIVATE ENTERPRISE
SYSTEM IN THE ENTIRE WORLD, AND IF WE WILL ONLY LET THE
SYSTEM WORK ITS MAGIC —
IF WE WILL MAINTAIN BALANCED FISCAL
AND MONETARY POLICIES — THEN WE WILL HAVE A SUSTAINED, IJRABLE
RECOVERY AND WE CAN BEGIN TO ENJCY ONCE AGAIN THE FRUITS OF
PROSPERITY,
BY HOLDING
STEADY ON COURSE, MAKING OCCASIONAL ADJUSTMENTS
AS REQUIRED, WE THUS FORESEE CONTINUING IMPROVEMENTS IN THE
ECONOMY DURING 1976 ~ IMPROVEMENTS WHICr. WILL PROVIDE A
SOLID RECORD OF ACHIEVEMENT TO PRESENT TO THE ELECTORATE:
BUT WHAT LIES BEYOND NEXT YEAR'S HORIZON? CAN THE ECONOMY
STAY ON AN UPWARD COURSE THROUGH THE LATE 1970'S AND INTO
THE 1980'S, OR CAN WE ANTICIPATE FURTHER DOUBLE-DIGIT INFLATION
AND PERHAPS ANOTHER SEVERE DIP IN OUR FORTUNES? CAN WE
PRESERVE AND STRENGTHEN OUR PRIVATE ENTERPRISE SYSTEM, OR WILL
WE ABANDON OUR FATE TO THE CENTRALIZED PLANNERS WHO WANT TO
TAX AND REDISTRIBUTE MORE AND MORE OF OUR EARNINGS AND REGIMENT
EVERYTHING IN THE ECONOMY THAT MOVES? THESE QUESTIONS MUST
BE CENTRAL TO THE POLITICAL DEBATES OF 1976 BECAUSE ULTIMATELY
THE WAY IN WHICH THEY ARE ANSWERED WILL SHAPE THE FUTURE OF
OUR COUNTRY FOR YEARS TO COME.
MY EXPERIENCE IN WASHINGTON CONVINCES ME THAT THE
ROOT OF OUR CURRENT ECONOMIC TR0U3LES LIES IN THE
MISGUIDED GOVERNMENT POLICIES THAT BEGAN BACK IN THE
1960's. THE HORRENDOUS GROWTH OF BIG GOVERNMENT DURING
THE PERIOD, ACCOMPANIED BY EXCESSIVE FISCAL AND MONETARY
POLICIES, LEFT US WITH A LEGACY OF INFLATION, CONFUSION
AND FEAR WHICH STILL PLAGUE US TODAY.
JUST LOOK AT THE RECORD:
WHEN PRESIDENT EISENHOWER LEFT OFFICE, THE FEDERAL
BUDGET STOOD AT APPROXIMATELY $100 BILLION. SLNCE THEN,
IT HAS NEARLY QUADRUPLED IN SIZE.
IN THE EARLY
l960's->
THE
FEDERAL DEBT STOOD AT
$240
BILLION. SINCE THEN, THE DEBT HAS MORE THAN DOUBLED.
IN THE EARLY 1960'S, WE HAD ABOUT 100 DOMESTIC ASSISTANCE
PROGRAMS. TODAY THERE ARE OVER 1CG0.
AND IN THE EARLY
I960"s, THE MONEY SUPPLY WAS GROWING AT
AN AVERAGE RATE OF 2k PERCENT A YEAR. SINCE THEN, THE GROWTH
HAS MORE THAN DOUBLED.
THE FEDERAL GOVERNMENT TODAY IS THE NATION'S BIGGEST
SINGLE EMPLOYER, ITS BIGGEST CONSUMER, AND ITS BIGGEST
BORROWER.
OF COURSE, THE ENERGY CRISES, FOOD SHORTAGES AND THE
LIKE HAVE CONTRIBUTED TO INFLATION AND UNEMPLOYMENT. BUT THE
BASIC MOMENTUM TOWARD HIGHER AND HIGHER RATES 0- INFLATION AND
UNEMPLOYMENT HAS BEEN GENERATED BY EXCESSIVE SPENDING AND
MONETARY POLICIES PRACTICED IN WASHINGTON OVER MORE THAN A
DECADE.
GROWING GOVERNMENT SPENDING, ESPECIALLY DURING THE BOOMS
OF RECENT YEARS, HAS PLACED HEAVY DEMANDS UPON THE ECONOMY,
HELPING TO DRIVE UP PRICES AND DRIVE DOWN PUBLIC CONFIDENCE.
GROWING GOVERNMENT BORROWING, MOSTLY TO COVER CHRONIC DEFICITS,
HAS DRAINED ENORMOUS AMOUNTS OF MONEY FROM THE PRIVATE MONEY
MARKETS — A THIRD OF A TRILLION DOLLARS IN THE LAST DECADE
ALONE -- HELPING TO DRIVE UP INTEREST RATES AND DENYING MANY
PRIVATE COMPANIES THE MONEY THEY NEED FOR EXPANSION. AND TOO
MUCH GROWTH IN THE MONEY SUPPLY HAS MEANT, IN EFFECT, THAT
"MORE AND MORE MONEY IS CHASING FEWER AND FEWER GOODS" —
THE CLASSIC RECIPE FOR INFLATION.
AS A NATION, WE CANNOT LONG ENDURE SUCH PRACTICES. THE
UNRESTRAINED GROWTH OF GOVERNMENT WILL INEVITABLY BRING MORE
INFLATION, MORE UNEMPLOYMENT, AND GREATER MISERY. OUR FINANCIAL
SYSTEM IS ALREADY UNDER STRAIN AND-CANNOT TOLERATE ANOTHER FIVE
YEARS OF UNRELIEVED PRESSURE. A PUBLIC THAT LOSES FAITH IN
OUR DEMOCRATIC INSTITUTIONS WILL EVENTUALLY ORDER THEIR WHOLESALE
REPLACEMENT. AND ULTIMATELY,. WE WILL'USHER IN THE AGE OF BlG
-13-
tfrf
BROTHER THAT WILL DESTROY NOT ONLY OUR ECONOMIC FREEDOMS BUT
OUR POLITICAL AND SOCIAL FREEDOMS AS WELL.
CAN THERE BE ANY DOUBT THAT THE SINGLE LARGEST ECONOMIC
ISSUE OF 1976 MUST BE SIMPLY THIS: ARE WE GOING TO TURN THE
MANAGEMENT OF OUR ECONOMY OVER TO THE SAME PEOPLE WHO PLANTED
THE SEEDS OF THE WORST INFLATION AND THE WORST UNEMPLOYMENT IN
MORE THAN A GENERATION OR WILL OUR LEADERS BE THOSE WHO ARE
COMMITTED TO SOUND ECONOMICS POLICIES ~ TO BOTH PROSPERITY
AND-FREEDOM? THAT IS JJHE CHOICE WE FACE AS A NATION, AND
WE MUST BE ABSOLUTELY CERTAIN THAT THE AMERICAN PEOPLE FULLY
UNDERSTAND IT.
PRESIDENT FORD IS GOING TO THE PUBLIC WITH A SOUND,
RESPONSIBLE PROGRAM TO CARRY CUT OUR COMMITMENT TO GROWTH
AND FREEDOM.
FIRST, HE IS PROPOSING THAT WE BRING THE FEDERAL BUDGET
INTO ACTUAL BALANCE WITHIN THREE YEARS ~ SOMETHING WE HAVE
DONE ONLY ONCE IN THE LAST 17 YEARS. THE PRESIDENT'S PLAN
TO CUT PROJECTED SPENDING DURING FISCAL YEAR 1977 TO $28 BILLION
AND TO RETURN THOSE SAVINGS DOLLAR-FOR-DOLLAR TO THE AMERICAN
PEOPLE THROUGH A PERMANENT TAX CUT REPRESENTS A MAJOR STEP IN
THAT DIRECTION. I HE DEMOCRATS IN THE CONGRESS, OF COURSE, WANT
TO TAKE THE EASY WAY OUT: CUT TAXES BJ" MAKE NO COMMITMENT
ON SPENDING.
WE SAY THAT WE CAN NO LONGER ACCEPT "POLITICS
AS USUAL" IN WASHINGTON; WE REJECT THE OLD FORMULA OF
"SPEND AND SPEND, ELECT AND ELECT". WE HAVE TO PUT OUR
ECONOMIC HOUSE IN ORDER, AND THE TIME TO START IS NOW.
SECONDLY, THE PRESIDENT IS PROPOSING THAT WE LIFT
THE HEAVY HAND OF GOVERNMENTAL REGULATION "T-AT IS THREATEN IN
TO STRANGLE THE FREE ENTERPRISE SYSTEM. IF THIS COUNTRY
IS TO BECOME MORE SELF-SUFFICIENT IN ENERGY — AS WE MUST —
IT IS IMPERATIVE THAT CONTROLS BE LIFTED FROM THE OIL
AND NATURAL GAS INDUSTRIES. BUT THE REFORMS MUST NOT
STOP THERE: MILLIONS OF BUSINESSMEN AND WOMEN IN OTHER
INDUSTRIES, ESPECIALLY SMALL BUSINESSES, ARE NOW ENSNARLED
IN SO MUCH BUREAUCRATIC RED TAPE THAT THEIR PRODUCTION
IS BECOMING LESS EFFICIENT AND MORE EXPENSIVE FOR
THE CONSUMER. LET US BE SURE THAT PEOPLE UNDERSTAND THAT
THE CONSUMER WILL GAIN MORE FROM REGULATORY REFORM THAN
ANYONE ELSE; IT'S HIS POCKETBOOK THAT IS AT STAKE.
THIRDLY, THE PRESIDENT IS PROPOSING THAT THE GOVERNMENT
HELP TO INVIGORATE THE PRIVATE SECTOR THROUGH TAX REFORM.
SPECIFICALLY, WE ARE ASKING THAT THE CONGRESS ACT IMMEDIATELY
TO REDUCE BOTH INDIVIDUAL AND CORPORATE TAXES ~ THE PROVISION
THAT IS TIED TO THE SPENDING CUT. OVER THE LONGER
RUN, WE ARE PROPOSING TO ELIMINATE THE DOUEI_E TAXATION
ON BUSINESS PROFITS — SOMETHING TNAT MOST OTHER INDUSTRIALIZED
COUNTRIES OF THE WEST HAVE ALREADY DONE ~ SO THAT WE
CAN ENCOURAGE GREATER PERSONAL SAVINGS AND INVESTMENT.
EVERY MAJOR STUDY OF THE ISSUE MAKES IT CLEAR THAT THE
AMOUNT OF MONEY NEEDED FOR CAPITAL INVESTMENT IN THE NEXT
10 YEARS WILL BE APPROXIMATELY THREE TIMES AS LARGE AS
WHAT WE HAVE INVESTED IN THE LAST 10 YEARS. IT IS IMPERATIVE
THAT WE SHIFT AWAY FROM OUR EXCESSIVE EMPHASIS UPON
GOVERNMENT SPENDING AND CONSUMPTION TO A GREATER EMPHASIS
UPON SAVINGS AND INVESTMENT.
LAST WEEK, SPEAKING NOT FOR THE PRESIDENT BUT FOR
77
- 17 MYSELF, 1 ARGUED THAT WE SHOULD CARRY TAX REFORM TO ITS
LOGICAL CONCLUSION. THE SUCCESS OF THE FEDERAL TAX SYSTEM -AND WE SHOULD ALWAYS REMEMBER THAT IT HAS BEEN ONE OF THE
MOST SUCCESSFUL IN THE WORLD ~ IS THAT OUR CITIZENS VOLUNTARILY
COMFLY WITH ITS REQUIREMENTS., T.HE SYSTEM IS BASED ON NEUTRALITY,
SIMPLICITY AND EQUITY, WITH CITIZENS VOLUNTARILY PAYING Uc
EECAUSE THEY BELIEVE THAT OTHERS ARE ALSO PAYING THEIR FAf-R
SHARE.
OVER THE YEARS,
HOWEVER,
AS
ONE DEDUCTION, EXEMPTION
AND SHELTER HAS BEEN PILED ON ANOTHER, PEOPLE HAVE BEGUN TO
LOSE FAITH IN THE SYSTEM. COMPLIANCE IS SLIPPING, AS PEOPLE
DECIDE THAT THEIR TAXES ARE BEING IMPOSED UPON THEM WITHOUT
THEIR CONSENT, THAT TOO MANY OF THEIR FELLOW TAXPAYERS ARE
ESCAPING THEIR RESPONSIBILITIES THROUGH DOZENS OF LOOPHOLES,
AND THAT THE CODE ITSELF HAS BECOME A LABYRINTH OF LEGAL
DOUBLE TALK. IN SHORT, FOR MANY TAXPAYERS, THE NEW DEAL HAS
GIVEN WAY TO THE RAW DEAL, AND THEY DON'T LIKE IT ONE BIT.
- j*, IF WE TRULY BELIEVE IN TAX REFORM, THEN THE TIME HAS
COME FOR SOME FUNDAMENTAL CHANGES AND FOR FAR MORE IMAGINATION
ABOUT WHAT WE CAN ACCOMPLISH AS A NATION IF WE ONLY PUT OU3
MIND TO IT. I PROPOSE THAT WE NOW CONSIDER SWEEPING AWAY
ALL PERSONAL TAX PREFERENCES, SPECIAL DEDUCTIONS AND ORED.TS.
EXCLUSIONS FROM INCOME, AND THE LIKE, IMPOSING INSTEAD A
SINGLE, PROGRESSIVE TAX ON ALL INDIVIDUALS — A TAX THAT
WOULD BE ELEGANT IN ITS SIMPLICITY AND WOULD RESTORE PUBLIC
FAITH IN THE FAIRNESS OF OUR TAX SYSTEM.
• SOME CRITICS WILL TELL YOU WHAT-I AM SUGGESTING SHOULD
BE DISMISSED AS PURE POLITICAL ORATORY. THE CHARGE OF
POLITICS IS A POOR SUBSTITUTE FOR THINKING. IF ANYTHING,
I WANT TO GET POLITICS OUT OF THE TAX SYSTEM ~ TO TAKE THE
TAX CODE AWAY FROM THE POLITICIANS WHO WANT TO USE IT TO
ALLOCATE CREDIT TO CERTAIN SECTORS OF THE ECONOMY AND TO
REWARD SPECIAL INTEREST GROUPS WITH SPECIAL SUBSIDIES. LET'S
" 19 GIVE THE TAX SYSTEM BACK TO THE PEOPLE OF THIS COUNTRY;
INDEED, LET'S GIVE PEOPLE MORE ECONOMIC FREEDOM IN EVERY
FIELD SO THAT THEY CAN BE MASTERS OF THEIR OWN DESTINIES A
_ 2n LADIES AND GENTLEMEN: THE TIME HAS COME FOR THE
HIGHESTOFFICES IN OUR LAND — THE PRESIDENCY, THE CONGRESS,
THE GOVERNOR'S OFFICE, AND THE REST ~ TO BE FILLED WITH
RESPONSIBLE, FORTHRIGHT LEADERS WHO UNDERSTAND THE GREAT
CHOICE WE FACE AS A PEOPLE AND ARE WILLING TO ACT ON
THEIR CONVICTIONS.
IN THE CANDIDATES THE REPUBLICAN PARTY WILL OFFER
TO THE VOTERS OF DELAWARE THIS FALL ~ FROM PRESIDENT
FORD'ON DOWN, AND I CERTAINLY COUNT MY FRIENDS BILL ROTH
AND PETE DU PONT AMONG THEM ~ I BELIEVE WE HAVE THOSE
LEADERS — TRUE STATESMEN WHO WILL TELL THE PUBLIC NOT
WHAT THEY SUPPOSEDLY WANT TO HEAR BUT THE HARD TRUTHS
THEY NEED TO HEAR; WHO KNOW THAT ECONOMIC FREEDOM IS
INEXTRICABLY BOUND TO POLITICAL AND SOCIAL FREEDOM; AND
WHO WILL NOT SACRIFICE OUR FREEDOMS IN THE NAME OF ANOTHER
MAZE OF POLITICAL HANDOUTS AND PIE-IN-THE-SKY POMISES.
THIS IS OUR CHOICE IN 1976: SHALL WE DELIVER THE REINS
OF POWER TO THOSE WHO BELIEVE THAT THE GOVERNMENT CAN
IDENTIFY, SOLVE AND PAY FOR EVERY PROBLEM IN OUR SOCIETY?
OR SHALL WE ELECT MEN AND WOMEN WHO HAVE FAITH IN THE
PEOPLE THEMSELVES AND WHO'WILL FIGHT RELENTLESSLY FOR
THEIR LONG-RANGE EEST INTERESTS,
THIS NATION IS NOW FACED WITH WHAT I BELIEVE TO
BE THE MOST IMPORTANT CHOICE OF MY LIFETIME; I_ET US VOW
TONIGHT THAT THE ULTIMATE DECISION WILL BE FOR A STRCNCANDFREE AMERICAN.
THANK YOU VERY MUCH.
7737
For Release on Delivery
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
TUESDAY, DECEMBER 9, 1975, 10:00 A.M.
Mr. Chairman, it is always a pleasure to appear before
the Senate Finance Committee and especially on this occasion
when you begin your arduous task of deliberating the tax
legislation before you. Everyone in the Administration
considers that the work you must accomplish is critically
important to the integrity of our federal tax system and may
significantly affect the future of our national economy. As
you proceed with your hearings and mark-up sessions, it is
our hope you will call on us for active participation and
such assistance as you might need. Such cooperative efforts
will ensure that the resultant legislation will be mutually
acceptable to the Congress and the Administration and thus,
in our joint view, in the best interests of the American
people.
There are some who hold the view that the most urgent
matter before you is timing. Because four of the major
provisions of the Tax Reduction Act of 1975 expire on
December 31, Federal tax receipts will begin to increase
January 1, 1976, at an annual rate of approximately $10.3 billion
in additional accrual of individual and corporation income
taxes. And many of those concerned about the impending rise
in tax revenues believe that this should not occur because
it might retard the rate of economic recovery.
There is reason for giving the calendar attention. Tax
changes not synchronized with the calendar year are disruptive.
But, I would remind you, the legislation before you includes
WS-516
7/7
- 2permanent changes in the Federal income tax structure, and
these changes ought to be made only in the context of their
consistency with long-range fiscal objectives. If we
legislate a permanent reduction in Federal revenues, whenever
we do so, unless we simultaneously legislate a reduction in
the level of Federal expenditures, we merely delude our
constituents that we are providing them a tax cut. We only
substitute the capricious tax of inflation for the income
tax we seemingly cut.
This is why President Ford proposed on October 6 that
$28 billion be permanently cut from the income tax system
along with a corresponding cut from the level to which
Fiscal Year 1977 expenditures would climb if Fiscal Year
1976 programs are allowed to grow as presently projected.
We can control the share of GNP channeled through government
only if we discipline ourselves to set tax and expenditure
policies in harmony with our goals. This is the intent of
the Congressional Budget and Impoundment Control Act of
1974, which is universally endorsed, and this is the spirit
in which changes in tax structure whpLch reduce the capacity
of the income tax system to generate revenues should be
enacted. The President does not give this principle of
responsible fiscal policy mere lip service; he said on
October 6 that he would consider a tax cut unacceptable that
was not accompanied by an explicit expenditure limitation,
which would make clear to all whether the intent of the
Government is to hold inflationary pressures in check, or to
increase them.
From their enthusiastic response to the President's
announced policy, we have concluded that the American
people overwhelmingly support it. We must be disappointed
by the response of the House of Representatives which failed,
by a narrow margin, to instruct the Ways and Means Committee
to incorporate an expenditure ceiling in its tax legislation.
We urge this Committee to previde leadership in the Senate
by reporting a $28 billion t<x cut linked to a fiscal year
1977 spending ceiling of $39i» billion as the President has
proposed.
i
i
The Overall Fiscal Context I
Before going to the immediate issue of the extension of
the expiring 1975 tax cuts, I would like to emphasize the
purpose of and thought behiid the President's October 6
- 3fiscal package, of which the current tax proposals are only
a part. There were two broad objectives of that balanced
tax-cut, spending-limitation proposal --to sustain the
upward momentum of the current economic advance and, more
importantly, to make a start toward regaining control over
the excessive rise in budget spending which has been a major
force behind the inflation of recent years.
As the table below shows, in fiscal year 1962 the
Federal budget exceeded $100 billion for the first time in
history. By fiscal year 1971 it exceeded $200 billion. By
CHANGES IN FEDERAL UNIFIED BUDGET OUTLAYS,
BY FISCAL YEAR, 1961-1976
(dollars in billions)
Fiscal Year
Federal
Outlays
$ 97.8
1961
1962
106.8
1963
111.3
1964
118.6
1965
118.4
1966
134.7
1967
158.3
1968
178.8
184.5
1969
1970
196.6
1971
211.4
1972
231.9
1973
246.5
1974
268.4
1975
324.6
1976(est.) 370.0
Source:
Increase Over
Preceeding Year
$ 5.6
9.0
4.5
7.3
-0.2
16.3
23.6
20.5
5.7
12.1
14.8
20.5
14.6
21.9
56.2
45.4
Percentage
Increase
6.1
9.2
4.2
6.1
13.8
17.5
13.0
3.2
6.6
7.5
9.7
6.3
8.8
20.9
13.7
Surplus
or Deficit
-3.4
-7.1
-4.8
-5.9
-1.6
-3.8
-8.7
-25.2
+3.2
-2.8
-23.0
-23.2
-14.3
-3.5
-43.6
-70.0
Economic Report of the President, February 1975,
Table C-64, p.324, for years 1961 through 1974;
1975 figures from Final Monthly Treasury Statement
of Receipts and OutTays of the United States
Government, for period from July 1, 1974 through
June 30, 1975; 1976 estimated figures from the
White House Fact Sheet, Oct. 6, 1975.
. 4 .
fiscal year 1975 it exceeded $300 billion and a figure of
$423 billion is in prospect for FY 1977 without some restraint -a fourfold increase in just 15 years! Federal government
outlays increased at an annual rate of 6-6 percent during
the period 1961-1966, at 9.4 percent per year during the
next 5 years and at 11.8 percent per year from 1971 to 1976.
If Fiscal Year 1977 expenditures are permitted to grow to
$423 billion, the rate of growth will reach 14.3 percent.
For the past 10 fiscal years expenditures grew 175 percent
while total GNP increased about 120 percent -- that is, the
rate of growth in government outlays was nearly 50 percent
greater than that of the economy itself, with all of the
attendant inflation and financial consequences.
Furthermore, the growth in spending has far exceeded
the growth in revenues. During these same years we have
posted a string of budget deficits that are unprecedented in
peacetime. The Federal Government (including the agencies)
will have been forced to borrow over $350 billion from our private
money markets over the decade ending with the current fiscal
year. That is over a third of a trillion dollars that might
otherwise have been used to build new plants and to create
new jobs in the private sector.
It is no wonder the inflation has been a severe problem
and interest rates have risen to historic levels, a natural
consequence of these policies. Furthermore, an even worse
result of such budgetary practices is that continuing
deficits tend to undermine the confidence of the public in
the capacity of our government to deal with inflation.
As the President reviewed these figures in developing
the decision which he announced on October 6, he became
increasingly convinced that a dramatic and permanent shift
in direction was called for. Facing another huge budget
deficit in FY 1977 of close to $70 billion he concluded that
without a significant reduction in the growth of Federal
spending a high and damaging rate of inflation would reappear,
with all of its resulting harm for our economic system and
the living standards of our people. Inflation was a major
factor in causing the sharp recession from which we are now
?71
- 5 recovering. A resurgence of inflation, which could readily
be spurred by escalating government spending, will hurt our
otherwise brightening economic prospects and could well
cause an even more serious recession later on. As President
Ford pointed out in speaking of the Federal deficit:
"Over the years, these excesses have played a major
role in driving up prices, driving up interest rates, and
holding down jobs. We do not have to look far for our
underlying problems. Much of our inflation should bear
a label: 'Made in Washington, D.C.'"
In designing his proposal, the President realized that
the magnitude of the deficit is so great and acceptance of
its size and growth so institutionalized that no action
could restore a balanced Federal budget in a single year.
He therefore chose to attack the problem in stages. For
FY 1977 he proposed to hold the deficit to $40-$44 billion.
In effect, this would amount to a deficit level in FY 1977
equivalent to the FY 1975 figure. It is noteworthy that if
Fiscal Year 1977 expenditures could 'be held to $395 billion,
the increase over 1976 would be 5.4 percent, about the same
rate of increase as prevailed during 1961-1966.
If we were able to achieve this goal through cooperation with the Congress, it would be our objective in succeeding
years to seek such additional budget reductions as are
necessary to achieve a balanced budget in a 3-year period
and then to strive for budget surpluses at high employment.
These budgetary goals can be achieved only if we tie
tax reduction and expenditure reductions together.
The Tax Reduction Act of 1975, The House Bill (H.R. 10612),
and the President's Proposals
The table below presents in summary form a comparison
of the income tax provisions in the Tax Reduction Act of
1975, the House Bill (H.R. 10612), and the President's
October 6 proposals. In addition to the $14.6 billion of
"temporary" cuts in personal and business income taxes, the
Tax Reduction Act provided $9.8 billion in rebates of 1974
tax liabilities and payments to social security recipients.
The $14.6 billion can be broken down into $4.7 billion
of business income tax reductions and $9.9 billion of personal
income tax reductions.
Mft
- 6Comparison of Tax Cuts Relative to 1972-74 Law
(in $ billions assumes 1975 Income Level)
Individual Cuts
-- standard deduction
changes
-- exemption/taxable
income credit
Tax Reduction
Act of 1975
H.R. 10612
President's
Proposal
$ 2.5
$ 2.5
$ 4.0
$10.2
$ 5.3
-- personal exemption
$10.1
-- rate changes
$ 6.6
-- earned income credit 1/
$
1.5
-- house purchase credit
$
0.6
——
$
9.9
$12.7
$20.7
3:0
3.0
$ 1.5
$ 1-5
——
¥
Business Cuts
-- investment credit
-- small business rate
and surtax exemption
changes
3.3
$
1.5
2/
27o corporate rate
reduction
$ 2.2
Six point utility
package
$ 0.6
Total Tax Cuts
1/
$
$ 4.7
$ 4.5
$ 7.2
$14.6
$17.2
$27.9
Includes both refundable and non-refundable portions.
2/ Includes extra 1 percent credit for ESOP's.
(For additional detail see Annex Tables 21 and 22.)
Ml
- 7 Of the $9.9 billion of personal tax reductions, approximately $8 billion -- the changes relating to personal exemptions and the standard deduction -- were taken into account
in preparing the withholding tables which have been in
effect since May of this year. Since such $8 billion cut
was implemented through the withholding tables in only 8
months, the continuance of withholding at approximately the
same level would require an adjustment of tax rates that
would produce a $12 billion annual tax reduction. Such
"temporary" cuts in 1975 income taxes have thus become the
base on which the House built its package of revisions for
1976, with one slight modification which I shall note
hereafter.
Since withholding tables are not used to calculate
periodic business tax payments, the extension by H.R. 10612
of the "temporary" business tax reduction for 1975 did not
entail additional revenue loss beyond the simple reduction
in liabilities provided for in the 1975 Act.
Thus, altogether H.R. 10612 would increase the income
tax revenue loss by $2.6 billion over the 1975 Act. But
this time, $2.5 billion of the now $17.2 billion revenue
loss is permanent, attributable to a conversion to permanency
of the previously "temporary" increase in the standard
deduction.
Temporary economic stimuli, such as rebates and onetime direct payments, are appropriate fiscal measures in
periods of underutilized capital and human resources, and
the tax system often is an efficient mechanism for effecting
such countercyclical policy. But I will repeat what I told
this Committee last March about "temporary" tax cuts when
urging you to eschew tampering with the income tax structure
for short-run fiscal purposes.
"Being realistic, one of three things will have to occur
under the House approach:
1. The reductions will be temporary and expire by
their terms.
2. More realistically, the reductions will be permanent,
and since there are no revenues to fund them, greater deficits
and greater inflation will result over the long-run ...
3. A third alternative, then, is to make the reductions
permanent while also raising revenues or cutting costs by
the same amount . . . "
Wl
- 8What I would add to this statment on the basis of
legislative experience since then is that, if Congress
persists in making expedient "temporary" changes in the tax
laws annually, it will have no time to consider the important
fundamental reforms we all agree are needed.
The President's program of permanent tax law changes
with an expenditure ceiling faces reality squarely. It
accomplishes what the House has sought to do -- avoid an
increase in tax burdens -- and does so in a manner which
gives due attention to tax structure, equity and simplicity
without running the risk of increased inflationary bias.
Personal Tax Cuts
The Tax Reduction Act of 1975 contains several complicated provisions including a $30 per exemption tax credit in
addition to the $750 personal exemption and a standard
deduction equal to 16 percent of Adjusted Gross Income, with
a range from $1,900 to $2,600 for a joint return and from
$1,600 to $2,300 for a single person. H.R. 10612 retains
the change in standard deduction, which becomes permanent,
but substitutes another temporary credit which is no less
than $30 but may be as much as 2 percent of taxable income,
with a maximum of $240 for both married couples and for
single taxpayers. In contrast the President's proposal
recommends a simple personal exemption of $1,000 and a flat
standard deduction of $2,500 for a joint return and $1,800
for a single person, along with rate reductions (Tables 1A
and IB) (Numbered tables are found in the Annex.)
These provisions of the President's proposal have two
important aims: First to extend the tax reduction of 1975
for everyone; second, to begin the difficult task of realigning
the tax rate structure to relieve the middle income taxpayer
of onerous tax burdens on industriousness and thrift.
Because of rising productivity, but more particularly the
effect of inflation on nominal money incomes, families
comprising the middle and upper-middle classes of society
have been moved up the tax scales to positions previously
occupied by only the top one or two percent of American
families. As a result, the middle-income taxpayers find
that larger and larger tax bites are being taken from their
paychecks and entrepreneurial incomes. The rewards to
- 9enterprise, to sustained effort, to the accumulation of
capital, of this group have been eroded. As we all benefit
from the vigor of this group, so are we hurt when its vitality
is threatened. The President's program aims to reverse the
trend, by providing relief to the middle-income taxpayer
while, at the same time, more than preserving the gains of
the lower-income taxpayer.
To accomplish this reversal, the proposal combines
carefully balanced changes in the basic elements of the
income tax structure -- bracket rates, personal exemptions
and standard deductions. Altogether, as you can see in
Table 4, in all income classes up to $20,000 the share
of tax reductions exceeds the share of tax burden under 1975
law. Moreover, taxpayers with incomes under $15,000, who
presently pay 28.0 percent of personal income taxes, will
receive 53.3 percent of the additional tax reduction proposed by the President (Table 4). At the same time, the
maximum level of tax-free income is raised for both single
and joint returns as compared to 1975 law (Table 6) with the
result that 2.1 million returns are removed from the tax
rolls.
The President's proposal is also more progressive than
the tax cut recently passed by the House of Representatives
in H.R. 10612. Under the House Bill only 38.9 percent of
the additional tax cut goes to taxpayers with incomes under
$15,000 (Table 8). This is not only a smaller percentage,
it is a smaller percentage of a tax cut which is itself
smaller by $8 billion. As you can see in Table 9, under the
House Bill, taxpayers with incomes of less than $15,000
would pay 27.7 percent of $116.7 billion while they would
pay 25.3 percent of $108.7 billion under the President's
proposal. Those with income under $15,000 receive some $5
billion less than the President proposed.
Furthermore, aside from the earned income credit which
is not a part of either proposal, the very lowest income
groups are treated better by the President's tax plan than
they are by the House Bill. Since the House Bill does not
change the standard deduction or the personal exemption, it
does not increase the level of tax-free income for those
taxpayers, as does the President's proposal. In sum, the
President's plan gives some reduction in tax to almost every
taxpayer in every income class.
7771
- 10 The differences between the President's proposal and
the House Bill may be seen most clearly in Tables 10 through
19 which indicate the tax liabilities under 1974 law, 1975
law, and 1976 law, as proposed, for taxpayers with various
income levels and family sizes. The vast differences
accorded families with two or more dependents and moderate
incomes are particularly striking. The House Bill, due to
the characteristics noted above, provides no tax reduction
at all from 1975 for families with two children until adjusted
gross income exceeds $10,900 (Table 18) and for families
with four children until adjusted gross income exceeds
$16,000 (Table 19). In contrast, the President's proposal
gives significant tax reductions for families with two or
more dependents and lower incomes. For example, the tax
reductions from 1975 for a family with $10,000 adjusted
gross income (AGI) and two children is $224 (Table 13) and
for a family with $15,000 AGI and four children is $257
(Table 14). We should keep in mind that, because of the way
the withholding rates were derived under the Tax Reduction
Act of 1975, families with no reduction in annual tax liabilities
would experience either a decrease in,monthly take-home pay
or the need to make a substantial payment at tax settlement
time. I shall return to this topic below.
In summary, the President's tax recommendations for
individual tax reductions are simple to understand and
generous to virtually all taxpayers. I strongly urge the
enactment of this comprehensive and equitable package as an
important component of the total expenditure restraint and
tax reduction program.
Business Tax Cuts
Let me now turn to the proposed business tax cuts.
The Tax Reduction Act of 1975 increased the nominal
rate of the investment credit to 10 percent from 7 (4 percent
in the case of utilities) for the years 1975 and 1976H.R. 10612 extends this period for 4 more years, through
1980. The President's proposal would make the increase
permanent. It is well known that any tax provision intended
to encourage investment is most effective when investors may
regard it as permanent, for then they may take it into
account over the full range of their investment planning
horizons, which are frequently 10 years or longer. As part
of a program of structual fiscal change, the investment
credit helps offset the anti-capital formation bias of the
Federal tax system and should have permanent status.
U77
- 11 "
The Tax Reduction Act, for the year 1975, raised the
corporation surtax exemption to $50,000 from $25,000, and
lowered the tax rate on the first $25,000 of taxable income
from 22 to 20 percent. H.R. 10612 extended this tax reduction 2 additional years. Again, the President's proposal
would make this change permanent.
In addition to this modification of the corporation
tax schedule, the President proposes to reduce the top rate
2 points so that the maximum applicable tax rate would be
46 percent. Until we, working with the committees of
Congress, can effect integration of the corporation and
personal income taxes, this modest relief of the extra
burden of tax should cause beneficial increases in the rate
of capital formation.
Finally, the President's proposals include a 6-part tax
incentive program for electric utilities to accelerate the
replacement of facilities now made obsolete by the higher
costs of fossil fuels and to encourage the application of
more adequate capital cost pricing formulas by utility
commissions. The program includes: *
* Increasing the permanent investment credit to 12 percent
for all electric utility property except generating facilities
fueled by petroleum products or natural gas.
* Allowance in full of the investment credit on progress
payments for construction of property which takes 2 years or
more to build. This would except utilities from the present
law 5-year phase-in requirement with respect to credit for
progress payments.
* Permit a utility to elect to depreciate property
during its construction period rather than when it is placed
in service. This election, along with the increase in tax
credit and allowance of the credit for progress payments,
would be available only in those instances in which regulatory commissions include construction work in progress in
the utility's rate base.
* Extend to January 1, 1981 the period during which
pollution control facilities installed in pre-1969 plants
may qualify for 5-year amortization.
4V6
* Permit 5-year amortization of the costs of converting
petroleum or natural gas fueled generating facilities
to other fuels.
* Permit a shareholder in an electric utility to elect
to receive dividends in the form of stock and to defer
income tax thereon until the stock may be sold. Such stock
is deemed sold before other stock in the same company held
by an electing stockholder, and the dividend will be taxed
as ordinary income when the stock is sold.
As compared with H.R. 10612 the President's proposals
for tax reductions on income from business capital would
result in revenue losses greater by $2.7 billion. But the
ratio of these tax reductions to personal tax reductions is
about the same in both H.R. 10612 and the larger program of
reductions proposed by the President.
