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w r
FOR IMMEDIATE RELEASE
February 3, 1976
DAVID F. BRADFORD
APPOINTED DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
Treasury Secretary William E. Simon today announced
the appointment of Dr. David F. Bradford to the position
of Assistant Secretary for Tax Policy.
In this position, Dr. Bradford is the chief economic
advisor to the Treasury Assistant Secretary for Tax Policy
and also is head of the Treasury's Office of Tax Analysis.
Dr. Bradford assumed the position on October 20, 1975; he
succeeds George S. Tolley.
To fill the position with the Treasury Department,
Dr. Bradford has taken leave as Professor of Economics and
Public Affairs at Princeton University, where he was
involved in research centering on public finance and urban
problems.
Dr. Bradford is a 1960 Phi Beta Kappa graduate of
Amherst College (B.A., economics) and he holds advanced
degrees from Harvard University (M.S., applied mathematics,
1962) and Stanford University (Ph.D., economics, 1966).
In 1963-64 he attended Churchill College of Cambridge
University, England.
In 1965-66, Dr. Bradford served as a consultant to the
Assistant Secretary of Defense. For the academic year
1965-66, he was an acting Instructor in Economics and a
Research Associate at Stanford University.
Dr. Bradford joined the Princeton University faculty
in 1966 as an Assistant Professor of Economics, advancing to
Associate Professor of Economics and Public Affairs (1971)
and Professor of Economics and Public Affairs (1975) -- a
joint appointment with the Woodrow Wilson School of Public
and International Affairs. During 1975, he served as
Associate Dean of the Woodrow Wilson School.
WS-612
(over)
- 2-
Dr. Bradford is a member of the American Economic
Association and the Econometric Society. He has served
as a consultant to the National Advisory Commission on
Selective Service, the U.S. Bureau of the Budget, the
Office of Economic Opportunity, the National Science
Foundation and the National Aeronautics and Space Agency.
Dr. Bradford is published widely in the areas of
public finance and urban economics.
Dr. Bradford was born January 8, 1939, in Cambridge,
Massachusetts, is married to the former Gunthild Klarchen
Huober and resides in Washington, D.C. with his wife and
two children.
oOo
The Department
dm
of theTREASURY
TELEPHONE 964-2041
WASHINGTON, D.C. 20220
3
February 2, 1976
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 3.1billion of 13-week Treasury bills and for $3.8 billion
of 26-week Treasury bills, both series to be issued on February 5, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing M a Y 6>
Price
High
Low
Average
98.799
98.778
98.784
26-week bills
maturing August 5, 1976
1976
Discount
Rate
4.751%
4.834%
4.811%
Investment
Rate 1/
4.89%
4.98%
4.95%
Price
97.457
97.430
97.439
Discount
Rate
5.030%
5.084%
5.066%
Investment
Rate 1/
5.25%
5.30%
5.29%
Tenders at the low price for the 13-week bills were allotted 98%
Tenders at the low price for the 26-week bills were allotted 59%
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
75,185,000
Boston
$
New York
3, 541,835,000
32,710,000
Philadelphia
43,395,000
Cleveland
21,620,000
Richmond
47,450,000
Atlanta
343,320,000
Chicago
54,970,000
St. Louis
37,200,000
Minneapolis
37,075,000
Kansas City
43,260,000
Dallas
San Francisco_ 220,215,000
TOTAL^ 4 ' 4 9 8 ' 2 3 5 ' 0 0 0
Accepted
$
74,685,000
2,347,435,000
31,710,000
43,395,000
21,620,000
46,450,000
257,620,000
34,970,000
32,200,000
27,800,000
39,240,000
145,015,000
Received
$
34,100,000
5,147,380,000
38,490,000
212,385,000
32,530,000
57,390,000
429,295,000
40,885,000
40,000,000
22,145,000
29,790,000
469,985,000
$3,102,140,000 a/$6,554,375,000
Accepted
33,100,000
2,893,970,000
4,490,000
172,385,000
16,030,000
43,790,000
266,885,000
14,385,000
20,950,000
20,145,000
25,970,000
287,935,000
$3,800,035,000 W
/Includes $ 353,295,000 noncompetitive tenders from the public.
b/ Includes $155,300,000 noncompetitive tenders from the public.
17 Equivalent coupon-issue yield.
WS-621
FOR IMMEDIATE RELEASE
STATEMENT BY THE HONORABLE WILLIAM M. GOLDSTEIN
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
U.S. DEPARTMENT OF TREASURY
BEFORE THE
NEW YORK STATE BAR ASSOCIATON
NEW YORK CITY,
JANUARY 29, 1976
Two hundred years ago England imposed on the American
Colonies a tax on newspapers, tea and liquor, and this was a
sufficient irritant to provoke a revolution. I wonder how
much more violent that revolution would have been if England
had imposed on the Colonies the Internal Revenue Code of
1954, as amended?
This is not idle speculation. Former Treasury Secretary
Barr first observed almost 10 years ago, and Secretary Simon
observed only last month, that we may be faced with an
incipient taxpayers' revolt. While I would not push the
parallel too far, I think it is clear that sufficiently
serious criticisms of the Internal Revenue Code have been
voiced by a sufficiently broad cross-section of the taxpaying
population for it to be appropriate to consider whether the
time is ripe for a "revolution1' in the field of tax law.
Should we cease our frantic efforts to patch up the Code
and, instead, step back and attempt to restructure the
system entirely? This restructuring is what I have in mind
when I speak of "real" tax reform. This afternoon I would
like to discuss with you whether real tax reform is needed,
some of the options for real tax reform, the mechanics of
achieving such reform and the role of the Bar in the consideration
of these issues.
Is real tax reform needed?
To find the answer we should consider three additional
inter-related questions.
WS-630
2 What are the ultimate goals of our system of
taxation?
Is the system attaining these goals?
And, most importantly, are the failures of the
system attributable to causes which can be avoided
through real tax reform?
Commentators generally have suggested three goals
toward which a system of taxation should strive: simplicity,
equity and neutrality. Let me briefly explain these concepts
as I understand them:
Simplicity The system should be as simple as possible
and, in any event, the level of complexity of each of its
provisions should not exceed the comprehension of the group
of taxpayers directly affected by any such provision. It is
thus not inappropriate for corporate reorganization provisions
to be more complex than provisions dealing with standard
deductions for individuals.
Equity The tax burden should be distributed on the
basis of a rational theoretical framework within which
similarly situated taxpayers bear equal tax burdens and
principles of progressivity are uniformly implemented.
Neutrality The classic explanation of this concept is
that tax laws should not be utilized by Congress to influence
the business and personal decisions of taxpayers, nor should
such influence result inadvertently. Put another way,
individuals and businesses should conduct their affairs
without regard to taxes and the tax law should impact upon
the resultant transactions as it finds them. In the real
world, however, it is clear that no tax system which imposes
taxes at other than very low rates can be completely neutral.
Probably the most that can be hoped for is to limit the
utilization of the tax system to influence nontax decisions
to situations involving very significant national policy and
to avoid inadvertent influence of this type. I will refer
to this goal as limited neutrality.
c
- 3I am certain we can all agree that our tax system
should strive to achieve simplicity and equity. With respect
to the third goal, limited neutrality, we can also agree
that the system should not unintentionally influence decisions.
The extent to which the tax system should be utilized to
forward national policy is open to debate, however; it
should be clear that the system should not be utilized to
foster so many divergent national policies that incentives
become seriously distorted. For example, the substantial
tax benefits accorded to certain low-income housing projects
led directly to many bad projects. In short, the question
"what are the goals of our system of taxation" is not difficult
to answer.
The second question, "is our present system achieving
these goals" is also easily answered. The answer is, "no".
The Code and Regulations are unbelievably lengthy, complicated
and confusing; what's more, they are growing at a prodigious
rate. In many cases the provisions are actually inequitable;
even worse, and more important, the average individual
taxpayer perceives the system as so inequitable that voluntary
compliance may be in jeopardy. Finally, the tax laws have
been utilized to advance such a wide range of divergent
national policies that the incentives sought to be provided
are distorted and frequently do not operate as intended.
The third question is much more difficult to answer.
Are the failures of our tax system attributable to causes
which can be avoided through real tax reform?
I can identify four causes of such failures.
First, the Code provisions are sometimes not drafted in
the simplest and shortest form; the alternative tax on
capital gains comes to mind as an example. Moreover, such
provisions occasionally produce unforeseen inequities or
inadvertent influences. Finally, new provisions sometimes
make old provisions irrelevant without physically removing
them from the Code. In general, however, the Code is very
well drafted and the incidence of unforeseen inequities and
inadvertent influence is not high. Although this type of
problem should not be difficult to remedy once identified;
it is very difficult to develop momemtum for technical
amendment acts as indicated by the tortured path of the socalled "Deadwood Bill" through Congress.
- 4Second, the goals of our tax system frequently conflict
with one another. Everyone agrees that simplicity is a
desirable goal, but simplicity is almost always abandoned in
the face of the other goals. The concept of recapture of
depreciation on the sale of an asset is not complicated.
Sections 1245 and 1250 are, however, very complicated and
take up approximately 10 pages of the Code; this is because
the goals of equity and national policy have prevailed over
simplicity. Section 341(e), a monument to the triumph of
intended equity over simplicity, may soon be overshadowed in
complexity if the LAL provisions in the Tax Reform Act of
1975 are enacted. The recent history of tax exemption of
the interest on municipal bonds illustrates the dominance of
changing national policies over both equity and simplicity.
Congress has desired to support the financing of these
governmental entities even at the cost of permitting very
rich people to pay no tax - but only where such financing is
for "proper" purposes -but pollution control may be an
important, if not wholly proper, purpose - but the whole
municipal bond market may be adversely affected by too much
pollution control financing - and so on.
The question of what priorities we should assign to our
tax goals deserves careful attention. Are we willing to say
that, in certain cases, we will endure inequity or ignore
national policy in order to achieve a simple Code? Are we
willing to say that in some cases national policy should be
sacrificed to equity? I would hope so, in both cases, since
the national policy in question can almost always be implemented
outside of the tax Code.
Third, different parties have different views as to how
each of the tax goals should be achieved, and even the views
of the same party may differ over time. A Code provision
often represents a less than perfect compromise of the views
of different parties. Also, over time, different parties
will be successful in their efforts to influence legislation
so that provisions will reflect contrasting views of how a
particular goal should be achieved. For example, the investment
tax credit provisions are designed to support a very significant
national policy -- thd encouragement of capital formation by
industry -- and are theoretically consistent with the goal
of limited neutrality. As drafted, however, the provisions
- 5reflect a series of less than successful compromises and
changes of view on how that policy should be implemented.
Should the credit be available without regard to where
property is used or only if property is used within the
United States? Should the credit be available to all taxpayers,
or only to corporate taxpayers, or only to certain types of
corporate taxpayers? What rate of credit should be available
and how long should a taxpayer be required to retain the
property in order to receive various levels of credit? The
resulting provisions clearly do not satisfy the goal of
limited neutrality and are complex and perhaps inequitable
as well. It may be that this cause of failure is a natural
by-product of our democratic process and that no system of
taxation can completely avoid these influences.
The fourth cause of failure in our system of taxation
is an inherent conflict within the system itself. Our
system is premised on the so-called "accretion" concept of
income which means that the tax is based on the sum of
consumption and change in net worth during the accounting
period. Taxes levied on this base are not neutral with
respect to the decision of whether to save or consume; the
system discourages savings and encourages current consumption.
The yield which an individual can receive by putting money
in the bank is reduced by the income tax, thus diminishing
the individual's incentive to forego current consumption.
Many of the most complicated Code provisions are designed to
overcome this anti-savings bias. For example, the deductions
for contributions to qualified pension plans, special treatment
of capital gains, investment tax credit, and depreciation in
excess of "economic depreciation" all have the same practical
effect as exempting or deferring the tax upon the income
from the investments involved, and they thereby make the tax
system more neutral with respect to savings. So long as we
retain both a tax system based on the accretion concept and
the policy of encouraging capital formation, we may have to
tolerate the complexity, inequity and lack of limited neutrality
occasioned by provisions designed to overcome this antisavings bias.
This examination indicates that the answer to the third
of our initial questions is far from clear. Perhaps the
causes of failure in our current system of taxation would,
- 6to a considerable degree, be inherent in any system we could
devise and we will just have to live with our system's
shortcomings. The implications of this conclusion would be
profound, and rather sad; the question deserves very careful
consideration.
I would like to turn now to a description of some of
the options available if real tax reform is pursued.
The Federal Government derives its tax revenues from
five major sources: individual income tax, corporate income
tax, payroll and self-employment taxes, estate and gift
taxes, and excise taxes. Which of these should be brought
within the purview of real tax reform?
Approximately two-thirds of tax revenues are derived
from the income tax, corporate and individual. As Secretary
Simon indicated in Congressional testimony last year, the
integration of individual and corporate income taxes is
extremely important in order to encourage capital formation
by avoiding the double taxation of the income from corporate
capital. In view of this inter-relationship, I believe that
these two taxes certainly should be included in any real tax
reform proposal.
Approximately 30 percent of Federal tax revenues are
derived from payroll taxes and the tax on self-employment
income. These taxes and the benefits they provide, of
course, have a very significant social and economic impact.
For example, although current payroll taxes fall far short
of adequately funding social security retirement benefits,
workers tend to regard future social security benefits as a
substitute for private retirement savings and they reduce
their own retirement savings accordingly. Recent estimates
by Professor Martin Feldstein of Harvard suggest that the
rate of private savings and hence, in the long run, our
nation's capital stock is reduced by 30 to 40 percent by
this single phenomenon.
I believe that the decision whether to include payroll
and self-employment taxes in real tax reform depends largely
on the direction in which these taxes are heading. If, as
the present Administration believes, the programs funded by
- 7these and perhaps new taxes are regarded as compulsory
insurance and such taxes can be assessed on a basis designed
to assure full funding, a good case can be made for excluding
them from real tax reform. That is, the "trust fund" concept
would be a fact rather than a theory. If, on the other
hand, we continue the past practice of not adequately funding
these programs, then the payroll and self-employment taxes
may have to be regarded as just another revenue source which
should be included in the reform effort.
Approximately two percent of Federal tax revenue is
derived from estate and gift taxes. The major function of
these taxes is to redistribute accumulated wealth as it
passes from one generation to the next. Since a basic
change in the personal income tax is likely to have certain
implications for the accumulation of family wealth, it would
probably be appropriate to include estate and gift taxation
within the purview of real tax reform.
Excise taxes account for approximately 7 percent of
Federal tax revenue. These taxes probably can be excluded
from reform since the interaction of excise and income taxes
is not substantial.
Having considered the types of taxes to be included in
real tax reform, let us turn to what is generally regarded
as the most significant, and certainly the most controversial,
aspect of any such reform program - namely, determining the
base of the personal income tax . Indeed, this type of tax
reform is frequently referred to as base broadening tax
reform. Broadening the base of the tax will, in general,
contribute to simplicity by eliminating Code provisions
which exclude certain income and allow most of the deductions
and credits. It will also contribute to equity by treating
most taxpayers generally the same. Finally, it will contribute
to neutrality by removing many of the special incentives
from the law and, most significantly, by permitting sharply
reduced tax rates.
In discussing base broadening, the first class of items
to be considered consists of items presently excluded from
income. Some of these are quite easy to identify while
others may appear to the tax practitioner as merely a gleam
/ /
- 8 •
in some economist's eye. Among the more obvious exclusions
provided for by the Code are one-half of long term capital
gams, gains on property held until death, social security
benefits and interest on municipal bonds. Moving from the
obvious towards the exotic, a second grouping might include
tellowships and scholarships received; welfare payments of
all types, including food stamps, school meals, medicaid
and, medicare, unemployment compensation, and employer
contributions to pension and profit sharing plans. A third
grouping might include fringe benefits associated with
employment such as group life insurance, cafeterias, parking,
travel, business lunches and military cash and kind allowances.
Next, we must consider disability compensation, workmen's
compensation, veterans' compensation, gifts and bequests and
attributed earnings on pension funds and the investment
element of life insurance policies. Finally, we come to the
economists' favorite -- the fair rental value of owneroccupied dwellings.
Turning to the deduction side, any serious study must
commence with an evaluation of personal exemptions and the
standard deduction. It would then go on to consider such
items as state and local taxes, medical expenses, medical
insurance premiums, interest paid on mortgage and personal
loans, expenses for child care, uniforms and tools, charitable
contributions of money and property, alimony, and, in general,
every type of cost or expense for which a deduction is
presently allowed under the Code. Finally, the credits
allowed on personal income tax returns would have to be
considered; this would include not only such items as the
retirement income credit but also such pending "publicpolicy" proposals as the credits for garden tools and home
insulation.
I have not produced the foregoing list to bore you,
even though I know that you have reviewed such lists in'the
past. The purpose of the listing is to demonstrate the vast
complexity of any study of real tax reform. In addition, it
should be clear that the result of any such study would
depend upon the totality of the items considered and the
treatment accorded thereto, rather than the treatment of any
single item.
Real tax reform would also have to give serious consideration
to many tax issues faced by business. Even if the integration
- 9of the personal and corporate income tax is assumed, the
income of corporations would still have to be measured. In
addition, business and investment income other than corporate
would have to be measured and appropriately taxed. Thus,
such items as permissible methods of accounting, depreciation,
investment credit, deferral of foreign source income, depletion,
and the special treatment of such industries as timber would
all come under review.
In my view, consideration of each of the above items
should be undertaken with a strong bias in favor of simplicity
and equity and a strong motivation to achieve limited neutrality.
Even where significant public policies are involved, every
effort should be made to implement such policies outside of
the tax system.
As if the task already described were not sufficiently
onerous, we really should return to one of the problems I
noted earlier - the fact that even a broadly based income
tax would perpetuate the present anti-savings bias of our
system of taxation. Since, as noted above, many of the more
complex and inequitable provisions of the Code are presently
designed to counteract this bias, broadening the base of an
accretion-type income tax by eliminating such countermeasures
would serve to exaggerate such bias rather than ameliorate
it. Hence, a major decision in proceeding with real tax
reform is whether an effort should simultaneously be made to
remove the anti-savings bias of an accretion-type tax.
Let me offer a brief example to illustrate what we mean
by the anti-savings bias. Since money can be used to make
more money, one dollar today is worth more than one dollar a
year from today. Speaking very generally, prevailing money
market rates at any given time reflect the discount factor
one must use to determine the present value of money to be
received in the future. For example, if the highest grade
corporate bonds are yielding 9 percent, that indicates that
$109 a year from today is worth $100 today. To state this
in a slightly different way, the decision of whether to
spend $100 today or to invest it at 9 percent and spend $109
a year from today is neutral. Our present system of taxation
does not, however, give a taxpayer that choice. We tax both
the wages which produced the $100 of capital as well as the
earnings on that capital. Assuming a 50 percent incremental
- 10 bracket, the $100 invested at 9 percent will produce, after
taxes, $104.50 a year from today. Since the present value of
$104.50 in one year is less than $100, there is a strong
incentive to consume the $100 currently; i.e., there is an
anti-savings bias.
Expanding the tax base would increase the impact of
that bias since there would certainly be fewer investments
one could make, directly or indirectly, on which the income
would be either untaxed or taxed at reduced rates. Integration
of corporate taxes would help alleviate the present bias,
but it might still be desirable to provide incentives to
encourage savings, thus reintroducing some complexity and
inequity.
The suggestion has been made that the anti-savings bias
can be eliminated by abandoning accretion as the basic
concept of ascertaining income, and substituting "consumption".
Speaking very generally the consumption concept involves a
cash flow calculation of how much an individual has consumed
during the accounting period. Put another way, consumption
income is accretion income with increases in savings deducted
(or decreases in savings added). For example, if an individual
earned $10,000 and at the end of the year had increased his
savings by $3,000, he would receive a deduction of $3,000
and pay tax on the $7,000 which he had consumed.
A system based on the consumption concept of income
does not bias a taxpayer in his decision of whether to
consume currently or save. Let us say I am taxed at an
over-all rate of 50 percent and I am about to earn another
$200. I have a choice, I can consume these earnings or I
can save them. If I consume them I will have no deduction
from income and I will pay a tax of $100 and consume $100.
If, however, I save the $200, I receive a $200 deduction and
pay no tax. Assuming I have invested these savings at 9
percent, I will have $218 at the end of the next year. If,
at that time, I make the decision to consume, my savings
will go down by $218, thereby producing $218 of taxable
income. I will pay a tax of $109 and consume $109. In
summary, my decision at the time of earning the $200 is
between consuming $100 immediately or $109 one year later.
Since the current value of the $109 is $100, the tax impact
-lion such decision is neutral; there is no anti-savings bias.
It should be noted that although the payment of tax on the
earnings in question was delayed by one year the Treasury
has not been harmed since it received $109 of tax instead of
$100.
Implementing an income tax based upon consumption
involves other theoretical benefits and some drawbacks as
well, the discussion of which is well beyond the scope of my
remarks today. And, of course, the theoretical and practical
problems of effectuating a transition from our present
system would be vast to say the least.
My purpose in mentioning the consumption-type tax, as
well as in outlining the directions in which reform might
proceed if the accretion concept is retained, is to give you
some feeling for the broad range of options open to us if we
undertake real tax reform. Obviously changes of this magnitude
require very careful study and we at the Treasury are presently
exploring alternative ways in which we might move toward
this goal. We are also considering whether this is an
appropriate time to move full steam ahead. I personally
think it is.
Assuming that the study should proceed, there are
various proposals as to the most efficient and effective
modus operandi. Several groups, including the Bar Association
of the City of New York, have recommended a special commission.
Others have suggested, or are about to suggest, that the
staff of the Joint Committee on Internal Revenue Taxation
assign the requisite personnel solely to this task for a
period of years. Finally, the Treasury Department itself,
with a strong, independent group of expert advisors, might
undertake to develop an initial legislative proposal after
intensive study and economic and statistical analysis. If
the latter route were chosen, this would obviously require a
major allocation of human and financial resources within our
offices of tax policy and tax analysis. Regardless of
whether the study of real tax reform is headed by a special
Commission, Congress or the Treasury Department, input from
the organized Bar, and especially the Tax Bar, will be
extremely important. Itfe hope that the major Bar Associations,
including particularly your own Tax Section, will support
this project with enthusiasm and will provide the benefit of
your accumulated wisdom and experience.
73
- 12 To date, I must confess some disappointment in the
reaction of many leaders of the Tax Bar to the study of real
tax reform. I should hasten to add that certain of their
brothers in the accounting profession appear equally unenthusiastic.
As a group, of course, lawyers are conservative and tend to
resist change. More particularly, we tax lawyers have
become attached to the present Code and regulations which we
have studied and to some extent mastered. Limited tax reform
bills introducing even more complexity, such as the Reform
Act of 1969 and the House passed Tax Reform Act of 1975,
have proved quite unsettling to the Tax Bar and, at first
glance, the prospect of the type of real tax reform I have
been discussing today may strike terror in our collective
hearts.
But, upon reflection, I would hope that you would agree
with the following points. We tax lawyers can only function
effectively when giving advice with respect to, and acting
within, a system of taxation which is itself functional. Our
system of taxation today is rapidly approaching the point at
which it will cease to work. Right now it does not work very
well; many taxpayers who lack access to expert advice simply
cannot cope with the complexity of the Code and they fall
back upon the hope of either not getting caught or working
out some kind of rough justice compromise if they are in
fact audited. If this attitude spreads even to those taxpayers
who have expert advice, or if significant numbers of taxpayers
simply abandon voluntary compliance, we will have arrived at
the chaotic and potentially corrupt system of negotiated tax
liabilities found elsewhere in the world, and the Internal
Revenue Code will be of interest primarily to philosophers.
In the highest view of our profession, we owe it to our
clients in general, and even to ourselves, to carefully
study any proposal which affects such a wide cross-section
of our citizens and which would constitute such a fundamental
element of our economic and political structure. In this
context, I ask that if this study proceeds, we all use
restraint in evaluating the project before it is completed
and suggest that our clients do likewise. The impact of the
possibility (and I emphasize the word possibility) of the
implementation of such emotion-arousing concepts as the
repeal of the charitable and home mortgage interest deductions,
7
- 13 the elimination of capital gains and the taxation of municipal
bond interest must not be viewed in isolation. Rather, we
must be patient and reflect upon the entire proposal to see
if it creates a system which is simple, fair and relatively
neutral. If the great majority of citizens will benefitd
from such a system, we should enthusiastically support it.
If significant groups or important incentives are, nevertheless,
damaged by the proposal, and such injuries cannot be remedied
outside the tax system, then and only then, should appropriate
modifications be suggested and adopted.
In summary, there are many of us, including myself,
who feel that real tax reform is an idea whose time has
come. We may be wrong, but that judgment can only be made
after a careful and detailed study of the type which I have
briefly described today. If such study is to provide satisfactory
answers to these difficult questions, we will need your
help, support, patience and restraint.
Thank you.
o 0 o
17
FOR A.M. RELEASE, TUESDAY, FEB. 3, 1976
SOCIAL SECURITY PAYMENTS DEPOSIT BY COMPUTER
BEGINS IN GEORGIA, EXTENDS NATIONWIDE IN 1976
The second phase of a long-range program to eliminate a
large part of government check-writing and mailing — cutting
costs and reducing risk of lost or stolen checks — begins
today in Georgia.
There nearly 50,000 social security beneficiaries will
have their February payments directly deposited by electronic
funds transfer (EFT) to their checking or savings accounts.
The system in April will be expanded to include 350,000
social security beneficiaries in Florida. By year's end it
will become nationwide with an estimated 6 million social
security participants.
Plans are underway for bringing civil service and
railroad retirement annuitants into the system later this year.
Payments to veterans and their dependents and salary payments
to Federal employees will follow.
At the end of 1979, according to Treasury Department projections, 18 million, or 40 percent of the total volume of
recurring monthly payments by the Federal government will be made
by electronic transfer.
This new and improved system of making recurring monthly
benefit payments will be unparalleled for reliability and
convenience to the individual.
It will, in addition, save Treasury Department and other
government agencies involved, and ultimately the taxpayer,
millions of dollars. Treasury estimates it alone will save
in excess of $25 million annually when the system becomes
fully operational in five years.
WS-619
- 2 The individual, however, is the big gainer, particularly
the elderly and infirm. These beneficiaries will be spared the
repetitiously nagging concern each month over whether their
checks will arrive on time or at all, since thousands are
lost, stolen or forged each year.
The first phase of the program was started in November 1974
in Georgia, with the mailing of checks to banks and savings
institutions rather than to the homes of beneficiaries. This
part of the program was completed nationwide last fall with
more than 3.5 million participants.
Conversion to electronic funds transfer was first tested
last November in Georgia, and again in January. Similar tests
are being made in Florida in advance of the new system becoming
operational there in April.
The testing in advance of implementation will be
followed across the country as EFT goes nationwide. The
testing facilitates coordination by Treasury, Social Security,
Federal Reserve and the cooperating financial organizations on
all aspects of the system prior to actual computerized
transfer of payments. For further information call
Les Plumly, (202) 964-2525.
#
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE HOUSE COMMITTEE ON THE BUDGET
FEBRUARY 3, 1976
Mr. Chairman and members of this distinguished committee:
I am pleased to be with you this morning to discuss the
President's economic program. Your Committee plays a key
role in the budget process and in bringing an organized and
responsible approach to Congressional legislation. Because
Federal expenditures now have such an important impact on
the allocation of resources in our society and on the stability
of our economic system, the decisions reached will have
significant implications for our future economy.
As Mr. Lynn was with you earlier this week to discuss
the details of the President's budget and Mr. Greenspan is
with me this morning, I will focus my remarks on Federal
revenue estimates and on certain concepts which underlie a
durable, orderly and sustained economic recovery. It is
obvious that we all share such basic goals as achieving
greater economic growth, reducing the unacceptable rate of
unemployment and of moderating the rate of inflation.
However, there can be disagreement about what tradeoffs will
be required to achieve simultaneous progress toward all of
these goals, about the best mix and timing of economic
policies and about the proper time horizon for planning
purposes. In our discussion today, I hope that we can come
to a better understanding of these issues and of the need
for responsible budgetary policies.
We begin this important budget planning session with
significant and solid improvement in the U.S. economy
during 1975. As we know, the turning point in the economy
came around April ending the most severe recession since
World War II. Final sales, real gross national product and
industrial production have shown solid gains and give us
all considerable optimism for further progress in output
WS-620
^
- 2 growth. Significant improvement also has been made in
reducing the rate of inflation and expanding employment
opportunities. This is an impressive turnaround from the
situation which prevailed one year ago.
Despite this progress, we must not become complacent.
Inflation and unemployment remain serious problems. Embedded
in the present recovery are risks which must be watched
closely. If inflation should escalate, it will bring on
severe problems that ultimately could halt the recovery. We
then would repeat the pattern of inflation-recession-unemployment
of the last several years, but with even more serious consequences.
Throughout much of the past fifteen years, the concept
that the U.S. Government must continually intervene to
stabilize the economy has come to dominate policy decisions.
However, because of the lagged impact of fiscal and to a
lesser extent, monetary stimulus, such actions have often
been counter-productive and have accentuated rather than
stabilized fluctuations in the business cycle.
'/?. The proper role of government is to create an environment
for sustained, orderly and durable economic growth through
its fiscal, monetary, and regulatory policies. With respect
to fiscal policy, the beginning is the budget. As you know,
proposed Federal expenditures total $394.2 billion under the
Administration's plan, and Mr. Lynn already has discussed
the details with you. The other side of the picture, of
course, is Federal revenues which I wish to take a few
minutes to discuss.
Federal Revenue Estimates
The Department of the Treasury is responsible for
estimating Federal revenues as a basis for planning fiscal
policies. The beginning point for our estimates is the
preparation of detailed GNP forecasts by a trio of the
Treasury, the Council of Economic Advisers and the Office of
Management and Budget. Using these general forecasts and
specific revenue information obtained from a variety of
sources, the Treasury prepares monthly collection estimates.
I might add that in my testimony of September 29, 1975,
before the House Budget Committee, the detailed estimating
procedures for revenues were described. Attached is a copy
of that testimony.
The estimating process obviously depends upon several
factors: (1) the accuracy of the GNP forecasts; (2) changes
in the mix of economic results which cause adjustments in
2l
estimates of personal income and expenditures, business
spending and profits, unemployment, government transfer
payments, etc.; (3) the refinement of statistical estimating
procedures; and (4) the frequent revision of tax legislation
which can be anticipated only in part. As a result, actual
receipts always vary from those which are forecast. However,
the discrepancy usually is relatively small. In fact, it is
amazing to me that with all the uncertainty involved our
revenue estimates are as accurate as they are. Budget
estimating errors over the past six years together with 1950
and 1960 are summarized in Table 1.
As shown in Table 2, Federal Budget receipts are
estimated at $351.3 billion for FY 1977. These estimates
take into account the Tax Reduction Act, enacted on March 29,
1975, and the Revenue Adjustment Act, enacted on December 23,
1975. The President has proposed additional tax reductions
to become effective July 1, 1976, if spending is properly
controlled. His recommendation would make permanent the
six-month extension of the Revenue Adjustment Act of 1975 and
add about $10 billion of additional tax relief. He also has
asked for some special tax incentives in order: (1) to
stimulate construction in areas of particularly high unemployment;
(2) to encourage broader ownership of common stock; (3) to
ease the burden of estate and gift taxes on farms and small
businesses; (4) to take initial steps to integrate individual
and corporate taxes so as to stimulate investment; (5) to
bring about more investment in the hard pressed utility
area; and (6) to encourage residential construction. Recommended
also is an increase in social security and unemployment
trust fund taxes, and these would increase revenues in
FY 1977. The details of these proposals and their impact on
Federal revenues for FY 1977 are summarized in Table 3.
Looking five years into the future, receipts are
projected to increase from $351.3 billion in FY 1977 to
$585.4 billion in FY 1981. These projections, shown in
Table 4, are based on the legislative initiatives recommended
by the President and they also are based on the integration
of individual and corporate income taxes, as outlined in my
testimony before the House Ways and Means Committee last
July. The assumption embodied in the projections is that
such integration will begin January 1, 1978. The revenue
projections are consistent with the economic assumptions and
legislative initiatives proposed by the President in his
budget message. Those assumptions should not be interpreted
as forecasts for years beyond 1976, since they do not include
the potential impact of policy decisions made between now
and the end of the 5-year period, 1981. Nor are the projections
to be considered
figures
merely represent
recommendations
extrapolations
for policy
of conditions
actions. The
beyond
- 4 next year. Nevertheless, the projections indicate that a
balance in the Federal budget will be achieved by FY 1979 if
current assumptions are correct and the recommendations in
the President's budget message are adopted.
The Need for Responsible Accounting
The balance of the Federal budget by FY 1979 would have
a favorable impact on the future development of the U.S.
economy. Because of the cumulative nature of government
spending programs over the years, decisions made during this
budget-planning period will largely determine whether or
not we will achieve responsible fiscal policy goals in the
future. Thus, the long-term impact of current policy
decisions should be the basis for all of our economic
planning.
There can be confusion about what is necessary to deal
with a current problem and the effect of that action on
future fiscal flexibility. Too often we in government &re
prone to make decisions without proper consideration of the
cumulative impact of those decisions on the future. To deal
with this problem, I am proposing that government accounting
be placed on an accrual basis where unfunded liabilities are
fully recognized. This would thwart the natural tendency
for those at all levels of government to want to claim
revenues too early and expenditures too late, thereby postponing
the day of reckoning. We have had recent examples of the
sharp and painful adjustments that must occur to a local
government when things are continually swept under the rug
until eventually the rug will cover no more. With each
sweeping, future fiscal flexibility is curtailed one more
notch. Eventually a government has no flexibility to deal
with current problems. The same thing occurs for the Federal
government, except the rug can be stretched for a while
because, after all, the Federal government prints the money.
The Treasury has been publishing accrual statements for
certain individual agencies since 1956 and we now plan to do
this on a consolidated basis for the Federal government as
a whole. Our target date for the first of these publications —
for the Fiscal Year ending September 30, 1977 — is early
in 1978. I would emphasize that the initial publication
will focus on significant accruals that have a major impact
on the overall financial condition and operating results of
the Federal government. The first set of statements are
likely to be accompanied by extensive qualifications. As
the reporting process and statement preparation procedures
are improved, however, these qualifications will diminish.
- 5Not only will the reader obtain a consolidated financial
view of the Federal government but an idea of the magnitude
of all liabilities, whether they be funded or unfunded and
whether they be due for payment in the near future or the
distant future. In these consolidated statements, revenues
will be recognized only when they are earned and sure to be
collected and expenditures will be recognized no later than
the time the liability to pay them is firmly established.
We believe that this will bring more responsible accounting
to government. Financial problems will surface long before
a crisis is imminent, thereby reducing unpleasant surprises.
I believe this will permit more reasoned judgments on decisions
which impact the future fiscal flexibility of our nation.
Our children should not bear the albatross of paying for the
excesses of this generation, while their government is
unable to cope with problems because it lacks fiscal flexibility.
I realize that there has been concern with the cost of
installing elaborate accrual accounting systems in agencies
where the need is not clearly established. I want to assure
you that I am not advocating a slavish application of textbook
accounting to every agency and appropriation without regard
to benefits. All Federal agencies have accrual accounting
of some sort. What we intend to do is to supplement the
data we already have with some missing pieces of major
proportions, and by major I mean in terms of governmentwide
magnitudes, not individual appropriations.
I also want to say that I am not proposing a change in
the basis for calculating the official budget surplus or
deficit, or in the manner of justifying appropriations.
There are some who advocate accrual accounting for both of
those purposes, but I do not want to let the controversy
over those applications interfere with my objective of
giving the American people a clear business-like disclosure
of the overall financial condition of their Government.
Longer-Term Policy Issues
Looking at some longer-term policy issues, I am disturbed
by the fact that government spending which has been proved
to be a cumbersome tool for short-term economic stabilization
continues to be used for such purposes. The reason it is so
cumbersome is because of the various lags involved. First
of all, there usually is a considerable lag between the time
a need is identified, or a claim is made by some special
interest group, and the time there is a specific response by
Congress to the proposal. Then there is another time lag
before the expenditures actually occur and begin to spread
throughout the economic system. Whereas at the time when
the proposal was initially considered there may have been
- 6 underutilization of resources in the economy, by the time
the program actually comes on stream resources are often
fully employed so that the additional government spending
leads to greater inflation. Furthermore, such initiatives
take on a life of their own.
If there were some way that old programs could be
phased down or eliminated during a period of rapid economic
expansion, fiscal policy might be more effective as a tool
for stabilization purposes. However, experience has shown
that this is not the case. Even programs started in a
period of economic slack to stimulate the economy most often
become a permanent part of the budget.
We must avoid abrupt and excessive changes in government
expenditures. No matter how well intentioned, such sharp
swings in spending tend to accentuate rather than stabilize
the business cycle and serve to increase the uncertainty of
developing policies to meet future needs. In turn, this
uncertainty is felt in the consumer markets, in the markets
for capital goods, and in financial markets.
In addition to government expenditures, I am concerned
with the size of the chronic Federal deficits, particularly
the negative impact oh financial markets and capital formation.
The traditional view of the government's role in the business
cycle was that deficits would be recorded in periods of
economic slack, but that surpluses would occur in periods of
above-average economic activity. As a result, savings would
be available to the private sector for the capital formation
necessary to sustain the economic advance in real terms.
Obviously this has not occurred in recent years where we
have had deficits in periods when there is less than full
utilization of our resources.
These deficits, of course, need to be financed and such
financings in periods of prosperity hurt the economy. They
place the U.S. Treasury in a position of preempting private
investors. The recent avalanche of Treasury securities has
created distortions in the traditional patterns of funds
being raised and, in my judgment, this has contributed to
making our financial markets less efficient in recent years
in channeling the savings of society to investment opportunities.
As a result, capital formation is impeded.
Furthermore, deficits cumulate over time. Total
Federal debt has increased from $329.5 billion at the end
of FY 1966 to an estimated $633.9 billion at the end of
FY 1976 — a rise of 92 percent in only 10 years time. Over
the past ten years the average maturity of the debt has
- 7declined from 5 years, 3 months to 2 years, 5 months. What
this means is that the U.S. Treasury must be a more frequent
visitor in financial markets simply to roll over outstanding
securities let alone to raise funds for current deficits.
In this fiscal year (1976) the U.S. Treasury will absorb
over 70% of all moneys in the securities markets; government
at all levels will absorb over 80%. This percent must be
sharply reduced as the economic advance continues or else
some private areas will have to go without.
This problem of "crowding out" becomes far more critical
of course as the recovery progresses and the financing needs
of the private sector intensify. If deficits remain large,
the Treasury, by being first in the credit line, will always
get its needs financed but in so doing may make it difficult
for companies with less than a prime financial rating to
obtain the financial resources they need at acceptable
interest rates.
Moreover, as annual interest payments grow with increases
in the total debt, fiscal flexibility is eroded further'.
This "uncontrollable" outlay of over $45 billion in FY 1977
is the third largest item in the budget. It puts pressure
on the total budget, which in turn means that programs must
be displaced or tax reductions foregone. (A more extensive
discussion of crowding out is found in Appendix A.)
The size of the deficit also affects the rate of
capital formation in the private sector, and this is a
matter of great concern. As the recovery progresses,
private capital investment needs to increase to sustain the
recovery. In the next decade, the need for increased
capital formation is extremely large. This need has been
carefully documented by the Treasury, by numerous outside
studies, and, most recently, in Chapter 1 of the Economic
Report of the President. If we are to meet our goals for
increased employment and productivity in a non-inflationary
environment as well as our environmental, safety and energy
goals, we must have an increase in the rate of national
savings and private direct investment relative to the total
GNP.
The achievement of our capital formation goals depends
on the necessary expenditures being financed in the private
sector. In turn, the adequacy of capital flows depends on
the savings of society being less and less used to finance
Federal expenditures and more and more focused on capital
formation. This is the only way we can sustain a durable
recovery over the long run and bring down the level of
inflation. If the private sector is unable to finance
capital formation because of the huge demands on savings by
- 8the Federal Government and because of the resulting strains
and distortions introduced in financial markets, the boomand-recession sequence of the last decade may be repeated.
Therefore, it is imperative that we reduce the Federal
deficit and work toward budget surpluses as the recovery
progresses.
Another aspect of the crowding out problem is the
secular deterioration I see in the financial structure of
U.S. businesses. Over the past decade there has been a
strong trend towards a much more leveraged corporate balance
sheet. Debt has roughly tripled; liquid assets have declined
relative to liabilities; the debt-equity ratio has about
doubled; and the average maturity of debt has shrunk. Just
as the Treasury is a more frequent visitor to credit markets,
so too will many companies, and if there is an intense
competition for funds, it is quite clear that the less than
prime rated company will be the loser. Continuing heavy
Treasury borrowings will eventually cause difficulties for
these companies, small businesses and potential home owners.
For both fiscal and monetary policies, the problem of
instability is compounded by the present inflation psychology
that permeates our society. All too readily the economy
will move to a higher level of prices, but only grudgingly
will it move to lower prices despite slack demand. This
inflation psychology has been building for a decade and its
unwinding will not be easy. The achievement of economic
growth without accelerating inflation could be upset by
fiscal and monetary policies that are, or even appear to be,
overly stimulative.
In addition, such excesses will lead to bottlenecks
developing in certain key industries well before the economy
as a whole reaches full employment. This occurred in 1973
in such industries as steel, paper, chemicals and fertilizers.
The dislocations caused by bottlenecks send inflationary
tremors throughout the economy and lead to inefficiencies
which ultimately can curtail a recovery in real terms.
We must act wisely and responsibly in bringing stability
to our economy. The excesses of the past are not easily
undone. Excessive spending, excessive credit creation,
excessive stimulation all may provide a short-term palliative,
but before long additional inflation and production bottlenecks
set in and economic performance declines. The stop-and-go
policies of the past fifteen years have led to an instability
whichThank
now is
deeply rooted in our society. To come to grips
you.
with this issue we have designed a responsible mix of
economic policies that will bring about durable lasting
and
economic
increasing
prosperity
employment.
which benefits our nation with sustainable
TOTAL GOVERNMENT EXPENDITURES
(As a Percent off GNP)
Percent
36
1948
1950
1955
1960
1965
Percent
36
1970
1975
1977
Source: Department of Commerce
^
^
TABLE 1
Budget Estimating Errors
i
'
=
Overestimate ( + ) or Underestimate (-)
as a Percent of the Actual Figure
Fiscal
year
Estimates made 18 months
prior to the end of the
fiscal year
i
—
Estimates made 6 months
prior to the end of the
fiscal year
i
Outlays
Receipts
Outlays
Receipts
1950 1/
+4.1
+ 10,3
+7.8
+ 1.9
1960 1/
-0.3
-1.7
+ 1.6
+ 0.2
197 0 2/
-0.7
+2.6
+ 0.7
• +2.9
1971 2/
-5.0
+7.3
* +0.6
+ 3.1
1972 2/
-1.1
+ 4.3 '
+ 2.0
-5.2
1973 2/
-0.1
-4.9
+ 1.3
-3.1
1974 2/
+ 0.1
-3.4
+ 2.3
+ 1.9
L975 2/
-6.2
+ 5.0
-3.4
-0.8
)ffice of the Secretary of the Treasury
Office of Tax Analysis
._/
Administrative budget.
!/ Unified budget. The first estimate on a unified budget basis was
prepared in January 1968.
TABLE
2
BUDGET RECEIPTS BY SOURCE
(In billions of dollars)
1975
actual
Individual income taxes
1976
TQ
1977
estimate estimate estimate
122.4
130,8
40.0
153.6
Corporation income taxes--^— 40.6
40.1
8.4
49.5
Social insurance taxes and
contributions
-—
86.4
92.6
25.2
113.1
Excise taxes ~-
16.6
16.9
4.4
17.8
Estate and gift taxes --
4.6
5.1
1.4
5.8
Customs duties ——
3.7
3.8
1.0
4.3
Miscellaneous receipts
6.7
8.3
1.5
7.2
Total budget receipts: 281.0 297.5 81.9 351.3
1/23/76
2
TABLE
3
CHANGES IN BUDGET RECEIPTS
(In billions of dollars)
1975
1976
estimate estimate
eipts under tax rates and
structure in effect Jan.1,1974
rease in import fee on
jpetroleum products by administrative action
*cted legislative changes:
^Social security taxable earnings
base increases:
$13,200 to $14,100
effective Jan.1,1975
:
$14,100 to $15,300
effective Jan. 1,1976
$15,300 to $16,500
1/
effective Jan. 1,1977—
Tax Reduction Act of 1975
290.8
+0.4
TQ
estimate
1977
estimate
87.2
371.3
+1.6
+ .4
+2.1
+ .2
+ .6
+2.4
-9.8
-6.0
-.2
-.5
+ .8
+ .4
-1.3
310.2
+ 1.7
+.1
-10.2
rRevenue
Adjustment Act of 1975
r-.l
T-.3
T-,5
liberalized deduction for
r-.l
-.4
-<9
individual contributions to
+ .1
+ .1
+ .3
i pension plans
—«—~~,.~-.-,—^—
~0,2
deduction in telephone excise tax
-.1
374.6
297.3
87.4
-Increase in SMI (medicare)premium
+.1
Total receipts under existing
legislation
281.0
iges due to tax proposals:
-5.4
-28.1
individual and corporation
-.3
income tax reductions,
-.3
3 effective July 1, 1976
inancial Institutions Act
-*
-*
-.3
^tock ownership incentives
,. ccelerated depreciation on
investment in high unem+ 3.3
ployment areas
+ 2.1
ocial security tax rate increase
_
*
+ 0.2
+ .1
from 11.7% to 12.3%
effective January 1, 1977 1/ —
297.5
81.9
351.3
nemployment tax rate and
base increase Jan.l, 1977
ther
BS than $50 million.
Total receipts under existing
i effect of the taxable earnings base increase is calculated using a
and proposed
tax rate
of 11.7%.legislation
The effect of 281.0
the tax rate increase is
calculated using a taxable earnings base of $16,500.
'76
TABLE
4
THE FISCAL OUTLOOK, 1975-81
(In billions of dollars)
Outlays under current programs —
324.6
„
Outlays under proposed programs—
324.6
TQ
1977
1978
1979
1980
373.7
98.2
391.9
420.4
441.8
465.0
4.89.2
-.2
-.2
2.3
9.1
13.9
17.5
20..7
373.5
98.0
394.2
Total projected outlays
—
Receipts under current law
— 281.0 297.3 87.3 374.1
„
Effects of proposed tax changes—
429.5 455.7 482.5 509.9
430.1 491.7 555.1 623.9
.2
-5.5
-22.8
-23.4
-26.4
-32.0
38.4
Total projected receipts
—
281.0
297.5
81.9
351.3
406.7
465.3
523.1
585.4
Budget margin or deficit (-)
—
-43.6
-76.0
-16.1
-43.0
-22.8
9.6
40.6
75.5
1/23/76
^ j_ _L a V*" Cl-L
U.S.Treas.
17
1160
l'f 61
X9 6 2
'1963
1964
1965
1966
1967
1968
1969
.8
2.0
8.8
6.4
2.7
3.1
-1.0
-.6
18.2
-1.9
197 0
1971
1972
1973
19 7 4
19 7 5
1976
6
20
19
18
2
51
87
Federal & -.Total
sponsored
:Federal
agencies 2/:sector
8
5
6
5
1
9
5 (est.)
V^CIJ.O,
UXXXO.VJU>3
V^JL
U U X X U X
^ /
•.Corp. & :
State & :foreign
:Total
local 37-.bonds 4/ s e c u r i t i e s
Federal
:Gov't
sector as
:sector as
a % of total :% of total 5/
1.6
-.2
2.2
1.0
1.5
2.2
6.8
2.7
5.6
5.8
2.4
1.8
10.9
7.4
4.2
5.3
5.8
2.1
23.8
3.9
5.7
4.9
6.0
5.5
5.2
6.9
7.3
6.0
7.2
12.0
4.9
6.3
5.7
6.2
6.4
7.9
10.9
13.0
16.4
15.9
13.0
13.0
22.6
19.2
15.8
20.1
24.0
21.1
47.4
31.8
18 6
14 0
48 4
38 7
26 5
26 3
24 1
9 8
50.3
12.2
62.4
51.8
74.7
67.5
59 6
60 6
54 5
38 5
65 5
50.0
8.2
2.8
8.7
14.4
21.3
15.8
14.3
15.0
23.3
28.3
32.9
23.4
67.7
101.8
9.7
15.0
15.6
12.6
17.0
16.8
14.0
16.8
27.5
21.7
15.4
17.4
33.5
25.1
41.5
65.8
65
60
57
117
140.9
36.2
35.3
43.1
53.9
40.5
57.4
72.2
59.4
58.2
66.9
74.7
69.9
71.6
U 2. 2
Office of the Secretary of the Treasury
Office of Debt Analysis
January 8, 197 6
Source: FY 1960-1975 data based on Federal Reserve Flow-of Funds accounts (which show net changes
in outstandings).
1/ Net increase in marketable and nonmarketable bills, notes and bonds. (Includes Federal
Increase9inCbiils, notes and bonds of budget and sponsored agencies. Includes GNMA pass-throu
2/
Increase in notes, bonds and Government loans.
3/
Increase in bonds and notes with original maturities of.more than 1 year.
Includes State and local as part of government sector.
5/
y
ghs.
TABLE 6
/ *
Unified Federal Budget Surplus or Deficit in Relation to GNP
1954-1977
Budget Surplus (+)
or Deficit (-) as % of GNP
Fiscal Year
Budget Surplus (+)
* or Deficit (-)
( $ billions)
Annual
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976e
1977e
- 1.2
- 3.0
+ 4.1
+ 3.2
- 2.9
-12.9
+ 0.3
- 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
-76.0
-43.0
-0.3
-0.8
1-0
0.7
-0.7
-2.7
0.1
-0.7
-1.3
-0.8
-1.0
-0.2
-0.5
-1.1
-3.0
0.4
-0.3
-2.3
-2.1
-1.2
-0.3
-3.0
-4.8
-2.3
Three-Year
Moving Average
(Centered)
—.
- .0
0.3
0.3
-0.9
-1.1 '
-1.1
-0.6
-0.9
-1.0
-0.7
-0.6
-0.6
-1.5
-1.2
-1.0
-0.7
-1.6
-1.9
-1.2
-1.5
-2.7
-3.4
_
if
January 16, 1976
APPENDIX A
CROWDING OUT — SETTING THE RECORD STRAIGHT
There clearly exists some misunderstanding about the
meaning and significance of the so-called phenomenon of
"crowding out." In essence, there is the idea that since
financial collapse has not yet occurred, then the whole
issue is misleading. This is wrong. What has occurred is
a focussing of attention on short-run improvements in financial markets (associated primarily with the worse recession
since the 1930 ! s) and an ignoring of what happens longer-term
as the economy moves back toward fuller capacity under conditions of repeated huge sized government budget deficits.
No matter how viewed, the inescapable fact is that with
reasonably full use of capacity, more resources claimed by
the government must mean less for the private sector. Huge
deficits which take the lion share of credit flows will
eventually push out the weaker private areas--specifically
potential home owners, small businesses and even larger
companies who do not have a superior credit rating. This in
turn will hurt real growth, deprive our workers of adequate
productive tools, frustrate the achievement of our longerterm economic needs, and further misallocate our scarce
resources. (This was pointed out repeatedly in prior testimony,
e.g., January 25, 1975, before the House Ways and Means Committee.)
1. Interest Rates. Interest rates have declined over the past
year or so as would be expected during a recession. High-grade
bond rates have fallen from a peak of about 10.5$ in mid-1974
to around 8.5% today. Yet this drop cannot be taken as sufficient
evidence that credit is ample and more importantly that credit
will remain ample to support a lasting business recovery. This
cost of long-term funds is still very high historically. (Such
interest rates ranged between 2#-6$ from l865-1965--a period
containing serious wars, depressions, financial panics, business
booms and other assorted economic extremes.) The combination of
sustained high Federal government financing, of a growing demand
for private financing as the expansion proceeds and of a Federal
Reserve policy which must eventually moderate in generosity (to
avoid rekindling inflation) points to a level of interest rates
and availability of funds for private areas which are not consistent with our long-run needs. Total government borrowings this
fiscal year will absorb a record 82% of funds available in the
securities market; this percent eventually must be sharply reduced
or else some private areas will have to go without.
2. Availability of Credit. Funds are more readily available
to more sectors of the economy today, but again this too reflects
the cyclical slack in the economy and not the longer-run secular
forces at work here. In the first quarter of 1975 about 5% of
all new bond issues were Baa-rated or less. By the fourth quarter,
it was almost 1035. (This is still below rates close to 20$ at
times in 1971 and 1972 however.) More lesser-rated companies are
- 2 able to finance today. Unfortunately, a lot of these bonds are
for shorter duration--5-7 year maturity as opposed to 20-30 year
maturity which was the norm not too long ago. This will raise
problems in the future since the companies will have to refinance
more frequently (referred to as the "rollover" problem in point 4
below). The most important issue immediately ahead is whether such
lesser rated companies will continue to find the necessary funds
to sustain the economic advance. When credit markets eventually
tighten (as is inevitable), problems of credit availability will
occur and their severity will be directly proportional to the
relative borrowings of the government.
3. Financing of Deficit. The relative "ease" with which the
Federal government financed the deficit in 1975 should not be
viewed as a normal state of affairs. The fact is that private
needs for credit were low because of the recession but as the
recovery gains momentum this year, private credit needs will
rise. For example, total short-run business borrowing declined
in 1975 by about $14 billion; this year it is expected to rise
by about $20 billion which is a swing of" almost $35 billion.
What this means is that there will be a much higher need for
total credit in 1976 than in 1975 and eventually some private
areas will be squeezed. This is why it is imperative to take
steps now to limit the rise in Federal government spending (up
almost 40$ in just two years time). Not only is future flexibility
lost if this cannot be accomplished but the deficit will remain
huge and some private areas will not be financed.
4. Financial Structure. Over the past decade there has been a
strong trend towards a much more leveraged and brittle structure
of corporate balance sheets. Debt has roughly tripled, liquid
assets have declined relative to liabilities, and the debt-equity
ratio has about doubled. Sustained high Federal budget deficits
will eventually create pressures in financial markets that will
cause difficulties for lesser-rated companies (in terms of debt
rollover) let alone leave sufficient credit for expansion needs.
5. Capital Formation. Several studies clearly point to a much
heavier need for investment over the next several years if there
are to be enough jobs for a growing labor force, a healthier
environment for our people and a higher degree of energy self
sufficiency in the United States. (The share of business investment in GNP must increase from an average of 10.4$ over the past
10 years to 12.0$ for the rest of this decade--an historically
unprecedented change. ) Sustained high Federal budget deficits
will automatically frustrate the fulfillment of those capital
needs by depriving many, many private areas of needed financing
to build the new factories and buy the advanced machinery. The
real dimension of crowding out becomes much more persuasive and
severe the further ahead we look.
Conclusion: Crowding out is a genuine problem whose major
economic impacts will occur ahead if something is not done
about excessive Federal budget deficits caused by too rapid
- 3 a rise in government spending. The serious nature of this
issue should not be masked because of the impacts of a recession.
If steps are not taken to exercise better fiscal control, some
areas in the private sector will go without needed financing;
capital formation will be less than desired; and our serious
unemployment and inflation problems will be that much further
from a satisfactory resolution. The following excerpts from
Professor Paul McCracken?s article on the January 8 editorial page,
of the Wall Street Journal is a well articulated discussion
of budget deficits and the phenomenon of "crowding out":
"There is here, however, a more substantive problem. It is
the failure of conventional fiscal policy wisdom to face the
full implications of the fact that an increase in the federal
deficit, from accelerated spending or more tax reduction, must
be financed. And the added funds that the Treasury must then
borrow are funds not then available to others in the market
for financing. . . .
"Markets have, of course, substantial capacity for accommodating
to changes in demands, and effects on other borrowers of swings
in budget deficits of modest proportions will not be large.
When, however, the U.S. government had to raise funds at the
rate of $81 billion per year in the first half of 1975, after
a $5 billion pace a year earlier, the 22$ decline in money for
home and commercial mortgages during that period can hardly be
assumed to have been an entirely unrelated development.
"The question was never whether a large deficit would cause a
disintegration of financial markets, or a collapse of capitalism,
or some other catastrophe of draconian proportions, though some
have pointed to the absence of such cosmic disaster as evidence
that the "crowding out" theory was wrong. The point is the
quite common sense one that in financial markets where demands
for funds are active, and this is apt to characterize 1976,
other claimants for funds will get less than if the large
Treasury requirements were not present in the market. The
financing "loop" of fiscal policy must be closed.
"This all carries with it some implications for budget strategy
in 1976. Within the limits of fiscal discipline that the
political process can muster in a quadrennial year, the Congress
and the President can continue efforts toward regaining better
control of spending without having to worry about the net adverse
effect of this fiscal restraint on the economy. Dollars not
borrowed by the Treasury will be put to work by other claimants
in the money and capital markets. And housing would be a major
beneficiary of the easier financial markets that would result.
The basic 1976 trend for interest rates, in fact, is more in
the hands of those who manage# the
# # budget than of the Federal
,f
Reserve.
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE
THE HOUSE BUDGET COMMITTEE
SEPTEMBER 29, 1975 .
Mr. Chairman and members of this distinguished Committee:
I am pleased to appear before you this morning to
review current economic conditions and to discuss the Federal
budget revenue estimates prepared by the Department of the
Treasury. My analysis of economic developments and prospects
will hopefully contribute to a broader understanding of the
economic recovery now underway and the importance of sustaining
responsible policies required for achieving both our nearterm goals regarding inflation, unemployment and national
output as well as our long-term objective of creating a more
stable economy. The discussion of projected Federal budget
revenues and the related testimony, of James T. Lynn, Director
of the Office of Management and Budget., concerning anticipated
Federal outlays will provide, necessary background for
decisions about the future course of fiscal policies.
This Committee has a vital role in developing national
economic policies. The past- decade has been an unusually
difficult period as our policy flexibility has been increasingly
restricted by the lagged impact of past decisions. In
particular, great concern has developed about the impact of
Federal spending and tax policies as outlays have accelerated
more rapidly than the overall growth of the economy and
WS-391
-2chronic Federal deficits have occurred. Your Committee was
created to help correct these serious problems. While I do
not agree with some of your policy recommendations, I am
impressed by your efforts to create a more organized and
disciplined approach to making Congressional fiscal decisions.
The First Concurrent Resolution to Congress was a constructive
step in providing general economic and spending guidelines.
However, the real test for the Congressional Budget Committees
is yet to come as the specific actions of individual appropriation committees must be adjusted to conform to the targets
to be established by your Second Concurrent Resolution to
Congress. I look forward to working with you in preparing
these important fiscal policy recommendations which will
directly affect the current recovery and the future of the
U.S. economy.
I. ECONOMIC OVERVIEW
The United States has developed the most productive and
creative economic system in the world. Americans have
traditionally experienced rising standards of living as real
output has increased, inflation pressures have been
relatively moderate and employment opportunities have
expanded. However, the performance of the U.S. economy
during the past decade has been disrupted by recurring booms
and recessions caused by inappropriate fiscal and monetary
policies. The resulting excessive rates of inflation and
unemployment created serious domestic economic distortions
and eventually disrupted the balance of the international
system. No matter how well-intentioned the original fiscal
and monetary actions may have been, the resulting sequence
of overheating and accelerating inflation, followed by
periods of recession and unemployment, has been a heavy
price to pay for temporary economic benefits.
In planning economic policies for ]975 the Administration
believed that recovery would begin by midyear if three
fundamental adjustments could be accomplished: (1) the
unwanted accumulation of inventories could be liquidated
- 7> -
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 occurred.
During the first three months of 1975 the real output
of goods and services continued to decline at a seasonally
adjusted annual rate of 11.4 percent but economic performance
was already beginning to shift as personal consumption
increased. Most of the 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 19 74
business inventories accumulated at a seasonally adjusted
annual rate of $18 billion. 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 $31.0 billion.
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 and the Tax Reduction Act of 1975 was passed in
March. As a result, real disposable personal income increased
during the second quarter following five consecutive quarterly
declines. The turnaround of consumer purchasing power
further strengthened personal spending and enabled people to
improve their financial situations as the savings rate
jumped from 7.5 percent during the first quarter to 10.6
percent in the second quarter. As these favorable developments
pushed final sales above current levels of production, ex
runoff of inventories occurred beginning at the retail level
and then spreading back through the system into the manufacturing
sectors. New orders turned upward in April and inventories
have started to rise once again at the retail level.
-4-
As economic conditions improved employment began to
rise again in April. The "lay-off" rate has declined
steadily each month through 1975 and the average number of
hours worked and the amount of overtime have increased. The
general measure of industrial production finally bottomed
out in April and four consecutive months of expansion have
been reported. Exports continued at a strong pace throughout
this period and rising government spending has occurred at
all levels. The long declines in residential construction
and new car sales stopped in the spring and these two basic
sectors are no longer dragging the economy down. The seasonally
adjusted annual rate of new housing starts rose to 1260
thousand units in August, up from the low annual rate of 980
thousand units in April, and domestic automobile sales have
steadily improved for several months. The rate of recovery
in these two basic sectors has been sluggish but at least t
the negative results reported in 1974 and early in 1975
have been reversed.
It is now recognized that the turning point for the
U.S. economy was reached sooner than expected -- probably by
April or May -- and that the initial pattern of recovery has
been somewhat stronger than anticipated. The public's
general perception of the improving developments will
continue to lag far behind actual events -- by as much as
nine months or more according to some public opinion experts —
but "the economic recovery does appear to be well underway.
Perhaps the best overall measure of the recovery is the
swing in "real" GNP — the total output of goods and services
with the effects of price changes removed -- from a sharp
decline in the first quarter at an annual rate of 11.4
percent to a positive performance in the second quarter when
output increased at an annual rate of 1.9 percent (both
figures are seasonally adjusted).
The conclusion that the U.S. economy has started to
recover does not mean that our fundamental economic problems
have suddenly been solved or that we will not continue to
suffer specific economic disappointments during the coming
months. The present level of economic activity is still
inadequate and we can never be satisfied until the current
excessive levels of inflation and unemployment are substantially reduced. Even though some acceleration is likely to
occur over the coming months if consumer spending remains
strong, corporate profits improve and the stimulative
- 5 effects of the investment tax credit are felt in 1976,
business capital spending remains sluggish. Therefore, the
outlook for residential construction and business capital
investment suggests that the recovery pattern for the entire
economy is likely to be moderate. But I also believe that
improvement will be more sustainable if responsible fiscal
and monetary policies are supported.
Unfortunately, the hoped-for recovery of residential
construction and business investment will be hampered by the
disruptive 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. Two
weeks ago the Treasury announced that it would 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 $6.0 billion and $3.0 billion
respectively in the current calendar year.
We have substantial refunding requirements this year.
Apart from the rollover of the $77 billion of privately-held
regular weekly and monthly bills, $23.0 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
-6the 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
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 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.
We must also be concerned about renewed inflation
pressures. The slowdown in the rate of price increases
during the first half of 1975 was reversed by the disappointing
statistics reported for June arid July. While those specific
monthly statistics were not an accurate representation of
the underlying rate of inflation -- just as the 0.2 percent
increase in the CPI for August was an aberration on the low
side -- most analysts now anticipate that inflation will
persist in the 6 to 8 percent zone. That level of inflation
is clearly inconsistent with our Nation's other basic economic
goals. Because these inflation pressures have been accumulating
for many years actions to correct them will require a sustained
effort.
A third problem involves the unacceptable level of
current unemployment which is the direct result of the
recession. Although large employment gains have occurred
since April, the unemployment rate is still in the 8-1/2
percent zone. Further progress in reducing the level of
unemployment is expected as the economic recovery moves back
to full activity. For several quarters real output will
actually exceed the long-term target growth rates.
-7During the transition period, it has been necessary to
sharply increase the funds allocated to manpower programs,
public service employment, unemployment compensation benefits
and other social programs to alleviate the recession's
impact. But I hope that we will avoid the traditional
errors of overheating the entire economy by adopting policies
of excessive fiscal and monetary stimulus. That approach
might temporarily contribute to the reduction of the unemployment rate but the "stop-go" patterns of the past indicate
that excessive stimulus eventually tends to create more
problems than solutions.
Considering all of the pluses and minuses, it is clear
that we are well into an economic recovery which should
accelerate as we move into 1976. However, the strength and
durability of this recovery is not certain -- particularly
if a renewed surge of price increases or the expectations of
inflation disrupt the pattern of economic activity. The
amount of actual slack in the economy is uncertain and
policy makers should not underestimate the strength of the •
economic recovery. Extensive stimulus has already been
provided by the widespread increase in Federal outlays, the
recent tax cut and monetary actions. Monetary policies have
been responsive as the money supply (M*) has increased at an
annual rate of 8.6 percent over the past seven months since
mid-February. A broader money supply measure, which includes
net time deposits (M2), increased at an annual rate of 11.3
percent over the same time period. Specific money supply
growth rates tend to fluctuate widely from week to week but
the Federal Reserve System does appear to be following
policies which will support the economic recovery. As to
fiscal policies, the large tax cut passed in March provided
tax relief of $22.8 billion and Federal outlays increased
from $268.4 billion in FY 1974 to $324.6 billion in FY
1975, a gain of 21 percent. If outlays in FY 1976 actually
rise to the level of $368.2 billion recommended by your
Committee in its report of April 14, 1975, that would mean
that Federal spending would have increased $100 billion in
just two fiscal years, a two-year percentage jump of 37.2
percent. This surge of spending created a huge Federal
budget deficit of $43.6 billion in FY 1975 and the shortfall
for the current fiscal year will be even larger. In February
1975 the President submitted a budget which called for a FY
1976 Federal deficit of $51.9 billion. The Mid-Session
Review of the 1976 Budget published May 30 raised the anticipated
deficit to $59.9 billion. In the First Concurrent Resolution
on the Budget-Fiscal Year 1976 submitted as a Conference
Report
to in
thetough
Congress
May Executive
9, a deficit
of control
$68.8
billion
was
cooperate
recommended.
Unless
and on
responsible
the
action
Office
to
and
the
Federal
Congress
-8spending the prospective deficit could even escalate to.$90
billion and the outlook for future years is for more Federal
budget deficits. The challenge is clear.
In addition to the substantial increases in the size of
our budget deficits I am particularly concerned about the
rapid increase in expenditures. As summarized in Table 1,
Federal outlays increased from $97.8 billion in FY 1961
to $324.6 billion in FY 1975, an increase of 232 percent.
From 1961 to mid-1975 the entire GNP increased from $520.1
billion to $1440.9 billion, a gain of 177 percent (the mid1975 figure is the GNP figure reported for the second quarter
at a seasonally adjusted annual rate). The Federal budget
has clearly grown more rapidly than the total U.S. economy.
These budget outlay increases — including the changes
in FY 1976 -- are spread throughout the Government and tend
to become permanent. If we are to have the necessary fiscal
flexibility to meet our current and future priorities, we
must regain control over Federal outlays.
II. FEDERAL REVENUE ESTIMATES
Turning next to the important topic of Federal revenues,
I would first like to describe the analytical techniques
used by the Department of the Treasury and then discuss our
most recent estimates. Within the Treasury the estimating
functions are assigned to an Assistant Director of the
Office of Tax Analysis and a staff of five professionals
whose duties are divided between the preparation of general
receipts estimates and the analysis of specific revenue
changes that might result from proposed tax legislation
initiatives.
The beginning point for our estimates is the preparation
of detailed GNP forecasts by the professional staffs of the
Treasury, Council of Economic Advisers and Office of Management and Budget. Using these general forecasts of national
output and information obtained from various sources the
Treasury then prepares monthly collection estimates for
several major categories. We also revise the estimates at
the beginning of each month to reflect current collection
experiences. Finally, the potential impact of any proposed
or recently enacted tax legislation is added or subtracted
-9from the basic estimates. Legislative changes are handled
directly because the time series information used in the
calculations would not include the effects of new tax
initiatives.
The tax collection experience of the past five years is
summarized in Table 2. Over the five-year period, Fiscal
Years 1971 through 1975, individual income taxes accounted
for 45 percent of all unified budget revenues, corporate
income taxes for 15 percent, social insurance taxes and
contributions (consisting of "employment taxes and contributions,
"unemployment insurance" and "contributions for other insurance
and retirement") accounted for 28 percent and all other
sources combined represented the remaining 12 percent. It
is also interesting to note the relative stability of each
source of revenue as a share of the total even though economic
conditions and specific tax legislation change over time.'
The methods used for estimating each major source of
revenues are as follows:
Individual income taxes -- The individual tax receipts
model includes: (1) an equation which estimates current
calendar year liabilities, other than capital gains taxes,
as a function of personal incomes adjusted to eliminate
transfer payments and other labor income and to add the
employee payments for social insurance; (2) an equation
which estimates current realized capital gains subject to
taxation; and (3) an equation which estimates the withheld
tax liabilities as a function of quarterly wage and salary
figures. The amount of withholding collections must be
estimated on a current monthly basis and the income tax
withholding must be separated from the social security
withholding. There are significant time differences between
the tax liability period and the payment date for different
payment methods. The model also develops estimates by
source of individual tax payments, including refunds, and
converts the figures into a monthly and fiscal year collection
pattern.
The income tax liability for a given calendar year is
estimated by benchmarking on the last actual year. On the
basis of past experience, the change from the benchmark year
-10liability is then estimated by correlation with the projected
change in personal income (adjusted to a concept of income
subject to tax). This gives an estimate of the tax liability
excluding the tax on capital gain income. Capital gains,
which are not included in the concept of personal income are
volatile and often change in opposition to changes in personal
income. They are, therefore, treated separately. Even so,
estimated capital gains are only approximations for the
calendar years in which stock prices and market volume are
known. For future years the estimates are subjective.
The estimated total individual income tax liability for
the calendar year is then broken down by major method of
payment, including refunds, on the basis of historical
relationships. Withheld taxes are estimated by means of
relationship to salaries and wages by quarters. Refunds ar"e
estimated as a percentage of withheld taxes. Payments other
than withheld taxes are estimated as a residual after subtracting withheld taxes less refunds from the total liability
estimate. This residual is then broken down into estimated
tax payments, payments on final tax returns and back taxes,
again on the basis of past relationships. All of the past
data have to be further adjusted for changes in tax law in
order to obtain meaningful relationship. Considerable
uncertainty in the relative proportionalities has been
introduced in recent years. In the past decade, rarely have
there been two years, back to back, in which the methods of
payments have not been affected by legislative and administrative changes.
Corporation income taxes — This model begins with an
estimate of calendar year corporate profits before taxes as
measured in the national income accounts. The next step is
to determine the overall tax rate percentage to apply to the
profit estimates. The actual percentage collected will vary
according to the mix of economic activity, accounting policies
and differences between gross and net tax liabilities. The
third step is to determine the "collections lag" which will
determine which fiscal year the estimated gross liability
will apply to. Finally, the size of corporate income tax
refunds must be estimated based on an analysis of the
expected tax liabilities and the timing of economic recessions
77
-11-
and recoveries. Greater percentage errors occur in preparing
corporate income tax collection estimates because the basic
variables are more volatile and the availability of information
is not as good. Unfortunately, there have been only two or
three years in the past twenty-five in which there was no
statutory change in the coverage or timing of current
estimated payments. In addition, corporations are allowed
three methods of computation in determining whether they
complied: (1) a current estimate for the year if within 80
percent, (2) annualization as the year progresses if within
80 percent, and (3) the preceding year's tax. This mix
results in variations in the pattern apart from the statutory
changes and increases in forecasting difficulty. In any
event, past collection patterns modified by recent collection
experience and expected pattern alterations form the basis
for collection forecasts, monthly and for the fiscal year or
years. There is a good deal of intuition and judgment in*
the final result.
Employment taxes and contributions -- This category
includes FICA, SECA (for self-employed), deposits by states
of their employee-paid portion of social security taxes for
covered state employees, Federal employer deposits of
employees share of social security taxes for Federal employees
not covered by the retirement system, railroad retirement
taxes, and premiums for uninsured participants enrolled in
the Federal hospital insurance trust fund. The annual
estimates of liabilities and receipts, except for railroad
retirement taxes, are made by the Social Security Administration
and then Treasury produces quarterly and monthly collection
estimates.
Unemployment insurance premiums -- The Department of
Labor normally prepares estimates of collections although
Treasury may occasionally prepare internal revisions based
on employment data and historical experience.
Contributions for other insurance and retirement programs Various government agencies are responsible for preparing
estimates of collections related to-programs under their
jurisdiction and these figures are collected by the Office
of Management and Budget and then given to the Treasury. We
then prepare monthly collection estimates based on historical
experience.
Excise taxes ~ Historical experience is used to forecast excise tax collections with some effort to anticipate
future income levels. Annual estimates of the various trust
fund excise taxes are jointly prepared by the Treasury and
the responsible government agency.
Estate and gift taxes — Estimates are based on stock
prices and historical experience.
Customs duties — Estimates are based on current levels
of GNP results.
Miscellaneous receipts — Deposited earnings of the
Federal Reserve System accounted for nearly 90 percent of
the miscellaneous receipts in FY 1975. The only other major
source of miscellaneous revenue in FY 1976 is the import fee
and tariff on crude oil and petroleum products. This figure
is based on estimates of future imports, prices and demand
assumptions.
In general, the Treasury is responsible for the overall
estimates of revenues but it must obtain necessary economic
forecasts and information from a variety of outside sources.
This procedure obviously creates the possibility that
revenue estimates may turn out to be inaccurate because of
errors: (1) in preparing the forecast of GNP; (2) in
estimating the mix of economic activity as a basis for predicting personal incomes and expenditures, business spending
and profits, unemployment, government transfer payments,
etc.; and (3) in applying the equations developed within the
Treasury for estimating probable revenues. Unfortunately,
the underlying economic conditions constantly change and tax
legislation is modified rather frequently. For example, the
FY 1975 budget estimated that personal incomes would total
$1,135 billion in 1974. The latest figure, which is still
subject to further revision, is reported to be $1,150
billion. The $15 billion underestimate would create an
error in estimating individual income tax receipts of at
least $2 billion. Similarly, the FY 1975 budget forecast
for 1974 corporate profits was underestimated by $17 billion,
according to the current figures. That underestimate would
generate an error of roughly $5 billion in estimating receipts.
-13-
Public and private economic forecasters have experienced
great difficulty in predicting both the total GNP and major
sectors. No matter how sophisticated our forecasts become,
they will still be distorted by unexpected economic and
political developments. In the final analysis we must
recognize that complex mathematical models and careful human
judgments must be combined to estimate future results which
will ultimately be influenced by many unforseen developments.
It is also true that the tax law is constantly changing.
The econometric models used for preparing the estimates
attempt to apply equations to a time series of information
in order to project future revenues. Unfortunately, it is
difficult to develop these historical relationships because
the tax law is changed so often and the specific collection
and reportinq procedures are frequently adjusted. To the
extent that proposals in the President's budget prepared
each January are modified, rejected or replaced by other
actions, the revenue estimates will be disrupted.
The actual historical record for estimating errors in
forecasting Federal receipts and outlays is summarized in
Table 3. That record indicates that both under- and overestimates have occurred over the years and that estimating
errors persist even as the time horizon of the forecast
shortens. For FY 1975 the Federal Budget revenues were
overestimated by 5.0 percent in the original publication in
January 1974 and outlays were underestimated by 6,2 percent
(estimates prepared eighteen months prior to end of FY 1975
on June 30, 1975). In January 1975, at the mid-point of the
forecast year, receipts were underestimated by 0.8 percent
while outlays were underestimated by 3.5 percent. These
errors are attributable to at least three major factors:
(1) large changes in the underlying economic forecasts; (2)
legislative actions; and (3) internal reestimates of the
outlays and receipts as the year progressed. In summary, it
is clear that economic forecasting -- including the estimating
of Federal Budget revenues -- is far from qualifying as an
exact science. The Treasury will continue to work with the
best technical methods known to us and we will strive to
-14-
refine our judgments as much as possible but the blunt fact
that Federal budget revenue forecasts will continue to be
subject to errors should be recognized by everyone.
In the Mid-session review of the 1976 Budget published
May 30, revenues for FY 1976 were estimated to be $299.0
billion. Our latest estimates of expected FY 1976 revenues
fall within a range of $297.6 to $305.6 billion. In preparing
these estimates several key assumptions must be made as to
future decisions concerning the Tax Reduction Act of 1975,
tax withholding rates and various energy policy issues,
including the status of the $2.00 oil import fee and the
$0.60 fee applied to products. If the $2.00 oil import fee
is continued (but not the product levy) and the tax relief
provided by the 1975 Tax Reduction Act is discontinued, the
revenue estimates would be at the high end of the range
indicated. If the tax relief is extended, along with adjustments
to the withholding rates to maintain the amounts of taxes
withheld (at current levels), and the $2.00 oil import fee
is not continued, then the revenues collected would probably
be at the low end of the range. Since the final decisions
may combine different variations of several different policies
we believe that it is more realistic to estimate a range of
possible collection figures.
It should be emphasized that these revenue estimates
are still very tentative and contingent upon the basic
decisions about tax and energy policies referred to above.
In addition to the legislative uncertainties, a number of
forecasting problems have complicated our FY 1976 revenue
estimates:
1. The underlying forecasts for total GNP, personal
income corporate profits, personal consumption,
business investment, foreign trade and other
important economic sectors are still uncertain
at this early stage of the economic recovery.
Even a small percentage change in these basic
figures has a major impact on the actual taxes
collected.
2. Possible inaccuracies in estimating individual
capital gains (1974 figures will not be available
until late 1975).
SI
-15-
3.
The potential effects of corporate net losses in
calculating refunds is uncertain. It should also
be emphasized that corporate accounting practices
have frequently changed. For example, many
companies have changed their accounting for inventories from a FIFO to a LIFO basis and such
adjustments have had a major impact on the timing
of tax collection.
4. Uncertainties about the receipts lag in collecting
corporate tax liabilities given the flexibility
corporations have in paying their taxes and the
sharp drop in profits in calendar year 1975 measured
on a National Income Accounts basis.
5. Uncertainties about the probable behavior of individuals
in adjusting their personal claims for exemptions
in order to adjust the amount of taxes currently
withheld.
III. SUMMARY
Although the U.S. economy appears to be well into a
period of economic recovery a very large Federal deficit
will occur in FY 1976 and FY 1977 following the deficit of
$43.6 billion in FY 1975. These unusual deficits result
from: (1) an erosion of current tax revenues caused by the
severe economic recession; (2) a temporary increase in
Federal outlays intended to moderate the impact of the
recession; (3) a permanent type increase in Federal outlays
resulting from past legislative decisions and the initiation
of new spending programs; and (4) the tax relief provided by
the temporary Tax Reduction Act of 1975. The return to
strong economic activity will restore the tax collections to
a more normal level and reduce the temporary outlays directly
related to the recession but this will not solve the fundamental
erosion of fiscal stability caused by the rapid escalation
of Federal spending and periodic permanent tax cuts.
Some analysts have claimed that the budget deficits of
FY 1975 and FY 1976 are merely aberrations which will
disappear once the economy returns to a normal pace. Unfortunately, the historical pattern of Federal budget deficits
and the outlook for future fiscal years does not support
-16this optimistic conclusion. At the end of FY 1976 we will
record the fifteenth Federal Budget deficit in the last
sixteen years. Furthermore, the pattern of increased Federal
spending is not concentrated in the "temporary" automatic
stabilizers associated with the recession. As summarized in
Table 4, large spending increases have occurred throughout
the permanent programs of the entire government. Even the
emergency programs created for temporary relief tend to
become part of the permanent activities of government.
The rapid increase in Federal outlays is not necessarily
wrong if one agrees that more functions should be transferred
from the private sector to the government. My strong
preference is to maximize the role of the private sector
because I believe that it is more efficient and responsive •
to the interests of our people and because I believe this
approach provides for more individual freedom. This debate
will continue and we cannot hope to resolve it during these
hearings. However, one basic consideration is indisputable:
When the combination of private and public sector demands
exceeds the productive capacity of our economy an inflationary
overheating of the economic system occurs. The total productive
capability of the entire economy must be identified as a
beginning point for ranking and selecting claims against the
potential national output. Estimating the total economic
capacity of the system and the existing private and public
claims would help us avoid the simplistic arguments that
additional government programs can be continuously created
to meet every claim by simply shifting resources from the
private to the public sector. Adding new government commitments
is not feasible if the productive capacity of the economy is
exceeded. This basic guideline has been frequently violated
as total demand has increased too rapidly for the economic
system to absorb. When this happens the economy begins a
boom and bust sequence with severe inflation and unemployment
distortions, such as occurred in the mid-1960's and again
during the early 1970*s.
Some analysts have claimed that adding new government
spending programs is no threat because of the amount of
slack created in the economic system by the severe recession.
Beyond the fact that our measures of capacity and excess
resources are very uncertain, I believe that this recommendation
misses the basic point: The fiscal decision of the past
S3-17have already eroded our fiscal flexibility in responding to
the problems of the present and the future. If we accept
the recommendations to expand Federal spending even more we
will create permanent claims that will further disrupt the
allocation of resources in the future. Many government
programs now involve an "entitlement authority" which makes
the actual outlays open-ended depending upon the eligibility
rules and benefits established. There has been a tendency
to liberalize both guidelines and many government programs
are now indexed so that they rise automatically as inflation
occurs. Other outlays are required by specific legislative
and contractual agreements. In the future, there should be
no such thing as an "uncontrollable" Federal budget commitment
because the Congressional Budget Committee discipline will
require careful consideration of priorities and the elimination
of ineffective programs during the annual appropriations.
process. We must correct the historical approach of merely
continuing existing programs so that any new claims were
typically "added on" to current outlays.
I believe that by concentrating on short-term stabilization
goals rather than the long-term allocation of resources our
fiscal policies have actually become a disruptive force.
Too often fiscal policies have lagged economic developments
so that the desired stimulus or restraint typically arrives
long after the economic situation has changed. The "emergency"
spending programs created to pull the economy out of a
recession often exaggerate the subsequent overheating of the
economy and create additional commitments that last far into
the future. A corresponding reduction of such programs
during periods of economic expansion is unusual because the
Executive Office and the Congress have been unwilling to
shift their attention to longer-term goals or to face up to
the agonizing experience of saying no.
This country now faces the reality of a strong challenge
to our basic fiscal stability. Your Committee is a key
factor in determining whether or not this challenge will be
met. In preparing your Second Concurrent Resolution to
Congress I hope that you will consider the future course of
fiscal policies -- particularly the escalating pattern of
Federal spending and "off-budget" commitments -- as well as
the need to develop guidelines for FY 1976. We need to
consider longer-term goals by relating the future impact of
-18current government spending actions. When we consider the
total impact of our fiscal decisions we will recognize that
individual pieces of legislation cannot simply be added to
existing commitments without considering what current claims
need to be eliminated or curtailed. Too often we have
ignored the economic discipline of allocating scarce resources
to different claims according to national priorities which
are responsive to the interests of the American public. The
economic distortions of the past decade indicate that this
was a costly decision. Your Committee has a major opportunity
to help correct these distortions and I look forward to
working with you as you attempt to achieve that goal. Thank
you.
ss
TABLE 1
FEDERAL BUDGETS
CHANGES IN THE UNIFIED BUDGET OUTLAYS
BY FISCAL YEAR, 1961-1976
(dollars in billions)
1 Year over
eding Year
Federal
Outlays
Dollar
Increase
Percentage
Increase
Surplus
OX Deficit
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
$ 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
6.1
-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
Source:
—
13.8
17.5
13.0
3.2
6.6
7.5
9.7
6.3
8.8
20.9
Economic Report of the President, February 197 5,
Table C-64, p.324, for years 1961 through 1974;
1975 figure from Final Monthly Treasury Statement
of Receipts and Outlays of the United States
Government, for period from July 1, 1974 through
June 30, 197 5.
TABLE 2
Net Unified Budget Receipts, by Source, Percent of Total, and Five-year Average
Fiscal Years 1971-1975
1972
1973
1974
1975
86.2
26.8
41.7
3.7
3.2
16.6
3.7
2.6
3.9
188.4
94.7
32.2
46.1
4.4
3.4
15.5
5.4
3.3
3.6
208.6
103.2
36.2
54.9
6.1
3.6
16.3
4.9
3.2
3.9
232.2
119.0
38.6
65.9
6.8
4.1
16.8
5.0
3.3
5.4
264.9
122.4
40.6
75.2
6.8
4.5
16.6
4.6
3.7
6.7
281.0
45.8%
14.2
22.1
2.0
1.7
8.8
2.0
1.4
2.0
100.0
45.4%
15.4
22.1
2.1
1.6
7.4
2.6
1.6
1.7
100.0
1971
: 5-year
:average
Fiscal Year ($ billions)
Individual income tax
«
Corporation income tax
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
•
Customs duties
Miscellaneous receipts
Total budget receipts
«
105.1
34.9
56.8
5.5
3.8
. 16.3
4.7
3.2
4.7
235.0
Fiscal Year - Percent
Individual income tax •
Corporation income tax
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties • • • •
Miscellaneous receipts
Total budget receipts
Office of the Secretary of the Treasury
Office of Tax Analysis
Note: Figures are rounded and may not add to totals.
,
,
,
,.
44.5%
15.6
23.6
2.6
1.6
7.0
2.1
1.4
1.7
100.0
44.9%
14.6
24.9
2.6
1.5
6.4
1.9
1.3
2.0
100.0
43.6%
14.5
26.8
2.4
1.6
5.9
1.6
1.3
2.4
100.0
44.7%
14.8
24.1
2.4
1.6
7.0
2.0
1.4
2.0
100.0
September 18, 1975
$9
TABLE 3
Budget Estimating Errors
Overestimate (+) or Underestimate (-)
as a Percent of the Actual Figure
Fiscal
year
Estimates made 18 months
prior to the end of the
fiscal year
Estimates made 6 months
prior to the end of the
fiscal year
Outlays
Outlays
Receipts
Receipts
1950 1/
+ 4.1
+10t3
+7.8
+ 1.9
1960 1/
-0.3
-1.7
+ 1.6
+ 0.2
197 0 2/
-0.7
+2.6
+ 0.7
+2.9
1971 2/
-5.0
+7.3
+ 0.6
+ 3.1
1972 2/
-1.1
+ 4.3
+ 2.0
-5.2
1973 2/
-0.1
-4.9
+ 1.3
-3.1
1974 2/
+ 0.1
-3.4
+ 2,3
+ 1.9
1975 2/
-6.2
-5.0
-3.4
-0.8
Office of the Secretary of the Treasury
Office of Tax Analysis
September 19f 197 5
1/ Administrative budget.
2/ Unified budget, The first estimate on a unified budget basis was
prepared in January 1968.
TABLE
CHANGES IN BUDGET OUTLAYS BY FUNCTION; FY 1976 over FY 197 5
(millions of dollars)
Function
House Budget Committee
Resolution (3)
FY 1976 1 Change over FY
FY 1976
(2)
87 .4
5 .0
4 .3
9 .7
1 .8
12 .6
4 .6
15 .0
27 .6
109 .1
16 .7
3 .0
2 .7
7 .0
31 .2
+6,7
+ 0,5
+0,3
•f0,6
+ 0.2
+3.1
+1.5
+ 1.8
+ 1.4
+ 13.7
+ 0.4
+0.3
+ 0.5
+ 0.3
+3.2
+6.8
+ 5.9
89,7
4,9
4,6
11.5
1.8
19.8
9.5
20.4
30.7
123.9
17.4
3
3
7
35
1.1
-16.2
+7. 2
+ 4. 9
+ 5. 4
+ 3. 1
+ 14, 8
+0 .7
+0 .4
+0 • r
+0 .2
+3 .8
+1 .1
+2 .1
+35.3
368.2
+44.6
National defense
International affairs
General science, space, and technology
Natural resources, environment and energy
Agriculture
Commerce and transportation
Community and regional development
Education, manpower and social services
Health
Income security
'
V e t e r a n s benefits and services
Law enforcement and justice
General government
R e v e n u e sharing and general purpose fiscal assistanceInterest
Allowances
Undistributed offsetting receipts
-14.1
94.1
5,5
4.6
10,3
2.0
15.7
6.1
16.8
29.0
122.8
17.1
3
3
7
34
6.8
-20.0
Total
323.6
358.9
(1)
Change over
FY 1975
FY 1975
(1)
M i d - S e s s i o n Review of the 1976 Budget, May 30, 1975, Table 9, p . 1 5 .
(2) FY 1976 Administration estimates as published in Mid-Session Review of the 1976 Budget.
(3) First Concurrent Resolution on the Budget-Fiscal Year 1976, Report of the Budget, House of Representatives,
Appendix A - 2 , p . 4 9 .
+ 2, 3
-0, 1
+0, 3
+1. 8
1975
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE
THE HOUSE SUBCOMMITTEE ON APPROPRIATIONS
FEBRUARY 3, 197 6
2:00 P.M.
r
2
Mr. Chairman and members of the subcommittee:
I am pleased to be here with you today to consider the
Department of the Treasury budget requests for operating
appropriations during fiscal year 1977.
Let me introduce my associates - Mr. Donald Alexander,
Commissioner of IRS; Mr. David Macdonald, Assistant Secretary
for Enforcement, Operations, and Tariff Affairs; Mr. Warren
Brecht, Assistant Secretary for Administration; Mr. David
Bradford, Deputy Assistant Secretary for Tax Policy; and
Mr. Arthur Kallen, Director of my Office of Budget and * *
Finance.
Mr. Chairman,,the members of this subcommittee have always
worked with the Department in a highly cooperative spirit. I
fully intend that I and officials of the Department will continue the same effective and harmonious relationship that has
characterized our joint efforts in the past.
As your schedule indicates, the Treasury bureau heads
have already appeared before this Committee to justify their
individual requests in detail. As a summary of their testimony,
I would like to insert for.the record a more detailed Treasury
bureau addenda. At the conclusion of my statement, I will be
pleased to discuss any matters relating to the bureaus which
the Committee may wish to review with me.
WS-622
- 2 With your permission, Mr. Chairman, I would like to make
a short general statement on the overall economic situation
and the Administration's total budget, before discussing the
Treasury Department's FY 1977 budget. Much more was said
earlier on this topic when I testified before the full House
Appropriations Committee last week.
Since 1962, Federal Government outlays have roughly
quadrupled from $106 billion to the $394 billion proposed for
1977. In fiscal year 1965, outlays in the federal budget
accounted for about 18 percent of a $658 billion Gross National
Product. For fiscal year 1977, outlays will be over 22 percent
of a $1.8 trillion GNP. Government spending has been 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, and placed in the hands of government.
Believing that the path to a truly durable economic recovery
lies in the private sector, we hope to redress this trend in
fiscal year 1977.
The rise in Federal Government spending not only has
outstripped the growth in the economy, but has also surpassed
the growth in revenues, thereby causing record budget deficits.
In fiscal year 1975 the budget deficit was $43.6 billion, and
in FY 1976 it will be almost $76 billion. By FY 1977, we
hope to reduce this deficit to $43 billion, and begin the
- 3 long road back to fiscal responsibility with a budget surplus
by FY 1979. These deficits require Treasury financing, which
in turn places significant strains on our financial markets
and nudges aside many a would-be borrower from the private
sector. Over the past 10 years, the Federal Government
(including the off-budget agencies) has borrowed over a third
of a trillion dollars. In the current fiscal year, over 80
percent of all funds in the securities market will be
absorbed by the Federal Government.
The most pressing goal of fiscal policy must be to bring
the spiraling growth of government spending under control and
to move toward budget balance as the economic recovery gains
further momentum. The President's budget, which calls for
limiting fiscal year 1977 spending to $394 billion instead of
the $423 billion projected, is a positive step toward this
goal. Even with this program, outlays will rise by about
$21 billion from fiscal year 1976--an increase of 5.5 percent.
Thus, the President's program is not a massive or indiscriminate
slash in spending, as some allege, but is rather a necessary
step in restraining the rapid growth in outlays and bringing
about responsible fiscal policy so as to sustain a solid
economic recovery in a non-inflationary environment.
I would now like to turn from the broad overall budget
environment to the specifics of the Department's request.
- 4 Treasury Department Fiscal Year 1977 Overview
The operating accounts budget before you reflects our
continuing efforts to strike a reasonable balance between the
needs of the Nation's economy and the needs of our Department.
In keeping with the President's efforts to prevent a runaway
growth of government, minimize inflation, and produce a
balanced budget within three years, we have tightened our
belts and requested additional resources only where the workload
clearly dictates. On the other hand, while we are trying to
set an example of efficiency and economy, we have not sought
to reduce spending below levels that are essential if the
Department is to carry out its responsibilities relating to
the financial and economic affairs of the Nation. We have
attempted to protect our revenue production capacity and carry
out effectively our law enforcement duties. I am sure the
testimony of the bureau officials made these points very clear
to the Committee.
Our estimates as contained in the President's budget for
the new October 1, 1976 to September 30, 1977 fiscal year
indicate that Treasury will require a total of $2.6 billion
for operating accounts as compared to almost the same amount
in FY 1976. (This figure is broken down in detail in Table 1,
which I would like to insert for the record.) You will note
that this request represents an increase of $14.2 million and
a decrease of 2,172 average positions compared to our 1976
- 5levels.
The real program level for the Department has been
reduced somewhat, partially offset by productivity gains, as
part of the tough budgetary decision process. This result is
masked, however, by the effects of the October 1975 pay increase,
which added costs of $62.7 million to the 1976 budget and a
corresponding cost of $90.1 million for a full year in FY 1977.
Thus, comparing 1976 with 1977, it is clear that the increase
in total proposed outlays is only nominal, and we have reduced
our average positions some 2 percent.
Highlights of Expected Program Accomplishments for FY 1977
These funds will enable us to meet the workload generated
in our many programs. Here are some brief highlights of the
Department's budget for fiscal year 1977:
In the Internal Revenue Service, for example, the funds
we are asking for are adequate to permit us to assist 4 0 million
taxpayers, which represents roughly about 47 percent of the
individuals filing tax returns. This is 4 percent lower than
1976. In our Collection activities we anticipate being able
to collect, in a timely fashion, about $230 million of delinquent
returns, although our inventory of unprocessed returns is
expected to increase slightly. In the Audit of tax returns,
we will be examining approximately 2.39 million returns, which
is not far different from last year's program of 2.42 million
examinations. The rate of coverage of full examinations will
decline from 2.5 percent to 2.4 percent because of a growth in
- 6 tax return filer population. We are also making in our Service
Centers 1.8 million adjustments for items on tax returns, up
from 1.4 million in 1976. This increase is due mainly to a
higher level of activity in the Information Returns Matching
Program. We expect to process 600,000 more tax returns, with
211 less average positions, in the IRS data processing operations.
In our Fiscal Service we anticipate a volume of 666 million
checks issued, 777 million paid, and 1.2 million check claims.
Savings bonds issues and retirements in 1977 are expected to
reach an estimated 289.6 million pieces, an increase of
6 million over 1976. Transactions in other Treasury securities
are expected to reach 12.5 million in 1977, which is .5 million
above the 1976 level.
We expect a total production of almost 16 billion coins
at the Mint, which is an increase of over 1.9 billion from the
prior year.
We expect to increase our level of Compliance enforcement
in the Office of Revenue Sharing by a modest amount.
In the Bureau of Alcohol, Tobacco and Firearms, we are
proposing no new program initiatives, but we do expect to
carry out fully the President's Concentrated Urban Enforcement
Program which was approved for three cities by the Congress in
the 1976 supplemental. This program is a four-pronged approach
to significantly reduce the criminal misuse of firearms in all
of the Nation's major metropolitan areas.
io7
- 7 The Secret Service will receive and investigate 237,000
cases involving counterfeiting, check and bond forgeries,
protective intelligence, and other criminal and non-criminal
matters, a 9.8 percent increase over the 215,852 cases in
fiscal year 1976.
And, finally, we anticipate that the Customs Service will
be handling an increased number of persons entering the country—
267 million, up 4 percent from FY 1976—as well as starting
their new responsibilities under the generalized system of
preference, as provided by the Trade Act of 1974. With 319
less positions, we will need to be vigilant to prevent a
denigration in the level of inspection quality or interdiction
capability.
1977 Budget Summary
Overall, the President's budget for the Department of the
Treasury requests budget authority of $56,335,284,000 for
FY 1977—an increase of $5,842,918,000 over 1976. Of this
increase, $7,300,000,000 is for interest on the public debt.
Incidentally, I might note that the FY 1977 interest payment
on the public debt is estimated at $45 billion—a compelling
reason to make every effort to stem the rising cost of the
Federal Government. $187,500,000 of the increase is for
Revenue Sharing, $14,172,000 for operating accounts, with an
offsetting reduction of $1,658,754,000 in all other accounts.
Funds for the Department's operating programs have been held
- 8 essentially level at $2,575,797,000, an increase of only
$14,172,000 over 1976. As I noted earlier, this apparent
increase largely reflects the effect of the October pay raise.
Our net outlays for the Department are estimated at
$56,309,963,000, of which $45,000,000,000 is for interest on
the public debt; $6,548,504,000 is for Revenue Sharing; and
$2,575,356,000 is for the Department's operating programs; and
$2,186,103,000 is for all other accounts, such as interest on
IRS refunds, Customs collections in Puerto Rico and Virgin
Islands, IRS collections in Puerto Rico, Claims, Judgments
and Relief Acts, and the expenses for administering the New
York City Seasonal Financing Fund.
The budget provides for a reduction of 2,172 average position
for the operating accounts for a FY 1977 total of 110,668 compared
with 112,840 in 1976. We have made every effort to economize, in
keeping with the need to reduce Federal Government spending; we
are convinced that we can increase our productivity, so as to
continue to carry out our responsibilities. We expect a minimal
reduction in the quality of our service or level of enforcement
as compared to FY 1976.
One reason for confidence in our ability to meet the
1977 budget challenge has been the fine support given the
Department by this Committee over the past several years.
While we are reducing our average positions this year, in the
- 9 longer run context, I believe the Department has fared well in
obtaining the resources needed to meet its workload. For
example, the five-year period 1971-1976, Treasury increased
average employment from 87,384 to 112,840. With this solid
base, I believe this year's budget, combined with careful
management attention, will enable us to do our job.
FY 1977 Budget Changes
I would like to insert Table 2 into the record to show
the relationship between our average position and dollar requirements, as well as Table 3, which provides the detailed derivation
of Treasury's "Proposed Authorized Level for 1976." Also attached
is a chart depicting the relative size of the Treasury bureaus
for 1977. Following is an outline of the significant increases
and decreases for our 1977 request.
Budget Authority - Net +$14,172,000
+$19,884,000 — to meet workload increases, including such
major items as:
- $5.4 million for IRS for processing tax returns
and employee plans workload;
- $7.4 million for the Fiscal Service for
issuing and paying checks;
- $5.5 million for the Bureau of the Public
Debt for costs related to the redemption
of public debt securities;
- 10 - $.6 million for the Secret Service for
protection related to Bicentennial foreign
dignitary travel;
- $.2 million for additional coins; and
- $.8 million for all other related workload.
+$13,273,000 —
to provide for full funding by AT&F of the
Concentrated Urban Enforcement program.
+$ 2,000,000 —
for payments to state and local governments for
protection of permanent foreign diplomatic missions
under extraordinary circumstances.
+$ 1,327,000 —
for equipment replacement in Bureaus of the Mint
and Alcohol, Tobacco and Firearms.
+$
500,000 —
for repairs and improvements to Treasury
buildings.
+$24,068,000 —
for full-year costs of civilian pay increases
authorized by Executive Order 11881.
+$17,568,000 —
to provide full-year cost in 1977 for programs
authorized for part of 1976.
+$22,37 9,000 —
is the remaining cost to maintain current levels
of operation offset by nonrecurring costs and
savings—within-grade promotions, grade to grade
promotions, and annualization of space costs.
Included also are the severe effects of inflation
reflected in greatly increased prices for such
things as printing, communications, utilities, and
operating supplies.
- 11 These increases are offset by significant decreases:
-$77,142,000 —
a decrease reflecting program reductions in
FY 1977 includes such items as:
- Equipment
- Premium Pay
- Audit of Tax Returns
- Taxpayer Service
- Illicit Liquor Program
-$ 9,685,000 —
for productivity savings for most Treasury bureaus.
Employment - Net Decrease of 2,172 Average Positions
+
443 average positions of new employees to meet workload
increases, including such major items as: 172 average
positions for workload related to Employee Plans; 129
average positions for issuing and paying checks; 102
average positions related to the redemption of Public
Debt securities; 11 average positions for additional
coins; 16 average positions for staff support in Office
of the Secretary; and 13 average positions for Office of
Revenue Sharing.
+
504 average positions to provide for full funding of the
Concentrated Urban Enforcement Program (AT&F).
+
390 average positions to provide full-year cost in 1977
for programs authorized for part of 1976.
- 12 These increases are offset by the following decreases:
-2,119 average positions for program reductions in FY 1977,
reflecting the program decreases mentioned previously.
- 720 average positions resulting from lower inventories in
the IRS Collection activity.
670 average positions for productivity savings.
Mr. Chairman, the budget before you is a lean request.
The minor program increases have been substantially offset by
program reductions and other cost-saving actions. We have
reduced employment by 2,172 average positions and held?the line
on resource requirements while at the same time providing for
the accomplishment of the projected FY 1977 workload increases.
I shall, of course, welcome the opportunity to answer any
questions you may have. Thank you.
Table 1
- 13 -
THE DEPARTMEOT OF THE TREASURY
Annual Appropriations for Treasury Department for 1976
and Estimated Requirements for 1977
(In Millions of Dollars)
1976
Proposed
Authorized
Level l/
1977
Budget
Estimate
Change
over
1976
Office of the Secretary
27.7
27.0
-.7
Office of Revenue Sharing
3.0
3.8
.8
Federal Law Enforecement Training
Center (Salaries and Expenses)
12.0
8.5
-3.5
Bureau of Government Financial
Operations:
Salaries and Expenses
Government Losses in Shipment
Eisenhower College Grants
Hoover Memorial Fund
131.7
.7
1.0
7.0
147.2
15.5
-.2
-1.0
-7.0
Bureau of Alcohol, Tobacco and
Firearms
109.7
125.3
15.6
Uc S. Customs Service
319.1
324.1
5.0
14-1.2
3.4
43.2
2.0
-3.4
105.6
114.5
8.9
Regular Operating Appropriations:
Bureau of the Mint:
Salaries and Expenses
Construction of Mint Facilities
Bureau of the Public Debt
.5
Internal Revenue Service:
Salaries and Expenses
Accounts, Collection and
Taxpayer Service
Compliance
Total, IRS
79L7
85U.O
1,5913
789.9
83^9
1767175
-1.8
•19.1
•20.0
U.S. Secret Service
108.0
110.3
2.3
TOTAL, Regular Operating Appropriations
NOTE:
•46.7
$2,561.6
$2,575.8
-3
1U.2
Amounts are rounded and do not add to total.
1/ Includes pay increases authorized by Executive Order 11881 effective
October 1, 1975 -. and program supplemental for the Biireau of the
Public Debt and the Bureau of Government Finanical Operations.
760089
January 13,
^^
Table 2
- 1M- TEE DEPARTMENT OF THE TREASURY
Comparative Statement of Average Positions
Fiscal Years 1976 and 1977
(Direct Appropriations Only)
1976
Authorized
Level
1977
Estimate
Change
over 1976
839
+23
Regular Annual Operating Appropriations:
Office of the Secretary
816
Office of Revenue Sharing
1014- 123 +19
Federal Law Enforcement Training
Center
256 2k0 -16
Bureau of Government Financial
Operations
2,518
2,557
+39
Bureau of Alcohol, Tobacco and
Firearms
4,062
4,573
+511
13,255
12,936
-319
Bureau of the Mint
1,934
1,925
-9
Bureau of the Public Debt
2,499
2,539
+40
1,771
-103
^2,567
37,221
81,559
-l,68l
-821
-2,605
110,668
-2,172
U. S. Customs Service
Internal Revenue Service:
Salaries and Expenses
1,87^4Accounts, Collection and Taxpayer
Service
kk,2k8
Compliance
38,0te
Total, IRS
8U,16U
U. S. Secret Service 3,232 3,377 +1^
TOTAL, Regular Annual Operating
Appropriations
76OO9O
January 13? 1976
112,8to
Table 3
THE DEPARTMENT OF THE TREASURY
Derivation of "Proposed Authorized Level for 1976"
(in thousands of dollars)
1976 Appropriation 1 / $2,k65,859
Supplemental Appropriation (P. L. 94-157) -
16,000
Proposed Supplemental:
1. Pay Increase:
a.
b0
Classified
Wage Board
$62,2^8
I+52
62,700
2.
Program:
a.
Public Debt - Provides for increased
reimbursement to the Federal Reserve Banks
(3,7^6), increased reimbursement to paying
agents for redemption of savings type
securities (276), reimbursement to U. S.
Postal Service for increased mailings of
securities (1,3^8), increased cost of
space and services (1,123).
6,^93
b.
Government Financial Operations - to
provide for reimbursement to the U. S.
Postal Service resulting from the postal
rate increase
10,573
Proposed Authorized Level for 1976
1/
Includes $5.5 million for the Bureau of Alcohol,
Tobacco and Firearms (Concentrated Urban Enforcement)
and $10.5 million for Secret Service (Protection of
Foreign Dignitaries).
760091
January 13, 1976
17,066
2 561 625
7/
Department of the Treasury
Operating Appropriation Levels
Total $2375,797 (thousands)
fiscal Year 1977
ADDENDUM
BUREAU STATEMENTS
Office of the Secretary
The Office of the Secretary provides for functions that are
directly attributable to the Secretary of the Treasury as a major
policy advisor to the President and for executive direction of
the Department. The Office assumes primary responsibility for
the direction and coordination of all Treasury activities, and
direct responsibility for formulating and recommending domestic
and international economic, tax, fiscal and monetary policies.
The appropriation also funds general maintenance, and major repairs
and improvements to the Main Treasury and Annex Buildings.
The appropriation request for fiscal year 1977 is $27 million
and 839 average positions. The estimate is $.7 million less and
23 average positions more than the authorized level for fiscal year
1976. The major elements which comprise this change are $.5 million
for repair and improvements to the Main Teasury and Annex Buildings,
$.M- million and 16 average positions for new and increased program
responsibilities, 7 average positions and $1.9 million for increases
to maintain the 1976 level of operations in 1977, offset by a reduction in the repairs and improvements program and other nonrecurring
equipment costs and savings of $3.6 million.
A total of 21 new positions is being requested for the staffs
in the various supporting organizations of the Office of the
Secretary. These include six positions in the Office of Debt
Analysis, one position in the Office of Tax Analysis, two positions
- 2 in the Office of the Assistant Secretary (EO&TA) , eight positions
in the Office of Equal Opportunity Program, one position in the
Office of the General Counsel, one position in the Office of
Personnel, and two positions in the Office of Administrative
Programs. This request represents the minimum needs necessary
to accomplish our mission of providing guidance, direction, and
overall supervision for the many functions of the Department.
- 3 Office of Revenue Sharing
The Office of Revenue Sharing was established to implement
the General Revenue Sharing Program as authorized by Title I of
the State and Local Fiscal Assistance Act of 1972 (P.L. 92-512).
Through General Revenue Sharing, $30.2 billion from federally collected individual income tax receipts is being returned over
a five-year period to nearly 39,000 recipient governments. The
Office of Revenue Sharing assumes responsibility for the distribution
of revenue sharing monies, maintaining detailed accounting records,
insuring compliance with the requirements and provisions of the
law, and reporting at regular intervals to Congress, recipient
governments
9
and the general public on the revenue sharing
program.
