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10
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v. 244
U.
S. Dept. of the
(;
Treasury
PRESS RELEASES
apartment of the Treasury
FOR IMMEDIATE
~
Washington,
O.C. ~ Telephone 566-2041
RELEASE
Friday, March 5, 1982
There were no injuries and only limited damage from
Bureau of Engraving and Printing this morning.
The fire, of undetermined
cause, apparently started in
duct work in a pressroom devoted to postage stamp printing.
It was discovered at approximately 2:45 a. m. and, aided by
automatic extinguishers,
employees at the scene contained
the fire until D. C. firemen arrived and brought it under
complete control by 4:00 a. m.
a
fire at the
The fire was confined to a 4, 000 square foot wing of
the Bureau's Annex Building, east of 14th at C Street. Two
of the four printing presses in the area are expected to be
in operation next week, and the two others will require
refurbishment.
It is expected that some stretchout in
scheduled delivery of selected postage stamps will be
required, but rearrangement of production schedules will
result in minimal impact on the overall Postal Service
product program.
in
Cost of repairing
the damage has not yet been determined
detail, but is not expected to exceed $75, 000.
R-G61
epartmeni of the Treasury
o
Washington,
D.C. ~ Telephone %66-2041
March
BIOGRAPHICAL
5, 1982
NOTES
DORE MCLAUGHL IN
SECRETARY FOR PUBLIC AFFAIRS
ANN
ASSISTANT
Ann
was confirmed on June 12, 1981
Secretary of the Treasury for Public Affairs.
Dore McLaughlin
as Assistant
Since 1977 Mrs. McLaughlin
has been President
of
D. C. and Washington
McLaughl in & Company o f Washington,
Manager of Braun and Company of Los Angeles, California.
Both firms are public
affairs companies.
In 1974-77 she was with the Union Carbide Corporation.
director, Office of Public Affairs, Environmental
Protection Agency, in 1973-74. Mrs. McLaughlin was Assistant
to the Chairman and Press Secretary, Presidential Inaugural
Committee in 1972-73. In 1971-72 she was Director of
Presidential Election Committee.
Communications,
Previously
she served as an Account Executive with Myers-Infoplan
International, Ines of New York City. Mrs' McLaughlin
was Director, Alumnae Relations, Marymount College in
1966-69; and Supervisor, Network Commercial Scheduling,
American Broadcasting Company, in 1963-66.
She was
was graduated from Marymount College
and attended the University of London, Queen
Mrs. McLaughlin
(B.A. , 1963)
Mary
College in 1961-62.
Mrs. McLaughlin is married
D. C. She was born in Chatham,
R-662
and
New
resides in Washington,
Jersey on November 16, 1941.
partmeni of the Treasury
~
Washington,
March
O.C. ~ Telephone 566-2041
8, 1982
B I OGRAPH Y
Michael A. Driggs
Acting Director of the Office of Chrysler
Finance
Michael A. Driggs is currently the Executive Director of the
Chrysler Corporation Loan Guarantee Board and the acting Director
of the Office of Chrysler Finance for the Office of the
Secretary. The Office of Chrysler Finance is responsible for
supporting the activities of the Chrysler Corporation Loan
Guarantee Board, which has the authority to guarantee up to
He has been
$1.5 billion in loans to the Chrysler Corporation.
in the Office since its inception in January 1980.
the Office of Management and Budget from
responsible for review of federal
transportation activities concentrating on the railroad industry.
His first three years at OMB were spent in review of the activities
Previously,
1973 through
he was with
1979.
was
He
of several foreign intelligence
agencies.
was an intelligence
officer in the United States Army from
1969 to 1972. He had several assignments in the United States
and the Republic of Viet Nam.
He
Mr. Driggs
Virginia.
R-663
has an
He
MPA
and BA degree
and resides
is single
from the University
in Washington, D. C.
of
West
)epartment of the Treasury
FOR IMMEDIATE
D.C. ~ Telephone %66-2041
~ Washlnyion,
1982
March 8
RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
for $4, 802 million of 13-week bills and for $4, 802 million of
26~eek bills, both to be issued on March 11, 1982, were accepted today.
Tenders
OF ACCEPTED
COMPETITIVE BIDS:
RANGE
High
Low
Average
a/ Excepting
b/ Excepting
Tenders
Tenders
13-week bills
June 10, 1982
Investment
Discount
Rate 1/
Rate
Price
26~eek bills
Se tember
maturin
maturin
:
Price
Discount
Rate
9, 1982
Investment
Rate 1/
93.947 b/ 11.973% 12.92%
12. 55%
93.885 12.096% 13.06%
12.65%
12.098%
93.901 12.064% 2/ 13.03%
12.61%
12.058%
5 tenders totaling $4, 100, 000.
3 tenders totaling $3, 000, 000.
at the low price for the 13~eek bills were allotted 33%.
at the low price for the 26-week bills were allotted 87%.
96. 967 a/ 11.999%
96 942
96. 952
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Boston
66, 425
8, 318, 100
82, 065
New
$
York
Philadelphia
65. 415
43, 245
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas
City
Dallas
San
Francisco
Treasury
TOTALS
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
55, 300
776, 255
33, 535
20, 985
55, 025
29, 105
544, 365
225, 855
$10, 315, 675
$
$
8, 165, 080
1, 054, 295
9, 219, 375
1, 080, 100
16, 200
$10, 315, 675
~dcce
ted
:
Received
50, 345 : $ 107, 310
$
3, 692, 900 : 7, 225, 930
22, 580
32, 065 :
59, 585
44, 415 :
112,530
43, 245 :
54, 550 :
374, 505 :
32, 535 :
18, 975 :
55, 025 :
25, 755 :
41, 025
42, 840
43, 675
22, 060
637, 930
151,415 :
272, 550
225, 855 :
$4, 801, 585 : $9, 374, 750
97, 530
75, 625
288, 510
31, 725
39, 840
43, 675
17, 060
148, 930
272, 540
$4, 802, 240
: $6, 816, 520
: 980, 730
$2, 344, 010
: $7»797. 250
980, 730
$3 324, 740
975, 000
875, 000
602, 500
16, 200
$4, 801, 585 : $9»374»750
602, 500
$4, 802, 240
$2, 75Q, 99Q
Q54, 295
$3, 805, 285
980, 100
1/ Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum
on money market certificates is 12.976%.
R-664
76, 625
710, 110
ted
77, 310
3, 637, 330
22, 580
49, 585
~dcce
$
interest rate payable
epartment of the Treasury
~
Washlneton,
O.C. ~ Telephone 566-204%
For Immediate Release:
March 9, 1982
Remarks Prepared For Delivery By
The Honorable Donald T. Regan
Secretary of The Treasury
To
The Chamber of Commerce
Winston Salem, North Carolina
Tuesday, March 9, 1982
--
I am delighted to be here in North Carolina
a state with a
long and glorious history.
Through the years North Carolina has
given many a prominent son and daughter to the service of the
United States
not least among them are Senators Jesse Helms
and John East.
--
This state has a gift for producing talented people
ask any Virginian and they' ll tell you about the talents
Perkins, James Worthy and Dean Smith.
Most of us here have studied at
have probably found
a collection
dispassionate
it
analysis.
--
of
just
Sam
least some history. And most
of dry facts and cold,
if one were to trace the development of that
to its origins, one would find that history was
intermingled with mythology.
The ancient Greek historian
Herodotus is a case in point: Confronted with an event that
could not interpret, Herodotus and other ancient historians
simply resorted to a myth in order to explain it.
However,
discipline
he
I mention this only because today there are some who would
use the same technique to impugn this Administration's
policies
and purposes.
The confusion of myth and reality may have been
harmless in the ancient world; but in these times the
consequences of that confusion can be profound indeed.
I'm afraid
that myths about the Administration's
program are
and communicated
I'd like to
instantaneously.
spend some time today examining some of those myths to see if
there is any element of truth in them, or whether reality is so
far divorced from myth as to leave them empty slogans -- mere
propaganda in the service of politics-as-usual.
concocted daily,
The first myth
ago and we should
inflation
economy.
is that things were better just a few years
return to those wonderful days of a high
For those of you who have forgotten the joys of 13 percent
inflation and 21 percent interest rates, it must be reassuring to
hear that ghostly call from our opponents for easy money,
R-665
quick-fix tax increases,
and
less defense spending.
As former Vice President Mondale assumes the mantel of
economic spokesman, we can almost see the current Democratic
leadership in the Congress feeding him talking points on the
glories of past policies -- the policies of failure that got us
into this mess in the first place.
It was during the Carter Administration that inflation and
interest rates reached all time highs: that the market for
I suggest
housing and autos started their trek to all-time lows.
I
those
policies.
return
to
if they want a
we ask the unemployed
who
ageeed
just
suggest we ask the Ford Motor Company employees
to pay cuts in order to save their jobs if they also want new tax
increases and a return to higher inflation.
Those are the people in the front lines of this fight for
economic recovery.
And they know better than to believe the
myths of the gloomocrats who shout depression and hope for a
failure of our program.
The second myth is: "Reaganomics has been tried and found
the
To paraphrase
wanting. " Reality, however, says otherwise.
English author G. K. Chesterton:
The Administration's
program has
been found difficult, and has not yet been fully tried.
Let me just remind you of how the program was fashioned in
the first place. Shortly after the Administration
took office, a
carefully integrated economic game plan was developed.
Simply stated, it was a fourfold program:
first, we asked
for an across-the-board tax cut of thirty percent over three
years; second, we asked for major cuts in the fiscal 1982 budget;
third, we instituted a program of regulatory reform; and fourth,
we encouraged
the Federal Reserve Board in a policy of slow,
steady growth in the money supply -- one that did not alternately
starve and force feed the economy.
Only one element of the program is ~full
operative.
Regulatory reform is being carried out under the auspices of Vice
president Bush. It's been remarkably successful so far, saving
the private sector $2 billion in annual operating costs, and
perhaps $5 billion in initial capital costs.
Other parts of the program are only partially operative.
Accelerated cost recovery for capital investments went into
effect last year. All told American business will realize an
increase of around $10 billion in cash flow in 1982
That's $10 billion that American businesses won't be alone'
dipping into
the credit markets for.
The thirty percent across-the-board
personal tax reductions
that we originally proposed were reduced and delayed by the
Last year's five percent cut, coming as it did in the
Congress.
fourth quarter,
swallowed
whole
1.
was only
25
by inflation.
percent for the year,
and was
truly significant cuts won't begin until this July when
tax rates will be cut by ten percent.
I might add that
this will be the first time in recent history that a tax cut has
become effective during a recovery rather than later, as was so
often the case in the past.
The
personal
July's cut will be followed next year by an additional
percent rate cut, making the cumulative cut in tax rates
twenty-five percent.
ten
The Administration's
advocacy of slower growth in the money
In 1980,
supply brought results even beyond our expectations'
the annual inflation rate was 12. 4 percent.
In January of this
year it was down to 8. 4 percent, and in the previous four months
it was running at an even lower rate.
The
fourth element in our program was a reduction in the
efforts
federal spending.
As a result of bipartisan
to cut $35 billion from the fiscal 1982 budget.
growth of
were able
we
still is sufficient to put the United States back
real, noninflationary growth. If Congress will
give it the time, the program will work; if Congress will
cooperate with the Administration's
latest economic proposals,
the program will lead us out of this recession and onto the
The program
on the road to
of prosperity.
The third myth that we find circulating goes something like
this: When the Federal government dips into the credit market to
finance the deficit, it will bid up interest rates, and crowd out
other borrowers.
The reality that we see is a credit market that
will accommodate both government and private borrowers.
Let's be clear from the outset; the Administration is deeply
troubled by deficits. Like taxes, deficits are used to finance
excessive government spending which absorbs resources better left
in the private sector. We are opposed to them as a matter of
principle; and intend to see a budget in balance ultimately.
economic high ground
But the deficit must be put in some perspective; it can't be
viewed in isolation from the rest of the economy.
Granted,
viewed in isolation and in terms of sheer dollars, the projected
budget deficit is the largest in our history.
But that does not hold true if you put the deficit in the
context of the total economy. For fiscal 1983, we' re projecting
a deficit that amounts to 3. 1 percent of the gross national
The fiscal 1976 deficit amounted to 4. 5 percent of the
product.
gross national product.
Nevertheless,
won't
financing
a
deficit of that
magnitude
drive up interest rates
don't believe it will.
Private saving,
and
"crowd out" other borrowers?
We
from normal growth and the effects
Tax Act, will be several times the total
the federal government in fiscal 1983
resulting
of the Economic Recovery
borrowing requirement of
and fiscal 1984.
year-to-year increases in saving exceed $40 billion
personal
each year. This will be supplemented
by the additional
tax cuts.
the
induced
by
savings and additional business earnings
Compared to 1981, private saving will be more than $60
billion higher in 1982, more than $170 billion higher in 1983,
and more than $260 billion higher in 1984. Private saving was
just under $480 billion in 1981; it will rise to more than $740
billion in 1984.
The net additions to total private saving are larger than the
increase in the deficit. If
anything, we' ll see "crowding in, "
"
rather than "crowding out.
Normal
fourth myth one hears repeated
taxes to balance the budget.
The
--
it.
lately
is:
We
must
raise
The cause of the current and projected deficits
other factor -- is a lack of economic growth.
Far from
more than any
to balance the budget, while raising living
through economic growth that enlarges the tax base.
We want to see growing
payrolls that will contribute to federal
not
taxes
on a declining number of workers and
revenues,
higher
The only way
is
standards,
businesses.
has tried time and time again to balance the
increases. And it hasn't accomplished the
The government
budget
with tax
objective.
1974 and 1981, despite several legislated tax
overall federal tax receipts rose $338 billion; yet
accumulated deficits of $350 billion, and today have a
debt in excess of a trillion dollars.
Between
reductions,
we
still
national
Raising taxes does not balance budgets; raising taxes makes
easier. Tax increases simply give the federal
spending
government
more
constituencies
to spend on federal programs
for even greater spending.
that create
re f aced with any number of proposal s to raise taxes
the name of balanced budgets.
Many a member of Congress who
once worshipped at the shrine of John Maynard Keynes and deficit
financing has undergone a transformation more sudden and
miraculous than St. Paul's conversion on the road to Damascus.
Now
we '
--
One
proposal
a course
~pending and
stopped dead
would
would
that
have increased taxes by some $200 billion
have meant massive cuts in defense
Security benefits. The economy would have
in Social
in its tracks for years.
of Congress believe the deficits are caused by
tax cuts enacted last year. The general perception
is that federal revenues have been slashed to an historically low
level, aad that revenue increases are needed to fund essential
Government functions.
This is. another myth.
Many
members
the massive
In the
1960's, taxes as
a percent
of
GNP
averaged
18.6
In the:.
1970's, taxes as
a percent
of
GNP
averaged
18.9
percent.
percent.
In 19 of the last 25 years, taxes as a percent of GNP were
lower t'han the 19.4 percent level projected in fiscal 1983.
P'ostponinQ the %ax cuts-, or eliminating
them altogether would
transform'"&a. -t'ax program oriented toward work, and saving, and
productivity into just another attempt to fine tune the economy.
Tampering' With the July '82 tax cut should be anathema to
even the most: doctrinaire-%(eynsian.
That tax cut will occur at
just the right- time to feed' the momentum -of recovery. Eliminate
it and recovery would probably be out of the question during
1982.
or made
And, '-if -the 1983 tax cut' is postponed, or eliminated,
contingent 'or? future' economic performance, we'd be injecting the
most toxic of elements into 'the economic system -- uncertainty.
I might add that the small businessman would be especially
affecte'd'by any change in the Administration's
program of general
tax rate-ieductien bec'ause typical small businessman is
unincorporated
and pays
a per'sonal
income
tax.
the President took office, he promised the country that
That is
no longer be subjected to business-as-usual.
it
precisely 'what we'd have if. the program of tax rate reduction is
When
would
undermined. '
"History makes men wzse, " then
we'd do well to learn from past attempts to attack deficits
through tax increases rather than spending cuts. President
Lyndon Johnson imposed a surtax of 7. 5 percent in 1968, ten
percent in 1969, and 2. 5 percent in 1970 '
If, as, Francis
Bacon sand,
'
And from late 1969 to late 1970, real gross national
product
But more
declined one percent and unemployment almost doubled.
to the point, the deficit -- from being marginally in balance in
1969 -- grew to $23 billion in 1971. The tax increases reduced
saving,
higher
deficit.
If
anything,
investment
and
gross national
product,
and
led to a
balance of $3. 2 billion in the
1969 budget was an exception that proved the rule: Taxes won' t
balance the budget, they' ll simply bloat the governments
Tampering with the tax program in the name of balancing the
budget would send a clear, unmistakable message to the economy
a message that would say, "We' re back to business-as-usual
back to the old stop and go policies. "
that marginal
will confirm the market's belief that the
specifically the legislative branch -- is incapable
of taking the long-term actions necessary for real growth. And
that belief in turn will keep interest rates high.
These are just a few of the myths that have gained currency
For example, some still
in recent weeks'
There are others:
believe we' re cutting government spending in an absolute sense.
We' re not; we' re simply slowing the rate at which government
That message
--
government
has grown.
spending
last time that federal spending accounted for less than
percent of the gross national product was in 1974. Last
year it accounted for twenty-three percent -- almost one in every
four dollars generated by the economy.
The
twenty
is not to cut government spending per se, but to
In this way we
share of the gross national product.
can make greater resources available to the private sector
Our purpose
its
reduce
that can be used productively.
resources
Another myth is that we' re cutting taxes. In fact, we' re not
cutting taxes in an absolute sense; we' re preventing them from
rising as high as they would have because of increases in social
security taxes during the last Administration,
and because of
bracket creep.
nor our efforts to cut the growth of
are mere doctrinaire adherence to ideology.
They are very much the product of pragmatism.
Our objective in
both instances is to prevent the government from encroaching
further on the resources that the private sector needs in order
Neither
our tax program
federal spending
to
grow
in productivity.
Having said that, I would also point out that our economic
do rest on a foundation of principle.
has been
and again, and can be summed up quite handily in two
again
proven
private enterprise.
words
policies
It
--
in the market place, we believe that the
We believe
given enough incentive and enough regulatory room
entrepreneur,
to maneuver, will work miracles, using what President Reagan
called "the magic of the marketplace. "
Far too often we in government think, and act, and speak in
terms of what we -- the government -- will do. In fact, there is
little of a lasting and productive nature that government can do,
other than to establish a hospitable atmosphere for the
intelligence, the creativity, and the talent of individuals
men and women who are willing
take the risks that have made this
nation the great economic power that it is.
That is precisely what this Administration
is trying to do-establish an economic atmosphere that is conducive to work and to
saving, to risk and to enterprise.
We believe
in the words of the Seventeenth Century English
poet James Graham that, "He either fears h is fate too much or his
desserts are small, who will not put it to the touch to win or
lose it all. "
We
alive
believe that the adventurous
still
We
is the
believe that the free marketplace
of allocating goods and services .
We
it
that, if given the right circumstances,
the economy.
and
again pervade
means
spirit of the entrepreneur
believe in applying
all because
indivisible.
economic
will
is
effective
most
most of
these free market principles
and political freedom are
freedom
Shakepeare wrote that brevity is the soul of wit. And, if
that ' s true, then one of our Presidents, Calvin Coolidge to be
precise, was one of the wittiest men to live in this century.
story is told of a White House press conference during
reporters were vainly firing their questions at Calvin
Coolidge .
"Have you anything to say about Prohibition?"
The
which
II
Nope
lf
to say about the
situation?"
"Have you anything
fl
If
Nope
"About the farm
"Nope. "
"About the
Il
Nope
II
f orthcoming
The meeting
the room.
At that
"And don' t
World Court?"
senator ial campaign?"
broke up and the reporters
began
to
file
point Coolidge called out to the departing
quote me. "
out of
reporters,
that I can' t approach Nr Coolidge in brevity,
I ' m not so sure about wit . But one thing I ' m
positive of is this: You certainly may quote me as I touch on
It ' s
and
obvious
sometimes
~
the final myth.
That myth has not gained widespread attention, but some of
you may have heard speculation about the possibility of another
depression.
Nothing could be more absurd nor further from
reality. This nation is nowhere near that fate.
contrary, our program -- combined with a
resolve to continue reducing the growth in spending
this nation out of the twilight of recession and
We are about to see the
daylight of prosperity.
dawn of a new era -- an era marked by stable prices and low
interest rates -- an era marked by productivity and initiative
an era marked by confidence and growth.
Quite the
Congressional
will bring
into the broad
can only create the environment
As I said earlier, government
for capital investment, only you can put that capital to work.
hospitable to talent and
Government can create an environment
innovation, but only you can bring them to bear in the economy.
Government
what
rewarded;
risk.
can
create
climate in which risk is
the willingness to take that
an economic
it can't create is
others like you throughout the country, can
summon the entrepreneurial
spirit that welcomes risk. I'm asking
asked
others
around the country, to seize the
as
I
have
you,
program offers.
opportunity that the Administration's
Only you,
and
Churchill once pleaded with Franklin Roosevelt,
"Give us the tools and we will finish the job. "
Winston
saying:
We' ve
given you the
tools,
finish the job of restoring
Thank
you.
and
trust that
the nation's
you
economy.
will, begin
and
)epartment of the TreasurV ~ Washlnpton,
4:00
FOR RELEASE AT
PE M.
O.c. ~ Telephone S66-204$
March
9, 1982
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $9, 600 million, to be issued March 18, 1982.
This offering will provide $325
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $9, 280 million, including $1, 222 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2, 197 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $4, 800
million, representing an additional amount of bills dated
June 18, 1981,
and to mature
June 17, 1982
(CUSIP
No. 912793 7J 9), currently outstanding
in the amount of $11,630
million, the additional and original bills to be freely
interchangeable.
182-day
bills for
March 18, 1982,
No. 912794 BL
7).
approximately
and
to mature
$4, 800 million, to be dated
(CUSIP
September 16, 1982
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing March 18, 1982.
Tenders from
Federal Reserve Banks for themselves and as agents for foreign
and international
monetary authorities will be accepted at the
weighted average prices of accepted competitive tenders.
Additional amounts of the bills may 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 bills held by them.
The bills will be
and noncompetitive
issued on a discount basis under competibidding, and at maturity their par amount
Both series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $l0, 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
Tr easur y.
tive
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 Standard time, Monday,
March 15, 1982.
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 .
.
.
Tenders over
Each tender must be for a minimum of $10,000
of competicase
the
In
$10,000 must be in multiples of $5, 000
basis of
on
the
expressed
tive tenders the price offered must be
be used
not
Fractions
may
100, with three decimals, e g , 97 920
.
. .
.
.
.
and dealers who make primary markets in
Banking institutions
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
if the names of the
may submit tenders for account of customers,
Others
customers and the amount for each customer are furnished
Each
account.
own
are only permitted to submit tenders for their
bills
in
the
tender must state the amount of any net long position
This
being offered if such position is in excess of $200 million
Eastern
12:30
m
information should reflect positions held as of
p
Such positions would include bills
time on the day of the auction.
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
.
. .
.
.
Dealers, who make
previously offered as six-month bills
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
maturity
primary
.
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.
deposit need accompany
tenders from incorporated banks
companies
and
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
No
trust
.
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
of
2
accompanies
the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection' of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement
for accepted tenders
for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on March 18, 1982,
funds
in cash or other immediately-available
or in Treasury bills maturing
March 18, 1982.
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.
Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill. If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
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
Under
amount
Debt.
epartment of the Treasury
~
Washington,
D.C. ~ Telephone 566-2044
REMARKS BY
THE HONORABLE R. T. McNAMAR
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
CALIFORNIA SAVINGS AND LOAN LEAGUE
1982 MANAGEMENT CONFERENCE
DIEGO, CALIFORNIA
SAN
MARCH
Good morning.
It's
a
pleasure
I'd like to begin
Today
picture of
4, 1982
my
I'
In
low and
interest
by trying to paint a
course, since this is
to paint my picture with
remarks
an economic environment.
and not an easel,
ll have
podium
some words.
to be here.
Of
a
this
economic environment,
year after year went by with a
stab3. e inflation rate, coupled with low and stable
rates.
The country's
industrial structure had emerged
from a terrible war, and was the envy of the entire
increases in national income and productivity meant
rising real incomes for the majority of the populace.
unscathed
world. Real
consistently
Cheap gasoline opened up more cheap land in the suburbs,
helping to control housing costs. And economic growth and rising
real incomes, combined with the growing families of the baby boom
era, generated both the demand for more and larger houses, and
the ability of more people to pay for them.
of previous,
less stable environments a financial
that encompassed a variety of specialized
institutions.
Specialization was defined by law, and included
restrictions on geographic, product and price competition.
Out
structure
had
developed
banking was separated from commercial banking,
Thrifts were restricted in
banking was forbidden.
activities to mortgage lending on the asset side, and to
Investment
and
interstate
their
the short
The
end of the yield curve on the liability side.
fixed rate, level payment, long-term mortgage replaced the
short-term, balloon payment mortgage that had proven to be such
disaster in the deflation of an earlier era.
R-667
a
Special tax breaks for thrifts as well as the deductibility
of interest expense to mortgage holders reflected a national
priority to house the baby boom generation, and to use thrift
passbook savings as the means to finance that housing.
Computers were developed during this period, and as they
became larger and more efficient, they became more and more
affordable
to financial institutions.
Indeed, no institution
to be without one, because they were the means by
which productivity
improvements
came to financial services and
kept unit costs declining.
could afford
In this economic environment,
thrift institutions prospered
as in no other.
In many years their market share of savings
flows increased, and never did it seriously decline; short-term
sources of funds had every appearance of being long-term;
liquidity was not a problem. And with a yield curve that was
sloped positively year in and year out, borrowing short from
passbook savers and lending long to mortgage holders was a sure
blueprint for success, particularly when unit operating costs
were declining through automation,
and when competition was
limited by law and by regulation.
this economic environment, each year and every year
substantial profits. Management was handsomely
compensated and the shareholders
annually rewarded with dividend
increases.
In
thrifts
made
Of
course,
have portrayed.
is
until
and
It is
description
a
1973
--
all recognize
you
the economic
environment
that I
States, circa 1957. Indeed,
the United
of the America that existed from about 1948
a full quarter century of unparalleled
prosperity
What a wonderful
time.
security.
There is only
That environment
one problem.
longer
no
again.
THE CHANGING
today,
The world
different.
and
Someone
exists.
this is
And
defaced my painting.
will never exist
it
ENVIRONMENT
revelation, is radically
the price of oil has
And with every increase
the luster of that house in the suburbs
no
In just the last nine years,
one thousand five hundred percent.
risen
in the price
has dimmed a
Real
dropped
percent
GNP
of
OPEC
little
growth,
oil,
more.
to 3. 2 percent
in 1980.
it
after averaging
4. 2 percent
in the 1970s, and plunged
in the 1960s,
to minus
0. 2
rate of productivity growth decreased from an annual
of 3. 1 percent during the first twenty years after World
War II to 0. 7 percent in the 1973-80 period.
America' s
industrial plant, in short, is no longer the world's envy, but
instead is locked in a worldwide competitive struggle for
survival.
The
average
In the latter part of the last decade, the inflation rate
(as measured by the CPI) almost tripled in four years to over 12
percent in 1980. Federal spending rose from $270 billion in 1974
to 8660 billion in FY81, and now claims 23 percent of GNP
almost one dollar in every four generated by our massive economy.
In fact, if one adds to our Federal on-budget deficit the
off-budget deficit, Federal loan guarantees, and the credit
demands of state and local governments,
almost one-half of all
credit flows in our economy are now preempted by government.
All those babies of the
Demographics have also changed.
baby boom generation don't require a third and fourth bedroom any
longer. They need a job. Unemployment, which used to be
shockingly high when it reached five percent,
to stick in the area of seven to nine percent.
considered
seems
now
Today a larger proportion are opting for an apartment or
townhouse close to their place of work, rather than a house in
the suburbs.
At today's inflated prices, and with no money to
put down, and facing expensive commuting,
heating and cooling
costs, they couldn't afford that house even if they wanted
it.
Further, the parents of the baby boom generation are now
aging. The medical care costs of our society as a whole
therefore are rising at an unprecedented rate, as are the costs
of income transfer payments from the current working generation
to the retired generation, that is, social security.
The external environment
The U. S. no
has also changed.
longer possesses the preeminent military superiority that made
the world of the 1950s and 1960s so relatively secure.
Reclaiming some measure of the military security that was
frittered away in the 1970s is thus another, and expensive,
national
priority.
the technological environment has changed.
computers, of course, have continued to advance, and
this continued reduction in processing costs has been of growing
as wage inflation threatened
importance to financial institutions
to get totally out of hand in the last decade.
Finally,
Mainframe
However, of even greater technological
importance has been
the extraordinarily
rapid development of mini- and
micro-computers
and of telecommunications.
Together these two
developments
have brought a true revolution to the financial
services industry.
It is these that have made possible both
automated tellers that improve the profitability
of traditional
depository institutions -- and also money market mutual funds and
cash management accounts that in combination with inflation and
Regulation Q erode their market share. Who could have handled a
sweep account in 1960? 1970?
Inflation provided the impetus for innovation and
automation.
Mini-computers
and telecommunications
provided
means.
Indeed, the pace of change is accelerating.
the
The result has been the de facto repeal of a whole host of
statutes and regulations that attempted to protect each type of
institution from competition by all the others. Glass-Steagall
severed depository banking from investment banking.
Mini-computers,
telecommunications,
and money market mutual funds
packaged together in cash management accounts -- have
rebridged the gap. McFadden separated banking in California from
banking in New York. Mini-computers,
telecommunications,
and the
American Express card have re-established
the link. Interstate
banking does take place -- just branching and deposit taking are
prohibited
today.
Yes, the world has changed.
National
defense,
reindustrialization
and medical and old age benefits now compete
directly with housing and low mortgage rates as national
priorities. And we must find a way to satisfy each and balance
them
all.
Regardless of what the law tries to establish, virtually all
financial institutions now compete directly with virtually all
others. And those most bound by the old laws that once seemed so
protective are those most mortally threatened by the new
economic, technological, and national priority environments.
THE COMPETITION
today's
of you are only too painfully
financial services environment,
to show
how much
Most
services they offer, but let
change
me
and
reintroduce
has already
of the players in
of the wide range of
a few of them to you
aware
taken place.
competitors -- the money center banks -- offer
corporate financial planning,
municipal bond underwriting,
business loans, credit cards, check cashing, consumer finance,
travel planning nationwide, commercial loans in most states, and
mortgages in multiple locations.
Your
Your
competitor,
Manufacturers
bought a string of sixty-seven
Oregon, and Washington.
Hanover of New York, recently
finance offices in California,
Your
competitor,
Merrill
services,
and money
Lynch,
offers stock
and
bond
underwriting,
mortgages, check-writing, trust and estate
Planning, real estate brokerage, personal property management
relocation
Your
Those are only a few examples of your regulated competitors.
"unregulated" competitors have even greater flexibility.
Your
consumer
Sears, has long offered insurance and
has recently acquired the nation's fifth
firm, decided to establish a money market fund,
competitor,
It
credit.
largest brokerage
and
and
management.
purchased
the nation's
largest real estate brokerage
firm.
It is also the largest savings and loan holding company in the
United States.
Its announced intent is to become "the largest
consumer oriented financial service entity".
And how many of you
don't have at least
a
Sears catalog store in your town?
Your competitor, American Express, offers credit cards,
cable television, securities brokerage, travelers' checks, travel
planning, and cash withdrawal at airports nationwide.
Your
competitor,
General
estate loans, second mortgages,
mortgage
insurance
Electric, is
commercial
leasing.
leveraged
and
in real
real estate financing,
involved
could get into the act. How long
deregulated AT&T sells home
computers in its Phone Center Stores? And how long before the
combination of debit cards, telecommunications,
and that home
computer are put together to offer true banking in the home'?
Even the
do you think
telephone
it
company
will be before
a
A journalist
recently compared the state of financial
services today with the grocery business of the 1920s. Fifty
years ago, butchers sold meat, green grocers sold produce,
drugstores sold medicines, and other shops sold sundries.
The
advent of the supermarket
put many of these single-service
shops
out of business, and substantially
changed the way the remainder
conducted their operation.
A
recent private
study
found
perhaps
an
interesting
parallel. The average consumer now uses over thirty financial
services per year, and goes to more than a dozen financial
institutions to obtain them. We are witnessing today a
reasonably orderly, but extraordinarily
fast-paced, change in
this structure, and, as illustrated by my recitation of your
competitors, the emergence
services industry.
Qf
course, implicit
of supermarkets
in
in the financial
all these "supermarket"
the recognition of the convenience
importance of customer contact.
strategies
of one-stop shopping
and
the
is
the demise of specialized financial
financial services are not cabbages, and the
customer's need for specialized, individual assistance for his
financial affairs will remain, and may even increase. A market
for specialized institutions will continue to exist. However,
financial institutions that wish to specialize should do so by
choice; they should not specialize because they are required to
do so by government
regulation.
Yet, for the last half century, that's exactly what we' ve
done. Government erected seemingly countless barriers to keep
the cabbages from spilling over into the tomato bin, and to keep
California tomatoes from being sold in Florida and vice versa.
In a changed and changing environment,
that just is not possibles
The regulatory
walls that serve to keep competitors out under one
set of circumstances serve only to keep the so-called protected
hemmed
in in another.
am
not predicting
institutions:
REAGANOMICS
So what
about
are
we
in the Reagan Administration
going
all of this? We' re going to do two things.
First, as Ed Meese described at length to you last
to do
summer,
re going to do everything we can to restore more stable
economic conditions in this country -- conditions of low
inflation, low and stable interest rates, economic growth, and
reward for work, saving and investment.
Fortunately, we' re
beginning to make progress in this area -- particularly
in
reducing inflation and interest rates.
we'
more stable economic conditions has been the
objective of the four-part Program for Economic
Recovery that Ed reviewed with you -- the slow and steady growth
of the money supply to reduce inflation, the budget cuts to
reduce the bloated size of the Federal Government, the
incentive-oriented
tax cuts to promote work, saving, and
investment, and the regulatory reform program to eliminate costly
and counterproductive
regulations.
Achieving
overriding
regulatory reform brings me to the second part of what
Administration
are going to do about all of
this. We can't promise that, even after more healthy economic
conditions are restored, someone else won't be elected someday
who will mess it all up again.
And we won't and probably
couldn't promise to halt or even slow down technological change.
What we can do is free all financial
institutions to compete and
adapt to all manner of changes in our economy, technology, or
national priorities.
And
we
in the Reagan
is precisely the purpose of the legislation embodied in
the so-called Garn Bill, S. 1720, and the Administration's
proposal regarding financial services affiliates.
We want to
give thrifts the expanded asset powers that will allow them to
compete with commercial banks.
We want to give banks the
expanded securities powers that will allow them to better compete
with investment banks.
And we want to give to both the
liberalized liability powers that will allow them to compete with
money market mutual
funds.
Further, we support other efforts to remove legal and
regulatory barriers that inhibit the process of adjustment to
economic change.
Thus we support the thrusts of the Garn Bill
that overturn usury laws and strengthen the enforceability of
due-on-sale clauses, for example.
thrust
But
we do not support
protec'ting existing
suggestions
institutions
that have as their
from competition.
main
short, we believe that the safety and soundness of our
system will best be served not by protecting each and
every institution as it existed in 1981, but by freeing all
institutions to compete and adjust in 1982 and beyond.
In
financial
I know that some of you feel that, while the level playing
field is a great idea, getting from here to there isn't going to
be a very fair game, because the players are starting from very
unequal positions.
In particular, you feel that the thrifts are
in such a weakened condition relative to the commercial banks
that they cannot possibly hold their own.
While that certainly may be true in a number of individual
cases, I'm not so sure it will bear up under scrutiny across the
board. For example, a recent study by a major consulting firm
found that the impact of deregulation
on commercial banks is
For that industry as a whole,
likely to be of major proportions.
the value of the Regulation Q interest subsidy was estimated at
over $40 billion in 1980. By contrast, industry earnings in that
Thus, all other things being equal,
year were $20 billion.
complete immediate deregulation of interest rates in that year
swing from $20 billion
would have resulted
in an industry-wide
losses.
billion
in
Clearly, the
per year in profits to $20
some of them
banks, too, will have to make a lot of adjustments,
dramatic.
probably quite
the spectre of multinational
banks running rampant
the countryside gobbling up every thrift and bank in
their paths, and ultimately ending up as the sole survivors of
the deregulatory process just doesn't seem very plausible to me.
Thus
through
Why
that
buy money
way?
To the contrary,
it seems to me that all our financial
institutions face the same threat, and that threat is not
deregulation.
The threat comes from inflation and an economy
that has spiraled downhill over the last decade. Such ostensible
solutions as All-Savers tax give-aways and mortgage bail-outs are
not long-term solutions at all. To the extent that they increase
the Federal deficit and increase the Federal role in credit
allocation they are, in fact, a major part of the problem.
real solution is to continue our battle to restore
to our fiscal and monetary processes, and to free the
industry to compete and adjust.
The only
integrity
financial
C ONC LOS
I ON
Success in implementing
these policies will result in an
economic upturn beginning in the spring, and renewed vigor for
all our 'financial institutions.
Already there are signs that
that development.
may be foretelling
By the last half of the
year, a very strong period of economic growth should be under
way.
success, however, depends very much on how
the Congress are, and on the response of
As I suggested
management
in the private sector to that program.
earlier, we -- the Reagan Administration
fully intend to stay
the course.
Long-term
resolute
we
and
intend to succeed and I believe that you, certainly
as any others, have a major stake in that success.
We
much
Thank
you.
as
OF:
TESTIMONY
NARC
LELAND
ED
ASSISTANT
SECRETARY
INTERNATIONAL
AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE:
SUBCOMMITTEE ON INTERNATIONAL
ECONOMIC
COMMITTEE ON FOREIGN RELATIONS
WEDNESDAY,
I
WELCOME
TO
DISCUSS THE CURRENT
MY
COMMENTS
TO
RESOLVE THOSE
STATES
PUT
REVIEW
CANADA
H
AND
DEPTH
TO
OF
ONE
INVESTMENT
R-668
AND
WE
HOW
OF
IN
MIGHT
THE
IN
OUR
DONE
DATE
TO
BETWEEN
PROCEED
THE
ECONOMIC
IN
CONTEXTS
RELATIONS
~
ATTEMPT
TO
CONTENTION
LARGER
RELATIONS
ECONOMIC
CANADIAN
HAVE
WE
BEFORE THIS SUBCOMMITTEE
THE
UNITED
FUTURES
IT
MAY
WITH
BE USEFUL
CANADA
~
P
UNITED
STATES CONCERNS
POLICIES STEMS
ANOTHER,
FLOWS
S
LI
ISSUES
ECONOMIC
APPEAR
TO
OF
WHAT
ON
DIMENSIONS
THE
S ECONOMIC
ECONOMIES
STATUS
THIS DISCUSSION
A
THE
FOCUS
CANADA,
AND
TO
TO
WILL
10, 1982
MARCH
THIS OPPORTUNITY
POLICY
WHICH
AND
THE
FROM
THE
WITH
GREAT
MAGNITUDE
THESE POLICIES
THE
OF
MAY
CURRENT
IMPORTANCE
THE
TREND
OF
IN
OUR
BILATERAL TRADE
JEOPARDIZE
. ARE
WE
S
TRADE
FOR
NEARLY
U
WITH
TRADE
WITH
OF
CANADA
AT
THE
END
TERMS,
THE
$45 BILLION,
TOTALS
DIRECT
IT IS CLEAR
TRADE
IT IS
ECONOMIC
EFFORTS
TO
OF
TRADE
AND
INVESTMENT
PLAN
~
THE
APPROACH
ON
REPRESENTS
S
70X
IN
TOTALLED
CANADA
S.
U
INVEST
QF
IN
STATES
UNITED
THE
FOREIGN
S TOTAL
CANADA
IS
OF
ECONOMIES
A
ARE
STRONG
ECONOMIES'
SIGNIFICANT
DIFFERENCES
THIS ADMINISTRATION
MARKETS
CORNERSTONE
THE
FOR
OF OUR
EFFORTS ARE DIRECTED
AND
SO
CONTROL
OR
FOR BOTH
CONCERN
CAPITAL
OPEN
TRADE
CURRENT
SUCH
THIS IS
TO
OUR
INVESTMENT&
AND
AT
FREE FLOW
ECONOMIC
AT
ELIMINATING,
REDUCING
INVOLVEMENTS
GOVERNMENT
ECONOMIC
CONTROL
GOVERNMENTS
55K
OR
THE
INTERNATIONAL
BARRIERS
ISSUES SPECIFICALLY
CANADIAN
INVESTMENT
IMPLICATIONS
THAT
MAINTAINING
OUR
TRUDEAU
TO
U
INVESTMENT
BETWEEN
MAJOR
APPROACHES
COMMITTED
GOVERNMENT
THE
EITHER SIDE TO RESTRICT
ON
HAVE
IS
CREATING,
TIES
THE
OUR
NOT
S
U
$10 BILLION,
IN
RECOVERY
WITH
DEPENDENT
MORE
TRADE.
DIRECT
THIS REASON
FOR
EVEN
ACCOUNTING
TRADE
FOREIGN
ST
REPRESENTS 20X OF TOTAL
WHICH
THAT
INVESTMENT
AND
$77 BILLION,
INVESTMENTS
GOVERNMENTAL
THAT
TRADE
1980,
S PRIVATE
CANADA
THUS,
IS
U
1980,
IN
ABROAD'
MENTS
NOW
S
U
TOTAL
CANADA
S FOREIGN
OF
OF
PARTNER
TRADING
EXCEEDED
CANADA
FIFTH
ONE
RELATIVE
IN
S LARGEST
OTHER
EACH
OF
ISSUES
ADVOCATES
IN
GENERAL,
NATIONALISM,
THE
A
ECONOMY~
WHICH
IS
THE
MORE
AND
INTERVENTIONIST
TRADE
AND
TRANSLATES
CENTRAL
INVESTMENT
INTO
THEME
OF
INCREASED
THE
CURRENT
WHILE
OWNERSHIP
TO
IN
MAKE
WE
IS
USING
MENT
SEGMENTS
DQ
IN
WORLD
MENT
A
N'A
GN
TMENT
CANADA
THE
HAVE
EVEN
THAT
WAS
IN
TO
PROLIFERATION
OF
LIBERALIZATION
A
FOREIGN
OF CONCERN
POLICY,
Y.
THE
ESTABLISHED
DIRECT
APPLY
THUS
ACTIVITIES
INVOLVE
THE
UNRELATED
TRANSFER
SERIOUS RESERVATIONS
OF
QF
WE
UNITED
THE
TQ
BEEN
HAVE
THE
ANADIAN
FOREIGN
1973
SCREEN
IN
OR
ESTABLSH
PARENT
OWNERSHIP
ON
FIRA
CANADA
CANADIANS
INVEST
ACQUIRE
BUSINESSES,
NEW
EXISTING BUSINESSES
TQ
OF
TO
NQN
ONE
SIGNIFICANT
ABOUT
(
IN
BETWEEN
ITS DECISION
INVESTMENT
WHICH
INVESTMENT
BEFORE
EXTEND TQ MERGERS
F IRA BASES
SUBSIDIARY'
IS
NEW
AREAS
BUSINESS ENTERPRISES,
(. ANADIAN
REQUIREMENTS
GEN
TYPES OF FOREIGN
REQUIREMENTS
OF
ARE
THE CANADIANS'
V
(F IRA )
SCREENING
UNDERTAKE
SPECIFIC
ADDRESS WITH
TQ
ALL
OR
THE
FLOWS
INVESTMENT
CANADIAN
VIRTUALLY
OF
BY GOVERNMENTS
EFFORTS TQ ACHIEVE
OUR
OF
NUMBER
REVIEW AGENCY
CONTROL
THESE MEASURES
DISCONCERTING
MORE
TREND
GENERAL
A
INVESTMENT
UNDERCUTS
STATES REGARDING
FORE
OF
GOVERN
CANADIAN
THE
WHILE
EVEN
CANADIAN
DECISION
S
CANADA
OF MEASURES
THEY ARE
INCREASE
ECONOMY'
THERE ARE
ATTEMPTING
AND
NUMBER
IS
THAT
ECONOMY
A
PRINCIPLE,
TRADE
S DESIRE TO
CANADA
ITS OBJECTIVES
INDICATIVE
THESE MEASURES
THE
OBJECT TO
IN
THEY ARE
INTERVENE
ITS
OF
TO ACHIEVE
OBJECTIONABLE
THAT
OBJECT TQ
NQT
DO
WE
OF
PRINCIPLE
BENEFIT
IN
MANNER
WHICH
OUTSIDE
COMPANIES
A
TQ
F IRA
(. ANADIAN
CRITERION:
(, ANADA.
FIRA
WE
IS BEING
ADMINISTERED, '
FIRA EXACTS LEGALLY ENFORCEABLE
INVESTING
IN
CANADA
WHICH
MAY
DISTORT
COMMITMENTS
TRADE
AND
FROM
INVESTMENT
FIRMS
FLOWS
~
THESE
A
INCLUDE
MAY
CERTAIN
CERTAIN
SHARE
INVESTMENTS
NEW
TORS& AND
BY PROHIBITING
THE
FIRMS
F IRA ACTION
BLOCK THE
DIAN
A
SUBSIDIARY
FROM
A
IS
DESIGNED
PROVISIONS
UNITED
OF
PROMOTE
TO
THAT
IMPLEMENTING
BY
ASSETS TO
FIRM TO ANOTHER
ENERGY
NATIONAL
INCREASED
OF
LEAD
COULD
INVES
(. ANADIAN
CANA
A
THE
TO
THIS
SPECIFIC
LEGISLATION
WHICH
S
OF CANADA
CONTAINS
PROGRAM
INTERNATIONAL
THESE PROVISIONS
HAVE
(NEP),
PROGRAM
EXPROPRIATORY'
AND/OR
ACCEPTED
TO THE
CONCERN
OWNERSHIP
CANADIAN
IMPLEMENTING
TREATMENT
WE
NON
OF OWNERSHIP
ALSO OF SERIOUS
FROM
~
A
RESTRICT FOREIGN
CAN
EXISTING FOREIGN
OR
NEW
TRANSFER
PRE DISCRIMINATORY,
STATES FIRMS
EXPORT
TO
AND
DEPRESSED PRICES'
AT
LEGISLATION
NATIONAL
AS
FOREIGN
THE CANADIAN
SIGNIFICANTLY
DEPART
SUCH
IS
SECTOR
ENERGY
ONE
PURCHASE
TO
~
SALE OF CANADIAN
P
A
STATES
UNITED
TO
ASSETS
SALE OF FOREIGN
PRODUCTION
ITS REVIEW PROCESS F 1RA
OF
BY BLOCKING
FOR
GOODS
AN
THINGS,
OTHER
AMONG
PRODUCTION
OF CANADIAN
VIRTUE
HY
ENTRY'
(ANADI
OF
AMOUNT
i
COMMITMENTS
WHICH
AND
PRINCIPLES'
ECONOMIC
WILL ADVERSELY AFFECT
PROBLEMS
WITH
THE
TWO
PIECES
~
-48
OUR
PROBLEMS WITH
INADEQUATE
IN
BILL
COMPENSATION
OIL EXPLORATION
LEASES ARROGATED
THE
REQUIREMENT
CANADIAN
LICENSE
OWNED
ON
PROVISIONS
48,
C
WHICH
FOR
PERMITS
LICENSES (AND
RETROACTIVELY
TO THE
FIRMS
CONSORTIA
THAT
AND
FEDERAL
DESIGNED
OR
CONTROLLED
LANDS;
TO
ENACTED,
INCLUDE:
25 PERCENT INTEREST
THE
AND
RECENTLY
WAS
TO
SOME)
GOVERNMENT;
OBTAIN
BE
A
50
PERCENT
PRODUCTION
AND
ENSURE
THAT
(. ANADIAN
SUPPLIERS
CONSIDERED
ARE
ON
SIONS WILL BE IMPLEMENTED
INDUSTRIAL
WHY
CANADIAN
HOW
THE
GOODS
FIRM
WEREN
INVOLVED
PLANS
THE
ACT
(ESA),
28,
AND
IS EXPECTED
ESA CONTAINS
INCENTIVES
IN
THE
CANADA
TO
TO THE
BE ENACTED
(PIP)
ELIGIBLE
ARE
25K GIVEN
AND
DEPLETION
ALLOWANCES
TO
CANADIAN
PERMIT CANADIAN
FOR
IN
LI
S
THE
AND
ENERGY
SECTOR.
MAY
PROMOTE
INVESTOR
THEY
CONFIDENCE
IN
MAY
PETROLEUM
EXCESS OF
IN
CANADIAN
PIP WILL REPLACE
ONEROUS
LEAD
THAT
FOREIGN
AGAINST
THE
~
THEIR WILL
IN
APPLICATION
CERTAINLY
COMPANIES
OF
IN
NEASURES
~
LOSSES
CANADIAN
COMPANIES
ON
AND
SHAREHOLDERS
SUBSTANTIAL
TO
SECURITIES FIRMS'
FLOWS
PROVISIONS
THESE PROVISIONS
ACT
SHAREHOLDERS
( ANADA
THE
MEET CERTAIN
THE
SPILLOVER EFFECTS
CAPITAL
THE
MONTH-
FIRMS OPERATING
INCENTIVES
THESE CORPORATIONS
FOREIGN
INTERNATIONAL
ENERGY
OF OTHER
IT ALSO APPEARS
HAVE
A
FEBRUARY
ON
INCLUDING
FORCE MINORITY
MINORITY' FOREIGN
SECTORS, PARTICULARLY
THESE DISTORT
IN
TO
WITHIN
SECURITY
FIRMS'
ALL
THESE PROVISIONS
OTHER
THESE PROVISIONS
TO
NUMBER
A
IF
CRITERIA
AVAILABLE
CORPORATIONS
OF
PIP,
ONLY
CONTROL
SELL THEIR HOLDINGS
IMPLEMENTATION
AND
CANADIAN
THE ENERGY
PARLIAMENT
MEASURES,
BUSINESS CORPORATIONS
THE CANADA
PROJECT
FUTURES
LAW
RECEIVE FEDERAL
THE ESA ALSO CONTAINS
TO
INTO
THE
uNDER
COMPANIES
TO ALL
OWNERSHIP
AMENDING
CANADIAN
SEVERAL DISCRIMINATORY
PROGRAM
A
THAT
LEGISLATION,
IMPLEMENTING
OF
INTRODUCED
WAS
ENSURE
THE
IN
FOR
)
PIECE
OTHER
TO
NEGAPROJECT
ON
WILL DETERMINE
WHICH
PURCHASED
T
SUPPLIERS ARE CONSIDERED
(
THESE PROVI
BY THE COMMITTEE
BENEFITS,
REGIONAL
AND
BASIS
COMPETITIVE
A
OTHER
SUCH
AS
WILL NOT
0. S-
THE
POLICIES'
WE
AND/OR
STATES
ACTIONS
AFFECT 0~S
RECOVERY
ECONOMIC
EFFECTIVE IN INDUCING
0NITED STATES
THE
POLICIES
IN
HAS
BILATERALLY'
PURSUED
ITS
INTERESTS,
IN
SYSTEMS
INTERESTS
OUR
0NITED
THE
IN
THE
AND
PROBABLY WOULD
AND
A
NOT
BE
POLICIES'
CONCERNS
WITH
CANADIAN
FORA;
OF
NUMBER
A
INVESTMENT
CANADIAN
DIFFERENT
OF
NUMBER
A
IN
IN
NATIONAL
ECONOMIC
NATIONAL
PROGRAM,
CHANGES
0-S
TO
INTERNATIONAL
THE
RESTRICT FOREIGN
TO
THESE POLICIES
TO
BE DETRIMENTAL
WOULD
ADVERSELY
WOULD
DOMESTIC
WHICH
RESPOND
CANADIAN
WITH
EXTREMELY CONCERNED
TO
WANT
JEOPARDIZE
WOULD
VIEWS ANY
NOT
DO
HOWEVER,
WAYS
IS
6OVERNMENT
LEVEL CONSULTATIONS
HIGH
HAVE
OCCURRED'
NULT ILATERALLYp
AT
RA
ON
A
WITH
CONSULTATIONS
BASIS,
THE
THESE CONSULTATIONS
NOT
SUFFICIENT'
THE
NEP
OF
THE
TRADE
AND
FIRA
THE
DOMESTIC
UNDER
CONCERNS
LAW,
ACT
60VERNMENT
ARE
WE
~
0. S
THEIR CONCERNS
OF
PRODUCED
HAVE
WE
ADMINISTRATION
THE
IN
THE
OECD
CANADA
SOME
HAS
REGARDING
CHANGES
EXTENSIVE
HELD
ITS POLICIES
BUT THEY
ACTIONS,
ARE CONSIDERING
INCLUDING
A
POSSIBLE ACTION
~
CLEARLY
ARE
PRESSING FOR FURTHER MODIFICATIONS
IN
THEREFORE,
UNDER
SECTION
301
~
GOVERNMENT
REGARDING
0
T
V
7HE
OUR
V
BILATERAL
AND
RAISED
INITIATIVES'
WILL BRIEFLY REVIEW THESE
t
A
HAVE
THE GATT.
AND
B
WE
p
AS
WELL
CANADA
AS
D
OTHER
S TRADE
AND
COUNTRIES,
INVESTMENT
HAVE
EXPRESSED
POLICIES
BOTH
THE GATT
THE
AND
OECD
ARTICLE XXII CONSULTATIONS
REQUIREMENTS
ASSOCIATED
XXIII,
ARTICLE
UNDER
SPECIFIC
THE
GATT
OUT
IN
CANADIAN
TRADE
DISCRIMINATORY
XXII CONSULTATIONS
HAVE
ON
TUTED
WHICH
MANNERS
THE
NEP
INITIATED
RELATED
CASE
A
ITS OBLIGATIONS
WHETHER
UNDER
ARE CARRIED
NEP
INITIATING
WILL CONSIDER
WE
PERFORMANCE
CONSIDER
WOULD
OF THE
HELD
AND
PREPARING
ARE
PANEL
IF CERTAIN ASPECTS
EARLIER,
BY THE CANADIAN
WE
GATT
A
ARTICLE
~
RAISED THESE ISSUES
ALSO
AS MENTIONED
OECD
FIRA-
THE
PRACTICES VIOLATE
ADDITION,
IN
A
WE
UNDER
WE
RESPECT TO TRADE
WITH
WITH
GATT,
THE
IN
~
BELIEVE
WE
THAT
OF
INST
I
TREND
GENERAL
A
THE
IN
THESE MEASURES
INDICATIVE
ARE
GOVERNMENT
SEVERAL OCCASIONS
ON
USERS
INTERVENE, IN TRADE
BY GOVERNMENTS
TO
DISCRIMINATORY
REQUIREMENTS'
PRACTICES&
AND
THEREFORE,
WE
THE
OECD,
TRADE
AND
ULTIMATELY
COMMITTEE
PLEASED WITH
INITIATE
TO
ADDITIONAL
REQUIREMENTS'
INVESTMENT
DISCIPLINE
SOME
INCENTIVES
WORK
THE
ON
IMPOSED
EXAMINATION
STUDY
A
THERE
RECENT
BY APPLYING
NEEDS
TO
BE
OF
THESE
BY THE
IN
PERFORMANCE
THE
AND
ISSUES
BY THE OECD
RELATED
THIS SUBJECT
WILL ALSO BE DONE
THEIR
ON
AGREEMENT
TRADE
ON
FLOWS
EFFECT OF THESE TYPES OF
OF THE
PRESSED FOR FURTHER
WERE
OPINIONS
OUR
CONSIDERATION
INTERNATIONAL
MORE
IN
INVESTMENT
AND
ISSUE
OF
INVESTMENT
OECD
COMMITTEES
IN
ADDITION,
SEPTEMBER
OF
1981
THE
GATT
TRADE-RELATED
THE
MEASURES
COMPARABLE
NEGOTIATIONS'
THAT
TO
THE
THE
GATT
PERFORMANCE
DEVELOPMENT
WITH
PROPOSED
GOVERNMENT
MEETINGS
INVESTMENT
STARTING
ROUND
lJ-S.
NTB
OF
AN
THE
uNDERTAKE
REQUIREMENTS
EXHAUSTIVE
INVENTORY
AT
MARCH
A
DEVELOPED
SYSTEMATIC
AND
LISTING
FOR
AND
STUDY
INCENTIVESJ
OF THESE
THE
TOKYO
THERE ARE
COMI NG
AT
MONTHS
DISCUSSION
INCLUDE
JUNE,
AND
WH I
PRACTICES
BUT
IT IS
A
RELATIONS
GATT
ADOPTION
THI S OBJECT I VE
INTEND
DEVELOPED
WORK
DISCRIMINATORY
AND
TQ
REVEW
DEAL
WOULD
WOULD
PROVIDE
NEGOTIATION
OF
THE
p
WE
ARE
SUCH
ULTIMATE
OBJECTIVE
THIS OBJECTIVE
BASIS
TO
WHICH
FOR
MULTILATERAL
SUPPORT
HAVE
AND
ORDER
IN
TQ
AT
THESE MEETINGS
TO
INITIATE
INCLUDES
OF
HOW
INVESTMENT
PROCEEDING
FOR
A
OUR
RELATED
SUMMIT
INITIATIVE
~
INCLUDED
6ATT MIGHT
POLICIES
WITH
THE
RQADN
ON
TO
~
AT
THE
REVIEW QF
MAJOR
POLICIES
THE
RULES OF THE
ECONOMIC
MINISTERS AGREE
THE
INVESTMENT
ANALYSIS
RELATED
BEGIN TO DEVELOP
TO
RULES OF THE ROAD
COUNTRY
DISTORTfNG
AN
INTERNATIONAL
OF
IT IS TIME
THAT
RULES HAVE
~
HOPE
PROGRAM
BE
TRADE
WITH
ON
AREA
USE THE OECD t1 IN I STER I AL AND
TO
MINI STER IAL
OF
OUR
~
AGREEMENT
A
THIS
IN
THE
POLICIES
S
EMPLOYS
WHICH
A
PRACTICES
AND
t. ANADA
NG
~
SUMMIT
VI EWr
OUR
MULTILATERAL
EVERY OTHER
BASIS EFFECTIVE
BEGIN TO GENERATE
THE
POLICIES
COUNTRY
AND
BELIEVE
HE
THESE PRACTICES
TOWARDS
WE
THE ONLY
VI RTUALLY
IN
WILL BE TQ REACH
WORK
IN
THIS ISSUE.
INSTITUTIONS
MULTILATERAL
CONTROL
NOT
THE ECONOMIC
NAY,
IN
NOVEMBER
IN
PRACTICES
DISCRIMINATORY
AND
OPEN I
IN
LEAD
THE
TO TAKE
THE
IN
~
BEEN DEVELOPED
ON
PLANS
INVESTMENT
ESCALATE
TO
INTERNATIONAL
ECONOMIC
S~
POLICY
EGREGIOUS
IT ESSENTIAL
EXEMPLARY'
~
MINISTERIAL
THE GATT
OF
lJ
OECD NINI STERIAL
THE
PROLIFERATION
MAKE
THE
CH
MEETINGS
LEVEL MULTILATERAL
HIGH
OF
NUMBER
INVESTMENT
OF
THESE
A
THIS
BE STRENGTHENED
WORK
DEVELOPMENT
FOR
IN
PROGRAM
AND
INVESTMENT
~
ARE AT
THE
60VERNMENT
FOREIGN
TIME PUZZLING
SAME
OF
ALSO QUESTIONED
FOREIGN
POINTED
THE
OFF
AN
THE
60VERNMENT
ARE
IN
OF CANADA,
DISCRIMINATORY
AT
THE
HIGHEST
TO
THE
6ATT
PERFORMANCE
INVESTMENT
THAT
0. S
WELCOMES
CANADA
INTERESTS THEY ARE, AS
HAS
WE
( ANADIAN
TO THE
VERY HARMFUL
HAVE
ECONOMY'
DECIDED THAT THESE POLICIES
IS SERIOUSLY DISTURBED
IN
ADDITION,
REQUIREMENTS
PRACTICES
BILATERALLYJ
RESOLVE OUR
POLICIES'
WE
HAVE
LEVELS IN BILATERAL MEETINGS.
PROBLEMS VIGOROUSLY
TO
NDI CATE
HOWEVER,
INVESTMENT
BE UNDERTAKEN
CANADA
I
HAVE
PUBLIC
SAME
THE
AT
ECONOMY
AN
THEIR BEST INTERESTS'
THIS ADMINISTRATION
WORK
HARM
POTENTIALLY
ALSO
S METHODS
ALS
t. ANADI
OF THE
ATTRACT
TO
~
THESE POLICIES
OUT,
I CI
ITS DESIRE
ABOUT
ELEMENTS
GOVERNMENT
BY (-ANADI
INVESTMENT
WHILE
CERTAIN
~
BUT
US CONCERN,
POLICIES BEING ENACTED BY THE
THE
~
RAISE QUESTIONS
CANADA
INVESTMENT
STATEMENTS
POLICIES CLEARLY CAUSE
INVESTMENT
CANADIAN
IN
IN
IN
AND
THE
THE
AND
HAVE
WE
WE
OTHER
OECO
GATT
NE
RAISED
NE
FURTHER
TAKEN' CANADA
WORK
TRADE
WILL PROPOSE THAT
WILL CONTINUE
WILL CONTINUE
FORAi
TO
PURSUE
AS WELL&
S
CONCERNS
OUR
HAVE
DISCRIMINATORY
AND
MULTILATERAL
DIFFERENCES
INITIATED
BY CANADA
ON
AND
SIMILAR
TO WORK
WITH
THESE
IN
AN
EFFORT
~epartNent of the Treasiiry ~ Washington,
FOR RELEASE AT
O.C. ~ Telephone S66-204f
4:00 P. M.
TREASURY TO AUCTION
TOTALING
March
2-YEAR
$9, 000
AND
10, 1982
4-YEAR NOTES
MILLION
The Department of the Treasury will auction $5, 250
million of 2-year notes and $3, 750 million of 4-year notes to
refund $6, 037 million of notes maturing March 31, 1982, and to
raise $2, 963 million new cash. The $6, 037 million of maturing
notes are those held by the public, including $335 million of
maturing 2-year notes and $356 million of maturing 4-year
1-month notes currently held by Federal Reserve Banks as
agents for foreign and international monetary authorities.
In addition
to
holdings,
tFie public
Government
accounts
and Federal Reserve Banks, for their own accounts,
million of the maturing', hotes«that may be refunded
additional a~aunts pg. . the new, notes at the average prices of
accepted competitive tenderS. Additional amounts of the 'new
securities may' also. be issued at the average prices to-:Federal
Reserve Banks as agents for' foreign and international .
monetary authorities, to 'the extent that their aggregatetenders for each of the new notes exceed their aggregate
holdings of each of the maturing notes.
hold $888
by issuing
-
"-'
~
Details about the new securities
highlights of the offerings
offering circulars.
attached
Attachment
o0o
R-669
are given in the
in the official
and
HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 4-YEAR NOTES
TO BE ISSUED MARCH 31, 1982
iount Offered:
public. . . . . . . . . . . . . . . . . . . . . . $5, 250 million
. scription of Security:
. . . . .2-yeares notes
Term and type of security. . .
. . . . .Serj. Q-l'984
Series and CUSIP designation
To the
(CUSIP No. 912827
.March
Naturity date. . . . . . ~. . .
Call date. . . . . . . . . . . . .
rate. . .
yield. . . . . . .
coupon
NZ
2)
31, 1984
.No provision
.To be determined
~
Interest
based on
the average of accepted bids
.To be determined" at auction
Investment
after auction
.To be determinedand March
.
.
Premium or discount. .
31
30
September
.
dates.
Interest payment
000
.
.
ailable
$5,
av
denomination
Minimum
Terms of Sale:
Nethod of sale. . . . . . . . . . . . . . . . . . . . . .Yield Auction
Accrued interest payabl
.None
by investor. . . . . . . . . . . .
bid for
.Noncompetitive
Preferred allotment. . . .
000 or less
~ ~ ~ ~ ~ ~ ~
~
$1,000,
Payment
by
investors.
non-institutional
. . . . . . . . . . . . . . . . . . . . . . . .Full
with
~ ~
~
Deposit guarantee by
designated institutions.
Key
Dates:
Deadline
for receipt of
payment
tender
10, 1982
$3, 750 million
~
~
March
to be submitted
. . . . . . . . . . . .Acceptable
tenders. . . . . .Wednesday, Narch 17,
by 1:30 p. m. , EST
4-year notes
Series G-1986
(CUSIP No. 912827
Narch 31, 1986
No provision
NA
6)
determined based on
the average of accepted bids
at auction
To be determined
after auction
determined
be
To
September 30 and March 31
To be
$1,000
Yield Auction
None
Noncompetitive
$1,000, 000 or
Full payment
with tender
bid for
less
to be submitted
Acceptable
~
1982,
date (final payment
f rom institutions)
March 31, 1982
a) cash or Federal funds. ~. . . . . . . . ..Wednesday,
March
29, 1982
Monday,
.
.
.
.
check.
.
b) readily collectible
Delivery date for coupon securities .Wednesday, April 7, 1982
Wednesday, March 24,
by 1:30 p. m. , EST
1982,
Settlement
due
~
Narch 31, 1982
Monday, March 29, 1982
Wednesday, April 14, 1982
Wednesday,
epartment of the Treasury
FOR RELEASE UPON
~
Washlnoton,
O.C. ~ Telephorle
556.2041
DELIVERY
Expected at 7:30 P. M. ,
Thursday, March 11, 1982
ADDRESS
BY
SECRETARY OF THE TREASURY
.
T REGAN'
BEFORE THE
DONALD
FINANCIAL
NEW
WORLD
DINNER
CITY, NEW, YORK
MARCH 1 1
1 982
YORK
.
It is good . to be back in New York among so many friends.
left the f inancial world and gone to the nation' s Capitol,
can tell you that my new job is really much easier than yours.
Having
I
we have to do in Washington'
is get interest rates down,
recession, pay off a trillion dollar. -debt, and find out
who takes notes. at Al Haig''s staff meetings.
I do have one advantage that Al doesn' t. I know where my
critics are: on Wall Street, on the record, and on television.
It's getting so the two most valued qualifications' for a good
All
end the
analyst
are
an
MBA-.
from Harvard. and makeup
from Elizabeth
Arden.