Earned Income Credit
A further provision of the Tax Reduction Act of 1975
which is scheduled to expire at the end of this year is the
earned income credit, under which taxpayers who maintained
a shared residence for a dependent child receive a credit of
10 percent of earned income up to a maximum of $400. The
credit is phased out as earnings go from $4,000 to $8,000.
This is a refundable credit in that if the credit exceeds
tax liability, the balance is paid to the taxpayer.
This provision has represented a significant departure
from the traditional structure of our personal income tax.
Obstensibly it was designed as an offset to the Social
Security tax, at the same time encouraging certain individuals to secure employment. If these are the objectives,
we believe the earned income credit in the Tax Reduction Act
of 1975 is both ineffective and inequitable in achieving its
goals. As an offset to the Social Security tax the credit
is inequitable in that many workers, namely unmarried
individuals and members of families without children, are
not eligible for the offset. Further, a family with children is entitled to but one credit even though two-earner
families would appear to be most deserving of relief from
Social Security taxes, since in many cases the secondary^
worker in a family does not receive any additional benefit
from the Social Security taxes paid on earnings.
In reality, it appears the earned income credit is but
another publicly administered "welfare" provision, which
adds complexity to the system but does not significantly
affect the degree to which families are self supporting. We
^1
- 13 would prefer that consideration of such a wage subsidy be
undertaken in connection with a comprehensive overhaul of
the entire structure of programs to assist the needy.
Withholding Taxes
As you are aware, not only will the applicable tax
rates change as of January 1, 1976, if Congress takes no
action, but also employers will be required to use once
again the withholding tax tables in effect prior to May
1975. The Internal Revenue Service has notified employers
to this effect and they will shortly be incurring the
considerable expense to reprogram their systems to implement
the higher rates of withholding. If, as we strongly recommend, the President's tax cut proposals are adopted by
Congress, prompt notice will be given with regard to the
publication of new withholding tables which will take the
place of those presently in effect; such prompt notification
should be able o spare employers the burden of a double
change in the levels of withholding.'
The problems of designing a set of withholding tables
should not be underestimated, particularly when tax laws are
changed in mid-year, or when credits in lieu of, or in
addition to, exemptions are provided. As I noted earlier,
one of the reasons why H.R. 10612 provides additional tax
cuts as compared with the Tax Reduction Act is that the
withholding tables in effect under that Act were designed to
reduce in 8 months the tax reduction applicable to the full
year. If these same tables were carried forward into 1976
along with the provisions of the Tax Reduction Act of 1975,
too little tax would be withheld. Thus, if the provisions
of the Tax Reduction Act were simply extended to 1976, new
tables providing for more withholding would have to be
designed. To avoid this, the House has increased the
temporary tax reductions. Notwithstanding the overall
reduction in tax effected by H.R. 10612, the substitution
thereunder of another kind of credit for the $30 credit in
the Tax Reduction Act will result in some families having
increased withholding. I noted above that such would be the
case for large families with medium and low income.
7777
- 14 -
Thus it is not unlikely that new withholding schedules
will be needed in any case.
The Economic Impact Of The Recommendations
Your Committee is no doubt concerned about how its
action on the matters discussed here today may affect the
economic recovery from the recent serious recession. A
further concern, will undoubtedly be the long-term implications of any such program with regard to the continuing
major problem of inflation. The President's program of tax
cuts and spending limitation was designed with these two
problems very much in mind.
In considering these matters, you may very well take
note of the fact that certain economic indicators have
declined in the most recent two-month report. I recently
had occasion to discuss such matters in my testimony on
November 7 before the Joint Economic* Committee and I think
it appropriate to include my remarks on this subject in the
record before you here today:
"Although economic recovery is well underway, there is
concern in some quarters about its sustainability. The
American public, labor and business leaders and other
nations repeatedly express their concern about long-term
prospects. Therefore, the major economic thrust of the
President's program is directed at what we perceive to be
the long-term economic problems confronting the United
States. It has two goals: (1) to slow down the upward
momentum of government spending and eliminate the chronic
Federal budget deficits that have occurred in fourteen of
the last fifteen fiscal years -- or, in thirty-eight of the
last forty-six years; and (2) to return more of the decisionmaking power to individuals and families in determining how
they will use their income. These actions would help to
improve the efficiency of the economy and the permanent
changes would create additional stability which would enable
individuals and business firms to plan for the future with
more confidence.
M7f
- 15 -
"Turning the basic direction of fiscal policy will not
be easy because of the legislative momentum that has been
accumulated over the years. Budget experts continually
describe the "uncontrollable nature" of most of the Federal
budget which rises each year as the number of programs
multiply and the number of participants in those programs
increase. It is now estimated that nearly three-fourths of
the budget is committed to programs for which payment is
required under existing law or contracts. These payments
must be made unless substantive changes in the laws occur.
The Government payrolls make up an additional one-sixth of
the Federal budget and the residual one-tenth involves
mainly nonpayroll purchases of goods and services. These
facts make the job of regaining fiscal control difficult.
They do not make it impossible. We have listened to so many
economists describe why things cannot change that too many
people are beginning to believe them. I do not believe that
there is any such thing as an "uncontrollable" Federal
budget commitment because they all depend upon legislative
priorities. I do believe that there are different priorities
and that all good things are not equally good. There is a
solution to the problem if the Congressional Budget Committee
discipline will require more careful consideration of these
priorities and the elimination or curtailment of ineffective
programs during the annual appropriations process. We must
correct the historical approach of merely continuing existing
outlays so that any new claims are always "add-ons". But
for that process to occur the underlying discipline of
economics in matching priority claims and limited resources
must occur. The Joint Economic Committee can provide that
economic leadership for the rest of Congress.
"Although the major thrust of the President's program
is to emphasize long-term goals, a major policy change of
this sort affects the near-term pattern of economic activity
as well. In a $1-1/2 trillion economy, there obviously are
uncertainties in predicting potential changes in economic
activity and the specific impact of fiscal policy recommendations.
In preparing the President's balanced package of policy
initiatives we analyzed the probable course of economic
developments that would result if existing government spending
trends were to continue and if the tax relief provided by
the Tax Reduction Act of 1975 were to be continued in essentially
its present form, except for an upward modification of
#ra
- 16 approximately $4 billion which is necessary to maintain
existing personal withholding rates. Since the Administration strongly believes that the existing growth rate of
government spending must be curtailed and that changes in
the distribution of tax relief should occur, a second
forecast based on the President's recommendations was also
prepared.
"Under either set of assumptions, economic recovery
would move forward over the next year with an annual rate of
growth of real GNP of approximately 7 percent, gradual
reduction of unemployment to the 7 to 7-1/2 percent zone by
yearend 1976 and a continuation of the current pattern of
consumer price increases of inflation 6 to 7 percent over
the next few quarters. Comparing the two forecasts, we find
that under the President's program the quarterly path of
"real" GNP is slightly higher between now and mid-1976 and
slightly lower subsequently as the government spending
restraints take effect. These forecasts are subject to the
usual caveats with respect to forecasting errors, particularly when the differences are so sirtall relative to the
gross national product. Therefore, the President's program
must be judged in terms of its long-term benefits since
economic forecasts indicate that there will not be significant
economic stimulus or restraint in the immediate future as a
result of the President's policy recommendations."
Conclusion
Certain aspects of our mutual task are clear. The tax
cuts which have been proposed by the President in his
October 6 message should be adopted. But that is really
only the beginning. By simultaneously limiting spending for
the fiscal year 1977 to $395 billion, we have the unique
opportunity to turn the tide of fiscal irresponsibility
which has been engulfing our nation for at least fifteen
years.
The President has pointed the way. He has made it
clear that if we are ever to provide for stable economic
growth and really defeat the extreme economic vice of
regressive taxation via inflation, we must immediately join
together in imposing a limitation on Federal spending. If
this Committee will take the lead, I am confident that the
^1
- 17 Senate as a whole will follow and that the House of
Representatives, if presented with a full opportunity to
consider the matter, will join in the required effort to
bring an acceptable piece of tax reduction legislation to
the President's desk.
Please do not miss this opportunity. Each year that we
fail to stem the tide, the task becomes more difficult.
Those who misguidedly find it the "easy way" will grow evermore accustomed to turning to Washington for fiscal bounty
to attempt to solve every conceivable human problem. We
must begin now to halt this trend for the good of those very
people who ill-advisedly support its continuance and for the
good of the Country as a whole.
As always, I thank you for the opportunity of appearing
before you and sharing with you my views on these important
subjects.
i
y-si
Table 1-A
Tax Rate Schedule for President's
October 6, 1975 Tax Reduction Proposals
(Married Taxpayers Filing Jointly)
Taxable income
bracket
Present rates :Proposed rates
;
(percent)
(percent)
$
0
$1,000
1,000
2,000
2,000
3,000
3,000
4,000
4,000
6,000
6,000
8,000
8,000
10,000
10,000
12,000
12,000
16,000
16,000
20,000
20,000
24,000
24,000
28,000
28,000
32,000
32,000
36,000
36,000
40,000
40,000
44,000
44,000
52,000
52,000
64,000
64,000
76,000
76,000
88,000
88,000
100,000
100,000
120,000
120,000
140,000
140,000
160,000
160,000
180,000
Office
of
the
Secretary of the Treasury
180,000
200,000
Office
200,000of Tax Analysis
1/
14
15
16
17
19
19
22
22
25
28
32
36
39
42
45
48
50
53
55
58
60
62
64
66
68
69
70
12
14
15
15
16
17
21
22
25 V
29 1/
34
36
39
42
45
48
50
53
55
58
60
52
64
66
68
October
69 6, 1975
70
While two rates are increased in the higher brackets,
taxpayers with income taxed in those brackets will
benefit from rate reductions in the lower brackets
so that on balance the changes in rates reduce taxes
even for those affected by the increased rates.
Table 1-B
Tax Rate Schedule for President's
October 6, 1975 Tax Reduction Proposals
(Single Taxpayers)
Taxable income
bracket
$
0
500
1,000
1,500
2,000
3,000
4,000
5,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
26,000
32,000
38,000
44,000
50,000
60,000
70,000
80,000
90,000
100,000
: Present rates :Proposed rates
;
(percent)
:
(percent)
$
500
1,000
1,500
2,000
3,000
4,000
5,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
26,000
32,000
38,000
44,000
50,000
60,000
70,000
80,000
90,000
100,000
—
Office of the Secretary of the Treasury
Office of Tax Analysis
14
15
16
17
19
19
21
21
24
25
27
29
31
34
36
38
40
45
50
55
60
62
64
66
68
69
70
12
13
15
15
16
17
18
19
21
24
27
29
31
34
36
38
40
45
50
55
60
62
64
66
68
69
70
October 6, 1975
Table 2
Distribution of Tax Liabilities and Reductions Under the Presidents Proposal
at 1975 Levels of Income as Compared to 1972-74 Law, by Size of Adjusted Gross Income
Adjusted gross
income class
Tax liability
based on
1972-74 law
(billions of dollars)
Proposed
Tax
1976 tax
reduction
liability
Percentage
distribution of
tax reduction 1/
Percentage
reduction in
tax liability
1.2
5.9
59.9
9.1
5.0
24.0
35.3
23.1
17.6
5.5
26.6
23.8
15,000 - 20,000
23.7
19.5
4.2
20.2
17.7
20,000 - 30,000
28.0
24.7
3.3
16.0
11.8
30,000 - 50,000
16.9
15.9
1.0
5.0
6.1
50,000 - 100,000
12.1
11.7
0.4
1.8
3.2
100,000 +
9.4
9.4
0.1
0.4
1.0
Total
129.4
108.7
20.7
100.0
16.0
0 - $5,000
2.0
$5,000 - 10,000
14.1
10,000 - 15,000
0.8
Office of the Secretary of the Treasury
Office of Tax Analysis
December 8, 19
1/ Based on unrounded liability figures.
Note: Detail may not add to totals due to rounding.
^
^
< ;
Table 3
Distribution of the Ccnponents of the Preside.it's Tax Reduction Proposal
at 1975 Levels of Income as Compared to 1972-74 Law, by Size of Adjusted Gross Income
(millions of dollars)
Ccnponents
Adjusted Gross
Income Class
$
0 -
$5,000
$1,000
Personal Exenption
Standard Deduction Change
515
608
Rate Reduction
Total
102
1,225
5,000 - 10,000
1,908
1,961
1,098
4,967
10,000 - 15,000
2,548
925
2,040
5,513
15,000 - 20,000
2,056
342
1,788
4,186
20,000 - 30,000
1,867
154
1,287
3,308
30,000 - 50,000
802
31
204
1,037
50,000 - 100,000
330
5
48
383
100,000 +
80
1
10
91
6,580
20,711
TOTAL
10,105
Office of the Secretary of the Treasury
Office of Tax Analysis
Note: Detail may not add to totals due to rounding.
4,026
December 6, 1975
Distribution of Tax Liabilities and Reductions Under the President's Proposal
at 1975 Levels of Income as Compared to 1975 Law, by Size of Adjusted Gross Income
Adjusted Gross
Income Class
Tax Liability
based on
1975 law 1/
Proposed
1976 tax
Liability
Tax
reduction
billions of dollars
Percentage
distribution of
tax reduction 2/
) (
Percentage
reduction in
tax liability
percent
)
0
-
$ 5,000
1.2
5,000
-
10,000
11.5
9.1
2.4
20.4
20.9
10,000
-
15,000
21.1
17.6
3.5
29.6
16.5
15,000
-
20,000
21.9
19.5
2.4
20.5
11.0
20,000
-
30,000
26.8
24.7
2.1
17.5
7.7
30,000
-
50,000
16.6
15.9
0.7
5.6
4.0
50,000
-
100,000
12.0
11.7
0.3
2.4
2.3
9.4
9.4
0.1
0.6
0.8
108.7
11.8
100.0
9.8
00,000 +
TOTAL
120.5
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
0.8
0.4
32.3
3.3
December
8, 1975
Includes effect of changes in the standard deduction, the $30 exemption credit; the home purchase credit,
and the nonrefundable portion of the earned income credit. The refundable portion of the earned income
credit is treated as an expenditure item.
2/ Based on unrounded liability figures.
Note: Detail may not add to totals due to rounding. Minor differences may arise in totals appearing on
other tables due to the different methods used in estimating these income distributions.
&
Table 5
Distribution of the Ccnponents of the Tax Induction Act of 1975
at 1975 Levels of Income as Compared to 1972-74 Law, by Size of Adjusted Gross Income
(millions of dollars)
Adjusted Gross
Inocme
Class
Standard
Deduction
Change
Tax Reductions
Earned
Inocme
$30 Credit
Credit
:
Home
: Purchase
: Credit
Total
Tax
Reduction
Refundable
Portion of
Earned Inocme
Credit (Outlays)
Tax
Reduction
Plus
Outlays
1,725
0-$5,000
502
298
29
6
835
890
5,000-10,000
1,062
1,190
250
53
2,555
223
10,000-15,000 374
1,505
0
144
2,023
2,023
15,000-20,000 527
1,079
0
156
1,762
1,762
20,000-30,000 240
824
0
176
1,240
1,240
30,000-50,000 46
257
0
68
371
371
50,000-100,000 8
75
0
- 19
102
102
100,000 + 1
15
0
4
20
20
5,243
279
625
8,908
TOTAL
2,760
Office of the Secretary of the Treasury
Office of Tax Analysis
Note:
1,113
2,778
10,021
December 6, 1975
Detail may not add to totals due to rounding,
3
Table 6
Maximum Levels of Tax-Free Income
Under the President's Tax Reduction Proposal
and under H.R. 10612
(rounded to nearest $10)
Filing status
?
Maximum tax-free inocme
H.R. 10612
President's
Proposal
Poverty inocme levels 1/
1975
1976
Single
no dependents
2,560
2,800
2,790
2,970
Married, joint return
no dependents
1 dependent
2 dependents
3 dependents
4 dependents
3,830
4,790
5,760
6,720
7,670
4,500
5,500
6,500
7,500
8,500
3,610
4,300
5,500
6,490
7,300
3,840
4,570
5,850
6,900
7,770
Single, over 65
no dependents
3,310
3,800
2,580
2,740
Married, joint return
both over 65
no dependents
5,330
6,500
3,260
3,460
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
Underlying Consumer Prioe Index assurpticn:
December 6, 1975
for 1975, 161.2; for 1976, 171.5.
^
•7^7
Table 7
Distribution of Tax Liabilities Provided in H.R. 10612
as Compared to 1972-74 Law at 1975 Income Levels,
by Size of Adjusted Gross Income
:
:
:
::
Income
Class
($000)
Tax
:
Liability
:
Based on
::
1972-74 Law :
(
Up to 5
Tax
Liability
under
H.R. 10612
: Percentage :Percentage
: Distribution:Reduction
:
Tax
:
of Tax
: in Tax
:: Reduction : Reduction :Liability
$ billions
) (
percent
)
2.0
1.2
0.8
6.5
40.6
5 -
10
14.1
11.1
2.9
23.2
21.0
10 -
15
23.1
20.0
* 3.1
24.5
13 5
15 -
20
23.7
20.8
2.9
22.7
12.2
20 -
30
28.0
25.9
2.1
16.6
7.5
30 -
50
16.9
16.3
0.6
4.9
3.7
50 - 100
12.1
11.9
0.2
1.4
1.4
9.4
9.4
*
0.3
0.4
129.4
116.7
12.7
100.0
9.8
100+
Total
Office of the Secretary of the Treasury
Office of Tax Analysis
* Less than $50 million.
December 6, 1975
4/&d
Table 8
Distribution of Tax Liabilities Provided in H.R. 10612
as Compared to 1975 Law at 1975 Income Levels,
by Size of Adjusted Gross Income
:
:
::
:
Income
Class
($000)
Up to 5
5 - 10
Tax
Liability
Based on
1975 Tax 1/
(
:
Tax
: Liability
:
under
::
Tax
: H.R. 10612 :: Reduction
$ billions
1.2
1.2
11.5
11.1
: Percentage :Percentage
: Distribution :Reduction
:
of Tax
: in Tax
:: Reduction
:Liability
) (
*
percent
)
-0.2
-0.6
0.4
10.3
3.4
10 -
15
21.1
20.0
» 1.1
28.6
5.2
15 -
20
21.9
20.8
1.1
29.4
5.1
20 -
30
26.8
25.9
0.9
22.8
3.2
30 -
50
16.6
16.3
0.3
6.7
1.5
50 - 100
12.0
11.9
0.1
1.9
0.6
9.4
9.4
*
0.4
0.2
120.5
116.7
100.0
3.2
100+
Total
3.8
Office of the Secretary of the Treasury
Office of Tax Analysis
December 8, 1975
*Tax change of less than $50 million.
Note: Numbers may not add to totals due to rounding.
1/ Includes effects of changes in the standard deduction, the $30 exemption
credit, the home purchase credit, and the nonrefundable portion of the
earned income credit. The refundable portion of the earned income credit
is treated as an expenditure item, rather than a tax reduction.
#6/
Table 9
Distribution of Tax Liabilities Provided by H.R. 10612
as Compared to the President's Proposal at 1975 Levels of Income,
by Size of Adjusted Gross Income
Adjusted Gross
Income Class
Tax
:
Tax
: Higher Tax Liability
Liability : Liability : Under H.R. 10612
under
President's:
H.R. 10612: Proposal : Amount
: Percent
(
$
0-$ 5,000
$ billions
)
Percentage
Distribution of
Liability
H.R. 10612: President
percent )
(
1.2
0 .8
0.4
5.0
5,000- 10,000
11.1
9 .1
2.0
25.3
9.5
8.4
10,000- 15,000
20.0
17,.6
2.4
30.0
17.1
16.2
15,000- 20,000
20.8
19. 5
1.3
16.3
17.8
18.0
20,000- 30,000
25.9
24..7
1.2
15.0
22.2
22.7
30,000- 50,000
16.3
15. 9
0.4
5.1
14.0
14.6
50,000-100,000
11.9
11. 7
0.2
2.6
10.2
10.7
100,000+
9.4
9. 4
0.1
0.7
8.1
8.6
108.7
8.0
100.0
100.0
100.0
Total
116.7
Office of the Secretary of the Treasury
Office of Tax Analysis
Note:
Numbers may not add to totals due to rounding.
1.0
0.8
December 6, 1975
JfCto
Table 10
President's Proposed Plan
Tax Liabilities for Single Person Without dependents,
with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
Gross
Income
$
5,000
:
Tax Liabili• ty
Proposed
1972-74 : 1975 :
: Law 2/:
1976 Law
:
Law
$
490
$
404
$
307
:
:
Propos od
Reduction from
1975
1972-74 :
Law
:
Law
$
183
$
97
7, COO
889
796
641
248
155
10,000
1,506
1,476
1,227
279
249
15,000
2,589
2,559
2,307
282
252
20,000
3,847
3,817
3,553
294
264
25,000
5,325
5,295
5,015
310
280
30,000
6,970
6,940
6,655
315
285
40,000
10,715
10,685
10,375
340
310
50,000
15,078
15,048
14,725
353
323
100,000
41,600
41,570
41,155
445
415
Office of tine Secretary of the Treasur;
Office of T ?.:••: Analysis
December 7
V)l 3
1/ If standard deduction exceeds itemized deduction, family uses sti.:7<-?d
deduction .
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit.
°?t3
Table 11
President's Proposed Plan
Tax Liabilities for Family with No Dependents,
Filing Jointly with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
:
Adjusted
Gross
lucerne
$
5,000
:
:
Tax Liabili• ty
Proposed
1972-74 : 1975 :
: Law 2/ :
1976 Law
Law
$
322
$
170
$
:
:
:
ProDosed
Reduction from
1972-74 :
197.';
Law
:
Lav?
60
$ :>M?
>
! a;
7,000
658
492
335
323
157
10,000
1,171
1,054
800
371
254
15,000
2,062
2,002
1,750
312
252
20,000
3,085
3,025
2,780
305
245
25,000
4,240
4,180
3,?50
290
230
30,000
5,564
5,504
5,328
236
176
40,000
8,702
8,642
8,444
258
198
50,000
12,380
12,320
12,080
300
240
100,000
34,790
34,730
34,440
350
290
Office of the Secretary of the Treasury
Office of Tax Analysis
December 5, 1975
1/
If standard deduction exceeds itemized deduction, family uses standard
deduction.
2/
Assumes that taxpayer is not eligible for the Home Purchase Credit.
Table 12
President's Proposed Plan
Tax Liabilities for Family with 1 Dependent,
Filing Jointly with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
Gross
Income
$
5,000
:
:
1972-74
Law
$
207
Tax Liability
: 1975 :
Proposed
: Law 2/ :
1976 Law
$
73
$
o
Proposed
Reduction from
1972-74 :
1975
Law
: Law
$
207
$
73
7,000
526
JoO
190
336
196
10,000
1,028
938
640
388
298
15,000
1,897
1,807
1,535
362
272
20,000
2,897
2,807
2,530
367
277
25,000
4,030
3,940
3,660
370
280
30,000
5,324
5,234
4,988
336
246
40,000
8,406
8,316
8,054
352
262
50,000
12,028
11,938
11,630
398
308
100,000
34,355
34,265
33,860
495
405
Office of the Secretary of the Treasury
Ofiicc of Tax Analysis
December 5, 1975
1/ If standard deduction exceeds itemized deduction, family uses standard
deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit.
Also assumes that taxpayer is not eligible for the Earned Income Credit.
Taxpayers maintaining a home in the United States for a dependent child
are eligible for the Earned Income Credit (EIC) if they earn less than
$8,000. If eligible for the EIC under 1975 law, taxpayers with earned
income of $5,000 would have no tax liability and would receive $227 in
direct payments from the Government. Taxpayers with earned income of
$7,000 would have tax liabilities of $286.
Table 13
President's Proposed Plan
Tax Liabilities for Family with 2 Dependents,
Filing Joint Return with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
Gross
Income
5,000
:
::
:
1972-74
Law
$
98
Tax Liability
: 1975 :
Proposed
: Law 2/:
1976 Law
$
o
0
:
:
:
Proposed
Reduction from
1972-74 : 1975
Law
: Law
*
98
$
0
7,000
402
186
60
342
126
10,COO
886
709
485
401
224
15,000
1,732
1,612
1,325
407
387
20,000
2,710
2,590
2,280
430
310
25,000
3,820
3,700
3,370
450
330
30,000
5,084
4,964
4,648
436
316
40,000
8,114
7,994
7,664
450
330
50,000
11,690
11,570
11,180
510
390
100,000
33,920
33,800
33,280
640
520
Office of the Secretary of the Treasury
Office of Tax Analysis
December 5, 1975
1/ If standard deduction exceeds itemized deduction, family uses stancaro
deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit. Also
assumes that taxpayer is not eligible for the Earned Income Credit. Taxpayers maintaining a home in the United States for a dependent child are
eligible for the Earned Income Credit (EIC) if they earn less than $8,000.
If eligible for the EIC under 1975 law, taxpayers with earned income of
$5,000 would have no tax liability and would receive $300 in direct payments
from the Government, Taxpayers with income of $7,000 would have a tax
liability of $86.
//7>7
Table 14
President's Proposed Plan
Tax Liabilities for Family with 4 Dependents,
Filing Joint Return with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
Gross
'Income
$
5.000
:
:
:
1972-74
Law
$
o
Tax Liability
: 1975 :
Proposed
: Law 2/ :
1976 Law
$
o
$
o
:
:
:
Proposed
Reduction f r oi
1972-74 :
1975
Law
: Law
$
o
$
0
7,000
170
0
0
170
0
10,000
603
372
190
413
182
15,000
1,402
1,222
965
437
257
20,000
2,335
2,155
1,816
519
339
25,000
3,400
3,220
2,830
570
390
30.COO
4,604
4,424
4,008
596
416
40,000
7,529
7,349
6,896
633
453
50,000
11,015
10,835
10,280
735
555
100,000
33,050
32,870
32,120
930
750
Office of the Secretary of the Treasury
Office of Tax Analysis
December 5, 1975
1/ If standard deduction exceeds itemized deduction, family uses standard
deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit. Also
assumes that taxpayer is not eligible for the Earned Income Credit. Taxpayers maintaining a home in the United States for a dependent child are
eligible for the Earned Income Credit (EIC) if they earn less than $8,000.
If eligible for the EIC under 1975 law, taxpayers with earned income of
$5,000 would have no tax liability and would receive $300 in direct
payments from the Government. Taxpayers with income of $7,000 would
have no tax liability and would receive direct payments of $100.
Table 15
H.R. 10612
Tax Liabilities for Single Person Without Dependents,
with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
:
Adjusted
Gross
Jncoiiie
$
5,COO
:
:
:
Tax Liabili ty
1972-74 : 1975 :
Proposed
: L a w 2 /:
Law
1976 l a w
$
490
$
404
$
380
7n
-•
:
Propo>ed
Reductior L from
1972-74 :
1975
Law
L :'•//
$
110
1 56
$
24
63
7,000
889
10,000
1,506
1,476
1,353
153
123
15,000
2,589
2,559
2,352
237
207
20,000
3,847
3,817
3,607
240
210
25,000
5,325
5,295
5,085
240
210
30,000
6,970
6,940
6,730
240
210
40,000
10,715
10,685
10,475
240
210
50,000
15,078
15,048
14,838
240
210
100,000
41,600
41,570
41,360
240
210
/%
Office OJ. the Secretary of the Treasury
Office of T a x Analysis
December 5, i'v/5
1/
If standard deduction exceeds
deduction.
itemized d e d u c t i o n , family uses si.xv<'xrl
2/
Assumes that taxpayer is not eligible for the Home Purchase Credit.
//4t
Table 16
H.R. 10612
Tax Liabilities for Family with No Dependents,
Filing Jointly with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
Gross
Income
5,000
:
:
Tax Liability
1972-74 : 1975 :
Proposed
Law
: Law 2/ :
1976 Law
$
322
$
170
$
170
:
::
.
Proposed
Reduction from
1972-74 :
1975
Law
: Law
$
152
$
o
7,000
658
492
480
178
12
10,000
1,171
1,054
982
189
72
15,000
2,062
2,002
1,840
222
162
20,000
3,085
3,025
2,845
240
180
25,000
4,240
4,180
4,000
240
180
30,000
5,564
5,504
5,324
240
180
40,000
8,702
8,642
8,462
240
180
50,000
12,380
12,320
12,140
240
180
100,000
34,790
34,730
34,550
240
180
Office of the Secretary of the Treasury
Office of Tax Analysis
December ?;, 1975
1/ If standard deduction exceeas itemized deduction, feraily uses standc;id
deduct:on.
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit.
Table 17
H.R. 10612
Tax Liabilities for family with 1 Dependent,
Filing Jointly with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
Adjusted
Gross
Income
$
5,000
1972-74
Law
$
207
Tax Liability
1975
Proposed
: Law 2/:
1976 Lav$
73
$
29
Proposed
Reduction fron1972-74
1975
Law
Law
$
178
$
526
386
336
190
50
10,000
1,028
938
854
174
84
15,000
1,897
1,807
1,690
207
117
20,000
2,897
2,807
2,657
240
150
25,000
4,=030
3,940
3,790
240
150
30,000
5,324
5,234
5,084
240
150
40,000
8,406
8,316
8,166
240
150
50,000
12,028
11,938
11,788
240
150
100,000
34,355
34,265
34,115
240
150
7,000
Office of the Secretary of the Treasury
Office of Tax Analysis
44
0
December s5.
J i ^
1/ If standard deduction exceeds itemized deduction, family usee st^ricui::deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit.
Also assumes that taxpayer is not eligible for the Earned Income Credit.
Taxpayers maintaining a home in the United States for a dependent child
are eligible for the Earned Income Credit (EIC) if they earn less than
$8,000. If eligible for the EIC under 1975 law, taxpayers with earned
income of $5,000 would have no tax liability and would receive $227 in
direct payments from the Government. Taxpayers with earned income of
$7,000 would have tax liabilities of $286.
4&
Table 18
H.R. 10612
Tax Liabilities for Family with 2 Dependents,
Filing Joint Return with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
:
Adjusted
Gross
Income
$
5,000
:
:
Tax Liabili ty
1972-74 : 1975 :
Proposed
Law
: Lav? 2/:
1976 Law
$
98
$
o
o
$
o
$
o
7,000
402
186
186
216
0
10,000
886
709
709
177
0
15,000
1,732
1,612
1,540
192
72
20,000
2,710
2,590
2,470
240
120
25,000
3,820
3,700
3,580
240
120
30,000
5,084
4,964
4,844
240
120
40,000
8,114
7,994
7,874
240
120
50,000
11,690
11,570
11,450
240
120
100,000
33,920
33,800
33,6°0
240
120
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
$
:
:
Proposed
Reduction from
1972-74 :
1975
Law
:
Law
December 5. 1975
if standard deduction exceeds itemized deduction, ffmsil? uses standard
deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit. Also
assumes that taxpayer is not eligible for the Earned Income Credit. Taxpayers maintaining a home in the United States for a dependent child are
eligible for the Earned Income Credit (EIC) if they earn less than $8,000.
If eligible for the EIC under 1975 law, taxpayers with earned income of
$5,000 would have no tax liability and would receive $300 in direct
payments from the Government. Taxpayers with income of $7,000 would have
a tax liability of $86.
wi
Table 19
H.R. 10612
Tax Liabilities for Family with 4 Dependents,
Filing Joint Return with Itemized Deductions of
16 Percent of Adjusted Gross Income 1/
:
Adjusted
Gross
Income
$
5,000
:
:
:
1972-74
Law
$
0
Tax Liability
: 1975 :
Proposed
: Law 2J:
1976 Law
$
0
$
0
:
Proposed
Reduction from
1972-74 :
1975
Law
:
Law
0
$
0
0
0
372
231
0
1,222
1,222
180
0
2,335
2,155
2,095
240
60
25,000
3,400
3,220
3,160
240
60
30,000
4,604
4,424
4,364
240
60
40,000
7,529
7,349
7,289
240
60
50,000
11,015
10,835
10,775
240
60
100,000
33,050
32,870
32,810
240
60
7,000
170
0
0
10,000
603
372
15,000
1,402
20,000
Office of the Secretary of the Treasury
Office of Tax Analysis
December 5, 1975
1/ If standard deduction exceeds itemized deduction, family uses standard
deduction.
2/ Assumes that taxpayer is not eligible for the Home Purchase Credit. Also
assumes that taxpayer is not eligible for the Earned Income Credit. Taxpayers maintaining a home in the United States for a dependent child are
eligible for the Earned Income Credit (EIC) if they earn less than $8,000.
If eligible for the EIC under 1975 law, taxpayers with earned income of
$5,000 would have no tax liability and would receive $300 in direct
payments from the Government. Taxpayers with income of $7,000 would
have no tax liability and would receive direct payments of $100.
J7-77
Table 20
A Comparison of the Liability Effects
of the Tax Reduction Act of 1975,
President's Tax Cut Proposal, and H.R. 10612 on Business Income 1/
(±975 Levels of Income)
Tax Reduction
Act of 1975
Increase the corporate surtax exemption to $50,000
with a 2 percentage point reduction
in the normal tax
Increase the rate of
the investment tax
credit to 10%
(
President's Tax:
Cut Proposal :
$ billions
H. R. 10612
)
-1.5
-1.5
-1.5
-3.3
-3.0
-3.0
2 percentage point
reduction in the
corporate surtax
-2.2
Utilities tax relief
previously proposed
-0.6
WIN credit
TOTAL
-4.8
-7.2
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
-4.5
December 6, 1975
These figures show the difference between 1972-74 law liability
and the two tax programs as applied to calendar 1975 income.
Note: Detail may not add to totals due to rounding.
* Less than $50 million.
f 73
TABLE 21
Comparison of Individual Tax Cuts
($ billions, 1975 levels of income)
1975 Act
increased standard deduction
(minimum increased from
$1300 per return to $1900
for joint return and $1600
for single person; maximum
increased from $2000 to $2600
for joint return and $2300 for
single person)
$30 personal exemption credit $ 5.3
$ 2.5
earned income credit $ 1.5 —
house purchase credit $0.6
$ 9.9
House Bill
increased standard deduction $ 2.5
(same as 1975 Act)
tax credit equal to 27o of taxable $10.2
income (minimum $30 per exemption)
__
$12.7
President1s Proposal
flat amount standard deduction
($2500 for joint return and
$1800 for single person)
$ 4.0
increased personal exemption $10.1
deduction ($750 to $1000)
reduced tax rates $ 6.6
$20.7
T7
Includes the refundable portion of the earned income
credit.
Note: Numbers may not add to totals due to rounding.
Decembe* 8, 1"
TABLE 22
•77/
Comparison of Business Tax Cuts
($ billions, 1975 levels of income)
1975 Act
increased investment tax credit $ 3.3 —
for 1975 and 1976 from 7-10%
(4-10% for utilities)
corporate tax rate and surtax $ 1-5
exemption changes (reduce tax
rate from 22% to 20% on first
$25,000 of income and provide
22% rate on second $25,000)
VK7
House Bill
extends investment tax credit
increase for four years, through
1980
extends corporate tax rate and $ 1-5
exemption changes two years,
through 1977
2/
$ 3.0 —
inrs
President's Proposal
Permanent extension of investment credit increase
Permanent extension of corporate $ 1.5
tax rate and surtax exemption
changes
2/
$ 3.0 —
27o corporate rate reduction $ 2.2
(48-46%)
Six point utilities package $ 0-6
$ 7.2
T7
Some permanent structural changes were also provided, as
well as an additional 1% credit for ESOPs.
2/ A full year cost at 1975 income levels. Revenue effect
not incurred until 1977.
Note: Numbers may not add to totals due to rounding.
December 8, 1975
7777
FOR RELEASE ON DELIVERY
STATEMENT OF DAVID MOSSO
FISCAL ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE COMMITTEE ON THE DISTRICT OF COLUMBIA
HOUSE OF REPRESENTATIVES
DECEMBER 9, 1975, 9:00 A.M., EDT
Mr. Chairman, and members of the Committee, I am glad
to appear this morning to discuss the nature and extent of the
financial obligations of the District of Columbia to the United
States Treasury, and the projected future obligations of the
City.