The appropriation request for fiscal year 1977 is $3.8
million and 123 average positions. The estimate for fiscal year
1977 is $.8 million and 19 average positions higher than the
authorized level for fiscal year 1976. The major elements that
comprise this increase are $ .4- million and 13 average positions
for increased program responsibilities, and $ .«+ million and six
average positions to maintain the 1976 level of operations in 1977.
A total of 21 new positions is being requested for the
Compliance Division, and will improve the civil rights and financial
compliance programs as required by the General Revenue Sharing Act.
- 4 Federal Law Enforcement Training Center
Salaries and Expenses
The request for the Federal Law Enforcement Training Center
for FY 1977 is $8.5 million, a decrease of $3.5 million and 16
average positions from the FY 1976 appropriation. This is net
of the following items: an increase of $115 thousand for plant
operations; an increase of $1.0 million for increases to
maintain the current level (within-grades, annualization of pay
costs, etc.) ; and a decrease of $4-.7 million for one-time costs
related to the move to Glynco, Georgia; decreases in training
projections; and other nonrecurring costs.
The eight-week Criminal Investigator School (C .1 .S .) will
continue to provide basic training for new agents of the 2^
participating agencies and, on a space-available basis, to
personnel from other Federal organizations. It is estimated that
the C.I.S. will train 659 students in FY 1977.
The Police School (PS) will continue to provide basic
training in police techniques and enforcement law for recruits from
ten Federal law enforcement agencies. The full course for recruits
attending the Police School is a 12-week program. In addition,
the staff of the Police School conducts some special 8-week and 5-we
classes.
The Center conducts full-time driver training on a temporary
course which will be used until the permanent course is constructed.
- 5 Advanced, In-Service, Refresher and Specialized (AIRS) driving
training is also conducted for requesting agencies, and the
Center is moving further into this area. The curriculum
includes training in high-speed driving, defensive driving, and
skid recovery techniques. In addition, firearms training is
also conducted on behalf of the Center with 1,562 students to be
trained in FY 1977.
Construction
No appropriation is requested for this account. The Center
has been authorized to spend $28 million for permanent construction
at Glynco, Georgia. These funds will come from amounts previously
appropriated by the Congress.
The Master Plan for the Glynco facility is currently being
finalized. It will call for utilizing some or all of the permanent
buildings and facilities now in use at Glynco, as well as
construction of new facilities. The first priorities for
additional construction under the Master Plan are the completion
of dormitories begun, but not completed, by the Navy; and the
construction of a modern, up-to-date, indoor firing range. New
construction to house additional classrooms and training support
activities is also planned as part of the Master Plan --as well
as a permanent driving range facility for our Driver Training
program. In addition, other renovation, demolition and upgrading
of the facility will be undertaken consistent with our approved
Master Plan.
- 6 Bureau of Government Financial Operations
Salaries and Expenses
The 1977 estimate for the Bureau of Government Financial
Operations is $1M7.2 million -- a net increase of $15.5 million
above the 1976 level. Of this increment, $9.2 million is for
the annualization of the recent postal rate increase. Outlays
for equipment which will provide service and benefits in future
years total $2.8 million — $1.6 million for the purchase of
equipment and $1.2 million for the rental of equipment with a
purchase option.
Other increases totaling $6.2 million are necessary for
financing incremental workloads, additional functions and those
increases necessary to maintain in 1977 the current levels of
employment and operations. Offsetting reductions for nonrecurring
equipment purchases, compensation for one less workday, and
management savings other than those reflected in the workload
areas, amount to $2.7 million.
An increase of 18 million brings the total volume of
issuances, primarily checks, to 666 million for 1977. The Bureau
expects to pay 777 million Government checks and to reconcile such
payments against issues reported by disbursing officers. In
addition, an increase of 107 thousand check claims over the 1976
level will bring total claims for lost, stolen and forged checks
to 1.2 million. Productivity increases of over 2% are anticipated
in all work volume areas.
- 7 Government losses in shipment
This self insurance account covers losses in shipment of
government property such as coins, currency, securities and
losses in connection with the redemption of savings bonds. An
appropriation of $500 thousand is requested in 1977 to cover
these losses.
Bureau of Alcohol, Tobacco and Firearms
The appropriation request for the Bureau of Alcohol, Tobacco
and Firearms for fiscal year 1977 totals $125.3 million, an
increase of $15.6 million over the proposed authorized level for
fiscal 1976. Of this increase, $13.3 million is for program
increases, $9.7 million is for maintenance of current operating
levels with a $7.4- million offset for nonrecurring costs.
The program increase of $13.3 million is requested to fund
the balance of the Concentrated Urban Enforcement (CUE) program
to combat illegal traffic in firearms and explosives. This
program was requested by the President in his June 1975 message
on crime and was authorized by Congress in Public Law 9*1-157 ,
which provided funds to implement the program in three of the
eleven cities contemplated. This program has four basic objective
The first is to trace guns seized In crimes to determine the
channel of illegal gun commerce. Second is the investigation
and elimination of major illegal sources of weapons. TTiird, is
the use of concentrated enforcement techniques to perfect cases
against persons using firearms and explosives in criminal activit
F«mrt expanded dealer compliance efforts will be made to assure
stricter conformity to Federal firearms and explosives laws.
An intensive effort will also be undertaken to deny terrorists
and organized criminals access to explosives through a nine point
enforcement program.
The bureau regulation of the legal alcohol and tobacco industries
will assure collection of proper taxes which are projected at
nearly $8.2 billion in fiscal 1977.
U. S. Customs Service
The budget request for the Customs Service is $324-.1 million.
This level reflects a net increase of $5.0 million over the FY 1976
proposed authorized level. No program increases have been requested;
however, the Service is requesting $16.0 million to maintain current
levels, offset by a reduction of $11.0 million for nonrecurring onetime costs, equipment, and program reductions.
The Customs Service is continuing their Intensified efforts in
all areas of their enforcement responsibility. In fiscal year 1975,
Customs expended 24-0 more work-years on special enforcement than the
previous year. This includes the areas of general enforcement,
smuggling, fraud, cargo surveillance, added inspections of vessels,
cargo and persons, and a wide range of laws and regulations of other
Government agencies.
In the area of drugs, Customs is facing the worst smuggling problem
since the days of prohibition. We are in the midst of a resurgence in
drug usage, especially heroin abuse. .Reflecting this increase is an
increase of 416 percent in heroin sezied to date in fiscal year 1976.
The President In his statement of December 26, 1975, said, "Drug
abuse is a tragic national problem which saps our Nation1s vitality.
It is also a major contributor to our growing crime rate. All of us
must redouble our efforts to combat this problem". The Customs Service
is the interdiction force at our borders, and, as such, will play a
major role in this new Presidential initiative. The Customs Service
Is meeting the challenge of processing on-going workload, increasing
- 10 -
responsibilities and limited resources, with many improved procedures:
selectivity in inspection of passengers, and in technological assists
through the use of X-ray equipment, communications systems, computers,
aircraft, helicopters, boats and other devices,,
The economic downturn beginning in fiscal year 1974- has caused
reductions in the traditional workload indices of the Customs Service.
However, in fiscal year 1976 Customs workloads are again on the rise,
reflecting improved economic factors.
The Customs Service continues to experience increases in workload
that are not captured by traditional workload measures. Tasks mandated
by Congress through recent legislation, such as the Trade Act, and
by the President through the Executive Order process, have placed
additional burdens on the Customs Service. The tasks I refer to
include the Trade Act, the Freedom of Information and Privacy Acts,
and the Executive Orders dealing with labor management relations and
importations.
In line with the Administrations policy of reducing Federal
employment and expenditures, some Customs programs in fiscal year 1977
will decrease. However, the Service will make every effort to hold
the program effect to a minimum.
- 11 -
Bureau of Engraving; and Printing
The Bureau of Engraving and Printing designs and produces United
States currency, postage stamps, Public Debt securities, and
miscellaneous financial and security documents.
Operations of the Bureau are financed by means of a
revolving fund established in accordance with the provisions of
Public Law 656, approved August 4-, 1950. This fund is reimbursed
by customer agencies for the direct and indirect costs of the
Bureau incidental to work and services performed, Including
administrative expenses.
For fiscal year 1977 the bureau estimated a delivery requirement of approximately 2.9 billion Federal Reserve Notes. Actual
production for the current fiscal year will approximate 3.1
billion notes, as compared with 2.8 billion notes delivered in
fiscal year 1975. Savings to the Federal Reserve System, estimated
at $27 million in the next 5 years, led to the announcement by the
Secretary of the Treasury on November 3^ 197 5. that the Bureau of
Engraving and Printing would commence production of $2 Federal
Reserve Notes and that the first day of issue would be April 13, 197 6,
the anniversary of Thomas JeffersonTs birth.
Accordingly, the Bureau started production of a new $2 Federal
Reserve Note on November 18, 1975. The design of the S2 note
features a portrait of Thomas Jefferson on its face and a rendition
- 12 -
of the painting, "The Signing of the Declaration of Independence",
by John Trumbull, on its back.
n -F™ rmnrlnntion of 4-00 million notes by
Current plans call for production
, , „r -n,-«„ available for issuance on April 13,
June 30, 1976, with 225 million availauie IUX
a.. • +.„* -KhrH- Linn million notes will approximate
197 6. It is anticipated, that 4-uu mixnun
annual requirements.
Bureau of the Mint
• — w i . — i « . « — ^ > » » — • • • » —
Salaries and Expenses
The appropriation request of the Bureau of the Mint for
fiscal year 1977 is $4-3.2 million, an increase of $2 million
over the authorized level For fiscal year 1976. This increase
will provide additional production of 1.9 billion coins raising
the total annual production to 15.8 billion.
Included in our
1977 coin production is a reserve inventory to prevent recurrence
of the just ended one-cent shortage which has been with us for
the last two years.
In fiscal year 1977 the Philadelphia Mint will produce
coinage strip.
operation only.
The Denver Mint has been converted to a coining
Denver1 s strip fabrication equipment was removed
and replaced by coining equipment, enabling us to increase coin
production.
Construction of Mint Facilities
To assure the coinage capability needed to meet the increasing
coin needs of the Nation, it is essential that we replace the Mint
at Denver with a new and modern facility.
The new Mint will be
needed by no later than 1980 if we are to meet anticipated demand
of the future.
Under the terms of the Act of Congress of August 20, 1963,
authority for the appropriation of Mint construction funds expired
June 30, 1973.
In the 93rd Congress, the Department proposed
legislation authorizing the appropriation of the funds needed for
the new Mint and extending the time during which funds could be
appropriated to September 30, 1983. However, the legislation had
to be resubmitted to the 94-th Congress.
Requests for additional funds to begin construction of a new
Mint has been postponed until authorizing legislation is enacted.
71
- 15 Bureau of the Public Debt
The request for the appropriation "Administering the
Public Debt" for fiscal year 1977 is $114.5 million, an increase
of $8.9 million above the authorized level proposed for fiscal
year 1976. This appropriation finances operations of the Bureau
of the Public Debt, estimated at $102.3 million, and the U. S.
Savings Bonds Division, estimated at $12.2 million.
The workload of the Bureau of the Public Debt Is expected
to remain at a high level in 1977. Savings bond issues and
retirements are expected to reach 289.6 million pieces, an
increase of 6 million over projected 1976 totals. Transactions
in other Treasury securities have continued to rise and are
expected to increase in 1977.
The major program increases requested for the Bureau relate
to these projected workload increases and would provide for
additional personnel, supplies, and security stock, and for
increased reimbursements to the Federal Reserve Banks, the Postal
Service, and paying agents. It is also necessary to further
automate the registered accounts operation in order to keep pace
with increases in registered security activity. Other program
increases are requested to enable the Bureau to increase productivity
in future years.
- 16 -
fy
Internal Revenue Service
The Internal Revenue Service budget request for fiscal year 1977
totals about 81,500 average positions and $1,671 billionQ These are
decreases of approximately 2,600 average positions and $20 million from
the adjusted fiscal year 1976 levels. The total decreases are net of
program and cost increases offset by program reductions.
The proposed decreases are a direct response to the Presidents
program to reduce federal expenditures, and does not signal a decrease i
workload or responsibilities for the tax administration system0
Taxpayer Service
The fiscal year 1977 request for Taxpayer Service totals over
4-,000 average positions and $122.8 million, a decrease of some 150
average positions and $1 million. This funding will permit assistance
to over 4-0 million taxpayers.
Collection
The fiscal year 1977 budget for Collection proposes a level of
some 11,400 average positions and about $230 million, a decrease of
over 1,200 average positions and $13.2 million0 Prior experience
indicates application of these resources should permit the collection
of approximately $2.9 billion in overdue taxes.
Audit
The proposed FY 1977 Audit program totals about 27,600 average
positions and some $591 million, a reduction of some 520 average positio
and some $13 million. This level of funding should permit a total Audit
program of some 4-.2 million returns, with a coverage rate under current
2.4 million is used in calculating audit coverage and 1.8 million is
additional Service Center contacts for the unallowable deduction program.
- 17
?/
plans of about 2.4 percent, a decrease from the 2.5 percent expected
for fiscal 1976. Experience suggests that approximately $5.3 billion
in additional tax should be recommended and some $4.5 billion in
additional tax and interest should be assessed.
Employee Plans
The Employee Plans activity, created as a result of the Employee
Retirement Income Security Act (ERISA) of 1974, is budgeted for more
than 1,350 average positions and almost $30.5 million, an increase
of about 170 average positions and $2.7 million. These resources
should enable the Service to process approximately 160,000 of an estimated 350,000 determination requests expected to be filed under ERISA
in IY 1977 as well as operate a small examination program and a delinquent
returns program. The issuance of standard plans and paragraphs and
model plans should help applicants in securing plan approvals.
7?
U Q S. Secret Service
The appropriation request for the U. S. Secret Service for fiscal
year 1977 is $110.3 million, a $2.3 million increase over the proposed
authorized level for fiscal 19760
Essentially, the request maintains
fiscal 1976 level of activities, but does provide for two program increases0
One is for travel associated with expanded foreign dignitary protection
during the Bicentennial, and the second is $2 million for payments to
state and local governments for protection under extraordinary circumstances of Foreign Diplomatic Missions and places of temporary domicile,
as recently authorized by Public Law 94-196.
The number of counterfeit, forged check and bond, protective
intelligence, and other criminal cases to be investigated is expected
to grow from 215,852 in fiscal 1976 to 237,000 In 1977, an increase of
nearly 10 percent.
The number of these cases to be closed is expected
to increase by nearly 6 percent, from 138,852 in fiscal 1976 to 146,500
in 1977. The Service made 9,318 arrests in connection with these types
of cases in fiscal 1975, a 21 percent increase over 1974.
The Service7s protection of foreign dignitaries visiting this
country is expected to increase in 19770
The number and frequency of
such visits is expected to be at least 25 percent higher than 1976.
Department of theTREASURY
ASHINGTON, D.C. 20220
TELEPHONE 964-2041
February 3, 197
FOR RELEASE AT 4:00 P.M.
6
93
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 $7,000,000,000 >
thereabouts, to be issued February 13, 1976,
or
as follows:
90-day bills (to maturity date) in the amount of $3,100,000,000* or
thereabouts, representing an additional amount of bills dated November 13, 1975,
and to mature May 13, 1976
(CUSIP No.912793 ZG 4 ) , originally issued in
the amount of $3,301,815,000, the additional and original bills to be freely
interchangeable.
181-day bills, for $3,900,000,000, or thereabouts, to be dated February 13, 1976
and to mature August 12, 1976
(CUSIP No.912793 A4 8 ) .
The bills will be issued for cash and in exchange for Treasury bills maturing
February 13, 1976
outstanding in the amount of $6,303,960,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $3,222,405,000.
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, February 9, 1976.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in
multiples of $5,000.
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-623
(OVER)
99
-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 February 13, 1976,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing February 13, 1976.
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
FOR IMMEDIATE RELEASE
February 4, 19 76
SIMON NAMES PARSKY TO HEAD
TREASURY INTERNATIONAL AFFAIRS
Treasury Secretary William E. Simon announced today that
Assistant Secretary Gerald L. Parsky will assume greater
responsibility for assisting the Secretary and other senior
departmental officials in the formulation and execution of
the department's policies and programs in the international
economic field. Mr. Parsky will assume the title of Assistant
Secretary for International Affairs.
Since June 1974, Mr. Parsky has been in charge of
Treasury's policy in the trade, energy, commodities and
financial resource areas as well as economic relations with
the Middle East. In addition to these duties, he will now
supervise Treasury policy in the other International economic,
financial and monetary areas, including investment, policy
with respect to the Industrial and developing nations, and
policy with respect to international financial institutions.
In naming Mr. Parsky, Secretary Simon noted, "placing
the Treasury's international staffs under one Assistant
Secretary will greatly strengthen Treasury operations in the
international area." Mr. Simon further stated, M I believe in
allowing people to take on additional duties as soon as they
are willing and able. Gerald Parsky has done an outstanding
job In the areas in which he has been involved, and I am sure
he will approach his new tasks with the same diligence and
competence. "
Last year, Mr. Parsky was chosen as one of America's Ten
Outstanding Young Men by the United -States Jaycees. He came to
the Treasury Department In 1971 as Special Assistant to
Edwin S. Cohen, Assistant Secretary for Tax Policy, and later
Under Secretary of the Treasury. He then served as Executive
Assistant to William Simon when he was Deputy Secretary of the
Treasury and head of the Federal Energy Office.
Mr. Parsky, 33, received his'A.B. degree (cum laude) from
Princeton University in'1964, and' his J . D. degreey with honors
from the University of Virginia Law School in 1968. He resides
In Washington, B.C.
X
WS-624 ° ° °
FOR RELEASE UPON DELIVERY
9&
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE JOINT ECONOMIC COMMITTEE
WEDNESDAY, FEBRUARY 4, 1976, 10:00 A.M.
Mr. Chairman and Members of this Distinguished Committee:
I am pleased to appear before you to discuss the current
economic situation and, more importantly, to consider some
of our longer-term economic goals and policies. The importance
of economic issues in shaping the future gives the Joint
Economic Committee a basic role in determining these goals
and policies. I hope that my analysis of the current economic
outlook and of the policies needed to provide permanent
prosperity and employment will contribute to a calm, reasoned,
and perhaps, dispassionate discussion of these issues.
The Nation's economic goals were summarized 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..." It is obvious that
we all support the same basic goals of sustaining the current
output and employment gains, of further moderating the still
unsatisfactory rate of inflation, of reducing the unacceptable
rate of unemployment, and of correcting the monetary, trade
and investment problems which have periodically disrupted
the international economic system. But there can be disagreement
about what tradeoffs will be required to achieve simultaneous
progress toward all of these goals, about the best mix and
timing of fiscal and monetary actions and about the proper
time horizon for planning current policies.
A year ago at this time, we were concerned with an
economy in the midst of a serious recession. Fortunately,
the turning point in the U.S. economy occurred somewhat
earlier than anticipated and the pace of recovery during the
transition period has been stronger than expected. Economic
historians will likely identify last April as the low point
WS-625
99
Economic Forecasts for 1976
Forecast Published Forecast Published
February 1975
January 1976
Gross National Product (current
dollars)
12.6%
12.4%
Gross National Product (constant
dollars)
4.8
6.2
GNP price deflator (yearly
average)
7.5
5.9
Consumer Price Index (yearly
average)
7.8
6.3
Unemployment rate (yearly
average)
7.9
7.7
The basic turning point in the U.S. economy occurred
during the second quarter of 1975 when real output rose at
an annual rate of 3.3 percent following five consecutive
quarterly declines. Then in the third quarter real GNP
increased at an unusually high annual rate of 12.0 percent.
However, over one half of the gain reflected a massive swing
in inventories toward less liquidation. During the last
three months of 1975, preliminary figures indicate that real
output expanded at an annual pace of 5.4 percent as the
liquidation of inventories effect was largely over. Real
final sales increased at a 5.0 percent annual rate, compared
with 4.7 percent in the third quarter of 1975.
The forecast for real economic growth in 1976 is now
6.2 percent with the pattern of recovery continuing throughout
the year and into 1977. The major strength of the U.S.
economy will continue to be personal spending, which represents
approximately two-thirds of our GNP. Real personal consumption
expenditures are expected to increase 5 percent this year,
compared to a rise of about 1 percent in 1975 and to a
decline of almost 1 percent in 1974. As consumers increased
their spending in early 1975 and continued to purchase a
variety of durable and nondurable goods throughout the year,
this fundamental shift has proven to be a crucial element in
the recovery to date. Personal incomes are expected to rise
strongly in 1976, and real purchasing power should continue
to improve if inflation does not accelerate. After falling
1-1/2 percent in 1974, real disposable personal income
increased approximately 2 percent in 1975.
Furthermore, consumers increased their savings as a
percentage of disposable income to the unusually high level
of 8.3 percent in 1975 compared to an average annual rate of
6.4 percent from 1960 through 1974. Our 1976 forecast
anticipates a continued high savings rate of about 8 percent,
9^
which affords the consumer a cushion to sustain the rise in
spending. The improvement in household balance sheets —
resulting from the rapid accumulation of savings, liquidation
of personal installment debts last year and the increase in
the value of financial assets — the reduced pace of inflation,
further improvement in employment, and general economic
recovery all should work to strengthen consumer confidence
and spending in 1976.
While personal consumption expenditures will provide a
necessary foundation for the economic recovery, the incremental
thrust for growth will need to be provided by accelerated
private domestic investment. Business spending for new
plant and equipment tends to lag behind other sectors during
an economic recovery and such real outlays actually fell
11.8 percent in 1975. Fortunately, that decline bottomed
out in the third quarter of 1975 and business fixed investment
should show good growth in 1976. The quarterly pattern of
business spending is expected to accelerate throughout the
year as rising corporate profits provide additional incentives,
as increased retained earnings provide financing, and as
improved corporate financial positions enable managers to
plan more confidently for meeting future demands for goods
and services. Long-term interest rates, though they have
declined, still remain at historically high levels. However,
a record amount of long-term financing was consummated last
year (primarily in the high grade area). The sharp improvement
in the stock market will likely encourage more equity financing
which is badly needed to offset the heavy reliance on debt
during recent years. The combination of these things would
lead me personally to believe that real capital spending
will rise in the neighborhood of 3 percent this year.
The liquidation of inventories is now largely completed —
except for a few manufacturing sectors — and modest additions
to inventory stocks should add to the general recovery in
1976. During the first and second quarters of 1975, inventories
were liquidated at annual rates of $24.8 billion and $29.6 billion
respectively in current dollars. During the third quarter,
only a small decline was reported and in the fourth quarter
inventories were essentially unchanged. Businessmen naturally
are being very careful about replenishing their inventories
following the problems caused by excessive purchases and the
drop in sales in 1974, which piled up unwanted stocks that
had to be liquidated in 1975. The expectation of a moderate
acceleration in inventory accumulation as the year progresses
is consistent with the overall economic outlook.
Residential construction is also expected to continue
the pattern of gradual recovery begun in 1975. By the
- 6-
/<V
fourth quarter of 1975 new housing starts had reached an
annual rate of 1.37 million units compared to a level of
1.07 million new starts at an annual rate reported during
the second quarter. By yearend 1976 new housing starts will
likely reach an annual rate of 1.75 million units which
while still be below the peak levels of 1971 through 1973
will contribute to the total economic expansion. The availability
of mortgage financing has greatly improved but new building
activity continues to be constrained by the large backlog of
unsold housing units, the jump in average prices for new
homes from $38,900 in 1974 to $42,300 last year, the high
rates of interest still required on mortgage#loans as well
as by the general uncertainties associated with the sharp
increase in unemployment during the recent recession. The
housing sector will benefit from the improvement in personal
incomes as the economy strengthens, but a variety of serious
structural problems must be corrected. In particular, a
more stable economy would help reduce the disruptive swings
in home building that have badly hurt this industry over the
years.
The surplus in our balance of international trade will
likely decline in 1976 from last year's record surplus of
around $11 billion. As the U.S. economy continues its
economic expansion, imports of raw materials and some finished
goods will rise more rapidly than exports to our major
trading partners, who generally are not recovering as rapidly.
Fortunately, the reduced surplus will not curtail the domestic
level of output and employment because exports will continue
to grow.
Combining the major private sectors of the U.S. economy
and the government into a total GNP forecast indicates that
1976 will be a good year with real output gains of about
6 percent and real final sales of 4-1/2 to 5 percent.
Personal consumption expenditures should provide a solid
base for continued growth and business spending for plant
and equipment should accelerate as the year progresses,
which will provide much of the additional thrust to sustain
the recovery. Solid gains in residential construction and
inventory investment are also expected to add to the total
growth. If the economy could be judged only on the basis of
output and consumption the forecast for 1976 would seem most
satisfying. However, the serious problems of inflation and
unemployment will require continued attention.
The rate of price increases in 1976 will probably
continue at about the level reported in late 1975, although
the figures reported for individual months may swing widely.
7
- -
A£
In 1975, the GNP price deflator increased 8.7 percent. The
1976 figure is expected to be 5.9 percent.
The expected moderation of inflation on a year-overyear basis is, of course, a welcome development but it must
be recognized that there is considerable uncertainty surrounding
this outcome. It is clear that: (1) inflation at the
present level will continue to distort personal consumption
and business investment decisions; (2) price increases in
the high single- and double-digit categories are disruptive
to the allocation of resources in our economy as well as to
the stability of existing institutions and they threaten
our entire economic system; and (3) while inflation pressures
tend to moderate and intensify over the course of a business
cycle, each time we start an economic recovery it is from a
higher level. The last point is particularly troublesome at
this time, for it points to the difficulty of reducing the
near-term level of inflation.
The near-term outlook for unemployment is also a matter
of great concern. From 1960 through 1975 the unemployment
rate averaged 5.2 percent. On a yearly average basis, the
low point of 3.5 percent was reported in 1969 and the
highest yearly average level was 8.5 percent during 1975
when a postwar record was set. Over this extended time
period there have been significant changes in the composition
of the civilian labor force and in the development of various
government programs to minimize the social costs of unemployment
which may be causing some disincentives for returning to
work. Despite these structural changes, it still is clear
that unemployment is far too high today. In fact, after
each bout of stop-go policies, there is a worrisome tendency
to start the next economic advance from successively higher
levels of unemployment and inflation.
There were several encouraging developments in the
labor market during 1975: (1) the gain in employment of
1.1 million workers since the recovery got under way in
April; (2) the turnaround in the average hours worked each
week which are now almost back to the pre-recession level;
(3) the gradual improvement in overtime hours worked; (4) the
improvement in the "lay-off rate" from 3.1 per 100 employees
in January 1975 to 1.3 in December; and (5) the drop in the
unemployment rate from the peak of around 9 percent. While
these developments are encouraging, specific effort must be
committed to reducing the existing level of excessive unemployment
if all Americans are to share in the benefits of recovery.
- 8 II.
ECONOMIC POLICY BACKGROUND
Although the prospects for near-term economic performance
are favorable, several basic trends require further analysis.
Without question, this country has developed the most efficient
and creative economic system the world has ever known. It
has been particularly responsive in satisfying the consumption
demands of our large population and the real standard of
living for most Americans has risen sharply during the
postwar era. Real disposible per capita income has increased
by about 50 percent in the past 15 years — after inflation.
Over the same 15 years, the percent of persons in families
below the poverty line has been cut in half — to approximately
10 percent. The median family income now is approximately
$13,000. Personal consumption expenditures now account for
almost two-thirds of our Gross National Product and Americans
spend around 92 percent of their disposable income.
Yet, as I take soundings of people throughout our
country, I sense a growing concern about the long-term
outlook for continued economic development. America seems
to be on a path that may not hold the same promise for the
future. There appears to be declining recognition of the
fundamental importance of markets and a narrowing of the
boundaries in which individual Americans can make personal
economic decisions. Of course the market system adapts to
change. The population has grown, the availability of
resources has fluctuated, concerns about the environment
have increased and the United States has become a major part
of an increasingly integrated world economy. As our economy
has become more complex, new approaches to difficult problems
have been needed to achieve our general economic goals, to
prevent specific abuses, and to stimulate and preserve
competition in the markets. I believe that free, competitive
markets are the most effective way to provide for increased
output and the equitable distribution of the results of
economic activity.
We do need government regulations and other safeguards
to protect the public interest. But I am disturbed by my
discussions with individual consumers and businessmen which
indicate that the government at all levels is increasingly
constraining innovation, entrepreneurship, and individual
spending decisions. In particular, the small businessman
attempting to create a new enterprise today, in which you,
Mr. Chairman, have expressed such justifiable concern, is
curtailed at most every turn.
He must comply with thousands of government regulations
on health, safety, pollution control, hiring practices,
?7
product liability, tax reporting, employee pensions and
compensation, advertising, distribution practices and other
requirements too numerous to list. This compliance burden
is costly to large and small businesses alike. These costs
ultimately must be passed on to consumers in the form of
higher prices. Moreover, such costs are particularly heavy
for the smaller businessman because of the fixed-cost nature
of many of the regulations. If profits are earned, and that
is obviously the basic reason for creating most new businesses,
they are taxed by the Federal Government, usually by the
States, and increasingly by local governments, to support
the enormous growth of government spending at all levels.
Just the paperwork burden of government regulation
is staggering. Individuals and business firms spend over
130 million person-hours a year filling out over 5,000
government forms. Even more costly is the paperwork burden
within government itself. The Commission on Federal Paperwork
estimates that Federal spending to process forms totals an
incredible $15 billion a year. In fact, just the cost for
forms themselves runs to a billion dollars annually, and one
department — Agriculture — maintains nearly a million
cubic feet of records and spends $150 million yearly on
reporting systems. When government and businesses are so
burdened, it is not just they who pay the penalty. Everyone
pays — the taxpayer and the consumer alike.
Small businessmen are increasingly questioning the
desirablility of working so hard and bearing so much risk
when others are able to claim virtually the same financial
rewards in our society with shorter hours, far fewer headaches,
much less responsibility, and little risk. Is it any wonder
that the entrepreneurial spirit in this country is fading?
Employees also have growing concerns about the future as
they see an increasing share of their financial resources
eroded by personal income taxes paid to several layers of
government, payroll taxes, property taxes, sales taxes on
most of the goods and services they purchase and many other
indirect taxes. Although earnings continue to rise rapidly,
the real purchasing power of these higher incomes is quickly
erased by higher taxes and inflation.
These personal concerns raise fundamental questions
about the proper allocation of resources and decison making
between the public and private sectors. Determining the
proper functions of government and the means of financing
those activities is a critical issue facing our society.
The key, of course, is what is the appropriate balance? If
the balance is almost entirely in the private sector, the
public's interest may not be properly safeguarded. There
- 10 -
J6S
would be little or no national defense, national parks or
other public goods of this sort, and we would still have the
difficult challenge of providing a basic level of income and
services for those Americans who are currently not able to
pay for their basic needs. Clearly, there is an important
role for government.
However, when resource allocation and other economic
decisions become dominated by a government bureaucracy,
innovation and productivity are too often restricted.
Moreover, the individual finds he has less freedom of
economic choice as greater portions of his pay check go to
support growing government outlays at all levels, as prices
rise, and as the total economy becomes less productive. As
an economy becomes increasingly dominated by the government,
individual initiatives fade away. The potential entrepreneur
considering a new business because he has an idea he thinks
is really good finds himself stymied at almost every turn.
The danger of all of this is that in many cases he concludes
that the risks and inconvenience far outweigh the potential
rewards and he drops the idea. At the extreme, economic
decision making by people in the market is supplanted by
people in government, individual incentives evaporate, and
the economy deteriorates into conditions of stagflation.
Reasonable people will agree that we do not want either
extreme. Too little government results in an absence of
public goods and safeguards of the public interest. Too
much government, on the other hand, stymies the workings of
efficient and competitive markets and reduces the individual's
freedom of economic choice. We obviously must have a balance.
But what is the appropriate mix of public and private decison
making? There is no exact answer to this question, but I do
believe that we can make a reasoned assessment.
We must recognize that the resources of this great
country — the number of people, their education and skills,
the amount and types of capital goods, the abundance of raw
materials, and the infrastructure of transportation, communicatio;
utility, and other services — are limited, particularly in
the short run. Yet as we all know there are numerous claims
on these resources. Each special interest group assumes
that its claim is somehow unique and deserves satisfaction.
When we total all of the worthwhile claims, we find that
they far exceed our ability as a Nation to satisfy them
particularly in the unrealistically short time frames that
are sometimes expected. Obviously hard choices must be
made.
In trying to respond to the claims before it, governments
at all levels attempt to satisfy as many claims as possible.
That is a natural response to the desire to attract future
electoral support. However, this response has resulted in
the increasing intervention of govenment at all levels into
our economic system and into our individual affairs. In my
judgment, the efficiency of our economic system has been
unnecessarily distorted by bureaucratic infringemnts and by
stop-and-go policies which have produced an atmosphere of
instability.
The growth in government spending (Federal, State and
local) has far exceeded the rate of expansion of the economy.
Total government spending averaged about 35 percent of our
GNP in 1975, compared with 27 percent in 1960 and 21 percent
in 1950 (see Chart 1 ) . In 1975, 1 out of 6 workers was a
government employee; in 1950 this ratio was only 1 out of
10. In absolute terms, total government spending at all
levels — Federal, State and local — has gone from $61 billion
in 1950 to $136 billion in 1960 and to $525 billion in 1975
(see Table 1 ) . Increasingly, a greater portion of our
ability to produce goods and services is being taken over
by government. Each new inroad has implications for the
efficiency of the private sector, to which we must look for
productivity gains and resulting increases in the total
amount of goods and services produced.
I believe that the balance has tipped too far in the
direction of bigger and bigger govenment at the relative
expense of the private sector. The American people are
beginning to resent this growth, for many of them know that
ultimately it must be paid for directly with their taxes
and/or indirectly by accelerating inflation.
We must redress this imbalance and restore to the
American people greater discretion over personal spending
decisions. They are usually able to decide what is best for
them and, within limits, competitive markets are able to
respond to these desires in the most efficient and responsive
manner. I am not talking about a reduction in the absolute
level of government expenditures. What I am advocating is
a slowdown in the upward momentum of government spending
that began to accelerate in the mid-1960fs so that the
relative portion of resource allocation decisions made by
the private sector increases. In this way, the overall
efficiency of our economic system can increase and we can
bring about higher economic growth.
It cannot be emphasized often enough that the true
wealth of a Nation is in its ability to produce goods and
services. Improvements in this ability come mainly from the
A/
private sector. We can debate how the total pie should be
divided, but we should not lose sight of the fact that we
are no better off as a Nation unless the pie continues to
increase in real terms. To do so and realize a durable
prosperity, we should restore incentives to the private
sector by tipping the scales toward a somewhat greater
relative growth of the private sector.
However, government spending is only one part of the
picture. Resource allocation also is affected by the myriad
of regulations the private sector faces. Regulatory agencies
have come to exercise direct control over transportation,
energy, communications and the securities market — industries
that account for almost 10 percent of the value of everything
made and sold — and to exercise indirect control over much
of the rest of our private economy. Business activities
have become more controlled in areas of environmental protection,
job safety, consumer requirements, hiring practices and
information reporting and much more.
To be sure, many of these regulations are necessary and
important in safeguarding the public interest. For example,
regulations to prevent monopolistic pricing, to assure
product safety, to provide reasonable and effective standards
for environmental protection and worker safety, to make
possible fair employment and other things of this sort are
important to us all. However, too many regulations are
overlapping, inefficiently administered with long delays,
or obsolete. Others are actually anti-competitive. Regulators
regulate with a frenzy and in so doing hamper the basic
efficiency of competitive markets.
An underlying problem is that many regulations have
never been subjected to a true cost-benefit type of analysis.
The benefits are always cited, but very seldom are they
documented by evidence showing that the regulation proposed
is really going to make a difference. In other words, is
there going to be a measurable and significant benefit which
will exceed the combined cost of administering the regulations
and the costs resulting from reduced efficiency of the U.S.
economic system — costs which ultimately must be borne by
the consumer? In cases where the benefits are less than the
total costs, we should consider changing or eliminating the
government regulations and administrative actions that have
caused the problems. Many regulations designed to cope with
yesterday's problems are obsolete today. Frequently these
regulations impede innovation by creating barriers to entry
which preserve the status quo and limit competition.
Other regulations
creating
needless red
simply
tape
are
andineffectively
delays
administered
u/
- 13 -
'
In those relatively few areas where there is an identifiable
need to safeguard the public interest, Government regulation
and administrative direction should be used but normally
economic decisions should be left to the marketplace. By
eliminating unnecessary regulations and streamlining others,
the negative impact of government actions that restrain the
economic decision making ability of the private sector would
be reduced. The consumer would benefit in being able to
purchase the product or service at a lower price and/or with
less inconvenience than would otherwise be the case. The
reform of government regulation is a principal goal of the
Administration and many members of Congress as well- I know
of no issue that has the agreement of so many people — from
liberals to conservatives, from business to labor. Yet the
special interest groups are vociferous and tenacious.
Witness the reactions of airline and trucking executives to
the President's reform proposals for these industries. We
should all recognize that we have an enormous stake in
restoring competition to the marketplace.
Turning next to the question of economic stabilization,
there is certainly an important role to be played by fiscal
and monetary policies in evening out extreme moves in the
economy. There have unquestionably been times, however,
when such moves and policies have been counter productive.
For example, additional government stimulus frequently takes
effect at times when the total productive capacity of the
economy cannot absorb the increased demand for goods and
services. The result is inflation, dislocations in the
economy, and, eventually, unemployment. Increased government
spending programs have proven to be a cumbersome tool for
short-term economic stabilization purposes. There usually
is a considerable lag between the time a need is identified,
or a claim is made by a special interest group, and the time
there is a specific response by Congress to the proposal.
Then there is another time lag before the expenditures
actually occur and begin to spread throughout the economic
system. At the time a proposal was initially considered
there may have been underutilization of resources in the
economy, but by the time the program actually comes on
stream resources are often fully employed so that the additional
government spending leads to greater inflation.
If there were some way that old programs could be
phased down or eliminated during a period of rapid economic
expansion, fiscal policy might be more effective as a tool
for stabilization purposes. However, experience has shown
that this is not the case and that programs initiated in a
period of economic slack tend to become a permanent part of
the budget. It is extremely difficult to reduce or eliminate
/*?
even the obviously ineffective or obsolete programs; to
scale down existing programs for countercyclical purposes
has been, for all practical purposes, impossible. This is
particularly true when the sizable outlays of the many State
and local governments are added to the total.
This implies that we must avoid abrupt and excessive
changes in government expenditures. No matter how well
intentioned, such sharp swings in spending tend to accentuate
rather than stabilize the business cycle and serve to increase
the uncertainty of developing policies to meet future needs.
In turn, this uncertainty is felt in the consumer markets,
in the markets for capital goods, and in financial markets.
In addition to government expenditures, I am concerned
with the size of the chronic Federal deficits, particularly
the negative impact on financial markets and capital formation.
The rise in Federal expenditures has exceeded the growth in
revenues resulting in Federal budget deficits in sixteen out
of the last seventeen years. The traditional view of the
Government's role in the business cycle was that deficits
would be recorded in periods of economic slack, but that
surpluses would occur in periods of high economic activity.
As a result, savings would be available to the private
sector for the capital formation necessary to sustain the
economic advance in real terms. This has not occurred in
recent years. We not only have had deficits in periods of
economic boom but even larger deficits in periods when there
is less than full utilization of our resources.
These deficits, of course, need to be financed and such
financing in periods of prosperity harm the economy in a
number of ways. Over the past ten years, the Federal Government
will have borrowed in the capital markets a total of nearly
one-third of a trillion dollars on a net basis. The national
debt now is climbing at a rate of more than $1 billion a
week. During the last ten years, the interest on the debt
has more than tripled to almost $38 billion in the current
fiscal year and will go to $45 billion in FY 1977, (Interest
is now the third largest Federal budget item, after income
maintenance and defense.) As annual interest payments grow/
fiscal flexibility is constrained. This "uncontrollable"
outlay puts pressure on the total budget, which in turn
means that programs must be displaced or tax reductions
foregone.
Moreover, the deficits place the U.S. Treasury in a
position of competing with private investors. The recent
avalanche of Treasury securities has created distoritons in
- 15 -
/ti
the traditional patterns of funds being raised by various
sectors in the capital markets as well as in the sheer
magnitude of total funds raised (see Table 2 ) . In my
judgment, this has contributed to making our financial
markets less efficient in recent years in channeling the
savings of society to investment opportunities. As a
result, capital formation is impeded.
Furthermore, deficits cumulate over time. Total Federal
debt has increased from $329.5 billion at the end of Fiscal
Year 1966, to an estimated $633.9 billion at the end of
FY 1976 — a rise of 92 percent in only 10 years time. Over
the last ten years the average maturity of the debt has
declined from 5 years, 3 months to 2 years, 5 months. What
this means is that the U.S. Treasury must be a more frequent
visitor in financial markets simply to roll over outstanding
securities let alone raising funds for current deficits. In
this fiscal year (1976) the U.S. Treasury will absorb over
70% of all moneys in the securities markets; government at
all levels will absorb over 80%. This percent must be
sharply reduced as the economic advance continues or else
some private areas will have to go without.
The problem becomes far more critical as the recovery
progresses and the financing needs of the private sector
intensify. If deficits remain large, the Treasury, by being
first in the credit line, will always get its needs financed
but in so doing will make it difficult for companies with
less than prime financial ratings to obtain the financial
resources they need at acceptable interest rates.
This problem of "crowding out" does not imply a dollarfor-dolar displacement of Treasury for private borrowing,
but rather describes strains in the financial markets.
These strains result in certain private borrowers not being
satisfied and in the financial markets as a whole being less
efficient in their function of channeling savings in our
society to investment opportunities.
Another aspect of the crowding out problem is the
secular deterioration I see in the financial structure of
U.S. businesses. Over the past decade there has been a
strong trend towards a much more leveraged corporate balance
sheet. Debt has roughly tripled; liquid assets have declined
relative to liabilities; the debt-equity ratio has about
doubled; and the average maturity of debt has shrunk. Just
as the Treasury is a more frequent visitor to credit markets,
so too will many companies, and if there is a competition
for funds, it is quite clear that the less than prime rated
-
1
6
-
/ / /
company will be the loser. Continuing heavy Treasury borrowings
will eventually cause difficulties for these companies,
small businesses and potential home owners. (In the Appendix,
crowding out is discussed in greater detail.)
The size of the deficit also affects the rate of capital
formation in the private sector, and this is a matter of
great concern. As the recovery progresses, private capital
investment must rise to sustain the recovery. In the longer
run, the need for increased capital formation has been
carefully documented by the Treasury, by numerous outside
studies, and most recently, in Chapter 1 of the Economic
Report of the President. If we are to meet our goals for
increased employment and productivity in a noninflationary
environment as well as our environmental, safety and energy
goals, we must have an increase in the rate of national
savings and private direct investment relative to the total
GNP. More specifically, we must increase the percentage of
business fixed investment from the average figures of 10.3 percent
of our gross national product the last decade to approximately
11-1/2 percent over the next decade. In another sense,
total investment, including residential construction, must
increase from approximately 14-1/2 percent to 16 percent.
The achievement of our capital formation goals depends
on the necessary expenditures being financed in the private
sector. In turn, the adequacy of capital flows depends on
the savings of society being less and less used to finance
Federal expenditures and more and more focused on capital
formation. This is the only way we can sustain a durable
recovery over the long run and bring down the level of
inflation. If the private sector is unable to finance
capital formation because of the huge demands on savings by
the Federal Government and because of the resulting
inefficiencies introduced in financial markets, the boomand recession sequence of the last decade will be repeated.
Therefore, it is imperative that we reduce the Federal
deficit and work toward a budget surplus as the recovery
progresses.
Excessive monetary stimulus must also be avoided to
prevent renewed inflationary pressures and uncertainty. No
one wants to see an explosion of the money supply. On the
other hand, it is important that the monetary growth be
adequate to support the increase in nominal GNP necessary to
sustain the recovery. With the surge in the economy in the
last half of 1975, velocity increased dramatically; that is,
the turnover of the money stock rose indicating people and
business
used
money
efficiently.
Thiswell
growth
rate
in
velocity
the average
is not
rate
sustainable
of more
growth
of
over
velocity
the longer
may
run,be
but
higher
still
77b
- 17 than in years gone by. If this occurs, the money supply
need not grow at as fast a rate to sustain a given level of
nominal GNP as it would need to do if there were only a
modest growth in velocity. Given the fact that monetary
growth in 1975 was moderate, the Federal Reserve has considerable
flexibility in managing monetary growth in the months ahead
and still be within its target range on a cumulative basis.
Given the anticipated velocity increase and this flexibility
in near-term policies, the Federal Reserve's target range of
5 to 7-1/2 percent for growth in the money supply is consistent
with the sustained recovery we anticipate for 1976. However,
over the longer run, this range is not compatible with
bringing down the level of inflation. Therefore, the monetary
targets will need to be reduced in the future as the recovery
proceeds.
For both fiscal and monetary policies, the problem of
instability is compounded by the present inflation psychology
that permeates our society. All too readily the economy
will move to a higher level of prices, but only grudgingly
will it move to lower prices despite slack demand. This
inflation psychology has been building for a decade and its
unwinding will not be easy. The achievement of economic
growth without accelerating inflation could be upset by
fiscal and monetary policies that are, or even appear to be,
overly stimulative.
In addition, such excesses will lead to bottlenecks
developing in certain key industries well before the economy
as a whole reaches full employment. This occurred in 1973
in such industries as chemicals, steel, paper and fertilizers.
The dislocations caused by bottlenecks send inflationary
tremors throughout the economy and lead to inefficiencies
which ultimately can curtail a recovery in real terms.
I believe that by excessively concentrating on shortterm economic stabilization goals rather than on the longterm allocation of resources, stop-go fiscal and monetary
policies in the past have been a disruptive influence which
has accentuated the business cycle. Too often fiscal
policies and, to a lesser extent, monetary policies have
lagged economic developments so that when the stimulus or
restraint arrives the business cycle has changed. As a
result, these policies accentuate rather than dampen the ups
and downs in the economy — just the opposite of the intended
purpose of these changes.
We must act wisely and responsibly in bringing stability
to our economy. The excesses of the past are not easily
undone. Excessive spending, excessive credit creation,
excessive stimulation all may provide a short-term palliative,
//i
but before long additional inflation and production bottlenecks
set in and economic performance declines. The stop-and-go
policies of the past fifteen years have led to an instability
which now is deeply rooted in our society. We can undo this
problem only through a moderate and steady economic recovery
which restores confidence in the prospect for longer run
prosperity in a noninflationary environment.
There can be confusion about what is necessary to deal
with a current problem and the effect of that action on
future fiscal flexibility. Too often we in government are
prone to make decisions without proper consideration of the
cumulative impact of those decisions on the future. To deal
with this problem, I am proposing that government accounting
be placed on an accrual basis where unfunded liabilities are
fully recognized. This would thwart the natural tendency
for those at all levels of government to want to claim
revenues too early and expenditures too late, thereby postponing
the day of reckoning. We have had recent examples of the
sharp and painful adjustments that must occur to a local
government when things are continually swept under the rug
until eventually the rug will cover no more. With each
sweeping, future fiscal flexibility is curtailed one more
notch. Eventually a government has no flexibility to deal
with current problems. The same thing occurs for the Federal
government, except the rug can be stretched for a while
because, after all, the Federal government prints the money.
The Treasury has been publishing accrual statements for
certain individual agencies since 1956 and we now plan to do
this on a consolidated basis for the Federal government as
a whole. Our target date for the first of these publications for the Fiscal Year ending September 30, 1977 — is early in
1978. I would emphasize that the initial publication will
focus on significant accruals that have a major impact on
the overall financial condition and operating results of the
Federal government. The first set of statements are likely
to be accompanied by extensive qualifications. As the
reporting process and statement preparation procedures are
improved, however, these qualifications will diminish.
Not only will the reader obtain a consolidated financial
view of the Federal government but an idea of the magnitude
of all liabilities, whether they be funded or unfunded and
whether they be due for payment in the near future or the
distant future. In these consolidated statements, revenues
will be recognized only when they are earned and sure to be
collected and expenditures will be recognized no later than
We
thebelieve
time the
that
liability
this will
to pay
bringthem
more
isresponsible
firmly established.
accounting
?/y
to government. Financial problems will surface long before
a crisis is imminent, thereby reducing unpleasant surprises.
I believe this will permit more reasoned judgments on decisions
which impact the future fiscal flexibility of our nation.
Our children should not bear the albatross of paying for the
excesses of this generation, while their government is
unable to cope with problems because it lacks fiscal flexibility.
I realize that there has been concern with the cost of
installing elaborate accrual accounting systems in agencies
where the need is not clearly established. I want to assure
you that I am not advocating a slavish application of textbook
accounting to every agency and appropriation without regard
to benefits. All Federal agencies have accrual accounting
of some sort. What we intend to do is to supplement the
data we already have with some missing pieces of major
proportions, and by major I mean in terms of governmentwide
magnitudes, not individual appropriations.
I also want to say that I am not proposing a change in
the basis for calculating the official budget surplus or
deficit, or in the manner of justifying appropriations.
There are some who advocate accrual accounting for both of
those purposes, but I do not want to let the controversy
over those applications interfere with my objective of
giving the American people a clear business-like disclosure
of the overall financial condition of their Government.
III. SUMMARY
This country has developed the most efficient and
prosperous economic system the world has ever known. Over
the past fifteen years the U.S. economy has increased
the real output of goods and services by 60 percent; the
real income of the average American has increased by over
50 percent; the number of Americans living in families with
incomes below the poverty level has declined from 20.7 to
10.2 percent (1974) of the population; and 20 million new
jobs have been created. Unfortunately, that impressive
performance was marred by: (1) a sharp increase in inflation
beginning in the mid-1960's; (2) continued unemployment in
excess of 5 percent throughout the first half of the 1960's
and again in the 1970's, and a sizable GNP "gap" between
actual and potential output during those same time frames;
and (3) occasional disruption of international trade and
investment. While we clearly are justified in having a
great deal of pride in our economic system, there also are
sufficient reasons to have concern about the future pattern
of economic progress.
Throughout much of this period the concept that the
government must continuously intervene to stabilize the U.S.
- 20 -
//;-
economy has dominated policy decisions. The repeated use of
fiscal and monetary stimulus too often has turned out to be
counter-productive because of the lagged impact of such
actions. The "temporary" programs created to respond to
current problems have frequently become a permanent government
activity with the result that fiscal flexibility and control
have been continuously eroded.
This is not to say that governments do not have an
important role in promoting economic development. The
Federal budget has become a major factor in determining the
allocation of national resources. In addition, the Federal
Government has an important role in providing temporary
assistance to moderate the negative impact of economic
recessions. During the 1974-75 recession public employment
programs were expanded, unemployment insurance coverage was
liberalized, various transfer payments were increased and
considerable personal and corporate income tax relief was
provided. Federal spending increased dramatically — up
approximately 40 percent from FY 1974 to FY 1 9 7 6 — and part
of this increase was the responsiveness of existing programs
to economic slack. Government policies clearly have a major
impact on the total economy, particularly during periods of
recession.
The debate over the proper role of the government in
the total economy will continue. But there is an even more
fundamental issue involving the total size and growth of
government spending which has led to chronic deficits and
periodic disruption of the entire economy. Merely ranking
priorities within the Federal budget is not enough. We must
expand the analysis to evaluate total government outlays as
they relate to the priorities of the entire economy. I
emphasized the need for considering the combined private and
public demand for goods and services in my testimony before
the Subcommittee on Priorities and Economy in Government of
the Joint Economic Committee on April 3, 1975.
The second basic requirement is to lengthen the time
horizon of policy planning. There is a natural tendency to
concentrate too much on short-run needs without adequate
consideration for the cumulative impact of decisions into
the future. This point is particularly important at this
time because of the short-term benefits claimed for rapidly
stimulating the economy with the slack that still remains at
this stage of the recovery. However, because of the painful
inflation recently experienced there must be greater concern
about the reactions in the private sector to actual and
potential government polcies. Employees are anxious to
restore their real wage gains and business wants to restore
- 21 profit margins which have been eroded by inflation. If the
real growth in the economy is accelerated too rapidly, both
real and perceived inflation pressures could quickly escalate
because of concerns about the future. Another repetition of
inflation and recession would result in even more unemployment
and lost output. Lower rates of unemployment and inflation
are obviously the desired goal, but we must consider the
prospects over the next few years not the next few months.
A mix of policies designed to provide temporary relief at
the expense of higher rates of inflation and unemployment in
future years is inappropriate.
It is particularly important to consider the longer-run
government spending trends. The amount of adjustment in any
specific Federal budget may appear to be relatively limited
because of the legislative decisions of the past. However,
decisions to better control Federal spending today will have
major significance on the levels of outlays in 1978, 1979
and beyond as existing programs continue to expand. It will
never be easy to make these fundamental shifts and there is
a tendency to wait for a more "convenient" time to begin the
painful process of regaining fiscal control, but I am convinced
that the longer we permit the existing trends to continue
the more difficult the ultimate correction process will be.
To come to grips with this issue we have designed a responsible
mix of economic policies that will bring about durable,
lasting
economic
Thank
you. prosperity which will benefit our nation
with sustainable and increasing employment.
FEDERAL BUDGET OUTLAYS
(As a Percent of GNP)
Percent
25
Percent
25
20
15
1948
1950
1955
Source: OMB and Department of Commerce
1960
1965
1970
1975
1977
10
TOTAL GOVERNMENT EXPENDITURES
(As a Percent of GNP)
Percent
36
1948
1950
1955
1960
1965
Percent
36
1970
1975
1977
Source - . D e p a r t m e n t of C o m m e r c e
<^C>>
THE FISCAL OUTLOOK TO 1981
$ Billions
$ Billions
600
600
I
Budget Surplus
500
500
Outlayst
^>
Outlays
400
400
Receipts
300'
300
Deficits
200
200
100
100
0
1975
1976
Fiscal Years Estimate
* Current Services—no restraint.
1977
Projection
1978
1979
1980
0
1981
<§
TABLE 1
TOTAL GOVERNMENT EXPENDITURES
(billions of dollars)
Calendar
Year
Federal
State &
Local
Grants
In Aid
Total
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
34.9
41.3
40.8
57.8
71.1
77.1
69.8
68.1
71.9
79.6
88.9
91.0
93.1
101.9
110.4
114.2
118.2
123.8
143.6
163.7
180.6
188.4
204.2
220.6
244.7
264.8
300.1
356.9
17.6
20.2
22.5
23.9
25.5
27.3
30.2
32.9
35.9
39.8
44.3
46.9
49.8
54.4
58.0
62.8
68.5
75.1
84.3
94.7
106.9
117.6
132.2
148.9
163.7
180.9
201.3
222.4
2.0
2.2
2.3
2.5
2.6
2.8
2.9
3.1
3.3
4.2
5.6
6.8
6.5
7.2
8.0
9.1
10.4
11.1
14.4
15.9
18.6
20.3
24.4
29.0
37.5
40.6
43.9
54.2
50.5
59.3
61.0
79.2
93.9
101.6
97.0
98.0
104.5
115.3
127.6
131.0
136.4
149.1
160.5
167.8
176.3
187.8
213.6
242.4
268.9
285.6
311.9
340.5
370.9
405.1
457.5
525.1
GNP
259.1
258.0
286.2
330.2
347.2
366.1
366.3
399.3
420.7
442.8
448.9
486.5
506.0
523.3
563.8
594.7
635.7
688.1
753.0
796.3
868.5
935.5
982.4
1,063.4
1,171.1
1,306.3
1,406.9
1,499.0
Federal
12.7
15.2
13.4
16.7
19.7
20.3
18.2
16.3
16.3
17.0
18.6
17.3
17.1
18.1
18.2
17.7
16.9
16.4
17.2
18.6
18.7
18.0
18.3
18.0
17.7
17.2
18.2
20.2
Percent of GNP
State &
Local
6.8
7.8
7.9
7.2
7.3
7.5
8.2
8.2
8.5
9.0
9.9
9.6
9.8
10.4
10.3
10.6
10.8
10.9
11.2
11.9
12.3
12.6
13.5
14.0
14.0
13.8
14.3
14.8
Total
19.5
23.0
21.3
24.0
27.0
27.7
26.5
24.5
24.8
26.0
28.4
26.9
27.0
28.5
28.5
28.2
27.7
27.3
28.4
30.4
31.0
30.5
31.8
32.0
31.7
31.0
32.5
35.0
Note: Federal grants-in-aid to State and local governments are reflected in Federal
d State and local expenditures. Total government expenditures have been adjusted to
iminate this duplication. The ratio of Federal expenditures to GNP excludes grants-in-aid.
January 28, 1976
TABLE 2
Net Funds Raised in the Securities Markets by Major Sector
(fiscal years, billions of dollars)
U.S.Treas
1/
Federal & :Total
sponsored :Federal
agencies 2/:sector
:Corp. & :
State & :foreign :Total
local 3/:bonds 4/ :securities
13.,0
5.7
4.9
13.,0
4.9
6.3
22.,6
6.0
5.7
19.,2
5.5
6.2
5.2
6.4
15.,8
20.,1
6.9
7.9
24.,0
7.3
10.9
21.,1
6.0
13.0
47.,4
7.2
16.4
31.,8
15.9
12.0
1960
.8
1.6
2.4
1961
2.0
-.2
1.8
1962
8.8
2.2
10.9
7 4
1963
6.4
1.0
4 2
1964
2.7
1.5
5 3
1965
3.1
2.2
5 8
1966
-1.0
6.8
2 1
1967
-.6
23.8
2.7
1968
18.2
3.9
5.6
1969
-1.9
5.8
8
8
15.0
6
1970
2
23.3
20 5
1971
8
28.3
19 6
1972
14
32.9
18 5
1973
21
23.4
2 1
1974
51.9
67.7
1975
87,5 (est.) 15.8
14.3
101.8
1976
Office of the Secretary of the Treasury
Office of Debt Analysis
9.7
15.0
15.6
12.6
17.0
16.8
14.0
16.8
27.5
21.7
15.4
17.4
33.5
25.1
41.,5
65.,8
65,.6
60,.9
57,.7
117,.9
140,.9
:Govft
Federal
:sector as
sector as
a % of total :% of total 5/
18.6
62. 4
51. 8
14.0
74. 7
48.4
67. 5
38.7
59. 6
26.5
60. 6
26.3
54. 5
24.1
38.,5
65.,5
9.8
50.,0
50.3
12.2
59,,4
36.2
58,.2
35.3
66,.9
43.1
74,.7
53.9
69 .9
71 .6
40.5
82 .2
57.4
72.2
January 8, 197 6
Source: FY 1960-1975 data based on Federal Reserve Flow-of Funds accounts (which show net changes
in outstandings).
1
Net increase in marketable and nonmarketable bills, notes and bonds. (Includes Federal
Financing Bank.)
2
Increase in bills, notes and bonds of budget and sponsored agencies. Includes GNMA pass-throughs.
3
Increase in notes, bonds and Government loans.
4
Increase in bonds and notes with original maturities of more than 1 year.
fi Includes State and local as part of government sector.
TABLE 3
Unified Federal Budget Surplus or Deficit in Relation to GNP
1954-1977
Budget Surplus (+)
or Deficit (-) as % of GNP
Fiscal Year
Budget Surplus (+)
or Deficit (-)
(? billions)
Annual
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976e
1977e
- 1.2
- 3.0
+ 4.1
+ 3.2
- 2.9
-12.9
+ 0.3
- 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
-76.0
-43.0
-0.3
-0.8
1.0
0.7
-0.7
-2.7
0.1
-0.7
-1.3
-0.8
-1.0
-0.2
-0.5
-1.1
-3.0
0.4
-0.3
-2.3
-2.1
-1.2
-0.3
-3.0
-4.8
-2.3
Three-Year
Moving Average
(Centered)
_
- .0
0.3
0.3
-0.9
-1.1
-1.1
-0.6
-0.9
-1.0
-0.7
-0.6
-0.6
-1.5
-1.2
-1.0
-0.7
-1.6
-1.9
-1.2
-1.5
-2.7
-3.4
—
._
*
APPENDIX A
January 16, 1976
CROWDING OUT--SETTING THE RECORD STRAIGHT
There clearly exists some misunderstanding about the
meaning and significance of the so-called phenomenon of
"crowding out." In essence, there is the idea that since
financial collapse has not yet occurred, then the whole
issue is misleading. This is wrong. What has occurred is
a focussing of attention on short-run improvements in financial markets (associated primarily with the worse recession
since the 1930's) and an ignoring of what happens longer-term
as the economy moves back toward fuller capacity under conditions of repeated huge sized government budget deficits.
No matter how viewed, the inescapable fact is that with
reasonably full use of capacity, more resources claimed by
the government must mean less for the private sector. Huge
deficits which take the lion share of credit flows will
eventually push out the weaker private areas--specifically
potential home owners, small businesses and even larger
companies who do not have a superior credit rating. This in
turn will hurt real growth, deprive our workers of adequate
productive tools, frustrate the achievement of our longerterm economic needs, and further misallocate our scarce
resources. (This was pointed out repeatedly in prior testimony,
e.g., January 25, 1975, before the House Ways and Means Committee.)
1. Interest Rates. Interest rates have declined over the past
year or so as would be expected during a recession. High-grade
bond rates have fallen from a peak of about 10.5% in mid-1974to around 8.5% today. Yet this drop cannot be taken as sufficient
evidence that credit is ample and more importantly that credit
will remain ample to support a lasting business recovery. This
cost of long-term funds is still very high historically. (Such
interest rates ranged between 2%-6% from l865-1965--a period
containing serious wars, depressions, financial panics, business
booms and other assorted economic extremes.) The combination of
sustained high Federal government financing, of a growing demand
for private financing as the expansion proceeds and of a Federal
Reserve policy which must eventually moderate in generosity (to
avoid rekindling inflation) points to a level of interest rates
and availability of funds for private areas which are not consistent with our long-run needs. Total government borrowings this
fiscal year will absorb a record 82% of funds available in the
securities market; this percent eventually must be sharply reduced
or else some private areas will have to go without.
2. Availability of Credit. Funds are more readily available
to more sectors of the economy today, but again this too reflects
the cyclical slack in the economy and not the longer-run secular
forces at work here. In the first quarter of 1975 about 5% of
all new bond issues were Baa-rated or less. By the fourth quarter,
it was almost 10%. (This is still below rates close to 20% at
times in 1971 and 1972 however.) More lesser-rated companies are
- 2 able to finance today. Unfortunately, a lot of these bonds are
for shorter duration--5-7 year maturity as opposed to 20-30 year
se
nance
Lt 4
). The most important issue immediately ahead is whether such
lesser rated companies will continue to find the necessary funds
to sustain the economic advance. When credit markets eventually
tighten (as is inevitable), problems of credit availability will
occur and their severity will be directly proportional to the
relative borrowings of the government.
3. Financing of Deficit. The relative "ease" with which the
Federal government financed the deficit in 1975 should not be
viewed as a normal state of affairs. The fact is that private
needs for credit were low because of the recession but as the
recovery gains momentum this year, private credit needs will
rise. For example, total short-run business borrowing declined
in 1975 by about $14 billion; this year it is expected to rise
by about $20 billion which is a swing of almost $35 billion.
What this means is that there will be a much higher need for
total credit in 1976 than in 1975 and eventually some private
areas will be squeezed. This is why it is imperative to take
steps now to limit the rise in Federal government spending (up
almost 40% in just two years time). Not only is future flexibility
lost if this cannot be accomplished but the deficit will remain
huge and some private areas will not be financed.
4-. Financial Structure. Over the past decade there has been a
strong trend towards a much more leveraged and brittle structure
of corporate balance sheets. Debt has roughly tripled, liquid
assets have declined relative to liabilities, and the debt-equity
ratio has about doubled. Sustained high Federal budget deficits
will eventually create pressures in financial markets that will
cause difficulties for lesser-rated companies (in terms of debt
rollover) let alone leave sufficient credit for expansion needs.
5. Capital Formation. Several studies clearly point to a much
heavier need for investment over the next several years if there
are to be enough jobs for a growing labor force, a healthier
environment for our people and a higher degree of energy self
sufficiency in the United States. (The share of business investment in GNP must increase from an average of 10.4% over the past
10 years to 12.0% for the rest of this decade--an historically
unprecedented change.) Sustained high Federal budget deficits
will automatically frustrate the fulfillment of those capital
needs by depriving many, many private areas of needed financing
to build the new factories and buy the advanced machinery. The
real dimension of crowding out becomes much more persuasive and
severe the further ahead we look.
Conclusion: Crowding out is a genuine problem whose major
economic impacts will occur ahead if something is not done
about excessive Federal budget deficits caused by too rapid
DepartmentoWMASURY U
ya^
FOR IMMEDIATE RELEASE
February 4, 1976
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $2,160,000,000 of 52-week Treasury bills to be issued to
the public, to be dated February 10, 1976, and to mature February 8, 1977,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $655,000)
Investment Rate
Price
Discount Rate
94.439
94.342
94.366
5.500%
5.596%
5.572%
(Equivalent Coupon-Issue Yield)
•
5.84%High
Low
Average -
5.94%
5.92%
, TENDERS FROM THE PUBLIC RECEIVED AND ACC1
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL
Received
$
23,975,000
3,368,525,000
26,880,000
79,425,000
27,905,000
9,205,000
309,845,000
42,075,000
10,680,000
7,435,000
14,920,000
224,060,000
Accepted
$
15- 975.000
7 szs?r
/ v ^ / l s***^ / y^/L/s
7. Y3/
$4,144,930,000
The $2,160,765,000 of accepted tenders include
bills bid for at the low price and $48,390,000 of noncompetitive tenders
from the public accepted at the average price.
In addition, $ 767,985,000 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-626
FOR IMMEDIATE RELEASE
February 5, 1976
The Secretary of the Treasury, William E. Simon,
stated today that the Commissioner and other senior officials
of the Internal Revenue Service will voluntarily appear before
a sitting Grand Jury in Washington, D.C., next week at the
invitation of the Justice Department. In commenting on this
prospective appearance, the Secretary reaffirmed his complete
confidence in the Commissioner and his integrity and the
Internal Revenue Service.
The Secretary said that this investigation into the
allegations made against the Commissioner and the Service
is an old matter that has been dragging on for months, and
it is important that the allegations be pursued to a conclusion
or laid to rest. The Secretary pointed out that the use of
a Grand Jury by the Justice Department is a routine investigative
procedure, and he is unaware of any other purpose for this
particular inquiry. He emphasized that the Treasury and the
Internal Revenue Service are cooperating in every way with the
Justice Department. He added that the Treasury has previously
investigated a number of the allegations and shared the results
of its investigation with the appropriate committees of Congress,
and the Justice Department. He said he hoped that the Justice
Department investigation would conclude the matter.
Secretary Simon said:
"The whole purpose for this is to expedite the
process of investigation. We cannot allow this investigation to
drag on while Don Alexander and his senior associates are subjected to leaks, innuendos and vilification by a mindless,
invisible bureaucracy. Through these unsavory tactics, men such
as Don Alexander are subjected to calumnious attacks on their
character and integrity. We must remember that the overriding
principle in this great country remains that a man is innocent
until proven guilty."
oOo
VS-629
las
The Treasury expects to announce the results
of the 7-year 8 percent note due 1983 on
Thursday, February 5 at 10:00 a.m.
FOR 10:00 A.M. RELEASE
FEBRUARY 5, 1976
RESULTS OF OFFERING OF 8 PERCENT 7-YEAR TREASURY NOTES
Preliminary figures indicate that approximately
106,000 subscriptions totalling $29.2 billion were
received for the offering of $3.5 billion of 8 percent,
7-year Treasury Notes of Series A-1983.
Due to the overwhelming response to the offering,
the Secretary of the Treasury has found it necessary to
exercise his authority to reduce the amount of notes to
be allotted on subscriptions in amounts over $200,000.
Accordingly, all subscriptions for $200,000 or less will
be alloted in full and subscriptions over that amount
will be allo-tted $200,000.
Approximately $6.0 billion of the notes will be
allotted to the public. In addition, $1.9 billion of
the notes have- been allotted to Government accounts and
Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities.
MSTS
3 - i~f*~*
.,./
*-/h
7O/7/?JT
/-?-'//7^
'i>-V'^
7,0C7
£V
<r
%v c^^o-^
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a
he Department of theJREASURY
!ASHINGTON,D.C. 20220
TELEPHONE 964-2041
February 5, 1976
FOR IMMEDIATE RELEASE
RESULTS OF AUCTIONS OF 3-YEAR NOTES AND 29-1/4-YEAR BONDS
/
#
The Treasury has accepted $3.0 billion of the $4.4 billion of tenders for
the 3-year notes, Series H-1979, and $0.4 billion of the $0.7 billion of tenders
for the 29-1/4-year 8-1/4% bonds maturing May 15, 2005, received from the
public for the notes and bonds auctioned today.
The range of accepted competitive bids for the notes was as follows:
7.00% 1/
7.09%
7.05%
Lowest yield
Highest yield
Average yield
The interest rate on the notes will be
yields result in the following prices:
Low-yield price 100.000
High-yield price
Average-yield price
7%.
At that rate, the above
99.761
99.867
The range of accepted competitive bids for the bonds was as follows:
Price Approximate Yield
To First Callable To
Date
High
Low
Average
102.14
101.42
101.75
8.04%
8.11%
8.08%
Maturity
8.05%
8.12%
8.09%
The $3.0 billion of accepted tenders for the notes includes 15 % of the
amount of notes bid for at the highest yield and $0.5 billion of noncompetitive
tenders from the public accepted at the average yield.
The $0.4 billion of accepted tenders for the bonds includes 68 % of the
amount of bonds bid for at the low price and $25 million of noncompetitive
tenders from the public accepted at the average price.
In addition, $ 1.7 billion of tenders for the notes and $0.2 billion
of tenders for the bonds were accepted at the average yields/prices from
Government accounts and from Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities.
1/ Excepting 4 tenders totalling $2,510,000
WS-631
FOR RELEASE UPON DELIVERY
/37
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON THE BUDGET
FEBRUARY 5, 1976
Mr. Chairman and members of this distinguished committee:
I am pleased to be with you this morning to discuss the
President's economic program. Your Committee plays a key
role in the budget process and in bringing an organized and
responsible approach to Congressional legislation. Because
Federal expenditures now have such an important impact on
the allocation of resources in our society and on the stability
of our economic system, the decisions reached will have
significant implications for our future economy.
As Mr. Lynn was with you earlier this week to discuss
the details of the President's budget and Mr. Greenspan is
with me this morning, I will focus my remarks on Federal
revenue estimates and on certain concepts which underlie a
durable, orderly and sustained economic recovery. It is
obvious that we all share such basic goals as achieving
greater economic growth, reducing the unacceptable rate of
unemployment and of moderating the rate of inflation.
However, there can be disagreement about what tradeoffs will
be required to achieve simultaneous progress toward all of
these goals, about the best mix and timing of economic
policies and about the proper time horizon for planning
purposes. In our discussion today, I hope that we can come
to a better understanding of these issues and of the need
for responsible budgetary policies.
We begin this important budget planning session with
significant and solid improvement in the U.S. economy
during 1975. As we know, the turning point in the economy
came around April ending the most severe recession since
World War II. Final sales, real gross national product and
industrial production have shown solid gains and give us
all considerable optimism for further progress in output
WS-627
/JTL
growth. Significant improvement also has been made in
reducing the rate of inflation and expanding employment
opportunities. This is an impressive turnaround from the
situation which prevailed one year ago.
Despite this progress, we must not become complacent.
Inflation and unemployment remain serious problems. Embedded
in the present recovery are risks which must be watched
closely. If inflation should escalate, it will bring on
severe problems that ultimately could halt the recovery. We
then would repeat the pattern of inflation-recession-unemployment
of the last several years, but with even more serious consequences.
Throughout much of the past fifteen years, the concept
that the U.S. Government must continually intervene to
stabilize the economy has come to dominate policy decisions.
However, because of the lagged impact of fiscal and to a
lesser extent, monetary stimulus, such actions have often
been counter-productive and have accentuated rather than
stabilized fluctuations in the business cycle.
The proper role of government is to create an environment
for sustained, orderly and durable economic growth through
its fiscal, monetary, and regulatory policies. With respect
to fiscal policy, the beginning is the budget. As you know,
proposed Federal expenditures total $394.2 billion under the
Administration's plan, and Mr. Lynn already has discussed
the details with you. The other side of the picture, of
course, is Federal revenues which I wish to take a few
minutes to discuss.
Federal Revenue Estimates
The Department of the Treasury is responsible for
estimating Federal revenues as a basis for planning fiscal
policies. The beginning point for our estimates is the
preparation of detailed GNP forecasts by a trio of the
Treasury, the Council of Economic Advisers and the Office of
Management and Budget. Using these general forecasts and
specific revenue information obtained from a variety of
sources, the Treasury prepares monthly collection estimates.
I might add that in my testimony of September 29, 1975,
before the House Budget Committee, the detailed estimating
procedures for revenues were described. Attached is a copy
of that testimony.
The estimating process obviously depends upon several
factors: (1) the accuracy of the GNP forecasts; (2) changes
in the mix of economic results which cause adjustments in
estimates of personal income and expenditures, business
/
&
spending and profits, unemployment, government transfer
payments, etc.; (3) the refinement of statistical estimating
procedures; and (4) the frequent revision of tax legislation
which can be anticipated only in part. As a result, actual
receipts always vary from those which are forecast. However,
the discrepancy usually is relatively small. In fact, it is
amazing to me that with all the uncertainty involved our
revenue estimates are as accurate as they are. Budget
estimating errors over the past six years together with 1950
and 1960 are summarized in Table 1.
As shown in Table 2, Federal Budget receipts are
estimated at $351.3 billion for FY 1977. These estimates
take into account the Tax Reduction Act, enacted on March 29,
1975, and the Revenue Adjustment Act, enacted on December 23,
1975. The President has proposed additional tax reductions
to become effective July 1, 1976, if spending is properly
controlled. His recommendation would make permanent the
six-month extension of the Revenue Adjustment Act of 1975 and
add about $10 billion of additional tax relief. He also has
asked for some special tax incentives in order: (1) to
stimulate construction in areas of particularly high unemployment;
(2) to encourage broader ownership of common stock; (3) to
ease the burden of estate and gift taxes on farms and small
businesses; (4) to take initial steps to integrate individual
and corporate taxes so as to stimulate investment; (5) to
bring about more investment in the hard pressed utility
area; and (6) to encourage residential construction. Recommended
also is an increase in social security and unemployment
trust fund taxes, and these would increase revenues in
FY 1977. The details of these proposals and their impact on
Federal revenues for FY 1977 are summarized in Table 3.
Looking five years into the future, receipts are
projected to increase from $351.3 billion in FY 1977 to
$585.4 billion in FY 1981. These projections, shown in
Table 4, are based on the legislative initiatives recommended
by the President and they also are based on the integration
of individual and corporate income taxes, as outlined in my
testimony before the House Ways and Means Committee last
July. The assumption embodied in the projections is that
such integration will begin January 1, 1978. The revenue
projections are consistent with the economic assumptions and
legislative initiatives proposed by the President in his
budget message. Those assumptions should not be interpreted
as forecasts for years beyond 1976, since they do not include
the potential impact of policy decisions made between now
and the end of the 5-year period, 1981. Nor are the projections
to be considered recommendations for policy actions. The
figures merely represent extrapolations of conditions beyond
/
/
/
next year. Nevertheless, the projections indicate that a
balance in the Federal budget will be achieved by FY 1979 if
current assumptions are correct and the recommendations in
the President's budget message are adopted.
The Need for Responsible Accounting
The balance of the Federal budget by FY 1979 would have
a favorable impact on the future development of the U.S.
economy. Because of the cumulative nature of government
spending programs over the years, decisions made during this
budget-planning period will largely determine whether or
not we will achieve responsible fiscal policy goals in the
future. Thus, the long-term impact of current policy
decisions should be the basis for all of our economic
planning.
There can be confusion about what is necessary to deal
with a current problem and the effect of that action on
future fiscal flexibility. Too often we in government are
prone to make decisions without proper consideration of the
cumulative impact of those decisions on the future. To deal
with this problem, I am proposing that government accounting
be placed on an accrual basis where unfunded liabilities are
fully recognized. This would thwart the natural tendency
for those at all levels of government to want to claim
revenues too early and expenditures too late, thereby postponing
the day of reckoning. We have had recent examples of the
sharp and painful adjustments that must occur to a local
government when things are continually swept under the rug
until eventually the rug will cover no more. With each
sweeping, future fiscal flexibility is curtailed one more
notch. Eventually a government has no flexibility to deal
with current problems. The same thing occurs for the Federal
government, except the rug can be stretched for a while
because, after all, the Federal government prints the money.
The Treasury has been publishing accrual statements for
certain individual agencies since 1956 and we now plan to do
this on a consolidated basis for the Federal government as
a whole. Our target date for the first of these publications —
for the Fiscal Year ending September 30, 1977 — is early
in 1978. I would emphasize that the initial publication
will focus on significant accruals that have a major impact
on the overall financial condition and operating results of
the Federal government. The first set of statements are
likely to be accompanied by extensive qualifications. As
the reporting process and statement preparation procedures
are improved, however, these qualifications will diminish-
/3*~
Not only will the reader obtain a consolidated financial
view of the Federal government but an idea of the magnitude
of all liabilities, whether they be funded or unfunded and
whether they be due for payment in the near future or the
distant future. In these consolidated statements, revenues
will be recognized only when they are earned and sure to be
collected and expenditures will be recognized no later than
the time the liability to pay them is firmly established.
We believe that this will bring more responsible accounting
to government. Financial problems will surface long before
a crisis is imminent, thereby reducing unpleasant surprises.
I believe this will permit more reasoned judgments on decisions
which impact the future fiscal flexibility of our nation.
Our children should not bear the albatross of paying for the
excesses of this generation, while their government is
unable to cope with problems because it lacks fiscal flexibility.
I realize that there has been concern with the cost of
installing elaborate accrual accounting systems in agencies
where the need is not clearly established. I want to assure
you that I am not advocating a slavish application of textbook
accounting to every agency and appropriation without regard
to benefits. All Federal agencies have accrual accounting
of some sort. What we intend to do is to supplement the
data we already have with some missing pieces of major
proportions, and by major I mean in terms of governmentwide
magnitudes, not individual appropriations.
I also want to say that I am not proposing a change in
the basis for calculating the official budget surplus or
deficit, or in the manner of justifying appropriations.
There are some who advocate accrual accounting for both of
those purposes, but I do not want to let the controversy
over those applications interfere with my objective of
giving the American people a clear business-like disclosure
of the overall financial condition of their Government.
Longer-Term Policy Issues
Looking at some longer-term policy issues, I am disturbed
by the fact that government spending which has been proved
to be a cumbersome tool for short-term economic stabilization
continues to be used for such purposes. The reason it is so
cumbersome is because of the various lags involved. First
of all, there usually is a considerable lag between the time
a need is identified, or a claim is made by some special
interest group, and the time there is a specific response by
Congress to the proposal. Then there is another time lag
before the expenditures actually occur and begin to spread
throughout the economic system. Whereas at the time when
/J7
the proposal was initially considered there may have been
underutilization of resources in the economy, by the time
the program actually comes on stream resources are often
fully employed so that the additional government spending
leads to greater inflation. Furthermore/ such initiatives
take on a life of their own.
If there were some way that old programs could be
phased down or eliminated during a period of rapid economic
expansion, fiscal policy might be more effective as a tool
for stabilization purposes. However, experience has shown
that this is not the case. Even programs started in a
period of economic slack to stimulate the economy most often
become a permanent part of the budget.
We must avoid abrupt and excessive changes in government
expenditures. No matter how well intentioned, such sharp
swings in spending tend to accentuate rather than stabilize
the business cycle and serve to increase the uncertainty of
developing policies to meet future needs. In turn, this
uncertainty is felt in the consumer markets, in the markets
for capital goods, and in financial markets.
In addition to government expenditures, I am concerned
with the size of the chronic Federal deficits, particularly
the negative impact on financial markets and capital formation.
The traditional view of the government's role in the business
cycle was that deficits would be recorded in periods of
economic slack, but that surpluses would occur in periods of
above-average economic activity. As a result, savings would
be available to the private sector for the capital formation
necessary to sustain the economic advance in real terms.
Obviously this has not occurred in recent years where we
have had deficits in periods when there is less than full
utilization of our resources.
These deficits, of course, need to be financed and such
financings in periods of prosperity hurt the economy. They
place the U.S. Treasury in a position of preempting private
investors. The recent avalanche of Treasury securities has
created distortions in the traditional patterns of funds
being raised and, in my judgment, this has contributed to
making our financial markets less efficient in recent years
in channeling the savings of society to investment opportunities.
As a result, capital formation is impeded.
Furthermore, deficits cumulate over time. Total
Federal debt has increased from $329.5 billion at the end
of FY 1966 to an estimated $633.9 billion at the end of
FY 1976 — a rise of 92 percent in only 10 years time. Over
?/7
the past ten years the average maturity of the debt has
declined from 5 years, 3 months to 2 years, 5 months. What
this means is that the U.S. Treasury must be a more frequent
visitor in financial markets simply to roll over outstanding
securities let alone to raise funds for current deficits.
In this fiscal year (1976) the U.S. Treasury will absorb
over 70% of all moneys in the securities markets; government
at all levels will absorb over 80%. This percent must be
sharply reduced as the economic advance continues or else
some private areas will have to go without.
This problem of "crowding out" becomes far more critical
of course as the recovery progresses and the financing needs
of the private sector intensify. If deficits remain large,
the Treasury, by being first in the credit line, will always
get its needs financed but in so doing may make it difficult
for companies with less than a prime financial rating to
obtain the financial resources they need at acceptable
interest rates.
Moreover, as annual interest payments grow with increases
in the total debt, fiscal flexibility is eroded further.
This "uncontrollable" outlay of over $45 billion in FY 1977
is the third largest item in the budget. It puts pressure
on the total budget, which in turn means that programs must
be displaced or tax reductions foregone. (A more extensive
discussion of crowding out is found in Appendix A.)
The size of the deficit also affects the rate of
capital formation in the private sector, and this is a
matter of great concern. As the recovery progresses,
private capital investment needs to increase to sustain the
recovery. In the next decade, the need for increased
capital formation is extremely large. This need has been
carefully documented by the Treasury, by numerous outside
studies, and, most recently, in Chapter 1 of the Economic
Report of the President. If we are to meet our goals for
increased employment and productivity in a non-inflationary
environment as well as our environmental, safety and energy
goals, we must have an increase in the rate of national
savings and private direct investment relative to the total
GNP.
The achievement of our capital formation goals depends
on the necessary expenditures being financed in the private
sector. In turn, the adequacy of capital flows depends on
the savings of society being less and less used to finance
Federal expenditures and more and more focused on capital
formation- This is the only way we can sustain a durable
recovery over the long run and bring down the level of
inflation. If the private sector is unable to finance
capital formation because of the huge demands on savings by
the Federal Government and because of the resulting strains
and distortions introduced in financial markets, the boomand-recession sequence of the last decade may be repeated.
Therefore, it is imperative that we reduce the Federal
deficit and work toward budget surpluses as the recovery
progresses.
Another aspect of the crowding out problem is the
secular deterioration I see in the financial structure of
U.S. businesses. Over the past decade there has been a
strong trend towards a much more leveraged corporate balance
sheet. Debt has roughly tripled; liquid assets have declined
relative to liabilities; the debt-equity ratio has about
doubled; and the average maturity of debt has shrunk. Just
as the Treasury is a more frequent visitor to credit markets,
so too will many companies, and if there is an intense
competition for funds, it is quite clear that the less than
prime rated company will be the loser. Continuing heavy
Treasury borrowings will eventually cause difficulties for
these companies, small businesses and potential home owners.
For both fiscal and monetary policies, the problem of
instability is compounded by the present inflation psychology
that permeates our society. All too readily the economy
will move to a higher level of prices, but only grudgingly
will it move to lower prices despite slack demand. This
inflation psychology has been building for a decade and its
unwinding will not be easy. The achievement of economic
growth without accelerating inflation could be upset by
fiscal and monetary policies that are, or even appear to be,
overly stimulative.
In addition, such excesses will lead to bottlenecks
developing in certain key industries well before the economy
as a whole reaches full employment. This occurred in 1973
in such industries as steel, paper, chemicals and fertilizers.
The dislocations caused by bottlenecks send inflationary
tremors throughout the economy and lead to inefficiencies
which ultimately can curtail a recovery in real terms.
We must act wisely and responsibly in bringing stability
to our economy. The excesses of the past are not easily
undone. Excessive spending, excessive credit creation,
excessive stimulation all may provide a short-term palliative/
but before long additional inflation and production bottlenecks
set in and economic performance declines. The stop-and-go
policies of the past fifteen years have led to an instability
which now is deeply rooted in our society. To come to grips
737
with this issue we have designed a responsible mix of
economic policies that will bring about durable lasting
economic prosperity which benefits our nation with sustainable
and increasing employment.
Thank you.
TOTAL GOVERNMENT EXPENDITURES
(As a Percent of GNP)
Percent
36
1948
1950
1955
1960
1965
Percent
36
1970
1975
1977
Source: Department of Commerce
^
?/7
TABLE 1
Budget Estimating Errors
Overestimate ( + ) or Underestimate (-)
as a Percent of the Actual Figure
Estimates made 18 months
prior to the end of the
fiscal year
Fiscal
year
Estimates made 6 months
prior to the end of the
fiscal year
1
Outlays
Receipts
Outlays
Receipts
1950 1/
+ 4.1
+ 10..3
+7.8
+ 1.9
1960 1/
-0.3
-1.7
+ 1.6
+ 0.2
1970 2/
-0.7
+ 2.6
+ 0.7
+ 2.9
1971 2/
-5.0
+7.3
+ 0.6
+ 3.1
197 2 2/
-1.1
+ 4.3
+ 2.0
-5.2
1973 2/
-0.1
-4.9
+ 1.3
-3.1
1974 2/
+ 0.1
-3.4
+ 2.3
+ 1.9
1975 2/
-6.2
+ 5.0
-3.4
-0.8
Office of the Secretary of the Treasury
Office of Tax Analysis
1/ Administrative budget.
2/ Unified budget. The first estimate on a unified budget basis was
prepared in January 1968.
1/23/76
//Jt
TABLE
2
BUDGET RECEIPTS BY SOURCE
(In billions of dollars)
1975
actual
1976
TQ
1977
estimate estimate estimate
Individual income taxes
122.4
Corporation income taxes
40.6 40.1
8.4 49.5
Social insurance taxes and
contributions
—
«
86.4 92.6
25.2 113.1
Excise taxes
16.6 16.9
4.4 17.8
Estate and gift taxes
4.6 5.1
1.4 5.8
Customs duties
3.7 3.8
1.0 4.3
Miscellaneous receipts
6.7 8.3
1.5 7.2
Total budget receipts:
281.0 297.5
81.9 351.3
130,8
40.0
153.6
1/23/76
TABLE
3
CHANGES IN BUDGET RECEIPTS
(In billions of dollars)
TQ
estimate
1977
estimate
87.2
371.3
+ 1.6
+ .4
+ 2.1
+ .2
+ .6
+ 2.4
-9.8
-6.0
-.2
-.5
+ .8
+ .4
-1.3
-.4
+ .1
.-.I
^.1
+ .1
^.5
-•9
+ .3
297.3
87.4
374.6
-5.4
-28.1
-.3
-.3
1975
1976
estimate estimate
ceipts under tax rates and
structure in effect Jan.1,1974
crease in import fee on
petroleum products by administrative action
acted legislative changes:
Social security taxable earnings
base increases:
$13,200 to $14,100
effective Jan.1,1975
$14,100 to $15,300
effective Jan.1,1976
$15,300 to $16,500
1/
effective Jan. 1,1977—
Tax Reduction Act of 1975
Revenue Adjustment Act of 1975
Liberalized deduction for
individual contributions to
pension pians-~~~'-^~~,^^*-^<—Reduction in telephone excise tax
Increase in SMI (medicare)premium
Total receipts under existing
"
legislation
langes due to tax proposals:
Individual and corporation
income tax reductions,
effective July 1, 1976
. Financial Institutions Act
Stock ownership incentives
Accelerated depreciation on
investment in high unemployment areas
Social security tax rate increase
from 11.7% to 12.3%
effective
January
1, 1977
1/ -Total receipts
under
existing
Unemployment
tax rate
and
and proposed
legislation
base increase Jan.l, 1977
Other
290.8
310.2
+ 1.7
+0 . 4
+ .1
-10.2
-0.2
-.1
+ .1
281.0
_*
_*
-.3
+ 3.3
+ 0.2
281.0
297.5
_*
81.9
+ 2.1
+ .1
351.3
jess than $50 million.
The effect of the taxable earnings base increase is calculated using a
tax rate of 11.7%. The effect of the tax rate increase is
calculated using a taxable earnings base of $16,500.
23/7f
TABLE
4
THE FISCAL OUTLOOK, 1975-81
(In billions of dollars)
Outlays under current programs
1975
1976
TQ
1977
1978
1979
1980
1981
324.6
373.7
98.2
391.9
420.4
441.8
465.0
489.2
-.2
-.2
2.3
9.1
13.9
17.5
20.7
Outlays under proposed programs—
Total projected outlays 324.6 373.5 98.0 394.2 429.5 455.7 482.5 509.9
Receipts under current law 281.0 297.3 87.3 374.1 430.1 491.7 555.1 623.9
Effects of proposed tax changes—
.2
-5.5
-22.8
-23.4
-26.4
-32.0
38.4
Total projected receipts
281.0
297.5
81.9
351.3
406.7
465.3
523.1
585.4
Budget margin or deficit (-)
-43.6
-76.0
-16.1
-43.0
-22.8
9.6
40.6
75.5
1/23/76
*
TABLE 5
Net Funds Raised in the Securities Markets by Major Sector
(fiscal years, billions of dollars)
:Corp. &
Federal & :Total
U.S.Treas
State & -.foreign
sponsored :Federal
local 3/:bonds 4/
1/
agencies 2/:sector
4.9
5.7
2.4
1.6
1960
.8
6.3
4.9
1.8
-.2
1961
2.0
5.7
6.0
10.9
2.2
1962
8.8
7
4
6.2
5.5
1.0
L963
6.4
4
2
6.4
5.2
1.5
1964
2.7
6 9
5
3
7.9
2.2
A9 6 5
3.1
7 3
5
8
10.9
6.8
1966
-1.0
6
0
2 1
23.8
13.0
2.7
1967
-.6
7 2
12.0
3.9
16.4
5.6
1968
18.2
15.9
5.8
1969
-1.9
9.7
15 0
8 2
6 8
16.8
1970
15.0
23 3
2 8
20 5
27.5
1971
15 6
28 3
8 7
19 6
21.7
1972
12 6
32 9
14 4
18 5
15.4
1973
17 0
4
23
3
21
2 1
15.8
17.4
1974
16 8
67 7
51 9 (est.) 14.3
33.5
1975
14 0
101 8
87 5
25.1
1976
Office of the Secretary of the Treasury
Office of Debt Analysis
Total
securities
13.0
13.0
22.6
19.2
15.8
20.1
24.0
21.1
47.4
31.8
41.5
65.8
65.6
60.9
57.7
117.9
140.9
:Gov't
Federal
:sector as
sector as
5/
a % of total :% of total
62.4
18 6
51.8
14 0
74.7
48 4
67.5
38 7
59.6
26 5
60.6
26 3
54.5
24 1
38.5
50.3
9 8
65.5
12.2
50.0
59 4
36.2
58 2
35.3
66 9
43.1
74 7
53.9
69 9
40.5
71.6
57.4
82.2
72.2
January 8, 197 6
Source: FY 1960-1975 data based on Federal Reserve Flow-of Funds accounts (which show net changes
in outstandings).
1/ Net increase in marketable and nonmarketable bills, notes and bonds. (Includes Federal
Financing Bank.)
#
2/ Increase in bills, notes and bonds of budget and sponsored agencies. Includes GNMA pass-tnroughs.
3/ Increase in notes, bonds and Government loans.
Increase in bonds and notes with original maturities of more than 1 year.
Includes State and local as part of government sector.
5/
V
7?7
TABLE 6
Unified Federal Budget Surplus or Deficit in Relation to GNP
1954-1977
Budget Surplus (+)
Fiscal Year
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976e
1977e
Budge t Surplus (+)
or Deficit (-)
(S billions)
- 1.2
- 3.0
+ 4.1
+ 3.2
- 2.9
-12.9
+ 0.3
- 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
-76.0
-43.0
or Deficit (-) as % of GNP
Three-Year
Moving Average
Annual
(Centered)
-0.3
-0.8
1.0
0.7
-0.7
-2.7
0.1
-0.7
-1.3
-0.8
-1.0
-0.2
-0.5
-1.1
-3.0
0.4
-0.3
-2.3
-2.1
-1.2
-0.3
-3.0
-4.8
-2.3
—
- .0
0.3
0.3
-0.9
-1.1
-1.1
-0.6
-0.9
-1.0
-0.7
-0.6
-0.6
-1.5
-1.2
-1.0
-0.7
-1.6
-1.9
-1.2
-1.5
-2.7
-3.4
APPENDIX A
CROWDING OUT — SETTING THE RECORD STRAIGHT
January 16. 19Y6
*
'
There clearly exists some misunderstanding about the
meaning and significance of the so-called phenomenon of
"crowding out." In essence, there is the idea that since
financial collapse has not yet occurred, then the whole
issue is misleading. This is wrong. What has occurred is
a focussing of attention on short-run improvements in financial markets (associated primarily with the worse recession
since the 1930's) and an ignoring of what happens longer-term
as the economy moves back toward fuller capacity under conditions of repeated huge sized government budget deficits.
No matter how viewed, the inescapable fact is that with
reasonably full use of capacity, more resources claimed by
the government must mean less for the private sector. Huge
deficits which take the lion share of credit flows will
eventually push out the weaker private areas--specifically
potential home owners, small businesses and even larger
companies who do not have a superior credit rating. This in
turn will hurt real growth, deprive our workers of adequate
productive tools, frustrate the achievement of our longerterm economic needs, and further misallocate our scarce
resources. (This was pointed out repeatedly in prior testimony,
e.g., January 25, 1975, before the House Ways and Means Committee.)
1. Interest Rates. Interest rates have declined over the past
year or so as would be expected during a recession. High-grade
bond rates have fallen from a peak of about 10.5? in mid-1974
to around 8.5% today. Yet this drop cannot be taken as sufficient
evidence that credit is ample and more importantly that credit
will remain ample to support a lasting business recovery. This
cost of long-term funds is still very high historically. (Such
interest rates ranged between 2?-6? from l865-1965--a period
containing serious wars, depressions, financial panics, business
booms and other assorted economic extremes.) The combination of
sustained high Federal government financing, of a growing demand
for private financing as the expansion proceeds and of a Federal
Reserve policy which must eventually moderate in generosity (to
avoid rekindling inflation) points to a level of interest rates
and availability of funds for private areas which are not consistent with our long-run needs. Total government borrowings this
fiscal year will absorb a record 82% of funds available in the
securities market; this percent eventually must be sharply reduced
or else some private areas will have to go without.
2. Availability of Credit. Funds are more readily available
to more sectors of the economy today, but again this too reflects
the cyclical slack in the economy and not the longer-run secular
forces at work here. In the first quarter of 1975 about 5% of
all new bond issues were Baa-rated or less. By the fourth quarter,
times
it was in
almost
1971 and
10#. 1972
(This
however.)
is stillMore
belowlesser-rated
rates close companies
to 20% at are
- 2 -
7Vi
able to finance today. Unfortunately, a lot of these bonds are
for shorter duration—5-7 year maturity as opposed to 20-30 year
maturity which was the norm not too long ago. This will raise
problems in the future since the companies will have to refinance
more frequently (referred to as the "rollover" problem in point 4
below). The most important issue immediately ahead is whether such
lesser rated companies will continue to find the necessary funds
^to sustain the economic advance. When credit markets eventually
tighten (as is inevitable), problems of credit availability will
occur and their severity will be directly proportional to the
relative borrowings of the government.
3. Financing of Deficit. The relative "ease" with which the
Federal government financed the deficit in 1975 should not be
viewed as a normal state of affairs. The fact is that private
needs for credit were low because of the recession but as the
recovery, gains momentum this year, private credit needs will
rise. For example, total short-run business borrowing declined
in 1975 by about $14 billion; this year it is expected to rise
by about $20 billion which is a swing of almost $35 billion.
What this means is that there will be a much higher need for
total credit in 1976 than in 1975 and eventually some private
areas will be squeezed. This is why it is imperative to take
ste^s now to limit the rise in Federal government spending (up
almost 40? in just two years time). Not only is future flexibility
lost if this cannot be accomplished but the deficit will remain
huge and some private areas will not be financed.
4. Financial Structure. Over the past decade there has been a
strong trend towards a much more leveraged and brittle structure
of corporate balance sheets. Debt has roughly tripled, liquid
assets have declined relative to liabilities, and the debt-equity
ratio has about doubled. Sustained high Federal budget deficits
will eventually create pressures in financial markets that will
cause difficulties for lesser-rated companies (in terms of debt
rollover) let alone leave sufficient credit for expansion needs.
5. Capital Formation. Several studies clearly point to a much
heavier need for investment over the next several years if there
are to be enough jobs for a growing labor force, a healthier
environment for our people and a higher degree of energy self
sufficiency in the United States. (The share of business investment in GNP must increase from an average of 10.4? over the past
10 years to 12.0? far the rest of this decade--an historically
unprecedented change.) Sustained high Federal budget deficits
will automatically frustrate the fulfillment of those capital
needs by depriving many, many private areas of needed financing
to build the new factories and buy the advanced machinery. The
real dimension of crowding out becomes much more persuasive and
severe the further ahead we look.
Conclusion: Crowding out is a genuine problem whose major
economic impacts will occur ahead if something is not done
about excessive Federal budget deficits caused by too rapid
- 3a rise in government spending. The serious nature of this
issue should not be masked because of the impacts of a recession.
If steps are not taken to exercise better fiscal control, some
areas in the private sector will go without needed financing;
capital formation will be less than desired; and our serious
unemployment and inflation problems will be that much further
from a satisfactory resolution. The following excerpts from
Professor Paul McCracken's article on the January 8 editorial page
of the Wall Street Journal is a well articulated discussion
of budget deficits and the phenomenon of "crowding out":
"There is here, however, a more substantive problem. It is
the failure of conventional fiscal policy wisdom to face the
full implications of the fact that an increase in the federal
deficit, from accelerated spending or more tax reduction, must
be financed. And the added funds that the Treasury must then
borrow are funds not then available to others in the market
for financing. . . .
"Markets have, of course, substantial capacity for accommodating
to changes in demands, and effects on other borrowers of swings
in budget deficits of modest proportions will not be large.
When, however, the U.S. government had to raise funds at the
rate of $81 billion per year in the first half of 1975, after
a $5 billion pace a year earlier, the 22? decline in money for
home and commercial mortgages during that period can hardly be
assumed to have been an entirely unrelated development.
"The question was never whether a large deficit would cause a
disintegration of financial markets, or a collapse of capitalism,
or some other catastrophe of draconian proportions, though some
have pointed to the absence of such cosmic disaster as evidence
tnat the "crowding out" theory was wrong. The point is the
quite common sense one that in financial markets where demands
for funds are active, and this is apt to characterize 1976,
other claimants for funds will get less than if the large
Treasury requirements were not present in the market. The
financing "loop" of fiscal policy must be closed.
"This all carries with it some implications for budget strategy
in 1976. Within the limits of fiscal discipline that the
political process can muster in a quadrennial year, the Congress
and the President can continue efforts toward regaining bettercontrol of spending without having to worry about the net adverse
effect of this fiscal restraint on the economy. Dollars not
borrowed by the Treasury v/ill be put to work by other claimants
in the money and capital markets. And housing would he a major
beneficiary of the easier financial markets that v/o-ild result.
The basic 1976 trend for interest rates, in fact, is more in
the hands of those who manage the budget than of the Federal
Reserve."
#
#
#
1ST)
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE
THE HOUSE BUDGET COMMITTEE
SEPTEMBER 29, 1975
Mr. Chairman and members of this distinguished Committee:
I am pleased to appear before you this morning to
review current economic conditions and to discuss the Federal
budget revenue estimates prepared by the Department of the
Treasury. My analysis of economic developments and prospects
will hopefully contribute to a broader, understanding of the
economic recovery now underway and the importance of sustaining
responsible policies required for achieving both our nearterm goals regarding inflation, unemployment and national
output as well as our long-term objective of creating a more
stable economy. The discussion of projected Federal budget
revenues and the related testimony of James T. Lynn, Director
of the Office of Management and Budget, concerning anticipated
Federal outlays will provide necessary background for
decisions about the future course of fiscal policies.
This Committee has a vital role in developing national
economic policies. The past decade has been an unusually
difficult period as our policy flexibility has been increasingly
restricted by the lagged impact of past decisions. In
particular, great concern has developed about the impact of
Federal spending and tax policies as outlays have accelerated
more rapidly than the overall growth of the economy and
WS-391
-2chronic Federal deficits have occurred. Your Committee was
created to help correct these serious problems. While I do
not agree with some of your policy recommendations, I am
impressed by your efforts to create a more organized and
disciplined approach to making Congressional fiscal decisions.
The First Concurrent Resolution to Congress was a constructive
step in providing general economic and spending guidelines.
However, the real test for the Congressional Budget Committees
is yet to come as the specific actions of individual appropriation committees must be adjusted to conform to the targets
to be established by your Second Concurrent Resolution to
Congress. I look forward to working with you in preparing
these important fiscal policy recommendations which will
directly affect the current recovery and the future of the
U.S. economy.
I. ECONOMIC OVERVIEW
The United States has developed the most productive and
creative economic system in the world. Americans have
traditionally experienced rising standards of living as real
output has increased, inflation pressures have been
relatively moderate and employment opportunities have
expanded. However, the performance of the U.S. economy
during the past decade has been disrupted by recurring booms
and recessions caused by inappropriate fiscal and monetary
policies. The resulting excessive rates of inflation and
unemployment created serious domestic economic distortions
and eventually disrupted the balance of the international
system. No matter how well-intentioned the original fiscal
and monetary actions may have been, the resulting sequence
of overheating and accelerating inflation, followed by
periods of recession and unemployment, has been a heavy
price to pay for temporary economic benefits.
In planning economic policies for ]975 the Administration
believed that recovery would begin by midyear if three
fundamental adjustments could be accomplished: (1) the
unwanted accumulation of inventories could be liquidated
\T77L
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 occurred.
>.
During the first three months of 1975 the real output
of goods and services continued to decline at a seasonally
adjusted annual rate of 11.4 percent but economic performance
was already beginning to shift as personal consumption
increased. Most of the 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 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 $31.0 billion.
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 and the Tax Reduction Act of 1975 was passed in
March. As a result, real disposable personal income increased
during the second quarter following five consecutive quarterly
declines. The turnaround of consumer purchasing power
further strengthened personal spending and enabled people to
improve their financial situations as the savings rate
jumped from 7.5 percent during the first quarter to 10.6
percent in the second quarter. As these favorable developments
pushed final sales above current levels of production, a
runoff of inventories occurred beginning at the retail level
and then spreading back through the system into the manufacturing
sectors. New orders turned upward in April and inventories
have started to rise once again at the retail level.
As economic conditions improved employment began to
rise again in April. The "lay-off" rate has declined
steadily each month through 1975 and the average number of
hours worked and the amount of overtime have increased. The
general measure of industrial production finally bottomed
out in April and four consecutive months of expansion have
been reported. Exports continued at a strong pace throughout
this period and rising government spending has occurred at
all levels. The long declines in residential construction
and new car sales stopped in the spring and these two basic
sectors are no longer dragging the economy down. The seasonally
adjusted annual rate of new housing starts rose to 1260
thousand units in August, up from the low annual rate of 9 80
thousand units in April, and domestic automobile sales have
steadily improved for several months. The rate of recovery
in these two basic sectors has been sluggish but at least
the negative results reported in 1974 and early in 1975
have been reversed.
It is now recognized that the turning point for the
U.S. economy was reached sooner than expected -- probably by
April or May — and that the initial pattern of recovery has
been somewhat stronger than anticipated. The public's
general perception of the improving developments will
continue to lag far behind actual events -- by as much as
nine months or more according to some public opinion experts -but the economic recovery does appear to be well underway.
Perhaps the best overall measure of the recovery is the
swing in "real" GNP — the total output of goods and services
with the effects of price changes removed -- from a sharp
decline in the first quarter at an annual rate of 11.4
percent to a positive performance in the second quarter when
output increased at an annual rate of 1.9 percent (both
figures are seasonally adjusted).
The conclusion that the U.S. economy has started to
recover does not mean that our fundamental economic problems
have suddenly been solved or that we will not continue to
suffer specific economic disappointments during the coming
months. The present level of economic activity is still
inadequate and we can never be satisfied until the current
excessive levels of inflation and unemployment are substantially reduced. Even though some acceleration rs likely to
occur over the coming months if consumer spending remains
strong, corporate profits improve and the stimulative
7^7
- 5effects of the investment tax credit are felt in 1976,
business capital spending remains sluggish. Therefore, the
outlook for residential construction and business capital
investment suggests that the recovery pattern for the entire
economy is likely to be moderate. But I also believe that
improvement will be more sustainable if responsible fiscal
and monetary policies are supported.
Unfortunately, the hoped-for recovery of residential
construction and business investment will be hampered by the
disruptive 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. Two
weeks ago the Treasury announced that it would 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 $6.0 billion and $3.0 billion
respectively in the current calendar year.
We have substantial refunding requirements this year.
Apart from the rollover of the $77 billion of privately-held
regular weekly and monthly bills, $23.0 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
6
--
/Sr
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
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 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.
We must also be concerned about renewed inflation
pressures. The slowdown in the rate of price increases
during the first half of 1975 was reversed by the disappointing
statistics reported for June and July. While those specific
monthly statistics were not an accurate representation of
the underlying rate of inflation -- just as the 0.2 percent
increase in the CPI for August was an aberration on the low
side -- most analysts now anticipate that inflation will
persist in the 6 to 8 percent zone. That level of inflation
is clearly inconsistent with our Nation's other basic economic
goals. Because these inflation pressures have been accumulating
for many years actions to correct them will require a sustained
effort.
A third problem involves the unacceptable level of
current unemployment which is the direct result of the
recession. Although large employment gains have occurred
since April, the unemployment rate is still in the 8-1/2
percent zone. Further progress in reducing the level of
unemployment is expected as the economic recovery moves back
to full activity. For several quarters real output will
actually exceed the long-term target growth rates.
/7TDuring the transition period, it has been necessary to
sharply increase the funds allocated to manpower programs,
public service employment, unemployment compensation benefits
and other social programs to alleviate the recession's
impact. But I hope that we will avoid the traditional
errors of overheating the entire economy by adopting policies
of excessive fiscal and monetary stimulus. That approach
might temporarily contribute to the reduction of the unemployment rate but the "stop-go" patterns of the past indicate
that excessive stimulus eventually tends to create more
problems than solutions.
