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parlmenloftheJREASURY
HINGTON,D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
July 2, 1979
Contact:
George G. Ross
202/566-2356
TREASURY ISSUES POSITION PAPER ON NEED TO
REVISE USA/WEST GERMANY INCOME TAX TREATY
The Treasury Department today made available the
text of a United States position paper on the need for
a revision of the income tax convention between the
United States and the Federal Republic of Germany, to
take account of the West German corporate tax reform
that went into effect in 1977.
The position paper was prepared in the context of
ongoingo• income:- tax treaty discussions between the USA
and West Germany, and was sent to tax policy officials
in the German Finance Ministry. Tax policy officials
in both countries have agreed to make the paper public
in order to give interested parties an opportunity to
comment.
Persons interested in offering comments on^the
attached position paper are invited to send their comments in writing to H. David Rosenbloom, Internationa__
Tax Counsel, U. S. Department of the Treasury, Room
3064 Main Treasury Building, Washington, D. C. 20220.
Written comments should be received by August 17,
1979, so that they may be taken into account in preparation for the next round of discussions with West
Germany, now scheduled for mid-September.
0
B-1703
THE NEED TO AMEND THE INCOME TAX CONVENTION
BETWEEN THE UNITED STATES AND GERMANY BECAUSE OF THE
1977 GERMAN TAX REFORM — THE VIEW OF THE UNITED STATES
-2-
Introduction
The Convention between the United States and Germany for
the Avoidance of Double Taxation with Respect to Taxes on
Income ("the Convention") was last amended in 1965. In 1977,
Germany substantially modified
porate profits.
its system of taxing cor-
In the view of the United States the 1977
changes in German domestic law warrant further amendment of
the Convention.
In 1965, Germany taxed corporate profits under a "splitrate" system.
Profits not distributed by a corporation were
subject to German federal income tax cjt a rate of 51 percent.
Distributed profits bore federal tax at a rate of 15
percent.
Because of the so-called "shadow effect" - the
rule that taxes on distributed profits were themselves considered undistributed profits - the effective rate of German
federal corporate tax on distributed profits was in fact
23.5 percent.
When the German municipal trade tax was taken
into account, at the then representative figure of 12.3
percent, the effective rates of total German tax on undistributed and distributed profits were approximately 57 percent and approximately 33 percent, respectively.
The Convention as amended in 1965 provides in general
for a maximum withholding tax rate of 15 percent on
dividends.
Prior to the 1965 amendments, the Convention
dealt only with direct investment dividends, providing for
a maximum 15 percent rate.
-3The German Tax Reform that went into effect in 1977 retained the split-rate feature of the German system but made
two important changes.
First, the federal corporate rate
was increased, in the case of distributed profits, from 23.5
percent to 36 percent and, in the case of undistributed
profits, from 51 percent to 56 percent.
was eliminated.
The shadow effect
Taking the trade tax into account - at the
current representative rate of 15 percent - the total German
corporate tax burden is now 45.6 percent on distributed
profits and 62.6 percent on undistributed profits.
The second important aspect of the German Reform was the
introduction of an imputation credit.
A German resident
receiving a dividend from a German corporation increases, or
"grosses up," his taxable income by the amount of federal
corporate income tax paid by the corporation with respect to
the distributed profits.
The shareholder may then credit an
amount equal to the gross-up against his individual German
income tax liability.
If the individual's income tax lia-
bility is less than the gross-up, he receives a refund of
the difference from the German government.
The refundable imputation credit is unavailable, under
German domestic law, to investors who are not German residents.
It is this aspect of the German Reform, in partic-
ular, that leads the United States to seek amendment of the
Convention.
Effects on United States Investors
The German Reform has had, and may be expected to continue to have, significant adverse consequences for United
States investment in Germany.
As a result of the Reform:
(1) U.S. owned German corporations do not have important
-4options for capital expansion that are available to German
owned German corporations; (2) U.S. shareholders are asked
to bear a substantially higher German tax burden on dividends from German corporations than German resident shareholders; and
(3) the German income tax is generating sub-
stantial excess foreign tax credits.
Point (3) is, of necessity, vital to the investment
decisions of U.S. enterprises.
As a result of the German
Reform, the German tax burden on dividend
income now exceeds
normal international standards by a substantial measure.
The 1977 Reform increased the total German corporate tax on
distributed profits by 38 percent
(12.6 points) and the
total German corporate tax on undistributed profits by about
10 percent
(5.6 points).
Even a distribution of one hundred
percent of a German corporation's after-tax profits (when
the German tax burden is lowest) bears a German tax burden
of 53.8 percent, and hence generates 7.8 points of foreign
tax credits in excess of the current U.S. corporate rate.
Prior to the Reform a similar distribution did not produce
any excess credits.
The level of German tax might not, by itself, lead the
United States to seek amendment of the Convention if that
tax were applied equally to all investors in Germany.
But
it is clear that the German burden on U.S. investment is
significantly higher than the German burden on German investment.
Under Germany's imputation system the federal
corporate tax on distributed profits generates a refundable
credit for German resident shareholders.
With respect to
United States shareholders, the German corporate tax does
not have this characteristic; it is simply a final tax at
-5the corporate level.
Thus, not only is United States in-
vestment in Germany subject to substantially higher taxation
as a result of the German Tax Reform, but it is subject to a
burden that German investment is not required to bear.
The denial of the imputation credit to U.S. investors
has important economic implications for United States
investment
in Germany.
After the Reform, a German owned
German corporation can give its shareholders the same
after-tax return as prior to the Reform with a lower rate of
distributions, because each unit of profits distributed is
worth more to the German resident recipient
(by reason of
the imputation credit) than it was prior to the Reform.
As
a result, the German owned corporation can retain more
profits for corporate expansion.
The German corporation
owned by U.S. residents does not have similar possibilities.
This effect of the German Reform is illustrated by the
following example.
Assume three German corporations
—
Corporation A has only German resident individual shareholders; Corporation B is wholly owned by U.S. resident
individual shareholders; Corporation C is wholly owned by a
U.S. parent corporation which, in turn, is wholly owned by
U.S. resident individual shareholders.
In each case, it is
desired to leave the ultimate shareholders with a net dividend of 200 after all taxes, out of pre-tax German corporate
profits of 1000.
Individuals in both Germany and the United
States are assumed to be subject to an income tax rate of 36
percent on dividend
income.
-6Corporation A declares a dividend of 200.
Because of
the imputation credit, there is no additional tax at the 1
shareholder level.
The German shareholder is left with a
net dividend of 200.
Corporation A retains 236.50.
Corporation B is wholly owned by U.S. individuals and
therefore cannot rely upon the possibility of reinvestments.
It must retain the funds it needs for expansion.
At the
same time, because Corporation B has no access to the
imputation credit, it must increase its distributions to
allow its shareholders to maintain a rate of return comparable to that obtained by shareholders of Corporation A.
Corporation B therefore declares a dividend of 312.50.
retains 159.16.
It
Corporation C declares a maximum dividend of 544. If
there were no German withholding tax with respect to this
dividend, the U.S. parent corporation would have 540 to
distribute and/or reinvest
4).
(after paying a small U.S. tax of
In order for the parent to leave its shareholders with
an after-tax dividend of 200, it must distribute 312.50.
The U.S. parent therefore would have 227.50 to reinvest in
Corporation C.
Assuming a German withholding tax of 15 percent on the
dividend from Corporation C, the situation is more adverse.
The withholding tax liability is 81.60, and the U.S. parent
must still distribute 312.50 to leave its shareholders with
an after-tax dividend of 200.
The U.S. parent therefore has
only 149.90 to reinvest in Corporation C.
Thus, if the ultimate U.S. investors in Corporations B
and C are to receive the same net dividend as the German
shareholders of Corporation A, there is substantially less
-7available for capital expansion by Corporations B and C than
is available to Corporation A, even assuming, in the case of
Corporation C, that the U.S. parent reinvests all of its
undistributed profits in Corporation C.
Corp. A
Corp. B
(15 percent
German withholding)
Corp. C
(no German
withholding)
Corp. C
(15 percent German
withholding)
German Corporation
Pre-tax profits 1,000.00
Trade tax
Federal taxable income
Dividend declared
Withholding tax
Income taxable at 36%
tax on'distr ibuted profits
Income taxable at 56%
Tax on retained profits
Total federal corporate tax
Retained profits
150.00
850.00
200.00
312.50
112.50
537.50
301.00
413.50
236.50
1,000.00
150.00
850.00
312.50
46.88
488.28
175.78
361.72
202.56
378.34
159.16
1,000.00
150.00
850.00
544.00
850.00
306.00
000.00
150.00
850.00
544.00
81.60
850.00
306.00
306.00
306.00
544.00
462.40
81.60
456..00
1,000..00
456.00
1,000.00
German Shareholder
Dividend received
Gross-up for distributed
profits tax
Taxable income
German Individual income tax
liability (36%)
Credit for distributed
profits tax
Net tax
Net dividend
200.00
112.50
312.50
112.50
112.50
200.00
U.S. Parent
Dividend received
German withholding tax
Gross-up for German
corporate level taxes
Taxable income
U.S. corporate tax
liability (46%)
Poreign tax credit
•Jet U.S. tax (excess foreign
tax credit)
fet income
Dividend declared
Available for reinvestment
460,.00
460.00
456..00
537.60
4.,00
540.,00
312.,50
227. 50
(77.60)
462.40
312.50
149.90
J.S. Individual Shareholder
Dividend received
Serman withholding tax
taxable income
J.S. individual income
tax (36%)
'et dividend
let individual shareholder
income after tax
amount retained or reinvested
in German corporation
265.62
46.88
312.50
312.50
312.50
312.50
312.50
112.50
200.00
112.50
200.00
112.50
200.00
200.00
200.00
200.00
200.00
236.50
159.16
227.50
149.90
(
-9-
It is true that in this example Corporation A pays a
higher amount of German taxes than Corporations B or C,
because amounts retained by Corporation A to finance expansion are taxed at the high rate of 56 percent.
The amounts
distributed by Corporations B and C benefit from the German
split rate.
That is not, however, the point.
The point is
that Corporation A can retain more profits than can be retained by Corporation B or reinvested
in Corporation C, and
yet Corporation A can give its shareholders the same return
on investment received by the ultimate investors in Corporations B and C.
If we assume (as is realistic) that the ultimate shareholders of all three corporations seek a comparable return
on their investments, there is no possibility of retaining
or reinvesting in Corporations B or C, at any tax price, the
amount that can be retained by Corporation A.
In summary,
because the German Reform increased taxes on distributed
profits (and thus decreased after-tax profits), the U.S.
owned German companies have fewer after-tax profits than
before; and because they have no access to the imputation
credit, they must distribute a larger percentage of these
profits than their German owned counterpart in order to provide equivalent benefits to their shareholders.
It could be argued that the fault here is that of the
United States, which does not allow imputation credits for
amounts distributed by Corporation B or by the parent of
Corporation C to their shareholders.
two responses to this argument.
There are, however,
First, even if the United
States did have an imputation system, it would doubtless not
wish to allow full imputation credits for taxes collected by
-10another country. Germany does not allow such a flow-through
of foreign taxes under its imputation system. Second, and
more fundamentally, we must deal with the world as it is.
The United States is not likely to adopt an imputation
system. The hard fact remains that Germany's 1977 Tax
Reform has seriously prejudiced U.S. investment in Germany,
for the reasons just described.
Moreover, just as the German owned German corporation
can maintain its level of distributions while retaining a
greater amount for expansion, it can also keep retentions at
the pre-Reform level while increasing the amount of distributions. It thus possesses another option for expansion
not available to U.S. owned German corporations: increasing
after-tax dividend flows with a view to attracting new share
capital. If the benefits of owning shares increase, it can
be expected that German residents will manifest an increased
interest in investing in new share capital. Indeed, this is
a primary objective of the German Reform. A German corporation that cannot pass the imputation credit on to its
shareholders - for example, a German corporation owned by
U.S. residents - does not have the same opportunity for
capital expansion.
In short, whether a German owned German corporation
distributes more or less than it did prior to the Reform,
it has a power to increase corporate capital which is not
available to its American owned counterparts.
The United States fully recognizes that the profits of a
German corporation bear total German corporate level taxes
of 62.6 percent as long as they remain in corporate solution, even when a distribution is made to a German parent
corporation.
This burden appears heavier than the German
-11burden imposed on profits distributed to an American parent
by a German subsidiary: 53.8 percent in the case of a 100
percent distribution (assuming a withholding tax of 15 percent) .
There are, however, two flaws in this comparison which
make it meaningless when considering the issue of competitive equality. First, the comparison wholly ignores the
reduction in tax when profits are distributed. Of the 62.6
points of tax in the case of the German parent corporation,
17 points ((85 x .56) - (85 x .36) = 17) represent a temporary tax imposed only as long as profits remain in corporate
solution, whereas all 53.8 points of tax in the U.S. direct
investment case represents a final liability. When the
German parent redistributes profits received from its subsidiary to its individual shareholders, the parent's net
federal corporate income tax burden of 17 with respect to
those profits is, in effect, reduced to zero. A similar
reduction in German tax does not apply when a U.S. parent
makes a redistribution to its shareholders. A temporary tax
cannot be fairly compared with a permanent tax.
Second, the comparison fails to take account of the
value of 30.6 points (85 x .36 = 30.6) of German tax in the
hands of the ultimate German resident shareholder. The
right of a German individual shareholder to claim a credit
for this portion of the tax attaches to intercorporate distributions and is not lost even if profits are redistributed
through several tiers of German corporations and even if one
of these corporations retains profits for many years. This
compares very unfavorably with the situation of the U.S.
parent corporation, which has no possibility of giving its
shareholders such a credit, even if amounts received from a
German subsidiary are redistributed immediately.
-12United States Proposal To Amend the Convention
1. Compensation for the Imputation Credit
The United States proposes that the Convention be
amended to align the different tax burdens currently imposed
by Germany on residents and nonresidents and to compensate
for the competitive inequality created by the German Tax
Reform. Of independent concern is the fact that the higher
German tax rates enacted as part of the Reform create excess
foreign tax credits for U.S. companies when the German withholding tax on dividends is taken into account.
It is not
necessary, however, to make separate adjustments to the
Convention for each of these points.
An appropriate adjust-
ment for competitive and tax inequalities will also serve to
bring the German tax burden closer to the available United
States foreign tax credit.
The most direct, and most appropriate, adjustment would
be for Germany to provide United States shareholders with
benefits commensurate with the imputation credit now available only to German resident shareholders.
This would mean
granting United States shareholders refunds of the German
federal corporate tax on distributed profits.
In the case
of portfolio investment, the refund should be the full 36
percent tax.
In the case of direct investment, it would be appropriate to gear the refund to the amount expected to be
redistributed, on average, by the U.S. parent corporation to
its shareholders.
Assuming
(as appears realistic) that
roughly one-half of dividends received from German corporations are redistributed, the refund should be one-half of
-13the German federal tax burden on corporate profits.
Since
the split-rate feature of Germany's system already produces
a benefit of 20 percentage points, a refund of an additional
8 percentage points would give relief to the extent of onehalf of the German federal corporate rate of 56 percent on
undistributed profits.
If Germany were to agree to make such refunds, withholding taxes could be fixed for the purpose for which they are
intended: as a surrogate for net basis taxation of the nonresident shareholder.
If appropriate refunds are made, the
rate of reciprocal withholding taxes is negotiable, although
the United States would wish to avoid excess credits.
The United States understands that Germany finds it
difficult to consider making such refunds.
Although we
believe refunds are the fairest and most appropriate
solution to the problems discussed above, we believe that
another possibility exists for amending the Convention namely, a reduction in the German withholding tax on
d ividends.
As a result of the German Tax Reform, individual German
resident shareholders pay little if any German tax on
dividends from German companies.
The maximum marginal rate
of German individual income tax on distributed corporate
profits is 20 percent; the average is between zero and four
percent.
The rate of German withholding under the Con-
vention is generally 15 percent of gross dividend income.
This tax burden on nonresidents is greater than the German
burden on residents, because the 15 percent rate is imposed
on gross income, while the zero to four percent which the
average German individual shareholder pays is imposed on net
income, after personal allowances and deductible expenses.
-14There is, therefore, a substantially unequal German tax
burden for resident and non-resident
individual
shareholders.
The United States believes that its shareholders should
be treated fairly by the German tax authorities.
It is a
long-standing principle of international taxation that a
withholding tax on nonresidents should function as a
substitute for the tax burden imposed on residents.
is no reason to deviate from that principle here.
There
Since
the German imputation system functions, in effect, as a
virtual exemption for dividend income received by resident
individuals, the German withholding tax on U.S. portfolio
shareholders should be reduced to zero.
It follows, moreover, the German withholding tax on
direct investment dividends should also be reduced to zero.
International practice normally assigns a lower withholding
tax burden to such dividends than the burden on portfolio
dividends.
The OECD Model Convention takes this approach,
as does the U.S. Model Convention.
A lower tax on direct
investment dividends recognizes that a withholding tax is
inappropriate to the extent that funds remain in corporate
solution, and that only a portion of an intercorporate
distribution will be redistributed in any reasonably near
term to individuals.
Thus, to the extent that a withholding
tax on portfolio shareholders is justifiable, a similar tax
on direct investors may be justified as well (but at a
reduced rate).
In the case of Germany, however, there is no
justification for a withholding tax on portfolio shareholders, and there can therefore be no basis for a withholding tax on direct investment dividends.
-152.
The Reinvestment Problem
In 1965 Germany noted that its split-rate system could
create an incentive for a German subsidiary of a U.S.
company to make the maximum possible distributions, even
when profits were intended to be reinvested
sidiary.
in the sub-
The fact that reinvested profits would bear a
lower tax burden than retained profits was perceived as
placing German owned German corporations at a competitive
disadvantage. The 1965 amendments to the Convention
addressed this reinvestment problem with a special rule:
under defined circumstances, when a reinvestment was deemed
to occur, Germany would be entitled to impose a withholding
tax of 25 percent, rather than the normal 15 percent.
This
increase in German tax burden would reduce the incentive to
distribute and reinvest and bring the burden on reinvested
profits more nearly into line with the burden on profits
retained by a German owned corporation.
In a July 12, 1978 report, a group of German companies
stated that "any reduction of the German dividend tax below
the [statutory] rate of 25 percent is a concession which, if
the dividends are reinvested, can result in a substantial
fiscal distortion of competition to the disadvantage of
German investors. . . .
A large number of companies there-
fore regard it as unjustifiable to go beyond the 15 percent
rate already planned by the Federal Government.
This fear
would only be dispelled if the arrangement arrived at in the
treaty guaranteed that no further distortion of competition
could take place."
At a November 20, 1978 meeting the reinvestment problem
was discussed by the Board of the Federation of German
Industry ("BDI").
A translation of the summary of the BDI
-16presentation states that "representatives of domestic German
companies are afraid that such a generous mitigation [to
zero or at least 5 percent] of the withholding tax on dividends might lead to a competitive advantage for foreign
companies in the German market."
It was recommended that
the executives of the BDI agree, among other things, that
qualified minority holdings in German companies be subject
to a 10 percent withholding tax burden.
In reviewing these documents it appears that some
segments of German industry continue to believe that: 1)
U.S. owned German companies can and regularly do distribute
all profits to their parents, which can and regularly do
then reinvest such profits in Germany; 2) such reinvested
profits receive the benefit of the lower tax burden on distributed profits by reason of the split-rate feature of the
German system; 3) this benefit creates a significant tax
advantage for U.S. owned entities over domestically owned
entities; 4) the cure for this reinvestment advantage lies
in subjecting all distributions to a high (15 or 10 percent)
withholding tax.
Under a split-rate system there can be an advantage in
distributing and reinvesting profits, as compared with retaining them.
And it is entirely possible that U.S. owned
German corporations are presently following a policy of
distributing most if not all of their profits.
There is,
however, no evidence to demonstrate that U.S. parent corporations are reinvesting most or all of the amounts distributed to them, and it seems doubtful that such a policy
would be in the best interests of the U.S. investor.
the first place, there are indications that U.S. owned
In
-incorporations in Germany represent relatively mature investments and are not expanding substantially.
In the
second place, it is unrealistic to suppose that the U.S.
shareholders of a U.S. controlled multinational entity would
allow the corporation complete freedom to reinvest, rather
than distribute, profits.
Finally, as the example discussed
on pages five to nine illustrates, U.S. parents of German
corporations must make larger distributions than their
German counterparts to meet the expectations of their
investors.
Compared both to the German counterpart and to
the pre-Reform situation, there is less after-tax profit
available for the U.S. parent to reinvest.
Thus, it is far from clear that the reinvestment advantage feared by German industry exists today in practice.
Indeed, even if Germany were to reduce its withholding tax
to zero, it is difficult to see the reinvestment advantage
that German companies fear.
Nevertheless, tax treaties are
by their nature long-term commitments and must take account
of future or potential problems.
It is in this spirit,
therefore, that we address the reinvestment question.
It appears to be true that the split-rate feature of the
German system, standing alone, would provide a U.S. parent
of a Germany subsidiary with a lower German tax burden on
reinvested profits than the German burden on profits retained for corporate expansion by a German owned company.
The appropriate solution to this question is not, however,
to subject all distributions - whether or not reinvested to a high withholding tax.
This suggestion makes the with-
holding tax a device to rectify a possible deficiency in the
corporate tax, and this is not the function of a withholding
tax.
Such a tax is intended to subject foreign recipients
-18of income to tax on a basis that is roughly comparable to
the taxation of domestic recipients of such income.
If
domestic recipients are taxed on dividend income very modestly or not at all, it is grossly unfair and unnecessary to
subject all foreign recipients to a high withholding tax
merely because some profits may be reinvested by some foreign recipients.
In 1965 — under a very different German tax system —
Germany and the United States perceived the special problem
created by reinvestments, and created a special rule to deal
with that problem.
Even though circumstances have changed
dramatically and the problem is not what it was before, the
United States is prepared to work with German tax authorities in the same spirit of cooperation today.
We under-
stand that drafting may present some difficulties, but we do
not believe the problems are insurmountable and in any event
they do not justify penalizing parties who do not reinvest
at all.
3. Adjustments to United States Withholding Taxes
The Convention presently authorizes the United States to
impose a withholding tax of 15 percent on dividends to
German investors, both portfolio and direct.
United States
taxation has changed little since the Convention was last
amended in 1965.
Perhaps the most significant change has
been a recent reduction in the rate of corporate taxation
from 48 to 46 percent.
It would appear that no adjustment is warranted with
respect to the U.S. withholding rate of 15 percent insofar
as German portfolio investors in the United States are
-19concerned. However, since the United States accepts the 5
percent rate proposed by the OECD for direct investment
dividends, a reduction to this level might be acceptable.
Conclusion
It is undeniable that the German Tax Reform created
advantages for capital expansion by German owned German companies.
That was the intent of the Reform.
The concomitant
result, however, was that U.S. owned German companies were
disadvantaged
parts.
in comparison to their German owned counter-
The United States believes that an appropriate
amendment to the Convention rectifying this inequality is
necessary.
If the United States were to accede to an amendment that
did not involve refunds comparable to the imputation credits
given German shareholders, the United States would in effect
be deferring to the goals of the German Tax Reform. We
would consider this approach, even though it would not fully
restore the situation existing prior to the 1977 German
Reform, if Germany were to accord a measure of compensation
to U.S. shareholders for the competitive disadvantage which
they suffer.
A reduction in German withholding taxes would
constitute such compensation.
Concern over the reinvestment issue should not be permitted to blur analysis of the point at hand.
ing all the assumptions on which the supposed
Even acceptreinvestment
advantage rests, it is unfair and inappropriate to impose a
higher withholding burden on all distributions because of
the possibility that some reinvestment may occur.
investment
The re-
issue is a discrete matter, separate from the
-20question of the appropriate level of withholding, and a
solution should be designed to deal specifically with th
issue.
The matters discussed in this memorandum must be
addressed and resolved at an early date.
It is contrary
the common interest of our two countries to permit these
contentious problems to fester.
The United States is ea
to work with German tax authorities to achieve mutually
acceptable solutions.
mmntottheTREASUffl
TELEPHONE 566-2941
YGTON,D,C, 10220
July 2, 1979
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
t
Tenders for $2,901 million of 13-week bills and for $3,000 million of
26-week bills, both to be issued on July 5, 1979,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
26-week bills
maturing January 3, 1980
Discount Investment
Rate 1/
Price
Rate
13-week bills
maturing October 4, 1979
Discount Investment
Rate
Rate 1/
Price
95.526 8.850%
8.879%
95.511
8.867%
95.517
9.25%
^1%151- 8.897%
High
9.35%
Low
97.727
8.992%
9.33%
Average
97.733
8.968%
a/ Excepting 2 tenders totaling $50,000.
9.42%
9.45%
9.44%
Tenders at the low price for the 13-week bills were allotted 63%.
Tenders at the low price for the 26-week bills were allotted 54%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
Location
38,845 :
$
38,845 $
Boston
2,306,890 :
3,698,340
New York
20,445 '
20,445
Philadelphia
29,045 '•
29,045
Cleveland
22,660 :
22,660
Richmond
33,295 :
33,295
Atlanta
133,125
243,125
Chicago
19,240
40,240
St. Louis
16,185 s
16,185
Minneapolis
26,295 :
26,295
Kansas City
11,455 :
11,455
Dallas
220,120
245,120
San Francisco
22,900 :
22,900
Treasury
Received
$
77,305
4,506,945
16,510
26,365
33,790
28,540
218,110
36,485
18,255
26,440
12,045
277,075
24,380
Accepted
$
27,305
2,650,345
16,510
14,365
33,790
27,030
42,110
12,485
16,415
25,440
10,045
99,875
24,380
$4,447,950
$2,900,500
$5,302,245
$3,000,095
Competitive
Noncompetitive
$2,792,915
435,500
$1,245,465
435,500 :
$3,811,470
350,375
$1,509,320
350,375
Subtotal, Public
$3,228,415
$1,680,965' :
$4,161,845
$1,859,695
Federal Reserve
and Foreign Official
Institutions
$1,219,535
$1,219,535
$1,140,400
$1,140,400
TOTALS
$4,447,950
$2,900,500 :
$5,302,245
$3,000,095
TOTALS
Type
^/Equivalent coupon-issue yield.
B-1704
:
FOR IMMEDIATE RELEASE
July 2, 1979
Contact: Alvin M. Hattal
202/566-8381
TREASURY STARTS COUNTERVAILING
DUTY INVESTIGATION ON CERTAIN
VALVES AND PARTS FROM ITALY
The Treasury Department has started an investigation into whether imports of certain valves and
parts thereof from Italy are being subsidized.
A preliminary determination in this case must be
made by October 18, 1979, and a final determination by
April 18, 1980.
Imports of this merchandise amounted to about
$20.4-million in 1978.
The investigation follows receipt of a petition
alleging that manufacturers and/or exporters of this
merchandise receive benefits from the Government of
Italy.
The Countervailing Duty Law requires the Secretary
of the Treasury to collect an additional customs duty
equal to the subsidy paid on merchandise exported to
the United States.
Notice of this investigation will be published in
the Federal Register of July 3, 19 79.
o
B-1705
0
o
FOR RELEASE AT 12:00 NOON
July 3, 19 79
TREASURY»S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,900 million, to be issued July 12, 1979.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,926 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,900
million, representing an additional amount of bills dated
April 12, 1979,
and to mature October 11, 1979
(CUSIP No.
912793 2 Q 8 ) , originally issued in the amount of $3,018 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
July 12, 1979,
and to mature January 10, 1980
(CUSIP No.
912793 3L 8) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing July 12, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,384
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. 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, July 9, 1979.
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-1706
-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
• 9
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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding' bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
todecimals)
these
reservations,
tenders
for
each
respective
Didder
issue
(in three
for
will
$500,000
issues.
be accepted
or
of less
accepted
in without
full noncompetitive
at
competitive
stated
the weighted
price
bids
average
from
for the
any
price
one
-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on July 12, 1979,
in cash or other immediately available
funds or in Treasury bills maturing July 12, 1979.
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.
Under 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, 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.
JFFICE OF REVENUE SHARING
5r—0_fe
TELEPHONE 634-5248
WASHINGTON, DC. 20226
CONTACT:
ROBERT \i. CHILDERS
(202) 634-5248
July 9, 1979
FOR IMMEDIATE RELEASE
REVENUE SHARING FUNDS DISTRIBUTED
The Department of Treasury's Office of Revenue
Sharing (ORS) distributed "lore than $1.7 billion in
general revenue sharing payments today to 37,549
State and local governments.
Current legislation authorizes the Office of
Revenue Sharing to provide quarterly revenue sharing
payments to State and local governments through the
end of Federal fiscal year 1980.
30
B-1707
Ju
FOR IMMEDIATE RELEASE
lY 5>
1979
TREASURY REVISES RULES ON TAX & LOAN ACCOUNT REMITTANCES
The Department of the Treasury today announced revised procedures, effective next August 2, on remittance of tax and loan
deposits to ease the burden on small depositary institutions
handling $3 million or less in such funds yearly.
The action is being taken, through changes in Procedural
Instructions for Treasury Tax and Loan Depositaries, to relieve
a problem involving the unavailability of positive delivery systems for tax deposit information between Federal Reserve Banks
and small depositaries in outlying areas.
Two revisions to the provisions affecting those Remittance
Option depositaries will be:
First, for Class 2 -- the smallest Remittance Option depositaries — an exemption will be provided, within specified limits,
when calculating the amount of the analysis credits (i.e., late
fees) assessable as a result of tax deposit information arriving
at the Federal Reserve Bank later than the specified time deadlines.
This would be accomplished by establishing a rule which in
essence states that, when the average weekly balance of funds in
transit for more than one business day between the depositary and
the Federal Reserve Bank is $25,000 or less, the first $5,000 will
be exempt from the analysis credit (i.e., late fee) calculation.
The second revision is a change in the definition of Class 2
of the Remittance Option to include more depositaries in that
class. Currently, Class 2 is defined to include depositaries
which had less than $1.5 million in tax and loan credits during
calendar year 1978. The revision will include in that class all
Remittance Option depositaries which had tax and loan credits of
$3 million or less during calendar year 1978.
These changes are expected to affect over 8,000 of the
approximately 14,000 Treasury Tax and Loan Depositaries. It is
further expected that as many as 91 percent of the over 8,000
depositaries either will not be subjected to late fees or will
realize a partial offset of late fees.
Further details will be furnished to depositaries through
the Federal Reserve Banks in their Districts.
B-1708
o
o
o
FOR IMMEDIATE RELEASE
July 5, 1979
HARRY R. CLEMENTS NAMED DIRECTOR OF
BUREAU OF ENGRAVING AND PRINTING
Treasury Secretary W. Michael Blumenthal today
appointed Harry R. Clements as Director of the Bureau of
Engraving and Printing, effective July 1.5, 1979. He
succeeds Seymour Berry, who retired.
The Bureau, with a work force of 3,200 in the District
of Columbia, designs and produces U. S. currency, postage
stamps, public debt securities, and other financial and
security documents.
Mr. Clements has had a 21-year career in the aerospace
and transportation systems industry involving executive
responsibilities in. engineering, manufacturing, new business development, administration and general management.
Before joining the Treasury Department in January 1979
as Deputy Director of BEP, Mr. Clements was chief executive
officer of National Industries for the Severely Handicapped,
a private, nonprofit organization that provides technical
and business assistance to sheltered workshops.
Mr. Clements served as Chief of the Division of Special
Industries at the Occupational Safety & Health Administration from 1972 to 1973 and as Deputy Commissioner,
Rehabilitation Services Administration, at the Department
of Health, Education and Welfare, from 1974 to 1975.
Mr, Clements holds Bachelor of Science and Master of
Science degrees in engineering from Wichita State University and has had additional graduate-level training in
business administration and government operations.
Mr. Clements and his wife, Patricia, live in
Annandale, Virginia. They have six children.
o
0-m<>1
0
o
STATEMENT OF EMIL M. SUNLEY
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TAX POLICY (TAX ANALYSIS)
ON TAX EXPENDITURES FOR HEALTH CARE
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
OF THE COMMITTEE ON WAYS AND MEANS AND THE
TAX EXPENDITURE TASK FORCE OF THE HOUSE BUDGET COMMITTEE
JULY 9, 1979
Mr. Chairman and Interested Members:
I am pleased to appear here today to discuss
expenditures for health care that operate through the tax
system. The President's National Health Plan offers us new
ways of structuring Federal expenditures for health, and
therefore, it is especially appropriate that this
subcommittee and task force have undertaken a review of the
tax expenditure side of Federal health policy. My testimony
in part will summarize a recent Treasury research paper on
this subject (attached).
Over $11 billion of Federal income tax expenditures are
provided currently through the exclusion or deduction from
the income tax base of payments for certain medical expenses,
including premiums for insurance. These tax expenditures are
the principal programs of government assistance for the
purchase of medical care by the non-aged, non-poor
population.
Specifically, the tax system subsidizes the purchase of
medical care by means of provisions permitting (1) employer
contributions for health insurance premiums or other medical
payments for employees to be excluded from taxable income and
(2) certain medical expenses to be deducted from adjusted
gross income on individual income tax returns.
B-1710
-2The tax expenditure estimate of $11 billion relates to
the Federal income tax alone. There is a further tax
expenditure cost of about $2 billion to States with income
taxes. In addition, social security tax revenues are reduced
by about another $4 billion. In total, Federal and State
revenues are reduced by about $17 billion because certain
health expenditures are allowed to be excluded or deducted
from income and social security tax bases.
Like many tax expenditures, I am not sure that Congress,
if starting over, would determine that existing tax
expenditures for health care would be an optimal way of
providing either tax relief or assistance for purchasing
medical care. Current tax law in this area has resulted more
from a maintenance of past practice, or habit, than from a
process in which choices were made among means of subsidizing
expenditures for health care.
The Medical Deduction
No deduction for medical expenses existed until 1942.
During World War II, substantial numbers of citizens were
brought under the income tax and tax burdens were raised
significantly; it was felt that some relief from this heavier
tax burden should be granted to taxpayers with extraordinary
medical expenses. Consequently, deductions were allowed for
certain medical expenses exceeding a five percent floor. The
1951 Act and subsequent provisions effectively eliminated any
floor for medical expenses for the aged; in 1965, however,
the Social Security Amendments required that all taxpayers,
including the aged, again to be subject to the same floor.
In 1954, another major change was made when the five
percent floor was lowered to three percent, and an additional
one percent floor was applied to expenses for drugs before
those expenses could be counted toward the overall three
percent floor. A major justification for both actions was
that deductions should be allowed for all "extraordinary"
expenses. While a five percent floor was considered too high
to cover all extraordinary expenses, a one percent floor was
considered necessary to exclude ordinary drug expenses.
Besides the one percent floor on drugs, another separate
calculation was required when the Social Security Amendments
of 1965 allowed a deduction for one-half the cost of medical
-3insurance, up to a maximum deduction of $150, without regard
to the 3 percent floor. The remaining half of insurance
premiums (including premiums in excess of $300) are subject
to the 3 percent floor.
The deduction for medical expenses generally has been
justified on the grounds that extraordinary medical expenses
reduce ability to pay taxes and that the income tax base
should take account of this. However, this argument makes
more sense for uncontrollable than it does for controllable
or voluntary medical expenses, and also, there is no clear
standard for what constitutes extraordinary expenses.
Moreover, only 23 percent of taxpayers benefit from the
medical deduction and 41 percent of these only deduct
one-half of their insurance premiums.
Distributionally, the value of the itemized deduction
rises with income. Of course, the deduction is of no value
to the non-itemizer. However, even among returns with
itemized medical deductions, the average tax expenditure per
return increases as income increases. This increase is the
result of several factors, including higher marginal tax
rates and greater medical expenditures at higher income
levels. The 3 percent floor does result in a decline in the
proportion of taxpayers who can itemize expenses in excess of
the floor, especially at income levels in excess of $50,000.
However, if the average tax expenditure is calculated across
all taxpayers in the income class, rather than just
itemizers, the tax expenditure is still of greater average
value to taxpayers in higher income classes, rising from $10
for taxpayers with incomes between $5,000 and $10,000 to $501
for taxpayers with incomes of $200,000 or more.
Recent Administration proposals. In 1978 the Carter
Administration proposed that medical and casualty losses be
deductible only to the extent that, when combined, they
exceeded ten percent of adjusted gross income. All medical
expenses, including health insurance premiums and drug
expenses would be subject to this same floor. Thus there
would be no separate allowance for half of insurance premiums
nor would there be a separate one percent floor for drugs.
The House of Representatives accepted the simplification
aspects of this proposal, but the suggested ten percent floor
was kept at three percent, and casualty losses were not
folded into the medical deduction. The Senate rejected the
House provision and no change was made in the Revenue Act of
1978.
-4Nonetheless, if the itemized deduction is to apply only
to extraordinary expenses, then the floor should be raised.
While the floor for itemized medical expenditures has
remained at three percent for 25 years, the proportion of
income spent on medical expenditures has risen. From 1950 to
1976, total health expenditures, both public and private have
risen from 5.9 percent to 12.6 percent of adjusted gross
income, while private expenditures have risen from 4.5
percent to around 7 percent. What at one time may have been
an extraordinary level of medical expenditures may now be
only an ordinary or normal level. Substantial simplification
would also be possible if fewer taxpayers were required to
maintain medical records.
As part of its National Health Plan, the Administration
has again proposed that medical expenses be deductible only
to the extent that they exceed ten percent of adjusted gross
income. Although we believe that the floor should be raised
even in absence of a National Health Plan, there are
additional, compelling reasons why the deduction should be
limited in the context of a National Health Plan. Perhaps
most importantly, unlike 1978, today a clear choice is given
to redirect some of the current Federal expenditures on
health care rather than merely reduce those expenditures.
Moreover, a National Health Plan means that total Federal
expenditures for health would increase substantially, leading
to subsidies not only of the aged and disabled, but also of
those persons in high risk categories and those currently
unable to obtain insurance. Indirect subsidies to
individuals may also result from subsidies of premium
payments made by employers. There is no reason why we should
want to run a separate subsidy system by allowing deductions
for non-extraordinary medical expenses.
Exclusion of Employer Paid Premiums for Medical Insurance
Historically, the exclusion from individual income
taxation of payments to employer-provided group plans has
existed since the adoption of the income tax; only the
rationale for the exclusion has varied over time. At first,
most fringe benefits of employees were not taxed -- tax rates
were low and non-cash compensation was not widely recognized
as income. Of course, before World War II, the income tax
did not affect the majority of workers, and taxation of
fringe benefits would have served little purpose in the case
-5of non-taxable workers. Moreover, a few decades ago, benefit
payments under group health insurance were much smaller
relative to income. Later Internal Revenue Service rulings
eventually supported the exclusion, and in 1954 the exclusion
was written into the Code. However, despite later
recognition that fringe benefits indeed are income, and
despite rapid growth in amounts spent on group health
insurance, no substantial changes have ever been made in the
exclusion. Treasury figures show the Federal income tax
expenditure cost of the exclusion to have grown from $1.1
billion in 1968 to $8.3 billion in 1979.
The distribution of benefits from the exclusion is
somewhat similar to the deduction; that is, because marginal
tax rates increase with income, a dollar of tax-free health
insurance is worth more (i.e., the tax expenditure cost is
greater) to taxpayers at higher income levels. However, the
exclusion is available to all employees, regardless of
whether they itemize on their returns. Below tax-exempt
levels of income, of course, there is no employee gain from
either the exclusion or the deduction. The exclusion can
also be viewed as a subsidy for the purchase of medical
insurance through an employer, with the subsidy rate
increasing with income.
Recent Administration Proposals. In 1978, the President
proposed that employer-sponsored medical, disability and
group-term life-insurance plans be required to provide
nondiscriminatory benefits to a fair cross-section of
employees, not merely to a select group of officers or highly
compensated employees. Anti-discrimination tests would have
been similar to those applied with respect to coverage and
benefits under qualified retirement and group legal plans.
Congress, however, adopted substantial nondiscrimination
tests only for coverage and benefits under medical
reimbursement plans which are not funded by insurance, thus
allowing discrimination with respect to insured medical plans
(as well as disability benefits and group-term life
insurance).
As part of the National Health Plan, the President has
proposed that employers make equal dollar contributions to
all plans that they offer, thus encouraging employees to seek
out lower cost plans so that the employer's relative
contribution will be greater. We believe that this proposal
will not only solve some of the problems of discrimination,
-6but also will increase competition in the medical marketplace
by giving employees an incentive to choose among
cost-efficient plans or health maintenance organizations.
Effect of Tax Expenditures For Health on The Demand and Price
of Medical Care
"
I believe that this subcommittee and task force are
especially interested in the effect of the tax expenditures
for health on the demand and price of medical care.
Exclusions for medical care, like many other tax
expenditures, are mostly open-ended. That is, there are few,
if any, budget limits on the amount of the expenditure that
can occur. In the area of fringe benefits, earners have a
substantial and fairly open-ended incentive to convert wage
compensation into nontaxable compensation in order to
minimize their taxes. For instance, for a taxpayer with a 20
percent marginal tax rate from all sources, $1 in cash
compensation can buy no more than $0.80 in nontaxable
compensation. The tax incentive lowers the price of the
fringe benefit and thereby creates a powerful demand for more
of the fringe benefit— far beyond the demand that would
exist in absence of the incentive.
Over the last three decades, these demands have
increased enormously, and non-cash compensation has become a
large part of the compensation package of most workers. As
a result, the income tax base has been eroded. To compensate
for this, the rate of tax on cash wages effectively must be
increased if a given amount of revenue is to be raised; thus,
marginal rates of tax on cash wages must go up even if
average rates of tax on all compensation remain steady.
Workers who receive larger proportions of their compensation
in cash — often workers in weak firms or secondary workers
— suffer the most from this shift in tax liabilities. Also,
the social security tax base has been eroded, slowly forcing
other changes in that system of taxation. Moreover, some
inflationary pressures can be traced in part to demands of
employees for greater increases in payments to nontaxable
benefit plans than for increases in cash compensation. It
should also be noted that policies to grant equal pay to
employees of both sexes are often hindered by the inability
of the secondary worker to receive equal value of pay in
fringe benefits.
-7These problems are present with all exclusions of fringe
benefits from income subject to tax. The exclusions increase
the demand for fringe benefits, which in turn weaken the
effort of policies which are based on cash compensation.
In the case of health benefits, income in the form of
employer-paid health insurance premiums is exempted from
Federal income tax, State income tax and social security tax.
Thus, employees are inclined to accept a larger share of
their compensation in the form of health insurance than they
would if the income in-kind was taxable. This has
contributed to the growth in employer payments to group
health plans from 0.8 percent of wages and salaries in 1955
to 2.8 percent in 1975.
Since the exclusion provision reduces the price
employees must pay for health insurance, it is also likely to
increase the demand for coverage under health insurance.
Increased coverage in turn increases the demand for health
care. Improved coverage may be reflected in a reduction of
the deductible amount, a reduction of the coinsurance or
copayment amount, or inclusion of previously uncovered
services. Since tax rates are higher in higher income
brackets, the price reduction—and the price incentive to
increase the quantity of services demanded—increases with
income.
The effect of allowing itemized deductions for health
care expenses may be analyzed along the same lines. The
deduction for health insurance premiums has much the same
effect as the exclusion: it reduces the after-tax price of
health insurance or health care, and the reduction is of
greater value at higher income levels. The major difference
is that the exclusion is available regardless of whether the
taxpayer itemizes deductions or takes the standard deduction,
whereas the personal deduction for health insurance premiums
must be itemized. For the majority of taxpayers who do not
itemize, there is no price reduction.
The requirement that medical expenses exceed three
percent of AGI before qualifying as a deduction (except for
50 percent of health insurance premiums up to $150) is
somewhat similar to a deductible clause in an insurance
policy. According to some researchers, a small deductible
has little effect on the demand for hospitalization, while,
for ambulatory and other non-hospital services, a moderate
size deductible is likely to influence demand markedly.
-8While the three percent floor is roughly analogous to a
deductible in an insurance policy, the exclusion of employer
premiums and the deduction of all expenses above three
percent are both analogous to a copayment rate. For
employees in group health plans and for itemizers^above the 3
percent floor, then, the marginal tax rate determines the
proportion of the last dollar of medical expense or medical
insurance paid by the government; thus, the copayment rate
equals one minus the taxpayer's marginal tax rate.^ Again,
the tax incentive for increased use of medical srvices is
greater the higher the taxpayer's taxable income.
The exact effect of these tax subsidies on the overall
demand for health services is thus based in large part upon
the subsidy rate on marginal expenditures.
On average the
Federal income tax expenditures of about $11 billion cover
approximately 9 perent of total private expenditures for
health care. At the margin, however, the reduction in price
is much greater than 9 percent. The marginal price reduction
is equal to the taxpayer's marginal tax rate.
For an
average employee, the income tax rate alone is 22 percent.
If we also take into account State income taxes and social
security taxes, that marginal rate rises to about 35 percent.
For the average itemizer, the marginal rate of income tax is
about 25 percent; adding State income taxes raises the rate
to about 29 percent. Since demand is based primarily upon
marginal price, the impact of the tax expenditures upon the
demand of medical services is greater than the price
reduction averaged across all expenditures would indicate.
Whether increased demand for medical services will
actually lead to an increase in the quantity purchased will
depend primarily upon demand and supply. In general, the
more responsive supply or demand is to price changes, the
more likely will the tax subsidy increase the amount of
medical care provided in the economy. While the demand for
health care is often viewed to be insensitive to price, price
effects on demand may be much stronger for controllable
expenses or non-catastrophic events than for uncontrollable
or catastrophic occurrances. That is, demand for some
minimal health care or insurance may not be responsive to
price, but the demand for additional health care or insurance
may be much more responsive.
-9Insurance complicates considerably the demand side of
the medical marketplace. Some researchers argue that the
demand for health insurance is relatively responsive to price
incentives (compared to most estimates of the demand for
medical care). Tax subsidies then lead to increased
insurance coverage, and increased coverage, in turn, leads to
lower copayment rates on medical goods actually purchased.
These researchers then suggest that, once a large proportion
of the population pays little or nothing for additional
medical services, the demand side of the market ceases to
exert an independent restraint on the market, and medical
care price changes, over time, are determined by non-market
forces or events.
Because tax subsidies act to increase the demand for
medical care, they also tend to increase its market price. A
subsidy creates a wedge between the market price received by
the seller and the net cost to the buyer.
Increases in
price result in the tax subsidy (or the wedge) being shared
with the providers of medical care; thus, the greater the
increase in market price, the less the tax subsidy reduces
the net cost of medical care to taxpayers.
To make matters worse, market price increases probably
apply fairly uniformly to many types of purchase of medical
care, while the value of the tax subsidy increases with the
taxpayer's income. Thus, even if the tax subsidy results in
a net price (after subsidy) decrease to the average taxpayer,
it may still result in a net price increase for low- and
moderate- income taxpayers who receive only a small price
subsidy. For those who do not receive any subsidy, a net
price increase is almost certain.
There are various ways in which the exclusion and
deduction can be redesigned or replaced so as to change the
method of subsidy and to limit their effects on the demand
for health insurance and health care. Some of these would
involve placing a cap on the amount of the exclusion, such as
proposed by Congressman Ullman, or requiring qualified group
health plans to adopt certain standards with regard to
minimum copayment rates, such as proposed by Congressman
Jones. The President has proposed to increase the floor on
the medical deduction, to replace some tax expenditures with
direct subsidy programs, and to require employers to make
equal contributions to all plans that they offer. Of course,
-10any program which changes the amount of expenditures made by
employees or private persons will affect the size of the tax
expenditure, even with no change in the Tax Code.
Summary
In summary, tax expenditures for medical care form a
large and growing part of the Federal budget. For 1979
Federal income tax expenditures for medical care will exceed
$11 billion and will comprise about 5 percent of total
expenditures for medical care and about 9 percent of private
expenditures.
State income tax and social security tax
collections are also reduced by another $6 billion. While
not as large as direct expenditure programs such as Medicare
and Medicaid, these tax expenditures do have an impact upon
the demand and price of medical care. At the margin, these
expenditures often reduce price by 29 to 35 percent.
Practically all policies connected with medical care
affect the amount of tax expenditures for medical care.
Direct expenditures may change tax expenditures even if the
laws affecting the exclusion and deduction are unchanged.
The design and choice of tax expenditure policy should be
dependent upon the extent to which tax burdens are to be
shared between those receiving cash compensation and those
receiving compensation in other forms, the extent to which
medical exclusion, deductions and subsidies are to be made
equally available to all persons, the design of direct
expenditure programs, and the limits that should be placed on
tax-induced increases in demand for health insurance and
health care.
OTA Papers
Tax Expenditures
for Health Care
Eugene Steuerle
Ronald Hoffman
U.S. Treasury Department
OTA Paper 38
April 1979
V
5r—0
/789
Department
of the
Treasury
Assistant Secretary for Tax Policy
Office of Tax Analysis
TABLE OF CONTENTS
INTRODUCTION
1
HISTORY OF MEDICAL EXCLUSIONS AND DEDUCTIONS ... 4
REVENUE COST OF TAX EXPENDITURES FOR HEALTH:
1968 - 1979
11
DISTRIBUTION OF TAX EXPENDITURES BY INCOME
CLASS
16
EFFECT OF TAX EXPENDITURES FOR HEALTH ON THE
DEMAND AND PRICE OF MEDICAL CARE
20
POLICY ALTERNATIVES 27
CONCLUSION 39
TAX EXPENDITURES FOR HEALTH CARE
I. INTRODUCTION
-a_-»__________-> « _ - _ _ _ _ _ _ .
Because of the renewed interest in proposals to provide
for National Health Insurance, and because of increased
concern over the rising cost of medical care to both
individuals and the government, much recent* research has
focused on equity and efficiency aspects of direct
expenditure programs to provide medical care. Yet the
Federal Government also helps individuals finance the
purchase of medical care through substantial tax subsidies.
Over $11 billion of Federal income tax expenditures are
provided currently through the exclusion or deduction from
the income tax base of payments for certain medical expenses,
including premiums for insurance. 1/ These tax expenditures
are the principal programs of government assistance for the
purchase of medical care by the non-aged, non-poor
population.
t
1/ This paper does not treat other indirect tax subsidies
such as deductions for charitable contributions to health or
medical institutions, tax exemption of interest on hospital
bonds, expensing of removal of architectural and transportation barriers to the handicapped, and the non-taxability of
social security and public assistance payments for medical
care.
-2Specifically, the tax system subsidizes the purchase of
medical care by means of provisions permitting (1) employer
contributions for health insurance premiums or other medical
payments for employees to be excluded from taxable income; 2/
and (2) certain medical expenses to be deducted from adjusted
gross income on individual income tax returns.
In general,
payments by employers for medical insurance or other medical
care of employees are deducted as a cost of business; at the
same time, these payments are excludable from the gross
income of employees.
In addition, individuals are allowed
itemized deductions for 50 percent of the amount paid for
health insurance premiums, up to a maximum of $150, and for
other medical care expenses (including the remaining amount
of health insurance premiums) which exceed three percent of
the taxpayer's adjusted gross income (AGI).
Expenditures for
drugs and medicines may be counted in this three percent
floor only to the extent that they separately exceed one
percent of AGI.
This paper will examine these tax expenditures, their
impact on the Federal budget and their effects on price and
demand for medical care.
Section II provides a brief history
2/ In this paper, the terms "exclusion" or "employee
exclusion" will be used as an abbreviated reference to the
exclusion from taxation by employees of employer
contributions to health plans.
-3of tax law changes leading to the present exclusion and
deduction.
Section III presents estimates of revenue loss
from these tax expenditures and some evidence on their
increasing cost over time.
Section JV then analyzes the
distributional impact of these expenditures.
Effects of the
taxation of medical expenditures on the demand and price of
medical care are discussed in Section V, while some policy
alternatives are detailed in Section VI.
is contained in Section VJI.
Finally, a summary
-4II.
HISTORY OF MEDICAL EXCLUSIONS AND DEDUCTIONS
Although trie exclusion from individual income taxation
of payments to employer-provided group plans has existed
effectively since the adoption of the income tax, the rationale for that exemption has varied over time.
At first, most
fringe benefits of employees were not taxed —
non-cash com-
pensation was not widely recognized as income.
Of course,
before World War II, the income tax did not affect the majority of workers, and assignment of value of fringe benefits
would have served little purpose in the case of non-taxable
workers.
Moreover, a few decades ago, benefit payments under
group health insurance were much smaller relative to income,
both because a smaller proportion of income was spent on
medical care and because more private payments were made by
individuals or through individual, rather than group, policies.
Internal Revenue Service rulings 3/ eventually
supported the exclusion by declaring that the premiums paid
by an employer to a group insurance medical policy were not
taxable to the employee.
In later years, however, it came be to recognized that
in-kind compensation was a form of wages which could be
3/ Special Ruling, October 26, 1943, 433CCH, Federal Tax
Service par. 6587.
-5subject to tax.
inconsistent,
By 1953, IRS rulings had become somewhat
while employer payments on group policies
remained nontaxable to employees, employer-paid premiums on
individual policies were deemed to be income subject to tax.
4/
In the 1954 Code, Congress decided to make the exclusion
uniform, and all contributions to accident or health
insurance plans have since been allowed an exclusion from
income by the employee.
The tax treatment oi medical expenses paid by individuals (rather than by employers) has evolved differently.
deduction for medical expenses existed until 1942.
No
During
World War II, substantial numbers of citizens were brought
under the income tax and tax burdens were raised significantly; it was felt that some relief from this heavier tax burden
should be granted to taxpayers with extraordinary medical
expenses.
Consequently, deductions were allowed for medical
expenses exceeding five percent of net income, with a maximum
deduction of $2,500 for families.
The maximum deduction was
raised several times and finally eliminated in 1965.
Changes were also made in the five percent floor. The
1951 Act and subsequent provisions effectively eliminated any
floor for the medical expenses of the aged or for taxpayers
T7 RevT Rul. 210, CB 1953-2, p. 114
-6taking care of aged dependent parents.
However, in l* 65
the
Social Security Amendments provided substantial amounts of
medical care for the aged and at the same time required all
taxpayers, including the aged, again to be subject to the
same floor for itemized medical deductions. 5/
In 1954, another major change was made when the five
percent floor (by now based on adjusted gross income) was
lowered to three percent, and an additional one percent floor
was applied to expenses for drugs before those expenses could
be counted toward the overall three percent floor.
A major
justification for both actions was that deductions should be
allowed for all "extraordinary" expenses.
While a five
percent floor was considered too high to cover all
extraordinary expenses, a one percent floor was considered
necessary to exclude ordinary drug expenses.
Besides the one percent floor on drugs, another separate
calculation was required when the Social Security Amendments
of 1965 allowed a deduction for part of the expenses of
insurance policies without regard to the dverall floor. 6/
5/ The change was made effective beginning in 1967.
6/ A deduction was allowed for one-half of insurance
premiums, not to exceed $150. Any remaining insurance
premiums were to be subject to the three percent floor.
-7The rationale for this allowance was that the normal
deduction favored those who could self-insure against
variable expenses, while those who stabilized their outlays
through purchase of insurance would be less likely to benefit
from the deduction.
In 1978, the Carter Administration proposed that medical
and casualty losses be deductible only to the extent that,
when combined, they exceeded ten percent of adjusted gross
income.
All medical expenses, including health insurance
premiums and drug expenses would be subject to this same
floor.
Thus there would be no separate allowance for half of
insurance premiums nor would there be a separate one percent
floor for drugs.
The House of Representatives accepted the
simplification aspects of this proposal, but the suggested
ten percent floor was kept at three percent, and casualty
losses were not folded into the medical deduction.
The
Senate rejected the House provision and no change was made in
the final Act. 2/
While the floor for itemized medical expenditures has
declined to three percent and remained there for over two
decades, the proportion of income spent on medical
7/
The Revenue Act of 1978.
-8expenditures has risen.
Table I shows health expenditures
from 1950 to 1976 and compares this data to adjusted gross
income of households.
During this period, total health
expenditures, both public and private, 8/ have risen from 5.9
percent to 12.6 percent of adjusted gross income, 9/ while
private expenditures have risen from 4.5 percent to around 7
percent.
What at one time may have been an extraordinary
expenditure may now be only ordinary.
In fact, this increase
in percent of income spent on health expenditures was a major
argument for the Carter Administration's proposal to increase
the floor on combined medical and casualty deductions to ten
percent.
Other arguments related to the small percentage
(about 25 percent) of taxpayers benefitting from the medical
deduction, and to the simplification possible if fewer
taxpayers were required to maintain medical records.
Opponents of the change, on the other hand, argued that it
would be unfair to raise the floor at a time when medical
expenses were becoming more burdensome.
Apparently,
Congress, in maintaining the three percent floor, has shifted
87 For estimates of total public and private health
expenditures, see Gibson and Fisher (1978) .
9/ As a percent of GNP, health expenditures are about nine
percent.
Table I
ti
Year
11
Health Expenditures 1/
ti Total Public t
11 end Private t fy^vfte
IIAdjusted u Health Expenditures as
II Cross
n
a Percentage of AGI
n Incowe ti Total Public i
i (ACI) 2/ti and Private : P r i v f
( I WW«W ••••••
1930
1955
I960
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
12.0
17.3
25.9
38.9
*2.1
47.9
53.8
60.6
69.2
77.2
86.7
95.4
106.3
123.7
141.0
9.0
12.9
19.5
29.4
31.3
32.0
33.7
37.7
43.8
48.4
53.2
58.7
64.8
71.3
80.8
)
202.1
273.9
346.1
466.4
508.9
541.6
595.6
644.7
677.3
719.9
793.2
887.5
963.1
1.008.3
1,118.7
5.9
6.3
7.5
8.3
8.3
4.5
4.7
5.6
6.3
6.2
5.9
5.7
5.S
6.5
6.7
6.7
6.6
6.7
7.1
7.2
«.*
9.0
9.4
10.2
10.7
10.9
10.7
11.0
12.3
12.6
Office of the Secretary of the Treasury
Office of Tax Analysis
1/ Health expenditure estimates are forfiscal years. Source:
Fisher (1978J.
2/ Source: U.S. Department of Commerce,
Gibson and
Bureau of Economic Analysis.
-10from a standard
which allowed deductions for "extraordinary"
expenditures to one in which deductions are allowed for
expenses which are more than a "moderate" proportion of
income.
This shift makes the personal deduction more
consistent with the employer exclusion in which all payments
for medical expenses or insurance are non-taxable to the
employee.
-11III.
REVENUE COST OF TAX EXPENDITURES FOR HEALTH:
1968 -
1979
For fiscal 1979, Federal income tax expenditures for
health care will be over $11 billion.
Seventy-four percent
of this total is for the employee exclusion of employer
contributions, while 26 percent is for individual deductions.
These tax expenditures cover about 5 percent of total public
and private health care expenditures and about 9 percent of
private expenditures.
Like Medicare and Medicaid, these
subsidies are non-taxable and are of even more value to
individuals than an equivalent increase in before-tax income.
The tax expenditure estimate of $11 billion relates to
the Federal income tax alone.
There is a further tax
expenditure cost of about $2 billion to States with income
taxes.
In addition, social security tax revenues are reduced
by about another $4 billion, although this revenue reduction
does not properly constitute a tax expenditure. 10/
In
total, Federal and State revenues are reduced by about $17
billion because of these tax expenditures.
10/ Since social security operates at least in part as an
insurance scheme, the reduced taxes are reflected in reduced
benefit payments later.
-12Most workers currently benefit from the exclusion of
employer payments.
According to the latest data from the
Social Security Administration (Yohalem, 1975), in 1975 about
58.2 million workers or 72 percent of all wage and salary
workers, were covered by some type of health care insurance
financed by employer-paid premiums.
Treasury estimates show the Federal income tax
expenditure cost of this exclusion to have grown from $1.1
billion in 1968 to $8.3 billion in 1979, or at a rate of
about 20 percent a year. (See Table 2).
Treasury method of
While changes in the
estimation do not allow exact
comparisons, there clearly was a sharp rise in lost revenue
during these years. This rise can be traced primarily to two
factors:
(1) the increase in cost of medical insurance, and
(2) the growth in use of nontaxable fringe benefits as a
means of payment for work.
The increased use of insurance
may itself have led to increased costs of medical care, in
turn raising the cost of medical insurance.
And, although
there may have been increased use of group insurance policies
in absence of the exclusion, there is little doubt that the
exclusion acts as an incentive for workers and employers to
receive their compensation in non-taxable health benefits
rather than taxable wages.
Since the government pays part of
the cost through reduced tax collections, the employee faces
-13a lower after-tax price for his health insurance.
The
employer may also share in this benefit since he can provide
an increase in after-tax compensation more cheaply through
extra insurance than through direct wages.
Compared to the exclusion, fewer taxpayers benefit from
the itemized deduction of medical expenses on individual
income tax returns.
Still, by 1978, 20 million tax returns
are estimated to have claimed itemized deductions of $14.4
billion for medical care expenses.
The estimated revenue
cost of this tax expenditure has grown from about $1.5
billion in 1968 to $2.9 billion in 1979 or at a rate of about
7 percent per year.
—
This lower growth rate for the deduction
as compared to the exclusion —
can be traced to two
principal factors (besides changes in methods of estimation).
First, the increased use of employer-provided insurance over
these years has meant that a lower proportion of total
medical expenditures were being paid out-of-pocket.
Second,
the size of the standard deduction (currently called the
"zero bracket amount") has increased greatly during this
period.
For instance, for joint returns before 1970, the
minimum amount of the standard deduction was $200, plus $100
for each exemption 11/ (other than age and blindness).
11/ Or, for certain taxpayers, the deduction equaled 10
percent of adjusted gross income, if greater.
By
-14-
1979, the minimum amount (and the maximum amount) of zero
bracket amount (standard deduction) for joint returns had
risen to $3,400, regardless of income, and the number of
taxpayers itemizing deductions had fallen correspondingly.
-15Table 2
Major Federal Income Tax Expenditures for Health Care
($ millions)
i Deductibility of
Fiscal ;: Exclusion of Employer
Year :: Contributions for Medical:; Medical Expenses on:i Total
: Insurance Premiums and : Individual Income .
;
Medical Care
:
Tax Returns
;
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
Average Annual
Growth Rate
8,255
7,105
5,560
4,490
3,275
2,940
2,500
2,000
1,450
1,450
1,400
1,100
(20 %)
2,890
2,785
2,556
2,315
2,315
2,125
1,900
1,900
1,700
1,700
1,600
1,500
( 7 %)
11,145
9,890
8,116
6,805
5,590
5,065
4,400
3,900
3,150
3,150
3,000
2,600
(13 %
->
V
Excludes deductibility of charitable contributions (health) ,
tax exemption of interest on hospital bonds, expensing of removal
of architectural and transportation barriers to the handicapped,
and non-taxability of social security and public assistance
payments for medical care.
-16IV
DISTRIBUTION OF TAX EXPENDITURES BY INCOME CLASS
Table 3 shows the latest Treasury estimates of the
distribution among income classes of tax expenditures from
the exclusion of employer payments for health care.
The
numbers are highly tentative and are based upon some simple
assumptions about the distribution of employer-provided
health insurance among employees.
Because marginal tax rates
are higher in higher income classes, a dollar of tax-free
health insurance is worth more (i.e., the tax expenditure
cost is greater) to taxpayers at higher income levels.
Below
tax-exempt levels of income, of course, there is no employee
gain from the tax expenditure.
Table 3
Distribution of Tax Expenditure for Employer
Payments for Health Care
Fiscal Year 1977
Expaned Income Class
:
Tax Expenditure
($000)
:
($ millions)
0
5
10
15
20
30
50
100
-
5
10
15
20
30
50
100
200
200 and over
TOTAL
$
91
494
814
1,028
1,547
882
456
178
70
$ 5,560
Source: U.S. Treasury Department, information is contained
in a news release from Senator Muskie's Office, "Muskie News"
(February, 1978), Appendix, p. 4.
-17By using a 50,000 sample of individual tax returns and
the Treasury Tax Model, the distribution of tax expenditure
benefits can be determined with more detail and accuracy for
itemized deductions. Table 4 demonstrates that the average
tax expenditure per return with itemized medical deductions
increases as income increases (column 9). This increase is
the result of several factors, including higher marginal tax
rates and greater medical expenditures at higher income
levels. Moreover, if the average tax expenditure is
calculated across all taxpayers in the income class, rather
than just itemizers, the tax expenditure is still of greater
expected value in higher income classes (column 6).
It is somewhat surprising that the regressiveness of the
deduction is not tempered more by the 3 percent floor which
applies to most itemized medical expenses. A percentage
floor decreases the probability that a high income person can
itemize medical expenses in excess of the floor. For
instance, a person with $20,000 of adjusted gross income can
itemize expenses (subject to the floor) in excess of $600,
while a person with $100,000 of adjusted gross income can
itemize expenses only in excess of $3,000. However, while
increases in income do reduce the probability of itemizing
deductions in excess of the floor, the average deduction
increases significantly in higher income classes (column 13).
Table 4
PERSONAL DEDUCTION FOR MEDICAL EXPENSES
—Tax Expenditures and Deductions by Expanded Income Class—
(1978 Law and 1978 Levels of Income)
121
1_JL
131
All
Expanded
Income
(000)
Below
5
J2L
JJLL
Returns
Total
:
: Average
Number
Medical
: Total Tax : Medical
of
Deductions :Expenditure :Deduction
Returns
($)
(thousands) ($ millions):($ millions):
23,019
$
700
____!
$
11
$
30
: Average
: Tax
: Expend:iture_($)
$
(8)
JLZ1
(9)
Returns Itemizing
Medical Expenses
: Average : Average
Number: Medical : Tax
of :Deduction: ExpendReturns:
($)
:iture ($)
(13)
(12)
(10)
(ID
Returns Itemizing 1/2 :Returns Itemizing Expenses in
of Insurance Premiums : Excess of 3 Percent Floor
Number
of
Returns
Average
Deduction
($)
Number
of
Returns
Average
Deduction
($)
0
341
$2,052
$ 33
263
$ 126
325
$ 2,057
H00
120
10
1,910
1,208
98
1,593
120
1,708
1,239
5 -
10
19,158
2,307
188
$ 10 -
15
14,099
2,845
388
202
28
3,421
832
114
2,934
121
2,600
958
$ 15 -
20
11,609
2,602
485
224
42
3,951
659
123
3,403
119
2,590
848
$ 20 -
30
12,970
3,383
807
261
62
5,889
574
137
5,325
119
3,133
877
$ 30 -
50
5,838
1,798
613
308
105
3,515
511
174
3,319
121
1,318
1,059
$ 50 - 100
1,429
558
268
390
187
867
643
309
829
129
205
2,204
S100 - 200
299
190
109
635
365
163
1,163
666
157
134
21
7,908
78
63
39
809
501
42
1,500
919
41
123
3
16,642
88,499
$14,447
$2 ,908
$ 163
33
20,101
$ 145
17,865
$ 121
11,903
$ 1,033
$
$200 and over
Tota 1
Office of the Secretary of the Treasury
Office of Tax Analysis
$
$
719
March 14, 1979
l
-19In fact, the increase is so large that the average deduction
across all returns —
itemizers and nonitemizers alike
—
still increases with income (column 5 ) . This result may
occur because of significant price and income elasticities of
demand, a greater ability of high-income persons to actually
pay off large medical bills, increased amounts of
self-insurance as income rises, or a combination of all these
factors.
Whatever the cause, the effect of the medical
deduction on tax liabilities is a regressive redistribution
of tax burdens. 12/
12/ The liability effect is clearly regressive. However,
the incidence effect may be different and can depend upon
such factors as political feedbacks. See Buchanin and Pauly
(1970) .
-20V. EFFECT OF TAX EXPENDITURES FOR HEALTH ON THE DEMAND AND
PRICE OF MEDICAL CARE
Generally, employers are indifferent between a dollar
paid in the form of a fringe benefit and a dollar paid as a
cash wage. Both amount to a dollar of cost to the employer,
and both are tax deductible as ordinary and necessary costs
of doing business.
However, to the employee, income paid in the form of
cash wages is fully taxable, whereas income in the form of
employer-paid health insurance premiums is exempted from
Federal income tax, State income tax and social security tax.
Thus, employees are inclined to accept a larger share of
their compensation in the form of health insurance than they
would if the income in-kind was taxable. As Section III
indicated, this has contributed to the growth in the use of
the employer exclusion.
Since the exclusion provision reduces the price
employees must pay for health insurance, 13/ it is also
likely to increase the demand for health insurance; improved
13/ A further consequence of the exclusion is the inducement
for groups to be employer based, rather than to form around
other organizations. Employees with employer-based group
health insurance are often faced with the loss of their
health insurance if they lose or change their job. Thus,
these employees may be vulnerable to increase health
insurance costs at a time when they can least afford it.
-21insurance coverage in turn increases the demand for health
care.
Improved coverage may be reflected in a reduction of
the deductible amount, a reduction of the coinsurance amount
14/ or inclusion of previously uncovered services.
Since tax
rates are higher in higher income brackets, the price
reduction —
and the price incentive to increase the quantity
of services demanded —
increases with income.
The effect of allowing itemized deductions for health
care expenses may be analyzed along the same lines.
The
deduction for health insurance premiums has much the same
effect as the exclusion: it reduces the after-tax price of
health insurance or health care, and the reduction is of
greater value at higher income levels.
The major difference
is that the exclusion is available regardless of whether the
taxpayer itemizes deductions or takes the standard deduction,
whereas the personal deduction for health insurance premiums
must be itemized.
For the majority of taxpayers who do not
itemize, there is no price reduction.
The requirement that medical expenses exceed three
percent of AGI before qualifying as a deduction (except for
50 percent of health insurance premiums up to $150) is
14/ The "coinsurance" or "copayment" amount is the
percentage of the total bill (after any deductible that might
a
PPly) which must be paid by the insured person.
-22-
similar to a deductible clause In an insurance policy
(Mitchell and Vogel, 1975).
Customarily, private insurance
deductibles are specified in dollar terms (e.g., $100 per
year per family member) rather than as a percentage of
income.
Specifying the deductible as a percentage of income
results in a higher deductible amount at higher income
levels.
Of course, the smaller the deductible, the larger
the share paid by the government.
According to Newhouse, et. al. (1974) a small deductible
(e.g., between $50 and $100 per year, per family) should have
little effect on the demand for hospitalization; i.e., the
effect of insurance would be about the same with or without
such a deductible.
The cost of an average hospital stay cost
was about $1,000 in 1975 (and has increased since then) and,
thus, would easily exceed a small deductible.
For ambulatory and other non-hospital services, however,
a moderate size deductible is likely to influence demand
markedly.
As the authors point out, the median individual
visits a physician about twice a year at a cost of about $40.
At this level of cost, there is a good chance that the
recipient of medical care would pay the cost out-of-pocket
because the deductible would not be exceeded.
-23While the three percent floor is roughly analogous to a
deductible in an insurance policy, the exclusion of employer
premiums and the deduction of all expenses above three
percent are both analogous to a copayment rate.
The marginal
tax rate determines the proportion of the last dollar of
medical expense paid by the government} thus, the copayment
rate equals one minus the taxpayer's marginal tax rate.
Again, the tax incentive for increased use of medical
services is greater the higher the taxpayer's taxable income.
The exact effect of these tax subsidies on the overall
demand for health services is thus based in large part upon
the subsidy rate on marginal expenditures.
As noted, on
average the Federal income tax expenditures of about $11
billion alone cover approximately 9 percent of total private
expenditures for health care. At the margin, however, the
reduction in price is much greater than 9 percent.
The
marginal price reduction is equal to the taxpayers' marginal
tax rate —
about 22 percent for the average employee and
about 25 percent for the average itemizer.
If we also take
into account State income taxes arid social security taxes,
the price reduction climbs to about 29 percent for itemizers
and 35 percent for employees. 15/ Since demand is based
15/ This example assumes that the incidence of the employee
portion of social security taxes falls on the employee,
while, for the employer portion, the incidence rests half on
the employee and half on the employer.
-24primarily upon marginal price, the impact of the tax expenditures upon the demand of medical services is greater than
the price reduction averaged across all expenditures would
indicate.
Whether increased demand for medical services will
actually lead to an increase in the quantity purchased will
depend primarly upon the elasticities 16/ of demand and
supply.
In general, the more elastic either supply or
demand, the more likely will the tax subsidy increase the
amount of medical care provided in the economy.
Often the
demand for health care is viewed to be inelastic.
However,
elasticity at the margin maybe higher for controllable
expenses or non^catastrophic events than for uncontrollable
or catastrophic occurances.
That is, demand for some minimal
health care or insurance maybe inelastic, but the demand for
additional health care or insurance may be much more elastic.
Because tax subsidies act to increase the demand for
medical care, they also tend to increase its market price.
A
subsidy creates a wedge between the market price received by
16/ The elasticity of demand (or supply) may be defined
roughly as the tendency of demand (or supply) for medical
goods to change as the price of those goods changes. More
precisely, the elasticity of Y with respect to X is the
percentage change in Y that accompanies a percentage change
in X.
-25the seller and the net cost to the buyer.
Increases in price
result in the tax subsidy (or the wedge) being shared with
the providers of medical care; thus, the greater the increase
in market price, the less the tax subsidy reduces the net
cost of medical care to taxpayers.
Generally, the more inelastic the demand for medical
care, the lower is the increase in market price as a
proportion of the subsidy.
On the other hand, to the extent
that supply is inelastic, the opposite case holds:
tax
subsidies are reflected more in increases in price.
Insurance complicates considerably the demand side of the
medical marketplace.
Phelps (1976b) argues that the demand
for health insurance is relatively elastic (compared to most
estimates of the demand for medical care).
Tax subsidies
then lead to increased insurance coverage, and increased
coverage, in turn, leads to lower copayment rates on medical
goods actually purchased.
Newhouse (1978) suggests that,
once a large proportion of the population faces trivially
small copayment rates, the demand side of the market ceases
to exert an independent restraint on the market, and medical
care price changes, over time, are determined by events
exogenous to normal market operations.
-26In any case, while the tax subsidies may be intended to
subsidize only the demanders of health care, in fact, both
the demanders and providers are subsidized.
To make matters
worse, market price increases probably apply fairly uniformly
to many types of purchase of medical care, while the value of
the tax subsidies increases with the taxpayer's income.
Thus, even if the tax subsidy results in a net price (after
subsidy) decrease to the average taxpayer, it may still
result in a net price increase for low- and moderate-income
taxpayers who receive only a small price subsidy. 17/
For
those who do not receive any subsidy, a net price increase is
almost certain.
17/ A similar argument with respect to the exclusion from
taxable income of net imputed rent of owner-occupied homes,
together with the personal deduction of mortgage interest and
property taxes, has been made by Schreiber (1978) . Homeowners with low marginal tax rates may actually pay higher
prices net of tax due to the existing tax deduction.
-27VI.
Policy Alternatives
The tax treatment of medical expenses can be changed
both directly by legal changes in the exclusion and
deduction, and indirectly through changes in other health
programs.
This section discusses briefly some commonly
proposed changes in health policy as they affect tax
expenditures for health care.
Limitation of the Exclusion of Employer Contributions.
One commonly suggested policy alternative is to treat some o
all employer contributions as income to employees.
Revenue
gain from such a change might then be available for direct
Federal expenditures for medical care, e.g., national health
insurance.
If employees include as income all employer
payments for health care and insurance, some personal
deduction might be maintained; in that case, the value of
employer-provided health insurance and other employer
payments for health care would be added to other personal
medical expenditures and would be subject to the same
limitation or floor (e.g., the current 3 percent AGI
limitation) that applies to those expenditures.
Whether the treatment of employer payments as taxable
income can be justified depends in part upon the principle o
equity under which the income tax base is defined.
Under
-28current law, the implied principle underlying the employee
exclusion of employer payments is that the base for
individual income taxation should be exclusive of all medical
expenses.
Under this principle, equal income status is
defined as equal ability to purchase non-medical goods; if
all medical expenses are viewed as both unwanted and
unavoidable, then the well-being of a person can be
approximated by his income after payment of all medical
expenses.
Thus employer payments of medical insurance and
care are excluded from income subject to tax.
Inclusion or employer payments, on the other hand, would
result in a consistent rule being applied to all medical
payments, no matter whether they were paid by the employer or
by the taxpayer.
If a floor for itemizations were
maintained, the implied principle of the current exclusion of
employer payments would be abandoned in favor of a principle
of deductibility that only "extraordinary" deductions should
be allowed.
In addition to considerations of taxequity and revenue
loss, other arguments to limit the exclusion are based upon
the objective of improving the efficiency and competitiveness
of the medical care market.
—
More economical —
less wasteful
coverage might be gained by requiring employer paid health
plans to meet certain standards to qualify for the exclusion.
-29And the standards might be designed to give employees more
choice and, hence, more of an economic incentive to choose
less costly plans (Enthoven, 1979).
Including employer payments in income would require some
arbitrary administrative rules.
Because employees vary in
occupation and age, there are market differentials in the
prices that they face for private insurance.
To charge them
equally for employer-provided insurance may not always
reflect the relative market value of the insurance that they
receive, although similar valuation problems apply as well to
other taxable fringe benefits.
Alternatively, to calculate
the value of the insurance for each employee separately would
impose additional administrative burdens upon employers.
The
final alternative of disallowing the exclusion to the
employer, i.e., making the payments taxable to the employer,
would also bring about a unfavorable result, for the
employer's expense is clearly a cost of doing business, and
the employer's marginal tax rate is not a good proxy for the
employee's marginal tax rate.
Changing Deduction Floors. Tax expenditures could be
decreased or increased by changing the floor for itemized
deductions.
An increased floor seems to be in line with a
measure of ability to pay which allows adjustments to income
-30only for extraordinary or above average medical expenses. As
noted in Section II, the proportion of individuals1 incomes
spent on medical expenditures has increased in recent years.
Taken as a percent of total adjusted gross income, both total
and private expenditures for medical care have risen, and
this is the primary rationale usually given for increasing
the floor.
Increasing the floor for medical deductions from
three to ten percent and folding in the separate allowance
for one-half of insurance premiums, 18/ as proposed in 1978,
would have decreased the number of taxpayers itemizing
medical expenses by over 80 percent.
On the other hand, as already noted, the inherent logic
of the current employee exclusion of employer payments
implies that a deduction should be allowed to all taxpayers
for all medical expenses. To carry that logic to its extreme
would require both elimination of the floor and an allowance
for medical deductions to taxpayers who do not itemize.
Following the same logic to a lesser extent, a case can be
made for not increasing the floor if the employee exclusion
is not changed.
The higher the floor, the greater is the
relative tax on those who buy their own insurance or
self-insure and do not receive insurance through an employer.
T|7 Casualty losses were also folded into the medical
deduction under this proposal.
-31The question of self-insurance deserves mention in this
context.
The allowance of a separate deduction for half of
insurance expenses (up to $150) was enacted in 1965 partly
because of objections from the insurance industry that the
deductible amount or floor gave individuals an incentive to
self-insure.
Since medical expenditures varied, it was
argued, a person would be more likely to have expenses above
the floor in some years if he did not even out the
expenditures over the years through insurance. 19/ The
adoption of a higher floor would also reduce the tax benefit
of those who self-insure since, at least in certain
expenditure ranges, no tax subsidy would be available.
Additionally, if individuals are risk averse and risk
aversion increases with the size of the risk, then it is less
likely that individuals will self-insure for extraordinary
expenses than for ordinary expenses.
Thus, with a higher
floor, not only would fewer non-insured expenses be
subsidized, but there may be fewer individuals who would be
willing to self-insure for the expenses that remained
eligible for the subsidy.
19/ The merit of this argument is debatable. At least for
very high medical expenses, only the very wealthy can
realistically self-insure. Since most families have a strong
incentive to purchase insurance for catastrophic events, and
most taxpayers do not itemize, repeal of the separate
deduction may have little impact on insurance coverage.
-32Converting the Personal Deduction to a Personal Credit.
A credit could be offered against medical expenses, and the
current deduction could be eliminated (or allowed only for
expenses in excess of the credit).
Depending on the extent
to which the credit covers costs, such a proposal could be
designed as part of a program of national health insurance,
or it could be much more limited in scope.
In some national
health insurance schemes, the credit serves as a device to
provide catastrophic coverage, while other coverage is
provided through other means.
Converting the deduction to a credit implies a change in
the purpose to which the tax expenditure is directed.
A
deduction is allowed primarily to define the tax base, i.e.,
to classify individuals with equal ability to pay taxes.
Thus, a taxpayer with $25,000 of income and $5,000 of
deductible medical expenses is treated as having equal
ability to pay as a taxpayer with $20,000 of income and no
deductible medical expenses, all other things being equal.
At the same time, since the value of a deduction increases
with income, it provides a greater price subsidy to those at
higher income levels.
A credit, on the other hand, may be
viewed as a payment from the government to subsidize the cost
of some item —
in this case, medical care —
adjust the measure of income subject to tax.
rather than to
A credit
usually provides an equal level of price subsidy for all
-33subsidized expenditures at various income levels and marginal
tax rates. 20/
Because the purpose of the credit is usually
unrelated to the goal of defining the tax base, it is often
designed to be available to taxpayers who do not itemize and
to nontaxable persons, 21/ as well.
The cost (i.e., revenue loss) of a credit would depend
upon the type of proposal that is made.
Assume that a
personal credit is adopted in lieu of the personal deduction,
that there is no increase in price of or demand for health
care, and that a credit is available for all private medical
expenses.
Each one percent of credit would then cost about
$1 billion in 1978, with an offset of around $150 million due
to the elimination of the current tax expenditure for
personal deductions and a reduction in the use of
employer-provided insurance.
To lessen the cost of a credit, both a deductible amount
and a copayment rate could be applied to the credit.
These
20/ Thus we have such terms as "refundable tax credits,"
even though there is no tax against which'the credits are
taken. In effect a refundable tax credit is an expenditure
administered along with the income tax.
21/ Sunley (1977) argues that, if one could separate involuntary and voluntary medical expenses, then one might want to
allow a deduction for involuntary expenses since they reduce
ability to pay, but to credit (subsidize) the voluntary
expenses.
-34changes would not only lead to a decrease in the cost of the
credit, but they also would limit the increase in demand
caused by the government subsidization of health care.
To target a credit most to those in need, a deductible
amount should be based on income. 22/ Thus, as with the
current medical deduction, only expenses in excess of a given
percentage of income would be eligible for the credit. The
alternative to a variable deductible amount is a flat
deductible amount. A flat deductible, however, is not well
targeted to those most in need of assistance, nor does it
take into account that demand may increase somewhat with
income.
Moreover, parameters in the Tax Code are not indexed
for increases in income, whether real or inflationary. Over
time, a credit with a fixed dollar deductible could lead to a
larger and larger proportion of total medical expenses being
paid out of public funds. Assuming more than pure
inflationary growth in the total amount of medical
expenditures, an increase in public share would occur even
with a flat dollar deductible indexed for inflation.
2 2 / O n e result of varying the deductible with income is
that, for certain persons there is an implicit tax rate on
increased earnings due to the increase in the amount of
expenses not eligible for the credit. For instance, if the
credit were to equal 100 percent of all expenses in excess of
10 percent of adjusted gross income, thhen, for a person with
$1,500 in medical expenses and $10,000 in adjusted gross
income, an extra dollar of earnings reduces the credit by ten
cents (from $500 to $499.90).
-35-
National Health Insurance.
This paper is concerned with
tax expenditures rather than national health insurance (NHI).
However, adoption of a NHI plan would have substantial
effects on existing tax expenditures for health care even
without a change in the laws allowing the exclusion and the
deduction.
The principal change comes about because of the
substitution of sources of payment for medical care.
If
employer payments increase, so do tax expenditures due to the
exclusion.
If government payments substitute for employer
payments, tax expenditures due to the exclusion go down.
On
the other hand, increases in employer or government payments
for medical care both may lead to decreases in direct
payments by persons and, therefore, to decreases in the use
of the itemized deduction for medical expense.
Because the
size of the tax expenditure for the employee exclusion is
much larger than the tax expenditure due to the personal
deduction, the change in total tax expenditures for most NHI
proposals is primarily determined by the change in
expenditures of employers.
Table 5 shows the change in tax expenditures and other
changes in income tax collections due to adoption of selected
prototype plans for national health insurance.
Since the
amount of direct patient payments decline in all cases, there
-36is a decrease in the use of the personal itemized deduction
for medical expenses.
Public plans which require increased
employer payments raise the tax expenditure cost of the
exclusion, while plans which primarily increase government
payments decrease the amount of that exclusion.
Any NHI plan might be accompanied by any of the three
previously mentioned options:
elimination of the exclusion,
disallowance of the deduction, or a credit in lieu of a
deduction.
To the extent that NHI replaces excludable
employer payments, elimination of the employee exclusion of
employer payments may not result in a large increase in
taxable income. A proposal for eliminating the exclusion
might properly be based on the argument that all
extraordinary costs already would be covered by NHI and that
tax-exempt NHI coverage would be approximately equal for all
citizens.
However, it would be inconsistent if taxable
income would include payments for medical insurance and
services from employers but not from the government.
Furthermore, the problem of attributing the market value of
employer-paid insurance premiums to each employee would
remain.
Disallowing the itemized personal deduction might also
be justified if national health insurance covered all
Table 5
Indirect Effect of National Health Insurance on Income Tax Collections
Expenditure Source
Tentative Estimates
Prototype Plan
<
Target
:: Consumer Choice
Publicly Guaranteed
:;
Public Corporation
;;
* Change In :;
: Change In ::
: Change In : : ~ ~
"
x Change In
Change In : Income Tax:: Change In : Income Tax:: Change In : Income Tax:: Change In : Income Tax
Expenditures Collections::Expenditures:Collections::ExPenditure3:Collection8::Expenditures:Collection8
Insurance
Employer
Employee
Private
• 17.0
•
0.5
5.0
- 4.3
*
-I- .2
• 24.0
•
2.0
5.0
- 6.0
*
• .2
Other Employer
- 1.0
• .3
- 1.0
• .3
Direct Patient Payment
• 14.5
+ .6
-14.5
• .6
Federal
- 29.0
Total
+ 26.0
• 25.5
- 8.0
• 1.3
*
•
.1
.3
- 4.9
+15.5
- 28.0
- 9.5
- 4.5
- 0.5
• 7.0
• .2
• .2
• .1
- 8.5
• .3
• 72.0
•32.5
• 20.0
- 3.2
- 5.0
- 2.0
- 2.0
• 1.7
• 21.0
• 7.8
CO
I
Addendum:
-If add employer tax
credit of $5 billion
•SI. 3
•$1.3
- If increase excise taxes,
increase employer payments to a payroll tax
or add to a value added
tax of $5 billion
-$1.3
-$1.3
-$1.3
-$1.3
* Less than $50 million
January 4, 1979
Office oi the Secretary of tne Treasury
Office of •ax Analysis
-38extraordinary costs.
Still, the more coverage provided by
NHI, the less the possibility that out-of-pocket health
expenditures would exceed three percent of adjusted gross
income.
Thus, while eliminating the deduction might be
justified, the revenue effect is of less significance because
fewer taxpayers would exceed the floor.
Finally, a tax credit might very well be the form in
which insurance for catastrophic events is offered under NHI.
Depending upon the size of the credit, the personal deduction
might or might not be eliminated.
If not eliminated, it
would only be allowed for expenses in excess of those not
covered by the credit.
If the credit is large enough,
however, there may be no cases in which expenses would exceed
a floor, and, thus, no need for the deduction.
-39VII.
CONCLUSION
Tax expenditures for medical care form a large and
growing part of the Federal budget.
Employer payments for
medical care have always been exempted from income taxation,
and an increasing proportion of total private medical
payments are exempted from tax because of the increase in
coverage provided by employers.
The personal deduction was
first allowed in 1942 and has been expanded since then to
cover expenses which might be considered quite ordinary
today.
For 1979 Federal income tax expenditures for medical
care will exceed $11 billion and will comprise about 5
percent of total expenditures for medical care and about 9
percent of private expenditures.
State income tax and social
security tax collections are also reduced by another $6
billion.
While not as large as direct expenditure programs
such as Medicare and Medicaid, these tax expenditures do have
an impact upon the demand and price of medical care.
At the
margin, these expenditures often reduce price by 29 to 35
percent.
Practically all policies connected with medical care
affect the amount of tax expenditures for medical care.
-40Direct expenditures may change tax expenditures even if the
laws affecting the exclusion and deduction are unchanged.
The design and choice of tax expenditure policy is dependent
upon the extent to which medical exclusions and deductions
are to be made equally available to all persons, the amount
of ordinary expenditures which are to be disallowed a
deduction, and the extent to which other public expenditures
are used to offset costs of health care.
-41-
BIBLIOGRAPHY
[1]
Buchanin, James M. and Pauly, Mark V. "On the
Incidence of Tax Deductibility," National Tax Journal 23
(June, 1970): 157-167.
[2] Davis, Karen. "National Health Insurance." In
Setting National Priorities -- The 1975 Budget. Ed. by
Blechman, Barry McGramlich, Edward M.; and Hartman,
Robert W., Washington: The Brookings Institution, 1974.
[3] Davis, Karen and Schoen, Cathy. Health and the War
on Poverty: A Ten-Year Appraisal. Washington,: The
Brookings Institution, 1978.
[4] Enthoven, A. "Recommended Low-Cost Changes to
Existing laws to Enhance Competition Among Health Care
Financing and Delivery Plans." Unpublished note
(February, 1979) .
[5] Feldstein, Martin S. "The Welfare Loss of Excess
Health Insurance." Journal of Political Economy 81
(March-April, 1973): 251-281.
[6] Gibson, Robert M. and Fisher, Charles R. "National
Health Expenditures, Fiscal Year 1977. Social Security
Bulletin 41 (July, 1978): 3-20.
[7] Havighurst, Clark C. "Controlling Health Care Costs:
Strengthening the Private Sector's Hand." Journal of
Health Politics, Policy and Law. 1(Winter, 1977) :
471-498.
[8] Mitchell, Bridger M. and Phelps, Charles E.
"National Health Insurance: Some Costs and Effects of
Mandated Employee Coverage." Journal of Political
Economy 84 (1976): 553-571.
[9] Mitchell, Bridger M. and Schwartz, W. "The Financing
of National Health Insurance." Science 192 (May, 1976).
[10] Mitchell, Bridger M. and Vogel, Ronald J. "Health
and Taxes: An Assessment of the Medical Deduction."
Southern Economic Journal. XLI(April, 1975): 660-672.
-42[11]
Newhouse, Joseph P. "The Erosion of the Medical
Marketplace." Prepared under a grant from the
Department of Health, Education and Welfare. Santa
Monica: The RAND Corporation, 1978.
[12] Newhouse, J.; Phelps, C; and Schwartz W. "Policy
Options and the Impact of National Health Insurance."
New England Journal of Medicine (June, 1974).
[13] Phelps, Charles E. rtThe Demand for Reimbursement
Insurance." In The Role of Health Insurance in the
Health Services Sector. Ed. by Rosett, Richard N. New
York: National Bureau of Economic Research, 1976b.
[14] Phelps, Charles E. "Some Implications of
Catastrophic Health Insurance." Unpublished paper.
Santa Monica: RAND Corporation, January, 1976a.
[15] Schreiber, Chanoch "Inequality in the Tax Treatment
of Owner-Occupied Homes," National Tax Journal XXXI
(March, 1978): 101-104
[16] Sunley, Emil M. "The Choice Between Deductions and
Credits." National Tax Journal 30 (September, 1977):
243-247.
[17] U.S. Treasury Department. "Tax Expenditures
Affecting Individuals, Fiscal Year 1977," "Muskie News"
(February 13, 1978). Appendix to
[18] Yohalem, Martha Remoy "Employee Benefit Plans,
1975." Social Security Bulletin 40 (November, 1977):
19-27.
G P O 943-704
wtmentoftheJREASURY
TELEPHONE 566-2041
||NGTONr D.C. 20220
July 9, 1979
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,900 million of 13-week bills and for $3,0Q1 million of
26-week bills, both to be issued on July 12, 1979,
were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:
26-week bills
maturing January 10, 1980
Discount Investment
Price
Rate
Rate 1/
13-week bills
maturing October 11, 1979
Discount Investment
Price
Rate
Rate 1/
High
97.669^' 9.222%
9.60%
97.669^
Low
97.650
9.297%
9.68%
Average
97.658
9.265%
9.65%
a/ Excepting 2 tenders totaling $640,000
b/ Excepting 1 tender of $10,000
Tenders at the low price for the 13-week
Tenders at the low price for the 26-week
95.389---/
: 95.355
: 95.367
9.121%
9.188%
9.164%
9.72%
9.80%
9.77%
bills were allotted
bills were allotted
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TENDERS RECEIVED AND ACCEPTED
(In Thousands )
Received
Received
Accepted
$
31,960
"5
40,270 "?
40,270
3,563,360
3,543,725
2,384,725
11,845
21,925
21,925
35,005
22,775
45,005
39,380
41,335
39,380
43,620
43,620
30,280
109,475
189,475
170,295
18,605
38,020
39,605
13,600
13,600
11,870
49,180
49,180
36,680
19,510
19,010
10,830
206,960
89,960
206,770
35,620
35,620
51,440
Accepted
$
31,960
2,560,860
11,845
22,775
41,335
30,280
65,295
17,020
11,870
36,680
10,830
108,770
51,440
TOTALS
$4,287,875
$2,900,375
$4,227,460
$3,000,960
Competitive
Noncompetitive
$2,571,470
514,005
$1,183,970
514,005
$2,793,115
396,245
$1,566,615
396,245
Subtotal, Public
$3,085,475
$1,697,975
$3,189,360
$1,962,860
Federal Reserve
and Foreign Official
Institutions
$1,202,400
$1,202,400 :
$1,038,100
$1,038,100
$4,227,460
$3,000,960
Ty.Ee
TOTALS $4,287,875 $2,900,375 '•
jVEquivalent coupon-issue^yield.^ ^
B-1711
STATEMENT OF
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
July 10, 1979
Mr. Chairman and members of this distinguished Committee:
I appear before you today to discuss our nation's
energy crisis, particularly as it relates to crude oil.
I will first review the severe energy problems we face.
Then, I will turn to the President's program: his decision
to decontrol crude oil prices, the imposition of a windfall
profits tax on domestic crude oil production, the creation
of an Energy Security Trust Fund, and revisions of the
foreign tax credit.
Nature of Our Energy Problem
At the core of our energy problem is the country's
dependence on crude oil imports to supply our energy demands.
We supply less than 60 percent of our needs from domestic
production despite gains from Alaska. As a result,
° our economy remains vulnerable to interruption of our
crude oil supplies for a variety of reasons, including
political instability in foreign countries;
0
0
our economy remains vulnerable to sharp and inflated
increases in the price of oil which enlarge our trade
deficit, threaten the value of the dollar, and erode
real incomes;
our economic planning remains vulnerable to the unscheduled and unpredictable pricing decisions of a
foreign cartel.
B-1712
- 2 These problems are not unique to the United States.
They are shared by all the oil importing countries of the
world. The harsh reality of our situation was evident even
before OPEC's decision in June to raise once again the
posted price of crude oil. The cutoff of production from.
Iran had diminished world petroleum stocks and sent the
price of crude oil soaring. As of the beginning of June
1979, world oil prices (outside of the spot market) had
reached an average of over $17 per barrel, an increase of
more than 38 percent from December 1978. The effects of the
cutoff in Iranian production, gasoline shortages and rising
prices for refined products, were already rippling through
the economy.
Our domestic energy problems were strained further by
the June OPEC price increase, despite the moderation shown
by some countries and despite Saudi Arabia's decision to
increase temporarily its level of production. OPEC's price
of $18.00 for Saudi marker crude was coupled with allowances
for surcharges and quality and location differentials of up
to $5.50. We now calculate that this will translate into an
average OPEC oil price of between $20 and $21, an increase
of about 60 percent since December, 1978.
The oil price increases this year, when compared to the
schedule announced by OPEC last December, increase the
likelihood of a recession. The direct, first round effect
of increases made since December, 1978 will be to cut 1
percent from our growth rate in 1979. By the end of 1980
the level of GNP will be 2 percent below what would otherwise have occurred. The rate of inflation will rise by 1
percent in 1979 and another 1 percent in 1980 above what it
would have been. Unemployment will increase by 250,000 by
the end of 1979 and another 550,000 by 1980, for a total of
800,000. Total OPEC pricing actions this year will add
about 12 cents a gallon to the price of gasoline and heating
oil, assuming a straight dollar and cents pass through.
The President's Program
President Carter took the lead in curbing our dependence
on oil imports long before the latest round of OPEC increases,
and he responded with decisive leadership at the Tokyo
Summit after the most recent OPEC price increase was announced.
In March, 1979 we agreed with our allies in the International Energy Agency to reduce U.S. imports (by the fourth
quarter of 1979) by up to 1 million barrels a day below
- 3 levels expected prior to the 1979 OPEC price increases. At
the Tokyo Summit the President pressed for and won a more
extensive commitment. In addition to limits on oil imports
in 1979 and 198 0, specific goals for each country were set
for 1985. The U.S. goal for 1985 is the same as the goal
for 1979 and 1980 — 8.5 million barrels a day.
This is an ambitious goal, and it will require much
sacrifice. We must move forward along the lines the President
is already implementing and along the lines the Administration
will propose soon. Close coordination between the Administration and Congress is essential if we are to achieve these
goals.
The two key elements of the program already set in
motion by the President are:
° phasing out price controls on domestic crude oil, and
° proposing a windfall profits tax.
The Decontrol Program
The first element in the President's program is the
phasing out of the perverse system of price controls and
entitlements imposed on domestic oil production.
The system originated with the comprehensive wage and
price controls instituted by the Nixon Administration in
1971 and has operated in its present form since 1973. The
system has grown steadily more complicated. At present, no
single expert can pretend to understand how all the regulations work or whom they benefit. If ever a federal program
deserved to be called a "bureaucratic nightmare", the regulation of U.S. oil prices has earned that distinction.
What is clear about the system is that it has intensified our"energy problems. It does so by disguising from
the American people ~ consumers, investors, and industry
alike —what, we are all really paying for oil. Because of
the system, we use and import more oil than we should; we
produce less domestic oil than we should; and we neglect to
make economically sensible and necessary investments in
alternative energy sources and technologies.
The oil pricing system has two components. First, it
sets various ceiling prices for the domestic production of
oil
Lower-tier oil — production from fields in operation
- 4 in 1973 — is generally capped at about $6 per barrel.
Upper-tier oil — production from fields placed in operation
since 1973 — is capped at approximately $13 per barrel.
Second, the system requires refiners to make payments —
known as "entitlements" — to each other so that each
refiner pays the same average price for a barrel of oil,
regardless of the source of supply.
The results of these controls and regulations are
rather obvious:
° The average price of oil to refiners, and thus to
individual and industrial consumers of oil, is substantially less than the world price. For example,
on April 1 of this year, the country was facing a price
of $17.55 a barrel for imported oil on the world market.
But the controls-and-entitlements system established an
average refiner price of $14.52 per barrel, regardless
of source. As a consequence there was an effective,
federally-mandated incentive of $3.03 per barrel to
import oil, rather than use domestic oil, and a like
incentive to consume oil, rather than to conserve it or
use some alternative form of energy, such as coal,
natural gas, or solar energy.
° The incentive to produce oil domestically is artificially depressed. About 40 percent of domestic oil
has been subject to the lower-tier cap of about $6, and
another 30 percent to the upper-tier cap of about $13.
Compared to the price for imported oil of $17.55 in
April, these controls constituted a straightforward
signal to oil owners to invest in more profitable
ventures, either here or abroad.
The President's decontrol program will end the subsidy
to consumers of oil, encourage conservation and substitution
of other energy sources, and provide the appropriate incentives to expand domestic oil production. The route chosen
will delay as much of the inflationary impact of decontrol
major
features
of the President's
decontrol
untilThe
1981
or 1982
as practical
while maximizing
the program
incentive
are: to increase production in 1979 and 1980.
° Producers of lower-tier oil (also called "old" oil)
will be allowed to reduce the volume of output they are
r.equired to sell as old oil by 1-1/2 percent each month
- 5 in 1979 and 3 percent each month from January, 1980
through September, 1981, dete_rmined from new control
levels established as of January, 1979. This means
that a property whose old oil control level is 100
barrels a day in January, 1979 will be required to sell
as old oil only 82 barrels a day in December, 1979, and
46 barrels a day in December, 1980. Production above
these levels may be sold as upper-tier oil.