Before the enactment of the District of Columbia Home Rule
Act, the District was authorized by law to borrow from the
Treasury for certain capital projects and, in addition, the
Secretary of the Treasury was authorized to make interest-free
repayable advances to the District for short-term cash-flow
needs. Loans for the capital projects, and the repayable advances, were made from appropriated funds.
Table 1 attached to this statement shows that as of
October 31, 1975, outstanding loans under these authorizations,
and the Stadium Fund borrowings which are financed from public
WS-517
4%
- 2 debt receipts, amounted to $1,084 million. The Table also shows
the maximum authorization under each loan category, and unused
appropriations. Most of these loans are repayable over thirty
years on a level-payment basis. A few loans extend for forty
years.
Table 2 is a combined loan amortization schedule and shows
the totals of principal and interest payable to the Treasury
by the District through the year 2015.
As I indicated, all of the loans, except those for the
Stadium Fund,were made from funds appropriated to the Treasury
by the Congress and were authorized by substantive law for
specific purposes. Interest-bearing loans were authorized for
four major capital projects: the Water Fund, the Highway Fund,
the Sanitary Sewage Works Fund, and the Metropolitan Area
Sanitary Sewage Works Fund. General Fund loans were also
authorized for capital projects in the areas of education,
health, welfare, public safety, recreation, and other general
government activities. In addition, the Secretary of the
Treasury may lend to the District, under a public debt authorization, for purposes of the D.C. Stadium Fund. These loans
are for the most part used to help meet the interest payments
on the Stadium Bonds.
All of the above loans carry interest rates established
7/77
- 3 by the Secretary of the Treasury, reflecting the current cost
of money to the Treasury. The interest formulas are established by law.
Interest-free short-term borrowings, referred to as
repayable advances, are authorized to help meet the general
expenses of the District during tax and other revenue shortfalls. Repayments to the Treasury are made from general
revenues of the District.
The loan agreements evidencing these loans generally
provide for payment of principal and interest on a date certain throughout the life of the loan. However, the authorizing
statutes for loans for sanitary sewage works, including the
metropolitan program, permit the Secretary to defer payments
of principal and interest if he finds that income from charges
for sewerage services is inadequate to cover expenses chargeable to these receipts. As a practical matter, the Secretary
has relied on certifications made by District officials when
the proviso was invoked.
I should also point out that frequently payments on
loans under the other loan categories have not been received
_ 4 _
by the Treasury on the due date—primarily during those periods
when the District's appropriation acts were not enacted by the
end of the fiscal year. None of the statutes provide for
penalties for late pyaments, and we have not attempted to
enforce rigid payment schedules. Since the District keeps
all its money with the Treasury, loan transactions — both
disbursements and repayments — have not involved any direct
cash flow, only a transfer from one accounting pocket to
another. We are in the process of tightening up on these
practices in anticipation of the withdrawal of District funds
from the Treasury.
Section 743 of the Home Rule Act terminates the District's
borrowing authority for the Water Fund, the Sanitary Sewage
Works Fund, the Highway Fund, and the General Fund; but continues the authorizations for the Metropolitan Area Sanitary
Sewage Works Fund, the Stadium Fund and the repayable advances.
Looking to the future, we fully expect that our relationships with the District will be on a sound financial footing.
As I indicated, no new loans will be made under the four major
capital works programs that account for almost 95% of their
present indebtedness to us. New borrowings under the other
loan categories should not increase significantly under the
7777
- 5 Home Rule Charter. The only question in this regard arises
in the context of proposed legislation now before the Congress
that would disapprove the Act of the District City Council
(Act 1-57) to authorize the District to issue $50 million in
general obligation bonds to refund a portion of the District's
borrowings from the Treasury. Presumably, if the District is
prohibited from going into the market for an extended period
of time, alternative financing arrangements would be provided
by the Congress—possibly in the form of Treasury loans.
That concludes my prepared statement, Mr. Chairman. I
will be glad to respond to questions.
oOo
SUMMARY OF TREASURY LOANS TO THE DISTRICT OF COLUMBIA
OUTSTANDING AS OF OCTOBER 31, 1975
UNUSED
APPROPRIATION
IT IT! OF LOANS
DISTRICT OF COLUMBIA:
AMOUNT
OUTSTANDING
MAXIMUM
AUTHORIZATION
MATURITY
RANGE
INTEREST
RATE
DIRECT
DIRECT
STAT.
STAT.
30 years
1/
30 years
1/
130,856,000.00
30 years
1/
46,000,000.00
40 years
1/
4/
1/
N/A
N/A
1. l\atcr Fund
$ 1,160,000.00
$
2. Sanitar/ Sewage Works Fund
30,885,000.00
53,305,510.29 5/ 106,000,000.00
7>. Highway Fund
116,878,852.06
-0-
4. Metro. Area Sanitary
Sewage Works Fund
40,796,195.61
15,795,888.07 6/
7,325,000.00
51,000,000.00
815,890,812.11 837,037,000.00
500.00
5. General Fund
$
831,600.00 2/
b. Stadium Fund, Armory Board
40,750,000.00
Indefinite 3/
$1,084,248,858.14
$1,170,893,000.00
-0-
Repayable Advances
$39,370,500.00
1/1 Rate of interest on these loans shall be fixed by the Secretary of the Treasury at the beginning of the
~
six month period in which the loan is made.
2/1 Repaid when appropriated.
3/' Pursuant to Act of July 26, 1939 (53 Stat. 1118 as amended by Section 14 of Act of June 28, 1944 (58
~~ .. Stat. 553).
/
/\/
—
$815,040,812.11 for 30 years
bSO.000.00 for 15 years
200,000.00 for S years
52
S/ Includes S l.HS,2Sb.09 principal deferred pursuant tc 74 Stat. 811
t, /
\ IM- \ m \ i - s
<. \ . \ 1 "7 . T-. S. \
3>7
pv\nc-iy>:il
ilof e r r e d
piirsunnt-
to
~7 A
St;it .
71 1 O
77f?
TABLE 2
SCHEDULE OF PAYMENTS TO BE MADE OF PRINCIPAL AND
INTEREST ON TREASURY LOANS BY THE DISTRICT OF COLUMBIA
OUTSTANDING AS OF OCTOBER 31, 1975
Payment Date
7/1/75
7/1/76
7/1/77
7/1/78
7/1/79
7/1/80
7/1/81
7/1/82
7/1/83
7/1/84
7/1/85
7/1/86
7/1/87
7/1/88
7/1/89
7/1/90
7/1/91
7/1/92
7/1/93
7/1/94
Amount
$63,555,412.98
81,299,135.85
78,005,471.38
78,005,471.38
78,005,471.38
77,956,830.68
77,956,830.68
77,956,830.68
77,956,830.68
77,956,830.68
77,861,407.06
77,861,407.31
77,745,128.27
77,535,085.46
77,425,476.61
77,176,787.95
77,121,191.74
76,427,516.28
73,882,942.45
73,259,886.29
Loans made in Oct. 1975
Interest on loans at
8-3/8% for approx.
30 years
Principal deferred
pursuant to 74 Stat.
210 and 811
Interest deferred
pursuant to 74 Stat.
210 and 811
Repayable advances
Stadium Fund, Armory
Board
Payment Date
7/1/95
7/1/96
7/1/97
7/1/98
7/1/99
7/1/00
7/1/01
7/1/02
7/1/03
7/1/04
7/1/05
7/1/06
7/1/07
7/1/08
7/1/09
7/1/10
7/1/11
7/1/12
7/1/13
7/1/14
7/1/15
Amount
$72,983,656.36
72,378,470.51
70,737,231.06
69,379,807.27
67,307,833.61
62,540,433.81
55,207,678.99
51,132,744.83
40,243,174.04
29,750,442.30
17,379,802.66
386,842.66
360,545.08
353,544.21
328,515.62
273,137.13
265,598.45
265,598.45
265,598.45
153,578.62
109,013.80
UNDISTRIBUTED
TOTAL
206,018,284.29
2,352,773,477.99
TOTAL PRINCIPAL
TOTAL INTEREST
TOTAL
1,084,248,858.14
1,268,524,619.85
2,352,773,477.99
$55,040,000.00
99,925,000.00
2,362,840.46
7,108,843.83
40,750,000.00
831,600.00
206,018,284.29
!he Department of theTREASURY
/ASHINGTON, D.C. 20220
TELEPHONE 964-2041
/78<*
FOR RELEASE ON DELIVERY
M/7
STATEMENT OF THE HONORABLE EDWIN H. YEO, III
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE SUBCOMMITTEE ON SECURITIES OF THE
SENATE BANKING, HOUSING, AND URBAN AFFAIRS COMMITTEE
ON THE SECURITIES ACTIVITIES OF COMMERCIAL BANKS
DECEMBER 9, 1975, 10:00 A.M.
Mr. Chairman and members of this distinguished Committee,
I am pleased to testify before you today on behalf of the
Treasury Department in connection with your study of securities activities of commercial banks. The role of commercial
banks in the securities markets has attracted increasing
attention in recent years. Spurred by changing economic
conditions and market forces, commercial banks have gradually
expanded their financial services in the securities field.
This expansion, of course, has been circumscribed by the
boundaries of the Banking Act of 1933, more popularly known
as the Glass-Steagall Act, and has been inhibited in some
cases by uncertainty and confusion concerning the extent to
which the Act limits bank securities activities. This is
particularly true with respect to those activities which
commercial banks did not perforin in 1933 and which Congress
consequently did not contemplate when enacting the GlassSteagall Act restrictions. It seems clear that a thorough
WS-518
#2?
- 2review of the Glass-Steagall Act restrictions is desirable
at this time. We should determine to what extent the Act's
restrictions on bank entry into the securities business
remain valid in light of changes that have occurred in the
economy, the banking industry, and government regulation
of banking and securities transactions since 1933.
As you are aware, the Capital Markets Working Group is
conducting a review of these matters.
That review does not
emphasize the legal aspects of current bank security activities.
Although these questions are important, in our view,
the first priority should be to examine each bank security
activity to determine whether as a matter of public policy
each is desirable and should be permitted by law.
Only after
the determination is made that a bank security activity be
permitted, need the question of regulation be considered.
Our initial issues paper, titled "Public Policy Aspects
of Bank Securities Activities" which I will submit for the
record, Mr. Chairman, attempts to identify the various public
policy considerations that should be weighed in determining
the proper scope of commercial bank participation in the
securities business.
As our issues paper indicates, we have
avoided definite judgments on these questions because we
believe that they would be premature.
Instead, the paper
presents the potential advantages and disadvantages of each
activity for the purpose of eliciting comment and factual
- 3data that will enable us to reach conclusions. I would like
to summarize for this Committee the major areas covered by
the study.
Public Policy Considerations
In assessing the desirability of bank participation in
particular securities activities, the foremost consideration
should be the effect of such bank activities upon the longterm health of the securities markets and their ability to
meet the capital needs of American enterprise. A second and
perhaps equally important consideration is the effect that
such bank activities would have on the stability and integrity
of the commercial banking system. This will require an
examination of the probable impact of these activities upon
competition between various segments of the financial communit
and an assessment of the likely benefits in terms of increased
efficiencies and lower costs in obtaining financial services.
The broad ramifications of increased economic concentration
within the financial community must also be explored. With
respect to bank brokerage-oriented and money management
activities, the effect on the liquidity and efficiency of
secondary markets is an important public policy consideration.
Finally, bank security activities must be analyzed in terms
of their compatibility with sound bank practices and their
potential for creating conflicts of interests and other difficulties within the commercial banking system.
77?r
- 4Agency and Brokerage-oriented Services
Commercial banks presently offer several agency and
brokerage-oriented services which provide customers with
access to securities markets.
These services include the
dividend reinvestment plans, automatic investment services,
and voluntary investment plans.
In each of these services,
the bank acts as a conduit between their customers and the
broker-dealer community by channeling the bank's customers'
orders to purchase or sell securities to a broker or dealer.
Bank sponsorship of these brokerage-oriented services
has several advantages.
First, these services could increase
competition within the brokerage business.
Secondly, the
introduction of these services could benefit investors and
the capital markets by providing a convenient and low cost
means of purchasing securities and thereby encouraging greater
participation by small individual investors in the securities
markets.
However, the concentration of investment services within
a relatively small number of banks could lead to an overconcentration in investment in a few favored stocks, usually
well-established issues, and in an allocation of investment
funds away from smaller emerging companies to larger established ones.
Thus, bank investment services could reinforce
tendencies toward a tiered market.
- 5Stated another way, the concern is that such concentration could harm market efficiency by greatly reducing the
diversity of investment opinions and the number of independent investment decision makers in the market place. Financial market efficiency, as opposed to efficiency in executing
and clearing transactions, may well depend upon the maintenance of a broad range of diverse viewpoints and decision
makers in the market.
Money Management Activities
Commercial banks have provided money management services
to individual customers on a fiduciary as well as agency
basis.
However, commercial banks may collectively manage
in a commingled investment account only assets held on a
true fiduciary (as opposed to investment) basis.
Thus, the
principal question in the money management area is whether
commercial banks should be permitted to sponsor and manage
commingled investment accounts or mutual funds.
The primary advantage of allowing banks to sponsor
mutual funds is that the small investor would have access
to the sophisticated portfolio management services of
commercial banks. Many bank trust departments, particularly
in the larger banks, have large, highly trained staffs
devoted to the management of funds entrusted to the bank.
-6 -
J/f7
Through the sponsorship of mutual funds, the bank could
make this expertise available to the general public.
While
the small investor currently has access to the money management expertise of bank trust department through the common
trust fund, participation in a common trust fund is limited
to the bank's trust customers.
Bank participation in the mutual fund field might also
benefit the investing public by providing increased competition within the industry, which could encourage better
investment services and lower sales load charges and investment advisory fees.
Bank participation in the mutual fund field
could give rise to certain concerns.
The promo-
tional incentives and pressures created by virtue
of the bank's pecuniary stake in the success of the fund,
it can be argued, could be destructive of prudent and disinterested banking.
A bank sponsoring a mutual fund would
have a strong interest in insuring the successful performance
of its fund so as to attract investors, and avoid a loss of
public confidence and good will because of poor performance
of its fund.
Some fear that the bank's stake in the fund might
distort its credit decisions.
For example, the bank could
be tempted to make unsound loans to investors to finance
the purchase of shares in the fund, or for the purpose of
assisting companies in which the fund had invested.
In
77f7
addition, the bank could be tempted to undertake, directly
or indirectly, to make its credit resources available to
the fund, or to exploit its access to confidential information in its commercial department for the benefit of the
fund.
These potential abuses may be controlled through
appropriate regulation and supervision by bank authorities.
The Federal Reserve System, for example, has carefully
limited the dealings between a bank holding company and a
closed end investment company for which it acts as an
investment adviser.
Corporate Financing Services
Perhaps the central policy issue raised by the expansion
of bank corporate financing services is whether such activities will result in greater concentration of economic power
within the financial community, and, if so, would such concentration result in more or less efficient, competitive
financial markets better able to serve the needs of American
enterprise, both large and small.
Bank expansion into new markets offers the potential
for additional competition, which may be especially desirable
where the new market is highly concentrated. Such competition
could provide consumers with more innovative and less costly
services. It is generally recognized that the competitive
benefits of bank expansion into new financial activities are
?7f?
- 6 -
maximized where such expansion occurs through de novo entry,
rather than through the acquisition of existing concerns.
De novo entry of new competitors not only increases the number
of competitors, but also provides an incentive for the entering company to compete vigorously in order to build its share
of the market.
On the other hand, some observers contend that banks
possess such leverage in so many i;ey areas of
finance that, if banks are permitted to engage in these
financial activities, they would possess unfair competitive
advantages over other financial institutions.
A danger may
exist that bank activities in related financial fields could
have an anti-competitive effect through the potential tying
of one bank service to another.
For example, a customer
seeking credit from a bank might determine voluntarily to
purchase other bank services, not on their economic merit,
but only to enhance its chances of obtaining credit. Thus,
the mere offering of related financial services by banks
could have a tying effect.
-9 -
J?^
Medium- and Long-term Lending
As a practical matter, banks have provided corporations
with an alternative source of long-term financing. Many
corporate entities rely on bank credit for longer term
financing needs. Commercial banks -- along with certain
insurance companies -- have helped in providing financing
and financial advice to many less than prime credits which
have faced difficulties in publicly issuing securities in
the capital markets.
To the extent that commercial bank long-term lending
displaces -- rather than supplements -- corporate securities
underwriting as a means of corporate financing, there could
be an adverse impact on investment banking firms. Thus,
the evolution of commercial banking services in the area of
long-term lending must be considered in the context of the
possible long-range effects on inter-industry competition
and economic concentration within the financial community.
Conclusion
Mr. Chairman, I have summarized for you today some of
the public policy considerations of various bank securities
activities. The issues are explained in much greater detail
in the Treasury issues paper. These questions require careful
review by the Congress, and others interested in the formulation of public policy in this area. The ultimate decisions
that are made could be of great important to the future of our
financial system.
477
- 10 We at Treasury look forward to working with the Subcommittee on these issues in the future.
0 o 0
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE STEPHEN S. GARDNER
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
HOUSE COMMITTEE ON BANKING, CURRENCY AND HOUSING
TUESDAY, DECEMBER 9, 1975, 1:30 p.m.
Thank you, Mr. Chairman and members of the Committee:
I am pleased to appear here today in response to your
request for the views of the Treasury Department on the
"Discussion Principles" of the Financial Institutions and
the Nation's Economy (FINE) Study.
The Discussion Principles cover a broad range of
financial topics, and the Treasury is gratified to see
this Committee shares so many of the issues and concerns
we have expressed during the past two and one-half years.
I am confident that your deliberations will provide an
important step in the meaningful reform of our financial
system, reform which can make it more efficient, less
volatile and increasingly responsive to the needs of
consumers.
Our studies of existing financial institutions over the
past several years have convinced us that the structure of
these institutions can be modified to enable them to better
fulfill their functions in our changing social, economic and
financial environment. Such structural change is long overdue. We are essentially pragmatic on the subject of change.
We believe our financial system must be strengthened where
it is demonstrably weak and modernized where it is functionally
outmoded.
The Discussion Principles that this Committee is
addressing are consistent in many ways with the recommendations
of the Administration contained in the Financial Institutions
Act of 1975. The purpose of the FIA is to expand competition,
provide improved consumer services, strengthen the ability of
financial institutions to adjust to changing economic
conditions and improve the flow of funds for mortgage credit.
ws-sia
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Although the FINE Study proposals are broader in scope, they
address issues which we agree deserve the attention of the
Administration and Congress.
Title I — DEPOSITORY INSTITUTIONS
Mr. Chairman, we find the chartering proposals set forth
in Title I of your Discussion Principles to be wholly
consistent with our own view that freedom and flexibility
will enhance the effective functioning of our financial
institutions. We believe that institutions desiring to do
so should be permitted to convert from one form of charter
to another, provided capital and other reasonable requirements
are met. In the Financial Institutions Act we also provided
for federal-to-state conversions by federally chartered
financial institutions, and while not specifically addressed
in the FINE Discussion Principles we assume that this option
would continue to be available.
Similarly, your rationale and timetable for the removal
of ceiling rates is substantially in accordance with our
own beliefs and the proposals expressed in the FIA. We agree
that it should be made clear that ceiling rates will be
removed at the end of 5-1/2 years so that savings institutions
will prepare themselves for a world without deposit rate
ceilings. We have suggested, however, that immediately prior
to removal a final review be made of the progress of financial
reform. This review is not intended as a time for new decision,
but rather as an opportunity to examine the economic and
monetary policy climate in which removal takes place.
Also within the spirit of the FIA, Mr. Chairman, is the
proposal to grant third-party payment powers to all depository
institutions. We strongly advocate such a plan. We do not,
however, believe it in the best interests of the consumersaver to abolish immediately all prohibitions against the
payment of interest on demand deposits. As I have noted in
previous testimony before this Committee, the homogenization
of savings and transactions balances resulting from the payment of interest on demand deposits gives rise not only to
important questions regarding monetary policy and reserve
requirements, but also raises concern that such payment of
interest would diminish consumer benefits resulting from the
phasing out of Regulation Q- The changes presently taking
place in our financial system, made possible by technological
advances, are already tending to blur the traditional
distinctions between time and demand deposits. The discernable
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the interests of the consumer, the financial system and the
economy.
We support the proposal for the expanded use of funds by
savings and loan associations, mutual savings banks and
credit unions, as set forth in Title I, section 3 of your
guidelines. These powers are much the same as those we have
proposed, and will, we believe, act to more effectively serve
the needs of American families, as well as to promote the
convenience of one-stop banking for all consumers.
While we recognize that public disclosure can contribute
to an open, efficient, and competitive banking system, many
of the items suggested by your guidelines, such as foreign
activities, capital provisions, and the impact of holding
company operations, are otherwise required by regulatory
agencies. We are not persuaded that the individual depositor
or consumer-borrower would obtain significant useful
knowledge from the additional disclosures called for by the
Discussion Principles.
The Financial Institutions Act contains provisions
requiring the Federal Home Loan Bank Board to hold reserves
on transaction balances under regulations established by
the Federal Reserve Board. Your proposal to require that all
reserves be held at the Federal Reserve and to extend noninterest bearing reserve requirements to time deposits in
thrift institutions represents a very significant departure
from existing practice. Such a dramatic action would
immediately affect the operations of thrift institutions which
are not now required to maintain such reserves.
Regardless of the merits of this change from a monetary
policy standpoint, we believe that its consideration should
be deferred until the thrift institions have demonstrated
their ability to compete effectively for savings deposits after
implementation of restructuring proposals and the elimination
of Regulation Q interest rate ceilings.
With respect to your proposal that commercial banks,
savings and loan associations, mutual savings banks and credit
unions receive equal tax treatment under the Federal tax laws,
the Treasury substantially favors equal tax treatment, having
proposed similar tax treatment for all financial institutions
except credit unions in the Financial Institutions Act. In
the case of credit unions, we would not object to the retention
-4-
J/^
of tax-exempt status by those entities which demonstrably
are mutual, self-help organizations linked together firmly
by the ties of a common bond.
The subject of banking across state lines is of great
importance to the future composition of the banking industrv.
It is particularly curious in a country whose state
boundaries have never barred commerce or trade, that the
American banking system has been constrained from engaging
in the regional or national expansion or consolidation that has
characterized almost all American business, including
significantly, financial intermediaries that in one form or
another compete with banks. I am referring to insurance
companies, consumer and commercial financial concerns,
investment bankers, brokerage concerns, and other firms
offering financial services.
While I believe strongly that the patchwork of conflicting
state restriction on branching should be modernized, I am
concerned that Federal imposition of nationwide interstate
banking might have a severe impact on the dual banking system
which I also strongly support. Perhaps further study will
disclose a means of promoting coordinated state action which
can resolve this apparent conflict of objectives.
Regarding your proposal that authority to engage in trust
activities be extended to savings and loan associations, credit
unions and mutual savings banks, Treasury is concerned about
such a broad grant of powers. In recognition of the
difficulties involved in operating trust departments, it is
significant that the regulatory agencies empowered to grant
trust powers to banking institutions have generally established
definitive criteria which must be met by the bank applicants.
For example, in determining the adequacy of bank capital, the
Federal Reserve Board requires those institutions holding
trust powers to conform to a formula which includes a sizable
allocation of existing capital to potential liability arising
from claims against the institution's trust department.
At a minimum, the management of trusts requires skilled
personnel with highly specialized training, the allocation
of operating resources of sizable proportions, and sufficient
institutional capital to protect the trustee from adversary
proceedings brought by dissatisfied trust customers,
beneficiaries or other parties in interest. The potential
benefits to consumers or to the institutions themselves may be
minimal, and outweighed by the risks associated with broad
fiduciary responsibility.
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We have given consideration to your proposals which would
permit commercial banks to engage in the underwriting of
revenue bonds. We believe that allowing banks to undertake such
activities, within the constraints of strong bank supervision,
would contribute to a reduction in financing and underwriting
costs, without increasing risks to depositors. We also concur
with your recommendation to defer action on EFTS policy
implementation, pending a report from the National Commission
on Electronic Funds Transfers.
Title II —
HOUSING
Title II of the Discussion Principles contains three
proposals concerning housing. The commentary indicates an
understanding that financial reform is not the same as housing
stimulation, although the two are interrelated. We agree that
it is unrealistic to expect that the needed reform of our
nation's depository institutions, once accomplished, will have
a curative effect on this country's housing industry. Although
it is clear that financial reform is needed to insure that
the flow of housing services is not impeded by the current
inadequacies of our financial structure, it is equally important
to recognize the need to deal with housing issues directly in
order to bring a lasting solution to the recurring problem of
housing finance.
Based upon preliminary analysis, we take exception to the
three housing proposals contained in the Discussion Principles.
The Mortgage Interest Tax Credit proposal applied only to low
and moderate-income housing would at best be ineffective; only
that segment of the housing industry which is engaged in the
construction of low-income housing would receive this incentive,
and the professed objective of the Mortgage Interest Tax
Credit--to offset any adverse impact on housing of the broadening
of banking powers—would not be achieved.
The real advantage of the Mortgage Interest Tax Credit,
as envisioned by FIA, is that it encourages all actual and
potential mortgage lenders to increase, or at least maintain,
their morgage activity during all phases of the housing cycle.
In particular, it provides the most stimulation when interest
rates are high and housing is experiencing its greatest
difficulties. Since low and moderate-income home building
accounts for only a portion of total home construction activity,
the cyclical stabilization function of the tax credit would
be lost if this proposal were implemented.
7777
Further, it must be remembered that thrift institutions
are already receiving a substantial tax incentive for keeping
their money in housing through the current special bad debt
reserve reductions they are allowed to make. (We estimate
that this will be worth approximately $445 million in 1976.)
If this special treatment is removed, without full replacement
by the mortgage interest tax credit, it could have a dampening
effect on overall housing investment. Although we agree there
must be special housing programs to assist in the production
and financing of low and moderate income housing, we do not
think it necessary that such aid come at the expense of the
remainder of the housing industry.
Finally, Mr. Chairman, a wide range of significant and
unanswered questions arise from your tax proposals. How
would the line be drawn to determine what set of low and
moderate income households would be qualified so as to assure
that financial institutions would receive the tax credit?
Would a savings institution be required to certify eligibility?
If so, the resultant paper work could be massive. It is
conceivable that the incentive to focus mortgage lending toward
lower-income households might encourage an outflow of mortgage
investment from urban to rural areas, since housing prices
are lower in rural neighborhoods. Is this a trend we wish to
encourage? These are only a few of many questions relating
to your tax proposals which deserve serious thought and indepth study prior to any attempt to reduce such proposals to
law.
The suggested program of Federal Home Loan Bank Loans at
subsidized rates to any depository institutions granting loans
for low and moderate-income housing would, in essence, duplicate
an existing and already well-funded section 8 program which is
designed to lower housing costs for low and moderate income
families.
Currently, member savings and loan associations may, in
times of need, borrow short-term advances from the district
Home Loan Bank. The rate charged for such advances reflects
the rate paid by the Home Loan Bank System in the capital
markets. This mechanism for advances has benefited both savings
and loans associations and the housing industry by enabling
thrifts to borrow so as to offset the impact of disintermediation
on housing. Although not clearly specified in the Discussion
Principles, it seems that the proposed discount mechanism of
the Federal Reserve System would replace Home Loan Bank advances
as a source of liquidity.
The third FINE Study housing proposal, which provides
for reserve credits equal to an established percentage of
loans for low income housing, is from our perspective, an
unwarranted mixing and misapplication of policy tools and
?7f
objectives. Historically, the function of reserves has been
to further the implementation of monetary policy and to
assure liquidity. We believe that the alteration of reserve
requirements for other purposes, however desirable, would
establish an unfortunate precedent and could be counterproductive to the effective conduct of monetary policy and
the maintenance of liquidity in the financial system.
Finally, a low-income MITC, advances for low-income
housing, and a low-income mortgage reserve credit would
provide a triple subsidy for low-income mortgages. If all
three proposals were enacted, a thrift institution would obtain
a subsidized loan from the Home Loan Bank while simultaneously
lending the funds at a profitable rate, reducing required
reserves, and receiving a credit against federal taxes. This
seems to be a complex and inefficient way of expanding mortgage
credit availability to the low-income homebuyer.
Title III — DEPOSITORY INSTITUTIONS HOLDING COMPANIES
Regarding Title III of your Discussion Principles, which
deals with Depository Institutions Holding Companies, we
recognize and agree with this Committee that the objective
of increased competition—and through competition, increased
efficiency and equity—requires careful supervision by the
appropriate regulatory agencies. We also see substantial merit
in simplifying transactions between and among affiliated
depository institutions so as to render them comparable to
interbranch banking transactions. However, we question the
advisability of vesting within a single federal agency the
sole discretion and authority to determine whether any action
by a depository institution with a holding company, a subsidiary,
or an affiliated non-financial institution might tend to weaken
the depository institution in question. From our viewpoint,
such a grant of authority would serve not to increase
institutional competition and efficiency, but rather to interject an unnecessary layer of Federal regulation into the
internal decision-making processes of our financial institutions.
Intra-company transactions do require close supervision, but
we believe this can be accomplished through a mechanism more
limited in scope than your present proposal.
Regarding the public disclosure of information concerning
loans and other financial transactions between and among
depository institutions, holding companies, non-financial
affiliates and entities such as real estate investment trusts,
we advocate a policy of openness, subject to reasonable
limitations regarding availability of information. However,
Mr. Chairman, we strongly oppose the proposal that federal law
require one-third, or any portion of the Board of Directors
and important committees of a private financial institution to
be selected on the basis of non-affiliation with the businesses
of that concern.
Title IV — REGULATORY AGENCIES
Title IV of the FINE Study Discussion Principles contains
sweeping proposals for the consolidation of regulation over
all types of financial institutions. Yesterday I testified
before the Senate Banking Committee on a more limited bill which
would consolidate only the agencies which regulate the
commercial banking industry. Since the concerns I expressed
apply equally, and in some cases more strongly to the FINE
proposals,
I am appending a copy of that testimony as an
exhibit to this statement.
While I agree that there is much work to be done in
strengthening our regulatory system, I am not convinced that
a major change in the organizational structural of our
regulatory agencies will accomplish that objective. As I
stated yesterday:
"The logic for a single agency in a complex
of interrelated Federal regulation of the banking
system appears persuasive, but the course of Federal
regulation, when imposed by a single monolithic
authority has yet to provide a model for efficient
and effective performance."
It is my hope that discussions of this portion of the FINE
Study will lead to a clear recognition of the steps which must
be taken to improve the regulatory system; and it is my belief
that those steps will not include massive agency consolidiation
or a diminished role for the dual banking system.
Title V — FEDERAL RESERVE SYSTEM
The Discussion Principles include some significant
recommendations concerning the Federal Reserve System. I am
opposed to the elimination of the System's regulatory and
examination authority, and to the proposed changes in the
number and terms of the Board of Governors. I fail to see
the purpose or value of the significant reorganizational
measures imposed on the regional Reserve Banks. Since we
are convinced that the long-range economic interests of this
nation are best served by maintaining a strong independent
Federal Reserve System, we continue to be opposed to the full
audit of the system by the General
Accounting Office.
- 9 Titles VI & VII —
FOREIGN BANKS IN THE UNITED STATES AND
UNITED STATES BANKS ABROAD
We concur, Mr. Chairman, with your recommendation that
foreign bank operations in the United States be subjected to
the same rules and restrictions applicable to domestic banks.
We suggest, however, that further thought and study be given
to the conclusion that foreign bank branches (whose parents
are not chartered in the United States) not be allowed to
accept deposits in this country from individuals, partnerships,
corporations, states and municipalities. Given appropriate
licensing, insurance and capital requirements, ;md subsequent
compliance with these constraints, such banks could make a
worthwhile contribution to the competitive banking industry
of the United States.
Finally, I have no opposition to the principles of
capital adequacy and comprehensive examination set forth
in Title VII relating to the operations of United States banks
in foreign countries. Although already available in large
measure under present authority they are important to effective
regulation.
I would like to thank you once again, Mr. Chairman, for
the opportunity to present our views this afternoon, and I will
be happy to answer any questions you may have or supply more
detailed explanations for the record.
0O0
PRESS RELEASE
Treasury has announced two note issues today.
The first is a 2-year note maturing December 31, 1977
to be auctioned on December 16 in the amount of $2-1/2 billio
to refund $1-1/2 billion of maturing notes and to raise
$1 billion in new money.
The second is a 4-year note maturing December 31, 1979
to be auctioned December 22 in the amount of $2 billion, all
of which will be new money for settlement on January 6, 1976.
Details of the two offerings appear in a separate
release.
oOo
WS-526
For information on submitting tenders in the Washington, D. C. area:
FOR RELEASE AT 4:00 P.M.
PHONE WO4-2604
December 9, 1975
TREASURY TO RAISE $3.0 BILLION THROUGH TWO NOTE ISSUES
The Treasury will auction to the public $2.5 billion of 2-year notes, and
$2.0 billion of 4-year notes. This will refund $1.5 billion of notes held by
the public maturing December 31, and will raise $3.0 billion of new cash.
Additional amounts of the notes may be issued at the average price of accepted
tenders to Government accounts and to Federal Reserve Banks, which hold $0.2 billion
of the maturing notes, and to foreign and international monetary authorities.
The notes to be auctioned will be:
$2.5 billion of Treasury Notes of Series F-1977 dated December 31,
1975, due December 31, 1977 (CUSIP No. 912827 FC 1) with interest
payable on June 30 and December 31, and
$2.0 billion of Treasury Notes of Series G-1979 dated January 6,
1976, due December 31, 1979 (CUSIP No. 912827 FD 9) with interest
payable on June 30 and December 31.
The coupon rates will be determined after tenders are allotted.
The 2-year notes will be issued in registered and bearer form in denominations
of $5,000, $10,000, $100,000 and $1,000,000. The 4-year notes will be issued in
registered and bearer form in denominations of $1,000, $5,000, $10,000, $100,000
and $1,000,000. Both notes will be available for issue in book-entry form to
designated bidders. Payment for the notes may not be made through tax and loan
accounts.
Tenders for the 2-year notes will be received up to 1:30 p.m., Eastern Standard
time, Tuesday, December 16, and tenders for the 4-year notes will be received up to
1:30 p.m., Eastern Standard time, Monday, December 22, at any Federal Reserve Bank
or Branch and at the Bureau of the Public Debt, Washington, D. C. 20226; provided,
however, that noncompetitive tenders will be considered timely received if they
are mailed to any such agency under a postmark- no later than December 15 for the
2-year notes and December 21 for the 4-year notes. Tenders for the 2-year notes
must be in the amount of $5,000 or a multiple thereof. Tenders for the 4-year
notes must be in the amount of $1,000 or a multiple thereof. All tenders must
state the yield desired, if a competitive tender, or the term "noncompetitive", if
a noncompetitive tender. Fractions may not be used in tenders. The notation "TENDER
FOR TREASURY NOTES (Series P-1977 or Series G-1979)" should be printed at the bottom
}f envelopes in which tenders are submitted.
Competitive tenders must be expressed in terms of annual yield in two decimal
>laces, e.g., 7.11, and not in terms of a price. Tenders at the lowest yields, and
noncompetitive tenders, will be accepted to the extent required to attain the amounts
>ffered. After a determination is made as to which tenders are accepted, a coupon
'ield will be determined for each issue to the nearest 1/8 of 1 percent necessary to
lake the average accepted prices 100.000 or less. Those will be the rates of
nterest that will be paid on all of the securities of each issue. Based on such
S-525
interest rates, the price on each competitive tender allotted will be determined
and each successful competitive bidder will pay the price corresponding to the
yield bid. Price calculations will be carried to three decimal places on the
basis of price per hundred, e.g., 99.923, and the determinations of the Secretary
of the Treasury shall be final. Tenders for the 2-year note at a yield that will
produce a price less than 99.501 will not be accepted. Tenders for the 4-year
note at a yield that will produce a price less than 99.251 will not be accepted.
Noncompetitive bidders will be required to pay the average price of accepted
competitive tenders; the price will be 100.000 or less.