Considering all of the pluses and minuses, it is clear
that we are well into an economic recovery which should
accelerate as we move into 1976. However, the strength and
durability of this recovery is not certain -- particularly
if a renewed surge of price increases or the expectations of
inflation disrupt the pattern of economic activity. The
amount of actual slack in the economy is uncertain and
policy makers should not underestimate the strength of the
economic recovery. Extensive stimulus has already been
provided by the widespread increase in Federal outlays, the
recent tax cut and monetary actions. Monetary policies have
been responsive as the money supply (M*) has increased at an
annual rate of 8.6 percent over the past seven months since
mid-February. A broader money supply measure, which includes
net time deposits (M2), increased at an annual rate of 11.3
percent over the same time period. Specific money supply
growth rates tend to fluctuate widely from week to week but
the Federal Reserve System does appear to be following
policies which will support the economic recovery. As to
fiscal policies, the large tax cut passed in March provided
tax relief of $22.8 billion and Federal outlays increased
from $268.4 billion in FY 1974 to $324.6 billion in FY
1975, a gain of 21 percent. If outlays in FY 1976 actually
rise to the level of $368.2 billion recommended by your
Committee in its report of April 14, 1975, that would mean
that Federal spending would have increased $100 billion in
just two fiscal years, a two-year percentage jump of 37.2
percent. This surge of spending created a huge Federal
budget deficit of $43.6 billion in FY 1975 and the shortfall
for the current fiscal year will be even larger. In February
1975 the President submitted a budget which called for a FY
1976 Federal deficit of $51.9 billion. The Mid-Session
Review of the 1976 Budget published May 30 raised the anticipated
deficit to $59.9 billion. In the First Concurrent Resolution
on the Budget-Fiscal Year 1976 submitted as a Conference
was
cooperate
Report
recommended.
to the
in tough
Congress
Unless
and on
responsible
the
May Executive
9, a deficit
action
Office
to
of control
and
$68.8
the
billion
Federal
Congress
-8spending the prospective deficit could even escalate to $90
billion and the outlook for future years is for more Federal
budget deficits. The challenge is clear.
In addition to the substantial increases in the size of
our budget deficits I am particularly concerned about the
rapid increase in expenditures. As summarized in Table 1,
Federal outlays increased from $97.8 billion in FY 1961
to $324.6 billion in FY 1975, an increase of 232 percent.
From 1961 to mid-1975 the entire GNP increased from $520.1
billion to $1440.9 billion, a gain of 177 percent (the mid1975 figure is the GNP figure reported for the second quarter
at a seasonally adjusted annual rate). The Federal budget
has clearly grown more rapidly than the total U.S. economy.
These budget outlay increases — including the changes
in FY 1976 -- are spread throughout the Government and tend
to become permanent. If we are to have the necessary fiscal
flexibility to meet our current and future priorities, we
must regain control over Federal outlays.
II. FEDERAL REVENUE ESTIMATES
Turning next to the important topic of Federal revenues,
I would first like to describe the analytical techniques
used by the Department of the Treasury and then discuss our
most recent estimates. Within the Treasury the estimating
functions are assigned to an Assistant Director of the
Office of Tax Analysis and a staff of five professionals
whose duties are divided between the preparation of general
receipts estimates and the analysis of specific revenue
changes that might result from proposed tax legislation
initiatives.
The beginning point for our estimates is the preparation
of detailed GNP forecasts by the professional staffs of the
Treasury, Council of Economic Advisers and Office of Management and Budget. Using these general forecasts of national
output and information obtained from various sources the
Treasury then prepares monthly collection estimates for
several major categories. We also revise the estimates at
the beginning of each month to reflect current collection
experiences. Finally, the potential impact of any proposed
or recently enacted tax legislation is added or subtracted
777
from the basic estimates. Legislative changes are handled
directly because the time series information used in the
calculations would not include the effects of new tax
initiatives.
The tax collection experience of the past five years is
summarized in Table 2. Over the five-year period, Fiscal
Years 1971 through 1975, individual income taxes accounted
for 45 percent of all unified budget revenues, corporate
income taxes for 15 percent, social insurance taxes and
contributions (consisting of "employment taxes and contributions,"
"unemployment insurance" and "contributions for other insurance
and retirement") accounted for 28 percent and all other
sources combined represented the remaining 12 percent. It
is also interesting to note the relative stability of each
source of revenue as a share of the total even though economic
conditions and specific tax legislation change over time.
The methods used for estimating each major source of
revenues are as follows:
Individual income taxes — The individual tax receipts
model includes: (1) an equation which estimates current
calendar year liabilities, other than capital gains taxes,
as a function of personal incomes adjusted to eliminate
transfer payments and other labor income and to add the
employee payments for social insurance; (2) an equation
which estimates current realized capital gains subject to
taxation; and (3) an equation which estimates the withheld
tax liabilities as a function of quarterly wage and salary
figures. The amount of withholding collections must be
estimated on a current monthly basis and the income tax
withholding must be separated from the social security
withholding. There are significant time differences between
the tax liability period and the payment date for different
payment methods. The model also develops estimates by
source of individual tax payments, including refunds, and
converts the figures into a monthly and fiscal year collection
pattern.
The income tax liability for a given calendar year is
estimated by benchmarking on the last actual year. On the
basis of past experience, the change from the benchmark year
-10liability is then estimated by correlation with the projected
change in personal income (adjusted to a concept of income
subject to tax). This gives an estimate of the tax liability
excluding the tax on capital gain income. Capital gains,
which are not included in the concept of personal income are
volatile and often change in opposition to changes in personal
income. They are, therefore, treated separately. Even so,
estimated capital gains are only approximations for the
calendar years in which stock prices and market volume are
known. For future years the estimates are subjective.
The estimated total individual income tax liability for
the calendar year is then broken down by major method of
payment, including refunds, on the basis of historical
relationships. Withheld taxes are estimated by means of
relationship to salaries and wages by quarters. Refunds are
estimated as a percentage of withheld taxes. Payments other
than withheld taxes are estimated as a residual after subtracting withheld taxes less refunds from the total liability
estimate. This residual is then broken down into estimated
tax payments, payments on final tax returns and back taxes,
again on the basis of past relationships. All of the past
data have to be further adjusted for changes in tax law in
order to obtain meaningful relationship. Considerable
uncertainty in the relative proportionalities has been
introduced in recent years. In the past decade, rarely have
there been two years, back to back, in which the methods of
payments have not been affected by legislative and administrative changes.
Corporation income taxes -- This model begins with an
estimate of calendar year corporate profits before taxes as
measured in the national income accounts. The next step is
to determine the overall tax rate percentage to apply to the
profit estimates. The actual percentage collected will vary
according to the mix of economic activity, accounting policies
and differences between gross and net tax liabilities. The
third step is to determine the "collections lag" which will
determine which fiscal year the estimated gross liability
will apply to. Finally, the size of corporate income tax
refunds must be estimated based on an analysis of the
expected tax liabilities and the timing of economic recessions
/ f a
and recoveries. Greater percentage errors occur in preparing
corporate income tax collection estimates because the basic
variables are more volatile and the availability of information
is not as good. Unfortunately, there have been only two or
three years in the past twenty-five in which there was no
statutory change in the coverage or timing of current
estimated payments. In addition, corporations are allowed
three methods of computation in determining whether they
complied: (1) a current estimate for the year if within 80
percent, (2) annualization as the year progresses if within
80 percent, and (3) the preceding year's tax. This mix
results in variations in the pattern apart from the statutory
changes and increases in forecasting difficulty. In any
event, past collection patterns modified by recent collection
experience and expected pattern alterations form the basis
for collection forecasts, monthly and for the fiscal year or
years. There is a good deal of intuition and judgment in
the final result.
Employment taxes and contributions -- This category
includes FICA, SECA (for self-employed), deposits by states
of their employee-paid portion of social security taxes for
covered state employees, Federal employer deposits of
employees share of social security taxes for Federal employees
not covered by the retirement system, railroad retirement
taxes, and premiums for uninsured participants enrolled in
the Federal hospital insurance trust fund. The annual
estimates of liabilities and receipts, except for railroad
retirement taxes, are made by the Social Security Administration
and then Treasury produces quarterly and monthly collection
estimates.
Unemployment insurance premiums -- The Department of
Labor normally prepares estimates of collections although
Treasury may occasionally prepare internal revisions based
on employment data and historical experience.
Contributions for other insurance and retirement programs -Various government agencies are responsible for preparing
estimates of collections related to-programs under their
jurisdiction and these figures are collected by the Office
of Management and Budget and then given to the Treasury. We
then prepare monthly collection estimates based on historical
experience.
Excise taxes ~ Historical experience is used to forecast excise tax collections with some effort to anticipate
future income levels. Annual estimates of the various trust
fund excise taxes are jointly prepared by the Treasury and
the responsible government agency.
Estate and gift taxes — Estimates are based on stock
prices and historical experience.
Customs duties — Estimates are based on current levels
of GNP results.
Miscellaneous receipts — Deposited earnings of the
Federal Reserve System accounted for nearly 90 percent of
the miscellaneous receipts in FY 1975. The only other major
source of miscellaneous revenue in FY 1976 is the import fee
and tariff on crude oil and petroleum products. This figure
is based on estimates of future imports, prices and demand
assumptions.
In general, the Treasury is responsible for the overall
estimates of revenues but it must obtain necessary economic
forecasts and information from a variety of outside sources.
This procedure obviously creates the possibility that
revenue estimates may turn out to be inaccurate because of
errors: (1) in preparing the forecast of GNP; (2) in
estimating the mix of economic activity as a basis for predicting personal incomes and expenditures, business spending
and profits, unemployment, government transfer payments,
etc.; and (3) in applying the equations developed within the
Treasury for estimating probable revenues. Unfortunately,
the underlying economic conditions constantly change and tax
legislation is modified rather frequently. For example, the
FY 1975 budget estimated that personal incomes would total
$1,135 billion in 1974. The latest figure, which is still
subject to further revision, is reported to be $1,150
billion. The $15 billion underestimate would create an
error in estimating individual income tax receipts of at
least $2 billion. Similarly, the FY 1975 budget forecast
for 1974 corporate profits was underestimated by*$17 billion,
according to the current figures. That underestimate would
generate an error of roughly $5 billion in estimating receipts.
Public and private economic forecasters have experienced
great difficulty in predicting both the total GNP and major
sectors. No matter how sophisticated our forecasts become,
they will still be distorted by unexpected economic and
political developments. In the final analysis we must
recognize that complex mathematical models and careful human
judgments must be combined to estimate future results which
will ultimately be influenced by many unforseen developments.
It is also true that the tax law is constantly chanqina.
The econometric models used for preparing the estimates
attempt to apply equations to a time series of information
in order to project future revenues. Unfortunately, it is
difficult to develop these historical relationships because
the tax law is changed so often and the specific collection
and reportinq procedures are frequently adjusted. To the
extent that proposals in the President's budget prepared
each January are modified, rejected or replaced by other
actions, the revenue estimates will be disrupted.
The actual historical record for estimating errors in
forecasting Federal receipts and outlays is summarized in
Table 3. That record indicates that both under- and overestimates have occurred over the years and that estimating
errors persist even as the time horizon of the forecast
shortens. For FY 1975 the Federal Budget revenues were
overestimated by 5.0 percent in the original publication in
January 1974 and outlays were underestimated by 6.2 percent
(estimates prepared eighteen months prior to end of FY 1975
on June 30, 1975). In January 1975, at the mid-point of the
forecast year, receipts were underestimated by 0.8 percent
while outlays were underestimated by 3.5 percent. These
errors are attributable to at least three major factors:
(1) large changes in the underlying economic forecasts; (2)
legislative actions; and (3) internal reestimates of the
outlays and receipts as the year progressed. In summary, it
is clear that economic forecasting -- including the estimating
of Federal Budget revenues -- is far from qualifying as an
exact science. The Treasury will continue to work with the
best technical methods known to us and we will strive to
-14-
refine our judgments as much as possible but the blunt fact
that Federal budget revenue forecasts will continue to be
subject to errors should be recognized by everyone.
In the Mid-session review of the 1976 Budget published
May 30, revenues for FY 1976 were estimated to be $299.0
billion. Our latest estimates of expected FY 1976 revenues
fall within a range of $297.6 to $305.6 billion. In preparing
these estimates several key assumptions must be made as to
future decisions concerning the Tax Reduction Act of 1975,
tax withholding rates and various energy policy issues,
including the status of the $2.00 oil import fee and the
$0.60 fee applied to products. If the $2.00 oil import fee
is continued (but not the product levy) and the tax relief
provided by the 1975 Tax Reduction Act is discontinued, the
revenue estimates would be at the high end of the range
indicated. If the tax relief is extended, along with adjustments
to the withholding rates to maintain the amounts of taxes
withheld (at current levels), and the $2.00 oil import fee
is not continued, then the revenues collected would probably
be at the low end of the range. Since the final decisions
may combine different variations of several different policies
we believe that it is more realistic to estimate a range of
possible collection figures.
It should be emphasized that these revenue estimates
are still very tentative and contingent upon the basic
decisions about tax and energy policies referred to above.
In addition to the legislative uncertainties, a number of
forecasting problems have complicated our FY 1976 revenue
estimates:
1. The underlying forecasts for total GNP, personal
income corporate profits, personal consumption,
business investment, foreign trade and other
important economic sectors are still uncertain
at this early stage of the economic recovery.
Even a small percentage change in these basic
figures has a major impact on the actual taxes
collected.
2. Possible inaccuracies in estimating individual
capital gains (1974 figures will not be available
until late 1975).
-15-
3.
The potential effects of corporate net losses in
calculating refunds is uncertain. It should also
be emphasized that corporate accounting practices
have frequently changed. For example, many
companies have changed their accounting for inventories from a FIFO to a LIFO basis and such
adjustments have had a major impact on the timing
of tax collection.
4. Uncertainties about the receipts lag in collecting
corporate tax liabilities given the flexibility
corporations have in paying their taxes and the
sharp drop in profits in calendar year 1975 measured
on a National Income Accounts basis.
5. Uncertainties about the probable behavior of individuals
in adjusting their personal claims for exemptions
in order to adjust the amount of taxes currently
withheld.
III. SUMMARY
Although the U.S. economy appears to be well into a
period of economic recovery a very large Federal deficit
will occur in FY 1976 and FY 1977 following the deficit of
$43.6 billion in FY 1975. These unusual deficits result
from: (1) an erosion of current tax revenues caused by the
severe economic recession; (2) a temporary increase in
Federal outlays intended to moderate the impact of the
recession; (3) a permanent type increase in Federal outlays
resulting from past legislative decisions and the initiation
of new spending programs; and (4) the tax relief provided by
the temporary Tax Reduction Act of 1975. The return to
strong economic activity will restore the tax collections to
a more normal level and reduce the temporary outlays directly
related to the recession but this will not solve the fundamental
erosion of fiscal stability caused by the rapid escalation
of Federal spending and periodic permanent tax cuts.
Some analysts have claimed that the budget deficits of
FY 1975 and FY 1976 are merely aberrations which will
disappear once the economy returns to a normal pace. Unfortunately, the historical pattern of Federal budget deficits
and the outlook for future fiscal years does not support
-16-
A
this optimistic conclusion. At the end of FY 1976 we will
record the fifteenth Federal Budget deficit in the last
sixteen years. Furthermore, the pattern of increased Federal
spending is not concentrated in the "temporary automatic
stabilizers associated with the recession. As summarized in
Table 4, large spending increases have occurred throughout
the permanent programs of the entire government. Even the
emergency programs created for temporary relief tend to
become part of the permanent activities of government.
The rapid increase in Federal outlays is not necessarily
wrong if one agrees that more functions should be transferred
from the private sector to the government. My strong
preference is to maximize the role of the private sector
because I believe that it is more efficient and responsive
to the interests of our people and because I believe this
approach provides for more individual freedom. This debate
will continue and we cannot hope to resolve it during these
hearings. However, one basic consideration is indisputable:
When the combination of private and public sector demands
exceeds the productive capacity of our economy an inflationary
overheating of the economic system occurs. The total productive
capability of the entire economy must be identified as a
beginning point for ranking and selecting claims against the
potential national output. Estimating the total economic
capacity of the system and the existing private and public
claims would help us avoid the simplistic arguments that
additional government programs can be continuously created
to meet every claim by simply shifting resources from the
private to the public sector. Adding new government commitments
is not feasible if the productive capacity of the economy is
exceeded. This basic guideline has been frequently violated
as total demand has increased too rapidly for the economic
system to absorb. When this happens the economy begins a
boom and bust sequence with severe inflation and unemployment
distortions, such as occurred in the mid-1960's and again
during the early 1970's.
Some analysts have claimed that adding new government
spending programs is no threat because of the amount of
slack created in the economic system by the severe recession.
Beyond the fact that our measures of capacity and excess
resources are very uncertain, I believe that this recommendation
misses the basic point: The fiscal decision of the past
6
A
have already eroded our fiscal flexibility in responding to
the problems of the present and the future. If we accept
the recommendations to expand Federal spending even more we
will create permanent claims that will further disrupt the
allocation of resources in the future. Many government
programs now involve an "entitlement authority" which makes
the actual outlays open-ended depending upon the eligibility
rules and benefits established. There has been a tendency
to liberalize both guidelines and many government programs
are now indexed so that they rise automatically as inflation
occurs. Other outlays are required by specific legislative
and contractual agreements. In the future, there should be
no such thing as an "uncontrollable" Federal budget commitment
because the Congressional Budget Committee discipline will
require careful consideration of priorities and the elimination
of ineffective programs during the annual appropriations
process. We must correct the historical approach of merely
continuing existing programs so that any new claims were
typically "added on" to current outlays.
I believe that by concentrating on short-term stabilization
goals rather than the long-term allocation of resources our
fiscal policies have actually become a disruptive force.
Too often fiscal policies have lagged economic developments
so that the desired stimulus or restraint typically arrives
long after the economic situation has changed. The "emergency"
spending programs created to pull the economy out of a
recession often exaggerate the subsequent overheating of the
economy and create additional commitments that last far into
the future. A corresponding reduction of such programs
during periods of economic expansion is unusual because the
Executive Office and the Congress have been unwilling to
shift their attention to longer-term goals or to face up to
the agonizing experience of saying no.
This country now faces the reality of a strong challenge
to our basic fiscal stability. Your Committee is a key
factor in determining whether or not this challenge will be
met. In preparing your Second Concurrent Resolution to
Congress I hope that you will consider the future course of
fiscal policies -- particularly the escalating pattern of
Federal spending- and "off-budget" commitments -- as well as
the need to develop guidelines for FY 1976. We need to
consider longer-term goals by relating the future impact of
79
current government spending actions. When we consider the
total impact of our fiscal decisions we will recognize that
individual pieces of legislation cannot simply be added to
existing commitments without considering what current claims
need to be eliminated or curtailed. Too often we have
ignored the economic discipline of allocating scarce resources
to different claims according to national priorities which
are responsive to the interests of the American public. The
economic distortions of the past decade indicate that this
was a costly decision. Your Committee has a major opportunity
to help correct these distortions and I look forward to
working with you as you attempt to achieve that goal. Thank
you.
TABLE
FEDERAL BUDGETS
CHANGES IN THE UNIFIED BUDGET OUTLAYS
BY FISCAL YEAR, 1961-1976
(dollars in billions)
Fiscal 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
6.1
-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
8.8
20.9
Economic Report of the President, February 1975,
Table C-64, p.324, for years 1961 through 1974;
197 5 figure from Final Monthly Treasury Statement
of Receipts and Outlays of the United States
Government, for period from July 1, 1974 through
June 30, 1975.
TABLE 2
Net Unified Budget Receipts, by Source, Percent of Total, and Five-year Average
Fiscal Years 1971-1975
1971
1972
1973
1974
1975
5-year
average
119.0
38.6
65.9
6.8
4.1
16.8
5.0
3.3
5.4
264.9
122.4
40.6
75.2
6.8
4.5
16.6
4.6
3.7
6.7
281.0
105.1
34.9
56.8
5.5
3.8
16.3
4.7
3.2
4.7
235.0
Fiscal Year ($ billions)
Individual income tax
Corporation income tax
t
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
t
Customs duties
Miscellaneous receipts
Total budget receipts
Fiscal Year - Percent
86.2
26.8
41.7
3.7
3.2
16.6
3.7
2.6
3.9
188.4
94.7
32.2
46.1
4.4
3.4
15.5
5.4
3.3
3.6
208.6
103.2
36.2
54.9
6.1
3.6
16.3
4.9
3.2
3.9
232.2
Individual income tax
Corporation income tax
Employment taxes and contributions
Unemployment insurance
Contributions for other insurance and retirement
Excise taxes
Estate and gift taxes
Customs duties
Miscellaneous receipts
Total budget receipts
45.8%
14.2
22.1
2.0
1.7
8.8
2.0
1.4
2.0
100.0
45.4%
15.4
22.1
2.1
1.6
7.4
2.6
1.6
1.7
100.0
44.5%
15.6
23.6
2.6
1.6
7.0
2.1
1.4
1.7
100.0
Office of the Secretary of the Treasury
Office of Tax Analysis
Note: Figures are rounded and may not add to totals.
44.9%
14.6
24.9
2.6
1.5
6.4
1.9
1.3
2.0
100.0
43.67o
14.5
26.8
2.4
1.6
5.9
1.6
1.3
2.4
100.0
44.77c
14.8
24.1
2.4
1.6
7.0
2.0
1.4
2.0
100.0
September 18, 1975
??d
TABLE
3
Budget Estimating Errors
Overestimate ( + ) or Underestimate (-)
as a Percent of the Actual Figure
Estimates made 18 months
prior to the end of the
fiscal year
Fiscal
year
Outlays
Receipts
Estimates made 6 months
prior to the end of the
fiscal year
Outlays
Receipts
1950 1/
+ 4.1
+10 t 3
+7.8
+ 1.9
1960 1/
-0.3
-1.7
+ 1.6
+ 0.2
1970 2/
-0.7
+ 2.6
+ 0.7
+ 2.9
1971 2/
-5.0
+7.3
+ 0.6
+ 3.1
1972 2/
-1.1
+ 4.3
+ 2.0
-5.2
197 3 2/
-0.1
-4.9
+ 1.3
-3.1
1974 2/
+ 0.1
-3.4
+ 2.3
+ 1.9
1975 2/
-6.2
+ 5.0
-3.4
-0.8
Office of the Secretary of the Treasury
Office of Tax Analysis
September 19, 197 5
1/ Administrative budget.
2/ Unified budget. The first estimate on a unified budget basis was
prepared in January 1968.
TABLE
4
CHANGES IN BUDGET OUTLAYS BY FUNCTION; FY 1976 over FY 197 5
(millions of dollars)
Function
National defense
International affairs
General science, space, and technology
Natural resources, environment and energy
Agriculture
Commerce and transportation
Community and regional development
Education, manpower and social services
Health
Income security
'
Veterans benefits and services
Law enforcement and justice
General government
Revenue sharing and general purpose fiscal assistanceInterest
Allowances
Undistributed offsetting receipts
Total
(1)
IFY 1975
(1)
FY 1976
(2)
87.4
5.0
4.3
9
1
12
4
15.0
27.6
.09
16
3
2
1
31.2
-14.1
323.6
94
5
4
10
2
15
6.1
16.8
29.0
122.8
17
3
3
7
34
6
-20
358.9
Change over
FY 1975
+ 6,7
+ 0,5
+ 0,3
+ 0.6
+ 0.2
+ 3.1
+ 1.5
+ 1.8
+ 1.4
+ 13.7
+ 0.4
+ 0.3
+ 0.5
+ 0.3
+ 3.2
+ 6.8
+ 5.9
+ 35.3
House Budget Committee
Resolution (3)
Change over FY 197 5
FY 1976
89
4
4
11
1
19.8
9.5
20.4
30.7
123.9
17
3
3
7
35
1
-16
368.2
Mid-Session Review of the 1976 Budget, May 30, 1975, Table 9, p.15.
(2) FY 1976 Administration estimates as published in Mid-Session Review of the 1976 Budget.
(3) First Concurrent Resolution on the Budget-Fiscal Year 1976, Report of the Budget, House of Representatives,
Appendix A - 2 , p.49.
+2,3
-0,1
+ 0.3
+1.8
+ 7.2
+ 4.9
+ 5.4
+ 3.1
+ 14.8
+0.7
+ 0.4
+0.7
+ 0.2
+ 3.8
+ 1.1
+ 2.1
+44.6
FOR RELEASE AT 4:00 P.M.
February 6, 1976
)14-
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 $6,400,000,000 , or
thereabouts, to be issued February 19, 1976, as follows:
91-day bills (to maturity date) in the amount of $2,800,000,000, or
thereabouts, representing an additional amount of bills dated November 20, 1975,
and to mature May 20, 1976
(CUSIP No.912793 Z H 2 ) , originally issued in
the amount of $3,401,085,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,600,000,000, or thereabouts, to be dated February 19, 1976,
and to mature
August 19, 1976
(CUSIP No.912793 A5 5).
The bills will be issued for cash and in exchange for Treasury bills maturing
February 19, 1976, outstanding in the amount of $6,405,015,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,836,230,000.
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, February 13, 1976.
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-63 2
(OVER)
J73
-2-
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 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 February 19, 1976,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing February 19, 1976.
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
j11
FOR IMMEDIATE RELEASE
FRIDAY, FEBRUARY 6, 1976
CONTACT: PRISCILLA R. CRANE (202) 634-5248
Data to be used to allocate funds for the final (seventh)
entitlement period of the general revenue sharing program
are being sent to all units of general-purpose government
for review and comment today.
The U. S. Treasury Department's Office of Revenue Sharping
is sending to each of approximately 39,000 units of local government the latest available figures on its own population, per
capita income, local tax collections adjusted for taxes attributable to education expenses and intergovernmental transfers.
On February 23, 1976, state governments will be provided
their most recent data for population, urbanized population,
state and local taxes, general tax effort, state individual
tax collections and federal income tax liabilities.
Counties, cities, towns, townships, Indian tribes and
Alaskan native villages are invited to review the figures and
if changes are needed, to notify the Office of Revenue Sharing
and provide documentation to support proposed changes by
March 5, 1976.
State governments must respond by March 15, 1976.
General revenue sharing funds are allocated according
to formulas set forth in Title I of the State and Local
WS-628
177
Fiscal Assistance Act of 1972 (revenue sharing law). The
formulas use data pertaining to each unit of government
which are provided primarily by the Bureau of the Census
of the U. S. Department of Commerce.
The amount of money each
government receives for an entitlement period is based on the
data applicable to that government in relation to the data
for others.
Today's mailing of new data also includes special forms
for recipient governments whose figures for the coming entitlement period may have been affected by major natural disasters
since April 1, 1974. The Disaster Relief Act of 1974 provides
that pre-disaster data may be used for such governments in the
allocation of shared revenues.
Recipient units of government
so affected are provided both their pre-disaster and post-disaster
data elements. They are asked to certify whether the disaster
caused the less favorable post-disaster figures.
If so, the
Office of Revenue Sharing will use the pre-disaster data in
allocating seventh entitlement period general revenue sharing
funds.
The final entitlement period of the general revenue sharing
program, as presently authorized, will extend from July 1, 1976
through December 31, 1976.
Quarterly checks will be mailed to
recipient governments in October 1976 and January 1977. A
total of $3.33 billion is available to allocate and distribute
for the period.
7%
Allocations of funds are announced by the Office of Revenue
Sharing in April, after all data changes have been entered into
the system and the allocations have been run.
In April 1975, President Ford asked the Congress to act
promptly to renew general revenue sharing past its present
1976 deadline.
Hearings were held in the fall of 1975 by
the Subcommittee on Intergovernmental Relations of the House
Committee on Government Operations. No hearings have been
scheduled in the Senate as yet.
Since the general revenue sharing program first was
authorized, in 1972, more than $23.5 billion has been paid
directly to nearly 39,000 states and local governments. A
total of $30.2 billion will have been paid when the present
program expires.
v
- 30 -
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
AT THE
REPUBLICAN REGIONAL CONFERENCE
WASHINGTON, D.C., FEBRUARY 7, 1976
It gives me great pleasure to come to this podium today
and see so many friends from the battles of the last few
years.
Soon after I came down here to Washington 3 years ago,
many of us in this room were thrown together to struggle
with the energy embargo imposed on us by foreign nations.
That was a difficult struggle, but we survived that blackmail and now we're hopefully on our way to energy self-sufficiency. I have always appreciated the personal help that
you gave me during the energy crisis.
Then about a year ago, many of us here began working
together in fighting the twin evils of inflation and recession. And now although that battle is by no means won, there
can no longer be any doubt how it will come out — if we can
only stay on course. Inflation has been cut nearly in half
in the past 12 months, and yesterday's news on unemployment
showed the biggest single drop in unemployment in more than
15 years. All of us recognize that New England still faces
massive unemployment problems, but we know we're on the right
track and I assure you we will stay there until this battle
is won.
In the midst of the recession, there was still a third
challenge which brought many of us together: the urgent need
to restore the financial integrity of New York City. Again
our struggle was long and difficult. Again, the struggle1 is
by no means over. But again, I believe we know today that we
are on the right course and that it can be won.
So the struggles of the last few years have not been
easy. Many said we would never succeed. The doomsayers,
those that are so willing to predict disaster at every turn -remember the predictor's depression, analyses of our federal
WS-634
- 2 system — $1 bread, $1 gas, $1 sugar, $1 toilet paper. Did
any of these predictions come true? No — but that does not
discourage them. They have been crying at our doorstep as
long as I can remember. But they continually forget that
this is not some banana republic; we have never been a people
who cave in at the first sign of trouble. The rock-hard
determination of the pilgrims who came to Massachusetts,
Rhode Island and other ports of entry along the Eastern seaboard still fires the American spirit. As Winston Churchill
once said while his own country was under siege, "We have
not journeyed all this way across the centuries, across the
oceans, across the mountains, across the prairies, because
we are made of cotton candy." No, we are of better stock,
and I'm damn proud of it.
Everyone who has grown up in the Northeast was brought
up to believe, as I still do, that our country has developed
the most efficient and creative economic system the world has
ever known.
It is really a marvel, bringing material benefits to
our people that are unsurpassed in the history of mankind.
Literally tens of millions of poor immigrants came to the
United States since the early 1800's in search of a better
life and achieved for themselves, their children, and their
children's children a standard of living that was beyond
their fondest hopes. This economy is so strong and dynamic
that since the early 1960's despite the abuses we have
inflicted on it, remarkable progress has been made:
-- The real income of the American family has increased
by over 40% (and that's after inflation and taxes);
-- Total production has risen by over 60% in real terms,
even after allowing for three recessions over this time span;
-- The percent of families below the poverty line has
been cut in half; to 10%.
-- Real farm output has risen over 25%, enabling us to
feed not only ourselves but many people in other countries;
and
— Almost 20 million new jobs have been created.
This is not to imply that the private enterprise
system is perfect. It does not change human nature nor
solve all problems everywhere. It does not guarantee personal and social freedoms. And it does not ensure human
- 3 happiness. But it provides more men and women with the
freedom to decide and the opportunity to obtain economic
security than any other system known to man. And it is a
powerful safeguard against the erosion of our personal
freedoms.
And yet as I have said, despite this excellent overall
performance of our free market system, there are strong and
growing developments which raise serious concern about the
future. America is on a path that may not hold the same
promise as in the past. There are clear indications that
government at all levels is increasingly constraining
innovation, personal initiative, and individual spending
decisions. And at the same time poll after poll points
to a rising disenchantment by the public with business and
with government.
In a more concrete sense, let me call your attention
to some economic developments which highlight the creeping
and excessive rise in government activity in our economic
affairs:
- In 1930 total government spending -- that is, spending
by Federal, state and local government — was about 12% of
our GNP. By 1950 it was 21% and this year it will be around
35%:. In other words, over one in every three dollars of
income is now spent by government. And if current trends
prevail, government spending will reach nearly 60% of our
GNP by the end of the century.
9c
In FY 1962, Federal Government spending exceeded
$100 billion for the first time in history. Since then it
has quadrupled, pushing toward $400 billion. Federal government outlays are now running over $1 billion per day or
the equivalent of almost $5,500 per year for every family in
the United States.
Today's Federal Tax Provisions contain over 6000 pages
of finely printed material. No wonder the average citizen
feels cut off from his government in Washington. Even my
economists at the Treasury, with all their Phds, have thrown
up their hands at Form 1040 and now go to the Tax Specialists.
It took 75 years for the national debt to reach $1 billio
an event which occurred in 186 3 during the Civil War. Today
it is growing by a billion per week. Is there any wonder why
we have an inflation problem? Up in the Northeast, you manufacture many wonderful products for our people; in Washington,
- 4 the only products we seem to manufacture are hot air and
inflation.
There are over 5000 forms required by the Federal
Government today which take business over 130 million work
hours to fill out. The costs of simply processing these
forms by the government are estimated to be an incredible
$15 billion a year. These costs must ultimately show up
in higher prices to consumers.
In five years, under the government's monopoly over
the Postal Service, the cost of a first class stamp has
more than doubled. As Bob Hope said when they raised the
price last time, "Now they're going to charge us 10$ for
delivery and 3C for storage."
Regulatory agencies directly control economic decisions
of airlines, railroads, trucking, broadcasting, power
production, energy, the securities market — almost 10% of
everything we make. Furthermore, there are other indirect
controls (including environmental protection, safety regulations, consumer requirements) which affect the costs in*" a
great variety of industries.
•*'*
The point of all this is to try to give you a feeling
for some serious and distrubing economic changes I see and
hopefully an understanding of what President Ford is trying
to do regarding these developments. We in the Administration
genuinely want to stem the tide toward ever bigger government,
to an ever larger and more cumbersome bureaucracy -- not
just to be anti-government — but because of a fundamental
belief that the market mechanism can do a much better job
in meeting the needs and preferences of the American people.
The thrust of the President's recommended spending and
tax policies is to strike an appropriate balance between
long-and-short-term needs, between conflicting and yet
desirable objectives. As outlined in the new Budget there
is to be a fairness and balance:
— Between the taxpayer and those who will benefit by
federal spending;
— Between national security and other pressing needs;
— Between our own generation and the world we want
to leave to our children;
- 5 — Between the desire to solve our problems quickly
and the realization that for some problems, good solutions
will take more time; and
— Between Federal control and direction to assure
achievement of common goals and the recognition that state
and local governments and individuals may do as well arbetter without restraints.
President Ford's program clearly strives to bring about
a durable and sustained economic advance that will steadily
reduce unemployment but at the same time will not bring
back high rates of inflation. Some people say our program
isn't bold enough. I say that this is probably the boldest
program we have had in years, because we now have a President
who goes before the American people and doesn't promise
them the moon. That's the kind of "boldness" we need in
America today. We are not going to fall into the trap of
trying to spend our way to prosperity again. It is precisely the kind of impatience with the speed of economic
recoveries which has overheated the economy twice in the
last decade, and I would hope that we have learned our
lessons about such stop-go policies. There is no real benefit in helping people get jobs for a while, only to bring
about even greater hardship later on.
r The President's proposals deal with four major objectives.
First, to reduce the unemployment rate, several new
steps have been proposed to keep the economic recovery
moving ahead, including,
— A permanent tax cut of approximately $28 billion to
become effective on July 1; and
-- Accelerated depreciation for the construction of
plant and equipment in areas experiencing high unemployment
(in excess of 7%). As many economists in New England have
recognized, this provision could be especially beneficial
in revitalizing industry and creating new jobs in the
Northeastern states.
Second, to prevent the inflation from accelerating back
toward high-single or double-digit inflation. The President
is proposing that:
- 6 — Projected Federal spending for the coming fiscal
year be cut by some $28 billion. This would mean not only
that a tax cut would be possible but that Federal spending
gains would be limited to only 5-1/2% in FY 1977 (compared
to a total rise of 40% in the past two fiscal years);
— It also means that the Federal budget would be
brought into actual balance within three years and that
another major tax cut could be enacted before the end of
the decade.
Third, to slow the rise of government influence on the
economy,
— The growth in total outlays is to be limited not
only in FY 1977 but well beyond;
— Reforms are to be pursued in terms of excess and
counter-productive regulations in order to move toward more
competitive markets; and
Finally, to meet the pressing need for greater capital
formation and long-term job creation:
— Corporate tax rates and the Investment Tax Credit
are to be permanently shifted to the present more favorable
base;
— Double-taxation of dividends is to be eliminated;
and
— Middle income taxpayers are to be given incentives
to invest in common stocks in order to broaden and strengthe
stock ownership in American companies.
To a far greater extent than in the past, our policy
must take into account long-run needs and not focus almost
exclusively on short-run problems with their expedient
"solutions". In the long run there is no substitute for
sound, sustained, even-handed policies that create an
environment in which private enterprise can flourish.
It took a long time for our economic problems to build
up and it is going to take a long time to wring them out
of the economy. There is no quick fix. We cannot pay for
the sins of a decade with the one year's penance. Some say
that the principles and ideals of the past no longer work.
Somehow they are no longer relevant. What nonsense. It is
- 7 not that our principles have failed us but that we have
failed to live up to them.
With patience and responsibly balanced policies - and
with firm adherence to sound economic principles -- we can
eventually work ourselves back to a healthy growing economy
on a stable enduring basis. If the country chooses the
route of stop-go again, we will have only ourselves to
blame for the inevitable problems that will develop.
It seems to me that we are faced with a fundamental
choice — not only for 1976 but well behond — in the kind
of economy and society we want. The economic objectives of
more jobs and stable prices may be pretty well agreed to,
but the routes to them are very different. Our emphasis in
the Republican Party is on a sound durable expansion that
will permit the free market to live up to its potential.
The other route is one that holds out a false, cruel promise
of a more rapid return to prosperity but at a cost of
future hardship and further erosion of our economic and
personal freedoms.
President Ford has set a course which points us in
the right direction and will permit us to get a much better
grip on these problems, but it will take several years, not
months, to bring this about. Unfortunately, the election
is only a bit over nine months away. There will be calls
from the opposition for "sweeping changes" and "broad new
initiatives" which will really mean bigger spending, bigger
deficits and ultimately bigger governmental control of the
economy. We must persuade the American people that this
course is wrong and that our approach is much sounder in
the long run. The real choice is between greater government control or greater individual freedom.
That is the battle before us. But we have been through
the fires before — over energy, over inflation, over
recession, and over New York City. And just as we have
proved that we could win those battles, I am confident that
we will win this one, too.
Ours is a great cause, and America will be even greater
because of our success.
Thank you.
-oOo-
^
Ihe Department of theJREASURY
B|
TELEPHONE 964-2041
February 9, 1976
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3.1 billion of 13-week Treasury bills and for $3.9 billion
of 26-week Treasury bills, both series to be issued on February 13, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
26-week bills
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing May 13, 1976
High
Low
Average
Price
Discount
Rate
Investment
Rate 1/
98.790
98.779
98.782
4.840%
4.884%
4.872%
4.98%
5.03%
5.01%
*X(7
y^\j:
i.i
{*->
is
w
Tenders at the low price for the 13-week bills \
Tenders at the low price for the 26-week bills \ z/ &n
T-
o
*"
I
S' c £
s
7 ?
~>
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESER^
District
Received
$ 115,325,000
Boston
3,929,000,000
New York
Philadelphia
24,390,000
Cleveland
49,395,000
25,515,000
Richmond
37,410,000
Atlanta
180,425,000
Chicago
56,200,000
St. Louis
28,325,000
Minneapolis
31,435,000
Kansas City
31,755,000
Dallas
197,815,000
San Francisco
T0TALS$4,706,990,000
$
Accepted
Recei^
62,325,000
2,553,800,000
24,390,000
37,915,000
25,515,000
29,950,000
99,725,000
34,800,000
21,925,000
26,245,000
19,045,000
164,815,000
$ 32
5,214
33
61
74
30
244,
7
X zc c
>/<-/?<
5. J>
±z,'+uu,UU0
4 0 , t u u , \j\jyj
24,905,000
20,085,000
26,900,000
407,460,000
9,905,000
14,385,000
10,900,000
229,360,000
$3,100,450,000 a/$6,211,385,000
$3,901,215,000
a/Includes $344,435,000 noncompetitive tenders from the public.
b/lncludes $149,470,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-635
i
V
/
FOR IMMEDIATE RELEASE
FEBRUARY 9, 1976
STATEMENT OF THE HONORABLE CHARLES M. WALKER
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE 1976 ADVANCED STUDY SESSION OF THE
AMERICAN BAR ASSOCIATION SECTION ON TAXATION
(JOINTLY SPONSORED WITH THE AMERICAN LAW INSTITUTEAMERICAN BAR ASSOCIATION) HOUSTON, TEXAS
FEBRUARY 9, 1976
This is an appropriate occasion to step back for a '•••-•-'-*
moment from the day-to-day work of the Treasury Department,
Office of Tax Policy and to take advantage of the collected
experience of the tax experts in this gathering to discuss r
;
the subject of the long-range objectives of tax policy.
;
In a recent speech in New York City, Secretary Simon
expressed his desire to move toward a radically simplified
income tax system, sweeping away the exemptions and deductions
of the present law, and obtaining needed revenue by a progressive
structure of rates substantially below those now in use.
Judging by the mail received in the Treasury from a great
variety of people, including representatives of many walks
of life, Congressmen, a Governor, etc., Bill Simon struck
a responsive cord for many people.
The Secretary has clearly done us all a service by taking
the lead in this. However, as we practitioners know, to make
progress towards this objective we must deal with a large
number of policy questions arising from the complexity of the
present Code, which over the years has become ever more
complex as efforts have been made to provide equity among
competing interests and to effect particular resource allocation
objectives. Many times additional complexity has arisen from
patchwork efforts to correct unforeseen consequences of
earlier legislative decisions.
To date, public discussion of this issue has brought
forth largely generalized opinions either that it is a wonderful idea and letfs do it or that it is a wonderful idea but
WS-633
we'll never do it or we can't do it. Fortunately, there are
9&
exceptions. A good example of a constructive analysis has
been provided recently by my predecessor, Frederic W. Hickman,
writing in the Wall Street Journal. Fred lays out with
great care several of the issues involved both in the appeal
and the political obstacles to a radical reform of the tax
system.
My purpose today is to discuss some of the puzzles which
must be solved if we are to succeed in developing a radically
simplified yet fair and efficient tax system, and to indicate
the direction our efforts are taking as we move forward with
this project. And let me assure you we are moving forward.
We have committed substantial manpower to it; we are in the
process of designing appropriate computer programs to aid in
the analysis of the various ingredients of the project; and
most important of all we have the will and in my opinion the
resources to bring forth something very much worthwhile.
The first assignment is to fix our goals. We must have
a set of criteria by which to judge the various alternatives
to be considered. Today is not the time to lay out all of
the desirable characteristics of a tax system. However, let
me focus on three broad properties which are certainly of
great importance:
-./<*•• The tax system should be fair.
The tax system should promote economic efficiency.
The tax system should be simple.
Let me take a moment to elaborate a bit on these objectives
and to illustrate the way they can be analyzed with specific
tax provisions in mind. At the outset however I wish to make
it very clear that the tax provisions used in the analysis
today have been selected today for illustrative purposes
only. It is far too early in our study to suggest that any
conclusions have been reached or any positions taken with
respect to them.
Clearly the tax system should distribute the burdens of
financing the Government (both the resources it uses and the
transfer programs it has) in a fashion that is widely agreed
to be fair and equitable. While there are bound to be differences
of opinion about what constitutes fairness, the traditional
- 3criteria of horizontal and vertical equity represent a good
starting point. Horizontal equity refers to equal treatment
of equals. This might be further translated to mean the tax
system should assign roughly equal burdens to those whose
opportunities and capabilities, for example of earning a
living, are the same. Vertical equity refers to the property
of assigning relatively larger burdens under the tax system
to those whose opportunities and capabilities are relatively
more ample.
An example in our present tax system which might be
criticized as being neither horizontally nor vertically
equitable is the exemption from tax of interest on state and
municipal bonds.
Let me first dismiss a false interpretation of what
constitutes horizontal equity. It is sometimes said that the
tax-exempt bond provision is horizontally inequitable because
it treats income from such bonds differently from income from
a taxable corporation bond. This misses the point however,
since the person holding the one clearly has the opportunity
to purchase the other so that this choice is made voluntarily.
Thus since everyone with capital to invest has the same opportunity to purchase tax-exempt bonds there is no horizontal
inequity associated with the fact that some choose to purchase
them and others do not.
However, there is another way in which horizontal inequity
may be said to arise, namely, in the different rates of tax
on earnings from capital on the one hand and earnings from
personal services on the other. Currently the maximum rate
of tax on personal services is 50 percent, while in effect
the rate of tax on capital held in the form of tax-exempt
bonds is only 30 percent, measured by the difference
in yield between the tax-exempt and taxable bonds. Such a
difference might be regarded as the effective tax paid on
capital in the form of tax-exempt bonds. Thus one might
argue there is a horizontal inequity implied by the difference
in treatment between income from services and income from
tax-exempt bonds.
The same phenomenon arguably leads to a situation of
vertical inequity since one person with a larger capability
for deriving income, namely one with a large stock of
financial capital, might well be taxed implicitly at a lower
rate than one who has a smaller capability of deriving
income and who must earn it in the form of payment for personal
services.
Iff
4 The second major goal of a good tax system noted above
should be to foster economic efficiency. One thing this
means is that the tax system should be as inexpensive as
possible to administer; it should impose as low compliance
cost as possible. Furthermore it would be desirable to
minimize the effort required of the nation s talended minds to the
discovery of tax saving arrangements and to maximize the
efforts to enhancement of true economic yield.
However, these costs important though they are, are
probably relatively small compared to the potential mischief
which can be done by the effect of the tax laws to distort
the allocation of resources. For example, the tax system
which applies rates so high that individuals are unwilling
to put in a full measure of work or to work in the most demanding
calling may impose a serious loss of economic output. A
tax provision which results in more or less investment taking
place in a certain line of activity
than is called for by
the undistorted demands of the marketplace imposes a similar
loss. A further example is seen in the disincentive effect
of the corporation income tax. The maximum social yield
obtainable from that remarkable form of business enterprise,
the limited liability firm, may be substantially impaired. One
well regarded economic study places the loss associated with
this inefficiency at one-half to one percent of GNP!
Broadly speaking, the inefficiencies which have attracted
the most attention of economists who have studied the subject
arise from the effects of the tax system on the provision of
labor services by the household, including the services of husbands
and wives, and the overall supply of saving for capital formation
together with its allocation among industries and forms of
enterprise.
The third objective noted above is simplicity. This may
seem a bit incongruous placed beside the goals of fairness
and efficiency. In fact, simplicity should perhaps be regarded as
an instrumental objective, one which contributes to the other
two. However, given the highly complex state of our tax
system I think simplicity must be listed right up there with
the other two goals.
We should perhaps distinguish simplicity of different^
kinds. Most importantly we should distinguish the simplicity
of the tax system as it touches the average taxpayer whose
income is principally from wages, and salaries from the simplicity
relevant to the higher income taxpayer and business enterprise.
For the average taxpayer the income tax system need not be
complex, although it has become increasingly so in recent
years. As noted above, much of the complexity has resulted
from efforts to provide equity among competing interests.
For the upper income and business taxpayer the complexity
is much more formidable, arising in part from the sheer
difficulty of defining the income from a business activity.
Some would regard the complexity faced by the business
enterprise or high-income taxpayer as of little moment on
the argument that these taxpayers can "afford" the services
of tax experts to advise them and prepare their returns.
Whatever the intrinsic merits of this view it overlooks the
effect on all taxpayers of the existence of a tax system
which few can understand. The feeling is increasingly widespread that those who can afford the talents of highly skilled
tax advisors are able to avoid paying their fair share of
taxes. When few can understand the law confidence in general
is sure to be eroded.
Having discussed the goals and illustrated the way in
which they can be analyzed in light of particular tax provisions
let me now approach the subject of broadening the tax base
as a means of furthering the goals.
To broaden the base on which the income tax is levied
means bringing into it elements now freed from tax. This
approach has clear promise. A broader base would seem likely
to be a move in the direction of greater fairness, treating
income of all types and sources similarly, thus serving
horizontal equity and better defining the basis upon which
the vertical equity of the system can be implemented through
the progressive system of rates. Furthermore a broader base
would allow lower rates of tax thus presumably reducing the
distorting effect of the tax system on the allocation of
resources,.serving the objective of efficiency. Finally, the
general approach to base broadening involves the elimination
of deductions and exclusions thus serving the objective of
simplicity.
When we look closely at some of the major components of
the typical approach to base broadening, however, we find that
some problems remain. Let me spend a few minutes exploring
with you some examples of addition to base, and here again, as
noted above, let me make it clear that these are only examples
selected to illustrate today the character of the studies
underway. There have been no conclusions reached and no
positions taken. The examples are: social security benefits;
imputed
netgains;
incomepresently
from owner-occupied
housing;
excluded plans.
half
of
capital
deferred items
in retirement
19*
- 6Let me give you a very rough idea of the impact these
few changes would have on the annual income tax base. I
should emphasize that the figures I am f ^ ' fc; 8 J V J / ~
are very rough preliminary estimates and that they do not
take into accouSt all of the refinements which will be
involved in a concrete proposal
Presently Ccaleridto 1975)
the payments to social security beneficiaries are running
at approximately $60 billion. Of these payments about $40
billion are received by individuals who file tax returns
Given the present structure of personal exemptions and deductions
this would translate into about $30 billion of taxable income.
The net rental value of owner-occupied housing is estimated
to be something between $15 and $20 billion. The excluded
half of capital gains accruing to present tax return tilers
is estimated at I little over $15 billion
The earnings on
pension funds is estimated to be about $30 billion.
Taken together these changes amount to nearly $100 billion
of taxable income which is to be compared with the present
level of individual taxable income (1975) of almost $600 billion.
Thus these four examples alone might increase the tax base by
about one-sixth. Put otherwise adding these items to the tax
base would permit a reduction of approximately 15 percent in
the tax rates. Naturally any such rate reduction would have
to be designed to provide an appropriate distribution of tax
burden among income classes.
Let me turn now to a closer analysis of these four rather
typical examples of base broadening measures to see how they
fare when judged against the three criteria discussed above.
Social security benefits are currently untaxed, regardless
of the other income of the recipient. It is often suggested
that this source of income should be brought into the income
tax base. Generally this proposal is accompanied by the
proposal to eliminate the employee's share of the social
security payroll tax from the tax base. To tax social security
benefits, would serve the interests of fairness, since it
would treat those with income from different sources alike
and would appropriately tax those with relatively larger incomes.
The impact of such a change on the efficiency of the allocation
of resources in the economy is not obvious, except that the
resulting lower tax rates would be an advantage. A slight
plus would be the increased savings for retirement which
might be undertaken by those who would pav taxes in order to
maintain their after-tax income in retirement. Thus there would
}9I
- 7 be some offset to the inherent bias against capital accumulation
in an income tax system. This base broadening step would
seem to make its contribution to simplicity also by means of
the lower rates. In one respect it might involve increased
complexity since it might increase the number of tax return
filers.
Imputed net income from owner-occupied housing is another
item of income often overlooked but generally recommended by
base broadening studies for inclusion in the income tax base.
The tax benefit can be seen most easily by asking what the
tax consequences would be of my neighbor and me renting each
other our identical houses. This would bring the yield from
investment in the housing into the tax base even though it
would not change the real flow of services in the economy.
In the interests of fairness, this is appealing. It
would bring about a parity of homeowners with renters. But
this source of horizontal equity may well be exaggerated for
the same reasons that we outlined before in the case of the
corporate and municipal bonds. That is, since everyone has
the choice whether to be an owner or a renter there is a
presumption of horizontal equity. The main effect may perhaps
be on vertical equity since the institutional forms are such
that it is easier for wealthier individuals to be owners and
therefore the degree of progression of the tax system is in
effect reduced.
The fact that renters and owners would be treated alike
would, however, contribute to efficiency, since it would mean
that the choice of the tenancy form would not be distorted by
the existence of the tax provisions. Furthermore, the lower
rates made possible by increasing the base will have a
generally favorable impact on the allocation of resources.
However, it must be recognized that the imputed income from
owner-occupied housing is a yield to capital and therefore the
effect of this base broadening would be to increase the overall
rate of tax on capital, thus worsening the impact of the tax
system on the allocation of resources to capital formation.
On the score of simplicity, it is doubtful that this reform
would get very high marks. Most schemes for carrying out an
explicit imputation to the owner of the market value of the
occupancy of his own house are rather complex. It would be
somewhat less complex to adopt the approximate alternative
plan of simply eliminating the deductions of property taxes
and mortgage interest on owner-occupied houses.
- 8Most base broadening proposals include the elimination
of the presently excluded one-half of capital gains. This
is argued to be in general accordance with the objective of
fairness since it would tend to equalize the treatment of
individuals who derive money from personal services with
those who derive money from capital. In my view this
approach overlooks the related problem of 'double taxation"
of capital income arising from the imposition of both the
personal and corporate income tax on distributed corporate
earnings. However for the purpose of this talk I have
skirted this issue by assuming full integration of the
corporate and individual income taxes together with appropriate
basis adjustments associated with undistributed corporate
earnings.
The efficiency questions raised by including all the
capital gains in the tax base are rather complicated. Again
we must make explicit, our.,assumption about integration since
corporate stock is one of the major type's of assets which
yields capital gains. As matters now stand there is a
bias in the tax system against equity financing. Bias results
from the fact that the corporation income tax base excludes
interest paid on debt (that is, it is deductible) but includes
dividends paid on stock (that is, dividends are not deductible).
Removal of the favored treatment given to capital gains would
worsen that bias. With integration of the corporation and
individual income taxes that particular source of inefficiency
would be eliminated. There remains however the general
question of the bias of the tax system agianst capital formation.
Since capital gains represent a yield to capital, their
inclusion in the tax base would represent an increase in
the effective rate of tax on yield to capital, worsening the
overall effect of the tax system on the net investment undertaken by the economic system.
There is no doubt that including the presently excluded
half of capital gains in the tax base would vastly simplify
the Internal Revenue Code. It also would remove a major
source of tax litigation and controversy during tax audit.
On the example of retirement plans, the taxation of
various categories of income can be deferred until retirement:
employer contributions to retirement plans and earnings on
plans; contributions to and earnings on Individual Retirement
Accounts; earnings implicit on annuities. Consideration
could be given to the elimination of some or all of these
deferrals under a broad-based tax reform. Generally such
a move would seem to be acceptable on fairness grounds.
The access of different individuals to these favored forms
of savings varies widely, depending on each person's employment
circumstances (however, again here one must add the note
that the opportunity for free choice of occupation and use
of an IRA mitigates the apparent horizontal inequity). On
the grounds of vertical equity this example would seem to
be more or less neutral, not favoring inherently any particular
income class of taxpayers. On the efficiency criterion we
again run into the unfortuante impact of this base broadening
step on rewards to savings. At present, the tax deferral on
retirement savings provides one way to neutralize the
disincentives of the tax system to savings. From the standpoint of simplicity this example would substantially simplify
the Code. The employee benefit provisions are very complicated
requiring tremendous resources, both in and out of Government,
to deal with the long Code provisions and the longer provisions
of the Regulations, probably among the most complicated in the
tax law.
Let me quickly review. We have been looking at four
examples of possibly broadening the tax base. Each of these
has been briefly examined against the criteria of improving
the tax system with respect to fairness, efficiency and
simplicity. The four examples are (1) social security
benefits, (2) imputed income from owner-occupied housing,
(3) excluded half of capital gains, (4) presently deferred
retirement income. The first of these examples, social
security benefits, receives positive marks on all three
criteria of fairness (assuming the rate structure makes
appropriate distribution of the tax burden among income
classes), efficiency and simplicity. Second, imputed income
from housing receives positive marks for fairness, plus and
minus marks for efficiency (with the gain due to a removal
of bias against tenant occupied housing but a loss on yield
from investment) and a big minus on the criterion of simplicity.
The third, the excluded half of capital gains, receives a
plus on fairness grounds, a minus on efficiency grounds (since
it increases the anti-savings bias) and a big plus on
simplicity grounds. Fourth, removing the deferral features
for retirement income provisions is rather a neutral change
on the criterion of fairness, a minus change from the viewpoint
of efficiency (in view of the capital formation incentive
effect) and a substantially affirmative change on the grounds
of simplicity.
/
- 10 As is not surprising the ideal tax system is not going
to jump out of the hat unaided. However, we think we can
begin to sort out the issues.
The examples suggest two important points. First, we
may have to come up with more innovative approaches ^ to the
problems than simple base broadening. Base broadening alone
is likely to lead to substantial improvements in some respects
but exact costs in other respects which could be avoided
by more immaginative approaches.
Second, in thinking about the gainers and losers from
changes in the Code of the sort we have been talking about,
it may be that a one step at a time approach to improvement
may be less promising than a wholesale change. This will
have to be carefully evaluated. Achieving a major reform
will mean for many removal of features of the law which
benefit them. It may be that progress will require a perception
that many are giving up a little in the short run for the
larger gain of all over the long run.
As our work unfolds, it may be desirable to assemble
a blue ribbon advisory group to counsel with us not only on
the
specifics involved, but also upon the method of
implementation.
The more I delve into this subject the more persuaded
I am of the desirability of fundamental reform. I am confident
that a balance can be achieved among competing objectives and
that the result will be very much worthwhile. Certainly I
shall welcome all the help you may be willing to give in that
effort.
Thank you.
#
#
#
WASHINGTON, D.C. 20220
Press inquir
202-964-26
federal financing bank
A
W
S
N
FOR IMMEDIATE RELEASE
SUMMARY OF LENDING ACTIVITY
January 16 - January 31, 1976
Federal Financing Bank lending activity for the period
January 16 through January 31, 1976 was announced as follows
by Roland H. Cook, Secretary:
.•.},.-
The Federal Financing Bank made the following 'advances
to borrowers guaranteed by the Department of Defense under
the Foreign Military Sales Act:
Interest
Date
Borrower
Amount
Maturity ••rrr Rate
1/20
Government of
$
277,631.49
9/30/83
7.513
China
1/20 Government of
China
20,421,453.67
7/1/83
7.492
.- . -» «v
•
1/2,9 Government of
Argentina
3,320,269.76
4/30/83
-.
.
i >
7V609 ;
r
1/50 Government of
Korea
9,024,708.31 6/30/83
7.486
1/30 Government of
Brazil
4,313,200.00 10/1/83
7.612
1/30 Government of
Israel
12,859,653.76 6/10/85
7.694
The National Railroad Passenger Corporation (Amtrak)
made the following drawings against Note #6, a $130 million
renewable line of credit with the Bank:
Maturity
Interest Rate
Amount
Date
1/16
1/27
$15,000,000
10,000,000
3/30/76
3/30/76
5.1041
5.002%
On January 30, Amtrak borrowed $7 million against Note
No. 4, a $120 million line of credit. The note matures
March 31, 1976. The interest rate is 4.969%. Amtrak
borrowings from the FFB are guaranteed by the Department
of Transportation.
WS-636
2The Bank made the following loans to utility companies
nteed by the Rural Electrification Administration:
guaran
Date
Borrower
1/19 Cooperative
Power
Association
1/19
Associated
Electric
Coop, Inc.
1/20 South
Mississippi
Electric
Power
Association
1/30 Oglethorpe
Electric
Membership
Corporation
Amount
Maturity
Interest Rate
$4,510,000
12/31/10
8.144
6,500,000
12/31/10
8.144
6,300,000
1/23/78
6.650
XJ/
1,915,000
12/31/10
8.130
o
Interest payments are made quarterly on the above loans.
On January 20, the Bank purchased $1,000,000 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 8.097%.
On January 28, the United States Railway Association
borrowed $1 million against Note No. 3, a $296 million
line of credit with the FFB. The line matures February 23,
1976. The interest rate is 5.002%. USRA borrowings from
the FFB are guaranteed by the Department of Transportation.
The Student Loan Marketing Association borrowed
$15 million on January 29 at an interest rate of 6.60%.
The loan matures January 26, 1978. The proceeds of the
loan were used to partially repay a $25 million note
maturing with the FFB. SLMA borrowings are guaranteed
by the Department of Health, Education and Welfare.
The Postal Service borrowed $800 million on January 29.
The loan will be repaid in 25 annual installments of
$32 million beginning May 30, 1976 and ending on May 30, 2000.
The interest rate is 8.075%.
- 3<t?ftn 0? JanuarX 30 the Tennessee Valley Authority borrowed
^ 8 0 million of 28 day funds at an interest rate of 4.675%.
Ihe loan matures February 27, 1976. Proceeds of the note
were used to repay $230 million of notes maturing with the
FFB and to raise new funds.
On January 30 the FFB purchased a $500 million 5 year
Certificate of Beneficial Ownership from the Farmers Home
Administration. The maturity is January 30, 1981. The
interest rate is 7.77% on an annual basis.
On January 30, the FFB and the Small Business Administration
signed a Transfer and Guaranty Agreement dated as of January
1, 1976 whereby the FFB purchased from SBA 3,273 mortgages
with a principal balance due of $193 million. The Bank
paid $173,032,642.66 for the assets which includes $23,941.04
of accrued interest. The effective rate of return to the FFB
is 7.746% calculated on a monthly payment basis. The mortgages
have an average length to maturity of approximately 6 years.
The final maturity is October 1, 2000. Principal and interest
payments to the FFB are guaranteed by the Small Business
Administration.
Federal Financing Bank loans outstanding on January 31, 1976
totalled $19.3 billion.
oOo
FOR IMMEDIATE RELEASE
February 10, 1976
Secretary of the Treasury, William E. Simon, today
called for the broadening and intensification of an Internal
Revenue Service drive to uncover tax evasion and avoidance
through the improper deduction of bribes and similar
wrongful payments both abroad and in the United States.
He said he intends to see to it that all those who have
made improper payments and bribes do not profit through
reducing their Federal tax liabilities. Secretary Simon
considers this action essential for the protection of the
integrity of the tax system and of the U.S. business
community.
The Internal Revenue Service has been working closely
with the Department of Justice and the SEC to deal with
tax evasion and avoidance through the improper deduction
of bribes and other wrongful payments to or for government
officials both abroad and in the United States. Commissioner
Alexander assured the Secretary that the IRS will give this
investigation increased and vigorous emphasis.
WS-639
0O0
77?
FOR IMMEDIATE RELEASE
February 10, 1976
DALE S. COLLINSON
APPOINTED TAX LEGISLATIVE COUNSEL
Secretary of the Treasury William E. Simon today
announced the appointment of Dale S. Collinson as Tax
Legislative Counsel for the Treasury Department.
Mr. Collinson, 36, will head the Office of Tax
Legislative Counsel, a group of lawyers that provides
assistance and advice in matters of domestic tax policy
and tax legislation to the Assistant Secretary of the
Treasury for Tax Policy, Charles M. Walker. Mr. Collinson's
appointment was effective December 30, 1975.
Prior to becoming Tax Legislative Counsel, Mr. Collinson
served as Deputy Tax Legislative Counsel (1975), Associate
Tax Legislative Counsel (1973-74), and Attorney-Advisor
(1972-73) with the Treasury Department. From 1966-72, Mr.
Collinson was Assistant Professor and Associate Professor
of Law at Stanford Law School, and from 1969-70 was an
Associate with the firm of Cleary, Gottlieb, Steen and
Hamilton of Brussels, Belgium.
A native of Oklahoma, Mr. Collinson received an A.B.
degree (Summa Cum Laude) from Yale University in 1960, and
an LL.B. degree from Columbia University in 1963, where he
was Notes and Comments Editor of the Law Review.
Mr. Collinson is married to the former Susan Waring
Smith of Irvington-on-Hudson, New York. They have one son,
Stuart, 3, and reside in Arlington, Virginia.
oOo
WS-641
FOR IMMEDIATE RELEASE
February 11, 1976
^
TREASURY DEPARTMENT SCHEDULES PUBLIC HEARING
ON CONSUMER REPRESENTATION PLAN
The Department of the Treasury will hold formal public
hearings in Room 4121, Main Treasury Building, 15th and
Pennsylvania Avenue, NW, Washington, D.C. on February 23,
1976, to provide opportunity for public comment on the proposed Treasury Department Consumer Representation Plan.
The hearings will he held from 2:00 pm - 5:00 pm and
from 6:00 pm - 9:00 pm. The evening sessions have been
scheduled specifically to hear testimony from interested
parties not able to participate during normal working hours.
Parties desiring to be accorded a place on the hearing
schedule should write or call the Treasury Department hearing clerk with the following information:
1. Name
2. Address
3. Telephone number
4. Capacity in which presentation will be made
(i.e., public official, organization representative, individual, etc.)
5. Principle issue to be addressed
6. The names of other parties known to have
similar positions regarding the principal
issue to be addressed.
7. Preferred session to testify.
The deadline for reserving time on the hearing agenda is
4:30 pm Wednesday, February 18. 1976. Parties scheduled to
testify are asked to provide the hearing clerk with two (2)
copies of their testimony on the day of the hearing. Parties
not scheduled to testify, but who wish to do so, are also
requested to provide copies of their testimony and will be
permitted to speak at the conclusion of the formal hearing
agenda on a time-available basis. Additionally, written
comments by any interested person, including those who may
not have sufficient time to express their full views at the
hearing, may be submitted to the hearing clerk before 5:00 pm
(Over)
WS-638
Monday, March 1, 1976.
- 2 The general public and the press are invited to attend
the hearings. The hearings will be transcribed, and along
with written submissions will become a part of the record in
these proceedings.
Testimony received at the hearings is inteded to further
aid the Treasury Department with revision of its proposed
Consumer Representation Plan, which appears in detail on
page 55221 of the Federal Register for November 26, 1976.
The hearing clerk for the Treasury Department is:
David Lefeve
Main Treasury, Room 1454
15th and Pennsylvania Avenue, NW
Washington, D.C. 20220
Telephone (202) 964-5487 or
(202) 964-8079
oOo
Contact: L.F. Potts
Extension 2951
February 11, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES 3-MONTH
EXTENSION IN INVESTIGATORY PERIOD
ON KNITTING MACHINERY FOR LADIES1
SEAMLESS HOSIERY FROM ITALY
The Treasury Department announced today a 3-month
extension in the anti-dumping investigatory period on
knitting; machinery for ladies' seamless hosiery, from
Italy. Notice of this action will appear in the Federal
Register of February 12, 1976.
A tentative decision was to have been made on
February 15, 1976, but will now be made on or before
May 15, 1976.
Imports of the subject merchandise from Italy during
CY 1974 were valued at roughly $2.25 million.
*
WS-640
.
*
*
J^
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
JACKSONVILLE BOARD OF REALTORS
JACKSONVILLE, FLORIDA - FEBRUARY 11, 1976
Thank you Mr. Carter, Ladies and Gentlemen.
It is a pleasure for me to be here in Jacksonville, and
an honor to be introduced by a man like Jack Carter, who set
such an outstanding example of service for his community. And,
of course, it's always a delight to visit this beautiful,
friendly state, as so many millions of other Americans do
each year.
There is, however, a difference between them and me.
Almost all of them come to Florida to enjoy the warm weather
and tropical sunshine. I'm here to cool off -- I have to take
all the heat I need back in Washington.
Considering the many problems our country has had to face
in recent years and the many hard decisions that still lie
ahead, it is only reasonable that the current political
economic debate should be vigorous and, at times, heated.
We are just beginning to bounce back from the worst recession
in a generation and the effects are still stroncrlv felt
across the nation, even in a southern paradise like Jacksonville.
I am well aware of the impact that recession, inflation,
and especially high energy costs, have had here, and I realize
that this, in turn, has taken its toll on credit, on construction
and, of course, on real estate.
But I am not a pessimist about America and I am not a
pessimist about Jacksonville. It's just not in my nature. Our
country, and this fine community, have too much going for them —
talent, resources, initiative, and plain old American know-how
and determination — to be stymied by anything for long, no
matter what the professional pessimists may say.
1/75- 7? 7&
Which brings me to a story told about one of the greatest
leaders — and greatest optimists — of history, Sir Winston
Churchill. For some years after he retired as Prime Minister,
Sir Winston stayed on as a sitting member of Parliament. In
fact, most of those last years he didn't do much else besides
sit. But every once in awhile, when least expected, a spark
of the old Churchill wit would flare up.
On one occasion, as Sir Winston was sitting in the members'
bar, fortifying himself for the duties of the day, the bell
rang for a vote on the floor of the House of Commons. Downing
what remained of his brandy, Churchill resolutely waddled
toward the door. At the same time, a 250 pound laborite from
Liverpool, a walking battleship by the name of Bessie Braddock,
also started plowing toward the door.
The inevitable collision occured, and Bessie went down for
the count. But, to her credit, she came up fighting. "Sir
Winston," she fumed, "you are drunk. Furthermore, you are
disgustingly drunk."
Churchill peered at Bessie for a moment through steady
if somewhat glazed eyes and replied, "My dear Mrs. Braddock
you are ugly. Furthermore, you are disgustingly ugly. But
tomorrow, I — Winston Churchill — I shall be sober."
Without drawing too fine an analogy, I think it is fair
to say that, like Mrs. Braddock's ugliness, the pessimism of
the professional doom sayers will still be with us tomorrow.
On the other hand, like Sir Winston, the American economy is
already proving that it is quite capable of sobering up and
getting back on the track.
Right here in Jacksonville, for instance, I was glad to
see that your retail sales are up 6% from 1974 and that local
businesses reported tremendous Christmas receipts. Like the
rest of the country, Jacksonville is on the comeback trial . . .
not that this should surprise anyone who knows our country and
our people.
But while I have a deep and abiding faith in this Republic
and in its people, I must tell you that I am very troubled by
what has happened in Washington over the past 15 years — the
sinister drift toward an ever-bigger Federal Government
usurping more and more of the rights and resources that belong
in the private sector and in the hands of the individual
citizen. This dangerous undercurrent has been ignored for too
- 3 long. In the long run it could undo all of the progress we
have made toward a balanced, healthy economic recovery.
Without question, our country has developed the most
efficient and creative economic system the world has
ever known. It is really a marvel, bringing material
benefits to our people that are unsurpassed in the history of
mankind. Literally tens of millions of poor imigrants came
to the United States since the early 1800s in search of a
better life and achieved for themselves, their children,
and their children's children a standard of living that was
beyond their fondest hopes. This economy is so strong and
dynamic that since the early 1900s despite the abuses we
have inflicted on it, remarkable progress has been made:
Real income of the American family has increased
by over 40% (and that's after inflation and taxes);
Total production has risen by over 60%, in real
terms, even after allowing for three recessions
over this time span;
The percent of families below the poverty line
has been cut in half (to around 10%);
— Real farm output has risen over 25%, enabling us
to feed not only ourselves but many people in
other countries; and
— Almost 20 million new jobs have been created.
^£
This is not to imply that the private enterprise system is
perfect. It does not change human nature nor solve all problems
everywhere. It does not ensure human happiness. While it does
not guarantee personal and social freedoms, it does provide more
men and women with the freedom to decide and the opportunity to
obtain economic security than any other system known to man.
And it is a powerful safeguard against the erosion of our personal
freedoms.
And yet as I have said, despite this excellent overall
performance of our free market system, there are strong and
growing developments which raise serious concern about the
future. America is on a path that may not hold the same
promise as in the past. There are clear indications that
government at all levels is increasingly constraining innovation, personal initiative, and individual spending decisions.
And at the same time poll after poll points to a rising
disenchantment by the public with business and with government.
In a more concrete sense, let me call your attention to
some economic developments which highlight the creeping and
excessive rise in government activity in our economic affairs;
* In 1930 total government spending — that is, spending
by Federal, state and local government — was about 12% of
our GNP. By 1950 it was 21% and this year it will be around
35%. In other words, over one in every three dollars of income
is now spent by government. And if current trends prevail,
government spending will reach nearly 60% of our GNP by the
end of the century.
* In FY 1962, Federal government spending exceeded
$100 billion for the first time in history. Without the
restraint advocated by the President, it will exceed $420
billion in FY ]977. Indeed, even with $395 billion ceiling,
this is an effective four-fold increase in just 15 years time.
Federal Government outlays are now running over $1 billion
per day or the equivalent of almost $5,500 per year for every
family in the United States.
* Today's Federal Tax Provisions contain over 6000
pages of finely printed material. No wonder the average
citizen feels cut off from his government in Washington.
Even my economists at the Treasury, with all their Phd's,
have thrown up their hands at Form 1040 and now go to the
tax specialists.
* It took 75 years for the National Debt to reach
$1 billion, an event which occurred in 1863 during the Civil
War. Today it is growing by a billion per week. Is there any
po7
wonder why we have an inflation problem?
* There are over 5000 forms required by the Federal
Government today which take business over 130 million work
hours to fill out. The costs of simply processing these forms
by the Government are estimated to be an incredible $15 billion
a year. These costs must ultimately show up in higher prices
to consumers.
* In five years, the cost of a first class stamp has
more than doubled. There is nothing like a government monopoly —
to deliver good, low cost services. As Bob Hope said when they
raised the price, "Now they're going to charge us IOC for
delivery and 3C for storage."
* Regulatory agencies directly control economic decisions
of airlines, railroads, trucking, broadcasting, power production,
energy, the securities market — almost 10% of everything we
make. Furthermore, there are other indirect controls (including
environmental protection, safety regulations, consumer requirements) which affect the costs in a great variety of indutries.
The point of all this is to try to give you a feeling for
some serious and disturbing economic changes I see and hopefully an understanding of what the President is trying to do
regarding these developments. We in the Administration
genuinely want to stem the tide toward ever bigger Government,
to an every larger and more cumbersome Bureaucracy — not just
to be anti-government -- but because of a fundamental belief
that the market mechanise can do a much better job in meeting
the needs and preferences of the American people.
The thrust of the President's recommended spending and
tax policies is to strike an appropriate balance between longand short-term needs, between conflicting and yet desirable
objectives. As outlined in the Budget there is to be a
fairness and balance:
-- Between the taxpayer and those who will benefit
by Federal Spending;
— Between National Security and other pressing needs;
— Between our own generation and the World we want to
leave to our children;
JkS7
—
Between those in some need and those most in need;
— Between the desire to solve our problems quickly
and the realization that for some problems, good
solutions will take more time; and
— Between Federal control and direction to assure
achievement of common goals and the recognition
that State and Local Governments and individuals
may do as well or better without restraints.
As obvious and as straightforward as these goals seem,
they cannot all be achieved simultaneously. This inevitably
implies some choice or compromise; and being an election year
means that there will be differences, which will be publicly
and loudly voiced, about the relative importance of each goal
and about the ways to achieve them. Liberals and Conservatives
will differ greatly on these matters.
President Ford's program clearly strives to bring about
a durable and sustained economic advance that will steadily
reduce unemployment but at the same time will not bring back
high rates of inflation. Some people say our program isn't
bold enough. I say that this is probably the boldest program
we have had in years, because we now have a President who goes
before the American people and doesn't promise them the moon.
That's the kind of "Boldness" we need in America today. We
are not going to fall into the trap of trying to spend our way
to prosperity again. It is precisely the kind of impatience
with the speed of economic recoveries which has overheated the
economy twice in the last decade, and I would hope that we
have learned our lessons about such stop-go policies. There
is no real benefit in helping people get jobs for a while,
only to bring about even greater hardship later on.
President Ford's proposals deal with four major objectives.
First, to reduce the unemployment rate, several new steps
have been proposed to keep the economic recovery moving ahead,
including,
-- A further tax cut of approxiamately $10 billion to
become effective on July 1; and
— Accelerated depreciation for the construction of
plant and equipment in areas experiencing high
unemployment (in excess of 7%).
>
Second, to prevent the inflation from accelerating back
toward high-single or double-digit inflation,
— Federal spending gains to be limited to only
5-1/2% in FY 1977 (compared to a total rise of 40%
in the past two fiscal years);
— Monetary growth is to be held to 5-7-1/2% and
eventually is to taper in speed as the economy
gathers steam; and
— The economy is not to receive undue net fiscal stimulus
but rather is to be set on a course of modest GNP growth
around 6 to 6-1/2% which is both sustainable and
desirable. We will continue warming up the economy,
but we are not going to overheat it again.
Third, to slow the rise of Government influence on the
economy,
— The growth in total outlays is to be limited not only
in FY 1977 but well beyond;
— Reforms are to be pursued in terms of excess and
counter-productive regulations in order to move towards
more competitive markets; and
— Budget deficits are to be eliminated by FY 1979
so that the private sector can obtain more of the
total credit flow.
Finally, to meet the pressing need for greater capital
formation and long-term job creation:
— Corporate tax rates and the Investment Tax Credit
are to be permanently shifted to the present more
favorable base;
-- Double-taxation of dividends is to be eliminated; and
— Middle income taxpayers are to be given incentives
to invest in common stocks in order to broaden
and strengthen stock ownership in American companies.
To a far greater extent than in the past, our policy
must take into account long-run needs and not focus almost
exclusively on short-run problems with their expedient
/
-811
solutions". In the long run there is no substitute for sound,
sustained, even-handed policies that create an environment in
which private enterprise can flourish.
There will, of course, be calls to do more, to try new
approaches. Indeed, one of the more fascinating sets of proposals
in dealing with our economic goals is contained in two bills
currently before the Congress which have been sponsored by a
very close friend of mine — who will remain nameless even
though he is a distinguished Senator from Minnesota. The
first bill is entitled "The Balanced Growth and Employment Act
of 1975". The second is entitled "The Equal Opportunity and
Full Employment Act of 1975". Now I ask you, how can anyone
possibly not support Balanced Growth or Equal Opportunity or
Full Employment? In fact, aren't these the very goals we all
would like? Of course they are. Unfortunately, the titles
on the bills fail to capture their contents.
The first bill advocating Balanced Growth would set
up an Economic Planning Board in the White House.
Every
two years this Board would draw up detailed long-term plans
for the economy and submit such plans to the Congress for their
approval. "The plans would establish economic objectives,
identify the resources necessary to achieve them, and recommend
appropriate administrative and legislative actions. Supposedly,
this plan would be an invaluable guide to both the private
and public sectors. Let's think about this.
Who is to decide on the objectives for the overall economy?
Who is to take action if certain goals are not met? Who is to
decide which localities, which businesses, which industries are
to do which tasks? Who decides on credit allocation, investment
decisions, output targets, even pricing and wage policies?
The answer is clear; The Economic Planners.
The implications of this potential power in the hands
of a government bureaucracy are absolutely frightening! The
heart of any planning program is to go from planning to action
and ultimately to compulsion. Inevitably this would mean most
economic decisions would be made in Washington by an ever more
powerful bureaucracy controlling the market place and interfering with our individual freedoms so that we get what the
bureaucracy knows is good for us. Such a planning scheme is
not a move in the direction of a better functioning market
mechanism but instead is an open ended commitment to make
mistakes and sap the very vitality of our economic machine.
In point of fact we already have the World's most sophisticated
system of economic planning — Free Markets planned by individual
consumers. We do not need more "guidance" from Washington.
£//
The second proposal also is deceptively simple. To assure
full employment, we would have the Federal Government act as
employer of last resort and guarantee a job to all persons
looking for work. In a bit over a year's time the unemployment
rate would be lowered to 3% (or less) or else the government
could be sued for being derelict in its responsibility. Already,
it sounds like another lawyer's relief bill. Furthermore, the
cost of the taxpayer is not supposed to be very great since the
people employed would not be drawing unemployment compensation anymore
but rather would be paying taxes on their income. Isn't this
a sound idea? By a wave of the wand we can almost reduce the
number of unemployed by five million workers and achieve the
lowest rate of unemployment since the peak activity of the
Korean War. Why are the Republicans, and especially the
President, resisting such good advice?
The answer, of course, is that the scheme totally ignores
what happens to prices and the ultimate impact on economic activity.
Two independent studies of this jobs program say that it will bring
a new wave of inflation that will curl your hair. One forecasts an
inflation around 10%; the other a rate of 13%. Some believe it
could go even higher because the public is highly sensitive to
every new burst of inflation. This obviously would lead to a
sharp erosion of the real value of peoples' savings and incomes,
would cause severe strains in our financial system, and ultimately
would give way to an even more serious recession than the one we
have already experienced.
The whole point of my discussion tonight is to highlight
the very serious economic questions we face and the policies
that are needed for our future. It took a long time for our
economic problems to build up and it is going to take a long
time to wring then out of the economy. There is no quick fix.
We cannot pay for the sins of a decade with one year's penance.
Some say that the principles and ideals of the past no longer
work. Somehow they are no longer relevant. What nonsense.
It is not that our principles have failed us but that we have
failed to live up to them.
With patience and responsibly balanced policies — and
with firm adherence to sound economic principles — we can
eventually work ourselves back to a healthy growing economy
on a stable enduring basis. If the country chooses the route
of stop-go again, we will have only ourselves to blame for the
inevitable problems that will develop.
Address by the Honorable William E. Simon
Secretary of the Treasury
Orlando, Florida
February 12, 1976
Thank you, Mr. Dantzler, Congressman Lou Frey, Ladies
and Gentlemen.
It is a great pleasure for me to be here, and to bring
you greetings from Fantasyland North. I sometimes think
that the only difference between Washington and Disney
World is that the weather is much nicer down here — that,
and the fact that Disney World pays its own way.
I understand that 12.5 million tourists visited Orlando
last year. That is quite a figure, although it's easy to
understand why so many people are drawn to one of the most
beautiful parts of the country and one of the most fantastic tourist and amusement complexes in the world. However,
I think that the record pales by comparison to ours in
Washington. Di'sney World may amuse and fascinate millions
of tourists, but Washington has taken every single American
taxpayer in our great country on one of the longest, bumpiest
rides in history.
Even in Washington, however, there are times when
common sense and sound principles win out.. And I like to
believe that the Administration and the President I serve
have helped to gain a few of these victories.
Soon after I came to Washington three years ago, something
approaching a panic hit the city, America was- struggling
with an energy embargo imposed on us by foreign nations and
there was real fear that the impact might wreck, among other
things, tourism in areas like Orlando.
But we survived the blackmail and now we are on the road
to energy self-sufficiency. It took time., but common sense
prevailed.
Then, about a year ago, we had to start tackling the
twin evils of inflation and recession at the same time --problems chat have also had a serious impact right here in
Orlando, Well, we haven't fought the last battle against
inflation and recession yet, but there is no longer any
doubt about the outcome, If. we hold true to a policy of
WS-64 3
fW
restraint and responsibility — of saying no to massive
Federal boondoggles and massive Federal interference — we
are going to win the economic war.
The doomsayers and gloom merchants who predicted
collapse during the energy crisis have already been proven
wrongRemember the predictions of a collapse of our international financial system, of a depression, of $1 bread, $1
gas, $1 sugar? They all turned out to be phoney. Our free
enterprise system, while troubled, was vibrant and alive. As
Winston Churchill once said while his own country was under
seige, "We have not journeyed all this way across the centuries,
across the oceans, across the mountains, across the prairies,
because we are made of cotton candy." No, we are of better
stock, and I'm damn proud of it.
Everyone who has grown up in this great country of
ours was brought up to believe, as I still do, that our
country has developed the most efficient and creative
econcr:.ic system the world has ever known.
It is really a marvel, bringing material benefits to
our people that are unsurpassed in the history of mankind.
Literally tens of millions of poor immigrants came to the
United States since the early 1800's in search of a better
life and achieved for themselves, their children, and
their children's children a standard of living that was
beyond their fondest hopes. This economy is so strong and
dynamic that since the early 1960's despite the abuses we
have inflicted on it, remarkable progress has been made:
—The real income of the American family has increased
by over 4 0%.
—Total production has risen by over 60% in real terms,
even after allowing for three recessions over this time span;
—The percent of families below the poverty line has been
cut in half; to 10%.
—Real farm output has risen over 25rb, enabling us to feed
not only ourselves but many people in other countries;
and
—Almost 2 0 million new jobs have been created. This is
not to imply that the private enterprise system is perfect.
It does not change human nature nor solve all problems everywhere.
Xif
It does not guarantee personal and social freedoms. And
it does not ensure human happiness. But it provides more
men and women with the freedom to decide and the opportunity
to obtain economic security than any other system known to
man. And it is a powerful safeguard against the erosion of
our personal freedoms.
And yet as I have said, despite this excellent overall
performance of our free market system, there are strong and
growing developments which raise serious concern about the
future. America is on a path that may not hold the same
promise as in the paste There are clear indications that
government at all levels is increasingly constraining
innovation, personal initiative, and individual spending
decisions. And at the same time poll after poll points to
a rising disenchantment by the public with business and
with government.
In a more concrete sense, let me call your attention
to some economic developments which highlight the creeping
and excessive rise in government activity in our economic
affairs:
In 1930 total government spending -- that is, spending
by Federal, State and local government -- was about 12% of
our GNP. By 1950 it was 21% and this year it will be around
35%. In other words, over one in every three dollars of
income is now spent by government. And if current trends
prevail, government spending will reach nearly 60% of our
GNP by the end of the century.
In FY 19 62, Federal Government spending exceeded $10C
billion for the first time in history. Since then it has
quadrupled, pushing toward $400 billion. Federal government
outlays are now running over $1 billion per day or the
equivalent of almost $5,500 per year for every family in
.the Untied States.
Today's Federal Tax Provisions contain over 6000 pages
of finely printed material. No wonder the average citizen
feels cut off from his government in Washington. Even my
economists at the Treasury, with all their Phds have thrown
up their hands at Form 1040 and now go to the Tax Specialists.
It took 75 years for the national debt to reach $1 billion,
an event v;hich occurred in 186 3 during the Civil War. Todayit is growing by a billion per week. Is there any wonder why
we have an inflation problem? Private industry manufactures
many wonderful products for our people; in Washington, the only
-4-
products we seem to manufacture are hot air and inflation.
There are over 5000 forms required by the Federal
government today which take business over 130 million work
hours to fill out. The costs of simply processing these
forms by the Government are estimated to be an incredible
$15 billion a year. These costs must ultimately show up
in higher prices to consumers.
In five years, under the Government's monopoly over
the postal service, the cost of a first class stamp has
more than doubled. As Bob Hope said when they raised the
price last time, "Now they're going to charge us IOC for
delivery and 3£ for storaqe."
This past decade has also seen unparalleled growth
in the regulatory apparatus of the government. Regulatory
agencies of the government now exercise direct control over
10 percent of everything bought and sold in the United States
and indirect control over almost every other sector of the
private economy.
The point of all this is to try to give you a feeling
for some serious and disturbing economic changes I see and
hopefully an understanding of what President Ford is trying
to do regarding these developments. We in the Administration
genuinely want to stem the tide toward ever bigger Government,
to an ever larger and more cumbersome bureaucracy — not just
to be anti-government -- but because of a fundamental belief
that
a free market
can do a much better job in meeting
the needs and preferences of the American people.
The thrust of the President's recommended spending and
tax policies is to strike and appropriate balance between
long-and short-term needs, between conflicting and yet
desirable objectives. As outlined in the new budget there
is to be a fairness and balance:
—Between the tax payer and those who will benefit by
Federal Spending;
—Between National Security and other pressing needs;
--Between our own generation and the World we want to
leave to our children;
—Between the desire to solve our problems quickly and
the realization that for some problems, good solutions vu.ll
take more time; a3id
?/7
-5-
—Between Federal control and direction to assure
achievement of common goals and the recognition that State
and local governments and individuals may do as well or
better without restraints.
President Ford's program clearly strives to bring about
a durable and sustained economic advance that will steadily
reduce unemployment but at the same time will not bring back
high rates of inflation. Some people say our program isn't
bold enough. I say that this is probably the boldest program
we have had in years, because we now have a President who
goes before the American people and doesn't promise them the
moon. That's the kind of "boldness" we need in America today.
We are not going to fall into the trap of trying to spend our
way to prosperity again. It is precisely the kind of
impatience with the speed of economic recoveries which has
overheated the economy twice in the last decade, and I would
hope that we have learned our lessons about such stop-go
policies. There is no real benefit in helping people get
jobs for a while, only to bring about even greater hardship
later on.
The President's proposals deal with four major objectives,,
First, to reduce the unemployment rate, several new steps
have been proposed to keep the economic recovery moving ahead,
including,
—A permanent tax cut of approximately $28 billion to
become effective on July 1; and
--Accelerated depreciation for the construction of plant
and equipment in areas experiencing high unemployment
(in excess of 7%).
Second, to prevent the inflation from accelerating back
toward high-single or double-digit inflation. The President
is proposing that:
—Projected Federal spending for the coming fiscal year
be cut by some $28 billion. This would mean not only
that a tax cut would be possible but that Federal spending
gains would be limited to only 5-1/2% in FY 19 77 (compared
to total rise of 40% in the past two fiscal years);
--It also means that the Federal budget would be brought
into actual balance within three years and that another
major tax cut could be enacted before the end of the decade.
Third, to slow the rise of Government influence on the
-6-
economy,
—The growth in total outlays is to be limited not
only in FY19 77 but well beyond;
—Reforms are to be pursued in terms of excess and
counter-productive regulations in order to move
toward more competitive markets; and
Finally, to meet the pressing need for greater capital
formation and long-term job creation:
—Corporate tax rates and the investment Tax Credit are
to be permanently shifted to the present more favorable
base;
—Double-taxation of dividends is to be eliminated; and
--Middle income taxpayers are to be given incentives to
invest in common stocks in order to broaden and strengthen
stock ownership in American companies.
To a far greater extent than in the past, our policy must
take into account long-run needs and not focus almost exclusively
on short-run problems with their expedient "solutions." In the
long run there is no substitute for sound, sustained, even-handed
policies that create an environment in which private enterprise
can flourish.
It took a long time for our economic problems to build up
and it is going to take a long time to wring them out of the
economy. There is no quick fix. We cannot pay for the sins
of a decade with the one year*s penance. Some say that the
principles and ideals of the past no longer work. Somehow they
are no longer relevant. What nonsense. It is not that our
principles have failed us but that we have failed to live up to
themc
With patience and responsibly balanced policies -— and with
firm adherence to sound economic principles ~- we can eventually
work ourselves back to a healthy growing economy on a stable
enduring basis. If the country chooses the route of stop-go
again, we will have only ourselves to blame for the inevitable
problems that will develop.
It seems to me that we are faced with a fundamental choice -not only for 1976 but well beyond — in the kind of economy and
society we want. The economic objectives of more jobs and stable
prices may be pretty well agreed to, but the routes to them are
-7-
very different. Our emphasis in the Republican Party is on
a sound durable expansion that will permit the free market
to live up to its potential. The other route is one that
holds out a false, cruel promise of a more rapid return to
prosperity but at a cost of future hardship and further
erosion of our economic and personal freedoms.
President Ford has set a course which points us in the
right direction and will permit us to get a much better grip
on these problems, but it will take several years, not months,
to bring this about. Unfortunately, the election is only a bit
over nine months away. There will be calls from the opposition
for "sweeping changes" and "broad new initiatives" which will
really mean bigger spending, bigger deficits and ultimately
bigger governmental control of the economy. We must persuade
the American people that this course is wrong and that our
approach is much sounder in the long run. The real choice
is between greater government control or greater individual
freedom.
That is the battle before us. But we have been through
the fires before -*- over energy, over inflation, over recession,
and over New York City. And just as we have proved that we
could win those battles, I am confident that we will win this
one, too.
Ours is a great cause, and America will be even greater
because of our success.
Thank you.
JJ<4
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
LINCOLN DAY DINNER
CLEARWATER, FLORIDA
FEBRUARY 11, 1976
It is a pleasure for me to be here this evening in
Clearwater to participate in this Lincoln Day Dinner, and
to salute a fine Congressman, Representative Bill Young.
As I was preparing my remarks for this evening it occured
to me that Bill Young is a particularly appropriate man to
honor on Lincoln!s birthday.
As the first Minority Leader in the State Senate, as a
National Committeeman and as an outstanding member of the
House of Representatives5 Bill Young has served his state
and his parry well -- and through difficult times,
-In fact I understand that back in 1960, when Bill was
first elected to the State Senate, the only reason there
was any State Party in Florida at all was because Republicans
were protected by the game laws.
But Bill believed with Lincoln that MThe probability
that we may fail in the struggle ought not to deter us from
the support of a cause we believe to be just.11 Bill has
fought for what he believed in, and, in return, he has won
the faith and belief of the people he serves.
But, then, isn't that what effective government is all
about -- mutual trust and mutual understanding? The problem,
in a society as complex and specialized as ours is that
it is too easy to lose sight of basic principles and truths
in the maze of conflicting technical data, statistics and
political double talko
/
Of course this is not exactly a new problem. It was one
that plagued Abraham Lincoln more than a century ago. I!I
have faith in the people", Lincoln said, "...the danger is in
WS-644
- 2-
JJ/
their being misled. Let them know the truth and the country
is safe."
Lincoln's faith was vindicated in his own time, although
his life was cut tragically short by an assassin's bullet.
Despite the suffering and destruction of the War Between the
States -- and the later ordeal of the reconstruction •-America and the American people survived.
And time and again, as challenge after challenge has
faced us since Lincoln's day, the American people have again
understood, have again sacrificed and have again perservered.
Much has changed since Abraham Lincoln's day. Breakthroughs in education, technology and communications, working
in tandem with a free economic and political system, have
offered Americans of our generation a broad vista of
experiences and opportunities that the men and women of
Abraham Lincoln's day never dreamed possible. And, inevitably,
new problems and challenges have followed in the wake of
progress.
So much has changed that some people may even question
the relevance of Abraham Lincoln, and the values he stood
for, to contemporary American life.
In the narrowest political sense, there is some doubt
that "Honest Abe", with his unpleasant, nasal voice and
homely, awkward figure, could have politically survived in
the age of television. Certainly, it is hard to imagine
Abe putting himself into the hands of "image makers" -capping his teeth, taking drama lessons, being fitted for
contact lenses, having his face lifted or his hair restyled.
As he once said, "the Lord must love homely people, or he
wouldn't have made so many of them."
Lincoln's character, like his jjnmortal Gettysburg
Address, was a thing of substance, not of style. Charisma
had nothing to do with it. Abe Lincoln stood for beliefs,
for principles, for integrity and for basic decency -- and
that is why history remembers him, and why we still celebrate
his birthday today.
o<7e^7 *Cs
Oh, he had plenty of personality -- among other things,
perhaps the sharpest sense of humor of any President. And
to those who knew him — who knew of the private grief of
a father who had lost his favorite son, and who, once the
duties of the day were over, was sometimes plunged into dark,
brooding despair -- Lincoln was something close to a tragic
figure long before his assassination. Certainly, he was a
heroic one.
But I suppose it was Lincoln's humor, often tinged with
irony, that was his most saving grace. Once his sense of
humor was brought to bear, it became a piercing weapon for
truth.
Responding once to a rhetorical defense of slavery,
Lincoln remarked that, "Whenever I hear anyone arguing for
slavery, I feel a strong impulse to see it tried on him
personally."
And when friends warned him of the extensive coverage
being given to his opposition, he shrugged the matter off,
"What kills a skunk," he said, "is the publicity it gives
itself."
When one of Lincoln's more energetic but less intelligent
field commanders persisted in sending him dispatches signed
"Headquarters in the Saddle," Abe quipped that the trouble
with that particular general was that, "his headquarters
were where his hindquarters ought to be."
A century later, some Federal officials -~ both civilian
and military -- still show a remarkable tendency to do things
backwards.
And that admittedly frivolous remark opens up an area of
as much serious concern in our own time as in Lincoln's -the fundamental question of how much power a clumsy and sometimes misdirected Federal Government ought to have over our
everyday lives and our destiny.
There are hundreds of arguments in favor of Federal
control. The list is as long as the number of problems,
real or imaginary, that plague society at any given time --
-4-
^J13
problems which seem to lend themselves to a quick fix at
the hands of Federal bureaucrats.
You name it: someone wants the government to do it or
regulate it. So much so that it is estimated that today
private industry spends $18 billion a year just filling out
Federal forms and complying with government red tape -- $18
billion in expenses that ultimately come out of the consumer's
pocket.
Today Federal officials are doing everything from
ordering parents where to send their children to school to
telling local governments how to spend their money. And
the massive cost of this vast, inefficient federal control
machinery is drying up the sources of capital and just plain
initiative that are needed to create more jobs and more
opportunity for all Americans in business and industry.
The plain truth -- the truth that most grass roots
Americans have known for a long time, but that too many
politicians have ignored -- is that government has grown too
big, too fast, for too many years.
Now, as I said a moment ago, the advocates of big
government can give you reasons by the hundreds. Every
vested interest group, every fat cat and every special cause,
has its own set of excuses.
Those of us who are against big government are not so
lucky. We only have one argument -- but it's a good one.
It's called individual freedom, and it's.what America is
supposed to be all about.
No one understood this better than Abe Lincoln, and the
words he had to say on the subject are even more relevant
today than they were in 1854 when he first spoke them:
"The legitimate object of government," Lincoln said,
is to do for a community of people whatever they need to
have done, but cannot: do...in their separate and individual
capacities. In all that the people can individually do
well for themselves, government ought not to interfere,"
%
- 5 It's instructive to note that on this basic issue,
Lincoln, the first Republican President of the United States
was in basic agreement with Thomas Jefferson, the first
Democratic President, whose motto was "That government is
best which governs least." Both of our great political
parties, like the nation itself, were founded on this bedrock
proposition.
But too many politicians today have lost sight of it.
As I work each day with President Ford in Washington, trying
to keep Federal spending and Federal interference to a
minimum, I see the problem first hand.
There are times when even the power of the veto cannot
stop the fiscal flood.
The only way we can be sure of victory -- the only way
we can ensure the triumph of common sense and sound principle
-- is by mobilizing public opinion.
Tliis is not a battle between Republicans and Democrats
or liberals and conservatives.
It is a battle between good and bad ideas.
It is a battle between those of us who believe in freedom,
in running to a government that has already grown too large
and too domineering.
In 1976, as the nation celebrates the bicentennial of a
struggle that was fought and won for the freedom of the
individual, we can and must elect the kind of President and
the kind of Congress that believe in government of the people,
by the people, for the people -- not government of the
bureaucrats, by the bureaucrats, for the bureaucrats.
For, despite Abraham Lincoln's warning that "no man is
good enough to govern another man without that other's
consent," more and more of the decisions that govern our
lives are being made for us by anonymous officials we wouldn't
have voted for, did not hire and cannot fire.
- 6As a citizen, as a father, and as one who has seen the
intimate workings of government, I deeply believe that the
central, underlying issue of our time is this basic confrontation between the freedoms we cherish as Americans and their
erosion by runaway big government.
And I submit to you this evening that unless we stand
together now -- unless we turn America away from, the road of
ever greater government spending and ever greater government
controls -- then our children will be robbed of their
birthright as free Americans. And you and I will be condemned
to spend the rest of our lives in a society doomed to chronic
inflation, economic stagnation and lingering unemployment.
How serious and how immediate is this threat? Let me
give you the figures and you can decide for yourselves.
For most of our history the Federal Budget stayed below
the $100 billion mark -- way below it most of the time. Then,
in 1962, 186 years after the founding of the Republic and a
century afrer Abe Lincoln's first Administration, we finally
went over the $100 billion mark.
Unfortunately, that was only the beginning. Seven years
later the budget broke the $200 billion mark and, only four
years later, in 1975, we broke the $300 billion mark.
And now, in our bicentennial year, the government is
spending $1 billion a day. That's right, $1 billion every
single day. And every week, the Federal Government goes
another billion dollars into debto
This trend has not been limited to the Federal Government
alone. In 1930, Government spending at all levels -«• Federal,
state and local -- amounted to about 12 percent of our Gross
National Product. Today, government accounts for a third of
our national output. And, if recent trends prevail, the
government's share of the total economy-could reach 60 percent
before the end of this century.
Now I put it to you that, when the day comes that the
average American taxpayer has to pay half or more of his
earnings to subsidize big government, ours will no longer be
a free societv as we know itr
- 7We must stop this disastrous trend before it is too late.
I am proud to be part of an Administration that is in
there fighting, even when the action means temporary unpopularity. For example, on December 17th, President Ford stood
firm by vetoing the tax cut extension bill. And thanks to
his firm stand, the Congress had to add a good faith pledge
to tie future tax cuts to similar cuts in Federal spending
before the legislation was signed into law.
The Ford Administration is exercising the same brand of
calm, firm leadership across the economic board.
As our country emerges from the worst recession in a
generation, Federal fiscal policy must strike a delicate
balance. It must stimulate the economy enough to keep it
moving forward -- and thereby reduce the rate of unemployment*
But, at the same time, Federal policy must not reach the
point where it triggers another round of runaway inflation.
By limiting the budget deficits to a level that can, with
proper management and the cooperation of the Congress, be
brought into balance by Fiscal 1979, the Administration has
struck the proper economic balance.
The question is, can we hold that balance? For, even
now. those who advocate more government and more spending
have begun to call for a new round of Federal spending and
"quick fix" programs that, while they may be politically
popular in the short run, will cause problems for the
average taxpayer and the wage earner for years to come.
We have already begun a strong, healthy economic recovery.
The best way to keep that recovery going and growing is to do
what President Ford is urging us to do -- to follow a fiscal
course that will create permanent jobs and permanent
prosperity in the private sector.
Americans want jobs, not handouts'. Artificial, "make
work" government projects never have been and never will be
an adequate substitute for real jobs with a real future in
industry, in crafts, in the professions and in big and small
business.
Jj?
-8 In two hundred years we as a people tamed a savage
continent and transformed thirteen tiny colonies bounded
by the sea on one side and sprawling wilderness on the
other into the mightiest and most abundant nation in human
history.
Government didn't do that. People did. The original
colonists, and the millions of immigrants who followed them,
came to these shores to escape the kind of government that
over-taxed, over-regulated and, ultimately, stripped the
individual of both his material and his spiritual independence.
We are the heirs of those successive waves of men and
women from all over the globe who came here, not to be "taken
care of" by some faceless central bureaucracy, but to build
proud, free lives for themselves.
As long as we, in our turn, stand for the same principles
and live for the same ideals -- and as long as we support
men like Jerry Ford and Bill Young who defend them -- government "of the people, by the people, shall not perish from the
earth."
oOo
7-2?
for learning, travel, and general upward mobility — not
everyone understands the basic economic facts of life that
create all these benefits.
Small wonder then, that when economic difficulties like
the recent recession hit, millions of otherwise reasonable
people fall for the quack nostrums of politicians who are more
interested in promising than performing, and for quick fix
government spending programs that provide some short term
relief but only aggravate the long-term economic ills of
inflation and stagnation in the private sector.
Because of this, I believe that the time is ripe for an
economic heart-to-heart talk with the American people -especially young Americans. And I believe that organizations
like the Chamber must do even more than they are now if such a
national dialogue is to succeed.
What is at stake is not just the future of this or that
industry.At stake is the survival of the private sector, and
the individual liberties which have never long survived the
collapse of a society's free enterprise system.
Unless we get the facts across today, the America of
tomorrow -- of our children and grandchildren -- will be doomed
'to a system of economic and political bondage that is the very
opposite of all that we hold dear.
The problem already exists, as I have had ample opportunity
to observe in my job as Secretary of the Treasury. And it is
getting worse, not better. It is a question of both policy and
perception for faulty perception of the economy makes faulty
economic policy almost inevitable.
And I am firmly convinced that, taken together, misunderstanding and misdirection of the American economy have become
the central, underlying problem of our times.
Part of it is a matter of^image. Frequently, and especially to youthful idealists, those who support bigger government spending and more government domination of the private
sector are perceived as concerned, socially progressive men and
women who "care" — in a nutshell, they are seen as the humane
champions of the persecuted underdog.
7)37
On the other hand, those who warn that the government
should not — and cannot — effectively solve every new
problem that comes down the pike, and who advocate instead
the strengthening of the free enterprise system are seen as
either outdated theorists or a new generation of economic
exploiters, indifferent to human suffering and only out to
make a fast buck for themselves and their companies.
To make matters worse, surface appearances often tend to
confirm this inaccurate impression. Advocates of big government are able to wax eloquent for hours about the ills they
imagine they can cure by cranking out more currency and
soaking up more credit through massive deficit spending. They
have as many arguments as there are social, economic and
political problems — even though the spending they advocate,
as we have seen with the New Frontier's war on poverty, is
often part of the problem rather than part of the solution.
Those of us who recognize the fallacy of the big government approach have only one argument. It's the right one,
but, by dint of repetition, people are getting tired of
hearing about it. For we constantly invoke the free enterprise
system, too often without defining the freedoms and the opportunities that it, and it alone, provides. We chant a slogan,
a label, without defining it in comprehensible, human terms.
We can talk about the free enterprise system until we
are blue in the face, but it still won't mean anything to those
who do not understand what it really is and what makes it work.
It's like trying to sensibly discuss the birds and the bees
with someone who is unshakable in their belief that babies are
delivered by the stork.
People who have never seen what happens to countries with
state-controlled economies simply have no standard for comparison.
They have never witnessed the long lines of workers and
housewives who have to cue up for hours outside state-owned food
and department stores in order to buy a poor selection of
overpriced food staples and state-manufactured clothing and
merchandise.
73/
-4They don't realize what a miracle of variety, economy
and productive competition the average American shopping
center would represent to nine-tenths of the earth's people.
They have never asked themselves why a country like the
Soviet Union, with some of the largest, richest tracts of
grainland in the world, but with a government-owned and run
agricultural system, cannot even feed its people without
turning to American farmers who own their own land, make
their own decisions and feed not only our own people, but
millions of others as well.
Too often they have been taught to scoff at the very
profit and property motives which make our prosperity possible.
They have never had the opportunity to compare the
miraculous economic recovery of a free enterprise country
like West Germany, to state-controlled East Germany.
They have never lived in countries where the seemingly
idealistic dream of a non-profit, propertyless society has
turned into a nightmare reality — where the state and the
state alone dictates-what kind of education you will receive;
whether or not you will be allowed to travel; what kind of
job you can have; what you will be paid; what merchandise you
can buy with your earnings; where you will live; where you
will receive medical treatment; and, utlimately, where you
will be buried.
They have not seen first-hand the political and social
aftermath in societies where the government has destroyed
free enterprise. For the personal rights all Americans cherish —
freedom of worship, freedom of speech and freedom of association -have never long endured once economic freedom has been destroyed.
As Alexander Hamilton warned so long ago, "Power over a man's
substance amounts to power over his will."
Without the individual profit motive, people simply do
not work as hard, produce as much, or bother to come up with
as many new improvements. Whether we like it or not, it is
an immutable law of human nature.
Unfortunately, like clean air, economic freedom is something
most people don't really appreciate until it begins to run out —
and then it is often too late.
-5-
J2£JL
Sowe have reached the point where, although the free
enterprise system works, and works better than any other
economic system in effect anywhere in the world -- and although
it feeds, clothes and houses more people more affluently than
any other while serving as the underpinning of our free
society — it is somehow losing the semantic war to an alien
philosophy of government control and economic irresponsibility
that has never worked but has somehow managed to preserve an
aura of idealism and altruism that attracts many young idealists.
I am simply saying that those of us who believe in the
free enterprise system have got to do a better job of getting
our story across -- ^especially to young Americans.
All of these misconceptions would be unimportant if they
were not so misleading -- so blatantly phoney. My experience
in Washington has convinced me that almost every man and woman
in a position of high public trust cares deeply about the well
being of our people, especially those who are impoverished or
face disadvantages because of their sex or the color or their
skin.
The central question is not who cares the most, but rather
how we broaden prosperity and reduce human hardship without
sacrificing our freedom or destroying the most successful
economic system that man has ever known.
I submit to you today that if America continues down the
road toward greater governmental spending and greater governmental control over our economy and our lives -- a road that
we have been moving steadily down for several decades — then
our children, no matter how many of them are individual young
achievers, will be robbed of their personal and economic
freedoms. And, in the meantime, all of us will be condemned
to an economy riddled by chronic inflation and incurable
unemployment.
»
That is really what is at issue underneath the semantics
and the misleading labels, and young Americans have an even
greater stake in the outcome than the rest of us.
Let's look at a few facts about government spending. For
most of our history, the Federal budget stayed somewhere below
the $100 billion mark -- usually way below it.
Then, in 1962, we finally hit $100 billion — and that was
only the beginning. Seven years later, the budget broke the
$200 billion barrier and then, only four years after that, we
hit the $300 billion mark. And now, in our bicentennial year,
we have reached the point where the Federal Government is
spending $1 billion a day.