Nevertheless, there is a very legitimate debate going on in
this country about the economy. Most would say it was sparked by
the recession and ignited by the Administration'e,
fiscal 1983
budget.
Perhaps so, in the short term. But in the long term it
was sparked by the people . of this c'ountry who said in the last
election they had had enough short term economic thinking.
They asked for' a recovery program that would reduce
inflation, reduce interest rates and get us moving toward
sustained economic growth.
The President responded to that
challenge.
And I believe we are on a soundly
constructed course
to realize those objectives.
Tonight I want to discuss one of the elements of the
President's program that is crucial to achieving real
non-inflationary
growth.
It also goes to the heart of our
short-term debate. That issue is money and monetary policy.
I realize that talking to this audience about the basics of
money is a little like talking to the New York Yankees about how
to hit a baseball. But I also know that within the last two
weeks we have seen some heavy hitters from a variety of chief
.
R-670
executive suites express
some
rather harsh views about deficit
interest rates. So let's go back to basics for a momentFirst, 'the basics' is where the truth is. And secondly'
there is a lingering, serious misunderstanding
among many people
about the role of money and monetary policy.
and
Paul Volcker testified last
me give you one example.
It was an open
before the House Banking Committee.
hearing, with written copies of the testimony available to anyone
who wanted them.
The following morning the Washington Post
account of the hearings was headlined (front page) "Fed Plans to
the New York Times
Ease Monetary Policy. " Simultaneously,
headline, based on the same hearing was, "Volcker Says Fed Plans
to Continue Tight Money Stand. " Is it any wonder people are
Let
month
confused
about what
The monetary
is
going on along the Potomac?
policy of this Administration
inflation is fundamentally
-- First,
a situation which cannot persist
basic ideas.
rests
on two
a monetary
without excessive
Second, the rate of monetary expansion is the
result of the actions of the Federal Reserve. Within this
framework, the task of monetary policy is simple and
achieve and maintain a steady moderate rate of
straightforward:
money growth.
phenomenon
money growth.
to emphasize this point -- the correct monetary
is
absolutely necessary for reducing inflation and less
policy
inflation is absolutely necessary for achieving the full
I
want
potential
of the economic recovery program.
The most important requirement
is that the Federal Reserve
not back away from its efforts to reduce the trend of money
Monetary finetuning -- aimed either at driving interest
growth.
rates down or boosting output and employment -- must be avoided.
I hear a growing chorus of recommendations from some
segments of the economic profession that we need an "easier"
monetary policy to stave off the recession.
Those critics would
have us return to the very type of policy which helped greatly to
create the problem of stagflation.
We must not again lose sight
of the fact that money is not a substitute for economic
incentives.
Money is not the football game, it is only the
ticket into the stadium.
What is truly important
in an economy are the real assets:
the real property, the capital and, most important, the human
resources: the creativity, dedication and plain hard work of the
men and women who make the economy go.
Money exists to provide a
consistent measure of the value of their real resources and their
It facilitates trade and ultimately
outputs.
productivity of human resources.
"Money, " as Henrik
Ibsen once wrote,
increases the
"may be
the husk of
kernels "
things, but not the
Past policy failures reflected efforts to substitute money
for real goods. And those failures were based on the logical
fallacy that since money represents goods, more money means more
many
goods.
Despite recent financial
between
despite the
principally
innovations,
the fundamental
And
and economic activity has not changed.
determined
innovations, money growth
is
by the actions of the Federal Reserve Board.
money
still
link
also
central feature of the monetary policy of this
-- I'm sure you have heard this a thousand times
is that we want a slow, steady growth in the money supply.
The
Administration
In an ideal world, the supply of money should expand at
the same rate at which the real economy is expanding'
Money
growth throughout
the entire term of the Carter Administration
was not only too rapid but too erratic, and it brought us high
inflation and interest rates. The key words in this
are moderate and ~stead
Administration
The Administration
agrees with and supports the Federal
Reserve Board's announced target ranges for both 1981 and this
year. Our support for their stated objective is complete and
unequivocal.
If there have been disagreements they are
emphatically not over policy. The disagreements -- to the extent
that there have been any -- have arisen when actual money growth
strayed for several months either significantly above or below
those ranges.
When the markets see an accelerating
money growth pattern,
When
they increase interest rates to cover for future inflation.
the markets see the money supply shoot up and don't know if they
are seeing a pattern or not, they raise interest rates even
That's where the uncertainty
to cover for the unknown.
comes in.
In spite of the recent upward movement, the basic policy is
yielding, and will continue to yield, lower interest rates.
Clearly, many observers do not agree. Now why is there such a
lack of consensus even on the basic direction that interest rates
will head? I think there are two reasons.
First, there is a difference of opinion over the relative
power of market forces.
further
premium
Our critics believe, I think, that the level of interest
rates will be forced up by a forthcoming expansion of the demand
for credit colliding with an alleged restriction of supply by the
Federal Reserve. After all, they reason, we are talking about
the largest deficits in history -- they must have a large effect.
According to this argument, big borrowing by the government
puts upward pressure on interest rates. Economic growth produces
corporate demand for loans for business expansion -- which also
puts upward pressure on interest rates. And if you have big
government deficits and economic expansion -- as we will have
t»s year -- then you will supposedly get a double whammy effect
on credit demand.
If you add to this the popular notion that the
Fed is keeping credit tight, you can see why some believe that
interest rates will go through the roof.
to be saying that it is the law of
demand to
A greater
supply and demand that is controlling.
-borrow money
when its supply is being held in check
-- will supposedlyespecially
result in a higher price for the money. And
the price of money, it is often said, is interest.
All that sounds very compelling.
But it is wrong.
So what is the case for declining interest rates? Our case,
it turns out is based on Adam Smith -- the part in his book where
he says people would rather make money than lose money.
Interest rates consist of three parts: the real rate, the
inflation premium and an uncertainty premium.
Deficits, if they
are very large, tend to put upward pressure on the real rate
which has historically
been around 3-4 percent; this effect,
however, is slight.
Of more consequence
is the inflation
premium.
If a lender thinks the rate of inflation will be lower
in the future, he can reduce his overall rates and still expect
to make a buck. Today, slow, steady money growth and declining
inflation are putting strong downward pressure on the other two
This argument
appears
components.
There is unquestionably
pressure pushing rates both ways.
But the downward pressure is much stronger than the upward
prcssure'
If it rains over there in the East River it will tend to
raise the level of the river. But if the tide is running out,
the level of the water will drop no matter how hard it rains.
It's a question of which force is predominant.
Now
if
the argument
forget theory for
in the abstract leaves you cold,
and look at history.
a moment,
let'
s
In the Fall of 1975, as post-recession real economic growth
gaining speed, interest rates moved up for a few weeks.
However, the Fed maintained
a steady hand on the tiller:
growth
in money compared to growth in output was slower over much of
1976 than in 1975.
was
Fall
And
and
what
happened?
As
into the following
the economy continued to grow that
year, inflation continued to go down.
This was a period,
deficits:
please remember,
billion in Fiscal year '76.
of large Federal
A deficit which,
as a
than the deficit projected for this
year. And yet there was solid economic growth. And as inflation
was declining to 5 percent, interest rates continued their
downward
trend. Not until late 1976 did rates move up. Because
not until late 1976 was money growth increased sharply.
percentage
I
66
of
GNp
is larger
to downplay the significance of the budget
I want to put it in perspective. We see the
projected deficits as a sign os a serious lack of discipline on
the part of government.
Certainly, growth in government spending
represented by the deficit crowds out the private sector. The
underlying problem is the enormous amount of resources which flow
to or through the government.
Restoring the potential of the
economy requires that we attack the deficit problem at its source
the growth of government spending.
do not mean
deficit.
Instead,
Today, the market place has become very astute in analyzing
the actions and intentions of the Fed. It sees very clearly the
cause and effect relationship between money supply, inflation and
-- what you might call the "eternal infernal
interest rates
"
One leads to the other which leads to the other.
triangle.
Now, the market doesn't even bother to wait for the middle step:
visible inflation.
Instead, as soon as weekly reports of high
come
money growth
out, interest rates -- immediately -- move up.
That is exactly what began to happen a few months ago.
not one -- where there has
been sustained high inflation and moderate, stable growth in the
And, the other half of the picture is that there
money supply.
has never been an economy which has -- over any length of time
had high interest rates and low inflation.
There
is
no example
The second
reason
in history
why
--
there is disagreement
direction of interest rates has to do with
of
therefore critical -- misunderstanding
is
not
credit.
someone believes that inflation
and credit, he would also believe
policy would have to
anti-inflationary
money and credit.
If
money
over the future
a fundamental
what money is
--
not.
and
It
is caused by excessive
an effective
that
restrict
the supply
of
many people view our monetary policy as an
Unfortunately,
And, of course, they see a conflict:
that.
attempt to do just
the supply of credit while the
restricting
the Fed is seen as
When
in credit demand.
increase
an
represents
budget deficit
is
obvious
result
the
increases,
demand
and
supply declines
prices rise.
But, you see, the argument ends up wrong because it starts
Unless
The Fed is dealing with the supply of money.
out wrong.
-nor
neither
we
the
which
monetized
is
deficit
the budget
Federal Reserve intends
-- it affects
for credit.
only the demand
is not inflationary.
Let me put it this way: More money does not
credit and less money does not mean less credit.
in credit
Growth
mean
more
The tax cut element of the President's program was designed
specifically to increase savings -- that is, real credit -- and
thereby expand the economy's ability to supply more goods. And
this has already started to happen.
We are projecting
that the increase in total private savings
from last year to this year will be in the neighborhood
of $60
billion and that the savings pool will grow by some $250 billion
by
1984.
It
that Federal borrowing this year,
off-budget financing, will consume 22 percent of total
funds raised in the credit market.
This compares, by the way,
with 1975 when government borrowing constituted 42 percent:
A
year when interest rates were declining.
including
end.
has been projected
In summary, we must view monetary policy, as a means to an
-- is to get
And the end -- the goal of this Administration
real growth
Let
me
up and
inflation
and
interest rates
down.
conclude with a very simple analogy.
Ask yourself
Does eating food make children grow? Think about
this question:
that for just
a moment.
tend to think that the answer is yes. But it does not
that way. As the body develops, it demands food to replace
the expended energy and perpetuate the on-going growth.
Stuffing
a kid with too much food doesn't make him grow faster; it makes
him sick.
Similarly, injecting a lot of money into an economy
We
work
does not make
Economies,
it
grow
faster.
like people,
have a natural
tendency
toward
self-correction.
Money exists to
follow and facilitate that activity; not to make it happen.
The course we have charted requires discipline and courage
on the part of all of us. But, believe me, it is the only course
which will lead to sustained lowering of interest rates.
creative
growth
and
toward
Sound public policy can come from the government.
But real
economic growth can only come from the private sector. And that
of those of you in business.
l eads to the responsibility
Recently
we have heard from the Business Roundtable
and
CEO's
about
the need to raise taxes. They even suggested
other
that we might want to raise individual tax rates and keep the
cuts for business. That's not exactly the kind of big-picture
thinking that will engender much support from the American
people.
Nor does it hold much water with me. Now
business leaders to show strength, not timidity;
not parochial interests.
is the
time for
statesmanship,
economy, the most massive and complex in the
You can' t
one of those million-ton oil tankers.
on a dime, or slam on the brakes if they are off
But the captain on the
Our economy is the same way.
has signalled the turn, the rudder has been moved, the
room is operating under a new set of commands, and I
The American
world, resembles
turn them around
course.
bridge
engine
believe the economy will respond.
I will be the first to admit that when you' re sitting in a
corporate management seat today, the view is bleak. Unemployment
is up. Sales and profits are down. And when managers start to
lose money, they ask what national policies can be changed to
help rewrite their profit and loss sheets. That's a legitimate
question.
But
its
a
little like
schedule.
Yet the minute
shout, "We' re in a slump,
the baseball team that has a 162 game
they lose three in a row, the fans
bench the pitchers and fire the coach. "
That's the short term thinking that has prompted some
professional critics to start shouting, "depression. " That kind
of fire-in-the-theatre
language is just plain irresponsible.
community should not forget the free enterprise
Don't forget that if
which our program is based.
in your economic business,
means
you want less government
putting more of your business in the economy of the country.
The
principles
business
upon
it
It also means helping Congress get on with the job of
passing the President's budget, cutting Federal spending, and
giving the country some assurance that our program will be
enacted.
Flailing at windmill
will short-sighted attempts
business tax incentives.
deficits will not get them
to sacrifice the economic
down.
and
Nor
And neither will reneging
on the personal tax cuts, hoping
that the increased revenue will wipe out the deficit. On the
face of it this seems like common sense. But it won't be used
that way. We' ve got to recall what Columbus told Isabella:
"Common sense tells you that the world is flat. "
That kind of common sense doesn't work in the Washington
environment where Congress tends to keep its spending up to the
level of your taxes. Lest we forget, in 1980 tax revenues
increased by $54 billion.
Did that mean the money was used to
eliminate the deficit. No. Congress found ways, as it will
find ways, to spend that. money. In 1980, instead of a
shrinking deficit, we had one of our largest deficits in history.
always
government
way to end deficits is controlling
not tax
on the one hand„ and increasing revenues
rates, but tax revenues
as a result of expanded economic
activity. And that is precisely the program that this
The
spending
right
--
--
Administration
is
pursuing.
of the deficit is
a transition problem caused by the
should improve as the economy recovers.
Nevertheless, government spending is the root cause. And I would
personally support the idea that, over time, we should require a
balanced budget forcing the Administration
and Congress to reduce
Federal spending and limit the growth in tax revenues.
Nuch
recession,
and
it
That's the course
budget.
we'
re taking today in the President's
It is a budget that accommodates the need for a
defense. It meets our compassionate social
And it restores trust in the integrity
of government.
not quibbling about this or that percentage, this or
line item, is what it is all about.
national
strong
commitments.
That, and
that budget
We are on our way toward
gaining a treasure beyond value:
currency and an economic policy we can trust, not one that,
because of cynicism linked to lack of imagination, seeks once
again to corrupt our system by perverting its economic and
psychological foundation.
no mistake about it, ladies and gentlemen,
we are
for high stakes in this budget and in this economic
policy. The stakes are nothing less than the survival of a free
Nake
playing
economic
system.
Now is the time for strength
and courage in seeing that we
are successful -- and that we move on to the lasting prosperity
our economic system can provide.
Thank
you.
a
!Partment oy the treasury
FOR IMMEDIATE
~ Nashincl
RELEASE
ton, D.C.
CONTACT:
11, 1982
March
~
TelePhone 566-2D4'
George G. Ross
(202) 566-2041
STEVEN R. LAINOFF APPOINTED
ASSOCIATE INTERNATIONAL TAX COUNSEL
of the Treasury today announced the
appointment of Steven R. Lainoff as Associate International
Tax Counsel and Associate Director of the Office of
International Tax Affairs. The appointment was effective as
of March 1, 1982.
The Department
Prior to joining the Treasury
in January
1981,
Mr. Lainoff was with the New York law firm of Coudert
Brothers, and was an Adjunct Assistant Professor of Law at
the New York University School of Law, Graduate Tax Program.
Tax Counsel, Mr. Lainoff
As Associate International
will assist International Tax Counsel Alan Winston Granwell
in the formulation of policy, legislation, and regulations
tax matters, including the taxation of
on international
foreign source income of U. S. taxpayers, the taxation of
foreigners receiving income from U. S. sources, and the
tax evasion.
prevention of international
Office of International Tax Counsel is one of three
under the Assistant Secretary for Tax Policy.
other units are the Office of Tax Legislative Counsel
the Office of Tax Analysis.
The
major units
The
and
native of New York City, Mr. Lainoff received his
B.A. degree from Boston University in 1974; his
D. in 1977
from the University of Arizona School of Law; and his LL. M
in Taxation in 1978 from the New York University School of
A
Law.
R-671.
J.
epattmeni of ice TIeasury o Washington, D.C.
FOR 'RELEASE AT
12:00
NOON
~
Telephone S66-2041
March
12, 1982
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $5, 250 million, of 364-day
Treasury bills to be dated
and to mature
March 25, 1982,
March 24, 1983
(CUSIP No. 912794 CA 0). This issue will
provide about $575
million new cash for the Treasury, as the
maturing 52-week bill was originally issued in the amount of
$4, 684 million.
The
bills will be issued for cash and
bills maturing March 25, 1982.
in exchange
for
In addition to the
maturing 52-week bills, there are $9, 255 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next week.
Federal Reserve Banks as agents for foreign and international
monetary authorities currently hold $1, 961 million, and Federal
Reserve Banks for their own account hold $3, 110 million of the
maturing bills. These amounts represent the combined holdings of
such accounts for the three issues of maturing bills. Tenders from
Federal Reserve Banks for themselves and as agents for foreign and
international monetary authorities will be accepted at the weighted
Additional amounts
average price of accepted competitive tenders.
of the bills may 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 bills held by them. For purposes of
determining such additional amounts, foreign and international
million
monetary authorities are considered to hold $ 502
of the original 52-week issue.
Treasury
bills will
be issued on a discount basis under competinoncompetitive bidding, and at maturity their par amount
This series of bills will be
will be payable without interest.
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
tive
The
and
Tr e as ur
y.
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 Standard time, Thursday,
Form PD 4632-1 should be used to submit
18, 1982.
tenders for bills to be maintained on the book-entry records of
the Department of the Treasury.
March
p-672
.
Each tender must be for a minimum of $10, 000
Tenders over
$10 &000 must be in multiples of $5, 000 . In the case of competitive
tenders
the price offered must be expressed on the basis of 100,
with three decimals, e .g . , 97 .920 . 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
Others
customers and the amount for each customer are furnished
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 as of 12:30 p .m . Eastern
time on the day of 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
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
must
.
determined
No
in the auction
.
deposit need accompany
tenders
from incorporated
banks
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
and
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 March 25, 1982,
funds
in cash or other immediately-available
or in Treasury bills maturing March 25, 1982 '
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.
Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section l232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the. stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
Under
amount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer 's date of purchase to the maturity of
the bill
If the gain on the sale of a bill exceeds the taxpayer 's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
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.
lepartmeni of the Treasury ~ wash}noton, O.C.
~
Telephone 566-204%
STATEMENT OF R. T. McNAMAR
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE COMMITTEE ON AGRICULTURE,
NUTRITION AND FORESTRY
UN1TED STATES SENATE
MARCH
12, 1982
to discuss the
welcome this opportunity
the Polish financial and economic situation
export lending activities
and the Commodity Credit Corporation's
with you and other members of the Committee.
MR.
CHAIRMAN:
relationship
between
I
for the record the
we have already submitted
to the questions you posed in preparation for these
I have attached those questions and answers to this
hearings.
statement.
Therefore, in my prepared statement, I will elaborate
on two of the major points of your concern.
As you know,
answers
I
like to begin
on the reasons why the
by commenting
declare
Poland
to
in default at,
not
has chosen
this
time. There has been considerable confusion and
. misunderstanding
in the press and elsewhere regarding this
would
Administration
decision.
of martial law in Poland on
and other official creditors
decided to take the following initial steps to bring financial
pressure to bear on the military government of Poland:
(1)
Government credits and export guarantees,
except those of a
humanitarian
nature, were terminated; (2) 1982 Polish debt
rescheduling discussions were indefinitely suspended; and (3)
official creditors insisted that Poland meet its 1982 obligations
as they fall due and pay up the arrearages on the 1981
obligations that were not previously rescheduled during 1981.
Subsequent
December
R-673
to the imposition
13, 1981, the United States
U. S. has
also taken
1982 fishing
Poland's
have suspended
We
of additional
a number
waters.
steps:
rights
in U. S.
have halted the renewal of the U. S. Export-Import
Bank's line of credit insurance to Poland.
We
have held
We
the shipment
up
have suspended
in the U. S.
We
of surplus
Polish civil aviation
dairy products.
landing
rights
taking these steps we instituted a process so that money
flowing from poland to the west rather than the West to
Poland as was the case during the last several years.
By
adhering to a policy of insisting on repayment while not
providing any new funds -- the private lenders have also severely
curtailed lending to Poland -- we are creating a situation that
maintains financial pressure on the Polish military regime and
through them on th'e USSR.
is
By
now
Some have
argued
that. a formal
declaration
of default
would
serve to curtail financial credit to Poland. There are no
credits going to Poland at, this time, and some of the other
Soviet bloc countries, which are experiencing serious economic
and financial problems, are finding it increasingly
difficult to
borrow.
Although a formal declaration of default would not affect
Poland's le al obli ation to repay its debts to U. S. lenders, the
Polish government could attempt to avoid paying U..S. lenders.
In
turn, this would make scarce hard currency available to pay for
additional imports which they otherwise could not purchase.
suggested that the United States 'should declare
in default of its obligations and satisfy these
Some have
Poland
obligations
by
attaching
its assets.
the United States could attempt to recover some of the
loaned Poland in this way there are, however, virtually
In fact, the court costs involved in such an
no Polish assets.
effort might even exceed the value of the property attached.
While
funds
it
In short,
we
for an approach that is draining
rather than taking what would essentially
And, by not declaring Poland in default
have opted
resources out of Poland
gesture.
to insist on their meeting their obligations, we
are also indirectly bringing additional financial pressure to
the real instigator of the repressive
bear on the Soviet Union
As a result of not declaring
a default, the
regime in Poland.
be a symbolic
and
continuing
—
Soviets are now pressured to provide additional economic
resources to keep the Polish economy f unctioning at some
minimally acceptable level and to assist the Poles in meeting
their hard currency debt service payments to avoid further damage
to Poland, other bloc countries, and the Soviet Union.
I will
briefly on the CCC export guarantee
offer to U. S. banks that has also been the
subject of much discussion.
When an exporter enters into a guarantee
contract with CCC,
CCC becomes legally obligated
to make payments to the exporter or
its assignee bank in the event the foreign importer's bank. fails
to meet its payment obligations.
This obligation is similar to
that undertaken in other U. S. Government loan guarantee programs
such as the Export-Import Bank's Financial Guarantee Program for
program
and
now comment
on CCC's
exports of manufactured goods. In order for the holder of the
guarantee to collect from CCC, the holder must first ~notif CCC
that a payment has been missed and then file a claim together
with the necessary supporting documentation.
Once the holder of
the guarantee has filed its claim with CCC, CCC must then pay the
The holder then transfers to
holder the amount of the guarantee.
borrower is in no wa
the identical amount.
payments
.
remaining
and
it
relieved
Only now
of an
it
obli ation
must
pay
CCC
continue paying the guarantee
as they fall due.
must.
payments
I would also like to emphasize
-as has been alleged -- that
that these
the CCC is
banks. The banks were certain of being paid.
the credits involved.
In the absence of Polish
mean
is obligated
to honor
its guarantees.
—it
still
owes
for the missed
holder
the
do not
out the
The CCC guaranteed
payments, the CCC
payments
bailing
refer to the notice document as a
Although CCC regulations
"notice of default, " it in fact is simply a notice of nonpayment.
It does not constitute a formal declaration by the holder of the
or by the. U. S. Government
that the foreign bank is in
declaration of default in a loan agreement
involves triggering specific penalty provisions of the
loan agreement, including declaring the entire debt to be
immediately due and payable, and perhaps increasing the rate of
interest charged on the outstanding balance due. A formal
declaration may also entitle the loan holder to seize the
debtor's assets in an attempt to satisfy the debt.
guarantee
default.
typically
A
formal
point to be made is that although the underlying
credit. agreement the exporter has with the foreign bank may
permit the exporter to declare a formal default in the event of
missed payment, CCC does not ~re uire the guarantee holder to
declare a formal default in order to trigger CCC's liability.
simply requires prompt. notice that a payment has been missed
to exercise its obligation to honor its guarantee.
The key
The January
obligations
it
28 offer of CCC to
had made to exporters
(or the assignee
Poland
banks)
repurchase
who
does not
had
guarantee
extended credits
differ substantially
to
from
would happen if the holders filed a notice and claim as
its
provided under CCC regulations.
(CCC would discharge
obligations by purchasing the claim rather than have the banks
file and then paying. ) However, CCC made this offer because of
the concern that some of Poland's other official or unofficial
what
a CCC guarantee
January 28 offer
that, could have
of default based
notice and claim
I will be
of the
members
Attachment
constituted
is intended
a
declaration
to prevent
of default.
the adverse
The
consequences
non-CCC declaration
from an unintended
on a misunderstanding
of the meaning of the
procedures used by the CCC.
resulted
happy to answer any
Committee may have.
questions
which
you
a
or other
Dear Nr. Chairman
a
is in reply to your letter of March 2, 1982, in
raised
a number of questions relating to the
vhich you
Corporation's
(CCC) export lending
Credit
Ccenodity
activities in Poland. The c7uestions you raised and our
responses to then are encloseR.
This
I trust this is
the info~ation
you
renuire.
Sincerely,
(Signed) Narc E. Lelana
Hare
ED
Leland
Assistant Secreta'
International Affairs
The Honorable
Jesse Helns
Chairman
Ccmnittee on
Agriculture,
Nutrition, and Forestry
United States Senate
Washington, D. C. 20515
Enclosure
IttlttATOw
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a
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tt
COOC
Nlettatta
SHAPIRO
CANNER
GALE
AHMERHAN
EIGHER
IFFFEL
tttITIAL/OATC
iD F104)A Q.77) nP4caaOENL9E
0-7@~
COMEaFONQENCE APPRQVAI. AND CLE~PLCE
(l)
Why did the Administration
in defaults
Question:
Poland
choose not to declare
believe that by not declaring Poland in default
to bear on
maximum pressure
we are bringing
Poland and the Soviet Union by promoting a continued flow
of hard currency from Poland to the West. We still retain
the option of declaring Poland in default.
Answer:
at this
We
time
(2)
Question: Were the USDA's Commodity Credit Corporation's (CCC)
regulations on paying guarantees to the banks adhered to in
payment to U. S. banks?
The January 28, 1982 of fer of the CCC to holders of CCC
guarantees covering credits to Poland is clearly within the CCC's
legal authority and is consistent with the laws and regulations
governing the CCC. This conclusion is based on two elements:
(1) the January 28 of fer in no way alters the basic zights and
liabilities of CCC under its obligations but instead offers a possibility of improving CCC's position concerning those obligations,
and (2) CCC has broad statutory authority to enter into contracts
of this type for the settlement of its claims and obligations.
Answer:
The regulations
that set forth the procedures for payment
in connection with CCC's guarantees under the GSM-101 and GSM-102
programs provide that in order for the holder of the guarantee to
collect from CCC, the holder must f irst ~notif CCC that a payment
has been missed and then file a claim, togethez with supporting
documentation.
Although the notice document provided for in CCC's
regulations is termed a notice of default, " CCC's definition of
default for purposes of notification is fundamentally different
Moreover, the
from the concept of default in banking circles'
notice required by CCC's regulations has a different purpose
from a declaration of default in the banking context.
"default" is defined as occurring
The purpose of
holder
of
the
guarantee
to
CCC
that the
the
notify
requiring
foreign bank has failed to make a remittance is to alert CCC to
its imminent liability for that payment and to allow it to take
such actions as it considers appropriate to protect its interests.
of default in the banking
On the other hand, a formal declaration
context commonly involves triggering the penalty pzovisions contained in the agreement with the debtor, including declaring the
entire debt to be due and payable and increasing the rate of
interest charged on the outstanding balance due. A formal
declaration may also trigger efforts to seize the debtor's
assets in an attempt to satisfy the debt. CCC does not require
such a declaration of default by the holder in order to trigger
CCC's liability.
CCC simply requires
prompt notice that a
The notice could have as well been
payment has been missed.
styled a notice of overdue payment" or a "notice of nonpayment".
CCC nevertheless
made its Janauzy 28 offez to guarantee-holders
because it felt that other lenders not familiar with the CCC
terminology might mistakenly believe that the filing of a notice
of default" with the CCC constituted a declaration of default.
when
Under the CCC regulations,
a payment by the borrower
has been missed.
to file a notice
While dispensing wi th the requirement
the January 28 offer otherwise closely approximates
the terms on which the CCC would make payment on a claim.
under the offer provide CCC the
The procedural requirements
as
same protection with respect to its rights and liabilities
of default",
the procedural notice and claim requirements of the regulations.
the terms and conditions under which
Noreover, substantively,
and, in fact, under one
CCC made its offer did not alter
option of the offer there was the potential to improve =- the
financial position of CCC compared to its position under the
original guarantee contract.
—
for the second element set forth above, the Commodity
Credit Corporation Charter act, 15 U. S.C. sections 714 ~et se
(the "CCC Act"), confers broad authority upon the CCC to manage
its fiscal affairs. The CCC, therefore, is not limited to making
payments under its guarantees only according to the terms of its
regulations.
Xt has sufficient statutory authority to amend the
terms of the guarantee contracts without, amending its regulations.
Xn exercising
this authority, CCC is subject to the duty to act in
accordance with customary standards of prudent business management.
Section 4(g) of the CCC Act empowers CCC to "enter into and
carry out such contracts or agreements as are necessary in the
Section 4(j) gives CCC the power to
conduct of business".
"determine the character of and the necessity for its obligations
and expenditures
and the manner in which they shall be incurred,
allowed, and paid". Section 4(k) authorizes CCC 'to make final
and conclusive settlement and adjustment of any claims by or
against the Corporation or the accounts of its fiscal officers".
Finally, section 4(m) provides that CCC "[s]hall have such powers
as may be necessary or appropriate for the exercise of powers
specifically vested in the Corporation, and all such incidental
powers as are customary in corporations generally". (15 U. S.C.
section 714b. )
As
making its January 28 offer, CCC was thus using its
make and amend such contracts as necessary to the
management
of its obligations and its powers to settle
claims arising under those contracts.
CCC was not obligated
Xn
to
judicious
powers
its
to amend its regulations in order to make this offer. Those
regulations prescribe the rules and conditions under which CCC
is willing to issue its guarantees, but once issued, those
guarantees are contracts between the holders and CCC. Like any
other contract, the guarantees are subject to amendment by the
parties to the contract.
(3) Question: What are the ramifications of declaring Poland
possibly other nations in default under the program?
and
The ramifications
of declaring Poland and possibly
other nations in default under the program would depend to a
large extent on the reactions of other governments and private
creditors. Other western governments are not obligated to follow
the United States in this respect. Private banks would be under
no compulsion to declare a default, and they would only have a
clear incentive to do so if they expected the U. S. or other
governments,
as a result of their declarations of default, to
obtain a preferred position in any subsequent legal steps against
Polish assets. Banks probably would not follow suit if they felt
that declaration of default would prejudice their chance of
ultimately being paid. Thus, it is conceivable that a declaration
of default under the CCC program would not basically alter the
status quo.
Answer:
However, a declaration of default could conceivably trigger
the invocation of cross default clauses in private bank loans to
Poland. Syndicated or negotiated loans normally carry default
and "cross-default" clauses in the loan agreement.
These clauses
describe when and how the lenders can declare a borrower to be in
default. The clauses are not uniform and vary from loan agreement
to loan agreement and bank to bank.
"cross default" clause merely states that a default can
on a specific loan if any other loan to the borrower
is in default. The invocation of cross default clauses could
trigger legal action by creditors in an effort to seize Polish
assets, of which there are few in the West. It would also reduce
Poland's ability to earn the hard currency necessary to service
its debts to the West.
A
be declared
(4)
Question: What is the probability o T'olan~ anc other Eastern
arrricultural
bloc nations' a".. ility to pay for 3rrerts of U.
crnods?
r:
".
.
A natinn's
ahilitv to irrort is directly re lated to its
earnincs
export
capabilities and underlying crcRitworthlness.
hi."., ir. turn, depends upon such factors as the econor. .ic performance
of tl e exrorting country, econnnic develop) ents in the potent'ial
iver". tin~ count+~, the availability,
oualitv and price of cor.petina
goods and the existence or absence of inpedirents to trade flows.
Civen Polanc''s extra.-;ely serious financial, econc~ic and Reht,
troller. ".s, it is unlikely that they will be in a position to inport
significant amounts of U. S. agricultural gooP . in the ir.".~ediate
future. Romania's financial difficulties also raise guestions about
it. -F:ilit;- to i. ~-. .rt e"ri. .ltu". .=. 1 e od. '.. c rrent circu~. «-r cr s.
The other Soviet bloc countries have sufficient hard currency
earnings to enable then to purchase U. S. agricultural goods for
cash i. those &cvern~cnts Rcc'i+r to allocate t~ese funds for that
Xf they do so, it will reduce the resources they have
purpose.
availahle for other purposes.
Answer
(5) Question: What is the likelihood the United States vill be
able to obtain repayment from Poland on guarantees paid to
U. S. bank
s?
it
Answer: In the short run,
is highly doubtful that Poland vill
pay these obligations in full, although some payments are being
Over the long run, the likelihood of payment would appear
made.
to be much greater. Poland has such basic resources as an educated
technically skilled population, coal, copper, sulphur and other
rav materials to earn the foreign exchange needed to pay its debts.
As it is in the economic interest of Poland to retain its business
and financial ties with the West, it can be expected to make all
Poland has repeatedly
possible efforts to meet these obligations.
indicated its intention to do so, and we will make every effort
to pressure Poland to make its payments in full.
and
(6) Question: Exactly what are the cases this century where foreign
governments have defaulted to the U. S. Government, U. S. citizens,
and to U. S. corporations'P
Is the U. S. Government owed money today
from any of these cases' Are U. S. citizens or corporations owed
If money is owed from these cases
money from any of these cases.
precisely what are the current amounts dueV
Me are not aware of any country
that has been formally
Answer:
declared in default by the U. S. Government.
Affairs
The Office of the Assistant, Secretary for International
publishes data semi-annually on foreign indebtedness to the United
States Government.
One of these publications
singles out, Amounts
Doe and Unpaid 90 Days or More". This information
has been compiled
since June 30, 1972. In cases of loan agreements with scheduled
repayment dates, the 90 days are calculated from the due dates of
incomplete payments.
For accounts receivable, the reference
, the
point. is that date on which repayment, is customarily expected.
Ve are enclosing, for your information,
a copy of the latest report,
which was published September 30, 1981.
The United States Government.
basis information on amounts due
citizens or U. S. corporations.
does not maintain on a regular
foreign governments to U. S.
by
Departnleni
of the Treasury
FOR IMMEDIATE
~ Washlnyton,
N. C. ~
Telephone 566-2041
March
RELEASE
15, 1982
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders
for $4, 802 million of 13~eek bills
bills,
26-week
both to be issued on
Average
Tenders
Tenders
at the
at the
12.822%
12.948%
12.909%
$ 4, 802 million of
were accepted today.
26~eek bills
maturin
96. 759
96. 727
96. 737
Low
for
and
18, 1982,
13"week bills
June 17, 1982
Discount
Investment
Price
Rate
Rate 1/
OF ACCEPTED
COMPETITIVE BIDS:
RANGE
High
March
maturin
Price
13.44%
13.57%
13.53%
Se tember 16, 1982
Investment
Discount
Rate
Rate 1/
13.99%
93. 478 12.901%
93.435 12.986%
14.09%
93.447 12.962% 2/ 14.06%
price for the 13-week bills were allotted 90%.
price for the 26-week bills were allotted 92%.
low
low
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Boston
New
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas
City
Dallas
San
Francisco
Treasury
TOTALS
Competitive
Noncompetitive
Subtotal,
Public
Federal Reserve
Foreign Official
Institutions
TOTALS
ted : Received
~Ace e t ed
"
590
60,
040
74,
53, 040
$
$
$
3, 697„955 : 9, 341, 170 3, 634, 170
56, 705 :
25, 265
25, 265
48, 280 :
108, 450
88, 450
48i015
45, 000 :
92, 575
49, 075
50, 490
50, 455 :
55, 985
50, 035
284, 745 : 1, 011,505
1, 103, 770
258, 605
38, 410
36, 410 :
26, 510
23, 510
26, 715
16, 715 :
21, 510
13, 510
41, 025
38, 525 :
48, 775
48, 275
31, 775
26, 775 :
21, 295
16, 295
448, 080
215, 980 :
822, 230
227, 230
223, 480
223, 480 ;
314, 465
314, 465
$10, 938, 365 $4, 801, 615 ; $11,963, 775 $4, 801, 925
Received
92, 090
8, 673, 005
108, 180
53, 330
$
~dcce
8, 626, 165 $2, 489, 415
1, 031, 670
1, 031,670
9, 657, 835 $3, 521, 085
1, 147, 030 1, 147, 030
133, 500
$10, 938, 365
133, 500
$4, 801, 615
$
970, 075
$10, 267, 275
1, 050, 000
646, 500
: $11,963, 775
1/ Equivalent coupon-issue yield.
the maximum
2/ The four-week average for calculating
certificates
is
12.
626%.
market
on money
R-674
9, 297, 200
$2, 135, 350
970, 075
$3, 105, 425
1, 050, 000
646, 500
$4, 801, 925
interest rate payable
RELEASE
FOR IMMEDIATE
The Treasury
March
today that the 2-1/2 year
155 1992, averaged
five basis points.
the nearest
on
15, 1982
yield curve rate for the five business
Treasury
ending
announced
MARCH
this rate will
be in
effect
~Q
!L
days
to
rounded
Ceiling rates based
from Tuesday,
March
16,
29, 1982.
Detailed rules as to the use of this rate in
1982 through
Monday,
establishing
the ceiling rates for small saver
cates
were published
March
certifi-
in the Federal Register on July 17,
1981.
Small saver
is available
The phone
ceiling rates
and
related
from the DIDC on a recorded
number
information
telephone
messages
is (202)566-3734.
Approve
y
avanaugh
Francis X.
Acting Director
Office of Market Analysis
Finance
& Agency
HALI
LLPIV
L,
VDC: %0 IU
DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Wa. binet()n. l).C. 20220
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD
GOVERNMENT
Time and
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
IN THE SUNSHINE
MEETING NOTICE
3:30 p. m. ,
Date:
FEDERAL HOME LOAN BANK BOAR
DEPARTMENT OF THE TREASUR
March
22, 1982
Place:
Cash Room, Department of the Treasury
(Use Pennsylvania Avenue Entrance)
Pennsylvania Avenue between 15th Street
and East Executive Avenue
Washington, D. C. , 20220
Status:
Open
l.
to be Considered:
Election of Chairman
2.
Consideration
Matters
limitations
of a plan to deregulate interest rate
deposits.
of short-term deposit instrument proposals'
of the interest rate ceiling for savings
on time
3. Consideration
4. Consideration
deposits'
NOTE:
and Vice Chairman.
will be recorded for the benefit of those
to attend. Cassettes will be available for
listening in the DIDC offices at the Department of the
Treasury, and copies may be purchased for $5. 00 per
cassette by calling (202) 566-5152 or by writing to:
Depository Institutions Deregulation Committee
Department of the Treasury, Room 1054 MT
This meeting
unable
Washington,
For further
D. C. , 20220
information
about the
please call (202) 566-3734.
Steven L. Skancke,
DIDC and
the March 22 meeting,
Executive Secretary of the Committee
lepartmeni of the Treasiiry
Washington,
~
D.C. ~ Telephone S66-204$
For Release U on Deliver
Expected at 10:00 A. M. EST
STATEMENT
THE
HONORABLE
JOHN
OF
E.
CHAPOTON
ASSISTANT SECRETARY FOR TAX POLICY
DEPARTMENT
BEFORE THE SUBCOMMITTEE
HOUSE
OF THE TREASURY
ON SELECT REVENUE
COMMITTEE
I
am
and Members
pleased
AND
16, 1982
MARCH
Mr. Chairman
WAYS
ON
of the Subcommittee:
to have the opportunity
views of the Treasury
MEASURES
MEANS
Department
on
to present the
the following
bills:
612, 2647, 2981, and 4592, relating to gambling
winnings; H. R. 4990, relating to the tax-exempt status of
certain amateur athletic organizations; H. R. 4473, relating
from qualified plans
to rollovers of partial distributions
and tax-sheltered
annuities to individual retirement
accounts; H. R. 3191, relating to the deductibility of
expenses of attending conventions on domestic cruise ships;
H. R. 4444, relating to the exclusion of research expenses
from the capital expenditure
limitation for small issue
industrial development bonds; H. R. 2597, relating to
for tax-exempt veterans
membership
requirements
organizations; H. R. 4577, relating to the effective date for
the restricted property provision of the Economic Recovery
Tax Act of 1981; H. R. 5630, relating to deferred compensation
plans for State judges; and H. R. 1808, relating to transfers
of certain imported beer from customs custody to a domestic
H. R.
brewery.
After setting out a summary and the position of the
with respect to these bills, I will discuss the
proposals in detail:
Treasury
—
~Summa
H. R. 2981,
for withholding
H. R. 612
requirement
limit
-.
and H. R. 4592 would
and H. R. 2647 would
~ a
the instances in which
winnings
i
repeal the
applies to gambling
raise the dollar threshold at
as
it
information
reporting
on
gambling winnings is required and would allow taxpayers to
carry a net wagering loss back 3 years and forward 3 years.
R-675
is strongly opposed to any efforts to repeal,
significantly, the provisions of current law
and information
reporting or gambling
withholding
In addition, Treasury opposes that provision of
winnings.
H. R. 4592 which would allow a 3-year carryback and
carryforward for net gambling losses.
which foster
H. R. 4990 would provide that organizations
Treasury
or limit
imposing
amateur sports competition are
or xnternational
entitled to tax-exempt status without regard to their
Additionally, special
provision of facilities or equipment.
to such
contributions
limitations
on
of
the
deductibility
arear'
national
organizations
are provided.
supports legislation to clarify this
certain issues remain under H. R. 4990. We
would
to assist in fashioning a solution which
would balance the interests of all concerned.
from
H. RE 4473 would allow certain partial distributions
stock bonus, and annuity
qualified pension, profit-sharing,
plans to be "rolled over" to individual retirement accounts
without the payment of current tax. Treasury supports the
concept of H. R. 4473. These changes would promote private
saving for retirement and would simplify one of the most
complex areas of the tax law. Treasury is concerned,
however, that the bill may have a negative impact on revenue
in the short term and we therefore cannot support this bill
at th is time .
Treasury
strongly
However,
be pleased
H. R. 3191 would allow a deduction for business expenses
for attending a convention, seminar, or similar meeting
aboard a domestic cruise ship to the same extent as other
business expenses if all ports of call of the cruise are
within the North America area. Treasury is strongly opposed
to
HER.
3191.
H. R. 4444 would
that
provide
R6D
expenses
which
the
taxpayer elects to deduct under section 174 will not be
treated as capital expenditures for purposes of the $10
million limitation on small issue industrial development
bonds. Treasury believes that it is inappropriate
to make
the change effected by this bill without a complete review of
the basic issues presented
by
section 103.
H. R. 2597 would broaden the membership
requirements
tax-exempt
veterans organizations,
for
to apply the 75
percent veteran membership requirement without regard to
whether such service was in war or peace. Treasury opposes
HER. 2597 '
H. R. 4577 would make retroactive to 1969 section 252 of
the Economic Recovery Tax Act, which permits a taxpayer who
receives stock subject to certain Federal securities or
accounting law restrictions to include the value of the stock
in income when those restrictions terminate.
Treasury
opposes H. R. 4577.
~
H. R. 5630 would exempt certain State judicial retirement
plans from the disqualification
rules of section 457(e)(1).
Treasury supports H. R. 5630.
certain imported beer to be
~
Treasury opposes H. R. 1808.
H. R. 1808 would
~
brewery.
-
permit
612, H. R. 2647, H. R. 2981, and H. R. 4592
Modification, of the
Re eal, or Substantial
uirements for Withholdin
and Information Re ortin
H. R.
Re
xn
t
e Case o
Certain
Gamb
xn
Wxnnxn
s
Current law provides for information reporting and
in the case of the payment of certain gambling
withholding
Three of these bills would repeal the requirement
winnings.
One of
for withholding as it applies to gambling winnings.
limit the
these three biLls, H. R. 4592, would substantially
This
instances in which information reports are required.
bill would also allow taxpayers to carry net wagering losses
The fourth bill, H. R.
back 3 years and forward 3 years.
264'7, although not repealing withholding,
would raise the
dollar threshold at which withholding begins.
Present
Law
Since 1977, withholding, at a 20 percent rate, has been
Net
required in the case of certain gambling winnings.
proceeds from the following categories of gambling winnings
are subject to withholding:
1.
Proceeds of more than $5, 000 from a lottery
conducted by a State agency acting under State law.
2. Proceeds of
wagering
Lottery.
more
pool or
$1, 000 from a sweepstakes,
lottery, other than a State
than
3.
Proceeds of more than $1, 000 from a parimutuel pool
respect to horse or dog racing, or )ai alai, if
the betting odds are at least 300 to
with
l.
4. Proceeds of more than $1, 000 from any other wagering
transactions if the betting odds are at least 300
to l.
Winnings from keno, slot machines, and bingo are exempt from
the current
law
provisions
for withholding
.
In addition to the requirement
for withholding,
information returns (Forms W-2G) generally must be filed when
the winnings from wagering activities exceed $600 and the
payout is based on betting odds of 300 to 1, or higher.
Although the $600 threshold is provided for by . statute, the
300 to 1 odds requirement
is a product of longstanding
administrative practice. In the case of winnings from bingo
or slot machine play, the dollar threshold is set at $1, 200
and, in the case of keno, it is set at $1, 500. In neither of
these cases is there an "odds requirement. " When an
information return is required, the person receiving the
payment must furnish the payor with his name, address, and
taxpayer identification number.
This information, in turn,
must be reported to the Internal Revenue Service.
Under current law, losses from wagering transactions
are
deductible only to the extent of gains from such transactions
in the taxable year. Current law does not permit the
carryover of such losses to a later or earlier taxable year
.
Pro osed Le
islation
are identical bills. Both would
the provisions of current law relating to withholding
on gambling winnings.
They would leave the information
reporting requirements intact. The provisions of H. R. 612
and H. R. 2981 would be effective for payments made after date
of enactment.
H. R. 612 and H. R. 2981
repeal
H. R. 2647 would amend the withholding
provisions of
law by raising the dollar threshold
from $1, 000 to
The betting odds requirement
at 300 to 1 would be
retained. H. R. 2647 would not modify the information
reporting requirements of current law and would be effective
for payments made after date of enactment.
current
q5, 000.
provisions of
it would amend the current
information reporting requirement so that reports would be
required only where the amount of gambling winnings was
$10, 000, or greater. In addition to these changes, H. R. 4592
would allow taxpayers to carry a net wagering loss back 3
years and forward 3 years.
H. R. 4592 would repeal
law. In addition,
current
Treasur
the withholding
Position
Treasury is strongly opposed to any efforts to repeal,
or limit significantly,
the provisions of current law
imposing withholding
and information
reporting on gambling
winnings.
In addition, Treasury opposes that provision of
H. R. 4592 which would allow a 3-year carryback and
carryforward for net gambling losses.
At the outset, it should be noted that the withholding
provisions of current law do not apply to the overwhelming
majority of payoffs from wagering transactions. There is not
only a dollar threshold requirement
(generally $1,000) but
also an odds limitation,
e. , the betting odds generally
must be at least 300 to 1. Thus, the withholding
provisions
are directed at those special types of wagers which represent
unique and occasional windfalls.
These are the cases in
which it is reasonable to expect a taxpayer to have
significant net gambling winnings for the year and, as a
result, a substantial income tax liability. We strongly
believe that it is both necessary and appropriate to retain
the withholding
provisions in those instances.
i.
Secondly, it must be recognized that withholding
is an
important tool available to the Internal Revenue Service to
insure compliance in the reporting of income. Withholding is
an element in improving
compliance in two respects.
First,
it provides an incentive for taxpayers who have substantial
winnings to report those winnings accurately in order to
claim the benefit of the withheld amounts 'on their income tax
returns.
Second, withholding
provides a means of collecting
at least a portion of the tax due from winners who fail to
file income tax returns. An Internal Revenue Service study
of compliance in the reporting of gambling winnings, mandated
by the Tax Reform Act of 1976, concluded that there was a
strong correlation between rates of compliance and the
presence of withholding at the source. Taxpayers subject to
withholding
had consistently
higher rates of compliance than
those subject only to information reporting
.
the viewpoint of tax administration,
provides a far better mechanism to ensure
Withholding
than does mere information reporting.
collects a
on significant gambling winnings automatically
portion of the tax liability attributable to those vinnings.
This helps to reduce the tax agency's audit and collection
workloads.
Withholding contributes to the efforts by the
Internal Revenue" Service to discourage the use of so-called
"10 percenters,
and similar practices to avoid tracing of
significant winnings. Withholding raises the cost to the
bettor of using a "10 percenter" because the bettor cannot
claim a refund for the taxes withheld. Withholding is also
superior to mere information reporting because information
reporting requires both accurate information documents and a
properly " filed income tax return to achieve an acceptable
"match, as well as the resources to follow up where there
are apparent discrepancies.
In the absence of withholding,
neither the payor nor the payee has any real incentive to
verify the accuracy of the statements made on the information
return. Inaccuracies, whether intentional or inadvertent,
frustrate the ability to match the documents, and raise the
overall cost of tracing gambling winnings to the returns.
While information
reporting is an effective tool to increase
compliance, its combination with a system of withholding
is a
significant benefit from the standpoint of tax
Third,
from
withholding
compliance
administration.
Finally, some in the industry have argued that the
imposition of withholding and information reporting creates
an incentive for patrons to wager with illegal bookmakers
rather than with legalized and state-regulated
wagering
establishments . Proponents of this view argue that
withholding
and information
reporting cause the gambling
dollars of these bettors to flow to the criminal elements
that operate the illegal wagering activity.
Furthermore,
they argue that legalized establishments
whose income is a
function of the gross amount wagered are financially
disadvantaged
by this decrease in the amount wagered.
.
ln our view, this argument proves too much
On careful
analysis, one must ask the question why such bettors prefer~
to place their bets with illegal bookmakers.
One natural
conclusion is that some, if not a substantial portion, of
these bettors must be attempting to avoid the reporting and
withholding
requirements
of current lav. It is also logical
to assume that these individuals are failing to report this
income on their returns.
Reduced to its essential points,
this argument asks us to condone implicitly a failure to
report income by making
easier to win at legalized
it
establishments
and not report the winnings.
This also
provides a net economic benefit to the legalized
establishments by allowing them to profit from the winnings
which vill go unreported.
Treasury simply cannot stand by
and acquiesce in a change which will encourage,
rather than
discourage, the failure to report income accurately.
For the reasons set forth above, Treasury strongly
opposes the provisions of these four bills which would
eliminate, or significantly modify, the information reporting
and withholding
requirements
of current law.
H. R. 4990
—Amateur
clarifies
H. R. 4990
amateur sports
S
orts
the tax-exempt
organizations.
S. 1757,
concept but taking a somewhat different
introduced in the Senate. The Treasury
on December
ll,
1981.
anizations
Or
status of certain
bill similar in
a
approach,
testified
has been
on
S.
1757
The Treasury
Department strongly supports clarifying
in this area. While both H. R. 4990 and S. 1757
would provide this clarification,
from a technical standpoint
H. R. 4990 would accomplish the objectives in a more direct
manner, although there are still several provisions in H. R.
4990 which need further consideration and which we will
address. We would be pleased to assist in fashioning a
legislation
solution
interests
to these issues which would effectively
of all concerned.
To put
the issues in perspective,
balance
I believe that
the
some
background may be useful.
Prior to 1976, organizations which
were engaged in the teaching of sports or promoting sports
for youth generally qualified for tax exemption as
educational or charitable organizations under section
501(c)(3) of the Internal Revenue Code and were thereby
eligible recipients
of tax deductible contributions.
organizations which were engaged in promoting,
governing, and regulating amateur sports but not for youth
were generally exempt under section 501(c)(4) or 501(c)(6),
with the result that contributions
to such organizations were
generally not eligible for tax deduction.
However,
of 1976 sought to provide
in this area. Additionally,
Congress considered it appropriate to encourage organizations
which contributed
to developing athletes for competition in
the Olympic games and other national or international
competition.
Accordingly, section 1313 of the Act created,
as a separate category of exempt organization under section
501(c)(3), organizations organized and operated exclusively
to foster national or international amateur sports
The provision was intended not to affect
competition.
adversely the qualification of any organization which would
qualify under the standards of prior law.
The Tax Reform Act
clarification
and
uniformity
-8In the development of this provision there was
substantial concern that organizations which foster amateur
sports could prove to be vehicles through which individuals
paid for private recreational activities with tax-deductible
the Conference Committee added as a
condition to exemption the parenthetical phrase "(but only if
the
activities involve
no part of [the organization's]
"
Although
or
equipment).
provision of athletic facilities
the legislative history of the 1976 Act indicates that the
for
purpose of this limitation was to prevent qualification
organizations which, like social clubs, provide facilities or
equipment to their members, the statute is absolute, stating
Thus, the
that any provision of facilities bars exemption.
effect of the clear provisions of the statute is to prevent
exemption, not only for social clubs, but also for other
dollars.
amateur
Accordingly,
sports organizations.
limitation
The existence of this facilities-equipment
has created serious administrative
problems.
Compelled to
follow the unambiguous language of the statute, the Internal
that
Revenue Service and Treasury have determined
organizations providing facilities cannot be recognized as
exempt, unless the organization could otherwise qualify under
section 501(c)(3). As a complicating factor, the Congress in
1978 enacted the Amateur Sports Act, a purpose of which was
to coordinate and reorganize amateur sports in this country.
The Act requires that the national governing bodies for
Olympic sports be incorporated as separate autonomous
entities. As a result, a number of former components of the
Amateur Athletic Union (AAU) have been spun off and have
applied for exemption under the amateur sports provisions
However, as many of these organizations
provide facilities
and equipment,
they could not qualify under the 1976 Act
amendments.
Further, it was not at all clear that they could
qualify under the standards of prior law. This created the
ironic situation where, while the AAU was an exempt section
501(c)(3) organization when the 1976 amendments were enacted,
the national governing bodies might not qualify for exemption
under present law.
.
Me Service and Treasury have been reluctant to take the
draconian measure of issuing adverse rulings to organizations
providing facilities and equipment.
At the same time,
however, we have been unable to fashion an approach
administratively
which would appropriately
draw the lines
between qualified and nonqualified
organizations.
Only
Congress can provide the solution to this dilemma.
In the
meantime, numerous applications
for exemption are pending at
the IRS and Treasury awaiting a solution.
We therefore
appreciate the introduction of legislation
to solve this problem. As I stated earlier, from a technical
standpoint, H. R. 4990 solves the problem in a more direct
fashion than does S. 1757. The Senate bill makes certain
changes to the exemption section, section 501(c)(3), which
defines a qualified organization.
The goal of these
provisions, of course, is to differentiate organizations
which truly foster national or international
amateur sports
competition from those which are merely for private
This line, however, is a difficult, if not
impossible, one to draw. Further, we do not believe it
necesssary to make the attempt in the exemption provisions.
As we see it, the problem is not one of exemption ~er se but
rather the deductibility of the contributions to the
organization.
We do not anticipate
that these organizations
will have substantial income. However, we are concerned that
individuals will be able to pay for recreational activities
with tax-deductible
contributions.
recreation.
In this connection, I should note that some may argue
that legislative changes are unnecessary in light of the
principle that no charitable contribution deduction is
allowed where the donor receives a benefit by reason of the
contribution.
While this ~uid ~ro ~uo doctrine is an
important and long-standing
principle of law, its reaches are
uncertain and it is not easy to apply. While the ~uid pro
duo doctrine should continue to apply in this, as well as in
aa5er, areas, we believe that certain specific rules, over
and above ~uid pro ~uo, are necessary.
Thus, H. R. 4990 attacks the problem by focusing on the
deduction rather than the exemption sections and by providing
specific disallowance rules. Under that bill, the
parenthetical to section 501(c)(3) would be eliminated, with
the result that any otherwise eligible organization which
fosters national or international amateur sports competition
will be eligible for exemption without regard to its
However,
provision of athletic facilities or equipment.
specific provisions would be added to the income, estate, and
gift tax charitable contribution sections which will preclude
deduction for contributions to these organizations under
the provision
As a general matter,
certain circumstances.
if the
would disallow a deduction to the organization
a
member
of his or
a
is
made
person
(or
contribution
by
by
her family) who uses any athletic facility or equipment
provided by the organization within a period beginning 12
months before and ending 12 months after the day the
contribution
is
made.
-20The changes to the section 501(c) (3) rules would be
retroactive to the effective date of the 1976 Act. The
changes to the contribution rules would apply prospectively
to contributions made after December 31, 1981. Thus,
contributions made to these organizations in prior years
would be allowed without regard to the specific disallowance
rules.
H. R. 4990 provides three exceptions to the disallowance
rule. The first, intended as a de minimis rule, provides
that contributions up to $500 per year will be insulated from
This exception
the specific disallowance provision.
area. We recognize
this
highlights one of the problems in
that there will be cases where a person makes a very small
contribution to an organization and he (or a member of his
In this
family) makes considerable use of the facilities.
the
other
allowed.
At
be
should
case, probably no deduction
substantial
makes
a
donor
the
extreme are cases where
contribution and uses the facilities to a relatively
insignificant extent. In these cases, at least some portion
In
of the contribution should be allowed as a deduction.
between are the vast majority of cases where there is some
contribution and some use of facilities. In these cases, it
is very difficult to determine the amount, if any, of the
contribution which should be allowed. Compounding the
difficulties of measuring,
problem are the administrative
under any of these scenarios, the extent and value of the
use, and the limited audit resources of the Internal Revenue
Service to make this measurement.
While the ~uid pro ~uo
doctrine is available to handle some of the clearer cases
when selected for audit, we believe that a rule is necessary
in other instances.
to facilitate administration
The approach taken by H. R. 4990 is to provide a strict
disallowance rule, barring all deduction when there is use of
the facilities, and then providing the de minimis exception.
we believe there is considerable
merit to tttrs approach.
The
strict disallowance rule will eliminate the requirement that
the Service monitor in every case the extent and value of
use, and the de minimis exception carves out those cases
where the amounts are small and therefore not of substantial
concern. In this connection, however, we think the $500
exception may be too high. Inasmuch as the purpose of the
disallowance rule in the first instance is to police the
financing of private recreation with deductible
contributions, the exception should be limited to relatively
small
amounts.
We
would
recommend
a $200 de minimis
emphasize that if a de minimis
I
is provided (whatever the amount), it sEouuu ~no
Thus, even
any way affect the ~uid pro ~uo principle.
contributions within the de minimis limit would be subject to
disallowance if the link between tEe contribution and benerit
to the contributor could be established.
exception.
exception
Further,
must
-11A second
exception to the specific allowance rule (also
subject to ~uid pro ~uo) applies to contributions to the U. S.
We have
Olympic Committee or to a national governing body.
no objection to this exception since contributions
to these
types of organizations were generally allowed under the law
prior to 1976 without regard to the provision of facilities
or equipment to the contributor or the contributor's
family.
We agree that a similar
rule should now apply.
out-ofThe third exception applies to non-reimbursed,
pocket expenditures made incident to the rendering of
services by a noncompetitor.
We are troubled
by this
provision in that it may be subject to abuse. For example, a
parent wanting to watch his or her child participate in an
out-of-town athletic competition may arrange to render some
nominal service to the sponsoring organization
and thereby
claim a deduction for the travel and lodging expenses
incurred. While this abuse potential is not unique to
amateur sports organizations,
its impact becomes more acute
given
the nature of the organization involved and the
of family members incurring the expenses
likelihood
described
.
We believe,
and we think supporters
of the bill would
agree, that charitable contribution deductions should not be
allowed under these circumstances.
Further, we believe that
under current law such deductions would not be allowed.
Under existing authority,
if an out-of-pocket expenditure is
made primarily
for the personal benefit of the contributor,
it is not a deductible contribution. Similarly, with respect
to expenses which have a dual character (in that they benefit
both the charity and the taxpayer), which are incurred
incident to the rendering of services, the presence of a
substantial direct personal benefit to the taxpayer or
someone other than the charity is fatal to the claim for a
charitable contribution.
In this area also the legislative
history should confirm that the exception is subject to this
rule of existing law.
In this connection, I must add that we do not want to
limit the deductibility of expenses incurred by the bona fide
volunteers of amateur sports organizations.
We understand
that many organizations depend upon these volunteers as their
life blood and we do not want to interfere with that
Our concern is rather with the abusive cases
relationship.
where the service rendered is disproportionate
in relation to
the expenses claimed.
strongly support an effort to reach a legislative
to the problems raised in this area. Accordingly,
would be pleased to assist in fashioning
a measure that is
satisfactory for all concerned.
We
solution
-12-
—Rollover
of Partial Distributions
H. RE 4473 would amend the Internal Revenue Code to allow
from pension, profit-sharing,
many partial distributions
stock bonus, and annuity plans to be "rolled over" to
H. R. 4473
individual
payment
retirement
arrangements
of current tax.
(IRA's) without
the concept of H. R. 4473.
would promote private saving for retirement
of the most complex areas of the tax law.
concerned, however, that this bill may have
short-term revenue impact and we therefore
We
support
this bill at this time.
the
These changes
simplify one
Treasury is
a negative
cannot support
and
distribution from a qualified plan
requirements of a lump sum
distribution is entitled to various forms of special tax
relief. First, part of the distribution may be eligible for
capital gains treatment.
Second, if employer securities
attributable to employer contributions are included in the
distr ibution, any increase in the value of the secur ities
since their acquisition by the plan is not subject to tax
until the securities are sold.
Under
current
law a
that meets the technical
The most recent form' of special tax relief for lump sum
distributions was provided by the Employee Retirement Income
Security Act of 1974 (ERISA) which amended the Code to allow
special 10-year forward income averaging.
Roughly, this
treats the distribution as if it were received ratably over a
10-year period
and
was
the only income earned
in each such
ostensible purpose of such relief was to mitigate
the impact of a progressive tax cn individuals who receive
extraordinary amounts of income in one year and perhaps to
recognize the general applicability of lower marginal rates
af ter retirement.
year.
The
Since the 10-year forward averaging provision seems to
that the taxpayer would have little or no additional
in his post retirement years, it is appropriate that a
taxpayer who elects this special tax relief not be entitled
to additional retirement benefits. Hence, in order to
qualify as a lump sum distribution,
the distribution must
constituteg among other things, a distribution of the total
balance to the credit of the employee in all similar
assume
income
tax-qualified
plans.
-13of the total
requirement of a distribution
to the credit of the employee applies to tax-free
rollovers of distributions from qualified plans. Under the
rollover rules, taxpayers receiving lump sum distributions
from qualified plans can avoid current tax by "rolling over"
the distribution
into an IRA or another tax-qualified plan.
Tax is payable only as distributions
are made from the IRA or
other plan.
None of the special forms of tax treatment
available to
is applicable to an IRA distribution.
lump sum distributions
Rollovers to IRA's therefore enable a recipient to avoid
current tax only if the recipient forgoes favorable forms of
tax treatment and retains the plan distribution until
retirement years.
The same
balance
A distribution
constitute a lump
under current law.
qualified plan that does not
distribution is taxed very differently
Partial distributions are includible in
income in the year in which received.
They cannot be rolled
over to an IRA or to another qualified plan, and they do not
qualify for any of the forms of special tax relief available
for so-called lump sum distributions.
However, a subsequent
distribution from the same plan may qualify as a lump sum
distribution.
That second distribution can then be rolled
be
eligible for special tax relief.
over and may
The current tax treatment of partial distributions
is
harsh when a substantial
partial distribution is received.
It can also act as a tax trap for the unwary. This can occur
if, for example, the employee terminates employment before
full vesting, receives a distribution of the vested balance
to his credit, and is reemployed before the nonvested balance
to this credit is forfeited. In this case, current law
requires that the first distribution be treated as ineligible
Thus, if
for special tax treatment and for IRA rollovers.
the employee has already made an IRA rollover, the employee
will be subject
to tax penalties on his "excess
"
contribution.
from a
sum
will
Expanded rollover treatment for plan distributions
This
eliminate or reduce the problems I have described.
expansion would continue the recent trend of liberalizing the
rollover rules. In 1974, when rollovers were introduced,
only complete rollovers of all proceeds of lump sum
However, we have since
distributions were permitted.
consistent with the policy
rollovers
which
are
realized that
individuals
to
save
for retirement and to have
of encouraging
for
their
available
retirement
period need not be tied
assets
"
distributions.
sum
"lump
to
-14rules have been liberalized to
permit partial rollovers, rollovers of proceeds from the sale
of property, rollovers of section 403(b) annuities and
custodial accounts, rollovers of lump sum distributions
received by a spouse upon the death of a participant,
rollovers of total distributions that did not meet certain
technical lump sum distribution rules, and rollovers of
distributions received due to a plan distribution or a sale
of a subsidiary or assets.
In 1980, Congress first extended tax-free rollover
An employee
treatment to one type of partial distribution.
from a money purchase pension was
who received a distribution
as eligible for rollover
allowed to treat the distribution
to have an interest in a
continued
the
even though
employee
defined benefit pension plan. However, the employee then
lost the benefit of special tax treatment for later
distributions from either plan.
that in light of the substantial retirement
We suggest
plan policies which are served by rollovers, the rollover
H. R. 4473 is a
rules should be still further liberalized.
step in this 'direction, but additional action is needed. For
example, rollover treatment should also be extended to
partial distributions received after a plan termination or
discontinuation
of plan contributions; and to distributions
received due to sale of a corporate subsidiary or assets.
Rollovers of lump sum distributions are permitted in these
circumstances and there is no reason to exclude partial
rollovers. However, as provided under H. R. 4473, an employee
should not be eligible for
who rolls over such a distribution
10-year forward averaging, capital gains treatment, or
exclusion of net unrealized appreciation on employer
securities attributable to employer contributions with
respect to any further distributions from the plan or any
other plan that would be aggregated with it under the lump
sum distribution
rules.
Since 1974, the rollover
We agree that rollover
treatment should not be extended
to payments under a life annuity or payments under a term
certain annuity for a substantial period because of the
abuses which might result.
For example, an employee who
begins to receive an annuity at age 60 could obtain
substantial deferral of tax by rolling over each annuity
payment into an IRA. No distributions
would be required to
be made from the IRA until the participant
reached age 70-1/2
and then the amounts which would be required to be
distributed would be less than the amounts otherwise
includible in the employee's income from the qualified plan.
Since the purpose of allowing for tax-favored retirement
plans is to provide for retirement savings, we believe a
rollover in these annuity situations would be inappropriate
since the ultimate beneficiary of the retirement plan might
be someone other than the employee or the employee's
beneficiary.
-15believe that the expanded rollover rules of H. R. 4473
simplify the law in the area of ro' lovers and w'''
prevent the harsh results that can now occur.