The Secretary of the Treasury expressly reserves the right to accept or reject
any or all tenders, in whole or in part, and his action in any such respect shall
be final. Subject to these reservations noncompetitive tenders for $500,000 or
less for each issue of notes will be accepted in full at the average price of
accepted competitive tenders.
Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and report
daily to the Federal Reserve Bank of New York their positions with respect to
Government securities and borrowings thereon, may submit tenders for the account of
customers, provided the names of the customers are set forth in such tenders.
Others will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for
their own account, Federally-insured savings and loan associations, States, political
subdivisions or instrumentalities thereof, public pension and retirement and other
public funds, international organizations in which the United States holds membership, foreign central banks and foreign States, dealers who make primary markets
in Government securities and report daily to the Federal Reserve Bank of New York
their positions with respect to Government securities and borrowings thereon,
Federal Reserve Banks, and Government accounts. Tenders from others must be
accompanied by payment of 5 percent of the face amount of notes applied for. However
bidders who submit checks in payment on tenders submitted directly to a Federal
Reserve Bank or the Treasury may find it necessary to submit full payment for the
notes with their tenders in order to meet the time limits pertaining to checks
as hereinafter set forth. Allotment notices will not be sent to bidders who
submit noncompetitive tenders.
Payment for accepted tenders for the 2-year notes must be completed on or before
Wednesday, December 31, 1975. Payment for accepted tenders for the 4-year notes
must be completed on or before Tuesday, January 6, 1976. Payment must be in cash,
7% Treasury Notes of Series H-1975, which will be accepted at par, in other funds
immediately available to the Treasury by the payment date or by check drawn to the
order of the Federal Reserve Bank to which the tender is submitted, or the United
States Treasury if the tender is submitted to it, which must be received at such
Bank or at the Treasury no later than: (1) Monday, December 29, 1975, for the
2-year notes and Wednesday, December 31, 1975, for the 4-year notes if the check
is drawn on a bank in the Federal Reserve District of the Bank to which the check
is submitted, or the Fifth Federal Reserve District in case of the Treasury, or
(2) Tuesday, December 23, 1975, for the 2-year notes and Monday, December 29, 1975,
for the 4-year notes if the check is drawn on a bank in another district. Checks
received after the dates set forth in the preceding sentence will not be accepted
unless they are payable at a Federal Reserve Bank. Where full payment is not
completed on time, the allotment will be canceled and the deposit with the tender
up to 5 percent of the amount of notes allotted will be subject to forfeiture to the
United States.
oOo
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $5,800,000,000 , or
thereabouts, to be issued December 18, 1975
as follows:
91-day bills (to maturity date) in the amount of $2,700,000,000, or
thereabouts, representing an additional amount of bills dated September 18, 1975,
and to mature March 18, 1976
(CUSIP No.912793 YY6 ), originally issued in
the amount of $2,920,240,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,100,000,000, or thereabouts, to be dated December 18, 1975,
and to mature
June 17, 1976
(CUSIP No. 912793 "ZH1 ).
The bills will be issued for cash and in exchange for Treasury bills maturing
December 18, 1975, outstanding in the amount of $5,639,215,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,605,980,000.
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their face amount will be payable without
interest. They will be issued in bearer form in denominations of $10,000,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Monday, December 15, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
multiples of $5,000.
Tenders over $10,000 must be in
In the case of competitive tenders the price offered must
be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
WS-523
(OVER)
-2securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
own account.
Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on December 18, 1975, l n
c a s n or
other immediately available funds or in a like face amount of Treasury bills
maturing December 18, 1975.
ment.
Cash and exchange tenders will receive equal treat-
Cash adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954. the
amount of discount at which bills issued hereunder are sold is considered to
accrue when the bills are sold, redeemed or otherwise disposed of, and the bills
are excluded from consideration as capital assets.
Accordingly, the owner of
bills (other than life insurance companies) issued hereunder must include in his
Federal income tax
return, as ordinary gain or loss, the difference between
the price paid for the bills, whether on original issue or on subsequent purchase,
and the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notic•
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from any Federal Reserve Bank or
DepartmentoftheTREASURY
OFFICE OF REVENUE SHARING
WASHINGTON, D.C. 20226
TELEPHONE 634-5248
S7^
FOR IMMEDIATE RELEASE, TUESDAY, DECEMBER 9, 1975
FOR INFORMATION, CONTACT: PRISCILLA R. CRANE (202) 634-5248
In an effort to make sure that the most accurate available data are used to allocate general revenue sharing funds
to all units of state and local general-purpose government in
the United States, the U.S. Treasury Department's Office of
Revenue Sharing initiated a supplemental data improvement
program this week.
Approximately 32,000 governments have been notified of
changes that have been made in data relating to population,
per capita income, adjusted taxes and intergovernmental
transfers for their jurisdictions since the figures were used
to calculate amounts to be paid for fiscal year 1976.
Most of the data changes have occurred as a result of
cooperative efforts between the U.S. Bureau of the Census and
state governments to refine population estimates used to update
1970 decennial census data. Newly-incorporated places that
have recently become eligible to participate in the general
revenue sharing program have also been provided their data
for the first time.
WS-522
37)7
Governments being notified of data changes this week
may request further corrections in the figures before
January 12, 1976.
Requests for further changes must be
received by the Office of Revenue Sharing before the January
deadline.
When all refinements have been made, a final alloca-
tion of fiscal year 1976 amounts will be calculated for all
of the nearly 39,000 revenue sharing recipients.
Any adjust-
ments that must be made to previously-announced 1976 allocations
will be added to or subtracted from allocations for the ensuing
period.
Allocations of revenue sharing funds are made in April
of each year for the following period.
At the same time, the
previous period1s allocations are recalculated using data that
have been corrected during the year.
Adjustments are made
accordingly.
All data used to allocate general revenue sharing funds
are published by the Office of Revenue Sharing as part of an
ongoing effort to keep the public fully informed.
Publications
containing the data used by the Office of Revenue Sharing to
allocate the money are available for inspection in the Treasury
Department's library at 15th Street and Pennsylvania Avenue, N.W.
in Washington, D. C. and at Federal depositories throughout the
country.
3
&?
As presently authorized, the general revenue sharing
program is providing $30.2 billion to nearly 39,000 units
of state and local general-purpose government over a
period that extends from January 1972 through December 1976.
President Ford has submitted renewal legislation and has
asked the Congress to act promptly to extend the program past
the December 1976 deadline.
- 30 -
\e department of the
5HINGT0N, D.C. 20220
TREASURY
TELEPHONE 964-2041
I
S3?
FOR RELEASE UPON DELIVERY
REMARKS OF THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
INSTITUTIONAL INVESTORS
CORPORATE FINANCING CONFERENCE
NEW YORK HILTON HOTEL
WEDNESDAY, DECEMBER 10, AT 1:45 P.M.
Capital Investment and the Need for a New Policy
I appreciate the opportunity to discuss with you issues
relating to capital formation. It is important to appreciate
the relationship between this subject and the future course of
our economy. There is not enough public awareness of the fact
that capital investment translates into more jobs, higher personal
incomes, higher productivity, lower inflation and in turn greater
economic growth -- all of which are the basic ingredients of
prosperity.
Let's briefly look at what the future will require. We will
need to create almost 20 million new jobs by 1985; by contrast,
we created about 13 million over the past decade. We will need
as much as a trillion dollars to satisfy our special needs in
energy. Protection of the environment and greater worker safety
will add to investment needs and already account for almost 10°o of
plant and equipment outlays in the manufacturing area. In total,
WS-524
-2-
J7a
investment outlays in the decade ahead will have to rise by
$4-4 1/2 trillion or three times the $1.5 trillion of the
past decade.
What is Capital Formation. When we talk about commitment
to future growth, about investment, we are talking what has
come to be called capital formation. Stripped of detail, we
can say that capital is "formed" when a decision is made at
any level of the economy -- from the household to the Federal
Government --to defer current spending (i.e., present
consumption) and instead use the amount deferred to purchase
an asset which yields a financial return (i.e. , future
consumption). It logically follows that such a decision
to defer present consumption is possible only if attractive
financial assets are available. And the availability of such
assets in turn depends on the ability of other entities -e.g., industrial companies -- to put the proceeds from the
sale of such assets to productive and profitable use.
What has been happening, however, is that government
has increasingly affected the conduct of both borrowers and
lenders to such an extent that lenders find it less profitable
to lend and borrowers find it less profitable to borrow. The
inevitable result is that government has become an end in
itself instead of a means to an end. We have experienced
a time where government intervention, so expertly planned,
has failed, not only here but more spectacularly abroad.
\ policy of more government intervention is clearly
J7/
not the answer. What government must do is extricate itself
from the economic machinery and allow the nation's productive
sector to function freely.
Only in this way can we ever
hope to strengthen our market economy for the future demands
of a growing world.
Only by maintaining free capital markets
can we expect to assure a vigorous economy and the most
efficient rate of economic growth.
The cornerstone of our capital markets has been, and
must continue to be freedom.
This means freedom for the
investor to select his investments without tax laws
allocating investment along certain politically expedient
lines.
This also means freedom for issuers to raise capital
in the most efficient and expeditious manner.
Finally
there must be freedom for our economy both to grow and
to protect itself from economic phenomena from outside our
markets, and outside our free economy; to protect ourselves
from the inevitable consequences of Government planning gone
awry, foreign government cartels, and the refusal of past
Administrations to impose the costs of war and welfare when
the bill came due.
The key to our future policies must be to strike a
delicate balance -- providing enough fuel to the economy to
continue the recovery and yet avoiding measures which would
propel us into another spurt of inflation.
As we do this,
. 4 -
&
&
we must focus not on what may be politically expedient for
the moment, but on what will be economically sound for the
long-term.
A basic answer lies in developing policies that will
encourage savings and investment as opposed to consumption.
Unfortunately in the past, the opposite has been the case -we have discouraged investment.
The results were really
predictable:
-- The United States has had the poorest record of
investment (as a share of GNP) and hence of real growth of
the major industrialized countries of the world for over a
decade now.
-- Productivity gains in the United States during
the last seven years have been averaging only one-half of
the gains in the preceding two decades.
-- From 1961 to 1965 almost $54,000 of real capital
was added per new worker; by 1971 to 1974 this had fallen
to only $44,000.
-- In 1973 clear evidence of absolute shortages existed
in many basic industries such as chemicals, steel, paper,
and fertilizer which served to exacerbate the inflation and
hinder growth in the economy.
Our capital markets, which serve as barometers of
government and private sector economic activities, also show
what has happened:
Rising government deficits requiring
giant new borrowings, the virtual disappearance of the new
issues market until just recently, the alarming increase in
debt to equity ratios; and the mergence of the two-tier
debt market.
Let's look at the capital markets in a little
more detail.
The Capital Markets Today.
Since 1970, the Federal
Government, through annual budget deficits ranging from
$2.8 billion to $44.2 billion, has increased the cumulative
deficit by $111 billion, requiring $117.4 bill ion net new borrowing
in the capital markets.
In 1970, our borrowing accounted for
38 percent of new issue dollar volume, this year our share will
reach 61 percent.
What has happened during the same period on the private
side?
The first, and perhaps most noteworthy, development
has been the virtual disappearance of a new issue market for
equities.
In the early 1970's, our private sector raised
some $13 billion per year in equity capital; in 1974, they
raised less than half that amount.
As would be expected, the decline of the equity market
was accompanied by an alarming increase in debt to equity
ratios.
In 1965, 75 percent of corporate capital was in
the form of equity.
to 53 percent.
By last year the percentage had dropped
Another important phenomenom is the restructuring
which has occurred in the private market for capital.
Over the past five years, the market access of the so-called
lower quality issuers -- that is, the company too small or
not profitable enough to warrant a rating higher than Baa
(or any rating at all) -- has declined precipitously. In
1971, such companies accounted for 15 percent of the dollar
volume in the corporate bond market. The share has dropped
steadily ever since and was down to the 7-8 percent range
by the first quarter of this year.
Moreover, what market access has been available is only
on less and less favorable terms. In 1971, only 20 percent
of the lower quality issues were limited to the intermediate
term -- i.e., not more than 7-10 years. By this year, 4
times as many -- more than 80 percent -- were subject to this
limitation. While all corporate issuers were faced by the
inflation generated reluctance of investors to commit for the
long term (the percentage of AAA issues so limited doubled over
the same period and the average maturity of all new debt
issues has fallen 10 years since 1973) , the bottom class was
particularly hard hit.
Finally, the price of what access is available has
become higher and higher. Not only have all interest costs
increased, but yield spreads -- the gap between the cost of
access for high quality and low quality issues -- have doubled
in recent years. During the period 1971-1973, the average
spread between A and Baa rated industrials ranged from 43 to
777/sr
- 768 basis points (100 basis points is equal to 1 percent).
For 1974, the spreads averaged 107 basis points.
And
early 1975 figures show spreads as high as 200 basis points
separating classes of securities closely linked in quality.
Worldwide Investment Patterns
These statistics lead to one conclusion:
less funds
are being committed to private sector investment and such
investments are being concentrated in fewer firms.
And
these phenomena are already taking a measurable toll on our
competitive position vis-a-vis the rest of the industrialized
world.
Over the past decade and more, the U.S. share of its
output allocated to investment has been below that of other
industrialized nations and thereby contributed to relatively
lower rates of advance in productivity and national output.
This disparity has effectively lowered rates of advance in
living standards of the average consumer in the U.S., created
shortages in basic materials producing industries during periods
of economic expansion and added substantially to the
inflationary consequences of high employment in recent years.
The disparity also has limited job opportunities in the
sense that had the growth of plant and equipment exceeded
that of the labor force, more jobs would have been required
to utilize that increased capacity.
376
- 8These factors also show up in our productivity growth
rate -- perhaps the key barometer of inflation outside the
financial markets.
Among the major industrialized nations,
only the United Kingdom showed a rate of productivity growth
slower than that of the United States.
Japan's rate was
nearly triple our own; the rates in Germany, France, Canada
and Italy were substantially higher than ours.
In today's
highly mechanized world, investment is the keystone of
productivity.
If, through underinvestment, we lose the
ability to compete effectively with other industrialized
nations, we will find ourselves in an intolerable situation:
plagued by inflation and lacking a way out.
Simply stated these phenomena tell me that the
American people have become less and less willing to make
permanent commitments to their own future prosperity.
And
this tendency -- which must be reversed if we are to retain
any semblance of our valued way of life -- can be traced
directly to Federal policies and Federal conduct.
How have Federal policies placed us in this predicament?
It begins with our Federal tax laws.
Apart from the U.K., no
other industrialized economy discriminates against saving to
the extent we do.
In our tax laws, we refuse to recognize the
difference in social utility between income saved and income
consumed, between present consumption and deferred consumption.
377
We force the saver (i.e., investor) to pay taxes twice on
profits derived from his ownership interest in a corporation.
And we place another tax on the free movement of capital -in response to market forces -- from one use to another.
The disincentives are equally strong on the borrower
side.
The concept of the corporation is truly one of the
most imaginative creations of modern man.
It has permitted
diverse wealth, skills and resources to be joined in the
most productive and desirable fashion.
But in exploiting
the corporation's virtues, we have incorrectly given it a
life of its own, independent of its owner.
And we have
taxed it accordingly.
I have already alluded to the adverse effect of our
system of corporate taxation on the decision to save.
The
impact is even more acute on the decision to borrow to
finance the purchase of productive assets.
To put it most
simply, any such investment in productive assets must
generate a return at least double that which would otherwise
be required in the absence of a corporate tax.
It was with these considerations in mind that Secretary
Simon, on behalf of the Administration, this summer proposed
a comprehensive reform of our system of corporate income
taxation.
That proposal -- an "integrated" tax system to use
the technical term -- involved two key changes:
-- First, corporate taxpayers would receive a partial
deduction for dividends paid.
Such a deduction would serve
- 10 -
37/
partially to redress the current imbalance between the tax
treatment of debt and equity financing. Moreover, and perhaps
more importantly, it would have reflected the economic reality
that corporate profits and dividends are a cost of doing busines
much like any other deductible cost: in this instance the cost
of raising capital.
-- Second, shareholders would receive the right -- phased
in over a period of time --to take as a credit against income
taxes due a portion of taxes paid by the corporation. This
again would reflect an economic reality: that the shareholder,
and some abstract entity, was in fact bearing the burden of
corporate taxation.
I wish I could tell you that these proposals were promptly
embraced by the Congress. Unfortunately, nearly the contrary
is the case and at this point, I see little chance of rapid
enactment. But we continue to believe in the correctness of
our approach and it will be pursued.
Additional Policies To Be Pursued. What else is needed?
What should our approach to policy be? To be effective, it
must satisfy short and long run needs.
First, the public must be educated about the meaning
and function of capital in our economic system. Leaders, both
in government and outside, must create better understanding of
the relationship between capital investment and productivity and
jobs.
- 11 -
3'?
Second, the rise in government spending must be reversed.
It is the only sound way to reduce inflation and in turn to
allow more real resources to flow to the private sector.
Third, budget deficits, which will total $150 billion in
just three fiscal years, FY 1975-1977, must be eliminated and
surpluses achieved in good years in order to release credit and
savings.
Fourth, any form of wage-price guidelines or controls must
be avoided. History has time and again showed us that controls
not only distort the allocation process but also create an
extra element of uncertainty in making future investment decisions, thereby directly hindering the investment process.
Fifth, we must lift the heavy hand of government regulation
that is threatening to strangle the free enterprise system.
Regulatory reform must be more than a slogan. It must be
converted into action that involves everything from removing
controls from the oil and gas industries to elininating the
bureaucratic red tape that effects millions of businesses
in every industry.
Conclusion. All of these policy measures would contribute
to improving the climate for financing by American business and
for capital formation in this country. In turn, by improving
the prospects for capital formation the current economic
recovery will be sustained and long-term prospects for higher
productivity, economic growth and rising standards of living will
be improved. An important point to realize is that it is not
- 12 -
^
^
a matter of reslicing the economic pie, but rather the need to
expand the pie so everyone can gain.
As with so much today, in the area of capital investment,
I believe that the time has come for some fundamental changes
and for more imagination about what we can accomplish if we
stop worrying about what is politically attractive. The claim
that politics won't allow it is a poor substitute for developing
sound solutions to our problems. The question I leave you with
is relevant to the policies we develop in energy, or the economy
or commodities, or investment -- do we or do we not have the
will and courage to act on our convictions? The answer will
determine the course of this country in the future.
0O0
FOR IMMEDIATE RELEASE
December 10, 1975
TREASURY ANNOUNCES SCHEDULE CHANGE FOR
WEEKLY BILL AUCTION DUE TO HOLIDAY SEASON
The Treasury announced today that the weekly Treasury
bill auction normally scheduled for Monday, December 22,
will be held instead on Friday, December 19. The day for the
auction is being advanced to assure ample time between it and
the payment date during the holiday season. The payment date
for the bills will be Friday, December 26.
###
WS-530
'of?
y/J/7^t/^^-~
rt
OA
y/^
he Department of theJREASURY
TELEPHONE 964-2041
iNGTON, D.C. 20220
J£Z
December 10, 1975
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S 52-WE5K BILL AUCTION
Tenders for $1,700,000,000 of 52-week Treasury bills to be issued to
the public, to be dated December 16, 1975, and to mature December 14, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $510,000)
Price
High
Low
Average -
Discount Rate
93.510
93.479
93.489
6.419%
6.449%
6.439%
Investment Rate
(Equivalent Coupon-Issue Yield)
6.86%
6.90%
6.88%
TOTAL TENDERS FROM THE PUBLIC RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS
District
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$
TOTAL
$4,459,430,000
11,785,000
3,050,815,000
86,880,000
130,970,000
114,055,000
33,695,000
574,765,000
64,895,000
60,905,000
31,620,000
30,175,000
268,870,000
Accepted
$
2,785,000
1,271,055,000
39,030,000
59,770,000
53,635,000
12,485,000
146,515,000
24,825,000
14,405,000
12,620,000
6,605,000
56,380,000
$1,700,110,000
The $1,700,110,000 of accepted tenders includes 4 3 % of the amount of
bills bid for at the low price and $83,880,000 of noncompetitive tenders
from the public accepted at the average price.
In addition, $1,549,915,000 of tenders were accepted at the average price
from Government accounts and from Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities.
WS-529
teDepartmentoftheTREASURY
INGTON, D.C. 20220
TELEPHONE 964-2041
3TJ3
FOR RELEASE UPON DELIVERY
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON COMMERCE
WASHINGTON, D . C , THURSDAY, DECEMBER 11, 1975
I welcome the opportunity to join in this review of the
prospects and problems of American participation in EastWest trade and economic relationships during the next five
years. As Chairman of the East-West Foreign Trade Board, I
believe that these hearings will provide an opportunity ro
assess current policies that affect East-West trade, and to
develop more open public discussion and understanding of
this important subject, at an appropriate moment.
During the Cold War period, U.S. participation in trade
with the Communist countries was virtually nonexistent. Our
contacts with these countries in the cultural and in other
areas were isolated events. No cooperative efforts were
undertaken either in the economic and commercial fields or
in science and technology. It was difficult to speak of
bilateral relationships with these countries in any meaningful way. As a result there was no inducement toward cooperation and little incentive for restraint.
The era of confrontation during the years of Cold War
demonstrated that the imposition of economic sanctions
against Communist countries neither altered the nature of
their systems nor materially improved their policies toward
the Western world. In this decade, the U.S. Government has
sought to develop a policy in which the attempt to normalize
U.S. commercial relationships with the U.S.S.R., Eastern
Europe, and the People's Republic of China is a cornerstone.
WS-527
We have pursued this policy with the firm conviction
that accelerated development of strong economic ties between
the United States and the Communist countries will give each
side a more solid stake in the parallel improvement of our
political relations. I believe these ties create a foundation of mutual interest which in turn improves the environment for progress in the relaxation of political tensions.
From its beginning, the new approach to the Communist
countries has received broad public support. The flow of
goods and an exchange of people between our country and
those expanded at an extraordinary rate. The developing
momentum in the expansion of our relations with the Soviet
Union led to the conclusion, in 1972, of several important
agreements with that country -- the Trade Agreement, the
Lend-Lease Settlement, and the Maritime Agreement. Since
1974, this momentum has slowed. We believe that this
slowdown has cost our economy exports and export-related
jobs. But it has also impaired United States political
and humanitarian objectives.
Let me stress at the outset, a fact of which this
Committee is no doubt already aware. Normalizing our
relations with the Communist countries in no way implies
a grant of special favors not provided to other countries.
Quite the contrary. Recognizing that East-West trade is
a two-way street which will bring mutual benefits to both
sides, we seek to eliminate the aspects of our policy toward
the Communist countries that discriminate against them. By
extending MFN treatment to the Communist countries we would
give our imports from them the treatment we now accord to
our imports from other countries.
Nor has it ever been our purpose to bargain away the
nation's security simply to see our trade statistics rise.
We maintain controls on the export of products and technology
of strategic significance, and we would continue to maintain them even under normalized trading conditions.
In addition, the Executive Branch carefully examines
exports that might involve national security considerations
through two Cabinet-level Boards.
To insure that our national security is not jeopardized,
the Export Administration Review Board (EARB), which is
chaired by the Secretary of Commerce, reviews particular
export license matters involving questions of national
security or other policy issues. As Chairman of the EastWest Foreign Trade Board I have attended EARB meetings, and
will shortly be formally designated a member of the EARB by
Executive Order. The Secretaries of State and Defense are
also members of this important body. The EARB was established by Executive Order in 1970 to assure the highest
level of consideration of difficult export license cases,
and to obtain agreed action among the departments chiefly
concerned with advising the Secretary of Commerce in administering U.S. export controls.
The East-West Foreign Trade Board
But the major East-West economic policy body of the
Executive Branch is the East-West Foreign Trade Board. The
Board was created by the Trade Act of 1974 to monitor EastWest trade in the national interest. The Board is comprised
of the Secretaries of State, Treasury, who is Chairman,
Agriculture, Commerce, the Special Representative for Trade
Negotiations, the Director of the Office of Management and
Budget, the Executive Director of the Council on International
Economic Policy, the President of the Export-Import Bank,
and the Assistant to the President for Economic Affairs, who
is Vice-Chairman of the Board. Recognizing the important
role of the Department of Defense in the national security
aspects of our trade with the Communist countries, the Board
has recently recommended to the President that the Secretary
of Defense be added to the Board's membership.
A Working Group of the East-West Foreign Trade Board,
consisting of representatives of the member agencies,
usually meets twice monthly to coordinate the development
and implementation of East-West trade policies and to refer
issues to the Board for decision. The Working Group also
reviews exports of technology to nonmarket economy countries
which is essential for the protection of our security,
and receives reports from U.S. Government agencies which
provide credits, guarantees, or insurance for exports to
nonmarket economy countries.
As required by the Trade Act, the East-West Foreign
Trade Board publishes a Quarterly Report on U.S. trade with
the nonmarket economy countries. The report reviews (a) the
status of negotiations of bilateral trade agreements, (b)
activities of joint trade commissions, (c) commercial
disputes and problems of market disruption, (d) East-West
trade promotion activities, and (e) recommendations for the
promotion of East-West trade in our national interest.
Current Status of East-West Trade
Prior to 1974, the United States was making remarkable
progress in developing trade with the East. Secretary
Morton will discuss trade flows in more detail, but I would
like to mention a few highlights.
In 1971, total U.S. exports to the Communist countries-'amounted to less than $400 million. In 1974, exports were
$2.3 billion, a more than 475 percent increase in three years.
By contrast, in 1971, U.S. imports were $230 million, and in
1974, they were $1 billion. Thus, our total trade surplus
with these countries grew to $1.3 billion in 1974, an increase
of 665 percent in only three years. The favorable impact of
this trade on our balance of payments and on the U.S. economy
is obvious.
T .
The expansion of trade with the Soviet Union has been
particularly striking, as can be seen in the following
table:
iFor this purpose the Communist countries are defined to
include Albania, Bulgaria, Czechoslovakia, German Democratic
Republic, Hungary, Poland, Romania, U.S.S.R., People's
Republic of China, and Mongolian People's Republic.
S£7
U.S. TRADE WITH THE U.S.S.R.
(Millions of U.S. Dollars)
1971
1972
1973
1974
1975*
161
547
1187
607
1800
102
265
293
700
95
215
350
250
218
638
1402
957
2050
+ 104
+ 446
+ 972
+ 257
+ 1550
U.S. Exports
Nonagricultural 118
U.S. Imports 57
Total Trade
Turnover
Trade Balance
*estimated
Source:
U.S. Department of Commerce
Our estimates indicate that, because of very substantial grain sales, two-way trade with the Soviet Union will
reach a new high this year of over $2.0 billion, with 70 percent of our shipments consisting of grains.
Although most of our exports to the Soviet Union and the
other Eastern countries are now agricultural products, our
manufactured goods exports have the greater growth potential
in the longer term. Shipments in 1974 of nonagricultural
commodities to Eastern Europe totaled nearly $300 million,
with almost one-half of these products going to Poland and
one-third to Romania.
Manufactured goods and other nonagricultural items
accounted for about $300 million of our exports to the Soviet
Union in 1974, and are expected to account for about
$700 million in 1975. However, this increase reflects shipments which continue to be made on contracts signed in past
years. Projects now underway involving major amounts of
U.S. exports include the Kama River Truck Plant, entailing
over $340 million in exports of U.S. goods and services
over a period of several years; the Moscow Trade Center,
involving an estimated $80 million in U.S. exports; a
chemical fertilizer project, involving $400 million in
U.S. exports; an acetic acid plant, involving $44 million;
and an iron ore pellet plant, involving $36 million. All
these and other current projects together totaling over
$1 billion are being financed in part by the Export-Import
Bank. Eximbank commitments to the U.S.S.R. currently total
$469 million.
East-West Trade and the Trade Act of 1974
The passage of the Trade Act of 1974 last December
was a milestone in the development of our international
trade relations. The new trade legislation has given the
President, for the first time in eight years, the authority
to participate in the far-reaching multilateral trade talks
which began in February of this year. Countries accounting
for most of the world's trade are participating in these
negotiations which focus on the reduction of all types of
tariff and non-tariff barriers that affect both agricultural
and industrial trade. The mandate given the President by
the legislation enables the United States to play a leading
role in the expansion of world trade based on clearer ground
rules for fair trade practice.
37?
Notwithstanding the importance of the Trade Act for
multilateral trade negotiations, this Administration has
consistently established its objection to the provisions of
this Act, and the 1974 Eximbank Act Amendments, which
adversely affect our trade with the Soviet Union, the nonmarket economy countries of Eastern Europe, and the People's
Republic of China, and which do not serve our political and
humanitarian interests.
During my trip to Moscow in April for the annual
meeting of the U.S.-U.S.S.R. Commercial Commission, the
President asked me to discuss the recent legislation, and
our future trade relations with the Soviets. My talks with
Soviet leaders convinced me that it is in our interest to
find a way to unblock the impediments to increased trade
which now face us.
^
In the past several months, we have consulted with
members of the Congress on this problem. During the summer,
Secretary Kissinger, other members of the Board, and I met
with the members of the Senate delegation to the U.S.U.S.S.R. Parliamentary Conference before and after their
visit to Moscow. The Senators had an extremely frank
exchange of views with top Soviet officials on the impact of
the Trade Act on U.S.-Soviet relations. I believe their
visit was extremely useful as was the visit of the House
delegation which took place in August.
Additional consultations with several Congressional
leaders have been undertaken more recently. I have been
encouraged by a common appreciation that we must move
ahead. We approach this task with the sure knowledge that
it is in our national interest.
The normalization of our commercial relations with the
U.S.S.R., Eastern Europe, and the People's Republic of China
is an integral part of our policy of expanding our relationships with these countries. The Administration continues to
believe that improvement in our commercial relations is a
necessary element in the improvement in our overall relations with these countries. In an interdependent world in
which economics and politics intertwine, commercial relations influence the conditions of the larger political
environment. What we do in the economic field could have a
significant impact on what we are attempting to achieve in
the political sphere.
8
A solution to the impasse we now face would also
materially enhance our business community's efforts to
expand trade with the East. We have had many indications
that the lack of official credits from the U.S. is causing
the U.S.S.R. and some of the Eastern European countries to
direct their purchases elsewhere. Lost U.S. exports mean
lost jobs in our export industries, a lost benefit to our
balance of payments, and to our competitive position in
world markets.
The inability to extend MFN treatment to imports from
the Eastern bloc countries is also holding back major joint
projects between our firms and the U.S.S.R. and other
countries of Eastern Europe. This is because these projects
often involve the eventual export of products to the U.S.
that are now affected by high U.S. non-MFN tariffs. These
projects could eventually supply us with products in limited
supply in our own market, such as energy sources and products
from energy consuming projects. Losing these major joint
projects is, therefore, a net loss to the U.S.
Prospects for East-West Trade
The potential for U.S. exports of goods and services,
particularly to the U.S.S.R., remains great. The Soviets
plan to boost foreign trade with the Western world by 9
percent in 1976 over the level planned for this year. U.S.
agricultural exports have been and will continue to be very
significant, in part as a result of the U.S.S.R.'s agreement
to buy annually a minimum of 6 million metric tons of wheat
and corn. But future growth, we believe, will be mainly in
manufactured goods. Moreover, the enormous scale on which
the Soviet projects are planned makes the U.S. in many cases
a favored trading partner, since few European firms are well
equipped for such huge undertakings.
The Soviet Union possesses greater energy reserves than
the United States, but faces increasing technological
problems as it moves to energy sources deeper in the ground,
offshore, and in the Arctic. The U.S.S.R. can obtain much
of the necessary technology elsewhere, but in many cases
would prefer to deal with U.S. companies. It is manifestly
in our interest to participate in the expansion of the world
supply of energy. In addition, the cooperative projects
that would be undertaken to develop these energy sources
could provide additional jobs to our economy, supply us with
337
some energy products, and strengthen our balance of payments.
Deputy Secretary Ingersoll in his testimony tomorrow will
elaborate on the Administration's efforts to negotiate a
petroleum agreement with the U.S.S.R.
The potential for trade with the other Eastern European
countries not now receiving MFN, and the People's Republic
of China, is also significant.
The U.S.S.R. and many of the Eastern European countries
are currently signing contracts with our Western competitors
that benefit from government-backed credits. The major
European countries and Japan have agreements with the
U.S.S.R. under which $10 billion of government-backed credits
will be available to finance export sales to the Soviet
Union. During my April visit to Moscow, the Soviets told me
that contracts involving over $700 million in credits which
might have been placed in our country had gone to European
suppliers because of the lack of Eximbank credits.
Soviet Deputy Minister of Foreign Trade Alkhimov has
recently indicated that in the last nine months, $1.6 billion in contracts which the Soviets were ready to sign with
U.S. firms have gone to Western Europe and Japan because of
the U.S. restrictions on Eximbank credits. Many of these
contracts were negotiated as part of the Soviet 1976-1980
plan and therefore represent business opportunities that are
not likely to appear again until the next five-year plan
period. Because of the present impasse, U.S. firms have
faced the possibility of being virtually excluded from
projects in the forthcoming Soviet plan period. The only
contracts that they might still win involve projects for
which the U.S. companies have no significant competition.
It is my hope, however, that competition among Western
industrial nations for exports through government-subsidized
credits will end. There was discussion of the problem at
Rambouillet, and I am pleased that the six leaders agreed to
intensify their efforts to achieve prompt conclusion of the
negotiations concerning export credits. Governments should
reduce government competition on credit terms offered to all
countries. There is simply no point in this subsidized
competition.
There is one change in U.S. law that would facilitate
the contribution of private financial markets to financing
East-West trade. The Johnson Debt Default Act of 1934 is a
criminal statute which provides penalties for any individual
who, within the U.S., purchases or sells bonds or any other
financial obligations of any foreign government which is in
10
default in the payment of its obligations to the United
States. The Act has not served its initial purpose, which
was to protect American investors against the purchase
of obligations of countries likely to default. Instead,
it has had the effect of deterring creative methods of
financing East-West trade by the private market. The
repeal of the Act would, in my opinion, remove an unnecessary barrier to the private financing of East-West
trade, and increase our efforts to expand trade and
commerce with nonmarket economy countries on commercial
credit terms.
Misconceptions about East-West Trade
Finally, Mr. Chairman, I would like to respond to some
misconceptions about East-West trade. Granting most-favored
nation status to the nonmarket economy countries of Eastern
Europe, the U.S.S.R., and the P.R.C. would give them no
special privilege. The Soviets, the East Europeans, and the
Chinese nevertheless consider the granting of nondiscriminatory tariff treatment as significant for the improvement of
our political and commercial relations. Granting MFN would
therefore have a positive impact on the growth of our
exports to the East. It is our hope that this expansion
would encompass industrial and consumer goods, as well as
agricultural commodities.
f..
J
If we confer MFN treatment to imports from these
countries, ultimately U.S. purchases of a variety of their
manufactured products will result. I certainly do not
predict a flood of manufactured products to enter our market
and displace domestically produced goods, however. In most
cases, these countries are not now able to manufacture goods
of sufficient quality and consumer appeal to displace products from our domestic industries. A large portion of
these imports would, in any case, simply compete with and
displace our imports from other foreign sources. In addition, in the Trade Act of 1974, Congress provided adequate
With regard
the legislation
safeguards
againsttomarket
disruptionprotecting
to protect our
ourdomestic
domestic
industries
dumping, some
of our Communist
industries,from
if necessary,
and American
consumerstrading
would
benefit from competition for our market and the lower
prices it would produce.
11
requires tnat export prices rrom a ^unuiiuiixr> u ^uumu A /
uw the
U.S. be compared with the prices of a manufacturer of a
similar product in a market economy country, if I, as
Secretary of the Treasury, determine that the home market
prices in the Communist country cannot reflect actual costs
and prices due to the structure of that economy.
Treasury is studying whether alternative methods of
comparison are available under the Act for conducting
investigations and whether revisions to our procedures or to
the Act would be appropriate. For the present, we have no
recommendation in that regard.
There is a second misconception which I would also like
to address.
Eximbank credits for exports to the Communist countries
dofnot represent either special treatment or "foreign aid"
for these countries. The potential flow of credits from the
U.S. represents only a small fraction of the capital available to the East for East-West trade.