The very size of such numbers makes them almost meaningless
to the average American. But there are ways of getting the
message across. For example: suppose that on the day that
Christ was born, a man had been given $1 billion on the
condition that he or his heirs spent $1,0 00 every day, seven
days a week. How long would that $1 billion last? Adding it
up, I think you'll find that today, almost 2000 years later,
the grandchildren would still not have spent the full billion
dollars.
Yet our Federal government is spending $1 billion every
single day, and going into debt another $1 billion every
week.
And as the budget grows, the government comes to occupy a
more and more dominant role within our society.
In 19 30, government spending at all levels — Federal,
state and local -- amounted to about 12 percent of the Gross
National Product. Today, because budgets have mushroomed,
government accounts for a third of our entire national output.
And if recent trends prevail, the government's share of the
total economy could reach 60 percent before the end of this
century.
For taxpayers, the burden of paying the Government's bills
has become so heavy that many are now in open rebellion. In
the 19 74 general elections, for example, voters across the
country turned down some three quarters of all bond issues on
the ballot. But too many get around this public opposition by
voting more Federal spending without increasing taxes.
The result has been a string of Federal budget deficits
that are unparalleled in our history. In 16 of the last 17
years, the budget has been in the red. And now, just when a
balanced, healthy economic recovery has begun, the advocates
of big spending would have us launch another round of reckless
spending and runaway inflation.
It is up to us to stop them.
I wish that there was some way for television cameras
to portray this story as vividly as they did the war in Vietnam
or the race riots of earlier years. For while the visual
images are less dramatic, the problem is every bit as pressing
and important.
But, as the great 19th century historian Thomas Carlyle
once said, political economics is the "dismal science." On the
surface, it seems nothing more than a pile of charts and a
jumble of numbers so large as to be incomprehensible in everyday
terms. To put it mildly, economics seldom makes "sexy" news
J37
-7stories. And yet the economy is the one thing that affects
every other aspect of american life — the food we eat, the
quality of our education, our mobility, our freedom of choice
in careers, services and merchandise, and our material and
personal sense of pride and independence.
The smallest shock to the economy is felt in every limb of
the body politic. And that is a big story, if only a graphic,
gripping way of telling it could be found.
Consider the case of the Federal debt and its impact.
As the debt climbs rapidly upwards, we have to pay higher and
higher interest costs on it. By the end of fiscal year 1976
we will have spent $36 billion in interest payments alone.
That's more than we spent in any single year on the war
in Vietnam. It's more than a third of our national defense
budget. And it is money that could be better spent on needs
such as public transportation, health care or any of a dozen
worthy purposes.
This heavy borrowing by the government has also aggravated
inflation and increased interest rates, creating strains in
money and capital markets. This, in turn, affects everyone from
the businessman interested in expanding his plant to create new
jobs, to the young couple trying to buy their first home without
paying an arm and a leg in mortgage interest.
Reckless government spending is the basic cause of inflation
and inflation was the underlying cause of the worst recession
our country has experienced in a generation -- a recession we
are only now beginning to recover from.
It was inflation that caused a loss in real income and the
confidence of consumers, prompting the sharpest drop in consumer
spending since World War II. And it was inflation that helped
dry up the flow of savings into our thrift institutions, driving
up interest rates and causing the housing industry to collapse.
So one of our prime concerns as we proceed with the economic
recovery is to avoid another dose of the poison that brought the
recession on in the first place -- rampant inflation fed by
runaway Federal spending.
But spending isn't the whole problem. There is also the
matter of government controls and regulation for, as government
spending has grown by leaps and bounds, so too has Federal red
tape.
Did you realize that government regulatory agencies now
exercise direct control over 10 percent of everything bought and
sold in the United States and indirect: control over almost every
other sector of the private economy?
-8Did you know that it costs private industry — and that
means each one of us as consumers — an estimated $18 billion
a year just to do the paper work demanded by Federal bureaucrats?
Some of these regulations are, of course, necessary. But
many of them are counter-productive, wasteful or obsolete. And
as President Ford has repeatedly stated, those regulations and
regulatory bodies that no longer serve a useful purpose should
be abolished, before we strangle in our own red tape.
Today happens to be Abraham Lincoln's birthday and, all
over the country, people are delivering Lincoln Day addresses
about the man who was probably the single greatest President in
the history of the Republic. Yesterday, in Clearwater, I spoke
at a Lincoln Dinner myself.
In preparing my speech for that occasion I read a number
of Lincoln's own words. What struck me most about them was
the fact that, although they were all more than a century old, they
were still vital, alive and full of meaning today. One quote in
particular stuck with me.
Speaking in 1865, Lincoln said, "I have faith in the
people....the danger is in their being misled. Let them know
the truth and the country is safe."
That is what I have been trying to stress here this
evening — the need to get the truth, the economic facts of
life, across to the American people, especially the young
Americans who must lead us in the years ahead.
Given the truth, I am confident that, as always, Americans
will rise to the challenge.
-oOo-
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
PALM BEACH ECONOMIC COUNCIL
PALM BEACH, FLORIDA, FEBRUARY 13, 19 76
Thank you, Jerry Thomas, President J. B. Stancliffe,
Executive Vice President Harold Staymari, Ladies and
Gentlemen.
It is a special pleasure for me to be here in Palm
Beach, especially before such a distinguished audience.
The Economic Council is still a very young group, only a
year old, but you have already built up an impressive
record of community service. Much of the credit for the
way that Palm Beach has managed to combine new ideas and
new businesses with a respect for the traditional charm
and quality of life here belongs to your group. My hat is
off to you.
I always welcome the chance to visit Palm Beach, but
on this particular occasion, I have an added sense of mission. I feel that, in this busy election year, with a
presidential primary just around the corner, Floridians
deserve a little change of pace; they deserve to hear from
at least one out-of-state speaker who isn't running for
President.
So here I am, asking not for your votes, but for a
few minutes of shared thoughts on some of the basic facts
and basic problems facing America -- the sort of thing that
sometimes gets buried in the political rhetoric of an election year.
The late Raymond Moley once said that "A political war
is one in which everyone shoots from the lip," and it was
Henry Adams who warned thatv"Practical politics consists in
ignoring facts."
u/s- 0 99
- 2 Well, I am not here to shoot from either the hip or
the lip. 'And, rather than ignore the facts, I would like
to discuss them with you — important economic facts and
trends that will shape the destiny of our country long
after the political sound and fury of 1976 have been forgotten.
Political rhetoric may make more dramatic headlines,
but, in the long run, the cold, dry realities of economic
policy will have more impact on the kind of life that we
and our children lead.
And I appear before you today as Washington enters
the first phase of an economic battle between the President
and the Congress on what we should do and where we should
be heading in the coming year, and beyond.
In all of the material that will be flowing forth from
the White House during this period, one point will be abundantly clear: We believe that the first and foremost task
of this Nation in 1976 is to restore the vitality of our
economy. We are encouraged by the progress that was made
during 1975:
As you will recall, the year 1975 opened with
inflation raging at 12%; we have cut that rate nearly in
half — to about 7 percent.
During the spring of 1975, the unemployment rate
reached 9 percent; today it is at 7.8 percent.
With the January increase of 800,000 employment
nearly all of the jobs lost during the recession have now
been restored.
During the third quarter of 1975, we registered the
biggest single jump in the GNP in 2 5 years and the fourth
quarter's pace, while slower, still indicates the recovery
is maintaining its momentum.
There are also many other indices of an economy
that is regaining its health — higher industrial production,
growing retail sales, and a very bullish stock market.
Thus we made considerable headway in 1975, and we will
make even more in 19 76. But it's not good enough and this
is certainly no time for complacency. The unemployment rate
is far higher than we can tolerate. And inflation is by no
means under control. in fact, it remains the most dangerous
enemy of future economic growth, and we must do nothing to
unleash another inflationary spiral. The ruinous inflation
that crested in 1974 was the chief cause of the severe
recession of 1975; if we embark once again upon excessive
- 3 fiscal and monetary policies resulting in double digit
inflation, I will guarantee an even worse recession than
before. Please let us not permit the pain and suffering
of the 1974-75 recession be in vain.
There will be a tendency in Washington in 1976,
especially as the elections draw closer, to look with great
alarm upon the current unemployment figures and inflation
figures. You are going to hear a great deal more rhetoric
in coming months about the so-called indifference of this
Administration to push hard enough, to spend enough, to act
decisively enough in solving our problems. We must not fall
prey to those who offer us instant cures — the so-called
compassionate people who promise us everything, but deliver
us only one thing: inflation.
In judging this matter, I urge that you step back for
a moment and ask yourselves a few basic questions:
How is it that the richest and most powerful country
on earth could wander into this economic quagmire?
How could the most dynamic economic system in the
world become infacted with the diseases of both inflation
and unemployment at the same time?
Indeed, where did we lose our way as a people?
I believe it is essential to decide how we got into
this mess before we can really determine the best way to
get out. Otherwise, we may just become more deeply mired.
Economists argue about this a good deal. Politicians often
ignore this question entirely, and seek instead to capitalize
on the effects of problems. But to me, there is no real
mystery about how we got here, nor what we must do.
It is clear, for instance, that the economic and social
problems of today do not spring from a lack of concern in
Washington. In the 10 years after President Eisenhower left
office, the Congress increased the number of domestic spending programs from about 100 to over 1,000.
It is also clear that we have not failed from a lack of
compassion. Since 1960, this Nation has spent over one
trillion dollars on social programs to support people and
communities that needed help. 7 3 percent of our entire
budget is now committed to social (non-defense) programs.
The compassion and generosity of the American people should
not be in question.
- 4 Nor can we say that our problems stem from a lack of
trying to control the business cycle. In the 1960's, it
was popular to believe that the Government could mandate
permanent prosperity through the Great Society, could finetune the economy and abolish the ups and downs of economic
growth. And we tried to do that with the tools of fiscal
and monetary policy, making one adjustment after another.
Nor do our troubles result from a lack of effort on
the part of the Government to control business — big and
small. Today we have an army of approximately 100,000
Government employees whose mission is to regulate and control almost every activity of the private sphere.
Nor have we had any lack of vision from our leaders.
The staple of Washington life has become the politician
with grand visions and even grander promises of what can
be accomplished if he can only spend more of our money or
can be given greater authority over our lives.
So, over the past 10-15 years, the Government has
tried many, many solutions. Yet the problems persist and
our people grow frustrated and disillusionedDoes this mean there are no answers? Of course not.
What it means, I would suggest, is that we have been taking
fundamentally the wrong approach. We suffer not from a
lack of Government action, but from an excess of Government
action.
The trouble with the Federal Government is that it is
trying to do more than its resources permit, to do many
things that it cannot do very well, to do some things that
it should never do at all, and to do all these things at the
same time. That just does not make common sense.
Excesses in the Government have been most apparent, I
would suggest, in three critical areas affecting the economy
Fiscal policy;
Monetary policy; and
Regulatory policy.
No one who has followed the pattern of Federal spending
m recent years can fail to be impressed by its explosive
growth.
- 5 The Federal budget has quadrupled in 15 years;
We have had 16 budget deficits in 17 years;
And we have doubled the national debt in just 10
years time.
The Federal Government today is the Nation's biggest
single employer, its biggest consumer, and its biggest
borrower. And if present trends continue until the end of
the century, Government at all levels will account for almost
60 percent of our gross national product. Let there be no
doubt that if Government ever becomes such a dominant part
of our society, our economic freedoms will disappear, and
when we lose them, our political and social freedoms will
not be far behind.
Partly to accommodate the Federal Government's borrowing
needs in the private markets, there has also been a less
noticed but equally significant shift in monetary policies.
From 1955 to 1965, the money supply of the United States was
growing at approximately 2-1/2 percent a year, and we enjoyed
relative price stability. From 1965 to the present, however,
the average rate of growth has more than doubled, and it is
no accident that during this period we have also had spiraling
inflation.
This past decade has also seen unparalleled growth in
the regulatory apparatus of the government. Regulatory
agencies of the Government now exercise direct control over
10 percent of everything bought and sold in the United States
and indirect control over almost every other sector of the
private economy.
Whenever I start talking about the bureaucracy in
Washington, I am reminded of a remark by Pope John. The Pope
was entertaining a visitor once who asked him: How many
people work in the Vatican? The Pope though for a second
and said — "About half." Well, that's usually true in the
bureaucracy too. But the Federal regulators are a different
breed of cat — they seem to work harder than anybody else
in Washington, and they're even more creative, as their
results certainly show. I'm told that American people now
spend over 130 million work hours a year filling our Federal
forms. That, too, just doesn't make good common sense.
<
&
/
- 6 The regulatory process has now become so burdensome,
for all businesses big and small, that it is threatening
to strangle much of free enterprise in red tape. Consider
also the staggering costs involved. One major firm estimates that in 1974 it spent $1.3 billion dollars complying
with or in anticipation of government regulation at all
levels. It has been estimated that the American people
paid the equivalent of $2,000 per family in increased costs
for all the goods and services they purchased because of
regulation.
When you add up all these factors of excessive government spending, excessive expansion of the money supply, and
excessive governmental regulation, one conclusion seems
inescapable: Both our inflation and our unemployment should
bear a label -- made in Washington, D.C.
The fact is that governmental excesses of the past 15
years became a strong, underlying cause of inflation during
the 1960's, and they remain so today. The rise in government
spending has added enormously to the aggregate demand for
goods and services in the economy, thus forcing up prices.
It is also clear that as the forces of Big Government
have been fed and nourished, our private enterprise system —
the system that provides five out of every six jobs in the
country and is the driving force of our society — has
become sadly undernourished. We have gradually channeled a
higher and higher percentage of our resources into consumption
and Government spending and less and less into savings and
investment. As a result, the United States since 1960 has
had the lowest rate of capital investment of any major
industrialized country and one of the lowest rates of productivity growth. There can be no doubt that higher productivity is the secret to a higher standard of living. Thus,
it is clear, as President Ford said, that we must strike a
new balance in our economy — a balance that favors a much
stronger and healthier free enterprise system.
If the country could grasp these central truths — and
I beleive people are beginning to understand and appreciate
them — then it would be much easier for all of us to agree
upon the solutions. As I have said, I believe the solutions
are relatively straightforward — and, I might add, they are
the basic policies of this Administration.
^The centerpiece of our economic policies is the President's proposal to cut the growth in Federal spending and
to return the savings to the American taxpayer in the form
of a major tax cut.
- 7 In the last several months, the President has spent
literally hundreds of hours trying to pare down the budget —
in fact, he spent more time on this budget than any President in a quarter of a century. The result was a very
realistic and solid budget that calls for a $28 billion cut
in projected spending growth. Instead of spending over $420
billion, the President is asking that in fiscal year 1977 —
which begins this October 1 — that we limit spending to $394
billion. We should realize that in the last two years alone,
Federal spending has grown by 40 percent. Under the President's proposal, next year's spending increase will be limited
to 5.5 percent — the smallest increase since the days of
President Eisenhower.
As the President said in his State of the Union address:
The only way to hold down the cost of living is to hold down
the cost of Government. No Government can spend more than
it makes, year-in, year-out, without reaching a point of
financial collapse. None of us want the tragic experience
of New York City this past year to become a preview of our
future as a Nation.
By holding down the growth in Federal spending, we can
also afford additional tax cuts and thus leave more money
in private hands where it can do the most good.
What the President is saying is this: We can have a
much bigger and much better tax cut if we will only cut the
growth in spending.
I think two points are critical: One, the tax and
spending plan would put us on the road to balancing the
Federal budget within three years. Secondly, if we stay on
that road, I believe it should be possible to enact another
tax cut before the end of the decade.
The Government has other ways to curb inflation. We
are seeking greater competition in private industry through
antitrust laws and we are trying to lower barriers to
international trade. But the key is to restrain Federal
spending, reduce the horrendous Federal deficits, and strengthen
the free enterprise system.
If we are to fulfill our promise as a Nation, it is
equally vital that there be enough jobs. The President's
tax and spending cuts are a major part of that effort. But
we can and must do more. We must offer the American people
and American industry much greater incentives to invest in
the future — to expand our supply of housing, to build new
plants and equipment, to modernize industry, to expand our
energy resources, and of greatest importance, to accommodate
a growing labor force. The capital investment needs of the
- 8 future are extremely large: about $4-1/2 trillion in the
next decade — or three times as much as we spent in the
last decade.
Most of the responsibility for raising new capital
must lie with the private sector — a private sector that
is invigorated by getting the government out of the marketplace, invigorated by a reduction in taxes, and invigorated
by striking a new balance that favors less consumption and
government spending and more savings and investment.
Last summer, on behalf of the Administration, I proposed a plan that would eliminate the double taxation of
corporate dividends and would thus encourage greater private
investment. Most of our European competitors have already
adopted this tax approach, and I firmly believe it is time
for the United States to catch up. That tax plan remains a
central part of our economic strategy within the Administration.
Furthermore, the Administration is advocating a broadened
stock ownership plan to encourage more Americans to invest in
American-owned companies.
Another major aspect of the President's economic program
is in the regulatory field. It is even more difficult to
achieve reform of Federal regulations than to fill out the
Federal forms that go with them, but we are determined to try.
Specifically, we are now seeking to lighten the regulatory
burden in four key areas — banking, airlines, trucking and
railroads — and we are currently investigating what can be
done in others. It is no accident, we believe, that three of
the industries in greatest difficulty today — airlines,
railroads and utilities — are also among the most highly
regulated industries in the country.
If time permitted, I would like to talk about many of
the other aspects of policies — what we are seeking to do
in energy, what we are trying to achieve in our international
policies, the cushions that we are placing beneath the unemployed, etc.
But let me conclude with these few observations:
As we enter our third century as a nation, I believe
the time has come not to reappraise our dedication to a
better life for all — that dedication is clear — but to
reappraise what we can pay for and how we can do it. The
current plight of New York City, the disease that afflicts
the British economy, and the overwhelming size of our own
tS are ali
f^eru\
9 r a v e warnings to us. We can pay
tor what we now have and provide for the future only if our
J77
great capitalist economy does its job -- produces goods in
a free market and makes a sufficient profit.
I am sick and tired of people apologizing for the free
enterprise system. It has given this country the highest
standards of living and the greatest prosperity ever known,
and of most importance, has helped to give us the greatest
freedom ever known to man. And it will continue to do that
unless it is crushed by the juggernaut of Big Government.
What we need are not fewer but more capitalists in the United
States -- more people with a real and direct stake in the
profits generated by a productive economy. We cannot continue
to have more and more of our citizens involved only in receiving
benefits from the government, and fewer and fewer people
responsible for paying for the benefits. We must broaden the
base of those who work and narrow the base of those who are
able but don't want to work.
President Ford urged that we strike a "new balance" in
our national life:
A balance that favors greater freedom and vitality
for our private enterprise system;
A balance that favors greater honesty and realism
in dealing with the challenges of our time.
These are great goals — goals worthy of the greatest
nation on earth. We should not begin our Bicentennial year
by retreating into the past, but by going forward into the
future with a common combination of patience, realistic hope,
courage, and common sense.
If we work together with common purpose and conviction —
with pride in ourselves and our Nation — the goals we share
today can become the first achievements of our third century
together.
President Ford has set a course which points us in the
right direction and will permit us to get a grip on these
problems, but it will take several years, not months, to bring
this about. Unfortunately, the election is only a bit over
nine months away. There will be calls from the opposition
for "sweeping changes" and "broad new initiatives" which will
really mean bigger spending, bigger deficits and ultimately
bigger governmental control of the economy. We must persuade
the American people that this course is wrong and that the
other approach is much sounder in the long run. The real
choice is between greater government control or greater individual freedom. That is the decision before us.
Thank you.
-oOo-
Contact: James C. Davenport
Extension: 8585
February 13, 19 76
FOR IMMEDIATE RELEASE
TREASURY DEPARTMENT ANNOUNCES
PRELIMINARY COUNTERVAILING DUTY DETERMINATION
ON CAP SCREWS FROM ITALY
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 cap screws, 1/4" in diameter and over, from Italy 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 February 17, 19 76.
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,
the Treasury has until August 11, 19 76, in which to make a
final determination.
The Treasury's preliminary determination concluded that
the rebate of certain taxes on the subject merchandise under
Italian Law 6 39 constitutes bounties or grants. If a final
affirmative determination is made, the Countervailing Duty
Law requires the Secretary of Treasury to assess an additional
duty on merchandise benefitting from such bounties or grants.
During calendar year 19 74 imports of cap screws, 1/4" in
diameter and over, from Italy were valued at $1.9 million.
During January-October 19 75 imports of the subject product
were valued at $1.7 million in comparison with $1.5 million
during January-October 19 74.
*
WS-647
*
*
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JkDepartmemoftheJREASURY
TELEPHONE 964-2041
J7&
FOR IMMEDIATE RELEASE
February 13, 1976
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.8billion of 13-week Treasury bills and for $3.6 billion
of 26-week Treasury bills, both series to be issued on February 19, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED 13-week bills
COMPETITIVE BIDS: maturing May 20, 1976
High
Low
Average
Price
Discount
Rate
Investment
Rate 1/
98.781
98.769
98.773
4.822%
4.870%
4.854%
4.96%
5.01%
5.00%
26-week bills
maturing August 19, 1976
Price
Discount
Rate
Investment
Rate-1/
97.407
97.364
97.386
5.129%
5.214%
5.171%
5.35%
5.44%
5.40%
Tenders at the low price for the 13-week bills were allotted 74%.
Tenders at the low price for the 26-week bills were allotted 5%
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Boston
$ 106,800,000
New York
3 ,714,165,000
Philadelphia
59,430,000
Cleveland
162,615,000
Richmond
27,045,000
Atlanta
39,485,000
Chicago
301,780,000
St. Louis
58,285,000
40,675,000
Minneapolis
72,390,000
Kansas City
46,500,000
Dallas
San Francisco, 131,470,000
T O T A L S 760, 640, 000
Accepted
$
77,200,000
2,160,260,000
59,430,000
82,615,000
19,045,000
35,545,000
177,780,000
31,525,000
27,895,000
55,965,000
21,500,000
52,690,000
Received
Accepted
$
28,740,000 $
28,740,000
4,063,935,000
2,995,935,000
4,460,000
4,460,000
137,120,000
92,120,000
34,780,000
34,780,000
26,790,000
26,790,000
216,975,000
186,975,000
39,985,000
34,985,000
36,690,000
36,690,000
17,340,000
15,840,000
17,140,000
17,140,000
151,195,000
126,195,000
$2, 801,450, 000 a/ $4,775,150,000
S3,600, 650,000 b/
a/Includes $ 371,515,000 noncompetitive tenders from the public.
b/Includes $151,490,000 noncompetitive tenders from the public.
J7 Equivalent coupon-issue yield.
WS-648
777?
FOR IMMEDIATE RELEASE
February 13, 1976
WILLIAM F. RHATICAN
NAMED SPECIAL ASSISTANT TO THE SECRETARY FOR PUBLIC AFFAIRS
Secretary of the Treasury William E. Simon today announced
the appointment of William F. Rhatican of South Orange, New
Jersey as Special Assistant to the Secretary for Public Affairs
for the Department of the Treasury. He will also be responsible
for the public affairs activities of the Secretary in his
capacity as Chairman of the Economic Policy Board.
As Special Assistant, Mr. Rhatican is responsible for
management of all the public affairs policies, plans and
programs of the Treasury Department.
Prior to joining the Treasury Department, Mr. Rhatican
served as Assistant to the Secretary of Commerce for Public
Affairs and Director of Communications. He was appointed
Assistant to the Secretary and Director of Communications with
the Department of the Interior by Rogers C.B. Morton in October
1974 and joined the Commerce Department when Mr. Morton was
named Secretary in May 1975.
Prior to his service with the Interior Department,
Mr. Rhatican was Vice President, Public Relations and Communications, for the American Paper Institute in New York. He also
served three years on the White House staff directing mediaoriented projects and as liaison to the Advertising Council.
Earlier he was Partner and Account Executive with Advance News
Associates, Elizabeth, New Jersey, specializing in community
relations for industry and for state and local government
agencies from 1965 to 1970.
Mr. Rhatican was born in Mt. Vernon, New York on
September 18, 1940, and graduated in 1962 from Seton Hall
University in South Orange, New Jersey.
Mr. Rhatican is married, with two children, and lives in
Alexandria, Virginia.
oOo
WS-649
DEBT LIMIT
BRIEFING MATERIAL
HOUSE COMMITTEE ON WAYS AND MEANS
177
Page
Public debt subject to limitation
fiscal years 1976 and 1977, monthly
1
Receipts and outlays by fund group 2
Unified budget, monthly 3
Federal funds budget, monthly 4
Trust fund receipts and outlays 5
Off-budget agency outlays, monthly 6
Federal Financing Bank, interest cost saving 7
Federal revenue estimate assumptions 8
Economic assumptions in FY 1977 budget 9
Budget estimating errors 10
Federal Reserve holdings of Treasury securities. ... 11
Treasury borrowing program 12
Treasury 7-year note offering 13
February 1976 Treasurv Financing 14
Treasury bond authority:
Hypothetical Interest Cost Savings
15
1
K
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1976
Based on: Budget Receipts of $298 Billion,
Budget Outlays of $374 Billion,
Off-Budget Outlays of $9 Billion
($ Billions)
Operating
Cash
Balance
1975
Public Debt
Subject to
Limit
-Actual
June 30
7.6
534.2
July 31
4.2
539.3
August 31
3.6
548.7
September 30
10.5
554.3
October :31
10.3
563.1
November 30
6.5
567.9
December 31
8.5
577.8
12.0
585.5
With $3 Billion
Margin for
Contingencies
1976
Januarv !31
-EstimatedFebruary 29
6
592
595
March 15
6
601
604
March 31
6
607
610
April 15
6
615
618
April 30
6
606
609
May 31
6
621
624
June 15 i(peak)
6
627
630
June 30
6
621
624
*v
DATE: February 9, 1976
3rt
PUBLIC DEBT
SUBJECT TO LIMITATION
TRANSITION OUARTER
JULY-SEPTEMBER 1976
Based on: Budget Receipts of $82 Billion,
Budget Outlays of $98 Billion,
Off-Budget Outlays of $4 Billion
($ Billions)
1976
Operating
Cash
Balance
Public Debt
Subject to
Limit
With $3 Billion
Mairgin for
Comtingencies
-EstimatedJune 30
6
621
624
July 31
6
632
635
August 31
6
642
645
September 30
6
640
643
DATE:
February 9, 19?6
7/
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1977
Based on: Budget Receipts of $351 Billion,
Budget Outlays of $394 Billion,
Off-Budget Outlays of $11 Billion
($ Billions)
Operating
Cash
Balance
1976
Public Debt
Subject to
Limit
-Estimated-
With $3 Billion
Margin for
Contingencies
September 30
6
640
643
October 31
6
650
653
November 30
6
659
662
December 31
6
663
666
Januarv 31
6
665
668
February 29
6
680
683
March 31
6
695
698
April 15
6
703
706
April 30
6
691
694
May 31
6
705
708
June 15 (peak)
6
711
714
June 30
6
694
697
July 31
6
699
702
August 31
6
704
707
September 30
6
707
710
1977
DATE:
February 9, 1976
27Z
BUDGET RECEIPTS AND
OUTLAYS BY FUND GROUP
($ Billions)
Transit
Quart
Actua
Fiscal Year
1975 Actual
Fiscal Year
1976 Estimated
Federal Funds
$187.5
$198.4
$54,
Trust Funds
118.6
134.8
33.
Interfund Transactions
-25.1
-35.6
-6.
Unified Budget
281.0
297.5
81,
Receipts:
Outlays:
Federal Funds
238.5
276.9
69,
Trust Funds
111.2
132.2
34
Interfiund Transactions
-25.1
-35.6
-6,
Unified Budget
324.6
373.5
9l
-51.0
-78.5
-15,
2.5
- 1,
Surplus or Deficit (-):
Federal Funds
Trust Funds
Unified Budget
7.4
-76.0
-43. 6
DATE:
Februarv 12, 1976
UNIFIED BUDGET MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
Outlays
Surplus or
Deficit (-)
July $ 20.2
$ 31.2
$-11.1
August 23.6
30.6
- 7.0
September 28.6
29.0
-
October 19.3
32.4
-13.1
November 21.7
29.4
- 7.7
December 26.0
31.8
- 5.8
January 25.5
31.9
- 6.4
February 20.4
30.7
-10.3
March 17.7
31.9
-14.2
April 35.1
33.3
1.8
May 23.3
31.7
- 8.4
June 36.1
29.6
6.6
$373.5
$-76.0
July 22.8
34.3
-11.5
August 26.8
32.2
- 5.4
September 32.3
31.5
.8
$98.0
$-16.1
Receipts
1975 - Actual -
.4
1976 - Estimated -
Fiscal Year $297 . 5
Transition Quarter $81.9
DATE:
February 12, 1976
?7V
FEDERAL FUNDS MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
Surplus or
Receipts
Outlays
Deficit (-)
1975 - Actual July $ 13.4 $ 27.5 $-14.0
August 13.0 21.0 - 8.0
September 22.3 20.2 2.1
October o. . 13.6 21.6 -8.1
November 13.4 20.0 - 6.6
December 19.8 27.2 - 7.4
1976 - Estimated January 18.3 24.0 - 5.2
February 10.0 20.7 -10.7
March 10.4 20.5 -10.1
April 25.2 23.5 1.7
May 10.2 22.0 * -11.8
June 28.3 28.7 - .4
Fiscal Year $198.4 $276.9 $-78.5
July 15.2 27.9 -12.7
August 14.7 21.3 - 6.6
September 24.8 20.6 4.2
Transition Quarter- $ 54.8 $ 69.8 $-15.0
Detail may not add to total due to rounding.
DATE: February 13. 1976
5
TRUST FUNDS RECEIPTS,
OUTLAYS AND SURPLUS OR DEFICIT
TRANSITION QUARTER
($ Billions)
Surplus
Receipts
ederal Old-Age Survivors, and
Disability Insurance Trust Funds
Outlays
$18.9
or
Deficit
$19.9
$-1.1
.9
-.4
1.7
1.6
.1
.2
.1
.1
ealth Insurance Trust Funds 5.1 4.6 .5
^employment Trust Fund 3.4 1/ 3.7 -.3
ailroad Employees Retirement
7unds
.5
ideral Employee Retirement Funds 2.1 2.3 - .2
Lrport and Airway Trust Funds • - • .3 .3 *
Lghway Trust Funds 1.9 1.9 *
,>reign Militarv Sales Trust
'und
*
iteran Life Insurance Trust
'und
her Trust Funds 1.8 1.6 2/ .2
ital Trust Funds $33.8 $34.9 $-1.1
Includes $1.1 billion advances from general fund.
Includes net activity of trust revolving funds of $- .2 billion.
Less than $50 million.
DATE:
February 12, 1976
(-)
TRUST FUNDS RECEIPTS,
OUTLAYS AND SURPLUS OR DEFICIT
FISCAL YEAR 1976
($ Billions)
Surplus
Receipts
Federal Old-Age Survivors, and
Disability Insurance Trust Funds
Outlays
$70.8
or
Deficit (-)
$73.8
$-3.0
3.3
3.5
- .2
13.0
8.5
4.5
Health Insurance Trust Funds 18.6 17.4 1.1
Unemployment Trust Fund 16.7 1/ 18.5 -1.8
Railroad Employees Retirement
Funds
"
Federal Employee Retirement
Funds
Airport and Airway Trust Funds... 1.1 .8 .3
Highway Trust Funds 6.3 6.6 -.3
Foreign Military Sales Trust
Fund *.
6.5
5.9
Veteran Life Insurance Trust
Fund
.9
.7
-6
.2
Other Trust Funds 7.0 5.9 2/ 1.1
Total Trust Funds $134.8 $132.2 $ 2.5
1/ Includes $8.5 billion advances from general fund.
7/ Includes net activity of trust revolving funds of $-1.1 billion.
Detail may not add to total due to rounding.
DATE:
February 12, 1976
7*7
OFF-BUDGET AGENCY OUTLAYS MONTHLY
FISCAL YEAR 1976 AND
THE TRANSITION QUARTER
Federal
Financing
Bank 1/
1975
July
Other 2/
Total
- Actual $.6
*
$.6
August
.7
$-1.0
- .3
September
.1
.5
.6
October
.5
.8
1.3
November
.6
.3
.9
December-
.2
.6
.8
1.2
.5
1.7
February
.8
.3
1.1
March
.5
.5
1.0
April
.2
.5
.7
May
.1
.5
.6
June
.2
.3
.5
1.8
.1
1.9
August.
.7
.4
1.1
September.
.4
.8
1.2
1976
January
- Estimated -
Fiscal Year: $5.6 $3.8 $9.3
July
Transition Quarter . . $2.8 $ 1.3 $4.1
1/The outlays of the Federal Financing Bank reflect only its purchase of
Government-guaranteed obligations, not its purchases of agency debt, in
order to prevent double counting. Virtually all of the other off-budget
activity is financed through debt issued to the Federal Financing Bank.
2/Export-fc©£)Xt^Baak_Epstal Service and U.S. Railway Association.
DATE: F^uary 13, 1976
OPTIONAL F O R M NO. 10
S.V^iJre?." .».-...«
UNITED STATES GOVERNMENT
"7
Department of the Treasury
Washington, D.C. 20220
Memomndum
TO
Mr. Snyder DATE: February 12, 1976
FROM
Mr. Cook L/77>
SUBJECT:
Federal Financing Bank
The Federal Financing Bank has saved the federal and
federally-guaranteed borrowers who use the Bank $340 million
in the 20 months of the Bank's existence.
The amount of savings is based on the conservative assumption
that the agencies who have borrowed from the Bank on the
average could have raised funds in the market at a cost of 1/2 of
1% above marketable Treasury obligations of similar maturities.
Whereas one or two of these agencies who were established
in the market, for instance the Tennessee Valley Authority,
were able to raise funds at rates reasonably close to Treasury s
cost, many of the guaranteed borrowers whose debt was less well
known and who raised funds through negotiated offerings paid
rates substantially above the Treasury curve.
/>^0\
501 0-1 OB
Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan
"?6-tf16
8
7*7
Federal Revenue Estimate
Assumptions
The Department of Treasury is responsible for estimating
Federal revenues as a basis for budget planning. These estimates
are based importantly upon GNP forecasts by a trio of the
Treasury, the Council of Economic Advisors and the Office of
Management and Budget. The key components for revenue estimating
purposes are nominal Gross National Product, personal income/
wages and salaries, and corporate profits. As contained in
Budget (p. 25)/ these forecasts are: (in billions)
Calendar Year
1976
1977
GNP $1,684 $1/890
Personal income
Wages and salaries
Corporate profits (after tax)
1/386
892
156
1/538
1/001
181
Using these general forecasts and specific revenue information obtained from a variety of sources/ the Treasury prepares
collection estimates.
The estimating process obviously depends upon several factors:
(1) the accuracy of the GNP forecasts; (2) changes in the mix
of economic results which cause adjustments in estimates of
personal income and expenditures, business spending and profits,
unemployment/ government transfer payments, etc.; (3) the
refinement of statistical estimating procedures; and (4) the
frequent revision of tax legislation which can be anticipated
only in part. As a result, actual receipts always vary from
those which are forecast. However, the discrepancy usually is
relatively small. Budget estimating errors over the past six
years together with 1950 and 1960 are summarized in Table 1.
PROJECTIONS
SHORT-RANGE ECONOMIC FORECAST
(Calendar years: dollar a m o u n t i in billions)
Forecast
Actual
1974
Item
Cross national product:
Current dollars:
Amount..
_
Percent change
Constant (1972) dollars:
Amount
Percent change
_
Incomes (current dollars):
Personal income
Wages and salaries
Corporate profits
Price level (percent change):
G N P deflator:
Year over year
Fourth quarter over fourth quarter
Consumer price index:
Year over year
December over December
Unemployment rates (percent):
Total.
.-
-_-
— 1 —
._.
Insured '
Average Federal pay raise, October (percent)..
Interest rate, 91-day Treasury bills (percent) *
]
1975
1976
$1 .407
$1,499
7.7
6.5
$1,684
12.4
$1,890
12.2
$1 .211
$1,260
$1,332
-1.8
$1,187
-2.0
6.2
5.7
$1 .155
$1,246
$1,386
763
132
802
118
892
156
$1,538
1.001
9.7
11.4
8.7
6.3
5.9
5.9
6.2
6.3
11.0
12.2
9.1
6.9
6.3
5.9
6.0
5.9
5.6
3.8
5.5
7.9
8.5
7.2
5.0
5.8
. 7.7
6.9
5.4
8.6
5.5
6.3
4.7
5.5
1977
181
Insured u n e m p l o y m e n t a> a percentage of covered e m p l o y m e n t .
Average rate on n e w issuei within period; the rate s h o w n for 1976 was the current market rate
it the time the estimates were m a d e .
2
10
TABLE
X
Budget Estimating Errors
Overestimate (+) or Underestimate (-)
as a Percent of the Actual Figure
Fiscal
year
Estimates made 18 months
prior to the end of the
fiscal year
Estimates made 6 months
prior to the end of the
fiscal year
Outlays
Outlays
Receipts
Receipt
1950 1/
+ 4.1
+10 t 3
+7.8
+ 1.9
1960 1/
-0.3
-1.7
+1.6
+ 0.2
1970 2/
-0.7
+2.6
+0.7
+2.9
1971 2/
-5.0
+7.3
+0.6
+3.1
1972 2/
-1.1
+ 4.3
+2.0
-5.2
1973 2/
-0.1
-4.9
+ 1.3
-3.1
1974 2/
+0.1
-3.4
+2.3
+ 1.9
1975 2/
-6.2
+5.0
-3.4
-0.8
Office of the Secretary of the Treasury
Office of Tax Analysis
September 19, 197 5
1/ Administrative budget.
2/ Unified budget. The first estimate on a unified budget basis was
prepared in January 1968.
11
J^Jt
Net Change in Federal Reserve Holdings
of Treasury Securities
($ millions)
: Net Change
:
in
i Holdings
1975
Jan.
844
Net Purchases
of Bonds
Over 4-1/4%
Net Change
in
Other Securities
28
816
Fab.
-258
82
-340
Mar.
332
201
131
Apr.
6,428
165
6/263
May
-2,224
3
-2,227
Jun.
-873
109
-982
Jul.
-2/866
Aug.
663
Sep.
4/452
Oct.
186
-2,866
47
616
124
4,328
—
186
9
Nov.
-2/047
244
-2/291
Dec.
2/797
73
2,724
1976
Jan.
1/948
64
1,884
Office of the Secretary cf the Treasury
Office of Debt Analysis
February 11, 1976
FTCB Market Purchases o f Bonds Issued Under $10 Billion Authority
July 1974 - Januarv 1976
($ millions)
•fcr.th
Total 1/
7%
6 3/8%
6 3/9^
6 1/93
7 1/2?
Aug 81
Feb 32
Aug 84
Nov 86
Aug 88-23
1/2*5
3/4'
Feb 93
May 93-93
May 24-99
8 1/4$
May 90
7 7 /Oft
Feb 95-00
w»
a . / *•/ J
May 00-05
9 3/<
Aug 95-
1274
July
Aucr
+ 36
16
Sso
OcXcv
Dec
-r
24
35
u.
25
+ 22
8
9
!!>/:>
Jar.
Fr/o
T28
. *. *"""
_^of>-
i
Apr
+1C5
-: 3
-J-1C2
2
Jur.e
o
2
1
- 82
15
13
15
]_
]_
10
2
5
21
14
23
12
107
64
52
5
10
• 45
4
2
3
13
O
A
—0
12
10
17
10
49
44
", r
3
45
— j
Aucr
Saot
+ 47
+124
Xcv
+
]_
o
244
T_
- 73
1
3
T[
*3
1
^
2
17
4.
5
24
T
^
0
23
191
1976
Jan
+ 64
21
Office of the Secretary of the Treasury
Office o f Debt Analysis
Note:
Figures m a y not add t o totals due to rounding.
22
February 11, 1976
Treasury Borrowing Program
During the next nineteen months the Treasury will be
required to raise $85-90 billion of new money in marketable
securities to refund over $51 billion of maturing marketable
securities held by private investors.
In accomplishing this unprecedented financing job, the
Treasury will, insofar as its statutory authorities and
market conditions permit, make maximum use of the coupon
market in order (1) to minimize the build-up in floating,
highly liquid short-term debt and (2) to avoid, insofar as
possible, increasing the already severe structural problems
summed up in the decline in the average maturity of the
privately-held marketable debt.
The instruments available to Treasury for these purposes,
until such time as its statutory authorities are amended,
include:
—13 and 26 week bills, auctioned weekly, in current
amounts now in the $7 billion range,
--52 week bills, auctioned every four weeks, in
current amounts now in the $3 billion range,
--2-year cycle notes/ at the end of each calendar
month/ which have been auctioned in amounts of
up to about $3 billion,
—4-year cicle notes, at the end of each calendar
quarter, which have also been auctioned in amounts
up to $2.5 billion,
--Refunding issues, typically with 3, 5, or 7-year
maturities, which have been auctioned in amounts
from $3.5 billion for the shorter issues to $2.5
billion for the longer issues; with an overall
limit of around $6 billion in any refunding.
—5-year cycle notes, which have been auctioned on an
experimental basis in the first month of a calendar
quarter to mature on a regular quarterly refunding
date. Use of 5-year cycle notes, however, will
likely preclude use of this maturity in regular
refundings.
12
<2&
Apart from the auction method, either on a price basis
against a fixed coupon or on a yield basis, the Treasury has
recently used fixed pricing of a coupon issue; e.g., the
7-year note offered at par in the February 1976 refunding.
This technique appears to allow a larger offering to be made
than the auction technique by placing more debt directly
with final investors, but raises policing problems to assure.
that the interest attracted is primarily investment interest.
Estimated Market Borrowing Requirements
.
.
New Money \ Refunding \
March 1-Ju e 30, 1976
$19-24
9-3/4
Total
28-3/4-33-3/4
July 1September 30, 1976
18-1/2
7-3/4
26-1/4
October 1, 1976September 30, 1977
47-1/2
34-1/4
81-3/4
Total
$85-90
51-3/4
136-3/4-141-3/4
13
7-Year Note Offering
The Treasury has been gratified by the market response
to a major effort towards achieving significant debt restructuring and reducing the amount of very short-term
Treasury debt in the market by issuing a significant amount
of longer-term notes.
The seriousness of the debt management problems facing
the Treasury today can hardly be overestimated. In addition
to $85-90 billion of new money needs over the next nineteen
months, the Treasury is faced with refunding $51 billion of
maturing coupon issues in the same period. Moreover, the
tremendous buildup in the debt, including a $95 billion
increase in the privately-held marketable debt in 197 5 and
the first two months of 1976, has severely impacted the
financing calendar and greatly reduced the options for placing
new Treasury debt in a constructive fashion.
These problems have been further exacerbated by the
exhaustion of the authority to issue additional long-term
bonds without regard to the 4-1/4% interest rate ceiling
and by the limitation of the maximum maturity of notes to
seven years. The prospect, unless these restrictions are
eased, is for a further decline in the average maturity of
the public debt and for a further increase in the annual
refunding burden. The consequence would be further calendar
congestion, more difficulty in issuing coupon securities,
and, therefore, increasing pressure to resort to the bill
market to meet financing requirements, further shortening
the average length of the debt and building up an already
large, highly volatile pool of extremely liquid short-term
Treasury debt in the hands of the public.
The offering of the 7-year, 8% notes at par represented
a deliberate decision by Treasury to break away from the
traditional pattern of debt offerings in order to, at least
temporarily, relieve the structural problem.
Under the auction technique, which has been the standard
offering method for Treasury securities since 1972, a considerable distributive burden is placed on the dealer
community in its underwriting capacity. Unlike underwriters
13
- 2 for corporate and municipal securities, however, government
dealers receive no price concession beyond the marginal
advantage afforded them by their close contact with the
market and technical expertness. The spread between the
average bid on new Treasury issues and the low bid, however,
is typically quite small; i.e., 2 to 4/32, which/ at best/
would represent a price advantage to a dealer of $1.25 per
bond/ compared to a concession of $5 to $10 to $20 on
corporate and municipal issues, depending on the maturity
of the security and the credit rating and marketability
of the issue.
As a result, while the auction technique is highly
efficient for Treasury offerings of moderate size, say, up
to $2.5 billion in a single issue and up to $6 billion in
a multiple issue offering, the distributive mechanism is
overloaded by larger offerings. Thus, a judgment was
reached that to sell an issue, even as large as the $3-1/2
billion initially offered, it would be necessary to change
the offering technique so as to place more of the debt directly
with final investors.
The response to the offering was unexpectedly strong,
with more than 105 thousand individual tenders, totalling
more than $29 billion, being received. Thus, the amount of
the issue was increased to $6 billion, a 71% increase, and
the maximum amount awarded to any subscriber was reduced to
$200,000.
The subsequent market judgment is that the issue has
been, in fact, well placed and that the speculative interest
was held to small proportions. Indeed, the major complaint
has been that there is an inadequate floating supply in the
market to afford normal trading opportunities.
In contrast, the much smaller, much shorter 3-year,
$3 billion issue has apparently been much less well placed
with a considerable overhang in the market, which appears
to confirm the judgment regarding the pricing of the 7-year
issue.
For information on submitting tenders in the Washington, D. C. area:
PHONE WO4-2604
FOR IMMEDIATE RELEASE January 27, 1976
TREASURY ANNOUNCES FEBRUARY REFINANCING
The Department of the Treasury will sell $3.0 billion of 3-year notes,
$3.5 billion of 7-year notes and $0.4 billion of 29-year 3-month bonds to
refund $4.3 billion of notes held by the public maturing February 15, 1976,
and to raise $2.6 billion of new cash.
Additional amounts of the notes may be issued to the Federal Reserve Banks for
themselves and as agents for foreign and international monetary authorities and to
certain Government accounts in exchange for maturing notes held by them in the
amount of $3.8 billion, and to the Federal Reserve Banks as agents for foreign and
international monetary authorities for cash. Government account holdings of the
maturing notes in the amount of $0.5 billion will not be exchanged for the new
issues but may be exchanged for special non-marketable issues.
The securities to be issued will be:
Treasury Notes of Series H-1979 dated February 17, 1976,
due February 15, 1979 (CUSIP No. 912827 FG 2) with interest
payable on August 15, 1976, and thereafter on February 15
and August 15. These notes will be sold at auction. The
coupon rate will be determined after tenders are allotted.
8% Treasury Notes of Series A-1983 dated February 17, 1976,
due February 15, 1983 (CUSIP No. 912827 FH 0) with interest
payable on August 15, 1976, and thereafter on February 15
and August 15. These notes will be sold at par. Subscriptions
will be received subject to allotment.
An additional amount of 8-1/4% Treasury Bonds of 2000-05
dated May 15, 1975, due May 15, 2005, callable at the
option of the United States on any interest payment date
on and after May 15, 2000 (CUSIP No. 912810 BU 1) with
interest payable on May 15 and November 15. These bonds
will be sold at auction.
The 3-year notes will be issued in registered and bearer form in denominations
f $5,000, $10,000, $100,000 and $1,000,000. The 7-year notes and the bonds will
;
e issued in registered and bearer form in denominations of $1,000, $5,000, $10,000,
100,000 and $1,000,000. Both the notes and the bonds will be available for issue in
ook-entry form to designated bidders. Payment for the securities may not be made
hrough tax and loan accounts.
The subscription books for the 7-year notes will be open through Tuesday,
February 3 except that subscriptions for $500,000 or less will be considered
timely received if they are mailed to an official agency under a postmark no
^ter than February 2. Subscriptions must be in multiples of $1,000.
Tenders for the 3-year notes and bonds will be received up to 1:30 p.m.,
-astern Standard time, Thursday, February 5. Noncompetitive tenders will be
considered timely received if they are mailed to an official agency under a postmark
WS-615
_2-
14<^6>£
no later than February 4. Tenders for the 3-year notes must be in the amount
of $5,000 or a multiple thereof. Tenders for the bonds must be in the amount
of $1,000 or a multiple thereof. Each tender for the 3-year notes must state the
yield desired, and each tender for the bonds must state the price 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
OF SERIES H-1979" or "TENDER FOR TREASURY BONDS" should be printed at the bottom
of envelopes in which tenders are submitted.
Tenders and subscriptions will, be received at any Federal Reserve Bank
or Branch and at the Bureau of the Public Debt, Washington, D. C. 20226.
Competitive tenders for the 3-year notes must be expressed in terms of annual
yield in two decimal places, 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 amount offered. After a determination is made as to which tenders
are accepted, a coupon yield will be determined to the nearest 1/8 of 1 percent
necessary to make the average accepted price 100.000 or less. That will be the rate
of interest that will be paid on all of the notes. Based on such interest rate,
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 at a yield that will produce a price less than 99.501 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.
Competitive tenders for the bonds must be expressed in terms of price, in two
decimals, e.g., 100.00. Tenders at a price less than 92.76 will not be accepted.
Tenders at the highest prices will be accepted to the extent required to attain the
amount offered. Successful competitive bidders will be required to pay for the
bonds at the price they bid. Noncompetitive bidders will be required to pay the
average price of all accepted competitive tenders; the price may be 100.00, or more
or less than 100.00.
The Secretary of the Treasury expressly reserves the right to accept or reject
any or all tenders and subscriptions, 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 the 3-year notes and the bonds will be accepted in full
at the average price of accepted competitive tenders, and subscriptions for the
7-year notes in the amount of $500,000 or less will be allotted in full. Subscriptions
over $500,000 for the 7-year notes may be allotted on a percentage basis but not less
than $500,000.
Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and report
dai.lv to the Federal Reserve Bank of New York their positions with respect to
Government securities and borrowings thereon, may submit tenders and subscription
for the account of customers, provided the names of the customers are set forth
therein. Others will not be permitted to submit tenders or subscriptions except
for their own account.
Tenders and subscriptions 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 dailv to the Federal Reserve
J7b
14
-3Bank of New York their positions with respect to Government securities and
borrowings thereon, Federal Reserve Banks, and Government accounts. Tenders and
subscriptions from others must be accompanied by payment of 5 percent of the face
amount of securities applied for. However, bidders who submit checks in payment
on tenders or subscriptions submitted directly to a Federal Reserve Bank or the
Treasury may find it necessary to submit full payment for the securities with their
tenders or subscriptions 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 or subscriptions for $500,000 or less.
Payment for accepted tenders and subscriptions for the notes and bonds must
be completed on or before Tuesday, February 17, 1976, and in the case of the bonds
include accrued interest from November 15, 1975, to February 17, 1976, in the amount
of $21.30495 per $1,000 of bonds allotted. Payment must be in cash, 6-1/4% Treasury
Notes of Series A-1976 or 5-7/8% Treasury Notes of Series F-1976, 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 or subscription is submitted, or the United States Treasury if the tender
or subscription is submitted to it, which must be received at such Bank or at the
Treasury no later than: (1) Wednesday, February 11, 1976, 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) Monday, February 9, 1976, 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 or" subscription up to 5 percent of the amount of securities allotted will
be subject to forfeiture to the United States.
#
#
#
TREASURY ANNOUNCEMENT
In view of the substantial public response
to the current 7-year note offering, the
Treasury reminds investors that.it has reserved
the right to increase the size of the current
offering of 8 percent notes due in 19 83 or reduce
below $500,000 the maximum amount to be awarded
in full.
Consistent with sound debt management
principles, either or both of these actions
may be taken depending upon the extent of
subscriptions received in amounts of $500,000
or less.
February 3, 1976
7?77
»
MEMORANDUM TO THE PRESS
*
January 29, 1976
The response to the Treasury's financing package
announced Tuesday has been highly favorable.
To assure
that the 7-year 8 percent note, which was announced as a
part of the package, attracts investor interest, as distinct
from interest of a more transitory nature, the Treasury is
raising the downpayment requirement to 20 percent from the
initially announced 5 percent.
FOR 10:00 A.M. RELEASE
FEBRUARY 5, 1976
RESULTS OF OFFERING OF 8 PERCENT 7-YEAR TREASURY NOTES
Preliminary figures indicate that approximately
106,000 subscriptions totalling $29.2 billion v?ere
received for the offering of $3.5 billion of 8 percent,
7-year Treasury Notes of Series A-1983.
Due to the overwhelming response to the offering,
the Secretary of the Treasury has found it necessary to
exercise his authority to reduce the amount of notes to
be allotted on subscriptions in amounts over $200,000.
Accordingly, -all subscriptions for $200,000 or less will
be alloted in full and subscriptions over that amount
will be allotted: $200,000.
Approximately $6.0 billion of the notes vrill be
allotted to the public. In addition, $1.9 billion of
the notes have been allotted to Government accounts and
Federal Reserve Banks for themselves end as agents of
foreign and international monetary authorities.
he Department of theJREASURY
kSHINGTON,D.C.
20220
TELEPHONE 9642041
FOR IMMEDIATE RELEASE
February 5, 1976
RESULTS OF AUCTIONS OF 3-YEAR NOTES AND 29-1/4-YEAR BONDS
The Treasury has accepted $3.0 billion of the $4.4 billion of tenders for
the 3-year notes, Series H-1979, and $0.4 billion of the $0.7 billion of tenders
for the 29-1/4-year 8-1/4% bonds maturing May 15, 2005, received from the
public for the notes and bonds auctioned today.
The range of accepted competitive bids for the notes was as follows:
7.00% 1/
7.09%
7.05%
Lowest yield
Highest yield
Average yield
The interest rate on the notes will be
yields result in the following prices:
Low-yield price
High-yield price
Average-yield price
7%.
At that rate, the above
100.000
99.761
99.867
The range of accepted competitive bids for the bonds was as follows:
Price Approximate Yield
To First Callable To
Date
High
Low
Average
102.14
101.42
101.75
8.04%
8.11%
8.08%
Maturity
8.05%
8.12%
8.09%
The $3.0 billion of accepted tenders for the notes includes 15 % of the
amount of notes bid for at the highest yield and $0.5 billion of noncompetitive
tenders from the public accepted at the average yield.
The $0.4 billion of accepted tenders for the bonds includes 68 % of the
amount of bonds bid for at the low price and $25 million of noncompetitive
tenders from the public accepted at the average price.
In addition, $1.7 billion of tenders for the notes and $0.2 billion
of tenders for the bonds were accepted at the average yields/prices from
Government accounts and from Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities.
1/ Excepting 4 tenders totalling $2,510,000
WS-631
Page 14 ( -)
d7f
utfxraa wwss
n-7±7mx7s? O F ;r>;s^u&::
PHR3S O O K -jg'SEHCS
EDWIN E . TOO
a^d^r-Saczr^-exY re err
Sraici&l &8fli8t&sifc feo
the* Secretary
Dircse^r, Cf f ic*:> of
4i00 v**^^iiss-^iVj January 27. 1976
T:-re&£ ury 3n:'. J.ct i,ag
X:->t.h •••.^•: ?^x-, &v$rtva«s, NW
Page 14 p)
Jsz
i
I
ASSISTANT SSCR3TARY YBOt
*te have I think an
2
•» J{iinteresting «md Important job to do today. £ am going to go
*| slowly becausa m havo ft g**2 »aay numbers to discuae.
..,, |i •s'i^-gtr our total reqair^nemta through the and of
' lj
:•> I Jan®,
in othas- words, oar raqalMKcentn for tfea period Jassuary
v 1| jwa, 1575, are. in th* rang® of $38 to 43 billion of borrowing
H
7 \\ £rc» the public*
Hartest borrowing is in a r^ge of $35 to 40 billion,
1;
a | the diff«eace beiag essentially savings bend©. Through
5;
•'« ^ billioa.
Shis includes tha weekly bill to be settled on
ii
n |j j u m z ? 23 aad th« two~y«sx note which will foa settled oa
i,;? |i February 2*
,4 (I Taking cur first set of fteetanptione, the $33 t> 43
Or. fl billi*nr asxhafc borrovi^g $33 to 40 billion, £<3dfceting tfh&t
M- || «» hsvm axwettHBO& tiowcgh y*st«Kday. giros yoa a M* balaaea
rt \ ia tarae of earfcafe borx:r,v*i:->.g from scow fcliroagh the ead of Jane
ii
>n jj in th® raitg^ of $26 to 31 billion*
IS
$L:
j!
'fji-ii 926 to 31 billion rav-^ 7 coinciaasitlyr coders
>,i) ji the ^oyiit o£ n&t tcsfiovfirig vra hava bofore us -to get throug
;••; !{ our lav point, i:-';. j^pn.1*
v;; |! We have sc^o tempersry boyrzovir^ to £^ in Juittl1 a
ii
'
/,:; j; our low poir*tr £ftt &&*• '&?& o^3h s±-i*&\z in '.--JM* ^ ^
,
*
v
~
v " o£ *hh$ fiscal Y-'^V b&v&Li CD *'^::: ps: vneix-i; ^>;::J.3'^35 *""" -
Page 14 (
•
" )
J 77
' M»
The exact amount is really dependent on what sort of
2 « i e»d~of Jus® balance we wish to arrive at*
\
2 think that if you
3
v> \
r»
iht to*e the combination of what we have <$one plus wn&t we are
M
tt
' |j cf*i&9 to announce, plus the concept involving the use of cash
5 j
ii
{ n&na<}e!tte&t bills to sacoth cat financing nefeds, you can sae
\\ tha-^ we nav-a a 3.*:.rgo bat #4itaUtemaaga&fci& ddtrfc mna<*eai£nt task
i!
- ;j
|
-- •$ J
^'|!
As a matter of £acfc? •*#& hav© already achieved a
•i
3
" || eicaiffic&at asaottst In torus of aseetla? vith or de&ling with thin
booking ahead* O R © of car objectives vill ba to
' ' ii ainissis-s prasenre© 02s the bill su&rk&fc, making* as ssxch use as
f
• possible ox the tse©-1- and four-year cycl© sootes;. and we are also
-^ j! giving serioas ccusider&tion to establishing a five~y$ar note
*:>
«
•*
i'
;; evcl®.
This »sould h« during the first ?rom;:i of each quar• *
M
!7 ^ter. Eoss could take a «- yen could vie** our January financing
)!
i8
Sj as a stert*
'i
»(
- |i
N^w i:or fch© financing, *-s ara plim,*:\r»g on raising
I!
20
ij $6.3 billion of ?:&*? :.a:-ir;-ay flnancis*/ is ^«!>rmrv. tfe vill need
I :
f.'
?
-« !! scanewhera b a t m e n $9 ot^d $11 billion th* first hi-.li: of March.
'^ *! Tbis a^oui:t is «^bsi;aR^i^l, but fchs rsq^Ir^^vit can be a*et
;:i
f: Qisit^- roacHly ?;^vvj^h -;;h<r- v^
;:,f
*>* t-io-A.ar :-iot^ cycle, wel
-'" |! establf.aatv5 vithir/. f-?v »*£*!;**; ^:~':<-t>^; ^'vur-.^^ note cycle
^7 \: »-& additions te &•.># ^^kl./ .*i>-c; &vr;r^l b.M.U ^"^ rash
Page 14 (v)
?7t
management bills in the form of additions to late April or
late Jane.
Fro® raid-March through tha April low ?point we
estimate our nesds between $12 and $13 billion of n«^ »oney
for borrowing.*
As you know, theatre is a few-year n#te asaturing at
the end of Kerch, and as I a&ofcioned, the possibility of a
five-year note issued in early.April*
*Che balance of require~
laanto can be mot through bill additions scad further additions
to regular bills, assd farther cash aanagesQent bills.
Today «© are announcing a $700 taillion addition
to the weekly bill which settles oxt February 5 and the ter>as
of the refunding which settles on February !£•
?hex~e is a total of $4.4 billion mastering on February IS, SJO& we will he offering $5.9 billion of row securities
in three issues «> Thi$ vill raia& $2-1/2 billion in new xa©a<ay*
ar3d bring the total asount through this aancanceiaenfe since tho
start of the year to $11,a billion.
So you G&& ss& v<* hsve a rather^ 1* think, good
The* t.lscs# re-funding ir^r-u^s •Xrrzl-j.&r* fc£* following:
$3 billion c:-: & t":r^^-v^ir r.r.y.-r* -iu© F^brct-rv 15?£3-1/2 bill**1
of a savanr-y-Mr ?.:•.:/•.>: r.toi ^b',-:vt.^::y 1S,? XiiVi-i &<& y4Q0 udiiioB
i& tfe® rc^e;;'.:r^.g of: oi^^svvH#-:? civ*t-'-V^d -A.- -.^.lartcrs of 5-15,
2;; 000 *-ud 2005,
fage 14.*;
777
The three-year note and the recpsn^d bond will
be auctioned on Thursday, F^bruery 5*
auction will b« n yield auction*
The three-year note
$he bond auction will be
a price suction, since the coupon is already established.
The caven-yoar z%ote will be offered at par with ax
8 percent coupon, with the books open through Tuesday,ftbruax\
Kow if you don't mind, it is probably redundant,
but I would like to go ovar thi.& &gain & little faster.
Cur total requirements through the &nd of June,
$38 to $43 billion of borrowing frosa the public. Market
borrowing total, is in the range of $35 to $40 billion, with
fch<s difference being savings bonds?.
Through yesterday *** hadttnneuncednew cash f inane •
ing totaling $8.6 billion.
That includes a weekly bill sett: i:
ui'i January 29, a two-y©ar KD~2I which will b& settled or* Febrt ary 2,
As a result, w© hava a balancs of net «arket borrowi; *:
frcsa now through tha end of J^TJ* in th# range of $26 to $31
billion.
The $26 to $31 billion raug* for market borrowing
covers the aftount of »at barrc^l^g-
We still have bafor^ us
to get through the low point in Ap^il.
QUBB'CIOW:
Mic-^rvr th?
vvhil» >*i-> -vill f.:r-o to c;o soiv;*, fc^por&ry borrowing
Page 14 (6)
to handle our June low point, our cash needs in the last 2-1,;
?*oxiths of the fiscal year frppaax to b® quite zsoderate.
I isanticaied that; one of our objactives will le to
continue to ninlmise preososres on the bill saarkefe using the i« :
&ssc~. £our-»yea? note cycles* a&d that w© are considering £&tab« 1
liehzaent of a fi^e-year »c*fc« cyol&« i
I stsntioned that wa ar<$ planning on raising $3.3 lii-i
i
iiea in February and tha refunding, and in the weakly one*
\
year bills- the weekly &®& ©na~year bills, asad that we will j
have to raise $10 billion* I gave you & range of $9 to $11 I
billion, fthich X thisak is a bettor s?ay to approach it, in the \
i
first half of March.
j
i
la ts*r©s of our financing, $3 billion of a three- \
i
year note, $3-1/2 billion of a sevesv-yaar note due February • ? < j
I9E3, §400 million in the reopening of the outstanding eight- j
and~&~quarters, 5-1S, 2,600 and 2,00S* a fchree-y®ar not© and
the bond auct;Um on Shursd&y, February 5, the note at yield j
auction, the bond at prices auction because of coupons estab- j
e
lished, the sevan-yeer not* offered at par with an 8 percent
coupon, with the books opsn through Tuasd&y, February 3. j
i
Incidentally, oa cra?.r r&~funding- the sefcfcleaaant ii i
February 17. ac?t the ICtfc, which X mentioned. !
i
Ttiiz r ^ p r ^ ^ t s ar« c^fciina ol-u* far coaling with n>'j
financing neecis this* half. UG think that it is important thn 1
^- ^a ths bill saricst, but uaa it In such a wssy th&t we arc
7
not totally dependent on it.
We think that it is important that we continue to
use our 2, 4, and possibly 5-year note eyeries* Bv*t X %&uid h\
lees than candid if 1 told you that that ^as the solution to < HI}
overall debt Ranagc&ent challenges, because if you have look*
at cur developing maturity structure, you can see that wa ar<
starting to fill up slot aftar available slot*
It is for this reason that ve have asked Congress
for additional long bond authority* It is for this reason tt
we havo asked that notes be redefined frora seven-year K&aturi*;
to tea-year xa&turity.
What we are seeking to construct is a balanced da •
structure, one that will not provide a legacy for the future4 J
tsr&s of xaas&ive amounts of short-t^rm finance resulting in :
Treasury being in the market constantly in very, v®ry sigaif ,•
cant size.
I personally thi^k that a debt structure that
involved very considerable amounts of short-term maturities
results in increased volatility, reduced efficiency, and over:
the course of events, a higher net interest cost to be paid 's
tha American public.
I think that wa have se-sn cv&z the last two years
both domestically a^5d int«srna«-.ioiialiy, the effects — advers >
effects — cf market volatility? which in part resulted frexa
heavy reliance, not just on th« pzxt of t~he Treasury, bat on -.:•<
Page 14 (<)
J77
part of mout borrowers* •— heavy reliance a-n short~ters fisyaecj
Tfca%: is our fira^ci^, -&B$ I will try to a n e w **'
?j^stit2&3 you slight hav<£a
Q^S^XOH*
c«n y ^ v^OLais- w:iy y«*u ^ ^ ^ ^ ancttoi
?f3
QUESTIONS
Looking ahead, can you estimate ^t&th&z
the borrowing needs in the last half of vh® calendar year wil .
be greater or smaller than the first half?
ASSISTANT SECRETARY ygos I would just as soon not
get into borrowing needs in the second half of the calendar
year, Ed. I can say that I would expect that taking the seco i j
i
half of Calendar 1975 and the- first half of Calendar 1975,
i
i
that wa will have completed the largest fiscal year financing
that. Is prospective, assuming that iSS policies that we advo- j
cat-3 in terms of the budget are agreed to by the Congress. |
In other words, we are in a st®$ss& thinking in ters : j
i
i
of fiscal year. Ws are wall on our way to completing a ^/ery
!
large finaacing task that confronted us at this start of
Fiscal '76.
QUESTION: What is borrowing totaling in the first
half of the fiscal year?
ASSISTANT SECRETARY YBO: 48.
QUESTION: And just & small point —~ the aiaou&t
that is maturing on February 15 — is that $4.4 or $4-3 billi: 7"
ASSISTANT SECRETARY YSO? 4.3.
UESTXCN: ?TOQ said that the* total through this
announcement would be $11.S billion. If you add. the $8.6
billion plus the §2.6 billion you are annouaciatg..today plus > .M
$700 million of additional weekly siotss for nest weak, you gc *
$11.9 billion, fthloh one should w© uso?
ihSSISTASB? SBCRIiSTAnY IHBOs
That is because you «ed
the 4«3# It b&I&xsees.
""""*' QUESTION: Did X understand you to say tk&t for th*
remainder of February it ie this aanouaeesaent and bills and
that is it?
ASSISTANT SECRETARY YEO* That is ccrr#ct«
QUESTION: Also ~- just a saatter of maiaory •— did
yo'.?. suggest -~ was th&<r& a five-year aot® Bold in January?
ASSISTANT SECRETLY !TEOs Y<s**A
QUESTION: So that could fc** the start of e cycle?
ASSISTANT SECRETARY YBOf
Y«*s.
fiv^-ysssur nofc& at the &£*3 of l&st y^r*.
th& p^iat, but this is n&c&ss&ry,
C-;IT©&
f*e anr^^YiCea
X dosa't ~?^\t tc i&bo:
the A&rg& see c£ &e
t^r^-y^ar cycle and the* four-year iiote cyclo*. and whii® v& tre
r^Jw&g a v-sry decided ©ffort *:e produce a balar^ce^ financing
pjrctr&^p w© &z® still of course usi&g -i*h& bill ^&rka;t hoavily
QUESTION: ftill veil cro e-vs,:? fo>*7 you g&t -ha £11*8
ASSISTANT SSCfcftTA&Y Y<>0; S!fe $3,€ feilliea tfovt W£
ar:.Ko,^c»d, $700 aailliou i& billc, ??*S i::;.iion in r^ras o.c tk-:
QU£ST£03!; So tl.,:* first ?j.-;:i^:c.7>h sh^ulfi be ch«W«-
rSdISTAKT SH:::;E'iVRY V^;^; '77:. depend'" on tow you
j:
1
Page 14 (11)
>j MR. SNYDER2 The amount of siatnring securities
*•" j| publicly held we have been carrying in our c*m minds as a 4.4,
and the Fed in its operations from time to time has picked us
4
nam® coupon issues, and I suppose &c&& of the agencies in
their trust accounts have picked up so^® of the stuff, too.
6
It is vary close to 4.35* so you pay your zson©y and take you*
' t\ choxce.
D
|
ASSISTANT SECRETARY YEO:
4.35 is the precise figs* ;
£ \ QUESTION: So if you use 4*4, then we should have
.. *%y
& \\Jt*5 in the net?
ASSISTANT SECRETARY YEO: Yes, sir* Why don't we
! just agree on that?
j QUESTION: ^Z.4 and 2.5?
j ASSISTANT SECRETARY YSOs Yes.
!
j
I
|
QUESTION:
We will change the release.
QUESTION:
I doa't quit& understand hc*sf, with the
i
}
«/
| seven-year notes, thin receiving subscriptions subject to
| allotment, works. Can you give ras a brief description of th&t?
AS3ISTANT
SECRETARY YSO: i?e are announcing to thfe
19
public that investors with a thousand dollars or multiples of
2: !j $1,000 can subscribe to a sevoa-y©ar nsvte with an 3 percent
22 I coupon placed as par, **id th© suiteriptions are taken by the
.?.3 |j various I^serve £snks ana by f in&n«icil institotxo&gi that in
24 j| effect submit thoaw* subscriptions for their custodiers.
•^ j! so thAt s ps^so?: -,- say t%^ vou wanted to invest
a one of our 8 percent savea-year notes, you would go tc- ye*
A •
ba^.k or Federal Reserve Sank and tender your subscription.
W® set it out ivi detail in tfea announcement -*hai
you have -~ the procedure.
QUESTION: If I %*a&fc to toy just $1,000 iaecis
band and there was an allotoeafc of 5fi percent or eome&hi&g,
wha'i happens?
ASSISTANT SHC^ETAmf YSO* v^ iB ap to $500,0C*\
QUESTIONS I sac,
QUESTION* Yo& are assuming that you will get
&nc&gh subscriptions tc? a&ak& th« §3.5 billion?
x\SSISTANT SEC3STARY
YBOJ
"to; sjir*
QSSSTrONe ^h^t happen© if yen gst as:^ thss -&at'
AS^XS^iT SECRETARY ^EOi Aft«lv the initial £330,-:
•tftt -:;illc-t on a pro rata baeia. L-et a® giv© you an e&iffiplg*
V?© are offering 3»5, a^:d l*vcr$ say just as &.&
OT<^V\U*,
*?s hs.d a billion-asad-a-half
ITS
subscriptions &;.lotfc
in iull, Oix fccp of t'tefc ?v?i ;M;.2 ^ billion and that would is*
QUSf>isIOxiJ*. Wfcy £id t'r^v: 1.4 qn*? „, ..U.VI a
J> .i- ' ^ •*"-
s^SrAOT- SPCvS^A^V YiO:;
£*K-;C?S$
we have tedicat
tii^^ -v-b^orl^-lun^ vtft *.:•?
••:
,v
^0-T
o*7:v7.Jjv-i.s.'.iY Y J v \
S^'.IJ.
invito*
3
.."•... . _ • . .
w
-.'.
•' v>
*•
J77
Page 14 (13)
give the smaller investor who is not in the position to gang*;
the £ibb and flow of interest, not in a position to really est' ssate wh&t sort of allotments saight b& made —~ it gives him ai
opportunity to subscribe and not be concerned about what he :.i
going to receive*
In other words, if h& subscribes for $SO,000 in
3 p&ro&nt notes, he is going to gat 50,000 6 percent notes.
QUESTION: What are seven-year securities present: 13
yielding in the ssarket?
ASSISTANT SECRETARY YEO* About 7.72, 7.73.
QUESTIONS Won't this push all £h&&® np to the 8
F&resmt level?
ASSISTANT SECRETARY YEOs Well, we are selling $3-'
billion in aotes. The market will adjust -~ it cas &&$Vi:*t
three ways ~ up, down, and -onchanged.
The point is this —• that I think generally the
market ©xpectsd a smaller iseus for the purposes, *°* *cke
reasons that I hav© raantloasd. *?© thinh it is important to
have a gocd start on our financing needs, and I think that
post this financing, investors am or s?ill perceive that a h'
part of the job, a significant part of tha job, has bm®n don-5
Gra&naliy, but in retrospect a larga p&rt, a
significant p#rt complete, BO that v& d^ rtot hav« a nmd tfc*
is conjectural ir. terras of 'hrm it c?«n be 2eet»
We described hxsj it can !•»© £**t and we hsv© alreae*
Page 14 ( 14 )
dons* a significant pext of W-.
2 i-nlght a»iso s?.y £h&t through tI-.<; April low H-'lfct
that, ^6it.icr*al coupon f ir^>-iift3 t-?£ll bn shmrt of the £«-v'a:^
ysar sr®&*
QUESTIONS Foar 'AWM b® "Bi» isost?
.J?.»3I3TaSIT SECRST'^Y
Y30S
Fi'*&j &^yfe# a five..
X v::hi&k *h* v?ire Sarvic-as vai#ht tmnt fee •—• i* *®
&r*- ^<sar, fchtf Wire Services s;ight wast'- to —
v^SSTIGNs Sine* it is so co&clitf£*&d, csra yd 'jiv*
c.3 ;- little sore than five «intit-.stf?
MvSISTAiOT S^CPJOTJ'.Y ^HO;
£Y:::^,
A*>vrc& 10 of?
Q"CX?i>TION: 10 o£ >^ ftesu
&£S:L8T.£I*T
SECRST?:-!^ YSOi i-:3 ^l^r-:-* ssst-hing rv-v:&?
TSdank you*
{VTh^r-aiJipcyA, s.t £?$« cvnlMk p**:.» >r.h$ p?&3£ ^:;\£#r*
.\-.«;.'::.n: 'JCr.U 0#v#xV*Sd'$d.)
HYPOTHETICAL INTEREST SAVINGS
FROM ISSUING BONDS
(millions of dollars)
FY
1966
Total
Budget
Outlays
Net Interest
Cost of
Hypothetical
Bonds
Gross Interest
Cost on
Hypothetical
Bonds
14.8
$
Less: Interest
Savings on
Reduced Notes
134,652
$ 12,014
1967
158,254
13,391
0.2
85.8
1968
178,833
14,573
0.9
182.9
183.8
1969
183,548
16,588
9.6
302.0
311.6
1970
196,588
19,304
-
30.2
413.4
443.6
1971
211,425
20,959
-
52.1
605.9
658.1
1972
231,876
21,849
-
19.5
691.3
710.7
1973
246,526
24,167
7.7
711.3
718.9
1974
268,392
29,319
-
20.1
731.6
751.7
1975
324,601
32,165
-
61.5
731.6
793.1
1976
373,535e
37,700e
-
79.5
731.6
811.1
-$281.2
$5.,202.1
$5,483.3
Total
$
Interest
on Public
Debt
$2,508,230
$242,029
$
—
Office of the Secretary of the Treasury
Office of Debt Analysis
14.8
86.0
February 15, 1976
Details may not add to totals because of rounding.
Ui
HYPOTHETICAL-^ AND ACTUAL BOND SALES TO PRIVATE INVESTORS
AND EFFECT ON GROSS FINANCING REQUIREMENTS
($ billions)
Per Year
Cumulative
Bond Sales
Bond Sales
Gross
Financing
Assumed
$ o
$ 1.663
Calendar
Year
Assumed
Actual
Total
1966
$1,663
$
0
$1,663
1967
1.719
0
1.719
-
.381
1968
2.216
0
2.216
1969
1.498
0
1970
2.523
1971
Actual
Gross
Financing
$
0
o
$ 1.663
3.382
0
3.382
- 1.198
5.598
0
5.598
-
1.579
1.498
- 1.358
7.096
0
7.096
-
2.937
0
2.523
- 2.221
9.619
0
9.619
-
5.158
1.389
1.000
2.389
- 2.585
11.008
1.000
12.008
-
7.743
1972
.294
3.321
3.615
- 1.770
11.302
4.321
15.623
-
9.513
1973
.303
1.114
1.417
- 1.916
11.605
5.435
17.040
- 11.429
1.613
1.613
- 2.864
11.605
7.048
18.653
- 14.293
- 1.754
3.307
3.307
0
1975
Office of the Secretary of the Treasury
Office of Debt Analysis
11.605
10.355
1974
1/
~~
0
$
Total
.381
21.960
- 16.047
February 15, 1976
Assumed sales are equal to 10% of actual notes issued in each quarterly financing in
which no bonds were actually sold.
Ul
*
EFFECT ON GROSS REQUIREMENTS
QUARTERLY FINANCINGS, OF HYPOTHETICAL BOND SALES
($ Billions)
Calendar
Year
Quarter
Gross Financing Requirements
Actual With Assumed
Reduction
Bonds
1966:
1
2
3
4
$ 7.4
1.4
4.2
3.5
$16.6
1967:
1
2
3
4
$ 4.0
4.7
4.0
4.9
$17.6
1968:
1
2
3
4
$ 8.1
6.1
5.5
3.7
$23.4
1969:
1
2
3
4
$ 3.5
4.3
2.8
5.8
$16.3
1970:
1
2
3
4
$ 4.9
7.2
8.0
7.4
$27.5
$ 7.4
1.4
4.2
3.5
$16.6
$ 4.0
4.7
3.7
4.8
$17.2
$ 7.9
5.9
5.3
3.1
$22.2
$ 3.1
3.8
2.4
5.8
$15.0
$ 4.9
6.0
7.5
6.7
$25.2
$0
0
0
__0
$0
$0
0
.2
.1
$ .4
$ .2
.2
.2
._6
$1.2
$ .4
.5
.4
_0
$1.4
$0
1.1
.4
.J_
$2.2
Calendar _ Gross Financing Requirements
With Assumed
Actual
Reduction
Year
Bonds
Quarter
1971: 1
$11.0
$10 .4
$ .7
3
.5
4.2
2
.6
5
.3
5.5
3
.2
7
.5
8.6
4
1.1
$29.3
$26 .7
$2.6
1972
1
$ 4.0
$ 3 .4
$ .7
1 .1
2
1.8
.6
7
.7
3
8.2
.5
2
.9
4
2.9
__Q
$17.0
$15 .2
$1.8
1973
1
$ 3.5
$ 3,.0
$ .5
1,
.2
2
2.5
1.3
2.
.1
3
2.3
.2
3.
.8
4
3.8
J)
$12.2
$10. 2
$1.9
1974
1
$ 4.1
$ 3.6
$ .4
3. 6
2
4.2
.7
3. 9
3
4.6
.7
3.9
4
4.9
1.0
$17.9
$15. 0
$2.9
1975
1
$ 5.8
$ 5.3
$ .5
4. 8
2
5.1
.4
5.
0
3
5.9
.8
3.
4
4
3.5
$20.3
J,
$18.5
$1.8
HYPOTHETICAL MATURITY STRUCTURE
WITH ASSUMED BOND ISSUES
($fs Billions)
Calendar
Actual
Year
Quarterly
Quarter Maturities
1976:
1977:
1978:
1979:
1980:
Hypothetical
Maturities
Reduction
Calendar
Year
Quarter
1
2
3
4
$4.4
4.1
4.6
4.0
$3.9
3.0
3.6
3.7
$ .5
1.1
1.0
.3
1981:
1
2
3
4
2.1
4.4
3.3
2.4
1.7
3.7
2.9
1.8
.4
.7
.4
.6
1982:
1
2
3
4
5.0
6.0
4. 5
4.6
4.1
5.2
3.9
3.9
1
2
3
4
3.1
1.8
2.8
2.3
3.1
1.8
2.6
2.1
1
2
3
4
1.6
1.7
1.7
1.1
1.6
.4
1.4
1.1
1983:
.8
.6
.7
Actual
Quarterly
Maturities
Hypothetical
Maturities
1
2
3
4
$ 2.8
2.0
.4
2.7
$ 2.5
2.0
.4
2.3
1
2
3
4
1.7
1.4
1.9
2.4
1.7
1.3
1.6
2.3
1
2
3
6.1
1.2
6.1
1.2
17.3
28.9
Reduction
$
.3
.4
.1
.3
.1
4 •
Later
11.6
.2
.2
1.3
.3
Office of the Secretary of the Treasury
Office of Debt Analysis
February 15, 1976 »^
^
J93
or information on submitting tenders in the Washington, D. C. area: PHONE W04-2604
OR IMMEDIATE RELEASE February 13, 1976
TREASURY TO AUCTION $2.5 BILLION OF NOTES
The Department of the Treasury will auction $2.5 billion of 21-month notes to
lise new cash. Additional amounts of the notes may be issued to Federal Reserve Banks
3 agents for foreign and international monetary authorities.
The notes now being offered will be Treasury Notes of Series Q-1977 dated March 3,
)76, due November 30, 1977 (CUSIP No. 912827 FJ 6), with interest payable on a semimual basis on November 30, 1976, May 31, 1977, and November 30, 1977. They will be
jsued in registered and bearer form in denominations of $5,000, $10,000, $100,000, and
,000,000, and they will be available for issue in book-entry form.
Payment for the notes must be made on March 3, 1976. Payment may not be made
irough tax and loan accounts. Notes in bearer form will be delivered on March 3, 1976.
Tenders will be received up to 1:30 p.m., Eastern Standard time, Friday, February
i, 1976, at any Federal Reserve Bank or Branch and at the Bureau of the Public Debt,
shington, D. C. 20226; provided, however, that noncompetitive tenders will be condered timely received if they are mailed to any such agency under a postmark no later
an Thursday, February 19. Each tender must be in the amount of $5,000 or a multiple
I ereof, and all tenders must state the yield desired, if a competitive tender, or the
rm "noncompetitive", if a noncompetitive tender. Fractions may not be used in tenders.
e notation "TENDER FOR TREASURY NOTES" should be printed at the bottom of envelopes
which tenders are submitted.
Competitive tenders must be expressed in terms of annual yield in two decimal
aces, e.g., 7.11, and not in terms of a price. Tenders at the lowest yields, and
ticompetitive tenders, will be accepted to the extent required to attain the amount
fered. After a determination is made as to which tenders are accepted, a coupon yield
*'11 be determined to the nearest 1/8 of 1 percent necessary to make the average
:epted price approximately 100.000. That will be the rate of interest that will be
id on all of the notes. Based on such interest rate, the price on each competitive
ider allotted will be determined and each successful competitive bidder will pay the
i-ce corresponding to the yield bid.
Price calculations will be carried to three
:imal places on the basis of price per hundred, e.g., 99.923, and the determinations
-the Secretary of the Treasury shall be final. Tenders at a yield that will produce
,->rice less than 99.751 will not be accepted.
The Secretary of the Treasury expressly reserves the right to accept or reject
' or all tenders, in whole or in part, and his action in any such respect shall be
''ial. Subject to these reservations, noncompetitive tenders for $500,000 or less will
accepted in full at the average price of accepted competitive tenders, which price
1 be approximately 100.000.
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 must be completed on or before Wednesday, March 3,
1976, at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt in
cash, in other funds immediately available to the Treasury by March 3, 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) Thursday, February 26, 1976, if the
check is d»awn on a bank in the Federal Reserve District of the Bank to which the check
is submitted, or the Fifth Federal Reserve District in the case of the Treasury, or
(2) Tuesday, February 24, 1976, 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.
?7f
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
TO THE TEXAS BANKERS ASSOCIATION,
FORT WORTH, TEXAS
FEBRUARY 16, 1976
Thank you Mr. Friedman, President J. B. Wheeler, Chairman
Bruce Campbell, ladies and gentlemen.
It is a pleasure for me to be here in Fort Worth and to
have this chance to get together with such an important group.
We in Washington have to wrestle with the broad economic issues,
but it is bankers like you who are on the front line every day,
serving your communities, keeping the local economy alive and
contributing to the general, national trend toward recovery
which is now gaining momentum.
Yours is not an easy job, and public understanding of the
magnitude of your task is often sketchy at best. Too many
people still think of bankers as a strange, cold-blooded cross
between Clifford Irving and Ebenezer Scrooge. To use Mark
Twain's definition, they feel that, "A banker is a fellow who
lends you his umbrella when the sun is shining and wants it
back the minute it begins to rain."
And what the average American has experienced during the
worst recession in a generation — a recession we are only now
beginning to rally from — has done little to sweeten the public
attitude toward the banking community.
The cartoon figure of the selfish, grasping banker, fattening on his moneybags while the plain citizen has more and more
trouble just making ends meet is a vivid image in the public
imagination. It's not an honest picture, but it is believed by
an awful lot of otherwise reasonable people. And this makes it
all too easy for political demagogues to use the banking
community as a scapegoat whenever the economic going gets rough.
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As with so many of our other national institutions, the
banking community faces an even greater challenge in winning
and holding public confidence in this increasingly cynical
age, a period that future historians may someday dub the "Era
of Post-Watergate Morality".
More than ever before, the public is in a doubting, questioning mood — and understandably so. On the face of it,
this new questioning is all to the good, a sign of healthy
interest in matters that affect the welfare of us all. Such an
inquiring spirit is needed if real democracy is to survive.
But there comes a point where healthy questioning ends and
a kind of poisonous cynicism begins; when people begin to think
that the cause of all their problems is someone else's fault —
preferably someone high in government, business or finance.
In a negative kind of way, it is very comforting to be
able to blame inflation, recession, productivity problems and
the high cost of government on Wall Street wolves and local
robber barons. It's a cop out, of course -- but a particularly
tempting cop out for politicians who have spent the country
into unbelievable debt and unacceptable inflation.
So, from a purely public relations point of view, it is
not a very good time to be a banker — as you can appreciate
far better than I.
And the sad thing about this lies in one of the biggest
economic ironies of our time. In recent weeks we have seen a
wave of sensational news stories, in print and on the air,
questioning the soundness of the American banking system. The
impression that one got from these stories was that the whole
structure is tottering on the brink of collapse, with some of
the biggest names in banking ripe for the endangered species
list.
Now you and I know that this is not the real picture. It
is our job to know the facts, and the facts are that the American banking community has emerged from the recession in remarkably good shape. The surprise is not that a few banks -- an
•infinitesimal fraction of the banking community -- have experienced some difficulties. The real surprise, and it's a
pleasant surprise for a change, is that American banks have
weathered the storm of the worst recession in a generation,
have covered problem loans out of operating funds and have still
showed a substantial increase in earnings.
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^
I submit to you that this is a record to be proud of.
But I also submit to you that this is an untold success story —
a success story that most Americans have never heard and therefore do not appreciate.
After all the average worker and average housewife have
enough to keep them busy without reading the fine print of
the financial page or subscribing to the Wall Street Journal
or Fortune Magazine. Most of their economic news comes in the
form of scare headlines, short, dramatic T.V. spots and political rhetoric....hardly a mixture designed to give deep understanding or tell the full detailed story.
Who is to blame? Certainly not the public. It's hard
enough keeping up with the general news — much less the comparatively dry, complex economic situation. As the great 19th
century historian Thomas Carlyle once pointed out, economics
is "the dismal science". It doesn't lend itself to glossy
picture spreads, spicy interviews or short, simple reports.
So neither the public nor the media can be blamed for what is
fast becoming the most dangerous communications gap in comtemporary America.
What about the politicians? Certainly they could be a little
more responsible than they are. After all, unlike the average
American, they do have the time and the resources to get at the
facts and see the whole picture. But they have another problem.
Every two, four or six years, they have to run for election.
So, despite their best intentions, they often end up thinking
and speaking not in terms of the long-range public interest,
but rather, in terms of short-range political survival.
And that is another of the big ironies of our time. The
very measures that are politically tempting in the short run —
Federal giveaways, pump-priming, pork barrel projects and using
small segments of the population like the banking community as
scapegoats — these same ploys that help many politicians to
buy a little time for themselves and create a false temporary
sense of security with the public, spell long-term economic
disaster for us all.
Now in fairness to the politicians, we really cannot expect
them to do much more than they already are. The job of educating
"the public while running the office at the same time requires
the courage of an Alexander, the wisdom of -Socrates, the eloquence of a Demosthenes, and the luck of a good river boat
gambler.
^
It would be both unrealistic and unfair to expect most
politicians to combine all of these traits. If they did,
we wouldn't face the problems we do right now; I would still
be working as a private citizen in New York; and there wouldn't
be any reason for you to be meeting here in Fort Worth other
than good fellowship.
Which brings me to us — you as bankers and me as Secretary
of the Treasury. Perhaps a large part of the blame for the
public's misconceptions about the economic situation lies with
us.
If we can't get the story across for ourselves, how can
we expect anyone else to do it for us?
The banking community, like the rest of the business
community, has performed its internal functions admirably.
But the whole private sector — the source of the enormous
abundance, opportunity and freedom that makes our country so
unique in the world -- has failed at one crucial test. It is
not making itself understood to the media, the politicians and,
most importantly, to the people.
The free enterprise system has done a magnificent job for
everyone but itself. And as a result, it faces an ever growing
menace in the form of diminishing public confidence and increasing domination by the Federal Government.
Consider the energy field. In spite of the impact of the
oil embargo and the general increase in the cost of imported
fuel, Americans still pay less to heat their homes, run their
automobiles and keep the giant wheels of industry turning than
any other major industrial power.
The purpose of government energy policy should be to keep
those costs as low as possible by encouraging-, not discouraging,
domestic energy production without creating a massive, permanent Federal energy bureacracy.
Unfortunately, that is not what is happening. I know. I
was there at the creation of Federal Energy Administration.
And if ever there was a clear illustration of the Federal foot
in the door, it is the evolution of F.E.A. Originally, the
F.E.A. was intended to be a temporary, emergency measure.
Neither I nor anyone else wanted to become a Federal Energy
Czar. But that is exactly what happened, not because I or
my successors wanted it that way, but because bureacrats and
bureacracies have a way of taking on a life of their own. Like
too many politicians, their first instinct is for personal
survival, whether that survival is in the public interest or not.
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79?
So, today, we have not only an energy czar, but a federal
energy empire to go with him, and a constant clamor on the
political front for more and more Federal regulation and control of petroleum and related energy industries.
Given the poor public image of the oil industry, these
demands are increasingly taking the form of cries for divestiture, a move that could potentially cripple rather than enhance
American's energy potential.
Attacking the oil corporations makes big headlines and
short-term political hay, but those who advocate divestiture
have a responsibility to show us how -- if at all — their
proposals would help us to solve our energy problems.
And so far, underneath all of the anti-business rhetoric,
there has been precious little substance. Advocates of divestiture have found an entire industry guilty without benefit of
trial, and they want the public to blindly agree to their
kangaroo verdict.
I say they are wrong. To blindly argue for the dismantling
an entire industry without considering the consequences makes
about as much sense as arguing that you can get better mileage
out of a car by chopping it up into tiny pieces. In fact,
you may get no mileage at all. You may destroy the delicate,
intricate mechanism beyond repair. At the very least, you
will have to spend a great deal of time, energy and money in
repairing the damage you have done before you can get it back
into working order.
I am proud of the responsible role which the Administration I serve has played in the field of energy. The original
legislation proposed by President Ford was sound and responsible;
the changes that occurred were the inevitable result of the
legislative process. Neither I nor the President are happy
about some of those changes but the political climate in the
land — and the communications failure of the private sector —
made those changes inevitable.
The Administration's commitment has been, and continues
to be, toward less, not more Federal intervention. But we
can't fight this battle alone. It is going to take a massive
swing in public opinion, and that, in turn, means a massive
effort to educate the public.
As Abraham Lincoln once said, "I have faith in the people....
the danger is in their being misled. Let them know the truth
and the country is safe."
j^'
Already, in at least a broad sense, there are signs of
a public awakening to the evils of big government.
More and more people are fed up with a Federal Government
that costs a billion dollars a day and is going another billion
dollars into debt every week.
They are sick and tired of a red ink Federal track record
that has yielded 16 deficit budgets in the last 17 years; that
has seen the Federal budget quadruple in the past 15 years,
and has seen the national debt doubled in a decade.
And they are fed up with the growing encroachments of the
Federal bureacracy into their everyday lives. They resent the
fact that today Federal Bureacrats whom they would not have
voted for, did not hire and cannot fire have the power to control
everything from where their children go to school to how their
local communities spend their revenues.
Yet unless this general public dissatisfaction can be
channeled, informed and articulated, the Federal juggernaut
will keep on rolling and growing by the weight of its own
momentum.
The Federal Government today is the nation's biggest single
employer, its biggest consumer, and its biggest borrower. If
present trends continue until the end of this century, government
at all' levels could account for almost 60 percent of our gross
national produc-t — 60 cents out of every dollar.
If that day ever comes, we will not longer be a free country
in any meaningful sense of the word. And to stop that day from
coming, we must act now.
Nineteen seventy six is our bicentennial year. Across the
country millions of Americans are celebrating 'the 2 00th anniversary of a struggle that was fought and won for the freedom of
the individual.
But, like all great and worthwhile undertakings, that
struggle still goes on.
The men and women of '76 and the millions of immigrants
who followed them came to these shores to escape the kind of
government that over-taxed, over-regulated, and, ultimately,
stripped the individual of his political as well as his economic
freedoms.
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3of
Today, 200 years later, the question remains: Do we
preserve the sacred heritage of government of the people by
the people for the people or do we trade our heritage of
freedom for the false security of a state-run economy "of
the bureacrats, by the bureacrats, for the bureaucrats?"
As a citizen, as a father and as one who has seen the
intimate workings of government first hand, I deeply believe
that the central, underlying issue of our time is this basic
confrontation between the freedoms we cherish as Americans
and their erosion by runaway big government.
Our cause is just and our cause is strong. It is up to
us to get it across to the American people.
0O0
3®^
"'REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
MOBILE CHAMBER OF COMMERCE
MOBILE, ALABAMA, FEBRUARY 16, 19 7 6
Congressman Jack Edwards, President William Holland,
Ladies and Gentlemen:
It is.a pleasure for me to be here in Alabama, not
only in the traditional heart of Dixie, but in a city that
is a shining example of the economic vitality of the modern
South. And I am proud to share this occasion with a man
who has again and again stood up for sound principles and
common sense in both government and the economy —Congressman Jack Edwards9 Jack is doing a fine job for
Mobile and for America.
In this election year, when the newspapers and the
airwaves are overloaded with political rhetoric and promises
of pie-in-the-sky, the last thing you want to hear from me
is yet another political speech.
Don't worry. You7re not going to.
"Practical politics too often consists of ignoring facts."
And it is facts — hard, crucial economic facts -~ that I want
to discuss with you today. For, long after the sound and
fury of the 19 76 campaigns are only a memory, the economic
decisions that we make in the months immediately ahead will
shape our lives and the lives of our children.
As I appear before you this evening, Washington has
already entered the first phase of the annual economic battle
between the President and the Congress on what we should do
and where we should be heading during the coming year.
And rest assured that the advocates of big government will
be in there pitching for more federal interference and more
federal spending with all of "the enthusiasm of boll weevils
burrowing into cotton plants.
WS-654
In all of the material that will be flowing forth from
the White House during this period, one point will be
•
abundantly clear; we believe that the first and foremost task
of the Nation in 19 76 is to restore the vitality of our
economy. We are encouraged by the progress that was made
during 1975:
As you will recall, the year 19 75 opened with
inflation raging at 12%; we have cut that rate nearly in
half — to about 7%;
During the spring of 1975, the unemployment rate
reached 9%; today it is at 7.8%.
— With the January employment increase of 80.0,000,
nearly all of the jobs lost during the recession have now
.been restored.
— During the third quarter of 19 75, we registered
the biggest single jump in the GNP in 25 years and the
fourth quarter's pace, while slower, still indicates the
recovery is maintaining itc momentum.
There are also many other indices of an economy
that is regaining its health — higher industrial production,
growing retail sales, and a very bullish stock market.
Thus we made considerable headway in 1975, and we will
make even more in 1976. But it's not good enough and this
is certainly no time for complacency. The unemployment
rate is far higher than we can tolerate. And inflation is
by no means under control. In fact, it remains the most
dangerous enemy of future economic growth, and we must do
nothing to unleash another inflationary spiral. The ruinous
inflation that crested in 19 74 was the chief cause of the
severe recession of 19 75; if we embark once again upon
excessive fiscal and monetary policies resulting in double
digit inflation, I will guarantee an even worse recession
than before. Please let us not permit the pain and suffering
of the 1974-1975 recession be in vain.
There will be a tendency in Washington in 1976, especially
as the elections draw closer, to look with great alarm upon
the current unemployment figures and inflation figures.^
You are going to hear a great deal more rhetoric incoming
months about the so-called indifference of this Administration
to push hard enough, to spend enough, to act decisively
enough in solving our problems. We must not fall prey to those
who offer us instant cures — the so-called compassionate
people who promise us everything but deliver us only one thing:
inflation.
3°7
-3In judging this matter, I urge that you step back
for a moment and ask yourselves a few basic questions;
— How is it that the richest and most powerful
country on earth could wander into this economic quagmire?
— How could the most dynamic economic system in
the world become infected with the diseases of both inflation
and unemployment at the same time?
Indeed, where did we lose our way as a people?
I believe it is essential to decide how we got into
this mess before we can really determine the best way to
get out. Otherwise, we may just become more deeply mired„
Economists argue about this a good deal. Politicians often
ignore this question entirely, and seek instead to capitalize
on the effects of problems. But to me, there is no real
mystery about how we got here, nor what we must do.
It is clear, for instance, that the economic and social
problems of today do not spring from lack of concern in
Washington. In the 10 years after President Eisenhower
left office, the Congress increased the number of domestic
spending programs from about 10 0 to over 1,0 00.
It is also clear that we have not failed from a lack of
compasssion. Since 1960, this Nation has spent over one
trillion dollars on social programs to support people and
communities that needed help. 7 3% of our entire budget is
now committed to social (non-defense) programs. The compassion
and generosity of the American people should not be in question,
<
v
Nox can we say that our problems stem from a lack of
trying to control the business cycle. In the 1960's, it
was popular to believe that the government could mandate
permanent prosperity through the Great Society, could
fine-tune the economy and abolish the ups and downs of
economic growth. And we tried to do that with the tools of
fiscal and monetary policy, making one adjustment after another.
Nor do our troubles result from a lack of effort on
the part of the government to control business -- big and
small. Today we have an army of approximately 100,000
government employees whose mission is to regulate and control
almost every activity of the private sphere.
Nor have we had any lac]: of vision from our leaders.
The staple of Washington life has become the politician with
grand visions and even grander promises of what can be
accc-mplishcd if he can only spend more of our money or can
be gi ven^i ul LTJiT aVd J or i ty over our lives.
3*f
So, over the past 10-15 years, the government has
tried many, many solutions. Yet the problems persist and
our people grow frustrated and disillusioned.
Does this mean there are no answers? Of course not.
What it means, I would suggest, is that we have been taking
fundamentally the wrong approach. We suffer not from a
lack of government action, but from an excess of government
action.
The trouble with the Federal Government is that it is
trying to do more than its resources permit, to do many
things that it cannot do very well, to do some things that
it should never do at all, and to do all these things at
the same time. That just does not make common sense.
Excesses in the government have been most apparent, I
would suggest, in three critical areas affecting the economy;
Fiscal policy;
— Hone tary po1i cy; and
Regulatory policy.
No one who has followed the pattern of federal spending
in recent years can fail to be impressed by its explosive
growth.
The federal budget has quadrupled in 15 years;
We have had 16 budget deficits in 17 years;
And.we have doubled the national debt in just 10
years time.
The Federal Government today is the Nation's biggest
single employer, its biggest consumer, and its biggest borrower.
And if present trends continue until the end of the century,
government at all levels will account for almost 60rc of our
gross national product. Let there be no doubt that if
government ever becomes such a dominant part of our society,
our economic freedoms will disappear, and when we lose them,
our political and social freedoms will -not be far behind.
Partly to accommodate the Federal Government's borrowing
needs in the private markets, there has also been a less
noticed but equally significant shift in monetary policies.
From 1S55 to 1965, the" money supply of the United Sharer: was
3*6growing at approximately 2-1/2 percent a year, and we
enjoyed relative price stability. From 1965 to the present,
however, the average rate of growth has more than doubled,
and it is no accident that during this period we have also
had spiraling inflation.
This past decade has also seen unparalleled growth
in the regulatory apparatus of the government.
Regulatory agencies of the government now exercise direct
control over 10 percent of everything bought and sold in
the United States and indirect control over almost every
other sector of the private economy.
Whenever I start talking about the bureaucracy in
Washington, I am reminded of a remark by Pope John.
The Pope was entertainina a visitor once who asked him? How
many people work in the Vatican? The Pope thought for a
second and said — "About half". Well, that's usually
true in the bureaucracy too. But the Federal regulators
are a different breed of cat -- they seem to work harder
than anybody else in Washington, and they're even more
creative, as their results certainly show. I'm told that
the American people now spend over 130 million work hours
a year filling out Federal forms. That too, just doesn't
make good sense.
The regulatory process has now become so burdensome,
for all businesses, big and small, that it is threateninQ
to strangle much of free enterprise in red tape. Consider
also the staggering costs involved. One major firm
estimates that in 1974 it spent $1.3 billion dollars
complying with or in anticipation of government regulation
at all levels. It has been estimated that the American
people paid the equivalent of $2,000 per family in increased
costs for all the goods and services they purchased because
of regulation.
When you add up all these factors of excessive government
spending, excessive expansion of the money supply, and excessive governmental regulation, one conclusion seems inescapable;
both our inflation and our unemployment should bear a label —
made in Washington, D.C.
The fact is that governmental excesses of the past 15 years
became a strong, underlying cause of inflation during the
1960fs and they remain so today. The rise in government spending
has added enormously to the aggregate demand for goods and
services in the economy, thus forcing up prices. The heavy
need for Governmental borrowing means it must now have 30% of
all new long term lonable capital, leaving only 20% to the
private sector.
It is also clear that as the forces of Big Government have
been fed and nourished, our private enterprise system --- the
system that provides five out of every six jobs in the country
and is the driving force of our society — has become sadly
undernourished. We have gradually channeled a higher and
higher percentage of our resources into consumption and Government spending and less and less into savings and investment.
As a result, the United States since 1960 has had the lowest
rate of capital investment of any major industrialized country
and one of the lowest rates of productivity growth. There
can be no doubt that higher productivity is the secret to a
higher standard of living. Thus. :i t is clear, as President
Ford said, that we must strike a new balance in our economy —
a balance that favors a much stronger and healthier free
>r
enterprise system.
If the country could grasp these central truths — and
I believe people are beginning to understand and appreciate
them — then it would be much easier for all of us to agree
upon the solutions. As I have said, I believe the solutions
are relatively straightforward — and, I might add, they are
the basic policies of the Administration.
The centerpiece of our economic policies is the President'
proposal to cut the growth in Federal spending and to return to
savings to the American taxpayer in the form of a major tax
cut.
In the last several months, the President has spent
literally hundreds of hours trying to pare down the budget -in fact, he spent more time on this budget than any President
in a quarter of a century. The result was a very realistic
and solid budget that calls for a $28 billion cut in projected
spending growth. Instead of spending over $420 billion, the
President is asking that in fiscal year 19 77 -- which beqins
this October 1 — that we limit spending to $394 billion.
We should realize that in the last two years alone, Federal
spending has grown by 40%. Under the President's proposal,
next year's spending increase will be limited to 5.5% -- the
smallest increase since the days of President Eisenhower.
As the President said in his State of the Union Address,
The only way to hold down the cost of living is to hold down
the cost of government. No government can spend more than
it makes, year-in, year-out, without reaching a point of
financial collapse. None of us w^nts the tragic experience
of New York City this past, year to become a preview of our
future as a Nation.
By holding down the growth in Federal spending, we can
also afford additional tax cuts and thus leave more money
in private hands where it can do the most good.
What the President is saying is this? We can have a
much bigger and much better tax cut if we will only cut the
growth in spending.
I think two points are critical: One, the tax and
spending plan would put us on the road to balancing the
Federal budget within three years. Secondly, if we stay
on that road, I believe it should be possible to enact another
tax cut before, the end of the decade.
The government has other ways to curb inflation. We are
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Jo?
seeking greater competition in private industry through
antitrust laws and we are trying to lower barriers to
international trade. But the key is to restrain Federal
spending, reduce the horrendous Federal deficits, and
strengthen the free enterprise system.
If we are to fulfill our promise as a Nation, it is
equally vital that there be enough jobs. The President's
tax and spending cuts are a major part of that effort. But
we can and must do more. We must offer the American people
and American industry much greater incentives to invest in
the future ~~ to expand our supply of housing, to build new
plants and equipment, to modernize industry, to expand our
energy resources, and of greatest importance, to accommodate
a growing labor force. The capital investment needs of the
future are -extremely large: about $4-]/2 trillion in .the next
decade — or three times as much as we spent in the last
decade.
Most of the responsibility for raising new capital must
lie with the private sector -- a private sector that is invigorated by getting the government out of the marketplace,
invigorated by a reduction in taxes, and invigorated by
striking a new balance that favors less consumption and
government spending and more savings and investment.
Last summer, on behalf of the Administration, I proposed
a plan that would eliminate the double taxation of corporate
dividends and would thus encourage greater private investment.
Most of our European competitiors have already adopted this
tax approach, and I firmly believe it is time for the United
States to catch up. That tax plan remains a central part of
our economic strategy within the /administration.
Furthermore, the administration is advocating a broadened
stock ownership plan to encourage more Americans to invest in
American-owned companies.
J/t>
Another major aspect of the President's economic
program is in the regulatory field. It is even more
difficult to achieve reform of Federal regulations than
to fill out the federal forms that go with them, but we
are determined to try. Specifically, we are now seeking
to lighten the regulatory burden in four key areas -banking, airlines, trucking and railroads — and we are
currently investigating what can be done in others. It
is no accident, we believe, that three of the industries
in greatest difficulty today — airlines, railroads, and
utilities — are also among the most highly regulated
industries in the country.
If time permitted, I would like to talk about many
of the other aspects of pur policies -- what we are seeking
to do in. energy, what we are trying to achieve in our
international policies, the cushions that we are placing
beneath the unemployed, etc.
But let me conclude with these few observations:
As we enter our third century as a nation, I believe
the time has come not to reappraise our dedication to a
better life for all -- that dedication is clear -~ but to
reappraise what we can pay for and how we can do it. The
current plight of New York City, the disease that afflicts
the British economy, and the overwhelming size of our own
federal deficits are all grave warnings to us. We can pay
for what we now have and provide for the future only if
our great capitalist economy does its job -- produces goods
in a free market and makes a sufficient profit.
I am sick and tired of people apologizing for the
free enterprise system. It has given this country the
highest standard of living and the greatest prosperity
ever known, and of most importance, 'has helped to give us
the greatest freedom ever known to man. And it will
continue to do that unless it is crushed by the juggernaut
of big Government. What we need are not fewer but more
capitalists in the United States -~ more people with a
real and direct stake in the profits generated by a
productive economy. We cannot continue to have more and
more of our citizens involved only in receiving benefits
from the government, and fewer and fewer people responsible
J7
-10for paying for the benefits. We must broaden the base of
those who work and narrow the base of those who are able
but don!t want to work.
President Ford urged that we strike a "new balance1' in
our national life:
—A balance that favors greater freedom and vitality
for our private enterprise system;
--A balance that favors greater honesty and realism
in dealing with the challenges of our timec
These are great goals — goals worthy of the qreatest nation
on earth. We should not begin our Bicentennial year by
retreating into the past, but by going forward into the
future with a combination of patience, realistic houel courage,
and common sense.
If we work together with common purpose and conviction
-- with pride in ourselves and our Nation — the goals we
share today can become the first achievements of our third
century together.
President Ford has set a course which points us in
the right direction and will permit us to get a grip on
these problems, but it will take several years, not months,
to bring this about. Unfortunately, the election is only
a bit over nine months away. There will be calls from the
opposition for "sweeping changesn and "broad new initiatives"
which will really mean bigger spending, bigger deficits
and ultimately bigger governmental control of the economy.