° The price of upper-tier oil will be phased up to the
world price beginning on January 1, 1980 and ending on
October 1, 1981.
° As of June 1, 1979, newly discovered oil was decontrolled, as was that volume of production from any oil
field that results from introducing tertiary recovery
programs.
° Eighty percent of production from marginal wells —
that is, wells producing less than specified amounts of
oil in 1978 — was allowed to sell at the upper-tier
price beginning June 1, 1979. The balance is to be
released to the upper tier on January 1, 1980.
A key aspect of this program is the decontrol of old
oil. From 1976 to 1978, oil price regulations gave the
lowest return to those producers who made the greatest
effort to increase production after the 1973 embargo, while
giving the highest return to those producers who did the
least to meet the national need after 1973. The decline
rate change for lower-tier oil announced by the President
eliminates the disincentive to produce from old oil fields,
since the profit earned from increased production in old oil
properties will be the same as from investments in new oil
properties. From the standpoint of production incentives, a
rapid decline rate is the most efficient method of decontrolling
lower-tier oil.
Another key aspect of the President's program is the
decontrol of newly discovered oil and incremental production
which results from the completion of tertiary recovery projects. No longer will exploration for new reserves in
untapped areas be discouraged by a stifling system of price
controls. Further, the incentive to invest in tertiary
projects which involve risky efforts to apply expensive,
experimental procedures to the recovery of additional oil
from depleted reserves will be as great as the incentive to
explore for newly discovered oil. This is as it should be
in a competitive economy.
- 6 Windfall Profits Tax
Decontrol is "an essential step toward a sensible national energy policy. However, decontrol will create some
windfall profits since, in many instances, the world price
exceeds that necessary to induce rapid discovery and production. To recapture some of these windfall profits, while at
the same time preserving production incentives, we have
proposed to tax a portion of the windfall profits generated
by decontrol and by recent and future OPEC price increases.
An additional portion of the windfalls will automatically be
recovered through existing federal income tax laws.
1. The Administration Proposal
The President proposed a 50 percent tax on three bases:
° The windfall profits from moving lower-tier oil to the
upper-tier;
0
The windfall profits from moving upper-tier oil to the
world price; and
° The windfall profits from recent and future real increases
in the world price.
A. Lower-tier
The tax on old oil would be equal to 50 percent of the
difference between the price at which the oil is sold and
the control price of the old oil. The control price is
currently about $6.00* per barrel and is to be increased by
inflation. The tax would apply beginning January 1, 1980 to
that volume of lower-tier oil freed to the upper tier under
decontrol which exceeds the volume of oil which would be
freed under a 2 percent decline rate.
B. Upper-tier
The tax on upper-tier oil would be equal to 50 percent
of the difference between the price the oil sells for and
the inflation adjusted price of upper-tier oil. The uppertier tax is structured differently from the lower-tier tax
because upper-tier oil is to be decontrolled by ramping the
control price to the world price level by October, 1981,
rather than by using a decline rate mechanism. The tax
would begin phasing out in November, 1986, and would disappear by January, 1991.
- 7 C.
Uncontrolled tier
The third base of the windfall profits tax applies to
most uncontrolled oil to the extent not subject to the
lower-tier or upper-tier tax. The 50-percent tax would be
imposed on the difference between what the producer receives,
and a base price of $16 per barrel as of January 1, 1980.
The base would be adjusted for domestic inflation occurring
after 1979. Eventually, the decontrolled tier tax would
apply to all other domestic oil, as it is decontrolled.
2. The House Bill
The House approved the basic structure of the windfall
profits tax, but did make a few significant changes. In
view of the overall supply and revenue impacts of the House
bill, we believe that the House has adopted a basically
sound approach to the problem of windfall profits. We
greatly appreciate the prompt and reasoned action of the
House and the cooperation and encouragement provided by the
House leadership.
The House bill, like the Administration bill, imposes
an excise tax on the difference between the amount received
for domestically-produced crude oil, and a base price. The
tax is imposed on three different bases, derived approximately from the existing price control structure. The bases
corresponding to existing production would gradually be
phased out. Incentives are provided in order to stimulate
production for oil (such as incremental tertiary) which is
especially difficult to produce. The revenues derived from
the tax are to be set aside in a special trust fund.
The Administration endorses the overall approach taken
by the House. I will, therefore, not take time here to
review each of the elements of the House bill. Rather, I
would like to discuss with you those differences between the
House bill and the Administration bill which are of particular
concern to us, and the reasons why in certain instances we
would prefer that you modify ,the House bill. In addition,
there are certain issues not specifically covered by the
legislation which merit your attention.
3. Windfall Profits From Uncontrolled Tier
The Administration proposed a permanent tax on production
that is now decontrolled or effectively decontrolled, and
therefore is able to earn the world market price. This
- 8 includes oil from stripper wells (wells that produce less
than 10 barrels a day for a 12-month period), newly discovered oil and incremental production resulting from the
introduction of tertiary recovery procedures in old oil
fields. This base also includes oil from producing reservoirs as this oil is decontrolled and the windfall profits
tax on lower and upper tier oil gradually phased out.
The House bill divides the tax on the uncontrolled tier
into two parts, only one of which is made permanent. Newly
discovered oil and incremental tertiary oil are taxed at a
50-percent rate on receipts between $17 and $26 per barrel,
and a 60-percent rate on receipts in excess of $26. The
$17-26 base is adjusted for inflation plus 2 percent. The
tax on these two categories of oil terminates abruptly on
December 31, 1990. The balance of oil in the uncontrolled
tier is taxed in a manner similar to the Administration's
proposal, except that a 60-percent rate applies. This part
of the tax is permanent.
A. Permanency
The Administration believes that both parts of the
uncontrolled tier should be permanent.
It has been argued that a permanent tax on the uncontrolled tier would permanently condemn producers to a lower
price at home than they might realize abroad, and that the
United States will produce less oil than would be produced
in the absence of a permanent tax.
The world price of oil is not determined by the workings
of a free market where supply and demand equate price to the
marginal cost of production. Since 1973, it has been set by
a cartel well above the cost of production. Given these
circumstances, there is no economic reason for allowing
producers of domestic oil to receive the world price of oil
on their production.
It has been argued that the imposition of a windfall
profits tax on increases in the world price in excess of
inflation will drive producers toward foreign exploration.
This is simply not true. The United States is not unique in
seeking to capture a portion of higher oil prices. In every
other producing country, increases in the price of oil have
immediately been accompanied by increases in taxes on
producers or by nationalization. Either action deprives the
producer of the increased revenues. In the United Kingdom,
- 9 the tax on North Sea producers is designed to make the
government the principal beneficiary of higher world oil
prices. This same effect has been realized in Venezuela
through nationalization. Similar examples can be found in
most other countries.
Finally, those who argue that we will lose a small
amount of domestic production due to the uncontrolled tier
tax fail to recognize the risk of imposing no tax at all.
Political forces will not allow complete and permanent
decontrol of oil so long as we face an unqualified threat of
embargoes and sudden price increases. In the absence of a
permanent tax, a future surge in oil prices could compel a
return to regulation. It is preferable to risk sacrificing
the very small potential supply response in order to avoid
such a situation.
B. Threshhold price and inflation adjustment
The Administration recommends that the entire uncontrolled tier tcix base begin at $16 per barrel and be adjusted
no more rapidly than the domestic inflation rate. The House
bill treats newly discovered and incremental tertiary oil
specially, starting the tax at $17 per barrel and adjusting
for domestic inflation plus 2 percent.
The Administration's $16 figure is based on the estimated
world price which would be in effect as of the first quarter
of 1980 as a result of the December, 1978 OPEC price announcement. The base price was calculated to allow for uncertainties about the difference between the posted price of
Saudi Arabian marker crude, and transportation costs,
quality differentials and other relevant factors. By
choosing $16, most domestically produced uncontrolled crude
oil would pay no tax unless OPEC were to raise its prices in
excess of inflation.
It has been suggested that the $16 base be increased
because recent OPEC surcharges and the increase in the price
of Saudi marker crude have already increased the price of
oil. However, the President's windfall profits tax proposal
is designed to prevent domestic producers from benefiting
from just these kinds of sudden price increases. There is
no rational reason for exempting from the windfall profits
tax the profits domestic producers are realizing from these
recent increases.
- 10 Allowing the tax base to be adjusted upwards by 2
percent more than inflation seems excessive. The price
received by oil producers should increase no more rapidly
than the general price level. The argument that drilling
costs have risen more rapidly than inflation is simply not a
sufficient justification for providing the very generous 2
percent additional adjustment.
C. Tax Rate
We agree with the reduced tax rate provided in the
House bill for newly discovered and incremental tertiary oil
when receipts are not more than $26 per barrel.
4. State-owned Lands
Under the House bill, income from interests in oil
production owned by State or local governments, or their
instrumentalities, is exempt from tax if it is dedicated to
public education. The Administration's bill did not have
this exemption.
The Administration opposes the House "education"
exemption and recommends that it be deleted from the bill.
The exemption bears no relationship to oil production or to
windfall profits. It is, in effect, a form of "revenue
sharing" to subsidize certain educational activities in
states fortunate enough to have oil-bearing lands. If these
activities are in need of a subsidy, there are surely more
direct, simpler, and fairer means than providing a special
exemption from the windfall profits tax. . After all, under
decontrol, even with a windfall tax, revenues for these
educational purposes will increase substantially. Moreover,
these additional revenues are not subject to income tax.
5. Alaskan Oil
The House bill taxes certain Alaskan oil production to
a limited extent. The Administration bill would have
exempted Alaskan oil entirely from the tax, even though
Alaskan oil currently being produced is upper-tier oil under
the oil price control program.
The exemption in the Administration bill was based on
the large differential between the wellhead price for
Alaskan oil (only $5.40 a barrel when the proposal was made)
and the $13 control price which is also the threshhold level
- 11 for the upper-tier windfall tax base. It was believed that
since the wellhead price of Alaskan oil would not soon
approach the threshhold tax level, an outright exemption was
preferable to the administrative inconvenience of requiring
producers to demonstrate that their oil was not taxable.
World oil prices have surged dramatically since the
Administration proposed its windfall profits tax. The
assumption underlying the Alaskan oil exemption is no longer
valid. Consequently, the Administration has no objection to
taxing oil from existing Alaskan production. This is
entirely consistent with the overall policy behind the
windfall profits tax.
We believe, however, that the threshhold tax level in
the House bill is too low. Since Alaskan oil does not
benefit from decontrol until the wellhead price reaches $13
per barrel, we would prefer that Alaskan oil from the
Sadlerochit reservoir be taxed as upper-tier oil. Newly
discovered Alaskan oil should be exempt from the windfall
profits tax.
6. Windfall Profits Tax and Production Capital
Some have argued that the windfall profits tax denies
capital required for further exploration. Such arguments
are without economic foundation. The economic incentive is
provided by the price of newly discovered oil, not by the
cash flow from existing production. The cash flow argument
is premised on the untenable proposition that those now
engaged in the exploration for oil and gas deserve a cheap
source of capital while new entrants should pay the market
price for capital. This is inconsistent with commonsense rules of fair play in a competitive economy, because
it would further impede entry by non-oil firms into oil
production and thus reduce competition.
A variation on the "cash flow" argument is plowback.
Plowback is an offset against the windfall profits tax for
certain oil-related investments. Plowback should be recognized for what it is: a subterfuge for windfall profits tax
relief for oil producers. This tax is being sought in part
because some of the increased profits from decontrol aire
windfalls that do not lead to appreciably increased domestic
oil production. Likewise, plowback — which is merely an
abritrary forgiveness of the tax — will not necessarily add
to domestic oil production.
- 12 Proponents of plowback argue that it provides assurance
that this additional income would be reinvested only in
domestic oil production. However, as a targeted subsidy, a
plowback is deficient. Since plowback would be limited only
to present owners of oil, it would provide no incentive to
new entrants into production. This would discourage competition in the industry and encourage concentration.
Moreover, plowback subsidies would be distributed only to
the owners of interests in the oil, such as royalty holders.
Not all owners look for, find, and produce oil, and it is
discovery leading to production by anyone, not merely those
who presently own oil, which should be encouraged. In
addition, plowback would require complex and arbitrary
definitions of threshhold, or base period, investment levels
and of qualifying investments, leading to interminable
administrative disputes and litigation.
Energy Security Trust Fund
The President has proposed to convert windfall profits
derived from OPEC pricing into the direct advancement of
energy technology, the development of energy efficient mass
transit, and for assistance to those least able to afford
energy price increase's attributable to decontrol. This will
be done through the Energy Security Trust Fund.
Under the President's proposal, the Fund would consist
of the proceeds of the windfall profits tax, and increased
federal income taxes attributable to decontrol during the
deregulation period. The Fund is an addition to, and not a
replacement of, existing Department of Energy funding. The
cost of all Fund programs will be limited to Fund resources.
The new programs will be undertaken only if the windfall
profits tax is enacted. The cost of any new energy tax
expenditures will be charged against Fund receipts in order
to control these subsidies more effectively. All spending
programs financed from the Fund will be subject to annual
authorization and appropriation. Given available funds,
additional initiatives may be undertaken to reduce U.S. oil
import dependence.
Although the House adopted the general concept of a
trust fund, it made several important changes to the President's
proposal. The program specifications were left out; general
revenue financing was dropped; and the charge against the
Fund for new tax expenditures deleted.
- 13 We believe that the Trust Fund should be augmented by
the increase in federal income taxes from decontrol collected
through fiscal year 1982. It is important that this revenue
be available to finance Trust Fund programs. In addition,
for reasons of sound fiscal as well as energy policy, it is
essential that any new energy tax expenditures be charged
against the Fund. This would provide at least some measure
of accountability for subsidies that are functionally
equivalent to direct spending programs.
Foreign Tax Credit
The President is also proposing certain changes in the
way the foreign tax credit applies to oil and gas income.
The foreign tax credit is fundamental to the United
States system of income taxation. It is intended to prevent
the double taxation of income earned abroad. To ensure that
the credit operates as intended, the Treasury Department has
recently proposed new regulations to clarify existing law on
the standards to be applied in determining when a payment to
a foreign government qualifies for the credit.
Our legislative proposal is designed to improve the
credit in one important area. In essence, the proposal
seeks to ensure that income taxes paid to a foreign country on
income from oil extraction in that country may be credited
against the U.S. tax on that same income, and only on that
same income.
There are already special rules in the law, introduced
in 1975 and modified in 1976, which limit the credit available for foreign taxes paid on income from oil extraction.
The amount of foreign taxes paid on such income which may be
claimed as a foreign tax credit is limited to the U.S.
corporate tax rate times foreign oil extraction income.
That credit may only be used against the U.S. tax on income
from foreign oil extraction or from other foreign oilrelated activities. Thus, the President's proposal builds
upon concepts inherent in existing law.
There are, however, some defects in present law which
prevent it from operating as intended: to limit the credit
for extraction taxes to the U.S. liability on the very same
income that was burdened by those taxes. As a result of
those defects, high taxes paid on foreign oil production and
losses generated by foreign drilling expenses in a particular
- 14 country may still reduce U.S. tax on other income. Although
these defects are highly technical, they are also highly
important.
Our proposal would cure these defects by making three
changes. First, the foreign tax credit with respect to oil
extraction income would be strictly limited to the U.S. tax
on extraction income. We would accomplish this by requiring
that the credit for taxes on foreign oil extraction income
be computed separately from the credit on all other foreign
income. Thus, extraction taxes or losses will no longer be
able to shelter other income, such as foreign shipping or
refining income, from U.S. tax. Second, the credit for
foreign oil extraction taxes would be limited to the lesser
of the amounts computed on a country-by-country or overall
basis. Where there are substantial losses, the overall
limitation will be retained to prevent the losses from
reducing U.S. tax on U.S. source income. But where there
are no such losses, the country^by-country limitation will
prevent the averaging of high taxes and low taxes to the
detriment of the U.S. Treasury. Third, the proposal provides for the recapture of the U.S. tax benefit attributable
to extraction losses incurred in any given foreign country.
Recapture will apply in a situation where a loss reduces
U.S. tax, and a later gain in the same country generates
taxes. Without recapture, the allowance of both the loss
and the foreign tax credit would represent a double benefit.
The proposal is estimated to increase U.S. tax liability
by about half a billion dollars at current (1979) income
levels. Considered in the context of the Administration's
overall energy package, the proposal should not curtail the
incentive to look for new sources of oil.
Economic Impacts
Our initial estimate, based on an assumption of no real
increases in OPEC prices, was that the additional inflation
resulting from phased decontrol compared to retaining controls
indefinitely would have been 0.1 percent in 1979 and 0.2-percent on average over the next three years. By 1982, the
level of the consumer price index would have been approximately
0.75 percent higher. We also estimated a case in which world
oil prices rose 3 percent a year faster than world inflation.
Under this case, the level of the consumer price index in
1982 would have been 0.9 percent higher than otherwise.
- 15 Of course, OPEC has raised its prices at a far higher
rate than we forecast. However, the basic conclusion we
reached earlier — that the inflation rate is not substantially affected by phased decontrol — is unchanged.
This is because price controls govern only about a third
of the oil consumed by the United States. The remaining
two-thirds (imports, stripper production, and Alaskan oil)
are already free to receive the world price.
Let me illustrate. By the fourth quarter of 1980,
we estimate that the inflation rate will be approximately
0.3 percent higher under a revised decontrol path which takes
into account the most recent OPEC increases. This represents
an increase of 0.1 percent in our earlier forecasts. To
put this into perspective, we estimate that, by the fourth
quarter of 1980, OPEC price increases above the December,
1978 schedule will be adding a full 2 percent to the inflation rate, even if OPEC imposes no additional real price
increases in the interim.
These inflation estimates are based only on quantifiable
decontrol effects, such as the higher prices of gasoline,
heating oil, and goods manufactured from petroleum, and the
induced impact on prices resulting from wage increases
caused by cost of living adjustments made in response to the
additional inflation. The estimates do not include any
effects from reduced prices of nonenergy imports due to the
strengthening of the dollar, and from the lower oil prices
which would result from future world oil price moderation
due to reduced U.S. demand. The excluded effects are simply
not quantifiable. Since the nonquantifiable elements suggest
lower inflation impacts, it is probable that our numbers
overstate the effect of decontrol on inflation.
Decontrol will restrain aggregate demand and economic
growth slightly over the next two years — by perhaps 0.1
percent a year. In later periods, fiscal and monetary
policy can be adjusted to the needs of the economy as they
develop, taking into account the specific economic impacts
of decontrol and expenditures from the Energy Security Trust
Fund.
The Department of Energy estimates that, relative to
continued price controls, the President's program will
reduce oil imports by about half a million barrels per day
in 1981 and 1.3 million barrels per day by 1985, assuming
OPEC prices increase only with inflation. Should OPEC raise
prices at a rate in excess of inflation, the oil import
savings would be greater.
- 16 Conclusion
In the past we have refused to address the problem of
oil prices because of the windfall profits involved. We can
no longer afford to avoid the issue. By artificially suppressing
the price of oil, too much oil is consumed and too little
produced; other efforts to solve our energy problem are
frustrated; and less incentive to switch to other fuels or
to conserve energy is provided.
The President has proposed a way to resolve this dilemma.
He has acted to decontrol crude oil prices permanently by
the end of 1981. He has also addressed in an effective
manner the issue of windfall profits created by decontrol.
He now needs your assistance to complete the program.
I look forward to working with this Committee in taking
these next steps in resolving our energy problem.
o 0 o
Revenue Effects of Decontrol and the Windfall Profits Tax
as Passed by the House of Representatives
and as Endorsed by the Administration
Assuming a $22.00 Uncontrolled Oil Price, 1979-III,
and No Real Price Increase
Calendar Year Liabilities, 1980-84
($ millions)
1980
,R, 3919 as passed by the House:
Change in tax receipts before the
windfall profits tax
Net windfall profits tax 1/
Total, decontrol and windfall profits
tax
ivenue effect of changes proposed by
the Administration:
Tax newly discovered and incremental
tertiary oil on the difference
between the sales price and $16.00
adjusted for inflation
Eliminate the exemption for state and
local royalties allocated to public
education
Tax Alaskan oil other than newlydiscovered oil as upper-tier oil
Net revenue effect of proposed
changes
control and the windfall profits tax as
endorsed by the Administration:
Ctiange in tax receipts before the
windfall profits tax
Net windfall profits taxi/
Total, decontrol and windfall profits
tax
Calendar Years
1983
1981
1982
1984
2,983
3.539
7,665
7.312
10,339
8.990
10,925
8.603
11,542
8.125
6,522
14,977
19,329
19,528
19,667
84
170
315
546
898
245
380
446
441
434
-705
-726
-713
-699
-685
-376
-176
48
288
647
2,990
3.156
7,659
7.142
10,311
9.066
10,864
8.952
11,437
8.877
6,146
14,801
19,377
19,816
20,314
fice of the Secretary of the Treasury July 9 1979
Office of Tax Analysis
'
Windfall profits tax net of the income tax offset due to the deductibility of the
windfall profits tax.
:e: The revenue effect details of the proposed changes are dependent upon the
order in which they are listed; that is, on the assumption that preceding
modifications are effective.
Energy Security Trust Fund Receipts under the Windfall Profits
Tax Endorsed by the Administration
Assuming a $22.00 Uncontrolled Oil Price, 1979-III,
and No Real Price Increase
Fiscal Years 1980-84
($ millions)
:
1980
:
Fiscal Years
1981 : 1982 : 1983
:
1984
inergy security trust fund receipts:
Income tax receipts before the windfall
profits tax
Windfall profits tax:
Gross windfall profits tax
Income tax offset
Windfall profits tax allocated to the
trust fund
Total, trust fund receipts
1,385
5,056
8,833
2,907
-863
9,311
-3,067
14,694
-5,039
14,747
14,517
2,045
3,430
6,244
11,300
9,655
18,488
14,747
14,747
14.517
14,517
•ffice of the Secretary of the Treasury July 9, 1979
Office of Tax Analysis
tote: Details may not add to totals due to rounding.
FOR --MEDIATE RELEASE
Monday, July 9, 1979
Contact; John P, Plum
202/566-2615
CHINESE FINANCE MINISTER ZHANG JINGFU HEADS DELEGATION TO U.S.
Chinese Finance Minister Zhang
here tcmorrow, at the invitation
menthal, for a two-week visit to
continuing discussions initiated
to China early this year.
Jingfu heads a delegation arriving
of Treasury Secretary W. Michael Blulearn more about the United States while
by Secretary Blumenthal on his visit
The 13-member delegation, including Vice Minister of Finance Xin
Yuanxi, will be guests of Secretary Blumenthal at a welcxDming dinner
Tuesday evening. On Wednesday, July 11, the delegation is scheduled
to meet with Secretary Blumenthal and with Congressional leaders,
Federal Reserve Board Chairman William Miller and Export-Import Bank
Chairman John L. Mcxxre.
Minister Zhang's delegation will have an opportunity to see hew
private enterprise and local government operates in the United States
in visits to Nov York, Chicago, Kansas City, Dallas, and San Francisco.
In New York July 12 and part of July 13, the group will meet with
banking and financial interests, returning to Washington July 13 for
further discussions with Treasury Department officials. On Saturday,
July 14, the mission goes to Chicago for three days of meetings with
financial and industrial leaders, and will meet Mayor Jane Bryne.
The delegation is scheduled for Kansas City, JVD., Tuesday, July 17,
for briefings on farm cooperatives and agricultural industries, as well
as a tour of a research and demonstration farm.
In Dallas, July 18 rand 19, the group will meet business and financial leaders and will visit several industrial plants, departing July
20 for San Francisco and four days of meetings there with banking,
industrial and educational leaders. The delegation is scheduled to
return hone July 24.
o 0 o
B-1713
FOR RELEASE AT 4:00 P.M.
July 10, 1979
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,900 million, to be issued July 19, 1979.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,923 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,900
million, representing an additional amount of bills dated
April 19, 1979,
and to mature October 18, 1979
(CUSIP No.
912793 2R 6), originally issued in the amount of $3,021 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
July 19, 1979,
and to mature January 17, 1980 (CUSIP No.
912793 3M 6).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing July 19, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,731
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. 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, July 16, 1979.
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 maintainedon the book-entry records of
the Department of the Treasury.^""^
B-1714
-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding' bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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.
-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on July 19, 1979,
in cash or other immediately available
funds or in Treasury bills maturing July 19, 1979.
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.
Under 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, 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.
STATEMENT BY
THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE SUBCOMMITTEES,]/ OF
THE HOUSE BANKING, FINANCE AND URBAN AFFAIRS COMMITTEE
JULY 12, 1979
This series of hearings which the Subcommittees have called
will make a valuable contribution to the understanding of the
functions being performed by the Eurocurrency market as well as
of the problems associated with the operation of that market. I
am pleased to have the opportunity to express the views of the
Treasury Department on these questions and also to comment on the
legislative proposals to deal with these problems contained in HR
3962.
The international extension of credit is an essential
ingredient of the flow of international goods and services which
is critical to the economic health and prosperity of the United
States and the world as a whole. In the early 1970's, the
current account deficit of all countries in a deficit position
taken together,* averaged about $15 billion annually. Those
deficits were financed by international credit.
The quadrupling — or quintupling — of the price of oil in
1974, together with other, less significant factors, caused a
veritable explosion in current account imbalances so that,
beginning in 1974, the aggregate deficit has averaged oyer $75
billion annually. The amount of net international credit
required to finance these deficits expanded accordingly.
Obviously, there were surpluses which aggregated to an equal
magnitude** which required the placing of investments abroad. In
practice, there are flows in both directions in both surplus and
deficit countries.
A portion of the financing — broadly speaking, about
one-quarter — was provided by governments and by multilateral
institutions (through export credits, development loans, balance
of payments financing, etc.), but the great bulk of this
international credit was arranged through the private markets.
1/
On Domestic Monetary Policy and on International Trade,
Investment and Monetary Policy
* .....
Defined as those remaining in deficit after taking account
of official grants
tit
In most of the published estimates the aggregate of the
deficits does exceed the aggregate of the surpluses because
of statistical problems but conceptually there must be a
balance.
B-1717
-2-
Banks, firms and individuals in surplus countries invested
these national surpluses abroad wherever and in whatever assets
they found best suited to their investment needs. Most of these
investments were placed in public and private p u r i t i e s and
deposits in various foreign money and capital markets ana tne
Euromarket. Some government agencies also accrued and invested
surpluses just as private entities do.
In some countries when foreign exchange was °«e"d °n the
foreign exchange market, monetary authorities purchased the
funds. They did so, either to increase their official reserve
assets or as a by-product of market intervention to prevent §
exchange rate movements, and invested that foreign exchange in
foreign government securities or bank deposits. These transactions provided a pool of funds on which commercial and investment
bankers could draw in order to lend to countries in deficit.( The
banks performed the standard intermediary function familiar in
domestic financing.
Years ago these transactions were handled in the domestic
money and capital markets of the United States and — to the
extent allowed by governmental restrictions — of other major
industrial countries. What is known as the Eurocurrency market
system developed in part because access to domestic markets was
restricted and in part because the Eurocurrency arrangements
offered slight but important competitive advantages. European
banks, prevented by governmental restrictions from extensive
foreign lending operations in their own currencies, were able to
operate in other currencies, either at home or abroad. By using
foreign currencies, primarily the dollar, they could participate
in this rapidly burgeoning business.
U.S. banks turned to branches abroad as the channel for
expanding their international lending operations, in part because
of limitations on expanded lending under the U.S. voluntary
restraint programs introduced as a balance of payments measure in
1965 and strengthened in 1968. Thus, by the time the controls
were removed in 1974 the overseas branching operations of U.S.
banks had been well established.
With the removal of the U.S. controls and the relaxation of
controls by some of the other countries, the questions of
competitive advantage and convenience of operating through
branches and subsidiaries overseas has become more important m
determining where the transactions i s booked. None of the major
industrial countries which require that banks operating within
their territories hold reserves against their liabilities
apply
those requirements to the liabilities of the foreign 'branches or
subsidiaries of their banks. Thus, offshore operations are
slightly cheaper than operations of head offices.
There may be other factors as well — in some cases offshore
operations offer some tax advantages. Furthermore, there are
cost advantages in operating what is essentially a Wholesale
-3market confined to large transactions. As a result, most of the
growth in international credit has been provided through this
Eurocurrency mechanism rather than through the home offices of
banks in their domestic currencies. For example, it is estimated
that at the end of 1978 only 17 percent of outstanding dollar
credits to foreign borrowers by U.S. banks was booked through
domestic offices, the remainder being extended through foreign
branches.
Largely because the demand for international credit is now
so large (and the volume of surplus country funds seeking
placement is so large), the size of the Eurocurrency market and
the rate of its growth have led to expressions of concern and to
fears that:
the Eurocurrency market was itself generating or
creating excessive amounts of credits,
banks were incurring excessive risks,
the ready availability of such large sources of credit
contributed to destabilizing speculation on the foreign
exchange markets,
and more recently, that .he Eurocurrency market was
complicating efforts to appraise and manage domestic
monetary conditions.
These are serious questions, and they deserve careful study.
We must expect the amount of international credit outstanding to continue to increase. The volume of world trade is
growing; prices are rising and with these increases the need for
tmancmg rises. Imbalances in world payments will not be
reduced quickly. Positions of some countries may improve in the
future, but for others the reverse may occur. The further
escalation of oil prices which we have seen in recent weeks is,
m fact, likely to result in larger global imbalances and in
demands for even more international credit recycling.
Obviously we need a financial system which "recycles" or
channels the funds accruing to coutries in current account
surplus to those seeking to finance deficits. We need a system
which provides credit to obviate the necessity for abrupt, severe
and disruptive contraction of imports by deficit nations.
On the other hand, a financial system which makes credit too
easily available to countries with weakening payments positions
and growing internal inflation may add to world inflation Lid may
aelay the initiation of desirable adjustment policies until
crisis is inevitable. Does the Eurocurrency market, with banks
in many nations competing intensively for loan business, have a
tendency to produce this result? Some analysts feel that it
Joes. Or is this competition a largely inevitable result of
-he large amounts of liquid international assets that are accumulating in surplus countries and not being invested in lonqer term
y
Lin
investments?
The VOlume Of rr.or.-it fhpco m.arU_*4-r- ~r>.,lj _. J , - .
t cnese markets could extend would be
-4somewhat reduced if the Eurobanks could — effectively and
equitably — be made subject to some type of reserve requirement.
It is argued that this action, if it could be implemented successfully, might slow the growth of total international bank
assets and liabilities, easing inflationary tendencies, encouraging weak borrowers to turn more quickly to the official international financial institutions, and adopting stabilization
policies before their situations become so acute that severe
restraints are unavoidable. Others feel that the imposition of
reserve requirements on the Eurocurrency market would simply
shift a portion of the lending to national credit markets and
have very little impact on the overall volume of international
lending.
There are no firm answers to these questions. The existence
of
this reserve-requirement-free market probably does have some
effect on the total volume of international lending and on world
inflation, particularly at times when national authorities are
exercising restraint. My own feeling, however, is that the
impact is quite modest. Imposing reserve requirements on this
market would not be a magic cure-all for world inflation.
Also highly uncertain is the degree to which the imposition
of reserve requirements on the Eurocurrency market might shift
the focus of operations back to national markets. Conceivably, a
significant portion of the operations now booked through "shells"
in the Caribbean and elsewhere, where risk of major change in
local governmental rules and regulations is sometimes considered
a factor, might, over a period of time, be shifted to head
offices as a result of the reduction in the extent of the
competitive advantage. Operations from major financial centers
in Western Europe which have a pool of managerial and banking
expertise might be less affected.
Certainly for the next few years at least we must expect
that the Eurocurrency market will continue to have a competitive
advantage over the national markets. We should not, therefore,
be surprised to see further substantial increases in the volume
of Eurocurrency assets and liabilities. A high percentage of
these increases is likely to be in dollars. Such increases do
not automatically bring pressure on the dollar in the foreign
exchange market. That pressure will depend on the changing
market demand for dollars relative to other major currencies.
It is erroneous to view the level of dollar deposits in
Eurocurrency banks as a measure of "unwanted dollars" or dollar
overhang. There is no logic in the assumption that dollars are
deposited in banks in the U.S. if the holder (whether a foreigner
or a resident of the U.S.) "wants" them and depositied in the
Euromarket if he considers them excess or "unwanted." The
decision as to whether a depositor will place his funds in a bank
within the U.S. or in a Eurocurrency bank is, at least for most
investors, primarily a matter of where he can obtain the best
banks
yield. to This
placeconsideration
a portion of even
theirleads
fundssome
in of
the the
Eurocurrency
smaller central
-5market where they can earn higher interest rates.
Some of the major central banks, however, have a gentlemen's
agreement not to increase their holdings in the Eurocurrency
market, which means that they may be expected to place any
increased dollar claims with domestic U.S. banks or in U.S.
Government securities. Also, the Federal Reserve has requested
that foreign branches of member banks outside the U.S. not
solicit deposits from U.S. residents unless such deposits serve
an international purpose.
Related to concern about excessive Eurocurrency credit is a
fear that, under the pressure of competition for business, banks
in the Eurocurrency market extend high risk credits which would
be subject to criticism from bank supervisory authorities if
extended by home offices in domestic currencies. I am confident
that this is not a problem as far as U.S. banks are concerned.
Our banks operate in the Eurocurrency market largely through
branches, and our regulatory authorities examine the worldwide
activities of each bank, not merely its head office activity.
Our bank examiners actually go into most branches overseas as
well as many subsidiaries, in addition to the head offices. They
have authority to obtain information on branches and subsidiaries
from the head office and from other foreign offices. Thus, the
degree of supervision of the Eurocurrency activities of U.S.
banks abroad is quite comparable to that of their domestic
activities.
Laws, regulations and institutional methods differ among
countries, however, and I am in no position to judge whether
excessive risk is a problem for operations of non-U.S. banks
conducted outside the home country. Most Eurocurrency operations
of German banks, for instance, are conducted by subsidiaries
established outside Germany rather than through branches. German
supervisory authorities apparently have little authority over
these subsidiaries and, in fact, are not able to obtain as much
information about their activities as they feel appropriate.
The charge that the Eurocurrency banks contribute to
destabilizing currency speculation needs to be weighed in the
context of a recognition that the pool of highly liquid funds
available to these banks is extremely large, that the system of
interbank lending is highly developed, and that the communication
facilities for global operations around the clock are extensive.
Thus, the facilities of the Eurocurrency banks can be used by
large operators in the exchange market to mobilize large sums in
a matter of minutes. The accusations that banks themselves have
engaged in collusive speculative maneuvers are not, however,
supported by our data on changes in banks' net positions in
specific foreign currencies.
The aspect of the Eurocurrency market operations which is of
greatest concern to the U.S. is the nature of its effect on
domestic monetary policy management. This is, of course, the
-6responsibility of the Federal Reserve System, and Governor
Wallich has already discussed this issue with you.
I am appending to my testimony a slightly revised and
updated version of an Assessment of the Financing of Payments
Imbalances and Activity in International Capital Markets which I
provided a few weeks ago to the Subcommittee on International
Finance of the Senate Banking Committee. It provides factual
detail on Eurocurrency market activity and the Eurodollar element
of that market.
The general policy issues surrounding the Eurocurrency
market are of current concern both to governments and central
banks in most of the major industrial countries. Detailed
studies of these problems are being conducted in central bank
channels, but the broader questions have also been discussed at a
meeting of the Deputies of the Finance Ministers and Central Bank
Governors of the Group of Ten and Switzerland. Finance Ministers
of a number of countries are following the studies under way in
the central bank channels and are encouraging and supporting
these studies.
One suggestion which the U.S. has raised for consideration
is the possibility of applying uniform reserve requirements to
Eurocurrency liabilities in somewhat the same manner as most
countries do with respect to domestic bank liabilities. The
Federal Reserve staff prepared a paper on this subject for
consideration by the central banking group. That group is
currently examining; (a) whether there is need for any further
action to regulate Eurocurrency operations; and (b) if it should
appear that some action was desirable, what type of action would
be advisable. The application of Eurocurrency reserve requirements is one — but not the only — type of measure which would
be considered by this group. As Governor Wallich has indicated,
this work is actively under way.
The Eurocurrency market has become a very important element
in a global system. We want this market to remain strong and to
continue to fulfill its intermediary function without eroding
domestic money and credit policies. We support the consideration
of both the need for and of means to promote this objective.
Under the circumstances, I believe it would be premature for
the Congress to consider legislation directing the imposition of
reserve requirements on Eurocurrency operations such as is
proposed in HR 3962. In any event, as I understand it, the
Federal Reserve would have all the authority it needed to take
such action, should it later be found advisable to do so, upon
Congressional approval of H.R. 7, the Monetary Control Act of
1979.
Finally, I am hopeful that today's hearings will prove
useful in illuminating what is a very complex and technical
aspect of international finance. We in the Executive Branch are
continuing to examine these issues carefully in order to under-
-7stand them fully ourselves, and will be working to develop viable
and useful solutions to such problems as may be disclosed during
this examination. I look forward to continuing cooperation with
the House Banking Committee throughout this process. These
hearings are a good beginning.
0OO0
EXTRACT FROM
THE OPERATION OF THE INTERNATTCNAL MONETARY SYSTEM,
JULY 1977-MARCH 1979: A TREASURY ASSESSMENT"
(REVISED JULY 11, 1979)
The Financing of Payments Imbalances
And Activity in International Capital Markets
INTRODUCTION
Intesrnational money movements, if one includes till the short-term
and foreign exchange transactions as well as medium and long term credit,
are now in the range of tens of billions of dollars daily. These transactions occur for a variety of reasons and through a number of channels.
There are no oatprehensive reporting requirements which would provide
data on the volume of transactions or their nature. The bulk of the
transactions in terms of magnitude are very short term movements, and
the flow is normally two-way. There is, in effect, an international
money market. We do not have to add up all these transactions to reach
conclusions about the way in which, on a net basis, they finance current account :imbalances.
It is useful, however, to develop sane estimates of the level of
activity in medium and long term credit. There is a clear distinction
be-taveen net balance of payments flows and a measure of activity. The
net international capital inflow which "finances" the current account
deficit of a country represents the balance of many transactions and is
a much smaller magnitude than the volume of transactions. Moreover,
the presentation of a balance of payments analysis cannot readily shew
such important questions as the extent of new borrowing which is necessary in order to repay maturing credits. A melasure of activity of
medium and long term flows can shed seme light on this aspect and provide
an indication of the institutional significance of credit markets—
their strengths and potential weaknesses; and the impact of policy measures and supervisory practices—although it can be misinterpreted .and
lead to exaggerated views of the impact of international financial markets on real economic activity. This section looks at developments
during the previous three years with a view toward assessing the relative role of the private credit markets and official credit flews in the
functioning of the international financial system.
I. THE FINANCING OF PAYMENTS IMBALANCES
During the past three years countries with current account deficits
have successfully sought to finance these deficits in large part from
private sources, chiefly from banks. Indeed, the role of private banks
-2-
in intermediating large flows of funds from surplus to deficit countries
is a hallmark of international monetary developments during the past five
years. Funds provided by governments and by multilateral institutions,
while increasing in 1978 in absolute terms, declined as a proportion of
total financing extended during this period.
Nature of Capital Flows to Deficit Countries
Table 1 at the end of this section presents a very rough overview of
the channels through which deficit countries as a group obtained the funds
needed to finance their deficits. These financing patterns are shcwn
separately in Tables 1-a through 1-d for four categories of countries:
(a) OECD (i.e., largely the industrialized countries;) (b) OPEC; (c) nonoil exporting developing countries; and (d) other deficit rountries. The
U.S. is not treated as a deficit country for the purpose of these tables.*
As can be seen from these tables, deficit counbries as a group have
continued to rely primarily on the private markets for their net annual
financing needs, the total of which has fluctuated in the range of $70-80
billion each year. Funds from official sources have been accounting for
less than one-fourth of net financing required by all deficit countries.
However, net official flows to developing countries have been proportionately much higher, ranging between 40% and 60% of their aggregate current
account deficits. In 1978, there was a small increase in the amount of
official flews to deficit countries as a group, accounted for entirely
by flews to non-oil exporting developing countries.
In recent years, borrcwing fron banks has constituted the main channel of private finance to deficit countries although bond financing and
other private investment flows have also been significant, particularly
for OECD deficit countries. On average, the OECD deficit countries have
been obtaining as much net financing through bond issues as from banks.
Total liabilities Of deficit countries to foreign banks have increased
by considerably larger magnitudes, but claims of deficit countries on
banks have also grewn rapidly. Part of this growth on both sides of the
balance sheet reflects the inflating effects of banks' redepositing of
funds with other banks (which is a characteristic of the "Euro-currency"
market).
* Because of the extensive use of the U.S. money and caoital
markets and the international role of the dollar, inclusion
of the U.S. would distort the presentation. A subsequent subsection discusses U.S. caoital account transactions.
-3*T
The growth in lending through the private markets also reflects the
emergence of sizable imbalances in the payments positions of surplus and
deficit countries in the wake of significant oil price increases. A significant portion of the surpluses has been placed with private institutions,
especially banks, and has been recycled to countries in deficit. This
recycling role has contributed to — and partly results from — the efficiency of the Euromarkets, which cure iminhibited by capital controls common to the domestic markets in many countries and not subject to reserve
requirements • imposed by national authorities on lending by resident banks
in dcmestic currencies.
Pattern of U.S. Capital Movements
As shewn in Table 2, United States residents provided considerable
amounts of private capital to other countries despite large deficits in
the U.S. balance of payments on current account in 1977 and 1978. Net
banking outf lews were particularly large in 1978 — about $17 billion
oonpared to $10 billion and $5 billion in 1976 and 1977 respectively.
Gross outflows in 1978 reached $34 billion. The concentration of bank
lending in the fourth quarter last year, followed by a partial reversal
in early 1979, suggests that some of the banking movements were associated
with exchange market disturbances and other transitory factors. Direct
investment outflows have been increasing at a moderate pace and last year,
on a net basis, were almost two-thirds as large as net outf lews from U.S.
banks. (Of the $15.4 billion in gross direct investment outflows, $10.7
billion represented reinvested earnings and $4.7 billion new funds from
the U.S.) Compensating capital inflcws to the U.S. largely took the form
of increased official holdings of liquid dollar assets — about $34 billion. There was also, however, a significant "inflow" frcm unrecorded
transactions which is usually assumed to be largely the result of capital
transactions not captured by the reporting system. The increase in foreign
official assets reflected in large part intervention by other major countries
which purchased dollars in the foreign exchange markets to stem the appreciation of their currencies. A number of other countries, however, appear
to have been motivated by a desire to increase reserves.
The exchange market developments which so greatly affected the U.S.
capital account in 1978 were themselves heavily affected by developments
and expectations concerning fundamental economic performance in the U.S.
and .abroad. At times these factors more than offset the effect of differentials between U.S. and foreiqn short-term interest rates. Of course,
the sheer volume of liquid funds held in national as well as the Euromarkets and the volume of international trade for which payments have to
be made provide considerable scope for very large swings, especially in
banking flews, in response to a wide range of .specific factors.
-4The United States is almost unique in its capacity to provide large
volumes of external finance, directly or indirectly, irrespective of its
cwn balance of payments position. These outf lews are, however, a product
of many individual transactions reflecting inter alia the inability or unwillingness of other countries to perform these functions.
Role of the IMF
•
As the central monetary institution, the IMF is the principal source
of official multilateral balance of payments financing. In a very real
sense the Fund acts as the financial back-stop for the system. It serves
as the lender of last resort for countries experiencing financial difficulties. The Fund also prcmotes the corrective measures required to achieve
effective balance of payments adjustment.
The pattern of IMF financing shifted sharply during 1976-78. In 1976,
net drawings by deficit countries (i.e., gross drawings, including reserve
tranche, less repayments) amounted to a record $6.5 billion. The OECD
countries accounted for about $4.3 billion, or 66 percent, of the total,
and developing countries $2.2 billion (including $128 million by deficit
OPEC members), or 34 percent. Drawings were heavily concentrated in the
relatively less conditional facilities: the temporary Oil Facility and
the liberalized Compensatory Financing Facility.
In 1977 and 1978 the use of IMF resources by deficit countries (excluding, the U.S.) slewed considerably. In part this reflected the successful stabilization efforts of some countries — both developed and developing - and the increased availability of financing from other sources. New
drawings totalling about $2.9 billion in the two years were offset by repayments of outstanding drawings of roughly the same magnitude. However
the area pattern of use of IMF resources shifted, with the developing
countries having net drawings of $440 million in 1977-78 while the OECD
had net repayments of about $460 million. In addition, drawings from
the regular credit tranches were the predominant source of IMF financing.
II. ACTIVITY IN INTERNATIONAL CREDIT MARKETS
Amount and Types of Credit
Despite the relative stability in the size of aggreqate current account deficits over the past three years, the volume of medium and long
term credit raised in international markets during this period grew dramatically, as shewn in Table 3. The increase in funds raised in these
markets was especially large during 1978, oarticularly F^rrocurrency credits.
A substantial portion of these loans did not create additional credit.
The maturation of earlier debts contracted by borrowers required in many
instances the seeking of new loans to "roll over" these debts. In addition,
-5oonditions in the private markets in the past year have been favorable
to borrowers, leading to widespread refinancing of unmatured debt in
order to reduce interest costs and to lengthen maturities. Such debt
repayments in 1978 are estimated to have accounted for over 40% of
medium and long term Eurocurrency loans and over 20% of international
bonds issued. Accordingly, the amount of net medium and long term
credit extended through the Eurocurrency markets and the international
bond markets has been considerably lower than groiss new credit extensions in these markets.
Not included in these totals are loans extended to non-residents
by banks in "dcmestic currencies", e.g., dollar loans by U.S. banks,
DM loans by German banks. Much of such foreign lending frcm national
markets serves to fund Eurc>currency loans syndicated internationally,
and its addition to these loans would introduce double counting.
A major development over the past year or so has been the sharp
increase in foreign borrowing in the German, Swiss and especially the
Japanese bond markets. In 1978, foreign issues in these three markets
increased by about 55% to $10.4 billion. Recourse to the Japanese market
increased dramatically, as Japanese authorities adopted an increasingly
liberal policy on foreign access to the Japanese capital market as a
means of reducing pressure on the yen emanating from a strong current
account position. In 1978, foreign bond issues in Japan more than tripled to $3.9 billion compared to only $1.2 billion the year before.
Size of the International Banking Market
Table 4 shows the main components of the liabilities of banks in
major countries and "offshore" banking centers which serve to fund their
net international lending of all types. The international banking market
includes both transactions in the currency of the country in which the
bank is located and transactions in other (i.e., foreign) currencies.
The latter, e.g., borrowings and loans of dollars by banks in London,
make up what is corntonly known as the Eurocurrency market. The bulk of
this market is denominated in dollars (Eurodollar^), and since U.S. banks
account for much of the transactions in dcmestic currencies, the predominant role of the dollar is evident. Indeed, almost all of the major
form of Eurocurrency lending, the medium-term syndicated credit, takes
place in dollars.
It is essential to recognize that measuring these markets by the gross
amount of liabilities (or all external assets) is highly misleading. Almost half of the reported liabilities reflect the practice of redepositing
of funds received with other banks in the reporting area, leading to
"double counting" for which adjustments need to be made. These redeposits
in turn reflect the high efficiency of the market in effecting rapid, extensive intermediation of funds between banks with excess supply of and
-6demand for funds, and arbitrage activities which eliminate disparities
in interest rates and exchange rates in the various markets of the world.
Eurooirtency liabilities to non-banks as of the end of 1978 were on the
order of $165 billion.
Growth of International Banking Market in 1978
Growth of the international banking market ih 1978 was quite rapid,
and it accelerated sharply during the fourth quarter to a record annual
percentage increase. A substantial part of the rapid growth is attributable to a statistical phenomenon. Liabilities (cmd assets) denominated
in other currencies are reported in dollar terms. When the value of a
particular currency rises in terms of the dollar in a particular period,
the dollar value of the entire stock of assets and liabilities denominated in such a currency rises. In 1978, there were significant increases
in both the dollar and the non-dollar segment of the market, quite apart
from valuation changes. The increase in the latter was proportionately
greater.
The increase reflected a number of different factors, the relative
importance of which varied during this period. In addition to the U.S.
current account deficit, foreign lending by banks in the U.S. was large
by historical comparison. Substantial liquidity in the economies of
major countries made it possible for banks in those countries, as well,
to place funds in the Eurocurrency market. Other factors were increased
tension in the exchange markets, which increased non-bank demand for
financing changes in their pattern of trade payments, and the placement
of funds in the market by official institutions.
Concerns Over the Eurodollar Market
The large magnitudes of dollar-denominated assets and liabilities
arising from transactions in the Eurodollar market have led to expressions of concern by seme observers that this market: (a) results in the
extension of international credit in excessive amounts; (b) exposes the
banks involved to an inappropriate degree of risfe; and (c) increases
the potential for speculation in the foreign exchange markets and adds
to instability in those markets.
The dangers tend to be exaggerated and distract attention from the
efficient functioning of the market and its very important role in facilitating the international extension of credit which was critical to avoidance of world economic disaster in the aftermath of the oil price increase
in 1974. Neither national governments nor international institutions are
in a position to play the primary role which this market new performs in
international credit extension. Nevertheless, developments in the market
need to be carefully monitored, and steps are being taken to improve our
kncwledge of and influence on this market.
-7Concern that credit extension is excessive may stem in part frcm
focusing on the size of the market rather than the flows that it generates. The magnitudes of the net flews shewn in Table 1., which include
but aire not limited to Eurodollcir lending, are a more meaningful indicator of the role of the market in financing payments imbalances. Moreover, it is erroneous to think that Eurodollcir transactions are carried
on outside the jurisdiction of any supervisory authorities and are insensitive to instruments of domestic monetary policy. U.S. regulatory
authorities have for seme time been examining the global operations of
U.S. banks both through their examination procedures at the heme offices
and through on-site examinations of most foreign offices. Demand and
supply conditions in the market are influenced by interest rates which
are linked to rates in the domestic market and thus to domestic monetary
policy. With respect to international cooperation, steps taken by the
governments and central banks of the major countries include expanding
the collection of data on Eurocurrency transactions, limiting placement
in the market by major countries of foreign exchange reserves, and increasing attention by bank regulators to the activities of foreign
branches and subsidiaries of banks located in the major countries. While
>s there may be room at the international level for improving regulatory
techniques and strengthening the links to national credit markets — the
possibility of further improvements is under study — international
banking transactions can be said to be generally sound and to play a
significant part in financing imbalances without unde_nrtining the adjustment process.
The Eurodollcir market should riot be viewed as being a unique causative factor in the weakness of the dollar last year, although the availability of dollar credit, whether from the Eurodollar or U.S. domestic
market, provided one means of obtaining dollars to be sold for currencies
that were expected to appreciate in the foreign exchange market.
TABLE 1
NET FINANCING BY DEFICIT COUNTRIES
$ Billions
All Deficit Countries, Excluding United States
1976
1977
1978
77
71
75
72
65
68
5
6
7
SOURCES OF FINANCING
85
74
82
Official Flows, Total
19
13
15
. — Multilateral Credits, Net
10
6
7
— Net Use of IMF Credit
( 6)
( 0)
( 0)
- Gross Drawings 6/
- Repurchases 6/
( 8)
( D
( 1)
( 1)
( 2)
( 2)
— Net Flows from other Institutions
( 5)
( 6)
( 7)
- Gross Credits
- Repayments
( 6)
( 7)
( 8)
( D
9
( 1)
8
( 1)
8
Private Flews, Total
66
61
67
— Increase in Net Indebtedness to Banks
in other Countries .2/ 5/
39
29
39
(82)
(42)
(75)
(46)
(92)
(53)
17
17
14
(21)
( 4)
(21)
( 4)
(19)
( 5)
10
15
14
FINANCING REQUIREMENTS
—
1/
Aggregate Current Account Deficits -
— Increase in Foreign Exchange Reserves -'
********** ** ********************************
— Bilateral Credits, Net of Repayments 7/
— Increase in Gross Liabilities *
—
Increase in Gross Claims *
— Bond Issues, Net
— Gross Issues
—
Estimated Net Redenption
— Net Direct and Non-Bank Portfolio
Investments, and other flows _./
* * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
RESIDUAL:
8
* includes inter-bank depositing
Treasury / QASIA
4-30-79
TABLE 1-a
NET FINANCING B Y DEFICIT COUNTRIES
$ Billions
OECD Countries, Excluding United States
1977
1971
33
35
2!
37
33
23
- 4
2
S
1976
FINANCING REQUIREMENTS
*
—
1/
Aggregate Current Account Deficits -
—
2/
Increase in Foreign Exchange Reserves -
* * *
*
*
* *
*
*
*
*
*
*
* * * *
i
33
41
3
Official Flows, Total
3
0
,
—- Multilateral Credits, Net
3
0
1
— Net Use of IMF Credit
( 3)
( 0)
((
- Gross Drawings 6/
" Repurchases 6/
( 5)
((
( D
( 0)
( 0)
( 0)
( 0)
0
0
30
41
I
7
20
11
(29)
(22)
(39)
(20)
(2!
(1
15
14
11
(19)
( 4)
(17)
( 3)
(11
SOURCES O F FINANCING
—
Net Flows frcm other Institutions
- Gross Credits
-
(]
Repayments
— Bilateral Credits, Net of Repayments
Private Flews, Total
— Increase in Net Indebtedness to Banks
in other Countries .3/
— Increase in Gross Liabilities *
—
Increase in Gross Claims *
— Bond Issues, Net
— Gross Issues
— Estirated Net Redemption
— Net Direct and Non-Bank Portfolio 8 7 '
Investments, and other flows _y
******************************************
RESIDUAL:
* includes inter-bank depositing
0
(
TABLE 1-b
NET FINANCING BY DEFICIT COUNTRIES
$ Billions
OPEC Countries
1976
FINANCING REQUIREMENTS
2
— Aggregate Current Account Deficits -' 2
— Increase in Foreign Exchange Reserves -' 0
*********************************
* t.
SOURCES OF FINANCING 2
Official Flows, Total 2
— Multilateral Credits, Net 1
— Net Use of IMF Credit (0)
- Gross Drawings 6/ (0)
Repurchases 6/
(0)
~ Net Flare from other Institutions (1)
- Gross Credits (1)
- Repayments
(0)
— Bilateral Credits, Net of Repayments 1
Private Flows, Total 0
— Increase in Net Indebtedness to Banks
in other Countries .3/5/
— Increase in Gross Liabilities * ^
—
Increase in Gross Claims *
—
Bond Issues, Net
—
• —
Gross Issues
Estimated Net Redemption
— Net Direct and Non-Bank Portfolio
Investments, and other flows __/
*********************************
RESIDUAL: 0
* includes inter-bank depositing
1
(3)
0
(°)
^
"-1
TABLE 1-C
NET FINANCING BY DEFICIT COUNTRIES
$ Billions
Non-Oil Exporting Developing Countries
1976 1977
™m™"
FINANCING REQUIREMENTS
— Aggregate Current Account Deficits r^
—
29
23
22
18
7
5
2/
Increase in Foreign Exchange Reserves -
*****************************
*
*
*
* *
*
*
*
36
?4
13
11
6
5
— Net Use of IMF Credit
( 2)
( 0)
- Gross Drawings 6/
- Repurchases 6/
( 2)
( 0)
( D
— Net Flows from other Institutions
( 4)
( 5)
- Gross Credits
- Repayments
( 5)
( 6)
( D
( 1)
7
6
Private Flews, Total
23
13
— Increase in Net Indebtedness to Banks
in other Countries 3/
19
4
— Increa.se in Gross Liabilities *
—
Increase in Gross Claims *
(40)
(21)
(23)
(19)
SOURCES OF FINANCING
Official Flews, Total
~ Multilateral Credits, Net
— Bilateral Credits, Net of Repayments
— Bond Issues, Net
— Gross Issues
—• Estimated Net Redemption
— Net Direct and Non-Bank Portfolio 3 7
Investments, and other flows i-/
****************************************
RESIDUAL:
7 1
* __i_cluc.es inter-bank depositing
( 0)
1
2
( D
( 3)
( 0)
( D
TABI£ 1-d
NET FINANCING BY DEFICIT COUNTRIES
$ Billions
Other Countries
1976
FINANCING REQUIREMENTS
13
— Aggregate Current Account Deficits - H
— Increase in Foreign Exchange Reserves - 2
*********************************
SOURCES OF FINANCING 13
Official Flews, Total 1
— Multilateral Credits, Net 1
— Net Use of IMF Credit (1)
- Gross Drawings 6/ (0)
- Repurchases 6/
(0)
— Net Flows from other Institutions (0)
- Gross Credits (0)
- Repayments
(0)
— Bilateral Credits, Net of Repayments 0
Private Flews, Total 12
— Increase in Net Indebtedness to Banks
in other Countries 3/
12
— Increase in Gross Liabilities * (8)
—
Increase in Gross Claims *
(-4)
— Bond Issues, Net 0
— Gross Issues (1)
—
Estimated Net Redemption
— Net Direct and Non-Bank Portfolio
Investments, and other flows __/
*********************************
RESIDUAL: 0
k
includes inter-bank depositing
( 0)
°
fABLE, i^e
1/ Balance of goods, services, and private and official transfers.
Official transfers from OPEC countries are assumed to be entirely from
surplus countries, and those to non-oil LDCs are assumed to be entirely
to deficit countries. Non-oil LDCs may include sane countries which,
after receipt of official transfers, are in surplus on current account.
2/ As published in International Financial Statistics.
3/ Calculated from data reported to the Bank for International Settlements. Conprises increases in liabilities of residents of designated
areas to reporting banks (i.e., increase in the banks' assets) less
increases in their claims on those banks, excluding the estimated increase
in that part of those claims representing foreign exchange .reserves —
the latter are' included in the "requirements" for funds. For 1978, data are
available only through end-September and are extrapolated to obtain
annual estimates.
4/ Very rough estimates based largely on direct investment transactions.
5/ Includes net borrowing by all Middle East oil exporters classified as
"high absorbers", some of which are surplus countries (e.g., Iraq,
Libya and, in 1976 and 1977, Iran) .
6/ Not precisely oorrparable to IMF credit use/repayment. Drawings include
reserve tranche purchases, but repurchases exclude drawings of the respective
member's currency by other countries.
7/ Includes the following balance of payments financing provided by the U.S.
to several countries:
1976: Italy drew and repaid $500 million under the .swap facility with the
Federal Reserve.
Mexioo drew $1,175 million under various Federal Reserve and ESF credit
facilities of which $300 million was outstanding at the end of the year.
United Kingdom drew and repaid $600 million, split evenly between the ESF
and Federal Reserve, under swap facilities.
1977; Mexico repaid $300 million outstanding swap drawings to the ESF and Federal Reserve.
Portugal drew and repaid $300 million under credit facilities provided by
the ESF.
1978: Portugal received $300 million in medium term balance of payments financing
as part of a $750 million multilateral credit arrangement.
NOTE:
Conponents may not add to totals due to rounding.
TABLE 2
BALANCE OF PAYMENTS FINANCING BY UNITED 'STATES
$ billions
1976
1977
1978
46.8
49.6
73.2
- 4.3
15.3
16.0
— Increase in U.S. Reserve Assets
2.5
0.2
- 0.9
— Increase in Other U.S. Government Assets
4.2
3.7
4.7
— Banli Lending to Non-residents
21.4
11.4
34.0
— U.S. Direct Investment Abroad
11.6
12.2
15.4
— Purchase of Foreign Securities
8.9
5.4
. 3.4
— Other Capital Outflows
2.5
1.4
0.6
DANCING REQUIREMENTS .
— Current Account Deficit
* * * * * * * * * * * * * * * * * * * * * * * *
*"*
* * * * * * * * * * * * * * *
JRCES OF FINANCE
37.5
50.5
61.6
— Increase in Foreign Official Holdings
of Assets in U.S.
18.1
37.1
34.0
— Increase in Foreign Private Claims on
U.S. Banks
11.0
6.7
16.9
. — Foreign Purchases of U.S. securities
4.1
3.4
5.1
— Foreign Direct Investment in U.S.
4.3
3.3
5.6
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
IDUAL
- 9.3
0.9
* * * * * * *
~ 11.4
roe: Survey of Current Business, March 1979
Treasury/Eoonardc Policy
4-30-79
TABLE 3
ACTIVITY IN MEDIUM AND IONG TERM IOTERNATIONAL CREDIT MARKETS
$ billions
1976
1977
1978
29
34
72
— to Developed Countries
( B)
(11)
(30)
— to Oil Exporting Countries
(4)
( 6)
(10)
— to Other Developing Countries-^1/
(17)
(17)
(32)
New Medium and Long-term Eurocurrency
Bank Credits
Less: Estimated Repayments and Refinancing
10
15 -
30
19
19
42
34
36
37
— by Developed Countries
(23)
(23)
(23)
— by Oil Exporting Countries
( 0)
( D
( 2)
— by Other Developing Countries-/
(11)
(12)
(12)
4
5
8
30
31
29
.Net New Medium and Long Term Eurocurrency
Bank Credits
International Bond Issues
Le- Estimated Redemption
_>jet International Bond Credit
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
TOTAL LENDING ACTIVITY IN INTERNATIONAL MARKETS
63
70
108
Less: Estimated Repayment and Refinancing
14
20
38
NET NEW MEDIUM AND LONG TERM IENDING IN
INTERNATIONAL MARKETS
49
50
70
1/ Includes Eastern Europe and International Institutions.
Source: World Bank and Morgan Guaranty Trust Company.
Treasury/OASIA
6-25-79 (Revised)
TABLE 4
wain usrpanents of Eurocurrency and International Banking Market
(Liabilities of U.S. and Euro-Banks) 1/
$ billions
*******************************************
Liabilities To Non-Residents
End
1. Dollar Liabilities of Banks in Europe, Canada & Japan
PLUS
2. Dollar Liabilities of U.S. Branches in Offshore Centers
EQUALS
3. GROSS SIZE OF EURODOLLAR MARKET, FIRST DEFINITION
PUUS
4. Other Foreign Currency Liabilities of U.S. and Euro-banks
' " EQUALS
•
5. G R X S SIZE OF EUROCURRENCY MAFKET, FIPST H2FTNITI0N
PLUS
6. Dollar Liabilities of Banks in U.S.
PLUS
7. Domestic Currency Liabilities of Euro-banks
!
EQUALS
'
8. GRDSS SIZE OF INTERNATIONAL BANKING MARKET AS SHOWN BY BIS
UESS
.US Estimate of Double Counting due to Interbank
Deposits Among Banks in BIS importing Area
L0. NET SIZE OF INEERMATIONAL BANKING MARKET AS SHOWN BY BIS 530 100
1978
398
DECREASE
1978
80
J.01
16
-499
96
174
47
673
143
98
21
93
29
:
864
193
334
93
L3. GROGS SIZE OF EUROCURRENCY MARKET, SECOND EEF1NI1TON
(Lines 5 and 11)
843
181
14. GROSS SIZE OF EIJRDDOL1AR MAK\ET, SECOND DEFINITION
(Lines 3 and 12)
624
J18
i: *******************************************
Foreign Current Liabilities To All Custoners
LI. Liabilities to Residents -170 37
L2. Of which: in dollars 125 23
******.*************************************
ESTIMATED NET SIZE OF EURODOLLAR MARKET 350 to 400
^ O^nsisting of banks in countries reporting to the Bank for International
ettlciTents plus branches of U.S. banks located in the Bahamas, Cayman
.islands, Hong Kong, Panama and Singapore.
Note: Partly Estimated Trec_sur>'/QASLA
5-30-79
FOR IMVLEDIATE RELEASE
July 12, 1979
WALTER J. MCDONALD IS SWORN IN
AS ASSISTANT SECRETARY FOR ADMINISTRATION
Walter J. McDonald-a career Federal executive, was sworn in today
as Assistant Secretary for Administration by Treasury Secretary W.
Michael Blumenthal. McDonald was ncminated by President Carter on June
5, 1979, and confirmed by the Senate on June 27.
McDonald, who has been in the Treasury Department since 1964, was
Acting Assistant Secretary ( Administration) since November 1978. He
succeeds William J. Beckham, Jr., who resigned.
Frem 1974 to 1978, McDonald was Deputy Director, Office of Management and Organization, where he shared responsibility for financial
management, management analysis, emergency planning, personnel, and
payroll/personnel information. He also directed a number of manor
studies of Treasury bureaus and operations.
During his 15-year career at Treasury, McDonald has also been Chief
of the Emergency Planning Staff and a management analyst. He has received many awards for Government service, including the Civil Service
Award for Distinguished Service, the Treasury Sustained Superior Performance Award (twice), and the Treasury Special Act or Service Award.
McDonald has a B.S. degree from New York University and a Master
of Business and Public Administration degree from Southeastern University.
He and his wife, Sharon, live in Washington, D.C.
o 0 o
B-1718
FOR RELEASE ON DELIVERY
July 12, 1979
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT & OPERATIONS)
BEFORE THE
SENATE ENERGY RESEARCH AND DEVELOPMENT
SUBCOMMITTEE
OF THE COMMITTEE ON ENERGY AND NATURAL RESOURCES
OF THE
UNITED STATES SENATE
Mr. Chairman, and members of the Subcommittee,
I appreciate the opportunity to appear here today
to respond to certain questions relevant to your consideration of Title VIII of S. 1308 relating to the
use of alcohol motor fuels. The questions you have
raised, and to which I will address myself, involve
the gasoline excise tax exemption, the applicability
of the investment tax credits included in the 1978
Energy Tax Act, and the regulatory procedures of the
Bureau of Alcohol, Tobacco and Firearms (ATF). I am
accompanied by Mr. Thomas George, Chief, Regulations
and Procedures Division, Bureau of Alcohol, Tobacco
and Firearms and by Mr. John Copeland of the Office
of Tax Policy.
Permanent Extension of Gasoline Tax Exemption
In a message sent to the Congress on June 20 the
President recommended an extension of the exemption
B-1719
- 2 for gasoline/alcohol mixtures ("gasohol") from the
federal gasoline excise tax. This exemption was
initially included in the Energy Tax Act of 1978
which exempted fuel containing a mixture of at least
10 percent alcohol from the four cents per gallon
Federal excise tax on gasoline, but only through
September 30, 1984. Under the Act the blend of
gasoline and alcohol must consist of alcohol which is
methanol or ethanol, but which does not include
products of petroleum, natural gas, or coal.
Alcohol can be used as a petroleum supplement and
octane booster which could help moderate current
pressures on U.S. oil supplies. Since enactment of
the four cents subsidy in 1978, gasohol sales in fact
have risen rapidly. However, little interest has
thus far been exhibited by commercial producers seeking to expand or build new commercial production facilities for gasohol. Development of these facilities,
with the accompanying economics of scale, would help
reduce the cost of producing gasohol in the future.
Permanent extension of the gasohol exemption from the
Federal gasoline tax, however, could significantly
increase the incentive for production of this fuel by
providing the continued demand for the product that
new investors need. It is hoped, therefore, that
this proposal will further assist in the development
of our capability to produce gasohol.
The proposal will also make a technical change to
existing law. The 1978 Energy Tax Act did not provide a mechanism for persons who pay the excise tax
to claim a credit or refund of the excise tax paid if
the gasoline is mixed with alcohol. The Technical
Corrections Act of 1979 (H.R. 2797) contains such a
provision. The Administration's proposal will make
this technical correction in the event H.R. 2797 is
not adopted.
Energy Investment Tax Credit
You have also requested that I discuss the applicability of the investment tax credit to gasohol
production.
Section 301 of the 1978 Energy Tax Act provides
for a 10 percent energy investment tax credit (in
- 3 addition to the regular 10 percent investment tax
credit) for "alternative energy property." Alternative energy property includes "equipment for
converting an alternate substance into a synthetic
liquid, gaseous, or solid fuel (other than coke or
coke gas)" and an "alternate substance" means "any
substance other than oil and natural gas and any
product of oil and natural gas." Thus, equipment for
producing alcohol from a substance other than oil and
natural gas and their derivatives would generally
qualify for the energy investment tax credit provided, of course, that the alcohol produced is used
as a fuel.
The additional 10 percent investment tax credit
is available for acquisition of property after
September 30, 1978, and before January 1, 1983.
ATF Regulatory Procedures
ATF has responsibility for assuring the collection of the excise tax on alcoholic beverages.
Since, in 1978, this tax produced some $5.4 billion
and involved a tax of $10.50 a proof gallon on distilled spirits, Congress has mandated and ATF has
implemented numerous requirements to protect the
revenue.
The system of regulations created by current
statutes does not really consider the needs of those
producing alcohol for use as fuel. It is for this
reason that S. 1200, an Administration proposal
introduced by Senator Bayh and 15 co-sponsors, would
provide the Secretary with the authority to waive
these regulatory requirements for those producing
alcohol for mixture with gasoline, while allowing
discretion to react to future developments or
problems which may arise. This proposal, and our
preliminary plan for implementing it, are discussed
below. This legislation would particularly assist
the small and middle size producers of gasohol, such
as the farmer and farm cooperative. In the meantime,
also as discussed below, ATF has been using the
provisions for experimental distilleries temporarily
to allow the development of gasohol facilities with
the minimum burdens possible.
- 4 There are two types of distilled spirits plants
(DSP's) presently authorized by law. The first is
the commercial DSP — this distiller is authorized to
produce beverage or industrial alcohol. The second
type of plant is the experimental DSP. This authorization is for any person who experiments or develops
sources of materials for distillation, processes of
distillation, or industrial uses of alcohol. The
commercial DSP is authorized by section 5171 of the
Internal Revenue Code. The Code requires that this
type of plant be located on a commercial premises,
have a continuous and closed distilling system, and
provide adequate facilities for all operations, which
may include production, warehousing, denaturation,
and bottling. Extensive requirements also govern the
location, construction, arrangement, and protection
of the DSP.
In order to further protect revenue the distiller
is. required to give bonds to cover his potential tax
liability. Bonds are required for production facilities and for storage facilities. The Government also
is given a first lien on the distiller's plant. If
the distiller does not own the property on which the
plant is located he may also be required to file an
indemnity bond in lieu of this lien.
While this system will be changed by the MTN
implementing legislation, the commercial distiller's
operations are under direct on-site supervision. ATF
stations inspectors at DSP's to monitor all phases of
production and storage. ATF literally maintains the
distilling system and the alcohol under Government
lock and key.
The present law also requires that, in order for
alcohol to be removed from the DSP free of tax, it
must first be denatured. "Denaturation" may be
defined as the destruction of the beverage character
of the alcohol, that is, it is rendered unfit for
beverage use. Segregated facilities are required for
the DSP proprietor to denature alcohol and only a DSP
may denature alcohol. In addition, in the past the
approved denaturation formulas have been limited. As
discussed below, new formulas have been developed to
ease the production of gasohol.
- 5 The commercial DSP also has substantial recordkeeping requirements, which include many types of
records detailing all production, storage, rectification, bottling, and other operations. Numerous
reports and returns are required semi-monthly,
monthly, and annually.
While ATF continuously evaluates its supervisory
role and the purpose of the required records and
reports, and attempts to regulate the alcohol industry
with the minimum of intrusion, the regulatory scheme
mandated by the Internal Revenue Code does not meet
the needs of an alcohol fuel industry. The requirements for the commercial DSP are too extensive for
many fuel producers, and prohibitive for the small
and middle size producer.
The other type of plant presently authorized -the experimental DSP — provides only a temporary and
extremely limited alternative. The experimental DSP
is authorized to produce alcohol for experimental or
developmental purposes only. No alcohol may be sold
or given away. All alcohol produced must be used in
experimental processes at the plant premises, with
certain exceptions. This authorization, granted by
Section 5312 of the Code, is intended for bona fide
research and experiments. It is valid only for a
limited period of time, generally two years. Due to
these limitations, the experimental DSP is not
subject to the extensive controls and requirements
mandated for the commercial distillery. The experimental distiller has no on-site supervision and no
required reports. This proprietor is, however, currently required to file a bond to cover his potential
tax liability and is required to maintain records
detailing his production and disposition of alcohol.
In 1978 there were 18 applications for experimental DSP authorizations. All of these applications
were granted. Since January 1, 1979, ATF has received
2,042 applications for the experimental DSP -- all of
these are fuel related, and most are individuals who
want to produce fuel for their personal use. Although
it is not actually clear that this use of the experimental DSP provisions were contemplated when this
- 6 legislation was enacted, ATF has moved to approve
these applications under Section 5312, since there is
no other provision for them under current law.
Approval of these applications is only a short
term and unsatisfactory solution for those who are
seeking alternative fuels, however. These plants may
not produce fuel alcohol for sale, their authorization is for a limited period of time, and many of
those who have made this application have experienced
difficulty in obtaining the requisite surety bond.
The lack of clear statutory authority and of established guidelines regulating these plants also creates
the kind of confused situation which produces the risk
of diversion of this alcohol to the beverage market.
ATF has waived all regulatory requirements within
its waiver authority. The one remaining area where
further relief is possible relates to the bond
requirement. ATF has tentatively approved approximately 95 percent of the nearly 2100 applications,
yet only 113 have been authorized to operate — the
Bureau cannot issue an authorization without an
approved bond. ATF has determined that it can waive
the bond requirement for experimental DSP' s without
undue risk to the revenue and a final rule is being
prepared to do so. The experimental DSP procedures
remain, however, stop-gap at best.
The proposed legislation — S. 1200 -- now before
the Congress will provide the Department with the
flexibility required to meet the needs of the alcohol
fuel industry. This legislation provides for a third
type of DSP — the fuel producer. This bill authorizes the establishment of plants which may produce
alcohol for fuel purposes only. The distiller may
remove the alcohol free of tax after rendering it
unfit for beverage purposes. This legislation would
give the Secretary broad authority to waive existing
regulatory requirements for these new types of plants.
We have also attached to the legislation a paper
describing how, subject to Congressional and public
comment, we plan to implement this statute, if passed.
I would like to submit a copy of this plan for the
- 7 record. Our plan necessarily, however, might change
over time. Based on our experience, we may discover
that further liberalization is possible. At the same
time, it must be recognized that our proposals do
increase the risk of illegal "moonshining" and, if
problems develop, regulatory action to deal with that
problem may have to be taken.
We envision a regulatory scheme which provides
for intrusion only to the degree necessary to protect
the revenue. Under the proposed plan, the fuel producer plants would be regulated in direct proportion
to the danger they present to the revenue, based on
their production. We propose to establish three
categories of alcohol fuel producers — the small,
medium, and large alcohol fuel distiller. A small
producer would be one who makes up to 5,000 proof
gallons per year; the medium producer would produce
from 5,000 to 100,000 proof gallons per year; and the
large producer would produce in excess of 100,000
proof gallons per year. A proof gallon is one liquid
gallon of 100 proof alcohol.
While specific regulatory controls will vary at
each level of production, all fuel alcohol plants
will be expected to file a simplified application;
denature their alcohol; maintain some security necessary to prevent diversion of alcohol to uses other
than fuel; and maintain limited records with respect
to production and disposition of the alcohol. The
small producer would not be required to file a bond;
but the medium and large producers would be required
to give a surety bond.
One planned reform is to simplify the application
procedure. While the present commercial distiller
may be required to file as many as twenty different
forms and additional documentation, such as detailed
drawings and plans of the distillery, the fuel producers will be required to file only one basic form
— the application. The large producer would also be
required to file certain other forms giving more
details about the plant's operations, facilities,
equipment and business structure.
- 8 At the present time all distillers who also store
alcohol must give a surety bond with the minimum penal
sum of at least $10,000 up to a maximum penal sum of
$200,000. The bond is calculated on the potential
tax liability for alcohol produced and stored during
any 15 consecutive days under our plan. The small
fuel producer would not be required to file a bond.
The medium and large producers will be required to
give a bond in order to mimimize the risk to the
Government of any loss of tax revenue and to protect
the plant itself from tax liability on any alcohol
diverted unlawfully to nonfuel purposes.
The law now also requires every distiller to have
a continuous and closed system. A closed distilling
system may be described as one in which the alcohol
can be removed only at one point. ATF can thereby
assure that all production is then properly accounted
for.
Under our proposal the small producer need not
have a closed distilling system, but need only be
able to accurately determine the proof and quantity
of his production and to store the alcohol in a secure
storage facility. The basic equipment necessary to
determine the proof of the alcohol is not expensive
nor sophisticated.
The medium producer would similarly be required
to be able to gauge his production, again with inexpensive and simple equipment. The medium producer
would only be required to have a closed system in the
instance of a plant operated by a number of individuals, for example, a farm cooperative. The medium
producer who is required to have a closed system
would, however, use his own seals and locks. This
producer would also be required to have a storage
facility which he can lock. No additional security
measures would be required.
The large producer will be required to have a
continuous and closed system and ATF will maintain
security with Government locks and seals or by meters
installed by the proprietor. If the MTN implementing
legislation is adopted, this requirement will be
eliminated for these producers as well.
- 9 The proposed requirements for construction are
comparable to the present requirements for commercial
distillers only in the case of the large producer.
The small and medium producers have substantially
less restrictive requirements due to their significantly smaller volume of production.
The present commercial distiller is required to
provide substantial security for the distilling system
and the alcohol. The security measures which the fuel
producers may be required to provide are only those
necessary to prevent theft or unauthorized removal of
alcohol. It is possible that the small and medium
producers will not be required to implement any
security measures beyond those which they mightalready deem necessary simply to protect their
property.
The present commercial distiller is also now
required to file numerous reports and returns and to
make numerous records. Under our plan the small
producer will be expected to maintain a record only
of the quantity and proof of the alcohol produced;
the quantities and types of materials added to the
alcohol to destroy the beverage character; and, of
the disposition of the denatured alcohol. Once a
year, the small producer will file a report with ATF
stating the volume and proof of alcohol produced
annually and the disposition of the denatured alcohol.
The medium producer will be expected to maintain
records of volume and proof of alcohol produced; the
quantities and types of materials used to destroy the
beverage character of the alcohol; and, the disposition of the alcohol. This producer will be expected
to file a semi-annual report with ATF giving the
details of production on a monthly basis and of the
disposition of its alcohol fuels.
The large producer will be expected to maintain
records of volume and proof of alcohol produced; the
quantities and types of materials used for denaturation; and the disposition of its denaturated
alcohol. Additionally, the large producer would be
expected to maintain records of the materials
received and used to produce alcohol. The large
- 10 producer will file a quarterly report providing
details of the volume and proof of alcohol produced
by months and of its disposition.
Present commercial distillers are required to
denature alcohol using specified formulas requiring
substances such as gasoline, kerosene, and other
chemicals. At the present time denaturation must be
accomplished either under the direct supervision of
ATF inspectors or through metered systems. ATF will
work with the fuel producer to develop an acceptable
formula which will meet his specific needs. For
example, we now plan to authorize the denaturing of
alcohol by using as little as ten gallons of gasoline
for every 100 gallons of alcohol. This should provide
substantial assistance to the gasohol producer.
We believe that the changes in the law which have
been presented in our proposal will then provide the
Bureau and the Government with the flexibility to be
responsive to the varying demands and considerations
for fuel producers, botn big and small -- from the
commercial plant which produces millions of gallons
annually, to the home producer who makes only enough
fuel to run his farm or heat his home. We have articulated a plan to implement this legislation. We
welcome any further suggestions to improve it. We
hope to respond to the needs of today with a program
which will protect the revenue while easing the
burdens and obstacles which the fuel producer faces.
While we are now utilizing stop-gap, interim measures
to provide for immediate authorizations for fuel
producers, if S. 1200 is adopted it would remove the
obstacles which prevent maximum alcohol production
and would allow the alcohol fuel producers to make
the maximum contribution to the American people with
the minimum regulation.
Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions which
the Committee may wish to ask.
FOR RELEASE AT 4:00 P.M.
Jul
Y
12
'
1979
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public-notice,
invites tenders for approximately $3,380 million, of 364-day
Treasury bills to be dated July 24, 1979,
and to mature
July 22, 1980
(CUSIP No. 912793 4M 5 ) . This issue will not
provide new cash for the Treasury as the maturing issue is
outstanding in the amount of $3,380 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing
July 24, 1979.
The public holds
$2,153 million of the maturing issue and $1,227 million is held
by Federal Reserve Banks for themselves and as agents of foreign
and international monetary authorities. Tenders from Federal
Reserve Banks for themselves and as agents of foreign and international monetary authorities will be accepted at the weighted
average price of accepted competitive tenders. Additional amounts
of the bills may be issued to Federal Reserve Banks, as agents of
foreign and international monetary authorities, to the extent
that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them.
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. This 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,
Wednesday, July 18, 1979.
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. 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
B-1720of 100, with not more than three decimals, e.g., 99.925.
basis
Fractions may not be used.
-2Banking 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. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
at the close of business on the day prior to the auction. Such
positions would include bills acquired through "when issued"
trading, and futures and forward transactions. 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, when submitting tenders for customers, must
submit a separate tender for each customer whose net long
position in the bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
$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.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on July 24, 1979,
in cash or other immediately available
funds or in Treasury bills maturing July 24, 1979.
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.
-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, 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.
department of theTREASURY
ASHINGT0N,D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE
July 12, 1979
RKT.FA^T^
Contact:
Alvin M. Hattal
202/566-8381
TREASURY ANNOUNCES FINAL DETERMINATIONS
IN COUOTERVATLING DUTY INVESTIGATION
ON CERTAIN TEXTILES AND TEXTILE PRODUCTS
FROM THREE COUNTRIES
The Treasury Department today announced its final determination
not to impose countervailing duties on iitports of certain textiles
and apparel from Malaysia and IVfexioo. A final determination that
Pakistan is subsidizing exports of these products was also announced.
The coimtervciiling duty law requires the Secretary of the Treasury
to collect an additional duty equal to the subsidy paid on merchandise
exported to the United States.
Treasury's investigation detentiined that the benefits were provided
by the Governments of Malaysia and Mexico to their respective textile
and apparel firms, but the size of these benefits were too insignificant
to warrant the imposition of countervailing duties. Mexican subsidy
programs comprised preferential export financing and duty-free machinery
imports. Malaysian subsidies included tax exemptions for ccmpanies
surpassing their previous year's export sales level.
In the case of Malaysia, one company was found to receive a countervailable benefit, but that firm has agreed to pay voluntarily to its
government an amount equal to the subsidy received. Accordingly, no
countervailing duties will be imposed.
In the Pakistan case, Treasury found that the textile exporters
received subsidies consisting of:
(1) Partial reductions in total
income tax liabilities for firms which export; and (2) short-term
export financing at preferential rates.
In Pakistan, the ad valorem amount of subsidy was determined to
vary among the products subject to the investigation, with the largest
subsidy estimated to be 1 percent ad valorem on exports of cotton
garments. On the other hand, the subsidy paid on towels was insignificant
in size, and therefore no countervailing duties will be imposed on exports
of towels from Pakistan.
-MDRE-
B-1721
- 2 -
Iitports of certain textiles and apparel in 1977 from Malaysia
were valued at $22.2 million and from Mexico at $101 million.
Iitports of this merchandise from Pakistan in 1978 were valued at
$42 million.
Notices of these findings will appear in the Federal Register
of July 13, 1979.
0
0
0
FOR RELEASE ON DELIVERY
July 11, 1979 ^
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT & OPERATIONS)
BEFORE THE
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE,
GENERAL GOVERNMENT
OF THE
SENATE APPROPRIATIONS COMMITTEE
Mr. Chairman and members of the Subcommittee,
I appreciate the opportunity to appear here at
these oversight hearings today to discuss with you
various aspects of the operations of the Bureau of
Alcohol, Tobacco and Firearms. Accompanying me is
Mr. G. R. Dickerson who is the Director of the Bureau
and members of his staff.
As the Assistant Secretary for Enforcement and
Operations, I have oversight and general supervisory
responsibility for five Treasury entities which have
enforcement responsibilities. They are the U.S.
Customs Service; the U.S. Secret Service; the Office
of Foreign Assets Control, the Federal Law Enforcement Training Center and the Bureau of Alcohol,
Tobacco and Firearms. I also am responsible for
coordinating law enforcement policy for all Treasury
Department matters.
As part of my responsibilities, I am necessarily concerned with the agency priority setting
process, methods and practices of operations and,
of course, allegations of misconduct and government abuse. I wish to discuss very broadly certain
policies of the Treasury Department which are
relevant to these hearings and to the activities of
the Bureau of Alcohol, Tobacco and Firearms. I will
leave to Mr. Dickerson a more specific discussion
of the various activities of the BATF.
B-1715
- 2 One area about which you have expressed interest
is the (question of alleged investigative abuses by
BATF. In this regard I think it is important to
remember that criminal investigations and enforcement are by nature conflict-oriented. Inevitably,
any criminal investigation situation is bound to
produce negative reaction from the subjects of
investigations. This is often the case regardless
of guilt or innocence. It is simply not the kind
of activity which by its nature creates good feeling
among the parties involved.
Rigorous enforcement of violations of the
criminal laws is necessary for the effective functioning of any agency with criminal enforcement
responsibility. Though it may be a necessary
ingredient to effective accomplishment of an agency's
mission, it can sometimes lead to instances of abuse
or misconduct on the part of the investigator. At
the same time criminal investigations, by their nature,
also can produce false allegations by the subject
of an investigation of misconduct or other wrongdoing.
While instances of abuse and bad judgment are
unfortunately inevitable in any organization, there
are steps which can be taken to minimize their
occurrence. One such step is the development of a
strong internal affairs division. Such a division
is a valuable management tool for an agency as it
enables it to investigate allegations of improper
conduct. It also serves to protect the public. At
the same time, from an agents viewpoint it is also
quite desirable as it protects him/her from unfair
or unfounded accusations.
Great emphasis has been placed on the internal
affairs function within each Treasury enforcement
bureau. The Office of the Inspector General was
also created last fall within the Office of the
Secretary of the Treasury. It has an effective
oversight function for all internal affairs activities within the Department. At the same time we
have been working with Director Dickerson since he
took office to enhance BATF's capabilities in this
area.
-3It is important also to make certain we are
aware of instances of improper or questionable
conduct by our agents. To help accomplish this
some time ago I sent a letter to the Department
of Justice and asked them to notify the relevant
Special Agent-in-charge of any Treasury law enforcement agency whenever in the course of a judicial
proceeding a motion to suppress is granted on
account of the action of that agency's agent or
when the court finds that one of our agents committed
an illegal or otherwise improper act. This would
enable agencies to identify not only single
incidents, but any patterns of conduct requiring
policy change or discipline.
Another way to avoid instances of misconduct
is to develop management policies dealing with
sensitive areas. As you know, last fall BATF and
Treasury re-evaluated and subsequently changed procedures governing routine compliance inspections of
firearms licensees and investigations of gun shows.
Except for a small number of situations, BATF has
ceased to make unannounced inspections of licensees.
In most cases licensees are phoned to be notified
of a proposed inspection. Inspections without prior
notification are now generally limited to very
specific instances where there is reason to suspect
a violation based on the licensee's prior conduct
or where there is specific information indicating
that a licensee may not be in compliance.
BATF has also limited its investigations of
gun shows and flea markets to situations where there
are specific allegations that significant violations
have occurred and where there is reliable information
that guns sold at the specific show or flea market
have shown up in crimes of violence with some degree
of regularity. Mr. Dickerson will elaborate more
on this issue in his testimony.
- 4 With regard to undercover operations, we have
stressed the need to ensure that proper steps are
taken so that undercover operations are not
directed at anyone unless there is reliable information that the person has committed serious violations in the past or is about to commit one in
the future. Also when an individual who is the
subject of an undercover investigation indicates a
lack of desire to make an illegal sale it is
our policy that no informant or agent coax or
otherwise encourages him to do so. We have also
created a Treasury-wide task force to review all
policies regarding undercover investigations.
These then are some of the steps we are taking
to try to ensure proper conduct by our agents in
enforcing the law. Director Dickerson will describe
other changes made to try to direct BATF resources
to the most serious problems in the firearms and
other areas. I can assure you that we constantly
strive for the highest possible standards of performance and conduct from our personnel.
In the
vast majority of cases we have achieved this. A
critical examination of the record of BATF will
reveal an overwhelming number of successful investigations and criminal prosecutions. But as with any
organization there is always room for improvement
and certain acts occur of which we do not approve.
Every effort is presently being made to eliminate
these incidents to the extent possible.
Thank you, Mr. Chairman.
FOR RELEASE ON DELIVERY
Expected 10:00 AM
July 11, 1979
TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
JOINT ECONOMIC COMMITTEE
Mr. Chairman, you have asked for a report on the
Tokyo Summit.
The Summit has received wide coverage in the press.
I am sure that you and your colleagues and your
staffs
have reviewed these reports and the communique that was
issued by the participating countries.
If you will allow
me, I prefer to concentrate my remarks not on the specifics
of the Summit meeting itself, but on its broader meaning
and significance, which I view as substantial.
During the
question and answer period I shall be glad to address
myself to specific issues you wish to have clarified.
The Tokyo meeting was a watershed in Summit history.
At previous Summits —
and Bonn —
at Rambouillet, Puerto Rico, London
the focus of the deliberations was on demand
management, specifically the need for greater coordination
of demand management policies.
The object was to reduce
tensions in the economic and monetary systems by agreeing
to pursue policies which corrected divergent growth and
inflation patterns in individual countries.
In effect,
- 2though each of these Summits played a valuable role in
enhancing macro-economic coordination and dealt with the
question of enhancing global energy production through
World Bank lending to the less developed countriep, it
would be fair to say that the meetings that preceeded Tokyo
did not grapple head-on with the root causes of the world*s
energy and structural crises.
AtRairfbouillet in 1975 the primary focus was on
stimulating recovery from the 19 73-74 global recession
through coordinated demand policies and improved international
4
monetary arrangements.
At Puerto Rico in 19 76, the discussion centered on
managing the transition from recovery to expansion, again
through traditional demand management techniques.
At London in 1977, the Summit participants sought to
continue the expansion through a coordinated effort in
which countries with balance of payments surpluses were
encouraged to grow more rapidly and deficit countries more
slowly.
The Bonn Summit last year continued the discussion of
coordinated growth scenarios and, Mr. Chairman, I am sure
you will remember that it was at this Summit that pledges
were made to implement short term policies to achieve specific
growth rates.
Thus on the one hand the thrust of the three
previous Summits reached the height of refinement at Bonn.
Specific ways were detailed on reaching coordinated demand
- 3management and were then successfully pursued.
In the aftermath
of Bonn, growth among the Summit countries became less
divergent and consequently payments imbalances narrowed.
For this we should be grateful; the commitments made at
Bonn and adhered to especially by Japan, Germany and the
United States were critical factors in reducing serious
tensions in the global payments and financial systems.
But the significance of Bonn goes beyond this achievement.
At the Bonn Summit there became evident an
awareness of the limited usefulness of demand management in
* addressing not just the symptoms but the causes of the constrained
potential growth and of the inflation, payments imbalances
and monetary instability that is plaguing the industrialized
and the developing worlds.
The Communique issued at Bonn
acknowledged that "we are dealing with long term problems
which will only yield to sustained effort...there must be a
readiness over time to accept and facilitate structural
change. Measures to prevent such change perpetuate economic
inefficiency, place the burden of structural change on trading
partners and inhibit the integration of developing countries
into the world economy."
It was at Tokyo that this awareness crystalized. At
Tokyo we jointly acknowledged the shortcomings of demand
management as a cure to our common economic malaise. The
emphasis at Tokyo was on the need for structural adjustment
and not fine tuning.
We acknowledged that unless we were
- 4to permanently forgo growth, jobs and a perpetually rising
standard of living, the emphasis of macroeconomic management must shift to increasing directly the supply
of energy and other goods.
Let me elaborate.
The immediate problem faced at Tokyo was the energy
problem.
With the announcement of the pricing decision
made by OPEC in Geneva, the world price of oil has gone up
by 60 percent since December.
Although the price increases
have come in stages, we have not yet seen more than a small
fraction of the effect in the performance statistics.
The
direct, first round effect of this price increase will be to cut
one percent from the average OECD growth rate in 1979, and
1-3/4 percent in 1980.
It will add 1-1% percent to the
average OECD inflation rate in 1979, and 2-2% percent in 1980.
For the U.S. alone, it will cut one percent from our growth
rate, and add one percent to our inflation rate, in each year.
And these estimates may not fully capture the impact of
continued oil price escalation and supply uncertainty on
business confidence, consumer behavior and wage demands.
Thus:
—
The likelihood of recession in the United States
has been increased.
—
Non-inflationary growth in the other industrialized
countries has been seriously hampered.
—
Severe
damage may be
done to the economies
and political structures of the less developed
countries.
- 5The oil price increase will reverse
much of the progress that had been made in improving the world
balance of payments.
However, even with a higher oil import
bill, we expect further substantial reductions in the U.S.
current account deficit —
year —
perhaps even a small surplus next
because of slower growth
in our domestic economy
extremely strong export performance, and increased earnings
on our overseas investments.
But the OPEC surplus, which
had nearly disappeared last year, will again surge to
disturbingly high levels.
The OECD countries as a group
will move from surplus into deficit.
And the position of
the non-oil developing countries, already in large
deficit as a group, will deteriorate sharply, increasing
the problems of some of the poorest nations.
World financing needs have been increased sharply by
the oil price increase.
Although the international monetary
system has demonstrated its capacity to handle those needs
in the aggregate, we must expect a recurrence of strains and
difficulties on the part of some individual countries,
noteably the LDCs.
In short, the world has again been thrown into a difficult
situation by oil price increases. And today we not
only have the problem of oil price increases but also of
limited supply.
The Tokyo Summit recognized this essential fact, and
acted upon it.
First, it was agreed that there is no alternative to
conservation in the short-run.
If we do not
deliberately reduce our consumption of oil in ways that
- 6are least damaging to our economy, consumption cutbacks will
be forced —
capriciously and painfully - by whatever increase
in price it takes to reduce demand to the level of supply.
To bring this situation under better control,the Summit
nations each committed themselves to limits on oil imports
in 1979 and 1980, limits that will apply on a country-by- country basis. The limit for the United States is 8.5
million barrels a day in both years —
equivalent to our
imports in 1977.
For the medium-term, the Summit countries adopted
specific goals for a ceiling on oil imports in 1985, goals
which —
assuming reasonable rates of economic growth over
the period —
will require very powerful efforts to conserve
oil consumption and develop alternative sources of energy.
—
The U.S. goal for 1985 is the same as for 1979
and 1980, 8.5 million barrels per day.
— France, Germany, Italy and the United Kingdom
committed themselves to limiting 1985 oil imports
to 1978 levels and agreed to recommend to
their European Community partners that each EC
member country pledge themselves to similar
specific targets.
—
Canada pledged to reduce its annual rate of growth
of oil consumption to one percent, and to reduce
oil imports by 50,000 barrels per day by 1985.
- 7
—
Japan adopted as a 1985 target an oil import level
of 6.3 to 6.9 million barrels a day, a level
substantially higher than Japan's import level of
5.0 robd for 19 78.
This allowance for increase
will allow Japan to continue to pursue the high rates
of growth needed to overcome the massive, fundamental
imbalances in its external accounts. At the same time
it will mean an increase in the efficiency with which the
Japanese use imported oil.
this
Recognizing the uniqueness of
commitment, Prime Minister Ohira pledged to
do the utmost to further reduce oil imports and
rationalize oil usage.
Meeting these goals will require tremendous efforts of
conservation.
But to meet these goals and improve upon them
in the future will also require a massive effort to increase
the supply of alternative energy resources. To
this end the Summit participants launched major initiatives to
make use of alternative energy sources, particularly coal,
and to develop alternative sources and techniques.
The
participants recognized that large private and public resources
will be needed for the development and pomroercial application
of new technologies, and committed themselves to ensuring
that those resources are made available.
They also agreed
to create an international energy technology group to review
actions taken or planned in each country and to report on the
need and potential for international collaboration, including in
the area of financing.
- 8 For the longer run we must mobilize
the resources needed to develop secure
alternative supplies.
The investment costs will be enormous,
and resources must be diverted from consumption and other uses
for this purpose.
This will require an all-out effort to increase
the use of other existing sources of energy, such as coal and
nuclear power and natural gas, as well as the development of
new technologies.
. These Summit actions represent a basic reorientation of
policy, a joint dedication to reduce dependence on oil.
Implementing these commitments will not be easy, and we cannot
expect the underlying situation to improve overnight.
What
is implied is a basic restructuring of our economies, and we
will have to persevere through some difficult times. The
specifics of what will be needed are under review, and we
and other participating governments will be announcing detailed
measures in the weeks ahead.
But the direction and the commitment
have been firmly established.
I believe this commitment has been
recognized by at least some of the major OPEC nations, and I
am pleased that Saudi Arabia has indicated a production increase
that can help to ease the situation in the immediate future.
But this step, while helpful, is temporary.
our dependence on oil.
stick to it.
We must reduce
We have set a course, and we have to
9 Mr. Chairman, I have reviewed the actions taken at Tokyo to
deal with a critical commodity that is and will continue to be
in short supply.
Energy is symptomatic —
in the extreme
~
of a larger problem also noted in the Summit communique, and I
would like to outline briefly that broader context.
It was recognized at the Summit that energy is not the
only supply problem we must address.
In many other respects,
the economies of the industrial world are not responding as
they must to changing conditions.
on a consensus —
For decades we have operated
that the major economic policy concern of
governments should be to manage aggregate demand to
smooth out swings in the business cycle and assure steady
increases in income and employment.
The supply side of the
equation was largely neglected, assumed to take care of itself
and respond to changing demands.
This assumption no longer holds.
responding.
The supply side is not
Productivity is lagging badly —
in the U.S.,
productivity growth in the past five years has been only about half
what it was in the 1950vs and 1960's.
Government spending
has taken an ever growing share of income, and has shifted away
from capital construction and defense toward income transfers.
Effective tax rates have escalated sharply.
Tax structures
and levels are such as to stultify innovation and risk taking.
Industry is bound in a stifling web of regulations.
Indexation,
formal and informal, tends to fix relative prices and weaken
incentives for movement of resources between industries and
sectors.
- 10 We need, in short, to reorient economic policy to
concentrate more heavily on the supply side, to reduce
rigidities and inefficiencies that create supply constraints
ithroughout
the economy.
This task involves rebuilding our
capital stock, reinvigorating productivity growth, reducing
structural unemployment —
all on top of creating a new
base for the energy needs of the economy.
This is true in part for every Summit country.
Let
me quote from the Tokyo communique:
"We agree that we must do more to improve the longterm productive efficiency and flexibility of our economies.
The measures needed may include more stimulus for investment
and for research and development; steps to make it easier for
capital and labor to move from declining to new industries;
regulatory policies which avoid unnecessary impediments to
investment and productivity, reduced growth in some public
sector current expenditures, and removal of impediments to
the international flow of trade and capital."
Each of these tasks will take a long time to accomplish
and will involve a great deal of sacrifice.
Together, they
represent a fundamental political and economic challenge. The
politician's job is inherently easier —
and safer —
when it
consists of spending heavily on quick pay-out projects that pleas*.
the voters.
This is as true in the United States as it is in
Germany or Japan or France, Canada, England or Italy.
time required to earn
But the
a visible return on investments made
in expanding supply is much longer than the horison that defines
-li-
the political calendar in any Summit country.
The question is
whether we have the will, wisdom and discipline to stay a
tmedium-term
course, involving short-term sacrifices for
longer-term gains.
in this effort.
We are all aware of the difficulty involved
But we are confident that, in the end, the
American people and our allies at the Summit table will have
the strength and patience to do the job.
nrtmentoftheTREASURY
UNGTQN, D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
July 12, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY DEPARTMENT WITHHOLDS APPRAISEMENT
OF SPUN ACRYLIC YARN FROM JAPAN
The Treasury Department said today it is withholding appraisement
on imports of spun acrylic yarn from Japan. The withholding action,
based on a tentative detennination that this product is being sold
in the United States at "less than fair value" will not exceed six
months. A final deterniination will be issued in three months.
Under the Antidumping Act, the Secretary of the Treasury is
required to withhold appraisement when he 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.
Withholding of appraisement means that the valuation for Customs
duty purposes of goods imported after the date of the tentative dete3_mination is suspended until completion of the investigation. This
is to permit assessment of any dumping duties that are ultimately imposed on those .Imports.
Cases in vrtiich a final determination of sales at less than fair
value is issued are referred to the U.S. International Trade Commission
to determine whether an Anerican industry is being, or is likely to be,
injured by such sales. Both sales at less than fair value and injury
must be found to exist before a dumping finding is reached.