While the potential credit flow may be relatively
small, the availability of credits is nonetheless an important factor in the purchasing decisions of the Communist
countries. Until we succeed in reducing competition for
exports through government-backed credits, Eximbank credits
are necessary to put our firms on a competitive footing with
their industrial competitors in doing business with Eastern
Europe and the Soviet Union, as with other countries.
I would further stress that in making any decision on
extending Eximbank loans to the Communist countries, each
loan application would be judged on its merits on a case by
case basis, just as the loans are judged for exports to
other countries. Each project must be economically justified according to the criteria enunciated in the Eximbank
Act, and must also bring a net economic benefit to the
United States in order to be approved.
Thirdly, as I described at the outset, when we trade
with the Communist countries, we recognize that the tech-
33/
nology that we permit to flow to them might sometimes have
limited and indirect uses for military production. Not
trading with the Communist countries will frequently not
prevent them from acquiring this technology, because it
often is and will be available from other Western sources.
Excluding ourselves from this trade therefore represents
foregone economic opportunities and commercial gain for
America for no real purpose. Nonetheless, we are always
acutely aware of the need to maintain the delicate balance
between U.S. economic opportunity on the one hand, and
national security on the other. The latter must be given
full weight.
Conclusion
Mr. Chairman, I have attempted to be as frank and as
candid as I can in expressing the Administration's views on
the status of East-West trade and our current policies
affecting it.
I hope that my testimony, and that of my distinguished
colleagues, is responsive to your request in your invitation
to testify.
It is an opportunity that I personally have welcomed.
I believe that it is very healthy to have an intensive
public airing, based on the facts about trade and the issues
surrounding it. The current climate is still too much
instilled with the emotion surrounding the passage of the
Trade Act's provisions relating to MFN and credits. I
believe -- and indeed I fervently hope -- that full public
ventilation of the issues will be the basis for reestablishing an atmosphere of credibility and trust.
This Committee has always been at the forefront in the
development of East-West trade policy. Its concern has been
constructive, and therefore productive of useful dialogue.
These hearings demonstrate your continuing leadership. I
commend you for this initiative and look forward to working
as closely as possible with you and your able staffs, and
with other appropriate Senators and Congressmen as our
policy evolves.
3Sr
For Release Upon Delivery
STATEMENT BY THE HONORABLE CHARLES M. WALKER
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE JOINT ECONOMIC COMMITTEE
DECEMBER 11, 1975
Mr. Chairman and Members of this Distinguished Committee:
I am pleased to appear before you today to testify on
the subject of Employee Stock Ownership Plans (ESOPs). Your
invitation stated that the Committee will be analyzing the
different forms such plans can take as well as the major
advantages and disadvantages of each form. I am glad to
provide the Committee with material to use in that analysis.
Preliminarily I think it is important to comment upon a
definition of terms. There is a tendency to use "ESOP1' as a
definition for all types of employee stock ownership plans.
But this obscures the differences among such plans. It also
obscures the fact that plans other than ESOPs may be useful
in the promotion of broadened stock ownership -- one of the
virtues of an ESOP.
Broadening Stock Ownership
Before discussing the types of ESOPs, I will comment on
the more general subject of broadening stock ownership. Is
it a desirable objective? If so, how can it be achieved?
Preliminarily it should be emphasized that broadened
stock ownership is not a panacea. The future well being of
the American public is primarily related to the long-run
economic growth of this country which in turn requires a
continuation of high rates of capital formation, continued
technical progress, and continual improvement in the skills
of the labor force. It is our contention that the economy
will perform best if we can generally restrict the growth of
WS-528
Government spending and reduce the extent to which Government
deficits draw savings away from productive, private capital
investments. It is for this reason that the President has
proposed a $395 billion spending ceiling and a $28 billion
in tax cuts from 1974 levels.
We believe it is desirable to broaden stock ownership.
It furthers the American tradition of private ownership of
business. It strengthens the economic, social, and political
base of support for the free enterprise system. It is
highly important to do this in order to foster participation
by more people in providing growth of the economy and its
capacity to satisfy the ever increasing demand for jobs.
It is important also that a tax inducement for broadening
the base of stock ownership be neutral in the identification
of taxpayers who can benefit from the inducement. Thus the
benefit should not be limited to taxpayers who are employees
of employers having qualified ESOPs. The benefit should be
extended to all taxpayers, including those who are: (1)
employees of corporate employers who do not have qualified
ESOPs, (2) self-employed individuals, (3) employees of
governmental units, nonprofit corporations, and noncorporate
enterprises which do not have a qualified ESOP, and (4)
members of the Armed Forces.
One way to provide neutrality among benefitted taxpayers is to extend the ESOP concept across the board the
same way the Individual Retirement Account (IRA) concept is
extended for qualified retirement plan purposes, i.e., to
self-employed persons or employees of employers who do not
have a qualified plan. The extension could be called an
Individual Stock Ownership Plan (ISOP) which would be like
an ESOP but would not be dependent upon the employer setting
up a qualified plan, and would contemplate investment in
portfolio stocks.
Another way to provide neutrality among benefitted
taxpayers is to drop the ESOP-ISOP concept (contributions to
the plans being tax deductible) in favor of a tax credit
equal to a specified percentage of the purchase price of
stock held for a specified period.
Still another alternative is to drop the ESOP-ISOP
concept in favor of an Individual Stock Saving Account
(ISSA) concept. Both ESOPs and ISOPs are retirement type
mechanisms. An ISSA could be utilized for individual
savings motivated otherwise than for retirement.
- 3 In deciding among the alternatives, it will be necessary
to develop the specifics of the plan to use. Among the
items to consider are:
1. The class of individuals who are to benefit from
the plan.
2. The income level an individual must have in order
to qualify.
3. The limit on the amount of contribution that can be
tax deductible.
4. The level of tax deductible contribution available
to the employer if he contributes to the plan.
5. The length of time funds must be held in the plan,
i. e. , for a minimum period of time or until reaching a
specified age.
6. The nature of the available investment media, e.g.,
common stocks, preferred stocks, bonds, savings accounts,
etc.
Differences Among ESOPs
Although there is no single definition of an ESOP, it
can be viewed generally as any tax qualified individual
account (also known as a defined contribution) deferred
compensation plan which invests a significant portion of its
funds in employer stock. Under the Internal Revenue Code an
ESOP is a stock bonus plan or a combination of a stock bonus
plan and a money purchase pension plan.
The Term "Employee Stock Ownership Plan" (ESOP) was
added by the Employee Retirement Income Security Act of 1974
(ERISA). It was made operative for only a narrow purpose,
namely the exemption from ERISA's prohibited transaction and
prudent investment rules. An ESOP is permitted to borrow
from a "disqualified11 person or with the guarantee of a
disqualified person and is exempted from rules limiting
holdings of employer stock.
A conventional stock bonus plan (an ESOP) contemplates
annual tax deductible contributions of employer stock. A
leveraged ESOP, however, contemplates use of funds borrowed
&
by the ESOP to buy a substantial block of the employer's
stock. Over the years the employer makes tax deductible
contributions to the ESOP which it uses to amortize the loan
and pay interest.
Under the Tax Reduction Act of 1975, an extra 1 percent
investment credit (11 percent instead of 10 percent) was
made available to taxpayers who contribute the amount of the
1 percent credit to an ESOP. Taxpayers who use the extra 1
percent this way thus realize a dollar-for-dollar tax benefit,
as opposed to the tax benefit normally derived from making a
tax deductible contribution to the ESOP.
Business Considerations
Business decisions are required with respect to many
aspects of ESOPs: Does adoption of the investment credit
ESOP require continued contributions to the ESOP in later
years when a similar 100 percent funding by the tax credit
is not available? What is the effect oti employees, some of
whom will not be covered if contributions are not continued?
Is dilution of stock interests of existing shareholders
under the leveraged type of ESOP acceptable? Can valuations
be handled satisfactorily, particularly in the case of
closely held stock? Will ESOP holdings and distribution of
employer stock involve SEC problems?
Conclusion
In conclusion, I would like to emphasize that any
program to promote broadened stock ownership should meet
these two requirements. First, it should be a broad based
program that would extend the employee benefits of ESOPs to
self-employed individuals and employees of employers who do
not have an ESOP. Second, employees should have an opportunity to direct that their funds be invested in stock other
than stock of the employer.
While opinions may differ on the matter, we do not
regard an ESOP, or an ISOP, or ISSA as a tax loophole.
Rather it is a device to achieve the end of broadened stock
ownership. Until such time as we can basically reshape the
tax law to broaden its base, reduce the tax rates, and
substantially simplify it, and in the process encourage
business activity, we think that tax incentives to broaden
investment, including investment in stock are desirable.
- 5 The appendix to this statement contains supplemental
material and statistics.
I appreciate the opportunity to appear before your
Committee, and will be glad to answer your questions.
APPENDIX TO TESTIMONY
The Chairman in his invitation to the Treasury for
testimony on Employee Stock Options Plans (ESOPs) requested
certain specific information. Most of the requested information has been discussed in the testimony itself. Presented
below are further elaborations on the testimony as well as
responses to points not covered in the testimony.
ESOPs and Related Plans
Employee stock ownership plans as they now exist are
within the broad scope of private employee benefit plans.
These are plans which are sponsored unilaterally by employers
or jointly with employees. These plans provide for financial security at old age and retirement or when certain
contingencies arise such as sickness, accident, death, or
unemployment.
Employee benefit plans include profit-sharing plans
which enable employees to participate in the profits of
employers. Distributions to employees from these plans may
be made for a variety of reasons (discussed later). Employee
benefit plans also include savings or thrift plans which may
be directed toward use for retirement or for certain contingencies, and stock bonus plans which provide benefits to
employees (not unlike profit-sharing in timing of distribution) payable in employer stock.
Stock ownership is permitted in individual account
plans including defined contribution, profit-sharing and
stock bonus plans; and such plans are, in general, exempted
from the diversity requirement applicable to other plans,
which prohibits more than 10 percent of a plan's assets
being invested in stock of the employer.
The so-called "Kelso" type employee stock ownership
plan is a special utilization of a stock bonus (or money
purchase) plan which permits the plan (or trust) to be used
to provide financing for the employer by purchasing the
employer's stock with borrowed funds. Typically the employer guarantees the debt and undertakes to make annual
payments (contributions or dividends) sufficient to service
the debt.
- 7 -
$<//
The structure of most employee benefit plans is affected
by tax law because a plan must be qualified under the law in
order for employers to obtain income tax deductions for
contributions to the plan, for employees to defer income tax
on employer contributions made in their behalf, and for the
plan or trust itself to obtain tax-free treatment of investment earnings.
We shall examine each of these pension plans, profitsharing plans, thrift plans, stock bonus plans, and employee
stock ownership plans as to their similarities and differences.
A pension plan is established and maintained by an
employer to provide systematically for payment of definitely
determinable benefits to his employees over a period of
years after retirement. Contributions and benefits under a
pension plan must not depend on profits. Forfeitures of
benefits by terminating employees may not increase the
benefits of the remaining employees; instead they must
reduce future employer contributions.
There are roughly 420,000 pension plans in existence
covering approximately 27 million employees. The preferential
tax treatment of pension plans costs the Government $4.1
billion in revenues in 1975.
A profit-sharing plan is established and maintained by
an employer to enable his employees to participate in his
profits on a deferred basis according to a definite formula
for allocating contributions and distributing accumulated
funds. Distributions from the plan may be made prior to
retirement, for various reasons: after a fixed number of
years, the attainment of a stated age, or the prior occurrence
of some event such as layoff, illness, disability, retirement, death, or severance from employment. The term "fixed
number of years" means at least 2 years. Thus, profitsharing plans receive preferential tax treatment but are not
necessarily retirement plans.
In order to be a qualified profit-sharing plan, contributions must come "out of profits." Such a plan need
not provide retirement benefits, and it may contain a number
of provisions prohibited to pension plans. For example,
benefits may be distributed before retirement, forfeitures
may be applied to increase benefits, the contribution
formula may be discretionary, and accident or health insurance
may be provided for employees and their families.
- 8 A modification of profit-sharing plans is the "thrift"
plan. It is a tax-qualifed plan under which each employee
has the option to contribute a percentage of his salary to
the plan. The employer then contributes an amount equal to
a percentage of the employees' contributions. Amounts
contributed under a thrift plan usually may be withdrawn
before retirement in the case of emergencies, such as large
medical expenses. Because benefits may not be paid prior to
retirement under pension plans, "thrift" plans are drafted
to meet the requirements applicable to profit-sharing plans.
Where employers have profits, however, the limitation that
contributions be paid out profits has no real impact.
There are roughly 310,000 profit-sharing plans in
existence covering approximately 9 million employees. The
revenue loss for preferential treatment of profit-sharing
plans is $1.4 billion in 1975.
Another tax qualified plan -- the stock bonus plan -is one established and maintained by an employer to provide
benefits similar to those of a profit-sharing plan, except
that the contributions by the employer do not necessarily
depend upon profits and benefits must be distributed in
stock of the employer company. An employer who wishes to
adopt a tax-qualified plan that requires fixed contributions
independent of profits and permits distributions prior to
retirement can do so only through a stock bonus plan.
Stock bonus plans now number roughly 7,250 covering
about 400,000 employees. The revenue loss of stock bonus
plans is $40 million for 1975.
Another category of tax-qualified plan is the so-called
"employee stock ownership plan," a classification that was
intoduced with the enactment of ERISA in 1974 in connection
with the rules relating to plan investments and prohibited
transactions.
Basically, an employee stock ownership plan (ESOP)is a
stock bonus plan, although it may be coupled with a money
purchase plan. In an ESOP, contributions are ordinarily not
based on profits, but rather are fixed (money purchase). In
the case of the "Kelso" leveraged financing variety of ESOP,
this insures that the loan can be repaid with tax deductible
dollars even though the employer may be without profits in a
particular year.
373
The 1974 Act limits the investment by certain plans in
securities of the employer corporation to 10 percent of plan
assets, but these limitations do not apply to stock bonus or
stock ownership plans.
The Act prohibits plan fiduciaries from engaging in
certain transactions and imposes a special excise tax on
other persons who are parties to such transactions. Among
the prohibited transactions are a sale or exchange of any
property between the plan and a "party in interest" and the
lending of money or other extension of credit between a plan
and a 'party in interest." A "party in interest" includes
the employer corporation and its principal stockholders and
officers. Under the Act, however, an exception is made for
stock bonus and stock ownership plans. This was necessary
to permit employers to guarantee loans obtained by such a
plan or to sell stock to the plan. Borrowing by a plan in
order to invest in securities of the employer corporation
does not affect the tax qualification of the plan.
It is estimated that no more than 300 ESOP's are
presently in existence. However, the plans are now being
considered rather widely because of the investment credit
incentive in the Tax Reduction Act of 1975.
The 1975 Act provides a special incentive for the
establishment of ESOPs. In addition to the 10 percent
investment credit, an additional 1 percent credit is provided if a corporate taxpayer agrees to transfer, to an
ESOP, cash or securities of the employer corporation which
are equal in value to the 1 percent credit. If cash is
contributed, it must be used to purchase the employer's
securities.
ESOPs under the 1975 Act must meet the following
requirements.
(1) The stock contributed to the plan, or purchased by
it, must be allocated among participants substantially in
proportion to compensation. Allocations must be made to all
employees who were plan participants at any time during the
plan year, whether or not they are participants at the close
of the plan year. Compensation in excess of $100,000 is not
taken into account in making allocations.
(2) The employees' rights to the stock allocated to
them must be nonforfeitable.
- 10 -
377
(3) Except in the case of separation from service,
death, or disability, stock allocated to an employee's
account may not be distributed to him before the expiration
of 84 months (7 years).
(4) Employees must be given the right to direct the
manner in which shares allocated to their accounts are to be
voted.
The Act provides the 1 percent ESOP investment credit
for tax years 1975 and 1976. The current House passed tax
bill, H.R. 10612, extended the 10 percent investment credit
4 additional years -- through 1980 -- but did not extend the
special ESOP incentive beyond 1976.
Aggregate Savings, Capital Formation, and Economic Growth
The Administration's proposal to integrate corporate
and personal taxes is designed to encourage additional
saving by increasing the rate of return to savers. This
would be accomplished by reducing or eliminating the double
tax burden on corporate earnings which, in turn, would
induce more people to hold their savings in the form of
corporate stocks. Since the corporate sector is so large in
the U.S. economy, increasing the rate of return to corporate
investment would have the effect of increasing the average
rate of return across the entire economy. Therefore, to the
extent that savings is responsive to higher rates of return,
the proposal would have the effect of increasing savings in
the economy as well. In this case, broadened stock ownership would occur as a natural by-product of the more favorable
rates of return that would be available on corporate equities.
Furthermore, the increase in the rate of return would
be relatively greater for lower- and middle-income taxpayers
who are most penalized by the double taxation of corporate
earnings. A taxpayer in the 20 percent marginal tax bracket,
for example, finds that under current arrangements his total
tax on corporate source income results from a combination of
the 48 percent corporate tax rate and his personal tax rate
of 20 percent of the 52 cents available for distribution by
the corporation. This gives a total tax of over 58 percent.
Thus, the corporate tax has the effect of increasing his tax
burden by almost 300 percent over what it would be if such
income were taxed only at the individual shareholder level.
For the high-income shareholder, on the other hand, the
377
relative increase in taxation brought about by the double
tax on corporate earning is much less. The 70 percent
shareholder pays total taxes on the margin equal to 48
percent plus 70 percent of the remaining 52 percent for a
total of 84 percent. The extra burden in this case is only
about 20 percent over what it would be if such income were
taxed only at the individual shareholder level. Thus,
integration of corporate and personal taxes, to prevent the
double tax on corporate earnings would provide the greatest
gain to those income groups where the opportunities for
broadened stock ownership are greatest. In fact, the double
taxation of corporate earnings may be one of the most
important factors restricting ownership at present.
Stock Ownership Today
The New York Stock Exchange gives the following figures
on share ownership. These estimates are derived from
occasional NYSE surveys of the population.
1952 6,490 thousand
1956
8,630
1959
12,490
1962
17,010
1965
20,120
1970
30,850
1975
25,206
The frequency of share ownership has risen from 1 in 16
adults in 1952 to 1 in 4 adults in 1970. Although this
growth in share ownership has slackened somewhat to about 1
in 5 adults since 1970, this dispersion of share ownership
is the more remarkable given that persons have been being
displaced in relative aggregate share ownership by institutional holders, especially pension plans.
Nonetheless, only a small percentage of lower income
families have invested directly in publicly-traded stock.
(See Table 1) Their demand for this type of illiquid asset
has been low. However, lower income classes do invest in
stock through their pension plans. Employer and employee
contributions to retirement plans are currently about 4
percent of wages and salaries in private industry and about
8.5 percent of wages and salaries of covered workers.
Possibly one-half of the assets of private pension funds are
held in the form of common stock. Only about 45 percent of
?(/{,
- 12 Table 1
Percentage Distribution of Families,1 Dividend I n c o m e , a n d Value.
of Stock by F a m i l y I n c o m e Level, 1958-71
Family income*
1958
1060
1964
1969
1970
1971
N u m b e r of families
r n d r r $5,000
$5,000-$9.999
SI0,000-$14,999...
$15,000 $24,999...
«25,0«M9/»99
$50,000-$99.999...
$100,000 and over
Total. ...
48.75
37.9
8.5
3.5
1.1
.2
.05
43.9
39.4
10.6
4.6
1.2
.25
.05
37.2
38.6
16.0
6.0
1.7
.4
.1
100.0
100.0
100.0
26.9
32.7
21.8
15.2
2.3
.7
o
100.0
23.9
31.9
23.1
15.9
4.3
.7
.2
22.0
31.4
23.5
17.3
4.8
.8
o
100.0
100.0
Apprepate dividend income
Vnder $5.000
$5,000- *'.t,999
$10.000-$14,999...
$15,000- $24.999....
$25,000-$49.99?'...
$50,000 - $99.999...
$100,000 and over
Total
4.6
10.5
12.9
17.4
20.7
15.5
18.4
5.0
10.7
11.7
18.2
21.8
13.5
19.1
4.0
10.6
11.0
15.1
20.5
17.2
21.6
3.0
9.9
9.4
14.6
20.2
19.8
23.1
2.9
8.6
9.4
14.1
19.7
20.1
25.2
2.8
8.2
9.3
13.8
18.9
20.0
26.9
100.0
100.0
100.0
100.0
100.0
100.0
Apcrepr iti- market value of stock
Under $0/ioo
4.4 |
«.»
10.2 ! 10.3
12.6
11.2
17.6
172
20.6 . 21.9
15. fr 14.0
19.2
20.2
$5,000 $'.','.W>
$10,000 $)4,'.W ..
$15,000 $24.!•"'.. .
$25,000 $4",""M
$50/W>0 i't'j.'t'.l'H
SlOO.noo and over
Total
100.0
3.9
5.6
10.3
8.6
10.7
9.0
13.7
15.0
20.4
19.2
17.4 i 20.7
22.3
26.2
100.0 100.0 •
Survey of Current Business
9] O
2*. 5
100.0 100.0
l. Definition of families includes u n a t t a c h ? d individuals.
2. F a m i l y persona) i n c o m e before i n c o m e taxes.
Source:
2.5
7.4
S.4
13.2
IS. 8
November 1974
24
7.0
S. 9
12.8
17.8
20. «*
30.2
100.0
3<J?
wage and salary workers are covered by employee benefit
plans, and, of these, a fair proportion only have a limited
amount of coverage.
For families as a whole, pension fund reserves are a
significant proportion of total wealth. Currently, private
pension fund reserves comprise approximately 8.3 percent of
the total financial assets of families, while the current
annual Clow of funds into private pension reserves comprises
approximately 13.6 percent of the net acquisition of financial
assets by families.
In summary, there is substantial, savings for retirement
in the form of pension plans. For lower income families,
then, stock may be indirectly saved through ownership of
pension reserves, but the demand for more direct ownership
has been quite small.
Participation in and Revenue Effects of ESOPs and
Related Plans
Attached is Table 2 which gives current estimates of
the number of plans, number of participants, and expected
revenue loss of ESOPs and related plans.
Accurate statistics on ESOPs themselves are hard to
obtain. The term "employee stock ownership plan" has only
been given more specific meaning through acts passed recently.
As can be seen from the table, it appears that few such
plans existed before this year.
The future participation and revenue costs of ESOPs are
also unclear. Because the 1 percent additional investment
tax credit was only applicable to the years 1975 and 1976,
and because it has been unclear whether similar incentives
will continue into the future, many companies have adopted a
wait-and-see attitude toward the adoption of ESOPs. Based
upon current investment eligible for the investment tax
credit, the maximum annual revenue cost of the special 1
percent incentive is in the range of $600-700 million for
1975 liabilities if all corporate employers elect to establish
ESOPs and claim the extra credit.
If adoption of ESOPs becomes widespread through the
economy and if employers make substantial contributions to
such plans in addition to the contributions already being
made to tax qualified employee benefit plans, the revenue
- 14 -
s«r
costs could be substantial. For exemple, if the total
additional contributions equalled 1 percent of total wage
payments by employers, the revenue cost would be about $1
billion.
Table 2
Estimates of Retirement Plans 1975
Number of Plans
Number of Participants
(mi 11 ions)
Re vein iu Loss
$mi 1.1 ion
Employer Pension Plans
420,,000
27.0
4,100
Profit Sharing Plans
310,,000
9.0
1,350
,250
1,
0.4
40
0. 1
2/
.10"
Stock Bonus (other than
/SO?) Plans
:SOP Plans
Total Employer Plans
Keogh Plans
rndividual Retirement
Accounts
Total Individual Plans
250
737 :,500
. 500 ;,000
1/
.5
1 ,300;,000
1.3
1 ,800,,000
1 8
Office of the Secretary of the Treasury
Office of Tav Analysis
'
36.5
5,500
450
300
750
December
Total about 32 million after allov/ance for dual coverage.
Estimate excludes the cost of the additional 1. percent investment tax credit that ma) be
by employers investing in qualified ESOP plans under provisions of the Tax Reduction Act
/
'ADDRESS "BY I (IE iliAK^Ai'LL WILLIAM E. SI!'
SLCRLTAKY Or THL TRhASURY
BEFORE I HE HOUSTON CKA,".3k.R OF COrvlEKCE
\
3&
HOUSTON, TtXAS ~ JJZCLABLR ll, 1^75
MR. WALBRIDGE, MR. WELCH, GOVERNOR CONNALLY, AND LADIES AND
GENTLEMEN:
THIS IS MY FOURTH VISIT TO TEXAS SINCE TAKING OFFICE,
AND EVERY TIME I FEEL MORE AT HOME.
IT'S CERTAINLY GOOD TO
BE HERE TODAY.
TEXAS, I UNDERSTAND, IS NUMBER ONE AMONG THE 50 STATES
IN CATTLE PRODUCTION, NUMBER ONE IN OIL PRODUCTION, NUMBER
ONE IN GAS PRODUCTION, NUMBER ONE IN COTTON, AND USUALLY
NUMBER ONE IN FOOTBALL.
I'M GLAD TO SEE THAT YOU'RE STILL
NUMBER ONE IN HOSPITALITY TOO.
As JOHN CONNALLY WILL TELL YOU, ANYONE WHO SERVES AS
SECRETARY OF THE TREASURY IN SUCH A TURBULENT PERIOD ALWAYS
APPRECIATES THE KIND OF WELCOME YOU HAVE GIVEN ME TODAY.
I DIDN'T REALIZE HOW MUCH TROUBLE THE JOB WAS UNTIL THE
DAY I WAS SWORN INTO OFFICE, AND ART BUCHWALD TOLD ;-<Z,
"CONGRATULATIONS, BILL, YOU'VE JUST BECOME THE PURSER CN THE
TITANIC." . •
So FAR, WE'VE WEATHERED THE STORMS FAIRLY WELL, BUT NOT
WITHOUT CAUSING SOME HARD FEELINGS. THE OTHER DAY I RECEIVED
A LETTER FROM AN IRATE CITIZEN OF NEW YORK, WHO REMINDED ;:E
THAT THE FIRST SECRETARY OF THE TREASURY, ALEXANDER HAMILTON,
HAD BEEN BORN OUT OF WEDLOCK. "HOWEVER, I WANT YOU TO
KNOW," THIS FELLOW WROTE, "THAT HAMILTON WAS NOT THE ONLY
BASTARD WHO HAS EVER HELD THAT OFFICE."
THE SLINGS AND ARROWS ARE ALL PART OF THE JOB, OF
COURSE, AND I'M SURE THAT ANYONE WOULD BE DISAPPOINTED IF
THEY DIDN'T COME. WHEN IT'S ALL OVER, I ONLY HOPE THAT
PEOPLE CAN LOOK BACK AND SAY THAT BILL SIMON WAS AS STRONG
AND EFFECTIVE AND HONEST A SECRETARY OF THE TREASURY AS
GOVERNOR JOHN CONNALLY. NO MAN COULD ASK FOR MORE.
I THOUGHT 1 MIGHT TAKE THIS OPPORTUNITY TONIGHT TO
REPORT TO YOU ON THE CURRENT STATE OF OUR NATIONAL ECONOMY
AND TO OFFER A FEW OBSERVATIONS ABOUT WHAT I BELIEVE THE
FUNDAMENTAL ECONOMIC ISSUES OF THE FUTURE MUST BE. CLEARLY,
CONCERNS OVER THE ECONOMY ARE BY FAR THE NUMBER ONE
ISSUE FOR AMERICANS TODAY, AND IT IS ESSENTIAL THAT ALL OF
US HAVE A BETTER IDEA OF WHERE WE ARE HEADING.
FROM MY VANTAGE POINT, THE IMMEDIATE PROSPECTS FOR THE
RECOVERY ARE MUCH MORE ENCOURAGING THAN SOME ECONOMISTS HAVE
RECENTLY SUGGESTED, I AM THE FIRST TO ARGUE THAT WE HAVE .
SOME SERIOUS HURDLES AHEAD
AND I WILL DISCUSS THEM IN A
MINUTE, BUT LOOKING AT THE PROSPECTS FOR THE NEXT YEAR OR
SO, I WOULD HAVE TO SAY THAT I AM OPTIMISTIC. INDEED, THE
RECOVERY NOW UNDERWAY IS RIGHT ON TARGET.
?S7>
WHEN PRESIDENT FORD TOOK OFFICE, AS YOU WILL RECALL, WI
INHERITED THE HIGHEST INFLATION RATE IN OUR PEACETIME HISTC-Y 14 PERCENT -- WHICH, AS EVENTS PROVED OUT, WAS DRIVING US
S
TOWARD A VERY SEVERE RECESSION.
BY "EARLY THIS YEAR, UNEMPLOY-
MENT ROSE TO 8,9 PERCENT,
SINCE THAT TIME, THE INFLATION RATE HAS BEEN CUT IN
HALF, 1A MILLION JOBS HAVE BEEN CREATED. UNEMPLOYMENT, WHILE
STILL FAR TOO HIGH, HAS BEEN REDUCED TO 8.3 PERCENT. AND
THE GNP IN THE THIRD QUARTER REGISTERED ONE OF THE BIGGEST
QUARTERLY GAINS IN MODERN TIMES. THESE ARE ALL VERY SOLID
ACCOMPLISHMENTS, AND THE PRESIDENT CAN JUSTIFIABLY BE PROUD
OF THEM.
WE DID, AS YOU KNOW, EXPERIENCE DISAPPOINTING RESULTS
IN SOME OF THE OCTOBER FIGURES FOR THE ECONOMY.
1 WOULD CAUTION, HOWEVER, AGAINST READING TOG MUCH INTO THE
STATISTICS FOR ONE OR TWO MONTHS. INEVITABLY, AS THE RECOVER"
CONTINUES, THE NUMBERS WILL GYRATE, BUT ONE MONTH'S FIGURES
*
DON'T REVERSE A GENERAL TREND,
THERE ARE TWO IMPORTANT ASPECTS TO BEAR IN MIND AS THE
RECOVERY PROGRESSES:
FIRST, WE SHOULD REMEMBER THE PATTERN OF RECOVERIES IN
THE PAST. ECONOMISTS IN THE TREASURY DEPARTMENT HAVE BEEN
STEADILY CHARTING THE COURSE OF THIS RECOVERY AGAINST THE
PREVIOUS FOUR WE HAVE HAD OVER THE LAST 23 YEARS. COMPARING
THE INCREASES IN RETAIL SALES, WORKHOURS IN MANUFACTURING,
AND GROWTH IN EMPLOYMENT, WE FIND THAT THE STATISTICS THIS
TIME ARE ALL BETTER THAN THE AVERAGE RESULTS OF THE PAST
RECOVERY PERIODS. So BY HISTORICAL STANDARDS, WE ARE DOING
WELL,
SECOND, WE SHOULD REALIZE THAT THIS IS THE MOST DELICATE
STAGE OF THE RECOVERY CYCLE — THE STAGE WHEN PEOPLE SOMETIMES
BECOME FRUSTRATED WITH THE PACE OF THE RECOVERY AND INSIST
THAT THE GOVERNMENT ADOPT HIGHLY EXPANSIONARY POLICIES.
TWICE IN THE LAST DECADE WE HAVE SUCCUMBED TO SUCH PRESSURES,
AND EACH TIME THE STOP-GO BEHAVIOR HAS ULTIMATELY LEFT US
WORSE OFF THAN BEFORE,
SO THIS IS A TIME WHEN I WOULD URGE THE SKIPPER OF THE
SHIP TO HOLD "STEADY AS YOU GO". WE MUST ACT WISELY AND
PRUDENTLY; IT WILL TAKE TIME TO REMEDY THE YEARS OF POLICY
MISMANAGEMENT IN WASHINGTON; INDEED, WE CANNOT PAY FOR THE
SINS OF A DECADE WITH A SINGLE YEAR OF PENANCE.
BASED UPON EVERYTHING WE KNOW TODAY, THE ECONOMY SHOULD
CONTINUE TO.MOVE UPWARDS, ACHIEVING AN AVERAGE REAL GROWTH
RATE OF 7 PERCENT BETWEEN MID-1975 AND MID-1975. WE EXPECT
UNEMPLOYMENT TO CONTINUE ITS DONWNWARD PATH TOWARD 7 FERCENT
BY THE END OF 1976/ INFLATION SHOULD ALSO "CONTINUE TO
MODERATE, AVERAGING APPROXIMATELY 6 FERCENT DURING 1976,
AND BASED UPON HISTORICAL EXPERIENCE, PARTICULARLY THE LAST
FOUR RECOVERIES, WE SHOULD EXPECT THE CURRENT RECOVERY TO
CONTINUE THROUGH 1976 AND 1977 AND PROBABLY BEYOND.
I SAY ALL OF THIS, OF COURSE, CONTINGENT UPON THE
ABSENCE OF OUTSIDE SHOCKS TO OUR ECONOMY, IF ANOTHER OIL
EMBARGO WERE UNEXPECTEDLY THRUST UPON US, ALL BETS WOULD BE
OFF, THE VERY FACT THAT OUR ECONOMY HAS BECOME MORE VULNERABLE
TO THE BLACKMAIL OF FOREIGN NATIONS THAN IT WAS EARLIER IN
THE '70S SHOULD BE A MATTER OF GRAVE CONCERN FOR ALL OF US.
MY COMMENTS ON THE ECONOMY ALSO ASSUME THERE IS NO GREAT
LOSS OF CONSUMER CONFIDENCE. THERE MAY BE A TENDENCY IN AN
ELECTION YEAR TO TRY TO FRIGHTEN THE AMERICAN PEOPLE INTO
~ o ~
BELIEVING THAT THE ECONOMY IS IN THE FINAL THROES OF A
COLLAPSE, I HOPE THAT NO ONE WILL BE MISLED BY CAMPAIGN
r
ORATORY'. SURE, WE HAVE OUR ECONOMIC PROBLEMS; WE ALWAYS
WILL. BUT THE UNITED STATES IS STILL INCREDIBLY STRONG,
POWERED BY THE MOST DYNAMIC AND MOST PRODUCTIVE PRIVATE
ENTERPRISE SYSTEM IN THE ENTIRE WORLD, AND IF WE WILL ONLY
LET THE SYSTEM WORK ITS MAGIC — IF WE WILL MAINTAIN BALANCED
FISCAL AND MONETARY POLICIES — THEN WE WILL HAVE A SUSTAINED,
DURABLE RECOVERY AND WE CAN BEGIN TO ENJOY ONCE AGAIN THE
FRUITS OF PROSPERITY,
5$
BUT LET US FACE A MORE IMPORTANT CJESTICN: WHAT LIES
BEYOND NEXT YEAR'S HORIZON? ARE WE GOING TO TAKE THE HARD,
TOUGH STEPS THAT WILL PUT OUR ECONOMY ON A FIRM FOUNDATION
*
FOR THE NEXT DACADE?
OR WILL WE SIMPLY ACOUIESE IN A CON-
TINUATION OF THE EXCESSIVE SPENDING AND MONETARY POLICIES Aril
<
IN THE GROWTH OF BLG GOVERNMENT THAT LED US INTO THIS CUAGMIPE?
INDEED, ARE WE EVEN WILLING TO FACE U? TO THE LONG-RANGE NEEDS
OF OUR ECONOMY, TO STOP LISTENING TO THE POLITICIANS WHO DEFINE
THE LONG-TERM BY THE DATE OF THE NEXT ELECTION, AND TO BEGIN
ACTING ONCE AGAIN WITH A SENSE OF HIGH PURPOSE AND PRINCIPLE.
I DO NOT PRETEND TO HAVE ALL OF THE ANSWERS FOR REBUILD I N'G
OUR NATIONAL SELF-CONFIDENCE. I AM, HOWEVER, CONVINCED THAT
IN ORDER TO RESTORE PUBLIC FAITH IN OUR DEMOCRATIC INSTITUTIONS
AND TO ENSURE OUR LONG-RANGE PROSPERITY, WE MUST FIRST RESTORE
THE PRINCIPLES THAT HAVE BEEN FUNDAMENTAL TO OUR GROWTH AS A
NATION. AND WE MUST HAVE LEADERS WHO NOT ONLY PROFESS A
?7/ ->
BELIEF IN THOSE PRINCIPLES BUT HAVE THE COURAGE TO FOLLOW
THEM.
