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Treas.
HJ
10
.A13P4
v. 216
U. S. Dept. of[Treasury.
Press-Releases.*

LIBRARY
WAR 131980
TREASURY DEPARTMENT

Department of theJREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE ON DELIVERY
Expected at 10:00 a.m.
August 1, 1978

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY FOR DOMESTIC FINANCE
BEFORE THE SUBCOMMITTEE ON ECONOMIC STABILIZATION
OF THE COMMITTEE ON BANKING, FINANCE AND
URBAN AFFAIRS OF THE HOUSE OF REPRESENTATIVES

Mr.

Chairman and Members of the Subcommittee:

I appea r before you today to present the President's
proposal for a National Development Bank, which is embodied
in H.R. 1329 5. This innovative proposal is the product of
extensive wo rk within Treasury, HUD, Commerce, and other
agencies, an d of consultations over more than a year with
representati ves of State and local governments, local develop
ment authori ties, financial institutions, businesses and the
academic com munity. This project has been one of the Adminis
tration's hi ghest priorities during that time. These are
the reasons why we are proposing this legislation:
1. The key to this country's economic future is our
private sector. Four of every five jobs are private jobs.
The primary reason that national unemployment fell from 7.4%
to 5.7% in the period from January 1977 to June 1978 is that
more than 5.5 million new private jobs were created.
2. Many areas of this country, urban and rural, have
not fully participated in this recent growth. Particularly
during the 1970's, certain areas have lost population, jobs
and important parts of their tax base.
3. These trends are costly for those places. They
experience high unemployment, unused public facilities,

B-1078

- 2 a growing concentration of less skilled and less educated groups,
and increasing welfare and other social support costs. At the
same time, their fiscal bases shrink, and their ability to
maintain an appropriate level of social services becomes
6trained.
4. Land, construction and operating costs in distressed
cities are disproportionately high and have led American businessmen to invest elsewhere. Furthermore, small and mediumsized businesses already located in distressed urban and rural
areas frequently cannot obtain long-term financing to expand
or rehabilitate.
5. In the past, the Federal government has influenced,
directly and indirectly, these business and job location
trends•
6. The National Development Bank represents a private jobs
strategy. It is aimed at increasing private investment and
related jobs in distressed areas. We believe that a new economic
development tool of this type is needed. It does not presently
exist•
7. Specifically, the National Development Bank will
provide a combination of grants, loan guarantees and interest
subsidies to reduce financing costs for business in distressed areas. These reduced financing costs will relate
to acquiring, constructing and rehabilitating facilities.
The combination of Development Bank incentives can lower the
cash invested in such projects, on a present value basis, by
over 60%•
In addition, the Bank also will provide a liquidity
facility to increase the flow of private credit to small
and medium-sized companies located there.
8. It would be inefficient to give the Bank's powers
to existing agencies. This would mean building a separate
long-term, private financing staff in each agency — two
or more staffs instead of one.

CHRONIC ECONOMIC DISTRESS
Numerous rural and urban areas are experiencing chronic
economic distress -- low levels of investment, a lack of jobs,

- 3 loss of population, poverty and a shrinking tax base. The
health of most central cities has declined relative to the
suburbs. The cities of the Northeast and Midwest have not
shared in the growth of the South and West. And many rural
areas in all parts of the nation continue to be isolated
from growth.
There is n o single cause of t his distress — fi rms leave
an area or go o ut of business; the loss of jobs and skilled
people increase s the concentration of unemployment a nd poverty
among those who remain; a greater proportion of the unemployed
are structurall y unemployed person s; the physical an d social
environment det eriorates; crime in creases, insurance costs
rise and the co st of attracting an d retaining skille d workers
increases; the tax base deteriorat es and taxes rise; and then
investment decl ines more and there is a further loss of jobs
and skilled wor kers. The resultin g social cost grow s at the
very time the 1 ocal government's t ax base is eroding -- so
services deteri orate further, whic h accelerates the trend•
The nation's le vel of economic act ivity may pick up, but
it does not rev erse the long-term decline in these p laces •
ress is less visible than urban distress —
Rural dist
because it is n ot geographically concentrated — but it is no
less serious. Low incomes and chronic poverty caused both by
unemployment an d underemployment characterize economically
weak rural area s •
Rural Amer
ica may need infrastructure beyond what now
exists to succe ssfully attract the private investment necessar
to diversify it s economy. In addition, rural development need
should be plann ed across geographic areas large enough to prov
sufficient labo r for a variety of basic economic activities.
URBAN DISTRESS
The characteristics of chronic distress in urban areas
can be highlighted by comparing the economic indicators
for distressed places with those of healthy places.
Employment and Unemployment
It is well known that many of our larger cities have
not shared in national growth. During the period 1970 to
1975, overall growth in employment was 7.8%. In contrast,

- 4 in St. Louis, employment fell during that period by over 19%,
and in New York City by 16%.
As indicated in Table 1, central cities showed major
declines in manufacturing jobs between 1970 and 1975. Jobs
lost, largely through ordinary attrition, were not being
replaced. In addition, looking at the ten American cities
with the largest number of headquarters of "Fortune 500"
companies in 1956, we find that the number of headquarters
had declined from 293 to 236 in 1971. In large measure,
the cities' loss has been the suburbs' gain, as shown in
Table 2.
Looking at the unemployment side of the equation, we
again see clear geographical disparities, as in Table 3. One
study has compared the average unemployment rates of fourteen
declining cities with those of eight growing cities. On an
unweighted basis, the rate of unemployment in the declining
cities was 41% greater in 1976 than in the growing cities
(see Table 4 ) . Within regions, there are further disparities
between central cities and their suburbs.
Investment
The imbalance among different regions and cities is also
highlighted by differences in investment per employee, as set
forth in Tables 5 and 6. According to a recent Urban Institute
study, the average capital investment per production employee
during 1970-1976 was 66.7% greater in a group of growing cities
as compared to distressed cities. For the same distressed cities,
the ratio of wages to value added per production worker was
35% less favorable than in the group of growing cities.
Shifts in Population
Population loss is also both a cause and an effect of
chronic distress. During the 1960's, the nation's central
cities lost 3.5 million residents through population movements; in the first half of this decade the pace quadrupled.
In some individual cases, this loss has been staggering.
Detroit has shrunk from a city of 1.85 million in 1950 to
a city of 1.3 million in 1975. The population of St. Louis
has declined by more than 15% since 1970.

- 5 Those who leave tend to be young and have above-average
skills and income. Employers find the relatively more unskilled
job pool less attractive than before. Thus, it is even more
difficult to find jobs for those who remain. Between 1970
and 1976, 1.2 million skilled workers left the central cities
for the surrounding suburbs, while only a half million skilled
workers moved in the opposite direction.
In addition, the more affluent tend to leave distressed
cities. For example, 25 percent of the households that moved
from the Pittsburgh area between 1965 and 1970 had 1970 incomes
of $15,000 or more, while only 18% of all Pittsburgh area households had incomes at that level. Individuals who left Pittsburgh
also tended to be young, with a median age of 24 compared to the
city's median age of 35.
RURAL DISTRESS
Rural areas have consistently had a lower standard of
living and a larger share of poverty-stricken residents than
urban areas. While rural America has shown signs of some
turnaround in its economic prospects since 1970, nationwide
data conceals the continuing decline in population which
some rural areas are experiencing, notably in the Mississippi
Delta and the Corn Belt.
In the most rural counties, the incidence of poverty is
high. Housing is more often substandard and medical care often
unavailable. These problems are continuing despite some
positive trends in rural economies. For example, Appalachia
has benefited from the boom in the coal industry, but its
1975 per capita income was still only 84% of the national
average•
Frequently, the root of a rural area's economic problems
is the lack of diversification in its economy. In many
agricultural areas, farm employment is declining, and nonfarm
opportunities are not available to fill the gap. Other rural
areas are dependent on a single manufacturing industry. The
recent problems of the American shoe industry have severely
harmed some undiversifled rural areas in Arkansas and Missouri.
In many areas the problem of attracting new business to
rural America is aggravated by the lack of a public infrastructure, a lack of capital, and other symptoms of underdeveloped
economies•

- 6 IS IT APPROPRIATE FOR THE GOVERNMENT TO INFLUENCE
LOCATIONAL DECISIONS?
"""
The foregoing demonstrates that there is a need for action.
Nevertheless, some argue that the Federal government should not
"distort" the locational decisions of private firms and that such
programs merely subsidize inefficiency. We do not find these
arguments convincing. Let me explain.
The Effect of Federal Policies on Regional Economic Trends
Throughout the history of this country, Federal policy has
influenced certain patterns of settlement and development. Sometimes the effect on the geographic dispersion of people and
economic activity has been intentional. Sometimes it has not.
Important examples in the expansion of the West include
land grants to railroads, public universities and individual
homesteaders. More recent actions are the construction of the
interstate highway system, tax and mortgage credit policies
that encourage home ownership, electrical power pricing
policies, and water and sewage system grants to new areas.
The Federal government thus bears some responsibility
for current disparities in the locations of jobs and people,
and in some respects, it still supports policies that encourage
the movement of new investment and jobs from central cities.
It is unfair, therefore, to argue that the Federal government
should not now play a role in fostering economic development
in distressed areas.
E fficiency
Efficiency cannot be measured by looking only at the economics of a particular business that is offered the incentives.
We must also take into account the overall social costs of
permitting deterioration to continue in economically distressed areas. The costs of public medical services, welfare,
police and fire protection, among other things, rise as
these places decline. Tables 7 and 8 indicate that the expense
levels experienced by economically distressed cities, for
example, is higher than those in the suburbs and other cities.
If the Bank's incentives create new permanent jobs in an
area, there can be substantial savings in many of these
costs. In addition, declining investment causes the revenue

- 7 base of distressed areas to shrink sharply, while expenses
rise. These localities are forced to Increase their tax
rates (see Table 9) or reduce services. Most have tried the
former course, which increases the disincentives to new
Investment•

FEDERAL ECONOMIC DEVELOPMENT PROGRAMS
These reasons and others have given rise to substantial
Federal programs aimed at helping to aid our economically distressed urban and rural areas. First, in certain cases, aid
has been directed to selected local governments. Examples
include the countercyclical revenue sharing program, the Emergency Local Public Works Act of 1977, the proposed Supplementary
Fiscal Assistance program, and the Comprehensive Employment
and Training Act. Second, EDA's programs have provided
grants and loans for public infrastructure and technical
and planning assistance. The President's proposed Laborintensive Public Works program will improve the quality
of public facilities, while providing jobs for the structurally
unemployed. Third, HUD's Community Development Block Grant
program provides grants to local governments, which have
until recently been used primarily to revitalize older
neighborhoods. With changes in this legislation, these
funds can be used increasingly for economic development.
HUD's UDAG program provides a flexible economic development
and revitalization tool for many distressed cities.
A fourth focus of activity has been special training
programs for the structurally unemployed, principally through
the Comprehensive Employment and Training Act. In addition,
many programs under the Department of Health, Education and
Welfare deal with the impact on people of chronic economic
distress •
Finally, a different set of initiatives focuses on the
private sector economic base itself. The Departments of
Commerce, Housing and Urban Development and Agriculture
each have programs designed to promote economic development
in distressed areas. What is lacking, however, is a program
of long-term financing for relatively large private projects.
The Bank will fill this void in a way which will complement
the existing development efforts mentioned above.

- 8 WHY USE CAPITAL

INCENTIVES?

The mos t important disincentive to new investment in
land acquieconomically distressed areas is higher costs —
sition, cons truction, property taxes, labor, insurance,
security, tr ansportation and the like. The Bank's programs
respond dire ctly to the higher costs of land acquisition and
construction by providing significant cash flow savings -in excess of 60% of the cost of capital. They respond
indirectly t o higher costs of operations because the savings
from the Ban k's financial assistance will partly offset
higher costs of operation.
Capital financing subsidies have been the traditional
method of governmental aid to private business. There is
good reason for that choice.
Financing incentive s permit the degree of assistance
to be frozen at the time the investment is made, leaving
the business free to mak e operating choices without regard
to the impact on governm ent subsidies. By contrast, operating
subsidies give the gover nment a direct interest in wages,
salaries and other subsi dized expenses of private businessmen.
The government's
They are also administra tively complex.
transactions
is
far more limited
involvement in financing
in time and scope. Acco rdingly, we think that a capital
subsidy is the most appr opriate method of increasing jobs
and investment in econom ically distressed areas.
Moreover, it is an effective response in this case because
it is a very substantial subsidy. While its value will vary
from project to project, on the basis of our discussions with
bankers and businessmen, we believe that the savings will be sig
nificant in many cases.

THE FOREIGN

EXPERIENCE

The United States is not alone among the industrialized
democracies in its desire to promote balanced economic growth
among its regions. The Western European countries, Canada,
and Japan have all had substantial experience with their own
regional development programs.
In Europe, the initial policies took the form of subsidies
to labor but later shifted to business loans, capital grants
direct controls over the location of private industry and the

- 9 deliberat e locat ion of governme nt facilities and governmentcontrolle d Indus try in order to achieve more lasting success.
Japan has provid ed long -term fu nds for "economic reconstruction,
industria 1 devel opment, and soc io-economic progress" through
the Japan Develo pment B ank sine e 1951. More than two-thirds of
all Japan Develo pment B ank loan s in fiscal 1976 went to urban
developme nt, reg ional d evelopme nt, improvement of the quality
of life a nd the relocat ion of i ndustries to underdeveloped
areas. L oans ar e made to priva te firms for acquisition or
reclamati on of 1 and and for con struction or improvement of
plant and equipm ent. T he total amount of debt outstanding
as of the end of fiscal year 19 76 was $13.9 billion.
STRUCTURE AND RELATION TO OTHER FEDERAL PROGRAMS
The Bank is designed to complement, not compete with,
existing programs. Indeed, we have explicitly structured
it to maximize cooperation with existing economic and
community development activities at HUD and Commerce.
Let me be specific. The Bank will not have a field staff.
It will not set economic development policies for an eligible
area. Funds for the Bank's grants are proposed to be appropriated through existing HUD and Commerce grant programs.
The Bank will have the final decision-making authority over its
grants, and HUD and Commerce will participate fully in the
grant process. In short, the Bank will not be an entity
acting independently of other federal agencies and programs.
We do not view the Bank as duplicating existing programs.
Some of its incentives, such as the interest subsidy for
taxable development bonds and the liquidity facility for
non-guaranteed loans, simply are not offered by any agency
today. And there is no program offering these combined
incentives for large private projects.
For example, the HUD UDAG program provides only grants.
EDA has both grant and loan guarantee authority, but they
are not usually offered in combination. Moreover, the average
EDA business loan ranges between $1 million and $1.5 million.
The average Small Business Administration loan or loan guarantee is under $150,000. In contrast, the Bank's loan guarantee authority extends up to $15 million per project.

- 10 We propose establishing the Bank as an independent agency
in the Executive Branch under the direction of the President
of the United States. Its Board will be composed of the Secretaries of the Departments of Housing and Urban Development,
Commerce and Treasury. The Board will have the power to exercise
all of the powers granted to the Bank, including the powers to
issue regulations, fix policy and review investments. It may,
of course, delegate those functions where appropriate.
The staff will be headed by a President and an Executive
Vice President, each appointed by the President of the United
States with the advice and consent of the Senate.
In addition, the Bank will have a nine-member advisory
committee composed of individuals knowledgeable about or representative of state and local government, commerce, finance,
labor, community development and consumer interests. Two
members of the advisory committee may be Federal government
officials •
The Bank will submit annual reports to the President of
the United States and the Congress.
THE BANK'S PROGRAM
I would like to summarize the major provisions of the
Bank proposal and then to discuss them in detail.
Program - The Bank's basic program is to provide longterm financing assistance to viable businesses for the acquisition, construction or rehabilitation of physical facilities
in economically distressed areas.
Objective - Its objective is to increase the number
of permanent, private sector jobs in these distressed places
that would not otherwise have been located there and to
increase the economic and fiscal base of the areas.
Powers - The Bank will have five basic tools at its
disposal, which may be used singly or in combination:
equity grants
loan guarantees

- 11 -

-

interest subsidies on guaranteed

-

interest subsidies on taxable development

loans
bonds

a liquidity facility to increase the flow of ere dit
to economically distressed areas .
-

Role of Locatl Government - The basi c governmental d ecisions
a bou t which projects have pri ority and w hich are consistent
with local develc•pment plans, as well as post-financing
moni toring, will remain with the local e lected officials or
their designated local develo pment authorities.
Eligible Projects
The Bank will assist those businesses -- small,
medium and large — which will provide permanent private
sector jobs in eligible localities. In each case, the Bank
must find that the facility financed would not have remained,
expanded or been located in the distressed area unless the
Bank provided financing assistance — or that Bank assistance
was a dominant factor in the decision to do so. The justification for that finding must be put in writing, and it will
be subject to audit. The Bank will make a separate decision
on the appropriate combination of incentives in each case.
In selecting among projects, the Bank will give primary
consideration to two factors:
(1) the permanent jobs to be
provided by the project; and (2) the project's contribution
to the economic and tax base of the distressed area, including
the extent to which it provides employment opportunities to
the.area's long-term unemployed and low-income residents.
The Bank will also consider additional factors. These
include the opportunities provided by the project to expand
minority business; companion actions undertaken by the locality
to encourage economic development in the area; and the ability
of the area's labor force, public facilities and services
to accommodate the project.
The Bank will not provide financing assistance to relocate
a facility or private sector jobs from one area to another
unless it finds that that relocation does not significantly
or adversely affect the area from which the business is relocating.

- 12 Examples
I would like to give you a few examples of projects
that might be appropriate for the Bank. Each of these is drawn
from conversations with local officials who have requested
that the areas and companies remain confidential. First, one
Midwestern city would like National Development Bank assistance
in retaining a major manufacturer in the city. The firm is
a division of a large U.S. company which does not have a strong
commitment to the area. The manufacturer employs 6,000 skilled
and semi-skilled laborers and is located on the fringe of
one of the lowest income neighborhoods in the city.
It needs one-story plant facilities. Local environmental
problems and the unavailablity of suitable land for expansion
have already forced the firm to move some of its operations
to another country.
To accommodate some of its operations, the manufacturer
is considering an old plant in the city that had been vacant
for the past ten years. It needs $25 million to prepare the
facility. A local bank has been involved in the city's negotiations with the firm and is likely to help finance the
project if National Development Bank aid is also provided.
Second, the mayor of a small, Northeastern city would
like to use the Bank's assistance to help a local manufacturer
to expand and another firm to locate on an industrial site
in the city. The firms would provide 800 jobs, including >•
300 new ones•
A nine-and-a-half-acre site has recently become available
for approximately $1 million. The city would like to purchase
the land for the two companies. A combination of local capital
and combined local and National Development Bank incentives
could persuade the companies to use the site.
Financing Assistance Provided by the Bank
The Bank will offer a unique combination of long-term
financing incentives, which in each case will be conditioned
on a substantial commitment from private sector lenders — eith
private institutions or the public markets. Specifically, no
grant will be made or loan guaranteed unless at least 25% of th
long-terra debt associated with the project is provided by a

- 13 private financial institution or the public credit markets.
This "private market test" is intended to differentiate
between projects which, if financed, have a reasonable chance
of long-term economic viability and those where the risk
of loss is too high to attract any private capital, even
when three-quarters of the total debt is guaranteed by the
Bank. Economic viability is important not only to protect
against waste of government funds and credit but also to
help assure the permanence of the new jobs and the investment.
Some ask why a project which can raise 25% of its required
long-term debt cannot raise all of it. In cert ain cases ,
businesses may have adequate access to capital but avoid
distressed areas because of high costs. The ba sic purpose of
the Bank's financial incentives is to lower the cost of capital
to the private firm — by providing an infusion of equity and
inexpensive long-term debt -- to offset the hig her capital and
operating costs of doing business in economical ly distressed
areas. .It .is an incentive to private firms to locate in the
area. It? is not intended, as a general matter, to make "bankable"
a project which is not expected to be self-sust aining. Of course,
in some cases the availability of credit will b e adversely
affected when a proposed project plans to locat e in an
economically distressed area. In those cases, the Bank's
guarantee will aid in making credit available.
The Bank will have at it6 command five basic tools -grants, loan guarantees, interest rate subsidies on guaranteed
loans, interest rate subsidies on taxable development bonds
and a new liquidity facility.
Grants
The Bank may provide equity grants in amounts up to 15%
of the eligible capital costs of a project, but not more than
$3 million for each project. A grant may be combined with
loans guaranteed by the Bank, with tax-exempt industrial
revenue bonds, or with subsidized taxable development bonds.
These grants are a crucial part of the Bank's incentives,
representing approximately 45% of the savings that a total
package of Bank financing can offer to a company. A grant
will substitute for an equivalent amount of equity investment,
reducing sharply the amount of cash that a company must invest

- 14 -

at the front end of a project. We propose that the Bank have
authority to provide $1.65 billion in grants over the first
three years of its life.
Grants are not speculative seed money. A grant will be
made only after the full financing for the project has been made
or irrevocably committed, or after appropriate provision has
been made for its return to the Bank if the project does not
go forward.
Loan Guarantees
The Bank may guarantee up to 75% of the long-term loans
incurred to finance the eligible capital costs of a project;
The amount guaranteed for each project may not exceed $15 million.
We have gone to special lengths to ensure that the terms
other than the interest rate of the guaranteed long-term
debt and the nonguaranteed long-term debt are equivalent,
including conditions, covenants, maturity, security and
application of payments in the event of default. This parity
has two advantages. It protects the interests of the United
States as a creditor. It also assures that the considerations
supporting the private credit decision are equally applicable
to the portion guaranteed by the government.
Before guaranteeing any debt, the Bank must find that '.
there is a reasonable prospect of repayment. The Bank thus'
retains responsibility for its own credit decisions. Nevertheless, the fact that at least 25% of the long-term debt has
been extended by a private financial institution or by the
public credit markets will help to confirm the Bank's judgment.
The guarantee will apply to taxable debt issued by local
development authorities or by the business itself.
We have proposed authority for the Bank to guarantee up to
$8 billion of long-term loans for fiscal years 1979, 1980 and
1981.
Interest Subsidies on Guaranteed Loans
The Federal guarantee will have the effect of lowering
interest costs to the business on the portion of the long-term
debt which is guaranteed. The rate must be approved by the

- 15 Bank and will bear a relationship to the rates carried
by other U.S. guaranteed debt securities, which are just
above the rates applicable to Treasury securities.
The Bank may further reduce the effective interest on
the guaranteed portion through a direct interest cost subsidy.
The effective rate to the borrower may be reduced to 2-1/2%
per annum. We do not expect, however, that every loan
would be subsidized and that every subsidy would reduce
the effective rate to 2-1/2%. When a subsidy commitment
is made, the amount of subsidy must be fixed. It cannot
vary with future fluctuations in interest rates.
• We have proposed $3,795 billion in budget authority
for interest rate subsidy commitments in fiscal years 1979,
1980 and 1981. The total subsidy payable over the full life
of a guarantee will be counted against the Bank's budget
authority in the year of the commitment.
Interest Rate Subsidies on Development Bonds
. The Bank may also provide an interest rate subsidy on
up to $20 million of nonguaranteed taxable development bonds
for eligible projects. The subsidy is fixed at 35% in fiscal
years 1979 and 1980 and 40% in the following years. Interest
subsidies on taxable development bonds are an alternative
to a loan guarantee for a company that has the credit to
finance in the public markets.
The Bank's subsidies on taxable development bonds would
not be subject to the capital expenditure limitation imposed
by Section 103 of the Internal Revenue Code. The amount of
outstanding tax exempt or subsidized industrial development
bonds, plus the outstanding amount of taxable bonds subsidized
by the Bank, may not exceed $20 million in one eligible area.
We have proposed $934 miJLlion in budget authority for
interest rate subsidy commitments in fiscal years 1978, 1980
and 1981. The total subsidy payable over the full life of the
taxable development bonds will be counted against the Bank's
budget authority in the year of the commitment.
Liquidity Facility
Our extensive consultations revealed that banks and
other financial institutions are reluctant to make the large,

- 16 -

long-term commitments which a Bank project may require because
of the impact on their liquidity. In addition, many mediumsized and small businesses have difficulty in securing longterm financing because traditional long-term lenders, such as
insurance companies and pension funds, prefer to deal with
larger companies. The Bank's liquidity facility addresses this
need. By providing liquidity and some incentives to lenders,
it will increase the flow of long-term capital to distressed
areas •
o purchase existing longThe Bank would be authorized t
term loans made to businesses to fi nance capital projects
in distressed areas, provided that the selling bank or other
financial institution re-lends the proceeds only in the form
of capital improvement loans in dis tressed places. The local
development authority must also cer tify that the new investment
is consistent with the Bank's job c reation and economic
development goals. The Bank may no t purchase a loan which
is either tax exempt or guaranteed by the Bank or by any
other Federal, State, or local gove rnment entity.
The Bank will finance these loan purchases by selling
the loans, with its guarantee, to the Federal Financing Bank.
The Development Bank would have the power to purchase loans
at a premium created by the difference between the interest
rate on the loans and the Federal borrowing rate, which will
determine the sale price to the Federal Financing Bank.
The private financial institution will continue to
service each loan. Let me emphasize that the Bank will have
full recourse to the selling institution in the event of a
default, which would also require forfeiture of any unamortized
premium. The Development Bank may require the seller to provide collateral to secure its obligation to repurchase the
loan. We have proposed budget authority of $3 billion for
the liquidity facility in Fiscal Years 1979, 1980 and 1981.
Definition of Distressed Areas
Since the primary objectives of the Bank are to provide
jobs and income to distressed localities, the Bank's incentives
should be targeted to those areas suffering from chronic
economic decline.

- 17 We believe that we have arrived at a fair and effective
formula. It is the product of months of effort to choose
criteria that reflect economic distress in an appropriate
way. These factors take into consideration the absolute
wealth of a community, the level of unemployment and three
growth factors over a five-year period. In combination, they
provide a good profile of chronic economic decline. A list
of eligible areas prepared on the basis of current information
has been requested by the Chairman and has been furnished
for the record.
It is important to remember that the purpose of these
criteria is to define geographic areas which are eligible
under the Bank's programs. The actual number of assisted
projects will be far fewer than the number of eligible
distressed areas.
Distressed areas will be defined by the boundaries of
local governments and will include the unincorporated areas
within county jurisdictions. To be eligible, an area must
exhibit three of the following four conditions:
(1) An unemployment rate above the national average for
the most recent five-year period.
(2) A population growth rate below the national average for
the most recent five-year period.
(3) A growth rate in total employment below the national
average for the most recent five-year period.
(4) An increase in absolute dollars in per capita income
less than the national average for the most recent five
year period.
In addition, no area is eligible if, in the most recent year for
which data is available, its per capita income is 125% or more
of the national average.
We have developed separate national averages for "Standard
Metropolitan Statistical Areas (SMSA)" and "non-SMSA" areas.
This feature makes the Bank's eligibility standards sensitive
to the differences between urban and rural economies. It allows
urban areas to be judged against other urban areas and rural
areas to be compared to other rural areas.

- 18 -

Of about 40,000 local jurisdictions in this country,
almost 12,000 are eligible, comprising approximately
one-third of the American population. Approximately threequarters of the people in eligible areas reside in urban areas
and one-quarter in rural areas.
Eligible areas with populations in excess of 10,000 can
apply directly to the Bank for assistance. Smaller areas may
apply with the concurrence of other eligible areas if their
combined population is 10,000 or more.
If an area with a population of 50,000 or m ore does not
qualify on the basis of eligibility criteria, it may still
receive assistance under the "pockets of poverty " provision.
Ten percent of the Bank's assistance will be set aside for
pockets of poverty in areas that, taken as a who le, do not
meet the Bank's eligibility criteria. A pocket of poverty
must have a population of at least 10,000 in a c ontiguous
area within the jurisdiction. The local jurisdi ction will
furnish evidence through its local economic deve lopment
authority showing that this particular area woul d probably
be eligible under the Bank's tests if it were a separate
jurisdiction•
Each year the Bank will publish a list of eligible areas.
Once the Bank determines that an area is eligible, it may
provide financial assistance to projects in that area during
any time in the next two years, even if the Bank determines
during the second year that the area is ineligible.
Local Development Authorities
Successful local economic development requires public
and private cooperation and careful planning at the local
level. Hence, the National Development Bank legislation
requires local development authorities to play an important
role in formulating the projects. Applications for all forms
of Bank assistance, with the exception of the liquidity
facility, must be submitted by a local development authority.
The latter is responsible for ensuring that the project
is consistent with the area's economic and community development policies and for assessing the economic value of the
project to the community. It must also concur in the
purchase of any loans by the liquidity facility.

- 19 The bill provides flexibility as to which local government body can qualify as a local development authority.
The authority could be a city economic or development entity,
a county development authority, an economic development
district, a non-profit private development corporation or
a State department or development authority. In most cases,
these functions are already assigned to an existing local
or county agency. Only a simple designation is required.
Only one local development authority will be designated
in each area. Units of State or local government with wider
responsibilities (i.e., counties and States), however, can
carry out specific projects in the economically distressed
area, even if the State or county is not the designated
authority, provided that the elected officials of the eligible
locality agree. If the municipality itself does not act
as the local development authority, then the municipality
must redesignate one every two years.

SUMMARY OF PROPOSED FUNDING
Following is a table showing the requested authority and
anticipated outlays for fiscal years 1979, 1980 and 1981.

- 20 NATIONAL DEVELOPMENT BANK
GUARANTEE AND BUDGET AUTHORITY T~QIITT.AVQ
1979
1980
1981
^dollars in millions)
Formation of Bank, initial organizing
expenses and operating expenses
Budget authority

25
5
(2,175)

$

$

25
17
(2,900)

25
23
(2,900)

$

Outlay
Loan guarantee authority pursuant to
Title VII — subject to
appropriations control
Reserve for contingencies to honor
guarantees, pursuant to Section 706
725
543.75
725
Budget authority
272
166
46
Outlay*
Interest rate subsidies for guaranteed
loans pursuant to Section 801
1,380
1,380
1,035
Budget authority
144
73
9
Outlay
Interest rate subsidies for long-term
debt (taxable development bonds)
376
pursuant to Section 802
324
234
43
Budget authority
21
2
Outlay
Title IX of the Public Works and
Economic Development Act, as amended,
275
275
275
for grants pursuant to Title IX
275
255
70
Budget authority
Outlay
Title I of the Housing and Community
Development Act, as amended for
275
275
275
grants pursuant to Title IX
211
109
8
Budget authority
Outlay
1,095
Loan purchases to carry out the
1,095
810
-0purposes of Title X
-0-0Budgetary authority
Outlay
273.
202.,5
273.,75
Reserve for contingencies to honor
104
65
18
guarantees, pursuant to Section 1009
-83
-47
-11
Budget authority
21
18
7
Outlay
Less: Recoveries
$3 ,400.,25
$4,372.75
$4,424J'
Net Outlay Effect
706
1,072
158
Total
-47
-83
-11
Budget authority
659
989
147
Outlay
Less:
Recoveries
*These
amounts
do not include recoveries from loans that default.
Net Outlay Effect

- 21 CONCLUSION
In conclusion, Mr. Chairman, the Administration believes
the National Development Bank will fill a significant void in
the existing array of Federal economic development tools and
that it will do so efficiently. .

MANUFACTURING EMPLOYMENT IN
CENTRAL CITIES AND URBAN COUNTIES BY REGION
Region
Number of
Cities

New England

Balance of Urban Ctaunty 3/

Cit£
Total
Qrployment
(In thousands)
1975
1976

5

160

157

Middle Atlantic

10

1092

East M . Central

19

West N. Central

Percent Change
1970 - 1975

Number
of
Counties
1975-76

Total
Employment
(In thousands)
1975

Percent
Change
1970 - 1975

, -21%

-2%

5

242

-10% •

1066

-27%

-2%

8

379

- 4%

1396

1398

- -18%

0

19

890

- 1%

6

325

305

-19%

-6%

5

69

-12%

10

338

336

- 6%

0

9

104

-11%

South Fast

5

199

199

-10%

0

5

73

4%

South West

8

431

447

- 2%

4%

7

107

15%

West

12

716

724

5%

1%

10

630

1%

All Cities/
Urban Counties

75

4657

4632

-1%

68

2463

-1%

South Atlantic

-17%

a/ Balance of urban county is urban county less its central city.
~~ County less Detroit.

For example, Cook County less Chicago, or Vfayne

Sourc^: U.S. Department of Commerce, Bureau of the Census, 1972 and 1976 Census of Manufacturing.
Table reproduced from Muller, Thomas, "Central City Business Retention: Jobsf Taxes, and Investment Trends", Urban
Institute, February 22, 1978, revised June 1978, p. 6.

t-«

w

TABLE 2

NUMBER OF FORTUNE "500" COMPANIES IN TEN CITIES BY CITY
SUBURB, AND REGION, 1956 and 1971 '
'
Central City
City a/

1956

New York

140
116156 156
-24
16
40 +24

1971

Change

Suburbs
1956
1971 Change

1956

Region
1971 "~cha

Chicago

47

37

-10

4

15

+11

51

52

Pittsburgh

22

15

- 7

2

0

- 2

24

15 -9

Detroit

18

8

-10

2

4

+ 2

20

12 -8

Cleveland

16

14

- 2

0

2

+ 2

16

16 0

Philadelphia

14

- 5

8

- 4

22

13 -9

St.

T

ouis

+1

11

10

- 1

- 1

12

10 -2

Los Angeles

10

15

+ 5

+ 1

15

21 +6

San Francisco

8

+ 4

12

15 +3

- 1

Boston
Total
Source:

8

7 -2

- 2
293

236

-57

44

81

+ 37

337

317 -20

Wolfgang Quante, "The Relocation of Corporate Headquarters
from New York City", Ph.D. dissertation, Columbia University,
1974.

a/ The ten cities are ranked in the order of number of headquarters in
1956.
Table reproduced from Vaughan, Roger J., The Urban Impacts of Federal
Policies; Vol. 2, Economic Development, Santa Monica, CA: Rand
Corporation, June 1977, p. 19.

TABLE 3 .
UNEMPLOYMENT RATE 1975, BY REGION
Unemployment
Rate
1975

Region*
New England 10.3
Mid-Atlantic
9.3
East North Central
9.0
West North Central
5.8
South Atlantic
7.9
South Central
6.9
Mountain
7.5
Pacific
Q.8
Nation
8.5
Souxce: The National Journal, June 26, 1976, p. 887.
Reprinted by permission of the National Journal.
a

The Regional definitions correspond to census definitions
of divisions except in the case of the South Central
region, which includes both the East and West South
Central divisions.

Table reproduced from Vaughan, Roger J., The Urban
Impacts of Federal Policies; Vol. 2, Economic
Development, Santa Monica, CA; Rand Corporation,
June 19 77, p. 21. '

TABLE 4

14 Cities Declining in Population*
Rate of
Unemployment
1970

1977

4.4
Chicago
7.4
4.6
9-7
Philadelphia
7.2
9.9
Detroit
4.6
8.7
Baltimore
5.2
8.7
Cleveland
4.1
5.1
Milwaukee
6.4
8.3
4.3
9.6
San Francisco
6.4
7.8
Boston
5.8
7.7
St. Louis
8.3
8.4
New Orleans
5.3
8.2
Seattle
6.0
12.0
4.8
7.3
Pittsburgh
Buffalo
5.5
8.5
Cincinnati
Unweighted Average
8 Cities Growing in Population*
Rate of
Unemployment

Houston
Dallas
San Diego
San Antonio
Memphis
Phoenix
Jacksonville
Denver
Unweighted Average
Sources:

1970

1977

3.1
3.1
6.6
4.3
4.7
3.9
3.3
4.1

4.,7
4..7
9,,1
7,.2
6..2
7,,4
6..8
7,.0

4.1

6.6

1970, data provided by George Reigeluth of the
Urban Institute

1977, data provided by Bureau of Labor Statistics
* Population change measured during period 1960-1973.

TABLE' 5
CAPITAL INVESTMENT PER PRODUCTION
EMPLOYEE BY REGION 1970 • 1975

Central City

Balance of
Urban County

Percent Difference

$5467

$6952

27%

Middle Atlantic

6197

11480

85%

North Central

9796

14528

49%

South Atlantic

11626

9594

-18%

South Central

12206

32043

163%

Nest

8395

11774

40%

Average, U.S.

8910

$12064

35%

Region
New England

Table reproduced from Muller, Thomas, "Central City Business
Retention: Jobs, Taxes, and Investment Trends", The Urban
Institute, February 1978, revised June 1978, p. 4.

TABLE 6

CITIES

CAPITAL INVESTMENT
(1970 - 1976)
PER PRODUCTION
WORKER

MOST DISTRESSED
Newark
$12,,700
12,,400
Buffalo
7,,800
Bridgeport
8,,200
New York
18,,800
Detroit
10,,700
Boston
5,,600
11,,000
New Bedford
11,,700
Philadelphia
.
" ,,700
St. Louis
11,400
Dayton
Average
LEAST DISTRESSED
$19,500
Cedar Rapids
15,900
Winston Salem
18,400
Memphis
30,000
Houston
19,600
San Jose
13,100
Tulsa
15,200
Denver
15,600
Omaha
14,900
Charlotte
_ 27,400
Richmond
$19,000
Average
6ource: Bureau of Census, Survey of Manufacturers
Table reproduced from Muller, Thomas, materials provided
to Treasury, The Urban Institute, June 1978, table 4.

Table 7
Costs of Police Protection
1972-73
t
•

l

in

*

u:v

Central City
Expenditure
Per Capita
Declining Cities
Baltimore
Boston
Buffalo
Chicago
Cincinnati
Cleveland
Detroit
Milwaukee
New Orleans
Philadelphia
Pittsburgh
St. Louis
San Francisco
Seattle

$65
63
51
68
56
60
72
56
38
71
44
64
42
52

Previously Growing,Now Declining Cities
Columbus
Dallas
Denver
Indianapolis
Kansas City
Los Angeles

534
38
39
27
51
59

Growing Cities.
Honolulu
Houston
Jacksonville
Memphis
Phoenix
San Antonio
San Diego
New York City

$37
24
22
27
46
16
25
$70

— \
mmmwm^mm^mm^wmmmmmm^mmwmmmmmwmmmmm^mmt

Expenditure
Per Capita
Rest of
SMSA
$21
29
21
26
27
23
60
27
17
18
15
20
33
19
$18
19
17
9
22
49
$22
18
27
12
28
$35

These cities comprise 100 percent of their SMSA's.
Data from Bureau of the Census, Local Government Finances
in Selected Metropolitan Areas ana Large counties: 1972-73,
table 3.
"
~"
~
Table reproduced from The Urban Predicament, William
Gorham and Natnan Glazer, eds., Chapter 2, "Finance",
by George Peterson, Washington, D.C., The Urban Institute
1976, p. 76.

TABLE 8
Per capita expenditures on all city services
excluding health, education, and welfare
1973

13 cities growing in population
from 1960 to 1973*
14 cities declining in population
from 1960 to 1973*

Source:

Reigeluth, George, "Economic Base," Chapter 4 of Urban
Economic and Fiscal Indicators, Urban Institute Public
Finance Staff, 1978, p. 23,

*Growing Cities

•Declining Cities

Columbus
Dallas
Denver
Honolulu
Houston
Indianapolis
Jacksonville
Kansas City
Los Angeles
Memphis
Phoenix
San Antonio
San Diego

Baltimore
Boston
Buffalo
Chicago
Cincinnati
Cleveland
Detroit
Milwaukee
New Orleans
Philadelphia
Pittsburgh
St. Louis
San Francisco
Seattle

TABLE 9

LOCAL TAX BURDENS

Mean Effective Property
Tax Rate

Total Tax Effort
As Percent of
Household Income
1967
1972

rity Type *

1967

Growing Cities

1.85%

1.33%

3.5%

4.0%

Growing to 1970,
Declining Thereafter

1.89%

1.98%

4.9%

6.2%

2.54%

5.1%

6.7%

Declining Cities 2.05%

Source:

1972

Effective property tax rates: computed from data in 1967
Census of Governments, vol. 2, Taxable Property Values and
1972 Census of Governments, vol. 2, Part 2, Taxable Property
Values and Assessment-Sales Price Ratios; Total tax effort
from Census of Governments data.

'able reproduced from The Urban Predicament, William Gorham and
fathan Glazer, eds., Cnapter 2, "Finance", by George Peterson,
r
ashington, D.C., The Urban Institute, 19 76, p. 56.
r

See Table 7 for a list of cities in each category stated above.

FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.M.
August 1, 1978
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE
THE INTERNATIONAL TRADE, INVESTMENT
AND MONETARY POLICY SUBCOMMITTEE
OF THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
I am delighted to be here today to discuss current
issues in international trade policy. As you indicated
so well Mr. Chairman, in your recent editorial in the
Washington Post, continued movement toward more open trade
and resistance to calls for increased protectionism are more
vital than ever to our economic welfare and the health of
the world economy.
There are three basic issues surrounding U.S. trade
policy today: the status and outlook for our trade balance,
the prospects for developing a more aggressive and effective U.S. export policy, and the completion of the
Multilateral Trade Negotiations (MTN). I will address each
briefly in my opening remarks.
3-1079

- 2 U^S^Trade Policy Objectives in the MTN
At the outset, I reiterate that we continue to pursue a
policy of open trade, and trade liberalization, for three
simple reasons — though some here at home have called for
higher protective barriers instead.
First, imports are of great benefit to the United States.
They lower prices in the US market, allowing the consumer to
stretch his dollar farther. They make available a greater
range of consumption choices. Where imported goods can be used
as inputs by a domestic producer, U.S. production costs can
be lowered. Competition from imports has frequently spurred
U.S. producers to develop more efficient methods and new
products. Particularly as long as inflation remains the
priority concern of U.S. economic policy, continued movement
toward trade liberalization is essential.
By contrast, import restrictions add to inflation.
Tariffs raise domestic prices directly and harm consumers.
Quotas cut supply and indirectly achieve the same effect.
Import restrictions generate resource misallocations, imposing permanent losses on the United States economy.
Second, millions of U.S. jobs depend on the preservation
of an open trading system. Those who would seek a solution
to our trade deficit and import-impacted industries by erecting new barriers to imports forget that others will emulate

- 3 us if we impose import restraints, choking off U.S. exports
— and American jobs. Consider the following facts:
— Somewhere between one of six, and one of eight,
manufacturing jobs in the United States produces
for export. For some of the states represented
on this Subcommittee, direct export-related manufacturing employment, and exports, are as follows
(FY 1976 data - Bureau of Census):
Employment

—

Exports
($ billions)

Ohio 86,800 5.8
California
123,700
8.1
New York
84,000
5.3
New Jersey
34,900
2.7
Oregon
13,000
0.8
Massachusetts
48,200
2.5
Indiana
40,000
2.8
Iowa
19,800
1.5
Georgia
21,100
1.4
Minnesota
23,200
1.6
Nebraska
3,700
.3
Exports take 39% by value of all U.S. production

of construction machinery, for example, and about
40% by value of our aerospace output.
Every third acre of American farmland produces
for export. More than half our wheat, soybeans
and rice is sold abroad.
— Nearly one-third of U.S. corporate profits now
come from the international activities of U.S.

- 4 companies, including both their exports and
their foreign investments (which also rely
heavily on open international trading
arrangements).
—

The share of trade in our GNP has doubled over
the past decade.

In short, we believe that the United States has far more
to gain from negotiating more open markets abroad than from
closing off our own markets to imports.
Foreign Trade in First Half 1978
The major cause of the $45 billion annual-rate trade
deficit in the first quarter was an extraordinary surge of
nonpetroleum imports, which were 27% higher than in the first
quarter of 1977.

This upsurge was led by sharply higher pur-

chases of machinery, autos, and steel, but most other products
were also up.

The dollar depreciation was a major factor

causing import prices to rise over 10% and encouraging buyers
to accelerate shipments.

Steel import tonnage was up 75%

compared to last year as importers rushed to beat the trigger
price deadline.
The trade deficit in the second quarter declined to an
annual rate of $32 billion due to a very strong increase in
exports, and only a slight rise in imports.

Led by major

shipments of corn, wheat, and soybeans, agricultural exports

- 5 increased 23%.

The sharpest gains were with Eastern Europe

and the developing countries.

Very encouraging has been the

steady growth of nonagricultural exports over the four months,
March through June, following a long period of stagnation.
All major categories of nonagricultural exports have shown
significant increases, especially machinery, automotive,
and consumer goods.

The two major factors in this increase

have been foreign growth and the initial effects of dollar
depreciation, both of which should continue to encourage
strong U.S. export growth during the remainder of 1978 and
1979.
In the second quarter nonpetroleum imports leveled off.
In May and June steel import tonnage was down about 20% from
last year, as the trigger-price program began to take effect.
There was also a slowdown in the rise of import prices, which
suggests that the price effects of the dollar depreciation
already have been realized.
Petroleum imports on a balance-of-payments basis averaged only 8.6 mb/d in the first half of 1978 —

down about

1 mb/d from 9.6 mb/d in the first half of last year.
However, a rundown of private stocks and a one-time
buildup of Alaskan production fully accounted for the
decline.

Alaskan oil, which began to flow in June 1977, was

approaching the capacity pipeline flow of 1.2 mb/d in the

- 6 second quarter of this year. In contrast, crude production
in the lower 48 states was down almost 3% from last year,
while domestic petroleum consumption was up about 2.4%.
With petroluem consumption expected to continue to grow
moderately, crude production declining without the benefit
of any additional Alaskan oil, and imports for our strategic
stockpile amounting to about 1/2 mb/d in the second half of
this year, petroleum imports are expected to increase in the
second half of 1978 and continue to rise through 1979.
Export Policy
In April, the President established an interagency
Export Policy Task Force chaired by Secretary Kreps to
develop ways of increasing U.S. exports. The Treasury
Department participated actively in the task force,
which completed its work and sent its recommendations to
the President last week.
The recommended package focuses on several important
areas. First, the Task Force looked at possible incentives
to help firms overcome the greater difficulties associated
with exporting as compared to selling in the U.S.
Second, the Task Force has made recommendations to
reduce the disincentives to exports resulting from U.S.
Government-imposed requirements. This is a fertile area
of conflicting policy objectives, confusing regulations,

- 7 and slow licensing procedures. Examples are the application
of U.S. environmental requirements to foreign trade, export
controls, antitrust policy, and illicit payments to foreign
agents. Reducing government disincentives affords many
opportunities for increasing exports at no additional cost.
Third, we examined direct government assistance programs
to help U.S. firms develop new export markets and to help
overcome the factors which deter small- and medium-sized
firms from exporting.
While the specific recommendations of the task force
will help to improve our export performance, equally
important is the need for both government and private
business to develop an awareness of the increasing importance
of exports to the overall health of our economy. We must
weigh carefully the impact on exports of our policies and
actions in non-trade areas.
Status of the MTN
Ambassador Strauss has been ably working to conclude the
MTN in Geneva, and I was privileged to join him there for the
last ten days of the latest negotiations — which produced
the "framework of understanding" released on July 13. We did
not achieve final agreement, and many difficult issues remain,
but I believe that remarkable progress has been made toward

- 8 attaining agreements which seemed impossible just a few months
ago.
Most of the major issues are now clearly defined in a way
which makes them amenable to political resolution.

The

Summit has mandated completion of the negotiations by December
15.

I believe that we can succeed in that task, and that we

should therefore now review where we are and how much further
we have to go.
I was particularly heartened by the great progress made
over the past few months on a subsidy/countervailing duty
code —

one of the top MTN priorities of the United States.

This issue was dead in the water as late as last February.
But we have worked with our major trading partners to fashion
a detailed proposal that has recently been circulated to
other MTN participants, and —

to quote the "framework of

understanding" already endorsed by 20 nations —

provides a

"substantial basis for developing agreement in this area".
We believe that subsidies represent one of the most
critical problems for the world trading system in the decade
ahead, because governments are increasingly tempted to export
their problems to others through direct financial and other
types of help to favored industries.

At the same time, we

recognize that the present U.S. countervailing duty statute
—

alone among major countries —

includes no injury test,

- 9 which many countries view as disruptive to their trade.

We

also recognize that the temporary waiver authority in the
statute will expire next January, with possibly dire consequences for world trade unless an effective new regime has
bfcen negotiated by that time. Hence we seek three basic
objectives in any new code:
effective discipline on the use of subsidies
themselves
recognition of the need for an injury test
in the U.S. countervailing duty law
effective procedures, both domestically and
in the GATT, to ensure faithful and timely
implementation of the new arrangements.
Two current problems illustrate the critical importance
of developing new understandings with regard to the use of
subsidies affecting international trade, through either the
MTN or other avenues such as the International Arrangement
on Export Credits.
One was an example of aggressive financing of exports,
under which the British offered highly concessional terms
to induce Pan American Airways to select th$ Rolls Royce
engine for its purchase of 12 L-lOlls. While aircraft are
not included in the International Arrangement, there is a
limited OECD Aircraft Standstill and there is an OECD

- 10 agreement on local cost financing.

The British credit offer

violated international understandings by failing to require
any down payment, exceeding the agreed-on ten year maximum
term, and providing local cost financing.

The British, while

acknowledging that this was an unusual financing offer,
argued that they were only matching financing terms offered
by a private U.S. firm.

Our view is quite clear, and we

have made it abundantly clear to the British at the highest
level —

the UK action constituted a triple derogation from

existing understandings.
The second instance relates to several steps taken by the
Government of Canada which seek to induce U.S. and other
automobile companies to locate a significant part of their new
production north of the border.

Sizeable cash grants have

reportedly been offered by the Federal government, along with
certain provincial authorities, to persuade the companies to
do so.

Duty reductions have been negotiated for Canadian imports

of Volkswagens made in the United States, conditioned on larger
purchases of Canadian auto parts by Vokswagen plants located
throughout the world.

Similar arrangements are contemplated

with other non-U.S. firms.
We fully recognize that several U.S. states have also
offered substantial incentives for the location of auto plants,
but so have the Canadian provinces.

We simply cannot sit by

while these interventionist practices are escalated to the

- 11 Federal level. We have so informed Cabinet officials of the
Government of Canada and we have called for urgent consultations under the terms of both the U.S.-Canadian Automotive
Products Agreement and the 1976 decision of the OECD Council
on international investment incentives and disincentives.
Assistant Secretary of State Katz and I will travel to Canada
on Friday to launch these discussions, which we hope will
prevent the opening of another front of international subsidy
competition.
The Subsidy/Countervail Code
The draft subsidy/countervail text would establish a
comprehensive discipline on the use of government subsidies,
and set strict standards to limit the effect of subsidies on
world trade. The text also incorporates the "two-track"
approach proposed by the United States, which lays out procedures whereby countries can take countermeasures to offset
the impact of foreign subsidies in both their domestic market
and third country markets as well. This will provide the
means to protect our exporters from subsidized competition
in foreign markets.
As part of the proposed agreement on subsidies and
countervailing duties, we are prepared to recommend to the
Congress that it accept inclusion of an injury test in the
U.S. countervailing duty law. This is an issue of major
importance for our trading partners, for understandable and

- 12 justifiable reasons.

Only the United States now operates

without an injury test, and our continued failure to adopt
one places us in clear violation of the spirit of the GATT.
Our willingness to recommend this change —

within the con-

text of an agreement containing effective discipline on
the use of subsidies themselves —

demonstrates our great

interest and sincere desire to avoid trade disputes in this
area in the future.
The injury test would be incorporated within the framework of the two-track approach.

If a country granted a

subsidy in violation of specific commitments not to use certain practices, then the importing country could apply countermeasures along one track without having to demonstrate
injury.
tariffs:

This is fully consistent with the GATT approach to
retaliation is authorized whenever a member country

violates its tariff bindings, with no need to demonstrate
injury.

Indeed, the MTN seeks to extend such a network of

rights and responsibilities from the traditional area of tariffs into several non-tariff areas.
The other track provides for countermeasures against subsidies after a finding of injury.

With the two-track approach,

we will be able to provide expeditious and appropriate relief
for industries facing subsidized competition.
The subsidy/countervail code also provides an excellent
opportunity to engage the advanced developing countries (ADCs)

- 13 more actively in the international trading system.

We recog-

nize that subsidies can contribute to development in poorer
countries, but also believe that ADCs should assume responsibilities commensurate with their level of development and
should accept increased obligations as their industries become
internationally competitive. The current proposal affirms
this principle, and seeks to provide a flexible basis for the
adoption of obligations on subsidies which are appropriate
for individual developing countries.
There are still three key issues that have yet to be
resolved in the subsidies code, without which there can be
no agreement:
Agriculture. We will not accept an agreement that
does not tackle the thorny problem of limiting subsidized
competition in world agricultural export markets.
Provisional Measures. We have not agreed on some of
the mechanics of the second track, in particular whether a
country can have recourse to provisional measures while international review of a case is pending. We favor expeditious
international resolution of disputes but, where this is not
possible, we need to maintain the right to act against the
most blatant of subsidy practices — those which countries
have already agreed to avoid.

- 14 —

Domestic Subsidies.

We need to include an illustra-

tive list of domestic subsidies in the code.

Direct govern-

ment financial assistance to industrial development is often
introduced in the name of laudable domestic economic goals:
increased employment, industrial efficiency, farm income security, long-term research and development efforts.

But it also

tends to forestall needed structural adjustment at home, while
exporting problems abroad.

We believe that international

guidelines and an illustrative list are needed to guide the
application of such subsidies, and should be valuable in preventing (or at least helping to resolve) disputes over their
use in the future.
These three issues, and the details for applying the
code to the ADCs, are tough both intellectually and politically.

But they are not insurmountable obstacles.

The foun-

dation for a comprehensive agreement exists in the text prepared by our negotiators over the past few weeks.
that agreement can be reached —

I believe

indeed must be reached

—

by the end of the year.
Framework
Subsidy/countervail is but one, albeit perhaps the most
important, area where the MTN seeks to create new rules to
govern international trade for the 1980s and beyond.

Recog-

nizing the tremendous changes which have occurred in trade

- 15 practice and international circumstances since the founding
of the GATT in 1948, the Trade Act called on the President
to negotiate changes in GATT rules, and procedures in the MTN.
Originally dubbed "GATT Reform", this effort is now being
carried forward in the MTN's "Framework Group."

In addition,

it applies to other parts of the MTN, particularly the various
code negotiations.
The Framework Group concerns itself with the following
topics:
a)

special and differential treatment for developing
countries, including LDC reciprocity for trade
concessions by developed countries and the related issue of graduation from LDC status;

b)

trade restrictions for balance of payments
reasons;

c)

consultation, surveillance, and management of
disputes;

d)

export restrictions.

Many developing countries have come to regard the Framework Group as the "LDC Group" in the MTN.

They are pushing

hard for GATT amendments which would provide a permanent
"legal" basis for special and more favorable treatment of
LDCs by developed countries in future trade negotiations, and
enshrine the principle that LDCs owe less than full reciprocity for trade concessions by developed countries.

The

- 16 developing countries believe that present GATT rules give
insufficient consideration to development problems, and that
deviations from the rules to take account of such problems
require "waivers" which are complicated and difficult to
obtain.
This is one of the most politically sensitive issues in
the MTN.

We are sympathetic to the special problems of LDCs.

At the same time, we cannot agree to a change in GATT rules
which might result in a permanent two-tier trading system and
less than fair treatment of our own trade interests by a large
bloc of other countries.

We also believe that any solution

must provide for "graduation" —

the phasing out of special

treatment, and acceptance by the more advanced developing
countries of the increasing obligations of the trading system
as the status of their development warrants it.
The GATT sanctions use by its members of import quotas
and licensing restrictions to remedy serious balance of
payments difficulties.

However, it does not adress the issue

of import surcharges and prior import deposits —

which have

been much more commonly used in recent years. More generally,
this provision was adopted under a regime of fixed exchange
rates whereas the new system of flexible rates provides for
a whole new balance of payments adjustment device.
Clearly, "GATT reform" is needed here.

When the GATT

rules are manifestly inadequate to deal with common practice

- 17 in a major area like this, the entire Agreement loses credibility.

More important, better coverage of these practices

by GATT would limit their use to situations which are fully
justifiable.
An essential element of a final MTN agreement will be an
improved dispute settlement package.

It should apply specifi-

cally in the non-tariff measure codes, as well as to disputes
under the GATT generally.

We believe it should provide:

maximum inducement for the parties to a dispute
to reach agreement directly;
—

means for impartial establishment of the facts of
a dispute;
a means of arbitration and conciliation;
a record of the disposition of disputes.

We believe that existing GATT practice is useful in this
regard, but could be improved upon.

The GATT now provides for

the use of impartial panels of experts to help resolve questions of fact and law related to a dispute.

Such findings

then can form the basis for efforts at reconciliation, either
directly between the parties or with the help of mediators.
We would like to spell out more fully how this system would
work, improve GATT procedures to restore the system's efficacy,
and provide for time limits on the various steps in the process.
Finally, we need improvements in GATT provisions governing export restrictions, to balance existing GATT restraints

- 18 on import restrictions. The former can be just as tradedistorting, and can also be used to export one country's
economic problems to its trading partners —

as experience

has demonstrated in recent years.
The general rules of the GATT apply to exports in much
the same manner as to imports.

Restrictions on quantity

such as quotas and licensing systems —

—

are generally prohi-

bited, but duties or taxes on exports may be imposed so long
as:
—

they do not discriminate among trading partners, and
the contracting country has not agreed to
"bind", or set a limit on, the amount of
such duties or taxes.

However, the GATT clauses dealing with export restrictions are in several ways less complete than those dealing
with import restrictions.

When the GATT was written in 1948,

import restrictions were a serious issue but export restraints
were not.

Thus the Agreement permits export restraints to

prevent or relieve critical shortages of essential commodities
in the restricting country, to conserve "exhaustible natural
resources", or when domestic prices of inputs are being held
below world levels as part of a government stabilization program.

- 19 But the GATT provisions dealing with binding of duties
and taxes need to be made more clearly and specifically applicable to exports. The general rule of nondiscrimination among
trading partners needs to be made as clearly relevant to
exports as it is to imports. The status under GATT of export
restraints imposed by state trading enterprises, rather than
governments themselves, needs to be clarified. And we need
more specific provision for notification, consultation, and
dispute resolution with respect to export restraints, reflecting the increasing importance of this issue in world trade.
Export Credits
Although it is not being negotiated in the MTN, I would
like to comment finally on a closely related topic — the new
International Arrangement on Official Export Credits, concluded
by twenty countries and the Commission of the European Communities earlier this year. You will recall that, when I last
appeared here last March, I pointed out that the Arrangement
is intended to head off the possibility of a self-defeating
export credit war, a very real danger in this time of increased
government intervention in trade.
You may recall that I expressed hope that the new
Arrangement would form the basis for cooperation among the
major trading nations to curb excessive competition in export
credits. It was a welcome first step, but further action was

- 20 needed to restrain aggressive government financing practices
and reduce the element of subsidy in official export credit
financing.
We are especially concerned about practices such as
those of the British in the aircraft sector, which I mentioned
earlier, because they create a kind of competitive trade
atmosphere that brings forth counter actions tending to produce
a general export credit war.

To avoid these dangers, we will

seek to strengthen the International Arrangement on Export
Credits.

At the OECD Ministerial in June, Secretary Blumenthal

emphasized the need for further negotiations this year.

Such

negotiations will be formally initiated at the review meeting
of the Participants in October.
While we pursue a more rigorous international agreement,
we are also taking action to maintain our ability to compete
in the highly competitive export credit market.

The Export-

Import Bank is increasing its financing activities, with an
anticipated budget authority increase of 30 percent for fiscal
1979 (from $2.9 to $3.8 billion).

And we could of course

respond to excessive foreign export subsidies by using our
own countervailing duty law or even Section 301 of the Trade
Act, which gives the President authority to retaliate against
foreign subsidies of exports both to the U.S. and to third
country markets.

- 21 Conclusion
The goal of U.S. trade policy is to maintain, and further
liberalize, the open trading system which has played such a
major' role in the postwar prosperity of the United States and
the entire world. We thus seek further freedom for trade via
the MTN.
But we feel just as strongly that all industrialized
countries, and increasingly the advanced developing countries
as well, must play by agreed rules of the game. In some areas,
new rules are needed. In all areas, closer adherence to the
rules is maandatory. It is an old, but true, cliche that
"trade must be fair to be free".
Hence we are trying to negotiate, simultaneously, a
further opening for trade flows and a more effective international regime within which trade takes place. I believe
that we will achieve such a two-fold result before the end
of 1978.

FOR RELEASE AT 4:00 P.M.

August 1, 1978

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,800 million, to be issued August 10, 1978.
If final action on the debt ceiling legislation has not been
completed by August 10, the issue date of these bills, the bills
delivered on that date will be those issued on July 31 to Government accounts. The auctions will be held as scheduled and the
bills will have the CUSIP numbers and due dates specified in this
announcement. This offering will not provide new cash for the
Treasury as the maturing bills are outstanding in the amount of
$5,808 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
May 11, 1978, and to mature November 9, 1978
(CUSIP No.
912793 U3 8), originally issued in the amount of $3,403 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,500 million to be dated
August 10, 1978, and to mature February 8, 1979 (CUSIP No.
912793 W7 7).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing August 10, 1978. Federal Reserve
Banks, for themselves and as agents of foreign and international
monetary authorities, presently hold $3,482 million of the
maturing bills. These accounts may exchange bills they hold for
the bills now being offered at the weighted average prices of
accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Re-serve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20226, up to 1:30 p.m., Eastern Daylight Saving time, Monday,
August 7, 1978. Form PD 4632-2 (for 26-week series) or Form
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to be maintained on the book-entry records of the
B-1080
Department of the Treasury.

-2Each 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 securities and report daily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on August 10, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
August 10, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

August 1, 197 8
Immediate Release
The Treasury Department today suspended sales
of U.S. Savings Bonds until the public debt limit
is increased. Without new legislation to increase
the public debt limit, the government lacks
authority to issue new debt obligations. Notice
of the suspension is being given to about 40,000
issuing agents throughout the country.
Until the debt ceiling is raised, the Treasury
Department will also be unable to complete transactions involving special nonmarketable securities
which are issued in connection with the financing
of tax-exempt bond issues by state and local governments.

B-1081

FOR IMMEDIATE RELEASE

August 1, 1978

RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $2,503 million of
$5,384 million of tenders received from the public for the 3-year
notes, Series N-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 8.44% 1/
Highest yield
Average yield

8.47%
8.46%

The interest rate on the notes will be 8-3/8%. At the 8-3/8% rate,
the above yields result in the following prices:
Low-yield price 99.831
High-yield price
Average-yield price

99.753
99.779

The $2,503 million of accepted tenders includes $1,124 million of
noncompetitive tenders and $1,379 million of competitive tenders from
private investors, including 16% of the amount of notes bid for at
the high yield.
In addition to the $2,503 million of tenders accepted in the
auction process, $1,200 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 15, 1978, and $320
million of tenders were accepted at the average price from Federal
Reserve Banks as agents for foreign and international monetary authorites
for new cash.
If Excepting 6 tenders totaling $155,000

B-1082

partmentoftheJREASURY

FOR IMMEDIATE RELEASE

August 2, 1978

RESULTS OF AUCTION OF 7-YEAR NOTES
The Department of the Treasury has accepted $3,000 million of
$4,078 million of tenders received from the public for the 7-year
notes, Series B-1985, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 8.28%
Highest yield
Average yield

8.41%
8.36%

The interest rate on the notes will be 8-1/4%. At the 8-1/4% rate,
the above yields result in the following prices:
Low-yield price 99.843
High-yield price
99.166
Average-yield price 99.426
The $3,000 million of accepted tenders includes $715 million of
noncompetitive tenders and $2,286 million of competitive tenders from
private investors, including 57% of the amount of notes bid for at
the high yield.
In addition to the $3,000 million of tenders accepted in the
auction process, $1,434 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 15, 1978, and $330
million of tenders were accepted at the average price from Federal
Reserve Banks as agents for foreign and international monetary authorities
for new cash.

B-1083

Release on Delivery
Expected / p.m. CDT
August 7, 1978
REMARKS BY THE HONORABLE
BETTE B. ANDERSON
UNDER SECRETARY OF THE TREASURY
BEFORE THE
SCHOOL FOR BANK ADMINISTRATION
MADISON, WISCONSIN
AUGUST 7, 1978
THE BANK SECRECY ACT: CHALLENGE FOR AMERICAN BANKING
I am very pleased to have this opportunity to participate in
your program. As a career banker, I hold the School for Bank
Administration in high esteem for the role it plays in furthering
the development of bankers who have audit, controllership,
administrative, and operations responsibilities.
Tonight I would like to talk about the Bank Secrecy Act, and
its role to help law enforcement officers overcome foreign bank
secrecy laws which were, and still are, being used to frustrate
investigations of tax evasion and other crimes. I want also to
explain why its success is a challenge to American banking.
As many of you are aware, the statute requires that:
— banks and other financial institutions report
unusual currency transactions in excess or $10,000
and maintain certain basic records;
— travelers and others report the importation or
exportation of currency and other bearer instruments
in excess of $5,000; and
— all U.S. persons file reports concerning the
ownership or control of foreign financial accounts.
The Act assigns the responsibilities for compliance to the
Secretary of the Treasury, and he has delegated them, in turn, to
my office.
For many years prior to 1969, when the Act was introduced,
Federal law enforcement agencies were well aware of the problems
in prosecuting persons who use foreign transactions and foreign
financial facilities to conceal or shield their violations of
U.S. law.
B-1084

-2-

Some of the abuses of foreign bank accounts then included:
— The use of foreign bank accounts to hide income not
reported for tax purposes. Since U.S. investigators
rarely have access to them, such accounts can be
used very much like a safe deposit box. However,
the funds on deposit in a foreign bank have an added
advantage; they can be invested through the bank and
earn additional, untaxed income without disclosing
the identity of the depositor.
— The use of a foreign bank as a conduit to permit a
U.S. depositor to "borrow" the funds from his own
secret foreign account without disclosing the actual
source of the funds. In this way, the depositor
could overtly use his hidden funds and take a tax
deduction for the "interest" the foreign bank
charges him.
— The use of foreign banks as a front in conducting
securities transactions, which were frequently
executed through U.S. brokers. Some of those
transactions were for the purpose of concealing
dividend income and capital gains; others were used
to facilitate the violation of the margin
limitations on security purchases.
Of course, in some instances, the banking system was
by-passed. Currency was simply packed in an attache case,
carried out of the country and deposited in a foreign bank. Even
though law enforcement officers may have had accurate information
concerning some of these shipments, they usually had no legal
basis for stopping or taking other action against the courier.
Unfortunately, once the money was deposited, undetected, in a
foreign bank governed by bank secrecy lawsf there was little
likelihood that U.S. law enforcement officials would learn about
it.
Even when bank information came from informants or was
obtained from foreign governments, its use was usually restricted
because of problems of admissibility in U.S. courts or
limitations imposed by the foreign government.
Congress recognized these obstacles and attempted to
alleviate them by passing a statute which has become known as the
Bank Secrecy Act.
Public Law 91-508, which included the Bank Secrecy Act, was
enacted in October, 1970, and the Treasury implementing
regulations became effective two years later.
Although the Act gave Treasury extremely broad powers to
require recordkeeping and reporting of financial transactions,
the Department has chosen a moderate course, striving to
accomplish the goals of the statute without imposing unnecessary

-3burdens. The regulations apply mainly to the banking and
securities industries and set standards which reflect prevailing
industry practices. They include the following provisions:
Banks, savings and loans, securities brokers, dealers in
foreign exchange, agents of foreign banks, and other
institutions are required to retain the original or a copy
of:
— Each extension of credit in excess of $5,000 except
for those secured by real estate, and
— Fecords of instructions for the transmission of
credit, funds, currency or other instrument, check,
or securities of more than $10,000 out of the United
States.
Banks and bank-type institutions such as savings and loans,
and credit unions, must also retain a variety of records for each
deposit or share account, especially those pertaining to
transactions with foreign financial institutions.
Also, securities brokers supervised by the SEC must obtain
a signature card or similar document establishing trading
authority over an account and make a reasonable effort to obtain
a Social Security Number for each account.
There are a number of other provisions which you should
know about.
First, financial institutions must report to the IRS any
unusual domestic currency transaction in excess of $10,000. This
only modifies a similar requirement in effect for more than 25
years which required banks to report any unusual customer
transaction involving more than $2,500.
Second, except for certain shipments made by banks, the
international transportation of currency, bearer checks and other
monetary instruments in excess of $5,000 must be reported to the
Customs Service.
Finally, the regulations require all U.S. persons to report
their foreign financial accounts. The regulations also specify
that certain records of such accounts be maintained in the United
States.
To enforce this act, the Treasury Secretary delegated
responsibilities to several agencies which already regulate
groups of financial institutions: the Comptroller of the
Currency, the Federal Peserve Bank, the Federal Home Loan Bank
Board, the National Credit Union Administration, the Federal
Deposit Insurance Corporation, the Securities and Exchange
Commission, the Commissioner of Customs, and the Commissioner of
Internal Revenue.
Qveral 1 rp.gnnn.gi hi i i i-y for coordination and compliance with

-4the regulations remains in my office.
toe believe that the regulations, which- are relatively
uncomplicated, have already helped fight white collar crime,
political and commercial corruption, and organized crime.
For example, during the 12 month period which ended June 30
of this year, the Treasury Department provided Federal drug
enforcement agents with more than 1,700 currency transaction
reports covering more than $200 million.
Last year, the Miami Herald credited these reports with
helping to identify a widespread drug operation in the Miami
area. One of the transactions was in excess of $900,0<*0, and
most of it was in denominations of less than $100. Some of the
deposits involved such large volumes of currency that it took
three tellers three or four hours to count the money. Someone
familiar with the investigation commented that the currency h-id
to be converted into some other form because otherwise "you'd
need a LC-6 to fly it to your holding bank."
The currency transaction reports have been valuable in
other ways. Every one of them is screened by the IRS. Also,
chey have been used by the Department of Justice and
Congressional subcommittees in connection with specific
investigations.
The Customs Service has had increasing success in utilizing
currency transaction reports against drug dealers and other
violators.
For example, in one case, a joint investigation by Customs,
the Drug Enforcement Administration, and foreign police, Customs
seized 2,r?00 pounds of hashish, $19,000 in currency, and $1?0,G0P
in bank drafts. Further investigation disclosed other reporting
violations and resulted in freezing more than $800,000 in various
oank accounts. In December, three of the defendants were fined
$5^0,000 each, the maximum amount possible under the Bank Secrecy
Act, and given substantial jail terms.
Customs also is investigating with the Department of
justice possible violations of the reporting requirement by a
number of large corporations in connection with the maintenance
of slush funds. The first case completed resulted in the
assessment of a $229,000 penalty against Gulf Oil last year.
Earlier this year, Control Data Corporation was fined $1,000,0^0
for a violation of tne reporting requirement.
Even a financial institution has been affected. In May,
the San Francisco subsidiary of Deak & Company, the international
foreign exchange dealer, was fined $20,000"for failing to report
several million dollars in shipments.
Customs makes several hundred seizures of currency and
monetary instruments each year under a variety of circumstances.
In one case last month, agents seized some currency that a

-5traveler had concealed in his wooden leg.
Although these successes are very significant and we are
proud of them, I believe that we have only scratched the surface.
Consider, for example, the huge amounts of money that flows
tnrough criminal enterprises. Legitimate businesses that gross
far less have very high visibility in our communities. For
example, in 1977 K Mart Corporation required more than $1
billion in working capital to generate approximately $10 billion
in sales. Yet that is less than the estimated value of illegal
drugs sold in the United States each year.
Can you imagine trying to conceal the cash generated from
those operations? I can't. But still the huge cash flow from
drugs, illegal gambling, and other large scale criminal
activities remains, for the most part, undetected.
The fact that there is a comparatively large volume of
currency in circulation today has become the basis for estimates
of the subterranean economy — the new name for economic activity
not reported for tax purposes.
According to one observer it amounts to $200 billion
annually based on the changes in the ratio of currency in
circulation to demand deposits. For example, in 1963, there was
S249 in currency circulating for every $1,000 in demand deposits.
By 1976, the ratio increased to $344 and led one economist to
estimate that $28.7 billion of the currency in circulation then
was used for illegal purposes — the subterranean economy.
While the size of the subterranean economy is subject to
dispute, the increase in currency in circulation is not. The
figures clearly indicate that while we may talk about a checkless
and cashless society, the public uses a much larger amount of
currency than ever before.
The fact that criminals continue to generate and use large
volumes of currency in their illegal activities is the reason
that the Bank Secrecy Act is an opportunity and a real challenge
to bankers to help discourage criminals from using cash.
Although we had very broad authority to require in-depth reporting
of currency transactions, Treasury decided to limit reporting to
large, unusual transactions.
The reasoning was that bankers are in the best position to
know their customers and to decide what is normal activity in a
customer's account. Therefore, you and your associates have z
key role in our program to combat crime in America.
Is the job getting done? Frankly, I don't know.
Part of the problem has been that Treasury needs to improve
its analysis of the reports. We recognized that and have
established a Reports Analysis Unit in our Office of Law
Enforcement. With imoroved computerization and collation of the

-6reports, we should be more sensitive to the data and better able
to identify persons who habitually deal in relatively large
amounts of currency, as well as banks which .file an unusual
number of reports or no reports at all.
The other part of the job is to develop greater awareness
of banks' responsibilities under the Act. Last year, one of the
major New York banks was fined $222,500 in connection with the
failure to report 445 currency transactions amounting to several
million dollars. The case came to light as the result of a
narcotics investigation. Several bank employees admitted
receiving commissions on drug related transactions which involved
the exchange of $1.8 million in small bills for larger bills, and
no reports were filed. The activity took place at several
branches of the bank. It is my understanding, however, that no
senior executives were implicated and that the internal auditors
were unaware of the situation.
Yet all of our investigations have been initiated as a
result of complaints by law enforcement agencies. Not one
resulted from information from bank management. We intend,
however, to work with the bank supervisory agencies to overcome
this deficiency.
We also plan to work with more of you, in groups and
individually, to answer questions you may have about the
reporting requirements and to listen to any suggestions you may
have.
I am confident in the ability of the banking community to
iolp us make these regulations work, and we are looking forward
to d more successful program.
Thank you.
oOCo

JepartmentoftheJREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

August 3, 1978

RESULTS OF AUCTION OF 30-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF AUGUST FINANCING
The Department of the Treasury has accepted $1,501 million of $2,588
million of tenders received from the public for the 30-year bonds auctioned
today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield

8.37%
8.46%
8.43%

The interest rate on the bonds will be 8-3/8%. At the 8-3/8% rate,
the above yields result in the following prices:
Low-yield price 100.055
High-yield price
Average-yield price

99.079
99.402

The $1,501 million of accepted tenders includes $148 million of
noncompetitive tenders and $1,353 million of competitive tenders from
private investors, including 4% of the amount of bonds bid for at the
high yield.
In addition to
process, $600
from Government
in exchange for

the $1,501 million of tenders accepted in the auction
million of tenders were accepted at the average price
accounts and Federal Reserve Banks for their own account
securities maturing August 15, 1978.
SUMMARY RESULTS OF AUGUST

FINANCING

Through the sale of the three issues offered in the August financing,
the Treasury raised approximately $3.3 billion of new money and refunded
$7.6 billion of securities maturing August 15, 1978. The following table
summarizes the results:
New Issues
8-3/8% 8-1/4% 8-3/8%
NonmarNet New
Notes
Notes
Bonds
ketable
Maturing
8-15-81 8-15-85 8-15-03- Special
Securities Money
Raised
2008 Issues Total
Held
Public $2.5 $3.0 $1.5 $ - $7.0 $4.4
Government Accounts
and Federal Reserve
Banks
1.2
1.4
0.6
Foreign Accounts for
Cash
0_^3
O^
_J1_
r..
TOTAL $4.0 $4.8 $2.1 (*) $10.9 $7.6
*$50 million or less.
Details may not add to total due to rounding.

B-1085

$2.6

(*)

3.2

_JL_

0^

3.2
_-_ .

0.6
$3.3

FOR IMMEDIATE RELEASE
FRIDAY, AUGUST 4, 1978
CONTACT: ROBERT W. CHILDERS (202) 634-5248

ALLOCATIONS OF REVENUE SHARING FUNDS ANNOUNCED

The Department of the Treasury's Office of Revenue
Sharing today announced the amounts of general revenue
sharing funds which each of approximately 39,000 units of
state and local government is entitled to receive for the
1979 fiscal year.
More than $6.8 billion has been allocated nationally
for the period. The money is scheduled to be paid in four
quarterly installments, in January, April, July and October
of 1979.
General revenue sharing funds are allocated periodically,
as specified in the revenue sharing law. The law requires that
the Office of Revenue Sharing calculate the allocations using
such factors as per capita income, local tax effort and intergovernmental transfers and population for each recipient unit
of government. These data are applied to formulas set forth
in the revenue sharing law in order to arrive at individual
recipients! allocations.
B-1086
- 30 -

tpartmentoftheTREASURY
ASHINGTON, D.C. 20220

TELEPHONE 566-2041

For Release Upon Delivery
Expected at 9:30 a.m., E.D.T.

STATEMENT OF
DANIEL I. HALPERIN
ACTING DEPUTY ASSISTANT SECRETARY (TAX LEGISLATION)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE FINANCE COMMITTEE
AUGUST 4, 1978
Mr. Chairman and Members of the Subcommittee:
I welcome the opportunity to appear before you today to
discuss S. 2256, a bill which reforms the law of bankruptcy.
S. 2256, and its counterpart on the House side, H.R.
8200, embody the first major attempt in forty years to revise
the bankruptcy laws of the United States. Since the United
States Government, as a result of its role as tax collector,
is a frequent creditor in bankruptcy, many of the provisions
of these bills have an important impact on the tax collection
process. Questions of priority, dischargeability, and
collection of tax claims in bankruptcy have a direct impact
on the integrity of our Federal tax system. The Federal tax
system, based on voluntary assessment, can only work as well
as it does today if the majority of taxpayers think it is

B-1087

-2fair. This presumption of fairness is an asset which must be
protected. A modernized bankruptcy law may well allow more
debtors to avail themselves of bankruptcy relief. Provisions
which reduce or minimize tax liabilities in bankruptcy will
inevitably increase the attractiveness of bankruptcy for both
debtors and creditors (other than the Federal Government),
and thus may undermine taxpayer confidence in the equity of
our tax system. It is very important, in protecting the
integrity of the Federal tax system, that any increased use
of the bankruptcy laws not be viewed by taxpayers at large as
providing a loophole for other taxpayers to avoid their tax
debts unfairly by going into bankruptcy.
The competing considerations of tax policy and bankruptcy policy express themselves in a number of provisions in
S. 2266, the bill before you today. Several solutions suggested in S. 2266 differ from those advanced in its counterpart, H.R. 8200. On occasion, a third solution is suggested
by the proposed amendments before you. These proposed amendments were developed by the staff of the Joint Committee on
Taxation. We appreciate the opportunity we were given to
work with the staff in the development of the amendments.
Although the result is not. always the one we would have
chosen, we believe that S. 2266, if modified by the proposed
amendments, would generally follow a reasonable middle ground
between protecting the integrity of the tax system and yet
allowing for the policy of the bankruptcy laws.
In our testimony, we will review some of the important
issues raised in the various sections which have been referred to you by the Committee on the Judiciaryl/; discuss
various issues raised in other sections which affect tax
claims and raise issues which invite amendments; explain
differences between S. 2266 and its counterpart, H.R. 8200,
to make clear why we favor the provisions in the Senate
version; and express our reservations on one of the provisions in S. 2266 for your further consideration.
1/ All references to sections in S. 2266 and H.R. 8200
are to" sections of the proposed new Title 11 of the United
States Code, which is embodied in section 101 of each bill.

-3-

I.

SECTIONS REFERRED TO THIS COMMITTEE BY
THE COMMITTEE ON THE JUDICIARY

The Treasury, with the exception noted below with
respect to section 505, supports the proposed amendments to
the seven sections referred to the Finance Committee. A
discussion of the issues raised by the amendments to these.
sections follows.
1. Section 346. Special tax provisions. The provisions
in this section deal with certain substantive tax issues
which must be resolved in bankruptcy for Federal, State, and
local purposes, such as the allocation of tax attributes
between a debtor and the debtor's estate. However, section
345 generally applies only to State and local tax issues.
The resolution for Federal tax purposes is left to another
bill now being considered by the Ways and Means Committee.
Since we believe the same rules should apply for Federal,
State and local purposes, we think it is premature to
legislate in these areas before the Federal rules are finally
determined. Thus, we agree with the proposed amendment which
would delete all the rules in section 346 of the bill, except
for the rule concerning withholding or collection of taxes,
such as employment taxes withheld from wages. The rules
governing withholding must be integrated with the principles
of priority and dischargeability of liabilities, principles
which are determined in other sections of S. 2266. For this
reason, it is appropriate to deal with those provisions, for
Federal as well as State and local purposes, in this bill.
2. Section 505. Determination of tax liability. This
section follows present law and authorizes the Bankruptcy
Court to determine the tax liability of the debtor where no
court has previously ruled on the debtor's liability. The
section also requires the trustee to request a prompt tax
audit from any Federal, State, or local taxing authority.
Under the bill, the Governmental unit would be required to
respond to the request for a quick audit within specified
time periods. This would apply to tax returns filed by the
trustee in the proceeding.

-4One aspect of the procedure for quick audits under S.
2266 creates unnecessary paperwork, contrary to the needs of
a streamlined bankruptcy policy and efficient tax administration. The vast majority of bankruptcy cases are cases in
which there are little or no assets in the debtor's estate.
Once this is determined, the trustee would have no reason to
keep the estate open for purposes of obtaining a quick tax
audit. Although in some situations there is a theoretical
possibility of personal liability for the trustee, in the
absence of an audit, there would be no such liability as a
practical matter. Accordingly, it is appropriate (as the
proposed amendments provide) to allow the trustee to determine by election whether he wishes to request a prompt audit.
If the quick audit is made elective with the trustee, rather
than mandatory, it will significantly reduce the amount of
paperwork required in many cases both for the trustee and for
the taxing authority.
The proposed amendments also revise the procedures for
choice of forum for litigating the tax liability of the
debtor and the debtor's estate, in cases where the tax liability is not dischargeable in bankruptcy. Under current
law, upon bankruptcy, a debtor is generally denied entry into
the Tax Court. The issue of the debtor's tax liability may
be raised by the debtor without prepayment of the tax if the
debtor institutes a proceeding in the Bankruptcy Court under
section 17c of the Bankruptcy Act. If the debtor chooses not
to contest personal tax liability in the Bankruptcy Court,
and the Federal government asserts a tax liability against
the debtor individually, the debtor can litigate only by paying the tax and suing for a refund in the District Court or
the Court of Claims. Some have argued that the decision of
the Bankruptcy Court in determining the liability of the
estate may have binding effect only on the Government in a
subsequent refund suit.
Under the proposed amendment, the debtor would be
given a choice of prepayment forums. If the debtor so chose,
the debtor could ask the Bankruptcy Court to determine individual tax liability for prepetition taxes, a determination
which the Bankruptcy Court would, in any event, normally make
in measuring the liability of the debtor's estate.

-5If the bankrupt did not choose to have personal liability determined in the Bankruptcy Court, the amendments
would allow the debtor to bring a separate suit in the Tax
Court. The bill makes clear that neither the government nor
the debtor could rely on the decision of the Bankruptcy Court
in the Tax Court action. The Tax Court would be free to
reach a contrary result. Thus, the debtor could formally
choose to stay out of the Bankruptcy Court in order to be
free to relitigate the claim in the event the Government
succeeds in the Bankruptcy Court. The debtor will follow
this course in every case unless by doing so the debtor runs
the risk of further liability even if the Government loses in
the Bankruptcy Court. This risk is not real unless the
Internal Revenue Service will actually relitigate cases it
does not win in the Bankruptcy Court.
The structure embodied in the amendment to S. 2266 thus
raises a significant possibility of duplicative litigation
for the IRS in its determination of a single taxpayer's tax
liability. The effect of current law is, in almost all
cases, to consolidate all determinations of the debtor's tax
liability for prepetition years in the Bankruptcy Court.
Since identical facts and legal issues apply in determining
the debtor's tax liability and the tax liability of the
debtor's estate, we would prefer that current law be continued. The basis for the proposed amendment is concern that
present law deprives the debtor of the opportunity to make a
presentation in the Tax Court. We believe that taxpayers are
allowed a hearing in Tax Court so that they will have a prepayment forum. The debtor in bankruptcy has such a forum in
the Bankruptcy Court. Also, we believe that the structure of
current law could be retained while granting to most debtors
— those whose estates have little or no assets — the right
to go into Tax Court.
3. Section 507. Priorities. S. 2266 provides a significant advance over current law by indicating more clearly
the priority which various tax liabilities will be given in
bankruptcy. The proposed amendments in this section are
important because they eliminate various devices which taxpayers have used to thwart the purposes of the priority rules
in bankruptcy. In general, the priority of taxes depends on
their age — many old taxes (those that are more than 3 years
old) do not receive priority and, under the general rule

-6which coordinates priority and discharge, are discharged
through bankruptcy. Very often a tax becomes "stale" because
the Government and the taxpayer are negotiating the taxpayer's potential liability. Taxpayers who wish to take
advantage of this rule have entered into such negotiations
for the purpose of transforming their liability into a
"stale" tax liability. Once the tax has been sufficiently
aged, the taxpayer is able to go into bankruptcy to discharge
the tax liability.
The proposed amendment would preclude that possibility.
Under the amendment, if an offer in compromise is withdrawn
by the debtor, or rejected by a Governmental unit, within 240
days before the petition date, the tax involved will receive
sixth priority as long as the tax would have been entitled to
priority had the bankruptcy case begun when the offer was
originally submitted. This is a useful addition to the rules
in order to prevent abuse.
4. Section 523. Nondischargeable taxes. This section
of S. 2266 provides that priority taxes will not be discharged. However, proper exceptions are made to the general
rule coordinating priority and discharge of tax liabilities.
These exceptions are for taxes as to which the debtor had not
filed a required return as of the date the bankruptcy petition was filed, for certain taxes as to which a late return
was filed within three years before the petition, and for
taxes with respect to which the debtor filed a fraudulent
return or as to which the debtor fraudulently attempted to
evade or defeat any tax. A proposed amendment to this section, coupled with a proposed amendment to section 507, will
help determine in a reasonable fashion the proper treatment
of liabilities for taxes as to which a deferred payment plan
had been negotiated between the debtor and a taxing authority
prior to bankruptcy.
The proposed amendments add a rule that if the Service
fails to file a timely proof of claim for a prepetition tax
liability of the debtor, any later collection which the
Service makes from the debtor's after-acquired assets and
exempt and abandoned property must be reduced by the amount
of that debt that could have been paid from property of the
debtor's estate if the tax authority had filed a timely
claim. In general, the Service will fail to file a proof of
claim only in a "no asset" case. It should be stressed that

-7the rule provides an exception to its application where the
taxpayer's nondischarged liability results from fraud or the
failure to file, or late filing of, a return.
5. Section 728. Special tax provisions in liquidations. This section provides special tax provisions concerning the treatment of debt liquidation cases under State
and local tax laws. For the reasons stated in connection
with section 346, this provision should be deleted at this
time. Comparable provisions which would also apply to
Federal taxes will be dealt with in later legislation.
5. Section 1146. Special tax provisions in reorganizations. To the extent the provisions of S. 2256 deal with
the tax rules under State and local law, they should be
deleted for the reasons .discussed in connection with sections
346 and 728.
The proposed amendments would delete provisions in S.
2266 which permit the Bankruptcy Court to "declare" the tax
effects of a reorganization plan following a request for a
private ruling made to the taxing authority. We support this
deletion. The provision would have created serious administrative problems because the IRS could have been required to
respond to many alternative proposed plans in a single reorganization. It would also have allowed creditors in a
bankruptcy reorganization to have the tax effects of a plan
determined by a court before the plan went into effect.
Under the amendment, creditors participating in a bankruptcy
reorganization will simply make the same kinds of business
decisions that other businessmen make outside the bankruptcy
context.
7. Section 1331. Special tax provisions in wage
earner plans. We agree with the proposed amendments to this
section, which subject the collection of nondischargeable
taxes after bankruptcy to the normal restrictions on
assessment and collection of taxes, and which indicate that
the payment of nondischargeable taxes under a wage earner
plan are generally subject to other rules for wage earner
plans.

-8II. OTHER PROPOSED AMENDMENTS
Before this Subcommittee for consideration are several
amendments on tax-related matters which appear in sections of
the bill which have not been referred specifically to the
Finance Committee. Because the Finance Committee may want to
suggest further amendments to the bill in these areas, we
would like to offer our comments on these proposals.
As in the case of the amendments to the seven sections
which were specifically referred to the Finance Committee, we
believe the amendments before you reach appropriate positions
reconciling the conflicting purposes of tax and bankruptcy
law.
1. Section 108. Extensions of the statute of limitations . The amendment here is a technical one, making clear
in the statute what the Judiciary Committee in its report on
S. 2256 indicates should be the rule regarding the effect of
bankruptcy on the running of the statute of limitations with
respect to the collection of assessed taxes by levy or suit.
2. Section 506. Avoidance of certain liens. Under S.
2266, tax liens would be automatically voided if the Internal
Revenue Service fails to file a proof of claim and the claim
is therefore not allowed (unless the Service had no notice or
knowledge of the case). Under the proposed amendment, failure of the Service to file a proof of claim would not cause a
tax lien securing the claim to be void if the tax claim is
nondischargeable. As indicated before, the Service will
often fail to file a proof of claim in a "no asset" case. If
the rule in S. 2266 were adopted, the Service would be required to file a proof of claim in all these cases in order
to maintain its liens. This would be nothing more than
useless paperwork. Accordingly, we support the proposed
amendment.
3. Section 511. Federal unemployment tax (FUTA)
credit. Under the Internal Revenue Code, the tax credit
against the Federal unemployment tax for payments into a
State compensation fund is normally reduced in the case of a
late contribution to the State fund. S. 2266 provides that
the credit will not be reduced if a trustee in bankruptcy
makes a late payment, since the trustee may be barred by the

-9bankruptcy proceedings from making a timely payment of the
State contribution. The amendment to S. 2265 would expand
this rule so that in the case of a prepetition FUTA credit
which would have been available to the debtor absent late
payment, the Federal Government's claim attributable to a
reduction of such credit because of a late payment would be
treated as a tax claim which is not entitled to priority.
Although we might have preferred a more stringent rule in
this area, we defer to the bankruptcy policy considerations
which have led to the expansion of this rule as embodied in
the amendment.
4. Section 522. Collection of taxes from exempt
assets. The proposed amendment would make it clear that
taxes may be collected out of exempt property, even if the
property had been subject to a lien for taxes that was
avoided by the debtor or the trustee. The authority to
collect taxes out of exempt property is an important one, and
this clarification supports the general structure which
allows for such collections.
5. Section 541. Property of the estate. One proposed
amendment to this section would make clear that property of
the estate includes a refund of any tax arising from the
carryback of a loss or a credit of the debtor to a taxable
year before the first taxable year of the estate. This is a
useful clarification of the statute.
This section would also be amended to state specifically
that property of the estate does not include certain "trust
fund taxes," including amounts withheld from the wages of
employees and sales taxes collected by a retailer. It seems
inappropriate for other creditors to collect their debts from
such amounts, which the debtor does not receive for the
debtor's own account. If S. 2256 is amended as proposed
there will be a conflict between S. 2255 and H.R. 8200 in
this area. We would hope that, at least in a case where
these amounts are placed in a segregated trust account, the
amounts would not be considered property of the estate.
6. Section 1325(c). Payment of taxes in wage earner
plans. The proposed amendment would require that tax debts
be paid in cash under a wage earner plan. As a general rule,
it is very important for the proper administration of the tax
laws that taxes be paid in cash rather than in kind. The

-10debtor or the trustee is in a better position than the
Internal Revenue Service to dispose efficiently of property
in the estate, and payments in kind to the IRS should not be
encouraged in the bankruptcy context. Accordingly, we
strongly support this amendment.
III. DIFFERENCES BETWEEN H.R. 8200 AND S. 2266
In a number of tax-related areas, S. 2266 differs significantly from H.R. 8200. We think it is important for the
Committee to be cognizant of these areas, and to understand
why we prefer the approach taken in S. 2266.
1. Section 507. Priorities. Under S. 2266, like
current law, any taxes that a debtor was required to withhold
from wages or collect from customers and turn over to the
Government would be entitled to priority and be nondischargeable regardless of age. In contrast, H.R. 8200 would
deny priority for, and make dischargeable, liabilities for
such "trust fund" taxes if the accompanying return was due
more than two years before bankruptcy.
Withheld taxes differ from other taxes payable by a
debtor, and by law they must be held in special trust for the
Government. Nevertheless, delinquency in this area is continually increasing and represents a serious problem. The
Senate bill's treatment of the priority and dischargeability
of trust fund taxes appropriately reflects the special nature
of this form of liability and the serious breach of public
trust which results when such funds are used to pay other
creditors prior to bankruptcy. Accordingly, the Treasury
Department supports the approach taken in the Senate bill.
Another difference between the Senate and House bills is
that the former recognizes that collection efforts generally
do not commence until a liability is assessed. Absent an
extension of the statute of limitations, the assessment must
usually be made within three years of the filing of the
return. 3ut under current law and under the House bill, a
tax may lose priority and be dischargeable although the
Service never had any realistic opportunity to collect. The
Senate bill ameliorates this problem by affording priority to
a tax and forbidding its discharge when the tax assessment
was made within 240 days before the bankruptcy petition was

-11filed, but only if the assessment was made within three years
of the due date of the return. This relatively modest change
of current law will be helpful in curing present abuses and
we strongly endorse this provision.
2. Section 522. Exemptions. Under current law, tax
authorities are permitted to collect both nondischargeable
and dischargeable taxes from exempt property. Under H.R.
8200, only nondischargeable taxes are collectable from a
debtor's exempt property. Under both the Senate and the
House bills, the debtor is permitted to elect exemptions
under state laws which may be quite generous. There is no
reason to restrict the rule of present law which allows
collection of all taxes from exempt property. Accordingly,
we support the version in S. 2266.
3. Section 547. Preferences. Under H.R. 8200, it is
not stated explicitly that pre-petition tax payments are
not preferential transfers which can be avoided by the
trustee. S. 2265 makes clear that the preference rules may
not be applied to tax payments. Since the Government is an
involuntary creditor that must continue to extend credit
regardless of past non-payment by the debtor, the general
evil at which the preference rules are addressed does not
apply to a taxing authority. Accordingly, it is appropriate
that the preference rules not be applied to tax payments. It
is important that this issue be made clear in the statute
itself, as S. 2266 does.
4. Section 1130 (section 1129 of H.R. 8200). Confirmation of plan. Under H.R. 8200, a taxing authority could be
paid in property other than cash on its claims. As indicated
before, the trustee is in a better position than the Internal
Revenue Service to dispose of property in the estate. It
would be extremely difficult for the Government to monitor
and properly dispose of such property at full value. S. 2256
makes clear that the Government is to be paid in cash for its
priority taxes. This is an important and appropriate result,
which we strongly support.
IV. OTHER P0SSI3LE AREAS FOR AMENDMENT OF S. 2266
There are a number of sections in S. 2266 which may
profit from further technical improvements. We are discussing these issues with the staffs of your Committee and of
the Joint Committee on Taxation, and expect to resolve them.

-12There is one issue which we would bring to your attention at this time, however. Under S. 2266, the Government
may receive property in kind in payment of its non-priority
taxes. As indicated above, the trustee of an estate is
generally in a better position than the Internal Revenue
Service to dispose of property in the estate. Because of
restrictions on the flexibility granted to the Government in
its disposition of property, the Internal Revenue Service may
not be able to obtain full fair market value for property it
receives. Moreover, when the property it receives consists
of stock or securities of a newly reorganized corporation,
the Government may be placed in the inappropriate position of
owning an equity interest (or a creditor's interest which is,
in effect, an equity interest) in a private enterprise. Such
a position could lead to the appearance of impropriety in the
Government's dealings with the newly-reorganized debtor and
its competitors. This result must be avoided. Accordingly,
we would recommend that S. 2256 provide that all tax payments
be made in cash rather than in kind.
V. CONCLUSION
In summary, we believe that the tax-related provisions
in S. 2266, if amended in the manner suggested by the proposed amendments before you, will provide a reasonable and
appropriate compromise between the conflicting policies of
tax and bankruptcy law. We believe the amendments before
you, taken as a whole, represent a useful improvement to S.
2266 in those areas where the tax and bankruptcy laws interact in the administration of a debtor's estate.
I am authorized to say that the Justice Department
agrees with the views expressed in this statement.
I would be pleased to try to answer any questions that
you might have.

WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
August 3, 1978

Contact: Alvin M. Hattal
202/566-8381

TREASURY STARTS ANTIDUMPING INVESTIGATION
OF HOUSEHOLD LIGHT BULBS FROM HUNGARY
The Treasury Department today announced it has
started an antidumping investigation of imports of
household light bulbs from Hungary.
Treasury's action followed a summary investigation conducted by the U. S. Customs Service after
receipt of a petition filed by Westinghouse Electric
Co. alleging that the Hungarian manufacturer is dumping household light bulbs in the United States. The
petitioner claims that Hungarian light bulbs are sold
in this country at lower prices than in the home market.
Although the petitioner also claimed injury from
these imports, the Treasury has expressed "substantial
doubt" of the injury and has referred the case to the
U. S. International Trade Commission for a determination
within 30 days of whether there is any reasonable indication of injury from these imports. If the Commission
finds there is no reasonable indication of injury, the
antidumping investigation will be terminated immediately;
otherwise, the investigation will continue.
If, after a full investigation, the Treasury finds
sales at "less than fair value," the Commission will
again consider the question of injury in a full 90-day
investigation of that issue. Both sales at "less than
fair value" and "injury" must be determined before a
dumping finding is reached.
Notice of the start of this investigation will
appear in the Federal Register of August 7, 1978.
Imports of household light bulbs from Hungary during
calendar year 1977 were valued at approximately $4 million.
B-1088

o

0

o

FOR IMMEDIATE RELEASE
August 3, 1978

Contact:

Alvin Hattal
566-8381

TREASURY DEPARTMENT FINDS MOTORCYCLES
FROM JAPAN SOLD HERE AT LESS
THAN FAIR VALUE
The Treasury Department announced today that it has
determined that motorcycles imported from Japan are being
sold in the United States at "less than fair value" as
defined by the Antidumping Act. For purposes of this
action, the term "motorcycles" means those motorcycles
having engines with total piston displacement over 90 cubic
centimeters (cc), whether for use on or off the road.
This affirmative determination affects all Japanese
motorcycle manufacturers except Suzuki Motor Co., Ltd.
Suzuki was excluded from the determination on the basis
that its sales to the U.S. were at margins below home
market prices that are legally de minimis, or insignificant.
Virtually all other motorcycle imports from Japan are produced by Honda, Kawasaki and Yamaha, and weighted average
margins of sales below fair value in their cases were,
respectively 2.9, 7.26 and 1.98.
(over)
B-1089

-2The case is being referred to the U.S. International
Trade Commission/ which must decide, within 90 days, whether
a U.S. industry is being, or is likely to be, injured by
these sales. If the ITCfs decision is affirmative, dumping
duties will be collected on those sales found to be at "less
than fair value".
Sales at less than fair value generally occur when the
prices of the merchandise sold for export to the United States
are less than the prices of the same merchandise sold in the
home market. Interested persons were offered the opportunity
to present oral and written views prior to this determination.
Notice of this action will appear in the Federal Register
of August 8, 1978.
Imports of motorcycles from Japan were valued at $484
million during calendar year 19 77.
* * *

APP-2-04-O:D:T-RR-llf
DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
MOTORCYCLES FROM JAPAN
ANTIDUMPING
DETERMINATION OF SALES AT LESS THAN FAIR VALUE AND EXCLUSION FROM INVESTIGATION
AGENCY: United States Treasury Department
ACTION: Determination of Sales at Less Than Fair Value
and Exclusion from Investigation
SUMMARY:
This notice is to advise the public that an antidumping investigation has resulted in a determination
that motorcycles from Japan are being sold at less than
fair value. Sales at less than fair value generally
occur when the price of merchandise for exportation to
the United States is less than the price of such or similar merchandise sold in the home market or to third
countries. This case is being referred to the United
States International Trade Commission for a determination
whether such sales have caused or are likely to cause
injury to an industry in the United States.
EFFECTIVE DATE:
(Date of publication in the Federal Register.)
FOR FURTHER INFORMATION CONTACT:
Richard Rimlinger, U.S. Customs Service, Office of
Operations, Duty Assessment Division, Technical Branch,

2
1301 Constitution Avenue, N.W., Washington, D.C., 20229,
telephone (202) 566-5492.
SUPPLEMENTARY INFORMATION:
On June 8, 1977, information was received in proper
form pursuant to sections 153.26 and 153.27, Customs
Regulations (19 CFR 153.26 and 153.27), indicating that
motorcycles from Japan are being, or are likely to be,
sold at less than fair value within the meaning of the
Antidumping Act, 1921, as amended (19 U.S.C. 160 et seq.)
(referred to in this notice as "the Act").

This infor-

mation was submitted by counsel acting on behalf of the
Harley-Davidson Motor Co., Inc., a subsidiary of AMF,
Inc.

On the basis of this information and subsequent

preliminary investigation by the Customs Service, an
"Antidumping Proceeding Notice" was published in the
Federal Register of July 15, 1977 (42 F.R. 36584).
Pursuant to section 201(b)(2) of the Act (19 U.S.C.
160(b)(2)), notice was published in the Federal Register
of January 20, 1978 (43 F.R. 3968), stating that the
Secretary had concluded that the determination provided
for in section 201(b)(1) of the Act (19 U.S.C. 160(b)),
could not reasonably be made within 6 months. The determination under section 201(b)(1) of the Act (19 U.S.C.
160(b)(1)) was, therefore to be made within no more than
9 months.

3
A "Withholding of Appraisement Notice" was published
in the Federal Register of April 26, 1978 (42 F.R. 17900-02).
For purposes of this notice, the term nmotorcyclesM
means motorcycles having engines with total piston displacement over 90 cubic centimeters, whether for use
on or off the road.
FINAL DETERMINATION OF SALES AT LESS THAN FAIR VALUE
On the basis of information developed in Customs'
investigation and for the reasons noted below, I hereby
determine that motorcycles from Japan, other than those
produced and sold by Suzuki Motor Co., Ltd., are being
sold at less than fair value within the meaning of section
201(a) of the Act (19 U.S.C. 160(a)).

In the case of

motorcycles from Japan produced and sold by Suzuki Motor
Co., Ltd., I hereby exclude such merchandise from this
determination.
STATEMENT OF REASONS ON WHICH THIS DETERMINATION IS BASED
The reasons and bases for the above final determination
are as follows:
a.

Scope of the Investigation.

It appears that

virtually all imports of the subject merchandise
from Japan were manufactured by Honda Motor Company,
Ltd., Yamaha Motor Co., Ltd., Kawasaki Heavy Industries,
Ltd., and Suzuki Motor Co., Ltd.

Therefore, the

investigation was limited to these manufacturers.

4
B.

Basis of Comparison.

For the purpose of

considering whether the merchandise in question is
being, or is likely to be, sold at less than fair
value within the meaning of the Act, the proper
basis of comparison, with the exception of one model
sold by Honda Motor Co., Ltd. (the GL 1000 K2), is
between exporter's sales price and the home market
price of such or similar merchandise on all sales.
In the case of Honda model GL 1000 K2, the proper basis
of comparison was between exporter's sales price and sales
of such merchandise sold in a third country.

Exporter's

sales price as defined in section 204 of the Act
(19 U.S.C. 163) was used since sales by all four manufacturers
were made to U.S. firms related to those manufacturers
within the meaning of section 207 of the Act (19 U.S.C. 166).
Home market price, as defined in section 153.2, Customs
Regulations (19 CFR 153.2), was used since such or similar
merchandise, with one exception, was sold in the home market
in sufficient quantities to provide a basis for fair value
comparisons.

Third country sales, as defined in section 153.3,

Customs Regulations (19 CFR 153.3), were used for Honda
model GL 1000 K2 since, upon advice of an independent
technical consultant, the Treasury Department has determined that there were no sales in the Japanese home market
of such or similar merchandise within the meaning of section
212(3) fo the Act (19 U.S.C. 171(3)).

5
Sales of the GL 1000 K2 to Canada were selected for fair
value comparisons, since the Canadian model was virtually
identical to the United States model and was, thus, considered
to.be "such or similar " within the meaning of section 212(3)(A)
of the Act.

Accordingly, no comparisons were made under

section 212(3)(B) with merchandise sold in other third countries.
In accordance with section 153.31(b), Customs Regulations
(19 CFR 153.31(b)), pricing information was obtained concerning imports from Japan sold in the United States during
the 8-month period November 1, 1976, through June 30, 1977,
and Canadian and home market sales of motorcycles during
the period corresponding to the dates of export of those
motorcycles sold in the United States during the above
8-month period.
c.

Exporter's sales price.

For the purposes of

this determination of sales at less than fair value,
all of the merchandise was sold or agreed to be sold
in the United States, before or after the time of
importation, by or for the account of the exporter, within
the meaning of section 207 of the Act.

Accordingly, the

exporter's sales price was calculated based on prices to
unrelated U.S. dealers with deductions for Japanese inland
freight and insurance, U.S. duty, U.S. port handling, U.S.
inland freight, set-up and preparation, tires and tubes
excise tax, direct advertising, co-op advertising,

6
discounts, rebates, selling expenses and sales
promotion, as appropriate.

An addition was made for

the Japanese commodity tax incurred with respect to
home market sales but not collected or rebated by
reason of exportation to the United States, in
accordance with section 204 of the Act (19 U.S.C.
163).
After the Tentative Determination, information was
presented indicating that respondents might have paid
rebates after the investigatory period in connection
with motorcycles sold during the period, in addition to the
rebates disclosed to the Customs Service in the course of
its investigation.

Respondents were requested to supple-

ment their responses to report any such additional rebates.
Some supplementary information has been received, and
taken into consideration in the calculation of exporter's
sales price. A further Customs verification effort directed
to the question of unreported rebates is underway. Should
it reveal the existence of additional unreported rebates,
this Final Determination of Sales at Less than Fair Value
will be amended, as appropriate.
d.

Home Market price.

For the purposes of this

determination of sales at less than fair value, the
home market prices have been calculated on the basis
of the weighted-average prices to unrelated dealers.
Adjustments were made for inland freight,owners'

7
manuals, rebates, discounts, warranty costs, financing
expenses, selling expenses, sales promotion, and
direct advertising, with an addition for cost of
export packing, as appropriate, in accordance with
section 153.10, Customs Regulations (19 CFR 153.10).
Adjustment was made for differences in merchandise
sold in the two markets, as appropriate, in accordance
with section 153.11, Customs Regulations (19 CFR
153.11).
(i) Model Year Adjustment.

It has been claimed

by counsel for certain of the respondents that, with
respect to 1974, 1975 and 1976 model year motorcycles sold
during the investigatory period, an adjustment should be
made to account for the fact that these motorcycles
were considered "current" when sold in Japan, where
motorcycles are not marketed by model year designations,
but were not considered "current" when sold in the United
States, where this merchandise is sold by model year designation.
Counsel for petitioner has claimed that discounts
given in connection with sales of certain prior model year
Japanese motorcycles are not "customary'' in the United
States market, and that such a "custom",

if it existed,

was established by respondents in order to sell excess
inventory

and was unrelated to the fact that these motor-

cycles were of a prior model year.

8
An adjustment of the type here claimed by respondents
must be predicated upon a practice of discounting prior
model year motorcycles.

This practice must be shown to be

consistent, both as to timing of the discount

to

coincide

with the introduction of new model year motorcycles and
as to the amount of the discount.

Further, such a

practice must be shown to be carried out in response to
consumer perception that prior model year motorcycles
will be discounted.

However, the recent introduction of

such a practice or custom will not prevent its recognition.
Based on the evidence presented on the above points,
it has been concluded that the adjustment must be denied.
The introduction of new models did not result in an
automatic reduction of prices on prior models as part
of the alleged custom.

Older models were discounted at

varying times and in varying amounts and in connection
with various promotional programs unrelated to the introduction of new models.

Further, when older models consti-

tute a substantial portion of sales (in this case for
some exporters from 26 to 58 percent of all sales made in the
period of investigation) and, in some cases, continue to
be shipped after the introduction of new models, the sales
of prior model year motorcycles may not be disregarded in
assessing the exporter's sales policies.
(ii) Valuation of "differences" in merchandise.
Section 153.11, Customs Regulations (19 CFR 153.11),
provides that in making comparisons between similar merchandise, due allowance shall be made for differences in

9
the merchandise.

Primarily, such allowance will

be based upon differences in the cost of manufacture,
including differences in the costs of materials, labor
and direct factory overhead.

Counsel for petitioner has

claimed that such adjustment must be made based on the
costs of producing differences in the merchandise which
have been previously identified.

Counsel for certain

of the respondents have urged that the adjustment may
be determined by simply comparing the total of all
costs of producing the two similar products.
It has been concluded that the methodology urged by
the respondents may distort the adjustment by introducing
cost differences totally extraneous to, and which do
not result from, the objective differences in the merchandise.

The adjustments for differences in the mer-

chandise have, therefore, been based on those cost
differences directly attributable to the objective
differences in the merchandise.
During the extended investigatory period, information was requested concerning direct factory overhead
expenses applicable to the cost of manufacture of
motorcycles sold to the United States and similar merchandise sold in the home market, and if applicable,
third countries.

This information has been analyzed

prior to the Final Determination and has been utilized
in determining differences in cost of manufacture of
similar merchandise in the two markets, under Section
153.11.

10
(iii) Advertising Adjustment.
The Withholding of Appraisement Notice in this
case stated:
Petitioner has claimed that advertising expenses
directed to the promotion of sales of a particular
motorcycle should be deducted form the price of
that particular model, rather than allocated over
the entire class or kind of merchandise subject to
the investigation. While it has been concluded
that this claim is well-founded, it has not been
possible to perform the necessary recalculations
in time for this Tentative Determination. This
will be done prior to the Final Determination.
This statement was intended to reflect the dual concepts
of section 153.10(b), Customs Regulations (19 CFR 153.10(b)),
relating to adjustments for differences in circumstances
of sale: First, allowable expenses under that provision
must bear a direct relationship to the sales which are under
consideration, and may not be items of general overhead
attributable to all of a company's sales; second, allowable
advertising expenses under that provision must be attributable
to a later sale of the merchandise by a purchaser.
The concepts in section 153.10(b) have been interpreted in previous Treasury practice to mean:
1. The expense must have been incurred with respect
to the particular product in question, rather than
benefiting the sales of more than one product, the
company's entire product line or its institutional
image.

11
2.

The expense must have been incurred with respect

to the particular geographic market in question,
rather than benefiting sales in all markets or
markets not under consideration.
3.

The expense must relate to materials or adver-

tising media directed to purchasers in later sales;
in effect, they must represent an assumption of a cost
by the producer that would otherwise be borne by the
customer of the producer.
In the instant case, each respondent has stated that it
does not maintain records of expenditures in a way which
would enable a determination of the advertising expenses
incurred with respect to each model of motorcycle sold.
Rather respondents' evidence establishes that funds were
expended in respect of sales of "motorcycles", and then
allocated by value of sales to types of motorcycles.

In

this case, the allocations of such expenses to models and
markets made by each respondent, have been determined to
be appropriate.
(iv) Adjustment for currency value changes
Counsel for petitioner has requested that Treasury
examine whether prices of the subject merchandise have
been revised to reflect fully increases in the value of

12
the Japanese yen during the time subsequent to the conclusion of the investigatory period, i.e., June 30, 1977.
It is not normally possible, nor generally is it Treasury
policy, to examine pricing behavior subsequent to the
investigatory period, other than in the context of considering a request for a discontinuance of investigation
under section 153.33, Customs Regulations (19 CFR 153.33).
Under that section, an investigation may be discontinued
if no more than "minimal" margins are found, if assurances
of no further sales at less than fair value are received,
and if the exporter has, in fact, revised prices so as to
eliminate sales at less than fair value.

None of the three

companies, with respect to which sales at less than fair
value in more than a de minimis amount have been found*
have margins which would be considered "minimal" under
existing Treasury practice.

Should, however, information be

received which would necessitate a revision of the findings
of margins set forth in this notice to a level considered
minimal, it will be necessary, in view of the significant
change in the value of the yen since June 1977, to scrutinize
closely the evidence submitted by respondents of the current
pricing in the two relevant markets.
e.

Third Country Sales. During our extended in-

vestigatory period, additional information was obtained in
connection with the comparability of merchandise sold to
the United States with that sold in the home market.
This information has been reviewed and analyzed by a

13
special consultant selected by the U.S. Customs Service
for this purpose. As a result of his analyses, the
determination was made that there were no sales of motorcycles in the home market which were considered to be
"such or similar" to Honda Model GL 1000 K2 within the
meaning of section 212(3) of the Act. Therefore, third
country sales of this model weie examined.
Since the GL 1000 K2 sold to Canada was virtually
identical

to the United States model, Canadian sales

information was obtained and verified.

For the purposes

of this determination of sales at less than fair value, third
country sales price has been calculated on the weightedaverage prices to unrelated Canadian dealers. Adjustments
were made for: Japanese inland freight, in-transit storage
costs, Japanese brokerage and handling, ocean freight,
marine insurance, Canadian duty, Canadian customs brokerage,
Canadian inland freight, Canadian harbor charges, Canadian
local delivery and miscellaneous charges, Canadian
federal sales and excise taxes, cash and early payment
discounts, and an offset to U.S. selling expenses deducted
from exporter's sales price. Also, an adjustment
was made for a de minimis difference in the
merchandise sold in the two markets, in accordance with
section 153.11, Customs Regulations (19 CFR 153.11).
However, so minor an adjustment on a product of such
value does not prevent the consideration of the merchandise under section 212(3)(A) of the Act and obviates

14
the need to consider merchandise in other countries under
section 212(3)(B).
f.

Result of Fair Value Comparisons.

Using the

above criteria, exporter's sales price was found to be
lower than the home market and third country price of such
or similar merchandise.

Comparisons were made on approxi-

mately 90 percent of the total sales of the subject
merchandise to the United States by all manufacturers
vestigated for the period under investigation.

in-

Margins

were found on approximately 18.8 percent of the sales
ranging from 0.9 to 54

percent resulting in a weighted-

average margin of 2.59 percent on all sales compared.
Weighted-average margins found with respect to the
companies under investigation, computed over all sales
compared, were as follows:

Honda, 2.9 percent;

Kawasaki, 7.26 percent; Yamaha, 1.9%; and Suzuki, 0.28
percent.
In the case of Suzuki, the weighted-average margin
is considered to be de minimis.
The Secretary has provided an opportunity to known
interested persons to present written and oral views
pursuant to section 153.40, Customs Regulations (19 CFR 153.40).
The U.S. International Trade Commission is being
advised of this determination.

-15The order issued April 26, 1978, to withhold
appraisment on the subject merchandise from Japan, the
notice of which is cited above, is hereby terminated
with respect to Suzuki, effective upon publication of
this notice.
This determination is being published pursuant to
section 201(d) of the Act (19 U.S.C. 160(d)).

Robert H. Mundheim

FOR IMMEDIATE RETFASE
August 4, 1978

Contact:

Charles Arnold
202/566-2041

TREASURY RESUMES SALES OF SAVINGS BONDS
The Treasury Departanent today authorized the resumption of
sales of U.S. Savings Bonds, state and local series securities— socalled special arbitrage securities— and other types of Treasury
securities, effective August 3, 1978. This action was made possible
by the passage of legislation providing a temporary increase in the
public debt limit.
In the absence of legislation to increase the public debt
limit, the government had lacked authority to issue new debt
obligations. Notice of the resumption of sales is being given
to all Federal Reserve banks and 40,000 other issuing agents
throughout the country.

B-1090

Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Transcript

Number of Pages Removed: 22

Author(s):
Title:

Date:

Press Conference by Secretary W. Michael Blumenthal on the Corman-Fisher Amendment to
the
Ways and Means Bill

1978-08-04

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

CORMAN-FISHER AMENDMENT TO WAYS AND MEANS BILL
This amendment to the Ways and Means tax bill contains the following
features: •
° The Committee bill cuts individual taxes through bracket widening,
an increase in the standard deduction, selected rate cuts, and an
increase in the personal exemption to $1,000. The amendment would
replace these changes with a modified rate schedule and an increase
in the general credit from $35 to $100 per exemption.
° The amendment would preserve the provisions of the Committee bill
that set a 35 percent maximum rate on capital gains, exclude gains
on home sales, and eliminate the existing minimum tax on capital
gains. But in place of the Committee's micro-mini tax on capital
gains, the amendment would place a new limitation on the amount of
capital gains that could be deducted from the regular tax base.
One-half of total capital gains can now be excluded from income
even though the remaining half may be sheltered by ordinary losses.
Under the proposal, the special exclusion for capital gains would
generally be limited to the amount of capital gains subject to tax.
This new limitation could never reduce the amount of excluded gains
below $5,000 nor would it apply in a manner to reduce the benefits
of charitable deductions.
Advantages of Amendment
The bill, as amended, would have a revenue cost similar to the
original Ways and Means bill ($18.0 billion in CY 1979 compared to $16.1
billion in the Committee bill). The proposed changes would improve the
bill in the following respects:
0

The amendment would provide greater tax relief than the Committee
bill for all income classes through $50,000.

0

The amendment would provide the same capital gains relief to unsheltered
taxpayers as the Committee bill, but at a revenue cost $300 million
less. Taxpayers who have ordinary income exceeding ordinary losses
would be unaffected by the amendment and would pay no minimum tax.

° At the same time, the amendment would build upon the Committee bill
to provide a true alternative minimum tax. Under the Committee
bill, individuals with millions of dollars of capital gains and no
regular tax liability would pay a micro-mini tax of no more than 5
percent on their gains. The capital gains tax for these persons
might rise to 17-1/2 percent under the true alternative tax (although
the usual rate in such cases would be 10-12 percent).
0

In contrast to the micro-mini tax approach in the Committee bill,
this amendment would have no negative impact on incentives for
charitable giving.

Income Tax Burdens under Present Law, the Ways and Means
Committee Bill and the Corman-Fisher Amendment 1/
Four-person, One-earner Families

:
Wage
income

$ 7,200 11

(dollars)
:
Changes in Income Tax
:
Present law
:
Under
Under
income tax
: Ways and Means
:
Corman-Fisher
:
Committee Bill
•
Amendment
0

0

0

10,000

446

-62

-260

15,000

1,330

-77

-229

20,000

2,180

-146

-228

25,000

3,150

-232

-308

30,000

4,232

-304

-423

40,000

6,848

-486

-654

50,000

9,950

-654

-700

100,000

28,880

-924

-700

Addendum:
Tax-free income
levels

7,200

Office of the Secretar y of the Treasury

7> 400

8,888
August 4, 1978

1/ Tax burdens assume deductible expenses equal to 23 percent of income.
2/ Excludes the earned income credit.

Ton ExnmplcB of High Income Tnxpnyern Who Presently Pay No Regular Tnx
1

Capital gains before 507. oxcluRion

.

:

2,316.914

2

•

2,184,982

1"

:

2,6V,,860

4

:

791,076

5

:

1,603,951

6

:

1,117,311

7

:

1,347.515

8

t

876,746

9

:

558,994

10
1,631,290

Ad|ii«to,l grnRN lnr»n.P -327,290 -2,566 -178,709 -48,100 -288,613 -93,051 32,865 23,242 -68,273 -177,724
Capital gains after 50* exclusion . 1,168,457 1,092,491 1,354,155 396,538 801,977 558,657 673,758 438,135 279,497 815.645
All other Income -1.495,747 -1,095,057 -1,602,864 -444,638 -1,090,610 -651,708 -640,892 -414,893 -347.770 -993,369

Preference Income:
Excluded capital galna 835,115 1,079,075 947,499 172,316 491,813 393,236 673,758 239,387 206,523
Other preference

income

()

0

0

256,382

0

0

0

0

0

0

0

Current law tnx:
R,ru,lr tax

0 0 o

0

0 0 0 0 0 -133^

M,ntrm

'mt,x 123,83? lf,0,984 140,278 73,659 72,092 57,305 99,564 34,408 29,408 36,777

Total

•••• iTvnT 160,984 140,278 2T7659 727092" 577305" 99, $64 3T» 29^408 3TT54T

Ff feet
lve 5.17.
tnx rat
« > V3.97. 5.37. .27.
3.07.
4.57.
7.47.
2

5.37.

7.47.

5.37.

Tnx under Committee Bill:
Regular tnx

0

0

0

0

0

0

0

0

0

0

Micro-Mini Tnx (10 percent)

82,531

106,907

93,750

15,544

48,001

38.144

66,376

22.939

19,582

24,458

Total

82,531

106,907

93,750

15,544

48,001

38,144

66,376

22.939

19,582

24,325

3.67.

2.07.

3.07.

3.47.

4.97.

2.67.

3.57.

1.57.

K. ffective tnx rate

3.57.

4.97.

Tnx under Cormnn/Flnher•
K e p M I n t tnx

144,833

345,628

325,110

35,236

139,630

90,396

204,917

38,646

44,736

T9.145

0

0

0

0

0

0

0

0

0

0

144,833

345,628

325,110

35,236

139,630

90,396

204,917

38,646

44,736

59,145

8.17.

15.27.

4.47.

8.07.

3.67.

MlnI mum tnx
Totnl
Kffective tnx rate

6.27.

15.87.

12. 37.

4.47,

8.77.

Change in tnx over current lnw taxCommittee Rill -41,301 -54,077 -46,528 -8,115 -24,091 -19,161 -33,188 -11,469 -9,826 -12,319
Corman/Flsher 21,001 184,644 184,832 11,577 67,538 33,091 105,353 4,238 15,328 22,501
Office of the Secretary of the Trensury, Office of Tnx Analysis
a/ Inxp.iver qualified for earned income credit.
b/ Tnx ns percent of capital gain«i before 50 pet cent exclusion.

.

August 7

1978

DESIRABILITY OF A TRUE ALTERNATIVE MINIMUM TAX APPROACH
Question: The existing minimum tax on capital gains has been
widely criticized. The Ways and Means Committee
eliminated the existing minimum tax on capital
gains and substituted a new micro-mini tax provision. Why didn't the Ways and Means bill solve
the problems?
Answer: The Committee bill solves one problem and exacerbates
another. The Corman-Fisher amendment solves both
problems.
Impact on persons with significant tax liability.
Since the current minimum tax can be imposed on capital
gains even when an individual has a significant regular tax
liability, it has increased the capital gains taxes for many
individuals who are already paying a relatively high rate of
tax. For some persons, the minimum tax can now raise the
effective capital gains tax rate from 3 5 percent to 39-7/8
percent.
° The Committee bill and the Corman-Fisher amendment both
eliminate the minimum tax for these individuals and
lower the top capital gains rate to 3 5 percent.
Tax-sheltered individuals. The current minimum tax has
little impact on persons who use tax losses to shelter
capital gains from all regular tax liability. Many individuals
now have a total tax liability of 7-1/2 percent or less on
millions of dollars of capital gains.
° The Committee bill has the undesirable effect of
reducing the capital gains tax still further for many
tax-sheltered individuals. For a person with no regular
tax liability, the maximum capital gains rate under the
micro-mini tax approach would be no higher than 5
percent regardless of whether he had $50,000 or $5,000,000
of capital gains.
0
Under the Corman-Fisher proposal, a true alternative
minimum tax would be applied to the capital gains of
tax-sheltered individuals. The capital gains tax for
these persons who now have no regular tax liability
would vary in accordance with the amount of gain, with
a top rate of 17-1/2 percent under the true alternative
minimum tax.

IMPACT ON MIDDLE-CLASS TAXPAYERS .
Question: How would the Corman-Fisher amendment affect
middle-class taxpayers?
Answer: The Corman-Fisher amendment1would be much more
beneficial to middle-income' taxpayers than would
the Committee bill.
° Taxpayers in all income brackets through
$50,000 would receive greater tax relief
under the amendment.
° A typical family of four with income of
$20,000 would save $228 under the amendment,
as compared to $146 under the Committee bill.
A family at the $30,000 income level would
save $423 under the amendment, as compared to
$304 under the Committee bill. For a family
making $50,000, the amendment would increase
the tax relief in the Committee bill from
$654 to $700.
° 87 percent of the total individual relief
under the Corman-Fisher proposal would go to
persons with less than $50,000 of income;
almost one-fourth of the relief under the
Committee bill goes to taxpayers with incomes
over $50,000.

IMPACT ON HOMEOWNERS
Question: What impact will the Corman-Fisher amendment have
on gain realized on the sale of a home?
Answer: The Corman-Fisher amendment would retain the
Committee bill's generous capital gains exclusion
for homeowers.
° Taxpayers would be permitted a one-time
exclusion of up to $100,000 of the gain on
the sale of a home used as a principal
residence for 2 years.

IMPACT ON CHARITIES
Question: Isn't the Corman-Fisher amendment very similar to
other alternative minimum tax proposals that are
estimated to have a substantial adverse impact oncharitable giving?
Answer: The Corman-Fisher proposal has been carefully
drawn to avoid any adverse impact on charities.
° Under present law, a taxpayer with $200 of
capital gain can completely eliminate tax
liability with $100 of ordinary deductions.
Our proposal is designed to prevent tax
avoidance in this manner. Such a taxpayer
would offset $100 of capita! gain with the
deduction and would pay tax on one-half of
the remaining $100 gain. However, we have
kept present law with respect to charity; a
$100 charitable contribution could continue
to offset $200 of income from capital gain.
We have also avoided another adverse impact of
some minimum tax proposals, such as the one in the
Committee bill.
° Under the Committee bill, a taxpayer pays the
micro-mini tax if it is higher than the
regular tax. Once the taxpayer has enough
deductions so that the regular tax has been
reduced below the micro-mini tax, further
charitable deductions will not affect his tax
liability. (See attached example 5.)
Corman-Fisher avoids this adverse impact on
the incentive for charitable giving.
In addition, the Corman-Fisher amendment would
delete the increased standard deduction from the
Committee bill—a Committee provision that might
have a negative effect on charities.

COMPARISON TO CORPORATE CAPITAL GAIN TREATMENT
Question: Why are you introducing such a novel system of
taxing capital gains at this point?
Answer: This system is not novel. It is very similar to
the current treatment of a corporation's capital
gains.
0

Individual taxpayers can now completely avoid
tax on capital gain by excluding one-half
through the capital gains deduction and
sheltering the remaining half with ordinary
deductions. On the other hand, corporations
pay an alternative tax of 30 percent on total
capital gain without regard to other deductions; corporate capital gains are taxed at a
preferential rate without permitting special
capital gain treatment to turn into a complete
exclusion.
° Like the current corporate capital gain
structure, the Corman-Fisher amendment would
place some meaningful limits on the extent to
which taxes can be avoided by combining the
capital gains preference with shelter losses.
In contrast to the Committee bill, this
amendment would not permit millions of dollars
of capital gains to escape all but token
taxation.
° The limitation on the exclusion from capital
gain as a percentage of taxable income is
patterned after the limit on percentage
4 depletion (65 percent of taxable income)
adopted by the Congress in 197 5.

Application of Capital Gain Proposals*
1. High Income Taxpayer With Shelter Losses
Under present law a taxpayer with capital gains of
$1,600,000 and tax shelter losses of $1,000,000 pays a tax
of $90,000 on capital gains. This represents less than a
6 percent rate on capital gains. The Committee bill would
reduce the taxpayer's liability to $60,000 or less than a
4 percent rate on capital gains. The Corman-Fisher amendment would result in a tax liability of $178,740, about an
11 percent rate on capital gains.
Tax Impact

1. Capital gain before 50% exclusion

Present
Lav

Committee
Bill

CormanFisher

1,600,000

1,600,000

1,600,000

2. All other income -1,000,000 -1,000,000 -1,000,000
3. Income before capital gain
exclusion (1 and 2)

600,000

600,000

600,000

4. Capital gain exclusion

800,000

800,000

300,000

5. Taxable income (3 minus 4)

-0-

-0-

300,000

6. Regular tax

-0-

-0-

178,740

7. Minimum tax**

90,000

8. Micro-mini tax**
9. Total tax (6 plus 7 or 8)

60,000
90,000

60,000

178,740

* All calculations are made on the basis of present law rates applicable
to married taxpayers filing joint returns in order to permit a
comparative analysis of the capital gain changes.
** These calculations assume a tax benefit rule so that minimum tax at
15 percent (present law) or 10 percent (Committee bill) is applied
only to the amount of capital gain exclusion ($600,000) necessary to
reduce taxable income to zero.

2.

High-Income Taxpayer Without Shelter Losses

Under present law a taxpayer with capital gains of
$1,600,000 and other income of $1,000,000 pays a tax of
$1,256,418. The Committee bill would reduce the taxpayer's
liability to $1,228,560 by eliminating the minimum tax on
the excluded portion of capital gains. The Corman-Fisher
proposal would also reduce the taxpayer's liability to
$1,228,560.
Present
Law
1. Capital

gain before 50% exclusion

Committee
Bill

CormanFisher

1,600,000 1,600,000 1,600,000

2. All other income

+1,000,000 +1,000,000 +1,000,000

3. Income before capital gain
exclusion (1 and 2)

2,600,000 2,600,000 2,600,000

4. Capital gain exclusion

800,000 800,000 800,000

5. Taxable income (3 minus 4)

1,800,000 1,800,000 1,800,000

6. Regular tax

1,228,560 1,228,560 1,228,560

7. Minimum tax

27,858

8. Micro-mini tax

-0-

9. Total tax (6 plus 7 or 8)

1,256,418 1,228,560 1,228,560

3.

Taxpayer With Gain on Stock

Under present law a taxpayer who has ordinary income of
$30,000 and a capital gain of $40,000 from the sale of stock
would pay a total tax of $16,780. Under both the Committee
bill and the Corman-Fisher amendment the taxpayer would pay
a tax of $15,28 0 and would not be subject to the minimum tax
Tax Impact
Present
Law

Committee
Bill

CormanFisher

40,000

40,000

40,000

2. Net ordinary income (salary less
itemized deductions and
exemptions)

30,000

30,000

30,000

3. Income before capital gain
exclusion (1 and 2)

70,000

70,000

70,000

4. Capital gain exclusion

20,000

20,000

20,000

5. Taxable Income (3 minus 4)

50,000

50,000

50,000

6. Regular Tax

15,280

15,280

15,280

7. Minimum Tax.

1,500

15,280

15,280

1.

Capital gain before 50% exclusion

8. Micro-mini tax -09.

Total tax

16,780

4.

Taxpayer With Gain on Residence

Under present law, an individual with ordinary income
of $30,000 and a capital gain of $40,000 from the sale'of
a residence would pay a tax of $16,780. Under both the
Committee bill and the Corman-Fisher proposal, he is allowed
to exclude from income the gain on the residence and would
pay only a $6,488 tax.
Tax Impact
Present
Law

Committee
Bill

CormanFisher

1. Capital gain before 50% exclusion

40,000

2. Net Ordinary income (salary less
itemized deductions and exemptions)

30,000

30,000

30,000

3. Income before capital gain
exclusion (1 and 2)

70,000

30,000

30,000

4. Capital gain exclusion

20,000

5. Taxable income (3 minus 4)

50,000

30,000

30,000

6. Regular tax

15,280

6,488

6,488

7. Minimum tax

1,500

6,488

6,488

—

._

8. Micro-mini tax _09.

Total tax (6 plus 7 or 8)

16,780

5.

Taxpayer With Charitable Contributions

Under present law, an individual with a $100,000 capital
gain and losses from his business of $2 8,500 who makes a
$15,000 contribution to charity pays a tax of $6,889. $4,250
of the charitable contribution yields no current tax deduction
and the taxpayer would receive no tax benefit in the current
year if he made additional charitable contributions. Under
the Committee bill, he would pay a tax of $4,000, and would
receive no current tax benefit from the charitable contribution. Under the Corman-Fisher proposal he would pay only
$3,304 in tax. The full $15,000 charitable contribution would
reduce his tax liability in the current year, and he would
receive additional current tax benefits if he increased his
charitable contribution this year.
Tax Impact
Present Committee CormanLaw
1. Capital gain before 50% exclusion
2. Business Losses (other than charitable deductions)

100,000

Bill
100,000

Fisher
100,000

-28,500 -28,500

3. Income before capital gain exclusion,
exemptions, and charitable deduc71,500
tions (1 minus 2)
71,500 71,500
4. Exemptions 1,500

1,500 1,500

5. Income
Income before
beforecapital
caDitalgain
eain exclusion
and charitable deduction
(3 minus 4)

70,000

70,000

70,000

6. Capital gain exclusion

50,000

50,000

35,000

7. Adjusted Gross Income (3 minus 6)

21,500

21,500

36,500

8. Contributions actually made

15,000

15,000

15,000

9. Contributions allowed

10,750

10,750

15,000

9,250

9,250

20,000

11. Regular tax

889

889

3,304

12. Minimum tax

6,000

10. Taxable income (7 minus 4 and 9)

13. Micro-mini tax
14. Total tax.(11 plus 12 or 13)

4,000
6,889 4,000 3,304

6.

Taxpayer Aided by De Minimus Rule

An individual with total capital gains of $15,000 and
deductions and exemptions which total $7,00 0 would pay no
tax either under present law or under the proposals. Under
present law and under the Committee bill, the capital gain
exclusion would be $7,500, taxable income would be $500, and
no tax would be owed. Under the Corman-Fisher proposal, the
capital gain exclusion would be $5,000, taxable income would
be $3,000, and no tax would be owed. Although the CormanFisher proposal normally limits the capital gain exclusion
to one-half of income before the exclusion, which would yield
an exclusion of only $4,000 in this example, the proposal
never operates to limit the exclusion to less than $5,000,
and the $5,0 00 minimum applies in this example.
Tax Impact
Present
Law
1.

Capital gain before 50% exclusion

Committee
Bill

CormanFisher

15,000

15,000

15,000

2. Deductions (exemptions and itemized
deductions other than charitable
contributions)

7,000

7,000

7,000

3. Income before capital gain exclusion
(1 minus 2)

8,000

8,000

8,000

4. Capital gain exclusion

7,500

7,500

5,000

500

500

3,000

5. Taxable income (3 minus 4)
6. Regular tax

-0-

7. Minimum tax

-0-

8. Micro-mini tax
9. Total tax (6 plus 7 or 8)

-0-

-0-

-0-0-

-0-

-0-

Table 1
Comparison of Tax Liability Changes in Calendar Year 1979

($ billions)
Ways & Means
Bin
Personal

-10.4

Business

— 3.3

Capital gains

-1.9

:

•

Alternative
-12.7

1/

-3.8

1/

-1.6

Total -16.1 -18.1
Office of the Secretary of the T r e a s u r y A u g u s t
Office of Tax Analysis
1/

3,1978

Includes revenue attributed to repeal of the general
jobs credit, elsewhere included in the President's
budget.

Table 2
Individual Income Tax Liabilities by Expanded Income Class
Present Law, Committee Tax Bill, and Alternative Tax Bill

(1978 Levels)
H.R. 13511

Present Law
Expanded
income
class

Tax
liability

($000)

($ millions)

Less than 10

8, 110

Percentage
distribution
(percent)
4.4%

Tax
liability
($ millions)

Percentage
distribution
(percent)

Alternative
Change
in tax

Tax
liability

($ millions) ($ millions)

-7,620

4.4%

-490

6,608

Percentage
distribution
(percent)
3.9%

Change
in tax
($ millions)
-1,502

10 - 15

17,067

9.3

16,217

9.3

-849

15,406

9.0

-1,661

15 - 20

24,055

13.1

22,716

13.1

-1,339

22,309

13.0

-1,746

20 - 30

44,774

24.3

41,830

24.1

-2,944

41,345

24.2

-3,429

30 - 40

26,007

14.2

24,405

14.1

-1,672

24,005

14.0

-2,072

40 - 50

13,182

7.2

12,304

7.1

-878

12,264

7.2

-918

50 - 100

24,009

13.0

22,637

13.1

-1,372

22,998

13.4

-1,011

100 - 200

13,130

7.1

12,624

7.3

-506

12,827

7.5

-303

13.743

7.5

13,053

7.5

-690

13,378

7.8

-365

$-10,743

$171,144

200 and over
Total

$184,148

100.0%

$173,405

00.0%

Office of the Secretary of the Treasury
Office of Tax Analysis
Note: Details may not add to totals due to rounding.
1/ Excludes baala adjustment for Inflation.

100-0%

$r-13,004
August

3, 197

Table

3

Individual Tax Change as Percent of Present Law Tax
by Expanded Income Class:
Committee Tax Bill 1/ and Alternative Tax Bill
(1978 Levels)
Expanded
income
class
($000)

Alternative
percent,

Less than 10

-6.0%

-18.5%

10 - 15

-5.0

-9.7

15 - 20

-5.6

-7.3

20 - 30

-6.6

-7.7

30 - 40

-6.4

-7.9

40 - 50

-6.7

-7.0

50 - 100

-5.7

-4.2

100 - 200

-3.9

-2.3

200 and over

-5.0

-2.7

-5.8%

-7.1%

Total

Office of the Secretary of the Treasury
Office of Tax Analysis
1/

August 3, 1978

Excludes basis adjustment for inflation.

Table 4
Alternative to the Ways and Means Committee Tax Bill
Estimated Effect on Calendar Year Liabilities of Personal Income Taxes

(1978 Levels of Income)

Expanded
Income
class
($000)

,:Delete capital gains :
l
; ^ ^ : i , Item of p r e f e r ^ : *"><> '»<>"""<
iaU?r-:
FoT
; For
,
P^sonal
.B l n l m u n i .
residence
: n*"v«. mMimm
c
: tax
** ; ta>f
***
exclusion
-6

Leas than 10
10 - 15

($ millions)
Bala of :Lxndt capital:Technical: Repeal : Repeal :Simpll-:
Tax
personal :gains audi*: changes :gasollne:polltlcal : fled J $100 Raduce
en#ral
uneaploy'
residence:aion to fc :to earned: tax
:contribu- :medical:*
tax
i
mant
within : taxable : income : deduc- : tlon
:deduc- : t**
rate:;
bciiaflta
18 months:
Jncouie : credit : tlon deductions: tlon ; cy edlt

- 9

*

5

-4

28

- 3

-1,500

-

9

*

Total

-1,502

-33

*

8

90

- 8

-1,544 -180 6

-1,661

13

151

-13

-1,521 -334 8

-1,746

15 - 20

-3

-48

*

20 - 30

-14

-228

-2

18

328

- 8

-2,046 -1,582 105

-3,429

30 - 40

-31

-163

-1

15

196

17

- 714 -1,470 77

-2,072

-35

-108

-1

8

79

13

- 260 -640 26

- 918

-225

-67

*

40

81

25

- 260 -636 17

-1,011

-208

-32

*

53

18

8

- 56 -133 6

-303

-636

-21

*

307

5

2

- 13 - 34 1

-365

-1,158

-709

-5

976

34

-7,915 -5,016 246

-13.Q04

40 - 50

*

50 -100

14

100 -200

55

200 and over
Total

55
124

-2
-14
-32
-47

Office of the Secretary of the Treasury
Office of Tax Analysis
* Lest) than $500 thousand.

466

-4

August 3, 1978

Table 5
Comparison of 10% Micro-Mini Tax and Corman-Fisher
True Alternative Capital Gains Tax
i

(1978 levels of income)
: 10% Micro-Mini : Corman-Fisher True
:
Tax
: Alternative Tax
Revenue Gains ($ million)

148

466

Number of Taxpayers
Affected (000)

49

168

Nontaxable Returns
Made Taxable (000)

16

3T<

Impact on Charitable
Giving

Yes

Office of the Secretary of the Treasury
Office of Tax Analysis

No
August 3/ 1978

Table 6

Alternative to the Ways and Means Committee Tax Bill
($ millions)
Calendar Years

I. Personal income taxes:
Reduce tax rates
-5,016
$100 general tax credit
-7,915
Repeal deduction for gasoline tax and political
contributions
981
Simplify medical deduction ....
34
Tax unemployment compensation starting at $20,000
of income for single taxpayers, $25,000 for
married
246
Technical changes to earned
income credit \l
-4
Subtotal
-11,674

II. Business income:
Reduce rates to 17 percent
of first $25,000, 20 percent of next $25,000,
30 percent of next $25,000,
40 percent of next $25,000,
46 percent above $100,000..
-4,493
90 percent limit for investment credit (phase in at
10 percent a year)
-201
Tighten tax shelter provisions
(at risk, partnership a u d i t ) .
12
10 percent investment tax
credit for pollution control
facilities
-120
$10 million limitation for IDB.
-14
Targeted unemployment
-679
Small business proposals
-145
Investment tax credit for rehabilitation of structures ..
-227
Extend rapid write-off for lowincome housing
Repeal general jobs credit 2/ . 2.458
Subtotal
-3 409

1979

1980

1981

•6,019
8,152

-7,223
-8,397

1,157
37

1982

; 1983

8,668
8,649

•10,401
-8,908

-12,481
-9,176

1,369
41

1,609
45

1,897
50

2,238
55

251

261

259

263

268

-4
-12,730

-4
-13,953

-4
-15,408

-3
-17,102

-19,099

-5,033

-5,536

-6,008

-6,514

-7,089

-287

-629

-1,169

-826

-728

14

10

8

5

6

-8
-2
-299
-379

-25
-10
-638
-322

-53
-18
-760
-277

-91
-26
-841
-242

-112
-34
-887
-216

-237

-276

-300

-328

-355

-1
2.458
•3,774

-7
2,458
•4,975

-15
2,458
•6,134

;

-3

-26
2,458
-6,983

Table 6 continued
($ millions)
Full :
year
1979
1978
[I. Capital gains:
Repeal alternative tax
(individuals)
124
Delete capital gains as item
of tax preference from
minimum and maximum tax
(individuals and
corporations)
-1,279
Limit capital gains exclusion
one-half taxable income
(individuals)
466
$100 thousand personal
residence exclusion
-709
Sale of personal residence
within 18 months
zl
Subtotal
-1,403
Total

-16,486

Calendar Years
' 1980

' 1981

* 1982

! 1983

133

143

154

166

178

-1,414

-1,560

-1,716

-1,888

-2,076

513

564

620

682

750

-780

-858

-944

-1,038

-1,142

zX
zl
'-1,553'-"* -1,716

zl
-1,891

zl
-2,083

zl
-2,295

-18,057

-20,644 -23,433

:fice of the Secretary of the Treasury August 4, 1978
Office of Tax Analysis
Excludes increased outlays (-). -13 -12 -12 -11 -11 -11
. Elsewhere included in the President's budget.
ess than $500 thousand.

-25,612 -28,377

Table 7

Alternative to the Ways and Means Committee Tax Bill
($ millions)
Fiscal Years

I. Personal income taxes:
Reduce tax rates
-5,016
$100 general tax credit
-7,915
Repeal deduction for gasoline tax and political
contributions
981
Simplify medical deduction ....
34
Tax unemployment compensation starting at $20,000
of income for single taxpayers, $25,000 for
married
246
Technical changes to earned
income credit 1/
-4
Subtotal
T11,674

II. Business income:
Reduce rates to 17 percent
of first $25,000, 2 0 percent of next $25,000,
30 percent of next $25,000,
4 0 percent of next $25,000,
46 percent above $100,000.. -4,493
90 percent limit for investment credit (phase in a t
10 percent a year)
-201
Tighten tax shelter provisions
(at risk, partnership audit).
12
10 percent investment tax
credit for pollution control
facilities
_120
$10 million limitation for IDB.
-14
Targeted unemployment
-679
Small business proposals
-145
Investment tax credit for rehabilitation of structures .. -227
Extend rapid write-off for lowincome housing
...
Repeal general jobs credit 2/ . 2,458
Subtotal
7... -3 409

1979

1980

1981

•3,724
•5,044

•6,764
8,304

•8,117
8,553

•9,740 -11,688
8,809 -9,074

473
15

1,244
39

1,467
43

1,727
47

2,036
52

251

261

259

263

-4

-4

-3

-4

-8,284

-13,538

-14,903

-3
-16,519 -18,414

-2,265

-5,259

-5,748

-6,236 -6,773

-129 -441 -872 -1,015 -782
2 14 10 8 5
-6
-108
-148

-18
-3
-436
-357

-42
-13
-702
-305

-76
-22
-812
-263

-104
-30
-862
-232

-84

-259

-292

-318

-340

•

-1
689
2,050

-4
2,458
-4,305

-11
2,458
-5,517

-19
2,458
-6,295

-24
2.458
-6,684

Table 7 continued

($ millions)
Full
year
1979
1978
CI. Capital gains:
Repeal alternative tax
(individuals)
124
Delete capital gains as item
of tax preference from
minimum and maximum tax
(individuals and
corporations)
-1,279
Limit capital gains exclusion
one-half taxable income
(individuals)
466
$100 thousand personal
residence exclusion
-709
Sale of personal residence
within 18 months
zl
Subtotal
-1,403

Total

-16,486

-10,336

Fiscal Years
1980

:

1981

:

143

154

165

-1,414

-1,560

-1,716

-1,888

513

564

620

682

-780

-858

^944

-1,038

-5
-1,553

-5
-1,716

-5
-1,891

-5
-2,084

-19,396

-22,136

-24,705

-27,182

August 4, 1978

-13

Elsewhere included in the President's budget.
<ess than $500 thousand.

1983

,133

rfice of the Secretary of the Treasury
Office of Tax Analysis

Excludes increased outlays (-)•

1982

-12

-12

-11

-11

Table 8-A
Alternative Tax Bill
Individual Tax Rate Schedules for Joint Returns

Taxable income
bracket

0
3,200
4,200
5,200
6,200

—

—
_
—
-

7,200
11,200
15,200
19,200
23,200

^

27,200
31,200
35,200
39,200
43,200

^

47,200
55,200
67,200
79,200
91,200

_

103,200
123,200
143,200
163,200
183,200

—
—
—
-

—
—
-

—
.
-

3,200
4,200
5,200
6,200
7,200

Present law
Tax at
:
Tax rate
low end
:
on income
of bracket
: in bracket

:
:

$

o
0
140
290
450

0%
14
15
16
17

:

Alternative tax bill '
Tax at
:
Tax rate
low end
:
on income
of bracket
: in bracket

:

$

o
0
140
290
450

0
14
15
16
17

11,200
15,200
19,200
23,200
27,200

620
1,380
2,260
3,260
4,380

19
22
25
28
32

620
1,380
2,260
3,180
4,180

19
22
23
25
29

31,200
35,200
39,200
43,200
47,200

5,660
7,100
8,660
10,340
12,140

36
39
42
45
48

5,340
6,660
8,180
9,860
11,660

33
38
42
45
48

55,200
67,200
79,200
91,200
103,200

14,060
18,060
24,420
31,020
37,980

50
53
55
58
60

13,580
17,580
23,940
30,540
37,500

50
53
55
58
60

123,200
143,200
163,200
183,200
203,200

45,180
57,580
70,380
83,580
97,180

62
64
66
68
69

44,700
57,100
69,900
83,100
96,700

62
64
66
68
69

110 ,980

70

110,500

70

203,200 and over

Office of the Secretary of the Treasury
Office of Tax Analysis

August 4,

Table 8-B
Alternative Tax Bill
Individual Tax Rate Schedules for Single Returns

Taxable income
bracket

0
2,200
2,700
3,200
3,700
4,200

-

2,200
27700
3,200
3,700
4,200
6,200

6,200
8,200
10,200
12,200
14,200

-

8,200
10,200
12,200
14,200
16,200

16,200
18,200
20,200
22,200
24,200

-

28;200
34,200
40,200
46,200
52,200

-

62,200
72,200
82,200
92,200
102,200

Present law
Tax at
:
Tax rate
low end
:
on income
of bracket
: in bracket

$

o
0
70
145
225
310

0%
14
15
16
17
19

Alternative tax bill
Tax at
:
Tax rate
low end
:
on income
of bracket
: in bracket

$

o
0
70
145
225
310

0%
14
15
16
17
19

1,110
1,590
2,090
2,630

21
24
25
27
29

1,110
1,570
2,050
2,550

21
23
24
25
28

18,200
20,200
22,200
24,200
28,200

3,210
3,830
4,510
5,230
5,990

31
34
36
38
40

3,110
3,730
4,410
5,130
5,890

31
34
36
38
40

34,200
40,200
46,200
52,200
62,200

7,590
10,290
13,290
16,590
20,190

45
50
55
60
62

7,490
10,190
13,190
16,490
20,090

45
50
55
60
62

- 72,200
- 82,200
- 92,200
- 102,200
and over

26,390
32,790
39,390
46,190
53,090

64
66
68
69
70

26,290
32,690
39,290
46,090
52,990

64
66
68
69
70

690

Office of the Secretary of the Treasury
Office of Tax Analysis

690

August 4, 1978

Table 9-A
tfays and Means Committee Tax Bill
Individual Tax Rate Schedules for Joint Returns

Taxable income bracket

:

Tax at

:

$

o

3,400 4,460 5,520
6,580

3,400
4,460
5,520
6,580
7,640

7,640
11,880
16,120
20,360
24,600

-

28,840
33,080
37,320
41,560
45,800

-

50,040
58,520
71,240
83,960
96,680
109,400
130,600
151,800
173,000
194,200

low end

of bracket

Tax rate on
: income in ^ ] r r r

0
0
148
307
477

0
14
15
16
17

11,880
16,120
20,360
24,600
28,840

657
1,420
2,311
3,328
4,516

18
21
24
28
32

33,080
37,320
41,560
45,800
50,040

5,872
7,399
9,052
10,833
12,741

36
39
42
45
48

- 58,520
- 71,240
- 83,960
- 96,680
- 109,400

14,776
19,016
25,758
32,754
40,132

50
53
55
58
60

47,764
60,908
74,776
88,468
102,884

62
64
66
68
69

117,512

70

-

130,600
151,800
173,000
194,200
215,400

215,400 ,and over

Office of the Secretary of the Treasury
Office of Tax Analysis

$

:

August 4, 1978

Table 9-B
Ways and Means Committee Tax Bill
Individual Tax Rate Schedules for Single Returns

Taxable income bracket

I

0
2,300
2,830
3,360
3,890
4,420
6,540
8,660
10,780
12,900
15,020

—

2,300
2,830
3,360
3,890
4,420
6,540

Tax at low end
of bracket

$

o
0
74
154
238
329

:
Tax rate on
: income in bracket

0%
14
15
16
17
18

8,660
10,780
12,900
15,020
17,140

710
1,113
1,558
2,067
2,639

19
21
24
27
29

19,260
21,380
23,500
25,620
29,860

3,254
3,911
4,632
5,395
6,201

31
34
36
38
40

36,220
42,580
48,940
55,300
65,900

7,897
10,759
13,939
17,437
21,253

45
50
55
60
62

65,900 — 76,500
76,500 - 87,100
87,100 - 97,700
97,700 - 108,300
108,300 and over

27,825
34,609
41,605
48,813
56,127

64
66
68
69
70

17,140
19,260
21,380
23,500
25,620
29,860
36,220
42,580
48,940
55,300

—
—
—
—

:ice of the Secretary of the Treasury
Office of Tax Analysis

August 4, 1978

Table 10

Comparison of Changes in the Combined Income and Social Security Taxes Resulting from
H.R. 13511 and the Alternative Compared with.1977 Law Taxes 1/

Wage income

$

: Four-person, two•-earner 1
: Four-person, one-earner
Single ind ividuals
_
families 2/
families
•
: H,,R. 13511 : Alternative : H.R. 13511 : Alt ernative : H.R. 13511 • Alternative

14

14
-34
-35

5,000
10,000
15,000

14
-34
-35

-232
-187

20,000
25,000
30,000

115
207
135

33
131
16

-162
-220

40,000
50,000
100,000

-47

-215
-261
-261

35
223
-47

-215
-485

-90

-232
-187

-7
13
-29

-44
19
-14

-172
-237
-339

157
279
226

162
339

-133

112
3
3

339
339
339

14

177
177

339

,,^«-

Office of the Secretary of the Treasury
Office of Tax Analysis
1/ Assumes deductible expenses equal to 23 percent of income.
2/ Assumes each spouse earns 50 percent of total family income

Q

1Q7Q

Table 11
Combined Income and Social Security Tax Burdens
1977 Law vs H.R. 13511
Four Person, One-earner Families
\

(dollars)
Wage
income

\ 1979 tax under H.R. 135111

1977 law tax
: Income : FICA : Total
: tax i/ : tax j-/: tax

Change in tax

: Income : FICA : Total ': Income : FICA : Total
tax : tax
: tax
' tax 1.1 : tax 3/: tax

$ 5,000
10,000
15,000

-300
446
1,330

292
585
878

-8
1,031
2,208

-300
384
1,253

306
613
920

6
997
2,172

0
-62
-77

14
28
42

14
-34
-35

20,000
25,000
30,000

2,180
3,150
4,232

965
965
965

3,145
4,115
5,197

2,034
2,918
3,928

1,226
1,404
1,404

3,260
4,322
5,332

-146
-232
-304

261
439
439

115
207
135

40,000
50,000
100,000

6,848
9,950
28,880

965
965
965

7,813
10,915
29,845

6,362
9,296
27,956

1,404
1,404
1,404

7,766
10,700
29,360

-486
-654
-924

439
439
439

-47
-215
-485

Office of the Secretary of the Treasury
Office of Tax Analysis

August 3, 1978

^1/ Assumes deductible expenses equal to 23 percent of income.
2/ FICA calculated under prior law rate for 1977 (5.85 percent) and
prior law base for 1977 ($16,500), employees' share only.
3/ FICA calculated under present law rates and base for 1979 (6.13 percent
and $22,900), employees1 share only.

Table 12

Combined Income and Social Security Tax Burdens
1977 Law vs H.R. 13511
Four Person, Two-earner Families JL/
(dollars)
Wage
income

1977 law tax

| 1979 tax under H.R. 135115

: Income : FICA : Total •: Income : FICA : Total
: tax y : tax i*/: tax
: tax U : tax y:
tax

Change in tax

. Income : FICA
tax : tax

: Total
: tax

5,000
10,000
15,000

-300
446
1,330

292
585
878

-8
1,031
2,208

-300
384
1,253

306
613
920

6
997
2,172

0
-62
-77

14
28
42

14
-34
-35

20,000
25,000
30,000

2,180
3,150
4,232

1,170
1,463
1,755

3,350
4,613
5,987

2,034
2,918
3,928

1,226
1,533
1,839

3,260
4,451
5,767

-146
-232
-304

56
70
84

-90
-162
-220

40,000
50,000
100,000

6,848
9,950
28,880

1,931
1,931
1,931

8,779
11,881
30,811

6,362
9,296
27,956

2,452
2,808
2,808

8,814
12,104
30,764

-486
-654
-924

521
877
877

35
223
-47

$

Office of the Secretary of the Treasury
Office of Tax Analysis

August 3, 1978

1/ Assumes each spouse earns 50 percent of total family income.
2/ Assumes deductible expenses equal to 23 percent of income.
3/ FICA calculated under prior law rate for 1977 (5.85 percent) and
prior law base for 1977 ($16,500), employees share only.
4/ FICA calculated under present law rate and base for 1979 (6.13 percent
and $22,900), employees1 share only.

Table 13
Combined Income and Social Security Tax Burdens
1977 Law vs Alternative Tax Bill
Single Individuals
__ (dollars)
Wage
income

1979 tax under
Alternative
Income : FICA : Total
tax 1/ : tax 3/: tax

1977 law tax
Income : FICA : Total
tax 1/ : tax 21: tax

Change ln tax
FICA
tax

Income
tax

Total
tax

$ 5,000
10,000
15,000

278
1,199
2,126

292
585
878

570
1,784
3,004

220
1,190
2,070

306
613
920

526
1,803
2,990

-58
-9
-56

14
28
42

-44
19
-14

20,000
25,000
30,000

3,231
4,510
5,950

965
965
965

4,196
5,475
6,915

3,132
4,410
5,850

1,226
1,404
1,404

4,358
5,814
7,254

-100
-100
-100

261
439
439

162
339
339

40,000
50,000
100,000

9,232
12,985
32,235

965 10,197
965 13,950
965 33,200

9,132
12,885
32,135

1,404 10,536
1,404 14,289
1,404 33,539

-100
-100
-100

439
439
439

339
339
339

Office of the Secretary of the Treasury
Office of Tax Analysis

August 3, 1978

1/ Assumes deductible expenses equal to 23 percent of income.
2/ Calculated under prior law rate for 1977 (5.85 percent) and
prior law base for 1977 ($16,500), employees1 share only.
3/ FICA calculated under present law rates and base for 1979 (6.13 percent
"" and $22,900), employees' share only.

Table 14

Combined Income and Social Security Tax Burdens
1977 Law vs Alternative Tax Bill
Four Person, One-earner Families
(dollars)
Wage
income

$

1977 lav tax
Income : FICA : Total
tax 1/ : tax V: tax

1979 tax under
Alternative
FICA : Total
Income
tax 1/: tax
tax 1/

Change in tax
Income
tax

FICA
tax

Total
tax

5,000
10,000
15,000

-300
446
1,330

292
585
878

-8
1,031
2,208

-300
186
1,101

306
613
920

6
799
2,021

0
-260
-229

14
28
42

14
-232
-187

20,000
25,000
30,000

2,180
3,150
4,232

965
965
965

3,145
4,115
5,197

1,952
2,843
3,809

1,226
1,404
1,404

3,178
4,246
5,213

-228
-308
-423

261
439
439

33
131
16

40,000
50,000
100,000

6,848
9,950
28,880

965
965
965

7,813
10,915
29,845

6,194
9,250
28,180

1,404
1,404
1,404

7,598
10,654
29,584

-654
-700
-700

439
439
439

-215
-261
-261

Office of the Secretary of the Treasury
Office of Tax Analysis

^1/ A s s u m e s d e d u c t i b l e expenses equal to 23 percent of i n c o m e .
2/ FICA calculated under prior law rate for 1977 (5.85 percent) and
"" prior l a w b a s e for 1977 ($16,500), e m p l o y e e s 1 share o n l y .
3/ FICA calculated under present law rates and base for 1979 (6.13 percent
and $ 2 2 , 9 0 0 ) , e m p l o y e e s ' share o n l y .

August 3, 1978

Table 15
Combined Income and Social Security Tax Burdens
1977 Law vs Alternative Tax Bill
Four Per8on, Two-earner Families 1/

Wage
Income

(dollars)
1979 tax under
:
1977 law tax
Change ln tax
Alternative
: Income : FICA : Total •: Income : FICA : Total : Income : FICA : Total
: tax y : tax 11: tax
tax
tax
tax
: tax 11 : tax */: tax

$ 5,000
10,000
15,000

-300
446
1,330

292
585
878

-8
1,031
2,208

-300
186
1,101

306
613
920

6
799
2,021

0
-260
-229

14
28
42

14
-232
-187

20,000
25,000
30,000

2,180
3,150
4,232

1,170
1,463
1,755

3,350
4,613
5,987

1,952
2,843
3,809

1,226
1,533
1,839

3,178
4,376
5,648

-228
-308
-423

56
70
84

-172
-237
-339

40,000
50,000
100,000

6,848
9,950
28,880

1,931
1,931
1,931

8,779
11,881
30,811

6,194
9,250
28,180

2,452
2,808
2,808

8,646
12,058
30,988

-654
-700
-700

521
877
877

-133
177
177

Office of the Secretary of the Treasury
Office of Tax Analysis

August 3, 1978

1/ Assumes each spouse earns 50 percent of total family income.
2/ Assumes deductible expenses equal to 23 percent of income.
3/ FICA calculated under prior law rate for 1977 (5.85 percent) and
prior law base for 1977 ($16,500), employees share only.
4/ FICA calculated under present law rate and base for 1979 (6.13 percent
" and $22,900), employees' share only.

Table 16

Combined Income and Social Security Tax Burdens
1977 Law vs H.R. 13511
Single Individuals
(dollars)
Wage
income

Change in tax

1979 tax under H.R. 13511

1977 law tax
Income : FICA : Total
tax y : tax 2/: tax

Income

tax y

FICA : Total
tax 3/ ; tax

Income
tax

FICA
tax

: Total
: tax

5,000
10,000
15,000

278
1,199
2,126

292
585
878

570
1,784
3,004

257
1,184
2,055

306
613
920

563
1,797
2,975

-21
-15
-71

14
28
42

-7
13
-29

20,000
25,000
30,000

3,231
4,510
5,950

965
965
965

4,196
5,475
6,915

3,127
4,350
5,737

1,226
1,404
1,404

4,353
5,457
7,141

105
160
213

261
439
439

157
279
226

40,000
50,000
100,000

9,232
12,985
32,235

965 10,197
965 13,950
965 33,200

8,905
12,549
31,799

1,404 10,309
1,404 13,953
1,404 33,203

327
436
436

439
439
439

112
3
3

$

Office of the Secretary of the Treasury
Office of Tax Analysis

1/ Assumes deductible expenses equal to 23 pereant of income.
2/ Calculated under prior law rate for 1977 (5.85 percent) and
prior law base for 1977 ($16,500), employees' share only.
3/ FICA calculated under present law rates and base for 1979 (6.13 percent
and $22,900), employees' share only.

August 3, 1978

^m^oftheJREASURY
KHINGTON, OX. 20220
v

FOR IMMEDIATE RELEASE
AUGUST 4, 1978

CONTACT:

" JirpT"

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES REVISED ANTIDUMPING
REGULATIONS FOR VALUING MERCHANDISE FROM
STATE-CONTROLLED ECONOMIES
The Treasury Department announced today a revised
regulation for the valuation of merchandise from statecontrolled economies under the Antidumping Act.
Under the new regulation, products imported from
countries considered "state-controlled" will be valued for
the purposes of the Antidumping Act by comparing them to
similar products made and sold in a non-state-controlled
economy that is at a comparable stage of economic development.
If similar products are not actually made and sold in
such a free market economy, a "contructed value" for the
merchandise will be calculated based on the physical inputs
(labor, material, energy, etc.) in the state-controlled
economy, valued in a non-state-controlled economy at a
comparable stage of economic development.
If neither of these procedures provides data that can
be verified to the satisfaction of the Secretary of the
Treasury, domestic prices and costs may be used to establish
the "fair value" of the merchandise.
Under the Antidumping Act, a special dumping duty is
applied to products imported at "less than fair value" if
the International Trade Commission determines that such sales
cause or threaten injury to a U.S. industry. "Fair value"
is generally based on the prices or costs of the foreign
producer in its home market or sales to third countries.
However, because the prices and costs in state-controlled
economies are generally not reflective of market supply and
demand, but are arbitrarily determined, they cannot be used
to establish "fair value" under the Antidumping Act.

B-1091

-2The new regulation provides a basis for establishing
"fair value" for a producer in a state-controlled economy
that takes into account any advantages (and disadvantages)
in its production abilities, and allows the resources used
to be valued in a market economy that is approximately comparable to the economy in which the goods are produced.
The new method for calculating "fair value" might be
applied, for example, to the case of golf carts from Poland.
Golf carts are not sold in Poland and appear not to be
produced in commercial quantities in any other country outside the United States. The cost of producing golf carts
(plus statutory minimums for general expenses and profit)
may now be calculated by obtaining the verified physical
inputs from the Polish producer and valuing them in a nonstate-controlled economy such as Spain or Portugal.
The regulation was first proposed in January 1978 and has
been intensively studied since then. It is being adopted
on a trial basis and will be reconsidered in the light of
experience.
A copy of the revised regulations is attached.

###

(T.D. 78-

)

Antidumping—Customs Regulations amended
Part 153, Customs Regulations, relating to procedures under the
Antidumping Act, 1921, amended
DEPARTMENT OF THE TREASURY
OFFICE OF THE COMMISSIONER OF CUSTOMS
Washington, D. C.
TITLE 19—CUSTOMS DUTIES
CHAPTER I — UNITED STATES CUSTOMS SERVICE
PART 153—ANTIDUMPING
AGENCY: United States Customs Service, Department of the Treasury.
ACTION: Final Rule.
SUMMARY: This document amends the Customs Regulations relating to
antidumping investigations which involve merchandise from countries
whose economies are determined to be "state-controlled" for the
purposes of the Antidumping Act, 1921, as amended. The amended
regulations provide that in determining the fair value of merchandise
from a state-controlled-economy country through comparisons with
prices or the constructed value of merchandise in a country or
countries not regarded as having a state-controlled-economy, the
Secretary of the Treasury may give recognition to the level of
economic development and to relative efficiencies or natural
advantages in the state-controlled-economy country. In addition,
the amended regulations provide that antidumping petitions which
involve merchandise from a state-controlled-economy country should
contain information pertinent to the new procedures.
EFFECTIVE DATE: The amendments will become effective as noted below
under that part of the document entitled "Effective Date".
FOR FURTHER INFORMATION CONTACT:
Theodore Hume, Office of the Chief Counsel, U.S. Customs
Service, 1301 Constitution Avenue, N.W., Washington, D. C.
20229, 202-566-5476.
SUPPLEMENTARY INFORMATION:
BACKGROUND
On January 9, 1978, notice was published in the FEDERAL REGISTER
(43 FR 1356) of a proposal to amend sections 153.7 and 153.27 Customs

2
Regulations (19 CFR 153.7 and 153.27), concerning investigations
under the Antidumping Act, 1921, as amended (19 U.S.C. 160 et seq.)
("the Act"), which involve merchandise imported from a "state-controlledeconomy country." Section 205(c) of the Act (19 U.S.C. 164(c)), as
added by the Trade Act of 1974, provides that the Secretary of the
Treasury ("the Secretary") may determine the foreign market value of
merchandise exported from a state-controlled-economy country on the
basis of the normal costs, expenses, and profits for the merchandise,
as reflected by the prices or the constructed value of such or similar
merchandise from a non-state-controlled-economy country or countries.
Based on its experience in administering this provision and in an effort
to make comparisons on a more equivalent and realistic basis, it was
concluded that when the foreign market value, and thereby the fair value,
of merchandise from a state-controlled-economy country is being
determined based upon the prices or the constructed value of such
or similar merchandise in a non-state-controlled-economy country
or countries, the latter country or countries should be comparable in
terms of economic development to the state-controlled-economy
country in which the merchandise under investigation is produced.
Accordingly, it was proposed to amend section 153.7 to provide
that prices shall be used as a basis of comparison if they are
available from a non-state-controlled-economy country of comparable
economic development. Where such or similar merchandise is not
produced and sold in sufficient quantities in a non-state-controlledeconomy country comparable in terms of economic development to the
state-controlled-economy country from which the merchandise is exported,
a constructed value could be used. When constructed value is
used as the basis for fair value, it would be determined based upon
the actual factors of production in the state-controlled-economy
country as valued in a non-state-controlled-economy country of
comparable economic development. If such factors and values cannot
be adequately verified, then prices of such or similar merchandise
sold or produced by any other non-state-controlled-economy country s
including, if necessary, the United States would be used.
It also was proposed to amend sections 153.27(a)(3)(i), (ii),
and (iii) to distinguish clearly certain types of information
required in any petition involving merchandise from a statecontrolled-economy country, as well as to require that such petitions
include information pertinent to the comparability of the statecontrolled-economy country with a non-state-controlled-economy
country from which prices or constructed value are to be determined.
Interested persons were invited to submit comments on the
proposed amendments on or before February 8, 1978. By notice
published in the FEDERAL REGISTER on February 6, 1978 (43 FR 4871),
the comment period was extended to February 22, 1978.

3

DISCUSSION OF COMMENTS
USE OF PRICES OR CONSTRUCTED VALUE
IN DETERMINING FAIR VALUE
A number of commenters argued that the proposed amendments
would depart from the statutory requirements for determining
the fair value of merchandise from a state-controlledeconomy country. Some comnenters interpreted the proposed
amendments as giving preference to prices over constructed value
in determining fair value. Others believed the amendments would
make the constructed value of such or similar merchandise in a
non-state-controlled-economy country the primary determinant of
fair value.
Section 205(c) provides that the Secretary shall determine
the foreign market value in antidumping investigations of merchandise
from a state-controlled-economy country on the basis of the normal
costs, expenses, and profits as reflected by either-(1) the prices at which such or similar merchandise
of a non-state-controlled-ecomony country or countries
is sold either (A) for consumption in the home market,
of that country or countries, or (B) to other countries,
including the United States; or
(2) the constructed value of such or similar
merchandise in a non-state-controlled-economy
country or countries.
It is the position of the Treasury Department that section 205(c)
provides that either prices or constructed value may be used by the'
Secretary in determining the foreign market value and thereby the fair
value, depending uponthe information available in the particular case
under consideration. To indicate more clearly that the regulations
are intended to follow the statutory standards, section 153.7(a)
retains the statutory structure.
AUTHORITY FOR APPLYING A STANDARD
OF COMPARABILITY OF ECONOMIES
Some commenters questioned the authority of the Treasury
Department to make adjustments in determining fair value based
on differences in the level of economic development between the
non-state-controlled-economy country or countries and the statecontrolled economy country, or to determine fair value on the
basis of prices for such or similar merchandise in a non-statecontrolled-economy country of comparable economic development.

4
One commenter objected that the proposed regulations would
provide for examination of economic criteria and factors of
production in the state-controlled-economy country whose
merchandise is under investigation even though, in his view,
the intent of the law is that information concerning markets
and products in state-controlled-economy countries must be
disregarded altogether.
Section 205(c) of the Act provides that the Secretary shall
determine the foreign market value, and thereby the fair value, of
merchandise from a state-controlled-economy country on the
basis of the normal costs, expenses, and profits as reflected
by the prices or constructed value of such or similar merchandise
in a non-state-controlled-economy country or countries, as set
forth in sections 205(c)(1) and (c)(2) of the Act. This provision
reflects Congressional concern that state control of an economy
renders inherently suspect the prices and costs of producers in such
countries. Therefore, the prices (or costs, if appropriate) are to
be determined from a non-state-controlled economy country. In
selecting a non-state-controiled-economy country as a surrogate
for the country from which the products, in fact are being exported
to the United States, the Treasury in the past has attempted to select
a country that is most like the exporting country. The standard for
selection, however, has not been articulated clearly. The present
regulation seeks to provide such a standard, consistent with the
principles of the Antidumping Act which attempt generally to establish
the "fair value" of merchandise from the practices of the foreign
producer or, in the instant case, of the surrogate producer.
One commenter argued that the most suitable non-state-controlledeconomy country to be selected is the one with a market for sales most
like the United States. This, however, is, not the usual priority
established by the Act. Under section 205(a) of the Act and section
153.2(a) Customs Regulations (19 CFR 153.2(a)), it is the home market
that is the preferred reference for establishing the foreign~market
value, and thereby the fair value. The proposed regulation attempts
to follow that concept by using data from another country, but not a
state-controlled-economy country, most like the unavailable home market.
The prices in such a country will be the preferred reference, but costs
may be used if sales in a non-state-controlled economy country are
insufficient or data is unavailable.
Even though the prices and costs in the state-controlled-economy
country are not regarded as sufficiently reliable to establish the foreign
market value, and thereby the fair value, of merchandise, the actual physical
inputs in such a country can be recorded and verified. If adequately
recorded and verified, they should provide a reliable measure of the
capabilities of the producer to make and sell the merchandise in question.
These inputs then can be valued in a non-state-controlled economy country,
and the appropriate value established, which recognizes both the natural
advantages and po ssible disadvantages of production for the producer.
This method should accord most closely with the statutory requirement

5
of section 205(c) of the Act that the "normal costs" be found. Based
on past experience and practice — which the Congress sought to incorporate into the Act — the regulatory provisions hereby adopted seem
best suited to achieving the purposes of the Act as a whole in the
unique circumstances to which they are addressed.
The Treasury Department believes that the new procedures
are necessary for fulfilling properly its responsibilities
under the Act and are consistent with both its past
practices and the law that adopted those practices. For
example, the Treasury Department has based, in part, its
selection of a non-state-controlled-economy country or
countries for price comparison purposes on the comparabilities
of that country's or countries1 level of economic development
with that of the state-controlled-economy country from which
the merchandise under investigation was exported.
COMMENTS ON PROPOSED COMPARISON PROCEDURES
Some commenters argued that the fact that the proposed
regulations require examination and comparison of production
costs in various countries introduces elements of unreliability
and speculation in determinations of fair value. Similarly,
it was contended that there is no reliable basis for applying
a standard of comparability between state-controlled-economy
countries and non-state-controlled-economy countries. Further,
it was suggested that without detailed guidelines and definitions
in the regulations, persons affected will not be able to make
informed judgments as to whether they are in compliance with
the statute.
The regulations as adopted should make clear that costs
of production in a non-state-controlled-economy country of
comparable economic development will be used only if (1) price
'
information is unavailable, and (2) verified information is
made available by the state-controlled economy country producer
concerning the specific factors actually used in producing
the merchandise exported to the United States. As stated in
the amended regulations, these specific factors include, but
are not limited to, hours of labor required, quantity of
materials employed, and amounts of energy consumed. The valuation
of these components and factors in a comparable non-statecontrolled economy country also would be required to be
subject to verification.
The basis for the use of constructed value in fair
value determinations under the Act generally is that the
components and factors of production can usually be ascertained,
for any given type of merchandise and, if verified, provide a
reliable basis for determining fair value. Similarly, comparability

6
in ecomonic development will be determined from per capita
gross national product, the level of infrastructure (particularly
in the sectors of the economy at issue), and other widely
used criteria for which generally reliable information is publicly
available.
Proposed section 153.7(b)(i) is not being adopted. This
section provided for adjustments for differences in economic
factors between (1) a non-state-controlled-economy country or
countries actually producing such or similar merchandise, and
(2) a non-state-controlled-economy country or countries determined
to be comparable in terms of economic development to the statecontrolled-economy country whose merchandise was under
investigation. Upon further consideration, it has been
concluded that adop tion of this provision would, as the
commenters argued, be relatively speculative and unreliable,
and would create an unnecessary burden upon persons involved
in an investigation, without significantly improving the
Treasury Department's ability to ascertain the normal costs,
expenses, and profits.
USE OF UNITED STATES
PRICES OR CONSTRUCTED VALUE
Some conmmenters contended that section 205(c) of the Act
does not authorize the use of prices or constructed value
of such or similar merchandise in the United States.

7

The Treasury Department does not agree with this interpretation
of the statutory language. Proposed section 153.7(b)(3) is not new,
but merely restates the provision for the use of prices or constructed
value of United States produced merchandise in th-e existing section
153.7 and, indeed, in section 153.5 of the Customs Regulations in effect
prior to the Trade Act of 1974. Specifically, former section 153.5
provided for the use of "prices at which such or similar merchandise is
sold by a non-state-controlled-economy country." The Treasury Department
considers that this language clearly authorized, and continues to authorize,
the use of U.S. prices in appropriate situations.
EDITORIAL CHANGES
In addition to the change in format and deletion of proposed section
153.7(b)(i), the last sentence of proposed section 153.7(b)(ii), which
is being adopted as the last sentence of section 153.7(c), is revised
to read as follows:
To the constructed value thus obtained, there shall be
added an amount for general expenses and profit, as required
by section 206(a)(2) of the Act (19 U.S.C. 165(a)(2)), and
the cost of all containers and coverings and other expenses,
as required by section 206(a)(3) of the Act.
After consideration of all comments received and further review
of the matter, it has been determined that the amendments should be
adopted as proposed, except for the noted changes.
EFFECTIVE DATE
These amendments will take effect 30 days after publication with
respect to investigations initiated on or after that date, and to the
extent practicable, will be applied to any investigations pending on
the effective date. Similarly, the Department intends to adopt the
procedures set forth in these amendments for the purposes of determining
whether special dumping duties should be assessed on any merchandise
entered for consumption or withdrawn from warehouse for consumption
on or after the effective date. Recognizing the need to assess the
effects of these amendments, the Department will evaluate the impact of
these amendments as soon as sufficient experience has been acquired, with
a view to making further revisions if deemed appropriate.

8'
DRAFTING INFORMATION
The principal author of this document was Edward T. Rosse,
Regulations and Legal Publications Division, U.S. Customs Service.
However, other personnel in the Customs Service and the Treasury
Department assisted in its development.
AMENDMENTS TO THE REGULATIONS
Part 153 of the Customs Regulations (19 CFR Part 153) is
amended as set forth below.
'(Signed) LB01T1BD LEHm»
XatlagEommissioner °^

Customs

Approved: ' 8 AUG 1978
Xsigned} Robert H»j Mundheim
" General Counsel of the Treasury

PART 153 - ANTIDUMPING
1. Section 153.7 is amended to read as follows:
153.7 Merchandise from state-controlled-economy country.
(a) General. If the information available indicates to the
Secretary that the economy of the country from which the merchandise
is exported is state-controlled to an extent that sales or offers o^
sales of such or similar merchandise in that country or to countries
other than the United States do not permit a determination of fair value
under section 153.2, 153.3, or 153,4, the Secretary shall determine
fair value on the basis of the normal costs, expenses, and profits as
reflected by either:
(1) The prices, determined in accordance with subsection
205(a) and section 202 of the Act (19 U.S.C. 164(a), 161) at which such
or similar merchandise of a non-state-controlled economy country or
countries is sold either: (A) for consumption in the home market of
that country or countries, or (B) to other countries, including the
United States; or
(2) The constructed value of such or similar merchandise
in a non-state-controlled-economy country of countries.

9

(b) Comparability of economies. (1) The prices as determined
under section 153.7(a)(1), or the constructed value as determined under
section 153.7(a)(2), shall be determined, to the extent possible, from
the prices or costs in a non-state-controlled-economy country or countries
at a stage of economic development comparable to the state-controlledeconomy country from which the merchandise is exported. Comparability
of economic development shall be determined from generally recognized
criteria, including per capita gross national product and infrastructure
development (particularly in the industry producing such or similar
merchandise),
(2) If no non-state-controlled-economy country of
comparable economic development can be identified, then the prices or
constructed value as determined from another non-state-controlledeconomy country or countries other than the United States shall be used.
(3) If neither section 153.7(b)(1) nor (b)(2) provides
an adequate basis for determining the price or constructed value of
such or similar merchandise, then the prices or constructed value, as
determined from the sales or production of such or similar merchandise
in the United States, shall be used.
(c) Use of constructed value. If such or similar merchandise
is not produced in a non-state-controlled-economy country which is
concluded to be comparable in terms of economic development to the
state-controlled-economy country from which the merchandise is exported,
the constructed value of such or similar merchandise may be determined
from the costs of specific objective components or factors of production
incurred in producing the merchandise in question, including, but not
limited to, hours of labor required, quantities of raw materials employed,
and amounts of energy consumed, if such information is obtained from the
producer of the merchandise in the state-controlled-economy country under
investigation, and verification of such information in the state-controlledeconomy country is concluded to the satisfaction of the Secretary.
Such components or factors shall be valued and such values verified in
a non-state-controlled-economy country determined to be reasonably comparable in economic development to the state-controlled-economy country
under investigation. To the values thus obtained, there shall be added
an amount for general expenses and profits, as required by section 206(a)(2)
of the Act (19 U.S.C. 165(a)(2)), and the cost of all containers and
coverings and other expenses, as required by section 206(a)(3) of the
Act (19 U.S.C. 165(a)(2)).
*****

2. Paragraph (a)(3)(i-iii) of section 153,27 is amended by deleting
subparagraph (iii) and revising subparagraph (i) and (ii) to read as
follows:

10

153.27 Suspected dumping; nature of information to be made
available.
(a) General.
*****

(3) Price information; fair value.
(i) If the merchandise is being exported from a
country other than one considered to be a "state-controlled-economy
country" within the meaning of section 205(c) of the Act (19 U.S.C.
164(c)):
(A) The home market price of such or similar
merchandise in the country of exportation;
(B) If such information is unavailable, the
price at which such or similar merchandise is sold to a third country
from the country of exportation; or
(C) If the information required under section
(a)(3)(i)(A) or (a) (3) (i) (B) is unavailable, the constructed value
(as defined in section 206 of the Act (19 U.S.C. 165)) of such merchandise produced in the country of exportation,
(ii) If the merchandise is being exported from a
country considered to be a "state-controlled-economy country":
(A) The price or prices at which such or similar
merchandise of a non-state-controlled-economy country or countries,
considered to be comparable in terms of economic development to the ^
state-controlled-economy country, is sold for consumption in the home
market of that country or countries or to other countries (including
the United States);
(B) The constructed value of such or similar
merchandise in a non-state-controlled-economy country, determined in
accordance with sections 153.7(b) and (c).
(iii) Deleted,

(Sec. 201-212, 407, 42 Stat, 11 et seq^, as amended, sec. 5, 72 Stat,
585, sees. 406, 407, 42 Stat, 18 (5 U.S.C, 301, 19 U,S,C, 160-173))

kpartmentoftheJREASURY
ASHINGTON, D.C. 20220

TELEPHQH

FOR IMMEDIATE RELEASE

August 7, 1978

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,301 million of 13-week Treasury bills and for $3,500 million
of 26-week Treasury bills, both series to be issued on August 10, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing November 9, 1978
Price

High
Low
Average

98.283
98.278
98.279

Discount
Rate
6.793%
6.812%
6.808%

Investment
Rate 1/
7.01%
7.03%
7.02%

:
26-week bills
: maturing February 8. 1979
;

Price

Discount
Rate

' 96.380
: 96.370
: 96.374

7.160%
7.180%
7.172%

Investment
Rate 1/
7.53%
7.55%
7.55%

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 22%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

Received

Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
21,580,000
3,678,530,000
19,450,000
62,145,000
21,180,000
24,750,000
280,705,000
79,125,000
20,345,000
18,745,000
18,470,000
225,455,000

$
21,580,000
2,015,405,000
19,400,000
31,755,000
17,920,000
23,750,000
30,845,000
57,875,000
14,045,000
18,745,000
9,950,000
31,825,000

$
47,965,000
5,248,745,000
9,860,000
25,790,000
13,600,000
16,375,000
249,160,000
37,445,000
21,150,000
23,955,000
12,510,000
386,405,000

$
32,965,000
3,181,590,000
9,860,000
15,790,000
11,600,000
16,375,000
48,160,000
21,445,000
21,150,000
21,780,000
7,950,000
101,645,000^

8,380,000

10,160,000

10,160,0001

Treasury
TOTALS

8,380,000
$4,478,860,000

$2,301,475,000a/ $6,103,120,000

/includes $ 311,965,000 noncompetitive tenders from the public.
/includes $195,145,000 noncompetitive tenders from the public.
VEquivalent coupon-issue yield.
B-1092

$3,500,470,000b/

FOR IMMEDIATE RELEASE
August 7, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES START OF ANTIDUMPING
INVESTIGATIONS ON CONDENSER PAPER
FROM FINLAND AND FRANCE
The Treasury Department said today that it will
begin antidumping investigations of imports of condenser paper from Finland and France.
Treasury's announcement followed summary investigations conducted by the U. S. Customs Service after
receipt of a petition filed by counsel on behalf of
Crocker Technical Papers, Inc., Kimberly-Clark Corp.
and Stevens Paper Mill, Inc. alleging that firms in
those two countries are dumping condenser paper in the
United States.
The petition alleges that imports of condenser
paper are being sold in the United States at "less than
fair value." Fair value was based on the foreign producers' prices to a market other than the United States
because petitioners presented information indicating
that there was no home market for this merchandise.
The Customs Service will investigate the matter and
make a tentative determination by February 8, 1979.
If sales at less than fair value are determined by
Treasury, the U. S. International Trade Commission will
subsequently decide whether there is injury, or the
likelihood of injury, or a domestic industry. Both
sales at less than fair value and injury must be determined before a dumping finding is reached. If dumping
is found, a special antidumping duty is imposed equal
to the difference between the price of the merchandise
at home (or in third countries) and the price to the
United States.
Notice of the start of this investigation will
appear in the Federal Register of August 8, 1978.
Imports of condenser paper in 1977 were valued at
$401,000 for France and $263,000 for Finland.
o
0
o
B-1093

FOR IMMEDIATE RELEASE
August 7, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES START OF ANTIDUMPING
INVESTIGATION OF AUTOMOTIVE AND MOTORCYCLE
REPAIR MANUALS FROM THE UNITED KINGDOM
The Treasury Department said today that it will
begin an antidumping investigation of automotive and
motorcycle repair manuals from the United Kingdom.
Treasury's announcement followed a summary investigation conducted by the U. S. Customs Service after
receipt of a petition filed by counsel on behalf of
Clymer Publications alleging that this merchandise is
being sold in the United States at "less than fair
value."
Sales at "less than fair value" generally occur
when imported merchandise is sold in the United States
for less than in the home market.
This case is simultaneously being referred to the
U. S. International Trade Commission. Should the
Commission find, within 30 days, that there is no
reasonable indication of injury or likelihood of injury
to a domestic industry, the investigation will be terminated; otherwise, the Treasury will continue its
investigation. A tentative determination would then be
made by February 8, 1979.
Dumping occurs when there are both sales at less
than fair value and injury to a U. S. industry. If
dumping is found, a special antidumping duty is imposed
equal to the difference between the price of the merchandise at home and the price in the United States.
Notice of this action will appear in the Federal
Register of August 8, 1978.
Imports of these manuals from the United Kingdom
during 1977 were estimated to be valued at approximately
$1 million.
o
B-1094

0

o

FOR RELEASE AT 4:00 P.M.

August 8, 1978

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 5,700 million, to be issued August 17, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5 7^5 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
May 18, 1978,
and to mature November 16, 1978 (CUSIP No.
912793 U4 6 ) , originally issued in the amount of $3,405 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
August 17, 1978,
and to mature February 15, 1979 (CUSIP No.
912793 W8 5 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing August 17, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,502
million of the maturing bills. These accounts may exchange bills
they hold tor the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, August 14, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-1095

-2Each 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 securities and report daily to the
Federal Reserve Bank of New York their positions in and
Dorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on August 17, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
August 17, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

tpartmentoftheJREASURY
*HINGT0N,D.C. 20220

TELEPHONE 566-2041

FOR RELEASE ON DELIVERY
EXPECTED 9:30 A.M.
AUGUST 10, 1978
TESTIMONY OF STEPHEN J. FRIEDMAN
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
HOUSE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

Mr. Chairman and Members of this distinguished
Subcommittee:
I appreciate this opportunity to testify on behalf
of the Administration on H.R. 11310, the National Credit Union
Liquidity Facility Act. Assistant Secretary Lawrence P. Simons
has already presented the views of the Administration on the
other issues under consideration at these hearings.
The Congress has been concerned with the liquidity needs
of our nation's credit unions for many years. Authorizing
legislation has been introduced in eight successive sessions of
Congress. We agree that the Congress should act on this
matter now. The Administration enthusiastically supports the
creation of a central liquidity fund for credit unions. We
have a few technical suggestions in the language of the bill,
and we recommend a different and more limited borrowing
authority.
Credit Union Liquidity Needs
Credit unions are increasingly experiencing the type of
cyclical liquidity crises that long have characterized other
depository financial institutions. There is a growing
imbalance between the uses and sources of credit union
funds — a rapid and sustained growth in the demand for loans
of increasing maturities combined with a relatively volatile
flow of share capital.

B-1096

- 2 Loans have grown faster than deposits. The loan-to-share
ratio of federal credit unions was 0.76 in 1955. By 1965 the
loan-to-share ratio was 0.85; at the end of 1977 it was 0.87.
As the loan-to-share ratios have been drifting upward, their
liquid asset ratios* have been declining, down to 0.33 in 1977
for federal credit unions. This is largely attributable to the
growing proportion of shares represented by large accounts,
and the growing reliance on borrowings as a source of funds.
At the end of 1977, more than half of the total share capital
at federal credit unions was held in accounts larger than
$5,000; and notes payable accounted for 5.5% of total liabilities,
up from 1.8% in 1965.
This imbalance may deepen as credit unions implement
recently-gained powers such as mortgage loans, share drafts
and preauthorized lines of credit.
Until recently, the credit union industry was able to
deal with its liquidity needs. Credit unions lend only
to members. When members' deposits became insufficient
to fund new loans, further loan commitments were curtailed,
reducing the need for liquidity. Using the cooperative
form, they organized to help meet their liquidity needs
through the corporate central system. This program
has made an important contribution. For example, for
the 10-month period September 1977 through June 1978,
the total share capital of corporate central members of
the U.S. Central averaged about $1.2 billion, while loans
outstanding averaged about $664 million.
The U.S. Central Credit Union specializes in offering
loan and investment services to its 41 member corporate centrals
to help maintain their liquidity. Over the same 10-month
period, the total share capital of the U.S. Central averaged
$279 million while loans outstanding averaged $79 million.
Nevertheless, it must be recognized that the structural
pyramiding of the internal capital base of the credit union
industry at the corporate central and U.S. Central levels
introduces an element of weakness in this privately funded
liquidity system. This system is least able to maintain
liquidity when the need for it is widely experienced, since
* The liquid asset ratio represents the sum of U.S. Government
obligations, common trust investments, shares and deposits in
other credit unions, and savings and loan association shares
as a percentage of the sum of notes and other accounts payable,
other liabilities and share accounts larger than $5,000.

- 3 the members tend to draw down their deposits to meet
liquidity needs. Accordingly, we agree upon the need for an
external source of funds to help meet credit union liquidity
needs.
The Central Liquidity Facility
H.R. 11310 would establish a Central Liquidity Facility
(CLF) within the National Credit Union Administration.
The CLF would be managed by the Administrator.
Membership in the CLF would be open to any credit union
serving individuals that invests at least 1/2 of 1 percent
of its capital and surplus in CLF shares. A corporate
central credit union may also become a member with the
approval of the Administrator.
Lending Powers
The CLF would be authorized to meet the liquidity
needs of its members for (1) short-term adjustment credit,
(2) seasonal credit, and (3) protracted adjustment credit.
Those catagories are drawn from the Federal Reserve's
Regulation A, which defines the lending operations of its
discount window.
In general, the Administration agrees that the present
practices of the Federal Reserve System in administering
its discount window operations are a good model for CLF
operations. That is, the facility should be used to help
credit unions satisfy their deposit and other liability
obligations. Advances should not be used to maintain or
expand the level of loans except in the case of a short
run and unusual decrease in available funds. We would be
pleased to submit to the Subcommittee staff suggestions
for changes in the language of the bill that would make
that purpose more clear.
Financing
The National Credit Union Administration has estimated
that if all insured credit unions became members of the
CLF its capitalization would be about $150 million.
H.R. 11310'would authorize the CLF to sell its own debt
securities, with or without guarantee by the United States,
in the public credit markets. The face value of those
obligations guaranteed by the United States may not exceed
twenty times the subscribed capital stock and surplus of

- 4 the Facility. In addition, the Administrator would be
authorized to borrow up to $500 million under a Treasury
line of credit.
If the $500 million line of credit is added to the
subscribed capital and the maximum borrowing, the CLF
would have funding capacity of over $3.6 billion. This
sum is in addition to the credit union share insurance
fund of approximately $100 million, a back-up Treasury
line of credit for that fund of $100 million and the
resources of the corporate central system. We suggest
that a smaller amount would be more appropriate for the
needs of the credit union industry.
The Federal Reserve and FHLB Systems
Consideration of the Federal Reserve System and the
Federal Home Loan Bank System is instructive in this respect.
The Federal Reserve has no limit on the funds it makes
available to member banks through the discount window.
The System creates (rather than borrows) these funds. The
size of its "fund" is a by-product of its monetary policy
functions rather than the needs of its discount window.
As a matter of fact, the level of discount window advances
has been modest. For example, since the beginning of
December 1977, outstanding loans to member banks have
averaged about $500 million; in more recent months they have
averaged about $750 million. Since 1965, the amount outstanding
has never been higher than about $3.4 billion, or about
36/100 of 1 percent of insured banking assets.
Unlike the Federal Reserve, the Federal Home Loan Bank
System obtains funds for its program of advances by borrowing in the private market. It may borrow up to 12 times
the total paid-in capital and retained earnings of its
regional banks.
As of June 1978, the paid-in capital and retained
earnings of the FHLB System were about $4.7 billion. Thus,
the FHLB System can borrow up to $56 billion in the private
market. That ceiling greatly exceeds the historical level
of advances by the System.
In the last period of severe disintermediation, 1974,
the level of advances outstanding reached $22 billion.
Currently, loans outstanding are approaching a new high

- 5 in excess of $26 billion. These large amounts are
a result of the mandate of the FHLB System to maintain
and expand mortgage lending, rather than merely
to provide liquidity.
The CLF Size
As noted above, since 1965 the largest proportion of
outstanding Federal Reserve discount window balances in
relation to the size of the insured deposit base has been
about 36/100 of 1 percent. If that relationship is applied
to a credit union deposit base of even $100 billion — which
is twice the size of the present industry — the result is a
fund of about $360 million. That result is generally consistent with statements by the National Credit Union Administrator as to the likely level of advances in the near future
Accordingly, we suggest that the capitalization of
the Facility should be smaller than that contemplated by
the bill. We recommend that the borrowing authority be
limited to ten times the capital and surplus of the CLF or
$400 million, whichever is less. For the same reasons, we
suggest that the Subcommittee consider a smaller line of
credit from the Treasury, perhaps in the area of $100 million
These amounts, added to capital of about $150 million,
would generate a potential fund of $650 million, which should
be more than adequate in the near future.
Method of Financing
In recent years, the Treasury has consistently taken
the position that borrowing by agencies of the Federal
government should not be conducted directly in the credit
markets.
Securities issued by Federal agencies, particularly
new agencies, can be marketed only at interest rates which
are significantly higher than the rates on Treasury
securities. In order to issue its securities directly
in the market, a Federal agency would be required to
develop a highly sophisticated debt management staff with
the necessary market expertise. Even with that expertise,
agencies are required to pay excessive rates of interest
because the agencies are not widely known or accepted by
various investor groups, they must borrow in relatively

- 6 small amounts, they have little flexibility as to the timing
of their issues, and they have a limited secondary market.
Also, permitting such agency securities to be issued in
direct competition with Treasury's own securities, and at
higher interest rates, is counterproductive to Treasury
debt management goals.
Accordingly, we strongly recommend that the CLF borrow
the $400 million directly from the Treasury and that it
be held in a revolving fund. In order to assure the fund's
continued availability in time of need, the bill should
provide for a one-time appropriation without fiscal year
limitation. As advances by the CLF are repaid, they will
be available to be advanced again.
***

Mr. Chairman, this concludes my formal testimony.
I would be pleased to answer any questions that you or the
members of this Subcommittee may have.