We
would
While we support the concept of H. R. 4473, we are
concerned that it may have a negative impact on revenue in
the short term and we therefore cannot support this bill
until we know what the revenue impact would be. This could
occur because partial distributions would otherwise be taxed
at an individual's marginal tax rate, as would earnings on
the after-tax portion of the distribution.
H. R. 4473 will
exclude partial distributions
that are rolled over from
current taxation and will increase the pool of tax-sheltered
earnings until IRA distributions begin.
H. R.
Attendin
3191
—Deductibilit
Conventions
of Ex enses of
on Domestic Cruise Shi
s
Back round
The restrictions placed on the deductibility
of expenses
relating to foreign conventions were first enacted in 1976.
At that time, 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.
The
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. In short, many
taxpayers were attending foreign conventions that were really
thinly-disguised
vacations and then deducting these personal
vacation expenses as business expenses. Deductions for
attending foreign conventions had thus become a source of tax
abuse.
In response to the problem, Congress adopted rules which
allowed the claiming of deductions for two conventions per
year if the primary purpose for the trips was business and
not pleasure.
These rules did not eradicate tax-subsidized
vacations, however, and were therefore supplemented in 1980
with a "reasonableness"
test.
Under this test, the expenses of attending
a foreign
convention, seminar, or similar meeting are not deductible
unless it is more reasonable to hold the convention outside
the North American area than within
The factors to be
considered in determining reasonableness of the convention
site are: the purpose and activities of the convention; the
the
purpose and activities of the sponsoring organization;
residence of active memb rs of the sponsoring organization;
and the places at which other meetings of the sponsoring
organization have been held.
it.
-16-
if
significant
portion of an
resided in France, it could be
considered more reasonable for the organization to hold a
convention in France than in the United States. Similarly,
if the members of an organization composed of individuals
engaged in a certain type of business regularly conducted a
portion of their business in Germany, it could be considered
to hold a convention in
more reasonable for the organization
Germany than in the United States.
For example,
organization's
a
members
H. R. 3191
the present statute, a convention held on any
cruise ship is not considered as satisfying the
reasonableness test and no deduction is allowed in connection
H. R. 3191 would modify this rule and permit the
therewith.
deduction of attending a convention, seminar, or similar
meeting held on a domestic cruise ship if all ports of call
of such cruise are inside the North American area. A
domestic cruise ship is defined to mean any cruise ship
documented under the laws of the U. S.
Under
,
Treasury
is strongly
opposed
to H. R. 3191.
test adopted in 1980 was intended to
The reasonableness
deal with the primary problem with foreign conventions,
namely, the selection of the foreign site because of vacation
Even
motives without regard to business considerations.
though a convention benefits a taxpayer's business to some
degree, there is no justification for a tax deduction where
the convention is held at a foreign site having nothing to do
In such cases the personal
with the taxpayer's business.
benef it predominates.
this reasoning is sound and applies
to conventions held aboard cruise ships. The
only reason for holding a convention or seminar on a cruise
ship would be for personal enjoyment.
It would be a rare
case where a cruise has any connection with the topic of the
convention or with the organization.
In short, we think
allowing a deduction for expenses of attending a convention
aboard a cruise ship would too closely resemble a
tax-subsidized vacation. It is the type of deduction that
discredits our entire tax system.
We
think
particularly
-17-
--
H. R. 4444
Ca
Small Issue
ital Ex enditures Limitation
Industrial Develo ment Bonds
on
Under present law, interest on IDBs is generally not
exempt from Federal income tax since the bond proceeds are
used in a private trade or business and payment of the bonds
is derived from the business. Exceptions are provided,
however, for certain quasi-public
"exempt facilities" (such
as airports) and for certain "small issues. " The small issue
exception applies to single issues of $1 million or less, if
the bond proceeds are used for land or depreciable property.
election of the issuer, the $1 million cap may be
to $10 million, provided that all outstanding
exempt small issues plus other capital expenditures
(not
financed out of exempt small issues) within a 6-year period
with respect to the business project are aggregated for
purposes of the limitation.
This $10 million cap on the
aggregate of prior issues and capital expenditures has the
effect of denying tax-exemption to IDBs used in connection
with large and expensive projects.
At the
increased
Under
Treasury
regulations,
the amount of capital
the usual tax rules for
from currently deductible
expenditures is
distinguishing
capital charges
expenses.
Thus, the research and development cost of
developing a new formula, product or other capital asset with
respect to the IDB project are capital in nature and now
count against the $10 million cap.
determined
under
It would provide
H. R. 4444 would alter this result.
the project user eLects to deduct .currently
R&D which
under section 174 would not be counted as capital for IDB
Section 174, of course, was originally enacted not
purposes.
of R&D from capital to
to change the general characterization
that
noncapital, but only to allow otherwise capital R&D expenses
to be treated in effectively the same manner as ordinary
deductible expenses.
generally is capital in nature, we
believe that the proposal to treat it as noncapital for IDB
purposes has some merit. The interaction of the R&D rules
could, in some
and the section 103 small issue requirements
bias
an
inequitable
of
creating
effect
the
cases, have
of
make
use
the small
to
firms
desiring
against R&D-intensive
issue exemption.
Even though
R&D
-18this background, we must balance the perceived
to encourage R&D activities against tax policy
considerations which militate against creating an exception
to the general Code treatment of R&D as capital in nature.
that we are not writing on a clean
We must also recognize
slate. Substantial tax incentives for R&D were enacted as
part of the Economic Recovery Tax Act of 1981. Finally, we
of piecemeal change to the
must consider the appropriateness
-an area fraught with numerous and
tax rules governing IDBs
A comprehensive
very basic unresolved questions.
reexamination of this area by Congress is clearly in order.
We are therefore
of the view that it is inappropriate to make
the change effected by this bill in the absence of a complete
review of the basic issues presented by section 103.
In addition, several technical points should be
stressed. First, it is not clear whether the bill applies
only to items such as labor and supplies, or whether it also
H. R.
applies to capital R&D equipment and leased quipment.
4717, passed by the Senate in December of last year, applies
only to labor and supplies and we think it is a sound rule .
Given
need
Second, HER. 4717 has, properly in our view, delimited the
scope of permissible R&D expenditures in one other way: The
exclusionary rule is not extended to contract research
expenses. Particularly in light of the substantial tax
credit for such expenditures and current budgetary
constraints,
we
feel that this limitation
is appropriate.
Third, we think any new rule should only apply to R&D
expenditures made after the date of enactment.
H. RE 4444
provides for retroactive change of treatment and is deficient
in that regard.
H. R. 2597
--
Membershi
Veterans
Or
Re uirements
anizations
for
Since 1969, Code section 501(c)(19) has granted
status to certain groups of veterans.
In order to
qualify for such status, the group must be composed of at
least 75 percent war veterans. The remaining 25 percent
must be substantially
composed of veterans (other than war
veterans), veterans' widows or widowers, and military cadets.
A war veteran
is defined by the regulations as any person who
served in the U. S. Armed Forces during a period of war
(including the Korean and Vietnam conflicts)
tax-exempt
.
-19Prior to the enactment of section 501(c) (19) in 1972
the veterans organizations generally qualified for exemption
as social welfare organizations under section 501(c)(4) or as
social clubs under section 501(c)(7). This special category
of exemption was created to allow veterans organizations more
advantageous
treatment with respect to their unrelated
business income from the sale of insurance coverage.
Qualifying veterans organizations are exempt from unrelated
business income tax on any amounts attributable to payments
for life, sick, accident or health insurance coverage with
respect to members or their dependents, provided that such
amounts are set aside for purposes of providing
for the
payment of insurance benefits or for a qualified charitable
purpose.
~
The problem faced by these organizations
is that the
combination of a prolonged period of peace and the natural
attrition rate among surviving war veterans is rapidly
reducing the percentage of "war" veterans in section
H. R. 2597 would amend the
501(c)(19) organizations.
test of section 501(c)(19) to provide tax
membership
exemption for an otherwise qualifying organization, provided
that at least 75 percent of its members are past or present
members of the U. S. Armed Forces, without regard to whether
these veterans had served during a period of war.
Treasury opposes HER. 2597 because we oppose any
expansion of a rule which exempts from subchapter L (dealing
with the taxation of life insurance companies) an
organization which engages in the life insurance business at
a time when the taxation of life insurance companies is under
active study by the Treasury Department.
H. R. 4577
--
Transfers
of Restricted
Stock
any taxpayer who received stock subject
The Securities Exchange Act of 1934,
profit may be recovered by a
an 'insider's"
the stock is sold within 6 months of receipt),
to treat the value of the stock (less any amount
Prior to ERTA,
to section 16(b) of
(under
which
corporation
if
required
paid) as compensation when received. ~/ Section 252 of ERTA
revised this rule, on the theory that restrictions on
transferability which are mandated by Federal securities laws
or accounting principles should be taken into account in
the time in which the value of the stock should
determining
was
See Horwith
v.
Comm'r,
71 T. C. 932
(1979).
-20in income. Af ter ERTA, any taxpayer who receives
stock subject either to section 16(b) or to the
"pooling-of-interest" accounting rules will be treated as
risk of forfeiture within the
being subject to a substantial
meaning of Code section 83 for the 6-month period during
apply. Thus, the employee
which the mandated restrictions
will include in income, and the employer may deduct at the
time the restriction lapses, the difference between the value
of the stock at that time and the amount paid for the stock
This provision applies to transfers after
( if any).
be included
31, 1981.
December
H. R. 4577 would
make
the above-described
change
in the
restricted stock transfer rule retroactive to June 30, 1969,
provided that any person who received restricted stock after
The same effective date
that date elects the tax deferral.
of
this amendment to the
appeared in the original version
of H. R. 4242. Under
section
810
restricted property rules,
this original proposal, any individual who had received
restricted stock in the latter half of any year after 1968
could elect to defer tax liability on the value of the
transferred property from the year of receipt until the next
The original proposal
year (when the restriction lapsed).
did not, however, provide for any adjustment in the
corresponding business expense deduction of the employer,
which under the principles of section 83 should be claimed in
the same year the property is taken into income by the
would prevent any
The statute of limitations
employee.
adjustment in returns filed up to 14 years prior to the time
of an employee's election, thus defeating the correlation
between employer deduction and employee inclusion that is
mandated by section 83. When this provision appeared in the
Conable-Hance
It
was
II bill, it
this version
ultimately
became
which
law.
was given prospective effect only.
was supported by Treasury and which
Treasury continues to oppose
of ERTA's change in the restricted
opposition is consistent with our
retroactivity even where, as here,
the law
is sound.
any
retroactive
application
property rules. This
general oppostion to
the substantive change in
There are additional reasons why retroactivity
is
in this case. First, by going back to 1969,
inappropriate
the bill would permit taxpayers to elect to open years closed
statute of limitations.
The purpose of a statute of
limitations is to prevent both the Internal Revenue Service
and taxpayers
from reopening issues after a certain period of
time regardless of how meritorious the position may be.
by the
-21legislation
clearly violate that rule. Secondly, the
apply the new rule to past years.
Rather, it provides taxpayers with the option of applying
either the old rules or the new rules. Such an optional
substantive rule does not represent sound tax policy.
bill
would
does not simply
For these reasons,
H. R. 5630
Treasury
—State
oppoSes H. R. 4577.
Judicial Retirement
Plans
Section 457, as added to the Code by the Revenue Act of
1978, generally permits employees of a state or local
government
to defer compensation under an eligible state
deferred compensation plan, if the deferral does not exceed
$7, 500 or 25 percent of compensation.
Amounts of
compensation deferred under an eligible plan, plus interest
thereon, are includible in the income of the participant or
the participant's
beneficiary only when paid or made
available under the plan (e.cC. , upon the participant's
separation
from
service).
If a deferred compensation plan fails to meet the
of an eligible plan, sectionCodex'
requirements
457(e)(l) provides
that all compensation deferred under this ineligible plan
after January 1, 1982 will be included in income for the
first year in which there is no substantial risk of
Section 457(e)(2) lists five exceptions to this
inclusion rule, encompassing plans that are governed by
other retirement rules set forth in the
These
exceptions are: (1) a qualified plan which includes an exempt
trust; (2) a section 403 annuity plan or contract; (3) a
qualified bond purchase plan (4) a section 83 arrangement;
and (5) a nonqualified
but funded trust.
forfeiture.
broad
This statutory list of exceptions does not include
certain regular but unfunded state retirement plans
i. e. ,
plans that provide benefits solely by periodic appropriations
from the state's general fund.
by the state legislature
Participants in all such regular state retirement plans are
therefore facing current taxation of amounts deferred under
the plan as of January 1, 1982, when section 457 took full
—
effect.
It is clear
from the
legislative
history of section 457
that unfunded regular retirement plans of a state were not
intended to be disqualified by section 457(e)(l)
the limited exceptions provided by section
(notwithstanding
457(e)(2)). See H. R. Rep. No. 95-1445, 95th Cong. , 2d Sess.
-22-
(1978); S. Rep. . No. 95-1263, 95th Cong. , 2d Sess. 70
(1978) . The fact that the legislation was prompted by the
Service's position under Prop. Reg. S 61-16, pertaining to
compensation deferred under an individual o tion, and the
deferral, provide further indication that Congress did not
intend to disqualify those mandatory unfunded state
57
for individual
retirement plans that provide no opportunities
salary reduction arrangements.
457 (issued on
respect to whether
regulations could appropriately be drafted to exclude
regular retirement plans from the current taxation
unfunded
rule of section 457(e)(1). However, given the clear and
language of the statute, Treasury and the
unambiguous
Internal Revenue Service have been unable to justify drafting
a regulatory exception which would accomodate certain
under section
The proposed regulations
December 29, 1980) requested comments with
unfunded state retirement plans but which would not exclude
from section 457(e)(1) those ineligible plans that properly
belong
within
its scope.
clarification of the status of all unfunded
retirement
state
plans, Treasury has provided in its proposed
regulations under section 457 that the income inclusion rule
of section 457(e)(1) will apply only to compensation deferred
under these plans after December 31, 1981. (See Prop
under section 457 can
5 1.457-3(c). ) The final regulations
be expected to contain the syme rule.
As a result,
participants in these unfunded state retirement plans will
not be penalized as of January 1, 1982, by the current
inclusion in income of all amounts deferred under these plans
pending
the 1978-81 transitional
during
period.
H. R. 5630 provides
unfunded state retirement
statutory clarification of the
plan issue only for certain plans
plan meets the following
requirements:
covering state judges. Specifically, the bill exempts
certain qualified state judicial plans from the income
inclusion rule of section 457(e)(1), provided that such
(1)
has been in existence
(2) requires
j udges;
100 percent
(3) bases contributions
compensation;
(4) includes
no
continuously
participation
on a uniform
salary reduction
a
since 1978;
by
eligible
fixed percentage
options;
of
-23retirement benefits for each judge equal to
of the compensation of all judges of the state
holding similar positions (Texas provides for a deferral of
6 percent of judges' compensation);
and
(5) provides
a percentage
(6) pays
limits.
A
seventh
no
benefits
requirement,
in excess of the section 415(b)
which
would
have prevented
judges
participating in the plan from being eligible to participate
(on the basis of judicial service) in any other state
deferred compensation plan that qualifies under section 457,
appeared in S. 1855 and in H. R. 4881, the original version of
H. R. 5630, but has recently been deleted from this bill.
Treasury supports H. R. 5630, based upon our recognition
that certain state unfunded plans were not intended to be
covered by the section 457(e)(1) disqualification
rules. We
would also recommend,
however, that Congress make a future
attempt to exempt from section 457 other state unfunded
which are not judicial plans, but
retirement arrangemuents
which are also unfairly disadvantag~e
by section 457(e).
This broader exception, which would apply generally to
regular state retirement plans, should cover any defined
benefit pension plan established and maintained by a state
of
(or by a political subdivision, agency, or instrumentality
a state) for the exclusive benefit of state employees, even
if the plan is unfunded, provided that
(1) the plan has been continuously in existence since
31, 1978;
(2) the plan benefits a significant number of employees,
all of whom are similarly situated;
(3) all employees eligible to benefit under the plan are
required to participate, and, if contributions to the plan
are required, to contribute the same fixed percentage of
their basic or regular rate of compensation under the plan;
December
(4) the plans applies uniform retirement methods to
determine the accrued or vested benefits of participants
under the plan;
(5) the plan cannot pay benefits with respect to any
participant which exceed the limitations on benefits
permitted under tax-qualified plans; and
(6) the plan provides no option to plan participants as
to contributions or benefits the exercise of which would
affect the amount of any participant's currently includible
compensation.
-24H. R. 1808
--
Tax-Free Transfers
Present law provides
separate
of
Im
orted Beer
excise tax rules for
imported beer. Domestically produced beer is
subject to a $9 per barrel excise tax ($7 per barrel for
certain small producers) at the time the beer is removed from
the brewery for consumption or sale. Imported beer is
subject to a $9 per barrel tax at the time the beer is
removed from customs custody, even if the beer is then
transferred to a domestic brewery.
domestic
and
H. R. 1808 would change the point of imposition of the
excise tax on imported beer from the point of removal from
customs to the point of sale from the brewery, in the case of
any beer brought into the United States in bulk containers.
Because bulk beer can be stored indefinitely and transferred
(either in the pressured containers or by pipeline) tax-free
between producers and bonded warehouses,
this bill could
provide a lengthy deferral of excise tax liability for all
beer imported in these containers.
Treasury understands that
very few domestic brewing companies currently import beer in
pressurized bulk containers for bottling in the United
States. The bill would place these few with the capability
of importing container beer at a competitive advantage
relative to those importers that will continue to be liable
for excise taxes at the point of removal from customs
custody. Treasury believes that the beer excise tax should
continue to be imposed uniformly on all importers of beer at
the point of removal from customs custody, and therefore
opposes H. R. 1808.
I
would
be pleased
to answer
any
questions
you may
have.
Department
of the Treasury
FOR RELEASE AT
~ Washinion,
p.g.
4:00 P. M.
~
Telephone 566-2041
March
16, 1982
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $9, 600 million, to be issued March 25, 1982.
This offering will provide $350
million of new cash for the
Treasury, as the maturing bills were originally issued in the
amount of $9i255 million.
The two series offered are as follows:
91 -day bills (to maturity date) for approximately $4. 800
million, representing an additional amount of bills dated
December 24, 1981,
and to mature June 24, 1982
(CUSIP
No- 912794 AU 8 ), currently outstanding
in the amount of $4, 715
million, the additional and original bills to be freely
interchangeable.
182 -day
bills for
March 25, 1982,
(CUSIP No. 912794 BM 5
dated
approximately
).
and
$4, 800 million, to
to mature
September
be
23, 1982
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing March 25, 1982 '
In
addition to the maturing 13-week and 26-week bills, there are
$4I 684 million of maturing 52-week bills. The disposition of
this latter amount was announced last week. Federal Reserve
Banks, as agents for foreign and international monetary
authorities, currently hold $1, 946 million, and Federal Reserve
Banks for their own account hold $3, 110 million of the maturing
bills. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills.
Tenders from Federal Reserve Banks for themselves and as
agents for foreign and international monetary authorities will be
accepted at the weighted average prices of accepted competitive
tenders. Additional amounts of the bills may be issued to Federal
monetary
Reserve Banks, as agents for foreign and international
authorities, to the extent that the aggregate amount of tenders
for such accounts exceeds the aggregate amount of maturing bills
For purposes of determining such additional
held by them.
monetary authorities are
amounts, foreign and international
considered to hold $1, 444 million of the original 13-week and
26-week
issues.
The bills will be
and noncompetitive
issued on a discount basis under competibidding, and at maturity their par amount
Both series of bills will be
will be payable without interest.
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
Tr easur y.
tive
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 Standard time, Monday,
March 22, 1982.
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 .
~
Each tender must be for a minimum of $10, 000 . Tenders over
000
must be in multiples of $5, 000. In the case of competi$10,
tive tenders the price offered must be expressed on the basis of
100, with three decimals, e g , 97 920 . Fractions may not be used.
. .
.
and dealers who make primary markets in
Banking institutions
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
if the names of the
may submit tenders for account of customers,
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 as of 12:30 p .m . Eastern
time on the day of 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
No
in the auction
deposit need accompany
tenders
.
from incorporated
banks
trust companies and from responsible and recogni&ed 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 «r must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
and
accompanies
the tenders
.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection: of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement
for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
f unds
in cash or other immediately-available
on March 25, 1982,
Cash adjustments
or in Treasury bills maturing March 25, 1982.
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new
bills.
Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated' redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
from the
bill and the denominator of which is the number of days
day following the taxpayer's date of purchase to the maturity of
If the gain on the sale of a bill exceeds the taxpayer's
the bill.
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gains
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
Under
amount
Debt.
partment of the Treasury
~
washington,
D.C. ~ Telephone 566-204'5
FOR IMPS DIATE RELEASE
March
J
7, 1982
Sale of Chrysler Defense to General Dynamics
On
March
15, 1982, the
members
of the Chrysler
Loan
Guarantee Board approved the sale of Chrysler Defense,
a wholly-owned
subsidiary of the Chrysler Corporatj. on,
General Dynamics, Inc. for approximately
&335 mj. llj. on
dollars. By selling this subsidiary Chrysler j.mproves
cash position and strengthens it's ability to conduct
business
R-577
xn a sagging
automotive
market.
Inc. ,
to
it' s
Department of the Treasury ~ Washington,
Q.C. ~ Telephone S66-204%
For Release U on Deliver
Expected at 10:00 a. m. , EST
STATEMENT OF
THE HONORABLE JOHN ED CHAPOTON
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE SENATE COMMITTEE ON THE BUDGET
March
Chairman
Mrs
and Members
of this
17, 1982
Committee:
I am pleased to be here today to discuss tax expenditures.
think everyone would agree, there are many provisions of the
Internal Revenue Code specifically designed as incentives to
encourage selected economic activities.
These special tax
provisions are commonly referred to as "tax expenditures, " and I
will therefore use this term in my testimony today. However, it
should be noted that the label "tax expenditu're" is misleading.
Special tax provisions are not equivalent to direct Government
expenditures on goods and services. Direct expenditures involve
the purchase of labor, capital, and materials that are used
directly by the Government to achieve public goals, such as
In contrast, most special tax provisions
national defenses
provide a subsidy to an activity carried out in the private
sector. For this reason, the label "tax subsidies" may better
describe these special tax provisions " than does the more
But even the label "tax
conventional term "tax expenditures.
subsidies" is misleading, for many special tax provisions simply
reduce disincentives in our tax Code. This is particularly true
in the case of special tax provisions which have the effect of
reducing the double taxation of corporate income.
As
I
The Administration
is opposed to attempts to legislate
Such
blanket, across-the-board limitations on tax expenditure@.
limitations do not account for the different, sometimes highlyInstead, this
desirable, effect of different tax expenditures.
Administration
is committed to a reevaluation of all Government
activity in the economy, whether that activity is undertaken
through direct outlay and subsidy programs, loan and loan
guarantee programs, regulations, or through tax expenditures.
Resources can be allocated to achieve public goals by each of
But, that
these methods, and they must therefore be evaluated.
evaluation must deal with each program, regulation, or tax
provision individually on its own merits. For example, a review
of Government energy policy would be incomplete unless it covered
(such as expensing of exploration and
energy tax expenditures
development costs, the excess of percentage over cost depletion,
and various energy credits, which will total $8. 8 billion in FY
1983), energy loan and loan guarantee programs (which will total
$9. 4 billion, net, in FY 1983), the cost of energy regulations
(for example, price controls on natural gas and the 55 MPH speed
limit, for which cost estimates are not included in the Budget),
as well as direct outlays for energy (which will total $4. 2
billion in FY 1983)For Government management purposes, it is essential that the
resource cost of Government programs be comparably measured,
regardless of the particular method by which the allocation of
was
resources is accomplished.
The concept of tax expenditures
developed to provide such comparability between programs effected
through special tax provisions and programs effected through
other methods. Properly defined, measured, and applied,
therefore, the tax expenditure concept can serve as a very useful
tool. Like many other concepts, however, it. is
management
and therefore has
subject to misuse as well as misunderstanding,
received some well-founded criticism.
today, I will review the definition and
of tax expenditures, as well as some of the
related concepts and measures that have been confused with tax
expenditures.
I will discuss the relative efficiency of tax
expenditures as a method of achieving public goals. I will also
discuss the control of tax expenditures under the Budget Act.
In
my
remarks
measurement
Tax Ex enditures
Definin
Section 3 of the Budget Act defines tax expenditures as
losses attributable to provisions of the Federal tax
laws which allow a special exclusion, exemption, or deduction
from gross income or which provide a special credit, a
preferential rate of tax, or a deferral of tax liability. "
This definition requires a distinction to be drawn between the
special provisions of the tax structure, which are designed to
to achieve public goals, and the normal provisions, which are
necessary to make the tax system operational.
Obviously, there
are different ways to draw this distinction, a point to which I
will return later. Nhat follows, then, is the Administration's
"revenue
view
of
how
this distinction
should be drawn.
of the income tax include the
subject to tax and allowable deductions,
including some provision for the recovery of the cost of
depreciable assets; taxable units and their threshold levels of
The normal
definition
of
provisions
income
taxability;
the relationship between the taxation of corporations
and their shareholders;
the schedule of tax rates; the basic tax
rules, including the accounting period for taxation
income is taxed as it is realized or as it accrues;
the treatment of international transactions; and the system of
tax administration.
Unlike the special tax expenditure provisions, these normal provisions are essential to the income tax.
In our view, for a provision to be special, two conditions
accounting
and whether
must be met:
provision must apply to a narrow class of
transactions or taxpayers; and
o
The
o
There must be a general
provision to which the
special provision is a clear exception.
Some examples of tax expenditures,
from Special Analysis G
of the Budget, will illustrate this definition.
Under the general provisions of the income tax code,
interest received from any source is includable in income
subject to tax. However, a special provision allows interest
on obligations of State and local Governments to be excluded
from taxable income.
The exclusion is therefore considered a
tax expenditure intended to reduce the cost of borrowing for
State and local Governments, even though some of the benefits
accrue to lenders. A second example is the statutory exclusion
of certain fringe benefits, such as employer-paid medical
The
insurance premiums, from the taxable income of employees.
inclusion of wages in the tax base is a normal rule of the tax
Code, and the exclusions of these fringe benefits are special
Other
provisions, and therefore constitute tax expenditures.
include special provisions that
examples of tax expenditures
promote homeownership,
exports, and employment of the
handicapped.
Several features
noted.
First,
provisions
of the tax expenditure
concept should be
while the distinction
of the
between the normal and special
tax may be clear in the abstract, in
difficulty in applying the distinction
tax expenditures.
income
always
practice there is
in order to delineate
Second, the definition of tax expenditures
taken to suggest that the normal tax provisions
should
not be
no tax
incentives or disincentives.
All existing taxes affect economic
incentives to some extent, and therefore the level and allocation
of resources'
In fact, some of the normal provisions of the
income tax have effects very similar to special provisions.
involve
is provided by the
A good example of this similarity
Accelerated Cost Recovery System (ACRS) rules and the investment
tax credits Any income tax requires a set of rules for determinThe ACRS
ing how the cost of depreciable assets is recovered.
provisions now constitute the general income tax rules for that"
purpose.
To see this, one need only ask: If ACRS is "special,
what is the "general" rule in the Internal Revenue Code governing
the recovery of cost of depreciable property to which ACRS is an
exception? Absent some other general provisions, the ACRS
provisions must be treated as part of the normal tax structure
In contrast,
and therefore do not constitute a tax expenditure.
the investment credit is considered a tax expenditure because,
unlike ACRS, it does not deal with one of the basic structural
elements
of
an income
tax.
Third, as I noted previously, there are other possible
definitions of tax expenditures.
It has often been suggested
that tax expenditures be defined relative to the standard of an
"ideal" income tax. However, there is no consensus among tax
experts on the structure of an "ideal" tax relative to which
special (tax expenditure) provisions could be delineated, and few
would seriously regard an "ideal" tax as a practical tax
structure.
For example, under an "ideal" income tax, the rental
value of owner-occupied housing would have to be added back
(imputed) to homeowners' money income to arrive at the "ideal"
income tax base. In addition, using an "ideal" income tax as a
standard the double taxation of dividends at the corporate and
individual levels would constitute a ne«eative tax expenditure.
The more common approach to tax expenditures
has simply been
to list possible "tax reform" items. This approach has led to
much confusion about the concept and measurement
of tax
expenditures.
Further, neither the "ideal tax" or "tax reform"
approaches has the pragmatic advantage of the definition used
here and in Special Analysis G of identifying those provisions
of the Internal Revenue Code that deal with basic structural
features of the income tax, and those that provide special
exceptions to those structural rules.
the fact that a provision is a tax expenditure
this definition says nothing about the desirability or
the effectiveness of the provision.
This is also true, it
should be noted, for direct outlay programs'
The definition
(and measurement)
of tax expenditures is not a substitute for
the analysis and evaluation of programs implemented through the
tax system any more than a listing of direct outlays by program
is a substitute for their evaluation. Further, the designation
of a provision in the income tax Code as "normal" does not imply
that the provision is desirable.
under
Fourth,
Clearly, there are many tax expenditures that serve
desirable purposes in an efficient manner. The investment
credit provides investment incentives for economic growth. The
special tax treatment afforded pension savings, including IRA's
Note that
and Keogh's, provide important incentives to save.
these provisions were expanded by the Economic Recovery Tax Act
of 1981.
It is also clear that there are some undesirable tax
expenditures and the Administration has proposed to repeal or
modify them.
Specifically, under our tax proposals the business
energy tax credits would be repealed, corporations would be
required to capitalize and amortize construction period interest
and certain restrictions
and taxes on commercial structures,
would be placed on issues of tax-exempt bonds for private
activities.
In addition to repealing or revising certain tax
has
expenditure provisions, however, the Administration
proposed, for example, to revise the modified coinsurance
provision, which has never appeared on any official list of
tax expenditure items. Similarly, the special treatment of
tax straddles,
which was extensively
revised by the Economic
of 1981, was never listed as a tax expenditure.
The fact that these provisions have not been listed as tax
expenditures well-illustrates
the confusion that has arisen from
considering tax expenditures as a list of "tax reform" items.
The tax expenditure
concept is a tool for budget review and
analysis; tax policy review and analysis, on the other hand, need
not and should not be limited to an examination of some, rather
than all, of the provisions of the income tax Code.
Recovery Tax Act
Measurin
Tax Ex enditures
Tax expenditure estimates are intended to show the cost of
To insure
resource allocations caused by special tax provisions.
comparability between tax expenditure estimates and direct outlay
estimates, tax expenditures must be measured in the same manner
as are direct outlays.
This requires that specific conventions
be followed in measuring tax expenditures.
First, as with budget outlay estimates, tax expenditure
estimates are made on the assumption that all other provisions of
the tax Code and all other laws governing market exchanges are
unchanged.
The same levels of aggregate income and economic
growth that underlie direct outlay estimates are also assumed.
Second, tax expenditure and direct outlay estimates are both
based on the actual level of activities given the program;
neither estimates what the level of the activity would be in the
absence of the program.
This is a particularly important point.
in the case of tax expenditure estimates, because they are often
incorrectly assumed to be estimates of the revenue that would be
gained if the special tax provision were repealed.
changes that may follow the repeal
special tax provision, the revenue gain from repeal may
An example
be much lower than the tax expenditure estimate.
would be the taxation of a particular employee fringe benefit
which is currently untaxed, such as employer-paid medical
The expected response would be a decrease in
insurance premiums.
the amount of employer-paid medical insurance premiums, but an
increase in the amount of other still untaxed fringe benefits,
and educational
such as employers' pension contributions
assistance. Thus, the revenue gain from the change would be less
than the tax expenditure estimate, which only measures, quite
correctly, the reduction in tax receipts from the actual level of
employer-paid medical insurance premiums in the particular year
Note that there would be analogous behavioral responses if many
direct outlay programs were eliminated or curtailed. For
example, the removal of a price support for a particular
agricultural commodity could be expected to lead to somewhat
In
commodities.
higher production of other, price-supported,
lower
would
be
outlays
in
budget
reduction
net
the
cases,
such
than the savings from the eliminated (or curtailed) program.
of
a
Because of behavioral
~
revenue gains
estimates
is the
from repeal of provisions and tax expenditure
income
and
level
of
effect repeal would have on the aggregate
well
as
as
economic growth.
For example, all receipts
expenditure figures in the Budget are based on projections of
income and growth which assume the investment tax credit, as
currently enacted, will continue to operate. If, however, the
investment credit were repealed (or curtailed) without being
replaced by a comparable investment incentive, the current
projections of income and growth would have to be revised
Consistent with these revisions, receipts and
downward.
The
expenditure projections would also have to be revised.
estimated net effect of repeal of the investment tax credit on
receipts, therefore, would not be equivalent to the tax
expenditure estimate shown in the Budgets
A
second reason for the difference
between
Third, comparability with direct outlay estimates requires
that tax expenditures be measured as "outlay equivalents. " Most
outlays in the Federal Government are measured in pretax dollars.
That is, the outlay of the Federal Government is taxable income
to someone. Tax expenditures directly return income in the form
of after-tax dollars in most cases. That is, a tax credit of $10
is a subsidy of $10 after taxes. The measurement of tax
expenditures in outlay equivalent form converts the after-tax
dollars that the subsidy directly gives rise to into a pretax
equivalent amount.
For example, in the case of the $10 credit,
if the average tax rate
of recipients of that credit were
20 percent, the outlay equivalent of the $10 credit would be
$12. 50. If a $12. 50 payment were made in place of the cred't
re it,
the tax would be $2-50 leaving $10 after tax, the same amount
the credit.
In addition to following these measurement conventions,
adjustments must be made for the interactions between various
tax expenditure provisions in order to make total tax expenditure
estimates by budget function. These interactions may be demonstrated by comparing the result of deleting two tax expenditures
simultaneously
to that of deleting them separately.
In some cases, the reduction in tax expenditures from the
deletion of two items simultaneously would he ~rester than the
from the deletion of the two items
sum of the reductions
This increase is due to "stacking" of the two items
separately.
For example, if interest income
when they are taken together.
from State and local Government bonds were made taxable and
capital gains on home sales were not deferred, more individuals
would be pushed into higher tax brackets than if just one of
these sources of income were treated under the normal rules of
the tax Code; the combined reduction in tax expenditures would be
greater than the sum of the two separate effects.
In other cases, the reduction in tax expenditures from the
deletion of two items together would be smaller than the sum of
the reductions considered separately.
For example, if the
deductibility of mortgage interest payments and homeowner
property taxes were both repealed and the zero bracket amount
(standard deduction) were left unchanged, more individuals who
now itemize their deductions
would opt for the zero bracket
The reduction
amount than if only one preference were repealed.
in tax expenditures would therefore be lower from repealing both
preferences together than the sum of the two estimates obtained
from repealing each one separately.
Total tax expenditures for each functional category, such as
national defense and energy, are shown in this year's Budget. In
making the estimates, all of these interaction effects were taken
into accounts Note, however, that the Budget does not present a
total of tax expenditures for all functional categories combined.
This omission is not due to an inability to take all interactions
into account for purposes of such a total. Rather, the omission
is due to the fact that such a total carries little meaning. As
noted above, tax expenditure estimates are based on the assumption that the programs are in place and that the level of
These assumptions
aggregate income and growth are unchanged.
would clearly be wrong if all tax expenditure provisions were
repealed.
Further, tax expenditures represent only one method by
which Government allocates resources in the economy to achieve
public goals; a total for any particular method in isolation is
therefore not very useful for Budget review and analysis.
There is one other aspect of the measure of tax expenditures
that should be noted. Tax expenditure estimates are measures of
the difference between the cost of resources allocated under
current law and the cost of the allocation which would take place
under the assumption that each tax expenditure provision had
never been in effects The estimates, therefore, generally
larger amounts than would be saved in the first years of
transition to a tax law without one of the special provisions'
This is analogous to the "phase-out" likely to accompany
reductions in outlay programs as previously authorized and
appropriated funds are spent.
Relative Efficienc
of Tax
Ex enditures
Several factors must be considered to determine the
efficiency of tax expenditures relative to other methods
the Government uses to allocate resources in the economy to
achieve public goals. Separate from the determination of the
relative efficiency of methods, of course, a determination must
be made of whether each program serves a useful public goal.
Furthermore, there should be no illusion that somehow programs
effected through the tax system are "cheaper" than other
This is one reason why it is so important to measure
programs.
tax expenditures on an "outlay equivalent" basis. I will simply
assume in the following that the usefulness and cost
determinations
One
have been made.
consideration
in choosing a method to implement
a
is the level of Government administration required
for the program to be effective. If little or no Government
administration
is required, and other conditions described below
are met, the program might efficiently be designed as a tax
expenditure.
An example of such a program is the investment
tax
credit. However, if a high level of Government involvement in
the program is required, such as is true, for example, of many
agricultural programs, a direct outlay program may be far more
efficient.
A second consideration
is the specific design of tax
program
Because of the graduation of income tax
or deduction has more value to a high-bracket
taxpayer than to a taxpayer in a lower bracket.
is the
reason, for example, that. some of the benefits ofThis
the exclusion
of interest on State and local bonds accrues to lenders, as I
noted earlier.
Credits, on the other hand, are of equal value to
all taxpayers. Thus, generally, tax expenditure programs
are
more efficiently designed as credits, rather than as exclusions
or deductions.
expenditure
rates,
programs'
an exclusion
Third,
the relative
efficiency of a tax expenditure e may
m
or activity which is to receive the subsidy,
For example, many low-income individuals have no taxablee income
and therefore could only benefit. from a tax credit if
wer e
refundable.
Further, to receive the refundable credit.
ey would
have to file an income tax return, which many would not oth
otherwise
have to do. A direct outlay or other program might theref
ore be
a much more efficient way to reach such groups'
depend
on the group
Fourth, it must be remembered that the normal provisions of
the income tax Code interact with, and therefore affect the value
For example, an across-the-board rate cut
of, tax expenditures.
e. , the subsidy provided by, many tax
changes the value of,
If a stable subsidy, or one that should not depend
expenditures'
is required
on tax rates and other features of the tax structure,
for the efficient operation of the program, the program should
not be framed as a tax expenditure.
i.
final consideration
is that there is
a hidden, although
the tax system with too
Tax expenditures complicate the tax
many subsidy programs.
system for taxpayers and the Internal Revenue Service, and
contribute to the view
(whether or not well founded) that the tax
system is "unfair. " These compliance and perceived equity costs
should be included in any assessment of the relative efficiency
of tax expenditures.
A
very
Bud
real, cost involved in
et Control of
burdening
Tax Ex enditures
Given the importance of tax expenditures
as a method of
allocating resources in the economy in order to achieve public
goals, there is naturally concern within the Administration and
the Congress in exerting proper budget control over tax
At present, this control is exerted in several
expenditures.
ways. Section 303 of the Budget Act prohibits the consideration
of tax legislation effective for a fiscal year before the first
Similarly,
budget resolution for that year has been adopted.
Section 311 of the Act prohibits tax legislation that conflicts
Section
with the revenue floor set by the second resolution.
new
that
provides
resolution
308(a) requires that every bill or
or increased tax expenditures be accompanied by estimates for
In addition,
the current fiscal year and a five-year projection.
Section 601 of the Act requires a list of tax expenditures to
be included in the President's Budget, and similar lists are
prepared annually by the Congressional Budget Office (under
Section 308(c) of the Act), and by the staff of the Joint
Committee on Taxation.
These provisions provide some control,
albeit indirect, over tax expenditures.
and directly, however, tax expenditures
More importantly
are consistently subject to review during consideration of major
tax legislation.
Most recently, as I have noted, there were
substantial changes made in several tax expenditure items in the
Economic Recovery Tax Act of 1981. In addition, changes in tax
current
expenditure items are included in the Administration's
tax proposals.
A number
of proposals have recently been made to require
for tax expenditures, or to
more formal Budget control procedures
place explicit limitations on them. I believe these proposals
Changes in tax expenditure
are undesirable for several reasons.
-10provisions
should be based on long-run considerations of economic
and equity, rather than on short-run Budget consider-
efficiency
ations. Especially for those tax expenditures that concern
long-term investments such as housing and business plant and
equipment, decisions are made for several years at a time and a
stable set of tax laws is the refore essential.
Furthermore, other policy instruments in addition to direct
outlays, such as regulations and loan guarantee programs, are
alternative ways to achieve the objectives of tax expenditures.
is intended to allocate resources in
Each of these instruments
the economy in order to achieve public goals. A possible
therefore, might be to
consequence of limiting tax expenditures,
not
subject to the same
is
which
increase off-budget spending
direct
outlays. In
as
are
Act
restraints under the Budget
be
replaced by
even
might
expenditures
tax
certain areas,
in order to achieve the same or similar
Government regulations
objectives.
It should also be noted that there is not universal
agreement on the definition and measurement of tax expenditures.
This lack of agreement is not critical to the current Budget
With an explicit
procedures for controlling tax expenditures.
limitation or more formalized control procedures, however, both
the concept and the measurement of tax expenditures would have to
be precisely defined.
This would not be an easy task.
of tax
Even with precise definition and measurement
however, severe difficulties would be encountered
an explicit limitation or more formalized control procedures
were imposed on tax expenditures.
One such difficulty is that
the normal provisions of the income tax Code interact with tax
expenditure provisions.
For example, when individual income tax
expenditures,
if
rates are lowered or increased, the value of most tax expenditures changes'
How would these changes be handled?
A second
type of difficulty would arise with some of the limitations that
have been proposed, for example, limiting tax expenditures to a
fixed percentage of net revenues.
Such a limitation could be
Codex'
exceeded during a short-run downturn in economic activity.
It
would therefore become necessary to reduce tax expenditures
or to
increase taxes, steps which could prolong and deepen the downturn. Another difficulty with measures that would focus
attention on "special" tax provisions, however defined and
measured, is that it would take attention away from all other tax
provisions.
Thus, there would be a real danger that provisions
such as those that allowed tax straddles would persist in the tax
The conclusion to be drawn from such considerations
is
not, of course, that tax expenditures should be free from
review and control.
Instead, I conclude that because tax
expenditures arise from special tax provisions. they are best
-11reviewed and thereby controlled in the context of the entire tax
Code, including the normal as well as the special tax provisions'
This review takes place currently during consideration of tax
legislation. No further Budget limitations or control procedures
are required.
~Suama
r
Tax expenditures are one method by which the Government
allocates resources in the economy in order to achieve public
goals. Many tax expenditures, such as the investment credit
and those that encourage pension savings, serve important public
goals in an efficient manner.
Others, such as the business
and should be repealed.
are
desirable
less
credits,
energy
The concept of tax expenditures,
properly defined, measured,
and applied, is a useful tool for Budget analysis and control.
The concept should not be confused with tax reform proposals,
nor should estimates of tax expenditures be taken as equivalent
to revenue gains from repeal.
The efficiency of tax expenditures
relative to other
methods of implementing
programs depends on the required level
of Government program administration,
whether the tax expenditure
is in the form of an exclusion or deduction rather than a credit,
the specific group or activity the program will subsidize, the
effect of other tax provisions on the tax expenditure, and the
effect of the tax expenditure provision on income tax compliance
costs and the perceived equity of the tax system.
While there has been some interest in imposing an explicit
limitation or additional controls on tax expenditures, they would
be difficult to implement and could seriously interfere with the
desirable incentives provided by some tax expenditures'
I will be pleased to answer any questions you may have.
partmeni of ihe Treasury ~ Washington, D.C. ~ Te)ephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 2:00 P. M EST
We
nes ay, Mare
, 1982
8
~
STATEMENT OF
GREGORY BALLENTINE
DEPUTY ASSISTANT
SECRETARY (TAX ANALYSIS)
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON TRADE OF THE
HOUSE WAYS AND MEANS COMMITTEE
of the Subcommittee:
I am pleased to have the opportunity to appear before your
Subcommittee in support of the Caribbean Basin Economic Recovery
Act. As the President noted in his transmittal message, this Act
is an integrated program designed to improve the lives of the
peoples of the Caribbean Basin. The tax provisions of the Act
are a vital element of this integrated program.
The tax incentives in this legislation may be divided into
two parts:
the investment tax credit designed to promote investment in Caribbean Basin countries and the investment
tax credit
and other tax incentives designed to restore the favored tax
status of Puerto Rico and the U. S. Virgin Islands, the two U-ST
possessions in the region, as well as the other U. S. possessions .
I will first address the Caribbean Basin aspects of the legislation. Before discussing the specifics of the legislation, it
will be useful to describe the economic characteristics of the
region and the current levels of U. S. investment in the region.
of the parts of the legislation pertaining to
My discussion
Puerto Rico and other U. S. possessions will also include a review
of the relevant economic context of these proposals.
Mr. Chairman
I.
and Members
The Caribbean
Basin
Characteristics
of the Caribbean Basin
The term "Caribbean Basin" as used in this discussion describes those Caribbean countries which are designated by the
President as qualifying for the benefits of the Act. These may
Economic
R-679
in Central America and
include Guyana, Suriname, and countries be
with reference to all
will
remarks
islands.
My
the Caribbean
of Cuba. Although
exception
the
the countries in the region with
jurisdictions
qualifying
the
by any reasonable standard all of countries, they are not. a homowould be classified as developing
They share certain features, such as low per
geneous group.
dependcapita income, high unemployment, , lack of skilled le labor,
manufacturing
litt.
very
s,
product.
ence on one or a few primary
activity, and small markets. But they vary widely in resources,
institutions,
A
few
and
countries
facilities for foreign
have
investment,
profitable
mineral
in Jamaica,
.
resources
Suriname,
(oil in
and
and Tobago and bauxite
base (the
Some have a reasonably sound. agricultural
trade
developed
have
Some
Guatemala).
Dominican Republic and
British
(the
Some
Rica)
Costa
and
(Panama
services sectors
Virgin Islands, the Cayman Islands, the Bahamas, and the
Trinidad
Guyana).
.
or
Netherlands Antilles) are able to generate income from marketing
Others have practically no cash
tax savings to nonresidents.
Although tourism
economy (Barbuda, St . Lucia, and St. . Vincent)
is a major industry in the region, it. cannot. be relied on to
Some are
support the economies of all the Caribbean countries.
Kingdom
United
the
of
not independent. countries, but dependencies
Netherlands
the
of
or
Islands)
part.
the
British
Virgin
(e.g. ,
(Netherlands Antilles).
.
'Phe languages
spoken include Dutch, English, French, Spanish,
Communications
The currency units differ.
and various dialects.
and transportation
facilities range from extremely poor to
excellent. Political and economic stability vary, but are generally fragile. The total population of the area, 41 million, is
The most populous
governed by over 20 separate governments.
country is Guatemala, with about, 7 million inhabitants; the
smallest are the Turks and Caicos Islands, with less than 10, 000
persons. Per capita income varies from less .than $300 per year
in Haiti and St. Vincent to more than $3000 annually in the
Bahamas and Trinidad and Tobago.
A discouraging
demographic
factor is the high percentage of the population under 15 years
is dependent for support, upon a relatively unskilled
work force.
old which
U. ST Investment
in the Caribbean
Basin
At the end of 1980, U. S. direct investment
(equity investment
in foreign affiliates plus net outstanding loans to foreign
affiliates) in the Caribbean Basin jurisdictions had a value of
$10. 2 billion, ignoring the Netherlands Antilles where a negative
investment was recorded due to the borrowings of U. S. parent
corporations through Netherlands Antilles affiliatesOW that
amount, $5. 9 billion, or 60 percent, was in the Bahamas and
about $1.0
Panama.
Of the remaining $4. 3 billion in investment,
billion was in Trinidad and Tobago, $2. 3 billion in Jamaica, the
other Caribbean islands, Guyana, and Suriname, and the remaining
A significant
in Central American countries.
$. 1-0 billion
portion of the investment in Jamaica, Suriname, and Trinidad and
U. S. direct investTobago is in mining (bauxite) or petroleum.
ment in manufacturing
in the region at the end of 1980 was about
$1.0 billion, or approximately 10 percent of the total U. S.
investment.
Over 70 percent of the investment classified as
was in Panama and the Bahamas.
Majority owned
manufacturing
Caribbean basin affiliates of U. S. companies planned about $680
million in capital expenditures during 1980, of which $480
million was in mining
manufacturing.
II '
and petroleum
and $65
million
in
of the Pro osal
Re uirements of an Effective Tax Incentive
To be effective, a U S tax incentive must cause more U. S.
investment to take place in the Caribbean Basin than would
otherwise occur. An incentive does this by raising the rate of
return on investments, making some profitable which were previously unacceptable . An effective incentive should also attract
projects which will continue to benefit the recipient economy
after the expiration of the incentive period. The incentive
should promote an increase in local production and employment in
the Caribbean Basin, rather than simply encouraging transfers of
financial or intangible assets. This can best be achieved by
encouraging investment in real physical capital. An increased
transfer of financial assets to the Caribbean Basin will contribute to economic growth in the Caribbean only if it increases the
or reduces its cost. This growth
amount of physical investment
objective will be frustrated if the increased inflow of funds
into the Caribbean is offset by an increased outflow of funds for
Outlines
~
investment
~
outside the Caribbean.
Descri tion of the Pro osed Le islation
extension for five years of
The Act includes an unprecedented
the investment tax credit to property which is used predominantly
in certain Caribbean Basin countries and which would otherwise
qualify for the domestic investment tax credit. A Caribbean
Basin country will qualify for this benefit if, first, it has
been designated by the President as a country entitled to the
benefits of the Act, and second, it enters into a bilateral
executive agreement with the United States for exchange of
purposes .
information for tax administration
rules and limitations which apply to the allowance of the
in the
investment tax credit for property used predominantly
Caribbean
Basin
to
property.
generally
apply
will
United States
credit is generally available for up to
The regular investment
ten percent (10%) of the cost, of tangible personal property and
other tangible property (generally not, including buildings or
structural components) used in connection with manufacturing,
A few
production, agriculture or certain other activities.
rehabilitated
narrow categories of property, such as qualified
buildings and qualified t, imber property, will not be eligible for
the credit, if located in a Caribbean Basin country because of the
specific statutory provisions governing their eligibility for the
credit, . In our judgment, it. is not advisable to extend the
credit, for these specialized categories of property.
The
provision reiterates that, this is a special
to provide economic assistance in an extraordinary situation.
At the end of five years consideration may
be given to an extension of the credit. on a bilateral basis
through a tax treaty.
The sunset
measure
intended
Relative Advanta
A
wage
credit,
subsidy
es of the Investment
and
were considered
Tax Credit
tax sparing, along with the investment tax
as possible incentives for the Caribbean
Since the Caribbean Basin needs to develop the skills of
labor force, a labor oriented subsidy has considerable intuitive appeal. This type of incentive, however, does
not increase the capital-labor ratio and therefore it. does not
improve the long run product, ivity of the labor force.
It is
temporary incentive that ceases to have effect as soon as wages
are no longer subsidized.
A country merely tends to become dependent, on the wage subsidy, with little prospect, for the type of
growth and development that will lead toward economic selfsufficiency. The recipient countries themselves may resent. a
wage subsidy.
They may view it as a "colonialist, ic" attempt by
the United States to restrict .the Caribbean Basin to the role of
a supplier of low wage goods. For these reasons, it is preferable to rely on a capital incentive which indirectly encourages
the employment of more labor and which will improve the overall
productivity of labor.
Basin.
its
indigenous
Tax sparing is often proposed as an investment incentive for
regions like the Caribbean.
Tax sparing allows a credit against
domestic taxes for taxes an investor is spared from paying when a
foreign country reduces or waives tax liabilities as an investment incentive.
There are two major economic objections to tax
sparing as an investment incentive.
The first is that tax
sparing is a reward to profits earned during the incentive
period, regardless of whether such profits come from prior or new
investments.
That is, no new investment is needed to obtain the
benefits. Thus, there is no assurance that tax sparing will contribute to economic growth by increasing real physical capital
investment in the recipient country.
Secondly, tax sparing invites non-productive investments, such as the transfer of financial or other intangible assets and the assignment of artificially high profits to such assets, in order to generate tax
spared
income.
In contrast, the investment tax credit which we are proposing
will encourage the placement of machinery and equipment in the
Caribbean Basin. The credit depends directly on an investor
making a productive investment
in the Caribbean Basin. By
providing workers with additional capital, it will increase labor
productivity and economic growth and development in the region.
Finally, the investment tax credit is independent of the
foreign tax credit, requires no revenue sacrifice by the
developing. countries, and is relatively simple.
Potential U. S.
investors in the Caribbean Basin region are familiar with the
credit as it applies to domestic investments'
Its effectiveness
will not be undercut by the, uncertainty which would accompany any
totally
new
incentive.
III.
Details of the Pro osal'
Qualif in Caribbean Basin Countries
Basin country which is designated by the
A Caribbean
President as eligible for the benefits of the Act will qualify
for the extension of the credit only if the country enters into a
bilateral executive agreement with the United States to exchange
such information as is necessary and appropriate to carry out and,
enforce the tax laws of the two countries .
of the
Exchange of tax information assists the administration
tax laws of both the United States and the qualifying country.
The tax administrators
of the Caribbean Basin countries will have
access to information from the IRS regarding their taxpayers who
engage in economic activities in the United States and thereby
should strengthen their own tax administration.
This self-help
aspect of the measure is consistent with the overall concept of
the Caribbean Basin Initiative.
Moreover, the United States will
itself require access to such i'nformation to adequately administer the tax credit, particularly where a "pass-through" credit
is claimed by a five percent (5%) or greater U. S. shareholder in
a foreign corporation.
(The "pass-through" aspect of the
proposal is discussed below. )
in the Caribbean Basin region
both for avoidance and
used
been
are tax havens which have
believe that it. is appronot
do
We
laws.
evasion of U. S. tax
S. tax incentives unless
U.
from
benefit
to
priate for countries
they are willing to cooperate with the United States in matters
In addition,
several countries
of tax administration.
Exchan e of Information
A
reements
authorizes the Secretary of the Treasury to
.
negotiate and conclude the exchange of information agreements
'kinds
what
regarding
discretion
accorded
is
While the Secretary
the exchange
of information will be included within the scope ofminimum
certain
Act
imposes
the
provisions,
of information
standards for such agreements .
The exchange of information provisions in the agreements must.
scope tax informat, ion pertaining to "thirdinclude within their
"
of countries
that
is, nationals or residents
country persons,
country that
Basin
Caribbean
the
or
States
United
the
other than
with
is a party to the agreement. This approach is consistent. the
U. S.
our present tax treaty policy, embodied in Article 26 of
a
that,
policy,
In accordance with
Model Income Tax Treaty.
jurisdiction with restrictions on disclosure of information
regarding such third country persons ~ould be required to modify
The same principle applies with respect to
such restrictions.
disclosure of information regarding ownership of bank accounts or
Nost. countries do not. place restrictions on
share ownership.
disclosure of such information; such limitations are characteristic primarily of jurisdictions which have organized themselves as
tax havens.
The
legislation
of information agreements will be terminable on
reasonable notice by either party. This will permit the credit
to be terminated with respect to future investment. in the event
that. the President revokes his designation of the country as a
country eligible for the benefits of the Act,
The Secretary may incorporate by reference in an exchange of
information agreement the exchange of information provisions of
an existing income tax treaty with a Caribbean Basin country,
provided such treaty provisions otherwise satisfy the requirements of the statute.
Our more recent tax treaties, -such as the
recently ratified treaty with Jamaica, will satisfy such
standards and we would be desirous of extending this tax incentive to these treaty partners as expeditiously as possible . It
should be clearly understood that exchange of information agreements may be entered into with a country whether or not. the
country has a tax treaty with the United States.
The exchange
~
It is
of information agreements
signature.
The text of the
agreements will, of course, be transmitted
to Congress not later
than sixty days after the agreement has been signed, in
accordance with the prescriptions of the Case Act (1 U. ST CD
section 112b).
expected that the exchange
will generally
Predominant
become
effective
on
Use
Property used predominantly outside the United States generally is not eligible for the investment tax credit. The Act
establishes an additional exception to this rule for Caribbean
Basin property; that is, property used predominantly
in one or
more qualifying
Caribbean Basin countries is made eligible for
the
credit.
Under
existing Treasury regulations
the
test for
test
determining
predominant use is the physical location
Thus, if property
or equipment is located in one or more qualifying Caribbean Basin
countries during more than 50 percent of the taxable year, the
predominant
use test will be satisfied.
The same regulations
also provide that the determination of whether a credit is allowable with respect to any property is made only with respect to
the year the property is placed in service.
If property is
thereafter used predominantly outside the United States the
credit taken with respect to such property will be subject to
recapture. A credit taken with respect to qualifying Caribbean
Basin property will be subject to recapture if the property is
used predominantly
outside one or more qualifying Caribbean Basin
countries and the United States.
The Act provides an exception to this recapture rule in the
case where a qualifying Caribbean Basin country no longer constitutes a qualifying country because the President' s designation of
the country as eligible for the benefits of the Act is terminated
or the exchange of information agreement is terminated.
In such
a circumstance, property which continues to be used predominantly
in the country in succeeding taxable years without interruption
will not be subject to the recapture rules. It would not be
equitable to subject the credit for such property to recapture
because of an event which is not within the taxpayer's control.
of Credit to Five Percent U. S. Shareholder of
oration
Forei n Cor
To summarize my discussion to this point, the credit will be
allowed to a UPS. citizen, resident, or corporation that invests
in property that is used predominantly
in one or more qualifying
Caribbean Basin countries after the enactment of the Act. Under
present law, however, the credit, would not be available to a U. S.
Pass-throu
h
that makes an equity investment in a foreign corporaWhere, for reasons of
tion that invests in qualifying property.
local law or accepted business practice, it is necessary that the
business activity be carried on through a "host country" corporation, allowance of the credit solely with respect, to property
a U. S. person would not constitute an effective
owned directly-by
investment, incentive.
shareholder
this problem and ensure the effectiveness of the
incentive, we have designed a passallow the credit. on a current basis
would
which
mechanism
through
to a U. S. shareholder that, owns five percent or more in value of
a foreign corporation's
stock, subject to certain limitations.
credit. is computed with respect to the
The pass-through
shareholder' s pro rata share of the foreign corporation' s investThe shareholder's
ment in Caribbean Basin property.
pro rata
share of such investment is limited for this purpose, however, to
the amount of the shareholder's actual additional equity investment in the corporation after the date of enactment of the Act.
The purpose of this limitation
the incentive in . these
fi. s to key
circumstances to new equity investment, which is permanent in
nature and subordinate to debt claims or trade payables.
In our
view, new equity investment. is the kind of investment. which is
likely to be responsive to the credit and which will form the
base for continued future growth in the Caribbean Basin
To surmount.
credit. as an investment
economies.
The limitations
on the pass-through
credit also take into
account the concern that the credit is allowed currently while
income earned by a foreign corporation is generally not subject
to U. S. taxation until it, is repatriated as a dividend to the
U S. shareholder.
It is for this reason that. the pass-through
credit is not allowed with respect to investment of retained
earnings of the foreign corporation in Caribbean Basin property.
The foreign corporation's
investment must. be attributable,
directly or indirectly, to new equity investment by the U. ST
shareholder.
This protects against, the possibility of an initial
profitable investment, generating a continuous series of credits
for a shareholder while U. S. tax on the income generated by such
investment is deferred.
Summar
View
of Investment
Tax Credit,
The five year extension of the credit I have described is an
innovative, carefully targeted incentive for new physical investment in Caribbean Basin countries . This proposal represents
as
powerful a tax incentive for investment as is feasible without
disturbing the integrity of our tax system. Its revenue cost,
will be about $50 million in 1983.
Relation of Extension of Credit to U. S. Tax Treaties
The United States has a number of tax treaties with countries
in the Caribbean Basin region, including extensions of certain of
our older treaties with the United Kingdom and the Netherlands.
It is our longstanding tax treaty policy to provide U. S. source
basis tax benefits to the residents of the treaty partner and to
obtain tax benefits for U. S. residents . Ne do not, as a general
rule, limit our residence basis taxation of our citizens and
residents . The decision to provide a tax credit incentive for
investment in qualifying Caribbean Basin countries is generally
at variance with our treaty policy of not limiting (or reducing)
U. S. taxation of our citizens and residents.
This decision highlights the special nature of our relationship to the Caribbean
Basin region and the importance we attach to this Initiative.
Countries outside the Caribbean Basin region will, no doubt,
seek similar benefits through tax treaties . The United States
has exchanged notes with a number of developing country tax
in which we acknowledge the partner's desire to
incentives in the treaty, but state that the
United States is not in a position to agree to such incentives'
The letters go on to state that if policies change in this regard
in the future, the United States will reopen discussions with a
view to amending the treaty to include an investment incentive.
These countries may view the extension of the tax credit as such
a change in our policy. A decision regarding further extensions
of the investment tax credit, both to existing and new treaty
partners, would not be made without full consultation with
interested Congressional committees.
treaty partners
include
investment
tax credit for Caribbean
The extension of the investment
Basin property is not inconsistent with this Administration's
strong policy against use of our tax treaties for conduit investments in the United States by residents from countries other than
our treaty partner.
Our opposition to such tax treaty abuse is
tax policy and consistent with the objectives
sound international
The purpose of the Initiative
of our Caribbean Basin Initiative.
is served by encouraging increases in productive economic activity and self-sustaining growth in the Caribbean Basin countries .
This purpose is not served by creating or sustaining tax haven
activity which is contrary to U. S. tax treaty policy, undermines
of the Internal Revenue Code,
and administration
and fosters an increased dependence by the tax haven country on
the United States .
the operation
IV.
Puerto Rico and Other U. S. Possessions
essential counterpart to the proposals to assist
Basin countries, the Act includes important tax
incentive and revenue measures for Puerto Rico and the U-S.
Some of these measures will also benefit other
Virgin Islands.
U S, possessions
As an
Caribbean
~
~
-10Back round of the Legislative
Measures
Affectinq the
Possessions
have a special
Puerto Rico and the U. S. Virgin Islands
the United States which this Adminihistoric relationship with
S- tax policy has long
stration recognizes and values. U.investment
in Puerto Rico, the
extended favored tax treatment to
The passage of
possessions.
U. S. Virgin Islands and other U. S.
substantially,
however,
(ERTA),
1981
the Economic Recovery Act of
incenthese
of
effectiveness
the
reduced
but unintentionally,
to
available
credit,
tax
investment
the
Further, making
t, ives.
encourage
investment in qualifying Caribbean Basin countries will
investment in the Caribbean Basin, possibly to the detrimentthatof
It, is essential
Puerto Rico and the U. S. Virgin Islands'
in the expected
share
Puerto Rico and the U. .S. Virgin Islands
region. Special
this
in
stability
economic progress, growth, and
so
possessions
these
for
provided
be
investment incentives must.
the
induced
by
Basin
Caribbean
the
in
that the development
Initiative does not occur at the expense of Puerto Rico or the
Virgin Islands.
The importance of the measures contained in this legislation
facing Puerto
is underscored by the adverse economic situation
22
approximately
rate
is
unemployment.
Rico. The Puerto Rican
in
Investment
decreasing.
of
prospect,
immediate
percent, with no
was
inflation,
for
adjusting
after
in
1980,
and
equipment
plant
only one-half the value of investment. in 1970. Between 1980 and
1981, the number of contractual agreements between the Puerto
and potent, ial non-local
Rican Economic Development Administration
contractual agreenew
in
This drop
investors dropped sharply.
plants beginning
manufacturing
ments indicates that the number of
is likely to
future
immediate
in
the
operation in Puerto Rico
fall.
for the impact, of ERTA and the Caribbean Basin
is proposing to extend certain tax
the Administration
incentives for investment. -to the U. S. possessions and to modify
the rum excise tax payment arrangements with Puerto Rico and the
U. ST Vi
Virgin Islands. Although the tax incentives will be available to the U. S. Virgin Islands and all other possessions, their
principal impact will be with regard to business operations in
Puerto Rico.
To adjust,
Initiative,
~
.S . Tax
Polic Toward Puerto Rico
The encouragement
of manufacturing investment in puerto Rico
is a longstanding tenet of Federal tax policy. This principle is
rooted in the belief that increased capital investment is the
most effective way of encouraging real economic growth in Puerto
Rico. Generally speaking, the Federal tax laws have encouraged
Existin
U
-11Puerto Rican investment by exempting income from such investment
from U. S. taxation.
Puerto Rico has, in turn, granted tax
holidays for most manufacturing operations.
Thus, U. S. manufacturing corporations operating in Puerto Rico generally pay little
or no U-S. or Puerto Rican tax.
Under section 936 of the Code, a U. S. corporation (the 936
corporation) deriving income from Puerto Rico is subject to
Federal tax on its worldwide income, but a special credit available under section 936 fully offsets the Federal tax on income
from a trade or business in Puerto Rico or from "qualified
possessions source investment income. " A U. S. corporation which
owns at least 80 percent of a section 936 corporation
is also
exempt from Federal tax on the dividend income from the 936
corporation.
Since 1948, Puerto Rico has had a complementary
program of tax exemption, called Operation Bootstrap, under which
exemptions from Puerto Rican tax have been offered as incentives
to U. S. companies to invest in manufacturing plants in Puerto
Rico
~
Prior to the passage of the Economic Recovery Tax Act of
1981, section 936 provided a significant incentive to invest in
Puerto Rico compared to the United States . By reducing the
effective corporate tax burden on U. S. investment through the
Accelerated Cost Recovery System (ACRS) and liberalizing the
investment tax credit, ERTA erodes the relative value of the
Puerto Rican tax incentive.
Once the provisions of ERTA are
will be
amount of U. ST investment
substantial
a
fully effective,
taxed nearly as favorably as Puerto Rican investments, thus
eliminating any tax incentive for investing in Puerto Rico. The
Administration
proposes to restore the incentive to invest in
Puerto Rico by extending the benefits of ACRS and the investment
tax credit to U. S. corporations operating in Puerto Rico and the
Restoration of the incentive will require
other possessions.
that the full investment tax credit plus one-half of the ACRS
deductions be made available to a U. S. corporation owning a
section 936. corporation.
Descri tion of Tax Incentives
present law, property used predominantly outside the
United States generally is not eligible for the investment tax
credit. However, property owned by a domestic corporation and
in a U. ST possession qualifies for the credit
used predominantly
unless the domestic corporation has in effect an election to
claim a Puerto Rico or possession tax credit under section 936 (a
section 936 corporation) or is entitled to the benefits of
section 934(b), relating to reduction in tax liability incurred
to the Virgin Islands (a section 934(b) corporation). Also,
in a U. S.
property owned by a AS ~ citizen and used predominantly
Under
U
is
qualifies for the credit, unless the U. S. citizen taxaU.