IN THE LAST 10-15 YEARS, THIS NATION HAS DRIFTED FAR
FROM ITS ORIGINAL MOORINGS. I HE RELENTLESS SURGE TOWARD
BIGGER AND BIGGER GOVERNMENT, THE CONTINUING INABILITY TO
LIVE WITHIN OUR MEANS, WIDESPREAD PERMISSIVENESS, HOLLOW
POLITICAL PROMISES THAT WE COULD SIMULTANEOUSLY FIGHT A LAND
WAR IN ASIA, ABOLISH POVERTY, AND SPEND OUR WAY TO PROSPERITY —
ALL OF THESE HAVE BADLY ERODED PUBLIC CONFIDENCE IN OUR
FORM OF GOVERNMENT.
SOME SAY WE ARE FLOUNDERING TODAY BECAUSE THE PRINCIPLES
OF THE PAST ARE OUTDATED, THAT THEY ARE OBSOLETE AND IRRELEVANT,
I CATEGORICALLY REJECT THAT CHARGE. OUR PRINCIPLES HAVE NOT
FAILED US AT ALL; NO, IT IS WE WHO HAVE FAILED TO LIVE UP TO
THEM,
JUST LOOK AT THE RECORD OF MISMANAGEMENT ON THE ECONOMIC
FRONT ALONE:
"- 11"WHEN PRESIDENT EISENHOWER LEFT PUBLIC OFFICE, THE
FEDERAL BUDGET WAS HEARING $100 BILLION A YEAR. SINCE THE::,
IT HAS QUADRUPLED IN SIZE.
IN THE EARLY
1960s, THE FEDERAL DEBT STOOD AT S2A0
BILLION. SINCE THEN, THE DEBT HAS MORE THAN DOUBLED.
IN THE EARLY
1960s, THE MONEY SUPPLY WAS GROWING AT AN
AVERAGE RATE OF 2k PERCENT A YEAR. SINCE THEN, THE GROWTH
HAS MORE THAN DOUBLED,
AND IN THE EARLY 1960S, THERE WERE ABOUT 100 DOMESTIC
ASSISTANCE PROGRAMS. TODAY THERE ARE OVER
1,000,
THE GOVERNMENT IS NOW THE NATION'S BIGGEST SINGLE
EMPLOYER, ITS BIGGEST CUSTOMER, AND ITS BIGGEST BORROWER.
- 12
As A NATION, WE CANNOT LONG ENDURE SUCH PRACTICES, "TIE
UNRESTRAINED GROWTH OF GOVERNMENT WILL INEVITABLY DRiNG 7ZF7
INFLATION, MORE UNEMPLOYMENT, AND GREATER .MI SERY. O'JR
FINANCIAL SYSTEM IS ALREADY UNDER STRAIN AND CANNOT TOLERATE
ANOTHER FIVE YEARS OF UNRELIEVED PRESSURE, LET US ALSO
RECOGNIZE THAT IF THE PEOPLE LOSE FAITH IN OUR DEMOCRATIC
INSTITUTIONS THEY WILL EVENTUALLY ORDER THE WHOLESALE REPL-AOE'-ENOF THOSE INSTITUTIONS. AND THEN WE WILL USHER IN AN AGE OF
BIG BROTHER THAT WILL DESTROY NOT ONLY OUR ECONOMIC FREEDOMS
BUT OUR POLITICAL AND SOCIAL FREEDOMS AS WELL.
HISTORY LEAVES LITTLE DOUBT THAT POLITICAL FREEDOMS ARE
INEXTRICABLY BOUND TO ECONOMIC FREEDOMS. A NATION THAT
SURRENDERS CONTROL OVER ITS ECONOMIC FORTUNES TO THE STATE
WILL SOON FIND THAT ITS OTHER FREEDOMS HAVE BEEN USURPED AS
WELL. IT IS MY JUDGMENT THAT BY TOLERATING THE GROWTH OF
BIGGER AND BIGGER GOVERNMENT AND BY FAILING TO NOURISH THE
PRIVATE ENTERPRISE SYSTEM, THE UNITED STATES IS DRIFTING
513
- -1 "> r3
J.cD..'V
PERIOUSLY FAR AWAY FROM ITS MOORINGS AND TOWARD AN ALLPOWERFUL CENTRALIZED ECONOMY.
CAN WE REVERSE THIS TIDE? CAN WE LIFT OURSELVES OUT OF
*
OUR NATIONAL MENTAL DEPRESSION? CAN WE END THIS MALAISE THASEEMS TO WEIGH UPON OUR NATURAL PRIDE? CERTAINLY, WE CAN.
<
BUT IT'S GOING TO REQUIRE A HARD, TOUGH PROGRAM OF SELFHELP. WE ARE GOING TO HAVE TO END THE WHINNING
AND WHIMPERING
ABOUT EVERYTHING THAT'S WRONG IN OUR COUNTRY. WE OBVIOUSLY
HAVE OUR TROUBLES, BUT WE MUST START LOOKING ON THE OTHER SIDE
OF THE EQUATION, TOO — AT ALL THE THINGS THAT ARE RIGHT ABOUT
AMERICA. AND WE ARE GOING TO NEED STRONG, EFFECTIVE LEADERSHIP NOT ONLY IN WASHINGTON BUT IN THE CORPORATE HEADQUARTERS
ACROSS THE LAND, IN OUR SCHOOLS, OUR PLACES OF WORSHIP, AND
MOST ASSUREDLY IN OUR HOMES. WE MUST HAVE STATESMEN WHO
WILL TELL THE PUBLIC NOT WHAT THEY SUPPOSEDLY WANT TO HEAR
BUT WHAT THEY NEED TO HEAR, AND WHO WILL NOT WAVER IN THEIR
STRUGGLE FOR A STRONG AND FREE AMERICA.
*/,3
-I?~\ "
LET ME TALK FOR A FEW H.OMON-S ABOUT THE FROCRAM THAT
THE ADMINISTRATION IS SETTING FC-F.TH FOR THE FUTURE OF ZUR
ECONOMY,
FIRST, PRESIDENT FORD IS INSISTING THAT WE BRING THE
FEDERAL BUDGET INTO ACTUAL BALANCE WITHIN THREE YEARS -SOMETHING WE HAVE ONLY DONE-ONCE IN THE LAST 17 YEARS, T-E
PRESIDENT'S PLAN TO SLOW THE GROWTH IN SPENDING DURING
FISCAL YEAR 1977 BY $28 BILLION AND TO RETURN THOSE SAVINGS
DOLLAR-FOR-DOLLAR TO THE AMERICAN PEOPLE THROUGH A PERMANENT T-;
- 13 -
5W.
CUT PLTREGENTO A MAJOR STEP IN' THAT DI RECTI CN . OGME 7777123
OF THE CONGRESS, OF COURSE, WANT TO TAKE THE EASY WAY OUT:
CUT TAXES BUT MAKE NO COMMITMENT ON SPENDING, WE SAY THAT
WE CAN NO LONGER ACCEPT "POLITICS AS USUAL" IN WASHINGTON';
WE REJECT THE OLD FORMULA OF "SPEND AND SPEND, ELECT AND
ELECT", WE HAVE TO PUT OUR ECONOMIC HOUSE IN ORDER, AND T
TIME TO START IS NOW,
#
SECONDLY, THE PRESIDENT IS PROPOSING THAT WE LIFT THE
HEAVY HAND OF GOVERNMENTAL CONTROL AND REGULATION THAT IS
THREATENING TO STRANGLE THE FREE ENTERPRISE SYSTEM. IF T
COUNTRY IS TO BECOME MORE SELF-SUFFICIENT IN ENERGY -- AND
HERE IN TEXAS, YOU KNOW HOW VITAL THAT IS -- IT IS IMPERATIVE
THAT CONTROLS BE LIFTED FROM THE OIL AND NATURAL GAS INDUSTRIES
AND THAT THE BURDENS BE LIGHTENED FOR THE COAL INDUSTRY.
MY VIEW, THE ENERGY BILL THAT THE CONGRESS IS NOW SHAPING
A GREAT DISAPPOINTMENT: IT ONLY ENCOURAGES FURTHER RELIA
UPON FOREIGN SOURCES OF OIL AND DOES NOTHING TO ENCOURAGE
GREATER CONSERVATION. THIS BILL DOES NOT SOLVE OUR BASIC
PROBLEMS IN ENERGY; IT ONLY EXACERBATES AND POSTPONES THE';.
»
THIRDLY, THE PRESIDENT IS PROPOSING THAT THE GOVERNMENT
HELP TO INVIGORATE THE PRIVATE SECTOR THROUGH THE TAX SYSTEM.
t
SPECIFICALLY, WE ARE ASKING THAT THE CONGRESS ACT IMMEDIATELY
52
"*'''a.^
TO REDUCE BOTH INDIVIDUAL AND CCRPCRATE TAXES -- THE F^.CVIS :CN
THAT IS TIED TO THE SPENDING CUT. 1<E ARE ALSO PRO":IN3 TO
ELIMINATE THE DOUBLE TAXATION ON BUSINESS PROFITS -- SOMETHING
THAT MOST OTHER INDUSTRIALIZED COUNTRIES OF THE
I'EST
HAVE
ALREADY DONE ~ SO THAT WE CAN ENCOURAGE INCREASED
SAVINGS AND INVESTMENT. TVERY MAJOR STUDY OF THE ISSUE
MAKES IT CLEAR THAT THE AMOUNT OF MONEY NEEDED FOR CAPITAL
INVESTMENT IN THE NEXT 10 YEARS WILL BE APPROXIMATELY THREE
TIMES AS LARGE AS WHAT WE HAVE INVESTED IN THE LAST 10
YEARS. IN THE ENERGY FIELD ALONE, ESTIMATES OF INVESTMENT
NEEDS OVER THE NEXT 10 YEARS RANGE AS HIGH AS $1 TRILLION.
IT IS IMPERATIVE THAT WE SHIFT AWAY FROM OUR EXCESSIVE
EMPHASIS UPON GOVERNMENT SPENDING AND CONSUMPTION TO A
GREATER EMPHASIS UPON SAVINGS AND INVESTMENT.
LAST WEEK, SPEAKING NOT FOR THE PRESIDENT BUT FOR
MYSELF, I ARGUED THAT WE SHOULD CARRY TAX REFORM TO ITS
LOGICAL CONCLUSION. '|HE SUCCESS OF THE FEDERAL TAX SYSTEM --
,-.a.b.-.
AND WE SHOULD ALWAYS REMEMBER THAT IT HAS BEEN ONE OF THE
MOST SUCCESSFUL IN THE WORLD — IS THAT OUR CITIZENS VOLU TA~I_Y
COMPLY WITH ITS REQUIREMENTS, THE SYSTEM IS BASED ON NEUTRALITY,
SIMPLICITY AND EQUITY, WITH CITIZENS VOLUNTARILY PAYING THEIR
TAXES BECAUSE THEY BELIEVE THAT OTHERS ARE ALSO PAYING THEIR
FAIR SHARE, OVER THE YEARS, HOWEVER, AS ONE DEDUCTION,
EXEMPTION AND SHELTER HAS BEEN PILED ON ANOTHER, PEOPLE HAVE
B
EGUN TO LOSE FAITH IN'THE SYSTEM, COMPLIANCE IS SLIPPING,
AS PEOPLE DECIDE THAT THEIR TAXES ARE BEING IMPOSED UPON
THEM WITHOUT THEIR CONSENT, THAT TOO MANY OF THEIR FELLOW
TAXPAYERS ARE ESCAPING THEIR RESPONSIBILITIES THROUGH DOZENS
OF LOOPHOLES, AND THAT THE CODE ITSELF HAS BECOME A LABYRINTH
OF LEGAL DOUBLE TALK. IN SHORT, FOR MANY TAXPAYERS, THE NEW
DEAL HAS GIVEN WAY TO THE RAW DEAL, AND THEY DON'T LIKE IT
ONE BIT.
IF WE TRULY BELIEVE IN TAX REFORM, THEN THE TIME HAS
COME FOR SOME FUNDAMENTAL CHANGES AND FOR FAR MORE IMAGINATION
ABOUT i-fllAT WC CAN ACCOMPLISH AS A NATION IF WE ONLY PUT OUR
•'."*'.-- . ;
•— t
**J
"7
:
MIND TO IT.' I PROPOSE THAT WE NOW CONSIDER SWEEPING AWAY
ALL PERSONAL TAX PREFERENCES, SFEGIAL DEDUCTIONS AND CREDITS..
EXCLUSIONS FROM INCOME, AND THE LIKE, IMPOSING INSTEAD A
*
SINGLE, PROGRESSIVE TAX ON ALL INDIVIDUALS —
A TAX THAT
WOULD BE ELEGANT IN ITS SIMPLICITY AND WOULD RESTORE PUBLIC
FAITH IN THE FAIRNESS OF CUR TAX SYSTEM,
SOME CRITICS WILL TELL YOU WHAT I AM SUGGESTING SHOULD
BE DISMISSED AS PURE POLITICAL ORATORY. 1 SAY THAT THE
CHARGE OF POLITICS IS A POOR SUBSTITUTE FOR THINKING. IF
ANYTHING, I WANT TO GET POLITICS OUT OF THE TAX SYSTEM -- TO
TAKE THE TAX CODE AWAY FROM THE POLITICIANS WHO WANT TO USE
IT TO ALLOCATE CREDIT TO CERTAIN SECTORS OF THE ECONOMY AND
TO REWARD SPECIAL INTEREST GROUPS WITH SPECIAL SUBSIDIES,
LET'S GIVE THE TAX SYSTEM BACK TO THE PEOPLE OF THIS COUNTRY.
INDEED, LET'S GIVE PEOPLE MORE ECONOMIC FREEDOM IN EVERY
FIELD SO THAT THEY CAN BE MASTERS OF THEIR OWN DESTINIES
AGAIN.
&1
-.13'-LADIES AND GLNTLEME;::
OUR GOVERNMENT CAN DESIGN T.-.E
BEST POLICIES IN THE WORLD AND ADHERE TO THEM FAITHFULLY, BUT
LET'S FACE IT:
THOSE POLICIES WILL SUCCEED ONLY IF ALL OF .S
WORK TOGETHER IN SOLVING THE COUNTRY'S PROBLEMS. THIS MUST
BE A NATIONAL UNDERTAKING, DRAWING UPON THAT VAST RESERVOIR
OF TALENT AND DEDICATION THAT EXISTS ALL ACROSS THE LAND,
AND LET US RECOGNIZE THIS TRUTH: THE BUSINESS COMMUNITY
BEARS A SPECIAL RESPONSIBILITY IN PRESERVING AND STRENGTHEN ING
THE PRIVATE ENTERPRISE SYSTEM IN THIS COUNTRY.
IT MUST PROVE
TO THE AMERICAN PEOPLE THAT IT IS NOT PART OF THE PRODLEM BUT
PART OF THE ULTIMATE SOLUTION.
EACH OF US MUST ACT AS A
TRUSTEE OF THE FUTURE.
I DO NOT PRESUME TO TELL YOU HOW TO RUN YOUR BUSINESSES,
BUT I WOULD LIKE TO MAKE A FEW SUGGESTIONS ABOUT WHAT YOU
CAN DO TO HELP IN THIS GREAT EFFORT,
I WOULD MAKE A SPECIAL
APPEAL TO YOU THAT YOU MAINTAIN COMPETITIVE, EFFICIENT
MARKETS WITHIN
YOUR 0..:: INDUSTRIES 00 THAT YOU WILL NOT INVITE -UR1HEN
GOVERNMENTAL CONTROLS OVER ALL INDUSTRIES. To REGAIN T"HE
CONFIDENCE OF THE PUBLIC, PRIVATE BUSINESS MUST RESPOND TO
RISING DEMANDS FOR HONESTY AND FAIR DEALING IN' THE OGRP.RATE
COMMUNITY, THE FEW ABUSES WHICH DO EXIST WILL ALWAYS BE
SEIZED UPON BY THOSE WHO BELIEVE THAT THE ECONOMY OUGHT TO
BE RUN BY WASHINGTON, AND MOST IMPORTANTLY, I ASK FCR Y;J=
HELP IN STEMMING THE FLOW OF BUSINESSMEN WHO COME TO W.ASHING'GN
IN SEARCH OF SUBSIDIES AND PROTECTION FROM THEIR COMPETITORS -A PRACTICE THAT HAS ONLY AIDED AND ABETTED THE MOVEMENT TO
SHACKLE OUR PRIVATE ENTERPRISE SYSTEM, ONE OF THE SADDEST
EXPERIENCES IN MY PUBLIC LIFE HAS BEEN TO WATCH AS SOME OF
OUR BUSINESS LEADERS ACT PERFECTLY CONTENTED WHEN PROFITS
ARE ROLLING IN, BUT THE MOMENT THERE'S A CLOUD ON THE ECONOMIC
HORIZON, THEY COME RUNNING TO WASHINGTON LOOKING FOR A SUBSIDY.
IHE TIME HAS COME TO STOP TRYING TO KEEP ALL THE PROFITS AND
NATIONALIZE ALL THE LOSSES. TARIFFS, SUBSIDIES, QUOTAS, HANDOUTS, BAIL-OUTS -- I'VE SEEN THEM ALL, AND NONE IS WORTH THE PRGE
Kit
/<- 20T-S'
THEY ALL LEAD TO SACRIFICING OUR FREEDOMS FOR A FALSELY
PERCEVIED SECURITY.
IF WE WANT TO
PRESERVE THE PRIVATE MARKETPLACE IN
AMERICA, THEN WE HAVE A DUTY TO DEFEND IT, IT CANNOT BE
SAID OFTEN ENOUGH THAT A CENTRALIZED ECONOMY IN AMERICA IS
THE SUREST MEANS WE HAVE OF KILLING THE GOOSE THAT LAYS THE
GOLDEN EGG,
AN EPITAPH WRITTEN FOR ANCIENT ATHENS AND ATTRIBUTED TO
THE PEN OF THE HISTORIAN EDWARD GIBBON IS RELEVANT FOR US
NOW. "IN THE END," HE WROTE, "MORE THAN THEY WANTED FREEDOM,
THEY WANTED SECURITY. THEY WANTED A COMFORTABLE LIFE AND
THEY LOST IT ALL — SECURITY, COMFORT AND FREEDOM. WHEN THE
ATHENIANS FINALLY WANTED NOT TO GIVE TO SOCIETY BUT FOR
SOCIETY TO GIVE TO THEM, WHEN THE FREEDOM THEY WISHED FOR
MOST WAS FREEDOM FROM RESPONSIBILITY, THEN ATHENS CEASED TO
BE FREE."
WHETHER THE SAME WILL ONE DAY BE SAID OF AMERICA IS
THE CHOICE NOW BEFORE US.
THANK YOU.
# # # # w If
i"
7
Contact: D. Cameron
Extension 2951
December 11, 1975
FOR IMMEDIATE RELEASE
TREASURY DEPARTMENT ANNOUNCES TERMINATION
OF COUNTERVAILING DUTY INVESTIGATION OF
OXYGEN SENSING PROBES FROM CANADA
Assistant Secretary of the Treasury David R. Macdonald
announced today a termination of the countervailing duty
investigation of oxygen sensing probes from Canada. On
June 30, 1975, a "Notice of Tentative Termination of Countervailing Duty Investigation" was published in the Federal
Register with respect to the subject merchandise. Interested
persons were given an opportunity to submit written comments
on the tentative termination. No information has been
received that would change the basis for that decision.
Accordingly, this final termination indicates that the
investigation is being terminated on the basis that there have
been no imports of oxygen sensing probes during the recent
past and that production of this item will be discontinued.
Should imports of oxygen sensing probes from Canada resume at
any time, the Treasury Department will reopen its investigation
as to the existence of bounties or grants under section 303 of
the Tariff Act of 1930, as amended (19 U.S.C. 1303).
Notice of this decision will be published in the Federal
Register of December 12, 1975.
k
WS-531
k
k
FOR RELEASE AT 4:00 P.M.
December 12, 1975
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $5,800,000,000 , or
thereabouts, to be issued December 26, 1975, as follows:
90-day bills (to maturity date) in the amount of $2,700,000,000, or
thereabouts, representing an additional amount of bills dated September 25, 1975,
and to mature March 25, 1976
(CUSIP No. '912793 YZ3) , originally issued in
the amount of $2,804,540,000, the additional and original bills to be freely
interchangeable.
181-day bills, for $3,100,000,000, or thereabouts, to be dated December 26, 1975.
and to mature June 24, 1976
(CUSIP No. 912793 ZN9) .
The bills will be issued for cash and in exchange for Treasury bills maturing
December 26, 1975, outstanding in the amount of $5,603,995,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,511,750,000.
These accounts may exchange bills they hold for the bills now being offered at
the average prices of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their face amount will be payable without
interest.
They will be issued in bearer form in denominations of $10,000,
$15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value), and in
book-entry form to designated bidders.
Tenders will be received at Federal Reserve Banks and Branches up to
one-thirty p.m., Eastern Standard time, Friday, December 19, 1975.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000.
multiples of $5,000.
Tenders over $10,000 must be in
In the case of competitive tenders the price offered must
be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
WS-532
(OVER)
securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers provided the names of the customers are set forth in
such tenders.
Others will not be permitted to submit tenders except for their
own account.
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of the
face amount of bills applied for, unless the tenders are accompanied by an express
guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders, in
whole or in part, and his action in any such respect shall be final. Subject to
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the average
price (in three decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be made or completed
at the Federal Reserve Bank or Branch on December 26, 1975, in cash or other immediate!
available funds or in a like face amount of Treasury bills maturing December 26, 1975;
provided, however, that if tenders are submitted to a Federal Reserve Bank or Branch
that will be closed on December 26, settlement must be completed at such bank or
branch on either December 24, or on December 29 with payment of three days1 accrued
interest unless settlement is made with Treasury bills maturing December 26, 1975.
Cash and exchange tenders will receive equal treatment. Cash adjustments will be
made for differences between the par value of maturing bills accepted in exchange
and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to accrue
when the bills are sold, redeemed or otherwise disposed of, and the bills are
excluded from consideration as capital assets. Accordingly, the owner of bills
(other than life insurance companies) issued hereunder must include in his Federal
income tax return, as ordinary gain or loss, the difference between the price paid
for the bills, whether on original issue or on subsequent purchase, and the amount
actually received either upon sale or redemption at maturity during the taxable
year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and this notice,
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
Copies of the circular may be obtained from any Federal Reserve Bank or
sj
deral financing bank
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
47^
Summary of Lending Activity
December 1 - December 15, 1975
Federal Financing Bank lending activity for the period
December 1 through December 15, 1975 was announced as follows
by Roland H. Cook, Secretary:
The Federal Financing Bank made the following loans to
utility companies guaranteed by the Rural Electrification
Administration:
Date
Borrower
Amount
Interest
Maturity
Rate
12/1 Oglethorpe Electric
Membership Corp.
$3,064,000
12/31/09
8.484%
12/2 United Power
Association
3,500,000
12/31/09
8.4861
12/10 Colorado-Ute Electric
Association
3,500,000
12/10/77
7.583%
12/12 Central Louisiana
Telephone Company
250,000
12/31/09
8.492
12/31/09
8.492
12/12 Tri-State Generation
§ Transmission
Association
2,990,000
Interest payments are made quarterly on the above REA loans.
The Bank made the following advances to borrowers
guaranteed by the Department of Defense under the Foreign
Military Sales Act:
Interest
Date
Borrower
Maturi tv
Amount
Rate
12/3 Government of
Argentina
$1,177,347.16
4/30/83
12/-J Government of
Argentina
692,750.78
4/30/87
(over)
WS-545
-.996%
.9"6%
- 212/4
Government of
Greece
7,500,000.00
1/2/86
8.092
12/5 Government of
Brazil
162,460.00
10/1/83
8.079
12/5 Government of
China
27,932.70
12/31/82
7.982
12/5 Government of
Korea
1,237,209.08
6/30/83
7.998
12/8 Government of
Greece
29,774,629.99
1/2/86
8.139
12/10 Government of
Brazil
2,673,959.57
10/1/83
8.178
12/15 Government of
Philippines
1,000,000.00
12/31/81
7.901
12/15 Government of
Brazil
204,805.16
10/1/83
8.067
On December 1, the Export Import Bank borrowed $550 million
from the Bank at an interest rate of 7.905%. The loan matures
December 1, 1979. The proceeds of the loan were used to pay
$337 million in principal and $65 million in interest under
Note #1 to the FFB and for other purposes.
On December 1, the US Railway Association borrowed
$23 million against its line of credit with the FFB. The
interest rate is 5.802%. The loan matures February 23, 1976.
On December 4, the General Services Administration
borrowed $302,250 under the Series M $190 million commitment
with the Bank. The interest rate is 8.591%. The loan matures
on June 15, 2005.
On Decenber 11, GSA borrowed $632,257.14 under the Series
L $107 million commitment with the Bank. The interest rate
is 8.636%. The loan matures November 15, 2004.
On December 1, the National Railroad Passenger Corporation
(Amtrak) rolled over Note No. 4, a $120 million renewable
line of credit, in the amount of $73,250,000 at ar interest
rate of 6.033%. On December 15, Amtrak borrowed $25 million
against Note No. 4 which matures on March 31, 1976. The
interest rate is 5.76%.
(over)
On December 5, Amtrak borrowed $10 million against
Note No. 6, a $130 million revolving line of credit. The
interest rate is 5.834%. The note matures December 31, 1975.
On December 5 the Bank advanced $3,356,114.72 under a
June 1, 1975 agreement with Amtrak and others to finance the
purchase of 25 GE diesel electric locomotives. The agreement
provides for serial repayments with a final maturity date of
December 31, 1988. The rate of interest, set at the time of
the agreement, is 7.92%.
The Department of Transportation guarantees all Amtrak
borrowings from the FFB.
On November 9, the Bank purchased $590,000 of notes
from the Department of Health, Education and Welfare. The
Department had previously acquired the notes which were
issued by various public agencies under the Medical Facilities
Loan Program. The notes purchased by the Federal Financing
Bank are guaranteed by the Department of Health, Education,
and Welfare and mature on July 1, 2000. The interest rate is
8.481%.
The Tennessee Valley Authority borrowed $25 million
of 110 day funds on December 12. The note matures on
March 31, 1976. The interest rate is 5.954%.
Federal Financing Bank loans outstanding on December 15,
1975 totalled $17.0 billion.
oOo
REMARKS.- BY .JiltvHOCiQ^ABLL->l IULIAM C,.• S1 HON
SElRElARY OF I HE IREASURY
BEFORE THE ARIZONA ASSOCIATION OF INUUSlRItS
PHOENIX, ARIZONA
DECEMBER 15, 19/5
^tf
0
SENATOR FANNIN AND LADIES AND GENTLEMEN:
AFTER THE INSPIRING TRIBUTE TO PAUL BY YOUR ASSOCIATION,
I CAN CERTAINLY UNDERSTAND WHY PAUL AND BARRY GOLDWATER
AND YOUR OTHER GREAT GIFTS TO THE U,S, CONGRESS ~
MEN-
SUCH AS JOHN RHODES ~ TAKE SO MUCH PRIDE AND PLEASURE IN
REPRESENTING ARIZONA,' THIS MAY HAVE BEEN THE LAST STATE
ON THE CONTINENT TO JOIN THE UNION, BUT YOU ARE CERTAINLY
FIRST IN THE HEARTS OF MANY OF YOUR FELLOW COUNTRYMEN,
I ALSO WANT TO THANK YOU AGAIN FOR YOUR HOSPITALITY
TOWARD ME.
AS PAUL WILL TELL YOU, ANYONE WHO SERVES AS
TREASURY SECRETARY DURING SUCH A TURBULENT PERIOD ALWAYS
APPRECIATES THAT KIND OF WARM WELCOME,
I DIDN'T REALIZE HOW MUCH TROUBLE THE JOB WAS UNTIL THE
DAY I WAS SWORN INTO OFFICE, AND ART BUCIIWALD TOLD ME,
C/3
"CONGRATULATIONS, BILL, YOU'VE JUST BECOME THE PURSER ON THE
TITANIC."
So FAR, WE'VE WEATHERED THE STORMS FAIRLY WELL, BUT NCT
WITHOUT CAUSING SOME HARD FEELINGS. THE OTHER DAY I RECEIVED
A LETTER FROM AN IRATE CITIZEN OF NEW YORK CITY, WHO
REMINDED ME THAT THE FIRST SECRETARY OF THE TREASURY,
ALEXANDER HAMILTON, HAD BEEN BORN OUT OF WEDLOCK. "HOV;EVER,
r'WANTjrpiTTC KNOW,". THIo FELLOW WROiE, "THAT HAMILTON V.'AS
NOT THE ONLY BASTARD WHO HAS EVER HELD THAT OFFICE,"
THE SLINGS AND ARROWS ARE ALL PART OF THE JOB, OF
COURSE, AND I'M SURE THAT ANYONE WOULD BE DISAPPOINTED IF
THEY DIDN'T COME. BUT IT'S ALWAYS REFRESHING TO RECEIVE
A BOUQUET FROM AN AUDIENCE LIKE THIS THAT
I RESPECT
SO
HIGHLY,
1 THOUGHT I MIGHT TAKE THIS OPPORTUNITY TODAY TO
REPORT TO YOU ON THE CURRENT STATE OF OUR NATIONAL ECONOMY
AND TO OFFER A FEW OBSERVATIONS ABOUT WHAT I CONSIDER THE
FUNDAMENTAL ECONOMIC ISSUES OF THE FUTURE.
FROM MY VANTAGE POINT, THE PROSPECTS FOR THE RECOVERY
DURING THE COMING YEAR ARE MUCH MORE ENCOURAGING THAN SOME
ECONOMISTS HAVE RECENTLY SUGGESTED, INDEED, THE RECOVERY
NOW UNDERWAY IS RIGHT ON TARGET.
«
WHEN PRESIDENT FORD TOOK OFFICE, AS YOU WILL RECALL, HE
TNHE.MTrn.THE IIIGHECT IWFiATTON
RATE IN OUR
PEACETIME HISTORY -
1L\ PERCENT -- WHICH, AS EVENTS PROVED OUT, WAS DRIVING US
TOWARD A VERY SEVERE RECESSION, BY EARLY THIS YEAR, UNEMPLOYMF
ROSE TO 8.9 PERCENT.
SINCE THAT TIME, THE INFLATION RATE HAS BEEN CUT IN
HALF. THE GNP IN THE THIRD QUARTER REGISTERED ONE OF THE
BIGGEST QUARTERLY GAINS IN MODERN TIMES, 1,4 MILLION JOES
HAVE BEEN CREATED. UNEMPLOYMENT, WHILE STILL TOO HIGH, HAS
BEEN REDUCED TO 8.3 PERCENT. THESE ARE ALL VERY SOLID
.
.
372
ACCOMPLISHMENTS, AND THE PRESIDENT CAN JUSTIFIABLY BE PROUD
OF THEM.
WE DID, AS YOU KNOW, EXPERIENCE DISAPPOINTING RESULTS
IN SOME OF THE OCTOBER FIGURES FOR THE ECONOMY. I WOULD
CAUTION, HOWEVER, AGAINST READING TOO MUCH INTO THE STATISTIC:
FOR ONE OR TWO MONTHS. INEVITABLY, AS THE RECOVERY CONTINUES,
THE NUMBERS WILL GYRATE, BUT ONE MONTH'S FIGURES DON'T
-REYE RSE 'A -Gtr:ERAL TREND.
THERE ARE TWO IMPORTANT ASPECTS TO BEAR IN MIND AS THE
RECOVERY PROGRESSES:
FIRST, WE SHOULD REMEMBER THE PATTERN OF RECOVERIES IN
THE PAST. ECONOMISTS IN THE TREASURY DEPARTMENT HAVE BEEN
STEADILY CHARTING THE COURSE OF THIS RECOVERY AGAINST THE
PREVIOUS FOUR OF THE LAST 23 YEARS, COMPARING THE INCREASES
IN RETAIL SALES, WORKHOURS IN MANUFACTURING,
5^3
AND GROWTH .IN EMPLOYMENT, WE FIND THAT THE STATISTICS T!!::
TIME ARE ALL BETTER THAN THE AVERAGE RESULTS OF THE PAST
RECOVERY PERIODS. BY HISTORICAL STANDARDS, THEN, WE ARE
DOING WELL,
SECONDLY, WE SHOULD REALIZE THAT THIS IS THE MOST DELICATE
STAGE OF THE RECOVERY CYCLE ~ THE STAGE WHEN PEOPLE SOMETIMES
BECOME FRUSTRATED WITH THE PACE OF THE RECOVERY AND INSIST
-THAT THE GOVERNMFNT ADOPT HIGHLY EXPANSIONARY POLICIES.
.TWICE IN THE'LAST DECADE WE HAVE SUCCOMBED TO SUCH PRESSURES,
AND EACH TIME THE STOP-GO BEHAVIOR HAS ULTIMATELY LEFT US
WORSE OFF THAN BEFORE.
SO THIS IS A TIME WHEN I WOULD URGE THE SKIPPER OF THE
SHIP TO HOLD "STEADY AS YOU GO". WE MUST ACT WISELY AND
PRUDENTLY; IT WILL TAKE TIME TO REMEDY THE YEARS OF POLICY
MISMANAGEMENT IN WASHINGTON; INDEED, WE CANNOT PAY FOR THE
SINS OF A DECADE WITH A SINGLE YEAR OF PENANCE.
7?7
BASED UPON EVERYTHING WE KNOW TODAY —
ASSUMING THAT THE
ECONOMY IS NOT HIT BY ANOTHER OIL EMBARGO AND THAT COMSUMER
CONFIDENCE IS MAINTAINED — THE ECONOMY SHOULD CONTINUE TO
0
MOVE UPWARDS, ACHIEVING AN AVERAGE REAL GROWTH RATE OF
7 PERCENT BETWEEN MID~l975 AND MID-1976. WE EXPECT UNEMPLOYMEV
TO CONTINUE ITS DOWNWARD PATH TOWARD 7 PERCENT BY THE END OF
«
1976. INFLATION SHOULD ALSO CONTINUE TO MODERATE, AVERAGING
- APPROXIMATELY 6 PERCENT DURING 1976. AND BASEDJJPON HISTORICAL
EXPERIENCE"," WE SHOULD~E~XPECT THE CURRENT RECOVERY TO CONTINUE
THROUGH 1976 INTO 1977 AND PROBABLY BEYOND.
BUT LET US FACE A MORE IMPORTANT QUESTION: WHAT LIES
BEYOND NEXT YEAR'S HORIZON? ARE WE GOING TO TAKE THE HARD,
TOUGH STEPS THAT WILL PUT OUR ECONOMY ON A FIRM FOUNDATION
FOR THE NEXT DECADE? OR WILL WE SIMPLY ACQUIESE IN A
CONTINUATION OF THE EXCESSIVE SPENDING AND MONETARY POLICIES
AND IN THE GROWTH OF BlG GOVERNMENT THAT LED US INTO THIS
QUAGMIRE?
-
/
-
77f/r
I DO NOT PRETEND TO HAVE ALL OF THE ANSWERS FOR REBUILDi.'.j
OUR COUNTRY, 1 AM, HOWEVER, CONVINCED THAT IN ORDER TO
m
RESTORE PUELIC FAITH IN OUR DEMOCRATIC INSTITUTIONS AND TO
ENSURE OUR LONG-RANGE PROSPERITY, WE MUST FIRST RESTORE THE
PRINCIPLES THAT HAVE BEEN FUNDAMENTAL TO OUR GROWTH AS A
NATION. AND WE MUST HAVE LEADERS-WHO NOT ONLY PROFESS A
«
BELIEF IN THOSE PRINCIPLES BUT HAVE THE COURAGE TO FOLLOW
.THEM.