FOR IMMEDIATE RELEASE
EXPECTED AT 2:00 P.M. EDT
THURSDAY, AUGUST 10, 1978

STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
POLICY AND TRADE
AND THE SUBCOMMITTEE ON AFRICA
OF THE
HOUSE COMMITTEE ON
INTERNATIONAL RELATIONS
I appreciate the opportunity to testify before the
Subcommittee regarding the three bills, H.R. 12463,
H.R. 13262 and H.R. 13273, which would restrict U.S.
investment in South Africa.
H.R. 13273 would prohibit additional U.S. investment
in South Africa until "The President determines that the
Government of South Africa has made substantial progress
towards the full participation of all the people of South
Africa in the social, political and economic life in that
country and toward an end to discrimination based on race
or ethnic origin." H.R. 12463 and H.R. 13262 have similar
goals but are somewhat less restrictive. Both of these
B-1097

-2 bills would prohibit all new investment, except for reinvested
earnings.

H.R. 12463 would deny tax credits, export

licenses, Government contracts, and Ex-Im facilities.
H.R. 13262 would permit new investment in existing or new
enterprises that did not engage in unfair employment practices.
The Administration is of course strongly opposed to
the practice of apartheid in South Africa and elsewhere.
We have adopted policies to promote peaceful change
in South Africa, as indicated by the representative of
the Department of State, and we will continue to do so.
As the State Department has already testified, however,
the Administration believes that bills such as those
under consideration today would not represent a productive
approach to the problem of apartheid.

Accordingly, the

Administration opposes passage of these bills.
There are several reasons why we believe that passage
of any of these bills would be contrary to the national
interest.

First, such legislation might be totally

ineffective in achieving its stated objective of limiting
U.S. investment in South Africa.

Second, the implementa-

tion of such legislation would be difficult and burdensome on both the Government and business firms.

Third,

it could provoke retaliatory actions by the Government of
South Africa that would be harmful to U.S. economic interests.

- 3 Fourth, it would be inconsistent with basic U.S. policy
on foreign investment, which is to avoid intervening in the
activities of U.S. companies in regard to their activities
abroad.

Fifth, such legislation would conflict with

two objectives of U.S. foreign investment policy
regarding national treatment of foreign-owned companies
and government intervention in these activities.
Administrative Considerations
Let me begin by stating the serious problems we would
foresee regarding implementation of these bills.
One problem is that companies could frustrate the
intent of the law by simply reinvesting more and hence
obviating the need for new capital flows from the United
States or elsewhere. If reinvested earnings were also
prohibited, the Government of South Africa could counter
the U.S. law by prohibiting U.S. affiliates operating
under the jurisdiction of South Africa from remitting
their profits.
In regard to the provision in H.R. 12463 denying the
foreign tax credit, the effect of this provision would be
mitigated in part or entirely by other provisions of U.S.
tax law.
First, in computing the foreign tax credit, a.U.S.
taxpayer is required to aggregate all his foreign source

- 4 income and all foreign taxes levied against that income.
He then uses the foreign tax as a credit against the
U.S. tax levied on the foreign source income.

Thus, any

taxes in excess of the applicable U.S. tax on income
from the rest of the world are used to offset the
U.S. tax on South African income.
Second, South African taxes are deductible against
the income that would otherwise be subject to U.S. taxes
if they are not eligible for the foreign tax credit.
H.R. 12463 does not prohibit this result.
Finally, U.S. taxes are not levied against the earnings
of foreign subsidiaries until the income is repatriated.
U.S. parent companies could therefore postpone indefinitely,
or until' such time as they have sufficient excess foreign
tax credits from third countries, any U.S. taxes that might
otherwise be due because of the enactment of H.R. 12463.
This bill would also prohibit the use of Eximbank
services for transactions with South Africa made by U.S.
persons with major investments there.

The U.S. Government

some time ago took action to express its disapproval of
South Africa's racial policies:

direct loans by Ex-Im to

finance exports to South Africa have been prohibited since
1964.
The constraint in H.R. 12463 on Ex-Im loan guarantees
and insurance would have little effect.

Total outstanding

- 5 Eximbank exposure in South Africa as of May 1978 was
$197 million, of which $100 million was in long-term
financial guarantees, $67 million in medium-term
insurance and guarantees, and $30 million in short-term
insurance and guarantees.

Thus, cessation of Eximbank

authorizations would be economically insignificant
to South Africa, whose merchandise imports totaled $8.5
billion in 1976.
We should also recognize that enforcement of this
kind of legislation would necessitate the establishment
of an exchange control regime which would require
detailed regulation and close monitoring of business
transactions between U.S. parent companies and their
affiliates in South Africa.

The distinction between

investment flows, which would be prohibited, and money
flows on account of trade and service transactions,
which would not be prohibited, might be difficult to
maintain in the actual operation of a regulatory program.
We should also weigh this cost to the firms and to the
Government against the prospective benefits of the
legislation.
Implications of Retaliation
We do not want to exaggerate the consequences of these
bills, which we realize are quite limited in their intended

- 6 effect.

But we are talking here about legislation designed

to force companies operating in South Africa to conform to
U.S. standards, an action which would be viewed as hostile
by the Government of South Africa.

Thus, it is only

prudent to carefully assess the possible implications
of this action if the Government of South Africa chose not
to remain passive and to retaliate against U.S. trade and
investment.
The value of U.S. direct investment assets in South
Africa is about $1.8 billion.

In addition, U.S. persons

hold investments in South Africa in the form of securities
and bank loans of about $2.8 billion.

The total assets of

residents of South Africa in the United States are only
about $200 million.

In other words, U.S. assets subject

to South African control and expropriation outweigh
South African assets subject to U.S. control and
expropriation by more than $4 billion.

If we decide

to use investment as an instrument for imposing sanctions,
or even for making a symbolic statement, the hard fact
is that South Africa has more cards to play than we
do in this area.
Any response by South Africa need not be limited to
the investment area.

If they chose to respond on trade,

they could cause considerable pain to many people in
the United States.

South Africa provides a significant

- 7 portion of several critical mineral imports to the United
States including chromium, manganese, industrial diamonds,
vanadium, platinum group metals and antimony. If supplies
of South African chromium were to stop, there would
be sharp price increases and shortages in the U.S. specialty
steel industries.

These shortages would be felt in industries

consuming these steels.

The United States could adjust

to a cutoff in supplies of the other minerals from South
Africa by switching to other sources of supply where
available, by using substitutes, by drawing down private
inventories, and by releasing materials from the excesses
in the strategic stockpile.

There would, however, be

serious economic dislocations in attempting to adjust
to the loss of these minerals which would compromise
achievement of our policy objectives in the fields of
environment, energy, and employment.
U.S. Policy on Foreign Investment
In addition to our objections to the likely economic
effects of these bills, we also believe that they run
counter to U.S. foreign investment policy.
Shortly after taking office, this Administration undertook a review of U.S. policy on foreign investment.

The

conclusions of that review, which were announced in July 1977,

- 8 rested on the long-standing U.S. principle of not intervening in foreign investment transactions.

Specifically,

the policy statement said:
The fundamental policy of the U.S. Government toward
international investment is to neither promote nor
discourage inward or outward investment flows or
activities.
and
The Government, therefore, should normally avoid
measures which would give special incentives or
disincentives to investment flows or activities
and should not normally intervene in the
activities of individual companies regarding
international investment.
The reasons given for this conclusion were quite
pragmatic.

The first two reasons were, in essence, that

the investment process is economically more efficient in
the absence of government intervention.

A third reason was:

Unilateral U.S. Government intervention in the
international investment process could prompt
counteractions by other governments with adverse
effects on the U.S. economy and U.S. foreign policy.
In addition to possible counteractions by South
Africa, we should also be aware of the implications of

- 9 -

the measures proposed in these bills for the attitudes
of other governments and for the climate for international investment in general.

Too many governments

are now intervening in the international investment process,
in an effort to increase the economic benefits accruing
to their countries from the activities of multinational
companies.

Because these interventions often redound

to the detriment of the United States, one of our basic
policy objectives, as stated in the July 1977 policy statement, is to:
Strengthen multilateral discipline and restraint
over government actions which affect investment
decisions, when such actions might adversely affect
other countries.
While it may be argued that U.S. Government intervention in the case at hand is morally justified, the
fact remains that it would be a unilateral intervention
for U.S. political purposes.

Other governments view

their interventions, although not aimed at international
political objectives, as being at least equal in moral
justification.

For example, the most important reason

for intervention in the investment process by other
governments is to increase domestic employment.

In

- 10 countries where poverty and wide-scale unemployment are
endemic, it is hard to argue that the objectives of
government interventions are not on sound moral grounds.
If everyone plays this game, however, we will be in
a downward spiral of beggar-thy-neighbor actions reminiscent of what happened to international trade in the
1930's.
A fourth reason given for the July 1977 conclusion
was:
The United States has an important interest
in seeking to assure that established investors
receive equitable and non-discriminatory treatment
from host governments.
In other words, we seek for our companies operating
abroad treatment which is no less favorable than that
accorded to domestically-owned companies and companies
owned by other foreign nationals.

When the United States

takes the position that U.S.-owned companies which are
located and operating in other political jurisdictions
are also subject to U.S. laws, we can hardly expect
them to be viewed as nationals entitled to the same
treatment as other companies.

In effect, such action

suggests that U.S.-owned companies have all the rights
of domestic companies in the host country and in addition

- 11

-

are subject to U.S. laws and policies where we deem
the local laws and policies as insufficient or simply
wrong.
We should also ask ourselves if we are prepared to
accept political intervention by foreign governments in
the activities of U.S. companies operating in the United
States in cases where such companies happen to be owned
or controlled by foreign nationals.

If the answer to that

is a unanimous "no," which I am sure it is, regardless of
any moral imperatives which might motivate foreign governments, then it is obviously difficult for us to justify
unilateral interventions on our part in the activities
of U.S.-owned companies operating in other countries.
It might be argued that the actual economic effect
of these bills is secondary to the symbolic effect of
the United States' taking a concrete step to express
disapproval of South Africa's apartheid policy.

The

Administration of course shares that sense of disapproval.
Nevertheless, it is clearly bad public policy to put
a law on the books which is ineffective, is difficult
and burdensome to enforce, could trigger retaliation
against important U.S. economic interests, and is inconsistent with several key aspects of our own national policy
toward international investment.

- 12 We appreciate the laudable objectives of the sponsors
of these bills and I am sure they are put forth under the
impression that the effect would be relatively limited
and essentially benign.

However, the costs of such a

symbolic action could be very high, and we strongly urge
that these bills not be passed.

FOR RELEASE AT 4:00 P.M.

August 10, 1978

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
j

$3,500 million, or thereabouts, of 364-day Treasury bills to be dated
August 22, 1978,

and to mature August 21, 1979

(CUSIP No. 912793 Z5 8 ) .

The bills, with a limited exception, will be available in book-entry form only,
and will be issued for cash and in exchange for Treasury bills maturing
August 22, 1978.
This issue will provide $495 million new money for the Treasury as the
maturing issue is outstanding in the amount of $ 3,005 million, of which
$1 891 million is held by the public and $1,114 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 par amount will be payable without interest.
Except for definitive bills in the $100,000 denomination, which will be available
only to investors who are able to show that they are required by law or regulation
to hold securities in physical form, this series of bills will be issued entirely
in book-entry form on the records either of the Federal Reserve Banks and Branches,
)r of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and Branches and at the
bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern
'aylight Saving time, Wednesday, August 16, 1978.

Form PD 4632-1 should be used to

ubmit tenders for bills to be maintained on the book-entry records of the
epartment of the Treasury.
Each tender must be for a minimum of $10,000. Tenders over $10,000 must
e in multiples of $5,000.

In the case of competitive tenders, the price

ffered must be expressed on the basis of 100, with not more than three decimals,
•8-» 99.925.

Fractions may not be used.
(OVER)

-1098

-2Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers, provided the names of the customers are set forth in
such tenders.

Others will not be permitted to submit tenders except for their

own account.
Payment for the full par amount of the bills applied for must accompany all
tenders submitted for bills to be maintained on the book-entry records of the
Department of the Treasury-

A cash adjustment will be made for the difference

between the par payment submitted and the actual issue price as determined in
the auction.
No deposit need accompany tenders from incorporated banks and trust companies
and from responsible and recognized dealers in investment securities, for bills
to be maintained on the book-entry records of Federal Reserve Banks and Branches,
or for definitive bills, where authorized.

A deposit of 2 percent of the par

amount of the bills applied for must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.

Those submitting competitive tenders

will be advised of the acceptance or rejection thereof.

The Secretary of the

Treasury expressly reserves the right to accept or reject any or all tenders, in
whole or in part, and his action in any such respect shall be final.

Subject to

these reservations, noncompetitive tenders for $500,000 or less without stated
price from any one bidder will be accepted in full at the average price (in
three decimals) of accepted competitive bids.
Settlement for accepted tenders for bills to be maintained on the records
ot Federal Reserve Banks and Branches must be made or completed at the Federal
Reserve Bank or Branch on

August 22, 1978,

able funds or in Treasury bills maturing

in cash or other immediately avail-

August 22, 1978.

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

-3include 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 a 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 Circulars, Public Debt Series - Nos. 26-76 and
27-76, and this notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue.

Copies of the circulars and tender forms may be

obtained from any Federal Reserve Bank or Branch, or from the Bureau of the
Public Debt.

FOR IMMEDIATE RELEASE
August 10, 1978

Contact:

Charles Arnold
566-2041

TREASURY ANNOUNCES TENTATIVELY THAT STEEL
WIRE ROPE FROM KOREA IS NOT BEING "DUMPED"
The Treasury Department today announced its preliminary
determination that steel wire rope from the Republic of Korea
is not being sold in the United States at less than fair value.
"Sales at less than fair value" generally occur when
merchandise is sold in the United States for less than in the
home market or third countries.
In this case, the petitioner alleged the possibility of
sales in the home market, or to third countries, at prices
below the cost of producing steel wire rope in Korea. However,
cost information received from the Korean manufacturers covered
by this investigation could not be analyzed in sufficient time
for this tentative determination. Before a final determination
is made, which is due in this case by November 15, 1978,
Treasury will make a decision as to whether there were in fact
sales in the home market below cost. If sales below costs are
found and insufficient sales remain at prices above the cost
of producing the merchandise, then the "fair value" of Korean
steel wire rope will be calculated based upon the verified cost
information submitted by the Korean manufacturers.
Notice of this action will appear in the Federal Register
of August 15, 1978.
Imports of steel wire rope from the Republic of Korea
were valued at $9.7 million during the period May-October 1977.

*

B-1099

*

*

RELEASE ON DELIVERY
EXPECTED 1:30 P.M. EDST
AUGUST 12, 1978

REMARKS OF THE HONORABLE
BETTE ANDERSON
UNDER SECRETARY OF THE TREASURY
BEFORE THE
AMERICAN INSTITUTE OF BANKING
SAVANNAH, GEORGIA

It's a pleasure to be here to discuss the economic and tax
policies of the Carter Administration.
We've clearly come a long way since President Carter took
office. Since November, 1976 we reduced the unemployment rate by
about two points — from 8 percent to 6.2 percent. Last year, we
added more than four million jobs to the economy. And so far
this year, we have added 1.8 million more new jobs. We now have
almost 59 percent of working-age Americans in civilian jobs —
higher than at any time in our history.
In the last three years, the utilization rate of our
nation's industrial plant rose from 72 percent in early 1975 to
84 percent recently. Real per capita disposable income has risen
by 13 percent in the same period, and business profits have
increased substantially.
This year our economy has grown by about 3-3/4 percent in
real terms during the first half of the year. The first quarter,
of course, was depressed by the severe weather and the coal
strike. But the economy came back strongly, with real growth of
close to 7-1/2 percent in the second quarter, based on preliminary figures.
We have only to look around*us — at the city of Savannah,
its port, its historical district, its industries — at the State
of Georgia and the rest of the nation — to see the tangible
results of an economy that is strong, vital and growing.
Now that we are well into the fourth year of this recovery,
some business executives and analysts have questioned whether it
can last much longer. Some have even predicted a recession next
year.

B-1100

-2-

In our postwar business cycles, the expansion phase has
lasted an average of about four years, so some have suggested
that we cannot expect a fifth year of expansion in this cycle.
Past patterns, however, have a way of not repeating
themselves, and we do not see any fundamental reasons for an end
to this expansion in the fifth year.
Fortunately, we have avoided the kinds of major imbalances
that brought previous recoveries to an end. Inventories are
lean. The ratio of inventories to final sales are at their
lowest level in over a decade.
The surplus of apartments and offices that glutted the
market four or five years ago has largely disappeared, and
vacancy rates for apartments today are unusually low.
While nonfinancial corporations are less liquid today than a
year or two ago, they do not have the distortions in balance
sheets that undermined business in the early 1970's.
Aside from some building materials, there are no signs of
major bottlenecks or shortages that could boost prices for
materials and finished goods. The rise in unfilled orders for
durable goods has been moderate.
Moreover, we expect business investment to help sustain
growth. While it is not high enough to be completely satisfactory, new orders and contracts for new plant and equipment
have been 11 percent above a year ago, adjusted for inflation.
We expect consumer spending to continue to rise by close to
four percent next year, about the same as our overall growth
rate. Personal savings have returned to about normal rates by
historical standards, and we see no major shift in consumer
patterns in the near future.
Finally, we can foresee some decline in housing starts and
construction later this year and in 1979 because of high interest
rates. But lending institutions have much stronger financial
positions now than in previous cycles, and the demand for housing
remains strong — so we do not foresee a sharp decline in this
important segment of the economy.
All in all, we can continue on a path of moderate growth of
3-1/2 to 4 percent through 1978 and 1979 — if we follow
sensible, balanced policies to attack our economic problems.
The dark cloud in the picture, of course, is inflation.
Although we've nearly cut in half the double-digit inflation
of three years ago, we still have an unacceptably high underlying
rate of about 7 percent.

-3-

At this level, inflation is the most serious economic
problem we face today. It has created major inequities, hitting
some groups of people hard, while others have kept pace with
rising prices. It has impaired the competitiveness of American
exports and helped erode the exchange value of the dollar. Most
important, it jeopardizes our continued economic expansion.
While prices increased in the first half of 1978 by almost
11 percent — to a major extent because of food prices — we can
expect moderation in those increases during this half.
We expect, for example, food price increases to slacken. A
more stable dollar should contribute less to inflation. And the
payroll cost increases resulting from the scheduled rise in the
minimum wage will be less in 1979 than this year.
But these factors, while significant, are not at the heart
of our problem. The central problem in inflation is that
pressures on costs of production are mounting.
We simply are not investing enough in new tools of
production. At this stage in previous expansions, investment had
exceeded its previous peak by an average of 18 percent. This
time, investment has exceeded the previous peak level by less
than five percent.
Yet we urgently need more investment to increase
productivity and keep down costs.
In the past four years, our manufacturing capacity has
increased at an annual rate of less than 3 percent, down 1-1/2
percentage points from the growth rate in the postwar period
through 1973. And since 1973, productivity growth in manufacturing has fallen by almost half, compared to its average for
1948 to 1973.
We must contain the wage-price spiral that is underway -- as
workers seek to catch up with prices, and companies raise prices
to catch up with costs. It's the proverbial vicious cycle, and
it calls for cooperation and coordination to wind down this
spiral.
The Carter Administration takes the inflation problem
seriously, and we are carrying out a policy toreduce the rate of
inflation without slowing down our economic growth to an
unacceptable level.
First, we are exercising budget restraint to contain budget
deficits and avoid creating an overheated economy.
While the 1979 deficit will be large, we have already cut
the deficit projections we made in January by $12 billion. And
the President has encouraged Congress to trim the deficit even
further by reducing outlays by another $5 billion.

We are now drawing up the fiscal year 1980 budget with the
same restraint that we exercised earlier — and we expect the
1980 deficit to be substantially smaller than 1979. This will
permit sustained growth, without generating undue inflationary
pressures.
In recent months, we have heard some voices advocating even
slower growth targets — under three percent, for example —
help fight inflation.

to

Unfortunately, the likely result would be only a small drop
in wage and price increases and a large increase in unemployment.
In fact, only massive unemployment for a very long time would
have a significant impact on this inflation — a cost that is
clearly unacceptable, and as we have seen recently, not
necessarily guaranteed to keep inflation down.
Consider the impact on business of such a slowdown. As
capacity utilization fell, profits would fall. Combined with
depressed consumer demand, these would discourage investments
needed to improve productivity and restore jobs. We have already
been through such a period in this decade, and our lagging growth
in productivity is directly attributable to that.
In other words, we cannot afford deliberately to slow
economic growth below our long-term potential.
We must instead encourage investment through direct business
tax cuts and broader cuts that sustain consumer demand.
That's why we continue to work with Congress for a moderate
tax cut. Only with greater incentives to invest will we begin to
hold down the rising costs of production.
In view of the overriding public concern about inflation, it
is ironic that Congress is seriously considering a massive income
tax cut contained in the Kemp-Roth bill.
Instead of working toward a balanced budget, as President
Carter's tax proposals would, Kemp-Roth proposes to cut Federal
income taxes by one-third over three years — increasing the
deficit by $12 billion the first year and $38 billion by the
third year — figures, I might add, that were developed by
supporters of Roth-Kemp.
We do not quarrel with the use of tax reductions, in a slack
economy, to stimulate growth. But huge tax cuts in an economy
already plagued by inflation is irresponsible. Such cuts would
push consumer demand far beyond our capacity to produce goods
that could satisfy demand. The inflation that would result would
simply undo all the benefits envisioned by the promoters of the
Kemp-Roth bill.

-5-

Budget restraint and moderate tax cuts, however, are not our
only economic policies.
To bring down the wage-price spiral, we are continuing
President Carter's deceleration program, seeking voluntary
restraint from both business and labor.
In the early months of this program we received considerable
support from the business community, and we are seeking to
sustain that cooperative spirit.
Also, we are proceeding with specific programs to relieve
the very serious problem of structural unemployment. Besides the
obvious personal hardships these programs can relieve, we can
help ease inflation by training the hard-core unemployed,
expanding the pool of skilled labor available to businesses,
thereby reducing inflationary pressures caused by tight labor
markets •
Finally, we are continuing to push for Congressional
approval of the President's energy program. An effective energy
program for this nation is the single most important step we can
take to reduce our balance of payments deficit.
Last year, about $45 billion went overseas to pay for
imported oil ~ an unprecedented drain on our domestic income
stream — and an unnecessary burden on our economy. While we can
expect some easing of that payments deficit in coming months, we
can restore stability to the dollar only when we significantly
curb our appetite for imported oil.
That, briefly, is the shape of the Administration's economic
program. We consider it an important fulfillment of the pledge
we made last fall — that we would put in place a clear,
consistent economic game plan — and that business leaders would
participate in forming that plan.
We've set our priorities, and made clear that our first
priority is to fight inflation, for without control of inflation
we cannot have a healthy, growing private sector.
So now it is largely up to you. If we are to succeed, these
policies need and deserve your strong support. You, as the
leaders most concerned about your community's economic needs and
the impact of proper handling of resources on those needs, are
the logical people to assure the success of a reasonable economic
plan.
0OO0

For Release Upon Delivery
Expected at 10:00 a.m.
STATEMENT OF
DANIEL I. HALPERIN, ACTING DEPUTY ASSISTANT SECRETARY
DEPARTMENT OF THE TREASURY, OFFICE OF TAX POLICY
BEFORE THE
SUBCOMMITTEE ON MISCELLANEOUS REVENUE MEASURES
OF THE COMMITTEE ON WAYS AND MEANS
August 11, 1978
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the
views of the Treasury Department on the eleven miscellaneous
bills under current consideration by the Subcommittee. The
Treasury Department position on each of these bills is
summarized in Exhibit A to this statement.
In our testimony to this Subcommittee we have urged
extreme caution in the use of the Subcommittee as a vehicle
through which special exceptions to generally applicable
rules are created for particular taxpayers. All such claims
must be carefully examined and reasonable people may reach
opposite conclusions on the merits. However, we must all
recognize that ad hoc solutions inevitably increase the
complexity of the Code, invite other taxpayers to seek
- similar relief and, unless scrupulously drafted, may create
new potentials for abuse.
B-1101

2

H.R. 12846 (Investment tax credit for poultry structures)
H.R. 12846 is an example of this situation. This bill
would amend Code section 48(a)(1) to make eligible for the
investment credit buildings used solely for the raising of
poultry and for related work and maintenance space. The
provision would be effective for taxable years ending on or
after August 15, 1971.
Under current law, buildings and their structural
components are generally not eligible for the investment
credit. Certain special purpose structures are eligible for
the credit but only if the structure houses property used as
an integral part of a production activity and the structure
is so closely related to the use of such property that it is
clearly expected to be replaced at the same time as the
property that it houses is replaced. Thus, H.R. 12846 would
treat poultry structures as eligible for the credit even
though under current law they are generally ineligible.
We have proposed expanding the investment credit to all
industrial structures. Under our proposal these poultry
structures would be eligible for the credit. However, we do
not support H.R. 12846 since we believe that extension of the
credit to industrial structures should be done on a general,
rather than a piecemeal basis. Also, from the standpoint of
equity, we do not consider it appropriate to favor
investments in buildings used to house poultry raising
facilities, over investments in other industrial structures.
Finally, H.R. 12846 would apply retroactively to August 15,
1971. This presumably is to resolve in taxpayers' favor
pending disputes between taxpayers and the Internal Revenue
Service. We oppose this retroactive effective date.
H.R. 12395 ("Independent Local Newspapers Act of 1978")
H.R. 12395, designed to provide tax relief to those who
own independent "local" newspapers, is another example of
specific relief legislation.
The bill is divided into two principal parts. The first
permits the establishment of a trust by an independent
v
"local" newspaper for the purpose of paying the estate tax
attributable to any owner's interest in the business. The
trust must have an independent trustee and its corpus may be
invested only in United States obligations. The value of the
trust cannot exceed 70 percent of the value of the owner's
interest in the business. The income earned on the trusteed

3
assets will be exempt from tax. The transfer of assets to
the trust is deductible by the newspaper business, but is
also excluded from the taxable income of the owner. The
corpus of the trust is excluded from the owner's gross estate
and the estate does not realize income when its estate tax
liability is discharged by the trust.
t
The newspaper must have all its publishing offices
located in a single state, and if it is a partnership or
corporation, it cannot be traded on an established securities
market. Deductions for transfers from the business to the
trust are limited to 50 percent of the business profits.
The second part of the bill provides for an elective
deferral of the estate tax attributable to the newspaper
interest not otherwise paid from the assets of the estate tax
payment trust essentially on the same terms as Code section
6166, with the same preferential 4 percent interest rate but
without regard to the size of the interest in relation to the
owner's estate.
I would like to take a few moments to examine the major
aspects of the bill. First, the bill permits a deduction for
earnings diverted to the estate tax payment trust. Although
the bill provides that such a deduction is allowable under
section 162, the payment in no way can be said to meet the
"ordinary and necessary" business expense criteria of that
section. Nor, is there in the tax law any other provision
similarly allowing a deduction for amounts to be used to pay
death taxes.
Second, the bill provides that the funds transferred to
the estate tax payment trust will not be included in taxable
income by the owner. To the extent that the newspaper
business is held in corporate form, this payment would in all
other cases be treated as a taxable dividend.
Third, the exemption of trust earnings is contrary to
existing law which would normally, in this case, treat the
beneficiary as the owner of the trust and taxable on its
income.
Fourth, exclusion of the corpus of the trust from the
owner's gross estate violates existing principles which would
include in a decedent's estate any asset in which the
decedent or his estate had an interest.

4

Finally, if it was appropriate to exclude the funding
and earnings of the trust from the decedent's income, then
the exclusion from estate income of the amount paid by the
trust to relieve the estate of its estate tax liability
contravenes the basic income tax rule that discharge of an
obligation to another results in income to the party whose
obligation has been discharged.
The proponents of this bill may argue that many of its
provisions are analogous to provisions of existing law. For
instance, there are provisions in the deferred compensation
area dealing with business deductions, exclusions from
income, tax-exempt trusts, and estate tax exclusions. But
this is a poor analogy. First, in the employee plan area the
law does not discriminate between industries or businesses.
Second, although deductions are allowed at the business
level, these deductions are allowed only insofar as they meet
the "ordinary and necessary" standards of sections 162 or
212. Third, although the employee participating in a
retirement plan is not taxed currently as contributions are
set aside for him by his employer, those amounts and their
accumulated earnings are taxed to the employee, or his heirs,
when received. Finally, the estate tax exclusion for certain
employee benefits is limited to benefits payable as annuities
and does not extend to lump-sum payments. Furthermore, this
exclusion is specifically not applicable to the extent the
payment is made to or for the benefit of the decedent's
estate.
Apart from its significant departure from accepted tax
principles the bill has other deficiencies. The benefits are
available to any shareholder of an independent "local"
newspaper, no matter how many shares are owned and without
regard to whether such ownership creates an estate tax
liquidity problem. Moreover, there is no provision for the
recapture of benefits if the family of the owner does not
continue the operation of the local newspaper.
While we are sympathetic to the plight of some owners of
small businesses in planning the payment of estate taxes
while retaining control of their business in the heirs, we
oppose this special relief for one group of "small
businessmen." We well understand that these problems have in
some cases increased following the enactment of the Tax
Reform Act of 1976. In particular, there is now a greater
likelihood of a significant income tax liability in the event
that a business interest is sold to provide funds for the
payment of estate taxes.

5

It must be noted, however, that present law already
provides relief for small business owners and their heirs.
Section 303 provides that in certain cases the redemption of
stock by a corporation to pay estate taxes will be treated as
a redemption and thus subject to capital gains tax rather
than as a dividend subject to ordinary income tax. Also, if
a portion of the business must be sold to generate funds to
pay estate taxes, the gain realized will generally be taxed
at the capital gains rate. Further, the transaction can
often be structured as an installment sale, in which case the
payment of the income tax is deferred over the installment
payment period.
In computing the estate tax, there are special relief
provisions. In the 1976 Act, the amount of property which
may be passed without being subject to the estate tax was
increased from $60,000 to $175,000. Also, the marital
deduction for transfers to surviving spouses, which before
the 1976 Act was limited to one-half the estate, was changed
to a limit of the greater of 50 percent of the value of the
gross estate or $250,000.
Finally, the payment of the estate tax may be deferred
where a business interest constitutes a major part of the
estate. Under section 6161(a) the time for payment of the
estate tax may be extended for up to 10 years upon a showing
of reasonable cause. Reasonable cause exists when an estate
consists largely of a closely held business and does not have
sufficient funds to pay the tax on time, or must sell assets
to pay the tax at a sacrifice price. In section 6166 a fiveyear deferral and 10-year installment payment is allowed if
the value of an interest in a closely held business exceeds
65 percent of the adjusted gross estate. Finally, section
6166A is applicable to a broader number of situations, those
in which the value of the closely held business interest is
either 35 percent of the gross estate or 50 percent of the
taxable estate. Under that section the estate tax
attributable to the closely held business interest may be
paid in up to 10 annual installments. As valuable as a free
and vigorous press is to this nation, we do not believe that
an ownership interest in such business should be entirely
-free from tax. If the independent local newspaper industry
has particular problems arising from its economic
circumstances, the tax expenditure method may be one of the
least controllable method of dealing with them.
Consideration should be given to other means of relieving the
burdens of payment outside of the framework of the tax laws.
For instance, special loan programs might be considered. To

6
the extent the value of these businesses is being
artificially escalated by takeover bids from larger
newspapers, consideration might be given to the remedies
available under anti-trust law.
The adoption of this bill would provide a wedge to be
used again and again by other segments of society, each
arguing its own importance. We do not believe in this
piecemeal approach to legislation. There are existing
provisions intended to minimize the problems inherent in the
payment of taxes. If they are inadequate they should be
reviewed in a comprehensive and not an ad hoc manner.
H.R. 8533 (Exemptions for income received by certain taxexempt organizations from bingo and similar games)
These four bills deal with the tax treatment of income
from the conduct of bingo and similar games of chance by
certain tax-exempt organizations. Under H.R. 7460 and H.R.
13405 the unrelated business income tax would not be
applicable to the income from such games conducted by
organizations exempt under Code section 501(a) if wagers are
placed, winners determined and prizes distributed in the
presence of the participants. The bills also require that
such games not be "ordinarily carried on a commercial
hbasis;" and that the conduct of the activity not violate
applicable local law. H.R. 8533, H.R. 9429 and H.R. 13405
would exempt from tax income from bingo and similar games
when conducted by political organizations subject to Code
section 527.
The Treasury generally is opposed to the creation of
special exceptions from the unrelated business income tax.
One policy underlying the unrelated business income tax is to
insure that exempt organizations do not compete on an unfair
competitive advantage with commercial enterprises. Also,
bingo and similar games are not substantially related, apart
from the need of tax-exempt organizations for funds, to the
purpose or function constituting the basis for the
organization's exemption. In this context, the conduct of
bingo is unrelated, may compete with commercial enterprises
and thus should be taxable.
There is an exception under current law, Code section
513(a)(1), which exempts income from these games from the
unrelated business income tax if the activity is carried on
with volunteer labor. We do not regard this exception as
inappropriate since an organization is not likely to engage
in large scale, commercial activities where they are
conducted through volunteers. Thus, we would not object to a
similar exception in the case of political organizations.

7

If the Committee believes that the tax exemption for
income from certain games should be extended, we would urge
that the exception be limited to bingo and should not be
extended to other games of chance which are essentially
casino activities. Furthermore, we would limit the exemption
to situations where the conduct of bingo games by exempt
organizations is specifically sanctioned by applicable State
or local law and, under such law, may not be carried on by
taxable enterprises. If the legislation were restricted in
this fashion it would be more consistent with the underlying
policy of the unrelated business income tax. Finally, the
bills to extend the exemption from unrelated business income
tax to tax-exempt organizations which carry on the activity
with paid employees would apply retroactively to 1969 and
subsequent years. This would have the effect of overturning
two Court decisions, which we oppose.
H.R. 8615 (Income averaging for certain taxpayers who have
changed marital status)
We understand that the bill is directed at the situation
in which a taxpayer is attributed base period income earned
by a former spouse for purposes of determining his
eligibility for income averaging. Under Code section
1304(c)(2), during any base period year unless a taxpayer and
spouse filed a joint return and the taxpayer had no other
spouse in that year, that base period year income is the
greatest of (1) the individual's separate income and
deductions for that year; (2) 50 percent of the total of both
his and his former spouse's separate income and deductions
for that year; or (3) 50 percent of the total of his and his
present spouse's separate income and deductions for that
year. Thus, even if the taxpayer's former spouse earned 100
percent of the taxable income for a base period year, the
taxpayer's base period income would be 50 percent of such
taxable income. This will generally result in the lowerincome taxpayer failing to qualify for the benefits of income
averaging, because his current income will not exceed by
$3,000 120 percent of his base period income.
We believe that present law operates properly in the
situation described above. The low-income spouse received a
benefit during the base period years from filing a joint
return with the high-income spouse, since the household
enjoyed greater after-tax income in those years as a result
of the joint return. Thus, we are opposed to the bill.

8
H.R. 13047 (Tax accounting rules for trading stamps and
coupons redeemed after the close of the taxable
year)
The last bill, on which I will comment, concerns the
proper tax accounting treatment of certain trading stamps and
coupons redeemed after the close of a taxable year.
Specifically, since 1918 the income tax regulations have
allowed taxpayers who issue certain trading stamps and
premium coupons to exclude from gross receipts the estimated
redemption cost of stamps and coupons outstanding at the end
of the year. The regulation (Treasury Regulation section
1.451-4) applies only to trading stamps and premium coupons
issued "with sales" and which are "redeemable in cash,
merchandise, or other property." H.R. 13047 would codify the
regulation and extend its application to discount coupons
which allow "cents-off" on the purchase price of merchandise
or property.
The Treasury is opposed to this bill. We are currently
studying the problem of the proper accounting rules for
discount coupons and expect shortly to propose an alternative
solution. However, I would like to discuss with you the
various issues and the considerations involved.
In 1973 the Internal Revenue Service ruled that the
trading stamp and premium coupon regulation does not apply to
so-called "media" type discount coupons. "Media" coupons are
those which are distributed gratuitously through the mail or
in newspaper or magazine advertisements. In June of this
year the Internal Revenue Service ruled that the regulation
also does not apply to so-called "in pak/on pak" discount
coupons. These are coupons which are either inside the
package of the product or on the outside of the package. The
IRS ruling regarding "media" coupons relied on the fact that
they are not issued "with sales" as required by the
regulations. Both rulings were based on the underlying
intent of the regulation that the use of property, such as
trading stamps and premium coupons, not be conditioned on a
future event. The issuer of discount coupons has no
obligation to redeem them unless and until the consumer
purchases the requisite product. Trading stamps and premium
coupons, on the other hand, are subject to redemption
immediately.
We believe that the IRS's rulings are proper. We
acknowledge, however, that there may not appear to be a great
difference between trading stamps and premium coupons on one
hand and discount coupons on the other. In fact, we

9
understand that a number of discount coupon issuers have
relied on the trading stamp and premium coupon regulation in
creating a reserve for their future redemptions, while taking
a current tax deduction. Thus, we believe that any confusion
in the tax treatment of discount coupons should be promptly
resolved. However, we do not believe that the proper result
is simply to add discount coupons to the trading stamp and
premium coupon rules. A reserve for discount coupons, in our
view, raises a number of far-reaching tax policy issues
concerning the proper measure of gross income and the
allowability of reserves for estimated future expenses.
The rationale of the trading stamps and premium coupons
regulation is that when the consumer has purchased the
product and has received the stamps or coupons, he has
purchased two things — the product and the stamps or
coupons. Conversely, the seller has sold the product and the
stamps or coupons. When a taxpayer sells property, his gross
income is not the revenue he receives, but is the revenue
less his cost of the product. With respect to the portion of
the sale that relates to the trading stamps or premium
coupons, were we to tax the full amount, we would be taxing
the gross receipt. However, consistent with general tax
concepts the seller offsets the gross receipt with the
estimated cost of the goods he is selling. This cost is the
estimated cost of redemptions. This is consistent with
current tax accounting rules.
The case of trading stamp companies is clearer. What
they are selling is the merchandise consumers turn their
stamps in for. Revenue is received when they sell the stamps
to retail stores. When that sale takes place, they have sold
property and the gain on the sale is the difference between
the revenue and the cost of the merchandise that will be used
when the stamps are redeemed.
Discount coupons, however, are a different matter. I
will first discuss "media" coupons, i.e., those that are
issued directly or in the print media. When an issuer mails
out thousands of cents-off coupons, he has no fixed immediate
obligation to redeem them. The consumer must purchase the
product first. These discount coupons are in the nature of
promotion expenses and we understand that it is in this
manner that most issuers include them in their financial
statements. General tax rules provide that an expense does
not accrue until all events have occurred which determine the
fact of liability and the amount thereof can be determined
with reasonable accuracy.* We understand that the issuer may
not have a legal obligation to redeem discount coupons until

10
the redemption center has verified their validity and
compliance with the applicable coupon agreement. The
earliest time for accrual may be when the consumer has used
the coupon to purchase the product. However, since these
media coupons are not issued with the sales of the product,
there is no issue of proper determination of gross income on
these sales. It is strictly a question of a reserve for
future expenses, which as a general rule is not allowed by
the Internal Revenue Code.
The issue presented by this bill is whether these
transactions should be given a special accrual rule.
Currently there are areas within the tax law where reserves
are allowed; most notably, the bad debt reserve and the
reserve for accrued vacation pay. However, it should be
noted that in 1954 Congress enacted Code sections 452 and 462
which changed the accrual rules by allowing deferral of
prepaid income and accrual of reserves for estimated future
expenses and, less than a year later, repealed these sections
retroactively. In large part the repeal was due to the
unanticipated large revenue loss for the adjustment on the
change of method of accounting for these items. Since that
time, the reserve issue has been raised periodically and
Congress has been very cautious about allowing such rules.
Thus, we believe that very careful consideration should be
given before a reserve for future expenses is allowed with
respect to media type discount coupons.
With respect to in pak/on pak coupons, the issues are
slightly different. We recognize that there is a reasonable
argument that like trading stamps and unlike media coupons,
they are issued with sales and part of the cost of the
product relates to the coupon. However, to which sale do
they relate — the current one or the future one? We do not
believe there is a definite answer. If it is the latter —
the future sale, in pak/on pak coupons are no more acceptable
than media coupons. In any event, like media coupons and
unlike trading stamps the obligation to redeem them is
contingent on a future purchase.
I would like to discuss one more specific issue
presented in the bill. The current trading stamp and premium
coupon regulation allows an exclusion only for the cost of
vthe cash or merchandise of the future redemption of the stamp
or coupon. No accrual of related expenses incurred to
service such redemptions, such as service center costs, is
allowed. These expenses clearly do not accrue until later,
when the service has been performed. However, with respect
to discount coupons, this bill would allow the accrual of the

11
service fee paid to the retailer and the redemption center.
This would allow a current deduction for services to be
rendered and paid for in the future. We strongly oppose such
an accrual.
As I previously stated, we are presently studying these
issues concerning the proper treatment of discount coupons.
We believe they are economically different than trading
stamps and premium coupons and under current rules of tax
accounting should not be treated the same. We believe we can
resolve the problem shortly with a fair and equitable rule
consistent with current tax law.
* Treasury Regulation section 1.461-1 (a) (2).

Exhibit A

Summary of Treasury Positions
1. H.R. 8533 (Exemption from income received by certain taxexempt organizations from bingo and similar games)
The Treasury supports these bills only on a prospective
basis and only with respect to bingo games where they are
conducted in accordance with State and local law and pursuant
to such law may not be conducted by profit-making businesses.
2. H.R. 8615 (Income averaging for certain taxpayers who
have changed marital status)
The Treasury opposes this bill.
3. H.R. 8696 (Tax treatment of retroactive determination of
eligibility for disability compensation from the
Veteran's Administration)
The Treasury has no objection to this bill.
4. H.R. 12395 ("Independent Local Newspaper Act")
The Treasury opposes this bill.
5. H.R. 12846 (Investment credit for poultry structures)
The Treasury opposes this bill.
6. H.R. 12950 (Nonrecognition of gain on the sale of
residence for certain members of the Armed Forces)
The Treasury has no objection to this bill.
7. H.R. 13047 (Tax accounting rules for trading stamps and
coupons redeemed after the close of the taxable year)
The Treasury opposes this bill. We are currently
studying the problem and expect shortly to propose an
alternative solution.

2

8.

H.R. 13092 (Small tax case procedures of the Tax Court)

The Treasury supports this bill. However, we recommend
that it be made clear that the Government will have the right
in appropriate circumstances to remove cases from the small
tax case category.

Exhibit B
Treasury Comments on H.R. 13092, 8696 and 12950
H.R. 13092 (Small tax case procedures of the Tax Court
and authority of Tax Court commissioners)
The Treasury Department supports this bill which would
increase the jurisdictional limits for small tax cases from
$1,500 to $5,000. This is a desirable step to help relieve
the Tax Court judges of the need to deal with mainly routine
factual cases. At the same time, however, it is important
that the Government have the right to insure the removal of
appropriate cases from the small tax case category. We
recommend that the legislative history recognize the
authority of the Tax Court to remove a case from the small
case category when the orderly conduct of the work of the
Court or the administration of the revenue laws call for a
regular trial of the case. We will be glad to consult
with the staff of the Joint Committee and the Tax Court in
drafting appropriate language.

2

H.R. 8696 (Tax treatment of retroactive determination of
eligibility for disability compensation from the
x
Veteran's Administration)
.
The Treasury has no objection to this bill.; On March
18, 1978 the Internal Revenue Service published a ruling
which would interpret existing law in a manner substantially
similar to the provisions of this bill. In addition, the
bill has two desirable provisions not in Rev. Rul. 78-161:
it would allow taxpayers a one-year period during which to
apply for refunds after a retroactive determination had been
made with respect to a closed tax year and also would limit
the interest due on any refund allowed by the bill to the
period commencing after the Veteran's Administration
determination.

3

H.R. 12950 (Nonrecognition of gain on sale of residence for
certain members of the Armed Forces)
The Treasury Department does not oppose this bill which
would extend the nonrecognition of gain period on the sale of
a principal residence by a members of the Armed Forces who
are stationed outside of the United States or who are
required to reside in Government-owned quarters for at least
a one-year period after the date on which the taxpayer is no
longer stationed outside the United States or is no longer
required to reside in Government-owned quarters.

FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m.
STATEMENT OF
DONALD C. LUBICK
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE
TASK FORCE ON EMPLOYEE FRINGE BENEFITS
OF THE WAYS AND MEANS COMMITTEE
August 14, 1978
Mr. Chairman and Members of this Task Force:
I am pleased to appear here today to comment on the tax
treatment of employee fringe benefits.
The income tax treatment of most types of fringe benefits
is clear. Unless specifically exempted from tax by statute,
the Internal Revenue Code requires that fringe benefits be
included in income, and the courts have upheld this requirement over many years in many different circumstances.
The uncertainty which exists under present law is
limited primarily to two types of fringe benefits. One type
is the fringe benefit which is a product of the employer's
business -- such as transportation provided by a transportation company, education provided by a university, and
discounts provided by a company which produces or sells the
discounted goods. Another type is the fringe benefit which
is indirectly related to the employee's job, such as limousines
for commuting and "supper money".
The primary question before this Task Force, then, is
whether these two types of fringe benefits should be taxable.
The answer to this question will turn on identification of
the true nature of the particular benefit and the administrative feasibility of subjecting it to tax. I shall, at a
later point, suggest some principles to be applied in deciding
these issues. However, I would like first to discuss the
considerations of equity and economic efficiency which
demonstrate that these issues must be squarely faced.
^-1132

- 2 Inequity and Economic Inefficiency Caused
by Exempting Fringe Benefits From Tax
Fringe benefits come in a wide variety of shapes and
sizes. They also vary widely in their patterns of distribution. As the Commissioner has pointed out, the nature and
extent of fringe benefits vary from industry to industry,
from employer to employer within industries, and from
employee to employee in the case of a single employer. For
these reasons, exempting fringe benefits from tax or valuing
them at less than real value creates substantial tax inequities
among employees.
Fairness requires that taxpayers with equal incomes be
treated equally for income tax purposes. Compensation
received in kind may be just as valuable as compensation
received in cash. When fringe benefits are exempted from
tax, taxpayers with equal incomes pay unequal taxes.
Exempting fringe benefits from tax produces unfairness
not only among employees at the same income level, but also
among employees at different income levels. When a fringe
benefit is exempted from tax, the exemption is of greater
value to a high-income taxpayer than to a low-income taxpayer. For a person in the highest tax bracket, an exemption
provides 70 cents in tax savings for every dollar's worth of
fringe benefits received. For a person in the lowest tax
bracket, the exemption is worth only 14 cents. For a person
with income too low to be taxed, the exemption is worth
nothing.
There may be a social welfare purpose which justifies
these horizontal and vertical inequities for the statutory
exclusions, such as for pensions or life insurance, which
already exist. No such purpose exists with respect to the
cases which have become controversial.
When a fringe benefit is exempted from tax, the resulting tax savings to the employee makes the fringe benefit
worth more than cash compensation of equal value. Suppose,
for example, that an employee in the 50 percent tax bracket
receives as a fringe benefit an item worth $100. In order
to purchase that benefit out of after-tax dollars, the
employee would have to earn $200 in wages, pay tax on the
wages, and then use the remainder to purchase the item. It
is true that the item may not be worth $100 to the employee;
rnat is, the employee may only be willing to pay $80 in
a
rea
< i * a g e S f ° r t h e i t e m ' s t i 1 1 / since that would
equire $160 in before-tax wages, the employee would prefer

- 3 ~
the $100 fringe benefit to any amount of wages up to $160.
Thus, exempting fringe benefits from tax creates a strong
incentive to convert cash compensation into tax-free fringe
benefits.
This incentive to provide tax-free fringe benefits
instead of cash has unfortunate effects. First, it is
likely to result in significant erosion of the tax base.
This, in turn, would make it necessary to increase tax rates
for items of income which are not exempt, exacerbating tax
inequities among employees which resulted from exempting
fringe benefits in the first place.
As taxpayers perceive themselves as being treated
unfairly in comparison to other taxpayers, they may begin to
lose confidence in the income tax system and in government.
In a tax system that is dependent upon self-reporting, such
a decline in confidence may lead to a decline in compliance.
Second, an incentive to provide tax-free fringe benefits
instead of cash reduces economic efficiency. When fringe
benefits are exempted from tax, employees demand and employers
provide more compensation in the form of those benefits than
they would if the benefits were taxed. This shift in demand
causes a distortion in the economy. The tax law is interfering with free choice in the allocation of economic resources.
Third, exempting fringe benefits from tax leads to
distortions in labor markets and creates inequities among
employers. Employees accept less total compensation if a
portion is in tax-free fringe benefits than if the entire
compensation is in cash. In the example I gave before, an
employer offering less than $160 in wages could not compete
with an employer offering the $100 fringe benefit. Thus,
employers who are able to provide compensation in the form
of tax-free fringe benefits are given a competitive advantage
over employers who are not. When fringe benefits are exempted
from tax, employees shift to the tax-preferred industries.
Employers who do not want to play these games, who want to
pay cash compensation, who want to concentrate on increasing
production rather than finding ways to take advantage of tax
subsidies, or who simply are limited in the extent to which
they can offer fringe benefits, are heavily penalized.
In sura, exempting fringe benefits from tax leads to
inequities among employees and employers and distortions in
demand and in labor markets. These inequities and distortions
imply added complexity in the economy and loss of welfare to
individuals.

- 4 Practical Problems in Taxing Fringe Benefits
Despite these compelling policy reasons for taxing
fringe benefits, some claim that practical problems make it
impossible to do so. They point to difficulties in distinguishing between fringe benefits and working conditions.
They point to problems in valuing fringe benefits. And they
point to the administrative burdens of accounting for many
benefits of small value.
While these obstacles to taxing fringe benefits may be
significant, they should not be insurmountable. However,
problems in identifying, valuing, and reporting fringe
benefits are an appropriate subject for public comment
before this Task Force. We can suggest some general guidelines.
Working Conditions Distinguished
Some noncash items provided by employers to employees
are so closely connected with the employee's performance of
his job that the items would not be considered compensation
and therefore would not be taxed. Items provided to enable
the employee to perform the job, rather than to compensate
him for performing it, are commonly called working conditions.
The basic factor in distinguishing between working
conditions and other noncash items is the relationship
between the item and the employee's performance of his job.
Generally, items which are used by the employee in performing
his job should be considered working conditions, at least to
the extent of that use.
Many working conditions are easy to recognize. For
example, tools provided by an employer for an employee's use
on the job are working conditions. Offices also are working
conditions, even if they have features designed to make work
more pleasant, such as air conditioning and piped-in music.
Even if those features do, in fact, make work more pleasant,
the office still is a working condition.
Many items which are not working conditions also are
easy to recognize. An all-expenses-paid vacation at a
luxurious resort may improve an employee's attitude toward
his job, but that vacation is no more a working condition
than is a $5,000 bonus.

- 5 In determining whether an item is used by the employee
in performing his job, it is relevant to look at where and
when the item is used. Items are more likely to be working
conditions if they are used by the employee at his place of
employment during normal working hours. For example, if
an automobile manufacturer provides one of its executives
with a new car for personal use and requires that the
executive report his reaction to the car, the use of the car
is not likely to be a working condition even though it must
be used in order to write the report.
Even if an item is not used in performing the employee's
job, it still may be appropriate to consider it a working
condition if it plays an essential role in enabling the
employee to perform the job. For example, lodging provided
at the job site because the employee is required to be
available for duty at all times, is excludable from income
under Code section 119The relationship between an item and the employee's job
should be scrutinized with particular care if the item is
essentially personal in nature. By "essentially personal"
items, I mean those which individuals ordinarily pay for out
of after-tax dollars, such as food, clothing, shelter, and
any item provided to a member of the employee's family.
Items which are essentially personal are likely to be
compensatory. If exempted from tax, they are also likely to
be a primary source of inequity among taxpayers. In developing rules to determine which essentially personal benefits
are to be subject to tax, it would seem appropriate to focus
on whether the cost of an item would be deductible if paid
for by the employee. Since personal expenses such as meals
and commuting are not deductible, the creation of rules of
inclusion which deviate too far from the rules regarding
employee deductibility could result in substantial inequity.
Even when use of an item is noncompensatory at a
particular time, allocation between periods of compensatory
and noncompensatory use should be made where it is feasible
to do so. Such allocation often is possible where personal
and business use of an item do not occur simultaneously.
For example, a salesperson may use an employer-provided
automobile during the day to travel to customers, and may
use the same automobile during the evening for personal
purposes. In such a case, allocation of value should be
made between compensatory and noncompensatory use.

- 6 -

Valuation
The next question is how taxable fringe benefits should
be valued. As the Commissioner has said, the regulations
under section 61 require the recipient of compensation paid
in any form other than cash to include in income the "fair
market value" of the compensation. In addition, a specific
statutory provision, section 83 of the Code, provides that
where "property" has been transferred in connection with the
performance of services, the recipient is required to include
in income the excess of the fair market value of the property
over the amount paid for it. For these purposes, "fair
market value" is the price which would be paid for the
benefit if it were purchased in an informed marketplace
transaction. This standard has been generally applied by
the courts in determining the value of in-kind benefits and
was specifically adopted by the Staff of the Joint Committee
on Taxation in determining the amount of income President
Nixon realized on account of the personal use of government
aircraft by his family and friends.
Some assert that it is unfair to treat a fringe benefit
as having a value equal to its market price because fringe
benefits are generally nontransferable and are substituted
for cash in a process which depends upon the relative bargaining strengths of the employer and the employee. They conclude
that the value of the benefit should be equal to the cash
payment the employee would demand if the benefit were not
available. In other words, they assert that subjective
value is the appropriate income measure.
Subjective value is a superficially appealing choice.
Indeed, it was adopted once by the Tax Court in determining
the value of first class steamship tickets won as a prize on
a radio quiz. Assuming accurate measurement of the personal
value of the benefit, a system based on personal value would
achieve a type of tax neutrality. It would avoid establishing a tax incentive to provide benefits in kind, without
creating an offsetting tax disincentive. By definition, tax
treatment would not determine whether compensation is
received in cash or in kind because tax liability would not
vary according to the form of the payment.
Unfortunately, however, it would be administratively
impossible to tax fringe benefits on the basis of their
subjective value to the recipient. It is unreasonable to
expect a self-assessment tax system to function effectively
it income is subjectively determined on a case-by-case
asis. Problems of accurate withholding and information
reporting under such a system are virtually insoluble.

- 7 Of course, even if it is agreed that fringe benefits
should be taxed on the basis of objective fair market value,
a number of important questions remain. An item may have
more than one objective fair market value. For example,
when the Joint Committee Staff determined the value of the
economic benefit to President Nixon of personal use of
government aircraft, it had to choose between two "fair
market" values — the per-passenger cost of first class air
fare on a commercial airline, or an allocated portion of the
cost of renting a comparable plane. It chose the former.
The same issue arises in other contexts. For example,
if an employee discount is treated as a taxable fringe
benefit, should the value of the discount be determined by
reference to the price of the discounted item at the time of
purchase, or the lowest price at which the item has been
offered to the public within a defined time period?
Further, notwithstanding the fact that the objective
fair market value standard is consistent with generally
accepted valuation standards, it may be appropriate to
consider other alternatives. For example, some suggest that
the objective fair market value standard be adopted as the
base for income inclusion but that the base value be discounted by some percentage to reflect individual utility.
Administrative difficulties of valuation, particularly
those involving withholding, may be alleviated by the creation
of generally applicable guidelines or safe harbor rules
regarding either the value of the benefit or the amount to
be withheld. As an illustration of the former, the value of
a personal flight on a company airplane could be determined
by reference to first class airfare bewteen the points. As
to the latter, an employer who allows an employee to use, in
nonworking hours, a company car usually used for business
could be deemed to have satisfied his withholding obligation
by withholding based on a fixed dollar amount.
Accounting and Reporting
The taxability of noncash items provided by employers
to employees should depend not only on the nature of the
item, but also on the administrative implications of taxing
it. Tax simplicity is as important as tax equity. Unreasonably expensive recordkeeping requirements should not
be imposed on employers. Nor should Internal Revenue Service
audit resources be frittered away.

- 8 Compensation in kind should not be taxed if it would be
administratively impractical to do so. If the total combined costs of an employer in accounting for an item and of
the government in collecting tax on it would be unreasonably
large in relation to the value of the item, the item should
not be subject to tax.
When looking at specific, isolated examples of employerprovided items, it is not difficult to suggest some which
should be exempt from tax for administrative reasons. For
example, Revenue Ruling 59-58, 1959-1 C.B. 17, holds that
the value of a turkey or ham provided by an employer to each
of his employees at Christmas or a comparable holiday should
be excludable from income. Similarly, employees should not
be taxed on the value of attending their employer's annual
company picnic.
Rules for determining which benefits should be excluded
for administrative reasons (de minimis rules) could apply on
an item-by-item basis. For example, an item whose value did
not exceed a specified dollar amount could be excludable
from income. A discount on an employee purchase could be
excludable if the sales price of the item purchased did not
exceed a specified dollar amount, or if the discount did not
exceed a specified percentage of the sales price. We are
not suggesting that we have decided upon these rules.
Rather, we raise them as examples of the types of solutions
the public may wish to address in its comments.
We note that applying de minimis rules solely on an
item-by-item basis could allow large total amounts to be
excluded from income. A Christmas dinner may be de minimis,
but a year of free meals in an executive dining room may not
be. A set of china may not be de minimis, and every piece
of china in the set can be purchased separately.
To avoid becoming a sieve, ideally de minimis rules
should take into account in some way the aggregate value of
noncash items provided by an employer to an employee during
the year. We recognize the potential difficulty of accounting for numerous small items, but we believe this difficulty
can be avoided. Reasonable approximation of value may well
be appropriate for some types of items. We also note that
employers already keep records of the amounts and recipients
o£ many types of fringe benefits. They may do so for purposes
or. tax deductibility, internal cost accounting, or disclosure
required by the Securities and Exchange Commission.

- 9 In conclusion, we note that most types of fringe
benefits are clearly subject to tax and that an exemption
for others would create serious inequities and economic
distortions. We recognize that there are potential administrative problems in taxing some types of fringe benefits.
However, we believe these problems can be solved. Hearings
before this Task Force could provide the information needed
to do so.
o 0 o

FOR IMMEDIATE RELEASE
August 11, 1978

Contact:

George G. Ross
202/566-2356

TREASURY RELEASES RESULTS OF
NATIONAL ASSOCIATES STUDY OF PENSION PLAN
The Treasury Department today released the results of
a study designed to assist in evaluating the impact on small
pension and profit-sharing plans of the Administration's
proposal to change the present pension-social security integration rules in the Internal Revenue Code.
Plans which reduce private pension benefits or contributions based roughly on an employee's anticipated benefits
from social security are said to be "integrated." Under
present law, it is possible for employees whose earnings
are lower than the social security wage base ($17,700 in
1978) to receive little or nothing from an integrated private pension plan.
The study was conducted by National Associates, an
actuarial and consulting firm which services small and large
plans. At the request of the Treasury, and without commitment to the Treasury's position, National Associates
undertook the study of its plans voluntarily in the public
interest and at no cost to the government.
On April 25, 1978, the Treasury released the A. S.
Hansen study which surveyed defined benefit plans only.
That study represented mainly larger plans. The National
Associates study, however, has a good representation both
of defined contribution plans and of smaller plans. The
study is based on a survey of 2,155 plans (1,205 defined
benefit plans and 950 defined contribution plans) selected
at random. Thirteen offices affiliated with National Associates participated in the survey. The participating offices
are located in Atlanta, Baltimore, Chicago, Cleveland,
Detroit, Honolulu, Houston, Los Angeles, New York, Philadelphia,
Providence, San Francisco, and Seattle.
A defined benefit plan may be described as one for which
the monthly pension is determined by a formula usually involving the employee's pay and service. In a defined contribution
plan, the benefit depends on the amount in the employee's
account at retirement.
3-1153

- 2 -

The Administration's proposal, part of the President's
1978 tax program, would provide at least some benefits to
those who now are not receiving any benefits, and would
improve the benefits of other participants who are also
affected by present integration rules. In large part,
employees who would benefit most from the proposed change
range from low to moderately paid. They would range from
those with wages considerably below the social security
wage base to those with wages somewhat above that wage base.
The Administration's proposal generally is that plans
can provide pensions based on pay in excess of the social
security wage base no greater than 1.8 times the pensions
based on pay below the social security wage base.
Alternatively, the Administration's proposal will
allow plans integrated by the social security offset
method to use as a maximum offset the same portion of
social security benefits as the portion of pay provided
by the plan formula. For example, a plan could provide
a pension of 50 percent of final average pay reduced by
50 percent of Social Security; or, 60 percent of final
average pay reduced by 60 percent of Social Security.
The National Associates study found that nearly half
of the plans were not integrated and therefore clearly would
not be affected by the President's proposal. Of the 2,155
plans analyzed 1,182 were integrated, or 55 percent. Furthermore, of these 55 percent, more than 200, when tested without
reference to any other employer plans, would clearly meet
the Administration's guidelines.
Evidently a substantial number of integrated pension
plans are maintained by employers who also maintain a nonintegrated defined contribution plan. If those plans were
tested together, as the Administration proposal permits,
even a higher percentage of plans would meet the Administration
test. A number of additional plans would also meet a more
liberalized rule—2.0 instead of 1.8—that has been suggested
by the Administration as a modification to its original
proposal.
The 2,155 plans included in the National Associates
study are sorted into categories of: (1) non-integrated
plans, (2) pure excess plans, (3) step-rate excess plans,
and (4) offset plans.

- 3-

The 1,182 integrated pension plans include 17 percent
which are offset plans and 67 percent which are step-rate
excess plans. Fourteen percent are pure excess plans.
Two percent have frozen benefits.
For further information, contact:
Gabriel Rudney (Treasury) 202/566-5911
Howard Neal (National Associates)

213/626-5542

The National Associates study, "Analysis of the Effect
of Proposed Integration Rules on Small Pension and ProfitSharing Plans," is attached.

o

0

o

- 4 ANALYSIS
OF THE EFFECT OF PROPOSED INTEGRATION RULES
ON SMALL PENSION AND PROFIT SHARING PLANS
Prepared at the Request of the
United States Department of the Treasury
By
NATIONAL ASSOCIATES, INC.

I. Total plans analyzed:
Defined benefit plans 1,205
Defined contribution plans 950
Total 2,155
II. Offices participating are located in the following cities:
Atlanta, Baltimore, Chicago, Cleveland, Detroit, Honolulu,
Houston, Los Angeles, New York, Philadelphia, Providence,
San Francisco, and Seattle.
III. Plans analyzed by type and size (active participants):
Number of Active
Participants

Defined
Benefit

Defined
Contribution

Total

Under 10

675

536

1,211

10 - 25

294

221

515

26 - 100

%

182 146 328

101 - 1,000 54 47 101
TOTAL 1,205 950 2,155
Plans with more than 1,000 participants were omitted from the
analysis; 80% of the surveyed plans and 80% of the integrated
plans analyzed covered 25 or fewer participants.

- 5 -

Plans analyzed, breakdown by type of integration formula:
Defined
Benefit

Defined
Contribution

Not Integrated

252

721

973

Integrated

952

229

1,182

5

6

11

Excess only

155

12

167

Step-rate

596

211

807

Offset

197

-0-

197

1,205

950

2,155

Integration
Formula

Benefits frozen

TOTAL

Total

54% of all plans analyzed are integrated, 79% of the
defined benefit plans are integrated, 23% of the defined
contribution plans are integrated.
Plans analyzed in terms of compliance with the Treasury
Department's proposed integration guidelines (generally
the proposal provides that pensions based on pay in
excess of the integration level can be no greater than
1.8 times pensions based on pay below the integration
level; Social Security "offsets" could be no more than
the portion of pay provided by the plan formula).
Defined
Defined
Effect of Proposal
Benefit Contribution Total
Integrates

123

80

203

Fails to integrate

830

137

967

Unable to determine

-0-

12

12

TOTAL integrated now

953

229

1,182

If the Treasury Department's original recommendations were
adopted, 87% of the integrated defined benefit plans would
require revision, 60% of the integrated defined contribution plans would require revision, and 82% of all integrated
plans would have to be amended.

- 6 -

Detailed analysis, defined benefit plans:
Under 10 10 - 25 26 - 100* 100 - 1000 Total
Not Integrated

178

30

35

9

252

Integrated

49 7

264

147

45

953

1

2

2

5

44

16

3

155

Frozen Benefits -0Excess only
Step-rate
(Integrates)

92

*
i

53

18

8

3

82

Step-rate (Fails
253
to Integrate)

157

82

22

514

Offset
(Integrates)

24

Offset (Fails
to Integrate)

75

41

30

10

156

675

294

182

54

1,205

TOTAL

41

Detailed analysis, defined contribution plans:
Under 10 10 - 25 26 - 100 100 - 1000 Total
Not Integrated

424

144

114

39

721

Integrated

112

77

32

8

229

Frozen accounts

3

1

1

1

6

Excess only

6

5

1

0

12

Step-rate
(Integrates)

44

23

12

1

80

Step-rate
(Fails to
Integrate)

51

46

17

5

119

Step-rate
(Unable to
Determine)

8

2

1

1

12

536

221

146

47

950

TOTAL

- 7 -

VIII.

Detailed analysis of excess and step-rate plans, by
integration level:

Defined Defined
Integration Level

Benefit 1/

Under $6000 per year 96

Contribution

Total

4

100

$6000 - $8400 304

25

329

$8400 - $12,000 38

61

99

Over $12,000 36

133

169

Table I - fixed 2/ 22 7
2/
Table I - current TOTAL 751 22 3 9 74

-0-

227

-0-

50

50

20% of the defined benefit plans adjust automatically
as Social Security benefits adjust (4% step-rate, 16%
offset). 14% of the defined contribution plans adjust
automatically as the Social Security wage base changes
1/ These are almost exclusively flat benefit plans.
Excluded are 197 integrated offset plans and
5 integrated plans with frozen benefits.
1./ Integration level was $8400 per year for employees
retiring in 19 78 under current IRS rulings.

o

0

o

partmentoftheTREASURY
«INGT0N,D.C. 20220

August 14, 1978

'OR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,300 million of 13-week Treasury bills and for $3,401 million
>f 26-week Treasury bills, both series to be issued on August 17, 1978,
are accepted at the Federal Reserve Banks and Treasury today. The details are
is follows:
lANGE OF ACCEPTED
lOMPETITIVE BIDS:

13-week bills
maturing November 16, 1978
Price

High
Low
Average

Discount
Rate

98.265 6.864%
98.255
6.903%
98.259
6.887%

26-week bills
maturing February 15, 1979

Investment
Rate 1/

Discount Investment
Price
Rate
Rate 1/

7.08%
7.12%
7.11%

96.338
96.328
96.330

7.244%
7.263%
7.259%

7.62%
7.64%
7.

Tenders at the low price for the 13-week bills were allotted 77%.
Tenders at the low price for the 26-week bills were allotted 47%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Jcation

Received

Accepted

Received

Accepted

uston
2v York
liladelphia
Leveland
ichmond
ilanta
licago
•• Louis
nneapolis
:
nsas City
lias
n Francisco

$
23,435,000
3,130,015,000
16,325,000
26,760,000
25,050,000
48,825,000
271,570,000
28,180,000
18,580,000
37,010,000
10,835,000
306,445,000

$
23,435,000
1,836,615,000
16,325,000
26,760,000
25,050,000
46,525,000
125,340,000
12,180,000
17,430,000
37,010,000
10,835,000
115,295,000

easury

7,210,000

7,210,000

$
23,360,000
5,356,010,000
12,615,000
38,420,000
14,525,000
25,605,000
211,845,000
25,965,000
19,790,000
24,280,000
7,385,000
337,215,000
7,480,000

$
7,360,000
3,120,405,000
12,615,000
13,420,000
11,575,000
25,605,000
59,195,000
9,965,000
12,140,000
16,405,000
7,385,000
97,865,000
7,480,000

TOTALS

$3,950,240,000

$6,104,495,000

$3,401,415,000^'

$2,300,010,000a/

eludes $332,175,000 noncompetitive tenders from the public.
clucies $174,675,000 noncompetitive tenders from the public.
u
ivalent coupon-issue yield.
-04

prmentoftheJREASURY
SHINGTON, D.C. 20220

|||f

TELEPHONE 566-2041

For Release Upon Delivery
Expected at 10:00 a.m.
STATEMENT OF
DANIEL I. HALPERIN, ACTING DEPUTY ASSISTANT SECRETARY
OF THE TREASURY (TAX LEGISLATION)
BEFORE THE SUBCOMMITTEE ON LABOR OF THE SENATE
HUMAN RESOURCES COMMITTEE AND THE SUBCOMMITTEE ON PRIVATE
PENSION PLANS AND EMPLOYEE FRINGE BENEFITS OF THE
SENATE FINANCE COMMITTEE
August 15, 1978
Messrs. Chairmen and Members of the Subcommittees:
I am pleased to have the opportunity to appear before you
today to discuss the several bills you are addressing concerning
the private pension system.
The broad policy issues I will address today include those
proposals concerning the jurisdiction of the administration of
the Employee Retirement Income Security Act of 1974 ("ERISA").
A second area of proposed major change is in ERISA reporting
and disclosure requirements. My testimony focuses on those
proposed changes affecting requirements specified by the Internal
Revenue Code.
The third major area encompasses changes in the rules
designed to prevent those persons connected with a plan from
engaging in transactions that are likely to lead to conflicts of
interest and consequently impairment of plan assets—fiduciary
responsibility and prohibited transactions.
The fourth area of broad policy proposals I will address are
those designed to encourage more savings for retirement: by the
employee through deductions for contributions to employer plans;
by the employer through a credit for new and improved plans; and
by the development of special master and prototype plans. The
denial of IRA deductions in certain cases also furthers this
goal.
Finally, I will outline the basic policy issues that are
inherent in the changes S. 3017 proposes to ERISA's joint and
survivor annuity rules.
We plan to submit shortly a brief analysis and the position
of the Department on the less far reaching changes also proposed
by S. 3017.
B-1105

-2The Treasury Department will not comment on those issues
that fall outside its administration: for example, S. 260
relating to reductions in disability payments; S. 1383 regarding
preemption of health plans; and those areas of reporting and
disclosure administered solely by the Labor Department.
Dual Jurisdiction
As you know, the President announced last week his
Reorganization Plan Number 4. This proposal to divide rulemaking
jurisdiction between the Departments of Treasury and Labor is
described in the testimony of the Department of Labor. We are
confident that this plan will reduce substantially the
difficulties caused by the current, overlapping rulemaking
authority. The plan is designed to be evaluated in early 1980.
Based on that evaluation, the Administration will submit
legislative proposals for a long term administrative structure
for ERISA. This interim plan does not prevent adopting a single
agency approach in the future.
We have not supported the single agency concept to date in
part because we are reluctant to thrust a new administrative
system on the pension industry before there has been a more
in-depth analysis of the problems it raises. There are two major
areas of concern to the Treasury Department. First, a single
agency will not eliminate the need to coordinate with the
Internal Revenue Service; the agencies will have to begin again
to learn to cooperate on a different basis. Second, reducing the
role of the IRS in determining eligibility for tax benefits may
impair equity in the tax system.
The first concern I stated arises because the private
pension system is now based on tax incentives and penalties.
Like other single agency proposals, S. 3017 uses these incentives
and penalties, recognizing that the potential loss of tax
benefits may be a more effective deterrent than the threat of
injunctive relief or other action by an agency other than the
IRS. Under S. 3017, the new agency would certify the tax
qualification or disqualification of a plan to the Service. Such
qualification affects issues left to the Service, including
taxation of participants on distributions and the employer's
deduction.
A few, isolated precedents exist for certification by
another agency to the IRS for tax purposes. In general, however,
these cases involve a single factual determination made at a
single point in time. 1/ In contrast, in the area of
tax-qualified pension plans, tax qualification must be based on
the plan in operation. The result must be continued
certification of operational facts as affecting tax liability;
initial qualification does not suffice.

-3This procedure requires coordination of tax audits with the
other agency or, if all functions are transferred, presumably an
entirely separate audit of pension issues with IRS auditors
instructed not to raise such matters. If the IRS is required to
await determinations by another agency, its ability to conclude
audits of the employer and all plan participants would be
impaired. In other words, new types of dual jurisdiction would
exist.
Furthermore, the more "certification" one places in a single
agency, the more likely it is that tax equity may be compromised.
S. 3017 would transfer the Code's qualification standards
(including nondiscrimination and limits on benefits for the
highly compensated) to the new agency. Discriminatory treatment
and excessive contributions may seriously compromise tax equity
and yet may have little to do with retirement security, as
evidenced by the fact that they are not presently a concern of
the Department of Labor. Therefore, continued IRS authority over
these issues seems appropriate.
I would also point out that even S. 3017 does not cleanly
divide jurisdiction. It does not make all plans subject to the
single agency through the certification process. S. 3017 retains
jurisdiction in the Service over, among other provisions,
individual retirement accounts and the excess contributions tax
on Keogh plans. Furthermore, the Code provisions would apply to
governmental and church plans and nonqualified plans.
The total division of authority proposed by S. 2352 raises
some of these same issues. Employers could be faced with more
duplicative jurisdiction if the Labor Department audited a
pension plan for violations of prohibited transactions and the
Service for tax qualification. Even more important, we believe
that the use of the IRS audit force is critical to adequate
enforcement of the prohibited transactions rules.
to reiterate, the dual jurisdiction reorganization plan
developed within the Administration has important and immediate
benefits; it does not develop new problems, nor does it weaken
enforcement of employee rights. Nonetheless, we recognize the
importance of, and encourage, this dialogue to fully examine the
issues before the pension community may again be subjected to a
new form of administration.
Reporting and Disclosure
The Internal Revenue Service recently has testified
concerning its efforts in the area of reporting and disclosure.
Specifically on June 27, the Assistant Commissioner for Employee

-4Plans and Exempt Orgainzations testified before the Senate
Finance Subcommittee on one of the bills considered here, S.
3193. I will briefly address three of the proposals made by that
bill and several others considered here.
First, the proposal has been made that the Labor
Department's plan description (EBS-1) and the Service's
application for a determination letter (5300 series) should be
combined into one form. Because the Labor Department is now
considering elimination of the EBS-1, concern over it may have
dissipated. We believe that further consideration should be
given to consolidating IRS and Labor forms, but that
consolidation issues can best be pursued administratively.
Second, the bills propose a single form for annual reports
by the three agencies. This already has been accomplished
through administrative action.
Third, cyclical filing—every five years—is proposed for
the annual reports, with staggered filings of the major report
every five years and a simplified report in the other years. The
Service has agreed in principle with the Labor Department for
filing of a compliance-oriented annual report every three years
by plans covering fewer than 100 participants. There will be an
abbreviated filing in the other years. The three-year cycle is
essential considering the statutory assessment period of three
years from the date of filing a tax return.
One bill, S. 2992, proposes uniform acounting standards for
various purposes for pension plans. The Treasury Department is
commenting in detail on S. 2992 in a bill report. That report
states that we do not believe legislation is appropriate at this
time. First, Treasury is opposed to the requiring of a single
funding method for purposes of sections 404 and 412 of the Code
(relating to the limitations on deductions and the minimum
required contribution). We believe that with respect to reports
to plan participants, section 103(d) of ERISA contains adequate
statutory authority for the determination of appropriate
information for their benefit. The Labor Department is
considering this problem and it does not appear essential to
mandate a single funding method at this time.
Second, Treasury is concerned that prescribing a uniform
method for some purposes will cause it to be used in other areas
where it may not be apppropriate; and that uniform data may not
be produced at a reasonable cost to plans which are using other
actuarial methods for other purposes such as the calculation of
actual contributions.

-5Fiduciary Responsibility and Prohibited Transactions
In changing to a single agency, S. 3017 would also delete
the excise tax that is now used to deter plan officials from
entering into prohibited transactions. Similarly, it would
delete the 100% correction penalty. In lieu of these provisions,
civil litigation is left as the sole remedy.
It is our belief that the annual excise tax is an effective
deterrent to persons engaging in the enumerated transactions. If
the only relief available were in equity, the
plan often could easily (and basically without cost) undo its
transaction. There could be no downside risk to engaging in
these transactions. Under the current system, the tax is
coordinated with the Labor Department's seeking equitable relief
so that participants are made whole, but persons connected with
plans also are deterred from ever engaging in the transactions.
Another bill under consideration, S. 1745, also would change
the rules applying to fiduciaries. We concur in the Labor
Department's analysis of the prudence standard and consequently
of their position on this bill.
Deductible Employee Contributions to Qualified Plans
Provisions of S. 3017. — Under section 303 of S. 3017, an
employee who is an active participant in any one of a number of
types of tax-favored plans may make a deductible contribution to
the plan. The deductible contribution is limited to the lesser
of 10% of compensation for the taxable year or $1,000. However,
if the indiviudal's adjusted gross income (AGI) exceeds $30,000
($15,000 in the case of a married individual filing a separate
return) , the deductible limitation is reduced by 20% of the
amount by which that AGI exceeds $30,000 (or $15,000). Thus, for
example, a single individual having AGI of $31,000 would have the
maximum deductible contribution reduced by $200 (i.e., 20% of the
$1,000 excess over AGI of $30,000), and the limitation would be
reduced to zero at AGI of $35,000.
The plans to which deductible contributions can be made
include plans qualified under section 401 and similar provisions
of the Code, governmental plans (whether or not qualified), and
tax-deferred annuities maintained by tax-exempt institutions
under section 403(b). Thus, self-employed individuals and
participants in government plans could benefit under this
provision of the bill.
Under a separate provision of this section, a plan could not
be qualified under section 401 of the Code unless it accepts
deductible employee contributions up to $1,000 per calendar year
for each employee.

-6Problems Affected by the Bill. —
Present law creates two
problems which would be affected by S. 3017. S. 3017 seems to be
concerned with the ability of a participant in a tax-favored
retirement plan to make deductible contributions to an individual
retirement arrangement, but it also affects the broader problem
of the tax teatment of employee contributions to retirement and
fringe benefit programs.
(a) IRA contributions. — An individual who is entitled to
make deductible contributions to an individual retirement acount
(IRA) may generally make a contribution up to the lesser of
$1,500 or 15 percent of compensation for the year. However, an
individual may not make a deductible contribution for a taxable
year to an IRA if he or she is an active participant during any
part of the taxable year in a qualified plan, a tax-deferred
annuity maintained by a tax-exempt institution, or a governmental
plan (whether or not qualified). As a result, an active
participant in such a plan may not make a deductible
contribution, even though the employer's contribution to the plan
on his or her behalf might be quite small or the individual might
never vest in a retirement benefit because of frequent changes in
jobs.
In an extreme example of this disparity, an individual
earning $10,000 and not participating in any retirement plan
could make a deductible IRA contribution of $1,500, whereas a
second individual with the same income who receives an allocation
of a minimal amount under an employer-maintained plan would not
be able to make an IRA contribution.
There is no easy answer to this dilemma once the decision to
create IRAs has been made. Allowing all participants in
qualified plans to make deductible contributions to IRAs is
unacceptable. IRAs already are inherently discriminatory in that
there is much greater utilization by eligible individuals at
higher income levels. Opening IRAs to participants in qualified
plans will substantially increase this disparity. However,
a solution to the problem which remains solely within the current
IRA structure and limitations is necessarily complex. For
example, efforts to develop procedures to reduce the IRA
deduction limitation by the amount of employer contributions
allocable to a particular employee under a defined benefit plan
have not been successful.
Because of the complexity inherent in an IRA approach, it
can be argued that the inequity, if any, should be accepted
without further solution. Moreover, although allowing IRAs to
individuals who participate in modest retirement plans may
mitigate employee objections to establishment of such plans, it

-7is possible that those employees who establish IRAs will resist
plan improvements. Therefore, although pressure against the
establishment of qualified plans might be reduced, attempts to
meld qualified plans with partial IRA deductions within the
framework of the current IRA rules could still have an adverse
effect on qualified plans. We discussed these concerns at
greater length in testimony before the Subcommittee on Oversight
of the House Ways and Means Committee on February 16, 1978. In
general, the better approach may be to retain IRAs only for
employees who do not participate in employer-maintained plans.
(b) Treatment of employee contributions generally.
(1) Present law: The broader problem is the question of the
tax treatment of employee contributions to tax-favored employee
benefit plans. The law on this point now goes in many
directions, due to the variety of types of employee benefit plans
in existence and the varying approaches to the treatment of
employee contributions to them. These plans include traditional
types of qualified retirement plans, so-called "cash or deferred"
profit sharing plans, unfunded salary reduction arrangements
maintained by State and local governments, and a number of
others. In testimony before the Subcommittee on Private Pension
Plans and Employee Fringe Benefits of the Finance Committee on
March 15, 1978, we suggested that Congress and the Treasury
together begin to give serious consideration to the possibility
of deductions and exclusions for employee contributions to all
types of tax-favored deferred compensation arrangements and
fringe benefit plans. We pointed out that it seems to us that a
unified system could be developed under which amounts set aside
at the employee's election are deductible or excludable if the
arrangements are nondiscriminatory with respect to both coverage
of employees and benefits (or contributions) actually provided
and where excessive deferral is not created. However, care must
be taken to prevent undue revenue costs. We indicated in March
that a possible starting point would be an expansion of the
proposal concerning cafeteria plans contained in the President's
tax reform program to both cash or deferred profit sharing plans
and salary reduction arrangements for government employees. On
May 4 we submitted to the Finance Committee and the House Ways
and Means Committee a proposal to establish uniform, favorable
treatment of salary reduction contributions to those types of
plans.
(2) H.R. 13511: H.R. 13511, the Revenue Act of 1978 as
adopted by the House of Representatives, deals with three types
of arrangements which, as a result of that bill, would continue
to receive tax-favored treatment.

-8(A) Cafeteria plans. — The bill adopts a provision which
is substantially the same as was contained in the
Administration's Tax Reform Proposal. The rules for cafeteria
plans 2/ would result in nondiscriminatory plan coverage and
nondiscrimination in operation of the plan. In measuring
nondiscrimination in operation, the plan would have to be
nondiscriminatory with respect to both total contributions or
benefits and nontaxable benefits elected by participants. The
provisions of the bill will allow for the continuance or
establishment of an attractive type of employee benefit plan and
will incorporate meaningful anti-discrimination features.
(B) Cash or deferred profit sharing plans. — Cash or
deferred profit sharing plans are similar in concept to cafeteria
plans, except that they involve qualified retirement plans rather
than other types of fringe benefits. Under such an arrangement,
an employer offers an employee an election between immediate
payment of an amount of compensation in cash or contribution of
that amount to a qualified profit sharing plan. For a number of
years these arrangements were subject to discrimination rules
prescribed under Internal Revenue Service revenue rulings. These
rulings generally held that a cash or deferred plan would not be
discriminatory if one-half the participation in the plan came
from among the lower paid two-thirds of employees eligible to
participate. ERISA limited the effect of these rulings to
previously existing plans. 3/ H.R. 13511 would essentially
apply the rules of the prior revenue rulings to all cash or
deferred plans and would make those rules permanent.
The problem with the prior revenue rulings is that they do
not assure any degree of participation from the lowest ranking
group of eligible employees. Since one-half of the actual
participation must come from the lowest paid two-thirds of
eligible employees, this requirement can be met by having that
degree of participation come from the middle third. Thus, the
lower third of the eligible group might have no actual
participation, but the plan could be held not to be
discriminatory. We believe that there should be stricter
discrimination rules which would result in substantial
participation from the lowest paid group.
(C) Government salary reduction arrangements. — For several
years, State and local governments were able to establish
sucessfully nonqualified, unfunded deferred compensation
arrangements on a salary reduction basis. Since the exception
under ERISA for governmental plans allowed these plans to be
unfunded, an employee participating in one of these arrangements
was able to defer tax on the amount of withheld compensation
until that amount was paid. Thus, employees of State and local

-9governments were in effect allowed to make deductible
contributions to IRAs without any ceiling and despite their
participation in another qualified plan. Put another way, they
obtained the deferral benefit of qualified plans without any of
the restrictions. Except as might be unilaterally imposed under
the arrangement, there were no requirements regarding the amounts
of salary which could be deferred, offering of the program to a
nondiscriminatory group of employees, or nondiscriminatory actual
participation in the plan. Proposed regulations published
earlier this year would reverse the Internal Revenue Service's
position on these arrangements and would result in current
taxation of deferred amounts.
H.R. 13511 would basically accord the same treatment to
State and local government salary reduction arangements as
existed prior to the proposed regulations, except that a
limitation equal to the lesser of $7,500 or 33-1/3% of net
compensation would be imposed upon annual salary reduction
contributions. These limitations can be well in excess of the
limitations which are imposed upon the deferral inherent in a
qualified retirement plan. Moreover, as in the past, there would
be no discrimination requirements in connection with these
arrangements.
Our May 4 legislative proposal would have subjected State
and local government salary reduction arrangements to the same
requirements as would be applied to privately maintained plans in
order for all employees to obtain deferral. However, we
recognize that there may be legitimate reasons for treating the
governmental arrangements separately, since State and local
government employees typically work at lower compensation levels
than their counterparts in the private sector. Thus, we do not
object to the creation of separate rules for these arrangements.
However, we do not believe that favorable tax treatment should be
available for these plans in the absence of meaningful
discrimination rules and deferral limitations appropriate to the
nature of the plans and employers.
Methods of Dealing with Discrimination. — Although attempts
have Deen made to limit it, section 303 of S. 3017 can still
result in discriminatory utilization of the tax benefits which
would be accorded to employee contributions under the bill. The
phase-out of the deductible limitation for higher paid employees
does not begin until the individual reaches adjusted gross income
of $30,000. Thus, an individual well above the median income
level could make a full $1,000 contribution. Because such a
person is in a better position to save for retirement, tax
benefits from deductible contributions would tend to cluster
around the group of employees at that income level.

-10Another approach to this problem which we have supported is
contained in S. 3140. Under that bill, deductible employee
contributions would be permitted to an employer plan which is in
essence an employer-maintained IRA which, unlike IRAs under the
current rules, could also receive employer contributions. The
employee's deductible limit would be the amount equal to the
difference between the employer's contribtions and the
individual's usual IRA deductible limitation. To illustrate the
difference, assume that an individual has compensation from an
employer of $30,000 for a year (also assumed to be adjusted gross
income), and the employer contributes 10 percent of the
compensation to an employer-maintained plan for the benefit of
that individual. Under section 303 of the bill, the taxpayer
could deduct a full $1,000 for an employee contribution in
addition to the employer's $3,000 contribution. Under S. 3140,
the employer's $3,000 contribution would completely eliminate the
possibility of a deductible contribution by that employee.
The most effective method of handling discrimination is a
direct approach, such as is contained in the cafeteria plan
provisions under H.R. 13511. This is also the result under S.
3288, which is very similar to section 303 of the bill, except
that it contains a much more effective discrimination feature.
Under S. 3288, deductible employee contributions made to the
employer's plan are treated as an employer contribution for
purposes of measuring discrimination under the plan. Thus, the
employee contributions automatically enter into the traditional
measurement of discrimination in employer-derived benefits.
Revenue considerations. — We have emphasized revenue
considerations in the past in connection with proposals dealing
with employee contributions to retirement plans. We think it is
particularly important to bear the cost implications of section
303 of the bill in mind. We estimate that the annual revenue
cost of this section of the bill is between $2 billion and $2.2
billion.
Credits for New and Improved Plans
S. 3017 provides a tax credit in the case of new qualified
plans. The credit begins at 5 percent in the first plan year and
ends with 1 percent in the fifth year, and is applied to the
employer's total plan contribution, up to the deductible limit.
The new plan credit is available to employers which are "small
businesses" as determined by the administrator of the Small
Business Administration. No credit is allowed if the employer
terminated another qualified plan at any time after January 1,
1978. The credit is not allowed for contributions to an ESOP.
It is, however, available for contributions to Keogh plans.

-11The improved plan credit of section 305 is available without
regard to the small business restriction, but is not applicable
to Keogh type plans described in Code section 401(d). The credit
applies for all years during which an improved plan is
maintained. The bill provides that an improved plan is one which
is certified by the Employee Benefits Commission created in Title
I of the bill. This certification is dependent on the meeting of
one of two alternatives. The first alternative is that both the
participation and vesting rules of the plan are significantly
more liberal than the minimum requirements of ERISA. The second
alternative is that there is some other significant improvement
at least equivalent to the vesting and participation improvement
possibilities.
According to a study "appearing in the November, 1975 Social
Security Bulletin, the portion of the nongovernmental labor force
covered by a retirement plan was 46.2 percent in 1975. Although
that percentage has increased from 42.1 percent in 1970, we have
no reason to believe that much more than one-half of the nation's
labor force is now covered by private pension plans. Employees
working for small employers tend to be among those who are least
likely to be covered by a private pension plan. The purpose of
the bill is the encouragement of such small employers in the
establishment of plans for their employees. The further purpose
of the bill is to improve the level of benefits for all plans.
It is probably true that a major improvement in coverage by
private plans will not be accomplished within the present
framework of incentives. However, there is not to our knowledge
sufficient information about the gap in coverage so as to be able
to target tax benefits narrowly enough to provide a substantial
increase in coverage without an unacceptably large revenue cost.
Although the percentage of the work force covered by retirement
plans has grown slowly, employer contributions grew from $15
billion in 1971, to $28 billion in 1975. It has been estimated
that over the next 10 years contributions could reach $176
billion. Because of the number of plans already in existence or
which will be established by employers in any event, there will
be a substantial tax cost under the bill even if no employer
changes his or her mind as a result of the offered credit. If by
1985 as many as 50 percent of the contribution dollars were to
"improved" plans, the tax cost of the improved plan credit would
be $4.4 billion.

-12Perhaps the credit could be made effective if it were more
narrowly focused, such as to employers whose work force has a low
average pay, those whose income is below specified levels, or
those who have a relatively small amount of assets. Without
clearer information as to the gap in coverage, we cannot evaluate
these possibilities.
We are also concerned over the administrability of the power
to certify an "improved plan". Certification requires that the
plan be more generous than required by ERISA's minimum standards
with respect to the age and service and vesting requirements.
Should the change in participation and vesting rights be
factually as well as legally significant? For instance, some
employers with a very low rate of employee turnover can change
from ten-year "cliff" vesting to five-year vesting at little or
no cost. If the test is to be one of economic significance under
the facts and circumstances, there will be complex actuarial
problems to resolve. If the test is that any plan is eligible if
by its terms it appears better, there will be many employers
receiving the credit at little or no additional cost.
There is an even more difficult administrative aspect of the
proposal. As an alternative to "significantly better
participation and vesting rights", the bill directs the
Commission to look for "some other significant improvement in a
participant's benefits and rights under the plan, which is at
least equivalent to an improvement which would satisfy the
required participation and vesting improvements." The difficulty
here is the relative nature of the term improvement. There is no
standard. There is no minimum standard under ERISA regarding the
amount of benefit granted by the employer.
If the improvement refers to what was done by the employer
in some prior year, there will be statutory encouragement to the
starting up of very small plans, so that a measurable increase
may be granted. If, as suggested by the bill, the maintenance of
an improved plan can begin with the first year of a plan (merely
by satisfying the participation and vesting side of the test),
there will
be no prior
year's level of contributions or benefits
Master
and Prototype
Plans
against which to measure.
In addition to the preceding measures designed to encourage
more savings for retirement, S. 3017 would establish mechanisms
for special master plans.
The bill proposes that the master sponsor—the bank,
insurance company, or other investment manager—be considered the

-13lan administrator and named fiduciary for purposes of Title I of
RISA. We concur in the Labor Department's support of this part
of the proposal.
As you know, the Internal Revenue Service is an enthusiastic
supporter of, and has developed several different types of,
master and prototype plans. The major difference between S. 3017
and existing IRS procedures for master plans for corporate
employers—from the perspective of the tax law—is that under the
bill there would be no need for an employer to apply for a letter
demonstrating that the plan is qualified. The IRS does not
believe such a provision is workable unless a plan covers all
employees and has full and immediate vesting. In the absence of
this requirement, a determination of qualification cannot be made
without examination of the employer's workforce.
Although we do not support such a plan, if a master plan
with potentially discriminatory standards were permitted to be
qualified without individual examination, appropriate sanctions
for marketing and establishing discriminatory plans would have to
be developed. Questions must be addressed concerning the type of
sanction, the effective date of the sanction, and the party on
whom the sanction is to be imposed.
Denial of IRA Benefits to Certain Individuals
Another means of encouraging plans covering more members of
the workforce is through denial of IRA deductions where they
compete with nondiscriminatory plans. S. 3017 would deny IRA
deductions to individuals who are owner-employees in partnerships
or sole proprietorships or who are officers or 10%-or-more
shareholders of corporations. We support this amendment.
A serious problem in connection with IRAs is that an
individual in control of a business can elect to forego a Keogh
plan in favor of an IRA. Although the direct tax benefits for
that individual may be less under an IRA than under a Keogh plan,
the overall cost of the IRA may be substantially less, since the
establishment of a Keogh plan would require the provision of
benefits for a nondiscriminatory group of employees. Thus, IRAs
constitute a serious disincentive to the establishment of
qualified plans in many cases. Section 306 of the bill will
reduce this disincentive. However, we would not preclude an
individual from having an IRA if he or she (or the relevant
corporation) has no other employees.
Joint and Survivor Annuity
The changes proposed in S. 3017 to ERISA's joint and
survivor annuity rules are highly technical. Yet they raise

I

-14broad and significant policy issues that must be addressed before
any changes are effected. Under both Title I of ERISA and
section 401(a) of the Internal Revenue Code, special rules apply
if a plan provides for the payment of benefits in the form of an
annuity. 4/ Under those rules, the annuity benefits must be paid
«, in the form of a qualifying joint and survivor annuity to the
participant and his or her spouse unless the participant elects
not to receive payment of the benefit in that form. These rules
apply generally where the participant has begun to receive
benefit payments at or after reaching normal retirement age, or a
plan's early retirement age if it has one. The vesting rules of
ERISA and the Code provide that employer-derived benefits may be
forfeited upon the death of a participant (before or after
retirement), except in the case of a survivor annuity payable
under the joint end survivor annuity rules. Thus, the
employer-derived benefits (other than the survivor annuity) can
be forfeited even where a participant is fully vested and dies
prior to the commencement of any benefit payments.
Section 238 of S. 3017 would, in substance, change the
vesting and joint and survivor annuity rules in two situations.
In either case, the surviving spouse of a participant would be
entitled to a survivor benefit where the participant is at least
50% vested in employer contributions or benefits and dies before
receiving the vested percentage of his or her employer-derived
account balance or benefits.
The provisions of this section of S. 3017 are technical
responses to limited problems within the scope of the joint and
survivor annuity provision. As such, they contain their own
technical problems. More important, the amendments proposed in
the bill do not directly address several important questions
which we believe need to be considered over a longer period of
time. We do not yet have answers to these questions ourselves,
but we would hope to work with the Committees to arrive at proper
results.
The fundamental question is whether the vesting rule which
allows forfeiture of employer-derived benefits upon death is a
correct approach. The existence of any retirement plan implies
that employees have received reduced immediate compensation in
favor of the diversion of that compensation into the retirement
plan. It can be argued that death should not result in the loss
of the diverted compensation. On the other hand, at least in the
context of a defined benefit plan, the diversion can be viewed as
something like the purchase of an annuity. It is not illogical
to accept the loss of future annuity payments on death, even if
the annuitant dies before any payments have been made.