Notices of this action will appear in the Federal Register of
July 13, 1979.
Imports of spun acrylic yarn frcm Japan during 1978 were valued
at $4.6 million.
0 0 0
B-17
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M.
FRIDAY, JULY 13, 19 79
TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
SENATE BUDGET COMMITTEE
Mr. Chairman and members of this distinguished Committee:
Your letter of invitation for these hearings asked me
to comment on an exceptionally wide range of economic and
policy issues. I have tried to address most of them in my
prepared testimony, and will be most happy to supplement
the testimony in our colloquy this morning.
I believe that the questions you pose can be grouped
under the two critical issues facing the nation: inflation
and energy. These problems are interrelated, and their
solutions are interdependent. We cannot reduce inflation
without resolving energy supply problems. Unless we master
the inflation problem, the prospect of a mild downturn of
short duration could turn into the much grimmer prospect
of a deeper, more prolonged recession. And we cannot solve
either the energy or the inflation problem unless we are
willing to make the sacrifices—individually, collectively
and equitably—that are necessary to insure our economic
future.
Inflation. Our core problem is inflation—inflation
that is decimating the purchasing power of American consumers, inhibiting business investment, weakening our export
competitiveness.
Since last December, consumer prices have risen at a
13-1/2 percent annual rate, a sharp acceleration from the
9 percent of last year, and almost double the inflation
rate in 1977.
Earlier in the year, a major element in the inflation
was the rise in food prices, as adverse weather conditions
B-1723
-2and strikes pushed the food component of the Consumer Price
Index to a 20 percent annual rate of increase. But
increasingly, the thrust to inflation has come from rising
energy prices. The food supply situation has improved, and
the rate of increase in food prices at retail has slowed—
although retail prices have not yet reflected the actual
declines in food prices at the wholesale level.
But while the rise in food prices has decelerated,
the increase in energy prices has accelerated, as the increases in crude oil prices levied by the OPEC nations
last December and additional surcharges added by most oil
producing nations began to permeate the price structure.
In January and February, some 30 percent of the increase
in consumer prices resulted from the rise in food prices,
and only 10 percent was attributable to increased energy
costs. By May, the proportions were reversed, with just
over one-tenth of the May rise in consumer prices the
result of higher food prices, and about one-third of the
total reflecting increases in energy prices. Since the
beginning of the year, energy product prices at retail have
gone up at almost a 38 percent annual rate, more than three
times faster than the rest of the items bought by consumers.
Moreover, these figures measure only the direct increase
in energy product prices—the rise in gas, electricity,
gasoline and heating oil prices. But rising energy costs
affect prices of all other goods. Very sharp increases have
been registered in the past few months across a variety of
petroleum-based chemicals, and these will show up in finished
goods prices later on, as will the higher costs of transportation engendered by rising energy prices.
It is important to recognize the extent to which the
inflation that has plagued us this year has stemmed from
forces not directly related to current levels of domestic
demands but rather has reflected forces which were unpredictable and over which we have had no control. The
persistence of double-digit inflation despite the gradual
and now clear slowing in economic activity has been interpreted by some as a measure of the failure of the Administration's efforts to move toward price stability through a
voluntary program dependent essentially on the cooperation
of business and labor. From this assessment of failure,
some have argued for abandonment of the program, others have
argued that the voluntary program should be supplanted by
mandatory controls.
-3But such glib and premature conclusions do not stand
up to a more careful analysis of the price statistics.
Approximately half the composition of the Consumer Price
Index is accounted for by three categories: food, energy,
homeownership costs. For one or another reason, these
areas are not within the effective scope of the wage/price
deceleration program—nor, for that matter, would they be any
more amenable to control under a mandatory system. But
the major price acceleration this year has been in just
these areas. Prices of food, energy and home-ownership
combined have increased this year at a 20 percent annual
rate, up from 11 percent last year. The rest of the CPI
has accelerated too—not decelerated, as we had hoped—
but the acceleration has been quite modest, from 6.7 percent
last year to a 7.0 percent rate in the first five months
of 1979.
On the wage side of the program, the publicity attendant
on several major collective bargaining settlements that were
judged to be outside the guidelines in varying degree has
led to similarly premature conclusions about the failure
of the deceleration program. But the most reliable measure
of changes in wages—the BLS series on average hourly earnings for production workers—has increased thus far this year
at an annual rate of under 8 percent, compared with an
8.5 percent increase during 1978. Wage increases have not
been a primary cause of accelerating inflation.
Nevertheless, unit labor costs have accelerated sharply.
This apparent anomaly reflects in part the acceleration in
private and publicly-mandated fringe benefits, but even more
importantly, it has reflected the continued disappointing
and puzzling behavior of productivity. The slowing in
productivity gains over the past decade has been one of the
grave weaknesses in our economic life, for it is putting
severe constraints on our ability to raise our living standards
while reducing our ability to compete in international markets.
Last year, productivity in the private business sector increased
by less than half of one percent—compared with an annual
average increase of 3.1 percent in the first two postwar
decades—and in the first quarter of this year, productivity
actually declined substantially. As a result of the collapse
in productivity, and the rise in compensation costs resulting
from social security tax increases and the higher mimimum
wage, unit labor costs have soared this year, while wages
have decelerated.
The moderation in wages while inflation has remained
so high has resulted in a substantial reduction in consumer
-4purchasing power. During the first five months of this
year, real hourly wages fell at an annual rate of almost
5-1/2 percent, and would have fallen more without the
January increase in the minimum wage. And given the small
increase in nominal earnings in June, real wages probably
declined further during the month.
The squeeze on real incomes explains, in large measure,
the sluggishness of retail sales this year. In real terms,
retail sales have declined 6 percent over the first six
months of the year.
To be sure, some pause in consumer buying was to be
expected this year after the unusually rapid pace of consumer spending in the final months of 1978. Historically,
a buying binge such as occurred in the fourth quarter of
last year is followed by a period of consumer moderation.
The moderation has continued too long, however, to be merely
a reaction to earlier free-spending. The consumer is
increasingly constrained by declining real incomes, heavy
debt repayment burdens, lack of adequate availability of
the products he is willing to buy—small, fuel-efficient
cars—and, more recently, by the necessity to husband gasoline.
It is difficult to maintain normal shopping habits if one
spends an abnormal amount of time queuing up for gasoline,
and spends an abnormal proportion of income once one reaches
the pump. Reduced traffic at shopping malls testifies to
the OPEC impact on our domestic economic developments.
The weakness in consumer spending in recent months is
being reflected down the production chain to industrial
output and employment. Employment gains in recent months
have been much smaller than earlier in the year, and employment in manufacturing has declined—modestly—in each of the
past three months. It is worth noting, however, that
unemployment has declined in all but one month this year,
and the latest unemployment rate reported by the BLS,
5.6 percent, is the lowest in almost 5 years. Nevertheless,
continued sluggishness in retail sales will undoubtedly
result in some downward adjustment of business production
and employment schedules in the months ahead.
One factor that has sustained the economic expansion
so long has been the prompt adjustment businesses have made
in output to avoid excessive inventory buildup. There
was an acceleration in business accumulation of inventories
earlier this year, partly to replace stocks depleted by the
surge in consumer spending late in 1978, partly in anticipation of strike-interruptions, partly in anticipation of
further inflation. But the latest figures indicate some
-5slowing in the rate of inventory additions at the manufacturing
level, and purchasing agent reports suggest increased caution
in business buying plans for materials. Inventory/sales
ratios are low by historical standards, except for certain
specific areas such as the larger-size autos.
One of the elements of strength in the economic picture,
therefore, is that we are not weighed down with large, excess
inventories that would have to be liquidated abruptly if
consumer spending deteriorated further. Moreover, business
capital spending plans, and appropriations to implement
these plans, remain relatively strong. New orders for capital
goods, other than defense items, returned to a respectable
rate of increase in May, after a puzzling sharp decline in
April.
Finally, U.S. exports have been sustained at a relatively
high level, some 16 percent higher in the first five months
of the year than the monthly average in 1978. Foreign demand
for our agricultural products remains strong, and continued
sizeable increases in nonagricultural exports are likely.
Thus, the economy does not demonstrate the characteristics
that in the past have preceded a sharp or prolonged downturn.
Sluggishness—teetering on the edge of a mild recession—is
probably a better characterization of the current state of
the economy, a sluggishness induced by the inflation-erosion
of consumer purchasing power, and by consumer and business
uncertainties about the cost and availability of energy
supplies.
We expect this sluggishness to continue for several
months, at least until abatement in the rate of inflation
permits an end to the decline in real incomes. When consumer
purchasing power begins to improve, spending will, too.
Since businesses have kept the rate of inventory accumulation
closely tied to the rate of sales, a resumption of consumer
purchases should be accompanied by some inventory rebuilding.
It is reasonable, therefore, to expect the decline in
economic activity this year to be mild and, in terms of
postwar cyclical experience, of relatively short duration.
Economic activity should be on the rise later this year
or early in 19 80. But the recovery next year should also be
moderate, in part because still unacceptably high rates of
inflation will require continued fiscal austerity.
-6Energy. The OPEC oil price actions since December
have been a major factor depressing economic progress and
intensifying inflationary pressures in the United States,
and the impact of these price increases on growth and
inflation will continue to be felt in the months ahead.
We estimate that growth in real GNP will be lower by about
1 percent this year and by another 1 percent in 19 80, and
inflation about 1 percent higher in each year, than would
have been the case if OPEC had adhered to the oil price
schedule announced last December. As a consequence of the
price actions taken since December, there will be 800
thousand more persons unemployed by the end of 1980 than
forecast earlier, raising the unemployment rate by approximately 0.8 percent.
Ours is not the only economy, of course, that is having
to make difficult adjustments to escalating oil prices and
diminished oil availability. It is estimated that the
direct, first round effect of the 60 percent rise in world
oil prices since last December will be to cut one percent from
the average growth rate of OECD countries in 1979, and
1-3/4 percent in 19 80. It will add 1-1-1/2 percent to the
average OECD inflation rate in 1979, and 2-2-1/2 percent
in 1980.
Despite the higher oil import bill, we expect further
substantial reductions in the U.S. current account deficit—
perhaps even a small surplus next year—because of the
reduction in non-oil imports associated with slower growth
in our domestic economy, because of continued strong export
performance, and because of increased earnings on our
overseas investments.
More generally, however, the oil price increase will
reverse much of the progress that had been made in improving
the world balance of payments. As the OPEC surplus, which
had nearly disappeared last year, again surges to levels
reminiscent of 1974-75, the OECD countries as a group will
move from surplus into deficit. And the position of the
non-oil developing countries, already in large deficit as
a group, will deteriorate sharply, increasing the problems
of some of the poorest nations.
These problems were recognized and addressed directly
at the recent Summit meeting in Tokyo. The world leaders
assembled there concluded:
First, there is no alternative to conservation
in the short-run. If we do not deliberately
-7reduce our consumption of oil in ways that are
least damaging to our economy, conservation will
be forced by whatever increase in price it takes
to reduce demand to the level of supply.
The Summit nations each committed themselves
to limits on oil imports in 1979 and 1980,
limits that will apply on a country by country
basis. The limit for the United States is
8.5 million barrels a day in both years—
equivalent to our imports in 1977.
For the medium-term, the Summit countries
adopted specific goals for a ceiling on oil
imports in 1985, goals which—assuming reasonable
rates of economic growth over the period—will
require very powerful efforts to limit oil
consumption and develop alternative sources of
energy.
Finally, the Summit participants launched major
initiatives to make use of alternative energy
sources, particularly coal.
Implementing our Summit commitments will, in the longerrun, require difficult decisions and hard choices. The
investment costs of developing alternative energy supplies
will impinge on the availability of resources for other
purposes. Personal as well as governmental budgets will
feel the impact.
But in the end, there really is no choice. If we
remain so dependent on imported energy, we will ultimately
pay an even greater price, both in monetary terms and in
terms of world leadership. Some months ago I reported to
the President the results of a year-long study conducted
by the Treasury of the threats to our economic welfare and
national security posed by our heavy dependence on imported
oil. We concluded that this threat was real and imminent.
Recent events have underscored that finding.
Conclusion. As we survey the economic outlook here
and abroad, and try to match the range of policy tools
available for restoring adequate rates of growth and reducing
inflation with the varied and serious problems we face,
some guiding principles emerge:
-8It would make no sense at this stage to rush
in with a program to pump up the economy by
either a new tax cut or spending programs, or
by an easing of monetary restraint.
— There is not a sufficient body of consistent
evidence to justify "pushing the panic button"
on macro economic policies. There could be no
credibility—at home, or abroad—in our dedication to conquer inflation if we were to switch
policies with each swing in the statistics.
— Traditional countercyclical economic policies
simply do not address the root causes of our
current slowdown or of the current double-digit
inflation. In fact, an expansionary policy
now would aggravate inflationary pressures,
and divert resources needed to solve our productivity and energy supply problems.
We must aggressively pursue policies to encourage
conservation of oil and to increase the availability
of domestic energy sources and to make more rational
use of them, thereby lessening our dependence on
foreign energy sources, for which the costs and
availability are outside our control.
We must reduce the gap between wages and unit labor
costs. That means pursuing policies to restore
productivity, particularly by encouraging more rapid
growth in and rejuvenation of our capital stock. It
also means holding down the rise in the costs of
fringe benefits, such as health care.
We must avoid being trapped into a wages-chasingprices cycle such as characterized the 19 75-77
period, when we suffered from a relatively high
underlying rate of inflation despite significant
underutilization of labor and industrial capacity.
The costs of compensating labor for past losses of
real income must not be imposed on the future price
structure. This would be a futile process, for it
would merely perpetuate the inflation that already
threatens the maintenance of our living standards.
The principle of voluntary compliance with a program
for deceleration in prices and wages must be preserved.
-9We must protect the value of the dollar in
international markets, for depreciation of
the dollar feeds back into higher inflation
domestically.
The fiscal policies recommended by the President last
January, and reaffirmed in this mid-session Budget review,
conform to these principles. We are not wavering in our
dedication to the fight on inflation.
Neither are we heedless of the slowing in the pace
of economic activity. If, at some point in the future,
countercyclical policies prove to be necessary, the choice
of measures will have to be considered most carefully.
There are significant constraints on our flexibility in
coping with cyclical disturbances.
— We will have to avoid policies that might
jeopardize the strength of the dollar in
foreign exchange markets.
— We will have to avoid policies that would
increase the share of output absorbed by
government at the expense of the private
sectors.
— We will have to emphasize those fiscal policies
that contribute to our fight on inflation by
reducing costs and encouraging greater
productivity growth.
These are relevant and serious considerations in
appraising the appropriateness of policy alternatives.
But they are not problems requiring resolution at the
moment.
With both inflation and recession prospects so much a
function of energy supplies and prices, our immediate
priority must be the implementation of a program that puts
us far along the road to mastery of energy problems^ The
President will shortly be announcing the next steps in his
program in meeting our energy objectives.
oOo
pttmentofthe
^
TELEPHONE 566-2041
4INGT0N, D.C. 20220
FOR IMMEDIATE RELEASE
July 16, 1979
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
»
Tenders for $2,900 million of 13-week bills and for $3,001 million of
26-week bills, both to be issued on July 19, 1979,
were accepted today.
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing October 18. 1979
Discount Investment
Price
Rate
Rate 1/
High
97.647ii/9.309%
97.636 9.352%
Average
97.640 9.336%
a/ Excepting 1 tender of $10,000
9.69%
9.74%
9.72%
Low
26-week bills
maturing January 17. 1980
Discount Investment
Price
Rate
Rate 1/
95.349
95.304
95.321
9-200%
9.289%
9.255%
9.81%
9.91%
9.87%
Tenders at the low price for the 13-week bills were allotted 19%.
Tenders at the low price for the 26-week bills were allotted 233..
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted
$
57,140 $
37,140
$
47,055
3,838,865
2,365,145
3,335,335
26,885
26,885
17,675
35,360
35,360
24,500
33,890
32,040
22,635
44,860
44,860
29,130
214,135
85,035
258,755
29,070
19,070
27,910
20,895
20,895
20,995
32,130
29,900
31,775
16,860
16,860
13,920
338,110
148,110
247,720
39,075
39,075
43,985
Accepted
$
27,055
2,460,585
17,675
24,500
22,635
29,130
143,755
21,910
20,995
31,775
13,920
142,720
43,985
TOTALS
$4,727,275
$2,900,375
$4,121,390
$3,000,640
Competitive
Noncompetitive
$2,745,290
547,945
$
$2,635,765
432,870
$1,515,015
432,870
Subtotal, Public
$3,293,235 $1,466,335
$3,068,635
$1,947,385
Federal Reserve
and Foreign Official
Institutions
$1,434,040
$1,052,755
$1,052,755
$4,121,390
$3,000,640
Type
TOTALS $4,727,275 $2,900,375 :
J/Equivalent coupon-issue yield.
. B-1724
918,390
547,945
$1,434,040 :
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m.
July 16, 1979
Testimony of the Honorable Robert Carswell
Deputy Secretary of the Treasury
Before the
Senate Committee on Banking, Housing and Urban Affairs
Mr. Chairman and members of this distinguished Committee:
I appreciate this opportunity to present the Administration's views on the important international banking issues
being addressed at this hearing. Given the diversity of subjects before this Committee, I would like to discuss each
separately beginning with the Federal Reserve Board's new
regulation to implement Section 3 of the International Banking
Act of 1978.
EDGE ACT CORPORATIONS
In the International Banking Act of 1978 the Congress
provided for the first time a comprehensive regulatory scheme
for foreign bank activities in the United States. As part of
this comprehensive effort, the Congress in Section 3 of that
Act directed the Federal Reserve Board to eliminate or modify
any unnecessary restrictions or limitations that disadvantage
Edge Act corporations in competing with foreign banks in the
United States or abroad.
B-1725
- 2 Pursuant to this Congressional directive, the Federal
Reserve Board issued proposed revisions to Regulation K,
which governs Edge Act corporations. On June 14 after receipt
of a substantial number of comments on the proposed regulation,
the Board issued a final regulation. A variety of international
banking rules were consolidated in the revised regulation,
its administrative procedures were simplified and the lending
and capital requirements of Edge Act corporations were
significantly liberalized.
When the proposed revisions were issued for public comment
two sections were especially controversial, and I understand
they are the focus of the Committee's attention. One proposed
section authorizing interstate branching by Edge Act corporations
was adopted as part of the final regulation. The other section
proposing a change in the criteria for defining the domestic
business these corporations may conduct was withdrawn and is
being studied further by the Board.
Interstate Branching
While questions have been raised about the legal authority
of the Board to permit such branching under section 25(a) of the
Federal Reserve Act, interstate branching by Edge Act corporations appears to be consistent with the objectives of the International Banking Act. Heretofore, a bank had to charter a
separate corporation for each state in which it wanted to have
an Edge Act office. Consequently, a number of banks currently
operate separate Edge Act corporations in several major
financial centers around the country. Branching would be a
more efficient form of operating in terms of management
control and administrative expense. It would also permit
more efficient utilization of capital funds by banks owning
Edge Act corporations.
Every Edge Act corporation must have minimum capital
of two million dollars while parent banks must not have more
than 10% of their capital invested in Edge Act corporations.
Branching -- which would be subject to prior regulatory
approval — allows a corporation to have more than one office
for the same capital investment. This leverage may be crucial
to the establishment of multi-state offices by smaller regional
banks with limited capital to invest in Edge Act corporations.
Their participation in international banking should therefore
be facilitated, advancing one of the express objectives of the
J
IBA.
- 3 In addition, interstate branching by Edge Act corporations
is consistent with the principle of competitive equality between American and foreign banks operating in the United
States. The International Banking Act permits a foreign bank
in certain circumstances to operate branches with Edge Act
deposit-taking powers outside its "home" state. It seems
appropriate to provide domestic Edge Act corporations with a
flexibility comparable to that provided to foreign banks.
Qualifying Customer Criteria
You have asked as well whether Edge Act corporations
should maintain an export-import orientation. At the present
time all of the domestic business of Edge Act corporations
must be incidental to international or foreign business. The
Federal Reserve Board proposed to modify this requirement in
the section of Regulation K that it withdrew for reconsideration.
The Board had proposed that Edge Act corporations be able to
do business with any customer if two-thirds of that customer's
purchases or sales were directly attributable to international
or foreign commerce. The Federal Reserve notice pointed out
that this more liberal standard would ease supervision of
Edge Act corporations and give them increased operating
flexibility.
The rather arbitrary restrictions to which Edge Act
corporations are subject have long created administrative
problems, and we would see no reason why the Federal Reserve
should not explore ways to reduce those problems. It would
also seem appropriate to consider modifications that would
better enable Edge Act corporations to compete in the international banking market. The line between international
and domestic banking is not a clean one, and to the extent
that this proposal permits Edge Act corporations to engage
in purely domestic banking activities, it can be viewed as
raising interstate branching issues that have traditionally
been considered in the context of the McFadden Act. At the
request of Congress, the Treasury Department (at the direction
of the President) is chairing an interagency study of the
McFadden Act and its relevance to present-day banking. We
BANK
would ACQUISITIONS
expect to cover this range of issues in that study.
Since 1970, foreign banks have acquired at least 59 American banks with assets at the time of acquisition in excess
of $20.6 billion. As banking becomes a global activity more
- 4 foreign banks may recognize the competitive advantages of a
significant American representation. Unfavorable political
and economic prospects in some other countries accentuate
the advantages of doing business in the United States. In
addition, there are a large number of privately owned banks
in the United States relative to the number of such institutions in most foreign countries. At present many banks are
viewed as attractive investments with equity prices well
below book value and favorable price/earnings ratios.
The traditional policy of the United States Government
toward international investment is neither to promote nor to
discourage inward or outward investment flows or activities.
This policy is based on a careful and pragmatic assessment of
the national self-interest, though it comports as well with
our philosophical preference for open markets and a minimum
degree of government interference. Investment in this country
which originates from abroad benefits our economy; indeed
much of this nation was built with foreign capital.
Foreign investment in American banks has generally
brought to our banking system additional capital, management
skills and increased competition. This has been especially
true in recent acquisitions. Many of the banks acquired
needed financial and managerial assistance. Many also
became parts of larger international financial organizations
better able to compete with the largest American and foreign
banks in domestic and foreign markets. Virtually all of the
major banks acquired recognized the advantages of their
association with a foreign institution and overwhelmingly
endorsed the combination.
No one can predict with any assurance whether the
acquisition of large American banks by foreign persons will
continue at a relatively high level and whether a significant
number of American banks will eventually be foreign owned.
The economic, cultural and political considerations that
influence acquisitions are not the same for all large foreign
institutions and the value of the dollar vis-a-vis foreign
currencies has fluctuated widely in recent years. Nonetheless,
the potential for major acquisitions in our banking sector
is something that requires our continuing attention.
Banking is at the core of the nation's economy; hence
significant foreign ownership could raise questions as to
whether such ownership is consistent with the overall best
interests of the nation. These questions are difficult to
articulate. As of today there has been no suggestion that
any significant past bank problem was the result of, or
- 5 facilitated by, foreign ownership. The potential problems
associated with foreign ownership cluster around two related
issues: (i). added difficulties in assuring the safety and
soundness of the bank; and (ii) possible diversion of credit
and service from, and concomitant injury to, the area or
market served by the bank.
Banking is a comprehensively regulated industry, and the
regulators are presumably in the best position to comment on
these problems. To the extent that particular foreign ownership would prejudice the safety or soundness of the institution,
clearly such an acquisition should not be permitted--just as a
domestic acquisition would not be permitted in similar
circumstances. We understand the regulators feel they have
adequate power to deal with this type of issue.
The second issue -- the risk that foreign ownership may
limit or deprive United States customers of service or credit -is difficult to evaluate. Clearly a foreign owner is subject
to the laws of his home country and that could — at least in
extreme situations -- lead to pressures that might be inimical
to the United States. However, in that type of situation
the regulators have power to prevent precipitous actions by
the bank and the President could also invoke his emergency
powers to block assets under the International Emergency
Economic Powers Act. It is also not likely that all foreign
owned banks would act uniformly; so the risk of sizeable
dislocations is not likely to be high.
If the concern is that the bank may shift its business
emphasis when controlled by a foreigner, there are similar
risks when control shifts between domestic persons. I would
also point out that it is not entirely realistic to assume a
foreigner would acquire a bank and then deliberately take
actions that would alienate the bank's customers and its
standing in the community. That type of action would surely
reduce the bank's deposit base and the value of the foreigner's
investment. It would also encourage competitors and attract
new entrants to the market. Also, all insured banks (including
foreign-owned banks) are subject to the Community Reinvestment
Act.
I should also stress that in addition to general supervisory powers over banks, the regulators today have the power
to disapprove all significant acquisitions, domestic and
foreign. They do not have the power to disapprove merely
because the acquirer is foreign but they do if the particular
foreigner presents a question as to whether he will operate
the bank on a safe and sound basis. The change in the Bank
- 6 Control Act, which the Congress enacted just last year,
contains new provisions that are especially tailored to
cover bank acquisitions by individuals. While there has
been only limited experience to date with these new provisions,
it appears that the standards contained in the Act are broad
enough to assure that the regulators have the power to make
a comprehensive review of acquisitions by domestic or foreign
individuals.
We conclude that at its present level, foreign ownership
of United States banking assets does not pose any undue risks.
Accordingly, we do not see any need for an artificial percentage
limitation on foreign banking assets in the United States.
However, we do feel that the situation should be followed
closely, and the two Treasury studies underway on the treatment of U.S. banks abroad and on the McFadden Act should
provide useful insights generally in this area.
I will also ask the Interagency Coordinating Committee
to consider adopting a more comprehensive and contemporaneous
reporting system so the Congress and the regulators themselves
will have more complete and timely information about foreign
ownership. This should facilitate the timely review of
proposed acquisitions and provide the Congress with information
so that it too may better monitor developments in this area.
The bank regulators, as part of their approval process
for acquisitions, are looking into a variety of issues. They
are interested in the special circumstances of hostile takeovers
of American banks and whether the acquisition or ownership of
our banks by foreign government owned institutions poses any
special problems. They are also working with foreign bank
regulators to improve the process of verifying financial
information on proposed foreign acquirers and monitoring
financial transactions between an overseas bank and its
domestic subsidiary.
Given these various inquiries into foreign bank acquisitions of American banks, we believe it is not necessary to
initiate another study as proposed by S.J. Res. 92. If, after
the studies now in process are completed, further work is
required, that would be the time to expand on their conclusions.
We are particularly opposed to any moratorium on acquisitions.
Such an action could undermine foreign confidence in our
open-door investment policy. It could be viewed as a forerunner of restrictions on acquisitions first in banking and
then in other industries.
- 7 INTERNATIONAL BANKING FACILITIES
The Treasury Department has favored the establishment
of international banking facilities (IBFs) in New York City.
On December 22, 1978 Treasury advised the Federal Reserve
Board that it endorsed the thrust of the New York City
Clearing House banks' IBF proposal.
In theory, the IBF proposal would relocate to this
country some of the activities that American banks are now
conducting overseas. We are not in a position to confirm
that these facilities would bring to the United States a
significant amount of international banking business and
the job opportunities associated with it. But to the extent
they have such an effect, the results would obviously be
beneficial. Our support for the proposal assumes that the
operation of these facilities would have no adverse effect
on the conduct of monetary policy, and on the supervision
and stability of the banking system. In our opinion, the
New York IBF proposal would have no significant effect on
Federal tax revenues and the Office of the Comptroller of
the Currency believes there would be no unmanageable bank
supervision problems. Indeed, the return of certain of
these off-shore activities to offices within the United
States might facilitate the supervisory process and the
ability of the regulators to gauge the safety and soundness
of the banks.
You have asked about the effects that the IBF might have
on our monetary policy and our balance of payments. We would
expect the IBF to have a minor positive effect on our balance
of payments. For purposes of monetary policy, it would
appear that the flow of funds between American bank main
offices and IBFs could be controlled much as the flow of
funds between main offices and overseas branches is now
controlled. The increased proximity of the offices should
not make that much difference, but we would want to rethink
our opinion if the Federal Reserve Board or any of the other
bank regulators were to reach a different conclusion.
The Federal Reserve, the Administration and the Congress
are presently considering a major revision of domestic reserve
requirements and the appropriateness of reserve requirements
on Eurocurrencies. If in the future, because of legislative
or Federal Reserve action, domestic and foreign reserve
levels were so close as to eliminate any significant reserve
advantage to IBFs, these facilities could still be useful.
The country-risk exposure of American banks doing business
abroad and of their customers could be favorably affected by
- 8 doing more of that business in the United States. In addition,
IBFs would have the advantage of exemption from state or
local taxes on their activites if other states acted like
New York State in eliminating such taxes.
Other states may want to have IBFs for the use of their
own banks. This would seem to be an appropriate means of
spreading the competitive benefits of these facilities. NonNew York State banks have expressed a strong desire to have
their own IBFs located in New York City whether or not
they have them in their home state. We would hope that the
technical difficulties raised concerning clearing activity at
the New York Clearing House and the Federal Reserve can be
favorably resolved on a non-discriminatory basis. This should
assure a broad base of competition among banks in their IBFs.
*
*
*
Thank you Mr. Chairman. If there are any questions I
would be glad to try to answer them.
PPBUL A.^^WkH^^?!-^.^^^*-^7
^artmenfo/J/ieJUfylS/I^K
TELEPHONE 566-2041
,SHINGT0N, D.C. 20220
FOR IMMEDIATE RELEASE
EXPECTED A T 10:00 A.M., E D T
WEDNESDAY, JULY 1 8 , 1979
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF T H E TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON COMMERCE, CONSUMER
AND MONETARY AFFAIRS
COMMITTEE ON GOVERNMENT OPERATIONS
HOUSE OF REPRESENTATIVES
Introduction
The events of the past few weeks have reminded us, as
seldom b e f o r e , of the intense interdependence between o u r
own economy and that of other c o u n t r i e s . T h e success of the
United States in creating jobs for our w o r k e r s , and in reducing
the rate of inflation for all o u r p e o p l e , depends critically
on our ability to forge effective working relationships with
a large number of nations — industrialized n a t i o n s , such as
those with which President Carter met at the Tokyo Summit at
the end of J u n e , and developing nations, including some which
supply to o u r economy critical raw materials such as petroleum.
Indeed, this interdependence should have been apparent
to the American people for most of this d e c a d e . During the
1970s, we have felt the ravages of global inflation which
turned quickly into global recession. Since 1 9 7 3 , we have
experienced m a s s i v e increases in the world price of o i l which
have produced dramatic changes in national balance of payments
position and international financial d e v e l o p m e n t s , in addition
to their impact on inflation and recession.
The stability of the world economy has been sorely
tested by these e v e n t s . Some observers predicted a collapse
of the international financial system. Some predicted a
- 2 return to the protectionism and beggar-thy-neighbor policies
which deepened and broadened the Great Depression of the 1930s.
Some even foresaw a resort to military means to protect access
to raw materials or other vital national interests.
Fortunately for all of us, none of these dire events
has occurred. To be sure, we continue to experience an
intolerable level of inflation, the threat of at least a
mild recessi' <, concern about the dollar, and longer run
worries about the availability of adequate supplies of energy.
These issues will continue to preoccupy the President and
the Congress of the United States for years to come.
But one piece of very good news is that the international
economic system has held. Protectionism has been largely
held at bay, and trade has in fact been liberalized through
the Multilateral Trade Negotiations (MTN) in Geneva. Balance
of payments adjustment has taken place — the United States
ran a current account surplus in the first quarter of this
year, while Japan ran a current account deficit. The petrodollars have been recycled successfully. The debt problems
of both industrialized and developing countries have been
managed effectively. The industrialized countries have
learned how to coordinate their policies much more
effectively, including at Tokyo in the critical area of
reducing oil imports.
This ability to cope can be largely attributed to the
success of the United States, over the course of the entire
postwar period, in leading the world toward the creation of
an international economic system based on the market principles
which have lain behind the unprecedented historical success
of our own economy. The goal of the United States has been
maximum freedom for trade, investment and capital movements —
and our success in pursuing that goal has created an interdependent world economic system in which all major countries
best serve their own economic interest by adopting and
maintaining policies which preserve and defend that system.
Any retreat from that approach by the United States could
jeopardize all that has been built, and with it some of our
own most important economic, political and philosophical
objectives.
I begin my testimony with these references to international economic interdependence, and to the continuing
themes of postwar U.S. international economic policy,
- 3 because they provide the framework within which I will seek
to answer the specific questions raised in the Chairman's
letter of invitation to me to testify today. These questions
relate to the amounts and objectives of investment by OPEC
countries in the United States, the impact of such investments
on our economy and financial system, the adequacy of the
data which are now collected on such investments by the U.S.
Government, our policy on disclosure of certain of these
data, and the ability of the United States to defend itself
against any withdrawals of assets by foreign investors in
the United States. I ill address each of these questions
in my statement, and provide annexes with detailed answers
to each question raised in the Chairman's letter.
The Level of OPEC Investments in the United States
A number of OPEC countries have experienced large
balance of payments surpluses following the quadrupling of
the oil price in 1974, and hence have had a substantial
volume of money to invest outside their own borders.
We estimate that residents of these countries had invested
only a few billion dollars in the U.S. prior to 1974.
Since January 1, 1974, however, roughly $46 billion —
approximately 20 percent of estimated cumulative investable
surpluses of all OPEC countries during that period — has
been invested in the United States or used to amortize debt
(Table 1). Thus, we estimate the total value of OPEC holdings
in the United States at the end of last year at about
$42 billion (Table 2). About 80 percent comes from Middle
East oil-exporting countries (Table 3). These numbers
should rise further in the next year or two: after dropping
to only $5 billion in 1978, the OPEC surplus is likely to
rise again to over $40 billion in both 1979 and 1980 (Table 4).
These are sizable numbers. However, in every case they
represent a modest percentage of total foreign investment in
the United States — and a tiny share of total investment,
foreign and domestic, in such assets (Table 5):
— the oil-exporting countries account for 9 percent
of all foreign holdings of Treasury securities,
and about 1.6 percent of all holdings of Treasury
debt;
— they hold an estimated 20 percent of all foreign
investments in U.S. corporate and other securities,
but only about six-tenths of 1 percent of all
outstanding U.S. equities and about seven-tenths of
1 percent of all outstanding U.S. corporate bonds;
- 4 —
they account for less than 10 percent of all
liabilities to foreigners reported by banks
in the United States, and for less than
1 percent of the total of $1.1 trillion of
deposits held by Americans as well as foreigners
in those banks;
— their direct investment holdings amount to less
than 1 percent of all foreign direct investment
in the United States, a..d something on the order
of one hundredth of one percent of the net worth
of all U.S. firms.
Hence it would be difficult to conclude that any
possible withdrawals of investments of oil-exporting countries
constitute a threat to the U.S. economy or financial system.
The magnitudes involved would simply seem to belie any such
possibility. Indeed, the first conclusion cited by the
General Accounting Office in its report of July 16 to this
Subcommittee is that "these holdings do not constitute an
immediate danger to U.S. banks or the economy."
A word of background on the nature of these investments
in the United States by oil-exporting countries, particularly
concerning how their official holdings differ from those of
virtually all other countries, may be useful. Since
World War II, the dollar has been the principal currency
used in international trade and the principal currency
used by monetary authorities when they intervene in the
foreign exchange market to influence their exchange rate.
When countries have increased their official reserves, most
of those increases were acquired and held in the form of
dollars. Most of these dollar reserves were, in turn,
invested in U.S. Treasury securities or in bank deposits in
the U.S. Some were deposited with banks in the Eurocurrency
market.
Most of the OPEC countries followed the same practice
until 1974, when the price of oil was quadrupled (although
some had had close ties to sterling). In most of these
countries the revenue from oil exports accrued directly to
the governments, not to private entities. To a considerable
extent, the excess of revenues over the demand for foreign
exchange from other government entities and the limited
private sector was viewed in the traditional way as an
increase in reserves. The monetary authorities tended to
invest the funds in dollars — a substantial part in the
U.S., mostly in U.S. Government securities.
- 5 But for some of these countries the accumulations were
such — and the prospect of further surpluses was such —
that some of the funds were not really needed as liquid
reserves, but could be used for longer-term investments.
In some cases, the monetary authority has continued to
manage both the "reserves" and the "investments." In some,
a separate agency was established to handle the funds not
counted as reserves. There are a few non-OPEC countries
(e.g., state trading countries) where various government
entities other than the central bank hold dollars in the
U.S., but few if any instances of government operated
investment funds.
In U.S. statistics the bulk of these holdings of OPEC
government agencies, whether considered by these governments
as reserves or investment funds, are reported as liabilities
to official holders. Our use of the term "investment" thus
covers both types. In addition, U.S. liabilities to private
entities in a number of OPEC countries are negligible whereas
U.S. liabilities to private entities are substantial in most
non-OPEC countries which have significant holdings in this
country. Any discussion of OPEC investments in the U.S.
must take account of these special factors.
The Impact of OPEC Investments on the United States
We are fully satisfied that the U.S. has benefitted
from the placement of these funds in the U.S. We cannot,
of course, guarantee that every foreign investment in the
United States has brought identifiable gains to U.S.
productivity. But the inflow of capital which these funds
provided has helped finance our balance of payments deficits,
added investment capital to foster domestic growth and create
jobs, helped to finance the external lending activities of
U.S. banks, and contributed to the strength of the dollar
and the overall stability of the international monetary
system.
The past three decades have been characterized by a
progressive liberalization of international trade and
capital flows, developments which have catalyzed rapid
and sustained increases in the wealth and living standards
of the industrial countries and progress in the developing
world. Beyond the economic gains from specialization
and efficient resource allocation, a result of this
movement toward an open system of trade and capital has
been an increasing degree of international economic
interdependence. The industrial and agricultural structures
of
nations
are
now heavily
dependent
on and
sources
The
therefore
and individual
markets
extentinof
abroad.
the
U.S.
global
involvement
economy,
is
in frequently
world
trade,
overlooked.
- 6 —
We are the world's largest exporter, in 1978
selling $140 billion in U.S. goods and $36 billion
in U.S. services abroad;
— One out of every eight manufacturing jobs in
this country, and one out of every three acres of
American farm land, produce for exports;
— We import more than $170 billion in goods from
abroad. These imports provide essential inputs
for U.S. industry, including more than or -fourth
of U.S. consumption of twelve of the fifteen key
industrial raw materials;
Our total trade, exports plus imports, is now
equivalent to about 15 percent of U.S. GNP, double
the figure of just over a decade ago.
There is an integral relationship between the international flow of goods and the flow of investment capital.
Countries — just like firms — cannot buy more than they
sell unless they can borrow funds to finance the purchases.
Similarly, there is no incentive for a country to sell
more than it needs to buy unless there are opportunities
for safe and profitable investment of the surplus funds.
Our economy is highly dependent on trade and a vigorous
world economy. That, in turn, is dependent on an open
system of international payments and capital flows.
The world and U.S. economies have benefited greatly
from the expansion of world trade and capital flows, in
terms of increases in employment and standards of living
far greater than would have been possible if we and other
nations had raised, rather than lowered, the barriers to
international trade and payments.
An essential element in the preservation of an open
trade and payments system has been our policy toward
international investment. A country cannot run a deficit
in its balance of payments on external account without
financing the deficit through some form of capital inflow
(except by selling off existing claims on foreigners).
A U.S. readiness to accept foreign investment, including
investment in dollars by foreign central banks, is a
crucial element in the operation of the international
monetary system.
We impose no restrictions on the use of the U.S.
dollar by non-residents, with minor exceptions to which
- 7 I will refer later. Broadly speaking, non-residents,
whether official or private, have the same access to U.S.
money and capital markets as have our own citizens. We
do not discriminate on the basis of race, religion,
nationality, color or creed in the application of this
policy any more than we do at home.
With respect to equity investments in U.S. firms, the
principle is the same. Only in a few highly sensitive
strategic industries, such as the production of fissionable
material, has Congress called for restrictions on investment by foreigners that are not applicable to domestic
residents. The question whether any special provisions with
respect to the purchase of American banks by non-residents are
advisable is being discussed currently by the Senate Banking
Committee. The Treasury does not believe that at its present
level, foreign ownership of banks poses any undue risk,
although the situtation should be followed carefully. The
general, underlying principle is to afford the same privileges
and responsibilities to the non-resident investor as to a
resident. Therefore, we neither promote this type of investment
by foreigners nor discourage it. So long as it takes place
in response to market forces, we welcome it.
This policy is based on a careful and pragmatic assessment of the national self-interest, though it comports as
well with our philosophical preference for open markets and
a minimum degree of government interference. Investment in
this country which originates from abroad should be no less
beneficial to our economy than investment which originates
here.
Concerns About OPEC Investments
I understand the concern of this Subcommittee to be not
whether overall U.S. investment policy is right or wrong,
but whether sufficient data are being collected and adequately
analyzed to ensure proper implementation of that policy and
of specific legislation with respect to the collection and
analysis of data. You have indicated concern with the adequacy
and analysis of information on the investments — financial
and direct — of residents of the 13 countries which are
members of OPEC.
The question of whether OPEC investments should be
viewed differently from other investments presumably
arises because most of these investments are made by
government bodies in these countries. There is no basis
for considering investments in the U.S. by private individuals
- 8 or firms that happen to be residents of an OPEC country in a
different manner than investments by residents of other
nations. Obviously, however, there is a possibility that a
foreign government could use its assets in the U.S. to pursue
political objectives contrary to our national interests.
Considerable public concern was expressed about the
possibility of politically motivated investments in the
U.S. by foreign governments when a number of OPEC countries
began to accumulate large amounts of funds. The government
responded to these concerns in 1975 by establishing a special
procedure which called for advance notification to the U.S.
Government of any major investment in the U.S. by a foreign
government (excluding investments in U.S. government securities,
bank deposits, etc.) and for review by a special inter-agency
committee of any foreign governmental investments here which
might have adverse implications for the national interest.
This procedure was from the beginning, and is now, equally
applicable to investments by any foreign government.
Executive Order 11858 of May 7, 1975, established the
Committee on Foreign Investment in the United States,
consisting of representatives of the Departments of Commerce,
Defense, State and Treasury. The Order assigns the Committee
responsibility for "monitoring the impact of foreign investment
in the United States, both direct and portfolio, and for
coordinating the implementation of United States policy on
such investment." In particular, it mandates the Committee
to "review investments in the United States which, in the
judgment of the Committee, might have major implications for
United States national interests." The Committee gives us
an orderly procedure for examining these questions to make
sure that any action, or inaction, by the Government is
based on carefully considered judgments of what is in the
national interest.
Since the establishment of this procedure, there has
been only one proposed investment by an OPEC government which
was of sufficient significance to warrant its use. This was
a proposed investment in the Occidental Petroleum Company by
the Government of Iran in 1976. The proposal was eventually
withdrawn for business reasons unrelated to the USG review.
Thus, to date there have been no instances of investments by
the governments of any OPEC member which have been considered
significant in terms of control of, or influence in, a major
U.S. enterprise. We estimate the total value of direct
investment — the value of equity holdings in companies in
- 9 which the foreign investor holds 10 percent or more of voting
stock or its equivalent — in the U.S. by all residents of
all OPEC countries at about $325 million as of end-1978.
This constitutes less than 1 percent of the direct investment
in this country by foreigners, and is not a volume which
poses a threat to our national interests.
In addition, it is worth pointing out that the Government
of Saudi Arabia has stated publicly that a central feature
of its investment policy is to limit its holdings to a maximum
of 5 percent of the equity in any company. We understand
that investment managers handling Saudi portfolios have been
specifically instructed to observe this limit. Private
Saudi citizens have made several direct investments in this
country, but it is the clear policy of the Saudi Government
and monetary authorities to eschew such initiatives.
The Subcommittee has raised the question of whether
other kinds of OPEC investments in the U.S. — mainly
financial instruments — are so large that our financial
markets are unduly dependent on, and vulnerable to, one
or a few governments who could take disruptive action for
political reasons.
I have already noted that the approximately $24 billion
which constitutes total holdings of U.S. securities by all
residents of all OPEC countries combined is not a large
enough component of our markets to constitute a major threat
to our financial system. The U.S. equity and capital
markets are by far the broadest and most resilient financial
markets in the world. In the very unlikely event that
all of the OPEC countries dumped their entire holdings of
U.S. securities at one time, the markets would absorb
these securities at a significant but manageable price
concession. The effects might be pronounced and
undesirable — but they would clearly be manageable.
As money is fungible, most of the impact would be quickly
offset. The OPEC countries would either reinvest their
dollar proceeds in dollar-denominated investments abroad,
or would exchange these dollars for other currencies. In
either event, those foreign institutions that acquired the
dollars from OPEC countries would, directly or indirectly,
have to reinvest the funds in the U.S.
- 10 It is important to recognize that withdrawal of dollar
deposits from U.S. banks by foreign depositors, and their
transfer to European banks, does not affect U.S. domestic
liquidity. What is transferred is ownership of the dollar
deposits, which in this case become the U.S. bank's liabilities
to European banks as opposed to liabilities to the original
foreign depositors. The U.S. bank still has the same
liabilities available to support its asset structure.
There are no actual dollars, in the Eurodollar market, which
is in fact a market in claims on deposits in U.S. banks, and
not a market in greenbacks.
It might be worthwhile to elaborate this point. If
an American firm drew a check on a bank in New York in favor
of an OPEC government to pay oil royalties, the New York
bank's liabilities to the firm would decline and its
liabilities to the OPEC government would rise. Our data
would then show an increase in U.S. bank liabilities to
foreign official holders. If the OPEC government then
transferred its deposit to a bank in London, the liabilities
of the New York bank to the OPEC government would go
down and its liabilities to the London bank would rise.
Our data would show a decline in U.S. liabilities to
official holders abroad, but an equal increase in liabilities
to private foreigners — a decline in our liabilities to
residents of OPEC countries and a rise in our liabilities
to residents of the U.K. Neither the asset-liability
position of the bank nor the U.S. money supply would be
affected.
If a particular bank in the United States were to be
faced with a demand for an immediate withdrawal of a very
large deposit, it would have numerous ways to meet that
demand. To begin with, most OPEC bank deposits are not
held in demand deposit form but are subject to withdrawal
limitations or penalties. The mere sale of a certificate
of deposit by an OPEC holder to a non-OPEC entity would
not place pressure on the bank in which that certificate
of deposit is held. Pressure could be applied only by
demanding immediate payment. Should such a demand be made,
the bank could borrow in the interbank market.
The international banking system is accustomed
to interbank borrowings which may total in the billions of
dollars daily and would probably be able to handle any attack
on an individual bank easily. One reason there would be no
- 11 -
difficulty is that the funds withdrawn from one bank would
have to be deposited with some other bank. The bank receiving
the new deposit would find itself with excess funds which
it would immediately offer in the interbank market. But even
in the unlikely event that funds were not easily obtainable
in the interbank market, a .bank facing a large deposit
withdrawal could borrow from the Federal Reserve. governor
Coldwell may elaborate on this point, but the Federal R^erve
serves
as a lender
last resort
for banks
in the United
States.
Similarly,
theofUnited
States has
fully adequate
defenses
against any attempt to disrupt the U.S. Government securities
market by dumping large holdings. The Federal Reserve Bank
of New York maintains a secondary market for U.S. Government
securities and could immediately purchase for its own account
or? if necessary, for the account of the Treasury, whatever
amount of such securities might be needed to maintain order
in the markets. Obviously we try to avoid disruption in
the securities markets, and one of the purposes of the add-on
arrangements which we established for the use of governments
and central banks has been to facilitate both the Purchase
and the sale of large amounts without disturbing the market.
Concerns have also been expressed that one or more
OPEC governments might attempt to damage the United States by
suddenly dumping large amounts of dollars on the foreign
exchange market? Several OPEC central banks hold sufficient
dollar-denominated assets, either in the United States or
in the Euro-currency market, to cause considerable disorder
in the foreign exchange market under certain conditions
should they deliberately attempt to do so. (So, for that
matter, do a good many non-OPEC central banks.
One does
not need detailed statistics or a detailed analysis of
individual country holdings to conclude that such capability
exists.
Such events are unlikely, however, for several
reasons. The first is the strong interest of major OPEC
countries, expressed repeatedly by them, in the stability
of She exchange rate of the dollar. Most of the investments
of nearly every OPEC country are denominated in dollars,
and a depreciation of the dollar reduces the value of those
assets in terms of other currencies.
- 12 In addition, OPEC countries price their oil in dollars.
A depreciation of the dollar in effect thus reduces the value
of their oil revenues, in terms of what they could buy in
many other countries.
Finally, such a political attack would have obvious
implications for overall relationships between the countries
involved and the United States. The likelihood of a
politically motivated attack on the dollar thus seems
very remote.
Even if there were a politically motivated attempt
to damage the dollar, we have extremely strong defenses
to counter it, as pointed out in the GAO Report. Private
banks themselves could readily borrow abroad, or through
the domestic inter-bank market, to offset immediately the
impact of withdrawals. If official action became imperative,
authority exists under the International Emergency Economic
Powers Act for the President to declare a national emergency
and to block any withdrawals of assets.
In addition, we could count on help from abroad.
Other countries, both developing and industrial, have a
very great stake in preserving international monetary
stability. Central banks of countries whose currencies
were being purchased would not wish to face either the
effects on their exchange rate and their domestic economy,
or the effect on their money supply, of providing the
domestic currency themselves. I am confident that we
could count on widespread cooperation to counter such a
misguided attempt.
Your letter also implied a concern that OPEC governments
might gain undue influence in specific U.S. companies, or
specific sectors of the economy, by secretly acquiring a
controlling or influential interest in particular companies
by means of anonymous acquisitions of their securities,
through nominee accounts in non-OPEC countries, or other
indirect methods.
Any such acquisitions would contravene current laws and
regulations regarding reporting of foreign investment in the
United States. The Securities and Exchange Commission requires
that any person acquiring more than 5 percent of a publicly
traded U.S. company must report this fact to the SEC.
Regulations issued by the Commerce Department under authority
of the International Investment Survey Act of 1976 require
- 13 -
that any U.S. company whose voting stock is 10 percent
or more owned by a foreign resident must report quarterly to
the Commerce Department if the value of its assets, sales,
or income are more than $5 million.
Obviously, there is a theoretical possibility that a
foreign person determined to acquire a controlling or
influential interest in a U.S. company secretly could do
so by orking through various intermediaries and nominee
accounts. It is conceivable that some foreign firms or
individuals have a larger interest in more U.S. firms than
now appears on our records. But the possibility that any
foreign government has acquired such interests in this way
in a large number of firms, or firms which are important to
our economy, is too small to merit the establishment of an
extensive organization to investigate such possibilities.
But let us assume for purposes of discussion that a
government has acquired controlling interest in a U.S. firm
which is below our reporting threshold and of which we are
therefore unaware. Could a foreign government, using
secretly held equity, shape the operations of a U.S. company
in a manner that we would consider undesirable? The key
point here is that the laws and regulations which we now
have on the books presumably cover all potential abuses
or misuses of U.S. companies. These laws are applicable
equally to U.S. and foreign-owned companies in the U.S.,
and their effectiveness is not dependent on our having
detailed knowledge on whether particular foreigners own
particular amounts of particular companies.
Therefore, any concerns about foreign investors
misusing U.S. companies presumably relate to actions of
some sort which are not now covered by U.S. laws. If, in
fact, particular actions are a real threat to the national
interests we should have laws against them regardless of
whether the actions are perpetrated by foreigners or
by Americans. But we should not have laws or reporting
regulations which are based on the assumption that certain
actions by foreign-owned companies — whether official
- 14 -
or private — in the U.S. are intolerable even though the
same actions by U.S.-owned companies would be acceptable,
except in a few instances which Congress has decided to
legislate such differential treatment.
For all these reasons, we see no basis for differentiating
between OPEC investments in the United States and those by
other foreign persons. Nor-do we see a case for substantially
increasing the uurdens on American companies to supply more
data than they now provide on these investments.
I would also like to point out that, just as we
should not discriminate against OPEC investments in this
country, neither should we discriminate in favor of such
investments. In the Conference on International Economic
Cooperation, during which there was extensive dialogue
between industrial countries and developing countries, some
OPEC officials contended that preferential treatment for
their investments was warranted in exchange for oil production
in volumes excessive to their own immediate financial needs.
We and the other industrial countries rejected this approach.
Thus, while we welcome investment in this country by residents
of OPEC countries, just as we do investment from other
countries, we give no special incentives to attract it.
Notwithstanding our ability to cope with a withdrawal of
OPEC investments from the United States, we would not want to
precipitate such withdrawal. As I have said, these investments
provide distinct benefits to our economy. Withdrawal also could
have disruptive, if manageable, effects on our capital market.
As the GAO report noted, withdrawal of the investments would
adversely impact on the customer relationships which have been
established between the OPEC countries and our banks and other
enterprises — hurting their competitive position over the
longer run. Measures which would force a withdrawal of OPEC
investments would cast a pall on the investment climate in the
U.S., and could lead other foreign investors to reevaluate the
desirability of maintaining their investments here as well.
- 15 Data on OPEC Investments in the United States
When the oil price was quadrupled in 1974 and some
of the OPEC countries began to accumulate large payment
surpluses, the disposition of those surpluses became a
matter of major importance not only to the surplus countries
themselves but also to the entire world. In the national
interest of the United States and the interest of world
financial and economic stability, the U.S. Government
sought to make clear to ^PEC countries that investment
in the United States — particularly in U.S. Government
securities — would be welcome.
Since the amounts of the surpluses were extremely
large and the U.S. monetary authorities wanted to
minimize the impact of large purchases by foreign
governments on the U.S. securities markets, Treasury
offered facilities for the purchase of regular U.S.
Government securities off-market but at market rates —
the so-called "add on" facility. The same facilities were
offered to other interested governments. In addition,
in response to requests from officials of some OPEC countries,
Treasury officials assured those countries that the
confidentiality of their government accounts in the
United States would be maintained.
In 1974, Treasury found it necessary to make significant
changes in its reporting systems with regard to the
portfolio transactions of the Mid-East oil exporting
countries in order to continue to afford confidentiality
to individual investors there. Prior to that time,
Treasury required reporters to submit data on liabilities to
these and a number of other countries only semi-annually, and
then only for specific transactions. These partial data
were published by country in the Treasury Bulletin.
The requirement for only partial, infrequent reports on
these countries was based on the fact that their holdings
in the United States were very small; there was little need
for comprehensive, monthly reports which would increase
reporter burden. The small size of these holdings
also reflected a situation where the data collected for
each country represented a mix of holdings by banks,
other private residents, and official institutions.
In 1974, the holdings of residents of Mid-East oil
exporting countries in the United States began to increase
of
cover
rapidly.
the these
reporting
thecountries.
whole
Consequently,
instructions
range At
ofTreasury
the
portfolio
to
same
require
felt
time,
transactions
monthly
it
asadvisable
a result
reports
by of
residents
to change
the
and to
- 16 -
substantial increase in official oil revenue of these
countries, it became obvious that the assets held in the
United States by a number of official monetary authorities
would constitute a very high percentage of the total
holdings of residents of those countries — as has remained
the case since that time. With this development, the
continuation of the previous practice of publishing an
individual country breakdown would have effectively
disclosed holdings of these individual official
institutions. Thus it became nee sary to group countries
in order to maintain confidentiality, as requested by
some of the countries involved.
Throughout the period of data collection under the
Bretton Woods Agreements Act and the International
Investment Survey Act, the U.S. Government has sought
to maintain the principle of confidentiality of the
accounts of individual investors and reporters. An assurance
that accounts of individual OPEC governments would be
kept confidential therefore cannot be viewed as an offer
of preferential treatment. Such confidentiality is
available to all other governments as well as to private
investors, domestic and foreign.
The sensitivity of governments and central banks
to U.S. statistical treatment of their accounts varies.
The Canadian Government, for example, has for many years
accepted specific identification of its official holdings in
the United States, but no other government's holdings have
ever been specifically identified in U.S. statistics.
There are some instances in which U.S. liabilities to
official institutions have come to constitute a relatively
high percentage of U.S. liabilities of a particular type
to all residents of that particular country. This is a
situation which has evolved over the years as an increasing
percentage of private liquid dollar balances came to be
deposited in the Eurodollar market, rather than directly
in the United States, while central banks of many nations
were increasing their official dollar reserves substantially
and continuing to hold those reserves in the United States.
In the absence of expressions of concern by these governments,
we have not changed our statistical presentation because we
- 17 wish to make as much information available to the public as
is consistent with individual customer and individual reporter
concerns. However, very rarely are the percentages of official
holdings in a country's total holdings as high for other
countries as for the OPEC countries which have expressed
concern over the issue. 1/
The U.S. is not alone in providing protection against
the disclosure of the affairs of individual customers and
reporters. As far as we know, no government divulges
detailed data on the investments of individual investors,
including individual foreign governments or central banks.
No major country releases data on the holdings within its
territory of individual Middle East oil exporting countries.
Indeed, no other country discloses nearly as much data as
does the United States in this whole area of international
capital movements.
1/
Upon re-reading my letter of April 19 to the GAO, I have
concluded that its fifth paragraph may have conveyed a
misleading impression which I wish to clarify. The
disclosure policy of the Treasury has been applied
uniformly in the sense that confidential treatment is
available to any investor (1) whose investments could
be disclosed, contrary to the Bretton Woods Agreements Act
and the Investment Survey Act of 1976, by publication of
the individual country data and (2) who wishes to take
advantage of it. The Government of Canada has indicated
that it has no objection to disclosure of its holdings,
which are therefore disclosed. The governments of several
OPEC countries have indicated that they would object to
disclosure of their holdings, which would in fact occur
if data for those individual countries were reported
because official holdings represent such a high share of
total country holdings; thus these countries are grouped
with several others to avoid disclosure of the holdings
of individual investors. No other governments have
objected to our long-standing presentation, so we have
not felt it necessary to alter our presentation. Any
government which did indicate a desire to avoid disclosure
of its holdings, where those holdings were found to
represent the bulk of the country's total holdings,
would receive similar treatment.
- 18 The Subcommittee has asked whether such treatment should
continue to be extended to foreign governments. I would
answer in the affirmative, for those who consider it important.
Most governments and central banks around the world —
not merely those that are members of OPEC — consider that
the details of their holdings abroad are a private matter.
Most governments and central banks publish the total amount
of their official reserves-and give a breakdown between SDR,
their IMF position, foreign exchange and gold. Very few
countries release a breakdown of their foreign exchange
reserves by currency but it is widely known that, for most
countries, the great bulk of those holdings are in dollars.
It is known that the major industrial countries hold most of
their dollars in U.S. government securities. Thus they have
not expressed concern over the publication of disaggregations
in which official holdings have come to constitute a high
percentage of the country total.
Whenever and to whatever extent confidentiality is
sought, however, we do our best to maintain it. Some OPEC
countries may be more sensitive on this issue than some of
the industrial nations whose external government-owned
assets are all in the category of liquid reserves because,
as I noted earlier, some of their holdings are more akin to
an investment portfolio than liquid reserves. Nevertheless,
the basic principle is available to all.
Finally, the Chairman's letter of June 26 raised the
question of whether "some form of understanding, promise,
agreement, or arrangement" exists between the United States
and any OPEC country regarding data disclosure. I have
already indicated that several OPEC countries have repeatedly
expressed concern about the confidentiality of their investments in the United States, leaving a clear implication that
they might be less inclined to invest here in the absence of
such confidential treatment. I have also indicated that the
Treasury Department, in expanding its reporting on investments
by OPEC residents, changed its treatment of the holdings of
some OPEC countries in 1974, in conformity with the
requirements of the Bretton Woods Agreement Act, in light of
the requests of these countries that it do so.
- 19 The Treasury files contain no evidence of any explicit
agreement on the subject, although former Secretary Simon
has indicated that such an agreement did in fact exist. We
can assure the Subcommittee that no such arrangement has
ever been mentioned, let alone agreed or carried on, during
the present Administration — though representatives of
several OPEC countries have reiterated to us on several
occasions their concern over the continuing confidentiality
of their' holdings. Indeed, the level of investments in the
United States by these countries has fluctuated rather widely
during the past few years, which is inconsistent with the
notion that any such arrangement was in place at least during
that period.
The primary determinant of the level of OPEC investments
in the United States is the level of the OPEC investable
surplus. The proportion of this surplus invested in the
United States ranged from 21 percent in 1974 to a high of
30 percent in 1976 and fell back to a level of 14 percent
in 1978. From mid-1978 through the first quarter of 1979,
OPEC investments in the United States actually declined.
The principal reason was that, during that period, these
countries had no significant surplus while they had
continuing commitments for grants and disbursements on
earlier loan commitments.
I have attached to my testimony as much of the
detailed information which the Subcommittee has requested on
all of these topics as is available to us, and as I can
disclose. We have provided to the Subcommittee over three
hundred documents from our files containing material relating
to these investments which do not bear a national security
classification. We have also provided lists of other
documents, copies of which we have not provided for
several different reasons.
We have been unable to furnish classified materials
because, in response to our question as to whether the
Subcommittee and its staff would maintain the confidentiality
of classified documents, we were told that the Subcommittee
would wish to reserve for itself the right to release any
documents it received. If the Subcommittee should now be of
the view that it can give such assurance, we would be pleased
to supply all appropriate documents.
We also cannot supply some of the more detailed data
requested because they would reveal the identity or holdings
of an individual reporter, or an individual customer of a
reporter. This is the case with respect to information
data
East
relating
the
in Africa.
accounts
tables-Jiihich
and
for data
the
to To
individual
eight
of
for
avoid
these
it
four
oil
publishes.
disclosing
individual
OPEC
exporting
oil producing
countries
information
countries
investors,
countries
in the
in
Treasury
that
Middle
the
inwould
Middle
Africa
East
groups
reveal
and
in
- 20 Avoidance of such disclosure is called for by the
International Investment Survey Act and the Bretton Woods
Agreements Act, under which these data are collected.
Neither the Acts nor their legislative histories contain
any suggestion that an exception to the confidentiality
requirements is to be made for Congress. In statutes
under which Congress has intended that it have access to
information which is to be kept confidential according to
the mandate of those statutes, Congress has explicitly
indicated that intention. The opinion of Treasury legal
counsel on this issue is appended to my testimony.
Conclusion
I welcome this opportunity to discuss in detail
with the Subcommittee the application to OPEC countries
of U.S. policy toward foreign investment in the United
States. I have reached several conclusions in the
course of my testimony:
— that OPEC investments in the United States, while
large in absolute terms, represent a small share
of every category of foreign investment in the
United States and an extremely small share of
total investments, domestic and foreign, in this
country;
— that the interests of the OPEC investors themselves,
and their clearly stated policies, suggest little
likelihood that they would ever try to disrupt our
economy or financial system by withdrawing their
investments here;
— that, if they did, we have ample defenses against
actual disruption through the workings of the private
banking system, existing legislation and cooperation
from other major countries;
— that it would not be in the national interest of
the United States to deter OPEC investments in this
country any more than it would be to deter investments
from other countries, and hence we respect the desires
of some OPEC countries to maintain confidential
treatment for their investments here, as clearly
authorized by U.S. law;
- 21 —
and that a reversal of these policies, whether by
changes in law or in current practice, would clearly
discourage foreign investment for no apparent public
purpose.
Within this framework, we have supplied — and will
continue to supply — the maximum amount of data which we
are free to supply under current law.
I look forward to continuing to discuss these issues
with you.
TABLE 1
Estimated Disposition of OPEC Investable Surplus
1974-1978
($, billions)
1975:
1976
1977:
13
9 1/2
12
9 1/4
1 3/4
(
(
(
(
(
5.3)
.2)
.9)
.6)
4.2)
( .5)
(2.0)
(1.6)
(1.7)
( .6)
(-1.0)
( 4.2)
( 1.2)
( 1.8)
( 1.9)
(-.9)
(4.3)
(1.7)
(1.4)
( .4)
(-1.0)
(-1.5)
( .8)
( .8)
( .7)
(il.2)
(6.3)
( 8.1)
(7.0)
(- .2)
( 1.7)
(3.2)
( 4.2)
(2.3)
( 2.0)
1974:
United States
of which
Treasury securities
Bills
Bonds and notes
Other marketable U.S. bonds
U.S. stocks
Ccnmercial bank liabilities
Subtotal (banking and
portfolio placements)
Other (including direct
investment, prepayments
on U.S. exports, debt
amortization, etc.)
Eu_x^banking market
22 1/2
United Kingdcm
7 1/2
Other developed countries
Less developed countries*
11
12
2 1/2
3/4
1/4
-1
6
7 3/4
8
8
6
6
7 1/4
7 1/2
8 1/2
4 1/4
2
1 1/4
1 1/4
1/2
4 1/4
1 3/4
1/2
- 1/2
14 1/4
1/2
Non-market countries
International financial institutions (including IMF oil
facility)
8
1978
3 3/4
- 1/4
TOTAL A3__L0CATED
59 1/4
39
40 1/2
40 1/2
Estimated current account surplus
71
35 1/2
39 1/2
35 1/2
Adjustment for lag in receipt of
oil revenues
-11 1/4
+1
-4 1/2
+3
+ 1
V2
4
10
15
4 8 1/2
21
Estimated gross borrowings
Cash surplus plus borrowings
60 V 4
Discrepancy in estimates
1 1 1/2
**
NA
r
Includes grants, debt amortization and
prepayments for imports
Includes grants
Not available
—
Revised
40 1/2
8
43
^
2 1/2 8 *
5
6 3/4
Office of Intesrnational Banking
and Portfolio Investment
July J_5___1979
OIL-EXPORTING COUNTRIES • FOREIGN INVTSOMENT IN THE UNITED STATES 1/
(Millions of Dollars)
*~
Capital Flows
Position
12/78 P
1574
1975
1976
1977
1978
11,847
7,967
10,982
7,348
473
42,041
5,475
5,280
195
2,425
458
1,967
3,205
- 1,044
4,249
3,467
852
4,319
- 2,467
958
- 1,509
12,659
3,277
9,382
Other U.S. Government liabilities 2/ 3/
125
946
2,351
372
495
4,414
U.S. Government Agency Securities 4/
Corporate bonds
~~
Corporate stocks
884
13
618
1,067
495
1,652
761
418
1,828
956
736
1,408
128
"703
793
3,796
2,365
6,299
4,238
630
1,903
401
685
10,255
Non-bank liabilities 2/
494
752
516
8
136
2,253
Direct Investment •
111
32
6
!0
69
325
11,958
7,935
10,976
7,338
542
42,366
Portfolio Investment
U.S. Treasury securities
Treasury bills & certificates
Treasury bonds & notes
Camercial bank liabilities, n.i.e.
•i
Total foreign investment
5/
-
i
i
i
n.a. not available
n.i.e. not included elsewhere
1/ Oil-exporting countrifes consist of OPEC plus Oman and Bahrain.
2/ Position consists of cunulative flows, 1972-1978, OPEC only.
3/ Liabilities to foreign official agencies associated with U.S. military sales contracts and other U.S.
Government transactions.
4/ For all years, holdings are by foreign official institutions.
5/ Differs frcjn total, line 1, table 1, because table 1 Office of International Banking and Portfolio Investment
includes and this1 table excludes changes in U.S. assets
July 16, 1979
abroad, such as amortization of OPEC debt.
T/J3LF
3
PORTFOLIO INVESTMENT IN THE U.S. BY OIL-IKPOKTING COUNTRIES AND MIDDLE EAST OIL-EXPORTING COUNTRIES 1/
(Millions of Dollars)
197J
1974
3,424
15,271
Position at end of period
1977
1976
1975
1978
Apr. 1979 p
Oil-Exporting Countries
Portfolio investment
34,220
41,568
42,041
39,379
U.S. Treasury securities
Treasury bills . certificates
Treasury bonds - notes
551
393
161
6,02!)
5,€73
356
8,454
6,131
2,323
11,659
5,087
6,572
15,126
4,235
10,891
12,659
3,277
9,382
11,189
3,405
7,784
Other U.S. Government liabilities 2/ 3/
125
250
1,196
3,547
3,919
4,414
4,648
U.S. Oovorrj'ent agency securities 5/
Co q » rate bonds
Corporate stocks
n.a.
n.a.
n.a.
881
13
618
1,951
508
2,270
2,712
926
4,098
3,668
1,662
5,506
3,796
2,365
6,299
3,688
2,298
6,610
Conmjrcial baric liabilities, n.i.e.
2,398
6,636
7,266
9,169
9,570
10,255
10,946
1,593 _»/
2,109
2,117
2,253
n.a.
Nonbank liabilities
II.
23,238
347 6/
841 6/
£/
Riddle East Oil-Exporting Countries
947
7,192
16,250
27,662
35,358
34,094
32,339
U.S. Treasury securities
Treasury bills & certificates
Treasury bonds & notes
81
81
0
2,373
2,173
200
5,674
3,677
1,997
9,766
3,886
5,680
13,484
3,153
10,331
10,846
2,296
8,550
9,523
2,613
6,910
Other U.S. Government liabilities 2/ 3/
114
256
1,178
3,493
3,869
4,328
4,565 4/
U.S. CoverruT^nn agency securities 5/
Corporate f/ends
Corporate storks
n.a.
n.a.
n.a.
884
1,951
495
2,167
2,712
903
3,970
3,668
1,640
5,360
3,796
2,332
6,141
3,638
2.265
6,461
Ccmrercial tank liabilities, n.i.e.
567
2,544
3,678
5,474
5,826
5,127
5,837
IJonbank liabilities
185 6/
617 6/
1,117 6/
1,344 6/
1,511
1,524
n.a.
Portfolio investnvjr.t
n.a.
not available
n.i.e. not ir.cludeJ sl-owhcre
p
preliminary
1/
~
0
5)8
-
Oil-exporting counU ies consist of OPBC-ircmber countries plus Bahrain and Oman.
So'idi Arabia, United Arab Emirates, Bahrain, and Onwn.
Middle East consists of Iran, Iraq, Kuwait, Qatar,
% ^mu::t3^:«™ _£t£Di2S.£?-& ™. su—-_*_*- - __«„... *—* _«««-_.
4/ u:-ta «s of March 1979.
. . _-,..•
¥, i £ i ^ ™4L£l?££
£ o l l S t i n l ^ L S f l n ^ r i n d Africa not reported separately prior to 1977.
"
-othc/Africa" used to estate data for oil-exporting countries.
^
7/16/79
«al
TABLE 4
OPEC CURRENT ACCOUNT
($ billion)
Forecasts 2/
1977
1978
1979
1980
Oil Exports Earnings 1/ 135.9 129.2 181 205
Non-Oil Exports (f.o.b.) 9.3 10.1 11 13
Imports (f.o.b.) .-85.6 -100.6 -111 -137
Trade Balance 59.6 38.7 81 81
Services and private
transfers, net
-26.6
(of which net investment income)
(5.0)
Current Account Balance
(ex. official transfers) 33.0
-33.4
-36
-41
(5.0)
(6)
(8)
5.3
4J5
£0
2.0
42
38
Official Transfers 2.0 3.3 3 2
Current Account Balance
(inc. official transfers) 31.0
Current Account Position
of OPEC:
Countries in Surplus 37.2 15.9 46 43
Countries in Deficit -6.2 -13.9 -4 -5
1/ Government take plus cost of production.
7/ The 1979 and 1980 forecasts include OPEC oil price
increases announced through June 1979. JThe estimated
July 1, 1979 average OPEC price is aboutf $20.50. It is
assumed in the 1980 forecast that the July 1,~1979 prices
hold throughout the rest of 1979 and 1980.
TABLE 5
PERCENT OF FOREIGN AND TOTAL INVESTMENT ACCOUNTED FOR BY OIL-EXPORTING COUNTRIES 1/
(Percent)
Position 12/78
(+ inflows, - dutflcws)
Of Domestic
Capital Flews
Of Foreign
1978
Investment
1977
1976
Investment
1975
1974
Portfolio Investment
U.S. Treasury securities
Treasury bills & certificates
Treasury bonds & notes
40
134 3/
140 3/
64
Other U.S. Government liabilities 2/
42
U.S. Government Agency Securities
Corporate bonds
Corporate stocks
97
10
68 4/
Comnercial bank liabilities, n.i.e.
19
Nonbank liabilities
26
Direct Investment
Total foreign or all investment
2
35
13
1
19
*
*
9
5
14
2
2
1
52
30
18
30
35
75
67
66
35
50
53
*
16
*
1
60
34
16
33
26
35
26
11
*
*
*
48
62
117 3/
it
138 3/
10
1
30 5/
58 \
33J
20
1
5
3
10
1
1
5
16
•*
*
*
it
1
1
** *
50
30
14
1
12
2/3
n.a. not available
* Percent, not calculated if outflows bv all foreirn countries or by oil-exporting countries.
** L£ss than ^ of II.
*** on the order of 1/100 of 1% of total net worth of all U.S. firms.
1/ Oil-exporting countries consist of OPEC members plus Onan and Bahrain.
2/ Liabilities to foreign official agencies associated with U.S. military sales contracts and other U.S
~~ Government transactipns.
3/ inflects net disinvestment by countries other than oil-exporting countries.
4/ Based on flows of $367 million; valuation adjustments of $251 million were not included in the
percent calculation.
5/ No conparable liabilities to residents.
""
1MB
7/16/79
ANNEX
Response to the Subcommittee's Questions
in the letter to Mr. Bergsten
of June 26- 1979
QUESTION: We request that you produce all documents
responsive to my April 10, 1979 letter- barring any
constitutional privileges prohibiting this disclosure.
We request that you include in an appendix to your
testimony the information and data asked for on page 1
through 3 of the April 10 letter, set forth in the manner
and under the categories requested.
ANSWER: The Department has determined we are not in a
position to supply the documents which fall into three
categories: (1) information colJ-cted pursuant to
statutes which accord confidential treatment to such
information; (2) classified material, and (3) sensitive
foreign relations information and high level policy memoranda.
As indicated in Mr. Mundheim's letter dated May 4,
1979 to Congressman Rosenthal, the Department is prohibited
from releasing information collected under the authority of
the Foreign Investment Survey Act of 1976 or the Bretton
Woods Agreements Act, if the information relates to the
affairs of an individual or a customer of a reporter.
These two statutes preclude the Department from disclosing
this information for the reasons discussed in the attached
memorandum dated October 13, 1978, from Russell Munk,
Assistant General Counsel, to C. Fred Bergsten, Assistant
Secretary for International Affairs.
With respect to requests for classified material, while
the Department would like to assist the Subcommittee to the
fullest extent possible, we cannot release such documents
absent adequate assurances by the Subcommittee that
complete confidentiality of these documents will be maintained. The Department has an obligation to insure that
classified information which is disseminated outside of the
Executive Branch is fully protected from unauthorized
disclosure. Executive Order 12065 on National Security
Information, issued by the President on June 28, 1978,
provides as follows:
Section 4-103: Controls shall be established by each agency
to ensure that classified information is used,
processed, stored, reproduced, and transmitted
only under conditions that will provide adequate
protection and prevent access by unauthorized
persons. (emphasis added)
- 2 More importantly, Section 4-105 specifically addresses the
dissemination of information outside the Executive Branch as
follows:
Classified information disseminated outside
the Executive Branch shall be given protection equivalent to that afforded within
the Executive Branch. (emphasis added)
The third category of information includes memoranda
which record sensitive communications with oreign governments and high level inter- and intra-agency policy deliberations. The documents recording government-to-government
communications must be kept confidential in order not to
impair our ability to carry on candid discussions with
other countries. Release of such documents containing
statements which were made by representatives of foreign
governments with the expectation that they would be closely
held could seriously damage our future relations with
such governments. The balance of the documents which we
are not supplying involve high level intra- and inter-agency
policy deliberations. It would be inappropriate to release
these documents since there is a clear need to protect
communications between high policy officials and those
who advise them. The deliberative process involved in the
policy-making decisions of the Executive Branch must be
free from outside scrutiny to insure candid, objective
consideration of policy alternatives.
The Department would like to emphasize that we
recognize the Subcommittee's oversight responsibilities
in this area, and we would very much like to assist and
cooperate with the Subcommittee, to the fullest extent
possible without jeopardizing the confidentiality of
information which continues to need protection.
OPTIONAL r O R M MO. %•
• M A Y 1t«t COITION
OSA P P M * (41 CFfl) ltl-tt.«
Department of the Treasury
Washington, D.C. 20220
UNITED STATES G O V E R N M E N T
Memcmwdum
TO
DATE: OCT 1 3 1978
Assistant Secretary Bergsten
FROM
Russell
Munk
SUBJECT:
D i s c l o s u r e of I n f o r m a t i o n
Saudi A r a b i a n Investments
^
Concerning
in the United
States
C o n g r e ssman J a m e s H. S c h e u e r , in his c a p a c i t y as
Chairman of the Subcommittee on Domestic and
Internation al Scientific P l a n n i n g , A n a l y s i s and
C o o p e r a t i o n (the •Subcommittee") of the House C o m m i t t e e
on Science and T e c h n o l o g y , h a s requested T r e a s u r y to
provide the Subcommittee with detailed information on
Saudi Arabi an investments in the United S t a t e s . In h i s
request, Co ngressman Scheuer included a legal report
dated J u l y 18,1978 prepared by Richard Ehlke of the
C o n g r e s s i o n al Research Service which supported the
C o n g r e s s m a n •s r e q u e s t . W e have considered the
C o n g r e s s i o n al Research Service m e m o r a n d u m , but we
d i s a g r e e wi th its c o n c l u s i o n .
Information on Saudi A r a b ian Investments in the
United States is collected and given c o n f i d e n t i a l
treatment pursuant to the Inte rnational Investment
Survey Act of 1976, 22 U . S . C . 3101 e t . s e q . , (the
"Survey A c t " ) , and the Bretton W o o d s A g r e e m e n t s A c t , 22
U . S . C . 286 et seq., (the "Bret ton W o o d s A c t " ) . Y o u have
asked for m y o p i n i o n on the ex tent to which T r e a s u r y is
precluded from providing such information to the
Subcommittee b y the Survey Act and the Bretton W o o d s
Act.
I h a v e concluded that these two Acts p r e c l u d e
T r e a s u r y from disclosing to C o n g r e s s data obtained under
their a u t h o r i t y to the same extent that they p r e c l u d e
d i s c l o s u r e of such data to persons other than g o v e r n m e n t
a g e n c i e s which a r e s p e c i f i c a l l y authorized to obtain the
data under the A c t s , This conclusion is based on the
lact that neither the A c t s , nor their l e g i s l a t i v e
"histories, cohfain a n y " I n d i c a t i o n that an "exception to"
their c o n f i d e n t i a l i t y r e q u i r e m e n t s , which are v e r y
s t r i n g e n t , was to be m a d e for C o n g r e s s . 1 /
-4/1 have not examined in this m e m o r a n d u m the g e n e r a l
question of whether the request for information is
within the scope of the S u b c o m m i t t e e ' s j u r i s d i c t i o n .
I0t*-t««
Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan
**%*%
">§.i9*
-2-
In statutes under which Congress has intended that it
have access to information which is to be kept
confidential according to the mandate of those statutes,
Congress has explicitly indicated that intention and has
placed certain restrictions on such access.
A. The Survey Act and the Bretton Woods Act
1. Survey Act
The general purpose of the Survey Act
•clear and unambiguous authority for
collect information on international
provide analyses of such information
is to provide
the President to
investment and to
to the Congress."
More specifically, Subsection 4 (a) of the Survey
Act provides that the President will: (1) conduct a
regular data collection program; (2) conduct studies and
surveys as may be necessary to prepare reports; (3)
report periodically to the Committees on Foreign
Relations and Commerce of the Senate and the Committee
on International Relations of the House on developments
with respect to laws and regulations affecting
international investment and (4) publish for the use of
the general public and United States Government
agencies, statistical information collected pursuant to
the subsection. Nothing in this subsection indicates
that the reports and raw data from the reports will be
used for purposes other than producing the statistics to
be published pursuant to Subsection 4 (a)(4), or that
the Executive Branch is required to provide these
reports and raw data to Congress. The fact that in the
Survey Act Congress explicitly required certain types of
information be furnished to it and did not mention its
access to data which it required be kept confidential
indicates that it did not intend to receive the
confidential data received from reporters under the
Survey Act.
The Survey Act provides that information obtained
from reporters (a) will be used only for analytical or
statistical purposes within the United States Government
-atrd -(b)-may not be published-or-made-av^.liable to any _
person in a manner that the person who furnished the
information can be specifically identified. *Person" is
defined in Section 3 (3) of the Survey Act to include "... any government (including a foreign government, the
United States Government, a State or local government,
-3and any agency, corporation, financial institution, or
other entity or instrumentality thereof, including a
government-sponsored agency)." Thus, Congress is a
person" subject to the above-described limitations on
disclosure of information.
Within the United States Government, access to the
information is strictly limited to officials or
employees designated to perform functions under the
Survey Act. However, the President may authorize the
exchange of such information between agencies or
officials designated by him. Since the Congress is not
an "agency" and since we believe that the "officials"
who may be designated to receive information refers to
officials of agencies, it is our view that the President
could not designate Congress, its members and its staff
as an "agency" or "officials" with whom the information
could be exchanged. In any event, no such designation
has been made by the Secretary of the Commerce, to whom
the responsibility
for designation
been Identify
delegated.2/
A person who reveals
d ata thathas
would
a
reporter to any person other than a person designated to
perform functions under the Survey Act Is subject to a
criminal fine of up to $10,0 00. Given this strong
expression of congressional concern about maintaining
the confidentiality of the i nformation obtained from
reporters, it would be anoma lous to find implicit in the
Survey Act a congressional i ntent to make such
information available to the Congress without any
limitations.
2/ The disclosure provisions of the Survey Act are based
on those of the Foreign Investment Study Act of 1974,
Pub. L. 93-479, October 26, 1974. That Act provided in
Section 7 that neither the Secretary of the Treasury nor
any employee of either Department may:
"1) use any information furnished under subsection
(b)(2) except for analytical or statistical purposes
within the United States Government; or
"2) publish, or make available to any other person
in any manner, any such Information in a manner that the
information furnished under subsection (b) (2) by any
person can be specifically identified, except for the ~
purposes of a proceeding"under section 8."
-4Moreover, the Survey Act provides that "no person"
can compel the submission or disclosure of any report or
constituent part thereof, without prior written consent
of the person who maintained or furnished such report
and without the prior written consent of the customer,
where the person who maintained or furnished such report
^/(Continued from preceding page) In Senate floor
debate, Senator Inouye explained several amendments he
proposed to the bill as passed by the House. In
amending Section 7, the Senator stated that:
"The second amendment, which amends subsection
7(c)(2), clarifies the intention of the Congress that
the information gathered under subsection 7(b) may be
furnished in an enforcement proceeding under section 8
even though a person can be specifically identified
through the data. Ordinarily, data under this act can
be released only in aggregate form."
***
"The information gathered under this act may be
used only for preparing analyses and statistical data
within the sections responsible for studying foreign
investment. Subsection 7(c)(2) prohibits the release of
identifiable information to anyone outside the
Government except in a court proceeding under section 8
of this act. Subsection 7 (d) protects the information
from involuntary disclosure under court order or
administrative subpoena other than a section 8
proceeding." 120 Cong. Rec. 34683-34684 (1974).
It is evident from this statement that Senator
Inouye read the word "Government" as used in Section 7
of the 1974 Act to mean solely the Executive branch,
since the statement referred to court proceedings as
being "outside the Government." Congress carved out
this single exception for court proceedings from the
otherwise complete prohibition of disclosure of
dis-aggregated data to persons outside the Executive
branch. By applying the maxim expressio unius est
exclusio alterius, it appears that the failure to make a
similar exception to permit disclosure to the Congress
suggests a Congressional intent that an additional
exception not be implied for release of particularized
survey data to the Congress. Adoption of generally
similar language in the Survey Act of 1976 suggests _tha__L
this interpretation is likewise applicable to the Survey
Act.
-5-
included information identifiable as being derived from
the records of such customer. Thus, a committee of the
Congress —which would appear to be a "person" within
the meaning of the Survey Act— also lacks authority to
compel disclosure of data except on the condition that
the data not identify the reporter or customer of the
reporter.
Finally, in Section 7(c) of the Survey Act,
Congress stated, "Nothing in this Act is intended to
restrain or deter foreign investment in the United
States or United States investment abroad." The very
strict confidentiality provisions of the Survey Act are
in furtherance of this statement of intent. Saudi
Arabia, which invests in the United States almost
exclusively through the Saudi Arabian Monetary Agency
(SAMA), would be deterred from investing in the United
States were the details of SAMA investments in the
United States to be disseminated to persons other than
those espressly mentioned in the Survey Act. Saudi
Arabian officials have stated on a number of occasions
to high level Treasury officials the great importance
they attach to having the details of SAMA's investments
in the United States remain confidential. From a Saudi
perspective, disclosure of the information to the
Subcommittee could appear to be inconsistent with the
requirement of confidentiality.
Thus, it could result
in a withdrawal of investments from the United States,
causing a disruption in our relations with Saudi Arabia
and thwarting U.S. policy to encourage productive
investment of petrodollars. Such a result would be
directly contrary to the express intention of Congress
that 2.
nothing
in Woods
the Survey
Bretton
Act Act is intended to restrain
or deter foreign investment in the United States.
Section 8(a) of the Bretton Woods Act 22 U.S.C.
286f(a) provides that the President may require any
person to furnish such data as the President may
determine to be essential to comply with a request by
the International Monetary Fund (IMF). Section 8 of the
Bretton Woods Act expressly authorizes disclosure of the
Information collected only to the IMF. However,
information acquired by the President under the section
may not even be furnished to the IMF in a degree of
detail that would disclose the affairs of any person
-6—either the reporter or its customers.3/ The purpose
of the prohibition protecting the affairs of particular
persons from disclosure when the data is used for its
intended purpose of reporting to the IMF would be
frustrated if the same data could be released to all
entities other than the IMF in a manner that would
disclose the affairs of the persons to whom they
pertained.
Section 8(a) speaks in terms of limiting the amount
of detail in the release of information only in the
context of releases to the IMF, because the data
collected pursuant to that section was expected to be
released only to the IMF. Since it was not contemplated
that that section would authorize the release of this
data to any other entity, the issue of the extent of
detail in releases to other entities would not arise.
Moreover, 22 U.S.C. 286f(c) provides that it shall
be unlawful for any government officer, employee,
consultant or adviser to disclose information obtained
pursuant to Section 286f other than in the course of his
"official duty." Violation of this provision is
punishable by fine and imprisonment.
"Official duty" should, in our view, be construed
to mean the duty imposed by Section 286f; i.e., to
collect information, to analyze it and to summarize it
in a form to be sent to the IMF. Any disclosure of data
for purposes other than these and not authorized by the
Federal Reports Act, (e.g. disclosing the information to
the Congress) would fall outside the "duty" imposed by
Section 286f, and would, consequently, be prohibited.
This prohibition is qualified, however,.to the extent
that information is collected under the more recent
Survey Act as well, because the Survey Act allows
transfer of information to agencies or officials
designated by the President.
3/ Treasury currently furnishes the IMF with aggregate
data similar to that published in the Treasury Bulletin.
However, in order to obtain this aggregate data, Treasury must collect disaggregated data from individual
Reporters. This raw data, together with certain country.
total-s—produced from this raw data, could reveal the
affairs of individual reporters or their customers and
for this reason is not published in the Treasury
Bulletin or furnished to the IMF.
-7their customers and for this reason is not published in
the Treasury Bulletin or furnished to the IMF.
A recent amendment to the Bretton Woods Act,
Section 286k(b), requires the President, upon request of
any congressional committee having legislative or
oversight jurisdiction over monetary policy or the IMF,
to furnish that committee with information obtained from
the IMF, consistent with United States membership
obligations in the IMF and subject to such limitations
as are appropriate to the sensitive nature of the
information. None of the data requested by the
Subcommittee was obtained by the U.S. Government from
the IMF. Conversely, Treasury has never released the
data requested by the Subcommittee to the IMF. Of equal
importance is the fact that the IMF does not receive
from member states data of the type and detail requested
by the Subcommittee. Thus, 286k(b) does not constitute
authority for the Subcommittee to obtain from Treasury
the data on Saudi Arabia which it seeks.4/
B. Opinions of the Attorney General
Congressional access to data gathered under
confidentiality provisions of other statutes has been
the subject of several opinions of the Attorney General.
Most recently on September 8, 1978 the Attorney General
opined that Section 301 (j) of the Federal Food, Drug and
Cosmetic Act, 21 U.S.C. 331(j) prohibits the disclosure
to Congress of reports from drug manufacturers filed
with the Department of Health, Education and Welfare
under that Act. In 1975, the Attorney General opined
that the Secretary of Commerce was precluded by the
confidentiality provisions of the Export Administration
Act of 1969, 50 U.S.C. App. 2406(c) from complying with
4/ That Congress made no attempt to require the
Executive Branch to provide the Congress with
information furnished to the IMF under Section 286f in
no way implies that Congress already was entitled to
such data. On the contrary, the fact that the Congress
apparently felt it necessary to adopt Section 286k(b) in
order to obtain access to the data furnished b% the IMF,
-suggests that a similar provision would _be__nec_j»i5jsary *°
grant it access to data furnished ^to the IMF.
-8-
a Congressional subpoena to produce reports filed with the
Commerce Department under that Act.5/ Other opinions
supporting the Executive Branch's withholding confidential
Information from Congress include:
- 27 Ops. A.G. 150 (1909), subpoena of
Senate Judiciary Committee for confidential information held by the Commis:ion of Corporations
- 41 Ops. A.G. 221 (1955), request of Senate
Interstate and Foreign Commerce Committee
for confidential information held by the
Federal Communication Commission.
- 42 Ops. A.G. 485 (1974), request of House
Judiciary Committee for tax return information.
All of these opinions have relied on the general rule
that "... statutory restrictions upon executive agency
disclosure of information are presumptively binding even with
respect to requests or demands of congressional committees."
(September 4, 1975 Attorney General's opinion issued to the
Secretary of Commerce)
2#
Other statutes
There are a number of other statutes where Congress has
made its intent clear in legislation to have confidential
information supplied to it. For example,
The Internal Revenue Code contains a
confidentiafiTy provision limiting the
disclosure of tax returns (26 U.S.C. 6103).
That provision has an express exception
allowing the Committee on Ways and Means,
the Committee on Finance, the Joint
5/ It should be noted that the statute at issue in this
J[plniqn_permitted disclosure "in the national interest" and
that the Secretary of Commerce util ized~thiS" statutory
discretion by releasing portions of the requested material to
Congress. The Survey Act and Bretton Woods are more absolute
In their terms and allow no such discretion.
-9-
Committee on Taxation, the Chief of Staff
of the Joint Committee on Taxation, and any
other congressional committee authorized by
the case of a joint committee, by a concurrent resolution to obtain access to
any return upon request.
- The Civil Aeronautics Act (49 U.S.C.
1504) limits under"certain conditions,
the disclosure of information obtained
from persons who are regulated under the
Act. However, this confidentiality
provision contains an express exception
for Congress, which states " . . . nothing
in this section shall authorize the
withholding of information by the Board or
Administrator from the duly authorized
committees of Congress."
The Atomic Energy Act expressly provides
for the Joint Committee on Atomic Energy to
receive information on all activities of
agencies in the atomic energy field,
notwithstanding a provision in the same Act
severely limiting access to such data. (42
U.S.C* 2252).
In the 1977 amendments to the Export
Administration Act of 1969, Congress
specifled~any information obtained under
that Act "shall be made available upon
request to any committee or subcommittee of
Congress of appropriate jurisdiction. No
such committee or subcommittee shall
disclose any Information obtained under
this act which is submitted on a
confidential basis unless the full
committee determines that the—withhoiding
thereof Is contrary to the national
interest."
—• These and other statutes reveal that when Congress
Intends to give itself the right of access to information
which it has statutorily mandated be kept confidential,
Congress clearly indicates that intention in the legislation.
-10naming the committees which are to have access or otherwise
specifying within each confidentiality provision procedures
for determining which committees are to have access. The
confidentiality provisions of the Survey Act and the Bretton
Woods Act contain no exceptions to their confidentiality
requirements which would permit the information requested by
Congressman Scheuer to be given to any congressional
committee.
- 3 QUESTION: We would like you to summarize these OPEC
investment schedules (referred to above and to be included
in your appendix). More specifically, we would like your
testimony to cover, for each major OPEC investor, (Saudi
Arabia, Kuwait, United Arab Emirates, Qatar, Iran, and
Venezuela), both the most recent and the December 31, 1974,
dollar amount figures for those country investments in the
United States, showing as to each country the investment in
(1) U.S. Government securities, broken down by Treasury and
non-Treasury securities; (2) Americ i bank liabilities,
broken down by time deposits, demand deposits, and
negotiable CDs; (3) state and local government bonds; (4)
stocks; (5) bonds; and (6) portfolio investment in real
estate.
ANSWER: Detailed data on U.S. investments by OPEC countries
and by Middle East Oil Exporters are attached to my
testimony. Data available to Treasury on holdings of
U.S. Treasury securities do not permit separate identification of purchases through nominee/custody accounts or in the
secondary market. The split between demand, time and savings
deposits, and negotiable certificates of deposit as of end
April, 1979, is as follows:
All Oil Exporters Mid East Oil Exporters
($ millions)
Demand Deposits 3,647 1,781
Time and Savings
Deposits
2,014
514
Negotiable CDs
1,383
1,259
Treasury data do not permit us to identify separately
purchases of securities issued by state and local governments. Such purchases by foreigners, however, should be
negligible because of their low yields relative to after
tax yields available to foreigners on other instruments.
Data reportable under the Treasury's International
Capital Movements System on any investments or financing
associated with real estate transactions can not be
separately identified.
Data for individual Middle East Oil Exporting
countries cannot be disclosed under the provisions of
the International Investment Survey Act and the Bretton
Woods Agreements Act. Data for Venezuela are attached.
Venezuela: Lsii.r..ned i1.ioMne.it- in United Sinter
(NeL placements ( + ) or withdrawals (-): i» S millions)
nlilng & Portfolio Security Placement*
Cuniu'.it 1ve
1974-Aprll 1979
Long-term:
Treasury Bonds & Notes
Federal Agency Issues
Subtotal
Other U.S. Bondn
U.S. Stocks
Long-tern bank labilities
Total Longjterro
Short term:
Treasury bills
Other
Total ShortJ-term
>tal Placement in U.S. of which
Treasury securities^/
Bank deposits
Other private sector
*
1/
Treasury International Capital Reports, and
Federal Reserve 2502 S reports.
Treasury/OASP/El/ClS
July 13,
*
1976
1977
1978
April 1979
H-5
50
-55
-12
-67
9
11
39
179
-12
167
20
An
9
216
*
*
145
2
3
11
18
10
2
2
14
*
16
1
162
50
-1
18
-7
60
1
51
106
300
•194
105
-77
182
-283
1.1652/
882
"82
-369V
-377
*
n.a.l/
--47
-
39
*
-10 «
n.a.l/
29
1,949
1,950
1,894
1,945
2,186
168
1,963
51
-110
240
-32
251
-122
-55
835
-350
-348
31
1,958
60
1,907
5
-362
12
-299
16
-84
" 17
1,165
20
-369
-10
bank liabilities not reported seperately after April 1978.
2/ Includes long-tei"m bank liabilities.
3/ Includes Federal Agency Issues
Sou rce:
1975
240
-364
-124
Less than $500,COC.
Long-term
1974
- 4 QUESTION: We would like you to break down the OPEC
investments in stocks and bonds by industry sector,
using the SIC 2 number code, for only the Middle
East OPEC nations. (A country-by-country breakdown
here is not required.)
ANSWER: The Treasury International Capital (TIC)
reporting system does not provide the identity
of domestic issuers of stocks and bonds in which
foreign entities have invested. Therefore, the
TIC data cannot identify the industry sectors of
firms whose stocks and bonds Mid East oil exporting
nations have purchased. Foreign holdings by industry
will be collected in the benchmark survey of foreign
portfolio investment in the U.S. presently underway
and these data will be incorporated in the report we
will submit to Congress. The results of this study will
be available next year.
QUESTION: Please give the more recent Treasury projections for the 1979 OPEC investable surpluses, breaking it
down by country. Also, please give the same projections
for 1980, 1981, and 1982. Have these figures been computed
to include the effects of the OPEC price increase expected
this very week? (Please indicate in the appendix how those
figures compare to those of FAC, IMF, CIEC.)
ANSWER: We do not forecast OPEC's investable surplus.
We estimate the investable surplus only on an ex post
basis. Our estimates through 1978 are attached to my statement. However, trends in the investable surplus are
closely related to trends in the aggregate OPEC current
account balance excluding official transfers. The major
elements that distinguish the investable surplus from the
current account balance are net borrowings by OPEC members and
differences between payments and accrual accounting techniques*
In a period of rising prices for oil, the current account
balance will increase faster than the investable surplus due
to payments lags for oil shipments.
I believe that our projections for the aggregate OPEC
balance for 1979 and 1980 will give a good indication of the
likely trend in the OPEC investable surplus. Our
experience suggests that the projections will be useful
as indicators of the rough order of magnitude of movements
in the OPEC surplus but not as precise numerical estimates
of
statistical
the absolute
data size
are not
of the
verysurplus.
precise.The underlying
- 5 Historical data must be revised frequently as new
information is obtained. As is the case for many countries,
particularly the developing nations, statistical collection
procedures used by many OPEC countries are incomplete and
inadequate, and produce data only with a considerable time
lag and substantial margin of error. Some of the countries
are revising collection procedures and over time more
accurate data will become available. At present much of
the trade data in fact are derived from exporter country
data. For example, U.S. exports to OPEC have to be used
as a proxy for OPEC imports from the U.S., recognizing
that this practice can result in errors. It also
requires estimation of the freight and insurance payments
which are not included in export data.
Over time, we have learned that individual country
projections are more variable, and therefore are not as
useful as the aggregate OPEC estimates. Changes in the level
of oil production, for example, among countries may leave
the aggregate balance roughly unchanged while substantially
altering the position of individual countries. While
aggregate imports by OPEC have been fairly accurately
projected, projections of the widely fluctuating import
growth rates for individual countries have not been reliable.
Consequently, it is with these caveats that I am
providing you our most recent estimates which are for
1979 and 1980. These projections do include our estimates
of the OPEC price increases which OPEC announced during its
June meeting. We estimate that the export weighted
OPEC average price resulting from the June meeting will
be about $20.50.
If the oil prices agreed upon at the June OPEC
conference hold throughout the rest of 1979 and 1980,
the OPEC current account balance (excluding official
transfers) in 1979 is expected to increase to $45
billion, and then drop slightly to $40 billion in 1980,
as compared to $5 billion in 1978. At current oil
export volume and oil prices a rough rule of thumb
is that each one percent increase in oil prices raises
the balance by roughly $1 1/2 billion, annually. We
have not at this time made any projections for 1981 and
1982, in light of all the uncertainties cited above.
We are not at liberty to disclose IMF and OECD
forecasts which, in any event, are subject to the same
weaknesses. We are unable to identify an "FAC".
The CIEC was disbanded in 1977.
- 6 I
OPEC CURRENT ACCOUNT
($ billion)
Non-Oil Exports (f.o.b.)
Imports (f.o.b.)
Trade Balance
Services and private
transfers, net
(of which net investment income)
Current Account Balance
(ex. official transfers)
Forecasts 2/
1979
1980
1977
1978
135.9
129.2
181
205
9.3
10.1
11
13
-85.6
-100.6
-111
-137
59.6
38.7
81
81
-26.6
-33.4
-36
-41
(5.0)
(5.0)
(6)
(8)
33.0
5.3
45
40,
2.0
3.3
3
2
Current Account Balance
(inc. official transfers) 31.0
2.0
42
38
15.9
46
43
Official Transfers
Current Account Position
of OPEC:
C o u n t r i e s in S u r p l u s
37.2
Countries in Deficit -6.2 -13.9 -4 -5
1/ Government take plus cost of p r o d u c t i o n .
7 / T h e 1979 and 1980 forecasts include OPEC oil price
increases announced through June 1 9 7 9 . T h e estimated
July 1, 1979 average OPEC price is about $ 2 0 . 5 0 . It
assumed in the 1980 forecast that the July 1, 1979 pr
hold throughout the rest of 1979 and 1 9 8 0 .