S.
limit
which
sections
entitled to the benefits of Code
tion of income derived in a U. S. possession. The Caribbean Basin
Economic Recovery Act would allow the investment tax credit, for
any property owned by a section 936 or 934(b) corporation or by a
U. S. citizen entitled to the benefits of such Code sections and
in a possession of the United States.
which is used predominantly
The Act also provides that property used in a possession would be
eligible for the recovery lives generally available for property
not used predominantly outside the U. S. Thus, it. will extend
ACRS to property
used in a possession.
Because section 936 and 934(b) corporations would be unable
use
these tax benefits, the Act provides for a pass-through of
to
the investment tax credit and fifty percent of the cost, recovery
deductions attributable to property owned by a section 936 or a
domestic section 934(b) corporation to certain U. S. corporations
that together own 80 percent, or more of the stock of the section
Thus, a U. S. corporation that would
936 or 934(b) corporations.
be a member of an affiliated group that includes the section 936
or domestic 934(b) corporation (but for special rules excluding
section 936 and 934(b) corporations from an affiliated group),
tax credit and fifty percent of
would be allowed the investment
the cost recovery deductions otherwise allowable to the section
936 or domestic 934(b) corporation.
Effect of Pro osal
These investment incentive provisions will reduce the cost of
capital and promote real economic growth in Puerto Rico, the U. ST
This proposal will
Virgin Islands, and other U. S. possessions.
restore the relative preference for investment in Puerto Rico
that existed prior to the passage of ERTA. It reaffirms the
Congressional policy of encouraging investment in Puerto Rico and
provides a significant, incentive to invest in the plant and
equipment which is vital to economic growth of the possessions.
Its revenue cost vill be about 955 million in 1983, rising to
possession
.
$100 million
annually
by 1985-
Dis osition of Excise Taxes on
Rum
law, the Internal Revenue Code imposes an exAll taxes collected under the Internal Revenue
Code on rum produced in Puerto Rico or the U. S. Virgin Islands
and transported
to the United States (less the estimated amount
necessary for payment of refund and drawbacks), are paid to
Puerto Rico or the U. S. Virgin Islands, respectively.
Under
cise tax
present
on rum.
At present, Puerto Rico and the U. S. Virgin Islands supply
about 90 percent of the U. S. rum market.
Rum produced
in Puerto
Rico and the U. S. Virgin Islands enters the United States duty
-13free
in import duties on rum produced in other
Basin countries, provided for in the trade title of the
Act, will reduce the Puerto Rican and U. S. Virgin Islands' share
of the U. S. rum market. This will adversely affect the rum
industry in Puerto Rico and the U. S. Virgin Islands and reduce
the amount of U. S. excise tax collections which they receive.
~
The reduction
Caribbean
In order to maintain this revenue source for the islands, the
legislation provides that all excise taxes collected at the
current tax rates on rum imported into the United States from any
country (less the estimated amount necessary for payment of
refunds and drawbacks) will be paid over to the treasuries of
Puerto Rico and the U. S. Virgin Islands.
The amount per proof
gallon paid over will not exceed the amount per proof gallon
would have been paid over if the rum had been produced in
Puerto Rico or the U. S. Virgin Islands. The Secretary of the
Treasury will prescribe by regulations a formula for the division
of these tax collections between Puerto Rico and the U. ST Virgin
Islands. The estimated revenue cost of this provision is about
$18 million in 1983.
which
oOo
of the Treasury
apartment
FOR IMMEDIATE
March
16, 1982
U. S.
AND
~
Washington,
RELEASE
SWEDEN
D.C. ~ Telephone 566-2041
CONTACT:
GEORGE
G. ROSS
(202) 566-2041
TO CONDUCT
INCOME
TAX TREATY NEGOTIATIONS
The Treasury Department
today announced that representatives
of the United States and Sweden will meet in Washington during
the week of March 22, 1982 to renegotiate the income tax treaty
between the two countries which has been in effect since 1939.
Since the treaty has been in effect for so many years, the
negotiations
will encompass a complete review of all of its
will take into account changes in
provisions.
The discussions
in the model
the tax laws of both countries and developments
for Fconomic
income tax treaties published
by the Organization
Cooperation and Development (OECD) and by the United States.
to provide information or comments on tax
wishing
related to the forthcoming negotiations is invited to do
writing to A. W. Granwell, International Tax Counsel, U. S.
Anyone
matters
so by
Treasury
Department,
Room
3064, Washington,
This notice will appear
1982.
in the Federal
o 0 o
R-680
D. C.
20220.
Register
on March
18,
,
pariment of the Treasury
FOR INNEDIATE
~
Washington,
D.C. ~ Telephone 566-20m
March 17, 1982
RELEASE
RESULTS OF AUCTION
OF 2-YEAR NOTES
The Department of the Treasury has accepted $5, 254
million of
10. 507 million of tenders received from the public
for the 2-year
notes, Series Q-1984, auctioned today. The notes will be issued
March 31, 1982, and mature March 31, 1984.
The interest coupon rate on the notes will be 14-1/89-.
The
range of accepted competitive bids, and the corresponding
prices at
the 14-1/8~ coupon rate are as follows:
$
Prices
100. 076
Bids
Lowest yield
yield
yield
Highest
Average
Tenders
at the high
14. 08'-o 1/
14. 16%
14. 14%
yield were allotted
99. 941
99. 975
48%.
TENDERS RECEIVED AND ACCEPTED
Location
Boston
New
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Tot al s
Rece ived
$
97, 510
8, 075, 120
85, 600
201, 185
114, 940
108, 650
1, 048, 335
128, 000
59, 155
91, 795
61, 220
(In Thousands)
Accepted
69, 495
3, 938, 735
67, 000
175, 435
93, 340
91, 620
281, 395
115, 735
54, 655
91, 295
53, 620
212, 580
8, 615
426, 740
8, 615
$ 10, 506, 865
$5, 253, 520
The $ 5, 254 million of accepted tenders includes $1, 327 million
of noncompetitive
tenders and $3i592
million of competitive tenders
from private investors.
It also includes $335 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 $ 5 ' 254 million of tenders accepted in the
auction process, $600 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for maturing securities, and $225 million of tenders
were accepted at the average price from Federal Reserve Banks as agents
for foreign and international
monetary authorities for new cash.
1/ Excepting 1 tender of $25, 000.
epartment of the Treasury ~ Washington,
For Release Upon Deliver
p. m.
Expec e a
:
D.C. ~ Telephone 566-204%
Address
by
Beryl W. c'prinkel
before the
Conference on clupply Side Economics
Atlanta, Georgia
The Honorable
March
Goad
18, 1982
Afternoon.
to be down here in Atlanta with you. I think it
is fair to say that this city has definitely become —the hub of
on their way
In fact people joke that when they die
the south.
in
chance
planes
have
to
will
to heaven (or wherever) they
It is
good
Atlanta!
Judging
a
from the program
certified supply sider
—
stay awhile
in Atlanta.
you
here, it appears that in order to be
also need to chanae planes — and
I know that Dave Meiselman spoke to you yesterday about the
Ho I
relationship. between supply side and monetarist economics'
am not aoing
to dwell on it. But I would like to kick in my two
cents on the subject because there is such a pervasive
on this point.
misunderstanding
these days that
How many times do you read in the newspapers
Fed's
tiaht
money
the
and
fiscal policy
the Administration's
other?
each
policy are runnina head long into
And how many times do you read that the supply side and the
policies are fighting
monetarist side of the Administration's
with each other?
In spite of the frequency of their appearance in the media,
Not only are supply side
both of these statements are untrue.
is essential that they go
it
compatible,
policies
and monetarist
together.
R-682
There are three great challenges to economic policy. The
up with the riaht policy in the first
first challanae is coming
And the third is
implementing
is
place. The second
that the public
a
such
way
in
that policy
communicating
understands
For those who still think there is some kind of conflict with
the supply side and monetarist economics, perhaps it i~s use uZ to
think of the situation this way.
it.
it.
heart and soul of any economy are the freedom,
opportunity, and incentives which it provides to individual
are based on the
initiative. Monetary and supply side economics
source
of wealth and
the
is
initiative
that
private
proposition
Both theories argue that. government
higher standards of livings
policies can be a significant detriment to private initiative and
both seek to reduce this perverse government influence.
The
characterized as the supply side of our
economic policy deals with the effect government spending and
financing has on the willingness and ability of individuals to
The monetarist component
take a chance on productive venturese
deals with money in the belief that. high and variable inflation
And that
is detrimental to work, savings and investment.
inflation is a monetary phenomenon.
The goal of the supply side
to increase the
and monetary elements of. our policy is the same:
productive potential of tHe economy. The only difference is that
they focus on different aspects of government behavior.
What has been
is carefully designed to rid
Beaqanomics
us
of stagflation
limiting money growth and inflation, while increasing
to produce more real goods and services.
Let
me
Reaganomics:
now
turn to the subject that
The Monetary
Component.
I
was asked
incentives
by
to speak on-
First, the monetary component, of the President's overall
economic policy must, be seen in the light of our single over
riding objective. And that, objective is to obtain real and
sustained non-inflationary
economic growth in this country.
That,
is what we are all about on the economic front.
want inflation to keep coming down and to
down.
We
interest rates to keep coming down. We want stay
to balance the
budget. And we want to reduce Federal spending as a percent of
CNP.
But all of these objectives — while very important in their
own right - are keyed in to the over riding goal of achieving
We
want
strong, sustained
economic growth
in America.
Now,
achieving
role does money and monetary policy play in
that objective? In order to answer that auestion,
what
we
clear on what money is and, perhaps more importantly,
purpose is to
it is not. Money is a construct, whose sole
faciiitate trade and to improve the efficiency of markets. It
exists to provide a consistent measure of the relative value of
real resources, both currently and over time. In sum, it is the
Money is not the ball game; it is only the
medium of exchange.
ticket into the stadium.
maximum efficiency of our monetary
It is our view that thestraightforward
policy: moderate,
a
simple,
requires
system
must be
what
.
~stead
growth
in the money supply.
Earlier this year, the Fed announced money growth targets for
1982. They are, xn our view, appropriate target ranges and the
endorsement of them is total.
Administration's
are, however, lingering doubts in the financial markets
There are a variety of
that this policy will be maintained.
is one of the major
condition
reasons for these fears, and this
high-inflation/low-growth
from
a
obstacles in the transition
growth.
economy to one of low-inflation/high
Imagine for a moment, that investors, bankers — the public at
large — was very confident that money growth was going to be sure
Whether there was an election, whether
and steady and gradual.
whether
there was a budget deficit;
there was a recession;
It was going to stay the same.
whatever.
make any
that is, the belief itself
Would that
difference in terms of our goal of ancreased real arowth? I
Because savings, investment and capital
submit that it would.
expansion decisions would be made in an environment where "the
Other
element of the unknown" was significantly reduced.
countries, such as Japan and Germany, have that type of
environment
and they have enjoyed enviable rates of inflation and
interest as well as economic growth. They have established that
environment because they have a sound, credible monetary policy.
Let's look at it this way: The whole point of monetary
policy is to establish and maintain an environment where the
A
positive effects of supply side actions can be maximized.
the
of
sound monetary policy simply sets up the nominal side
equation so that supply side economics can really qo to work on
the real output side. And that is why it is essential that
supply side economics go hand in hand with a stable monetary
policy. One cannot work without the other.
There
—
—
interest rates consists of three parts: the real rate, the
inflation premium and an uncertainty premium. Deficits, if they
are very .large, do tend to put upward pressure on the real rate
This effect,
which has historically been around 3-4 percent.
the
inflation
is
conseauence
more
Of
however, is slight.
Xf a lender thinks the rate of inflation will be lower
premium.
in the future, he can reduce his overall rates and still expect,
to make a buck. Today, slow, steady money growth and declining
inflation are putting strong downward pressure on the other two
componentse
Now,
how do we
achieve this stable money policy'P
of financial innovation in recent, years has
the idea that monetary policy has been (or i, s being)
xendered ineffective as a tool for economic stabi3. ization.
However, the evidence that, is provided to support. this conclusion
is largely anecdotal. People look at the rapid growth of new
types of tx'ansfex accounts and money market mutual funds, and
conclude that they must, have a fundamental
impact on monetary
The burst.
reinforced
relationships.
The implication of all these anecdotes is that. the nature of
'money" in our economy is changing so xapidly that either (1) the
Fedex'al Reserve can no longer define money, let alone control
adeguately, or (2) controlling money,
possible, is no longex' a
if
useful policy.
it
all these changes are undeniably going on and are
important, they do not lead eithex to the conclusion that the
Federal Resexve's ability to conduct monetary policy is being
hampered, ox to the conclusion that the economic impact, of
monetary policy has been weakened.
Effective monetary policy
actions reauire only that there exist, some economic variablebe it the money supply, the monetary base, or the price of
carrots —that
awhile
meets two conditions:
First, it must be controllable -- and ideally with some
recision
by the Federal Reserve.
condition eliminates
ot of potential candidates, including This
the price of carxots.
Second, it needs to be an economic variable that is related
in a reliable way to the economy.
—
Consider the first condition.
Relative to the thousands of
pieces of economic data that we regularly collect in this
country, there are but, a handful of economic variables that. the
Federal Reserve can control to some degree. That small group
includes, of course, several measures of the money supply,
monetary base, and several measures of bank reserves1 sh;-=", ]d
a
add that some would also include interest rates or bank credit as
candidates, but in my view the Federal Reserve cannot effectively
control either with an acceptable level of precision over the
long run. Certainly the Federal Reserve cannot control total
credit.
opinion, the monetary base is a useful and reliable
of the monetary actions of the Federal Reserve. The
base is simply the sum of certain items on the Federal Reserve's
balance sheet and since it can exactl control the largest asset
(its portfolio of government secure mes) the monetary base can be
closely controlled even in the short run. This is less true of
the money stock
and the precision of control declines as we
move from M1 out to the broader money measures, M2 or M3.
It is certainly true that financial innovations can change
the assets that constitute transaction balances in our economy.
At times, these changes have necessitated chances in the
definitions of money, such as in 1981 with the introduction of
nationwide NOW accounts. But with the information, and technical
expertise available to the Federal Reserve, such adjustments can
be, and have been, made. The particular menu of items which is
included in the measure of "money" is not the most important
issue. Instead, the major concern is to define a monetary
aaaegate that the Federal Reserve can control.
In
measure
my
—
Financial innovation has no effect on controlling the
monetary base. Despite the large growth of NOW accounts in 1981,
the ability of the Federal Reserve to control the average growth
of M1 was apparently unimpaired.
relationship
between the monetary base and M1 has
extremely stable over the past decade, despite the
much talked about increased pace of financial
innovation.
If one
looks at the trends over the past decade, one will find that the
link between the base and- the money supply did not become less
predictable as the pace of financial innovation has auickened.
If financial changes were interfering with the Fed' s ability to
control M1 we would observe increased variation between changes
in the base, which the Fed can control exactly, and money growth.
shows that this is simply
The stability of the money multiplier
not the case.
The
remained
it
to my second condition: that once we control money,
be predictably and reliably related to the economic
If financial innovation
variables we really want to influence.
has reduced the effectiveness of monetary policy, we would expect
to see greater variability in the relationship between money and
Now,
must
GNP;
that
is, velocity.
from one auarter to
velocity does vary substantially
over periods
variation
the next, it, has shown remarkably little
arowth
of 3.1
txend
a constant
of several quarters and has hadThere
this
that,
sian
no
percent per. year since 1959.in recentis years
by financial
relationship has been upset
While
innovationo
innovation has been a
clear effect of recent financial
of various measuxes of
growth
of
rates
wide divergence among the
of
This is nothing new. Since N2 contains a number
money.
have
rates
interest
in
variations
interest, -sensitive components,
N1.
of
that
from
diverae
to
P2
of
arowth
always caused the
and other
Before the introduction of money market certificates qrowth
would
N2
rate of interest,
items that pay a market-related
savinqs
out
of
slow when interest rates rose as funds were drawn
Now, with the relaxation
accounts and into market instruments.
in N2 of instruments.
inclusion
of interest rate ceilings and the
that pay a market. return, N2 gro~s more rapidly than N1 as
interest rates rise.
This was the case during 1981, when N2 qrew much more xapidly
than N1B. However, this does not mean that. the efficacy of
monetary policy has been diminished because when N2 qrowth
divexges from N1, GHP (which is what, we want to influence) has
not, followed the path of N2, but instead has continued to follow
(defined to include NOW accounts). That, is, the
N1 growth,
x'eliable and predictable relationship between N1 arowth and GNP
One
is not chanqed by divergent
experience only reaffirms this.
arowth
growth
in N2.
The 1981
Differing rates of arowth in N1 and N2 typically lead to
auestions and concerns about which monetary aggregate is the
better guide to monetary actions. Returnina to the two
conditions I listed earlier, the money aaareqate that, is most
controllable by the Federal Reserve and most xeliably related to
activity is,
either criterion, N1.
. At the present time, I see no need for changes in regulations
or in the Federal Reserve's powers to compensate for the effects
of financial innovation.
Arguments for changes in regulation might, also be based on
issues of equity between types of financial institutions and
organizations.
Whatever the motive —whether out of perceived
concern about monetary control or about, equity -- action to stop
or reduce the effects of financial innovation usually involve
some addition to, or extension of, government
regulation.
It is
important to recognize that much of' the financial innovation we have
witnessed in recent years has been in res onse to regulation.
None)
Market Nutual Funds are probably the most successful example
f such
innovation.
If we have slow, steady money growth, this will -.voramly
affect investment decisions and contribute to lower rates of ~+crest,
economic
by
,
.
There is a rather subtle shift taking place in America.
In
periods of accelerating inflation -- which is what we had until
last year -- real assets tend to have a greater real rate of return
than financial assets.
As a result, over the last several years,
savvy investors have tended to move out of such things as stocks and
bonds and into such things as houses, land and antiques.
there
Conversely, in periods of decelerating inflation, which is now,
is a tendency for investors
institutions and individual
—
--
to shift their portfolios somewhat from real assets
to financial assets. The reason for the shift, of course, is that
investors see a shift in the rate of return of one category of
assets relative to the other category. I am not saying that
everyone is selling rugs and condominiums
and buying stock. But
there is some of that going on.
And in a 4 trillion dollar economy -- which we are on the verge
of having -- a shift of 1 or 2 or 3 percentage points puts tens of
billions of dollars into the system in the form of expanded potential
credit. Thanks to declining inflation, that phenomenon is already
happening, and additional credit needed for economic expansion is
Volatility in policy delays desired movement into
forming rapidly.
households
stocks and bonds.
Conclusion
Let
me
sum up
then, in a very brief fashion,
what we have
here.
First, the monetary component of Reaganomics is critical to tne
The old garden-and-soil
analogy is applicable here.
overall program.
is sound. The
The supply side promise of real growth and prosperity
incentive effects will work in America in the 1980's just as they have
worked hundreds of times before in our own country and in other countries'
But they will not work unless there is a fertile, stable monetary
You can have the best seeds in the world, but they will
environment.
not grow without the proper soil.
Secondly, the Fed can control the money supply and therefore the
If you look at the data you
environment" for the economy.
will see the following relationships:
"monetary
Inflation,
nominal
GNP
and
interest rates follow
Ml
growtn.
follows the growtn of the monetary base. And
if it chose, control the base -- to the
could,
the Federal Reserve
are
of this approach, I say "Try it,
who
skeptical
To those
penny.
"
you' ll like
Nl
growth,
in turn,
it.
Let
me
that history will record this Administration
-- high growth Administration.
inherited a pretty tough situation.
conclude by saying
as a low inflation
But please remember,
--
low
we
interest rate
felt like
and found
I first
went to Washington,
on a tour of an art gallery
alone in a room of modern sculpture.
Staring
broken glass, and tangled shapes, one of tgqg
Don Regan and,
two teenage boys who were
You know,
when
themselves
at, the twisted
pipes,
said, ."Let's get out of here before they accuse us of wrecking this
place!"
We
were tempted
to leave,
but, we
stayed, and
we
are staying.
And in the last twelve months we have had to spend a great, deal of
But we
time repairing the wreckage from the last Administration.
are now on a sure, steady course toward low inflation, lower
interest rates and real economic growth in America. For us fully to
realize our potential, we must have less volatility in monetary growth,
Thank you.
department
of the Treasury
FOR IMMEDIATE
March
18, 1982
RELEASE
Unblocking
~
Washington,
D.C. ~ Telephone 566-204%
Contact:
Stephen Hayes
566-2041
of Czechoslovak Assets
of the Treasury announced today the
of Czechoslovak assets located in the United
States. This action was taken in accordance with the
Settlement of Certain Outstanding Claims and Financial
Issues, which was signed by the United States and the
Czechoslovak Socialist Republic on January 29, 1982.
Czechoslovak assets were previously blocked under
the Foreign Funds Control Regulation, 31 C. F. R. Part 520.
The initial blocking, which occurred in 1941, was intended
to prevent nationals of Czechoslovakia from being forced
under duress to transfer to the Axis powers their claims
to assets in the United States.
The Department
unblocking
The blocking also served as a weapon of economic
warfare to hamper the financial and comtnercial activities
of the World War II enemies of the United States. After
the end of World War II, the United States continued to
block Czechoslovak assets as a response to the nationalization by the Czechoslovak Government without compensation
of property of certain United States nationals.
R-683
of the Treasury
Department
FOR IMMEDIATE
S.C. ~
~ Washington,
RELEASE
March
Telephone 566-204%
18, 1982
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders
for
to mature
as follows:
and
RANGE
$
5, 251 million of 52-week bills to be issued March 25, 1982,
were accepted today.
The details are
24, 1983,
March
OF ACCEPTED COMPETITIVE
(Excepting
BIDS:
Price Discount Rate
— 87. 391
High
12.470%
— 87. 328
Low
12.533%
12. 509%
Average — 87. 352
Tenders
at the
low
2
tenders totaling
Investment Rate
Coupon-issue
(Equivalent
$3, 195, 000)
Yield) 1/
13.98%
14.06%
14.03%
price were allotted
38%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Boston
New
York
Philadelphia
Received
$
40, 715
7, 363, 490
31, 845
95, 920
99, 090
45, 270
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
702, 635
56, 385
14, 415
28, 195
15, 515
795, 850
63, 050
$9, 352, 375
Accepted
21, 715
4, 277, 750
31,845
71, 920
$.
60, 470
44, 770
152, 635
35, 045
10, 415
27, 695
15, 515
437, 750
63, 050
$5, 250, 575
~T8
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
$7, 422, 390
428, 185
$7, 850, 575
1,000, 000
$3, 320, 590
501, 800
501, 800
$9, 352, 375
$5, 250, 575
Institutions
TOTALS
An additional
$3, 300
to foreign official institutions
thousand
for
new
428, 185
$3, 748, 775
1,000, 000
of the bills will be issued
cash.
1/ The average annual investment yield is 14. 52%. This requires an
annual investment yield on All-Savers Certificates of 10. 16%.
R-684
lepartmeni of the Treasury
~
Washington,
O.C. ~ Telephone 566-2O41
I„,„H'("
For Release Uaon Deliver
Expected at 10: 0 a. m.
March 22, 1982
STATEMENT
THE HONORABLE JOHN
OF
E.
CHAPOTON
ASSISTANT SECPETARY (TAX POLICY)
BEFORE THE SUBCONNITTEE ON OVERSIGHT
CF THE INTERNAL REVENUE SERVICE
COMMITTEE
Nr. Chairman
and Members
ON
FINANCE
of this Committee:
I am pleased to be here today to discuss the provisions
of S. " 2198, the "Taxpayer Compliance Improvement Act of
1982. In general, we view this bill as an important step in
reducing
has
the compliance
just described.
tax gap
--
which
Commissioner
Egger
Overview
is a particularly appropriate time to consider
steps that might be taken to collect taxes due under existing
law which, for a variety of reasons, currently escape
collection. I would like to compliment the Chairman and this
Committee for holding hearings on the issues presented by the
tax gap. I would also like to thank the Chairman and other
sponsors of S. 2198 for introducing tnis measure, which we
think takes important steps toward reducing the compliance
tax gap as well as preserving the integrity of our voluntary
tax ccmpliance system.
This
The
provisions
of S. 2198
may
be divided
into five
categories: (1) broadening the scope of and improving the
quality of information reporting; (2) reworking the penalty
structure of the Internal Revenue Code to correct certain
deficiencies, and to deter troublesome and growing abuses
R-685
that
may
reflect increasing public acceptance of
(3) adjusting the method of computing in«
on payments and receipts by the IRS; (4) revising the
antiquated rules dealing with voluntary withholding of
retirement plan distributions; and (5) ancillary issuesI
chiefly application of the Paperwork Reduction Act of 1980
Treasury and IRS. I will discuss each of these provisions
turn.
noncompliance;
Re
ortin
Requirements
General
existing law, many types of payments are subject
Most payments of dividends and
to information reporting.
than
$10 in a year are required to
interest aggregating more
1099. Copies of Form 1099 are
Form
on
be reported to the IRS
also required to be sent to taxpayers so that they will have
The
the amount of income from each source readily available.
these
chief class of obligations that is not covered by
reporting rules is obligations of the United States
(although there is reporting by the Bureau of the
Government
Payments
Public Debt to IRS on some types of obligations).
such as royalties, rents and annuities are subject to
information reporting if the payor is engaged in a trade or
business, and the payments in a year exceed $600.
are subject to information
Wages paid to individuals
reporting in addition to withholding of tax at source. The
system has been in place for almost forty
wage withholding
the
years;
system has long been accepted, and it is generally
agreed that the system functions well.
Under
S. 2198 would effect major changes to the tax rules
The thrust of these
information reporting.
provisions is to increase the number of transactions subject
to information reporting and, in conjunction with certain
governing
penalty provisions, to improve the quality and
of reported information.
that
We recognize
information reporting on taxable transactions is valuable
both to the Government
to enable it to check the
information reported by taxpayers -- and to the vast majority
of taxpayers who conscientiously attempt to report all of
their income. Time and experience have shown, however, that
infcrmation reporting is not a panacea: We need only
contrast the rate of taxpayer compliance in the wage area,
where withholding
is generally required, with current levels
of compliance in areas where only information reporting is
proposed
usability
—
required.
It is estimated that wage and salary income, most
of which is subject to withholding,
is underreported by onlY
2 or 3 percent; on the other hand, the comparable
figure for
interest and dividend income, most of which is subject to
information reporting only, is between 10 and 16 percent.
Twenty
dividend
billion dollars or
income
more each year
goes unreported.
in interest
and
There is little question that compliance is
substantially higher under a withholding system than under a
system of information reporting only. We therefore believe
the time has come for imposing withholding on interest and
dividend income as long as the costs to withholding agents of
this system are not excessive. For that reason,
implementing
has proposed withholding
on interest and
the Administration
dividends.
Thus, while improving and extending the
information reporting network is desirable, particularly to
the extent that U. S. Government and corporate bearer
obligations would become subject to reporting, we believe
that the tax gap has grown too large for us to continue to
take limited incremental steps toward improved taxpayer
compliance in the interest and dividend area.
the
The balance of the bill's provisions broadening
on
reporting
for:
(1)
scope of information reporting call
on
governments
local
and
State
charged tips; (2) reporting by
tax refunds; and (3) issuance of regulations requiring
reporting by commodities and securities brokers. Let me
discuss these proposals in turn.
Char ed
Ti s
Employees who receive tips of $20 or more in a month are
required under present law to report such tips to their
The employer, in turn, is required to report to
emp'oyer.
the IRS (and to the employee) the amount of tips reported by
the employee.
The employer is similarly obligated to
on
tips reported by the employee.
withhold tax
constitute
employees report
This
is simply
income.
their
tip
of
less than 20 percent
require
would
2198
S.
compliance.
unsatisfactory taxpayer
employers to treat tips that are charged on a credit card,
and paid over by the employer to an employee, as wages
Small emp'oyers, who are
subject to information reporting.
or fewer employees
five
had
defined as those who normally
be exempt from this
would
calendar
year,
during the preceding
Tips are clear" y compensation
taxable income. Current estimates
and thus
show that
reporting
generated
requirement.
Since a paper record is already
the credit card transaction, there should be
little additional paperwork burden as a result of this
it is therefore desirable to impose informatio~
requirement;
reporting in these circumstances.
by
State
are required to include in income the amount
State or local income tax refund, if the tax was
deducted in a prior year, and the deduction gave rise to a
tax benefit. Frequently, however, taxpayers fail to include
these refunds in income. Doubtless this noncompliance
sometimes results from taxpayer ignorance of the requirements
of substantive law. In addition, we believe that taxpayers
often completely overlook the fact that they received a
refund in the prior year, or lack the particulars about the
S. 2198
refund when they fill out their income tax returns.
of
Receipt
problems.
would go far to remedy both of these
taxing
local
and
States
information reports from the
jurisdictions would heighten taxpayers' awareness that the
the requirement would
refunds are taxable.
Additionally,
of
.
Tax Refunds
Taxpayers
any
provide taxpayers with a timely paper record of the
informatiorr which they require.
Although this provision is clearly desirable from the
we must tread
point of view of Federal tax administration,
carefully in imposing a requirement of even this limited
nature on State and local governments,
if for no other reason
than out of concern for the costs to the States of complying
with these new reporting requirements.
Ne note, however,
that there has been a proliferation of information exchange
agreements between the Federal and State governments.
It is
anticipated that many States would satisfy their obligations
under this provision of S. 2198 by simply providing the
information called for by current agreements (although
information would also be required to be provided to the
inaividual taxpayer, a practice that is not now in effect).
It thus appears that it would not be unduly burdensome to ask
the States and local governments to take the further step of
insuring that taxpayers have the needed records concerning
State tax refunds to complete their Federal tax returns.
Re
orts
b
Securities
and Commodities
Brokers
The tax law has long provided the Internal Revenue
Service with authority to require reporting by brokers of the
profits and losses and other information concerning their
customers'
effect. S.
At
present,
there are
no such
requirements
in
the issuance of regulations
2198 would
requiring information reporting by commodities and securities
brokers on capital transactions, as well as the sale or
transfer before maturity of any bond or other evidence of
indebtedness (other than Treasury Bills or commercial papez'
sold or transferred by corporations).
In its present form,
S. 2198 would reauire that this information be reported only
to the IRS, not to the taxpayers involved.
In our view, a
'substantial part of the value of reporting lies in the fact
that it informs taxpayers of their taxable income -- in this
case, gains and losses on securities and commodities
transactions.
The failure of taxpayers to receive this
could
well account for the very high rate of
information
noncompliance -- 56 percent -- for capital transactions
If reporting of capital transactions is to be
generally.
mandated, we hope the Committee will give careful
consideration to the desirability of furnishing information
to taxpayers as well as the IRS.
mandate
In cases where a brokerage house does not possess all of
the information necessary for the taxpayer to compute gain or
loss on a given item, we would anticipate that regulations
would simply require that the brokerage house report the
information that it has. For example, in the case of a
customer who brings a security to a brokerage house for sale,
the brokerage house would report the sale proceeds'
While
this would not provide full information on the amount of gain
or loss from this transaction, it would give the IRS
sufficient information to determine that the full proceeds
were correctly reported, and would fully inform the taxpayer
of the sale transaction, requiring only that he ascertain his
tax Lasis to report the transaction correctly.
poor rate of compliance for capital
generally leads us to the conclusion that
information reporting by securities and commodities brokers
is desirable. However, we would like an opportunity to
consider certain questions that are raised by this provision.
First, we would wish to consider the types of information
that would be useful to IRS in improving compliance in this
az'ea. Second, we would like to examine the costs both to the
Lrokerage industry and to the IRS of producing information
that would be useful to the Government and taxpayers.
We
of the
look forward to working with you and representatives
brokerage industzy to develop answers to these questions.
The extremely
transactions
Re
ortin
S.
2198 would permit
In Machine-Processable
Form
the Commissioner
to require
filed in a machine-processable form,
media in the case of a person who is
on
magnetic
including
It is substantially
required to file multiple returns.
simpler and cheaper for the IRS to process documents filed in
machine processable form.
Many persons filing large numbers
of returns now voluntarily report in magnetic form.
Reporting on magnetic media is typically no more expensive
At a
(and often less expensive) than reporting on paper.
that tax returns
be
time when businesses are increasingly relying on computers to
perform basic information processing functions, it seems
appropriate to confirm that the Commissioner may require
reporting in this manner, recognizing that it will be
necessary to employ a flexible approach to take into account
situations where persons do not have computer capability.
Penalt
Provisions
Penalties in a voluntary tax compliance system must have
basic characteristics.
First, the penalties must deter
taxpayer behavior that would impair the voluntary tax
compliance system; persons who purposely or recklessly fail
to comply with the tax law must be subject to sanctions.
Second, penalties must take into account, through abatement
processes or otherwise, reasonable errors or omissions made
in good faith. This second element is particularly
important
given the degree of complexity of our tax laws.
two
A'though most taxpayers wish to pay their fair share of
taxes, there is an institutionalized
minority that relies on
flaws in the existing penalty structure to avoid taxes. This
avoidance results, in part, from the opportunity under
current rules to take highly questionable or aggressive
positions on tax returns with knowledge that even if the
position taken is struck down, no penalty will be imposed on
the resulting tax deficiency so long as a "reasonable basis"
for the position taken exists. Because only a small
percentage of returns are audited each year, these aggressive
positions may never be scrutinized or questioned by the
Internal Revenue Service (although it is true that IRS audits
a relatively high percentage of c rtain returns based on
selection techniques indicating a high probability of a
substantial audit adjustment).
Thus, the combination of rhe
audit lottery and the absence of effective penalties makes it
prof' able for taxpayers to reduce their tax liability
through aggressive positions on their
masquerade as good faith constructions
Revision of the penalty
structure
is
tax returns which
of the tax law.
thus
clearly in order.
progress has been made in dealing with abusive
behavior of this sort. An over-valuation
penalty
was added by the Economic Recovery Tax Act of 1981 to deter
taxpayers from claiming exaggerated deductions or credits
based on an overstated valuation of property.
As structured,
the penalty will apply if the claimed value of property
exceeds 150 percent of its true value; appraisal reports or
opinions of experts will not, in general, prevent application
of the penalty.
Some
taxpayer
Audit Lotter
Penalt
S. 2198 would impose an "audit lottery" penalty equal to
of tax liability if the
10 percent of an understatement
understatement
is substantial.
understatement
A substantial
is defined as 10 percent of tax liability, but at least
$5, 000 for individuals, subchapter S corporations and
personal holding companies, and $10,000 for other
corporations.
In computing the understatement,
items giving
rise to a deficiency would be treated as having been reported
properly and full tax paid thereon if the taxpayer adequately
disclosed on the return or an attachment to the return that
the reporting of the item was questionable.
Thus, taxpayers
about the resolution of an issue may
who are uncertain
continue to take "reasonable basis" positions, just as under
existing law. Taxpayers would, however, be required to
disclose to IRS the fact that the questionable or aggressive
position has been taken or else face the possibility that
this penalty would be imposed.
I applaud the sponsors of S. 2198 for squarely facing
the difficult issue of overly aggressive returns filed by
taxpayers attempting to take advantage of perceived
It is
weaknesses in our voluntary compliance system.
important to reverse the perception among some taxpayers that
aoopting aggressive tax return positions is necessary or
appropriate to avoid "overpaying" taxes relative to other
The audit lottery penalty would undoubtedly
taxpayers.
go
far in reducing that perception.
There are certain aspects of this penalty that we
Whether
believe are in need of careful consideration.
set
forth
in
a
tax
return
been
adeouate disclosure has
difficult to resolve in certain cases. Also, we wonder
may
if
be
application of the penalty might be inequitable in cetain
circumstances, such as in the case of ill-informed taxpayers.
like to work with this Committee to fashion a
We would
penalty that would avoid or minimize these difficulties.
Cor orate Officer/A ent Fraud Penalt
penalty measure of S. 2198 that I wish to
penalty for
review in detail is the corporate office'r/agent
Under this
corporation.
participation in the tax fraud of a
as
or
employee,
director,
officer,
provision, a corporate
civil
for
a
liable
be
would
corporate
agent,
well as a
of tax by a
penalty equal to 50 percent of an underpayment
"knowingly
corporation if the corporate officer or agent
participated" in the fraud. Knowing participation would
include direct participation in the fraud by the individual,
ordering a subordinate (whether or not the subordinate was
to participate in the fraud, or
employed by the corporation)
to prevent participation in the
knowing of and not attempting
conduct would constitute
However,
subordinate.
fraud by a
"knowing participation"
only if the individual knew or should
would result in an
have Known that the participation
The second
underpayment
of tax.
Under present law, corporate officers are subject to
criminal penalties but not civil penalties for participating
in the tax fraud of a corporation.
Agents who are tax return
preparers may be subject to civil liability of $500 for
participating in such fraud. The unavailability of civil
sanctions against corporate officers for participating in the
fraud of a corporation leaves the IRS without an effective
civil remedy agaiimt corporate officers who engage in conduct
constituting tax fraud of a corporation.
While a civil fraud
penalty may be asserted against the corporation itself, the
burden of such a penalty is borne by the shareholders;
particularly in the context of a publicly held corporation,
the corporate officer might not feel the "sting" of that
penalty.
Initially, the issue of the overlap of the return
penalties and the corporate officer/agent penalty
should be clarified.
the amount of any corporate
Presumably,
preparer
officer/agent fraud penalty should be reduced by the amount,
of any return preparer penalty.
Second, we wonder whether a
penalty of $100, 000, particularly in the case of relatively
low-level
employees,
issues, however,
conceived.
may
Conduct
high. Aside from these
in our view, soundly
to tax fraud committed by a
be somewhat
the penalty
amounting
is,
doing business in noncorporate form would give rise to
It is difficult to see why a
fraud penalty.
different result should obtain merely because the business is
carried on in corporate form. Therefore, we view the concept
of this penalty as a logical and necessary supplement to the
Code provisions dealing with tax fraud.
person
a
civil
Penalties
Tax a er
The
penalty
for Failure to File Returns
Identification
bill provides for
provisions relating
or Provide
Number
a
series of revisions to the
to information reporting, and
reguirement in the situation where no
social security number or other taxpayer identification
number is provided to a payor, or where an incorrect taxpayer
identification number is provided to a payor, after the IRS
has notified the payor that the number is incorrect.
Briefly, these provisions are as follows:
adds a withholding
a person fails (1) to furnish a taxpayer
identification number to a payor, (2) to include a
taxpayer identification number in a return, or (3) to
include the taxpayer identification number of another
person in a statement or return filed (e. cC. , A' s
failure to include B's social security number on a
Form 1099 issued to B), the $5 penalty provided under
present law would be increased to $50, with a maximum
of $50, 000 (increased from $25, 000) for all such
failures during a calendar year. Where the failure
to include another person's taxpayer identification
the penalty
number in a return filed is intentional,
would be $100 per failure, with no limit.
Where
Where
a payor
dividends,
fails to file
interest or other
an
information
return
on
amounts, the penalty
would be increased from $10 to $50 per failure, but
not to exceed $50, 000 ( increased from $25, 000). If
the failure to file such returns is due to
intentional disregard of the filing reauirements, the
penalty would be 10 percent of the amount of the
payment (5 percent in the case of reports by
brokers).
If
fails to provide a taxpayer identification
at the rate of 15
a payor, withhclding
IRS
Alternatively,
percent would be reauired.
cetermines that the taxpayer identification number
provided to the payor is incorrect, the payor would
a payee
number
to
if
-10upon notice from the IRS that the
withholding
to supply the correct taxpayer
failed
taxpayer has
identification number. Withholding would continue as
long as the taxpayer fails to provide a number, or
does not correct an incorrect number.
start
or deliberately
with the
will
provoke, at
income
expectation that a failure to report
the
making
to
far
2198
goes
S.
sanctions.
most, trivial
generally
meaningful
by
requirements
various Code reporting
increasing the penalties for refusals to comply. I would
like to comment on two of these penalty provisions.
Persons should not be able to disregard
avoid information reporting responsibilities
The minimum penalty of 10 percent of the amount subject
the
to
reporting requirement (5 percent in the case of
reports by brokers) where a payor intentionally disregards
the filing requirements would in some cases result in a
However, we think significant penalties
substantial penalty.
are appropriate where parties knowingly attempt to subvert
the reporting requirements that are crucial to the
functioning of our tax system.
Next, let me mention the "penalty withholding"
reports which are received
provision.
Ktany information
or
number altogether,
identification
either lack a taxpayer
show an incorrect number.
Fully 11 percent of the reports on
These
dividends and interest payments lack this information.
defective reports are in many cases worthless to the Internal
Revenue Service; those reports that are corrected are done at
a system of source
very substantial expense.
By implementing
withholding on persons who are not willing to provide correct
taxpayer identification numbers, this provision will place
the onus of correct information reporting on the person best
able to insure that the reporting is accurate.
We think
this is an appropriate and desirable sanction.
Minimum
Penalt
for Extended Failure to File
Under present law, a person who fails to file a tax
return on a timely basis is subject to penalties based on a
percentage of the amount of tax due. Thus, where no tax is
due, no civil penalty can be assessed.
In many cases, IRS
finds it necessary to seek out persons who have failed to
file their tax returns, in order to obtain such persons'
returns. Many of these persons ultimately are entitled to
refunds.
In those cases, IRS' efforts tc compel the filing
are not recompensed, except for the value of the right to use
-11the refund without interest expense (assuming IRS pays the
refund within 45 days after the return is filed). S. 2198
addresses this problem by imposing a minimum late filing
penalty of $100 when a return is filed more than 60 days
after the return due date (including extensions).
We
reservations about this provision.
are concerned about the effect of codifying a
late filing by 60 days. Although we recognize
have two
Initially,
we
rule allowing
that there could be substantial practical problems in
applying this penalty without a grace period, we are not
persuaded that Code-sanctioned
late filing is a desirable
rule of law.
Second, we are concerned that application of the penalty
could give rise to a perception of government insensitivity
in certain cases where a penalty was applied to
poorly-informed
persons; however, a liberal construction by
IRS of the "reasonable cause" exception to the penalty would
go far toward allaying those concens.
Relief
From Criminal
Estimated
Tax Return
Penalt
Where
far Failure to File
licable
A
Exce tions
present law, the obligation to file an estimated
and the criminal sanction for failure to file
such a return, are not correlated with the exceptions to the
Thus, a
of estimated tax liability.
penalty for underpayment
sanction for failure to file an estimated tax return may
exist for a person who would incur no penalty for
underpayment
of estimated taxes because one of the statutory
exceptions is applicable.
S. 2198 would conform the rules
imposing criminal liability for failure to file a return to
of estimated
the exceptions from liability for underpayment
taxes. We support this provision.
Under
tax return,
Interest Com utation Method
S. 2198 provides a number of adjustments to the Internal
Revenue Code interest computation provisions, which apply
both to interest due to IRS as well as interest due to
taxpayers.
welcome.
Com
At
computed
In our view, these changes
oundin
present,
are appropriate
and
of Interest
interest
on a simple
rather
under the Int mal
than a compound
Revenue
basis.
Code
is
-12Particularly in the case of an underpayment or overpayment.
that is outstanding for several y'ears, the simple interest
the amount
computation has the effect of greatly understating
of interest due.
For example, 15 percent simple interest for 1 year is
equivalent to 14.5 percent interest compounded semi-annually
However, 15 percent simple
not a significant difference.
interest for 5 years is equivalent to only 11.5 percent
For 10 years, a
interest compounded semi-annually.
rate of 9 4 percent is equivalent to 15 percent
compounded
for longer
Thus, for debts outstanding
simple interest.
—
does not
rate
even at a high
periods, simple interest
As a
money.
of
the
use
for
provide adequate compensation
Code
in
the
rate
interest
of
compound
the
absence
a
result,
discourages prompt settlement of disputes and prompt payment.
S. 2198 would require interest to be compounded
—
—
This would bring the tax interest computation
into line with modern commercial practice, and would insure
that both taxpayers and the Government are treated fairly
when they are in a position to receive interest payments.
We do wish to point
This is a change that is long overdue.
out, however, that taxpayers who compute their own interest
on deficiencies could have some difficulty
in doing so when a
compound rate is employed.
like the opportunity to
We would
further consider wheather it would be appropriate to use
simple interest, rather than a compound interest. computation.
for deficiencies that are outstanding for a relatively short
period of time.
semi-annually.
Interest Bate
Ad
'ustments
Under present law, the interest, rate applicable to tax
deficiencies and overpayments is adjusted each January 1
effective for the ensuing calendar year to a rate equal to
100 percent of the average prime rate in effect during
September of the preceeding year, rounded to the nearest full
percentage.
This rule was adopted as part of the Economic
Recovery Tax Act of 1981. Prior to the 1981 Act, the rate
was adjusted every two years, based on a rate equal to 90
percent of the prime interest rate.
S.
2198 would provide for semi-annual adjustments
on the average prime rate charged
banks (rounded to the nearest full percentage) during
six-month period ending three months prior to the date
change.
interest rate, based
to the
by
the
of the
-13I think it is important
concerns about high interest
that
we
rates,
not
and
let our basic
large fluctuations
in
interest rates, affect our analysis of the proper interest
rate to be charged on tax overpayments and deficiencies.
Regardless of the formula employed to fix interest rates,
during periods when there are significant interest rate
fluctuations, the possibility of significant differences
between the interest rate determined under the formula and a
market interest rate will exist. Under many circumstances,
however, the proposed interest formula will yield an interest
rate that
more
provided
formula
closely approaches
Restrictions
under
present
on Pa ment
a market
law.
rate than the
of Interest
In a study by the General Accounting Gffice, it was
pointed out that taxpayers who file a late return are able to
earn interest on a refund from the due date of the return if
the IRS is not able to process the return within 45 days
after receipt. The GAO perceived this to be a potential
abuse, and we agree. S. 2198 would change this result by
providing that interest would be paid only from the date on
which a tax return is filed, if it is filed late. Although
interest is compensation for the use of money over time, the
principle that interest should not generally be paid on a
refund is presently established in the tax law -- no interest
is due unless IRS fails to pay the required refund within 45
The proposed
days of the date that the return is filed.
change would not diminish the Service's incentive to issue
refunds promptly; it would merely deny a windfall benefit to .
taxpayers who might deliberately delay f'ling their return,
We think,
hoping that the IRS will miss the 45 day deadline.
therefore, that this is a desirable change.
In the same vein, S. 2198 provides that interest will be
only from the date that a return is received by IRS
in "processable" form. For a variety of reasons IPS
receives a number of returns each year which it
unfortunately
Although IRS prefers to
cannot process through its system.
it is not
work with taxpayers to rectify filing deficiencies,
equi-able for IRS to be burdened with the obligation of
dealing with such a return within the 45-day period.
Therefore, it is appropriate to limit the IRS' obligation to
after 45 days following filing
pay interest on overpayments
of a return so that the return is not be considered filed
until
is received in a processable form.
computed
't
-14Finally, the bill would limit interest o~ refunds
resulting from operating loss and capital loss carrybacks as
Under present law, interest
well as tax credit carrybacks.
from such a carryback is computed
on a refund resulting
commencing with the first day of the taxable year following
the year in which the loss or credit giving rise to the
carryback occurs. We understand that some taxpayers might
in the
seek to take advantage of this rule, particularly
context of the current high interest rates applicable to
to delay filing a refund claim, thereby earning
interest on the tax refund in excess of what they might earn
S. 2198 would
at a bank or other financial institution.
from such a
resulting
provide that interest on an overpayment
carryback would be computed from the date on which a claim
for refund is filed, except that interest accruing prior to
March 12, 1982 would not be affected.
Although we think the tax system should not create
artificial incentives to defer filing of a tax refund claim,
some persons have asserted that the rule proposed by S. 2198
would unduly restrict the payment of interest to taxpayers
who are unable to file their returns,
and, therefore, their
refund claims, prior to the due date of the return for the
loss or credit year. Therefore, we would like-to work with
this Committee to insure that there would not be inequitable
application of this rule in some cases.
Withholdin
on Retirement Plan and Annuit
Distributions
S. 2198 would impose reporting requirements on employers
who maintain
qualified pension, profit-sharing,
stock bonus
and annuity plans and on administrators
of such plans; would
extend the withholding
system to total distributions,
and, on
a voluntary
basis, to periodic payments from qualified
overpayments,
retirement
plans,
technical
changes,
individual
retirement
accounts and
commercial annuities; and would reverse the thrust of the
current withholding system for distributions by such plans by
requiring that a recipient be subject to withholding unless
he elects not to have withholding
apply. Subject to certain
Current
we
support
these provisions
of S. 2198.
Law
The basic principle that underlies the taxation of
distributions from qualified retirement plans or commercial
annuities is a familiar one: Distributions that exceed the
recipient's basis are generally includible in income in the
year received.
However, the rules for determining
the
-15basis are often complex, and significant
exceptions to the general rule exist. As a result, taxpayers
often do not understand the extent to which distributions
constitute taxable income. The problem is compounded by the
current withholding system and exacerbated by inadequate
reporting requirements.
Under current law, there is no mandatory or voluntary
Thus, the
on total or lump sum distributions.
withholding
recipient of such a distribution may find it necessary either
to increase wage withholding or to make estimated tax
of
payments in order to avoid a penalty for underpayment
estimated taxes. In the case cf periodic pension or annuity
recipient's
is possible, but only if it is
withholding
Thus the current withholding
by the recipient.
payments,
requested
is partial, voluntary,
system
by the recipient.
and
requires
an
affirmative
act
In addition, the present information reporting system is
not effective in providing taxpayers and the Internal Revenue
Service with the information required to determine tax
liab'lity.
Re
ortin
reporting requirements contained
steps in closing the
important
constitute
a
person who makes
current
law,
Under
compliance gap.
of $600 or more in a
excess
in
pension or annuity payments
taxable year must report such payments in accordance with
from pension
Lump sum distributions
Treasury regulations.
plans and commercial annuities are reported on Form 1099R
while Form W-2P is used in the case of periodic payments.
These forms are designed to provide taxpayers and the
to
Internal Revenue Service with the information neededHowever,
in
liability.
tax
individual's
income
calculate the
the
to
access
no
has
the
payment
making
the
party
cases,
many
For example, in order to compute the
required information.
capital gains portion of the recipient's distribution, it is
necessary to know when the recipient's plan participation
is
In most cases, that 'nformation
began and when it ended.
rather than the
in the possession of the plan administratcr,
While
bank trustee or insurance company making the payments.
provide
generally
employers and plan administrators
is no
recipients with the required information, there 2198,
plan
S.
Under
do
so.
that
they
statutory obligation
the
both
provide
to
required
be
administrators would
recipients of distributions and the Internal Revenue Service
The pension
in S. 2198 would
and annuity
with
the information
needed
it is
to determine
income
tax
that such an
liability. We
and we
administrators,
.
on
plan
imposed
be
obligation
therefore support this portion of S. 2198.
on Periodic Pa ments
Withholdin
S. 2198 would also institute a new system of voluntary
under qualified
on periodic benefit payments
withholding
would apply
provisions
These
annuities.
commercial
or
plans
to typical pension or annuity payments that are made for a
specific number of years or over the recipient's lifetime.
which is the amount
The taxable portion of these payments,
would be subject to
contributions,
attributable to employer
believe
withholding
as
if it
The withholding
imperative
were wages.
system
on
periodic payments
would
be
voluntary; the recipient could elect on an annual basis not
to have withholding apply. Payors would be required to
notify recipients of the opportunity to elect out of the
withholding system.
We support
these measures to make it easier for pension
recipients to use withholding and to avoid the obligation to
make estimated
tax payments and unanticipated
tax burdens at
the end of the year. However, we have some concern that the
notice provisions of the bill may impose undue burdens on
to work with this
We would be happy
plan administrators.
Committee to insure that these provisions pose the minimum
administrative
burden consistent with informing pension
recipients of their right not to have withholding apply.
Withhcldin
on Total Distributions
S. 2198 would also impose withholding on the taxable
portion of a "total distribution. " A total distribution is a
distribution within one taxable year to the recipient of the
balance to his credit under an eligible retirement plan or
commercial annuity.
As with periodic payments,
only the
taxable portion of the distribution would be subject to
withholding.
However, unlike withholding
on periodic
distributions,
withholding on total distributions
would be
unless the recipient notified the payor that the
distribution would be rolled over to an individual retirement
account (IRA) or a qualified plan. Further, withholding
would be calculated on the basis of the ten-year averaging
rules of section 402(e) of the Code. This will generally
result in lower withholding than if normal wage withholding
tables and computational procedures were used.
mandatory
-17generally suppor t the withholding system that would
to total distributions.
Specifically, we agree that it
is appropriate to institute withholding on these payments; we
believe that an exception for rollovers must be made; and we
believe that use of the ten-year forward averaging rates on
total distributions is an appropriate way to minimize
overwithholding.
We
apply
Other Provisions
Issuance of
Re
ulations
S. 2198, the Internal Revenue Code would be
to require tl at rules and regulations necessitated
by
future Code amendments be issued "as soon as possible " I am
not certain of the purpose for this provision.
I have no
hesitancy in saying that Treasury and IRS today issue all
regulations "as soon as possible. " Continual changes in the
law, the need to carefully consider technical and policy
issues presented in the interpretation of complex statutory
provisions, and the need to carefully consider the views of
affected taxpayers, all delay the issuance of regulations.
While I share the general concern about the backlog of
regulations projects, I am uncertain about the desirability
of writing this measure into the public law.
Under
amended
Effective Dates
I have not in this statement attempted to systematically
comment on the effective date of each of the many provisions
of S. 2198. I do wish to note, however, that it appears to
us that early effective dates for certain of the provisions
-- particularly, for example, where new reporting
requirements are involved -- could create hardships for
as well as
persons required to comply with the requirements,
for the Internal Revenue Service, in preparing to comply
with these measures.
Just as an example, I note that
December
31, 1981 on obligations of
interest paid after
corporations issued in bearer form would be subject to
reporting for the first time. Obviously, it would be
difficult to comply with this requirement in many cases.
We
would
Le happy
to
work
with
effective dates for these provisions
into account practical difficulties
implementing
some
of the
the Committee in devising
take
which adequately
which could arise in
bill's provisions.
-18OMB
Oversi ht
last provision of S. 2198 that I would like to
mention is section 202(b), which would eliminate oversight by
the Office of Management and Budget over certain Treasury
functions, particularly those discharged by IRS, under the
Paperwork Reduction Act of 1980.
is still considering the application
The Administration
The
of the Paperwork Reduction Act to Treasury and IRS, and
respectfully requests an opportunity to advise the Committee
of its views at a later time.
Revenue
Estimates
The Office of Tax Analysis in the Treasury is currently
in the process of estimating the revenue effects of the
bill's provisions. These estimates are expected to be
completed within the next, three weeks. We will furnish these
estimates for the record as soon as they are available.
department
of the Treasury
FOR IMMEDIATE
~
Washineion, D.C. ~ Telephone 566-2048
RELEASE
22, 1982
March
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
for $4, 804 million of 13~eek bills
Tenders
bills,
26~eek
both to be issued on
Average
at the
at the
Tenders
Tenders
low
low
for $4, 800 million of
were accepted
today.
26~eek bills
maturin
96. 837 12. 513%
96.821 12. 576%
96. 827 12. 553%
Low
and
25, 1982,
13-week bills
June 24, 1982
Discount
Investment
Price
Rate
Rate 1/
OF ACCEPTED
COMPETITIVE BIDS:
RANGE
High
March
maturin
Price
13. 10%
13. 17%
13. 14%
Se tember 23 1982
Investment
Rate 1/
Discount
Rate
13.64%
13.77%
13.73%
93.630 12.600%
93. 577 12. 705%
93.593 12.673% 2/
price for the 13~eek bills
price for the 26-week bills
were
were
allotted 12%.
allotted 53%.
TENDERS RECEIVED AND ACC EPTED
(In Thousands)
Location
Boston
New York
Recetved
76, 335
$
ted
44, 835
$
4, 154, 215
38, 600
64, 580
40, 350
53, 480
804, 490
34, 205
36, 535
42, 080
37, 005
50, 250
11,676, 245
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
19, 995
60, 695
27, 485
629, 630
170, 935
Minneapolis
Kansas
City
Dallas
San
Francisco
Treasury
TOTALS
Received
62, 915
$
925
604,
8,
25, 030
79, 050
51, 370
57, 905
627, 880
31, 360
29, 875
43, 310
22, 475
666, 365
233, 775
~Aece
101,640
23, 125
10, 995
40, 715
22, 485
69, 630
170, 935
$13, 697, 025
$4, 804, 445
$11,446, 550
$2, 553, 970
964, 420
$3, 518, 390
1, 195, 855
:
$10, 536, 235
ted
415
825
898,
3,
25, 030
~Acce
$56,
61,050
51, 370
53, 655
132, 880
27, 360
21, 875
41, 040
22, 475
174, 365
233, 775
$4, 800, 115
~Te
Competitive
Noncompetitive
Subtotal,
Public
Federal Reserve
Foreign Official
Institutions
TOTALS
964, 420
$12, 410, 970
1, 195, 855
90, 200
$13, 697, 025
,
R-686
$4, 804, 445
886, 640
8, 988, 735
1, 000, 000
886, 640
$3, 252, 615
1, 000, 000
547, 500
$10, 536, 235
547, 500
$4, 800, 115
$
90, 200
:
8, 102, 095 $2, 365, 975
yield.
for calculating the maximum interest rate payable
market certificates is 12. 621%.
coupon-issue
1/ Equivalent
2/ The four-week average
on money
$
of th 'treasury
yeyartment
D.C. ~ Telephone 566-204
Washington,
~
C
FOR Z2'IEDZMZ
I'Unsay,
RELE'ASE
Narc' 22, 1982
CONTACZ:
Rabert Don Le~e
(202) 566-2041
SECIWZARY' REGAN ON THRZFTS TO TIIE DIDC
THI S (.OMMITTEE
TODAY,
THAT
PAYING
BE DI SCUSS I
INSTITUTIONS
WILL HELP DEPOSITORY
ORGANIZATIONS
WILL AGAIN
I
THAT
HAVE
EXPERIENCED
INCREASE
MODEST
A
IN
NET
WITH
AM
PLEASED TO
THRIFT INSTITUTIONS
SINCE THE LAST COMMITTEE MEETINGS
NOTE
PROPOSALS
FOR FUNDS
COMPETE
INTEREST RATES.
MARKET
NG
DEPOSITS
NEW
THE
DIRAC
CONTRIBUTION
MAJOR
RATE
CEILINGS WERE ELIMINATED'
BY THE
IN
1981
ITS EFFORTS
TO
INSURE
HAVE
FUNDS
ADEQUATE
AWHILE
IN
THIS INCREASE
TO
THE
MANY
CURRENT
STRONGER
INST
I
~
WITH
THRIFT
ECONOMIC
I TUTIONS
RAISED TO NEAR MARKET LEVELS&
OR
THE
COMMITTEE
THRIFT
AND
OTHER
WHICH
TO
CONDUCT
HAVING
ENVIRONMENT
AND
SOME
AGENCIES
~
THE
ARE
NO
EXISTING
ADEQUATE
TO
INSTITUTIONS
THEIR BUSINESS
ARE
i THERE SHOULD BE
WILL CONTINUE
DEPOSITORY
INSTITUTIONS
VIABILITY OF THIS INDUSTRY
DEPOSIT INSURANCE
BEEN FROM DEPOSITS WHOSE
THAT
KNOW
THAT
HAS
FINANCIAL
MAY
HAVE
TO
PUBLIC CONCERN
RESOURCES
DEAL
WITH
~
DIFFICULTIES
MERGE
WITH
ABOUT
THE
OF THE
ANY
FEDERAL
PROBLEM
INSTITUTIONS
ARISES
THE
~
AND
THESE RESOURCES WILL BE EXPANDED
FEDERAL 60VERNMENT
THAT
THE
SAY I NGS
AND
IN
A
LOAN
TO
INSURANCE
INSURANCE
SAFEGUARD
THRIFT
IS,
AND
WILL TAKE ALL NECESSARY
FEDERAL OEPOSIT
COMMITMENTS
FUNDS
S POLICY
THI S ADMINISTRATION
(
THE
INSTITUTION
CORPORATION
ORPORATI
ON
WILL
IF
BE,
STEPS
AND
THE
TO
NEED
THAT
ASSURE
THE FEDERAL
WILL BE ABLE TO MEET THEIR
INTEGRITY OF EACH
OR COMMERCIAL
INSURED
BANK
~
DEPOSITOR
S
partmeni of the Treasury ~ Washington,
For Release U
March 23, 1982
n
D.C. ~ Tele@hone 566-204'
Delive
Remarks by
Donald T. Regan
Secretary of the Treasury
Before the
Union League
Philadelphia,
March
'Res
nsibilit
Pennsylvania
23, 1982
and Ca
italism'
I need hardly tell you what a pleasure it is for me to be
here this afternoon.
The Washington press corps is fond of
the Reagan Administration's
ambassador to Wall Street.
fondness for Walnut Street. I am
my personal
delighted to be back in Philadelphia to see old friends and renew
old ties in this city that was my home for ten years.
calling
me
They overlook
I also have cherished
the greatest of Americans,
memories of this
by an organization
hall, dedicated to
dedicated to his
memory and his ideals.
I think of Lincoln often, peering through
the smoke and division of civil war, seeing history beyond the
horizon
cannot escape history, " he said in the darkest days of
battle. "We of this Congress and this Administration will be
remembered in spite of ourselves.
or
No personal significance,
insignificance, can spare one or another of us. The fiery trial
through which we pass will light us down in honor, or dishonor,
to the latest generation.
We, even we here, hold the power, and
bear the responsibility. "
'We
Responsibility can be a heavy load, a double-edged sword, or
the key that unlocks the door to tomorrow.
None of us can escape
A11 of us, as Lincoln said, will be remembered in spite of
ourselves. So this afternoon I'd like to spend a few minutes on
I'd like to share some straight
the subject of responsibility.
talk with some old friends. Earlier today, I spoke at Bucknell
University on The Morality of Capitalism. ' To me, the
relationship is self-evident.
For no other system in no other
more social
land has produced more abundance, more opportunity,
mobility or more freedom. No other way of life provides a more
equal distribution of profit or demands a broader assumption of
it.
responsibility.
echoes my belief. We recognize
that
without risk, no prosperity without
toil. We have set out to encourage the risktakers, and provide
for those who would tap their own ingenuity in
new incentives
The Reagan Administration
there can be no security
R-688
creating jobs and restoring America's cutting edge in the world
We hold to the maxim first expressed
by Theodore
marketplace.
Roosevelt, eighty years ago. . .
"The first requisite of a good citizen in this Republic of
"
"is that he shall be able and willing to pull his
ours, he
" said,
weight.
policies are designed to give every American
In the last fifteen months,
the ability to pull his own. weight.
Think back to
we' ve made striking progress toward that goal.
I know it's painful, but try it anyway.
January, 1981
Americans on the eve of the Reagan presidency were suffering a
double whammy of 12 percent inflation and the highest interest
rates since the time of Lincoln. Government, already bloated,
itself, feasting on a stagnant economy and
was merrily indulging
waistline.
adding 14 percent a year to an ever-expanding
Business languished in a regulatory straightjacket, -starved for
new capital, deprived of old markets.
Our economic
—
scent of hypocrisy lingered in the air, mixed with the
stale aroma of the government printing press. For years,
Washington had waged an ineffective war on poverty — without once
trying to make peace with prosperity.
A
It
our currency, tarnished our ideals, and
millions of our people to unemployment lines "and
welfare- lines instead of assembly lines.
had cheapened
condemned
It claimed a near-monopoly on
little or nothing to alleviate
compassion
for the poor
— yet
did
the suffering they felt every
time they walked into a grocery store or drove up to a gas pump.
So intent had government become in protecting us from ourselves,
it didn't seem to mind that we had fewer dollars in our pockets,
or less faith in our futures.
In a word, government had behaved irresponsibly.
The extent
of its failure could be measured in the numbers of economic
activity — hardly a passing grade. President Reagan was
determined to do better.
In partnership with the Congress and
the American people, he has charted a new course; not a midcourse
correction, but a virtual U-turn. Again, let me resort to some
numbers.
For the first time in four years, inflation has fallen below
double-digit levels. Less than 9 percent for all of 1981,
consumer prices will fall further this year, to around 7 percent
or less. And if you don't believe me, take a look at February's
producer price index, which registered the first actual drop
over six years.
still too high, have declined by more
since the President took office. The tide of
regulation has itself been regulated; there were
Interest rates, while
than five points
government
23, 000 fewer pages in the Federal Register last year than in
1980.
is up. The number of people
The rate of personal savings
at all levels is down. So, unfortunately,
employed by government
You don't need me to tell you
are the ranks of other jobholders.
we' ve been in a recession.
I say "been" because of mounting
that the worst is behind us. Last month's sharp
retail sales — led by a 3 percent gain in durable
goods — is just the latest and most encouraging sign that the
economy is coming out of its slump.
evidence
increase in
course, we still have our critics, those mail-order
prophets of doom who toss around words like "depression" and who
probably would get a thrill out of shouting fire in a crowded
theatre if they weren't so worried about getting trampled in the
Of
ensuing
stampede.
that's all right. We' ll let them do their worst; we' ll
It was Nark Twain who counseled a
be content to do our best.
friend, "Always do right. This will gratify some people and
astonish the rest. " For fifteen months, this Administration
has
— and much of
A lot of people are grateful
been doing right.
official Washington is still rubbing its eyes in disbelief.
a President who does in office what he said he would do
Imagine:
on the stump; whose campaign promises turn into tax cuts, not tax
increases; who is daring enough to utter words like "profit" and
"incentive" right out loud. I think you' ll agree with me: this
is heady stuff.
I think you' ll agree as well, that this President is living
to
his responsibility to lead us away from the failed dogmas
up
—without
of fifty years' standing.
He is leading a revolution
the support of some of those cautious businessmen who were at our
side last summer, but who have since deserted the streets for the
relative safety of their boardrooms.
Of course, they run the
risk of abandoning the field of battle to the counterrevolutionaries,
those who have lain in wait for this chance to
avenge their earlier defeat and restore business as usual -- that
But
is to say, anti-business
as usual.
For as long as I can remember, you and I have argued that
We were
alone could not guarantee economic advance.
right then -- and we are still right. Government could not tax
and spend and regulate
cannot
and government
us to prosperity,
the
Not
without
retrench its way to prosperity.