-15The second question follows only if, as a result of
examination of the first question, the possibility of forfeiture
upon death still remains. The question then is whether the death
to be focused upon is solely that of the plan participant or the
death of the survivor of the participant and his or her spouse.
The current joint and survivor annuity rules, in effect, mean
that both deaths must be taken into account in some situations.
However, the current rules deal with the problem in a very
confused and somewhat arbitrary manner.
The third question is whether, assuming there should be
survivor benefit requirements of some sort, the participant
should be allowed to elect against benefits for the surviving
spouse. If the proper policy is that the law should at least
favor survivor benefits, subsidiary issues arise regarding the
degree of flexibility which should be involved. For example,
would it be appropriate to make survivor benefits mandatory
where, at the time of a participant's retirement, the participant
is healthy but his or her spouse is terminally ill? Similarly,
should the actuarial reductions implicit in the provision of
survivor benefits be mandated where the participant's spouse is
receiving, or will receive, full retirement benefits resulting
from his or her own employment?

FOOTNOTES
1/ Examples of certification include, under prior law, the
department of Commerce certifying import injury for purposes
of determining a taxpayer's entitlement to a special
five-year loss carryback established under the Trade
Expansion Act; the War Production Board certifying facilities
as war emergency facilities in connection with the special
amortization rules applicable to those facilities. Under
present law, there is a similar certification procedure with
respect to the amortization of pollution control facilities
(I.R.C. Section 169); there is also special treatment for
gain or loss under SEC orders (I.R.C. Section 1081) or FCC
policy changes for radio stations (I.R.C. Section 1071).
2/ A cafeteria plan is an arrangement under which a
participating employee elects the types of fringe benefits to
which employer contributions will be applied on his or her
behalf. These plans usually include benefits, such as health
and accident insurance or group-term life insurance under
$50,000, which would be nontaxable under current Code
provisions if provided under a non-elective plan. A
cafeteria plan usually also includes elective benefits which
are taxable, such as current cash distributions. Under H.R.
13511, if a cafeteria plan is nondiscriminatory, a highly
compensated employee will be currently taxed only to the
extent that he or she elects taxable benefits. If the plan
is discriminatory, a highly compensated employee will be
currently taxed on the total amount of taxable benefits which
could have been elected, regardless of the actual election
made by the employee.
3/ The ERISA provision was only a temporary measure. The
original freeze was until the end of 1976. It was extended
until the end of 1977 by the Tax Reform Act of 1976, and it
would be extended further until the end of 1979 by H.R. 9251
which has been approved in different versions by the House of
Representatives and the Senate.
4/ Under the Internal Revenue Service regulations
interpreting this provision, the special rules apply only
where the annuity is a life annuity. Thus, a plan's
provision for the payment of an annuity for a term certain or
for a term measured by the life expectancy of the recipient
would not, in itself, result in application of the special
rules.

FOR RELEASE AT 4:00 P.M.

August 15, 1978

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued August 24, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,706 million.
The two series offered are as follows:
92-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
May 25, 1978,
and to mature November 24, 1978 (CUSIP No.
912793 U5 3), originally issued in the amount of $3,407 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
August 24, 1978,
and to mature February 22, 1979 (CUSIP No.
912793 W9 3) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing August 24, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,355
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
0. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, August 21, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-1106

-2Each 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 securities and report daily to the
Federal Reserve Bank of New York their positions in and
oorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on August 24, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
August 24, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

FOR RELEASE ON DELIVERY
EXPECTED AT 10 A.M.
AUGUST 16, 1978

TESTIMONY OF ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS

I am pleased to present the views of the Administration
on S. 3304, introduced at the request of the Federal Reserve
Board. That bill authorizes actions to eliminate the
incentive for commercial banks to withdraw from the Federal
Reserve System.
In June of last year, this Committee considered S. 1664,
which had the dual purpose (1) of authorizing financial
institutions to maintain NOW accounts and (2) of reducing the
cost of Federal Reserve membership by lowering the range of
statutory reserve ratios and by permitting the Federal Reserve
to pay interest on required reserves. This Committee acted
promptly, and favorably, on that legislative proposal, which the
Administration supported, and reported out a bill in mid-August
of last year. No further action has been taken.
Since that time, the trend toward lower Federal Reserve
membership has continued. In the last 12 months, more than
60 commercial banks have voluntarily withdrawn from the
System. We understand that additional member banks are
considering doing so, but have delayed their decision until
after the Congress responds to the bills, such as S. 3304,
that are presently before it in this area.

B-1107

- 2 Previous witnesses have reviewed the burden imposed on
National and state chartered member banks by the requirement that they hold non-interest bearing reserves in the
Federal Reserve System. The burden has been heightened
by the advent of high interest rates, which have increased
the opportunity cost to member banks of reserves that cannot
be employed to generate income. As a result, the effective
cost of deposits to member banks is higher than for nonmembers.
Summary of Conclusions
The Administration believes that the continuing attrition
in Federal Reserve System membership will endanger the pivotal
role in our financal system played by the Federal Reserve.
The Treasury believes that requiring mandatory reserves for
all but the smaller depository institutions is the preferable
method of dealing with that problem.
If the Congress does not adopt that approach, the
Administration supports the enactment of legislation that
would (1) lower reserve requirements and (2) explicitly
grant to the Federal Reserve the authority to pay interest
on member bank reserve balances. The legislation should
limit the potential revenue loss to the Treasury and provide standards for the Federal Reserve to follow in setting
the appropriate levels of interest payments and reserve
requirements.
The Administration also agrees that the Federal Reserve
should move to impose explicit charges for each of its
services, with appropriate safeguards to provide for an
orderly transition from the present system.
The Impact of a Declining Membership on the Federal Reserve
In the aftermath of the banking reforms that began with
the Federal Reserve Act in 1913 and continued after the
Depression, the financial system of the United States has become
the strongest in the world. Bank regulators at the Federal and
state levels have played an important part in that development.
The role of the Federal Reserve System as the central bank
has been critical — as the overseer of the money supply and
discount window; as an institution that maintains close
relations with, and provides counsel to, a large spectrum of
the banking community through its regional Federal Reserve
Banks; and through the extension of its services to members.

- 3 Each of these functions plays a part in fulfilling the
Federal Reserve's responsibility for the integrity and control
of the monetary system. Each is eroded by the continuing decline in membership. We cannot pinpoint the moment when a
worrisome trend becomes an alarming event. In all likelihood,
there is no such single point. But the stature and power of
the central bank will become more attenuated as the trend
proceeds. This weakening of the role of the Federal Reserve
in our banking system should be arrested.
I would now like to turn to the specific legislative
issues before this Committee.
Universal Reserves
The Federal Reserve has proposed legislation that would
require all depository institutions — whether or not members to comply with Federal Reserve requirements for reserves
against transaction accounts. Nonmember reserves would be
held at the Federal Reserve Banks or at other member banks
which would, in turn, hold the reserves at a Federal Reserve
Bank.
The Treasury supports, in principle, the imposition of
uniform reserve requirements on similar types of deposits at
institutions of comparable size regardless of the type of
depository institution holding the deposits. The Federal
Reserve's effectiveness in the conduct of monetary control
would be strengthened by requiring universal reserves.
This approach will provide a permanent solution to the
impact of the membership problem on the conduct of monetary
policy. It severs the link between Federal Reserve membership and the separate issue of the appropriate level of reserve
requirements necessary for the conduct of monetary policy.
It avoids the necessity — which arises if the problem is to
be met by the payment of interest on reserves — of requiring
the Federal Reserve to compute the differing burdens of membership for different banks to insure that the interest payments
and other benefits are properly targeted.
Another advantage of a universal reserve requirement
is that this approach is significantly less costly to the
Treasury than the alternatives. Nevertheless, even under
a universal reserve structure, a substantial reduction in

- 4 reserve requirements (or even the payment of interest) may
be required to reduce the impact on smaller nonmembers of
meeting reserve requirements.
Finally, it would eliminate the present inequities
between treatment of members and nonmembers with respect
to reserves while continuing to vest responsibility for
supervision and regulation of nonmembers with the FDIC and
State bank supervisors.
Of course, there are a number of issues that remain to
be resolved. One very important question is the extent to
which smaller institutions may be exempted from reserve requirements in order to avoid the adverse impact on earnings
that would flow from a charge. Another is whether the
"universal" reserve requirement should extend to deposits
other than transaction accounts. In addition, the interaction of this proposal with the separate questions of Federal
Reserve membership and access to Federal Reserve services
must be closely examined.
Other issues include the place at which reserve balances
should be held, the form in which the reserves are held (some
have argued in favor of permitting Treasury securities to
be used as reserves), the degree of reduction in reserve
requirements, the degree of uniformity in reserve ratios, and
the amount of interest, if any, paid on required reserves.
Despite these unanswered questions, this is a straightforward and workable approach to a complex problem. We would
be glad to assist you and your staff in seeking answers to
these difficult questions.
Payment of Interest on Reserves and Reduction
in Reserve Requirements
If the Congress should decide that nonmember banks
and thrift institutions should continue to be exempted from
reserve requirements of the Federal Reserve, then the Administration supports legislation to reduce the financial burden
of membership on those banks that would otherwise leave the
System. One approach, contained in S. 3304, is to lower
reserve requirements and to permit the Federal Reserve to pay
interest on its required reserves.

- 5 This approach will initially be more costly than universal
reserves. There is no reason to believe that the precise level
of interest payments and reserve requirements which serve to
stabilize Federal Reserve membership can be readily identified
and it is likely that pressures for additional payments or reserve
changes will build in the future.
The Federal Reserve's proposal is similar in design and
cost to the program contained in Title II of the Administration's
NOW account bill introduced last summer. The Federal Reserve
Banks would begin paying interest on required reserves and
reserve requirements on demand deposits would be simplified and
reduced. Services now provided at no cost to member banks would
begin to be sold to members — and perhaps eventually to others —
at prices set by the Federal Reserve.
During the first phase, reserve requirements would be
reduced to release approximately $3 billion in reserves. The
Federal Reserve Banks would also begin paying an interest rate
of 2 percent on all required reserve balances held by them.
At present deposit levels, these payments would equal approximately $430 million.
As the program becomes fully implemented, the interest
rate paid on the first $25 million of a bank's reserves will
be raised to a level equal to 1/2 of 1 percent below the yield
on the Federal Reserve's securities portfolio. Reserve requirements will be further reduced to release an additional
$2 billion in reserves to member banks.
Under present conditions, the Federal Reserve estimates
that total interest payments to member banks under the fully
phased-in program would equal about $765 million annually.
The increased member bank earnings from the released reserves
will provide an additional $320 million in earnings, but
member banks will probably pay about $410 million to the
Federal Reserve in service charges. The net benefit to banks
is therefore estimated to be approximately $675 million.
Interest payments would be limited to not more than the sum
of the System's receipts from charges for services purchased
by members plus 7 percent of its annual net earnings.
To reduce the initial impact of the program on the Treasury
and the Federal deficit during the transition period, the Federal
Reserve will finance the program's estimated after-tax cost by
paying the Treasury about $575 million from its accumulated
surplus.

- 6 The Cost to the Federal Government
Any payment by the Federal Reserve of interest on reserves,
and any reduced earnings from lower reserve balances, result
in a reduction of payments to the Treasury. On the other hand,
the increased income received by member banks as a result of
such a program will lead to their paying additional taxes to
the Treasury. We estimate that over time the Treasury will
recapture approximately one-half of these benefits. Based on
the estimated cost of the Federal Reserve proposal of
$675 million, we estimate that the net cost to the Treasury,
after tax recapture, will be about $335 million per year.
When Secretary Blumenthal testified last year on
S. 1664, he stated that the Administration would accept a
net revenue loss of some $200-300 million in order to solve
the membership problem of the Federal Reserve. As I noted,
approaching the problem through the requirement of universal
reserves will reduce the cost to the Federal government, but
we continue to believe that incurrence of a significant cost
is warranted to solve this problem.
The aggregate cost to the Treasury should, however, be
subject to an appropriate limit and should also take into
account that the loss of revenue to Treasury can accrue from
a reduction in reserve requirements just as easily as from
the payment of interest on the reserves. We also believe
that any plan based on the payment of interest on reserves
should take into account that different classes of banks
receive differing benefits from Federal Reserve membership.
Thus use of the discount window may well be more important
to a larger than to a smaller bank that may borrow in an
emergency situation from its larger correspondent.
There is considerable room for debate about the
appropriate amount necessary to stem the membership loss
and whether payments should be the same to all banks or
targeted to that class of bank where membership attrition is
most probable. We would be pleased to discuss with your
staff further possible ways to target payments to reduce
the cost to the Treasury.

- 7 Pricing of Federal Reserve Services
Imposing explicit charges for services rendered by the
System will impose a useful discipline on the users of the
services. It will also permit private vendors of these
services to compete on an equal basis. At the present time,
private participation has been constrained by the difficulty
of competing with a government agency offering free services.
We would suggest, however, that the Committee consider alternative methods by which such pricing may be phased-in so that
unnecessary disruption in the system can be avoided.
The Administration is, in principle, in favor of open
access to Federal Reserve services for all non-members at
nondiscriminatory prices. That issue must be resolved,
however, in the context of the effectiveness of the steps
taken to stem the reduction in membership. If access to
services is no longer an advantage of membership, then this
change may increase the outflow of members unless the other
disadvantages have been fully offset.
That concludes my formal testimony, Mr. Chairman.
I would be pleased to answer any questions the Committee
may have.

0O0

FOR IMMEDIATE RELEASE
August 17, 1978

Contact: George G. Ross
202/566-2356

TREASURY PUBLISHES 2ND ANNUAL REPORT
ON HIGH INCOME TAX RETURNS
The Treasury Department today made available the second
annual report on high income taxpayers. The report, "High
Income Tax Returns - 1975 and 1976," was prepared as required
by Section 2123 of the Tax Reform Act of 1976.
The report contains the first data reflecting the changes
made by the Tax Reform Act of 1976. For high income individuals,
a major change was the strengthening of the minimum tax including an increase in the rate from 10 to 15 percent and the provision of new tax preference items for intangible drilling
expenses and for itemized deductions (other than casualty losses
and medical expenses) exceeding 60 percent of adjusted gross
income (AGI) .
The report highlights the fact that the Tax Reform Act of
1976 was "extraordinarily successful" in reducing the number of
high-income nontaxable income tax returns. The number of nontaxable high-AGI returns fell from 260 in 1975 to 22 in 1976, a
decline of 92 percent. In proportion, the nontaxables fell from
1 out of 130 high-income returns in 1975 to about 1 out of every
2,000 returns in 1976.
As measured by the more comprehensive expanded income, the
decrease was similar although less dramatic. The number of nontaxable high expanded income returns fell by 75 percent, from
215 in 1975 to 53 in 1976. By either measure, there were far
fewer high income nontaxable returns than in any year since data
first became available in 1966.
In testimony today before the Senate Finance Committee,
Secretary of the Treasury W. Michael Blumenthal urged passage
of tax legislation that would "avoid a serious setback to
important minimum tax reform efforts." He asked adoption of
a
"true alternative tax" approach that would provide a "much
more reasonable minimum tax liability" for individuals with tax
sheltered capital gains.

r- 2

The report also highlights the fact that despite the
sharp decline in the number of high income nontaxable returns
there is still a significant number of high income taxpayers
who, while paying some tax, fail to pay a fair share of the
tax burden. For every nontaxable high-income return,^ there
are about 10 or more nearly nontaxable returns where income
has been reduced by more than 80 percent by use of preferences,
deductions, and tax credits. The nontaxables, and these so-called
nearly nontaxables, whose effective tax rates are lower than those
of a typical middle or lower-middle income family, totaled
nearly 500 in 1976. This is about twice the number of highincome nontaxables there were in the late 1960's, whose existence
prompted the Treasury Department to focus on this problem and the
Congress to enact the minimum tax.
The report finds that while the Tax Reform Act of 1976 reduced
the number of nontaxables and nearly nontaxables and raised the
average effective tax rate modestly for the remaining nearly nontaxables, it did not significantly change the average effective
tax rate for other individuals with incomes of $200,000 or more.
In fact, the tax rate on all high expanded income returns other
than nontaxables and nearly nontaxables actually declined from
36 percent in 1975 to 35 percent in 1976.
Even the expanded income measure, which is broader than AGI,
does not include income from some sources which are very valuable
to high-income taxpayers. Thus, expanded income understates
economic income because taxpayers are allowed deductions for real
estate and agriculture expenses in excess of economic costs and
because income such as interest on tax-exempt state and local
bonds is omitted. This understatement of economic income results
in some high-income individuals being omitted from the report.
The actual number of individuals omitted, however, is not known.
In addition, the understatement of income makes the effective
tax rate for all high income returns appear higher than it actually
is.
Presented in the report are data for all individuals with
AGI of $200,000 or more, as well as similar data based on three
other income measures specified in the 1976 Act. These include
the broader-based "expanded income" (AGI plus preferences less
investment interest), "AGI plus preferences," and "AGI less
investment interest." In 1976, there were 53,587 high income
taxpayers, as measured by expanded income. They paid an average
tax of $144,942 or 35.0 percent of expanded income. Similarly,
the 41,761 returns with AGI of $200,000 or more had an average
tax of $167,656, or 44.5 percent of AGI.

- 3
The 122 page report includes 57 statistical tables and
2 charts, which contain virtually all of the basic data about
high income returns currently available for 1975 and 1976
tax returns.
Copies of the report are available from the Office of Tax
Analysis, U. S. Department of the Treasury, Washington, D. C.
20020. Copies also are available from the Superintendent of
Documents, U. S. Government Printing Office, Washington, D.C.
20402.

FOR IMMEDIATE RELEASE
August 15, 1978

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES RESULTS
OF GOLD AUCTION
The Department of the Treasury announced that 300,000
ounces of fine gold were sold today to 12 successful bidders
at prices from $213.23 to $216.17 per ounce, yielding an
average price of $213.53 per ounce.
Gross proceeds from this sale were $64.1 million. Of
the proceeds, $12.7 million will be used to retire Gold
Certificates held by Federal Reserve banks. The remaining
$51.4 million will be deposited into the Treasury as a
miscellaneous receipt.
These sales were made as the fourth in a series of
monthly auctions being conducted by the General Services
Administration on behalf of the Department of the Treasury.
The next auction, at which another 300,000 ounces will be
offered, will be held on September 19.
A total of 50 eligible bids were submitted by 17 bidders
for a total amount of 564,400 ounces at prices ranging from
$192.80 to $216.17 per ounce.
The General Services Administration will release additional information, including the list of successful bidders
and the amounts of gold awarded to each, after those bidders
have been notified that their bids have been accepted.

B-1108

tockpile Information
August 16, 1978
FOR IMMEDIATE RELEASE

GSA #P2365

The General Services Administration, in consultation with the
Department of the Treasury, today announced the award of 300,000 fine
troy ounces of gold from U.S. Treasury stocks. The total proceeds of
the sales were $64,060,440, averaging $213.54 per ounce.
The sale of this material resulted from the sealed bid offering
of U.S. Treasury gold conducted at 11 a.m., Washington, D.C. time on
August 15, 1978. The gold was available from the U.S. Assay Office,
New York, New York.
The acceptable bids are as follows:
Approximate Price Per
Firm

Fine Troy Ounces

Fine Troy Ounces

Bank Leu, Ltd. 1,200 $216.17
Zurich, Switzerland
Credit Suisse 4,000 214.07
Zurich, Switzerland
Dresdner Bank AG 32,000 213.73
Frankfurt, West Germany

32,000
64,000
32,000
32,000
32,000

213.61
213.56
213.51
213.47
213.41

Edward P. Cawley 1,200 214.26
Westlake, Ohio
Exchange National Bank 1,200 214.00
and Trust Company
Atchison, Kansas
Gold Standard Corporation 400 213.95
Kansas City, MO.

3T\1K

U.S. General Services AdminiStfetfcre- Central Office
18th & F Sts., N W , Washington, D C 20405 (202) 566-0512

2.

Firm

Approximate
Fine Troy Ounces

Price Per
Fine Troy Ounces

J. Aron and Company 10,000 $213.31
New York, NY
Leytess Metal and 800 ' 213.57
Chemical Corporation
New York, NY

400
400
400

213.48
213.32
213.26

Republic National Bank 6,000 213.80
of New York
10,000
New York, NY

213.46

Metal Traders, Inc. 1,200 213.30
New York, NY

Swiss Bank Corporation 8,800 213.23
Zurich, Switzerland
Union Bank of Switzerland 10,000 213.51
Zurich, Switzerland
20,000
* * * * * * * *

213.26

FOR IMMEDIATE RELEASE

August 16, 1978

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $3,500 million of 52-week Treasury bills to be dated
August 22, 1978, and to mature August 21, 1979, were accepted at the
Federal Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $1,105,000)
Investment Rate
Price

Discount Rate

High - 92.103 7.810% 8.42%
Low
91.965
Average 92.037

(Equivalent Coupon-Issue Yield)

7.947%
7.875%

8.58%
8.50%

Tenders at the low price were allotted 7%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

$
35,685,000
3,850,210,000
6,080,000
53,850,000
4,415,000
80,795,000
349,775,000
30,470,000
2,645,000
5,385,000
2,500,000
161,365,000

$
35,685,000
2,923,010,000
6,055,000
53,850,000
4,415,000
50,795,000
299,775,000
25,470,000
2,645,000
5,385,000
2,500,000
87,065,000

Treasury

3,650,000

3,650,000

TOTAL

$4,586,825,000

$3,500,300,000

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

The $3,500 million of accepted tenders includes $93 million of
noncompetitive tenders from the public and $1,087 million of tenders from
Federal Reserve Banks for themselves and as agents of foreign and
international monetary authorities accepted at the average price.
An additional $39 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

B-1109

FOR IMMEDIATE RELEASE
August 16, 1978

Contact:

Robert E. Nipp
202/566-5328

NATIONAL STEEL CORPORATION WITHDRAWAL
OF ANTIDUMPING PETITIONS
The U.S. Treasury Department today announced that National
Steel Corporation has withdrawn its antidumping petitions concerning cold rolled and galvanized carbon steel sheets imported
from Belgium, France, the Federal Republic of Germany, Italy,
the Netherlands and the United Kingdom.
The petitions were filed on October 25, 1977, and formal
antidumping proceedings were initiated by the Treasury
Department on December 2, 1977.
Subsequent to the initiation of the investigations, a
steel "trigger price mechanism" recommended by an Interagency
Task Force chaired by Treasury Under Secretary Anthony Solomon
became effective February 21, 1978, to monitor imports of steel
products, including those covered by the National Steel Corporation petitions. Under the TPM, the Treasury should be able to
identify cases of dumping quickly and to expedite antidumping
proceedings.
On August 14, National Steel Corporation addressed a
letter to Robert Mundheim, General Counsel of the Treasury,
stating in part:
"We recognize that the effective administration
of the TPM will continue to require the allocation of substantial Treasury resources. We also
are hopeful that, with the expiration of an
initial "grace period," the TPM should start to
do the job it was intended to do, and that the
results of an effectively administered TPM
should be seen shortly (and thereafter on a
continuing basis) in steel import figures."
The withdrawal is without prejudice to the reinstitution
of antidumping proceedings by National Steel Corporation on
these products.
B-1110

- 2 In a reply, General Counsel Mundheim acknowledged the
basis of National's action and confirmed that if National
should refile, "Treasury will expeditiously conclude its disposition of any refiled complaints en these products, utilizino
all the relevant information contained in its files, includino
information obtained in updating and implementing the trigger
price mechanism."
General Counsel Mundheim also stated in his letter
". . .the Treasury Department will continue carefully to monitor
cold rolled and galvanized steel sheets under the trigger price
mechanism and will take appropriate action to ensure the
effective enforcement of the Antidumping Act with respect to
that product."
A formal notice terminating the investigations is being
published in the Federal Register. Copies of the Federal
Register notice and exchange of letters between National Steel
Corporation and General Counsel are attached.

*

*

*

*

DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
COLD ROLLED AND GALVANIZED CARBON STEEL SHEETS FROM
BELGIUM, FRANCE, THE FEDERAL REPUBLIC OF GERMANY,
ITALY, THE NETHERLANDS, AND THE UNITED KINGDOM
TERMINATIONS OF ANTIDUMPING INVESTIGATIONS
AGENCY: U. S. Treasury Department
ACTION: Terminations of antidumping investigations
SUMMARY:
This notice is to advise the public that the antidumping
investigations concerning cold rolled and galvanized carbon
steel sheets from Belgium, France, the Federal Republic of
Germany, Italy, the Netherlands, and the United Kingdom are
being terminated. The terminations are based on the withdrawal
of the original antidumping petitions, as detailed in the body
of this notice and appendices hereto.
EFFECTIVE DATE: (Date of publication in the FEDERAL REGISTER).
FOR FURTHER INFORMATION CONTACT:
Linda F. Potts, Assistant to the Director, Office of
Tariff Affairs, U.S. Treasury Department, 15th and Pennsylvania
Avenue, NW, Washington, D.C. 20220, telephone (202/566-2951).
SUPPLEMENTARY INFORMATION:
On October 25, 1977, information was received in proper
form pursuant to Sec.153.26 and 153.27, Customs Regulations
(19 CFR 153.26, 153.27), from counsel on behalf of National
Steel Corp., alleging that cold rolled and galvanized carbon
steel sheets from Belgium, France, the Federal Republic of
Germany, Italy, the Netherlands, and the United Kingdom is
being, or is likely to be sold at less than fair value within
the meaning of the Antidumping Act, 1921, as amended (19 U.S.C.
160 et seq.).
This information was the subject of "antidumping proceeding
notices" which were published in the FEDERAL REGISTER of
December 2, 1977 (42 FR 61348-54.) A notice extending the antidumping investigatory period for the six investigations was
published in the FEDERAL REGISTER on June 8, 1978 (43 FR 24933).

- 2 National Steel submitted a letter dated August 14, 1978,
indicating a willingness to withdraw its petition if the
Treasury agreed with certain understandings concerning National
Steel's right to refile its petition. On August 15, 1978, the
Treasury Department confirmed these understandings in a letter
and on that date, National Steel submitted a letter formally
withdrawing its petition. These letters are reproduced as
appendices to this notice.
Treasury has been monitoring and will continue carefully
to monitor entries of cold rolled and galvanized carbon steel
sheets under the trigger price mechanism and to take appropriate
action to ensure the effective enforcement of the Antidumping
Act with respect to that product. In this connection, it should
be noted, as indicated in the notice of proposed rulemaking
regarding the special summary steel invoice (42 FR 65214) , that
Treasury views its authority to withhold appraisement retroactively
in appropriate cases as an important tool for providing effective
enforcement of the Antidumping Act.
Accordingly, I hereby conclude that based upon the withdrawal
of the antidumping petition and in view of the fact that cold
rolled and galvanized carbon steel sheets are subject to the
"trigger price mechanism" administered by this Department, it
is appropriate to terminate these investigations. These
terminations are without prejudice to the filing of one or more
subsequent antidumping petitions concerning the same products.

(signed) Robert H. Mundheim
Robert Mundheim
General Counsel of
the Treasury

AUG 1 5 1978

National Steel Corporation
F. E. TUCKER
Vice President - Public Affairs

August 14, 1978

Robert H. Mundheim, Esquire
General Counsel
Department of the Treasury
Washington, D.C. 20220
Re: National Steel Corporation Antidumping Case
Dear Mr. Mundheim:
On October 20, 1977, National Steel Corporation
("National") filed an Antidumping Petition at the U. S.
Customs Service. The Petition covered cold rolled and
galvanized steel sheets from Belgium, France, Germany,
Italy/^Netherlands and the United Kingdom. The Petition
alleged that these steel products were being sold in the
United States at less than fair value under the usual
pricing test and under the cost of production/constructed
value test.
On December 2, 19 77, separate Antidumping Proceeding
Notices were published for each of the six European countries
involved in this case (42 F.R. 61348-61354).
On December 6, 19 77, the Solomon Task Force Report
recommended a Trigger Price Mechanism ("TPM") to facilitate
administration of the Antidumping Act for certain steel mill
products including cold rolled and galvanized sheets. The
TPM subsequently was (and is continuing to be) implemented
by the Treasury Department.
On May 31, 1978, in recognition of Treasury's need
to devote substantial resources to the TPM, National withdrew
the cost of production (but not the pricing) allegations in
its Antidumping Petition.
On June 2, 19 78, Treasury announced a three-month
extension of the investigatory period (43 F.R. 42933, June 8, 1978).

Robert H. Mundheim, Esquire
August 14, 1978
Page Two
We recognize that the effective administration of
the TPM will continue to require the allocation of substantial
Treasury resources. We also are hopeful that, with the
expiration of an initial "grace period", the TPM should start
,• ~u u

..,-,~

I~±~~A~A

+-^

r>~* .i-u->.u tY\e results

A^

;hortly (and
.mport figures.
Therefore, National will withdraw the remaining
pricing allegations in its Antidumping Petition (and thus its
entire Petition) if Treasury accepts and expressly acknowledges
the following:
(1) The withdrawal is without prejudice;
(2) The Treasury files pertaining to the
National Antidumping Petition will be
retained for at least five years from
the date on which the Petition is
withdrawn; and
(3) Any subsequent filing with respect to
the withdrawn Petition will be processed
expeditiously using, among other things,
the relevant information in these retained
files and the accumulated expertise
attained in the development of that
information.
Upon receipt of your acceptance and acknowledgement
of the above three points, National promptly will provide you
with a letter confirming the withdrawal of its Petition.
Very truly yours,
/

' C

/ sff /?

/

Fred E. Tucker
cc:

G. A. Stinson
R. M. Golden

flu

G 1 5 1978

Dear Mr. Tucker:
Thank you for your letter of August 14, 1978, in which
you indicate that based on certain understandings, National
Steel Corporation would withdraw its antidumping petitions
relating to cold rolled and galvanized steel sheets from
Belgium, France, Germany, Italy, the Netherlands and the
United Kingdom.
I want to confirm to you that National Steel Corporations' withdrawal of its petition will be without prejudice
to its right to refile antidumping petitions against Belgian#
French, German, Italian, Netherlands' and United Kingdom cold
rolled and galvanized steel sheets at any time in the future.
Moreover, I want to confirm that if National Steel Corporation should refile an antidumping petition against such cold
rolled and galvanized steel sheets, relevant evidence submitted
or developed in connection with National Steel's previous
complaints will be used. As you may know, Treasury normally
maintains its files for more than 5 years and would make no
exception to that practice in this case. Finally, Treasury
will expeditiously conclude its disposition of any refiled
complaints on these products, utilizing all the relevant information contained in its files, including information obtained
in updating and implementing the trigger price mechanism.
Please be assured that the Treasury Department will
continue carefully to monitor cold rolled and galvanized steel
sheets under the trigger price mechanism and will take appropriate action to ensure the effective enforcement of the Antidumping Act with respect to that product.
We will act on your withdrawal as soon as you give me
formal notification that National Steel Corporation is with-

-2-

drawing its antidumping petitions on cold rolled and galvanized steel sheets from Belgium, France, Germany, Italy,
the Netherlands and the United Kingdom.
Sincerely yours,
("Ened) Robert „. VwShBia
Robert H. Mundheim
Mr. Fred E. Tucker
Vice President - Public Affairs
National Steel Corporation
1050 17th Street, N.W.
Washington, D.C*
20036

^jp? 7 National Steel Corporation
F. E. TUCKER
Vice President - Public Affairs

August 15, 1978

Robert H. Mundheim, Esquire
General Counsel
Department of the Treasury
Room 3000
15th & Pennsylvania Avenues, N.W.
Washington, D.C. 20220
Re: National Steel Corporation Antidumping Case
Dear Mr. Mundheim:
Thank you for your letter of August 15, 1978,
in which you confirm the understandings set forth in our
letter of August 14, 1978.
This constitutes formal notification by National
Steel Corporation that it is withdrawing its Antidumping
Petition on cold rolled and galzanized steel sheets from
Belgium, France, Germany, Italy, Netherlands and the
United Kingdom.
Very truly yours,

Fred E. Tucker
cc:

Counsel of Record
G. A. Stinson
R. M. Golden

FOR IMMEDIATE RELEASE
August 16, 1978

Contact:

Robert E. Nipp
(202) 566-5328

TREASURY ANNOUNCES START OF ANTIDUMPING
INVESTIGATION OF SUGAR FROM BELGIUM, THE FEDERAL
REPUBLIC OF GERMANY AND FRANCE
The Treasury Department today announced it has initiated
an antidumping investigation of imports of sugar from Belgium,
the Federal Republic of Germany and France.
Treasury's announcement followed a summary investigation
conducted by the U.S. Customs Service after receipt of a
petition filed by the Florida Sugar Marketing and Terminal
Association, Inc. alleging that growers/processors in these
three countries are dumping sugar in the United States. The
petitioner claims that sugar from these three countries is
sold in this country at lower prices than in the respective
home markets.
Although the petitioner also claimed injury from these
imports, the Treasury has expressed "substantial doubt" of
the injury and has referred the case to the U.S. International
Trade Commission for a determination within 30 days of
whether there is any reasonable indication of injury from
these imports# If the Commission determines there is no
reasonable indication of injury, the antidumping investigation
will be terminated immediately; otherwise, the investigation
will continue.
If, after a full investigation, the Treasury finds sales
at "less than fair value," the U.S. International Trade
Commission will again consider the question of injury in a
full 90-day investigation of that issue. Both sales at
"less than fair value" and "injury" must be determined before
a dumping finding is reached.
The Treasury Department has recently imposed a 10.8 cents/
pound countervailing duty on sugar exported to the United States
from these three countries as members of the European
B-llll

-2Community. This action was taken in a Notice published
in the Federal Register of July 31, 1978 after the Treasury
found that subsidies are paid on European Community exports
of sugar to the United States.
Notice of the start of the investigation will appear
in the Federal Register of August 18, 1978.
Imports of sugar from these three countries during
calendar year 1977 was valued at approximately $10.4 million
as follows: Federal Republic of Germany - $5.3 million
France - $4.8 million, Belgium - $0.3 million.
'

***

August 17, 1978
Statement by W. Michael Blumenthal
Secretary of the Treasury Regarding the Dollar

The President has asked me to announce that under his
instructions, Chairman Miller and I are giving urgent
attention to proposals in a number of areas and we would
expect a series of continuing actions to be announced as
decisions are reached over the next few weeks.

FOR IMMEDIATE RELEASE
EXPECTED AT 10:00 A.M.
THURSDAY, AUGUST 17, 1978
STATEMENT BY HELEN B. JUNZ
DEPUTY ASSISTANT SECRETARY FOR
COMMODITIES AND NATURAL RESOURCES
BEFORE THE
SUBCOMMITTEE ON OCEANOGRAPHY OF THE
HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES
Mr. Chairman and Members of this Committee:
I am pleased to testify before this Committee in order
to clarify the relationship between U.S. international economic
policy and the seabed negotiations at the U.N. Law of the Sea
Conference. While consistency with the international economic
policies of the United States, especially in the areas of
commodity policy and technology transfer is important, it
clearly cannot be the only criterion for assessing the seabed
text. A comprehensive LOS treaty, in the overall national
interest, needs to balance a broad spectrum of policy objectives
and interests, of which commodity and investment policies are
an integral but not an overriding part.
I would like to summarize U.S. policies in these latter
areas as they might apply to seabed mining considerations.

B-1112

- 2 The Administration's Commodity Policy __^
The Carter Administration has sought to integrate ^
domestic and international policy concerns in the commodity
area into a single, coherent approach. Central to this
approach is our willingness to negotiate international
agreements for individual commodities (ICAs) designed to
reduce excessive price volatility. Such agreements form
a basic part of our efforts to assure a stable domestic
and international production, investment, and trading climate
for raw materials. In addition, we have agreed to find
ways and means to asssist in the financing of buffer stocks
as part of individual commodity agreements, and to use
existing financial institutions, both national and international, to expand production and processing of raw materials.
Both producing and consuming countries currently face
important problems in the commodity area. Excessive shortterm price fluctuations can ratchet up inflation in importing
countries, and destabilize economic development in exporting
countries. Inadequate investment in the production of raw
materials creates supply shortages, which in turn result
in longer run inflationary pressures world-wide.
International Commodity Agreements
In devising economically rational ICAs, we believe that
certain principles are essential to serve the multi-faceted
interests of the United States as a major importer/consumer

- 3 or exporter/producer of virtually every primary commodity:
they must be designed to reduce short-term price
fluctuations around underlying market trends, and
not to raise prices in the longer-term;
they must balance the interests of producers and
consumers, in terms of responsibilities and
benefits;
they must provide wide latitude for the operation
of market forces; and
decision making within ICAs should be weighted to
reflect the relative economic interests of each
producer or consumer.
The United States opposes production controls in
ICAs. By artificially cutting back on supplies, production
controls in ICAs tend to distort markets, raise prices above
market trends and provide short-term gains for producers to
the detriment of consumers. Such production controls also
create inefficient production patterns by forcing both
low and high cost producers to cut back output thereby
raising the average cost of production.
Because they are usually based upon some average of
historical market shares, production controls tend to freeze
production and marketing patterns and restrain the entry of
newer, possibly more efficient producers. The implementation
of supply controls is difficult, with leakages frequent, and
errors not easily corrected in the short run. Supply control

- 4 mechanisms usually are based on previous years1 data
and sometimes involve precarious forecasts of future
output. Finally, they require long lead times before
significant impact on the supply and demand situation
becomes apparent. For these reasons, in negotiating ICAs,
the Administration prefers buffer stock arrangements.
Commodity Investment Policy:
The United States seeks to facilitate investment in mining
and processing in order to:
avoid misallocation of important economic resources
and the inflation such misallocations cause;
diversify supply and contribute to a reduction
in U.S. vulnerability to collusive price arrangements and disruptions of supply; and
help developing countries expand their economies.
There is evidence of global misallocation of resources
which, if continued, could significantly increase the cost
of raw materials over the long run. A recent World Bank
survey found that 80 percent of all exploration expenditures
in 1970-73 were being made in the industrialized countries—
the United States, Canada, Australia, and South Africa.
Private firms are reluctant to invest in developing countries,
primarily because of political risks. U.S. firms, for
example, prefer to develop a copper deposit with less than
one-half percent richness in the United States than deposits

- 5 which are more than twice as rich in an LDC*

Yet the rate

of return on minerals projects in developing countries can
be higher than in industrial countries. Indeed, for some
Fourth World countries, minerals projects may be the only
good projects that external private investment could develop.
To avoid this misallocation of resources, the Administration
has encouraged the international financial institutions, such
as the World Bank, to take measures which will stimulate
investment in developing country mining and processing
projects. The United States has also expanded the mandate
of the Overseas Private Investment Corporation (OPIC) so
that it can offer investment insurance for U. S. investors
in overseas raw materials projects.
Production Controls in LOS Treaty
In the Law of the Sea Conference land-based producers
of nickel are seeking to protect and preserve their future
investments from competition from seabed mining. They
fear that seabed mining will be subsidized in one way
or another, and accordingly, be able to compete with
unfair advantage over land-based mining. Canada, as the
leader of this group, has stressed the nickel production
potential of tropical developing countries in order to
gain additional allies. Many might have deposits of nickel
bearing laterite ores. The G-77, as a whole, have adopted
the position that a production control mechanism is necessary

- 6 in order to protect nickel producers in developing
countries, even though the number is small.
The United States has agreed to negotiate production
control mechanisms that should interfere as little as
possible with the currently anticipated production from
seabed mining.

To this end, we have been prepared to agree

to a control formula that would allow ocean miners to supply
100 percent of the projected growth of the nickel
market.

Offering to agree to such a formula represented a

significant effort to reach a compromise as well as a
departure from the pure principle of efficient resource
allocation by market forces.
At the last session, on an ad referendum basis, the
U.S. Delegation negotiated a formula with the Canadians that
would be limited to the first 20 years of seabed mining and
in which seabed mining would be restricted, under standard
assumptions, to a range of 60-70 percent of the projected
growth in the world nickel market.
Admittedly, there may be economic costs associated with
any production control formula.

A restrictive production

control formula may misallocate resources and distort efficient
market patterns if it attempts to assure any group of producers
a fixed share of the projected growth of the market regardless
of the relative costs and efficiency of various modes of
production.

- 7 The interests the U.S. has in a Law of the Sea treaty
and in a seabed mining regime clearly are much broader
than those that govern our general policy vis-a-vis
commodity agreements on specific commodities. Moreover,
the entire regime being considered for deep seabed mining
raises a unique set of circumstances in which to assess
the costs and benefits of any of the elements of that
system, including production controls. Thus, a production
limitation that would be unacceptable for example in a
commodity price stabilization agreement, might be found
acceptable to U.S. economic and other interests in a
Law of the Sea treaty. Any production limitation would,
of course, have to be examined in light of all relevant
provisions of the text and relevant economic factors
to determine to what extent, if any, it in fact would
limit expected seabed mining. The Administration still
is weighing the costs and benefits of the various navigational,
environmental, scientific and economic considerations
that attach to the treaty as a whole.
The Administration's Policy on Technology Transfer
With regard to privately-owned technologies, the
Administration favors a generally open, market-oriented
international system. In keeping with our foreign
investment posture, we do not actively promote or

- 8 discourage proprietary transfers through special measures
although the activities of our Overseas Private Investment
Corporation and EXIM Bank indirectly affect such flows.
We support efforts that facilitate an environment
conducive to flows of capital and technology. In particular,
we support the efforts of LDCs to generate a scientific
and technological infrastructure to support economic
growth. We believe, however, that a system of appropriate
rewards and incentives, including protection of industrial
property rights, is essential to induce and sustain
high levels of innovation. Such a system should not,
however, lend itself to collusion among technology suppliers.
The main forum for the North-South dialogue on the
transfer of technology is the UN Conference on Trade
and Development (UNCTAD), where negotiations on an
international code of conduct for technology transfer
have been on-going since 1975. The United States and
other industrial countries support the adoption of
voluntary guidelines for technology transfer, perhaps
similar to the OECD guidelines for multinational enterprises
adopted in June 1976. This might involve a code setting
out balanced guidelines for government action in respect
to technology transactions and conduct by enterprises.

- 9 The developing countries, however, are looking for
a legally binding convention based on the principle that
all countries should have the right of access to technology
in order to improve the living standards of their peoples.
Thus, the G-77 seek to extend the concept of the universal
heritage of mankind to the field of technology. The
developing countries seek to revise and limit the protection
accorded industrial property rights and to institute
rules at the national and international level which
limit the negotiating flexibility of enterprises.
The United States believes that erosion of the traditional
rights associated with proprietary technology would constitute
a significant disincentive to the generation and dissemination
of technology.
Many developing countries have national laws and policies
affecting the transfer of technology which the United States
could not accept as part of an international agreement on
technology transfer. For example, some developing countries
have laws which tend to reduce patent protection for
certain types of technology, require patent rights to lapse
if not worked in a short period of time, or tax royalties
as if they were profits.
The G-77 often have used restrictive policies regarding
technological transfers adopted at a national level as
a basis for their positions in multilateral negotiations.

- 10 The negotiations on technology transfer conducted at
the Law of the Sea Conference are unique in the sense that
they aim at assuring that the Enterprise will in fact be
able to operate its sites productively. Thus they back up
the basic principle of the parallel system. While the
Enterprise will need to have access to requisite technology,
such tranfer clearly also must occur under fair and
commercial terms. The negotiations on technology transfer
in the Law of the Sea Conference will be pursued further
at future sessions. The Administration will weigh provisions
regarding the transfer of technology in an LOS treaty
seriously, given the far-reachinng implications they could
have for the future of ocean mining.

FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m., E.D.T.

STATEMENT OF
HARRY L. GUTMAN
OFFICE OF TAX LEGISLATIVE COUNSEL
OFFICE OF TAX POLICY
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON MISCELLANEOUS REVENUE MEASURES
OF THE HOUSE WAYS AND MEANS COMMITTEE
AUGUST 17, 1978
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views
of the Treasury Department on H.R. 12686 and H.R. 10239.
H.R. 12686
H.R. 12686 would amend Code Section 48(a)(1) to make
eligible for the investment credit greenhouse structures which
are used for the commercial production of plants. The bill is
similar to H.R. 12846, which would render structures used to
house poultry facilities eligible for the investment credit.

B- 1113

- 2 Under current law, buildings and their structural components are generally not eligible for the investment credit.
Certain special purpose structures are eligible for the credit
but only if (1) the structure houses property used as an
integral part of a productive activity and the structure is
so closely related to the use of such property that it is clearly
expected to be replaced at the same time as the property that
it houses is replaced, or (2) the structure essentially
constitutes an item of machinery. Thus, H.R. 12686 would render
greenhouses eligible for the investment credit even though under
current law they are generally ineligible.
As we noted in connection with H.R. 12846, the President
has proposed expanding the investment credit to all industrial
structures. Under this proposal, greenhouses would be eligible
for the credit. We do not support H.R. 12686 because we
believe that extension of the credit to industrial structures
should be given effect on a general, rather than piecemeal, basis.
H.R. 10239
Code Section 103(b)(4)(G) provides that tax-exempt bonds
may be issued to provide "facilities for the furnishing of
water, if available on reasonable demand to members of the

- 3 general public."

H.R. 10239 would eliminate the "general

public" requirement and permit tax-exempt bonds to be issued
simply for "facilities for the furnishing of water (including
water used for the furnishing of electric energy)."
We are opposed to H.R. 10239. We oppose the expansion
of the use of tax-exempt industrial development bonds. Such
bonds tend to increase the financing cost of traditional governmental functions. Financing for activities, such as schools,
is forced to compete with industrial development bonds, which
may9provide greater security and a higher premium to investors.
This competition is particularly unfair because private
corporations, unlike state and local governments, have access
to other sources of capital. The result is that local taxpayers
pay higher taxes to finance their traditional governmental
services so that private concerns can pay a lower interest
rate to finance their expansion.
Also, the bill would eliminate the "public use" test for
water facilities. Thus, under the bill tax-exempt financing
would be allowed for any water project, even if only one or two
private corporations would benefit from the project. This
constitutes a substantial enlargement of the "water facilities"
exemption.

- 4 Further, the bill would expand present law by permitting
tax-exempt bond treatment for water facilities used to provide
cooling water for any electrical generating facility. Where
the water will be used in conjunction with production of
electrical energy, the Internal Revenue Service has taken the
position that the bonds will be tax exempt only if they meet
the electrical energy exemption requirements; that is, the
facility must produce energy that will be used locally.
H.R. 10239 would appear to allow the use of cooling water for
electric energy even where the electrical power is not "local"
within the meaning of the Code and regulations.
Thus, the bill provides a substantial expansion of the
industrial development bond exceptions. Water would no longer
have to be available on reasonable demand for use by the
general public. In addition, the water could be used for
cooling purposes in conjunction with the generation of electric
energy even where the facility is not local.

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FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m.
STATEMENT OF
H. DAVID ROSENBLOOM, INTERNATIONAL TAX COUNSEL
OFFICE OF TAX POLICY, DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON MISCELLANEOUS REVENUE MEASURES
OF THE COMMITTEE ON WAYS AND MEANS
August 17, 1978
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to appear before
you today to discuss H.R. 13336 and H.R. 13758.
H.R. 13336
The proposed bill would amend section 1441(c) of the
Code to provide that commissions paid by a ship supplier to
a nonresident alien individual will not be subject to
withholding if the individual is in the employ of a foreign
person in the operation of a ship documented under the laws
of a foreign country and the commissions relate to the sale
of supplies to be used in the operation of such ship.
The proposed amendment to the Code would apply retroactively to all open years, but refunds of taxes actually
withheld are not authorized except as to commissions paid on
or after July 1, 1978.
Background
It is Treasury's understanding that the bill has been
proposed in reaction to a technical advice issued by the
Internal Revenue Service in 1975. The technical advice
provided that, under the facts in that particular case,
kickbacks or commissions paid by a ship supplier to ship
captains were for the performance of services in the U.S. by
the ship captain as an independent contractor. The services
in question were the purchasing of the ship supplier's
wares. As a result, the kickback was subject to withholding
and the ship supplier was the responsible withholding agent.
B-1114

- 2 This position conforms to the general rule that payments
by a U.S. person to a nonresident alien independent contractor
for the performance of services within the United States are
subject to withholding at the rate of 30 percent of gross
income. Rev. Rul. 58-479, 1958-2 C.B. 60, specifically
states that kickbacks from ship suppliers to nonresident
alien ship captains are subject to withholding under section
1441.
There is an argument, however, that a ship supplier
merely remits wages on behalf of the ship owner to the
latter's employee, the ship captain. This argument takes.
into account that ship suppliers increase their billings to
the foreign ship owner by the amount of the kickback and
that many foreign ship owners are aware of this practice and
take kickbacks into account in setting the captain's salary.
In effect the argument is that the ship supplier is not
obligated to withhold under section 1441 for wages he remits
as agent of the ship owner.
Analysis
The bill proposes to relieve U.S. ship suppliers from
the obligation to withhold U.S. tax on kickbacks or commissions they pay to nonresident alien ship captains. There
are two reasons why this proposal is justifiable. First, it
may be difficult to determine whether the relationship
between a ship owner, ship captain, and ship supplier is
such that the ship supplier is remitting wages on behalf of
the ship owner or making a payment to the ship captain on
his own behalf. Various factors, such as the state of the
ship owner's knowledge of the kickback practice and whether
the ship owner bears the cost of the kickback through inflated
prices for goods purchased, appear to be relevant.
Second, in many cases there is little need to withhold
U.S. tax. The nonresident alien ship capitan is subject to
tax in the United States only with respect to his U.S.
source income. The services of a captain or crewmember are
viewed as U.S. source only to the extent that the ship is in
U.S. territorial waters. In computing the captain's final
tax liability a personal exemption is allowed. Thus,
adjusted gross income must exceed $750 before U.S. tax
liability attaches. Because of the Code source rules and
because a ship captain may visit the U.S. only infrequently
andfor short periods of time, it appears that many nonresident alien ship captains may have little or no final
U.S. tax liability and that withholding of tax may frequently
serve no purpose. By filing a tax return the captain can in
many cases obtain a refund of the taxes that have been
withheld.

- 3 Treasury Position
The Treasury does not object to section (a) of the
bill. However, the Treasury objects to section (b) of the
bill, which contains the effective date. The Treasury would
not object to section (b) if it were modified so that the
proposed changes to section 1441 would apply only to commissions paid on or after the date of enactment of the bill.
As drafted, section (b) would absolve from withholding
liability all U.S. ship suppliers who in the past decided
not to withhold. Section (b) would, however, prevent
refunds of any amounts that had been deducted or withheld
under section 1441 prior to July 1, 1978. Presumably,
the intention is to preclude the proposed amendment to
section 1441(c) from authorizing a refund that would not
otherwise have been allowed. The bill is ambiguous on this
point, however, and could be read to disallow refunds of
withholding tax to which a ship captain would otherwise be
entitled when he files his return.
Even if the bill were modified to clarify this point,
however, the effective date would have the objectionable
effect of retroactively eliminating a withholding tax liability
that should have been observed. In this sense it rewards
those who were negligent and undermines the general purpose
of the Code's withholding provisions.
We understand there has been considerable competitive
pressure on ship suppliers not to withhold tax because ship
captains would have been more likely to give their business
to a ship supplier who did not withhold. Nevertheless,
there has been a published IRS position since 1958 stating
that kickbacks from ship suppliers to ship captains are
subject to withholding under section 1441 and there appears
to be no justification for retroactively rewarding those who
decided to take their chances by not following the Service's
published position.
H.R. 13758
Section 1 of the bill amends section 861(a)(1)(F) of
the Code so that it applies to interest on amounts described
in a new provision, section 861(c) (2). Section 2 of the
bill amends section 861(c) by adding the new section 861(c) (2).
This section states that for the purposes of section 861(a)(1)(F)
the amounts covered are (1) deposits with persons carrying
on the banking business and (2) certain deposits or withdrawable accounts with, in broad terms, chartered savings

- 4 and loan associations. Section 3 of the bill provides that
the amendments made by sections 1 and 2 shall apply to
taxable years beginning after the date of enactment.
Analysis
Code section 861 provides, in relevant part, that
interest income paid by a United States person is considered
to be sourced within the United States. There are three
relevant exceptions to this general rule. First, interest
on amounts described in section 861(c) (deposits with persons
carrying on the banking business and with chartered savings
and loan associations, and certain amounts held by insurance
companies) which is received by a nonresident alien or
foreign corporation is considered to be foreign source if
the interest is not effectively connected with the conduct
of a trade or business within the United States. Second,
interest paid by a domestic corporation is considered to be
foreign source when less than 20 percent of the gross
income from all sources of such corporation is from within
the U.S. Third, interest on deposits with a foreign branch
of a domestic corporation or domestic partnership is considered to be foreign source if such branch is engaged in
the commercial banking business. This third exception does
not apply to savings and loan associations. Thus, interest
paid by a foreign branch of a domestic savings and loan
association to a U.S. person or a resident alien is from
U.S. sources unless less than 20 percent of the savings and
loan association's income is from U.S. sources.
There is a class of U.S. taxpayers that must determine
for tax purposes whether interest received is sourced within
Puerto Rico — corporations that desire to qualify for the
tax credit extended by section 936 and individuals that seek
exemption from U.S. tax provided by section 933. To determine
whether interest paid by a savings and loan operating in a
foreign country or possession is sourced in that foreign
country or possession reliance must be placed on the source
rules provided by Code sections 863 and 861(a)(1)(D). In
essence, these sections provide that when a U.S. person or
resident alien receives interest income from a United States
corporation that is a savings and loan association with less
than 20 percent U.S. source income, that interest is sourced
within a country or possession if and to the extent that the
gross income of the savings and loan is from within that
country or possession; for this rule to apply, however, at
least
from within
50 percent
that country
of the savings
or possession.
and loan's
The
income
percentage
must be
of

- 5 the interest that is treated as being from, for example,
Puerto Rico depends upon the percentage of the savings and
loan's gross income that is from Puerto Rico.
In contrast to the section 861(a)(1)(D) pro rata apportionment of the source of the interest paid by the savings
and loan is section 861(a)(1)(F). That section provides in
conjunction with section 863 that all of the interest paid
by a foreign branch of a U.S. corporation engaged in the
commercial banking business is sourced in the country or
possession in which the branch is located (see regulation
section 1.861-2(b)(5)).
Treasury Position
H.R. 13758 has been proposed in order to provide
equality of treatment for savings and loan associations and
those engaged in the commercial banking business. The
current Code provision that sources all bank interest in a
particular country or in a particular possession, without
regard to the general "pro rata" rule, applies only to those
engaged in the commercial banking business. A savings and
loan association must source its interest payments based on
the proportion of its income that is derived from the
particular country or possession, and none of its interest
is sourced in the country or possession if it has 20 percent
or more U.S. source income.
This statutory inequality has significance in the case
of depositors that desire the benefits of sections 936 and
933 of the Code. The Treasury expects that regulations to
be proposed under section 936 will cure the problem for
section 936 corporations. The problem will remain, however,
for individuals resident in Puerto Rico. Those individuals
might find it preferable to deposit funds with Puerto Rican
branches of commercial banks rather than savings and loans
because in the former situation the interest is, in all
cases, entirely from within Puerto Rico.
Thus, the Treasury supports the objective sought by
H.R. 13758. The language of H.R. 13758 raises, however, a
side issue which should be resolved. Section 2 of the bill
amends Code section 861(a) (1) (F) so that it would also apply
to banks other than commercial banks and savings and loan
associations. I refer you to proposed section 861(c) (2) (A)
as compared with current section 861(a)(1)(F). This proposed
statutory change does not relate to the problem facing the
savings and loan associations and we are not aware of the

- 6 need for, or the practical consequences of, the change. We
recommend, absent a satisfactory explantion, that H.R. 13758
use the relevant language of current section 861(a)(1)(F)
referring to "the commercial banking business" (emphasis
added) . Subject to our reservation on this portion of H.R.
13758, the Treasury supports the bill's enactment.
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ROOM 5004

^Z3f78
TRUSvi.ii' , LPAKTMENT
FOR RELEASE UPON DELIVERY
Expected At 10:00 a.m.
August 17, 197 8
STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
ON
THE REVENUE ACT OF 1978 (H.R. 13511)
BEFORE THE COMMITTEE ON FINANCE
WASHINGTON, D.C.
Mr. Chairman and members of this distinguished Committee:
The Committee begins consideration today of H.R. 13511,
the Revenue Act of 1978. This bill, recently adopted by the
House of Representatives, would reduce tax liabilities by
$16.3 billion in calendar year 1979. Of this amount, $10.4
billion is attributable to personal tax relief, $4.0 billion
to business tax reductions, and $1.9 billion to a cut in
capital gains taxes.*
My testimony will assess the House-passed bill in light
of the objectives outlined in the President's tax message
last January. One goal emphasized by the President is to
provide substantial tax relief for individuals, especially
those persons in the low and middle-income categories.
Another objective is to furnish efficient investment incentives
that encourage businesses to modernize productive facilities
and to create permanent, meaningful jobs. We also believe
that the income tax structure should be improved through
reforms that make the system more equitable and simpler for
average taxpayers.
H.R. 13 511 takes some steps toward these goals, but
there is substantial room for improvement. The size of the
net tax reduction — about $16 billion — is within a reasonable range of tax cuts that will maintain growth without
increasing inflationary pressures. Moreover, the bill's
*~ These revenue figures do net include "feedback" revenues
that micht be aenerated through economic stimulus.
The Appendix describes the role of "feedback" effects
in Treasurv revenue estimating procedures.
L

~ -115

- 2 split between personal and business relief is acceptable.
But we do not like the distribution of the cuts among
taxpayers. In my statement, I will describe ways in which
we believe the relief can be distributed more equitably.
I will also suggest additional structural tax changes
for the Committee's consideration. We are pleased that the
House adopted some of the tax reform proposals recommended
by the President. The bill includes new tax shelter restrictions,
simplification of the itemized deduction schedule, elimination
of the tax exclusion for unemployment benefits at highincome levels, and repeal of the special alternative tax
ceiling on the capital gains of persons in the top rate
brackets. We urge the Committee to build upon these reforms
now contained in H.R. 13 511.
In this regard, the results of a recent Roper survey
are illuminating. The survey, released last month,
indicates that the American public considers tax reform the
third most pressing national problem, ranking behind only
controlling inflation and lowering the crime rate; and
significantly, "tax reform" to the Roper respondents is
equated much more frequently with tax fairness than with tax
reduction. This timely expression of public sentiment
should provide a useful guide for your deliberations.
THE ECONOMIC NEED FOR A PRUDENT TAX REDUCTION
Before turning to specific proposals in the House bill,
let me discuss the size of tax reductions needed in 1979 —
an evaluation that must be made in the light of recent
economic developments. In many ways, our economy has performed
remarkably well over the past year and a half.
The unemployment rate at the end of 197 6 was 7.8 percent; that rate
has now dropped to 6.2 percent in July. Almost 6 million
more people are employed now than were employed at the
beginning of this Administration, and a larger percentage of
the working age population now holds jobs than ever before.
In the fourth year of our recovery from recession, we are
still experiencing a real growth rate of about 4 percent.
To maintain this recovery, tax policy must take account
of several factors. In 1979, social security tax liabilities
will be increased over 1977 levels by $4 billion due to
previously scheduled rate increases and by an additional $7
billion due to chances enacted in 1977. Other tax increases
will result as a higher cost of living pushes individuals
into higher rate brackets without increasing real incomes.

An income tax cut in ]979 will help to compensate for these
factors and thereby to maintain adequate purchasing power to
continue our economic growth.
Perhaps the most significant risk in the economic
outlook is inflation. Over the first half of ]978, the
consumer price index has risen at an annual rate exceeding
]0.4 percent. We believe that the inflation rate for the
second half of this year will be substantially lower, by
perhaps one-third, and that the annual rate will be more
moderate in ]979 than in 197 8. Nevertheless, inflation will
continue to be a troublesome problem.
In recognition of the need to restrain accelerating
inflationary pressures, the Administration has called for a
reduction in the size of the ]979 tax cut, from the $25
billion figure recommended in January to $20 billion.
Moreover, we have urged Congress to trim an additional $5
billion from Federal budget outlays for fiscal year ]979 in
order to reduce the deficit for that year to $43.5 billion.
Budgetary restraint is essential.
Tax and budget policy must address another threat to
continued economic recovery: sluggish business investment.
Investment in new plant and equipment now accounts for only
one-tenth of our Nation's real gross national product, a
much smaller share than is needed to provide the tools of
production for a full-employment economy in the ]980's.
Manufacturing capacity has increased at an average annual
rate of only 3 percent over the past 4 years, as compared to
a 4-]/2 percent capacity growth rate during the post-war
period through ]973. Incentives, in the form of business
tax cuts, are needed to improve this disappointing record of
business fixed investment and to avoid inflationary capacity
bottlenecks in the years ahead.
We believe that the tax reduction contained in the
House bill for ]979 represents generally an appropriate
fiscal response to these economic concerns. The magnitude
of the cut in H.R. ]35]] is about $].2 billion less than
that recommended by the Administration.* Tax relief of this
size would help maintain the economic recovery, without
bloating the deficit and exacerbating inflation. We recommend
that the Finance Committee adopt a tax cut of approximately
the same magnitude.
* Using the same estimating assumptions, the tax cut in
H.R. 13511 is $18.8 billion, compared to the Administration's
$20 billion recommendation. The Administration did not
count the expiration of the $2.5 billion general jobs^
credit in its tax program as a revenue-raising prevision.
It was, however, accounted for elsewhere in the budget.

- 4 A tax cut substantially larger than that in the House
bill would create serious risks to our economic recovery, in
particular the creation of inflationary pressures. Whatever
temporary benefits might be obtained through lower tax
burdens would be quickly negated by the resulting rise in
prices and interest rates; increased after-tax incomes for
Individuals would be illusory, and the tax incentives for
business investment and job creation would be undermined.
These economic risks should not be taken. We ask this
Committee not to adopt a significant increase in the tax
reduction now contained in H.R. 13511.
PERSONAL TAX CHANGES
Tax Relief for Individuals
In fashioning the portion of the tax cut relating to
individuals, the Committee is urged to bear in mind a fundamental principle of tax equity: taxes should be imposed in
accordance with ability to pay. The tax program recommended
by the President reflects that principle. We are convinced
that tax reduction should be focused on individuals in
middle and low-income brackets; these are the persons most
in need of relief from tax burdens. The tax bill adopted by
the House does not adequately respond to this critical
principle of tax equity.
H.R. 13511 would effect the tax cut through several
changes. Individual rate brackets would be expanded by
about 6 percent. The zero bracket amount ("standard deduction")
would be increased from $3,200 to $3,400 for joint returns
and from $2,200 to $2,300 for single returns. The personal
exemption would be raised from $7 50 to $1,000, with the
general tax credit being eliminated. Rates would be cut in
certain brackets.
In the abstract, these changes may appear to have
merit. Yet, when one examines the impact of H.R. 13 511 on
specific taxpayers, the inequities become apparent. As
H.R. 13511 was adopted by the House, a typical four-person
family with wage income of $10,000 would receive an income
-ax reduction of only $62 — a cut one-fifteenth the size of
the reduction provided to a family with salary ten times as
i^rge. Relief for the typical four-person family at the
$20,000 income level would be less than cne-sixth of the tax
cut enjoyed by a $100,000 income family.

- 5 An examination of combined income and social security
tax changes reveals the same disturbing pattern. For a
family of four at the $15,000 wage level, combined income
and social security taxes would be reduced $35 in 1979 in
comparison to 1977 levels. The net income and social security
tax reduction at the $100,000 level would be $485 — a cut
14 times as large even though income is only 7 times as
large.
Moreover, it is important to recognize that these
figures, relating to personal income tax relief, do not
present the bill in its full perspective. The comparisons I
have just discussed do not include the impact of capital
gains relief in H.R. 13511. The proposed capital gains tax
changes for 197 9 and the subsequent inflation adjustment for
capital assets would provide capital gains relief amounting
to nearly $7 billion annually by 1983. Like any cut in
capital gains taxes, this $7 billion would be enjoyed
primarily by persons in higher income brackets. As a
result, the inclusion of capital gains cuts in the bill
makes it especially important that the personal cuts be
focused on middle and low-income groups.
The Administration recommends that the distribution of
tax relief be altered to provide greater tax reductions than
the House bill for all income classes through $50,000. We
would reduce some of the bill's bountiful tax cuts for
persons in income classes above $50,000 and increase cuts
for taxpayers with incomes under $20,000. The share of the
total individual tax cut going to persons below $20,000
should be increased from 25 percent to about 40 percent
while the share for those above $50,000 should be reduced
from 24 percent to about 10 or 15 percent. This distribution
of relief reflects much more accurately the tax principle of
ability to pay.
As you know, the distribution of personal tax relief in
the bill depends upon two factors: rate changes and the
size of the exemption or credit for dependents. Neither of
these factors can be viewed in isolation. Changes in tax
rates can be combined with an exemption or credit to produce
virtually any degree of progressivity the Committee desires.
We suggest that a $240 credit for each dependent be
combined with generous rate cuts in the middle-income brackets
to achieve the recommended tax cut distribution — increased
tax savings in the bill for all income categories through a

- 6 level of about $50,000. The new credit would replace the
current $750 exemption for each dependent and the general
tax credit, which is equal to the greater of $3 5 per dependent
or 2 percent of the first $9,000 of taxable income. By
eliminating this complicated scheme of exemptions and
alternative forms of credits, the $240 personal credit would
achieve the same simplification as the $1,000 exemption in
the House bill.
The $240 credit would provide a more equitable tax
differential for various family sizes than would the $1,000
exemption in H.R. 13511. The members of this Committee are
well aware of the advantages of providing tax savings
through a credit. Since the personal credit would be
subtracted directly from tax liability, each additional
dependent would furnish $240 in tax savings to a taxpayer
regardless of his income level. By contrast, a $1,000
exemption would result in a $700 tax benefit for each
dependent in a top-bracket family and a $140 benefit for
each dependent in the lowest-bracket family.
In addition to equalizing the tax savings for dependents,
the $240 credit would raise the level of earnings at which
an income tax begins to be imposed. For example, the taxfree level of income for a family of four would rise from
$7,200 under present law to $9,200. This figure compares
with a tax-free level of $7,400 under the House-passed bill.
This Committee now has the opportunity to review the
tax rate schedules, the exemptions and credits that are
proposed for 197 9. I urge you to reject the House bill in
these areas and to substitute a $240 personal credit and a
new rate schedule that direct greater relief to middle and
low-income families. A sense of fairness demands these
changes to benefit the vast majority of American taxpayers.
Changes in Itemized Deductions
The House responded favorably to a number of personal
tax changes recommended by the President. Among these
proposals are changes in itemized deductions. I ask that
you accept these provisions in order to continue the tax
simplification effort that began last year.
In the Tax Reduction and Simplification Act of 1977,
Congress worked with the Administration to enact changes
that incorporate the standard deduction in the tax tables,

- 7 lessen the number of computations made by taxpayers, and
simplify the total reporting and recordkeeping burden. As a
result of these changes, approximately 40 percent of all
individual taxpayers were able to file a short Form 1040A
for tax year 1977, and the number of lines on that form was
reduced from 25 to 15. The error rate of taxpayers was
decreased dramatically, from 9.1 percent to 6.5 percent for
the long Form 1040 and from 12 percent to 5.1 percent for
Form 1040A.
We hope to sustain this encouraging progress. Itemized
deduction changes in the House bill would accomplish further
tax simplification without creating significant controversy.
The bill would simplify or eliminate a number of deductions
that add complexity to the tax system and that do not advance
any major objective of public policy.
1. State and Local Taxes. H.R. 13511 would eliminate
the deduction for State and local gasoline taxes. We urge
the Committee to adopt this provision of the House bill.
The administrative problems associated with the gasoline
deduction are large relative to the tax savings involved.
Taxpayers using the standard deduction receive no tax benefit.
The tax savings of a typical itemizer are calculated arbitrarily
and amount to only about $25. Most taxpayers use gasoline
tax tables prescribed by the Internal Revenue Service and
guess at the number of miles driven in a given year — a
fact which must be known for proper utilization of the
tables. Therefore, calculation of the gasoline tax paid is
seldom accurate, and the Internal Revenue Service has no
adequate way to check the mileage claimed by taxpayers.
In addition to creating these administrative problems,
the deductibility of gasoline taxes represents bad substantive policy. Current law lowers the net price of
gasoline by the value of the deduction, thereby encouraging
the purchase of gasoline relative to other goods. Eliminating
the deduction would advance the governmental policy of
discouraging the consumption of energy.
We recommend that the Committee also eliminate the
special deduction for general sales taxes, personal property
taxes and miscellaneous taxes while retaining deductions for
State and local income and real property taxes. State sales
taxes, like gasoline taxes, are usually determined arbitrarily
with reference to published tables that provide nearly

- 8 uniform deductions and result in a relatively small tax
benefit. Since the tax benefit for itemizers is generally
modest and since there is no benefit at all for the 69
percent of individuals claiming the standard deduction,
deductibility is not a major factor for State and local
governments in determining the rate of tax to impose. By
extending H.R. 13511 to remove deductions for these other
forms of State and local taxes, the Committee could achieve
further tax simplification; and tax increases could be
avoided by using the revenue raised from these changes to
provide larger rate reductions.
2. Political Contributions. The House adopted the
Administration's proposal to simplify the confusing scheme
of deductions and credits for political contributions.
Under current law, a taxpayer can elect to claim itemized
deductions for the first $200 of contributions. In lieu of
the deduction, he may claim a credit for one-half of his
political contributions, with a maximum credit of $50. The
House bill would repeal the political contribution deduction
while retaining the credit. As a result, the incentive of
the tax subsidy for political contributions would be available
equally to itemizers and non-itemizers and would not rise
with the income level of the taxpayer.
3. Medical and Casualty Expenses. The current provision
for medical deductions is unnecessarily complicated. Twelve
lines on schedule A for Form 1040 are devoted to computation
of the deduction for dental and medical expenses. Currently,
one-half of the first $300 of health insurance premiums is
deductible outright for those who itemize. Other medical
expenses are deductible to the extent they exceed 3 percent
of adjusted gross income, with this latter category of
deductibility including the remaining portion of health
insurance premiums and including medicines and drugs in
excess of 1 percent of adjusted gross income.
The House has accepted the President's proposal to
treat medical insurance premiums, drugs and medicines in the
same manner. All of these expenditures would be subject to
the same floor — in the House bill, 3 percent of adjusted
gross income. This change would greatly simplify return
preparation. However, for those who now itemize their
medicines and drugs, the House bill would have the effect of
reducing the overall floor from 4 to 3 percent. This change
by itself would increase the number of itemizers.

- 9 The Committee may wish to consider additional simplification measures in this area. Since normal medical expenditures average about 8 percent of income, the floor for
medical deductions could be raised — perhaps to 5 percent
of adjusted gross income. This would accord with allowing
deductions for hardship cases, but leaving the normal amount
of expenses as an element of the standard deduction. On the
same theory, casualty losses, now deductible for amounts in
excess of $100, could be subjected to an additional floor of
5 percent of adjusted gross income. There is no reason the
government should in effect insure property damage losses at
a lower threshold than personal injuries or sickness. By
substituting rate cuts for the lost deductions, over one
million taxpayers would be able to switch to the standard
deduction.
Unemployment Compensation
The House also adopted the Administration's recommendation that the current tax exclusion for unemployment
compensation benefits be phased out as an individual's
income rises above $20,000 for a single person or $25,000
for a married couple. Under the bill, 50 cents of unemployment compensation would be taxed for every dollar of taxable
income (including unemployment compensation) received in
excess of these income ceilings.
Dollars received from unemployment benefits are just as
valuable as dollars received in any other form. Therefore,
a continued exclusion at high and middle-income levels
violates the principle that a person should be taxed in
accordance with ability to pay. In the 197 6 Act, Congress
repealed the sick pay exclusion for workers at high-income
levels on the grounds that sick pay is a substitution for
wages and should generally be taxed in the same manner.
This rationale should now be extended to unemployment
compensation.
Reforming the tax treatment of unemployment benefits is
especially important in view of the serious abuses that can
be caused by the preference. In many cases, the unemployment compensation system serves not to relieve hardship but
to discourage work. For example, some individuals receive a
substantial income every year through investment income and
a salary from a 9-month job; they take a winter vacation and
collect untaxed unemployment benefits. There is no reason
we should continue to permit such persons to "beat the
system" at the expense of their neighbors who work throughout the year for taxable wages.

- 10 Earned Income Credit
The House bill would extend and simplify the earned
income credit — an important provision developed by the
Chairman of this Committee to assist workers at lower-income
levels. Under H.R. 13511, the earned income credit would be
made permanent rather than allowed to expire after 1978. In
addition, there would be changes in the calculation and
determination of eligibility for the credit. These changes
would make the credit easier to compute and would enable the
IRS to determine more readily those eligible individuals who
fail to claim the credit.
Currently, taxpayer mistakes are caused by difficult
computations and by eligibility criteria that differ from
the criteria for determining filing status and claiming
exemptions. The House bill would achieve substantial
simplification through the elimination of calculations and
the substitution of published tables for hand computations.
In addition, the bill would make it possible to determine
eligibility for the earned income credit from the information
supplied in claiming dependent exemptions or head of household
status. The Administration has strongly supported these
efforts, and we believe that enactment of the House bill
would result in simplification for both the taxpayer and the
Internal Revenue Service.
Deferred Compensation Arrangements
In order to provide similar tax treatment for persons
in the same economic circumstances, the tax law generally
requires income to be reported by employees regardless of
the form in which compensation is received. It is thought
that a person who receives cash wages and uses those wages
to save for retirement, to purchase insurance, or to make
other investments should not be taxed more heavily than the
person who receives those benefits through arrangements with
his employer.
As exceptions to this general rule, preferential tax
treatment is now provided for various employee benefits,
including certain pension plans, group life insurance plans,
and medical insurance plans. The Administration believes
that a tax preference for employee benefits can be justified
only as a means of ensuring that a wide range of employees
is protected against such contingencies as sickness, disability,
retirement, or death. Accordingly, the President's tax

- 11 program recommended that tax-favored status be withheld from
certain kinds of employee benefit plans that discriminate
against rank-and-file employees.
Included in the President's recommendations was a nondiscrimination requirement for "cafeteria plans." A cafeteria
plan is an arrangement under which a participating employee
elects the type of fringe benefits to which employer contributions will be applied on his or her behalf. H.R. 13 511
contains a provision which is substantially similar to the
President's proposal, and we urge that this Committee retain
that provision.
Other sections of the House bill would enable employees
to defer taxation under certain plans that permit an employee
to elect whether or not to receive a current cash payment.
One type of plan covered by the House bill is an unfunded
"salary reduction plan"; another type is a "cash or deferred
profit sharing plan." We believe that preferred tax treatment for these plans should also be based on a requirement
of non-discriminatory coverage. The Treasury Department is
working on a detailed proposal in this area, and we will be
happy to consult with the Committee members in designing a
fair and reasonable provision.
Tax Shelters
Tax shelters are devices used by taxpayers to generate
artificial paper losses to offset income from other sources.
There are at least two undesirable by-products of tax shelter
activity. First, such tax avoidance by high-income persons
is demoralizing to average taxpayers bearing a substantial
tax burden on all their income. Second, many shelter
activities drain investment funds from productive enterprises
into schemes designed primarily to generate tax losses.
In 1976, this Committee received extensive evidence
regarding tax shelter abuses. You responded with several
tax changes. Tax shelter restrictions are among the most
significant reforms contained in the Tax Reform Act of 1976.
Unfortunately, shelter gimmicks have now assumed forms
intended by promoters to avoid the restrictions in the 197 6
Act. Tax shelter activity may have actually increased
during 1977. The National Association of Securities Dealers
reports that over $1.8 billion of shelters were publicly
offered by its members during 197 7 — a 50 percent increase
over cfferincs in 197 6. And there is some evidence that
private shelter deals mav have increased even more dramatically.

- 12 In an effort to combat the new shelter devices, the
House adopted an extension of the current "at risk" rules
recommended by the President. The "at risk" limitation
denies deductibility for certain paper losses that exceed an
individual's cash investment and indebtedness for which he
has personal liability. The 197 6 Act extended coverage only
to partnerships and to a few specified activities of individuals.
Under the House bill, the "at risk" rule would be broadened
to cover all activities (except real estate) carried on
individually, through partnerships, or by corporations
controlled by five or fewer persons. This important provision in H.R. 13 511 should be retained.
The President has also recommended that the Internal
Revenue Service be authorized to implement tax audits of
partnerships and to resolve tax issues at the partnership
level rather than being forced to proceed against each
partner individually. H.R. 13511 now contains only minor
portions of the President's proposal: a civil penalty for
late filing of partnership returns, and a very narrow
version of a proposal to extend a partner's statute of
limitations with respect to partnership items. We would
like to work with you to adopt additional portions of the
Administration's partnership audit proposals.
Entertainment Expenditures
Perhaps no proposal in the Administration's tax program
has received as much public attention as the recommended
limitation on deductions for entertainment expenditures.
This attention is not surprising. For many average taxpayers,
the unfairness of current tax law is brought home most
vividly by the fact that a few taxpayers are able to spend
before-tax dollars to purchase some of the items most taxpayers must buy with income that has already been taxed.
Allowing entertainment expenses to be deducted, without
taxing the related personal benefits to the recipient,
offends fundamental principles of tax policy because it
seriously distorts income measurement. The effect is to
provide these benefits partially at public expense. The
Federal Treasury loses about $2 billion each year on account
of entertainment deductions -- a revenue loss that must be
recovered from other taxpayers.

- 13 The public resents this form of subsidization of personal
luxuries through the tax system. The July Roper poll
indicates that 69 percent of Americans believe that there
should be no deduction for the "cost of membership in [a]
club if [the] job requires entertaining customers and prospects".
Seventy-five percent thought there should be no deduction
for the cost of theatre and sporting tickets purchased to
entertain business customers, and 76 percent of respondents
would not allow a full deduction for business lunches.
H.R. 13511 now contains none of the restrictions on
deductibility of entertainment expenditures reommended in
the President's program. We continue to believe that these
proposals are in accord with sound principles of tax policy
and, more importantly, address the overwhelming sentiment of
the American public for reforms in this area. We urge that
the Finance Committee take account of this attitude of
average taxpayers and, at least, deny a deduction for the
expenses of maintaining facilities such as yachts, hunting
lodges and swimming pools and for fees paid to social,
athletic or sporting clubs.
BUSINESS TAX CHANGES
Corporate Rate Reductions
Present law taxes the first $25,000 of corporate income
at a 20 percent rate and the second $25,000 at 22 percent;
income over $50,000 is taxed at a 48 percent rate (a normal
tax of 22 percent plus a surtax of 26 percent). The House
bill provides for a corporate rate schedule that is much
more steeply graduated than the current rate structure.
Under H.R. 13511, the corporate rate would be 17 percent on
the first $25,000 of corporate income, 20 percent on the
second $25,000, 30 percent on the third $25,000, 40 percent
on the fourth $25,000, and 46 percent on corporate income
exceeding $100,000.
The corporate rate reductions in the House bill differ
from the cuts proposed by the President. In the President's
tax program, he recommended a reduction from 20 to 18 percent
on the first $25,000 of corporate income, a reduction from
22 percent to 20 percent on income between $25,000 and
$50,000, and a reduction from 48 percent to 44 percent on
income exceeding $50,000. The Administration believes that
tnis proposal provides the best means of reducing corporate
rates. In our view, the top marginal rate should continue

- 14 to apply to corporate income in excess of $50,000 — the
amount of the current "surtax exemption." Certainly, the
level of graduation should not be raised above that in the
House bill.
A graduated corporate rate structure raises troubling
questions of tax equity. It should be borne in mind that
individuals are the ultimate taxpayers; therefore, the tax
policy goal of progressivity has meaning only as it relates
to the impact of the system on individuals. Viewed in this
light, a steeply graduated corporate rate schedule is actually
regressive.
The principal beneficiaries of the House provision are
individual owners of closely-held corporations — persons
who are generally in higher income brackets than the owners
of publicly-held companies. Corporations whose shareholders
are in lower personal income tax brackets tend to elect
subchapter S. In a group of tax returns studied by the
Treasury Department, the average income of shareholders in
closely-held corporations exceeded $50,00 0. By contrast,
the average income of all individual shareholders receiving
corporate dividends was about $25,000.
Moreover, most of the corporate relief would be provided
in corporate income brackets from $50,000 to $100,000, the
brackets affected by increasing the surtax exemption above
the current $50,000 level. The proposed increase in the
surtax exemption would provide no relief for small corporations with no taxable income or with taxable income of less
than $50,000. Only 10 percent of all corporations would
receive any tax reduction from the increase in the surtax
exemption. These corporations represent less than 1.5
percent of all business entities.
We fear that an unintended result of the House changes
would be the aggravation of tax-shelter abuses by many highincome individuals. To many owners of closely-held corporations, the corporate income tax — far from being an additional
burden — is actually a relief from taxes which they would
otherwise pay if all the income of their corporation were
attributed directly to them. The sheltering of income at
the corporate level would be made still more attractive if
substantial capital gains tax cuts, such as those in H.R.
13511, were adopted; capital gains tax reductions would
increase the tax advantage of avoiding the receipt of annual

- 15 dividends and postponing a shareholder's realization of
corporate profits until he sells his stock. In short,
potential for tax abuse might be increased significantly
by the use of the close corporation -- a device already
advertised widely as the "ultimate tax shelter."
Investment Tax Credit
As part of his program to encourage business investment,
the President recommended that the 10 percent investment tax
credit be made permanent and be extended to a wider range of
taxpayers and a broader scope of investments. Most of these
recommendations were adopted by the House.
1. Permanent investment credit. The present 10 percent
credit is now scheduled to revert to a 7 percent level after
1980. The House accepted the President's recommendation
that the credit be made permanent at a 10 percent rate so
that businesses can plan ahead with greater certainty of the
tax benefits that will be associated with projected capital
expenditures. We hope the Finance Committee will follow
this course.
2. Increase in tax liability ceiling. Under current
law, the investment credit claimed during any taxable year
cannot generally exceed $25,000 plus 50 percent of tax
liability in excess of that amount (with excess credits
being eligible for a three-year carryback and a seven-year
carryforward). The Administration proposed that the tax
liability ceiling be raised to 90 percent of tax liability
in excess of $25,000. We also recommended that a taxpayer
be entitled to offset no more than 90 percent of the first
$25,000 of tax liability.
The House bill would phase in an increase in the tax
liability ceiling, with a 90 percent ceiling to be applicable
after 1981 for tax liability exceeding $25,000. We support
this provision in H.R. 13511 as a constructive step to make
the investment credit more fully available to businesses
with high investment needs and low profitability. However,
to ensure that no firm will be able to use investment credits
to eliminate its entire tax liability, we continue to
recommend that the 90 percent ceiling also be applicable to
•he first $25,000 of tax liability — a limitation not
included in H.R. 13511.

- 16 3. Eligibility for the rehabilitation of structures.
The House bill would allow the investment credit for investments made to rehabilitate existing structures such as
industrial buildings, commercial buildings and retail
establishments. Present law generally limits the credit to
expenditures made to purchase machinery and equipment. In
our view, the extension of the investment credit to the
rehabiitation of structures would encourage the renovation
of buildings and would thereby assist in the redevelopment
of decaying urban areas. For this reason, the Administration
generally supports this provision. However, there may be
serious problems in defining those structures eligible for
the credit and the type of investment that qualifies as a
"rehabilitation" expenditure; we would like to consult
with this Committee in developing provisions that mitigate
these definitional problems.
4. Distressed area credit. In the President's urban
program, he recommended that an additional 5 percent credit
be available for investments, certified by the Commerce
Department, in economically distressed areas. Adoption of
this proposal would furnish additional incentives for urban
investment.
5. Pollution control facilities. Certain pollution
control facilities can now qualify for special tax treatment
under two separate Code provisions. These facilities can
generally be financed through the issuance of tax-exempt
industrial development bonds. In addition, pollution
control equipment installed in pre-197 6 plants is eligible
for special five-year amortization. However, if rapid
amortization is elected, only one-half of the full investment credit can be claimed.
H.R. 13511 would generally permit pollution control
equipment to qualify for the full 10 percent credit even if
rapid amortization is claimed under the provisions of existing
law. There would be an exception to this rule. To the
extent pollution facilities were financed with tax-exempt
industrial development bonds, a taxpayer could not combine a
full investment credit with rapid amortization.
The Administration originally proposed the extension of
the full investment tax credit to pollution control facilities,
but this recommendation was accompanied by a proposal (discussed
below) to repeal the tax-exempt status of pollution control
bonds. By coupling these two proposals, our intention is to

- 17 provide tax relief that is more efficient and does not
disrupt the market for state and local government bond
issues. We will support the extension of the full investment tax credit to facilities being rapidly amortized only
if tax-exempt financing for investments in pollution control
facilities is repealed.
Industrial Development Bonds
Interest on debt obligations issued by State and local
governments is exempt from Federal income tax. There is
also a current tax exemption for certain "industrial development bonds" that are issued by State and local governments
for the benefit of private borrowers. In order to qualify
for tax-exempt status, industrial development bonds must be
issued to provide financing for certain facilities such as
pollution control equipment, sports arenas and convention
halls, airports, industrial parks, and the facilities (such
as hospitals) of private, nonprofit organizations. There is
also a "small issue" exemption for certain industrial
development bonds where the amount of the bonds sold does
not exceed $1 million or the total capital expenses of the
facility being financed do not exceed $5 million.
The President's tax program recommends the termination
of tax-exempt status for certain industrial development
bonds. Our proposals would provide substantial assistance
to State and local government financing efforts and would
also improve the equity of the tax system. These important
provisions are not included in H.R. 13 511 — an omission we
consider to be a serious defect in the bill.
1. Termination of Exemption for Pollution Control Bonds,
Bonds for the Development of Industrial Parks, and Private
Hospital Bonds. The Administration recommends that there no
longer be an exemption for interest on industrial development bonds for pollution control or for the development of
industrial parks. We believe the exemption should also be
removed for bonds issued to finance construction of hospital
facilities for private, nonprofit institutions unless there
is a certification by the State that a new hospital is
needed.
These activities are essentially for the benefit of
private users. The tax exemption in such cases serves
little or no governmental purpose, but increases the supply
of bonds in the tax-exempt market. The cost of municipal
financing is raised as a result.

- 18 Municipal financing is injured particularly by the
abundance of pollution control bonds in the market place.
In 1977, there was nearly $3 billion of tax-exempt borrowing
for pollution control, accounting for 6.6 percent of all
tax-exempt financing and 86.2 percent of all industrial
development bonds. Substituting a liberalized investment
tax credit in place of tax-exempt financing for pollution
control facilities would provide Federal assistance in
bringing existing plants into compliance with environmental
standards without undermining the ability of State and local
governments to borrow funds.
2. Small Issue Exemption for Economically Distressed
Areas. Under the House bill, the small issue industrial
development bond limit would be increased from $5 million to
$10 million. We oppose this change. By increasing the
exemption limit generally, this proposal would not improve
the competitive position of depressed localities in seeking
funds; it would serve only to increase the supply of taxexempt bonds and to impair borrowing capacity for governmental purposes.
The Administration recommends that the financial
assistance be targeted. The existing "small issue" exemption should be retained only for economically distressed
areas; and, with respect to those areas, we recommend that
the $5 million exemption be raised to $20 million.
Targeted Jobs Credit
In April, 1978, the President announced his urban
program to encourage employment of those individuals who
have been experiencing the most difficulty in finding jobs.
A targeted employment tax credit was proposed to replace the
general jobs tax credit that will expire at the end of 1978.
Under the Administration's program, employers would earn a
tax credit for employing disadvantaged youth and handicapped
individuals.
As modified by the House, the targeted jobs tax credit
would provide a maximum credit per employee of $3,000 for
the first year of employment and $1,000 for the second year
of employment. Eligible employees would include WIN registrants,
vocational rehabilitation referrals, youths and Viet Nam
veterans eligible for food stamps, SSI recipients, general
assistance recipients, and cooperative education students.
Like the Administration's proposal, the House bill would

- 19 avoid discrimination by company size, industry and region;
it places no absolute limitation on the amount of credit
claimed by an employer and does not restrict the availability
of the credit to companies that have employment growth.
The Administration generally supports the targeted jobs
credit contained in H.R. 13511. This proposal is very
similar to the recommendation made by the President. The
targeted jobs credit is urgently needed to provide job
opportunities for economically disadvantaged young people
and for others who have not been reached by more general
programs to encourage business expansion and to increase
employment.
We believe it is especially important that these young
people be aided in their efforts to find private employment
before they are drawn into the welfare system. For other
eligible groups, the incentives offered by the tax credit
should be fully coordinated with Federal job placement
programs to provide necessary assistance and information and
to assure uniform eligibility standards. The Administration
would like to assist the Committee in developing technical
provisions to reflect these objectives more fully.
Small Business Proposals
We urge the Committee to retain in H.R. 13 511 two provisions recommended by the President to provide specific
relief to small corporations. First, the Subchapter S rules
that treat certain small corporations as partnerships would
be simplified and liberalized. Second, risk-taking would be
encouraged by doubling (from $5 00,000 to $1 million) the
amount of a small corporation's stock that can qualify for
special ordinary loss treatment, by doubling (from $25,000
to $50,000) the amount of losses that can be claimed by any
taxpayer with respect to such stock, and by eliminating
several technical requirements that needlessly restrict the
ability of small businesses to use this provision.
We do not support a provision in the House bill that
increases the first-year depreciation allowances for certain
businesses. Under the House bill, the maximum amount of
first-year "bonus" depreciation that could be taken would be
increased from $2,000 to $5,000, and this special provision
would be limited, for the first time, to taxpayers with less
than $1 million of depreciable property.

- 20 This new "bonus" depreciation provision would add
further complications to a system that is already confusing
for many small businesses. Far more valuable assistance can
be provided to small businesses by simplifying the depreciation calculations that must now be made. We repeat here our
recommendation, outlined in H.R. 12078, for a new, simple
table for equipment depreciation tantamount to a streamlined
ADR system for small business.
Farm Accounting
The Tax Reform Act of 197 6 generally requires farming
corporations to use the accrual method of accounting in
order to match properly farming expenses with farming
income. That Act contains exceptions from the accrual
accounting requirement for certain corporations. One of the
exceptions is for corporate farms with annual gross receipts
of $1 million or less; another exception is for farms
controlled by one family, without regard to size or the
extent of public ownership.
The Administration has recommended the repeal of the
one-family corporation exception, so that large corporate
farms would be subject to accrual accounting requirements
regardless of whether they are family owned. We have also
recommended an extension of the accrual accounting requirement to farm syndicates. There is no reason to permit multimillion dollar corporations and tax shelter syndicates to
utilize a cash accounting privilege designed for unsophisticated
taxpayers.
In lieu of the Administration's proposal, the House
adopted an additional exception to the accrual accounting
rules for certain farm corporations owned by two or three
families. The stated purpose of the House provision is to
avoid competitive advantages for one-family corporations now
permitted to use cash accounting. We feel that the President's
proposals provide the appropriate means of eliminating the
competitive imbalances caused by the accrual accounting
exceptions. However, if this Committee decides not to adopt
the President's recommendations in this area, we will not
object to the additional exceptions in the House bill.
H.R. 13511 would also revoke an IRS ruling which requires
farmers, nurserymen, and florists who use the accrual accounting
method to inventory growing crops. On July 23, 1978, the
IKS issued Revenue Procedure 78-22, which allows any farmer,

- 21 nurseryman, or florist who is on the accrual method of
accounting to change to the cash method. This revenue
procedure should eliminate any undue hardship that may have
been caused by the previous ruling. The House provision is
not needed to provide relief, and we oppose its adoption.
Domestic International Sales Corporation (DISC)
In its tax program, the Administration recommended that
the large cuts in corporate tax rates be combined with the
elimination of two costly tax preferences for firms conducting
international business operations. One proposal would have
phased out the foreign tax deferral provision, which permits
domestic corporations to avoid paying a U.S. tax on the
earnings of their foreign subsidiaries as long as those
earnings remain overseas. Another proposal would have
phased out the DISC tax preference. Neither of these
proposals is contained in H.R. 13511.
I would like to discuss the DISC provision in some
detail. The President's program would eliminate, over a 3year period, the special tax benefits granted for exports
channeled through a company's specially created subsidiary —
a paper entity known as a Domestic International Sales
Corporation (DISC). Artificial pricing rules on transactions
between the parent company and its DISC permit a favorable
allocation of export profits to the DISC, and the taxation
of one-half of "incremental" DISC income is deferred as long
as these profits are invested in export-related assets.
There are numerous problems with the DISC program. It
is incredibly complicated; over 50 pages of fine print in
the Internal Revenue Code and Treasury Regulations are
devoted to describing this special tax program. DISC is
inequitable; special tax benefits apply only to exporters
who establish these paper subsidiaries, and well over onehalf of DISC benefits is realized by only 2 percent of the
DISCs. DISC is expensive; it costs U.S. taxpayers over $1
billion per year in lost Treasury revenues. And there is
little evidence that this enormous cost has resulted in a
significant increase in exports.
We need to stimulate exports, but the current DISC
provision is the wrong approach. If a DISC program is to be
maintained, we would like to work with you to focus it more
effectively. Many DISC benefits now go to exporters with
large profit margins -- companies that would obviously be

- 22 exporting in the absence of any special tax incentive. The
Committee may wish to consider the elimination of the "SOSO" rule that permits one-half of those large profits to be
allocated to the DISC. Another possible restriction would
place a dollar limitation on DISC benefits in order to
target the relief to small companies that may experience
difficulties entering the export market. These modifications
would result in an export incentive that is much more cost
effective and equitable.
CAPITAL GAINS
H.R. 13511 contains significant changes in the tax
treatment of capital gains. Following a recommendation of
the President, the House bill would repeal the special 25
percent alternative tax that now applies to the first
$50,000 of capital gains of high-income individuals. A onetime exclusion would be permitted for up to $100,000 of gain
on the sale of a principal residence. The bill would also
eliminate capital gains as an item of tax preference for
purposes of the individual and corporate minimum tax and as
a preference offset to the amount of personal service
income eligible for the 50 percent maximum tax ceiling.
Capital gains in excess of $20,000 would be subject to a new
alternative minimum tax of 5 percent if that tax exceeded
regular tax liability. Finally, in determining capital
gains or losses, an inflation adjustment would be provided
after 1979 for common stock, real estate and tangible
personal property. Taken together, these changes would
reduce capital gains tax liabilities by $1.9 billion in
1979, with that figure expanding to nearly $7 billion
If capital gains relief is provided, we recommend conannually by 1983.
sideration of several modifications in the House-passed
version of H.R. 13511:
0
First, to limit tax avoidance by wealthy individuals,
a reasonable alternative minimum tax on large capital
gains should be adopted in place of the token "micromini" tax in the House bill.
0
Second, the existing minimum tax on the capital gains
of corporations should be retained.