- 7 -
OPEC:
II
CURRENT ACCOUNT BALANCES
($ billion)
1977
1978
Forecasts
1979
19.80
Algeria
-2.8
-3.4
-1.4
-1.6
Ecuador
- .3
- .3
- .2
- .3
Gabon
- .1
+ .1
.4
.4
Indonesia
- .1
-1.3
.5
.3
Iran
5.1
-1.4
2.8
5.8
Iraq
5.0
4.5
10.0
7.4
Kuwait
5.2
5.8
12.2
11.5
Libya
2.6
1.5
5.5
5.7
- .9
-3.4
.5
-1.6
.5
.9
1.9
2.2
16.7
2.8
8.9
4.8
4.1
3.5
6.0
7.2
Venezuela
-2.0
-4.1
-2.1
-1.8
Total
33.0
5.3
44.9
40.1
Nigeria
Qatar
Saudi Arabia
UAE
- 8 QUESTION: it appears that a significant amount of OPEC
investment may be made through the financial or other institutions of other countries. For example, a review of several
memoranda from Mr. Keyser to Mr. Karlik dealing with recent
foreign purchases of Treasury securities reveals that investors
from either the Netherlands Antilles or Switzerland or both
often purchase or sell more Treasury securities than do OPEC
nations. Their purchases seem out of proportion to the true
wealth of their country's citizens. In fact, a Treasury
document dated April 3, 1979, shows that Swiss investment
in U.S. Government securities totals around $15 billion,
several billion dollars more than all reputed OPEC investment in them, taken together.
Please therefore give estimates as to what dollar amount
of Swiss, British, Bahamian, and Dutch Antilles investments
in both U.S. Government securities and in other types of
assets are indeed OPEC originated and owned investments?
What are your estimates based on? If you do not have
estimates, what attempts have been made to uncover the
true origin of the investments made through other countries?
How could the Federal Government, by legislation or otherwise, overcome the concealment of OPEC investments through
other nations?
ANSWER: The question quotes "several" Keyser to Karlik
memoranda as showing larger purchases or sales of Treasury
securities by residents of Switzerland or Netherlands Antilles
than by OPEC residents. We are unable to find any such
indication in any of the five memoranda from Keyser to Karlik
which were supplied to the Subcommittee.
Clearly some portion of the investments which are placed in
the U.S. by residents of other major financial centers represents reinvestment of funds for the account of residents of
third countries. Switzerland is one of the most commonly used
centers for such reinvestments.
Based on the data available to the Treasury, which are
summarized in the attached tables, we do not believe that Treasury data grossly understate the amount of investments in
the U.S. placed directly by OPEC residents or that placements
by OPEC residents via either Switzerland or the Netherlands
Antilles are very large. These centers handle funds
from investors around the world and the total amount
of such funds flowing through these countries to the
United States is too small to represent significant
OPEC investment activity. Moreover, the amount of most
forms of Swiss and Netherlands Antilles portfolio investments in the U.S. has not increased from the levels that
prevailed prior to 1974 when the investable surpluses
by OPEC countries began to mount.
- 9 The data indicate, for example, that U.S. non-bank
liabilities to Swiss residents are lower now than
in 1972-73. Similarly Swiss purchases of private
U.S. securities have been lower in recent years
than in 1972-73.
We estimate that placements in U.S. banks by trust departments of Swiss banks for the account of all their customers
are less than half the amount of total direct OPEC placements
in U.S. banks. Placements through the trust departments of
Swiss banks did jump sharply in 1974 and although the
identities of the Swiss customers are unknown, it is reasonable
to assume that some part of the increase was accounted for
by OPEC residents. This mode of placing funds can be
attributed at least in part to the uncertainties of OPEC
investment practices at that time in the face of the
sudden, massive influx of excess funds from oil exports.
In 1975, the amount of these placements on behalf of customers
of trust departments of Swiss banks declined sharply and after
some growth in 1976 has remained level.
Placements in U.S. banks by all residents of the
Netherlands Antilles have been extremely small and stable
throughout the 1970's.
Purchases of U.S. Treasury securities by Swiss
residents have fluctuated sharply in recent years. The
most rapid increases in such purchases have occurred since
1977. These purchases have been almost entirely of shortterm Treasuries and clearly reflect the turbulent exchange
market events of this period.
Total foreign exchange holdings of Swiss monetary
authorities as published in IMF's International Financial
Statistics rose $7.5 billion during 1978. Although
neither the Swiss nor the IMF publishes a breakdown of
these assets by currency, there is little doubt that a
very high percentage of this increase represented dollar
purchases in the foreign exchange market and that a high
percentage of these official dollar purchases were invested
in U.S. government securities.
The Treasury does not believe that any useful purpose
would be served by legislation designed to identify the
country of origin of funds handled by international banking
countries such as Switzerland. The United States does
not have legislative power over the banking institutions
of other countries. It would thus be necessary to register
all foreign purchases of U.S. securities, requiring
the buying institution to identify the nationality of
the customer for whom it was acting. Such legislation
- 10 would be ineffective. Since most portfolio investors of whatever nationality, Americans included, wish to keep their private
affairs private, such a registration requirement would
divert funds away from U.S. markets, to the extent
the regulations were not evaded by interposing nominees of
different nationalities from those of the ultimate investor.
Swiss banking laws protecting customers' privacy
would force Swiss bankers either to stop buying U.S.
securities, or to buy the securities on non-U.S. exchanges
from other foreigners. Such additions to the normal
market friction of international transactions would impede
the international securities markets and would damage the
financial and economic interests of the United States.
Amount of Outstanding Liabilities Reported by U.S. Non-Banks
to Switzerland and Netherlands Antilles ($ millions)
1976
1977
1978
1972
1973
1974
1975
Switzerland
N. Antilles
663
28
674
12
728
34
656
64
449
37
504
46
499
50
Net Purchases (-Sales) of Long-Term Domestic Bonds by Swiss
and Antilles Residents 1/ ($ millions)
Switzerland
N. Antilles
135
-7
333
8
96
66
117
-3
155
34
94
-6
-100
3
Net Purchases (-Sales) of U.S. Stocks by Swiss and Antilles
Residents 1/ ($ millions)
Switzerland
N. Antilles
642
-35
685
-35
36
-13
899
-22
-100
45
152
52
-585
8
Estimated Outstanding Liabilities of U.S. Banks to Trust
Departments of Swiss Banks ($ billions)
N.A.
1 1/2
5 1/2
3 1/2
1/ Excluding U.S. Treasury notes and bonds.
4 1/2
4 1/2
4 1/2
- 11 QUESTION: We would like Treasury's position and views
on (1) the benefits and desirability and (2) the risks and
negative effects of OPEC investment.
ANSWER: These points are covered in the body of my testimony.
QUESTION: What are the ten industry sectors (SIC 2 number
sectors) in which OPEC investors have invested the most in
making portfolio investments? What have been the effects
in each or these sectors? More particularly, what has been
the impact on the companies involved in terms of technology
transfer, repatriation of profits, local borrowings for
business expansion and export generation? What studies
or analyses has Treasury done in this area?
ANSWER: As noted in an earlier response, the TIC data
do not identify the domestic issuers of stocks and bonds
purchased by non-residents. Consequently, TIC data
cannot identify the ten industry sectors which have
received the largest amounts of OPEC portfolio investments.
In conjunction with the 1974 benchmark survey, an
extensive analysis was conducted on the impact of total
foreign portfolio investment in the U.S. on our economy
and our capital markets. This analysis appears in the
published report on the benchmark survey. After compilation
of the data from the benchmark survey presently underway,
this analysis will be -updated and expanded as the data
permit.
The Treasury has not undertaken studies of the microeconomic effects of foreign portfolio investment including
the effects of such investments on technology transfers,
repatriation of profits, local borrowings for business
expansion and export generation. The data Treasury collects
do not lend themselves to such analyses nor were they or
the benchmark surveys intended for such use.
QUESTION: What OPEC investment is monitored by the
Treasury Department and what is not monitored? How often
is this (sic) data collected? What is the extent of
OPEC portfolio investment in real estate?
- 12 ANSWER: Extensive data on portfolio transactions between
the U.S. and residents of individual foreign countries,
including each OPEC country, are regularly collected under
the Treasury International Capital (TIC) Reporting System.
The data are collected monthly, quarterly or semi-annually
depending upon the form. Mandatory reports are filed
with Federal Reserve Banks by commercial banks, bank
holding companies, securities brokers and dealers and
nonbanking concerns in the U.S., including the branches,
agencies, subsidiaries and other affiliates in the United
States of foreign f rms.
Some 500 banks file a combination of monthly, quarterly
and semiannual reports (B series) on their liabilities to
and claims on, foreign residents. The liabilities and
claims, including those held for banks' domestic customers,
are reported by major type of item and by type of foreign
resident, i.e., foreign official institution, unaffiliated
foreign bank, own foreign offices, and other foreign
residents.
Banks, securities brokers and dealers, and in some
instances, nonbanking concerns, submit monthly reports
on their securities transactions (Form S) with foreign
residents. Specifically covered are long-term domestic
securities by type, i.e., Treasury bonds and notes, Agency
issues, corporate bonds and stocks, and foreign stocks and
bonds. Currently some 175 Forms S are filed monthly.
Detailed quarterly forms (C-Series) are filed by
approximately 1,000 nonbanking concerns such as
importers, exporters, industrial and commercial concerns
and financial institutions other than banks and brokers.
These reports cover the financial and commercial liabilities
and claims by type, of nonbanking firms in the U.S. vis-a-vis
unaffiliated foreign residents.
Foreign investment in U.S. real estate, i.e., purchases
of land and buildings, are not within the purview of the
TIC reporting system. Such transactions are considered
to be direct investments. The international flow
of capital arising from the financing of such an investment would, of course, enter into the banking statistics,
but can not be identified separately. Foreign investment
in U.S. real estate ventures evidenced by shares, etc.,
would be covered by Form S; however, these data are not
collected by SIC categories and cannot be separately
identified.
- 13 QUESTION: We would like a full and detailed explanation
for the policy reasons behind the refusal to publish
OPEC country data and to provide this (sic) data to
GAO.
ANSWER: The statement discusses at length the legal
and policy reasons for not p* blishing the data on the U.S.
holdings of individual Mid East oil exporting countries,
and for not supplying them to the GAO.
The question above cited the following passage in
the GAO report: "If the policy reasons for either of
these aggregations reflect concerns that disaggregation
would reveal the specific holdings of a foreign central
bank or monetary authority, the data which support these
concerns should be made available under appropriate
safeguards to the subcommittee and to us."
The following tables provide the data requested by
the GAO report. They demonstrate that:
official institutions now account for the overwhelming bulk of the portfolio investments of
each of the major Mid East Oil Producing Countries.
— in contrast, prior to 1973-1974, private investors
generally accounted for the majority of the
portfolio investments by these countries in
those instruments for which data were collected.
- 14 Portfolio Transactions in the U.S. by Official Institutions
of Mid East Oil Exporters 1/ as Proportion of That
Country's Total Transactions
I. Outstanding Liabilities Reported by U.S. Banks and Brokers
Including U.S. Treasury Bills Held in Custody
End 1973
Percent Official
0-35
35-50
50-65
End 1978
Percent Official
50-60
60-70
70-80
80-100
Average for All
Mid-East Countries
Country
Country
Country
Country
Country
II.
A
B
C
D
E
X
X
X
X
X
Net Transactions in U.S. Securities
Fourth Quarter 1974 2/
90-100
1978
70-90
90-100
Average for All
Mid-East Countries
Country A 3/
Country B
Country C
Country D
Country E
X
3/
3/
3/
3/
X
X
1/ Countries covered are Iran, Iraq, Kuwait, Saudi Arabia,
UAE.
2/ Data on official holdings not collected prior to September
1974.
3/ Transactions of all residents of the country or official
transactions were de minimus.
- 15 QUESTION: Your April 18 letter relies heavy on statistical
reasons for nondisclosure, that reason is belied by
other statements and facts.
First, in your April 19 letter, you state:
"...Over the years, some of the OPEC Governments which
have expressed concern over possible disclosure of the
details of their investment in the United States have been
told of this treatment."
Second, the former Secretary of the Treasury, William
Simon, and an assistant of his, told GAO there were policy
reasons for withholding OPEC country information, which
started in 1974. As stated in the GAO report:
"Other sources whom we interviewed, including the
former Secretary of the Treasury, stated that information
on specific OPEC countries is not held confidentially for
statistical or legal reasons. Rather, they assert that
the Treasury Department had made special commitments of
financial confidentiality to Saudi Arabia and perhaps
other OPEC governments. Part of these agreements was an
understanding that OPEC statistics would be reported by
region in exchange for Saudi Arabian purchases of U.S.
Government securities. According to Department sources, OPEC
nations told the Treasury Department and the Federal Reserve
Board that OPEC money would not be put in the United States
without a pledge of confidentiality. The Treasury Department
denies that such promises were made to OPEC nations.
Treasury maintains that OPEC countries receive no special
treatment."
ANSWER: We have not denied that there are policy reasons
for withholding data on assets of individual OPEC countries.
There are both policy and legal reasons. My statement describes
the policy reasons in detail.
We have also not denied that some OPEC countries were
promised that the confidentiality of their accounts would be
respected. What we do deny is that any pledge of confidentiality •
by this Administration, at least - was contingent on some investment commitments by OPEC countries. Treasury officials gave
assurances that confidentiality would be respected and made
clear that OPEC investments - particularly in U.S.G. securities would be welcome. It became apparent that if certain OPEC
governments invested in the U.S. in the magnitudes contemplated,
maintenance of confidentiality and adherence to the legal
requirement of the Bretton Woods Agreements Act would necessitate
a chanae in U.S. statistical presentation. The change was made to
maintain the principle - not to give a protection which had not
previously been provided.
- 16 The assurances that confidentiality would be respected
did not constitute preferential treatment. Confidentiality
was at that time, as now, available to all investors in
the U.S. To have asserted that the principle of confidentiality would only be respected if individual OPEC
governments instituted special investment programs would
have been to threaten discrimination against such
investors.
My letter of April 19 may inadvertently have been
misleading in one respect which I greatly regret. Treasury
has not maintained a procedure for continuing review of it?
statistical presentation to assure that in no case did the
holdings of a particular central bank or government come to
constitute a percentage of the total high enough to approach
the target of generally used disclosure tests. It is our
understanding that, when established, the disaggregations
were believed to avoid any such problems. As I have pointed
out in my statement, investment patterns have changed
greatly over the past 10 to 15 years and the bulk of foreign
holdings of U.S. securities are held by official institutions
globally and, obviously, in a number of individual countries.
Thus in the absence of complaints we have continued the
detailed presentation. Should any country request a change
to preserve the confidentiality of its holdings we would feel
obligated - by the law as well as policy - to make such
a change. This is why we consider that the treatment afforded
OPEC countries is not preferential.
QUESTION: The assertion that no promises were made is contradicted by statements in a memo to you from Lisle Widman,
re: "Talking Points for Use with Mr. Scheuer Re Saudi
Investments in U.S.", with a written date of August 17,
signed by the initiator, J. M. Newman. In that memo,
Mr. Widman states:
"7. We believe it is essential that we continue not
to release such data. Many foreign governments,
including those in the Middle East, consider this
to be a sensitive, private matter. Some of the Middle
East governments have told us frankly that should
information on their financial position (sic) be
released, they would consider this to be a most
serious breach of confidence, requiring changes in
their investment policies in favor of countries
which are able to be discreet. Such action, apart
from legal considerations, could, therefore, result
in depriving the U.S. capital market of an important
source of funds and lead to increase in the cost of
funds to the U.S. for the external financing of our
current account deficit.
- 17 "8. Release of data on the assets of Saudi Government could have even more extensive, dangerous
implications. We could well lose the cooperation
of the Saudis as a moderating force both on financial
and energy questions."
ANSWER: The U.S. has indicated to the governments of
several Middle East oil-exporting countries that the
confidential treatment of their investments in the United
States would be continued. Maintenance of this confidentiality
is not, however, contingent on any pledge by any government
with respect to investment in the United States.
QUESTION: In view of all of the above, it appears that some
form of understanding, promise, agreement, or arrangement,
unilateral or otherwise, does exist between one or more
OPEC nations and the United States. Accordingly, we would
like to know the details of any such understandings,
promises, agreements, or arrangements and the approximate
date and nature of such discussion, referred to in the
above passages, between Treasury official(s) and Middle
East OPEC governments. We would also like information
on (1) what these governments told Treasury about the
specific consequences resulting from publishing these
data and (2) the governments involved.
ANSWER: The previous responses indicate the nature of the
assurances provided OPEC countries regarding disclosure of
data on their investments in the U.S. Treasury files do not
contain records of all of the conversations in which this
matter could have been discussed between representatives
of OPEC governments and high-level Treasury officials,
especially in previous Administrations. A search of our
files has identified a number of classified documents
containing material of relevance, especially a number of
memoranda of conversations with officials of OPEC countries
which occurred since 1973. The implications of changes
in current procedures for publishing these data are
discussed in my statement.
- 18 QUESTION: is OPEC direct investment, particularly Arab
direct investment, dependent on such secrecy and does
its importance to the U.S. economy justify this preferential
treatment of withholding investment information from the
public?
ANSWER: Most investors, both here and abroad, want to
maintain some degree of confidentiality in their
business transactions. We have had no indication that
individuals from the OPEC countries who make direct
investments here are any more or less sensitive about
this than investors in other countries or here in
the United States.
OPEC direct investments in the United States are
not and never have been given preferential treatment.
The Commerce Department has given the Subcommittee a
breakdown by country of OPEC direct investment in the
U.S.
QUESTION: Also, in the appendix to your testimony, please
explain the recent efforts and work done within the Treasury
Department to monitor international lending (usually of
petrodollars) by American banks to LDCs. For example, in
1975, Treasury formed a working group under the direction
of Lisle Widman. However, a review of the documents produced
show that nothing has been done since then. Is this accurate?
If not, please detail what has been done and produce any
studies, research efforts, or reports. Also, please produce
whatever documents this 1975 working group produced.
ANSWER: In the aftermath of the 1973/74 oil price increase,
the aggregate current account deficits of developing countries
rose dramatically. The bulk of the financing for these
deficits was arranged through private markets largely in
the form of relatively short-term commercial bank borrowings
(especially trade credits). In 1974/75 the Treasury Department
initiated a review of existing data sources on U.S. bank
lending activity and decided that additional data would be
useful in ascertaining both the exposure of American banks
to LDCs and the rising debt burdens of the LDCs themselves.
The Office of the Comptroller of the Currency (OCC), the
Federal Reserve and the FDIC developed a new reporting system
as a result of this review. The new system focuses on outstanding
loans, both by maturity remaining on the loan and by ultimate
country of risk. This effort has enabled a closer monitoring
of the activity of American banks as a group, not only in
regards to their lending to LDCs but to all foreign countries.
- 19 The latest survey is attached.
In addition, the Federal Reserve significantly expanded
the amount of data it collects on the foreign branch activity
of U.S. banks. These new data provide an extensive data
base for monitoring U.S. bank activities. The new information
available from the U.S. is now being combined with improved
data from the other major industrial countries, and quarterly
reports on foreign lending by banks headquartered in these
countries which are now published by the Bank for International
Settlements.
While the Office of International Banking in Treasury
follows bank lending on a global basis, the Office of
Developing Nations Finance is concerned with all lending
to LDCs, both individually and as a group. Since the 1973/74
oil-price increases, considerable effort has been devoted
to analyzing financial flows to the LDCs as a group. The
results of this effort are reflected in the annual Treasury
reports to Congress on LDC debt that were submitted pursuant
to Section 634 of the Foreign Assistance Act of 1961 (as
amended) in 1975 through 1978. As a result of amendments to
the Foreign Assistance Act last year, this information is
now submitted by the Development Coordination Committee as
part of the annual foreign assistance report to Congress.
Treasury had primary responsibility for producing the
information on debt and financial flows that appeared
in last January's annual report.
At the individual country level, the Office of Developing
Nations Finance is continually involved in monitoring the
lending activities of U.S. banks. Country economists
in this office meet with their counterparts in other agencies
to exchange information about individual countries. They
also regularly exchange views with representatives of
international organizations and U.S. financial institutions.
Treasury Attaches in Brasilia, Jidda and Mexico City are
able to report in detail on major banking developments,
and considerable information about bank lending is contained
in the cable traffic from our Embassies around the world.
The Treasury Department is especially concerned about
bank lending in countries experiencing debt-servicing
problems. In the process of making policy decisions related
to these situations, such as participation in debt-rescheduling
exercises, Treasury economists seek information about lending
from all possible sources, including the banking community
itself. The objective is to ensure both that steps are
taken to minimize losses for all creditors as a group and
We
which
occur.
thathave
all
thebeen
creditors
question
unable
refers.
share
to identify
equitably the
in any
working
losses
group
that to
may
Joint News Release
Comptroller of the Currency
Federal Deposit Insurance Corporation
Federal Reserve Board
June 21,
1979
COUNTRY EXPOSURE LENDING SURVEY
The results of a survey of foreign lending by lai&e United States
banks as of December 31, 1978, were made public today by the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, and
the Federal Reserve Board. The data cover claims on foreign residents held
by all domestic and foreign offices of 129 U.S. banking organizations with
significant foreign banking operations*
The results indicate that cross-border and nonlocal currency
claims increased moderately in 1978 rising 12 percent from $194 billion
to $217 billion. Most of the growth represented increased claims cm banks,
which are largely related to money market activities. Cross-border and
cross-currency lending to public and private nonbank borrowers increased
by only $2 billion during the year. In addit ion, the survey indicates that
local currency lending to local borrowers by foreign offices of U.S. banks
increased $9 billion in 1978 to a total of $58 billion. Most of the increase
in both types of lending occurred in the second half of the year.
Types of Loans
~--.-~ ~The survey c one pnr rated rm data involving lending -from, a bankU
offices in one country to residents of another country or lending in a
currency other than that of the borrowers. These are known as cross-border
and cross-currency loans.
Cross-border and cross-currency loans are those most closely associated with country risk. As shown in Table I, such claims totaled $217
2-
billion at year-end 1978.
Claims on residents of Switzerland and the Group
of Ten (G-10) developed countries represent 42 per cent of this total. Another
21 per cent represents claims on residents of "other developed countries" and
"offshore banking centers."—' Claims on residents of developing countries
that are not oil exporters amount to 24 percent.
In addition, the banks reported $58 billion in local currency claims
that were held by their foreign offices on residents of the country in which
the office was located. An example would be Deutsche nark claims on German
residents held by the German branch of the reporting U.S. bank. To a large
extent, these local currency claims were matched by $48 billion in local
currency liabilities due local residents.
Maturities
More than two-thirds of the reported cross-border and cross-country
claims had a maturity of 1 year or less. Only $16 billion in claims had
a maturity in excess of 5 years. Short-term claims are especially prominent in the G-10 countries and the offshore banking centers where a large
volume of interbank lending takes place. Such placements of deposits are
usually for very short periods.
For most other groups of countries, short-term claims accounted
for slightly less than half of the total claims, although the proportion
varied among countries.
Type of Borrower
Business with other banks accounted
1/ Countries where multinational banks conduct a large international money
market business.
-3for the largest amount, equaling $116 billion. Most of the claims on banks
were on those located in the G-10 countries and the offshore banking centers.
Private nonbank sector lending totaled $62 billion, and loans to the public
sector amounted to $39 billion. This last category Includes foreign central
governments, their political subdivisions and agencies, foreign central banks,
and commercial nonbank enterprises owned by government. The distribution by
type of borrower varied significantly from country to country.
Guarantees
Table II provides information on the cross-border and cross-currency
claims that are guaranteed by residents of another country. Claims are reallocated from the country of residence of the borrower to another country in
two major ways. First, claims on a bank branch located in one country where
the head office is located in another country are allocated to the country
of the head office. Since a branch is legally a part of the parent, claims
on a branch are treated as being guaranteed by the head office. Second, claims
on a borrower in one country which are formally guaranteed by a resident of
another country are allocated to the latter country. These reallocations are
thought to provide a better approximation of country exposure in the banks'
portfolios than the unadjusted figures.
The results of the reallocations appear in the last column of Table
- II. Most of the shifts are accounted for by the transfer of claims on branches
(and, where guaranteed, subsidiaries) of banks to~£Keir~head offices ($41 billion
out of $53 billion). In general, the reallocations primarily affected the
offshore banking centers and some of the developed countries. For example,
claims on the offshore banking-centers-deer eased from $26 billion to $7 billion
-4-
and claims on the United Kingdom decreased from $35 billion to $16 billion.
For most less developed countries, a relatively small portion of claims is
externally guaranteed. The total shown for claims on foreigners by country
of guarantor is abo«": $196 billion or $21 billion less than the total for
claims by country of borrower. This results from U.S. residents guaranteeing
about $26 billion in claims on foreign residents and foreigners guaranteeing
about $5 billion in claims on U.S. residents.
Commitments to Provide Funds for Foreigners
The survey also provided information on contingent claims on foreigners. The banks were asked to report only those contingent claims where
the bank had a legal obligation to provide funds. As shown in Table III,
the amounts reported total $60 billion, 73 percent of that total being on
the private sector, including banks. Table III also adjusts these commitments for guarantees in the same manner as Table II does for claims.
COUNTRY
TABLE I CROSS-BORDER ANO NON-LOCAL CURRENCY CLAIMS BY RESIDENCE OF BORROWER:
IIN MILLIONS OF DOLLARS!
—MATUP1TY
CLAIMS ONl —
PUBLIC
OTHER
BANKS
ONE YEAR
TOTAL
BORROWERS PRIVATE
AND UNDER
CLAIMS
G-IO ANO SWITZERLAND
BE LGIUM-LUXEMBOURG
CANAOA
FRANCE
GERMANY• FEDERAL REPUBLIC OF
ITALY
JAPAN
NETHERLANDS
SWEDEN
SWITZERLAND
UNITED KINGOOM
NON G-10 OEVELOPED
TOTALS COUNTRIES
AUSTRALIA i
AUSTRIA
0ENN4RK
FINLANO .
GREECE
ICELAND
IRELAND, REPUBLIC OF
NEW ZEALAND
NORWAY
PORTUGAL
SOUTH AFRICA
SPAIN
TURKEY
OTHER EUROPE
EASTERN
BULGARIA TOTALS
CHECHOSLOVAKIA
GERMAN DEMOCRATIC REPUBLIC
HUNGARY
,
POLANO
|
ROMANIA
U.S.S.R.
YUGOSLAVIA |
TOTALS
OIL EXPORTING
COUNTRIES
ALGERIA
ECUAOOR
GABON
INDONESIA
IRAN
IRAQ
KUWAIT
LIBYA
NIGERIA
QATAR
6693.8
6456.8
9148.6
5274.0
5744.8
14507.2
3611.8
2195.4
3129.9
35280.0
92044.9
1597.5
1122.0
2182.1
1363.7
1918.7
129.2
709.0
296.1
2199.0
594.4
2304.1
3476.2
1582.6
227.4
19404.5
590.6
172.9
1151.0
827.1
1315.2
323.3
1185.8
1629.8
7196.0
1829.9
1560.5
224.6
2215.4
2625.6
155.4
779.1
13 8.7
618.5
175.8
PAGE I
DECEMBER 1978
DIST. OF CLAIMS:
OVER ONE
OVER
TO 5 YEARS 5 YEARS
6139.7
3808.5
7131.9
2304.6
3271.3
8976.0
2773.4
1010.9
2141.7
26581.7
64140.1
85.2
1232.3
971.3
157.3
1681.1
114.2
10.6
315.8
48.2
1667.3
6283.6
468.7
1418.0
1045.4
2812.0
792.2
5416.9
827.6
868.7
940.5
7031.0
21621.4
6374.0
4676.7
7125.5
4263.7
3875.7
11799.7
3115.0
1259.3
2895.4
29055.3
74440.7
261.9
938.7
1447.2
930.0
1639.7
2396.3
396.3
621.6
181.4
4526.6
13340.0
57.8
843.2
575.9
80.0
227.9
310.1
100.4
314.7
52.9
1698.1
4261.6
391.9
958.3
764.7
434.5
322.6
12.5
94.5
14.9
242.9
427.1
377.3
1164.8
991.9
48.3
6246.9
127.8
80.6
526.9
406.7
637.9
81.8
339.5
62.0
166.0
102.9
775.8
766.4
432.6
33.0
4510.2
1077.7
83.0
890.5
522.3
988.1
34.9
275.0
218.9
1790.1
64.3
850.8
1547.7
158.0
146.1
8647.9
709.2
995.3
1145.5
t 3.8
803.4
29.7
291.9
107*1
737.9
477.0
1194.1
1696.3
1224.3
122.0
10138.2
602.2
79.1
832.0
545.3
844. *
69.5
291.4
148.2
931.9
72.4
72 5.0
1494.4
312.3
92.3
7041.3
285.1
47.6
204.5
214.4
270.4
30.0
127.1
40.7
529.1
44.8
85.0
287.0
46.0
11.1
2223.3
370.6
151.0
696.8
243.7
6 70.8
172.5
747.3
763.7
3816.7
178.1
16.5
363.2
577.4
440.9
134.8
363.3
234.6
2309.1
42.0
5.4
90.9
6.0
203.4
15.9
75.0
631.5
1070.3
302.6
126.4
551.0
381.7
498.7
220.3
475.4
505.7
3062.2
264.1
44.5
580.1
376.8
735.3
92.0
618.1
972.1
3683.2
23.9
2.0
18.2
66.4
81.1
11.0
92.1
152.0
447.0
427.8
251.9
3.6
369.8
1276.3
35.9
599.0
133.5
174.1
12.3
1111.0
696.9
206.8
921.6
944.9
37.5
1.8
5.0
357.7
112.4
290.9
611.7
14.2
924.0
404.3
82.0
178.3
•2
86.6
51.2
434.2
834.4
51.7
959.5
1241.1
123.8
723.6
138.7
220.1
28.2
1081.4
497.7
154.1
915.4
1104.8
31.6
55.2
•0
282.7
87.9
314.2
228.2
18.8
340.5
279.5
.0
•3
•0
115.6
59.7
TOTAL
CLAIMS
COUNTRY
nil EXPORTING COUNTRIES
SAUDI ARABIA
'UNITED ARAB EMIRATES
1
PHILIPPINES
SYRIA
THAILANO
OTHER
TOTALS
/
NON-OIL EXP DEV COUNTRIES-AFRICA
CAMEROON
EGYPT
GHANA
IVORY COAST
KENYA
MALAWI
MOROCO
SENEGAL
SUDAN
TUNISIA
CLAIMS ON: —
OTHFR
PUBLIC
BORROWERS PRIVATF
—MATURITY OIST. OF CLAIMS:
ONE YEAR
OVER ONE
OVER
ANO UNOFR TO 5 YEARS * YEARS
363.0
474.3
1338.1
5459.9
47.6
533.0
3220.6
8197.1
506.9
269.6
2970.4
6390.6
796.1
794.7
5102.4
11449.0
107.4
376.5
1966.0
6661.2
9.9
106.7
460.4
1934.1
690.3
83.4
4909.3
548.6
513.4
47.1
66.1
75.5
6.4
61.5
17.1
2557.3
208.3
14.2
515.8
9.0
20.5
539.2
10883.8
1041.2
291.9
3109.7
550.4
483.1
160.5
230.5
64.4
27.1
95.6
169.6
4418.7
231.3
42.7
921.0
75.1
51.2
30.8
11995.6
1021.0
->14. 7
5419.0
427.8
500.6
224.9
89.5
176.8
208.0
155.3
42.6
3681.0
132.0
27.9
227.9
78.9
19.9
12651.5
1479.4
303.8
4719.3
727.3
1023.6
245.5
248.4
239.1
128.8
171.9
83.4
4500.7
419.?
42.9
988.2
47.1
99.6
K
61.2
16 3.1
1085.6
254.4
6728.4
690.3
403.2
151.?
108.8
51.6
109.0
108.1
128.2
4615.1
129.5
16.2
576.7
32.6
37.5
25.2
15252.?
187.5
31.8
1990.3
109.4
70.2
35.9
28.9
25.9
3.7
32.4
17.6
1541.4
23.0
25.7
97.7
7.4
13.7
3.6
4246.4
3315.8
265.8
1096.5
140.0
3802.3
537.1
106.0
2852.6
6.9
1235.9
388.1
13747.3
1282.7
Al.2
794.2
14.9
2032.7
92.1
*4.9
927.2
1.7
856.3
110.4
6238.7
666.9
R2.5
lr.4.7
108.2
508.3
292.0
29.3
609.9
1166.2
101.6
147.4
16.9
1261.1
152.9
11.8
1315.2
.0
5.2
155.4
89.1
2896.6
224.1
189.6
4611.3
2339.8
129.5
895.6
30.7
2782.9
208.0
58.6
183 7.5
3.9
1323.7
201.8
9512.3
877.2
114.3
172.2
70.9
824.5
152.2
47.1
663.4
3.0
149.3
171.3
3245.7
98.4
22.0
28.6
38.3
194.9
176.9
.3
351.6
.0
60.8
15.2
987.2
62.1
565.1
65.1
418.9
59.0
77.3
597.7
66.4
196.1
203.7
4.2
390.5
1.6
42.7
1.0
9.4
84.4
I.1
30.0
10.6
54.9
137.8
48.5
315.5
30.7
64.7
475.5
58.1
153.6
171.5
11.3
470.1
52.0
140.7
28.2
34.5
138.4
17.0
120.5
41.5
46.7
82.9
3.0
241.5
29.2
37.3
395.6
45.9
68.3
136.9
4.1
12.0
10.1
36.5
1.6
5.5
63.8
3.5
7.2
25.2
917.5
1276.9
7528.9
20047.3
VENEZUELA
'TOTALS
1
N(IN-OIL FXff OEV COUNTRIES-LATIN AM £ CAPIRBEAN
2752.5
ARGENTINA
590.1
BOLIVIA
13438.1
BRAZIL
1527.0
CHILE
1497.2
COtOHBIA
I COSTA RICA
432.8
386.2
DOMINICAN REPUBLIC
316.7
EL SALVAOOR
241.4
GUATEMALA
312.5
HONDURAS
JAMAICA
229.3
MEXICO
10657.3
NICARAGUA
571.7
PARAGUAY
84.8
PERU
1664.7
1
TRINI DAD AND TOBAGO
87.2
URUGUAY
150.8
OTHER
590.0
TOTALS
35531.2
1
NON-OIL EXP DEV COUNTRIES-ASIA
CHINA, REPUBLIC 0* TAIWAN
INDIA
i ISRAEL
JORDAN
1 KOREA, SOUTH
MALAYSIA
PAKISTAN
3ANKS
3.1
3.0
66.6
15.1
60.5
27.3
3.2
37.7
7.2
12.4
21.6
TAJLE t CROSS-BORDER AND NON-LOCI L CURRENCY CLAIMS BY RESIDENCE OF BORROWERS DECEMBER 1976
U N MILLIONS OF OOLLARSI
COUNTRY
I
TOTAL
j
CLAIMS
NON-OIL EXP OEV COUNTRIES-AFRICA
ZAIRE
242.6
ZAMBIA
140.7
OTHER
230.0
TOTALS
2925.1
OFFSHORE BANKING CENTERS
BAHAMAS
9012.2
BAHRAIN
1208.3
BERMUDA
556.3
BRITISH WEST INDIES
4446.3
HONG KONG
2396.5
LEBANON
119.6
LIBERIA
2217.1
MACAO
.9
NETHERLANDS ANTILLES
401.7
PANA1A
2865.7
SINGAPORE
2766.9
TOTALS
26011.8
INTERNATIONAL t REGIONAL ORGANIZATIONS
AFRICAN REGIONAL
3.5
ASIAN REGIONAL
2.4
E. EUROPEAN REGIONAL
113.1
INTERNATIONAL
196.9
LATIN AMERICAN REGIONAL
25.8
MIDDLE EASTERN REGIONAL
.0
W.
EUROPEAN
REGIONAL
91.1
«••*• GRANO ••*•
432.8
217341.3
•• TOTALS TOTALS
••
BANKS
CLAIMS ONt
PUBLIC
BORROWERS
3.7
10.5
51.4
641.2
8524.3
1102.9
15.1
4396.1
1031.3
47.1
23.6
.9
78.4
1504.5
2282.2
19006.7
•0
•0
•0
.0
•0
•0
•0
•0
116434.3
OTHER
PRIVATE
PAGE 3
—MATURITY OIST. OF CLAlMSt
ONE YEAR
OVER ONE
OVER
ANO UNOER TO 5 YEARS 5 YEARS
6.3
16.6
65.8
343.5
112.6
97.7
146.2
1411.1
92.8
40.8
66.4
1287.6
36.2
•3
17.3
223.4
467.6
21.3
8.0
97.4
3.0
538.2
4.2
45.8
39.4
1325.7
1.0
71.5
83.7 ' 2109.8
.0
.0
1.4
321.9
286.8
1094.4
90.9
393.5
539.9
6466.1
8547.2
1157.5
399.2
4396.3
1712.8
90.5
541.2
.9
236.5
2053.4
2588.3
21724.2
185.1
15.9
103.5
47.9
513.7
29.1
1107.7
•0
154.5
602.8
115.1
2875.5
281.2
35.0
53.5
2.0
169.9
•0
568.2
.0
10.7
229.2
63.4
1413.2
1.3
•0
46.2
8.3
1.3
•0
.7
57.8
1.2
1.4
65.6
137.6
19.7
•0
17.3
242.8
1.0
1.0
1.3
51.0
4.9
•0
73.1
132.3
53630.0
15868.8
232.7
113.6
112.7
1940.3
3.5
2.4
113.1
196.9
25.8
•0
91.1
432.8
39105.5
•0
.0
•0
•0
•0
•0
•0
•0
61803.1
147825.9
PAGE 1
TABLE II rROSS-PHPDER ANO NON-LOCAL CURRENCY CLAIMS ON FOREIGNERS 8Y COUNTRY OF GURAP.ANTORz DECEMBER 1978
U N MILLIONS OF OOLLARSI
TOTAL CLAIMS
IBY RESIOENCEI
COUNTRY
G-10 ANO SWITZERLAND
BELGIUM-LUXFMROURG
CANAOA
FRANCE
GERMANY, FEDERAL REPUBLIC OF
ITALY
JAPAN
NETHERLANDS
SWEDEN
SWITZERLAND
UNITED KINGDOM
TOTALS
NON G-10 DEVELOPED COUNTRIES
AUSTRALIA
AUSTRIA
DENMARK
FINLAND
GREEC«=
ICELAND
IRELAND, REPUBLIC OF
NEW ZEALAND
NORWAY
PORTUGAL
SOUTH AFRICA
SPAIN
TURKEY
OTHER
TOTALS
EASTERN EU*OPF
BUI GAR I A
CZECHOSLOVAKIA
GFRMAN DEMOCRATIC PEPUBlIC
HUNGARY
POLAND
ROMANIA
U.S.S.R.
YUGOSLAVI A
TOTALS
OIL EXPORTING COUNTRIES
ALGER I A
ECUADOR
GABON
INDONrSIA
I»AN
IRAQ
KUW*BT
L
CLAIMS GUARANTEED
BY RESIOFNTS OF
OTHER COUNTRIES
ON BANKS ON OTHERS
TOTAL CLAIMS
LESS GUARANTEED
CLAIMS
CLAIMS ON RESIDENTS
OF OTHER COUNTRIES
GUARANTI > BY RESIDENTS
OF TI ; COUNTRY
ON BANK
ON OTHERS
TOTAL CLAIMS
BY COUNTRY OF
GUARANTOR/
6693.8
6458.8
9148.6
5274.0
5744.8
14507.2
3611.8
2195.4
3129.9
35280.0
92044.9
2059.1
339.0
1179.2
438.4
192.0
542.<*
230.8
17.0
213.9
17280.9
22493.5
257.4
330. *
139.1
360.2
200.8
174.2
219.7
66.1
260.4
1569.2
3578.2
4377.2
5789.0
7830.3
4475.3
5351.9
13790.1
3161.2
2112.3
2655.5
16429.8
65973.1
262.0
3604.6
2659.4
3545.9
645.3
4894.3
726.9
174.1
1587.8
1079.9
19180.7
389.6
517.4
766.4
831.0
265.0
1429.8
261.2
175.0
443.4
774.9
5854.1
5028.9
9911. 1
11256.2
8852.2
6262.3
20114.3
4149.5
2461.5
4686.6
18284.6
91008.0
1597.5
1122.0
2182.1
1363.7
1918.7
129.2
709.0
296.1
2199.0
594.4
2004.1
3478.2
158?.6
227.4
19404.5
5.2
17.3
1.0
.0
96.1
.0
14.0
•0
6.0
4.0
22.6
30.0
81.9
43.0
321.0
80.7
15.5
62.7
40.8
112.6
21.4
85.2
36.3
179.3
37.9
91.4
138.6
51.4
51.6
1005.9
1511.4
1089.1
2118.4
1322.9
1709.9
107.8
609.8
259.8
2013.6
552.5
1890.0
3309.5
1449.3
132.7
18077.4
429.3
27.7
212.8
121.9
10.0
.0
117.3
39.5
58.9
36.5
40.5
473.9
2.0
•0
1570.4
72.1
49.2
56.5
30.7
127.3
.0
41.9
2m0
69.0
5.5
24.7
10.6
22.2
18.6
530.7
2012.9
1166.1
2387.7
1475.5
1847.2
107.8
769.0
301.3
2141.6
594.5
1955.3
3794.1
1473.6
151.3
20178.6
590.6
172.9
1151.0
82T.1
1315.2
323.3
1185.8
1629.8
7196.0
4.2
.C
10.0
1.0
83.7
35.9
106.0
5.5
246.3
•0
•0
•0
•0
33.9
1.6
11.0
167.4
213.9
586.4
172.9
1141.0
826.1
1197.6
285.8
1068.8
1456.°
6735.7
4.5
18.0
213.0
10.8
13.8
%.3
193.0
27.0
484.4
•0
5.0
8.o
•0
5.0
•0
4.0
26.5
49.4
590.9
195.9
1362.9
836.9
1216.4
290.1
1265.8
1510.5
7269.6
1829.9
1560.5
224.6
2215.4
2625.6
155.4
779.1
5.7
10.2
.0
8.6
34.9
•0
.0
232.1
34.1
14.7
309.1
44.0
.0
9.5
15«2.1
1516.1
209.9
1897.6
2546.7
155.4
769.6
8.0
1.8
.0
55.8
206.e
1.0
27.0
17.9
2.3
.2
31.1
13.C
•0
2S.9
1618.0
1520.3
210.1
1984.6
2766.6
156.4
836.5
TABLE II CROSS-BORDER ANO NON-LOCAL CURRENCY CLAIMS ON FOREIGNERS BY COUNTRY OF GURARANTOR: DECEMBER 1978
U N MILLIONS OF OOLLARSI
COUNTRY
OIL EXPORTING COUNTRIES
LIBYA
NIGERIA
OATAR
SAUDI ARABIA
UNITED ARA<) EMIRATES
VENEZUELA
TOTALS
TOTAL CLAIMS
IBY RESIOENCEI
138.7
618.5
175.8
917.5
1276.9
7528.9
20047.3
NON-OIL EXP D£:V COUNTRIES-AFRICA
CAMEROON
EGYPT
GHANA
>
IVORY COAST
TOTAL CLAIMS
LESS GUARANTEED
CLAIMS
CLAIMS ON RESIOENTS
OF OTHER COUNTRIES
GUARANTEED BY RESIOENTS
OF THIS COUNTRY
ON BANKS
ON OTHERS
TOTAL CLAIMS
BY COUNTRY OF
GUARANTOR
.0
1.3
6.2
92.0
113.8
44.1
317.0
•0
9.0
16.9
39.1
48.7
261.5
1018.9
138.7
608.2
152.7
786.2
1114.4
7223.2
18711.3
1.0
•1
12.0
6.5
57.0
14.0
391.1
15.5
5.0
4.0
79.0
25.2
33.4
266.7
155.2
613.3
168.7
871.8
1196.6
7270.7
19369.2
41.5
6.1
255.3
19.7
56.6
3.0
1.0
1.2
•0
5.6
3.0
146.1
6.8
10.6
48.1
•0
.9
565.4
1171.2
133.7
16.0
1161.4
46.9
22.5
40.5
1.3
12.1
26.6
15.5
11.5
416.0
12.4
36.6
79.5
1.1
3.4
5.4
2043.1
2577.1
567.9
12021.2
1460.4
1418.1
389.3
383.9
303.4
214.8
291.3
214.8
10095.1
552.5
37.6
1537.1
86.1
146.4
19.1
32316.8
66.8
•0
807.1
1.3
184.5
.0
.0
10.0
•0
1.0
2.0
151.5
.0
•0
9.8
•0
•0
.0
1234.1
11.9
.0
112.5
17.8
8.2
2.6
5.0
1.3
2.9
3.0
6.0
86.3
.5
•0
.5
•0
1.2
.4
260.5
2655.9
567.9
12941.0
1479.5
1610.8
392.0
388.9
314.7
217.7
295.3
222.8
10332.9
553.0
37.6
1547.4
86.1
147.7
19.6
33811.5
3315.8
265.8
1096.5
140.0
3802.3
537.1
106.0
2852.6
6.9
1235.9
388.1
13747.3
73.4
•0
24.9
1.5
165.2
1.0
10.4
133.9
•0
21.2
18.5
450.1
236.0
11.0
18.6
23.4
145.5
63.1
•0
133.6
•0
48.0
36.0
715.6
3006.4
254.8
1052.9
115.1
3491.5
472.9
95.6
25*5.1
6.9
1166.6
333.5
12581.6
44.0
26.6
300.6
72.5
260.3
91.1
37.7
30.4
•0
95.2
20.4
978.9
161.4
8.0
19.8
•0
135.7
29.1
3.0
12.5
1.9
13.8
2.0
387.3
3211.8
289.4
1373.3
187.6
3887.6
593.1
136.3
2628.0
8.8
1275.6
355.9
13948.0
62.1
565.1
65.1
418.9
•0
7.1
.0
1.0
5.6
31.5
•0
14.3
56.5
526.4
65.1
403.5
,0
11.0
10.1
.0
.0
1.0
•0
.9
56.5
538.4
75.2
404.5
NON-OIL EXP DEV COUNTRIES-LATIN AN C CARIBBEAN
ARGENTINA'
2752.5
BOLIVIA
590.1
BRAZIL
13438.1
CHILE
1527.h
COLOMBIA
1497.2
COSTA RICA
432.8
DOMINICAN REPUBLIC
386.2
El SALVADOR
316.7
GUATEMALA
241.4
HONOURAS
312.5
JAMAICA
l
229.3
MEXICO
10657.3
NICARAGUA {
571.7
PARAGUAY
84.8
PERU
|
1664.7
TRINIDAD ANO TOBAGO
87.2
URUGUAY
150.8
OTHER
590.0
TOTALS
35531.2
NON-OIL EXP DEV COUNTRIES-ASIA
CHINA, REPUBLIC OF TAIWAN
INDIA
ISRAEL
JORDAN
KOREA, SOUTH
MALAYSIA
PAKISTAN
PHILIPPINES
SYRIA
THAILAND
OTHER
TOTALS
CLAIMS GUARANTEED
BY RESIDENTS OF
OTHER COUNTRIES
ON BANKS ON OTHERS
PAGE 2
PAGE 3
TABLE II CROSS-BORDER ANO NON-LOCAL CURRENCY CLAIMS ON FOREIG
1 IN MILLIONS OF DOLL
TOTAL CLAIMS
IBY RESIDENCEI
COUNTRY |
NON-OIL EXPI DEV COUNTRIES-AFRICA
KENYA
MALAWI
MOROCO
SENEGAL
SUDAN
TUNISIA
ZAIRE
ZAMBIA
OTHER
TOTALS
OFFSHORE BANKING CENTERS
BAHAMAS
BAHRAIN
BERMUDA
BRITISH WEST INDIES
HONO KONG
j
LEBANON
LIBERIA
MACAO
NETHERLANDS ANTIILES
PANA4A
SINGAPORE
TOTALS
INTERNATIONAL C REGIONAL ORGANIZATIONS
AFRICAN REGIONAL I
ASIAN REGIONAL
E. EUROPEAN REGIONAL
INTERNATIONAL
LATIN AMERICAN REGIONAL
MIDOLE EASTERN REGIONAL
W. EUROPEAN REGIONAL
TOTALS
i
*••• GRAND •••*
• • TOTALS •*i/
I
CLAIMS GUARANTEED
BY RFSIDENTS OF
OTHER COUNTRIES
ON BANKS ON OTHERS
59.0
77.3
597.7
66.4
196.1
203.7
242.6
140.7
230.0
2925.1
•0
.0
.0
1.0
•4
•0
1.3
•0
3.9
14.7
10.2
•0
3.3
2.0
55.6
6.1
128.5
26.5
43.0
326.7
9012.2
1208.3
556.3
4446.3
2396.5
119.6
2217.1
.9
401.7
2885.7
2766.9
26011.B
7479.5
976.3
4.2
3657.2
729.5
7.3
.7
.0
67.8
1205.1
1952.2
16080.0
52.3
5.0
332.2
14.5
192.2
11.1
1402.9
.0
255.4
553.0
74.4
2893.2
3.5
2.4
113.1
196.9
25.8
.0
91.1
432.8
.0
•0
.0
13.8
•0
.0
10.0
23.8
•0
.0
.0
.0
•0
.0
•0
•0
217341.3
41117.9
11795.9
OECEMBER 1978
TOTAL CLAIMS
LESS GUARANTEED
CLAIMS
48.8
77.3
594.4
63.4
140.0
197.6
112.8
114.2
183.1
2583.6
1480.3
227.0
219.9
774.6
1474.6
101.1
813.5
.9
78.5
1127.5
740.2
7038.6
3.5
2.4
113.1
183.1
25.8
•0
81.1
409.0
164427.4
CLAIMS ON RESIDENTS
OF OTHER COUNTRIES
GUARANTEED BY RESIDENTS
OF THIS COUNTRY
ON BANKS
ON OTHERS
•0
•0
7.0
•0
•0
.0
.0
•0
2.0
30.1
31.3
•0
•0
1.0
94.6
1.6
.0
.0
5.0
40.6
33.5
207.7
.0
•0
•0
•0
•0
.0
7.0
7.0
24084.7
TOTAL CLAIMS
BY COUNTRY OF
GUARANTOR
•0
.0
•0
•6
8.7
.5
•0
•0
•8
12.6
48.8
77.3
601.4
64.1
148.7
198.1
112.8
114.2
185.9
2626.4
26.9
•0
36.7
3.2
360.4
11.6
21.7
•0
•0
70.2
31.3
562.1
1538.6
227.0
256.6
778.8
1929.8
114.3
835.2
.9
83.5
1238.4
805.1
7808.5
1.5
•0
.0
•6
1.1
2.0
•0
5.2
5.0
2.4
113.1
183.7
26.9
2.0
88.1
421.2
929.1
196441.3
TABLE III
S BORDER AND NON-LOCAL CURRENCY CONTINGENT CLAIMS: DECEMBER 1978
U N MILLIONS OF DOLLARSI
COMMITMENTS TO AOVANCE FUNDS
IPY COUNTRY OF RESIDENCEI
TO PUBLIC TO OTHER
TOTAL BORROWERS BORROWERS
G-10 AND SWITZERLAND
BELGIUM-LUXEMBOURG
CANADA
FR ANC E
GERMANY, FEDERAL REPUBLIC OF
ITALY
JAPAN
NETHERLANDS
SWEDEN
SWITZERLAND
!
UNITED KINGDOM I
TOTALS '
NON G-10 DEVELOPED 'COUNTRIES
AUSTRALIA
AUSTRIA
DENMARK
MNLAND
GREECE
,
ICELANO
IRELAND, REPUBLIC OF
NEW ZEALAND
NORWAY
PORTUGAL
SOUTH AFRICA
'
SPAIN
TURKEY
OTHER
TOTALS
EASTERN EUROPE
RULGARI A
CZECHOSLOVAKIA
GERMAN OEMOCRATICl REPUBLIC
HUNGARY
POLAND
ROMANIA
i
U.S.S.R.
YUGOSLAVIA
TOTALS
OIL EXPORTING COUNTRIES
ALGERIA
ECUADOR
GABON
INDONESIA
IRAN
IRAQ
KUWAIT
LIBYA
COMMITMENTS
GUARANTEED
RESIOENTS OF
OTHER COUNTRIES
RESIDENTS OF OTHER
COUNTRIES GUARANTEED
BY RESIDENTS OF
THIS COUNTRY
PAGE I
TOTAL COMM.
BY COUNTRY OF
GUARANTOR
733.1
1430.6
3357.6
2078.0
1055.9
3427.6
1065.8
1516.6
1693.1
5726.8
22085.6
45.6
834.5
844.4
109.6
263.6
75.2
128.5
159.4
174.6
463.1
3098.7
687.5
596.1
2513.1
1968.4
792.3
3352.4
937.3
1357.2
1518.5
5263.6
18986.9
136.4
17.8
82.2
124.2
113.6
209.6
105.1
40.1
135.7
801.7
1766.7
76.2
105.3
521.2
228.6
163.6
522.7
54.0
39.6
173.4
725.2
2610.1
672.9
1518.1
3796.6
2182.4
1106.0
3740.8
1014.7
1516.1
1730.8
5650.2
22929.1
1138.0
277.0
674.4
712.8
734.1
33.8
231.0
177.3
807.1
417.6
284.2
720.7
436.7
219.4
6864.5
179.7
64.0
267.1
338.6
220.5
19.3
66.4
61.3
221.9
55.1
44.8
174.8
197.7
36.6
1948.1
958.3
213.0
407.2
374.2
513.5
14.5
164.6
115.9
585.1
362.5
239.4
545.8
239.0
182.8
4916.3
83.7
16.0
10.6
2.3
74.3
•0
58.1
2.3
57.2
8.8
28.2
43.8
34.2
20.6
44C.3
54.1
54.1
16.0
5.5
2.6
.0
7.1
5.0
4.6
8.0
4.3
6.9
•0
•8
169.2
1108.4
315.1
679.7
716.0
662.4
33.8
180.0
180.1
754.5
416.8
260.3
683.8
402.5
199.6
6593.3
79.2
67.0
118.9
81.6
963.9
236.2
316.1
586.3
2419.4
27.4
8.0
35.5
72.1
568.0
103.2
46.4
43.0
903.8
51.8
59.0
83.4
9.5
395.8
103.0
269.7
543.2
1515.6
•6
•0
•0
25.0
526.6
11.6
32.2
60.4
656.5
.0
•0
2.2
5.0
.6
.0
1.7
1.5
11.1
78.6
67.0
121.1
41.6
437.8
194.6
285.6
527.4
1774.0
552.5
496.6
16.2
659.1
789.6
243.2
302.4
276.7
296.5
253.1
11.6
333.9
222.0
105.0
23.0
59.8
255.9
238.5
4.6
325.2
567.5
138.2
279.4
216.9
44.2
9.4
6.9
74.1
79.1
.3
5.0
.7
4.2
•1
•0
18.2
3.2
•0
13.2
3.0
512.5
487.3
9.3
603.2
713.7
242.9
310.6
279.0
TABLE Iff CROSS
)ER ANO NON-LOCAL CURRENCY CONTINGENT CLAH»Ss DECEMBER 1978
U N MILLIONS OF OOLLARSI
COMMITMENTS TO ADVANCE FUNDS
I BY COUNTRY OF RESIOENCEI
TO PUBLIC TO OTHER
TOTAL BORROWERS BORROWERS
CIL EXPORTING COUNTRIES
NIGERIA
333.9
151.9
QATAR)
|
805.5
SAUDI ARABIA I
264.3
UNITED ARAB EMJRATES
2605.4
VENEZUELA
|
7497.5
TOTALS
YON-Olli EXP DEV COUNTRIES-LATIN AM I CARIBBEAN
957.5
ARGENTINA
191.9*
BOLIVIA
2261.9
BRAZIL
697.7
CHILE
837.7
247.9
COLOMBIA
99.6
COSTA RICA
107.4
DOMINICAN REPUBLIC
195.5
EL SALVAOOR
138.9
GUATEMALA
73.5
HONOURAS
1978.6
97.2
JAMAICA
46.2
MEXICO
217.6
NICARAGUA
148.8
PARAGUAY
161.5
PERU
54.6
6514.7
TRINIOAD AND TOBAGO
URUGUAY
OTHER
1651.1
TOTALS
260.4
NON-OIL EXP DEV COUNTRIES-ASIA
252.1
131.6
CHINA, REPUBLIC OF TAIWAN
1819.1
INDIA
216.0
ISRAEL
206.3
JORDAN
1648.4
KOREA, SOUTH
110.6
502.3
MALAYSIA
'
325.1
PAKISTAN
7123.6
PHILIPPINES
SYRIA
THAILAND
22.9
699.6
OTHER
'
108.3
TOTALS
75.8
NON-OIL EXP DEV COUNTRIES-AFRICA
40.0
CAMEROON
29.0
EGYPT
GHANA
KENYA
MALAJH
IVORJT COAST
COMMITMENTS
GUARANTEED
RESIOENTS OF
OTHER COUNTRIES
COMMITMENTS TO
RESIDENTS OF OTHER
COUNTRIES GUARANTEED
BY RESIDENTS OF
THIS COUNTRY
PAGE 2
TOTAL CONN.
BY COUNTRY OF
GUARANTOR
171.2
74.4
71.8
59.2
1072.2
2759.0
162.7
77.4
733.7
205.0
1533.1
4738.4
28.9
22.2
70.4
17.3
31.4
390.1
•3
6.0
32.8
30.7
32.6
144.5
305 .3
135,.6
767,.9
277,.6
2606,.6
7251,• 9
335.5
75.1
700.4
342.1
398.2
95.3
31.7
38.6
131.4
50.5
54.4
443.0
30.5
14.1
98.7
133.2
121.5
17.3
3112.1
622.0
116.7
1561.4
355.6
439.5
152.6
67.9
68.8
64.1
89.4
19.1
1535.5
66.6
32.0
118.8
15.6
39.9
37.3
5402.5
743.5
192.3
185.7
48.5
1579.0
124.8
128.3
815.2
76.0
355.8
192.8
4442.3
8.7
257.1
84.8
46.8
1.5
5.0
14.2
442.4
23.5
28.9
38.5
24.0
5.4
•0
109.4
4.0
1.1
2.0
•0
10.7
5.4
•0
•0
47.2
•4
•3
5.2
•1
55.3
•0
25.0
246.3
11.1
1.9
20.9
39.5
5.0
5.5
7.9
•0
11.4
11.6
139.9
•0
19.2
6.9
1.3
•0
16.0
873,.2
172,.6
2114,.5
672..1
837,.3
227.6
97,.2
113..3
171,.8
121,.4
69.9
1956.0
96..7
44..6
177,• 7
137.• 9
215..0
39,>4
8138.• 7
907.5
68.1
• 66.4
83.1
240.1
91.2
78.0
83 3.2
34.6
146.4
132.3
2681.2
89.6
19.3
256.7
29.7
1.5
22.2
2.4
4.8
29.0
17.4
3.6
69.7
.9
1.9
45.1
11.0
1.5
15.2
58.4
622.3
6.2
6.2
.5
78.4
21.6
31.0
92.0
•2
27.0
13.9
335.7
5.1
204.6
1.0
10.4
•0
•0
1617.6
265. 3
247. 8
152.0
1780. 3
199. 3
180. 8
1564. 3
110. 4
486. 7
322. 8
6927. 8
17. 8
514. 1
114. 2
66.6
40. 0
TABLE III CROSS BORDER AND NON-LOCAL CURRENCY CONTINGENT CLAIMS: DECEMBER 1978
(IN MILLIONS OF OOLLARSI
COMMITMENTS TO AOVANCE FUNDS
(BY COUNTRY OF RESIDENCEI
TO PUBLIC TO OTHER
TOTAL BORROWERS BORROWERS
NON-OIL EXP DEV COUNTRIES-AFRICA
MOROCO
SENEGAL
SUDAN
TUNISIA
ZAIRE
ZAMBIA
OTHER
TOTALS.
OFFSHORE BANKING (JENTERS
BAHAMAS
BAHRAIN
BERMUDA
BRITISH WEST INDIES
HONG KONG
LEBANON
LIBERIA
MACAO
NETHERLANDS ANTILLES
PANAMA
SINGAPORE
TOTALS
INTERNATIONAL £ REGIONAL ORGANIZATIONS
AFRICAN REGIONAL
ASIAN REGIONAL
E. EUROPEAN REGIONAL
INTERNATIONAL
LATIN AMERICAN REGIONAL
MIDDLE EASTERN REGIONAL
W. EUROPEAN REGIONAL
TOTALS
*••• GRANO ••••
•* TOTALS ••
COMMITMENTS
GUARANTEED
RESIDENTS OF
OTHER COUNTRIES
COMMITMENTS TO
RESIDENTS OF OTHER
COUNTRIES GUARANTEED
BY RESIDENTS OF
THIS COUNTRY
PAGE 3
TOTAL COMM.
BY COUNTRY OF
GUARANTOR
271.0
21.9
36.9
149.9
27.6
130.3
329^
1942.5
147.1
18.9
19.0
94.6
19.9
69.6
145.2 .
918.4
123.9
3.0
17.9
55.3
7.7
60.7
103.9
1024.1
41.0
•3
2.1
13.2
4.3
8.9
23.6
314.6
•0
.0
•0
•0
•0
.0
10.3
53.7
230.,0
21,.6
34,,8
136,• 7
23,,3
121..4
315,.8
1681.6
155.4
237.5
466.9
80.3
981.5
188.8
220.6
1.0
299.6
450.4
488.1
3570.4
10.0
89.0
60.9
•0
141.0
18.0
38.2
.0
11.3
139.9
88.4
59 6.7
145.'4
148.5
406.0
80.3
840.5
170.8
182.4
1.0
288.3
310.5
399.7
2973.6
23.0
•0
.0
17.2
1.3
.0
5.0
46.5
.0
•0
•0
•0
1.8
3.0
•0
4.8
3.2
8.8
5.0
2.3
12.0
7.9
12.4
.0
•0
12.5
15.1
79.2
•0
•0
•0
20.7
91.4
•0
.0
112.1
45.9
113,.3
241,.0
9,• 5
709,,7
185..5
145.2
1,,0
211,.5
389,.8
413,.2
2465,• 9
23.0
•0
•0
17.2
3.1
3.0
5.0
51.3
112.7
133.0
230.9
73.1
283.8
11.2
87.8
•0
88.1
73.1
89.9
1183.7
•0
.0
•0
•0
.0
•0
.0
•0
60070.0
16065.1
44004.9
5710.2
3566.4
23. 0
a0
.0
37. 9
94. 5
3.0
5.0
163. 5
57926. 1
- 20 QUESTION: Explain the problems and the solutions to those
problems, highlighted in the September 29, 1978, memo to
Cathryn Goddard from Dirck Keyser, Re: Oil Exporter
Placements (SRA-46). The memo notes that unrecorded
inflows of foreign buying in the stock market (presumably
by OPEC nations) amounted to $3.8 billion first quarter of
1978 and accelerated to $8.0 billion in the second quarter.
It concludes that Treasury may not be getting all securities
transactions on the S forms. The author of the memo further
states that he and Dave Curry seem:
"to share my view that there could also be unrecorded
portfolio shifts within the United States; his
speculation in this realm extends not only to the
possible unrecorded stock purchases which I have
suggested, but also to commodities and real estate.
He suspects there may also have been some shift into
other currencies, and I agree that this seems probable,
too."
We are concerned by these gaps in data coverage.
Given the large magnitude which appears to be unreported,
what actions have you taken to cover this apparent
gap in foreign portfolio coverage? If none have been
taken, what are you considering?
ANSWER: Mr. Keyser1s Memorandum entitled "Oil Exporter Placements" addressed to Cathryn Goddard on September 29, 1978,
offered interpretive comments on the apparent decline in
oil exporters' bank deposits and Treasury securities held
in the U.S. Your letter states that Mr. Keyser referred
to $3.8 billion of unrecorded stock buying in the stock
market (presumably by OPEC nations) in the first quarter
of 1978 and $8.0 billion in the second quarter. Mr. Keyser!s
memo did not refer to stock market purchases - by OPEC or
anyone else. This is an incorrect reading of Mr. Keyser's
memo. Mr. Keyser1s reference was in fact to the errors
and omissions item - the balancing item in the statistics
on the U.S. balance of payments. Obviously we do not
know the composition of this item since it represents the
net of all the transactions with the rest of the world
which we miss. It is very erratic and shifts from
positive to negative and from a small figure to a large
one as shown in the following table:
- 21 Errors and Omissions in the U.S. Balance of Payments
($ millions)
1972
1973
1974
1975
1976
1977
1978 I Q
II Q
III Q
IV Q
- 1,966
- 2,725
- 1,684
5,449
9,300
927
3,638
8,979
893
- 2,061
The dominant elements in this unrecorded item are
believed by many analysts to be shifts in the time
differential between shipments of goods and the payment
for the goods together with other very short term capital
movements.
In his memorandum, Mr. Keyser was speculating as to
whether the conventional wisdom could be wrong, at least
in part, and whether some portion of the inflows during
the period being discussed — not all $12 billion — could
have been longer-term capital flowing into the stock
markets. The memorandum was considering the extent to which
some of the draw-down of bank deposits and Treasuries could
have been for the purpose of buying U.S. stock and corporate
bonds, rather than to move into other currencies, which was
an alternate possibility. It now appears that the drawdowns were, except in June, confined to short-term Treasuries
and bank deposits. Reported flows show net OPEC purchases
of long-term U.S. securities of $519 million during the first
half of 1978.
The Department of Commerce has responsibility for the
overall balance of payments statistics. Treasury collects
the information on capital movements other than direct
investment. The Treasury Department would obviously like
to see a reduction in the estimating errors and an increase
in the comprehensiveness of the statistical coverage. We
work toward that end constantly. I am confident that
Commerce does so as well.
- 22 But the fact that the net of the unexplained movements
is larger than we would like is not a matter of grave
national concern. It is not so serious as to justify
an increase in the manpower and resources devoted to it.
One of the functions of Mr. Keyser's office in the
Treasury is to review the adequacy of our reporting forms.
It is almost certain that any portfolio investment inflows
not captured on *he Treasury International Capital (TIC)
S Form are very small. The error in estimating foreign
holdings of U.S. securities from these reports averaged
about 1% per annum over the 33 years between the 1941
and the 1974 benchmark surveys of foreign portfolio
investments in the United States. The Department is now
compiling and analyzing the results of the 1978 survey.
One of the specific purposes of this analysis is to uncover
shortcomings in the existing reporting system.
Despite this, we continue to review carefully the
adequacy of our reporting systems. The present S form
was revised after the 1974 survey to provide more detail
on foreign holdings of U.S. securities, and is of course
constantly under review for possible improvement.
A number of respondents to the 1974 survey indicated
prospective reporting responsibilities on Form S. Letters
were sent to these putative reporters requesting that they
review Form S reporting requirements and advise the
Treasury accordingly. All firms did respond and some new
reporters were added to our Panel.
QUESTION: A document entitled "OPEC Current Account Trends,"
issued by OASIA:IDN:DWolkow, May 21, 1979, estimates the
following:
"Total OPEC net investment income should exceed $7 billion
annually in 1979 and 1980, almost entirely concentrated in
Saudi Arabia ($4.3 billion), Kuwait ($2.2 billion), the UAE
($1.1 billion) and Iraq ($1.0 billion)."
In the appendix to your statement of testimony,
we would like you to answer the following questions about
OPEC investment income. First, of the above amounts, how much
- 23 is income generated from investments in the_ United States or in
U.S. financial instruments? Second, how much of this income
will remain in the United States or be reinvested in U.S.
financial instruments and how much will be removed from the
United States (for repatriation or other country investment)?
Second, what have been the past practices of these nations in this
regard; have they repatriated the income, have they used it
for investments in non-U.S. assets, or have they reinvested?
What is the approximate percentage in each category for each
of the above countries fo_. the years 1974 through 1978?
ANSWER: Data on income remittances from the United States
to foreign residents are compiled by the Commerce Department
Such data for individual Mid East oil exporting countries are not
disclosable because they would divulge the size of the holdings
of an individual foreign investor.
With regard to the disposition of income from
OPEC investments in the U.S., the practice varies both from
country to country and investment to investment. Income
from some U.S. investments of OPEC countries is transferred
to accounts outside the U.S.; other income is retained
here in the first instance.
The economic significance of an OPEC country's policy
with respect to the handling of its investment income
is far less than either the total stock or total
flows of investment capital. Income transferred abroad
may be reinvested in the U.S. within a very short period
of time and vice versa. OPEC countries — and most other
investors — determine the desired composition of their
investments on the basis of the total outstanding stock
of their assets, whether such stock represents original
principal or reinvested earnings.
QUESTION: Have any promises or agreements, whether
implicit or explicit, and/or arrangements or assurances
been made or given between any or several OPEC nations and
the United States conferring protection against U.S.
Government action toward OPEC assets?
ANSWER: No special protection of OPEC investments in
the U.S. has ever been offered or implied so far as I am aware.
QUESTION: If there were an attempt by one or more of the
wealthier OPEC countries to withdraw a large amount of
assets from the United States, either by sales of U.S.
Government securities, removal of deposits from American
- 24 banks (both foreign and domestic branches), or large sales
of corporate bonds or stocks, or a combination of all three,
(1) briefly, what specific actions can the President take
to intervene to either stop the withdrawal or alleviate its
effects, (please answer this question for each group of
assets referred to above); and (2) have contingency plans
been established? How do these interact with any promises
assurances,etc. referred to above under Section IV? Why
are Secretary Blumenthal and other Treasury officials so
concerned about withdrawal if effective remedies exist to
prevent withdrawal? Can these remr "ies be readily invoked?
ANSWER: Under the International Emergency Economic Powers
Act ("IEEPA"), P.L. 95-223, title II, 50 U.S.C. Sees.
1701-06, enacted in 1977, anticipated withdrawals of
foreign assets of such a magnitude as to threaten the
economy and security of the United States would justify
the President's use of the emergency powers provided in
IEEPA. These powers include the power to block transfers
of property in which there is a foreign interest. Accordingly,
in extraordinary emergency circumstances the President has
the power to stop any withdrawals of foreign assets from the
U.S. The remedies available under IEEPA can be quickly
invoked.
No special plans have been made for the contingency
of a large withdrawal of funds by an OPEC country and
none is considered necessary.
As noted in my statement, a sudden withdrawal of
a very large volume of funds from the U.S. or the offering
of a very large sum of dollars on the foreign exchange
markets - whether by OPEC or any other investors - would
have adverse effects on our markets. We would obviously
like to avoid them.
As noted in the response to an earlier question
no special treatment of OPEC investments in the U.S. has
been offered.
QUESTION: The memo to you from Mr. Widman, supra, contains
the following statement: "Neither State staff, nor CIA
staff, fully appreciated the sensitivity or implications
of releasing these (Saudi investment) data." Advise us of
the nature of discussions with CIA and State Department
staff regarding this issue, the names of the persons or
the CIA and State staffs involved, and the approximate dates
of such discussions. Which other agencies have disagreed
with Treasury on this issue?
- 25 ANSWER: In June 1978, Treasury staff had discussions with
a staff officer of the State Department and a staff
officer of the CIA regarding a proposed response to a
letter to Secretary Vance from Congressman Scheuer dated
May 25, 1978. Prior to these discussions, the CIA, in
response to a State Department request, had furnished
State classified information some of which was obtained
from its own sources and other of which had h3en collected
under the authority of the International Investment Survey
Act of 1976. Treasury pointed out that some of such
information could not be disclosed while other information
could be disclosed only on a classified basis. Treasury,
State and CIA then agreed that the response to Congressman
Scheuer should reflect this position regarding handling the
information; there was no disagreement. Neither have there
been disagreements with any other agencies on this issue.
FOR RELEASE UPON DELIVERY
EXPECTED AT 1:00 P.M.
WEDNESDAY, JULY 18, 19 79
TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE BUDGET COMMITTEE
Mr. Chairman and members of this distinguished Committee:
As this Committee meets to consider the changing economic
outlook and its implications for the Budget, it is clear that
the problems of inflation and energy dominate the economic
scene. They are interrelated. Rising costs of energy are
now the principal force driving our inflation. Failure to
cope with the energy problem would leave us subject to
further increases in oil prices imposed by forces beyond
our control. Coping with the energy problem will require us
to devote substantial resources to the development of alternatives to imported oil.
Thus, our alternatives are limited—but clear. The
President has mapped out the course we must follow: binding
resolve to limit our dependence on imported oil, massive
efforts to develop our domestic sources of energy, and
strict conservation of energy until the domestic sources can
come on stream in adequate quantity. We cannot solve the
energy problem or the inflation problem unless we are willing
to make the sacrifices—individually, collectively and
equitably—that are necessary to insure our economic future.
Inflation. Our core problem is inflation—inflation
that is decimating the purchasing power of American consumers, inhibiting business investment, weakening our export
competitiveness.
Since last December, consumer prices have risen at a
13-1/2 percent annual rate, a sharp acceleration from the
9 percent of last year, and almost double the inflation
rate in 1977.
Earlier in the year, a major element in the inflation
was the rise in food prices, as adverse weather conditions
3-1727
-2and strikes pushed the food component of the Consumer Price
Index to a 20 percent annual rate of increase. But
increasingly, the thrust to inflation has come from rising
energy prices. The food supply situation has improved, and
the rate of increase in food prices at retail has slowed—
although retail prices have not yet reflected the actual
declines in food prices at the wholesale level.
But while the rise in food prices has decelerated,
the increase in energy prices has accelerated, as the increases in crude oil prices levied by the OPEC nations
last December and additional surcharges added by most oil
producing nations began to permeate the price structure.
In January and February, some 30 percent of the increase
in consumer prices resulted from the rise in food prices,
and only 10 percent was attributable to increased energy
costs. By May, the proportions were reversed, with just
over one-tenth of the May rise in consumer prices the
result of higher food prices, and about one-third of the
total reflecting increases in energy prices. Since the
beginning of the year, energy product prices at retail have
gone up at almost a 38 percent annual rate, more than three
times faster than the rest of the items bought by consumers.
Moreover, these figures measure only the direct increase
in energy product prices—the rise in gas, electricity,
gasoline and heating oil prices. But rising energy costs
affect prices of all other goods. Very sharp increases have
been registered in the past few months across a variety of
petroleum-based chemicals, and these will show up in finished
goods prices later on, as will the higher costs of transportation engendered by rising energy prices.
It is important to recognize the extent to which the
inflation that has plagued us this year has stemmed from
forces not directly related to current levels of domestic
demands but rather has reflected forces which were unpredictable and over which we have had no control. The
persistence of double-digit inflation despite the gradual
and now clear slowing in economic activity has been interpreted by some as a measure of the failure of the Administration's efforts to move toward price stability through a
voluntary program dependent essentially on the cooperation
of business and labor. From this assessment of failure,
some have argued for abandonment of the program, others have
argued that the voluntary program should be supplanted by
mandatory controls.
-3But such glib and premature conclusions do not stand
up to a more careful analysis of the price statistics.
Approximately half the composition of the Consumer Price
Index is accounted for by three categories: food, energy,
homeownership costs. For one or another reason, these
areas are not within the effective scope of the wage/price
deceleration program—nor, for that matter, would they be any
more amenable to control under a mandatory system. But
the major price acceleration this year has been in just
these areas. Prices of food, energy and home-ownership
combined have increased this year at a 20 percent annual
rate, up from 11 percent last year. The rest of the CPI
has accelerated too—not decelerated, as we had hoped-but the acceleration has been quite modest, from 6.7 percent
last year to a 7.0 percent rate in the first five months
of 1979.
On the wage side of the program, the publicity attendant
on several major collective bargaining settlements that were
judged to be outside the guidelines in varying degree has
led to similarly premature conclusions about the failure
of the deceleration program. But the most reliable measure
of changes in wages—the BLS series on average hourly earnings for production workers—has increased thus far this year
at an annual rate of under 8 percent, compared with an
8.5 percent increase during 1978. Wage increases have not
been a primary cause of accelerating inflation.
Nevertheless, unit labor costs have accelerated sharply.
This apparent anomaly reflects in part the acceleration in
private and publicly-mandated fringe benefits, but even more
importantly, it has reflected the continued disappointing
and puzzling behavior of productivity. The slowing in
productivity gains over the past decade has been one of the
grave weaknesses in our economic life, for it is putting
severe constraints on our ability to raise our living standards
while reducing our ability to compete in international markets.
Last year, productivity in the private business sector increased
by less than half of one percent—compared with an annual
average increase of 3.1 percent in the first two postwar
decades—and in the first quarter of this year, productivity
actually declined substantially. As a result of the collapse
in productivity, and the rise in compensation costs resulting
from social security tax increases and the higher mimimum
wage, unit labor costs have soared this year, while wages
have decelerated.
The moderation in wages while inflation has remained
so high has resulted in a substantial reduction in consumer
-4purchasing power. During the first five months of this
year, real hourly wages fell at an annual rate of almost
5-1/2 percent, and would have fallen more without the
January increase in the minimum wage. And given the small
increase in nominal earnings in June, real wages probably
declined further during the month.
The squeeze on real incomes explains, in large measure,
the sluggishness of retail sales this year. In real terms,
retail sales have declined 6 percent over the first six
months of the year.
To be sure, some pause in consumer buying was to be
expected this year after the unusually rapid pace of consumer spending in the final months of 1978. Historically,
a buying binge such as occurred in the fourth quarter of
last year is followed by a period of consumer moderation.
The moderation has continued too long, however, to be merely
a reaction to earlier free-spending. The consumer is
increasingly constrained by declining real incomes, heavy
debt repayment burdens, lack of adequate availability of
the products he is willing to buy—small, fuel-efficient
cars—and, more recently, by the necessity to husband gasoline.
It is difficult to maintain normal shopping habits if one
spends an abnormal amount of time queuing up for gasoline,
and spends an abnormal proportion of income once one reaches
the pump. Reduced traffic at shopping malls testifies to
the OPEC impact on our domestic economic developments.
The weakness in consumer spending in recent months is
being reflected down the production chain to industrial
output and employment. Employment gains in recent months
have been much smaller than earlier in the year, and employment in manufacturing has declined—modestly—in each of the
past three months. It is worth noting, however, that
unemployment has declined in all but one month this year,
and the latest unemployment rate reported by the 3LS,
5.6 percent, is the lowest in almost 5 years. Nevertheless,
continued sluggishness in retail sales will undoubtedly
result in some downward adjustment of business production
and employment schedules in the months ahead.
One factor that has sustained the economic expansion
so long has been the prompt adjustment businesses have made
in output to avoid excessive inventory buildup. There
was an acceleration in business accumulation of inventories
earlier this year, partly to replace stocks depleted by the
surge in consumer spending late in 1978, partly in anticipation of strike-interruptions, partly in anticipation of
further inflation. But the latest figures indicate some
-5slowing in the rate of inventory additions at the manufacturing
level, and purchasing agent reports suggest increased caution
in business buying plans for materials. Inventory/sales
ratios are low by historical standards, except for certain
specific areas such as the larger-size autos.
One of the elements of strength in the economic picture,
therefore, is that we are not weighed down with large, excess
inventories that would have to be liquidated abruptly if
consumer spending deteriorated further. Moreover, business
capital spending plans, and appropriations to implement
these plans, remain relatively strong. New orders for capital
goods, other than defense items, returned to a respectable
rate of increase in May, after a puzzling sharp decline in
April.
Finally, U.S. exports have been sustained at a relatively
high level, some 16 percent higher in the first five months
of the year than the monthly average in 1978. Foreign demand
for our agricultural products remains strong, and continued
sizeable increases in nonagricultural exports are likely.
Thus, the economy does not demonstrate the characteristics
that in the past have preceded a sharp or prolonged downturn.
Sluggishness—teetering on the edge of a mild recession—is
probably a better characterization of the current state of
the economy, a sluggishness induced by the inflation-erosion
of consumer purchasing power, and by consumer and business
uncertainties about the cost and availability of energy
supplies.
We expect this sluggishness to continue for several
months, at least until abatement in the rate of inflation
permits an end to the decline in real incomes. When consumer
purchasing power begins to improve, spending will, too.
Since businesses have kept the rate of inventory accumulation
closely tied to the rate of sales, a resumption of consumer
purchases should be accompanied by some inventory rebuilding.
It is reasonable, therefore, to expect the decline in
economic activity this year to be mild and, in terms of
postwar cyclical experience, of relatively short duration.
Economic activity should be on the rise later this year
or early in 19 80. But the recovery next year should also be
moderate, in part because still unacceptably high rates of
inflation will require continued fiscal austerity.
-6Energy. The OPEC oil price actions since December
have been a major factor depressing economic progress and
intensifying inflationary pressures in the United States,
and the impact of these price increases on growth and
inflation will continue to be felt in the months ahead.
We estimate that growth in real GNP will be lower by about
1 percent this year and by another 1 percent in 19 80, and
inflation about 1 percent higher in each year, than would
have been the case if OPEC had adhered to the oil price
schedule announced last December. As a consequence of the
price actions taken since December, there will be 800
thousand more persons unemployed by the end of 19 80 than
forecast earlier, raising the unemployment rate by approximately 0.8 percent.
Ours is not the only economy, of course, that is having
to make difficult adjustments to escalating oil prices and
diminished oil availability. It is estimated that the
direct, first round effect of the 60 percent rise in world
oil prices since last December will be to cut one percent from
the average growth rate of OECD countries in 1979, and
1-3/4 percent in 19 80. It will add 1-1-1/2 percent to the
average OECD inflation rate in 1979, and 2-2-1/2 percent
in 1980.
Despite the higher oil import bill, we expect further
substantial reductions in the U.S. current account deficit—
perhaps even a small surplus next year—because of the
reduction in non-oil imports associated with slower growth
in our domestic economy, because of continued strong export
performance, and because of increased earnings on our
overseas investments.
More generally, however, the oil price increase will
reverse much of the progress that had been made in improving
the world balance of payments. As the OPEC surplus, which
had nearly disappeared last year, again surges to levels
reminiscent of 1974-75, the OECD countries as a group will
move from surplus into deficit. And the position of the
non-oil developing countries, already in large deficit as
a group, will deteriorate sharply, increasing the problems
of some of the poorest nations.
These problems were recognized and addressed directly
at the recent Summit meeting in Tokyo. The world leaders
assembled there concluded:
First, there is no alternative to conservation
in the short-run. If we do not deliberately
-7reduce our consumption of oil in ways that are
least damaging to our economy, conservation will
be forced by whatever increase in price it takes
to reduce demand to the level of supply.
The Summit nations each committed themselves
to limits on oil imports in 1979 and 19 80,
limits that will apply on a country by country
basis. The limit for the United States is
8.5 million barrels a day in both years—
equivalent to our imports in 1977.
For the medium-term, the Summit countries
adopted specific goals for a ceiling on oil
imports in 1985, goals which—assuming reasonable
rates of economic growth over the period—will
require very powerful efforts to limit oil
consumption and develop alternative sources of
energy.
Finally, the Summit participants launched major
initiatives to make use of alternative energy
sources, particularly coal.
Implementing our Summit commitments will, in the longerrun, require difficult decisions and hard choices. The
investment costs of developing alternative energy supplies
will impinge on the availability of resources for other
purposes. Personal as well as governmental budgets will
feel the impact.
But in the end, there really is no choice. If we
remain so dependent on imported energy, we will ultimately
pay an even greater price, both in monetary terms and in
terms of world leadership. Some months ago I reported to
the President the results of a year-long study conducted
by the Treasury of the threats to our economic welfare and
national security posed by our heavy dependence on imported
oil. We concluded that this threat was real and imminent.
Recent events have underscored that finding.
Conclusion. As we survey the economic outlook here
and abroad, and try to match the range of policy tools
available for restoring adequate rates of growth and reducing
inflation with the varied and serious problems we face,
some guiding principles emerge:
-8It would make no sense at this stage to rush
in with a program to pump up the economy by
either a new tax cut or spending programs, or
by an easing of monetary restraint.
— There is not a sufficient body of consistent
evidence to justify "pushing the panic button"
on macro economic policies. There could be no
credibility—at home or abroad--in our dedication to conquer inflation if we were to switch
policies with each swing in the statistics.
-- Traditional countercyclical economic policies
simply do not address the root causes of our
current slowdown or of the current double-digit
inflation. In fact, an expansionary policy
now would aggravate inflationary pressures,
and divert resources needed to solve our productivity and energy supply problems.
We must aggressively pursue policies to encourage
conservation of oil and to increase the availability
of domestic energy sources and to make more rational
use of them, thereby lessening our dependence on
foreign energy sources, for which the costs and
availability are outside our control.
We must reduce the gap between wages and unit labor
costs. That means pursuing policies to restore
productivity, particularly by encouraging more rapid
growth in and rejuvenation of our capital stock. It
also means holding down the rise in the costs of
fringe benefits, such as health care.
Vie must avoid being trapped into a wages-chasingprices cycle such as characterized the 1975-77
period, when we suffered from a relatively high
underlying rate of inflation despite significant
underutilization of labor and industrial capacity.
The costs of compensating labor for past losses of
real income must not be imposed on the future price
structure. This would be a futile process, for it
would merely perpetuate the inflation that already
threatens the maintenance of our living standards.
The principle of voluntary compliance with a program
for deceleration in prices and wages must be preserved.
-9We must protect the value of the dollar in
international markets, for depreciation of
the dollar feeds back into higher inflation
domestically.
The fiscal policies recommended by the President last
January, and reaffirmed in this mid-session Budget review,
conform to these principles. We are not wavering in our
dedication to the fight on inflation.
Neither are we heedless of the slowing in the pace
of economic activity. If, at some point in the future,
countercyclical policies prove to be necessary, the choice
of measures will have to be considered most carefully.
There are significant constraints on our flexibility in
coping with cyclical disturbances.
— We will have to avoid policies that might
jeopardize the strength of the dollar in
foreign exchange markets.
— We will have to avoid policies that would
increase the share of output absorbed by
government at the expense of the private
sectors.
— We will have to emphasize those fiscal policies
that contribute to our fight on inflation by
reducing costs and encouraging greater
product ivity growth.
These are relevant and serious considerations in
appraising the appropriateness of policy alternatives.
But they are not problems requiring resolution at the
moment.
With both inflation and recession prospects so much a
function of energy supplies and prices, our immediate priority
must be the implementation of a program that puts us far along
the road to mastery of energy problems. The program announced
by the President will accomplish this with a minimal net
effect on our budgetary situation over the next decade, for
the initiatives will be financed from the proceeds of the
windfall profits tax. Economically, the program will require
us to devote a significant share of our resources to development of alternative energy sources. With an economy as large,
resilient and flexible as ours, I have no doubt that the
goals of the program can be achieved. What we need is the
0O0
dedication to succeed.
FOR RELEASE AT 4:00 P.M.
July 17, 1979
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,000 million, to be issued July 26, 1979.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $6,020 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,000
million, representing an additional amount of bills dated
April 26, 1979,
and to mature October 25, 1979
(CUSIP No.
912793 2S 4), originally issued in the amount of $3,009 million,
the additional and original bills to be freely interchangeable.
1.82-day bills for approximately $3,000 million to be dated
July 26, 1979,
and to mature January 24, 1980
(CUSIP No.
912793 3N 4) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing July 26, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,564
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 ur.3er competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. 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, July 23, 1979.
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-172S
-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve' Banks and Branches. 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
stated
price
from
anyprice
one
respective
bidder
(in three
will
decimals)
issues.
be accepted
of less
accepted
in without
full at
competitive
the weighted
bids average
for the
-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on
July 26, 1979,
in cash or other immediately available
funds or in Treasury bills maturing July 26, 1979.
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.
Under 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, 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.
mrtmentoftheTREASURY
KINGTON, D.C. 20220
TELEPHONE 566-2041
For Release Upon Delivery
Expected at 9:15 A.M.
Wednesday, July 18, 1979
STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
Mr.
Chairman and Members of the Committee:
I appear today to discuss tax-exempt
family housing mortgages.
financing of single
My testimony today is divided into two parts. First is
the effect on the Federal budget and other economic effects of
such mortgage financing, and second, the potential impact on the
municipal bond market itself, if this type of financing is not
eliminated.
BACKGROUND
Almost one year ago, the City of Chicago sold an
unprecedented $100 million issue of tax-exempt revenue bonds
solely for the purpose of making mortgage loan s on single
family homes. The rate on such loans was 7.99 percent,
approximately two full percentage points less than conventional mortgage rates. Such a differential in interest cost
means an after tax savings of approximately $4 0 per month
for the first few years of a 30-year - $35,000 mortgage.
Families with incomes up to $40,000 qualified for such loans.
Most importantly, the City of Chicago had no 1 iability on the
bonds.
B-1729
- 2 -
Since that time, local governments in 13 states have
issued over $2 billion of single family mortgage backed
securities with only limited personal income standards for
eligibility. State housing agencies, which traditionally
have financed multi-family housing, have also issued single
family mortgage subsidy bonds.
During the first four months of 1979, over one quarter
of all tax-exempt financing was for single family housing.
If this type of financing were to continue to expand, projections indicate that the impacts pn the tax-exempt market and
the Federal budget could be severe.
As you know, the Ways and Means Committee is considering
a bill, H.R. 3712, which, as introduced, would revise the tax
code to completely eliminate tax-exempt financing of sincfle
family mortgage subsidy bonds. The bill would, however, allow
state and local governments to continue to finance low and
moderate income multi-family housing. The Administration
supports this bill, and let me explain our reasons for doing so.
FEDERAL BUDGET AND OTHER ECONOMIC EFFECTS
If Congress fails to take positive action on H.R. 3712,
the continued growth of single-family-mortgage subsidy bonds
will have substantial Federal budget and other economic effects.
Revenue Loss
Let me first discuss the potential revenue loss. The
Treasury estimates that if this financing is not restrained,
the potential cost to the taxpayer will range from $4.4 billion
to $22.1 billion by 1984. This range reflects varying assumptions on the share of residential mortgages financed in the
tax-exempt market. The lower estimate represents a shift to
tax-exempt financing of only 10 percent from the conventional
mortgage market through 1984. The $22.1 billion represents the
cost of financing 50 percent of all residential mortgages in the
tax-exempt market.
My assessment is that the larger estimates are more
probable, since at the local level, public officials have
been very attracted to this type of financing. It enables
them to deliver lower cost housing finance, at no explicit
cost to their local budget.
- 3 Federal Control
In recent years there has been a growing concern with
the growth of the Federal budget and Federal credit and
steps have been taken to improve control over it. For
example, the Congressional Budget Act of 1974 mandated an
annual review of tax expenditures — the use of the tax
system to channel funds towards activities without budgeting
for them or seeking appropriations from the Congress. In
addition, the Administration's FY 1980 Budget announced the
establishment of a Federal credit control program, intended
to limit and order the Federal presence in credit market
activities with annual Federal direct loan and loan guarantee
limitations contained in appropriation Acts.
The Administration and Congress obviously are trying to
exert greater control over the Federal Budget and Federal
credit assistance. The emergence of tax-exempt mortgage
subsidy bonds, and the related, large potential for revenue
losses, poses major difficulties of control and is untimely.
The lack of Federal control over the potentially large revenue
losses, and the growth of this new component of the capital
markets makes future budget and credit planning difficult.
It also has the highly undesirable effect of increasing the
growthInflation
of uncontrollable
off-budget costs.
Effects
Further growth of tax-exempt mortgage subsidy financing
also can be inflationary. First, over the short term, the
Federal revenue losses will mean larger budget deficits than
otherwise would occur, with proportionately negative implications for inflation. Second, mortgages financed by tax-exempt
bonds represent much cheaper financing for housing. As a
result, they may over stimulate housing demand. The effects
of fiscal and monetary policy on the economy and inflation
are thus weakened.
Inefficient Subsidy
Further, tax-exemption as a subsidy is very inefficient
— not all the subsidy goes to the recipient. Treasury
estimates that mortgage subsidy bonds deliver only 33 cents
in subsidy for each dollar of cost because of the large
amount of funds yoing to underwriting costs and various
reserves and because of the large impact on municipal borrowing costs generally. Also, the Federal Government is already
- 4 subsidizing housing in a number of important ways. Among
tax subsidies to homeowners alone, which will involve an
estimated $17 billion in revenue losses in FY 1980, are:
deduction of interest—$9.3 billion
deduction for real estate property taxes—$6.6 billion
exclusion of gain on sale of residence—$535 million
rollover of gain on sale of residence—$1 billion
TAX-EXEMPT MARKET
Let me turn now to the second part of my testimony -a discussion of the effects of this mortgage revenue bond
financing on the municipal bond market. I'll begin with some
background on that market.
The market for the securities of state and local governments is enormous and complex. Volume in the municipal market
has expanded considerably in recent years, doubling since 1974.
Specifically, a total of $70 billion in short- and long-term
debt was sold in over 8,000 separate issues in 1978. Of this
amount, $48.5 billion represented long-term municipal debt.
Outstanding municipal debt at 1978 year end totalled $301
billion.
Support for the tax-exempt market historically has come
primarily from three sources: commercial banks, fire and
casualty insurance companies, and individual investors. At
the end of 1978, commercial banks held approximately 41 percent of outstanding municipal debt, individuals owned 30 percent, and fire and casualty insurance companies held 19 percent.
The ability of these financial institutions to support a
significantly expanded tax-exempt market in the future is
questionable in view of the historical record of their purchasing patterns. For instance, during periods of tight monetary
conditions such as in 1969, 1974, and 1975 net bank purchases
of tax-exempt securities dropped sharply. Similarly, fire and
property casualty insurance companies have not been consistent
buyers, as their need for tax-exempt income drops during the
phase of their underwriting cycle when losses are incurred.
Thus, insurance company purchases of tax-exempts declined
significantly from prior levels in 1968 and 1969, and again in
- 5 1974 and 1975. In the absence of institutional purchasers,
yields rose considerably in order to attract individual
investors, although interest rates in general were trending
higher during those periods.
Potential Growth of Mortgage Revenue Bonds
In assessing the potential impact of mortgage revenue
bonds on the market for municipal securities, the size of the
overall mortgage market is a vital consideration. Gross
mortgage originations in 1978 amounted to approximately $176
billion. Such originations have grown more rapidly than the
tax-exempt market in the past, tripling in size from $35 billion
in 1970 to $110 billion by 1976, while the municipal market
barely doubled in volume during the same period. It is clear
that there is an ample potential supply of mortgages to be
financed, despite the higher interest rate levels of recent
months.
While only comprising a modest share of the municipal
market earlier in the decade, financing of housing, including
multi-family housing, grew to 11 percent of that market last
year. Of that amount, two-thirds constituted single family
mortgages financed by state housing agencies and local governments. During the first four months of 1979 mortgage revenue
bond financing by state and local governments was in excess of
$3 billion, or 25 percent of total long-term municipal debt
issued. At least another $3 billion of housing bonds were in
the process of coming to the market in the second quarter when
H.R. 3712 was introduced.
The municipal bond market has not yet been disrupted by
these securities, because only 5 states have issued substantial
amounts of them, and another 8 states have authorized, but not
issued, mortgage subsidy bonds — several of them after the
introduction of H.R. 3712. Yet, major future growth in issuance
of these bonds is expected by the financial community, by the
Administration, and by the Congressional Budget Office, because:
-- Given the size of the mortgage market and the
substantial interest savings, potential demand for
this type of financing exists.
-- Mortgage subsidy bonds may constitute a superior
credit, thereby appealing to investors.
- 6 —
Institutional investors have indicated a preference
for revenue bonds like these, rather than the more
traditional general obligation debt.
-- More fundamentally, if the Congress rejects H.R. 3712
other states may regard that rejection as an authorization to proceed.
Concerning credit quality, over 90 percent of the single
family mortgage revenue bonds issued to date have been rated
AA or better by either Moody's or Standard and Poors. According
to Moody's, 80 percent of municipalities are rated A or less.
Thus, it appears that substantial differences in quality exist.
Regarding investor preferences, since the New York City
financial crisis in 1975, some institutional investors have
indicated a preference for revenue debt because of the uncertainties associated with some general obligation issues, particularly those of the nation's older cities. These uncertainties
include a lack of timely financial information, as well as
dependence on state and Federal aid as opposed to own source
revenue. Revenue bonds, including mortgage revenue bonds,
tend to be more readily analyzable and thus more preferable
than general obligation debt.
Unless limited by Congress, therefore, we think that additional states will authorize mortgage revenue bond financing
which will cause dislocations in the municipal market.
Potential Disruption in the Municipal Bond Market
Specifically, such disruptions might mean:
Crowding out of other housing debt -- Other housing
debt issued by state agencies, including Section 8 and multifamily debt for low and moderate income families, would be
forced to pay higher interest rates because they must compete
with single family mortgage debt, which carry higher credit
ratings, for funds. Increased interest costs may make some
projects financially unfeasible.
Crowding out of marginal borrowers -- All marginal
borrowers"! as well as smaller municipalities whose economies
are less than robust, will have difficulty borrowing at reasonable interest rates. Marginal borrowers will have to compete
with mortgage revenue bonds, which have better credit ratings,
- 7 for funds. Further, institutions will tend to prefer to invest
in revenue debt at the expense of general-obligation debt.
Because marginal borrowers tend to be interest rate sensitive,
they will most likely be shut out of the market altogether.
Crowding out of regional borrowers -- Regional
borrowers will be affected as well, particularly those of
smaller size. Smaller issues are generally sold within a
given state, or in some cases in neighboring states. They
are difficult to market out of state because their credit
quality may be unknown and their small size a disadvantage.
Sixty percent of the issues of securities by local governments in 1978 only amounted to $2.5 million or less. The
purchasers of this type of debt include local banks and
individuals. Significantly higher interest rates will have
to be offered by regional borrowers in order to attract
investors. A more likely possibility, however, is that,*
because regional borrowers, like most municipal governments,
are interest rate sensitive, they will be barred from the
market place altogether.
Industrial Revenue Bonds
In conclusion, let me remind you of the similar situation
that confronted the Congress in 1968, when it acted to deny tax
exemption to large private corporations. As you may recall,
over 40 states by the late 1960's had authorized extension of
tr.eir tax-exemption privilege to industrial firms. The resultI"j expansion in tax-exempt financing for this purpose created
the same problems we are facing today — a substantial revenue
loss for the Federal Government, a lack of Federal control over
the subsidy level, and a threat to the stability of the municipal
market.
In the debate on the industrial revenue bond issue, Senator
Ribicoff, who supported the elimination of tax exemption for
private corporations, stated the issues so clearly that I think
it is worthwhile to quote him today.
The Federal Government's concern is obvious.
The benefits received by the private corporation
in the form of lower rental payments represent
nothing more than an unauthorized Federal subsidy
to private industry. The total cost of this subsidy -- which is exclusively attributable to the
interest exemption intended to help our State and
local governments -is borne by other Federal taxpayers. . . .
- 8 Unlike most Federal programs, the Federal
expenditure is not a part of the Federal budget,
was never passed on by Congress, and is not even
subject to review by a Federal agency....
However... as more and more tax-exempt bonds
are issued the interest rate on all tax-exempt
bonds, including school bonds, water and sewer
bonds, will increase in order to make the total
supply of exemption bonds attractive to lower
bracket taxpayers. Thus, the cost of local government goes up.
Because it illustrates the current problem so well, I
would like to submit for the record Senator Ribicoff's entire
statement, which appeared in the Congressional Record on
November 8, 196 7.
It is the Administration's view that the Congress must
recognize the importance of eliminating mortgage revenue
bonds now, as it did in 1968 by limiting industrial development bonds, and again in 1969 by eliminating arbitrage bonds.
In conclusion, I thank you for your attention and I am
prepared to answer any questions you may have.
FOR RELEASE AT 4:00 P.M.
July 17, 1979
TREASURY TO AUCTION $3,000 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $3,000
million of 2-year notes to refund approximately the same
amount of notes maturing July 31, 1979. The $3,010 million
of maturing notes are those held by the public, including
$1,185 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
$170 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 security may also be issued at the
average price to Federal Reserve Banks, as agents for
foreign and international monetary authorities, to the
extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing securities
held by them.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.
oOo
Attachment
B -1 7 3 0
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED JULY 31, 1979
July 17, 1979
Amount Offered:
To the public.
Description of Security:
Term and type of security
Series and CUSIP designation
$3,000 million
2-year notes
Series V-1981
(CUSIP No. 912827 JU 7)
* Maturity date July 31, 1981
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 auctio
Interest payment dates
January 31 and July 31
Minimum denomination available
$5,000
Terms of Sale:
Method of sale
Accrued interest payable by
investor
Preferred allotment
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
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.