Not alone.
active participation of a private sector whose own authority to
make decisions has expanded
along with its tax base.
government
It
will lead us
of the recession.
re seeing evidence of that already.
let ultimately, any lasting recovery will depend on the decisions
'of investors and producers.
is never a spur to
Now uncertainty
And it's not surprising
investing.
that much of the business
oUt
has been said more than once that consumers
We'
world has responded with caution to the economic program enacted
Commerce Department,
capital
last summer. According to the
fall
about
to
1 percent.
expected
by
are
1982
for
plans
spending
survey by McGraw-Hill points to a larger dropoff;
A more narrow
according to the
while the nation's largest manufacturers,
gain in capital
10
percent
a
to
post
Conference Board, expect
spending this year.
the numbers were compiled during the worst of
the recession, that may not seem too bad. Compared with the 10
percent drop in capital spending that occurred in the 1975
Considering
recession, they
So
why
am
may
seem downright
cheerful.
I not smiling?
is an inexact science, influenced
Such numbers have
on
current
psychology.
influential
by and
They can set a tone for recovery, or
political ramifications.
paint a bleak picture of the status quo. And in today' s
Washington, especially on Capitol Hill, there is a growing
uneasiness about all this. There's a feeling that last year' s
most fervent believers in tax cuts have become this year' s
agnostics on the subject of business investment.
Even more than in the stock exchanges and brokerage houses,
in the world of politics, appearances and realities are easily
This year alone,
Yet some realities are undeniable.
confused.
American business will recover around $13 billion as a result of
the Economic Recovery Program passed by the Congress and signed
By 1986, that figure will rise to
by the President last summer.
infusion
of cold cash comes a
billion.
With
the
around $75
to
use
it
The
wisely.
responsibility
program President Reagan
achieved last year is yours as well as ours. The cuts in taxes
and spending,
the accelerated cost recovery, the pursuit of
deregulation and a slow, steady growth in the money supply:
these are reflections of common priorities and long-frustrated
preferences. You raised your voices, you rolled up your sleeves.
You helped us to overcome the entrenched
opposition of those who
Because economic planning
wouldn't
Washington
recognize a budget surplus
Monument.
if it
jumped
over the
Deficits are much in the news these days. Some of the
capital's biggest spenders have taken to denouncing them as too
large. I trust you' ll forgive me for not joining in the
crocodile tears.
Just last week, an informal poll of congressional committee
forecast a 1983 budget nearly $30 billion higher than
chairmen
what
the President
has asked
for. I think
you have
a
to oppose such a cynical effort at budget-busting.
think
have
I
a responsibility
to ask the next congressman
you
seen mopping his brow over deficits how he voted on synfuels a„d
student loans and price supports.
And I think you have a
responsibility to demand straight talk from your elected
responsibility
--
the subject of their own spending habits
that equates a smaller deficit with lower
interest rates. Of course, if they really cared about reducing
the size of the deficit, they might face up to the need for
rather than the individual
further belt-tightening
by Washington,
consumer whose tax cut, after all, does little more than keep
pace with the built-in appetite of inflation for more and more
revenue.
representatives
and on
on
the subterfuge
first responsibility of any capitalist is to himselfa good product, and earn a fair profit.
We have given
Now we ask that you put them to work.
you the tools to do both.
We did not confuse October
1, 1981 with the Millenium. We did
not expect overnight recovery or instant Utopia.
At a time when
inventories were high and plant utilization relatively low, it
to anticipate an immediate surge of
would have been unrealistic
to
The
make
visible investment.
Yet there were lawyers and accountants poised to take
Someone was planning
immediate advantage of safe harbor leasing.
And now is a time for making some additional
something.
plans
that take into account the following factors:
Inventories are falling, and falling fast. By $3. 4
billion in December, by an additional $2. 1 billion in January.
In tandem with the increase in consumer spending, there is solid
ground for optimism.
—
—Inflation,
too, is coming down. This isn't due to any
stroke of luck, nor any fortuitous mingling of random elements.
On the contrary,
the progress we' ve made in fighting inflation is
due to fundamentals.
Energy prices are down, and the oil glut
We' re on the right track with wage
shows no sign of vanishing.
negotiations, with a host of upcoming contracts pointing in the
same general direction as the historic agreement
between Ford and
the U. A. W. And might I add here a note of praise to union
leaders and rank and file members, who have seen and grasped
their own responsibility to make our products more competitive
and our plants and factories more efficient.
They deserve
prosperity; they already have the Reagan Administration's
gratitude.
far as the deficits are concerned, the President has
his willingness to look closely at any comprehensive
to his own. But
Package the Congress fashions as an alternative
our primary responsibility
to the American people remains
unchanged.
We want to balance the budget -- but we must restore
economic health first.
And we cannot do the latter by imposing
~ew taxes or retreating
from the basic provisions of the
As
8ignalled
President's
This
know.
the
program.
is
for one, ought to
back a few years, to
of Gerald Ford and Jimmy Carter. In 1976, the
something
They should
presidencies
the Business Roundtable,
also be able to
remember
sustained a $66 billion deficit, the largest
Ford Administration
fifteen times the size of the '74 deficit.
and
in U. S. history,
two
that
same
year period, interest rates declined
Yet during
The deficit run up in
from 12 percent to less than 7 percent.
Far from
Even with
1976 did not stall economic recovery.
modest growth in the money supply, the economy grew at a vigorous
clip for three
Administration
inflation
and
more years
boasted a
—until
it.
1979,
deficit cut to
interest rates both doubled
the Carter
billion —and
over their '76 levels.
when
$27
What's more, those who conclude an automatic cause and
between federal deficits and interest rates have
conveniently left out of the equation the most potent single
the rate of personal savings.
weapon in our economic arsenal
This year alone, we expect that private savings, which were
running at $480 billion in 1981, will increase by $60 billion.
By next year, the increase will reach $170 billion.
By 1984, it
will hit $260 billion, totaling $740 billion in 1984. And those
numbers are far larger than anything glimpsed by even the
effect relation
--
gloomiest
deficit-monger.
So let me suggest, as a member in good standing
Hardheaded Businessman's
Club, that your own primary
of the
to retool,
to succeed mirrors the nation's need
agressively pursue new ideas and new markets.
Verbal assurances of longrange investment are not enough.
As
John Maynard Keynes used to say, "In the longrun, we' re all
dead. " And he ought to know.
Your second responsibility
is to the program itself. No
team can expect to win for long if half the players refuse to
leave the sidelines.
Yet that is exactly what has happened with
some advocates of the President's
program.
Having sought, and
achieved an atmosphere of stability and predictability within
which to make longrange decisions, they now troop to Washington
to beseech Congress to raise taxes. It won't wash.
responsibility
modernize
and
Less defensible still are proposals to delay or cancel
individual tax cuts while leaving business untouched.
To be
sure, this year's deficit might be reduced by a few billion
dollars. But who can calculate the jobs uncreated, the
businesses failed, the opportunities for expansion unrealized'P
It is narrow thinking at best to believe you can stimulate the
economy by raising labor costs or by shrinking
savings
power.
It threatens both the labor supply and consumer
the pool of new
capital
on which
we
rely for lasting prosperity.
the stability business itself seeks.
severe political backlash.
It is the
sensibilities.
It
runs the
It
undermines
a
risk of
appearance of selfishness that aggravates public
In fact, what the public demands is not far
removed from what the Administration
expects. We don't expect
free enterPrise to take over the social welfare system, but
expect it to participate in the President's Private Sector we do
We expect it to give generously
of its
program.
We expect it to
imagination and its sweat equity.
join vigorouslv in our campaign to restore the inner cities and
reclaim millions of young people for the system in which we place
our faith. We expect an aroused business community to sustain
our belief that it can be an engine of social progress and not
one more sacred cow feeding at the Washington trough.
Initiatives
its
knowhow,
responsibilities in the days ahead: to
accept the risks and calculate the odds on America's economic
rebirth; to consolidate the gains and know the political
realities that have prevailed since passage of the President's
program; to unleash your ingenuity on a troubled society as well
These are your
as a revised
tax code.
I
hope these words don't sound too poetic. Because I know
each of you go back to the grindstone
when you take
another look at the corporate ledger sheet
you will be hit by
And I know that
the sobering reality of our economic situation.
the profit and loss statement speaks to your daily concern for
But I also know that the Reagan
corporate performance.
Administration
and the business community have a unique
to reorient the government of this country and to
opportunity:
reinstitute the marketplace as the driving force in our economy.
that
when
--
So
I
He
said,
—
ash that as you consider short term versus long term
objectives; as you consider the responsibilities of capitalism in
our society; remember the words of Winston Churchill during the
War.
"Do not
rather of sterner
...
days
and we must
to play a part
I
let us speak of darker days; let us speak
These are not dark days; they are great
all thank God that we have been allowed
days.
Let there be no mistaking the fact that in these days,
this debate, each of us can play a part. Together, we
will put America back to work. We will give America back to
those who make her work.
That is our responsibility.
during
Thank you.
Ipartment of the TrecssurV ~ WclshlnSton, D.C. ~ Telephone 566-2041
FOR RELEASE ON DELIVERY
Expected at 10:00
23, 1982
a. m.
March
STATEMENT OF MARK E. STALNECKER
DEPUTY ASSISTANT SECRETARY OF THE TREASURY (FEDERAL FINANCE)
BFFORE THE SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
THE HOUSE COMMITTTEE ON BANKING' FINANCE AND URBAN AFFAIRS
of the Subcommittee:
It is a pleasure to be here this morning to discuss the
objectives of public debt management and the financing
techniques employed by the Treasury.
I also want to discuss
our concerns regarding certain limitations
imposed by the
Second Liberty Bond Act, the governing statute for Treasury
Mr. Chairman
and Members
debt management.
public debt includes both marketable and nonmarketable
The tables attached to my
issued by the Treasury.
statement present data on public debt securities and ownership
over the last decade.
The Treasury issues these securities
to finance both budget deficits and off-budget deficits,
including the borrowing needs of the. Federal Financing Bank,
and to refund maturing
debt. My prepared statement will deal
primarily with Treasury marketable securities, but I will also
comment on the savings bond program and I will be happy to
answer any questions you may have regarding other nonmarketable
The
securities
Treasury
Marketin
issues.
Techni ues
Treasury
marketable
securities
include
(1) Treasury bills,
of less than
which are sold at a discount and have maturities
interest
1 year; (2) Treasury notes, which have semiannual
coupons and maturities from 2 to 10 years; and (3) Treasury
in excess
bonds, which have semiannual coupons and maturities
of 10 years.
The Treasury
and
R-.
coupon
689
currently sells all of its marketable
in competitive auctions.
securities
bills
and sales of regular 13-, 26- and 52-week
Announcements
bills are on a well-known schedule that varies only on holidays
or when interrupted by Congressional inaction on debt limit
legislation. With regard to coupon securities (notes and bonds),
participants are generally cognizant of the schedule of
Treasury issues, because of the regularity of the new issue
a sale of
When the Treasury announces
and maturity cycles.
announcement
of
the amount
its
makes
it
marketable securities,
financial
available
to
the
press
sale
and other terms of the
news
organiso
that
no
and news wire services simultaneously,
of
advance
zation or market participant has the advantage
information.
The Treasury announces its offerings far enough
to be disseminated
ahead of the sale dates to permit information
to all interested parties.
for its marketThe Treasury does not purchase advertising
able securities, nor does it pay commissions to dealers who make
markets in Treasury securities.
Dealers and investors submit
subscriptions to Treasury offerings directly to the Treasury
or to Federal Reserve Banks and Branches which act as the
Treasury's fiscal agency. Dealers in U. S. Government securities
often are awarded the major share of issues in competitive
auctions, and dealers subsequently distribute the securities
to their customers.
Dealer profits or losses on the transactions
are determined by the difference between the price the dealer
pays to the Treasury and the price the dealer receives from
the customer.
The dealer's capital is at risk in each transaction, since the dealership is trading for its own account.
market
bill
The Treasury accepts noncompetitive
tenders in
and coupon auctions up to pre-announced
limits
Treasury
for each
investor at the average price of accepted competitive tenders.
on noncompetitive
tenders are made prior to awards
on competitive bids.
The purpose for accepting tenders on a
noncompetitive basis is to achieve a wider distribution of the
securities by attracting tenders from small banks and other investors who are generally thought to have limited access to
up-to-date information on market conditions.
Allotments
Re
ularization
of Issues
Treasury debt management operations are directed to meeting
the U. S. Government's daily cash needs in order to assure that
sufficient funds are available to pay obligations when and as
due, while providing a prudent cash balance.
Our operations
in the market are conducted so as to minimize disruption and
thereby reduce the cost of our debt operations.
Disruptive
financing operations increase market uncertainty and hence the
risk of purchasing securities, raising the rates paid on Treasury
obligations.
Treasury feels that the most important element in
reducing market uncertainty about debt f inancing is the maintenanc~
of a regular, predictable cycle of security issuance'
Regularity
of debt management removes a major source of market uncertai
ain tyy,
assures that Treasury debt. can be sold at the lowest possible
interest rate consistent with market conditions at the time of
and
the
sale.
Predictability of debt management is important for another
reason, as well. Because Treasury securities are the benchmark
for the Nation's fixed income market, Treasury mismanagement of
the debt can destabilize the entire financial system.
Treasury has
raised large amounts in the market over the past few years.
In FY 1979, net market borrowing amounted to $27. 4 billion.
This
total rose to $83.6 billion in FY 1980, and to $90. 5 billion last
year. Although market interest rates were historically high during
this period, Treasury financing operations, per se, did not disrupt
the market.
Leaving aside the issue of whether a given level of
deficit financing raises interest rates, the conduct of debt
management
during this period prevented major market dislocations.
massive
had been met in a
borrowing requirements
If these
haphazard manner, significant damage to the financial markets
Unpredictable shifts of Treasury financing
would have occurred.
out of one sector of the market to'another based on interest
rate forecasts or other "opportunistic" rationales could have
seriously damaged market confidence and driven rates significantly
higher. This potential for damage to the market is yet another
reason to pursue prudent, predictable debt operations.
The
current
regular
issue "cycles" for Treasury financing
notes, and bonds began in the early 1970's
sales of bills,
still evolving. Treasury sells securities in all maturity
ranges to meet the needs of the broadest possible array of investors.
Establishment of this regular pattern has contributed to a positive
market climate in several ways:
1) By creating a schedule of Treasury security auctions,
different investors, as well as dealers, can plan portfolio strategies in advance.
2) By establishing the potential Treasury new issue
calendar in advance, other issuers, including Federallysponsored agencies and private borrowers, can plan
their financing operations with more certainty.
3) By spreading Treasury maturities more evenly over time,
through
and
are
market disruptions are lessened and future refunding
and borrowing operations can be facilitated.
Not all Treasury borrowing can be done on this regular schedule,
because there are seasonal flows in U. S. Government budget receipts
Receipts, for instance, tend to be concentrated in
and outlays.
Seasonal borrowing to adjust for this misthe April-June quarter.
has
been
accomplished by selling cash management
flows
cash
match in
period
to
mature in the cash surplus period.
deficit
the
bills in
used
to
cash shortfalls resulting from
also
bridge
are
These bills
in
Nevertheless,
receipts
or
bulge in outlays.
drop
an unanticipated
of
operations.
debt
keystone
Treasury
regularity is a
Lon -Term Bonds
I would especially like to address the role of long bond
in the overall scheme of Treasury debt management and
regularization.
Long bond issuance is an integral part of
Two bond sales
Treasury's regularization of debt operations.
are normally conducted each quarter, with a 20-year bond auction
in the last month of the quarter and a 30-year bond sale as part
of the mid-quarter refunding operation. The Treasury bond
market is deep and liquid, with cash market trading aided by
issuance
a well-developed
futures market.
I would like to note at this point that the Treasury
believes that the financial futures markets have on balance
facilitated the management of the public debt, by shifting
able to bear it, by price discovery
and dissemination,
increasing the liquidity of the
cash market for Treasury
A liquid
underlying cash market.
securities is in Treasury's interest because it increases the
attractiveness of its offerings, thus reducing the cost of
servicing the public debt.
risk to those willing
and
and by
In addition to meeting the investment needs of long-term
portfolio managers, sale of long-term obligations extends
the average life of Treasury debt, which reduces the disruptive
effects of frequent Treasury operations to refund maturing
issues. Almost one half of outstanding marketable debt matures
within one year (See Chart 1). This refunding need must be
added to Treasury's new cash borrowing requirement
to determine
gross Treasury issuance in the market.
Because of the short
average maturity of outstanding Treasury debt (See Chart 2),
long bond issuance must remain an integral part of Treasury's
debt management policy.
Some observers have suggested that Treasury should avoid
the sale of long-term securities when interest rates are "high, "
in order to avoid locking in high interest costs. However,
any definition of "high" interest rates is extremely subjective
and carries with it an implicit forecast of future interest
rates. If Treasury "temporarily" "withdrew from the bond market
because it felt rates were "high, market reaction to reentry
in the long market could well be that rates were "low. " Thus,
reentry could be interpreted as a government forecast of higher
rates in the future. Management of the debt based on interest
rate forecasts would create tremendous uncertainty as to
Treasury's financing schedule and, over the long run, would
result in higher costs to the Government by reducing the market's
willingness to bid in auctions.
Therefore, a consistent policy
Qf debt issuance across the maturity spectrum must be maintained
without regard to expected interest rate developments.
I would also note that, because of the large volume of maturi~9
obligations refinanced each year, interest expense on the public
debt is extremely sensitive to interest rate movements.
This
volatility to the interest expense component of Federal
outlays. As interest rates move up and down, Treasury's interest
expense also rises or falls. As long as the debt outstanding
adds
retains this short-term character,
part of our debt operations.
debt extension
must
be a
At this point I would like to mention that market uncertainty
recently arisen because of Congressional inaction on Treasury's
request to repeal the 4 1/4% ceiling on long bonds. The face
amount of Treasury bonds held by the public with interest rates
in excess of 4 1/4% may not exceed $70 billion.
Treasury has
exhausted this authority (See Chart 3). Unless Congress repeals
the 4 1/4% ceiling, or grants additional issuing authority, no
more bonds may be sold.
In fact, Treasury would normally announce
its regular auction of 20-year bonds today. It cannot do so
because of Congressional inaction.
Unless authority is granted
next
few
weeks
the
usual
sale
the
of 30-year bonds as part of
in
is
also
in
our Nay refunding
Inability to sell these
jeopardy.
securities has created dislocations in the market and raised
questions about the Treasury's ability to carry out predictable,
I urge Congress to expedite
prudent debt management policies.
the long bond authority legislation so that this uncertainty can
be resolved.
has
States Savin s Bonds
I would like to turn now to our current proposal for the
The Treasury has sent a request for
savings bond program.
expedited action on new savings bond legislation to the Chairman
Savings bond legislation
of the House Ways and Means Committee.
is urgently needed to give savings bond investors a fair rate of
return and to stem the cash outflow from savings bonds that the
Treasury has sustained since late 1978 (Chart 4). Under existing
law the Treasury is not permitted
to offer an interest rate on
savings bonds that will keep up with the interest rates available
from other investments.
The legislation Treasury submitted to
Congress in January will remove the statutory interest rate
ceiling on savings bonds and thus will enable Treasury to
guarantee the small, long-term savings bond investor that
the interest rate will always be reasonably in line with
This is
current market rates available to larger investors.
the only way that we can revitalize the savings bond program.
savings bond program is not only good for
A healthy
small savers, it is good for the Treasury too. Even at the
rates we propose to pay to savings bond
higher market-related
holders the costs to the Treasury will be somewhat less than
cost of financing this debt in the open market.
the alternative
of the new variable
Thus, the longer we delay the introduction
rate savings bond, the greater the cost of financing the debt.
United
SUNNARY
of Treasury debt management policy is
that it is most effective when it is least obtrusive.
Debt
extension, regularization of new issues and maturities, the
use of auctions to sell new Treasury securities at prevailing
market yields, the communication of Treasury financing needs
to the public, and the maintenance of a viable savings bond
program all help to minimize the potential disruptive effects
of the Treasury's large refunding and new financing tasks, and
to minimize the cost of financing the public debt.
A
capsule
summary
Nr. Chairman, that concludes
debt management matters of primary
but
I
prepared statement on
concern to the Treasury,
will be happy to answer any questions at this time.
OoO
my
Table
Changes
in Interest-Bearing
public Debt Securities Held by private
(Calendar years, in billions of dollars)
1971
Total Debt Held by Public*
Marketable
Bills
Coupons
Maturing in:
under 1 year
1-5 years
5-10 years
10-20 years
20 years and over
Nonmarketable
Savings bonds
Foreign series
State
and
&
notes
local
I
972
973
1974
1975
$246. 0 $260.5 $259.7 $269.9 $348.4
976
977
Investors
978
979
198
980
$408.4 $459.2 $502.8 $539.4 $615.1 $693.1
173.4
180.2
170.7
181.0
255. 8
307.8
344. 3
365.2
402. 2
492. 3
580.7
65.9
73.4
70.4
82.2
119.3
122.3
119.0
119.3
127.3
172.1
195.3
107.5
106.8
100.5
98.8
136.7
185.6
225. 3
245. 9
274. 9
320. 2
385.4
15.9
60.7
16.9
17.6
57.6
17.5
50.9
22. 9
18.1
54.2
13.5
35.2
103.8
53.0
119.5
4. 3
5.9
7.4
8.2
8.3
11.7
63.1
133.2
36.6
4.3
8.7
54.9
128.3
33.6
4.4
9.1
30.8
74.7
16.7
15.3
19.8
22. 3
67.5
159.6
41.2
27.3
24. 6
80.0
188.4
50.9
34.1
32.0
6.6
7.3
9.6
13.2
8.5
31.0
32.8
13.8
72.7
80.2
88.9
88.8
92.5
100.6
114.9
137.5
137.1
122.8
112.4
54.9
58.1
20.6
60.9
26.0
63.8
22.8
67.9
21.6
72. 3
22.3
77.0
22.0
79.9
28.8
24. 6
72. 5
24.0
23.8
68.1
13.9
80. 9
29.6
24. 3
101.2
109.6
117.5
121.3
130.9
16.8
1.1
Other
0.4
1.6
0.6
1.2
1.6
1.8
78. 5
80.5
4.5
1.5
1.8
2.7
3.8
2.5
19.0
23. 0
2.3
Memo:
Holdings
Banks
Federal Reserve
62. 1
70. 2
69.9
97.0
Offzce of the Secretary
of the Treasury
*Excludes U. S. Government
March
accounts and Federal Reserve Banks' holdings of public debt securities.
17, 1982
II
Table
Changes
in Interest-Bearing
(Calendar
1972
Total Debt Held
by
Public*
Marketable
1~ 8
-3.1
1-5 years
5-10 years
10-20 years
Nonmarketable
Savings bonds
Foreign series
&
notes
local
Other
Federal Reserve
5' 3
7
2'9
-6.
-4 ' 3
-0.5
7'6
8.7
3~3
3~9
2'7
5~4
4
2
0.6
20 years and over
and
1976
1977
1978
1979
1980
1981
-2 ' 9
0.4
-0
~
3
0.
0.
8. 6
-4. 8
3.3
0. 3
-0.4
3.0
0. 2
-3 ' 2
2. 0
12.7
20. 5
3'2
4. 4
29. 5
14.3
17.8
15.7
1.8
0.9
1.8
8.8
0. 8
5.5
-0.2
1.6
3.7
-1.1
1
4. 4
0~7
3'2
0~2
-0.3
-0. 1
9.4
0.2
3.9
7.4
10.4
0.9
7. 4
9.0
4. 2
8. 4
4'
-1.2
0. 6
2' 3
8.0
~
~
~
3.5
14.3
4. 7
3'6
22 ' 6
8'2
4.9
3'0
6.0
7. 0
4. 4
4. 6
7 5
2. 3
26. 4
~
accounts and Federal Reserve Banks' holdings
12.5
28 ~ 8
9.7
6 ~8
7~4
-0.4 -14.3 -10.4
-1.1 -7. 4 -4 4
-0.7 -4.8 -5 0
0. 3 -0.8 -0 8
1.1 -1.3 -0 ' 2
~
~
7'8
3'8
March
Office of the Secretary
of the Treasury
*Excludes U. S. Government
~
~
~
~
Maturing in:
under 1 year
Holdings
Banks
1975
$14.5 $-0. 8 $10.2 $78. 5 $60.0 $50. 8 $43.6 $36.6 $75.7 $78. 0
6.9 -9 5 10 3 74 9 52. 0 36 5 20. 9 37.0 90. 1 88. 4
8.0 44 8 23 ' 2
0.3
3 2
3.0
11.9 37. 1
3 2
7 6
65 ' 2
45 3
29 0
-0 ' 7 -6 ' 3 -1.7 37 8 49 0 39.7 20. 6
~
Coupons
Memo:
1974
Investors
~
Bills
State
1973
public Debt Securities Held by private
years, in billions of dollars)
9.6
17, 1982
of public debt securities.
Table
Ownership
End
of
Calendar
ar
Total
Privately
Held
i970
971
972
973
974
1975
1976
1977
1978
1979
1980
1981
$229. 1
247. 1
261.7
260.9
271.0
349.4
409.5
461.3
508.6
540. 5
616.4
694.5
of Public
Debt
III
Securities
by
Private Investors~
Billions of Dollars
Mutual
State
Ccmmercial
Banks
Indzvlduals
Savings Other
Insurance
Savings
Local
Foreign and
Other
Bonds
Companies
Banks
Governments
International
Investors
$62. 7
$52. 1
65.3
67.7
60.3
55. 6
85 ' 1
103.8
101.4
93.2
96.4
116.0
109.4
54.4
57.7
60.3
63.4
67.3
72.0
76.7
80.7
79.9
72. 5
68.1
Securities
$7.4
$29. 1
7.0
6.6
6.4
6.2
9.5
18.8
16.2
16.9
20. 8
21.3
12.7
15.5
15.7
16.7
29.6
31.1
33.3
36.2
56.7
75.6
20. 1
19.1
$3.1
3.1
3.4
2.9
2. 5
4.5
5.9
5.9
5.0
4.7
5.4
5.2
Co
rations
$7. 3
11.4
9.8
and
$27. 8
12.4
21.3
25.4
28.9
29.2
29.2
34.2
19.6
64. 4
10.9
26. 1
20.5
22.9
25. 7
37.8
41.6
50.8
69.9
78.8
85.6
$19.8
46. 1
$19.9
58.8
66.5
78. 1
109.6
137.8
123.7
134.3
141.5
22. 1
54. 5
54.7
15.6
17.0
19.3
37.4
39.7
49.7
58.9
90.1
106.9
152.2
Percentage Distribution
End
of
Calendar
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Total
Privately
Held
100%
100
100
100
100
100
100
100
100
100
100
100
~rcial
Banks
27. 4%
26.4
25.9
23.1
20. 5
24. 4
25. 3
22. 0
18.3
17.8
18.8
15.8
Indzvzduals
Savings Other
Mutual
State
Insurance
Savings
Local
Bonds
Ccanpanies
Banks
22. 7%
22. 0
22. 0
23.1
23.4
19.3
17.6
16.6
15.9
14.8
11' 8
9.8
Securities
12.7't
7.6
6.2
6.5
7.7
6.1
7.2
6.7
6.5
6.7
9.2
10.9
3.2%
2.8
2.5
2.5
2. 3
2.7
3.1
3.4
3.1
3.1
3 2
~
2.8
1.4%
1.3
1.3
1.1
0.9
1.3
1.4
1.3
1.0
0.9
0.9
0.7
Office of the Secretary
of the Treasury
"Includes small amounts of matured debt on which interest has ceased.
Corporations
3.2%
4.6
3.7
4.2
4.6
6.1
6.4
4.4
3.9
4.2
4. 2
5.4
and
Governments
12.1%
10.3
11.0
11.2
10.8
9.8
11.0
10.2
12.7
12.9
12.7
12.3
Foreign and
Other
International
Investors
8.6%
18.7
20. 8
21.0
21.7
19.0
19.1
23.8
27. 1
22.9
21.8
20.4
8.7%
6.3
6.5
7.4
8.2
10.7
9.7
10.8
11.6
16.7
17.3
21.9
March 17
1982
Chart j.
PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
BY MATURITY
$Bil
600
500
COUPONS
580.7
~Over
10 years
:
~~;. 2-10 years
A@1-2 years
ggg1
66.1
year & under
149.0
BILLS
400
300
80.0
200
195.3
100
0
1971
1972
1973
1974
1975
1976
As of December
Olleu ol the gestatory ol tha Treasury
Ogica ot Government Financing
1977
1978
1979
1980
1981
31
January 2$, 1982.1
Chart
2
AVERAGE LENGTH OF THE MARKETABLE DEBT
Years
10
~
Privately Held
June 1947
10 Years
Months
5 Months
December 1981
48 Months
g
50
45
40
J
F
M
A
M
J J
A
S
0
N
0
1961
December 1975
2 Years
5 Months
1945
47
Once ol the Secreterr ol the Treasure
Or. ,ce ol Government Financing
49
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
Jenuery 26 ltt82 4
Chart
3
USE OF AUTHORITY TO ISSUE TREASURY BONDS
WITH INTEREST RATE OVER 4'/4 PERCENT
$Bil.
100
$Bil.
100
Gelling increased
to $70 billion
80
80
October 3, 1980
60
60
Amount
40
40
Outstanding
$10 billion ceiling
$10 billion
applied only
authority enacted
March 17, 1971
Privately
Held
to private holdings
July
1, 1973
20
20
~OOOOOOOOO
1971
1972
1973
OOO~N~OO™~
1974
1975
1977
of December 31
As
&Issued or annoiJnced
Ollfce of Ihe ruecretary ol the Treasury
Oltfce ol Gwemment Finanong
1976
through
December
1978
1979
1980
1981~
31, 1981
January 26, ttt82. 21
Chart
CUMULATIVE
$Bil
0
l
4
NET CASH FLOW IN SAVINGS BONDS'
$Bil.
'00000000000000000000 000000000000000000000000
OOOOOOOOOOOOOOOOOOOOOOOOOOOO
~ 000000
~0000000
000000
0
1978
~e ~
1979
1981
~e
~O
~
0
~
~
1980
-10
-10
~
0
~ eo
F
M
A
0
M
N
p
12
Month pf yest
Oflme of Ihe Secretary of the Treasury
Goaernment Financing
Ofhce
d
Cash sales less redemptions
jj
e January 1982
estimated
partly
January 26, 1662.5
epartment of the treasurV
~
Washinclton,
For Release Upon Delivery
Expected at 7:30 p. m. , EST
p.c. ~ TelePhone 568-2O4
Remarks Prepared For Delivery By
The Honorable Donald T. Regan
Secretary of the Treasury
The Philadelphia
Stock Exchange Dinner
The Bellevue Stratford Hotel
Philadelphia,
Tuesday,
Pennsylvania
23, 1982
"Choices"
Narch
Senator Heinz, thank you for a very kind introduction.
The
are fortunate indeed to have you
people of Pennsylvania
representing them in Washinaton.
I might also add that the
Administration
has had numerous reasons to be appreciative of
your presence in the Senate.
Some of you may be aware of the fact that I once ran the
merrill Lynch office in Philadelphia.
That was a very happy
experience for me, so I'm especially delighted to groin you here
tonight. In fact, the only thina I'd welcome more than an
opportunity to address this group is an eight percent prime rate.
The vitality of this city is manifest in the new structure
It's particularly
that houses the Philadelphia Stock Exchange.
fitting that the Exchange's opening be celebrated this year-the three hundredth anniversary of the founding of Pennsylvania.
I was e pecially taken with the design of a trading floor
I'm
that allows the public to observe the exchange in operation.
sure the public will be edified by the civility, protocol and
decorum that prevail among the traders on the floor.
I'm very impressed by the new building that now
the exchange.
The structure's modern design and
sophisticated communications systems bespeak a forward looking,
innovative and energetic financial community in Philadelphia.
Seriously,
houses
Still, in the course of the transition, you' ve been able to
preserve some of the old values and traditions.
For instance, I
believe that -- despite the move -- you' re still within range of
Bogart's and the Newstand.
And I'm clad the Exchange has stayed in the center city area,
because the truest test nf any broker's mettle is a daily commute
down the Schuylkill
Expressway.
That experience is one cf the
in Philadelphia since my departure.
few things unchanged
In
ano ir the nation.
But much else has changed in Philadelphia
the pace and scope of change durina recent years is
fact,
R-690
to validate the observation by the Greek philosopher
Heraclitus who said: "Nothina endures but change. "
nealected to say was that chanae occurs
What the philosopher
either by chance or by choice. It's that last factor -- choice
the truly human element in chanae -- that I'd like to address
this evenina.
choices by the American people
One of the most sianificant
was made more thar. a year aao with the election of Ronald Reagan.
That was when the electorate said, "enouah"-- erouah of erratic
economic policies -- enouah of inflation -- enouah of tax rates
that penalize incentive and discouraae investment -- enough of
aovernment that hinders productivity
by absorbing resources from
the private sector -- and enouah of aovernment that sacrifices
initiative on the altar of reaulation.
The electorate voted for
enouah
chanae.
In making that choice, the American people didn't merely swap
one Administration
for another, or place a new tenant in the
White House; they demanded a new course in the affairs of the
nation
--
tack for the ship of
a new
state.
It' s
The new course we' ve plotted is for the iona term.
intended to produce sustained economic growth and it will.
It' s
intended to produce jobs -- and it wil3. It's intended to
produce lower interest rates -- and zt will. These are the
objectives that the Administration sought when it first devised
its program for economic recovery.
That program emeraed from a series of choices. We could have
chosen to seek a balanced budaet on the backs of the taxpayers;
we chose instead to cut back the arowth of aovernment
spendina.
we
We could have allowed
inflation to increase federal revenues;
chose instead to cut personal tax rates and index them.
We could have chosen the auick fix of inflatina
our way into
prosperity; we chose instead to encouraae the Federal Reserve in
a policy of slow, steady arowth in the money supply.
Fir. ally,
marketplace,
endeavor.
we
chose to reduce reaulatory intrusions into the
eminently successful in that
and we' ve been
The cumulative effect of all those choices is a policy that
has begun to turn the economy back to the producers of this
country -- to those who can aenerate growth, and jobs, and real
wealth.
And we' ve begun to see some of the results of
policy.
For the
declined.
phenomenon.
first
time in seven years, inflation has actua,
say that was an anomaly -- a transitory
That may be partially true, but I' ll waaer that
Some
there will be more of those phenomena in the months ahead -- more
indicators of progress toward our qoals of strona, real economic
arowth.
for the
are beginning
For example,
first
time in years union contract
to reflect -- at least in part -- the
lowering of inflationary expectations.
That's been manifest most
recently in the automobile industry.
Those settlements are
portents of declining inflation.
settlements
if
We are
we have
approaching a new economic environment.
not as yet broken the back of inflation, we at
pinned to the mat.
it
have
rapidly
And
least
And inflation
will stay pinned even durina the economic
recovery that is beginr inq to emerae.
Last week, for example,
the Federal Reserve announced a 1.6 percent increase in
industrial production and 1.2 percent rise in capacity use.
as Aristotle said: "One swallow does not a summer
" And one
or even two positive indicators does not make a
recovery. Nevertheless, as sprinq continues, we' ll see more
swallows in the form of positive indicators, and we' ll come into
the summer with the recovery under a full head of steam.
Granted,
make.
All this of course is predicated on prompt, deliberate
conaressional action on President Reagan's budget. Adlai
Stevenson once said: ".. . there are no qains without pains. "
This Administration
made the tough choices that went into our
budqet
proposal.
It's
time for Conqress to accept its portion of pain, and
the fiscal choices that will stimulate economic growth and
maintain the nation's security.
I believe the Administration
would welcome bipartisan
alternatives that don't try to balance
the budget on the backs of the taxpayers, or impede our ability
to defend the nation.
make
We
others
understand the misqivings of members of Congress
are worried about budaet deficits.
and
who
Let's
outset; this Administration is deeply
Like taxes, deficits finance excessive
by deficits.
government
spending and absorb resources better left in the
private sector. We are opposed to them as a matter of principle;
and intend to see a budqet in balance ultimately.
But the deficit must be put in some perspective; it can't be
viewed in isolation from the rest of the economy.
Granted,
viewed in isolation and in terms of sheer dollars, the prospected
budget deficit is the largest in our history.
troubled
be
clear
from the
But that does not hold true if you put the deficit in the
context of the total economy. For fiscal 1983, we' re proiectina
a deficit that amounts to 3. 1 percent of the qross national
product. The f isca1 1976 def icit amounted to 4. 5 percent of the
qross national product.
In fact, a number of other industrial nations during the last
several years have consistently posted deficits areater than ours
products. And I include
when compared to their gross national
amona them West C-'ermany, Japan, Italy, and the United Kingdom.
While our estimated
budget
deficit for
1981 amounts
to
two
percent of our aross national product, Japan's is estimated at
3.6 percent. Indeed, Japan has in the past run a deficit as high
as 5. ~ percent of its qross national product.
Japan's experience with inflation, interest
real growth stands in marked contrast to ours. The
reason is primarily its stable monetary policy and hiah rate of
In 1980, for example, gross savina as a percentaae of
savinq.
Japan's GNP was a little more than 30 percent. Our gross savinq
rate, on the other hand, was 18.3 percent, sliqhtly more than
half that of Japan.
Deficits must be financed, either by borrowing a portion of
national savings, or by inflationary money creation. Japan has a
hiqh enouqh savinas rate to finance a deficit with enough savinqs
left over for investment and growth without rapid money creation.
Conseauently, Japan's inflation rate and interest rates have
Nevertheless,
rates
and
remained
low.
The U. F. on the other hand has done too little saving and
allowed too much money creation over time. The result has been
slow arowth, rapid inflation and hiqh interest rates. We irtend
to chanqe that.
Increasing the rate of saving in the United States has been
of our major objectives. We believe that goal has been
achieved, and that as a result, private savinq will be several
times the total borrowina reauirement of the federal government
in fiscal 1983 and fiscal 1984.
one
If current and projected deficits
it is a lack of economic qrowth.
are symptomatic
of anything
to balance the budaet, while raising living
through economic growth that enlarges the tax base.
We want to see arowinq
payrolls that will contribute to federal
revenues, not higher taxes on a declining number of workers and
The only way
standards,
is
businesses.
The Conqress
budqet
with tax
objective.
Between
has tried time
increases. And
and
it
1974 and 1981, despite
time aqain to balance the
hasn't accomplished the
several leaislated
tax
reductions,
we
still
national
overall federal tax receipts rose S338 billion; yet.
accumulated deficits
debt in excess of a
of S350 billion,
trillion dollars.
and today
have a
Raising taxes does not balance budgets. Tax increases simply
give the federal qovernment more to spend on federal programs
that create constituencies for even qreater spendinq.
postponinq the tax
transform a tax proqram
cuts, or eliminatina
altoqether would
savino, and
productivity into just another attempt to fir e tune the economy.
If, as Francis Bacon said, "History makes men wise, " then
we'd do well to learn from past attempts to attack deficits
throuah tax increases rather than spending cuts. President
Lyndon Johnson imposed a surtax of 7. 5 percent in 1968, ten
percent in 1969, and 2. 5 percent in 1970.
oriented
toward
them
work,
And from late 1969 to late 1970, real gross national
product
almost doubled.
But more
declined one percent and unemployment
to the point, the deficit -- from beina marginally in balance in
1969 -- arew to S23 billion in 197 1. The tax increases reduced
savinq, investment and qross national product, and led to a
hiqher
deficit.
If anythinq, that marqinal balance of S3.2 billion in the
1969 budget was an exception that proved the rule: Taxes won'
balance the budaet, they' ll simply bloat the government.
You know, I know,
money to Washinqton,
way
every taxpayer knows that, if you send
The only
ll find a way to spend
spending is to tighten the purse strings.
and
it.
they'
to cut qovernment
That's what we did
t
Now the free
when we cut tax rates.
are complaininq about deficits. They' re
tryina to conceal their real desires for more taxes and more
spenders
in Conaress
spendina.
fact is plain to anyone who's paid attention to
It's a fundamental-Washington during that last two decades.
That
principle
then some.
Another
that Congress will spend everything
principle
of Congress is this:
it
It is
limit action on the tax code once Congress opens
takes in
and
impossible to
up to chance.
it
Their leqislative axe will fall on much more than just the
third year of the tax cut. It will very likely fall on other
tarqets -- the cut in the tax on unearned income from seventh' to
fifty percent, for example, or the reduction in the long term
capital qains tax to twenty percent.
trust. that no one here is naive enough to believe that
Conqress will eliminate or PostPone Personal tax relief, and
leave other aspects of the tax program
untouched.
tax on unearned income and the twenty
And if the maximum
percent tax on long term capital gains are chanqed -- and they
very well could be -- you can kiss much of the strenqth in the
new issues market goodbye.
The proqram
have
we
in place should
stay in place.
Tampering with the tax program in the name of balancing the
message to the economy-budget would send a clear, unmistakable
a message that would say, "We' re back to business-as-usual
back to the old stop and ao
policies.
belief that the
branch -- is incapable
of takinq the long-term actions necessary for real growth. And
that belief in turn will keep interest rates high.
That message will confirm the markets
government
specifically the leqislative
--
to the current crux of the economic problem-interest rates. Looked at from my vantage point, there is
little reason for rates to be as high as they are.
&o now we come
hiqh
The more I search for a reason for current
the more I'm reminded of the young Irish girl
Confession.
interest rates,
who went
to
She told the kindly
have committed the sin
old curate that she was afraid she might
of vanity.
"Every mornina I look in the mirror, " she told the father,
"and I think how beautiful I am. "
The voice in the confessional replied:
"Dc n't be afraid.
That's not a sin. It's a mistake. "
Today's interest rates are no lauahinq matter.
After all, real interest rates have historically run three or
four percent above the inflation rate. But in recent years,
layered on top of real rates, have been premiums for inflation
and
for uncertainty.
Those premiums were understandable
in the climate of
inflation that existed before this Administration took office.
Clearly, today there is little reason for addina a premium for
inflation -- at least not at the levels that obtpin today.
does
it
take to convince the markets that the
committed to slow, steady growth in the
money supply, to not monetizina
the debt, and to restoring the
economy to a non-inflationary
course?
How much
government
is seriously
Think about
this for
a moment;
Federal borrowing
this year
will take about twenty-two
market.
percent of the funds in the credit
In 1975, the government preempted fourty-two percent of the
credit available and interest rates were declining.
In light of this year's relatively minor pressure on the
credit markets, one can only conclude that real interest rates of
seven or eight percent -- if not unconscionable -- are at least
paradoxical.
I'm sure that in time that paradox will be resolved as we
toward a growing economy -- one without the torments of
inflation -- one that affords every one the prospect of
move
prosperity.
In the final analysis problems of economic policy are human
Behind the cold numbers issued by the Bureau of Labor
problems.
Statistics are people and families who ask only the opportunity
to put their skills to work in some productive endeavor.
understand that human dimension,
to put our policy where our principles
We
President announced
creating enterprise
that
and we'
re
are. This
leaislation
he would send
zones that will promote
fu3 ly prepared
mornina the
to Congress
eccnomic orowth in
areas.
It's a strategy that we believe will revitalize many of the
in the inner
depressed areas in this country -- particularly
depressed
cities'
that reducing the burdens of taxation ar d federal
We believe
regulation will create a hospitable economic atmosphere in these
zones -- one that encourages new businesses and preserves
existing businesses.
combination of tax incentives will be provided for
tax credit
employers:
among them are a five percent investment
tax
credit
and
a
for capital investments in personal property,
for waaes paid to employees who were considered disadvantaged
A
when
hired.
The program
also contain
incentives
over welfare; it's a five percent
working in the Fnterprise Zone.
work
for people who choose
tax credit to employees
incentives is built into the j egislation.
A host of other
estimate that the package, as proposed, will allow the creation
of as many as twenty-five Fnterprise Zones.
We
This program represents more than mere abstract care for the
Our concern is real, active, and in a
poor and disadvantaged.
President Reagan, myself and most of the cabinet
sense personal.
are old enough to remember the lean years. Our generation has
been marked by that experience, iust as a later aeneration was
Ard to
marked by the experience of the war in Vietnam.
Rememberina our past, we will not
paraphrase George Santayana:
be condemned to repeat
it.
Rather than repeatina the past -- either the past of the
thirties, or the recent past of inflation and periodic slumps-we instead look to a future that will be different.
And
In that future we see a vibrant,
this year.
we see it beainnina
Thank
you.
secure, productive
nation.
epartment of the vreasury
d'or Release U n
March 23, 1982
9:00 AM EST
~
Washinciion, D.C. ~ Telephone 566-2041
Deliver
Contact:
Marlin Fitzwater
566-5252
Remarks by
Donald T. Regan
Secretary of the Treasury
Bucknell University
Lewisburg, Pennsylvania
March 22, 1982
"Moralit
and Ca
italism"
I am delighted to be at Bucknell University today to talk
tomorrow's entrepreneurs
about capitalism and the values
that make it work. You know, one of the elements essential to
which is why I know
is faith
the character of an entrepreneur
I'm preaching to the choir here at Bucknell.
You see, I know
there's no doubt in your minds that the next time you meet Lehigh
in a football game you' re going to win
with
--
Perhaps
I shouldn't
have taken
such
liberty,
however,
in
The
any of you expect or want to become entrepreneurs.
highbred and highbrows of this world have often looked askance at
those "in trade. " The very name "capitalist" was dreamed up by
intellectuals in the middle 1800's as an insult. You know the
went:
capitalists are a useful sort, but you wouldn' t
way
assuming
it
to marry one
too many Americans really do feel that
Unfortunately,
capitalism is not very noble, that somehow our economic system is
something to apologize for. Today I hope to rid you of any such
I believe capitalism proves its
misplaced feelings of guilt.
character traits engendered
those
two
first,
morality in
ways:
in the people who practice it and second, the effect it has had
The theory of
in raising the standard of living for all mankind.
capitalism may be prosaic, but its effects make it the most moral
want
any
your daughter
people have ever
tried.
capitalist, and proud to be one.
part of this country's phenomenal
I have been contributing to the growth of
process of production.
-increasing its well-being, not just spending its
cur society
Benefits. I believe capitalism to be an honorable way of life
a.-d one that encourages man's better nature.
I have no intention of defending big
Don't get me wrong.
business or corporate America.-- Those impersonal institutions no
much of their stock is held by
longer belong to individuals
groups -- so they feel less strongly the constraints of
Belonging to no one in
individual values, needs and morality.
to
only
the
bottom
responsible
line, too many have
particular and
bureaucracies
government
than
cradles of
become more like
Not
R-69]
Well, I stand before you a
just
a consumer,
I
am
risk-taking
What
It
entrepreneurial
and
I
may
is
do defend
be
dull,
and
spirit.
commerce.
rarely heroic, but a nation of small
is a nation whose people hold close those practical
virtues known as "bourgeois" values. Democratic capitalism
encourages thrift, discipline, hard word, public-spiritedness
It rewards individual effort, which is why it
and, yes, honesty.
is no accident that capitalist countries in the world are
outproducing socialist ones by nearly 2 to 1.
merchants
But I don't think capitalism's intellectual critics find a
lack of morality in our system, I think they just find its code
of ethics, the values it encourages, to be, well, boring.
Commercial societies tend to produce a citizenry that is
non-ideological, moderate, and willing to
non-self-righteous,
split the difference. It must seem terribly unromantic to those
yearn for righteous purity, but it kept society from the
frequent divisive strife endemic to so many other lands.
who
Americans
have
been called every name in the book
materialistic, narcissistic, selfish, mean-spirited and petty.
After all, their entire way of life is based on self-interest.
But a funny thing happens to the theory on its way to reality.
Somewhere along the line we all realize that we can't calculate
our self-interest properly without having a respect for others.
The merchant
who
cheats his customers,
belittles his clients, the
the' salesman
who
gouges his buyers will
soon be looking for other ways to make a living.
We learn,
in
our free commercial dealings, to be sensitive to the desires of
others, tolerant of their differences, understanding of their
wants and even neighborly to our fellow citizens.
businessman
who
The theory of capitalist selfishness
is forever belied
the truth of the reality.
We are, in fact, a nation
of
volunteers,
friends.
of charitable
organizations,
of magnanimity
and
by
of
As a matter of fact, it has recently been estimated
that
about 52 percent of adult Americans -- 84 million of us -- work
in our spare time at some worthy cause, or contribute to
That's the kind of people our system produces,
and that's the
kind of character that keeps us strong.
it.
But, in truth, I have stepped out of my capitalist role
temporarily.
I went to Washington at President Reagan's request
because I feel, as he does, that this country is drifting
dangerously far from that well-charted course first laid out for
us by our Founding Fathers.
Past leadership in Washington has
falsely led too many of our people to believe that somehow our
system of democratic capitalism caused our economic problems at
home and around the world.
We' ve been told that our appetites
have ravaged
nations
underdeveloped
their resources.
Well,
let's just
of Democratic
Ca
States
--
robbing
and plundering
take a look at what capitalism
italism
--
lays
it
our pretty
has done
clearly.
to
Until
came into being in 1776, the classical pattern
of political economy was mercantilist.
Famines ravaged the
civilized world on the average of once a generation.
Plagues
the United
seized scores of thousands.
In the 1780's four out of five
French families devoted 90 percent of their incomes simply to
buying bread -- only bread -- to stay alive.
Life expectancy in
France was about 27 years for women and 23 for men.
the beginning of the 19th century, travelers from Europe,
accustomed to poverty at home, were appalled by the still more
unspeakable conditions they found in Africa and Asia. In most
places, elementary hygiene seemed unknown.
In Africa, the wheel
had never been invented.
Most of the planet was unmapped
Hardly any of the world's cities had plumbing systems.
Potable
water was mostly unavailable,
and ignorance was so extreme that
most humans did not know that unclean water spreads disease.
At
~
But the American revolution exploded onto the scene at
almost the same time as Adam Smith's The Wealth of Nations.
The
world would never be the same.
In reality the American way of
life, enterprise in liberty, is the world's only hope.
There should be no doubt that our Founding Fathers fully
intended this land to be one of commerce, encouraging creativity,
risk-taking, investment and moral responsibility.
By the year
1800 there were more private business corporations in the infant
United States than in all of Europe combined.
It's
it's hard to write a poem about
The
inspiring song about the marketplace.
theoretical
of socialism seems much more attractive and
noble. But all we have to do is look around us to see the proof
that America has been the glory of modern times.
been said that
or sing
equality
moneymaking
an
have brought light where before there was
We capitalists
darkness, heat where once there was only cold, medicines where
there was sickness and disease, food where there was scarcity,
and
wealth
where
humanity
In Novak's words,
beings finally figured
sustained,
systematic
was
living
in squalor.
"After five millennia of blundering,
out " how wealth may be produced in a
way.
human
look beyond the theory to find the morality of
look too far. We have only to see its
we needn't
effects to realize that democratic capitalism has lifted the
standard of living for more people in more places in a shorter
period of time than any other system in the history of mankind.
We
must
capitalism,
but
It is
a system
that requires
the apology of no American.
scratch the surface of even its theory, if you
look closely at what makes capitalism work, you will also find,
as Irving Kristol writes, its moorings in morality.
Alexander Hamilton, the first Secretary of Treasury, made
of public
clear that the maintenance of good credit, theitspaying
He
citizens.
and
Nation
debts, was essential for both the
"States,
said "good faith" was key to our success, explaining,
are respected
like individuals, who observe. their engagements,
who pursue
of
those,
fate
the
is
while the reverse
and trusted:
"
"
and
said, "in
He cited "moral obligation,
an opposite conduct.
"between
public
the order of Providence" there is a connection
virtue and public happiness. "
But
What
if
you
has become known
as the Puritan
ethic
was the
Our
system.
with taking
of America's political
Fathers did not equate self-interest
They designed a political and economic
advantage of others.
system to be run by a people under God and trusting in God,
working His will in their daily lives.
can work is
way capitalism
As a matter of fact, the ~onl
fairness and compassion
when equity,
when it is tied to morality,
are the hallmarks of its people, and when the limited government
that oversees the system is ready and able to help those who
cannot help themselves.
foundation
Founding
and economic
of capitalism that I have just gone through
is also at the heart of this Administration's economic policy.
human drive to make a
The same key elements -- the natural,
better life; the risk-taking and the faith in the entrepreneurial
spirit -- are also the keys to the President's program for
The philosophy
economic recovery.
believes, as I do, that big government has
been booming out of control in the last few decades while our
We don' t
economy has limped from one recession to another.
believe the system has suddenly failed us, that it has outlived
its usefulness, or that it is too simple for today's complex
world. We believe that some of our leaders have failed the
President
Reagan
system.
the tax burden has escalated -- increasing more than 200
percent in the last ten years -- and as social spending has
-- Government outlays in the same period went up by
mushroomed
300 percent
the values of work and family were slowly being
eroded.
As
—
last
15 years, the cost of our food stamp program has
gone up more than 16, 000 percent.
In just 10 years Medicaid and
Medicare have increased by more than 500 percent.
At the same
time inflation and interest rates were soaring, unemployment
was
In the
climbing
and
the misery
index for Americans
hit
an
all-time high.
is no question that we in this country have a solemn
to take care of our needy, to feed those who are
hungry and shelter those who are cold. Our elderly must be
allowed to live out their lives in security and dignity.
We do not propose
to abandon those values nor undo that
style of compassionate life known as the American Way. Far from
it, we are desperately trying to save it.
On behalf of the young couple who dreams of buying
their own
to wring out inflation and bring these
home, we are struggling
intolerable interest rates down. On behalf of those who have no
jobs, we have proposed programs that will provide them work. We
have created new incentives for small business and for industry,
incentives that will result in new jobs and new opportunities.
On behalf of our elderly,
our handicapped and our disadvantaged
we have reaffirmed
our commitment and redoubled our efforts to
protect them from the inflation that has been ravaging their
On behalf of all Americans,
pensions.
we are returning
our
government and our economy to the people.
After too many decades of more and more spending and more
and more taxing, our program for economic recovery returns sane
fiscal policy to Washington.
The joke is that if you laid all
the economists in Washington end to end they'd never reach a
conclusion, but the truth is that the economic advisors in
Washington have consistently believed that all our problems would
There
obligation
if
only we would spend more.
and then spent even more than that.
go away
So our leaders
taxed more
This Administration
has no intention of turning its back on
Americans in need of help, but when these programs have been
growing with wanton disregard for so many years, why does a
proposal to cut their rate of growth send so many people on
Capitol Hill up in arms?
automobile workers are suggesting their own
has no
pay cuts just to keep their jobs, this Administration
intention of succumbing to the spending addiction so rampant in
the Congress.
At a time when salary increases are no longer just
falling behind but the wages themselves are being cut, well, the
believes big government should tighten its belt,
Administration
as well.
At a time when
all-intrusive Federal Government never has worked and it
will, and it is time some people in Washington realized the
rest of the country is tired of it.
me be very clear that we in the Reagan Administration
An
never
believe that economic sanity includes balancing
wholeheartedly
I wouldn't mind if balancing the budget
budget.
the Federal
a
requirement
of the Constitution.
became
But I don'
every year
t
it. is by making that auto worker's check even
smaller. we refuse to balance the budget on the back of the
already weary American taxpayer.
We appreciate
you see, we believe in the American system.
of capitalism have done for
what the incentives and motivations
this country and the world. We propose to unleash them again.
spirit back in the center of
to put the entrepreneurial
We intend
the
be
wellspring of progress
our economy so once again it can
and the promise of a better life for all our people.
Our programs have only begun to take effect, but surprise!
Look what has happened in only half a year! Changes in the
capital gains tax have spurred investor interest in new
In that
companies, with more than 400 going public last year.
investor
the
sense, 1981 was a record year for the risk-taker,
That means more competition, more progress
and the entrepreneur.
and a better deal for the consumer.
think the
way
to
do
Such a program,
instant gratification.
it is true, offers
But it is fair,
no quick fixes, no
and
is compassionate.
it
Although we were able
Let me also set the record straight.
to pass, last year, the largest budget cuts in history, these
And
cuts only slowed the rapid increase in government spending.
across-the-board,
tax
our
25
rate
3-year,
percent
although
reduction is the largest tax cut working Americans have ever
experienced, it also only offsets the incredible increase already
in our
scheduled
If
taxes.
the rate at which government programs are
you understand
the salaries of the
a rate which by far outdistances
Americans who must pay for them
you get a better
perspective on the cuts we propose. We have never suggested
--
growing
working
--
spending less in next year's budget
only want to reduce the increase!
Let
services
me
we
than
in the year before.
give you a few examples of the level of
are still providing in the 1983 budget:
We
human
--
Nearly 7 million separate loans or awards will be made
available for students in higher education through Federal
assistance programs.
Since the college-level population numbers
only slightly more than 11 million, that means better than one
out of every two students has the opportunity for assistance.
Although reduced from last year by about $1.5 billion, the 1983
budget provides more than $12 billion in total tuition support,
nearly three times the level available in 1977.
--
The Federal Government will subsidize approximately
95
million meals per day, or l4 percent of all meals
served in the
United
--
States'
Through
Medicaid
and
Medicare,
the Federal Government
wi»
pay for the medical care of 99 percent of those Americans
over the age of 65: approximately 47 million aged, disabled and
needy people, 20 percent of our population.
-- Twenty-eight percent of all Federal spending will go to
the elderly -- an average of $7, 850 per senior citizen in
services'
-- About $2. 8 billion will be spent on training and
employment
programs for almost 1 million low-income people,
nearly 90 percent of whom will be below the age of 25 or
recipients of Aid to Families with Dependent Children.
payments
and
--
About
--
And
3.4 million American households will receive
housing assistance at the beginning of 1983. By the
end of 1985, under Reagan Administration
proposals, 400, 000 more
households will be added to the list.
subsidized
just today, President Reagan sent to the Hill
for a new effort to revive the decaying areas of
legislation
America's inner cities and rural towns. The "Enterprise Zone
Tax Act" is an experimental,
free market program for dealing with
the severe problems of our Nation's economically depressed areas.
I think
Admnistration
safety net is
these examples clearly demonstrate that we in this
are not turning our backs on America's needy. The
still there.
But our program
to rely again
our people
in so
found
their
much
to cut spending,
cut taxes, cut regulations
--
on the magic of the marketplace
only hope of avoiding the scarcity
of the rest of the world.
also offers
and misery
the globe for proof that
control, further punishing our producers
robbing everyone of incentive -- in short socializing our
One need
increasing
only look around
government
and
economy
-- will not work. In Russia, the average worker produces
only half the goods and services of his American counterpart.
His economy has been described as one of "scarcity underlined
by
bribe giving and bribe
long lines at stores, black marketeering,
taking. " Already grim, his living standards are expected to
decline even more. Economic growth rates are sliding to near
zero levels'
admits publicly that, "It is
becoming clear that for a full 30 years we have been unable to
solve problems associated "with production under socialism, either
As a news magazine recently reported,
in theory or in practice.
for the 1.5 billion inhabitants of the Communist world, the
Marxist promise of a worker's paradise has turned into a
nightmare of permanent scarcity, economic stagnation and
A
Czechoslovak
economist
discontent.
In poland
such economic discontent
was put down
with
off. Travel was forbidden.
Mail was restricted,
telegrams.
You couldn't send or receive
rounded
were
Malcontents
up and imprisoned.
opened and censored.
Newspapers were closed down and television was taken over by the
tactics.
Orwellian
Phones were cut
army.
It
not long after that military crackdown in Poland that
intellectual who
Susan Sontag, the very model of a left-liberal
the
of her colleagues
jeers
through
visited
Hanoi,
spoke
had once
to revise her assessment of communism.
was
"There are many lessons to be learned from the Polish
events, " she said, "but I would maintain, the principle lesson
is the . . . failure of communism, the utter villainy of the
It has been a hard lesson to " learn. And I
communist system.
struck by how long it has taken us to learn
it.
I only hope
we
am
have.
and
Our system of democratic
genius of the individual,
for
it
capitalism,
with
based on the freedom
individual
rights
and
responsibilities under representative government and the rule of
law, was a unique and precious gift to the world.
It has been
handed carefully to us by our forefathers,
and it is ours to
protect and nurture for the generations that are to follow.
to America's youth, as they rise to take their
My message
places in American business, government and society, is to care
well.
Lincoln once said that we Americans, the freest
will determine our own fate. If it is to be
greatness, we will have built it; if it is to be destruction,
then we will have wrought it. "As a Nation of freemen, " he said,
"we must live through all time or die by suicide. "
Abraham
people
in the world,
leave Bucknell that responsibility will become
needs the dreams of its youth.
We need their
and their passion for equity, justice and fairness.
Our
country needs its best minds and all our energies as much now as
in any crisis in our history.
There can be no new wealth unless
we create it, no new discoveries
unless we find them. And we
will neither create nor discover until we once again are willing
to gamble that we have it within ourselves to shape a better
tomorrow -- to bring progress and prosperity to our country and
the world
When
yours.
ideals
you
America
Join us in our crusade to breathe new life into our system
of enterprise in liberty. Restore with us the values that make
it work. Together let us be sure that future generations never
freedom
say
was
Thank
lost
between
you very much.
us.
of ihe Treasury
~apartment
FOR RELEASE AT
4: 00
P
.
M
~ Washington,
D.C. o Telephone 566-204%
March
~
TREASURY'S
NEEKLY
23, 1982
BILL OFFERING
of the Treasury, by this public notice,
for two series of Treasury bills totaling approximately $9, 400 million, to be issued April 1, 1982.
This
offering will result in a paydown for the Treasury of about $50
million, as the maturing bills are outstanding in the amount of
$9, 444 million, including $2, 043 million currently held by Federal
Reserve Banks as agents for foreign and international
monetary
authorities and $1, 426 million currently held by Federal Reserve
Banks for their own account . The two series offered are as follows:
The Department
invites
tenders
91 -day
million,
bills (to maturity date) for
representing
December 31, 1981,
(CUSIP No 912794 AV 6
currently
$4, 922 million, the additional and
.
interchangeable
),
.
182-day bills
April 1, 1982,
No. 912794 BN 3)
approximately $4, 700
of bills dated
1, 1982
outstanding in the amount of
an additional
amount
and to mature July
original
bills to
be
for approximately $4, 700 million, to
and to mature
September 30, 1982
freely
be dated
(CUSIP
~
series of bills will be issued for cash and in exchange
bills maturing April 1, 1982.
Tenders from
Federal Reserve Banks for themselves and as agents for foreign and
international monetary authorities will be accepted at the
weighted average prices of accepted competitive tenders . Additional amounts of the bills may be issued to Federal Reserve Banks,
as agents for foreign and international
monetary authorities,
to
Both
for Treasury
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them
.
bills will
be issued on a discount basis under competinoncompetitive bidding, and at maturity their par amount
Both series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $10, 000
on the records either of the
and in any higher $5, 000 multiple,
Federal Reserve Banks and Branches, or of the Department of the
Treasury
tive
The
and
.
R-692
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 Standard time, Monday,
March 29, 1982.
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 .
Each tender must be for a minimum of $10,000 . Tenders over
$10,000 must be in multiples of $5, 000 . In the case of competitive tenders the price offered must be expressed on the basis of
100, with three decimals, e .g . , 97 .920 . 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
if the names of the
may submit tenders for account of customers,
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 as of 12:30 p .m . Eastern
time on the day of 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 .
deposit need accompany
tenders from incorporated banks
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
No
trust
and
percent of the par amount of the bills applied for must
tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders .
of
2
accompany
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Compet. itive 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 i000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
~
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on April 1, 1982,
funds
in cash or other immediately-available
or in Treasury bills maturing April 1, 1982.
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.
Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income
The acquisition
discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
Under
amount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill. If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
of the Treasury Circulars, Public Debt Series
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
Department
Nos. 26-76 and
Debt.
epcmrtment
of ihe Treasury
FOR IMMEDIATE
March
23, 1982
No
~
Washington,
RELEASE
Change
D.C. ~ Telephone 566-204
CONTACT:
in the Sale of Treasury
Robert Don Levine
(202) 566-2041
Securities
The Department of the Treasury announced today that it has
completed its review of procedures for small investor participation in Treasury security auctions and has decided not to
It will continue to sell
change its procedures at this time.
Treasury bills, notes and bonds as
has in the past at the
main Treasury building in Washington and at Federal Reserve
Banks and branches across the country.
There will be no
change in the minimum tender and no charge for this service.
it
R-693
department
of the Treasliry
FOR RELEASE AT
~
Washington,
4:00 P. M.
O.C. ~ Telephone 566-2041
March 23, 1982
$3,
TREASURY TO AUCTION
250 MILLION OF 7-YEAR NOTES
TREASURY CANCELS 20-YEAR BOND
The Department of the Treasury will auction $3, 250 million
of 7-year notes to raise new cash. Additional amounts of the
notes may be issued to Federal Reserve Banks as agents for foreign
and international
monetary authorities at the average price of
accepted competitive tenders.
Treasury has exhausted its $70 billion authority to issue
long bonds with coupons in excess of 4-1/4%. Due to Congressional
inaction to expand Treasury's authority to issue long bonds, the
20-year bond normally announced at this time will not be sold.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
Attachment
oOo
R-,694
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 7-YEAR NOTES
1982
ISSUED APRIL
BE
TO
'
7,
23, 1982
March
Amount
Offered:
public.
.... .. . . . . .. . .. .......
To the
De scr ipt
ion o f Sec ur
Term and type o
Series and CUSIP
it
. . ... . .
... .
security.
designation.
.. ... . . . . . ... . .....
.
. . . .. . ... ... . . . . . . .
coupon rate. . . . . . . . . . . . .
Maturity date.
Call date. . . .
Interest
yield. . . . . . . . . . . . . . . . .
or discount. . . . . . . . . . . . . .
Investment
Premium
Interest
Minimum
Terms
payment
dates.
denomination
. .. . ......
available.
investor.
interest payable
Payment
by
investors.
non-institutional
~
due from
None
Noncompetitive
$1,000, 000 or
Full payment
with tender
....
Wednesday,
date (final payment
institutions)
....
a) cash or Federal funds. .
b) readily collectible check.
Delivery date for coupon
4)
at auction
To be determined
after auction
To be determined
October 15 and April 15 (first
payment on October 15, 1982)
Acceptable
for receipt of tenders.
Settlement
NB
April 15, 1989
No provision
based on
To be determined
the average of accepted bids
. . . . .by. . .designated
. . . . .. . . .. .. ...
Deposit guarantee
Deadline
(CUSIP No. 912827
by
. . . . . . . . . . . . . . .. . . .. .. .. .
institutions.
Series D-1989
Yield auction
... . . .. . . .. . .. . . . . . . . . . .
allotment. . . . . . . . . . . . . .