- 23 0

0

Third, the exclusion for residences might be altered to
reduce the revenue loss.

Fourth, the special inflation adjustment for certain
capital assets should be eliminated.

I will discuss each of these modifications in some
detail.
Adoption of a True Alternative Tax on Capital Gains
In attempting to provide relief for persons with
significant capital gains tax liabilities, the House created
an undesirable by-product: H.R. 13511 would exacerbate the
problem of tax avoidance by wealthy individuals making
extensive use of tax shelters. Eliminating the current
minimum tax provision would reduce the top rate on capital
gains to 35 percent; that result appears to be the objective
sought by the House. But the replacement of the current
minimum tax with the new "micro-mini" tax also has the
effect of reducing from 7-1/2 percent to 5 percent the
maximum capital gains rate paid by individuals who have
completely sheltered millions of dollars of capital gains
from regular tax liability. A present minimum tax with a
modest impact on sheltered capital gains would be diluted.
An example derived from actual tax files may help to
illustrate the increased sheltering opportunities that would
be available under the House bill. An individual with
$2,184,982 of capital gains uses $1,095,057 of shelter
losses to eliminate all regular tax liability; the regular
tax that would normally be paid on one-half of capital gains
($1,092,491) is offset completely by tax losses. Under
current law, he would pay a minimum tax of $160,984 — an
effective tax rate on capital gains of 7.4 percent. If the
"micro-mini" tax in the House bill were adopted in place of
the current minimum tax, this person's minimum tax liability
would fall to $108,249 — a tax rate of less than 5 percent
on capital gains exceeding $2 million.
Viewed in the context of the other capital gains changes
in H.R. 13511, there is no justification for an alternative
minimum tax that is so insignificant. The current minimum
tax rate was kept low because it affects unsheltered taxpayers;
it can add several percentage points to an effective tax
rate that is already substantial. If the current "add-on"

- 24 minimum tax on capital gains is eliminated in favor of an
alternative tax approach, a graduated alternative minimum
tax can be adopted so that persons with very large capital
gains would have to pay more than a token 5 or 7-1/2 percent
tax.
Such a graduated "true alternative tax" is reflected in
the amendment we supported on the House floor — an approach
we commend to this Committee. This amendment would affect
only persons with ordinary losses exceeding ordinary income.
For those individuals, the true alternative tax would simply
require that ordinary losses be offset against capital gains
before the special capital gains deduction (equal to onehalf of total gains) is applied. This new limitation would
never reduce the amount of the special capital gains deduction
below $5,000, nor would it apply in a manner to reduce the
benefits of charitable deductions.
The "true alternative tax" approach would provide a
much more reasonable minimum tax liability for the individual,
described earlier, who has sheltered over $2 million of
capital gains from all regular tax liability. He would be
required to pay tax on about one-fourth of his total capital
gains. Rather than paying a "micro-mini" tax of only $10 8,249
imposed under the House bill, this taxpayer's liability
would be $345,628 under the "true alternative tax." The
effective tax rate on $2 million of capital gains would rise
from 5 percent in the House bill to nearly 16 percent under
the amendment.
Mr. Chairman, you and other members of this Committee
have played an instrumental role in developing a minimum tax
concept — an effort to minimize the extent to which highincome taxpayers can use various preferences to eliminate
all or most tax liability. The Treasury Department will
release today its High Income Report for tax year 197 6.
This report will show that provisions in the Tax Reform Act
of 1976 have succeeded in reducing dramatically the number
of high-income, nontaxable returns; in 197 6, the number of
nontaxable returns for individuals with expanded incomes
over $200,000 fell by 75 percent, from 210 in 1975 to 53 in
1976. The number of nontaxable individuals with adjusted
gross incomes over $200,000 fell from 260 to 22, a decrease
of over 90 percent.

- 25 -

The results of this report should not lead to complacency.
There are still nontaxable returns with high economic incomes
that, for various reasons, do not fit into the categories of
"expanded income" or "adjusted gross income." Moreover, for
every nontaxable high-income return, there are still ten or
more "nearly nontaxable" returns where income has been
reduced by more than 8 0 percent by use of preferences,
deductions, and tax credits.
We believe that the true alternative tax on capital
gains represents a significant effort to continue the important
work already performed by this Committee in reducing largescale tax avoidance. It begins to focus on the problem of
the "nearly nontaxable" return. You may wish to expand the
alternative tax concept to include preferences other than
capital gains. Whatever course of action is selected, we
believe it is critical to amend H.R. 13511 to avoid a
serious setback to important minimum tax reform efforts.
Retention of Minimum Tax on Capital Gains of Corporations
A corporation can now elect to have its capital gains
taxed at a 30 percent alternative rate, as opposed to the
top rate of 48 percent under the regular corporate schedule.
The corporate alternative tax on capital gains is considered
a preference item for minimum tax purposes. But unlike the
individual minimum tax, the corporate minimum tax adds a
very insignificant amount to the effective capital gains
rate — a maximum increase of only 1.125 percentage points
even if all a corporation's income is eligible for the
capital gains preference.
Other provisions in the House bill would cause a
corporate minimum tax on capital gains to be even less
burdensome than it is now. If the corporate rate schedule
in H.R. 13 511 is enacted, the impact of a corporate minimum
tax would be reduced still further to a maximum 0.717
percentage point addition to the capital gains rate.
Moreover, by providing a 30 percent corporate rate on
ordinary income between $50,000 and $75,000, the House bill
would reduce the number of corporations that would elect the
alternative capital gains tax and subject themselves to an
additional minimum tax liability.
We see no reason for eliminating the corporate minimum
tax on capital gains, as proposed in H.R. 13 511. Even with
the individual capital gains relief in the House bill, the

- 26 maximum corporate rate on capital gains would still be more
than 4 percentage points below the maximum individual rate.
In our view, the elimination of the corporate minimum tax
can be justified only if the alternative capital gains rate
for corporations is raised to the maximum individual level —
35 percent.
Reduction in Revenue Cost of Exclusion for Residences
The Administration believes that capital gains relief
should be provided for homeowners. In the Administration's
tax program, we recommended that the gain on sales of
residences be excluded as a tax preference item for purposes
of both the minimum tax and the maximum tax.
Additional homeowner relief may be appropriate.
However, the $100,000 exclusion in H.R. 13511 is extremely
costly. It would result in an annual revenue loss of
approximately $700 million.
To provide significant capital gains tax cuts to
homeowners at a reduced revenue cost, the Committee may wish
to consider excluding from taxation the gain attributable to
the first $50,000 of sales price on residences for persons
age 55 or older. This would represent an expansion of the
exclusion in current law for gain attributable to the first
$35,000 of sales price for persons age 65 and over. Under
this approach, the revenue cost of homeowner relief would be
reduced to approximately $300 million.
Deletion of Inflation Adjustment
We believe that the Archer amendment, which would
provide inflation adjustments for certain capital assets,
reflects a serious mistake in the House. This provision is
unfair, complicating and very costly. It should be eliminated
from H.R. 13511.
The Archer amendment is inequitable because it selects
for inflation adjustments only one aspect of the tax law —
the income of persons who already enjoy the benefits of the
capital gains preference. It is difficult to justify an
inflation adjustment for owners of capital assets while
ignoring the'effect of inflation on the savings account
depositor. Nor is it fair to permit the holder of debtfinanced property to adjust the asset's basis for inflation
while making no allowance for the fact that the debt is
being repaid with cheaper cellars.

- 27 These inequities are illustrated graphically by considering three hypothetical taxpayers:
0

Taxpayer A has a $100,000 certificate of deposit, which
bears interest at the rate of 5 percent.

0

Taxpayer B purchases a capital asset for $100,000; he
sells it for $105,000 after it appreciates 5 percent in
one year.

0

Taxpayer C purchases a capital asset for $200,000,
financing the purchase with $100,000 of debt bearing 5
percent interest; this asset is sold for $210,000 after
it also appreciates 5 percent in one year.
At the end of one year, each of these taxpayers has an
additional $5,000 in cash and is in the same economic position
before taxes; however, the Archer amendment would result in
disparate tax treatment. Assume an inflation rate of 5
percent. Taxpayer A has an additional $5,000 of taxable
income and receives no relief under Archer. Taxpayer B has
no additional taxable income because the inflation adjustment
equals his appreciation. Taxpayer C is in a better position
than either A or B; although he has $5,000 more cash upon
the sale of his capital asset ($210,000 less the $100,000
initial cash investment and less repayment of $105,000
principal and interest), he will show a loss for tax purposes
equal to the $5,000 of interest paid. Such disparities make
no tax sense and will distort investment and borrowing
decisions.
The economic distortions and tax shelter possibilities
of the Archer amendment are only beginning to be analyzed by
tax specialists. For example, the special inflation adjustment
granted to owners of corporate stock would undoubtedly lead
to the subterfuge of incorporating assets not eligible for
the adjustment. Indexing the basis of depreciable assets
only for purposes of measuring gain would encourage businesses
to engage in unproductive asset exchanges, using an inflation
adjustment to avoid reporting gain on the exchange while
taking a stepped-up basis to increase depreciation allowances
for the newly acquired equipment.
The amendment would introduce staggering new complexities
into the tax law. Taxpayers and the Internal Revenue Service
would have to make determinations such as: (i) whether a
particular asset qualifies for indexation, either in whole
or in part; (ii) if an asset qualifies only in part, the
Portion of the asset's basis that is "adjustable"; (iii)

- 28 whether a particular transaction is one in which indexation
is allowed; and (iv) the holding period for measuring
adjustments where, for example, the basis of an asset is the
sum of the cost of numerous property improvements made
through the years. The answer to each of these questions
might differ from that applied for other tax purposes.
Recordkeeping and return preparation burdens for taxpayers
would be increased substantially, and disputes with the IRS
would arise more frequently.
The revenue cost of the Archer amendment would exceed
$4 billion annually by 1983. This cut is twice as large as
all the other forms of capital gains reductions in the bill.
In combination with the other capital gains changes and tax
reductions on business and investment income, this amendment
would result in a tax bill that provides 71 percent of the
total relief to the owners of capital. As H.R. 13511 now
stands with the Archer amendment, it is a bill tilted far
too heavily away from American wage earners.
In addition to this proposal's inequity, complexity and
excessive cost, there is a problem with Archer that is even
more fundamental. Indexation is a response to high inflation
rates, but the proliferation of indexation schemes tends to
make those rates an accepted fact of economic life. The
economic defect becomes institutionalized. Rather than
accommodating to inflation, we should bend all efforts to
control it.
CONCLUSION
As I conclude my remarks, it is appropriate to acknowledge
the time constraints under which you are working. The
Committee is considering this bill late in the legislative
session. For this reason, we are not proposing that you
consider far-reaching structural changes in H.R. 13511 that
would consume an inordinate amount of time. In fact, we are
recommending that the Committee delete from the bill proposals,
such as the Archer amendment, that can be considered properlyonly after extensive testimony and debate.
The recommendations I have outlined today are designed
to bring the House bill closer to the tax policy objectives
outlined by the President. We urge that greater tax relief
be provided to middle and low-income families. We believe
the investment incentives in H.R. 13 511 should be modified
in order to increase their efficiency and fairness. And we
are suggesting a reasonable extension of the tax reforms in
the House bill so that the system can be made more equitable
° 0 °
and simpler. The Administration
is anxious to work with
this Committee to accomplish these objectives.

Appendix:

Feedback

Effects and

Revenue

Estimation

The term "revenue feedback effect" refers to the fact
that the actual change in revenues resulting from a tax
revision will depend upon economic responses to that
revision.
There is general agreement that such feedback
effects can be important.
To understand more clearly the
implications of feedback effects for revenue and receipts
estimation, it is useful to separate economic responses into
three types.
First, there are short-run responses to changes in
spendable income that result from tax increases or
reductions. A tax cut, for example, will raise the amounts
of after-tax income available to households and to business
firms.
If there is sufficient additional capacity, higher
after-tax incomes will lead to increased consumption and
investment which in turn will generate higher incomes and
higher revenues.
A number of standard macro-economic
forecasting models are usually employed to estimate the
magnitude of these short-run income effects.
A second type of feedback effect deals with long-run
factor-supply responses to tax c h a n g e s .
Taxes alter the
after-tax returns for work effort and for saving and thus
will influence the supply of labor and capital offered to the
marker. The size of the capital stock and labor force will
in the long run determine economic capacity and, therefore,
tne income base potentially available for future revenues.
The third type of feedback effect is the behavioral
response to price increases or decreases brought about by tax
chances. As tax changes alter relative prices, households
and business firms tend to shift patterns of consumption and
investment away from those activities that have increases in
price or cost toward those that have d e c r e a s e s .
That is,
taxpayers will move into activities which have been granted a
tax benefit and away from activities which have lost such a
benefit.
The result influences the allocation or composition
of economic activity and also the volume of Federal revenues.
Therefore, to estimate all potential revenue feedbacks
requires determination of (1) the increase or reduction in
spending cue to changes in income, (2) the changes in
teeneric rapacity due to changes in the supply of labor and
capital, and (2) the substitution of lower cost for higher
-est activities.
In general, estimating procedures currently
usee by tr.e Treasury dc incorporate such feedback effects.
--•-v;et receipts for e:cl. fiscal year include the impact of

-2-

tax changes on aggregate demand.
Longer-run receipt
projections allow for the likelihood of tax-induced changes
in the capacity of the economy.
Furthermore, whenever it is
reasonable to do so, the allocation effects of price changes
resulting from tax revisions are incorporated into revenue
estimates.
Each of the three types of feedbacks is discussed
in more detail below.
Macro-economic Responses
According to the macro-economic models, tax law changes
which reduce government revenues w i l l , over time, increase
demand, resulting in higher GNP, personal incomes and
corporate profits and higher tax receipts. Consequently,
estimates which do not take into account these short-run
multiplier effects tend to overstate revenue losses resulting
from proposals which reduce tax rates or narrow the tax base
and overstate revenue increases resulting from proposals to
raise taxes. Treasury estimates are alleged to suffer from
this defect.
However, this criticism is based on a misunderstanding
of the longstanding Treasury practice to provide two types of
revenue estimates for proposed changes in tax law.
The first
type of estimate is made for the complete program of tax
changes in the President's budget.
Feedback effects on
incomes and tax receipts resulting from short-run multiplier
effects are always incorporated in these figures to show the
actual impact of the President's program on the economy.
For example, Treasury estimates of total tax receipts
curing the 1953-195S period incorporated such feedback
effects. The stimulative effects of the Kennedy tax cut
along with anticipated growth in the population, the labor
force, prices and productivity were more than enough to fully
offset the reduced revenues resulting directly from lower
income tax rates. While total receipts were projected to
rise over this period, it is generally agreed that the 1964
tax cut by itself, could not have inducea an economic
response sufficient to restore the initial revenue loss.
The
figures in Table 1 demonstrate that Treasury anticipated the
feedback revenues.
The estimating errors taken from the
annual budget documents for that period ran about 4 1/2
percent, far too close to the" mark for estimates which did
not accurately include short-run feedback effects.
In the context of the current tax debate, Table 2
illustrates the impact on receipts of short-run multiplier
e
ffects resulting from the President's proposed $20 billion
tax reduction program.
The Y id session Review of the 1979
^dgen shows estimated unified budget receipts of $ 4 4 C 2
Million in 1S79 and S5C7.2 billion in I960.
These figures
include proposed tax reductions of C14.1 billion and $21.S
- i 1 i ion , respectively.
Iiov/eve r , in the absence of these

-3-

prcposec tax reductions, revenues are estimated to be $459.3
billion in 1979 and $521.1 billion in 1980.
T h u s , the net
cost to the Treasury of the President's proposed program is
$11.1 billion in 1979 and $13.8 billion in 1980.
These net
tax program figures include $3 billion and $8 billion of
offsetting revenues attributed to short-run multiplier
effects.
These feedback revenues are included in the receipt
totals but are not separately identified in the published
tfidsession Budget Review.
The estimation of multiplier effects requires making a
number of critical assumptions, including actions the Federal
Reserve may take to adjust the money supply and interest
rates.
These assumptions can influence the multiplier
effaces on the economy and the resulting revenue feedback.
However, there are no plausible assumptions under which
induced feedback effects from tax cuts will lead to an
increase in tax receipts over what they otherwise would have
teez. In fact, none of the macro-economic models of the
Unitec States economy predict revenue feedback sufficient to
offset the initial revenue loss.
The second kind of estimate made by Treasury involves
the revenue change from specific proposals without feedback
effects (except to the extent Treasury is able to estimate
price effects as described b e l o w ) .
This kind of estimate is
also appropriate for the kind of policy questions which may
arise. For example, great attention is focused on the
distribution of tax changes among taxpayers at different
income levels.
For distributional analysis policymakers
shejid look at the direct impact on taxpayers engaged in a
particular activity, such as paying private school tuition,
or on those receiving a a particular source of income, such

In contrast to the tax side of the Budget, there is
general acreer.ent that feedback effects are not acporcpriate
for the expenditure sice of the budaet.
Congressional
decisions concerning the expenditure side of the budget are
also properly made on the basis of gross expenditures.
We
should net estimate, for example, that a dam, highway,
harbor, or even aircraft carrier costs only 60 percent of its
initial outlay on the argument that the Federal government
recoups the rest in the form of higher revenues. A dollar of
outlay costs a dollar in resources used up and a dollar of
tax reduction releases a dollar for use in the private
sector.
The macrc-econcmic feedback effects of both of these
cr.anges are important, but it is also important, to evaluate
^
initial im tacts cor recti v.

-4do not markedly alter the desired fiscal posture. The
assumption is mace that each separate tax proposal being
considered is designed to be incorporated into a
comprehensive package of proposals, with net tax reductions
consistent with the overall fiscal policy. In this
framework, it is clearly incorrect to include offsetting
nultiplier effects in revenue estimates for individual tax
proposals. This is because the budget receipt estimates
already include the feedback effect of the aggregate change
in taxes. To again include feedback effects, as each
component of an overall tax package is being considered,
would be to double count induced revenue changes anc misguide
policymakers as to the size of the budget deficit or surplus.
Capacity Responses
Much attention has recently been focused on the
potential for increasing economic capacity by reducing rates
of tax. Since income taxes necessarily reduce the reward
from additional work effort or from adding to savings or
investment, reductions in rates of income taxes—especially
reductions of the highest marginal rates--would increase
significantly the aggregate amount of work effort and capital
supplied in the economy. This increased work effort and
larger capital stock would provide increased capacity to
produce income that is subject to tax, offsetting at least
some of the initial revenue lost by tax reduction.
The fundamental logic of this argument is sound, but
there are a number of practical considerations that recommend
against regularly reporting separate estimates of these
aggregate capacity, or "supply side", effects of tax changes.
There are presently no economic models that fully incorporate
supply effects and that have also developed a track record
over a period cf years. In fact neither the magnitude nor
the timing of such effects is well known and there is
consequently wide professional disagreement about their
importance. For example, some advocates of the Roth-Kemp tax
reductions claim, that induced supply responses would be so
large that general rate reductions would bring about higher
revenues than would occur without them. Some of these
advocates argue that the responses would be so rapid that
revenue increases from induced supply would occur in the
first year. Other analysts, including those who have
developed the well-known econometric forecasting models,
predict that in the first few years following a tax change,
there will be no significant increases in economic capacity
resulting frcm higher wages or increased returns to saving.
In the case of induced labor supply even the direction
sf change is at issue. V.i s to r i ca 11 y , there has been ~
tendency, as incomes have increase:. , for the average v.crh-_r
r
-o ,VQrk shorter hours and to retire at an earlier age. V,her.
toxes or. lebcr income are reduced, the positive response to

-5-

higher after-tax earnings will be offset, perhaps completely,
by this tendency to take some of the increased potential
earnings in the form of increased leisure.
The greatest weight of professional opinion is that
increased capacity in response to reduced tax rates will take
effect much more slowly than the demand effects induced by
higher incomes. Any tendency for labor supply to respond to
increases in after-tax wages will be translated into
increased economic capacity only over a period of years. In
part, this is because it takes time for households to
adjust—to seek out a second job, to arrange for chile care,
to take mere schooling, and the like. More important,
however, is that it takes time for businesses to make the
additional investment necessary to accommodate the increased
labor supply.
Nevertheless, these long-run supply effects are very
important since they will help to determine the underlying
growth and composition of employment and output in the
future. Significant supply sice factors are not ignored in
deriving the long ran^e receipts projections that are
included in the budget.
These projections show the path of
Federal receipts through time that are consistent with
attainable increases in capacity and aggregate demand.
The Treasury has been devoting substantial resources to
understanding and estimating supply effects. We also
closely monitor new research in this area. Analysis of l_liC
longer-run implications of tax policy will build upon new
research findings as they become available.
z- e
rrice~ directs

Tax policy changes have consequences for economic
behavior other than their aggregate demand effects anu supplysice responses. A further important effect of tax policy
r
consumption and investment patterns. Not all tax c
have significant price effects. Changes in exemptions, the
standard deduction, and even across-the-board cuts in tax
rates do not bring about significant chances in relative
prices. However, when such relative price effects do occur
anc when there is brcac; agreement as to both, the magnitude
enc the direction of these impacts, revenue estimates
incorporate the behavioral responses to the relative price
cr.a.nges. There are numerous examples ct s^c;; behavioral
responses. The
' " "
7-;e taxahle bend cation, wi-e-re it is assjm _- th-.i
-- fractich c: municipal debt will be iaaued o;. a tc.x..-bl
:
---iis as r. result of z':.r_ ^c-ver interest costs
o: issui:.
£y

-6Table 1

Comparison of Estimated and Actual Unified Budget Receipts
Fiscal Years 1963-1968

($ billions)
:
Fiscal Years
: 1963 : 1964 : 1965 : 1966 : 1967 : 1968
963 budget (January 1962)

113.5

96A budget (January 1963) 105.4 109.3
965 budget (January 1964) 106.6* 111.3 115.9
966 budget XJanuary 1965) 112.7*114.6 119.8
967 budget (January 1966) 116.8*124.7 141.4
96S budget {January 1967) 130.9* 150.3 158.6

ctual receipts 106.6 112.7 116.8 130.9 149.6 153.7

stimating errors:
Estisace made 16 months prior to year end
minus actual receipts

+7.0

-3.4

-0.9

-11.0

-8.1

Error as percent of actual receipts +6.57. -3.0% -0.87. -8.47. -5.47. +3.27.

ffice cf the Secretary of the Treasury July 14, 1978
Office of Tax Analysis

denotes actual level of unified budget receipts.

5t

e: Details may not add to totals due to rounding

+4.9

-7-

Table 2
Proposed Tax Reductions Included in the
Administration's Hidsession Budget Review

($ billions)
Fiscal Years
1979
1980
:

Unified budget receipts published in the
Midsession Review

448.2

507.3

Receipt effects of the President's tax reduction
and reform proposals:
Gross change in receipts
Offsetting induced receipts

-14.1
3.0

-21.8
8.0

459.3

521.1

Net change in receipts -11.1 -13.8
Unified budget receipts in absence of the
President's tax reduction and reform proposals

Office of the Secretary of the Treasury
Office of Tax Analysis

August 16, 1978

-8subsidizec taxable debt compared
tax-exempts.

to the prevailing

rate on

The automobile efficiency tax, where consumers are
assumed to modify their pattern of automobile purchases in
response to the increased prices of gas-inefficient v e h i c l e s .
Residential and business thermal efficiency and
solar tax credits, where the reduction in prices of the
subsidized activities are assumed to induce households and
firms to install more insulation and to use lower cost
sources of energy;
Any new program such
(DISC) or for new
revenue estimates
provision will be

as subsidies for exports
retirement programs (IRA), where the
depend upon the extent to which the newused;

Integration of corporate and personal taxes, where
an increase in corporate dividends would be expected to
accompany the reduction in the combined level of personal
corporate taxes on these d i v i d e n d s .

and

In all of these cases, there may be disagreement over
tne magnitude of the behavioral responses.
Nevertheless, a
good faith effort is made to incorporate behavioral responses
intc the revenue estimates where the behavioral responses
will obviously occur and they are believed to be substantial.
But we do not try to estimate feedback effects where the
predominant responses are unpredictable or where there is no
objective basis for making a judgment.
Two s p e c i f i c cases of tax induced p rice changes are
They a re the cuts of
cur ren tly of p a r t i c elar inte rest.
1
c a i n s t a x e s and the reduction of top marginal tax
cap ita
*3S
.
been alleged in both cases that the price
rat
i tf has
e
c
t
the
tax change wi 11 induce a f lood of new revenues
eff
so o
*
'
.
In
to
easury, ou tweighing the initial revenue loss.
w u e Tr
the C5 se of caDital gains c u ts, the claim is made that the
inc
sec realizati o n s will be so large a s to yield an
inc i e c ^e
In the case of a
e in tax rec eipts on capital gains
the
switch of
ion in the to p margins 1 tax rates,
inv est m e n t from she ltered to unsheltered activities along
wit h a v a st increas e in work effort are t he alleged sources
of
hi gher tax r e c e i p t s .
4.

Claims have been made that solid empirical analysis
underlies both behavioral responses.
3ut these claims are
tatiy overstated.
l h e empirical W O T K to date concerning
r
~ r e s p o n s e o f g a i n s r e a l i z a t i o n s t o c h a n g e s in c a p i t a l
g a m s t".x r a t e s h a s n o t d i s t i n g u i s h e d b e t w e e n s h o r t - r u n
'rpr.s: t ior.
e c1 1c e c t s r.r.c l o r . c - r u r . e f f e c t s .
Further,
t < "- ' * - Q
- »
e s t i m a t e s o f c '-. r r.. a hi ei o n -"\ — r u n
e r :; r e t e c
~ <- ~ i 1o i!''.c u s i 6«i ^ c v - i C H b x r. ;. e a v e r a - e
sue!
»• - —

— _

>_ c"

tr. i

-9-

holding periods of assets as to be totally at variance with
the observed historical stability of these holding p e r i o d s .
Also, the estimates assume that every investor has an
unlimited amount of unrealized accrued gains just waiting to
be realized at lower tax rates, an assumption surely contrary
to the facts.
Moreover, it may be very difficult to separate
statistically the effect of the marginal tax rates from the
effect of high itemized deductions for medical expenses or
casualty losses.
Higher realizations of capital gains may be
cue to high itemized deductions rather than to low marginal
rates themselves.
Attempts to adduce the likely responses of high income
taxpayers to reductions in their marginal tax rates by
examining historical data for the years before and after the
1954 tax cut also are seriously deficient.
While it may be
true that at substant ally lower marginal tax rates
individuals would find tax shelters of much diminished
economic advantage and would therefore tend to invest more in
fully taxed assets, the likelihood and magnitude of such a
response cannot be determined by merely looking at the income
taxes paid by those in the upper income classes before and
after the tax cuts of 1964.
The upper income group did, in
fact, pay more in taxes after their marginal rates were cut,
but all income classes experienced tax cuts and all realized
significant increases in incomes along with the general
expansion of the economy in 19 5 4-65.
The share of before-tax
income reported by the highest income classes was remarkably
stable over the entire period from 1952 through 1972.
In
addition, it should be pointed out that most of the increased
taxable income in these income groups was from higher
realized capital g a i n s .
But the 19G4 Revenue Act did not
change the 25 percent alternative tax on capital g a i n s .
Thus
while it may be desirable to reduce marginal tax rates to
provide additional incentives to work and to save, there is
little evidence for claiming large revenue gains to the
Federal Treasury as a result of tax-induced price effects.
Ccnclus ion
First, estimates of aggregate budget receipts do
include the additional receipts resulting from, the impact of
tax changes on aggregate demand.
However, estimates for
particular tax changes, just like estimates for particular
expenditure changes, do not include feedback e f f e c t s .
To do
so when they are already in the aggregate estimates would be
double co unt i ng .
Second, projections of long-run budgetary figures also
^commodate the impacts of tax changes on economic capacity.
<^ research sheds more light or. the nature of these effects,
:
- -a \ be possible to incorporate them more formallv into

-10-

Thirc, Treasury does incorporate estimates of changes in
c-ecific types of investment or consumption induced by
relative price changes whenever it appears the effects are
inportant and it is possible to make reasonable estimates.

mrtmentoftheJREASURY
JHINGTON, D.C. 20220

TELEPHONE 588-20*1
•••

FOR IMMEDIATE RELEASE
August 17, 1978

Contact: George G. Ross
202/566-2356

TREASURY PUBLISHES 2ND ANNUAL REPORT
ON HIGH INCOME TAX RETURNS
The Treasury Department today made available the second
annual report on high income taxpayers. The report, "High
Income Tax Returns - 1975 and 1976," was prepared as required
by Section 2123 of the Tax Reform Act of 1976.
The report contains the first data reflecting the changes
made by the Tax Reform Act of 1976. For high income individuals,
a:major charige was the strengthening of the minimum tax including an increase in the rate from 10 to 15 percent and the provision of new tax preference items for intangible drilling
expenses and for itemized deductions (other than casualty losses
and medical expenses) exceeding 60 percent of adjusted gross
income (AGI) .
a
The report highlights the fact that the Tax Reform Act of
1976 was "extraordinarily successful" in reducing the number of
high-ihcbme nontaxable income tax returns. The number of nontaxable high-AGI returns fell from 260 in 1975 to 22 in 1976, a
decline of 92.percent. In proportion, the nontaxables fell from
1 out of 130 high-income returns in 1975 to about 1 out of every
2,000 returns in 1976.
As measured by the more comprehensive expanded income, the
decrease was similar although less dramatic. The number of nontaxable high expanded income returns fell by 75 percent, from
215tin 1975 to 53 in 1976. By either measure, there were far
fewer high income nontaxable returns than in any year since data
first"became available in 1966.
In testimony today before the Senate Finance Committee,
Secretary of the Treasury W. Michael Blumenthal urged passage
of tax legislation that would "avoid a serious setback to
important minimum tax reform efforts." He asked adoption of
a "true alternative tax" approach that would provide a "much
more reasonable minimum tax liability" for individuals with tax
sheltered
capital gains.
B-1116

- 2 The report also highlights the fact that despite the
sharp decline in the number of high income nontaxable returns
there is still a significant number of high income taxpayers
who, while paying some tax, fail to pay a fair share of the
tax burden. For every nontaxable high-income return, there
are about 10 or more nearly nontaxable returns where income
has been reduced by more than 80 percent by use of preferences,
deductions, and tax credits. The nontaxables, and these so-dalled
nearly nontaxables, whose effective tax rates are lower than those
of a typical middle or lower-middle income family, totaled
nearly 500 in 1976. This is about twice the number of highincome nontaxables there were in the late 1960's, whose existence
prompted the Treasury Department to focus on this problem and the
Congress to enact the minimum tax.
The report finds that while the Tax Reform Act of 1976 reduced
the number of nontaxables and nearly nontaxables and raised the
average effective tax rate modestly for the remaining nearly nontaxables, it did not significantly change the average effective
tax rate for other individuals with incomes of $200,000 or more.
In fact, the tax rate on all high expanded income returns other
than nontaxables and nearly nontaxables actually declined from
36 percent in 1975 to 35 percent in 1976.
Even the expanded income measure, which is broader than AGI,
does not include income from some sources which are very valuable
to high-income taxpayers. Thus, expanded income understates
economic income because taxpayers are allowed deductions for real
estate and agriculture expenses in excess of economic costs and
because income such as interest on tax-exempt state and local
bonds is omitted. This understatement of economic income results
in some high-income individuals being omitted from the report.
The actual number of individuals omitted, however,'is not known.
In addition, the understatement of income makes the effective
tax rate for all high income returns appear higher than it actually
is.
Presented in the report are data for all individuals .with
AGI of $200,000 or more, as well as similar data based on three
other income measures specified in the 1976 Act. These, include
the broader-based "expanded income" (AGI plus preferences less
investment interest), "AGI plus preferences," and "AGI less
investment interest." In 1976, there were 53,587 high income
taxpayers, as measured by expanded income. They paid an average
tax of $144,942 or 35.0 percent of expanded income. Similarly,
the 41,761 returns with AGI of $200,000 or more had an average
tax of $167,656, or 44.5 percent of AGI.

- 3 The 122 page report includes 57 statistical tables and
2 charts, which contain virtually all of the basic data about
high income returns currently available for 1975 and 1976
tax returns.
Copies of the report are available from the Office of Tax
Analysis, U. S. Department of the Treasury, Washington, D. C.
20020. Copies also are available from the Superintendent of
Documents, U. S. Government Printing Office, Washington, D.C.
20402.

#

#

#

Lf)
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cariK
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u_

FOR IMMEDIATE RELEASE
FEDERAL FINANCING BANK ACTIVITY
July 1-July 31, 1978
Roland H. Cook, Secretary, Federal Financing Bank,
announced the following FFB activity for July, 1978.
New Loan to The Milwaukee Road
On July 31, the FFB and the U.S. Department of Transportation (DOT) signed an agreement in which FFB agreed to lend up
to $21,419,377 to the Trustee of the Chicago, Milwaukee, St.
Paul and Pacific Railroad. This loan, which is guaranteed by
DOT under §511 of the Railroad Revitalization and Regulatory
Reform Act of 1976, will be used to repair freight cars and
locomotives and construct pollution control facilities. The
loan is repayable in eleven annual installments beginning in
1981. The first drawdown is expected in early August.
This is the FFB's second loan to The Milwaukee Road,
currently in a Chapter 77 reorganization. On April 20, 1978,
FFB agreed to lend up to $5.1 million to The Milwaukee Road
Trustee for operating expenses. This loan is guaranteed by DOT
under §3 of the Emergency Rail Services Act of 1970. To date,
no funds have been requested under this loan.
Other DOT-Guaranteed Lending
FFB continued to advance funds to borrowers under other
DOT-guaranteed programs.
Borrower

Date

Amount

Amtrak (#15)

7/13
7/17
7/20
7/24
7/31

$10,000,000
6,000,000
7,000,000
5,000,000
6,000,000

B-1117

Maturity
10/1/78
10/1/78
10/1/78
10/1/78
10/1/78

Interest
Rate
7.505%
7.439%
7.329%
7.314%
7.023%

- 2Other DOT-Guaranteed Lending (continued)
Amount

Maturity

Interest
Rate

7/3
U.S. Railway Assn. (#13)

$500,000

12/26/90

8.125%

U.S. Railway Assn. (#8)7/25

144,500

4/30/79

8.3521

Chicago § North Western7/3

577,531

3/1/89

8.9271 annually

7/6

674,937

11/15/97

8.7351 quarterly

89,195

6/21/91

Borrower

Missouri-Kansas-Texas

Date

Chicago, Rock Island §
7/12
Pacific

8.875%

The advance to the Trustee of the Rock Island completed
a $17.5 million loan entered into in 1976. This loan matures
on June 21, 1991 and is also guaranteed under the Emergency
Rail Services Act.
Agency Issuers
The Farmers Home Administration continued to be FFBTs
largest borrower by issuing a $670 million Certificate of
Beneficial Ownership to FFB on July 5. The CBO will mature
on July 5, 1983, and provides for annual interest payments at
an interest rate of 8.84%.
The Tennessee Valley Authority sold two notes to the FFB
with a November 31, 1978 maturity: a $70 million note on July 17
with a 7.724% interest rate; and a $270,000,000 note on July 31
with an interest rate of 7.159%.
In its weekly short-term FFB borrowings, the Student Loan
Marketing Association, a Federally-chartered private corporation
which borrows with a Department of Health, Education and Welfare
guaranty, raised $15 million in new cash and refunded $165 million
in maturing securities. FFB holdings of SLMA notes now total
$705 million.
Guaranteed Loan Programs
FFB advanced a total of $81,572,168.80 to 19 rural telephone and electric cooperatives under notes guaranteed by the
Rural Electrification Administration.

- 3On July 19, the FFB purchased $3,695 million in debentures
issued by nine small business investment companies. These
debentures, which are guaranteed by the Small Business Administration, will mature in 3, 5 and 10 years and carry interest
rates of 8.715%, 8.725%, 8.825% respectively. The issuers and
the amounts issued were: ,
$500,000
3 year: Southwest Capital Investment, Inc.
5 year: BBS Equities Ltd.
Winfield Capital Corp.

$50Q,000
300,000

Brittany Capital Corp.
$200,000
Capital Marketing Corp.
430,000
Equi-Tronics Capital Corp.
540,000
Lake Success Capital Corp.
275,000
Tidewater SBI Corp.
500,000
TSM Corp.
450,000
The FFB purchased the following General Services Administration Purchase Contract Participation Certificates:
Interest
Date
Amount
Maturity
Rate
$6,376,550.03
7/31/03
8.841%
7/5
Series M-•035
7/18
Series L-•044
1,670,903.53
11/15/04
8.879%
7/31
Series K-•010
1,530,570.17
7/15/04
8.791%
10 year:

FFB provided Western Union Space Communications with $11.2
million on July 20 and $5.6 million on July 28 at interest
rates of 8.937% and 8.904% (annual basis) respectively. These
advances are part of the FFBfs $687 million financing of a
satellite tracking system to be constructed by Western Union
and leased to the National Aeronautics and Space Administration.
Under the Department of Defense-guaranteed foreign military
sales loan program, the FFB made 25 separate advances to 14
foreign governments totalling $74,263,338.45.
FFB Holdings
As of July 31, 1978, FFB holdings total $45.5 billion.
Detailed FFB Activity and Holdings Tables are available on
request.

# 0 #

FOR RELEASE ON DELIVERY
Expected at 10:00 a.m.
August 18, 1978

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY FOR DOMESTIC FINANCE
BEFORE THE HUD - INDEPENDENT AGENCIES SUBCOMMITTEE
OF THE SENATE APPROPRIATIONS COMMITTEE

Mr. Chairman and Members of the Committee:
My testimony covers two major points. First, I will
discuss the Administration's request for a full appropriation
to enable the Secretary of the Treasury to guarantee payments
of principal and interest on loans pursuant to the New York
City Loan Guarantee Act of 1978, which was signed by the
President on August 8, 1978. The second part of my testimony
will cover the status of the City's $4.5 billion four-year
long-term financing plan and its seasonal financing plans.
Request For Appropriation
First, Mr. Chairman, the Administration requests authority for the Secretary of the Treasury to issue guarantees
of the principal and interest on $1.65 billion principal
amount of City and MAC bonds and appropriation of such sums
as are necessary to make payments of principal and interest
on guaranteed bonds if there is a default. The appropriated
sums should remain available until September 30, 1998. No
guaranteed bonds can be issued after June 30, 1982 and the
maximum length of any guarantee is 15 years; therefore the
last date on which a guaranteed payment might be due is
June 30, 1997. The extra time will allow for resolution
of any dispute or litigation over a payment due in 1997.
The House Appropriations Committee has already acted favorably and reported out an appropriation bill for the full
amount of the authorized guarantees to the full House.
B-1118

- 2 -

Mr. Chairman, we request a full appropriation because
it is needed to raise the $4.5 billion in long-term capital
which New York City requires over the 1979-1982 period. In
particular, it is needed to obtain commitments to loan on
an unguaranteed basis $1.8 billion over the next four years
from private lenders.
The financial institutions have specifically stated in
their term sheet that they will lend only on the condition
that there has been prior enactment of legislation appropriating the full amount of Federal guarantees on a one-time basis.
The pension funds' representatives have advised us that in
their capacities as trustees they also expect to make such
appropriation a condition of their lending on an unguaranteed
basis to the City or MAC. They both make the point that they
cannot be expected to commit to loan for the next four years
if the Federal commitment — on which they count as the ultimate backstop — is subject to periodic review and unrestricted
withdrawal- While I cannot state that this financing will
fail if this condition is not met, I must say that their
position is not unreasonable. I should further point out
that without a four-year commitment, that is a real commitment, from these lenders, we could have a very difficult
time making the necessary findings under Section 103(4)
of
the Loan
Guarantee
Act necessary
to issue any
guarantees.
Status
of the
City*s Long-Term
and Short-Term
Financing
Plans
Mr. Chairman, let me now review the status of New York's
financing plans. I'll begin with the more important of the two
plans — long-term financing. The four-year plan, in the process
of being developed jointly by City officials and the Municipal
Assistance Corporation, is summarized in the table below.
Treasury has tentatively concluded that the plan is generally
sound. As you can see, the City and MAC intend to raise $4.5
billion in long-term capital over the next four years. Of this
total, approximately $2.3 billion relates to true capital spending, $.5 billion is for purposes of bonding the State advance,
?.9 billion for financing the remaining operating expenses in
the City's capital budget, $.5 billion for refinancing certain
MAC debt and $.3 billion for funding the necessary increase in
MAC's capital reserve.

- 3 -

New York City
Long-Term Financing Plan FY 1979-1982
($in millions)
Source of Funds

Private Placement
of MAC Bonds
Public Offerings
MAC Bonds
City Bonds
Federal Guarantees
City Bonds
Total

1979

$

401

1980

$

537

500
0

500
0

500

250

$1,401

$1,287

1981

$

537

$

1982

Total

325

$1,800

1/

1/

300

650
0

0
$

837

$

975

1,000
950
750
$4,500

1/ Backed up by stand-by guarantee authority up to $900 million.
The plan calls for approximately 82 percent of the four-year
total to be raised on an unguaranteed basis. Specifically,
$1.8 billion of MAC bonds will be sold privately to financial
institutions and-City pension funds and $1.95 billion in MAC and
City bonds is expected to be sold to the public.
The Treasury has tentatively concluded that $500 million of
City bonds will probably have to be guaranteed during the City's
current fiscal year. We will make no final decision to issue a
guarantee, of course, until all of the conditions listed in Section
103 of the Act are fulfilled. In addition, concerning guarantees
in subsequent years, we can only make the necessary findings at
the time that such guarantees are requested by the City. While
the City's plan for FY 1980 reflects the expectation of a Federal
guarantee, let me repeat that the Secretary will issue no guarantees until all of the conditions under Section 103 have been met.
At the moment, Mr. Chairman, intensive negotiations are continuing on (a) the terms and conditions of the $1.8 billion MAC

- 4 private placement, (b) the terms and conditions which will
be contained in the guarantee agreement between Treasury, the
City, MAC and the EFCB, and (c) the terms and conditions of the
new City bonds which we will guarantee.
These negotiations are complex and time consuming, but
they are proceeding in a satisfactory way. The present target
is to execute the long-term financing and guarantee agreements
in the first week of September with credit to be extended under
the agreements in the latter half of September.
Let me turn now to the City's seasonal financing needs over
the 1979-1982 period. The most significant point is that the
City's seasonal needs in FY 1979 are expected to be only $800
million, a full one billion dollars lower than the amount borrowed last year. This reduction reflects several expectations,
including the partial bonding-out of the State advance, the
timely receipt of capital funds, more sophisticated internal
financial controls and better utilization of cash management.
In general, this reduction is an important accomplishment and
one which we think will help speed the City's return to the
credit markets.
Negotiations also are underway on lines of credit to
supply this seasonal financing for the City. These negotiations
have not progressed as far as those on long-term financing,
simply because all parties have been concentrating primarily on
the latter. We do not expect the City to have difficulty in
finalizing the needed seasonal commitments for fiscal 1979,
however, or for subsequent years, from local sources. Assuming
Congressional passage of an extension of P.L. 94-236, enabling
the City pension funds to make further loans to the City (including seasonal loans) without jeopardizing their tax exempt status,
the City has informed us that it is not planning to request Federal
guarantees of any of its seasonal borrowings in fiscal 1979.
I would be pleased to answer any questions.
oOo

FOR RELEASE AT 4:45 P.M.

August 17, 1978

TREASURY TO AUCTION $3f000 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $3,000
million of 2-year notes to refund $2,749 million of notes
maturing August 31, 1978, and to raise $251 million new
cash. The $2,749 million of maturing notes are those held
by the public, including $775 million currently held by
Federal Reserve Banks as agents for foreign and
international monetary authorities.
In addition to the public holdings, Government accounts
and Federal Reserve Banks, for their own accounts, hold
$200 million of the maturing securities that may be refunded
by issuing additional amounts of the new notes at the
average price of accepted competitive tenders. Additional
amounts of the new securities may also be issued at the
average price, for new cash only, to Federal Reserve Banks
as agents for foreign and international monetary
authorities.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

oOo

Attachment

B-1119

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED AUGUST 31, 1978
August 17, 1978
Amount Offered:
To the public
Description of Security;
Term and type of security
Series and CUSIP designation

$3,000 million
2-year notes
Series S-1980
(CUSIP No. 912827 HZ 8)

Maturity date August 3.1, 1980
Call date
Interest coupon rate

No provision
To be determined based on
the average of accepted bids
Investment yield To be determined at auction
Premium or discount
•
To be determined after auction
Interest payment dates
February 28 and August 31, 1979;
and February 29 and August 31,
1980
Minimum denomination available
$5,000
Terms of Sale;
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates;
Deadline for receipt of tenders
Settlement date (final payment due)
a) cash or Federal funds
b) check drawn on bank
within FRB district where
submitted
c) check drawn on bank outside
FRB district where
submitted
Delivery date for coupon securities.

Wednesday, August 23, 1978,
by 1:30 p.m., EDST
Thursday, August 31, 1978

Tuesday, August 29, 1978

Monday, August 28, 1978
Friday, September 1, 1978

FOR IMMEDIATE RELEASE
August 17, 1978

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES COUNTERVAILING DUTY
INVESTIGATION ON IMPORTS OF TEXTILE MILL
PRODUCTS AND MEN'S AND BOY'S APPAREL
The Treasury Department has started an investigation into
whether textile mill products and men's and boy's apparel
imports from Malaysia, Mexico, Pakistan, Singapore and Thailand
are being subsidized.
This action, under the Countervailing Duty Law, is
being taken pursuant to petitions alleging tnat the textile
and apparel industries in these countries receive benefits
under several government programs that subsidize the manufacture and/or exportation of those products.
The Countervailing Duty Law requires the Secretary of
the Treasury to collect an additional customs duty that equals
the size of a "bounty or grant" (subsidy) paid on merchandise
exported to the United States.
A preliminary determination in this case must be made on
or before January 5, 1979, and a final determination no later
than July 5, 1979.
Notice of this investigation will be published in the
Federal Register of August 23, 1978.
Import figures of textile mill products and men's and
boy's apparel by value are not prepared. The 1977 imports
in square yards from tl\e five countries totalled 358 million
square yards. This included Malaysia, 21 million; Mexico,
162 million; Pakistan, 63 million; Singapore, 65 million, and
Thailand, 47 million.
o
B-1120

0

o

FOR IMMEDIATE RELEASE
August 18, 1978

Contact:

Robert E. Nipp
(202) 566-5328

TREASURY ANNOUNCES FINAL DETERMINATION IN
COUNTERVAILING DUTY INVESTIGATION OF
CHAIN FROM JAPAN
The Treasury Department today announced a final affirmative determination under the Countervailing Duty Law that
imported chain of iron or steel and parts thereof from Japan
are being subsidized.
The Countervailing Duty Law requires the Secretary of
the Treasury to collect an additional duty that equals the
size of a "bounty or grant" (subsidy) which has been paid on
merchandise exported to the United States.
As a result of its investigation, Treasury found that
Japanese manufacturers of this merchandise received benefits
which are considered bounties or grants. Treasury's decision
was made in the absence of the information necessary to properly
quantify these benefits.
Notice of this action will appear in the Federal Register
of August 23, 1978.
Imports of the subject merchandise from Japan during 1977
were valued at $3.2 million.

*

B-1121

*

*

DATE: August 21, 1978

13-WEEK

2 6-WEEK

TODAY: 7. >(ol % 7, V 7/ %
LAST WEEK: ioAol % Z 357 'D

HIGHEST SINCE:

7/(7/7 $
LOWEST SINCE:

1

Apartment of theJREASURY

4

"CI

jfcSHINGT0N,D.C.2022

/789

August 21, 1978

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 2,300 million of 13-week Treasury bills and for $3,401 million
of 26-week Treasury bills, both series to be issued on August 24, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing November 24, 1978
Price

Discount
Rate

98.151a/ 7.235%
High
Low
98.138
7.286%
Average
98.143
7.267%
a/ Excepting 1 tender of $1,000,000
b/ Excepting 1 tender of $250,000

Investment
Rate 1/
7.47%
7.53%
7.51%

26-week bills
maturing February 22. 1979
Price

Discount
Rate

Investment
Rate 1/

96.234b/ 7.449% 7.85%
96.218
7.481%
7.88%
96.223
7.471%
7.87%

Tenders at the low price for the 13-week bills were allotted 61%.
Tenders at the low price for the 26-week bills were allotted 46%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location

Received

Boston
$
34,160,000
New York
3,331,415,000
Philadelphia
19,430,000
Cleveland
30,540,000
Richmond
24,525,000
Atlanta
24,700,000
Chicago
233,585,000
St. Louis
41,225,000
Minneapolis
19,425,000
Kansas City
22,715,000
Dallas
11,610,000
San Francisco
167,755,000
6,545,000
Treasury
TOTALS

$3,967,630,000

Accepted
$
34,160,000
1,951,565,000
19,430,000
28,590,000
24,135,000
24,700,000
78,585,000
31,225,000
19,425,000
22,715,000
11,610,000
47,755,000
6,545,000
$2,300,440,000c/

Received
36,000,000
,316,120,000
8,260,000
27,640,000
22,955,000
16,150,000
224,970,000
29,440,000
17,635,000
16,230,000
10,185,000
209,480,000
7,995,000
$5,943,060,000

c/lncludes $ 331, 945,000 noncompetitive tenders from the public.
d/lncludes $ 186,575,000 noncompetitive tenders from the public.
^/Equivalent coupon-issue yield.

B-1122

Accepted
$
11,000,000
3,155,320,000
8,260,000
12,640,000
20,955,000
14,150,000
34,470,000
11,440,000
13,635,000
16,230,000
10,185,000,
84,480,000'
7,995,000
$3,400,760,000 d/

RELEASE UPON DELIVERY
Expected at 2 PM E.D.T.
August 20, 1978
REMARKS BY THE HONORABLE
W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
AT THE
UNIVERSITY OF MICHIGAN COMMENCEMENT
ANN ARBOR, MICHIGAN
AUGUST 20, 1978
President Fleming, . . . , ladies and gentlemen, first let
me convey — to the extent that spoken words can do so -- my
sense of gratitude for this act of recognition. I am deeply
touched. In one of his cheekier moments, H. L. Mencken wrote
that honorary degrees were appropriate tokens for bankers,
company directors, college professors, Presidents of the United
States and "other such riffraff." Thank you for including me
among the riffraff!
- I The other day, I asked a thoughtful graduate student what I
could usefully say to an audience of his peers. He replied:
"Offer them jobs."
That's fair enough. At this stage in your lives, after
years of rigorous preparation, you are entitled to have jobs on
your minds. Yet it was just a few years ago that college
graduates were marching to the tune of an entirely different
drummer, one beckoning them to drop out and tune in to some
cosmic rather than worldly order.
It is, I understand, no longer in fashion to use
pharmaceutical wonders for creating private experience and
a
yoiding the challenge of public experience. I regard that as
good news. Good news for me, for it provides me less opportunity
to feel old fashioned. But also good news for the country,
because your generation has the pragmatic determination that the
times so obviously require. The United States faces
down-to-earth problems of enormous complexity. It is now your
w n to help solve them.
B-U23

-2- II The effects on this nation of slowing economic growth and,
more recently, of unprecedented inflation, have created wholly
new patterns of inefficiency and discrimination. There has
rarely been a time when the art of governance was more demanding.
Ind equally certain, there has never been a time when those that
govern have found it so hard to deliver . . .
Our national security is being threatened by gluttonous
energy consumption and an excessive dependence on imported oil.
Yet we creep at a snail's pace toward a national energy program.
Our welfare system is wasteful and inefficient. Yet we are
unable to enact a program of reform.
Our economy is stifled by government interference, putting
in question our ability to compete in international markets. let
we find it nearly impossible to provide urgently needed relief.
Government bureaucrats enjoy a system of job security that
would turn even the most fervent defender of academic tenure pale
with envy. Yet it is like moving mountains to enact civil
service reform.
We seem wedded to a haphazard system of social services. A
welfare widow with children must check with 11 different Federal
agencies to obtain help. Yet even to mention improving the
efficiency of these systems raises an ideological furor. For
some, efficiency is seen as an assault on free enterprise; for
others, an assault on the New Deal. The result is stalemate -which is a continuing assault on common sense.
A final example: We labor under a patchwork of government

regulations range from $60 billion a year to well over $100
billion. Just filling out Federal reports costs businesses $25
to $32 billion a year. Yet we do very little to budget these
enormous costs or to measure them against the benefits they
yield.
Small wonder that some are fast losing faith in our economy
and that many are uncertain about the future and about our
ability to cope.
What has gone wrong? Why can't we make simple, logical and
basic reforms whose necessity is obvious to any well-informed
Person?

-3The problem is not with our aspirations and intentions. But
it is simply not enough that our intentions are good. In fact,
American government today suffers from a surfeit of good
intentions — a great confusion of benevolent impulses, all
running up against each other.
What is missing, in practically every area of policy, is the
institutional discipline to sort out the conflicts and move in a
single direction.
- Ill This is in part because government is too big. But only in
part. The matter is more complex and dynamic. Government is not
only enlarging itself but growing ever more skillful at tying
itself in knots.
In a perceptive lecture entitled "An Imperial Presidency
leads to An Imperial Congress leads to An Imperial Judiciary,"
Senator Moynihan sets out what he terms "The Iron Law of
Emulation:"
When any branch of government acquires a new
technique which enhances its power in relation to
other branches, that technique will soon be adopted
by those other branches as well.
The Executive Branch was the original sinner here. The new
alphabet agencies of the 20th Century learned how to promulgate
laws and try cases through the regulatory process, becoming three
branches in one.
But the imperial impulse has now spread to the other
branches. The managerial role of the Congress in almost all
aspects of policy making (and unmaking) has become more nearly
equal to that of the Executive.
The Congress, for example, creates a Congressional Budget
Office to rival the Executive's 0MB.
The Congress acquires an Office of Technology Assessment to
parallel the President's Office of Science and Technology Policy.
In the office of every Congressional member and committee,
there has been an explosion of advisors and experts, to match the
specialists in every Executive agency.
The list of analogous functions is very long.
The result is Congressional bureaucracy, which our
forefathers would have thought a contradiction in terms. A
r
ecent report stated that The Senate budget for FY 1978 will be
greater than the budgets of 74 countries. As for the House, $282

-4million will be spent this year merely to manage the affairs of
its 435 members: about $650 thousand per member. In the Senate
alone, the number of committees and subcommittees has increased
by 50 percent in the last 15 years.
All this added help has failed to make life easier for the
Congress. Quite the reverse. In the first session of t^he 85th
Congress — 20 years ago — there were 107 votes in the Senate
and 100 in the House. In the first session of the current 95th
Congress there were 636 in the Senate and 706 in the House. A
Congressional study committee in 1977 found that for one-third of
their day, Members of the House were supposed to be in at least
two places at the same time. This is a good way to keep one's
waistline down, but it is otherwise an exhausting regime and
hardly a good way to ensure sound decisions.
Government by frenzy is not a problem for Congress alone.
It is now expected that a Cabinet member be equally ubiquitous.
In the 20 months that I have been Secretary of the Treasury, I
have made 56 formal appearances before Congressional committees.
Earlier this year, I was scheduled to testify eight times in
eight consecutive working days, sometimes before more than one
committee on the same day. In addition, my staff spends much of
its time preparing for Congressional testimony by top Treasury
officials.
The impulse to grow and aggrandize has also been noted in
the judiciary. This is largely alien ground for me. So I leave
you with just one small poem crafted by my friend George Ball.
This might best be entitled "Lament for the Tennessee Valley
Authority" or "Ode to the Snail Darter":
Wee, cowering snail darter
You need not be martyr
To the woes of Jimmy Carter
For the Court with all its power
Will protect each fish and flower
From the Ultimate damnation
Caused by power dam escalation
As our shrinking oil ration
Terrifies the whole darn nation!

check
elaborate, confl irt.i r\e hureanrtranles in nlace and crowing in each

-5branch of government, the result is often an abrupt cutting off
of forward progress. A systemic stalemate is imposed on
government policy making.
On top of this, the very notion of governmental authority
has been eroded: Vietnam and Watergate, Elizabeth Ray and Fanny
Foxe, Koreagate and Tongsun Park. We in Washington are hamstrung
by institutionalized skepticism — some of it good, some
overdone. And the loss of confidence is measurable. The idea of
government is doing badly in the polls.
-- At the end of the 1950's three quarters of the
American people thought that their government was
"run primarily for the benefit of all the people."
By 1976, only 2*4 percent thought so.
According to the Lou Harris Poll, the proportion of
the population having a "great deal of confidence"'
in the leaders of major governmental institutions
was cut in half between 1966 and 1977.
A separate Lou Harris survey reveals that, in 1966,
37 percent of the people believed that what they
thought "doesn't count much anymore." By 1977 the
figure had grown to 61 percent.
Our view of politics has taken on a cynical edge. A New
York Times reporter recently asked a Texas farmer if it didn't
bother him that his state legislature met for only 140 days every
2 years. The farmer replied: "Shoot, I wish it 'war 2 days
every 140 years."
- IV I am trying to make two points:
The first point is, I suppose, a defensive one. The Carter
Administration is being blamed for a Washington malaise that is
largely institutional and goes well beyond the personalities and
power of a single Administration.
The Administration is on the cutting edge of a new system of
checks and balances with the other branches of government.
The President has been fighting for programs that, in my
judgment, make obvious sense: cutting our dependence on imported
^ergy, rationalization of the civil service, tax reform, welfare
reform, containment of hospital costs, deregulation of airline
*a^es> wage and price moderation, fiscal restraint and a balanced
budget. We have of course made our share of mistakes. But these
ln
itiatives have faced heavy weather not because they are flawed,

-6but because each of them challenges the status quo, runs against
the grain of entrenched interests, and requires the system to
take decisive action. Over the past decade, we have allowed the
system to complicate itself to such an extent that decisive
action, of any kind, is nearly impossible in the absence of a
dire emergency.
The governing principle today is inertia, and no leader will
fare easily who violates that principle.
My second point is observational. "Progress," observed C.
K. Chesterton, "is the maker of problems." Our government -your government — has sought over time to improve the quality of
life for all Americans, to eliminate discrimination and assure
that everyone has a chance to develop his or her talent to its
full potential. We have made great progress towards these
fundamental goals. But a severe problem of management has
accumulated in the process. During the forty years since
Franklin Roosevelt gave tangible meaning to the Federal
government's responsibility for the general welfare, Presidents
and Congresses have evolved program upon program to address one
aspect after another of the complex problems of poverty and
discrimination. Yet, because of the circuitous and
controversy-laden way these programs have evolved, many are
overlapping, contradictory and self-defeating. Some favor only
narrow groups, which now have the political muscle to deny
resources to others who need them equally as much or more. Many
of these programs need drastic revision. Some must be reshaped
to meet radically changed conditions. Others are ripe to be
abandoned.
In short, the United States Government is in clear need of
consolidation and rationalization. The Carter Administration
knows it and is striving to get it done. The American people not
only know it, but have begun demanding it. And, our foreign
allies are watching us with interest — and with a high degree of
anxiety.
economic destinies. The role of the United States is unique and
unprecedented. We are the defenders of the free world. We are
x
*s largest economy and provider of money. We are still its
standard of democracy. To the extent we falter, we cripple the
hopes of millions beyond our shores.
Qiuu We would do well to remember that last line of Shakespeare's
pth Sonnet: "Lilies that fester smell worse than weeds."
Precisely because of its enormous success in the past, America's
Responsibility to the future is awesome. We cannot afford to
nio*:. T h e world cannot afford a paralysis of the American
Political process.

-7- V My young graduate student friend asked me to offer you jobs.
You have a job: to make this country work better.
Jack Kennedy, at a similar occasion at Vanderbilt
University, said: "the educated citizen has an obligation to
serve the public" and "be a participant not a spectator."
The counsel offered by Pericles is even more pointed: "he
who holds himself aloof from public life is not quiet, but
useless."
The opportunities for useful involvement in government are
great. We need bright, energetic policy makers to make the
consolidation and rationalization process work, people who are
not bogged down by the intellectual baggage of the New Deal, of
Keynsianism or Monetarism, of the Vietnam War, of Watergate.
We need political scientists to study bureaucracy and teach
us how to make it work.
We need scientists and business men and women to help us
discover new sources of economic growth.
We need economists and mathematicians to help us encourage
that growth and channel it to productive uses.
We need social workers eager to lift the weak, the poor, and
the old beyond welfare to greater self-sufficiency.
Each and everyone of you will have an opportunity to serve
in government at some time in your career — be it in the
Executive, the Legislative or the Judiciary. Do it. Don't
succumb to the temptation to let others do it for you. Don't
succumb to the temptation to run away, to say "to \ >11 with it, a
plague on your houses."
America has always been a "can-do" nation. You are the
trustees of America's future. The burden is on you to make our
government and our nation work.
- VI So much for the good advice of a man deeply touched by the
honor you have bestowed upon him. I understand now why the
commencement speakers who spoke at me never seemed to quite
overcome the temptation to speak forever. But I shall heed the
advice given me by my staff as I left Washington to come here.
Th
ey handed me a note which read as follows: "Socrates was a
very wise man. He went around giving people good advice. They
Poisoned him." End of speech.
0OO0

FOR RELEASE AT 4:00 P.M.

August 22, 1978

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued August 31, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,714 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
June 1, 1978,
and to mature November 30, 1978 (CUSIP No.
912793 U6 1), originally issued in the amount of $3,406 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
August 31, 1978,
and to mature March 1, 1979
(CUSIP No.
912793 X2 7) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing August 31, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,281
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, August 28, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-1124

-2Each 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 securities and report daily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on August 31, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
August 31, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

^

.

.

•

"

tfartmentoftheTREASUFY
jHINGTON, D.C. 20220

TEIEPHON

FOR RELEASE AT 4:00 P.M.

August 22, 1978

TREASURY TO AUCTION $2,250 MILLION OF 4-YEAR 1-MONTH NOTES
The Department of the Treasury will auction $2,250
million of 4-year 1-month 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 at the average price of accepted
competitive tenders.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

oOo

Attachment

B-1125

(over)

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 4-YEAR 1-MONTH NOTES
TO BE ISSUED SEPTEMBER 6, 1978
August 22, 1978
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation

$2,250 million
4-year 1-month notes
Series J-1982
(CUSIP No. 912827 JA 1)

Maturity date September 30, 1982
Call date
Interest coupon rate

No provision
To be determined based on
the average of accepted bids
Investment yield To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
March 31 and September 30 (first
payment on March 31, 1979)
Minimum denomination available
$1,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Tuesday, August 29, 1978,
by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
Wednesday, September
b) check drawn on bank
within FRB district where
submitted
Friday, September 1,
c) check drawn on bank outside
FRB district where
submitted
Thursday, August 31,
Delivery date for coupon securities. Tuesday, September 12,

6, 1978

1978

1978
1978

r

\
CONTACT:
Robert Nipp
202-566-5328

For Release at, 6:00 p.iro. EST
/
August 22, 1978
v
!•
>r I
Increase in the.Amount of Gold Sales
by the rU. S. Treasury
<

—
r

r

)

The Treasury announced today that it will increase the
'amount of1 gold offered at its monthly auctions to 750,000
ounces, beginning with the scheduled November 19 7 8 auction.
Currently 300,000 ounces are sold at each auction.
At the new level of 750,000 ounces per month, Treasury
gold sales will be roughly equivalent to the 1977 rate of
net gold imports. The sales will thus make an important
contribution toward reducing the U.S. balance of payments
deficit on current account. At the current price the
balance of payments benefit would be more than $1.8 billion
at an annual rate. The continuing sales will also represent
further progress toward elimination of the international
monetary role of gold.
When the present gold auction program was announced last
April, the Treasury indicated that the auction level of
300,000 ounces per month would be maintained for six.auctions
and that the amounts to be offered at subsequent auctions
would be determined in the light of the initial experience.
Four of these auctions have now been completed. Results
have been quite satisfactory. The receipts, which have
totaled $230 million in the four auctions held to date, can
be said to have reduced the U.S. trade and current account
deficits by that amount. Since those deficits remain at an
excessive level, however, and net gold imports in the period
preceding the initiation of the auctions were running at an
annual rate of about 9.5 million ounces, the Treasury has
concluded that a substantial increase in the rate of sale
would be desirable.
The 750,000 ounce level of sales will be continued
for a period of four months. The amounts of sales at subsequent auctions will be reviewed well in advance of the final
auction of this four-month series.
For the present no changes are planned in the manner
in which the auctions are conducted or in the bid procedures.
It is expected that invitations to bid will continue to
specify payment in U.S. dollars and provide for delivery at
the U.S. Assay Office in New York or at other U.S. gold
B-1126
depositories. Auctions will be conducted at 11:00 AM on the

-2third Tuesday of each month in the General Services Administration Office at 7th and D Street, S.W., Washington, D.C.
The minimum bid accepted will be for 400 ounces. A bid
deposit of $10 an ounce will be required.
The gold will be made available in bars, each containing approximately 400 ounces. Sales will be by competitive
bids, with all successful bidders Spaying the price bid for
each ounce of gold. The Treasury reserves the right to
reject any or all bids. Bids by or on behalf of foreign
governments or central banks will not knowingly be acceoted.

#

#

#

*artmentoftheTRE/\$URY
JHINGTON, D C 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
August 23, 1978

Press Contact:
Non-Press Contact:

Robert E. Nipp
202/566-5328
202/566-8235
566-5286

TREASURY ANNOUNCES NEW
COLD FINISHED BAR EFFECTIVE DATE

The Treasury Department announced today a change in the
effective date of the revised trigger prices on cold finished
bars that were announced on July 20.
The Third Quarter trigger prices in effect prior to the
July 20 revisions will continue to apply to cold finished bars
exported through September 30, 1978. The base trigger prices
as revised for the Fourth Quarter will apply to cold finished
bars exported on or after October 1, 1978.
In this way, cold finished bars are treated like other
products whose base prices were revised by the Task Force.
All other effective dates remain as previously announced.

B-1127

DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
NOTICE
Trigger Price Mechanism
Cold Finished Bars Revision
New Effective Date
I am hereby announcing a change in the effective date for
the revised cold finished bar trigger price announced in the
Treasury Department Release of July 20, 1978 (43 F.R. 33993,
August 2, 1978). The base trigger prices as shown in footnote 1/
below (i.e., the Third Quarter trigger price for this product
prior to the July 20 revisions) will continue to apply to cold
finished bars exported through September 30, 1978. The announced
Fourth Quarter revised base trigger prices will apply to carbon
cold finished bars shipped on or after October 1.
The new effective date is being established since the
revised cold finished bar trigger price represents a change
in a previously announced trigger price and many parties have
acted in reliance on the previously published trigger price.
The Department has concluded that substantial unfairness would
result if the revised price were to take effect before October 1.
Thus, the revised cold finished bar prices are effective on or
after October 1 consistent with the previously announced prices
of galvanized sheets, tin plate, double reduced plate, and
others noted on page 12 of Treasury's July 20 press release,
43 F.R. 33993.
Aotlng General Counsel

^»• o

Dated:

A'uG 2 2 1978

1/

TPM page
12-1
12-2
12-3

Grade
Cold Finished Round Bar
AISI 1008 to 1029
Cold Finished Sulphur Free
Cutting Round Bar
AISI 1212 to 1215
Cold Finished Free Cutting
Lead Round Bar 12L14 &
12L15

Applicable
3rd Quarter
Base Price
(per M/T)

4th Quarter
Base Price
Applicable to
Shipments Exported on or
after 10/1/78

381

460

430

521

452

544

Z32

S-1980
TREASURY NOTES OF SERIES

DATE:

LLAST
A S T I ISSUE:
SSUE

; f~

HIGHEST SINCE:

LOWEST SINCE:

August 23, 19

. ^

f1^^q-t1ty^uf7t

TODAY:

^v p
"\

FOR IMMEDIATE RELEASE

August 23, 1978

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $3,002 million of
$6,129 million of tenders received from the public for the 2-year
notes, Series S-1980, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 8.37% J7
Highest yield
Average yield

8.39%
8.38%

The interest rate on the notes will be 8-3/8%. At the 8-3/8% rate,
the above yields result in the following prices:
Low-yield price 100.009
High-yield price
Average-yield price

99.973
99.991

The $3,002 million of accepted tenders includes $ 600 million of
noncompetitive tenders and $2,032 million of competitive tenders from
private investors, including 89% of the amount of notes bid for at
the high yield. It also includes $370 million of tenders at the
average price from Federal Reserve Banks as agents for foreign and
international monetary authorities in exchange for maturing securities.
In addition to the $3,002 million of tenders accepted in the
auction process, $ 200
million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 31, 1978, and $289
million of tenders were accepted at the average price from Federal
Reserve Banks as agents for foreign and international monetary authorities
for new cash.

1/ Excepting 2 tenders totaling $55,000

B-1128

FOR IMMEDIATE RELEASE
August 23, 1978

Contact:

George G. Ross
202/566-2356

USA/NIGERIA INCOME TAX TREATY TO BE TERMINATED
The Treasury Department today announced that the
Government of Nigeria has officially informed the United
States Government of Nigeria's intention to terminate
the income tax treaty now in force between the two countries. The notice of termination was delivered under
the terms of Article XXIV of the treaty.
The present tax treaty is the United States/United
Kingdom income tax convention of 1945 which was extended to Nigeria, as a U. K. overseas territory, in
1959 and continued in force after Nigerian independence
in 1960.
Under Article XXIV, termination will be effective
for Nigerian income tax purposes for years of assessment
beginning on or after January 1, 1979.
Upon termination of the tax treaty, statutory rules
in both countries will apply in place of the former
treaty rules. Thus, for example, statutory tax withholding rates on dividends and royalties will apply in
place of the exemptions or reduced rates of tax withholding provided in the treaty. Similarly, there will
no longer be a reciprocal exemption for the income of
shipping and aircraft companies.
It is anticipated that negotiations will begin
between the United States and Nigeria on a tax treaty
to replace the one which will terminate.
o

B-1129

0

o

tfomentoftheTREASURY

FOR IMMEDIATE RELEASE
August 23, 1978

Contact:

Robert E. Nipp
(202) 566-5328

TREASURY DEPARTMENT FINDS
STEEL WIRE STRAND FROM JAPAN
SOLD HERE AT LESS THAN FAIR VALUE
The Treasury Department announced today that it has
determined that Japanese steel wire strand for prestressed
concrete is being sold in the United States at "less than fair
value" within the meaning of the Antidumping Act.
The affirmative determination affects all Japanese manufacturers of this merchandise except Kawatetsu Wire Products Co.
The investigation with respect to Kawatetsu is being discontinued
on the basis of minimal margins and formal prices assurances.
The bulk of all other imports from Japan are produced by Shinko
Wire Co., Sumitomo Electric Industries, Suzuki Metal Industry
Co., and Tokyo Rope Manufacturing Co., whose weighted-average
margins of sales below fair value (in percent) were, respectively, 13.3, 15.8, 6.9 and 4.5.
The case is being referred to the U.S. International
Trade Commission, which must decide, within 90 days, whether
a U.S. industry is being, or is likely to be, injured by these
sales. If the Commission^ decision is affirmative, dumping
duties will be collected on those sales found to be at "less than
fair value." Sales at less than fair value generally occur when
the prices of the merchandise sold for export to the United States
are less than the prices of the same merchandise sold in the home
market.
Interested persons were offered the opportunity to present
oral and written views prior to this determination.
Notice of this action will appear in the Federal Register
of August 28, 1978.
Imports of steel wire strand for prestressed concrete from
Japan were valued at $19.6 million during the period investigated,
June-November 1977.

B-1130

*

For Release Upon Delivery
Expected at 2:00 p.m.
STATEMENT OF DONALD C. LUBICK
ASSISTANT SECRETARY OF THE TREASURY (TAX POLICY)
EEFORE THE
SENATE FINANCE COMMITTEE
AUGUST 24, 1978
Mr. Chairman and Members of the Committee:
We welcome the opportunity to present the Treasury
Departments views on S. 3370. In broad terms, this bill
would roll back the Treasury's recent regulations concerning
arbitrage, sinking funds, and advance refundings. It would
also put a freeze on further regulations for approximately a
year and a half.
We are strongly opposed to S. 3370. The bill would
result in substantial federal revenue losses and would
seriously and adversely affect the market for tax-exempt
securities.
Arbitrage
Generally, an "arbitrage bond" is a municipal bond that
is used to make an investment profit. The yield on a taxexempt municipal bond is ordinarily lower than the yield on
Treasury notes, certificates of deposit, and other high-grade
taxable investments. Thus, for example, a substantial profit
can be made by selling municipal bonds at six percent and
investing the proceeds in Treasury notes at 8-1/2 percent.
Bonds used to secure this profit are called "arbitrage
B-1131
bonds."

2
A State or local government can earn a substantial
profit from arbitrage. However, arbitrage has two drawbacks
that more than offset this profit. First, the cost to the
Treasury is considerably more than the profit earned by the
State or local government. Thus, arbitrage results in a net
loss to the taxpayers of the country as a whole. Second,
arbitrage damages the market for municipal bonds. Arbitrage
bonds tend to crowd out bonds that are sold to finance roads,
schools, and other traditional projects. Thus, in the long
run, arbitrage tends to drive up the cost of municipal
borrowing, and therefore is self-defeating and contrary to
the interests of State and local governments.
For these
reasons, in 1969, Congress delegated broad authority to the
Treasury to keep arbitrage bonds off the market. To that
end, the Treasury has written extensive regulations.
However, these regulations have not been completely
successful. A series of devices has been invented to
circumvent the arbitrage regulations, the most recent being
the invested sinking fund (sometimes called the "Bullet" or
the "Nashville Goose").
Invested sinking funds
Typically, municipal bonds have serial maturities. For
example, if a city sells $10 million of 20-year school bonds,
the city may use property taxes to pay a portion of the
principal off each year. Thus, for the protection of the
bondholders, the bonds will be paid off gradually over 20
years, and the $10 million principal amount will not come due
all at once. However, if the city employs an invested
sinking fund, it will not pay any principal off until the
bonds come due in 20 years. Instead, the city will
periodically pay property taxes into a sinking fund. Amounts
held in the sinking fund will be invested in Treasury notes
or high-grade taxable investments, enabling the city to make
a substantial investment profit.
The invested sinking fund was devised as a way around
Treasuryfs arbitrage regulations. In the short run, certain
State and local governments were able to gain a financial
advantage from invested sinking funds. However, in the long
run, invested sinking funds (like other forms of arbitrage)
are a burden on taxpayers and a threat to the market for
municipal bonds. In particular, invested sinking funds
damaged the tax-exempt market in two ways. First, bonds that
used this device were left outstanding longer because they
were not retired serially. Second, many refunding issues
were motivated chiefly by the profit that could be earned
from an invested sinking fund; these issues would not have
been sold if that profit had not been available. The

3
invested sinking fund — if unchecked — could have resulted
in nearly a 50-percent income in the amount of tax-exempt
bonds outstanding. The estimated annual loss in Federal
revenue could ultimately have reached $3 to 3.5 billion at
1979 levels. It is also important to note that the
elimination of the invested sinking fund was regarded
favorably by a substantial segment of the concerned financial
community.
Advance refundings
The remainder of the regulations apply primarily to
advance refunding. An advance refunding is an unusual type
of financial transaction, almost unique to municipal finance.
It is also a highly sophisticated type of transaction, and
generally cannot be done without the aid of computers.
An ordinary refunding is a relatively simple
transaction- It enables an issuer to substitute new bonds
for outstanding bonds. Generally, the substitution is made
because the outstanding bonds were sold on unfavorable terms.
For example, the interest rate on the old bonds may be too
high, or the indenture for the old bonds may contain unduly
restrictive covenants. In an ordinary refunding, a state or
local government simply sells new bonds, and uses the
proceeds to call in its outstanding bonds.
By contrast, in an advance refunding, both sets of bonds
remain outstanding. For example, assume that a sanitation
district has $10 million of bonds outstanding. In an advance
refunding, the district will typically sell an additional $11
or $12 million of refunding bonds. However, it will not call
its outstanding bonds immediately. These bonds will remain
outstanding for perhaps 5, 10, or even 20 years. Until the
sanitation district calls in its old bonds, the proceeds of
the new bonds will be kept in an escrow fund. The escrow
fund will be invested in United States Treasury obligatiQns.
These obligations will be selected with the aid of computer
so that the cash flow earned by the escrow fund is just
sufficient to pay debt service on the old bonds.
Advance refundings raise serious questions of tax
policy. First, they double the amount of tax exempt bonds
outstanding for any project. As a result, they tend to
increase borrowing costs for state and local governments.
According to rough estimates, this increase in borrowing
costs may amount to 20 or 30 basis points in the long run.
An increase of this magnitude could substantially impair the
ability of hard-pressed state and local governments to
provide essential services.

4

Second, the holders of the old bonds get a double
benefit. In addition to being tax-exempt, these bonds are
effectively guaranteed by the United States. Thus, the old
bonds are superior both to obligations of the United States^
Treasury and to conventional municipal obligations.
Recently, the Congress rejected this double benefit — both a
tax exemption and a federal guarantee — in the case of the
New York City Financial Assistance Act. The Congress
determined that it was inappropriate to provide New York City
with this double benefit, even in connection with a program
necessary to assure the City's financial survival. In the
case of a typical advance refunding, where much less than
financial survival is at stake, this double benefit is still
less appropriate.
And third, advance refundings have been the principal
cause of the difficulties that we have had with the arbitrage
regulations. As stated earlier, a continuing series of
devices has been invented to circumvent the arbitrage
regulations. For a variety of reasons, these devices have
been used almost exclusively in connection with advance
refundings. Thus, advance refundings have been the principal
cause of frequent changes in the arbitrage regulations.
These frequent changes have tended to disrupt the tax exempt
market. They have been bad for the Treasury, bad for state
and local governments, and generally bad for all concerned.
IDE's
Advance refundings of industrial development bonds (or
IDB's) are particularly questionable. Generally, IDE's are
governmental in form, but are issued to raise capital for
private business enterprise. Most frequently, the proceeds
of an issue of IDE's are used to build a facility which is
"leased" for its useful life to an industrial user at a
rental exactly sufficient to pay debt service on the bonds;
generally the government unit is not liable on the bonds and
the holders must look solely to the credit of the industrial
user. The use of the tax-exempt market for such essentially
private purposes places a burden on that market and drives up
the cost of municipal borrowings for conventional
governmental purposes. Therefore, on November 4, 1977, the
Treasury announced regulations that generally prevent advance
refundings of industrial development bonds.
However, the Treasury recognized that these regulations
might, in certain cases, cause hardship to state and local
governments. As a result, the Treasury announced that it
would support legislation to alleviate these hardships. In

5
the past nine months, the Treasury has worked closely with
affected governmental officials to develop appropriate
legislation. Our work on this legislation is now
substantially complete, and we expect that it will be made
public shortly.
Administrative costs

*

In the case of any advance refunding, the existing
regulations permit an issuer to earn enough arbitrage to
cover most or all of the administrative costs. We believe
that this is bad policy. While some advance refundings may
have a legitimate financial purpose, we believe that they
should pay their own way.
The ability to earn back administrative costs has led
many issuers to pay inflated and excessive fees to lawyers,
accountants, underwriters, and others. This inflation of
administrative costs has had a corrosive effect on the ethics
of the bond community. In addition, it has brought into
being a class of talented financial advisors who make their
living by finding ways around the arbitrage regulations.
However, this history of abuse is not the only reason
for requiring issuers to pay the administrative costs of
advance refundings. The ability of issuers to recover
administrative costs has led to many refundings that are
economically unsound. For example, assume that the
administrative costs of an advance refunding are $3 million,
and the gross debt service savings are $2 million.
Economically, the transaction does not make sense. There is
no good reason to spend $3 million in order to save $2
million. However, under the existing regulations, this
transaction would probably be done. The issuer would save
nearly $2 million, and underwriters, lawyers, and financial
advisors would earn $3 million at the expense of the Federal
Treasury. The public cannot benefit from a transaction in
which $3 million is spent to save $2 million. Only the
recipients of the $3 million — the underwriters, the
lawyers, and the financial advisors — can benefit.
Further, the treatment of expenses in the case of
advance refundings discriminates against new money issues in
two ways. First, issuers generally cannot recover their
administrative costs in the case of new money issues.
Recovery of such costs is generally possible only in
connection with advance refundings. And second, advance
refundings occupy a considerable share of the market,
crowding out new money issues needed for schools, roads,
water systems, and other essential projects.

6

Certification
The last aspect of the new regulations we would like to
address is certification. Under existing regulations,
issuers are able to "certify" their bonds conclusively. As a
result, they are able to act as the sole judge of whether
their bonds comply with Internal Revenue laws. This ability
has been a major cause of the continuing series of devices
that have been invented to circumvent the arbitrage
regulations. It permits bond lawyers to interpret the
regulations in a highly aggressive manner and has severely
handicapped the IRS in its efforts to protect the tax-exempt
market.
Therefore, the certification is revised under the new
regulations. These revisions are designed to make bond
lawyers stand behind the opinions they give. After September 1, bond lawyers will no longer be able to give
irresponsible opinions and hide behind a conclusive
certification. This will enable the IRS to enforce the
regulations effectively, and at the same time to protect
issuers acting in good faith.
Customary financial practices
We wish to emphasize particularly that the new
amendments are not intended to interfere with customary
financial practices. They are aimed only at sophisticated
transactions — the computerized sinking funds and advance
refundings. Some state and local governments have expressed
the concern that the regulations will disrupt customary
financial practices. These concerns are absolutely genuine.
To a large extent, however, they are unjustified. They
reflect advice given by certain bond counsel who insist —
for reasons of their own — on reading the regulations is a
way that was never intended. In order to allay these
concerns, the Treasury issued a press release yesterday that
contained two revenue rulings to clarify the regulations.
There may be ambiguities and technical defects in the
proposed regulations. Municipal finance is a complicated
area, and our regulations are not always perfect. However,
we believe that any problems can be solved by appropriate
amendments to the regulations. Further, we believe that
S. 3370 is a drastic over-reaction to these problems.
In May of this year, before the sinking fund rules
became effective, the volume of sinking fund bonds was large
and growing rapidly. If the sinking fund rules are repealed,

7
we would anticipate an enormous volume of sinking fund bonds.
The total amount of municipal bonds now outstanding is
approximately $250 billion. From a short-run perspective, it
would be highly advantageous, at least initially, to refund
the great majority of these bonds. If only 20 percent are
refunded, this would amount to a volume of $50 billion.
Fifty billion dollars is more than the total volume for the
entire year of 1977. If anything approaching $100 billion of
sinking fund bonds were sold, the effect on the market could
be catastrophic. Borrowing costs, and hence local taxes,
would go up. Communities that have financial problems — and
these are the communities that need access to the market most
— might be unable to sell their bonds. Thousands of
innocent people who have put their savings into tax exempt
municipal bonds could suffer substantial losses. The strain
on the market would be very considerable indeed.
In conclusion, the new regulations are aimed at
sophisticated arbitrage devices put together by resourceful
and ingenious financial advisors and computer experts. They
are not aimed at customary financial practices. To the
extent that they are problems with the regulations, we are
absolutely willing to work out whatever changes are
necessary. In this connection, we have been consulting
frequently with representatives of state and local
governments, and will continue to do so.
On the other hand, S. 3370 would be the worst possible
way to atttack these problems. It would turn the municipal
market into a playground for bond lawyers and computer
experts, to the vast detriment of state and local
governments, thousands of innocent bondholders, and taxpayers
throughout our country.

mtmentoftheTREASURY
«NGTQN,D.C. 20220

TELEPHONE

RY
RELEASE AT 8^P.K. EDT
AUGUST 23, 1978

tin IB 78
YF*
•^'SUfiY

CiPARTliEHT

REMARKS BY THE HONORABLE DANIEL H. BRILL
ASSISTNT SECRETARY OF THE TREAUSURY FOR ECONOMIC POLICY
AT THE
1978 SESSION OF THE GRADUATE SCHOOL OF BANKING
UNIVERSITY OF WISCONSIN
MADISON, WISCONSIN
AUGUST 2 3 , 1978
Thank you for inviting me to participate in your program.
An invitation to return to school has a special attraction these
days for anyone from Washington working in the field of economic
policy.
I can think of no better time -- or perhaps no worse time -to be speaking on the subject of economic policy-making. Even in
normal times, the process is exciting, frustrating, demanding,
risky, and — all too infrequently — rewarding. But these are
not normal times, so the process is more agonizing than usual.
Before plunging into the substance of today's menu of policy
issues, I would like to sketch for you some of the ground rules
that underlie the policy-making process. Otherwise, it would be
impossible to understand the wide range of considerations that
must — and do — get involved in every policy decision. Some of
these observations may seem trite, but they are often overlooked
in the very popular game of "second-guessing Washington."
First, we must al ways keep in mind that we live in a
pluralistic society wi th multiple objectives. By pluaralistic I
mean that in our body politic, the majority on any issue does not
ride roughshod over th e interests and aspirations of the
minority. The conside rations in forming policy, and in enacting
legislation to impleme nt policy, must accomodate a wide range of
needs and interests: regional, sectoral, social. That is why
Washington is sometime s called the "City of the Second Best."
What appears to expert s to be the most direct and efficient
solution to an economi c or social problem must be tempered to
insure that no one sec tor of our society is too severely
disadvantaged by that solution. The result is often a
compromise, scorned by many but, I submit, a testimonial to the
strength and virtues o f our democratic institutions.
B-1132

-2-

Concomitantly, we are committed to achieving not just one
economic goal, but to several simultaneously. Thus, we are
dedicated to achieving higher employment and reasonable price
stability, to using less oil and gas and more coal at the same
time as we try to improve the environment, to promote worldwide
economic growth and development while we moderate the pace at
which our less-competitive industries adjust to foreign
competition.
This need to serve several objectives, which often appear to
be in conflict, is where newspaper columnists and financial
newsletter writers have a great advantage over policy makers.
They can — and often do — focus on only one policy objective,
and insist that all actions serve that goal, and that goal only,
whatever the cost to our other objectives. An example is the
advice so freely bestowed on us to engineer a recession, tolerate
high unemployment for several years, in order to lick inflation.
Even if any of these simple solutions would work — and I doubt
it -- a cost-benefit analysis would quickly indicate that they
yield a poor payoff in terms of the balance among the several
objectives we must achieve. Only those not burdened with the
responsibility of administering public policy can afford the
luxury or arrogance of determining what single objective must
override all others.
A final point to make about the ground rules for policy
making is that we have to recognize that policies are formulated
in an environment of less than perfect knowledge. Policy makers
are neither omniscient nor abysmally ignorant. It amused me,
when I was out of government service and a participant in the
private financial community, to hear some of my business
colleagues bitterly inveigh against the regulations and
legislation coming out of Washington. "Those stupid s.o.b.'s
know better than that; they are just being malicious." In almost
the same breath, the same commentator would add: "What can you
expect from those pinhead briefcase carriers; they don't know any
better.".
The fact is that in formulating and recommending economic
policy, we know less than we want to know, less than we need to
know, but more than we are given credit for. It is not only the
facts which are often missing. Of equal gravity is the fact that
the analytical frameworks have not kept pace with the changing
economic environment, particularly in light of the rapid social
and structural changes that have occurred during recent years.
It is certainly a fact that some of our generally accepted
propositions in economics have recently been placed on the
injured reserve list, whether permanently or temporarily remains
to be seen. This is not making the economic policy task any
easier. It is difficult enough to chart a policy course without
finding that some of the road signs are pointing in unexpected
directions.

-3-

One basic relationsh iip that we came to depend upon connects
the rate of unemployment to the economy's rate of r eal gr owth. I
am sure that my good frie nd, Art Okun, mus t be tired of h earing
that Okun's Law has been repealed. As you know, Ok un det ermined
that it required economic growth at a rate of some 3 perc ent
above the economy's long- run potential gro wth rate to ach ieve a 1
And in deed , in the
percent reduction in the unemployment rate
early years of the curren t expansion, the reduction of th e rate
of unemployment tracked c losely with the b ehavior o f real growth.
But over the past year or so, this relatio nship has gone awry.
The economy has grown onl y a shade faster than its trend potential, yet the unemploymen t rate has fallen sharply. The fall in
the unemployment rate was good news; the a ccompanyi ng fal 1 in
productivity was not.
Or take the so-called Phillips curve, which was once held to
relate the rate of unemployment to the rate of inflation. For a
while, economists were referring vaguely to the possibility that
the curve was shifting to the right. I think that by now it must
have shifted right out of view. On the few recent occasions when
I have inquired as to its whereabouts, the answer ran in such
esoteric terms that I regretted having asked the question.
Monetary matters are another example where we know a good
deal less than we once thought we did. There was an age of innocence during which high hopes were held for a purely monetary
approach'to many of our problems. But that was before there had
been much practical experience with attempting to control the
growth of the monetary aggregates. Now sadder but wiser, with
monetary velocity frequently living a life of its own, we have
found that these matters are not nearly as simple as some once
thought.
The crumbling away of some of these older pro positions
leaves econonic policy bett er off in some respects and worse off
in others. On the one hand , we no longer can place as much faith
in econometric projections, since they depend heav ily upon past
relationships, some of whic h are at least temporar ily out of
action. That may be a step forward, but, on the o ther hand, we
do not always have much tha t is both new and relia ble to put in
place of the older relation ships. This is not sim ply a matter of
how to forecast, or what th eories to espouse, but a practical
question of trying, through a simulation process, to forecast
what policies will yeild wh at results. The basis for such forecasting is a lot shakier no w than it was when I fi rst began to
participate in the policy rr aking process.
The seeming breakdown of some of the older theoretical
a
Pproaches reflects in large measure, I believe, the persistence
°f inflation and the effects that it has been having on personal
a
nd business behavior. My own conclusion is that after such a
sustained period of inflation, and after a basic and enduring
change in the cost of energy, the path back to a more stable
economic and financial environment will inevitably be a fairly

-4-

long one even if optimal policies are followed. It will involve
a change in public perceptions and economic arid social values.
These do not come quickly or cheaply. As far as policy making
goes in this sort of environment, there are no easy solutions and
no shortcuts.
Let me cite two examples of shortcuts that we should not
follow, because they don't lead where we want to go. First, some
would direct us down a trail of very slow growth for a very long
period of time. Fiscal and monetary restraint throughout this
period would be severe and unremitting.
There are convincing economic objections to following such a
policy course, even if it were feasible politically. From an
analytical point of view, it is a policy to reduce excess demand,
but when demand is not excessive. From a more practical point of
view, the economic cost of following such a policy would be exorbitant. Econometric evidence suggests that an extra percentage
point of unemployment lowers the rate of inflation by only a few
tenths of a percent, even if maintained for three years. And in
the process it would cost over a million jobs and some $60 billion of real production in each of those three years. In view of
my earlier sideswipes at Okun's Law and the Phillips curve, these
estimates should not be taken as the last word on the matter.
However, they do suggest that the policy of deliberately contriving very slow growth is really not a promising alternative.
Moreover, one must possess insights denied to the rest of
the economics profession, or an arrogance bordering on pathological insanity, to be confident that we can deliberately run
the economy close to its stalling point for a protracted period
without actually stalling, and then be able to rev it back up to
desired speed whenever it suited our purpose. It seems appropriate to me, in the context of current demand and inflationary
pressures, to accept a short-term growth rate close to our longrun potential, estimated to be in the 3-1/4 to 3-1/2 percent per
annum range. But to assume we can force growth well below that,
perhaps even into the negative range, and then snap back as soon
as inflation abated goes beyond what I regard as the bounds of
reason. This is a risk that no responsible official could or
should undertake.
A second shortcut would, in my opinion, carry us even
farther from where we should be headed. That is the old snake
oil of wage and price controls. In the public mind, controls
have the advantage of simplicity and direct action. Eut experience in many countries at many different times demonstrates the
futility of this approach. Prices and costs may be held down
temporarily, but only at the cost of serious economic distoritons
and inefficiencies. When the controls are removed, as they must

Administration has repeatedly disavowed any intention of
to wage-price controls and for very good reason.