Yield auction
None
Noncompetitive bid for
$1,000,000 or less
Acceptable
Tuesday, July 24, 1979,
by 1:30 p.m., EDST
Tuesday, July 31, 1979
Friday, July 27, 1979
Friday, July 27, 1979
Monday, August 6, 1979
FOR RELEASE UPON DELIVERY
EXPECTED AT: 10:00 A.M. EDT
THURSDAY, JULY 19, 19 79
STATEMENT BY GARY C. HUFBAUER
DEPUTY ASSISTANT SECRETARY
OF TREASURY FOR
TRADE AND INVESTMENT POLICY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL TRADE
OF THE
SENATE COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman, I am pleased to join in support of the
President's request to extend the emigration waiver
authority for Romania and Hungary under Section 40 2 of
the Trade Act of 1974. The Department of the Treasury
endorses the President's determination that further
extension of the emigration waiver authority for Romania
and Hungary will substantially promote the objectives of
Section 402. The waiver authority permitted us to sign
bilateral trade agreements with Romania and Hungary in
April 1975 and March 1978, respectively, thereby laying
the basis for growing trade and closer relations.
Continuation of this authority will provide a basis for
B-1731
- 2future expansion and improvement of bilateral relations
with other countries, subject to the provisions of
Section 402.
Extension of the waiver is necessary for Romania and
Hungary to continue using official U.S. Government
financing for imports from the United States. Officiallysupported export trade finance has been one of the mechanisms
used by governments to encourage exports, particularly in
this era of aggressive export competition among the
industrialized countries. In the absence of the waiver,
the Export-Import Bank would be unable to make loans or
guarantees, and U.S. exporters would thus operate at a
competitive disadvantage. Commodity Credit Corporation (CCC)
credits, which have been instrumental in increasing U.S.
agricultural exports, particularly to Romania, also cannot
be extended without the waiver. Both forms of financing
greatly benefit U.S. exporters, and ultimately the United
States' balance-of-payments position.
To be able to earn hard currency, Romanian and Hungarian
exporters must have access to Western markets. If the United
States does not continue to facilitate access to U.S.
markets through most-favored-nation tariff treatment for
Romanian and Hungarian products, the U.S. may lose potential
exports to these countries. The President's waiver will
- 3enable us to continue extending MFN, thereby enhancing
the ability of Romania and Hungary to earn hard currency,
which they can use to purchase American goods.
Romania
When Secretary Blumenthal, acting at the request of
President Carter, visited Romania last December, he
underscored the importance which our two nations attribute
to closer U.S.-Romanian ties.
We believe that is in our
national interest to encourage Romania's independent policy
orientation through further expansion of bilateral relations.
Extension of the waiver for Romania will foster improved
relations and promote the objectives of Section 402 of
the Trade Act.
The expansion of our commercial relations in recent
years can be attributed to the efforts of both governments
to construct a viable framework and favorable atmosphere
in which trade and economic cooperation can develop.
The
U.S.-Romanian Trade Agreement is one joint effort which
has contributed substantially to the growth of bilateral
trade.
Total trade turnover has grown from $322 million
in 1975, which was four times the value of trade in 1970,
to a record $664 million last year.
The U.S. maintained
a positive trade balance during the years prior to 1978,
and recent data reveal a U.S. trade surplus of $82.5 million
for the first five months of 1979.
- 4Aided by official financing, American exports to
Romania for the first five months of this year are
$80.6 million ahead of the same period in 1978. The
Commodity Credit Corporation (CCC) has extended
$110 million in credits in fiscal year 1979, compared
to only $23 million in 1978. Eximbank exposure in
Romania (as of March 31, 1979) is about $100 million.
The few instances of threatened market disruption from
Romanian imports have been resolved.
We are aware of Congressional concern regarding a
Romanian decree which sets arbitrary limits on compensation for confiscation of U.S. property in Romania. The
Administration shares these concerns. We are pleased
to note that two cases involving this decree were
effectively resolved earlier this year with the payment
of compensation to American claimants. The U.S. Government
has presented five additional cases to the Government of
Romania and has received assurances that processing of
these and the one outstanding case will continue.
Hungary
The Administration vigorously supports the expansion
of American-Hungarian economic and commercial contacts,
which have been facilitated by the bilateral trade agreement.
We believe that these contacts will serve to encourage an
- 5independent Hungarian foreign and economic policy. In
February of this year, Secretary Blumenthal and the
Hungarian Finance Minister signed a bilateral tax treaty
which, having been ratified by the Senate, will enter
into force once the countries notify each other that the
treaty has been approved. The tax convention will
encourage further economic and cultural exchanges by
clarifying tax rules, reducing taxes at source, avoiding
double taxation, and providing for administrative cooperation in implementing the treaty.
The notable increase in total U.S.-Hungarian trade
over the past decade illustrates the potential for
mutually beneficial economic and commercial cooperation.
U.S.-Hungarian trade turnover was a mere $11 million in
1967. Trade has increased steadily since that time (with
the exception of 1975) , and reached a high of $166 million
in 1978. Throughout this period of expanding trade, the
United States has consistently sustained a positive annual
trade balance.
Last summer, the Treasury Department initiated an
investigation under the Antidumping Act of lightbulbs
imported from Hungary and allegedly sold in the U.S. at
less than fair value. The International Trade Commission
determined in September that there was no reasonable
indication of injury, or potential injury, in the United
- 6States caused by these Hungarian imports. Consequently,
the Treasury terminated its investigation. Since that
time, Action Industries, the U.S. importer of Hungarian
lightbulbs, has begun to manufacture lightbulbs domestically
in a joint venture production arrangement. The operation
is the first production joint venture in the United States
with participation by an East European firm.
Although Hungary is more self-sufficient in agriculture
than other East European countries, CCC credits are playing
an increasingly important role in our bilateral trade. In
fiscal year 1979, $42 million in CCC credits were made
available to Hungary to finance agricultural sales,
principally of soybean meal and cotton. These credits
could encourage Hungary to purchase other U.S. agricultural
commodities. Eximbank is hopeful that it can commence
financing Hungarian industrial projects later this year.
In conclusion, Mr. Chairman, I believe that a one-year
extension of the Presidential waiver for both Romania and
Hungary will serve our national interest.
FOR IMMEDIATE RELEASE
July 17, 1979
Contact: Jack. Plum
Phone: 202/566-2615
TREASURY ANNOUNCES RESULTS OF GOLD SALE
The Department of the Treasury announced that 750,000
troy ounces of fine gold were sold today to 10 successful
bidders at an average price of $ 2 9 5. ;4 4 per ounce.
Awards were made in 300 ounce bars whose fine gold
content is 39.9 to 91.7 percent at prices ranging from $295.11
to $296.75 per ounce. Bids for this gold were submitted by
19 bidders for a total amount of 2.1 million ounces at prices
ranging from $110.00 to $296.75 per ounce.
Gross proceeds from the sale were $222.3 million. Of
the proceeds, $31.7 million will be used to retire Gold
Certificates held by Federal Reserve Banks. The remaining
$190.7 million will be deposited into the Treasury as a
miscellaneous receipt.
The list of the successful bidders and the amount awarded
to each is attached. The General Services Administration will
release the details of the individual awards to successful
bidders.
The current sale was the fifteenth in a series of
monthly sales being conducted by the General Services
Administration on behalf of the Department of the Treasury.
The next sale will be held on August 21 at which 750,000 ounces
of gold will be offered in bars whose fine gold content is
39.9 to 91.7 percent. The minimum bid for these bars will be
300 fine troy ounces.
B-1732
OUNC
3AMK LEU LIMITED
NEW YORK
NY
U800
CREDIT SUISSE 9°°
ZURICH
SWITZERLAND
DERBY AND COMPANY LTD 193°
LONDON
ENGLAND
DRESDNER BANK
FRANKFURT
672
°
W.GERMANY
J ARON AND COMPANY INC
NEW YORK
NY
159
°
REPU3LIC NATIONAL BANK OF NY J930
NEW YORK
NY
SAMUEL MONTAGU LIMITED 3000
LONDON
ENGLAND
S3C FINANCIAL LIMITED 9°°
MONTREAL
CANADA
SWISS BANK CORPORATION
ZURICH
SWITZERLAND
3900
UNION 3ANK OF SWITZERLAND
ZURICH
SWITZERLAND
9000
N3
partmentoftheTREASURY
TELEPHONE 566-2041
HINGTON,D.C. 20220
FOR IMMEDIATE RELEASE
July 18, 1979
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $3,380 million of 52-week bills to be issued July 24, 1979,
and to mature July 22, 1980, were accepted today. The details are as
follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 2 tenders totaling $2,500,000)
Price
High
Low
Average -
Discount Rate
91.027 8.874%
90.978
8.923%
91.005
8.896%
Investment Rate
(Equivalent Coupon-issue Yield)
9.68%
9.74%
9.70%
Tenders at the low price were allotted 17%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
$ 37,970
4,436,885
2,310
6,795
50,665
65,050
345,015
34,470
3,585
9,585
2,070
198,550
9,355
$ 27,970
2,881,615
2,310
6,795
50,665
65,050
232,015
9,470
3,585
9,585
2,070
79,550
9,355
TOTALS
$5,202,305
$3,380,035
$3,915,070
112,555
$2,092,800
112,555
$4,027,625
$2,205,355
Federal Reserve
and Foreign Official
Institutions
$1,174,680
$1,174,680
Type
Competitive
Noncompetitive
Subtotal, Public
TOTALS
B-V733
$5,202,305
$3,380,035
For Release Upon Delivery
Expected At 2:00 p.m.
July 19, 1979
STATEMENT OF THE HONORABLE DONALD C. LUBICK
ASSISTANT SECRETARY (TAX POLICY)
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
OF THE INTERNAL REVENUE SERVICE
OF THE SENATE COMMITTEE ON FINANCE
Mr. Chairman and members of the Subcommittee:
I am pleased to present today the views of the Department of the Treasury with respect to S. 1444, "the Taxpayer
Protection and Reimbursement Act." This bill provides for
the reimbursement of attorney fees to prevailing parties in
tax cases where the Government's position in the litigation
is found to be unreasonable. The Treasury Department supports
S. 1444.
CURRENT LAW
We recognize at the outset that S. 1444 departs from
the general procedures for payment of attorney fees in our
court system. Under the so-called "American rule," each
party in litigation ordinarily pays his own legal fees
whether the case involves private litigants or the Government. Congress has created a few statutory exceptions to
the "American rule." For example, a victorious party can
recover attorney fees under the Civil Rights Act of 1964,
the Freedom of Information Act, and the Consumer Product
Safety Act. But most provisions for fee shifting are
designed to encourage private citizens to enforce rights
that transcend the interests of the litigating parties -- a
rationale that rarely applies in tax cases.
Current law does contain an ambiguous provision for
awarding attorney fees in tax litigation. The Civil Rights
Attorneys' Fees Awards Act of 1976 provides judicial discretion to grant attorney fees to a prevailing party (other
than the United States):
B-1734
- 2 "...in any civil action or proceeding, by or on behalf
of the United States of America, to enforce, or charging
a violation of, a provision of the United States
Internal Revenue Code...."
Interpretation of this quoted language has been the subject
of controversy in Congress and the courts.
With respect to two basic issues, the courts have
determined that the statute has a narrow application.
First, virtually all the cases have held that attorney fees
can be awarded only if the taxpayer is the defendant. This
interpretation results in the statute being applied to very
few cases; most tax litigation occurs in the Tax Court where
the taxpayer is the petitioner or in a District Court where
the taxpayer is the plantiff suing for a refund. Second,
the courts have cited legislative history to conclude that
taxpayers must demonstrate that the Government has acted "in
bad faith, for purposes of harassment or vexatiously or
frivolously."
In. our view, current law is unacceptable. The .ambiguities
in the 1976 Act are troubling, and the Act has been held to
apply to such an arbitrarily narrow category of cases that
it provides more confusion than protection for taxpayers.
The tax provision of the Civil Rights Attorneys' Fees Awards
Act should be repealed.
OBJECTIVES OF NEW LEGISLATION
Some persons may argue that this Subcommittee should
take no action beyond repeal of the tax provision in the
Civil Rights Attorneys' Fees Awards Act. As we have noted,
a Federal tax case is not, in general, the type of litigation in which attorney fees historically have been awarded;
tax litigation seldom involves a "private attorney general"
seeking to establish social principles for the public at
large. In fact, an attorney fees statute presents the
danger of impairing the interests of the vast majority of
taxpayers. A recent comment by the Tax Section of the New
York State Bar Association is instructive:
- 3 "...[I]t must be recognized that in legal disputes
right and wrong are often matters of degree, or of
fact; that a system that encourages the settlement of
cases may be as desirable as one that pushes cases to
trial; that the allowance of attorneys' fees may induce
either more litigation or more prolonged litigation;
and that any increased litigation expenses of the
Government will ultimately be borne by all taxpayers."
Tax Section, New York State Bar Association, Report
of the Committee on Practice and Procedure, "Awards
of Attorneys' Fees in Federal Tax Cases," January 18,
1978.
However, in spite of the potential problems with
awarding attorney fees in tax cases, we favor a provision
for fee shifting in certain instances. The issue must be
faced squarely: when should the legal fees of one taxpayer
be paid by all taxpayers? In addressing this question, we
believe that legislation should be designed with several
general objectives in mind.
Protection of Taxpayers Against Government Abuses
Any attorney fee proposal should be examined in the
context of our self-assessment method of taxation. The
American tax system is unique in the extent to which it
depends upon voluntary compliance. The Government relies
upon individual taxpayers to assess themselves and to pay
their share of the tax burden. In return, taxpayers expect
the Government to administer the system fairly and evenhandedly.
We believe that the Government usually lives up to its
end of the bargain. The Internal Revenue Service generally
administers the tax laws reasonably and equitably. But in
any institution as large as the IRS, some mistakes are made.
In those instances where the Government overreaches, a
taxpayer must not feel incapable of defending his interests.
The awarding of attorney fees in appropriate cases can help
to preserve the principle of fairness .that is central to the
voluntary assessment system.
Encouragement of Responsible Government Action
The attitudes and actions of Government employees, as
well as taxpayers, may be affected by attorney fees legislation. Proponents of such legislation usually suggest the
- 4 need to restrain the Federal bureaucracy. Accordingly, an
attorney fees bill is advanced as a deterrent to heavyhanded actions by the Internal Revenue Service.
In order to achieve this deterrent objective, legislation should distinguish between abusive and responsible
governmental actions. Tax administration would obviously be
ineffective if the Government conceded all close cases to
taxpayers. Reasonable pursuit of debatable tax issues
should not be discouraged by enactment of an attprney fees
bill that applies broadly to all prevailing taxpayers.
Concern for Tax Court Congestion
Moreover, a bill that is drafted too broadly would
encourage litigation and increase substantially a volume of
tax cases that is already alarming. The current Tax Court
inventory is at an all-time high of over 24,000 cases. Such
a huge case load places a strain upon the Government's
ability to dispose effectively of a case and impairs the
ability of a taxpayer to obtain prompt judicial resolution
of .a dispute.
Congress has acted recently in an effort to alleviate
this court congestion and to assist small taxpayers. The
Revenue Act of 1978 expands a special Tax Court small case
procedure, originally created in 1969. Effective June 1,
1979, the Act permits an informal, expedited process for
handling disputes where $5,000 or less is at issue; the
prior jurisdictional ceiling was $1,500. Nearly all of
these cases are handled by the taxpayers themselves, without
the need to hire counsel. In describing this recent amendment, the General Explanation of the Revenue Act of 1978
states:
"[M]ore taxpayers will be able to take advantage of
that expeditious and simplified procedure for handling
tax disputes. In addition, it will provide a means of
relieving the regular judges of part of an extremely
heavy workload."
If attorney fees were to be awarded routinely to
prevailing taxpayers, we fear that use of the simple small
case mechanism would be discouraged. Attempts to streamline
Tax Court procedures would be undermined. And in the
process, the ultimate losers would be the thousands of
taxpayers who desire swift judicial decisions on tax controversies.
- 5 -
APPROACH OF S. 1444
Measured by the objectives I have outlined, S. 1444 is
a good bill. Its scope is more expansive and rational than
current law. Yet, its language is well tailored to accommodate the unique characteristics of tax cases.
To recover attorney fees under S. 1444, a litigant must
show that the position of the Government in the litigation
is unreasonable. This standard promotes the sound principle
that taxpayers should not have to bear the cost of defending
themselves against abusive governmental action. But at the
same time, it recognizes the interest of all taxpayers in
responsible tax administration by the IRS and in having an
expeditious judicial remedy for cases not settled at an
administrative level.
The "reasonableness" test is to be applied by "taking
into account the entire record of the case as well as any
other relevant evidence." Under this standard, the attorney
fees issue should be viewed in the context of the history
of litigation on a particular tax question. For example, a
court might award attorney fees where the Government continues
to litigate a legal issue after losing in several Circuit
Courts. On the other hand, attorney fees should not ordinarily
be granted where a decision invalidates an IRS ruling that
had previously been upheld by other courts.
In outlining the requirements for recovering attorney
fees, the bill recognizes that tax cases, compared to other
forms of civil litigation,* typically involve many differing
issues of fact and law as well as several taxable years.
There is likely to be no clear-cut winner in such a multifaceted proceeding; approximately 40 percent of all Tax
Court cases result in decisions that are split between the
taxpayer and the Government. Accordingly, S. 1444 describes
with some precision the extent to which a party must prevail
in order to qualify for an award. Under the bill, a party
must prevail with respect to all, or all but an insignificant
portion portion of, the amount in controversy. If no amount
is in controversy, the taxpayer must prevail with respect
to all, or all but an insignificant portion of, the issues
involved.
- 6We believe that the definition of "prevailing party" in
S. 1444 — a definition that incorporates the "reasonableness"
standard and the specific treatment of multiple issue
proceedings — should allay many of the concerns about
exacerbating court congestion in tax cases. But to discourage unnecessary litigation, the Subcommittee may wish to
consider an additional refinement of the requirements for
recovery of legal expenses. Under current practices, a
taxpayer typically appeals to an IRS regional office in the
event he disagrees with the findings of an examining agent;
over 95 percent of all disputed cases are resolved without
trial. If the bill is enacted as drafted, there is a danger
that a taxpayer will circumvent the administrative process
and have his case docketed in court solely because of the
prospect of recovering attorney fees and other court costs.
As a safeguard against such unintended results, we recommend
that the bill allow attorney fees to be recovered only in
those instances where a taxpayer has exhausted his administrative remedies before instituting court proceedings.
Finally, we would like to note another provision in the
bill that reflects the unique aspects of tax cases. Contrary
to most other forms of litigation, the complexity of a tax
case is generally related to the relative affluence of the
taxpayer. Most persons with modest resources can litigate
their tax issues without incurring the legal fees that might
be paid by a large, multinational company. Therefore, to
target relief to those most in need, H.R. 1444 places a
ceiling of $20,000 on the amount of costs and attorney fees
that can be awarded in any one proceeding. This cap is a
workable limitation that focuses the bill on small taxpayers
without requiring a judicial determination of asset size —
a determination that could itself raise difficult fact
questions for a court.
S. 1444 takes a reasonable, balanced approach to the
special problems of awarding attorney fees in tax litigation.
°0°
The bill is scheduled to be effective
for a 4-year period,
so that its impact can be carefully evaluated before permanent
legislation is adopted. This experiment should be undertaken.
We urge enactment of S. 1444.
FOR IMMEDIATE RELEASE
July 18, .1979
Contact: George G. Ross
202/566-2356
TREASURY ANNOUNCES PUBLIC HEARING ON
BUSINESS HOLDINGS OF PRIVATE FOUNDATIONS
The Treasury Department today announced that a public
hearing will be held on September 6, 1979 concerning proposed regulations governing excess business holdinqs of
private foundations, which were published in a notice of
proposed rulemaking on May 22, J.°7°<.
Treasury also announced that, to the extent that any
rules as finally adopted are more stringent that the rules
proposed in 1973, the effective date will be no earlier than
December 31, 1979. As published on May 22, 1979, the proposed regulations would have been applicable to transactions
taking place on June 22, 1979 and thereafter.
The Tax Reform Act of 1979 placed limitations on foundation ownership and control of active businesses, but provided certain exceptions for then-existing holdings. The
regulations proposed in 1973 would extend grandfather protection to certain changes in business holdings acquired by
foundations through merger or other reorganizations involving
stock held on May 26, 1969. • Grandfather protection oroposed in the 1979 notice would be less extensive than that
proposed in 1973.
Concern has been expressed about the effect of the new
proposed rules on what is described as normal expansion of
business corporations in which a private foundation has a
grandfathered holding. The public hearing in September 1979
will determine whether the final regulations should embody
the rules of the January 3, 1973 notice of proposed rulemaking resulting from the Tax Reform Act of 1969, the proposed
rules of the May 1979 notice, or an intermediate position.
Comments are requested as to both notices, and respondents
are urged to set forth any alternative rules they would recommend. Comments, as well as requests to speak at the September 6, 1979 hearing, should be sent by August 22, 1979 to:
Commissioner of Internal Revenue, Attention: CC:LR:T (EE-162-78) ,
Washington, D.C. 20224.
B-1735
-2To the extent that any rules finally adopted are more
stringent that those in the 1973 notice, the rules will not
apply to transactions taking place prior to ninety (90)
days after the publication of the Treasury decision setting
forth the final regulations, or December 31, 1979, whichever
is later. Consideration also will be given to additional
rules needed to protect transactions in progress at the
time of the Treasury decision.
o 0 o
Societe Universitaire Europeenne de Recherches Financier
S U E R F
COLLOQUIUM
May 10-12, 1979
Basle
EUROPE AND THE DOLLAR IN THE WORLD-WIDE DISEQUILIBRIUM
L'EUROPE ET LE DOLLAR DANS LE DESEQUILIBRE MONDIAL
"The Changing Rcle of the United States in the World Econory"
Daniel H. Brill
Assistant Secretary of the Treasury for Economic Policy
Washington, D.C., USA
I find the title for the colloquium puzzling,
pejorative, challenging, frustrating. What is "the
worldwide desequil ibrium' ? Do disparate trends among
nations ir. the balance of their international trade
and service transactions constitute "disequilibrium"?
Do long-standing differences among nations in their
savings and investment propensities constitute "disequilibrium" when these differences are manifested in
their current and capital accounts? Is it "Disequilibriur." if exchange rates adjust to reflect these
disparate trends and tendencies? The very term"disequil ibriur." suggests to me that some analysts still cling tc
the notion of ar. ideal static state of international
economic relationships from which deviations threaten to
shake the world loose from its economic moorings.
I favor a more dynamic interpretation of international
events, one which views change as an inevitable and evolutionary process — although not always to beneficial ends.
In this context, disequilibrium can exist if social,
economic or political barriers prevent—or seriously
delay--adjustment to change, thereby forcing, in the end,
an abrupt or violent adjustment. Alternatively (and subjectively), I would class as disequilibrating a change
-2which leaves the world poorer than it need be as a
result of adjustment to the change.
It is within the context of these interpretations
of disequilibrium that I propose to explore some aspects
of the impact of U.S. developments on the world economy.
Has U.S. economic policy and performance tended to
stabilize or destabilize the global economy? Has the
effectiveness of the United States as a global economic
flywheel diminished? Of course, from an American viewpoint, it is equally important to ask whether external
events have had an increasingly destabilizing effect on
the United States.
This is a vast subject, far too broad to be encompass
in a single paper. I will limit my observations, therefor
to certain developments in trade, capital flows and
international monetary reserves that may have contributed
to equilibrium or disequilibrium in the sense these terms
are defined above.
The U.S. Role in World Trade
Various criteria--financial and nonfinancial--can be
used to measure the influence of any one economy on the
course of global economic developments. Relative size of
output is one such measure; while imperfect and inadequate,
it is not an insignificant factor. Equally, if not more
-3important, is the extent of a country's participation
in world trade. Size alone may offer potential influence,
but if a country's trade links to the world are relatively
small, it lacks the reans of transmitting—at least through
economic channels — the influence its size might
confer, or of being influenced significantly by developments abroad. Thus, the extent to which any nation can
contribute to world economic stability is a function of
both its relative size and its relative "openness".
In the 1940's, 1950's, and through the early 1960's,
the ability of the United States to exert strong influence
on the world economy stemmed primarily from its preponderant
share in world output. Even though, as a result of the
relative self-sufficiency of the American economy, the
U.S. propensity to import was probably lower than that in
the rest of the world, the sheer size of the U.S. market
made the fortunes of many foreign economies dependent on
that of the United States. Expansions in the U.S. led to
increases in exports by other countries and, via foreign
trade multipliers, to noticeable upswings in their domestic
economic activity.
In large measure, this reflected relative economic
positions at the end of World War II. With many of the
world's industrial economies in disarray, the share of
the United States in global output was overwhelming.
-4Accurate statistics for this period are not available,
but if one roughly takes into account output generated
and exchanged outside the market in the then still disorganized economies of Europe and Japan, in the mid-1940's
the United States produced probably more than one-half of
total world output.
As the recovery of other World War II participants
progressed, the U.S. share of global GNP declined. By
1955, U.S. share of world output amounted to about 36 percent, while the share of the countries which later became
members of the Common Market stood at about 18 percent of
the world output.
Throughout the fifties, the growth rates in U.S.--while
on average impressive by U.S. historical standards—still
lagged behind those in other industrial countries, and the
U.S. share in world output kept declining, albeit not as
abruptly as in the first post-war decade. By 1960, the
U.S. share had fallen further to about one-third of the
world's output. Japan, Communist countries, and, to a
lesser extent, Western Europe were gaining in relative
terms.
In the 1960's, even though U.S. growth accelerated,
growth in other industrial countries increased even more
rapidly. By 1965, the U.S. share fell to about 31 percent
while the share of EEC countries rose to 19 percent of the
-5world output. Japan began by that time its dash for
economic growth that increased its share from slightly over
2 percent in 1955 to almost 4 percent in 1965.
In the next five years the United States' share
declined by a fraction of a percentage point, the share of
the European Community rose to almost 20 percent, and the
share of Japan exceeded 6 percent. Relative losers in
the late 196C's were Communist countries and LDC's.
Overheating of the U.S. economy, as in the early 1950's
and, again, in the late 1960's, coincided with investment
binges abroad, sharp increases in commodity prices, and
other symptoms of economic fever. Conversely, the slumps
of the fifties (and, to a lesser extent the slowdown of
1966) brought about periods of marked deceleration of growth
in the economies of U.S. major trading partners. On the
whole, however, throughout the quarter of a century following World War II the U.S. had a remarkable record of
relatively stable, albeit not spectacular economic growth
that contributed to the stability of the world economy.
Accompanying the growth in world output during this
period was an even more rapid growth in the commerce among
nations. In the 1960's, for example, world output increased
at an annual rate of 5 percent while world trade grew by
8-1/2 percent per year.
-6The increase of world trade relative to world
output reflected a general, country-by-country increase
of trade ratios.
For example, trade turnover (exports
plus imports) as a percentage of U.S. GNP has increased
from around 7 percent in the mid-1950fs to over 15 percent last year.
Figures for other industrial countries
show a similar, though perhaps not so striking, pattern.
For Japan, and France, the ration of trade to output
increased by only 3 or 4 percentage points, but for each
country there was a significant increase in the part of
national output which entered into world trade.
The "openness" of the U.S. economy has grown
appreciably only in recent years.
Throughout the 1950's
and 1960's U.S. exports and U.S. imports both remained
small, stable proportions of GNP, about 4.0 and 3.0 percent respectively.
Beginning in the mid-1970's, however,
the two measures of openness for the U.S. economy evidence
sizeable increases.
By 1978, the ratio of U.S. exports
to GNP increased to 7.0 percent, while the ratio of
imports to GNP advanced to 9.0 percent.
This increase of
U.S. openness is remarkable because it represented a growth
in "two-way" interdependence.
The rise in imports relative
to GNP of the U.S. was in pace with the rise in the export
share.
-7Historical data assembled by Simon Kuznets
indicate that the tendency toward increased openness
of the economies of the industrial countries is not a
new phenomenon. His data show that from 1800 to 1913
foreign trade (exports plus imports) increased from
3 percent to almost 33 percent of world output. As we
already observed for recent years, over the historical
long-run the tendency toward increased openness in
merchandise trade has been widespread, and not confined
to a handful of large or rapidly growing countries.
Viewed then in this perspective, the expansion of
world trade is a resumption of an historical trend which
was "temporarily" interrupted by two world wars and a
worldwide depression.
But the structure of trade, or more particularly,
the structure of the growth of trade is different now
than it was in the late 19th and early 20th century.
First, there is the rapid increase of intra as
opposed to inter-industry trade between developed countries.
By the mid-1970's, almost $65 of every $100 of manufactured
goods traded internationally by industrial countries was
exchanged within industries, i.e., exports by one country
matched by imports by that country of products produced in
-8the same industry. While the volume of trade among
industrial countries is continuing to increase, lines
of specialization among industrial countries are
becoming less clear.
A second important difference between the 19th century and the current growth of trade involves the role
of the developing countries. During the 19th century
there was a relatively clear distinction between industrial
and non-industrial countries. Trade between their tended
to be the text-book exchange of materials for manufactured
goods. The recent growth of world trade is accompanied by
the increasing production and export of manufactured goods
by developing countries. In 1978, 24 percent of U.S.
manufactured imports originated in LDC's, while in 1965,
the figure was 14 percent.
Among industrial countries specialization is
basically among firms, not among countries. Differences in technology are probably as important among
firms in the same industry but in different countries as
they are among different industries in different countries.
Between such firms, specialization is based on economies
of a scale according to particular product varieties. In
this sense, trade among the industrial countries is becoir.in
-9more like commerce within them. In the early stages
of development, firms in the LDCs tend to produce
standardized products and tc base their position in the
market on access to cheap inputs, particularly labor.
But as LDCs enter more advanced stages of development,
there is a tendency to move output up to more sophisticated,
less standardized product, and to enter into the kinds of
competition typical of that among industrial countries.
One final set of observations before pulling together
the strands of the discussion of trends in trade. Most
analyses indicate a greater response of U.S. imports than
of exports to fluctuations in income. The higher import
elasticities are well established in the econometric
literature, although one must suspect that the income variable
is a surrogate for other factors that cannot yet be identified
separately or measured well. But even if the values attributed
to the influence on imports of U.S. incase fluctuations tend to be
overstated, they clearly are larger than the influence of foreign
income changes on U.S. exports. In fact, there is evidence that U.S.
demand for foreign products has even become more sensitive
to the growth of U. S. output, especially following the Vietnam
war, while the estirmated responsiveness of U. S. exports to
changes of foreign growth has remained relatively stable.
-10-
There is no evidence that foreign "elasticities" have
changed to U.S. income developments in the post-war period.
The U.S. has, more cr less year-by-year since 1952, absorbed
7 percent to 8 percent of Western European countries' exports.
The share of Japanese exports destined for the U.S. is about
the same now as it was in the mid 1950s (though this ratio
has varied more than the ratio for U.S. imports from Western
Europe). While the share of the oil producers' exports
to the United States has remained stable, at a bit over
25 percent during the 1970s, the share of their exports
shipped to the U.S. by non-oil producing LDC's jumped from.
1C to 25 percent over the same period. But this has been
a function of development, not income elasticities.
To summarize these observations on the changing role
cf the U. S. in world trade: a) U.S. output, while still
by far the single largest national component of world output,
is a far smaller share of the global economy than earlier
in the past war era; other industrial and developing
countries, starting from a lower base, have been able to
grow more rapidly, b) external trade has become a significantly
larger share of U.S. output, particularly in recent years,
c) "comparative advantages" in trade have tended to diminish
as the diffusion of technologies across borders increases
-11-
ccnpetition, d) the foreign trade of the U.S. has became quite sensitive
to domestic economic conditions, with imports significantly
more sensitive than exports.
The implication of these observations is that the
ability of the United States to act independently as an
international economic stabilizer is much reduced from the
role it could play during the postwar reconstruction era.
In other words, the U.S. could not, through trade flows,
become a global economic "flywheel" even if it wanted to.
At the same time, the greater interdependence of the U.S.
in the global economy adds to constraints in the development
of U.S. economic policies.
The constraints on policy
formulation become even more binding on the major
reserve-currency country in a regime of flexible
exchange rates, as was painfully evident in 1978 when
the decline in the value of the dollar, in consequence
of the large U.S. trade deficits of recent years, added
significantly to inflationary pressures in the U.S.
economy.
These pressures, in turn, reinforced the need
for policies to slow the U.S. expansion and restrain inflationary forces.
This slowing will reduce the rate of growth
in U.S. imports.
Thus, the U.S. will not be in a position to
-12-
compensate strongly for inadequacies in growth of other
industrial nations which may not be fully exploiting their
potential.
Of course, the influence of the U.S. on the global
economy is exerted through the world's monetary and financial
system as well as through trade flows. We turn now to a
consideration of the central role the U.S. plays in the
international financial system.
-13-
The Chang in g__Role of the United States in the International
Financial System
I have already noted that the United States contributed
to global economic growth in the 1950's and '60s by maintain
ing a reasonably steady rate of expansion and by participating in the burgeoning of world trade. The United States
also promoted world growth by extending substantial
amounts of foreign credit, both private and public. Year
in and year out, the United States enjoyed trade and,
excluding government transfers, current account surpluses
with the rest of the world.
These surpluses were, of course, a reflection of other
nations' appetite for American goods and services. To
the extent that this appetite could be satisfied by
American farms and factories, imports from the U.S. played
a vital role in the process of the post-war reconstruction
and subsequent development of the rest of the world.
Yet this process of transferring real resources from
the U.S. to the rest of the world could not be accomplished
were it not for the readiness of the United States to
"recycle," to use the term of more recent coinage, its
current account surplus by investing abroad. Apart from
transferring American technology and managerial knowhow,
U.S. investment abroad allowed the recipient countries to
expand their output and, usually, their exports as well.
-14-
Th e U.S. Government pursued a conscious policy of
resource transfers of its own. Beginning with the Marshall
Plan, the rest of the world received, during the two
post-war decades, tens of billions of dollars in military
and civilian grants, rollovers or forgiveness of war debts,
soft and hard loans, bilateral and multilateral aid.
Relative to the amounts of savings the war-ravaged world
was able to generate in the first post-war decade, transfers of public capital by the United States to the rest of
the world were very substantial.
Smooth functioning of the world economic mechanism,
which made the unprecedented growth in the 1950's and
1960's possible, was contingent in large measure on the
willingness of the United States to keep playing the role
of banker to the world -- borrowing short-term and lending
long-term. Even after pre-World War II levels of output
had long since been surpassed, the world enjoyed a decade
and more of rapid and sustained economic growth, high levels
of employment, expanding international trade and investment,
remarkably low rates of inflation by today's standards,
and stable exchange rates. The provision of international
liquidity through the export of dollar-denominated capital
was a potent influence on the degree of ease or stringency
of other governments' economic policies and, consequently,
on the level of economic activity in the world.
-15Until the late 1950's, increases in official claims
on the United States accounted for close to one-half of
all additions to international reserves. In 1959, these
claims were equal to over 60 percent of all foreign exchange reserves and constituted over a quarter of all
reserve positions in the IMF.
Despite major institutional innovations of the 1960s
and 1970s — increased use of offshore markets by private
financial institutions and monetary authorities, introduction of the SDR, and expanded use of Fund-related assets -the relative importance of the dollar as a reserve currency
has remained high. In 1970 official claims of all IMF
members on the United States amounted to 53 percent of all
foreign exchange holdings and about 25 percent of reserve
asset holdings. Even at the end of 1977 these proportions remained virtually unchanged, and this even if gold
reserves were valued at current market prices. If Eurodollars are added to official claims on the U.S., the
proportion of dollar-denominated assets in foreign exchange
holdings remained stable at around 80 percent through 1977.
-16-
Data through the first three quarters of 1978,
suggest that there were instances of diversification
out of dollars in 1978. During the fourth quarter I
suspect there were further shifts out of dollars. But
more recent dollar strength clearly suggests a return
to dollar reserves.
Even with the strains put on the U.S. balance of
payments —indeed, on the world's payments mechanism—by
the soaring of oil prices since 1973, the U.S. has continued
to perform as an international banker in recycling of oil
revenues. From 1973 through 1977, total U.S. liabilities
to OPEC countries increased by nearly $39 billion, while
U.S. bank claims on foreigners increased almost $66 billion.
Since most of these OPEC assets were placed in U.S. Government obligations, the recycling took place through the
workings of U.S. domestic financial markets. In this
respect, the United States played an important stabilizing
role that supplemented the Eurocurrency markets in helping
deficit countries finance oil imports.
There are some signs, however, of a changing role for
the dollar, at least in the transactions functions it
serves. The SDR has begun to assume the role of numeraire
alongside the dollar. The dollar is less dominant as a
-17-
transactions currency; gradually an increasing proportion
of international transactions is being invoiced in other
currencies. Similarly, the role of the dollar as the
intervention currency is diminishing, especially within
what has become the European Monetary System. And, in
time, other financial instruments will undoubtedly come
to share increasingly the dollar's store-of-value
function.
Even though the proportion of dollar-denominated
assets barely changed in the 1970's until 1978, there
has been some limited tendency toward asset diversification on the part of official holders. This tendency toward
diversification has been modest so far. But the IMF has
decided on sizable new allocations of SDR's in coming
years. And the IMF is also examining the possibility of
further strengthening the SDR through a substitution account
which might lead to the deposit of some official dollar
assets with the Fund in exchange for an SDR denominated
instrument.
Diversification of reserve assets in official portfolios may be a natural consequence of evolving economic
relationships. But the evolution of new reserve assets to
significant size is a slow process, and the dollar's role
in contributing to the expansion or contraction of international liquidity will remain paramount for quite some time
-18Summary
In the evolution of the postwar world economic
order, a number of developments have increasingly
limited the ability of the U.S. to determine independently
its own economic fate, or to determine single-handedly
the course of the global economy. The relatively faster
rise in other countries' output, the reduction in the U.S.
share of world trade, the rising share of foreign trade
in U.S. output, the emergence of strong competitors able
to employ contemporary technology but retaining comparative cost advantages, the inception of floating exchange
rates, the development—still in its early stages—of
alternative reserve assets, all tie the U.S. more closely
into the world economy.
At the same time, these developments require
that more of the burden of global economic stabilization be shared by other countries, in both the
financial and nor.financial spheres of cooperation. The
worldwide impact of rising energy costs, and the accompany
ing mammoth transfers of claims on wealth give greater
impetus to the growth of interdependence, calling for
increased coordination of domestic economic policies, as
well as increased cooperation in assuring a monetary and
financial environment conducive to growth and stability.
Appendix
The source of data that are cited in the text may be
found in the appropriate accompanying tables.
The keynote dates may be found in Simon Kuznets,
"Quantitative Aspects of the Economic Growth of Nations:
Level and Structure of Foreign Trade Long-Run Trends,"
Economic Development and Cultural Change V. 15 (Jan. 1967)
No. 2 part II.
The discussion of intra-industry trade among the
developed economies is further examined in, Finger, J.M.,
and DeRosa, Dean, "Trade Overlap, Comparative Advantage,
and Protection," U.S. Treasury Department, Jan. 1, 1979.
Table 1
World r»ro*s National Product '
jln ..i!ii....- »* \ S dollar-]
MMiii
l«.M.."i
I..MW 2. _**•
ld:i
Hi
»ptau Conmaniu \
liiitcd Kmjrd-ii!
France..
West Gcrniun)
It Ah
27
_!l
HI.
:«••
!«•:
:.-.
4:<
_U
4*
s;.
411
71
.>
7l)
;i2
9:.
1)_*
r»7
Tun Mil jinrrs
Hi**, oi. .rtrraf, !,lv i :).;> :_•-< .,j ,._. h_i^,
E^.imati
jure* Dfpanmri., uf C oninwrct
>*
Table 2
Recent Trends of Exports MusJnjjortsjuL.i Proportion^ National Pr«luctim_ofJtajor_T«dina
~
"
Countries M
(mient Pricier
(Percentile 5;)
United
States
Year
Ifnited
KLnydotn_
Franco
Cernvmy
Italy
Japin
26
20
28
19
19
1955
7
23
22
30
24
20
1960
7
30
21
31
25
19
1965
7
33
23
34
2R
19
1970
9
42
—
39
—
21
1975
15
Source :
a/
IMF International Financial Statistics, May 1976, Feb. 1977
1952 figure
Historical Trends of Exports Plus Irrj»ort s as a Proportion of Nat ional Product ion of Major
r
i ad in<j Count i i«"; at Cuiront Pi ices
(Percentages)
United
States
United
Kincjdfjm
19th Century
13
22
IB1'/
Pre World War I
11
44
n<v
1920's
11
38
SI-"'
1950's
8
30
4 1 h / 20r
1970's
11
38
Year
Sources:
France
—
•
29
/
•/
Germany
It^ily
I Japan
21
10
md/
28
30
31 d /
26
36
25
19
37
21
Yiv
2<fJ
17 <V 3 ^
1834-1929 for all countries; 1954-63 for the United States, 1957-63 for the United Kingdom,
Italy, and France; 1950-56 for Japan; 1955-59 for Germany: Simon "TCuznets, "(X-antitative
Aspects of the Economic Growth of Nations," Foonomic Development and Cultural Change, Vol.
15, Nr>. 2, Part II (Jan. 1967), pp. 19,20;
~~~
a/ Years for which data were used for each country are: United States 1834-43, 1804-13, 1918-28,
1954-61, 1970-74; United Kinqdom 1837-45, 1R09-1), 1924-28, 1957-63, 1970-74; France 1845-54,
1805-13, 1920-24, 1957-63 and 1954-63, 1970-74; Germany 1872-79, 1919-13, 1925-29, 1955-59
and 1954-63, 1970-74; Italy 1861-70, 1911-13, 1925-29, 1957-63, 1970-74; Japan 1878-87, 190813, 1918-27, 1950-56, 1970-74.
b/ E>cports plus imports as a percentage of value added in agriculture and manufacturing (including
mining and handicraft and some construction) .
c/ Deports plus imports as a percentage of OJP.
6/ EKports plus imports as a percentage of the sums of private and government cons\_mption and
net domestic capital formation.
Table 4
US Export and Import Trade Relative To
US GNP, 1951-78
Year ^
Exports/GNP
Imports/GNP
1951 0.04 0.04
1955 0.04 * 0.03
I96 0 0.04 0.03
1965 0.04 0.03
1970 0.04 0.04
1975 0.07 0.07
19~8 0.07 0.09
Scurce:
IMF, Ir.terr.at_.or.al Financial Statistics.
Table 5
UNjTED STATES IMPORTS FROM MAJOR COUNTRY GROUPS AS
A PERCENTAGE OF THEIR TOTAL EXPORTS
Exporter
Year
Western
Europe
Japan
Developing Countries
All
Oil
Producers
Other
1952
7
19
26
NA
NA
1955
7
23
23
NA
NA
196C
8
27
2 2
NA
NA
1965
8
30
19
NA
NA
8
32
21
26
10
1975
6
22
22
26
17
1977
7
25
26
27
25
_.>'_•
Table 6:
U.S.
HII.IIK c
el
l.iy-iinls
(MI I I i o n s
Merchandise Trade
Balance!/.?/
Current Account ILUjiire )/
Government Transfers
Long-tern Capital Account
Balance^/
Basic Balance5/
Short-term Capital
Balance6/
Balance of
Source:
.»(
I'Kf,
1930
195 r >
I960
I'H,',
|<*f,H
von
IOOS
2/53
unu
4 9 •> I
6 T)
7 149
-226/
)76)
1603
- 347.»
-3/8
2230
-1901
-881
4'»44
19 \l
- H30*
/HIH
-? 2/1
-/HI*
884 5
-2'«'.5
-3)2
-34 1
-1/96
II '. .
Sl.il I M
I' s
b)
1969
19/0
IV/I
19/2
(,07
260)
-2260
6.18
). 8/
-22.1
-2828*
2 392
21 86
-4 )49
/W0 J
-7)46
6)46
IH)
-2/)9
-9079
138/,
-194 »
)989
-10483
197)
19/4
19.75
1976
1977
fl/l
-5)63
• 8953
-9)71
-31070
-)0)0
2942
36)3
9688
-2830
-6/44
810)
-6409
-8281
22)49
-1963
-19781
87IJ
-4400
-14329
-11037
-4160
-12487
11607
94
-6389
-897
-10016
-27704
-11082
-2460
-8824
-4434
-1054)
-15109
Account
Payments//
1006 /02 491 -242) 308 )232 6682 -6/18 -19990 323 -2354 -22)5 -3537 -527 -7405
9851
Balance of Payments Yearbook,
-174)
IMF.
-41
-299b*
-128H*
1668*
2 7)9
-10707
-304 7 5
"Standard Presentation" (except where n o t e d ) , various
volumes
* derived from both "Standard Presentation" and "Analytic Presentation"
]_/ 1946-1955. F.A.S. basis; thereafter F.O.B. basis;
2/ includes non-monetary gold
3/ Excludes government transfers
4/ Consists of government, private, and bank long-term capital
5/ Current Account, Including government transfers and Long-Term Capital At<ount
6/ Short-term Capital Account consists of general government, private and bank short-term capital and Errors & Omissions
7/ Official S e t t l e m e n t s Basis - Basic B a l a m e and Short-term Capital Account
Table
li
orfl.i.l H o l d l n x . o.
r „ . A...-.S.
... >• —
I •••.•,. *'•. <•». ' - -•
(In bi 11 ions of SOKsi_
\yfYi
)'?uld reserves
Fund-related assets
Keserve positions
Special
drawing
in the
Fund
1.2
assets
v 6. ,
19. «
reserves
6.5
\.:
16. '
Foreign exchange
liquid
>>'<
1968
'""'
7
,,/.
.9/7
.9/,
.•./*
Soutce: International
1^76
1977
1978
'. ; ;
^
$6.4
^
3 '• »
^
S 6.2
^
3 M.d
^ ,
?,;•./
< IB.l
5 17.2
___>
_ H
„^_,
___ 8^j
H_j
__«____
_•_
6. /
10.8
12. J
l'i-0
15.0
102 .0
1 26.9
lJ/^5
1M).6
206.6
96. 7
201 .2
7 5J
144 .6
158.9
187.0
2)1.9
111.2
1 I 7.0
227. L
8 7.4
\ ». 6
66 0
13. 6
114. '
)5.,6
id9. , 3
)w t
1 ul.4
1)6. 1
I ()'<9
5 6.7
2 ).8
)1 .9
)2 )
45 4
2 9. 7
3S.4
<9.0
36. 2
'"'•I, «„.. so,»P« »• *•••> '•"» "'" ;;;; ,;:: ""• • ':'•': .'«••: •-<•' .;«::» ^ >»>•*
( 1 1 ) at L o n d o n m a r k e t
««"
M.y
,,„.
rights
Subtotal, Fund-related
Total
196)
• >'"
.
;
I/-'
312.6
__„„
;i _,
"•<•
26 4
",-C*
)5. )
prices
Financial
Statistics.
Claims b. Swll/erlind on the himl
s-r£S_K_r_;n-r_s»T_,- _5'S-_£ x . i:™:;::'".-::;- _::'.•:.•_,'--.—.
1973
include official
French claims on th* turopean M o n e t a r y
Cooperation
Fund
•
--
26.2
2 3. 1
Die
0:
Official Holdings of Foreign Exchange, b> T>p« of Claim, End of Y e a n 1970-77 i
(In billions of S D R s )
Official claims on United States*
Official sterling claims or. United K i n g d o m
Offic.al deutsche mark claims on Fed Rep of G e r m a n y
Official French franc claims on France
Othe r official claims on countries denominated in the
debtor's o w n currency
Official foreigr exchange claims arising from s*ap credits
and related assistance
Identified official holdings of Eurocurrencies
Eurodollars
Industrial countries
P n m a r > producing countries
M o r e developed countries
Less developed countries
Western. H< r>..sphrre
Middie Easi
Asiu
1970
1971
1972
1973
1974
1975
1976
1977
23.8
57
46 6
56.7
81
14
628
83
24
1.1
689
64
2.5
1.1
79.:
103.8
1.0
554
65
2.2
1.2
3.2
4.3
09
3.3
5.7
0.8
1.3
0.6
7.3
1.0
08
0.9
1.0
0.9
1.6
1.5
2.7
38
46
07
____
___
04
1.6*
1.3s
1.53
1.2'
5.1
3.4
5.6
7.3
6.5
7.0
7.9
14.7
1.7
3.2
34
9.2
3.6
1.9
20
1.7
3.9
180
3.2
103
4.0
2.3
27
1.3
4.0
3 0
22.8
3.8
27.7
3.7
54
1.6
1.1
11
1.6
2.8
104
1.1
4.8
38 5
1.6
38
1.0
0.6
11
1.1
1.6
5.0
120
3.0
2.8
5.6
340
5S
16.7
19.1
35
2.0
5.9
3.1
237
73
20.6
7.8
2.9
Africa
25.8
20.7
15.6
M e m o r a n d u m nem
Major oil exporting countries
45.6
38.5
580
05
323
21.1
Tola' identified Eurodollars
12.3
04
7.6
5.3
5.8
7.2
Othe r Eurocu~ r encies
45 7
26 4
70.3
09
11 6
21.2
38.0
53.1
Tota' identified holdings of Eurocurrencies
0.9
1.8
2.5
2.1
0"
06
06
06
10
Ident.fiec claims or. I B R D and I D A
7.7
104
7.1
9.3
12 1
6.2
63
Residual *
45 4
75.1
96 1 102 0
126.9
137.5
160 6 201.2
Total officii' holdings of foreigr exchange
Sou-; es / nie'^xzi.onz
._ Fmanaa'
Statistics and Fund staff information and estimates
1 The
foreig- exchange 'ese^ves covered m this tabic are descr.bed in Table 14. footnote 1 Includes the estimated change
in the value of .nolo r.£< ov.mg to the genera realignment of currencies in 1971, the U.S dollar devaluation »n 19"3. and the
uidesp^ead flea ir.c of Currencies since 1974
- C o > r ^ on!. laimb o' countries, including those denominated in the claimant's o * n currency
1
::
Cor-.p':sev he double depos:: arrangement be *eer the Deutsche Bundesbank and the Bank of Italy.
r
* Pa ' of t^:i -es'dual occurs because some m e m h e ' countries do not classify all the foreign exchange claims that they report to
the F u n . I; a ~ includes as\ mmet-ies arising because data or U S and U K currency liabilities are m o r e comprehensive than
data or. offc.al fore.gr exchange as sho*n in 1FS
Table 9
CURRENCY BREAKDOWN OF OFFICIAL FOREIGN EXCHANGE RESERVES
(Ool.a' amounts m millions C U S dollars)
D*c
19"C
19"1
19"2
19"3
19-4
1975
1976
19-"
31
ccw^i'iei
$ 33 356
(100 0.
62H6
(10C0>
76 392
(1000
86 566
(10C0,
106 255
(10C 0
102616
(100 0
115 666
(103 0
160-:3c
(1000.
U S
Qz itrt
$ 2M13
(6\3
4S 19(776
6i.8"9
(810
70 6c'
(79 7;
E5 91!
(80882 669
(806'
92.963
(e0 4.
130 063
(81.2)
Sier rg
$2 986
(9 C i
4 936
(79
5.0*4
(66
4 409
(50,
5 79(54,
3 390
(33)
1.902
(16)
2.335
(V5)
Ga"r>af*
mark*
$
710
(21)
1.917
(3D
3.626
(4.8i
5.870
(66)
6 165
(56j
6 363
(6.2)
8.0?i
(6.9)
11.122
(6.9)
Franeh
Iranct
$ 6
(.0)
109
(.2)
29.
(.4)
469
(.5)
410
(4)
925
(.9)
645
(.6)
527
(3)
r#aar-a
currtncaa
I 1.800
(54)
3.951
(6.4)
5 046
(66)
7.014
(7.9)
7.625
(7 4
8 664
(64)
11.803
(10.2)
15.657
(9.8)
Or*«'
«aae*i
$ 73"
(22^
3 009
(46'
469
(.6
240
(3
169
(.21
40"
(.4)
333
(.3)
432
(.3^
i Co-*:*'" UTipte
7 Cort %[. Tt •* j c' ^ S Traas-^ w : ''•i -ttj*: \z cani - carura bantu ir the late ^a*C i anfi
fianommatM
,r the ; u T j n c T c the -c oa- (fioo.» co^si H o w a v f r • ac mci_flei »T\» amt> w n!. c' I I I M I h.a*C by r»Qi©r»a
ciaf r c *r c * •.he-.evf • 'h#-r cw'ra^C) o' cane-- -^' r r anc a i m i rai'O.a f t " O.a tc <-»por; ng irra^uianitai
N C * £ P,;_»ei f pe-f- •.-•eses •r»o.:at* pa::*vtgei C toiai»
Da: a & T»»> -p' ace \z tc:»i &eca_»e c ro_ia nQ
SDJTE
mia'^ai o'fc Msii'i'y ^ n :
May 8, 1979
FOR IMMEDIATE RELEASE
The Treasury announced that there have been delays in
mailing checks in payment of Treasury bills that matured on
April 26 and May 3 and some slight delays are also expected
in connection with the May 10 maturity. Treasury bill accounts
maintained by commercial banks through the Federal Reserve Banks
are not affected.
A combination of three circumstances contributed to the
situation.
First, the historically high interest rates of recent
months have resulted in a dramatic increase in participation by
small investors in the Treasury's bill system. Tenders have
increased by 379% and daily transactions by 427% since January
1978. This unprecedented volume has strained the facilities
available for servicing the bill accounts. The problem is
complicated by the fact that more than half of the accounts
maintained by Treasury are rolled over at maturity into new
^ssues, at the investors1 option, but in most cases these investors do not submit their reinvestment requests until the
last minute.
Second, in the month of April, the postponement of auctions
because of the failure of the Congress to act in timely fashion
on the debt ceiling legislation made it necessary to compress
five bill auctions into an exceptionally short period. The
abnormal workload created by this congestion caused delays in
the issue of checks.
Third, in late April there was an unanticipated failure
of word-processing equipment used to prepare check schedules»
The situation has been corrected and checks for the May 17
bill maturities are expected to be mailed on schedule.
The Treasury is considering whether any action can be taken
to adjust the matter of interest on the delayed payments.
oOo
FOR IMMEDIATE RELEASE
Thursday, July 19, 1979
CONTACT: Alvin Hattal
202/566-8381
TREASURY ANNOUNCES TERMINATION OF
ANTIDUMPING INVESTIGATION CONCERNING
FRESH WINTER VEGETABLES FROM MEXICO
The Treasury Department announced today that it is
terminating its investigation under the Antidumping Act
of imports of five types of fresh winter vegetables from Mexico.
The investigation was terminated because the petitioners
who had invoked the Act — three groups of vegetable growers
in the State of Florida -- withdrew their complaint. In
withdrawing the complaint, counsel for the Florida industry
stated that the petitioners wished to provide the Government
with an opportunity to negotiate arrangements to avoid market
disrupting imports of produce. Such negotiations are being
planned for August.
Secretary of the Treasury W. Michael Blumenthal stated
that he very much welcomed the withdrawal of the petition.
He said, "It should improve the climate for the talks that
will hopefully provide us with a constructive solution to a
problem that is difficult to deal with under the Antidumping
Act." He noted, however, that the language of the Act does
not exclude agricultural products and that it had been applied
in the last decade to grapes from Canada and eggs from Mexico
and Canada.
The withdrawal is "without prejudice." Thus petitioners
have reserved the right to refile their petition at a later
date. If refiled, Treasury's General Counsel, Robert H. Mundheim,
has agreed to give the petition expedited consideration in
reaching a Tentative Determination.
The proceeding involved tomatoes, peppers, cucumbers,
squash and eggplant, grown primarily in Culiacan, Mexico, and
marketed in the United States from November through April.
Imports of such products are valued at about $200 million
annually, of which roughly 60 percent is accounted for by tomatoes.
o 0 o
B-1736
FOR RELEASE ON DELIVERY
Expected at 2:UU p.m.
July 20, 1979
STATEMENT OF PAUL H. TAYLOR
FISCAL ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON
ENVIRONMENT AND PUBLIC WORKS
Mr. Chairman and Members of the Committee:
I am glad to be here this morning to discuss the Treasury
Department's role under section 9 of the John F. Kennedy
Center Act.
That provision authorized the Center's Board of Trustees
to issue revenue bonds to the Secretary of the Treasury in an
amount not to exceed $20-4 million. The proceeds were to be
used to finance the Center's parking facilities, the bonds
were to be repaid from revenues accruing to the Center, and
interest on the indebtedness was to reflect the cost of
market borrowings by the Treasury. The Act permits deferral
of payment of the interest with the approval of the Secretary
of the Treasury, but stipulates that interest so deferred will
B-1737
- 2 bear interest after June 30, 1972. Deferred interest does
not, however, reduce the borrowing limitation.
The first
bond was issued on July 1, 1968 in the amount of $1.5 million
and carried a maturity date of December 31, 2017. Attachment
A to my statement shows the obligations, their interest rates
and maturity dates.
The bonds provide that principal and interest are to be
paid from parking revenues. However, because these revenues
were insufficient to meet the current interest on the bonds
(partially because a substantial portion was used to repay
a $3.5 million loan from the parking concessioner), the Center's
Board, in December 1968, and annually thereafter, requested and
was granted a deferral of the interest by the Secretary of the
Treasury. Attachment B shows the computation of deferred
interest from December 31, 1968 through December 31, 1978.
In February 1979 the Department granted a further one-year
deferral after the Center indicated an intent to seek legislation to ameliorate their financial problems.
In this
connection, proposed legislation introduced in the 95th
Congress would have provided for an accommodation between
the Center and the Treasury whereby the Board would undertake
to repay, in equal annual installments, the $20.4 million
principal on the bonds and the Secretary would release the
Board from its obligation to pay deferred and future interest
- 3 thereon.
The proposed legislation was not considered, but we
understand there is interest in the Congress to consider other
measures to grant financial relief to the Center.
On December 20, 1977, the Comptroller General transmitted
to the Secretary of the Treasury a report on the financial
operations of the Center. The report pointed out that one of
the Center's largest financial obligations is the $15 million
in interest and deferred interest owed to the Treasury on the
revenue bonds. The report concluded that only the Congress
can determine the "future financial course" of the John F.
Kennedy Center for the Performing Arts.
We concur in that
assessment, recognizing that that determination will require
an accommodation between the Center and the Treasury. We
believe the Center's status as a national memorial and cultural center requires us to view their financial impairment
in a different light than would be the case with respect to
normal business-type operations of the Government. Therefore,
the Department would support the write-off of the Center's
interest obligation to the Treasury. We also believe that a
firm schedule for repayment of the principal should be adopted,
and in that connection we suggest that the Treasury advance
to the Center the necessary funds to pay off the remaining
balance on the concessionaire loan so the the major portion
- 4 of parking revenues can be dedicated to repayment of the
bonds. We also suggest, as a practical
matter, that the
Secretary of the Treasury be appointed to the Center's Board
of Trustees since the Department has a substantial financial
interest in the Center.
That concludes my prepared statement, Mr. Chairman.
will be glad to respond to any questions.
Attachments
0O0
I
Attachment A
John F. Kennedy Center for the Performing Arts
Loans, John F. Kennedy Center, Parking Facilities
Revenue Bonds - 12/31/78
Calendar
Year
Advanced
Accrued
Face
Amount
Interest to December 31, 1978
No . of Days
Interest
From
To
Rate
Bond
No.
Due Date
5-1/8%
2-5
12/31/2017
1968
3,800,000
12/31/77
1 yr
194,750.00
5-1/4%
1-6
12/31/2017
1968
2,900,000
12/31/77
1 yr
152,250.00
5-3/8%
7 & 8
12/31/2017
1968
1,200,000
12/31/77
1 yr
64,500.00
5-3/4%
9 & 10
12/31/2018
1968
2,200,000
12/31/77
1 yr
126,500.00
5-7/8%
11 & 14
12/31/2018
1969
4,300,000
12/31/77
1 yr
252,625.00
15
12/31/2018
1969
1,000,000
12/31/77
1 yr
60,000.00
6-1/4%
16 & 17
12/31/2018
1969
1,300,000
12/31/77
1 yr
81,250.00
6-1/2%
18 & 19
12/31/2018
1969
1,900,000
12/31/77
1 yr
123,500.00
12/31/2018
12/31/2019
1969
1970
800,000
1,000,000
1,800,000
12/31/77
12/31/77
1 yr
1 yr
6%
6-5/8%
20
21
GRAND TOTAL
20,400,000
119,250.00
1,174,62S00
^i o mi
r.
MMineuy
— ueierreci
incereisL
Revenue Bonds - 12/31/78
Year
Deferred
12/31/68
12/31/69
12/31/70
12/31/71
12/31/72
12/31/73
12/31/74
12/31/75
12/31/76
L2/J1/77
Interest Deferred
114,176.57
775,852.06
1,152,844.18
1,174,625.00
1,174,625.00
1,174,625.00
1,174,625.00
1,174,625.00
1,174,625.00
1,174,625.00
10,265,247.81
Interest on Deferred Interest Deferred 12/31/72
II
II
M
n
ti
12/31/73
n
II
II
n
n
12/31/74
H
II
n
M
n
12/31/75
H
M
•i
M
n
12/31/76
it
ii
n
•1
M
12/31/77
Deferred
Rate
5-1/2%
7-1/8%
6-5/8%
5-7/8%
6-1/8%
6-7/8%
7-3/4%
7-1/2%
6-1/8%
7%
6-1/8%
6-7/8%
7-3/4%
7-1/2%
6-1/8%
7%
Interest on Deferred
Interest
Int. on Deferred
Interest Deferred
Total Int.
Deferred
6,279.71
55,279.46
76,375.93
69,009.22
71,945.78
80,755.47
91,033.43
88,096.88
71,945.78
82,223.75
692,945.41
103,472.16
285,227.76
385,592.64
506,509.50
632,594.59
743,286.79
2,656,683.44
6,337.66
19,609.41
29,883.43
37,988.21
38,746.42
52,030.08
184,595.21
877,540.62
SUMMARY
Interest
Deferred
Interest
Interest
12/31/78
Interest to date
on Deferred Interest
on Deferred Interest Deferred . . .
Principal owed 20,400,000.00
Total Interest owed
Total owed 12/31/78 35,374,096.87
1,174,625.00
10,265,247.81
3,349,628.85
184,595.21
14,974,096.87
14,974,096.87
>
rt
rt
O
_r
0
n>
t#
3
FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
July 20, 1979
STATEMENT OF DANIEL I. HALPERIN
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TAX POLICY
ON THE TAX TREATMENT OF FOREIGN CONVENTION EXPENSES
BEFORE THE
SUBCOMMITTEE ON TOURISM AND SUGAR
OF THE SENATE FINANCE COMMITTEE
JULY 20, 1979
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before this Subcommittee to
discuss the deductibility of foreign convention expenses.
After commenting on the three bills before the Subcommittee,
I shall describe the Treasury's suggestion for change in this
area. Of the three bills being considered, the Treasury
Department opposes S. 589 and S. 749. If the Treasury
proposal were to be adopted, S. 940 would be unnecessary; if
the present system were to be retained, however, we suggest
modifications to S. 940.
Present Law
Before I speak about legislative change, let me briefly
review the law in this area.
A convention is deemed related to trade or business if,
considering all the facts and circumstances, attendance at
the convention benefits or advances the taxpayer's trade or
business. If this test -- which is qualitative and not
quantitative — is met, then the cost of travel for the
primary purpose of attending a convention is generally
deductible regardless of the purely personal benefits a
B-1738
-2taxpayer may derive from the convention trip. The Internal
Revenue Code provision which allows a deduction for ordinary
and necessary business expenses (section 162) denies a
deduction only if the primary purpose of the trip is
personal.*
Beginning in 1964, Congress imposed a further, although
limited, restriction on the deductibility of expenses for
foreign trips, including conventions (section 274(c)). If a
foreign trip lasts longer than one week and at least twentyfive percent of the taxpayer's time on the trip is devoted to
personal pursuits, only a portion of travel costs are
deductible. The part allocated to personal activities,
generally in proportion to the number of days spent on
business or pleasure, is disallowed. But if the foreign trip
lasts one week or less, or less than twenty-five percent of
the time is spent on nonbusiness activities, the "primary
purpose" test applies and expenses are deductible in full.
In 1976 Congress recognized the growing practice among
professional, business and trade organizations to sponsor
cruises, trips and conventions during which only a small
portion of time was devoted to business activity. Committee
reports noted that promotional material often highlighted the
deductibility of expenses incurred in attending a foreign
convention and, in some cases, described the meeting in such
terms as a "tax-paid vacation" in a "glorious" location.
Committee reports also noted that some organizations
advertised that they would find a convention for the taxpayer
to attend in any part of the world at any given time of the
year.
In short, many taxpayers were attending foreign
conventions primarily to take advantage of opportunities for
sightseeing and recreation. However, since it was extremely
difficult to distinguish between personal and business
motives in taking such trips, taxpayers were able to claim a
tax deduction. As a result, deductions for attending foreign
conventions had become a source of tax abuse. In 1976,
Congress responded to this problem with the provision under
consideration today (section 274(h)).
*
Regardless of the primary purpose of the trip, the cost of
meals and lodging at the convention site are deductible if
they are attributable to a day spent on business.
3-
Under this provision, deductions can be taken for no
more than two conventions per year. For these two conventions, transportation expenses to and fro, not exceeding
coach or economy air fare, are fully deductible if at least
one-half of the days spent at the convention are business
related; otherwise transportation expense is pro-rated.
Subsistence expenses, limited to the Federal per diem for the
particular location, are deductible for each day in which
there are at least six hours of business activities if the
taxpayer attends two-thirds of the scheduled activities. One
half day of subsistence expenses is allowed if there are at
least three hours of business activities and the taxpayer
attended two-thirds of the activities.
These provisions are complex but at the same time
continue to allow two deductible foreign vacations annually.
We sympathize with the desire to mitigate recordkeeping and
other burdens on legitimate business activities. But this
does not require that we jettison any restrictions on foreign
conventions. Rather, it is possible to mitigate the burdens
on business while at the same time to deal more effectively
with the abuse which led to the 1976 legislation.
We have a proposal to accomplish this goal. First,
however, I shall comment on the three bills before the
Subcommittee.
S. 589
S. 589 would exempt expenses incurred in attending
conventions in Canada and Mexico from the limitations of
section 274(h). There are several reasons why we oppose this
legislation.
As we have stated, the purpose of the 1976 change is to
prevent tax subsidized foreign vacations. Controlling abuse
by attempting to determine the primary purpose of the trip on
a case-by-case basis has proved ineffective to combat conventions promoted for their vacation features. S. 589 would
apply the primary purpose test, which is known to have been
subverted in the past, to conventions in Canada and Mexico.
The issue is not whether American tourism in foreign
countries should be encouraged or discouraged. The issue
rather is whether American tourism in foreign countries
snould directly increase the tax burden of the average
American taxpayer. From the point of view of the American
-4taxpayer who would, in the end, underwrite these Canadian or
Mexican conventions facilitated by S. 589, a vacation that is
taken in the guise of a convention in Canada or Mexico is not
different than a vacation taken in any other foreign country.
Furthermore, the State Department consistently opposes
legislation that discriminates among foreign countries. An
additional point pertains specifically to conventions held in
Canada. For some time now the Treasury Department has been
involved in active negotiations with Canadian representatives
with a view to modifying our existing income tax treaty,
which dates from 1942. Most issues have been satisfactorily
resolved, and there are only a few questions that remain,
although these are admittedly quite important. Two of the
remaining issues are the treatment of foreign conventions in
Canada under United States tax laws; and the treatment of
expenses for advertising on United States television stations
under Canadian tax laws. We do not think it would be
appropriate for the United States unilaterally to extend
foreign convention benefits to Canada while negotiations are
in process and the United States is seeking important tax
concessions from Canada.
S. 749
S. 749 would repeal section 274(h) as enacted by the
Tax Reform Act of 1976. We oppose S. 749.
As I have said, the provision was designed to curb tax
deductions for foreign vacations. The law prior to 1976
created a serious enforcement problem for the Internal
Revenue Service, and was perceived by many taxpayers as a tax
loophole. To repeal section 274(h) and to substitute nothing
in its place would be tantamount to approving the use of tax
money to subsidize foreign vacations. However, we are not
opposed to an overhaul of section 274(h), and I shall explain
our suggestion shortly.
S. 940
A taxpayer who claims a deduction for foreign convention
expense must attach to his return a written statement
relating to attendance at the convention, which must be
signed by an officer of the organization sponsoring the
convention. (Section 274(h)(7)(B).) S. 940 would eliminate
this requirement.
-5-
At present convention expenses are deductible only if
the individual actually attends convention activities. We
believe enforcement of this provision requires that the
sponsoring organization verify attendence. On this basis, we
oppose S. 940.
However, we would suggest two changes in the present
rules which we believe will substantially reduce the compliance burden. First, the statement of the sponsoring
organization must now be signed by an officer of the
organization. The Internal Revenue Code uses the word
"signed" literally; under the present wording of the statute,
it is likely that signatory authority cannot be delegated and
facsimile signatures cannot be used. To require an officer
of any large sponsoring organization to sign personally
hundreds or thousands of forms is too burdensome. We would
support the elimination of the signature requirement.
Second, when an employer claims a deduction, the
employer must attach to its return a statement from the
sponsoring organization for each convention attended by each
employee, as well as written statements signed by the
employees themselves. In the case of an employer with a
large number of employees, this requirement makes the
employer's tax return unwieldly, to say the least. We would
support a proposal that would allow employers with large
numbers of employees attending foreign conventions to submit
the information in summary form, such as a computer printout, with their returns, and keep the original statements in
their own files to substantiate the deductions on audit.
Modifying both the signature requirement and the
requirement of attachments to the return will lessen the
compliance burden without weakening enforcement of the
deductibility restrictions.
Treasury Proposal
to
In our view, the present provisions are inadequate
deal with the primary problem, namely, selection of the to
foreign site because of vacation motives without regard its a
business considerations. Even though a convention benef ation
taxpayer's business to some degree, there is no justific reign
for a tax deduction where the convention is held at a fo In
site having nothing to do with the taxpayer's business.
such cases the personal benefit predominates.
-6-
The mechanical tests of present law do not solve the
problem. For those taxpayers with legitimate business
concerns abroad, two conventions per year may well be too
few. For those taxpayers with no international ties, two
conventions per year are obviously two too many. Yet in both
cases, present law allows deductions for the same number of
conventions.
As a result, taxpayers who do business abroad and who
commonly go to more than two foreign conventions or similar
meetings per year have been faced with the strict disallowance rule. On the other hand, some taxpayers may still take
two foreign vacations a year at public expense. Opportunities for such vacations are not hard to find. For example,
the California Trial Lawyers Association sponsored seminars
all over the world for its members in 1977. The promotional
booklet advertises as follows:
Decide where you would like to go this year:
Rome. The Alps. The Holy Land. Paris and London.
The Orient. Cruise the Rhine River or.the
Mediterranean. Visit the islands in the Caribbean.
Delight in the art treasures in Florence.
The booklet also noted that these trips have been "designed
to qualify under the 1976 Tax Reform Act as deductible
foreign seminars." This type of advertising breeds
disrespect for the tax system.
In order to solve this problem, we suggest a more
objective test to determine whether attendance at a foreign
convention is primarily for business purposes. The test is
identical to that adopted by the Committee on Ways and Means
in H.R. 9281, as reported to the House last year. It focuses
on the reason why a foreign site is chosen for a convention.
The expenses of attending a foreign convention, seminar or
similar meeting would not be deductible unless it is more
reasonable to hold the convention outside the United States
and its possessions than within them. The factors to be
considered in determining reasonableness of the convention
site are: the purpose and activities of the convention; the
purpose and activities of the sponsoring organization; the
residence of active members of the sponsoring organization;
and the places at which other meetings of the sponsoring
organization have been held.
-7-
For example, if a significant portion of an organization's members resided in Canada, it could be considered more
reasonable for the organization to hold a convention in
Canada than in the United States. Similary, if the members
of an organization composed of individuals engaged in a
certain type of business regularly conducted a portion of
their business in Mexico, it could be considered more
reasonable for the organization to hold a convention in
Mexico than in the United States.
The reasonableness test would supplement the primary
business purpose test now used for business trips under
present law. If it is not more reasonable to hold a foreign
convention outside the United States and its possessions than
within them, then all convention activities will be regarded
as nonbusiness activities for which deductions would not be
allowed.
If the foreign site meets the reasonableness test, the
convention will be treated as a foreign trip, and must be
related primarily to the taxpayer's trade or business. In
addition, as with other business trips, the special restrictions on foreign travel will apply where the convention trip
takes more than one week and at least one-quarter of the trip
is spent on nonbusiness activities.
This approach, we feel, will go a long way toward
distinguishing between true foreign vacations and bona fide
business meetings that advance American business abroad. We
regard this proposal as a complete substitute for the
mechanical rules of present law. Accordingly, we propose to
eliminate the annual maximum of two conventions and the
recordkeeping and attendance rules.
Our proposal is aimed at the difficulty under present
law in determining whether or not a foreign convention is
primarily for a business purpose.
Once the characterization
of deductible business activities and nondeductible personal
activities has been determined, the mechanics of allocating
expense between those activities should be the same for
conventions as for other foreign business trips. Accordingly, we do not suggest any special limits on the deductibility of convention transportation or subsistence expenses.
If a convention passes the proposed foreign site test, it
will be treated as a foreign trip. This approach will also
tend to eliminate the troubling questions of whether a
meeting is similar to a convention and which limits to apply
when a trip has several phases, including attendance at a
foreign convention.
-8-
Conclusion
I repeat that the evil to which the 1976 change was
addressed was the tax subsidized foreign vacation that had no
relation to on-going business ventures abroad. Our proposal
meets this problem, while at the same time removing needless
and burdensome restrictions on American business efforts in
foreign countries.
For Release Upon Delivery
Expected at 10:00 A.M.
STATEMENT OF
THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
July 20, 1979
Mr. Chairman and members of this distinguished
Committee:
Cn May 9, Secretary Blumenthal appeared before
this Committee to review our severe energy problems
and to discuss with you the President's program to
address those problems.
The President's initial step in his effort to
reduce our crippling reliance on imported crude oil
was to direct the phasing out of price controls on
domestic crude oil. This was begun on June 1. By
October 1, 1981, all domestic oil will be decontrolled. This will end the subsidy to consume oil,
thereby encouraging conservation, and will allow
market forces to provide incentives for expansion of
domestic oil production and for development of
alternative energy sources.
The next step recommended by the President was
the imposition of a windfall profits tax on domestic
crude oil production and the creation of an Energy
Security Trust Fund to utilize the tax revenues
generated by the windfall profits tax and increased
income tax collections attributable to decontrol.
This Committee, under the Chairman's guidance,
acted upon the Administration's proposal and produced
a strong, well-balanced windfall profits tax. The
House generally accepted the Committee's basic
approach but did make a few significant changes.
Although Secretary Blumenthal recommended to the
Finance Committee that the House bill be modified in
certain respects, the House has adopted a sound
approach tc the problem of windfall profits and has
assured us of increased domestic production in the
future as well as adequate revenues to finance the
Energy Security Trust Fund.
B-1739
-2-
I would like briefly to update trie energy situation as it has developed since Secretary Blumenthal
testified before you in May. The events in that
interim period dramatize in stark terms the need for
us to act quickly to implement the President's
proposals. Following this review, Principal Deputy
Assistant Secretary Goldman of the Department of
Energy will discuss the world oil problem as it
relates to the President's program. W. Bowman Cutter,
Executive Associate Director, Office of Management and
Budget, will discuss the major elements of the
President's program including allocations of trust
fund monies. Assistant Secretary Lubick will deal
with the tax proposals contained in the President's
program as well as special tax provisions designed to
discourage non-energy acquisitions by energy
companies.
By the beginning of June, 1979, world oil prices
(outside of the spot market) had reached an average of
over $17 per barrel, an increase of more than 38
percent from December, 1978. The effects of the
cutoff in Iranian production, gasoline shortages and
rising prices for refined products, were rippling
through the economy.
The June OPEC price increase strained our domestic energy situation further despite the moderation
shown by seme countries and despite Saudi Arabia's
decision to increase temporarily its level of
production. CPEC's price of $18.00 for Saudi marker
crude was coupled with quality and location
differentials of up to $5.50 and allowances for
surcharges. We now calculate that these changes will
translate into an average GPLC oil price of between
$20 and $21, an increase of about 60 percent since
December, 1973.
The oil price increases this year, when compared
to the schedule announced by OPEC last December,
increase the likelihood of a recession. The effect of
increases made since December, 1978 will be to cut 1
percent from cur growth rate in 1979 and another 1
percent in 1930. Thus, by the end of 1980 the level
of GNP will be 2 percent below what would otherwise
have occurred. The rate of inflation will rise by 1
percent in 1979 and another 1 percent in 1930 above
what it would have been. Unemployment will increase
-3by 250,000 by the end of 1979 and another 550,000 by
1980, for a total of 800,000 beyond what it otherwise
would be.
In March, 1979 we agreed with our allies in the
International Energy Agency to reduce U.S. imports (by
the fourth quarter of 1979) by up to 1 million barrels
a day below levels expected prior to the 1979 OPEC
price increases. At the Tokyo Summit the President
pressed for and won a more extensive commitment. In
addition to limits on oil imports in 1979 and 1980,
specific goals for each country were set for 1985.
The U.S. goal for 1985 was to be 8.5 million barrels a
day.
The President's Goal for 1990
Last Sunday, the President announced how we will
achieve this goal. He pledged that this nation will
never use more foreign oil than we did in 1977 — 8.5
million barrels a day. He set as our goal cutting
imported oil dependence by one-half by the end of the
next decade -- a saving of over 4.5 million barrels
per day. This means that an increasing portion of our
energy needs must be met from our own production.
This is an ambitious goal. It will require
sacrifice. It will be expensive. The windfall
profits tax will be needed to pay for it. Without tax
revenues the program cannot be financed without
incurr ing*'ser ious deficits.
I will now turn to my associates to describe the
details of the President's program.
For Release Upon Delivery
Expected at 10:00 a.m.
July 20, 1979
,
STATEMENT OF
THE HONORABLE DONALD C. LUBICK
ASSISTANT SECRETARY (TAX POLICY)
BEFORE THE
COMMITTEE ON WAYS AND MEANS
July 20, 1979
Mr. Chairman and members of the Committee:
As part of the President's program to reduce dependence
on imported oil, he has proposed a number of tax incentives
to encourage development and use of alternative energy
resources. As the Administration has indicated, these tax
incentives should be funded by a charge to the Energy Trust
Fund that is to be established under H. R. 3919.
Tax Credit Initiatives
The President has proposed major new tax solar
initiatives as part of his program to generate 20 percent of
the nation's energy requirements by the year 2000 by the use
of solar energy. One element of his solar program is a Solar
Bank. In additon to the Solar Bank, the President has
proposed major new tax credits for solar energy. These
credits will provide a significant stimulus for the use of
solar energy and reduce our reliance on imported oil for
heating and transportation.
-2In addition to the solar energy credits, production
credits for gasohol and the development of oil shale and
unconventional natural gas are proposed.
Tax Credit for Passive Solar Residential Construction
Current decisions regarding energy efficiency in the
design of new buildings will affect energy demands for
decades. These credits will provide incentives to builders
to design and build structures which are estimated to save
energy at a level significantly above the Federal Building
Energy Performance Standard (BEPS) and therefore conserve our
energy for many years to come.
Builders of residences with up to four family units
would be eligible for a passive solar tax credit. Prior to
January 1, 1983, 20 percent of the cost of passive solar
property (meeting specified standards), up to a maximum of
$2,000 per unit would be allowed as a credit. After December
31, 1982, and through December 31, 1985, the full $2,000
credit would be available to builders of new residences if
the unit requires 50 percent or less energy than specified in
the Federal Building Energy Performance Standards (BEPS).
The Department of Energy will promulgate BEPS for residential
construction prior to January 1, 1983. These standards will
be established on a regional basis, and states will be
requested to conform housing codes to BEPS.
Treasury will issue regulations setting out the
procedures under which a design must be certified as meeting
or exceeding the standard for the credit. If a state housing
code conforms to BEPS, a certification by an architect,
engineer or other person designated by the state that the
design qualifies will suffice. If the state housing code
does not conform to BEPS, the Treasury regulations will
specify a method of certification.
Tax Credit for Commercial Passive Solar Construction
In the interest of long-range conservation builders of
commercial structures will be provided with a tax credit of
$20 per million Btu estimated design savings per annum for
thermal performance at a specified level above the baseline,
up to a maximum of $10,000 per building.
The Department of Energy will, pursuant to the Energy
Conservation and Production Act, promulgate BEPS, which will
be expressed in terms of Btu's per square foot per year
needed to heat and cool a structure and to provide hot water.
-3-
Tax Credit for Solar Process Heat
The generation of process heat for industrial and
agricultural applications, a significant portion of which is
provided by oil and natural gas, now accounts for about 25
percent of our energy demands. Use of solar to generate
energy for process heat would significantly reduce our
dependence on imports of foreign oil.
Under present law, a 10 percent refundable energy
investment tax credit is available for solar property that is
used to generate electricity or to heat or cool (or to
provide hot water for) a structure. Solar equipment used in
the production of process heat does not qualify.
Under the President's proposal, solar thermal energy
property used to produce process heat would be eligible for
an energy tax credit of 15 percent, effective through
December 31, 1989.
Tax Credit for Woodburning Stoves
The nation's wood resources are very large and more than
sufficient to allow a significant increase in the present use
of wood for home heating. In order to encourage use of these
resources, and reduce the amount of fossil fuel burned to
heat homes, the cost of a high efficiency woodburning stove
installed in a taxpayer's principal residence would be
included in the definition of qualified expenditurre for
purposes of the residential energy credit under section 44C
of the Internal Revenue Code. Unlike other qualifying
expenditures, however, a woodburning stove would qualify even
if installed in a new residence.
All of the provisions of section 44C would be applicable, except that the woodburning stove credit would expire
on December 31, 1982. The credit is equal to 15 percent of
the cost of the stove, but not to exceed $2000, or a maximum
credit of $300.
Excise Tax Exemption for Gasohol
In addition to these solar tax credits, the President
also has proposed to make permanent the current exemption
from the 4 cents per gallon federal excise tax on gasoline
allowed any gasoline mixture with at least 10 percent
alcohol. The exemption is scheduled to expire on October 1,
1984. Since enactment of the exemption in 1978, gasohol
-4sales have risen rapidly—from nearly zero a year ago to a
rate exceeding 7 million gallons a year in February 1979.
However only a few applications to build or expand commercial
production facilities for gasohol are now pending. Permanent
extension of the exemption could significantly increase the
incentive for production of this fuel by providing the
assurance of continued demand for the product that new
investors need. We expect that economies of scale will help
reduce the cost of producing gasohol in the future.
Shale Oil Tax Credit
Recoverable shale oil reserves in the Western United
States have been estimated from 400 to 700 billion barrels;
several times the size of Saudia Arabia's proven reserves.
It is technically possible today to produce shale oil in
large quantities. However it is not yet a financially viable
proposition, although the expected cost of producing shale
oil, $25 to $35 a barrel, indicates that it will be the first
synthetic fuel to compete economically with imported oil.
In addition to including oil shale within the mandate of
the Energy Security Corporation, the President has proposed a
$3 tax credit for each barrel of shale oil produced. The
credit would begin to phase out when the world oil price (or
reference price) adjusted for inflation, reaches $22 a barrel
and would terminate when the adjusted price exceeds $27.56 a
barrel. It is expected that many companies need only the
encouragement provided by this tax credit to begin the
construction and operation of major oil shale production
facilities. Oil shale projects receiving any assistance from
the Energy Security Corporation would not be eligible for the
oil shale tax credit.
A capital facility must be placed in service by December
31, 1993 for its production to be eligible for the tax
credit. In addition, on-site access must be allowed to the
facility for the purpose of environmental testing, to ensure
that shale oil will be developed in an environmentally
acceptable manner.
Because the credit is not taxable, the economic subsidy
provided by the credit to corporations paying tax at the top
corporate marginal rate of 46 percent is the equivalent of an
additional $5.56 added to the sale price of shale oil. To
reflect this fact the subsidy will be phased out as the
adjusted price of oil exceeds $22, by reducing the subsidy by
54 percent of the amount by which the reference price exceeds
$22.
-5-
Unconventional Natural Gas Tax Credit
Extremely large potential gas resources exist in the
United States, in unconventional formations such as tight
sands, Devonian shale, geopressured methane and coal seams.
In addition to the mandate of the Energy Security Corporation to provide assistance for development of these
resources and to initiatives to decontrol the price of this
fuel, the President has proposed a tax credit for unconventional gas production. The tax credit will total $.50 per
mcf of production. The tax credit will begin to phase out
when the world oil price, adjusted for inflation, is equivalent to $28 per barrel and will phase out completely when
the world price, adjusted for inflation, is $33.56 per
barrel. As with the shale oil credit, the conventional gas
producers receiving assistance from the Energy Security
Corporation would not be eligible for the $.50 mcf tax
credit.
Tax Provisions Designed to Discourage Nonenergy Acquisitions
The Committee has expressed an interest in exploring the
use of tax provisions as a means of discouraging nonenergy
related acquisitions by major oil companies. At least one
bill, introduced by Mr. Gephardt (H.R. 4769), is before this
Committee.
Mr. Gephardt's bill would impose an additional windfall
profits tax on certain major oil producers that acquire,
directly or indirectly, a significant interest in any
corporation primarily engaged in an "unrelated" trade or
business.
This proposal seems to arise from the following
concerns. First, it is argued that the sheer size of certain
oil companies and their apparent economic dominance call for
measures to restrain their expansion beyond the energy
sector. Second, these companies will have substantial
increases in cash flow as a result of oil decontrol. Third,
these companies will be unable or unwilling to invest
increased oil revenues in energy development, and will seek
to expand into nonenergy sectors.
With regard to the size of these companies and their
dominance in the energy sector, existing anti-trust laws
generally provide protection against anti-competitive
practices. Two agencies, the Department of Justice and the
-6Federal Trade Commission, have the expertise to administer
the anti-trust laws effectively. If the existing anti-trust
laws do not adequately restrict oil companies from engaging
in monopolistic practices, the Congress can amend these laws
to achieve the desired policy.
The concern expressed that higher revenues from
decontrol will provide oil companies with funds for
acquisitions has already been appropriately addressed by this
committee by approving a windfall profits tax on oil company
revenues.
Thus, the objectives sought by Mr. Gephardt's bill and
similar proposals may be more directly achieved. We would
much prefer the direct approaches — the windfall profits tax
and the anti-trust laws — to further complications of the
tax laws.
Finally, the objective of ensuring oil company
investments in energy-related activities may be directly
realized through outright bans or other limitations. This
direct route is taken by a bill recently introduced by
Senators Kennedy and Metzenbaum. The Administration supports
this approach.
0O0
FOR IMMEDIATE RELEASE
EXPECTED AT 10:00 A.M., EDT
FRIDAY, JULY 20, 1979
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
INFLATION TASK FORCE
BUDGET COMMITTEE
HOUSE OF REPRESENTATIVES
INFLATION AND THE EXTERNAL ECONOMIC
POSITION OF THE UNITED STATES
THE ISSUE
It is now widely recognized that the United States has
become part of an integrated world economy. One of every
eight U.S. manufacturing jobs produces for the export market.
One of every three acres of U.S.' farm land produces to sell
abroad. One of every three dollars of U.S. corporate profits
derives from the international activities of U.S. firms. We
depend on the rest of the world for oil and a wide range of
other key raw materials.
There is less recognition, however, of the intimate
relationship between external events and our domestic price
level. To be sure, everyone understands the inflationary
impact of OPEC price increases. This particular
B-1740
- 2problem must be countered by a wide range of initiatives in
the energy area itself, as announced by the President earlier
this week and already adopted during the past few years.
But the relationship between internal and external
events has a much more pervasive impact on U.S. inflation.
When U.S. inflation accelerates, relative to inflation
in other countries, our international competitive position
declines. Exports lag and imports rise, and our trade balance
deteriorates. Every one percent increase in relative U.S.
inflation produces a deterioration of about $2 billion in the
U.S. trade balance. Sooner or later, the exchange rate of
the dollar will weaken as a result.
This is only the beginning of the story, however. Such
a weakening of the dollar raises the cost of our imports,
and intensifies foreign demand for U.S. exports. Indeed,
this is its purpose — because both reactions, over time,
will if supported by proper domestic policies improve the
trade balance and restore our original competitive position.
In the short run, however, both effects of a weaker
dollar add further to domestic inflationary pressures.
Unless these are promptly and effectively contained by
domestic economic policy, this additional inflation will
produce a further weakening of the dollar which will
produce more inflation, etc.
- 3 The result is what economists call the "vicious circle" —
an inflation/depreciation spiral which becomes increasingly
critical to any country as that country becomes more deeply
enmeshed in the world economy. For the United States, we
estimate as a rule of thumb that every depreciation of one
percentage point in the exchange rate of the dollar ultimately
adds, directly and indirectly, 0.1-0.15 percentage points to
U.S. inflation.
There is, of course, a "virtuous circle" diametrically
opposed to the "vicious circle." Countries with low inflation
rates experience an appreciation of their exchange rates.
This in turn cheapens their imports and dampens demand for
their exports. Both effects further reduce inflationary
pressures in the country. This enhances their competitive
position, lending to further appreciation of their exchange
rates, etc.
Actual developments never fit economic theory perfectly,
but one can readily identify particular countries with these
stylized scenerios. Germany is the prototypical case of the
"virtuous circle". Britain, before North Sea oil, was
illustrative of .the "vicious circle". Many other countries
range toward one or the other end of the spectrum.
The Policy Implications
The policy lessons for the United States are clear:
— there is an external, as well as a purely
internal, reason to adopt and maintain an
- 4 effective fight against inflation because
renewed weakness of the dollar will further
compound domestic inflation;
—
it is essential to attack the external
situation directly, to break into the
"vicious circle" at that juncture as well
as fighting its internal causes.
I will not address the internal policy aspect, except
reiterate the essentiality of maintaining the fight against
inflation to a successful conclusion.
I. will stress, however, the "purely domestic" merits
of achieving and maintaining external balance and thereby
braking inflation from the outside.
The dollar
defense program of last November 1 was motivated largely by
just such a concern, and was eminently successful in
strengthening and stabilizing the dollar.
To achieve this
goal on an ongoing basis, several steps are necessary:
—
a sharp reduction in the level of oil imports;
—
a sustained and effective commitment to increasing
exports by both the U.S. Government and the private
sector;
—
adequate economic growth, and openness to imports,
in our major markets abroad.
- 5 The Administration has adopted, and is implementing,
major policy steps in each of these areas. They are an
essential component of the battle against domestic inflation.
This link needs much greater recognition in the Congress and
the American public, so that it will gain the support
commensurate with the high stakes involved.
Recent Developments
Fortunately, we have achieved a number of recent
successes in our effort to combat domestic inflation through
external devices. The Multilateral Trade Negotiations (MTN)
have been concluded successfully, enabling us to reduce our
import barriers on a fully reciprocal basis with other
countries. We have negotiated price-stabilizing commodity
agreements for sugar and natural rubber, and are seeking
to revise existing agreements for tin and cocoa, in ways
that would contribute more to global price stability.
Most important, however, is the dramatic improvement
in the U.S. trade and current account balance:
During the fourth quarter of 1977 and first
quarter of 1978, our trade in goods and services
(the current account) was in deficit at an annual
rate of $24 billion;
During the second and third quarters of 1978,
the deficit was cut in half to an annual rate of
about $13 billion;
- 6— The deficit was nearly erased in the fourth
quarter of 1978, and moved into surplus in the
first quarter of this year.
For the full year 1979, we expect the current account
deficit to fall to $4-5 billion from the $14 billion recorded
in 1978. In 1980, we expect a small surplus. (A recent
forecast to the contrary by the OECD, which failed to take
into account the midyear revisions in our domestic economic
outlook and the recent sharp rise in our earnings on services,
is simply wrong.)
Looking at trade alone, our most recent projections —
made after the latest OPEC price increase — suggest that
the deficit will be reduced by about $6 billion during
1979 from last year's record $34 billion deficit. This
improvement takes place at a time when our oil import bill
will rise by an estimated $16 billion. Thus, the reduction
represents an improvement in our trade balance — excluding
oil -- of something like $22 billion. That is an impressive
gain.
Even more impressive, we believe our trade balance,
excluding oil, will by the fourth quarter of 1979 have
improved by $41 billion (annual rate) from its $5 billion
(annual rate) deficit of the first quarter of 1978. In
eight quarters, this represents a very substantial gain.
- 7 The gain comes from both sides of the trade account —
a marked slowing of the growth of imports and a quickening
of exports.
oil —
We estimate that import volumes —
excluding
will fall some 2 percent between the first quarter
of 1978 and the end of 1979.
On the other hand,
non-agricultural export volumes are projected to rise by 28
percent during the same period.
Both the spectacular growth of exports and the slowing
of imports are largely the result of improvement in our
competitive position over the past few years.
Exports
have risen particularly sharply over the past 12 months.
During the March-May period, the volume of U.S. exports
of non-agricultural products was roughly 15 percent higher
than a year earlier.
This strong growth in export volumes
took place while world trade grew an estimated 5 percent.
Clearly, U.S. products are gaining market share.
On a volume
basis, the U.S. share of world trade in 1978 rose to the
highest level in three years and was higher than in 1971-72.
Conclusion
Recent events thus suggest that we could be on the path
toward breaking the "vicious circle" of the recent past,
which has plagued U.S. efforts to both check inflation at
home and restore equilibrium abroad.
- 8 However, full achievement of such an outcome will require
sustained attention to all of the policy efforts enumerated
above: fighting inflation at home, defending the dollar
abroad, cutting energy imports, expanding exports.
Greater public awareness of the critical link between the
external and internal issues is a necessary prerequisite for
the Government to maintain such a focus. I applaud the
efforts of this Task Force to help create such awareness.
Growth of U.S. Exports and Imports
(B/P-basis; % change, SAAR)
79:Q1
from 78:Q1
March-May 1979
from year earlier
VOLUME:
Non-Agricultural Exports
Agricultural Exports
23
4
15
- 6
1
4
2
5
Non-Agricultural Exports
Agricultural Exports
13
13
13
10
Non-Petroleum Imports
Petroleum Imports
10
5
7
17
Non-Agricultural Exports
Agricultural Exports
39
17
30
4
Non-Petroleum Imports
Petroleum Imports
12
10
9
23
Non-Petroleum Imports
Petroleum Imports
UNIT VALUE:
VALUE:
Treasury:Office of
Balance of Payments
7/19/79
VOLUME OF U.S. NON-AGRICULTURAL EXPORTS
Billions of
1967 $
4.8
4.6
4.4
4.2
4.0
Mar.-May average
represents
1 5 % increase
from year earlier
3.8
3-Month Moving
Average
Auorano
^
3.6
i
•*-
¥
3.4
J
A
S O
1977
N
D J
F
M
A M
J J
1978
A
S
O
N
CYKO
D J F M
A M J
1979
Treasury: Office of
Balance of Payments
7/5/79
$Bil. per month
U.S. NON-AGRICULTURAL EXPORTS*
12
11
.»••••»
•
10
^
Monthly
A
Mar .-May average
represents
3 0 % increase
from year earlier
V
3-Month Moving
Average
8
••••
J
^«.«"»"7
J A S O N
1977
D
J F M A M J
I I L
J A S O N D
1978
J F M A M J
1979
*B/P basis; seasonally adjusted
Treasury: Office of
Balance of Payments
7/5/79
Index 1967=100
UNIT VALUE INDICES OF
U.S. NON-AGRICULTURAL EXPORTS
270260-
250
240 230
Monthly
,,••••
/
220-
^
S"":.
3-Month Moving
Average
Mar.-May average
represents
1 3 % increase
from year earlier
210200
J
A
S O
1977
N
j* >
D
-
'•"•")
J
F
M
A
M
J I L
J J A S
1978
O
N
D
J
F
M A M
1979
iTreasury. Office of
Balance of Payments
7/5/79
VOLUME OF U.S. NON-PETROLEUM IMPORTS
Billions of
1967$
4.8
4.6
Monthly
4.4
3-Month Moving *'**
4.2
4.0
Mar.-May average
represents
2 % increase
from year earlier
3.8
3.6
3.4
J_l
A
I L
J
S O N
1977
D J
J
I I L
F M
A
M
I I L
J J A
1978
S O
N
D
I I I I
J F M A M
1979
* B / P basis; seasonally adjusted
Traasury: Office of
Balance of Payments
7/5/79
U.S. NON-PETROLEUM IMPORTS
$Bil. per month
J
A
S O
1977
N
D J
M A M J
J
1978
A S O N
D J
F M A
1979
M
Treasury: Office of
Balance of Payments
7/5/79
UNIT VALUE INDICES OF
U.S. NON-PETROLEUM IMPORTS
1 C7\J 1 —
1 \J\J
290
280
Monthly —^
270
*
260
.%*i_!I___y_----^-^^^^^^^
^
It
x
250
3-Month Moving
Average
Mar.-May average
represents
7% increase
from year earlier
Me
240
iir
230 _
. , " " - —
oon
i
i
i
1
A S O
1977
1 1
N
D
1 11
J F
1
M A M
1
1
1
1
1
1
1 1
1
J
J A S O N D J
1978
1
1
1
1 1
M A M
1979
Treasury: Office of
Balance of Payments
7/5/79
$Bil. per month
U.S. PETROLEUM & PRODUCTS IMPORTS
A"MM| (II ,
3-Month Moving
Average
J
I
I L
AGRICULTURAL EXPORTS
$Bil. per month
J A S O N D J
1977
* B / P basis'; seasonally adjusted
F M A M
Office of
1979Treanify:
Balance of Payment!
7/5/79
For Release at 10:00 am EDT
July 20, 197 9
Statement by Secretary Blumenthal
On behalf of the President, I strongly endorse the
measure announced this morning by the Federal Reserve
Board. It will be helpful in the fight against inflation,
and in dealing with speculative pressures on the dollar.
The pressures on the dollar in the exchange markets
that have emerged in recent weeks are completely at odds
with the dramatic improvement in the U.S. balance of
payments now underway -- an improvement that will reduce
the*current account deficit sharply this year and shift
the position into surplus in 1980.
This country has serious energy and inflation problems.
We are addressing these problems forcefully and comprehensively. Success will be critical to our nation's health.
The United States will not permit a renewal of depreciation
of the dollar to undermine its efforts. Massive resources
are at our immediate disposal for market intervention, in
cooperation with other major countries. We will not hesitate
to use these resources, and enlarge them if necessary, to
deal with unjustified pressures on the dollar in the exchange
markets.
o 0o
B-1741
FOR IMMEDIATE RELEASE
July 20, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY STARTS COUNTERVAILING
DUTY INVESTIGATION AND ISSUES
PRELIMINARY FINDING THAT PAKISTAN
IS SUBSIDIZING EXPORTS OF TEXTILE
PRODUCTS TO THE UNITED STATES
The Treasury Department has started an investigation
into whether imports of certain textiles and textile products from Pakistan are being subsidized. A preliminary
determination that these products are being subsidized is
being issued simultaneously. A final determination in the
case must be made by January 20, 1980.
Imports of this merchandise amounted to about $42million in 1978.
The products covered by this action were also involved
in a recently completed investigation by the Treasury
Department under the Countervailing Duty Law. In that
investigation the Treasury determined that all Pakistani
exports to the United States except cotton towels were
being subsidized.
The new investigation is being started in order to
determine whether Pakistani textiles are receiving additional subsidies under a program not considered under the
original investigation.
The preliminary affirmative determination is based on
Treasury's knowledge that the additional program was established
specifically to benefit the Pakistani textile industry, and
the fact that the benefits are paid only on exports. The
investigation and preliminary determination apply to cotton
towels as well as the other textile products previously
investigated.
The Countervailing Duty Law requires the Secretary of
the Treasury to collect an additional customs duty equal to
the subsidy paid on merchandise exported to the United States.
Notice of this investigation appears in today's Federal
Register.
o
B-1742
0
o
FOR RELEASE ON DELIVERY
Expected at Noon CDT
REMARKS BY
THE HONORABLE
W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
AT THE
NATIONAL URBAN LEAGUE
CHICAGO, ILLINOIS
JULY 23, 1979
This will likely be my last speech as Secretary of the
Treasury. I can think of no audience that I would rather address
on this occasion.