Preferred
7-year notes
. . . . . $1,000
of Sale:
Accrued
$3, 250 million
.
securities.
1:30 p. m.
bid for
less
to be submitted
March
, EST
31, 1982,
Wednesday, April 7, 1982
Monday, April 5, 1982
Monday,
April
19,
1982
by
Department
of the Treasury
Washington,
~
STATEMENT
MARGERY
O.C. ~ Telephone 566-204$
OF
TAXMAN
DEPUTY GENERAL COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED
ON
CONCERNING
STATES SENATE
MARCH
PROPOSED
25i 1982
LEGISLATION
INSPECTOR GENERAL ACT OF
TO EXTEND THE
1978
TO THE TREASURY DEPARTMENT
Mr. Chairman,
I am pleased to have the
appear before this Committee and to provide
Treasury concerning the proposed amendments
General Act of 1978. Accompanying me is the
Inspector General, Paul Trause.
opportunity to
the views of
to the Inspector
Department's
the Assistant Secretary for Administration
stated in
her testimony before this Committee on April 8, 1981, the
Treasury Department supports the establishment of a
statutory Inspector General and agrees with the general
thrust af this bill. In fact, we have had an administratively created Office of Inspector General since July 1978,
and we are proud of the way that Office has functioned
As
.
'81 the Department's internal
half billion dollars in audit
penalties, recoveries and additional revenues; $2 million in
questioned costs disallowed through audits and approximately
$9. 7 million in possible savings through new procedures.
Further, the Department's internal investigators completed
about 8500 investigations.
These investigations
resulted in
over 210 prosecutions and over 1900 administrative
disciplinary actions.
The investigations
also produced over $8. 8
million in penalties, recoveries and additional revenues .
These accomplishments
and the future of the Inspector
General's office must be viewed in light of Treasury's
mission.
Unlike most Departments with statutory Inspectors
General, the Treasury Department, with the exception of the
revenue sharing program, administers neither grant nor
entitlement programs.
Further, Treasury does not engage in
extensive contracting.
Rather, Treasury's responsibilities
During fiscal year
produced over a
auditors
R-695
are in economic, tax, and monetary policy, tax administraIt also receives and disburses
tion, and law enforcement.
Thus, Treasury's audits and
the Government's funds.
investigations have focused on the adequacy of the
Their goal has
Department's internal control procedures.
systems
Department's
the
of
the
integrity
been to protect
are
Treasury
the
monies
handled
that
the
ensure
by
and to
processed expeditiously and safely.
recognizes the unique nature
The proposed legislation
of the Treasury by protecting the Department's mandate to
help establish the nation's economic policies and its law
enforcement priorities while ensuring the independence of
the Inspector General
Because of the nature of Treasury's mission, the
sensitivity of its activities, and its role in formulating
that the
economic and monetary policy, we have maintained
must
be
kept
functions
internal audit and investigation
the
Department.
separate from the unique policy functions of
Section 8C(c) of the proposed amendments to the Act would
.
ensure
this separation.
for separating policy and audit functions can
be seen most clearly as you begin to examine Treasury's
For
various economic and law enforcement functions.
example, Treasury has offices which are involved in such
areas as trade and investment policy, bank regulation, loan
guarantees, international and domestic tax policy, foreign
assets control and multilateral development banks.
Decisions made by Treasury officials with respect to these
activities are made in the context of broad economic and
public policy considerations, both domestic and international.
Empowering
an Inspector General to review these
policy decisions could not only affect Treasury, but
the nation's economic and foreign policy as well.
Second-guessing economic policy decisions through the
Inspector General's Office could have a significant unintend«
effect on the financial markets whose performance often
reflects these policy decisions . This is particularly true
because the Inspector General would be obligated by the
Inspector General Act to make public semi-annual reports whic"
would contain recommendations
for corrective action in the
Department's programs and operations.
The need
The same argument
holds true in the area of law
enforcement.
For example, a decision made by officials of t&~
Customs Service to commit vast resources and staff power to &
lengthy
drug
smuggling
investigation
might
be viewed
by an
But law
as inefficient or ineffective.
Inspector
activities
are not meant to be measured solely
enforcement
in terms of cost effectiveness or from the Inspector General' s
General
Program officials with direct responsibility
must exercise their professional
judgment in
these unique areas without the harmful effects of
second-guessing by the Inspector General
perspective.
and expertise
.
Finally, to the extent that an Inspector General makes
recommendations
as to the wisdom of policy
objectives of a particular program, he or she acquires a
stake in the perceived effectiveness of these objectives.
If the organization accepts the recommendations, the
Inspector General is not then in a position to be as
objective in assessing the achievement of its goals.
The proposed legislation,
however, does not limit the
Inspector General's authority to review allegations that a
decision was improperly influenced, or that funds, once
allocated, were not properly expended or administered . This
function traditionally has been at the heart of the Inspector
General's role and, as the figures which I cited show, can
be and has been performed effectively by the Treasury's
Inspector General. Because this bill will protect the
Inspector General's independence and enhance his ability to
act aggressively against fraud, waste and abuse without
functions, the
impeding the Department's
key policy-making
Department, as previously stated, agrees with the establishment of a statutory
Inspector General.
We believe,
however, that two changes should be made in
specific
bill.
First,
the program review function and the
in the Customs Service, the Bureau of
Alcohol, Tobacco and Firearms and the Secret Service should
not be transferred to the Inspector General's Office. These
units have f unctioned as in-house management consultants
rather than as true internal auditors or investigators.
ability to diagnose
They are essential to line management's
and to address problems before they become major crises.
If
managers are deprived of these resources, they simply will
be forced to divert other resources to meet their legitimate
needs. Therefore, transferring these resources
management
to the Inspector General's office will result in unnecessary
duplication and will not add materially to the Inspector
General's ability to combat waste, fraud and abuse.
the
related
resources
Second, Treasury does not believe that the Inspector
General should be authorized to release information about an
on-going criminal investigation
The Department
has adopted
should not
a consistent policy that this type of information
be released and does not believe that the Inspector General
should be exempted from this important policy.
The official
release of information about which there has been public
speculation obviously could harm on-going investigations.
.
This concludes
Thank
you,
that you
I will
may
have.
my
now
remarks on the proposed legislation.
be pleased to answer any questions
department
of the Treasury
~
Washington,
O.C. ~ Telephone 566-2141
FOR RELEASE UPON DELIVERY
Expected at ll:30
24, 1982
March
Testimony
a. m.
of the Honorable
Assistant
Subcommittee
House Committee
Mr. Chairman
Roger N. Mehle,
Secretary of the Treasury
Jr.
(Domestic Finance)
Be fore the
on Housing and Community
Development
of the
on Banking,
and members
Finance and Urban Affairs
of this distinguished
Subcommittee:
tions'~
I appreciate this opportunity to review with you again the
condition of depository institutions, their ability to deliver
credit to all sectors of the economy and the contingency plans
available to deal with any problems confronting the instituIn particular, Mr. Chairman, I am pleased to present
the Administration's
testimony on H. R. 5568, the "Home
Mortgage Capital Stability Act" introduced by Chairman
St Germain.
My
testimony
thrift institutions,
today will focus on the current
how we should be structuring
condition of
and modernaffect them,
Chairman
izing legislative and regulatory constraints that
the role for measures like those suggested in
St Germain's proposed legislation.
Every action we take should
be part of a process of building a strong and competitive framethe flexibility to
work that will give our thrift institutions
and
to a changing financial environment
forces for years to come.
respond
and
shifting market
of Thrift Institutions
Despite enormous inflationary pressures, our depository
institutions generally have been performing adequately. The
foreign and domestic assets of Federally insured commercial
banks increased 9-1% in 1981 and their return on equity,
Condition
R-696
after tax, was a healthy 13 2%, compared with 13.7% in 1980.
Bank net worth increased 9. 3%. Federal credit unions increased
their assets by 6. 4% in 1981 and achieved a rate of return on
assets of . 57% in 1981 which is a three fold increase over their
. 14% rate of return in 1980.
(savings
The one problem area involves thrift institutions
assets
of
The
banks).
and loan associations and mutual savings
mutual
and
savings
associations
Federally insured savings and loan
in 1981. However,
banks increased 5. 2% and 2. 4%, respectively,
as a result of operating losses experienced by both types of
institutions, their net worth declined 15.0% and 12. 38, respectively. There should be no doubt that the Administration is
very much aware of the thrift industry's earnings, and hence,
its net worth problems. We are concerned both for the health of
the industry itself and for the flow of funds to the housing
sector.
As we discussed during my appearance before the full Committee last July, the fundamental problem facing thrift institutions is the structural imbalance between an asset portfolio
dominated by long-term, fixed rate, low-yield mortgage instruments and liabilities increasingly dominated by rate-sensitive
shorter-term
deposit instruments.
Thrift institutions are using an increasing amount of
deposit liabilities with interest rates that vary with market
rates to make new mortgage loans or to carry long-term mortgages
The institutions'
made in prior years at fixed rates of interest.
deposits which are under Federal interest rate ceilings are
inevitably eroding as customers take advantage of alternative
market rate accounts both within and outside the institutions.
This imbalance between increasingly rate sensitive liabilities and long-term rate insensitive assets is central to the
thrift industry's earnings problems. For almost two years,
short-term interest rates have exceeded the rates on most of the
institutions' existing mortgages. As a result, thrift institutions have been paying more for their liabilities than they are
earning on their assets, thus operating at a loss and eroding
their net
worthy
Declining
Net Worth;
Until short-term
cost of
funds
falls
thrift institutions
Adequacy
of
Cash Flow
interest rates decline, and the average
asset portfolio yield,
will continue to experience operating losbelow the average
ses eroding their net worth. The decline in net worth is
important not for its own sake, since it does not determine
a depository institution's
ability to conduct its business,
but because at some point depositors and lenders may become
troubled by the erosion of an account commonly (and correctly)
thought of as a mark of financial soundness for non-depository
institutions.
In addition, some state regulatory officials and others
concerned with the industry's condition have come to accept
net worth declines below some arbitrary minimum level as
automatically necessitating a merger or liquidation of the
institution in question.
In at least one state a thrift
institution may not pay interest on deposits if its net
worth falls below a specified percentage of deposits.
This
is true despite the fact, as I said, that a decline in net
day-to-day
worth does not necessarily inhibit the institution's
operations so long as the institution can maintain a positive
cash flow.
In contrast
to its poor earnings performance
for the past
two years, the thrift industry has had, and continues to have,
ample cash flow with which to conduct its business and meet
its obligations to depositors. Interest income, mortgage
principal repayments and Federal Home Loan Bank borrowings
have more than offset withdrawals
of thrift industry deposits
Such excess funds have been
during the last twelve months.
invested in new, higher yielding assets, principally. mortgage
loans, and have resulted in an increase in savings and loan
assets by 5. 6% between the end of January 1981 and the end
of January 1982.
Interest Rate Dere ulation
What the industry needs most immediately,
along with
the entire economy, is lower short-term interest rates. But
for a long-term solution to the industry's problems, we must
also deal with the asset and liability structure that limits
the ability of thrifts to cope with high interest rates.
During the twelve months ended January 31, 1982 only
deposit categories paying market and near market rates of
interest have generated additional deposit flows. Such
accounts at savings and loan associations increased by $70. 2
billion, or 24. 6%, between January 1981 and January 1982,
while those accounts paying less declined in the aggregate
the 2-1/2 year
by $55. 6 billion, also 24. 6%. In particular,
alone
an
additional
small saver certificate
provided
$40
billion -- an increase of 66% in 6 months -- after the
Depository Institutions Deregulation Committee (DIDC) removed
the 12% interest rate cap last August and let the rate float
with the 2-1/2 year Treasury note yield.
To assure
all depository institutions'
ability to continue
to obtain deposit resources, the DIDC has acted to raise
interest rate ceili'ngs and create new deposit
strangulating
account categories competitive with open market alternatives,
particularly money market funds. On Monday, March 22, the
time deposit indexed to 91-day
DIDC created a three-month
Treasury bill rates with a quarter of a percentage point
interest rate differential in favor of thrift institutionsIn addition, the Committee acted to begin phasing out interest
rate ceilings on time deposits starting with maturities of
3-1/2 years and over. Deregulation at the longer end of the
maturity structure of regulated deposit accounts will enable
all depository institutions to attract a more stable base of
longer-term
funds.
Thrift Industry Problems
Apart from the necessity for competitive deposit accounts,
let us focus on the basic structural problems of the thrift
industry.
As I stressed in my July testimony before the
full Committee, thrift institutions must have the ability to
invest in a portfolio of assets which will provide greater
rate sensitivity and allow a sufficient rate of return during
all phases of the business cycle The long-time limitations
imposed upon them to invest nearly exclusively in fixed rate
mortgages is largely responsible for their present plight'
Legislation has been introduced in both the House and the
Senate to accomplish an important first step in removing governmental restrictions on the thrift industry.
The relevant
bills are the "Thrift Institutions Restructuring Act of 1981, "
H. R. 4724, introduced by Congressman Stanton, and S. 1720,
the "Financial Institutions Restructuring and Services Act
of 1981." Congressman Stanton's bill and the comparable
provisions of ST 1720 have the Administration's
strong support,
with few exceptions, and I urge the House Banking Committee to
take prompt action on H. R. 4724.
I will now review the most significant features of the
legislation in the Administration's
view and set forth our
reasons for supporting them.
Structural
~
Expanded
tions
Asset Powers
Title II of the Stanton bill
many
commercial
of the
would give
and lending
such as the power
same investment
thrift institupowers
that
have,
to make commercial
and agricultural
loans, with only such limitations as are
applicable to a national bank of the same size. The bill' s
banks
now
is appropriate, since our goal is to permit all
depository institutions eventually to compete on equal terms.
We recognize
that this legislation would not eliminate all
approach
inequalities between thrift institutions and commercial banks,
but
would move us a long way in that direction.
It is
important that we make as much progress as possible in deregulating thrift institutions at this time; we can deal with
remaining inequalities at a later date in other legislation.
it
Providing thrift institutions with new investment and
lending powers need not diminish their contribution to housing
finance, howevers
Real estate lending is their area of greatest expertise and they are likely to continue expanding this
activity. The ability to make a broader range of loans and
investments should supplement their real estate lending and
help the industry stabilize its earnings in periods when there
is strong demand for other services, such as commercial and
consumer loans, but a relatively lower demand for mortgages
~
Interstate
and
Interindustry
Both HER. 4724 and
interstate
and
rescue troubled
Mergers
S. 1720
interindustry
commercial
would authorize emergency
mergers and acquisitions to
banks and thrift institutions.
so granted would greatly assist the regulaIt should
tory agencies in coping with problem organizations.
also reduce the cost to the Federal deposit insurance agencies
by opening attractive markets to acquirers who might pay a
in order to enter one of
premium for a troubled institution
those markets.
for interstate and
We regard provisions
interindustry mergers and acquisitions as an essential
element of any legislative assistance to the thrift industry .
The
flexibility
Preemption
of Due-on-Sale Clause Prohibitions
has reviewed provisions of H. R. 4724
which would preempt state due-on-sale clause
prohibitions and has determined that preemption is necessary
The
and
Administration
S. 1720
to Federally
We would confine the preemption
appropriate.
chartered depository institutions,
as well as lenders
other than state chartered depository institutions -- approved
for participation
by the Secetary of Housing and Urban Development
in any mortgage insurance program under the National Housing
Act. State-chartered depository institutions have the ability
to convert to a Federal charter if state due-on-sale prohibitions
prove onerous or if the states do not eliminate such prohibitions.
and
Preemption
of State
Usury
Ceilin s
Deregulation and Monetary
The Depository Institutions
Control Act of 1980 preempts state usury ceilings on mortgage
do not reinstate
and commercial loans, if state legislatures
the ceiling for their states within three years from the effective date of the Act. We favor provisions of S. 1720 which
would preempt usury ceilings for all loans in the manner
prescribed in the Deregulation Act. In our opinion, usury
ceilings can only distort financial markets and credit flows
Moreand do not reduce the cost of credit in the economy.
over, if usury ceilings on consumer loans are not preempted
thrift institutions will be discouraged from developing
their new consumer loan powers.
Now,
Mr. Chairman,
of thrift institutions.
let
me
turn to the short term problems
Institutions
One of the principal
advantages of a Federally insured
depository institution is that it can offer accounts insured
by an agency of the Federal government for the first $100, 000
of a customer's total deposits4 Although we believe that
there is, no reason to question the ability of the Federal
Deposit Insurance Corporation (FDIC) and the Federal Savings
and Loan Insurance Corporation
(FSLIC) to meet their insurance
obligations, a variety of commentators has expressed concern
about whether the insurance agencies would be able to handle
the problems of the thrift industry arising from their losses
and consequent net worth decline.
As a result, several actions have been taken to eliminate
those concerns.
First, senior Administration officials have
stated publicly that the United States Government will do whatever might be necessary to aid the insurance agencies in
their protection of depositors. The Secretary of the Treasury
made this point specifically on Monday in an opening statement
at the quarterly DIDC meeting. Second, Congressional resolutions
have been passed by both the House and Senate which make clear
Congress' position in this regard.
We are not assuming
the
insurance agencies' liabilities and their responsibilities,
but we are committing to assist them in the unlikely event
that they need assistance.
Public Confidence
in Depository
At the present time, the Treasury line of credit to the
FDIC fund is $3 billion and to the FSLIC fund is $750 million.
There seems to be
question as to the adequacy of the
FDIC line of credit, and the Administration
cannot now foresee that even the FSLIC will have any need to draw on
line
little
its
of credit. Even after merger assistance, the FSLIC insurance
fund balance at the end of 1981 was $6. 3 billion, as compared
to $6. 5 billion at the end of 1980. The fund appears to be
adequate for presently projected needs and certainly any likely
rate of utilization will be slow enough to permit due reconsideration by Congress and the Administration of any need to
expand
the backup line.
Income
Capital Certificate Program
To the extent that specific assistance is required to
alleviate temporary net worth problems for those members of
the industry that otherwise are viable, we believe that
Federal agencies have the authority and means to furnish
such assistance under current law. We believe the recently
developed FSLIC Income Capital Certificate (ICC) program
shows that adequate relief can be provided.
The ICC is a
security issued by savings and loan associations to the
FSLIC in exchange for an FSLIC note, which provides the
issuing association with net worth. These FSLIC notes do
not require the use of cash except for interest payments,
and therefore have only a limited Federal budget impact.
There would be an additional budget expenditure only if the
notes were required to be paid off in cash to an institution,
which, given the adequacy of the industry's
cash flow, is
extremely unlikely.
Already the FSLIC has used ICCs on four occasions to adjust net worth in connection with the merger of certain troubled
institutions, and we understand that they will be using the
In our opinion this
program more extensively in the futures
is exactly what is needed to accomodate thrift institution
net worth problems.
HER.
5568
Mr. Chairman,
although
we
remain
committed
to working
together with you in addressing the problems that prompted
Chairman St Germain to introduce H. R. 5568, our objective is
to obtain a solution to thrift industry problems that will
minimize the cost to the Government and maintain the framework
in which depository institutions have been able to serve the
We have
needs of their communities and the nation at larger
examined H. R. 5568 carefully and have concluded that it is
Moreover, we believe that certain parts of it
unnecessary.
would in fact harm the thrift industry.
Under the current regulatory system the responsibility
for maintaining solvency and ensuring profitable operation of
thrift institutions resides first with the institutions themselves. The Federal insurance agencies share responsibility
for insured deposits and so they assume a supervisory role
in assuring that, by their own standards, an institution is
operating so as to protect the integrity of insured deposits.
operating with losses automatically
Mandating that institutions
qualify for restoration of net worth to some arbitrary level
absolves both the institution and the agency of a substantial
portion of their responsibility for protecting the income
Providing continuing replenishment
stream of the institution.
of subsequent earnings losses further constrains the insurance
agencies from taking corrective action they may deem necessary.
The
Federal deposit insurance
agencies are experienced
in
their current range of remedial measures to individual
institutions that are quite different with respect to financial
structure and outlook, competitive market position, and other
relevant factors. A rigid legislative assistance program with
fixed terms can not be developed to meet all the circumstances
H. R. 5568 is addressed to a broad
the regulators encounter.
financial need, but it does not provide sufficient flexibility
to the regulatory agencies, flexibility necessary for ICC
structuring features. such as eligibility, repayment terms,
yield, level of net worth restoration, and treatment of
future asset growth.
Trying to make some statutory rule a
common denominator
will result in an inefficient and possibly
adapting
damaging
program.
With regard to its specific focus on housing, it is not
clear to us that H. R. 5568 will generate additional funds
for home building.
Moreover, we are concerned about the
specific requirement that 50 percent of an institution's net
new deposits be used to issue mortgages at a rate of interest
not more than one percent greater than the average cost of
funds for the institution.
This provision would further
exacerbate the earnings and net worth problem of the institutions the bill is designed to help. In November 1981, insured
savings and loan associations were earning 10.40% on their
assets and paying 12. 04% for their funds. Charging no more
than 1% greater than average funds costs would not close the
earnings gap, but more importantly,
it probably would not
even cover the cost of the funds used for the loans because
new funds now cost more than the average.
The Money Market
Certificate (MMC) ceiling rate for March 16-22 was 13.2% and
the ceiling rate for thrift Small Saver Certificates (SSCs)
was 14. 1%. Over half of the savings and loan industry
deposits are held in MMCs and SSCs, and another ten percent
of deposits are held in large certificates of deposit with
no
What is accomplished when savings and loan
must pay 14% or more for new money but can
only 13% for the loans made with those funds?
ceilings.
associations
charge
In addition, I would point out that savings and loan
institutions are continuing to invest principally in housings
During 1981 the net increase in mortgage loans outstanding
at savings and loan associations contributed to 46% of the
total increase in savings and loan association assets.
Increases in mortgage backed securities were another 18% of
the asset increase.
As a result, mortgage related investments continue to constitute more than half of the total
increase in assets even at a time when savings and loan
associations might naturally try to arrange for greater
diversity in their portfolios. H. R. 5568 would have had no
effect over the past year, since there were no net new deposits
requireand therefore no funds to which H. R. 5568's investment
ments would have applied.
Even if interest credited were
included in the definition of net new deposits, as we believe
it should be, only $6. 7 billion in housing investments would
have been required in 1981. The $20. 8 billion increase in
mortgage loans outstanding and mortgage backed securities
was triple the size of this deposit increase.
All of this leads me to conclude, Mr. Chairman, that H. R.
5568 does not advance our mutual objectives.
Assistance to
troubled depository institutions provided in the bill is not
likely to be greater than that available through existing
programs, and indeed the reinvestment requirement may be harmWe should
observe carefully as
ful to thrift institutions.
the insurance agencies exercise existing authority and expand
their use of the ICC program, rather than attempt to revise
their authority before it becomes apparent that they need
our assistance.
In summary, we believe that the thrift industry can
successfully weather the current adverse economic environment.
It will need some help, but the wherewithal for that assistance
is already available from the FDIC and FSLIC. If additional
money or powers are needed by the agencies, the Administration
will join the Congress in responding to that need. In the
meantime, we should encourage the use of ICCs where appropriate
and provide legislation
supporting private solutions to the
industry's problems, such as authorizing interstate and interpreempting due on
industry mergers of troubled institutions,
state
and
usury ceilings.
sale clause prohibitions
preempting
10
we must remove the legal restrictions
lending and investment activities as
institutions'
on thrift
do. No public policy dealing with
would
1720
S.
H. R. 4724 and
if it did not attempt to deal
sufficient
be
would
this industry
The public must not
problems.
structural
industry's
with the
and inadequate
thrift
industry
troubled
a
with
be forced to cope
short-term
interest
rates
risc'
everytime
funds for housing
Most importantly,
Mr. Chairman, that concludes my testimony.
pleased to answer any questions the Subcommittee
I will be
may
have.
Department
of the Treasury
~
Washington,
D.C. ~ Telephone 566-2141
For Release U on Deliver
Expected at 9:30 AM
March 25, 1982
TESTIMONY OF THE HONORABLE
MARC
E.
ASSISTANT SECRETARY FOR INTERNATIONAL
BEFORE THE
IELAND
AFFAIRS
SENATE FOREIGN RELATIONS COMMITTEE
THE CARIBBEAN BASIN INITIATIVE
ON
MARCH
25, 1982
Mr. Chairman, I welcome the opportunity
to appear before your
Committee to discuss the Caribbean Basin Initiative.
This is a
foreign policy program of high priority for this Administration
and I hope we will be able to move forward quickly with
The
are proposing
it.
has been carefully crafted over the past
several months and is aimed at addressing- the serious economic
problems which confront the nations of the Caribbean and Central
America.
Through it we hope to be able to help its beneficiaries
establish the foundations for more stable and sustained economic
development and enhance their ties with the United States.
package
we
of the Problems of the Countries in the Region
The Caribbean Basin Initiative includes about two dozen
countries with a total population of about 41 million.
Combined
GNP is about $40 billion,
or $975 per capita but it ranges from
less than $300 annually in Haiti to over $3000 annually in the
Bahamas.
These countries exported a total of about $10 billion
to the U. S. in 1980, but only $4 billion if petroleum is excluded.
Although the countries of the region are quite diverse in
terms of size, resource endowment, and heritage, many of them
suffer from a number of common economic problems. Nearly all
have been hard hit by the precipitous rise in energy costs since
1974 which have increased their petroleum import bills on average
six fold. Costs of financing other imports, notably
by more than
capital goods and food, have also risen rapidly.
Nature
on
On the other hand, most of them are heavily dependent
or a small number of primary products for the bulk of their
In general, price increases for these products
export earnings.
one
R-697
have not kept pace with
those of imports.
squeeze
foreign exchange
balance of payments
larger countries.
which
The
result has
been a
increasingly serious
particularly for some of the
has produced
difficulties,
At the same time, rising interest rates in international
financial markets over the past few years have made it more difficult and expensive for them to borrow. In some instances, such
borrowing was not even a possibility because of the perception
This has
that the prospective borrower was not creditworthy.
and
real
capital
made it difficult to obtain both the financial
economic
growths
necessary to produce an acceptable rate of
Another
problem
is limited
market
size.
Virtually
all of
the countries in the area have populations of less than 7 million
While
people and several have less than one hundred thousand.
inteeconomic
greater
made
to
promote
been
have
strong efforts
these countries, in some cases with success, the
of intra-regional trade has been far from sufficient
to meet their needs. Nor does such integration alone have the
potential to do so, given that these nations are already poor
and lack the means to create sufficient demand.
gration
among
expansion
Most of the area's economies are also heavily dependent on
The
public sector spending and investment to stimulate growth.
even
more
so
private sector is relatively weak and has been made
recent
in
prevalent
by the depressed economic conditions widely
years. In some cases inappropriate development strategies have
aggravated these problems.
Political upheavals
economic activity with
several cases such turmoil
in
also
In
a negative impact.
a prolonged contraction
an incalculable economic and psycho-
have
had
has produced
Real standards of living
logical impact on the people involved.
have fallen dramatically
from already low levels, thereby contributing to further social unrest.
In El Salvador, for example,
real GNP has declined by 20 percent over the past two years.
During the 1970's Jamaica suffered seven consecutive years of
negative growth and is only now beginning to recover.
I need not dwell on the implications for the United States
of the problems just described except to say that obviously it
is not in our best interests to allow them to persist. Many of
the potential beneficiaries are already trying to implement the
necessary economic adjustment measures.
Several countries have
undertaken IMF supported stabilization programs and others are in
the process of negotiations with the IMF.
But these problems are difficult and the negative economic
environment
they have created has tended to be self-perpetuating'
They will not be overcome unless they are addressed resolutely
with the proper mix of internal economic policies and external
assistance. Sound monetary, fiscal, and other economic policies
which allow market mechanisms to operate as freely as possible
are of paramount importance.
We intend
to use our program to
help induce recipient countries to move in this direction.
With
the proper responses it can help create the necessary environment
to make their economies stronger and more self-sufficient.
The Pro osed Pro ram
heart of the Administration's
proposal is a free trade
which will allow beneficiary countries improved
access for their products to the U. S. market. It is evident
that such trade opportunities are critical to the ability of
developing countries to provide the necessary stimulus to their
economies.
One has only to look at the experiences
of the newly
industrialized countries of Latin America and Asia which have
emerged over the past decade.
In every case a the creation of
an environment
favorable to rapid export growth has been a key
element of their success. We expect that tnis will be a major
drawing card for new investment
in the region to take advantage
of these improved market possibilities and lower cost structures.
The
arrangement
As an additional
and reinforcing
inducement for investment
are proposing an important tax incentive for potential investors in the area. This is the investment tax credit of up to 10
percent of the cost of machinery and equipment used in qualifying
This incentive will increase labor producbeneficiary countries.
tivity and help to encourage the employment of labor. It will
which will stimulate the economic
promote productive investments
development of the region.
we
of the program -- trade and tax incentives
at encouraging medium and longer term
But many countries require an immediate injection
development.
of financial resources to purchase imports to keep their economies
is also proposing a $350 million
going. Thus, the Administration
this year to help countries meet their immediate
aid supplemental
needs. The bulk of these funds would go to a few countries
These two elements
are primarily
aimed
Costa Rica, the Dominican Republic, El Salvador, Honduras and
Jamaica -whose balance of payments problems are most pressing.
These funds along with the other elements of our FY 82 aid program
can both relieve the immediate financial problem and create an
incentive for economic reforms required to assure sustained
economic growth over the longer term.
Impact on the U. S.
Administration's
proposal is not a one way street.
It
subtantial
benefits
the
for
United
States.
reap
promises to
Obviously it is in our own best security interests to help insure
But there are
that our neighbors are healthy and prosperous.
for
us
as
well.
The
gains
access of
improved
potential
other
The
Caribbean products to the U. S. market promises to benef it our
Also, as the economies in the
consumers through lower prices.
region expand, new market opportunities will arise for U. ST
producers.
This program is not expected to exert much, if any, adverse
effect on the U. S. economy, either in the short run or over the
longer term.
To give you an idea of the possible economic impact of the
is useful to look at the current level
program on the U. S ,
of dutiable imports from the Caribbean and how these might change
In 1980 duties were collected on $800 million
under our program.
in imports from the Caribbean and Central America, excluding
of tariffs, even if
With the elimination
textiles and apparel
these import figures doubled or tripled over the next few years
the impact in the U. S. would be negligible.
~
it
Of course, this in
possible impact because
itself
may
not be a good measure
of the
expect the program to promote a
since exportdynamic response and help to promote new industries
Another point of comparison,
ing now would be more attractive.
Since its inception
then, is our experience with the GSP program.
in 1975 duty-free imports under this program have grown to slightly
more than $8 billion last year.
Of course, this includes imports
from countries such as Brazil, Korea and Hong Kong with much
greater production capacities than any of the potential beneficiary
Even if the program were spectacularly
countries.
successful
the additional exports which it. would generate almost certainly
we
would
not even approach this figure.
But this in no way diminishes
the importance of the program.
Given the size of the economies
it would be helping, we expect it to be of substantial benefit
would
to them.
Tax Incentives
tax incentives may be divided into two parts:
(a) the
for 5 years of the investment tax credit aimed at
promoting investment in the Caribbean Basin countries and. ; gb)
the expansion of the property eligible for the investment tax
credit and other incentives which are intended to restore the
favored tax status of Puerto Rico and the Virgin Islands.
The
extension
Basin investment tax credit is designed to
in machinery and equipment in qualifying
Basin countries'
Generally, it is not extended
for buildings or other structural components.
This incentive
was selected because it requires the investor to make a productive
investment in order to qualify.
The additional
real capital
which it generates will help to strengthen
the production base
of the region's economies, improve labor productivity, and stimulate
new employment.
At the end of five years, consideration
may be
The Caribbean
encourage
Caribbean
investment
of the credit on a bilateral basis through
a tax treaty.
A decision
regarding extension of the tax credit,
both to existing and new treaty partners, will not be made without
full consultation with interested Congressional Committees.
given to an extension
prerequisite to qualify for the tax credit a country
enter into a bilateral agreement with the United States for
exchange of information for tax administration
Treasury
purposes.
believes that such agreements are useful because they will help
tax administrators
in both countries.
The U. S. will benefit in
particular by access to information which is needed to properly
administer the investment tax credit and other U. S. tax laws.
Moreover, since some countries in the Caribbean are tax havens
used to contravene U. S. tax laws, they should not benefit from
these tax incentives unless they are willing to cooperate with
the U. S. on tax matters.
As a
must
The extension of the investment
tax credit for Caribbean
Basin property is not inconsistent with this Administration's
strong policy against use of our tax treaties for conduit investments in the United States by residents from countries other than
our treaty partner.
Our opposition to such tax treaty abuse is
sound international
tax policy and consistent with the objectives
of the Caribbean Basin Initiative.
The purpose of the Initiative
is served by encouraging increases in productive economic activity and self-sustaining growth in the Caribben Basin countries.
This purpose is not served by creating or sustaining tax haven
activity which is contrary to U. S. tax treaty policy, undermines
the operation and administration
of the Internal Revenue Code,
and fosters an increased dependence
by the tax haven country on
the United
States.
A part of the U. S. longstanding
special relationship with
Puerto Rico and the U. S. Virgin Islands has been favored tax treatment of taxpayers operating
in these jurisdictions.
The passage
of the Economic Recovery Act of 1981 unintentionally
reduced the
At the same time, the
effectiveness of this special treatment.
extension of the investment tax credit to the Caribbean Basin
will encourage investment there, perhaps to the disadvantage of
In light of these
Puerto Rico and the U. S. Virgin Islands.
facts the Administration proposes to extend to them additional
tax incentives for investment.
corporations operating in Puerto Rico and the U. S.
currently benefit from special provisions in the
Internal Revenue Code (principally sections 936 and 934) which
effectively eliminate Federal tax on income from a trade or
Puerto Rico and, to a certain extent, the U. S.
business there.
Virgin Islands, in turn, grant tax holidays for most manufacturing
These corporations have not been eligible for the
operations.
investment tax credit and the benefits of accelerated cost
in
recovery deductions (ACRS) for property used predominately
Puerto Rico or a possession.
Most UPS.
Virgin Islands
legislation allows these corporations the
tax credit. Since such corporations generally pay
little or no tax in the U. S. , they are unable to use these tax
benefits to reduce their tax liabilities in the UPS. The proposed
legislation therefore also allows such domestic companies to
pass the investment tax credit and a portion of the tax benefits
of ACRS to their parent corporations in the UPS. This will
restore the relative preference for investment in Puerto Rico
and offer an important
incentive to investment in the Virgin
The proposed
investment
Islands.
Finally, the legislation provides for some modifications in
the disposition of excise taxes collected on rum. Puerto Rico
and the Virgin Islands currently provide about 90 percent of the
U. S. rum market and, at present, the entire amount of U. S. excise
taxes collected on rum produced there is transferred to them.
Since the Act proposes to reduce import duties on rum produced
in other Caribbean Basin countries, the Puerto Rican and U. S.
Virgin Islands' share of the U. S. rum market may decrease. This
could adversely affect the rum industries in Puerto Rico and the
UPS. Virgin Islands and reduce the amount of UPS. excise tax
collections the island governments currently receive. To maintain this revenue source the legislation provides that excise
taxes collected at the current rates on rum imports into the
U. S. from ~an country will be transferred
to Puerto Rico and
the Virgin Islands, provided that the amount transferred will
not exceed the amount per proof gallon which would be paid over
if the rum was produced in Puerto Rico or the U. S. Virgin Islands.
Conclusion
The Caribbean Basin Initiative is a bold and imaginative
which promises to reap substantial
benefits both for
beneficiary countries and the United States.
will embody a
substantial increase in U. S. economic assistance in support of
a concerted effort on the part of the Basin Countries to pursue
appropriate economic policies and offer them the chance to take
package
It
of new opportunities in the U. S. market as well as
incentives for new investment.
It will help to restore
greater stability to the region and strengthen mutually beneficial
ties with the U. S. I would urge the Congress to move ahead
quickly with the legislative proposal so that we may begin to
implement the program as soon as possible.
advantage
important
Department
of the Treasury
EMBARGOED
Nashlngton,
D.C. e Telephone 566-214%
FOR RELEASE UPON DELIVERY
9:30 A. M. , EST
Expected at,
Wednesday,
~
March 24, 1982
TESTIMONY OF THE HONORABLE DONALD
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE BUDGET COMMITTEE
Mr. Chairman
and Members
of the
T.
REGAN
Committee,
It is a pleasure to be with you today to discuss the
economic outlook and the Budget.
I hope this occasion will
be part of an on-going dialogue between the Committee and
the Administration over the need to restore a stable fiscal
climate to promote long-term noninflationary
growth in the
American economy.
As you know,
the economy continues
in the grip of the
second recession in two years. This latest downturn began
in July 1981, hard on the heels of the sharp recession of
1980, from which the economy had never really recovered.
are clear: years of excessive
rising inflation, rising interest rates, rising
tax rates, and rising Federal spending as a share of GNP.
With the help of this Committee, we hope to continue the
fight to bring Federal spending and deficits under control.
With the help of the Federal Reserve, we hope to bring inflation
and interest rates down.
These steps will lead to an early end
to the current downturn.
In spite of the continued slide in the first quarter of
1982, there are some hopeful signs. Excess inventories are
being drawn down at a rapid rate. This is typical of the last
stages of a recession. Retail sales are rising. Housing starts
are up slightly.
Durable goods orders have leveled off. And,
very important for the financial well-being of all Americans,
whether of working age or retirees, inflation continues to fall.
we have in place a sound long-run tax
More importantly,
system for the 1980's. It will not only help bring an early
end to the current recession, but will promote rapid growth
of income, savings, investment and employment for years to
come. That tax system, with a healthy economy, will generate
The
causes of the two downturns
money
growth,
as much revenue
to spend.
R-698
as government
should
reasonably
be allowed
However, the short-run revenue picture has been heavily
the recession and the drop in
by two factors:
one bitter pill and one piece of candy which
affected
inflation
—
together have significantly decreased revenue to the point
of causing large deficits. The recession is temporary, and
the decline in inflation is most welcome.
Nonetheless, nominal GNP is estimated to be 4 percent
lower than was forecast last March, and the 1982 unemployment
These
rate over one and one-half percentage points higher'
changes in economic assumptions have added roughly $60 billion
to the deficit projections for FY-1983 compared to our estimate
last year. Higher interest rates and a higher level of national
debt by FY-1983 have added $30 billion more.
We, therefore, had to face some tough decisions about how
to cover the costs of some very important government programshow to make up the difference between the $666. 1 billion in
revenues and the $757. 6 billion in outlays -- until the growing
economy triggered by our reformed tax system brings growing
revenues into line with restrained outlays.
tax
Some have urged us to revoke the incentive-creating
cuts already in place. The result would have been lower real
It would have involved
growth for many years into the future.
a self-defeating major change in a permanent tax program. to
Instead, we shall propose certainhandle a temporary problem.
worthwhile tax reforms, upgrade our tax collection program,
renew our efforts at controlling spending, and borrow to cover
the remaining
deficit.
Deficits are not good. They rob the private sector of
financial and real resources needed for growth, and divert
those resources into government consumption.
So do taxes.
The root of the problem is the Federal spending which
appropriates those real resources and then must find the
means to pay for them in one way or another.
The budget deficit can and must be narrowed from the
spending side. For too long, spending has been rising faster
than the economy has grown.
The economy can no longer support
Some progress was made last year in reducing the
the burden.
runaway rate of growth in Federal non-defense spending.
Further
efforts will be required this year
and
into the future.
Insofar as spending is not reduced, i.t is preferable to
close the remaining transitional recession deficits of the
sort now being experienced by borrowing rather than by taxing.
The funds are pulled from the private sector in either case,
but taxes impose a larger cost in terms of reduced incentives
for real growth.
Borrowing takes a portion of current national savings out
of current national income (which equals current net output) to
enable the government to gain command over a portion of current
Taxing also enables the government to have at its
output.
Like borrowing, taxation
disposal a portion of current output.
reduces the supply of savings for investors to borrow by a
substantial
amount.
However, there is a difference.
In recent years, tax
increases have generally taken the form of allowing inflation
to push taxpayers into higher brackets, or allowing inflation
The former
to erode the value of depreciation allowances.
reduces the value of incremental present or future wages and
interest income; the latter reduces the rate of return on
The effect is to reduce the supply of
plant and equipment.
labor, savings, plant and equipment, cutting down on future
output. Thus, taxation often produces disincentives which
adversely affect future output, as well as directing a portion
of current output to the government.
Federal borrowing creates debt that must be serviced, and
this implies the future payment of taxes, but it need not
require an increase in marginal tax rates, as long as economic
Thus, borrowing should
growth produces an enlarged tax basehave less adverse impact on future output than taxation.
Therefore, in deciding how to cover the transitional deficits
associated with the current recession, we feel it is better to
borrow, while leaving the tax incentives in place for long-run
growth, rather than to undo the structural tax reforms of the
ERTA,
which would
choke
off future expansion.
to strive to reduce the deficit by
real growth. The budget
we are proposing
take major steps toward closing that deficit
In the interim, it can be
over the next several years.
fashion. The first three charts
handled in a nondisruptive
help to put the deficit into perspective.
The projected deficits, though some of them are at record
dollar levels, are not unusual following a recession when
measured as a percent of GNP. On- and off-budget deficits
were 3.6 and 4. 5 percent of GNP in Fiscal Years 1975 and 1976,
Deficits are projected
due largely to the 1974-1975 recession.
GNP
in Fiscal Years 1982
of
and
3.
1
percent
to be 3.8 percent
the
current
recession.
a
result
of
as
and 1983, largely
There has been considerable concern that our projected
deficits will put extr~me pressure on credit markets and thus
However, we believe there will be
drive up interest rates'
We
must continue
curtailing
spending
and promoting
private sector saving to finance these deficits without
excessive pressure on the credit markets or inflationazy
money creation by the Federal Reserve.
ample
In the past, deficits were often accompanied by falling
interest rates. It should be particularly true this time,
tax program in
with falling inflation and a savings-oriented
place. The deficits will be manageable because of the growth
of private sector saving.
Pzivate saving resulting from normal year-over-year
and the Economic Recovery Tax Act will be several
times greater than the total borrowing requirement, of the
Federal Government in 1983 and 1984 and thereafter.
growth
net additions to total private saving are larger
rise in the deficit. "They will produce "crowding
in" rather than "crowding out.
This extra shot in the arm
of capital markets will put downward. pressure on interest
rates. Even after financing the Federal deficit, there will
be billions of additional dollars each year for private
The
than the
investment.
Normal year-to-year increases in saving exceed $40 billion
each year. This will be supplemented by the additional personal
savings and additional business retained earning induced by the
tax cuts.
Compared to 1981, private saving will be more than $60
billion higher in 1982, more than $170 billion higher in 1983,
and more than $260 billion higher in 1984. Private saving was
$480 billion in 1981. It is projected to rise to more than
$740 billion in 1984.
It has been lack of growth, more than anything else, that
has been responsible for the current and projected deficit.
As a rough rule of thumb, each time growth falls off by enough
to produce a 1 percent increase in unemployment, the budget
deficit widens by more than $25 billion. In fact, if we had
grown fast enough over the past four years to get unemployment
down below 6 percent, the current deficit would be roughly
$75 billion lower.
Growth is the only way to balance the budget while
promoting rising real income and employment.
I would like to
point out, very firmly, that any changes in the economic
recovery program which reduce real growth will tend to worsen
the budget picture.
Changes which reduce individual or business
saving by as much as or more than the deficit will only worsen
the situation in the credit markets.
The budget is not merely an accounting document.
One
cannot simply take a billion dollars out of column A and put
it
in column B. There are behavior changes and economic
repercussions from tax and spending shifts which affect
saving, investment, labor supply, income and revenue.
Very
often, changes which may look good on paper will buy little
or no progress toward solving a budget problem, especially
compared to the economic cost to the whole nation of the
policy shift.
the
These facts should be kept clearly in
deficits in this budget.
Taxation,
S ending
and
mind
as
we
look at
the Budget
The tax code we have in place, plus the tax proposals
contained in the Administration's
budget regarding obsolete
provisions and improved tax compliance measures, will generate
as much revenue over the long term as the government should
reasonably be allowed to spend. We project long-term receipts
of between 19 and 19-1/2 percent of GNP between 1983 and 1985
These percentages would rise slowly thereunder our proposals.
after with real economic growth and scheduled payroll tax
increases. This compares with 18.7 percent from 1964 through
1974 and 19.0 percent from 1975 through 1979. Receipts were
20 ' 1 and 21.0 percent of GNP in 1980 and 1981, respectively,
20. 3 percent in 1982. Receipts,
and will be approximately
therefore, will be in line with, or even higher than historical
levels.
the other hand, spending, on- and off-budget, is already
It was 23. 0 and 23. 7
too high and threatening to go higher.
and will exceed
and
respectively,
in
1980
1981,
percent of GNP
to
19.
This
compares
8 percent from
in
1982.
24 percent of GNP
1964 through 1974 and 22. 1 from 1975 through 1979 ' We have
recommended
a decline to just over 21 percent of GNP by 1985,
thereafter.
declines
and further
On
is a general perception that spending and taxes
slashed.
In fact, all we have done so far is 'to
reduce the rate of growth of spending, and we have just begun
to see a modest tax reduction.
The personal tax rate reductions in the ERTA are not
substantially larger between 1981 and 1984 than the continuing
bracket creep and the payroll tax increases of 1981 and 1982.
In fact, there was a net. personal tax increase of roughly
$15 billion in 1981. In 1982, taxpayers will barely break
even. Not until 1983 and 1984 will there be real tax cuts
for most families, totalling $12 to $15 billion each year.
Taxes will rise again in 1985 due to a scheduled payroll
There
have been
tax increase.
the other hand, even under our proposed spending
spending will remain well above long-term averages
for several years to come. If major budget changes are to be
made, they should be in spending levels, not taxes.
On
restraint,
of a Stable Tax Polic
could
It is unlikely in the extreme that tax increases
First, they would weaken
succeed in balancing the budget.
the economy, and be partially offset by slower growth.
In spite of
Second, they would encourage higher spending.
the fact that the tax receipts of the Federal Government rose
'nearly $250 billion from FY-1977 to FY-1981, the government
ran deficits of nearly $200 billion.
the Administration hopes to balance the
Consequently,
Importance
budget by restraining spending and encouraging
a stable incentive-creating
tax program.
growth
through
Business Taxes
Stability in tax policy is essential f' or private sector
planning and economic recovery.
Consider the impact of sudden
changes in the tax law on the cost of plant and equipment and
the related investment decisions.
Millions of firms planning billions of dollars of investment decisions must be in a situation of great uncertainty
with
respect to leasing, ACRS and other provisions.
There is no way
for a firm to determine whether an investment is practical or
not until the tax picture is clarified.
The decisions of the
Congress regarding ACRS and related provisions have the power
to unleash a flood of investment or to choke off tens of billions
of dollars of spending on modernization and expansion of plant
and equipmentUntil the political decisions are made, the
economic decisions, and the economic recovery, are on hold.
The
right decisions will start the economy climbing. The wrong ones
will set it tumbling.
Taxes on Saving
Consider the impact on personal saving of a decision to
the third year of the tax cut and indexing.
Under
current law, over the life of a 10-year bond purchased in 1983,
a taxpayer who will be in the 33 percent bracket following the
third year of the tax cut would pay roughly one-third of his
interest to the government.
But without the third year and
indexing, that tax rate would start at 39 percent and rise
within a decade to 44 percent and 49 percent, as the taxpayer's
income rises through the tax brackets with inflationThe
average of these tax rates would probably be nearly 44 percent
compared to roughly 33 percent under current law.
suspend
At a 10 percent nominal interest rate and 5 percent or
percent inflation, this rise in the tax rate would be enough
to cut a 2 percent real after-tax interest rate in half, or a
1 percent real after-tax interest rate to zero. Historically,
such swings in the real after-tax interest rate have shifted
the personal savings rate by one or even two percentage points.
6
This would be enough to remove $25 to 850 billion dollars per
year from the credit markets over the next decade, with obvious
adverse consequences for interest rates, investment, and real
growth.
Furthermore,
the potential
were repealed
saver would know as soon as
what the impact would be on
He would react at once, before
these provisions
the rate of return to saving.
the bond were purchased, not 5 or 10 years later after having
committed money in good faith.
Taxes on Labor
There are those who would preserve the business portions
of the ERTA, and cancel most of the remaining individual tax
Such a move would be extremely counterrate reductions.
I am frankly
productive to business as well as to individuals.
amazed at the lack of thought behind such proposals.
In my years at Merrill Lynch, I came to appreciate the
importance of the individual in his or her role as saver,
I am surprised that others in
investor and entrepreneur.
commerce or industry do not appreciate the importance of the
individual in the roles of employee and customer.
Those who think of business only in terms of large corpoproprietorships
rations forget the millions of partnerships,
are taxed at the
whose
profits
S corporations
and sub-chapter
decisions of
rates.
The
tax
individual
at
individual level
influenced
are
heavily
-entrepreneurs
owner-investorsand
these
reforms
tax
estate
and
and
gift
reductions
by the personal rate
recently enacted.
and consumers, consider the effect of
As for employees
of the tax cut and indexing on the
third
year
the
suspending
standard
of living of the American
the
and
cost of labor
f amily.
Total net output of goods and services in the economy
results from the combination of labor and capital. The value
added by these two factors of production is reflected in the
wages, salaries, rents, royalties,
Value added equals
they receive.
total net output.
It
away
may come
as a surprise
the larger of the
two
interest and dividends
total national income and
to some, but labor is far and
Value added by labor is
factors.
two-thirds and three-quarters of the total in most
Labor inputs outweigh
years for most products and industries.
capital inputs two or three to one. It is time to remember
that taxes on labor and the resulting higher labor costs are
extremely damaging to American business.
between
Over the last 15 years, inflation, bracket creep and
payroll tax hikes have sharply increased the pre-tax cost to
the firm of giving a worker a one dollar after-tax wage increaseA median
income worker now faces 40 percent to 44 percent
tax rates on added income- This is the sum of social security
and Federal marginal income tax rates, plus state and local
taxes at the margin.
It is up sharply from the late 1960's,
when the marginal
rates would have been roughly 26 percent
to 30 percent.
it
now costs a firm more than $1.70 to
Consequently,
compensate a worker for a $1.00 increase in the cost of living.
This is up from $1.40 in the late 1960's. Without indexing,
will rise to $2. 00 by the late 1980's, and to $2. 50 or
higher in the 1990's. Any wage increase, whether merely COLA's
or a real wage hike, would send taxes rising and tend to push
. labor costs up faster than the prices the firm receives f' or
it
its
products.
Profits, employment, or real wages would tend
to fall continually over time in the absence of extraordinary
productivity increases. The competitive position of U-S. labor
in the world economy would suffer.
The likely consequence of such a tax situation will be
falling after-tax wage. Labor will absorb a substantial
portion of the tax burden.
The cost of eliminating
the third
year of the tax cut, and indexing to a wage earner making
$20, 000 in 1982 and receiving a cost-of-living increase
thereafter would be substantial:
$80 in 1983, $203 in 1984,
$289 in 1985, and $369 in 1986. . This is only the direct cost.
a
economy, reduced saving, investment and growth,
lower productivity and reduced demand for American labor
would lower the market wage itself, reducing the family' s
real earnings by two or three times the direct cost of the
higher taxes. American workers and savers are the primary
customers of American business.
There is no way such an
impact on the real income of its customers would be good for
The weaker
business.
ortance of a Stable Monetary Policy
The President's original economic program included the
that money growth be gradually reduced to a nonrecommendation
inflationary pace. During the past year, the Federal Reserve
made significant progress toward that goal.
Im
Fourth quarter to fourth quarter, M1B grew by 5 percent
in 1981. December to December, the rate was 6 ' 4 percent due
to rapid money growth at year's end. Compared to the inflationary rates of monetary expansion in the past -- 7. 3 percent
in 1980 and an annual average of 8-0 percent in the preceding
three years -- this is a substantial deceleration in money
The Federal Reserve's tentative target ranges for
growth.
1982, 2-1/2 to 5-1/2 percent for Ml, represent continued
money growth and the Adminisprogress toward noninflationary
tration fully supports that general policy.
Administration's
original recommendation was that the
growth gradually be cut in half by 1984 from the
average 7.8 percent rate of the prior four years; this is the
assumption that we built into our economic projections.
The
deceleration that has actually occurred was initially much
almost three-fourths of the planned reduction
more rapid
until end-of-year increases in money
in the first year
growth rates raised the level of M1B above the lower end of
last year's target range. Currently, the level of Ml is $4
billion above the target range for 1982.
The
rate of
money
— —
This more rapid deceleration of money growth has economic
consequences -- some good, some bad. It is leading to a faster
reduction in inflation, but it also means reductions in real
output, employment, and real .income. Lower inflation and lower
real output mean lower GNP and lower Federal tax revenues.
Lower inflation also means lower Federal outlays on indexed
In the interim,
programs, but only with a considerable time lag'
is
clear
from
It amply
history, both here
the deficit widens.
do not produce
not
monetized,
and abroad, that deficits, if
inflation
the
lower
rate
of
is a partial
inflation. Indeed,
deficit.
the
current
cause of
the short-run costs and the long-run benefits
the Administration. . remains committed
to its goal of slow and steady money growth over the long run.
Given that goal, we supported money growth in the middle of
the Federal Reserve's M1B target range in 1981, and we support
money growth in the upper third of the Federal Reserve's
tentative Ml target range for 1982.
There are those who are urging the Federal Reserve to
abandon its goal of a steady and moderate growth rate of the
They- believe that faster money growth would
money supply.
depress interest rates. History does not support that view,
as the attached charts show.
Recognizing
of controlling
inflation,
For many Years, it has been apparent that inflation is
the main factor determining the level of interest rates.
Excessively rapid moneY growth in the past has brought about
10
the current high levels of interest rates. As inflation has
risen or fallen in the past, interest rates haved moved in
step.
last year or two, however, interest rates have
risen relative to the inflation rate. This may be due, in
part, to the unusual volatility of money growth rates since
In the
1980.
In the last two months of 1980, Ml fell at an annual rate
of 1.4 percent per year, after a sharp rise in the previous
five months. All of the growth in Ml in 1981 occurred in the
first four months of the year, when it grew at a 14. 2 percent
annual rate, and the last two months of the year, when Ml
In the interim, Ml oscilgrowth was at a 11.6 percent rate.
months from April to
the
six
week.
week
In
lated from
to
October, the net change was a decrease of 0. 2 percent, annual
rate.
Early 1982 saw a very rapid increase in the money supply
through January, followed by a levelling off in February as
the Fed has tried to bring Ml back inside its target range.
The rapid growth or money from November through January was
accompanied by rising interest rates, reversing the dramatic
decline in interest rates that had been under way since
September.
The evidence
long-run
lenders
two
years
is
very
clear:
growth undermines the credibility of
monetary controls, adds to uncertainty and
and thereby helps keep interest rates high as
Volatile
risk,
of the past
money
seek to protect their principal.
Faster growth of Ml and the monetary base is associated
with rising interest rates. Slower growth of Ml and the
monetary base is associated with falling interest rates.
The Administration
strongly supports the Federal Reserve's
announced goal of a steady and moderate rate of growth of the
money supply, not because we seek to drive interest rates up,
but because it is the only known way to bring inflation and
interest rates down on a permanent basis.
It is
easy to illustrate why the financial markets watch
supply so closely, and why variability of inflation
and interest rates creates turmoil and uncertainty
in the
bond markets.
Old securities must fall in price to remain
competitive with new issues as interest rates rise. Conversely,
bond prices rise when interest rates fall.
Consider the
history of the Treasury's 6-3/4 percent 20-year bond issued
on October 1, 1973, priced at $99. 50 per $100 of face value
the
money
to yield 6. 79 percent. Its value over time has fluctuated
substantially with market interest rates:
Price
9/30/74
9/30/75
9/30/76
9/30/77
9/30/78
9/30/79
9/30/80
9/30/81
latest
As interest rates
Yield to Maturity
84-63
8.41
92 ' 19
95 ' 44
7 ' 59
7 ' 25
8 ' 44
9 ' 38
85. 69
8 ' 32
86. 06
80 ' 19
69-69
11 ' 37
14 ' 96
55. 75
62. 50
and bond
13.38
prices have
become
increasingly
in recent years, the risk involved in buying bonds
This has resulted in greater reluctance to buy
has increased.
the
bonds on
part of those who cannot afford a risky porfolio,
of a risk or volatility premium which has
the
emergence
and
driven interest rates higher than normal relative to inflation
in recent years. This is why stability in the rate of money
growth and interest rates is critical to the success of our
unstable
program.
APPENDIX
Full
One way
Deficit
the impact of the back-to-back
Employment
to illustrate
recessions of 1980 and 1981-1982 on the budget deficit is to
examine the high employment budget deficit.
This concept
has been used in the past to measure the "stimulus" of budget
policy, on the theory that deficits increase total spending
and pump up "demand".
We reject the notion that deficits per
se are inherently stimulative.
They must be financed by
borrowing in the absence of inflationary monetary creation.
Nonetheless, the one useful insight the high employment budget
does provide is a measure of the fundamental relationship
between the current policy level of spending and the current
tax code's capacity to generate revenue with the distorting
effects of the recession removed. I am happy to comply with
the Chairman' s request to present the high employment figures.
The high employment budget estimates the budget aggregates
that would result if the economy were continuously operating
at a high level of employment under the tax and spending
proposals contained in the FY-1983 Budget documents.
The
rate at high employment is traditionally estimated
for this purpose to be about 5. 0 percent.
(However, many
observers feel the real economy has a long-term basic unemployment rate somewhat higher. ) Potential real GNP is assumed
to grow 3. 2 percent ahnually.
(We believe this potential
growth rate can be increased by proper policies, but have
conformed to convention to provide estimates consistent
with those of earlier years. )
unemployment
The CEA has estimated the high employment deficit through
FY-1985 on a unified budget basis. (The high employment deficit
can be computed on a national income accounts (NIA) basis or on
a unified budget basis.
The major differences are the inclusion
of offsetting receipts from oil and mineral leases and asset
sales
the netting out of Federal retirement receipts and
in the unified budget. ) The figures are available
FY-1985-
and
outlays
through
FY
Receipts
Outlays
Deficit (-)
81
FY 82
FY 83
FY 84
FY 85
636
644
691
702
739
723
768
793
830
860
-8
-ll
-16
-25
-30
is clear from the tables that the major portion of the
projected deficits of nearly $100 billion in FY-1982 and FY-].983
is due to the fact that the economy is operating at less than
The phased tax reductions result in small
fu]1 employment.
in the high employment deficit, and,
increments
year-to-year
Zt
even in "demand" terms, cannot, be regarded as large or excessively
stimulative.
The bulk of the deficit increase, from $11 to $25
billion, is completed by FY 1984. By FY-1985, high employment
receipts grow 8.1 percent over FY-1984, nearly matching the gro~h
of outlays at 8.4 percent.
Savin s Flows and
How
They
Fit into the Scenario
The f'ollowing outlines some of the concepts underlying
the
gross and net private savings figures commonly cited and provides
background on the savings numbers consistent with the economic
scenario underlying the budget. By whatever savings measure one
prefers, projected deficits as a share of savings are less than
in the 1974-1975 recession and the subsequent recovery, and are
I am happy to submit these comments at the Chairman's
declining.
request.
Concepts
o
Zn
the National
and product
Zncome
rivate saving is the
sum
of:
Accounts
(NZpA),
gross
--
the difference between after-tax
of the household sector and outlays of
that sector for consumer goods and services, interest
Personal
personal
saving
payments,
etc.
z. ncome
Corporate saving, consisting of' depreciation allowances
after-tax profits. (This is equivaplus undistributed
lent to the cash flow available to corporations, both to
maintain and add to productive assets. Inventory profits
are excluded.
)
Depreciation allowances of the noncorporate sector
including unincorporated business enterprises plus
The
on owner-occupied homes.
~im uted depreciation
latter, roughly $40 billion or about one-twelfth
of gross private saving, is the only item in the
saving figures which does not represent true cash
flow.
far the larger part of total
includes the surplus of state and local governments (largely
the surplus of the pension funds for their employees, as
surpluses on operating account have been fairly narrow)
The
and the surplus or deficit of the Federal Government.
latter is on a NIPA basis. In the next couple of years,
the NZPA deficit will be wider than the more widely cited
unified budget deficit (the difference arising from sales
of mineral rights and other transactions that are not
reflected in the NIPA but affect the unified budget).
attached presents historical data on gross savings
flows as percentages of GNP.
Gross private
saving
forms by
3/23/82
private saving in the accounts is comprised of per
profits of corporate
sonal saving and the undistributed
unincorporated
businesses
business.
(Profit-type income of
allowances
are
gets into personal saving. ) Depreciation
(The net saving figures are
not included in net saving.
close to, but do not quite represent available cash for
net investment, as undistributed profits and returns to
unincorporated enterprises are after allowances have been
of inventories and fixed capital
made for full replacement
They exclude inventory
used in the production process.
profits, and depreciation is on a so-called economic
e. , replacement rather than
rather than book-basis,
historical cost. ) Savings or dissavings of government
can be added to net private saving to get total net saving.
Net saving figures are commonly compared with net national
product (NNP, or GNP less depreciation allowances).
Thus, depreciation is excluded from both numerator and
denominator.
Table 2 attached presents net savings flows
as percentages of NNP.
Net
i.
0
Domestic
augmented
savings flows, either gross or net, may be
by inflows from abroad, which are likely to
be attracted
0
by the new
tax climate.
In an accounting sense, total gross saving (including any
dissaving by the Federal Government) must match total
gross investment
the net additions to the stock of
—
plant, equipment, inventories, and residential structures
plus an amount sufficient to replace existing assets that
have worn out or become obsolete.
In any year, investment
to replace existing assets far exceeds net additions to
the stock of productive assets. Similarly, total net
saving must equal net investment.
Gross Savings Flows in the Scenario
Savings flows consistent with the economic scenario
underlying the 1983 Budget were worked up by the CEA. They
were, of course, forced to fit within the constraint of the
total uses of savings
overall investment response to the
rate of return changes in the ERTA plus Federal, state and
local deficits and foreign flows. The breakdown between
corporate and personal savings within the totals can be
affected by dividend payout assumptions, capital intensity
assumptions across corporate and non-corporate businesses,
etc. In keeping within the totals, personal savings rates
appear to have come out a bit low by historical standards.
--
yield substantial private savings flows,
they do not appear to be out of line with the sum of
normal year-to-year growth, the business share of ERTA and
historical responses by individuals to tax reductions.
The
although
estimates
Historically,
gross private saving has averaged about
16-1/2 percent of GNP. The peak ratio in the postwar
period was 18.2 percent in the recession year of 1975.
The next highest ratio was 17.5 percent in 1967. (See
left-hand column of table 1 attached. )
0
Gross Private
Saving as a Percent
of
GVI.
P
Budget scenario
16.3
1956-65
1966-75
1976-80
1981
16 ' 6
16 ' 7
16 ' 4
17.2 projected
1982
1983
1984
18 ' 5
19 ' 1
The impact of ERTA on gross private saving can roughly
be estimated by calculating saving on the assumption
that the historic 16-1/2 percent share of GViP had been
maintained and comparing those numbers with the higher
The implicasaving flows projected in the new scenario.
tion of these calculations is that gross private saving in
the new scenario in 1985 is $101 billion more than if old
saving patterns prevail.
o
Gross Private
Level
Calendar
Year
Level
Saving
Dif ference
Yearly
—
—
1981
1982
1983
1984
actual
project. ed
Tax
at 16.5% from
Cut
Increase of GNp
Budget
ERTA
Budcuet
(2)
(3)
(4) = (1)-(3) (5)
(1) . ----(---billions of dollars ---- ---—
)
in
480
542
651
742
62
109
91
521
581
641
21
70
101
58
115
151
Added
Savings
as
o f ERTA
(6)=(4) (5)
(percent)
36
61
67
0
Com
0
In terms of total saving flows, including government
surplus, note that increased government deficits (dissaving)
resulting from a tax cut have no effect on total saving
if those tax cuts flow directly into increased private
saving, as the funds from ACRS, which are recorded as
retained earnings, might be expected to de Of course,
private saving may increase by more or less than any tax
cut, depending on responses of households and businesses
to changes in after-tax real rates of return on prospective
investments.
In the mid-1960's, personal savings increases,
as
result
of above average income growth, exceeded
a
partly
70 percent of the marginal tax rate reductions for three
years, rising to exceed the tax reductions in the fourth
The personal savings rates in the
year and thereafter.
scenario assume a savings increase averaging roughly 45
percent of the personal tax cuts from 1982 to 1984.
osition of Gross Private Savin
The
in the
Bud
et Scenario
rise in business saving reflects:
A recovery of the profit share (before allowance
for
ACRS) and retention of a large portion of those
increased profits, rather than their distribution in
dividends.
2~
other tax changes which reduce profits taxes
by about $10 billion in CY-1982, $19 billion in CY-1983,
and $27 billion in CY-1984 '
3.
rising stoc3c of capital.
path of the personal saving rate is as follows:
The
ACRS and
The
depreciation
thrown
off
by a
Personal
Saving Rate (%)
Budget scenario
1980
1981
1982
1983
1984
5. 6
5'3
6. 7 projected
7'0
6' 1
I~
II
The dip in 1984 was conditioned by overall constraints
imposed on the forecast, and appears to be an understate-
ment.
Personal saving available to households is related
to prospective real after-tax rates of return; these
should be vastly improved from returns available during
the 1970's, and higher in 1984 than in 1983.
savings rates averaged 7. 6 percent from 1965 to 1975 '
Net
Private Savin s in the Scenario
Net saving figures indicate resources available to increase
the stock of productive capital after allowance has been made
for its maintenance.
indicated by the figures in the left-hand columns of
table 2, ratios of total and net private saving to net
national product (NNP) were severely eroded in the late
1970's. In 1981, net private saving was 6. 1 percent of
with 8-3/4 percent during the late 1960's.
NNP compared
The scenario shows that late 1960's ratio being restored,
As
though
not surpassed.
Net
private saving
as percent of
NNP
1956-65
1966-75
1974
1975
1976
1977
1978
1979
1980
1981
1982 pro j ected
1983
1984
o
8. 1
8' 6
7. 6
8.9
7'7
7'3
6'9
6'7
6'2
Federal deficit
as percent of
net private
savings plus
S&L surplus
2'8
-14-5
-10 ' 9
-53.8
-39-0
-30 ' 0
-17 ' 9
8' 6
-35 ' 0
6. 1
-31 ' 8
7'0
F 7
8'8
-45 ' 0
-32 ' 0
-28 ' 0
column of table 2 and the tabulation on
the prior page show the ratio of the NIPA Federal deficit
to the total net private savings plus supluses (if any) of
The right-hand
That ratio hit a peak of 54
state and local governments.