-5-

If these shortcuts are ruled out, what is the appropriate
road to travel? I am sure it will come as no surprise to you
that the recommended course is the one that we are actually
trying to follow. However, I am not here to try to sell the
program, but to explore its logic with you.
The cornerstone of the program is a measured amount of
fiscal and monetary restraint. Too much abrupt restraint would
cause a sharp rise in the unemployment rate, without much benefit
to the price situation, and could bring on a recession. Too
little restraint would lead to even sharper rises in inflation
than we have been experiencing and would sooner or later surely
bring on recession, perhaps a very serious one.
Moreover, I do not feel that we are in a razor's edge
situation between too much and too little restraint. The U.S.
economy and its financial markets are strong and resilient. They
can adjust to a fairly wide range of fiscal-monetary outcomes.
At the present time, there is a case for tilting on the side of
restraint. At the beginning of the year, fiscal dials were set
to offset the drag on the flow of income from large state and
local surpluses and a big foreign deficit. Forces now appear to
be in motion which are reducing both of these drags, thereby reducing the need for such a large Federal fiscal offset. In addition, the inflationary situation is much worse now than it was
expected to be when the earlier fiscal plans were made. While we
do not diagnose the current inflation as the simple excess demand
variety, it is clear that reduced demand does have some dampening
effect on costs and prices.
Furthermore, in terms of policy mix, there may be a case for
pressing farther with fiscal restraint than with monetary tightening under present circumstances. It is apparent that it takes
a much higher level of nominal interest rates now to achieve a
reduction in credit availability, for a variety of reasons including the fact of inflation and widespread institutional adaptation to that fact. What is not so apparent is just where and
how hard monetary tightening might eventually bite under these
altered circumstances. On the other hand, reduction of the
growth rate of Federal expenditures can have a more predictable
snd equitable effect in the present setting.
Tangible progress is being made in the area of fiscal restraint. In January of this year, the 1979 fiscal Federal budget
deficit was estimated at $60.5 billion. In July, the Mid-Session
Review of the 1979 budget lowered the deficit estimate to $48.5
billion — $12 billion below the initial estimate. More recently
the Office of Management and Budget has recommended a further $5
billion reduction in fiscal 1979 outlays to the Congress. Behind
the scenes, planning is going forward on the fiscal year 1980
budget. There are groans and cries of distress from executives
w
ith programs to administer for the momentum of Federal spending
ls
strong. Eut the President has established counter-romentum

-6-

for spending restraint, and he "ain't foolin." I am a member of
a task force created to find ways of improving efficiencies in
government and reducing the budget, and we are invested with full
support from the White House.
Treasury has a special interest in this process of Federal
restraint. First, we are responsible for the financing of the
budget deficits that actually result and are fully aware of the
financial dislocations that excessively large deficits can cause.
Thus far in the current expansion, debt management objectives
have been met without constricting the availabiliy of credit for
private borrowers. Restraint over growth in Federal spending and
close control of the expansion of Federal credit programs can
help insure the continuation of that good financial record.
Second, we at Treasury are responsible for the continued
efficiency of the tax system. Revenue losses arise from the use
of the so-called tax expenditures which allow special tax breaks
to individuals or corporations. It is pleasant to use euphemisms
such as "tax credits" for the less palatable term "subsidy." But
that's what tax credits are. And we must apply as rigorous
standards in restricting subsidies resulting from tax breaks as
we are in disciplining ourselves with respect to direct handouts.
It makes little sense to hold down budget outlays but to use tax
expenditures indiscriminately.
If fiscal restraint is the order of the day, one might
question why the Administration is supporting a tax cut in the
$15 to $20 billion range. We do not rest our case on the
debatable supply side effect which the Kepm-Roth adherents claim
to have discovered. They seem to think there is a free lunch.
We know there is not. But the modest tax cut that we are advocating would only partially offset the drag otherwise imposed by
higher social security taxes and the effects of inflation pushing
taxpayers into higher brackets. In short, there would be little
net fiscal stimulus but a gradual move toward restraint.
•

The other major element in the fight against inflation is
the deceleration strategy. Wages and prices are caught up in a
self-reinforcing spiral which benefits no major segment of the
public. Over the past decade, real wages have been virtully flat
despite large increases in monetry compensation. Also, after adjustment for inflation and cyclical swings, the return to capital
has actually drifted down slightly. Neither labor nor capital
has benefited from the inflationary spiral. And, in the process,
heavy losses have been inflicted on other segments of the population. Public attitudes have, therefore, shifted strongly against
an indefinite continuation of inflation at current rates. This
provides a potential base of support for any sensible measures to
reduce inflationary pressures.
The problem is how to insure that inflation can be unnwound
without asking for an unrealistic sacrifice from either labor or
business. It is not clear that the final solution has been

-7-

found. We are in the process of reviewing ways in which the
current deceleration strategy might be strengthened and made more
effective. It is no secret that the so-called TIP plans are
under intensive reexamination to determine whether or not they
are a practical step to recommend. And other avenues of relief
from inflationary pressure are being explored.
Indeed, our reexamination is covering every alternative
except controls. For the umpteenth time, let me stress our
rejection of the controls approach. As Santayana said, "he who
refuses to read history is condemned to repeat it." We have read
the history of the late 60's and early 70's. We remember that a
process of trying to reduce inflation by protracted deflation of
the economy was unsuccessful and was abandoned for controls. And
we remember that controls were unsuccessful and counterproductive
and were abandoned just before the price explosion in 1973•
We're determined to find a better way of coping.
I have emphasized the need -- for both domestic and international reasons -- of making progress on the inflation front.
At the same time, the Administration is vigorously pursuing an
energy policy which places great emphasis on using the market
price mechanism to achieve the necessary conservation in energy
consumption. Contradictory? Perhaps! But illustrative of the
policy-making problem I discussed early on, namely, that we often
have to optimize two or more objectives rather than maximize only
one. To continue subsidizing oil imports, to the detriment of
our international trade account and to the detriment of the
objective of energy conservation, would serve this nation poorly
over the intermediate-term and long run, whatever short-term
price benefits might appear to accrue. We can, and will, bring
the cost of energy up to its true replacement cost. And we will
do this in a way that is equitable and economically efficient.
Many of us working on the energy problem have gotten impatient for more decisive action on the legislative front. I think
I understand some of the more mundane political considerations
that have contributed to the protracted debate, but that is not
my province of expertise. What is more impressive to me is that
the slow, very deliberate pace of Congressional consideration
must reflect an inarticulated perception that what is involved is
the most dramatic change likely to occur in our social and
economic structure in this quarter of the century.
Our postwar economic structure and its social values have
been built very much on the basis of cheap, readily accessible
energy. It is cheap energy that has permitted the realization of
the middle-class idyll of a home in the suburbs with all the
electrical gadgets one can imagine, the delights of shopping
malls, the willingness and ability to commute long distances for
work or play.
We now have to come into the era of expensive energy. It
will be expensive because we will be at the mercy of a foreign
cartel, or expensive because there will be major capital costs in
developing adequate domestic alternatives. I think you must
share with m^ respect for a President who is willing to force us

-8-

to face these unpleasant facts now, before they become unpleasant
realities. And who has designed a program for4 conserving use and
promoting supply, without allowing the economic rent to be
siphoned off? And who has had the persistence to keep up the
pressure on the Congress to act?
In my cataloguing of the economic policy issues of greatest
moment this day, there is one on which I haven't touched, and
deliberately so. This may appear strange in light of the media
emphasis on the "dollar crisis." I have avoided specific discussion for several reasons. First, it is my observation that
whenever a Treasury official speaks directly about exchange
markets, the dollar drops -- whatever he might say. Second, I am
not the right Treasury official to speak directly on the subject
-- our Secretary and our Under Secretary for Monetary Affairs are
the appropriate spokesmen on this issue. Eut finally, I think I
have addressed the issue. As we are perceived to be making
progress on our major domestic economic problems — inflation and
energy — the fundamental strength of our economy will be more
apparent to all investors, domestic and foreign.
Let me make one point in closing. Whenever a discussion
focuses on policy issues of the day, the impression necessarily
is created that we have only problems. To be sure, we have many
and grave ones. But we do have some successes, and our legitimate concerns should not blind us to the areas where significant
economic progress has been made.
The current expansion is now moving into its fourth year, a
very long-lived recovery indeed. The list of accomplishments in
this period is impressive:
Real GNP has risen on average at roughly a 5 percent
annual rate from the recession trough, and now stands 11
percent above its previous peak.
Income per person — after taxes and after correction
for inflation — has risen 13 percent since early 1975.
— The rate of unemployment has been reduced from 9 percent
to about 6 percent, and the ratio of employment to
overall population has recently been at record highs.
-- Real business fixed investment, so essential to our
long-run economic performance, has rebounded after
gagging early in the recovery. Growth in real capital
investment in the past year and one-half has proceeded
at a vigorous 9 percent annual rate; in the second
quarter of this year, real investment finally rose above
its previous peak of early 1974.
We must be doing some things right in the economic policy
f,n!!# N ° W w e h a v e t 0 ex tend our winning streak to the as yet
SSliJTlof? a r ? a s o f in^lation and energy. That's where the
policy action is at.

FOR IMiMEDIATE RELEASE
EXPECTED AT 10:00 A.M. EDT
FRIDAY, AUGUST 25, 1978

STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE SENATE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
It is my privilege, on behalf of Secretary Blumenthal,
to respond to your invitation to testify before the Committee
on the question of Treasury gold sales and on S.2843, a bill
to provide for the issuance of gold medallions by the Treasury.
You have asked us to address a number of specific questions,
Mr. Chairman, and I will do my best to respond.
The Monetary Role of Gold
The monetary role of gold, both domestically and internationally, has been declining progressively over a period of
many years due to the general recognition that neither gold nor
any other commodity provides a suitable base for monetary arrangements -- a view that is strongly shared by the Administration.
New gold production is strictly limited. Industrial
demand is growing as GNP expands. Hence the residual supplies
available for monetary use are both inadequate for, and unrelated
to, the liquidity needs of an expanding national or world economy.
3-1133

- 2 Furthermore, the extreme volatility in the market price of gold
makes it a high risk asset. For example, the price of gold moved
from a peak of $195 per ounce at the end of 1974 to a trough
of $104 in mid-1976, and back to a new high of $215 on August
16. As of August 24 the price was about $203 per ounce.
To our knowledge, there is no major nation in the world
today in which official gold holdings act as an effective limit
on the domestic money supply. The United States abandoned
the domestic gold standard by a series of laws enacted in
1933-34 which effectively removed the domestic monetary
system's direct link with gold. Moreover, the provision
in the Federal Reserve Act for a gold certificate reserve
against bank required reserves was eliminated in 1968. In
August 1971, the U.S. also ended the convertibility into gold
of United States dollars held by foreign monetary authorities.
Since August 1971, transactions in gold between central
banks have been very rare and limited primarily to a few
instances in which gold has been used as collateral for
official loans; there have also been a few instances in which
gold has been sold in the private market to acquire foreign
currencies to finance balance of payments deficits. Basically,
there is now a general reluctance among central banks to
acquire gold, given the fact that there is no fixed official price
and no commitment by any central bank to buy or sell, and
in view of the volatile private price. I have attached at
Table 1 a listing of the gold holdings of IMF members which
shows the slow but steady decline in world gold reserves
since 1972.

- 3 The amended IMF Articles of Agreement, which entered
into force in April of this year, formally removed gold from
its previous role in the international monetary system.
The amendments contain three major changes with respect to
gold. First, the official price of gold is abolished and gold
loses its formal position as a common denominator for the
IMF (and thus the international monetary system). Second,
gold is eliminated as an important instrument in IMF transactions,
and the IMF is prohibited from accepting gold unless specifically
provided for by a decision requiring an 85 percent majority
vote. Finally, the IMF is empowered to dispose of its remaining
gold holdings in a variety of ways. These actions constitute
important progress in phasing out the monetary role of gold.
In 1976, the IMF initiated a four year program to dispose
of one-third of its gold holdings, with 25 million ounces
being sold at public auction for the benefit of developing
countries and a further 25 million ounces sold to members in
proportion to their quotas at the official price of SDR 35 per
ounce. Thus far, the IMF has held 24 public auctions at which
about 15 million ounces of gold were sold, at a profit of nearly
$1.7 billion. About 12.3 million ounces have been distributed
to members under the second program, of which the United
States has received about 2.8 million ounces. (See Table 2)
The United States has strongly supported these changes.
This Administration, like its predecessors, considers gold
to be an unsuitable basis for a stable monetary system. This
view has been endorsed by the Congress, which authorized the
actions removing gold from the U.S. domestic monetary system

- 4 and approved the recent amendments to the IMF Articles by a
wide margin. In its 1973 report on the amendment of the
Par Value Modification Act, the Senate Banking Committee
stated that "it is important that a reformed international
monetary system calls for a diminished role for gold and
eventual removal of gold from the center of the system.
In that connection the Committee believes that sales of
gold in the private market from official monetary stocks
could make an important contribution to this goal and to
more orderly conditions in international currency markets."
Consistent with the general move toward elimination of a
monetary role for gold, and toward its treatment internationally
and domestically like any other commodity, the United States
repealed the prohibition on the holding of gold by private
U.S. citizens effective December 31, 1974.
At that time, U.S. gold stocks totaled 276 million ounces,
a sum roughly equivalent to nine times the world's annual
production of new gold. Given the reduction in gold's utility
as a monetary reserve, and the fact that strategic requirements
are less than the volume of annual domestic production,
gradual disposal of these stocks has been appropriate and has
contributed to two important U.S. objectives — continued
demonetization of gold and a reduction of our trade and current
account deficits. (Since the United States acquired 2.8
million ounces from the IMF in 1977 and 1978 under the restitution program, the total U.S. stock despite the sales program
has risen to 277 million ounces as of end June.)

- 5 At the same time, the market for gold can be affected
importantly by the rate at which the United States and others
dispose of gold, and we have faced the task of determining
under what circumstances and at what rate we should sell.
Two auctions were held in 1975, at which a total of 1.3
million ounces of gold were sold. Shortly after the Carter
Administration took office, Chairman Reuss of the House Banking
Committee wrote to Treasury Under Secretary Solomon urging the
resumption of U.S. gold sales. In response, Mr. Solomon stated
that U.S. policy remained to sell gold from time to time to help
meet U.S. demand for imported gold and in support of our objective
of reducing the monetary role of gold. He indicated that the timing
of such sales would depend inter alia on U.S. demand for gold
imports, the IMF gold sales program, the needs of other countries
to sell gold for balance of payments purposes, and progress
towards eliminating gold's monetary role.
The Treasury Gold Sales Program
On April 19, 1978 Treasury announced the initiation of a
series of monthly gold auctions, indicating that auction-sof 300,000 ounces each would be held for six months and that
the amounts to be offered in subsequent auctions would be
determined in the light of the initial experience. Four
auctions have now been completed, and Treasury earlier this
week announced monthly sales of 750,000 ounces beginning
with the November auction. The new auction level will be
maintained for four months, with amounts to be offered at

- 6 subsequent auctions to be determined well before the end
of the four-month series.
This latest action is being taken on the basis of two main
considerations.

First, the sales program has operated smoothly

and the results to date (summarized in Table 3) have been
quite satisfactory, with receipts of $230 million having
reduced the U.S. trade and current account deficits by a
roughly equivalent amount.

Our judgment is that the market

should be able to absorb*substantially larger U.S. sales
without serious difficulty.
Second, the United States must take all appropriate
actions to improve its trade and current account positions.
A variety of measures is needed —

most importantly to reduce

our energy imports, to combat inflation, to promote exports,
and to encourage satisfactory growth abroad.
Sales of gold can also make a significant and quite
tangible contribution to this effort. At the new level of
750,000 ounces per month, such sales will be at an annual
rate nearly equal to the 9-1/2 million ounces of net U.S.
gold imports in 1977. At current prices, this would repre-sent
an improvement in the trade position of about $1.8 billion
annually.

The sales will also represent continued progress

toward elimination of gold's monetary role.
The United States has been a major importer of gold.

Net

imports (on a balance of payments basis) last year totalled 9.5
million ounces, including 1.6 million .ounces of gold imported in
the form of coins.

In the first half of 1978, net imports amounted

- 7 to 4.8 million ounces, of which 1.5 million ounces were coins.
In 1977, net U.S. gold imports were equivalent to roughly 18
percent of supplies coming onto the world market, including
new gold production and sales from stocks. Sources of gold
moving into world markets and their estimated uses are shown
in Table 4. These are rough estimates, but they help to
provide a composite picture of the world gold situation.
Table 5 offers a similar estimate of sources and uses
gold for the United States alone.

of

You will note that the

domestic demand for gold, including demand for inventories and
trading purposes, has been running about five times domestic
production, leaving us primarily dependent on imports in the
absence of sales from the Treasury stock.
The figures on gold transactions reported in the U.S.
balance of payments statistics need a bit of explanation. The
relevant data assessing the balance of payments impact of the
gold sales program are those presented on a balance of payments
basis.

They differ substantially from the data series on

U.S. gold trade compiled by the Census Bureau, which records
the actual physical movement of gold into and out of the
United States (Table 6 ) . The Census data show large net exports
of bullion in 1977 (rather than net imports), and also very
small net exports during the first six months of this year.
In measuring the balance of payments impact The Census
data must be adjusted to reflect the fact that, in addition
to actual physical shipments of bullion into and out of

- 8 the country, there are very large amounts of foreign-owned
gold —

especially those stocks held at the New York Federal

Reserve Bank for the IMF and foreign central banks —
physically located in the United States.
stocks —
auctions —

already

Sales from these

for example, when the IMF holds one of its periodic
into the private New York market are included in

U.S. import statistics on a balance of payments basis, but
not on the Census basis. Transactions between central banks
are excluded entirely from the U.S. statistics on either
basis. With the exception of transactions between central
banks, all physical shipments of gold abroad show up in the
Census export statistics.

Since much of this gold originated

in central bank or IMF stocks already in the United States,
the Census data do not record the offsetting import and thus
give the impression that the United States is a net exporter
of gold when in fact we are a net importer, as the data on
a balance of payments basis show.
The principal purchasers of gold at the U.S. auctions have
been seventeen firms and banks which specialize in gold trading.
The largest purchasers of the 1.2 million ounces sold through
August have been the Dresdner Bank (641,600 ounces), the Swiss
Bank Corporation (145,200 ounces), the Union Bank of Switzerland
(128,000 ounces) and the Bank of Oman (100,000 ounces).
These firms normally purchase for the account of their customers; the ultimate buyer and his purpose cannot be identified.

- 9 Tha fact that large purchases have been made by firms
owned by residents of the United Kingdom, Switzerland, and
Germany does not necessarily mean that the purchases are
for the account of foreign customers. These firms have branches
in the United States and are active suppliers and dealers of
gold in the United States.

Furthermore, U.S. trade figures show

that very little of the Treasury gold has actually been exported.
This suggests that it is effectively being sold to U.S. customers, particularly since the Treasury gold is industrial grade
needed by U.S. fabricators.
You have asked about the factors which determine the
market price of gold, and about the impact of the Treasury sales
on that price.
question.

There are no definitive answers to either

There are two widely divergent types of demand for

gold, and they react to changing conditions in very different
ways.

Industrial and commercial demand appears to follow

a pattern quite similar to that of demand for other metals.
When the economy is growing rapidly, industrial and commercial
demand for gold will grow.

When the price rises rapidly,

particularly in relation to the prices of other metals which
can be used as substitutes, the industrial and commercial.
demand slackens.
The hoarding demand for gold, however, rises when the
fear of inflation grows and falls when there is a prospect of
growing price stability. In some periods, the prospect for price
stability has been such that hoarding demand has disappeared
and there have been efforts to dispose of such holdings.

- 10 It is not possible to say what effect the Treasury gold
sales have had on the gold price. As a significant addition
to supply, one would expect some price effect. However,
the impact has not been such as to disrupt the market or
to be inequitable to American producers and firms holding
gold inventories.
All sales at the Treasury auctions have called for payment
in U.S. dollars.

In announcing the sales program last April,

Treasury stated that it planned to study technical aspects
of selling gold against payment in West German Deutschemarks,
with a view to determining whether sales of gold would provide
a technically feasible and advisable means of acquiring
Deutschemarks for use in countering disorderly conditions
in foreign exchange markets.
The major gold markets, both here and abroad, operate
in U.S. dollars. Prices are normally quoted in U.S. dollars
and payment is normally made in U.S. dollars. Typically,
non-residents of the United States who buy gold in these
markets either use existing dollar balances or enter the
foreign exchange markets to buy dollars with which to purchase the gold.
If Treasury were to call for payment in Deutschemarks at
its auctions, it is likely that many buyers, whether American
or foreign, would sell dollars on the foreign exchange
market to obtain the Deutschemarks to make the payment.
Holders of Deutschemarks might simply forego purchases of

- 11 dollars which they would have had to make to finance a gold
purchase payable in dollars. In such cases, the initial impact on the dollar's position on the foreign exchange markets
would be negative, and the subsequent sale of Deutschemarks
by the Treasury would do little more than offset the earlier
adverse impact.

Nonetheless, the situation is not absolutely

clear, and it may be that at some point such sales would
appear desirable.
The Manufacture and Sale of Gold Coins and Medallions
American residents presently have ample opportunities
to buy gold in small amounts, both in coins and other forms.
A number of bullion coins currently being minted are available in
the United States, such as the Krugerrand, Mexican peso, Austrian
krona, and British sovereign.
to 1 ounce of gold.

These coins contain 1/4 ounce

Small gold bars, produced by Swiss banks,

are also available in the 1/2 ounce and 1 ounce sizes.
The markup charged by South Africa on the Krugerrand,
3 percent over the bullion price, is enough to cover only the
minting and advertising costs to the South African Chamber of
Mines which markets the coin.

The dealers, in turn, are free to

take what markup they can, but efficient competition has generally
limited this markup to an additional 2 to 3 percent above the
gold value of the coin.
For this reason, private minters of gold medallions have
been unable to compete effectively with the Krugerrand.
One United States refiner, Engelhard Industries, did mint

- 12 a one ounce medallion called the "American Prospector,"
which was sold to dealers at the same markup as the Krugerrand.
However, only about 20,000 of these medals were sold before
the effort was ended because it was felt that the advertising
costs necessary to sell large amounts of the medallion would
be too high to permit a reasonable profit.
Official production of gold medals and medallions has been
very small. Most countries that have produced gold coins
in recent years have done so for a combination of revenue
and commemorative purposes. The markup on such issues has
usually run from 50 percent to 100 percent over the market
value of the gold in the coin, and the issues have usually
been limited in order to enhance their numismatic value.
For example, of the forty-nine countries that minted gold
coins in 1977, forty-two limited the issues to less than
15,000 ounces each. The total official gold coinage by all
countries other than South Africa in 1977 contained only
1.5 million ounces of gold. South Africa and the USSR were
the only countries producing coins as a technique for
marketing gold production, rather than for coinage profit.
or a commemorative purpose. The minting of Krugerrands
amounted to 2.9 million ounces in 1977 and 2.7 million in
the first .half of 1978.
The American Bicentennial Administration produced three
Bicentennial gold medals in 1976, as part of a program of selling
bronze, silver, and gold medals.

The Treasury sold gold to

- 13 the Bicentennial Administration at the current market price
and the Administration contracted with the Mint to produce
the medals. Sales of the medals involved about 36,000 ounces
of gold and yielded profits of about $2.7 million which
were used to finance Bicentennial activities- This also
was a limited issue sold as a collectors item.
Proposed Gold Medallion Act
Let me turn now to the bill on which you have asked us
to comment. S.2843 would provide that, upon determination by
the Secretary of the Treasury to sell gold, all or part of
the sales would be in the form of one ounce and one-half
ounce gold medallions. The first 1.5 million ounces to
be sold in the first fiscal year after the passage of the Act
would be required to be' sold in this form, while any remaining
gold to be sold could be in a manner as the Secretary deems
appropriate. In following years, the Secretary of the Treasury
would have the discretion to determine the number of medallions
to be produced and sold in light of anticipated import demand.
The medallions, although not legal tender, would have
the style of coins, with the Great Seal of the United States
on one side. The bill specifies that they would be sold at
market-related prices and in a manner to encourage broad
public participation. The purposes of producing the medallions
would be to reduce sales to the American public of South
African Krugerrands and other similar gold coins, and to
provide U.S. citizens the opportunity to buy a United Statesissued source of gold.

- 14 The Administration believes that issuance of gold medallions
as called for by this bill would be unwise and inappropriate
for several reasons.
On the one hand, there would be little, if any, additional
balance of payments or budgetary receipts from the sale
of gold medallions rather than gold bullion. In order to
compete against the one ounce Krugerrand, any U.S. gold
medallion would have to be priced close to the market value
of the gold bullion content, as is the case of the Krugerrand.
In addition, there would be direct budgetary costs
arising from the manufacturing and distribution of the
medallion.

The U.S. Mint estimates that the cost of minting

a U.S. medallion would be about $2 per medallion. While
the General Services Administration is unable to make
an accurate estimate of distribution costs, the medallion
would be expensive to distribute to the public on a wide
basis.

It should be borne in mind that the Krugerrand has

been in production for some time and the distribution system
is well developed and efficient.

Furthermore, that coin is

deliberately designed to develop a market for South African
gold production, rather than to generate revenue.
While being of little or no budgetary or balance of payments benefit to the United States, the proposal in S.2843
would have several negative effects. It would: (1) raise
questions about the Government's determination to fight
inflation, (2) offer official encouragement to U.S.
citizens to invest in a highly speculative commodity,

- 15 and (3) call into question the sincerity and credibility
of the policy of eliminating the monetary role of gold,
contrary to long-standing and widely supported U.S. policy.
Accordingly, the Administration opposes the passage of
S.2843.
First, the issuance of these medallions would tend to
create the erroneous impression that the U.S. Government needs
to supply the public with an officially issued gold piece as
a hedge against inflation.

This implication would be particularly

apparent in the case of a medallion deliberately patterned
after the Krugerrand, because the latter is actively promoted
as a hedge against inflation.
There may have been one or two instances where the
intent of governments in issuing gold pieces was to absorb
domestic liquidity as a means of fighting inflation. For
the United States, however, such a policy would be totally
impractical. No amount of gold sales which could realistically
be absorbed by the market would have any appreciable effect
on liquidity in the United States, nor would such sales
meet any needs that cannot be met by use of existing
monetary policy instruments.
It is thus clear that gold medallion sales could make
no positive contribution to the effort to combat inflation.
They are much more likely to be harmful to that effort.
Second, the production and sale of an American medallion,
as specified in S.2843, could be interpreted as a U.S.

- 16 Government effort to encourage investment in gold. The fact
that the medallions were minted by the U.S. Government and
bore the Great Seal of the United States would suggest to
potential investors that the U.S. Government was favorably
disposed toward such investment.
As I have pointed out, gold is a highly speculative
commodity subject to volatile swings in price. The investor
in such a Government-sponsored medallion at the end of 1974
would have seen the value of his investment drop by 47 percent
by mid-1976. We should thus avoid any implication that the
U.S. Government is promoting such investment.
U.S. citizens who want to buy gold for investment
or speculative purposes can, of course, do so in the private
markets now. There is no need for U.S. Government involvement
to enable U.S. investors, large or small, to buy gold coins or
medallions.
Third, there are certain aspects of S.2843 which would
be inconsistent with the U.S. policy of continuing progress
toward demonetizing gold. In introducing the bill last April
Senator Helms suggested that a U.S. gold medallion would
meet a commercial need in connection with payment of gold
clause contracts. But such a use of these medallions would
give them a clear monetary character.
In addition, the very existence of the U.S. Seal on
the gold medallion would be an invitation to those who favor
the remonetization of gold to press for designation of the

- 17 medallions as legal tender —

if not now, then at some sub-

sequent date. Foreign governments might well question whether
passage of this legislation meant that the U.S. Government
was reconsidering its policy with respect to gold.
Conclusion
The trend toward demonetization of gold has evolved
gradually but with steady progress over many years.

This

trend has reflected the inherent inadequacies of basing either
a national or an international monetary system on a commodity.
The United States and other nations have removed gold from
their domestic monetary systems.

Quite recently, the inter-

national community has followed this path formally through
amendment of the Articles of Agreement of the IMF.
With the reduced monetary role for gold, continued large
U.S. gold imports and trade deficits, and the existence of
large U.S. gold stocks, it has seemed desirable to engage in
a program of gold sales by the Treasury.

The sales have

been successful, and it is desirable to maintain flexibility
to adapt the program to changing circumstances.
The proposed gold medallion legislation would add nothing
toward achieving any of the objectives which are already
being met by the bullion sales program.

To the contrary, it

would raise some important problems and questions concerning
U.S. domestic and internationl economic policy.

For these

reasons we urge the Committee not to approve this proposal.
0O0

Table 1
GOLD RESERVES
End of Period; Millions of Ounces
Change */
1972 1977

1978
to date

1973

-13JA-

197S

1376

1977

1978
(May)

1,177.6

1,176.4

1,175.3

1,174.1

1,164.0

1,154.7

1,152.1

-22.9

-2.6

153.4

153.4

153.4

153.4

149.5

131.6

128.6

-21.9

-3.0

1,017.3

1,017.4

1,015.9

1,014.8

1,009.9

1,011.7

1,013.4

- 5.6

+1.7

850.1

850.7

850.7

849.4

849.3

857.0

859.1

+ 6.3

+2.1^

Other Europe

51.9

52.0

52.4

52.3

52.3

49.2

48.0

- 2.7

-1.2

Australia, N.Z., S. Africa

25.4

26.4

25.7

25.1

20.1

17.4

17.6

- 7.9

+0.1

Oil Exporting Countries

33.3

33.7

34.3

34.9

37.0

34.4

34.6

+ 1.0

+0.2

Other Less Developed Countries

56.0

54.7

52.9

53.1

51.3

53.7

54.1

- 2.3

+0.4

l?72
World
IMF
IMF Members
All Countries
Industrial Countries

a/ As part of the 1975 IMF gold agreement, the IMF has initiated a program to dispose of one-third of its gold holdings by selling 25 million
at public auction for the benefit of developing countries and restituting a further 25 million ounces to matters by sales at the official price.
The change in IMF gold holdings in 1976 and subsequent periods reflect these transactions. Information on these IMF gold transactions are listed
below and are based on data contained in the IFS.
IMF Gold Transactions: In Period
(million ounces)

Restitution
Sales
TOTAL

1976

1977

3.9
3.9

11.9
6.0
17.9

1978 (to May)
0.3
2.6
2.9

b/ Reflects change in Japanese gold reserve^ due to transfer of gold between government accounts.
Source: International Financial Statistics, August 1978

QASIA/QFEO: JNisenson
August 24, 1978

\

»

IMr Cold Auctionsi Summary Statistics

Dace

O)
June

2. 1976

July

14. 1976

Sept. 15. 1976

>

Pricing
method
(2)
Conunon

Place of
delivery
New York

Ounces bid
(thouaande)
<<)
2,320.0

Common

New York

2,114.0

2.71

2)

Bid

New York

3,662.4

4.70

Uld

New York

4,214.4

0)

Subscription
ratio!/
<5>
2.97

Number of bidders
Total Successful
i*>) ,. <*>
30
20

Number of bids
Total Successful

(»)
220

w
59

17

196

23

14

5.40

24

Cut-off
pries
<10)

Average
swsrd
price

01)

Average
market
price!/
(12)

Differential
UD-(12)
(13)

126.00

126.00

126.78

-0.78

56

122.05

122.05

122.23

-0.18

380

41

108.76

109.40

110.38

-0.98

16

383

37

116.80

117.71

117.75

-0.04

Oct.

27. 1976

bee.

8. 1976

Conunon

London

4.307.2

5.52

25

13

265

33

137.00

137.00

135.15

1.85

Jan.

26, 1977

Common

New York

2,003.2

2.57

21

15

192

49

133.26

133.26

132.55

0.71

Mar.

2, 1977

bid

New Yoik

1,632.8

3.11

21

7

167

14

145.55

146.51

144.96

1.53

Apr.

6. 1977

bid

New York

1.276.0

2.43

18

11

136

22

148.55

149.18

147.90

1.26

Hay

4. 1977

Bid

New York

1.316.4

2.51

17

14

107

38

147.33

148.02

147.85

0.17

June

1. 1977

Common

New Yotk

1,014.0

1.93

14

13

75

35

143.32

143.32

143.80

-0.48

July

6. 1977

Common

Paris

1,356.4

2.59

15

15

63

35

140.26

140.26

140.80

-0.54

Aug.

3. 1"77

Common

London

1,439.2

2.74

1H

16

136

44

146.26

146.26

145.93

0.33

Sept.

7. 197 7

Bid

New York

1,064.4

2.07

15

11

115

21

147.61

147.76

147.25

0.53

Oct.

5. 1977

Bid

New York

971.2

1.65

17

12

103

32

154.99

155.14

155.13

0.01

Nov.

2. 1977

Bid

London

1,356.4

2.58

16

7

90

21

161.76

161.86

161.63

0.23

Dec.

7. 1977

Common

New YiVrk

1,133.6

2.16

19

19

108

58

160.03

160.03

160.45

-0.42

June

4. 1976

Conunon

Now Yoik

9648

1.86

19

19

103

64

171.26

171.26

172.16

-0.92

Feb.

1. 1976

Common

Paris

596.4

1.14

17

17

76

62

175.00

175.00

176.50

-1.50

March

1. 1976

Bid

New York

1,418.0

2.70

19

16

127

76

181.13

181.95

183.15

-1.20

April

i. 1976

Bid

New York

1,367.0

2.60

21

15

122

30

177.61

177.92

178.53

-0.61

Hay

3. 1978

Bid

Loudon

3,104.0

5.91

24

17

192

36

170.11

170.40

170.36

+0.02

June

1. 1970

Did

New York

1.073,4

2.28

21

IS

137

28

182.86

183.09

182.95

+0.14

197B

Uld

New York

22

19

101

44

383.97

184.14

184.20

-0.06

3978

bid

Now York

July

5.

797.2

1.69
3.12

1,467.6
21
20
117
42
203.03
203.25
203.28
+0.03
•
•
1/ The ratio of total bid* to the amount on auction, i.e.. 780,000 ounces in the auctions from June 2, 1976 through January 26, 1977|
!>2!> 000 ounces in suctions from March 2, 1977 through May 3. 1978| and 470,000 ounces In subsequent auctions.

Auyuat 2,

2/ Average of London fixing prices on. auction day.

8/21/78

u. s. Treasury Gold Sales
1978

Number of Bidders
Quantity bid
(troy ounces)
Number of successful bidders
Quantity sold
(troy ounces)
Price range of awards

May 23

June 20

July 18

August 15

44

31

27

17

364,000

1,036,000

1 ,385,600

564,400

12

21

9

12

300,000

300,000

300,000

300,000

$ie0.01-$182. 35
per oz.

$186.52-$190.,29
per oz.

$185.05-$189.0 0
per oz.
$185.16
per oz.

$21J.2J-^it>

per oz.
$213.53
per oz.

$180.38
per oz.

$186.91
per oz.

($179.75)

($186.50)

($184.85)

($213.20)

Proceeds
(millions of dollars)

$54.1

$56.1

$55.5

$ 64.1

Retirement of gold
certificates

$12.7

$12.7

$12.7

12.7

Miscellaneous receipts
of the Treasury

$41.4

$43.4

$42.8

51.4

Average Price
London Second Fixing

August 21, 1978

TABLE 4
World
Supply and Demand for Gold
(millions of ounces)

Production

1975

1976

1977

22.9
1.7
1.0
5.2
30.8

22.9 ' v
1.7
1.0
6.5

22.5
1.8
1.0
5.8

31.2

31.1

4.8

13.3
3.9

12.9
6.0

1.3
- 1.8

- 1.6

1.8

5.3

15.5

20.7

36.0

46.7

51.7

16.6

30.0

31.5

5.8
7.8
0.7
0.2
5.0

6.7
5.9
1.5
5.7
-3.0

7.2
4.4
1.6
2.2
4.9

36.0

46.7

51.7

•

•i

South Africa
Canada
United States
Other
Total
Net Communist Sales
IMF Sales
U.S. Sales
Other Official (net)
Total Other
Total Supply
Fabrication Demand
Jewelry
Other Industrial
Fabrication
Official coins
Fake coins, medals
Bars for Hoarding
Residual 1)
Total

Source: Gold 1978,
Consolidated Gold Fields Ltd

1)

Believed to be bars for investment, includes errors in
estimating supply and demand.

August 21, 1978

Supply and Distribution of Gold in the United States
(millions of ounces)

1975

1976

1977

2.2

2.0

2.1

Jan.-June
1978

Source
2/
Domestic Production-'
Treasury Sales
•

Net Imports of Bullion
Gold Coin Imports
Total

1.3
<K3

1.3
4.8

7.9

3.3

1.3

1.6

1.5

5.8

8.1

11.6

6.4

3.7

4.7

4.9

2.3

0.5
0.1

- 0.2
-

1.5
1.0

1.2
- 0.9

0.6
*.!•*

Uses
Industrial & Commercial
Fabrication
Commodity Exchange
Stocks 1/
Industry Stocks
Coin Purchases

1.7 1.3 1.6 1.5

Unexplained

- 0.2 2.3 2.6 2.3

1/
2/

Includes gold held', by dealers to back up trading on commodity futures exchanges
Refinery Production which includes gold from U.S. mining output and old scrap.
These were 1.0 million ounces, and 1.1 million ounces respectively in 1977.

August 22, 1978

United

1977

S t a t e s F o r e i g n T r a d e in G o l d t>y M o n t h (Thousands of O u n c e s )

Gold Bullion
Imports
Census
IMF
Foreign
Census
(1)
(1) Account (2) Accounts(2) Total

Jan.
227
Feb.
175
183
Mar.
Apr.
161
194
May
June
615
July
182
Aug.
190
Sept.
601
287
Oct.
Nov.
1 ,072
372
Dec.
4 ,259

780
514
32
1,025
529
—
_

525
525
—

525
4,455

*

1977/78

Exports
Foreign
Accounts(2) Total

1,103
481
42
13
671
197
1,642(3)
664
50
1,612
259
510
7,244

Gold
Net Imps,
Coin
& Exps.(1) imports

Total
Net Imps.
ft Exps.(1

1,103
481
42
13
671
229
1,706
682
91
1,612
259
521
7,410

83
641
891
439
1,485
1,080
-1,336
473
1,595
3
1,933
590
7,877

160
112
122
111
137
92
39
124
94
121
157
345
1,614

243
753
1,013
550
1,622
1,172
-1,297
597
1,689
124
2,090
935
9,491

—

1,225
146
238
1,060
202
126

415
88
1,115
20
216
1,409

227
231
365
158
321
187

642
319
1,480
178
537
1,596

241

2,997

3,263

1,489

4,752

959
167
236
259
937
165
188
965
560
803
1,120
214
6,573

1,186
1,122
933
452
2,156
1,309
370
1,155
1,686
1,615
2,192
1,111
15,287

1,640
234
1,353
1,080
418
1,535

1,061
146
207
1,028
108
126

164

6,260

2,756

m&m

—

32
64
18
41
-

11
166

1978
Jan.
Feb.
Mar.
Apr.
May
June

(1)
(2)
(3)

443
191
773
523
289
434

525

463

672
43
55
32
129
638

2,6^3

2,038

1,569

—

525
525
—

—

31
32
14

Includes small amounts of ores, scrap, and base bullion.
Gold delivered to and from foreign official accounts at the Federal Reserve Bank of New York
Exports for the month of July 1977 include 1,602 million ounces which were actually
exported in prior months.

FOR RELEASE AT 4:00 P.M.

August 25, 1978

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,600 million, to be issued September 7, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,606 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,200
million, representing an additional amount of bills dated
June 8, 1978,
and to mature December 7, 1978
(CUSIP No.
912793 U7 9), originally issued in the amount of $3,403" million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
September 7, 1978, and to mature March 8, 1979
(CUSIP No.
912793 X3 5).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing September 7, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,445
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Friday, September 1, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-1134

-2Each 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 securities and report daily to the
Federal Reserve Bank of New York their positions in and
oorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied f6r
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury *: A
cash adjustment will be made on all accepted tenders for ther
difference between the par payment submitted and the actualrf
issue price as determined in the auction.
^No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on September 7, 1978, in cash or
other immediately available funds or in Treasury bills maturing
September 7, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

FOR IMMEDIATE RELEASE
August 24, 1978

Contact:

George G. Ross
202/566-2356

UNITED STATES AND HUNGARY REACH TECHNICAL
AGREEMENT ON PROPOSED INCOME TAX TREATY
The Treasury Department today announced that representatives of the United States and Hungary have reached
agreement at the technical level on a proposed income tax
treaty between the two countries. The two delegations will
submit the proposed text to their governments for the necessary review prior to signature.
The proposed treaty will be the first such treaty concluded between the United States and Hungary. It is intended
to facilitate economic and cultural relations between the two
countries by removing income tax obstacles to such relations.
The proposed treaty will clarify the rules governing income
tax jurisdiction, and will provide for administrative cooperation between the tax authorities of the two countries to
avoid double taxation of income.
The proposed treaty between the United States and
Hungary is similar to agreements concluded by the United
States with Poland and Romania, and to the model draft treaty
published by the Organization for Economic Cooperation and
Development (OECD) in January 1977. Thus, it provides rules
for the taxation at source of business, investment and employment income, specifies the method to be used by the residence
country to avoid double taxation, guarantees nondiscriminatory
treatment and provides for mutual consultations to resolve
any problems which might arise in implementing the treaty and
avoiding double taxation.
o

B-1135

0

o

FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
TESTIMONY OF
DANIEL I. HALPERIN
ACTING DEPUTY ASSISTANT SECRETARY (TAX LEGISLATION)
OFFICE OF TAX POLICY, DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT OF THE
SENATE FINANCE COMMITTEE
August 28, 1978
Mr. Chairman and Members of this Subcommittee:
I am pleased to have this opportunity to appear before
you this morning to present the views of the Department of
the Treasury on the nine bills on the Subcommittee's agenda.
These bills range from items that the Treasury regards as
relatively noncontroversial to those that raise what we view
as very serious policy problems meriting considered review
by this Subcommittee. With respect to the less controversial
or more narrow items — H.R. 810, H.R. 4030, S. 2771, H.R.
5099 and S. 3345 — I will outline briefly the Treasury's
position, elaborating in appropriate instances in the appendix
to my testimony.
The bulk of my testimony will be devoted to S. 1611 and
S. 3049, both of which deal with product liability; S. 3176,
dealing with contributions in aid of construction to the
capital of certain public utilities; and S. 3341, the
"Independent Local Newspaper Act of 1978".
K.R. 810, H.R. 4030, S. 2771,
H.R. 5099, S. 3345
H.R. 810 we regard as relatively noncontroversial. The
Tax Reform Act of 1969 added a provision to the Code (section
4941) which in general prohibits certain transactions between
private foundations and certain "disqualified persons," by
imposing a graduated series of excise taxes on the disqualified
person (and in certain circumstances on the foundation
manager). Government officials are "disqualified persons"
for this purpose except for certain specifically set forth
transactions
including the payment of expenses of domestic
B-1136

- 2 travel. The bill would provide an additional exception for
payment or reimbursement of foreign travel expenses of a
government official by certain foundations within specified
limits.
The Treasury Department recommends that H.R. 810 be
amended to limit the permitted amount of reimbursable transportation expenses to the cost of the lowest coach or economy
air fare charged by a commercial airline.
The recommended change would make the reimbursable
amounts under the bill consistent with the limitation on
deductions for attending foreign conventions under the
Administration's 1978 tax program. Treasury would not
oppose H.R. 310 if this change were made.
H.R. 4030, in contrast, would amend the provisions
governing the activities of private foundations in a manner
the Treasury does not support. It would create an ad hoc
exception to the tax on excess business holdings of a
private foundation (section 4943) in cases where the foundation owns over 50 percent of the voting stock of a public
utility which had taxable income of less than $1 million
during its first taxable year ending after May 26, 1969 if
certain other conditions are met. While there were a
variety of considerations underlying the provisions of the
Tax Reform Act of 1969 that were designed to eliminate the
use of private foundations to preserve control of business
enterprises, one ^principal consideration was that the
presence of control on the part of the foundation would tend
to direct the foundation's efforts toward operating the
business and to divert its attention from its legitimately
charitable purposes. The Treasury Department opposes H.R.
4030 not only because it creates a special ad hoc exception
to section 4943, but also because, by preserving the opportunity
for private foundations to control certain kinds of taxable
businesses, it would tend to undermine one of the policies
of section 4943. Our views on H.R. 4030 are set forth in • .
greater detail in the appendix.
S. 2771 would exempt from the unrelated trade or
business income tax generally applicable to exempt organizations, income from the conduct of bingo and similar games
of chance. Eligible games are defined as those in which
wagers are placed, winners determined, and prizes distributed
in the presence of participant. The bill also would require
that such games not be "ordinarily carried on on a commercial
basis" and that their conduct not be in violation of applicable
local law. One of the underlying policies of the unrelated
business income tax is to prevent unfair competition by tax
exempt organizations with commercial enterprises. Because
m many states bingo may be regularly carried on only by

- 3 exempt organizations, it is arguably consistent with this
underlying policy not to tax the income from such games.
Consequently, Treasury would not oppose this legislation
provided that it was limited to the conduct of bingo and did
not confer tax exemption on income from other, essentially
casino activities; and, that it was limited to the conduct
of bingo in jurisdictions where, under applicable law, bingo
may lawfully be carried on only by exempt organizations. We
also regard it as essential to clarify S. 2771 to provide
that exempting the income from bingo does not foreclose the
possibility, which exists under current law, that where
bingo has become an overly substantial part of the organization
activities the organization may forfeit its tax exemption.
Modified in this fashion, the Treasury would not oppose this
legislation. We do not endorse the effective date, which is
retroactive to 1969.
The Treasury is also unable to support H.R. 5099, which
would provide relief for two individuals who were unable to
sell their old principal residence within 18 months after
purchasing a new principal residence and thus did not .qualify
for the rollover of section 1034. It adversely affects the
equity of our tax system to create special exceptions for
particular taxpayers to general limitations with which the
rest of us must comply. This bill would provide just such
special relief. It has been suggested in support of this
legislation that these individuals could have qualified for
an extension of the rollover period available under section
1033 if their propoerty had been involuntarily converted.
We have concluded, for the reasons set forth in greater
detail in the appendix, that this premise is incorrect. The
Treasury opposes H.R. 5099.
Finally, the Treasury supports S. 3345, which would
make available to certain regulated investment companies—
those that constitute Small Business Investment Companies
(SBICs)—a deficiency dividend procedure similar to that h'ow
available for personal holding companies and real estate
investment trusts. The Treasury sees no reason, indeed, why
a deficiency dividend procedure should not be made available
to all regulated investment companies, provided that the
procedure were made identical with that accorded real estate
investment trusts by the Tax Reform Act of 1976. (See
§§1601(b)-(f) of P.L. 94-455.)
Product Liability (S. 1611, S. 3049)
Mr. Chairman, I would now like to turn to S. 16il
and S. 3049, both of which are measures designed to facilitate

- 4 self-insurance of product liability risks. With the Chair's
consent, I would also like to consider with the Subcommittee
an Administration-sponsored alternative to the approach
taken by S. 1611 and S. 3049, both of which the Administration
opposes.
Both S. 3049 and S. 1611 would amend Section 165 of the
Code to provide current deductions for contributions to
product liability self-insurance accounts. In both instances,
annual contributions would be limited to a percentage of
gross revenues subject to a dollar maximum, and the aggregate
funding of the trust would similarly be subject to both
percentage and dollar limitations. S. 3049, which constitutes the more comprehensive treatment, provides separate
limitations for taxpayers in general and for those having a
"severe product liability problem." Contributions are
required to be made to an independently trusteed, segregated
account, the assets of which may be invested only in Federal,
State or local debt securities or instruments of deposit in
a financial institution, and which may not be used for any
purpose other than satisfying product liability losses.. To
the extent a product liability loss is paid out of the
proceeds of the account, no further deduction under Section
165 is allowed, and penalty taxes are imposed to insure that
proceeds of the account are not used for an inappropriate
purpose. Special rules are provided for groups of affiliated
companies and for contributions to a wholly-owned (or
"captive") insurance company.
The tax treatment of product liability self-insurance
is a subject that not only has been the source of lively
public and Congressional debate, but has received a most
thoroughgoing review by the Administration. My testimony on
this subject will constitute an effort to share with this
Subcommittee the reasons that have led the Administration to
oppose S. 1611 and S. 3049 and to endorse an alternative
proposal that would extend to ten years the carryback peric-d
for net operating losses attributable to product liability.
The nature and degree of the product liability problem
has been thoroughly studied by an Interagency Task Force
headed by the Department of Commerce. In its Final Report,
the Task Force outlined a number of steps, including a
variety of tort law revisions and changes to casualty
insurance ratemaking practices, that ought to be seriously
studied and possibly implemented to deal with the root
causes of the product liability problem. At the same time,
the Task Force Report suggested that interim relief might be

- 5 provided through the tax system. The relief considered in
the report would have been to permit deductions within
certain limits for contributions to self-insurance trusts.
This proposal was recognized by the Task Force as being of
an admittedly short-term nature, and to constitute no
substitute for longer term revisions to local tort law and
insurance ratemaking^ practices needed to deal with the root
causes of the product liability problem. Moreover, the
short-term tax recommendation was based principally on the
perception that by permitting deductions for casualty insurance
premiums but not for contributions to self-insurance funds,
the tax law discriminated against self-insurance. The Task
Force Report cautioned, however, that any such proposal
should not be advanced without a more thorough study of its
merits.
That follow-up study now has been completed. The
Administration's conclusions and proposal were announced by
Commerce Secretary Kreps on July 20, 1978. The reasons that
led the Administration not to endorse a deduction for
contributions to product liability self-insurance reserves
are essentially three. First, the superficially appealing
notion that the tax law discriminates in favor of commercial
insurance and against self-insurance is in fact based on a
misapprehension. Second, the existing proposals for current
deductibility of contributions to self-insurance trusts
provide an opportunity for deferral of taxes and thereby
would operate to subsidize self-insurance. Eecause selfinsurance is inherently inefficient by contrast with commercial
insurance, and because of technical difficulties stemming
from the inability to estimate future product liability
losses, we concluded that extending such a subsidy would not
be appropriate. Finally, we concluded that existing law,
with some modification, would provide virtually the same tax
benefits, other than deferral, as proposals providing
current deductibility for contributions to a self-insurance
trust, and with far less administrative complexity. The"
necessary modification, as I have already noted, would be to
amend current law to provide a special 10-year net operating
loss carryback, in contrast to the three-year net operating
loss carryback generally available under current law, for
losses attributable to product liability. Let me now explore
each of these reasons in somewhat greater detail.
It is a misconception to believe that, because commercial insurance premiums paid in the ordinary course of a
trade or business are deductible and contributions to a
self-insurance trust are not, the tax law discriminates

- 6 against self-insurance. Product liability losses incurred in
a trade or business are, of course, deductible when incurred
under section 165 of the Code. The belief that the tax
treatment of insurance premiums is more favorable must be
based on the assumption that a deduction is allowed at an
earlier point even if the insurance company is building up a
reserve.* The deduction under 165 is disallowed,,however,
for any loss to the extent such loss is "compensated for by
insurance or otherwise." Thus, the enterprise paying premiums
for commercial product liability insurance may only deduct
those premiums when paid or incurred. To the extent the
loss is reimbursed by the insurer, however, no further
deduction is permitted even though because of earnings on
the reserve the total amount of losses might well exceed the
premiums paid. If this were the case the total deduction to
the self-insurer is greater and offsets the benefit obtained
from the earlier deduction by those who use commercial
insurance. Consequently, the tax treatment of self-insured
and commercially insured losses is essentially symmetrical.
There is no discrimination to be cured.
In view of the fact that the tax law does not discriminate against self-insurance, some other rationale for
permitting current deductions to self-insurance trusts must
be found. And, in considering the possibilities, one must
recognize that conferring current deductions for contributions
to self-insuiance trusts, v;here such trusts are tax exempt,
invariably gives rise to tax deferral.** That deferral
constitutes a subsidy to self-insurance. Consequently, the
pivotal question is whether any subsidy, and if so whether a
subsidy in the form of deferral, is warranted.
Taking the second question first, the Administration
concluded that if a subsidy for product liability selfinsurance was appropriate, deferral was not the appropriate
mechanism by which to deliver it. The benefits of deferral
vary with the marginal rate of the taxpayer and with the
period of time for which taxes are deferred. Thus, while a
good many corporate taxpayers are in the top 48 percent
* To thethose
extent
insurers
not build
up aSimreserve,
bracket,
in commercial
lower brackets
woulddobenefit
less.
self-insurance
obviously
increases
total
deducted.
ilarly, the greatest
benefits
would the
accrue
toamount
those whose
** The earnings of the trust are in effect taxed at the time
of the loss since no further deduction is allowed even
though the loss exceeds the original contribution.

- 7 funds remained on deposit the longest, who well might be
those with less in the way of product liability losses.
Finally, because a subsidy in the form of deferral is offbudget, it is subject to less rigorous scrutiny than a
subsidy required to be appropriated.
The Administration also concluded that the case for.
subsidizing self-ins~urance of product liability losses
generally was not strong. The principal basis for this
conclusion was that self-insurance very well may be the
least efficient form of insurance. By "least efficient", I
mean simply that, to self-insure, the insured party is
required to put up $1 of capital for every dollar of risk
insured. Because, in contrast, commercial insurance involves
the pooling of covered risks, the amount of capital required
per dollar of coverage is significantly smaller. Consider,
for example, the case of four business enterprises each of
which is reasonably certain that it will incur a $100 loss
at some time during the next four years. None is certain
when its loss will occur but probability tells us that if
each of the participants has a one-in-four chance of incurring a loss during each of the next four years, it is
likely that one of the four will incur a loss each year.
For each firm to self-insure would require each to place
roughly $100 in a self-insurance trust. If the four were,
instead, to engage in a pooling arrangement similar to
mutual insurance, each would have to tie up only roughly $25
each year. The $100 ($25 from each participant) would be
pooled' in the participants' mutual insurance company and
would be used to pay the likely claim of the one participant
who incurred a loss each year. By sharing their risks, each
participant would thus be able to spread its contribution to
the shared risks over a four-year period, rather than having
to self-insure for nearly the full $100 for the entire
period. Because of such economies in a risk-sharing arrangement, commercial insurance is inherently more efficient than
self-insurance.
The problems with self-insurance are compounded where,
as in the case of product liability, it is next to impossible
to predict the magnitude of future risks. This difficulty
is reflected by the fact that both S. 1611 and S. 3049
provide for deductions limited, not by a taxpayer's anticipated
experience, but by a percentage of sales subject to ceilings
on annual contributions and maximum funding of the product
liability loss reserve account. 3ecause such contributions
are not limited, and indeed in practice could not be limited,

- 8 to amounts that bear some relationship to a taxpayer's
actual experience, the contributions to such accounts well
might be excessive for some taxpayers, wholly inadequate for
others, and in only random instances would bear any relationship to the need of particular taxpayers. Because of this
randomness, the amount of subsidy afforded by these proposals
would also be random. *

* Indeed, the amounts for which S. 3049 and S. 1611 would
permit tax deductibility would not be properly accruable for
financial accounting purposes. A reserve for self-insurance
of possible future losses is in the nature of a general
contingency reserve, the contingency in the case of S. 3049
and S. 1611 being possible future product liability loss.
Statement number 5 of the Financial Accounting Standards
Board ("FASB") provides that, before liability for a loss
contingency may be recognized, (1) information available
must indicate that it is probable that an asset has been
impaired or a liability has been incurred at the date of the
financial statement, and (2) the amount of the loss must be
reasonably estimated. Under these provisions, contingency
reserves constitute liabilities for which no accrual is
permitted and FASB Statement number 5 specifically so provides. A potential liability of this type need not be
disclosed in supplemental information unless there is a
reasonable possibility that a loss has been incurred. This
treatment is required by generally accepted accounting
principles even though the reserve is funded through a
segregated trust or through the use of a captive insurer.
It is also worth noting that amounts for which a
deduction would be permitted by S. 3049 or S. 1611 would not
have been deductible under the general rules, once promulgated
by Congress, that would have conformed tax accounting to '•
general accepted accounting principles. As originally
enacted, the Internal Revenue Code of 1954 contained two
sections—Sections 452 and 462—which would have allowed for
the deferral of prepaid income and deductibility of additions
to reserves for estimated expenses. These provisions were
repealed retroactively in 1954. It is noteworthy that the
regulations promulgated under Section 462 provided that
allowable reserves for estimated expenses did not include
reserves for general, undetermined contingencies for indefinite
possible future losses. See Regulations Section 1.462-5(b)(4),
T.D. 6134. Thus, even under the liberal standards of former
Section 462, no deduction would have been allowed for
additions to reserves for product liability losses.

- 9 Finally, the existence of exempt, self-insurance trusts
would require complex administrative controls. For one
thing, the Internal Revenue Service would be required to
insure that such trusts were not overfunded and that their
investments were limited in the manner required by, for
example, S. 3049. Moreover, extremely complex accounting
would be required to define the appropriate tax treatment to
be applied on nonqualifying distributions from, or liquidations of, such product liability loss reserve accounts.
Presumably, the sponsors of such provisions would wish to
provide that, if an enterprise established a product liability
loss reserve account and, after a number of years, decided
that it no longer needed the account, the taxpayer should
reap no benefits by virtue of having established and maintained
the account. In order to give effect to this result, extremely
complex accounting provisions would be required to bring the
taxpayer back to square one. It would, I should note, not
be sufficient simply to provide that all amounts distributed
from the account be subjected to tax.
For all these reasons — the fact that self-insurance
is inherently inefficient, the fact that contributions to
such accounts would bear no relationship to_a taxpayer's
actual experience, and the administrative complexity that
these proposals would entail — we do not think the Congress
should endorse a provision that would subsidize such selfinsurance through the tax system.
Having concluded that the Administration should not
endorse proposals to subsidize through the tax system selfinsurance of product liability risks, did not stop there.
Apart from its deferral aspect, a proposal to allow a
current deduction for contributions to a self-insurance
trust can be regarded as a method of averaging product
liability losses over a period of several years. For example,
a taxpayer who put a thousand dollars in a product liability
loss reserve account for each of 10 years, and who at the"
end of that 10 years incurred a $10,000 product liability
loss, would effectively have spread the burden of that loss
over a 10-year period. Thus, we asked whether there were
any revisions to current law that might accomplish this
result but that would not entail deferral. Under current
law, the method by which taxpayers are permitted to average
losses over a longer period than the year in which the loss
is incurred is in the net operating loss carryover provisions
of Section 17 2 of the Code. In general, a net operating
loss may be carried back and applied against taxable income
earned during the three years perceding, and carried forward

- 10 and applied against income in the seven years following, the
year in which the loss was incurred. Where a net operating
loss is carried back to a prior taxable year, it is applied
against income earned during that year and gives rise to an
immediate claim for refund of taxes paid on that income. In
view of the fact that product liability may give rise to
sporadic but extraordinary losses, we were prompted to
inquire whether the "three year carryback period of current
law was adequate. In this connection, we noted that in some
instances, for example financial institutions, the Congress
had already concluded that a net operating loss carryback
period of longer than three years would be appropriate, and
we asked whether a similar proposal might not be adopted for
net operating losses attributable to product liability. We
have concluded, Mr. Chairman, that it would. Consequently,
as you know, on August 1, 1978, the Administration forwarded
to Chairman Long, Chairman Ullman and other interested
members of the Congress a proposal to modify Section 172 to
provide.a ten-year net operating loss carryback for losses
attributable to product liability.
Mr. Chairman, we believe that this net operating loss
carryback proposal constitutes an appropriate tax response
to the product liability problem and should be endorsed by
this Subcommittee in lieu of proposals such as S. 3049 and
S. 1611. As modified by this proposal, we believe that
current law will provide nearly all the benefits to taxpayers—other than deferral of taxes—that they would obtain
from being permitted to deduct contributions to a product
liability self-insurance trust. In this connection, I would
like to consider two arguments that have been raised in
support of the contention that allowing a deduction for
product liability set-asides would be preferable to current
law, even as modified by the ten-year net operating loss
carryback that the Administration has proposed.
First, it is said that by encouraging businesses to
establish self-insurance reserves for product liability,
measures such as S. 3049 would facilitate retention of
product liability risks and put pressure on the insurance
industry to reduce rates for commercial product liability
coverage. The answer, we believe, is that nothing in
current law precludes a firm from self-insuring by setting
aside some reserves—in tax paid rather than pre-tax dollars—
to provide for product liability risks. Indeed, a firm that
desired to obtain under current law the equivalent in selfinsurance through contributions to a self-insurance trust
would be required to put up roughly half the amount in tax

- 11 paid dollars as would be required for a reserve funded with
pre-tax dollars. This difference arises because, when a
reserve is funded with after-tax dollars, the loss against
which the reserve is maintained remains fully deductible and
the deduction gives rise to a corresponding decrease in
Federal income tax liability. Businesses will, therefore,
remain free to self-insure a portion of their risk with after-tax dollars, knowing that, through their ability to
deduct the loss, they are essentially "insured with the
government" for the amount of the tax benefit of the deduction.
Moreover, if the ten-year net operating loss carryback
proposal is adopted, as we believe it should be, such businesses
will have the assurance that the government will defray a
portion of their loss even if they have no taxable income in
the year the loss is incurred.
Second, it has been suggested that when a firm establishes
a self-insurance reserve, the knowledge that its own money
is "at stake" should a product liability loss be incurred
will encourage it to show greater concern for the safety of
its products. We believe that, under current law, and. as
modified by the Administration proposal, the incentive to
make safe products will be every bit as great. The firm
that self-insures without providing segregated self-insurance
reserves—the firm that "goes bare"—has perhaps the greatest
incentive to make safe products since, absent commercial
coverage or a reserve, the equity in its business is at
stake. This incentive would not be reduced by extending the
net operating loss carryback for product liability losses.
While the availability of that carryback would tend to
insure that each taxpayer will realize immediately the tax
benefits of being able to deduct the loss, even for a taxpayer
in the 48 percent tax bracket, the government only pays 48
cents on each dollar of loss. To the extent of the other 52
percent, the taxpayer's reserve (if it has one), or its
equity in its business (if it does not), remains at risk for
the loss. Consequently, we do not think current law as
modified by the ten-year net operating loss carryback, will
diminish at all the incentives that exist to produce safe
products.
In sum, Mr. Chairman, we believe that current law, as
modified by a ten-year net operating loss carryback, provides
an appropriate response to those who desire to encourage
self-insurance of product liability risks. We think it
would be far more equitable than either S. 3049 or S. 1611,
since it would not involve tax deferral. We think it is far
more efficient, since it neither requires nor forecloses

- 12 businesses from setting up self-insurance reserves—with
tax- paid dollars—at the level they consider to be appropriate.
And we think it would be far more simple to administer,
since the loss carryback would come into play only to the
extent it was necessary, and would not require cumbersome
administrative machinery to police the use of self-insurance
trusts. For these reasons, the Administration urges the
Subcommittee to give favorable consideration to the ten-year
net operating loss carryback proposal. It would oppose
adoption of either S. 3049 or S. 1611.
Contributions in Aid of Construction to the
Capital of Public Utilities (S. 3176)
S. 3176 would make contributions in aid of construction
to regulated electric energy or gas public utilities eligible
for treatment as nontaxable contributions to capital under
section 118(b). This bill, which is framed as an extension
of the treatment currently accorded water or sewerage
disposal facilities by section 118(b) of the Code, invites
this Subcommittee to reexamine the rationale for current
law.
Section 118(b), added by the Tax Reform Act of 1976,
provides that amounts received after January 31, 1976, as
contributions in aid of construction by a water or sewerage
disposal utility which are used for qualified expenditures
and which are not included in the utility rate base for
ratemaking purposes are treated as nontaxable contributions
to capital of the utility.
An amendment to extend section 118(b) treatment to
electric and gas utilities was offered on the Senate floor
and defeated. The relief was limited to water and sewerage
utilities because it was felt that they were more significantly
affected than were other utilities. Moreover, the revenue.
loss, measured from a base which treated contributions as
taxable income, was manageable if confined to water and
sewerage facilities but could be as high as $200 million if
gas and electric utilities were included.
The issue posed by S. 3176 is the appropriate tax
treatment of contributions in aid of construction in general.
The further question of what taxpayers other than water and
sewerage disposal utilities should receive section 118(b)
treatment must be dealt with as a separate issue only if it
is decided that section 118(b) is correct as a general
matter.

- 13 This is an extremely difficult and complex issue which
is currently under study by the Treasury Department. Put
simply, Treasury believes that section 118(b) is incorrect
and can permit substantial amounts of income to be received
tax free.* However, we would also agree that in some circumstances
full current taxation of so-called "contributions to capital"
would overstate actual economic income. Thus, in, the absence
of section 118(b) utilities would have to seek other forms
of financing.
The issue posed is whether it would create significant
difficulties for utilities and their customers, beyond a
loss of tax exemption for real income, if they had to use
the other means of financing. If this can be shown then we
must either decide to provide a tax benefit or seek a third
solution (which will not be easy) which will correctly
measure income. In any event, we believe the matter requires
substantial study and we continue to welcome input from all
interested parties.
The "Independent Local Newspaper
Act of 1978" (S. 334TT
S. 3341, the "Independent Local Newspaper Act of 1978,"
is designed to provide tax relief to those who own independent
"local" newspapers. The Treasury Department opposes this
bill, which in reality constitutes special relief legislation.
The bill is divided into two principal parts. The
first permits the establishment of a trust by an independent
"local" newspaper for the purpose of paying the estate tax
attributable to any owner's interest in the business. The
trust must have an independent trustee and its corpus may be
invested only in united States obligations. The value of
the trust cannot exceed 70 percent of the value of the
owner's interest in the business. The income earned on tft6
trusteed assets will be exempt from tax. The transfer of
assets to the trust is deductible by the newspaper business,
but is also excluded from the taxable income of the owner.
The corpus of the trust is excluded from the owner's gross
* Contributions in aid of construction represent a present
payment for future services. As such they constitute gross
income to the recipient. If we were to stretch the facts and
assume that the contributor has made a loan to the utility
to be repaid through reduced charges for services, it would
seem that "interest" en this hypothetical loan should be taxed.

- 14 estate and the estate does not realize income when its
estate tax liability is discharged by the trust.
The newspaper must have all its publishing offices
located in a single state, and if it is a partnership or
corporation, it cannot be traded on an established securities
market. Deductions for transfers from the business to the
trust are limited to"50 percent of the business profits.
The second part of the bill provides for an elective
deferral of the estate tax attributable to the newspaper
interest not otherwise paid from the assets of the estate
tax payment trust essentially on the same terms as Code
section 6166, with the same preferential 4 percent interest
rate but without regard to the size of the interest in
relation to the owner's estate.
I would like to take a few moments to examine the major
aspects of the bill- First, the bill permits a deduction
for earnings diverted to the estate tax payment trust.
Although the bill provides that such a deduction is allowable
under section 162, the payment in no way can be said to meet
the "ordinary and necessary" business expense criteria of
that section. Nor, is there in the tax law any other
provision similarly allowing a deduction for amounts to be
used to pay death taxes.
Second, the bill provides that the funds transferred to
the estate tax payment trust will not be included in taxable
income by the owner. To the extent that the newspaper
business is held in corporate form, this payment would in
all other cases be treated as a taxable dividend.
Third, the exemption of trust earnings is contrary to
existing law which would normally, in this case, treat the
beneficiary as the owner of the trust and taxable on its
income.
Fourth, exclusion of the corpus of the trust from the
owner's gross estate violates existing principles which
would include in a decedent's estate any asset in which the
decedent or his estate had an interest.
Finally, if it was appropriate to exclude the funding
and earnings of the trust from the decedent's income, then
the exclusion from estate income of the amount paid by the
trust to relieve the estate of its estate tax liability

- 15 contravenes the basic income tax rule that discharge of ah
obligation of another results in income to the party whose
obligation has been discharged.
The proponents of this bill may argue that many of its
provisions are analogous to provisions of existing law. For
instance, there are provisions in the deferred compensation
area dealing with business deductions, exclusions from
income, tax-exempt trusts, and estate tax exclusions. But
this is a poor analogy. First, in the employee plan area
the law does not discriminate between industries or businesses.
Second, although deductions are allowed at the business
level, these deductions are allowed only insofar as they
meet the "ordinary and necessary" standards of section 162
or 212. Third, although the employee participating in a
retirement plan is not taxed currently as contributions are
set aside for him by his employer, those amounts and their
accumulated earnings are taxed to the employee, or his
heirs, when received. Finally, the estate tax exclusion for
certain employee benefits is limited to benefits payable as
annuities and does not extend to lump-sum payments. Furthermore, this exclusion is specifically not applicable to the
extent the payment is made to or for the benefit of the
decedent's estate.
It has been suggested that special estate tax relief
was granted in 1976 to family farmers and that this bill
merely extends comparable benefits. This is not so. The
special estate tax valuation provisions of Section 2032A
relating to farm property contain substantial restrictions
regarding the pre- and post-death family ownership and
operation of the farm business, which are totally absent
from this bill. Furthermore, the benefits of that section
are limited to cases in which the farm interest is a major
part of the estate.
Apart from its significant departure from accepted tax
principles the bill has other deficiencies. The benefits
are available to any shareholder of an independent "local"
newspaper, no matter how many shares are owned and without
regard to whether such ownership creates an estate tax
liquidity problem. Moreover, there is no provision for the
recapture of benefits if the family of the owner does not
continue operating the local newspaper.
While we are sympathetic to the plight of some owners
of small businesses in planning the payment of estate taxes
while retaining control of their business in the heirs, we

- 16 oppose this special relief for one group of "small businessmen." We well understand that these problems have in some
cases increased following the enactment of the Tax Reform
Act of 1976. In particular, there is now a greater likelihood
of a significant income tax liability in the event that a
business interest is sold to provide funds for the payment
of estate taxes.
It must be noted, however, that present law already
provides relief for small business owners and their heirs.
Section 303 provides that in certain cases the redemption of
stock by a corporation to pay estate taxes will be treated
as a redemption and thus subject to capital gains tax rather
than as a dividend subject to ordinary income tax. Also, if
a portion of the business must be sold to generate funds to
pay estate taxes, the gain realized will generally be taxed
at the capital gains rate. Further, the transaction can
often be structured as an installment sale, in which case
the payment of the income tax is deferred over the installment
payment period.
In computing the estate tax, there are special relief
provisions. In the 1976 Act, the amount of .property which
may be passed without being subject to the estate tax was
increased from $60,000 to $175,000. Also, the marital
deduction for transfers to surviving spouses, which before
the 1976 Act was limited to one-half the estate, was changed
to a limit of the greater of 50 percent of the value of "the
gross estate or $250,000.
Finally, the payment of the estate tax may be deferred
where a business interest constitutes a major part of the
estate. Under section 6161(a) the time for payment of the
estate tax may be extended for up to 10 years upon a showing
of reasonable cause. Reasonable cause exists when an estate
consists largely of a closely-held business and does not
have sufficient funds to pay the tax on time, or must sell'
assets to pay the tax at a sacrifice price. In section 6166
a five-year deferral and 10-year installment payment is
allowed if the value of an interest in a closely-held business
exceeds 65 percent of the adjusted gross estate. Finally,
section 6166A is applicable to a broader number of situations,
those in which the value of the closely-held business interest
is either 35 percent of the gross estate or 50 percent of
the taxable estate. Under that section the estate tax
attributable to the closely-held business interest may be
paid in up to 10 annual installments.

- 17 As valuable as a free and vigorous press is to this
nation, we do not believe that an ownership interest in such
business should be entirely free from tax. If the independent
local newspaper industry has particular problems arising
from its economic circumstances, the tax expenditure method
may be one of the least controllable methods of dealing with
them. Consideration-should be given to other means of
relieving the burdens of payment outside the framework of
the tax laws. For instance, special loan programs might be
considered. To the extent the value of.these businesses is
being artificially escalated by takeover bids from larger
newspapers, the possible application or modification of the
anti-trust laws should be considered.
The adoption of this bill would provide a wedge to be
used again and again by other segments of society, each
arguing its own importance. We do not believe in this
piecemeal approach to legislation. There are existing
provisions intended to minimize the problems inherent in the
payment of taxes. If they are inadequate they should be
o 0 o
reviewed in a comprehensive
and not an ad hoc manner.

SUMMARY OF TREASURY POSITIONS
H.R. 810

—

Reimbursement by certain private foundations
of foreign travel expenses of government
officials: Would not oppose if modified.

H.R. 4030 —

Exception to tax on excess business holdings
for holdings in certain public utilities:- Opposed.

S. 2771

Tax treatment of bingo income of exempt
organizations: Would not oppose if modified.

—

H.R. 5099 — Relief under section 1034 for Mr. and Mrs. Hall:
Opposed.
S. 3345 — Deficiency dividend procedure for Small Business
Investment Companies: Not opposed. Would not
oppose extending the deficiency dividend procedure
accorded real estate investment trusts by the
Tax Reform Act of 197 6 to all regulated investment
companies.
S. 1611 &
S. 3049
-- Product liability self-insurance trusts: Opposed.
The Administration recommends adopting a 10-year
carryback for net operating losses attributable
to product liability.
S. 3176

—

Contributions in aid of construction to capi'tal
of electrical energy and gas utilities: Opposed.

s

—

"The Independent Local Newspaper Act of 1973":
Opposed.

- 3341

APPENDIX
1.

H.R. 4030

H.R. 4030 would create an exception to the tax on the
excess business holdings of a private foundation in cases in
which a private foundation owned over 40 percent-of the
voting stock of a public utility which had taxable income of
less than $1,000,000 during its first taxable year ending
after May 26, 1969, and which meets certain other conditions.
One of the basic goals of the 1969 Act was to eliminate the
use of private foundations to maintain control of business
enterprises. Foundation control of business interests had
produced a number of undesirable results: competing businesses
owned and operated by taxable entities were placed at a
competitive disadvantage; benefits to charity were deferred
through the accumulation of funds in controlled businesses;
and foundation managers became primarily concerned with
business affairs rather than with the charitable objectives
of their foundations. A provision (section 4943) was added
to the Code by Congress in 1969 to limit the involvement of
private foundations in business enterprises by imposing a
tax of up to 200 percent on the business holdings of private
foundations in excess of certain prescribed percentages.
The adoption of special exceptions to the excess business
holding provisions would undermine one of the basic goals of
the 1969 Act. While we recognize that an exception to the
tax on excess business holdings for holdings by a private
foundation in a public utility would not run counter to all
of the arguments advanced for the adoption of the tax on
excess business holdings (e.g., a public utility operates as
a regulated monopoly in a certain area and, therefore, does
not "compete" with other business) we are, nevertheless,
opposed to creating exceptions on an ad hoc basis to the
limitations imposed by Section 4943. Regardless of the
nature of the business controlled by the foundation and its
donor or donors, the mere existence of foundation control
inevitably tends to direct the foundation's efforts to
operating the business and thus to divert attention from the
charitable purposes of the foundation.
2. H.R. 5099 — A Bill for the Relief
of Brian and Vera W. Hall
Section 10 34 of the Code provides for the nonrecognition
of gain from the sale of a taxpayer's principal residence if
the taxpayer purchases a new principal residence within a

- 2 period beginning 18 months before the date of such sale and
ending 18 months after such date.
H.R. 5099 would treat the sale of the Halls' former
personal residence as if it had occurred within 18 months
after they purchased their new residence for purposes of
Section 1034 even though the sale of the former residence
occurred almost 20 months after the purchase. The enactment
of H.R. 5099 would thereby allow the Halls to avoid recognition
of gain realized on the sale of the former residence, even
though they did not comply with the requirements of Section
1034. It is contended that the Halls encountered difficulty
in selling the former residence because of the construction
of and controversy surrounding a highway project in the area
which was opposed by local groups and after 18 years is
not yet completed.
The statutory period aggregating 36 months provided for
in Section 1034 is a reasonable time for a taxpayer to
purchase a rew residence. To override this statutory limitation
for the benefit of two individuals would open the door.to
similar requests by other taxpayers. On the other hand, to
waive the 36-month requirement only for thes.e individuals
would discriminate unfairly against similarly situated
taxpayers who, because of failure to meet the requirement,
paid tax on the gain realized on the sale of their residences.
It has also been suggested that because an extension of
the reinvestment period under Section 1033 (involving
involuntary conversions) is available, Section 1034 should
also contain such an extension. However, in contrast with
Section 1034, Section 1033 provides relief for those subjected to involuntary conversion of property rather than for
individuals who voluntarily dispose of a residence. Persons
selling residences can be expected to have more time for
advance planning than those who are victims of involuntary
conversion.
Moreover, even under the standards of Section 1033, it
is unlikely that the Halls could have secured an extension.
Revenue Ruling 76-488, 1976-2 C.B. 244 and Revenue Ruling
76-540, 1976-2 C.B. 245, hold that when reinvestment is
delayed because of a sewer moratorium in the area of indefinite duration, "reasonable cause" does not exist for
failure to reinvest the proceeds in a timely fashion under
Section 1033. However, when a taxpayer can demonstrate that
a moratorium of limited and specific duration has delayed
reinvestment, an extension may be granted.

- 3 The project that delayed the sale of the Halls' former
residence was of indefinite duration. It had been the
subject of some controversy for 18 years, and there is no
indication that it is expected to be completed in the near
future. This is not a circumstance which arose unexpectedly
to thwart the Halls' sale of their residence. They had full
and adequate notice regarding this controversial project.
Because of the inequities involved in granting the
relief requested by the Halls, because of the differences
between Section 1033 and Section 1034, and because the Halls
may well have not qualified under the Section 1033 time
extension standard in any event, the Treasury opposes H.R.
5099.

------—---•"--•-——--T n a i l

mmentoltheJREASURY
KGTON,D.C. 20220

TELEPHONE 5 6 M

FOR IMMEDIATE RELEASE

August 28, 1978

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,301 million of 13-week Treasury bills and for $3,401 million
of 26-week Treasury bills, both series to be issued on August 31, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing November 30, 1978
Price

High
Low
Average

98.157
98.143
98.149

26-week bills
maturing March 1. 1979

Discount
Rate

Investment
Rate 1/

Price

7.291%
7.346%
7.323%

7.53%
7.59%
7.56%

96.195 7.526%
96.175
7.566%
96.183
7.550%

Discount
Rate

Investment
Rate 1/
7.
7.98%
7.96%

Tenders at the low price for the 13-week bills were allotted 39%
Tenders at the low price for the 26-week bills were allotted 32%
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

Received

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

$ 117,890,000
3,175,675,000
18,555,000
46,160,000
36,245,000
27,030,000
187,365,000
34,015,000
11,840,000
21,475,000
10,920,000
198,610,000
6,040,000

$
92,890,000
1,933,575,000
18,555,000
43,110,000
33,245,000
26,830,000
46,365,000
18,575,000
11,840,000
16,565,000
10,920,000
42,510,000
6,040,000

$ 107,935,000
4,935,190,000
22,065,000
50,590,000
23,820,000
16,320,000
192,290,000
36,050,000
13,940,000
14,495,000
9,840,000
208,815,000
10,325,000

TOTALS

$3,891,820,000

$2,301,020,000a/ $5,641,675,000

a/Lncludes $301,700,000 noncompetitive tenders from the public.
b/tncludes $174,025,000 noncompetitive tenders from the public.
l/Equivalent coupon-issue yield.
B-1137

Accepted
$
82,935,000
3,094,590,000
22,065,000
10,590,000
18,820,000
14,320,000
46,790,000
11,050,000
13,940,000
11,470,000
9,840,000
53,815,^00
10,325,00(1
$3,400,550;oo4)b/

Contact:

FOR IMMEDIATE RELEASE

Carolyn Johnston
(202) 634-5377
AUGUST 29, 1978

TREASURY SECRETARY BLUMENTHAL NAMES HAROLD W. POPE
SAVINGS BONDS CHAIRMAN FOR NEW HAMPSHIRE
Harold W. Pope, Chairman and Chief Executive Officer,
Sanders Associates, Inc., Nashua, has been appointed
Volunteer State Chairman for the Savings Bonds Program
by Secretary of the Treasury W. Michael Blumenthal,
effective immediately.
Mr. Pope will head a committee of business, financial,
labor, media, and governmental leaders, who — in cooperation with the Savings Bonds Division — assist in
promoting the sale of Savings Bonds.
Mr. Pope joined Sanders Associates in 1953 as Vice
President of Operations. In 1960 he was appointed
Corporate Vice President; in 1968 he was elected Executive
Vice President, and in February 1975 he became President.
He assumed his present position September 8, 1976.
Prior to joining Sanders Associates, Mr. Pope was
Chief Engineer, Guided Missile Division of General
Dynamics, Pomona, California. Previously, he had been
Chief of Dynamics in the San Diego Division of CONVAIR,
and Project Engineer on a number of early missile
programs for the U.S. Navy, including LARK, TERRIER, and
TALOS.

B-1138

FOR IMMEDIATE RELEASE
August 28, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES PRELIMINARY COUNTERVAILING DUTY
ACTION ON PAPERMAKING MACHINERY AND PARTS FROM FINLAND
The Treasury today announced its preliminary determination that Finland is not subsidizing exports of
papermaking machinery and parts thereof.
The action is being taken pursuant to a petition
filed in February 1978 by the Pulp and Paper Machinery
Manufacturers Association. Under the law, Treasury must
make a final decision no later than February 9, 1979.
The preliminary determination was based upon a
review of all information currently available regarding
the alleged subsidies. This review revealed that three
of the arrangements investigated did not constitute
"bounties or grants" (subsidies) within the meaning of
the Countervailing Duty Law and that all remaining programs were either not utilized by, or not available to,
Finnish papermaking machine manufacturers.
Under the Countervailing Duty Law, the Treasury is
required to assess an additional Customs duty that
equals the amount of a bounty or grant paid on imported
merchandise.
Imports of papermaking machines and parts thereof
from Finland were valued at approximately $21 million
in 1977.
Notice of this action will be published in the
Federal Register of August 29, 1978.

o
R-1139

0

o

FOR IMMEDIATE RELEASE
August 28, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT WITHHOLDS APPRAISEMENT
ON SILICON METAL FROM CANADA
The Treasury Department today said that it has tentatively determined that silicon metal from Canada has been
sold at less than fair value and that it is, accordingly,
withholding appraisement on imports of the product from
that country.
If the Secretary makes a Final Determination that
sales at less than fair value are occurring, the U. S.
International Trade Commission must subsequently decide
whether they cause or threaten injury to an American industry. Both sales at less than fair value and injury must be
found to exist before a dumping finding is reached and
antidumping duties are assessed.
The Treasury's Final Determination is due by November 29,
1978, and, if affirmative, the Commission will have three
months from the publication of that determination to consider
the injury issue.
Under the Antidumping Act, the Secretary of the Treasury
is required to withhold appraisement whenever he has reason
to believe or suspect that imports of the product are being
sold at less than fair value. Sales at less than fair value
generally occur when imported merchandise is sold in the
United States for less than in the home market or to third
countries. The withholding of appraisement will not exceed
six months.
When appraisement is withheld, the Customs Service defers
valuation of goods imported after the date of publication of
the notice, thus allowing any dumping duties ultimately imposed to be levied on all imports entered after that date.
Notice of this action will appear in the Federal Register
of August 29, 1978.
Imports of silicon metal from Canada during the period
January 1 through October 31, 1977, were valued at $7 million.
o 0 0
B-1140

FOR IMMEDIATE RELEASE

August 29, 1978

RESULTS OF AUCTION OF 4-YEAR 1-MONTH TREASURY NOTES
The Department of the Treasury has accepted $2,254 million of
$3,880 million of tenders received from the public for the 4-year
1-month notes, Series J-1982, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 8.38% 1/
Highest yield
Average yield

8.42%
8.41%

The interest rate on the notes will be 8-3/8%. At the 8-3/8% rate,
the above yields result in the following prices:
Low-yield price 99.961
High-yield price
Average-yield price

99.826
99.859

The $2,254 million of accepted tenders includes $ 350 million of
noncompetitive tenders and $ 1,904 million of competitive tenders from
private investors, including 96% of the amount of notes bid for at
the high yield.
In addition to the $2,254 million of tenders accepted in the
auction process, $ 325 million of tenders were accepted at the average
price from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash.

1/ Excepting 6 tenders totaling $39,000

B-1141

FOR IMMEDIATE RELEASE

August 30, 1978

AMENDED RESULTS OF TREASURY fS 4-YEAR 1-MONTH NOTE AUCTION

During the recording of competitive bids at a Federal Reserve Bank
for the 4-year 1-month Treasury notes, Series J-1982, a competitive
bid was overstated by $100 million. As a result of correcting this
overstatement, the amount accepted is changed from $2,254 million
to $2,154 million. This adjustment does not affect the average yield
and the range of accepted competitive bids remains as announced on
August 29.

B-1142

August 31, 1978
BIOGRAPHICAL NOTES
Bette B. Anderson
Under Secretary of the Treasury

Bette B. Anderson of Savannah, Georgia, the first woman
to be named Under Secretary of the Treasury, was nominated by
President Jimmy Carter on March 3, 1977, and she was confirmed
by the United States Senate on March 30, 1977. As Under
Secretary, Ms. Anderson is responsible for Treasury's Office
of Administration and the Office of Enforcement and Operations;
the Secret Service; the Bureau of Alcohol, Tobacco, and Firearms;
the Bureau of Customs; the Bureau of the Mint; the Bureau of
Engraving and Printing; and the Office of the Treasurer of the
United States. In her capacity as the Under Secretary she serves
as the Treasury Representative to the Interagency Council on
Minority Business Enterprise and the Settlement Policy Committee
on Conrail Valuation Litigation.
Before becoming the Under Secretary, Ms. Anderson was
affiliated for twenty-seven years with The Citizens and Southern
National Bank of Savannah. She had served most recently as
Vice President, after having moved up through the ranks from
teller-trainee, Assistant Cashier, Assistant Trust Officer, and
Assistant Vice President. She worked closely with and helped
develop the bankfs affirmative action and equal employment programs for women.
Ms. Anderson's professional banking affiliations include
the National Association of Bank Women, of which she was
President until she resigned to take the Treasury post. She
helped to develop the Association's education programs for women
in middle and upper level management. Ms. Anderson has also
been affiliated with the American Bankers Association and the
Banking Marketing Association.
Ms. Anderson attended Georgia Southern and Armstrong State
College and earned certification in 1975 from the Stonier Graduate School of Banking at Rutgers University.
Ms. Anderson is married to George H. Anderson of Grumman
Aviation of Savannah. They have one daughter, Sue, who is the
oOoOo
wife of Charles Strickland of
Savannah.
B-1143

FOR IMMEDIATE RELEASE
August 31, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT ANNOUNCES TENTATIVE
DETERMINATIONS REGARDING CUMENE IMPORTS
FROM ITALY AND THE NETHERLANDS
The Treasury Department has tentatively discontinued
its antidumping investigations of cumene from Italy but has
made a preliminary determination that imports of that product
from the Netherlands have been sold here at less than fair
value.
Cumene is an intermediate chemical used to make acetone
and phenol and, ultimately, plastics and solvents. Imports
of cumene from Italy during the period September 1, 1977,
to February 28, 1978, were valued at $10 million; imports
from the Netherlands, $16.7 million.
Under the Antidumping Act of 1921, a discontinuance of
an investigation can occur if the Treasury is satisfied that
margins of dumping involved are minimal in relation to the
volume of exports in question, price revisions have been
made that eliminate any likelihood of present sales at less
than fair value, and assurances have been received that eliminate any likelihood of sales at less than fair value in the
future. The Secretary will determine within three months
whether final discontinuance of this case is warranted.
The Act requires the Treasury to withhold appraisement
whenever it has reason to believe or suspect that sales at
less than fair value are taking place. (Sales at less than
fair value generally occur when imported merchandise is sold
in the United States for less than in the home market or to
third countries.) The withholding of appraisement will not
exceed six months.
If Treasury finds that sales at less than fair value are
occurring, the U. S. International Trade Commission must subsequently decide whether they cause or threaten injury to an
American industry. Both sales at less than fair value and
injury must be found to exist before a dumping finding is
reached and antidumping duties are assessed.
(MORE)
B-1144

- 2 -

The Treasury's final decision is due by December 1,
1978, and, if affirmative, the Commission will have three
months from the publication of that determination to consider
the injury issue.
When appraisement is withheld, the Customs Service defers
valuation of the goods imported after the date of publication
of the Notice, thus allowing any dumping duties ultimately
imposed to be levied on all imports entered after that date.
Notices of these actions will appear in the Federal
Register of September 1, 1978.

o

0

o

FOR IMMEDIATE RELEASE
September 1, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY PROPOSES AMENDMENTS
TO ARBITRAGE BOND REGULATIONS
The Treasury Department today announced that it
has proposed additional amendments to the arbitrage
bond regulations. The amendments will be published
in the Federal Register on September 7. The text of
the amendments is attached.

o 0 o

B-1145

[4830-01]

INTERNAL REVENUE SERVICE

[26 CFR Part 1]

[LR-1671]

ARBITRAGE BONDS

NOTICE OF PROPOSED RULEMAKING

AGENCY: Internal Revenue Service, Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed amendments to the
arbitrage bond regulations. The amendments are designed to
c

^rify and correct the regulations. They affect purchasers

and governmental issuers of tax-exempt bonds.

AT

ES: Written comments must be delivered or nailed by

The proposed amendments are effective as
specified in the text of the regulations. Where no effective

2

date is specified, the changes apply retroactively because
they merely correct technical errors or interpret the statute
or pre-existing regulations.

ADDRESS: Send comments to: Commissioner of Internal
Revenue, Attention: CC:LR:T, Washington, D.C. 2C224.

FCR FURTHER INFORMATION CONTACT: Leonard T. ttarcinko of the
Legislation and Regulation Division, Office of the Chief
Counsel, Internal Revenue Service, 1111 Constitution Avenue,
N.W., Washington, D.C. 20224, Attention: CC:LR:T,
2C2-56S-3459, not a toll-free call.

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income
Trx Regulations (25 CFR part 1) under section 103(c) of the
Internal Revenue Code of 1954. These amendments arc to be
issued under the authority contained in sections 103(c)(6)
£nd 7805 of the Internal Revenue Code of 1954 (S3 Stat. 655
2nd 53A Stat. 917; 26 U.S.C. 103, 7805).

3

Previous Notices of Proposed Rulemaking

On May 3, 1973, the FEDERAL REGISTER published proposed
Income Tax Regulations (26 CFR Part 1) under section 103(c)
of the Internal Revenue Code of 1954 (38 FR 10944). The
proposed regulations were revised by notices of proposed
rulemaking published in the FEDERAL REGISTER for December 3,
1975 (40 FR 55488), October 9, 1975 (41 FR 47579), May 31,
1977 (42 FR 27610), June 9, 1977 (42 FR 29517), and May 8,
1978 (43 FR 19675) and corrected by notices published in the
FEDERAL REGISTER for May 11, 1973 (38 FR 12405), December IS,
1975 (40 FR 58656), November 24, 1976 (41 FB 51840), and June
21, 1977 (42 FR 31452). This notice of proposed rulemaking
further revises the proposed regulations.

General Statement of Policy

Arbitrage

Generally, an "arbitrage bond" is a municipal bond that
is used to make an investment profit. The yield on a taxexempt municipal bond is ordinarily lower than the yield on
Treasury notes, certificates of deposit, and other high-grade
taxable investments. For example, a substantial profit can
be made by selling municipal bonds at six percent and

4

investing the proceeds in Treasury notes at 8-1/2 percent.
Bonds used to secure this profit are called "arbitrage
bonds."

Arbitrage has serious drawbacks. In particular,
arbitrage damages the market for municipal bonds. Arbitrage
bonds tend to crowd out bonds that are sold to finance roads,
schools, and other traditional projects. As a result,
arbitrage tends to drive up the cost of municipal borrowing,
and therefore is self-defeating and contrary to the interests
of State and local governments. For these reasons, in 1969,
Congress delegated broad authority to the Treasury to keep
arbitrage bonds off the market. To that end, the Treasury
has written extensive regulations. However, these
regulations have not been completely successful. A series of
devices has been invented to circumvent the arbitrage
regulations, the most recent being the invested sinking fund.

Invested sinking funds

Typically, municipal bonds have serial maturities. For
example, if a city sells $10 million of 20-year school bonds,
the city may use property taxes to pay a portion of the
principal each year. Thus, for the protection of the bondholders, the bonds will be paid off gradually over 20 years,

5

and the $10 million principal amount will not come due all at
once. However, if the city employs an invested sinking fund,
it will not pay any principal until the bonds come due in 20
years. Instead, the city will periodically pay property
taxes into a sinking fund. Amounts held in the sinking fund
will be invested in high-yield Treasury notes or other
high-grade investments, enabling the city to make a
substantial investment profit.

The invested sinking fund was devised as a way around
Treasury's arbitrage regulations. Certain State and local
governments were able to gain a financial advantage from
invested sinking funds. However, invested sinking funds
(like other forms of arbitrage) have the long-term effect of
being a burden on taxpayers and a threat to the market for
nunicipal bonds. In particular, invested sinking funds
damaged the tax-exempt market in two ways. First, bonds that
usee this device were left outstanding longer because they
were not retired serially. Second, many refunding issues.
were motivated chiefly by the profit that could be earned
from an invested sinking fund; these issues would not have
been sold if that profit had not been available. The
invested sinking fund device could have resulted in nearly a
50-percent increase in the amount of tax-exempt bonds outstanding without taking account of advance refundings.

Advance refundings

An ordinary refunding is a relatively simple
transaction.

It enables an issuer to substitute new bonds

for outstanding bonds.

Generally, the substitution is made

because the outstanding bonds were sold on unfavorable terms.
For example, the interest rate on the old bonds may be too
high, or the indenture for the old bones may contain unduly
restrictive covenants.

In an ordinary refunding, a state or

local government simply sells new bonds, and uses the
proceeds to call in its outstanding bonds.-

By contrast, an advance refunding is a highly
sophisticated financial transaction, almost unique to
municipal finance.

In an advance refunding, both sets of

bonds remain outstanding.

For example, assume th*t a

sanitation district has $10 million of bonds outstanding.

In

an advance refunding, the district will typically sell an
additional $11 or $12 million of refunding bonds.
it will not call its outstanding bonds immediately.

However,
These

bonds will remain outstanding for perhaps 5, 10, or even 20
years.

Until the sanitation district calls in its old bonds,

the proceeds of the new bonds will be kept in an escrow fund.
The escrow fund will be invested in United States Treasury
obligations.

7

The serious questions of tax policy raised by arbitrage
bonds are compounded in the context of advance refundings.
First, they double the amount of tax exempt bonds outstanding
for any project. As a result, they tend to increase
borrowing costs and impair the ability of hard-pressed state
and local governments to provide essential services.

Second, the holders of the old bonds get a double
benefit. In addition to being tax-exempt, these bonds are
secured by what amounts to a guarantee of the United States
(i.e., they are secured by Treasury obligations held in
escrow). Thus, the old bonds are superior both to
obligations of the United States Treasury and to conventional
nunicipal obligations. Recently, the Congress rejected this
double benefit in the case of the New York City Financial
Assistance Act. The Congress determined that it was
inappropriate to provide New York City with this double
benefit, even in connection with a program necessary to
assure the City's financial survival. In the case of a
typical advance refunding, where much less than
financial survival is at stake, this double benefit is still
less appropriate.

8

And third, advance refundings have been the principal
cause of difficulties with the arbitrage regulations. As
stated above, a continuing series of devices has been
employed to circumvent the arbitrage regulations. For a
variety of reasons, these devices have been used almost
exclusively in connection with advance refundings. Advance
refundings have been the principal cause of frequent changes
in the arbitrage regulations. These frequent changes have
tended to disrupt the tax exempt market. The amendments that
go into effect on September 1, 1978 are designed to eliminate
the need for continual changes in the regulations.

Administrative costs

In the case of any advance refunding, the regulations in
effect until September 1, 1978 permitted an issuer to earn
enough arbitrage to cover most or all of the administrative
costs. Cn re-examination, this has proved to be a bad
policy.

The ability to earn back administrative costs has
contributed to payment of inflated and excessive fees to
lawyers, accountants, underwriters, and others. In
addition, the ability of issuers to recover administrative
costs has led to many refundings that are economically

9

unsound.

For example, assume that the administrative costs

of an advance refunding are $3 million, and the gross debt
service savings are $2 million. There is no good reason to
spend $3 million in order to save $2 million. However, under
the old regulations, this transaction would be advantageous
to those involved. The issuer would save nearly $2 million,
and underwriters, lawyers, and financial advisors would earn
$3 million, which could be recovered largely at the expense
of the Federal Treasury. The public cannot benefit from a
transaction in which $3 million is spent to save $2 million.
Only the recipients of the $3 million — the underwriters,
the lawyers, and the financial advisors —.can benefit.

Further, the treatment of expenses in the case of
advance refundings discriminates against new money issues in
two ways. First, issuers generally cannot recover their
administrative costs in the case of new money issues.
recovery of such costs is generally possible only in
connection with advance refundings. And second, advance
refundings occupy a considerable share of the market,
crowding out new money issues needed for schools, roads,
water systems, and other essential projects.

10

Certification

Under the regulations in effect until September 1, 1978,
issuers were able to "certify" their bonds conclusively. As
a result, they were arguably able to act as the sole judge of
whether their bonds complied with Internal Revenue laws.
This ability has been a major cause of the continuing series
of devices that have been invented to circumvent the
arbitrage regulations. It permitted certain bond lawyers to
interpret the regulations in a highly aggressive manner and
severely handicapped the IRS in its efforts to protect the
tax-exempt market.

Therefore, the certification procedure is revised under
the new regulations. After September 1, bond lawyers will no
longer be able to give questionable opinions and be protected
by a conclusive certification. The revised certification
will enable the IRS to enforce the regulations effectively,
and at the same time protect issuers acting in good faith.

Customary financial practices

The amendments published on May 8, 1978 were not
intended to interfere with customary financial practices.

11

They were aimed at sophisticated devices to circumvent the
arbitrage regulations. Some state and local governments have
expressed the concern that the regulations will disrupt
customary financial practices. These amendments are designed
primarily to respond to that concern.

Explanation of Provisions

This notice of proposed rulemaking makes certain
technical and clarifying changes to the certification
provisions contained in paragraph (a)(2) of section 1.103-13.
First, the old certifiction procedure, which is set out in
paragraph (a)(2)(ii), will apply to reasonable expectations
of an issuer as to events occuring after September 1, 1978,
if the bonds were issued on or before that date. Second,
paragraph (a)(2)(iii) is amended to indicate that the
regulations do not dictate the contents of the issuer's
certification, but rather limit the certification's
conclusive effect. Third, the notice makes it clear that
facts and estimates on which the issuer's expectations are
based may be set forth in brief and summary terms in the
certification. Mo independent investigation of the facts by
bond counsel is required under the proposed regulations.
Fourth, a number of examples are added to paragraph (a)(2)(v)
that illustrate various certifications that could be made in

12

connection with an issue of govermental obligations.
Finally, the notice adds new paragraph (a)(4) which provides
that bonds are not arbitrage bonds merely because the issuer
makes an inadvertent, insubstantial error.

A substantive change is made by the notice of proposed
rulemaking through the addition of new paragraph (a)(2)(iv)
to section 1.103-13.

This provision applies in the case of

an issue of governmental obligations with a face amount of
$2,500,000 or less issued after September 1, 1978.
Generally, if counsel gives a reasonable, unqualified opinion
that the obligations in question are not arbitrage bonds, the
opinion can be conclusively relied upon by the holders of the
obligations.