The Urban League represents the finest example of that
peculiarly American blending of business expertise and social
concern to which we owe so much of our nationfs progress toward
a more equitable and compassionate society. In leaving the
public sector, I feel even more acutely than I did upon entering
Government, that this very special American-style coalition of
private resources and public concerns is vital to the nation's
future -- and more urgently needed in the future than ever before.
In many parts of the world, it is taken for granted that
the business elite will fight or frustrate, or at best ignore,
all efforts to address the most crucial problems of social
stagnation and economic injustice.
In America, while our record is hardly flawless, one can
take for granted neither reactionary resistence nor sullen indifference on the part of our business communities. At critical
moments in our history, the men and women of private business,
or at least the best of them, have been essential allies in the
struggle for social progress.
For this, all Americans owe an enormous debt of gratitude
to this organization. For it is you, and others like you, who
forge that vital link between the private sector and the public
interest.
We owe an equal debt to the extraordinary man who has led
your organization for so many years. Vernon Jordan has been a
B-1743
- 2 close personal friend for a long time. Lest that cause you
concern, let me at once reassure youi I have it on good
authority that this will not be held against him in Washington.
His job, I presume> is quite secure!
I will not recite to you Vernon's personal virtues. For
what is most important about Vernon is his singular public
virtue. He is that rarest of figures in today's America. He
is, through and through, and in every respect, a leader. The
President was right in his address to the nation a week ago,
when he noted that we have permitted too many of our social,
economic, and political institutions to be corroded by doubt
and indifference. This corrosion of basic social confidence
no doubt has many causes. But there is, I expect, only one
sure solution — and that is to have come forward among us, in
all walks of life, men and women with the public skill, the
social conscience and the sense of responsibility that distinguish
the career of Vernon Jordan.
Under his leadership, the Urban League acquired a valuable
reputation for realism. You have, learned the hardest of lessons:
To solve problems, we must see things as they are. To make
progress, we need more realism and less rhetoric. To improve
our lot, we must see the world without illusions, as it really is,
like it or not — and however uncomfortable that may be for timid
politicians and mindless poll watchers. In short, good policy is^
good politics -- is the courage to tell it like it is. Vernon,
we all know, has had the guts always to do that - mueh to his
credit and to that of the Urban League.
I would like today to take advantage of your willingness
to face reality, to accept hard truths. I wish to share with
you some of the major conclusions I have drawn, from my tenure
as Secretary of the Treasury, about the relationship between
economic policy and social progress in this country. These
conclusions are, I'm afraid, rather hard-boiled, but they justify
neither despair nor cynicism. They are, I think, merely the
reality we must confront in trying to make this society more
equitable and more compassionate.
My first conclusion is that meaningful social orogress
is nearly impossible in a high inflation economy. Inflation
erodes comoassion and altruism throuqhout society. It diverts
us all into selfish, and often wasteful, efforts to "keeo ahead
of the game." Inflation makes oeoDle deaf both to the oleas
of the poor and to the anger of those suffering discrimination
and injustice.
Inflation, moreover, punishes worst precisely those very
grouDst the poor, the retired on small fixed incomes, those'
most dependent on enlightened policies to address their needs
and ameliorate their unjust circumstance.
- 3 -
At the same time, high inflation inevitably drags down
the rate of growth in reai incomes, for it depresses investment and productive labor, diverting economic activity generally
into unproductive channels. So long as inflation rages, there
is virtually no prospect of a steady growth in real resources.
And without a steady growth in real resources, there is virtually no prospect that a fair share will go to those most in
need.
In our oolitics, an abhorrence of inflation is associated
with conservatism. Liberals are assumed not to care much about
the problem. To the extent those stereotypes are valid,
liberals are misreading reality. For anyone who cares deeply
about advancing the interests of our least advantaged citizens
over the long haul, the priority item on the nolitical agenda
should be the fight against inflation. Until that fight is
won, an inexorable tide will be running against the cause of
social reform.
The common objection to an emphasis on inflation is that
it imnlies an indifference to unemployment. Perhaps there was
some validity to that association at another time. But to face
the reality of the present, means accepting that this is no
longer true. To face things as thev are, means seeing that
the simple inflation/unemployment tradeoff no longer holds.
Economists and ooliticans don't really understand whv, but
they do know it to be true — even though some of the political
rhetoric still tells us otherwise.
In the mid-seventies, after all, we found ourselves with
both high inflation and high" unemployment. We even coined a
new term for it: stagflation. And we learned that to lick
one need not - indeed cannot - be done at the expense of the
other.
If we keep revving UP the budget deficit to fight each
rise in unemployment, we will fail in our stated ournose*
unemployment will go up desoite our efforts — and inflation
will accelerate to astronomical levels. If, on the other
hand, we stick to a steady course of fiscal and monetary prudence, any initial run-up in unemployment will be lower than
in the first course -- and it will be coupled with true price
stability.
This, at any rate, has been the experience of other nations,
and it accords with the best work of our best economists, of all'
political persuasions. I, therefore, simply raise the question:
Is it really liberal and compassionate to stave off a temporary
economic slowdown at the certain cost of higher unemployment in
the long term and at the devastating price of inflationary numbers
which impoverish us all?
- 4 -
The second conclusion I wish to share with you is perhaps
equally controversial. It is that economic equity rarely comes
out of the barrel of a regulatory gun.
Economic regulation — the control of prices and rates -- was
the great political passion of many Americans for much of this
century. The passion originated in a sensible perception that
some markets are monopolized by a single producer. But the passion
soon expanded well beyond its intellectual origins. Regulation
became for many a handy, direct tool for assuring low prices.
That is: regulation became a tool for distributing income. This
led to the notion that it "is somehow offensive to social justice
for products to be sold in an unfettered market — so-called
"rationing by price" is considered illiberal.
Just as we are clearing away the awful consequences of such
reasoning in the airline and trucking sectors of the economy, the
regulatory passion threatens to stage a comeback in the energy
sectors.
It is vital to the cause of social justice that we end this
reliance on regulation. Regulation is a hopelessly cumbersome
tool for distributing income from the rich to the poor; invariably,
it ends up enriching those with the greatest access to the regulators or the greatest sophistication in manipulating the system.
Regulation invaribly causes major economic inefficiencies -resulting in higher prices over the long term and a totally
unnecessary loss of real production and jobs. As a side effect,
we find shortages and lines developing, which put new strains on
the basic social fabric. Regulation becomes a new way to rip us
apart and roughen the social temper. Perhaps most importantly,
economic regulation diverts the efforts and talents of liberal
politicians and public servants into building, staffing, and defending huge government bureaucracies that are doomed to failure
and, ultimately, to public ridicule. Seeing government trying to
do the impossible, the people are drawn to believe that government
can do nothing.
- 5 -
Let me at once enter a caveat: I do not, of course, argue
that any and all Government regulation impenging on the market
place is invariably bad. Government does have a role to play.
Monopolists do need to be curbed. Price gougers do need their
wings clipped. Certain public goods do need to be regulated. The
rules of the game to ensure fairness and equity and the protection
of those with the least power, do need to be enforced.
But, for example, in dealing with our major national problem
of energy, we cannot hope to insulate ourselves from the reality
of the world market place. We must have programs to help the
poor and the near-poor, with special forms of assistance. But,
it is self-defeating to fool ourselves with regulating prices
below what things really cost.
That is why the President's decision to decontrol the price
of crude oil was the right decision. That is why decontrol of
all oil products is inevitable sooner or later — and the sooner
the better. Our friends and allies in Europe have long since
walked that road and we will have to do the same as soon as we
have the courage to tell it like it is.
For those interested in social justice must choose their
paths with care, for even then the journey will be long and hard..
Those who choose the path of regulating prices are taking a deadend. We need daring, not dead-ends.
My next conclusion is along the same lines. It is that
we should throw overboard tY\e simplistic notion that all federal spending for purposes of distributing income advances
the cause of social justice. The sad fact is that many of the
Government's programs for transferring money end up — and
quite bv design — in shifting it to groups distinguished not
by their plight, but by their raw political power. The federal
budaet is too often bloated not by compassion for the poor but
by a congenial coalition of middle or upper middle income grouos
that have learned to manipulate the Congress and the bureaucracy.
The budaet can be cut without setting back the disadvantaged,
and it can be blown up without helping the poor.
Let me give you one small example. The President earlv
this year suggested, and quite nroperly so, that some chancres
and—yes—some reductions in social security benefits were needed,
so as to improve the financial integrity of the social securitv
system and free up resources for more important social proqrams.
The President wasn't talking about basic benefits. He wasn't
suggesting cuts for those truly in need. He wanted merely to
eliminate certain clear and obvious cases of double coveraqe
and over-coverage in the system — changes that would have
o
saved several billion dollars in the long term and that would
have made the system both more rational and more equitable.
The outcry of the defenders of the social security faith was
as deafening as it was dead wrong. Nothing, they said, nothing
in the system must ever be removed or reformed. This is
blindness — blindness which diverts resources where they are
not needed in the name of protecting those long since protected
in other ways. That, is not social policy. That is foolishness.
The American people are neither wrong nor reactionary to
demand budgetary integrity and restraint. The forces of social
progress will do neither themselves nor their constituents any
favors bv defending federal spending in a general and uncriticial
manner.
The harsh fact is th^t the productive sectors of the American
economy cannot withstand in healthy fashion a steady expansion
in the share of resources going through the Government as tax
revenues and spending programs. Public resources are and will
remain sharply limited. This means that programs aiding the
poor cannot be expanded simply by piggy-backing them on top
of the other special-interest, transfer programs that riddle
the budget. In the past, that may have been a fruitful political
technique — productive of some amazing coalitions, progressive
more in their rhetoric than their deeds — but the technique
is now running into hard economic barriers. The only route
now open is the honest but risky course of justifying programs
for the needy on their own terms, and joining aggressively
in efforts to cut back spending where, in all good conscience,
it is not needed. Whether this is politically possible, I do
not know, but no other course is economically possible.
These then are the broad lessons I take from my recent
stint in the Government: that social progress depends on reducing the rate of inflation, that this can be done in the long
term without any permanent cost to jobs and production, that
regulation is a dead-end way to work for economic justice,
and that budgetary stringency is not in any logical sense incompatible with maintaining and improving programs to raise
the prospects of the disadvantaged in this society.
I think of these convictions as economic realism wedded
to social liberalism. That is the credo which I brought to the
job of Treasury Secretary in January, 1977, and that philosophy
has provided the framework formula of the Administration's
economic and social policies over the past 2-1/2 years.
There is nothing quixotic about this marriage of economic
logic and a social conscience. The only way to make real progress toward social justice is to confront the aspirations of
the conscience with the realities of our economic" situation.
- 7 This is no easy task in an era of severe economic constraints and of enormous problems on the energy front. In
this era, you need a lot more than slogans and righteousness
to make social progress. I took it as my job, while in the
Government, to fight hard and with candor for economic sanity,
and I am proud of it. I will let history judge whether I have
reason to be.
At the same time, I supported, whenever I could,sound
policies to advance social justice — policies to help rebuild
our cities, to retrain our workers, to employ our young, to
cushion the impact on the poor of the economic turbulence
of our times.
As the President pursues this general line of policy —
sound, realistic, and conservative in economics, comoassionate,
daring, and imaginative in social policy — he will have my
full support.
This is not just the Government's job. If we are to make
real progress against the high ostacles thrown UP by inflation
and the energy crisis, the private sector will have to assume
a very large part of the leadership role. That is your job.
And, I assure you, I now also regard it as mine. Let's get
on with it.
yartmentoftheTREASURY
TELEPHONE 566-2041
jHINGTON.D.C. 20220
FOR IMMEDIATE RELEASE
July 23, 1979
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 3,001 million of 13-week bills and for $ 3,003 Million of
26-week bills, both to be issued on July 26, 1979,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing October 25, 1979
Discount Investment
Price
Rate
Rate 1/
High
97.608-^9.463%
Low
97-600 9.495%
Average
97.604 9.479%
a/ Excepting 1 tender of $800,000
9.86%
9.89%
9.87%
26-week bills
maturing January 24, 1980
Discount Investment
Price
Rate
Rate 1/
95.217
95.208
95.211
9.461%
9.479%
9.473%
10.10%
10.12%
10.12%
Tenders at the low price for the 13-week bills were allotted 56%.
Tenders at the low price for the 26-week bills were allotted 80%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TENDERS RECEIVED AND ACCEPTED
(In Thousands])
Received
Received
Accepted
33,590
$
$
42,655
$
42,655 :
4,160,500
4,777,060
2,548,570 :
25,610
25,610
36,515
36,830
47,355
36,830
30,350
25,115
30,150 "
48,615
33,345
48,615 .
215,415
286,700
67,940 :
37,505
41,470
18,505
5,585
5,165
5,585 •
39,320
26,410
31,910 :
19,895
27,355
18,895 :
223,440
300,375
91,240 :
34,145
34,145 :
36,935
Accepted
26,590
$
2 ,627,840
36,515
27,070
25,115
27,345
35,700
18,470
5,165
23,535
11,355
101,375
36,935
$4,919,865
$3,000,650 ;
$5, 677,390
$3:,003,010
Competitive
Noncompetitive
$3,002,115
543,860
$1,082,900 .
543,860 :
$4,108,415
389,775
$1,434,035
389,775
Subtotal, Public
$3,545,975
$1,626,760 :
$4,498,190
$1,823,810
Federal Reserve
and Foreign Official
Institutions
$1,373,890
$1,373,890 :
$1,179,200
$1,179,200
$3,000,650 :
$5,677,390
$3,003,010
TOTALS
Type
TOTALS
$4,919,865
1/Equivalent coupon-issue yield.
B-1744
DATE : July 23, 19 7 9
13-WEEK
TODAY:
9,V7?%
LAST WEEK:
^ 3 3 6 /,
2 6-WEEK
ft
^7^
f.^/rr^
HIGHEST SINCE
/*
<"?
/jrry /.
^
LOWEST SINCE:
&
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 a.m.
July 24, 1979
STATEMENT OF
EMIL M. SUNLEY
DEPUTY ASSISTANT SECRETARY (TAX ANALYSIS)
BEFORE THE
• TASK FORCE ON INFLATION OF THE
HOUSE BUDGET COMMITTEE
Mr. Chairman and Members of this distinguished Committee:
I appreciate this opportunity to appear before you and
discuss the subject of Indexation of the Tax System. In
recent years there has been a great deal of interest in
indexation or automatic inflation adjustment of the tax
system and I think the reason for this interest is clear:
The high rates of inflation we have experienced in recent
years have made it obvious to everyone that our tax system is
not "neutral" with respect to inflation, but rather the
system tends to increase effective tax rates as inflation
proceeds. This has always been true of our tax system, but
has never been considered a problem in the past.
If inflation were proceeding at an annual rate of only
one or two percent as it did in the early 1960's, I am sure
there would be much less interest in a tax .change as
complicated as that implied by indexation. On the other
hand, if the rate of inflation were to accelerate and reach a
level of 20 or 25 percent as in some other countries,
probably most people would favor some form of indexation.
Thus, one factor in deciding whether we wish to index the tax
system is our expectation concerning likely future inflation
rates. If we expect a moderate rate of inflation--say six or
seven percent--we must then decide whether the complexities
involved in going to an automatically indexed system are
worth the gains or whether there are other forms of ad hoc
adjustments involving much less tax complexity which could
achieve the same ends.
There are two quite separate issues involved in indexing
the tax system, and I would like to discuss them separately.
They are the definition of income and the proper tax
treatment of income, once defined. I will begin by
discussing the second issue, the tax treatment of nominal
dollar amounts, because in this area proposals and
recommendations have been most fully developed.
B-174^
-2Fixed Dollar Amounts
As inflation occurs, the real value of fixed dollar
amounts declines. Since income taxes are computed from tax
brackets and exemptions that are defined in fixed dollars,
tax liabilities and effective tax rates rise. To illustrate
this result, consider a family consisting of a husband, wife,
and two children with an income of $20,000. Their income tax
this year would be $1,908 or about 9.5 percent of income
assuming they did not itemize deductions. Now let's assume
that inflation runs at an annual rate of seven percent and
that this family's income increases next year by this same
percentage. Then their dollar income in 1980 would be
$21,400, while their real income or actual spending
power would not have increased at all above last year's level
of $20,000. Yet their income tax would rise to $2,210, and,
more importantly, their effective tax rate would rise from
9.5 percent in 1979 to 10.3 percent in 1980. If this high
rate of inflation were to continue for 10 years, this family,
on the same real income, could see its effective tax rate
climb to 19.8 percent, almost double what it had been in
1979—if, and this is a big if, Congress did not make any
income tax changes during the intervening period.
in this instance, what is true for an individual family
is true for taxpayers as a whole. If we experience 10
percent inflation, as we have over the last 12 months,
individual income tax receipts rise not by 10 percent, but by
something closer to 15 percent. In the technical jargon of
economics, the elasticity of the income tax with respect to
inflation is about 1.5; that is, tax receipts rise one and a
half times as fast as the rate of inflation. Does this mean
that everyone's taxes will be 15 percent higher this year
than last? Not at all, because the tax law has been changed
and the change came not through automatic indexation but
through deliberate action of Congress. In fact, this is the
way in which the United States tax system has generally
responded to changes in income, both real and inflationary.
Since World War II, the rate of inflation has ebbed and
flowed, but the trend of prices has always been upward. Does
this mean that the effective tax rate on individual income
has been constantly rising over time? Not at all. Congress
has in fact taken frequent action to reduce individual taxes
so that the individual income tax as a percentage of personal
income has actually fluctuated in a rather narrow band.
Since 1951, the average effective tax rate has ranged from a
low of 9.2 percent (in 1965), to a high of 11.6 percent (in
1969 when the 10 percent surcharge was in effect) .
It is not just inflation which pushes taxpayers up into
higher tax brackets. Because the real productivity of the
American economy has been rising, in the absence of
-3offsetting legislation, our tax bills would also have risen,
given our progressive rate structure. This would have been
true even if there had been no inflation. Thus, the fact
that income taxes as a percent of personal income have not
risen, means that Congress, with its periodic tax cuts, has
been offsetting not only the impact of inflation on tax
rates, but also the impact of the growth of real per capita
income. In fact, if Congress had not cut taxes periodically
but instead had enacted automatic indexation by adjusting the
individual income tax for inflation on the basis of the
Consumer Price Index of 1960, taxes paid since that time
would have been higher than they have been under the actual
tax laws which have been in effect.
Thus, I think the question we should ask is not: -should
we adjust the tax system for inflation? But rather, how
should we adjust the tax system for inflation: by an
automatic process called indexation or by periodic
legislative readjustments?
Automatic Indexation
Many people favor automatic indexation because they
believe that in the absence of such adjustment, the
government would automatically increase its share of the
total economy as inflation generates additional taxes. Thus,
they believe the government "benefits" from inflation. This
view is mistaken. The historical record, mentioned above,
shows that the response of the Federal Government to an
upward trend in effective tax rates has not been to launch
new expenditure programs, but rather to reduce taxes. As the
work of this Committee shows, government programs are not
expanded just to spend increased tax revenues. Rather, the
Congress adjusts both taxes and expenditures in order to
achieve an overall budget surplus or deficit as it deems
appropriate. Automatic indexation by itself would lead to
neither a smaller nor a larger government sector.
Next, the argument is sometimes made, that automatic
indexing is desirable because Congress should not have to "be
bothered with" an inflation adjustment every year. It is
true that the automatic nature of indexation systems removes
the need for frequent oversight by Congress, but this
argument works both ways. The argument could be made equally
well, that encouraging the Congress to take a more frequent
look at what is happening to the tax system may in itself be
desirable. Also, even with indexation, Congress would have
to adjust taxes downward periodically to offset the impact of
rising real per capita incomes.
The final argument, and one which I find very important,
concerns the impact of automatic indexing on overall fiscal
stabilization policy. At times inflation can represent an
-4excess of purchasing power relative to the amount of goods
and services available, and in those cases it is tax
increases that are called for. Automatic indexation of the
tax system, whatever its appeal on equity grounds, moves in
the opposite direction. That is, under indexation, inflation
would give rise not to tax increases but rather to tax cuts
or at least, in real terms, no change in effective tax rates.
No one welcomes tax increases, whatever their source, and
citizens faced with rising prices for almost everything they
buy may call for tax "relief" to offset high prices.
However, if such "tax relief" merely yields an automatic
increase in the amount of after-tax dollars chasing the same
amount of goods, consumers have not really improved their
position. I feel the country would be better off if Congress
were to continue its existing ad hoc approach to the timing
of tax increases and decreases, rather than to accept the
perverse effects of such an "automatic" system.
There have been occasions when we would have been better
off with an automatic tax reduction--1974 or 1975 might have
been such occasions, given the increasing rate of
unemployment. But in general, if all we know about the
economy is that it has been experiencing inflation,
economists would generally prefer to have taxes going up
rather than going down. If the appropriate fiscal policy
calls for a tax reduction, Congress can provide that
reduction.
Income Measurement
The second and much more difficult issue concerning
indexation is the definition of income and specifically the
measurement of real income from capital. For a tax system
based on ability to pay, the ideal tax base is real income.
With reasonable price stability, nominal income provides a
satisfasctory approximation of real income, but under
inflationary conditions, this is no longer the case.
Particularly severe problems arise in four areas:
depreciation of fixed assets, inventory accounting, capital
gains, and financial instruments.
It may well be that making only some adjustments for
inflation, say depreciation, and not others will increase the
inequities and inefficiencies of the tax system. There is,
however, an important difference between the adjustments for
depreciation, inventories, and capital gains and the
adjustment for debt. If depreciation, inventories, and
capital gains are based on historical costs, nominal income
is not properly measured in terms of current dollars.
Therefore, as prices increase, effective tax rates rise,
resulting in transfers from private sector to the government.
Interest rates, however, are a current price, even if
established by long-term contracts. Moreover, if financial
within
instruments
the private
are not sector
adjusted,
from most
creditors
of the totransfers
debtors.are
-5Depreciation
Generally, fixed assets are depreciated on the basis of
their historical cost. It is easy to see that this is
inappropriate in a period of inflation because the dollar
value of depreciation allowances will be worth less, as time
goes on, than the "real" value of the assets being used up.
Unfortunately, while the problem is clear, the solution is
not: there has been much controversy in recent years, both
here and abroad, concerning the appropriate accounting for
depreciation of fixed assets in a period of inflation. One
possible approach would be to adjust depreciation for each
asset based on replacement cost, which would involve
calculating a separate price index for every kind of asset.
Even aside from the great difficulties in adjusting forquality changes and technological innovations over time, it
is clear that the sheer numbers and recordkeeping involved
here would lead to a very cumbersome system. Moreover, such
practice would allow real changes in relative values to
escape taxation. Another possibility would be to index on
the basis of some measure of the general price level. Such a
measure would refer not just to the- prices of capital assets,
but would be a reflection of the value of the dollar in
broader terms. This approach is preferable to replacement
cost depreciation on both simplification and equity grounds.
Although Congress has not legislated explicit inflation
offsets for depreciation, accelerated depreciation and ADR
provisions have actually provided such offsets. In fact,
until the high inflation rates experienced in the last few
years, the use of accelerated depreciation on an historical
cost basis has generally meant higher depreciation deductions
(and hence lower income taxes) than if the law permitted
straight-line depreciation on a replacement cost basis. The
Commerce Department has estimated the net effect of these
adjustments (accelerated depreciation and replacement cost
accounting) on Capital Consumption Allowances, which is the
National Income and Product Account concept analogous to
depreciation and amortization. For corporations, the net
effect was positive (i.e. lower taxes) for the years
1962-1973, while for the years since 1974, it has been
negative. That is, for the last few years of high inflation,
replacement cost depreciation on a straight-line basis would
have meant lower taxes, whereas for earlier years historic
cost depreciation on an accelerated basis meant lower taxes.
(For sole proprietorship and partnerships, the net effect has
been lower taxes ever since 1946.)
Inventory Accounting
In the area of inventories, the current LIFO (Last In,
First Out) system of accounting is in fact a form of
inflation adjustment similar to replacement cost
-6depreciation. Under this method, real changes in the
relative values of inventories escape taxation as long as the
firm is growing. Some have argued that it would be more
appropriate to require FIFO (First In, First Out) inventory
accounting but to permit an adjustment to reflect the change
in the general price level from the time the item was put in
inventory until the time it was removed from inventory and
sold. Such a system, while eliminating purely "inflationary"
profits, would still include in the tax base real gains and
losses from changes in the relative values of inventories,
but it would be much more complex than the LIFO method. Most
analysts feel that the present LIFO system adequately handles
the problem of inflation as far as inventories are concerned.
Capital Gains
One of the clearest areas in which inflation has an
impact is capital gains. If an asset's market value
increases due solely to inflation, the holder of that asset
has really experienced no increase in wealth, yet he is
required to pay a capital gains tax on the difference between
the original purchase price and the. sales price. This impact
of inflation has, in fact been one of the key arguments in
defending the favorable tax treatment of capital gains. The
present 60 percent exclusion of net long-term capital gains
does indeed provide an offset for inflationary gains.
However,, in any given case it is usually either too much or
too little; only rarely would inflationary gains amount to
exactly 60 percent of the total gain. Also, since taxpayers
may borrow to carry capital assets, the proper taxation of
capital gains under inflation depends crucially on the way
financial instruments are handled, and that is the area I
would like to discuss next.
Financial Instruments
If an individual earns an interest rate of five percent
on a $1,000 savings account, at the end of the year he would
have $1,050. Suppose, however, the rate of inflation has
been seven percent over the course of the year. This means
that at the end of the year the individual has not, in real
terms, gained from his investment, for he has less purchasing
power than he did at the beginning of the year." "His $1,050
is actually worth only $981 in terms of beginning-year
prices. Even though he is experiencing this $19 decline in
real purchasing power, under current law he must include $50
in his taxable income rather than taking a tax deduction of
$19 for his loss of purchasing power.
On the other hand, consider a debtor who is able to pay
off his debt in deflated dollars: he actually benefits from
inflation.
Yet, for tax those
purposes,
may deduct
of his
interest
payments—even
which he
merely
reflectall
inflation.
-7Considering both creditors and debtors, it is therefore
clear that inflation produces both gainers and losers in
terms of real income, and this asymmetry poses real problems
for any practical system of indexation. Suppose for example,
an investor purchases an asset for $1,000 and finances it
entirely by debt. Would he be helped or hurt by inflation?
The answer is that if the holding period of the asset and the
debt are the same, the investor is completely protected from
the effects of inflation; any inflationary loss on the asset
is exactly offset by a gain on the debt. This suggests that
it probably would be inappropriate to permit a full inflation
adjustment for the investment if no offsetting adjustment is
made for the debt.
There is currently no agreement among economists,
accountants, or businessmen on just how an adjustment for
financial instruments should be made. Some have argued that
the interest deduction should be reduced by the amount of
interest attributed to inflation, i.e., the "inflation
premium." Of course, this would require an estimate of how
much of the current nominal rate of interest is "real" and
how much is just an inflation premium. Others have suggested
that the full interest deduction should be permitted and the
full amount of interest income taxed, but at the time debt is
paid off, a gain or loss should be recognized to the extent
that the debt is paid off with deflated dollars.
Market Adjustments
We generally speak of the changes in value resulting
from inflation as if they were always unanticipated, but this
is not really the case. No one, for example, thinks that the
price level 12 months from now will be precisely where it is
today. Everyone anticipates some rise in prices, and
lenders, as well as borrowers, take this into account in
deciding the terms of a loan.
If the real rate of interest, that is, the rate for
stable prices, is three percent, lenders will not continue
lending money at three percent when the rate of inflation is
five percent. Instead, they will demand a higher rate of
interest. How much higher initially depends on the lender's
tax rate, for he will try to maintain his after-tax rate of
return. Suppose a lender's marginal tax rate is 50 percent;
under stable prices, his after-tax rate of return is 1-1/2
percent. If inflation now rises to five percent, he will
seek to raise the before-tax rate not just to eight percent
(i.e., three percent + five percent), but to 13 percent,
because after he pays taxes on 13 percent he will have 6-1/2
percent left, which in real terms (subtracting five percent
for inflation) is the same as the 1-1/2 percent he was
earning before inflation.
-8Thus, in this case the market rate of interest would
adjust so that no inflation adjustment would be necessary tor
the lender. What about the borrower? if he is in the same
tax bracket, no adjustment is necessary for him either. In
the absence of inflation, he had to pay three percent, but
this was a deductible expense on his tax return, so his
after-tax, real cost was 1-1/2 percent. Now he has to pay 13
percent interest, but this too, is deductible so after taxes
he pays only 6-1/2 percent, and he is repaying the loan in
depreciated dollars, so his real cost is again, 1-1/2
percent.
To the exuant that market rates of interest adjust for
anticipated inflation, then, it would appear that no tax
adjustment for debt instruments is necessary. There are
three qualifications to this, however. First, creditors and
debtors may not be in the same tax bracket, so any rise in s
the rate of interest will have certain redistributive effect
between them. Second, many people feel that the market does
not fully adjust, that there are always lags and other
discrepancies among nominal rates of interest, real rates of
interest, and the rate of inflation. Finally, for many
creditors there are institutional barriers which prevent them
from adjusting their rate of return in response to inflation.
Specifically, there are laws setting limits on the rate of
interest which may be paid on savings in banks and other
financial institutions. In some recent years, these limits
have been set lower than the rate of inflation, which means
that savings account holders have suffered an actual loss in
the value of their assets while paying income tax on their
nominal interest receipts.
Conclusion
At rates of inflation above a certain level almost
everyone would agree that indexation is desirable. I believe
that our present and prospective inflation rates are not at
that level. To annually adjust the fixed dollar amounts in
the Internal Revenue Code would involve only moderate
complexity. Since Congress has periodically cut taxes so
that average effective tax rates have not risen, the issue is
whether we want tax cuts annually or periodically.
To adjust the legal measurement or definition of income
would mean substantially increasing the complexity of the
present system and greatly increasing the recordkeeping
requirements of individuals and firms. Until there exists a
greater consensus within both the accounting profession and
the business community concerning the best manner of
adjusting financial and operating statements for inflation,
it would be inappropriate for the Treasury Department or the
Congress to attempt to impose any particular "correct"
method. Also, until the business community is prepared to
-9use an indexed financial statement in reporting to their
stockholders and creditors, Congress should not permit the
business community to report to the Internal Revenue Service
on an indexed basis.
FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.M.
JULY 24, 1979
TESTIMONY BY
GARY C. HUFBAUER
DEPUTY ASSISTANT SECRETARY FOR
INTERNATIONAL TRADE AND INVESTMENT POLICY
DEPARTMENT OF THE TREASURY
Mr. Chairman, you asked the Treasury Department to give
your Committee its views on Title II, regulatory reform, of
the Omnibus Maritime Bill. We believe, Mr. Chairman, that
your bill and these hearings represent a constructive step
in our search for improvements in maritime policy.
My remarks this morning are limited to Treasury's initial
reaction to Title II. Because the bill proposes far-reaching
changes, and because we have had only a few days to study it,
I can only give you a preliminary assessment. I hope to have
a more definitive Treasury position later.
Before discussing the policy issues raised by this legislation, I would like to review the current economic condition
of the U.S. ocean liner trades and the U.S. ocean liner
industry. The economic background clearly should be reflected
in proposals for policy changes.
First, tonnage carried in the U.S. liner trades has been
stagnant since at least 1966, while non-liner and tanker
tonnage has grown rapidly. In 1966, 50 million tons of cargo
B-1746
- 2 were transported in the U.S. liner trades.
In 1977, that
volume actually dropped to 48 million tons. Total tons carried
by non-liner vessels, by contrast, increased from 190 million
in 1966 to 290 million in 1977, an increase of about 53
percent.
Total tanker tons increased by more than 250 percent
during the same period.
The percentage of total liner tonnage
in the U.S. trades carried by U.S. flag vessels increased from
23 percent in 1966 to 31 percent in 1975, and has since
remained at about that share.
Second, in discussions on the current health of U.S.
liner carriers, attention often centers on the bankruptcy of
two U.S. carriers in 1977 and the apparent poor health of some
other carriers.
whole story.
But looking at the sickbed does not tell the
According to a recent magazine report, two major
U.S. carriers are planning to invest well over a billion
dollars in expansion of their fleets over the next few years.
This expansion should result in sizable net growth of the U.S.
liner fleet.
It indicates that a large segment of our fleet
is healthy and growing.
The figures show that liner shipping has lost ground in
the last dozen years.
The clear implication is that liners
simply are not competitive with alternative transportation
systems.
The increase in international trade over this period
and greater price competition in the non-liner market have
made it worthwhile for shippers to buy or charter entire
- 3 vessels rather than use liners. Air transportation too may
begin to pull cargo away from liners as air carriers are
allowed to compete more freely than in the past.
Our conclusion is that adopting closed conferences, as
proposed in this legislation, will not improve the competitive
position of the U.S. liner shipping industry. In fact, closed
conferences could well worsen the industry's position, if
higher rates are sought and tonnage is sacrificed. The end
result could be less efficient liner services at higher costs,
without any obvious gains for our liner carriers. Bilateral
arrangements carving up cargo among carriers might have similar
undesirable effects, although these agreements sometimes are
necessary in response to foreign restrictions.
We believe a better approach would involve measures
designed to end the uncertainty and delay that currently
surround federal regulation of ocean shipping. This could
be achieved by means of several steps:
The FMC should have basic responsibility to
confer antitrust immunity and to enforce the
Shipping Act;
The FMC should grant presumptive approval to
conference arrangements that provide the least
anti-competitive means of promoting operating
efficiency. Such approval would cover agreements
providing for terminal sharing and equipment
interchange;
- 4 —
The FMC should adhere to strict time limits in
all its deliberations.
An additional desirable action would be to broaden price
competition among liners.
Experience shows that this policy
has worked in other areas of transportation.
No inherent
reason exists why it could not also work in ocean liner shipping.
A more competitive regime need not involve implemented in one
fell swoop; a starting point might be the legalization of
effective independent action by conference members and a ban
on dual rate contracts.
Shippers' councils could also be
established to help ensure that carriers meet shippers' needs.
Interestingly, the U.S. carriers that are planning sharp
increases in capacity are unsubsidized; those that went bankrupt last year were subsidized.
Those companies foregoing
subsidies and the accompanying government restrictions on
their operations are evidently doing a better job of competing
than the subsidized carriers.
The more aggressive and effi-
cient U.S. carriers can compete effectively, even under the
current regulatory scheme.
It is likely that less efficient carriers would face
rough seas under a more competitive course.
harbors can, of course, be found.
Temporary safe
But if our long-term policy
with regard to any industry were gauged so as to keep the
least efficient producers in business, that policy would prove
very expensive both in terms of direct government subsidies
and in terms of higher prices.
- 5 To sum up, Mr. Chairman, Treasury agrees that our maritime policy could be improved. But it is not clear to us that
closed conferences are the answer. Rather, we think the
current system, with the reforms I have outlined, can meet
the needs of U.S. carriers and shippers.
—_,
_
_.
NT OF
lepartmentofthe
ASHINGT0N,D.C. 20220
TELEPHONE 566-2041
FOR RELEASE UPON DELIVERY
Expected at 9:00 A.M.
Tuesday, July 24, 1979
STATEMENT OF THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SENATE ENERGY AND NATURAL RESOURCES COMMITTEE
Mr. Chairman and Members of this Distinguished Committee:
Introduction
inally scheduled, President
Since these hearings were orig
Carter has announced a bold, compre hensive program to reduce
oil imports by 4.5 million barrels per day by 1990, including
a program for the new production of 2.5 million barrels per
day of synthetic fuels and unconven tional gas. The details
of this program, including the tech nologies and cost estimates,
have been described to you. As req uested by the Committee,
I shall limit my presentation today to the financing problems
associated with synthetic fuels and unconventional gas and
to a description of the President's proposed Energy Security
Corporation which is designed to ov ercome these problems.
Financing Risks Associated With Synthetic Fuels and Unconventional Gas
The amount of investment required to construct synthetic
fuel plants and to produce unconventional gas is large, and
the risks associated with that investment have been judged
by private investors to be so great that, as yet, no commercial
scale synthetic fuel plant has been built in the United States.
B-1747
- 2For example, a plant producing 100,000 barrels per dav of liquid
?S?J Sin
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eSt at
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tc
\cost
3
to 5 billion inconstant
1979 dollars while a plant producing 50,000 barrels per day
from oil shale is estimated to cost about $1.25 billion. The
capital requirements for a plant producing 50,000 barrels
per day of ethanol from biomass are approximately equal to
the capital requirements for synthetic liquids from oil shale.
The risks faced by private sector firms in financing a
synthetic fuels project are substantial and involve the
technologies and marketability of the product. Investors
have not been willing to commit sizeable funds to projects
involving technologies which have been untested at commercial
scales of operation. This is a particular obstacle in the
case of coal liquefaction and oil shale. If a plant is
unable to operate at sufficient capacity or the technology
does not work, the investment may not be recovered. This
has been the reason that development of these technologies
through pilot projects and demonstration plants before
commercial scale production has been proceeding slowly.
However, given the goals set by the President, we cannot
afford the years of delay that would be required to proceed
through a more extensive technical evaluation, and most
industry experts agree that the incremental risks of accelerating the process are not unacceptably large. If we do not
accelerate the process, 2.5 million barrels per day will not
be produced by 1990. Federal financing assistance may be
required to assume some of the technological risks associated
with at least the first generation of the projects.
The second major risk is the "price risk" which has two
elements—the market price of oil and the total cost of
construction. Obviously, if the final product cannot be sold
at prices sufficient to recover investment and to pay an
appropriate rate of return, investors will not be willing to
provide funds for the project. Current estimates of the cost
per barrel of synthetic fuels and unconventional gas remain
substantially higher than the current world price of oil.
Because the supply of oil is declining and more costly to
extract, sooner or later the costs will be competitive with
that of oil. While Department of Energy projections provide
a basis for concluding that this is likely to happen in the
foreseeable future, private investors are not sufficiently
convinced to commit the very large amounts of capital required.
A government guarantee of the price of the product will be
required until investors become convinced that synthetic
fuels and unconventional gas will be competitive.
The other part of the price risk involves the problem of
construction costs which directly affect the break even price
for synthetic fuels. These overruns can be attributed mainly
- 3 to the untested nature of some synthetic fuel technology on
a commercial scale, inflation, and delays caused by various
regulatory disputes which have led to delays in construction
periods. These risks can be partially covered by price
guarantees. The Energy Mobilization Board proposed by the
President will also assist in reducing the delays and therefore reducing the overruns.
It is difficult to forecast accurately the effect of
synthetic fuels investment on our domestic capital markets.
Any such conclusions depend upon projections of U. S. economic
conditions over the next ten years. Reliance on any such
projections is hazardous.
Nevertheless, while the amount of public and private
investment required to meet the President's import reduction
goals is very large, our capital markets should be able to
finance them without severe dislocations. For example, the
Department of Energy forecasts that as much as 100 to 160
billion in inflated, nominal dollars of total investment
over the 1980-1990 period might be required to meet the
President's production goals. This seems like an enormous
figure, but it must be compared to estimates of the total
capital raising capacity of our economy. Data Resources,
Inc. estimates that as much as $5 trillion may be raised
over that same period. If these two estimates are even
close to accurate, the capital markets impact of this
program should not be severe.
The proposed Energy Security Corporation, will have the
authority to borrow up to $88 billion from the Treasury to
assist in raising these funds. It will be funded by revenues
derived from the windfall profits tax. The maximum amount
available to the Corporation over the 1980-1990 period would
be $88 billion. By contrast the President's proposed windfall
profits tax would raise substantially more than this amount
over the 1980-1990 period.
Financing Techniques
A variety of techniques may be involved in providing
Federal financing assistance to synthetic fuels and unconventional gas projects. It is useful to provide a few hypothetical examples of the financing tasks which will be confronted
and the role which the Federal Government might play.
Many coal and shale oil plants would be financed on a
project-financing basis by a consortium of large or small
companies. Typically, a new entity would be created to
- 4 construct and operate the project. The partners would
provide equity for the entity which would then raise its own
debt capital. Often, this type of financing involves a more
highly leveraged project than normal balance sheet financing.
Furthermore, the balance sheets and cash flow of the partners
may not be sufficient to support the financing. The debt of
the project may be secured in whole or in part by either
contractual arrangements on product sales which insure that
payments will flow to the project to cover debt service
regardless of whether product is available or guarantees
of the project debt by the partners.
A joint venture might be formed by four medium-sized companies to construct a coal liquefaction plant at a cost of
$2.5 billion in 1979 dollars to produce 50,000 barrels per day
of gasoline. The joint venture would be capitalized with
I'Y-o equity and 75% debt as follows: the partners would
provide $625 million of equity and would need to borrow
$1,875 million in the private markets. However, because the
technology has not previously been tested commercially,
lenders uiight be unwilling to finance the venture, the partners
might not have sufficient resources on their own to guarantee
this large amount of debt because of restrictions in their
outstanding loan agreements or for other reasons. The project
might not be built, therefore, unless the Federal government
could provide guarantees, at least until the project had
commenced commercial production and perhaps for the duration
of the long-term financing.
Even if the technological and credit risks can be
overcome, the major problem faced may be the marketability
of the products. For purposes of illustration, an oil company,
two Large coal companies, and two utilities might become
joint venture partners in a coal 1iquifact ion plant producing
gasoline and other by-products. Contracts would be negotiated
with the oil companies and one of the utilities to purchase
the entire output of the project at the then current world
price. The credit of the purchasers might be sufficiently
strong at a fixed price, but the partners could be unwilling
to assume the risk that world oil prices will be below the
cost of producing the synthetic fuel. The Federal Government
could provide price guarantees to the project so that if the
wot"Id price is below the cost of the product, the project
would oe compensated for this differential and have sufficient
funds to repay the debt and provide a return to the partners.
In some situations, it may be that the technical and
price risks associated with a project are so significant that
the least expensive way for the project to be completed would
- 5 be for the Federal government itself to assume all the
responsibilities for construction and start-up. In effect,
the project would be completed on a government-owned basis
through the use of a private contractor and operated at least
initially by a private sector contractor under a management
contract. The plant, if successful, would be sold into the
private sector as promptly as practicable.
I should stress that although we believe these to be
representative alternative financing scenarios, it is simply
not possible to predict in advance what form the financing
should take in the case of each project—and there may be
upwards of 40 involved—in order to assure that the projects
will be completed and that they are completed at the least
cost to the Federal taxpayer. For example, the financing
devices associated with the development of unconventional
gas sources may be quite different from those outlined
above.
Thus, it is essential that the Federal entity created
to finance or assist in the financing and completion of
these projects have authority to use a variety of financing
tools to assist synthetic fuels projects. The use of these
tools will be determined by the technology involved, the
prospect for world oil prices at the time of financing for
the project, the partners involved and their financial strength,
the regulatory climate, and other important variables.
The President's Energy Security Corporation
In his July 15 speech, the President proposed an Energy
Security Corporation which would have broad ranging authority
to assist projects which produce synthetic fuels (including
liquids and gases from coal, biomass, peat and oil shale)
and unconventional natural gas. The Corporation is designed
to create a partnership with the private sector to achieve
the import reduction goals provided in the President's Energy
Program. It will be able to assume the risks which the
private sector has been unwilling to assume, and thus provide
the missing ingredient to the creation of a synthetic fuel
industry. To achieve this result in the most efficient
manner, it will be freed of most of the restrictions which
impede the ability of government agencies to act quickly and
decisively and will be able to attract the most qualified
personnel in the United States. In order to minimize the
incursion into the private sector, it will sunset in 12
years. At the end of its life, the Energy Security Corporation's assets and liabilities would be transferred to the
Treasury Department for settlement and liquidation.
- 6 The Administration firmly believes that it is critical
to create such a corporation in order to achieve the production
goals established by the President. The Energy Security
Corporation offers a focused Manhattan-project approach in
assisting the private sector development of a synthetic
fuels industry, which is consistent with the urgency of
reducing our dependence on oil imports.
The Corporation will be a Federally chartered corporation managed by a seven-member board of directors. The
Federal directors will include the Secretaries of Energy,
Treasury, and Interior. The Chairman and three outside
directors will be appointed by the President, subject to
confirmation by the Senate for five-year staggered terms.
The Chairman will serve as a full time Executive Officer who
will be experienced in at least one aspect of planning, construction and financing of production facilities.
The Board of Directors will be authorized to set the
compensation for the chairman, the outside directors, officers
and employees, and the Corportion's overall personnel levels.
The Corporation will develop domestic production
capacity and will not engage in research and development.
It will have discretion to use a wide range of tools to
assist in reaching its goals including price guarantees,
Federal purchases, direct loans, loan guarantees. It will
have the power to build up to three plants which will be
government-owned and operated or operated by private
parties under management contracts. Additional plants may
be constructed only if the Chairman determines that the
President's production goals cannot be met through the use
of the Corporation's other financing powers. If a private
sector firm receives a tax credit with respect to the output
of a project, that project will not be eligible for financial
assistance from the Corporation.
The Corporation will have the authority to borrow from
the Treasury up to $88 billion. This authority will be
sought in advance but with staggered availability — $22 billion
at the outset and an additional $22 billion every 18 months
thereafter. The President will have the authority to postpone
the availability of funds depending on the progress of the
Corporation.
The Secretary of Treasury will be authorized to purchase
from the Corporation its total stock in the amount of $100
million. This will be accomplished by an appropriation
available at the time the Corporation is established and
will be reflected in the Budget of the United States. The
Corporation will use the proceeds to meet administrative
expenses.
- 7 The operations of the Corporation will not be reflected
in the budget of the United States except to the extent
transfers are required from the Energy Security Trust Fund.
This will insure that outlays by the United States' Government
to the Corporation will be shown in the President's Budget.
Up to $88 billion will be available from the Energy Security
Trust Fund for the financing of its loans from the Treasury
It is recommended that annual appropriations not be required
and that necessary budget authority be provided at the time
of establishment.
The President's program will act to accomplish important
national energy objectives but will also provide other substantial benefits to the Nation:
The investment in synthetic fuels production will
reduce our dependence oh foreign sources of oil. This
dependence increasingly impairs our national security.
The Corporation will provide the impetus to start the
wide scale development of synthetic fuels and unconventional natural gas. The development of these
resources must occur in light of our declining reserves
of conventional oil and gas. The sooner we develop
these resources, the better off1 we will be.
The reduction in oil imports will have a very positive
impact on our balance of payments and will result in
expenditures in our domestic economy that would have
been made to foreign nations.
By removing uncertainty and by guaranteeing adequate
supplies of energy, the President's program would
increase the propects that the U. S. economy will
achieve its full growth potential in the years ahead.
The President's program will make the United States
a leader in advanced technology associated with the
production of unconventional and alternative sources
of energy. A beneficial spin-off of technology to other
fields and productivity gains should also occur.
Despite the freedom from normal governmental restrictions,
the President's proposal contains appropriate safeguards to
protect the Federal interest.
c
Borrowing authority is available in $22 billion
tranches.
- 8 Reserves are required to be set up against all
contingent and noncontingent obligations when
incurred and are charged against the Corporation's
budget authority. These reserves are based in part
on estimates of future world oil prices.
Loans and guarantees may be provided only where
capital is not available on reasonable terms and
conditions; collateral may be required.
Loan guarantees may not be provided for more than
75% of the initial cost of a project and 60% of
any overruns.
Loan guarantees may be purchased by the Federal
Financing Bank, thereby reducing financing costs;
Fees for loan guarantees must be charged to cover
administrative expenses and probable losses.
Price guarantees must be based on competitive bids,
where possible.
Projects built by the Corporation must ultimately
be sold to the private sector; no more than three may
be constructed unless necessary to meet the President's
goal.
The Board of Directors is subject to ultimate
Presidential control—three members are cabinet
secretaries and one of the other four members' term
will expire every 15 months, serving staggered fiveyear terms.
The GAO is authorized to conduct annual audits and
semi-annual reports to Congress are required.
Administrative expenses are limited to $35 million
annually.
Obligations are payable out of the Energy Security
Trust Fund with a priority over all other uses
except tax credits and low-income assistance.
Obviously, mistakes will be made, losses will occur and
some unforeseeable problems will develop. However, we believe
this type of organization presents the country's best chance
to achieve the President's goals.
Energy Mobilization Board
In addition, the President also proposed an Energy
Mobilization Board to accelerate the regulatory approval
- 9 process for vital energy projects. I wish to acknowledge
especially the work that you have done in developing this
idea, Mr. Chairman. This board must be created in order
to achieve the 1990 targets for domestic energy development
and import reduction. The Board would have three members
and will be located in the Executive Office of the President.
The members of the Board will serve at the pleasure of the
President and will be confirmed by the Senate.
The Board would be authorized to designate certain nonnuclear facilities as critical to the Nation's import reduction
goals and to establish schedules for Federal, state and local
decision-making with respect to those projects. No more than
75 projects could be assisted at any one time. Expedited judicial review procedures would be established through the Federal
Courts of Appeals for the jurisdiction in which the project
will be built. If a Federal, state, or local agency failed
to act within the established schedule, then the Board will
have authority to make the decision in place of the agency but
applying the appropriate Federal, state, or local law. The
Board will also have the authority to waive procedural requirements of Federal or local laws. To avoid delays after construction has started, the Board could waive the application of
new substantive or procedural requirements of law which came
into effect after construction of a project has commenced.
Waivers would be granted on a case-by-case basis. Waivers
would also be subject to a Presidential veto.
A copy of the detailed specifications for the Energy
Mobilization Board is attached for insertion into the
record.
Conclusion
In summary, the President has outlined a bold program to
reduce our Nation's reliance on oil imports by 4.5 million
barrels by 1990. This program is critical to preserving our
national security and economic health. The Administration
looks forward to working with Congress to achieve this
objective through enactment of the appropriate legislation.
I urge your support for the President's import reduction
measures including the establishment of the Energy Security
Corporation to encourage the development of synthetic fuels
and unconventional natural gas.
oOo
B-e-------
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pjrMo/f/ieJR£fl$(J/?K |[
HINGTQN, D.C. 20220 TELEPHONE 566-2041
,.-.* ,--.,..,: _HHi MSB - m HHB
For Release Upon Delivery
Expected at 10:00 A.M.
Tuesday, July 24, 1979
STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS
SENATE COMMITTEE ON GOVERNMENTAL AFFAIRS
Mr. Chairman and Members of the Subcommittee:
I appear before you to discuss the Administration's past
experience with the General Revenue Sharing Program and
certain aspects of its future. We in the Treasury Department
have devoted a great deal of attention to the evaluation of
this major program during the past several months. While we
have not yet formulated recommendations on the future of GRS,
we have been exploring a wide variety of options.
Concerning the Federal budget effects of this program, the
Administration's position is that it should be funded at
current levels through September 30, 1980 — when the current
statute expires. In 1976, Congress extended this program for
four years and recipients understandably have assumed that
they could depend on these funds for that period. We do not
favor, therefore, any immediate change.
Beyond fiscal 198 0, the General Revenue Sharing Program
clearly must be evaluated relative to the other important
demands on limited Federal resources. There is no doubt
that to the degree that this program contributes to a healthy
Federal system and supports the vital activities of States
B-1748
- 2 and localities, it should have high priority. Nevertheless,
we are weighing these positive aspects of revenue sharing
against the need for a balanced Federal budget, the needs
of other programs, the current health of the State and local
sector, and the possible need to better direct Federal assistance
to the most needy communities and the most serious problems.
Regarding the fiscal condition of State and local governments, there have been considerable surpluses in that sector
in recent years. I should sound two cautionary notes, however.
First, the NIA data on State and local finances is not flawless.
In addition, since the beginning of 1978, there has been a
trend toward smaller and decreasing NIA surpluses for this
sector.
The current revenue sharing allocation system distributes
funds to almost all general purpose governments in the United
States essentially on the basis of population, the inverse of
per capita income, and tax effort. While it is true that
many States and communities receive some funds, the GRS
program actually involves a moderate targeting of funds to
the advantage of communities which might be considered
as fiscally needy.
We at. the Treasury are giving careful consideration to
alternative formulae for distributing any future program of
general fiscal assistance. The role of the States in the
program; the use of alternative data and data concepts for
distribution purposes; the redefinition of recipient eligibility;
and the design of a several-tiered program, each tier with
its own purposes, are being explored.
I would like to remind the Members of the Subcommittee
that the development of an alternative formula for distributing
intergovernmental aid to a sizeable number of governments is
difficult both technically and politically. As concerns the
first difficulty, there are few alternative measures of need
for which there is acceptable quality data. Even if these
technical problems could be readily put aside, finding an
alternative distribution scheme which will oe widely supported
is a difficult task. This latter fact is especially true
when there is considerable support for the existing pattern
of allocations.
Let me turn now to a discussion of how GRS funds are
used by recipient governments. To begin, we all know that
General Revenue Sharing is a significant source of revenue
for the recipient governments. In 1976-77, GRS made up 1.3
percent of States' total general revenue, and about 4 percent
- 3 of local general revenue. This source of revenue has allowed
many to provide essential services and functions without
having to resort to increased taxes or borrowing. Obviously,
this is particularly significant for fiscally strained
localities, which might be required to cut current services if
GRS funds were terminated.
*
Studies on GRS fiscal impact found that, for fiscal 197375, between 50 to 70 percent of GRS funds were used by recipient
governments to expand and maintain expenditures on existing
functions. Functionally, the expenditure areas most affected
by GRS are public safety and transportation. In addition,
those earlier studies indicated that State governments transfer
a substantial portion of their GRS funds to local governments.
More specifically, actual use data for 1976-77 suggested
that 84.7 percent of States' GRS expenditures were for current
expenditures, and 68.2 percent of local GRS expenditures
were for this purpose.
Education accounted for slightly more than half of
reported State GRS expenditures in 1976-77. The other*
functions on which GRS funds were reportedly expended were
health and hospital, transportation and public welfare.
About 44 percent of all State GRS expenditures were
intergovernmental payments to local governments, mainly for
education. Concerning localities, they expended GRS funds
primarily on health and hospitals, public safety, and highways.
In particular, fire and police protection accounted for
18.9% and 26.6%, respectively, of all GRS expenditures by
municipalities in 1976-77.
Finally, Mr. Chairman, you and other Senators on the
Subcommittee are aware, I am sure, that the 1976 amendments
to the revenue sharing statute placed extensive nondiscrimination,
auditing, and public participation requirements on GRS recipients.
Unfortunately, the Office of Revenue Sharing has only limited
resources to administer these broad and somewhat unique
requirements.
With a civil rights staff of less than fifty, ORS has
since 1976 attempted to seriously enforce the nondiscrimination
requirements of the statute. In the case of States and larger
communities, much of the compliance actions called for by
these requirements would have resulted anyway from compliance
with other Federal laws or from State and local actions.
However, the revenue sharing law brings requirements of
nondiscrimination for a broad array of protected employment
- 4 classes to many smaller governments which have little other
contact with the Federal government.
Compliance with the audit requirement imposed in the
1976 amendments — that all recipients receiving $25,000
have an audit once every three years according to generally
accepted auditing standards -- is now being evaluated. The
Office of Revenue Sharing has depended to the degree possible
on State audit agencies to administer this responsibility.
Nevertheless, it still must review many audit reports submitted
to it. There is considerable evidence that this aspect of
the 1976 amendments has caused positive changes in State and
local practices.
There are also reasonably extensive procedural requirements
placed on GRS recipients to assure that the public is given
an adequate opportunity to participate in decisions about how
GRS funds are to be used. Again, our personnel resources
for assuring compliance are not extensive. However, we have
done our best to respond to complaints received. In many
instances, States and localities have been following procedures
similar to those in the GRS statute under their own laws and
practices.
Mr. Chairman and Members of the Subcommittee, I will now
be happy to respond to any questions you may have.
PRESS CONFERENCE
OF
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
JULY 19, 1979
ASSISTANT SECRETARY LAITlN: As you may have guessed, I
am now introducing to you for the last time, Secretary Blumenthal.
SECRETARY BLUMENTHAL: I am delighted to see that the press
corps has swollen by this remarkable extent. But I have come
to tell you what is obviously by now no longer news: Namely
that I met with the President this afternoon at 1:30 to discuss
my situation with regard to the general offer of resignations
which the cabinet had extended at the meeting on Tuesday. I
told the President that my offer was not pro forma, that I had
determined that it was in his best interest, as well as in mine,
that I step down as soon as possible and that I did want to leave.
The President concurred in that judgment and he told me that it
was his intention to nominate the Chairman of the Federal Reserve
Board, Mr. Miller, to succeed me. And I indicated to him that
I was delighted with that choice, that I thought that it was a
very good one, that I felt that it was an assurance that the
economic policies with which he had been identified for the last
two and one half years and in which I had attempted to assist him
in their development and their implementation would be continued
and that that was a very good guarantee for the continuity of
What I think are sound and sensible economic policies.
I also agreed with the President that I would carry on so
as to strengthen that continuity until Mr. Miller can be available to take over here, which I hope will be very soon.
I merely want to say that I am satisfied that the last two
and one half years have been good ones. I am satisfied that the
economic policies with which I have been identified and for which
I have worked, and heloed the President on are the riaht ones.
And I am auite sure that the President will continue to out at
the top of his agenda the fight against inflation, the expansion
of our energy resources, so as to substitute for imported sources
of energy, and continued policies of proper fiscal and budgetary
restraint and the expansion of what has come to be known as the
supply side of the economy. So I am happy with the turn of events
and will be here for some time until Mr. Miller can take my place.
B-1749
-2QUESTIONER: Why did the President accept your resignation
and why did you offer it? Is it a question of policy or is it
a question of a personal dispute that perhaps you are not perceived as a team player?
SECRETARY BLU4ENTHAL: I obviously am not in a position to
repeat to you the entire half hour conversation between myself and
the President. But I can tell you in general terms what I told
the President. I told the President that I felt that after two
and a half years it was, from ray point of view, time to return to
the private sector, that I felt that I had done as much as I could
to help him in the shapina and administerina of economic policies,
*-hatI felt that I needed a rest, was ready for it. And I felt that
it was. best for him and best for me if I resian. He concurred
in that assessment, he accepted mv resianation and that was the
aist of it.
QUESTIONER: What did you feel?
SECRETARY BLU1ENTHAL: I think that aiven the fact that I
feel that I would like to leave- that I have done as much as I
can and that obviouslv he is makina a number of changes, that
this was the right moment for him to do this and I'm quite satisfied
that he has accepted my resignation and will be carrying on.
QUESTIONER: Were you telling the President that you could
not handle the job anymore or was it the conditions under which
you were conducting your job?
SECRETARY BLUMENTHAL: I stand on what I've said. Obviously,
I would not — I did not tell him that I could not handle the
job. I feel that I have handled the job well. I have handled any
job that I have done well. So that isn't the problem. But I
really have to stand on what I've told you.
QUESTIONER: Did you feel the offers of resignation were
something less than voluntary, that you were cornered into offering
your resignation?
SECRETARY BLIMENTHAL: No, I think that the entire cabinet
felt that the President should be given a free hand, they did so.
All the cabinet members as far as I could tell -- you'll have to
ask them individually — did so without any coercion at all.
They felt that that was only proper. We all serve at the pleasure
of the President. Certainly I have told you that in my case
there was no coercion at all and that it was entirely voluntary
as far a's I was concerned.
-3QUESTIONER: How long have you been contemplating resigning
and returning to the private sector?
SECRETARY BLUMENTHAL: I've been giving it some thought
for some time, for some months.
QUESTIONER: What do you think of the whole process that the
Administration is now going through of restructuring itself?
SECRETARY BLUMENTHAL: Well, I really think you should ask
the President and his spokesman to explain the process. That's
not for me to do. Clearly, the President feels that he would like
to make a number of changes. He is doing so on the staff, he
is doing so on the cabinet. That is his privilege. It is a fact
that this team has been together, probably longer than most other
teams have. What are all of the details of the thinking, I
don't know and I think you should ask him.
QUESTIONER: While testifying, you suggested that this
process may have been one of the factors in the current financial
uncertainty that was having its effect on various markets. Do
you feel that it would have been done in a way that would have
promoted stability?
SECRETARY BLUMENTHAL: I was not being critical at all. I
was being asked why the price of gold has gone up. I indicated
I did not know, that I was not able to make that kind of judgment,
that I felt that during periods of change and uncertainty — which
related in this instance both to the rapid rise of oil prices, the
recent indications that there would be a higher rate of inflation
and a lower rate of growth in the United States and the changes in
the cabinet that were under consideration — that all of that
created conditions of uncertainty in which it was understandable
there would be some such movement. And, again, I would have to
stand on that.
QUESTIONER: The President, in his address to the nation
Sunday night indicated and endorsed at least tacitly the view
of a southern governor who was quoted as saying that some of my
cabinet members disloyal and some of my staff undisciplined. Do
you consider yourself disloyal?
SECRETARY BLUMENTHAL: Certainly not. And I would have to
say to you, to the best of my knowledge, neither does the President.
QUESTIONER: Mr. Solomon, Mr. Bergsten, do they go too?
SECRETARY BLUMENTHAL: I certainly hope and expect that the
very able group of people that I have been privileged to work with
in the Treasury will be here and will be available to Mr. Miller.
I have no knowledge of anyone intendina to resign.
-4-
QUESTIONER:
(inaudible)
SECRETARY BLUMENTHAL: I did, I told the President that he
had an excellent group of people in the Treasury, that I was proud
of them, that I felt as proud of turning over to Bill Miller the
group of executives that had worked with me in the Treasury as I
had been proud to turn over to my successor in the Bendix Corporation the people that had helped me make that one of the best
managed companies in the country and that I felt that it was
important that that team be recognized and kept together.
QUESTIONER: What did he say?
SECRETARY BLUMENTHAL: He said that he was quite aware,
he indicated that he was very much aware of the high quality of
the Treasury staff from top to bottom.
QUESTIONER: Have you talked to Mr. Miller, do you have any
idea when he will be taking over?
SECRETARY BLUMENTHAL: I have not yet talked to Mr. Miller
and I do not know. I have been trying to reach him. I have not
been able to reach him.
QUESTIONER: You said your resignation (inaudible). Are
you intending to distinguish it from the others in terms of timing
or substance?
SECRETARY BLUMENTHAL: No, I was only speaking for myself.
QUESTIONER: In the thirty months that you held this office,
what would you say is the accomplishment or the program that you
are most proud of?
SECRETARY BLUMENTHAL: I think it is difficult to single out
any one particular area or activity. I think that, obviously, the
part that we have played in the Treasury and that I have been
privileged to play in advising the President in the shaping of
his economic policies and the emphasis on the need to fight inflation
and the efforts to progressively
reduce government spending and
move us toward a better balance in the budget — I think that
has been a very important factor that I feel proud of. Second, I
think that the successful policies that we have pursued to maintain
the strength and stability of the dollar have been a very good
and terribly important thing for our country and for our standing
in a world context. Third, I believe that the tax policies that
have been pursued first under the superb leadership of Assistant
Secretary Woodworth, who unfortunately died much too soon, and then
under his very able successor Donald Lubick, which resulted in what
I thought was a good tax bill that was fair and equitable to all
concerned, was certainly something that has been a positive thing.
-5And in addition to that, all of the other things that we have done
in the international organizations, the multilateral development
banks, the IMF, many international initiatives under the leadership
of Under Secretary Solomon and Assistant Secretary Bergsten and
in the banking field under Deputy Secretary Carswell — all of
those things put together will show up, I think, as sound,
responsible policies on which the Treasury was helpful, which the
President followed and which I'm sure he will continue to follow.
QUESTIONER: Mr. Carter wants to put together a team which is
more cohesive in terms of their thinking and their policy and so
forth. Now 3. William Miller will be coming in to take over the
Treasury and has already disputed the Carter Administration's
projections on the future state of the economy. He says that the
projections were too optimistic. How do you think he is going
to do in that context?
SECRETARY BLUMENTHAL: I'm sure Mr. Miller will be fully
capable of speaking for himself. Mr. Miller issued a Federal Reserve
Board forecast. He is going to have to look at the details of the
projections that have been made here in the Council (of Economic
Advisers) and then he will have to give you his reply. I am quite
confident that the general economic philosophy, his experience,
his strength as a former senior business executive, his experience in the Fed equip him admirably for the job as Secretary
of the Treasury. I think it's a superb choice. I think he will
be very good at it. I think the President has chosen very well.
And I think that his views will be quite compatible with those
which the President is pursuing and the views with which I have
been identified.
QUESTIONER: Do you feel you jumped before you got pushed?
SECRETARY BLUMENTHAL: I took advantage of the opportunity
to get paroled with time off for good behavior.
Thank you very much.
FOR RELEASE AT 4:00 P.M.
July 24, 1979
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,000 million, to be issued August 2, 1979.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $6,018 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,000
million, representing an additional amount of bills dated
May 3, 1979,
and to mature November 1, 1979
(CUSIP No.
912793 2T 2), originally issued in the amount of $3,113 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
August 2, 1979,
and to mature January 31, 1980
(CUSIP No.
912793 3P 9) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing
August 2, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,788
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 uniler competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. 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, July 30, 1979.
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-1750
-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 ter -»rs for
their own account. Each tender must state the amoi t of any net
long position in the bills being offered if such pc ition is in
excess of $200 million. This information should reelect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as weJl as holdings
of outstanding' bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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.
-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on August 2, 1979,
in cash or other immediately available
funds or in Treasury bills maturing August 2, 1979.
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.
Under 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, 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.
Wednesday, July 25, 1979
STATEMENT OF THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
Mr. Chairman and Members of this Distinguished Committee:
I am honored to appear before the Committee this
morning to discuss the Administration's proposed program, and
various legislative initiatives proposed by Members of
Congress, which will assist the development of alternative
sources of energy and reduce oil imports by the United States.
As President Carter mentioned in his speech of July 15, the
Administration is firmly committed to reducing oil imports by
encouraging conservation and the production of new sources of
energy. Continued reliance on external sources of oil impairs
both our Nation's security and economic health. I need not
discuss in general terms the energy problems that we face
since these conditions are very familiar to you, but will
instead focus my presentation on the financing aspects of
developing new sources of energy. You have asked me to
testify with respect to a diverse collection of bills.
Since your request for testimony before this Committee,
President Carter has announced an extensive program to reduce
oil imports through conservation and the production of
alternative sources of energy. This program will include an
Energy Security Corporation to focus the Nation's efforts in
achieving the goal of producing two and one-half million
barrels per day of synthetic fuels and unconventional sources
of natural gas by 1990, and an Energy Mobilization Board to
facilitate the approval for siting of energy projects of all
types deemed to be critical to increasing production of our
domestic energy resources.
B-1751
- 2 General Principles of Energy Financing
Before discussing any of the particular bills in detail,
I would like to make some general comments about financing
alternative sources of energy. The United States has a very
robust private sector which conducts energy activities.
While some municipal utilities and rural electric cooperatives
are publicly-owned and are the exception, most large utilities
which generate and/or distribute electricity and natural gas
are private, investor-owned utilities. This Administration
firmly believes that the private sector should continue to
have primary responsibility for producing, transporting, and
distributing energy resources in the United States. An
important question is why has the private sector not developed
synthetic fuels or widely promoted solar energy? The answer
is different in each case.
While competitive when compared to electricity in some
parts of the country, solar energy has trouble competing
against natural gas and low-priced electricity found in other
parts of the United States. Of course, natural gas prices
have been controlled for many years, and Congress adopted
part of the National Energy Plan proposed by President Carter
which is resulting in the phased deregulation of natural
gas. As the prices of natural gas, home heating oil, and
electricity rise, solar energy should become very economically
competitive. The focus of the Administration's effort is to
help make solar energy more competitive over the near term
by subsidizing the purchase of solar equipment by the consumer.
As proposed by President Carter, the Congress enacted certain
tax credits for solar installations in residences and
businesses, which would assist the consumer by addressing the
problem of near-term economics. On June 20, the President
announced Administration support for the creation of a Solar
Energy Development Bank. The Solar Bank would also act to
assist consumers, particularly residential homeowners, by
providing interest subsidy payments on loans made by local
banks for solar equipment. The President believes it important
to get solar development underway.
The development of a synthetic fuels industry faces
somewhat different financing problems than solar energy.
Synthetic fuels projects suffer from a much more pronounced
capital availability deficiency than do solar investments,
which are smaller. The former are large, capital intensive
projects costing several billion dollars each. There is some
degree of technological risk in scaling-up synthetic fuel plants
- 3 to commercial level. The construction period alone of a plant
would be around four years during which commitment fees and
interest during construction must be paid. The market for
the end product depends on world oil prices many years into
the future, and the anticipated cost of synthetic fuels,
especially coal liquids, may be high when compared to market
prices for conventional crude oil.
Under these circumstances, it is not surprising that
the private sector has proved reluctant to finance large
synthetic fuel projects. Therefore, the Administration
program proposes a Federal Energy Security Corporation to
assist private sector development of synthetic fuels and
unconventional gas. It would have a broad range of financial
tools including loan guarantees, price guarantees, or
purchase arrangements to assist projects. Again, it is
the basic thrust of this proposal that the private sector
will build and operate the plants utilizing the financial,
managerial, and engineering expertise of the private sector.
Financing Risks Associated With Synthetic Fuels and Unconventional Gas
The amount of investment required to construct synthetic
fuel plants and to produce unconventional gas is large, and
the risks associated with that investment have been judged
by private investors to be so great that, as yet, no commercial
scale synthetic fuel plant has been built in the United States.
For example, a plant producing 100,000 barrels per day of liquid
fuel from coal is estimated to cost 3 to 5 billion in constant
1979 dollars while a plant producing 50,000 barrels per day
from oil shale is estimated to cost about $1.25 billion. The
capital requirements for a plant producing 50,000 barrels
per day of ethanol from biomass are approximately equal to
the capital requirements for synthetic liquids from oil shale.
The risks faced by private sector firms in financing a
synthetic fuels project are substantial and involve the
technologies and marketability of the product. Investors
have not been willing to commit sizeable funds to projects
involving technologies which have been untested at commercial
scales of operation. This is a particular obstacle in the
case of coal liquefaction and oil shale. If a plant is
unable to operate at sufficient capacity or the technology
does not work, the investment may not be recovered. This
has been the reason that development of these technologies
through pilot projects and demonstration plants before
commercial scale production has been proceeding slowly.
- 4 -
However, given the goals set by the President, we cannot
afford the years of delay that would be required to proceed
through a more extensive technical evaluation, and most
industry experts agree that the incremental risks of accelerating the process are not unacceptably large. If we do not
accelerate the process, 2.5 million barrels per day will not
be produced by 1990. Federal financing assistance may be
required to assume some of the technological risks associated
with at least the first generation of the projects.
The second major risk is the "price risk" which has two
elements—the market price of oil and the total cost of
construction. Obviously, if the final product cannot be sold
at prices sufficient to recover investment and to pay an
appropriate rate of return, investors will not be willing to
provide funds for the project. Current estimates of the cost
per barrel of synthetic fuels and unconventional gas remain
substantially higher than the current world price of oil.
Because the supply of oil is declining and is more costly to
extract, sooner or later the costs will be competitive with
that of oil. While Department of Energy projections provide
a basis for concluding that this intersection of prices is
likely to happen in the foreseeable future, private investors
are not sufficiently convinced, to commit the very large
amounts of capital required. A government guarantee of the
price of the product will be required until investors become
convinced that synthetic fuels and unconventional gas will
be competitive.
The other part of the price risk involves the problem of
construction costs which directly affect the break-even price
for synthetic fuels. These overruns can be attributed mainly
to the untested nature of some synthetic fuel technology on
a commercial scale, inflation, and delays caused by various
regulatory disputes which have led to delays in construction
periods. These risks can be partially covered by price
guarantees. The Energy Mobilization Board proposed by the
President will assist in reducing the delays and therefore
reducing the overruns.
It is difficult to forecast accurately the effect of
synthetic fuels investment on our domestic capital markets.
Any such conclusions depend upon projections of U. S. economic
conditions over the next ten years. Reliance on any such
projections is hazardous.
- 5 Nevertheless, while the amount of public and private
investment required to meet the President's import reduction
goals is very large, our capital markets should be able to
finance them without severe dislocations. For example, the
Department of Energy forecasts that as much as 100 to 160
billion in inflated, nominal dollars of total investment
over the 1980-1990 period might be required to meet the
President's production goals. This seems like an enormous
figure, but it must be compared to estimates of the total
capital raising capacity of our economy. Data Resources,
Inc. estimates that as much as $5 trillion may be raised
over that same period. If these two estimates are even
close to accurate, the capital markets impact of this
program should not be severe.
The proposed Energy Security Corporation, will have the
authority to borrow up to $88 billion from the Treasury to
assist in raising these funds. It will be funded by revenues
derived from the windfall profits tax. The maximum amount
available to the Corporation over the 1980-1990 period would
be $88 billion. By contrast the President's proposed windfall
profits tax would raise substantially more than this amount
over the 1980-1990 period.
Financing Techniques
A variety of techniques may be involved in providing
Federal financing assistance to synthetic fuels and unconventional gas projects. It is useful to provide a few hypothetical examples of the financing tasks which will be confronted
and the role which the Federal Government might play.
Many coal and shale oil plants would be financed on a
project-financing basis by a consortium of large or small
companies. Typically, a new entity would be created to
construct and operate the project. The partners would provide
equity for the entity which would then raise its own debt
capital. Often, this type of financing involves a more
highly leveraged project than normal balance sheet financing.
Furthermore, the balance sheets and cash flow of the partners
may not be sufficient to support the financing. The debt of
the project may be secured in whole or in part by either
contractual arrangements on product sales which insure
that payments will flow to the project to cover debt service
regardless of whether product is available or by guarantees
of the project debt by the partners.
- 6 A joint venture might be formed by several medium-sized
companies to construct a coal liquefaction plant at a cost of
$2.5 billion in 1979 dollars to produce 50,000 barrels per day
of gasoline. The joint venture would be capitalized with
25% equity and 75% debt as follows: the partners would
provide $625 million of equity and would need to borrow
$1,875 million in the private markets. However, because the
technology has not previously been tested commercially,
lenders might be unwilling to finance the venture. The partners
might not have sufficient resources on their own to guarantee
this large amount of debt because of restrictions in their
outstanding loan agreements or for other reasons. The project
might not be built, therefore, unless the Federal government
could provide guarantees, at least until the project had
commenced commercial production and perhaps for the duration
of the long-term financing.
Even if the technological and credit risks can be
overcome, the major problem faced may be the marketability
of the products. For purposes of illustration, an oil company,
two large coal companies, and two utilities might become
joint venture partners in a coal liquefaction plant producing
gasoline and other by-products. Contracts would be negotiated
with the oil companies and one of the utilities to purchase
the entire output of the project at the then current world
price. The credit of the purchasers might be sufficiently
strong at a fixed price, but the partners could be unwilling
to assume the risk that world oil prices will be below the
cost of producing the synthetic fuel. The Federal Government
could provide price guarantees to the project so that if the
world price is below the cost of the product, the project
would be compensated for this differential and have sufficient
funds to repay the debt and provide a return to the partners.
In return for providing the price guarantee, the government
might also receive a share of the profits if the world market
price exceeded the guaranteed price at the time of the completion
of the project.
In some situations, it may be that the technical and
price risks associated with a project are so significant that
the least expensive way for the project to be completed would
be for the Federal government itself to assume all the
responsibilities for construction and start-up. In effect,
the project would be completed on a government-owned basis
through the use of a private contractor and operated at least
initially by a private sector contractor under a management
contract. The plant, if successful, would be sold into the
private sector as promptly as practicable.
- 7 I should stress that although we believe these to be
representative alternative financing scenarios, it is simply
not possible to predict in advance what form the financing
should take in the case of each project—and there may be
upwards of 40 involved—in order to assure that the projects
will be completed and that they are completed at the least
cost to the Federal taxpayer. For example, the financing
devices associated with the development of unconventional
gas sources may be quite different from those outlined
above.
Thus, it is essential that the Federal entity created
to finance or assist in the financing and completion of
these projects have authority to use a variety of financing
tools to assist synthetic fuels projects. The use of these
tools will be determined by the technology involved, the
prospect for world oil prices at the time of financing for
the project, the partners involved and their financial strength,
the regulatory climate, and other important variables.
The President's Energy Security Corporation
In his July 15 speech, the President proposed an Energy
Security Corporation which would have broad ranging authority
to assist projects which produce synthetic fuels (including
liquids and gases from coal, biomass, peat and oil shale)
and unconventional natural gas. The Corporation is designed
to create a partnership with the private sector to achieve
the import reduction goals provided in the President's Energy
Program. It will be able to assume the risks which the
private sector has been unwilling to assume, and thus provide
the missing ingredient to the creation of a synthetic fuel
industry. To achieve this result in the most efficient
manner, it will be freed of most of the restrictions which
impede the ability of government agencies to act quickly and
decisively and will be able to attract the most qualified
personnel in the United States. In order to minimize the
incursion into the private sector, it will sunset in 12
years. At the end of its life, the Energy Security Corporation's assets and liabilities would be transferred to the
Treasury Department for settlement and liquidation.
The Administration firmly believes that it is critical
to create such a corporation in order to achieve the production
goals established by the President. The Energy Security
Corporation offers a focused Manhattan-project approach in
assisting the private sector development of a synthetic
fuels industry, which is consistent with the urgency of
reducing our dependence on oil imports.
- 8 -
The Corporation will be a Federally-chartered corporation managed by a seven-member board of directors. The
Federal directors will include the Secretaries of Energy,
Treasury and Interior. The Chairman and three outside
directors will be appointed by the President, subject to
confirmation by the Senate for five-year staggered terms.
The Chairman will serve as a full time Executive Officer who
will be experienced in at least one aspect of planning, construction and financing of production facilities.
The Board of Directors will be authorized to set the
compensation for the chairman, the outside directors, officers
and employees, and the Corportion's overall personnel levels.
The Corporation will develop domestic production
capacity and will not engage in research and development.
It will have discretion to use a wide range of tools to
assist in reaching its goals including price guarantees,
Federal purchases, direct loans, and loan guarantees. It will
have the power to build up to three plants which will be
government-owned and operated or operated by private
Parties under management contracts. Additional plants may
be constructed only if the Chairman determines that the
President's production goals cannot be met through the use
of the Corporation's other financing powers. If a private
sector firm receives a tax credit with respect to the output
of a project, that project will not be eligible for financial
assistance from the Corporation.
The Corporation will have the authority to borrow from
the Treasury up to $88 billion. This authority will be
sought in advance but with staggered availability — $22 billion
at the outset and an additional $22 billion every 18 months
thereafter. The President will have the authority to postpone
the availability of funds depending on the progress of the
Corporation.
The Secretary of Treasury will be authorized to purchase
from the Corporation its total stock in the amount of $100
million. This will be accomplished by an appropriation
available at the time the Corporation is established and
will be reflected in the Budget of the United States. The
Corporation will use the proceeds to meet administrative
expenses.
- 9The operations of the Corporation will not be reflected
in the budget of the United States except to the extent
transfers are required from the Energy Security Trust Fund.
This will insure that outlays by the United States Government
to the Corporation will be shown in the President's Budget.
Up to $88 billion will be available from the Energy Security
Trust Fund for the financing of its loans from the Treasury.
It is recommended that annual appropriations not be required
and that necessary budget authority be provided at the time
of establishment.
The President's program will act to accomplish important
national energy objectives but will also provide other substantial benefits to the Nation:
The investment in synthetic fuels production will
reduce our dependence on foreign sources of oil. This
dependence increasingly impairs our national security.
The Corporation will provide the impetus to start the
large scale development of synthetic fuels and unconventional natural gas. The development of these
resources must occur in light of our declining reserves
of conventional oil and gas. The sooner we develop
these resources, the better off we will be.
The reduction in oil imports will have a very positive
impact on our balance of payments and will result in
expenditures in our domestic economy that would have
been made to foreign nations.
By removing uncertainty and by guaranteeing adequate
supplies of energy, the President's program would
increase the propects that the U. S. economy will
achieve its full growth potential in the years ahead.
The President's program will make the United States
a leader in advanced technology associated with the
production of unconventional and alternative sources
of energy. A beneficial spin-off of technology to other
fields and productivity gains should also occur.
Despite the freedom from normal governmental restrictions,
the President's proposal contains appropriate safeguards to
protect the Federal interest.
- 10 Borrowing authority is available in $22 billion
installments.
Reserves are required to be set up against all
contingent and noncontingent obligations when
incurred and are charged against the Corporation's
budget authority. These reserves are based in part
on estimates of future world oil prices.
Loans and guarantees may be provided only where
capital is not available on reasonable terms and
conditions; collateral may be required.
Loan guarantees may not be provided for more than
75% of the initial cost of a project and 60% of
any overruns.
Loan guarantees may be purchased by the Federal
Financing Bank, thereby reducing financing costs.
Fees for loan guarantees must be charged to cover
administrative expenses and probable losses.
Price guarantees must be based on competitive bids,
where possible.
Projects built by the Corporation must ultimately
be sold to the private sector; no more than three may
be constructed unless necessary to meet the President
goal.
The Board of Directors is subject to ultimate
Presidential control—three members are cabinet
secretaries and the other four members serve
staggered five-year terms, one of which will
expire every 15 months.
The GAO is authorized to conduct annual audits and
semi-annual reports to Congress are required.
Administrative expenses are limited to $35 million
annually.
Obligations are payable out of the Energy Security
Trust Fund with a priority over all other uses
except tax credits and low-income assistance.
- 11 Obviously, mistakes will be made, losses will occur and
some unforeseeable problems will develop. However, we believe
this type of organization presents the country's best chance
to achieve the President's goals.
Solar Energy Development Bank
Solar energy can serve an increasingly important role in
meeting our Nation's energy requirements and in reducing our
oil imports. Accordingly, the Administration will send to the
Congress legislation to create a Solar Energy Development
Bank. Before I discuss the Administration's proposal, I wish
to acknowledge the important contribution that Senator Morgan
of this Committee and Senator Durkin of the Senate Energy
Committee have made to this effort.
The Solar Bank proposed by the President would be located
in the Department of Housing and Urban Development and would
have a strong management structure. The Board of Directors would
include the Secretary of HUD as Chairman and the Secretaries of
Energy and of the Treasury. Its life would be through 1985
unless extended by an Act of Congress. The Bank would be
authorized to make interest subsidy payments on loans originated
by private banks. Loans for the purchase and installation
of solar equipment in both residences and businesses would
be eligible. Limits on the subsidized portion of loans
would be limited to $10,000 per unit for a one to four family
residential structure, $5,000 per unit for any residential
structure with five or more dwelling units (not to exceed
$500,000 per loan), and $200,000 in the case of any commercial
structure. Sixty percent of the amount of subsidy payments
shall be for the purpose of financing solar energy systems
in residential structures. It is proposed that the
Bank be funded from the Energy Security Trust Fund and that
$150 million of such funds shall be available in each full
fiscal year during the life of the Bank.
The Administration looks forward to working with Congress
for passage of this legislation which will encourage the
development of this promising source of energy.
Energy Mobilization Board
In addition, the President also proposed an Energy
Mobilization Board to accelerate the regulatory approval
Process for vital energy projects. This Board must be created
in order to achieve the 1990 targets for domestic energy
- 12 -
development and import reduction. The Board will have
three members and will be located in the Executive Office of
the President. The members of the Board will serve at the
pleasure of the President and will be confirmed by the Senate.
The Board would be authorized to designate certain nonnuclear facilities as critical to the Nation's import reduction
goals and to establish schedules for Federal, State and local
decision-making with respect to those projects. No more than
75 projects could be assisted at any one time. Expedited judicial review procedures would be established through the Federal
Courts of Appeals for the jurisdiction in which the project
will be built. If a Federal, State, or local agency failed
to act within the established schedule, then the Board will
have authority to make the decision in place of the agency but
applying the appropriate Federal, State, or local law. The
Board will also have the authority to waive procedural requirements of Federal or local laws. To avoid delays after construction has started, the Board could waive the application of
new substantive or procedural requirements of law which came
into effect after construction of a project has commenced.
Waivers would be granted on a case-by-case basis. Waivers
would also be subject to a Presidential veto.
Conclusion
In summary, the President has outlined a bold program to
reduce our Nation's reliance on oil imports by 4.5 million
barrels by 1990. This program is critical to preserving our
national security and economic health. The Administration
looks forward to working with Congress to achieve this objective
through enactment of the appropriate legislation. I urge your
support for the President's proposal to create a Solar Energy
Development Bank, to establish an Energy Security Corporation,
and to undertake other import reduction measures.
o 0 o
FOR IMMEDIATE RELEASE
July 24, 1979
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $3,001 million of
$4,669 million of tenders received from the public for the 2-year
notes, Series V-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 9.35%^
Highest yield
Average yield
9.45%
9.41%
The interest rate on the notes will be 9-3/8%. At the 9-3/8% rate,
the above yields result in the following prices:
Low-yield price 100.045
High-yield price
Average-yield price
99.866
99.938
The $3,001 million of accepted tenders includes $ 426 million of
noncompetitive tenders and $1,805 million of competitive tenders from
private investors, including 96% of the amount of notes bid for at
the high yield. It also includes $ 770 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 $3,001 million of tenders accepted in the
auction process, $170 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 July 31, 1979.
1/ Excepting 1 tender of $10,000
B-1752
tf'^/fi %
TREASURY NOTES OF SERIES
V
~1981
DATE: July 24, 1979
HIGHEST SINCE:
m
L ^ 1 ISSUE:
%3Ar% 7.77//'" 7-'At%
LOWEST SINCE: TODAY:
<7. *«*//«<
JP-B
--__^H
WtoentoftheTREASURY
IGTON.D.C. 20220
TELEPHONE 566-2041
I
FOR IMMEDIATE RELEASE
July 25, 1979
STATEMENT BY SECRETARY BLUMENTHAL
I am extremely pleased that President Carter has nominated
Paul Volcker as Chairman of the Federal Reserve Board. Mr.
Volcker's appointment to the Chairmanship follows an already
distinguished career in public service, including important
service as Under Secretary for Monetary Affairs and as President
of the New York Fed.
The combination of Paul Volcker and Bill Miller provides
the basis for a forceful and resolute pursuit of responsible
anti-inflationary monetary and fiscal policy which recognizes
the importance of a stable dollar. The President's appointments
to these two important posts are superb.
o 0 o
B-1753
w*
M
ll Of
department of theTREASURY
IFFICE OF REVENUE SHARING
VJ
Pi
r
_h
TELEPHONE 634-5248
/789
WASHINGTON. DC 20226
CONTACT:
FOR IMMEDIATE RELEASE
ROBERT W. CHILDERS
(202) 634-5248
July 31, 1979
NEW REVENUE SHARING DATA RELEASED TODAY
The data to be used in allocating amounts of general
revenue sharing funds to be paid to approximately 39,000
units of State and local general government for Federal
fiscal year 1980 were released today by the Department of
the Treasury's Office of Revenue Sharing.
Population, per capita income, adjusted taxes and
intergovernmental transfer figures are included in the data
which are used to calculate the amount of money that each
recipient unit of government will receive.
The data released today include revisions which were
based upon information supplied by State and local governments in a data review program conducted by the Office of
Revenue Sharing in April and May 1979.
The amounts of money which each unit of government will
receive will be announced next month. These amounts will be
paid in four quarterly installments, in January, April, July
and October 1980.
30
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
July 25, 1979
TREASURY AUGUST QUARTERLY FINANCING
The Treasury will raise about $2,400 million of new cash
and refund $4,827 million of securities maturing August 15,
1979, by issuing $2,750 million of 3-year notes, $2,500 million
of 7-1/2-year notes and $2,000 million of 29-3/4-year bonds.
The 7-1/2-year notes will be an addition to the 9% notes of
Series B-1987 originally issued February 15, 1979. The bonds
will be an addition to the 9-1/8% Bonds of 2004-2009 originally
issued May 15, 1979.
The $4,827 million of maturing securities are those held
by the public, including $1,196 million held, as of today, 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 $2,721 million of the maturing securities that
may be refunded by issuing additional amounts of new
securities. Additional amounts of the new securities may
also be issued to Federal Reserve Banks, as agents for
foreign and international monetary authorities, to the extent
that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing securities held by
them.
Details about each of the new securities are given in
the attached "highlights" of the offering and in the official
offering circulars.
oOo
Attachment
B-1755
HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
AUGUST 1979 FINANCING
TO BE ISSUED AUGUST 15, 1979
July 25, 1979
Amount Offered;
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date
Call date
Interest coupon rate
$2,750 million
...3-year notes
Series M-1982
(CUSIP No. 912827 JV 5)
August 15, 1982
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 15 and August 15
$5,000
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
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, July 31, 1979,
by 1;30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
Wednesday, August 15, 1979
b) check drawn on bank
within FRB district where
submitted
Friday, August 10, 1979
c) check drawn on bank outside
FRB district where submitted....Thursday, August 9, 1979
Delivery date for coupon securities...Wednesday, August 15, 1979
$2,500 million
$2,000 million
7-1/2-year notes
9% Series B-1987
(CUSIP No. 912827 JK 9)
February 15, 1987
No provision
9%
To be determined at auction
To be determined after auction
February 15 and August 15
$1,000
29-3/4-year bonds
9-1/8% Bonds of 2004-2009
(CUSIP No. 912810 CG 1)
May 15, 2009
May 15, 2004
9-1/8%
To be determined at auction
To be determined after auction
November 15 and May 15
$1,000
Price Auction
Price Auction
None
Acceptable
$22.81250 per $1,000
(from May 15, 1979 to
August 15, 1979)
Noncompetitive bid for
$1,000,000 or less
5% of face amount
Acceptable
Wednesday, August 1, 1979,
by 1:30 p.m., EDST
Thursday, August 2, 1979,
by 1:30 p.m., EDST
Wednesday, August 15, 1979
Wednesday, August 15, 1979
Friday, August 10, 1979
Friday, August 10, 1979
Thursday, August 9, 1979
Thursday, August 9, 1979
Wednesday, August 15, 1979
Wednesday, August 15, 1979
Noncompetitive bid for
$1,000,000 or less
5% of face amount
TALKING POINTS
FINANCING PRESS CONFERENCE
July 25, 1979
This afternoon we are announcing the terms of our
regular August quarterly refunding. I would also like
to discuss briefly the Treasury's financing requirements
for the balance of the calendar year.
Our refunding will consist of a short-term note, an
intermediate-term note and a long-term bond. This is
the first three-pronged financing since November 1978.
You may recall that we made two-pronged offerings in
February and May of this year as a result of small
maturities and limited cash needs.
We are offering $7.25 billion of new securities to
refund $4.8 billion of publicly-held securities
maturing on August 15 and to raise approximately $2.4
billion of new cash.
The three new securities are:
First, a 3-year note in the amount of $2.75
billion maturing on August 15, 19 82. This
security will be auctioned on a yield basis
on Tuesday, July 31. The minimum denomination
will be $5,000.
- 2 Second, a 7-1/2-year note in the amount of
$2.5 billion maturing on Feburary 15, 1987.
This is a re-opening of the presently outstanding
9 percent note, which we sold last February.
The note will be auctioned on Wednesday, August 1.
Since the note is a re-opening of an already outstanding issue, this will be a price auction. The
minimum denomination will be $1,000.
Third, a 29-3/4-year bond in the amount of $2.0
billion. This is a re-opening of the presently
outstanding 9-1/8 percent bond, which we sold
last May. This issue matures on May 15, 2009
and is callable beginning May 15, 2004. This
bond will be auctioned on a price basis on
Thursday, August 2. The minimum denomination
will be $1,000.
On each of the three issues, we will accept noncompetitive
tenders of up to $1,000,000.
5. For the current July - September quarter, we estimate our
net market financing will total about $7 billion, assuming
a $15 billion cash balance at the end of September.
We may wish to have a somewhat larger cash balance
- 3 on September 30, depending upon an assessment of
our fourth quarter financing needs later in the
current quarter.
Thus far, not including this financing, we have raised
about $3.5 billion in net new cash in marketable borrowing
during this quarter. This was accomplished as follows:
$2 billion in the 2- and 4-year cycle notes
which settled on July 2.
$1.5 billion of new cash in the 15-year
1-month bond which settled on July 9.
The $2.4 billion new cash raised in this refunding will
bring the total new cash raised for the quarter to date
to approximately $6 billion, leaving a balance of about
$1 billion still to be done. This remaining cash need
could be easily met by additions to regular bill and note
offerings. Also, we will likely need some short-term
cash management financing prior to the September 15
tax date. In the event that^the remaining cash need
increased beyond expectations or that we decided to seek
a higher end-of-quarter cash balance, we would consider
an intermediate note offering to raise new cash in the first
half of September. The maturity of such a note would
- 4 likely be in the 5-year area. While we do not presently
contemplate an introduction of a new regular series of
notes in this maturity area, we would consider an occasional
note offering in periods of large permanent financing needs.
Our net market borrowing need in the fourth quarter is
estimated in the range of $16 - 19 billion, assuming a
$12 billion cash balance at the end of December.
As
a result of this large new borrowing need, coupled with
larger than normal maturities in the fourth quarter, we
are planning on meeting some of our financing needs in
that quarter through additions to weekly bills and/or
through cash management bills which would mature in the
second quarter of next year.
TREASURY FINANCING REQUIREMENTS
April — June 1979
$Bil
Uses
$Bil.
Sources
35V4
30
Gov't Acc't Investment > 12%
Coupon
Maturities I
20
30
12% | Special Issues
20
Coupon A
Refundings
Federal Reserve
Certificate ||
10
Nonmarketables
-10
1
/2 | Agency Maturities
Cash Surplus | 14%
4 Increase in Cash Balance
0
0
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-15
TREASURY FINANCING REQUIREMENTS
July—September 1 9 7 9 J /
$Bil.
$Bil.
Sources
Uses
31V4
30
20
30
Gov't Acc't Investment |
4 Special Issues II
20
Coupon ^
Maturities
14%
Coupon
Refundings
Nonmarketables^Vi
10
_, Cash
" Deficit
Net Market
Borrowing
10
Done
To Be Done
Decrease in Cash Balance I
0
0
1/Assumes $15 billion September 30, 1979 cash balance.
2/Net of exchanges for maturing marketable securities of $ % billion.
Office of the Secretary of the Treasury
Office of Government Financing
July 24. 1979-17
TREASURY NET MARKET BORROWING^
Calendar Year Quarters
$Bil.
1-10
IV
1975
I
II
III IV I
1976
Ill
1977
1977
IV I
1978
1979
.1/ Excludes Federal Reserve and Government Account Transactions.
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-6
TREASURY NET BORROWING FROM NONMARKETABLE ISSUES
$Bil.
10
Savings Bonds & Other
8
State & Local Series
Foreign Nonmarketables
1.4 1.5 1.4 1.0
__.
-1.8-1.9
I
II III IV
1975
Office of the Secretary of the Treasury
Office of Government Financing
III
1976
IV
I
II
III IV
1977
I
II III
1978
IV
I II
1979
July 24, 1979 3
QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES
$Bil.
20
Nonmarketable
Marketable
sss Add-ons -J/
• • Other Transactions
16
$Bil.
20
17.0
14.1
16
14.9
12
12
8
6.2
4.9 3.5
8
6.6
3.2
4
1.0
1.6 1.6
1.0
0
-0.5
-4h
4
1.4
1
lAXV
0
-4
-4.9
-8
-5.0
-8
12
-12
-14.4
16
-16
I
II III I V
1975
Office of the Secretary of the Treasury
Office of Government Financing
I
III
1976
IV
I
II III I V
1977
I
II III
1978
IV
III/
1979
1/ F.R.B. Purchases of marketable issues as agents for foreign and
international monetary authorities for n e w cash.
July 24, 1979-2
U
Partly estimated.
TREASURY OPERATING CASH BALANCE
Semi-Monthly
$Bi
20
Total
Operating |
Without
—NewBorrowing
Tax
and Loan
Accounts
10
Account f
0
-10
Jan
Mar
May
Jul
1978
Sep
Nov
May
1979
Office of the Secretary of the Treasury
Office of Government Financing
Julv24, 1979-12
SHORT TERM INTEREST RATES
Monthly Averages
%
%
14
Through Week Ending
July 18, 1979
14
4 Federal Funds
12
_r
*****>.
Prime Rate
»
m
*• \ w
«__.
*
I
I—
££^\Commercial Paper
H
-^-.^ VA ,, ^&i_X*
>:
\
,y
3 Month
Treasury Bill
i i
i
J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J
1974
1975
1976
1977
1978
1979
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-4
SHORT TERM INTEREST RATES
Weekly Averages
%
Through W e e k Ending
July 18, 1979
Prime Rate
12
I
11
Commercial Paper
^*^___5^
10
Federal Funds
10
%-»'
3 Month
Treasury Bill
9
-8
8
Jan
Office of the Secretary of the Treasury
Office of Government Financing
I II
Feb
Mar
Apr
1979
May
June
July
July 24, 1979-7
LONG MARKET RATES
Monthly Averages
%
%
11
11
New Aa Corporates
10
*/ \
•?
^
.Site
«
New Conventiona
Mortgages
_J_*L.
10
_#*"
-
_*•••«*
^-— V-<A" * / \. / •
8
Treasury
20-Year
6-
New 20-Year \
Municipal Bonds
/ " N — ' *"^s^.
\.•N.
*—v.^.^
Through Week Ending
July 20, 1979
J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J
1974
1975
1976
1977
1978
1979
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-5
INTERMEDIATE AND LONG MARKET RATES
Weekly Averages
%
Through W e e k Ending
July 20, 1979
N e w Conventional
Mortgages y
11
New Aa
Corporates
10
Treasury 10-Year
* —"
Treasury 20-Year
^*Z?2rZSmm~~
Treasury 7-Year
-8
8N e w 20-Year
Municipal Bonds
Jan
Office of the Secretary of the Treasury
Office of Government Financing
Feb
Apr
May
1979
Monthly, weekly data not available.
Mar
I II
June
July
July 24, 1979-8
MARKET YIELDS ON GOVERNMENTS
Bid Yields
Years to Maturity
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-19
TRADING VOLUME AND OPEN INTEREST IN 90 DAY
TREASURY BILL FUTURES CONTRACTS
$Bil
O p e n Interest
IP!;!
TRADING VOLUME
ill l.l.ll1
I II III I V I II III I V I II III I V I II
1976
1977
1978 1979
r. i . i .'. , i i . , i , i , . , i l
v.vM-X-!'M
m
I
II
III IV
1976
Office of the Secretary of the Treasury
Office of Government Financing
III
1977
IV
1978
IV
I
1979
July 24, 1979-21
DELIVERABLE BILLS AND DELIVERIES ON 90 DAY
TREASURY BILL FUTURES CONTRACTS
Mar
Jun Sep
1976
Office of the Secretary of the Treasury
Office of Government Financing
Dec
Mar
Jun Sep
1977
Dec
Mar
Jun Sep
1978
Dec
Mar Jun
1979
1/ Consists of the amount of accepted competitive tenders for the n e w
3 month bill and the 6 month bill issued 3 months earlier.
July 24, 1979-22
NET SAVINGS INFLOWS (LESS INTEREST) AND
NET INVESTMENT IN MONEY MARKET CERTIFICATES
$Bil
14
15.2
Savings and Loan Associations
$BJI
14
12
12
10
10
8
8
6
6
4
4
3-2
2
IV? 11-3" 2
2.9 ~
0
0
-2
-1.5
-2
- Mutual Savings Banks
._
|f
2 -2,0 1.8 1
.1 1-5
4
4
0
I I
-.1
-.1
-2 Jun
Jul
Aug
1 II
*
Sept
-•1,
Oct
g
.3
1333
E_a
-4,
1.8
.5
I im
--1
Nov Dec
Jan
1 9 7 8 — 1979
* Less than $ 5 0 million
Office of the Secretary of the Treasury
Office of Government Financing
2 3
9
|f
Feb
Mar
F
2
.4
.4
—
BE.
0
-.3, -.5
-1.2
-2
Apr
May June
e estimated
July 24, 1979-24
CUMULATIVE NET SAVINGS INFLOWS
(LESS INTEREST) TO THRIFT INSTITUTIONS*
—-_ $BN
_^
35
yC. ;.—
dr
_,**
-m
„•
••
_*^
_*
30
«_i»-«»^
1975 ,<.•:
25
> ^
1978
20
a * - "
•*-""
15
10
5
_-r_» _• »*
• -._.«.•»*
D
M
A
M
J
J
Month of Year
A
o
N
* Savings & Loan Assns. & Mutual Savings Banks.