We must persuade the American people that this course is
wrong and that the other approach is much sounder in the
long run. The real choice is between greater government
control or greater individual freedom. That Is the decision
before us. Thank you.
0O0
7^
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON INTERIOR AND INSULAR AFFAIRS AND
THE SENATE COMMERCE COMMITTEE
TUESDAY, FEBRUARY 17, 1976, AT 9:30 A.M.
Financing an Alaskan Natural Gas
Transportation System
Mr. Chairmen and Members of the Committees:
I am pleased to testify before you today concerning
the proposed Alaskan natural gas transportation systems. I
will concentrate my remarks on the questions of the feasibility
of financing this large project in the private capital markets.
At the outset, I should note that we believe that it
is possible to arrange a financing without Federal financial
assistance. Although the unprecedented size and the risks
of the project make private financing a difficult task, we
are convinced that with the proper regulatory actions as well
as participation by the various parties benefiting directly
from the project, a private financing could be accomplished.
Federal financial assistance should not be used as a
substitute for proper regulatory action as this would surely
WS-637
3/^
-4generated by the project. The preliminary financing plans
involve capitalization of 25 percent equity and 75 percent
debt.
Before they will provide funds to either of the proposed projects, both equity and debt investors must be
satisfied that the project is creditworthy and that the
level and certainty of their expected return on investment
is adequate to compensate them for the risks they assume.
The bulk of the equity will be provided by the project
sponsors, and the debt will be sought mainly from financial
institutions.
Although debt investors generally assume some amount
of risk in return for higher interest rates, the large
amounts of capital required for this project probably cannot
be raised if there is any substantial perceived risk to the
timely repayment of principal and interest.
Thus, a prereq-
uisite to financing this project is to establish that payment
of debt service could be expected regardless of what other
events occur.
The two major financial risks faced by investors
are (1) the risk of non-completion of the project and (2)
the risk that, once completed, revenues will be insufficient
to cover all project costs — including debt service. Non^
completion could result from unforeseen construction difficulties, excessive cost overruns that make the project
uneconomic, environmental suits, and other legal or political
difficulties.
Insufficient revenues could result from (a) the
.5.
J7*
failure of regulatory agencies to allow tariffs which recover
the full project costs, or (b) interruption of gas flow due
to natural disaster, mechanical failure, or other force
majeure events.
The Non-Completion Risk
In the event of non-completion, the fundamental concept
of project financing (i.e., service of debt through project
revenues) is frustrated and, in the absence of other protection, the lender loses his investment.
Therefore, before
committing funds to an Alaskan gas transportation system,
lenders will seek (a) assurances that there are adequate
funds to finance completion and (b) protection in the event
of non-completion for reasons other than lack of funds.
The first non-completion risk of major concern to
investors involves large cost overruns which could result
from such things as delays in the construction schedule
errors in engineering estimates.
or
In addition, construction
delays would add to debt-interest costs.
The second major non-completion risk of concern to
potential lenders is the fact that their debt might not
be repaid if the project never goes into operation to
generate the revenues they are looking to as the primary
source of their debt service.
As in the case of cost over-
runs, investors must have adequate assurances that their
-6debt will be repaid in the event of non-completion before
they will advance funds to the project.
Thus, the key question is who will finance cost overruns and bear the other risks of non-completion of the
project? At this point in time, the question remains
unanswered. If a private financing is to be arranged,
these risks must be borne by one or more of the various
parties standing to benefit directly from the project,
including:
--Equity investors
--Other gas pipeline and distribution companies
receiving gas
--Gas consumers receiving gas
--Owners of Alaskan gas reserves or
--State of Alaska.
We believe that these potential project beneficiaries
collectively have the capacity to provide lenders the
necessary assurances against non-completion risks. The
financing capabilities of these main project beneficiaries
are discussed at some length in our contribution to the
Interior Department Report. I refer you to that report
for our detailed analysis, but I would like to summarize
for you briefly our analysis of the various categories of
beneficiaries.
Equity Investors. As discussed in the Interior Report,
it appears that, considering both internally generated
cash flow and external financing possibilities, the
current group of project sponsors could provide the
requisite equity capital — although this would clearly
be a large undertaking for a group of companies of
this size, and some problems could arise for particular
companies.
However, the lenders will also be looking to the
project sponsors to provide part of any cost overrun
financing that might be required or possibly assist
in repaying debt in the event of non-completion.
While such commitments do not require the immediate
generation of cash, they do result in a contingent
liability of an indeterminate and conceivably quite
large amount. As they themselves have indicated,
the current sponsors apparently do not have the
capacity to assume fully the risk of repayment of the
project's debt.
Gas Pipeline and Utility Companies. There are a number
of interstate gas pipeline and distribution companies,
other than El Paso and those in the Arctic Gas group,
who could be considered as potential project sponsors.
For example, the ten iargest of these other interstate
-8gas pipeline companies (in terms of natural gas sales)
had a combined internal net cash flow of about $1.5
billion in fiscal year 1974. Were the 1974 cash flow
levels to continue, the combined internal cash flow
of these companies over a six-year period would be
around $9.0 billion. Thus, they could make a substantial contribution toward financing and bearing the
cost overrun and non-completion risks of this project.
Owners of Alaskan Gas. Another potential source of
financing would be the owners of the gas reserves.
They recognize that without a transportation system
the large proven gas reserves and potential future gas
discoveries are virtually worthless. However, it must
be recognized that any decision by the producers to
help finance the project would have to take into
account other competing demands for funds, the rates
of return on alternative projects and the fact that
they are already committed to provide substantial
additional amounts of capital in order to produce
North Slope oil and gas. One action which could
affect the willingness and ability of these companies
to participate in the financing would be the deregulation of wellhead price for Alaskan gas.
Gas Consumers. A third additional source of financing
is gas consumers. The large benefits that are expected
-9-
J77
to accrue to consumers of Alaskan gas would appear
to justify the adoption of regulatory procedures which
would involve them more directly in financing and
bearing the risks of this project.
With respect to
the cost overrun and non-completion risks, a surcharge on current gas consumption might be used to
help finance cost overruns and/or repay project debt
in the case of non-completion.
Very large amounts of capital could be raised
in this way.
One form of surcharge would be a
direct add-on to the current utility bill which
would be used to finance cost overruns. Another,
somewhat more indirect, form would be the inclusion
of work in progress in the rate base so that consumers would pay the interest charges on project debt
and return on equity investment while the project is
under construction.
A consumer surcharge mechanism,
in effect, increases the current cost of gas to consumers but reduces future costs to a level lower than
would prevail if consumers did not help finance the
project.
This reduction in future costs comes about
because the amount of debt service (i.e. principal
and interest payments) that would have to be recovered
through transportation tariff charges would be reduced.
-10State of Alaska The State of Alaska is another potential source of financing. Alaska would receive significant benefits if production of Alaskan gas were
assured by the building of a transportation system
since it would receive a 12-1/2 percent royalty and
approximately a 4 percent production tax. Thus, the
State of Alaska, as a direct beneficiary of a transportation system for gas, might decide to finance a portion of the pipeline or help finance cost overruns or
guarantee a portion of the debt to insure its repayment
in the event of non-completion.
Other. Other potential project beneficiaries who might
bear some of the cost overrun and non-completion risks
include (1) large industrial gas customers who could
provide substantial amounts of capital through advance
payments in exchange for an assured supply of gas and
(2) the financial institutions providing debt capital
who might be willing to commit to finance some level
of cost overruns.
As this summary indicates, there are direct benefici-
aries of the project who together have the capacity to finance
substantial cost overruns or repay the project's debt in the
case of non-completion. '
-nThe Risk of Insufficient Project Revenues
Even if the various project beneficiaries were able
to provide adequate assurances to the prospective lenders
with respect to non-completion risks, the difficult question
of who would bear the risks of inadequate project revenues
would remain.
With projects of this size and complexity,
even a low risk of interruption or diminution of revenues
is of concern to lenders. As in the case of non-completion,
if a private financing is to be arranged, this risk must be
borne by the various parties standing to benefit directly
from the project.
There are two major ways of satisfying the lender's
need to have some mechanism to insure debt repayment in the
unlikely event of a long-term service interruption.
First,
the lender might be satisfied by a clearly creditworthy party,
or parties, agreeing to guarantee repayments of the project's
debt.
In many projects, this type of guarantee is provided
by the project sponsors. However, in the present case,
the proposed projects are so large that the current group of
gas pipeline and utility sponsors have indicated that they
do not have sufficient aggregate credit to satisfy the
lenders.
Therefore, if a private finaicing is to be achieved,
it may be necessary to strengthen the combined credit of the
sponsoring group by adding new members ifor example, additional gas pipelines and utilities, and/cr the State of
Alaska and/or the gas producers).
As I nt ted earlier, this
-12could also assist in covering the risks of project overruns
or non-completion.
Second, users of the project's output or service might
enter into what are called "all events full cost of service
contracts." Under such a contract, the purchaser is obligated
to pay a minimum amount sufficient to service the project's
debt and cover certain other project costs even if he does
not receive output from the project. In short, he pays
regardless of what other events may occur. Thus, lenders
might be satisfied with an "all events full cost of service
contract" which would require gas shippers to pay the full
cost of operating the transportation system (including debt
service), regardless of whether gas was flowing or not. In
theory, this type of tariff would assure lenders that, once
the project is completed, revenues would always be adequate
to cover the project's expenses. Under such a contract, the
costs could be passed on to the local gas utilities, who in
turn, assuming approval by relevant State regulatory authorities, would pass on the cost to gas consumers.
Such a tariff would be essentially an insurance program
underwritten by consumers to cover whatever risks commercial
insurance companies will not underwrite, or do not choose to
underwrite, at reasonable costs. By accepting these risks,
consumers would not only assist in arranging a private
financing, but would also benefit from lower gas transportages from two sources. First, the insurance premiums
37?
associated with an unconventional commercial insurance program
would be avoided.
Second, the debt interest costs would be
lower, reflecting the increased creditworthiness of the project.
Thus, an all events full cost of service tariff could
provide substantial assurances to lenders with regard to the
adequacy of revenues to repay the project's debt.
If, in
addition, there were a wide distribution of Alaskan gas,
this could minimize any contingent price increase which consumers might face under such a tariff were there to be a
service interruption.
Taken together, a clearly enforceable
all events full cost of service tariff and a wide distribution of Alaskan gas do offer one way of handling the risk
of insufficient project revenues.
Nevertheless, it should be clearly recognized that an
all events full cost of service tariff implies that gas consumers would bear much of the project's post-completion risks,
including force majeure service interruptions or even costs
resulting from management error. Whether it is reasonable
to ask certain gas consumers to bear this level of risk must
be judged in relation to the benefits those gas consumers
could expect to receive, and whether such risk bearing is
required in order to get the project financed.
Apparently,
the gas consumers receiving Alaskan gas could expect to
receive substantial economic benefits.
I believe that under
the present system of regulated wellhead natural gas prices,
gas consumers are in a favored position and could receive
the bulk of the net economic benefits made available by a
gas transportation system.
-14From the standpoint of arranging private financing, I
believe that an all events full cost of service tariff could
be needed. Nevertheless, it would be premature to rule out
the possibility that the level of risk which gas consumers
would bear under an all events tariff could be reduced by
adopting something less than the full cost of service feature.
This might be accomplished by carefully defining in the
tariff which categories of costs are allowed to be passed
on in all events. In addition, provision might even be
made for a reduction in the return on, or a partial loss of,
stockholder's equity in the case of management error. Through
specially designed tariff formulas, we believe the risks
associated with an Alaskan gas transportation system can be
equitably shared between project sponsors and consumers.
In any event, such a tariff would have to be approved
by the Federal Power Commission--a decision that has not yet
been made. If approval does occur, it may be necessary to
consider ways of assuring both the gas pipeline and gas distribution companies and the lenders who are relying on this
tariff that the tariff will be maintained and enforced over
the life of the project.
Feasibility of a Private Financing
On the basis of this analysis, we believe that the
various private parties standing to benefit directly have
the capacity to finance the project and bear its risks.
&6
Since the project seems to be economic on current price/cost
estimates, there is sufficient incentive for these parties
to arrange a private financing provided the needed regulatory
actions are taken, including steps to involve gas consumers
in sharing the risk of the project.
Certainly the extent
of involvement of gas pipeline and distribution companies,
as well as the extent of participation of the owners of the
reserves, will be important.
However, the regulatory condi-
tions under which the project will operate will be critical
to determining whether the project will be financed privately.
Government Financial Assistance
Whether a totally private financing is achievable will
remain a matter of speculation until one of the projects is
selected and its sponsors are able to determine further the
capabilities and intentions of the potential financial participants and to determine the regulatory conditions under
which the project would be constructed and operated.
If the
needed regulatory actions are not taken and a private financing cannot be arranged, then we believe that the economics
and risks of the project raise serious questions as to whether
it should be undertaken at the present time.
On that basis,
I think it would be premature to consider legislation providing Federal financial assistance to the project.
Despite this, if the Congress eventually determines
that some form of Federal financial assistance to the project
-16is both necessary and desirable, then the following important
considerations should be kept in mind. First, any Federal
financial assistance granted should be kept to the absolute
minimum needed to achieve the desired result: Construction
of the gas transportation system. Federal assistance should
supplement and facilitate the maximum feasible amount of
private financing for the project; it should not substitute
for available private financing or for appropriate regulatory actions.
Second, any legislation providing such assistance should
give the administrator of this assistance adequate flexibili
to tailor the form of financial assistance to the needs of
the project. At this time, we, of course, do not know which
of the particular financial risks of this project which I
have discussed may prove insurmountable without Federal
assistance and it would seem desirable to defer legislation
until the problems of the project are sufficiently well under
stood to allow identification of why the private market cannot respond. However, possible forms of such assistance
would include Federal guarantees of the project's debt again
certain specific risks such as non-completion of the project
or long-term service interruptions, Federal insurance agains
the service interruption risk, or the financing of cost overruns above some determined level. The exact type, amount,
and terms of any Federal assistance would have to be worked
out through detailed negotiations with the project's sponsor
Third, it is important to minimize the impact on our
capital markets and on the management of the Federal debt
of any Federal financial assistance program. Any type of
Federal financial assistance resulting in the undertaking
of investments that would not otherwise have been made
leads to some redirection of resources in our capital
markets. Such incentives increase the demand for capital
while having little or no effect on the overall supply of
capital and thus tend to cause interest rates to rise.
Accordingly, we believe it is essential that the Secretary
of the Treasury have the authority to approve the timing,
terms, and conditions of any Federal guaranteed securities
that might be issued.
Conclusion
In conclusion, I would like to stress again our belief
that if appropriate regulatory and administrative actions
are taken, Federal financial assistance to an Alaskan gas
transportation system will not be necessary and therefore
I would urge that no such Federal assistance be provided at
this time. Instead, I would recommend that one or more of
the following actions be taken:
1. Prompt selection of a specific gas transportation system;
2. Grant of all necessary governmental authorizations including timelv resolution of all environmental and legal questions regarding the project;
-183. Approval of all events tariffs which permit
shippers to pass on a substantial portion of
the costs, if not the full costs, of the project
to the ultimate consumer coupled with strong
assurances that they will be maintained in
effect and enforced over the life of the project;
4. Approval of a mechanism (such as inclusion of
work in progres in the rate base) by which the
principal and interest payments on some part,
if not all, of the debt funds used during construction could be passed on to gas consumers
even in the remote contingency of non-completion
of the project;
5. Approval of a consumer surcharge mechanism
which would provide funds to help finance the
project;
6. Decontrol of natural gas prices or setting the
wellhead price of Alaskan gas at a level high
enough to attract the financial participation
in the project of the owners of the gas.
These actions would clarify the present regulatory and
administrative uncertainties that are now holding up this
project and would provide equitable means whereby the private beneficiaries of the project can assist in its financing and a sharing of the risks without the unnecessary and
-19-
p6
undesirable financial involvement of the Federal Government.
In my view, there are great long-run dangers if we
continue to substitute government financial assistance for
difficult regulatory decisions which equitably apportion
the costs and risks of large energy projects.
I believe
that this project affords us an opportunity to show that,
through innovative governmental action, we can create the
conditions necessary for the private capital markets to
finance this project.
Thank you Mr. Chairmen, and I would be happy to answer
any questions you and the Committees may have at this time.
FOR RELEASE UPON DELIVERY
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
WASHINGTON, D.C., TUESDAY, FEBRUARY 17, 1976
Mr. Chairman and Members of this Distinguished Committee:
It is never easy to.go through the process of
reconciling the manifold demands for more government
spending on the one hand with our willingness and
ability to pay for these demands on the other. But
while the budget, and particularly the fact of a
substantial budget deficit, are of course intimately
related to the issues which face us, we are not here
to consider proposals to increase or reduce the size
of the deficit. Today, we are here to consider another
substantial increase in the temporary debt ceiling.
But in addition, we also have the rare opportunity to
consider legislative proposals which, simply stated,
help everyone and hurt no one.
I refer, of course, to Treasury's proposals to
amend the Second Liberty Bond Act in two respects.
First, we are proposing that the authorized maximum
maturity of notes issued pursuant to that Act be changed
from seven years to ten years. And second, we are
proposing that the amount of long-term debt exempted
from the 4-1/4 percent rate ceiling imposed by the Act
be increased by $10 billion.
While these proposals are not new, they are more
important today than ever before. The reasons upon
which the restrictions in existing law were originally
based simply no longer apply. Indeed, there are few,
if any, observers of the capital markets who believe
the existing restrictions are healthy for the government,
for the capital markets, for the economy or for the
people of the nation.
WS-651
- 2 In addition, we are also proposing that * the 6 percent
rate ceiling on Savings Bonds be removed. Such action
would permit the rate on Savings Bonds to be varied from
time-to-time, reflecting the interests of both taxpayers
and savers.
DEBT LIMIT
Before turning to these key proposals, let me address
the primary question facing this Committee today: An
increase in the temporary debt limitation.
As you know, the present temporary debt ceiling of
$595 billion (enacted on November 14, 1975) will expire
on March 15, at which time the limit will revert to the
permanent ceiling of $400 billion. The Committee estimates
of when the debt subject to the limit would approach the
$595 billion level have been quite accurate. In the final
week before the expiration of the temporary limit, the
actual amount of debt subject to limit will closely
approach the temporary limit. Accordingly, during that
week, the limit may hinder the effective management of
the Treasury's debt and cash balance.
As is customary, I have provided you with a monthly
record of the debt subject to limit from June 30, 1975
through September 30, 1977, and interim monthly estimates
for months in which the peak does not occur on the last
day of the month. While today we are concerned primarily
with establishing a debt limit for the near term, data is
provided as an indicator of our financing requirements
based upon the President's budget through fiscal 1977.
As I will discuss in detail later, these requirements have
serious debt management implications.
Specific Requirements
The Second Concurrent Resolution on the 1976 Budget
provided for levels of public debt of $622.6 billion at
the end of the fiscal year 1976 and $641.0 billion at
the end of the Transition Quarter. It is, however, not
clear what level for cash balance was assumed in the
Congressional Budget Resolution. Furthermore, the level
J53
- 3 of debt in the Resolution apparently does not provide
for agency debt that is subject to the statutory
limitation. As a technical matter, moreover, depending
on the cash volume assumption, the peak debt levels are
reached on June 15 and August 31.
In the Federal Budget for fiscal year 1977, debt
subject to statutory limitation is estimated at $624.2
billion at the end of fiscal year 1976 and $643.1 billion
on September 30. These figures are based on an assumed
$9 billion cash balance. The Treasury estimates assume
a $6 billion cash balance and a $3 billion margin for
contingencies and show debt limit needs of $630 billion
at the June peak and $645 billion at the August peak.
Accordingly, we are requesting that the temporary debt
limitation be reenacted at $645 billion through
September 30, or, in any event, not less than $630 billion
for June 30.
SECOND LIBERTY BOND ACT AMENDMENTS
Let me now turn to an issue of only slightly less
urgency and far greater concern: the current confinement
of Treasury borrowing to maturities of seven years or
less. To state our position most directly, we believe
this restriction poses severe risks to the capital markets
and provides nothing in the way of economic benefits.
Objectives of Treasury Debt Management
It is clear to all of us that the national debt
cannot be managed without careful consideration of its
impact. Because Federal borrowing now accounts for almost
80 percent of all financing in our nation's capital markets,
all other markets, all other financial assets are directly
influenced by the structure of the Federal debt. As a
result, the structure of the debt has an impact on our
economy; it can contribute to economic stabilization or
detract from it. What are the implications of this
tremendous influence? In my view, it means that we must use
every available tool to insure that Federal borrowing needs
are met in such a way that the resulting debt structure
permits financing at the lowest cost, both in terms of
interest rates and economic and financial dislocation.
- 4 Given these objectives, it is no longer possible to
justify severe and anachronistic constraints that
result in a debt structure that has been very expensive
in an economic, as well as a financial sense. Moreover,
in light of our massive borrowing needs, these constraints
are destined to have an even greater adverse impact in
the future. The extensive economic work which has been
done in the area of debt structure has not only confirmed
the potential for harm, but has also demonstrated conclusively that there are no countervailing benefits.
Consequences of the Current Restrictions
We know what the current restrictions have meant in
absolute terms: a decline of more than 33 percent in
the average maturity of the publicly-held debt in the
last three years alone and more frequent and larger
Treasury borrowings. But the question I want to concentrate
on today is why we care: why we believe there are serious
dangers in confining Treasury borrowing to only the short
end of the market.
We care primarily because over-reliance on short term
financing, as reflected in a short and shortening maturity
structure and the resulting lack of balance in the overall
debt structure exposes us to adverse financial and economic
effects:
-- First, it poses the risk of higher Federal
borrowing costs and imposes unnecessary
transaction costs;
-- Second, it contributes to a more volatile
market environment, placing substantial
burdens on financial intermediaries and
threatening the ability of the private
sector -- and particularly small and mediumsized businesses -- to meet financing needs;
-- Finally, it poses an unmeasurable and
uncontrollable threat to sound fiscal
and monetary policies.
- 5Cost
Our concerns begin with the fact that unless the
Treasury is authorized to balance its borrowing throughout the maturity ranges, the taxpayer will be vulnerable
to short run changes in interest rates. Moreover,
whatever may happen with respect to interest rates, a
debt structure weighted heavily to the short end imposes
unnecessary transaction costs.
In periods of unexpected rises in interest rates,
such as we have experienced during most of the last
decade, the average cost of borrowing in the short-term
market, and subsequent refunding in this market, may
well exceed the rate for borrowing long-term in the
first place. But in pursuing these proposals, it is
not our purpose to suggest that interest rates are
headed higher, or that any such estimates -- guesses
may be more accurate -- ought to play a role in our
consideration of these statutory limitations. Rather,
I am suggesting that, from the standpoint of costs, it
is imprudent to have statutory limitations that in
effect mandate further dramatic shortening in the
maturity structure of the debt. We need a balanced
debt structure, not an extreme one.
In addition to possible interest rate costs, there
are heavy transaction costs, which must be borne by the
taxpayer. When Treasury borrowings are confined to the
short-term area, obviously a large amount of debt
roll-over is necessary, relative to what would be
necessary if we could borrow more in the long-term
area. Each time there is a roll-over, there are inevitable
direct transaction costs. Moreover, the proliferation
of short-term borrowings means that dealers have to carry
larger inventories of securities. The cost of carrying
such larger inventories adds further to the transaction
price, increasing the overall cost which is ultimately
borne by the taxpayer.
Effect on Private Borrowers
A concentration of Treasury financing in the shortterm area also has potentially adverse effects on private
users of short-term credit. With the Treasury constantly
tapping the short-term market for substantial funds,
- 6both short-term interest rates and the availability
of short-term financing become vulnerable to episodes
of market congestion and to changes in the general
monetary environment.
To understand the potential risks involved, we
must first examine the enormous change in the magnitude
of the Treasury's demands upon the market. Just in
the last 2 years, the overall amount of privately-held
marketable Federal debt outstanding has grown from
$171 billion to $263 billion. When this overall growth
is viewed in the context of a shortening maturity
structure -- occasioned primarily by the limitations
which concern us today -- the results are even more
disturbing. For the first two months of this year,
Treasury borrowed an average $9 1/2 billion per week.
For the comparable period in 1974, the figure was
$5 1/2 billion.
Part of this increase is, of course, due to our
large new money requirements, primarily to finance the
deficits. But the bulk of the borrowing is to finance
the roll-over of maturing debt. And the shorter the
debt structure, the greater the roll-over burden.
From the market's standpoint, there is virtually
no difference between the two components. Each type of
borrowing requires a new underwriting and investment
decision. Roll-overs are not automatic; a holder of
a maturing bill must make the choice between lending
to the Treasury, lending to another borrower, or
spending the proceeds. Accordingly, all of the costs
and pressures of borrowing are there, irrespective of
the purpose of the borrowing.
Let's be clear about the implications.
First, there are substantial pressures on
intermediaries: Given a greater amount of securities
outstanding and a sharp growth in periodic refunding,
dealers must take larger and larger positions. To the
degree that dealers cannot or will not increase their
position-taking capacity, the breadth, depth and
resiliency of the market is reduced. In every day
terms, the market becomes thinner, and prices -that is interest rates -- become more volatile.
- 7Volatility is also enhanced by other factors.
The enormous supply of riskless, liquid Treasury
securities provides a tempting alternative for
investors with psychological concerns about other
assets -- e.g. commercial paper, certificates of
deposits. Thus, in effect our debt structure
facilitates large-scale and highly disruptive
shifts of funds from one short term sector to
another, irrespective of whether such shifts are
economically justifiable.
Finally, the sheer increase in the number of
decisions the market must make enhances the
possibility of distortions.
Consider the process. The dealers on which we
depend to distribute our securities must decide,
separately, the amount they will purchase from us, and
the price thereof, as well as the terms on which they
will sell to their customers. Holders of maturing
instruments have to decide whether and where to
reinvest the proceeds, giving them an opportunity
to rethink their needs in terms of the type of
security to purchase as well as the maturity. And
other investors have to decide whether they are going
to buy our new securities, how much, and at what
price. In terms of volatility versus stability, what
kind of debt structure would we prefer: one that
causes this unsettling process to occur less than 100
times a year, as was the case only a few years ago?
Or today's, under which the process occurs, on average,
nearly every business day.
What are volatility's ultimate by-products? At
a minimum, we are likely to see an increase in rates
on new short-term debt and a higher dealer mark-up on
debt trading in the secondary market. These phenomena
are the natural reaction of investors and dealers to
a condition markets do not tolerate well: uncertainty.
If the uncertainty reaches greater levels -- for
example, as might be the case if market disruption is
accompanied by perceptions of change in Federal Reserve
policy -- many market participants may temporarily
withdraw from the market altogether.
0
- 8 In such circumstances, Treasury's ability to
finance is obviously impaired. But, more importantly,
the non-Federal portion of the market may feel far
more serious repercussions. Local governmental units,
small and medium-sized business -- indeed all but the
top-rated credits -- may find themselves facing serious
difficulties as they are cut-off from sources of funds
to rollover maturing short-term debt.
Moreover, these shocks are not confined to the
short-term market. They spread rapidly into the
intermediate and longer-term markets and begin to
interfere with orderly financing plans of business
corporations and state and municipal governments, as
well as with the growing volume of mortgage financing
which is handled through securities markets.
Again, the impact is particularly acute on the
smaller or lower-rated issuers. Because of the risks
set forth above, investors know that such entities are
especially vulnerable to even normal changes in the
business cycle, especially when they have substantial
short-term debt outstanding.
In the final analysis, therefore, perhaps the most
dangerous consequence is a further reluctance on the
part of investors to make long-term commitments to our
nation's capital growth. This reaction, which accentuates
the pressures on long-term investment caused by fears of
future inflation, has grave implications for our future
economic growth. It discourages outlays for new expansion,
it discourages risk-taking and it discourages entrepreneurshi]
at precisely the time in our nation's economic history when
such conduct is needed most.
Impact on Economic Policy
Another aspect of this continued trend toward a shorter
and shorter debt maturity -- which if carried to an extreme
could give us a national debt with zero maturity, i.e.,
a huge stock of green pieces of paper called money -- is
growing liquidity in the economy. By pumping more and
more liquidity into the system, spending may be increased
at the expense of savings and investment.
- 9Even more disturbing is the fact that these consequences are unmeasurable and uncontrollable. Such
spending effects could come at any time, irrespective
of the course of fiscal and monetary policy at the
time. And if the dam bursts, so to speak, in a period
of growing inflation, the resulting sharp acceleration
of the inflationary trend may be invulnerable to fiscal
and monetary efforts.
We believe debt management should complement longrun economic and financial stabilization goals. An
unbalanced debt structure poses the risk that policy
efforts to control cyclical excesses -- such as might
be appropriate at a future time when the economy is
expanding rapidly -- will be thwarted by an accumulation
of liquidity; and accumulation in the form of shortterm Treasury securities. Given the debt structure
in effect mandated by the size of recent deficits and
the maturity limitations, this risk is serious.
Impact on Interest Rate Structure
The old argument against these proposals is that
more long-term Federal borrowing would drive up longterm interest rates; in other words, that a balanced
debt structure and judicious borrowing in all maturities
would somehow be harmful to the long-term market. This
argument, taken at face value, would imply that the
Government should always finance in the short-term
markets - - a conclusion which not only is wrong in
concept but, as we have shown, has in the past been
extremely costly in both financial and economic terms.
Long-term interest rate levels respond primarily to
investors' views regarding inflation and the future
course of inflation. If inflation is expected to persist,
investors demand to be compensated not only for the use
of their money, but also for the fact that when the money
is repaid, it is worth less, as a consequence of inflation,
than when it was lent out. The result is higher long-term
rates.
In addition, inflation makes all borrowers -- but
particularly the smaller or lower rated firms -- more
vulnerable to economic reversals. Accordingly, it tends
3n
- 10 to enhance the investment risk, with respect to many
long-term investments. Again, this higher investment
risk will be reflected in the interest rate, providing
another source of upward pressure on long-term rate
levels.
Other factors in the level of long-term interest
rates include expectations about the future course of
short-term rates and existing short-term rates. If
short-term interest rates are expected to rise, a
potential long-term investor will demand a rate which
compensates him not only for the principal risk presented
by the investment, but also for the lost opportunity to
rollover short-term debt at higher and higher returns.
Current short-term rate levels also play a role
because many financial intermediaries rely on short-term
credit as a principal source of funds. Thus, for example,
if a savings and loan association is forced to pay higher
rates on short-term deposits, the higher costs must
ultimately be reflected in the rate at which it is
willing to make long-term mortgage loans, and in the
amount of long-term credit it is able to supply.
By contrast, there is no evidence that greater
Treasury access to the longer maturities -- if judiciously
employed -- would play any role whatsoever in the determination of long-term rates.
Indeed, for at least two reasons, just the contrary
is likely to be the case. First, as we have shown,
concentration of Federal borrowing in the short-term area
can lead to greater uncertainty and, at some point, inflation
in the economy. This leads to an increase both in shortterm rate expectations and in the inflation premium
demanded by long-term investors and, hence, to an increase
in long-term interest rates.
Second, as heavy Treasury short-term borrowing drives
up short-term rates, disintermediation takes place. As
outflows occur, the ability of intermediaries to make
long-term loans is curtailed and what loans are made are
at higher rates, reflecting the relative scarcity of this
form of credit.
37/
- 11 In short, as we would expect, the distortion of
the market mechanism caused by the artificial maturity
limitations has no demonstrable benefits in terms of
long-term interest rates or any other legitimate
objective.
Debt Management in 1976-77
I have dwelled at length on the principles involved
because they are crucial to an understanding of the
issues. But let me turn now to the very real practical
problems we face in the immediate future.
Our Government securities market is an immensely
flexible, immensely capable market. Perhaps a good
comparison is a freeway. With all lanes open, a freeway
can handle a tremendous volume of traffic at the most
efficient speeds. But when overloaded, either because
traffic volume is simply too high, or because an accident
or construction has closed some of the lanes efficiency
drops precipitously. Not only is traffic on the freeway
slowed, but the effects spill over on to other roads.
The capital markets roday are hampered by the fact
that, in effect, two of the four lanes are blocked off,
insofar as the Treasury is concerned. We are forced to
confine ourselves to the below two year and two-to-seven
year ranges and these lanes, Mr. Chairman, have become
severely congested.
Congestion exists not only because we must enter
the market to raise new funds to finance our deficits
and meet other new needs, but also because we must borrow
to retire maturing debt. Looking first at new borrowing
alone, by the end of this month, the Treasury will have
borrowed nearly $16 billion in the market in 1976. And
during the remainder of the fiscal year, through June,
we will need to borrow an additional $19-24 billion of
new funds; a total of $35-40 billion in the first six
months of 1976.
In later periods, we will need to borrow nearly
$20 billion in the transition quarter, and some $50 billion
of new money in the market in fiscal year 1977.
Jm
- 12 All in all, our new money market borrowing needs
in the next 19 months -- based on the President's
budget -- will total upwards of $90 billion.
This is nearly $5 billion a month and more than
$1 billion every week.
On top of these new money borrowing requirements,
we also have an immense refunding job to do. In the
same nineteen-month period, over $51 billion of
privately-held coupon debt will mature. Our weekly
issues of 13 and 26 week bills are now in the $7
billion range and will inevitably increase. And our
issues of 52-week bills, every four weeks, are now
in the $3 billion range and may well be in the $4 billion
range by the end of fiscal year 1977. In short, our
total requirements for both purposes are some ten times
our new money needs; approaching $2 billion of
borrowing every day.
To meet these needs, since 1972, we have relied
primarily on the auction technique; that is, the yield
on a particular issue is determined by public bids.
While the auction technique has resulted in substantial
savings to the taxpayer, it has one important limitation.
We have found from experience that, given the absorptive
capacity of the market, auctions of much more than
$2.5 billion at one time result in disproportionately high
interest costs.
All in all, we face a formidable financing job.
It is one that can be managed, but there are severe
costs and serious risks. And I hope, in my testimony
this morning, I have conveyed some of these concerns
to you.
Let me add that there is another legacy in this
dilemma; one that will be faced by my successor, and
yours as well. Even if we are successful in reducing
the size of our deficits and the consequent need for
new money financing, the enormous concentration of
short-term financing will require similar magnitudes
of financing, just for refunding, week after week,
far into the future.
- 13 Accordingly, I must urge this Committee, as strongly
as I can, to respond to these immediate needs. What is
done in managing the public debt this month, and this
year, will have a direct effect on the strength and
sustainability of the economic recovery. Treasury
must promptly minimize its reliance on short-term
bills and maximize its use of the longer intermediate
and longer-term markets. If, instead, we are forced to
rely on short-term financing, we will be obliged to
come to the market more frequently and for larger
amounts. The excessive liquidity injected into the
economy as a result of such shorter-term financing,
when coupled with these more frequent incursions, will
destabilize the overall market environment and will pose
a continuing threat to all other borrowers and to the
financial institutions on which the housing industry,
small business, and all of us must rely.
SAVINGS BOND RATE CEILING
Finally, let me also urge that Congress act to
remove the current 6 percent interest rate ceiling on
Savings Bonds. Since Savings Bonds account for
approximately one-fourth of the total privately-held
Treasury debt, greater flexibility in this area can
make a significant contribution to our overall debt
management objectives. Savings Bonds provide a stable
and important source of credit for the Government and
we must have the flexibility to insure that the return
to savers is a fair one; one that reflects financial
and economic conditions as they may change from time
to time.
Authority to vary the rate on Savings Bonds would,
of course, be exercised with due regard for the impact
of rate changes on depositary institutions. In this
connection, I would note that we have consistently
supported legislation such as the Financial Institutions
Act which would allow all forms of institutions to compete,
on an equal basis, in a free market environment. Freedom
to compete and competitive equality, in our view, will
contribute far more to the health of all institutions
than artificial constraints such as the 6 percent
limitation.
- 14 It is in no one's interest to price Savings Bonds
at rates which would significantly erode depositary
institutions' sources of funds. But it would be
equally undesirable to deny the Government a stable
source of credit by artificial constraints. We need
the flexibility to strike the balance.
•k -k Vc -k
Ladies and Gentlemen, we are not faced with a
Gordian Knot which can be cut only with Herculean
effort. It's a slip knot that can be undone by a
simple pull from the Congress. As Winston Churchill
once said, "Give us the tools and we will do the job."
Give us in the Treasury the tools and we will do our
job of debt management in a manner in which the Congre
can take pride.
Thank you.
o 0 o
DEBT LIMIT
BRIEFING MATERIAL
HOUSE COMMITTEE ON WAYS AND MEANS
&
Page
Public debt subject to limitation
fiscal years 1976 and 1977, monthly
1
Receipts and outlays by fund group 2
Unified budget, monthly 3
Federal funds budget, monthly 4
Trust fund receipts and outlays 5
Off-budget agency outlays, monthly 6
Federal Financing Bank, interest cost saving 7
Federal revenue estimate assumptions 8
Economic assumptions in FY 1977 budget 9
Budget estimating errors 10
Federal Reserve holdings of Treasury securities. ... 11
Treasury borrowing program 12
Treasury 7-year note offering 13
February 1976 Treasury Financing 14
Treasury bond authority:
Hypothetical Interest Cost Savings
15
376
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1976
Based on: Budget Receipts of $298 Billion,
Budget Outlays of $374 Billion,
Off-Budget Outlays of $9 Billion
($ Billions)
Operating
Cash
Balance
1975
Public Debt
Subject to
Limit
-Actual
June 30
7.6
534.2
July 31
4.2
539.3
August 31
3.6
548.7
September 30
10.5
554.3
October 31
10.3
563.1
November 30
6.5
567.9
December 31
8.5
577.8
12.0
585.5
With $3 Billion
Margin for
Contingencies
1976
January 31
-EstimatedFebruary 29
6
592
595
March 15
6
601
604
March 31
6
607
610
April 15
6
615
618
April 30
6
606
609'
May 31
6
621
624
June 15 (peak)
6
627
630
June 30
6
671
624
1
PUBLIC DEBT
SUBJECT TO LIMITATION
TRANSITION QUARTER
JULY-SEPTEMBER 1976
Based on: Budget Receipts of $82 Billion,
Budget Outlays of $98 Billion,
Off-Budget Outlays of $4 Billion
($ Billions)
>
With $3 Billion
Mai:gin for
Com:ingencies
1976
Operating
Cash
Balance
June 30
6
621
624
July 31
6
632
635
August 31
6
642
645
September 30
6
640
643
Public Debt
Subject to
Limit
-Estimated-
/
DATE:
February 9, 1976
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1977
Based on: Budget Receipts of $351 Billion,
Budget Outlays of $394 Billion,
Off-Budget Outlays of $11 Billion
($ Billions)
Operating
Cash
Balance
1976
Public Debt
Subject to
Limit
With $3 Billion
Margin for
Contingencies
-Estimated-
September 30
6
640
643
October 31
6
650
653
November 30
6
659
662
December 31
6
663
666
January 31
6
665
668
February 29
6
680
683
March 31
6
695
698
April 15
6
703
706
April 30
6
691
694
May 31
6
705
708
June 15 (peak)
6
711
714
June 30
6
694
697
July 31
6
699
702
August 31
6
704
707
September 30
6
707
710
1977
DATE :
February 9, Wb
2
BUDGET RECEIPTS AND
OUTLAYS BY FUND GROUP
($ Billions)
Transition
Quarter
Actual
Fiscal Year
1975 Actual
Fiscal Year
1976 Estimated
$187.5
$198.4
$54.8
Trust Funds
118.6
134.8
33.8
Interfund Transactions
-25.1
-35.6
-6.6
Unified Budget
281.0
297.5
81.9
Federal Funds
238.5
276.9
69.8
Trust Funds
111.2
132.2
34.9
Interfiund Transactions
-25.1
-35.6
-6.6
Unified Budget
324.6
373.5
98.0
Federal Funds
-51.0
-78.5
-15.0
Trust Funds
7.4
2.. 5
- 1.1
Unified Budget
-43.6
-76.0
-16.1
Receipts:
Federal Funds
Outlays:
Surplus or Deficit (-) :
DATE:
February 12, 1976
UNIFIED BUDGET MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
Receipts
1975
Outlays
Surplus
Deficit
- Actual -
Jul
y $ 20.2
Au ust
§
$ 31.2
$-11.1
30.6
- 7.0
29.0
- .4
32.4
-13.1
29.4
- 7.7
31.8
- 5.8
31.9
- 6.4
30.7
-10.3
17.7
31.9
-14.2
35.1
33.3
1.8
23.3
31.7
- 8.4
36.1
29.6
6.6
$297.5
$373.5
$-76.0
22.8
34.3
-11.5
32.2
- 5.4
31.5
.8
$98.0
$-16.1
23.6
September \ 28 6
October 19 ?
November 21 7
December
26.0
6
i^ - - Estimated Januar
? 25.5
February 2Q
March
April
4
May
y
June
Fiscal Year. ... A„„
July
*
August
26.8
September
32.3
Transition Quarter $ 81 9
DATE:
February 12, 1976
4
FEDERAL FUNDS MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
Surplus or
Receipts
Outlays
Deficit
(-)
1975 - Actual July $ 13.4 $ 27.5 $-14.0
August 13.0 21.0 -8.0
September 22.3 20.2 2.1
October 13.6 21.6 - 8.1
November 13.4 20.0 - 6.6
December 19.8 27.2 - 7.4
1976 - Estimated January 18.3 24.0 -5.2
February 10.0 20.7 -10.7
March 10.4 20.5 -10.1
April 25.2 23.5 1.7
May 10.2 22.0 -11.8
June 28.3 28.7 - .4
Fiscal Year $198.4 $276.9 $-78.5
July 15.2 27.9 -12.7
August 14.7 21.3 - 6.6
September 24.8 20.6 4.2
Transition Quarter. $ 54.8 $ 69.8 $-15.0
Detail may not add to total due to rounding.
DATE: February 13, 1976
TRUST FUNDS RECEIPTS,
OUTLAYS AND SURPLUS OR DEFICIT
FISCAL YEAR 1976
($ Billions)
Surplus
Receipts
Federal Old-Age Survivors, and
Disability Insurance Trust Funds
Outlays
$70.8
$73.8
or
Deficit (
•
$-3.0
Health Insurance Trust Funds 18.6 17.4 1.1
Unemployment Trust Fund 16.7 1/ 18.5 -1.8
Railroad Employees Retirement
Funds
Federal Employee Retirement
Funds
3.3
3.5
- .2
13.0
8.5
4.5
Airport and Airway Trust Funds... 1.1 .8 .3
Highway Trust Funds 6.3 6.6 -.3
Foreign Military Sales Trust
Fund
6.5
5.9
.6
Veteran Life Insurance Trust
Fund
.9
.7
-2
Other Trust Funds 7.0 5.9 2/ 1.1
Total Trust Funds $134.8 $132.2 T^
1/ Includes $8.5 billion advances from general fund.
7/ Includes net activity of trust revolving funds of $-1.1 billion.
Detail may not add to total due to rounding.
DATE:
February 12, 1976
$73
TRUST FUNDS RECEIPTS,
OUTLAYS AND SURPLUS OR DEFICIT
TRANSITION QUARTER
($ Billions)
Federal Old-Age Survivors, and
Disability Insurance Trust Funds
Receipts
Outlays
$18.9
$19.9
Surplus
or
Deficit (-)
$-1.1
Health Insurance Trust Funds
5.1
4.6
.5
Unemployment Trust Fund
3.4 1/
3.7
- .3
.5
.9
- .4
2.1
2.3
- .2
.3
.3
Highway Trust Funds
1.9
1.9
Foreign Military Sales Trust
Fund
1.7
1.6
Veteran Life Insurance Trust
Fund
•".
.2
.1
Railroad Employees Retirement
Funds
Federal Employee Retirement Funds
Airport and Airway Trust Funds . . .
Other Trust Funds
Total Trust Funds
.1
.1
1.6 2/
1.8
$33.8
$34.9
.2
$-1.1
1/ Includes $1.1 billion advances from general fund.
7/ Includes net activity of trust revolving funds of $- .2 billion
* Less than $50 million.
DATE:
February 12, 1976
6
OFF-BUDGET AGENCY OUTLAYS MONTHLY
FISCAL YEAR 1976 AND
THE TRANSITION QUARTER
Federal
Financing
Bank 1/
Other 2/
I975 - Actual -
Total
July $ -6 * $ .6
August .7 $-1.0 - .3
September .1 -5 • °
October .5 -8 1.3
November .6 -3 .9
December- .2 .6 .8
1976 - Estimated -!
January 1.2 .5 1.7
February .8 .3 1.1
March .5 .5 1.0
April .2 .5" .7
May •' .1 .5 .6
June .2 .3 .5
Fiscal Year: ,. $5.6 $ 3.8 $9.3
July 1.8 .1 1.9
August. .7 .4 1.1
September .4 .8 1.2
Transition Quarter . . $2.8 $ 1.3 $4.1
1/The outlays of the Federal Financing Bank reflect only its p
(lovernment-guaranteed obligations, not its purchases of agency debt, in
order to prevent double counting. Virtually all of the other off-tow6
activity is financed through debt issued to the Federal Financing Ba»2/Export-lmport
Postal Service and U.S. Railway Association.
DATE: February Bank,
13, 1976
O P T I O N A L F O R M NO. 10
M A Y 1962 EDITION
(4i CFR> ioi-n.«
UNITED STATES GOVERNMENT
GSA FPMR
7
Department of the Treasury
Washington, D.C. 20220
Memomvdum ^
TO Mr. Snyder DATE: February 12, 19
FROM : Mr. Cook /20*^
SUBJECT: Federal Financing Bank
The Federal Financing Bank has saved the Federal and
federally-guaranteed borrowers who use the Bank $340 million
in the 20 months of the Bank's existence.
The amount of savings is based on the conservative assumption
that the agencies who have borrowed from the Bank on the
average could have raised funds in the market at a cost of 1/2 of
\% above marketable Treasury obligations of similar maturities.
Whereas one or two of these agencies who were established
in the market, for instance the Tennessee Valley Authority,
were able to raise funds at rates reasonably close to Treasury's
cost, many of the guaranteed borrowers whose debt was less well
known and who raised funds through negotiated offerings paid
rates substantially above the Treasury curve.
8010-ioe
Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan
Federal Revenue Estimate
Assumptions
#1
The Department of Treasury is responsible for estimating
Federal revenues as a basis for budget planning. These estimates
are based importantly upon GNP forecasts by a trio of the
Treasury, the Council of Economic Advisors and the Office of
Management and Budget. The key components for revenue estimating
purposes are nominal Gross National Product, personal income,
wages and salaries, and corporate profits. As contained in
Budget (p. 25), these forecasts are: (in billions)
Calendar Year
1976
1977
GNP $1,684 $1,890
Personal income
1,386
1,538
Wages and salaries
892
1,001
Corporate profits (after, tax)
156
181
Using these general forecasts and specific revenue information obtained from a variety of sources, the Treasury prepares
collection estimates.
The estimating process obviously depends upon several factors:
(1) the accuracy of the GNP forecasts; (2) changes in the mix
of economic results which cause adjustments in estimates of
personal income and expenditures, business spending and profits,
unemployment, government transfer payments, etc.; (3) the
refinement of statistical estimating procedures; and (4) the
frequent revision of tax legislation which can be anticipated
only in part. As a result, actual receipts always vary from *
those which are forecast. However, the discrepancy usually is
relatively small. Budget estimating errors over the past six
years together with 1950 and 1960 are summarized in Table 1.
PROJECTIONS
SHORT-RANGE ECONOMIC FORECAST
(Calendar years; dollar amount! in billion*)
Actual
1974
Item
Cross national product:
Current dollars:
Amount
Percent change
Constant (1972) dollars:
Amount
Percent change
Incomes (current dollars):
Personal income
Wages and salaries
.
Corporate profits.
_
Price level (percent change):
G N P deflator:
Year over year
Fourth quarter over fourth quarter
Consumer price index:
Year over-year
December over December
Unemployment rates (percent):
Total
_.._
!
Insured
Average Federal pay raise, October (percent)
Interest rate, 91-day Treasury bills (percent) *
1
._
_
__1
Forecast
1975
1976
1977
$1,407
7.7
$1,499
$1,684
12.4
$1,890
12.2
$1,211
—1.8
$1,187
-2.0
$1,260
$1,332
6.2
5.7
$1, 155
763
132
$1,246
$1,386
$1,538
1.001
6.5
802
118
892
156
9.7
11.4
8.7
6.3
5.9
5.9
6.2
6.3
11.0
12.2
9.1
6.9
6.3
5.9
6.0
5.9
5.6
8.5
7.2
5.0
5.8
. 7.7
6.9
5.4
8.6
5.5
3.8
5.5
7.9
6.3
4.7
5.5
181
Insured unemployment as a percentage of covered employment.
Average rate on new issues within period; the rate shown for 1976 was the current market rate
it the time the estimates were made.
1
10
TABLE
1
is*
Budget Estimating Errors
..
.
,i.,i
!
Fiscal
year
_
_
_ _
Overestimate (+) or Underestimate (-)
as a Percent of the Actual Figure
Estimates made 18 months
prior to the end of the
fiscal year
Estimates made 6 months
prior to the end of the
fiscal year
Outlays
Outlays
1950 1/
+4.1
1960 1/
-0.3
Receipts
+10 t 3
-1.7"
Receipts
+7.8
+ 1.9
+ 1.6
+0.2
*
1970 2/
-0.7
+ 2.6
+0.7
+2.9
1971 2/
-5.0
+7.3
+ 0.6
+3.1
1972 2/
-1.1
+ 4.3
+2.0
-5.2
1973 2/
-0.1
-4.9
+1.3
-3.1
1974 2/
+0.1
-3.4
+2.3
+ 1.9
1975 2/
-6.2
+5.0
-3.4
-0.8
Office of the Secretary of the Treasury
Office of Tax Analysis
September 19, 1975
1/ Administrative budget.
2/
Unified budget. The first estimate on a unified budget basis was
prepared in January 1968.
&f
Net Change in Federal Reserve Holdings
of Treasury Securities
($ millions)
Net Change
in
Holdings
1975
Jan.
844
Net Purchases
of Bonds
Over 4-1/4%
Net Change
in
Other Securities
28
816
Feb.
-258
82
-34C
Mar.
332
201
131
Apr.
6,428
165
6,263
May
-2,224
Jun.
-873
Jul.
-2,866
—
Aug.
663
47
616
Sep.
4,452
124
4,328
Oct.
186
Nov.
-2,047
Dec.
1976
Jan.
3
-2,227
109
-982
—
-2,866
186
244
-2,291
2,797
73
2,724
1,948
64
1,884
Office of the Secretary of the Treasury
Office of Debt Analysis
February 11, 1976
FRB Market Purchases of Bonds Issued Under $10 Billion Authority
July 1974 - January 1976
($ millions)
M3nth
Total 1/
7%
6 3/8%
6 3/8%
6 1/8%
Aug 81
Feb 82
Aug 84
Nov 86
7 1/2%
Aug 88-93
6 3/4%
"*9-
8 \/2\
8 1/4%
7 7/8%
a 1/4%
Feb 93
May 93-98
May 94-99
May 90
Feb 95-00
May 00-05
52
49
44
15
8 3/8%
Aug 95-00
1974
July
Aug
Seo
Oct
Ncv
Dec
+ 36
7
8
4
16
+ 35
2
3
3
24
+ 25
+ 22
8
3
2
7
2
8
9
15
18
15
1
1
10
2
1975
Jan
Feb
Mar
Aor
Mav
June
July
Aug
Sept
Occ
Nov
Dec
+ 28
+ 82
+201
+1G5
.; 3
+109
+ 47
+124
,244
+
+ 73
2
1
1
2
1
8
1
1
1
1
1
3
3
5
21
14
23
12
107
64
5
10
45
4
3
45
13
13
3
4
2
8
5
24
23
60
12
10
17
10
17
1
3
8
191
34
4.
1976
Jan
+ 64
Office of the Secretary of the Treasury
Office of Debt Analysis
Note: Figures may not add. to totals due to rounding.
21
22
February 11, 1976
^
Treasury Borrowing Program
During the next nineteen months the Treasury will be
required to raise $85-90 billion of new money in marketable
securities to refund over $51 billion of maturing marketable
securities held by private investors.
In accomplishing this unprecedented financing job, the
Treasury will, insofar as its statutory authorities and
market conditions permit, make maximum use of the coupon
market in order (1) to minimize the build-up in floating,
highly liquid short-term debt and (2) to avoid, insofar as
possible, increasing the already severe structural problems
summed up in the decline in the average maturity of the
privately-held marketable debt.
The instruments available to Treasury for these purposes,
until such time as its statutory authorities are amended,
include:
—13 and 26 week bills, auctioned weekly, in current
amounts now in the $7 billion range,
--52 week bills, auctioned every four weeks, in
current amounts now in the $3 billion range,
—2-year cycle notes, at the end of each calendar
month, which have been auctioned in amounts of
up to about $3 billion,
--4-year cicle notes, at the end of each calendar
quarter, which have also been auctioned in amounts
up to $2.5 billion,
—Refunding issues, typically with 3, 5, or 7-year
maturities, which have been auctioned in amounts
from $3.5 billion for the shorter issues to $2.5
billion for the longer issues; with an overall
limit of around $6 billion in any refunding.
—5-year cycle notes, which have been auctioned on an
experimental basis in the first month of a calendar
quarter to mature on a regular quarterly refunding
date. Use of 5-year cycle notes, however, will
likely preclude use of this maturity in regular
refundings.
y*^
Apart from the auction method, either on a price basis
against a fixed coupon or on a yield basis, the Treasury has
recently used fixed pricing of a coupon issue; e.g., the
7-year note offered at par in the February 1976 refunding.
This technique appears to allow a larger offering to be made
than the auction technique by placing more debt directly
with final investors, but raises policing problems to assure
that the interest attracted is primarily investment interest.
:Estimated ]Market Borrowing Requirements
\ New Money
Refunding
Total
March 1-June 30, 1976
$19-24
9-3/4
28-3/4-33-3/4
July 1September 30, 1976
18-1/2
7-3/4
26-1/4
October 1, 1976September 30, 1977
47-1/2
34-1/4
81-3/4
Total
$85-90
51-3/4
136-3/4-141-3/4
13
7-Year Note Offering
The Treasury has been gratified by the market response
to a major effort towards achieving significant debt restructuring and reducing the amount of very short-term
Treasury debt in the market by issuing a significant amount
of longer-term notes.
The seriousness of the debt management problems facing
the Treasury today can hardly be overestimated. In addition
to $85-90 billion of new money needs over the next nineteen
months, the Treasury is faced with refunding $51 billion of
maturing coupon issues in the same period. Moreover, the
tremendous buildup in the debt, including a $95 billion
increase in the privately-held marketable debt in 1975 and
the first two months of 1976, has severely impacted the
financing calendar and greatly reduced the options for placing
new Treasury debt in a constructive fashion.
These problems have been further exacerbated by the
exhaustion of the authority to issue additional long-term
bonds without regard to the 4-1/4% interest rate ceiling
and by the limitation of the maximum maturity of notes to
seven years. The prospect, unless these restrictions are
eased, is for a further decline in the average maturity of
the public debt and for a further increase in the annual
refunding burden. The consequence would be further calendar
congestion, more difficulty in issuing coupon securities,
and, therefore, increasing pressure to resort to the bill
market to meet financing requirements, further shortening
the average length of the debt and building up an already
large, highly volatile pool of extremely liquid short-term
Treasury debt in the hands of the public.
The offering of the 7-year, 8% notes at par represented
a deliberate decision by Treasury to break away from the
traditional pattern of debt offerings in order to, at least
temporarily, relieve the structural problem.
Under the auction technique, which has been the standard
offering method for Treasury securities since 1972, a considerable distributive burden is placed on the dealer
community in its underwriting capacity. Unlike underwriters
13
3^7
for corporate and municipal securities, however, government
dealers receive no price concession beyond the marginal
advantage afforded them by their close contact with the
market and technical expertness. The spread between the
average bid on new Treasury issues and the low bid, however,
is typically quite small; i.e., 2 to 4/32, which, at best,
would represent a price advantage to a dealer of $1.25 per
bond, compared to a concession of $5 to $10 to $20 on
corporate and municipal issues, depending on the maturity
of the security and the credit rating and marketability
of the issue.
As a result, while the auction technique is highly
efficient for Treasury offerings of moderate size, say, up
to $2.5 billion in a single issue and up to $6 billion in
a multiple issue offering, the distributive mechanism is
overloaded by larger offerings. Thus, a judgment was
reached that to sell an issue, even as large as the $3-1/2
billion initially offered, it would be necessary to change
the offering technique so as to place more of the debt directly
with final investors.
The response to the offering was unexpectedly strong,
with more than 105 thousand individual tenders, totalling
more than $29 billion, being received. Thus, the amount of
the issue was increased to $6 billion, a 71% increase, and
the maximum amount awarded to any subscriber was reduced to
$200,000.
The subsequent market judgment is that the issue has
been, in fact, well placed and that the speculative interest
was held to small proportions. Indeed, the major complaint
has been that there is an inadequate floating supply in the
market to afford normal trading opportunities.
In contrast, the much smaller, much shorter 3-year,
$3 billion issue has apparently been much less well placed
with a considerable overhang in the market, which appears
to confirm the judgment regarding the pricing of the 7-year
issue.
tyartmentoftheTREASURY
VtfASHIiSjGTQN, p $
TELf PHONE 9§4-2Q41
361
For information on submitting tenders in the Washington, D. C. area:
PHONE W04-2604
FOR IMMEDIATE RELEASE January 27, 1976
TREASURY ANNOUNCES FEBRUARY REFINANCING
The Department of the Treasury will sell $3.0 billion of 3-year notes,
$3.5 billion of 7-year notes and $0.4 billion of 29-year 3-month bonds to
refund $4.3 billion of notes held by the public maturing February 15, 1976,
and to raise $2.6 billion of new cash.
Additional amounts of the notes may be issued to the Federal Reserve Banks for
themselves and as agents for foreign and international monetary authorities and to
certain Government accounts in exchange for maturing notes held by them in the
amount of $3.8 billion, and to the Federal Reserve Banks as agents for foreign and
international monetary authorities for cash. Government account holdings of the
maturing notes in the amount of $.0.5 billion will not be exchanged for the new
issues but may be exchanged for special non-marketable issues.
The securities to be issued will be:
Treasury Notes of Series H-1979 dated February 17, 1976,
due February 15, 1979 (CUSIP No. 912827 FG 2) with interest
payable on August 15, 1976, and thereafter on February 15
and August 15. These notes will be sold at auction. The
coupon rate will be determined after tenders are allotted.
8% Treasury Notes of Series A-1983 dated February 17, 1976,
due February 15, 1983 (CUSIP No. 912827 FH 0) with interest
payable on August 15, 1976, and thereafter on February 15
and August 15. These notes will be sold at par. Subscriptions
will be received subject to allotment.
An additional amount of 8-1/4% Treasury Bonds of 2000-05
dated May 15, 1975, due May 15, 2005, callable at the
option of the United States on any interest payment date
on and after May 15, 2000 (CUSIP No. 912810 BU 1) with
interest payable on May 15 and November 15. These bonds
will be sold at auction.
The 3-year notes will be issued in registered and bearer form in denominations
of $5,000, $10,000, $100,000 and $1,000,000. The 7-year notes and the bonds will
be issued in registered and bearer form in denominations of $1,000, $5,000, $10,000,
$100,000 and $1,000,000. Both the notes and the bonds will be available for issue in
book-entry form to designated bidders. Payment for the securities may not be made
through tax and loan accounts.
The subscription books for the 7-year notes will be open through Tuesday,
February 3 except that subscriptions for $500,000 or less will be considered
timely received if they are mailed to an official agency under a postmark no
later than February 2. Subscriptions must be in multiples of $1,000.
Tenders for the 3-year notes and bonds will be received up to 1:30 p.m.,
Eastern Standard time, Thursday, February 5. Noncompetitive tenders will be
considered timely received if they are mailed to an official agency under a postmark
WS-615
14-2- &&
no later than February 4. Tenders for the 3-year notes must be in the amount
of $5,000 or a multiple thereof. Tenders for the bonds must be in the amount
of $1,000 or a multiple thereof. Each tender for the 3-year notes must state the
yield desired, and each tender for the bonds must state the price 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
OF SERIES H-1979" or "TENDER FOR TREASURY BONDS" should be printed at the bottom
of envelopes in which tenders are submitted.
Tenders and subscriptions will,be received at any Federal Reserve Bank
or Branch and at the Bureau of the Public Debt, Washington, D. C. 20226.
Competitive tenders for the 3-year notes must be expressed in terms of annual
yield in two decimal places, 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 amount offered. After a determination is made as to which tenders
are accepted, a coupon yield will be determined to the nearest 1/8 of 1 percent
necessary to make the average accepted price 100.000 or less. That will be the rate
of interest that will be paid on all of the notes. Based on such interest rate,
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 at a yield that will produce a price less than 99.501 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.
Competitive tenders for the bonds must be expressed in terms of price, in two
decimals, e.g., 100.00. Tenders at a price less than 92.76 will not be accepted.
Tenders at the highest prices will be accepted to the extent required to attain the
amount offered. Successful competitive bidders will be required to pay for the
bonds at the price they bid. Noncompetitive bidders will be required to pay the
average price of all accepted competitive tenders; the price may be 100.00, or more
or less than 100.00.
The Secretary of the Treasury expressly reserves the right to accept or reject
any or all tenders and subscriptions, 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 the 3-year notes and the bonds will be accepted in full
at the average price of accepted competitive tenders, and subscriptions for the
7-year notes in the amount of $500,000 or less will be allotted in full. Subscriptions
over $500,000 for the 7-year notes may be allotted on a percentage basis but not less
than $500,000.
Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and reportdaily to the Federal Reserve Bank of New York their positions with respect to
Government securities and borrowings thereon, may submit tenders and subscription
for the account of customers, provided the names of the customers are set forth
therein. Others will not be permitted to submit tenders or subscriptions except
for their own account.
Tenders and subscriptions 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
2*/ "
Bank of New York their positions with respect to Government securities and
borrowings thereon, Federal Reserve Banks, and Government accounts. Tenders and
subscriptions from others must be accompanied by payment of 5 percent of the face
amount of securities applied for. However, bidders who submit checks in payment
on tenders or subscriptions submitted directly to a Federal Reserve Bank or the
Treasury may find it necessary to submit full payment for the securities with their
tenders or subscriptions 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 or subscriptions for $500,000 or less.
Payment for accepted tenders and subscriptions for the notes and bonds must
be completed on or before Tuesday, February 17, 1976, and in the case of the bonds
include accrued interest from November 15, 1975, to February 17, 1976, in the amount
of $21.30495 per $1,000 of bonds allotted. Payment must be in cash, 6-1/4% Treasury
Notes of Series A-1976 or 5-7/8% Treasury Notes of Series F-1976, 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 or subscription is submitted, or the United States Treasury if the tender
or subscription is submitted to it, which must be received at such Bank or at the
Treasury no later than: (1) Wednesday, February 11, 1976, 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) Monday, February 9, 1976, 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 or1 subscription up to 5 percent of the amount of securities allotted will
be subject to forfeiture to the United States.
#
#
#
TREASURY ANNOUNCEMENT
In view of the substantial public response
to the current 7-year note offering, the
Treasury reminds investors that it has reserved
the right to increase the size of the current
offering of 8 percent notes due in 1983 or reduce
below $500,000 the maximum amount to be awarded
in full.
Consistent with sound debt management
principles, either or both of these actions
may be taken depending upon the extent of
subscriptions received in amounts of $500,000
or less.
February 3, 1976
MEMORANDUM TO THE PRESS
January 29, 1976
The response to the Treasury's financing package
announced Tuesday has been highly favorable.
To assure
that the 7-year 8 percent note, which was announced as a
part of the package, attracts investor interest, as distinct
from interest of a more transitory nature, the Treasury is
raising the downpayment requirement to 20 percent from the
initially announced 5 percent.
p»
FOR 10:00 A.M. RELEASE
FEBRUARY 5, 1976
RESULTS OF OFFERING OF 8 PERCENT 7-YEAR TREASURY NOTES
Preliminary figures indicate that approximately
106,000 subscriptions totalling $29.2 billion were
received for the-offering of $3.5 billion of 8 percent,
7-year Treasury Notes of Series A-1983.
Due to the overwhelming response to the offering,
the Secretary of the Treasury has found it necessary to
exercise his authority to reduce the amount of notes to
be allotted on subscriptions in amounts" over $200,000.
Accordingly, -all subscriptions for $200,000 or less v:ill
be alioted in full and subscriptions over that amount
will be allotted $200,000.
Approximately $6.0 billion of the notes will be
allotted to the public. In addition, $1.9 billion of
the notes have been allotted to Government accounts and
Federal Reserve Banks for themselves and a's agents of
foreign and international monetary, authorities.
OtpartmentoftheJREASURY
HNGTON, O.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
February 5, 1976
RESULTS OF AUCTIONS OF 3-YEAR NOTES AND 29-1/4-YEAR BONDS £ ' I
The Treasury has accepted $3.0 billion of the $4.4 billion of tenders for
the 3-year notes, Series H-1979, and $0.4 billion of the $0.7 billion of tenders
for the 29-1/4-year 8-1/4% bonds maturing May 15, 2005, received from the
public for the notes and bonds auctioned today.
The range of accepted competitive bids for the notes was as follows:
7.00% 1/
7.09%
7.05%
Lowest yield
Highest yield
Average yield
The interest rate on the notes will be
yields result in the following prices:
Low-yield price
High-yield price
Average-yield price
7%.
At that rate, the above
100.000
99.761
99.867
The range of accepted competitive bids for the bonds was as follows:
Price
Approximate Yield
To First Callable To
Date
High
Low
Average
102.14
101.42
101.75
8.04%
8.11%
8.08%
Maturity
8.05%
8.12%
8.09%
The $3.0 billion of accepted tenders for the notes includes 15 % of the
amount of notes bid for at the highest yield and $0.5 billion of noncompetitive
tenders from the public accepted at the average yield.
The $0.4 billion of accepted tenders for the bonds includes 68 % of the
amount of bonds bid for at the low price and $25 million of noncompetitive
tenders from the public accepted at the average price.
In addition, $ 1.7 billion of tenders for the notes and $0.2 billion
of tenders for the bonds were accepted at the average yields/prices from
Government accounts and from Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities.
1/ Excepting 4 tenders totalling $2,510,000
WS-631
Page 14 (1)
imrasD
STATES DEPARTMENT O F
TRKA3trar
Washington, t>* C
PRESS CaKfFBREHCB
Bald bys
2EMXH B. YEO
cmdar-Sacrefcary f or
Monetary Affairs
and
RALPH M* FORBES
Special Assistant to
thai Secretary
and
BDWAOT P* SNYDER
Director, Office of
Debt Analysis
4:00 p»a«
Tuesday, January 27, 1976
Treasury Building
Room 4121
15th and Penm Avenue, Nff
Washington, D. C.
The above-entitled press conference was convened,
pursuant to notice, at 4:10 p.a.
A13
,
Page 14(2) ]
ASSISTANT SBCRSTARY YEO: We have I think an
interesting and important job to do today.
X am going to go
slowly because we have a good many numbers to discuss.
First, our total requirements through the end of
June*
In other words, our requirements for the period January
June, 1976, are ln the range of $38 to 43 billion of borrowing
from the public*
Market borrowing is in a range of $35 to 40 billion,
the difference being essentially savings bonds*
Through
yesterday we had announced new cash financing totaling $8.6
billion. This includes the weekly bill to be settled on
January 29 and the two-year note which will be settled on
February 2.
Taking our first set of assumptions, the $38 to 43
billion, market borrowing $35 to 40 billion, deducting what
we have announced through yesterday, gives you a net balance
in terms of market borrowing frost now through the end of June
in tjgbe range of $26 to 31 billion.
The $26 to 31 billion range, coincidently, covers
the amount of net borrowing w$ have before us to get through
our low point in April.
We have some temporary borrowing to do in June at
our low point, but
our net cash needs in the last 2-1/2 months
of the fiscal year, based on our present estimates —
like to emphasize that —
are quite moderate.
I would
.
Page 14 (3);
!
1
The «*«ot MBoaat t« rwtlly dapwi&ant oa what sort of
2
.ad-of J«n© balaac. w . wish to arrlv. at.
3
take the combination of what we have done plus what we are
4
X think that ff you
* going to announce, plus the concept involving tha use of cash
management bills to smooth out financing na&ds, you can see
that we have a.large but ^ j ^ m n a g e a b l e debt management task
before us.
As a matter of fact, we have already achieved a
9
30
1 significant amount in terms of meeting with or dealing with thin
job.
11
Looking ahead, one of our objectives will be to
12
minimise pressures on the bill market, making as much use as
13
possible of the two- and four-year cycle notes, and we are also
14
giving serious consideration to establishing a five-year note
15
cycle.
16
This would be during the first month of each quar-
17
ter. You could take a — you could view our January financing
18
as a start.
19
Wow for the financing, we are planning on raising
20
$6.3 billion of new money financing in February, tfe will need
21
somewhere between $9 and $11 billion the first half of March.
22
This amount is substantial, but the requirement can be met
23
quite readily through the use of the two~y®ar note cycle, well
24
established within the market structure? four-year note cycle;
25
and additions to the weekly and annual bills and cash
Page 14 (4)
management bills in the form of additions to late April or
late June.
From mid-March through the April lew point we
estimate our needs between $12 and $13 billion of new money
for borrowing.
As you know, there is a two-year note maturing at
the end of March, and as I mentioned# the possibility of a
five-year note issued in early April. The balance of requirements can be met through bill additions and further additions
to regular bills, and further cash management bills.
Today we are announcing a $700 million addition
to the weekly bill which settles on February 5 and the terms
of the re-funding which settles on February 16.
There is a total of $4.4 billion maturing on February 16, and we will be offering $6.9 billion of new securities
in three issues. This will raise $2-1/2 billion ln new money,
and bring the total amount through this announcement since the
start of the year to $11.8 billion.
So you can see we have a rather, I think, good
start*
The three re-funding issues include the following:
$3 billion of a three-year note due February 15?$3-1/2 billion
of a sevon-year note due February 15, 1983% and $400 million
in the reopening of outstanding eight-and-a-quarters of 5-15,
2,000 and 2005.
Page 145
The three-year note and the reopened bond will
be auctioned on Thursday, February 5. The three-year note
auction will be a yield auction.
The bond auction will be
a price auction, since the coupon is already established.
The seven-year note will be offered at par with as
8 percent coupon, with the books open through Tuesday, &bruax /
3.
Wow if you don't mind, it is probably redundant,
but I would like to go over this again a little faster.
Our total requirements through the end of June,
$38 to $43 billion of borrowing from the public. Market
borrowing total is in the range of $35 to $40 billion, with
the difference being savings bonds.
Through yesterday we had announced new cash f inane ing totaling $8.6 billion. That includes a weekly bill settle
on January 29, a two-year note which will be settled on Febrtary 2. As a result, we have a balance of net market borrow!} <
from now through the end of June in the range of $26 to $31
billion.
The $26 to $31 billion range for market borrowing
covers the amount of net borrowing. We still have before us
to get through the low point in April.
QUESTION
Mid-month?
ASSISTANT SECRETARY Y30:
Yes.
While w© will h&v® to do soma temporary borrowing
Page 14 (6)
•=
to handle our June low point, our c&sh nmd® In the last 2-1, 1
months of the fiscal year appear to be quite moderate,
I mentioned that one of our objectiv<j&s will to to
j
j
j
continue to minimise pressures on the bill market using the i i :
and four-year note cycles, and that w© are considering estab*
lishment of a five-year note cycle.
I mentioned that wa are planning on raising $6.3 1 i )>
lion in February and the refunding, and in the weekly oneyear bills, the weekly and ona-year bills, and that we will
!
have to raise $10 billion.
I gave you a range of $9 to $11
i
i
billion,which I think is a better way to approach it, in the
first half of March.
In terms of our financing, $3 billion of a threeyear note, $3-1/2 billion of a seven-year note due February 1!*
1983, $400 million in the reopening of the outstanding eight-
j
and-a-quarters, 5-15, 2,000 and 2,005, a three-year note and
the bond auction on Thursday, February 5, the note at yield
auction, the bond at price auction because of coupons established, the seven-year note offered at par with an 8 percent
coupon, with the books open through Tuesday, February 3.
Incidentally, on our re-funding* the settlement it
February 17, not the 16tfc, which X mentioned.
This represent** an outline plan for da&ling with «* r
financing needs this half. We think that it is important thi \
we use the bill market, but use It in such a way that we &re
Page 14
(7) |
P7 |
not totally dependent on it.
We think that it is important that we continue to
use our 2, 4, and possibly 5-year note cycles*
j
Bist X wild hi
less than candid if I told you that that was the solution to < w\
overall debt management challenges, because if you have lcok<*
at our developing maturity structure, you can see that we are
starting to fill up slot after available slot.
It is for this reason that we have asked Congress
for additional long bond authority.
It la for this reason twt
we have asked that notes be redefined from seven-yisar maturivy
to ten-year maturity*
What we are seeking to construct is a balanced da>
structure, one that will not provide a legacy for the future n
terms of massive amounts of short-term finance resulting in 1 <a
Treasury being in the market constantly in very, vesry signif.
cant sise.
I personally think that a debt structure that
involved very considerable amounts of short-term maturities
results in increased volatility, reduced efficiency, and over
the course of events, a higher net interest cost to be paid h«
the American public.
I think that we have seen over the last two years
both domestically and internationally, the effects ~ advers i
effects —
of market volatility, which in part resulted from
heavy reliance, not just on the part of the Treasury, but on :>
Page 14
(®
377
part of most borrowers —
j
I
heavy reliance on short-term finane 1. i
We are using a pricing sale on the seven-year not*
with the objective of eliciting the maximum interest, and mas i - j
response.
It is related to another problem, which is tint we 11 •••
going to have to increase the else of amounts of individual
maturities*
On the present basis we are exhausting thea&lenda;
We think that the eights at par represent an attractive invet i meat from the standpoint of potential buyers and an attract!'-'<
financing medium for the Treasury.
In terms of one of our concerns, the longer-run
effects on our system of thrift intermediaries, the challenge
is to move in the direction of a debt structure that centrist n\
to, among other things, less interest rate volatility, rathe. •
than tends to facilitate it.
That is our financing, and I will try to answer an;
questions you might have.
QUESTION t Can you explain why you are not auctions;
that seven-year note on a yield basis?
ASSISTANT SECRETARY YBO:
I am not auctioning it o\
a yield basis because we think that we can elicit a larger
raspon.* by pricing it, putting it out whar«v«w one can se. i :.
We have the feeling that there are institutional
buyers and non-institutional buyers that from time to time a% \
!
benefit from the use of this particular technique.
{
Page 14
( 9)
QUESTION: Looking ahead, can you estimate whether
the borrowing needs in the last half of tha calendar year wil ,
be greater or smaller than the first half?
ASSISTANT SECRETARY YEOs I would just as soon not
get into borrowing needs in the second half of the calendar
i
i
year, Ed. I can say that I would expect that taking the seco \ j
i
half of Calendar 1975 and the first half of Calendar 1976,
that we will have completed the largest fiscal year financing
that is prospective, assuming that iSt policies that we advocat® In tanas of the budget are agreed to by the Congress.
In other words, we ere in a sens© thinking in terns
of fiscal year. We are well on our way to completing a very
large financing task that confronted us at the start of !
i
Fiscal "76. j
QUESTIONS
What is borrowing totaling in the first j
half of the fiscal year?
ASSISTANT SECRETARY YBO*
QUESTION:
48 •
And just a small point —
the amount
j
that is maturing on February 15 — is that $4.4 or $4.3 bllli:i'f
i
ASSISTANT SECRETARY YEO: 4.3.
UESTION: You said that the total through this
announcement would be $11.8 billion- If you ad4 the $8.6
billion plus the $2.6 billion you ars* i&nnounei&g today plus t MJ
$700 million of additional weekly stot&s for next w@#k, you git
$11.9 billion. Which cpe should we use?
Page 14
&i
1
2
the 4.3.
3
4
5
ASSISTANT SECRETARY YEO:
It balances.
QUESTION:
That is because you <&ed
Did I understand you to say that for tht
remainder of February it is this announcement and bills and
that is it?
6
ASSISTANT SECRETARY YEO:
7
QUESTION:
8
(10)
you suggest —
9
Also —
That is correct.
just a matter of memory —
did
was there a five-year note sold in January?
ASSISTANT SECRETARY YEO:
10
QUESTION*
11
ASSISTANT SECRETARY YEO:
Yes.
So that oould be the start of a cycle?
Yes.
12 I five-year note at the end of last year,
W e announced the
I don't want to labor
13
the point, but this is necessary, given the large use of & e
14
two-year cycle and t h e four-year note cycle, and while w e are
15
making a very decided effort to produce a balanced financing
16
program, w e are still of course using the bill market heavily
17
QUESTION*
Will you go over how you get the $11.8
IS I billion?
19
ASSISTANT SECRETARY YEO:
The $8.6 billion that w e
20
announced, $700 million in bills, $2.5 billion in terms of th*
21
financing.
22
23
24
QUESTIONS
So the first paragraph should be change 5
to 2.5 instead of 2.6?
ASSISTANT SECRETARY YBO:
25 i! round. Bd will give you the figure.
It depends o n how you
Page 14 (11)
t MR. SNYDER: The amount of maturing 8«curiti.s
2
publicly h.ld we have been carrying in our own minds as a 4.4,
3
and the Fad in its operations from time to time has picked up
4
some coupon issues* and I suppose some of the agencies in
S
their trust accounts have picked up some of the stuff, too.
0
It is very close to 4.35, so you pay your money and take your
7
choice.
ASSISTANT SECRETARY YEOs
8
4.35 is the precise figurr
QUESTION: So if you use 4.4f then we should have
10
AT.5 In the net?
11
12
ASSISTANT SECRETARY YEOs
just agree on that?
Yes, sir. Why don't we
,
13
QUESTIONS ^ Z U and 2.5?
14
ASSISTANT SECRETARY YBOs
15
QUESTION: We will change the release.
16
QUESTIONS
Yes.
I don't quite understand how, with the
\
V
17
seven-year notes, this receiving subscriptions subject to
18
allotment, works. Can you give me a brief description of that?j
19
ASSISTANT SECRETARY YEO: We are announcing to the
20
public that Investors with a thousand dollars or multiples of
21
$1,000 can subscribe to a seven-year note with an 8 percent
22
coupon placed as par, and the subscriptions are taken by the
23
various Reserve Banks and by financial institutions that in
24
effect submit those subscriptions for their customers.
25 jj
So that a persor —
say that you wanted to invest
\
Page 14 0.'! ):
in I
in one of our 8 percent seven-yaar notes, you would go to your j
bank or Federal Reserve Bank and tender your subscription. |
j
4
|
W e set it out in detail in the announcement that
you have — the procedure. j
\
QUESTION: If I want to buy just $1,000 in me
i
bond and there was an allotment of 50 percent or something,
j
what happens?
ASSISTANT SECRETARY YEO: It is up to $500,000.
QUESTION: I see. '
QUESTIONS You are assuming that you will get
enough subscriptions to make the $3.5 billion?
ASSISTANT SECRETARY YEO: Yes, sir.
QUESTION* What happens if yen get more than that"
ASSISTANT SECRETARY YEO: After the Initial $500,01 (
we allot on a pro rata basis. Let m® givts you an example.
i
i
W e are offering 3.5, and let's say just asl>»\ ! /. '*
J-f 7.7
example, w e had a billion-and-a-half in subscriptions allottits*
in full.
On top of that w e had $4 billion and that would me ~:
a 50 percent allotment.
QUESTION:
/• f
Why did that JL.4 get *. lull allotment?
ASSISTANT SECRETARY YEO: Because we have indicate
that subscriptions up to —
QUESTION: I so© —* okay. Bo the small investor
is pretty well assured of getting the full amount -.ASSISTANT SECFJKTARY Y320: Exactly. The idea is ta J
3:
Page 14 (13)
give the smaller Investor who is not in the position to gang*
the ebb and flow of interest, not in a position to really est J •
mate what sort of allotments might be made —
it gives him ait
opportunity to subscribe and not be concerned about what he it
going to receive.
In other words, if he subscribes for $50,000 in
8 percent notes, he is going to g&t 50,000 8 percent notes.
j
!
QUESTIONS
What are seven-year securities present!; j
yielding in the market?
ASSISTANT SECRETARY YEOs
QUESTIONS
About 7.72, 7.73.
Won't this push ail those up to the 8
percent level?
ASSISTANT SECRETARY YEOs
Well, we are selling $3- , !
billion in notes. The market will adjust —
it can adjust
three ways -*- up, down, and unchanged.
The point is this —
that I think ge&erally the
market expected a smaller issue for the purposes* for the
reasons that X have mentioned. We think it is important to
have a good start on our financing needs, and I think that
post this financing. Investors can or will perceive that a la
part of the job, a significant part of the job, has been dona
Gradually, but in retrospect a large part, a
significant part completed, so that we do not have a need th'*'»
is conjectural in terms of how it can be met.
We described hew it can be s*et and we have alraad?
Page 14 ( 14 )
done a significant part of it.
3
^
I might also say that through the April low point
that additional coupon financing will be short of the sevenyear area.
QUESTIONS
Four would be the most?
ASSISTANT SECRETARY YEO: Five* maybe a five.
X think the Wire Services might want to —
if we
are clear, the Wire Services might want to —
QUESTIONS Since it iB so complicated, can you give
us a little more than five minutes?
ASSISTANT SECRETARY YEOs
QUESTIONS
Sure. About 10 of?
10 Of is fine.
ASSISTANT SECRETARY YEOs
Is there nothing more?
Thank you*
(Whereupon, at 4s40 o'clock p.m. the press conference was concluded.)
HYPOTHETICAL INTEREST SAVINGS
FROM ISSUING BONDS
(millions of dollars)
FY
1966
Total
Budget
Outlays
Net Interest
Cost of
Hypothetical
Bonds
Gross Interest
Cost on
Hypothetical
Bonds
14.8
$
Less: Interest
Savings on
Reduced Notes
134,652
$ 12,014
1967
158,254
13,391
0.2
85.8
86.0
1968
178,833
14,573
0.9
182.9
183.8
1969
183,548
16,588
9.6
302.0
311.6
1970
196,588
19,304
-
30.2
413.4
443.6
1971
211,425
20,959
-
52.1
605.9
658.1
1972
231,876
21,849
-
19.5
691.3
710.7
1973
246,526
24,167
7.7
711.3
718.9
1974
268,392
29,319
-
20.1
731.6
751.7
1975
324,601
32,165
-
61.5
731.6
793.1
1976
373,535e
37,700e
-
79.5
731.6
811.1
-$281.2
$5 ,202.1
$5 ,483.3
Total
$
Interest
on Public
Debt
$2,508,230
$242,029
$
Office of Debt Analysis
Details may not add to totals because of rounding.
$
14.8
February 15, 1976
HYPOTHETICAL-^ AND ACTUAL BOND SALES TO PRIVATE INVESTORS
AND EFFECT ON GROSS FINANCING REQUIREMENTS
($ billions)
Cumulative
Per Year
Bond Sales
Bond Sales
Gross
Financing
Total
Gross
Financing
Assumed
$1,663
$ 0
$ 1.663
$ 0
$ 1.663
$ 0
0
1.719
- .381
3.382
0
3.382
.381
2.216
0
2.216
- 1.198
5.598
0
5.598
- 1.579
1969
1.498
0
1.498
- 1.358
7.096
0
7.096
-
2.937
1970
2.523
0
2.523
- 2.221
9.619
0
9.619
-
5.158
1971
1.389
1.000
2.389
- 2.585
11.008
1.000
12.008
-
7.743
1972
.294
3.321
3.615
- 1.770
11.302
4.321
15.623
-
9.513
1973
.303
1.114
1.417
- 1.916
11.605
5.435
17.040
- 11.429
1.613
1.613
- 2.864
11.605
7.048
18.653
- 14.293
- 1.754
3.307
0
3.307
1975
Office of the Secretary of the Treasury
Office of Debt Analysis
11.605
10.355
21.960
- 16.047
February 15, 1976
Calendar
Year
Assumed
1966
$1,663
1967
1.719
196R
1974
1/
~~
0
Actual
0
Actual
Total
Assumed sales are equal to 10% of actual notes issued in each quarterly financing in
which no bonds were actually sold.
cn
EFFECT ON GROSS REQUIREMENTS
QUARTERLY FINANCINGS, OF HYPOTHETICAL BOND SALES
($ Billions)
Calendar
Year
Quarter
Gross Financing Requirements
Actual With Assumed
Reduction
Bonds
Calendar
Year
Quarter
Gross Financing Requirements
Reduction
With Assumed
Actual
Bonds
1966:
1
2
3
4
$ 7.4
1.4
4.2
3.5
$16.6
$ 7.4
1.4
4.2
3.5
$16.6
$0
0
0
0
$0
1971:
1
2
3
4
$11.0
4.2
5.5
8.6
$29.3
$10. 4
3. 5
5. 3
7. 5
$26. 7
1967:
1
2
3
4
$ 4.0
4.7
4.0
4.9
$17.6
$ 4.0
4.7
3.7
4.8
$17.2
$0
0
1972:
.2
.1
$ .4
1
2
3
4
$ 4.0
1.8
8.2
2.9
$17.0
$ 3.4
1. 1
7,,7
2,.9
$15,.2
1968:
1
2
3
4
$ 8.1
6.1
5.5
3.7
$23.4
$ 7.9
5.9
5.3
3.1
$22.2
$ .2
.2
.2
.6
$1.2
1973:
1
2
3
4
$ 3.5
2.5
2.3
3.8
$12.2
$ 3,.0
1..2
2 .1
3,.8
$10,.2
$ .5
1.3
.2
_0
$1.9
1969:
1
2
3
4
$ 3.5
4.3
2.8
5.8
$16.3
$ 3.1
3.8
2.4
5.8
$15.0
$ .4
.5
.4
0
$1.4
1974:
1
2
3
4
$ 4.1
4.2
4.6
4.9
$17.9
$ 3 .6
3,.6
3,.9
3 .9
$15 .0
$ .4
.7
.7
1.0
$2.9
1970:
1
2
3
4
$ 4.9
7.2
8.0
7.4
$27.5
$ 4.9
6.0
7.5
6.7
$25.2
$0
1.1
.4
.7
$2.2
1975:
1
2
3
4
$ 5.8
5.1
5.9
3.5
$20.3
$ 5,.3
4,.8
5,,0
3.,4
$18.5
$ .5
.4
.8
$ 9.6
$ 9.2
Office of the Secretary of the Treasury
Office of Debt Analysis
1976:
$ .7
.6
.2
1.1
$2.6
$ .7
.6
.5
_0
$1.8
J,
$1.8
$ .4
February 15, 19 76
HYPOTHETICAL MATURITY STRUCTURE
WITH ASSUMED BOND ISSUES
($'s Billions)
Calendar
Actual
Year
Quarterly
Quarte>r Maturities
1976:
1977:
1978:
1979:
1980:
Hypothetical
Maturities
Reduction
Calendar
Year
Quarter
1
2
3
4
$4.4
4.1
4.6
4.0
$3.9
3.0
3.6
3.7
$ .5
1.1
1.0
.3
1981:
1
2
3
4
2.1
4.4
3.3
2.4
1.7
3.7
2.9
1.8
.4
.7
.4
.6
1982:
1
2
3
4
5.0
6.0
4.5
4.6
4.1
5.2
3.9
3.9
.9
.8
.6
.7
1983:
1
2
3
4
3.1
1.8
2.8
2.3
3.1
1.8
2.6
2.1
1
2
3
4
1.6
1.7
1.7
1.1
1.6
.4
1.4
1.1
Office of Debt Analysis
Later:
Actual
Quarterly
Maturities
Hypothetical
Maturities
Reduction
1
2
3
4
$ 2.8
2.0
.4
2.7
$ 2.5
2.0
.4
2.3
1
2
3
4
1.7
1.4
1.9
2.4
1.7
1.3
1.6
2.3
1
2
3
4
6.1
1.2
6.1
1.2
— —
_ —
——
——
—— —
———
—
17.3
28.9
$
.3
—
—
.4
.1
.3
.1
11.6
.2
.2
1.3
.3
February 15, 1976
Department of the
[TON, D.C. 20220
FOR RELEASE AT 4:00 P.M.
February 17, 1976
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 > ox
thereabouts, to be issued February 26, 1976
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 November 28, 19759
and to mature
Ma
Y 27, 1976
(CUSIP No.912793 ZJ 8), originally issued in
the amount of $3,411,890,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,700,000,000, or thereabouts, to be dated February 26, 1976,
and to mature August 26, 1976
(CUSIP No.912793 A6 3).
The bills will be issued for cash and in exchange for Treasury bills maturing
February 26, 1976,
outstanding in the amount of $6,433,165,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,472,145,000.
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, February 23, 1976.
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-653
(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 February 26, 1976,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing February 26, 1976.
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
Contact: L.F. Potts
Extension 2951
February 17, 1976
OR IMMEDIATE RELEASE
TREASURY ISSUES DUMPING FINDING WITH RESPECT TO
BIRCH 3-PLY DOORSKINS FROM JAPAN
Assistant Secretary of the Treasury David R. Macdonald
mnounced today that he was issuing a dumping finding with
•espect to birch 3-ply doorskins from Japan. The finding will
>e published in the Federal Register of February 18, 1976.
On October 15, 1975, the Treasury Department determined
:hat birch 3-ply doorskins from Japan were being, or likely
:o be, sold at less than fair value within the meaning of
:he Antidumping Act, 1921, as amended.
On January 12, 1976, the U.S, International Trade Comlission advised the Secretary of the Treasury that an industry
.n the United States was being injured by reason of the im)ortation of birch 3-ply doorskins from Japan sold, or likely
:o be sold, at less than fair value.
After these two determinations, the finding of dumping
lutomatically follows as the final administrative requirement
-n antidumping investigations.
Imports of the subject merchandise from Japan during
calendar year 1975 were valued at roughly $8.7 million.
o 0 o
WS-655
$
&
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE EDWIN H. YEO III
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE TASK FORCE ON TAX EXPENDITURfiS AND OFF-BUDGET AFFAIRS
OF THE HOUSE BUDGET COMMITTEE
WEDNESDAY, FEBRUARY 18, 1976, 11:00 AM
I am pleased to appear this morning to contribute to the
Task Force1s consideration of the Exchange Stabilization Fund
(ESF). The ESF was established by Act of Congress in 1934
to make particular resources available to the Secretary of
the Treasury for the purpose of stabilizing the exchange „
value of the dollar. In addition to the appropriated capital
of the ESF, all income earned by the fund was to be retained
and to be available for the purposes of the fund. Losses must
be financed out-of the fund. The Secretary was specifically
authorized by statute to engage in transactions in foreign
exchange, gold, securities and other instruments of credit
for the account of the fund. Congress has also explicitly
acknowledged, on several occasions, the Secretary's authority -as necessary and appropriate to fulfillment of the purposes
of the ESF --to finance certain administrative and personnel
expenditures from the fund.
WS-657
- 2In establishing the ESF, Congress recognized that a high
degree of flexibility and discretion would be required for the
Secretary to effectively fulfill the purposes for which the
Fund was established.
Specifically, the Fund was placed "under
the exclusive control of the Secretary of the Treasury, with
the approval of the President, whose decisions shall be final
and not be subject to review by any other official."
The
Congress has also recognized that operations for the account
of the ESF are likely to be highly sensitive, requiring a
substantial degree of confidentiality.
Most recently, in
1970 when the Congress enacted legislation authorizing GAO
auditing of the administrative * expenses of the ESF, it
explicitly recognized the sensitivity of the Fund and the
need for continuing confidentiality with respect to operational
transactions of the Fund, as distinct from administrative accounts.
This need for confidentiality of currency operations is considered imperative
by other governments which have similar funds for exchange
stabilization purposes.
The ESF, therefore, was given a status
which enabled it to operate with flexibility, speed and
sensitivity to the delicate nature of the transactions involved.
Over the years the ESF has been used in a number of ways,
directed to the basic purpose of stabilizing the dollar.
We
have described ESF operations in some detail in answers provided
- 3to written questions submitted by the Committee.
Generally
stabilization operations undertaken for the account of the ESF
are designed to offset temporary pressures upon the dollar
in world exchange markets. To enable the Treasury to perform these market
operations, ESF funds are used to acquire foreign currencies which then can be
used in market operations as the need arises. In particular instances the
Treasury has entered into specific exchange agreements with foreign countries which
were attempting to keep their currencies convertible into
dollars at reasonable exchange rates.
The ESF has also
played a role in our pursuit of stabilization policies through
the International Monetary Fund (IMF).
of the original appropriation
The major portion
to the ESF was used for the
initial U.S. subscription to the IMF in accordance with
the Bretton Woods Agreement Act of 1945.
Currently, the
ESF holds and conducts transactions in Special Drawing Rights.
This ESF function was specifically authorized by Congress
in the Special Drawing Rights Act of 1968.
Future Operations of the ESF
ESF operations in the future will employ the same range
of market techniques as characterized use of the ESF in the
past.
However, these future operations must be consistent
with and supportive of international monetary policy as it
has substantially evolved since the early 1970fs.
The essential
purpose of the international monetary system is to provide a
framework that facilitates the exchange of goods, services,
- 4 and capital among countries, and that sustains sound economic
growth.
This is stated explicitly in the proposed amendments
to the Articles of Agreement of the International Monetary
Fund agreed upon in Jamaica by the IMF Interim Committee last
month and soon to be presented to the Congress for ratification.
By fostering orderly underlying economic and financial
conditions and an international monetary system that does not
tend to produce erratic disruptions, we can best assure orderly
exchange arrangements.
We live in a world in which underlying economic and
financial conditions have been particularly unstable for several
years.
Inflation rates in major industrial countries have
been inordinately high; they have varied widely among
countries; food and raw material prices have fluctuated
dramatically; and the OPEC cartel has quintupled the price
of oil in less than two years.
Changes such as these in
world economic and financial conditions have required rapid
and unanticipated changes in our capacity for study, for
analysis, and for international consultations and negotiations.
The understandings reached at Jamaica will require an
intensification of the exchange of information and analysis
of underlying economic and financial factors among finance
ministries of major countries and close continuing consultations
on the policies being pursued by individual countries.
In
addition, consistent with our obligations under the amended
$1
- 5IMF Articles of Agreement, the Secretary will need the
capability to counter erratic movements of exchange rates.
In pursuit of our international monetary objectives, the financial resources of the ESF will be indispensable.
The Secretary
must have resources which can be utilized flexibly, as the
exigencies of the moment may require, in a way that will
avoid provoking or facilitating disruptive speculative
activity in the markets.
Operations to combat disorderly markets will be conducted
in cooperation with foreign governments and their central
banks.
In order to cooperate with the U.S. in such operations
these governments must have confidence that the information
which they share with us on a confidential basis will be kept
confidential.
If such information or the decisions of the
Secretary of the Treasury with respect to transactions through
the ESF were to become public prematurely, it would not only
be disruptive to markets and to foreign governments, but would
totally hamper the use of the fund by the Secretary of the
Treasury for its intended purpose.
The new international monetary system established by
the Jamaica agreements, calls for cooperative actions to counter
erratic fluctuations in the foreign exchange markets.
The
Treasury and the Federal Reserve System, in close collaboration,
- 6 may engage in exchange market intervention for this purpose.
In addition, upon Congressional authorization of U.S. participation in the Financial Support Fund and the entry into
froce of the Support Fund Agreement, the ESF will also be used
to meet the obligations of the U.S. to make immediate transfers
to the Support Fund.
Administrative Control and Management of the Fund
Since the ESF was first established, it has been recognized that the Secretary would need to have competent expert
staff and administrative support to successfully formulate and
execute U.S. stabilization policy, and that the required staff
would be funded from the ESF itself.
In today's interdependent
world, effective operations in the broad area of stabilization
policy require an organization equipped to (a) develop information
on and analyze foreign activities in the monetary, exchange,
trade, and development fields, and other matters bearing on the
U.S. external payments position; (b) assist in formulating U.S.
policy positions on international financial issues, including
the evolution of the international monetary system; and (c)
implement those policies.
In furtherance of the proper discharge of his authority to
manage and administer the Stabilization Fund, the Secretary has
applied clear and precise standards of public administration.
An annual budget for ESF administrative expenditures is submitted to the Secretary for his approval.
Our current procedures and practices with regard to the
recruiting, promotions, and salaries of personnel employed by
the fund, or hired as consultants, are the same as those of the
Civil Service Commission.
Departmental orders issued by the
Secretary set forth strict criteria for determining which personnel positions in the Treasury are eligible for funding from
the ESF.
The GAO has recently conducted a thorough examination
of our practices concerning personnel, including the critieria
for determining ESF financing.
The GAO examination, which
concluded that Fund resources could appropriately be used in
accordance with these criteria, resulted in a report submitted
to your Task Force in November 1975.
The personnel management controls mentioned above have
produced excellent results not only in terms of the quality of
work performed but also in keeping proper limits on the size
of the administrative expenditures and staff.
An unusual
staff increase was required in FY-75 as a result of a series
of major changes in the world economic situation, which we have
discussed at some length in response to one of the Committee's
bitten questions.
I am pleased to inform the Committee that
the FY-76 budget of the Fund has been revised and, pursuant to
- 8 a recent reorganization and consolidation in the international
activities of the Treasury, we have been able to maintain for
FY-76 the same number of authorized positions as for FY-75.
This decision has enabled us to reduce FY-76 expenditures to
$18.3 million, $1.6 million below the total which appeared
in the Federal budget documents for FY-77.
Although the budget
for FY-77 has not been finalized, we expect to be able to keep
the size of the staff and real expenditures within the FY-76
levels.
In addition to the personnel standards mentioned above, an
extensive system of financial and accounting reviews is applied
by the Secretary to the conduct of the Exchange Stabilization
Fund.
Controls are exercised by means of a comprehensive
accounting and internal audit system, an annual administrative
budget, and an annual post-expenditure audit review carried
out by a committee of auditors appointed by the Secretary from
bureaus not connected in any way with the Stabilization Fund.
The report of the Audit Committee is included in the Annual
Report on the Exchange Stablilization Fund which the Secretary
submits each year to the Congress.
The Fund's balance sheet and
income and expense statement are published four times a year in
the Treasury Bulletin.
Public Law 91-599 enacted in 1970 provided for an audit of
the Stabilization Fund's administrative expenses to be performed
by the General Accounting Office at any time the Comptroller
General wishes.
The administrative accounts have been so audited
-9"
776/
and no significant problems were cited in the GAO report
of audit issued on June 20, 1974.
I think you will agree, Mr. Chairman, that although the
administration of the Exchange Stabilization Fund involves a
trust and an element of discretion, this does not mean an
absence of accountability.
Indeed the information available
about U.S. foreign economic policies, including the
Stabilization Fund, already far exceeds that supplied by other
major governments.
Conclusion
Mr. Chairman, the Treasury recognizes the importance of
maintaining open and full communication with the Congress on all
matters of policy, especially the budget process.
Secretary
Simon and I have both consulted extensively with key Congressmen
and Senators on the nature of the reform of the international
monetary system, and I believe that the Congress is in agreement
with the Administration on the objective of exchange stability
and its attainment through the achievement of greater underlying
stability of economic and financial factors as outlined in the
new international monetary accord reached in Jamaica.
Yet, I
believe it is also clear that in order for the Treasury to be
free in fulfilling its obligations to the Congress and the
American people in the area of international monetary operations
and economic stability, it is necessary for ESF operations
to be handled in a confidential and responsible manner.
- 10 -
7^2.
We believe we have maintained firm control over operations
of the ESF as contemplated by the Congress.
At the same time
we continue to believe that the original Congressional intent of
providing the Secretary of the Treasury with maximum flexibility
as well as insuring confidentiality in ESF's activities continue
to be essential.
0O0
7/63
FOR RELEASE ON DELIVERY 1:00 PM, EST
WEDNESDAY, FEBRUARY 18, 1976
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
TO THE NEW YORK CHAPTER
THE PUBLIC RELATIONS SOCIETY OF AMERICA
NEW YORK CITY, FEBRUARY 18, 1976
It's a special pleasure for me to appear before this
distinguished communications group for several reasons. For
one thing, it's nice to see so many smiling faces in Fun City.
On my last few visits I detected a distinct chill in the air —
perhaps because of the hard, serious business that brought me
here during New York's fiscal crisis.
It was a difficult time for all of us and no one had an
easy role to play. As far as my own role was concerned, I
would say that I felt I had a duty to be honest and forthright
about the situation as I saw it in this great but troubled
city. I told the truth a§ I saw it, even though I realized
it wouldn't make for very pleasant listening.
But, today, I come to praise New York City, not to bury
it. And I want to express my personal admiration for the way
in which the people and the administration of this great
municipality are facing up to a problem that demands the best
effort from all of us. It won't be easy, but New York can and
will be restored to economic health.
You, as communicators, can help by explaining the issues
and educating the public. For if my three years in Washington
have taught me anything at all, it is the vital importance of
your speciality — good communications.
The success of public policy, even more than the success
of a commercial product, is directly dependent on the communications ability of those who advocate it. In fact, one of
the biggest problems we face today in government is the paradox
of too many good communicators selling bad policies and too
many bad communicators selling good policies. A rhetorical
spellbinder could sell ice to eskimos.
WS-659
*fio(/
- 2 Some of the advocates of free enterprise and fiscal responsibility, on the other hand, are so stuffy and naive about
communications that they'd have trouble peddling Alka-Selzer
on New Year's morning. There isn't a better product on the
political market than the free enterprise system. But it
just isn't being sold with enough savvy and imagination in
this politically competitive age we live in.
Washington, it has been said, is the only city on earth
where sound travels faster than light. As the late Vince
Lombardi might have put it, in Washingtpn, communication
isn't everything, it's the only thing.
During the past three years I have developed a healthy
•respect and appreciation for the real professionals in the
field. In fact, I have a feeling that I'm here today partly
because of some conniving on the part of Treasury's former
Public Affairs Director, Jim Sites, and Texaco's Bob Kelly,
another former bureaucrat — and a good one, I hastily add!
And now that Jim has joined the NAM, Treasury has a great
replacement in Bill Rhatican, who recently came over from J<
Commerce and who, I know, will be glad to lend any of you a
hand at any time.
De
Since public relations, as we understand it, is practiced
only in democratic societies, I suppose it's only natural, x
as we near the end of our great democracy's second century,e
to think about the impact of public relations on our future.
is
Perhaps the most significant — and distressing — fact
confronting this country today is closely related to your ii
field. I refer to the decline in public confidence in our
institutions. Instead of observing our Bicentennial on the
upbeat, we find our nation in a mood of deep and widespread
distrust of many of the very elements that made our society
great. Hardly any group — business, government, the press,
education, labor — enjoys the credibility and trust it once
did.
Many people sensed this decline in public confidence
long before the pollsters confirmed it. George Shultz, a
former Secretary of the Treasury, has summed up the problem
pretty well: "We need moorings in our society," he points
out, but "We have let go of many old moorings and we do not
have new ones to replace them."
This decline in public confidence has been building for
a long time. Many different things have contributed to it:
Vietnam, Watergate, and the over-promising and under performance
of government. But, today, it involves far more than government.
it now seems to pervade every facet of our social structure and
J7o?
- 3 poses a threat to the system that has enabled this country to
achieve the greatest prosperity and the highest standard
of living ever known.
One of the institutions whose credibility has lost the
most ground is business — or what I prefer to call free
enterprise. Today the American private sector is re-examining
itself to determine not only what has caused this loss of
confidence but also what it can do to regain it.
One opinion researcher says the major concern facing
business is to overcome the public's alienation and cynicism.
Ifm not sure I agree. I certainly don't agree with those
who allege there is something basically wrong with the
American enterprise system itself.
Part of the problem, I believe, is that many people are
misinformed and misled on the economic issues. In other
words, the problem is one of communications. Too much is
h&ppening too fast. People have trouble keeping up and our
society gets too little accurate information about what is
really going on in the business sector. According to a
recent study by the Opinion Research Corporation, the key
issues on which the public is most misinformed are the level
ar*3 trend of corporate profits and their inter-relationships
with prices, wages, unemployment and inflation — a major
part of the system of economic causes and effects that
iiffluence their daily lives. They also found that people
were misinformed about antitrust problems, monopolistic
practices and competition and the relations between corporations and governmental regulatory agencies.
j^ If that worries you, there's more. Some of you may
recall the report last year by the Commerce Department and the
Advertising Council, which portrayed the average American as
a virtual economic illiterate who perceives our economic
system almost solely in terms of his or her own personal
This rather
situation
is only than
humanin— its
but
broad
it is
functional
also dangerous.
aspects.
People usually fear what they don't understand. And
People tend to reject what they fear. So we shouldn't be
surprised if they're tempted to unknowingly embrace programs
and quack economic remedies — that are destructive to our
system. Which raises the basic question of whether or not
our system is worth preserving. Perhaps the fairest way to
Dudge is by performance. Here are some of the measurable
standards of performance of the American economy in the postWorld War II era:
- 4 - Since the late 1950s, real purchasing power of Americans
has jumped by 40 percent, average family income has risen
to over $13,000 a year, 20 million new nobs have been created,
and we have cut the number of people below the poverty line
in half.
0ur farmers 'harvest more than twice as much grain with
fewer workers compared to a generation ago.
— Medical science has added 10 years.to our lives over
this period.
Our economic abundance has made it possible for us to
give $110 billion in food and economic aid to less fortunate
nations since the end of World War II.
— And Americans today have more leisure time for study,
recreation and self-improvement than any society in recorded
history. We continue to spend about 90 percent of our personal
disposable income on ourselves.
No other country — no other system — has achieved so
much for its people. Yet these tremendous achievements are the
product of the same free-market system that now finds itself
under attack.
Where does it stand today? For all the talk about J
excessive profits, it's a system that, on the average, offers
a profit incentive of less than five cents on the dollar, a
small reward for all the effort and risk-taking that goes into
developing and operating a successful business.
Nevertheless, it remains the real productive source of
li
our nation's wealth, as well as that of each individual
American.
Despite the growing influence of government over our
lives, this system produces the food we eat, the goods we use,
the clothes we wear, the homes we live in.
It is the source of five out of every six jobs in
America, and it pays the taxes to provide most of the rest
of the jobs in our all-too-rapidly expanding public sector.
It is the foundation for defense security for ourselves
and most of the Free World.
7o7
- 5 It is the productive base that pays for government
spending to aid the elderly, the jobless, the poor, the
dependent and the disabled. Indeed, far from being the
anti-human caricature painted by political demagogues, the
American private sector is in reality the mightiest engine
for social progress and individual improvement ever created.
In a nutshell, the values we live by — all of the
material and spiritual things about our country that make it
unique and make us so proud to be Americans — could not
exist without the free enterprise system.
If the prospect of seeing a system like that go down
the drain doesn't worry you, let me call your attention to a
syndicated column that Charles Bartlett wrote on December
26: "More than 10 years ago," Mr. Bartlett said, "Arthur
Koestler wrote that a loss of incentive was ailing Britain
far more than its loss of empire, and the glummest aspect of
today's scene is £he bowed spirit of a creative, courageous,
ebullient people.
If that can happen to a nation that once was one of the
proudest bastions of free enterprise, we are in no position
to .assume that it can't happen here.
Every generation hopes it will leave its children a
better world. But there is no guarantee of endless prosperity
in the United States any more than in any other country.
Prosperity doesn't happen by accident. Tamper with its
source and the shock is felt throughout our entire society.
And I am convinced that, today, the private sector —
indeed, our very society — is enduring the greatest series
of^shocks and challenges since the 1930s. In my opinion the
threat can be traced directly to the explosive growth in
government and the ominous concentration of power on the
Potomac. Today government spending at all levels accounts
for some 38 percent of our gross national product. If recent
growth patterns continue, it will reach 60 percent before
the end of this century.