This exemption for small issues applies only to

the first $2,500,000 of obligations issued for the same
project in any twelve-month period.

The proposed amendments make a clarifying change to
paragraph (c)(5) of section 1.103-13 regarding the treatment
of acquired purpose obligations allocable to governmental
obligations issued after September 1, 1978.

This provision

states that administrative costs paid by the obligor are
disregarded in calculating yield on acquired purpose
obligations.

These administrative costs include the cost of

issuing, carrying, or repaying the issue, the underwriter's

13

spread, and the cost of purchasing, carrying, selling, or
redeeming the acquired purpose obligations.

The notice of proposed rulemaking adds a new paragraph
(j) to section 1.103-13 of the proposed regulations.

It

provides that if an artifice or device is employed in
connection with the issuance of a governmental obligation,
such obligation will be considered an arbitrage bond.

An

•artifice or device" is defined as a transaction or series of
transactions that attempts to circumvent the provisions of
section 103(c) or the regulations thereunder, enabling the
issuer to exploit the difference between tax-exempt and
taxable interest rates and increasing the burden on the
market for tax-exempt obligations.

However, it is not

considered an artifice or device to invest bond proceeds at a
materially higher yield if specifically provided for in
section 103(c)(4).

The proposed amendments provide examples

of the application of the artifice or device rule in various
situations.

The proposed amendments delete paragraph (b) (2) (i i i) of
proposed section 1.103-13 relating to indirect proceeds.
rfost situations to which the indirect proceeds rules would
have applied either will be covered by the sinking fund rules
or w i l 1

be

considered an artifice or device within the

meaning of section 1.103-13(j).

14

The notice of proposed rulemaking adds a new paragraph
(h) to section 1.103-13, which sets forth the rules relating
to acquired program obligations that were contained in
section 13.4 of the temporary regulations under section
103(c). Although a few clerical changes were made to these
rules, their inclusion in the proposed regulations is not
intended to have any substantive effect. The rules in the
proposed regulations relating to acquired program obligations
will supersede those contained in the temporary regulations.

Section 1.103-13(g) of the proposed regulations, which
was added by a notice of proposed rulemaking published in the
Federal Register for May 8, 1978 (43 FR 19G75) , contains
rules relating to invested sinking funds. In response to the
comments received with respect to these rules, this current
notice of proposed rulemaking makes a number of changes to
the proposed regulations in order to lessen the impact of the
sinking fund rules on customary financial practices and to
correct certain technical problems.

Paragraph (g)(2) of proposed section 1.103-13 is amended
to make it clear that receipts from the investment of a
sinking fund, as well as amounts originally held in the
sinking fund, are treated as proceeds of the issue. New

15

paragraph (g)(7) provides that a sinking fund for two or more
issues must be allocated among the issues in proportion to
their original face amounts, or according to the debt service
on the issues that will actually be paid from the sinking
fund.

In addition, new paragraph (g)(8) contains two

examples illustrating the application of the sinking fund
rules.

Section 1.103-14 of the proposed regulations provides
for the temporary investment of bond proceeds at a materially
higher yield.

The notice of proposed rulemaking revises the

13-month temporary period for amounts contributed to a bona
fide debt service fund.

Paragraph (b)(10) of section

1.103-14 provides that if a portion of a fund satisfies the
requirements of a bona fide debt service fund, then that
portion is allowed a 13-month temporary period under this
provision.

A definition of bona fide debt service fund is

added to the proposed regulations in section 1.103-13(b)(12).

The proposed regulations also contain rules (section
1.103-14(b)(11) and (b)(14)) for situations where a debt
service fund is combined with another fund (e.g., a reserve
fund or an operating fund).

These rules are designed to put

the issuer in the same position that it would have been in if
it had established two separate funds.

The rules elaborate

16

on the position taken in Rev. Rul. 78-349, announced by the
Internal Revenue Service on August 22, 1978.

A relief provision is added in paragraph (b)(11) of
section 1.103-14 for a revolving fund.

A revolving fund is

one that consists of receipts from the sale of property
acquired with bond proceeds or payments of principal and
interest on acquired program obligations, and that will
generally be used for the acquisition of additional property
or acquired program obligations.

The temporary period for

such a revolving fund is three years.

Paragraph (b)(12) of proposed section 1.103-14 adds a
new temporary period for sinking funds for certain new money
issues.

This temporary period begins on the date of issue

and ends on the first call date (but not more than 10 years
after the date of issue)•

The new temporary period does not

apply to a refunding issue unless the prior issue had a term
of less than three years and was issued in anticipation of
permanent financing.

If this provision does apply to a

refunding issue, then the 10-year limitation is reduced by
the term of the prior issue.

In addition, this temporary

period does not apply to an issue unless the issuer makes a
reasonable effort to schedule payment of as much debt service
as is practicable in each year before the first call date.

17

The notice of proposed rulemaking makes several
amendments to the provisions in the regulations relating to
reasonably required reserve or replacement funds.

Paragraph

(d)(2) of section 1.103-14 is amended so that if an issuer
requests a ruling that a reserve or replacement fund in
excess of the amount provided in section 1.103-14(d) of the
regulations is reasonably required, it need not wait for such
a ruling before issuing the obligations.

A similar change is

made to paragraph (e)(5)(iv) of section 1.103-14 with respect
to reasonably required reserve funds for refunding issues.
Where an issuer applies for a ruling under one of these
provisions, new paragraph (b)(13) of section 1.103-14
provides a temporary period for the amount of the reserve
fund in excess of the amount specified in section
1.103-14(d).

This temporary period continues from the date

of issue until 30 days after final disposition of the ruling
request.

Section 1.103-14(e)(5)(ii)(B) of the proposed
regulations states that the proceeds of a refunding issue may
not be invested at a materially higher yield as a reasonably
required reserve or replacement fund before the adjusted
maturity date of the prior issue.

The notice of proposed

rulemaking creates an exception to this rule with respect to

jmounts deposited in reasonably required reserve or
replacement funds for a refunding issue sold after the
effective date of the sinking fund rules.

New paragraph

(e)(7) of section 1.103-14 provides that paragraph
(e)(5)(ii)(B) does not apply to these amounts, if they were
held in a reasonably required reserve or replacement fund for
the prior issue or would (but for the refunding) have been
deposited in such a fund for the prior issue.

Two examples

are included within this new subparagraph that also
illustrate the operation of the replacement theory under
section 103(c)(2)(B).

This replacement theory was recently

applied in Revenue Ruling 78-348, announced by the Internal
Revenue Service on August 22, 1978.

Comments

Before adopting these proposed amendments, consideration
will be given to any written comments that are submitted
(preferably six copies) to the Commissioner of Internal
Revenue. All comments will be available for public
inspection and copying.

Drafting Information

The principal author of these proposed regulations was
rd T

« Marcinko of the Legislation and Regulations

Di

»ision of the Office of Chief Counsel, Internal Revenue

erv

ice.

nt

However, personnel from other offices of the

ernal Revenue Service and Treasury Department participated

19

in developing the regulations, both on matters of substance
and style.

PROPOSED AMENDMENTS TO THE REGULATIONS

The proposed amendments to 26 CFR Part 1 are as follows:

Paragraph 1. Section 1.103-13 is amended as follows:

1. Paragraph (a)(2) is amended by revising subdivision
(i) and (iii), by redesignating subdivisions (iv) and (v) as
subdivisions (v) and (vi), by adding a new subdivision (iv),
and by revising subdivision (vi) as redesignated.

2. Paragraph (a) is amended by redesignating
subparagraph (4) as subparagraph (5) and by adding a new
subparagraph (4) •

3. Paragraph (b)(1)(ii) is amended by inserting
"paragraphs (c) and (d) " in lieu of "paragraph (c)" and by
inserting "paragraphs (h) and (e)" in the sixth sentence in
lieu of "paragraphs (d) and (e)" in the seventh sentence
thereof.

4. Paragraph (b)(2) is amended by redesignating
subdivision (ii) as subdivision (ii)(A), by adding a new
subdivision (ii)(B), and by deleting subdivision (iii).

20

5.

Paragraph (b)(4)(iv) is amended by inserting

•section 103(b)(6)- in lieu of "section 103(c)(6)- in the
third sentence thereof.

6. Paragraph (b)(5) is amended by inserting "or (iii)"
immediately after "paragraph (a)(2)(ii)" in the third
sentence of subdivision (i)by adding a new sentence at the
end of subdivision (iv), by revising subdivisions (v) and
(vi), and by adding new subdivisions (viii) and (ix).

7. Paragraph (b) is amended by revising subparagraph
(11) and adding a new subparagraph (12)•

8. Paragraph (c) is amended by inserting "1978" in lieu
of "1980" in example (1) of subparagraph (3)(i), by revising
subparagraph (5), and by adding a new subparagraph (6), (7),
and (8).

9. The last sentence in paragraph (f)(2) is deleted.

10. Paragraph (g) is amended by revising subparagraphs
(1)* (2), (3), and (5), and by adding new subparagraphs (6),
(7), and (8) .

11. New paragraphs (h) and (j) are added.

21

Section 1.103-13 Arbitrage bonds.

*****

(a) Scope.***

(2) Reasonable expectations. (i) Under section
103(c)(2), the determination whether an obligation is an
arbitrage bond depends on the issuer's reasonable
expectations, as of the date of issue, regarding the amount
and use of the proceeds of the issue.

Thus, an obligation is

not an arbitrage bond, if, based on the issuer's reasonable
expectations on the date of issue, the proceeds will not be
used in a manner that would cause the obligation to be an
arbitrage bond under section 103(c)(2), this section, section
1.103-14, and section 1.103-15.

Reasonable expectations

regarding the amount and use of the proceeds of a
governmental obligation issued on or before September 1,
1978 may be established by the certification described in
subdivision (ii) of this subparagraph.

Reasonable

expectations as to future events regarding governmental
obligations issued after September 1, 1978 may be established
to the extent permitted by the certification described in
subdivision (iii) of this subparagraph.

For the treatment of

22

certain issues with a face amount of $2,500,000 or less, see
subdivision (iv) of this subparagraph.

*****

(iii)(A) A state or local governmental unit may
certify, in the bond indenture or a related document,
reasonable expectations of the issuer on the date of the
issue as to future events.

(B) Certification by a State or local governmental unit
will not tend to establish conclusions of law (including
legal characterizations of future events).

(C) An officer responsible for issuing the bonds must
certify for the issuer.

(D) In addition to the matters certified, the
certification must set forth (in brief and summary terms) the
facts and estimates on which the issuer's expectations are
based and state that, to the best of the knowledge and belief
of the certifying officer, the issuer's expectations are
reasonable.

23

(E)(1)

If the temporary period for a construction issue

is more than 3 years but not more than 5 years, the issuer
must commission an independent architect or engineer to
prepare a study of the planned construction.

An architect or

engineer will be considered independent if (he is not employed
by the issuer on a permanent basis.

(2) The study prepared by the architect or engineer
must accompany the certification and must include an
estimated completion date for each stage of the construction.

(F) Subsequent events do not affect a certification
made in accordance with this subdivision.

(iv) In the case of an issue with a face amount of
$2,500,000 or less issued after September 1, 1978, an
unqualified opinion of counsel that such obligations are not
arbitrage bonds can be conclusively relied upon by the
holders of the obligations; provided that the opinion is
reasonable and is not given in bad faith.

This subdivision

(iv) shall apply only to the first $2,500,000 of governmental
obligations issued by (or on behalf of) a State or local
governmental unit for the same project in any twelve-month
period.

Thus, for example, if a town issues $2,500,000 of

bonds for a school building on July 1, 1980, this subdivision

24

does not apply to additional bonds issued for the same school
building before July 1, 1981.

*

(vi)

*

*

*

*

***

Example (3). (i) On July 5, 1980, city A issues
C3,COO,000 of municipal bonds to finance the construction of
a water treatment facility. The city includes in the bond
indenture a certification which contains a statement that S5
percent of the receipts from the sale of the bonds will be
used for construction costs by July 5, 1983.
*****

Example (4). On January 1, 1930, city A sells $5
million of 6 percent refunding bonds. City A certifies the
bonds in the manner described in subparagraph (iii) of this
subparagraph. In addition, attorney X gives an opinion that
the bonds are not arbitrage bonds. In connection with the
refunding issue, city A makes use of an artifice or device as
described in paragraph (j) of this section. As a result, the
legal conclusion reached by attorney X is erroneous and the
refunding bonds are arbitrage bonds despite the
certification.
Example (5). (i) The Chairman of the County Commission
of County X made the following certification with respect to
an issue of governmental obligations.
(1) The County is issuing and delivering,
simultaneously with the delivery of this certificate,
$2,SCO,GOG principal amount of its General Obligation Library
Bonds dated December 1, 1973 (herein called "the Bonds").
The Bonds are being issued for-the purpose of providing for
payment of a portion of the costs of constructing and
equipping a new public library in and for the County.
(2) The estimated total costs of constructing and
equipping said library (which is herein called "the Library")
will be not less than $3,235,000. The said total costs are

25

expected to be financed with (i) $2,500,000 of proceeds from
the sale of the Bonds, (ii) a Federal grant in the amount of
not more than $560,000, and (iii) approximately $151,000 in
building funds made available to the County by the County X
Library Board. The County has not yet determined how it will
finance the deficiency ($24,000).
(3) The County has heretofore entered into a contract
for the construction of the Library, which contract obligates
the payment by the County of not less than $100,000. The
actual work of constructing the Library began during the
month of September, 1978. It is contemplated that such work
will proceed with due diligence to completion, expected on or
about October 1, 1979.
(4) The County has heretofore expended, for payment of
costs incurred in constructing and equipping the Library,
approximately $758,000, derived from (a) portions of the
aforesaid Federal grant, (b) short-term borrowings made in
anticipation of the issuance and sale of the Bonds and which
will be fully repaid within five (5) days following the
issuance of the Bonds, and (c) building funds made available
to the County by the County X Library Board.
(5) The principal proceeds to be derived by the County
from the sale of the Bonds [excluding the "premium"
anticipated to be received by the County from such sale,
which premium will, as required by law, be applied to payment
of interest maturing with respect to the Bonds on June 1,
1979] are expected to be used, needed and fully expended for
payment of costs of constructing and equipping the Library
[including the repayment of the short-term borrowings
referred to in the preceding Paragraph (4)] by no later than
May 1, 1980.
(6) Except for the Debt Service Fund established under
Section XII of the Bond Resolution, the County has not
created or established, and does not expect to create or
establish, any sinking fund or other similar fund.
(7) To the best of my knowledge, information and
belief, the above expectations are reasonable.
(8) The County has not been notified of any listing of
it by the Internal Revenue Service as an issuer that may not
certify its bonds.
(9) This certificate is being executed and delivered
pursuant to sections 1.103-13, 1.103-14, and 1.103-15 of the

26

Income Tax Regulations under the Internal Revenue Code of
1954, as amended, and the undersigned Chairman of the County
Commission is one of the officers of the County charged (by
resolution and order of the said County Commission) with the
responsibility of issuing the Bonds.
(ii) This certification by County X meets the
requirements of subdivision (iii) of this subparagraph and
conclusively establishes the County's reasonable expectations
on the date of issue as to the future events described in the
certification. However, nothing contained in this
certification tends to establish any conclusions of law.
Example (6). (i) The Chairman of the Board of
Directors and the Secretary-Treasurer of The Industrial
Development Board of City A, a public corporation organized
under the laws of State B (herein called "the Industrial
Board"), made the following certification:
(1) The Industrial Board is issuing and delivering
simultaneously with the delivery of this certificate, its
Environmental Improvement Revenue Bonds, 1973.Series A dated
November 1, 1978, in the principal amount of $5,000,000
(herein called "the Bonds"). The Bonds are being issued for
the purpose of providing funds for the permanent financing of
costs of acquiring, constructing, installing and equipping,
on certain real property located in J County, the air
pollution control facilities described on Exhibit A attached
hereto and made a part hereto (the said facilities being
herein together called "the Project Facilities"). Those of
the Project Facilities described in Paragraph (1) of said
Exhibit A are herein called "the Quench Car Facilities";
those described in Paragraph (2) of said Exhibit A, "the
Sinter Line Facilities"; and those described in Paragraph (3)
of said Exhibit A, "the Mixer Fume Control Facilities."
(2) The Project Facilities and certain real property
(and interests therein) appurtenant thereto are, upon the
completion of the acquisition, construction, installation and
equipment of the Project Facilities, to be sold by the
Industrial Board, on an installment basis, to Corporation C,
a Delaware corporation (herein called "the Corporation"),
under and pursuant to an Agreement of Sale dated as of
November 1, 1978 (herein called "the Agreement"), between the
Industrial Board (as seller) and the Corporation (as buyer).
(3) The actual work of acquiring, constructing,
installing and equipping the Quench Car Facilities has,
pursuant to the provisions of a Letter Agreement between the

27

Corporation and the Industrial Board (which Letter Agreement
was executed on behalf of the Industrial Board on May 10,
1978 and the Corporation on May 11, 1978), heretofore begun,
and binding contracts or commitments obligating the
expenditure, for the work of acquiring, constructing,
installing and equipping the Quench Car Facilities, of not
less than $100,000 have heretofore been entered into or made.
It is anticipated that the total financeable costs of such
acquisition, construction, installation and equipment
[excluding a pro rata portion of (a) interest during
construction, and (b) the expenses anticipated to be incurred
in connection with the issuance of the Bonds] will be
approximately $1,231,370. It is expected that the work of
acquiring, constructing, installing and equipping the Quench
Car Facilities will proceed with due diligence to full
completion, presently anticipated on or about October 1,
1979.
(4) The actual work of acquiring, constructing,
installing and equipping the Sinter Line Facilities has,
pursuant to the provisions of a Letter Agreement between the
Corporation and the Industrial Board (which Letter Agreement
was executed on behalf of the Industrial Board on May 10,
1978, and on behalf of the Corporation on May 11, 1978)/
heretofore begun, and binding contracts or commitments
obligating the expenditure, for the work of acquiring,
constructing, installing and equipping the Sinter Line
Facilities, of not less than $100,000 have heretofore been
entered into or made. It is anticipated that the total
financeable costs of such acquisition, construction,
installation and equipment [excluding a pro rata portion of
(a) interest during construction, and (b) the expenses
anticipated to be incurred in connection with the issuance of
the Bonds] will be approximately $1,780,000. It is expected
that the work of acquiring, constructing, installing and
equipping the Sinter Line Facilities will proceed with due
diligence to full completion, presently anticipated on or
about January 1, 1980.
(5) While the actual work of acquiring, constructing,
installing and equipping the Mixer Fume Control has not yet
begun, binding contracts or commitments obligating the
expenditure, for the work of acquiring, constructing,
installing and equipping the Mixer Fume Control Facilities,
of not less than $100,000 have heretofore been entered into
or made, and such actual work is expected to begin on or
about June 30, 1979. Further, all such work is anticipated
to proceed with due diligence thereafter to completion,
presently expected on or about September 1, 1980. The total

28

financeable costs of acquiring, constructing, installing and
equipping the Mixer Fume Control Facilities [excluding a pro
rata portion of (a) interest during construction, and (b) the
expenses anticipated to be incurred in connection with the
issuance of the Bonds] are expected to be approximately
$2,680,000.
(6) The total proceeds to be received by the Industrial
Board on the sale of the Bonds, i.e., the gross sum of .
$5,998,633.33, does not exceed the total o f —
(i) the estimated total financeable costs of acquiring,
constructing, installing and equipping the Project Facilities
[excluding (a) interest during construction, and (b) the
expenses anticipated to be incurred in connection with the
issuance of the Bonds] (viz., the gross sum of $5,691,370),
plus
(ii) interest on the Bonds during construction of the
Project Facilities and the expenses anticipated to be
incurred in connection with the issuance of the. Bonds (viz.,
the gross sum of $263,630), plus
(iii) the amount required to be set aside out of the
proceeds to be derived by the Industrial Board from the sale
of the Bonds, for payment of a portion of the interest
maturing thereon on May 1, 1979 (viz., the sum of
$43,633.33).
(7) The proceeds to be derived by the Board from the
sale of the Bonds (viz., the gross sum of $5,998,633.33) are
expected to be needed and fully expended as follows:
(a) $43,633.33 of said proceeds will be set aside and
paid into the "Bond Fund" (as said term is used and defined
in the Trust Indenture dated as of November 1, 1978 between
the Industrial Board and The First National Bank of A, under
which the Bonds are being issued) simultaneously with the
issuance and delivery of the Bonds and used and applied for
payment of a portion of the interest maturing thereon on May
1, 1979;
(b) $263,630 of said proceeds will be expended, for
payment of (i) interest on the Bonds during construction of
the Project Facilities, and (ii) the expenses anticipated to
be incurred in connection with the issuance of the Bonds; and
(c) the remaining $5,691,370 of said proceeds will be
expended for payment of the costs of acquiring, constructing,

29

equipping and installing the Project Facilities [excluding
(i) interest on the Bonds during construction of the Project
Facilities, and (ii) the expenses anticipated to be incurred
in connection with the issuance of the Bonds], substantially
in accordance with the following schedules:
Quarter during
which Expected
Amount Expected to be Expended
to be Expended
Sinter Line
1978, Fourth
1979, First
1979, Second
1979, Third
1979, Fourth
1980, First
1980, Second
TOTALS

Quench Car

$ 280,000
250,000
430,000
550,000
270,000

720,250
511,120

$1,780,000

$1,231,370

Mixer Fume
Control

Total

50,000
350,000
800,000
1,150,000
300,000
30,000
$2,680,000

$ 280,000
300,000
1,500,250
1,861,120
1,420,000
300,000
30,000
$5,691,370

(8) The facts and estimates in Paragraphs (2) through
(7) are based on representations made by Corporation C. The
Board is not aware of any facts or circumstances that would
cause it to question the accuracy of the representations made
by Corporation C.
(9) Money deposited in the Debt Service Fund
established by Article X of the indenture for the Bonds will
be used to pay principal of and interest on the Bonds and the
Board reasonably expects that there will be no other funds
that will be so used.
(10) Any money deposited in the Debt Service Fund will
be spent within a thirteen-month period beginning on the date
of deposit, and any amount received from investment of money
held in the Debt Service Fund will be spent within a one-year
period beginning on the date of receipt.
(11) To the best of our knowledge, information and
belief, the above expectations are reasonable.
(12) The Industrial Board has not been notified of any
listing of it by the Internal Revenue Service as an issuer
that may not certify its bonds.

30

(13) The undersigned are those officers of the
Industrial Board charged, by resolution of the Board of
Directors of the Industrial Board, with the responsibility of
actually issuing and delivering the Bonds.
(ii) This certification by the Industrial Board of City
A meets the requirements of subdivision (iii) of this
subparagraph and conclusively establishes the Board's
reasonable expectations on the date of issue as to the future
events described in the certification. However, nothing
contained in this certification tends to establish any
conclusions of law.
(iii) It has been assumed that the Letter Agreements
described in this example constitute "some other similar
official action" within the meaning of section 1.103-8(a)(5).
Example (7). City D issues $10 million of 7-percent
revenue bonds for the purpose of constructing a water
treatment facility. Certain proceeds of the revenue bonds
will be deposited with a trustee. In part, the trust
agreement provides as follows: "In the event City D is of
the opinion that it is necessary to restrict or limit the
yield on the investment of any moneys paid to or held by the
Trustee hereunder in order to avoid the Bonds, or any series
thereof, being considered "arbitrage bonds" within the
meaning of the Internal Revenue Code of 1954, as amended, the
Board or the Medical Center may issue to the Trustee a
written certificate to such effect (along with appropriate
written instructions), in which event the Trustee will take
such action as is necessary so to restrict or limit the yield
on such investment in accordance with such certificate and
instructions, irrespective of whether the Trustee shares such
opinion." If city D uses reasonable care in the selection of
the trustee, it can reasonably expect the trustee to invest
the funds in accordance with the trust agreement. This
reasonable expectation will be conclusive without regard to
the subsequent actions of the trustee.
Example (8). County Y, in connection with an issue of
revenue bonds, covenants in the bond indenture that it will
proceed with due diligence to spend the bond proceeds for the
construction of a library. This covenant is included in the
indenture as a bona fide safeguard for the protection of the
bondholders. County Y can reasonably expect to comply with
this covenant and, therefore, to satisfy the due diligence
test of section 1.103-14(b)(4). The result is the same
whether or not the bond proceeds are actually spent with due
diligence.

31

*

(4)

*

*

Innocent mistake.

*

*

Bonds are not arbitrage bonds

merely because of an inadvertent, insubstantial error (e.g.,
in arithmetic)•

*****

(b) Definitions.***

(2) Proceeds.***

(ii) ***

(B) Despite section 1.103-13(b)(2)(ii)(A), "investment
proceeds" do not include receipts from investment of amounts
treated as proceeds under section 1.103-13(g) (relating to
invested sinking funds)•

*****

(5) Materially higher.***

(iv) *** Nothing in this subdivision implies that the
deliberate over issuance of less than 5 percent will not be
treated as an artifice or device (see section 1.103-13(j)).

32

(v)

The following examples illustrate the application

of paragraph (b)(5)(iv) of this section:

Example (1). On July 1, 1977, city A sells $10 million
of 7-percent Series A revenue bonds and $5 million of
4-percent Series B special obligation bonds at par in the
full cash defeasance of a prior issue. Assuming that under
State law and the bond indenture the amount necessary to
achieve the purpose of the refunding is only $10 million,
paragraph (b)(5)(iv) of this section applies to both the
Series A and the Series B issues. Thus, for example, if
transferred proceeds of the Series A issue are invested at
more than 7 percent, the Series A bonds are arbitrage bonds.
Example (2). On July 1, 1978, city B sells $10 million
of 7-percent revenue bonds at par.
One and a half million
dollars of the bond proceeds will be placed in a debt service
reserve fund and invested for 25 years in Treasury bonds at a
yield of 8-1/2 percent. Assume that a reserve fund of no
more than $800,000 is reasonably required for the revenue
bonds. Based on these facts, paragraph (b)(5)(iv) of this
section applies to the revenue bonds. Therefore, the revenue
bonds are arbitrage bonds.
Example (3). On July 1, 1979, City C has outstanding
$20 million of revenue bonds. In addition, City C has
accumulated $15 million in a sinking fund for the revenue
bonds. Assume that City C sells approximately $23 million of
refunding bonds at par, defeasing the prior issue and freeing
the sinking fund from any lien. The $15 million held in the
sinking fund will continue to be invested in long-term
Treasury bonds. Of the proceeds of the refunding issue, $20
million will be used to call the revenue bonds at par and $3
million will be used to establish a reserve of $3 million.
Based on these facts, paragraph (b)(5)(iv) of this section
applies to the refunding issue. The amount necessary to call
the outstanding revenue bonds is only $5 million (i.e., $20
million less the $15 million held in the sinking fund).
Thus, at least $15 million of the proceeds of the refunding
issue will not be needed for any governmental purpose.
*****

(vi) Except as provided in subdivision (viii) of this
subparagraph (and despite anything in section 1.103-13(b) or

33

(e) to the contrary), section 1.103-13(b)(5)(vii) applies to
any acquired obligation that is allocated to amounts treated
as proceeds under section 1.103-13(g) (relating to invested
sinking funds).

* * * * *

(viii) The yield on an acquired program obligation is
materially higher than the yield on an issue if the yield on
the acquired program obligation exceeds—

(A) The yield on the issue, plus

(E) Cne and a half percentage points.

(ix) In lieu of the amount described in section
1.103-13(b) (5) (viii) (B) , the issuer may substitute such
larger amount as is necessary to pay expenses (including
losses resulting from bad debts) reasonably expected to be
incurred as a direct result of administering the program, to
the extent that such amounts are not payable with funds
appropriated from other sources.

(11) Discharged. An issue is "discharged" when cash is
available on the date due (whether at maturity or upon prior

34

call for redemption) at the place of payment, and interest
ceases to accrue on the issue.

(12) Bona fide debt service fund. (i) A bona fide
debt service fund is a fund that is used primarily to achieve
a proper matching of revenues and debt service within each
bond year.

(ii) A bona fide debt service fund for a single issue
must be depleted at least once a year except for a reasonable
carryover amount (not to exceed the greater of (A) one year's
earnings on the fund, or (B) 1/12 of annual debt service).

(iii) A bona fide debt service fund may be established
for two or more issues; provided that the total amount in the
fund at no time exceeds the total of the amounts that could
be held in bona fide debt service funds established
separately for each of the issues.

(c) Computation of yield.***

(5) Certain administrative costs. If acquired purpose
obligations are allocable (under section 1.103-13(f)) to an
issue issued after September 1, 1978, then the following
rules apply:

35

(i)

In determining the yield on the acquired purpose

obligations, administrative costs paid by the obligor shall
not be taken into account.

(ii) Subdivision (i) of this subparagraph applies
whether or not the obligor's payments are made from bond
proceeds, and whether or not such payments merely reimburse
the issuer. For this purpose, any payments made by the
obligor may be treated as reimbursements of administrative
costs; provided that the present value of such payments does
not exceed the present value of administrative costs paid by
the issuer.

(iii) In determining the present value of any payments
or costs, the yield on the issue (as determined under section
l.lC3-12(c) and (d)) shall be used as the discount rate.

(iv) For purposes of this subparagraph, the term
"administrative costs" means —

(A) The cost of issuing, carrying, or repaying the
issue,

(B)

The underwriter's spread, and

36

(C)

The cost of purchasing, carrying, and selling or

redeeming acquired purpose obligations.

(6)

Monthly payments.

An issuer may treat regular

monthly payments on an acquired purpose obligation as if they
were received semiannually.

(7)

Examples.

The following examples illustrate the

application of subparagraphs (5) and (6) of this paragraph:

Example (1). On January 1, 1979, authority A sells
$1,050,000 of single-family housing bonds. The yield on the
bonds is 7 percent (determined under section 1.103-13(c) and
(d) on the basis of semi-annual compounding)• Authority A
uses the bond proceeds to make 50 identical 25-year mortgage
loans of $20,000 each. The mortgage loans are acquired
program obligations (within the meaning of section
1.103-13(h)). Authority A uses the remaining $50,000 of
proceeds to cover the underwriter's spread and to pay other
administrative costs on January 1, 1979. Under the terms of
each mortgage loan, authority A will receive level monthly
payments of $168.98. Of each payment, $161.87 will be
denominated principal and interest, and the remaining $7.11
will be denominated a "finance fee." On January 1, 1979, the
present value of all these finance fees (using a discount
rate of 7 percent) is $50,000. Therefore, these fees merely
reimburse authority A for $50,000 of administrative costs.
Accordingly, the finance fees are not taken into account in
determining the yield on the mortgage notes. Consequently,
the yield on the mortgage notes (computed by treating monthly
payments as received semiannually on January 1 and July 1 of
each year) is only 8.5 percent. Under section
1.103-13(b)(5)(viii), this yield of 8.5 percent is not
materially higher than the yield on the single-family housing
bonds.
Example (2). The facts are the same as in example (1),
except that the entire monthly payment of $168.98 on each
mortgage note will be denominated principal and interest.
Although the stated interest rate on the mortgage notes is
9.02 percent, the results are the same as in example (1).
There is no requirement that reimbursement for administrative
costs
mustinbeinterest.
stated separately as a finance fee; it may be
included

37

(8)

Insurance,

(i)

Premiums paid to insure a

governmental issue are treated as interest paid on the issue;
provided that the present value of the premiums is less than
the present value of the interest reasonably expected to be
saved as a result of the insurance.

(ii) In determining present value for purposes of this
subparagraph, the yield on the governmental issue (determined
without regard to this subparagraph) shall be used as the
discount rate.

(g) Invested sinking fund—(1) Effective date.***

(ii) This paragraph does not apply to bonds sold before
May 16, 1978, if--

(A) The sale of the bonds was either authorized or
approved for sale before May 3, 1978, by a governing body of
the governmental unit issuing the bonds or by the voters of
such governmental unit, or by an administrative body or duly
constituted authority (including an Oklahoma Trust or similar
entity) on behalf of the governmental unit, statutorily
empowered to do so,

38

(2)

In general.

Amounts held in a sinking fund for an

issue (and receipts from investment of the sinking fund) are
treated as proceeds of the issue.

(3) Sinking fund. The term "sinking fund" includes a
debt service fund, redemption fund, reserve fund, replacement
fund, or any similar fund, to the extent that the issuer
reasonably expects to use the fund to pay principal or
interest on the issue.

(5)

Prior issue.

Original proceeds, investment

proceeds, and transferred proceeds of the prior issue are not
treated as proceeds of a refunding issue under this
paragraph.

See, however, section 1.103-14(e) (2)(ii) for •

rules relating to transferred proceeds.

(5) Other proceeds. Amounts treated as proceeds of an
issue under section 1.103-13(b) (2) (relating to original
proceeds and investment proceeds) are not treated as proceeds
of the issue under this paragraph.

39

(7)

Allocation.

A sinking fund for two or more issues

must be allocated between the issues—

(i) In proportion to their original face amounts, or

(ii)

According to the debt service on the issues that

will actually be paid from the sinking fund.

(8)

Illustrations.

The following examples illustrate

the application of this paragraph:

Example (1). Cn January 1, 1979, city A sells $8
million of general obligation bonds at par. All the proceeds
of the general obligation bonds will be spent before January
1, 1980 to build a new library. Beginning on January 1,
1980, city A will make periodic deposits into a sinking fund
for the general obligation bonds. The amount held in the
sinking fund will increase until it equals $S million on
January 1, 2CC8, and then it will be used to retire all of
the outstanding general obligation bonds. The first $1.2
million (i.e., .15 x $3 million) accumulated in the sinking
fund may be invested at an unrestricted yield pursuant to
section 1.103-13(b)(1)(ii) (relating to the major portion
test). Except as provided in section 1.103-14(d) (relating
to temporary periods), none of the remainder may be invested
at a yield that is materially higher (within the meaning of
section 1.103-13(b)(5)(vii)) than the yield on the general
obligation bonds.
Example (2). The facts are the same as in exanple (1).
In addition, city A establishes a bona fide debt service fund
for the general obligation bonds. No amounts are held in the
debt service fund longer tiian 13 months. The result is the
same as in example (1).

40

(h)

Acquired program obligations—(1)

General rule.

The term "acquired program obligations" means acquired
purpose obligations that carry out the purpose of a
governmental program described in subparagraph (2) of this
paragraph.

(2) Governmental programs. A governmental program is
described in this subparagraph if—

(i) The program involves the acquisition of acquired
purpose obligations.

(ii) At least 90 percent of all such obligations
acquired under the program, by amount of cost outstanding,
are evidences of loans to a substantial number of persons
representing the general public, loans to exempt persons
v.ithin the meaning of section 5Cl(c) (3), or loans to provide
housing and related facilities, or any combination of the
foregoing;

(iii) At least 90 percent of all of the amounts
received by the governmental unit with respect to obligations
acquired under the program shall be used for one or more of
the following purposes: to pay the principal or interest or
otherwise to service the debt on governmental obligations

41

relating to the governmental program; to reimburse the
governmental unit, or to pay, for administrative costs of
issuing such governmental obligations; to reimburse the
governmental unit, or to pay, for administrative and other
costs and anticipated future losses directly related to the
program financed by such governmental obligations; to make
additional loans for the same general purposes specified in
such program; or to redeem and retire governmental
obligations at the next earliest possible date of redemption
and

(iv) The program documents require that any person (or
any related person, as defined in section 103(b)(5)(C)) from
whom the governmental unit may, under the program, acquire
obligations shall not, pursuant to an arrangement, formal or
informal, purchase the governmental obligations in an amount
related to the amount of the obligations to be acquired under
the program from such person by the governmental unit.

(3) Examples. The following examples illustrate
governmental programs described in subparagraph (2) of this
paragraph:

Example (1). State A issues obligations the proceeds of
which are to be used to purchase certain home mortgage notes
from commercial banks. The purpose of the governmental

42

program is to encourage the construction of low income
residential housing by creating a secondary market for
mortgage notes and thereby increasing the availability of
mortgage money for low income housing. Amounts received as
interest and principal payments on the mortgage notes are to
be used for one or more of the following purposes: (1) to
service the debt on the governmental obligations, (2) to
retire such obligations at their earliest possible date of
redemption, (3) to purchase additional mortgage notes. The
governmental program is one which is described in
subparagraph (2) of this paragraph.
Example (2). State B issues obligations the proceeds of
which are to be used to make loans directly to students and
to purchase from commercial banks promissory notes made by
students as the result of loans made to them by such banks.
The legislation authorizing the student loan program provides
that the purpose of the program is to enable financially
disadvantaged students to continue their studies. The
legislation also provides that purchases will be made from
banks only where such banks agree that an amount at least
equal to the purchase price will be devoted to new or
additional student loans. The governmental program is one
which is described in subparagraph (2) of this paragraph.
Example (3). Authority C issues obligations the
proceeds of which are to be used to purchase land to be sold
to veterans. The governmental unit will receive purchasenoney mortgage notes secured by mortgages on the land from
the veterans in return for such land. The purpose of the
program is to enable veterans to acquire land at reduced
cost. Amounts received as interest and principal payments on
the mortgage notes are to be used for one or more of the
following purposes:
(1) to pay the administrative costs
dirsctly related to the program, (2) to service the debt on
the governmental obligations, (3) to retire such governmental
obligations at their earliest possible call date, and (4).to
purchase additional land to be sold to veterans. The
governmental program is one which is described in
subparagraph (2) of this paragraph.
(i) [reserved]
(j)

Artifice or device.

If an artifice or device is

employed in connection with the issuance of a governmental

43

obligation, such obligation will be considered an arbitrage
bond within the meaning of section 103(c)(2). For purposes
of this section, the term "artifice or device" means a
transaction or series of transactions that attempts to
circumvent the provisions of section 103(c), this section,
section 1.103-14, or section 1.103-15,—

(1) Enabling the issuer to exploit the difference
between tax-exempt and taxable interest rates to gain a
material financial advantage, and

(2) Increasing the burden on the market for taxexempt obligations.

Examples of increased burdens on the market for tax-exempt
obligations include selling obligations that would not
otherwise be sold, selling more obligations than would
otherwise be necessary, and issuing obligations sooner or
allowing them to remain outstanding longer than would
otherwise be necessary. In no case shall it be considered an
artifice or device to invest bond proceeds (or amounts
treated as bond proceeds) at a materially higher yield if
specifically provided for in section 103(c)(4). The
provisions of this paragraph may be illustrated by the
following examples:

44

Example (1). Authority E decides to advance refund
certain revenue bonds. However, E intentionally delays the
issuance of the refunding bonds until 2 years before the call
date of the refunded bonds in order to take advantage of the
2-year temporary period provided by section
1.103-14(e)(3)(ii)(B). The ability of authority E to invest
proceeds of the refunding issue at a materially higher yield
during the temporary period makes this refunding more
attractive than would be the case if such investment were not
permitted. Authority E's decision to delay the issuance of
the refunding bonds to take advantage of this temporary
period is not an artifice or device within the meaning of
this paragraph, because investment of bond proceeds at a
materially higher yield during a temporary period is
specifically provided for in section 103(c)(4). In addition,
the purpose of the temporary period in section
1.103-14(e)(3)(ii)(B) is to encourage issuers to delay
advance refundings until later in the term of the prior
issue.
Example (2). On January 1, 1981, authority K sells $1
million of 40-year industrial development bonds at par. The
proceeds of the industrial development bonds will be needed
to make a $1 million loan to corporation X for 5 years. When
the principal of the loan is repaid on January 1, 1986,
authority K will invest this sum in Treasury bonds at a yield
that is materially higher than the yield on the industrial
development bonds. By selling bonds with a term that is 35
years larger than necessary, authority K has attempted to use
an artifice or device to defeat the purpose of section
103(c).
Example (3). On January 1, 1981, city L sells $10
million of tax anticipation notes. For purposes of
determining the cumulative cash flow deficit on January 1,
1982, city L assumes that the amount of its anticipated
expenditures for the month of January, 1982 is reasonably
required as a cash balance. See section 1.103-14(c)(2).
City L conducts no investigation into its actual cash balance
requirements. Therefore, city L is unable to ascertain
whether one month's expenditures is, in fact, a reasonable
balance. City L has not used an artifice or device in
connection with the tax anticipation notes. The purpose of
the one-month figure in section 1.103-14(c)(2)(ii) is to
eliminate the need for city L to conduct an investigation of
its cash balance requirements.

45

Example (4). On January 1, 1983, city M sells $10
million of 6-percent refunding bonds. The proceeds of the
refunding bonds will be held in escrow until they are used to
pay principal and interest on a 3-percent prior issue.
Although the prior issue is callable at par, it will be left
outstanding until maturity. Moreover, amounts held in the
escrow will be invested at a yield of 6 percent. Based on
these facts, city M has not used an artifice or device. It
has allowed the 3-percent prior issue to remain outstanding
merely because it would be unwise to buy back the prior issue
at par. Further, city M does not stand to make any profit by
exploiting the difference between taxable and tax-exempt
interest rates.
Paragraph 2. Section 1.103-14 is amended as follows:

1.

Paragraph (b) is amended by deleting subparagraphs

(7) and (10), by redesignating subparagraphs (8), (9), and
(11) as subparagraphs (7), (8), and (9), and by adding new
subparagraphs (10), (11), (12), (13), (14), and (15), and by
inserting "subparagraph (8)" in lieu of "subparagraph (9)" in
subparagraph (9) (as redesignated).

2.

Paragraph (d) is amended by inserting "Except as

provided in subparagraphs (2) and (4) of this paragraph" in
lieu of "As a general rule" in the second sentence of
subparagraph (1), by adding a new sentence at the end of
subparagraph (1) , by revising subparagraph (2) and by adding
a new subparagraph (4).

46

3.

Paragraph (e) is amended by deleting the sixth,

seventh and eighth sentences in subparagraph (2)(ii), by
adding a new subparagraph (2)(iv), by deleting the last
sentence in subparagraph (3)(i) and inserting three new
sentences in lieu thereof, by revising subparagraph (5)(iv),
and by adding a new subparagraph (7)•

Section 1.103-14 Temporary investments, reserve fund and
refunding issues.

(b) Temporary Period.***

(10) Debt Service Fund. (i) Despite subparagraphs (8)
and (9) of this paragraph, 13 months is the temporary period
for amounts contributed to a bona fide debt service fund (as
defined in section 1.103-13(b) (12)).

(ii) If a portion (but not all) of a fund satisfies the
requirements of bona fide debt service fund, then that
portion is allowed a 13-month temporary period under this
subparagraph.

However, the remainder of the fund is not

allowed the 13-month temporary period.

Thus, for example,

assume that a single fund serves both as a bona fide debt
service fund and as a reserve fund.

The portion of the fund

that serves as a bona fide debt service fund is allowed a
13-month temporary period under this subparagraph.

However,

47

the remainder of the fund is not allowed a temporary period
of 13 months.

If this subdivision applies, then the

requirement for annual depletion in section 1.103-13(b)(12)
applies only to the portion of the fund that constitutes a
bona fide debt service fund

(11) Revolving Fund. (i) The term "revolving fund"
means a fund—

(A) That consists of receipts from the sale of property
acquired with bond proceeds and payments of principal and
interest on acquired program obligations; and

(B)(1) That will be used for the acquisition of
additional property or acquired program obligations, or

(2) Whose governing instrument requires the acquisition
of additional property or acquired program obligations to the
extent that suitable property or obligations are reasonably
available.

(ii) For purposes of this subparagraph, the term
"property" does not include securities (within the meaning of
section 165(g)(2)(A) or (B) or obligations (other than
obligations described in section 103(a)(1) or (2)).

48

(iii)

Despite subparagraphs (8) to (10) of this

paragraph, the temporary period for amounts deposited in a
revolving fund is three years from the date of deposit.

(12) Certain new money issues. (i) In addition to the
other temporary periods allowed by this paragraph, a sinking
fund for an issue shall have a temporary period that—

(a) Begins on the date of issue, and

(b) Ends on the first call date (but not more than 10
years after the date of issue)•

(ii) This subparagraph does not apply to an issue unless
the issuer makes a reasonable effort to schedule payment of
as much debt service as is practicable in each year before
the first call date.

Thus, nothing in this subparagraph

implies that the use of a sinking fund to postpone the
maturity of bonds will not be treated as an artifice or
device under section 1.103-13 (j).

On the other hand, use of

the temporary period allowed by this subparagraph is not, in
and of itself, an artifice or device.

49

(iii)

This subparagraph does not apply to a refunding

issue, unless the prior issue had a term of less than three
years and was issued in anticipation of permanent financing.

(iv)

Despite subdivision (iii) of this subparagraph,

the term of the prior issue may be longer than three years if
the issuer demonstrates to the satisfaction of the
Commissioner, prior to the issuance of the permanent
financing, that a longer period of time was necessary.

(v)

If this subparagraph applies to a refunding issue,

then the 10-year limit in subdivision (i)(B) shall be reduced
by the term of the prior issue.

(vi) The following example illustrates the application
of this subparagraph:

Example. On January 1, 1980, housing authority A issues
$4 million of bond anticipation notes. The bond anticipation
notes have a terra of five years. On January 1, 1980,
authority A reasonably expects to roll the notes over into
permanent financing within three years. However, due to
unexpected difficulties, authority A is unable to issue
permanent financing until July 1, 1984. Assume that, prior
to July 1, 1984, authority A demonstrates to the satisfaction
of the Commissioner that a term of 4-1/2 years was necessary
for the temporary financing. Unless subdivision (ii) of this
subparagraph applies, amounts accumulated in a sinking fund
for the permanent financing will be allowed a temporary
period beginning on July 1, 1984 and ending on the first call
date. However, this temporary period may in no event exceed
5-1/2 years (i.e., ten years minus 4-1/2 years).

50

(13)

Reserve or replacement funds.

(i)

In addition to

the other temporary periods allowed by this paragraph, where
an issuer has applied for a ruling that a reserve or
replacement fund is necessary under paragraph (d)(2) or
(e)(5)(iv) of this section, any amount in excess of the
amount provided in paragraph (d) (1) of this section shall
have the temporary period allowed under subdivision (ii) of
this subparagraph.

(ii) The excess amount described in subdivision (i)
shall have a temporary period that—

(A) Begins on the date of issue, and

(B) Ends 30 days after the earlier of (1) the date the
ruling is issued (whether favorable or unfavorable), or (2)
the date the request for such ruling is withdrawn, or (3) the
date such request is administratively closed by the Internal
Revenue Service.

(iii) This subparagraph does not apply unless the
ruling request is made in good faith and satisfies the
procedural requirements of section 601.201.

51

(14)

Methods of accounting.

For purposes of this

paragraph, the issue may account for a sinking fund in any
reasonable manner. Thus, for example, the issuer may use the
first-in-first-out method or the last-in-first-out method.
Further, if net revenues for any bond year equal or exceed
debt service, then the issuer may assume that current debt
service is paid entirely from current revenues.

(15) Illustrations.

The following examples illustrate

the application of this paragraph:

Example (1). (a) On September 1, 1980, city W sells a
$2 million 20-year issue of 6-percent special assessment
bonds. The original proceeds of the issue amount to
$1,950,000. Of this amount, $60,000 will be used to make the
first payment of interest, $140,000 will be deposited in a
reasonably required reserve fund, and the remainder will be
used to pave streets.
(b) Persons who own property in city W will be subject
to a special assessment totaling $2 million. Each property
owner will be required to pay his share of the special
assessment in equal annual installments due on August 1 over
the next 20 years. The special assessment may be prepaid at
any time. However, if the special assessment is not prepaid,
then the outstanding balance of the assessment will bear
interest at 6 percent, due on August 1 of each year.
(c) One hundred thousand dollars of the special
assessment bonds will mature on September 1 of each year 1981
to 1990. In addition, $1 million of term bonds will mature
on September 1, 2000. The term bonds are callable at par
beginning on September 1, 1990.
(d) City W will accumulate prepayments of the special
assessment in a sinking fund until September 1, 1990.
At that time, all amounts in the sinking fund will be used
to call term bonds due in the year 2000.

52

(e) Based on these facts, city W's sinking fund is
allowed a ten-year temporary period that ends on September 1,
1990. See subparagraph (12).
(f) After September 1, 1990, the sinking fund will be
mandatory in character. All amounts deposited in the sinking
fund will be used to call term bonds on September 1 of each
year. Therefore, the sinking fund will serve merely as means
to match revenues and debt service. Accordingly, amounts
deposited in the sinking fund after September 1, 1990 will be
allowed a 13-month temporary period under subparagraph (10).
Example (2). On July 1, 1981, Authority X sells a $3
million 20-year issue of 6-percent school bonds. Authority X
uses the original proceeds of the issue to build a school
building, and leases the building to school district Y.
School district Y has general taxing powers. Under the terms
of the lease, school district Y is unconditionally obligated
to pay $130,000 on January 1 and July 1 of each year 1982 to
2002. These payments will be sufficient to enable authority
X to pay level debt services and retire the school bonds over
20 years. Nevertheless, authority X will not pay any
principal on the school bonds until July 1, 1991. Instead,
authority X will deposit the excess of rents over interest in
a sinking fund until July 1, 1991. Based on these facts,
authority X will not make a reasonable effort to pay
principal on the school bonds before July 1, 1991.
Therefore, * rents deposited
in the
sinking* fund will* be
*
*
allowed a temporary period of only 30 days.
(d)

Reasonably required reserve or replacement fund.

(1)

In general. ***

A reasonably required reserve or

replacement fund may consist of one or more funds, or
portions of funds, however labeled, derived from one or more
sources.

53

(2)

Exception.

If an amount in excess of the amount

provided in paragraph (d) (1) of this section is invested in a
reserve or replacement fund, such excess will be considered
to be invested in a reasonably required reserve or
replacement fund i f —

(i) At least two weeks prior to the issuance of
the governmental obligations, the issuer applies for a
ruling that the specified reserve or replacement fund is
necessary, and

(ii) A ruling to that effect is subsequently
issued to the governmental unit (before or after the
date of issuance of the obligations).

The procedure set forth in the preceding sentence does not
preclude an issuer from relying on a published ruling in
which the Commissioner specifically designates a category of
reserve or replacement funds as reasonably required.

(4) Pledge of endowment.

Endowment funds of a college,

university, or other similar institution (such as a hospital
or charity) pledged as collateral for an issue will be
considered to be a reasonably required reserve if the pledged
funds:

54 •

(A)

Were derived from gifts or bequests (including

the income thereon);

(B) Were not raised for the purpose of carrying
out the project financed by the issue;

(C) Are not reasonably expected to be used
(directly or indirectly) to pay principal or interest on
the issue; and

(D) Are held as part of the institution's
permanent capital.

The following example illustrates the application of this
subdivision*

Example. The Health and Educational Facilities
Authority of State X ("the X Authority") plans to issue
long-term bonds to finance a new medical school building for
College A. The bonds will be collateralized by a pledge of
securities held by College A as quasi-endowment funds (funds
functioning as endowment). In the financing agreement,
College A represents that the pledged securities are quasiendowment funds derived from gifts or bequests (or the income
therefrom) and that it will expend on the construction of the
medical school building an amount equal to or greater than
the amount of funds raised for the purpose of such
construction (including amounts that it reasonably expects to
receive in the future from pledges or otherwise), and no such
funds will be pledged as collateral for the issue. Authority
X is not aware of any facts or circumstances that would cause

55

it to question the accuracy of the representations made by
College A. In addition, on the basis of facts and estimates
including projections indicating that revenues from other
sources during the next five years will be more than
sufficient to pay debt service on the issue, Authority X does
not reasonably expect that the pledged funds or the income
therefrom will be required to make payment of principal or
interest on the issue. Accordingly, Authority X reasonably
expects that the pledged funds satisfy the requirements of
this subdivision, and such funds will be considered a
reasonably required reserve fund. Authority X does not need
a ruling under subparagraph (2) of this paragraph.
(e) Refunding issue.***
(2)

(iv)

Definitions.***

Despite section 1.103-14(e) (2) (ii), the term

•transferred proceeds" does not include amounts treated as
proceeds of the prior issue under section 1.103-13(g)
(relating to invested sinking funds)•

(3)

Temporary period.

(i) ***

Except as provided in

the preceding sentence, the issuer shall be allowed the
longer of the temporary periods determined under paragraph
(e) (3) (ii) (A) or (B) , or (at the issuer's option) the
temporary period determined under paragraph (e) (3) (ii) (C) .
This subparagraph (except for subdivision (viii) and (ix))
does not apply to amounts treated as proceeds under section
1.103-13(g) (relating to invested sinking funds). For the
temporary period for an invested sinking fund, see section
1.103-14{b)(8) to (12).

56

(5)

Reasonably required reserve or replacement fund.***

(iv) If an amount in excess of the amount allowed under
paragraphs (d) (1) and (e) (5) of this section is invested in a
reserve or replacement fund for a refunding issue, such
excess may be invested at a yield that is materially higher
than the yield on the refunding issue only i f —

(A) At least two weeks prior to the issuance of
the governmental obligations, the issuer applies for a
ruling that the specified reserve or replacement fund is
necessary, and

(B) A ruling to that effect is subsequently issued
to the issuer (before or after the date of issuance of
the obligations)•

The procedure set forth in the preceding sentence does not
preclude an issuer from relying on a published ruling in
which the Commissioner specifically designates a category of
reserve or replacement funds as reasonably required for
refunding issues.

57

(7)

Exception.

(i)

Section 1.103-14(e)(5)(ii)(B) does

not apply to amounts deposited in a reserve or replacement
fund for a refunding issue sold after the effective date of
section 1.103-13(g) to the extent that such amounts—

(A) Were held in a reasonably required reserve or
replacement fund for the prior issue, or

(B) Would (but for the refunding) have been deposited
in a reasonably required reserve or replacement fund for the
prior issue.

(ii) The following examples illustrate the application
of this subparagraph:

Example (1). On July 1, 1977, city A issues $10 million
of revenue bonds. No reserve or replacement fund is created
for the revenue bonds. On July 1, 1979, city A issues $11
million of refunding bonds to defease the 1977 issue. City A
accumulates a reserve fund of $800,000 for the 1979 issue.
This reserve fund is pledged as collateral for the 1979
issue, and city A is unable to make withdrawals from the
reserve fund at any time during the term of the 1979 issue
(except to pay debt service on the 1979 issue). Assume that
the entire 1977 issue will be called on July 1, 1987, and no
portion of the 1977 issue will be retired before that date.
Based on these facts, the proceeds of the 1979 issue replace
amounts held in the reserve fund within the meaning of
section 103(c)(2)(B). Therefore, these amounts are subject
to the same yield restrictions, and generally have the same
status, as proceeds of the 1979 issue. As a result, the
revenues deposited in the reserve fund are subject to
arbitrage yield restrictions until July 1, 1987 < s e e action
1.103-14(b)(5)(ii)(B)), unless city A makes the demonstration

58

required by section 1.103-14(b)(5)(iv). The result is the
same whether or not city A reasonably expects to use amounts
held in the reserve fund to pay debt service on the 1979
issue.
Example (2). On January 1, 1978, city B issues $10
million of revenue bonds. Under the bond indenture, city B
is required to deposit revenues of $200,000 a year for 5
years in a reasonably required reserve fund for the 1978
issue (the "1978 reserve"). On January 1, 1980, city B
issues $11 million of refunding bonds to defease the 1978
issue. At that time, city B transfers the $400,000
accumulated in the 1978 reserve to a reasonably required
reserve fund for the 1980 issue (the "1980 reserve"). In
addition, city B deposits revenues of $200,000 a year in the
1980 reserve for the next three years. Based on these facts,
the amounts held in the 1980 reserve may be invested at an
unrestricted yield pursuant to section 1.103-14(d).
Paragraph 3. Section 1.103-15 is amended by revising
paragraph (k) to read as follows:
Section 1.103-15 Excess proceeds.

*

*

*

*

*

59

(k)

Transferred proceeds—(1) Effective date.

This

paragraph applies to refunding bonds issued after September
1, 1978.

(2) In general. For purposes of this section, all
original proceeds, investment proceeds, and transferred
proceeds of the prior issue are treated as transferred
proceeds of the refunding issue, except for amounts spent
before the refunding bonds are issued.

Commissioner

wtmentoftheTREASURY
JINGTON, D.C. 20220

TELEPHONE 568-2011

FOR IMMEDIATE RELEASE

September 1, 1978

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,202 million of 13-week Treasury bills and for $3,404 million
of 26-week Treasury bills, both series to be issued on September 7, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing December 7, 1978
Price

Discount
Rate

98.067a/ 7.647%
98.061
7.671%
98.064
7.659%

High
Low
Average

26-week bills
maturing March 8

Investment
Rate 1/

Price

7.91%
7.93%
7.92%

96.092 7.730%
96.084
7.746%
96.086
7.742%

Discount
Rate

1979
Investment
Rate 1/
8.16%
8.17%
8.17%

a/ Excepting 1 tender of $80,000
Tenders at the low price for the 13-week bills were allotted 2%.
Tenders at the low price for the 26-week bills were allotted 56%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received

Accepted

20,950,000
4 ,006,920,000
14,750,000
128,930,000
29,310,000
36,790,000
173,900,000
42,295,000
13,480,000
20,610,000
23,445,000
238,165,000

$

$

8,205,000
$4,,757,750,000

20,355,000
1 ,899,730,000
13,560,000
104,590,000
26,310,000
20,675,000
27,390,000
12,555,000
4,480,000
20,290,000
8,445,000
35,325,000
8,205,000

: Received
26,125,000
: 5,080,010,000
7,555,000
.
64,280,000
•
35,060,000
:
11,720,000
:
259,105,000
:
24,045,000
53,695,000
:
14,175,000
:
5,410,000
:
536,255,000
:
: $

:

8,895,000

$2. ,201,910,000b/; $6 ,126,330,000

b/Includes $ 310,710,000 noncompetitive tenders from the public.
c/Includes $ 154,730,000 noncompetitive tenders from the public.
I/Equivalent coupon-issue yield.

B-1146

Accepted
$

6,125,000
2,992,640,000
7,030,000
11,385,000
7,060,000
9,620,000
22,555,000
5,740,000
2,695,000
13,110,000
5,410,000
311,255,000
8,895,000

$3,403,520,0C.L

FOR IMMEDIATE RELEASE
September 1, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES PRELIMINARY
COUNTERVAILING DUTY ACTION ON
OLEORESINS FROM SPAIN
The Treasury Department today announced its
preliminary determination that exports of oleoresins
from Spain are subsidized- Treasury must make a
final decision no later than February 17, 1979.
An oleoresin is a thick liquid extract of the
flavor of a spice used primarily in the food industry.
Imports of oleoresins from Spain were valued at approximately $3.4 million for the period January-November 1977.
The Countervailing Duty Law requires the Secretary
of the Treasury to collect an additional duty that
equals the size of a "bounty or grant" (subsidy) found
to have been paid on the exportation or manufacture of
merchandise imported into the United States.
The subsidy under review is received in the form
of an over-rebate of the Spanish indirect tax, the
"Desgravacion Fiscal."
Notice of this action will be published in the
Federal Register of September 5, 1978.

o

B-1147

0

o

FOR RELEASE AT 4:00 P.M.

September 5, 1978

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued September 14, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $ 5,709 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
June 15, 1978,
and to mature December 14, 1978 (CUSIP No.
912793 U8 7), originally issued in the amount of $ 3,410 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 3,400 million to be dated
September 14, 1978, and to mature March 15, 197 9
(CUSIP No.
912793 X4 3) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing September 14, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,388
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, September 11, 1978. Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-1148

-2Each 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 securities and report daily to the
Federal Reserve Bank of New York their positions in and
oorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the^f
difference between the par payment submitted and the actual u
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on September 14, 1978, i n cash or
other immediately available funds or in Treasury bills maturing
September 14, 1978. Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the" conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

FOR RELEASE UPON DELIVERY
EXPECTED AT: 10:00 A.M. EDT
WEDNESDAY, SEPTEMBER 6, 1978

STATEMENT BY GARY C. HUFBAUER
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TRADE AND INVESTMENT POLICY
BEFORE THE
SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL
SCIENTIFIC PLANNING, ANALYSIS, AND COOPERATION
OF THE
COMMITTEE ON SCIENCE AND TECHNOLOGY
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman, thank you for this opportunity to
testify on the international transfer of technology.
This subject has interested me for some years.
Prior to entering government service, I published
a number of articles on the economic aspects of international technology flows. More recently, I testified,
in a personal capacity, before a joint session of two
Senate subcommittees on changes in U.S. technological
leadership and the effects of those changes on our
trade performance. While my presentation before those
subcommittees was primarily analytical, many of the
points I made then are relevant to the policy concerns
you have raised today. I would therefore like to submit
my earlier statement for the record.
3-1149

- 2 Basic Concepts
Beginning with the basics, it is useful to distinguish in broad terms between science and technology.
Science explains observable facts in terms of theoretical models.

Technology translates scientific relation-

ships and concepts into workable applications.

Science

advances man's understanding of natural phenomena,
while technology leads to cheaper and better goods in
the economic marketplace.
These differences have important implications for
the choice of appropriate public policies.

In the United

States and most countries, science is largely the
province of academic institutions, supported by government
funds.

Scientists thrive, in status and in stimulation,

from the immediate transmission of their ideas to
colleagues all over the world.

Secrecy and science

do not mix; and scientific ideas, relating, for example,
to the laws of nature, are not patentable.
By contrast, industrial technology is primarily
the domain of private firms.

Firms which finance

the improvement of technology must generally look to
the marketplace for their reward.

This reward can

only be obtained by keeping new technology closely
held as a trade secret, or by securing the legal

- 3 protection of a patent.

If new technology were freely

and instantly transmitted to all users, the market
reward for innovating firms would be much reduced.
Technology has two distinct but related phases:
first, generation, and second, diffusion.

In the

United States, the generation of industrial technology
largely results from the research and development efforts
of commercial firms.

In some countries, such as Japan,

France, and Germany, government-sponsored institutions,
working closely with private firms, play a larger role
in developing new industrial technologies.

Whatever

the system, it is a fair generalization that the generation of technology by or on behalf of private firms in
the industrial OECD nations depends on commercial reward.
The system of commercial reward accomplishes two purposes:
it discourages the development of technology which has
no social use, and it provides both the funds and the
incentive for useful discoveries.
The conditions governing diffusion go a long way
to determine what proportion of the benefit of a new
technology will show up in private returns.

If diffusion

were to take place freely and instantly, the commercial
returns to the inventing company would be small; if
diffusion were controlled for decades by the inventing

- 4 firm, the private return would approach (and possibly
even exceed) the benefits to society.

Professor Mans-

field's study of a sample of innovations indicates that,
on average, private returns have amounted to only 20 to 40
percent of total (private plus social) returns resulting
from new technologies.

Put another way, society at large

benefits more than the innovating firm from the generation
of new technology.

One reason is that much technology

is not patentable; another reason is that the patent
system by design grants a monopoly of limited duration,
and the scope of that monopoly is circumscribed by
our antitrust laws.
The patent system institutionalizes the relationship
between technology generation and diffusion.

In the

United States, a patent monopoly is awarded to the
successful inventor for a period of time, 17 years,
after the patent is granted.

This legal monopoly pro-

vides rewards for and public disclosure of inventions;
at the same time, the patent system ensures diffusion of
the opportunity to utilize useful inventions no later
than 17 years after a patent is granted.

Attempts at

inventing around profitable inventions are certain
to occur much sooner, often with some success.

Under

the patent system, more generation of technology today

- 5 necessarily means more diffusion of use 17 years later,
if not sooner.
As I mentioned, much technology is never patented.
A firm can obtain some legal protection against the
disclosure of its unpatented trade secrets by faithless
employees, but it has no protection against reverse
engineering or independent attempts at imitation.

I

would guess that very few firms manage to preserve exclusive
control of profitable, but unpatented technology for
as long as 10 years.

Trademark laws do afford a lesser

degree of legal protection for the markets for trade
secrets which are embodied in branded products.

A brand

which acquires a reputation for superior performance
cannot be instantly displaced by physically identical
products.
International transfers of patented and unpatented
technology may take place through a variety of different
mechanisms:
—

The holder of a patent or trademark may license
another party, in return for money payments,
cross licensing of other patents, or other
compensation;

—

The firm may license its patent and trademark rights
and trade secrets to a foreign subsidiary or joint
venture in which it has a direct investment;

- 6 The firm may export goods which incorporate
the technology;
—

The firm may construct turn-key plants or
other facilities that embody its process
technology;
The firm may assign personnel with managerial
or technical expertise abroad under a management, service, or other type of contract;
Foreign competitors may acquire a firm with a
desired technology by a takeover bid, or they
may simply copy the product or process, and
litigate any patent infringement questions
that arise.

At the American Economic Association meetings in
Chicago a few days ago, Professor Mansfield reported on
his findings from a recent survey of U.S.-based multinational firms.

Approximately 30 percent of the expected

returns from R&D projects now underway by the sampled
firms are expected to come from outward sales of technology,
principally exports of goods from the United States and
licensing of foreign subsidiaries.

Further, if all

foreign outlets for the exploitation of new technology
were foreclosed, the R&D budgets of the sampled firms
would be cut by 16 to 26 percent; if only the licensing

- 7 of their foreign subsidiaries were foreclosed, their
R&D budgets might be cut by 12 to 16 percent.
At the same meeting, Dr. Haider Fisher reported
his findings concerning the operations of several
European multinational firms with subsidiaries in the
United States.

The European multinationals were pre-

dominately interested in transferring European technology
to the American subsidiaries, rather than vice versa.
The takeover of American firms as a vehicle for acquiring
American technology does happen, but to a greater extent
in our ethnocentric thinking than in reality.
I mention these findings because of their implications for the policy concerns which I would now like to
discuss.
Policy Issues
Over the years, a number of policy issues have
arisen regarding technology transfer.

I would like to

address four major issues which concern the role of
the U.S. Government in the technology transfer process.
(1) What action should be taken on the international level to meet the demands of the
developing countries for access to technology
on preferential terms?

- 8 (2)

What data should the U.S. Government be collecting concerning international technology
transfer?

(3)

What support should the U.S. Government give
to research and development activity?

(4)

Should we restrain transfers of U.S. technology
to foreign countries?

International Negotiations
The primary forum for international discussion on the
transfer of technology is the U.N. Conference on Trade and
Development (UNCTAD), where negotiations on an international code of conduct for technology transfer have been
in progress since 1975.

A negotiating conference is

scheduled for October 16 - November 10, 1978.

The

principal topics under consideration there are standards
for governments and enterprises, competition policy,
dispute settlement procedures, and national regulation.
The United States and other developed countries prefer
the adoption of voluntary guidelines for technology transfer.
The developing countries, however, have a different objective.

They insist that a legally-binding convention

be negotiated as the basis for international regulation
of technology transfers.

This convention would attempt

to make proprietary technology available to developing

- 9 countries on terms and conditions which could undermine our present system for technology development
and transfer.
The United States is seriously concerned that the
legal attributes of proprietary technology might be
eroded in these negotiations.

Any erosion could in

turn diminish the level of R&D activity, not only
in the advanced industrial countries but ultimately
in the developing countries themselves.

The erosion

of legal protection would also cause firms to be more
wary about diffusing technology to developing countries.
These are not idle concerns.

The work of Mansfield

and others points to a strong link between the expected
profitability and the level of R&D activity.

Moreover,

a major reason why firms today are much slower to license
independent foreign firms than their own subsidiaries is
that independent licensees can mount legal challenges
to the patent itself or to the terms of the license.
For the same reason, firms are even more hesitant to
convey their process technology, which is often unpatented, to independent foreign firms.

Unless the United

States and other industrial countries contemplate
radically new methods for promoting the generation and
diffusion of technology, they would disserve themselves

- 10 and the developing world by weakening the existing
system of legal protection. In light of Mansfield's
estimates that the typical private firm reaps only
20 to 40 percent of the total benefits of its innovation, I question G-77 rhetoric that the existing system
gives rise to the wholesale exploitation of developing
countries.
A forum for broader discussion of science and technology issues will be the U.N. Conference on Science and
Technology for Development (UNCSTD).

This conference

was spawned by the developing countries' efforts to
dramatize the scientific and technological needs of the
Third and Fourth Worlds.

The conference has been set

for late summer 1979.
The United States supports the efforts of UNCSTD
to build a scientific and technological infrastructure
for economic growth. Governments can contribute to
the exchange of scientists and students, and improve
the capacity of poor countries to develop and assimilate
useful technology.

But the United States also believes

that decisions on where and how existing commercial
technology is transferred should remain the responsibility of private firms.

- 11

-

A third international forum where the developing
countries are pressing for change involves the Paris
Convention for the Protection of Industrial Property.
The Paris Convention, signed by 87 nations, provides,
among other things, for national treatment and right
of priority for owners of patents and trademarks.
Since 1975, the developing countries have made various
proposals for revision of the Convention to facilitate
their access to patented technology.
They believe that the international industrial
property system is skewed in favor of the developed
countries with their greater capability to devise and
work patents.

The developing countries have proposed

compulsory exclusive licensing obligations on patent
and trademark holders: the exclusive opportunity to
use such patents would be transferred to host country
parties if the patent was not worked locally within
a shorter period of time —

a "use it or lose it"

principle.
The U.S. Government opposes this concept.

We see

no justification for pre-empting the patent rights of
companies simply because they have chosen not to exercise
those rights in a particular country.

It is quite imprac-

tical and economically unfeasible to expect companies to

- 12 work each of their many hundreds of patents in every
country.

The adverse effects of a "use it or lose it"

principle are obvious.

What foreign firm would purchase

a license from a U.S. inventor if it feared that a
firm in another country might produce the same goods
under a compulsory license?

What would happen to the

financial incentives for carrying out R&D if the U.S.
inventor, having lost its patent rights under a "use
it or lose it" scheme, had to face competition, both
in the United States and abroad, from foreign producers
using its technology under a compulsory license?
Thus far, the United States and other market
economy countries have opposed, with limited success,
moves to adopt the "use it or lose it" principle on
an international basis.

However, a number of developing

countries have adopted aggressive national policies
designed to increase the quantity and quality of technology they receive from the industrialized nations at a
lower cost.

If this trend continues, it is possible

that some countries might incorporate offensive principl
in their regulatory regimes.
Existing U.S. law provides for certain actions that
we might use in the event that our interests were
threatened by the overly aggressive policies of other

- 13 nations. The Trade Act of 1974, for example, contains
two relevant provisions.

Under Section 337, the U.S.

Government may move, in certain circumstances, to
exclude imports of products produced under infringed
patents or stolen technology. Section 301 sanctions
retaliation in a variety of ways against exports of
such products to third country markets. Both of these
remedies are available on a case-by-case basis, if
private parties find it necessary to initiate complaints.
Data Collection and Analysis
The description of technology transfer that I gave
in my opening remarks was rather general.

The very con-

cept of technology is itself diffuse and defies the kind
of easy quantification applied to financial statistics.
Technology is characterized by various features which
can take different values for different technologies:
for example, the extent to which it is conceived of as
a cumulated stock or an annual flow; the extent to which
it is a public good or a private good; the extent to
which it must be embodied in machinery or can be applied
in disembodied form; and the extent to which it is
potentially mobile from one location to another.
The existence of these various dimensions considerably complicates our efforts to collect satisfactory

- 14 data on the various aspects of technology transfer,
such as how much is occurring and what forms it is
taking.

We have traditionally used balance of payments

data on royalties and management fees as a proxy for
international transfers, but, for obvious reasons,
these financial magnitudes do not adequately portray
events.
Under the direction of Dr. Rolf Piekarz, the
Division of Policy Research and Analysis of the National
Science Foundation has sponsored a number of valuable
studies designed to increase our knowledge of international technology flows.

Some of their best studies

have looked very closely at relatively small samples.
Cumulatively, these studies have been much more revealing than large scale, but shallow, data collection efforts.
Nevertheless, we hope to improve our broad data
base with a survey now being conducted by the Commerce
Department on the foreign investments of U.S. firms.
survey covers calendar year 1976.

The

In this survey, U.S.

firms are asked to provide information on such things
as whether they have licensing agreements with unaffiliated
foreigners, their R&D expenditures in the United States
and abroad, and the number of their employees engaged
in R&D work, as well as more detailed data on their

- 15 receipts from abroad of royalties and fees. They are
also being asked to report on a similar list of items
with respect to each of their foreign affiliates.
The completed forms have been received from 3,000
U.S. firms with roughly 23,000 foreign affiliates

—

representing about 80 percent of the total number of
firms expected to report.

Once the data have been

analyzed we will be better able to decide what additional
information could usefully be collected by the Federal
Government.

Additional information may be collected

in small-scale special surveys devoted exclusively to
technology transfer.
U.S. Government Support for R&D
Over the past decade, there has been much discussion
concerning the relative and even absolute loss in the
United States' position as a post-war leader in technology.
A closely related question is what effects any changes
in our relative standing in the league of technologically
sophisticated nations may have had on our exports and imports.
These two questions quickly lead to a policy issue:
should the U.S. Government increase or alter the form
of its support for R&D activity?
I addressed the first two questions in some detail in
my statement before the Senate subcommittees last spring.

- 16 Since I have given you a copy of that statement, I will
only mention a few highlights today.
It is quite true that our technological lead has been
cut down or lost in a number of areas, corresponding to
the rise of Western Europe and Japan as major industrial
powers. This is evidenced in a variety of indicators,
ranging from patent statistics (foreign firms are taking
an increasing share of U.S. patents) to productivity
growth (especially Germany and Japan by comparison with
the United States) to common sense observations about
the source of a number of new products.
Yet our R&D situation is not as bad as is commonly
thought. While total industrial R&D spending in the
United States has barely kept up with inflation, private
industry spending on R&D — which dollar-for-dollar
possibly makes a more immediate contribution to our
economy — actually increased by an average 3.8 percent
in real terms between 1966 and 1976. In 1977 the
increase was some 10 percent in real terms. The overall level was highly influenced by Federal spending
which, although it increased in current dollars by
50 percent over this period, declined in real terms.

- 17 As to U.S. trade in high technology goods, we have
enjoyed a surplus of exports over imports in these products
for a number of years — making them a source of strength
in our trade balance. Efforts to trace the relationship
between R&D and trade performance are inhibited, however,
by the problem of isolating the influence of R&D from
closely related factors such as skilled labor, industrial
concentration, and economies of scale. Moreover, it
is difficult, if not impossible, for a country at
or near the technological frontier, such as the United
States, to pinpoint which processes or products offer
the most promising trade benefits from larger R&D
spending. In other words, a trade-oriented government R&D strategy would probably not achieve significantly
better results than more general R&D support strategies.
I conclude that the strongest case for government
R&D support rests not on international trade arguments,
but rather on other grounds. As I pointed out earlier,
the typical private firm can capture only a portion —
usually less than one-half — of the total benefits
flowing from its inventions. Scientific findings and
theories are, of course, not even subject to legal
protection, and private financial rewards are not a
significant source of support for the basic sciences.

- 18 On the basis of these two observations I conclude that
the private market, left entirely to its own devices,
would badly underfund our scientific and technological
efforts.
The present level of public support is not, however,
trivial.

The great bulk of scientific work in academic

institutions is publicly supported (perhaps $6 billion
in 1977).

Nearly 40 percent of the R&D activity in

private industry is financed by Federal funds (some $10
billion in 1977).

The Federal Government itself per-

formed about $6 billion of research in 1977.
In addition, Section 174 of the Internal Revenue
Code, which permits the immediate expensing of R&D
outlays on salaries and expendable supplies (but not
capital equipment), entails a modest incentive by comparison
with the conceptual alternative of capitalizing and
amortizing all R&D outlays.

The value of this incentive

in 1977 was about $1.4 billion.

Section 1235 of the

code allows capital gains rather than ordinary income
treatment for the sale by a noncorporate holder of
patent rights.

By court decisions, corporations can

usually characterize the sale of proprietary technology
as a disposal of a capital asset and thus also obtain
capital gains treatment.

These provisions provide

- 19 incentives for R&D activity on the order of less than
a hundred million dollars annually.

Finally, the special

tax status of losses on the sale of small business
stock, the pass-through provisions of Subchapter S,
the special treatment of regulated investment companies
and small business companies and the general capital
gains provisions all provide some indirect support
for R&D activity.
In summary, direct and indirect public support
financed perhaps $25 billion of the $40 odd billion of
the R&D activity (including basic science) performed
in the United States in 1977.

I would like to see

substantially more support for basic science, especially
since so many of our young graduate scientists have
not been able to find work in their chosen fields.

But

whether or not a major across-the-board expansion
of public support for industrial R&D would be justified
is another matter.

I am mindful of the views

of experienced executives in high technology firms who
complain that their main difficulty is not inadequate
R&D funding but rather the numerous local, state, and
Federal regulations that slow down the implementation
of new technologies.

Some of these executives say

that the implementation time has doubled in the past

- 20 decade. If this is generally true, perhaps Federal
attention should be directed towards lower barriers to
implementation rather than towards higher levels of
public R&D spending.
To be sure, a special case can be made for an
accelerated research effort in certain sectors, particularly energy and environment.

But Federal bureau-

crats possess no special gift for sorting the rubies
from the rubbish in choosing industrial research
projects.

I would rather leave these high-risk decisions

to individual inventors and R&D executives in the private
sector.

Moreover, in those cases where publicly-funded

research involves the assignment of patent rights and
trade secrets to the public domain, a higher level of
Federal involvement might weaken the nexus between
market rewards and research activity and, as a consequence, could crowd out some private R&D effort.
(I should hasten to add that no easy generalizations
are possible:

we do not know the extent to which

Federally-supported research complements or substitutes
for private research.

I understand, however, that

the NSF is beginning research that is intended to
shed some light on the subject.)

Finally, when the

results of publicly-funded research are made available

- 21 to foreign firms on nearly the same terms as U.S. firms,
there are obvious "free rider" implications.
These particular concerns are less serious if greater
public support is channeled through the tax system rather
than through direct funding, or if direct funding is
conducted in a way that leaves patent rights and trade
secrets with the private sector. This is a subject that
will be examined closely by the Industrial Innovation
Coordinating Committee established last May at the
direction of the President.
Restraints on Transfers of U.S. Technology
A position often heard is that the United States
should "protect" its lead role in the development of
technology by restricting the export of technology.
Advocates of this position often share one of the premises
I discussed earlier: the existence of a direct and immediate
relationship between R&D and exports. From this premise,
they reason that the United States is disadvantaged if
technology developed here is transported abroad before
its potential for contributing to U.S. exports has been
fully exploited. The seemingly logical conclusion is
that the export of advanced U.S. technologies should be
restricted. A subsidiary argument is that foreign

- 22 countries are often highly secretive about their own
technology —

the finger here is often pointed at Japan

and we should reciprocate with restrictive policies
imposed at the Federal level.
In thinking about these arguments, we should distinguish between proprietary technology, technology that
resides in the public domain because it was funded by
public money, and technology with national security
consequences.

I will leave aside the important question

of national security limitations in my remarks today.
The U.S. Government's policy on the transfer of
proprietary technology is based on our long-standing
commitment to an open international economic system.
This does not mean that the proprietary technology of
U.S. firms is free for the asking.

It does mean that

U.S. firms should be free to merchant their technology
abroad for a suitable reward.

As with our general

policies concerning flows of goods and investment, we
believe that technology will be used most efficiently
if its allocation is governed by market forces.

Our

general policy is neither to encourage nor to discourage
technology transfers.

If market imperfections exist, we

would rather see them corrected directly, rather than

—

- 23 offset with another layer of government intervention.
Thus, the burden of persuasion rests with those who
advocate either restrictive or promotional measures.
As Mansfield's survey indicates, many firms derive
a significant percentage of their returns to R&D activity
from the exploitation of technology in foreign markets.
Restrictions on technology transfer could render many
projects less attractive and cause a decline in our
overall R&D efforts. Faced with restrictions on the
transfer of proprietary technology, large U.S.-based
multinational firms might shift more of their research
facilities abroad. In the final analysis, pur technological competitiveness could be damaged rather than
bolstered by a restrictive approach.
Even if we reversed our present policy and determined
as a general principle that restricting outflows of proprietary technology would be advantageous, it is questionable whether restrictions would prove effective. Private
firms in search of profit have shown a devilish ingenuity
in evading or avoiding government controls on the flow
of capital, goods, and other resources in the international
marketplace. There is no reason to believe that their
talents would fail them if they were faced with controls
on technology. In different eras, Flanders, France,

- 24 Britain and Germany have all tried to keep vital know-how
within their national boundaries. In the end, their
barriers proved extremely porous.
An enthusiast for controls should also find reason
to pause over the associated bureaucratic costs — costs
that would inevitably take their toll on the profitability
and hence the level of R&D activity. A conscientious
system of technology control would require scores of
personnel to promulgate and enforce a web of complex
and often arbitrary regulations. Bureaucrats and
lawyers thrive under this kind of regime; technological
creativity does not.
Finally, we must take into account possible retaliation by other governments. The character of the international economic system decisively depends on the
example set by the United States. Regrettably, our
worst policy initiatives are imitated more rapidly than
our best. The "trade wars" of the 1930's illustrate
what could develop if the United States adopted a
restrictive posture. Imported technology is becoming
increasingly important to the United States, and retaliation is not a contingency that we can ignore.
Patented and unpatented technology which resides in
the public domain because it was funded by public money

- 25 presents a more difficult problem.

There is no uniform

practice across agencies in contracting for research.
Some require that patents be assigned to the public
domain, others do not. When patents are assigned to
the public domain, often the technology will be readily
available to foreign firms at little or no cost. The
one-sided nature of this access is not particularly
troublesome if other industrial countries are equally
open with their own publicly-funded technology. But the
situation is more troublesome if U.S. firms are denied
equivalent access to publicly-funded technology in
other industrial countries. This is a complicated topic
and I am not prepared to discuss it in detail today.
However, the subject deserves the close attention of the
Industrial Innovation Coordinating Committee.
Thank you Mr. Chairman. I will be pleased to
answer any questions you and the other members of the
subcommittee might have.

FOR RELEASE UPON DELIVERY
Expected at 2:00 p.m.
September 6, 1978
STATEMENT OF
GARY C. HUF3AUER
DEPUTY ASSISTANT SECRETARY
FOR INTERNATIONAL TRADE AND INVESTMENT
DEPARTMENT OF THE TREASURY
BEFORE
THE SUBCOMMITTEE ON MERCHANT MARINE AND TOURISM
OF THE COMMITTEE ON COMMERCE, SCIENCE AND TECHNOLOGY
UNITED STATES SENATE
Mr. Chairman, I am pleased to discuss with you the
Treasury Department's views on S. 2873, a bill to provide
for the regulation of rates and charges by certain state-owned
carriers in the foreign commerce of the United States.
We share tne concern reflected in this bill, that certain
carriers may be competing unfairly in our ocean trades by
engaging in "predatory" pricing. By persistently selling
shipping services below cost over a large number of routes,
those carriers may be driving out U.S. vessels and capturing
a larger share of the trade. Laws to prevent unfair
practices in our foreign merchandise trade are already
on the books — specifically, the Antidumping Act of 1921 (as
amended) and Section 301 of the Trade Act of 1974. We should
also be able to deal with similar unfair competition in
international shipping.
B-1150

- 2 -

Pricing below cost by carriers —
"controlled" —
conditions.

whether or not

may well occur under current market

Overtonnaging is a prominent characteristic

of our ocean trades today. Oversupply of any good or service,
including ocean shipping, can lead to temporary pricing
below cost.

Goods or services provided by state-controlled

economy countries pose an additional problem since their
prices are not necessarily established even in the long
run by market considerations.
We wish to avoid prejudging whether controlled carriers
are actually engaging in pervasive unfair pricing practices.
Such practices may not be as widespread as is frequently
asserted.

Nevertheless, the United States Government should

have the tools available to prevent unfair competition.
The Administration is prepared to support this
legislation, but would recommend certain amendments.
My colleagues from other Departments have presented these
to you in detail.

I would like to touch briefly on aspects

of particular concern to the Treasury.
First, we fear that the bill's grant of authority to
the FMC to determine whether rates are "just and reasonable"
is too broad and vague a standard.

We also oppose FMC

authority to set minimum rates during any period a rate

- 3 -

suspension is in effect, or after the FMC has found that
rates are not "just and reasonable".

Finally, we believe

that controlled carrier rate decreases should become
effective on the same conditions as rate decreases by other
carriers.

Under present law, there is no waiting period

for rate decreases by any carrier, but the bill as drafted
would impose a 30 day waiting period selectively on controlled carriers.
We think the level of rates subject to FMC suspension
should be more carefully delineated.

Suspension should

take place only when unfair practices are occurring, and
not to defeat fair competition.

We think the benchmark of

rates charged by independent non-controlled carriers, or
85 to 90 percent of the rate charged by the lowest-price
conference operating in the same trade, represents a fair
standard.

Controlled carriers should be allowed to be as

competitive as any other carrier in a trade.

An 85 or 90

percent test is reasonable because independent carriers
generally underprice conference carriers by approximately
that amount.

Independent carriers have been able to offer

shipping services at rates below those charged by conferences
and still earn a profit.

- 4 -

We believe that granting rate-setting authority to the
FMC is not warranted.

If a controlled carrier's rates are

suspended or disapproved, the carrier should be able to
file and operate under new tariffs as long as these tariffs
meet the standard the Administration proposes.

Finally,

controlled carriers should not be required to file rate
decreases 30 days in advance.

Currently, all carriers are

required to file rate increases 30 days before they may
become effective (except carriers employing dual rate
contracts, which must give 90 days notice), while rate
decreases may take effect immediately upon filing. Controlled carriers should be able to compete on an equal
basis.

If a waiting period is required for the rate

decreases of some carriers, it should be required for the
rate decreases of all carriers.
These proposals will assure that U.S. carriers are
not being victimized by predatory controlled carrier pricing.
At the same time, they will allow controlled carriers to
continue in the trade as long as they compete fairly. We
believe that competition in shipping should be strengthened.
Competition will encourage cost-effective service. This is
an important consideration, especially in view of President
Carter's emphasis on curbing inflation.

- 5 -

We believe that S. 2873, with the suggested amendments,
can effectively prevent predatory pricing by controlled
carriers without discouraging desirable competition in
shipping.

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
SEPTEMBER 8, 19 78

TESTIMONY OF LEWIS W. BOWDEN
DEPUTY FOR SAUDI ARABIAN AFFAIRS, DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL SCIENTIFIC PLANNING,
ANALYSIS, AND COOPERATION
COMMITTEE ON SCIENCE AND TECHNOLOGY
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before the subcommittee today
to discuss the United States-Saudi Arabian Joint Commission
on Economic Cooperation and, in particular, the role the
Joint Commission plays in the transfer of technology from
the United States to Saudi Arabia. Approaching these
subjects in a logical order, I would first like to present
a brief overview of the Joint Commission's history, goals,
and current activities.
The United States-Saudi Arabian Joint Commission, the
first of its kind between the U.S. and a Middle Eastern
country, was formally established on June 8, 1974, by a
joint communique issued by Secretary of State Kissinger and
Prince Fahd, who is now Saudi ArabiaTs Crown Prince and
First Vice President of its Council of Ministers. I would
like to submit this communique, the June 8 Joint Statement
of Cooperation, for the record. In part, this communique
stated the mutual desire of the United States and Saudi
Arabia to "promote programs of cooperation between the
two countries in the fields of industrialization, trade,
manpower training, agriculture, and science and technology."
It also stated that the Treasury Department and the Saudi
Ministry of Finance would consider general types of
cooperation in the area of finance.
B-1151

-2With these goals in mind, the Joint Commission was
established to provide a formal government-to-government
mechanism by which the expertise present in the various
parts of the U.S. and Saudi Arabian governments and their
respective private sectors could be pooled and brought to
bear on the developmental needs of the Saudi economy.
As established in the June 8 communique, the Joint
Commission is chaired by U.S. Secretary of the Treasury
W. Michael Blumenthal and Saudi Arabian Minister of
Finance and National Economy Muhammad Abalkhail. It is
coordinated on the U.S. side by Assistant Secretary of
the Treasury C. Fred Bergsten and on the Saudi side by
Deputy Minister of Finance and National Economy Dr. Mansoor
Alturki. I am, in effect, the general manager of the
Commission.
In order to support and coordinate U.S. involvement in
the Joint Commission, the Department of Treasury established
an Office of Saudi Arabian Affairs in Washington and the
Office of the U.S. Representation to the Joint Commission
in Riyadh. Technical assistance provided by the Joint Commission is carried out on a reimbursable basis in accordance
with a Technical Cooperation Agreement signed February 13,
1975, by the U.S. and Saudi Arabian governments, which I
will submit for the record. Expenses are defrayed by
drawing against a Treasury-held trust fund established by
the Saudi Government pursuant to this agreement.
The idea of establishing Joint Commissions with Middle
Eastern countries can be traced to a proposal from the
American Embassy in Jidda in January 19 74, shortly after
the October 1973 Middle East conflict and during the Arab
oil embargo. These traumatic events had highlighted the
interdependence of American welfare and that of the various
Middle Eastern countries, and it was thought that joint
commissions could broaden the network of contacts and
associations between the U.S. and several key countries,
thus creating relationships that could better withstand
temporary stress. Establishment of the U.S.-Saudi Arabian
Joint Commission thus reflected a conscious effort to
strengthen relations between the two countries by
broadening areas of mutual economic and political interest.
Other joint commissions were established in quick
succession. Following the Saudi example in June 1974,
commissions were established with Egypt and Jordan; in July
one was established with Israel; one with India in October;
one with Iran in November; and one with Tunisia the
following May. But the Saudi commission quickly moved

-3ahead of the others in its level of activity due to various
political, economic, and even bureaucratic reasons, and
over the past four years this pre-eminence has become even
more apparent.
The Saudi Government sees the Joint Commission as one
aspect of its program of rapid economic and social development. The United States does not have a monopoly on
foreign economic activity in Saudi Arabia. Firms and
governments from all over the world have mounted aggressive
campaigns to penetrate the Saudi market for imported goods
and services. Logically enough, this has led to the rapid
expansion of non-American foreign economic activity in
Saudi Arabia. But Saudi business and government leaders
still realize that the United States has resources of great
importance to Saudi Arabia's economic development, a view
derived from years of satisfactory experience with such
U.S. entities as ARAMCO and the Army Corps of Engineers.
American technology, American products, and American
management are highly respected by Saudi leaders and considered necessary for the successful implementation of the
$142 billion five-year development plan. The Joint
Economic Commission is recognized as an important mechanism
for facilitating the flow to Saudi Arabia of American goods,
services, and technology.
During the four years since its establishment, the
Joint Commission has acted to achieve the objectives outlined in the 1974 Joint Statement of Cooperation by:
--dispatching U.S. specialists and technical teams
to Saudi Arabia to analyze current conditions in
specific areas and to make recommendations for
actions;
--developing proposals for major technical assistance projects using these recommendations as a
base;
--coordinating U.S. Government and U.S. privatesector activity in implementing projects
approved by the two governments;
--developing the institutional framework necessary
for carrying out government-to-government
technical assistance projects; and
--stimulating U.S. private-sector involvement in
the overall Saudi development effort.

-4More than 40 separate groups of U.S. specialists have
been sent to Saudi Arabia under Joint Commission auspices
in the last four years. These teams have conducted shortterm studies in a large number of areas and their
recommendations have led to the development of numerous
proposals for technical assistance. To date, 16 agreements
for major technical cooperation projects have been signed.
I would like to note here for the record that copies of all
16 project agreements have been sent via the State Department
to the Congress under the provisions of the Case Act.
These 16 project agreements provide for assistance in
the following areas:
--statistics and data processing;
--electrical equipment procurement (two agreements);
--national electrification planning;
center
--formation and operation of a national
for science and technology;
--vocational training and construction;
--desalination research;
--consumer protection services;
--financial information services;
--solar energy research;
--customs services;
--national park planning;
--highway development;
--government procurement; and
--government auditing and accounting.
Detailed descriptions and up-to-date status reports of these
projects are submitted separately.
New Joint Commission projects are constantly being
suggested, some of which result in ad hoc assistance of a
short-term nature while others will ultimately result in
formal project agreements. The next agreement that will
probably be signed calls for assistance in the development
of Saudi Arabia's domestic transportation system, with a
focus on bus transport in the Kingdom's five major cities.
The total value of Joint Commission projects thus far
undertaken, estimated by projecting over the foreseeable
life of the projects, is now in excess of $800 million.
I should note that projects are actually undertaken
by action agencies such as, for example, the Department of
Labor and the Department of Energy. In securing the
implementation of projects, the action agency may either
call upon its own resources, those of another government
department, those of a private-sector firm, or some
combination of these, as will be illustrated in the following

-5exposition. I have submitted separately for the record a
list of action agencies and private-sector firms that have
been1 involved in Joint Commission activities. In cases ,
where an agency other than Treasury is given primary action
responsibility, Treasury is a co-signatory to the project
agreement. This has proved to be an effective way of maintaining a cooperative effort while at the same time providing
the framework for Treasury to carry out its coordinating role.
In all cases, Treasury carries out the financial arrangements
for projects, and also provides logistical support for
program implementation in Saudi Arabia.
Specific projects aside, though, there is little doubt
that the Joint Commission has served the broader interests of
U.S.-Saudi friendship and cooperation, as when Joint Commission
meetings have provided an opportunity for high-level discussions
between U.S. and Saudi officials. Thus, for example, during
Finance Minister Abalkhail's visit to Washington for the
third Joint Commission meeting in May 1977, he called on Vice
President Mondale, Secretary of State Vance, Office of
Management and Budget Director Lance, Assistant to the President
Schlesinger, and Federal Reserve Board Chairman Burns.
Having discussed the Joint Commission in general terms,
I would now like to address more specifically the question of
technology transfer, the actual subject of today's hearings.
It is important to recognize that Joint Commission
projects do not generally involve the transfer of what we
in the United States have come to think of as highly
sophisticated technology. This is not to belittle the
technological content of Joint Commission projects or the
technical competence of American advisors assisting with
these projects; we provide the best expert assistance
available, and certainly intend to continue doing so. What
I am driving at is that the Saudis are at a stage of
economic development demanding the development of basic
economic infrastructure, not the ability to produce the
latest generation computer chips or send men to the moon.
What they are most concerned about are projects involving
crucial but relatively mundane activities such as building
roads and houses, providing electricity to meet skyrocketing

-6demand, developing limited manpower and agricultural
resources, desalinating water to cope with the country's
critical shortage of this essential commodity, and
developing a basic industrial capacity, especially in the
petro-chemical area. It is true that Saudi Arabia's
approach to development is capital intensive, as its
resources dictate, but this does not undermine my basic
point about the type of technology presently demanded for
Saudi development.
It follows logically that the most important Joint
Commission projects, using monetary value as a convenient
indicator of importance, are those relating to vocational
training and electrification. I will summarize briefly
what is involved in these two areas in order to illustrate
somewhat more specifically the type of work being done
under Joint Commission auspices.
In June 19 76, a formal project agreement, which I
will submit for the record, was signed which calls for the
U.S. Department of Labor to provide 20 to 30 manpower
development specialists to work with the Saudi Ministry of
Labor and Social Affairs in 11 capacities relating to
vocational training, make arrangements for architectural
and engineering work and follow-on construction related
to the establishment of new vocational training facilities
and the expansion of existing facilities, and assist the
Ministry of Labor and the Saudi Education Mission in
Houston in monitoring skill-upgrading programs being held
in the U.S. for Saudi vocational training instructors. In
February 1977, the Labor Department entered into an interagency agreement with the U.S. General Services Administration calling for GSA to oversee design and construction
work on the vocational training facilities.
The vocational training project currently has a staff
of 31 long-term vocational training advisors and four
engineers in Riyadh working with the Ministry of Labor.
Two American firms, CRS Design Associates from Houston and
Hope VTN JV from San Diego, are handling design and
construction planning for the necessary project facilities
and actual construction should begin this December of
January.
Joint Commission assistance with electrification falls
under three separate project agreements, all three of which
I will submit for the record.