_E/ Preliminary
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-18
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
$Bii
BY MATURITY
400
June 30, 1979 » 377.6
COUPONS
////I Over 10 yrs
7-10 yrs
350
300
2-7 yrs
2 yrs & under
250
BILLS
200
150
100
50
0
1969
1970
Office of the Secretary of the Treasury
Office of Government Financing
1971
1972
1973
1974 1975
As of December 31
1976
1977
1978 1979
July 24, 1979-9
AVERAGE LENGTH OF THE MARKETABLE DEBT
21
1
1967
1
1
1
1
1
1
1
1
1
1
1 1
1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-1
ALLOTMENTS OF 15 YEAR AND LONG TREASURY BONDS
$Bil.
$Bil.
Long Bond
Other
Pension Funds
_] Corporations
Individuals
15 Year
Bond
_%3_ Banks
H _ B Dealers
i
0
II Qtr 1975 III Qtr 1977
Office of the Secretary of the Treasury
Office of Government Financing
1
0
I Qtr 1978 III Qtr 1978 IV Qtr 1978 I Qtr 1979 II Qtr 1979
July 24, 1979-23
OWNERSHIP OF MATURING COUPON ISSUES
July-December 1979*
(In Millions of Dollars)
Savings Institutions
Total
Privately
Held
Maturing Issues
6 1/4%
6 1/4%
6 7/8%
6 5/8%
8 1/2%
6 5/8%
7 1/4%
6 1/4%
6 5/8%
7 % Nt.
7 1/8%
7 1/2%
7 1/8%
Nt.
7-31-79
Nt.
8-15-79
Nt.
8-15-79
Nt.
8-31-79
Nt.
9-30-79
Nt.
9-30-79
Nt. 10-31-79
Nt. 11-15-79
Nt. 11-15-79
11-15-79
Nt. 11-30-79
Nt. 12-31-79
Nt. 12-31-79
Total
Office of the Secretary of the Treasury
Office of Government Financing
*
U
U
Commercial
Banks
3,021
2,739
2,109
3,026
1,851
3,517
3,877
3,111
461
1,806
4,308
1,869
3,352
817
733
1,035
927
623
817
1,156
975
175
673
1,293
784
977
35,047
10,985
State &
Other
LongIntermediate- Local Corpora- Private Foreign
General tions Domestic
term 1/
term 11
Investors
Funds
Investors
Holders
369
918
174
469
39
235
775
794
184
95
128
30
59
363
291
23
218
120
984
429
9
167
281
229
122
806
199
2
48
51
242
1,101
17
193
102
1,045
44
1,295
269
175
257
681
71
411
451
357
639
207
1
63
191
31
614
18
195
76
230
544
37
364
1,329
382
359
462
8
263
2
215
135
243
88
585
422
239
798
433
3,167
2,585
2,308
Amounts for investor classes are based on the M a y 1979 Treasury Ownership Survey.
Includes State and local pension funds and life insurance companies.
Includes casualty and liability insurance companies, mutual savings banks, savings anH loan
associations, and corporate pension trust funds.
7,255
8,314
July 24. 1979-20
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
$Bil.
6
5.3
4
6J.
5.2
3.9H4.3
4.5
1984
2.7
1985
3.4
2
0
6
4
.3.2
1.1
3.5
2
6
4
2
0
5
5.0
1981
4
i
2.8 2.5
4
J
2.8
in
I
3.3
1982
4.6
!
rn
2.6
2.5
2
1.8
0
I
2.7
2.4
4
2.9
4.1
2
I
0
4
2
2.2
1987
1.8
2.4
1988
2.3
2h
0
2.5 ?£
S3 1.0
2
4
0
1983
6
7.5
6-
5.0
2.9
2.2
6.4
4.3
55
H5.2
6
4
1986
8-
0
22 1989
2.2
0
F
M
A
Office of the Secretary of the Treasury
Office of Government Financing
M
J
S
O
N
D
J
F
M
A
M
J
J
A
S
H i Securities issued prior to 1977
K8J N e w issues calendar year 1978
I
::
|--;.-;
;:•! Issued or announced through July 20, 1979
] New issues calendar year 1977
O
N
D
July 24, 1979-10
TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
$Bil
2
0,
21
0
6
4
2
0
2
0
1.7
.8
I
$Bil
2
1991
0
2
0
1992
2.2
2000 26
I
2001
2002
2h
3.0
0
2003
2h
1.9
1993 2 3
3.0
1994 1.4
2
0
2
0
1990
0
20
1.4
2.1 2005
2|0
2-
1995
.4
oL
1996
20
2004
20
2006
2007
,2.7
2008
1997
2-
2.0,
2-
0
1998
2h
oL
1.1
1999
2-
3.7
14
K
2009
2010
2h
0
1.2
2011
.8
0
F
M
A
M
J
J
A
S
O
N
Securities issued prior to 1977
Office of the Secretary of the Treasury
Office of Government Financing
N e w issues calendar year 1977
D
F
M
A
M
J J
S
O
N
D
N e w issues calendar year 1978
r~~1 Issued or announced through July 20, 1979
July 24, 1979-11
NET NEW MONEY IN AGENCY FINANCE, QUARTERLY
$Bil
FCA
Privately Held
$Bil
FNMA
| _
2
0
i Ii. Ill i
II
|
!
3
1
.
r\
U
FHLB^
4
•X-
1
0
ii
1
*
r
.III
-1
IIIIn
I II III I V I II III I V I II III I V I II III I V I II III I V
1975
1976 1977 1978 1979
Office of the Secretary of the Treasury
Office of Government Financing
1
4
• III
.
.
1 11 III! II
1"
1
• •_.
*
GNMA
Mortgage Bac
Securities
I II III I V I II III I V I II III I V I II III I V I II III I V
1975
1976 1977 1978 1979
* Less than $ 5 0 million.
1/ Includes F H L B discount notes, bonds, and F H L M C certificates,
mortgage-backed bonds, and mortgage participation certificates.
July 24, 1979-14
A G E N C Y MATURITIES!/
Privately Held
$Bil,
3
2
1
0
1987
n
111-3
9U m 7
•ii
1991
1989
1988
1.0
^
1990
.6
I.I.
1992
1993
1994
2h
1
a J> .4
.2 .2
.3
*
.1
0
1995
1997
1996
2
1998
1.1
1
.5
0
1999
2000
I...
2001
.1 -2 -2 .1
2002
2
1
.2
0
2004
2003
2005
2
1
.1
2008
2007
.3
I III IV
I II III IV
I II III IV
2006
.2
I II Ml IV
I II III IV
Calendar Years Quarterly
.3
2009
.1
2010
.4
I II III IV
I II III IV
I II III IV
1/ Issued or announced through July 20, 1979.
* Less than $ 5 0 million.
Office of the Secretary of the Treasury
Office of Government Financing
July 24, 1979-16
FOR IMMEDIATE RELEASE
July 26, 1979
Contact:
Alvin M. Hattal
202/566-3381
TREASURY DEPARTMENT ANNOUNCES FINAL
DETERMINATION IN COUNTERVAILING DUTY
INVESTIGATION ON AMOXICILLIN TRIHYDRATE
AND ITS SALTS FROM SPAIN
The Treasury Department today announced a final
determination that Spain is subsidizing exports of
amoxicillin trihydrate and its salts to the United
States.
The Countervailing Duty Law requires the Secretary
of the Treasury to collect an additional duty equal to
the subsidy paid on merchandise exported to the United
States.
As a result of its investigation, Treasury found
that manufacturers of this merchandise received subsidies consisting of an overrebate of the Spanish indirect
tax, the "Desgravacion Fiscal." The overrebate consists
of the rebate of taxes on services, inputs and ingredients that are not physically incorporated in the final
product, and certain other taxes and charges assessed
'for services provided which are not levied on an ad
valorem basis.
The amount of the subsidy has been determined to be
0.62 percent of the f.o.b. value of the merchandise.
Notice of this action will appear in the Federal
Register of July 27, 1979
Imports of this merchandise amount to about $1.2million in 1978.
o
B-1756
0
o
FOR IMMEDIATE RELEASE
July 27, 1979
Contact:
George G. Ross
202/566-2356
UNITED STATES "MODEL" ESTATE AND GIFT TAX TREATY
The Treasury Department today released a revised "model"
estate and gift tax treaty. The model represents the Treasury's
basic treaty negotiating position. The new model, which replaces
the model published by the Treasury Department on March 16, 1977,
applies to the Federal taxes on transfers of estates and gifts
and on generation-skipping transfers. Most of the revisions
reflect the changes in Federal lc niade by the Tax Reform Act of
1976.
The general principle underlying the model is to grant to
the country of domicile the right to tax estates and transfers
on a worldwide basis. The treaty also permits a credit for tax
paid.to the other country with respect to certain types of property on which tax was paid on the basis of the property's
location. Specifically, transfers of real property and certain
business assets are taxable in the country where they are situated.
The model also allows the country of citizenship the right to tax
the estate or transfers of a decedent or transferor, with a credit
allowed for tax paid to the other State. The model also provides
rules for resolving the issue of domicile.
The Treasury Department welcomes comments on the model.
Comments should be sent in writing to: H. David Rosenbloom,
International Tax Counsel, U. S. Treasury Department, Washington,
D. C. 20220.
A copy of the model is attached. This notice appears in the
Federal Register of July 31, 19 79.
o
B-1757
0
o
Table of Contents
Index
e Subject Page
Scope
Taxes Covered
General Definitions
Fiscal Domicile
Real Property,
Business Property of a Permanent
Establishment and Assets Pertaining
to a Fixed Based Usr^ for the
Performance of Independent Personal
Services
Ships and Aircraft
Interests in Partnerships
Property Not Expressly Mentioned
Deductions and Exemptions
Credits
Non-Discrimination
Mutual Agreement Procedure
Exchange of Information
Diplomatic Agents and Consular
Officers
Entry into Force
Termination
2
4
5
8
11
12
16
17
18
19
21
26
28
30
33
34
35
MODEL OF JULY 9, 1979
CONVENTION BETWEEN THE GOVERNMENT OF THE
UNITED STATES OF AMERICA AND THE GOVERNMENT OF
FOR THE AVOIDANCE OF
DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON ESTATES, INHERITANCES, GIFTS,
AND GENERATION-SKIPPING TRANSFERS
The Government of the United States of America and the
Government of , desiring to conclude
a Convention for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on
estates, inheritances, gifts, and generation-skipping
transfers, have agreed as follows:
-2July 9, 1979
Article 1
SCOPE
1. Except as otherwise provided in this Convention, this
Convention shall apply to:
a)
transfers of estates of individuals whose
domicile at their death was in one or both of
the Contracting States;
b)
transfers of property by gift of donors whose
domicile at the time of gift was in one or both
of the Contracting States; and
c)
generation-skipping transfers of deemed
transferors whose domicile at the time of
deemed transfer was in one or both of the
Contracting States.
2.
This Convention shall not restrict in any manner any
exclusion, exemption, deduction, credit, or other allowance
now or hereafter accorded:
a)
by the laws of either Contracting State; or
b)
by any other agreement between the Contracting
States.
-3Article 1
July 9, 1979
3. Notwithstanding any provision of this Convention except
paragraph 4 of this Article, a Contracting State may tax
transfers and deemed transfers of its domiciliaries (within
the meaning of Article 4 (Fiscal Domicile)), and by reason
of citizenship may tax transfers and deemed transfers of its
citizens, as if this Convention had not come into effect.
For this purpose the term "citizen" shall include a former
citizen whose loss of citizenship had as one of its
principal purposes the avoidance of tax (including, for this
purpose, income tax), but only for a period of 10 years
following such loss.
4. The provisions of paragraph 3 shall not affect:
a) the benefits conferred by a Contracting State
under Articles 11 (Credits), 12 (Non-Discrimination), and 13 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State
under Article 15 (Diplomatic Aqents and
Consular Officers) upon individuals who are
neither citizens of, nor have permanent
residence in, that State.
-4July 9, 1979
Article 2
TAXES COVERED
1. The taxes to which this Convention applies are:
a) In the United States: the Federal estate tax; the
Federal gift tax; and the Federal tax on
generation-skipping transfers.
b) In :
2.
This Convention shall apply also to any identical or sub-
stantially similar taxes which are imposed by a Contracting
State after the date of signature of this Convention in addition to, or in place of, the existing taxes. The competent
authorities of the Contracting States shall notify each other
of any changes which have been made in their respective taxation laws and shall notify each other of any official publishec
material concerning the application >£ this Convention, including explanations, regulations, rulings, and judicial decisions.
3. For the purpose of Article 12 (Non-Discrimination), this
Convention shall also apply to taxes of every kind and description imposed by a Contracting State or a political subdivision
or local authority thereof. For the purpose of Article 14
(Exchange of Information), this Convention shall also apply to
taxes of every kind imposed by a Contracting State.
-5July 9, 1979
Article 3
GENERAL DEFINITIONS
the purpose of this Convention, unless the context
se requires:
the term "United States" means the United
States of America and, where used in a
geographical sense, includes any area outside
the territorial sea of the United States which,
in accordance with international law and the
laws of the United States, has been or may
hereafter be designated as an area within which
the United States may exercise rights with
respect to the exploration and exploitation of
the natural resources of the seabed or its
subsoil; the term "United States" does not
include Puerto Rico, the Virgin Islands, Guam,
or any other United States possession.
the term "
" means
-6Article 3
July 9, 1979
c) the terms "Contracting State" and "the other
Contracting State" mean the United States or
,as the context requires.
d)
the terms "enterprise of a Contracting State"
and "enterprise of the other Contracting State"
mean, respectively, an industrial or commercial
activity carried on by a domiciliary of a Contracting State and an industrial or commercial
activity carried on by a domiciliary of the
other Contracting State.
e)
the term "international traffic" means any
transport by a ship or aircraft, except where
such transport is solely between places in a
Contracting State.
f)
the term "nationals" means:
i)
all individuals possessing the citizenship
of a Contracting State;
ii)
all legal persons, partnerships, and
associations deriving their status as such
from the laws in force in a Contracting
State.
-7Article 3
July 9, 1979
9)
the term "competent authority" means:
i)
in the United States: the Secretary of the
Treasury or his delegate, and
ii)
in
:
2. As regards the application of this Convention by a
Contracting State, any term not defined therein shall,
unless the context otherwise requires and subject to the
provisions of Article 13 (Mutal Agreement Procedure), have
the meaning which it has under the laws of that State
concerning the taxes to which this Convention applies.
-8July 9, 1979
Article 4
FISCAL DOMICILE
1. For the purposes of this Convention, an individual has a
domicile:
a)
in the United States, if he is a resident or
citizen thereof under United States law;
b)
2.
in
, if
.
Where by reason of the provisions of paragraph 1 an
individual was domiciled in both Contracting States, then,
subject to the provisions of paragraph 3, his status shall
be determined as follows:
a)
the individual shall be deemed to have been
domiciled in the State in which he had a
permanent home availab??* if such individual
had a permanent home available in both States,
he shall be deemed to have been domiciled in
the State with which his personal and economic
relations were closer (center of vital
interests);
-9Article 4
July 9, 1
b) if the State in which the individual's center
of vital interests was closer cannot be
determined, or if he had no permanent home
available in either State, he shall be deemed
to have been domiciled in the State in which he
had an habitual abode;
c)
if the individual had an habitual abode in both
States or in neither of them, the domicile
shall be deemed to be in the State of which he
was a citizen;
d)
if the individual was a citizen of both States
or of neither of them, the competent authorities of the Contracting States shall settle
the question by mutual agreement.
Where an individual was
a)
a citizen of one Contracting State, but not
the other Contracting State,
b)
within the meaning of paragraph 1 domiciled in
both Contracting States, and
c)
within the meaning of paragraph 1 domiciled in
the other Contracting State in the aggregate
less than 7 years (including periods of
temporary absence) during the preceding 10-year
period,
-10Article 4
July 9, 1979
then the domicile of that individual shall be deemed, notwithstanding the provisions of paragraph 2, to have been in
the Contracting State of which the individual was a citizen.
4. An individual who, at the time of his death or the
making of a gift or deemed transfer, was a resident of a
possession of the United States and who had become a citizen
of the United States solely by reason of (a) being a citizen
of a possession, or (b) birth or residence within a
possession, shall be considered as having been neither
domiciled in nor a citizen of the United States at that time
for the purposes of this Convention.
5. For the purposes of this Convention the question whether
a person other than an individual was domiciled in a
Contracting State shall be determined according to the law
of that State. Where such person is determined to have been
domiciled in both Contracting States, the competent
authorities of the Contracting States shall settle the
question by mutual agreement.
-11July 9,* 1979
Article 5
REAL PROPERTY
1. Transfers and deemed transfers of real property from an
individual domiciled in a Contracting State and which is
situated in the other Contracting State may be taxed in that
other State.
2.
The term "real property" shill have the meaning which it
has under the law of the Contracting State in which the
property in question is situated.
The term shall in any
case include property accessory to real property, livestock
and equipment used in agriculture and forestry, rights to
which the provisions of general law respecting landed
property apply, usufruct of real property, and rights to
variable or fixed payments as consideration for the working
of, or the right to work, mineral deposits, sources, and
other natural resources; ships, boats, and aircraft shall
not be regarded as real property.
-12July 9, 1979
Article 6
BUSINESS PROPERTY OF A PERMANENT ESTABLISHMENT
AND ASSETS PERTAINING TO A FIXED BASE USED FOR THE
PERFORMANCE OF INDEPENDENT PERSONAL SERVICES
1. Except for assets referred to in Articles 5 (Real
Property) and 7 (Ships and Aircraft), transfers and deemed
transfers of assets from an individual domiciled in a Contracting State, forming part of the business property of a
permanent establishment situated in the other Contracting
State, may be taxed in that other State.
2.
For the purposes of this Convention, the term "permanent
establishment" means a fixed place of business through which
the business of an enterprise is wholly or partly carried
on.
3.
The term "permanent establishment" shall include
especially:
a)
a branch;
b)
an office;
c)
a factory;
d)
a workshop; and
e)
a mine, oil or gas well, quarry, or any other
place of extraction of natural resources.
-13Article 6
July 9, 1979
4. A building site or construction or installation project,
or an installation or drilling rig or ship being used for
the exploration or development of natural resources,
constitutes a permanent establishment in a Contracting State
only if it has remained in that State more than 24 months.
5.
Notwithstanding the preceding provisions of this
Article, the term "permanent establishment" shall be deemed
not to include:
a)
the use of facilities solely for the purpose
of storage, display, or delivery of goods or
merchandise belonging to the enterprise;
b)
the maintenance of a stock of goods or
merchandise belonging to the enterprise
solely for the purpose of storage, display,
or delivery;
c)
the maintenance of a stock of goods or
merchandise belonging to the enterprise
solely for the purpose of processing by
another enterprise;
d)
the maintenance of a fixed place of business
solely for the purpose of purchasing goods or
merchandise, or of collecting information,
for the enterprise;
-14Article 6
July 9, 1979
e) the maintenance of a fixed place of business
solely for the purpose of carrying on, for
the enterprise, any other activity of a
preparatory or auxiliary character;
f)
the maintenance of a fixed place of business
solely for any combination of the activities
mentioned in subparagraphs a) to e ) .
6.
Notwithstanding the provisions of paragraphs 2 and 3,
where a person —
other than an agent of an independent
status to whom paragraph 7 applies —
is acting on behalf of
an enterprise and has and habitually exercises in a
Contracting State an authority to conclude contracts in the
name of the enterprise, that enterprise shall be deemed to
have a permanent establishment in that State in respect of
any activities which that person undertakes for the
enterprise, unless the activities of such person are limited
to those mentioned in paragraph 5 which, if exercised
through a fixed place of business, would not make this fixed
place of business a permanent establishment under the
provisions of that paragraph.
7.
An enterprise shall not be deemed to have a permanent
establishment in a Contracting State merely because it
carries on business in that State through a broker, general
-15Article 6
July 9, 1979
commission agent, or any other agent of an independent
status, provided that such persons are acting in the
ordinary course of their business.
8.
Except for assets described in Articles 5 (Real Prop-
erty) and 7 (Ships and Aircraft), transfers and deemed
transfers of assets from an individual domiciled in a
Contracting State, pertaining to a fixed base situated in
the other Contracting State and used for the performance of
independent personal services, may be taxed in that other
State.
-16July 9, 1979
Article 7
SHIPS AND AIRCRAFT
Notwithstanding Article 6 (Business Property of a
Permanent Establishment and Assets Pertaining to a Fixed
Base Used for the Performance of Independent Personal
Services), transfers and deemed transfers of ships and
aircraft operated in international traffic from a
domiciliary of a Contracting State, and of movable property
pertaining to the operation of such ships and aircraft,
including containers, shall be taxable only in that State.
17July 9, 1979
Article 8
INTERESTS IN PARTNERSHIPS
Transfers and deemed transfers, from a domiciliary of a
Contracting State, of an interest in a partnership which
owns property covered by Articles 5 (Real Property) or 6
(Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of
Independent Personal Services) situated in the other
Contracting State may be taxed in that other State, but only
to the extent that the value of such interest is attributable to such property.
18July 9, 1979
Article 9
PROPERTY NOT EXPRESSLY MENTIONED
Transfers and deemed transfers of property other than
property referred to in Articles 5 (Real Property), 6
(Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of
Independent Personal Services), 7 (Ships and Aircraft), and
8 (Interests in Partnerships,) from a domiciliary of a
Contracting State, shall be taxable only in that State.
-19July 9, 1979
Article 10
DEDUCTIONS AND EXEMPTIONS
1. Debts that would be deductible according to the internal
law of a Contracting State shall be deducted from the gross
value of the property the transfer of which may be taxed by
that State in the proportion that such gross value bears to
the gross value of the entire tr-isferred property wherever
situated.
2.
The value of property transferred which may be taxed by
a Contracting State shall be reduced by the amount of any
debts of the transferor or deemed transferor assumed by the
transferee or deemed transferee, other than debts allowed as
a deduction under paragraph 1.
3.
The transfer or deemed transfer of property to or for
the use of a corporation or organization of one Contracting
State organized and operated exclusively for religious,
charitable, scientific, literary or educational purposes
shall be exempt from tax by the other Contracting State, if
and to the extent that such transfer
a)
is exempt from tax in the first-mentioned
Contracting State; and
b)
would be exempt from tax in the other
Contracting State if it were made to a similar
corporation or organization of that other
State.
-20Article 10
July 9, 1979
4. The tax of a Contracting State with respect to the
transfer of property (other than community property) which
is transferred from a domiciliary or citizen of the other
Contracting State to his or her spouse shall be determined
as follows:
a)
in the case of tax imposed by
, such
property shall be included in the taxable base
only to the extent that the value of the
property exceeds 50 percent of the value of all
property (after taking into account any applicable deductions) whose transfer may, under this
Convention, be taxed by
b)
;
in the case of tax imposed by the United States,
the tax shall be limited to the amount of tax
that would have been imposed if the transferor
were a domiciliary of the United States.
5.
Where a Contracting State may tax the transfer of an
estate solely by reason of Articles 5 (Real Property), 6
(Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of Independent Personal Services), or 8 (Interests in Partnerships),
that State shall allow a credit against its tax, in addition
to any other credits that may be allowed under Article 11
(Credits), in an amount no less than $3,600, or shall allow
an equivalent exemption in computing the tax otherwise due.
-21July 9, 1979
Article 11
CREDITS
1. Where the United States imposes tax by reason of an
individual's domicile therein or citizenship thereof, double
taxation shall be avoided in the following manner:
a)
where
imposes tax with respect to
a transfer or deemed transfer of property in
accordance with Articles 5 (Real Property),
6 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used
for the Performance of Independent Personal
Services), or 8 (Interests in Partnerships),
the United States shall allow as a credit
against the tax calculated according to its law
with respect to such transfer or deemed
transfer an amount equal to the tax paid to
with respect to such transfer or
deemed transfer.
b)
if the individual was a citizen of the United
States and was domiciled in
at
—__•——————_——————_________>_•
the date of his death, gift, or deemed
transfer, then the United States shall allow as
a credit against the tax calculated according
-22Article 11
July 9, 1979
to its law with respect to the transfer or
deemed transfer of property (other than property
whose transfer or deemed transfer the United
States may tax in accordance with Articles 5
(Real Property), 6 (Business Property of a
Permanent Establishment and Assets Pertaining to
a Fixed Base Used for the Performance of
Independent Personal Services), or 8 (Interests
in Partnerships)), an amount eaual to the tax
paid to
with respect to such
transfer or deemed transfer.
This subparagraph
shall not apply to a former United States
citizen whose loss of citizenship had as one of
its principal purposes the avoidance of United
States tax (including, for this purpose, income
tax) •
2.
Where
imposes tax by reason of an in-
dividual's domicile therein or citizenship thereof, double
taxation shall be avoided in the following manner:
a)
where the United States imposes tax with
respect to the transfer or deemed transfer of
property in accordance with Articles 5 (Real
Property), 6 (Business Property of a Permanent
Establishment and Assets Pertaining to a Fixed
-23Article 11
July 9, 1979
Base Used for the Performance of Independent
Personal Services), or 8 (Interests in Partnerships) , shall allow as a
credit against the tax calculated according to
its law with respect to such transfer or deemed
transfer an amount equal to the tax paid to the
United States with respect to such transfer or
deemed transfer.
b) if the individual was domiciled in the United
States at the date of his death, gift, or
deemed transfer, then shall
allow as a credit against the tax calculated
according to its law with respect to the
transfer or deemed transfer of property (other
than property which may tax in
accordance with Articles 5 (Real Property), 6
(Business Property of a Permanent Establishment
and Assets Pertaining to a Fixed Base Used for
the Performance of Independent Personal
Services), or 8 (Interests in Partnerships)),
an amount equal to the amount of the tax paid
to the United States with respect to such
transfer or deemed transfer.
-24Article 11
July 9, 1979
3. If a Contracting State imposes tax upon the transfer of
an estate, the credit allowed by paragraph 1 or 2 shall
include credit for any tax imposed by the other Contracting
State upon a prior gift of property made by, or a prior
generation-skipping transfer of property deemed made by, the
decedent, if the transfer of such property is subject to tax
on the transfer of the estate imposed by the first-mentioned
State.
4.
The credit allowed by a Contracting State under
paragraph 1 or 2 shall not be reduced by any credit allowed
by the other Contracting State for taxes paid upon prior
transfers or deemed transfers.
5.
The credit allowed by a Contracting State according to
the provisions of paragraphs 1, 2, 3, and 4 shall include
credit for taxes paid to political subdivisions of the other
Contracting State to the extent that such taxes are allowed
as credits by that other State.
6.
Any credit allowed under paragraphs 1 and 2 shall not
exceed the part of the tax of a Contracting State, as
computed before the credit is given, which is attributable
to the transfer or deemed transfer of property in respect of
which a credit is allowable under such paragraphs.
-25Article 11
July 9, 1979
7. Any claim for credit or for refund of tax founded on the
provisions of this Article may be made until two years after
the final determination (administrative or judicial) and
payment of tax for which any credit under this Article is
claimed, provided that the determination and payment are
made within ten years of the date of death, gift, or deemed
transfer. The competent authorities may by mutual agreement
extend the ten year time limit if circumstances prevent the
determination within such period of the taxes which are the
subject of the claim for credit. Any refund based solely on
the provisions of this Convention shall be made without
payment of interest on the amount so refunded.
-26July 9, 1979
Article 12
NON-DISCRIMINATION
1. Citizens of a Contracting State shall not be subjected
in the other State to any taxation or any requirement connected therewith which is other or more burdensome than the
taxation and connected requirements to which citizens of
that other State in the same circumstances are or may be
subjected.
This provision shall also apply to persons who
are not domiciliaries of a Contracting State.
However, for
purposes of United States taxation of transfers and deemed
transfers, United States citizens not domiciled in the
United States are not in the same circumstances as citizens
of
2.
not domiciled in the United States.
The taxation with respect to a permanent establishment
which an enterprise of a Contracting State has in the other
Contracting State shall not be less favorably levied in that
other State than the taxation levied with respect to enterprises of that other State carrying on the same activities.
This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs, and reductions
for taxation purposes on account of civil status or family
responsibilities which it grants to its own residents.
-27Article 12
July 9, 1979
3.
Enterprises of a Contracting State, the capital of which
is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting
State, shall not be subjected in the first-mentioned
Contracting State to any taxation or any requirement
connected therewith which is other or more burdensome than
the taxation and connected requirements to which other
similar enterprises of the first-mentioned State are or may
be subjected.
4. The provisions of this Article shall apply to taxes of
every kind and description imposed by a Contracting State or
a political subdivision or local authority thereof.
-28July 9, 1979
Article 13
MUTUAL AGREEMENT PROCEDURE
1. Where a person considers that the actions of one or both
of the Contracting States result or will result for him in
taxation not in accordance with the provisions of this
Convention, he may, irrespective of the remedies provided by
the domestic laws of those States, present his case to the
competent authority of the Contracting State of which he is
a resident or national.
Such presentation must be made
within one year after a claim, under this Convention, for
exemption, credit, or refund has been finally settled or
rejected.
2.
The competent authority shall endeavor, if the objection
appears to it to be justified and if it is not itself able
to arrive at a satisfactory solution, to resolve the case by
mutual agreement with the competent authority of the other
Contracting State, with a view to the avoidance of taxation
not in accordance with the Convention.
Any agreement
reached shall be implemented notwithstanding any time limits
in the domestic law of the Contracting States.
3.
The competent authorities of the Contracting States
shall endeavor to resolve by mutual agreement any
difficulties or doubts arising as to the interpretation or
-29Article 13
July 9, 1979
application of the Convention. They may also consult
together for the elimination of double taxation in cases not
provided for in the Convention.
4. ••« The competent authorities of the Contracting States may
communicate ^with each other directly for the purpose of
reaching an agreement in the sense of the preceding
paragraphs. ^'f> >
5.
The competent authorities of the Contracting States may
prescribe regulations to carry out the purposes of this
Convention."
-30July 9, 1979
Article 14
EXCHANGE OF INFORMATION
1. The competent authorities of the Contracting States
shall exchange such information as is necessary for carrying
out the provisions of this Convention or of the domestic
laws of the Contracting States concerning the taxes covered
by the Convention insofar as the taxation thereunder is not
contrary to the Convention.
The exchange of information is
not restricted by Article 1 (Scope).
Any information
received by a Contracting State shall be treated as secret
in the same manner as information obtained under the
domestic laws of that State and shall be disclosed only to
persons or authorities (including courts and administrative
bodies) involved in the assessment or collection of, the
enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the
Convention.
Such persons or authorities shall use the
information only for such purposes.
They may disclose the
information in public court proceedings or in judicial
decisions.
2.
In no case shall the provisions of paragraph 1 be
construed so as to impose on a Contracting State the
obligation:
-31Article 14
July 9, 1979
a)
to carry out administrative measures at
variance with the laws and administrative
practice of that or of the other Contracting
State;
b)
to supply information which is not obtainable
under the laws or in the normal course of the
administration of that or of the other
Contracting State; or
c)
to supply information which would disclose any
trade, business, industrial, commercial, or
professional secret or trade process, or
information, the disclosure of which would be
contrary to public policy (ordre public).
3.
If information is requested by a Contracting State in
accordance with this Article, the other Contracting State
shall obtain the information to which the request relates in
the same manner and to the same extent as if the tax of the
first-mentioned State were the tax of that other State and
were being imposed by that other State.
If specifically
requested by the competent authority of a Contracting State,
the competent authority of the other Contracting State shall
provide information under this Article in the form of
-32Article 14
July 9, 1979
depositons of witnessess and authenticated copies of
unedited original documents (including books, papers,
statements, records, accounts, or writings), to the same
extent such depositions in documents can be obtained under
the laws and administrative practices of such other State
with respect to its own taxes.
4.
For the purpose of this Article, this Convention shall
apply to taxes of every kind imposed by a Contracting State.
-33July 9, 1979
Article 15
DIPLOMATIC AGENTS AND CONSULAR OFFICERS
1. Nothing in this Convention shall affect the fiscal
privileges of diplomatic agents or consular officers under
the general rules of international law or under the provisions of special agreements.
2.
This Convention shall not apply to officials of
international organizations or members of a diplomatic or
consular mission of a third State, who were established in a
Contracting State and were not treated as being domiciled in
either Contracting State in respect of taxes on estates,
inheritances, gifts, or generation-skipping transfers as the
case may be.
-34July 9, 1979
Article 16
ENTRY INTO FORCE
1. This Convention shall be subject to ratification in
accordance with the applicable procedures of each
Contracting State and instruments of ratification shall be
exchanged at
2.
as soon as possible.
This Convention shall enter into force upon the exchange
of instruments of ratification and its provisions shall
apply to transfers of estates of individuals dying, gifts
made, and generation-skipping transfers deemed made on or
after the date of such exchange.
-35July 9, 1979
Article 17
TERMINATION
This Convention shall remain in force until terminated
by a Contracting State. Either Contracting State may
terminate the Convention at any time after 5 years from the
date on which this Convention enters into force provided
that at least 6 months' prior notice of termination has been
given through diplomatic channels. In such event, the
Convention shall have no effect in respect of transfers of
estates of individuals dying, gifts made, and deemed
transfers occurring after the December 31 next following the
date of termination specified in the notice of termination.
-36July 9, 1979
DONE at
, in duplicate, in
the English and languages, the two texts having
equal authenticity, this day of , 19
For the United States of America:
. (Seal)
For
(Seal)
Department of theTREASURY
WASHINGTON, D.C. 202
TELEPHONE 566-2041
For Release Upon Delivery
Expected at 9:00 p.m. E.D.T.
STATEMENT OF HARRY L. GUTMAN
DEPUTY TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SELECT REVENUE MEASURES
July 27, 1979
Mr. Chairman and Members of the Subcommittee:
I am pleased no have the opportunity to appear today to
present the views of the Treasury Department on tne subject
of tne simplification of tne tax laws generally, and on
specific proposals for simplification and other miscellaneous
measures.
B-1758
-2SIMPLIFICATION
Tne Treasury Department views simplification as a
fundamental policy objective, for the cost of tax complexity
is enormous. A portion of the cost is tangible; taxpayers
and the Government devote billions of dollars to the effort
to decipher the tax Code. But a more significant cost is
intangible; if we permit the Byzantine tax complexity to
grow, we erode the foundation of our tax structure. A
self-assessment system is severely impaired when the tax
treatment of even routine transactions can be incomprehensible to most taxpayers and require professional advice
for compliance.
Occasionally, sweeping reforms have been proposed as
antidotes to tax complexity. Some persons have advocated a
fresh start in developing a new income tax system, coupling
lower tax rates with a substantial reduction in complicating
provisions that refine the concept of taxable income. Others
nave offered a new kind of tax -- perhaps on consumption or
value added — as an alternative that might be simpler in
operation than tne current income tax. Such proposals should
continue to be developed and debated, but drastic
simplication along these lines is at best a long-term
objective. in the short run, incremental simplification
steps must be pursued. We applaud the Chairman for
commencing this process with the Subcommittee's consideration
today of H.R. 3899 and H.R. 3900.
In recent years, most persons have acknowledged the need
for simplification of the tax law. Yet, in spite of the
apparent consensus in favor of simplification, enactment of
specific proposals will not be easy. Our mission will surely
fail if tne cloak of "simplification" is used to disguise
other motives. For some practitioners, simplicity seems to
be a code word for eliminating any impediments to tne tax
results sougnt for particular clients. Discussions at
simplification conferences sometimes suggest that no law
reducing taxes is too complex and no law increasing taxes is
simple enougn. Of course, on the otner hand, some would
accuse the Treasury of seeking revenue-raising tax reform by
calling it "tax simplification."
In this endeavor, we must all. strive to avoid our
natural biases. With the proper exercise of good will, this
simplification effort can succeed. If either side refuses to
compromise, it is doomed to failure.
-3Sometimes, the search for equity can also be an obstacle
to simplicity. Simplicity is impossible if we become too
preoccupied with avoiding unwarranted advantages or
disadvantages that may result from peculiar fact situations.
Equity is of paramount importance, but a ton of complexity is
a high price to pay for an ounce of equity. Treasury and
taxpayers must be willing to suppress the drive for complete
equity, submerging this goal to simplicity when the
additional equity comes at too high a cost.
In this regard, H.R. 3899 — the bill to revise the tax
treatment of saies for deferred payment -- will be an
important barometer of the fortunes of the simplification
effort. Taxation of deferred payment sales is generally
recognized to be an area where complexity, and in particular
diversity of treatment, exists beyond any reasonable needs of
tax policy. Nevertheless, even here there will be trade
offs; no simple rule for treatment of sales for contingent
payments can possibly satisfy everyone as being equitable in
all circumstances.
The avoidance of new complications, such as those
contained in H.R. 2770, the Independent Local Newspaper Act,
is as important as affirmative steps to simplify existing
law. A proper balance of simplicity and equity should
discourage much legislation, particularly tax measures
affecting only a handful of taxpayers. Because of the broad
application of the tax laws to diverse personal, cnaritable
and business sectors of our society, it is important that a
vehicle exist to consider whether an unintended tax liability
has arisen. But regardless of how we resolve the equitable
merits of particular legislation, we must recognize that ad
hoc solutions inevitably increase the complexity of the Code,
invite other taxpayers to seek similar relief and, unless
scrupulously drafted, create new potentials for abuse.
Complications caused by special interest bills must be
weighed against the equity in the claim for relief. Unless
the equitable argument is extremely strong, the claim should
be rejected. We certainly do not feel that taxpayers should
be encouraged to view the legislative process as a forum of
first, ratner than last, resort. Often it is possible, with
minor cnanges of behavior, to accommodate taxpayer activities
to tne current provisions of the Code. If this can be done,
legislative relief is not needed." We hope the professional
tax community can join with the Treasury in opposing the
proliferation of special interest tax legislation, whicn in
itself complicates tne law and takes time away from more
far-reacning and important efforts.
-4I have thus far dealt principally with simplification of
the mecnanics of the tax law. I must, however, touch also
upon a more fundamental cause of concern. No discussion of
tax simplification should overlook the prime source of
complexity: the use of the tax system to perform far too
many Government functions. The basic purpose of the income
tax system is to raise revenue by applying a rate structure
to a tax base consisting of "net income." But it is also
used to implement nearly 100 Federal programs, ranging from
welfare assistance to promotion of certain forms of
investment. These so-called "tax expenditures" are nearly
one-third as large as direct budget outlays. As long as we
insist upon combining the basic revenue-raising function with
a plethora of tax expenditures, we cannot expect the tax Code
to be simple.
Nevertheless, technical tax simplification is important,
and I would like to express again our endorsement of the
simplificaton process this Subcommittee has set out to
implement. Dramatic improvements cannot be achieved
overnight. Time will be needed for Congressional and
Treasury staffs and for tax practitioners to develop and to
analyze additional proposals. Unless serious Congressional
consideration is relatively assured, we cannot expect the
professional tax community or the staffs to expend the
necessary resources. For this reason, the Subcommittee's
expression of interest and support for simplification is most
welcome. Mr. Chairman, we are grateful for the leadership
you have taken in this effort.
SIMPLIFICATION PROPOSALS
H.R. 3899 -- DEFERRED PAYMENT SALES
The installment sale area is an excellent choice for
beginning what we hope will become an ongoing simplification
process.
I. Current Law
The current law applicable to* reporting sales for future
payment has been described as the very model of complexity,
primarily due to a lack of a coordinated taxing structure.
The general rule of installment reporting under section 453
provides that a taxpayer, under qualifying circumstances, may
elect to report gain realized on a profitable sale ratably as
payments are received. While this rule may be stated simply
and clearly, it is a great deal more complex in practice.
-5Generally, the seller who does not elect or fails to
qualify for statutory installment treatment under section 453
is taxed in the year of sale on the difference between the
fair market value of the consideration received in the year
of sale and the tax basis in the property sold. Later
payments are tax free up to the amount of value received in
the year of sale. Later receipts, so called "collection
gain," is taxed as ordinary income if the obligor is not a
corporation and as capital gain if the obligor is a
corporation or a government entity.
However, under certain circumstances, a seller may defer
recognition of gain on non-statutory grounds. This
possibility causes much of the complexity in the area.
Specifically, if the purchaser's promise of future payment is
considered not to be the equivalent of cash, or if the
expectation of future payment is sufficiently contingent or
uncertain (for example, a specified percentage of all future
profits), and thus is found to have no currently
ascertainable fair market value, the seller arguably has
received consideration of no value in the year of sale. In
these circumstances the recognition of gain is deferred until
the proceeds are received. Further, because the total amount
to be received is uncertain, the seller reports gain on the
"cost recovery" method, applying proceeds first against
basis. Only when the total proceeds received exceed basis is
gain recognized, and the gain generally is taxed as capital
gain.
The installment method requires ratable recognition;
each payment received is in part a return of the seller's
basis and in part gain. Non-statutory deferred payment
reporting is wnolly different. Basis is recovered first.
Thus, at times non-statutory deferred payment reporting can
produce a greater measure of tax deferral than the
installment method. Well-advised taxpayers often design
transactions to achieve this advantageous result.
In general, a taxpayer becomes obliged to report gain
and pay tax for the taxable year within which a sale takes
place. Installment reporting and non-statutory deferred
payment reporting are highly advantageous because they permit
taxpayers to defer recognition of gain, and therefore payment
of tax. Both thus operate as an interest-free loan from the
Treasury. Taxpayers who sell property for notes are
permitted to postpone paying tax on a profitable sale until
tne notes are paid; taxapyers who, for example, receive
marketable securities or other property in an exchange must
pay tax currently.
-6The ability to postpone payment of tax is a great
advantage; a tax deferred is, in effect, a tax reduced.
Congress initially enacted section 453 to provide relief to
taxpayers who might have difficulty paying tax in the year of
sale because receipt of payment was deferred. The reason for
the creation of statutory deferred payment reporting should
be kept in mind as this area is revised, especially in light
of the even more advantageous cost-recovery benefits of
non-statutory deferred payment reporting.
II. H.R. 3899
H.R. 3899 addresses five issues under section 453:
(1) Current law limits the amount of cash and other
property (other than installment obligations) which may be
received in the year of sale to 30 percent of the sale price.
This limitation contributes to the complexity in the area;
much of the litigation involves whether the 30 percent
limitation has been met. The bill would eliminate the 30
percent limitation.
(2) The installment method is currently abused by
taxpayers who sell appreciated property to related persons
(for example, a trust set up for the benefit of the seller's
children), who immediately resell the property to a third
party as a part of a prearranged transaction. The original
seller defers recognition of gain. The related person
receives the full sale proceeds tax free because the tax
basis of the property in the hands of the related person is
its purchase price. Thus the economic unit comprised of the
two related persons has cash equal to the value of the
property while deferring taxation of the gain which would
have been immediately payable had the initial sale been for
cash. The bill would prohibit installment reporting of sales
between related persons.
(3) The bill raises the current $1,000 floor on
eligible sales of personal property to $3,000.
(4) The bill eliminates the requirement that there be
two or more payments in separate taxable years for a sale to
quality for the installment method.
(5) The bill makes it clear that the unreported gain
from an installment sale is recognized by the seller's estate
if the installment obligation is transferred or transmitted
at death to the obligor.
-7III. Treasury Position on H.R. 3899
The Treasury Department believes that H.R. 3899 reduces
complexity in the installment sale area. However, Treasury
recommends that Congress take this opportunity to provide
consistency of treatment and clarity of rules for all sales
for future payment. While this effort might result in a more
complex statutory provision — indeed, it will require an
expansion of section 453 to cover all deferred payment sales
— the law will be simplified immeasurably. A set of cogent,
uniform rules based on sound policy will clear up the morass
created by the lack of a coordinated taxing structure.
With the following qualifications Treasury supports H.R.
3899. First, Treasury supports the elimination of the 30
percent limitation only if a general rule requiring taxpayers
to recover basis ratably over the term of any deferred
payment sale is adopted and the abuse involving deferred
payment sales to related persons is eliminated. Second, if
tne 30 percent limitation is eliminated, we belive it is also
appropriate to eliminate entirely the $1,000 floor for casual
sales of personal property.
The 30 percent limitation has been criticized as adding
a great deal of complexity to the tax law. It is the subject
of a great deal of litigation and administrative dispute.
Yet, the 30 percent limitation serves an important purpose.
It limits access to tne advantageous tax deferral afforded by
section 453 to those taxpayer for whom the method was
introduced into the law — those with liquidity problems who
could suffer a hardship if the tax on a defered payment sale
was payable in full in tne year of sale.
If only specific complexities are to be addressed by
this bill, the 30 percent limitation should be rewritten in a
manner which serves its original purpose with less
complexity. However, we strongly believe that the
simplification process should not be viewed so narrowly.
Rather, where complexity is identified, it should be
eliminated by uniform rules which accord with sound tax
equity principles and, when compared to the prior state of
the law, balance fairly the legitimate interests of taxpayers
and the Treasury. Thus Treasury will support the elimination
of tne 30 percent limitation -- wnich we consider a major
substantive liberalization and not merely a simplifying
amendment — as well as other liberalizing changes contained
in our proposal, if other simplifying changes, which in some
instances restrict presently available tax deferral
-8opportunities, are adopted in the same spirit. In this way
we nope to establish an even-handed approach which may be
applied as a precedent to future simplification efforts.
IV. Treasury Proposal
A. GENERAL RULE
The Treasury Department proposes a general and
uncomplicated rule applicable to every sale for future
payment. When recognition of gain is deferred, the seller's
basis must be allocated ratably over the deferred payments.
The specifics are set forth below.
I note that the Tax Simplification Committee of the
Section of Taxation of the American Bar Association, the Tax
Committee of the American Institute of Certified Public
Accountants and the Tax Committees of the New York State and
City Bar Associations testified in support of both the
concept and the general framework of the Treasury proposals
at tne time the companion measure to H.R. 3899 (S. 1063) was
the subject of hearings held by the Subcommittee on Taxation
and Debt Management of the Senate Committee on Finance. The
American Bankers Association supported the Treasury proposal
regarding sales to related parties. We have modified tne
proposal presented at that time to reflect the suggestions of
these groups. While some differences on details remain, we
hope to resolve them in the near future. It is, however,
significant that in this initial simplification effort the
Treasury and tne major professional groups are in substantial
agreement as to the appropriate Congressional action.
1. Recognition of Gain
a. Installment treatment
Unless a taxpayer otherwise elects, the gain on any sale
of real property or casual sale of personal property (in any
amount) will be recognized ratably as payments are received.
b. Non-installment treatment
i. Method of recognition. If a
taxpayer so elects, gain shall be recognized in the year of
sale, measured by tne excess of the fair market value of the
consideration received in tne year of the sale over an
allocable portion of basis. If the fair market value of
consideration received in the year of sale is less than the
-9total amount due under the contract (e.g., there are
contingent payments or the value of the notes does not equal
the face amount of the obligations) then basis shall be
allocated according to the rules set forth in 2 below. The
amount of gain recognized on the receipt of notes will be
added to basis and allocated ratably to future payments.
Under current law, the taxation of future collections in
excess of basis is unrelated to and independent of the
original sale, except for sales of inventory. The nature of
the gain reported depends upon whether the note is a capital
asset in the hands of the seller and upon the holding period.
However, since collection is not a "sale or exchange" if the
maker is an individual, capital gain treatment is
unavailable. If the maker is a corporation and the note is a
capital asset in the seller's hands, section 1232 treats the
retirement as an exchange and capital gain treatment is
permitted.
Under the proposal, gain attributable to future payments
which exceed basis (adjusted for any gain reported on receipt
of the notes) retains the same character (e.g., capital gain
or ordinary income) as the gain originally reported, after
application of the recapture rules and any adjustments for
interest under section 483.
ii. Method of election. If the
installment method is not to apply, a taxpayer must
affirmatively elect not to report gain on the installment
method, or actually report the gain in a manner inconsistent
with the installment method.
2. Allocation of Basis
In any deferred payment sale, basis is to be allocated
according to these rules whether or not gain is reported on
tne installment method.
a. Fixed contract price
As under current law, basis is allocated to each payment
in the same proportion that the total basis bears to the
total contract price. If the contract price is subject to
change, the stated maximum payment will serve as the basis
for tne computation. The proportion would then be adjusted
prospectively for any change.
-10Example 1. A, a cash basis taxpayer, sells real
property with a basis of $5,000 to B for $10,000, $1,000 in
cash and $9,000 in notes with interest. The notes, due in
equal $3,000 installments on January 2 of the following three
years, have a fair market value at the time of sale of
$6,000. Whether or not the sale is reported on the
installment method, A must allocate the $5,000 of basis over
tne fixed contract price of $10,000. Thus, 50 cents of basis
would be allocated to each $1 of sales proceeds.
If A reports on the installment method, gain is
recognized only as cash is received and A would report the
following:
Year
Cash Received
Basis
Gain
1
2
3
4
$1,000
3,000
3,000
3,000
$ 500
1,500
1,500
1,500
$ 500
1,500
1,500
1,500
If A affirmatively elects not to report on the
installment method, gain is recognized based upon the fair
market value of the cash and notes received. Basis is still
allocated over the fixed contract price. A would report the
following:
Year
Taxable
Proceeds
Basis
Gain
1
2
3
4
$7,000
3,000
3,000
3,000
$3,500
2,500
2,500
2,500
$3,500
500
500
500
In year 1, A must include in income the $6,000 fair
market value of the notes, as well as the $1,000 cash down
payment received. The fair market value of the notes is
added to the basis of the notes as originally determined.
Thus, in years 2-4, $2,000 of this $6,000 addition to basis
is allocated to each $3,000 cash payment, leaving $1,000
taxable proceeds in each year from which the $500 basis
originally allocated is deducted.
-11Example 2. B, a cash basis taxpayer, sells a machine
with a basis of $5,000 for $1,000 down and the right to
receive $1 per unit of output for the year of sale and the
following three years, up to a maximum total purchase price
of $10,000. The $5,000 basis is allocated over the maximum
which may be paid, $10,000. Thus, 50 cents of basis would be
allocated to each $1 paid to B, whether or not B reports on
the installment method. The machine produced 0 units in the
year of sale, 2,000 units in year 2, 2,000 units in year 3
and 4,000 units in year 4. B would report the following on
the installment method:
Cash Received
Gain
Year
Basis
1
2
3
4
$1,000
2,000
2,000
4,000
500
1,000
1,000
2,500
$ 500
1,000
1,000
1,500
The total paid to B was $9,000, $1,000 less than the
maximum. B recovers the remaining basis in year 4, the final
year of the contract. If year 4 production had been 2,000
units, B would have reported a loss of $500 in that year.
If B had elected not to report on the installment
method, and nis right to receive $1 per unit was considered
to be so uncertain as to have no ascertainable fair market
value, B would have reported the following:
Year
Cash Received
Basis
Gain
1
2
3
4
$1,000
2,000
2,000
4,000
$ 500
1,000
1,000
2,500
$ 500
1,000
1,000
1,500
The cost recovery method of reporting is not permitted,
even if 3's right to receive $1 per unit nas no ascertainable
fair market value. Thus, there is no incentive to arrange
transactions artificially with notes or similar promises
arguably naving no ascertainable fair market value. As a
result, valuation problems are avoided and commercial
transactions will not be structured artificially to acnieve
desired tax results.
-12b.
Specified number of years
Where payments under a contract are to be made over a
specified number of years, in general, basis is allocated
equally to each year. Where basis allocated to any year
exceeds the amount received in that year, no loss is allowed.
The excess is added to total unrecovered basis and
reallocated equally to the remaining years of payment. Any
basis remaining at the end of the specified period may then
be treated as a loss.
Example 3. C, a cash basis taxpayer, sells a machine
with a basis of $5,000 for the right to receive $1 per unit
of output for the year of sale and the following three years
(with no maximum on the amount C might receive). The machine
produces 2,000 units in year 1, 3,000 units in year 2, 4,000
units in year 3 and 5,000 units in year 4. C would report
the following on the installment method:
Year
Cash Received
Basis
Gain
1
2
3
4
$2,000
3,000
4,000
5,000
$1,250
1,250
1,250
1,250
$ 750
1,750
2,750
3,750
Again, an argument by C that the right to receive $1 per
unit had no ascertainable fair market value would not affect
the amounts reported.
Example 4. D sells a machine under tne same terms as in
Example 3. The machine produces 950 units in year 1, 2,000
units in year 2, 3,000 units in year 3, and 4,000 units in
year 4. D would report the following on the installment
method:
Year
1
2
3
4
Cash Received
$
950
2,000
3,000
4,000
Basis
$ 950
1,350
• 1,350
1,350
Gain
$
0
650
1,650
2,650
-13Although $1,250 of basis is initially allocated to year
1, D received only $950. D may not report a loss for year 1,
and must allocate the excess of $300 equally over the
following 3 years.
There may be instances in which taxpayers can
demonstrate with reasonable certainty from the outset of a
transaction tne amount and timing -of the income to be
received under a contingent payment contract. In such cases
it may be inappropriate to require basis to be allocated
equally to each year of the payment contract. Accordingly
the Secretary would be granted regulatory authority to
prescribe those situations in which the general rule will not
apply and the method of basis recovery to be used.
3. Special Rule
Under the foregoing rules, a contingent payment
component may be manipulated to achieve some measure of cost
recovery initially. For example, assume E sells a machine
with a basis of $20,000 for the right to receive $20,000 in
each of years 3 and 4 and $1 per unit of output in years 1-4.
The machine produced 5,000 units each year. Under the rules
set fortn above, E would report the following on the
installment method:
Year
1
2
3
4
Cash Received
5,000
5,000
25,000
25,000
Basis
$5,000
5,000
5,000
5,000
Gain
20 000
20 000
By structuring the receipt of contingent payments first
in an amount estimated in advance to be approximately equal
to the basis allocated to each year, E has achieved cost
recovery and tax deferral. E could achieve a similar result
by receiving fixed payments of $5,000 each in years 1 and 2,
fixed payments of $15,000 each in years 3 and 4 and
contingent payments of $2 per unit of output in years 3 and
4.
Treasury proposes a special rule providing that the
existence of a contingent payment component shall in no event
accelerate basis recovery. The operation of this rule is
illustrated by the following example.
-14Example 5. E sells a machine with a basis of $20,000
for the right to receive $20,000 in each of years 3 and 4 and
$1 per unit of output in years 1-4. The machine produced
5,000 units in each year. E would report the following on
the installment method:
Year
Cash Received
Basis
1
2
3
4
$ 5,000
5,000
25,000
25,000
0
0
10,000
10,000
c.
Gain
$ 5,000
5,000
15,000
15,000
Both fixed price and specified term
When the terms of sale include both a fixed contract
price (or standard maximum) and payments over a specified
number of years, the taxpayer must allocate basis over the
fixed price (or maximum).
d. Neither fixed price nor specific term
Where the contract specifies no fixed price (or maximum)
and payments are not limited to a specified number of years,
basis may, in general, be recovered ratably over a period of
20 years if the transaction is a sale or exchange. As in the
case of payments limited by time only, tne Secretary will be
authorized to define situations by regulation in which this
general rule will not apply and to prescribe alternative
metnods of basis recovery.
B. EVENTS CAUSING ACCELERATION OF DEFERRED PAYMENT
INCOME
1. Section 337 Liquidations
Under present law, a corporation generally recognizes no
gain upon tne distribution of installment obligations to its
snareholders pursuant to a twelve-month liquidation under
section 337, except for recapture and other similar items.
However, shareholders are taxed upon receipt as having
received a distribution equal to the fair market value of the
notes. Sharenolders generally recover basis first rather
tnan allocate basis between notes and other property
received.
-15Under the proposal, if a corporation sells property
pursuant to a section 337 liquidation, receives notes as part
of the consideration and distributes those notes in a
liquidating distribution, shareholders would report gain as
if the stock had been sold on the installment method for the
cash or other property received in the liquidating
distribution, unless they elect otherwise. Basis would be
allocated according to the general rules specified above,
either ratably over the value of the property distributed and
the face amount of the notes or equally to each year during
which a payment may be made from the liquidating corporation
or on the notes. Shareholders would be taxed with respect to
the notes only upon receipt of payment. If taxpayers elected
not to report on the installment method, notes or other
obligations would be reported as income under the general
rules set forth in A.b.i. and A.2. above. These rules would
apply only to notes attributable to sales made by the
corporation pursuant to the section 337 liquidation.
A special rule would cover liquidating distributions
spanning two taxable years of a shareholder. Under current
law, basis is recovered first. This rule would not be
changed. In the first year, the shareholder would report
gain without regard to what might be received in the second
year. This is appropriate since in many cases it will be
impossible to predict the form or value of future
distributions.
Distributions received in the second year would be
subject to a new rule. The shareholder would be treated as
if all liquidating distributions had been made in the second
year, except that gain reported in the first year would be
subtracted from the gain that would have been recognized nad
the entire distribution occurred in the second year.
Example 6. F is the sole shareholder of corporation X
and has a basis of $100,000 in the stock. F causes X to
adopt a plan of liquidation pursuant to section 337 in July
of year 1. In September of year 1, X sells all of its assets
to D for $1,000,000, $500,000 in interest-bearing notes with
a fair market value of $350,000, due in equal installments in
years 3-6. The cash is distributed in November of year 1 and
tne notes in February of year 2. F would recognize $400,000
of income in year 1 ($500,000 of cash minus $100,000 of
basis).
-16In year 2, F is treated under the installment method as
having received all of the distributions in year 2, factoring
out gain reported in year 1. If X had distributed everything
in year 2, F would have reported $450,000 in gain ($500,000
cash minus $50,000 basis allocated to cash), and F would have
held $500,000 face amount notes with a basis of $50,000.
When the $400,000 gain recognized by F in year 1 is
subtracted ($450,000 in year 2 minus $400,000) $50,000 of
gain remains for F to report in year 2. F's basis for the
notes is $50,000, which will be recovered ratably as the
notes are paid.
If F elects not to repoprt on the installment method, F
reports the same $400,000 in year 1. Again in year 2, F is
treated as having received all of the distributions in year
2, subtracting the gain recognized in year 1. In this case,
if X had distributed everything in year 2, F would have
reported $765,000 in gain ($500,000 - $50,000 in basis
attributable to the cash plus $350,000 minus $35,000 in basis
attributable to tne notes). When the $400,000 gain
recognized in year 1 is subtracted, F recognizes $365,000 of
gain in year 2. F holds the notes at a basis of $365,000
($50,000 basis allocated to the notes plus $315,000 gain
recognized upon receipt of the notes).
2. Sales to Related Parties
Sales to family members, controlled corporations and
partnerships, or to trusts and estates in which a related
person has a specified interest would be subject to a special
disposition rule. A subsequent disposition by the purchaser
within two years of the original sale will result in the
acceleration of gain recognition on the installment
obligations held by the seller equal in amount to the
consideration received in the second sale (or amount of
cnaritable contribution deduction taken if the subsequent
disposition is a contribution to a charitable organization).
Certain dispositions would be excepted -- dispositions upon
the deatn of the purchaser, involuntary conversions, sales in
the ordinary course of a business which was the subject of
the installment sale, and redemptions described in sections
302(a) or 303(a). A subsequent sale for deferred payment
will be treated as a dispostion of the obligation from the
original sale only when payment is.received.
Under regulations to be promulgated by the Secretary,
the seller would be required to file a consent with the
year-of-sale tax return which identifies the purcnaser, the
-17of
2 years.
The proposal is narrowly structured to deny deferred
payment treatment only where the related party unit is
attempting to achieve the dual goals of tax deferral and
immediate use of the economic benefits of the transferred
property. It therefore will not affect installment sales of
farms or interests in closely held businesses where the
purchaser intends to continue the business activity.
However, because of the precise focus of the proposal, we
believe it is appropriate to define related persons broadly.
Thus, persons will be treated as related if stock ownership
in any amount would be attributed from one to the other under
the rules of section 318(a), except that "members of a
family" would be expanded to include brothers and sisters
(wnether of the whole or half blood), spouses of members of
the family and members of the family of one's spouse.
Example 7. G sells property with a $10,000 basis in
year 1 to spouse S for $45,000 in notes, due $15,000 each in
years 3-5. Still in year 1, S sells the property for $45,000
cash. G is treated as having disposed of S's obligations in
year 1.
Example 8. Same facts as Example 7, except that S sells
the property in year 1 for $45,000 in notes, payable $25,000
in year 3 and $20,000 in year 4. G is treated as having
disposed of obligations in the face amounts of $25,000 in
year 3 and $20,000 in year 4. Although S received payment
after the two-year period elapsed, the fact that the sale
occurred within that time causes this provision to apply.
3. Sales by Estates
An executor of an estate (or trustee of testamentary
trust or trust used as a will substitute) would be permitted
to sell property within 2 years of the date of the decedent's
death on the installment method and distribute the
obligations received without the distributions being treated
as a disposition which accelerates, gain recognition. The
distributee would take the estate or trust's basis for the
obligations.
-18C.
CLARIFICATION OF CURRENT LAW
1. Cancellation of Obligations.
Under some current case law, it may be argued that a
cancellation of an installment note is not a disposition.
The proposal would amend sections 453(d) and 691(a)(2) to
make it clear that a taxable disposition occurs when the
holder cancels or forgives an obligation or bequeaths an item
of income in respect of a decedent to the obligor. In the
latter case, income is recognized in the taxable year of the
entity holding the obligation during which the obligation is
cancelled or distributed.
2. Obligations held in trust which are
transmitted at death.
Some court decisions have held that the section 691(c)
deduction is not available for deferred receipts on
installment obligations held by a trust that is included in a
decedent's estate. The section 691(c) deduction would be
available for installment obligations in existence at the
date of the decedent's death held by a trust that is
included in the decedent's gross estate.
3. Sale for less than fair market value.
A taxpayer who disposes of installment obligations in a
sale for less tnan fair market value (e.g., to a related
person) would be taxed on the excess of the fair market value
of the obligation over its basis, and not on the lower sales
price.
D. Miscellaneous Provisions
1. Like-Kind Exchanges with Installment "Boot"
Under current law, a taxpayer under qualifying
circumstances may defer recognition of gain realized in a
sale by electing the installment method of reporting or in an
exchange if the property received in whole or in part was of
a "lixe-kind" to tne property given up. However, deferral is
unavailable to the same extent when a transaction qualifies
as both a like-kind exchange and an. installment sale, because
the property received in the exchange is treated as a
year-of-sale payment under the installment sale rules,
although gain attributable to the like-kind exchange is not
recognized. Treasury proposes that, subject to the
-19resolution of technical problems, the value of like-kind
property received in a deferred payment sale not be taken
into account in determining selling price, contract price or
payments received.
2.
Selling Expenses
Selling expenses would be deducted from the gross sales
price.
3. Two Payment Rule
The rule requiring payments in two or more taxable years
would be eliminated explicitly.
4. Marketable Securities
Marketable securities could not be sold on the
installment method. The definition of "marketable
securities" would exclude large blocks not immediately
saleable in an open market transaction.
As discussed above, deferred payment reporting is
designed to provide relief to taxpayers who might have
difficulty paying tax when receipt of proceeds is deferred to
future years. In the case of marketable securities, the
decision to sell for future payment, and thereby create a
situation which in form qualifies for deferred payment
treatment, lies totally in the hands of the seller. A ready
cash market is available. The only purpose for sale on those
terms is to qualify for tax deferral. This is inconsistent
with tne relief nature of section 453.
5. Section 1038
A decedent's estate will be permitted to qualify for
section 1038 treatment where a qualifying sale had been made
by the decedent.
IV. Summary
Simplification in this area is important for several
reasons:
o Clearer application of the tax law will facilitate
business and financial planning.
-20o If the rules are simpler and more certain, taxpayers
and the Government can devote less time and expense to
consturing and arguing about the proper application of
the Code to specific situations.
o With streamlined rules, there will be fewer instances
where tax savings are dependent upon a practitioner's
knowledge of arcane wrinkles in the law, and where
penalties are imposed on taxpayers with less
knowledgeable tax counsel.
o Simplification will also reduce the benefits enjoyed
by some aggressive taxpayers and practitioners who
play the "tax lottery" — the game of calling
uncertain rules in your favor in the hope, if the
expectation, that the transaction will not be audited.
Specifically, we believe the installment sale area is an
appropriate place to begin the process of substantive
simplification and entertain the hope that all interested
parties will cooperate in an effort to consummate this
project successfully. We further believe that if the
proposals set forth in this statement are adopted, two major
causes of complexity in the deferred payment area, e.g.,
whetner a transaction is "open" or "closed" and whether a
promise of future payment has an ascertainable fair market
value, will be eliminated, commercial transactions will not
be structed artificially to achieve full basis recovery prior
to the recognition of any gain and the deferred payment
reporting privilege will be made available in a uniform and
fair manner.
H. R. 3900—THE SUBTITLE F REVISION ACT OF 1979
In addition to providing a forum to achieve
simplification of substantive areas of the tax law, this
Subcommittee can maKe a significant contribution to fostering
efficient administration of the tax laws. The Subtitle F
Revision Bill is a example of this process and Treasury looks
forward to participating with interested professional groups
in continuing efforts to simplify tax administration. With
three minor amendments, Treasury supports H. R. 3900.
I. Section 2
Section 2 of the bill would amend section 6343(b) to
provide that where there is a subsequent administrative
determination by the the Internal Revenue Service that a
-21seizure for the collection of a delinquent taxpayer's
liability was wrongful, interest, at the statutory rate,
would be paid to the taxpayer. Under present law, interest
is payable only when there is a judicial determination of
wrongful levy. Interest ought also to be payable when there
is an administrative determination by the Internal Revenue
Service that a wrongful levy has been made. Therefore,
Treasury supports this change.
We do, however, recommend a technical amendment. The
bill provides that interest is to be paid until the date the
money is returned. Literally, this is impossible to do.
Under section 6611(b)(2) interest is computed until a date
preceding the check by not more than 30 days. We suggest
that this section of the bill be amended to provide that
interest be paid for the period described in section
6611(b)(2).
II. Sections 3 and 4
Sections 3 and 4 of the bill incorporate changes
proposed by the Internal Revenue Service. Presently, private
foundations are required to file two annual returns, one
under section 6033 and another under section 6056. The
proposal would consolidate the two reporting requirements
into one, under section 6033. In addition, non-exempt
charitable trusts described in section 4947(a)(1), whose
returns are presently filed pursuant to section 6011, will
also be required to file the annual return (including the
additional reporting requirements heretofore required under
section 6056) required under section 6033.
The proposed change would subject all private
foundations to section 6033 and would permit a wholesale
consolidation of sections 6033 and 6056. In addition to
streamlining the Federal filing requirements for private
foundations, the proposal would facilitate efforts underway
to bring state filing requirements into line with the Federal
requirements. If the efforts to coordinate state and Federal
filing requirements prove successful, the net effect would be
a very substantial reduction in the paperwork burden on the
Internal Revenue Service, state governments and affected
foundations. This would be welcome simplification and the
Treasury supports tnese sections of the bill.
There is an additional area of further simplification
not presently addressed in the bill. When nearings on the
Senate counterpart of H.R. 3900 (S. 1062) were held before
-22the Senate Finance Subcommittee on Taxation and Debt
Management, the American Bankers Association and the
Committee of Banking Institutions on Taxation recommended the
simplification and consolidation of the reporting
requirements of split interest charitable remainder or lead
trusts. Presently, splitinterest trusts are required to file
as many as three seprate returns with different filing dates
under two different Code sections. The returns are
substantially duplicative. The American Bankers Association
and the Committee of Banking Institutions on Taxation have
recommended consolidation of these reporting requirements
into a single form containing the information presently
required on the various separate forms. Treasury has been
working with these organizations to achieve reporting
simplification while retaining the appropriate public
disclosure of return information. Accordingly, we recommend
that the bill be expanded to include consolidation of the
filing requirements of split interest trusts.
III. Section 5
Section 5 of the bill would repeal section 6658, which
provides for an additional 25 percent penalty in the case of
termination assessments. This change was originally proposed
in 1976 in connection with revisions to the termination and
jeopardy assessment procedure in the Tax Reform Act of 1976.
It has been the experience of the Internal Revenue
Service that this provision, which provides an additional
panalty, is not needed. Consequently, the Treasury supports
its repeal.
IV. Section 6
Section 6 would eliminate the requirement that
corporations file a return witn the Internal Revenue Service
concerning certain stock options. The section also
eliminates the requirement, that a corporation furnish
certain information to a person who exercises a restricted
stock option.
Treasury understands there are still some restricted
stock options outstanding. The information supplied by
corporations is necessary to enable holders of stock acquired
through the exercise of restricted stock options to determine
their basis. Thus, wnile Treasury supports this section of
the bill we suggest it be amended to continue to require
corporations to furnish information to individuals who
exercise restricted stock options.
-23V.
Section 7
Tax professionals feel that many individuals do not
become aware of their gift tax return responsibilities until
a review of transactions for the previous calendar year is
made in connection with their individual income tax return,
due April 15. At this time the gift tax return is already
late.
Section 7 would coordinate the time for filing gift tax
returns for the fourth calendar quarter with the April 15
income tax return filing date in order to consolidate an
individual's tax responsibilities on one date. An extension
of time to file an income tax return will also extend the
time to file the fourth quarter gift tax return. The
Treasury does not oppose this provision.
VI. Section 8
Section 8 would permit excise tax information to be
disclosed to state tax officials. The Treasury supports this
provision.
MISCELLANEOUS BILLS
I shall now turn to the five miscellaneous bills before
the Subcommittee today. The Treasury position on each of
these bills is set forth in Appendix A. I shall comment upon
only two of the bills, H.R. 2770, The Independent Local
Newspaper Act of 1979, and H.R. 2536, relating to penalties
for failure to pay estimated tax.
I.
H.R. 2770 —
The Independent Local Newspaper Act of 1979
Earlier in this statement I discussed the importance of
tax simplification and noted that tax complexity results in
many instances from attempts to provide narrowly drawn
special interest legislation and/or the use of the tax Code
to achieve some social, economic or regulatory objective. It
is fitting that H.R. 2770 should be considered in this
context because that bill illustrates quite clearly the
points I made earlier.
The objective of H.R. 2770 is to preserve local
ownership of newspapers in the face of increasingly
aggressive acquisition offers, at premium prices, by large
newspaper cnains or conglomerates. If the owner of a local
-24newspaper declines to sell and dies owning the newspaper, the
estate tax value of the business is determined in part by
reference to recent sales of comparable newspapers, which, it
is alleged, are occuring at unrealistic, inflated prices. It
is further alleged that a newspaper valued in this manner
cannot generate funds sufficient to pay estate taxes. As a
result local newspaper owners, at death or prior thereto in
contemplation of this dilemma, are encouraged to sell out to
the large chains.
The bill attempts to solve this dilemma by providing an
extraordinary number of special exemptions from generally
applicable tax provisions to permit the tax-free accumulation
of funds to pay the estate tax attributable to the value of
the newspaper and permitting any unfunded estate tax to be
paid over fifteen years. Thirty seven pages of statutory
language are required to codify these provisions.
We have no quarrel with the proposition that a free and
vigorous press should be protected. But if this is to be a
of national policy goal, we believe the problem should be
addressed directly. If the independent local newspaper
industry is threatened, special loan or subsidy programs
should be considered. To the extent the value of these
businesses is being artificially escalated by takeover bids
from large newspapers, the possible modification of the
anti-trust laws should be considered. Either or both of
these courses would result in a more controlled and equitable
resolution of the problem than the use of tax expenditures.
I believe this point can be made clear by examining H.R.
2770 in some detail. 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 tne value
of the owner's interest in the business. The income earned
on the trusteed assets will be exempt from tax. The transfer
of assets to tne 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 tne estate does not realize income when its
estate tax liability is discharged by the trust.
-25The 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
estate tax benefit is "recaptured" if the business interest
is sold within 15 years of the owner's death.
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 special
estate tax payment trust. Payment may be made on essentially
tne 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.
What generally applicable tax law principles does this
bill violate? First, it 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 tne 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 tne owner. To the extent that the newspaper
business is held in corporate form, this payment would in all
otner cases be treated as a taxable dividend.
Third, the exemption of trust earnings from income is
contrary to existing law which would treat the beneficiary as
the owner of the trust and taxable on its income.
Fourth, exclusion of the corpus of the trust from tne
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 estate, then
tne 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 of another results in income to the party whose
obligation nas been discharged.
-26The effect of these provisions is, in most cases, to
cause the federal government to pay at least 46 percent of
the estate tax liability attributable to the value of an
independent local newspaper. This occurs because, assuming a
46 percent corporate tax rate, tne income tax on the
"deductible" contribution to the estate tax payment trust is
not collected. Moreover, the government's share of the
estate tax payment would be increased if these funds were
distributed as taxable dividends to the shareholder or if
these funds were invested and produced taxable income at
either the corporate or shareholder level. Finally, the
government also forgives a portion of the estate tax by the
failure to include the value of the trust in the owner'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. Although there is substantial income tax
relief granted by the bill, there is no recapture of these
benefit if the family of the owner does not continue to
operate the local newspaper. Furthermore, a qualified trust
may be established only if no stock of the newspaper is
publically traded. However, the trust becomes disqualified
only if the stock owned by the trust beneficiary becomes
traded in an established securities market. Finally, tne
limits on the trust are established on the assumption that
the highest possible estate tax rate (70 percent) will apply
in all cases.
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 tne 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.
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 rather than
ordinary income tax. Also, if a portion of the business must
be sold to generate funds to pay estate taxes, any gain
realized will generally be taxed at the capital gains rate.
-27Further, 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
adjusted gross estate or $250,000.
Finally, tne 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. Section 6166 allows a
five-year deferral and 10-year installment payment at a 4
percent interest rate on all or a portion of the deferred
estate tax if tne value of the closely-held business interest
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 tne taxable estate. Under that section the
estate tax attributable to the closely-held business interest
may be paid in up to 10 annual installments.
The adoption of H.R. 2770 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
II. H.R. in
2536
— DE MINIMUS and
RULE
TAXES
reviewed
a comprehensive
notFOR
an ESTIMATED
ad hoc manner.
H.R. 2536 relaxes the requirement for filing
declarations of estimated tax. Under current law, no
declaration of estimated tax is required if a taxpayer
reasonably expects that the amount of taxes which would be
-28owed with the taxpayer's return, over and above amounts
withheld from wages and other tax credits, would be less than
$100. The bill would raise this de miniums exception to
$500. In addition, no penalty would be imposed on
individuals for failure to pay estimated income tax if the
tax reported on the individual's return is less than $500.
The rules for estimated tax payments place taxpayers who
receive income on which there is no withholding on a
pay-as-you-go system similar to the system applied to wage
earners. The pay-as-you-go system is beneficial for the
Government, which receives taxes throughout the year, and for
the taxpayer, who is not faced with paying a large amount of
tax when filing a tax return on April 15.
Because current law provides a number of exceptions to
the estimated tax requirement, a taxpayer with a high income
tax liability might underpay taxes by a few thousand dollars
and still not be subject to a penalty for failure to pay
estimated tax. In contrast, though, a relatively low-income
taxpayer with steady income might fail the safe harbor tests
in the Code even if the taxpayer's underpayment of tax is a
relatively small amount. We believe it is appropriate to
increase the overriding safe harbor rule for filing declarations of estimated taxes from its present $100 level so that
a taxpayer who does not expect to pay a substantial amount to
the Government with his or her return will be permitted to
avoid the paperwork involved in making estimated tax payments. However, we believe what it would be unwise to raise
the safe harbor figure to $500 at this time. As indicated
above, the estimated tax rules are not solely for the benefit
of the Government. They also benefit individuals who would
otnerwise be faced with a large tax bill on Aril 15. The
$100 figure was incorporated in the Code in 1972. Before
then, the safe harbor rule was applied with a $40 figure. We
believe it would now be appropriate to raise the limit to $300.
We also believe that in conjunction with increasing tne
safe harbor amount it would be appropriate to increase the
minimum percentage of annual tax liability to be met by
withheld and estimated tax payments from 80 percent to 85
percent. Taxpayers whose liabilities are paid as estimated
taxes pay their taxes substantially later than those whose
liabilities are satisfied through withholding. This cnange
would reduce the advantage of paying taxes through estimated
payments and would reduce the amount payable in a lump sum
witn tne taxpayer's return.
I would be happy to answer any
oOoquestions you may have.
-29Appendix A
Summary of Treasury Positions on 5 Miscellaneous Bills
Scheduled for Hearing on July 27, 1979
Before the Subcommittee on Select Revenue Measures
of the Committee on Ways and Means
H.R. 2536. The Treasury Department agrees that the
amount of tax due before estimated tax is required should be
raised. However, Treasury believes that the new figure
should be $300 so that taxpayers on fixed incomes are not
subjected to large tax liabilities on April 15. In addition,
Treasury recommends that the minimum percentage of tax
liability to be met by withheld and estimated taxes should be
increased from 80 percent to 85 percent.
H.R. 2770. The Treasury Department opposes the bill.
H.R. 3660.
bill.
H.R. 4201. The
bill.
The Treasury Department does not oppose the
Treasury Department does not oppose the
H.R. 4726. The Treasury Department supports the bill on
the understanding that the amount of the credit or refund for
warranty adjustments will be computed in a manner consistent
with Rev. Rul. 76-423, 1976-2 C.B. 345.
FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
July 27, 1979
STATEMENTDF THE HONORABLE ROBERT H. MUNDHEIM
GENERAL COUNSEL OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL
ECONOMIC POLICY AND TRADE
AND THE
SUBCOMMITTEE ON ASIAN AND PACIFIC AFFFAIRS
OF THE
HOUSE COMMITTEE ON FOREIGN AFFAIRS
H.R. 2200 - International Claims Settlement Act'Amendments
• • • • • • • ' •
"
•
'
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•
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•
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II
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I
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li
•
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•
I am very pleased to present the views of the
Treasury Department on H.R. 2200. This bill would amend
the International Claims Settlement Act of 1949 to
provide for adjudication by the Foreign Claims Settlement Commission of claims of U.S. nationals for losses
of property taken by the Socialist Republic of Vietnam.
At the outset, I should say that the Treasury
Department supports H.R. 2200. More than four years
have already elapsed since the Socialist Republic of
Vietnam took control over South Vietnam, resulting in
substantial losses of American property. As more time
passes, it becomes all the more difficult for claimants
to present the Commission with the necessary evidence of
their losses. Since claims should be adjudicated on the
basis of the best possible evidence, we would favor
enabling claimants to present their claims to the
Foreign Claims Settlement Commission promptly.
Determination of the amount of claims would also be
important in the event that the U.S. entered into future
claims settlement negotiations with the Government of
the Socialist Republic of Vietnam. In negotiating the
recent private claims settlement with the People's
Republic of China, it was helpful to have available the
Commission's determination of claims against China under
Title V.
B-1759
i l
l l
-2From Treasury's perspective, we do not believe that
the establishment of a Vietnam claims program will have
any implications for U.S. relations with Vietnam.
I would like to comment on several aspects of the
bill as proposed.
First, we in Treasury support the provision in
Title VII for payment of claims under a new distribution
formula based on the $2500 minimum proposed by the GAO
study in 197 7, rather than on the $1000 minimum which
would otherwise be employed under Title I.
Second, while it does provide for certification of
awards to Treasury for payment purposes, the bill does
not provide for certification of awards to the
individual claimants, or to the Secretary of State.
There may well be a lapse of time between the
certification of claims by the Commission and actual
payment by Treasury pursuant to a claims settlement, and
since the Secretary of State may require the information
for negotiating purposes. Therefore, it might be
advisable to include language similar to that found in
section 507 (a) and (b), authorizing the Commission to
make such certifications.
Third, the claims fund established under the
proposed Title VII appears to operate only the case of a
future cash settlement with Vietnam. We would suggest a
slight modification in the bill also to authorize the
use of the claims fund where a settlement takes the form
of an assignment of assets to the U.S. from which sums
can be realized for distribution to U.S. claimants.
You have specifically asked for the current
estimate of blocked Vietnamese assets. We estimate that
roughly $140 million of assets are blocked, on the basis
of information available to Treasury including the
results of an informal telephone survey conducted by
Treasury through the New York and San Francisco Federal
Reserve Banks in late 1976.
I would also state that the Department of the
Treasury supports the changes in the definition of
Vietnam and in the indirect ownership test suggested by
the Department of State in its' testimony.
This concludes my oral testimony on the bill. I
appreciate having this opportunity to share my views
with you. I would be happy to try to answer any
questions you might have.
-3Technical Comments
^
•
_
_
_
_
_
_
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_
»
_
_
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_
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_
—
*
In addition to the above substantive comments, I
would recommend the following technical changes in the
language of the bill:
(1) Section 700: Change page 2, line 8 to read: "the
Socialist Republic of Viet-Nam which arose since
April 29, 1975 out of the na- "
(2) Section'701(1): Add to the end of the subsection,
after line 2 on page 3, the following: "The term
does not include aliens."
(3) Section 701 (3): change page 3, lines 7-9 to read:
"any debt owed by the Socialist Republic of
Viet-Nam or by any enterprise which has been
nationalized, expropriated, or taken by the
Socialist Republic of Viet-Nam, and any debt which
is a charge on property;which has been
nationalized, expropriated or;taken by the
Socialist Republic of Viet-Nam."
(4) Section 701 (5): Change page 3, lines 14-20 to read:
(5) the term "Claims Fund" is the special fund
established in the Treasury of the United States
composed of such sums as may be paid to or realized
by the United States pursuant to the terms of any
agreement settling such claims that may be entered
into by the Governments of the United States and
the Socialist Republic of Vietnam.
(5) Section 702: Change page 4, line 1 to read:
^»«-.-__*-_^_-«^-.«w.-»«__--«_»_..__^pii-i._^-»i»--»»
"Viet-Nam, arising since April 29, 1975 for
losses arising as a result of the nationalization."
(6) Section 703: Change page 4, line 21 to read:
"only to the extent that the claim has been held
by one or more nationals..."
(7) Section 704: page 5, lines 5, 9, 15, and 22:
Change "may" to "shall".
-4Section;706: Add at page 16, line 17:
"(a) The Commission shall certify to each
individual who has filed a claim under this
subchapter the amount determined by the Commission
to be the loss or damage suffered by the claimant
which is covered by the subchapter. The Commission
shall certify to the Secretary of State such amount
and the basic information underlying that amount,
together with a statement of the evidence relied
upon and the reasoning employed in reaching its
decision.
(b) The amount determined to be due on any claim
of an assignee who acquires the same by purchase
shall not exceed (or, in the case of any such
acquisition subsequent to the date of
determination, shall not be deemed to have
exceeded) the amount of actual consideration paid
by such assignee, or in case of successive
assignments of a claim by any assignee.
(c) With respect to any claim under section 702"
Section 710: Change page 8, line 22 to read:
"Notwithstanding any other provision of law, the
Secretary of State and the Secretary of the
Treasury shall transfer or other-."
O 0 0
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Date:
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Federal Reserve Bank of St. Louis
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FOR IMMEDIATE RELEASE
Friday, July 27, 1979
CONTACT: Robert Nipp
202/566-5328
INTEREST. RATE BASE FOR NEW SMALL SAVER CERTIFICATE
Secretary of the Treasury W. Michael Blumenthal today
advised the supervisory agencies for Federally-insured depository institutions that the average 4-year Treasury yield
curve rate during the five business days ending July 26 was
8.95 percent, rounded to the nearest 5 basis points.
(This rate will be used by the agencies in determining
the maximum interest payable in August on time certificates
issued in denominations of less than $100,000 and maturities
of four years or more.
The report of the Treasury yield curve average is announced
three business days prior to the first day of each month for
determination of ceilings for the new variable rate savings
certificates which are adjusted on the first calendar day of
each month.
The commercial bank ceiling for the certificate is one
and one-quarter percentage points below the yield on the fouryear Treasury securities. The ceiling for thrift institutions
is one percentage point below the yield on four-year Treasury
securities.)
o 0 o
B-1760
FOR IMMEDIATE RELEASE
EXPECTED AT 10:30 A.M., EDT
MONDAY, JULY 30,1979
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON COMMERCE, CONSUMER
AND MONETARY AFFAIRS
COMMITTEE ON GOVERNMENT OPERATIONS
HOUSE OF REPRESENTATIVES
U.S. POLICY TOWARD FOREIGN DIRECT INVESTMENT IN THE
UNITED STATES: THE ROLE OF THE COMMITTEE ON FOREIGN
INVESTMENT IN THE UNITED STATES.
I am happy to respond to your request to testify
on the operations of the Committee on Foreign Investment
in the United States (CFIUS). Since the basic terms of
reference for the Committee stem from our overall policy
on foreign investment, I first want to outline that policy
and the reasons for it. I will then describe how the Committee
operates in the context of that policy.
U.S. Policy
The United States has a long-standing policy of welcoming
foreign investment to this country and extending national
treatment to foreign owned firms based in the United States.
Prior to 1977, however, this policy had never been officially
B-1761
- 2 articulated.
Upon assuming office, this Administration
decided to do a formal review of U.S. policy on both
inward and outward investment.
The review was carried out by the Economic Policy
Group, the Administration's top policy-making
all economic issues.
body for
It resulted in a statement, issued in
July 1977, confirming the long-standing U.S. commitment to an
open international economic system.
The statement
concluded that:
The fundamental policy of the U.S. Government
toward international investment is to neither
promote nor discourage inward or outward flows
or activities.
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.
Whenever such measures are under consideration,
the burden of proof is on those advocating intervention to demonstrate that it would be beneficial
to the national interest.
The statement also confirmed the U.S. commitment to
national treatment by stating that governments "should
- 3 not discriminate against established firms on the basis
of nationality or deprive such firms of their rights
under international law."
The basic premises for the policy statement were
stated as follows:
~
First, international investment will generally
result in the most efficient allocation of
economic resources if it is allowed to flow
according to market forces.
—
Second, there is no basis for concluding that
a general policy of actively promoting or
discouraging international investment would
further the U.S. national interest.
—
Third, 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.
—
Fourth, the United States has an important
interest in seeking to assure that established
investors receive equitable and non-discriminatory
treatment from host governments.
It is important to understand that while this policy
is consistent with the long-standing national commitment
of the United States to an open international economic
system, it is primarily based on a pragmatic assessment
- 4 of the national self interest of the United States. We have
an open door for foreign investment in this country,
not
as an accommodation to foreigners or their governments but
because such new investment provides important benefits to
our own economy.
Our need for new investment is particularly apparent
at present.
We need more jobs, more productive capacity,
and more new technology to minimize the level of unemployment.
We need more exports and more capital inflows to help improve
our balance of payments and strengthen the dollar. We need
more investment and more competition to help fight inflation.
Our ability to achieve these objectives is directly
dependent on the willingness and ability of private companies
and individuals to put up money at risk, to gamble on the
future.
There is no surplus of such people, in the United
States or the world as a whole. Not enough of them are
prepared to "take the plunge" of new investment to meet our
needs for the next decade and beyond. The notion of discriminatin
against investors simply on the basis of where they come from
has never had any economic rationale, and in today's economic
environment it would be at cross purposes with our highest
priority domestic economic objectives.
In the interdependent world of today, it is apparent that
investors from abroad have much to offer to help us meet our
economic goals —
just as U.S. investors
have helped
other countries throughout the postwar period to meet their
- 5 goals,
in fact, the United States is still investing
far more in the rest of the world in the form of private investment
than is being invested here, in spite of the fact that foreign
investment here has picked up substantially in recent years.
In 1978, for example, the outflow of U.S. direct investment
abroad of $16.7 billion was over twice as great as the $6.3
billion inflow of foreign direct investment here. In the first
quarter of this year, the outflow was over four times the amount
of the inflow.
Since the early 1970's, concerns have occasionally been
expressed about foreign investment in the United States.
However, I am not aware that the perceived problem has
ever been precisely articulated.
The concerns appear to be
based, in large part, simply on the size of foreign investment
in the United States —
particularly those investments where
foreigners exercise control over, or a major influence in, U.S.
companies, i.e., direct investments. But the fact of the matter
is that the magnitude of this investment is insignificant in
relation to the size of the U.S. economy.
Perhaps the best indicator for this purpose is the
proportion of total U.S. output which is accounted for by
foreign-owned companies. The Commerce Department has estimated
that value added by U.S. affiliates of foreign firms accounted
for only 2.2 percent of total value added for the U.S.
economy as a whole in 1974.
We estimate that the figure
- 6
-
increased to about 2.6 percent in 1977, the latest year
for which sufficient detail for this purpose is available.
OPEC direct investment, which has been of particular concern
to this Committee, accounts for less than one percent of
total foreign direct investment and an infinitesimal fraction
of total U.S. value added.
It is sometimes suggested that we should restrict
investments in specific companies or industries but, to
the best of my knowledge, the basis for such restrictions
has never been articulated either.
In fact, I am not aware
that anyone has ever identified one single instance of a
foreign direct investment in this country which should have
been blocked or should now
be rescinded.
I have dealt at some length with our policy on foreign
investment and the current status of foreign investment
here because they provide the policy basis underlying the
existence of the CFIUS, how it operates, and what it should
or should not be doing at the present time. The key points
in this regard are:
—
We have an open door policy toward foreign
investment because this investment is
beneficial to our economy.
—
The size of foreign investment in this country
is not significant in relation to our overall
economy.
- 7 —
We are not aware of any individual
foreign investment which anyone
contends
should have been blocked, or should now
be reversed.
Committee on Foreign Investment in the United States
In addition to reviewing overall U.S. policy toward
foreign direct investment, the new Administration in early
1977 reviewed the Committee on Foreign Investment in the
United States, which had been established by the previous
administration, and decided that it was a useful procedure
and should be continued. The Committee was set up by Executive
Order 11858 of May 7, 1975, which stipulated that an interagency
committee, headed by the Treasury Department and including
representatives from the Departments of State, Defense and
Commerce, should monitor the impact of foreign investment
in the United States and coordinate the implementation of
U.S. policy on such investment. 1/ In particular, the Order
stipulated that the Committee should:
1/ From its inception CFIUS has drawn a distinction between
foreign investments in the United States which are of a
medium and long-term nature and placements of funds in liquid
balances or short-term securities for purposes of cash or
reserve management. CFIUS has never considered that its
responsibilities should extend into the area of such liquid
foreign dollar holdings, which result in large part from
the international role of the dollar as the primary international
reserve and intervention currency.
Accordingly, it has viewed its responsibilities in
the area of portfolio investment as limited to foreign purchases
of U.S. equities involving less than 10% ownership by the
foreign investor and of debt instruments with maturities
of more than one year. This was also the definition of portfolio
investment employed in both the 1974 Benchmark Survey and the
Survey currently under way.
- 8 1.
Arrange for the preparation of analyses of
trends and significant developments in
foreign investments in the United States;
2.
Provide guidance on arrangements with foreign
governments for advance consultations on
prospective major foreign governmental
investments in the United States;
3.
Review investments in the United States which,
in the judgment of the Committee, might have
major implications for United States national
interests; and
4.
Consider proposals for new legislation or
regulations relating to foreign investment
as may appear necessary.
The second and third of these functions, the provisions
for consultation and review in the case of certain investments, are particularly noteworthy. These provisions did
not at the time of the Order, nor do they now, constitute
a departure from, or an exception to, the long-standing
U.S. open door policy toward foreign investment.
United
States did not then, and does not
The
now, object to
direct investment here by foreign governments per se.
These new provisions, however, were devised as a respon
to the new situation which has arisen as a result of the
- 9 OPEC surpluses.
While the governments of those countries
said that they had no desire to take over any major
U.S. companies, this contingency had to be recognized
as a possibility given the necessity for those governments of finding investment outlets for their surplus
funds.
Such investments raise a question in the
minds of some of political motivation. The previous
Administration therefore set up the new procedures,
and they have been continued by this Administration.
A second key reason for the new procedures was
to dispel uncertainty in the minds of foreign investors
concerning U.S. policy.
Investors, particularly if
they are governments, do not want to invest where
they feel they are not welcome and some of the statements
being made about inward foreign investment at that
time raised doubts in this regard on the part of potential
foreign investors.
Therefore, in announcing the formation of the CFIUS
to a Senate committee on March 4, 1975, Under Secretary
of the Treasury Jack F. Bennett stated:
It is our belief that the policy and arrangements
we are proposing will simultaneously safeguard
our national interest and, by clarifying the
situation, actually enhance the attractiveness
of the United States for foreign investors.
- 10 It should be stressed that the CFIUS was not designed
to establish new entry requirements for foreign investment
in the United States.
It exists and operates entirely within
the context of basic U.S. policy on foreign investment,
as described
above.
It is not authorized to change this
policy. The consultation and review procedures of the CFIUS
constitute an orderly procedure for handling contingencies,
to assure that any actions or inactions by this Government
in regard to foreign investments in this country are based
on carefully considered judgments of what is in the national
interest.
The guidelines for the operation of the CFIUS, which
were officially adopted by the Committee in June 1978, have
been carefully drawn up in this context.
The introduction
to the guidelines reiterates that the Committee was formed
"in response to Congressional and public concern about potential
threats stemming from investments by OPEC countries," and
that it had been decided to ask all governments planning
investments here
to consult with the U.S.
Government
beforehand and to create a new office in the Commerce
Department to monitor individual investments more
closely.
The guidelines state that upon receiving a notification
by a foreign government of a proposed investment, the chairman
will make an initial decision as to whether the investment
- 11 warrants a formal review by the Committee. If he concludes
that such a review is not necessary, he will circulate to
the other members of the Committee information on the investment
and his recommendation on a response.
If the other members
concur, he will send a letter to the appropriate foreign government
official stating that the Committee decided not to review
the proposed investment and that no further consultations
will be necessary.
If a member of
the Committee believes that a proposed
investment might have major implications for the national
interest, the chairman will convene a meeting of the Committee
to formally review it.
The basic presumption for any such
review is that the proposed investment does not have major
adverse implications for the national interest and the burden
is on any member who thinks otherwise to so demonstrate. In
the absence of such a demonstration, the conclusion of the
review is that the Committee has no objection to the investment.
If the Committee concludes that an investment would
have major adverse implications for the national interest,
the chairman will communicate this conclusion to the
Economic Policy Group and to the National Security
Council and request the concurrence of these bodies in a
notification to the foreign
government involved through
the appropriate channel requesting the government to refrain
from making the investment or to modify it in such a
manner as to make it acceptable to the USG.
- 12 The Committee has no legal power to block or modify
investments, but in the case of investments by foreign
governments we are confident that diplomatic representations
would suffice.
Even in the case of an investment by a
private foreign investor a strong negative reaction by the
U.S. Government would probably be sufficient to stop it.
Regarding more
specific points, the introduction
to the guidelines notes that the Committee has consciously
avoided the formulation of criteria for judging "major
implications for United States national interests" since
the possible considerations involved are sufficiently
numerous that judgments are best made on a case-by-case
basis.
The Committee has also refrained from defining the
kinds of prospective investments by foreign governments
of which the latter should notify the Committee, or from
stipulating the timing of notification by foreign governments.
Thus, in a cable instructing all our foreign posts of
the new procedure in 1975, it was stated only that "We
expect foreign governments
that are contemplating major
investments in the U.S. to consult with us on such
investments."
(Another cable was sent to the field in
July 1978, reiterating the basic policy and CFIUS procedures
and conveying the new guidelines to them.)
- 13 That cable also stated that portfolio investments
are excluded from the procedure: "Advance consultations will
not be expected in cases of diversified portfolio investments
in U.S. corporate securities even though aggregate amount
by foreign governmental investor may be substantial. Nor do
foreign governmental investments in U.S. Government securities
fall within these terms of reference."
The reason for excluding portfolio investments from the
notification procedure was that these investments, by definition,
do not give the investor control of, or a major influence
in, the companies whose securities are being purchased. There
is, of course, no clear dividing line in terms of amounts
or percentages as to what is or is not a controlling or major
interest in a company. This will vary on a case-by-case basis.
Any attempt to draw a line for purposes of the notification
procedure, therefore, would be either so low as to inundate
the CFIUS with countless notifications from foreign official
agencies of inconsequential purchases or so high as to exclude
some investments which we might consider significant enough
to warrant notification.
Since foreign governments have every reason to respect
our desire for notification of significant investments and
are capable of making a common sense judgment of what we are
after, we see no need to try to devise some arbitrary line
to define portfolio investments.
- 14 The guidelines further state that, while it is considered
unlikely that any private foreign investments would be viewed
as having major implications for the national interest,
the possibility of the Committee reviewing such investments
could not be excluded for two reasons. First, it would be
difficult, if not impossible, to establish criteria for
determining what constitutes a government investment. Many
foreign governments have varying kinds and degrees of
participation in enterprises in their countries and it is
not possible to draw a meaningful line in the abstract to
distinguish between "private" and "government" investments.
Second, such a limitation would have unduly circumscribed
the purview of the Committee and, by implication, that of
the U.S. Government.
In regard to the procedure for consultations and review,
the guidelines state that the Committee should avoid reviewing
investments which do not have "major implications" for the
national interests.
The mere fact that the Committee is
reviewing or has reviewed a particular investment may be
interpreted as an implication that the U.S. government is
less than neutral on the investment and on foreign investment
generally. Also, the more cases the Committee reviews the
more it will come to be viewed as a general screening mechanism.
- 15 Consultations with governments can range from mere
notification by a foreign government of a prospective
investment to detailed discussions between the two governments,
depending on the nature of the case involved. We want
governments to notify us of prospective investments only
if they are significant enough, in the opinion of the foreign
government, to be brought to our attention. The timing
of the notification is also left to the foreign government
involved.
I want to emphasize, however, that this does not
mean that we leave the final decision in these respects
to foreign governments.
If at any time we became aware
of an investment which we felt was significant and of which
we had not been notified by the foreign government involved,
we would request consultation with that government immediately.
Thus, we leave the decision as to whether and when a foreign
government should notify us to the discretion of the foreign
government only in the first instance.
This is the only practical way to proceed, in our opinion.
Foreign governments recognize that they must respect the policies
of the U.S. government in regard to their activities in the
United States.
Thus,
it would not be in their interest to
consciously avoid notifying us of a significant investment which
- 16 they were contemplating. On the contrary, consultations on such
investments are in their interests since the procedure provides
a means to discover and deal with any difficulties that might
arise before they become substantially committed to an investment.
As to the timing of any notifications, any arbitrarily
set time period would
not be useful because situations vary
among individual investors.
Some investors may want to know at
an early stage what USG views are to avoid the possibility
of wasting time, money and effort on an investment which we
would not welcome.
Other investors might want to keep their
intentions confidential until shortly before the effective
date of the investment, for legitimate business reasons.
While
we would hold in confidence any information given us by a
foreign government on a prospective investment if it so
requested, the more broadly information is disseminated,
the more the concern of the investor that it will leak.
Thus, a requirement that might force investors into
premature disclosures of their intentions could have an
undesirable deterrent or distortive effect on foreign
investments in the United States.
The fact that the CFIUS has no legal power to block or
modify foreign investments may not be generally known because
there is a misconception that the CFIUS is a kind of regulatory
body for foreign investment in this country. Foreign investment
- 17
-
in the United States is regulated —
but not by the CFIUS,
and not in ways different from the regulation of investment
by Americans in this country, with a few exceptions.2/
Those who express concern about potential abuses or
misuses of U.S. companies which are owned by foreigners
overlook the fact that we have many laws and regulations
on the books which can cover all such potential abuses
—
and that these laws are equally applicable to U.S. and foreign
owned companies operating in this country. If there are
additional potential abuses of U.S. companies which are
a real threat to the national interest, we should have laws
against them regardless of whether such actions are perpetrated
by foreigners or by Americans. There would seem to be no
basis for a presumption that certain actions by foreign
owned companies could be against the national interest even
though the same actions by U.S. owned companies would be
acceptable.
Therefore, the regulation of foreign owned companies,
along with that of U.S. owned companies, is properly left
to the appropriate regulatory authorities.
2/
The Executive
See question III (2) in appendix for the exceptions.
- 18
-
Order establishing the CFIUS specifically stated that
nothing in the Order should in any way supersede or prejudice
any other process provided by law.
These remarks, Mr. Chairman, cover what I believe
are the key features of U.S. investment policy and of the
operations of the CFIUS.
They respond to some of the
specific questions you asked me in your letter of invitation
of July 18.
The other specific questions in that letter
are answered in the appendix to my testimony.
New Legislative Authority?
There was one question in particular, however, which
I want to respond to here because I think it goes to the
heart of our basic policy on foreign investment.