As
indicated
on the prior page, that
1975.
percent in
never approaches the 1975
scenario
for
1982
the
ratio in
ratios
for
1983
and
1984 stay below respective
figure, and
and
1977.
1976
for
figures
GROSS SAVING AND INVESTMENT
LEVELS
1979
Gross Private
Personal
Business
Saving
1980
1981
1982
1983
1984
400. 0 434. 1 478. 7 542. 0 650. 7 741.8
86. 2 101.4 106.6 150.8 171.7 163.4
313.9 332. 7 372. 1 391.3 479. 0 578. 4
PERCENTS OF GNP
Gross Private
Personal
Business
Saving
16-6
13-0
16.5
12.7
16.4
17.2
18.5
19 ' 1
3~6
4. 8
12.4
4. 9
13.6
4. 2
14.9
12-7
G«OSS 54'NI«GS
PFNCP. NT EF CNP
~ esei«i«ease««s ~ 'si«a«««ea««s ~ ess«ii«es«i«ii«s ~ sa«sess%esse%sea«ee««ee'««eee«asses««s«es«««s«aeee«ae«s«s««ees«sa«
GPOSS
CON PONA IV.
GPOSS PVTa
NONC01P%
I'P I VI TP.
NFTAINFO
NNFSTIC
CAP%CONS ~
CAP% CoNS%
Tof AL
STATP. 4 NFT FOPF ICN
SAVING
PthSONAL
CONPOAATK
flhNINGS
ALLONANCF.
ALLINAHCF.
Gov1 e F FOP. hit
LOCAL
INVFSIMFNT
INVFStllFNT
1417
Ioib
I oi 0
1450
'11%715
15% 01)
15 0$0
'Ii% 591
1951
1.
4%062
8%100
2% 021
~ % 011
3 818
le 252
2% 806
5% 370
3% 761
2% 520
2% 293
2% 356
l60
~ % 856
6, 455
QQI
d. 967
~e
15% 371
145?
145 )
2%217
242
I
15%116
15% idT
15 829
5 oio
~ %6?4
4%792
ded30
7 ?11
5 ~ 1)0
1%97)
2% 285
)s 283
?%520
1455
1056
16.OQO
ls I ll
I 451
I6 138
5%020
7%777
7%716
So?11
~ 3)2
1%13)
5 211
3 881
~ e 386
T%766
2% Il?7
2% 3$I
1%719
2% 375
8% 339
3% 221
3% ~ 19
II ~ 712
1458
Id, T39
14&0
Id 360
15 340
14& I
15% 815
14&2
16%010
196)
19&1
'IS%566
'Ibad70
10&5
19&6
5 050
Iat?2
I
2% 3?
1%$27
3%669
1%635
bei13
11%)16
'l1%01 ~
1% 871
9% 171
3.712
1,3)6
~ 75d
IQ&7
17, 197
5%'512
9%052
8 To5
3% 72O
14&8
14&4
tda?51
~ 802
~ a 300
IQTO
I97I
1472
1413
1«TI
I«75
147&
1417
1418
1419
IQSO
I«St
I'051«'I 955
1 old»19&O
15%214
15 918
16%7)~
15 458
11% 166
.
,
5 610
5e d?$
8%669
ba? I ~
7%591
4.038
231
3, 200
?.ii)
I ~ 188
Tet"12
5 076
7%788
6%719
8% 300
8%512
2% 115
2% 576
3%8&)
3%51'I
16,525
9% 101
9% 009
2%725
2% d85
)%570
b%855
16%185
1&%)11
)a 857
8% 3&6
2 111
I ~ 687
'I 641
I& ~
)5)
18~ 21'1
11~ I 36
lb. 8ob
'Id%
183
15%Tot
16%101
~ %136
5 45)
5% 435
6 ~ OU&
1.SO?
3% &lb
~
5, 150
728
7% 151
i, 707
Id%214
~ % 33'7
1%T4)
8% idb
I odd» I 970
16% 342
5%001
8% 100
1471»1475
1916 1980
16 841
16, 687
5% 608
3% 927
T%711
8%7SI
1961»1965
I
'
2%
l)5
0 436
I ~ 878
?%lib
2%1)8
2% 31$
3 110
3a011
I ~ 988
2% 335
)% 100
6 178
3%'5)S
3% 255
~ % 603
3% 832
«I ~ 302
1% 168
3%731
2%74i
711
I ~ 8)~
l, i90
3%
1% 611
3%800
O'I
~ 65T
3% 784
41& 840
1% 958
3 456
~ s 856
3% SILO
5 218
5%153
5a 606
5% 387
S%385
5% 311
5% lb
087
it. ops
0% 186
«0, 3?I
3%
710
i?e 808
0% 611
1%819
485
3% 206
Wa 110
3% 250
5% 011
«I ~ 181
3%238
Sa 119
3% 325
3% 121
3% 12'4
Wa)56
«0%?j)
io
o 500
«0%7il
0%012
W%070
«0%752
0%013
0% 082
0% 077
«0%513
0%077
0%1S6
oot
6 000
Ii% 231
5%100
I.
Wa 067
1%012
0 140
6%1?2
6 345
6% 380
3% S&1
6% 32 ~
3%
1% 070
-2%1?5
«3%040
3 811
W%456
93)
Wool 0
0% 141
Wa ~ 1$
I ~ 355
Wad II
«2%330
«2%105
il
~ 257
d 670
~ 222
Ia 233
6%T65
Ws 850
~ esses
~ ««ei
~ «s« ~
F)VK Thdh AVE hlOF. S
)% 820
Weldt
3% 903
So019
5% 083
)%171
W%216
Ws 328
3%288
W% 529
5%723
)%572
«1 ~ 189
)a 979
W%7&1
Wa 315
0% 007
Wa 37T
W%58T
«I ~ 832
«I ~ 461
0% 171
0%
0% 461
35)
ls Id3
I ~ 311
I ~ '105
'I ~
105
219
~ ss«i«
1%
W% 116
We?2 3
6% 200
0%140
oTo
0%786
0%230
We 330
I ~ 114
1% 100
51)
«I ~ 25)
Ms 014
»I ~ I lb
3% 664
7% 300
7%200
'II% 010
«I ~ Od5
«I ~ 805
5%81)
d, 6oo
d. ooo
0% 6oo
0, 728
0%012
Ws 122
Wa SOI
I ~ 172
15.281
1% 300
1% 300
5% 600
6% 300
0% 159
0% 155
0% 540
16% llb
'lie 779
'I ~ 075
11%123
11,7oo
15% 601
15,72$
0%5'57
W, do)
I ~ 135
11 Si1
11%853
I ~ 344
~0%68)
I ~ 053
0% 843
je 100
5%900
1%000
5 b00
7%100
11% '101
0, 323
«I 618
II, 767
15% 856
0 149
«0, 2)d
W%132
Oaolo
3, 12$
6% 113
«0% 207
«0% 306
W% 523
«0% 231
«0% 281
3, 743
«2% 281
Wa)1$
0% 339
Weoot
0% 064
3%173
~ a716
Se ltd
0%062
0% I I I
0%655
1%083
3%823
I, o&6
0%076
6.1)1
Wa 303
I ~ 130
3%275
5% 527
5% 500
5% 35)
«0%318
0%51 ~
835
5.iSo
0% 030
'I %231
5%021
~ %9?7
I
I ~ 029
«I ~ 615
I ~ I oi
0%?08
«Oabll
We&10
0%120
I
~0 615
0%266
O. ISO
936
3%713
3%518
3%151
3% 366
I
0%136
0% 051
«0% 281
«0%I? I
W%131
Wa 01 ~
3% 912
3%
3% 48 i
0%930
5%713
)%205
«I ~ 021
3%211
I ~ 468
«1%073
PfhSONAL
SAVING PATS
0%
lot
0% 060
0% 323
W, I20
0.2ol
1.11o
0% 248
Wa 723
Wa d34
W%010
0% 225
0%079
~ «sss ~
0%019
0%051
0%152
0%785
0% 055
Oo
4i3
0%?TII
Ie 147
«0% 182
0% 232
'l3%
I ~ 385
15.ool
I ~, T58
%
11%069
11% 360
11%113
'II% 202
I ~, 1))
'15%583
15,4) I
11 456
1)%744
11% 321
15 709
16% 3SI
6 700
7%100
1%000
8 100
1% 100
6% 100
8% 000
8% IOO
6% 500
8% &00
8% 500
8.&oo
6% 400
5%600
Sa 200
ld. 501
5% 200
15% 217
TQT
5% 300
Ii.
lla T31
11%813
11 289
11%~ 33
11%401
15%6)b
5% 600
~ «se«'
6% 860
d TIO
ds 300
Ts 320
5%0&0
5% 700
Table
tEtCKNT lF
ttZVAIK tLUS SSL
(f
tEtCKNT
NET NATZONAL ttOOVCT
$$$$$$$$$$ ~ $$$$$$$$$$ ~ $$00$$$ ~ ee ~ $$ ~ $ ~ eoe ~ $$$$$ ~ $$$ ~ $$$$$$$
STATE 6 LCCAL tKDKt. AL
ttZVATE
tbtSONAL
CObtOtATE
TOTAL
t9i7
2a i3
ia 55
3o 14
11$29
12 36
io 61
Se 46
10e 32
7$28
7$28
9$79
4ebi
5$60
7$19
1954
SoiS
1955
be 96
t956
1957
9o71
be 33
7$S9
4 10
4$36
5$04
8$50
5 57
5$ 81
tMb
19i 9
1950
1951
1952
1953
bo 83
2a T5
4$03
5$29
5 i5
ToST
5$5'1
2$50
2 37
2$ 1S
2 51
4$11
1958
io72
Te82
T$53
7$49
6$89
Toi3
4$0i
1i62
So5i
7$31
t$63
Tabb
196i
be 75
ll4
7$7i
9$13
5$5i
ie 77
ion
io42
8$51
~ $01
5$15
5$30
3$17
'10
10e02
9$59
4015
To 98
9oTT
'10$09
be 72
4o 52
6e 63
To 37
ie70
Te 81
6» tT
4$52
TeiO
8$50
6$18
ie4T
9adi
9$21
' t97i
1975
T$23
~ 29
To59
4$44
'1975
5$37
6$27
1965
1$66
1967
1968
1969
. 1971
1971
1972
1973
1977
1978
1941
1941
Te TO
7$7i
7$3i
6o Oi
Sa 23
5$53
4e 56
4a74
5 35
Oo 30
4$ 93
6$ 9i
7$24
4$ T2
3$ 99
io45
4 23
4 00
A$33
5o Oi
io17
ie tl
io53
1959
1961
1961
7$57
2$14
3 95
ie10
~
122$ 1 1
&o 31
3 ib
«to12
&$15
3 50
2$ 1i
39e12
«16$00
51 ~ 35
24$05
Oe iT
Oo 06
Mib
$0$01
l40i
~33
%$35
2$T9
2 56
be 02
3 tt
2 62
«0$23
4$ 3i
@$58
eOe 10
l401
2$6t
3 S3
&$08
ie18
Oo 1T
6 T2
~e51
0
0 19
0$04
l400
i9
a.01ti
2$67
le 63
0 21
3
2o 32
2 83
2e ST
1«03
2 09
2$39
,3$03
2 99
2 T3
tRÃtAL
«Eat
4020
3$61
be 05
SJVZNCS
~$$$$$$$$$$$$$$$
OT
Oo
0017
0 25
1025
le 11
l452
Oo 39
le 07
le 63
le 50
la 2%
to49
1$2i
1$90
~ $$$
~ $$$$
lei0
«le '17
«'lie63
'1
«27$32
«bio44
«le 4t
1021
le 58
l4S7
%$53
Mo26
0 56
We 41
«0$42
a.00 551815
%So 4'1
t9$ i9
7$30
3io90
«3$30
9$55
«ttoOT
«1 0, 12
0$60
4$01
0 83
«Oo 26
&$61
«1$40
«1 8$06
«boSi
12 9i
«17o 17
«25$60
«17o iO
Oe 75
0 98
«to
3T
«2$2i
«1$56
4e i5
«Oe89
«io 98
- «3oii
&$49
«1$51
«ie ib
«10e 9i
«53$7T
«39$ Oi
«3l40i
«2$ 62
«17$49
We 52
«35$03
«31 ~ 98
$$$$$$
%$35
«io 5i
~4$ 37
&$59
~3T
ZEAt. AVE
1451 1955
tOSC 1$51
1961 1965
1964 '1970
1971 1975
1976«t 980
7$33
To 57
4$11
4$17
To 05'
So fi
Ta83
7$41
4oiT
be 75
4o 37
4 99
5 17
5$19
ioTi
SoiS
2$67
2$ 62
4e 14
3 73
3 29
2$19
io38
2e 61
$0o 16
~25
0 15
0001
Aoit
0 04
«0$6i
l4'Tl
«2e03
1$ 3i
Ae '19
&$15
&$71
«22o
ii
&6$13
'
Budget Deficits
in Relation
to GNP*
Percent
1975 1976 1977 197,8 1979 1980 1981 1982 1983 1984 1985 1986 198
'
I
It
Actual
+ On and off budget as percent of fiscal year GNP.
Projected
Budget
Fiscal Year
1975
1976
1977
1978
1979
1980
1981 actual
1982 projected
1983
1984
1985
1986
1987
Notes
Deficits in Relation to
Deficits
(Bil. of dols. )
Percent of
GNP
-3.6
-53 ' 2
-4 ' 5
73 ~ 7
-2. 9
-53.6
-59. 2
-40. 2
-73. 8
-78. 9
-2 ' 8
-1.7
-2. 9
-2. 8
-118.3
-107 ' 2
-97. 2
-82. 8
-77. 0
-62. 5
Figures include off-budget
GNP
-3 ' 8
-3.1
-2 ' 6
-2. 0
-1.7
-1.3
entities.
3/23/82
Interest Rates and the Relative Size of the Deficit
Percent
15
I
I
I
I
I
10
3-Month
Treasury Bill
Rate
r
v
I
I
I
I
I
II
~
P
Q
Deficit as a Percent
of GNP*
1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980
Fiscal Year
+ Federal
surplus or deficit includes off-budget items. Points below zero line
represent surplus as percent of GNP, points above line a deficit.
Projected Borrowing Requirement
in Relation to Private Saving
Billions of
Dollars
700
600
:,":::::::::::::::
Federai
Borrowing
:': ':''::-. Requirements
500
Gross Private
Saving
400
300
200
~
a
~
~
~
~ ~
~
' Y Y 'eve'e
~ e
Y
~
~~~~
~~
975
1
976
1
lge
Ve
~
~~~
~ ~
~~~~~~~~
~~~~~~~~
oVOVoVge ~
~~~~
~
1
978
1
979
1
980
'
ace ace
O
977
~~~
~~~~~ ~
oYe'e'OVO'e
~ ~ ~~~~
ac~aYaoooao
~ ~~~~~~ ~
~~~~~
Ee
oYoYOVOV
O
~ ~
1
~
~ ~~
Y
'Yo'
O O
~~~~~~~
oeoeoeeeoeoeoeoe
0
V
Yo
~ o
~~~o
e'oeoeeoe', O,
100
1 981
ov
1
~~ ~
982
~~OVOVo
~ ~ ~ ~ ~ Ye
~ ~ ~
;o' oooooo YOVe~
avoeevaV
~ ~ OA
~ ~ ~ ~
1
~
~
ov
983
~~~~~~~~~
~~~~ ~~~~
1
984
Projected
Actual
Fiscal Year
+ Total budget deficit including off-budget entities.
Note: Saving flows do not reflect surpluses of state and local governments
from abroad.
or infiows
March
24. 1992
Projected Borrowing Requirement
Fiscal
~ear
1975
1976
1977
1978
1979
1980
1981 actual
1982 projected
1983
1984
Gross
in Relation to Private Saving
Federal
Deficit as
share of
deficit including
private
savin
off-bud
et
savin
---billions of dollars —— percent
253. 4
295. 6
309.8
347. 4
392. 2
423. 0
462. 3
-53 ' 2
523
624
-118.3
-107.2
-97. 2
712
73 ~ 7
-53 ' 6
-59. 2
-40. 2
-73.8
-78. 9
-21 ' 0
-24. 9
-17 ' 3
-17.0
-10.2
-17 ' 4
-17 ' 1
-22. 6
-17 ' 2
-13.7
3/23/82
Consumer Prices
(percent change from year earlier)
percent
15
gIPV
I
1'
les~
/
/
13
1V SV
lVP
12
All Itema
ii' VP
~
4'
11
10
11
Vy1
/
~101
j
Exctudtng Food
and Energy
11
11
1
BLOOP
goya
11
llar1i
PIPv
1P
1%%%
Vi+~
11
VIP
VP
I
V (II 1
~
&VlV1
1976
I
1977
1978
1979
1980
1981
1982
Producer Prices
perceni
(percent change from year earlier)
16
15
Finished Goods?
14
13
~ t~
j
~
1
Og~
'S
0
12
thIa4
Excluding Food
and Energy
10
)I~ IISINO
~
~ \\ ~
I
/Ill
p
1976
1977
1978
1979
1980
1981
1982
Current Law Tax Reduction vs. Quick Fix Alternative
Worker with $20, 000 in Wage Income in 1982 Rising with Cost of Living
Percent
1
Effective Tax Rate
0.5
1
1
r~
0.0
9.80 ~W
9.51
9.5
9.19
9.0
Quick Fix
~~
r
S8S ~~
8.50
8.5
8.0
0.07
Current Law
1982
1983
1984
1, 1982 tax
8.25
8.24
8.24
1985
1986
1987
rate reduction
Quick Fix alternative leaves the July
but cancels the July 1, 1983 tax rate reduction and indexing.
in
place,
RATES OF CHANGE OF MONEY AND PRICES
Percent
"
N
10
GNP Deflator ti
10
I
I
I
I
I
I:.
I
.
II
I
I
1
1
't
I
1
I
I
I
\
I
I
't
I
I
\
)I
I
V'
hq
\
I
M1B Trend &
'I
I
I
I
~1
I
LI
I
p arLirrLirrrlrlrrllrulrrrlmalrulr)ILIIILLILul
1957
I
I
I
I
I
I
1V
I
\
I
.
IIilLL
J Il
LliiLLLl
LLI
I
p
1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981
rate of change;
quarter rate of change; data prior to 1st quarter
Four-quarter
Q Twenty.
Latest data plotted: 4th quarter
1 964
are M1.
Jrrrww
V
21. 1882A 188
Mi VERSUS TARGET RANGE"
470
5k%
460
~o
o~
~
oo
oo
8.5%
~o
0
450
~o
~o
o
6.0%
~o
o
+
oo
~~
o
~~
o
Actual
~o
~
~
~o
~~
~
~
~o
o
440
~~
~o
~o
~
~o
~
~~~
~~~
~~~
~~~
~o
$
o~
~~~
~
~~
~~~
~~~
~~
~~
~~~
~ ~ ~ boffo
~
o
o
o
oo
430
~
420
o
~
~
~
~ oo
o
o,
~
o
o
o
o
~
~
o
~
~~
0~
~~
~
~
~ ~~
410
1 980
«Weekly Averages-Seasonally
1 981
Adjusted
~o
o
1982
~, o
~
o
/
"'
ohio
~o
2'h %
INTEREST RATES AND INFLATION
Percent
15
~0
~
~
~
~
~
~
~
~
~
~
~
~
~
10
~
~
~
~
~
~ ~
~ ~
~ ~
~0
~0
~~
3-Month Treasury Bill Rate
~ ~
~ ~
~
~
~~
~ ~
~0
~0
~ ~
~
~
~
~
~
~ ~
~
~ ~
~
~ ~~
~
~
~
~
~
~
~ ~
~ ~
~~
0Og 4 yO
~~
I
~ ~
~ ~0
~ ~
0
~~
~
~
~
~
;t
~ ~
~i0
~
~
~
~
~
~
~
~
~ ~
~
4
y
~0
63
~
Inflation Rate*
65
67
69
~ Growth from year earlier in GNP deflator.
Plotted quarterly.
71
75
77
79
S1
July
17. 1981 A169
CHANGE IN MONEY SUPPLY
MONTHLY
Percent
ISE ~ E ~ I ~ Sdd ~ I ~ I ~ I
W
I ~ ESSES~ ~ IE ~ I ~ IIEISS~ EEI ~ I ~ SIISSIEISEIS~ IIS
H
R
Q
1.5
R
M1
W
1.0
I
~ ~ SESS~
~~
~ IS ~ E ~ E ~
II ~ IIISI ~ ISIS~ I ~ IIS ~
~
I I II ~ I ~ E ~ E ~ I ~ I ~ I ~ I ~ I ~ ~ I ~ ~ I ~ II ~ I ~ ~
~ ~ ~
SIS
I IIIIII ~
~ IS ~ IS ESI ~ ~
I I II ~ II ~ I
~ ~ ~
I I Il
~ Sd ~ ~ ~ ~
0
~
I' ~
~
I
~ SSISSI~ ~ SIISEESSI
I
~ SSSSSEESSS~ ~ ESEESESSSISSESISIS
—1.0
—1.5
1978
1979
19SO
1981
Quarterly
Rates of Growth of Monetary Base and the Money Supply (M~)
Percent
16
14
12
Monetary Base
(St. Louis)
10
pl
l
\
I
I
I
I
I
lt
r+
8%
I
I
I
I
4%
0
0%
1979
1980
1981
Weekly
~Quarterly growth rates based on four-week averages compared with four-week averages
thirteen weeks earlier, at annual rates. Latest week plotted: March 3 for M1, March 10
for monetary base.
1982
Base Growth vs. 3-Month T-Bill
Monetary
7
I
I
I
I
g
g
3-Month Treasury
Bill Rate
'L
(right
scale)
g
6
lpl
I
Monetary
Growth~
(left scale)
Base~
1
31
20
JAN
26
FEB
+S2 Week Growth on
26
22
20
MAR
APR
MAY
4-Week Moving Averages
17 16
JUL
1981
JUN
12
AUG
9
SEP
7
OCT
4
2
NOV
30
DEC
27
JAN
10
24
FEB
1982
THE THREE-MONTH TREASURY BILL RATE AND GROWTH OF Mt
Percent
Percent
~ vv
~ ~
~ ~
~ ~
18
18
Bank discount rate
on 13-week Treasury bills,
~a
level
16
16
14
14
12
12
a
~vv
~Pl ~
10
10
Mu annualize d ttrowth rate
over Ihe prevlo us 13 weeks,
computed by Ioa rettresstons
~
on time
~ ae
vv
~ vs+
0
~~ a ~
~
~
~
vv vv
~
~
~
~
vv
~e
~v ~
~v
~
~
~~ ~
~
Jan.
Feb, Mar.
Apr.
May
Jun.
Jul.
1981
Aug.
Sep. Oct. Nov.
Dec.
Jan.
1982
6
INTERMEDIATE AND LONG MARKET RATES
Weekly Averages
~e
18
18
New Conventional
Mortgages
~ eo
~
eo e
16
~
~
~ oo
w e ee ~ ~
Ioee
13
~
,8
iJ
~e ~
&e A
16
oo+
r
~Oo
e~e+eoeeeoom
ee
eo
ooo
Oe
~
g Oe
8
oeeooo
~
~e
Ooo~ e
eoooooe
oe
eo ~oo
~,
e
e eo
~~Corporates
New Aa
14
12
eee~e
13
Treasury
10-Year
Treasury
20- Year
Through March
t9
10
10
8
Feb
Jan
Mar
Apr
May
June
July
1981
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
8
1982
Note: Mortgage data plotted monthly
ollro ol IIO slclmel7 ol
Ollre
III~ I&ooome
d Cmommool f moncioo
Clmcb 24 IC$2
SHORT TERM INTEREST RATES
Weekly Averages
Prime Rate
20
20
Federal
Funds
18
18
16
/"'g»
~ ~ i~o Og
-.
g~
14
i
~~ ~
~
+OiO
14
3 Month
Treasury Bill
/
t
~ gl
12
Through March
12
22
~so
+et
10
Jan
Feb
Mar
Apr
May
Jun
Jul
1981
olive
Oft
&
~
d lie
Aug
Sep
Oct
Nov
Dec
Jan
Feb
10
Mar
1982
Secreury el llw Isosauey
d Governnanl f wsnc&ng
MsrCk
2t,
10'
pepartment
of the Treasury
FOR IMMEDIATE
~ Washington,
D.C. ~ Telephone %66-2041
March
RELEASE
RESULTS OF AUCTION
24, 1982
OF 4-YEAR NOTES
of the Treasury has accepted $3i753 million
of $8i297 million of tenders received from the public for the 4-year
notes, Series G-1986, auctioned today. The notes will be issued
Narch 31, 1982, and mature March 31, 1986.
The range
The interest coupon rate on the notes will be 149 .
of accepted competitive bids, and the corresponding prices at the 14%
coupon rate are as foJ, lows:
Bids
Prices
Lowest yield
14. 02%
99. 940
Highest yield
14. 08%
99. 762
Average yield
14. 05%
99. 851
Tenders at the high yield were allotted 13%.
The Department
TENDERS RECEIVED AND ACCEPTED
Boston
New
S
Received
603
~3,
6, 650, 338
26, 000
65, 045
66, 311
48, 525
914, 485
71, 459
14, 982
43, 574
20, 999
337, 960
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Totals
(In Thousands)
Accepted
25, 303
3, 162, 879
25, 000
49, 695
24, 701
40, 829
194, 060
63, 219
13, 645
42, 074
3, 350
18, 999
89, 535
3, 348
$8 296, 631
$3, 753, 287
million
million of accepted tenders includes $ 722
675
of
tenders
million
competitive
tenders and $2,
It also includes $356 million of tenders at the
from private investors.
average price from Federal Reserve Banks as agents for foreign and
international monetary authorities in exchange for maturing securities.
1n addition to the $3 753 million of tenders accepted in the
auction process, $288 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for maturing securities, and $144 million of tenders
were accepted at the average price from Federal Reserve Banks as agents
monetary authorities for new cash.
for foreign and international
$3, 753
of noncompetitive
The
~
R-699
!partment of the Treasury
FOR IMMEDIATE
Mare
25, 1982
~
Washington,
RELEASE
Statement
D.C. ~ Teleilhone S66-204'
Contact: Charles Powers
566-2041
by Donald
T.
Regan
Secretary of the Treasury
Safe Harbor Leasing
There has been much debate about the safe harbor leasinq
of the Economic Recovery Tax Act of 1981. In order to
enhance the discussion and encourage informed review of this
important issue, we are releasing preliminary information on
total 1981 safe harbor leasing activity. Our information is
based on a representative
sample of 2000 leases. When a larger
sample has been analysed, additional information will be
provision
released.
Overall, our analysis indicates that the value of leased
property in 1981 totaled $19.3 billion, very close to the figure
In addition,
upon which we based our initial revenue estimates.
most of the tax benefits from leased property, about 84 percent,
go to the lessee, while 15 percent is retained by lessors with
the remaining one percent covering transaction costs to third
parties.
of the dollar value of all leased property
More than
in transactions in excess of $10 million.
however
60 percent of the number of actual lease transactions,
involved less than 8100,000 of property, and nearly 95 percent
Transaction costs for
involved less than $1 million of property.
small lease arrangements
appear to be no larger, relative to the
size of the transactions, than they are for large lease
transactions.
These facts indicate that there are no real
barriers to leasing by small companies.
Over 85 percent
was involved
Finally, companies in mining, oil and gas drilling, lumber
and paper, chemicals, airlines, primary metals, motor vehicles,
railroads, shipping and utilities were major lessees. This list
includes most of those industries that have been considered
"distressed. "
Safe harbor leasing is a significant element in this
effort to increase growth and productivity in
Administration's
provide
jobs. It is a realistic attempt to
and
the economy
incentives
to invest to all firms. If our further
provide egual
we will propose modifications
the
need,
in the
study indicates
harbor
leasing
rules.
existing safe
R-700
apartment
of the Treasiiry
FOR IMMEDIATE
~
Washington,
RELEASE
TREASURY OFFERS
$8, 000
MILLION
additional
by this public notice,
$8, 000 million of 20 -day
of the Treasury,
for approximately
be issued
April 2, 1982, representing an
maturing
amount of bills dated
April 23, 1981,
invites tenders
Treasury
20 -DAY
BILLS
CASH MANAGEMENT
The Department
OF
D.C. ~ Telephone 566-2041
March 26, 1982
bills to
April 22, 1982 (CUSIP No. 912793
7G
5).
Competitive tenders will be received at all Federal Reserve
Banks and Branches up to 1:30 p. m. , Eastern Standard time,
Tuesday,
blarch 30, 1982.
Wire and telephone tenders may be
received at the discretion of each Federal Reserve Bank or Branch.
Each tender for the issue must be for a minimum amount of
$1,000, 000. Tenders over $1,000, 000 must be in multiples of
$1,000, 000. The price on tenders offered must be expressed on
the basis of 100, with. three decimals, e. g. , 97=920. Fractions
may not be used.
tenders from the public will not be accepted.
Noncompetitive
Tenders will not be received at the Department of the Treasury,
Washington.
The
bills will be issued on a discount basis under competiand at maturity their par amount will be payable
interest. The bills will be issued entirely in book-entry
tive bidding,
without
form in a minimum
denomination of $10,000 and in any higher $5, 000
on the records of the Federal Reserve Banks and Branches.
Additional amounts of the bills may be issued to Federal Reserve
monetary authorities
Banks as agents for foreign and international
multiple,
at the average price of accepted competitive
tenders.
institutions and dealers who make primary markets
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 as of 12:30 p. m. ,
Such positions would
Eastern time, on the day of the auction.
include bills acquired through "when issued" trading, futures, and
Banking
in Government
R- 701
transactions as well as holdings of outstanding bills with
the same maturity date as the new offering, e. g. , bills with three
Dealers,
months to maturity previously offered as six-month bills.
and
securities
report
daily
Government
in
who make primary markets
in
and
their
positions
York
New
of
Bank
Reserve
to the Federal
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.
tenders from incorporated banks
No deposit need accompany
and recognized dealers
from
responsible
and
and trust. companies
of
2
percent of the par
A
deposit
securities.
in investment
tenders for such
must
for
accompany
bills
applied
amount of the
of
an
express
payment by an
unless
guaranty
from
others,
bills
tenders.
the
accompanies
bank
trust
or
company
incorporated
forward
Public announcement will be made by the Department, of the
Treasury of the amount and price range of accepted bids. Those
submitting tenders will be advised of the acceptance or rejection
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. Settlement for
accepted tenders in accordance with the bids must be made or completed at the Federal Reserve Bank or Branch in cash or other
immediately-avai:lable
funds on Friday, April 2, 1982.
Section 454(b) of the Internal Revenue Code, the
of discount, at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income
The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
Under
amount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill. If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount,
treated as short. -term capital gain.
the excess gain
is
Department of the Treasury Circulars, Public Debt SeriesNos. 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 may be obtained from any Federal Reserve
Bank
or Branch.
Department
of the Treasury
FOR IMMEDIATE
D.C. ~ Telephone 566-2041
~ Washington,
29, 1982
March
RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4, 701 million of 13-week bills and for $4, 703 million of
were accepted today26~eek bills, both to be issued on April 1, 1982,
13-week
OF ACCEPTED
RANGE
COMPETITIVE
BIDS: maturi
bills
July 1, 1982
Investment
Rate 1/
Discount
. Rate
High
Low
Average
a/ Excepting 3
Tenders
Tenders
maturi
Price
Price
96. 627 13.344%
14.00%
96. 603 13.439%
14. 10%
14.06%
96. 613 13.399%
tenders totaling $3, 040, 000.
at the
at the
low
low
26"week bills
September 30, 1982
Investment
Discount
Rate 1/
Rate
14.36%
93.320 a/ 13.213%
14.41%
93.296 13.261%
93.305 13.243% 2/ 14.39%
price for the 13-week bills were allotted
price for the 26-week bills were allotted
16%.
18%.
TENDERS RECEIVED AND ACCEPTED
ted::
42,
(In Thousands)
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San
Francisco
Treasury
TOTALS
~e
Competitive
Noncompetitive
Public
Federal Reserve
Subtotal,
Official
Institutions
Foreign
TOTALS
$
53, 455
9, 185, 525
64, 585
54, 210
36, 860
51, 855
817, 655
39, 960
~Acce
$
775
3, 666, 525
64, 070
36, 510
35, 860
46, 460
370, 390
37, 360
11,750
11,750
46, 195
28, 370
784, 045
183, 075
$11,357, 540
45, 865
28, 370
132, 265
183, 075
$4, 701, 275
726, 290
$2, 836, 935
897, 150
$3, 734, 085
726, 290
240, 900
$11,357, 540
9, 493, 200
897, 150
$10, 390, 350
:
$
:
:
:
:
:
:
:
:
:
:
:
88, 725
733, 765
39, 015
18, 795
44, 940
23, 960
888, 950
247, 875
: $11, 113,755
8, 695, 915
~dcce
$
ted
48, 300
3, 670, 840
22, 435
67, 855
45, 535
45, 725
179, 815
33, 015
15, 235
43, 695
23, 960
258, 450
247, 875
$4, 702, 735
700, 000
$2, 284, 895
864, 640
$3, 149, 535
700, 000
240, 900
853, 200
853, 200
$4, 701, 275
$11, 113,755
$4, 702, 735
$
864, 640
9, 560, 555
1/ Equivalent coupon-issue yield.
the maximum
2/ The four-week average for calculating
is
12.
735%.
certificates
on money market
R-702
Received
78, 940
8;709, 275
23, 255
123, 085
93, 175
interest rate payable
FOR IMMEDIATE
The Treasury
announced
today that the 2-1/2 year
yield curve rate for the five business
Treasury
ending
29, 1982
RELEASE MARCH
March
the nearest
29, 1982, averaged
five basis points.
/W90
%
days
rounded
to
Ceiling rates based
this rate will be in effect from Tuesday, March 30,
1982 through Monday April 12, 1982.
Detailed rules as to the use of this rate in
establishing the ceiling rates for small saver certificates were published in the Federal Register on July 17,
1981.
Small saver ceiling rates and related information
on
is available
The phone
from the DIDC on a recorded
number
telephone
message.
is (202)566-3734.
Approved
ncis X. Cavanaugh
cting Director
Office of Market Analysis
&
Agency
Finance
impartment
of'
the Treasury
~
Washington,
O. c. ~ Telephone 566-IC4'3
ADDRESS BY BERYL W. SPRINKEL, UNDER SECRETARY FOR MONETARY
AFFAIRS, BEFORE THE TWENTY-THIRD ANNUAL MEETING OF THE
INTER AMERICAN DEVELOPMENT BANKS CARTAGENAg COLOMBIA
March
30, 1982
Mr. President, fellow Governors, ladies
a great honor and a pleasure for me to
be here today to represent the United States at this twentythird annual meeting of the Inter-American Development Bank.
Secretary Regan has asked me to convey his regards and best
wishes for a successful meeting.
Mr. Chairman,
and gentlemen,
it is
I would like to offer my thanks to the government and
people of Colombia for the warm welcome and generous hospitality they have extended to me and all the members of the
It has been a real pleasure to visit this
U. S. delegation.
beautiful and historic city of Cartagena.
This year's meeting
has provided me with a wonderful opportunity
to meet with my
colleagues from Latin America, and to learn more about the
Inter-American Development Bank and the important role it
plays in the hemisphere.
role of the Bank in furthering the growth and developof Latin America and the Caribbean has been highlighted
at this year's meeting by the ongoing discussions of the proposed
replenishment
of IDB resources. In this context, I would
like to take this opportunity to describe for you today the
framework within which my government will be formulating
its
final position regarding participation in the proposed sixth
I would hope that this will help to maintain
replenishment.
the momentum of the negotiations, and aid others in formulating
their positions, so that fruitful discussions can continue
at the next session in Berlin in July.
The
ment
The survival
since
its
and growth
creation more
of the Inter-American
Development
years ago adequately
testifies to the importance of the institution and the mutual
benefits derived by borrowers and donors alike. I do not
need to remind you of the special importance of Latin America
President Reagan's
and the Caribbean to my government.
Organization
American States outlined
to
the
of
recent address
to
deal
with the special
initiative
designed
a bold new
needs
of
the
countries
of the Caribbean
critical
problems and
Bank
than
twenty
Basin.
Basin Initiative is a multi-nation plan
in the Caribbean and Central
in cooperation with Canada, Mexico,
more
Colombia.
recently,
We are now seeking
and
This Caribbean
to promote economic growth
America, and was developed
Venezuela,
R-703
Congressional approval of the major elements of our contribution to the Caribbean Basin, which include first, a onefor
way free trade area; second, special tax incentives
assistance.
financial
increased
third,
and
investment;
a key role in this
The IDB itself has undertaken
of economic developformulation
the
coordinate
to
intiative
We would like
America.
Central
of
countries
ment plans for the
undertake
this program.
to
willingness
to commend the IDB for its
the
United
supported
are
by
strongly
All of these efforts
States as positive measures to address immediate, specific
needs which are unique to countries of this particular region.
—
But, "the special programs I have mentioned are just that—
"special. They can only be complementary to the long-term,
on-going work of the Inter-American Development Bank. The best
hope for sustained growth and prosperity in the region lies
in the hands of the countries themselves. The multilateral
development banks, in particular the IDB, can play a key
role in ecnouraging growth and prosperity.
It was within this context of better defining the role of
development banks that we undertook just
the multilateral
over a year ago to assess U. S. participation in the MDBs.
study. The
Many of you now have read the recently completed
central conclusions of that study are that the multilateral
for promoting a
development banks are effective instruments
healthy and growing world economy, and that U. S. participation
in the
MDBs
has served
and humanitarian
important
interests.
U. S. economic,
political,
the Assessment recognizes that the
of the multilateral development banks can be
improved by enhancing their role as financial catalysts, and
as providers of sound economic policy advice, through insistence
on appropriate macro economic and sector policies.
The Assessment
also recognizes the considerable scope for increased financial
leverage of the capital resources of all the banks, in particular
the IDB, whose financial strength and degree of recognition in
capital markets is consistently reflected in its Triple-A
At the same time,
effectiveness
bond
ratings.
We will
be seeking, within the context of the proposed
sixth replenishment of IDB resources, to implement many of
the recommendations
of the Assessment.
We believe
these
recommendations
are critical to the future effectiveness and
viability of the IDB; and the extent to which they are implemented will play a major role in determining
the nature of
U. S. participation
in the institution.
are aware of the fact that the IDB is a multilateral
and that the influence of any single shareholder
But, I believe we can arrive at a consensus
which supports our objectives, and that, together we can move
forward in a deliberate and well conceived fashion.
Our major
goal is, after all, to make the IDB an even more effective
institution; this is a goal which we all share.
We
institution,
is limited.
Turning now to the specifics of our program, there are
three basic objectives which we are pursuing.
These objectives
are: greater private sector involvement; a shift in the
allocation of resources towards those countries which are
most in need, and which demonstrate a desire and ability to
make the best use of those resources; and, while bearing in
mind the need to maintain
the strong financial reputation of
the IDB, an increase in the financial leverage of contributions
and subscriptions
to the IDB, to reflect the strengthened
position in international financial markets of some of the
IDB's major borrowers.
respect to the first of these objectives -- greater
private sector involvement -- let me emphasize that our attitude toward international
policy questions generally is consistent with our own internal economic policy. Internationally,
as well as domestically, we are committed to the free market
that economic growth and productivity
We are convinced
system.
can be advanced most effectively, both at home and abroad,
through greater reliance on private economic activity.
With
In terms of the IDB, we anticipate an increased emphasis
as a catalyst for private investment flows.
Taxpayers in the donor countries should not be expected to
shoulder burdens which can be accommodated by the free play
To this end the IDB can facilitate
of market incentives.
attractive investment environments in their borrower countries
by:
on
its role
--
free and open markets;
reducing barriers to private capital investment
encouraging
encouraging
limiting
helping
sound
economic
policies;
the scope of government;
those countries
flows;
prepared
and
to help themselves.
private sector co-financing represents a significant
source of potential private sector involvement in development.
twenty
The IDB has already begun to tap this source, approving
"complementary" loans totalling $513 million in the period 1976
through ]981. This is a commendable effort, and we fully support
IDB's plans to expand its complementary financing program.
All of the multilateral development banks must recognize
that public sources of development resources will remain
strictly limited over the coming years, and steps must be
If
taken to increase the flow of private co-financing.
its
full
realizing
to
potential,
co-financing is to come close
of the three
it must be shown to be --in the best interests
the borrower, the private lender,
participating parties
of co-financing
and the IDB. The terms and flexibility
instruments will have to be made more attractive to the
private lenders. The borrowers will need to realize that
limited IDB funds can be blended with additional resources
are
through private co-financing, and that such arrangements
process of development
a natural element of the evolutionary
assistance.
Discussion of the IDB's catalytic role brings me to our
second major objective in the bank: the pursuit of wellIn the IDB
formulated maturation and graduation policies.
member
incomes
of
borrowing
capita
where
in particular,
per
an
we
will
be
encouraging
countries are relatively high,
window
on
hard
funds,
its
borrowers
reliance
increasing
by
thereby releasing scarce concessional funds for allocation
among only the poorest countries.
the substantial development needs of Latin
We understand
America and the Caribbean.
We are not convinced,
however, that
these needs can be financed ~onl with concessional funds of the
amount and on the terms currently provided by the Fund for
While we are willing to consider some
Special Operations.
replenishment
of resources to be provided on terms more concessional than in the IDB's capital window, these resources
should be allocated only to the poorest countries of the
region which cannot afford nor have adequate access to alter-
native sources of finance.
time, in order that sufficient hard window
can be made available to "maturing" IDB borrowers, the
higher income borrowers must reduce their reliance on IDB
capital, and turn increasingly to private markets in which
they have already demonstrated
their credit-worthiness.
At the same
funds
I have already discussed the role of private co-financing
in providing assistance to IDB borrowers.
Such co-financing is a
natural element of the maturation/graduation
process which we
foresee in the IDB. But, in order for this graduation/maturation
policy to be successfully implemented, and in order to attract th~
private co-financing which is a part of that process, the
IDB must link its loans and technical assistance to appropriate
micro economic and sector policy advice, and to the pursuit by
its borrowers of appropriate monetary and fiscal policies. On
the micro-economic policy side, this advice should address:
reducing
impediments
minimizing
--
eliminating
private
producer
to market determination
and consumer
bureaucratic
subsidies;
constraints
of prices;
and
to a dynamic
sector.
the macro-economic side, the IDB should, through its
of IMF
support and facilitate the implementation
and generally work to ensure that
programs where appropriate,
its projects are being carried out in an environment conducive
to sustainable economic growth and development.
On
lending,
are convinced that when such policies are introduced,
rigorously adhered to, the climate for both domestic and
foreign private investment will significantly improve.
We
and
third major objective we will be pursuing in the sixth
is increased financial leverage of the IDB's
capital resources. As the IDB prepares for another expansion
of its resources, we believe it is imperative to question how
great an increase is needed, given the considerable scope for
further expansion of the Bank's financial leverage. The IDB
is a mature financial institution with a proven track record
credit markets. Given the obvious constraints
in international
on budgetary outlays from IDB donor countries in the eighties,
A
replenishment
and
need for a significant IDB lending program,
that use of IDB resources be maximized.
the. continuing
it is
essential
There are two specific areas in which we are focusing our
attention: paid-in capital and usable callable capital. While
I will leave the details to our representative in the replenlet me just make a few key points.
ishment negotiations,
First, we believe there is considerable potential for
expanding the Bank's lending program without requiring an
unrealistic direct budgetary contribution from participating
countries. Second, a key component of a successful matura-
policy will be an increasing use of higher
tion/graduation
contributions and subscriptions as backing
income borrowers'
for IDB bonds. These countries already borrow considerable
sums on their own in commercial markets, and there is no
reason their paid-in and callable capital cannot be l00
percent usable by the bank in its borrowing operations.
Third, as retained earnings provide for higher levels of
accumulated reserves, the argument in favor of high proporMaintenance
tions of paid-in capital becomes less convincing.
covers
all
Bank's
which
fully
the
rate
costs and
lending
of a
in
amortization
and
adjustments
grace
periods
appropriate
wi]l permit the IDB's existing paid-in capital and reserves
to continue to generate further profits, thereby enhancing
of
equity cushion and preventing the decapitalization
the institution.
today the three goals which are the
of our approach to the proposed
underpinnings
resource replenishment
for the IDB. These goals were
formulated in the context of a thorough assessment of all the
multilateral development banks. We are pursuing these goals
not because we believe the banks have done a bad job in the
past, or because U. S. support for these institutions has weakened, but rather because we believe that the banks can do an
even better job in the future, and because achievement of our
goals and objectives will result in stronger, more effective
institutions which can count on the support of both traditional
and new donor countries.
I
have mentioned
structural
In sum, we support continued growth in the IDB's lending
reliance on nonWe favor the concept of increasing
program.
traditional donors to help finance that lending program.
process
Development assistance should support an evolutionary
in which funds are allocated to countries most in need,
while those countries which already have access to alternative
sources of finance rely less and less on development bank
funds. Consistent with maintaining the financial integrity of
the Bank and its financial maturity we- expect the Bank to be
able to better leverage subscriptions made by member governments.
Development assistance should be seed money to encourage the
adoption of appropriate economic policies which will result,
in turn, in increased access to private markets.
The IDB itself has evolved over the previous twenty
years so that it also can "mature" out of total dependence on
donor country contributions
to a reliance on its own ability
to attract private resources.
This is the future we foresee
for the IDB, and we believe it is a promising one.
yepcmrisnent
of |:he 'treessury
~ Ncmshinston,
D.c. o Telephone 566-204%
For Release Upon Delivery
Expected at 10:00 a. m. EST
STATEMENT OF DAVID G - GLICKMAN
DEPUTY ASSISTANT SECRETARY ( TAX POLICY)
BEFORE THE SUBCOMMITTEE ON
ENERGY AND AGRICULTURAL TAXATION
OF THE SENATE COMMITTEE ON FINANCE
MARCH
Mr. Chairman
I
and
Members
30, 1982
of the Subcommittee:
pleased to appear before you today to present the
Department's views on S. 1819, a bill to amend the
Internal Revenue Code with respect to the taxation of crude
oil purchasing cooperatives. Under the bill, crude oil
purchasing cooperatives would be treated in a manner similar
to that accorded exempt farmers' cooperatives under section
521 of the Code. Consequently,
unlike so-called "subchapter
T" cooperatives which are taxable on all nonpatronage
business, crude oil purchasing cooperatives would be able to
claim deductions against income for amounts paid to patrons
from nonpatronage
sources, including income from business
done with the United States and its agencies.
am
Treasury
Treasury
opposes
enactment
of S. 1819.
advised that this Committee is also
We were recently
considering S. 2151, a bill to amend the Code to add an
additional item to the list of specially defined energy
time to study the bill
We have not had sufficient
property.
However, we would be pleased
and comment on its provisions.
to forward our comments for the record if the Chairman would
perm it us to do so.
Taxation of Cooperatives
In general, cooperatives governed by subchapter T of the
Code are not subject to tax when operating on a cooperative
basis with patrons. The advantage of operating on a
cooperative basis is that it allows small businesses to form
association which may use its large size to obtain
purchasing and marketing economies and efficiencies for the
benefit of its patrons without incurring a corporate tax at
the association level. The elimination of the corporate
level tax is accomplished by permitting a deduction for
distributions (or deemed distributions) from cooperatives to
patrons which are based on the amount of business done with
are
the patrons on a cooperative basis. Such distributions
includible in the income of the patron. Use of the
cooperative form enables patrons to defer the recognition of
These benefits are not
income in patronage transactions.
available with respect to transactions which are not carried
out on a cooperative basis'
"Tax-exempt" farmers' cooperatives calculate their
income in the same way as subchapter T cooperatives but, in
addition, receive other significant tax benefits, including
the ability to deduct from gross income dividends paid on
capital stock and amounts paid to patrons with respect to
earnings derived from business done with the United States
Government or its agencies or (to a limited extent) from
other nonpatronage sources.
an
Descri tion of the Bill
S. 1819 is intended to provide crude oil purchasing
cooperatives the same tax benefits as are available to
farmers' cooperatives.
In addition, the bill would grant to
significant benefits not available to
such organizations
farmers' cooperatives.
S. 1819 would exempt from income tax crude oil
The membership
of such cooperatives
purchasing cooperatives.
must consist of independent
refiners or subchapter T
cooperatives and must be organized for the purpose of: (1)
purchasing crude oil and reselling it to members, nonmember
refiners and nonmember subchapter T cooperatives
independent
and turning back to them the proceeds of such resale less
necessary expenses; (2) purchasing supplies and equipment for
the use of members, nonmember independent refiners and
nonmember
subchapter T cooperatives and turning over such
supplies and equipment to them at actual cost plus necessary
expenses; (3) trading crude oil; (4) storing crude oil; and
(5) insuring risks associated with any of the enumerated
activities.
The
bill describes necessary
expenses
as being the
greater of 15 percent of the costs allocable to such activity
or the amount demonstrated
by the cooperative as being
properly allocable to the costs of such activity.
oil purchasing cooperatives
in a manner which is far less
to farmers' cooperatives.
Crude
operate
applied
under S. 1819 could
restrictive than
First,
membership
of farmers cooperatives is limited to
fruit growers and like organizations.
Membership in
crude oil purchasing cooperatives is not limited in any
respect since, in addition to independent refiners, any
subchapter T cooperative may be a member.
There is no
requirement
that the subchapter T cooperative members must be
independent
refiners.
farmers,
Second, section 521 does not specifically authorize
farmers' cooperatives to trade or store agricultural
products, nor does it authorize the insurance of risks
relating to such activities.
S. 1819 does so with respect to
activities of crude oil purchasing cooperatives. More
importantly S. 1819 allows the oil purchasing cooperative to
engage in "any other activity incidental to" the itemized
purposes or "designed to increase the efficiency of the
associations" in carrying out the itemized activities. This
would appear to permit these organizations
to engage in
refining activities and to purchase and market refined
It may also permit the cooperatives to construct
products.
and
sell refining
equipment.
1819 contains a "necessary expense" rule which
the cooperative to treat as a expense with
respect to a patronage transaction 15 percent of costs
allocable to an activity even when the actual cost
attributable to the patronage activity is less. This would
permit the cooperative to make a profit on cooperative
transactions with patrons.
Furthermore, this profit would
to
not be subject to tax to the extent it is distributed
members as a dividend on capital stock.
Neither section 521
farmers' cooperatives nor other cooperatives are granted such
Third,
would
ST
permit
benefits.
Fourth, S. 1819 would increase the amount of business
that can be done on a nonpatronage basis by crude oil
Under section 521,
purchasing cooperatives to 25 percent.
farmers' cooperatives are limited in the amount of business
they can do with nonpatrons to 15 percent of the value of all
the cooperative's purchases'
27, 1981, this Subcommittee held hearings on
One of the
tax incentives for independent refiners.
incentives then considered was a proposal to allow
refiners to organize crude oil purchasing
independent
At that hearing the Treasury Department
cooperatives.
Since
opposed adoption of the exempt cooperative proposal.
and
detail
greater
in
that time we have studied the proposal
The
refiners.
independent
of
have met with representatives
Treasury Department remains strongly opposed to the enactment
of ST 1819.
Statements submitted on March 27, 1981 on behalf of the
American Petroleum Refiners Association and the Independent
Refiners Association of America indicated that the rationale
for the exempt cooperative proposal was: (1) to enable
refiners to negotiate long-term oil supply
independent
contracts at a level equivalent to that of government-to(that is, it was felt that in dealing
government negotiations
with foreign government oil marketing organizations,
purchasing cooperatives would have greater bargaining
leverage than an individual independent refiners); (2) to
obtain broader access to financial markets; and (3) to avoid
antitrust complications.
On
March
It
has not been demonstrated
that the achievement of the
goals of this legislation can not be
accomplished under current law in a variety of ways.
refiners can combine to attain these goals
Independent
without incurring a corporate level tax through the use of
form of operation, the corporate form (but
the partnership
with the additional cost of a seven-plus percent tax on
intercorporate dividends) or as a subchapter T cooperative.
refiners contend that the
Although the independent
partnership and corporate forms are deficient for a variety
of reasons (a contention with which we disagree), subchapter
the three goals.
T of the Code can clearly accommodate
three
avowed
First,
independent refiners can establish cooperatives
crude oil from foreign suppliers under long-term
contracts. Their larger size may assist them in dealing with
foreign governments on a more advantageous basis. Second,
the combined financial resources of the purchasing
cooperatives may permit such organizations to obtain more
favorable financing than they would if they seek to purchase
oil independently.
Third, whatever antitrust implications
exist for subchapter T cooperatives presumably exist for
crude oil purchasing cooperatives.
to purchase
Since under subchapter T such cooperatives will not pay
an income tax to the extent they deal with their members or
patrons on a cost plus expenses basis it is not apparent why
there is a need to amend the tax laws to provide tax
exemption for crude oil purchasing cooperatives.
Obviously,
refiners in this bill must be seeking something
independent
more than freedom to operate in a cooperative form on behalf
of patrons.
S. 1819
allow such cooperatives to operate in the
taxable corporations in dealing with
without the obligation to pay a corporate
income tax. We see no justification
for exempting crude oil
purchasing cooperatives from income tax where they are not
In that
operating on a cooperative basis with customers.
business
are
not
different
than
other
they
capacity
any
entity and should be taxed accordingly.
Although Congress
has provided rules permitting cooperatives to avoid a
corporate level tax, these rules generally apply only to the
extent of business done with patrons on a cooperative basis.
While this restriction is relaxed somewhat in the case of
farmers' cooperatives, S. 1819 would grant to crude oil
purchasing cooperatives benefits in excess of even those
available to farmers. There is no justification for such a
tax preference.
would
same manner as
nonmembers
but
Finally,
such an amendment
could have an adverse
impact
corporate tax receipts to the extent that
exempt cooperatives deprive taxable corporations of profits
from crude oil purchasing
and related business.
In addition,
companies which must pay corporate taxes currently would be
placed at a competitive disadvantage.
upon
the Federal
For
S. 1819.
all these reasons
we
oppose the enactment
of
department
of the Treasury
EMBARGOED
FOR RELEASE UPON
~
Expected at 10:30 A. M. , EST
Tuesday, March 30, 1982
Washington,
DELIVERY
TESTIMONY OF THE HONORABLE DONALD
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE BANKING COMMITTEE
Mr. Chairman
D.C. ~ Telephone 566-204'l
and Members
of the
T.
REGAN
Committee,
It is a pleasure to be with you today to discuss the
economic outlook and the Budget.
I hope this occasion will
be part of an on-going dialogue between the Committee and
the Administration
over the need to restore a stable fiscal
climate to promote long-term noninflationary
growth in the
American economy.
As you know,
the economy continues
in the grip of the
second recession in two years. This latest downturn began
in July 1981, hard on the heels of the sharp recession of
1980, from which the economy had never really recovered.
Together they form one long period of near zero growth.
The causes of the problem are clear: years of excessive
rising interest rates, rising
money growth, rising inflation,
tax rates, and rising Federal spending as a share of GNP.
With the help of the Congress, we hope to continue the
fight to bring Federal spending and deficits under control.
With the help of the Federal Reserve, we hope to bring inflation
These steps will lead to an early end
and interest rates down.
to the current downturn.
In spite of the continued slide in the first quarter of
1982, there are some hopeful signs. Excess inventories are
being drawn down at a rapid rate. This is typical of the last
stages of a recession. Retail sales are rising. Housing starts
Durable goods orders have leveled off. And,
are up slightly.
very important for the financial well-being of all Americans,
whether of working age or retirees, inflation continues to fall.
importantly, we have in place a sound long-run tax
system for the 1980's. It will not only help bring an early
end to the current recession, but will promote rapid growth of
income, savings, investment and employment for years to come.
tax system, with a healthy economy, will generate as much
revenue as government should reasonably be allowed to spend.
More
R-705
However, the short-run revenue picture has been heavily
the recession and the drop in
by two factors:
one bitter pill and one piece of candy which
affected
inflation
--
together have significantly decreased revenue to the point
of causing large deficits. The recession is temporary, and
the decline in inflation is most welcome.
Nonetheless, nominal GNP is estimated to be 4 percent
lower than was forecast last March, and the 1982 unemployment
rate over one and one-half percentage points higher. These
changes in economic assumptions have added roughly $60 billion
to the deficit projections for FY-1983 compared to our estimate
last year. Higher interest rates and a higher level of national
debt by FY-1983 have added $30 billion more.
We, therefore, had to face some tough decisions about how
to cover the costs of some very important government programs
how to make up the difference between the $666. 1 billion in
revenues and the $757. 6 billion in outlays -- until the growing
economy triggered by our reformed tax system brings growing
revenues into line with restrained outlays.
Some have urged us to revoke the incentive-creating
tax
cuts already in place. The result would have been lower real
growth for many years into the future.
It would have involved
a self-defeating major change in a permanent tax program to
handle a temporary problem.
Instead, we shall propose certain
worthwhile tax reforms, upgrade our tax collection program,
renew our efforts at controlling spending, and borrow to cover
the remaining
deficit.
Deficits are not good. They rob the private sectoi of
financial and real resources needed for growth, and divert
those resources into government consumption.
So do taxes.
The root of the problem is the Federal spending which
appropriates those real resources and then must find the
means to pay for them in one way or another.
The budget deficit can and must be narrowed from the
spending side. For too long, spending has been rising faster
than the economy has grown.
The economy can no longer support
progress was made last year in reducing the
in Federal non-defense
Further
efforts will be required this year and into thespending
future.
the burden.
runaway
Some
rate of
growth
.
Insofar as spending is not reduced, it is preferable to
close the remaining transitional recession deficits of the
sort now being experienced by borrowing rather than by taxing.
The funds are pulled from the private sector in either case,
but taxes impose a larger cost in terms of reduced incentives
for real growth.
Borrowing diverts a portion of private savings away from
capital formation to enable the government to gain command over
a portion of current output.
Taxing also enables the government
to have at its disposal a portion of current output. Taxation
reduces private saving and it too cuts back the resources
available for capital formation.
However, there is a difference.
In recent years, tax
increases have generally taken the form of allowing inflation
to push taxpayers into higher brackets, or allowing inflation
The former
to erode the value of depreciation allowances.
reduces the value of incremental present or future wages and
interest income; the latter reduces the rate of return on
The effect is to reduce the supply of
plant and equipment.
labor, savings, plant and equipment, cutting down on future
output. Thus, taxation often produces disincentives which
adversely affect future output, as well as directing a portion
of current output to the government.
Federal borrowing creates debt that must be serviced, and
this implies the future payment of taxes, but it need not
require an increase in marginal tax rates, as long as economic
growth produces an enlarged tax base. Thus, borrowing should
have less adverse impact on future output than taxation.
Therefore, in deciding how to cover the transitional deficits
associated with the current recession, we feel it is better to
borrow, while leaving the tax incentives in place for long-run
growth, rather than to undo the structural tax reforms of the
ERTA, and
choke
off future expansion.
to strive to reduce the deficit by
real growth. The budget
take major steps toward closing that deficit
we are proposing
In the interim, it can be
over the next several years.
fashion. The first three charts
handled in a nondisruptive
help to put the deficit into perspective.
The projected deficits, though some of them are at record
dollar levels, are not unusual following a recession when
measured as a percent of GNP. On- and off-budget deficits
were 3.6 and 4. 5 percent of GNP in Fiscal Years 1975 and ].976,
Deficits are projected
due largely to the 1974-1975 recession.
to be 3.8 percent and 3.1 percent of GNP in Fiscal Years 1982
and 1983, largely as a result of the current recession.
There has been considerable concern that our projected
deficits will drive up interest rates. However, we believe
there will be ample private sector saving to finance these
We
must continue
curtailing
spending
and promoting
deficits
and strong
will be no need for
Reserve, which would
The
There
increases in capital formation.
creation
the
money
Federal
by
inflationary
indeed
deficits will
drive
up
be manageable
interest rates.
because of the growth
of private sector saving. Private saving resulting from
growth and the Economic Recovery Tax
normal year-over-year
Act will be several times greater than the total borrowing
requirement of the Federal Government in 1983 and 1984 and
thereafter.
additions to total private saving are larger
in
the deficit. They will produce "crowding
the
rise
than
in" rather than "crowding out. " This extra shot in the arm
of capital markets will put downward pressure on interest
rates. Even after financing the Federal deficit, there will
be billions of additional dollars each year for private
investment.
The annual
increases in saving exceed $40 billion
Normal year-to-year
each year. This will be supplemented by the additional personal
savings and additional business retained earning induced by the
tax cuts. Compared to 1981, private saving will be more than
$60 billion higher in 1982, more than $170 billion higher in
1983, and more than $260 billion higher in 1984. Private saving
was $480 billion in 1981. It is projected to rise to more than
$740 billion in 1984.
not all of this saving is available for
Unfortunately,
and financing deficits.
Some is needed to replace wornout equipment.
Net saving, which is gross saving less depreciation, is being diverted to finance government spending at an
alarming rate, although not so severely as in the recession of
1974-1975 (see appendix).
Fortunately, net saving will rise with
gross saving. Nonetheless, every effort should be made to restrain
Federal spending to promote future investment and growth.
growth
of growth has been responsible for much of the current
deficit. As a rough rule of thumb, each time
growth falls off by enough to produce a 1 percent increase
in unemployment,
the budget deficit widens by more than $25
billion. In fact, if we had grown fast enough over the past
four years to get unemployment down below 6 percent, the
current deficit would be roughly $75 billion lower.
Growth is the only way to balance the budget while
promoting ri'sing real income and employment.
I would like to
point out, very firmly, that. any changes in the economic
recovery program which reduce real growth will tend to worsen
the budget picture.
Changes which reduce individual
or business
saving by as much as or more than the deficit will only worsen .
the situation in the credit markets.
Lack
and
projected
The budget is not merely an accounting document.
One
cannot simply take a billion dollars out of column A and put
it in column B. There are behavior changes and economic
repercussions from tax and spending shifts which affect
saving, investment, labor supply, income and revenue.
Very
often, changes which may look good on paper will buy little
or no progress toward solving a budget problem, especially
compared to the economic cost to the whole nation of the
policy
the
shift.
These facts should be 'kept clearly in
deficits in this budget.
Taxation,
Spending
mind
as
we
look at
and the Budget
The tax code we have in place, plus the tax proposals
contained in the Administration's
budget regarding obsolete
provisions and improved tax compliance measures, will generate
as much revenue over the long term as the government should
reasonably be allowed to spend. We project long-term receipts
of between 19 and 19-1/2 percent of GNP between 1983 and 1985
under our proposals.
These percentages would rise slowly thereafter with real economic growth and scheduled payroll tax
increases'
This compares with 18.7 percent from 1964 through
1974 and 19.0 percent from 1975 through 1979. Receipts were
20 ' 1 and 21.0 percent of GNP in 1980 and 1981, respectively,
and will be approximately
20. 3 percent in 1982. Receipts,
therefore, will be in line with, or even higher than historical
levels.
On the other hand,
spending, on- and off-budget, is already
too high and threatening to go higher.
It was 23. 0 and 23. 7
percent of GNP in 1980 and 1981, respectively, and will exceed
24 percent of GNP in 1982. This compares to 19.8 percent from
1964 through 1974 and 22. 1 from 1975 through 1979. We have
recommended
a decline to just over 21 percent of GNP by 1985,
and further declines thereafter.
is
a general perception that spending and taxes
In fact, all we have done so far is to
reduce the rate of growth of spending, and we have just begun
to see a modest tax reduction.
There
have been
slashed.
The personal tax rate reductions in the ERTA are not
substantially larger between 1981 and 1984 than the continuing
bracket creep and the payroll tax increases of 1981 and 1982.
In fact, there was a net personal tax increase of roughly
$15 billion in 1981. In 1982, taxpayers will barely break
even. Not until 1983 and 1984 will there be real tax cuts
for most families, totalling $12 to $15 billion each year.
Taxes will rise again in 1985 due to a scheduled payroll
tax increase.
On
the other hand,
restraint,
spending
even under
our proposed
spending
will remain well above long-term
averages
for several years to come. If major budget changes are to
made, they should be in spending levels, not. taxes.
Importance of a Stable Tax Polic
could
It is unlikely in the extreme that tax increases
First, they would weaken
succeed in balancing the budget.
the economy, and be partially offset by slower growth.
In
Second, they would encourage higher government spending.
spite of the fact that the tax receipts of the Federal Government rose nearly $250 billion from FY-1977 to FY-1981, the
government ran deficits of nearly $200 billion.
the Administration hopes to balance the
Consequently,
budget by restraining spending and encouraging growth through
tax program.
a stable incentive-creating
Business Taxes
Stability in tax policy is essential for private sector
Consider the impact of sudden
planning and economic recovery.
on
in
the
tax
law
the
cost
of plant and equipment and
changes
the related investment decisions.
Millions of firms planning billions of dollars of investment decisions must be in a situation of great uncertainty
with
respect to leasing, ACRS and other provisions.
There is no way
for a firm to determine whether an investment is practical or
not until the tax picture is clarified.
The decisions of the
Congress regarding ACRS and related provisions have the power
to unleash a flood of investment or to choke off tens of billions
of dollars of spending on modernization and expansion of plant
and equipment.
Until the political decisions are made, the
economic decisions, and the economic recovery, are on hold. The
right decisions will start the economy climbing. The wrong ones
will set it tumbling.
Taxes on Saving
Consider the impact on personal saving of a decision to
the third year of the tax cut and indexing.
Under
current law, over the life of a 10-year bond purchased in 1983,
a taxpayer who will be in the 33 percent bracket following the
third year of the tax cut would pay roughly one-third of his
interest to the government.
But. without the third year and
indexing, that tax rate would start at, 39 percent and rise
within a decade to 44 percent and 49 percent, as the taxpayer's
income rises through the tax brackets with inflation.
The
average of these tax rates would probably be nearly 44 percent
suspend
At a 10 percent nominal interest rate and 5 percent or
percent inflation, this rise in the tax rate would be enough
to cut a 2 percent real after-tax interest rate in half, or a
1 percent. real after-tax interest rate to zeros
Historically,
such swings in the real after-tax interest rate have shifted
the personal savings rate by one or even two percentage points'
This would be enough to remove $25 to $50 billion dollars per
year from the credit markets over the next decade, with obvious
adverse consequences for interest rates, investment, and real
6
growth.