It is my firm belief that any government that taxes
away more than half of what people earn has robbed them of a
great part of their economic freedom. And can there be any
doubt that when our economic freedoms are destroyed, our
personal and political freedoms will not long survive them?
The head of one of our major corporations says it's no
longer just a challenge. In thefttew-York Times' annual
economic roundup last month, Richard Hiley, c.ie President of
il
Firestone Tire and Rubber Company, was reported to have pronounced free enterprise already dead. I shudder to think
how many other business leaders share in that counsel of
despair. If they give up, who is left to uphold economic
freedom?
Yet the same article quoted another executive as saying
that unless something is done to halt "the systematic
destruction by federal and state government of the ability to
make profits, the word 'corporation' will be something to be
studied
along with the buggy whip. "
Now no one would seriously question the role of government in safeguarding such areas as health and education. But
the layer upon layer of regulations that government has piled
on all aspects of the private sector, and its proliferation
of programs and administrative devices has seriously hobbled
the American businessman — especially the small businessman,
the very backbone of our free enterprise system. Every
business in America, from the little shop around the corner
to General Motors^ '.s being buried under a growing load of
federal paperwork and requirements to the tune of $20 billion
a year.
LC
The men and women who run this country's private industry
are your clients. You work with them daily. Both you and
they know there is justification for some of the charges
lodged against their industries. Most of them recognize that
they must put their own houses in order by correcting these
faults. And most realize that failure to do so would surely
contribute to the further undermining of the system they
profess to cherish.
)i.
But survival requires more than internal reform, andf
that is where you become so important.
>x
1
Even the misinformed consumers who were studied in that
survey by Opinion Research Corporation said they had no wish
to destroy our free enterprise system. They said they still
consider business a progressive force, but they would like
to see it "cleaned up."
According to the same pollsters — and here I quote:
"The pressure is on corporations to overcome misconceptions
about their activities while correcting abuses for which they
are responsible."
The public relations profession, it seems to me, has
its work cut out. It's a big job and a critical one. There
is an urgent need for leadership in helping to restore the
faith of the American people in their economic system, as
well as in government, and I don't know of any group of
professionals better qualified to do it than you.
- 7 It's been said that communications is the web holding
civilization together — the central nervous system of any
organized society. It's also the only means of perpetuating
the traditional values handed down by our forefathers which
give our civilization stability and continuity.
Never has that function been more important than today.
It is largely up to you to communicate the great story of
freedom — to dispel the confusion that has made free enterprise
a dirty word; to let our lawmakers and leaders in government
know they cannot let the system that generates our wealth,
our strength, and our freedom be destroyed. If ever
communication of the highest professional caliber was desperately
needed, it is NOW; if ever there was an assignment that
challenged your profession to the core, it is this one.
Too many in government have too long acted on the assumption that good economics is not good politics. We must show
them the error of their way. We must make it politically
attractive to vote for, not against, responsible economic
policies. Our lawmakers must be convinced that this is what
the public wants. For they know better than anyone that the
public attitude of today is the public statute of tomorrow.
I
Given the facts about the very real threats to our
economic system, I for one have no doubt about what the public's
reaction will^be. But the public must know them in order to
act on them.
The people have a right to know how government restrictions are undermining individual and industry initiative.
Thfey must learn how our government's tax and spending policies
are sopping up capital needed for investment and the creation
of jobs.
They must understand that runaway spending and unending
deficits fuel inflation — a silent thief that picks every
American's pocket, undermines public confidence in the future
and turns the desperate to government for still more illusory
help.
In short, the job before you — if you hope to preserve
this system of ours — is to convince both the public and its
leaders in Washington that government just can't go on wringing the neck of that marvelous goose that lays those golden eggs.
This is not a question of liberals versus conservatives
or Democrats versus Republicans; it is a matter of sense against
nonsense, freedom against oppression.
There is no doubt whatever in my mind that you can do this job. But all of us must
be united in our resolve;
- 8 To set a high moral and ethical standard by eliminating
any practices in our own organizations and operations that
may be questionable,
4
To square practices with principles by refusing
government subsidies, quotas, handouts, bailouts or other
inducements that offer an illusory, empty promise of security
in exchange for sacrifices of freedom, and
To initiate and, in some cases, redouble our efforts
to inform and educate the public about the benefits and
realities of the private enterprise system.
Given this commitment, the public relations profession
can create a real understanding of how the private enterprise
system benefits individuals and groups, and of its absolute
essentiality to progress, prosperity... and, above all, our
freedom.
Sages throughout history have placed freedom at the top
of all the things we hold sacred. Our founding fathers
built a new nation around that concept and, ever since,
freedom has been synonymous with America itself.
One way to ensure our freedom is through education. As
public relations professionals, you counsel corporate leaders
who provide millions of dollars each year to America's
educational institutions and foundations. It is fundamental
to America's strength to continue that generosity. I would
advise, however, that you counsel your bosses and your clients
to take a close look at the teaching policies of those schools
and foundations being considered for corporate gifts. Find
out if the subjects of that generosity are really assisting in
the fight to maintain our freedoms or if they're working to
erode them — and urge that judgments be made accordingly.
Otherwise the largesse of the free enterprise system will
continue to finance its own destruction.
This, ladies and gentlemen, is the crucial theme that
must be communicated broadly and deeply into the national
consciousness: The American production and distribution
system is the very wellspring of our nation's strength —the
source of present abundance and the basis for our hopes or a
better future. America can solve almost any of its pressing
problems if it preserves and continues to improve this
immensely productive system. And in this process, we 11
also be preserving the freedoms that made it all possible.
This is one P.R. campaign none of us can afford to
lose. And you, more than anyone else can help us to win it.
#
#
#
FOR RELEASE ON DELIVERY
777
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE SENATE BANKING COMMITTEE
FEBRUARY 19, 1976, 2:00 P.M. EST
Mr. Chairman and Members of the Committee:
I am here today in my capacity as Chairman of the
Emergency Loan Guarantee Board to address certain issues
you have raised about outstanding guaranteed loans to the
Lockheed Aircraft Corporation. Your primary concern is the
ability of Lockheed to repay guaranteed notes in an orderly
fashion. That, of course, is also the primary concern of
the ELGB, Mr. Chairman, you have stated that the board
should require a phase-out of the loan program by mandating
steady reductions in the amount of outstanding loans. For
the reasons I will explain, the Board feels that such an
approach is not only impractical but inconsistent with the
intent of the original 1971 loan guarantee legislation.
The goal of that legislation was to assist Lockheed
through a liquidity crisis. The proponents of the program
persuaded Congress that passage of the legislation would
avert the impact of a Lockheed failure upon the economy while
not posing a grave risk to the Federal purse. In recognition
of Lockheed's longer-term borrowing requirements and the expected fluctuation in its cash needs, the Emergency Loan
Guarantee Board was given great discretion and flexibility
in administering the program. The program was designed to
restore Lockheed to a position that would afford it access
to normal private credit markets. The desirability of_
granting the ELGB wide-ranging authority is evident from the
developments that have occurred since 1971. To cite an important example—because of a sharp drop-off in their business,
the failure of certain airline customers to make final payment for and take delivery of Tri-star aircraft last year
prevented Lockheed from paying off as originally planned a
large segment of its outstanding guaranteed loan obligation.
This is the sort of development that could not have been
WS-656
anticipated
at the outset.
-2Your suggestion of a rigid repayment schedule is more
consistent with the approach taken by Congress in dealing
with the New York City fiscal crisis. In the case of New
York City, while federal assistance was similarly intended
to bridge the gap until access to private capital markets
could be regained, different factors were present which
motivated Congress to insist upon less flexible repayment
terms. New York City had been living beyond its means for
some time and had a fundamental and growing budget gap between revenues and expenditures. In order to restore market
confidence in the City, a strict financial plan was developed
by the City and the State calling for the achievement of a
balanced budget over three years. The only Federal assistance required was to cover seasonal financing needs during
the three-year adjustment period. The legislation that
Congress passed and the credit agreement that we entered
into with New York City were tailored to meet that seasonal
need. Thus, there is a requirement in the law that specific
sources of repayment be identified at the time each loan is
made as well as a requirement that all loans be repaid in
the fiscal year in which they are extended. New York City
indicated that this type of seasonal financing arrangement
would enable it to return to the capital markets by 1978,
and Congress and the Administration agreed.
In contrast, the purpose of the Lockheed program was to
restore the financial health and viability of the company
over the long term. Because of uncertainties as to such
matters as the timing of product sales and cash receipts
inventory needs and general business trends in the aerospace industry, it was felt inadvisable to require Lockheed
to adhere to a rigid repayment schedule when the ELGB program was set up in 1971. For the same reasons, a rigid
repayment requirement at this time could well impair Lockheed's ability to regain its financial health.
I think it appropriate that I say a few words about the
activities that have recently been reported in the press.
I will then focus on the repayment question.
I am sure you will agree that my remarks before this
committee last August left no doubt in anyone's mind about
my views, and the views of the Loan Guarantee Board, on the
issue of bribes and other improper payments. I condemned
in the strongest possible terms all improper payments made
by Lockheed. The ELGB does not condone bribery in any way,
shape or form. The fact that a firm's competitors may
engage in such practices does not make the practices, in
any way, less odious.
I am a strong advocate of the American system of free
enterprise and of a competitive economy. When a business
seeks to obtain orders or make sales through bribes and
kickbacks, it not only undermines competition in the marketplace, it seriously erodes the reputation of the American
business community. This cannot be tolerated.
Since last summer, Lockheed has worked, at our behest,
and under our supervision, to put an end to all improper
practices. Lockheed's Board has adopted a set of rigid
controls over payments and over the hiring of consultants
and commissioned agents to assure that no improper payments
occur in the future. The ELGB is closely monitoring the
implementation of that policy by Lockheed. With respect
to improper payments previously made, the ELGB's principal
concern has been to assess the effect of the disclosure of
such payments on future and existing foreign orders for
Lockheed products. The primary factor bearing upon this is,
of course, the extent to which Lockheed will be required to
disclose publicly the names of all countries in which payments were made and the identities of those who received
payments. The ELGB has concluded that this kind of detail
is not necessary for it to perform its function of evaluating Lockheed's ability to repay its guaranteed borrowings.
The Emergency Loan Guarantee Board has taken a number
of important and decisive steps since learning that Lockheed
had been making improper foreign payments. We requested
from Lockheed information about the payments in order to
assess their impact on the guarantee program. The ELGB
insisted that Lockheed cease all improper payments immediately,
and Lockheed agreed to do so. The Company also instituted
certain procedures to prevent its officers or agents from
again becoming involved in improper marketing activities.
The ELGB reviewed those policy measures and required certain
modifications. As Lockheed develops further procedures to
implement its new policies, the ELGB will continue to review
the adequacy of such safeguards.
Lockheed's Board has established a flat prohibition
against the payment of any commissions directly or indirectly
to foreign government officials or to political organizations.
Any officer or employee found circumventing this rule will
be dismissed. Lockheed's Board has also ordered that no
corporate funds are to be maintained outside of normal channels to prevent the setting up of secret "slush" funds.
-4Lockheed has agreed to certify each month to the Emergency
Loan Guarantee Board that both these requirements are being
properly followed. In addition, Lockheed has set up a
committee of outside directors to investigate the Company's
prior activities. Finally, I should note that at a board
of directors' meeting last Friday, important changes were
made in Lockheed's top management. I might add parenthetically that T have been acquainted with Bob Haack for some
time, and I personally am pleased by his being named Chairman
of Lockheed at this time. This management change can be a
significant first step in rebuilding public confidence in
the Company.
On its part, the ELGB is presently considering amending
its agreements with Lockheed and the lending banks. The new
amendments would cause the making of further improper payments to be an event of default. The Amendments would also
set up a formal monitoring system to assure, to the extent
possible, that no wrongful payments are made in the future.
The ELGB also comtemplates that it will require a
special accounting from the committee of outside directors
recently set up by Lockheed's Board to investigate the
Company's improper activities. The Directors' committee
will use independent resources to investigate and fully
account for all past improper transactions. The ELGB will
evaluate the nature and scope of that investigation and require a special report about its findings. We will require
a further accounting if one is warranted.
Finally, with respect to the issue of disclosure, I
think it is important to note that Lockheed has turned over
all subpoenaed documents relating to foreign payments and
bribery to the Securities and Exchange Commission. This
has been done under a court order which requires that that
information not be made available by the SEC to anyone outside the agency pending action by the court.
Mr. Chairman, in your letter of February 13, you requested that I provide a number of documents. These have
been provided to your staff. You also asked that I furnish
you with the Board's assessment of the impact of a Lockheed
collapse on the economy. The Board itself has not made such
an assessment. However, last fall as part of the staff's
consideration of the Board's options in connection with the
-5improper-payments problem, the staff sought an analysis along
these lines from the Treasury Department's research staff.
Since several months have elapsed and major changes in the
economy have occurred in the interim, I have instructed my
staff to obtain a new analysis. I will be pleased to furnish
you this new analysis on its completion.
The Emergency Loan Guarantee Board staff has just returned from Lockheed's headquarters in California,so we have
timely reports on issues of concern to this committee.
Meetings were held with Lockheed management as part of our
regular monitoring function through which the Company's financial projections are reviewed and evaluated. While at
Lockheed, the staff also sought to assess the possible impact of recent newspaper stories about foreign payments
made by Lockheed on the Company's future. We are continuing
to obtain information that will enable us to evaluate how
sales of particular product lines to foreign countries
might be influenced by disclosure of improper payments.
While we will monitor further public disclosures of improper
payments, the ELGB does not consider detailed information
about individual transactions necessary to carry out its
mission.
Mr. Chairman, in your letter to me of February 12, you
urge that the ELGB take immediate steps to require a phase-out
of the guaranteed loan. You urge this to prevent a "Hobson's
choice" in 1978 — extending the guarantee further or bankrupting
Lockheed. In point of fact, the course you propose would quite
likely only force us to settle sooner on one alternative of that
dilemma — bankrupting Lockheed. In considering your suggestion,
we should keep in mind the original objective of the statutory
program — the rehabilitation of Lockheed to avoid the economic
impact of a major corporate failure.
The United States has only been experiencing economic
recovery since April 1975. Over the last two years, Lockheed,
which is so dependent on a healthy commercial airline industry,
was particularly hard hit by the recession. In spite of this,
the Company was able to show small operating net profits. As
the airline industry benefits from improved economic circumstances,
Lockheed's prospects should be greatly enhanced. However, the
Company's overall situation is uncertain because of the impact
that disclosure of improper payments could have on existing and
future orders for Lockheed products.
Mr. Chairman, I do not believe that the approach you
Propose is appropriate. In view of present conditions and
uncertainties, requiring Lockheed to adhere to a strict repayment
schedule would be the equivalent of attempting to
squeeze "blood out of a turnip". We cannot predict with
ln
certainty
specificthat
future
repayment
periods
money
of time.
will be
Lockheed's
available ability
to Lockheed
to
ultimately generate sufficient cash to repay the guarantee
notes can be achieved only if the Company is successful in
maintaining its business base. Any imposition of restrictions such as you propose would create additional risks to
Lockheed's ability to operate in its present form. This in
turn could discourage existing and new customers from placing
orders with Lockheed, thus, further decreasing the probability
of an orderly termination of the guarantee program. The key
here is that Lockheed must regain the confidence of all sectors
of the public including the government, customers, suppliers,
and other company creditors. Based on Lockheed's financial
projections, we believe that there is a reasonable prospect
that the company will be able to return to the private capital
markets by the time that the guarantee period expires.
I recognize that we do not know what impact on Lockheed's
operations will occur as a result of the foreign-payments
disclosures that have been made. We do not yet know whether
order cancellations might result from detailed disclosures
about improper payments. The Board and its staff will continue to monitor these events closely* There are many uncertainties. The improper-payments question has placed some
clouds on the .horizon. These clouds, by no means however,
necessarily spell the demise of Lockheed.
Mr. Chairman, in your letter of February 12 calling for
a rigid phase-out of the guaranteed loan program, you made
reference to the fact that the repayment schedule has been
modified several times. You cite the GAO report on the
guarantee program in making this observation. I think there
may be a basic misunderstanding here. We are not really
<v
dealing with a repayment schedule. The arrangement that
f
was set up for Lockheed through the guarantee legislation
was not intended to operate like a consumer loan for a new
car. It is not a loan that is to be paid off in installments.
While there is an expectation that over time Lockheed will
be able to scale down the amount of its guaranteed borrowings,
this is not a strict formal requirement.
I think what the GAO may have been focusing upon was
Lockheed's December 1974 forecast for debt repayment, which
also was described in the Loan Guarantee Board's most recent
annual report covering the period August 1974 through July
1975. The report indicates that in its December 1974 forecast, Lockheed projected reducing borrowings under the loan
Guarantee program by about forty million dollars during 1975.
As it turned out, last year Lockheed was unable to reduce
its borrowings under the program below the $195 million level
that pertained at the year's outset, largely because of postponement by airline customers of earlier agreed-to delivery
dates.
The airlines were hard hit, first by increased
fuel costs, and then by traffic declines caused by the
recession.
?,?
-7The important distinction that must be recognized here
is that we are dealing with a corporation's financial projection and not with a repayment plan in the sense of a
formal loan repayment schedule. All corporations make projections about their financial position over future periods
of time. Such is necessary for sound corporate planning.
It is true that as part of its evaluation of the loan guarantee
program, the Guarantee Board and its staff look closely at
Lockheed's financial projections. The projections are used
to assess both policy with regard to continuation of the loan
guarantee and the possible modification of its conditions.
However, the financial projections cannot be regarded in
any sense as a requirement that Lockheed reduce the amount
of its outstanding loans at the projected rate.
Lockheed's inability to meet its financial forecast
during 1975 was caused mainly by factors external to the
firm. In fact, Lockheed's business in certain areas exceeded forecast expectations. Lockheed's cash problems since
1974 have been closely related to the financial problems of
the airline industry. Airlines have defaulted on purchase
orders and have deferred delivery of some aircraft, with a
serious impact on the Company's anticipated cash flow. All
of this is without any practical recourse being available
to the company, since its commercial airframe business is
closely tied to the fate and fortune of its airline customers.
Some of these situations are now clearing up and if deliveries
can be made as now anticipated, Lockheed's cash-flow situation
will benefit. The point I want to make is that Lockheed's
inability to repay forty million dollars last year, as it had
originally hoped, was largely caused by external factors not
evident to Lockheed when it made its projections in December
1974.
It is Lockheed's practice to do a completely new forecast
annually. The Company's latest forecast, which still has not
been finalized, was made available to the ELGB for the first
time last week. I must point out that the effects of the recent
disclosure of Lockheed's improper payments are not and cannot
be taken into account in that forecast, and the ELGB does not
believe they are fully assessable unless and until the current
uncertainties are resolved.
-8This new forecast indicates that guaranteed borrowings
will trend downward as was expected by Lockheed and the ELGB
during 1975. In fact, the forecast now projects repayment
by the end of 1977 of $150 million of the $195 million of
guaranteed debt with the remaining $45 million to be repaid
in 1978. Based on a preliminary assessment, the ELGB is of
the opinion that the forecast is reasonable, although I
must reemphasize that it does not take into account the potential impact of disclosures of the details of past foreign
payments. The forecast does, however, provide some cushion
which could be applied against contingencies. If Lockheed
is in fact able to reduce the guaranteed borrowings substantially over the next two years as it has forecasted, it
seems reasonable to me to anticipate that Lockheed will have
access to private capital sources by the time that the Government Guarantee program ends.
Another factor that I think merits your consideration is
the Government's collateral. Our most recent analysis shows
that the value of the underlying collateral for the Government's loan continues to cover adequately the Government's
potential exposure in this program. This opinion was concurred in by the Comptroller General in his January 1976
report.
Thus, we are looking at a situation where the amount of
guaranteed loans outstanding has dropped from a high of
$245 million to $195 million, has been steady recently,
and should begin to decline in the near future, while the
the value of the Government's collateral fully covers the
Government's potential exposure. In view of this, it would
be unwise to shift to the rigid repayment schedule you are
suggesting, possibly causing a default by Lockheed and
bringing about the very bankruptcy dislocations that the
whole program was set up to avoid.
oOo
77/f
FOR IMMEDIATE RELEASE UPON DELIVERY
STATEMENT OF SIDNEY L. JONES
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE SUBCOMMITTEE ON FINANCIAL MARKETS OF
THE SENATE FINANCE COMMITTEE
FEBRUARY 19, 1976
Mr. Chairman and Members of this Subcommittee:
I welcome this opportunity to discuss the process of
capital formation, financial institutions and possible
incentives for encouraging capital investment. These
topics are of fundamental importance in establishing national
economic priorities. Experiences with sharp cyclical swings,
unprecedented double-digit inflation, unacceptable levels of
unemployment and uncertainties about the future adequacy of
raw materials and productive capacity have created increased
concern about our national economic prospects.
Adequate capital formation is required for economic
growth, creation of job opportunities, moderation of price
increases and maintaining our competitive position in international
markets. However, capital investment is only one of the
diverse claims against the national output. The quantity
and type of capital formation in the future will depend upon
what national priorities are established and what time
periods are used for planning economic policies. The challenge
of achieving capital formation goals can be met but success
will not be automatic and major policy changes are required
to: (1) eliminate the chronic Federal deficits which divert
resources and disrupt financial markets; (2) reverse the
long-term decline of business profits which are the basic
incentive for new investment and an important source of
financing; and (3) provide a positive tax environment which
is not biased against savings and investment.
I. Capital Investment Background
Economic growth depends upon: (1) the accumulated
stock of productive assets; (2) the pace of new capital
WS-658
- 2investment; (3) the application of advanced technology;
(4) the quality of the national labor force — its education,
training, discipline and commitment; (5) the available
infrastructure of transportation, communication, financial
institutions and services; (6) access to raw materials;
(7) managerial skills; and (8) the organization of the
economic system. The mix of these economic factors varies
for each country and changes over time as substitutions
occur. However, most analysts agree that a strong rate of
new capital investment is required to sustain economic
growth.
The United States retains a position of economic
leadership because it has had a favorable mix of the important
economic variables, along with political stability and
improving social mobility. The absolute amount of gross
private domestic investment has grown rapidly over the
years, as summarized in Table 1, and should begin to improve
in 1976 following the declines in spending caused by the
recession. Nevertheless, it is unrealistic to assume that
the historical patterns of investment and productivity will
be adequate to meet the economic priorities of the future.
A review of the performance of the U.S. economy indicates
several areas of concern.
First, during the decade of the 1960's, the United
States ranked 17 in a list of 20 industrial nations belonging
to the Organization for Economic Cooperation and Development
(OECD) as to the average annual growth rate of real output
(see Table 2).
Second, a study prepared by the Treasury Department
indicates that total U.S. fixed investment as a percent of
national output during the time period 1960 through 1973 was
17.5 percent using OECD definitions for comparing the different
countries. The U.S. figure ranks last among a group of
eleven major industrial nations. Furthermore, the gap
between the level of private fixed investment in the U.S.
economy, measured as a share of national output, and the
commitments of other industrial nations tended to increase
over time. When only nonresidential investment is considered
the total amounts are lower but the relative position of the
United States is not changed. As discussed below, the low
ranking of the United States is the result of several basic
characteristics of our economic system. However, it is a
useful signal for calling attention to fundamental concerns
about the undesirable levels of inflation, unemployment and
productivity over the past decade.
//7
Investment as Percent of
Real National Output 1960-73*
Total
Fixed**
Nonreside
Fixed
Japan
West Germany
France
Canada
Italy
United Kingdom
35.0
25.8
24.5
21.8
20.5
18.5
29.0
20.0
18.2
17.4
14.4
15.2
U.S.
17.5
13.6
11 OECD Countries
24.7
19.4
* OECD concepts of investment and national product. The
OECD concept includes nondefense government outlays for
machinery and equipment in the private investment total
which required special adjustment in the U.S. national
accounts for comparability. National output is defined in
this study as "gross domestic product," rather than the
more familiar measure of gross national product, to conform
with OECD definitions.
** Including residential.
Source: U.S. Department of the Treasury
Third, the United States also ranks last in a list
of seven major industrial nations as to the average annual
rate of growth of manufacturing output per manhour and
gains in the gross domestic product per employed person
from 1960 through 1973. During that period the amount
of "real" capital investment per additional civilian employee
declined and the historical U.S. advantage in "real" output
per employed civilian compared to other industrial nations
significantly narrowed. Various studies have indicated the
close relationship between capital investment and various
measures of economic growth and productivity. A dynamic
economy is needed to create jobs by applying new technology
and expanding productive capacity as a basis for raising the
general standard of living. Inadequate capital investment
limits new job opportunities and leads to inflation as
productivity fails to rise as rapidly as labor and materials
costs.
- 4 Productivity Growth, 1960-1973
(Average Annual Rate)
Gross Domestic Product Manufacturing output
per employed person
per manhour
United States
2.1
3.3
Japan
West Germany
France
Canada
Italy
United Kingdom
11 OECD Nations 5.2* 6.1
9.2
5.4
5.2
2.4
5.7
2.8
10.5
5.8
6.0
4.3
6.4
4.0
* Average for 6 OECD countries listed.
Source: Department of the Treasury
Fourth, there have been many specific examples
of production bottlenecks resulting from inadequate capacity
during periods of economic expansion. During the period of
wage and price controls extending from August 1971 until
June 1974 the Cost of Living Council became increasingly
concerned about the prospects for inflation resulting from
raw materials shortages and inadequate productive capacity
in several basic industries. Current statistics concerning
the utilization of existing plant capacity suggest that
extensive slack exists in the system since the operating
rate was 70.8 percent in the fourth quarter of 1975. However,
it should be recognized that this figure can change rapidly
as economic recovery occurs. It should also be emphasized
that the concept of operating at 100 percent of physical
capacity is misleading. Over the last fifteen years government
figures indicate that manufacturing capacity utilization
averaged 83 percent despite some periods of intense output.
The highest figure reported during those fifteen years was
91.9 percent in 1966. Most companies need to preserve some
reserve capacity to handle unexpected output requirements
and to accommodate maintenance and replacement needs.
Changing labor and material costs — particularly energy
prices — must also be considered in evaluating the actual
adequacy of existing plant and equipment. While it is
unlikely that widespread productive capacity bottlenecks
•
will develop during the next few months of economic recovery,
achievement of the Nation's longer-term economic goals will
require increased capital formation.
7^ji3
- 5 Fifth, the financial markets have also experienced
considerable strain as the combination of private financing
needs and public claims have increased rapidly. Corporations
have traditionally relied on retained earnings and capital
consumption allowances for approximately two-thirds of their
financing requirements. However, in 1974 nonfarm nonfinancial
corporate businesses required $101.8 billion of external
funds out of total financing needs of $183.3 billion, or
55.5 percent. It is estimated that over 80 percent of the
rise in corporate long-term funds of $270 billion over the
past decade involved the sale of debt issues. This strong
preference for debt issues — particularly the influence of
tax laws which allowed interest payments to be deducted from
taxable income — has brought about a doubling of the debtequity ratios. The resulting fixed charges, consisting of
payments of principal and interest charges, have made corporate
financial positions less liquid and less flexible in reacting
to the adversities of company problems and the general
pressures caused by economic recessions.
Fortunately, these problems have been recognized and
major efforts are now underway to correct the liquidity and
solvency positions of American businesses. Considerable
progress has been made already and companies are clearly
intent on continuing the correction process. The major
factor in this adjustment has been the sharp improvement in
corporate profitability beginning in 1975 which is expected
to be continued this year. This important turnaround follows
a long period of deteriorating profits beginning in the mid1960 's and lasting until last year. For example in 1965 the
adjusted after tax domestic profits of nonfinancial corporations
represented 6.8 percent of total national income; by 1973
that figure had declined to 3.3 percent. Similarly, adjusted
after tax profits of nonfinancial corporations as a percent
of gross product originating in nonfinancial corporations
fell from 10.2 percent in 1965 to 5.1 percent by 1973.
Finally, over the same period the rate of return on capital
investment declined from 10.1 percent to 6.1 percent.
These figures partially explain the loss of investment
incentives and financing problems that have occurred. A
major factor in the achievement of our national capital
formation goals will involve a continued recovery of business
profits necessary for encouraging future investment and for
providing an important source of financing.
The five problem areas described above do not mean that
economic progress in the United States has not occurred. In
fact, over the past fifteen years the U.S. economy has
- 6 increased the real output of goods and services by 60 percent;
the real income of the average American has risen by over
50 percent; the number of Americans living in families with
incomes below the poverty level has declined to 10.2 percent
of the population; and 20 million new jobs have been created.
In describing the relatively slower rate of capital
investment in the United States and the disappointing
productivity figures, it should be recognized that there are
many factors that influence a nation's level of investment.
First, the unusually large size of the U.S. economy and
its relatively advanced stage of development, particularly
the accumulated total of previous capital investments,
creates a different investment environment. Having already
developed an impressive productive capacity it is to be
expected that our rate of additional growth would be lower
than the development rates of other nations who are still
striving to achieve our relatively advanced level of economic
activity.
Second, the U.S. economy has traditionally emphasized
consumption which has contributed to strong demand for goods
and services leading to sustained output, employment and
investment. In 1975 personal consumption totaled $963 billion,
or 64 percent of the total gross national product and government
purchases of goods and services amounted to $331 billion, or
22 percent. By way of comparison gross private domestic
fixed investment was $112 billion, or 7.5 percent of the GNP
(this figure does not include residential construction or
inventory spending). Personal and government consumption
outlays have long dominated the GNP so that gross savings
flows required for private capital investment have been
relatively low in the United States throughout the postwar
period.
A third, important factor affecting the pattern of U.S.
investment, compared with other nations, is the relatively
large share of total capital outlays committed to the services
category, which includes housing, government and other
services. Our heavy investment in the services category
emphasizes consumption but moderates the expansion of productive
capacity relative to other nations (see Table 3 ) .
A fourth influence on the pattern of capital investment
in the United States is the relatively large share of our
investment that must be used for replacement and modernization
of existing facilities. It is estimated that 62 percent of
U.S. capital investment from 1960 to 1971 was committed to
?7jr
- 7 replacement needs, compared to the United Kingdom, 61 percent;
Canada, 52 percent; France, 54 percent; West Germany, 53 percent;
and Japan, 31 percent. This divergent pattern reflects the
advanced status of economic development in some nations and
the postwar experience of Europe and Japan in restoring their
devastated industrial facilities following World War II.
The heavy replacement requirement does provide a continuing
opportunity to introduce new technology into the U.S. economy.
However, the replacement outlays do not add to the net total
productive capacity of our economy.
Fifth, many countries provide a diversified group of
government incentives to encourage investment. Basic
industries are frequently controlled by foreign governments
and special financial and operating assistance may be
provided to preferred private companies to assist in thier
development if it is considered to be in the national
interest. The United States has avoided most of the capital
allocation and special incentive programs used in other
countries but there are some Federal programs which provide
direct financial support through the Economic Development
Administration, the Small Business Administration and some
169 different government credit programs. The Federal
Government particularly influences capital investment
through its budget decisions and specific legislative requirements
involving safety, health and environmental goals. Total
government spending at the Federal, State and local levels
now represents over one-third of the total GNP and its
actual influence is even broader since it frequently provides
captial grants to stimulate new projects, extensive funding
of research and development and other specific incentives.
The wide array of government credit and incentive programs
emphasizes the mixed nature of the current U.S. economy.
In summary, four major points concerning private fixed
domestic investment should be emphasized:
1. Captial investment is a fundamental factor in
national economic development and the absolute level of such
spending has been very large in the U.S. economy over the
years.
2. Other industrial nations have tended to allocate
a substantially larger share of their national output to new
capital formation in recent years and the gap has tended to
increase.
3. There are several underlying economic reasons for
the relatively low position of the United States as to
capital formation commitments as a share of total economic
<>?7t
- 8 output but a review of these moderating influences provides
only an explanation, not a solution.
4. The quantity and quality of capital investment in
the United States should not be evaluated in terms of
simplistic comparisons with other nations, historical
patterns or some arbitrary growth goals. Instead, the
adequacy of capital outlays can only be judged in terms of
the achievement of our basic economic goals of creating more
jobs for a growing labor force, the relative stability of
prices, the productivity of our workers and the degree of
progress in meeting specific environmental, safety, health
and resource development objectives.
II. Future Capital Formation Needs
The dynamic nature of the U.S. economy makes it impossible
to predict the exact amount of future capital needs. The
pattern of economic growth can only be estimated in gerneral
terms and actual events are often much different than expected.
The relationship of capital investment to future output is
particularly difficult to predict because capital/output
ratios change over time. Some industries will require more
capital per unit of output in the future and others will
require less. The replacement rate of existing assets will
also change as labor and materials costs — particularly
energy prices — affect the mix of production factors.
Unexpected private capital demands will undoubtedly develop
and anticiapted claims may moderate or completely disappear.
In short, the timing and magnitude of actual investments
will likely be quite different from the current projections.
Despite the forecasting difficulties, it is possible to
identify two basic trends: (1) total private domestic
investment will be very large compared to historical totals
as the economy grows from the current level of output of
$1-1/2 trillion to over $3 trillion by the mid-1980's; and
(2) the relative share of private investment in new plant
and equipment as a claim against the total GNP will have to
rise to achieve the desired national economic goals. Both
of these basic trends were recently identified in a major
study prepared by the Bureau of Economic Analysis of the
Department of Commerce for the Council of Economic Advisers
which was published last month in the Economic Report of the
President (see pages 39 to 47). The major conclusions of
that study are attached to this testimony. Table 4 summarizes
the shift in business fixed investment as a share of GNP
from an annual average of 10.4 percent in 1965-70 and in
1971-74 to an annual average of 12.0 percent during the
time period 1975-80. For the entire decade of the 1970's
777?
- 9 the growth rate is estimated to be 11.4 percent but the rate
must be accelerated to compensate for the sluggish pace of
investments during the 1974-75 recession. In Table 5 some
cumulative estimates of the dollar amounts — stated in
constant 1972 dollars — required during the decade of the
1970's are indicated for a series of different assumptions
involving changing capital to output ratios for different
industries and fulfillment of existing pollution control and
energy resource development goals. Once again, it should be
emphasized that actual events may be significantly different
from the specific percentages and dollar figures indicated
but the massive amounts of capital required and the necessary
acceleration of future business capital investment to a
level above the growth rate of the recent past are clear.
The policy conclusions of the Council of Economic Advisers
are particularly significant:
"If ratios of fixed investment to GNP substantially
in excess of 10 percent are unattainable, full
employment cannot be achieved by 1980 at capital-output
ratios and productivity growth rates as high as those
projected with the assumption that the environmental
and energy goals are to be met. Whether full employment can be achieved at all by 1980 under these conditions depends first, of course, on the reliability
of the previous estimates, and then on the ease of
input substitution and on the flexibility of relative
factor prices. If the estimated capital requirements
are not met, the 1980 output level could be lower
than projected, owing to lower productivity or
lower employment, or both. Alternatively, goals
concerning pollution control and energy independence
might have to be scaled down. Either of these possibilities seems far less desirable than providing
incentives to raise the share of investment in GNP."
(Economic Report of the President, January 1976, p. 46.)
This summary statement provides a basic reference
point for evaluating our future business capital requirements:
If we are to achieve our output and employment goals with
more stable prices along with specific environmental and
and energy resource development objectives the pace of
capital formation must be accelerated. The magnitude of
the necessary tilt tdward investment is not large in
percentage terms but in the multi-trillion dollar economy
of the near future the dollar amounts involved will be
large.
Several studies attempting to forecast business
capital investment requirements have also been prepared by
-Iter
- 10 private companies and university scholars and their basic
conclusions are summarized in Table 6. The private-sector
forecasts use a different time frame covering the mid-1970's
to mid-1980's period, use current dollars to incorporate the
anticipated impact of inflation and frequently add residential
construction outlays to the business investment total to
estimate total private domestic fixed investment. Nevertheless,
the general conclusions are consistent with the Bureau of
Economic Analysis findings and the interpretation of the
Council of Economic Advisers that the achievement of the
Nation's basic economic goals will require a shift toward
increased capital investment to provide the several trillion
dollars of funds needed.
III. Government Policies
Future fiscal and monetary policies will have a major
impact on the achievement of the capital formation goals.
In farticular, inflation must be better controlled and the
governemnt must avoid disrupting the capital markets if the
private sector is to acquire the necessary investment funds.
A balancing of the Federal budget over time is a necessary
prerequisite to achieve the goals discussed above.
Unfortunately, the Federal Government will have reported
a deficit in sixteen of the past seventeen years ending with
FY 1977, as summarized in Table 7. During the single decade
FY 1968 through FY 1977, the cumulative Federal deficits
will total $267.5 billion. Net borrowings for supporting
over one hundred "off-budget" Federal programs are expected
to total another $229.2 billion during that single decade.
The Federal Government will have usurped a total of $496.7 billion
out of the capital markets during a 10-year period ending
with FY 1977. But the most disconcerting point is the
upward momentum of Federal outlays which will have risen
from $268 billion in FY 1974 to $374 billion this fiscal
year, a jump of 4 0 percent in just two fiscal years. Another
large increase in Federal outlays will occur in FY 1977 as
President Ford has asked for a budget that would limit
spending to $395 billion. Part of this sharp increase in
outlays is the result of "automatic stabilizers", such as
unemployment compensation benefits, responding to recession
problems but most of the added spending has become part of
the permanent programs of government and will extend out
into the future. Government spending — both for temporary
stimulus and permanent programs — has increased at a rate
that is creating serious resource allocation problems which
will not conveniently disappear as the current recovery soon
moves into its second year. We must recognize the basic
reality that when the combination of public and private
•77?
- 11 demands for goods and services exceeds the underlying productive
capacity of the system the inevitable result is an overheating
of the economy followed by inflation and eventually economic
recession.
The strong underlying growth trends of the U.S. economy
will continue to provide for further economic progress, but
we cannot realistically expect to satisfy every new public
claim by shifting resources away from the private sector.
This simple guideline has been frequently violated as total
demand has been stimulated beyond the capacity of the economic
system twice within the past decade creating an unfortunate
boom and recession sequence with severe inflation and unemployment
distortions. The escalation of government spending levels
summarized in Table 7 has seriously eroded our fiscal flexibility
and the lagged impact of past spending decisions will
affect the allocation of resources far into the future. In
summary, the achievement of private domestic fixed investment
goals will require more realistic and sustainable government
policies.
Tax Policies.
Federal tax policies affect capital investment decisions
by determining the after-tax earnings available for investment
and by establishing incentives or disincentives for future
investment. Several major tax policies play a major role:
(1) the corporate income tax, including the existing approach
of levying taxes at the corporate level on earnings and
again on the recipients of dividends; (2) the investment tax
credit; (3) depreciation guidelines; and (4) other tax
incentives designed to encourage investment for specific
purposes, such as the President's proposal for accelerated
depreciation for the construction of plants and purchase of
new equipment in high unemployment areas. The Secretary of
the Treasury and other Treasury officials have frequently
presented testimony on all of these fundamental tax policy
issues. Rather than repeating their views in this general
statement about the importance of capital formation, I refer
the Committee's attention to the benchmark statements presented
by Secretary William E. Simon on July 8 and July 31, 1975
before the House Ways and Means Committee.
IV. Summary
As the United States continues the relatively strong
cyclical recovery that began last April it is important that
economic policies increasingly focus on longer-term goals.
The rapid growth of the U.S. economy to its present size and
the relatively low level of inflation until the late 1960's
- 12 has resulted from the creativity and productivity of the
system. Continued prosperity, however, cannot be taken for
granted; it must be earned. We must be willing to allocate
more of our resources to current investment rather than to
current consumption to prepare for the future. The logic of
this recommendation is not based on any arbitrary investment
level assumed to be necessary to avoid some "capital shortage
or on statistical comparisons with other nations or earlier
time periods. Instead, the required emphasis on investment
reflects the Nation's fundamental economic goals of reducing
both inflation and unemployment, improving productivity,
remaining competitive in international markets and achieving
specific environmental, safety and resource-development
objectives. With so many unfulfilled current needs this is
a difficult concept for some to accept because they would
prefer current consumption. However, our potential ability
to achieve all of our economic goals will be unnecessarily
restricted if we fail to prepare for the future. The
simple truism that we cannot consume more than we produce
needs to receive greater attention in the dicussion of
national priorities.
TABLE 1
7/J7
Gross Private Domestic Fixed Investment, 1950-1974 (Billions of dollars)
PART A. Nominal Dollars
Nonresidential Structures Residential
Year
Total
and Producers' Durable Equipment
19.9
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975p
PART B.
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975p
$47.0
48.9
49.0
52.9
54.3
62.4
66.3
67.9
63.4
72.3
72.7
72.1
78.7
84.2
90.8
102.5
110.2
110.7
123.8
136.8
137.0
153.6
178.8
203.0
202.5
197.5
27.1
31.1
31.2
34.3
34.0
38.3
43.7
46.7
41.6
45.3
47.7
47.1
51.2
53.6
59.7
71.3
81.4
82.1
89.3
98.9
100.5
104.1
116.8
136.5
147.9
148.7
Constant 1972 Dollars
83.2
80.4
78.9
84.1
85.2
96.2
97.1
95.7
89.6
101.0
101.0
100.7
109.3
116.8
124.8
138.8
144.6
140.7
150.8
157.5
150.4
160.2
178.8
191.4
172.2
149.0
50.0
52.9
52.1
56.3
55.4
61.2
65.2
66.0
58.9
62.9
66.0
65.6
70.9
73.5
81.0
95.6
106.1
103.5
108.0
114.3
110.0
108.0
116.8
131.3
127.5
112.4
SouFser-^epartiiEJrt of Commerce, Bureau of Economic Analysis
Structures
17.7
17.8
18.6
20.3
24.1
22.6
21.2
21.8
27.0
25.0
25.0
27.4
30.6
31.2
31.2
28.7
28.6
34.5
37.9
36.6
49.6
62.0
66.5
54.6
48.8
33.2
27.5
26.8
27.8
30.2
35.1
31.9
29.7
30.6
38.1
35.0
35.1
38.4
43.2
43.8
43.2
38.5
37.2
42.8
43.2
40.4
52.2
62.0
60.1
44.7
36.6
7M
TABLE
2
Average Annual Rate of Change in Real Growth for Member Nations of OECD,
1960-70
(percent)
Japan
Greece
Portugal
Yugoslavia
France
Italy
Canada
Finland
Australia
Netherlands
Norway
Eelgium
Denmark
West Germany
Austria
Iceland
Ireland
U.S.
Luxembourg
United Kingdom
Source:
11.1 •
7.6
6.3
6.7
5.8
5.6
5.2
5.2
5.1
5.1
5.0
4.9
4.9
4.8
4.8
4.3
4.0
4.0
3.3
2.8
Organization for Economic Development and Cooperation.
?33^
TABLE
3
Output and Investment by Sector
1969-1971 Averages
United United
States
France
PARTITION A
Agriculture
Mining
Manufacturing
Utilities
General Services
(Dwellings)
(Government)
(Other Services)
Total
Germany
Kingdom
(Current price percents)
Canada
Japan
Sector Percentage of Total Output:
3.0
1.6
30.3
2.3
62.8
(5.4)
(14.7)
(42.7)
100
5.9
0.8
45.3
1.8
46.2
(4.5)
(8.8)
(32.9)
100
3.2
2.2
50.4
2.3
41.9
(3.8)
(9.4)
(28.7)
100
2.6
1.4
33.5
2.8
59.7
(2.3)
(10.1)
(47.3)
100
3.9
3.4
26.6
2.4
63.7
(3.3)
(14.0)
(46.4)
100
7.3*
0.9
43.0
2.0
46.8
(NA)
(3.1)
(NA)
100
Sector Percentage of Total Investment:
Agriculture
Mining
Manufacturing
Utilities
General Services
(Dwellings***)
(Government)
(Other Services)
Total
3.8
1.0
19.7
5.2
70.3
(19.9)
(20.4)
(30.0)
100
PARTITION B
Agriculture
Mining
Manufacturing
Utilities
General Services
(Dwellings)
(Government)
(Other Services)
Source
**
***
4.6
.7
27.8
3.9
63.0
(26.3)
(12.8)
(23.9)
100
5.3**
1.3
25.2
5.0
63.2
(22.2)
(9.9)
(31.1)
100
2.6
1.5
23.8
8.6
63.5
(15.1)
(15.9)
(32.5)
100
5.5
7.5
16.6
9.4
61.0
(21.5)
(17.9)
(21.6)
100
5.9
.9
26.8
3.9
62.5
(17.9)
(24.9)
(19.7)
100
Sector Ratios: Investment Percentages
Divided by Output Percentages
1.3
0.6
0.7
2.3
1.1
(3.7)
(1.9)
(0.7)
0.8
0.9
0.6
2.2
1.4
(5.8)
(1.5)
(0.7)
1.7
0.6
0.5
2.2
1.5
(5.8)
(1.1)
(1.1)
1.4
2.2
0.6
3.9
1.0
(6.5)
(1.3)
(0.5)
0.8
1.0
0.6
2.0
1.3
(NA)
(8.0)
(NA)
OECD, National Accounts of OECD Countries, 1960-71.
Output averages of Japan are for 1969-70
Investment averages of Germany are for 1967-68.
Investment in owner-occupied dwellings. For Canada, France and
the United Kingdom the figure is from residential investment, which
differs slightly from the former category.
TABLE
TABLE
4
4 . — S h a r e of business fixed investment in gross national product:
projected requirement, selected periods,
1965-80
1965-70
Item
historical data and
1971-74
1975-80
1971-80
Billions of 1972 dollars
Cumulative gross national product (GNP):
Cumulative business fixed investment:
Actual
.. . .
Fixed 1970 c/o ratios:
Pre-1970law»
5,999.3 ' 4,674.5
-
623.4
1
8,254.6
12,929.1
»986.6
1.473.4
»844.5
>796.6
1,331.3
1,283.4
486.8
.
Percent
Business fixed investment as percent of G N P :
Actual
Projected c/o ratios
Fixed 1970 c/o ratios:
Actual law'
Pre-1970l3w*
10.4
10.4
12.0
11.4
10.2
9.7
10.3
9.9
' Derived from G N P projections in 1958 dollars provided by the Department of Labor, Division of Economic Growth.
"Actual Law" contains pollution control expenditures pursuant to the 1970 Clean Air Amendments and to the 1972
Federal Water Pollution Act Amendmsnts, while "Pre-1970 L a w " does not contain these expenditures.
3
Derived by subtracting actual investment in 1971-74 from the estimate of investment required during 1971-80.
Note.—The 1965-74 data in this table have not been revised to the new benchmark data used elsewhere in this Report
since the projections were made before the new data were available. However, using the new data, business fixed investment as percent of G N P would have been the same for 1965-70 as shown in the table (10.4 percent) and slightly lower for
1971 -74 (10.2 percent instead of 10.4 percent).
Sources: Department of Commerce (Bureau of Economic Analysis) and Department of Labor (Division of Economic
Growth).
1
(As published in the Economic Report of the
President, January 1976, page 44)
#3^
TABLE
TABLE
5
5 . — F a c t o r s affecting the cumulative total business fixed investment
through 1 9 8 0 t by major industries
required from
1971
IBillions of 1972 dollars)
Factor
Fixed 1970 capitaloutput (c/o) ratios, pollution
control requirements limited to
pre-1970
lawPolAdd
for actual
lution Control
Laws passed In
1970 and 1972....
Add for industries
with c/o ratios increasing for reasons other than
the achievement
of greater energy
independence....
Add
for industries
with decreasing
c/o ratios
Add for additional
capital required
for greater energy
independence....
Add for increase in
pollution control
investment induced by additional investment
Total business fixed
investment
required
Total
Agriculture,
forestry, Mining
and
fisheries
Construction
Manufacturing
Electric,
Trans- Com- gas, wa1
porta- munica- ter, and Services Other*
tion
tion
sanitary
services •
•
1.283.4
68.5
47.8
118.2
-36.0
10.3
48. S
29.5
292.2
134.7
.9
.5
29.5
.6
4.2
.0
35.3
-.0 -13.2
-.0 -21.8
2C9.5
173.8
225.7
.0
14.2
.3
1.8
5.3
.4
.4
62.4
.0
-.0
-.0
«~L0
-.0
-.0
101.1
57.9
.0
49.0
.0
.0
.0
.0
8.9
.0
.0
2.0
.0
.4
.0
«.2
.0
.0
1.3
.0
.0
1,473.4
78.8
81.2
30.0
344.0
140.6
101.4
233.3
236.5
227.5
» Includes product ion by both public and private enterprises.
* Consists of hotels and lodging places, personal and repeir services, business services, automobile repair and services,
amusements and medical, educational services and nonprofit organizations.
» Consists of wholesale and retail trade and finance, insurance and real estate.
* Increase in discard rate in p s utilities due to energy considerations would produce this decline unless offset by $1.0
billion higher investment required for greater energy independence.
• Although the outputs and capital-output ratios of petroleum refining and related industries are not assumed to change
in the process of achieving greater energy independence, the substitution of lower-grade domestic crude for higher-grade
imported crude causes some additional pollution control expenditures in petroleum refining.
Nota.-Oeta* nay mt add to totals becauee of rounding.
Source: Dopertmofit of COOMUNOO, Bureau of Ecawomic Analysis.
(As published in the Economic Report of the President,
January 1976, page 45)
TABLE 6
ACTUAL AND PROJECTED INVESTMENT AS A PERCENT OF GNP
Average
1965-1974
-•/
NYSE±/
D
Bosworth
^senbe£7
Carronf/
_ . . 3 /
Friedman-'
c
4/
(j.if,.—
E
y
mi J-
m i
Chase
Econometrics £'
15.9
Gross private domestic
inves tment
15.1
16.4
15.5
15.8
15.8
Non-residential fixed
10.4
12.1
11. 3
11.5
11.4 H.O
1.0
0.3
0.8
0.8
0.4
0.8
0.8
Inventory
3.8
3.9
3.5
3.5
4.0
3.8
3.3
Residential
15.7
11.8
in current dollars, 1974-1985.
2/
Barry Bosworth
"
^ r n ^ r f ^ T ^ e ^ ^ i ^ ^ . i ^ U o I e ^ n r e f n ^ n t dollar 19B0 figures in Table 2-11 project
T
e s S .
-senberry
and Andrew S
^
^
^
^
/
"
X
^
l
^
^
'
gross private domestic investment as 15.8 percent of GNP).
A^r, + >,*> N « t Five Years of Fixed Investment" in President's
/ Benjamin M. Friedman
" ^ ^ ^ g ^ ^ f
JiJiic Debt Ceiling Increase; and Emergency Tax
B
Authority to Adjust I»PO'* ?' ^ m S t e e ' o n ways and Means, House of Representatives, January
•• ll?7SllS/To&-7T6gS
Figures T h o w n areTas^d o/l975-79 averages of current dollar projections.
K/ -.ilaldV .ones "CapitalRequirements of^^^T^^V'^^ ^^^^
o
'
r.r^"ru:uStRrro^;s:S'in c;,r.nt don«..
5/ Data ^sources
"*"
6/
—
inside
are
^^-^.
.,
summer 1975, "Special Study: The Capital Shortage."
Inc. ^Summer 19 O ^ P d o l l
forecast.
standard
cover.
Summary table on
1 9 8 5 A d a„„<*+
t a onx^r
,
iQ75
"The N e x t Ten Y e a r s :
I n f l a t i o n , R e c e s s i o n and C a p i t a l
Chase E c o ^ ° m ^ " C * t a only
e^r r e n t d o l l a r s .
T a b l e , p a g e #1 of 1 4 No r e c e s s i o n r u n .
Shortage."
1 9 » 4 aax.a OII-L^,
\;,V VV
#*7
TABLE
7
FEDERAL BUDGETS
CHANGES IN THE UNIFIED BUDGET OUTLAYS
BY FISCAL YEAR, 1961-1977
(dollars in billions)
al Year over
ceding Year
Federal
Outlays
Dollar
Increase
1961
$ 97.8
$ 5.6
6.1
-3.4
1962
106.8
9.0
9.2
-7.1
1963
111.3
4.5
4.2
-4.8
1964
118.6
7.3
6.1
-5.9
1965
118.4
-0.2
—
-1.6
1966
134.7
16.3
13.8
-3.8
1967
158.3
23.6
17.5
-S
1968
178.8
20.5
13.0
-25,
1969
184.5
5.7
3.2
+3.2
1970
196.6
12.1
6.6
-2.8
1971
211.4
14.8
7.5
-23.0
1972
231.9
20.5
9.7
-23.2
1973
246.5
14.6
6.3
-14.3
1974
268.4
21.9
8.8
-3.5
1975
324.6
56.2
20.9
-43.6
1976(est)
373.5
48.9
15.1
-7 6.0
1977(est)
394.2
20.7
5.5
-42.9
Source:
.Percentage
Increase
Surplus
or Defic
Economic Report of the President, January 1976,
Table B-63, p.245.
FOR IMMEDIATE RELEASE
REMARKS OF WILLIAM M. GOLDSTEIN
DEPUTY ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
AT THE
27th ANNUAL INSTITUTE ON OIL AND GAS LAW AND TAXATION
DALLAS, TEXAS
FEBRUARY 20, 1976
The Administration's policy on oil and gas taxation is
part of its broader policies on energy and the economy. A
year ago, the Nation was experiencing its worst recession
since the 1930fs. A major contributing factor in the country's
economic difficulties was the arbitrary quadrupling of oil
prices by the OPEC following the 1973-74 embargo. Clearly,
top priorities were to end the nation's vulnerability to oil
import disruption and to restore its economic health.
Considerable progress has been made toward achieving
both goals. The Energy Policy and Conservation Act, which
President Ford signed into law in December, permits the
removal of controls on domestic oil prices at the end of 40
months. This action alone should increase domestic production
by more than one million barrels a day by 1985 and reduce
daily imports by about 3 million barrels.
The health of the economy also has improved. The
recession turned around last spring. The 1974 inflation
rate of over 12 percent was cut to less than 7 percent in
1975. And real gross national product is expected to grow
by over 6 percent this year.
WS-660
- 2As President Ford said last month with respect to the
economy, "Last January most things were rapidly getting
worse. This January most things were slowly but surely
getting better.'1
Today, let us consider the role which oil and gas tax
policy has played and may play in the broader context of
energy and economic policy in general. I shall begin by
discussing the legislative developments of the past year,
first with respect to energy and then with regard to capital
formation.
In January 1975, President Ford proposed a plan to
achieve National energy independence. The plan was designed
to reduce overall energy consumption, cut energy imports,
and increase domestic energy production. To achieve these
goals, the President proposed to rely on what Treasury
Secretary Simon has called "the most neutral and least
bureaucratic system available" -- the free market system of
fixing prices. Primary elements of the proposal were decontrol
of oil and gas prices and taxes and tariffs to restrain
demand, discourage imports and prevent windfall profits.
In developing this tax pricing package, the Administration
was guided by a fundamental need to assure an adequate
return on investment. As debate on energy policy continues, J
the Administration will continue to be sensitive to return rrr
on inve s tmen t.
The 1975 Energy Policy and Conservation Act established
an oil pricing formula that permits the gradual phasing out
of controls on domestic oil. While it is true that the new
energy law lowers crude oil prices in the short run, the
President has pointed out that "over time, this legislation
removes controls and should give industry sufficient incentive
to explore, develop and produce new fields in the Outer
Continental Shelf, Alaska, and potential new reserves in the
lower 48 States."
President Ford has expressed an intention to use his
power under the new law to expedite decontrol. Responding
to concerns that the energy industry might be subject
- 3 indefinitely to governmental controls, the President has
said:
"As one who believes that minimizing governmental
interference in the marketplace is essential to a
strong economy and more jobs, I share those concerns.
Accordingly, I pledge that I will work to ensure
that by the end of 40 months, governmental controls
over domestic oil prices will be fully phased out."
Like oil decontrol, deregulation of the price of new
natural gas has a high priority. The President proposed
such deregulation a year ago and recently called for immediate
Congressional action. The Senate has acted favorably and
the House has voted to end gas price controls for most
smaller producers. Unfortunately, however, the House has
also voted to extend controls for large producers to cover
intrastate, as well as interstate, sales of gas. A HouseSenate conference is expected to be the next step. The
Administration continues to support full decontrol for new
natural gas.
With the initial pricing features of the Energy Policy
and Conservation Act now established, proposed tax features
are likely to become the subject of debate. The mood of the
Treasury Department, in general, is to wait and see how the
new policy is working. It will be necessary to assess
carefully the results of legislative and administrative
actions already taken. Acting too quickly could jeopardize
their success.
This is one reason why the Administration can be
expected to oppose the House-passed tax on business use of
oil and gas. H.R. 6860, the energy bill which the House
approved in mid-1975, is still pending before the Senate
Finance Committee and will be discussed during tax reform
hearings to begin next month. This bill would impose an
excise tax on oil and gas used in business as fuel.
One problem with the proposed excise tax is that many
major industrial users of oil and gas would be exempt --an
exemption which would cause serious efficiency losses in the
business sector. More importantly, even if the tax did
- 4cover all businesses, it would produce undesirable distortion
in petroleum usage by tilting prices of products in favor of
non-business uses. As Secretary Simon has said, "Ultimately,
the best way to cut down consumption of oil and gas will be
to raise prices across the board, as was intended by the
President's program, rather than to impose most of the
conservation burden on one or two sectors of the economy."
Moreover, any new tax intended as a leveler, or supplement
to decontrol, must reflect recent developments. The partial
repeal of percentage depletion, as well as increases in the
costs of finding and developing new energy supplies, have
adversely affected the ability of oil and gas producers to
finance increased investments. Last year's changes in the
depletion allowance had the net effect of withdrawing about
$1.7 billion from oil and gas producers in 1975 alone. New
energy tax policy must take this into consideration. The
Treasury has consistently maintained that, so long as oil
and gas prices are controlled, percentage depletion should
be retained. Now that the depletion allowance has been
partially repealed, price decontrol should be allowed to
compensate for the loss of the incentive formerly provided
by the allowance.
In addition to the proposed tax on business use of oil
and gas, the House energy bill contains other tax provisions
which may be discussed at the forthcoming Senate Finance
Committee hearings. Two may be of particular interest to
you. The bill would provide 5-year amortization for certain
energy-use property, including oil shale facilities. The
Treasury opposes this provision. As Secretary Simon has
said, "When the technologies for such things as ... shale
oil production exist, the economics of business decisionmaking should suffice to induce their adoption. Where the
technologies are lacking, what is needed is research and
development - not an investment subsidy."
The Treasury also opposes the House Bill's proposed
denial of the investment tax credit for oil- and gas-burning
electrical generating equipment. On the other hand, we
recognize the desirability of converting to or building new
facilities not fired by oil or gas; accordingly, the Administration
77?
- 5 proposes to provide positive, rather than negative, tax
incentives for such conversion and/or construction. As part
of our "electric utility package", we would increase the
investment credit to 12 percent for generating facilities
not powered by oil and gas.
Before leaving the subject of energy-related tax policy,
I should mention an administrative matter. The smallproducer exemption from repeal of percentage depletion is
proving to be difficult to implement. The Treasury published
proposed regulations on percentage depletion in October,
held hearings in January, and expects to soon finalize the
earlier regulations and propose additional rules.
A particularly controversial aspect of the smallproducer exemption is the "transfer rule." The law denies
the exemption for oil or gas property transferred after
December 31, 1974, if the principal value of the property
has been demonstrated prior to the transfer. The statute
excepts only 2 kinds of transfers from this rule -- transfer
by reason of death and transfer pursuant to a section 351
transaction. Congress probably should have excepted additional
kinds of transfers, and Treasury is trying to deal with this
omission.
Now let me turn to the past year's legislative developments
with respect to capital formation.
As with its energy policy, the Administration's economic
policy assumes that reliance upon the private sector and
free market forces is the most efficient means of achieving
the Nation's goals. The Administration seeks to insure
sustained economic growth by assuring an adequate supply of
capital. New investment helps to provide jobs and increase
productivity which, in turn, permits real wages to rise and
holds down inflation. Sufficient savings and investment are
needed to permit a reasonable rate of growth at full employment
levels.
One way to help provide the capital needed for economic
expansion is to improve the return on business investment by
reducing business taxes. During the past year, the Administration
770
- 6 has sought and obtained liberalization of the investment tax
credit and reduction of the corporate income tax. The
Administration also has proposed plans for integrating
corporate and individual income taxes and for broadening
stock ownership.
The 1975 Tax Reduction Act increased the investment
credit from 7 percent to 10 percent for 1975 and 1976. The
estimated annual revenue loss from the Act's changes in the
investment credit is $3.3 billion. Of this amount, the
Treasury estimates that at least $175 million each year, or
about 6 percent, will accrue to the oil and gas industry.
The President has proposed to make permanent the higher
investment credit rate of 10 percent. H.R. 10612, the tax
reform bill which the House passed in December, would extend
the 10 percent rate only through 1980. The Senate Finance
Committee will consider this matter in March.
The investment credit is a valuable device for reducing
the cost and increasing the supply of capital. By stimulating
investment in plants and equipment, the credit tends to
increase employment. Such job-creating investment has
played an important part in the country's rapid emergence
from the recession.
Since its original enactment in 1962, the credit has
been modified on 4 separate occasions, has been suspended
for 5 months, and has been repealed for 2 years. Turning
the credit off and on in this way sharply reduces its effectiveness.
It is for this reason, as well as the need to provide for
long-run economic growth that the President has proposed to
permanently increase the credit to 10 percent.
This Administration has played a major role not only in
liberalizing the investment credit, but also in cutting the
corporate income tax. Before 1975, the first $25,000 of
corporate income was taxed at the rate of 22 percent and
income over $25,000 was taxed at 48 percent. The Tax Reduction
Act reduced these rates, for 1975, from 22 percent to 20
percent on the first $25,000 of taxable income, and from 48
percent to 22 percent on the second $25,000. Corporate
-777
- 7 income over $50,000 remains taxable at 48 percent. This
one-year cut represented $1.5 billion in tax savings to
corporations. The oil and gas industry alone will realize
at least $100 million of this total.
Recent legislation extended these corporate tax rate
reductions through June 1976, and chances are good that they
will be further extended. H.R. 10612, the House-passed tax
reform bill, would apply the reduced rates through 1977.
The President would make such rates permanent. In addition,
the President has proposed to lower from 48 to 46 percent
the rate applicable to corporate income over $50,000- The
Treasury is also considering the possibility of reducing the
tax rate on the second $25,000 of corporate income to 20
percent (at the annual cost of $107 million) .
The recent corporate tax cuts will help small business.
About 60 percent of the tax savings resulting from the rate
reductions will go to corporations with incomes under
$100,000. Corporate rate reductions also are a way of
helping businesses which are not capital intensive and,
therefore, not likely to benefit from the liberalization of
the investment credit.
As the Senate Finance Committee considers extending
these corporate rate reductions, it is important to emphasize
that temporary rate reductions do relatively little to
stimulate new investment. On the other hand, permanent
reductions would reduce taxes over the life of new investment,
increase the corporation's rate of return and, therefore,
provide considerable investment stimulus.
The Tax Reduction Act reduced the marginal tax rate for
corporations with taxable income under $50,000. To do the
same for corporations with income over $50,000, it is
necessary to cut the 48 percent rate. The President has
proposed this step to make the return from new investment
more attractive. In addition, reducing the 48 percent rate
would partially relieve the double tax burden on corporate
earnings. Corporations paying tax at the 48 percent rate
bear the brunt of that burden. A 2-point rate reduction
- 8would provide modest relief until the Administration, working
with committees of Congress, can achieve integration of
corporate and individual income taxes.
Integration would eliminate the double tax which
occurs because our system taxes corporate profits first to
the corporation and then, when the profits are distributed
as dividends or realized upon the sale of stock, to the
shareholder. This double tax is unfair to those who must
pay it. It also inhibits the flow of capital and discriminates
in favor of debt, and against equity, financing.
In July the Administration proposed to the Congress a
plan for integrating corporate and individual income taxes.
This plan would provide both a deduction for corporations
and a credit for shareholders. Corporations would be permitted
to deduct about half of the amount of dividends distributed.
In effect, this would reverse about one-half of the tax
which the corporation had already paid with respect to the
distributed earnings. A stockholder credit would compensate
for the rest of the double tax on such earnings.
Integration of this type would be quite expensive. At
1977 revenue levels, annual revenues would be reduced by
about $14 billion. Because of this cost, integration can
only be accomplished gradually. The Administration plan
would be phased in over six years, commencing in 1978.
The Administration's integration plan would help provide
the capital which our economy needs in order to continue to
grow. The plan would also improve the efficiency of capital
allocation. Moreover, as Secretary Simon has said, this is
the only major tax proposal that comes to grips with the
growing imbalance between corporate debt and equity. The
Ways and Means Committee's task force on capital formation
will turn its attention to integration this week.
Another Administration initiative to promote capital
formation is the Broadened Stock Ownership Plan. Last
month, President Ford proposed "tax changes to encourage
people to invest in America's future, and their own, through
a plan that gives moderate income families income tax benefits
if they make long-term investments in common stock in
- 9 American companies." To encourage broadened stock ownership,
a deduction would be allowed for certain funds invested in
common stocks. These funds could be invested under plans
established either by individuals or by employers for the
voluntary participation by their employees. Details of the
program are being worked out with the Congress.
With respect to capital formation, I should also
mention certain proposals pending in Congress which might
have an adverse impact on investment in oil and gas properties.
Four provisions of H.R. 10612, the House-passed tax reform
bill, raise this concern.
In an attempt to close tax shelters, the bill would
impose a limitation on artificial losses, or LAL, on investments
in real estate, farming, movies, equipment leasing, and
sports franchises. LAL would also apply to intangible
drilling and development costs of developmental -- but not
exploratory -- oil and gas wells. While Treasury generally
supports the basic concept of LAL, which is to match income
and deductions from the same property, we also realize that
domestic oil production has declined for the past 5 years
and natural gas production for the past 2. With the repeal
of percentage depletion, the continuation of price controls,
and the country's acute need for more energy, the application
of LAL to investments in oil and gas wells clearly does not
appear to be in the national interest. Accordingly, Treasury
will continue to oppose the application of LAL to developmental
as well as to exploratory wells.
To supplement the proposed limitation on artificial
losses, the House tax reform bill would make certain tax
benefits subject to the minimum tax on tax preferences to
the extent that they were not deferred under LAL. One of
these items would be intangible drilling costs in excess of
those that would be deductible if such costs were capitalized
and deducted over the life of the well. The Treasury opposes
this proposed change in the minimum tax.
To prevent the conversion of ordinary income into
capital gain, the House bill also would provide for the
recapture of deductions for intangibles. Under the bill,
- 10 gain on disposition of an interest in oil or gas property
would be treated as ordinary income to the extent of the
excess of the intangible drilling deductions taken with
respect to that property over the deductions which would
have been allowed had the expenses been capitalized. The
Treasury believes that although this proposed rule is
consistent with other recapture provisions, we should not
permit it to reduce the amount of capital available for oil
and gas exploration.
In an attempt to deal with the problem of "leveraging"
tax shelters, the House bill also would limit the intangibles
deduction with respect to a particular property to the
amount which the taxpayer has "at risk". A taxpayer would
be allowed a deduction only to the extent of his own equity
investment; he would not be considered at risk with respect
to his share of any nonrecourse indebtedness. The Treasury
opposes the proposed "at risk" limitation. Nonrecourse
financing is an accepted financing medium. The Treasury
regulation which allows a limited partner to increase the
basis of his partnership interest by his share of nonrecourse^
loans to the partnership is based on the long-standing
precedent of the Crane case which should not be selectively
repealed.
In part, to deal with the problems which the taxshelter provisions of the House tax reform bill were intended
to correct, the Treasury is looking in new directions. The
tax code and regulations now exceed 6,000 pages of fine
print. It is clear that the results they produce leave much
to be desired in terms of promoting economic efficiency and
distributing tax burdens fairly. In an effort to begin to
restore equity and confidence in the tax system, Secretary
Simon has recently proposed a study of reforming the Federal
income tax by of reforming the Federal income tax by eliminating
all personal tax preferences and cutting individual tax
rates approximately in half. The Treasury has begun this
study which I assure you is the subject of at least one more
speech. Alternative ways to restructure business taxes and
to remove the anti-savings bias of our tax system are
simultaneously being considered by our staff.
??/
In conclusion, I would like to be able to tell you that
the Administration's tax policy relating to oil and gas is
completely settled, comprehensive and precise. It is apparent,
however, that our consideration of these important matters
is to some extent in a transitional phase. This is because
the basic assumptions and background upon which we must act
are themselves in a state of flux. For example, the worldwide energy situation varies from day to day. Secondly, the
legislative pattern in non-tax energy matters is either
untried or uncertain. For example, our most basic energy
legislation was a compromise effected less than two months
ago and the natural gas legislation is pending, not moving
very fast and uncertain as to outcome.
Under the above circumstances, the Treasury will be
called upon to react promptly as various changes in the
present pattern of taxation of oil and gas are considered by
Congress. In arriving at our positions on these matters, we
would very much appreciate receiving the counsel of experts
such as yourselves. Your views are welcome and their prompt
receipt would be most helpful.
o 0 o
February 20, 1976
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 21-MONTH TREASURY NOTES
The Treasury has accepted $2.5 billion of the $4.8 billion of
tenders received from the public for the 21-month notes, Series Q-1977,
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield
6.57%
6.64%
6.62%
1/
The interest rate on the notes will be 6-5/8%
the above yields result in the following prices:
Low-yield price 100.039
High-yield price
Average-yield price
At the 6-5/8% rate,
99.925
99.957
The $2.5 billion of accepted tenders includes 6 % of the amount of
notes bid for at the highest yield and $0.4 billion of noncompetitive
tenders accepted at the average yield.
In addition, $110 million of tenders were accepted at the average-yieJ.d
price from foreign and international monetary authorities.
1/ Excepting 1 tender of $90,000.
WS-663
7s7)
BIOGRAPHY
GERALD L. PARSKY
Gerald L. Parsky, Assistant Secretary of the Treasury for
International Affairs, is recognized as a key U.S. spokesman
on critical global economic and financial issues. Since joining
the Treasury in 1971, Mr. Parksy has assumed increasing
responsibilities. From the position of Special Assistant to the
Under Secretary of the Treasury, Mr. Parsky has, subsequently,
served as Executive Assistant to William E. Simon, when Mr. Simon
was Deputy Secretary of the Treasury and later Administrator of
the Federal Energy Office. Since June 1, 1974, Mr. Parsky has
been in charge of Treasury's policy in the trade, energy, commodities
and financial resource areas, as well as the United States economic
and financial relations with the Middle Eastern Countries.
In addition to these duties, Secretary Simon recently
announced that Mr. Parsky will now supervise Treasury policy in the
other international economic, financial and monetary areas,
including investment, U.S. policy on industrial and developing
nations, and U.S. policy on international financial institutions.
After graduating cum laude from Princeton University in 1964,
Mr. Parsky taught English at Suffield Academy, Suffield, Connecticut.
He attended the University of Virginia Law School, from which he
graduated with honors in 1968, and then joined a New York law firm
where he practiced corporate and securities law.
For these and other accomplishments, Mr. Parsky was named
in 1975, as one of America's Ten Outstanding Young Men by the
U.S. Jaycees. At 33, and as the youngest Assistant Secretary in the
Treasury Department's history, Mr. Parsky has displayed an ability
to deal with a wide range of substantive issues, to negotiate
with Middle Eastern and European government leaders, and to work
with Congress in developing needed legislative reforms.
Mr. Parsky currently serves as Executive Secretary of the
East-West Foreign Trade Board, the Joint U.S.-Saudi Arabian
Commission for Economic Cooperation, and represents the United States
a
t the International Energy Agency and the Conference on
International Economic Cooperation. In addition, Mr. Parsky
Participates in the following:
<VS-665
C/S^<7
FOR RELEASE ON DELIVERY
STATEMENT BY THE HONORABLE CHARLES M. WALKER
ASSISTANT SECRETARY OF THE TREASURY
FOR TAX POLICY
BEFORE THE COMMITTEE ON WAYS AND MEANS
February 23, 1976
Mr. Chairman and Members of this Distinguished Committee:
I am pleased to appear before you today to testify on
the New York City pension fund legislation, H.R. 11700.
This legislation is part of the overall program to
render financial assistance to New York City.
On December 9,
1975, the President signed the New York City Seasonal
Financing Act of 1975, authorizing the Secretary of the
Treasury to loan up to $2.3 billion at any one time to the
;
if
City of New York in order that the City might maintain its
essential governmental services.
The Seasonal Financing Act
was enacted by Congress with the understanding that the
Agreement dated November 26, 1975 between the Municipal
Assistance Corporation, several of New York City's commercial banks, five New York City pension funds and the New York
sinking funds would take effect.
This Agreement, itself,
was generally conditioned upon the enactment prior to
WS-661
03
February 1, 1976 of Federal legislation that "would provide,
by way of guarantees or otherwise, for the seasonal financing needs of the City over the period from the effective
date thereof through a date not earlier than June 30, 1978,
in a maximum amount of not less than $2,300,000,000 at any
time outstanding."
As part of the New York City Agreement, the five pension
funds which entered into the Agreement -- namely, the New
York City Employees' Retirement System, the Board of Education
Retirement System for the City of New York, the New York City
Fire Department Pension Fund, the Teachers' Retirement
System for the City of New York, and the New York City Police
Pension Fund -- agreed to purchase New York City bonds in
the principal amount of approximately $2.5 billion through
fiscal 1978 on a scheduled basis.
The funds agreed to pur-
chase, prior to January 1, 1976, serial bonds of the City
with a face amount of $30 million, bearing interest at the
rate of 6 percent a year.
All other serial bonds of the City
to be acquired by the funds were to bear interest at the rate
of 9 percent a year.
All of these purchases were conditioned
upon receipt of a ruling from the Internal Revenue Service
or upon Congressional enactment of legislation to the effect
that the purchases would not constitute prohibited transactions or otherwise adversely affect the qualified status of
the pension funds for purposes of the Internal Revenue Code
of 1954.
If the pension funds were to lose their qualified status
under the Internal Revenue Code simply by reason of the City
bond purchases, the income earned by the funds might be subject to Federal income taxation and participants might be
required to pay an immediate tax on current plan assets and
contributions to the plans.
As governmental retirement plans, the New York City
pension funds are exempt from the prohibited transaction
rules of the Employee Retirement Income Security Act, the
1974 pension reform law. However, the prohibited transaction
rules that were generally applicable to all pension plans
under prior law continue to apply to such governmental plans.
In general, under those rules, a governmental plan will lose
its tax exempt status if it (1) lends any trust assets to a
substantial contributor without the receipt of adequate
security and a reasonable rate of interest; (2) makes any
substantial purchase of securities or other property from a
substantial contributor for more than adequate consideration;
or (3) engages in any other transaction which results in a
substantial diversion of trust income cr corpus to a substantial contributor. These prohibited transaction provisions appear in Section 503(b) of the Code.
Moreover, all qualified pension plans, including a
governmental plan, must be created or organized for the.
- 6for purposes of making investments, or, after June 30,
1986, considers, for purposes of deciding whether to retain
investments held on June 30, 1986, the extent to which the
investments will (1) maintain the ability of the City of
New York to make future contributions to the fund and to
satisfy the City's future obligations to pay pension and
retirement benefits, and (2) protect the source of funds to
provide retirement benefits. For purposes of the legislation, the acquisition or holding of any bond of the
Municipal Assistance Corporation on or after August 20,
1975, and before November 26, 1975, will be deemed to have
been acquired or held pursuant to the Agreement.
The latter provisions are required to cover the
Municipal Assistance Corporation obligations purchased by
the pension funds prior to November 26, 1975, in connection
with the overall program to enable New York City to maintain its essential governmental services, and to cover
New York City bonds retained by the pension funds following
their acquisition pursuant to the Agreement. In addition,
the language makes it clear that the Service may not disqualify the New York City pension funds under the prohibited
transaction and exclusive benefit rules simply because they
take the enumerated factors into account in making an investment decision.
Moreover, H.R. 11700 establishes reporting requirements and procedures with respect to the effectiveness of
amendments to or waivers pursuant to the Agreement. No
amendment to the Agreement having any bearing upon the
qualified status of the pension funds and no waiver pursuant to the Agreement can take effect for purposes of
H.R. 11700 until the Secretary of the Treasury has determined that the taking effect of such amendment or waiver is
not inconsistent with (1) maintaining the ability of the
City to make future contributions to the funds and to satisfy
the City's future obligations to pay pension and retirement
benefits, and (2) protecting the source of funds to provide
retirement benefits. Moreover, the trustees or administrators
of each fund must furnish to the Secretary of the Treasury
annual reports and such additional information as the
Secretary may reasonably require from time to time. This
information will then be furnished to the Chairman of the
House Committee on Ways and Means and to the Chairman of
the Senate Finance Committee.
Given these important safeguards, the Treasury Department strongly supports the New York City pension legislation
as part of the overall program to render financial assistance
to the City of New York and to implement the New York City
Seasonal Financing Act.
- 8 I appreciate the opportunity to appear before your
Committee and will be glad to answer any questions that you
might have.
mmentoftheTREASURY
, D.C. 20220
TELEPHONE 964-2041
I
^
*
FOR RELEASE UPON DELIVERY
STATEMENT BY THE tfONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FOREIGN COMMERCE AND TOURISM
SENATE COMMITTEE ON COMMERCE
MONDAY, FEBRUARY 23, 1976, 11:00 a.m.
International Investment Survey Act of 1975 ., ..;
Mr. Chairman and Members, of the Subcommittee:
I appreciate the opportunity to present to this
Subcommittee our views on international investment and on .
the International Investment Survey Act of 1975, S.2839,
International investment has received considerable
attention during the past two years both in the Congress and
the Executive Branch, and there are several basic principles
that lie at the heart of our policy in this area:
1. We should rely on the private market as
the most efficient means to determine the
allocation and use of capital in the
international economy.
2. Foreign investment in the United States
is beneficial, and, subject to limited
restrictions, should continue to be
WS-662
welcomed as healthy for our economy.
3. Although we must be aware of not imposing
undue burdens on the private sector, adequate
information on international investment should
be made available to all branches of the
Government and to the public.
The basic purpose of the legislation you are considering
relates to the third principle, namely, to make sure that
our information on U.S. international investment is
adequate an<3 to assure that our legal authority to collect
this information is clear and unambiguous.
The Treasury
Department concurs in such objectives. We do not believe
that such legislation should be viewed as in any way weakening
our commitment to the free flow of investment capital; Rather,
we view it as a desire to ensure that all the necessary facts
are available so that sound policy can be developed.
U.'St Policy Toward Investment
This morning, I would like to briefly review with
you our policy in this area and to assess this legislation
in light of that policy.
Our basic policy toward foreign
investment in the United States and U.S. investment abroad has
reflected an "open door" approach.
That is, we offer no
special incentives for inward or outward investment and,
with a few internationally recognized exceptions in the
J/^7b
- 3 case of inward investment, we impose no special barriers to
international investment. Furthermore, foreign investors
are generally treated equally with domestic investors once
they are established here, and national treatment for our
investors abroad is a basic tenet of our policy toward other
countries.
In light of certain changes in international economic
affairs, including in particular the rapid growth in the
hands of a few governments of funds available for investment
abroad, some people have questioned our policy with regard to foreign
investment in the United States. In part as a result of this
concern, the Foreign Investment Study Act of 1974, which was
initiated by this Committee, was passed, calling for more
information. The Treasury and Commerce Departments are now
gathering information on foreign portfolio and foreign direct
investment and final reports to Congress are due in April.
With respect to foreign portfolio investment in the
United States, the preliminary findings of the Treasury Department
are that this investment as of end-1974 totaled about $ 60
billion, of which $23 billion was in the form of stocks and
$37 billion in the form of bonds and other long-term debt.
These amounts are expected to increase somewhat when we make
our final computation but not significantly. Our estimates
prior to the benchmark survey were that foreign holdings of
stocks were $18 billion and holdings of bonds and other
long-term debt were about $38 billion.
- 4 We have found that the bulk of these holdings were by
persons resident in a few European countries and Canada and
were well diversified among various U.S. industries. The
holdings of the oil-producing countries accounted for less
than 4 percent of the total.
In addition to undertaking these studies, the Administration conducted a thorough review of our policy toward inward
investment and concluded that no change was necessary or warranted.
Consequently, we will oppose any new restrictions on foreign
investment. This conclusion is based on our findings that:
(a) the amounts of investment are not significant in relation
to the U.S. economy; (b) there is no evidence that foreign
investors are abusing or misusing their investments in this
country; (c) our safeguards against possible abuses are
adequate; and (d) the benefits from an "open-door" policy
far outweigh any possible disadvantages.
The published data on foreign direct investment inflows
into the United States show figures of $2.7 billion in 1973,
$2.2 billion in 1974 and $0.9 billion in the first three quarters
of 1975. However, these figures drop significantly in each
year, when one set of transactions — those associated with
the foreign purchase of a U.S.-incorporated company, whose
entire operations are abroad — are excluded. Of the
remaining amounts a major part, of course, represented
capital inflows into companies that were already foreigncontrolled.
- 5 The flows of foreign portfolio investment into U.S.
securities (excluding U.S. Government issues) fell from
$4.1 billion in 1973 to $0.7 billion in 1974 and rose to
$3.9 billion in 1975 with the recovery of our stock market.//; ;
Although these figures indicate more foreign interest
in investment in U. S. stocks, there is no evidence of any
trend toward takeover of important segments of U. S. industry
by foreign interests. According to reports to the Securities
and Exchange Commission and other sources of information there
has been no unusual foreign activity in this regard in
recent years.
OPEC Investment
Despite this, special concern has often been expressed
v
about OPEC countries and their potential for future investment.
I believe such concern is not warranted. Some of the
alarming estimates of long-run OPEC financial accumulations
made during the last two years have been drastically reduced.
Our latest estimate of the peak investment accumulation by
all these countries is about $200 billion in 1980. We believe
that the peak rate of new investments in any one year was in
1974 when it amounted to about $60 billion. Of the approximately $42 billion in total accumulations by OPEC countries in 1975, about $5.5 billion was placed in long-term investments
in the United States. Although that was an increase of about
$4 billion over 1974, virtually all of that investment
was of a portfolio nature. Attached is a table providing
4
our most recent estimate of OPEC's investment pattern for
1974 and 1975.
Looking ahead, we believe that the oil producing countries
will place an increasing proportion of their investments in
longer-term debt and equity instruments. Although investments
will continue to be placed in the United States, we must take
account of the fact that the rate of new investment by the
oil producers outside their own countries will decline as
they are able to absorb more internally.
With respect to the policies these countries are pursuing,
the managers of OPEC funds have indicated to us that they have
no desire to gain or maintain control over major segments of
the U.S. economy.
Many of these countries have participated
in our markets for years, have been responsible investors,
and have always sought to abide by our laws.
They are
following diversified investment objectives similar to any
institutional investor, and while there may be some additional
cases of major investments, I do not believe that any of the
major OPEC investors would consider any moves in this area
which would be against the U.S. national interest.
Administrative Action
, ,
, , ,
At the same time that our review concluded that no additional
limitations on investment were warranted, we did decide to
institute certain administrative measures to supplement our
existing laws and regulations.
Last May a new high-level
committee was created to assess the impact of foreign investment
in this country and to review national interests. Also
<j/6£
- 7 a new office of Foreign Investment in the United States was'
created in the Commerce Department.
We have also advised all
foreign governments contemplating a major direct investment in
the United States to seek consultation with the United States
Government on the prospective investment.
I personally have discussed this policy with the major
potential governmental investors in the Middle East and found
a broad acceptance of the concept of consultations as long as
it is applied to all governments on a nondiscriminatory basis,
and we view the policy that way.
We believe this
process of consultations to be far preferable to
any legislative proposals for formal screening or prenotification
mechanisms.
Our approach is much more selective, involving
only those few major direct investments that may raise important
public policy issues.
Our interest is not to raise any new
barriers to foreign investments but to provide a mechanism by
which a foreign government can learn of the U. S. Government"s
views on a prospective major direct investment before it is
undertaken.
Therefore, the process will minimize the possibility
of misunderstandings or future investment disputes.
Such
consultations will thus prove beneficial to the prospective
investors as well as to the United States.
Authority to Collect Data and S.2839
Inherent in this overall approach is a belief that we should
not make basic departures from a long-standing and wise policy
on the basis of conjecture.
Rather, we should make sure we have
U77
- 8 all the relevant information. S. 2839 is put forward on the
/
same premise, namely, that we must have the basic data on
outward as well as inward investment in order to understand the
implications of this investment for our current policy. Again,
we strongly support this approach to this important area.
The Government has, of course, been collecting data of the
kind envisioned in this bill for many years. However, as you have
noted, Mr. Chairman, our current authority to collect it is
deficient in some respects and I would like to give the Committee
some background on this.
Presently, international investment data is collected under
the authority of several statutes. There is no single, unified
authority for the data collection and studies as contemplated by
,3.2839. The present laws relied on by the Departments of Treasury
and Commerce are Section 5(b) of the Trading with the Enemy Act,
Section 8 of Bretton Woods Agreements Act, and the Foreign
Investment Study Act of 1974, which expires April 26, 1976.
Of these, the Bretton Woods Agreements Act is the most broadlj
used as a legal basis for collection of data by the Office of
Statistical Reports in Treasury and the Bureau of Economic Analysis
in Commerce. However, the authority of the Act is subject to an
inherent limitation. Under its authority, the President is
authorized to collect data only in the detail essential to comply
with requests for information from the IMF. Presently, the IMF
requests submission of balance-of-payments and international
investment position data from member nations and the Bretton Woods
Agreements Act has been relied on by Treasury and Commerce for the
7^
collection of such data.
Under Executive order 10033, the National Advisory Council
on International Monetary and Financial Policy (NAC) in
consultation with the Office of Management and Budget, must
approve reporting requirements which are proposed for issuance
under the Bretton Woods authority.
Since the Bretton Woods
authority is strictly limited to the collection of data essential
to respond to IMF requests, the NAC cannot approve reporting
requirements which go beyond the IMF's stated needs.
It was on
this basis that, in 1974, the NAC was forced to disapprove a
number of items on a Commerce proposed survey questionnaire on
direct investment abroad.
The NAC expressed no disapproval of the
Commerce proposal in substance, it simply could not fairly conclude
that all of the information to be sought was necessary to comply
with IMF requests.
Section 5(b) of the Trading with the Enemy Act contains broad
regulatory and reporting authority over a wide variety of
international transactions.
The statute, along with the Bretton
Woods Agreements Act, is one of the authorities cited for the
Treasury foreign exchange reporting system.
However, the statute
is operative only in time of war or national emergency.
While
several past national emergency declarations remain in effect,
they were not proclaimed for purposes of data collection on
international investment.
In this regard, the National
Emergencies Act presently pending in Congress arises out of some
Congressional views that emergency powers statutes should not be
used as a legal basis for actions or programs of permanent or
indefinite duration.
Among other matters, the proposed
Act would require a study of whether Section 5(b) should be
retained in its present form as an emergency powers statute.
Thus, Section 5(b), despite its breadth, is not the most
suitable or certain basis for the full range of ongoing
collection and study activities called for by S.2839.
In sum, we are relying on a patchwork of laws to
accomplish tasks which could be authorized by a single
omnibus measure such as the bill we are considering today.
Even more important is the fact that, despite the complementary
and even overlapping quality of the existing statutes,
deficiencies in our collection authority for certain
purposes still remain and should be cured by new legislation.
There is, therefore, a clear need for an unambiguous and
permanent authority to collect data on international
investment.
Given this need, the question is how can we best provide
for it? In some important respects, I believe that S2839
could be improved, and I would like to offer some general
suggestions as to the kinds of changes I feel should be
effected.
The bill as now drafted would give the Secretary of Commerce
authority to survey and analyze information on portfolio as
well as direct investment. As you know, the Treasury
Department has been collecting and publishing the data on
°77d
-11international investment other than direct investment
for many years and is currently doing the part of the inward
><
investment study which relates to foreign portfolio
investment in the United States.
We see no reason to
change this arrangement at the present time.
Since this
is to be permanent legislation, however, it might not be
advisable for particular agencies to be designated to carry
out each of the specific tasks.
It is certainly our current
intention that the Commerce Department and the Treasury
Department will continue to collect data on direct and other
investment respectively.
Nevertheless, I would suggest
that either the authority be given to the President or
that the Commerce and Treasury Departments be designated to
collect and analyze information on direct and other
investment respectively but with the proviso that the President
can change these designations at a later time if for some
reason he finds it desirable.
Another point I would like to note is that the bill
as it is written is intended to provide authority to
collect data on outstanding amounts of investment no less
often than every 10 years but it does not appear to give
authority to the Government to collect data on transactions.
As you know, the Commerce and Treasury Departments have for
many years been collecting data on foreign investment
transactions on a monthly or quarterly basis, and I would hope
-12-
47/
the Committee would agree that it is desirable to continue
these programs. As noted earlier, these data are being
collected under the Bretton Woods Agreements Act which
probably provides a firmer legal basis than for detailed
surveys of outstanding amounts. Nevertheless, there is some
ambiguity as to how much information we can collect under this
authority, and we believe that this would be an opportune
time to clarify this by having the new legislation authorize
the collection of data on all capital transactions, both
short-term and long-term, as well as on outstanding amounts.
The bill as it is now structured would authorize and
mandate studies of international investment no less
frequently than every ten years, and it spells out with
considerable specificity what information should be collected
and the kinds of analyses to be done.
The difficulty with trying to be too specific in
permanent legislation of this kind is that we cannot foresee
precisely what kinds of information will be topical and
desirable in the years ahead. Too much specificity can work
to our disadvantage in two ways. First, it could mandate the
collection and analysis of some kinds of information which
would be costly to provide yet not of particular interest at
the time the studies are being done. Secondly, it could
raise doubts about the legal authority to collect
some kinds of information which may be of great interest at
4777
some future time but which were not specified in the Act
because the need for them was not foreseen at the time the
legislation was drafted.
It is also important to bear in mind that the private
business community is now required to supply a vast amount
of information to the Government. The cost to them in
supplying this information and the cost to the Government in
processing and analyzing it is considerable, and we should
seek to minimize such costs. Therefore, I would recommend
that the legislation contain strong language to the effect that
the information gathering activities be carried out in a
manner which will reduce as much as possible the cost and
inconvenience to private firms.
In this connection, I should point out that a comprehensive
survey of U.S. portfolio investment abroad would raise serious
problems, both in terms of the cost to the private
sector in supplying the information and the intrusion into
the privacy of individuals that would be required if a
comprehensive census were done as we did in the case of
inward portfolio investment. For these reasons, we would
recommend against this kind of survey. Instead, we propose
that the Treasury Department first do an assessment of the
probable validity of our current estimate of the outstanding
amount of U.S. portfolio investment abroad on the basis of our
data on portfolio transactions and on what we learn from
#Z3
-14-
our inward portfolio study as to the processes and mechanisms
of international portfolio investment.
On the basis
of these findings we can then decide whether it would be
worthwhile to undertake a limited survey of U.S. financial
institutions.
Conclusion
In conclusion, I would emphasize that there is a need to
provide for clear and permanent authority to collect a
broad range of information on international investment on a
continuing basis and assure that information on international
investment will be adequate to meet the needs of the
Government, the Congress and the public in this important
area.
S.2839 would provide such authority.
We would like
to work closely with the Committee and its staff on the
changes suggested in my testimony as well as other changes
which would be aimed at avoiding unnecessary costs to the
Government and the private sector.
Current Treasury Staff Estimates of
OPEC Surpluses and Investment Pattern
1974 Preliminary 1975
$ Billion
Percent
of Total
$ Billion
Percent
of Total
!jn United States ' 11 1/4 19 1 ' 6 1/4 15
In Hiiro-banking market 22 1/2 * 37 1/2 7 17
(incl. UK banks, other ( '
European banks, and
offshore banks)
1)t her 1:o_IJnited Kin^d0in
7 1/2
Other to Developed Countries
5 1/2
9
7
I PI Financing and IMF Oil Facility
3 1/2
6
4
Other to LDC's (incl. grants)
4
6 1/2
6 1/2
All other .
5 3/4
9 1/2
12 1/2
1/4
•1/2
17
1
11
9 1/2
15
26
TOTAL 60 100 42 100
Treasury:OASIA
2/13/75
0\v
\^
Apartment of theJREASURY
(NGTON, D.C. 20220
TELEPHONE 964-2041
77^
FOR IMMEDIATE RELEASE
February 23, 1976
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2.9 billion of 13-week Treasury bills and for $3.7 billion
of 26-week Treasury bills, both series to be issued on February 26, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing May 27, 1976
High
Low
Average
26-week bills
maturing August 26
Price
Discount
Rate
Investment
Rate 1/
Price
98.780
98.766
98.769
4.826%
4.882%
4.870%
4.97%
5.03%
5.01%
97.387 a/5.169%
97.356
5.230%
97.369
5.204%
Discount
Rate
1976
Investment
Rate U
5*40%
.5.46%
" 5.43%
a/ Excepting 1 tender of $600,000
Tenders at the low price for the 13-week bills were allotted 100%.
Tenders at the low price for the 26-week bills were allotted 98%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Boston
$ 106,875,000
New York
3 ,587,485,000
Philadelphia
24,590,000
Cleveland
148,875,000
Richmond
31,945,000
Atlanta
44,785,000
Chicago
293,475,000
St. Louis
51,520,000
Minneapolis
35,725,000
Kansas City
36,630,000
Dallas
38,400,000
San Francisco 297,110,000
TOTALS,697,415,000
Accepted
$
88,875,000
2,138,035,000
24,590,000
123,875,000
29,945,000
42,785,000
169,975,000
32,520,000
25,725,000
34,630,000
37,400,000
152,110,000
Received
Accepted
$
50,495,000 $ 46,495,000
4,088,800,000 2,812,200,000
12,545,000
12,545,000
143,165,000
133,165,000
59,625,000
53,625,000
28,075,000
28,075,000
295,635,000
236,435,000
51,140,000
42,140,000
37,430,000
34,430,000
39,390,000
37,380,000
26,540,000
26,540,000
257,485,000
237,225,000
$2, 900,465, 000 b/ $5,090,325,000 $3,700,225,000 c/
-^Includes $ 382,915,000 noncompetitive tenders from the public.
-'Includes $ 188,880,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-668
DtpartmentoftheTREASURY
UNGTQN, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE ON DELIVERY
STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OP THE TREASURY
BEFORE
THE SENATE SUBCOMMITTEE ON APPROPRIATIONS
FEBRUARY 24, 1976
10:00 A. M.
Mr. Chairman and members of the subcommittee:
I am pleased to be here with you today to consider the
Department of the Treasury budget requests for operating
appropriations during fiscal year 1977.
Let me introduce my associates - Mr. Donald Alexander,
Commissioner of-IRS; Mr. David Macdonald, Assistant Secretary
for Enforcement, Operations, and Tariff Affairs; Mr. Warren
Brecht, Assistant Secretary for Administration; Mr. David
Mosso, Fiscal Assistant Secretary; and Mr. Arthur Kallen,
Director of my Office of Budget and Finance.
Mr. Chairman, the members of this subcommittee have
always worked with the Department in a highly cooperative
spirit. I fully intend that I and officials of the Department
will continue the same effective and harmonious relationship
that has characterized our joint efforts in the past.
As your schedule indicates, the Treasury bureau heads
will appear later before this Committee to justify their
individual requests in detail. I would, however, like to
insert for the record our usual detailed Treasury bureau
addenda. At the conclusion of my statement, I will be
pleased to discuss any matters relating to the bureaus which
the Committee may wish to review with me.
With your permission, Mr. Chairman, I would like to
make a short general statement on the overall economic
situation and the Administration's total budget, before
discussing the Treasury Department's FY 1977 budget.
WS-664
- 4 In our Collection activities we ancitipate being able to colle
almost $.5 billion from delinquent returns. In addition, over
$2.9 billion in delinquent accounts will be collected in FY
1977, although our inventory of unpaid accounts is expected to
increase. In the Audit of tax returns, we will be examining
approximately 2.39 million returns, which is not far different
from last year's program of 2.42 million examinations.
The rate of coverage of full examinations will decline from
2.5 percent to 2.4 percent in part because of a growth in
tax return filer population. We are also making in our
Service Centers 1.8 million adjustments for items on tax
returns, up from 1.4 million in 1976. This increase is due
mainly to a higher level of activity in the information
Returns Matching and Unallowable Items Programs. We expect
to process 600,000 more tax returns, with 211 less average
positions, in the IRS data processing operations.
In our Fiscal Service we anticipate a volume of 666
million checks issued, 777 million paid, and 1.2 million
check claims. Savings bonds issues and retirements in 1977
are expected to reach an estimated 289-6 million pieces, an
increase of 6 million over 1976. Transactions in other
Treasury securities are expected to reach 12.5 million in
1977, which is .'5 million above the 1976 level.
We expect a total production of almost 16 billion coins
at the Mint, which is an increase of over 1.9 billion from
the prior year.
We expect to increase our level of Compliance enforcement
in the Office of Revenue Sharing by a modest amount.
In the Bureau of Alcohol, Tobacco and Firearms, we are
proposing no new program initiatives, but we do expect to
carry out fully the President's Concentrated Urban Enforcement
Program which was approved for three cities by the Congress
in the 1976 supplemental. This program is a four-pronged
approach to significantly reduce the criminal misuse of
firearms in a number of the Nation's major metropolitan
areas.
The Secret Service will receive and investigate 237,000
cases involving counterfeiting, check and bond forgeries,
protective intelligence, and other criminal and non-criminal
matters, a 9-8 percent increase over the 215,852 cases in
fiscal year 1976.
And, finally, we anticipate that the Customs Service
will be handling an increased number of persons entering the
country — 267 million, up 4 percent from FY 1976 — as well
as starting their new responsibilities under the generalized
777
- 5 system of preference, as provided by the Trade Act of 1974.
With 319 less positions, we will need to be vigilant to
prevent a denigration in the level of inspection quality or
interdiction capability.
1977 Budget Summary
Overall, the President's budget for the Department of
the Treasury requests budget authority of $56,335,284,000
for FY 1977 -- an increase of $5,842,918,000 over 1976. Of
this increase, $7,300,000,000 is for interest on the public
debt,. Incidentally, I might note that the FY 1977 interest
payment on the public debt is estimated at $45 billion — a
compelling reason to make every effort to stem the rising
cost of the Federal Government. $187,500,000 of the increase
is for Revenue Sharing, $14,172,000 for operating accounts,
with an offsetting reduction of $1,658,754,000 in all
other accounts. Funds for the Department's operating programs
have been held essentially level at $2,575,797,000,
an increase of only $14,172,000 over 1976. As I noted
earlier, this apparent increase largely reflects the effect
of the October pay raise.
Our net outlays for the Department are estimated at
$56,309,963,000, of which $45,000,000,000 is for interest on
the public debt; $6,548,504,000 is for Revenue Sharing;
$2,575,356,000 is for the Department's operating programs;
and $2,186,103,000 is for all other accounts, such as interest
on IRS refunds, Customs collections in Puerto Rico, Claims,
Judgments and Relief Acts, and the expenses for administering
the New York City Seasonal Financing Fund.
The budget provides for a reduction of 2,172 average
positions for the operating accounts for a FY 1977 total of
110,668 compared with 112,840 in 1976. We have made every
effort to economize, in keeping with the need to reduce
Federal Government spending; we are convinced that we can
increase our productivity, so as to continue to carry out
our responsibilities. We expect a minimal reduction in the
quality of our service or level of enforcement as compared
to FY 1976.
One reason for confidence in our ability to meet the
1977 budget challenge has been the fine support given the
Department by this Committee over the past several years.
While we are reducing our average positions this year,
in the longer run context, I believe the Department has
fared well in obtaining the resources needed to meet its
workload. For example, the five-year period 1971-1976,
Treasury increased average employment from 87,384 to 112,840.
With this solid base, I believe this year's budget, combined
with
job. careful management attention, will enable us to do our
- 6I would like to insert Table 2 into the record to show
the relationship between our average position and dollar
requirements, as well as Table 3, which provides the detailed
derivation of Treasury's "Proposed Authorized Level for
1976". I would also like to insert for the record a new
analysis we have prepared called the "Treasury Budget in
Brief". This describes the highlights of the increases and
decreases for our 1977 request.
Mr. Chairman, the budget before you is a lean request.
The minor program increases have been substantially offset
by program reductions and other cost-saving actions. We
have reduced employment by 2,172 average positions and held
the line on resource requirements while at the same time
providing for the accomplishment of the projected FY 1977
workload increases.
I shall, of course, welcome the opportunity to answer
any questions you may have. Thank you.
it?is
- 7 -
Table 1
THE DEPARTMENT OF THE TREASURY
Annual Appropriations for Treasury Department for 1976
and Estimated Requirements for 1977
(in Millions of Dollars)
1976
Proposed
Authorized
Level 1/
,7 1977
Budget
Estimate
Change
over
1976
Office of the Secretary-
27.7
27.0
-.7
Office of Revenue Sharing
3.0
3.8
.8
Federal Law Enforecement Training
Center (Salaries and Expenses)
12.0
8.5
-3.5
131.7
.7
1.0
147.2
,5
—
15.5
-.2
-1.0
-7.0
Regular Operating Appropriations:
Bureau of Government Financial
Operations:
Salaries and Expenses
Government Losses in Shipment
Eisenhower College Grants
Hoover Memorial Fund
7.0
Bureau of Alcohol, Tobacco and
Firearms
109.7
125.3
15.6
U0 S. Customs Service
319.1
324.1
5.0
41.2
3.4
43.2
2.0
-3.4
105.6
114.5
8.9
45.8
M-6.7
;9
Bureau of the Mint:
Salaries and Expenses
Construction of Mint Facilities
Bureau of the Public Debt
Internal Revenue Service:
Salaries and Expenses
Accounts, Collection and
Taxpayer Service
Compliance
Total, IRS
791.7
854.0
,691.5
789.9
834.?
1,^71.5
U.S. Secret Service
108.0
110.3
2.3
$2,561.6
$2,575.8
14.2
TOTAL, Regular Operating Appropriations
-1.8
-19.1
-20.0
NOTE: Amounts are rounded and do not add to total.
^ludes pay increases authorized by Executive Order 11881 effective
uctober 1, 1975, and program supplementals for the Bureau of the
76oofl 1 1 C D 6 b t a n d t h e B u r e a u o f Government Finanical Operations.
Januar/^33-*Ic^
Table 2
- 8 THE DEPARTMENT OF THE TREASURY
Comparative Statement of Average Positions
Fiscal Years 1976 and 1977
(Direct Appropriations Only)
1976
Authorized
Level
1977
Estimate
Chanj
over 1?76
.ons:
Regular Annual Operating Appropriations:
Office of the Secretary
816
839
+23
Office of Revenue Sharing
104-
123
+19
Federal Law Enforcement Training
Center
256
240
-16
Bureau of Government Financial
Operations
2,518
2,557
+39
Bureau of Alcohol, Tobacco and
Firearms
4,062
4,573
+511
13,255
12,936
-319
Bureau of the Mint
1,934
1,925
-9
Bureau of the Public Debt
2,499
2,539
+4o
1,771
-103
42,567
37,221
81,559
-1,681
-821
-2,605
110,668
-2,172
U. S. Customs Service
Internal Revenue Service:
Salaries and Expenses
1,874
Accounts, Collection and Taxpayer
Service
44,248
Compliance
38,04-2
Total, IRS
84,164
U. S. Secret Service 3,232 3,377 +1^_
TOTAL, Regular Annual Operating
Appropriations
760090
January 13, 1976
112.840
- 9 -
Table 3
THE DEPARTMENT OF THE TREASURY
Derivation of "Proposed Authorized Level for 1976"
(in thousands of dollars)
1976 Appropriation -,/ $2,465,859
Supplemental Appropriation (P. L. 94-157) -
16,000
Proposed Supplemental:
1. Pay Increase:
a. Classified
b. Wage Board
$62,248
452
62,700
2.
Program:
a.
Public Debt - Provides for increased
reimbursement to the Federal Reserve Banks
(3,746), increased reimbursement to paying
agents for redemption of savings type
securities (276), reimbursement to U. S.
Postal Service for increased mailings of
securities (1,348), increased cost of
space and services (1,123).
_ 6,493
b. Government Financial Operations - to
provide for reimbursement to the U. S.
Postal Service resulting from the postal
rate increase
10,573
Proposed Authorized Level for 1976
1/
Includes $5.5 million for the Bureau of Alcohol,
Tobacco and Firearms (Concentrated Urban Enforcement)
and $10.5 million for Secret Service (Protection of
Foreign Dignitaries).
760091
January 13, 1975
17,066
2,561,625
77r
ADDENDUM
BUREAU STATEMENTS
Office of the Secretary
The Office of the Secretary provides for functions that are
directly attributable to the Secretary of the Treasury as a major
policy advisor to the President and for executive direction of
the Department. The Office assumes primary responsibility for
the direction and coordination of all Treasury activities, and
direct responsibility for formulating and recommending domestic
and international economic, tax, fiscal and monetary policies.
The appropriation also funds general maintenance, and major repairs
and improvements to the Main Treasury and Annex Buildings.
The appropriation request for fiscal year 1977 is $27 million
and 839 average positions. The estimate is $.7 million less and
23 average positions more than the authorized level for fiscal year
1976. The major elements which comprise this change are $.5 million
for repair and improvements to the Main Teasury and Annex Buildings,
$.4 million and 16 average positions for new and increased program
responsibilities, 7 average positions and $1.9 million for increases
to maintain the 1976 level of operations in 1977 , offset by a reduction in the repairs and improvements program and other nonrecurring
equipment costs and savings of $3.6 million.
A total of 21 new positions is being requested for the staffs
in the various supporting organizations of the Office of the
Secretary. These include six positions in the Office of Debt
Analysis, one position in the Office of Tax Analysis, two positions
- 2in
the Office of the Assistant Secretary (EO&TA) , eight positions
in the Office of Equal Opportunity Program, one position in the
Office of the General Counsel, one position in the Office of
Personnel, and two positions in the Office of Administrative
Programs. This request represents the minimum needs necessary
to accomplish our mission of providing guidance, direction, and
overall supervision for the many functions of the Department.
07
Office of Revenue Sharing
The Office of Revenue Sharing was established to implement
the General Revenue Sharing Program as authorized by Title I of
the State and Local Fiscal Assistance Act of 1972 (P.L. 92-512).
Through General Revenue Sharing, $30.2 billion from federally collected individual income tax receipts is being returned over
a five-year period to nearly 39,000 recipient governments. The
Office of Revenue Sharing assumes responsibility for the distribution
of revenue sharing monies, maintaining detailed accounting records,
insuring compliance with the requirements and provisions of the
law, and reporting at regular intervals to Congress, recipient
governments, and the general public on the revenue sharing
program.
The appropriation request for fiscal year 1977 is $3.8
million and 123 average positions. The estimate for fiscal year
1977 is $.8 million and 19 average positions higher than the
authorized level for fiscal year 1976. The major elements that
comprise this increase are $.4 million and 13 average positions
for increased program responsibilities, and $.4- million and six
average positions to maintain the 1976 level of operations in 1977.
A total of 21 new positions is being requested for the
Compliance Division, and will improve the civil rights and financial
compliance programs as required by the General Revenue Sharing Act.
0
Federal Law Enforcement Training Center
Salaries and Expenses
The request for the Federal Law Enforcement Training Center
for FY 1977 is $8.5 million, a decrease of $3.5 million and 16
average positions from the FY 1976 appropriation.
of the following items:
This is net
an increase of $115 thousand for plant
operations; an increase of $1.0 million for
increases to
maintain the current level (within-grades, annualization of pay
costs, etc.) ; and a decrease of $4-.7 million for one-time costs
related to the move to Glynco, Georgia; decreases in training
projections; and other nonrecurring costs.