You
asked whether CFIUS should be given more authority to
regulate foreign investment, either by legislation or by
executive order; whether it should be reconstituted; and
what recommendations, if any, would I have.
My response is that the CFIUS should not be given
such additional authority, for several reasons.
there is no need for such authority.
First,
Second, the establishment
of such authority in and of itself would tend to discourage
foreign investment here. Third, the mere existence of
the authority would significantly increase the possibility
- 19 of
foreign investments being blocked or delayed for reasons
unrelated to the national interest.
Finally, the creation of
such authority could have unfortunate repercussions for U.S.
investment abroad and for the international investment climate
in general.
As I have stated, the specter of a spate of foreign takeovers
of U.S. companies was raised as far back as 1973. Since that
time,
however, there has not been one instance in which we
needed any special authority to protect the national interest
against an unwanted foreign investment. The share of foreign
investment in our total capital stock remains extremely small.
Moreover,
we are confident that, in the case of investments
by foreign governments, diplomatic representations would suffice
to stop any investment of which we disapprove. We are also
confident that a strong negative reaction by the U.S. Government
would be sufficient to stop an unwanted investment by a private
foreign person.
Admittedly, government disapproval unsupported
by law is not an air-tight safeguard and it is theoretically
possible that an unwanted foreign investment could slip between
the cracks. But the possibility of such a contingency, based
on our actual experience to date, is de minimus.
We also want to make sure that we do not discourage foreign
investment here inadvertently or intentionally. The establishment
of new authority by law for the CFIUS to block foreign investments
would be highly visible to potential foreign investors in
- 20 the United States, and would be taken as a sign that our
nation is changing its basic and traditional attitude toward
such investment. Whatever the validity of such a conclusion,
it is clear that perceptions of the host government's attitude
toward foreign investment are an important factor in investors'
decisions as to whether to invest in a given country.
Direct investments in this country frequently represent
substantial sums of money and are made for the long term.
They are not quick, in-and-out propositions. Therefore, those
who make such investments must look down the road five, ten
or even more years and make a judgment as to whether this country
will continue to be a hospitable environment for their investments.
A move on our part, for the first time in U.S. history, to establis
authority to restrict foreign investments on a case-by-case
basis obviously would bode ill in the minds of investors for
the long term outlook for the investment climate in this country.
If we are prepared to restrict
entry of foreign companies today,
tomorrow we might even be prepared to restrict the operations
of foreign companies who have already come in.
Such a move would also pose a significant negative factor
in investment decisions in the short run.
Foreign investors
would have to take account of the possibility that an investment
might be disapproved after they had gone to the expense involved
in making the decision to invest here, which can be considerable
in the case of large investments.
- 21 In addition to having a chilling effect on foreign
investment here, I believe that the establishment of
legal authority to restrict foreign investment, even
if there were no mandate of any kind to use it, would be
a step down the road to restrictions.
The creation of
authority creates a presumption that it should be used.
An act of Congress signed by the President would, by
definition, be based on the proposition that there is a
new danger to the Republic which requires a new safeguard.
Hence, it would be an open invitation to pressures
to use it for reasons unrelated to the national interest,
although they would, of course, always be put forward under this
guise.
The "national interest" is not always clearly
identifiable, of course, and judgments in this area can be
highly subjective.
My final reservation about the establishment of such
authority is that it would be the wrong signal to send to
other governments.
It would tend to justify current and
future restrictions on entry and operations of foreign
investors (including U.S. companies) in other countries,
in ways clearly detrimental to our national interest
in an open world economy.
- 22 While the United States does not establish patterns
of behavior for other countries, our actions and the
perceptions of our intentions do affect the thinking
of other governments in the international economic area.
This is particularly true in the case of international
investment, because U.S. investment has traditionally dominated
international capital flows and U.S. firms still account for
close to one-half of all foreign direct investment in the
world —
a far greater ratio than our share of world
trade,
monetary reserves or in fact any other key international economic
indicator.
If the United States —
the primary "keeper of the faith"
for an open international economic system —
were to appear
to be moving down the road toward restrictions, this would have
a major corrosive effect on other countries and tend to
legitimize
current and new interventions in international
investment on their part.
While the United States would, of
course, portray any such new legislation on its part as necessary
in the national interest, all governments portray their
interventions as vital to their national interest. And this
justification would be particularly lacking in credibility in
our case, since we would be unable to point to one single
instance to demonstrate the need for such protection.
- 23 We cannot isolate our actions from the actions of
other governments, and foreign investment in the United
States must be viewed in relation to our investment abroad.
U.S. direct investment abroad stands at $172 billion (as of
last March), which is more than four times the $41 billion
of direct investment here.
We would clearly risk losing
much more than we would gain if we did anything to legitimize
government interventions in international investment.
It is true that many other governments maintain
restrictions on inward and outward investment.
But, on
the whole, borders are much more open to international
investment than they were twenty or even ten years ago.
Fears about foreign direct investment, which bordered on
paranoia in some countries just a few years ago, have been
receding rapidly.
This is due importantly to the continuing
efforts of the United States —
efforts which could hardly
continue if we began to restrict incoming investments
ourselves.
A more recent and more subtle problem in this area is
the tendency of some governments to try to steer the locations
and operations of multinational firms, in order to tilt
the benefits of international investment in their direction
at the expense of other countries.
Indeed many countries
now offer incentives to attract foreign investments into
their economies.
This Administration has mounted a major
- 24 effort in multilateral forums and bilaterally to reverse this
trend, so that market forces can continue to play the major
role in determining investment flows abroad as well as at
home.
We are making some progress in this area, though any major
initiative toward international reform in this area will
take many years to bring to fruition. However, we cannot
afford to take unilateral actions which would set back
the effort to assure that we and the rest of the world share
the benefits of international investment fully and fairly.
ANNEX
Response to the Subcommittee's Questions
in the letter to Mr. Bergsten
of July 18, 1979
Introductory Remarks
^ _ M _ M _ f c _ - . _ - « w w w _ - ' « a m _ - « « _ »
The questions listed in Congressman Rosenthal's letter
of July 18, 1979, are keyed on the several specific responsibilities
of the CFIUS as stated in Executive Order 11858 (which
is attached to this statement).
The basic purpose of these
questions, as we understand it, is to help the Committee
determine whether these responsibilties are being fully
and properly met by the Executive Branch.
In addressing
this question, it is important for the Committee to have
a clear understanding of how this Administration
interprets the responsibilities laid out in the Order.
The key. point, on which there may be some misunderstanding, is that the Order did not mandate a new
policy with regard to foreign investment.
Rather,
it was designed to create an orderly procedure to assure
that any necessary functions in regard to the foreign
investment policy which is traditional in the United States
and which has been reaffirmed by the previous and current
administrations, as outlined in the main body of my
statement, are carried out fully and in an orderly manner.
For this purpose it established the CFIUS, consisting
of representatives of specific agencies, to make clear
who in the Executive Branch has these responsibilities.
- 2 Thus, the test of whether the CFIUS is fulfilling its
responsibilities is not how much activity it has generated, on
itsbwn part or on the part of others, but the extent to which the
necessary functions are being carried out within the Government to
effectively implement U.S. policy toward foreign ivestment in the
United States.
PART I
1.
QUESTION:
What has CFIUS done to monitor the impact
of foreign investment?
Has it been
involved in any aspects of Federal data
collection efforts, and if so, what aspects
and when?
Has it coordinated data collection
efforts by Treasury, Commerce and other
agencies?
Has it set priorities as to what
type of data should be collected and provided
directions to match these priorities with
data collection efforts?
If so, what
priorities has it set and how have these
been implemented?
ANSWER:
Comprehensive analyses of the impact of foreign
investment in the United States - both
direct and portfolio - were published by the
Commerce and Treasury Departments respectively
in 1976 in accordance with the Foreign
Investment Study Act of 1974.
In January 1979
the Commerce Department published in its
- 3 Survey of Current Business an analysis of the
gross product of U.S. affiliates of foreign
companies in relation to total gross product
of all companies in the United States.
These studies constitute the basis or
benchmark from which we monitor the
significance of foreign investment to the U.S.
economy on a current basis.
This is done
on a continuing basis by my staff at the
Treasury, by the Bureau of Economic Analysis
(BEA) and the Office of Foreign Investment
in the United States (OFIUS) at the
Commerce Department, and by the Department
of Agriculture in the case of real estate.
CFIUS
does not review in detail
the
impact of foreign investment unless
a policy issue arises in this regard,
such as in the case of the petroleum
industry (in connection with the Iran/Occidental investment) or farmland.
Rather,
the CFIUS reviews the latest trends in a
general way to see if there are any developments which raise policy issues.
The CFIUS has been involved in federal
data collection efforts on occasion.
In
1976 it coordinated the Executive Branch
- 4 position on the International Investment Survey
Act of 1976, and in 1978 it
Government's collection
discussed the U.S.
of data on foreign in-
vestment in U.S. farmland.
Also, on July 20, 1979,
as Chairman of the CFIUS I sent a memorandum
(attached) to the Comptroller of the Currency requesting his cooperation with the OFIUS in getting
information on foreign investment in the banking sectc
The primary group for coordinating data collectioi
efforts is the Office of Federal Statistical
Policy and Standards,
Administration.
which was created by this
This office holds meetings of
representatives from
all government agencies
which have a policy interest or technical function
in regard to data collection in order to set priorities for data collection in accordance-with
policy needs, technical feasibility, and
available funds.
The participants in those
meetings who are concerned with data needs in
connection with our policy on foreign investment in the United States are satisfied that
current data collection efforts are adequate
for this purpose.
If there should be major
disagreement in this respect, this disagreement
would be brought up in the CFIUS.
- 5 -
A prime example of a new data collection
effort in regard to foreign investment in the
United States which was reviewed and agreed
to by the Federal Statistical Policy office
is the Commerce Department's new BE-13
report form requiring the reporting of the
establishment or acquisition of a 10% or
more equity interest in a U.S. business
enterprise by a foreign person, where the
value of the enterprise is more than
$500,000, or the purchase of
or more of land.
200 acres
Purchase of an
operating segment of a U.S. business enterprise
is also covered.
This report is required for
investments occurring on or after January 1,
1979.
It goes considerably further
than previous reports on foreign investment
in the United States, since it includes newly
established enterprises and acquisitions of
American companies that are not publicly held.
2.
QUESTION:
Closely related, what actions has CFIUS taken
to coordinate implementation of U.S. policies?
First, what policies have been formulated by
- 6 -
CFIUS to deal with foreign investment,
including investments in the energy and
other sensitive sectors?
(We know that
there is an attempt to formulate a policy
on foreign investment in energy in late
1976; did CFIUS ever formulate such a policy?)
Secondly, how do these policies relate to
CFIUS' review of investments, covered in
question #5 below?
ANSWER:
Coordination of policy on foreign investment is primarily a matter of day-to-day
implementation.
It is carried out by
policy and staff level officers of the CFIUS
agencies in their contacts with other U.S.
Government officials and foreign government
officials.
The only occasions for CFIUS to
concern itself with policy coordination are
when there are major questions as to whether
certain actions by the USG are or would be
in conflict with basic policy and whether
an exception to the policy would be justified.
There have been three occasions on which
CFIUS has discussed policy coordination:
- 7 (1) On October 24, 1975, in regard to the International Energy Agency's Long-Term Cooperation
Agreement; (2) in September 1976, in regard
to an FEA proposal (see below); (3) on
June 15, 1978, in regard to farmland (see
below).
As to formulating policies, as I stated
in the main body of my statement, our policy
on foreign investment is given in the July
1977 policy statement and CFIUS has no
authority to change this policy.
The CFIUS
would, of course, make recommendations for
changes in policy if it felt any were
needed.
One such suggestion was made by the
Federal Energy Administration (FEA) in 1976
during the
previous administration.
The FEA maintained that U.S. policy might
not be valid for energy and, therefore, that
investments in that sector might require
special treatment and safeguards.
The issue
was examined by a CFIUS working group, which
reached the conclusion that there was no
- 8 justification for singling out energy as
FEA had suggested.
Last year, the CFIUS reviewed the case for
special restrictions on foreign investment in farmland,
As I reported in my statement to a House subcommittee,
our general approach was unanimously reaffirmed in that
case as well although we supported a more intensive
effort to collect comprehensive data regarding foreign
investment in that sector.
(A copy of that statement
is attached for the Subcommittee's information.)
3.
QUESTION:
What analyses of trends and significant
developments in foreign investments has
CFIUS arranged to have prepared?
3/ Please
list the documents constituting these
analyses, indicating the date CFIUS requested
each analysis, the subject of each and the
conclusions of each.
(At the time of the
hearing, we would like all of these analyses
presented to the subcommittee.)
ANSWER:
As noted in the introductory remarks to this
appendix, we do not consider it necessary for
the CFIUS to perform or arrange for any
functions regarding foreign
investment if it considers that sufficient
efforts in this regard are already being
- 9 carried out.
Thus, the CFIUS has not
arranged for analyses itself because we
feel that analyses done and underway are
sufficient.
attached.
A list of these analyses is
It should be noted that statistical
data alone are frequently sufficient to show
"trends and significant developments in
foreign investments" in the United States.
As to the conclusions of each of these
analyses, many of them do not arrive at
explicit conclusions and the individual
conclusions in others are too varied and complex to list or be succinctly summarized.
I
would, however, be glad to supply the Committee
with any conclusions or judgments on
specific questions you may have regarding
trends and significant developments in
foreign investment in the United States.
Footnote #3
QUESTION:
In his letter of October 14, 1977, to
Assistant Secretary Daniel Brill, Senator
Inouye set forth seven areas of concern
involving foreign investment and suggested
that the Committee on Foreign Investment
be reconstituted, since it had not met in
- 10 over one year.
Such concerns as foreign
investment in banking, flight capital from
Europe, foreign investments by Communist
governments, among others, were listed as
needing
analysis.
has CFIUS done?
As to each of these what
Was there a review of U.S.
general policy towards foreign investment,
as requested by Senator Inouye?
ANSWER:
As we said in our reply to Senator Inouye and
as I indicated at the beginning of my statement,
this Administration undertook a review of
U.S. policy on direct international investment soon after taking office —
several
months before Senator Inouye sent us his
letter.
We informed Senator Inouye of this
and sent him a copy of the policy statement
that resulted from that review, the major
points of which I have outlined in my statement.
The remaining questions Senator Inouye
suggested that the Committee take up were
dealt with in several ways:
The questions he
raised about the United States' following a
policy of reciprocity or of encouraging
- 11 investments which involve advanced technologies
or are labor intensive had been dealt with in
our policy review; his question on foreign
investment in U.S. real estate was taken up,
in large part, by the CFIUS during its discussions
of foreign investment in U.S. farmland; two
questions related to hypothetical political
developments in Europe that did not materialize;
and the final two that concerned foreign
investment in the U.S. banking and fisheries
sectors, respectively, were handled through
other interagency channels.
4. QUESTION:
How has CFIUS fulfilled its mandate to provide
guidance to foreign governments on the need
for advance consultations?
it provided?
place?
What guidance has
When do advance consultations take
Have there ever been any problems
obtaining the cooperation of foreign
governments, and, if so, when?
More importantly,
what kinds of prospective portfolio and
direct investments by foreign governments
require advance consultation?
Have these
been defined and made known to foreign
governments?
- 12 -
ANSWER:
In 1975 a State Department cable was sent to
all American embassies abroad informing them of
the establishment of the CFIUS and the new
consultations procedures.
The cable said, in
part, "We expect foreign governments that are
contemplating major investments in the United
States to consult with us on such investments."
The embassies were instructed to provide
their host governments with copies of
Executive Order 11858 and the press release
issued at the time of the Committee's first
meeting, both of which noted the new consultations
procedure.
In addition, my predecessor,
Gerald L. Parsky, personally brought the new
procedure to the attention of the major oil
surplus countries in the Middle East, since
these were the major potential governmental
investors in the United States.
Thus far, all the governments involved
in the cases the Committee has reviewed have
cooperated fully in consulting with us on the
investments in question.
The other parts of this question are
covered in the main body of my testimony.
- 13 5. QUESTION:
With regard to CFIUS review of investments in
the U.S. having major implications for U.S.
national interests, please answer the following
questions:
(a) Which types of investments in
the U.S. fall within this category?
What criteria
and standards has CFIUS developed to determine
when portfolio and direct investments have
major implications for the national interests?
What industry sectors are involved?
ANSWER:
As noted in the main body of my testimony, the
CFIUS has consciously avoided the formulation
of such criteria because we do not feel they
are necessary or practicable.
QUESTION:
(b)
What was the basis for excluding certain
types of categories of foreign investment from
the scope of review, as having no major implications for the national interest?
ANSWER:
As I explained in my statement, we have
excluded only diversified portfolio investments
in U.S. corporate securities and foreign
governmental investments in U.S. Government
securities from the scope of the CFIUS review
process.
- 14 QUESTION:
(c)
What investments has CFIUS reviewed, and,
in each case, what was the scope of its review,
when did each review occur, what was its
determination, and what actions were taken?
ANSWER:
The Committee has reviewed the following
investments:
—
Government of Romania/Island Creek Coal
^«->»WM->M-M_»«»M_M_->__-_»W_*_-__-«_-»__a__M_*__M_-_><^^
Company:
In July 1975 the Government of
Romania signed a framework agreement with
the Island Creek Coal Company, a subsidiary
of Occidental Petroleum, which called
for a $150 million joint venture to open
a new coal mine in Virginia.
The Committee
held a preliminary discussion of the case
on July 18.
It was decided that the
Romanian Ambassador should be contacted
and given a list of questions relating to
such matters as the level of Romania's
coal imports from the United States, its
plans for future investments here, and the
nature of its participation
in the venture.
The Romanian Ambassador called on my
predecessor, Gerald L. Parsky, in August
with his government's responses to the
questions the U.S. Government had posed
- 15 and supplemented them orally.
After consulting
the other members of the CFIUS,
Under
Secretary of the Treasury Edwin H. Yeo,
Chairman of the CFIUS at that time, sent
the Romanian Ambassador a letter informing
him that the Committee had concluded that
no further consultations on the investment
would be necessary and that the Committee
had no objections to it.
We understand
that the final agreement was signed
the following year and went into effect
early in 1978.
Imetal/Copperweld:
In early September 1975
a French Firm, Societe Imetal, made a tender
offer for shares of the common stock of the
Copperweld Corporation of Pittsburgh,
Pennsylvania, which was opposed by
Copperweld's management.
The Committee's
members initially became aware of the
transaction as a result of press reports on
the dispute, and the CFIUS became formally
involved when the President of Copperweld wrote
to Under Secretary Yeo, requesting that it
- 16 -
review the case on the grounds that the
French Government was involved in the takeover
and that it would be against the national
interest.
Government officials were also
contacted by Congressmen on behalf of the
President of Copperweld.
Consultations were held with the French
Ambassador, who stated that his government
was not involved in the management of
Societe Imetal.
Subsequently, the Committee
met, on September 18, 1975, to discuss the
case.
Among the aspects of the case the
Comittee considered were the question of
French Government involvement and possible
defense implications.
The CFIUS concluded
that it had no basis for interposing itself
in the transaction and this conclusion was
communicated to Mr. Smith.
(The text of a
statement by my predecessor, Gerald L. Parsky,
to a House subcommittee which reviewed
the CFIUS' involvement in this case is
attached.)
Government of Iran/Occidental Petroleum
*
"
•
Corporation:
-
—
•
•
—i
•
ifa —
i
ii
•
•
i
i
•. ! • I —
—
•
•
•
.i
•
mm
II
•
>i
On June 21, 1976, the Government
- 17 of Iran and the Occidental Petroleum
Corporation signed a letter of intent
whereby Iran was to purchase
6,250,000 of cumulative voting preferred
stock and an equal number of common stock
warrants for a cash price of
million.
$125
The acquisition of the stock was
to give Iran control of approximately 9
percent of Occidental's outstanding voting
stock and the right to elect one member to
the Corporation's board of directors.
These were also conditions on exercise of
the warrants.
The final agreement was
subject to the approval of the Occidental
board and the appropriate U.S. and Iranian
government authorities.
Discussions were held with the Iranian
Ambassador and with officials of Occidental
concerning the proposed transaction.
The
issues covered included the Iranian Government's intentions regarding control of the
corporation, its reasons for undertaking the
transaction, and the possibilities for future
cooperation between the two parties.
- 18 -
The CFIUS met on July 7, 1976, to
discuss the case.
In addition to the
information that had been received from the
Iranian Ambassador and the Occidental
Petroleum Corporation, the Committee
discussed such issues as the implications
of the transaction for future development of
energy technology, the security of U.S. supplies
and possible defense implications.
No
agency objected to the proposed transaction.
The CFIUS concluded that it would have no
major adverse implications for U.S. national
interests and, therefore, there was no basis
for U.S. Government intervention.
The Committee also decided that the
proposed transaction should be reviewed
elsewhere within the Executive Branch.
This
was in process when it was announced that
the two parties had terminated their
negotiations because of their inability to
agree on the terms of the
final
agreement.
- 19 QUESTION:
(d)
meet?
How does CFIUS function?
When does it
Can any Federal agency participate?
Does a majority vote of CFIUS result in a
determination of undesirability or do you have
the final decision on this?
ANSWER: How CFIUS functions is discussed in the main
body of my statement.
As to the frequency
of its meetings, the Committee does not meet
periodically, but rather on an ad hoc basis
as the need occurs.
Since its establishment,
it has met eight times.
The Committee membership consists of
representatives of the Departments of Commerce,
Defense, State, and the Treasury.
Other
agencies with an interest in particular issues
under discussion are also invited to attend.
As to the basis for decision, the Committee
has never had to take a vote because it has
always been able to arrive at a consensus on
the issues before it.
In the event that there
were serious differences between the agencies
that could not be resolved at the CFIUS level,
the issue would probably be referred to the
Economic Policy Group and to the
National Security Council for resolution.
- 20 QUESTION:
(e)
What occurs if the investment is
undesirable?
What actions can CFIUS take to
either prevent entry of an investment
or to require changes making the investment
more beneficial to the U.S.?
ANSWER: This is covered in the main body of my statement.
6. QUESTION: What new legislation or regulations relating
to foreign investment, if any, has CFIUS
considered?
What position and actions did
CFIUS take with respect to each?
ANSWER: As noted In my answer to question #1, the
Committee has reviewed two legislative
matters —
the International Investment Survey
Act of 1976 and the issues related to foreign
investment in U.S. farmland.
On the 1976
Survey Act, the CFIUS discussed the proposed
legislation and coordinated the positions of
the Executive Branch agencies that were
scheduled to testify on it.
Regarding the
farmland issue, the CFIUS (1) reaffirmed that
there was no basis for departing from basic
U.S. plicy on inward investment in this sector
and agreed that I would be the lead witness for
the Administration in pending hearings before a
- 21 House subcommittee and (2) discussed the Department
of Agriculture's progress in conducting the study
of the feasibility of establishing a system of
monitoring foreign investment in U.S. farmland,
as mandated in the Survey Act, and its implementation
of the Agricultural Foreign Investment Disclosure
Act of 1978.
7. QUESTION: And, finally, what periodic reports has CFIUS
published?
(At the time of
the hearing,
we would like these reports presented to the
subcommittee.)
ANSWER: The CFIUS is not required to publish any reports
itself and has not done so.
The pertinent
language in Executive Order 11858 is:
"It
(CFIUS) shall also arrange for the preparation
and publication of periodic reports."
(underlining supplied)
Such reports are noted
in the answers to questions number (1) and (3)
above.
PART II
QUESTION:
Would you please specify the dates on which
CFIUS has met and set forth very briefly the
topic(s) under discussion at each meeting.
- 22 ANSWER:
May 20, 1975
(1)
Draft press release on the formation
of the Committee.
(2)
Draft cable to U.S. embassies on the
establishment of the Committee and procedures
for consultations with foreign governments
regarding their plans for investments in the United States.
(3)
The arrangements that had been worked
out to date with respect to advance
consultations with foreign governments.
(4)
Staffing and organization of the
Commerce Department's Office of Foreign
Investment in the United States.
(5)
Letter from the Public Service Commission
of the District of Columbia on a proposed
foreign purchase of bonds and preferred stock
of the Washington Gas Company.
July 18r 1975
(1) Government of Romania's proposed joint
venture with the Island Creek Coal Company.
(2)
U.S. position on the International
Energy Agency's long-term cooperation program.
(3)
Letter concerning the effects of Opinion
No. 17 of the Accounting Practices Board on
foreign investment in the United States.
- 23 September 18. 1975
Proposed acquisition of the Copperweld
Corporation by Societe Imetal.
October 24, 1975
«—«•_•*•"_••_»»«"_m_—a_mw_«a*«h«<_^_«m.
International Energy Agency Long-Term
Cooperation Agreement.
February 20, 1976
S.2839, the "International Investment Survey
Act of 1975."
July 7, 1976
Proposed investment by the Government of
Iran in the Occidental Petroleum Corporation.
June 15, 1978
(1)
Committee procedures, including approval of new
operating guidelines and transmission of cable to
all overseas posts reiterating basic U.S. policy
and conveying the guidelines.
(2)
Report by the Office of Foreign Invest-
ment in the United States on current trends
in foreign investment transactions.
(3)
The Department of Agriculture's work
regarding monitoring foreign investment in
farmland pursuant to Section 4(d) of the
International Investment Survey Act of 1976.
- 24 January 22, 1979
(1)
Current developments with regard to
foreign direct investment in the United States.
(2)
Status of new surveys on inward invest-
ment being undertaken pursuant to the International Investment Survey Act of 1976.
(3)
The Agriculture Department's efforts
to implement the Agricultural Foreign
Investment Disclosure Act of 1978 and
Section 4(d) of the International Investment
Survey Act of 1976.
(4)
U.S. policy and U.S. embassy activities
with respect to foreign direct investment
in the United States.
(1) QUESTION:
Apart from the issue of whether CFIUS is
operating effectively and carrying out its
mandates, we would like to know whether
CFIUS should be given more authority to
regulate foreign investment, either by
legislation or executive order?
be reconstituted?
Should it
What recommendations, if
any, would you have?
ANSWER: These issues are thoroughly discussed in the
main body of my statement.
- 25 QUESTION: With the exception of certain laws, passed at
different times in the past, prohibiting
varying degrees of foreign investment in certain
sectors of the U.S. economy, all of which were
specified in an October 7, 1977, GAO report,
what existing laws could be invoked to prevent
an investment from taking place, to regulate it
once it occurred, or to exact certain conditions
(such as performance requirements) prior to
approval?
out?
And how are any such laws carried
Would you have recommendations for further
legislation or regulation to regulate foreign
investment in one of these ways?
ANSWER:
As you note, many of these laws are described
in the GAO Report entitled "Controlling Foreign
Investment in National Interest Sectors of the
U.S. Economy".
Other laws are outlined in a
Treasury Department publication entitled
"Summary of Federal Laws Bearing on Foreign
Investment in the United States."
Treasury
issued this Summary in 1975, and will shortly
publish an updated version.
As both the GAO Report and the Treasury
Summary indicate, there are many laws which bear
on the activities of foreign investors in the
- 26
United States.
-
Some of these laws regulate
entry into particular sectors or industries.
For example, in addition to the sector limitations described in the GAO Report, U.S. laws
restrict alien or foreign investor participation
in the telegraph industry, geothermal steam
development, banking, fishing, and shipping
in U.S. waterways or the coast-wide trade.
Other laws, we note, exclude foreign investors
from certain insurance, loan and subsidy programs.
More important are laws of general
application which are not directly aimed at
foreign investment, but regulate foreign
investment in the same manner as domestic
investment.
Examples include the tax,
antitrust, securities, and trade laws, which
are summarized in both the Treasury Summary
and the GAO Report.
I would note that the President also has
authority under the International Emergency
Economic Powers Act to regulate or prohibit
any "acquisition" or "use of any property
in which any foreign country or national
thereof has any interest."
The President may
- 27 -
exercise this authority to deal with an unusual
and extraordinary external threat to the national
security, foreign policy or economy of the United
States.
As to any authority to exact certain
conditions, such as performance requirements,
our impression, based on our survey of U.S.
laws, is that Congress did not intend, in
any licensing statute, to impose such requirements on foreign investors.
Rather Congress
legislated specifically when it wished to
impose
requirements linked to the "nationality"
of an investor.
For example, in several
statutes Congress has imposed specific
requirements that board membership or management
must consist of U.S. citizens.
On the basis
of our limited research to date, we thus do not
believe that U.S. laws would authorize the
Administration to impose what are traditionally
thought to be performance requirements in
respect of a new foreign investment.
- 28 -
Finally, as discussed in the main body of
my testimony, I do not think any such new
measures are necessary or desirable.
(3) QUESTION: If it is your contention that certain
treaties with foreign governments would
prohibit the regulation of foreign investment, either at time of entry or after
entry, would you please provide in the
appendix to your testimony the relevant
passages from all such treaties.
Do
the countries involved regulate foreign
investment in a manner different from the
United States, and, if so, how?
ANSWER: We do not contend that treaties with
foreign governments would prohibit the
regulation of foreign investment.
As
noted in the main body of my testimony,
we are opposed to such regulation because
we believe that it would be contrary^ to our
national self interest.
Executive Order 11858
M a y 7, 1975
Foreign Investment in the United States
By virtue of the authority vested in me by the Constitution and statutes
of the United States of America, including the Act of February 14, 1903,
as amended (15 U.S.C. 1501 et seq.), section 10 of the Gold Reserve
Act of 1934, as amended (31 U.S.C. 822a), and section 301 of tide 3 of
the United States Code, and as President of the United States of America,
it is hereby ordered as follows:
1. (a) There is hereby established the Committee on Foreign
Investment in the United States (hereinafter referred to as the Committee). T h e Committee shall be composed of a representative, whose
status is not M o w that of an Assistant Secretary, designated by each of
the following:
SECTION
(1)
(2)
(3)
(4)
(5)
(6)
T h e Secretary of State.
T h e Secretary of the Treasury.
T h e Secretary of Defense.
T h e Secretary of Commerce.
T h e Assistant to the President for Economic Affairs.
T h e Executive Director of the Council on International Economic
Policy.
T h e representative of the Secretary of the Treasury shall lx the chairm a n of the Committee. T h e chairman, as he deems appropriate, may
invite representatives of other departments and agencies to participate
from time to time in activities of the Committee.
(b) T h e Committee shall have primary continuing responsibility
within the Executive Branch for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment. In
fulfillment of this responsibility, the Committee shall:
(1) arrange for the preparation of analyses of trends and significant
developments in foreign investments in the United States;
(2) provide guidance on arrangements with foreign governments
for advance consultations on prospective major foreign governmental
investments in the United States;
(3) review investments in the United States which, in the judgment
of the Committee, might have major implications for United States
national interests; and
(4) consider proposals for n e w legislation or regulations relating to
foreign investment as m a y appear necessary.
(c) A s the need arises, the Committee shall submit recommendations
and analyses to the National Security Council and to the Economic
Policy Board. It shall also arrange for the preparation and publication
of periodic reports.
S E C . 2. T h e Secretary of Commerce, with respect to the collection
and use of data on foreign investment in the United States, shall provide,
in particular, for the performance of the following activities:
(a) T h e obtainment, consolidation, and analysis of information on
foreign investment in the United States;
(b) the improvement of procedures for the collection and dissemination of information on such foreign investment;
(c) the close observation of foreign investment in the United States;
(d) the preparation of reports and analyses of trends and of significant
developments in appropriate categories of such investment;
(e) the compilation of. data and preparation of evaluations of significant investment transactions; and
(f) the submission to the Committee of appropriate reports, analyses,
data and recommendations relating to foreign investment in the United
States, including recommendations as to h o w information on foreign
investment can be kept current.
SEC. 3. The Secretary of the Treasury is authorized, without further
approval of the President, to m a k e reasonable use of the resources of the
Exchange Stabilization Fund, in accordance with section 10 of the Gold
Reserve Act of 1934, as amended (31 U.S.C. 822a), to pay any of the
expenses directly incurred by the Secretary of C o m m e r c e in the performance of the functions and activities provided by this order. This authority shall be in effect for one year, unless revoked prior thereto.
S E C . 4. A H departments and agencies are directed to provide, to the
extent permitted by law, such information and assistance as m a y be
requested by the Committee or the Secretary of C o m m e r c e in carrying
out their functions and activities under this order.
SEC. 5. Information which has been submitted or received in confidence shall not be publicly disclosed, except to the extent required by law;
and such information shall be used by the Committee only for the purpose of earning out the functions and activities prescribed by this order.
S E C . 6. Nothing in this order shall affect die data-gathering, regulatory, or enforcement authority of any existing department or agency
over foreign investment, and the review of individual investments provided by this order shall not in any w a y supersede or prejudice any other
process provided by law.
GERALD R. FORD
T H E WHITE HOUSE,
May 7, 1975.
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
ASSISTANT SECRETARY ^
JUL 20 1979
MEMORANDUM FOR John G. Heimann
Comptroller of the Currency
Subject: Improvement of Information on Foreign
Investment in the U.S. Banking Sector
I recently received a memorandum (copy attached)
from Milton A. Berger, Director of the Commerce
Department's Office of Foreign Investment in the
United States (OFIUS) concerning the improvement of
information on foreign investment in the U.S. banking
sector. He has written to me in my capacity as Chairman
of the interagency Committee on Foreign Investment in the
United States (CFIUS) to ask for the Committee's endorsement of and assistance on a proposed study toward this end
to be undertaken in cooperation with the regulatory
agencies with jurisdiction over the banking sector.
According to the memorandum, you chair the Federal
Financial Institutions Examination Council, which
coordinates the efforts of these agencies.
The CFIUS and the OFIUS were established under
Executive Order 11858 in May 1975. Pursuant to that
order, the CFIUS has responsibility for coordinating
U.S. policy on inward investment. The OFIUS is charged
with collecting and analyzing information in this area,
and with recommending to the CFIUS means for keeping
information on foreign investment current. The CFIUS
has given a high priority to obtaining good data on
inward investment in view of the contribution that
it makes to the policy-making process in this area.
I believe that the effort outlined by Mr. Berger in
his memorandum would move us a long way toward improving
our data on foreign investment in the U.S. banking sector.
Accordingly, this is to request that you ask the Federal
Financial Institutions Examination Council to work with
the OFIUS along the lines Mr.
Berger
(Signed)
C. suggests.
Pred Beresten
C. Fred Bergsten
Attachment
iK»0»
/£\
UNITED STATES DEPARTMENT OF COMMERCE
Industry and Trade Administration
Washington, O.C. 20230
2 2JJH w/^
MEMORANDUM FOR C. Fred Bergsten, Assistant Secretary
of the Treasury for International Affairs
Chairman, Committee on Foreign Investment in
the United States
SUBJECT: Improved Federal Financial Regulatory Agency
Data on Foreign Investment in the United States
The Office of Foreign Investment in the United States has been
meeting over a number of months with officials of federal
agencies to improve the quality, expand the coverage, and
facilitate the transmission to OFIUS of data on foreign
direct investments here. Our effort represents a periodic
stocktaking of existing arrangements and its need is underscored by recent Congressional concern and GAO investigations
of data gaps in national interest sectors and banking.
Fred Cutler of the Office of Federal Statistical Policy and
Standards and Kelly Kuwa^ama of the SEC are participating in
the meetings.
At this point we are meeting with the financial institution
regulatory agencies — the Federal Reserve Board, Comptroller
of the Currency, FHLBB and the FDIC. Our initial contacts with
these agencies took place three years ago at the time of the
formation of our office when we had a series of meetings with
the various agencies identified in the Price Waterhouse report
on Federal Government agency sources of data on foreign investment in the United States, which was included in Commerce's
1976 Report to Congress. The Price Waterhouse report identified
the available data and the gaps and recommended actions to
secure and improve data. We made arrangements to secure such
data as were available under existing laws and regulations and
established on-going personal contacts. We suggested administrative changes to facilitate improved data collection, but
did not press, however, for legislative or regulatory changes,
accepting the judgment of the agencies that the available
knowledge of foreign ownership was adequate to policy needs
2
and that the additional data that might be secured by such
changes would not justify the legislative difficulties, the
increased burdens on financial institutions, and the diversion
of staff time at the regulatory agencies from current priorities.
Even with respect to foreign ownership data that were being
collected there are some retrieval problems involving costs
which agencies have been unprepared to bear.
The time is propitious for a fresh examination of the problem
with policy direction via the Committee on Foreign Investment
in the United States. Coupled with the heightened Congressional
and public interest in foreign investment in the banking sector,
the financial institution regulatory agencies are now in the
process of developing regulations and procedures to implement
the International Banking Act and the Financial Institutions
Regulatory and Interest Rate Control Act of 1978. The latter
established a coordinating mechanism among the financial
regulatory agencies, called the Federal Financial Institutions
Examination Council. The Council is comprised of representatives
of the Federal Reserve Board, the Federal Home Loan Bank
Board, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, and the National Credit Union Administration, and is currently chaired by the Comptroller.
OFIUS's mandate requires us to make a vigorous effort to seek
more and better data. While we seek to exercise some reasonable
restraint, we require help in defining the needs and objectives
in this sector and then in requesting the financial institution
regulatory agencies to take appropriate steps to meet these
objectives.
We perceive our banking sector data objectives as follows:
1. Maximize reporting of foreign ownership in applications
and periodic reports by applicants and existing financial
institutions. In addition to the drafting of regulations and
procedures, and the designing of forms in connection with the
International Banking Act and the Financial Institutions
Regulatory and Interest Rate Control Act, we would like to see
a systematic examination of other pertinent legislation and
regulations to determine whether coverage can be improved.
2. Minimize the confidential classification of foreign
ownership data so that OFIUS could identify specific ownership
insofar as possible in its published reports and listings.
3. Maximize the sharing of confidential foreign ownership data,
within statutory limitations, with OFIUS for analytical purposes
and the presentation of aggregated data.
4. Establish retrieval systems in the financial institution
regulatory agencies to insure speedy organization of pertinent
foreign investor data and delivery to OFIUS.
Financial institution regulatory agencies would also
undertake reasonable efforts (cost and personnelwise) to assemble
foreign investor data presently diffused in agency headquarters
and field records and uncovered by retrieval systems.
If CFIUS could endorse the above objectives (as stated or
modified) then I recommend that you ask the Council to place
on their agenda a requirement to examine, in the light of the
new banking legislation and the above objectives, what measures
might be taken to attain the objectives. We would be prepared
to work with a Council task force to develop detailed arrangements.
Milton A. Berger
Director
Office of Foreign Investment
in the United States
FOR IMMEDIATE RELEASE
EXPECTED AT 10:00 a.m. EDT
TUESDAY, JUNE 20, 1978
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON FAMILY FARMS, RURAL DEVELOPMENT,
AND SPECIAL STUDIES
OF THE
HOUSE COMMITTEE ON AGRICULTURE
Mr. Chairman, I welcome the opportunity to testify
before this Subcommittee on the subject of foreign
investment in U.S. farmland. The subject is one part
of the overall question of foreign investment in the
United States. Thus, I would like to lead off by outlining the Administration's basic policy on foreign
investment.
Shortly after taking office, this Administration
undertook a review of U.S. policy on foreign investment.
In July 1977 the Administration issued a statement which
confirmed the long-standing U.S. commitment to an open
international economic system. Specifically, the 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."
Therefore, the Government "should normally avoid measures
which would give special incentive.? or disincentives to
investment flows or activities and should not normally
B-991
- 2 intervene in the activities of individual companies
regarding international investment.
Whenever such
measures are under consideration, the burden of proof
is on those advocating intervention to demonstrate that
it would be beneficial to the national interest."
We are aware, of course, that certain exceptional
investments might not be consistent with the national
interest.
For this reason, regarding inward investment
flows, the Administration continued the procedures
established in 1975 under Executive Order 11858 for the
Committee on Foreign Investment in the United States to
"review investments in the United States which in the
judgment of the Committee might have major implications
for the U.S. national interest."
As Assistant Secretary
of the Treasury for International Affairs, I chair that
Committee under the terms of E.O. 11858.
One important feature of these procedures is a
provision for advance consultations with foreign governments on investments in the United States.
Under this
procedure, foreign governments have been requested to
consult with the U.S. Government on any significant
direct investments which they might be contemplating
making in the United States.
If the Committee concluded
- 3 that a particular investment would be contrary to the
national interest, the foreign government involved would
be requested to refrain from making the investment or to
modify it in an appropriate manner.
While this procedure
was established primarily to review major investments by
foreign governments, the Committee may also review any
major investments here by foreign private parties if those
investments appear to have major implications for the
national interest.
The members of the Committee are kept informed on
investments in the United States by the Office of Foreign
Investment in the United States, which was established in
the Department of Commerce by the same Executive Order.
Mr. Berger, who heads that Office, will testify later on
this operation.
As to foreign investment in U.S. farmland, you are
well aware that the available data are quite sketchy.
Most
farmland investments involve smaller order of magnitude
than industrial plants, and therefore do not attract the
same degree of public notice.
A representative from the
Department of Agriculture is testifying on that Department's
plans to improve our data in this area.
- 4 In the meantime, the Administration believes that
its policy of not discouraging foreign investment in
general applies to foreign investment in U.S. farmland.
At "a meeting of the Committee on Foreign Investment in
the United States held last week it was unanimously agreed
that there was no basis at present for a departure from our
basic policy in the case of farmland.
Nevertheless, there has quite understandably been a
good deal of concern expressed about the sharp rise in the
price of farmland.
This phenomenon is attributed in part
to an increasing demand for U.S. farmland as investments by
persons who are not directly involved in farming.
The
vast majority of absentee farmland owners are Americans;
some are foreigners, though the very incomplete data now
available suggest that this amount is no more than one
percent of total land ownership in this country and much
of this ownership is not of recent origin.
Whether purchases by absentee owners have any significant effect on farmland prices is certainly a proper subject
for examination.
However, we see no basis at this point
for differentiating between persons who may be absentee
land owners on the basis of their nationality.
The economic
impact of land purchases does not vary with the geographic
residence of the purchaser.
- 5 There are two factors which are different for foreigners
buying land in the United States as compared to U.S. residents.
First, foreigners are subject to different tax lawg.
foreigners deal in a foreign currency —
buying and selling U.S. land.
Second,
the dollar —
when
Neither of these factors,
however, gives foreigners any inherent advantage over
Americans in buying land here.
The tax considerations involved are rather complex,
and turn on the tax laws of the foreigner's residence as
well as U.S. tax laws.
I have an addendum to my statement
which discusses these considerations.
The upshot of this
discussion is that whether or not a foreigner is better
or worse off from a tax standpoint than an American when
buying farmland depends on the particular circumstances of
the two individuals.
I want to emphasize, however, that there is no necessary
advantage to foreigners merely because profits from sales
of U.S. land are not subject to the U.S. capital cjains tax.
Foreigners subject to the tax laws of Canada, Germany,
France, Japan and the United Kingdom, which are reportedly
major sources of foreign demand for U.S. farmland, are
subject to tax in those countries on capital gains they may
derive in the United States and for some at least their tax
result may not be too different from an American's.
Also
in cases where foreigners are not subject to capital gairfs
- 6 tax, neither are they able to deduct capital losses resulting
from land sales as U.S. residents can.
In regard to the foreign currency aspect, it is
sometimes said that foreigners have an advantage over
Americans in that they can buy land with "cheap dollars".
But the fact that the mark and the yen will buy
more dollars today than in some previous period merely
means that Germans and Japanese have more purchasing power
in dollars than previously —
whereas Canadian and British
citizens, because of the weakening of their currencies,
have less.
Even residents of countries whose currencies
have strengthened do not have an absolute advantage over
Americans.
In fact, in a world of floating exchange rates,
having to deal in a foreign currency is an additional risk
factor for foreigners buying land here, a risk which
American land purchasers do not face.
In addition, it should be noted that foreign investment
in the United States reduces our balance of payments deficit
and strengthens the dollar.
Direct investment of a longer
term nature is particularly welcome in this respect.
It
represents a constructive means of financing the sizable
current account deficit which we are now running, and
- 7 the current account surpluses of foreign countries.
Mr. Chairman, you raised several specific questions
about foreign investment in farmland in your letter to
Secretary Blumenthal.
In response to your questions on the
economic impact of this investment, as I have already
indicated, I see no reason to believe that it essentially
differs from the impact of investment in farmland by
Americans except for its effect on our balance of payments.
You also asked whether restrictions on foreign
investment would be detrimental to our international
interests.
They key point is that such restrictions
would be detrimental to our national interests.
The main
reason that this and previous Administrations have followed
a neutral policy on foreign investment is that the policy
works in the best interests of the U.S. economy.
The
broader the amount of participation in any market, the
greater the competition in and efficiency of the market.
To exclude a certain sector of participants in the market
purely on the basis of their nationality would have no
economic rationale.
If we restrict the ability of foreigners
to invest in the United States, we also restrict the right
of Americans to dispose of their property —
purpose —
for no apparent
and we would also run a risk of retaliation against
the sizable stock of American investments abroad.
- 8 In summary, Mr. Chairman, unless it can be demonstrated that the national interest is adversely affected
by foreign investments in U.S. land, there appears to
be no basis for treating farmland* purchases by foreigners
any different than farmland purchases by Americans.
The
traditional U.S. policy of neutrality toward foreign
investment, both inward and outward, should apply here
as well.
TAXATION OF INCOME FROM FOREIGN INVESTMENT IN U.S.
Under U.S. tax laws, resident aliens generally are
taxed on their income from all sources, both within and
outside the United States, in the same manner as U.S.
citizens.
However, non-resident aliens normally are
taxed only on their income from sources within the United
States.
Special rules apply to the taxing of the income
of non-resident aliens, depending on whether such income
is derived from passive investments or from the conduct
of a business.
In considering how the provisions of the Internal
Revenue Code apply to foreign investments in U.S. farmland,
it is necessary to consider the legal identity of the
investor and the form of the investment.
The foreign
investor could either be a foreign corporation or an
individual.
The investment could be in the form of
stock in a U.S. corporation, which in turn owns the
farmland, or a direct purchase by the foreign investor.
In the latter case it may be presumed that the U.S. farm
will be operated as a branch of the foreign corporation
or, in the case of the foreign individual, as a business
with a U.S. manager.
- 2 In the
case of an indirect investment in farmland
through a U.S. corporation, the farm income will first be
subject to the U.S. corporate income tax.
Distributions
out of profits to non-resident aliens will be subject to
a 30 percent withholding tax unless reduced through a
bilateral income tax convention, which usually provides
for a rate of 15 percent.
This income will then be
subject to the tax laws in the investor's country of
residence.
It is worth noting that major capital
exporting countries such as Canada, Germany, France, 1/
Japan and the U.K. tax the worldwide income of their
residents.
The tax laws of these, and most other
countries, allow residents to take a credit for U.S.
withholding tax against their domestic tax liability.
In the case of direct investments, foreign corporations with U.S. source income must file special tax returns
(1120 F) with the IRS, and are subject to the same rate
schedule as are U.S. corporations.
Non-resident alien
individuals with income effectively connected with the
conduct of a trade or business are required to file a form
1040 NR even if the gross amount of income is less than $750.
An investment in a U.S. farm would be considered a trade
or a business.
This income would be subject to the same
1/ French corporations, however, are in principle not
"" subject to taxation on foreign source income.
- 3 tax rate schedules as are applicable to U.S. taxpayers.
Again, when the funds are transmitted abroad they will be
subject to the tax laws in the investor's country of
residence.
Non-resident aliens not present in the United States
for at least 183 days during the taxable year are not
subject to U.S. tax on gains derived from the sale or
exchange of capital assets within the United States.
This exemption from taxation applies to all capital assets,
however, not just farmland.
Whether this constitutes
an advantage to foreigners will depend on how they are
taxed in their home countries.
Canada, Germany, France,
Japan and the U.K. tax the worldwide income of their
residents including capital gains.
To determine whether
residents of these countries are subject to lighter or
heavier taxes than Americans would require detailed comparisons
of the various tax laws.
It should also be noted that,
in cases where a foreigner is not subject to a capital
gains tax, neither is he able to deduct a capital loss
from ordinary income as American taxpayers can.
A common problem in determining the tax liability of
business enterprises which operate in more than one tax
- 4 jurisdiction involves "artificial transfer pricing."
Under
this practice business enterprises strive to minimize their
tax liability by attributing as much of their income as
possible to countries with low tax rates.
To do this, they
tend to sell products produced by their affiliates in high
tax countries to their affiliates in low tax countries at
artificially low prices rather than the "arm's-length"
prices that would be charged to unaffiliated persons.
Tax authorities in all countries have difficulty in
preventing these practices because the products involved
are frequently unique and the arm's-length or market price
is difficult to establish.
In the case of foreign-owned
U.S. companies engaged in farming, however, the problem
is minimal because agricultural products have a wide
market and there is little difficulty in establishing an
arm's-length pr ice.
In summary, few generalizations can be made as to
whether foreigners have a tax advantage or disadvantage
vis-a-vis Americans in buying, operating or selling U.S.
farmland.
The situation will vary in accordance with the
individual circumstances of the taxpayers involved.
Attachment to Response to Question #3
«»-»»«»"-»"_»"_»«_»»^»-_«^^__««_--_w^^_»«w»^»-_*_»«_-*
Department of the Treasury
Report to the Congress, "Foreign Portfolio Investment
in the United States", (2 vols.), August 1976 (results
of benchmark survey done under Foreign Investment Study
Act of 1974).
"Taxation of Foreign Investment in U.S. Real Estate",
May 1979.
"Summary of Federal Laws Bearing on Foreign Investment
in the United States", June 1975.
Data on foreign portfolio investment in the United
States, (published monthly in the Treasury Bulletin).
Department of Commerce - General
Report to the Congress, "Foreign Direct Investment in
the United States", (9 vol's) April 1976 (result of
benchmark survey done under Foreign Investment Study
Act of 1974).
Department of Commerce - Office of.Foreign
Investment in the United States
4_M__M-_V--_V-a___M__IM-_P*__-'-l-__-*_»*-_»--VP»-W*
"Foreign Direct Investment in the United States: 1976
Transactions —
All Forms; 1974 - 76 Acquisitions,
Mergers and Equity Increases", December 1977.
- 2 7. Press release, "Foreign Investment Stays Strong in U.S.
in First Half 1977", April 18, 1978.
8.
Press release, "ITA Reports Sharp-Increase in 1978
Foreign Direct Investment Transactions in United
States", June 13, 1979.
9.
List of Foreign Direct Investments in the United States Pending Transactions - 1977.
10.
List of Foreign Direct Investments in the United
States - Completed Transactions - First Half of
1978.
11.
List of Foreign Direct Investments in the United
States - Pending Transactions - First Half of 1978.
12.
"Foreign Direct Investment in the U.S. Electronic and
Printed Media, 1974 - 1978", (Draft copy).
13.
"Foreign Investments in the U.S. Graphic Arts", Printing
and Publishing, Quarterly Industry Report, Winter
1978/79.
14.
"Highlights of Canadian Direct Investment in the
United States: 1974 - 1978," (Draft copy).
15.
"Foreign Direct Investment in the U.S. Machinery
Industry", (Draft copy).
- 3 16.
"Foreign Direct Investment in the U.S. Chemical
Industry", .(Draft copy) June 1979.
17.
"Foreign Direct Investment in the U.S. Primary and
Fabricated Metal Industries, 1974", (Draft copy) June
1979.
18.
"Foreign Direct Investment in the U.S. Food Industry",
(Draft copy).
19.
"Foreign Direct Investment Activity in the United
States", Report #79-3, March 1979 (one of a series of
monthly reports).
20.
"Improvement of Information on Foreign Investment in the
U.S. Banking Sector," July 20, 1979, Memorandum from
Assistant to Comptroller of Currency, John G. Heimann,
transmitting OFIUS suggestion for a work program.
Department of Commerce - Bureau of Economic Analysis
••_—»_fc._.w_.^»«_—._.*_—__w_.«_—...._—»•M_**_M»•_»«_—._»—_—._v—_n_M_M.M_—w»—_M_WWo_—*_—__M_—«_n_W__—a_»M»i__<«_*w*v_M_«M_VW*a_tB._—w_naa»»
21. "Employment and Employee Compensation of U.S. Affiliates
of Foreign Companies, 1974," Survey of Current Business,
December 1978.
22.
"Foreign Direct Investment in the United States,
1977," Survey of Current Business, August 1978
««>__><_-*_*«_———*-•»«_«_»«_—_____-_<••_—^w_-».n_>——»•«_-__•——M_*w»_a»__«»
(annual article).
23.
"Gross Product of U.S. Affiliates of Foreign Companies,"
- 4 24.
"OPEC Transactions in the U.S. International Accounts,
1972 - 77", Survey of Current Business, April 1978.
25.
"The International Investment Position of the United
States: Developments in 1977," Survey of Current
Business, August 1978 (annual article).
26.
"U.S. International Transactions", Survey of Current
Business, (quarterly article).
Department of Agriculture
27.
"The Agricultural Foreign Investment Disclosure
Act of 1978: The First Regulation of Foreign
Investment in United States Real Estate," by
Bruce Zagaris.
28. "Interim Report: Section 4(d), International
Investment Survey Act of 1976", Economics, Statistics,
and Cooperatives Service.
29.
"Outline of Work:
Section 4(d), International
Investment Survey Act of 1976", June 1, 1978.
30.
"Report of the Agricultural Stabilization
and Conservation Service,"
(on foreign investment
in U.S. farmland, by state), September 29, 1978.
- 3markets, we should not close off those markets to willing
investors from abroad.
Second, foreign-owned companies have yielded the U.S.
economy the same benefits as their domestically-owned counterparts -- that is, employment opportunities, tax revenues, and
competitively-priced goods and services.
Some foreign investors
have brought unique technology to this country, while others
have played a major role in the development of particular
states or regions, bringing more jobs and other important benefits to their economies.
Our experience has been that the behavior of these companies
does not differ from that of domestically-owned firms.
The
ownership of these companies has not altered then willingness
to abide by our laws, and they still must compete in our
marketplace.
Third, as this Subcommittee is particularly aware, we are
by far the largest foreign investor in the world.
The book
value of our direct investments overseas -- amounting to well
over $100 billion --is several times greater than foreign
direct investment here.
Furthermore, we now have treaties of
friendship, commerce and navigation with many nations under which
they have been promised that their investors -- with certain
well-defined exceptions -- will be given equal treatment with
American citizens with respect to investments within the United
States.
A consideration we constantly keep in mind is the
necessity that we not endanger these important treaties, which
- 4 provide parallel rights to U.S. investors in those countries.
Finally, we must always be aware of the responsibilities
attached to the leadership role we play in the world's economy.
If we were to abandon our historical support for freedom of
movement for capital and adopt investment restrictions, other
nations could be expected to follow suit and restrict U.S.
investment to a much greater degree than they currently do.
The need for worldwide cooperation is great at this time, and
we must not risk leading the nations of the world to a retreat
into economic isolation.
1975 Policy Review
Despite these considerations, many expressed concerns
about the rapid growth in the hands of a few governments of
funds available for investment abroad, and we, therefore,
recently conducted a complete review of our investment policy
and the effectiveness of our relevant laws and regulations.
The review was completed in late winter and its results were
presented to Congress in several hearings earlier this year.
Our basic conclusion was that the traditional U.S. open
policy with respect to foreign investment in this country should
be maintained.
We have, therefore, opposed proposals for any
new restrictions on foreign investment in this country.
Underlying our decision is the belief that our existing
laws, regulations, and practices provide extensive information
with respect to foreign investments as well as adequate safeguards to deal with potential problems that might arise in
- 5the case of particular investments.
There is a formidable array
of such laws, and I am sure that few people in this country
really understand the extent of the protection they provide
us against abuses by foreign investors..
There are, for example, a number of specific laws which
prohibit or limit foreign investment in certain areas of our
economy for reasons of national security or to protect an
essential national interest.
These sectors include atomic
energy, domestic airlines, shipping, Federally-owned land,
communications and media, and fishing.
Secondly, there are many laws which prevent abuses in
specific sectors.
defense area.
Among the most important are those in the
The Defense Department may deny security clearances
required to do classified work for the government to any firm
under "foreign ownership, control or influence."
Foreign invest-
ment in defense production facilities, although not expressly
prohibited, is severely limited by the prospect that such an
acquisition could result in the firm's losing its classified
government contracts.
Exports of arms and of classified tech-
nology related to defense manufacture are also effectively
controlled.
Finally, foreign investors are subject to the same laws
and regulatory constraints American firms must observe.
Many
of these are quite familiar, but are not usually thought of
as protections against abuse by foreign investors.
- 6 -- Our antitrust laws prevent a foreign investor from monopolizing a specific sector, or engaging in various anti-competitive
practices.
They also prevent foreign investors acting singly
or in a group from making a purchase of, or engaging in a merger
or joint venture with, a U.S. firm if the result would be to
substantially lessen competition or tend to create a monopoly.
-- Our export control authority provides protection
against the export of any product or resource if our national
security is threatened, if there is an excessive drain of
scarce materials and a serious inflationary impact from foreign
demand, or if controls are needed to further U.S. foreign
policy.
Special, more detailed, rules apply to exports of
armarments and certain types of energy.
Our securities laws require disclosures of significant
foreign ownership, prevent harmful activities with respect to
tender offers and stock market price manipulation and generally
preserve orderly markets.
--
Our labor laws require all firms operating in the
United States to refrain from unfair labor practices and to
assure all workers safe and healthful working conditions.
Finally the President has broad emergency powers,
including (1) the Trading with the Enemy Act, which gives him
the power during a war or national emergency to control completely any property in the U.S. in which any foreign country
or national- thereof has any interest; (2) condemnation power
- 7over any property within our jurisdiction; and, (3) priority
performance powers which authorize the President to order
the priority performance of defense related contracts, to
allocate materials and facilities necessary for national
defense, and to place priority orders for a particular product
and to take possession of the facility if they are not fulfilled.
Despite these extensive safeguards, we did feel that
certain new administrative actions to supplement our existing
laws and regulations would be desirable.
These included:
Creation of a new Office on Foreign Investment in
the United States, in the Department of Commerce, to synthesize
and analyze the data on foreign investment in the United States
which is collected by various U.S. Government agencies.
Although
considerable data on foreign investment has been collected by
individual agencies, until the creation of this office there
was no central collection or dissemination point for analysis
of individual investments.
Establishment of a new high-level Committee on
Foreign Investment in the United States to monitor the impact
of foreign investment in this country and to coordinate the
formation of U.S. policy on such investment.
Arrangements with the foreign governments for advance
consultation with the U.S. Government on their prospective
major investments in the United States.
- 8Committee on Foreign Investment in the United States
During the past months, we have made significant progress
in implementing these new arrangements.
The Committee on
Foreign Investment in the United States (the "Committee")
was established on May 7, 1975 pursuant to Executive Order 118S8.
Under this Executive Order, the Committee has "primary continuing responsibility within the Executive Branch for
monitoring the impact of foreign investment in the United
States, both direct and portfolio, and for coordinating the
implementation of the United States policy on such investment."
The membership of the Committee consists of representatives
of Government departments and agencies which are generally
concerned with foreign investment issues, including among others
State, Commerce, Defense, and Treasury, whose representative
serves as Chairman.
Thus, the Treasury Department has respon-
sibility for coordinating the activities of the Committee.
The Committee also invites representatives of other agencies
which have an interest in a particular issue under review to
participate in its discussions of that issue.
- 9Also as implementation of the Executive Order, the
Commerce Department has established an Office of Foreign
Investment in the United States to support the Committee's
activity.
The Office's responsibilities include developing
a consistent and timely data collection and processing system
on foreign investment activity in the United States; providing
evaluations and reports concerning the impact of foreign
investment to the Committee; and preparing reports for
publication.
The Office has been preparing statistical and other
analyses for the use of the Committee and is working intensively with a mangement consulting team and other government
agencies to develop improvements in the existing
system to secure more complete and timely data.
- 10 Committee Review of Specific Investments
In addition to its overall policy responsibilities, the
Committee is required to "review investments in the United
States which, in the judgment of the Committee, might have
major implications for the United States national interest."
With respect to specific investment transactions, the Committee
is primarily concerned with direct investment in the U.S. by
foreign governments -- although the Committee may review those
extraordinary private investments which may clearly adversely
affect the national interest.
As part of our policy, we have asked all foreign
governments contemplating significant foreign investment in
this country to hold prior consultations with the United
States.
The Committee is to assist in these consultations.
We already have had clear indications that other countries
recognize our legitimate interests with respect to investments
in the U.S. by foreign governments.
In fact, I have personally
discussed this policy with the major potential government
investors in the Middle East and found a broad acceptance of
our desire for consultations as long as they are applied to
all governments on a non-discriminatory basis; and, of course,
they will be equitably applied.
The experience we had with
Iran in connection with its proposed investment in Pan Am
and with
Romania in connection with its proposed joint
venture with Island Creek Coal Co. are good examples of how
- 11 such procedures can work to the satisfaction of both
governments.
I think the easiest way for me to explain how the
Committee might review a major foreign government investment
proposal would be to explain on a step-by-step basis the
procedures we would follow on handling cases that come before
us.
Most commonly, Committee involvement in a particular
case would be touched off by the receipt from a foreign
government of notification of its intent to make an investment.
When we receive notification from a foreign government,
the information supplied is analyzed initially by the staff
of the Secretary of the Committee on Foreign Investment in
the U.S. in the Treasury Department.
The action taken will
be determined in accordance with the facts in the case.
The
Committee could, for example, simply indicate that it had
"no objection" to the investment.
Alternatively, the Committee
may decide to request consultations and to initiate a more
extensive review procedure.
This could range from asking the
investor for one additional piece of information to undertaking
lengthy consultations.
It is anticipated that only a few investments that come
before the Committee will reach the stage in which extensive
consultations would be required.
The Committee would handle private investments somewhat
differently.
The key difference is that we have not
- 12 specifically requested that private investors enter into
prior consultations on proposed investments.
We would
regard such a requirement as both unnecessary and
inappropriate.
In the event that a private investment
which came to our attention could clearly have adverse
implications for our national interest, the Committee
would ask the parties involved to consult with it.
Potential Acquisition of Copperweld Corporation
We initially became aware of the proposed takeover of
Copperweld Corporation by Societe Imetal through public
reports of the French firm's tender offer.
As the issues
involved in the case became clearer, the new office at the
Commerce Department kept abreast of the situation by
establishing contacts within the other U.S. Government
agencies involved in the case.
I was in touch with the French Ambassador and other officials
here in Washington in order to clarify our policy with respect
to foreign investment in the United States and to ascertain
to what degree the French Government was involved in this
investment.
They advised me that there is no French
Government involvement in the management of Societe Imetal.
- 13 The Committee became officially involved when it received
a letter, dated September 10, 1975, from Mr. Phillip H. Smith,
Chairman and President of Copperweld Corporation, concerning
the proposed acquisition of his firm.
Some days earlier,
Under Secretary Yeo, the Chairman of the Committee, had
notified its members that he had disqualified himself from
participating in any consideration of any U.S. Government
action concerning the proposed transaction because of his
prior professional relationship and friendship with Mr. Smith.
Consequently, on receipt of his letter, I assumed the post
of Acting Chairman and determined that the Committee should
review the issues Mr. Smith had raised.
Committee was called for September 18th.
A meeting of the
In preparation
for the meeting, the new Office of Foreign Investment in
the United States, in the Commerce Department, investigated
the background of the case, drawing upon resources within
the Commerce Department and its contacts with officials of
the Securities and Exchange Commission and the Justice
Department.
My staff and that of the office were also in
contact with the Department of Defense, which was analyzing
the possible defense implications of the transaction.
- 14 After full consideration of the facts, the Committee
concluded that it had no basis for interposing itself
in this transaction.
This conclusion has been communicated
to Mr. Smith.
Conclusion
The lessons we have drawn from our analysis of our
experience with this case provide the answers to many of
the questions you raised, Mr. Chairman, in your invitation
to me to testify today.
First, the conclusion of our policy review that we
should not require prior notification with respect to
private investments continues to be sound.
Both the new
office at Commerce and our staff at the Treasury Department
were closely following the developments with respect to
Copperweld at an early stage, and we were able to act
expeditiously on it once it was formally brought before us.
Second, none of the developments in this case indicate
to us a need for additional legislation to safeguard the
national interests in regard to foreign investments in this
country.
We continue to feel that our current safeguards
against abuses of investment in this country, by domestic
and foreign persons, are adequate and we see no reasons to
depart from our traditional open policy.
- 15 During the past decade, foreign investors have become
increasingly attracted to invest in the United States for
a number of reasons:
we offer a vast, affluent, and
integrated market; we are rich
in natural and human
resources needed to service such investment; and there
are intangible benefits, such as access to advanced
technology, which result from participation in the U.S.
market.
However, the single most important factor has been
that our markets have remained open and we have afforded
domestic and foreign investors equal treatment.
I believe
it is essential that we protect our national interests,
but this can be done without altering this basic underlying
policy.
I hope that these remarks will be useful to your
Committee, Mr. Chairman, and I will be happy to answer
any further questions you may have.
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3
yartmentoftheTREASURY
.JINGTON.D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
July 30, 1979
RESULTS OF TREASURY1S WEEKLY BILL AUCTIONS
Tenders for $3,001 million of 13-week bills and for $3,000 million of
26-week bills, both to be issued on August 2, 1979,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturing November 1. 1979
Discount Investment
Price
Rate
Rate 1/
97.691
97.679
97.686
9.135%
9.182%
9.154%
9.51%
9.56%
9.53%
26-week bills
maturing January 31. 1980
Discount Investment
Price
Rate
Rate 1/
95.302
95.294
95.298
9.91%
9.93%
9.92%
9.293%
9.309%
9.301%
Tenders at the low price for the 13-week bills were allotted 90%.
Tenders at the low price for the 26-week bills were allotted 89%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands])
Received
Accepted
Received
$
51,585
$
60,650 $
34,550 '
:
4,941,865
4,657,710
2 ,538,110
14,860
41,540
40,615 '
:
17,285
45,680
35,325
:
36,275
24,860
29,860
23,395
38,465 •
41,195
299,525
236,690
59,060 •
31,005
36,675
17,375 '
12,585
12,295
4,295
:
25,685
30,985 •
30,995
:
11,275
19,405
19,405
296,410
134,525 :
299,525
28,670
23,165 •
23,175
Accepted
26,400
$
2, 704,730
14,860
17,235
20,275
23,370
56,675
10,005
8,145
22,110
11,265
56,410
28,670
$5,535,395
$3 ,000,735 •
$5,790,420
$3, 000,150
$3,875,770
488,855
$1,,341,110 :
488,855 :
$3,945,300
348,120
$1, 155,030
348,120
$4,364,625
$1, 829,965 :
$4,293,420
$1, 503,150
1,170,770
1,170,770 •
$1,497,000
$1,497,000
$5,790,420
$3,000,150
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
and Foreign Official
Institutions
TOTALS $5,535,395 $3,000,735
:
^/Equivalent coupon-issue yield.
B-1762
tpartmentoftheJREASURY
rtHINGT0N,D.C. 20220
TELEPHONE 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.M.
July 31, 1979
STATEMENT BY
GARY C. HUFBAUER
DEPUTY ASSISTANT SECRETARY FOR
INTERNATIONAL TRADE AND INVESTMENT POLICY
DEPARTMENT OF THE TREASURY
Mr.
Chairman, my remarks this morning on the omnibus
maritime bill are directed at Title III, the title concerning
promotional policies. I will be presenting the Treasury's
initial views and not the Administration's definitive position
since the Administration has not yet reviewed the detailed
proposals in your bill.
The President's letter of July 20 and your bill,
Mr. Chairman, reveal one major point of difference concerninq
promotional policy: U.S. policy toward bilateral agreements.
Section 301 of the Omnibus Bill directs the Secretary of
Commerce to "negotiate appropriate commercial agreements
with foreign nations to assure that, within five years of
enactment of this section ... United States vessels carry
a fair share of the foreign commerce of the United States."
B-1763
- 2The President, by contrast, calls the current trend
toward bilateral cargo sharing agreements "neither wise nor
necessary" and states that "we will continue to resist the
imposition of cargo sharing regimes." Treasury believes
that dividing up the world's trade routes by governmental
agreement will lessen innovation and remove incentives for
carriers to provide efficient service that meets shippers1
needs. The promotion of our foreign commerce — the first
declared purpose of this legislation in Section 102 — is
better served by competition among carriers.
The Administration recognizes that cargo sharing agreements
must at times be adopted in response to initiatives by foreign
governments. The President made clear that, in those instances,
we will defend the interests of our carriers and adopt cargo
sharing agreements. But we will not seek to enter into such
agreements unless first provoked by foreign measures.
In another area — reform of the dry bulk subsidy program
— the Administration's proposal tracks very closely with
the Omnibus Bill. The current dry bulk subsidy program has
not substantially improved the position of U.S. carriers.
The President, and this legislation, propose the elimination
of a number of restrictions on those bulk operators under
the subsidy prooram. These initiatives are intended to
revitalize that subsidy program and encourage its use by
U.S. operators. The President's proposals would
eliminate existing restrictions on:
- 3 — Foreign resales;
International tradinq rights;
—
Repair in foreign shipyards; and
—
Ownership of both foreign and U.S. vessels.
I believe that the spirit both of your legislation and of
the Administration proposal is identical:
allow bulk
carriers to make more efficient use of subsidy dollars.
Your bill, Mr. Chairman, goes considerably further than
the President's proposals by allowing greater flexibility for
all Operating Differential Subsidy (ODS)-supported operators
—
including liners —
and Construction Differential Subsidy
(CDS)-supported construction.
Treasury thinks that serious
consideration should be given to your proposals and their
impact on the industry.
We recognize that different circumstances
apply to bulk trades than the liner trades and ship construction,
and that the Administration will have to analyze the bill's
provisions in greater detail.
Nonetheless, the Federal Government
should consider cutting needless restrictions attached to
subsidies whenever they hamper the subsidy program's goal
of promoting our merchant marine and the shipbuilding base.
For instance, the following initiatives could obviously
have a large impact on the maritime industry and should be
carefully reviewed:
Elimination of ODS ties to "essential trade routes;"
Elimination of the ban on foreign-to-foreign
trading for all ODS vessels;
- 4 Liberalization of the restrictions on shifting
of ODS vessels between foreign and domestic trades;
Liberalization of current restrictions on use
of foreign components in the construction of
vessels in U.S. shipyards; and
Provision for temporary suspension of ODS
contracts by carriers.
Finally, Mr. Chairman, your bill proposes certain changes
in the ooeration of Capital Construction Funds (CCF). I will
not discuss those proposals today because they involve changes
in our tax laws. Thus, we believe they are appropriately
considered with Title IV of the bill, Amendments to the
Internal Revenue Code. Treasury will be prepared to address
the CCF and other tax provisions when the Committee takes
uo Title IV.
w
fartment of theJREASURY
pGT0N,D.C. 20220
FOR IMMEDIATE RELEASE
July 31, 1979
RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $2,753 million of
$6,725 million of tenders received from the public for the 3-year
notes, Series M-1982, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 9.03%
Highest yield
Average yield
9.07%
9.06%
The interest rate on the notes will be 9%. At the 9% rate,
the above yields result in the following prices:
Low-yield price 99.923
High-yield price
Average-yield price
99.820
99.845
The $2,753 million of accepted tenders includes $611 million of
noncompetitive tenders and $1,562 million of competitive tenders from
private investors, including 69% of the amount of notes bid for at
the high yield. It also includes $580 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 $2,753 million of tenders accepted in the
auction process, $7 75 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, 1979.
B-1764
July 31, 1979
Statement by Treasury Department
Regarding Chrysler Corporation
The Treasury Department has monitored Chrysler's
financial situation in the past several months, and is concerned about its possible impact on the overall economy
and on the employees of Chrysler and its suppliers. The
Treasury, in cooperation with staff from the Federal Reserve
System, is making a comprehensive study of the company's
financial records and operations. When Treasury's"final
analysis is completed, the results will be considered by
others in the Administration which will then be in a position
expeditiously to address Chrysler's proposals for assistance.
Other federal agencies involved in analyzing the
Chrysler Corporation financial situation are the Department
of Commerce, Environmental Protection Agency, Department of
Transportation, Council on Environmental Quality, Department
of Justice, Federal Trade Commission, Office of Management
and Budget, and the Council of Economic Advisers. The
Treasury report, based on its own investigation and those of
the other involved federal agencies, is now being expedited.
B-1765
FOR IMMEDIATE RELEASE
July 31, 1979
CONTACT: Charles Arnold
202/566-2041
Gerald Murphy Named Deputy Fiscal Assistant Secretary
Secretary of the Treasury W. Michael Blumenthal today
appointed Gerald Murphy to the position of Deputy Fiscal
Assistant Secretary of the Treasury.
Mr. Murphy is a career official who entered the Federal
Service with the Department of the Navy in January 1957. He
joined the Department of the Treasury in October 1959 and has
served in a variety of staff and managerial positions. Since
1975, he has been Deputy Commissioner of the Bureau of Government
Financial Operations.
He received a bachelor's degree and masters degree in
Commercial Science from Benjamin Franklin University in 1960,
and 1963, respectively. He also attended American University
and has served on the faculties at Southeastern University and
the U.S. Department of Agriculture Graduate School.
Mr. Murphy is a member of the American Institute of Certified
Public Accountants. He currently serves on the National Council
on Governmental Accounting and is a past National President of
the Association of Government Accountarits. He has received
Treasury's Meritorious Service Award, the Secretary's Special Act
or Service Award and the Benjamin Franklin University Distinguished
Alumni Award.
He is married to the former Harriet Gottlick of Westfield,
New Jersey, and they have three children, William, Janet and
Kathleen. Mr. Murphy and his family reside in Silver Spring,
Maryland.
###
B-1766
FOR RELEASE AT 4:00 P.M.
July 31, 1979
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
.invites tenders for two series of Treasury bills totaling
approximately $6,000 million, to be issued August 9, 1979.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $6,021 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,000
million, representing an additional amount of bills dated
May 10, 1979,
and to mature November 8, 1979
(CUSIP No.
912793 2U 9)/ originally issued in the amount of $3,016 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
August 9, 1979,
and to mature February 7, 1980
(CUSIP No.
912793 3Q 7) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing August 9, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,295
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. 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 6, 1979.
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-1767
-2Each tender must be for a minimum of $10 f 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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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.
-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on August 9, 1979,
in cash or other immediately available
funds or in Treasury bills maturing August 9, 1979.
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.
Under 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, 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
July 31, 1979
Contact: John P. Plum
202/566-2615
INTEREST RATE INCREASED FOR RETIREMENT PLAN
BONDS AND INDIVIDUAL RETIREMENT BONDS
The Treasury Department today announced an interest
rate increase of one-half percent for new issues of U.S.
Retirement Plan Bonds and U.S. Individual Retirement Bonds.
Bonds of both series issued on and after August 1, 1979,
will provide an investment yield of 6-1/2 percent, compounded
semiannually. This will make the rate on new issues comparable with that of U.S. Savings Bonds.
Since there is no leaal authority to change the rate on
outstanding Retirement Plan and Individual Retirement Bonds,
bonds issued prior to August 1, 1979, will not be affected
by the rate increase.
Retirement Plan Bonds, issued pursuant to the SelfEmployed Individuals Tax Retirement Act of 1962, are available for investment by self-employed persons and aualified
pension and profit-sharing trusts. Individual Retirement
Bonds, issued pursuant to the Employee Retirement Income
Securitv Act of 1974, are available for investment by persons eligible to establish an individual retirement account
(IRA) for tax-sheltered retirement savings.
Information and purchase apnlications for these bonds
may be obtained from anv Federal Reserve Bank or Branch or
Bureau of the Public Debt, Washington, D.C. 20226.
o 0 o
B-1768
::ederal financing bank
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
August 1, 19 79
FEDERAL FINANCING BANK ACTIVITY
Roland H. Cook, Secretary, Federal Financing Bank (FFB),
announced the following activity for June 1 - 30, 1979.
Guarantee Programs
FFB entered into two new foreign military sales loan
commitments in June: $175 million with Turkey and $.2
million with Haiti. Both loans are guaranteed by the
Department of Defense under the Arms Export Control Act.
FFB also made 40 advances totalling $2 74,509,924.97 to
17 foreign governments under existing DOD-guaranteed foreign
military sales loans.
Under notes guaranteed by the Rural Electrification
Administration, FFB advanced a total of $243,997,000 to 25
rural electric and telephone systems.
On June 20, FFB purchased a total of $4,905,000 in
debentures issued by 8 small business investment companies.
These debentures are guaranteed by the Small Business Adminis
tration and mature in 5, 7 and 10 years. The 5 and 7 year
debentures carry an interest rate of 9.0351, while the 10
year debentures carry a rate of 9.125%.
FFB provided Western Union Space Communications, Inc.,
with the following amounts which mature October 1, 1989.
Interest is payable on an annual basis.
Interest
Date
Amount
Rate
$ 2,500,000
6/1
464%
16,950,000
6/20
31%
1,900,000
6/29
144%
This loan will be repaid with payments to be made by
NASA under a satellite procurement contract with Western
Union Space Communications, Inc»
B-1769
- 2FFB purchased two General Services Administration interim
public buildings purchase certificates:
Interest
Series
Date
Amount
Maturity
Rate
9.056%
7/31/03
$5,975,757.23
6/11
M-046
9.009%
11/15/04
974,035.38
6/14
L-0 55
FFB advanced the City of Kansas City, Missouri $900,000 on
June 29 under the Department of Housing and Urban Development
Section 108 Block Grant Program. This advance is scheduled to
be repaid June 15, 1980 and carries an interest rate of 9.515%.
Department of Transportation (DOT) Guarantees
The United States Railway Association (USRA) issued a new
note #15 to the FFB on June 26. This note is for $2,414,511,
matures December 26, 1990, and carries an interest rate of 9.155%.
The proceeds were used to repay the FFB interest on earlier USRA
notes which funded USRA loans to the Delaware 5 Hudson Railway
Company.
FFB provided the following amounts to the National Railroad
Passenger Corp. (Amtrak).
Interest
Date
Note #
Amount
Maturity
Rate
10.082%
6/29/79
$ 3,500,000
18
6/1
6,000,000
6/29/79
10.078%
18
6/5
500,000
6/29/79
9.84%
18
n/7
5,500,000
9/6/79
9.84%
20
6/7
6,000,000
6/29/79
9.648%
18
6/11
1,000,000
9/6/79
9.648%
20
6/11
4,000,000
9/6/79
9.442%
6/12
20
9/6/79
9.358%
16,000,000
20
6/15
8,000,000
9/6/79
9.349%
20
6/19
3,000,000
9/6/79
9.442%
20
6/22
3,000,000
9/6/79
9.201%
20
6/27
On June 29, Amtrak extended the maturity on the $100 million
Note #18 for 91 days to September 28, 1979. This extended note
carries a new interest rate of 9.358%
Under notes guaranteed by DOT pursuant to Section 511 of
the Railroad Revitalization and Regulatory Reform Act of 1976,
FFB lent funds to the following railroads:
Interest
Date
Mount
Maturity
Rate __
9.27%
$ 408,420.00 11/15/91
Trustee of The Milwaukee Road
6/8
9.101%
1,151,555.00
11/1/90
Chicago § North Western 511-78-3 6/18
9.345%
2,108,567.00 12/10/93
Trustee of Chicago, Rock Island
6/18
- 3Agency Issuers
On June 1, the Export-Import Bank sold FFB a $1,283
million note which matures September 1, 1982. Interest is
charged on the note at 9.491%, payable quarterly. This note
raised $715 million in new cash and refinanced $568 million
in maturing securities.
FFB advanced $45 million to the Student Loan Marketing
Association (SLMA), a federally chartered private corporation.
FFB holdings of SLMA notes now total $1,140 million.
On June 4, FFB purchased a $1,150 million Certificate of
Beneficial Ownership from the Farmers Home Administration.
This certificate matures June 4, 1984 and carries an interest
rate of 9.39%, payable annually.
The Tennessee Valley Authority sold FFB a $55 million,
9.457% note on June 15, and a $1,095 million, 9.296% note on
June 29. Both notes mature September 28/ 1979. Of the total
$1,150 million borrowed, $970 million retired maturing securities,
and $180 million raised new cash.
FFB Holdings
As of June 30, 1979, FFB holdings totalled $60.8 billion.
FFB Holdings and Activity Tables are attached.
# 0#
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
Program
June 30. 1979
May 31, 1979
On-Budget Agency Debt
Tennessee Valley Authority
Export-.import Bank
Net Change
(6/1/79-6/30/79)
Net Change-FY 1979
(10/1/78-6/30/79)
$ 6,610.0
7,846.3
$ 6,430.0
7,131.3
180.0
715.0
$ 1,390.0
1,278.0
1,952.0
430.3
1,952.0
427.9
02.4
-162.0
73.5
29,200.0
77.3
160.1
38.0
921.0
98.7
28,050.0
72.6
163.7
38.0
921.0
100.2
150.0
4.7
-3.6
-2.2
-0-1.5
6,925.0
20.3
-3.6
-4.3
283.3
-13.5
22.4
80.5
4,990.3
340.4
36.0
38.5
1.9
450.8
382.5
5,497.0
303.0
1,140.0
21.6
177.0
22.4
76.9
4,791.4
333.5
36.0
38.5
1.0
394.3
361.2
5,253.0
298.1
1,095.0
21.6
177.0
-03.7
198.9
6.9
-0-00.9
56
21
244
4
45
-0-0-
4.9
44.8
1,012.4
70.2
-0-01.9
-83.6
146.0
1,305.4
52.4
395.0
-0.2
-0-
$60,815.5*
$58,186.4*
Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
Agency Assets
Farmers Home Administration
DHEW-Health Maintenance Org. Loans
DHEW-Medical Facility Loans
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government Guaranteed Loans
DOT-Emergency Rail Services Act
DOT-Title V, RRRR Act
DOD-Foreign Military Sales
General Services Administration
Guam Power Authority
DHUD-New Communities Admin.
DHUD-Comninity Block Grant
Nat' 1. Railroad Passenger Corp. (AMTRAK)
NASA
Rural Electrification Administration
Small Business Investment Companies
Student Loan Marketing Association
Virgin Islands
W4ATA
TOTALS
Federal Financing Bank
$2,627.1*
$13,736.0*
July 25, 1979
*totals do not add due to rounding.
FEDERAL FINANCING BANK
June 1979 Activity
BORROWER
:
DATE :
AMOUNT
OF ADVANCE
Department of Defense
Thailand #2
Thailand #3
Tunisia #4
Costa Rica #1
Colombia #2
Greece #10
Morocco #5
Thailand #6
Taiwan #8
Taiwan #9
Korea #9
Israel #7
Tunisia #4
Jordan #2
Jordan #3
Colombia #2
Korea #10
Greece #10
Turkey #2
Turkey #4
Turkey #6
Thailand #2
Thailand #3
Jordan #3
Colombia #2
Ecuador #2
Spain #2
Tunisia #4
Jordan #3
Costa Rica #1
Turkey #7
Liberia #4
Israel #7
Peru #4
Greece #10
Indonesia #4
Jordan #3
Jordan #4
Kenya #6
Spain #2
Thailand #6
Tunisia #4
6/1
6/1
6/4
6/5
6/5
6/5
6/5
6/6
6/7
6/7
6/7
6/12
6/13
6/13
6/13
6/13
6/15
6/15
6/15
6/15
6/15
6/15
6/15
6/18
6/20
6/20
6/20
6/20
6/22
6/22
6/22
6/22
6/26
6/26
6/26
6/26
6/29
6/29
6/29
6/29
6/29
6/29
$
539,371.41
100,657.00
531, 739.58
3,880.44
860, 317.17
2,567,977.00
23,373, 100.00
3,300,000.00
2,721,452.35
10,000,000.00
100,000.00
59,037, 747.58
709, 845.60
987, 354.90
1,798,179.00
415, 364.44
70,996,615.12
370,000.00
6,336,186.54
7,328,798.05
6,323,930.34
1,618,707.00
1,761,000.00
97,440.00
1,188, 737.20
23,500.00
3,802,963.58
54,231.00
327, 275.00
141, 244.00
1,210, 725.00
25,000.00
35,611,016.28
94 ,920.00
8,694 ,001.57
7,558 ,920.00
3 ,025.09
354 ,746.73
3,140 ,473.00
8,695 ,786.00
1,695 ,079.00
8 ,618.00
:INTEREST: INTEREST
MATURITY : RATE :
PAYABLE
(other than s/a)
6/30/83
9/20/84
10/1/85
4/10/83
9/20/84
2/1/89
4/10/87
9/20/85
7/1/85
7/1/86
6/30/87
12/15/08
10/1/85
11/26/85
12/31/86
9/20/84
12/31/87
2/1/89
10/1/86
10/1/87
6/3/88
6/30/83
9/20/84
12/31/86
9/20/84
8/25/84
9/15/88
10/1/85
12/31/86
4/10/83
6/3/91
10/31/84
12/15/08
4/10/85
2/1/89
9/20/87
12/31/86
3/15/88
10/1/88
9/15/88
9/20/85
10/1/85
9.4851
9.383%
9.332%
9.505%
9.362%
9.245%
9.276%
9.274%
9.222%
9.198%
9.165%
9.109%
8.975%
8.972%
8.961%
9.002%
9.001%
9.014%
9.034%
9.027%
9.021%
9.149%
9.078%
9.148%
9.183%
9.184%
9.100%
9.145%
9.123%
9.288%
9.089%
9.177%
9.091%
9.151%
9.103%
9.111%
8.924%
8.941%
8.935%
8.935%
8.956%
8.955%
Export-Import Bank
6/1
1,283,000,000.00
9/1/82 9.604'
9.491% quarterly
6/4
1,150,000,000.00
6/4/84 9.185*
9.396% annuallv
5,975,757.23
974,035.38
7/31/03 9.056%
11/15/04 9.009%
Farmers Home Administration
Certificate of Beneficial
CVnership
General Services Administration
Series M-046
Series L-055
6/11
6/14
Department of Housing and Urban Development
Section 108
Kansas City, Missouri
6/29
900,000.00
6/15/80
9.515%
FEDERAL FINANCING BANK
June 1979 Activity
BORROWER
DATE
Page 2
AMOUNT
OF ADVANCE
National Railroad Passenger Corp.
(AMTkAK)
*
*Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
#18
#18
#18
#20
#18
#20
#20
#20
#20
#20
#20
3,500,000.00
6,000,000.00
500,000.00
5,500,000.00
6,000,000.00
1,000,000.00
4,000,000.00
16,000,000.00
8,000,000.00
3,000,000.00
3,000,000.00
6/29/79
6/29/79
6/29/79
9/6/79
6/29/79
9/6/79
9/6/79
9/6/79
9/6/79
9/6/79
9/6/79
6/11
6/11
6/11
6/11
6/11
6/12
6/13
6/18
6/18
6/19
6/20
6/20
6/20
6/20
6/21
6/21
6/22
6/26
6/26
6/27
6/29
6/29
6/29
6/29
6/29
6/29
6/29
6/29
6/29
6/29
1,135 ,000.00
1,438 ,000.00
4,649 ,000.00
3,375 ,000.00
908 ,000.00
49,524 ,000.00
1,169 ,000.00
597 ,000.00
1,109 ,000.00
3,289 ,000.00
2,033 ,000.00
2,570 ,000.00
3,283 ,000.00
2,762 ,000.00
7,751 ,000.00
1,478 ,000.00
3,259 ,000.00
1,316 ,000.00
1,000 ,000.00
300 ,000.00
10,500 ,000.00
2,258 ,000.00
3,536 ,000.00
359 ,000.00
150 ,000.00
8,000 ,000.00
9,700 ,000.00
6,930 ,000.00
1,462 ,000.00
788 000.00
293 ,000.00
56,000.00
522,000.00
17,300 000.00
1,560,000.00
6,315,000.00
54,867,000.00
17,468,000.00
6,255,000.00
1,207,000.00
1,526,000.00
6/30/81
6/1/81
12/31/13
12/31/13
6/6/81
6/6/81
12/31/13
12/31/13
5/31/86
12/31/13
12/31/13
6/11/81
6/11/82
6/11/81
6/11/81
6/30/81
3/31/86
6/13/81
6/18/81
5/31/86
6/19/81
6/20/81
6/20/81
6/20/81
12/31/13
6/21/81
12/31/13
6/22/81
6/28/81
6/28/81
7/15/81
6/29/81
6/29/81
6/29/81
6/29/81
6/29/81
6/29/81
7/15/81
5/31/86
12/31/13
12/31/13
6/20
6/20
6/20
6/20
6/20
6/20
6/20
6/20
6/20
500,000.00
555,000.00
300,000.00
200,000.00
350,000.00
1,000,000.00
500,000.00
1,000,000.00
500,000.00
6/1/84
6/1/84
6/1/84
6/1/86
6/1/89
6/1/89
6/1/89
6/1/89
6/1/89
6/1
6/5
6/7
6/7
6/11
6/11
6/12
6/15
6/19
6/22
6/27
$
:
:INTEREST:
INTEREST
: MATURITY : RATE :
PAYABLE
(other than s/a)
10.082%
10.078%
9.84%
9.84%
9.648%
9.648%
9.442%
9.358%
9.349%
9.422%
9.201%
Rural Electrification Administration
Allegheny Electric #93
Medina Electric #113
Arkansas Electric #97
Dairyland Power #54
Glacier State Tele. #29
Basin Electric #137
Chugach Electric #82
Sugar Land Telephone #69
Tri-State Gen. $ Trans. #79
Wabash Valley Power #104
Pacific Northwest Gen. #118
Wolverine Electric #100
Northern Michigan Elect. #101
Colorado-Ute Electric #78
Minnkota Power #127
Allegheny Electric #93
Tri-State Gen. $ Trans. #89
Western Illinois Power #99
Basin Electric #86
Tri-State Gen. $ Trans. #37
Associated Electric #132
Big Rivers Electric #58
Big Rivers Electric #91
Big Rivers Electric #136
Doniphan Telephone #14
Cooperative Power #130
Arizona Electric #60
East Kentucky Power #73
So. Mississippi Electric #3
So. Mississippi Electric #90
Corn Belt Power #94
Big Rivers Electric #65
Big Rivers Electric #91
United Power #67
Wolverine Electric #100
Soyland Power #105
Basin Electric #137
Oglethorpe Electric #74
Tri-State Gen. § Trans. #89
North West Telephone #62
Wabash Valley Power #104
Small Business Investment Companies
Capital for Terrebonne, Inc.
Capital Resource Co. of Conn.
Intergroup Venture Capital Corp.
Intergroup Venture Capital Corp.
Brantman Capital Corp.
Builders Capital Corp.
The Christopher SBIC
J.H. Foster $ Co.
SBIC of Amarira
6/1
6/1
6/1
6/4
6/6
6/6
6/7
6/8
6/8
6/8
6/8
9.695% 9.58% quarterly
9.735% 9.619%
9.256% 9.151%
9.244% 9.140%
9.675% 9.561%
9.675% 9.561%
9.178% 9.075%
9.07%
8.969%
9.045% 8.945%
9.07%
8.969%
9.07%
8.969%
9.425% 9.317%
9.105% 9.004%
9.425% 9.317%
9.425% 9.317%
9.405% 9.297%
9.075% 8.974%
y . LLD'O
9.121%
9.415% 9.307%
9.085% 8.984%
9.435% 9.326%
9.415% 9.307%
9.415% 9.307%
9.415% 9.307%
9.112% 9.011%
9.425% 9.317%
9.100% 8.999%
9.425% 9.317%
9.375% 9.268%
9.375% 9.268%
9.135% 9.033%
9.125% 9.023%
9.125% 9.023%
9.125% 9.023%
9.125% 9.023%
9.125% 9.023%
9.125% 9.023%
9.115% 9.013%
8.905% 8.808%
9.004% 8.905%
9.004% 8.905%
9.035%
9.035%
9.035%
9.035%
9.125%
9.125%
9.125%
9.125%
9.125%
FEDERAL FINANCING BANK
June 1979 Activity
Page 3
BORROWER
DATE
AMOUNT
OF ADVANCE
MATURITY
INTEREST:
RATE :
INTEREST
PAYABLE
(other than s/a}
Student Loan Marketing Association
Note #199 6/5
Note #200
Note #201
Note #202
6/12
6/19
6/26
380,000,000.00
505,000,000.00
600,000,000.00
700,000,000.00
6/12/79
6/19/79
6/26/79
7/3/79
10.078'
9.442!
9.349'
9.278'
6/15
6/29
55,000,000.00
1,095,000,000.00
9/28/79
9/28/79
9.457',
9.296*
Trustee of The Milwaukee Road 6/8
Chicago £ North Western 511-78-3 6/18
Trustee of Chicago, Rock Island
6/18
408,420.00
1,151,555.00
2,108,567.00
11/15/91
11/1/90
12/10/93
9.066%
9.101%
9.136%
2,414,511.00
12/26/90
9.155'
2,500,000.00
16,950,000.00
1,900,000.00
10/1/89
10/1/89
10/1/89
9.25%
9.103%
8.944%
Tennessee Valley Authority
Note #100
Note #101
Department of Transportation
Section 511
9.271% annually
9.345% annually
United States Railway Association
Note #15 6/26
Western Union Space Communications, Inc.
(NASA)
6/1
6/20
6/29
9.464% annuallv
9.31%
9.144%
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL TRADE,
INVESTMENT AND MONETARY POLICY
OF THE
HOUSE COMMITTEE ON BANKING AND CURRENCY
WEDNESDAY, SEPTEMBER 24, 1975, AT 10:00 A.M.
Mr. Chairman and Members of the Subcommittee:
I am pleased to respond to the Chairman's request to discuss United States policy with respect to foreign investment and
the Treasury Department's role in foreign investments in the
United States.
You have also asked me to discuss the proposed
acquisition of Copperweld Corporation by the French enterprise,
Societe Imetal.
Although it is inappropriate for me to discuss the merits
of the proposed investment, in part because it is currently the
subject of litigation in the courts, I am fully prepared to discuss, in accordance with the Chairman's request, how our investment
policy in general relates to this case and the role that the
Committee on Foreign Investment in the United States has played
in connection with it.
WS-383
- 2Traditional U.S. Policy
I think it would be useful to review briefly for you our
traditional policy with respect to foreign investment here, so
that you will have a fuller appreciation of the context within
which the Administration has acted in this sphere.
U.S. policy with respect to international investment has
generally been based on the premise that we should rely on the
private market as the most efficient means to determine the
allocation and use of capital in the international economy.
Accordingly, our basic policy toward foreign investment
in the United States has reflected an "open door,T approach.
That is, we offer foreigners no special incentives to invest here
and, with a few internationally recognized exceptions, have imposed
no special barriers.
Furthermore, foreign investors are generally
treated equally with domestic investors once*they are established here.
There are a number of important reasons for our maintaining
an open policy toward foreign investment.
First, foreign
investment helps us to meet our large and rapidly growing capital
needs.
At a time when firms are facing difficult financing
requirements, we believe it would not be wise to raise new
restrictions on the available sources of capital.
Our open
policy towards capital flows is conducive to a healthy growing
U.S. economy and in this respect is beneficial to domestic
capital formation.
Moreover, at a time when unprecedented
budget deficits will place extraordinary demands on our capital
wrtmentoflheJREASMY
4INGT0N. D.C. 20220
FOR IMMEDIATE RELEASE
August 1, 1979
RESULTS OF AUCTION OF 9% 7-1/2-YEAR TREASURY NOTES
The Treasury has accepted $2,504 million of the $5,367 million of
tenders received from the public for the 9% 7-1/2 year notes, Series B-1987,
auctioned today. The range of accepted competitive bids was as follows:
Price
High
Low
Average
100.07
99.96
100.00
Approximate Yield
8.99%
9.01%
9.00%
The $2,504 million of accepted tenders includes $411 million of
noncompetitive tenders and $1,793 million of competitive tenders from
private investors, including 68% of the amount of notes bid for at
the low price.
It also includes $300 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 $2,504 million of tenders accepted in the
auction process, $500 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 15, 1979.
B-1770
?artmentoftheTREA$URY
HINGTON,D.C. 20220
August 2, 1979
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 29-3/4-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF AUGUST FINANCING
The Department of the Treasury has accepted $2,000 million of the
$3,137 million of tenders received from the public for the 29-3/4-year
9-1/8% Bonds of 2004-2009, auctioned today. The range of accepted
competitive bids was as follows:
High
Low
Average -
Approximate Yield
To
To First Callable
Date
Maturity
8.88%
8.89%
8.93%
8.92%
8.92%
8.91%
Price
102.36
101.99
102.13
The $2,000 million of accepted tenders includes $150 million of
noncompetitive tenders and $1,850 million of competitive tenders
(including 68% of the amount of bonds bid for at the low price) from
private investors.
In addition, $396 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, 1979.
SUMMARY RESULTS OF AUGUST FINANCING
Through the sale of the three issues offered in the August financing,
the Treasury raised approximately $2.4 billion of new money and refunded
$7.5 billion of securities maturing August 15, 1979. The following table
summarizes the results:
New Issues
9%
9%
9-1/8%
NonmarMaturing
Net
Notes
Notes
Bonds
ketable
Securities New
8-15-82
2-15-87
5-15-04- Special
Held
Money
2009
Issues Total
Raised
$2.8
$2.5
$2.0
Government Accounts
and Federal Reserve
Banks
0.8
0.5
$3.0
Public
TOTAL $3.5
Details may not add to total due to rounding.
B- 1771
$
-
$7.3
$4.8
0.4
1.0
2.7
2.7
$2.4
$1.0
$10.0
$7.5
$2.4
$2.4
WlmentoftheTREASURY
TELEPHONE 566-2041
IHIN6T0N, D.C. 20220
FOR IMMEDIATE RELEASE
August 6, 1979
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,002 million of 13-week bills and for $3,001 million of
26-week bills, both to be issued on August 9, 1979,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturing November 8, 1979
Discount Investment
Price
Rate
Rate 1/
97.655
97.637
97.644
9.277%
9.348%
9.320%
9.66%
9.73%
9.70%
26-week bills
maturing February 7. 1980
Discount Investment
Price
Rate
Rate 1/
95.322
95.277
95.288
9.253%
9.342%
9.320%
9.87%
9.97%
9.94%
Tenders at the low price for the 13-week bills were allotted 97%,
Tenders at the low price for the 26-week bills were allotted 24%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TENDERS RECEIVED AND ACCEPTED
(In Thousands]1
Received
Accepted
Received
37,095 :
$
37,095 $
$ 28,330
2 ,525,655 :
3,931,875
3,965,840
24,575 J
39,575
14,355
28,815
28,815 ;
29,545
22,910 :
27,910
21,780
42,965 :
42,965
34,975
254,620
102,070 :
156,990
27,020
21,020 ::
22,065
8,340 :
8,380
8,340
29,960 ,:
72,960
24,350
16,480 :
11,380
16,480
115,145 :
324,805
355,445
30,615
26,620 .
26,620
TOTALS
$4,869,720
$3 ,001,650 :
$4,673,410
$3 ,000,535
Competitive
Noncompetitive
$2,970,370
491,480
$1,102,300
491,480
$2,573,485
349,225
$
Subtotal, Public
$3,461,850 $1,593,780
$2,922,710
$1,249,335
$1,407,870 :
$1,750,700
$1,750,700
$3,001,650 :
$4,673,410
$3,000,535
Accepted
$
28,330
,604,565
2,
14,355
26,545
21,780
34,975
101,990
16,065
8,380
24,350
11,380
77,205
30,615
Type
Federal Reserve
and Foreign Official
Institutions
$1,407,870
TOTALS
$4,869,720
JVEquivalent coupon-issue yield.
B-1772
900,610
349,225
FOR RELEASE AT 4:00 P.M.
August 7, 1979
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,000 million, to be issued August 16, 1979.
This offering will provide $100
million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$5,915 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,000
million, representing an additional amount of bills dated
May 17, 1979,
and to mature November 15, 1979
(CUSIP No.
912793 2V 7), originally issued in the amount of $3,017 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
August 16, 1979,
and to mature February 14, 1980
(CUSIP No.
912793 3R 5) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing August 16, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,936
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. 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 13, 1979Form 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-1773
-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
respective
(in three
decimals)
issues.
of accepted
competitive
bids average
for the price
-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on August 16, 1979,
in cash or other immediately available
funds or in Treasury bills maturing August 16, 1979.
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.
Under 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, 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.
37282022 20
84/13/04-' M^/ HRB
@FedFRASER