SOME SAY WE ARE FLOUNDERING TODAY BECAUSE THE PRINCIPLES
OF THE PAST ARE OUTDATED, THAT THEY ARE OBSOLETE AND IRRELEYAV
I CATEGORICALLY REJECT THAT CHARGE. OUR PRINCIPLES HAVE NOT
FAILED US AT ALL; NO, IT IS WE WHO HAVE FAILED TO LIVE UP TO
THEM, IN THE LAST 10 TO 15 YEARS, THIS NATION HAS DRIFTED
PERILOUSLY FAR FROM ITS ORIGINAL MOORINGS.
JUST LOOK AT THE RECORED OF MISMANAGEMENT ON THE ECONOMIC
FRONT ALONE:
WHEN PRESIDENT EISENHOWER LEFT PUBLIC OFFICE, THE
FEDERAL BUDGET WAS NEARING $100 BILLION A YEAR, SINCE THEN,
0
IT HAS QUADRUPLED IN SIZE,
IN THE EARLY 1960S, THE FEDERAL DEBT STOOD AT
$240
BILLION, SINCE THEN, THE DEBT HAS MORE THAN DOUBLED.
#
IN THE EARLY 1960S, THE MONEY SUPPLY WAS GROWING AT AN
AVERAGE RATE OF 2K PERCENT A YEAR. SLNCE THEN, THE GROWTH
HAS MORE THAN DOUBLE:),
AND IN THE EARLY 1960S, THERE WERE ABOUT 100 DOMESTIC
ASSISTANCE PROGRAMS, TODAY THERE ARE OVER 1,000.
THIS UNPARALLELED GROWTH HAS MEANT THAT THE FEDERAL
GOVERNMENT HAS NOW BECOME THE NATION'S BIGGEST SINGLE
EMPLOYER, ITS BIGGEST CUSTOMER, AND ITS BIGGEST BORROWER.
THIS GROWTH HAS ALSO MEANT SOMETHING ELSE THAT IS
NOT ALWAYS SO OBVIOUS TO PEOPLE: THE RAPID ACCELERATION
OF INFLATION OVER THESE YEARS WHICH BROUGHT IN TURN THE
7<?.ff7
WORST RECESSION IN A GENERATION.
As A NATION, WE CANNOT LONG ENDURE SUCH BEHAVIOR
0
IN WASHINGTON. I HE UNRESTRAINED GROWTH OF GOVERNMENT WILL
INEVITABLY BRING MORE INFLATION, MORE UNEMPLOYMENT, AND
GREATER MISERY, OUR FINANCIAL SYSTEM IS ALREADY UNDER
STRAIN AND CANNOT TOLERATE ANOTHER FIVE YEARS OF UNRELIEVED
PRESSURE. LET US ALSO RECOGNIZE THAT IF THE PEOPLE LOSE
^AlTriiN-vUR TRAH1 t' I OJ -:*!_ DEMOCRATIC INSTITUTIONS THEY
EVENTUALLY ORDER THEIR WHOLESALE REPLACEMENT, AND THEN WE
WILL USHER IN AN AGE OF BLG BROTHER THAT WILL DESTROY NOT
ONLY OUR ECONOMIC FREEDOMS BUT OUR POLITICAL AND SOCIAL
FREEDOMS AS WELL,
HISTORY .LEAVES LITTLE DOUBT THAT ECONOMIC FREEDOMS ARE
INEXTRICABLY BOUND TO POLITICAL FREEDOMS. A NATION THAT
SURRENDERS CONTROL OVER ITS ECONOMIC FORTUNES TO THE CENTRAL
GOVERNMENT WILL SOON FIND THAT ITS OTHER FREEDOMS HAVE FEEN
USURPED AS WELL. YET THAT IS PRECISELY THE DIRECT ION IN
WHICH THE UNITED STATES OF AMERICA HAS BEEN DRIFTING FOR
MORE THAN A DECADE,
CAN WE REVERSE THIS TIDE? CAN WE LIFT OURSELVES OUT OF
OUR NATIONAL MENTAL DEPRESSION? CAN WE END THIS MALAISE
THAT SEEMS TO WEIGH UPON OUR NATURAL PRIDE? CERTAINLY, WE
CAN, BUT IT'S GOING TO REQUIRE A HARD, TOUGH PROGRAM OF
SELF-HELP. WE ARE GOING TO HAVE TO END THE WHINNING AND
v.-unr/p^Tf.'G-A.ro;JT.~r.,'r.r?Y:"HTKC-THATI-?_WRONG IN.OUR COUNTRY, ViE
ARE GOING TO HAVE TO LEARN WHERE OUR BACKBONE IS AGAIN, A,ND
WE ARE GOING TO NEED STRONG, EFFECTIVE LEADERSHIP — NOT
ONLY IN WASHINGTON BUT IN THE CORPORATE HEADQUARTERS ACROSS
THE LAND, IN OUR SCHOOLS, OUR PLACES OF WORSHIP, AND MOST
ASSUREDLY IN OUR HOMES, WE MUST HAVE STATESMEN WHO WILL
TELL THE PUBLIC NOT WHAT THEY SUPPOSEDLY WANT TO HEAR BUT
WHAT THEY NEED TO HEAR, AND WHO WILL NOT WAVER IN THEIR
STRUGGLE FOR A STRONG AND FREE AMERICA.
LET ME TALK FOR A FEW MOMENTS ABOUT THE PROGRAM THAT
PRESIDENT FORD, ALONG WITH THE HELP OF STATESMEN LIKE PAUL
FANNIN, IS SETTING FORTH FOR THE FUTURE OF OUR ECONOMY,
t
FIRST, THE PRESIDENT' IS INSISTING THAT WE BRING THE
FEDERAL BUDGET INTO ACTUAL BALANCE WITHIN THREE YEARS -SOMETHING WE HAVE ONLY DONE ONCE IN THE LAST 17 YEARS. THE
PRESIDENT'S PLAN TO SLOW THE GROWTH IN SPENDING DURING
FISCAL YEAR 1977 BY $28 BILLION. AND TO RETURN THOSE SAVINGS
:
DOLL\R-F.CR-DOL'CAR '.O'-THE'AME.RI CAN":PEOPLE THROUGH A PERMANENT
TAX CUT REPRESENTS A MAJOR STEP IN THAT DIRECTION. SOME
MEMBERS OF THE CONGRESS, OF COURSE, WANT TO TAKE THE EASY
WAY OUT: CUT TAXES BUT MAKE NO COMMITMENT ON SPENDING. WE
SAY THAT WE CAN NO LONGER ACCEPT "POLITICS AS USUAL" IN
WASHINGTON; WE REJECT THE OLD FORMULA OF "SPEND AND SPEND,
ELECT AND ELECT", WE HAVE TO PUT OUR ECONOMIC HOUSE IN
ORDER, AND THE TIME TO START IS NOW.
SECONDLY. PRESIDENT FORD IS PROPOSING THAT WE LIFT THE
HEAVY HAND OF GOVERNMENTAL CONTROL AND REGULATION THAT IS
TI]REAT£IUF4£ TO STRANGLE THE FREE ENTERPRISE SYSTEM. .IF- . H 1 .>
COUNTRY IS TO BECOME MORE SELF-SUFFICIENT IN ENERGY —
AND
HERE IN ARIZONA, YOU KNOW HOW VITAL THAT IS ~ IT IS IMPERATIVE
THAT CONTROLS BE LIFTED FROM THE OIL AND NATURAL GAS INDUSTRIEAND THAT THE BURDENS ARE LIGHTENED FOR THE COAL INDUSTRY.
IN MY VIEW, THE ENERGY BILL THAT THE CONGRESS IS NOW SHAPING
IS A GREAT DISAPPOINTMENT. INDEED, IT IS ONLY TYPICAL OF
«
POLITICS AS USUAL IN THE ONLY CITY IN THE COUNTRY WHERE
SOUND TRAVELS FASTER THAN LIGHT. WHO DO THEY THINK THEY'RE
FOOLING? THE AMERICAN PEOPLE KNOW FULL WELL THAT THE DAYS
OF CHEAP FUEL ARE OVER. WHAT THEY ARE LOOKING FOR IS A
SOUND NATIONAL ENERGY POLICY THAT WILL GIVE THIS COUNTRY
ITS INDEPENDENCE FROM FOREIGN ENERGY PRODUCERS. THIS BILL SI "PL:'
DOES NOT SOLVE OUR BASIC PROBLEMS IN ENERGY; IT ONLY EXACERBATES
AND POSTPONES THEM. WE MUST PUT AN END TO ENERGY CONTROLS
AND WE MUST GIVE BUSINESS, ESPECIALLY SMALL BUSINESS, IMMEDIATE
RELIEF FROM THE MOUNTAIN OF BUREAUCRATIC RED TAPE THAT HAS
BEEN HEAPED UPON IT,
IHIRDLY. THE PRESIDENT IS PROPOSING THAT THE GOVERNMENT
HELP TO INVIGORATE THE PRIVATE SECTOR, SHIFTING AWAY FROM
0
THE EXCESSIVE EMPHASIS UPON CONSUMPTION AND FEDERAL SPENDING
TO A HEAVIER EMPHASIS UPON SAVINGS AND INVESTMENT. SPECIFICALLY,
WE ARE ASKING THAT THE CONGRESS ACT IMMEDIATELY TO REDUCE
BOTH INDIVIDUAL AND CORPORATE TAXES ~ THE PROVISION THAT IS
TIED TO THE PRESIDENT'S ALL-IMPORTANT PROPOSAL TO REDUCE
THE GROWTH IN GOVERNMENT SPENDING. WE ARE ALSO PROPOSING
THE ELIMINATION OF DOUBLE TAXATION ON BUSINESS PROFITS —
SOMETHING THAT MOST OTHER INDUSTRIALIZED COUNTRIES OF THE
WEST HAVE ALREADY DONE ~ so THAT WE CAN ENCOURAGE GREATER
CAPITAL FORMATION. EVERY MAJOR STUDY OF THE ISSUE MAKES IT
CLEAR THAT THE AMOUNT OF MONEY NEEDED FOR CAPITAL INVESTMENT
IN THE NEXT 10 YEARS WILL BE APPROXIMATELY THREE TIMES AS
LARGE AS WHAT WE HAVE INVESTED IN THE LAST 10 YEARS. WE
CAN NO LONGER AFFORD TO DELAY ON THIS ISSUE.
I EN DAYS AGO, SPEAKING NOT FOR THE PRESIDENT BUT FOR
MYSELF, 1 ARGUED THAT WE SHOULD CARRY TAX REFORM TO ITS
°
'^
LOGICAL CONCLUSION. THE SUCCESS OF THE FEDERAL TAX SYSTEM —
AND WE SHOULD ALWAYS REMEMBER THAT IT HAS BEEN ONE OF THE
MOST SUCCESSFUL IN THE WORLD ~ IS THAT OUR CITIZENS VOLUNTARI '_'
COMPLY WITH ITS REQUIREMENTS. THE SYSTEM IS BASED ON NEUTRALITY.
SIMPLICITY AND EQUITY, WITH CITIZENS VOLUNTARILY PAYING
THEIR TAXES BECAUSE THEY BELIEVE-THAT OTHERS ARE ALSO PAYING
THEIR FAIR SHARE. OVER THE YEARS, HOWEVER, AS ONE DEDUCTION,
EXEMPTION AND SHELTER HAS BEEN PILED ON ANOTHER, PEOPLE HAVE
BEGUN TO LOSE FAITH IN THE SYSTEM. COMPLIANCE IS SLIPPING,
AS PEOPLE DECIDE THAT THEIR TAXES ARE BEING IMPOSED UPON
THEM WITHOUT THEIR CONSENT, THAT TOO MANY OF THEIR FELLOW
TAXPAYERS ARE ESCAPING THEIR RESPONSIBILITIES THROUGH DOZENS
OF LOOPHOLES, AND THAT THE CODE ITSELF HAS BECOME A LABYRINTH
OF LEGAL DOUBLE TALK. IN SHORT, FOR MANY TAXPAYERS, THE fiEW
DEAL HAS GIVEN WAY TO THE RAW DEAL, AND THEY DON'T LIKE IT
ONE BIT.
7773
IF WE TRULY BELIEVE IN TAX REFORM, THEN THE TIME HAS
COME FOR SOME FUNDAMENTAL CHANGES AND FOR FAR MORE IMAGINATIONABOUT WHAT WE CAN ACCOMPLISH AS A NATION IF WE ONLY PUT OUR
MIND TO IT. I PROPOSE THAT WE NOW CONSIDER SWEEPING AWAY
ALL PERSONAL TAX PREFERENCES, SPECIAL DEDUCTIONS AND CREDITS,
EXCLUSIONS FROM INCOME, AND THE LIKE, IMPOSING INSTEAD A
SINGLE, PROGRESSIVE TAX ON ALL INDIVIDUALS ~ A TAX THAT
WOULD BE ELEGANT IN ITS SIMPLICITY AND WOULD RESTORE PUBLIC
FAITH IN THE FAIRNESS OF OUR TAX SYSTEM.
SOME CRITICS WILL TELL YOU WHAT I AM SUGGESTING SHOULD
BE DISMISSED AS PURE POLITICAL ORATORY. I SAY THAT THE
CHARGE OF POLITICS IS A POOR SUBSTITUTE FOR THINKING, IF
ANYTHING, I WANT TO GET POLITICS OUT OF THE TAX SYSTEM —TO
TAKE THE TAX CODE AWAY FROM THE POLITICIANS WHO WANT TO USE
IT TO ALLOCATE CREDIT TO CERTAIN SECTORS OF THE ECONOMY AND
TO REWARD SPECIAL INTEREST GROUPS WITH SPECIAL SUBSIDIES.
LET'S GIVE THE TAX SYSTEM BACK TO THE PEOPLE OF THIS COUNTRY,
r-M7
S7<?
INDEED, LET'S GIVE PEOPLE MORE ECONOMIC FREEDOM IN EVERY
FIELD SO THAT THEY CAM BE MASTERS OF THEIR OWN DESTINIES
0
AGAIN,
LADIES AND GENTLEMEN: OUR GOVERNMENT CAN DESIGN THE
BEST POLICIES IN THE WORLD AND ADHERE TO THEM FAITHFULLY,
BUT LET'S FACE IT: THOSE POLICIES WILL SUCCEED ONLY IF ALL
OF US WORK TOGETHER IN SOLVING THE COUNTRY'S PROBLEMS, IHIS
MUST BE A NATIONAL UNDERTAKING, DRAWING UPON THAT VAST
RESERVOIR OF TALENT AND DEDICATION THAT EXISTS ALL ACROSS
THE LAND,
AND LET US RECOGNIZE THIS TRUTH: THE BUSINESS COMMUNITY
BEARS A SPECIAL RESPONSIBILITY IN PRESERVING AND STRENGTHENING
THE PRIVATE ENTERPRISE SYSTEM IN THIS COUNTRY, BUSINESS
CANNOT AFFORD TO BE APATHETIC, OR LET ME ASSURE YOU, SOME OF
THESE SO7CALLED LEADERS IN WASHINGTON WHO WANT TO RUN
EVERYTHING OUT OF WASHINGTON WILL JUST ASSUME THE RESPONSIBILI
THAT HAVE ALWAYS HAVE BEEN YOURS AND SHOULD ALWAYS REMAIN
3/73
YOURS.
liUSIflESo IS UNDER ASSAULT TODAY, AND IT MUST Pf;OwE
TO THE AMERICAN PEOPLE THAT IT IS NOT PART OF THE PROBLEM
BUT PART OF THE ULTIMATE SOLUTION, EACH OF US MUST ACT AS A
TRUSTEE OF THE FUTURE,
I WOULD MAKE A SPECIAL APPEAL TO EACH OF YOU TODAY TO
MAINTAIN COMPETITIVE, EFFICIENT MARKETS WITHIN YOUR OWN
INDUSTRIES SO THAT YOU WILL NOT INVITE FURTHER GOVERNMENTAL
CONTROLS OVER ALL INDUSTRIES, TO REGAIN THE CONFIDENCE
OF THE PUBLIC, PRIVATE BUSINESS MUST RESPOND TO RISING
DEMANDS FOR HONESTY AND FAIR DEALING IN THE CORPORATE
COMMUNITY, AND MOST IMPORTANTLY, I ASK FOR YOUR HELP IN
STEMMING THE FLOW OF BUSINESSMEN WHO COME TO WASHINGTON IN
SEARCH OF SUBSIDIES AND PROTECTION FROM THEIR COMPETITORS —
A PRACTICE THAT HAS ONLY AIDED AND ABETTED THE MOVEMENT TO
SHACKLE OUR PRIVATE ENTERPRISE SYSTEM. ONE OF THE SADDEST
EXPERIENCES IN MY PUBLIC LIFE HAS BEEN TO WATCH AS SOME OF
OUR BUSINESS LEADERS SIT BY PERFECTLY CONTENTED WHEN PROFITS
ARE ROLLING IN, BUT THE MOMENT THERE S A CLOUD ON THE
ECONOMIC HORIZON, THEY COME RUNNING TO WASHINGTON LOOKING
FOR A SUBSIDY. THE TIME HAS COME TO STOP TRYING TO KEEP ALL
THE PROFITS AND NATIONALIZE ALL THE LOSSES.
IF WE WANT TO PRESERVE
THE PRIVATE MARKETPLACE IN
«
AMERICA, THEN WE HAVE A DUTY TO DEFEND IT.
IT CANNOT BE
SAID OFTEN ENOUGH THAT A CENTRALIZED ECONOMY IN AMERICA IS
THE SUREST MEANS WE HAVE OF KILLING THE GOOSE THAT LAYS THE
GOLDEN EGG.
AN EPITAPH WRITTEN FOR ANCIENT ATHENS AND ATTRIBUTED TO
THE PEN OF THE HISTORIAN EDWARD GLBBON IS RELEVANT FOR US
NOW, "IN THE END," HE WROTE, "MORE THAN THEY WANTED FREEDOM
THEY WANTED SECURITY, THEY WANTED A COMFORTABLE LIFE AND
THEY LOST IT ALL — SECURITY, COMFORT AND FREEDOM, WHEN THE
ATHENIANS FINALLY WANTED NOT TO GIVE TO SOCIETY BUT FOR
SOCIETY TO GIVE TO THEM, WHEN THE FREEDOM THEY WISHED FOR
MOST WAS FREEDOM FROM RESPONSIBILITY, THEN
ATMLNS
CLASEL ',_
BE FREE."
WHETHER THE SAME WILL WILL ONE DAY BE SAID OF AMERICA
IS THE CHOICE NOW BEFORE US.
THANK YOU.
* # #
u Department of theJREASURY
•WGTQN, D.C. 20220
TELEPHONE 964-2041
?f/
Contact Point: LPotts
X2951
FOR IMMEDIATE RELEASE December 15, 1975
TREASURY ANNOUNCES TENTATIVE MODIFICATION OF
DUMPING FINDING ON POTASSIUM CHLORIDE, OTHERWISE KNOWN
AS MURIATE OF POTASH FROM CANADA
Assistant Secretary of the Treasury David R. Macdonald
announced today a Tentative Modification of dumping finding
on Potash from Canada with respect to Cominco, Ltd. Notice
of this action will appear in the Federal Register, Tuesday,
December 16, 19 75.
T e
^ Federal Register notice of December 16, 1975, will
state in part the finding that from December 19, 19 69 to
December 31, 1971, all sales by Cominco, Ltd., with the exception of some sporadic sales on which duties in a de minimis
amount were found to be due, were at not less than fair value,
and that written assurances that there will be no future sales
at less than fair value have been received.
Imports of the subject merchandise from Canada during
CY 1974 were valued at roughly $222 million. Imports from
Cominco, Ltd., during the same period were valued at roughly
$9 million.
WS-537
ktepartmentoftheTREASURY
INGTON, D.C. 20220
TELEPHONE 964-2041
3T7f
December 15, 1975
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.7 billion of 13-week Treasury bills and for $3.1 billion
of 26-week Treasury bills, both series to be issued on December 18, 1975,
were opened at the Federal Reserve Banks today. The details are as follows:
26-week bills
maturing June 17, 1976
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing March 18, 1976
High
Low
Average
Price
98.626
98.608
98.612
Discount
Rate
Investment
Rate 1/
5.436%
5.507%
5.491%
5.60%
5.
5.
Price
Discount
Rate
Investment
Rate 1/
97.030
96.997
97.010
5.875%
5.940%
5.914%
6.16%
6.23%
6.20%
Tenders at the low price for the 13-week bills were allotted 63%.
Tenders at the low price for the 26-week bills were allotted 92%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Boston
$
57,280,000
New York
3 ,493,510,000
29,945,000
Philadelphia
80,935,000
Cleveland
Richmond
40,230,000
35,290,000
Atlanta
282,020,000
Chicago
69,010,000
St. Louis
34,390,000
Minneapolis
53,235,000
Kansas City
51,285,000
Dallas
San Francisco- 222,300,000
TOTAL^4«,430,000
Accepted
$
52,540,000
2,082,660,000
29,410,000
64,635,000
35,990,000
35,105,000
109,020,000
54,770,000
31,390,000
50,455,000
48,815,000
105,300,000
Received
|
Accepted
:$
40,765,000 $
37,745,000
:: 3,782,745,000 2,418,665,000
::
20,010,000
13,850,000
67,650,000
::
52,650,000
69,075,000
59,815,000
::
29,775,000
28,470,000
::
272,840,000
144,480,000
::
:
54,780,000
40,780,000
:
47,570,000
47,570,000
::
.:
28,310,000
25,770,000
.
31,560,000
19,560,000
.
322,875,000
210,875,000
$2,700,090,000 */$4,767,955,000
$3,100,230,000 b/
i/lncludes $ 497,690,000 noncompetitive tenders from the public.
-/deludes $ 228,655,000 noncompetitive tenders from the public.
I] Equivalent coupon-issue yield.
4S-536
£od
FOR IMMEDIATE RELEASE
Contact: R.B. Self
Extension 8256
December 15, 1975
TREASURY DEPARTMENT ANNOUNCES
PRELIMINARY COUNTERVAILING DUTY DETERMINATION
ON CHEESE FROM FINLAND
Assistant Secretary of the Treasury David R. Macdonald
announced today the issuance of a preliminary determination
that bounties or grants are being paid or bestowed on
imports of cheese from Finland within the meaning of the
United States Countervailing Duty Law (19 U.S.C. 1303),
A notice to this effect will be published in the Federal
Register of December 16, 1975.
Interested parties will be given an opportunity to
submit written views before the Commissioner of Customs
in time to be received no later than 30 days from the
date of publication of this notice. As required under
the Countervailing Duty Law, a final determination will
be issued in the Federal Register by no later than
May 11, 1976.
If a final affirmative determination is made, the
Countervailing Duty Law requires the Secretary of the Treasury
to assess an additional duty on merchandise benefitting from
such bounties or grants.
During calendar year 1974 imports of cheese from Finland
were approximately $11,179,000.
* * *
WS-535
6>*f
REMARKS OF J. ROBERT VASTINE
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TRADE AND RAW MATERIALS POLICY
TO THE
FIRST INTERNATIONAL METALS COMMODITIES CONFERENCE
DECEMBER 15-16, 1975
NEW YORK, NEW YORK
Commodity Agreements and Commodity Price Fixing: The U.S. Approach
It is a pleasure to discuss with you some of the issues
surrounding international trade in commodities, and as you have
requested, U.S. attitudes about commodity price fixing.
Assistant Secretary Parsky, who had hoped to be with you today,
has been called to Paris to the Conference on international Economic
Cooperation--the CIEC. He will be helping create in that forum the
framework for an intensive dialogue about the problems we are
discussing this morning.
Commodities have become one of the hottest economic and
political issues in international affairs. Over the past several
years, severe shortages of critical raw materials, roller coaster
price swings, and vigorous demands by developing countries have
focused the attention of governments, and industry, on commodity
problems. Recession has compounded the problems of those
developing country raw material exporters which are primarily
dependent upon one or two commodities for their export earnings.
In response to these problems, many developing countries have
called for various forms of organization of commodity markets
through agreements designed to influence the prices at which
commodities are traded.
I would like to begin by talking about commodity problems
in the perspective of developments during the past several years.
I will describe the expectations for commodity agreements, problems
with such agreements, and alternatives which will better serve
the interests of both producers and consumers.
The Setting
You are all familiar with the major economic events which
led to the current interest of producers--and some consumers-in commodity agreements. In 1973-74, a worldwide boom caused
WS-534
extreme shortages. Many of the most visible shortages were
in commodities: many metals, tropical and temperate agricultural
commodities were in extremely short supply. In some cases this
led merely to very high prices; in other cases, it also resulted
in the imposition of export controls.
It was in the context of this overheated international
economy that the OPEC nations suddenly quadrupled the price of
oil. The unexpected success of the OPEC cartel, coupled with
shortages and inflation in most industrial countries, created a
widely shared fear that the industrialized world was entering a
new era in which its access to commodity supplies would be
dominated by cartels.
In retrospect, these fears seem unjustified. While
conditions of production and trade in a few commodities may
allow countries to raise prices temporarily above market levels
through concerted action, we now know that oil is the unique case.
We have seen the shortages of the 1973-74 boom give way to
surpluses and falling prices.
But the concern generated by this experience has led
industrial countries to conclude that we must improve our
economic relations with the Third World or face the prospect
of a continuing climate of hostility and distrust, and the
possibility of new attempts at concerted action arbitrarily
to increase prices in future periods of shortage.
The Developing Countries* View
Many Third World countries believed that a new era
had arrived. But their perspective was very different. What was
seen by the industrialized countries as an era of raw material
shortages was seen in the Third World as a new era of prosperity
based on high prices for their exports.
The Third World also had a different perspective on the
new success of the OPEC. Although they only too soon would
suffer its costs, OPEC was to them a source of inspiration. A
group of non-Western, non-industrial countries was successfully
dictating terms to the industrialized world. More important,
OPEC seemed to promise economic success for new cartels as
well. It was a model, and enormous OPEC profits, it was believed,
would be made available to help finance new cartels.
Thus, 1974 was a heady year for many raw materials exporters.
It was a year of great expectations, which left them unprepared
for the bust that was to follow.
6<*
Many of you are in the business of commodities. You know
what has happened to commodity prices since mid-1974. Copper-by far the largest LDC mineral export--fell from a peak of
$1.52 per pound on the London Metal Exchange in early 1974
to the current price of around $.55 per pound. The Economist
index of 19 commodities has declined by 40 percent.
At the same time, it has become increasingly apparent that
the high price of OPEC oil is not a bounteous source of funding
for Third World projects, but a serious drain on the balance of
payments of the majority of the developing countries, especially
the poorest ones, which are net importers of oil. OPEC has
extracted $5 billion more from Third World countries in oil price
increases than it has returned in aid. Even this figure understates the impact on the average developing country, since twothirds of OPEC's $7 billion in aid has been channeled to Islamic
oil importers.
A final disappointement to the Third World was the concensus
that the effectiveness of the OPEC cartel rests on a unique set
of circumstances: the extent of the world's dependence on oil,
the lack of substitutes in the short run, the low marginal costs
of production and consequent high financial returns, the cultural
cohesion and shared political objectives of its core of Arab
producers. The possibilities for successful cartels for other
raw materials are thus remote.
New Interest in Commodity Agreements
Against this background, it is not difficult to understand
why many in developed and developing countries alike have
proposed commodity agreements as a solution. To developing
country exporters, such agreements hold out the promise of
better terms of trade and a reduction in price volatility. To
some industrialized countries, they represent an alternative to
the supply shortages of 1972-74, which some fear may recur.
In many international forums, commodity agreements became
a critical element in the increasingly vocal and militant demands
of the Third World for a "New International Economic Order."
In February, 1975, these demands first surfaced at "UNCTAD"-the UN Conference on Trade and Development. There, the so-called
"Group of 77" developing countries called for an "Integrated
Program" for 17 key tropical and non-fuel mineral commodities.
Conceptually, the Integrated Program consists of two parts:
U ) a set of general objectives; and (2) a list of measures
to be applied to ten "core" commodities to achieve the objectives.
The major objectives are:
- 4- Stabilization of commodity prices and supplies;
- Maintenance of "real" commodity prices, or "indexation;"
- Assurance of access to supplies for essential foodstuffs and
raw materials and access to markets for commodities;
- Expansion of processing in commodity producing countries.
The central measures proposed:
- The establishment of a common fund to finance the creation
of buffer stocks for each of ten "core" commodities. UNCTAD's
estimate of the cost of such a fund varies between $3 and
$6 billion.
- The creation of buffer stocks for the "core" commodities,
through commodity agreements for each one.
- Other measures within the framework of commodity agreements
would include supply management by producers to sustain
price, coordination of investment, lower barriers to trade,
and promotion of consumption.
Indexation
A central idea running through these proposals, and
proposals in other forums, is the idea of indexation. Indexation,
as you know, means that commodity prices would be set not by
markets, but by application of a formula which would increase
the price of the commodity in proportion to the increase in the
price of some market basket of other imported products. We are
unalterably opposed to indexation as a concept, or as a guide in
determining commodity prices, for the following reasons.
First, indexing would strengthen those least in need of help.
Most raw materials production still takes place in the industrial
countries, and price indexing would harm those most in need of
help because the poorest, most populous states are net importers
of raw materials. Ironically, it would help developed country
exporters more than the poorer countries. Second, such a scheme
would introduce artificial rigidities which are likely to result
in misallocation of resources and scarce capital, and underutilization of needed productive capacity in many parts of the
world.
In addition these arguments against indexation, the technical
problems are too great.
Some of them are:
- Selection of a representative base period;
- 5 -
^6$
- The composition of a basket of goods against which to
index the commodity;
- How will qualitative and productivity changes be
reflected in prices of manufactured imports?
- How are qualities and grades of commodities taken into
account?
The U.S. Position
Despite continuing pressure to acquiesce in broad efforts
to organize trade in commodities, the U.S. has adopted an
approach toward commodity agreements based on careful analysis
of the specific characteristics of markets and trade in each
commodity. We have made clear that we will readily discuss
commodity agreements, but on a selective, case-by-case basis.
The U.S. has not attempted to define a set of generalized
principles which could automatically be applied to determine
whether a commodity agreement is acceptable. An interagency
task force considered this possibility last spring but quickly
concluded what I am sure many of you already know--that
commodity markets vary so greatly that any set of generalized
guidelines would not be very useful. There is simply no
substitute for hard analysis of the facts about each commodity.
Intensive interagency discussions over the past year have
identified certain major objectives to guide our approach to
commodity agreements.
First, commodity agreements should be a means of strengthening,
not weakening, markets. Markets have an irreplaceable role as the
most efficient allocator of resources.
Second, commodity agreements should not aim to transfer
resources; they should not therefore attempt to raise commodity
prices above long-term market levels. We concluded that
commodity agreements may be appropriate when they operate to
reduce excessive short-term price volatility.
To some, the case-by-case approach may seem unduly cautious.
But we believe that caution is prudence. Our intensive analysis
has revealed obstacles to the effective operation of commodity
agreements that may not be immediately apparent.
I would like to describe some of the theoretical and
practical problems and draw on past experiences with such
agreements.
**- 6 Theoretical and Practical Flaws
Price fluctuations complicate planning for both producers
and consumers, so the elimination of excessive price swings
might seem at first blush to be an unassailable objective.
However, as you know, price swings are not simple deficiencies
in the market. Rather, they tell us, whether we like it or not,
that the availabilities of products are increasing or decreasing.
They signal real changes in supply or demand.
To attempt to stabilize prices when underlying supply arid
demand forces are fluctuating is thus like treating the
symptoms instead of the cause. Stabilizing prices when underlying availability is unstable, may ultimately destablize markets.
Such treatment may destroy chances for the patient's recovery.
Certainly there are instances where market fluctuations,
whether motivated by so-called speculative demand or other
temporary factors, may cause price changes that are greater
than necessary to carry out the economic functions of the
market. Some price swings are excessive, and are counterproductive. Moderating excessive, irrational price fluctuations
and thus improving markets is one reason why we are willing to
entertain proposals for commodity agreements.
But who will decide when a price swing is excessive, and
what criteria will be used? It may be easy to decide with
20/20 hindsight, but in the real world, a decision to set a
"realistic" range within which prices will be stabilized is
difficult at best.
Most commodity agreements attempt to hold prices within
agreed ranges. Changes in the specified price range can
normally be accomplished only at irregular intervals through a
voting system which is affected by political as well as economic
factors. It is hard for a producer country to vote to
hold down the price of a product it exports. It is equally
difficult for a consumer country to vote to increase the price
of a product it consumes. Thus, the economic decisions embodied
in commodity agreements are too frequently the result of a play
of political forces. The danger is that the result may be
impractical and even unworkable arrangements.
Export Controls and Buffer Stocks
The major price stabilizing techniques used by commodity
agreements are export controls and buffer stocks. Both have
shortcomings.
- 7 (,
Export controls set producer market shares and thereby
create supply rigidities and price distortions. They result in
misallocation of resources. They may even retard development
and growth in producing countries* By restricting supply they
operate on the down-side against price declines and against
consumer interests. They have the potential to keep prices
above an average market-determined level.
Although buffer stocks do not necessarily favor the
producer, and are superior to export controls from the consumer
standpoint, they also have severe drawbacks%
One drawback is that they involve intervention by a political
body as an agent in the market, with the risk that intervention
will move the market price away from the long-term equilibrium
price in a manner which destabilizes the marketx
Another major problem is cost. The quantities necessary
to stabilize the price of a major internationally traded
commodity are staggering. We have some direct evidence from
the Tin Agreement where massive stockpile sales during 1973-74 by
the International Tin Council and the United States General
Services Administration's stockpiles, equivalent to 25% of
annual world consumption, failed to stem a major increase in
price.
We have tried to estimate the cost of a buffer stock for
copper. We have no conclusive answers--in part the cost
depends on variables such as the degree of price stabilization
sought. But the result of our computer simulations indicates
that the capital cost of a copper buffer stock large enough to
retain price stability during peak demand periods would be
several billion dollars.
A final potential problem with buffer stocks is the risk
that they will become politicized and therefore will fail to
achieve in practice whatever they might promise in theory.
Producing countries which welcome massive buffer stock purchases
during periods of depressed prices will see the stockpile in a
different light when it has been accumulated. Then it becomes
a threat, an "overhang" on the market which can be used to reduce
profitable price increases.
- 8 -
I
Some Lessons of Experience
A final justification for a cautious approach to commodity
agreements is that our experience with them has been disappointing.
Agreements have sometimes taken years to negotiate and then become
inoperative rather quickly as technological and economic changes
undercut the premises on which they were based. Of the five
major commodity agreements negotiated or renegotiated in the
I9601s--coffee, cocoa, sugar, wheat and tin--only the Tin Agreement has economic provisions which are operative today.
The causes for the breakdown of an agreement are varied.
Failure to hold price within the agreed range, disagreement over
the proper price range itself, allocation of market shares among
exporters have all been major factors. They tend not to be
able to withstand the pressure of the free play of markets.
I know that many domestic companies consuming tin are
skeptical about how well the Tin Agreement has worked, but even
its critics would generally concede it has done no real harm.
Most tins is produced in developing countries; the stockpile has
been primarily financed by them; the agreement's voting system
is balanced, and it has lasted for 20 years with all the major
consuming countries participating except the U.S. As you may
know, after an intensive analysis of the merits of the Tin
Agreement, the President decided to recommend that Congress
support U.S. participation in that agreement.
Possible New Agreements \
Apart from tin, it is difficult to identify metals that are
good candidate's for price stabilization agreements, A major
reason is that few of the metals we import in large quantities
are primarily produced in the developing countries. Of the top
ten U.S. imported metals and metallic ores, only bauxite and tin
are primarily produced in developing countries. The remaining
eight are either produced mainly in the U.S. or in other
industrialized countries, such as Canada and Australia. Copper
is a good example. A second reason is that not all these
commodities exhibit great price volatility.
Of these two commodities, an agreement already exists for
tin.
Bauxite is primarily traded among different parts of
integrated companies based upon long-term internal contracts.
The price is not volatile and there is little reason to seek a
price stabilization agreement.