The eight-week Criminal Investigator School (C.I.S.) will
continue to provide basic training for new agents of the 24participating agencies and, on a space-available basis, to
personnel from other Federal organizations.
It is estimated that
the C.I.S. will train 659 students in FY 1977.
The Police School (PS) will continue to provide basic
training in police techniques and enforcement law for recruits from
ten Federal law enforcement agencies. The full course for recruits
attending the Police School is a 12-week program.
In addition,
the staff of the Police School conducts some special 8-week and 5-week
classes.
The Center conducts full-time driver training on a temporary
course which will be used until the permanent course is constructed.
- 5-
#f?
Advanced, In-Service, Refresher and Specialized (AIRS) driving
training is also conducted for requesting agencies, and the
Center is moving further into this area. The curriculum
includes training in high-speed driving, defensive driving, and
skid recovery techniques. In addition, firearms training is
also conducted on behalf of the Center with 1,562 students to be
trained in FY 1977 .
Construction
No appropriation is requested for this account. The Center
has been authorized to spend $28 million for permanent construction
at Glynco, Georgia. These funds will come from amounts previously
appropriated by the Congress.
The Master Plan for the Glynco facility is currently being
finalized. It will call for utilizing aome or all of the permanent
buildings and facilities now in use at Glynco, as well as
construction of new facilities. The first priorities for
additional construction under the Master Plan are the completion
of dormitories begun, but not completed, by the Navy; and the
construction of a modern, up-to-date, indoor firing range. New
construction to house additional classrooms and training support
activities is also planned as part of the Master Plan --as well
as a permanent driving range facility for our Driver Training
program. In addition, other renovation, demolition and upgrading
of the facility will be undertaken consistent with our approved
Master Plan.
- 6 Bureau of Government Financial Operations
Salaries and Expenses
The 1977 estimate for the Bureau of Government Financial
Operations is $14-7.2 million — a net increase of $15.5 million
above the 1976 level. Of this increment, $9.2 million is for
the annualization of the recent postal rate increase. Outlays
for equipment which will provide service and benefits in future
years total $2.8 million — $1.6 million for the purchase of
equipment and $1.2 million for the rental of equipment with a
purchase option.
Other increases totaling $6.2 million are necessary for
financing incremental workloads , additional functions and those
increases necessary to maintain in 1977 the current levels of
employment and operations. Offsetting reductions for nonrecurring
equipment purchases, compensation for one less workday, and
management savings other than those reflected in the workload
areas, amount to $2.7 million.
An increase of 18 million brings the total volume of
issuances, primarily checks, to 666 million for 1977. The Bureau
expects to pay 777 million Government checks and to reconcile such
payments against issues reported by disbursing officers. In
addition, an increase of 107 thousand check claims over the 1976
level will bring total claims for lost, stolen and forged checks
to 1.2 million. Productivity increases of over 2% are anticipated
in all work volume areas.
- 7 Government losses in shipment
This self insurance account covers losses in shipment of
government property such as coins, currency, securities and
losses in connection with the redemption of savings bonds. An
appropriation of $500 thousand is requested in 1977 to cover
these losses.
Bureau of Alcohol, Tobacco and Firearms
The appropriation request for the Bureau of Alcohol, Tobacco
and Firearms for fiscal year 1977 totals $125.3 million, an
increase of $15.6 million over the proposed authorized level for
fiscal 1976. Of this increase, $13.3 million is for program
increases, $9.7 million is for maintenance of current operating
levels with a $7.4- million offset for nonrecurring costs.
The program increase of $13.3 million is requested to fund
the balance of the Concentrated Urban Enforcement (CUE) program
to combat illegal traffic in firearms and explosives. This
program was requested by the President in his June 1975 message
on crime and was authorized by Congress in Public Law 94--157 ,
which provided funds to implement the program in three of the
eleven cities contemplated. This program has four basic objectives.
The first Is to trace guns seized In crimes to determine the
channel of illegal gun commerce. Second is the investigation
and elimination of major illegal sources of weapons. Ttiird , is
the use of concentrated enforcement techniques to perfect cases
against persons using firearms and explosives in criminal activities.
Four# expanded dealer compliance efforts will be made to assure
stricter conformity to Federal firearms and explosives laws.
An intensive effort will also be undertaken to deny terrorists
and organized criminals access to explosives through a nine point
enforcement program.
The bureau regulation of the legal alcohol and tobacco Industrie
will assure collection of proper taxes which are projected at
nearly $8.2 billion in fiscal 1977.
- 9 -
^
U. S. Customs Service
The budget request for the Customs Service is $324-.l million.
This level reflects a net increase of $5.0 million over the FY 1976
proposed authorized level. No program increases have been requested;
however, the Service is requesting $16.0 million to maintain current
levels, offset by a reduction of $11.0 million for nonrecurring onetime costs, equipment, and program reductions.
The Customs Service is continuing their intensified efforts in
all areas of their enforcement responsibility. In fiscal year 1975,
Customs expended 24-0 more work-years on special enforcement than the
previous year. This includes the areas of general enforcement,
smuggling, fraud, cargo surveillance, added inspections of vessels,
cargo and persons, and a wide range of laws and regulations of other
Government agencies.
In the area of drugs, Customs is facing the worst smuggling problem
since the days of prohibition. We are in the midst of a resurgence in
drug usage, especially heroin abuse. .Reflecting this increase is an
increase of 4-16 percent in heroin sezied to date in fiscal year 1976.
The President in his statement of December 26, 1975, said, "Drug
abuse is a tragic national problem which saps our Nation1 s vitality.
It is also a major contributor to our growing crime rate. All of us
must redouble our efforts to combat this problem". The Customs Service
is the interdiction force at our borders, and, as such, will play a
major role in this new Presidential initiative. The Customs Service
is meeting the challenge of processing on-going workload, increasing
- 10 -
responsibilities and limited resources, with many improved procedures:
selectivity in inspection of passengers, and in technological assists
through the use of X-ray equipment, communications systems, computers,
aircraft, helicopters, boats and other devices0
The economic downturn beginning in fiscal year 1974- has caused
reductions in the traditional workload indices of the Customs Service.
However, in fiscal year 1976 Customs workloads are again on the rise,
reflecting improved economic factors.
The Customs Service continues to experience increases in workload
that are not captured by traditional workload measures. Tasks mandated
by Congress through recent legislation, such as the Trade Act, and
by the President through the Executive Order process, have placed
additional burdens on the Customs Service. The tasks I refer to
include the Trade Act, the Freedom of Information and Privacy Acts,
and the Executive Orders dealing with labor management relations and oil
Importations.
In line with the Administrations policy of reducing Federal
employment and expenditures, some Customs programs in fiscal year 1977
will decrease. However, the Service will make every effort to hold
the program effect to a minimum.
0f
- 11 -
Bureau of Engraving and Printing
The Bureau of Engraving and Printing designs and produces United
States currency, postage stamps, Public Debt securities, and
miscellaneous financial and security documents.
Operations of the Bureau are financed by means of a
revolving fund established in accordance with the provisions of
Public Law 656, approved August 4-, 1950. This fund is reimbursed
by customer agencies for the direct and indirect costs of the
Bureau incidental to work and services performed, including
administrative expenses.
For fiscal year 1977 the bureau estimated a delivery requirement of approximately 2.9 billion Federal Reserve Notes. Actual
production for the current fiscal year will approximate 3.1
billion notes, as compared with 2.8 billion notes delivered in
fiscal year 1975. Savings to the Federal Reserve System, estimated
at $27 million in the next 5 years, led to the announcement by the
Secretary of the Treasury on November 3, 1975, that the Bureau of
Engraving and Printing would commence production of $2 Federal
Reserve Notes and that the first day of issue would be April 13, 1976,
the anniversary of Thomas Jefferson1 s birth.
Accordingly, the Bureau started production of a new $2 Federal
Reserve Note on November 18, 1975. The design of the $2 note
features a portrait of Thomas Jefferson on its face and a rendition
- 12 -
of the painting, "The Signing of the Declaration of Independence",
by John Trumbull, on its back.
Current plans call for production of 4-00 million notes by
June 30, 1976, with 225 million available for issuance on April 13,
1976. It is anticipated that 4-00 million notes will approximate
annual requirements.
- -
497
Bureau of the Mint
Salaries and Expenses
The appropriation request of the Bureau of the Mint for
fiscal year 1977 is $4-3.2 million, an increase of $2 million
over the authorized level for fiscal year 1976. This increase
will provide additional production of 1.9 billion coins raising
the total annual production to 15.8 billion.
Included in our
1977 coin production is a reserve inventory to prevent recurrence
of the just ended one-cent shortage which has been with us for
the last two years.
In fiscal year 1977 the Philadelphia Mint will produce
coinage strip. The Denver Mint has been converted to a coining
operation only. .Denver1s strip fabrication equipment was removed
and replaced by coining equipment, enabling us to increase coin
production.
Construction of Mint Facilities
To assure the coinage capability needed to meet the increasing
coin needs of the Nation, it is essential that we replace the Mint
at Denver with a new and modern facility.
The new Mint will be
needed by no later than 1980 if we are to meet anticipated demand
of the future.
Under the terms of the Act of Congress of August 20, 1963,
authority for the appropriation of Mint construction funds expired
June 30, 1973. In the 93rd Congress, the Department proposed
*7?t
legislation authorizing the appropriation of the funds needed for
the new Mint and extending the time during which funds could be
appropriated to September 30, 1983. However, the legislation had
to be resubmitted to the 94-th Congress.
Requests for additional funds to begin construction of a new
Mint has been postponed until authorizing legislation is enacted.
477
Bureau of the Public Debt
The request for the appropriation "Administering the
Public Debt" for fiscal year 1977 is $114.5 million, an increase
of $8.9 million above the authorized level proposed for fiscal
year 1976. This appropriation finances operations of the Bureau
of the Public Debt, estimated at $102.3 million, and the U. S.
Savings Bonds Division, estimated at $12.2 million.
The workload of the Bureau of the Public Debt is expected
to remain at a high level in 1977 . Savings bond issues and
retirements are expected to reach 289.6 million pieces, an
increase of 6 million over projected 1976 totals. Transactions
in other Treasury securities have continued to rise and are
expected to increase in 1977.
The major program increases requested for the Bureau relate
to these projected workload increases and would provide for
additional personnel, supplies, and security stock, and for
increased reimbursements to the Federal Reserve Banks, the Postal
Service, and paying agents. It is also necessary to further
automate the registered accounts operation in order to keep pace
with increases in registered security activity. Other program
increases are requested to enable the Bureau to increase productivity
in future years.
- 16 Internal Revenue Service
The Internal Revenue Service budget request for fiscal year 1977
totals about 81,500 average positions and $1,671 billion. These are
decreases of approximately 2,600 average positions and $20 million
from the adjusted fiscal year 1976 levels. The total decreases are
net of program and cost increases offset by program reductions.
The proposed decreases are a direct response to the Presidents
program to reduce federal expenditures, and do not signal a decrease
in workload or responsibilities for the tax administration system.
Taxpayer Service
The fiscal year 1977 request for Taxpayer Service totals over
4,000 average positions and $122.8 million, a decrease of some 150
average positions and $1 million. This funding will permit assistance
to over 40 million taxpayers.
Collection
The fiscal year 1977 budget for Collection proposes a level of
some 11,400 average positions and about $230 million, a decrease of
over 1,200 average positions and $13.2 million. Prior experience
indicates application of these resources should permit the collection
of approximately $2.9 billion in overdue taxes.
Audit
The proposed FY 1977 Audit program totals about 27,500 average
positions and some $591 million, a reduction of some 520 average positions
and some $13 million. This level of funding should permit a total Audit
1/
program of some 4.2 million returns, with a coverage rate under current
2
^-^11:L?nnis ^Sed in calculating audit coverage and 1.8 million is
^ H 1 ^ ^
?? rvl £? ° ^ e r c o n t a c t s f o r the Information Returns program
and the Unallowable Deduction program.
3*1
- 17 plans of about 2.4 percent, a decrease from the 2.5 percent expected
for fiscal 1976. Experience suggests that approximately $5.3 billion
in additional tax should be recommended and some $4.5 billion in
additional tax and interest should be assessed.
Employee Plans
The Employee Plans activity, created as a result of the Employee
Retirement Income Security Act (ERISA) of 1974, is budgeted for more
than 1,350 average positions and almost $30.5 million, an increase
of about 170 average positions and $2.7 million. These resources
should enable the Service to process approximately 160,000 of an
estimated 350,000 determination requests expected to be filed under
ERISA in FY 1977 as well as operate a reduced examination program
and a delinquent returns program.
The development and issuance of
standard plans for practitioners and standard paragraphs and model
plans for applicants should help in securing plan approvals.
U. S. Secret Service
The appropriation request for the U. S. Secret Service for fiscal
year 1977 is $110.3 million, a $2.3 million increase over the proposed
authorized level for fiscal 19760 Essentially, the request maintains
fiscal 1976 level of activities, but does provide for two program increas
One is for travel associated with expanded foreign dignitary protection
during the Bicentennial, and the second is $2 million for payments to
state and local governments for protection under extraordinary circumstances of Foreign Diplomatic Missions and places of temporary domicile,
as recently authorized by Public Law 94-196.
The number of counterfeit, forged check and bond, protective
intelligence, and other criminal cases to be investigated is expected
to grow from 215,852 in fiscal 1976 to 237,000 in 1977, an increase of
nearly 10 percent. The number of these cases to be closed is expected
to increase by nearly 6 percent, from 138,852 in fiscal 1976 to 146,500
in 1977. The Service made 9,318 arrests in connection with these types
of cases in fiscal 1975, a 21 percent increase over 1974.
The Service's protection of foreign dignitaries visiting this
country is expected to increase in 1977. The number and frequency of
such visits is expected to be at least 25 percent higher than 1976.
^3
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE CHARLES M. WALKER
ASSISTANT SECRETARY OF THE TREASURY
FOR TAX POLICY
BEFORE THE HOUSE BUDGET COMMITTEE
TASK FORCE ON TAX EXPENDITURES
FEBRUARY 24, 1976 *
Mr. Chairman and Members of this Distinguished Committee:
The proposed electric utility tax program is important
not only as a stimulus to construction of additional facilities by electric utilities, but also as a means to minimize
imports of foreign oil and to insure adequate electric
capacity in the several years ahead. The construction
activity will help put many people back to work in the near
term, and in the longer run, will help insure that economic
expansion will not be limited by energy shortages. In sum,
the program is highly important to the national economy.
The proposals represent the recommendations of the
President's Labor-Management Committee, and the President
has endorsed them. The need for this legislation has not
lessened since last July 8 when Secretary Simon urged its
adoption in testimony before the House Ways and Means
Committee. The reasons he gave are still valid. In
summary, they are:
1. Financing difficulties have prevented the
construction, or completion, of badly needed nuclear
and coal fired plants.
2. The need to minimize our dependence on
foreign oil demands adoption of means to increase
electric generating facilities fueled otherwise
than by petroleum products.
WS-666
3*7
- 2 -
' ^
3. The energy shortage must be met. Insufficient electric power will inhibit construction of
new manufacturing and commercial facilities. This
cannot be allowed to happen.
Before reviewing the six elements of the proposed
electric utility tax program, I would like to set out
briefly the way tax incentives operate in the private sector
of the economy. While we are talking this morning only
about the regulated electric utility industry, the underlying concepts are the same throughout the private economy.
Each economic unit within an industry employs factors
of production to produce goods and services which it sells
to others. If it is to continue to produce and sell these
goods and services, it must receive in the market place
revenues sufficient to cover the costs it must incur for the
productive factors it employs.
In simplified form, the relevent factors are as follows
(these are presented in tabular form in a footnote as a
visual aid to those who may be reading these remarks)*/:
Industry's total revenue is derived from the quantity
of units sold times the price per unit. From this is taken
the amount paid in the purchase of labor, fuel and services,
*/ Total Revenue
Quantity sold X price
less: Purchases of labor, Man-hours employed,
fuel, and services
quantities of fuel
used X prices
Equals: Cost of capital services
1. Replacement of plant Quantity of capital
and equipment used-up
goods X its price
Borrowed funds X
2. Interest to creditors
interest rate
3. Return to equity
a. Income tax
Equity capital X
b. After-tax return
rate of return
- 3 that is, the man hours employed and the quantities of fuel
used, times the price paid for each. That leaves an amount
which is known in the aggregate as the cost of capital
services. This, in turn, is comprised of three elements:
First, the amount needed to replace the plant and equipment
used up in the production of the units sold. That is the
quantity so used times its price. Second, is the amount of
interest paid to creditors; that is, the amount of borrowed
funds times the interest rate. Third, is the return to the
equity invested. This, in turn, is comprised of two elements:
first, the income tax due and second, the after tax return
to the investor; that is, the equity capital times the rate
of return.
For electric utilities, the fraction of total cost per
unit of output which represents the cost of capital services
is unusually high, which is the reason why the industry is
often referred to as "capital-intensive." In recent years,
capital costs have accounted for upward of 40 percent of the
total cost of producing and distributing electric energy.
And with the sharp rise in fuel costs which have been
experienced in the past 3 years, it is to be expected that
extensive substitution of capital for other resource costs
will take place. Coal burning and nuclear power plants, for
example, which utilize less costly fuels, entail much more
capital per megawatt-hour of productive capacity than do oil
and gas burning installations.
We may use the above analysis to recapitulate the
problems of the electric power industry which Mr. Rosenberg
covered in his testimony and to address the solutions proposed in the 6-point utilities package recommended by the
President. When fossil fuel prices started their rapid rise
in mid-1973, the consequence for electric utilities, whose
rates are regulated, was a shrinkage in the residual cashflow labelled "cost of capital services" in the foregoing
analysis. This reduced the return to equity and made
increasingly difficult the simultaneous (1) maintenance of
dividend payments which were needed to continue to attract
and hold equity capital, (2) payment of interest on obligations to bond-holders, and (3) carrying out of investment
programs to replace existing capacity as well as to add
additional capacity needed to meet forecast growth in demand
for electric power. This squeeze on the electric power
industry resulting from what is commonly called "regulatory
lag" or the slow adjustment of allowable prices to reflect
526
- 4 changed cost conditions was exacerbated by two other
factors: the actual costs of replacement capital were
pushed-up by inflation while the allowances for this portion
of capital cost embedded in utility rate structures remained
unchanged; and interest rates on refunding and new issues of
bonds rose to incorporate the inflation premium. For many
utility companies the resultant drop in realized return to
equity owners was so severe that dividend payments were
suspended and/or construction programs were cancelled or
suspended.
It is true that the problems visited on the utility
sector differed only in degree from those faced by the
entire private sector. Unregulated businesses were also
caught in a cash-flow squeeze as their costs rose more
rapidly than the prices they could recapture in the market.
But, in the unregulated sector, restoration of balance
between prices and costs has been quicker, not only because
price regulation procedural lags are generally absent, but
also because their capital costs are generally a smaller
fraction of total costs.
It may also be comprehended from the analysis how
income tax investment incentives work. If the income tax
burden is reduced--and this may be done by a wide variety of
means, some of which are included in the 6-point utilities
program--the initial impact is an increase in after-tax
return to equity. If this occurs during a period of profits
squeeze, the obvious result is a diminution of the squeeze,
an opportunity to maintain a higher rate of investment
outlay to keep up the productive capacity of the squeezed
industry. If the tax burden reduction occurs in a more
normal economic situation, the result is to make additional
investment more attractive while simultaneously supplying
funds to business firms with which they may undertake the
additions to capacity. But whatever the circumstances under
which a tax burden reduction takes place, the ultimate
result is a reduction in the cost of employing capital and,
hence, in the total costs which must be recovered in the
prices paid for output. In the unregulated sector of the
economy, competition restores the balance between resource
costs and product prices; in the regulated sector, governmental authorities assume responsibility for restoring
balance.
- 5 I would now like to turn to the specifics of the
proposals before you. As I discuss each of them, I will
attempt to give an estimate of both the revenue and cost of
capital services impact.
1. Title I of the proposed legislation would increase
the investment tax credit permanently to 12 percent for all
electric utility property except generating facilities
fueled by petroleum products. Section 46 of the Internal
Revenue Code presently grants utilities, like other taxpayers, a maximum investment tax credit of 10 percent.
Although the 10 percent credit is scheduled tp revert to
lower rates at the end of this year, the President has
proposed the higher rates be made permanent.
2. Also under present law utilities, like other
taxpayers, are entitled to investment tax credits as they
make progress payments on long-term construction projects.
However, the Tax Reduction Act of 1975 provided a 5-year
phase-in of construction progress payment credits so that
entitlement to the full investment credit at the time a
progress payment is made will not occur until 1980. The
proposed legislation would give electric utilities full,
immediate investment tax credits on construction progress
payments for construction of property that takes 2 years or
more to build, except generating facilities fueled by
petroleum products. This would eliminate the 5-year phasein now required by the Tax Reduction Act of 1975. These
proposed changes with respect to the investment credit would
be limited to those utilities which "normalize" the increase
in the investment credit for ratemaking purposes and which
are permitted by their respective state regulatory agencies
to include construction work in progress in their rate base
for ratemaking purposes.
The normalization requirement refers to the accounting
treatment of the proceeds of the investment credit earned in
a particular year. Under normalization procedures, the
amount of the credit earned with respect to an investment
made during the year is pro-rated over the life of the asset
for ratemaking purposes. Absent this procedure, the full
amount of the credit would be considered to be a reduction
in the capital cost of service in the year in which the
investment was made rather than a reduction throughout the
life of the asset. Normalization, therefore, assures an
- 6 equitable assignment of cost reduction to all generations of
consumers who will benefit from the services of the capital
for which a credit was allowed.
The requirement that the cumulative costs of construction work in process be included in the rate base to qualify
utility companies for the additional 2 percentage points of
investment credit is provided in Title V of the proposed
legislation. The aim of this element of the electric
utilities' program is to accelerate the restoration of
balance between the prices regulated utilities are allowed
to charge and the higher costs of the capital they employ.
Absent such a re-equilibration of prices and costs, the
economic viability of the industry cannot be regained, and
the promise of tax incentives would be empty.
We estimate that the revenue cost of Title I--the
increased investment credit--will be $70 million the first
full year and reach $260 million by 1981. This rise in
revenue cost reflects an assumed rate of growth of investment in the utility sector plus a return to profitability
and taxability. In terms of the long-run cost of electric
service, we estimate that, for coal burning plants, the
increase in investment credit alone will make possible a
reduction of a little more than 3 percent of total capital
costs, or about 1.2 percent of total cost of service.
Although we have been unable to make an estimate for nuclear
plants, we are confident the implicit cost reduction will be
larger.
3. Under present law, section 167 of the Internal
Revenue Code allows a deduction for depreciation commencing
when a depreciable asset is placed in service. Title III of
the proposed legislation would permit electric utilities to
begin depreciation of major construction projects during the
construction period. The depreciation deduction would be
based on the accumulated construction costs which qualify
for the investment credit under the construction progress
payment system enacted as part of the Tax Reduction Act of
1975. Accelerated methods of depreciation would be permitted, and the depreciation deduction would be based on an
assumed useful life which would include the remaining
construction period plus the estimated useful life (or asset
depreciation range period) attributable to the property as
of the time it is placed in service. Depreciation after the
property is placed in service would be reduced by depreciation taken during the construction period.
- 7 Electric generating facilities fueled by petroleum
products would not qualify for this construction period
depreciation. Further, construction period depreciation
would be conditioned on the utility's normalizing the
benefits of the provision for ratemaking purposes and upon
the agreement of the relevant state regulatory agency to
include construction work in progress in the utility's rate
base for ratemaking purposes.
We estimate that the revenue cost of extending depreciation deductions to construction work in progress will be
$200 million the first year and rise to $1.2 billion by
1981. For coal burning plants, we estimate that the capital
cost reducing effect of this provision, in combination with
the increase in investment credit, will be nearly 16 percent
of capital costs, or about 6.4 percent of total cost of
service. Again, the cost reduction effect for nuclear
installations will be substantially larger.
4. Title II of the proposed legislation provides for
extending to January 1, 1981 the period during which pollution control equipment installed in a pre-1969 plant or
facility will qualify for rapid 5-year straight line amortization in lieu of normal depreciation and qualification for
the investment credit. Section 169 of the Internal Revenue
Code, which provides for this treatment of pollution control
equipment, expired December 31, 1975 and the proposal is to
extend the qualification period an additional 5 years.
5. Title II also would provide an election of 5-year
amortization in lieu of normal depreciation and the investment credit for the costs of converting an electirc power
generating facility fueled by petroleum products into a
facility fueled by non-petroleum products, or for the cost
of replacing petroleum product fueled facilities.
Both proposals 4 and 5 are aimed toward highly specific
investments and it is our present judgment that neither
would entail more than a negligible revenue loss. According
we estimate no long run cost reduction effect will result,
although some few companies forced to convert or replace now
obsolete facilities will be benefited in the immediate
future.
6. Finally, Title IV of the proposed legislation would
permit a shareholder of a regulated electric utility to
postpone tax on dividends paid by the utility on its common
- 8 stock by electing to take additional common stock of the
utility in lieu of a cash dividend. The receipt of the
stock dividend would not be taxed. The amount of the
dividend would be taxed as ordinary income when the shareholder sells the dividend stock, and the amount of capital
gain realized on the sale would be decreased (or the amount
of capital loss increased) accordingly. Dividend stock
would be deemed sold by the shareholder before any other
stock of the same utility.
We have had difficulty estimating the probable revenue
loss for this provision. The value of income tax deferral
on reinvested dividends plainly depends on the income tax
bracket of the stockholder and the period of deferral he
elects. Computations we have made indicate that for 5-year
deferral periods the increase in net yield to an investor in
a 30 percent tax bracket would be under 10 percent, i.e., if
the stock pays a dividend of 10 percent, 5-year deferral
would raise the effective yield to that 30-percent taxpayer
to 10.8 percent. For a 70 percent taxpayer, the 10 percent
dividend yield would be raised to 11.9 percent by 5-year
deferral. If the deferral period is increased to 10 years,
the increase in yields to the 30 and 70 percent taxpayers
are from 10 percent to 11.7 and 14.4 percent, respectively.
The extent to which tax deferral will be elected by utility
stockholders is thus highly dependent on the income status
of present and prospective stockholders. Our best estimate
of the likely revenue loss is thus about $300 million the
first year and rising somewhat to $365 million by 1981. In
view of the relatively slight impact this provision is
likely to have on the yield-to-equity requirements of
utilities, we have not attempted to assess the cost reduction implications of this provision.
Altogether, then, the proposed legislation will reduce
tax revenues by an estimated $200 million in the transitional
quarter of 1976 and $800 million in fiscal 1977. The long
run benefits which this purchases are an orderly restructuring of the U.S. electric utility plant to de-emphasize
the use of petroleum-based fuels and an accelerated normalization of annual investment to meet future electric power
needs of the economy.
FOR RELEASE ON DELIVERY
^J//
STATEMENT OF THE HONORABLE EDWIN H. YEO III
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE
THE SUBCOMMITTEE ON SECURITIES, SENATE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
TUESDAY, FEBRUARY 24, 1976, 10 A.M.
Mr. Chairman and members of this distinguished Subcommittee,
I am pleased to appear before you to testify on legislative
initiatives to require disclosure by States and municipalities
of their fiscal and financial condition. The Treasury supports
the concept, and, with qualifications which I will spell out
later, supports the Williams-Tower Bill, S. 2969.
The Current State of Municipal Disclosure and Its Shortcomings
Until last June, with one exception, no aspect of the
municipal securities field was subject to Federal Securities
law. Apart from the reach of the anti-fraud provisions -Section 17 of the 1933 Act and Section 10(b) of the 1934 Act
-- there were no uniform national standards to govern and
guide dealings in municipal securities.
Under the leadership of the Chairman, Congress moved
last year to fill part of that void. The Securities Act
Amendments of 1975 established a comprehensive mechanism to
regulate transactions in municipal securities and the
WS-667
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^''
intermediaries which facilitate the process. Today we begin
the infinitely more difficult and delicate -- but equally
important -- task of recognizing the critical need for
current, accurate and comparable information about the fiscal
and financial condition of State and local governments.
Forty three years ago, when municipal securities were
exempted from the Securities laws, Congress could not have
foreseen the importance of the municipal market of today.
Approximately $30 billion of tax-exempt bonds were issued
in 1975.
Another $30 billion was borrowed short term. Perhaps
a more significant change than growth in the size of the
market was the revelation that municipal securities were not
riskless.
Investors learned in 1975 that theoretical access
to the ad valorem taxing power was not an absolute guarantee
of timely repayment.
Clearly the times have changed for States and municipalities as well as for other economic sectors.
States and muni-
cipalities now perform far more diverse services than four
decades ago, or even ten years ago.
diverse set of taxes.
They employ a much more
Their financings are far more complicated.
All of these changes accentuate the need of investors and underwriters and dealers for reliable, current and comparable
information on the fiscal and financial condition of State
and local governments.
£773
- 3 A major defect in the flow of information now available
is that the data are not easily, if at all, comparable.
The
growth of State and municipal activities, the diversity of
taxes and the complexity of financing have spawned a variety
of methods of reporting.
Accounting procedures differ widely.
As a result, verification and interpretation of State and
local fiscal and financial data is extremely difficult.
The importance of providing reliable information is
enhanced by the fact that the nature of investors in the municipal market has changed.
Historically, investors have been
sophisticated institutions -- banks and fire and casualty
companies -- which had both the resources and the expertise
to develop and evaluate information on their own.
Today,
however, individuals are playing an increasingly important
role in the municipal market.
Safeguards Currently Available
Under existing practices, there are in effect three
mechanisms which tend to safeguard an investor's investment
in municipal securities.
First, there is the fact that many States, either by
statute or by constitutional provision, prohibit conduct
which would, undermine a political subdivision's ability to
meet financial obligations.
Such limitations generally include
the requirement of a balanced budget and limitations on such
items as outstanding long term debt, short term debt outstanding
at the end of the fiscal year, tax rates and expenditures, among
others.
- 4 -
^
Legal limitations provide poor financial standards
because they are arbitrarily applied to all municipalities
in the jurisdiction and often do not allow for judgment in
financial planning.
Also, such limitations often are legally
established in Constitutions, charters and statute books. As
time passes, they often become obsolete and are very hard to
amend.
Finally, as we learned in the case of New York City,
legal prohibitions are not necessarily enforced strictly.
A second source of potential protection is the anti-fraud
nrovisions of the Federal Securities Laws.
guards alone are deficient in two respects.
retrospective only.
But these safeFirst, they are
They cannot help investors to prevent
unwise investments, but can only provide a basis for recouping
losses after (and if) fraud is proved.
Moreover, they do not
provide a basis for helping investors choose among competing
investments; they only prohibit certain extreme unlawful
conduct.
A third possibility is the rating process.
But, since the
rating services must rely on the insufficient and non-comparable
data provided to them, they can at best only make general
estimates of creditworthiness.
There is a fundamental fallacy
in trying to base ratings on less than full disclosure. There
is no substitute for reliable, up-to-date, comparable information.
- 5 In short, there is no mechanism to insure that investment
decisions in municipal securities are made with clarity and
confidence.
Prudent decisions cannot be made when investors
are forced to compare apples and oranges, and often old ones
at that.
An efficient market requires access to comparable,
verified, and reasonably current information.
The Desired Nature and Scope of Disclosure Legislation
The fundamental goal of disclosure legislation must
be to assure that the maximum amount of relevant information
is readily available, with a minimum amount of Federal intervention and a minimum of cost.
Disclosure rules and regula-
tions should enhance the market, not interfere with the market
mechanism for municipal issues.
Most important, in order to
ensure that municipal investors are able to make a concise
comparative analysis of the finances of different issuers,
disclosure legislation must standardize the presentation of the
information being disclosed.
It is the importance of standardization which requires
that a disclosure program be administered at the Federal level.
We have examined carefully the voluntary disclosure approach.
As the Committee knows, it has been argued that since investors
and underwriters are demanding more information, if the free
market were left to its own devices, the information would be
provided by those issuers which needed market access.
We con-
cluded, however, that precisely to assure that the free market
mechanism will function smoothly with respect to municipal
376
- 6 issues, it is necessary to insist upon mandatory disclosure
of financial information by issuers entering the market.
It
is only by mandatory disclosure that adequate, uniform, usable
information can be assured, and that its flow to the investing
public can be guaranteed.
In designing a disclosure system, we must keep in mind
that the policy trade offs here may differ from those employed
in the corporate area.
It is not an overstatement to say that,
under existing law and procedures, the governing principle in
the corporate area is spare no expense to z^Try the investor
every last ounce of protection.
In the municipal area, where
such expenses must be directly paid by taxpayers, I do not
think we can or should make a similar choice.
Scope
There are many municipalities which do not enter the
capital markets frequently or to a heavy degree, and thus
present lesser concerns to the investing public or to the proper
functioning of our nation's capital markets.
There are many
municipal issues which have a relatively limited market. So
that mandatory disclosure does not result in overkill, we favor
the setting of threshold limits below which disclosure would
not be required.
Once the issuers which should disclose have been identified,
the information required of them should be carefully specified
and relatively comprehensive.
Some flexibility, of course,
is required, but State and local governments, we believe,
73/7
- 7 are entitled to have Congress decide the kind of information
it is required to disclosure.
Comments on Pending Disclosure Bills
Based on the above principles, we oppose S. 2574 and
H.R. 11044.
By eliminating the 1933 and 1934 Act exemptions
for municipal securities, these bills would require that municip
securities undergo the same disclosure, filing and clearance
and registration procedures as corporate securities.
Such an
approach would impose burdens and costs which outweigh the
benefits derived.
We are in general agreement with S. 2969, cosponsored
by the Chairman and Senator Tower.
S. 2969 is not a regulatory
bill; it would not require filing, registration or presale
clearance of issues.
Instead, it is strictly designed to insure
that information -- reports and distribution statements - - b e
prepared and made readily available to the public.
Let me stress this fundamental difference between the
Solarz and Eagleton bills, and S. 2969, even at the risk of
belaboring the point.
regulatory measures.
The Solarz and Eagleton bills are
They would intimately involve the SEC
in the issuance process, as it is in the corporate area.
The Williams-Tower bill does not contemplate such involvement,
providing only that informational reports and statements be
prepared and made readily available.
Responsibility, in the final analysis, is more a matter
of accountability than motive.
requires good information.
And, in turn, accountability
If comparable, reliable, up-to-date
- 8 information were made available through disclosure guidelines,
in depth scrutiny by investors and the electorate would be
facilitated.
The mechanism for public scrutiny of municipal issues
already exists. It lies in the market place and the election
process. What is required is only to put it to work, and this,
in turn, requires only assuring the flow of information.
Reliable, comparable current data would pre-empt the need
for presale registration and clearance.
I concur with the essential substance of S. 2969.
The bill provides for the preparation of annual reports
including audited financial statements by issuers of municipal
securities with more than $50 million outstanding. It provides
also that distribution statements be prepared prior to public
offer or sale of $5 million or more of securities. And it
requires that such reports and statements be reliable and
comparable, as well as readily available to underwriters,
dealers and investors. Finally, it encourages State oversight by providing for exemptions from the distribution
statement requirement where a State authority has approved
the offer or sale of the issue.
The advantages of the Williams-Tower bill's approach
are numerous.
The f34 Act's reporting requirements are less
burdensome than those under the '33 Act and will result in
less burden to reporting entities.
Ongoing information about
the basic financial health of a city affords an excellent
means of evaluating its creditworthiness and its potential
for meeting debt service on bond issues into the future.
the extent new issue
To
information is needed, the distribution
statement which the Williams-Tower bill would require will
provide all the relevant data.
Thus, the Williams-Tower
bill strikes an appropriate balance:
requiring disclosure
of as much information as is necessary to allow the market
to function properly, without burdening our States and cities
with requirements that impose unnecessary costs.
In my view, the bill as currently drafted requires
improvement in two areas.
First, I am concerned about the
authority conferred upon the Commission by subsection (d)
of Section 13A.
To the extent this provision reflects the
authors' belief that,in light of inflation, it may be
appropriate at some future date to allow t^e Commission to
adjust upward the minimum filing requirements, such intent
could be more clearly expressed by substituting the word
"increase" for the word "change" on line 5.
If, on the other hand, the provision contemplates a
possible downward adjustment of the minimum limits, I believe
- 10 the provision constitutes an inappropriate delegation of
authority to the Commission. It is important to keep in
mind that this legislation contemplates a degree of Federal
involvement in the affairs of sovereign political units.
Accordingly, it is our strong belief that any change which
materially increases the scope of the legislation, or the
burden on entities initially subject to the legislation,
must receive the review and approval of the Congress in the
form of new legislation.
This leads directly to our second area of concern.
While we recognize the necessity for a slight degree of rulemaking authority in the Commission to implement the statutory
directives, we think the legislation, as currently drafted, goes
much too far. As I indicated earlier, while the protection of
investors is, and must be, a consideration, it is not in my
view a consideration of such paramount importance as might
be the case on the corporate side. The grant of discretion to the Commission to expand the type of information
required must be carefully circumscribed and should recognize
expressly the different competing considerations which exist
in the municipal securities area.
After all of us have had the benefit of the hearing
process,we expect to work closely with the Commission and
the staff of this Subcommittee to develop language to deal with
the concerns set forth above. At the same time we will also
present additional minor technical amendments which we feel
5^/
- 11 will improve the legislation.
All in all, S. 2969 presents a desirable framework for
satisfying the important objectives of more and more useful
information about municipal credits.
We believe such legis-
lation is urgently needed and we will cooperate with the
Committee and the Congress in an attempt to achieve its
expeditious passage.
ASURV
eparltnento
N, D.C. 20220
TELEPHONE 964-2041
February 24, 1976
FOR IMMEDIATE RELEASE
SECRETARY SIMON LEADS DELEGATION
TO THE MIDDLE EAST AND EUROPE
Treasury Secretary William E. Simon will lead a highlevel delegation to the Middle East and Europe to hold economic
discussions with senior government officials in Saudi Arabia,
Israel, Syria, the United Arab Emirates, Egypt, Italy, and
Germany. The' delegation departs Washington February 26, and
will return March 11.
Secretary Simon plans to meet with King Khalid while in
Saudi Arabia, Prime Minister Rabin in Israel, President Asad
in Syria, President Zayid in the United Arab Emirates., and
President Sadat while in Egypt.
In addition, Secretary Simon will co-chair a meeting of
the U.S.-Saudi Arabian Joint Commission on Economic Cooperation
with Finance Minister Aba al-Khail. In Israel, Secretary Simon
will co-chair a meeting of the U.S.-Israeli Joint Committee
for Trade and Investment with Finance Minister Rabinowitz.
"This mission will seek to strengthen economic ties
between the United States and the countries of the Middle East.
We believe that the United States can assist these countries in
their development efforts and such cooperation will further our
goal of achieving a lasting peace in the Middle East,,T Simon said
On his return from the Middle East, the Secretary will
visit Rome and Frankfurt, where he will give an address at
the University of Mainz.
The Secretary will be accompanied by Assistant to the
President, L. William Seidman; Assistant Treasury Secretary,
Gerald L. Parsky; and senior officials from the Departments
of State, Treasury, Commerce, and other U.S. agencies.
'S-669
oOo
3^5
FOR IMMEDIATE RELEASE
February 24, 1976
POSTAL SERVICE NOTIFIED OF CHAIN-LETTER,
SAVINGS BOND SCHEME
Postal authorities today were notified of the reappearance of chain-letter schemes involving the use of United
States Savings Bonds in several areas of the country.
H. J. Hintgen, Commissioner of Treasury Department's Bureau
of the Public Debt, said information received indicates that
some promoters of the letters are motivating participation in
their schemes by falsely claiming Treasury's endorsement, and by
cloaking their appeals in bicentennial and other patriotic
labels.
"Many years of experience with chain-letter operations
indicates that most participants lose their entire investment,"
Mr. Hintgen said. "This outcome is inevitable because the supply
of interested persons is soon exhausted."
Mr. Hintgen pointed out that use of the mails to facilitate
participation and transactions in chain letters is considered
in violation of postal lottery and fraud laws. There is also
the possibility, he said, that such schemes violate local antilottery laws, even if the mails are not used in any way.
Chain-letter schemes hurt, rather than help the Savings
Bond Program. "Rather than encouraging persons to make genuine
investments, they create the illusion that participants are
both aiding their government and themselves. Even in the rare
case where an individual receives some return, it is likely
that he would quickly redeem the bonds, thereby placing a further
burden on the Treasury," according to Commissioner Hintgen.
Banks and other issuing agencies are authorized by Treasury
to refuse applications where there is reason to believe the bonds
will be used in a chain-letter scheme. Information on reappearance of chain-letter activity involving Savings Bonds have been
reported from several areas of Florida, Massachusetts, and in
Parts of Richmond, Baltimore, and the Mid-West.
oOo
WS-671
FOR RELEASE AT 4:00 P.M.
February 24, 1976
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
March 4, 1976,
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 December 4, 1975,
and to mature June 3, 1976
(CUSIP No. 912793 ZK 5 ) , originally issued in
the amount of $3,400,700,000, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,700,000,000, or thereabouts, to be dated March 4, 1976,
and to mature September 2, 1976
(CUSIP No. 912793 A7 1 ) .
»
The bills will be issued for cash and in exchange for Treasury bills maturing
March 4, 1976,
outstanding in the amount of $6,406,080,000, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,198,830,000.
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
3ne-thirty p.m., Eastern Standard time, Monday, March 1, 1976.
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
>e expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
•Tactions may not be used.
Banking institutions and dealers who make primary markets in Government
WS-673
(OVER)
Sis'*
-2securities 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 March 4, 1976,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing March 4, 1976.
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. Copies of the circular may be obtained from any Federal Reserve Bank or
Branch.
#
#
#
FOR IMMEDIATE RELEASE
STATEMENT OF THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
BEFORE THE
SENATE SUBCOMMITTEE ON APPROPRIATIONS
TUESDAY, FEBRUARY 24, 1976, 2:00 PM EST
<
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today to discuss
the U.S. National Central Bureau of the International
Criminal Police Organization — INTERPOL. With me today
are James J. Featherstone, Deputy Assistant Secretary
(Enforcement); Louis B. Sims, Chief, United States National
Central Bureau of INTERPOL; and, in accordance with your
request, Mr. Kenneth S. Giannoules, the previous Chief,
United States National Central Bureau of INTERPOL. Since
Mr. Giannoules has not appeared before this committee before,
I am offering his biographical sketch for the record.
U.S. Membership and Funding
By statute (22 U.S.C. 263a), the Office of the
Attorney General, U.S. Department of Justice, is the
"Office of Responsibility" for INTERPOL in the United
States. In 1958, by P.L. 85-768, the U.S. Congress authorized the Attorney General to designate the Department
of the Treasury the official liaison with INTERPOL.
The U.S. Government currently has twelve full-time
positions assigned to INTERPOL. One of these positions is
WS-674
33/
- 2 located at the Headquarters of INTERPOL in France, the
remaining eleven in the Main Treasury Building in
Washington, DC. These positions are funded as follows:
Three (3) by the Department of Justice; two (2) by the
Office of the Secretary, U.S. Treasury Department; two (2)
by the U.S. Secret Service; three (3) by the U.S. Customs
Service; and two (2) by the Bureau of Alcohol, Tobacco
and Firearms.
The Fiscal Year 1976 Department of the Treasury
Salaries and Expenses Appropriation for the Office of
the Secretary, in addition to the two (2) permanent positions, contains resources for travel and communication
costs and for the INTERPOL annual dues.
Public Law 93-468, approved October 24, 1974, increased the limit on INTERPOL dues from $80,000 to $120,000.
Because of unforeseeable fluctuations in the Swiss franc
exchange rate, we have proposed legislation, which has
recently been transmitted to the Congress, to remove this
limit.
INTERPOL annual dues were last increased in
September of 1974 from 4830 Swiss francs per budget unit
to 5900 Swiss francs per budget unit. The United States,
Germany, Italy, United Kingdom and France pay 60 budget
units each or the equivalent of 354,000 Swiss francs.
Other member countries pay correspondingly less, depending
on their development and utilization of INTERPOL. In addition to the increased budget unit, currency fluctuations
have increased the dollar equivalent of the budget unit
as expressed in Swiss francs. For this reason, annual
dues have ranged in value from $117,000 in October 1974
to $147,000 in February of 1975, and are now valued at
approximately $138,000. The current U.S. dues represent
6.2 percent of the overall INTERPOL dues of 5,693,000
Swiss francs.
In Fiscal year 1977 we are requesting $155,000 for
INTERPOL dues. The request for an additional $75,000 is
- 3 to cover the 1974 increase in dues, which had not previously been budgeted for, and also to provide for the
increase resulting from the change in the exchange rate
between the U.S. dollar and the Swiss franc. No other
increases are requested in the FY 77 budget.
INTERPOL was organized in 1923 and presently consists of 122 member countries with the General Secretariat
located in Saint Cloud, France, outside of Paris. The
Secretary General is a French citizen named Jean Nepote.
The current President of INTERPOL is Mr. William L. Higgitt,
recently retired Commissioner of the Royal Canadian Mounted
Police, and presently head of the Canadian Safety Council.
President Higgitt was elected in 1972 by the General
Assembly.
Mr. Nepote was elected by the General Assembly in
1963, and was re-elected in 1968 and 1973. Mr. Nepote
is a "Commissaire Divisionnaire" of the French Surete
Nationale, a "Chevalier" in the French Legion of Honour,
and has been decorated by a number of other countries.
INTERPOL is an intergovernmental organization composed of member countries represented by their law enforcement officials. This normally is the head of the
National Police. In the United States, the designated
representative is the Assistant Secretary of the Treasury
who is responsible for law enforcement. The National
Central Bureau of each country maintains its sovereignty
by operating within its country's laws. In the United
States, the National Central Bureau operates by statute,
and answers to the Assistant Secretary of the Treasury
and to the Congress.
Functions of INTERPOL
INTERPOL'S function is to provide the coordination
and communications mechanism for law enforcement agencies
(local, state or Federal) having a foreign investigative
requirement and to transmit that requirement to other appropriate foreign law enforcement agencies. INTERPOL has
no investigative force of its own and carries on no investigations. It has no control over its constituent
- 4 countries' police forces. Its function is that of
transmitting information or requests for action by
one country's police to another country's police.
Compliance with these requests is at the discretion
of the recipient country, depending on their laws,
type of crime, etc.
The requests for information or action which are
handled by INTERPOL range from a simple criminal record
check to a full investigation. Sometimes INTERPOL'S
valuable service may be merely to locate a person
wanted either by the United States or one of the other
121 member countries. These services frequently result
in the apprehension, extradition and prosecution of
an international criminal who would otherwise continue
to elude the authorities of several countries.
During FY 1976, the U.S. took an active role in
the 44th INTERPOL General Assembly, the INTERPOL
American Regional Conference, Crimes in Seaports and
Airports Symposium, the European Drug Conference, and
the European Regional Conference.
Member countries of INTERPOL, United States law
enforcement agencies or any other organization, person,
etc. with whom the United States may come into contact
in the course of carrying out its responsibilities,
have no direct access to criminal records in the United
States. Requests from law enforcement agencies for information from the United States are evaluated individually
by Federal agents assigned to the United States NCB and
arrest or other information is provided as approved (1)
by the agency from which the information is obtained and
(2) by the responsible agent in the United States NCB.
This is known as the "Third Agency Rule," and applies
to all exchanges of information between enforcement
agencies.
The procedure within INTERPOL requires the requesting
country to state the nature of its investigative request,
3&
- 5 which includes identifying its investigation and the
reason for the request. If this is not stated along
with the request, the receiving country will make a
request for that information prior to transmitting the
request. The request must be in accord with the laws
of the country receiving the request. Furthermore,
the request must not be in conflict with Article III of
the INTERPOL Constitution which reads, "It is strictly
forbidden for the Organization to undertake any intervention or activities of a political, military, religious
or racial character." This Article does not prohibit
INTERPOL from assisting in a criminal inquiry concerning
a political activist, religious sect, or other entity
which engages in generally recognized criminal activity,
such as bank robbery, murder, or fraud.
Litigation
A group known as the Church of Scientology is
presently in litigation with various branches of the
United States Government, including INTERPOL. INTERPOL
has no objection to litigating the matters which are
the subject of the suit before the Federal Courts and
is confident of the outcome of this litigation. The
Church of Scientology has, however, for reasons best
known to itself, decided to "try its case" in the newspapers, attacking INTERPOL with calumnies to which, to
this point, we have responded only In our testimony
before you, Mr. Chairman, of May 6, 1975. The most
scurrilous attack of this group is the allegation that
INTERPOL somehow is, or was in the recent past, under
Nazi influence. Probably the shortest refutation of
this argument is the simple fact that Israel has been
a fully participating member of INTERPOL since 1949.
It has also been argued that INTERPOL is a kind
of private club not authorized by or responsible to
the Congress. We would like to introduce for the record
Title 22, Section 263a, authorizing the U.S. participation
in INTERPOL, and the legislative history behind Public
33/
- 6 Law 85-768, pursuant to which the Treasury Department's
participation in INTERPOL was reported to and authorized by the Congress.
Conclusion
I have attached and submit for the record various
operating statistics for our Washington National Central
Bureau.
If INTERPOL did not exist, the same international
inquiries and investigative request would be made by
both U.S. and foreign enforcement agencies in a much more
haphazard and costly fashion. The same information
would be given out by the receiving agencies in a unilateral basis and without the additional filtering pro-'
tection provided by the Constitution and long-standing
practices of INTERPOL. The protection of rights in connection with this process is and must be the responsibility
of the law enforcement agencies who approve the transmission of information. INTERPOL is a necessary, effective and efficient coordination and communications tool
used by national enforcement agencies.
This concludes my statement. My associates and I
will be pleased to answer any questions that the Committee
may have.
Thank you.
oOo
.92 «-•
.E to
'aderal financing bank
a*
.IS
WASHINGTON, D.C. 20220
28
S3&
FOR IMMEDIATE RELEASE
SUMMARY OF LENDING ACTIVITY
February 1 - February 15, 1976
Federal Financing Bank lending activity for the period
February 1 through February 15, 1976 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
2/2 St. Joseph
Telephone Co.
Amount
$
400,000
Maturity
Interest Rate
2/2/78
6.5321
2/10 Tri-State
Generation %
Transmission
Association
2/11 Florida Central
Telephone Co.
2,972,000
12/31/10
8.221
461,000
12/31/10
8.243
2/11 Colorado-Ute
Electric
Association
4,200,000
12/31/10
8.243
2/11 Cooperative Power
Association
3,500,000
12/31/10
8.243
12/31/10
8.214
2/13 Allied Telephone
Co.
296,000
Interest payments are made quarterly on the above loans.
The US Railway Association made the following drawings
against Note No. 3, a $296 million renewable line of credit
with the Bank:
Date
Interest Rate
Maturity
Amount
2/2
$29,000,000
2/23/76
4.9691
2/4
5,500,000
2/23/76
5.117
USRA borrowings from the FFB are guaranteed by the Department
Transportation.
of
WS-677
333
- 2 -
On February 4, the General Services Administration borrowed
$502,059.00 under the Series M $190 million commitment with
tha Bank. The interest rate is 8.299%. The loan matures
June 15, 2005.
On February 13, GSA borrowed $875,019.23 under the
Series L $107 million commitment with the Bank. The interest
rate is 8.329%. The loan matures November 15, 2004.
On February 5, the Bank advanced $3,704,751.80 under
a November 25, 1975 credit agreement with the National
Railroad Passenger Corporation (Amtrak) 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, set at the time of the advance,
is 8.125%.
On February 9, Amtrak borrowed $15 million against
Note No. 6, a $130 million renewable line of credit with
the Bank. The note matures March 30, 1976. The interest
rate is 5.093%. Amtrak borrowings from the FFB are
guaranteed by the Department of Transportation.
The Bank advanced $59,225.86 to the Government of
China under Note No. 3 on February 10. The loan, which
matures on December 31, 1982 and bears interest at a rate
of 7.502%, is guaranteed by the Department of Defense under
the Foreign Military Sales Act.
On February 11, the Federal Financing Bank paid
$250,770,135.42 to the Secretary of Treasury for New York
City Note #4. The face amount of the Note is $250 million
and bears interest at a rate of 6.29%. The note matures
June 20, 1976. The effective rate of return to the FFB
is 5.415%. The Secretary of Treasury made the loan to
New York City under the New York City Seasonal Financing
Act of 1975.
On February 13, the Tennessee Valley Authority borrowed
$25 million at an interest rate of 5.147%. The note matures
on May 28, 1976.
Federal Financing Bank loans outstanding on February
15, 1976 totalled $19.7 billion.
^3/
FOR RELEASE ON DELIVERY
STATEMENT BY EDWARD P. SNYDER
DIRECTOR, OFFICE OF DEBT ANALYSIS
U.S. TREASURY DEPARTMENT
BEFORE THE TASK FORCE ON TAX EXPENDITURES OF THE
HOUSE BUDGET COMMITTEE
FEBRUARY 25, 1976, 10:00 A.M.
Mr. Chairman and Members of the Task Force:
I am pleased to be here today to present the views of
Treasury Department on the proposed mortgage interest tax
credit. We have already responded, for the record, to
the detailed and comprehensive list of questions provided
by your staff concerning the credit. Thus, it may be most
useful if I concentrate on an overview of the place of the
MITC in the Administration's program for financial reform,
as embodied in the Financial Institutions Act.
The MITC, as I am sure you know, was first proposed
as housing and mortgage market recommendation 10 of the
Hunt Commission Report; subsequently it became part of
Title VII of the Financial Institutions Act of 1973, which
was introduced in the 93rd Congress.
The mortgage interest tax credit was aimed at a number
of objectives. In particular, it was intended to attract
new mortgage lenders, so as to avoid any adverse effects
on the mortgage market of the changes in financial institution
asset and liability powers in the other six titles of the Act.
The MITC was also expected to promote greater cyclical
stability in mortgage lending and, therefore, in housing
activity, and it was also intended to establish tax neutrality
among financial institutions by providing a single, consistent
tax treatment of mortgage interest.
WS-670
3577The MITC is, of course, a tax credit based on interest
income from residential mortgages. As originally proposed,
individuals and partnerships could deduct from their tax bill
1 - 1/2 percent of any residential mortgage interest income
they received from first liens on property or pass-throughs.
Corporations, whose holdings of total assets in residential
mortgages would have amounted to less than 10 percent would
not be eligible for the credit; with a minimum investment of
10 percent of assets in eligible mortgages, however, corporations
would be entitled to a 1 - ]/2 percent credit, and the rate
of credit would, thereafter, increase by l/30th of a percentage
point for each 1 percent increase in the ratio of qualified
residential mortgages to total assets. Thus, for example,
while a firm with only 10 percent of its assets in residential
mortgages would receive a credit of 1 - 1/2 percent of mortgage
interest income, a firm with 55 percent of its assets in
residential mortgages would receive a credit of 3 percent
of residential mortgage interest income, and a firm with 70
percent of assets in residential mortgages would receive
a maximum credit of 3.5 percent of residential mortgage
interest income as a credit against its tax bill.
Title VII of the FIA was amended in 1975 to permit S&L's
and savings banks the option of continuing their special bad
debt loss deduction up to December 197 9, in lieu of an earlier
mandatory conversion to the MITC, but the tax credit itself
was unchanged. The Senate Banking Committee, however,
subsequently expanded the tax credit to cover up to 8 0 percent
of assets in residential mortgages. The maximum credit was
also increased to 3.833 percent.
The mortgage interest tax credit can be a significant
inducement for investors to acquire residential mortgages,
because it may substantially increase the effective aftertax yield on such mortgages. The effect depends upon the
tax rate of the investor, the contract rate of interest, and
the rate of credit. For example, assuming a 48 percent tax
rate, an investor who has invested 25 percent of total assets
in residential mortgages would find that a mortgage with a
before-tax yield of 9 percent could compete directly with
other investments yielding up to 9.35 percent before taxes,
a difference of 35 basis points. Similarly, an institution
- 3 with 80 percent of its assets in residential mortgages would
find that that same 9 percent mortgage would compete with
an alternative investment yielding a 9.66 percent return,
a difference of 66 basis points. Table 1 presents similar
calculations for the entire range of portfolio shares from
10 to 8 0 percent, and for nominal or contract mortgage rates
of interest varying between 5 and 12 percent.
There is, also, an additional, powerful incentive in
the MITC which results from the progressive structure of
the credit. The increase in the rate of credit from an
increase in mortgages applies not only to new investments
but to the existing portfolio. As a consequence, taking
into account the increase in after-tax yield on the mortgages
already held, the effective marginal yield on additional
mortgage investment or disinvestment can be very high.
Table 2 shows the effective marginal yields, including
the "portfolio effect". Thus, if an institution increases
its holdings of 9 percent mortgages from 24 to 25 percent
of total assets, the effective marginal before-tax yield
is not merely 9.3 5 percent, but is instead 9.4 8 percent.
For an institution increasing its portfolio share of
residential mortgages from 7 9 to 8 0 percent of total assets,
the effective marginal before-tax yield is raised to 10.12
percent, a difference of 112 basis points over the contract
rate.
As I have indicated, a purpose of the tax credit is
not only to induce S&L's and savings banks to maintain a
basic commitment to mortgage lending, but also to attract
new sources of mortgage financing, primarily commercial
banks.
At the end of 1974 the commercial banking system held
less than 9 percent of total assets in the form of residential
mortgages. We have estimated that the incentive provided
by the tax credit will induce most commercial banks to
increase their holdings of residential mortgages to a minimum
of 10 percent of assets. Subsequently, their mortgage holdings
should grow at about the same rate as total assets, which
since 1966 have grown at a rate of 9.8 percent per year.
The MITC should induce commercial banks to increase their
holdings of residential mortgages by some $10-15 billion
initially, and then by about another $10 billion over the
next 5 years, in addition to the mortgage lending they would
nave undertaken otherwise.
S27
Table 1
Effective Before-Tax Yield on Residential Mortgages Due to.
the Mortgage Interest Tax Credit
Nominal' Yield on Mortgages
PRQP0*TICW
12
e
o
79
78
77
76
75
7«
75
72
7i
70
69
69
67
66
65
60
63
62
61
60
59
1%
57
56
5S
50
53
52
51
50
09
09
C7
06
05
00
03
02
fll
flO
39
3S
37
JO
35
30
33
32
31
30
29
26
27
26
25
2a
23
?i
21
20
19
16
17
16
15
Ifl
13
12
11
10
i2.e**»
12.876
12.868
12.861
12.653
12.645
12.63ft
12.«30
12.822
12.815
12,807
12.799
12.79?
12.780
12.776
12.76*
12.761
12.753
12.705
12.738
12.730
12.722
12,715
12.707
12.699
12.692
12.680
12.676
12.666
12,661
12.653
l?.t>0S
12.638
12.630
12.62?
12.615
12.607
12. 599
12.S"?
12.580
12.576
5 2.568
12.561
12.553
12.505
12.536
12.530
12.522
12.515
12.507
12.099
12.092
12.064
12.076
12.068
12.061
12.053
12.005
12. <-39
12.030
32.022
12.015
12.007
12.399
12.392
12.380
12.376
12.308
12.361
12.353
12.305
10
11
11.81
11.BO
11.60
11.79
11.76
11.77
11.77
11.76
11.75
11.75
11.70
11.73
11.73
11.72
11.71
11.70
11.70
11.69
11.68
11.68
11.67
11.66
11.66
11.65
11.60
11.63
11.63
11.62
11.61
11.61
11.60
11.59
11.56
11.56
11.57
11.56
11.56
11.55
11.50 .
11.50
11.53
11.52
11.51
11.51
11.50
11.09
11 ,u9
11.u8
11.07
11.06
11.06
11.05
11.00
ll.oo
11.03*
n.02
11. a?
1 1 ,u\
1 1 .oO
1 1 . 39
11.39
11.36
11.37
11.37
11.36
11.35
11.30
11.30
11.33
11.32
11.32
8
«
10. 70
10.73
10.72
10.72
10,71
10,70
10.70
10.69
10.69
10.68
10.67
10.67
10,66
10,65
10.65
10,60
10.63
10.63
10.62
10.61
10.61
10.60
10,60
10.59
10.58
10.58
10.57
10.56
10,56
10,55
10.50
10.50
JO.53
10.52
10.52
10.51
10.51
10.50
10,09
10.09
10, 08
10,07
10.07
10, U6
10.05
10.05
10,tti
10.0(1
10.03
10.C2
10,fl?
10.01
10.00
10,00
10.39
10. 38
10.36
10,37
10. 36
1 0, 36
10.35
10.35
10.30
10.33
10.33
10.32
30.31
30,31
10.30
10,29
10.29
Office of the Secretary of the Treasury
Office of Debt Analvsis
9,66
9.66
9,65
9,65
9,60
9,63
9,63
9,62
9,62
9,61
9,61
9.60
9,59
9.59
9,56
9.58
9.57
9.56
9.56
9.55
9.55
9.50
9,50
9.53
9.52
9.52
9.51
9,51
9.50
9.50
9.09
9.(18
9.08
9.07
9,07
9,06
9,(16
9.(15
9,li(i
9,(10
9,(13
9,03
9.02
9.(11
9,01
9,00
9,00
9.39
9.39
9.36
9.37
9.37
9.36
9,36
9,35
9.35
9, 30
9.33
9.33
9.3?
9.3?
9.31
9.31
9.30
9.?9
9,29
9.?6
9.28
9.27
9.26
9.26
7
6.59
8.55
6,58
6.57
8.57
6.56
e.56
6.55
6.55
6.50
8.50
6.53
8.53
8.52
6.52
8.51
6.51
6.50
8,50
6,09
6.09
6,0B
£.08
8,«7
6,07
8,46
8,06
6.05
6,05
6,00
6, 00
8,03
8.03
6.02
8,01
6,01
8,00
6,00
6,39
8.39
8,38
8,38
8.37
8.37
6.36
6. 36
8,35
6.35
6,30
8,30
8,33
6.33
6.32
8.32
6.31
8.31
8. 30
6. 30
8.29
6.29
8.28
e,26
8.27
8.27
8.26
6.26
8.25
6.25
8.20
6,20
8.23
^
6
7.52
7.51
7.51
7.50
7.50
7.09
7.09
7.06
7.06
7.«8
7.07
7.07
7.06
7.06
7.05
7.05
7.ofl
7,a«
7.03
7.C-J
7.03
7.02
7.02
7.oi
7.01
7.00
7.00
7.39
7.39
7.39
7,38
7.38
7.37
7.37
7.36
7.36
7.35
7.35
7.35
7.30
7.30
7.33
7.33
7.32
7.32
7,31
7.31
7.30
7.30
7.30
7.29
7.29
7.26
7,28
7.27
7.27
7.26
7.26
7.26
7.25
7.25
7.20
7.20
7.23
7.23
7.22
7. 21
7.21
7.21
7.21
7.20
6,04
6.00
6.03
6.03
6.43
6.^2
6.02
6.01
6.01
6.01
6.O0
6.O0
6.40
6.39
6.39
6.38
6.38
6.36
6.37
6.37
6,36
6.36
6.36
6.35
6,35
6.35
6,30
6,30
6.33
6.33
6.33
6.32
6.32
6.31
6.31
6.31
6.30
6.30
6.30
6.29
6.29
6.28
6.28
6.28
6.27
6.27
6.26
6.26
6.26
6.25
6,25
6.25
6,20
6,20
6.23
6.23
6.23
6,22
6.22
6,21
6.21
6.21
6,20
6,20
6.20
6,19
6.1«
6.16
6.16
6,16
6.17
5.J7
5.J7
5. St
5.3b
5.14
5.35
5.35
5.3?
5.J.
5.J.
5.J.
5.3J
5.S3
5.3J
5.32
5.3?
5.32
S.J!
5.3:
5.3!
5.3C
5,3;
5,J;
5.??
5.2'
5.2'i
5,2:
5.2:
5.25.26
5.27
5.2:
S.2?
5.26
5.26
$.26
5.2:
5.2?
5,2:
5.2.
.
5.2;
5,23
5.23
5.23
5.22
5.22
5.22
5.21
5.21
5.21
5.2C
5.2C
5.2C
5.?:
5.1<
5.1«
5.1«
5,1'
5.U
5,1:
5,17
5.1?
5.17
5.16
5.It
5,:t
5.15
5.15
5.15
5,1-
Table 2
Effective Before-Tax Yield on Residential MDrtgages with a MITC
and Allowing for the Portfolio Impact
._ _
Nominal Yield on Mortgages
PROPORTION
12
n
10
12.37
11.20
10.12
12.35
10.11
11.23
10.10
12.30
11.22
10.06
12.32
11.20
10,07
12.31
11.19
10.06
12.30
n . ie
10.05
12.26
11.17
10,04
12.27
11.15
10.03
12.25
10,01
ll.io
12.20
10.00
11,13
12.23
9.99
11.11
9.98
12.21
11.10
9,97
12.20
11.09
9,96
12.16
11.08
9,95
12.17
11,06
9.9J
12.16
9,92
11.05
12.10
9,91
11.00
12.13
9,90
11.02
9,69
12.11
11.0]
9,68
12.10
11.00
9.66
12.09
10,99
9.65
12.07
10,97
9,64
12.06
9.63
10,96
12. CC
9,82
10.95
12.03
9.81
10,90
9.60
12.01
10,92
9.76
12.00
10.91
9.77
11.99
10.90
9.76
11.97
9.75
io.ee
11.96
9.70
10,67
!1.9«
9.73
10,66
11.93
9.71
10.65
9.70
11.92
10.63
s
9.69
11.90
2
10.82
9,66
11.69
« 1
9,67
10.61
11.67
1°
9.66
10,79
11.86
.'
9.65
10.76
8
11.65
9.63
. 7
10,77
9.62
11.63
. 6
10.76
9.61
11.82
10.70
9.60
11.80
*a
10.73
9.59
11.79
9.58
*
10.72
11.77
9.56
i\
10.70
* 1
11.76
9.55
10.69
-• 3
11.75
9,50
•S >
10,68
11.73
9.53
i? 1
10.67
9.52
11.72
10.65
>?'
9.51
11.70
*:
10.60
9,50
11.69
' >
10,63
9,06
11.68
-. i
10,61
9.07
•; i
11.66
9.06
10.60
11.65
.*
9.05
10,59
11.63
C
9,00
10.58
11.62
9,03
10.56
11.61
9.01
1
10.55
l<11.5«»
9,00
,1
10.50
9,39
11.58
tpT
10.52
9.38
11,56
10,51
9.37
11.55
I
10.50
9.36
ll,5t
!
9.35
10.09
11.52
9.33
10.07
'j
11.51
9.32
10,06
11.09
11.59
10,05
11.08
10,00
11.06
10,02
11.05
ice of the Secretary of the
Treasury
10,01
ll.oo
Office of Debt
Analysis10,00
11.*2
10.38
ll.oi
10.37
11.39
10,36
10.17
12.66
so
79
78
77
76
75
70
73
72
71
70
69
68
67
66
65
fcc
63
t>
t\
60
59
59
57
56
55
50
"S3
52
>1
50
!9
!3
:?
IS
5
0
i
3
|}
1S.«9
13.06
13.06
13.05
IX.«S
13.41
13,«0
13.38
13.37
13.35
13.30
13.32
13.31
13.29
13.29
13.26
13.25
13.23
13.21
13.20
13.18
13.17
13.15
13.10
13.12
13.11
13.09
13.02
13.0©
13.05
13.03
13,01
13,00
12.93
12.97
12.95
12.90
12.92
12.91
12.69
12,56
12,8b
12,85
12.63
12.81
12.63
12.79
12.77
12.75
12.70
12.72
12.71
12.69
12,68
12.66
12.65
12.63
12.61
12.60
12.59
12.57
12.55
12,5a
12.52
12.51
12,09
12,08
12,06
12.05
12.03
15.05
6.99
6.98
8.97
8.96
8.95
6.9(1
8.93
8.92
8,91
8.90
e.e9
6.88
6.87
6,66
6.65
6.60
6,63
8.62
6,61
6.60
6.79
6,78
6.77
8,76
6,75
6,70
8.73
6.72
6.71
8,70
8.69
8.66
6.67
6.66
6,65
6.60
8.63
6.61
6.60
6.59
6.58
8.57
6.56
6.55
6.50
6,53
e.92
6.51
6.50
' 6.09
e.oe
e.07
e.06
6.05
6,00
8,03
6.02
8,01
6,00
6,39
6.38
6,37
6,36
6.35
8,30
6,33
6.32
6.31
8,30
6,29
10,30
7.67
7.86
7.65
7.80
7.63
7,e3
7.62
7,61
7,80
7.79
7.76
7.77
7.76
7.75
7.70
7.70
7.73
7.72
7.71
7.70
7.69
7.68
7.67
7,66
7.65
7.65
7.60
7.63
7.62
7.61
7,60
7.59
7,56
7.57
7.56
7.56
7.55
7.50
7.53
7.52
7.51
7.50
7.09
7.09
7.08
7.07 '
7.06
7.05
7.00
7.03
7.02
.7.01
7.00
7.39
7.39
7.36
7.37
7.36
7.35
7,30
7.53
7,32
7.31
7.30
7,30
7,29
7.28
7,27
7,?6
7.25
9,01
6.75
6.70
6.73
6.72
6.71
6.71
6.70
6.69
6.68
6.66
6.67
6,66
6.65
6.65
6.60
6.63
6.62
6.62
6.61
. 6,60
6.59
6,59
6,59
6.57
6.56
6,55
6.55
6.50
6.53
6.52
6.51
6,51
6.50
6.09
6.oe
6.08
6.07
6.06
6.C5
6.05
6.00
6.03
6.o2
6. Li
6.-1
6.00
6.39
6.38
6.36
6.37
6.36
6.35
6.35
6.30
6.33
6.32
6.31
6.31
6.30
6.29
6.28
6,28
6.27
6,26
6.25
6.25
6.20
6.23
6.22
6.22
7.73
5.62
5.62
5.6*.
5.6:
5.6C
5.55
5.55
5.5?
5.57
5.S5.5*
5.55
5.55.55.53
5.53
5.52
5.51
5. = :
5,5:
5.«-«
5,oc
S.t;
5.-7
5.07
5.06
5.«.5
5,t5
S.i5.-5.<o
5.«2
5.i2
5.c:
S.i?
5..-:
5,} =
5.35
5.3:
5.3?
5.3T
5. 3s
5,35
5.35
5.35.3 3
S.3I5.32
5.3:
5.31
5.3:
5.2 =
5.2*
5.2!
5.2*
5.2"
5.2r
5.2 =
5.2?
5.25.25.2 3
5.22
5.22
5.2L
5.?:
5.2:
5.: =
5,:5.12
6,-i
S37
- 4 We also believe that the mortgage interest tax credit
will act as an automatic stabilizer for mortgage credit over
the interest rate cycle. The present bad debt reserve
provisions for mortgage-oriented thrift institutions provide
the greatest return when profits are high, and the least
when profits are low, thus accentuating the volatility of
mortgage lending. On the other hand, the mortgage interest
tax credit changes with gross mortgage interest income;
therefore, it provides mortgage lenders with an increase
in effective after-tax yield when interest rates are highest,
and competition for funds is greatest, and it reduces this
stimulus when interest rates are low and funds are plentiful
for all purposes.
The Treasury Department has been seriously concerned
about the stability of the supply of mortgage credit. I
do not have to recite the familiar litany. We are all
familiar with the housing cycle, and with the unemployment
at one end and excessive inflation at the other. Instability
in housing has involved costs for the consumer, the
construction worker, and the supplier of construction
materials. The mortgage interest tax credit, by bringing
about greater stability in the flows of mortgage credit,
could have a signficant impact on the health of the whole
housing industry and all those associated with it.
Tax neutrality between competing depository financial
institutions is a desirable objective. We can move a long
way toward achieving this end, within the context of overall
financial reform, by substituting the tax credit for the
special tax preferences presently enjoyed by S&L's and
savings banks, in such a way as to compensate them for their
foregone special treatment while providing a statutorily
equal treatment for all investors. This can be accomplished
by the stepped rate of credit, which assures that mortgagespecializing institutions will receive a greater reward for
their efforts. In this regard, then, the MITC
(1) will induce S&L's and savings banks to
maintain their commitment to residential
mortgage lending as well as attract other
mortgage lenders, such as commercial banks,
by enhancing the attraction of mortgage
instruments; and
(2) will compensate S&L's and savings banks
for their foregone special tax preferences.
0a
The attached Table 3 shows our most recent estimates of the cost
of the mortgage interest tax credit, by type of mortgage lender.
The estimates allow for offsets from the elimination of the
present tax preferences, and because we have assumed continuing
portfolio growth with no change in portfolio composition,
which is our standard procedure for revenue estimation, the
estimates are probably conservative in the sense of being
outside estimates. If growth should be lower than the assumed
annual rates of 11 percent and the portfolio composition of
investors changes, the actual costs would be somewhat below
the present set of estimates.
In summary, Mr. Chairman, the mortgage interest tax credit
from the beginning has been viewed as necessary for the balance
and comprehensiveness of the reforms contained in the
Financial Institutions Act.
The FIA seeks to modernize our financial structure and to
correct its inability to function without excessive Federal
intervention during periods of high interest rates. Because
mortgage-oriented thrift institutions are unable to offer
depositors services or rates of return on deposits which would
enable them to compete with commercial banks and with nondepository institutions during periods of high interest rates,
they have increasingly been paralyzed by savings outflows,
and the residential mortgage market has been able to keep
functioning only through the intervention of Federal agencies
during these times. But even this, as a measure, has been
self-defeating, because to finance home mortgages, Federal
agencies have had to borrow in the capital markets creating
further upward interest rate pressures which have contributed
to the problems of the institutions.
The FIA is intended to remedy this situation by enabling
mortgage-oriented thrift institutions to compete more effectively,
allowing them to offer increased deposit and lending services,
and by improving their ability to pay more competitive rates
of interest on their deposits. While S&L's, and to a lesser
extent mutual savings banks, are expected to remain primarily
mortgage lenders, these broad objectives require that they be
allowed more portfolio diversification.
Table 3
Revenue Effects of Financial Institutions Act
(Tax Provisions Only) as Amended by Senate Banking Committee
1976
1977
1978
1979
19S0
+388
--642
-1-450
-791
-7
-348
4-485
; -877
' -4
-396
*+538
-974
-266
+417
-713
-10
"-306
+57
+60
+68
+77
-167
-110
-3 85
-125
-i65
•-206
-141
-229
-161
-254
-177
All others - mortgage credit:
1. Life insurance conpeni.es
2. Banks, etc
3. Individuals
-42
-81
-45
»47
-90
-50
-52
-57
-102
-114
•-64
-126
-56
-62
-69
"otal revenue change
•544
-618
-699
790
-872
Savings and loans:
1. Repeal section 593
2. I-'ortga^c credit
3. Cost of option J/
4. Net revenue change
....
:'ul:ual savings banks:
1. R?peal section 593
2. Mortgage credit
3. Net revenue change
,
,
-12
Office of the Secretary of the Treasury
Office of Tax Analysis
o
^436*
December 22, 1975
J,/This is the additional revenue cost of allowing institutions to retain
Section 593, in lieu of the credit,.in 1976-1979. It is assumed that only
20 percent of SL's, and no MSB's, will exorcise this option.
3/77
- 6 I should also like to point out that the beneficiaries
of the mortgage interest tax credit will ultimately be the
savers and the mortgage borrowers. Competition will achieve
that result. Both savers and mortgage borrowers are interestsensitive. Paying savers slightly higher interest rates will
attract savings flows, while reducing mortgage rates by
fairly small amounts will stimulate mortgage demand. By
allowing the institution to respond in a flexible manner,
consumers, whether in the guise of savers or borrowers, will
reap the benefit. Thus, the mortgage interest tax credit is
not simply a stimulus to housing, but an important element
of financial reform, which takes into account the interest
of the depositor as well as that of the borrower, and thus
assumes that residential housing will not be adversely affected
by the other elements of financial reform.
Throughout the introduction and debate on the financial •
institutions bill in the Senate and in the House, the Treasury
Department and other witnesses have testified to the
desirability of a balanced and comprehensive reform program.
Viewed as a part of the overall program of financial reform,
the mortgage interest tax credit is a necessary complement
to the expanded range of services to be offered to consumers,
savers, and home buyers.
0 0 0
573
Responses to Questions
377
1. What would be the annual gross revenue loss from the
proposed mortgage interest tax credit for the period
1977-81? How much of this loss would be offset by
revenue gains from repeal of excess bad debt loss
reserve provisions? Upon what assumptions are these
revenue estimates based? How reliable are these
assumptions?
A. Our most recent estimates are appended, as are the assumptions, on which the calculations were based. Perhaps
most important of the latter is the assumption that relative mortgage holdings and the supply and demand for
mortgage credit are unchanged by the credit. While this
is a standard procedure when projecting revenue estimates
it may overstate the- cost.
Although we do not have firm estimates, we do have reason
to believe that the mortgage demand of S&L's will be
reduced under the FIA, relative to the demand for other
assets. This would reduce the gross tax credit, as well
as the repeal of 593 offset. If the ratios of these
factors projected in the chart are used as a guide there
might well be a modest reduction in cost. In addition,
the estimates do not allow for secondary impacts, such
as later recovery of the credit after distribution to
depositors, or a reduction due to a probable decline in
mortgage rates below what they otherwise would have been.
On balance, the attached figures are most likely outside
estimates of the cost.
Revenue Effects of Financial Institutions Act
(Tax Provisions Only) as Amended by Senate Banking Committee
1978
1980
Savings and loans:
1. Repeal section 593
2. Mortgage credit
3. Cost of option JJ
4. Net revenue change
+388
~6^2
zll
-266
+417
-713
-10
-306
+450
-791
-7
-348
+485
1 -877
' -4
-396
Mutual savings banks:
1. Repeal section 593
2, Mortgage credit
3. Net revenue change
+57
z!3JL
-110
+60
--1S5
-125
+65
-206
-141
+68
-229
-161
+77
-254
-177
-42
-81
-45
-47
-90
-50
-52
-102
-56
-57
-114
-62
-64
-126
-69
-618
-699
-790
-872
All others - mortgage credit:
1, Life insurance companies
2. Banks, etc
3. Individuals
•
Total revenue change -544
Office of the Secretary of the Treasury
Office of Tax Analysis
' +538
-974
0
-436"
December 22, 1975
JL/ Tills is the additional revenue cost of allowing institutions to retain
Section 593, in lieu of the credit, .in 1976-1979. It is assumed that only
20 percent of SL's, and no MSB's, will exercise this option.
57^
Technical Notes on Estimates
of Revenue Effects of Financial Institutions Act
1. Growth rate. Residential mortgages held by private
financial institutions were $277.1 billion at the end of 1970,
and $409-1 billion at the end of September, 1974. (FRB,
Dec, '74, p. A-44.) This represents an annual growth rate
of 10.95 percent, which was rounded to 11 percent and used
whenever extrapolation was necessary in the entire project.
2. Effect of option. Estimates have been made independently for repeal of Section 593 and for the mortgage tax
credit on the assumption that both would take effect in 1976
for all taxpayers. But under the proposal, each taxpayer is
to have a choice of which of the five years 1976-1980 it
is to come under the new plan. The option is irrevocable
and becomes a requirement in 1980. Since taxpayers will
switch to the new plan only when they consider it favorable
to them, the option increases the revenue loss under the
Act.
For mutual savings banks, the credit is (in the aggregate)
three times as favorable as Section 593, and it is assumed
that all will change to the new plan at the first opportunity.
For savings and loan associations, the old plan is relatively
more attractive, and it is assumed that 20 percent of these
will postpone their election, in equal proportions, to 1977,
1978, 1979, or 1980. Further, the nonelecting companies are
assumed to save 10 percent more from Section 593 than they would
have saved from the credit.
These assumptions are arbitrary but they are apparently
not very sensitive, since the additional revenue loss caused
by the option works out to only $12 million in 1976.
3. All of these estimates refer to calendar year
liabilities.
4. It is assumed that FNMA and other Federal and related
agencies are ineligible for the credit.
5. Inconsistency with prior estimates. The effect of
Section 593 has been estimated before, both by OTA and by
the Joint Committe on Internal Revenue Taxation. The present
estimates are lower, for two reasons:
377
- 2 (a) The tax data from the 1971 Sourcebook were not
available when the earlier estimates were made, so the
"assumed base" could not be calculated. Instead, various
published "net income" series were used, with or without
various adjustments; and these proved to be too high.
(b) The "minimum tax" was not considered in the earlier
estimates. These estimates are therefore refinements of the
earlier ones and should be used in place of them.
6. Section 585 as alternative. Under the proposal,
thirft institutions disqualified from using Section 593 will
become eligible for Section 585, which now provides a tax
preference for commercial banks. However, the thrift institutions will derive no tax preference from Section 585, since,
for the remainder of this century, their reserves will exceed
the limits set by that section. Thus, the thrift institutions
will deduct only their actual bad debt losses.
7. Other assumptions were needed to make the Treasury
estimates consistent with those of'the Senate Banking Committee
Staff and the National Savings and Loan Study. These include
(1) a 3.75 percent rate of credit for S&L's corresponding
to a 77.5 percent of assets in qualifying mortgages and (2)
the eligibility of 6 0 percent of mortgage income received by
commercial banks and other financial institutions for the
credit.
?77
How much of the net tax reduction from the credit would
go to different types of financial institutions (savings
and loan associations, mutual savings banks, commercial
banks and others), and how would it be distributed by
size of institution?
The first part of the question was dealt with in the answer
to question No. 1. Although we have not dealt explicitly
with the size distribution of the credit, a National
Savings and Loan League study, conducted by Kenneth
Biederman, of Georgetown University and formerly of the
Treasury Department and JohnTuccillo of HUD, has estimated
the size distributional impact. Tables II-5 and II-6
from the summary report, "The Taxation of Financial
Intermediaries" (1975), attached, suggest that the tax
savings are relatively independent of size. All categories
receive an equal effective tax rate under the assumptions
of below average growth in assets with both low and high
rates of before tax income, and a 3.5 percent rate of
credit.
Table II-5
A Comparison of Average Tax Bills and Tax Rates for Savings and Loan Associations
Under the Bad Debt Allowance (Full Phase-In) and the Proposed Mortgage
Tax Credit, by Asset Size of Association, 1979 Levels
(Average Return on Portfolio = 7 Percent)a
[Below Average Growth in Assets—High Rate of Net Return)
Asset Size Class
($ millions)
Less than 10
Average Tax B i l l —
Bad Debt Allowance (BDA)
($000)
Average Tax Bill-Mortgage Tax
Credit (3-1/2%)
($000)
16.4
19.5
Tax R a t e —
Bad Debt Allowance (BDA)
(percent)
Tax Rate-Mortgage Tax
Credit (3-1/27
(percent)
29.2%
24.7%
10-25
54.1
45.8
29.1
24.7
25-50
117.0
98.3
29.4
24.7
50-100
223.7
189.8
29.1
24.7
100-250
485.2
406.9
29.3
24.7
More than 250
15S2.0
.363.5
28.8
24.7
^Source:
Sample of 1000 Associations, 1973 Dafya Base.
Notes: 1. These are projections based on t^ie assumption of continued activities similar to current portfolio
structure.
2.
No allowances rn^de Zor first $25,000 exemption from 26% corporate surcharge; therefore, all rates
on small associations marginally overstated.
3.
Figures dc not show minimum tax. Add about 10% to Tax Bill under BDA and 10-12% to Tax Rates undo.
BDA to reflect effect of minimum tax.
Table II-6
A Comparison of Average Tax Bil" i and Tax Rates for Savings and Loan Associations
Under the Dad Debt Aiiowa ,-e (Full Phase-In) and the Proposed Mortgage
Tax Credit, by A3, >t Size o^ Association, 1979 Levels 3
(Below Average Growth in Ass ts—Low Rate of Net Return
Asset Size Class
) ( * millions)
Less than 10
1G 25
~
Average Tax B i l l —
Mortgage Tax
Credit (3-1/2%)
($000)
Tax R a t e —
Bad Debt Allowance (BDA)
(percent)
Tax R a t e —
Mortgage Tax
Credit (3-1/2%
(percent)
5.6 29.0% 13.0%
35.6 16.1 . 28.8 13.0
25-50
76.5 34.5 28.8 13.0
5G 100
~
12.5
Average Tax B i l l —
Bad Debt Allowance (BDA)
($000)
147.7 66.7 28.8 13.0
:
°-250 318.3 143.7 28.8 13.0
More than 250
a_
source:
i06i.3
479.0
28.8
Sampxe of 1000 Associations, 1973 Data Base.
Notes: 1. These are projections based on assumption of continued activities similar to current portfolio
structure.
2. No allowances made for first $25,000 exemption from 26% corporate surcharge; therefore, all rates
on small associations marginally overstated.
3. Figures do not show minimum tax. Add about 10% to Tax Bill under BDA and 10-12% to Tax Rates undei
BDA to reflect effect of minimum tax.
13.0
How have the effective tax rates on economic income (as
defined in the 1968 Treasury Tax Reform Studies and
Proposals, pp. 458-75) for commercial banks, savings
and loan associations, and mutual savings banks changed
from 1967-76? How would these rates be affected during
the period from 1977-81 by the proposed mortgage interest
tax credit and the phase out of excess bad debt reserves?
Tables A-C based on the most recent consistent set of
financial statement definitions show effective Federal
income tax rates on insured commercial banks, insured
savings and loan associations and insured mutual savings
banks.
Over the period covered in the tables, savings and loan
associations averaged the highest "effective" income tax
rate, about 24 percent. Commercial banks averaged the
lowest "effective" tax rate of about 18 percent. Mutual .
savings banks averaged an "effective" tax rate in
between.
But it is important to keep these measures of "effective"
tax rate in perspective. The corporation income tax to
which all banks are subject is a tax only on the income
attributable to bank equity. That portion of the gross
income of banks—and of all corporations—which is paid
out to employees and to cover other operating expenses
becomes income taxable to these contributing factors of
production; and the income paid out to depositors and
other creditors of the banks becomes taxable income to
these individuals and firms. Only the residual is taxable
income of the banks, and the taxability of this portion
only varies with the tax rules for income measurement.
Due to the fact that banks characteristically finance
their asset holdings largely with funds supplied by
depositors, the corporation income tax wedge in the
gross income of banks--a cost which must be covered in
the rates and service charges levied by banks—is
exceedingly small. For savings and loan associations
this wedge, i.e., the tax burden on the totality of the
banks' activities, is running at only 2.5 percent, for
mutual savings banks 1.3 percent, and for commercial
banks about 2.5 percent. Mutual savings banks reflect
the smallest tax burden because these banks operate
with substantially smaller equity ratios, characteristically
allocating a larger share of gross income to depositors.
532f
3.
- 2 Corresponding to the estimates of increased revenue loss
resulting from the replacement of artificial bad debt
deductions by the MITC, it is to be expected that the
tax wedge, "effective" tax rates, on banks will shrink.
Part of this shrinkage will be absorbed in lower nominal
rates on mortgage loans, part in higher interest payments
to depositors and other creditors of banks. There is no
reason to believe that after-tax rates of return on equity
to banking institutions will be increased by the tax subsidy
to mortgage lending.
Table A
Income, Income Shares, and Income Taxes:
Insured Commercial Banks, 1969-74
1969
Gross Income: (millions)
Percentage distribution:
Administrative and operating expenses
Interest paid depositors & creditors
Income attributable to equity
Federal income tax
Net income after tax
$30,299
43.4%
37.7
i...;-
1970
$34,456
1971
1972
1973
1974
$36,710
$40,439
$52,994
$68,018
45.2%
35. a
19.0
45.1%
36. G
lu.3
44.2%
32.1
17.7
38.9%
45.7
15.4
36.0%
51.2
12.3
4.3
4.7
3.7
3.2
2.5
2.0
14.6
14.3
14.6
14.5
12.9
10.8
Federal income tax as percent of
income attributable to equity
22.5
24.7
20.3
18.0
16.4
15.5
Rate of return on equity (percent)
11.6
12.0
12.0
11.0
12.4
12.1
3.5
3.3
3.3
4.2
53
2.0
2.4
2.4
2.4
2.4
Return on total assets* (percent)
Provisions for loan losses as a
percent of gross income
Office of the Secretary of the Treasury
Office of Tax Analysis
1.7
February 21, 1976
<
-
Source: Annual Report of the Federal Deposit Insurance Corporation.
*Gross Income less operating and administrative expense divided by total assets.
Table B
Income, Income Shares, and Income Taxes:
Insured Mutual Savings Banks, 1969-74
1969
Gross Income: (millions)
Percentage distribution:
Administrative and operating expenses
Interest paid depositors & creditors
Income attributable to equity
Federal income tax
Net income after tax
$ 3,523
:
1970
$ 3,754
:
1971
$ 4,471
13.770
80.0
6.3
0.4
5.9
14.8%
80.1
5.1
0o7
4.4
14.27G
76.6
9.2
1.4
7.7
6.3
13.0
15.7
1972
:
1973
:
1974
$ 5,280 $ 5,973 $ 6,335
14.1% 14.6% 15.1%
75.5
74.8
9.9
11.1
78.7
2.1
9.1
1.9
8.0
6.2
1.3
5.0
18.5
19.4
20.3
Rate of return on equity (percent) 4.4 3.4 6.6
8.4
7.6
4.8
Return on total assets* (percent) 4.8 4.8 5.2
5.5
5.6
5.7
.1
0.2
0.2
Federal income tax as percent of '
income attributable to equity
Net loan losses as a percent of
gross income
<0.1
<9.1
0.1
Office of the Secretary of the Treasury
Office of Tax Analysis
February 21, 1976
Source: Annual Report of the Federal Deposit Insurance Corporation.
*Gross Income less operating and administrative expense divided by total assets.
^
^
Table (J
Income, Income Shares, and Income Taxes:
Insured Savings and Loan Associations, 1971-74
1971
Gross Income: (millions)
Percentage distribution:
Administrative and operating expenses
Interest paid depositors & creditors
Income attributable to equity
Federal income tax
Net income after tax
1972
1973
1974
$12,833
$15,323
$18,392
$21,102
17.87.
69.2
13.0
2.8
10.2
17.4%
68.2
14.4
3.4
11.0
17.8%
68.5
13.7
3.4
10.3
17.9%
72.6
9.5
2.5
7.0
Federal income tax as percent of
income attributable to equity
21.5
23.5
24.7
26.4
Rate of return on equity (percent)
10.1
11.5
11,5
8.3
Return on total assets* (percent)
5.3
5.4
5.7
6.0
Net loan on losses as a percent
of gross income
N.Ao
0.2
0.3
0.4
Office of the Secretary of the Treasury
Office of Tax Analysis
*?pross Income less operating and administrative expense divided by total assets.
()ate prior to 1971 not available on a comparable basis.
Source: FSLIC - Insured savings and loan associations, combined financial statements;
net loan losses unpublished data.
February 21, 1976
What would be the impact of the Financial Institutions
Act regulatory reforms on mortgage lending, housing,
housing production, costs to home buyers, and cyclical
fluctuations in the housing industry? How would this
impact be modified by the proposed mortgage interest
tax credit (and the phaseout of excess bad debt reserves)?
Would there be a difference between the impact in the
short run (2-3 years) and the long run (5-10 years)?
The regulatory reforms (expanded asset and liability
powers) are intended to break mortgage-oriented thrifts
free from the boom and bust instability in their savings
flows occasioned by shifts in monetary policy and the
economy. As a result:
(1) the impact on mortgage credit would be to
reduce its volatility and increase its general
availability as sharp swings in savings flows
are reduced;
(2) the impact on housing fluctuations would
be to moderate them through a more constant
availability of mortgage credit at moderate rates;
and
(3) the impact on housing production and costs
to homebuyers would be to stabilize production
and reduce those costs resulting from the
unemployment of resources and the elimination
of firms during housing recessions and the consequent shortages of men and materials during
construction booms.
The increased deposit stability would be achieved through
a greater portfolio diversification on the part of
mortgage-oriented thrift institutions. Although we do
not anticipate a reduction in the overall supply of
mortgage credit as a consequence, it remains a possibility.
The MITC would nullify this likelihood by broadening the
base of mortgage supply and increasing the effective
yields on mortgages to investors. This would enable
S&L's and savings banks to maintain their mortgage
commitment more advantageously, and would encourage a
greater degree of mortgage investment from commercial
banks, other financial institutions and individuals.
The phasing out of the bad debt reserve tax preference
would restore tax neutrality between competing financial
institutions. The rate of tax credit has been calculated
to compensate S&L's and MSB's for the reduced incentive
to invest in residential mortgages resulting from the
elimination of this measure.
Our best estimates of the long run impact as compared to
the short run are derived from the simulations performed
by Patric Hendershott for HUD. He found that both short
run and long run impacts would be stimulative, especially
the former. His simulations dealt explicitly only with
the long run impacts — the post transition period.
ssr
5. Would the proposed mortgage interest tax credit be more
or less effective in encouraging mortgage lending than
the present excess bad debt loss provisions?
A. There are several reasons to believe the MITC to be
superior to the present set of tax preferences. First,
the mortgage interest tax credit would lead to a greater
stability in the flow of mortgage credit than the present
bad debt loss provision. The latter provides an incentive
for S&L's to increase their mortgage lending when profits
are high. Since periods of high profitability typically
occur when short-term yields are low relative to longterm yields, this incentive comes when it is least needed,
and can add to the instability of mortgage flows. The
mortgage interest tax credit, on the other hand, since
it is a percentage of the gross interest income received
from mortgage lending, increases in value to S&L's as .
interest rates rise and decreases in value as interest
rates fall.
For example, an S&L with a portfolio containing 8 0
percent residential mortgages would find that under
the mortgage interest tax credit a mortgage with a
contract rate of 7 percent would actually have an
effective before-tax rate of 7.52 percent, a gain of 52
basis points. If interest rates were to rise so that
the same S&L were to receive a contract rate of 10
percent on its mortgage loan, the effective before-tax
yield on that mortgage would be 10.74 percent, a gain
of 74 basis points, and an increase of 22 basis points
over the 7 percent loan. In short, the tax credit makes
residential mortgages a relatively more attractive investment when interest rates are high, thus tending to
stabilize the flow of mortgage lending.
Ralated to this point is the fact that the MITC raises the
effective after-tax yields of mortgages., making them more
competitive with other types of investment. The incentive
varies with the tax rate, the contract rate of interest,
and the share of total assets of the investor devoted
to qualified residential mortgages. Table 1 shows the
before-tax yields on alternative investments that would
be necessary before they would be competitive with
mortgages of comparable risk and maturity and of given
nominal yields (contract rates) for the range of possible
portfolio shares.
- 2 The mortgage interest tax credit presents a strong additional
incentive for S&L's to maintain their traditional mortgage
lending roles. For each percentage of total assets that
residential mortgage loans fall below 8 0 percent, the rate
of credit decreases by 1/30th of 1 percent, and it decreases
to zero if qualified mortgage loans drop below 10 percent
of total assets. This is a powerful incentive to stay in
mortgage lending, since each 1/30th of a percent reduction
applies not only to the interest earned on the foregone
mortgage loans, but to the interest earned on the mortgages
remaining in the portfolio as well. For example, suppose
an S&L is at 8 0 percent qualified residential mortgage loans
in its portfolio, and that all such loans bear a contract
rate of interest of 9 percent. The effective before-tax
yield on each of the loans would be about 9.66 percent,
of which 66 basis points can be attributed to the MITC.
If there is a reduction in mortgage holdings of 1 percent
of total assets, the 9.66 percent on that 1 percent of
portfolio is foregone, of course. In addition, .57 basis
points is foregone on the remainder of the residential
mortgage portfolio, which multiplied by 7 9 percent of
total assets gives about 46 additional basis points which
must be added to the value of the foregone mortgages.
Thus, instead of foregoing an effective 9.66 percent
yield, the S&L is effectively foregoing mortgages with
a 10.12 percent yield.
Table 2 summarizes this additional incentive to hold
mortgages by share of portfolio and by contract rate
or nominal yield, under the simplifying assumption
that all mortgages in the portfolio carry the same rate
of interest. Not only is it a disincentive for institutions to disinvest, it is also a powerful incentive for
financial institutions to acquire residential mortgages.
Table 1
Effective Before-Tax Yield on Residential Mortgages Due to
the Mortgage Interest Tax Credit
Nominal' Yield on Mortgages
OPO*T10*<
12
12.06«
12.676
12.068
12.461
12.653
12.B«5
12.030
12.»J0
12.«?2
12.815
12.807
12.799
12.79?
12.700
12.776
12.760
12.761
12.753
12.705
12.736
12.730
12.722
12.715
12.707
12.699
12.692
12.600
12.67ft
12.660
12.661
12.653
I?,60S
12.636
12.630
12.622
12.615
12.607 '
12.599
12.592
12.5*0
12.576
12.566
12.561
12.553
12.565
12.536
12.530
12.522
12.515
12.507
12.099
12.092
12.004
12.476
12,066
12.061
12.053
12.045
12.t36
12.030
12.022
12.015
12.007
12.399
12.392
12.360
12.376
12.366
12.36]
12.353
12.30S
lc
10
11
11.81
ll. ao
n . eo
11.79
11.76
11.77
11.77
11.76
11.75
IS. 7S
II. 74
11.73
11.73
11.72
11.71
11.70
11.70
11.69
11.60
11.6*
11.67
11.66
11.66
11.65
11.60
11.63
11.63
11.62
11.61
11.61
11.60
11.59
11.58
11.50
11. S7
11.56
11.56
11.55
11.54
11.54
11.53
11.52
11.51
11.51
11.50
11.09
11.09
11.00
11.47
11.06
11.06
11.45
11.40
11.44
11.43*
11.42
U.o2
11.01
11. oO
11.39
11.39
11.36
11.37
11.37
11.36
11.35
11.34
11.30
11.33
11.32
11.32
10. 74
10.73
10.72
10.72
10,71
10.70
10.70
10.69
10.69
10.66
10.67
10.67
10.66
10,65
10.65
10.64
10.63
10.63
10.62
10.61
10.61
10.60
10.60
10.59
10.56
10.56
10.57
10.56
10.56
10.55
10.54
10.54"
10.53
10.52
10.52
30.51
10.51
10.50
10,49
10.O9
10,48
10,47
10.47
10.O6
10.45
10.45
10.£4
10.04
10.43
10,42
10,42
10.41
10.40
10.40
10.39
10.38
10.30
10,37
10.36
10.36
10.35
10.35
10.34
10.33
10.33
10.32
10.31
10.31
10.30
10,29
10.29
e of the Secretary of the Treasury
Office of Debt Analysis
9,66
9.66
9,65
9,65
9,64
9,63
9,63
9,62
9,62
9,61
9.61
9.60
9,59
9.59
9.58
9.56
9.57
9.56
9.56
9.55
9,55
9.54
9,54
9.53
9.52
9.52
9.51
9,51
9.50
9.50
9.49
9,48
9.48
9.47
9,47
9,46
9,46
9.45
9,44
9,04
9,03
9,43
9.42
9,41
9.41
9,40
9,40
9.39
9.39
9.38
9.37
9.37 :
9.36
9.36
9.35
9.35
9.34
9.33
9.33
9.32
9.32
9,31
9,31
9.30
9.29
9.29
9.?8
9.26
9.27
9.26
9.26
.
6,59
8.56
6,58
6,57
8,57
6,56
6.56
6.55
6.55
6.54
6.54
8.53
6.53
6.52
8.52
6.51
6.51
8.50
8.50
6,49
6.49
6.48
6,46
8,«7
6,47
6,46
6,46
8.45
6.45
6,44
fi.oo
6.43
6.43
6.42
0.41
6,«1
6.40
6.40
8.39
8.39
6,38
6,36
6,37
6.37
6.36
6.36
8,35
6.35
6,34
8,30
6.33
6.33
8.32
8.32
6.31
8.31
8.30
6.30
0.29
6.29
6.28
6.28
6.27
6.27
6.26
6.26
ft.25
6.25
e.24
8,24
8.23
,
7.52
7.51
7.51
7.50
7.50
7.49
7,49
7,48
7,46
7.48
7.47
7.47
7.46
7.46
7.45
7.45
7.44
7,44
7.43
7.43
7.43
7.42
7.02
7,oi
7.41
7.40
7.40
7.39
7.39
7.39
7.38
7.36
7.37
7.37
7.36
7.36
7.35
7.35
7.35
7.34
7.34
7.33
7.33
7.32
7.32
7.31
7.31
7.30
7.30
7.30
• 7.29
7,29
7.26
6.44
6.44
6.43
6.43
6.43
6.42
6.42
6.41
6.41
6.41
6.40
6.40
6. 00
6.39
6.39
6.36
6.36
6.36
6.37
6.37
6.36
6.36
6.36
6.35
6.35
6.35
6.34
6,30
6.33
6.33
6.33
6.32
6.32
6.31
6.31
6.31
6.30
6.30
6.30
6.29
6.29
6.26
6.28
6,26
6.27
• 6.27
6.26
6.26
6.26
6.25
6.25
6.25
6,24
7,28
7.27
7.27
7.26
7,26
7.26
7.25
7.25
7.24
7.24
7.23
7.23
7.22
7.22
7.21
7.21
7.21
7.20
6.24
6.23
6.23
6.23
6,22
6.22
6.21
6.21
6.21
6.20
6,20
6.20
6,19
6.19
6.16
6.16
6,18
6.17
5.37
5.37
5.3t
5.3b
5.36
5.35
5.35
5.35
5.35.35.3S.33
5.32
5.33
5.32
5.3?
5.32
5.31
S.J:
5.31
• 5.3C
5.3C
5.3:
5.2?
5.2e
5.25
5.25
5.2:
5.2'
5.26
5.27
5.27
5.2?
5.26
5.26
5.2©
5.2 =
5.25
5.2 =
5.2*
5.25.2;
5.23
5.23
5.23
5.22
5.22
5.22
5.21
5.21
S.21
5.2C
5.2C
5.2C
5.2C
5.:c
5.1S
5.15
5.16
5. IS
5.1 =
5.17
5.17
5,17
5.16
5.:t
5.:t
5.15
5.15
5.15
5.1.
SZI
Table 2
Effective Before-Tax Yield on Residential Mortgages with a MITC
and Allowing for the Portfolio Iirpact
...._/_.
Nominal Yield on Mortgages
PROPORTION 1
12
k
13,49
80
13.46
79
78
13."*
13.05
77
13.4]
76
13.41
75
13,«0
74
13.36
73
13.37
72
13,35
71
13,34
70
13.32
69
68
13.31
13.29
67
13.28
66
13.26
65
60
13.25
13.23
63
62
13.21
13.20
61
13.16
60
13.17
59
13.15
56
13.14
57
13.12
56
55
13.11
13.09
54
13.08
53
13.06
52
13,05
51
13,03
50
13,01
C9
48
13,00
12.98
47
12,97
46
12.95
45
12.94
44
12.92
43
12.91
02
12.69
41
12.68
40
12,So
39
33
12.65
37
12.63
12.81
36
12.60
31
12.78
34
12.77
33
12,75
32
12,74
31
12.72
30
12.71
29
12.69
26
12.66
27
12.66
26
12.65
25
24
12.63
12.61
23
12.60
il
12.53
21
12.57 "
20
19
12.55
12,50
16
12.52
17
12,SI
16
12,49
15
12,46
10
12.06
13
12,45
12
12.43
11
10
15.45
u
*
10
12.37
12.35
12.34
12.32
12.31
12.30
12.26
12.27
12.25
12.2«
12.23
12.21
12.20
12.18
12.17
12.16
12.14
12.13
12.11
12.10
12.09
12.07
12.06
12.04
12.03
12.01
12.00
11.99
11.97
11.96
11.94
11.93
11.92
11.90
11.69
11.67
11.86
11.85
11.53
11.62
11.60
11.79
11.77
11.76
11.75
11.73
11.72
11.70
11.69
11.65
11.66
11 .65
11.63
11.62
11.61
11.59
11.58
11.56
11.55
11.54
11.52
11.51
11.49
11.48
11.46
11.45
11.44
11.42
11.41
11.39
14.17
11,24
11.23
11.22
11.20
11,19
U.ie
11.17
11.15
U.io
11.13
11.11
11.10
11.09
11.08
11.06
11.05
11.04
11.02
11.01
11.00
10,99
10.97
10.96
10,95
10,94
10.92
10,91
10.90
10.86
10.67
10.66
10.85
10.83
10.82 '
10.61
10.79
10.76
10.77
10.76
10,74
10.73
10.72
10.70
10.69
10,68
10,67
10.65
10.64
10.63
10.61
10.60
10,59
10.58
10,56
10,55
10.54
10.52
10.51
10.50
10.49
10.47
10,46
10,45
10.44
10,42
10.41
10,40
10.38
10.37
10.36
12.68
10.12
10.11
10.10
10.08
10.07
10.06
10.05
10.04
10.03
10.01
10.00
9.99
9.96
9,97
9.96
9.9S
9.93
9.92
9.91
9.90
9.69
9.68
9.86
9.85
9.84
9,63
9.82
9.81
9.60
9.76
9.77
9.76
9.75
9.74
9.73
9.71
9.70
9.69
9.66
9.67
9.66
9.65
9.63
9,62
9.61
9.60
9.59
9.56
9.56
9.55
9,54
9.53
9.52
9.51
9.50
9,48
9,47
9.46
9.45
9,44
9,43
9.41
9,40
9.39
9.38
9.37
9,36
9.35
9.33
9.32
11.59
Office of the Secretary of the Treasury
Office of Debt Analysis
8,99
6.96
8,97
6.96
8.95
8.94
8.93
8.92
8.91
8,90
8.69
6.68
6.87
6,66
6.65
6.84
8,63
6.82
6.81
6.60
6.79
6.78
6.77
6.76
6,75
6,74
8.73
8.72
6.71
6,70
6.69
8.66
6.67
6,66
8.65
6,64
6.63
6.61
6.60
6.59
6.58
6.57
6.56
6.55
6.54
8,53
•r.fz
8.51
6.SO
* 8.49
8.46
e,47
6,46
8.45
6,44
6.43
6.02
8.41
e,4o
8,39
• 8.38
6,37
6.36
8.35
8,34
6.33
8.32
6,31
8,30
8.29
10,30
7.67
7.86
7,85
7.64
7.83
7.63
7,62
7,61
7.80
7.79
7,76
7,77
7,76
7.75
7.74
7.70
7.73
7.72
7,71
7.70
7.69
7,65
7,67
7,66
7.65
7.65
7.64
7.63
7.62
7,61
7,60
7,59
7.56
7,57
7,56
7.56
7.55
7.54
7.53
7.52
7,51
7.50
7.49
7.48
7.48
7.«7 "
7.06
7.45
7,44
7.03
7.42
.7.41
7.«0
7.39
7.39
7,36
7.37
7.36
7.35
7.34
7.33
7.32
7,31
7,30
7,30
7,29
7.28
7,27
7.26
7.25
9,01
6.75
6,74
6.73
6,72
6.71
6.71
6.70
6.69
6.66
6.66
6,67
6.66
6.65
6.65
6.64
6.63
6.62
6.62
6.61
6.60
6,59
6.58
6,5*
6.57
6.56
6,55
6.55
6.54
6.53
6.52
6.51
6.51
6.50
6.U9
6,46
6."6
6.47
6.46
6.C5
6.05
6. til
6.03
6,o2 "
6,'2
fc.-l
6.00
6.39
6.36
6.36
6.37
6.36
6.35
6,35
6.34
6.33
6.32
6.31
6.31
6.30
6.2'
6.26
6.26
6.27
6.26
6.25
6.25
k.l6.23
6.22
6,22
7.73
5,62
5,fcJ
5,f.