-7The first agreement, signed in November 1975, provided
for Treasury arranging the purchase of approximately $57.6
million of electrical equipment and related goods and
services, including the construction of three warehouses,
for the Saudi Ministry of Industry and Electricity. An
interagency agreement was signed in December 1975 under
which GSA agreed to handle procurement of the equipment.
Shipping, warehousing, and technical assistance on specifications were contracted to a private non-profit firm,
Overseas Advisory Associates, Inc. of Detroit. In January
1977 the Saudi Government deposited an additional $10.4
million in the Trust Account to cover costs related to
installing part of the requested equipment. All the
requested electric power equipment, valued at $41 million,
is now in Saudi Arabia. The warehouses and generating
units at the Nasseriah Royal Power Plant, at the Riyadh
Industrial Estates, and in the provincial town of Abha
are ready for operation, though work is continuing on
certain ancillary facilities at various sites.
The second electrification agreement, signed in
February 1976, provided for U.S. assistance to the Saudi
Ministry of Industry and Electricity in the development of
a comprehensive electrification plan for the Kingdom, the
operation of the Department of Electricity on a day-to-day
basis, and any other areas of concern to the Ministry. The
three aspects of the project have been underway concurrently.
A draft 25-year electrification plan was presented to the
Ministry in December 1977 by the Charles T. Main Company
of Boston, the private firm contracted for this project, and
the final version of the plan will be submitted in October
or November of this year together with a scale model.
Since the future power system in the Kingdom will have many
American features, we fully expect that U.S. firms will
compete successfully for many of the contracts for providing equipment and services for the new system. In
another aspect of this project, work continues in an effort
to upgrade the Riyadh Electric Company's capability to cope
with the increased demand for electricity in the Saudi
capital. Eighteen Charles T. Main personnel are presently
working in Saudi Arabia.
The third electrification agreement was signed in
March 1977, and provides that Treasury will procure electrical equipment requested by the Saudi Consolidated
Electric Company (SCECO), which is managed by ARAMCO. This
equipment is being procured through GSA, with technical
assistance
by Overseas
Associates.
Shipping isprovided
being handled
by theAdvisory
ARAMCO Services
Company.

-8iii the eauipment, valued at approximately $11 million,
has been purchased, though deliveries will continue through
1978.
All of these projects entail the transfer of technology
in one sense or another, whether this is educational
Jechnology relating to vocational training, the technology
necessary for constructing vocational training centers or
installing electrical equipment, or the planning technology
involved in formulating a nation-wide electrification plan.
Similarly, there is a transfer of technology involved in
other Joint Commission projects such as, for example, the
computer technology involved in the statistics and data
processing project and the R 5 D work that will be done in
the desalination project. Given our limited time today,
I must restrict myself to summarizing this activity since
a comprehensive review of 16 major projects is impossible.
I would like, though, to go into somewhat greater
detail regarding three projects that may perhaps relate
more directly to the interests of the Subcommittee: the
establishment and operation of a national center for science
and technology; solar energy research; and the establishment
of a financial information center in the Ministry of
Finance and National Economy.
A project agreement was signed in February 1976 calling
for the U.S. National Science Foundation to assist in
drawing up an overall three-stage plan for science and
technology development. First, specialists are to conduct
an inventory and evaluation of existing Saudi S 5 T resources
Second, the U.S. and Saudi Arabia will undertake a n u m b e r
of discrete cooperative S §,T projects. And third, the U.b.
will assist in the long-term development of the Saudi
Arabian National Center for Science and Technology which,
for convenience, we have abbreviated to SANCST.
The overall objectives of SANCST are listed in Appendix
A of the project agreement, which I will submit for the
record, but U.S. involvement in this project can be pictured
as being three-pronged. First, there will be an inventory
of existing resources in Saudi Arabia, both human and
physical (i.e., lab facilities and equipment, etc.). A
13-person American team will visit Saudi Arabia in October
1978 to conduct this survey, and a final report will be
submitted to SANCST in April or May 1979. It is hoped that
during the course of this survey a number of Saudis will
receive training in inventory techniques and data compilation, but that is not a major objective of the exercise.
Second, an S § T information system will be set up for

-9SANCST which will ultimately include a data line from SANCST
to S § T data bases in the U.S. and a national S § T
information system. Work relating to this system commenced
in May 1978 with the travel of a five-person NSF team to
Saudi Arabia to survey information needs of libraries,
universities, and other potential users of the system. It
is projected that the Joint Commission will be responsible
for both installing the hardware for the information system
and training an on-line search manager. The third aspect
of U.S. involvement in SANCST will be the design of a
research plan by NSF. Areas for consideration include
solar energy, use of arid lands, environmental studies,
transportation planning, and industrial research. However,
work towards establishing this research plan has barely
begun.
A second project agreement particularly relevant to
the subject of technology transfers is the one signed in
October 1977 for cooperation in the field of solar energy,
which I will also submit for the record. This project, for
which the Department of Energy is the U.S. action agency,
calls for each country to provide $50 million for a fiveyear cooperative effort in the development and application
of solar energy technology. Preliminary technical and
management plans for the project were agreed on by U.S.
and Saudi representatives at discussions held in June 1978,
and later this month further discussions will be held in
Colorado regarding more specific project plans. At the
June meetings, it was agreed that the solar research and
development should concentrate on five major areas: solar
energy availability in Saudi Arabia; thermal processes;
storage and fuel production; electrical generation; and
other alternative solar-related sources of energy such as
wind, geothermal, and ocean-thermal energy. These five
areas of research and development will be applied to practical applications in agriculture, industry, and urban
use. Both sides agreed that this cooperative solar energy
program will emphasize both active and passive solar
cooling, solar desalination, solar-generated electricity
for remote regions, and thermal processes. Moreover, it
was agreed that approximately 30 percent of the total effort
will be directed at each of the following three areas:
research and development; the testing of prototypes; and
application development. It is expected that project work
will begin in FY 1979.
The third project which I think is of particular
interest to the Subcommittee is that calling for financial
information services. In May 1977 the Treasury Department
signed an agreement with the Saudi Ministry of Finance and

-10National Economy, which I will submit for the record, under
which Treasury is assisting in the establishment of a major
multi-media financial information center in Riyadh which
will upgrade the Ministry's ability to gather and analyze
worldwide financial data.
Treasury signed a contract in April 1978 with CRS
Design Associates of Houston, Texas, for project management
services and in February 1978 with Ford, Powell, and
Carson of San Antonio, Texas, for architectural and design
services relating to the project. Work on the new financial information center is now underway, the anticipated
completion date for the $24 million facility being April
1980.
Six Treasury employees (three economists and three
information specialists) are currently in Riyadh working
on this project, and three additional specialists are
expected to arrive in Riyadh before the end of this year.
This team is:
--providing oversight to project constructors as
work progresses;
--working with the Ministry to recruit and train
personnel to staff the center;
--providing the Ministry with up-to-date economic
reporting and analyses;
--assisting in the development of an expanded
library collection which will be organized
similar to the Library of Congress system;
--assisting in the specification and provision of
related equipment and materials; and
--establishing computerized ordering, bookinventory, and internal-management systems.
To permit the center to communicate with commercial
economic data bases in the U.S., a dedicated phone link
using the commercial satellite facilities of Western Union
International, a New York-based company, was established
between Riyadh and Washington in early 1978. Computer
equipment relating to this communications line is currently
temporarily housed in the main Ministry of Finance building,
but will be moved into the financial information center
when it is completed. This system will provide the American
economic advisors in Riyadh and their Saudi counterparts
with rapid access to economic and financial data. This data
is in private-sector, not government, data banks and is
publicly available.

-11The establishment of the financial information center
provides for the transfer of several types of technology
including the latest information storage and retrieval
techniques and the computer technology necessary for upgrading Saudi economic analysis and planning capabilities.
This is a good example of technology transfers benefitting
both the donor and the recipient since the twin goals of
improved Saudi economic and financial planning and improved
economic and financial coordination between the two
countries are being served.
This theme of mutually beneficial cooperation stands,
as I have tried to indicate, at the heart of all of the
activities undertaken by the Joint Commission. I feel
strongly that recognizing the long-term economic interdependence between the United States and Saudi Arabia is an
important step towards ensuring the future well-being of
both countries, and furthermore, that our approach towards
this relationship should be active, not passive. We, no
less than they, have much to gain, both economically and
politically, from successfully meeting the challenge presented by Saudi Arabia's giant step forward into the
twentieth and twenty-first centuries.
Although I recognize that foreign policy considerations
are the province of my State Department colleagues, in concluding, Mr. Chairman, I would like to return once more to
the larger question of U.S. policy in the Middle East. The
Middle East is a troubled part of the world in which U.S.
initiatives have met with mixed success. In this setting
the strength and longevity of the U.S.-Saudi relationship
stands out as remarkable. The Joint Commission exemplifies
both the vitality and the forward-looking nature of this
0O0 again that the United States
relationship, and demonstrates
shares many interests with Middle Eastern countries that
can be furthered through mutually beneficial cooperation.

STATEMENT BY F. LISLE WIDMAN
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL MONETARY AFFAIRS
BEFORE THE SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL
SCIENTIFIC PLANNING, ANALYSIS AND COOPERATION
OF THE
HOUSE COMMITTEE ON
SCIENCE AND TECHNOLOGY
Mr, Chairman and Members of the Subcommittee:
I welcome the opportunity to appear before the
Subcommittee to discuss the size, disposition and
significance of the financial surpluses of the oil
producing countries which I will also attempt to
place against the backdrop of global financial
developments.
Since 1973, world payments flows have undergone
a profound transformation as a result of massive
increases in oil prices, unprecedented and persistent
inflation, deep recession and hesitant economic
recovery and growth in many countries.
The 13 countries which make up the Organization
of Petroleum Exporting Countries (OPEC), after years of
of approximate balance on current account, registered
cumulative (net) current account surpluses of something

B-1152

- 2 like $175 to $180 billion during the four years 1974
through 1977.*

During this period of^iarge OPEC

surpluses, the industrial countries as a group, whfch
historically had run current surpluses and exported
capital to the rest of the world, experienced cumulative
current account deficits of unprecedented magnitude
—

about $80 billion. Similarly, the non-oil exporting

developing countries and the non-market economies
of Eastern Europe sustained deficits much larger than
they had previously experienced —

about $125 billion

for the four-year period.
The sudden and severe increase in the cost of oil
left many nations facing the necessity of major structural
adjustment in their domestic economies.

Many were already

struggling with very high rates of inflation and heavy
external deficits.

In the period immediately after the

oil price increase, there was widespread concern that
nations would be forced, by the lack of sufficient financing to pay for oil, to curb their imports so sharply as
to have a devastating impact on the world economy.

The

*The term "current account" is used here to include
official and private grants or unilateral transfers as
well as international transactions in goods and services.
The cumulative surplus on goods and services is estimated
at roughly $185 billion and net official grants at $7 billion. Many OPEC countries do not compile detailed balance
of payments data. Thus, the figures used here are U.S.
Treasury staff estimates.

- 3 international economic and financial organizations—
the International Monetary Fund and the Organization
for Economic Cooperation and Development—concentrated
heavily on measures to ensure that financing would be
available to the oil importing countries and on
avoidance of uncooperative and ultimately self-defeating actions by financially strapped countries to improve
their own positions at the expense of others.
The success of these measures provided a valuable
breathing space, enabling the required structural
adjustment to be stretched out over a longer period of
time and thus to be less disruptive.

The inevitable

economic slowdown did not begin until late in 1974
although it has been perhaps the deepest and, for much
of the world, the longest slowdown since the 1930*3.
Countries which delayed their adjustment efforts too
long and allowed their inflation rates to soar above
those of their trading partners were compelled to
institute strong stabilization programs.

Nevertheless,

the basically open trade and payments system which is
so crucial to the economic health of all major trading
nations has been preserved.
Unfortunately, the task of adjusting the complex
world economy to relatively high energy costs is far

- 4 from complete even today.

Structural changes

must yet take place in many economies, often involving significant alteration of traditional attitudes
and patterns of production and consumption.

Our own

need, here in the United States, to reduce our dependence on imported oil is perhaps the most critical of
all the structural changes required.
changes do not come easily.

These structural

Yet they must take place

if satisfactory levels of growth and employment —
an open system of trade and payments —

and

are to -be main-

tained.
The greatly increased global need for balance of
payments financing in the last 4-1/2 years has been
matched by a general expansion of credit.

The OPEC

surpluses, as a matter of necessity, have been invested
in the oil importing countries. Thus, directly or indirectly the OPEC members provided financing. Of course,
the individual OPEC countries placed their funds according to their own investment preferences. Since the
geographic placement of OPEC surplus funds has not
corresponded to the pattern of current account deficits,
financial intermediation on an unparalled scale has been
required to redistribute, or recycle, these huge surpluses

- 5 to the countries in need.

The IMF established a

special financing facility and took a number of other
steps to enhance the availability of balance of payments financing.

Nevertheless, private capital

markets and the international banking system have
met the bulk of the financial intermediation requirements.

They have done so efficiently and successfully.

Given the private market orientation of the
world economy, it was natural for the bulk of this
financing to be handled by private rather than
official channels.

The period was one of rapid

institutional expansion in the international banking
system.

Many institutions were competing eagerly

for new customers, as they sought to establish themselves in new activities and new geographic areas,
and endeavored to broaden their scope of operations
so as to spread risks and diversify portfolios at a
time when domestic loan demand was less buoyant than
in immediately preceding years.

Thus, the private

institutions were in a position to expand the level
of their activity.

As a result, a large portion of

the huge surpluses by OPEC and other countries was
placed with the banks and other financial intermediaries, particularly in 1974 and 1975.

- 6 In reaction to the growth of U.S. commercial
banks' activities abroad, U.S. regulatory authorities
strengthened their bank supervision procedures.

They

have also implemented new reporting requirements which
provide information on the extent of U.S. bank exposure
by country of risk covering both home offices and all
majority-owned banking affiliates abroad.
The jump in OPEC member revenues was so sudden
and so large that these countries were generally not
in a position during the early part of the period to
place much of their surpluses in long-term investment
instruments.

Also from the outset, most of the OPEC

members expected to be able to spend their new-found
surpluses fairly quickly for imports of goods and
services to develop their own countries. For these
various reasons, most of the surpluses were placed
in short-term instruments. The bulk of the funds in
these first surplus years went into time deposits
with banks or short-term securities issued by governments of major industrialized countries.
Over the four year period, 1974-1977, about $70
billion, or nearly 40% of OPEC's surpluses, were placed
in deposits with commercial banks in the industrial
countries.

About 40% of these deposits —

between

- 7 $25 and $30 billion—were placed with U.S. banks, partly
with the head offices in the U.S. and partly in branches
abroad.
The balance of the OPEC surpluses —
billion —

was placed outside the banks.

about $115
About $37

billion was invested in the U.S., consisting of about
$14-1/2 billion of Treasury securities, and a
little over $10 billion of purchases of other U.S.
securities, almost evenly divided between stocks and
corporate and government agency bonds, including
private placements.

The rest has been used to amortize

debt, prepay imports, make direct investments, etc.
(The amount which has gone into direct investments,
including real estate is relatively small. We
estimate that the total value of such holdings
in the U.S. by OPEC member countries is around
$1 billion) . The Middle East oil producing countries
account for about 90% of all OPEC assets in the U.S.
An equal amount of the cumulative OPEC surplus
$37 billion —

—

is believed to have been invested in other

industrial countries in non-bank assets.

In addition

some $10 billion has been placed with international
financial institutions such as the IMF and the World
Bank.

Only about $5 billion was put in the non-market

- 8 countries. We estimate that about $25 billion or
about 13% of the OPEC surplus was devoted to aidxto
developing countries, either in the form of loans or
as outright grants.
The bulk of OPEC investments—even those outside
the United States—has been in dollar-denominated
instruments. OPEC member countries have, in other words,
loaned dollars to other countries and they expect to be
repaid in dollars. The proportion of their new investments placed in dollar assets of course, fluctuates
from month to month, but the overall proportion has
remained relatively steady, ranging from an estimated
75% to 80% of their total external investments. This
high proportion is the result of a number of factors,
including the preeminent position of the U.S. capital
market, the role of the dollar as the principal transactions currency in the world, and the relative lack
of suitable investment opportunities elsewhere. The
OPEC pattern is similar to that of other international
lenders.
The pattern of OPEC investments has been gradually
changing since 1973.

The information available to us,

even though incomplete, reveals clearly that in 1976
and 1977 the Middle East oil producers placed a much

- 9 larger proportion of their investible surplus in longerterm maturities, including deposits with banks and purchases of U.S. Treasury securities.
of the maturity structure

This lengthening

coincided with—and is

probably the result of—more sophisticated investment
planning and a much better definition of the domestic
economic objectives of the major surplus countries.

It

reflected a better appraisal of the amount of funds
which would not be needed in the short-term and thus
could be used for longer-term investments yielding
higher returns.
At the same time, the size of the OPEC surplus
has been diminishing.

The decline is primarily the

result of a continuing increase in the absorptive
capacity of the OPEC countries and the consequent rapid
growth in their imports of goods and services.

Slower

growth among the industrial countries, coupled with conservation efforts by oil importing countries and continuing development of oil production from the North
Sea and other non-OPEC sources has also played a role.
In 1973 the combined imports of merchandise of the
OPEC nations amounted to only $20 billion.

This year

we estimate OPEC imports will reach $95 billion,
which represents a compound growth rate of about 35%

- 10 a year since 1973.
Because the surpluses have fallen sharply, the level
of new foreign investments by OPEC member countries has
been declining sharply.

In fact, some OPEC members have

apparently found it necessary to liquidate some of their
earlier investments in order to meet expenditure commitments.

A number of OPEC countries are now running

current account deficits and borrowing increasing amounts
of funds in the international capital markets to finance
their domestic development plans.
Thus, the OPEC surplus has come to be concentrated
primarily in a handful of countries in the Arabian
Peninsula.

Even these surpluses have been falling.

The combined OPEC surplus on goods, services and private *
transfers this year will probably be only about half the
$36 billion surplus of 1977 and thus the amount available for either official grants or investments will be
sharply reduced. OPEC merchandise imports are projected
to grow by perhaps $11 billion.

Their oil revenues

will probably fall by $5 billion or so, reflecting
slackened global demand for OPEC petroleum.
The combined surplus may fall further next year,
perhaps to about $10 billion, assuming no further
increases in the price of oil.

Each percentage point

- 11 of increase in the oil price would add roughly $1
billion to the combined surplus.

We would expect a fur-

ther increase of about 10% in merchandise imports by the
OPEC group in 1979, and a small increase in oil revenues
(assuming no change in price) as non-OPEC oil production
continues to increase and growth rates in the oil consuming
countries continue at a moderate level.

Surpluses are

likely to continue beyond 1979, but I would caution that
forecasts of trends in OPEC surplus are highly tenuous,
especially the further out one looks.

Both the global

supply and demand for oil and the ability of OPEC
countries to continue to absorb goods and services
from abroad at a rapid, uninterrupted pace are highly
uncertain, as is the oil price.
Before concluding, I would like to make a few
observations about both U.S. policies and the policies
of the major OPEC surplus countries toward their investments in the United States.

Our policies toward OPEC

investment should be viewed in the light of our overall
position on capital movements.
We are convinced that global resources will best
be allocated to their most efficient uses if market
forces are the main determinants of international
capital movements.

Accordingly, we seek, in general,

- 12 to avoid the use of either government incentives or
disincentives which would artifically distort the
direction or the form of international capital movements.
We do not discriminate among foreign investors according
to their nationality.

We have urged other nations to

follow the same principles.

In fact, we have negotiated

a series of Friendship, Commerce and Navigation Treaties
with many countries around the world which commit the
signatories to these principles.
Two somewhat conflicting concerns about OPEC
investments in the U.S. are expressed from time to
time.

Some people have been concerned that OPEC

countries might suddenly withdraw their holdings in
the U.S., imperiling U.S. institutions and depriving
the economy of important sources of capital.

Others

have felt that OPEC investment may exert an excessive
or even pervasive influence in the U.S. and should be
strictly controlled, perhaps even prohibited.

I think

it would be appropriate to comment briefly on these
concerns.
Although the individual OPEC countries pursue
independent investment policies based on their own
perceptions and needs, virtually without exception
their approach to investments in the U.S. has been

- 13 conservative and responsible. As I have noted, the
bulk of their investments is in financial instruments
which are designed to obtain satisfactory yields without sacrificing the security of their assets.
The Saudi Arabian Government has been most explicit
in detailing the approach it takes toward investments.
The Saudis have stated that they seek to play a constructive role, recognizing the need to act with larger
issues in mind than solely profit. In this regard, they
have sought to avoid sudden or largescale shifts in
assets, speculative transactions, investment in the
sensitive area of real estate, and controlling interests
in U.S. firms.

According to Govenor Quraishi, head of

the Saudi Arabian Monetary Agency, their investment
managers in this country have been instructed that at
no time may Saudi investments reach 5% of the voting
stock of any company. He further indicated that their
holdings of U.S. Government securities constitute the
largest single component of their international
reserves.
It is also necessary to put the size of OPEC
investment activity in proper perspective.

Although

the value of the U.S. assets held'by the Middle East
producers is large in an absolute sense—about $36 billion

- 14 at end 1977—their total holdings are very small in comparison with the size of the total U.S? capital market
which is estimated to be on the order of $3.3- trillion.
The volume of Middle East investment activity is also
small in comparison comparison with the total turnover
in U.S. investment instruments. Although their investments are concentrated in Treasury securities, Middle
East investors account for less than 10% of all foreign
holdings of U.S. Treasury securities and less than 3%
of total public holdings of U.S. Treasury securities.
Both on a stock basis and on an annual purchase basis
their investment in corporate bonds and equities represent
less than 1% of the total outstanding value and dollar
volume of each of these types of U.S. securities.

Similarly,

their deposits in all U.S. banks here and in their branches
abroad account for only about 5% of the total deposits
of the large U.S. banks and only about 2-1/2% of the
deposits of all U.S. commercial banks.
There are two additional reasons why U.S. banks
would not be particularly vulnerable to a sudden
withdrawal of Mid-East oil producer deposits.

First,

nearly all of these deposits are time deposits with
varying maturities stretching out over months and
years.

Second, banks have immediate access to

- 15 several alternative sources of funds which have
evolved to support an essential function of banking—
maturity transformation.

These sources (for example,

the federal funds market and the international eurodollar market) would enable affected banks to satisfy
their liquidity requirements until funds could be
attracted from other depositors.
If funds were suddenly withdrawn from a U.S.
bank or banks and placed with foreign banks, the
recipient banks would have to find outlets for the
additional funds.

The normal procedure would be to

offer these funds to the interbank market —

where

the banks which had initially lost the deposits could
borrow them back.
Obviously, if an OPEC investor—or any other
foreign holder of dollars—decided to sell dollars
or dollar assets to purchase assets in other parts
of the world which were to be paid for with another
currency, he would have to buy that other currency
with dollars.

This action would tend to increase

the demand for the foreign currency while increasing
the supply of dollars on the foreign exchange
market.

It would, therefore, tend to cause the

foreign currency to appreciate against the dollar.

- 16 Thus, the primary importance of OPEC investment
policy to the U.S. lies in the effect which it
has on the exchange rate.
I think it is important to recognize that we
live in an interdependent world.

We provide a

profitable outlet for the surplus funds generated
by the Mid-East oil producing countries—through
one of the very few capital markets in the world
capable of absorbing such large sums.

These

investments will be a primary source of financing
of the future development of their own countries.
The Mid-East countries in turn produce the oil
we need and in the cases of several of these countries
at a level that exceeds their immediate requirement
for capital.
In conclusion, we do not view OPEC investments
in the U.S. as a threat to our economic or political
independence.

To the contrary, they are important to

the financing of the U.S. balance of payments deficit
and the strength of the dollar. These investments are
an element, albeit highly visible, of what I would
characterize as a modern, somewhat complex, interstatal relationship, that fosters a high volume of
exchanges of goods, services and capital for

- 17 productive use in the economic development of each
our countries.

The OPEC nations benefit; so do

the U.S. and the world at large.

Estimated Disposition of OPPC Investible Surplus *
(Billions of U.S. Dollars)
1975

1976

1977

1978
QI

12 1/2

9 1/2

12

9 1/4

1 3/4

( 5.3)
C .2)
t .9)
C .4)
(4.1)

( .4)
(2.0)
(1.6)
• (1.6)
( .6)

(-1.0)
( 4.2)
( 1.2)
( 1.8)
( 1.6)

(-.9)
(4.3)
(3-7)
(1.4)
( .4)

C3)
( .2)
( .3)
( .5)

(10.8)

(6.3)

( 7.8)

(6.9)

(1.3)

1.7)

(3.2)

(4.2)

(2.3)

( .4)

32

1 3/4

1974
United States
of which
Treasury securities
Bills
Bonds and notes
Other marketable U.S. bends
U.S. stocks
Coimercial bank liabilities
Subtotal (banking and
portfolio placements)
Other (including direct
investment, prepayments
en U.S. exports, debt
amortization, etc.)
Euro-banking market

22 3/2

8

11

V4

)

(.-

V4

'United Kingdom

7 3/2

Other developed countries

6

7 3/4

8

8

Less developed countries**

4

6

6

8 3/2

3/4

2

1 1/4

1 1/2

V4

3 3/4

4 1/4

1 3/4

3/2

56 3/4

37 3/4

NcD-narket countries
International financial institutions (including IMF oil
facility)
TOTAL AUiXATED

V2

-1

39

Estimated current account
plus

72- 3/4 ' --36 1/2 -.-49 3/4

Adjustment for lag in receipt
of oil revenues

•31 1/4' +1

-4 3/2

Estimated gross borrowings

1/2 4

8 32

Cash surplus plus borrowings

61 1/2

41 3/2

43 1/4

4 3/4

3 3/4

4 1/4

Discrepancy in estimates

3/4

1

40 1/2

5 3/4

35 1/2

NA

+3

NA

50 3/2

NA

10

NA

*Heceipts fran exports of goods and services and gross borrowing abroad less
Payments for imports of goods and services.
*Incluctes grants
U.S. Treasury Department
NA - Not Available
Office of International Banking
and Portfolio Investment/QASIA
September 7, 1978

Embargoed For Release 6:30 P.M.
September 6, 1978

Contact:

Robert E. Nipp
566-5328

SECRETARY BLUMENTHAL MEETS WITH JAPAN'S VICE MINISTER
OF FINANCE, TAKEHIRO SAGAMI, FOR DISCUSSION OF JAPAN'S
ECONOMIC MEASURES
The Vice Minister of Finance for International Affairs
for Japan, Takehiro Sagami, met with Treasury Secretary
Blumenthal this afternoon. It was Minister Sagami's first
visit to the United States since his appointment as Vice
Minister in June.
Minister Sagami described for Secretary Blumenthal the
comprehensive economic measures including additional public
investments of 2.5 trillion yen (approximately $13 billion)
which the Government of Japan recently adopted with a view to
assuring the achievement of its 7% target for real growth in
the current fiscal year (April 1, 1978 to March 31, 1979).
Secretary Blumenthal said he appreciated the opportunity
to meet with Vice Minister Sagami and welcomed the measures
adopted by the Government of Japan as evidence of Japan's
intent to fulfill the pledge made by Prime Minister Fukuda
at the Bonn summit.
Secretary Blumenthal reviewed for Minister Sagami the
steps being taken in connection with the concern expressed
by President Carter over the recent sharp decline in the
dollar and disorderly conditions in the foreign exchange
markets. Secretary Blumenthal indicated his expectation
that the U.S. would be announcing further actions as decisions
are reached to deal with this situation.
Secretary Blumenthal and Minister Sagami expressed satisfaction with the recent strengthening of the consultation
arrangements between the two countries and indicated an intent
to continue to consult closely on both exchange market developments and more fundamental policy measures.
Minister Sagami will be continuing on to Paris to attend
the meeting of the Deputies of the Group of Ten on September 8.

B-1153

FOR RELEASE AT 4:00 P.M.

September 7, 1978

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
$3,036 million, or thereabouts, of 364-day Treasury bills to be dated
September 19, 1978, and to mature September 18, 1979 (CUSIP No. 912793 Z6 6 ) .
The bills, with a limited exception, will be available in book-entry form only,
and will be issued for cash and in exchange for Treasury bills maturing
September 19, 1978.
This issue will not provide new money for the Treasury as the maturing
issue is outstanding in the amount of $3,036 million, of which $1,731 million is
held by the public and $1,305 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 par amount will be payable without interest.
Except for definitive bills in the $100,000 denomination, which will be available
only to investors who are able to show that they are required by law or regulation
to hold securities in physical form, this series of bills will be issued entirely
in book-entry form on the records either of the Federal Reserve Banks and Branches,
or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and Branches and at the
Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern
Daylight Saving time, Wednesday, September 13, 1978.

Form PD 4632-1 should be used to

submit tenders for bills to be maintained on the book-entry records of the
Department of the Treasury.
Each tender must be for a minimum of $10,000.
be in multiples of $5,000.

Tenders over $10,000 must

In the case of competitive tenders, the price

offered must be expressed on the basis of 100, with not more than three decimals,
G

-g-, 99.925.

Fractions may not be used.
(OVER)

B-1154

-2Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers, provided the names of the customers are set forth in
such tenders.

Others will not be permitted to submit tenders except for their

own account.
Payment for the full par amount of the bills applied for must accompany all
tenders submitted for bills to be maintained on the book-entry records of the
Department of the Treasury.

A cash adjustment will be made for the difference

between the par payment submitted and the actual issue price as determined in
the auction.
No deposit need accompany tenders from incorporated banks and trust companies
and from responsible and recognized dealers in investment securities, for bills
to be maintained on the book-entry records of Federal Reserve Banks and Branches,
or for definitive bills, where authorized.

A deposit of 2 percent of the par

amount of the bills applied for must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.

Those submitting competitive tenders

will be advised of the acceptance or rejection thereof.

The Secretary of the

Treasury expressly reserves the right to accept or reject any or all tenders, in
whole or in part, and his action in any such respect shall be final.

Subject to

these reservations, noncompetitive tenders for $500,000 or less without stated
price from any one bidder will be accepted in full at the average price (in
three decimals) of accepted competitive bids.
Settlement for accepted tenders for bills to be maintained on the records
of Federal Reserve Banks and Branches must be made or completed at the Federal
Reserve Bank or Branch on September 19, 1978, in cash or other immediately available funds or in Treasury bills maturing September 19, 1978. 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

-3include 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 a 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 Circulars, Public Debt Series - Nos. 26-76 and
27-76, and this notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue.

Copies of the circulars and tender forms may be

obtained from any Federal Reserve Bank or Branch, or from the Bureau of the
Public Debt.

FOR IMMEDIATE RELEASE
September 7, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY TENTATIVELY DISCONTINUES
ANTIDUMPING INVESTIGATION ON VISCOSE
RAYON STAPLE FIBER FROM AUSTRIA
The Treasury Department today announced its
tentative decision to discontinue its antidumping
investigation of viscose rayon staple fiber from
Austria. A final determination is due by December 8,
1978.
This action results from an investigation conducted under the Antidumping Act of 1921. The
investigation was started in March 1978 as a reopening
of an earlier antidumping investigation that had been
discontinued in January 1978. The investigation was
reopened to determine whether the product was being sold
in the home market by the sole Austrian exporter to the
United States, Chemiefaser Lenzing A.G., for less than
it cost to make. The investigation uncovered no evidence
of below-cost sales and found that Lenzing was adhering
to the terms of the prior discontinuance.
Notice of this action will appear in the Federal
Register of September 8, 1978.
o

B 1155

0

o

kpartment of theTRE/[$URY
j^SHlNGTON, D.C. 20220

FOR IMMEDIATE RELEASE
September 8, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES COUNTERVAILING
DUTY INVESTIGATION ON IMPORTS OF
AMOXICILLIN TRIHYDRATE FROM SPAIN
The Treasury Department has started an investigation
into whether imports of amoxicillin trihydrate, a semisynthetic penicillin, from Spain are being subsidized.
A preliminary determination in this case must be made
on or before January 27, 1979, and a final determination no
later than July 27, 1979.
Imports of amoxicillin trihydrate in 1977 are estimated
to have been valued at approximately $1.2 million.
This action, under the Countervailing Duty Law, is
being taken pursuant to a petition alleging that manufacturers and/or exporters of this merchandise receive benefits
from the Government of Spain under its "Desgravacion Fiscal"
system. This system of remitting or rebating certain elements
of the Spanish turnover tax has been the subject of previous
Treasury investigations, and Treasury is currently soliciting
public comment on the matter.
The Countervailing Duty Law requires the Secretary of
the Treasury to collect an additional customs duty equal to
the size of a "bounty or grant" (subsidy) paid on merchandise
exported to the United States.
Notice of this investigation will be published in the
Federal Register of September 11, 1978.

B-1156

tyartoMofiheTREASURY
TELEPHONE 566-2041

INGTON, D.C. 20220

September 11, 1978

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,300 million of 13-week Treasury bills and for $3,401 million
of 26-week Treasury bills, both series to be issued on September 14, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing December 14, 1978
Price

High
Low
Average

98.066
98.048
98.055

Discount
Rate

Investment
Rate 1/

7.651%
7.722%
7.695%

7.91%
7.99%
7.

26-week bills
maturing March 15, 1979
Price

Discount
Rate

96.077a/ 7.760%
96.047
7.819%
96.060
7.793%

Investment
Rate 1/
8.19%
8.25%
8.23%

a/ Excepting 1 tender of $25,000
Tenders at the low price for the 13-week bills were allotted 32%.
Tenders at the low price for the 26-week bills were allotted 53%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

$
20,775,000
Boston
3 ,390,890,000
New York
16,970,000
Philadelphia
45,335,000
Cleveland
21,520,000
Richmond
25,350,000
Atlanta
223,920,000
Chicago
43,255,000
St. Louis
4,565,000
Minneapolis
32,910,000
Kansas City
17,510,000
Dallas
151,380,000
San Francisco
6,670,000
Treasury
TOTALS

$4,,001,050,000

Accepted

: Received

$
20,775,000 ;•
.
1,914,090,000
16,970,000
45,335,000
21,520,000 •
25,350,000 :
78,920,000 :
32,255,000 .
4,565,000 :
32,910,000 .
17,510,000 .
83,380,000 .
6,670,000

.

$

37,315,000
4,501,870,000
7,655,000
71,395,000
20,535,000
19,950,000
223,345,000
28,220,000
26,180,000
25,975,000
11,885,000
193,705,000
9,155,000

$2, 300,250,000b/. $5,,177,185,000

Wncludes $342,085,000 noncompetitive tenders from the public.
c/Includes $199,590,000 noncompetitive tenders from the public.
I/Equivalent coupon-issue yield.

B-1157

Accepted
$
32,615,000
2,971,020,000
7,655,000
71,395,000
18,535,000
19,950,000
73,345,000
17,220,000
26,180,000
25,975,000
11,885,000
115,705,000
9,155,000!
J
$3,400,635,001/

FOR RELEASE ON DELIVERY
September 14, 1978 — 10:00 a.m. EDST
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
OF THE
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
Mr. Chairman and Members of the Subcommittee:
I am pleased to have this opportunity to appear before
you today on behalf of the Department of the Treasury to discuss the growing problem of arson for profit and the role of
the Treasury Department in investigating those incidents. With
me is John Krogman, Acting Director of the Bureau of Alcohol,
Tobacco and Firearms; and William E. Williams, Deputy Commissioner
of the Internal Revenue Service.
There can be no doubt as to the seriousness of the arson
for profit problem. It has been characterized as the nation's
fastest growing crime; its cost is felt in human suffering as
well as in extraordinary economic effects such as the loss of
homes, businesses, and jobs; and it is a difficult crime for
law enforcement to successfully detect, investigate,and prosecute.
The impact of arson has not fallen on any single state or part
of our country alone, but has affected all of our major urban
areas in various degrees. The National Fire Prevention and
Control Administration has informed us that there were approximately 150,000 arsons committed in the United States in 1976,
and that the direct losses were estimated at approximately
$1 billion. In addition, we believe that there is evidence
that in various areas arson serves as a source of income to
organized crime.
Currently, the Treasury Department's role in the investigation or apprehension of those engaged in arson for profit
lies with the Bureau of Alcohol, Tobacco and Firearms (BATF).
The responsibilities of the Bureau is to investigate violations
B-1158

- 2 of the Federal firearms and explosives statutes which prohibit
the possession of many of the explosive and incendiary devices
which are commonly used by arsonists. Therefore, BATF has
statutory jurisdiction to investigate arsonists who employ
certain proscribed devices to commit arsons. In addition,
the Internal Revenue Service, whose mission is the administration and enforcement of our internal revenue laws, has the
authority to investigate individuals or entities who fail to
report their profits from arsons. As you can see, the Bureau
of Alcohol, Tobacco and Firearms has a direct role to play
in dealing with this problem, while, on the other hand, the
Internal Revenue Service has a much more indirect responsibility
in the arson area.
The Federal statutes which currently direct themselves
at arson are the National Firearms Act, 26 U.S.C. 5801 et seq.,
(Title II of the Gun Control Act of 1968) , and Title XI of the
Organized Crime Control Act of 1970, 18 U.S.C. 841 et seq.
Violations of both of these statutes may be punishable by fines
of $10,000 and/or imprisonment for up to 10 years. Justice
Department officials will be appearing before this Subcommittee
and will be offering their views as to the effectiveness of
these statutes as they relate to arson, as well as some other
statutes which might be applicable such as those involving
Racketeer Influenced and Corrupt Organizations and mail fraud.
Arson, like many other crimes, involves a blending of
Federal, State and local jurisdictions and responsibilities.
The Treasury Department believes that, at its core, arson is
primarily a state and local crime. These entities have the
basic responsibility to maintain public safety within their
respective boundaries and, obviously, the Treasury Department
does not have the resources to actively investigate more than
a small percentage of the arsons which are committed each year.
This does not mean, however, that we believe there is no
federal role in the arson area. To the contrary, the Treasury
Department believes that organized and direct Federal involvement is necessary, and we have acted to provide it. BATF
has already provided substantial assistance in attacking this
problem and is currently directing its arson investigative
activities to those instances where there is organized criminal
involvement, white collar crime, and arson for hire rings which
cross state lines in carrying out their illegal activities. We
have also been comminced to providing technical support and
assistance to state and local law enforcement authorities.

- 3 In the past the Treasury Department has attempted, within
its limited resources, to play an active role in combatting
arson and arson-related crimes, predicated upon ATFfs enforcement of the Federal firearms and explosives laws. As the
members of the Subcommittee may know from the GAO Report, the
number of ATF arson cases cannot accurately be measured
without great difficulty because what is now reported as an
arson or arson-related offense until January, 1978, was reported as a violation of the Federal firearms and explosives
laws. I am able to report, however, that between January
and July 1978, ATF had 163 active arson-for-profit schemes
under investigation, nationwide, 75 of which were being conducted by ATF Arson Task Forces.
I am also able to report that in cases where direct ATF
investigative involvement at the State and local levels was
precluded for jurisdictional reasons, the Bureau always stood
ready to furnish technical and investigative assistance. For
instance, during 1976 and 1977, ATF's four forensic laboratories
provided technical assistance in over 2,000 arson cases, and
investigative assistance in 606 cases.
As the problem of arson grew, the Treasury Department
in the past year has sought to develop new and more effective
strategies within the Department to combat it. We have also
recognized the need for a coordinated Federal effort and have
initiated programs with other Federal law enforcement agencies.
I would like to share some of these initiatives with
the Subcommittee:
In January 1977, an ATF Arson Task Force was established
in the Philadelphia, Pennsylvania, area consisting of personnel from BATF, the FBI, the Postal Inspection Service, and
Philadelphia police and fire investigators. This task force
was created to assist local law enforcement authorities in
arson investigations where violations of the Federal firearms
and explosives laws were suspected. The task force was very
effective and has led to the convictions of three individuals
who had employed professional arsonists to burn down coramerical
structures for the purpose of defrauding insurance companies.
The task force has also investigated nine other cases, three
of which are now awaiting prosecution, and six others awaiting
grand jury action.

- 4 In the fall of 1977, my office had discussions with the
Justice Department concerning the feasibility of establishing
Arson Task Forces in the twenty-three Department of Justice
primary and satellite strike force locations. The purpose of
these task forces is to develop cases against organized crime
and racketeering figures who are believed to be involved in
arson schemes; and to assist state and local authorities in
the investigation and prosecution of significant arson-forprofit cases.
During this same period of time, ATF investigative
personnel met with officials of the Criminal Division's
Organized Crime and Racketeering Section to develop specific
investigative standards and guidelines to be used in determining when an arson-related organized crime or white-collar crime
should be investigated. The purpose of setting these guidelines
is to ensure that the limited Justice Department and ATF resources would be utilized in the most effective manner by
investigating only those cases where there was a reasonable
likelihood of successful prosecution.
On February 1, 1978, the task force concept was approved.
Beginning in March, ATF began training special agents in arson
investigations and since then has trained 120 special agents.
The special agents chosen for these assignments all underwent
intensive instruction in the detection and investigation of
arson-for-profit schemes at the Federal Law Enforcement Training
Center in Glynco, Georgia. Since then, ATF, in cooperation
with the Department of Justice,also has held a seminar in
arson investigative techniques for Special Agents in Charge.
In January, 1978, we also met with representatives of
the Commerce Department's National Fire Prevention and Control
Administration to offer our assistance at the National Fire
Academy in the training of state and local law enforcement
and fire-fighting personnel in the detection and investigation
of arson. Previously such training had been provided by ATF
on only an ad hoc basis at the district level. Final arrangements for ATF participation have been made, and it is expected
that ATF will begin assuming teaching duties at the Academy
within the immediate future.
Because we have recognized the obvious interest that
insurance companies have in halting the growth of arson and
their wide experience in investigating this crime, we recently
enlisted their cooperation in combatting arson-for-profit
schemes. For instance, inApriland June, 1978, ATF met with
representatives of the Insurance Crime Prevention Institute
and the
Property
Loss
Research
Bureau
in order
toof
obtain
make
regarding
information
arrangements
detection
regarding
for
techniques.
major
the
future
arson-for-profit
Representatives
exchanges
of schemes,
information
both
and to

- 5 organizations have pledged their full cooperation in support
of the ATF Arson Task Force projects. In the case of the
Insurance Crime Prevention Institute, there were also arrangements made for ATF to participate on a limited basis in the
instruction of new investigators.
Treasury recognizes that further initiatives will be
required if the Federal effort against arson-for-profit
schemes is to be fully effective and as our experience grows
we are prepared, within our resource capability to undertake
them. For instance, we know that there must be a better and
more efficient procedure for sharing information on suspected
arsonists with Federal, State and local authorities. Studies
to develop these procedures are now underway.
While we continue to believe that primary responsibility
in this area should remain with the State and local authorities,
we are committed to continuing our role in this area. However,
we caution against heightened expectations that the Federal
government alone will be able to provide sufficient resources
to attack this problem. It can only be successfully addressed
by a coordinated federal/state effort. This is a reflection
of the fact that federal resources, law enforcement and others,
are not unlimited. This is particularly true of the Bureau of
Alcohol, Tobacco and Firearms, whose proposed 1979 budget was
severely reduced by the Congress. Nevertheless, we are determined to try to do what we can to try to meet this problem,
even though our primary actor — BATF -- may have less people
to meet all its responsibilities.
I will now ask Acting Director Krogman and Deputy
Commissioner Williams to present their statements after which
we will
be you.
glad to answer any questions you may have.
Thank

"<\ Of-

7j

iepartmentoftheJREASURY
IINGTON, D.C. 20220

f

x

tm~^

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

September 12, 1978

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 5,600 million, to be issued September 21, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,605 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,200
million, representing an additional amount of bills dated
June 22, 1978,
and to mature December 21, 1978 (CUSIP No.
912793 U9 5) f originally issued in the amount of $3,404 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
September 21, 1978, and to mature March 22, 1979
(CUSIP No.
912793 X5 0).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing September 21, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,320
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D C
20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, September 18, 1978. Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-1159

-2Each 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 securities and report daily to the
Federal Reserve Bank of New York their positions in and
Dorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on September 21, 1978, in cash or
other immediately available funds or in Treasury bills maturing
September 21, 1978. Cash adjustments will be made for
differences
accepted in exchange
between the
and par
the value
issueof
price
the maturing
of the new
bills
bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

FOR IMMEDIATE RELEASE
September 12, 1978

Contact:

Alvin M. Hattal
202/566-8381

EMERGENCY TRADE EMBARGO
AUTHORITY IS EXTENDED
Treasury today announced that the President has
extended for another year the emergency legal authorities under which Treasury administers the trade
embargoes against Viet-Nam, North Korea, Cambodia,
and Cuba. This action was in compliance with recent
Congressional amendments to the Trading With the
Enemy Act, requiring an annual determination by the
President that these emergency powers are necessary
in the furtherance of U. S. foreign policy objectives.

o 0 o

B-1160

FOR IMMEDIATE RELEASE
September 13, 1978

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT WITHHOLDS
APPRAISEMENT ON BICYCLE TIRES
AND TUBES FROM KOREA AND TAIWAN
The Treasury Department today said that it has tentatively determined that bicycle tires and tubes from the
Republics of Korea and China (Taiwan) have been sold at
less than fair value and that it is, accordingly, withholding appraisement on imports of that merchandise from those
countries. The withholding action will not exceed six
months.
If the Secretary makes a final determination that sales
at less than fair value are occurring, the U. S. International Trade Commission must subsequently decide whether
they cause or threaten injury to an American industry.
Both sales at less than fair value and injury must occur
before a dumping finding is reached and antidumping duties
can be assessed.
The Treasury's final determinations are due by December 18,
19 78. If affirmative, the Commission will have three months
from the publication of those determinations to consider the
injury issue.
Imports of bicycle tires and tubes from Korea and Taiwan
were valued at $14.5 million and $15.3 million, respectively,
during calendar year 1977.
The preliminary affirmative determination with respect
to Taiwan is based on the sales of only one of the four companies investigated, Cheng Shin Rubber Industrial Co., Ltd.
Two of the other three Taiwanese companies investigated, Nan
Kang Rubber & Industrial Corp., Ltd., and Hwa Fong Rubber
Industrial Co., Ltd., are excluded from the determination on
the basis of no margins, in the case of Nan Kang, and de
minimis, or insignificant margins, in the case of Hwa Fong.
The fourth company, Kenda Rubber Tire Corp., is being given
a discontinuance based on minimal margins and assurances
that all future sales will not be at less than fair value.
B-1161
(MORE)

- 2 -

Under the Antidumping Act, the Secretary of the
Treasury is required to withhold appraisement whenever he
has reason to believe or suspect that imports of the product are being sold at less than fair value. Sales at less
than fair value generally occur when imported merchandise
is sold in the United States for less than in the home market or to third countries.
When appraisement is withheld, the Customs Service
defers valuation of goods imported after the date of publication of the notice, thus allowing any dumping duties
ultimately imposed to be levied on all imports entered after
that date.
In a related matter, the Treasury made a preliminary
ruling in late July under the Countervailing Duty Law that
the Governments of the Republic of Korea and Taiwan were
subsidizing in whole or in part -exports of these same products to the United States. Final determinations in those
cases are due by December 28, 1978.
Notice of the antidumping actions will appear in the
Federal Register of September 18, 1978.
o

0

o

Z> Csi

scleral financing

E vo
a> o

WASHINGTON, D.C.

20220

FOR IMMEDIATE RELEASE

September 13, 1978

FEDERAL FINANCING BANK ACTIVITY
August 1-August 31, 1978
Roland H. Cook, Secretary, Federal Financing Bank,
announced the following activity for August, 1978.
Guaranteed Loan Programs
V

On August 23, the FFB purchased a total of $10,290,000
in debentures issued by 10 small business investment companies.
The debentures are guaranteed by the Small Business Administration, and mature in 3 years and 10 years, with interest
rates of 8.575% and 8.595%, respectively.
FFB purchased the following General Services Administration
Purchase Contract Participation Certificates:
Interest
Series
Date
Amount
Maturity
Rate
7/31/03
8.582%
$7,615,757.26
8/9
M-036
11/15/04
8.629%
1,551,744.48
8/14
L-045
7/15/04
8.560%
1,797,745.46
8/30
K-011
FFB made 26 advances on existing loans to 15 governments
totalling $55,998,163.48 under the foreign military sales program
These advances are guaranteed by the Department of Defense.
FFB also entered into a new $10 million loan agreement with
the Government of Ecuador.
Under notes guaranteed by the Rural Electrification
Administration, FFB advanced a total of $235,060,338 to
24 rural electric and telephone systems. Details of
individual advances are included in the attached table.
FFB provided Western Union Space Communications, Inc.,
with $7,950,000 on August 21 and $3.6 million on August 31
at annual interest rates of 8.806% and 8.782%, respectively.
These advances are part of the FFB's $687 million financing
of a satellite tracking system to be constructed by Western
Union and used by the National Aeronautics and Space Administration. Repayment of these advances is guaranteed by NASA.
B-1162

- 2Department of Transportation (DOT) Guaranteed Lending
Under Section 511 of the Railroad Revitalization and
Regulatory Reform Act, the FFB advanced funds to:
Date Amount Maturity Interest Rate

Chicago § North Western Trans. 8/1 $1,974,806.00 3/1/89 8.875% annuallv
Trustee of The Milwaukee Road
8/2
3,684,000.00 11/15/91 8.888% annually
Missouri-Kansas-Texas RR
8/3
1,112,028.00 11/15/97 8.54% quarterly
Under Note #15, which matures October 1, 1978, FFB lent
the following to Amtrak:
Date

Amount

Interest
Rate

8/8
5,000,000.00
7.034%
8/15
6,000,000.00
7.231%
8/17
5,000,000.00
7.394%
7.337
8/21
1,500,000.00
On August 30, the FFB advanced $414,000 to the United
States Railway Association at an interest rate of 8.408%.
This advance was against Note #8, which matures April 30
1979.
Agency Issuers
«* n On August 7, the FFB purchased a $695 million Certificate
?hi! e ?«n 1 C ^J 0 w " e r s h i P from the Farmers Home Administration.
This CBO will mature on August 7, 1983, and carries an
interest rate of 8.61% on an annual basis.
to +hIhlvIennelSee VaiJey Authority sold a $555 million note
to the FFB on August 31. The note matures November 30, 1978
and carries an interest rate of 7.855%.
in»n io Jts..weekly short-term FFB borrowings, the Student
Loan Marketing Association, a Federally-chartered private
idu?^?^°^n"[ w C ^ b ° r r 0 W S U n d e r a Department of Health,
Education and Welfare guarantee, raised $20 million in new
holding « ? f S ? S d $*29° m i l l i 0 n ^ maturing securities. FFB
holdings of SLMA notes now total $725 million.
FFB Holdings
billion ^PPP^L-1' 19?8J' FFB holdings totalled $46.7
billion. FFB Holdings and Activity Tables are attached.

FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
August 1978
Program

Aueust 31. 1978

.lulv 31. 1978

Net Change-FY 1978

Net Change
(7/31/78-8/31/78)

(10/1/77-8/31/78)

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank

$ 5,010.0
6,132.3

$

4,960.0
6,132.3

$

$ 1,130.0
208.8

50.0

-0-

Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association

2,114.0
356,8

2,114.0
356.4

-00.4

-67.0
46.4

695.0

7,660.0
20.2
11.5
-1,157.2
-4.3
97.0
-18.9

Agency Assets
Farmers Home Administration
DHKW-Health Maintenance Org. Loans
DHEW-Medical Facility Loans
Treasury-New York City
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration

22,275.0
50.0
163,7

21,580.0
43.0
163.7

7.0
-0-0-0-0-

-0-

-0-

40.1
450.7
114.1

40.1
450.7
115.2

17.5
34.2
3,719.2
263.2
36.0
38.5

17.5
27.4
3,664.6
252.3
• 36.0
38.5

-06.8

536,3
227.6
3,918.6
246.5
725.0
21.8
177.0

518,9
216.0
3,683.5
236.2
705.0
21.8
177.0

17.5
11.6
235.1
10.3
20.0

-1.0

Government Guaranteed Loans
DOT-Emergency Rail Services Act
DOT-Title V, RRRR Act
DOD-Foreign Military Sales
General Services Administration
Guam
DHUD-New Communities Admin.
Nat'l. Railroad Passenger Corp.
(AMTRAK)
NASA
n
Rural Electrification Administration
Small Business Investment Companies
Student Loan Marketing Association
Virgin Islands
WMATA
TOTALS

Federal Financing Bank

$46,668.0*

$45,549.9*

2.9
29.0
1,203.6
121.1

54.7
10.9

-0-0-

-0-4.0
-22.7
171.1
1,536.2
70.6
215.0

-0-0-

-.2
-0-

$1,118.1*

$11,250.1*

September 11, 1978
*totals do not add due to rounding.

FEDERAL FINANCING

BANK

August 1978 Activity

BORROWER

PATE

:

AMOUNT
OF ADVANCE

•
rINTERESI :
• MATURITY i RATE
:
:

(other than s/a)

Department of Defense
Greece #9
Malaysia #3
Ecuador #2
Peru #2
Peru #3
Korea #8
Thailand #2
Spain #1
Israel #6
Liberia #2
Spain #1
Indonesia #3
Ecuador #2
Jordan #3
Panama #2
China #3
Spain #1
Indonesia #3
Malaysia #3
Israel #6
Peru #2
Colombia #1
Korea #8
Jordan #2
Jordan #3
Turkey #6

INiEREST
RATE

8/1
8/2
8/3
8/4
8/9
8/9

$ 10,379,659.00
1,683,500.00
64,836.80
37,879.00
114,345.00
1,597,447.00
96,015.00
443,751.44
1,150,000.00
347,414.00
308,131.00
92,028.37
17,624.91
283,136.38
4,247.40
13,212.42
2,619,822.00
• 1,298,201.00
2,911,506.01
29,731,541.62
393,132.00
101,340.02
71,531.60
1,041,208.80
942,262.71
254,390.00

5/3/88
3/20/84
8/25/84
4/1/84
4/10/84
12/31/86
6/30/83
6/10/87
1/12/08
6/30/83
6/10/87
9/20/86
8/25/84
12/31/86
3/31/83
12/31/82
6/10/87
9/20/86
3/20/84
1/12/08
4/1/84
6/30/83
12/31/86
11/26/85
12/31/86
6/3/88

8.570%
8.499%
8.577%
8.502%
8.506%
8.541%
8.593%
8.590%
8.596%

695,000,000.00

8/7/83

8.432%

7,615,757.26
1,551,744.48
1,797,745.46

7/31/03
11/15/04
7/15/04

8.582%
8.629%
8.560%

8/8
8/15
8/17
8/21

5,000,000.00
6,000,000.00
5,000,000.00
1,500,000.00

10/1/78
10/1/78
10/1/78
10/1/78

7.034%
7.231%
7.394%
7.337%

8/1
8/1
8/1
8/4
8/7
8/10
8/10
8/10
8/10
8/10
8/14
8/14
8/15
8/15
8/15

,000.00
1^000 ,000.00
8,'200 ,000.00
128*309 ,000.00
384 ,064.00
10,000 ,000.00
*157 ,000.00
125 ,274.00
3,107 ,000.00
20 ,000.00
3,444 ,000.00
14*.000 ,000.00
2*500 ,000.00
3*897 ,000.00
1*203 ,000.00
*375 ,000.00

8/1/80
8/1/80
8/1/80
8/1/80
8/4/80
12/31/12
12/31/12
12/31/12
12/31/12
8/10/80
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12

8.654%
8.654%
8.654%
8.654%
8.435%
8.582%
8.565%
8.565%
8.565%
8.345%
8.565%
8.646%
8.646%
8.679%
8.679%
8.679%

8/10
8/11
8/15
8/15
8/15
8/16
8/18
8/18
8/18
8/22
8/22
8/23
8/28
8/29
8/29
8/29
8/30
8/31
8/31
8/31

8.6611
8.5851
8.5161
8.4471
8.367%
8.438%
8.329%
8.418%
8.669%
8.417%
8.485%
8.508%
8.592%
8.609%
8.581%
8.555%

Farmers Home Administration
8/7

8.610% annually

General Services Administration
Series M-036
Series L-045
Series K-011

8/9
8/14
8/30

National Railroad Passenger Corp. (Amtrak)
Note
Note
Note
Note

#15
#15
#15
#15

Rural Electrification Administration
United Power Assn. #6 8/1 3,200
Alabama Elect. Coop. #26
United Power Assn. #67
San Miguel Elect. Coop. #110
East Ascension Tele. Co. #39
Dairyland Power Coop. #36
Hillsborough $ Montgomery Tele.#27
Allied Tele. Co. of Arkansas #48
Allegheny Elect. Coop. #93
Northern Michigan Elect. Coop.#101
Wabash Valley Power Assn. #104
Cooperative Power Assn. #70
Tennessee Telephone Co. #80
Arizona Elect. Power Coop. #60
Arizona Elect. Power Coop. #103
Sierra Telephone Co. #59

8.554?0 quarterly
8.554%
8.554%
8.554%
8.348%
8.492%
8.475%
8.475%
8.475%
8.260%
8.475%
8.555%
8.555%
8.587%
8.587%
8.587%

FEDERAL FINANCING

BANK

August 1978 Activity
Page 2
•

BORROWER

AMOUNT
OF ADVANCE

! DATE :

INTEREST
:INTEREST :
RATE
: MATURITY i RATE :
(other than s/a)
:

Rural Electrification Administration
(continued)
Glacier State Tele. Co. #29
Central Iowa Power Coop. #51
Western Farmers Elect. Coop.#64
Big River Elect. Corp. #58
Colorado-Ute Elect. Assn. #78
Big River Elect. Corp. #91
So. Mississippi Elect. Coop. #3
So. Mississippi Elect. Coop. #90
Gulf Telephone Co. #50
East Kentucky Power Coop. #73
Northwest Generating Co. #118
Buckeye Power Corp. #123
Tri-State Gen. § Trans. #89
Southern Illinois Pwr. #38
Powell Telephone Co. #41
Arkansas Electric Coop. #77

8/15
8/16
8/16
8/21
8/21
8/21
8/23
8/23
8/24
8/24
8/28
8/30
8/31
8/31
8/31
8/31

$

1,166,000.00
1,435,000.00
2,400,000.00
3,426,000.00
881,000.00
1,948,000.00
125,000.00
822,000.00
109,000.00
5,782,000.00
17,405,000.00
11,079,000.00
6,075,000.00
870,000.00
613,000.00
1,003,000.00

8/15/80
12/31/12
12/31/12
8/21/80
12/31/12
8/21/80
8/25/80
8/25/80
12/31/12
8/24/80
12/31/12
12/31/12
12/31/80
8/31/80
12/31/12
12/31/12

8.465%
8.693%
8.693%
8.675%
8.692%
8.675%
8.645%
8.645%
8.575%
8.595%
8.593%
8.609%
8.625%
8.655%
8.631%
8.631%

1,100,000.00
300,000.00
500,000.00
400,000.00
500,000.00
1,450,000.00
1,000,000.00
2,540,000.00
2,000,000.00
500,000.00

8/1/81
8/1/81
8/1/88
8/1/88
8/1/88
8/1/88
8/1/88
8/1/88
8/1/88
8/1/88

8.575%
8.575%
8.595%
8.595%
8.595%
8.595%
8.595%
8.595%
8.595%
8.595%

10/31/78
11/7/78
11/14/78
11/21/78
11/28/78

7.240%
7.149%
7.232%
7.632%
7.689%

8.377% quarterly
8.601%
8.601%
8.583%
8.600%
8 . DOJ'b

8.554%
8.554%
8.485%
8.505%
8.503%
8.518%
8.534%
8.563%
8.54% f
8.54%

•

Small Business Investment Companies
CSRA Capital Corp.
Tappan Zee Capital Corp.
Bohlen Capital Corp.
DeSoto Capital Corp.
First Texas Investment Co.
First Women's SBI Corp.
Lloyd Capital Corp.
Royal Business Funds Corp.
Vega Capital Corp.
Venture SBIC, Inc.

8/23
8/23
8/23
8/23
8/23
8/23
8/23
8/23
8/23
8/23

Student Loan Marketing Association
#155
*156

8/1
8/8

ns7

8/15
8/22
8/29

70,000,000.00
70,000,000.00
70,000,000.00
60,000,000.00
40,000,000.00

8/31

555,000,000.00

11/30/78

".855%

1,974,806.00
3,684,000.00
1,112,028.00

3/1/89
11/15/91
11/15/97

8.686%
8.699%
8.631%

/30

414,000.00

4/30/79

8.408^

8/23
8/31

7,950,000.00
3,600,000.00

10/1/89
10/1/89

8.620%
8.597%

*158
#159

Tennessee Valley Authority

#81

Department of Transportation-Sec. 511 Loans
Chicago $ North Western Trans.
Milwaukee Road
Missouri-Kansas-Texas RR

8/1
8/2
8/3

8.875% annually
8.888% annually
8.54% quarterly

United States Railway Association
Note #8

8

Western Union Space Communications
(NASA
8.806% annually
8.782% annually

Apartment of theTREASURY
WINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

September 13, 1978

TREASURY TO AUCTION $2,684 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2,684
million of 2-year notes to refund the same amount of notes
maturing September 30, 1978. The $2,684 million of maturing
notes are those held by the public, including $709 million
currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
In addition to the public holdings, Government accounts
and Federal Reserve Banks, for their own accounts, hold
$511 million of the maturing securities that may be refunded
by issuing additional amounts of the new notes at the
average price of accepted competitive tenders. Additional
amounts of the new securities may also be issued at the
average price, for new cash only, to Federal Reserve Banks as
agents for foreign and international monetary authorities.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

oOo

Attachment

(over)
B-1163

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED OCTOBER 2, 1978
September 13, 1978
Amount Offered;
To the public
Description of Security:
. Term and type of security
Series and CUSIP designation
Maturity date September 30, 1980
Call date
Interest coupon rate

$2,684 million
2-year notes
Series T-1980
(CUSIP No. 912827 JB 9)
No provision
To be determined based on
the average of accepted bids

Investment yield To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
March 31 and September 30
Minimum denomination available
$5,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Settlement date (final payment due)
a) cash or Federal funds
b) check drawn on bank
within FRB district where
submitted
c) check drawn on bank outside
FRB district where
submitted
Delivery date for coupon securities.

Wednesday, September 20, 1978,
by 1:30 p.m., EDST
Monday, October 2, 1978

Thursday, September 28, 1978

Wednesday, September 27, 1978
Monday, October 2, 1978

kpartmentoftheTREASURY
IINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

September 13, 1978

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $3,037 million of 52-week Treasury bills to be dated
September 19, 1978, and to mature September 18, 1979, were accepted at the
Federal Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:

Price
High
Low
Average -

Discount Rate

91.972 7.940%
91.948
7.964%
91.958
7.954%

Investment Rate
(Equivalent Coupon-Issue Yield)
8.57%
8.60%
8.59%

Tenders at the low price were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Received

Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$ 44,030,000
4,917,030,000
21,545,000
149,875,000
35,290,000
84,245,000
237,655,000
27,205,000
49,040,000
16,605,000
11,645,000
456,240,000

Treasury

3,450,000

$ 14,030,000
2,629,415,000
21,545,000
81,875,000
6,290,000
51,245,000
58,155,000
4,965,000
7,040,000
11,005,000
5,645,000
142,240,000
3,450,000

TOTAL

$6,053,855,000

$3,036,900,000

Location

The $3,037 million of accepted tenders includes $112 million of
noncompetitive tenders from the public and $1,259 million of tenders from
Federal Reserve Banks for themselves and as agents of foreign and
international monetary authorities accepted at the average price.
An additional $ 311 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

B-H

Jtfl5f78
Tfvii'ASOfti" OtPAi?i,iE.^T
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:30 A.M.
THURSDAY, SEPTEMBER 14, 1978

REMARKS BY THE HONORABLE DANIEL H. BRILL
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE
1979 BUSINESS OUTLOOK SESSION OF THE CONFERENCE BOARD
NEW YORK, NEW YORK

In the last full fiscal year of the Administration
preceding ours, the budget deficit was over $66 billion.
For the fiscal year ending in two weeks—approximately the
second year of this A d m i n i s t r a t i o n — t h e deficit will likely be around $50 billion. For the fiscal year ahead (1979),
the deficit will be in the low $40 billions. For the fiscal
year following—1980—it will be significantly belcw $40 billion.
And we intend to keep going in this direction, at a
prudent pace consistent with further reduction in unemployment and abatement of inflation, until the budget is
balanced.
I suspect that's about as succinct a description of
this Administration's budgetary policy and the budget outlook as I can give. Perhaps I should quit while I'm ahead.
But I won't. There
and they must be
economic tool we
it is to control

are many dimensions to the budget,
explored to appreciate how powerful an
have in budgetary policy, but how difficult
the use of this tool.

In thinking about this speech, I was struck by the
fact that I, a life-long, card-carrying Democrat, am taking
pride in fiscal policies that will lead to a balanced
budget, while at the same time, some Washington luminaries

B-1165

-2of that other party are loudly advocating fiscal
policies that would yield mammoth deficits for the next
several years. One of us has seen the light!
Why our dedication to eliminating the budget deficit?
It offends many economists to focus so much on deficits,
since it implies some direct and powerful links between
deficits, per se, and inflation. The links are not that
tight. There can be budget balance at such a high level
of government spending and taxation that the government
is nonetheless adding to strains on resources. Conversely,
there can be large deficits which fail to take up sufficient
slack in the economy. The appropriateness of budget deficits
can be evaluated properly only in the context of the level
of private demands and of resource availability, of inflation and inflationary expectations, and of the composition
of outlays and the sources of revenues.
In the current economic context, large deficits are
inappropriate. I don't have to recite for this group the
current and recent numbers on inflation. Even with the
long-anticipated cooling off in food prices, the basic
inflation rate persists at an unacceptably high level.
While the economy is not yet fully stretched, it is getting
closer to the point where tautness in some goods and services markets is contributing to inflation.
This tautness is not readily apparent in the aggregate
statistics. For example, the overall unemployment rate is
still uncomfortably high—almost 6 percent—and far from any
reasonable definition of full employment. But it is down
one-third—three percentage points—from its recession peak,
and for the components of the labor force that in the past
have shown the closest relationship between unemployment
and wage pressures—adult males—the unemployment rate is
down to 4.1 percent, almost half its recession peak. On
the other hand, the unemployment rate for teenagers-^-at a
distressingly high level of 15*6 percent is only one-fourth
lower than its recession peak. Given the acceleration in
wages and prices over the past year, improvement in the
situation for those segments of the population which have
not fully shared in the recovery cannot depend on pumping
up the economy at the macro level. As far as fiscal policy

-3is concerned, what is called for is not bigger deficits,
but specifically-targeted training and employment programs.
While the utilization of industrial plant is also
not high by historical standards, it has risen substantially since the recession trough. Moreover, spotty
signs of capacity shortages are emerging, e.g., cement,
certain types of industrial machinery, and these signals
must be respected in formulating near-term budget policy.
Inflationary pressures when the overall capacity utilization rate is as moderate as 84 percent suggests to me the
need to re-evaluate the efficiency of our capital stock,
and to take actions not only to add to the size of the
stock but also to improve its effectiveness by encouraging
adoption of technology reflecting the best state of the
art.
It's worth repeating that the relationship between
the budget and the health of the economy is a two-way
street. It is important to keep a tight rein on budget
deficits in order to avoid an acceleration of inflation,
but it is also necessary to reduce the rate of inflation
without endangering the economic recovery. The size of
the budget deficit itself depends upon the pace of economic
growth. Slow growth tends to increase budget deficits, as
outlays for unemployment insurance, welfare payments, food
stamps, and public service jobs increase and decrease tax
receipts as a result of lower levels of profit and personal
income.
Thus, we have a delicate balancing act to perform: we
must sustain the recovery and at the same time bring inflation under control; neither objective can be fulfilled
without the other. The record of the past decade shows
that although an overheated economy will accelerate inflation,
a sluggish economy will not cure it, except very slowly, and
at great cost—not only to the young, the poor, and minorities
with still very high unemployment rates, but to businesses
who would suffer from reduced profits, sales, and opportunities to invest.
The deficit projections for 1979 and 1980 I cited
earlier do recognize the current and prospective economic
situation and requirements, particularly the dangers of
accelerating inflation. But these budgets reflect more than

-4just a preoccupation with near-term economic
developments; they reflect the basic philosophy that
proper fiscal policy should achieve at least three fundamental objectives:
Reduce the share of real and financial
resources absorbed by the Federal government.
Stimulate the private sector to utilize
the freed resources.
Meet our pressing social and international
needs.
The outlay numbers in these budgets are large, and I
realize that it is difficult for many of us to conceive
of scheduled expenditures of near $500 billion as being
consistent with "tight" budgetary policy. But in a
country of over 200 million citizens, with a GNP of over
$2 trillion, even the most prudent fiscal approach will
result in box-car outlay numbers that are hard, at least
for my generation, to put into proper context.
Even reducing the numbers to intellectually manageable
proportions, by relating the budget to GNP, is not too
comforting. In current dollars, federal outlays increased
at a faster rate than GNP during the decade through 1976.
As a consequence, budget outlays as a share of nominal GNP
increased from 20.4 percent in FY 1967 to 22.5 percent in
1976,
But a more appropriate measure of the impact of
federal spending on resource availability for the
private sectors requires expressing this ratio in real
terms. Inflation has been more rapid in the Federal
budget sector than in the economy as a whole. This
reflects, primarily, the fact that prices of services rose
faster than the prices of goods over this period, and
much of federal spending other than transfer payments is
for purchases of services. It also reflects the fact that
costs of construction projects—a major Federal budget
outlay—have also risen more than other costs. Thus,
while federal outlays in the 1967-7 6 period increased as
a share of nominal GNP, when expressed in real terms, the
ratio of outlays to GNP remained about unchanged.

-5-

The Carter Administration budget policy is directed
not just to maintaining but to reducing the government's
drain on real resources. The ratio of real federal outlays to real GNP has declined from 21.4 percent in 1976
to 20.8 percent in 1978. Moreover, by continuing to
exercise fiscal restraint and carefully applying zero
based budgeting, we intend to reduce further the government's preemption of real resources in 1980 and beyond.
If anyone is tempted to dismiss the record of
budget restraint to date as only a minor improvement, he
has not had the traumatic experience of budget-cutting
in the context of existing law, special interest groups
or the bureaucracy. Uncontrollable outlays—those where
the spending level for any given fiscal year is fixed by
existing statute or prior contracts—now account for over
three-fourths of total budget outlays, up from 60 percent
only a decade ago. Of the $500 billion originally proposed
as FY 79 outlays, only $130 billion, or one-fourth, were
within the President's discretion to modify, and over half
of the so-called controllables relatedto national defense
programs. Thus, the opportunities to make significant
changes in the thrust of budget policy come in small doses,
and yield significant results only if pursued persistently
over a period of years.
Paradoxically, it is as hard to achieve approved spending levels as it is to moderate prospective spending plans.
The tendency of government agencies to spend less than their
authorized budgets—the so-called underrun problem—has been
with us in every year but one since 1970.
In the current economy, however, the problem becomes a
blessing. For management purposes, it would obviously be
preferable to have accurate spending forecasts, and the OMB
continues to make progress in improving the estimating procedures. But if there are to be deviations from plan, it's
much more acceptable if the deviations are in a favorable
direction. I learned in my business career that exceeding
a sales and profit plan by a substantial margin still
brought admonitions to adhere to company plans, but
these admonitions were by a bonus. Given our objective
of reducing the government's impact on the economy, I
suggest we deserve the equivalent of a bonus for capitalizing on the good breaks.

-6As noted earlier, reducing the Federal government's
demands on current output is a laudable objective but,
in the context of a not fully utilized economy, only
when coupled with incentives to insure that the private
sectors pick up any resulting slack in demands. The tax
program submitted by the President earlier this year was
designed precisely to achieve this objective. In particular, it includes powerful incentives for business
investment, needed not only for the economic stimulus
these capital outlays provide in the near term but, even
more importantly, for the encouragement they would lend to
expansion and modernization of our capital stock.
The need for investment incentives—not wasteful
capital gains subsidies of remote significance to real
productive investment, but rather proven inducements for
increasing capital formation—is still strong. Business
capital investment is expected to rise about 8 percent in
real terms this year, down frcm the 9 percent increase in 1977
and still below the growth rate we need to maintain if we
are to equip our production system properly.
In addition, personal taxes must be cut to maintain
purchasing power by offsetting the adverse effects of
higher social security and income tax liabilities, Calendar year 1979 social security tax liabilities will be
$11 billion greater than in 1977, and almost $6 billion of
this increase falls on employees and self-employed individuals. Higher individual income tax liabilities will result
from higher real incomes and from inflated incomes pushing
people into higher tax rate brackets.
In the absence of the currently proposed tax cuts,
the share of personal income absorbed by federal personal
income taxes and the contribution of employees and the self
employed to social security would rise from 12.7 in 1977
to about 14.2 percent in 1979, The proposed tax cut would
moderate, but not completely eliminate this increase.
While the components of the proposed tax program
are still sorely needed, the overall magnitude of the
original program is not. In particular, the persistence
of an unacceptably high underlying rate of inflation has
argued for moderating stimulus from the revenue as well
as from the outlay side of the budget. The Administration
has therefore pruned about $10 billion from the originally
proposed tax cut of $24 billion for FY 1979—about
$5 billion in the size of the cut and about $5 billion
more by recommending postponement of the effective date
until January 1, 1979 instead of the October 1, 1978 date

-7recommended earlier. It should be clearf therefore, that
we are committed to as prudent a course in taxes as in
outlays. We're vigorously working both sides of the
ledger to moderate inflationary pressures. While one
cannot characterize the recent and current inflation as
one of excess demand—if it can be labelled at all, it is
more of a tail-chasing wages-chasing-prices-chasing wages
syndrome—the Administration's fiscal efforts are designed
to avoid reinforcing these inflationary pressures.
While we are exerting pressure to hold total outlays
in check, we have attempted to reallocate scarce budgetary
resources so as to get more for our money and achieve the
highest priority national and social objectives. As you
might anticipate, reordering priorities to meet urgent
domestic needs, while being sure not to short-change defense
and other vital international program commitments, is at
least as difficult as keeping down the outlay total itself.
However, we have made some noticeable progress along these
lines.
For example, estimated outlays in FY 1979 as shown in
the January budget include:
$15.2 billion for training, employment, and labor
services, an increase of $6.0 billion or 66 percent over FY 1977. These programs are now more
focused on the poor and structurally-unemployed
youth and members of minority groups. In addition,
they are more oriented toward placing workers in
private sector jobs and furthering their permanent
attachment to the private sector work force.
Included in this effort, for example, is a new
program which directly involves the private
sector in locally organized on-the-job training
for the structurally unemployed.
On the revenue side of the ledger, we have
proposed an employment tax credit which is
targeted on youth and would replace the more
cumbersome existing untargeted jobs tax credit.
$6 3.4 billion for health programs, an increase
of $13.8 billion or 28 percent over FY 1977.
$12.3 billion for environmental programs, an
increase of $3.1 billion or 34 percent FY 1977.

-8-

All of these programs of high social priority are
scheduled to rise more than the increase in the total
budget, indicative of how the Administration is reordering
the budget's priorities to meet major national goals.
It is important to emphasize, moreover, that these priorities are not being implemented at the expense of our
national security. National defense and international
affairs outlays are projected for FY 79 to be $125.4 billion
or 22 percent higher than in 1977.
The long decline in
the share of the budget allocated to meeting our international responsibilities is over.
In summary, our budget plans are for tight constraint
on the growth of expenditures, a change in the composition
of spending to focus on the highest priority needs of our
society, and a reduction in taxes to permit and encourage
the private sector to utilize the resources which would
otherwise have been preempted by government.
Will this indeed be the pattern of fiscal policy
next year? The signs are encouraging for a convergence
of Administration and Congressional views, at least on
the broad outlines of policy. The 2nd Congressional
Budget Resolution, due tomorrow (September 15) will set
the spending level for outlays, the floor for receipts,
and the estimated deficit. As the Senate and House Budget
Committees go to conference they are in virtual agreement
on outlays at nearly $490 billion. In his July 31 testimony
before the House Budget Committee, OMB Director Mclntyre
stated that the Administration viewed a target of about
$491 billion in outlays as appropriate. Thus, there is
only a minor difference on the proposed outlay figure,
and part of the difference is definitional.
There is a bit more play on the receipts side, because
the House and Senate differ on the size of the tax cut
on which they base their respective recommendations. The
House assumes a cut of $10.1 billion for FY 1979 whereas
the Senate assumes $14 billion, much closer to the
Administration's proposed reduction. The House goes to
the Conference with receipts of $450 billion and a
$39.6 billion deficit, whereas the Senate has receipts of
$447.2 and a deficit of $42.3 billion. The Administration's
Mid Session Review estimate for receipts was $448.2 billion,
in between those of the Congressional proposals. The
important point is that the range of differences among
the budget players is quite narrow. As you factor budget
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FOR RELEASE UPON DELIVERY
September 14, 1978
~
REMARKS BY THE HONORABLE
BETTE B. ANDERSON
UNDER SECRETARY OF THE TREASURY
BEFORE THE
WASHINGTON PRESS CLUB
WASHINGTON, D.C.
SEPTEMBER 14, 1978
I am delighted to be here today, but I have a hunch that
some of you may be surprised that my subject is law enforcement.
Unless you have covered the Treasury Department or criminal
justice, you probably are not aware that about 80 percent of
Treasury personnel have law enforcement duties.
We administer a wide range of laws ranging from gun control,
busting of illegal stills, bombings, and narcotics smuggling to
the Bank Secrecy Act, with all the ramifications involving
organized crime. As Under Secretary of the Treasury, I have
responsibility for the Secret Service, Customs Service, Bureau of
Alcohol, Tobacco and Firearms, to mention only a few of our
larger bureaus.
This is a difficult time to be involved in law enforcement
business. Past abuses, both real and imagined, have changed the
atmosphere drastically from that of the automatic "good guys."
Although there is an understandable tendency to long for those
good old days, the new reality is not without some important
benefits. I feel strongly that law enforcement should have to
explain why it needs certain tools; it should have to hold itself
accountable for its performance.
For example, take the area of hiring women and minorities.
For years, law enforcement dragged its feet, preferring to draw
upon the usual recruitment pools. However, in the past five
years — partly as a result of public criticism — we have
improved our hiring records of minorities and women, and, as a
result, I believe we have improved our law enforcement
operations.
It is a cornerstone principle of democracy that the
acceptance of government authority requires that people have a
sense that the government truly represents them. This is
particularly true of law enforcement. Its acceptance in the
Q-\\biP

-2community depends on a belief that it reflects the community it
serves. To gain and sustain this acceptance, we must see that
our agencies do in fact reflect the communities they serve and
include blacks, hispanics, women, and other minorities.
I also think that the general public distrust of too much
government, as witnessed most recently by Proposition 13, also
presents ma:^r challenges to those of us involved in setting law
enforcement policy. There are many times when we could impose a
regulation or enforce a law in such a way as to impose unfair
burdens on the general population just because we are eager to
catch the criminals. We must constantly guard against this
natural tendency and try to strike the best balance.
Nowhere do we see this tension more than in the conflicting
purposes of the Freedom of Information Act and the Privacy Act.
While many of us would agree in principle with both of these Acts
— in practice, both can be seriously abused. We hear about
criminals, some of whom are in jail, putting in freedom of
information requests so they can get information on who turned
them in. On the other hand there are some who would like to
prohibit law officers who are working on such important matters
as protecting the President from obtaining intelligence that
could provide needed information on a suspect.
Nowhere do we see these complex tensions become more
emotional than in the areas which touch upon, either directly or
indirectly, gun control. I think it is very unfortunate that the
debates which surround the gun control issue inevitably turn into
vindictive, ugly, emotional arguments in which the facts somehow
get buried. Yet, in order to accomplish anything significant in
the area, we have to recognize the tension. Many people do fear
that the government wants to take away their right to bear arms,
while others fear that they may become the next victim of a crime
committed with a firearm. These fears are real, and, yet, for
those of us who try to represent the public interest at large,
they make our job difficult.
As many of you may be aware, Treasury did propose some
firearms regulations last spring which had been developed to help
federal, state and local law authorities trace more efficiently
guns used in crimes and to identify those selling guns to
criminals. Unfortunately, however, instead of discussion of our
proposals, the debate quickly involved claims that we were
seeking a "first step" to registration of firearms and the
eventual confiscation of all firearms. Well, this was not at all
our intention. We had even taken special care to write the
regulations so that the names and address of private owners or
Purchasers were not to be reported. Nevertheless, the debate
Regenerated into a series of accusations and denials.
Thousands and thousands of letters were written both to us
and to Congressional representatives and senators. We are now
evaluating the comments we have received in connection with these
regulations.

-3We are also in the midst of another issue which we see as
important for law enforcement. This is the issue of tagging
explosives so that after a bomb has exploded it might be
identified and traced or so that it will be possible to detect
the presence of a bomb before it explodes. While some have tried
to categorize this as another step toward gun control, our
tagging proposal involves very broad and important issues of
public safety.
Experts from both inside and outside the government have
testified as to the soundness of the tagging program recommended
by Treasury. Explosives tagging involves placing a particle —
called a taggant — in explosive materials. The taggant would
remain intact after a bomb exploded so that the explosive might
be identified and traced. Without taggants, it is sometimes
impossible after a bombing to even get one clue as to who made
the bomb, since all of the evidence is blown to bits. That is
why, after nearly three years and more than a million
investigative work-years, we don't even know the type of
explosive used in the bomb that exploded in LaGuardia Airport,
killing eleven innocent bystanders. The tagging program would
change that.
Unfortunately, an effort is being made to exclude black and
smokeless powder from the tagging program. These materials are
also used to load certain kinds of guns and concern has been
expressed that taggants might adversely affect the quality of the
powder. But we suggested legislative provisions which require
tests to show this was not so before the taggants were added.
Nevertheless, the controversy is alive and is expected to
reach the Senate floor very soon.
A lot less controversial to everyone except organized crime
figures is the Bank Secrecy Act. That Act provides valuable
support to law enforcement officers in their investigations of
the financial aspects of crime.
As you may be aware, the statute requires that:
banks and other financial institutions report
unusual currency transactions in excess of $10,000
and maintain certain basic records;
travelers and others report the importation or
exportation of currency and other bearer instruments
in excess of $5,000; and
all

U.S. citizens file reports concerning the
ownership or control of foreign financial accounts.

That Act assigns the responsibilities for compliance to the
Secretary of the Treasury, and he has delegated them, in turn, to
my office.

-4For many years prior to the passage of the Act in 1970,
Federal law enforcement officials had been frustrated by the use
of secret foreign bank accounts to conceal the financial
activities of sophisticated criminals. They were unable to gain
access to the foreign records of international transactions, and
U.S. bank records were often inadequate. The Bank Secrecy Act
was intended to help overcome some of these obstacles and to
deter the use of foreign banks to facilitate crime in the United
States.
All of the Federal bank supervisory agencies, the Securities
and Exchange Commission, the Customs Service, as well as the
Internal Revenue Service, have responsibilities for enforcing the
Act. So, as you can see, I have had a lot of help.
We believe that the Act has been a major factor in the fight
against white collar crime and political and commercial
corruption.
For example, during the 12 month period that ended on June
30 of this year, we provided Federal drug enforcement
investigators with more than 1,700 currency-transaction reports
covering more than $200 million. Many of them described deposits
of currency totaling hundreds of thousands of dollars. I
understand that, in some instances, they were delivered ito the
bank in cardboard boxes by young men in T-shirts and blue jeans.
The currency transaction reports have been valuable in other
ways, too. Each one is screened by the IRS, and a number of them
have been used by the Department of Justice and Congressional
investigators.
The Customs Service has had increasing success in using the
Act to make cases against drug traffickers and other criminals.
For example, in one case, a joint investigation by Customs,
the Drug Enforcement Administration, and foreign police, Customs
seized 2,000 pounds of hashish, $19,000 in currency, and $130,000
in bank drafts. Further investigation disclosed other reporting
violations and resulted in freezing more than $800,000 in various
bank accounts. Three of the defendants were fined $500,000 each,
the maximum amount possible under the Bank Secrecy Act, and given
substantial jail terms.
We plan to increase our efforts to improve the
implementation of the Act so that it will be even more helpful to
other Federal law enforcement and regulatory agencies.
In addition to the Bank Secrecy Act, Customs is also
involved in enforcing various economic embargoes, guarding the
coun
weapo:
declaring _,
,
_„
.,,.
__
Customs Service processed more than 263 million persons, 77

-5million vehicles, 154 thousand ships, and 370 thousand aircraft
arriving i n the United States. The Service collected a record $6
billion in duty and taxes ^and seized almost $1.2 million worth of
merchandise including illicit drugs.
One of the challenges for those who work at Customs is the
sophistication of those who seek to break the laws. Today, we
are confronted with smugglers armed with modern electronic
devices and up-to-the-minute anti-detection techniques.
Nowhere is this more evident that on the isolated areas
along the U.S.-Mexican border, today's most fertile field for
narcotics smuggling and other crimes.
To combat this threat, Customs is beefing up its Air Support
Unit with some of Uncle Sam's most sophisticated and effective
avionics.
Moves are being made to implement a unique agreement between
our agency and the Air Force under which the intercept capability
of the Air Force Airborne Warning Control System (AWACS) will be
made available to the Customs Air Unit pursuing modern,
low-flying smuggler aircraft.
Our Air Unit is already using NORAD, the North American
Radar Defense/FAA long-range radar system through the cooperation
of the Federal Aviation Administration.
In addition, a first-class communications line provides us
with constant referral information on gun running and other
neutrality violations closely associated with the smuggling of
narcotics.
In a recent classic case of "guns for dope," four Texans
were arrested in Tuxpan, Vera Cruz, Mexico, leading to the
further arrest and indictment of seven defendants. Through the
cooperation of Mexican officials, U.S. Customs, and the Bureau of
Alcohol, Tobacco and Firearms, nine weapons, intended to be
traded for marijuana were seized.
By improving the efficiency of our interdiction efforts on
the border, we feel we can force smugglers to come through legal
ports of entry where we have more manpower to assist in their
interdiction.
Looking further ahead, I see tomorrow's Customs inspectors
operating, not only with expanded enforcement, communications,
and interception capabilities, but also with ingenious new
technology. This will include hand-held devices to detect drugs,
explosives, gems, and other contraband on the person of would-be
smugglers; advanced x-ray machines that develop layers of images
which equate to a 100 percent search, and a satellite
communications system connecting the entire Customs network with
data and voice channels. By the 1980's, I predict, we will have
down-looking radar on our interceptor aircraft, enabling one
Customs plane to screen the entire Mexican border.

-6As you can see, enforcement of the laws of our country is
complex as the ingenious schemes concocted by those who break
them. Sometimes we feel like so many greyhounds endlessly
pursuing a mechanical rabbit. We don't always catch it, but
chase we must.
I hope I've been able to give you some idea of Treasury's
law-enforcement responsibilities and operations, and I'll be
happy to answer any questions you may have.
Thank you.
O00O

FOR IMMEDIATE RELEASE

September 14, 1978

DANIEL I. HALPERIN APPOINTED
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
Secretary of the Treasury W. Michael Blumenthal today
announced the appointment of Daniel I. Halperin as Deputy
Assistant Secretary of the Treasury for Tax Policy. The
appointment is effective August 22, 19 78.
Mr. Halperin serves as deputy to Assistant Secretary
Donald C. Lubick, who has principal responsibility for formulation and execution of United States domestic and
international tax policies.
Mr. Halperin, 41, has been serving as Tax Legislative
Counsel since June 7, 19 77^ Prior to joining the Treasury
Department, he had been Professor of Law at the University
of Pennsylvania since 1970.
Mr. Halperin previously had served in the Treasury
Department, Office of the Tax Legislative Counsel, from
1967-70, and had been Deputy Tax Legislative Counsel from
1969-70. Before joining the government, Mr. Halperin had
been an Associate in a New York law firm.
A native of Brooklyn, New York, Mr. Halperin attended
the City College of New York, graduating magna cum laude
with the B.B.A. degree in 1957. He received his law degree
from Harvard Law School in 19 61, graduating magna cum laude.
Mr. Halperin has published a number of articles and has
been a frequent speaker in the field of Federal taxation.
Mr. Halperin is married to the former Marcia Hellman of
Beacon,"New York. They have three children and reside in
the District of Columbia.

#

B-1167

FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
September 15, 1978
STATEMENT OF
DANIEL I. HALPERIN
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON MISCELLANEOUS REVENUE MEASURES
OF THE COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views
of the Treasury Department on the four miscellaneous bills
under current consideration by the Subcommittee. The Treasury
Department position on each of these bills is summarized in
Exhibit A to this statement.
H.R. 13977 (sponsors of cooperative housing)
Under this bill, the sponsor of cooperative housing may,
under certain circumstances, be considered a tenant-stockholder
in the cooperative housing corporation even though he does not
have an unrestricted right to occupy a unit in the residence.
In general, section 216 of the Code allows a tenant-stockholder
in a cooperative housing corporation to obtain an allocable
portion of the deductions for taxes and interest which are
formally the obligation of the cooperative housing corporation.
One of the requirements of section 216 is that 80 percent of
the aross income of the corporation be derived from tenantstockholders. In general, the Code requires that a tenantstockholder be an individual who is entitled to occupy a house
or apartment in a building owned by the cooperative housing
corporation.
It has been recognized in the past that this rule limits
the ability of tenant-stockholders to obtain financing for
their cooperative units. If a bank which lends to a purchaser
B-1168

- 2 of stock in a cooperative housing corporation were forced to
foreclose on the stock, it could not qualify as a tenantstockholder because it is not an individual. Accordingly,
in the 1976 Tax Reform Act, section 216(b) (5) was added to
the Code to allow a bank or other lending institution which
acquires stock by foreclosure to be treated as a tenantstockholder for a period not to exceed three years from the
date of acquisition. H.R. 13977 extends this rule to the
sponsor of a cooperative housing project. Such an extension
is appropriate. However, the extension, unlike the provision
relating to banks and lending institutions, does not provide
a three-year time limit on the treatment of the developer as
a tenant-stockholder. Such a time limit is needed so that
the relaxation of the definition of tenant-stockholder does
not upset the general structure of cooperative housing
corporations as corporations in which the stockholders are
also the residents of the cooperative housing. Accordingly,
we would recommend that a three-year time limit be added to
this provision.
H.R. 12982 (withholding on sick pay and disability retirement
benefits)
H.R. 12982 is a bill which improves the administration
of the tax laws both for the IRS and for taxpayers. Under
current law, there is no requirement that a third party withhold on payments made under sick pay and disability retirement
plans. While this was less of a problem when payments under
such plans were not fully taxable, the change of their status
as a result of the Tax Reform Act of 1976 makes it appropriate
that there be withholding on such payments. Under the proposal,
withholding by third parties on sick pay will be on the same
basis as withholding by employers on wage payments. Since
sick pay is now fully taxable, and the taxpayer will generally
be earning money throughout the full year, this is an appropriate result. On the other hand, the bill provides for
withholding by third parties at a 10 percent rate when the
taxpayer receives disability retirement benefits. We believe
this is appropriate because disability retirement benefits
are not fully taxable. It would also be appropriate to have
reduced withholding where the employer was making disability
retirement benefit payments. In this connection, we note a
more general issue. We believe the IRS should be given

- 3more administrative flexibility to promulgate exceptions
to the withholding tables and to make changes in the withholding tables without the need for specific legislation.
This concern was reflected in H.R. 12078, which embodied
the President's tax reform proposals (see section 211(c) of
that bill). We continue to believe that such flexibility
should be given to the IRS.
H.R. 13732 (advance payments accrued by life-care communities)
H.R. 13732 raises a thorny issue. Certain life-care
communities for older persons receive lump-sum payments from
residents when the residents enter the life-care community.
Those amounts are determined, in part, by the life expectancy
of the person entering the life-care community. The monthly
payments that must be made by the residents of the community
thereafter are reduced as a result of the initial lump-sum
payment.
Under the tax law, an accrual method taxpayer who
operates a life-care community must include the full lump-sum
payment in income. Under financial accounting practices,
this amount would not necessarily be included at once in the
taxpayer's income since it relates to care which will be
provided over the remaining life of the resident. This
reflects a general difference between tax and financial
accounting which has been developed in a number of Supreme
Court decisions. Because the tax laws embody a pay-as-you-go
tax collection system, it is particularly important that
income be reported where a taxpayer has received an actual
cash payment. Otherwise, the funds may be dissipated and
there will be no money available to pay the tax.
It has been argued that the rules which include the full
lump-sum payment in income create hardships for taxpayers.
However, we believe that any solution to their problem must
be made in the context of a general consideration of the
broad issue of deferral of income when cash prepayments are
received. We have discussed with this Committee over the
past several months a number of issues which generally affect
the timing of income and deductions and conformity between
financial and tax accounting. As we have indicated, we expect
to undertake a review of this area shortly.

- 4 H.R. 13294 (transfer of proven oil or gas properties to a
wholly-owned corporation)
The fourth bill for your consideration today involves
the transfer by an individual of a proven oil or gas property
to a wholly-owned corporation. In general, a transferee of
a proven oil or gas property is not permitted to take percentage depletion. However, under current law, when a
proven oil or gas property is transferred to a controlled
corporation, the corporation generally can take percentage
depletion. This rule does not apply, though, when an
individual transfers the proven oil or gas property to a
wholly-owned corporation.
The legislation before you would allow the benefits of
percentage depletion to the controlled corporation as long
as all the stock of the corporation is owned by the individual
who transfers the oil or gas property to the corporation.
Although section 613A of the Code was drafted to limit the
proliferation of the use of percentage depletion for
oil and gas, we believe a properly circumscribed rule of
this nature is acceptable. Since corporations are permitted
to transfer oil or gas properties to controlled corporations,
it is appropriate to provide similar rules for individuals.
We do believe, though, that the bill should be amended to
indicate explicitly that the transfer qualifies under the
general rule in the Code which deals with transfers to
controlled corporations, section 351. Otherwise, this rule
might apply even where an individual sells oil and gas
property to a wholly-owned corporation or otherwise engages
in a transaction as to which tax attributes are not normally
transferred. In addition, we believe the bill as drafted
may contain some technical problems which we think can be
worked out with the staff of the Joint Committee.
I would be glad to answer any questions you may have
for me at this time.
o 0o

EXHIBIT A

H.R. 12982

-

Support.

H.R. 13294 - Support, if the provisions of section 351
of the Code are complied with in the
transaction.
H.R. 13732

-

Oppose.

H.R. 13977 - Support, if the provision applies only for
three years after the purchase or foreclosure.

Apartment of theJREf\$URY
IASHIHGTON, D.C. 20220

| | I

TELEPHONE 566-2041

FOR IxMMEDlATE RELEASE

September 15, 1978

JOHN M. SAMUELS APPOINTED
TAX LEGISLATIVE COUNSEL AT TREASURY
Secretary of the Treasury W. Michael Blumenthal
today announced the appointment of John M. Samuels as
Tax Legislative Counsel. He replaces Daniel I. Halperin,
who earlier this week was appointed Deputy Assistant
Secretary of the Treasury for Tax Policy.
Mr. Samuels, 33, has been serving as Deputy Tax
Legislative Counsel since August 29, 1977, and had been
a special consultant to the Treasury Department since
June 1977. Prior to joining Treasury, he had been a
partner in the New York law firm of Dewey, Ballantine,
Bushby, Palmer & Wood. Mr. Samuels also was an adjunct
professor of law at New York University.
As Tax Legislative Counsel, Mr. Samuels will be
principal legal advisor to Assistant Secretary for Tax
Policy Donald C. Lubick in the formulation of policy,
legislation, and regulations on domestic tax matters.
The Office he heads is one of four major units under
the Assistant Secretary for Tax Policy. The other units
are the Office of International Tax Counsel, which has
corresponding responsibilities for international tax
matters; the Office of Tax Analysis; and the Office of
Industrial Economics.
A native of Hollywood, Florida, Mr. Samuels received
a B.A. degree from Vanderbilt University in 1966 and a
J.D. degree from the University of Chicago Law School in
1969.
He received an LL.M. (in Taxation) degree from
New York University School of Law in 1975.
o
0
o

B-1169

Treas.
HJ U.S. Dept. of the Treasury
.A13P4 Press releases.
V.216

~^