Apparently for these reasons, the bauxite producing
countries themselves have displayed little interest in an agreement.
Our bauxite suppliers, principally Jamaica, Surinam, and other
9
- -
6>°f
Caribbean countries, have chosen to achieve earnings increases
through heavy direct and indirect taxation of bauxite production.
In the long run, this type of unilateral action will prove
self-defeating. It will encourage increased production outside
the Caribbean area, and the development of substitutes.
Better Remedies
There are, however, better remedies than commodity agreements
for commodities problems.
The U.S. Government is taking a leading
role in promoting realistic solutions.
In Secretary Kissinger's speech on September 1 before the
UN Special Session, and in Secretary Simon's speech on
September 2 before the Annual Meeting of the Bank and Fund, the
U.S. proposed a new Development Security Facility. This Facility
and its related trust fund proposal would make up to $2.5 billion
per year available to developing countries to cope with the
problems of swings in export earnings. These funds would be
made available in the form of loans and concessionary grants to
the poorest countries suffering from export earnings problems
due to factors beyond their control. This type of compensation
is a way to attack the root of the problem--the swings in export
earnings which complicate the planning process--without interfering
with the indispensable pricing function of the market.
Most developing countries depend upon imported technology
and manufactured products to promote their internal development.
These imports in turn depend upon their ability to earn sufficient
foreign exchange. Despite significant success in diversifying
their exports, most developing countries still depend primarily
on exports of raw or semi-processed commodities to earn foreign
exchange and many are heavily dependent on a few commodities.
When the price of copper falls by more than 60 percent, as it
has since March 1974, the economic development efforts of a country
like Zambia or Chile, that are 80 to 90 percent dependent on copper
exports for their foreign exchange earnings, are drastically
affected.
The New Facility should provide a solution to this problem.
It will also offer the developing countries an alternative to
drastic increases in taxes or other means of raising funds to
which they have felt compelled to resort when faced with an
immediate shortage of foreign exchange.
The United States has been in the forefront of the
industrialized countries seeking ratification of the Development
Security proposal. It is currently the subject of active
discussion within the International Monetary Fund. We are
hopeful that the other IMF countries will soon accept this
proposal.
Another important U.S. initiative is the establishment of
producer/consumer forums for key internationally-traded
commodities.
These forums would not be committed to commodity
agreements, but rather to a dialogue in which the problems of
consumers and producers alike would be aired in open discussion.
The purpose of such forums is to improve the conditions of the
market through a number of means short of actively interfering
with it. This proposal too has been greeted favorably and is
under discussion within various international bodies concerned
with commodities. Copper and bauxite are both candidates for
such forums.
The U.S. is also committed to the increased processing of
raw materials in the LDCs. The U.S. Generalized System of
Preferences, to go into effect on January 1, 1976, should give
many LDCs an increased incentive to augment their processing
of raw materials. The GSP will result in the elimination of
tariffs for 137 beneficiary developing countries and territories
on 2,724 products with a 1974 trade volume of $2.6 billion. The
major commodities affected are sugar, cocoa, jute, rubber,
lead ores, zinc ores, and wrought aluminum.
In the Multilateral Trade Negotiations currently underway
in Geneva, we are ready to negotiate reductions in our tariffs
for processed products in return for appropriate concessions
from commodity exporting countries.
The United States has also made proposals relating to investment in raw materials production in the developing countries.
Both developed and developing countries have much to gain
from cooperation in this area. If the climate for investment
in many of these countries continues to deteriorate,
they will lose their share in the growth of world demand for
commodities. The loss of investment means the loss of jobs and
the export earnings which developing countries require if they
are to continue to grow and diversify.
Deterioration in the investment climate also hurts consumers.
It is no secret that today's company managers would rather develop
higher cost sites in "secure" countries than risk their shareholders'
money investing in countries where loss of the investment is a real high
risk. This means higher prices, encouragement of substitutes and
eventually, reduced income for developing country producers. And,
it means a less efficient allocation of the world's resources.
Some countries recognize that their policies are discouraging
private investors, and may expect to replace private funding
with funds from governments and international organizations.
I believe that reliance on these sources as a substitute
would be misplaced. The United States has strongly encouraged
and funded international financial organizations. At the
UN Special Session, the U.S. proposed a four-fold increase in
the $100 million funding of the international Finance Corporation,
which provides seed capital to assist private companies and
developing countries in new enterprises. But international
organizations can only supplement, they cannot replace the flow
of funds from private sources, and they have little to offer by
way of the technology or judgment of markets that is necessary
to develop new sites economically and efficiently.
We have no easy solutions for the tenacious problem of
investment. But the eventual solution must be based on
recognition of the sovereign rights of a nation to lay down the
terms for foreign investment and the equally important right of
foreign investors to rely on the terms that have been mutually
agreed.
Conclusion
The United States and most other industrialized countries
have reached a consensus on some of the issues surrounding
commodity price fixing. There is wide agreement that an effort
to fix a commodity's price at a level indexed to import prices
is undesirable. There is further agreement that efforts to fix
prices with any degree of rigidity for most commodities are
unworkable.
But obvious differences among commodities make further
generality very difficult. That is the wisdom of the U.S.
"case-by-case" approach. We continue to be willing to
participate in negotiations relating to specific commodities
with producers and consumers of those commodities. We
have entered each such discussion with an open mind, but
we believe that agreements which operate with minimum
market interference, and which do not fix prices within
rigid price bands are in the best interest of both consumers
and producers. As such we will not enter agreements whose
purpose is to "fix" prices above a long-term market level
or to index them to prices of other goods. These considerations
underlie the President's decision to seek Congressional approval
of the Tin Agreement. We will continue to test each proposed
agreement on its economic merits.
The fundamental U.S. approach, however, is to use the
market and the dynamism of private enterprise to allocate
resources to produce, process and market the worldfs
commodity resources in the best interests of both producers
and consumers. We should strengthen the operation of markets
in order to facilitate adjustment by developing countries.
12
- -
kl&
Therefore, the keystones of the U.S, proposal in the commodities
area are the Development Security Facility, producer/consumer
forums to improve markets in specific commodities, the opening
of markets in industrial countries for the processed and
manufactured exports of developing countries, and expanded investment in raw materials production.
In Paris this week the ministers of the 27 countries taking
part in the Conference on International Economic Cooperation
will begin a new effort to achieve a common understanding on
sound approaches to producer/consumer problems in raw commodities,
and in the fields of energy, development and finance.
CIEC is only one of the forums where these issues will be
discussed through the next year. In all of them, the United
States will put forward its own soundly based, realistic proposals
to the real problems of poverty and economic development which
all countries must join together to solve.
1,13
For Release Upon Delivery
STATEMENT BY THE HONORABLE CHARLES M. WALKER
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
ON H.R. 10551
MONDAY, DECEMBER 15, 1975
Mr. Chairman, I am happy to appear before the House
Ways and Means Committee this morning to discuss an aspect
of the taxation of income from shipping. Specifically,
the question before us is whether the investment tax
credit should be extended to the portions of vessels paid
for by withdrawals from the ordinary income account of a
capital construction fund. As you know, I here use the
term "capital construction fund" in a technical sense to
refer to accounts authorized in the Merchant Marine Act
of 1970. Deposits from shipping income to these accounts
are deducted in calculating taxable income. Withdrawals
are not subject to tax if used for the construction of
ships. Since the "expense" has already been deducted from
income, the portion of vessels thus acquired is regarded
as having a zero basis for tax calculation purposes ("tax
basis"). This means that neither depreciation deductions
nor investment tax credits (both of which are calculated
from a
can be generated
by this
investment.
Ittax
hasbasis)
been suggested
that there
is some
ambiguity
in the law about the ineligibility of these investments
for the investment tax credit, and that the law should
be changed to make it clear that, contrary to present
practice, they are eligible. This apparently technical
point, which brings us together today, raises as well
broader issues of tax and economic policy.
WS-533
- 2 In assessing the suggested change I believe we must
address not only the important associated legal doctrines
but also the question of how the tax system should be used
to direct resources to ends desired by Congress. Specifically
you will wish to consider the following questions:
1. Is there ambiguity in the present law?
2. Regardless of the present statutory language,
is it desirable %as a matter of consistency
within the structure of tax law to extend the
investment tax credit to withdrawals from the
income accounts of capital construction funds?
3. Regardless of the answers to the first two
questions, would it be desirable on grounds of
economic policy to increase the level of subsidization of U.S. maritime industries?
Is there an ambiguity in the present law?
It will be helpful in considering this question to
review the history of the capital construction fund
legislation.
When, in 1936, Congress enacted the first capital
construction fund program, then called "capital reserve
funds", the Nation faced a serious situation: war
preparations were being made in Europe, and our merchant
marine, then a realistic auxiliary to the Navy, though
second in tonnage only to Great Britain's, had not initiated
a single new ship construction project in American yards
in the past year. To spur the modernization of the merchant
marine to meet the dangers ahead, the construction differential
subsidy, operating differential subsidy, and capital reserve
fund programs were started. Basically, under the capital
reserve fund program the subsidized lines could deposit
their shipping earnings in capital reserve funds; and those
earnings, plus retained earnings on the funds themselves,
would be, in the language of §607(f) of the Merchant Marine
Act of 1936 "exempt from all Federal taxes".
While the statute spoke of exemption of such earnings
from taxes, it was plain from the legislative history that
only "deferral" of taxes was intended. Thus, when the
Internal Revenue Service and the subsidized lines sat down
to resolve the tax implications of the 1936 Act, their
closing agreements, entered into in 1947, stated: "such
[tax-deferred] items are not to be recognized as taxable
income ... and likewise are not to be recognized in the
determination of cost basis or invested capital." As a
result, no depreciation would be allowed with respect to
vessels purchased wholly from tax-deferred funds.
In the 1960's the investment tax credit was introduced
to the Internal Revenue Code. This allowed a credit against
taxes of a certain percentage of the taxpayer's "basis" in
new property. The credit is authorized in section 38 of
the Code and the class of property eligible (called "section
38 property") and the rules for calculating the tax basis
are described in Code sections 46-50. With this innovation,
the subsidized lines commenced litigation to determine
whether the statements in their 1947 closing agreements
that the tax-deferred items were not to be recognized in
the determination of cost basis governed "basis" for investment credit purposes. Although no final decision on the
issue was made by the courts, the Government settled one
such case on a 50 percent basis. However, this settlement
was made by the Justice Department litigators over the
express objections of the Internal Revenue Service and the
Joint Committee on Internal Revenue Taxation. Additionally,
the Internal Revenue Service issued two revenue rulings,
in 1967 and 1968, that to the extent these tax-deferred
earnings were used to purchase ships or to retire purchase
money mortgages on ships there would be no investment credit
basis. Therefore, the settlement has not been followed as
a precedent in other cases.
The issue of the basis to use for the investment credit
diminished in importance when, in the Tax Reform Act of
1969, Congress repealed the Investment Tax Credit. As a
consequence the House Merchant Marine and Fisheries Committee
could note in its Report on the 1970 Merchant Marine Act:
Unsubsidized American-flag operators ... receive no effective
tax or other assistance to help them replace their vessels or
obtain additional vessels, except depreciation that is
available to all industries." So, recognizing that other
- 4nations heavily subsidized their shipping and with the
investment credit no longer available, Congress extended
the capital reserve fund tax benefits to the unsubsidized
lines, renaming the funds "capital construction funds."
In recommending this, the Merchant Marine and Fisheries
Committee of the House stated that: "care will be taken to
permit use of legitimate financing techniques." Additionally
it was stated by the Committee that "amounts held in the
fund are not to be taken into account for purposes of the
accumulated earnings tax ...."
Because of the potential expansion of capital construction
fund benefits to previously unsubsidized lines and to
lessors in leveraged lease transactions, the number of taxpayers thought to be eligible for this preferential treatment
was greatly increased. This would render the closing
agreement technique for clarifying the detailed tax
consequences of fund transactions unworkable as a practical
matter, and the Merchant Marine and Fisheries Committee
realized that the statute itself would have to provide
appropriately restrictive rules. Therefore, without any
criticism of past Treasury interpretations, the Committee
recommended such rules, clearly following past practices
by providing in section 607(g)(2) of the Act that, to the
extent of withdrawals from the ordinary income account of
a capital construction fund "the basis of such vessel,
barge or container shall be reduced by an amount equal to"
the amount so withdrawn.
Moreover, the Committee apparently was not in any
doubt as to whether such reduced basis was to be treated
generally as the purchase price of the vessel. The Committee
repeatedly refers to this reduced basis as "tax cost".
Thus, the Committee says: "to the extent a withdrawal is
made from the ordinary income account, no basis or tax cost
is assigned to the vessel, barge or container."
Despite this apparently unambiguous record, during
consideration in the Congress of the maritime authorization
bill, the Senate Commerce Committee and the managers on the
part of both houses thought that "clarification" of
"Congressional intent" in the 1970 Act was needed. Such
uif
"clarification" would provide that for investment credit
purposes "the basis or cost of such vessel, barge or
container shall not be reduced by the amount of all or
any portion of a qualified withdrawal" despite the language
of the 1970 Act that "the basis of such vessel, barge or
container shall be reduced by an amount equal to" any such
qualified withdrawal. It also should be noted that in the
House Committee report on the 1970 Act it was stated that
if a vessel is purchased by funds withdrawn from the ordinary
income account of a capital construction fund "no ... tax
cost is assigned to the vessel." Given the history as I
have just outlined it, the Treasury's position is that the
present law is abundantly clear. It need not be amended
if the sole purpose of the amendment is to clarify the
Congressional intent. If, however, the amendment is offered
for the express purpose of increasing the subsidy, it should
be evaluated directly for that purpose. Analysis of the
relevant economic factors is set forth below.
Is provision for the credit consistent with the
structure of the tax law?
Assuming the Congress wishes to increase the subsidy
to encourage U.S. shipbuilding beyond the subsidy provided
by the capital construction fund, I would like here to
take up the question of whether the proposed amendment is the
appropriate way to do it.
As a policy matter, it is undesirable in our opinion
to enact the additional subsidy in the manner suggested
by the proposed amendment.
To do so will break the connection between "basis"
and other provisions of the tax law heretofore connected
with basis. It would unnecessarily open the door to a
further rupture of this connection not only in the shipbuilding provisions (the shipbuilders could later urge
that depreciation be allowable despite the absence of
basis) but also in provisions impacting upon other industries
seeking tax subsidies.
The concept of "basis" is central to the Code. Once
a taxpayer has freely disposable money or property, which
becomes freely disposable because he has paid the appropriate
taxes in acquiring it, he gets a tax cost basis in any
property he acquires with it. But if such taxes have not
- 6 been paid, as is the case where they have been "deferred",
as for example in like-kind exchanges under section 1031
of the Code, then, to the extent that the taxpayer's money
or property represents "tax-deferred income", no cost basis
is generated by investing it in new property. That is the
essence of the Treasury's longstanding, nearly 30 year
oppostion to recognizing basis for funds withdrawn from
capital reserve and capital construction funds.
The investment tax credit is calculated on "basis",
that is, tax cost. The legislative history of the 1970 Act
is clear that to the extent a vessel is purchased with tax
deferred withdrawals from capital construction funds, "no
tax cost is assigned" to it. The absence of tax basis is
thus inherent in the initial act of acquisition itself.
Further, it should be noted that the regulations
provide that "items properly included by the taxpayer in
the depreciable basis of the property" are to be the items
constituting basis for investment credit purposes. To
include in basis withdrawals from the income account of
the construction fund for purposes of the investment credit
thus would do violence to that well established rule.
The regulations further provide that property is not
investment credit property "unless a deduction for depreciation ... with respect to such property is allowable to
the taxpayer ... [and that] if a deduction for depreciation
is allowable to the taxpayer only with respect to a part of
such property, then only the proportionate part of the
property with respect to which such deduction is allowable
qualifies as section 38 property".
*
Thus, permitting qualified withdrawals from ordinary
income accounts of capital construction funds to qualify
for the credit would run against not only
traditional
notions of "basis" but
the central concept of "depreciable
property" as well.
One final point should be made on the concept of "basis".
It is axiomatic in the tax law that if the acquisition of
an item of property is not capitalized in tax books of
account, the taxpayer simply has no basis in such property.
Uf
The proposed amendment not only runs afoul of this
fundamental concept, but does so through a tortured path.
First, the assumption must be made that the Merchant Marine
Act contemplated that withdrawals from the ordinary income
account of a capital construction fund amount to a reduction
of basis whereas by that Act no basis was ever allowed.
Second, it must be assumed that even if a reduction in
basis can be found to have occurred, it would be one of
instant operation, i.e., 100 percent immediately upon the
withdrawal from the fund, truly phantom instantaneous
depreciation. Third, notwithstanding such phantom
instantaneous depreciation it would be necessary to conclude
that the instantaneously fully depreciated asset had a
useful life of at least seven years in order to qualify
for the full investment credit.
There is a final policy matter that should be noted.
This has to do with the use of the tax system to subsidize
certain lines of economic activity. If subsidies are
accomplished by "on budget" annual appropriations, the
merits of the subsidy will be subject to specific review,
and all of the advantages of the authorization and appropriation
procedures of the Congress could be obtained.
Nonetheless, it may be that in some cases the tax
system offers advantages of administrative efficiency
which make it the preferred vehicle for subsidy. In such
cases it is important, as I have suggested, that we not
becloud existing well-understood concepts in the Code.
More importantly, I believe that every effort should be
made, when subsidy through the tax system is chosen, to
do it through clearly labelled Internal Revenue Code
provisions. For example, a subsidy could be extended by
a higher rate of investment tax credit for particular assets
or industries. It is not, however, sound tax policy to
extend subsidies by an unnecessarily complex combination
of tax provisions. Not only is the net subsidy effect
difficult to reckon, but, as is the case with H.R. 10551,
it would rupture long established tax principles.
Is additional subsidy desirable?
Preliminarily, we must determine the magnitude of the
Present subsidy provided by the capital construction funds.
This subsidy can be analogized to the following concepts
(given constant tax rates) even if taxes are eventually paid
°n the amounts that have been deposited into the capital
construction funds.
Itp
1.
Full and permanent tax exemption on the earnings
of the fund and on the earnings of qualified
vessels purchased by withdrawals from the fund.
2. Allowance of 100 percent expensing of the cost of
a qualified vessel in place of the current capital
construction fund provisions.
The tax exemption case can be demonstrated algebraically,
but it may also be presented via an illustrative example.
Consider a ship-owner who is subject to the maximum
corporate tax of 48 percent and who has $100,000 of shipping
earnings (after expenses) at the end of a period. Compare
two choices: he can pay taxes of $48,000 and use the
remaining $52,000 to purchase a ship or other assets or
he can put the $100,000 in the capital construction fund,
paying no taxes and allow earnings to accumulate in the
fund for future ship purchases.
In either case, the effective cost of the investment
for the ship-owner is $52,000. With the first choice, the
ship-owner has $52,000 of income producing assets; with
the second choice the ship-owner has $100,000 of such assets.
Through the mechanism of the capital construction fund the
Government has effectively put up $48,000, and the money
that the investor has at risk is $52,000. This is the
basis of the revenue loss due to the use of the capital
construction fund.
Assume for purposes of illustration that the investor
can earn 15 percent (net of economic depreciation and other
costs) before taxes on his investments. If tax on these
earnings can be deferred, then, at the end of five years
the investor will have just over $200,000 in the account.
Thus the $100,000 will have doubled to over $200,000 in
the five year period.
Even if the tax must now be paid on the entire $200,000,
(as would occur if a ship financed with these taxes were
immediately sold) after the 48 percent tax is paid
on both the initial amount in the fund as well as on the
earnings, the investment after tax will still be worth over
$104,000. When compared to the original amount at risk,
namely the $52,000 which he put up, we find that the investment still has doubled. In fact calculation would show the
rate of return to be exactly 15 percent.
In actual practice, people will not ordinarily buy
ships in order to sell them immediately. However, because
the resulting asset has no allowable depreciation deduction
(and, therefore, higher taxes assuming no further use of
the capital construction fund) it will be worth the same
$104,000 based on the available after-tax cash throw-off
to our ship-owner.
To complete the example, compare the ship-owner's
situation using the capital construction fund with his
situation if he had paid the taxes initially but had been
allowed to exempt from tax the earnings from investing the
after-tax $52,000. In this case, at 15 percent, his investment would grow to $104,000 in five years. He is in exactly
the same position as he was under the tax treatment provided
by the capital construction fund.
The complex analysis required to demonstrate the economic
effect of using the capital construction fund illustrates
the danger of providing that kind of subsidy. It must be
obvious that granting full tax exemption to an activity
amounts to a very significant level of subsidy. Were we
to add to this subsidy a further amount -- e.g., by allowing
investments out of the ordinary income portion of capital
construction funds to receive the investment tax credit,
we would put ship-owners in the position where they would
pay a negative tax, i.e., they would receive refunds beyond
tax exemption. The result of these and additional subsidies
of this kind will be to enlarge the share of the domestic
and world transportation markets served by U.S. vessels, or
to drive up capital and operating costs.
Let me put the matter another way. Suppose we were to
ask the question: What rate of investment tax credit would
be required if we wished it to replace entirely the tax
advantage conferred by the mechanism of the capital construction
fund, all other tax provisions remaining the same? Since
we have found that the capital construction fund provisions
amount to exemption of investment income in shipping, we can
restate this question as follows: What investment tax credit
is equivalent to exemption from tax of earnings on assets
in the ADR class with an 18-year guideline life? The answer
ls
: a 17 percent tax credit. (Details are provided in an
annex.) This is 7 percent higher than the tax credit available
to qualified investment generally. One wonders whether a
case can be made for an even greater subsidy.
While the desirability of subsidy to particular lines
of enterprise is not per se a matter of tax policy, we can
offer some evidence on the general health of the shipbuilding
industry in the United States.
Analysis of recent data tells the following story
concerning employment, production, and order backlogs for
U.S. ship construction:
° As of the beginning of the year, the backlog of
commercial ship construction contracts with U.S.
yards for unfinished work totaled 4.2 billion — a
peacetime high exceeded only during the crash
building program of World Wars I and II.
° The volume of projected construction of new
ships under the capital construction fund
agreements rose from about $3 billion at year-end
fiscal 1974 to $4.9 billion as of year-end fiscal
1975.
° Private shipyard employment had turned around
the trend that had been experienced through
1970 and increased every year from 1971 until
the present so that it is now close to the
post-World War II peak.
The Administration has not seen contrary evidence in support
of further subsidy at this time.
In this connection, I would remind you again of the
general position of the Treasury regarding tax incentives
for investment in selected industries. Since specialized
tax preferences for particular industries increase investment
in such industries at the expense of capital formation
elsewhere in the economy, careful evaluation is required
to determine whether the free market allocations should be
supplanted. Thus, the Treasury in its report on the Merchant
Marine Act of 1970 (P.L. 91-469) opposed the extension of
the tax deferral privileges of the capital construction
funds to profits derived from shipping in the noncontiguous
domestic trade, trade on the Great Lakes and from fishing
operations.
- 11 -
b>7>
Revenue Estimates
The growth in the use of capital construction funds
in the last year has been large. The estimated deposit
inflow in fiscal year 1975 was on the order of $235 million,
only 23 percent less than the accumulated amount of deposits
which had been made up until that time. Since about 85
percent of these deposits represent income on which taxes
are deferred, these deposits resulted in a revenue loss to
the Treasury on the order of $88 million in fiscal 1975.
The unexpected volume of use of the capital construction
funds meant that the revenue loss was over twice as high
as had been anticipated last January for fiscal 1975.
The volume of withdrawals from capital construction
funds for the purposes of purchasing new vessels, either
directly or indirectly through the repayment of indebtedness,
amounted to $137 million in fiscal 1975. This also was
high by historical standards and, in fact, exceeded the
total volume of withdrawals that had previously been made
since the capital construction funds were established by
the 1970 amendments. Since some withdrawals were of
nontax deferred funds, the current rate of withdrawals
implies a $12 million revenue loss if the 10 percent
investment tax credit is made available for vessels
financed out of capital construction funds.
The very rapid growth in the figures mentioned above
is the result of the relative newness of the program. This
revenue loss may be expected to grow rapidly over the next
5 to 10 years. This will occur because the tax loss from
deposits into the capital construction funds will exceed
the taxes generated by ships financed by withdrawals from
these funds as long as the program is growing. Ultimately,
some smaller steady level of revenue loss will be realized
when the program stabilizes. Obviously projections of these
revenue effects are difficult to make. However, on the
basis of current projected use of capital construction
funds, which average about $500 million per year, annual
revenue losses would reach $190 million and then decline
to somewhat less than $100 million. The investment tax
credit applied to the withdrawals from the income account
would cost an additional $40 million annually.
Li-t
A larger revenue loss is suggested from the projections
of shipbuilding activity contained in the Annual Report,
Shipbuilders Council of America, 1974 (March 1975). This
report projects ship construction for the merchant fleet
over the coming 5 years between $1.44 and $2.0 billion
annually. If we take the average of these figures and
assume that a half of the result is financed out of capital
construction funds, continuing to assume that 85 percent
of these funds represent accumulations of income and that
an average marginal tax rate of .45 applies, this represents
a peak annual revenue cost of about $330 million declining
to about $175 million over time. The 10 percent tax credit
applied to this level of investment would result in an
additional revenue loss of approximately $75 million annually.
These tax subsidies to the maritime industry are in
addition to sizeable subsidies directly furnished through
expenditure programs authorized by the Merchant Marine Act.
Presently, operating-differential and construction-differential
subsidy programs together total $600 million annually. Also,
under Title XI of that Act, the Maritime Administration
guarantees commercially placed mortgage loans. The total
guarantees outstanding at the beginning of fiscal 1975 was
$3.8 billion, with additional commitments of $2.9 billion pending.
Concluding Remarks
Large sums are involved and they suggest the magnitude
of the intervention we are making in the allocation of
resources in our Nation's economy. It is imperative that
we make these policy decisions on the basis of the best
available information and in accordance with principles
that will
economic efficiency and preserve the
Thank encourage
you very much.
integrity of our income tax system.
ANNEX TO STATEMENT BY CHARLES M. WALKER
u
r
Quantifying Tax Preferences: An Exposition with
Particular Reference to Tax Provisions of the
Merchant Marine Act of 1970
The Federal income tax includes in its base the
income which is generated by capital and which flows
to the owners of that capital. Since ownership of
capital is volitional, the reward for accumulating
and holding capital which is of interest to investors
is the reward net of taxes: that which he "nets"
from undertaking the risks of ownership, and foregoing
consumption is income after tax. On the other side
of the investment process are the markets in which
the services of capital embodied in products and
services are sold. The prices which must be paid by
those who would purchase these products and services
include charges which must cover all the costs of
inducing investors to provide the capital. These
charges, which are frequently called "user costs of
capital," or may simply be referred to as "gross
return to capital," include two basic elements: a
charge to cover depreciation, or maintenance of the
productive capacity of the capital if it is the kind
which wears out or becomes obsolete; and a charge for
- 2 the before tax income to investors who advanced the
funds for acquiring the capital. This latter element
is subdividable into payments of interest to lenders,
"profits" to equity suppliers, and, of course, the
income tax share. Clearly, then, the effect of an
income tax is to drive a wedge between the return to
capital suppliers, and the price which must be paid
in markets to elicit their services, for depreciation
is a cost which must be covered in any event whatever
the rate of return that is necessary or the additional
burden imposed by tax.
The following example may help to clarify the
concepts which underlie the measurement of user cost
of, or gross return to, capital. The elements are
presented in the accompanying table. The first column
may be viewed as a schedule of the annual cost of
maintaining the productive, and earning, capacity of
a particular item of capital equipment. Although
the entries have been rounded and adjusted to equal
$10,000, the pattern of depreciation,which is also
sometimes called "economic depreciation," is characteristic of a broad range of capital goods: amounts
Elements of User Cost of Capital
Depreciation :
replacement :
Income
:
]
50 Percent
income tax 1/
:
:
User cost
(Gross income of capital)
: With 50 percent
Without
income tax
taxes
$1,820
$785
$785
$2 ,605
$3,,390
1,635
635
635
2 ,270
2,,905
1,455
500
500
1 r955
2t,455
1,270
385
385
1 ,655
2 ,040
1,090
280
280
1 ,370
1 ,650
910
195
195
1 ,105
1 ,300
725
130
130
855
985
545
70
70
615
685
365
30
30
395
425
185
10
10
195
205
TVDtal $10,000
$3,020
$3,020
$13,020
$16 ,040
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
December 14, 1975
Assumes that depreciation allowed for tax purposes is same as shown in column (1).
^
K^
^
u
in the early years of the asset's economic life are
larger than in subsequent years.
The meaning of these
entries may be best described as follows:
if, in
each year subsequent to the acquisition of the asset
in question, the owner were to reinvest the amount
indicated, he would maintain the earning capacity of
his $10,000 investment.
The total of the column, which is $10,000, may
then be viewed as the depreciation cost of maintaining
a stock of 10 of the assets in question, each purchased
at the beginning of 10 prior years:
if a new $10,000
asset is purchased each year, and a worthless one
retired, the total stock will continue to produce the
same income stream for its owners.
Since depreciation
is a reduction in the remaining value of the asset,
each of these 10 assets in the stock has a different
value:
the one added to the stock this year (row #1)
is worth $8,180 at the end of the year ($10,000-$l,820);
the one added the year before (row #2) is worth $6,545
($8,180-$1,635) ; and so on.
The total value of this
stock adds up to $30,200, and it is the earning
capacity of this stock $30,200 which is maintained by
an annual replacement expenditure of $10,000.
- 4 The second column was constructed as a schedule
of the income which would have to flow to the owners
of the capital to yield them a net return sufficiently
high to induce them to undertake the acquisition and
maintenance of the asset through its lifetime. 1/ Again,
the total of the column might be viewed as the net
income thrown-off by the stock worth $30,200. Since
the total income is $3,020, the rate of return earned
by the owners is 10 percent.
In the absence of taxes, as is shown in the third
column, gross income to capital (after deducting from
business receipts such expenses as wages and salaries,
materials, etc.) must be $13,020. That is, if purchasers
of the product resulting from the use of this stock
of capital wish to continue to be able to buy the
quantity produced, they will have to pay at least
$13,020 in addition to labor and material cost of the
products, else capital owners will cease replacing
the capital and output capacity will shrink.
17 In order to achieve maximum simplicity in
presentation, the income entries were rounded
and adjusted with the result that the individual entries no longer represent equal rates
of return on the capital remaining embodied in
the asset each year, though they would be so in
principle.
- 5 Alternatively, one might view this stock of
capital as leaseable to others who might wish to use
it in their own business, in which case the owners
become lessors and the users lessees. In this event,
the lessees would have to pay an annual rental charge
of $13,020, hence the term "user cost" of capital.
They would have to pay no more, for if the rental
charge were higher, other lessors willing to accept
a 10 percent return would rush to close a deal for
$13,020; and if they were only willing to pay less
than $13,020, lessors would cease to acquire these
assets, and the supply of such capital would diminish
to the point that lessees would be willing to pay
rentals sufficient to cover the cost of obtaining
the services of the shrunken stocks of this capital.
If a 50 percent income tax is added, and for
simplicity of exposition we assume that depreciation
allowed under the tax laws is the same as indicated
in the first column, then the tax each year will be
exactly equal to the amounts in the second column,
and the gross return to capital will be increased
by a like amount. It should be noted that while,
in the presence of taxation, government and the capital
- 6 owners appear to "share" profit, the appearance is
misleading. As the example has been constructed,
under a 50 percent income tax the gross income
attributable to the stock of capital is $16,040,
and if we subtract the depreciation/replacement cost
of $10,000, "income before tax" is $6,040, a 20 percent return on the $30,200 stock of capital, half
of which is taken by government, half of which remains
for the capital owners. But, this is precisely the
rate of return the capital owners earned in the
absence of taxation. The effect of adding a tax, or
increasing the severity of tax, is to increase the
user cost of the capital the income from which has
been subjected to (additional) tax. Conversely, a
reduction in tax reduces the user cost of the affected
capital.
How User Costs Adjust
Of course, the process by which a reduction in
prices of capital goods, or an equivalent reduction
due to a change in the income taxation of capital,
reduces user costs consumes time. The instantaneous
effect of, say, an income tax reduction, given a
137
preexisting level of user costs, is to increase the
rate of return enjoyed by present owners of the benefitted
capital; use of the capital initially appears to be
more profitable.
This being so, more use of the capital
will be attempted.
But since the use of capital is in
the production of goods and services, more use of
capital can occur only if the prices of the ultimate
goods and services produced with this capital are
reduced.
As this occurs, the user costs of capital
will be depressed, and they will continue to fall until
the rates of return they provide owners of the capital
are restored to normal.
How long this process will take cannot be estimated
with certainty since it depends on the magnitude of the
ultimate change in user cost and the time required to
build-up capital stocks, which in turn depends on the
characteristics of the capital goods in question.
But
econometric estimates which have been made of the capital
stock adjustment process with respect to changes in
capital cost in the neighborhood of 10 to 15 percent
suggest that the time period for restoring normal rates
of return cannot exceed 5 years and mostly takes place
within 3.
- 8Application of the User Cost Concept to
Analysis of Tax Preferences
The implicit assumption of the foregoing example
is that capital owners will not hold stocks of
productive assets unless they may expect to earn a
stipulated rate of return, net of tax. Then, as the
example demonstrated, the effects of varying income
tax burdens are directly translatable into changes in
user cost. Adding a 50 percent income tax resulted
in a rise in the user cost of the illustrated stock
of capital from $13,020 to $16,040, an increase of
2 3.2 percent. This is exactly the result which would
have occurred if the prices of the capital goods
comprising the stock had risen by 2 3.2 percent. If
each unit (vintage) of capital had increased in cost
to $12,320, each entry in the depreciation/replacement
cost column would increase by 2 3.2 percent, and the
total value of a stock of these assets as previously
described would be $37,200. Correspondingly, the
10 percent rates of return in the second column would
be raised by 23.2 percent, and the total,for the entire
stock of capital would be $3,720, and the total user
cost would be $16,040 ($12,320 annual depreciation/
replacement cost plus $3,720 return to capital owners).
Consequently, the effect of adding a 50 percent income
tax in this example might be said to be equivalent to
an increase of 23.2 percent in the "cost of capital
goods", absent the increase in tax.
Conversely, if we begin with the situation
illustrated in the example including the 50 percent
tax, removal of the tax would reduce user cost by
$3,020, a reduction of 18.83 (18.8279, to 4 places)
percent. We could describe this reduction in tax as
equivalent to an 18.83 percent reduction in the cost
of capital goods, the tax change not being made. If
the cost of a vintage of capital were $8,117.20 rather
than $10,000, the value of the capital stock would be
$24,514, the charge for income to capital owners would
be $2,451.40, the 50 percent income tax would then
yield $2,451.40, and the total user charge would be
$13,020 ($8,117.20 plus $2,451.40 plus $2,451.40), the
same result as when capital goods cost $10,000 and
there is no income tax.
Since it is observable that capital is mobile and
flows to uses in which rates of return are highest, the
effects of changes in taxation on the magnitude of user
- 10 cost are useful measures by which to distinguish
alternative tax proposals.
Limitations
What limitations should be observed in using the
implied change in user cost of capital as a quantification of existing or proposed changes in the tax
treatment of income from capital?
The answer must be
presented in two parts:
a.
If the tax change, or preference, is restricted
to a particular industry, as for example the tax
exemption of income deposited in capital construction
funds along with the income earned by all assets in
the funds which is available only to owners of eligible
ships, or the capital gains treatment afforded income
from timber investment, etc., there is no limitation
in application of the user cost of capital concept to
evaluation of the tax preference.
Capital is mobile; if the tax laws are modified
to reduce the tax burden on income from private investment in, say, shipping, the instantaneous effect, as
noted above, is to increase rates of return to ship
owners, and this not only will cause existing ship
owners to take measures to expand
- 11 their fleets, but it will attract others into the
industry until rates of return in shipping are restored
to parity with the rates of return in the rest of
the private sector not benefitting from the tax preference.
After the adjustment proces
@FedFRASER