5.6:
S.fcC
5.5;
5.5!
5.5?
5.57
5.5*
5.5s
5.55
5,5.
5.5;
5.55
5.53
5.52
5.5:
5.5:
5.5:
5,n
5.t;
5.-7
5,t7
5.^
5.^
5.^5
5.-5.:i,H
5.42
5.-J
5,f.
5,t:
5.>-:
5.:-:
5.3 =
5.3:
5,37
5.37
5.3:
5,35
5.35
5.35.33
5,3;
5.32
5.3:
5.3:
5.3:
5.2=
S,2«
5.2!
5.215,2"
5.2s
5.2:
5.2?
5.25.25,2;
5.22
5. cl
5.2'5.?:
5.25,::
5.:;
s.'.i
6,-
What would be the impact of the mortgage interest tax
credit on the mortgage holdings of savings and loan
associations, mutual savings banks, and commercial banks?
In the absence of the other measures it would increase
them. However, for the S&L's and MSB's, the MITC as
nroposed would be accompanied by the elimination of the
present bad debt loss reserve, which would increase the
attraction of tax exempt investment as an alternative
for these institutions. Partly as a consequence of
this and oartly due to the other provisions of the FIA,
they would be likelv to reduce their relative holdings
of residential mortgages. Under these circumstances
and allowing for the new investment powers of the FIA,
the impact of the MITC would be to prevent their mortgage holdings from declining too rapidly or too far,
and would provide them with additional income with
which to attract deposits. T-Tith sufficient asset
growth their mortgage holdings might even increase,
although the relative share declined.
The MITC is intended to induce other financial institutions to fill the potential gap by increasing their
particiDation in mortgage lending. We estimate that
commercial banks, by simply bringing themselves up
to the 10 percent of assets level could increase their
mortgaae holdings by at least $10-15 billion, after
which their mortgage holdings should continue to grow
at the same rate as the remainder of their portfolio
If we assume that insured commercial banks' total assets
of $912.5 billion on December 31, 1974, grow by a rate
of 9.8 percent, then between 197 6 and 19 80 banks would
add about $10 billion in new residential mortgage
loans which could be directly attributed to the tax
credit.
How much of the credit would be passed on to home
buyers in the form of lower interest rates? How
would this benefit to home buyers be distributed
among individuals in different income classes? How
much of the credit would be retained by financial
institutions in the form of higher earnings?
Because there is some reason to believe that the demand
for mortgages is relatively more interest-elastic than
the supply there will be more impact on the volume of
mortgage lending than on the rates. We expect rates
to fall" moderately (on the order of 25 basis points),
based on the Hendershott study while the flow of mortgage credit is smoothed out. Since the mortgage rate
is set by the last transaction to occur during a period
of time, we expect the bulk of the credit to be passed
to the institution in the form of higher earnings.
From there much of it should flow to depositors in the
form of increased services and to mortgage borrowers
in the form of extended availability of credit, even
when earnings fall.
£Z?
8. Is a subsidy which goes to mortgage lenders more or
less effective in encouraging additional housing
production than a subsidy which goes directly to
home buyers?
A. This would depend on the relative elasticities of
supply and demand for mortgage credit and the
elasticity of demand for time deposits at mortgageoriented thrift institutions. Experience leads us
to believe that the demand for time deposits is
strongly interest elastic (e.g., the periodic crises
of disintermediation) and that the demand for mortgage
credit is more interest elastic than the supply, the
latter largely determined by the volume of savings
flows and future expectations concerning these flows.
If such is the case then the institution is the
logical recipient of the subsidy, where the competing
forces of savings demand and mortgage credit demand
will jointly determine savings rates and mortgage
rates that are at the respectively highest and lowest
levels to maximize mortgage flows.
If the credit were made refundable (i.e., payable
whether or not the institution had tax liability),
how much additional mortgage lending could be expected
by pension funds, life insurance compaines, and other
investors with little or no tax liability? What
would be the additional revenue loss from making the
credit refundable for the period 1977-81?
Life insurance companies and pension funds have been
disinvesting in residential mortgages during the past
10 years, especially in 1-4 family home mortgages.
It is not at all clear to us that simply making the
tax credit refundable would have any impact at all.
The attached table presenting historical data on the
share of residential mortgages at these institutions
and the corporate bond rate - residential mortgages
rate spread illustrates the basis for our concern.
A substantially higher subsidy could well be needed
before any reversal of the historical trend would be
noted.
327>
Nondepository Financial Participation hi in the
Residential Mortgage Market
:
:
Private
pension
:
funds *V
:
sar
:
Life
insurance
:
;
State
and local gvt.
retirement
funds 2/
: Mortgage rate : corporate bond
. rate spread 3/
: (basis points)
1965
23.5
4.5
11.3
40
1966
23.5
5.2
12.1
37
1967
22.7
4.6
12.1
11
1968
21.5
4.0
11.6
1
1969
20.7
4.1
11.5
- 25
1970
19.9
3.9
11.7
- 41
1971
18.0
2.8
11.0
- 57
1972
16.0
1.9
9.4
- 39
1973
14.9
2.0
8.2
-
1974
14.2
2.3
7.4
- 58
8
Office of the Secretary of the Treasury
Office of Debt Analysis
V Residential mortgage holdings as a percent of assets.
2/ Residential mortgage holdings as a percent of financial assets only.
V FHA mortgage yields and new "A" utility bonds.
:)0urce:
Life Insurance Fact Book, Institute of Life Insurance, Federal Reserve
Flow of Funds, Salomon Brothers, An Anatylical Record of Yields and
Yield Spreads.
Could modifications be made in the mortgage interest
tax credit to make it a more effective device to
encourage lending? Would a flat rate credit (i.e.,
a credit which did not have a higher rate for institutions
with a higher percentage of their holdings in mortgages)
be more or less effective in encouraging mortgage lending
than the present sliding rate credit?
There are certainly ways in which the MITC could be
made more cost effective, although some of them
might prove to be difficult to administer. For example
a tax credit
1. could be targeted towards different types
of institutions with the rates of credit
and steps (if any) chosen to elicit the
greatest response from each,
2. could be keyed to an index of disintermediation, such as the Treasury 6-month
bill rate — 5 year note rate spread,
which would ensure that it would only
be available when needed, or
3. could have floating rates that vary not
only with the share of residential mortgages
in the portfolio, but also with a disintermediation index.
This is by no means an exhaustive list.
A flat rate credit would be an inferior device, because the
strong marginal incentive to invest in residential mortgages
(or to refrain from disinvesting excessively) would be lost.
Because any increase in effective before-tax yield resulting
from the tax credit as a consequence of increasing the
residential mortgage portfolio share would also go to
income derived from all other residential mortgages,
it might add in the neighborhood 30-4 0 of basis points
to the yield on the last investment undertaken. Not
only would this marginal incentive be lost under a flat
rate system, but those who specialized less heavily
would be rewarded as well as those who specialized
more so, which might call up questions of equity.
Should the credit (or any alternative subsidy for
mortgage lending) be limited to mortgages for low
and middle income home buyers and/or for low and
medium-priced homes?
It is not clear to us that limiting the MITC to low
and middle income home buyers or for low and medium
priced homes would result in a relative increase in
the number of such homes. We believe that such a
scheme would quickly result in the mortgage rates
for other home buyers or homes being raised to
competitive levels.
In addition, such a provision would prove to be
difficult to enforce. There would be problems in
choosing an equitable standard of income or price,
and in policing home buyers and builders, who would
certainly devise methods of achieving a superficial
compliance with whatever regulations were set out,
while actually responding to conditions determined
by the workings of the housing and mortgage markets.
^7
Should the credit (or any alternative subsidy) be limited
only to new mortgage lending over and above the level of
mortgage lending done previously by an institution, i.e.,
additional or new incremental lending?
While this appears to be desirable on the surface, we
believe that it would be difficult to enforce in practice.
In particular there would be a rush of "re-financings"
which would be difficult to police properly.
An alternative might simply be to phase in a certain
percentage of the credit each year until portfolios
consisted only of "new mortgages." This however would
rob the MITC of its primary appeal — the impact it
would have on a new mortgage investment, and would be
likely to induce further complexity by forcing us
to phase out the present tax preferences as a consequence.
37*
Are there nontax alternatives that would be more effective
and/or equitable in encouraging mortgage lending, increasing
housing production, reducing costs to home buyers, and
smoothing out the cyclical fluctuation in the housing
industry?
Nontax alternatives do exist. For example a direct subsidy
of mortgage credit, either as a one time payment to the
originator or as an annual payment to the holder is one
possibility. An expanded GNMA tandem program might be
another. Subsidies could be scaled much like the MITC.
The presumption would be, however, that in the absence of
a tax credit thrifts would retain their present tax
preferences.
As to whether direct subsidies would be as cost effective
as the MITC, we have no evidence proving clear superiority
of either approach. We believe the MITC would be a less
expensive method because we would be able to eliminate
the present tax preferences in the process. But it is
possible that they could be eliminated under some sort
of stepped subsidy arrangement; then the subsidy would
have the additional advantages of periodic review and
appropriations.
If a goal of tax policy is to provide for equal or
uniform tax treatment of financial institutions,
is the proposed mortgage interest tax credit an
appropriate mechanism for doing so? Would other
tax changes be more effective and/or equitable?
The mortgage interest tax credit moves in the right
direction by making more equal the rules under which
financial institutions operate. The structure of
the mortgage interest tax credit itself gives a larger
tax benefit to institutions holding a greater portion
of assets in residential mortgages. Thus, the structure
of the credit itself is not entirely neutral among
financial institutions.
Treasury has always favored a uniform tax system based
on standard income accounting. As noted in the answer,
to question 3 Federal income taxes are such a small
portion of gross income that virtually undetectable
changes in interest payments or charges would be
required to adjust to a tax change. Thus, a question
worthy of consideration by Congress is the degree
of exceptional treatment that should be given to
financial institutions.
^
Should the present tax treatment of bad debt loss reserves
of savings and loan associations and mutual savings banks
be continued?
One purpose of the bad debt reserve provision granted
savings and loan associations and mutual savings banks
was to encourage the growth of these institutions
specializing in mortgage loans.
One of the intentions of the Financial Institutions Act
is to diversify the sources of mortgage loans and other
services among financial institutions, encouraging
competition in the financial industry and protecting
against the disruptions of disintermediation. Phasing
out artificial bad debt loss provisions is a means
of achieving this objective.
^73
If commercial banks currently receive tax advantages
not available to savings and loan associations and mutual
savings banks, could tax equity be achieved by reducing
the tax advantages of commercial banks? What tax changes
should be considered?
It is not clear that commercial banks do receive significa
tax advantages not available to savings and loan association:
and mutual savings banks excepting an ability to invest
in tax-exempt securities which is not fully available to
savings and loan associations. The percentage method of
calculating commercial bank bad debt reserves is still
less favorable than the bad debt allowances provided the
thrift institutions.
^7
17.
If the mortgage tax credit were enacted, should commercial
banks be permitted to retain their "excess" bad debt allowances through 1987 and also receive the credit, while
savings and loan associations and mutual savings banks are
required to give up their excess bad debt reserves in
exchange for the credit? In light of the recent increase
in bad debt losses experienced by commercial banks, will
the "percentage method" of calculating commercial bank
bad debt reserves (1.2 percent of eligible loans through
1981, then 0.6 percent until 1988) continue to permit bad
debt allowances in excess of actual losses calculated
under the "experience method"?
A. The mortgage interest tax credit is structured to provide
a higher rate of credit to financial institutions as they
hold a greater portion of their assets in the form of
residential mortgages. This will tend to encourage savings
and loan associations and mutual savings banks to continue
to hold mortgages, and to the extent they do, their taxability will be less than that of commercial banks.
Whether commercial banks should be permitted to retain
their "excess" bad debt allowances or otherwise be
accorded equalizing tax preferences is a policy question
which Congress may wish to consider on its merits.
Recent bad debt losses of commercial banks yield amounts
that are still below tax allowances based on the percentage
of eligible loans method referred to in the question.
Attached is a preliminary analysis on "Tax Treatment
of Income from International Shipping," prepared by the
Office of International Taxation, for consideration by the
House Ways and Means Committee Task Force on the Taxation
of Foreign Income.
The analysis does not represent an Administration
position and does not contain recommendations. Recommendations
from the Treasury Department are expected to follow at a later
date, after consultation with other agencies of the Executive
Branch.
The attached preliminary analysis is the first in a
series of five or six similar studies being prepared for the
Ways and Means Task Force on foreign income taxation. Topics
of the studies being prepared include State Taxation of
Foreign Source Income, Income of Private Employees earned
abroad, Tax-Free Allowances of Federal Employees Abroad,
Deferral of U.S. Tax by Foreign Subsidiaries of U.S. Corporations,
Limitations on the Use of Excess Foreign Tax Credits, and Expropriation Gains and Losses.
0O0
WS-672
Tax Treatment of Income
from International Shipping
Department of the Treasury
February 1976
jn^
PREFACE
This preliminary analysis was prepared by
Marcia Field and Richard Gordon of the Office
of International Tax Affairs for consideration by
the House Ways and Means Committee Task Force on
the Taxation of Foreign Income.
The analysis does
not represent an Administration position and does
not contain recommendations.
It is anticipated
that the Treasury Department will make recommendations at a later date, after consultation with
other agencies of the Executive branch.
TABLE OF CONTENTS
I.
Introduction
Part A: Reciprocal Exemption
II. Issue
III. Present Law
1. Equivalent exemption
2. Treatment of income which does not
qualify for reciprocal exemption
IV. Analysis
1. Impact on ocean freight rates
2. Rationale and effect of the exemption
3. Source rules and administrative aspects
4. Competitive and treaty implications
V. Options
1. Retain present law
2. Change the flag test to a residence
test
3. Require a dual test
4. Repeal the statutory exemption
VI. Revenue Estimates
Part B:
Tax Deferral
VII. Issue
VIII. Present Law
IX. Analysis
1. Reasons for foreign incorporation
2. Modifications to subpart F in 1975
3. Effect of including shipping income
within subpart F
X. Options
1. Retain present law
2. Remove shipping income from subpart
F as foreign base company income
3. Include foreign shipping income under
subpart F as foreign base company
income
4. Revise the substantial reduction test
XI. Revenue Estimates
I.
INTRODUCTION
The broad issue of what changes, if any, should be
made in the taxation of income from international shipping
operations has two aspects.
The first aspect concerns the
statutory exemption from U.S. income tax, on the basis
of reciprocity, of foreign flag ships which engage in
traffic to and from U.S. ports.
This aspect also involves
consideration of how U.S. tax is imposed on those foreign
flag ships which do not qualify for the exemption.
The second aspect concerns U.S. taxation of foreign
shipping corporations which are controlled by U.S. shareholders, whether or not they engage in traffic to and from
U.S. ports.
This aspect focuses on the deferral of U.S.
tax for U.S. shareholders of controlled foreign corporations .
In formulating a coherent policy for the taxation
of international shipping income the two aspects should
be viewed together.
However, since each raises distinct
issues, they are considered separately in Parts A and B
of this paper.
£?/
- 2 PART A: RECIPROCAL EXEMPTION
II. ISSUE
The issue is whether the statutory exemption from
U.S. income tax of ships registered in foreign countries
which provide an "equivalent exemption" to U.S. citizens
and corporations should be repealed or amended.—'
The exemption is a departure from the general rules
of taxing income from international business activities.
Under the general rules, the country in which the business operations are conducted is granted the prior right
to impose tax and the country of residence is granted
the residual right. Since international shipping is likely
to involve many countries in the course of a year, reserving the exclusive right to tax to the country of residence
clearly has administrative advantages. But it also makes
it attractive to establish residence and register ships
in a country which does not tax foreign income. Shipping
See Internal Revenue Code Sections 872 (b) (1),
872 (b) (2), and 883(a). These sections also provide reciprocal exemption for foreign airlines,
which is not discussed here. International airlines are generally government owned or subsidized,
often operate at a loss, and rarely incorporate
in tax haven countries. Thus, they raise different tax issues. The discussion of alternative
methods of taxing those shipping companies which
are not exempt from U.S. tax is relevant to airlines as well, however.
- 3 companies have great latitude in choosing their place
of residence, and much of the world merchant fleet is
registered in countries which impose no income tax.
Since worldwide exemption was not the purpose of the
reciprocal exemption of the Internal Revenue Code, the
question arises whether those provisions should be
amended or repealed.
- 4III.
PRESENT LAW
1. Equivalent exemption. Section 883(a)(1),
excludes from the gross income of a foreign corporation
the earnings derived from the operation of a ship documented under the laws of a foreign country which grants
an equivalent exemption to citizens of the United States
and to corporations organized in the United States.
Section 872(b)(1) contains a parallel provision for nonresident alien individuals. The IRS has taken the position that to qualify for the exemption the foreign country
granting the exemption must be the country of registration of the vessel (Rev. Rul. 75-459, I.R.B. 1975-43, 11).
This position reverses the "dual test" of an earlier
ruling which held that the country granting the exemption
must be not only the country of registration of the vessel
(the "flag" test), but also the country of residence
of the operator of the vessel (Rev. Rul. 73-350, 1973-2
C.B. 251).
The law is not clear on the circumstances under which
income from leasing a ship qualifies as income from the
operation of a ship. In general, income from time or
voyage charters does qualify, but bareboat charter hire
(payment for the use of the vessel alone without crew)
- 5 may not be considered as income from the operation of
a vessel but rather as rental income for the use of
property. This result is implied in Rev. Rul. 74-170
(1974-1 C.B., 175) which held that a foreign corporation's
income from leasing its ships under time or voyage charters,
and the income of a foreign charterer from the operation of ships under time, voyage, or bareboat charters
qualify for exemption as earnings from the operation of
ships within the meaning of Section 883, while the income
of an owner from leasing a ship under a bareboat charter
is not exempt unless the ship owner is regularly engaged
in the shipping, business and the lease is merely an incidental activity. The question, however, cannot be considered as settled.—
The outcome can have significant tax consequences.
If it does not qualify for the reciprocal exemption
as income from the operation of a ship, bareboat
charter hire is subject to U.S. tax, to the extent
derived from U.S. sources, either at 30 percent of
the gross rental (except where an income tax treaty
provides more favorable treatment) or at the ordinary
rates on net income if the income is "effectively
connected" with a U.S. trade or business. The
latter treatment would in many cases be less burdensome than a 30 percent tax on gross rentals because
of the high deductions incurred in operating a ship;
but to be "effectively connected" the income would
have to meet the tests of Section 864(c)(2) and the
regulations thereunder, principally the asset use
test or the business activities test. Clearly there
are serious administrative problems involved in making
such a determination.
- 6 2.
Treatment of income which does not qualify for
reciprocal exemption. In those cases where the foreign
country does not grant an equivalent exemption to U.S.
citizens and corporations, the U.S. tax liability of
the foreign shipper is determined by applying the ordinary
U.S. tax rate to taxable income from U.S. sources. In
the case of gross income derived from sources partly
within and partly without the United States, Section
863(b) provides that taxable income may be computed by
deducting expenses apportioned or allocated thereto and
a ratable part of any expenses which cannot definitely
be allocated to some item or class of gross income.
The portion of the taxable income attributable to sources
within the United States may be determined by processes
or formulas of general apportionment prescribed by the
Treasury. This provision is specifically made applicable
to transportation income in Section 863(b)(1).
The original allocation published by the Treasury
seemed to have provided that all of the income from an
outward bound voyage from the United States was U.S.
source income (T.D. 3111, 4 C.B. 380 (1921)). In 1922,
this rule was abandoned in favor of the present rules
(T.D. 3387, 1-2 C.B. 153 (1922)).
The present rules(Regulation 1.863-4) involve a
complicated formula by which the gross income from U.S.
sources is considered to be that fraction of the total
gross revenues which equals the fraction of (a) expenses
incurred within the United States plus a reasonable
rate of return on property used within the United States
over (b) total expenses of the business and a reasonable
return on the total business property.
Expenses not
directly attributable to U.S. operations are apportioned
on the basis of days spent or miles traveled in U.S.
waters to the total time and distance of the voyage.
Property must be valued net of the appropriate depreciation measured by U.S. standards.
Eight percent is ordin-
arily taken as a reasonable rate of return.
Under these rules, income from U.S. sources is limited
to income allocable to operations within U.S. territorial
waters.
The United States observes a three mile limit
to its territorial waters.
All income derived on the high
seas is regarded as income from sources outside the
United States.
- 8 IV.
ANALYSIS
1. Impact on ocean freight rates. As a general matter,
the U.S. tax on corporate income is approximately equivalent to a tax on equity capital. Contrary to popular belief,
it is not a tax on economic profit. A tax on economic
profit would require a deduction for the "normal" rate of
return on equity capital in computing the taxable income
base. No such deduction is permitted under U.S. tax law.
A tax on equity capital, like any other factor tax,
will be reflected in a higher price of goods or services
sold. As an approximation, a corporate income tax imposed
at rate t on a single sector will raise the price of that
sector's goods by tu, where u is the proportion of the
sales price accounted for by corporate profit. In addition, there will be a small reduction in the after-tax
rate of return to capital, but that effect will be spread
over capital throughout the economy.
On the basis of these principles, it is easy to see
that the reciprocal exemption of shipping income from corporate tax lowers the price of shipping services. Thus,
if the reciprocal exemption were repealed, freight charges
on U.S. imports and exports would rise to reflect the tax.
Depending on the elasticities of demand and supply for
imports and exports, the burden of the tax would be divided
0
- 9 between domestic and foreign producers and consumers.
Unless the supply and demand picture for exports is very
different from the supply and demand picture for imports,
it is reasonable to suppose that about one-half the tax
would be borne by foreign producers and consumers, and about
one-half by U.S. producers and consumers.
If a U.S. initiative on taxing shipping income were
followed by other countries, the tax incidence would be
similar, with part borne by the U.S. economy and part
borne by foreign economies.
The end result of the imposition of corporate taxes
on shipping income would be a general increase in freight
rates, approximately on the order of 5 percent.—
first sight, this seems undesirable.
prices.
At
No one likes higher
However, it must be remembered that the present
virtual exemption of shipping income from taxation results
in a discriminatory advantage for the ultimate consumers
of shipping services.
The prices they pay are too low
relative to the prices paid by consumers of goods produced
by taxed sectors.
Moreover, the effective exemption of
shipping income from taxation results in the inefficient
allocation of capital.
"" This figure assumes a 50 percent tax on net income,
or a 5 percent tax on shipping receipts. See the
revenue estimates in Section VI.
- 10 The impact on labor of repealing the statutory exemption
is less clear. On the one hand, the exemption is an
incentive to foreign registry and thus also encourages the
employment of foreign labor, so its repeal would be expected
to have the opposite effect and to benefit U.S. labor.
Lower labor costs abroad are themselves an incentive to
foreign registry, and taxes may have only a marginal effect,
but the tax exemption increases the attractiveness of
foreign registry and reduces the relative attractiveness
of the tax and subsidy benefits to U.S. registry. On the
other hand, repeal of the statutory exemption by the
United States alone would subject foreign flag ships carrying U.S. trade to tax only on their U.S. source income,
whereas U.S. flag ships would be subject to tax on their
worldwide income. This differential taxation might somewhat
diminish the attractions of the U.S. flag and thus the
employment of U.S. crews. Finally, repeal of the
reciprocal exemption by the United States alone could
have a negative impact on U.S. registry and thus on the
employment of U.S. crew and officers, for those ships
which engage in commerce between third countries. If
other countries continued to grant exemption on the basis
of reciprocity, such ships would find it attractive to move
from U.S. registry to registry in a country where reciprocal
exemption was still available. In practice, this effect
is likely to be very small, since there are few
£1*
- 11 "
cases of U.S. flag ships engaging exclusively in foreign
commerce between third countries.
2.
Rationale and effect of the exemption.
It is
difficult to allocate expenses among the various jurisdictions crossed in an international voyage.
If each
country taxed the worldwide income of its residents,
the situation could be best taken care of by exemption at
source, leaving it to the residence country to tally all
receipts and expenses and levy the tax on net income.
This is the solution aimed at by the provisions in the
Internal Revenue Code (Sections 872 and 883) which take
international shipping (and aviation) out of the ordinary
rules for taxing the income of foreign investors and grant
a special exemption from U.S. tax on the basis of reciprocity.
When introduced
into the law in 1921, the exemption
for foreign ship operators was explained as a method of
avoiding double taxation.
It now could be more accurately
described as a method of providing double exemption.
Some
30 percent of the world merchant fleet is registered in
Liberia, Greece, and Panama which impose no income tax
on their ships (see Table 1). These vessels also enjoy
exemption from tax in most ports of call including the
United States.
379/
- 12 Table 1
Principal Countries of Registry of Merchant Fleets
as of December 31, 1974
(thousands of tons)
:
Country of Regis try
:
All Vessels
:
Gross
Percent :
Tons
of Total :
Total, all Countries : 306,366
100.0%
Tanke rs
Gross
Percent
Tons
of Total
143,399
100.0%
Liberia
60,006
19.6
37,808
26.4
Japan
35,994
11.7
16,891
11.8
United Kingdom
32,153
10.5
17,403
12.1
Norway
25,095
8.2
13,319
9.3
Greece
22,339
7.3
8,018
5.6
U.S.S.R.
1/
U.S.A.
13,533
4.4
3,867
2.7
12,503
4.1
5,252
3.6
Panama
11,539
3.8
4,990
3.5
All Other
93,204
30.4
35,851
25.0
1/ Includes 3 million tons of government-owned reserve fleet,
of which 300,000 tons are tankers.
Source:
U.S. Department of Commerce, Maritime Administration,
Office of Subsidy Administration, Division of Trade
Studies and Statistics.
S73
- 13 The provision of a statutory reciprocal exemption
puts foreign ship operators in a preferred position over
other foreign persons engaged in business in the United
States.
Foreign flag ships carry more than 90 percent
by volume and more than 80 percent by value of U.S.
trade (Table 2).
Very little of the income they derive
is subject to U.S. taxation.
Data for 1973 indicate
that gross receipts of foreign flag ships from carrying
U.S. trade amounted to roughly $6 billion of which approxi- •
mately $5.5 billion was derived by ships exempt from U.S.
tax (Table 3) . The ships of some 50 countries qualify
for exemption from U.S. income tax on the basis of reciprocity; 37 of these exemptions are confirmed in U.S.
bilateral income tax treaties (Table 4) . Thus the equivalent exemption can be criticized as an unintended incentive to ships of foreign registry carrying U.S. goods.—
3.
Source rules and administrative aspects.
Repeal
of the statutory exemption would have little effect unless
accompanied by changes in the source rules.
Under present
source rules only a small portion of the total net income
Repeal of the equivalent exemption provision would
not, however, put the tax treatment of foreign and
domestic flag ships on an equal footing because special
tax benefits and construction subsidies are available exclusively to U.S. owners of domestic flag
ships in foreign commerce.
575
- 14 Table 2
U.S. FOREIGN TRADE TRANSPORTED UNDER
FOREIGN FLAGS, 1974 1/
Liner
Total
Irregular
Tons
% of
(000)
Total
Tanker
Tons
7o of
(000)
Total
Tons
(000)
7. of
Total
Tons
(000)
% of
Total
1971
433,058
94.7
34,080
77.1
215,949 97.8
183,029
95.1
1972
489,802
95.4
34,843
78.1
238,769 98.4
216,190
95.5
1973
591,669
93.7
38,028
74.2
277,375 98.4
276,266
92.6
1974
587,720
93.5
37,381
70.6
276,609 98.3
273,730
93.0
Total
Dollars
(Millions)
7o of
Total
Liner
Dollars
(Millions)
% of
Total
Irregular
Dollars
% of
(Millions)
Total
Tanker
Dollars
I of ;
(Millions) Total -
1971 40,539 80.4
23,196 71.6
12,755 96.9
4,588 94.5
1972 49,410 81.6
27,035 72.3
16,980 97.6
5,395 93.8
1973 68,106 81.1
35,215 70.9
24,578 97.5
8,313 90.9 '
1974 102,179 82.2
44,213 69.4
33,767 97.7
24,199 93.1
1/ Preliminary Data
Source:
U.S. Department of Commerce, Maritime Administration, Statistics Branch,
Division of Trade Studies and Statistics.
:
ffy
- 15 Table 3
Gross Receipts of Foreign Ships Carrying
U.S. Trade, 1973
(billions of dollars)
"
\
•
! Charter • Passenger • Total
Flag of Registry : Exports : Imports : Hire
Fares
:
Total foreign
flags
2.9
2.5
0.4
0.3
6.1
Exempt by
treaty e/
1.7
1.5
0.2
0.2
3.6
Exempt by
statute e/
0.9
0.8
0.2
0.1
2.0
Not exempt e/
0.3
0.1
JL.
Office of the Secretary of the Treasury
Office of Tax Analysis
0.5
January 14, 1976
e/ estimated
* Less than $50 million
Source: Totals and some flag data on import shipments from U.S.
Department of Commerce, Bureau of Economic Analysis.
Exempt and non-exempt categories estimated on the basis
of treaty and statutory exemptions and relative tonnage
of fleets of exempt and non-exempt flags.
- 16 -
^9r
Table 4
Exemption confirmed
by income tax treaty
Exemption confirmed by exchange
of notes or by a ruling (examples^
Chile (notes, 1976)
Austria
Jordan (notes, 1974)
Australia
Brazil (Rev. Rul. 74"309)
Barbados 1/
Taiwan (notes, 1972)
Belgium
Spain (Rev. Rul. 70-464)3/
Burundi 1/
De facto exemption (examples)
Canada
Bahamas
Denmark
Bermuda
Finland
Liberia
France
Gambia 1/
Not exempt (examples)
Germany
Greece
India
Iceland
Indonesia
Ireland
Malaysia
Italy
Philippines
Jamacia 1/
Singapore
Japan
Venezuela
Luxembourg
Malawi 1/
Netherlands
Netherlands Antilles 1/
New Zealand
Nigeria 1/
Norway
Pakistan
Poland 2/
Romania
Rwanda 1/
Sierra Leone 1/
South Africa
Sweden
Switzerland
Trinidad and Tobago
United Kingdom
IT By extension of another treaty (U.K. , Belgian, or the Netherlands)
U.S.S.R.
Zaire
1/
2/
Instruments
of ratification not yet exchanged.
Zambia 1/
3/ Certain other countries were found to fulfill the equivalent
exemption test in prior years; Lebanon (Rev. Rul. 67-183), and
by notes, Mexico (1964), Colombia (1961), Argentina (1950) and
Panama (1941).
- 17 is treated as of U.S. source, and all income derived from
the high seas is foreign source. It has been estimated
that U.S. source income under these rules represents only
10 percent, on average, of the total taxable income. On
this basis, the revenue effect of eliminating the statutory exemption, but retaining the present source rules,
would be negligible, probably less than $5 million.—
A number of countries treat part of the income earned
on the high seas as having a domestic source. Most regard
the outbound voyage as generating domestic source income
and the inbound voyage as generating foreign source income.
Australia, the Philippines, Indonesia, Malaysia, and Singapore follow this practice. Venezuela achieves the same
effect by treating one-half of a round trip to and from a
domestic port as generating domestic source income; this
approach might be more easily reconciled with the jurisdiction of other countries having foreign tax credit systems.
The administrative burden of imposing tax on foreign
flag shipping could be minimized by giving the operators
- In 1972, the latest year for which such data are
available, the U.S. tax collected from foreign
corporations engaged in transportation activity
(shipping, airlines, trucking, etc.) was only
$850,000. It is unlikely that this amount would
increase more than five times with repeal of the
reciprocal exemption and retention of the present
source rules.
- 18 an election to compute their tax on presumed net income,
calculated as a flat percentage of gross receipts. Several
other countries impose tax on gross receipts, but not all
make the gross receipts base elective. Such an election
would seem a desirable feature; on the other hand, where
exercised it should be binding for future years. Such a
presumptive tax should seek to approximate average profitability, taking into account good years and bad. The
limited data available (Table 5) indicate that the ratio
between net and gross income varies widely from company
to company, but suggest that 10 percent may be a reasonable ratio.
If an operator elected to be taxed on a gross receipts
basis, charter hire payments to a third party would not
be separately taxed. If the tax were computed on net
income, the charter hire payments would show up as a
deduction, and the operator would be the withholding agent
for U.S. tax purposes.
Companies not electing the presumptive income tax
would be required to file a return and pay tax on net
income, supplying the necessary books and records to calculate profit and loss on individual voyages. Alternatively,
they might be permitted to measure net income as a percentage of their worldwide net, equal to the ratio
between U.S. gross receipts on shipments to (or from) the
- 19 Table 5
Ratio of Net (Taxable) Income to Gross Income
from International Shipping Operations for a
Sample of U.S.-Controlled Foreign Shipping
Corporations, 1972
Ratio of net operating income
to gross operating receipts
Total number of subsidiaries
Negative or zero net income
Total subsidiaries with net income
Number of subsidiaries
77
14
63
Net income as percent of gross:
1 through 9%
8
10 through 19%
21
20 through 29%
11
30 through 39%
9
40 through 49%
8
50 through 59%
1
60 through 69%
1
70 through 797o
2
80 through 897o
2
Aggregate ratio, subsidiaries with net
income
Aggregate ratio, all subsidiaries
0THice of the Secretary of the Treasury
Office of Tax Analysis
Source: Tax Forms 2952.
11%
9%
February 13, 1976
- 20 United States and worldwide gross receipts.""
It might
be desirable, especially if net income were calculated
on the basis of a return, to limit certain deductions, for
example to deny accelerated depreciation, in order to
avoid artificial losses. It would also be important to
prevent avoidance of the U.S. tax by transshipment through
Canada or Mexico. One possible approach would be to
define the relevant voyage in terms of the ultimate point
of origin or destination of the goods.
4. Competitive and treaty implications. A sweeping
repeal of the present exemption system undertaken by the
United States acting alone could result in taxation by many
countries of U.S. ships, since reciprocity would no longer
exist. However, ships of other countries would continue
to enjoy reciprocal exemption. Thus, U.S. ships engaged
in trade between third countries would be placed at a competitive disadvantage.
A sweeping repeal of the present system would also
require Treasury to terminate U.S. income tax treaties
with 37 countries in order to delete the shipping exemption; reinstituting the other treaty provisions might
Singapore, for example, permits this apportionment
method to be used by companies incorporated in countries for which Singapore is prepared to accept the
certification of the national tax authorities as to
worldwide gross and net income.
- 21 require concessions on unrelated issues. On the other
hand, maintaining a policy of exemption by tax treaty
could simply transfer tax haven benefits from the traditional tax havens, such as Liberia and Panama, to treaty
countries which may also not tax foreign shipping income
(see the discussion below and Table 6) .
A compromise solution to both these problems would
permit selective reciprocal exemptions by treaty but
require that existing and future treaties be reviewed.
Where the other country constitutes a tax haven for
foreign owned shipping companies, future treaties would
not grant an exemption, and existing treaties would be
renegotiated to remove the exemption. Table 6 and the
following text describe some of the features of other
countries' taxation of income from international shipping.
Table 6 attempts to summarize the principal features
of foreign country tax laws as they apply to income from
international shipping. The information summarized in
the table must be regarded as both tentative and partial.
The detailed information needed for a thorough report is
not readily available, and the implementation of the laws
is subject to considerable administrative discretion.
Moreover, the statutory rates cited ignore such features
as accelerated depreciation, investment allowances and
investment reserves, which substantially reduce the effec-
Table 6
Taxation of Income from International Shipping in Selected Countries
Country
(by gross tonnage of merchant fleet)
Total, all countries
Liberia
Japan
United Kingdom
Norway
Subtotal
Greece
U.S.S.R.
U.S.
Panama
France
Italy
Germany
Sweden
The Netherlands
Spain
Denmark
India
Cyprus
Singapore
Subtotal
All Others
Office of the Secretary of the Treasury
Office of Tax Analysis
•
Million : Percent
Gross : of
Tons
: Total
306.4
100.0
60.0
36.0
32.2
25.1
153.3
22.3
13.5
12.5
11.5
9.5
9.4
8.5
6.8
4.7
4.4
4.2
3.7
3.6
3.3
271.2
35.2
19.6
11.7
10.5
8.2
50.0
7.3
4.4
4.1
3.8
3.1
3.1
2.8
2.2
1.5
1.4
1.4
1.2
1.2
1.1
88.5
11.5
; Taxation of domestic companies
:
Taxable on
: Applicable
: foreign source : statutory
:
income
'-rate
i-an»
±J1/
no
yes
yes
yes
—
no
yes
yes
no
4/
yes
yes
yes
yes6/
yes
yes
no J_l
no 7_/
—
—
—
0
52.61/40. 88
52/26.16
50.8/24.3
—
0
3/
48
0
50/25
49.7
27.5/15 5/
54.4
48
32.69
37
57.75
42.5
40
—
—
Taxation of foreign companies
Statutory : Rate of tax
Tax base limited to
reciprocal :
where
profits of a
exemption : applicable —'
P-e- -
yes
yes
?
yes
—
•?
yes
yes
?
yes
no
yes
yes
yes
yes
no
yes
no
no
—
—
0
52.61
52
50.8
—
38.24
0
48
10-50
50
49.7
51
54.4
48
37
34
73.5
42.5
40
—
no
yes
yes
no
no
?
yes
no
yes
yes
yes
yes
yes
no
no
February 10, 1976
^Sources: Submission by various countries, Harvard University, World Tax Series, volumes, various issues of the Price Waterhouse Information Guides (for
Doing Business in
_ _ ) , and the United Kingdom Board of Trade, Report of the Committee of Inquiry into Shipping (London. May 1970).
L/ Where two rates are shown divided by a slash (/) the first applies to undistributed profits and the second to distributed. If divided by a hyphen (-)
the rates indicate the range of marginal rates in a graduated scale. These are statutory rates; effective rates are lower due to accelerated
depreciation, investment allowances, investment reserves and other tax benefits.
[2/ I.e., no tax is imposed unless there is a local "permanent establishment" (which usually includes an agent who signs contracts for the home office
but not a commission agent) and the tax base is limited to the profits of that establishment. In some cases, e.g., Norway and Sweden, this amounts to
exemption in practice, and in moat cases the taxable income is comparable to a freight forwarder's commission.
3/ The U.S.S.R. is state owned, so apart from amounts allocate^ to ucrt-in reserves, the net earnings belong to the Government.
"4/ In general French companies are not taxed on their foreign source income; but French law (Article 209, C.G.I.) specifically authorizes France to tax in
those cases where an income tax treaty reserves to France the right to tax. This is the case in most French income tax treaties with respect to shipping
profits; the usual treaty rule reserves the right to tax shipping profits to the country of residence of the company.
5/ One half of the income from shipping (the outbound portion) is presumed to be foreign source income and is taxed at the special rate with no foreign
tax credit. The taxpayer elects to be taxed at the ordinary rates on the full amount and claim a foreign tax credit. The portion considered domestic
source is taxable at the ordinary rates of 51/15.
6/ Foreign source profits are exempt from Netherlands tax if they are derived through a permanent establishment in another country
y
and have been taxed by that country.
7/ Foreign source profits are taxable if remitted to Cyprus and Singapore.
to
C0? 6 <^
- 23 tive tax rates.
With respect to the taxation of domestic flag ships,
Liberia, Greece and Panama, which together account for
over 30 percent of the gross tonnage of the world's merchant fleet, do not tax income derived from international
commerce by ships flying their respective flags, and each
country makes it easy for foreign companies to register
ships locally.
Cyprus and Singapore tax the foreign
income of their shipping companies only when it is remitted
to (received in) Cyprus and Singapore, respectively.
In contrast, although France and the Netherlands
exempt most foreign source income from taxation, they often
tax the income of their domestic shipping companies.
For example, the Netherlands exemption of foreign source
income is conditioned on the derivation of foreign income
through a foreign permanent establishment which has borne
some foreign income tax (the amount does not matter) ; since
much of the foreign income of shipping companies is earned
on the high seas or in countries which exempt ships of
Dutch registry by treaty or statute, that condition will
frequently not be met.
As a general rule, the foreign
source income of a French company is excluded from the
French tax base without regard to whether any foreign
tax liability is incurred; but French officials report
/5>53
- 24 that one consequence of Article 209 of the General Tax
Code, which gives France the right to impose tax where a
treaty reserves taxing jurisdiction to the other country,
is that French shipping companies are subject to tax on
their foreign source income from the numerous countries
with which France has concluded a treaty providing for
reciprocal exemption of ships and aircraft. It is not
clear how France determines taxable income in such cases.
Germany presumes that one half of the income of
domestic companies from international shipping is of
domestic source and is taxed at the ordinary rate. The
other half is presumed to be foreign source and is taxed
at a reduced rate with no foreign tax credit. Alternatively, the shipping company can elect to be taxed on all
income in the ordinary way with a foreign tax credit
against the tax on the half deemed to be foreign source.
The taxpayer's choice will depend on how much foreign
tax was paid.
The United Kingdom has made an effort to compete with
the flags of convenience by offering free depreciation
and investment grants which greatly reduce, or eliminate,
the tax liability of U.K. flag ships. Similarly, the
United States has attempted to keep its shippers from
fleeing to flags of convenience by giving tax benefits
6*9
- 25 and direct subsidies to domestic flag shippers. The
United Kingdom, unlike the United States, permits the
use of foreign crews on its ships.
The U.K. tax prefer-
ences go beyond those of the United States in one respect:
as of 1970, shipping companies of other Commonwealth
countries could fly the U.K. flag; thus a Bahamas corporation, liable to no domestic income tax, could register
its ships in Britain.—
The other countries listed in Table 6 typically subject their corporations to tax on their worldwide income
and provide a credit for foreign taxes paid on foreign
source income.
However, liberal depreciation allowances,
investment grants, and similar measures generally ensure
that the net tax burden is small.
Traditionally, countries have exempted foreign flag
ships from income tax on the basis of reciprocity, without
the need for any special bilateral agreement between the
countries.
But three countries listed in Table 6 (India,
Cyprus, and Singapore) are exceptions to this rule.
They
(The U.K. Board of Trade, Report of the Committee
of Inquiry into Shipping, London, 1970, reports
that Bahamas and Bermuda companies represented only
about 1.5 million gross tons of the U.K. flag fleet
in 1970).
- 26 do not exempt foreign flag ships on the basis of de facto
reciprocal exemption, and are unwilling to grant exemption
by tax treaty, although they may be willing to reduce the
tax in a treaty. There are a number of other countries not
listed on the table which also unilaterally impose tax on
foreign flag ships in the absence of a formal tax treaty
(e.g., Australia, Singapore, Indonesia, Malaysia, the
Philippines, Venezuela); the reluctance to grant exemption
even by treaty appears to be growing, as evidenced by several
recent treaty negotiations.
The countries which do not grant reciprocal exemption
tend to tax on presumptive net income, usually a flat
percentage of gross receipts from outbound traffic.
Singapore is an example of this approach. Singapore imposes
tax equal to 2 percent of the gross receipts (calculated
as the corporate tax rate of 40 percent times presumed net
income equal to 5 percent of gross receipts) of any voyage
outbound from Singapore to the point of destination or
transshipment. The company may elect to be taxed instead
at 40 percent of that portion of its worldwide net income
which gross receipts from Singapore bear to worldwide gross
receipts. This pattern varies somewhat among other taxing
countries, as to the gross receipts figure used, the net
election, and the transshipment rule.
d#6
- 27 The countries which have traditionally granted reciprocal
exemption usually rely on the general statutory rules for
taxing foreign business activities in their jurisdictions
to determine the taxable income of foreign shippers.
In
most cases this means that tax is imposed only on the profits
derived by a local office authorized to contract for the
company; thus the tax base is roughly the commission income
of a freight forwarding agent.
In some cases even this element
is ignored, for example, where the law specifically limits ,
the taxation of foreign companies to income derived in the
taxing country.
Sweden has interpreted such language
narrowly and has rarely, if ever, imposed tax on a foreign
shipping company.
Denmark has followed a similar inter-
pretation, and Panama's law would support exemption on the
same interpretation.
to tax.
Norway has not exercised its authority
Japan, Italy and Greece have broader source rules.
Japan considers income from outbound traffic to be of
domestic source, but it is not clear whether net income is
determined as a percentage of worldwide net or computed
separately on the basis of books and records.
Italy may
use an imputation of profit per ton where net income cannot
be determined.
When a foreign shipping company maintains a
local office in Greece, Greece may tax not only the income
- 28 attributable to Greek sources but also a portion of the
foreign source income.
In no case is the method of determin-
ing taxable income clear.
The U.S. rules are also imprecise.
6*
- 29 V. OPTIONS
1. Retain present law. It can be argued that a change
in the present reciprocal exemption would raise the cost
of ocean freight and disturb our tax relations with treaty
countries. Further, any change in the reciprocal exemption
system might result in selectively heavier foreign taxation
of U.S. flag vessels, which would place those vessels at a
competitive disadvantage. On the other hand, the present
system allows international shipping to be free of most (or
all) taxes.
2. Change the flag test to a residence test. Residents
of any country which grants an equivalent exemption to U.S.
ships operated by U.S. residents would be exempt from U.S.
tax on income from the international operation of ships
(and aircraft) , without regard to where the ships were
registered. This approach would have the advantage of not
depriving a U.S. or treaty country operator of exemption
solely because it uses foreign flag feeder vessels. But it
does not address the basic criticism that international
shipping frequently pays tax to no country.
3. Require a dual test. Under a dual test, the foreign
country must be both the country of registry of the ship and
the country of residence of the operator. This was the
- 30 -
position taken in Revenue Ruling 73-350 (subsequently reversed
by Rev. Rul. 75-459).
It makes the conditions for reciprocal
exemption parallel for both countries, since foreign countries
are now only required to exempt U.S. citizens and residents
operating U.S. flag vessels.
But it has the presumably
unintended effect that while Liberian and Panamanian ships
would be exempt from U.S. tax when operated by residents of
Liberia and Panama, respectively, the exemption would no
longer apply if either operator were to lease the ship of
the other.
4.
Repeal the statutory exemption.
Repealing the
statutory exemption would make the tax treatment of foreign
flag shipping comparable to that of other foreign business
activity in the United States, cut back on the tax-free
status of international shipping, and thereby reduce the
appeal of tax havens.
U.S. action in this direction might
encourage other countries to take similar steps.
desirable policy objectives.
These are
But simple repeal of the U.S.
statutory exemption while maintaining the present source
rules would accomplish little toward these goals, and would
have the disadvantages of multiplying the administrative
burden of taxpayers and tax collectors and (at least
initially) making U.S. flag ships subject to foreign taxes
- 31 while ships of other countries continue to enjoy reciprocal
exemption. These disadvantages could be largely overcome
by additional changes along the lines indicated below:
(a) The source rules would be changed to define as
U.S. source income one half of the gross income from any
voyage to or from a U.S. port. This change should be
considered for international aviation as well as shipping.
(b) The tax would be levied at ordinary rates on net
income realized in or apportioned to U.S. sources, provided
the taxpayer furnishes adequate accounts. However, the
taxpayer could elect to be taxed on presumptive net income.
The election would be revocable only with the consent of the
Commissioner. As an example, this alternative tax might
be set at 5 percent of gross receipts from U.S. sources
(roughly 48 percent of net income presumed at 10 percent of
gross receipts) .
(c) In certain cases, the operator would be required to
post a bond in an amount equal to the tax on gross income,
unless sufficient business contacts with the United States
were regularly maintained so that the Internal Revenue
Service could be reasonably sure of collecting the tax.
(d) Reciprocal exemptions could be granted in income
tax treaties with countries that are not tax havens for
shipping, with instructions to the Treasury that existing
- 32 agreements with countries that constitute tax havens for
international shipping be renegotiated to terminate the
exemption.
Guidelines for identifying tax havens could be
provided by regulation.
For example, a shipping tax haven
might be defined in terms of the following characteristics:
little or no
tax on shipping income, a large fleet in
relation to the volume of exports and imports, ease of
registry of foreign owned vessels, and foreign ownership
of a substantial portion of the fleet.
Some of the
characteristics might be found in a number of countries, but
a tax haven would generally meet all of them.
(e) Subpart F would be changed to ensure the current
taxation of the U.S. controlled foreign flag fleet, as
discussed in Part B.
Repeal of the reciprocal exemption, together with these
collateral changes, would place the tax treatment of foreign
flag shipping on the same basis as other foreign activity
in the United States at a minimum of administrative cost
and would produce additional revenue of about $100 million.
Some U.S. flag ships would still be subject to a competitive
disadvantage through the loss of foreign tax exemption, but
this effect would be relatively minor in view of the possibi
of treaty exemptions. Moreover, in light of the low volume
of U.S. trade carried on U.S. flag vessels, this effect
should not be overestimated.
c4/£
- 33 VI. REVENUE ESTIMATES
Option (1), retaining present law, would involve no
revenue change.
Option (2), eliminating the flag test,
would involve a negligible revenue loss.
Option (3),
requiring the dual test would involve a negligible revenue
gain.
Option (4) would impose a net income tax on half of
the gross receipts on all traffic to and from U.S. ports,
but the taxpayer could elect a presumed income tax of 5
percent of gross receipts.
permitted by treaty.
revenue gain
Selected exemptions would be
This option would yield an estimated
of $100 million.
The revenue estimate for option (4) is derived from
Table 7. Figures were based on 1973 data, projected forward
to 1975 on the assumption that gross receipts of foreign
flag ships from carrying U.S. trade increased proportionately
with the value of waterborne U.S. trade.
The estimate assumes
no change in the treaty exemptions already agreed to, but no
new treaty exemptions.
Table 7
Estimated Revenue Effect of Taxing Presumed
Net Income of Foreign Flag Ships
($ millions)
Gross receiipts 1/
1973
All Foreign Flags
exempt by statute
Liberia, Panama
exempt by treaty
taxable
inbound
outbourfar
2,700
950
750
1,600
150
3,100
1,000
450
1,800
300
total
5,800
1,950
1,200
3,400
450
:U.S. gross
: receipts
: (50% of
:
total)
Tax base
(10%
of U.S.
gross)
Tax
(5% of
U.S.
gross)
2,900
950
600
1,700
225
290
95
60
170
20
145
47
30
85
10
i
Est. 1975
All Foreign Flags
exempt by statute
exempt by treaty
taxable
9,300
3,100
5,500
700
4,650
1,550
2,750
350
u>
465
155
275
35
Estimated revenue gain
on flags exempt by statute
n flags taxable under present rules 2/
235
80
140
20
i
100
20
Office of" the Secretary of Treasury
Office of Tax Analysis
January 28, 1976
J
17 Inbound figures rounded to nearest $50 m. , outbound available only to nearest $100 m.
2/ Tax now collected estimated at 48% of 10% of the presumed tax base, due to treatment as
foreign source of all income earned outside U.S. territorial waters; i.e. tax now
collected would be only about $2 m.
ti
- 35 PART B:
TAX DEFERRAL
VII. ISSUE
The issue is whether U.S. shareholders of controlled
foreign shipping corporations should be taxed currently on
their share of the profits of such corporations. This would
be accomplished by amending the Internal Revenue Code so that
shipping profits are fully included in subpart F, without
the current exception for profits reinvested in shipping
operations.
Foreign registry is attractive to U.S. shipowners for
a number of reasons. Lower operating costs are most
frequently cited, but tax savings are also important. The
possibility of deferring tax on foreign flag shipping runs
counter to other legislation designed to encourage U.S. flag
shipping. Moreover, given the prevalence of tax haven
countries as the chosen place of registry of many U.S.
owned foreign flag ships and the fact that their services
are largely performed outside the country of registry,
foreign shipping services exemplify the type of activity
to which subpart F applies. The issue then, is whether
the partial inclusion of shipping income within subpart F
under the Tax Reduction Act is adequate, or whether shipping
should be included under subpart F on the same basis as other
- 36 -
services.
A related question is whether the general exception
to subpart F for corporations not formed or availed of to
avoid tax should also be revised.
6/6
- 37 VIII. PRESENT LAW
Under subpart F of the Code, certain categories of
earnings and profits of a controlled foreign corporation
(CFC) are includable in the gross income of the U.S. shareholder.
The most important of these categories is foreign
base company income.
As originally enacted, subpart F
provided an exclusion from foreign base company income for
income derived from, or in connection with, the use (or
hiring or leasing for use) of any aircraft or vessel in
foreign commerce, or the performance of services directly
related to the use of any such aircraft or vessel (section
954(b)(2)).
This outright exclusion for shipping income was repealed,
effective for taxable years beginning after December 31, 1975,
by the Tax Reduction Act of 1975.
Under that Act, foreign
base company income will include foreign base company
shipping income except to the extent reinvested in foreign
base company shipping operations.
Foreign base company
shipping income, as defined in Section 954(f), includes
income derived from the use (or hiring or leasing for use)
°f any aircraft or vessel in foreign commerce, the
performance of services directly related to the use of an
aircraft or vessel, or the sale or exchange of the aircraft
- 38 or vessel.
It also includes dividends and interest from
certain foreign subsidiaries and gain from the sale of
securities of those corporations to the extent attributable
to foreign base comnany shipping income.
39
- IX.
//r
ANALYSIS
1. Reasons for foreign incorporation. U.S. owners
of ships, by incorporating in a country which imposes no
income tax, can avoid tax on most or all of their worldwide
income since many countries, like the United States, provide
statutory exemptions on the basis of reciprocity.
According
to the Maritime Administration, as of June 30, 1974, there
were 678 U.S. owned foreign flag ships, totalling 14 million
gross tons.
More than 80 percent of these ships, by gross ,
tonnage, were registered in Liberia, the United Kingdom,
and Panama (Table 8).
Liberia and
Panama impose no income
tax; the United Kingdom imposes tax but provides generous
writeoffs for shipping investments, and permits ships
owned by residents of tax haven colonies, like Bermuda, to
fly the U.K. flag.
Tax savings are not the only factor influencing the
choice of foreign over U.S. registry. Costs of operation,
1/
particularly wages for the crew, are often very much less
abroad. And ships which engage exclusively in commerce between
third countries are not eligible for U.S. subsidies.
But tax
exemption provides an added attraction, particularly for
integrated companies which may be able to shelter some
1/ In order to qualify for U.S. registry, all the officers and
75 percent of the crew must be U.S. citizens. If the ship
receives operating subsidies, then all the crew must be
U.S. citizens.
Table g
FOREIGN FLAG SHIPS OWNED BY UNITED STATES COMPANIES OR FOREIGN AFFILIATES OF
UNITED STATES COMPANIES INCORPORATED UNDER
THE LAWS OF THE UNITED STATES
As of June 30, 1974
•
S U M M A R Y
Total
.No.
Total
Liberia
United Kingdom
Panana
France
Netherlands
Corrr.any (West)
Spain
Italy
Norway
Belgium
Gross
Tons
Tankers
Deadweight
Tons
No.
Gross
Tons
Deadweight
Tons
Freighters
No.
Gross
Tons
Deadweight
Tons
Bulk & Ore Carriers
No.
Gross
Tons
Deadweight
Tons
678 25,264,165 47,925.033
485 21,793,448 41,739,038
84 396,921 392,797
109 3.073,796 5,793,198
321 14,491,604 28,651,732
122 4,415,5S6 8,155,906
102 2,103,487 3,627,452
12 1,022,107 1,978,118
25
716,097 1,251,523
224 11,753,858 23,418,121
74 4,098,941 7,748,047
85 1,979,438 3,463,665
12 1,022,107 1,978,118
13
643,844 1,179,852
9 58,267 67,508
39 146,892 151,748
12 54,590 48,280
88 2,679,479 5,166,103
9
169,753
256,111
5
69,459
115,507
11
5
10
10
9
525,577
489,149
333,880
254,916
163,159
971,720
931,367
494,091
453,895
259,393
11
5
10
10
9
525,577
489,149
333,380
254,916
163,159
971,720
931,367
494,091
453,895
259,393
Argentina
11
Denmark
6
Venezuela
6
Australia
3
British Coloniea 1
169,791
109,455
116,113
98,241
59,267
258,1S3
131,649
172,569
165,«57
110,187
6
6
6
1
1
96,037
109,455
116,113
16,890
59,267
141,921
181,649
172,569
26,642
110,187
Canada
Uruguay
*
Honduras
South Africa
Greece
Finland
58,517
50,766
46,921
14,560
17,993
6,974
88,737
85,830
43,618
23,421
9,972
9,813
6
2
58,517
50,766
88,737
85,830
14,560
23,421
6,974
9,813
6
2
9
1
3
3
o
12 72,253 71,671
9
46,921
73,754
116,262
81,351'
139,215
43,618
3 17,993 9,972
^
^
- 41 -
7>Jk)
profits from other activities in their tax haven shipping
subsidiaries, and which may have excess foreign tax credits
which can be used to repatriate the tax sheltered income to
the United States free of U.S. tax. More than 85 percent of
the U.S. owned foreign flag ships, by gross tonnage, were
oil tankers, most of which were owned by the large oil
producing companies (Table 8) . While the Tax Reduction Act
of 1975 placed a special limit on excess foreign tax credits
from oil production and restricted their use to other "oil
related income", that term was defined to include shipping
income arising from the transport of petroleum products.
Thus, some integrated companies continue to have ample
excess foreign tax credits which can be used to shield
shipping income from U.S. taxation.
2. Modifications to subpart F in 1975. Under the Tax
Reduction Act of 1975, shipping profits are not subject to
subpart F except to the extent they are reinvested in
shipping operations. In one sense shipping is now treated
more harshly than other subpart F activities, since
profits characterized as foreign base company shipping
income are "tainted" even if derived from unrelated
companies. But shipping also continues to enjoy a
preferred status in qualifying for partial exclusion
by virtue of the reinvestment condition.
- 42 '
It is too early to tell what effect
condition will have.
the reinvestment
In fact, the rules are so complex that
even the affected taxpayers will find it very difficult to
1/
assess their impact.
However, while the reinvestment
condition might not benefit foreign shipping companies when
the industry is experiencing a prolonged recession, it
could easily be satisfied in a growing economy for those
y
companies that are renewing or expanding their fleets.
For example, assume that $10 million is borrowed to finance
a ship which will yield gross receipts of 25 percent, or
$2.5 million, and a pre-tax profit, after payment of
interest and other expenses, of $500,000, per year.
The
profit could be used to retire the mortgage over 20 years,
and during this time there would be no U.S. tax liability
under subpart F.
To continue qualifying after 20 years,
the shipping company would have to replace the one ship or
expand its fleet.
So long as the reinvestment condition is
met, shipping profits will continue to enjoy exclusion from
subpart F; and when it is not met, shipping profits will be
subject to subpart F but with special and extraordinarily
1/
The regulations have not yet been issued in proposed form,
but a preliminary draft is approximately 130 pages.
2/
Of course in a prolonged shipping recession, the profits
of foreign shipping companies might be modest or nonexistent, so that current U.S. taxation under subpart F
would result in little additional burden.
- 43 -
complex rules (even by comparison with other subpart F rules).
3. Effect of including shipping income within
subpart F. The nature of international shipping services,
especially the frequency of incorporation in tax havens with
most of the services performed outside the country of
incorporation, is analogous to the general concept of base
company service income, which suggests including shipping
income under subpart F on the same basis. However, the idea
of including shipping within subpart F on the same basis as
foreign base company service income raises three further
issues. One is the shippers' contention that the result
would be a sale of U.S. controlled foreign flag ships to
foreign owners with adverse effects for U.S. national
security. The second is a quite different concern, that
to be effective the proposal should amend the general
exception to subpart F for corporations not formed or
availed of to reduce tax. And finally, some provision
should be made to cancel any overlap between U.S. tax
imposed as a consequence of repealing the statutory
reciprocal exemption and U.S. tax imposed under subpart F.
It has been argued that taxing the undistributed
profits of foreign shipping companies could cause their
sale to foreign interests and their consequent loss to the
- 44 United States in time of national emergency.
But both the
Maritime Administration and the Defense Department have
expressed doubts about the usefulness of the "Effective U.S.
Control Fleet".
In recent emergencies, such as the closing
of the Suez Canal and in Vietnam, both practical and legal
problems have arisen with respect to commandeering foreign
registered ships manned by foreign crews.
This is especially
difficult when the ships engage primarily or exclusively in
third country commerce so that they have virtually no
contact with the United States.
This is believed to be true
of many U.S. controlled foreign flag ships.
The Maritime
Administration estimated in 1974 that only about 20 percent
of the U.S. owned foreign flag tankers carried U.S. trade.
(As of April 1975, 330 of the 461 ships on the Effective
U.S. Control List were oil tankers.)
Other Commerce
Department data indirectly support this general view by
indicating that- on average under 10 percent of the sales
of foreign affiliates of U.S. international transport
corporations are to U.S. purchasers.
Thus, it is unlikely
that the sale of U.S. controlled foreign flag ships would
have a serious adverse affect on the national security
of the United States.
- 45 "
To the extent U.S. controlled foreign flag ships were
sold, presumably they would escape taxation, and there would
be little or no impact on freight charges. However, to the
extent these ships remained under U.S. control, and paid
U.S. taxes, there would be some increase in freight rates,
mainly between third countries. In any event, there would
be no discernable effect on the employment of U.S. seamen,
since U.S. crews are seldom used on foreign flag vessels,
whether or not controlled by U.S. corporations.
The second issue concerns the exception from subpart F
for controlled foreign corporations not availed of for the
substantial reduction of taxes. In the case of service
income, the CFC will not be considered to have been availed
of to reduce taxes if the effective foreign tax paid is at
least 90 percent of the effective rate that would have been
paid where the services are rendered, or is not more than
5 percentage points below that rate. The "substantial
reduction" test, as it is called, involves the enormous
confusion of computing potential effective tax rates in
many countries. Moreover, a shipping CFC might well pass
the substantial reduction test. Under the test, no tax
will be attributed to income earned on the high seas , and
the income generated within any given country will qualify
for the special benefits which many countries, like the
- 46 -
United States, grant to shipping. The problems wich the
test could be resolved by changing the standard from the
effective foreign rate to the statutory U.S. rate (48 percent for corporations).
If the deferral of U.S. tax were to be eliminated for
foreign shipping subsidiaries along with eliminating the
exemption provided under Section 883, some taxpayers would
be taxable under both concepts.
In those cases any tax paid
<
or withheld on U.S. source shipping income should be
credited against the tax on their worldwide net income
under subpart F.
- 47 -
6>J>6
X. OPTIONS
1. Retain present law. This option could be supported •
on the grounds that the treatment of shipping income under
subpart F was changed just last year and any further changes
should be delayed long enough to see the results of the
earlier legislation. But the 1975 change is not satisfactory.
The Tax Reduction Act puts shipping services neither in nor
out of the foreign base company services category, but in
a special in-between category, sometimes favored and sometimes
penalized compared to other covered services. Moreover,
applying the new provision promises to be extremely
complicated.
2. Remove shipping income from subpart F. This option
would return to the pre-1976 situation, which condoned the
use of tax haven companies by U.S. ship owners, in contradiction both to the general tax policy of denying deferral
benefits to tax haven companies and to the policy of granting
special tax benefits and direct subsidies to U.S. flag ships.
3. Include foreign shipping income under subpart F
as foreign base company service income. The purpose of the
subpart F provisions with respect to foreign base company
service income is: "... to deny tax deferral where a service
- 48 subsidiary is separated from manufacturing or similar
activities of a related corporation and organized in another
country ordinarily to obtain a lower rate of tax for the
service income."
(S. Rep. No. 1881 37th Cong., 2d Sess.,
C.B. 1962-3, 703, at 709). The use of tax haven corporations
to furnish international shipping services answers this
description.
If shipping income were to be treated like foreign
base company service income under subpart F, the substantial
reduction test would have to be strengthened.
Using as
the standard the foreign effective rates where the services
are performed is extremely complex
the discretion of the taxpayer.
and leaves too much to
In the case of shipping,
all of the income earned on the high seas and much of that
earned in individual countries pays an effective rate of
zero.
The test could be strengthened by making the U.S.
corporate rate the standard.
Any substantial change in the reciprocal exemption
(discussed in Part A) should be accompanied by the inclusion
of shipping income under subpart F.
Otherwise, to the extent
that other countries continue to grant exemption on the
basis of reciprocity, owners of U.S. flag vessels would have
an additional incentive to transfer those vessels to a
controlled foreign corporation and register them outside the
United States.
- 49 -
XI.
REVENUE ESTIMATES
Option (1), retaining present law, would involve no
revenue change. Option (2) would return to pre-1976 rules
which specifically exclude shipping from subpart F. This
would involve some revenue loss, but a small one; in general
the exception for shipping profits reinvested in shipping
operations is tantamount to an exclusion.
Option (3) would define foreign base company service
income to include shipping profits without exception and would
strengthen the substantial reduction test. The estimated
revenue gain from this option viewed in isolation is $100
million. However, an estimated $30 million of this amount
would represent double counting if the statutory exemption
under section 883 were also eliminated. In other words, if
both proposals were enacted, the additional revenue gain from
the subpart F proposals is estimated at $70 million.
The estimation of the revenue gain under Option (3) may
be briefly explained. A sample representing about two-thirds
of the gross tonnage of U.S. owned foreign flag ships showed
pre-tax earnings and profits of $690 million in 1973, an
effective foreign tax rate of 3 percent and dividends paid
°f $260 million, or 40 percent of earnings and profits
(Table 9). Based on that sample, the estimated revenue gain
Table 9
Earnings & Profits, Foreign Taxes and Dividends
Paid, Selected CFCs engaged in shipping, 1973
($ millions)
Pre-tax : Foreign tax paid : : ; Paid
Earnings :
& profits
$ million
Sample of U.S. owned foreign ^ _
flag ships 1/
.
rcA
~> O^*Q ^87
687,2
23.0
% of
: Earnings :
pretax E+P
& profits
3.3
Dividends:
$ million
664.3
256.8
% of
E&P
38.7
Owned by oil companies 636.4 22.8 3.6 613.6 ^232.7 37.9
Owned by others 50.8 0.2 0.4 50.6 24.2 47.8
1/ Representing two-thirds of the total gross tonnage of U.S. owned foreign flag ships.
Includes some CFCs which also engage in other activities.
Source.: 1973 tax return data for selected parent companies and their shipping CFCs.
o
773*
- 51 -
of eliminating deferral for shipping CFCs would be about
$100 million after foreign tax credits and usable excess
credits.
This assumes no exceptions from the subpart F
1975 Tax Reduction Act amendments (Table 10) . While the
1974 figure would have been higher than for 1973, the current
depressed market for tankers suggests a drop from 1974 levels
for 1975 and 1976.
The estimate assumes that the 1975
figure would be roughly the same as for 1973.
It is estimated by the Maritime Administration that
only about 20 percent of U.S. owned foreign flag oil
tankers carry U.S. trade, the rest engaging exclusively
in foreign commerce.
Assuming that 50 percent of the
nontankers carry U.S. trade and that the ships which
carry U.S. trade derive two-thirds of their pre-tax income
from U.S. sources, the tax imposed on their U.S. income by
eliminating the statutory exemption would have amounted to
perhaps $30 million.
Thus, crediting that tax would reduce
the net revenue gain of eliminating deferral to $70 million
(Table 10).
65/
- 52 Table 10
Estimated Revenue Effect of Eliminating Deferral on the Income of
Shipping CFCs in 1973
($ millions)
Gross
tonnage
of ships
(thousand
tons)
Sample for which tax returns
available
oil companies
others
Estimated others
Estimated total
:
Undistributed
pre-tax
earnings and
profits 2/
17,771
15,755
1,936
427
399
28
4,857
100
22,549 \7
527
Tentative
U.S. tax
205
192
13
y
Applied/
Net.
Foreign : excess
rev;
tax
: credits
gai'
credit : of
: parent !/•
18
18
135
135
48
253
52
39
13
_45
21
135
9?
Less credit for tax on U.S.
source income
31
Net revenue gain
71
Office of the Secretary for the Treasury
Office of Tax Analysis
1/
July 17, 197!
A s reported in U . S . Department o f C o m m e r c e , M a r i t i m e A d m i n i s t r a t i o n , Foreign Flag Merchant
Ships Owned b y U . S . Parent C o m p a n i e s , March 1 9 7 5 . Excludes ships owned b y M r . D.K. Ludwig,
an i n d i v i d u a l , w h o would presumably n o t b e subject t o subpart F b u t t o such other provisior
as t h e t a x on accumulated e a r n i n g s .
2/ Assumes that gross-up required on all distributions, including those from LDC corporations
and that a l l companies w e r e o n t h e o v e r a l l limitation.
3/ Estimated on an average of $33 thousand per gross ton. E & P based on the tonnage of tanke
cf. freighters and t h e E & P/ton figures o f t h e t a x return group.
4/ Computed on the basis of foreign taxes paid and deemed paid in 1973 (or in some cases, 1972
reduced b y t h e limitations o n taxes p a i d o n e x t r a c t i o n income once t h e 1975 Tax Reduction A
is fully in e f f e c t . Since extraction income w a s n o t identified o n t h e tax returns it was
estimated o n t h e basis o f countries and w a s probably o v e r s t a t e d ; this would have the effect
of overstating
t h e excess credits a v a i l a b l e , b u t only for those companies which clearly na
m o r e than enough c r e d i t s .
5/ Gross of any revenue gain from the 1975 Reduction Act changes with respect to shipping, her;
assumed t o b e zero.
_6/
Based o n M a r i t i m e estimate that only 2 0 % o f U . S . o w n e d foreign flag tankers carry U.S. trad
A s s u m e s further that (a) 5 0 % o f nontankers carry U . S . t r a d e , (b) that U . S . owned foreign J1
ships carry U . S . trade derive 2/3 of their total taxable income from that traffic, and (c) ;
that under section 1 t h e t a x o n presumed n e t income of such v e s s e l is equal to a tax on tn
actual n e t i n c o m e . P r e - t a x E & P estimated at $192 m i l l i o n of w h i c h 2/3 o r $128 million \
assumed from U . S . trade. T h e t a x o n U . S . source income is estimated at 48% of one half or
the $ 1 2 8 (which includes traffic in both d i r e c t i o n s ) .
7/ This is a maximum estimate in that it does not make any allowance for the various escape
m e c h a n i s m s o f subpart F.
Source:
1 9 7 3 t a x return d a t a for shipping CFCs a n d e s t i m a t e s explained above.
Contact: L.F. Potts
Extension 2951
February 26,1976
FOR IMMEDIATE RELEASE
WITHHOLDING OF APPRAISEMENT ON
SKI BINDINGS AND PARTS THEREOF FROM
WEST GERMANY, AUSTRIA, AND SWITZERLAND
The Treasury Department announced today a six-month
withholding of appraisement on the subject merchandise from
West Germany, Austria, and Switzerland, pending 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
February 27, 1976.
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 decision in this case will be made on or before
May 27, 197 6. 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
injured. 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 Austria for
calendar year 1974 were valued at approximately $860,000;
from West Germany for the period June 1974-July 1975, roughly
$1/560,000; and, from Switzerland for the period January through
August 1975, roughly $115,000.
WS-676
o 0 o
635
Contact: D. Cameron
Extension 2951
February 25, 1976
FOR IMMEDIATE RELEASE
TREASURY ISSUES
ANTIDUMPING PROCEEDING NOTICE WITH
RESPECT TO AUTOMOBILE BODY DIES FROM JAPAN
Assistant Secretary of the Treasury David R. Macdonald
announced today that he was issuing an antidumping proceeding
notice with respect to Automobile Body Dies from Japan.
Notice of this action will be published in the FEDERAL REGISTER
of February 26, 1976.
The Treasury Department's announcement followed a
summary investigation conducted by the U.S. Customs Service
after receipt of a petition alleging that sales at less than
fair value are occurring in the United States. The petition
also provided sufficient indication of injury to the domestic
industry to warrant an investigation.
The estimated volume of prospective imports is between
$1,660,000 and $1,992,600.
*
WS-678
*
*
tdtpartmento
February 26, 1976
FOR RELEASE AT 4:00 P.M.
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for $3,100 million, or thereabouts, of 364-day Treasury bills to be dated
March 9, 1976, and to mature March 8, 1977 (CUSIP No. 912793 D2 9). The bills
will be issued for cash and in exchange for Treasury bills maturing March 9, 1976.
This issue will provide $1.0 billion of new money for the Treasury as the
maturing issue is outstanding in the amount of $2,102 million, of which $761 million
is held by the public and $1,341 million is held by Government accounts and the
Federal Reserve Banks for themselves and as agents of foreign and international
monetary authorities. Additional amounts of the bills may be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities.
Tenders from Government accounts and the Federal Reserve Banks for themselves
and as agents of foreign and international monetary authorities will be accepted
at the average price 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, Wednesday, March 3, 1976.
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
ers except for their own account.
WS-679
Tenders will be received without
C3?
-2.
•
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.
Settle-
ment for accepted tenders in accordance with the bids must be made or
completed at the Federal Reserve Bank or Branch on March 9, 1976,
in
cash or other immediately available funds or in a like face amount of Treasury
bills maturing
March 9, 1976.
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 th^
bills are excluded from consideration as capit.-l 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 receive 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.
#
#
#
7»04
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT, OPERATIONS, AND TARIFF AFFAIRS)
BEFORE THE SENATE COMMITTEE
ON BANKING, HOUSING AND URBAN AFFAIRS
ON S. 1339 AND H.R. 5620
FRIDAY, FEBRUARY 27, 1976
Mr. Chairman, I am pleased to be here today to testify in support of
legislation which would enable the Department to replace the present Denver
Mint with a new and modern facility. The bills you are considering today
would amend the 1963 Mint construction statute by increasing the amount
of authorized funds and by extending the period during which these funds
would be available for use in building the facility. In effect, the proposals
would authorize the funding of up to $65 million for a new coinage facilitv
to replace the existing Mint at Denver. The funds so authorized would be
subject to annual appropriations and would be available through fiscal year
1983.
Passage of the legislation, in our view, is essential to assure production
of coins in the quantities required in the years ahead. Virtually all coinage
production takes place in the U.S. Mints at Philadelphia and Denver. At the
time the present Denver Mint began operations in 1906, it produced about
13 million coins. Today, after several expansions that have strained the
WS-680
- ? facility, it produces 5 billion coins in a multi-story, outdated building
which any private manufacturing concern would have abandoned years ago.
In the meantime, the total coinage demand of the nation, which has
nearly doubled since 1970, is expected to rise to approximately 18 billion
coins per year by 1980 from the current annual demand of about 13 billion coins.
The demand is expected to increase further to 30 billion pieces by 1985.
Even if the present rate of increase does not itself increase in the future,
the present production capacity of the Bureau of the Mint would probably be
insufficient to meet coinage demand by the end of this decade. Action should,
therefore, be taken now to prevent the recurrence of a coinage shortage
similar to the one we experienced about a decade ago, which would seriously
inconvenience our citizens and hinder retail transactions throughout the
nation.
To be able to satisfy the anticipated increase in coinage demand, we
project that a new Denver Mint facility must be in operation by 1980. Once
completed, the new Mint will have an initial production capacity of 10.5
billion coins per year — in contrast to the present production of about 5
billion coins — which could ultimately be expanded to 25 billion coins
annually. Together with the other Mint facilities which have the combined
capacity of producing 11 billion coins per year, the new Denver Mint would
represent an assurance that our nation's coinage needs would be fully supplied
for many years.
The bills before you, Mr. Chairman, (S. 1339 and H.R. 5620) are
essentially the same as the measure proposed by the Administration in early 1973,
- 3 which the Senate, after unanimous approval by the Banking Committee, passed
in June 1973. While that measure was similarly approved by the House Public
Vforks Committee, it failed to gain the votes necessary for passage under
suspension of rules in the House in the closing days of the 93rd Congress.
Before the Administration could reintroduce the proposals in this Congress,
the Colorado delegation both in the House and Senate introduced the bills
now pending before you. After hearings before the House Public Works
Committee, held in the spring of 1975, the House overwhelmingly approved the
proposal in September of last year.
While the authorization proposal was being considered by the 93rd Congress,
the Department and GSA undertook a thorough evaluation of the available sites
in the Denver area for a new Mint facility. After an intensive examination
of available alternatives, and after completion of clearance in accordance
with the National Environmental Policy Act of 1969, the Department selected
a site for the facility in July 1974, which is known as the "Park Hill" site.
This site is located on a golf course in the northeast part of Denver and
consists of some 34 acres. Under an agreement with the City of Denver, title
to that property was conveyed to the Federal Government by the City for
$1.5 million in September 1975.
Although the Department continues to consider the site we have so
acquired as an excellent and entirely feasible location for a new Denver
facility, we feel obligated to bring to your attention, Mr. Chairman, an
alternative site which our people and GSA have concluded will result in
considerable savings for the Government. Approximately three months ago,
- 4 a real estate firm brought to our attention the availability of an industrial
facility (known as the Littleton facility) located just outside Denver. This
vacant industrial building (containing 425,000 square feet of finished space
and 50,000 square feet of unfinished space on one unobstructed floor),
together with some 58 acres of land, is available for $8.5 million. The
Department could not ignore the potential savings which might result from the
acquisition and modification of this alternative site, we ordered, with the
General Services Administration, a thorough evaluation of this facility.
According to the findings of the study, the acquisition and renovation of this
facility would result in estimated savings of $25 million for the Federal
Government over the cost of acquiring the site and constructing a new Mint on
the Park Hill site. In addition, by acquiring the existing facility, it
appears to us that the Department could save about two years in placing the
new coinage facility into operation.
If we were called on to make a purely business judgment as a private
company could, we would have to conclude that the acquisition of the existing
Littleton facility is preferable to constructing an entirely new Mint at the
Park Hill site. We do, at the same time, fully realize that, as a Department
of the Federal Government, there are numerous legal complications that could
effectively delay the completion of the adaptation of the Littleton facility
for use as a Mint for years, particularly litigation over the adequacy of any
environmental impact statement that we might file. While we believe that
any environmental impact — social, economic or otherwise --of relocating
the Mint from downtown Denver to outside the city limits is far outweighed
6$
- 5 by the cost savings, we realize that Congress, in which the ultimate
selection responsibility rests, may feel differently.
While we are recommending
the Littleton facility, our real need is a new Denver Mint, and we cannot
afford to be tied up in litigation for years and years defending this choice.
We therefore propose the approval of S. 1339 and H.R. 5620, Mr. Chairman,
but with the addition of an amendment, which would enable the Mint to acquire
the Littleton facility.
If the Congress believes, as we do, that the potential savings in both
time and money warrant the selection of the Littleton site, then I draw your
attention to section 2 of H.R. 5620, as passed by the House.
This provision,
since it contemplates new construction, would be inconsistent with the
acquisition of an existing facility.
Thus, if the Littleton site is to be
acquired, then perhaps H.R. 5620 should be further amended by adding a new
section 3 along the following lines:
Notwithstanding any other provision of this Act,
if negotiation to that end can be concluded, the
Secretary of the Treasury is directed to acquire an
existing plant and associated real property in the
Denver, Colorado area and the appropriations authorized
by the first section of this Act shall be available
for such acquisition and the subsequent conversion
and equipping of such plant for use as a coinage
facility.
Such language would recognize that the Government may not necessarily
be successful in negotiating the purchase of the Littleton plant and site
because it may no longer be on the market when appropriations become available,
or because the owners may not be agreeable to a sale to the Government.
However, if the site can be acquired, the Congressional direction will assure
that the acquisition can proceed without further delay.
- 6 The Committee may also wish to address itself in its report to the need
for further consideration of environmental concerns.
The previous environ-
mental impact statements fully dealt with the matter. While the most recent
statement primarily related to the Park Hill site, most of the discussion is
applicable to a Mint anywhere in the Denver area.
In addition, we have made
a preliminary examination of the environmental factors associated with the
possible use of the Littleton facility and concluded that there would be no
significant adverse environmental effects under this proposal. Thus, the
Committee may wish to affirmatively state its satisfaction with the analysis
as its basis for directing that the Littleton site be acquired.
Such modification in H.R. 5620, in the Department's view, is necessary
so that we may acquire the Littleton site without delay. Nevertheless,
Mr. Chairman, if the Committee feels it is not prepared to amend the Housepassed bill, we, alternatively, recommend that it vote favorably on H.R. 5620
as it now reads.
Passage of H.R. 5620 in its present form would, at least,
enable us to proceed with the construction of a new facility at the Park Hill
site.
Before I joined the Treasury Department, when I was practicing law,
it was a commonplace occurrence for my clients to be forced to change their
capital plans at the last minute.
Having come to Washington two years ago,
I find that we have to be just as flexible in planning (ksvernment capital
expenditures.
The only thing that surprises me is the criticism that appeared
in the Denver press and elsewhere regarding the motives of those Mint and
Treasury officials who, when presented with the Littleton facility, proceeded
673
- 7 to analyze its advantages and disadvantages.
Let me assure you, Mr. Chairman,
that no matter what decision is ultimately made, our recommendation to the
Comnittee reflects simply the best efforts of dedicated Treasury personnel
to spend the taxpayers' money at though it were our own.
This, Mr. Chairman, concludes my prepared statement.
I appreciate your
patience and the patience of the Committee, and I will be happy to answer
and questions you may have.
#
#
#
^department of the
iSHINGTON, D.C. 20220
TELEPHONE 964-2041
77/3
For information on submitting tenders in the Washington, D. C. area:
FOR RELEASE AT 4:00 P.M.
PHONE WO4-2604
February 27, 1976
TREASURY TO AUCTION $2.0 BILLION OF NOTES
The Department of the Treasury will auction $2.0 billion of 4-year notes to
raise new cash. Additional amounts of the notes may be issued to Federal Reserve
Banks as agents of foreign and international monetary authorities.
The notes now being offered will be Treasury Notes of Series C-1980 dated
March 17, 1976, due March 31, 1980 (CUSIP No. 912827 FK 3), with interest payable on
September 30, 1976, and thereafter on March 31 and September 30. They will be
issued in registered and bearer form in denominations of $1,000, $5,000, $10,000,
$100,000, and $1,000,000, and they will be available for issue in book-entry form.
Payment for the notes must be made on March 17, 1976. Payment may not be
made through tax and loan accounts.
Tenders will be received up to 1:30 p.m., Eastern Standard time, Friday,
March 5, 1976, 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 Thursday, March 4.
Each tender must be in the amount of
$1,000 or a multiple thereof, and 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" should
be printed at the bottom of envelopes in which tenders are submitted.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, 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 amount
offered. After a determination is made as to which tenders are accepted, a coupon
yield will be determined to the nearest 1/8 of 1 percent necessary to make the
average accepted price 100.000 or less. That will be the rate of interest that
tfill be paid on all of the notes. Based on such interest rate, the price on each
competitive tender allotted will be determined and each successful competitive bidder
^11 pay the price corresponding to the yield bid. Price calculations will be
-arried to three decimal places on the basis of price per hundred, e.g., 99.923, and
:he determinations of the Secretary of the Treasury shall be final. Tenders at a
field that will produce a price less than 99.001 will not be accepted.
The Secretary of the Treasury expressly reserves the right to accept or reject
jny or all tenders, in whole or in part, and his action in any such respect shall be
•inal. Subject to these reservations, noncompetitive tenders for $500,000 or less
rail be accepted in full at the average price of accepted competitive tenders, which
,r
ice will be 100.000 or less.
YS-681
(OVER)
-2Commercial 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 hold*
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 must be completed on or before Wednesday,
March 17, 1976, at the Federal Reserve Bank or Branch or at the Bureau of the
Public Debt in cash, in other funds immediately available to the Treasury by
March 17, 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) Thursday,
March 11, 1976, 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
the case of the Treasury, or (2) Tuesday, March 9, 1976,
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
6</f
The Treasury will sell $2 billion notes due
March 31, 1980. The issue will be auctioned on
March 5 and will be settled on March 17.
February 27, 1976
WS-682
STATEMENT BY THE HONORABLE CHARLES M. WALKER
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL FINANCE AND RESOURCES
SENATE FINANCE COMMITTEE
MONDAY, MARCH 1, 1976, 10:30 A.M.
Elimination of U.S. Withholding on Dividends
and Interest Paid to Foreign Investors
Mr. Chairman and Members of the Subcommittee:
I want to thank you for this opportunity to present
to this Subcommittee our views on the elimination of
withholding taxes on dividends and interest paid to
foreign investors.
At the outset, let me state that the Treasury Department and the Administration believe that the existing withholding taxes on dividends and interest payments by United
States persons to non-resident aliens and foreign corporations should be eliminated. We strongly support elimination
of these taxes because of the defects inherent in the present
tax withholding system and the benefits to be derived through
its elimination.
Under present law, and subject to numerous exceptions,
a 30 percent withholding tax is imposed on the gross amount
of dividends and interest paid to foreign investors.
WS-683
- 2 In our view, this present tax withholding system:
Handicaps U.S. companies seeking to
raise funds in the international
capital market:
Favors short term debt investment at
the expense of longer term investment;
and
—
Has resulted in an unwarranted degree
of complexity in our tax law which is
now replete with exceptions for the
tax-wise foreign investor and traps
for the unwary.
The present tax withholding system handicaps U.S.
companies seeking foreign capital in a number of ways.
First, the present system narrows and inhibits the
market in which potential foreign investors operate. It
places a great premium on complexity and discourages from
investing at all, those who are unable or unwilling to deal
with these complexities, such as avoiding double taxation or
finding the optimum route for tax treaty reductions .
Certainly the development of our own national capital
market would have been severely retarded if each state had
imposed withholding taxes at varying rates on dividends.and
interest paid by local corporations to investors residing
in other states.
7/^
- 3 Second, the present system inhibits an effective
international secondary market in U.S. securities
and
securities which are not freely marketable throughout the
world are not competitively attractive investments. Foreigners
investing in U.S. securities today are generally those able
to blunt the impact of U.S. withholding taxes through use
of our network of bilateral income tax treaties which
eliminate or substantially reduce these withholding taxes.
However, these treaty exemptions and reductions are unsatisfactory in making U.S. securities attractive in international
markets because they depend on the identity of the holder
of the security.
treaty countries.
That is, they exempt only residents of
This fact greatly restricts the nego-
tiability of securities in international capital markets
and greatly narrows the opportunities open to U.S. issuers
abroad.
Third, U.S. borrowers seeking long-term funds are at
a competitive disadvantage with borrowers of other major
countries which do not impose withholding taxes on investments by nonresidents.
Indeed, other countries recently
have been taking legislative action to eliminate their
withholding on interest obligations in order to give their
borrowers greater access to international capital markets.
For example, Australia in 1973, Japan in 1975 and Canada in 1975
enacted laws to exempt interest on long term international bonds.
- 4 They have joined other countries that already provide
for exemption on international issues. (See Annex A).
Finally, U.S. withholding taxes increase the capital
costs of American companies. Foreign borrowing is
either deterred or it is the American company, not the
foreign investors, who bear the burden of U.S. withholding
tax, For example, an American borrower who would otherwise
borrow at 9 percent may be required to pay a nonresident
as much as 13 percent to secure the same loan.
In addition, the present tax withholding system favors
short term debt investment rather than desirable long term
debt or equity investment. This bias arises as a result
of the present exemptions from withholding for interest
on bank deposits and other short term obligations.
Finally, the present tax withholding system has resulted
in a patchwork of statutory and treaty provisions, which in
sum, are not simple, are not neutral with respect to investment decisions, and do not raise significant revenue. Indeed,
there have been so many ways around the United States withholding tax that the 30 percent tax on gross income either
acts as a deterrent to investment or is noted more for its
4ra
- 5 avoidance than its collection.
These conclusions are
perhaps best illustrated through a description of the
exceptions available under the present tax withholding
system.
Domestic legislation has singled out certain categories of income recipients to be free of withholding taxes.
Interest on United States bank deposits held by
foreigners has traditionally been free from United
States withholding tax and the Congress has extended
such exemption on several occasions.
The tax reform act
passed by the House and now before the Finance Committee
makes this exemption permanent.
The present exemption
undoubtedly contributes to the present flow of foreign
funds into bank deposits rather than longer term securities.
The Internal Revenue Code exempts from withholding
tax, investments in stocks and debt obligations by foreign
governments.
There are major administrative problems in
determining the scope of this exempiton and its application
to specific cases, particularly where the investment is
made through an entity separate in form from the foreign
government.
A broad exemption would avoid the difficult
administrative problem of making such determinations on a
case-by-case basis through private rulings.
- 6 In some cases, withholding has been eliminated
because it is not practical, as an administrative matter,
to collect a tax. For example, there are very difficult
problems in applying withholding where securities are
issued at discount, and the economic benefit is realized
subsequently through sale to third parties. Accordingly,
short term discount was removed from Withholding in 1971.
Similarly, capital gains taxes on U.S. investment assets
held by foreigners were eliminated through amendments to
the Code in 1966.
Other exemptions have been established on conceptual
grounds. Thus, U.S. companies having more than 80 percent
of their gross income from foreign sources are not subject
to withholding tax on dividends and interest paid to foreign
investors. This rule, coupled with favorable Internal
Revenue Service ruling practices, was the basis of a major
financing device during the period when direct investment
regulations required that U.S. companies who wanted to
borrow for foreign investment had to do that borrowing
abroad.
Statutory amendments tied to the Interest Equalization
Tax permitted the direct issuance by United States companies
of debt obligations free from United States withholding and
estate taxes. These possibilities for raising capital abroad
- 7are foreclosed today following expiration of the investment control programs and changes in ruling policy. This
leaves United States companies largely unable to issue
new securities in the international securities markets
that trade free of withholding and estate taxes.
Major exceptions to the tax lie in our series of
bilateral tax treaties. For many years, United States
policy has been to seek treaties which eliminate withholding on intere;t payments. We have treaties with
12 countries which eliminate withholding and treaties
with others which reduce the withholding rate. Similarly,
we have a number of treaties which reduce dividend rates
to 15 percent in the case of portfolio investment and
5 percent in the case of direct investment by a corporate
investor. These rates follow the treaty model of the
Organization for Economic Cooperation and Development
(OECD), which has been widely adopted by member countries
to reduce withholding taxes. These bilateral conventions
in effect create a series of individual income tax codes
under which income flows incur less tax when passed through
a circuitous route of interlocking tax treaties. Inordinate
time and effort is spent by tax planners in routing transactions and investments to obtain the most favorable arrangements. In some cases, this leads to the use of nominees and
concealed ownership.
The treaty network already serves to reduce or
eliminate withholding in the case of the bulk of
investments which are actually in place today.
In
1973 more than 90 percent of non-bank interest and
dividend income flowed to residents of treaty countries.
The important lesson of treaty experience, however,
is that elimination of withholding taxes on dividends
and interest paid to foreign investors is not only a
practical result but has long been recognized as sound
tax policy.
The question of dividend and interest income was
considered more than 50 years ago by a commission of
tax experts extablished by the League of Nations. They
concluded, back in 1923, that the right to tax investment incom
properly belongs to the state of the taxpayer's residence.
This principle has been reaffirmed in the commentaries to the
OECD Model Convention, while recognizing that some states
may wish to maintain some minimal withholding tax solely
on revenue grounds.
With respect to those investments in the United States
that have not been deterred by withholding taxes, the net
effect of the various statutory and treaty exemptions has
been to substantially lower the average rate of withholding
tax.
For 1973, the total withholding taxes collected on
dividends, and interest other than bank interest, were less
- 9
djr?
than 10 percent of the gross payments despite a basic
statutory rate of 30 percent. Further, the amount of
tax actually collected is very small. In 1973, only
$210 million of withholding tax was collected of which
less than $20 million is clearly identifiable as withholding on interest.
Thus, the revenue aspects of withholding are not
major. In sum, we are persuaded that our present tax
withholding system is counter-productive in hampering
our economy, denying access to foreign capital markets,
favoring short term foreign debt investment, and needlessly
complicating our tax law in order to raise so little revenue.
Rather, we recommend the elimination of withholding taxes
on dividends and interest paid to foreign investors.
In our view, elimination of withholding tax on investment income is desirable because:
1. Removal of the tax will make investing more attracttive and less difficult for investors. It w7ill make it easier
for U.S. companies to seek funds in international capital
markets and will enhance market efficiency for investment
in the United States. At a time when projections show a
- 10 need for increased capital sources, we should be concerned
over the efficiency of our tax system when applied to
foreigners otherwise willing to place their funds in the
United States.
By elimination of the withholding we reduce
the tax burden on capital formation.
2.
It should improve the relative attractiveness
of long term securities and reduce the present bias.
favoring short term obligations and bank deposits.
3.
It may help restore the United States financial
community to the center of international capital markets,
4.
It is consistent with principles of tax equity
and other rules relative to source of income.
5.
It will eliminate what has become a complex
patchwork of legislative and treaty provisions and simplify
one area of tax law.
The basic point is that the many benefits of eliminating
withholding outweigh the revenue loss and thus, on balance,
we believe it is the best approach to take.
We urge elimination of withholding not only with respect
to interest income, wher? a 30 percent tax on gross payments
of interest is a clear impediment, but also for dividend
paymerts.
There is no reason to perpetuate favorable
tax treatment for debt Investment over equity investment.
-nMany foreign investors are interested not only in capital
appreciation, which we do not tax in the case of a foreign
investor, but in yield. The 30 percent tax on portfolio
dividends is clearly a deterrent to those relying on the
investment yield. This deprives many of our businesses
of access to a form of capital they urgently require*
Before concluding, however, let me treaty briefly
with some of the reasons offered for retaining the present
withholding system.
Cost. It has been suggested that elimination of tax
withholding is costly and would merely give foreign investors
a "free ride" at the expense of the U.S. Treasury.
As noted earlier, because of the large number of
exemptions and rate reductions under the present system
these taxes deter additional investment and raise very
little of Our total revenue. Indeed for 1976 it is estimated that withholding tax collections will account for
less than l/10th of 1 percent of total revenue. Moreover,
it should be noted that to the extent the elimination of
withholding results in increased foreign investment in the
U.S., additional U.S. tax revenue will be generated from
the increased economic activity created by such investment.
Finally, to the extent foreign investors qualify for
exemption under the present system or the present withholding
taxes are borne by the U.S. borrower through an increased
interest cost, foreign investors already get this so-called
free ride.
- 12 Treaty Negotiations. There is some concern over
the effect of our unilateral removal of withholding taxes
on our bargaining position in tax treaty negotiations.
The development of a system of bilateral treaties for
avoidance of double taxation led in the past to the
adoption of reciprocal reductions in withholding tax
rates. However, the new realities are relatively clear.
Developing countries with limited amounts of investment
in the U.S. generally do not seek to have the United
States reduce its withholding tax and the United States
has generally not sought in its discussions with developing
countries to persuade them to forego revenues by reducing
their withholding tax rates.
Moreover, we now have tax conventions with the majority
of developed countries, virtually all of which already provide for reduced withholding rates. Finally, in cases where
we renegotiate these treaties, developed countries generally
do not have the reduction of our withholding taxes as a
major treaty objective. Thus, today United States withholding
rates are of limited significance in treaty bargaining.
Tax Avoidance. Some European country Treasury officials
have expressed concern in recent years over tax avoidance
by their residents investing in the Eurobond market in which
7sT
- 13 the securities are issued in a manner which makes them
free of withholding at the source.
They have suggested
the desirability of imposing uniform withholding taxes
on securities issues, with some form of verification
and refund system.
On the other hand, some European
capital importing countries, which do not have withholding tax on interest today, have opposed this suggestion and have pointed out that the imposition of a
withholding tax at the source at a 20 or 30 percent rate
may make tax avoidance somewhat more expensive, but will
not deter avoidance for persons in higher marginal income
brackets.
We are mindful of the problems raised by tax avoidance,
but do not believe that it is necessary to structure our
internal tax system to make up for the inadequacies of
individual countries with respect to the taxation of their
own citizens.
Thus, we believe it desirable to avoid
cumbersome withholding and refund systems, but we do support
the concept of expanding information reporting and the
exchange of information to permit countries to have access
to data they may require for tax enforcement.
The Treasury Department has suggested that legislation
eliminating withholding should also permit the imposition
of a withholding tax in the case of a country that refused
to cooperate in identifying recipients of dividend and
interest payments where there is believed to be a substantial
- 14 problem of tax evasion.
This discriminatory stick should
be more effective than our existing rules in dealing with
foreign tax havens.
Conclusion
In conclusion let me again emphasize that it is time
we reform the tax withholding system.
We believe the
investments the present tax withholding system discourages
and the complexity it creates are much more significant
than the amounts of revenue it produces.
Revenues gained
from increased investment and economic activities in the
United States will offset revenues lost.
It is in our
national interest, on both economic and tax policy grounds,
to eliminate withholding on dividend and interest' income.
We should do so, and do so promptly.
ANNEX A
6 &d
International Practice on Withholding Taxes on Interest
The following is a recent survey of foreign countries
exempting withholding on interest on obligations (other
than bank accounts) paid by domestic issuers to foreigners:
Austria. Interest paid to nonresident lenders is
exempt.
Australia. Interest payments by a resident to a
nonresident are exempt irom payment of the 10% withholding
tax if the interest liability is incurred in carrying on a
business in a country outside Australia through a permanent
establishment in Lhat other country. Furthermore, the income
tax law amended in 1971 to exempt any interest payments:
(i) made in a foreign currency on public issues or widely
offered private placements of bearer bonds, if the bonds
were issued in a foreign currency outside Australia by
Australian companies for use in their Australian businesses;
or (ii) made on bearer bonds in a foreign currency, if the
bonds were issued in a foreign currency outside Australia by
Australian companies for use in a business which Is wholly
or substantially Australian owned and controlled.
Belgium. With respect to loan agreements entered
into between March 1, 196.8 and December 31, 1971, Belgium
granted an exemption from withholding for interest paid by
Belgian industrial, commercial or agricultural enterprises
to nonresidents who had no permanent establishment in Belgium
in cases in which the loans served the purpose of financing
operations of general economic interest and contributed
directly to the establishment, expansion, conversion or
modernization of the borrower. (Arte. 89, § 2, 6°, C o f
Royal Decree of March 4, 1965; Royal Decree of January 5,
1971, 1971 Moniteur Beige 763 (January 21, 1971)). This
exemption was applicable to private and public borrowings
and no requirements as to maturities were imposed. The on\y
exemptions from withholding presently available in Belgium
cover interest paid to nonresidents on (1) loan^ to and
deposits in banks established in Belgium made by foreign
banks, and (2) registered obligations of, and deposits in,
Belgian banks and certain other financial institutions.
Canada. The Canadian Income Tax Act was
amended in 1975 to exempt from Canadian tax interest
which Canadian companies pay to unrelated nonresidents
on obligations issued after June 23, 1975 if, under the
terms of such obligations, the company may not be obliged
to pay more than 25 percent of the principal amount thereof
within five years of the date of issue.
Denmark. Interest paid to nonresident lenders
is exempt.
France. Under Article 131 ter 1 of the Code
Generale des Impots, the Minister of Economy and Finance
is authorized to exempt from French withholding tax payments
of principal and interest made outside France on special
issues of bonds floated abroad by French companies or enterprises. Under this provision, the Minister has authorized
exemptions for private placements with a small number of
lenders as well as for public issues. No limitations on the
maximum period to maturity have been imposed. By Degree
of January 7, 1966, codified as Article 41 Duodecies C of
Annexe III of the Code Generale des Impots of France, exemption from withholding is also given to interest on deposits
of foreign currency with French banks and to income on certain short-term transactions between French banks on the
one hand and foreign banks, international organizations
and foreign financial institutions on the other. Moreover,
in the 1975 Finance Law, passed on December 30, 19.75, France
has further expended its tax exemption for interest payments
to nonresidents.
Finland. Under.the "Act on Taxation of Income
and Property", Article 7, Section 2, Finland exempts from
income tax all bond interest paid to foreign lenders. This
provision was first enacted in 1966 as an interim measure
to be effective for one year. This law has been renewed
from year-to-year, most recently on December 29, 1972, for
the year 1973. In 1973, the provision was amended so as to
exempt from Finnish income tax all interest paid to foreign
lenders' on foreign loans^ including foreign private placements.
Italy. Italian law provides an exemption from withholding for interest paid to nonresidents on certain loans
contracted and bonds issued outside Italy. This exemption,
which has been available since April 28, 1970, was to expire
on January 7, 1974 unless extended.
T9£Z;
Japan. Under special legislation in Japan,
interest payable on foreign currency debt securities
issued by Japanese companies during the period from
April 1, 1968 to March 31, 1972 and having maturities of
not less than five years are exempt from withholding if
paid to nonresidents of foreign corporations not having
permanent establishments in Japan to which1 the interest
is attributable. It is understood that similar relief was
extended in 1974.
Netherlands. Interest paid by a Dutch financing
company is ordinarily exempt from withholding.
Norway. Interest paid to nonresident lenders is
exempt.
Sweden. Interest paid to nonresident lenders is
exempt.
United Kingdom. If a borrowing by a resident
borrower from a foreign lender is governed by foreign law,
the interest is exempt from withholding at the source. In
order for the interest to be deductible by the borrower,
the borrowing must comply with additional restrictions on
the place where, and the currency in which interest is paid
and on the purpose of the borrowing. (Income and Corporation
Taxes Act 1970, §§ 248(4) (b), 249(1)).
773
ANNEX B
Proiected Revenue Effects of the Elimination of Withholding
Taxes on Dividends and Interest Paid to Foreign Investors
($ millions)
1976
1977 1978 1979 1980
Elimination of tax on:
1.
2.
3.
4.
interest from portfolio investment
dividends from portfolio investment
interest from direct investment
dividends from direct investment
15
150
2
38
20
160
2
42
25
170
2
46
30
35
180 190
3
3
50
54
* * * * * * *
1976
1977 1978 1979 1980
Totals
portfolio interest and dividends
direct interest and dividends
all interest and dividends .
165
40
205
180
44
224
195
48
243
210
53
263
225
57
282
6>6?
FOR IMMEDIATE RELEASE
Contact: R.B. Self
Extension 8256
March 1, 1976
TREASURY ISSUES FINAL COUNTERVAILING DUTY DECISION
ON IMPORTED GLAZED CERAMIC WALL TILE
FROM THE PHILIPPINES
Assistant Secretary of the Treasury David R. Macdonald
announced today a final negative determination under the
Countervailing Duty Law with respect to imports of glazed
ceramic wall tile from the Philippines. A notice to this
effect will be published in the Federal Register of March 3,
1976.
Treasury's investigation revealed that "bounties or
grants" were being paid to the ceramic wall tile exporters in
the form of various tax incentives provided under the
Philippine Investment Incentives Act and the Export Incentives
Act. A preliminary determination that bounties are being paid
was published in the Federal Register of August 26, 1976.
The Treasury has now received assurances from the Government
of the Philippines that the Philippine firms receiving benefits under the incentive programs are no longer exporting to
the United States, and are not expecting to do so in the
future. Should this situation change in any way, the
Philippine Government would so inform the United States. On
the strength of these assurances, the Treasury concluded that
there are no bounties or grants paid or bestowed on imported
glazed caramic wall tile from the Philippines.
During 1974 imports of the glazed ceramic wall tile from
the Philippines were approximately $1.6 million.
*
WS-684
FOR DMEDIATE RELEASE
MONDAY, MARCH 1, 1976
CONTACT: PRISCILLA R. CRANE (202) 634-5248
The Third Annual Report of the U. S. Treasury Department's Office
of Revenue Sharing was released today.
Revenue sharing law requires the Secretary of the Treasury to
report to the Congress by March 1 of each year on the status of the
general revenue sharing trust fund. The Annual Report issued today
also includes such information as a discussion of the highlights of
the work of the office during the previous year, a chronology of
major events, a full description of allocation and payment procedures,
and a summary of the Administration's proposal for renewal of the program.
Individual copies of the report are available from the Office of
Revenue Sharing, 2401 E Street, N.W., Washington, D. C., 20226.
The general revenue sharing program is authorized by Title I of
the State and Local Fiscal Assistance Act of 1972 (P.L. 92-512). The
law presently authorizes the distribution of $30.2 billion to all uaits
of general-purpose state and local government over a five-year period,
from 1972 through December 31, 1976. President Ford has requested the
Congress to extend general revenue sharing for an additional five and
three-quarter year period.
oOo
WS-675
- 30 -
<06
FOR IMMEDIATE RELEASE
Contact: D.Cameron
Extension 2951
March 1, 1976
TREASURY DEPARTMENT ANNOUNCES PRELIMINARY
COUNTERVAILING DUTY DETERMINATION ON
GLASS BEADS FROM CANADA
Assistant Secretary of the Treasury David R. Macdonald
announced today tue issuance of a preliminary determination
that bounties or grants are being paid or bestowed on imports
of glass beads from Canada 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 March 2, 1976.
, 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 August 25, 1976.
The Treasury's preliminary determination concluded that
regional assistance provided by the Canadian Government and
preferential freight rates may constitute bounties or grants
on glass Leads 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 1974, imports of glass beads from Canada were
approximately $420,000.
* * *
WS-685
6&?
FOR MEDIATE RELEASE
TUESDAY, MARCH 2, 1976
CONTACT: PRISCILLA CRANE (202) 634-5248
The City of Miami, Florida-will be required to change its
employment and promotion practices according to the provisions of
a consent decree approved by the U. S. District Court for the
Southern District of Florida on Wednesday, February 18, as a result
of Office of Revenue Sharing initiatives.
The U. S. Treasury Department's Office of Revenue Sharing had found
evidence of discrimination in employment in the City shortly after
the general revenue sharing program was authorized.
It was noted, for
example, that although 45% of the population Were Spanish-speaking
persons, they held only 5.5% of the City's jobs.
The Office of Revenue Sharing coordinated its efforts to achieve
compliance with the U. S. Department of Justice which was seeking to
establish the rights of minorities and women under other programs, as
well.
The City of Miami has been allocated $8.8 million in general revenue
sharing funds for the current fiscal year.
Since the revenue sharing
program began in 1972, the City has received more than $31.8 million.
WS-686
(Over)
§
The consent decree approved recently requires the City to maintain
an active program of recruitment for Blacks, Latinos and women and to
assist them to prepare for examinations for positions in certain City
departments.
Employment tests are required to be developed in conformity with
guidelines established by the Equal Employment Opportunity Commission.
Examinations will be given in Spanish for positions which do not require
proficiency in the English language.
Although the consent decree gives special emphasis to employment
procedures for the City's Police and Fire departments, the decree also
specifically forbids the City to discriminate in any department on the
basis of race, color, sex or national origin.
In order to eliminate the effects of past discrimination, the decree
requires the city to seek to employ Blacks, Latinos and women in proportion to their availability in the City labor force.
Goals and timetables
are set forth for achievement of proper representation in City departments.
The decree also requires the submission of detailed reports by
the City to the Office of Revenue Sharing and Department of Justice within ninety (90) days and on each June 30th and December 30th thereafter
while the decree is in force.
The court will keep jurisdiction of the
case for at least five years to insure substantial compliance with
the decree and achievement of its basic objectives.
Moreover the decree requires the City to establish a fund of
$500,000 to provide back pay for persons discriminated against in
promotions or upon discharge from employment.
- 30 -
&69
REPORT ON DEVELOPING COUNTRIES
EXTERNAL DEBT AND DEBT RELIEF
PROVIDED BY THE UNITED STATES.
January 1976
"to
U?
U SECRI'.IARY OF THE IREASURY
WASHINGTON
O
C. -ATI*
Dear Mr. Chairman:
I am pleased to submit, as required by Section 634(g)
of the Foreign Assistance Act of 1961, as amended, the
second annual report on the debt situation in the developing
countries and the debt relief provided by the United States.
The report provides an historical perspective of the
LDC debt situation as of December 1973, the latest, date
for which complete data are available. Additionally, the
report reviews the balance of payments trends of the non-oil
LDC's for the period 1973-1976, and the implications of these
trends for LDC debt. The report also contains information on
the two major debt reschedulings in which the U.S. participated
in fiscal year 1975.
I hope this information will be of use to
@FedFRASER