Furthermore, the potential saver would know as soon as
these provisions were repealed what the impact would be on
He would react at once, before
the rate of return to saving.
the bond were purchased, not 5 or 10 years later after having
committed money in good faith.
Taxes on Labor and Small Business
There are those who would preserve the business portions
of the ERTA, and cancel most of the remaining individual tax
Such a move would be extremely counterrate reductions'
I am frankly
productive to business as well as to individuals'
amazed at the lack of thought behind such proposals'
In my years at Merrill Lynch, I came to appreciate the
importance of the individual in his or her role as saver,
I am surprised that others in
investor and entrepreneurs
commerce or industry do not appreciate the importance of the
individual
in the roles of employee
and customer.
Those who think of business only in terms of large corporations forget the millions of partnerships, proprietorships
whose profits are taxed at the
S corporations
and sub-chapter
The decisions of
individual level at individual tax rates'
are heavily influenced
and entrepreneurs
these owner-investors
by the personal rate reductions and estate and gift tax reforms
recently enacted'
consider the effect of
As for employees and consumers,
the
tax
cut and indexing on the
of
suspending the third year
standard
of
of the American
living
the
cost of labor and
family.
Total net output of goods and services in the economy
results from the combination of labor and capital. The value
added by these two factors of production is reflected in the
wages, salaries, rents, royalties, interest and dividends
they receive. Value added equals total national income and
total net outputs
to some, but labor is far and
It may come ofas thea surprise
two
factors.
Value added by labor js
larger
away the
two-thirds and three-quarters of the total in most
Labor inputs outweigh
years for most products and industries.
time to remember
is
It
one.
to
capital inputs two or three
labor costs are
higher
that taxes on labor and the resulting
business.
extremely damaging to American
between
15 years, inflation, bracket creep and
payroll tax hikes have sharply increased the pre-tax cost to
the firm of giving a worker a one dollar after-tax wage increase.
Over the
last
median income worker now faces 40 percent to 44 percent
tax rates on added income. This is the sum of social security
and Federal marginal income tax rates, plus state and local
is up sharply from the late 1960's,
taxes at the margin.
would
have been roughly 26 percent
rates
when the marginal
A,
It
to 30 percent.
it
now costs a firm more than $1.70 to
Consequently,
a $1.00 increase in the cost of living.
for
compensate a worker
the late 1960's. Without indexing,
in
40
from
$1.
This is up
and to $2. 50 or
it will rise to $2. 00 by the late 1980's, whether
merely COLA's
increase,
1990's.
wage
in
the
Any
higher
or a real wage hike, would send taxes rising and tend to push
labor costs up faster than the prices the firm receives for
its products. Profits, employment, or real wages would tend
to fall continually over time in the absence of extraordinary
productivity increases. The competitive
in the world economy would suffer.
position of U. S. labor
likely consequence of such a tax situation will be
after-tax wage. Labor will absorb a substantial
the third
The cost of eliminating
portion of the tax burden.
year of the tax cut and indexing to a wage earner making
$20, 000 in 1982 and receiving a cost-of-living increase
thereafter would be substantial:
$80 in 1983, $203 in 1984,
$289 in 1985, and $369 in 1986. This is only the direct cost.
The
a falling
economy, reduced saving, investment and growth,
lower productivity and reduced demand for American labor
would lower the market wage itself, reducing the family' s
real earnings by two or three times the direct cost of the
higher taxes. American workers and savers are the primary
customers of American business.
There is no way such an
impact on the real income of its customers would be good for
The weaker
business.
Regulatory
Reform
emphasis on the importance of the structural reof our tax system is consistent with this Administration's general regulatory reform program, the goals of
which are also to promote savings and investment and to
reduce the costs of government regulation for all sectors
of the economy. The Administration's
efforts are nowhere
My
forms
clear than with regard to the financial system, where
in past years an outdated regulatory system has caused the
redistribution of funds out of depository institutions to
institutions offering new financial products and services.
Thus, to assist our troubled thrift industry, the Administration has supported legislation to remove or lessen
more
restrictions which prohibit thrift institutions from exercising broader lending powers and would permit, through
separate subsidiaries, banks to compete in certain securities
activities. Further, as a member of the Depository Institutions
Deregulation Committee, I have been involved in the process of
removing interest rate limitations on depository institutions
so that they can compete equally to obtain funds with which
to support their vital lending functions.
In addressing the earnings losses of thrift institutions,
a variety of programs have been proposed which would involve
costly temporary
infusions which would increase the Federal
believe that Federal regulators now have
the necessary powers to assist troubled institutions and that
subsidy programs are not necessary.
We have focussed on
structural changes to give the industry the ability to be
healthy in changing economic circumstances.
budget
deficit.
We
Importance
of
a Stable Monetary
Policy
The President's original economic program included the
recommendation
that money growth be gradually reduced to a noninflationary pace. During the past year, the Federal Reserve
made significant
progress toward that goals
Fourth quarter to fourth quarter, M1B grew by 5 percent
in 1981. December to December, the rate was 6. 4 percent due
to rapid money growth at year's end. Compared to the inflationary rates of monetary expansion in the past -- 7. 3 percent
in 1980 and an annual average of 8. 0 percent in the preceding
three years -- this is a substantial deceleration in money
The Federal Reserve's tentative target ranges for
growth.
1982, 2-1/2 to 5-1/2 percent for Ml, represent continued
money growth and the Adminisprogress toward noninflationary
that general policy.
original recommendation was that the
The Administration's
rate of money growth gradually be cut in half by 1984 from the
average 7. 8 percent rate of the prior four years; this is the
The
assumption that we built into our economic projections.
deceleration that has actually occurred was initially much
of the planned reduction
more rapid -- almost three-fourths
in the first year -- until end-of-year increases in money
growth rates raised the level of M1B above the lower end of
last year's target range.
tration fully supports
10
This more rapid deceleration of money growth has economic
consequences -- some good, some bad. It is leading to a faster
reduction in inflation, but it also means reductions in real
output, employment, and real income. Lower inflation and lower
real output mean lower GNP and lower Federal tax revenues.
Lower inflation also means lower Federal outlays on indexed
programs, but only with a considerable time lag. In the interim,
It is amply clear from history, both here
the deficit widens.
if not monetized, do not produce
deficits,
and abroad, that
rate of inflation is a partial
lower
the
Indeed,
inflation.
deficit.
current
of
the
cause
Recognizing the short-run costs and the long-run benefits
inflation, the Administration remains committed
controlling
of
of
slow and steady money growth over the long run.
its
to
goal
Given that goal, we supported money growth in the middle of
the Federal Reserve's M1B target range in 1981, and we support
money growth in the upper third of the Federal Reserve's
tentative Ml target range for 1982.
There are those who are urging the Federal Reserve to
its goal of a steady and moderate growth rate of the
They believe that faster money growth would
money supply.
depress interest rates. History does not support that view,
as the attached charts show.
abandon
For many years, it has been apparent that inflation is
the main factor determining the level of interest rates.
Excessively rapid money growth in the past has brought about
the current high levels of interest rates. As inflation has
risen or fallen in the past, interest rates haved moved in
step.
In the last year or two, however, interest rates have
risen relative to the inflation rate. This may be due, in
part, to the unusual volatility of money growth rates since
1980.
In the last two months of 1980, Ml fell at an annual rate
of 1.4 percent per year, after a sharp rise in the previous
five months. All of the growth in Ml in 1981 occurred in the
first four months of the year, when it grew at a 14. 2 percent
annual rate, and the last two months of the year, when Ml
growth was at a 11.6 percent rate.
In the interim, Ml was
fairly flat. In the six months from April to October, the
net change was a decrease of 0. 2 percent, annual rate.
.
Early 1982 saw a very rapid increase in the money supply
January, followed by a levelling off in February.
Currently, the level of Ml is $4 billion above the target
range for 1982. The rapid growth of money from November
through
11
through
January
was accompanied
by
rising interest rates,
rates that had
the dramatic decline in interest
been under way since September.
reversing
The evidence
Volatile
lenders
two years
is
very
clear:
growth undermines the credibility of
monetary controls, adds to uncertainty and
and thereby helps keep interest rates high as
long-run
risk,
of the past
money
seek to protect their principal.
Faster growth of the monetary base produces faster
growth of Ml and is associated with rising interest
rates. Slower growth of the monetary base leads to
slower money growth and falling interest rates'
Administration
strongly supports the Federal Reserve's
goal of a steady and moderate rate of growth of the
money supply, not because we seek to drive interest rates up,
but because it is the only way to bring inflation and interest
The
announced
basis.
It is easy to illustrate why the financial markets watch
the money supply so closely, and why variability of inflation
and interest rates creates turmoil and uncertainty
in the
bond markets.
Old securities must fall in price to remain
competitive with new issues as interest rates rise. Conversely,
bond prices rise when interest rates fall.
Consider the
history of the Treasury's 6-3/4 percent 20-year bond issued
on October 1, 1973, priced at $99. 50 per $100 of face value
to yield 6. 79 percent.
Its value over time has fluctuated
substantially with market interest rates:
rates
down
on a permanent
9/30/74
9/30/75
9/30/76
9/30/77
9/30/78
9/30/79
9/30/80
9/30/81
latest
As interest rates
Price
84. 63
85. 69
92. 19
Yield to Maturity
8. 41
8 ' 32
7 ' 59
7. 25
8. 44
9 ' 38
11.37
14.96
13.38
95 ~ 44
86. 06
80. 19
69.69
55. 75
62. 50
and bond
prices have
become
increasingly
in recent years, the risk involved in buying bonds
This has resulted in greater reluctance to buy
has increased.
bonds on the part of those who cannot afford a risky porfolio,
and the emergence of a risk or volatility premium which has
driven interest rates higher than normal relative to inflation
in recent years. This is why stability in the rate of money
growth and interest rates is crit, ical to the success of our
program.
unstable
APPENDIX
Full
One way
Deficit
the impact of the back-to-back
Employment
to illustrate
recessions of 1980 and 1981-1982 on the budget deficit is to
This concept
examine the high employment budget deficit.
has been used in the past to measure the "stimulus" of budget
policy, on the theory that deficits increase total spending
We reject the notion that deficits per
and pump up "demand".
se are inherently stimulative.
They must be financed by
borrowing in the absence of inflationary monetary creation.
Nonetheless, the one useful insight the high employment budget
does provide is a measure of the fundamental
relationship
between the current policy level of spending and the current
tax code's capacity to generate revenue with the distorting
effects of the recession removed.
The high employment budget estimates the budget aggregates
that would result if the economy were continuously operating
at a high level of employment under the tax and spending
The
proposals contained in the FY-1983 Budget documents.
rate at high employment is traditionally estimated
unemployment
(However, many
for this purpose to be about 5. 0 percent.
observers feel the real economy has a long-term basic unemployment rate somewhat higher. ) Potential real GNP is assumed
to grow 3. 2 percent annually.
(We believe this potential
growth rate can be incr'eased by proper policies, but have
conformed to convention to provide estimates consistent
with those of earlier years. )
The CEA has estimated the high employment deficit through
FY-1985 on a unified budget basis. (The high employment deficit
can be computed on a national income accounts (NIA) basis or on
The major differences are the inclusion
a unified budget basis.
of offsetting receipts from oil and mineral leases and asset
sales
outlays
the netting out of Federal retirement receipts and
in the unified budget. ) The figures are available
FY-1985:
and
through
FY
Receipts
Outlays
Deficit (-)
81
FY 82
FY 83
FY 84
FY 85
636
644
691
723
702
739
768
793
830
860
-8
-11
-16
-25
-30
is clear from the tables that the major portion of the
projected deficits of nearly $100 billion in FY-1982 and FY-1983
is due to the fact that the economy is operating at less than
full
employment.
year-to-year
tax reductions result in small
in the high employment deficit, and,
The phased
increments
as large or excessively
the deficit increase, from $11 to $25
billion, is completed by FY-1984. By FY-1985, high employment
receipts grow 8. 1 percent over FY-1984, nearly matching the growth
of outlays at 8.4 percent.
even in "demand"
stimulative.
terms,
cannot be regarded
The bulk of'
Savings Flows and
How
They
Fit into
the Scenario
The following outlines some of the concepts underlying
the
gross and net private savings figures commonly cited and provides
background on the savings numbers consistent with the economic
scenario underlying the budget. By whatever savings measure one
prefers, projected deficits as a share of savings are less than
in the 1974-1975 recession and the subsequent recovery, and are
declining.
Concepts
o
Zn
the National
Income and Product
rivate saving is the
sum
of:
Accounts
(NZPA),
~ross
—the
difference between after-tax
of the household sector and outlays of
that sector for consumer goods and services, interest
Personal
personal
saving
payments,
etc.
income
Corporate saving, consisting of depreciation allowances
after-tax profits. (This is equivaplus undzstrzbuted
lent to the cash flow available to corporations, both to
maintain and add to productive assets. Inventory profits
are excluded. )
Depreciation allowances of the noncorporate sector
including unincorporated business enterprises plus
on owner-occupied homes.
The
~im uted depreciation
latter, roughly $40 billion or about one-twelfth
of gross private saving, is the only item in the
saving figures which does not represent true cash
flow.
P "'
"""—
far the larger part of total
includes the surplus of state and local governments (largely
the surplus of the pension funds for their employees, as
surpluses on operating account have been fairly narrow)
The
and the surplus or deficit of the Federal Government.
latter is on a NIPA basis. In the next couple of years,
the NIPA deficit will be wider than the more widely cited
unified budget deficit (the difference arising from sales
of mineral. rights and other transactions that are not
reflected in the NIPA but affect the unified budget).
Table 1 attached presents historical data on gross savings
flows as percentages of GNP.
Gross private
0
saving
forms by
saving in the accounts
sonal saving and the undistributed
Net private
is comprised of per
profits of corporate
(Profit-type income of unincorporated businesses
business.
gets into personal saving. ) Depreciation allowances are
(The net saving figures are
not included in net saving.
available cash for
represent
close to, but do not quite
and returns to
profits
undistributed
net investment, as
have been
allowance~
after
are
enterprises
unincorporated
fixed
and
capital
inventories
of
made for full replacement
exclude
inventory
process.
They
used in the production
profits, and depreciation is on a so-called economic
e. , replacement rather than
rather than book-basis,
or dissavings of government
Savings
cost.
historical
)
saving to get total net saving.
net
private
added
to
can be
i.
figures are commonly compared with net national
or GNP less depreciation allowances).
product
Thus, depreciation is excluded from both numerator and
Table 2 attached presents net savings flows
denominator.
as percentages of NNP.
Net saving
(NNP,
savings flows, either gross or net, may be
by inflows from abroad, which are likely to
be attracted by the new tax climate.
Domestic
augmented
In an accounting sense, total gross saving (including any
dissaving by the Federal Government) must match total
gross investment -- the net additions to the stock of
plant, equipment,
inventories,
and
residential
structures
plus an amount sufficient to replace existing assets that
have worn out or become obsolete.
In any year, investment
to replace existing assets far exceeds net additions to
the stock of productive assets. Similarly, total net
saving must equal net investment.
Gross Savings Flows in the Scenario
Savings flows consistent with the economic scenario
underlying the 1983 Budget were worked up by the CEA. They
were, . of course, forced to fit within the constraint of the
total uses of savings -- overall investment response to the
rate of return changes in the ERTA plus Federal, state and
local deficits and foreign flows. The breakdown between
corporate and personal savings within the totals can be
affected by dividend payout assumptions, capital intensity
assumptions across corporate and non-corporate businesses,
etc. In keeping within the totals, personal savings rates
appear to have come out. a bit low by historical standards.
estimates yield substantial private savings flows,
they do not appear to be out of line with the sum of
normal year-to-year growth, the business share of ERTA and
historical responses by individuals to tax reductions.
The
although
Historically, gross private saving has averaged about
16-1/2 percent of GNP. The peak ratio in the postwar
period was 18.2 percent in the recession year of 1975.
The next highest ratio was 17.5 percent in 1967. (See
left-hand column of table 1 attached. )
o
Gross Private
Saving as a Percent
Bud
1956-65
1966-75
1976-80
1981
GNP
et scenario
16.3
16 6
16 ' 7
~
16.4
17.2 projected
1982
1983
1984
18 ' 5
19 ' 1
The impact of ERTA on gross private saving can roughly
be estimated by calculating saving on the assumption
that the historic 16-1/2 percent share of GNP had been
maintained and comparing those numbers with the higher
saving flows projected in the new scenario.
The implication of these calculations is that gross private saving in
the new scenario in 1985 is $101 billion more than if old
saving patterns prevail.
o
Gross Private
Level
Level
Saving
Di f f erence
Tax
at 16.5% from
Cut
Increase of GNP
Budget
Budget
ERTA
— billions of dollars -----------)
(--------—
in
Calendar
Year
1981
1982
] 983
1984
of
actual
projected
II
480
542
651
742
Yearly
62
l09
91
521
581
641
21
70
101
58
115
151
Added
Savings as
o f ERTA
6 = 4
(percent,
36
61
67
5
)
total saving flows, including government
surplus, note that increased government deficits (dissaving)
resulting from a tax cut have no effect on total saving
if those tax cuts flow directly into increased private
saving, as the funds from ACRS, which are recorded as
retained earnings, might, be expected to do. Of course,
private saving may increase by more or less than any tax
cut, depending on responses of households and businesses
to changes in after-tax real rates of return on prospective
In the mid-1960's, personal savings increases,
investments.
of above average income growth, exceeded
result
as
a
partly
tax rate reductions for three
the
marginal
70 percent of
the
exceed
tax reductions in the fourth
to
rising
years,
The
thereafter.
personal
savings rates in the
and
year
scenario assume a savings increase averaging roughly 45
percent of the personal tax cuts from 1982 to 1984.
In terms of
of Gross Private Saving in the Budget Scenario
Composition
rise in business
The
saving
reflects:
recovery of the profit share (before allowance for
retention of a large portion of those
increased profits, rather than their distribution in
dividends.
A
ACRS) and
0
2.
ACRS and other tax changes which reduce profits taxes
by about $10 billion in CY-1982, $19 billion in CY-1983,
and $27 billion in CY-1984.
3.
rising stock of capital.
path of the personal saving rate is as follows:
The
The
depreciation
thrown
off
by a
Personal
Saving Rate (4)
Budget scenario
1980
1981
1982
1983
1984
5~6
5'3
6. 7 projected
7'0
6. 1
tl
II
The dip in 1984 was conditioned by overall constraints
imposed on the forecast, and appears to be an understate-
Personal saving available to households is related
to prospective real after-tax rates of =eturn; these
should be vastly improved from returns available during
the 1970's, and higher in 1984 than in 1983. Personal
savings rates averaged 7. 6 percent from 1965 to 1975.
ment.
Private Savings in the Scenario
Net saving figures indicate resources available to increase
the stock of productive capital after allowance has been made
for its maintenance.
Net
o
As indicated by the figures in the left-hand
columns of
table 2, ratios of total and net private saving to net
national product (NNP) were severely eroded in the late
1970's. In 1981, net private saving was 6. 1 percent of
NNP compared
with 8-3/4 percent during the late 1960's.
The scenario shows that late 1960's ratio being restored,
though
not surpassed.
private saving
as percent of
Net
NNP
o
Federal deficit
as percent of
net private
savings plus
SSL surplus
1956-65
1966-75
F 1
8' 6
1974
1975
1976
1977
1978
1979
1980
1981
7. 6
8.9
6. 2
6. 1
-35. 0
1982 projected
1983
1984
7 0
8'7
8. 8
-45. 0
-32. 0
-28. 0
2'8
-14.5
-10 ' 9
-53.8
-39.0
7' 7
7'3
-30 ' 0
-17 ' 9
6' 9
6 7
8' 6
~
-31.8
~
column of table 2 and the tabulation on
the prior page show the ratio of the NIPA Federal deficit
to the total net private savings plus supluses (if any) of
That ratio hit a peak of 54
state and local governments.
percent in 1975 ' As indicated on the prior page, that
ratio in the scenario for 1982 never approaches the 1975
figure, and ratios for 1983 and 1984 stay below respective
figures for 1976 and 1977.
The right-hand
Gross private
saving as percent
of
1981 actual
16.4
17.2
18 5
19.1
~
private
as percent
Of
GNP
Administration
1982
1983
1984
Net
saving
DRI
16.3
16.7
17.7
18.4
NNP
Administration
6-1
7. 0
8. 7
8 8
~
DRI
6. 0
5. 8
7. 0
7. 6
GROSS SAVING AND
INVESTMENT
LEVELS
1979
Gross Private
Personal
Business
Saving
1980
1981
1982
1983
1984
434. 1 478. 7 542. 0 650. 7 741.8
86. 2 101.4 106.6 150.8 171-7 163.4
313.9 332. 7 372. 1 391.3 479. 0 578. 4
400-0
PE RC ENT S OF GNP
Gross Private
Personal
Business
Saving
16 ' 6
3' 6
13-0
16 ' 5
3'9
12 ' 7
16 ' 4
3~6
12 ' 7
17 ' 2
4.8
12.4
18 5
~
4 9
~
13-6
19.1
4 2
14.9
~
Table
9EKEIT C'
tOXtAIE fLUO 4LL
FCRCEÃT % ICT OATXOIAL ItOOOCT
~oeeooooeoeeoeoeoeoooooeeooeoos«see«oooo«oooo«osoeooeoeoen
ltt40NAL CORPORATE STATE 6 lCCJL MRf&L
TOTAL JRZVAIE
ttAT
tOI4
1949
1950
1951
1952
1953
ttSA
1955
tt56
1957
le54
1959
1960
1961
1962
1963
1964
1965
1+$6
1967
1964
1969
1970
1971
Ao61
5«N
T024
T«24
L43
10«32
fe'Ft
te79
L03
6«CI
5«60
fe67
fo59
5«AS
Oo96
410
434
tsT1
L33
Re I3
L65
2e14
~ lT
Oeef
11
«443t
3o 16
Ae
Ae 53
R«T5
5«29
2«50
2«57
2« 15
5«AS
5«51
5«04
0«50
2 51
3s60
Reft
2 56
SoST
Rs 10
S«SA
LTR
To42
T«49
So 40
~ TT
Rs02
7«53
7«57
4 49
A«27
2«62
A.
2«6t
3o53
Cod
7s31
fo44
Te43
lL10
~
OA
foR
to13
LT5
3«1t
a
isSt
3e Ti
4«01
.
5 05
Oo06
420
3e IC
«le 12
3s 50
~0«15
~0«01
«tolf
«O«33
«te41
Os'
~35
W34
4«54
~10
0«01
«0«04
0«09
Oe04
A«04
Oe'1T
Oe 00
OoOT
2«1A
«Ltt
tQCtAL
tRRo
ll
3ts 12
«1LOO
5'le 35
RLOS
«tio63
«Rf s32
~RO«4
55«C'l
l«54
0«57
~53
~26
Oo66
~41
~42
a.00«050456
tteAt
fo30
«3Ae90
«3«30
te55
«1'lo07
«tOe12
0 40
«6«01
Oo43
~ L61
10s02
3«30
~ 72
ts59
L15
ts77
10 09
5o 1T
CoOA
A«60
O«05
To 94
Oo72
5«23
3oit
Oe01
T«37
Te40
A
LRt
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Aoft
'
Budget Deficits
in Relation
to GNP*
Percent
1
975
1
976
1
977
1
978
1
979
1
980
1
98 1
Actual
+ On and off budget as percent of fiscal year GNP.
1
l
I
I
982
1
983
1
984
1
985
Projected
1
986
1
987
Budget
Fiscal Year
1975
1976
1977
1978
1979
1980
1981 actual
1982 projected
1983
1984
1985
1986
1987
Notes
Deficits in Relation to
Deficits
(Bil. of dols
-53. 2
GNP
Percent of
)
-3 ' 6
-4 ' 5
73 ~ 7
-59. 2
-2. 9
-2. 8
-73. 8
-78. 9
-2 ' 8
-53 ' 6
-1.7
-40 ' 2
-2. 9
-118.3
-107.2
-97. 2
-82 ' 8
-77. 0
-62. 5
Figures include off-budget
GNP
-3 ' 8
-3. 1
-2 ' 6
-2. 0
-1.7
-1.3
entities.
3/23/82
Interest Rates and the Relative Size of the Deficit
Percent
15
I
I
I
I
10
3-Month
+r
pg
I
I
I
I
Treasury Bill
Rate
I
I
I
I
&
r
Q
Deficit as a Percent
of GNP*
1
956
1
958
1
960
1
962
1
964
1
966 1968 1970
Fiscal Year
1
972
1
+ Federal surplus or deficit includes off-budget items. Points below zero line
represent surplus as percent of GNP, points above line a deficit.
974
1976
1
978
1
980
Projected Borrowing Requirement
in Relation to Private Saving
Billions of
Dollars
700
600
:;:.":::::":;~ Federal Borrowing
':"':":::::Requirements
500
Gross Private
Saving
400
300
200
~~
1,1',1
111
~ ~~ e
11 sess ~ ~1'1
'1'1
~
~
1111
100
CA 'CVe,
1111~ ~
~~
1' Veo '1V 11
jlaaaaCCCa
a 11
Ya 11CA
Yeas'
1 jVasaC
a
~
~1~ ~ ~ ~ ~ 1111
1975
satanas
CCA
oP+VoCaa
atat11
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A
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+CjaoCCCga\Yoaas
11
111
~~
a~
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1111
Ca
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0
1V
~~
1976
111
oee 1aeotot ~
1977
re
1978
1979
C
\ a \ \ \
11s11
1980
1',1
1Va
~ ~111
~~~
~ ~ootAe~
1st ~ ~ ~
~ ~ ~\Va
~
1981
~ ~
11\
11
'A'
~
VA;A'a
~ ~
~ ~
a
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~ ~11
Y,~ ~ ~ ~ C
'o~
'el%
ate ~ ~
A
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11
~
og
~~
1982
'I%
~~
11 ~ ~~ ~ 11 ~
11~ ~ A'o
+a
1C
11
~~~~~~~
11at
taeaaasaaa
'A ~ ~
1983
1984
Projected
Actual
Fiscal Year
+ Total budget deficit including off-budget entities.
Note: Saving flows do not reflect surpluses of state and local governments
three srl
('
e,
'e+Ve
Ce',1
e',
~~
or inflows
March
24. 1982
Projected Borrowing Requirement
Fiscal
~ear
1975
1976
1977
1978
1979
1980
1981 actual
1982 projected
1983
1984
Gross
in Relation to Private Saving
Federal
deficit including
off-bud et
---billions of dollars---53. 2
253. 4
295 ' 6
73 7
-53.6
309. 8
-59. 2
347. 4
-40. 2
392. 2
-73.8
423. 0
-78. 9
462. 3
private
savin
~
523
624
712
-118.3
-107.2
-97. 2
Deficit as
share of
savin
percent
-21.0
-24. 9
-17.3
-17 ' 0
-10.2
-17.4
-17.1
-22. 6
-17.2
-13.7
3/23/82
Consumer Prices
tpercent change. from year earlier)
percent
15
uSVV
ii
'4l
ee
tsetse
ee
sl
12
AII
Items
ll V
I
10
'l
,ss'
S~
vest
ill lest eet
esses
.
ill
Vi
tet ~
il
ssss
e
Vll"
t
Excluding Food
and Energy
t
~
ll stti
1976
1977
1978
1979
1980
1981
1982
Producer Prices
percent
(percent change from year earlier)
16
15
Finished Goods
14
i
!
s,
13
12
hemi
t
10
t
C
~
I
I
~ I ~ I ~ ~ I ~0
+i
~
\+ ~
Excluding Food
and Energy
E'
'
~
~
t
/II'
'~
'~
+%I
1976
1977
1978
1979
1980
1981
1982
Current Law Tax Reduction vs. Quick Fix Alternative
Worker with $20, 000
in
Percent
1 0.5
Wage Income in 1982 Rising with Cost of Living
Effective Tax Rate
1
1
0.07
~P
0.0
9.80 ~W
9.51
Quick Fix
~t'
9.19
9.0
888 ~~
r~
8.5
8.0
Current Law
1982
1983
l984
1, 1982 tax
1985
rate reduction
Quick Fix alternative leaves the July
but cancels the July 1, 1983 tax rate reduction and indexing.
in
8.24
8.24
1986
1987
place,
RATES OF CHANGE OF MONEY AND PRICES
Percent
a
II', GNP Deflator tj
I
10
I
I
I
I
I
I::;
\
Il
l
1
/'
l
't
10
II
"I
't
t
I
I
I
I
+arr
I
M1B Trend
(4
r~l-
J
1957
r
I
'l~
0
&
-'
v~, i
I
I
I
I
1i
'l
I
iv
I
I
&
J~
0
1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981
Four-quarter rate of change;
g/ Twenty-quarter rate of change; data prior to 1st quarter
Latest data plotted: 4th quarter
g1
1964 are M1.
January 27, 1982.A164
M| VERSUS TARGET RANGE
470
5'/a
460
'/o
e
~e
6
450
ee
5'/o
e
~~
e
ee
~
e
e
~e
~
~
~~
~e
~e
e~
e
e
e
440
6.0'/o
ee
e
e
e
~
~e
e
e
Actual
e
e'
~
~e
e'
etc' e ~
~e
~
ee
'e
~~
~
~~~
~~~
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~~
~~~
~~~
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e
+
e
ee
430
e
e
420
e
e
~
~
~
~
e
~
~
~ ~~
~
~
~
~~
~
~~
~~
~
~e
e
e
e
e
ee
ee
e
~ ~~
410
1 980
"Weekly Averages-Seasonally
1981
Adjusted
1982
2 '/~
o/o
INTEREST RATES AND INFLATION
Percent
15
~
~
~
~
~o
~
~
~
~
~
~
~
10
~
3-Month Treasury Bill Rate
~
~
~
~
~
~
~
~
~
~
~
~o
~
~ ~
~ ~
~
~
~
~
~
~
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~ ~~ ~~
~ ~ ~
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~
~
~
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~
~
~o
~~
ooo ~ oo ~
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o~
~
~o
~
~
~
~
~
~
~
~
~ ~
~ ~
~~
~ ~
~ ~
~ ~~
~ ~
~
~o
~o
63
~
~ ~~
Inflation Rate*
65
67
69
~ Growth from year earlier in GNP deflator.
Plotted quarterly.
71
73
75
77
79
81
January
21, 198'J.A161
CHANGE IN MONEY SUPPLY
MONTHLY
Percent
$$$$ ~ $ ~ $ ~ $ ~ $ ~ $$$ ~ ~ $ ~ $ ~ $ ~ $ ~ $$$$$$$$$$ ~ $ ~ $$$ ~ $ ~ as$$$$$$$$$$$$ ~
1.5
M$
W
1.0
~ $$$$$$$
~s
eaeeeeeesseeseesassaaaassass
sssssssssssssssssesseassasa
R
~
aasssass
~ aaaaeeaaaaaaeeaeaa
aasaaeeseese
ssssese ~ eel
0
W
W
R
H
R
ease
1978
1979
~
eaaaasaaaaaasaaseae
1980
esaeeaaaaeasaaaaeeaaaaeaaaaeseas
1981
Quarterly
Rates of Growth of Monetary Base and the Money Supply (M1)*
Percent
16
14
12
Monetary Base
(St. Louis)
10
\
I
I
I
l~
I
j
r+
8%
I
I
I
I
4%
0
0%
1979
1980
1981
Weekly
*Quarterly growth rates based on four-week averages compared with four-week averages
thirteen weeks earlier, at annual rates. Latest week plotted: March 3 for M1, March 10
for monetary base.
NOTE: Monetary Base data do not reflect recent revisions in the series by the
St. Louis Federal Reserve.
1982
Base Growth vs. 3-Month T-Bill
Monetary
18
I
I
I
I
I
I
g
7
y4s
3-Month Treasury
Rate
(right scale)
Bill
h, ~
I
I
r~
\
6
lpl
I
Monetary
Growth~
14
Base~
(left scale)
20
31
JAN
+52
26
FEB
26
MAR
22
APR
20
MAY
17
16
12
JUN
JUL
AUG
1981
9
SEP
Week Growth on 4-Week Moving Averages
- ssnnotaru
Rico rlata rln not reflect recent revisions in the series by the
MAT'6
10
2
30 27 24
4
7
OCT NOV
DEC JAN FEB
1982
March 24,
1982
THE THREE-MONTH TREASURY BILL RATE AND GROWTH OF Mt
Percent
Percent
~ ~
18
~
~
Bank discount rate
on 13-week Treasury bills
~
~
18
~
~0
level
16
16
14
14
12
12
Qv
10
Mu snnustlze d growlh rate
over the prevlo us 13 weeks,
computed by Iog regressions
on time
10
e
~ vv
~v
~ ~
~
4~ +vs
~
0
~
vv vv
~
~
~
~
vv
~s
~ vvv
~v
~
~
~
vvv
Jan.
Feb. Mar.
Apr.
May
Jun.
~
C
Jul.
1981
Aug.
Sep. Oct. Nov.
Dec.
Jan.
1982
6
INTERMEDIATE AND LONG MARKET RATES
Weekly Averages
,re~. ~ ~a
~
18
New Conventional
Mortgages
~
ae ~
e
w e en
e me a
aa e ne
e
ea e ee e ee
.J
e
~e~
13
~e
oo
L-
r
~
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~
ee ~ aa e w
eoe
w,
r'
+e a
a ae a oe e
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17
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eeeoo
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~
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e
no e A a
-y L
Cor porates
~ooeo
~
...
erne'
New Aa
r'
~
P~P
13
Treasury
10-Year
Treasury
20- Year
hoUgh March qg
10
10
8
Note: Mortgage data plotted monthly
Otic e ol Ihe Sacretarr ot Ihe Transom
Otrce ot Coremment Fmanang
1981
Sep
Oct
Nov
Dec
Jan
Feb
1982
Mar
8
trtarch 24, 19B2
SHORT TERM INTEREST RATES
Weekly Averages
Prime Rate
20
20
Federal
Funds
18
18
16
~0'000
16
0000
~ 0000000
/0
14
~0
'0000
14
3 Month
Treasury Bill
~
12
10
00
/
Through March
Jan
Feb
Mar
Apr
May
Jun
Jul
1981
0000 ce Ine eecrehre re ItNI Treeeere
0000 CC Grnrernmenl Frnencrng
Aug
Sep
Oct
Nov
Dec
Jan
Feb
1982
22
Mar
12
10
of the Treasury
apartment
FOR RELEASE UPON
Narch
30, 1982
~
Washington,
D.C. ~ Telephone 566-204$
DELIVERY
STATEMENT BY
ROBERT E. POWIS
DEPUTY ASSISTANT SECRETARY FOR ENFORCEMENT
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCONNITTEE ON CRINE
HOUSE COMMITTEE ON THE JUDICIARY
Mr. Chairman
It is
and members
of the Subcommittee:
pleasure to appear before you today in response
of the Treasury Department to supply information about bullets capable of piercing soft body armor and
the so-called "Devastator" bullet.
I am accompanied this morning by Nr. Edward N. Owen, Chief of the Firearms Technology
Branch and Mr. Alfred C. Johnson, Senior Firearms Examiner
of the Forensic Science Branch, Bureau of Alcohol, Tobacco
and Firearms.
Also with me is Special Agent Gary McDermot
from the U. S. Secret Service.
These gentlemen will be in a
position to answer technical questions which you may have
ammunition.
regarding armor-piercing
my
to your request
shares the concern of the Committee and
large number of people who also expressed concern followa TV program regarding the
ing recent publicity surrounding
"KTW" armor-piercing
bullet. Although armor and ordinance
experts have been aware that there has been in existence for
a number of years many types of handgun ammunition
capable
of penetrating soft body armor, criminals and persons who
would cause harm to others were generally unaware of this
situation until the exposure on the television program and
the resulting publicity.
of
The Department
a
R-706
reaction of most people after the publicity
}i.-~t. this bullet must be banned.
People at all levels
in and out of government voiced a feeling that legislation
should be passed or regulations promulgated
that would make
the manufacture and possession of these and similar bullets
illegal. There was a feeling that this would cure the problem. I would submit for the Subcommittee's consideration
that the issue is far more complex than meets the eye and
that there are no easy answers.
wa'
The immediate
i..
A number
of practical problems arise in attempting to
legislate against the importation, manufacture or sale of
armor-piercing ammunition.
I would like to apprise you of
the significant problems we see in this effort. An attempt
to define projectile-type ammunition as H. R. 5437 would seek
to do, invariably includes a wide range of ammunition commonly
used for hunting, target shooting or other legitimate and
long-established sporting purposes.
The task is further
confounded by the fact that soft body armor is not designed
This is a very
to repel any and all armor-piercing bullets.
Soft body armor is
important fact and is worth repeating.
It should
not designed to repel any and all handgun bullets.
also be noted that serious injury can and does occur even
This is by shock
though a bullet fails to penetrate armor.
transmitted through the vests into the body and may, in a
Mr.
given situation, be more serious than a bullet wound.
I
intend
Chairman, in my testimony today
do not
for obvious
reasons to identify the numerous speciality cartridges which
have the ability to penetrate soft body armor.
I would like to point out that we have difficulty with
the terminology of H. R. 5437 which would restrict handgun
This is impractical
bullets rather than complete cartridges.
because the performance of a bullet or projectile is dependent
the quantity and type of
upon a number of factors including
propellent power used to assemble the bullet into a cartridge. The performance of a bullet which will not penetrate
armor can be changed by varying the quanity and/or type of
propellent, so that the same bullet will indeed penetrate
Legislation or regulations which attempt to address
armor.
this problem should deal with complete cartridges rather
than mere bullets or projectiles.
of the bill is to oroscribe ammunition
will Penetrate bullet-resistent
vests and
as
stated,
would,
previously
be
to
include
it
likely
apparel,
available
in
readily
commercial
ammunition
channels
other
While
such as
the intent
"KTW" which
is not
or intended to penetrate soft body
currently produced fire rifle-type
ammunition.
It is likely that much sporting rifle ammunition
when fired from a 5-inch barrel, would penetrate
soft armor.
Therefore, under H. R. 5437, all cartridges for which a handThis would be a monugun is made would have to be tested.
mental task. Many sporting rifle cartridges would end up
being restricted by this bill. Even though regulations may
be prescribed which will list certain restricted ammunition,
the physical identification of the restricted ammunition,
as
opposed to similar cartridges which are not restricted,
contemThe testing of ammunition
would be very difficult.
plated by the bill would be burdensome because virtually all
ammunition would need to be tested.
Additionally, the bill
imported
would mandate the testing of all foreign ammunition
into the United States. The changing of ammunition designs
would create an additional
burden under the bill by mandating
which
armor.
Many
continuous
designed
handguns
testing.
if
The purpose of H. R. 5437 may be thwarted
ammunition,
which although tested and determined
to be non-armor piercing,
is used in firearms having a barrel length exceeding that of
A longer
barrel can cause increased muzzle
the test weapon.
in
can
which
turn,
give a projectile from a nonvelocity,
the
ability
to penetrate soft body
restricted cartridge
armor.
In response to the Subcommittee's question as to how
quickly regulations implementing H. R. 5437 could be issued,
as to how much time would be required to
we are uncertain
where
proposed regulations would be approreach the point
for prescribing regulations listing
In
preparation
priate.
a
testing procedure must be estabammunition,
restricted
be
obtained, test fixtures would
lished, equipment must
and the acquisition
of additional
have to be constructed,
In addition, barrels
specialized space may be necessary.
in all needed calibers for virtually all kinds of ammunition would have to be acquired, as well as the ammunition
to be tested. Moreover, it would be necessary to consult
outside experts to develop test procedures and equipment
before regulations
are proposed.
Based upon the above, it would probably be six months,
perhaps longer, before regulations could be proposed
implement H. R. 5437. Once proposed, the regulation process
This includes a
usually takes 60 to 120 days to complete.
period, generally 60 days, and time for evaluating
review of the proposed regulation, and issuance of
the final regulation.
It is our judgment that the end product
would be difficult to achieve, would include many cartridges
that are commonly used for sporting purooses and would invariably fail to include certain cartridges that could, under
certain different conditions, be able to penetrate soft body
comment
comments,
armor.
respect to "Devastator" or other exploding bullets
we cannot conclude at this point in time that this ammunition
ooses any more of a serious problem or threat than other
However, the Subcommittee may be intertypes of ammunition.
ested to know that small arms projectiles containing explosive
materials designed to explode on impact already are regulated
under existing law administered
and enforced by the Department
and ATF. Aside from the fact that the ammunition
is subject
to regulation under the Gun Control Act, the explosive ingredients of such ammunition constitute "explosive materials"
under Title XI of the Organized Crime Control Act of 1970
(18 U. S.C. Chapter 40). Among other things, Title XI requires
licensing of those engaged in the business of importing,
manufacturing
and dealing in such materials and permits for
others who ship, transport, or receive explosive materials
In other words, . a dealer in explodin interstate commerce.
ing bullets must be licensed under Title XI and may only
distribute the ammunition in interstate commerce to other
Furthermore, these materials must
licensees or permittees.
be stored safely and securely in conformity with Federal
is exempt
regulations.
Although "small arms ammunition"
from regulation under Title XI, "Devastator" bullets do
not constitute exempt ammunition since their high explosive
ingredients are not treated as small arms ammunition
With
components.
In the Secret Service, protective armor is not viewed
as a panacea for the inherent dangers associated with Secret
It
Service protective and investigative responsibilities.
is merely a tool to help reduce the incidence of injury to
person being protected or an employee of the Secret Service
in the event that all other security measures fail.
a
The Service depends primarily on security arrangements
prior to the visit of the protectee to prevent injury to
that protectee, i. e. , intelligence gathering, physical security,
check points, locks, special lighting, explosives detection,
counter-sniper support, magnetometers, etc. The Service has
made
for a long period of t ime the fact that soft body
is not designed to defeat all handgun cartridges.
Intelligence regarding utilization or possession of
armor-piercing bullets by terrorists groups is classified
information.
I would like to suggest, Mrs Chairman, the
information in this matter be handled in Executive Session.
Nr. Chairman, let me conclude by stating in summary
that we are not certain that this legislation — H. R. 5437
will be effective in proscribing ammunition which can penetrate soft body armor. We do have a concern about the
availability of armor-piercing ammunition in the hands
of people who want to harm others'
With this in mind,
recognized
armor
the Treasury
of
some
Department
of the
used primarily
several manufacturers
armor-piercing bullets
have asked these manufac-
has contacted
more commonly
in handguns.
known
We
turers to voluntarily restrict their sales to legitimate
law enforcement organizations
at the Federal, state and
local level and to the armed services. We have asked them
The
not to make sales to Federal firearms licensees.
I do not suggest that
response so far has been excellent.
this is a full solution to this problem. However, we believe
In the meantime,
that it is a step in the right direction.
we are continuing
to explore with the Justice Department
We will,
of course, report
other legislative alternatives.
to the Committee if and when we are better able to deal
with this issue by means of legislation.
have also been asked to comment on H. R. 2280 and
5392, which are bills authorizing the Secretary of
the Treasury to conduct a study of handgun ammunition
manufactured
in, or imported into the United States, to
determine which have the capacity to penetrate bulletproof vests commonly used by most enforcement officers.
There were previous studies conducted by the Department of
the Army for the Department of Justice at the cost of
From these studies and others
approximately $1. 4 million.
and
which exists in law
knowledge
expertise
the
and from
at
the
Federal,
state
and
local levels, we know
enforcement
bullets
of
which
the
to oenetrate
have
capacity
of a number
vests.
The
as
indicated
problem
arises,
above,
bul]. et-proof
define
to
what
it
we
wish
to
is
prohibit.
in the effort
about the value of these bills in light of
We have doubts
known and whetner
already
or not the amount of
information
be
sufficient
would
to
do
worthwhile
a
study if
S500, 000
indeed
is
needed.
another one
We
HER.
At this time, Mr. Chairman,
I or one of my associates
from ATF and the Service would be pleased to attempt to
answer any questions which you or the members of the Subcommittee might have.
leportinent of the Treasury ~ Washlnclton,
FOR RELEASE AT 4: 00 P .
M ~
O.C. ~ Telephone 566-2041
March 30, 1982
TREASURY'S WEEKLY BILL OFFERING
of the Treasury, by this public notice,
for two series of Treasury bills totaling approximately $9, 400 million, to be issued April 8, 1982.
Th is
of fering will result in a paydown for the Treasury of about $75
million, as the maturing bills are outstanding in the amount of
$9, 479 million, including $1, 065 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1, 479 million currently held by Federal
Reserve Banks for their own account. The two series offered are
as follows:
The Department
invites tenders
bills (to
date) for approximately $4, 700
of bills dated
January
8, 1982
in the amount of
(CUSIP No . 912794 BD 5 ), currently outstanding
$4, 929 million, the additional and original bills to be freely
interchangeable .
91-day
million,
representing
7, 1982,
bills (to
maturity
an additional
amount
and to mature
July
date) for approximately $4, 700
additional amount of bills dated
October 7, 1982
(CUSIP
to mature
October 8, 1981,
in the amount of $5, 251
outstanding
No . 912794 AZ 7), currently
million, the additional and original bills to be freely
interchangeable .
182-day
million,
representing
maturity
an
and
series of bills will
for cash and in exchange
Tenders from
for Treasury bills maturing April 8, 1982.
Federal Reserve Banks for themselves and as agents for foreign and
international monetary authorities will be accepted at the weighted
Additional amounts
average prices of accepted competitive tenders.
Reserve
Banks, as agents for
of the bills may be issued to Federal
to the extent that
authorities,
foreign and international monetary
accounts
exceeds the
the aggregate amount of tenders for such
them
held
.
by
aggregate amount of maturing bills
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
on the records either of the
and in any higher $5&000 multiple,
and
Branches, or of the Department of the
Federal Reserve Banks
Both
Treasury
li-707
.
be issued
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 Standard time, Monday,
April 5, 1982.
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 .
.
Each tender must be for a minimum of $10,000 . Tenders over
$10,000 must be in multiples of $5, 000 . In the case of competitive tenders the price offered must be expressed on the basis of
100, with three decimals, e .g . , 97 .920 . Fractions may not be used
and dealers who make primary markets in
Banking institutions
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
as of 12:30 p .m . Eastern time on the day of 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
No
in the auction
deposit need accompany
tenders
.
from incorporated
banks
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
and
accompanies
the tenders
.
.
Public announcement will be made
the Department of the
Treasury of the amount. and price range byof accepted
bids. Competitive bidders will be advised of the acceptance or rejection'
of
their tenders. The Secretary of the Treasury expressly reserves
th«ight to accept or reject any or all .tenders, in whole or in
parti and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on
April 8, 1982,
in cash or other immediately-available
funds
or in Treasury bills maturing
April 8, 1982 '
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'
Section 454(b) of the Internal Revenue
the
of discount at which these bills are sold isCode,
considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share
acquisition discount must be included in the Federal income oftaxthe
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer 's
basis (cost) for the bill. ' The ratable share of this discount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill.
If the gain on the sale of a bill exceeds the taxpayer 's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
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
Under
amount
Debt.
)partment
of the Treasury
FOR IMMEDIATE
~ Washinc)ion,
D.C. ~ Te)ephone 566-2048
March 30, 1982
RELEASE
RESULTS OF TREASURY'S AUCTION
OF 20-DAY CASH MANAGEMENT
BILLS
$8, 016
million of 20-day Treasury bills to
and to mature April 22, 1982, were
accepted at the Federal Reserve Banks today. The details are as
follows:
for
Tenders
be issued
on April
2, 1982,
RANGE
Price
99. 198
99. 189
—
99. 192
Average
Tenders at the
High
Low
OF ACCEPTED COMPETITIVE
Discount
Investment Rate
Coupon-Issue
(Equivalent
Rate
14. 436'
14. 598%
14. 544%
—
—
low
price
BIDS:
14. 75%
14. 92%
14. 87%
were
allotted
82%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
(In Thousands)
Location
Boston
New
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS
R-708
Received
Accepted
000
$40,
28, 500, 000
6, 941, 700
40, 000
20, 000
1, 645, 000
10, 000
407, 300
2, 640
12, 000
35, 000
25, 000
1, 355, 000
619, 000
$31, 637, 000
$8, 015, 640
Yield)
iepart~ent of the Vreosiiry
For Release
Expected at
~
Washington,
D.C. ~ Telephone 566-204%
on Deliver
9:00 a.m. EST
U
31, 1982
March
STATEMENT OF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ENERGY, ENVIRONMENT AND
OF THE
HOUSE SMALL BUSINESS COMMITTEE
Mr. Chairman
I
and Members
SAFETY
of the Subcommittee:
here today to discuss the views of the Treasury
Department on guarantees by the Small Business Administration
development bonds issued to
(SBA) of tax exempt industrial
finance pollution control facilities.
am
Department opposes SBA guarantees of tax
control obligations.
In addition, the
Administration
is now proposing that Congress enact
additional restrictions on all types of private purpose tax
Before commenting upon our particular concerns
exempt bonds.
with respect to pollution control obligations and the SBA
program, I would like to review some of the factors that have
caused us to conclude that additional limits are needed on
all types of private purpose tax exempt bonds.
The Treasury
exempt pollution
There has been a virtual explosion in the last five or
six years in the issuance of private purpose tax exempt
This includes bonds issued for single family
obligations.
housing, student loans, and nonprofit hospitals and colleges
as well as industrial development bonds (IDBs). More than
$25 billion were issued in 1981, up from $8. 5 billion in
1976. Private purpose bonds accounted for 24 percent of the
long term tax exempt, bond market in 1976, but rose to 48
percent in 1981. The Treasury Department estimates that 55
percent of the tax exempt bonds sold in 1982 will be for
private activities. The volume of tax exempt pollution
control obligations issued for private businesses was $3. 8
billion in 1981, representing approximately 7 percent of the
entire long term tax exempt market, and will be an estimated
$4. 2 billion in 1982.
R-709
largest growth has occurred in small issue IDBs,
which allow virtually any business to obtain tax exempt
Small issue IDBs
financing for land or depreciable property.
have been used extensively by the largest corporations in the
For example, one of the largest retailing chains
country.
has used small issue IDBs to finance $240 million of
facilities since 1976. Small issue IDBs marketed in 1981
were an estimated $10.5 billion of the total $25 billion of
private purpose bonds. Small issues represented 20 percent
of the entire long term tax exempt market in 1981, as
compared with only 4 percent in 1976. The estimated revenue
loss to the Federal Treasury from small issue IDBs alone will
be $1.65 billion in fiscal 1982 and will exceed $2. 1 billion
in fiscal 1983 unless additional restrictions are imposed.
Moreover, we estimate that less than 15 percent of the new
investments made in 1981 that were eligible for small issue
This
IDB financing were in fact financed by that method.
means that the potential for future growth in the volume of
The
small
issue IDBs remains enormous.
proliferation of private purpose tax exempt bonds—
demand for tax exempt bonds by
institutional investors and the tax rate reductions and other
structural tax changes enacted in the Economic Recovery Tax
Act —has contributed to a significant narrowing of the
difference in interest rates between tax exempt and taxable
bonds. While the tax exempt rate historically has been about
65 to 75 percent of the taxable rate, issuers of tax exempt
bonds currently have to pay about 80 to 85 percent of the
taxable rate. This erosion of the relative advantage of tax
exempt financing has increased significantly
the interest
costs incurred by state and local governments in financing
essential public services and facilities.
The increasing volume of private purpose tax exempt
bonds has also caused mounting Federal revenue losses. We
estimate that the total Federal revenue loss from private
purpose tax exempt bonds outstanding
in fiscal year 1981 was
$3. 22 billion and will be $4. 19 billion for fiscal 1982.
The proliferation
of tax exempt bonds has made them less
cost-effective as subsidy mechanisms for private activities.
Tax exempt financing has often been criticized as an
inefficient means of granting Federal subsidies. The revenue
loss to the Treasury from the income tax exemption is
significantly greater than the interest cost savings to users
of the bond proceeds. For example, if we assume that an
investor in the 40 percent bracket purchases a bond bearing
interest at 70 percent of the taxable rate, the Treasury
loses $1.33 for every $1.00 of interest savings to the bond
user. Even more of the benefit is siphoned off by investors
as tax exempt bond rates grow closer to taxable rates, as
they have recently.
The
along with reduced
These and other considerations have caused us to
conclude that additional restrictions are needed to reduce
the growth of private purpose tax exempt obligations.
The
specific details of our proposal are described in the general
and technical explanations
released by the Treasury
Department on February 26. Copies of those explanations are
attached to this statement.
special provision for small business under our
relating to small issue IDBs should be of particular
interest to this Subcommittee. Under the Administration's
proposal, small issue IDBs will be retained for businesses
that have capital expenditures of less than $20 million over
the 6-year period from 3 years before to 3 years after the
issuance of the bonds. In addition, no single firm will be
able to have over $10 million of IDB-financed facilities at
small
However, subject to these restrictions,
any one time.
issue IDBs could be marketed as a part of a composite or
umbrella bond issue. These changes will make it easier for
small and medium-sized businesses to use small issue IDBs and
will prevent the use of small issue IDBs by large
corporations that are able to raise funds readily in capital
markets without an interest subsidy from the Federal
The
proposal
government.
I would now like to discuss the policy considerations
relating specifically to tax exempt financing for pollution
control facilities and the SBA guarantee program.
It is often argued that Federal assistance for
construction of pollution control facilities is justified
because pollution control requirements are special burdens
However, in our view
businesses by government.
be regarded as part
should
pollution
the cost of controlling
and
should
be reflected in
of the cost of producing goods
of goods produced by
The consumption
market prices.
techniques that create air or water pollution as a by-product
will be excessive if the market prices of those goods do not
reflect all production costs. Thus, providing tax exempt
financing for investments in pollution control facilities
produces undesirable economic distortions, in that it results
in a higher level of investment in polluting industries and a
lower level of investment in other economic activities.
Another result of the subsidy is that part of the cost of
controlling pollution is borne by taxpayers in general,
rather than by the purchasers of the goods produced.
imposed
on
also
Tax exempt financing for pollution control
has been justified in the past by the need
facilities
to assist
businesses in bringing existing plants into compliance with
Now, however, most
control requirements.
new pollution
pollution control bonds are issued to finance pollution
control facilities for new plants rather than existing
plants. Thus, the "transition rule" argument for the tax
exemption is no longer applicable in the majority of cases.
Furthermore, it is difficult in many cases t. o determine what
portion of a newly constructed plant constitutes pollution
control facilities, particularly if the plant employs new or
innovative processes or equipment rather than facilities of a
type that have previously been recognized as qualifying for
tax exempt financing.
This inevitably creates an undesirable
bias against new technology and in favor of particular types
of pollution control equipment which are recognized as
eligible for tax exempt financing.
Providing Federal guarantees for tax exempt obligations
raises additional problems. Placing the credit of the United
States behind an obligation that is exempt from Federal
taxation creates a security which is superior in the market
to the direct obligations issued by the Federal government.
A Federally
guaranteed tax exempt obligation also has a
distinct competitive advantage over all other tax exempt
obligations issued by State and local governments.
As a
result, Federal guarantees of tax exempt, obligations increase
the borrowing costs of Federal, State and local governments.
Because of these and other considerations,
the Treasury
Department has consistently opposed Federal guarantees of tax
exempt obligations.
Moreover, the Public Debt Act of 1941
prohibits the Federal government from issuing tax exempt
obligations directly; and numerous other statutes preclude
Federal guarantees of tax exempts in other contexts.
Allowing SBA guarantees of tax exempt pollution control
obligations would be directly contrary to the policies
expressed
by Congress
in those enactments.
Finally, in these times of budgetary constraint, we
believe that SBA guarantees of tax exempt obligations would
represent an unwarranted duplication of Federal benefits.
Both the SBA guarantee and the income tax exemption are
implicit subsidies that reduce the interest rate that
borrowers must pay. In view of the pressures on the tax
exempt bond market and the inherent inefficiencies involved
with using tax exempt financing as a subsidy mechanism, we
believe that it is appropriate for the Small Business
Administration
to restrict its guarantee program to taxable
financings.
I will
be happy
to answer your questions.
21TAX-EXEMPT BONDS
FOR PRIVATE ACTIVITIES
General Explanation
Current
Law
The interest on State and local bands issued for piivate
activities is generally taxable, with certain exceptions
enumerated in the Code. The exceptions include three general
categories of tax-exempt revenue bonds for private purposess
1) industrial development bonds that qualify as exempt small
issues' 2) industrial development bonds issued to finance
certain exempt activities' and 3) certain other private
purpose revenue bonds. A State or local gavernment
obligation is an industrial development bond (IDB) if all or
a ma)or portion af its proceeds are to be used in the trade
ar business of a non-exempt person (that is, a person other
than a State or local governmental unit ar an organixation
exempt from tax under section 501(c)(3) af the Code) and the
obligation is secured by or is to be repaid from trade or
business property or receipts.
Exe t Small Issues: Exempt small issue IDB's can be
issued n amounts of $1 million or less for the acquisition,
construction or improvement of land or depreciable property
The $1 million
located in any ane city or county.
limitation can be increased to $10 million at the election of
the goveaunental issuer provided the aggregate amount af
small issues outstanding and capital expenditures
tother than those financed with exempt anall issues) of the
business in the particular Jurisdiction do not exceed
$10 million over. a 5-year period. Current law haposes no
restrictions on the type or location of business activities
that may be financed with exenpt small issues.
Industrial Revenue Bonds For Exe t Activities: Current
or terest on
law also provides an income tax exemption
bonds used to finance certain specific "exempt activities.
Some af these bonds are used to provide quasi-. public
facilities such as airports and mass commuting facilities,
but others are used for strictly private purposes such as
industrial parks and pollution control facilities. No
limitation exists on the aneunt of these obligations or the
locations in which they may be used.
exempt,
Pu ose Revenue Bonds:
Specific statutory
ow
tax-exempt
a
xnancing
for student
current
y
exempt ons
that
for
tax
organizations
exemption
qualify
loa"~ and for
The
section
5~1(c)(3).
principal
501(c)(3)
under section
organixations that use tax-exempt financing are Private
and private non-profit educational
non-profit hospitalsaddition,
mortgage revenue bonds to finance
In
institutions.
~her private
~22~
certain owner-occupied housing are eligible for tax-exempt
financing through 1983.
Reasons
for
Chance
of tax-exempt, bonds issued for
users has grown rapidly during the past five
non-governmental
years. The largest growth has occurred in small issue ZDB's,
which allow access to tax-exempt financing for any type of
trade or business. Continued growth in the use of tax-exempt
bonds for private purposes is expected unless actions are
taken to limit their use. The expansion of tax-exempt bonds
for private purposes affects the market for tax-exempt
securities ae a whole, raising the cost of State and local
governments of financing traditional public services'
Many of the private activities using tax-exempt
financing would not have received direct Federal or local
Access to tax-exempt financing is
government assistance.
offered in almost all political jurisdictions, either by
State or local governments or by authorities acting on their
behalf. These authorities are often established for the sole
purpose of issuing tax-exempt revenue bonds for .private
entities and generally serve as mechanisms for avoiding local
The volume
voter approval
requirements.
Providing tax exemption
private purpose obligations
purposes f.n some instances.
for the interest
may
on
serve legitimate
certain
public
Current law, however, does not
require the showing of any genuine public purpose for the
project to be financed with tax-exempt obligations. A
requirement that private purpose tax-exempt obligations be
shown to serve the needs of the local community would improve
the uses of the Federal tax benefit and would limit the
volume of such obligations,
thus reducing their impact on the
market for traditional municipal bonds and on the Federal
government's revenue loss.
,
Tax exemption of interest on bonds issued by State or
local governments is an important element of the Federal
system of government.
However, State and local governments
have in many cases become merely conduits through which
rivate parties gain access to the tax-exempt bond market.
n addition. some local issuing authorities have profited
from their ability to pass on the tax exemption by obtaining
fees for authorixing bonds for facilities located outside of
their own jurisdictions.
Private purpose tax-exempt
obligations have also been used to obtain substantial
arbitrage profits on reserve funds and funds held during
temporary construction periods.
availability of tax-exempt financing for exempt
and other private purposes causes distortions
in
the allocation of scarce capital resources. The ability to
The
activities
~23~
obtain a lower cost of borrowing for certain activities, for
example, businesses requiring pollution control facilities,
through the use of tax-exempt financing creates a bias in
favor of investment in those activities.
Zn effect, those
favored activities, for example, businesses that create
pollution, are subsidixed at the expense of other activities.
Thus, the allocation of capital investments is based upon
government decisions rather than their relative economic
Moreover, in combination with the Accelerated
productivity.
Cost Recovery System (ACRS) provided by the Economic Recovery
Tax Act, tax-exempt financing can result in a substantial
negative tax or subsidy for qualifying activities.
Presently, eligible activities are able to add the tax
benefits from ZDB's to the tax benefits from ACRS.
Permitting tax-exempt financing for private investments that
also qualify for ACRS would allow companies to borrow at
tax-exempt interest rates for investments that provide
generally tax-free income. Those companies could then deduct
'the tax-exempt interest to shelter income from their other
assets-
contrast with other categories of private purpose
bonds, exempt small issues may be used in limited
dollar amounts for any type of investment in depreciable
property or )and. Large businesses presently are able to
finance numerous facilities nationwide with small-issue ZDB's
because .the dollar limit applies only to a single city or
countyMany large firms are using small issue ZDB's even
though they are able to raise funds readily in capital
markets without a government subsidy or guarantee.
~Pro osal
Zn
tax-exempt
limits tax exemption for private purpose
currently eligible under section 103 to those
issued under the following conditions:
(1) The highest elected official or legislative body,
for example, the mayor or city council, of the
governmental unit issuing the bonds and in which the
facility is located must approve the bonds after a
public hearing. Alternatively, the public approval
requirement could be met by a voter referendum on
the bonds to be issued for the particular facility.
after December 31, 1985,
(2) Zn the case of bonds issued make
a contribution or
the governmental unit must
commitment to the facility financed with tax-exempt
bonds. The contribution could take the form of a
cash payment, tax credit or abatement, provision of
additional services, or payment of the bond issuance
expenses with a value on the date the bonds are
issued equal to one percent of the face amount of
the bonds. Alternatively, the issuing governmental
The proposal
obligations
-24unit can satisfy the commitment requirement by
insuring ar guaranteeing the bonds or by designating
the bonds as general obligations af the State or
local government.
(3) The costs of depreciable assets financed with
tax-exempt bonds must be recovered using
straight-line depreciation aver the extended
recovery period used for earnings and profits
computation
purpases.
issue ZDB's will be limited to small
businesses. A small business is defined as a
business that has capital expenditures of less than
Zn addition,
$20 million over a six-year period.
bonds would not qualify as exempt small issue ZDB's
of
if the business will have mare than $10 million
ZDB's outstanding after issuance af the bands.
(5) With these restrictions, small issue ZDB's could be
sold as a part of a composite or umbrella issue of
(4)
Exempt small
bonds-
bond must be in registered form and information
concerning the issuance of the obligations must be
reparted by the State or local government to the
(6) Each
Internal
Revenue
(7) Restrictians
Service-
yield from the use of
the proceeds af the obligations are extended to
reserve funds and funds held during the temporary
construction period. Bond costs may not be taken
into account in determining the yield for purposes
of the arbitrage limitations.
(8) Except as indi. cated above with respect to the
financial contribution ar commitment requirement.
the additional restri. ctians generally apply to
private purpose bonds issued after December 31,
1982. Swever, the restrictions will not apply to
single-family mortgage subsidy bonds issued before
January 1, 1984, since such bands after 1983 will be
denied tax~xempt status.
Effects af Pro sal
on the investment
The proposal will impose needed limitations on access to
the tax-exempt market for private activities.
The volume of
tax-exempt financing for private purposes has grown
enormously during the past five years. New issues of private
purpose tax-exempt bonds rose from $8. 5 billion in 1976 to
over $25 billian in 1981, as shown in the following table.
The dollar volume af private purpose bonds increased at an
annual rate of 25 percent between 1976 and 1481. while public
«25»
bond volume rose at a 1 percent annual rate during
the same period. Private purpose bonds accounted for 48
percent of the tax-exempt bond market in 1981 ccaapared with
only 24 percent in 1976.
purpose
in Private Purpose Tax-Exempt Financing
1976 to 1981
Growth
a
e
Volume of Tax-Exempt
Sew Issues
s
a
Sousing
Private Hospitals
Student
Loans
Control
Issue IDB's
Tatal
Pollution
Small
($ billions)
19 6
1981
$3.0
19
0' 1
2'1
~
1.4
~5
$6 ~ 9
3.5
1' 0
3 8
10 ~ 5
25 ' 7
s
a
e
Annual
Rate of Growth
t 1981
(In Percent)
Between 1976
e
18%
13
58
13
50
25
in private purpose tax-exempt bonds will
of tax-exempt financing for
traditional governmental purposes and'will reduce the growing
Federal revenue loss attributable to the increasing valume of
The benefit from
private purpose tax-exempt obligations.
been a
borrawers
has
to
traditionally
tax»exempt financing
savings of 30-35 percent of the taxable interest rate. The
benefit from tax-exempt financing has fallen to 15-20 percent
af the taxable rate on 20-year obligations in 1981, due in
large part to the high volume of private purpose tax-exempt
bonds. Lowering the volume of private purpose tax-exempt
bonds vill reduce the interest rates necessary to attract
funds to the tax-exempt market,
The reduction
help restore the benefit
.
requires business users to choose between
financing and the tax savings from
the benefits af
allowances.
The result is to make
depreciation
accelerated
the after-tax cost of capital for businesses using ACRS
without taxexempt financing nearly equal to the cost for
For example, a firm choosing to
those using IDB financing.
finance a plant with IDB's after the propasal will have tax
of each dollar invested
benefits equal to 23-24 percent
IDB's. Similarly, for firms
without
percent
26
with
compared
ACRS
(5-year
recovery property), the tax
equipment
financing
48-54 percent with ZDB s
invested
will
be
dollar
savings per
proposal compared with 49 percent without IDB ' s
yithout the proposal the combination of tax-exempt financing,
and the investment tax credit for equipment results in
savings of 61«67 percent per dollar invested, which
future income tax attributabl e to the
o f fsets not only the the
tax on income from other investments.
but also
The propasal
tax»exempt
5
~
-28These restrictions on the use of tax-exempt bonds by
private entities are consistent with the goals of the
Economic Recovery Tax Act. ACES provides tax incentives
similar to tax-exempt financing, but does so for all capital
investments, not )ust a select group
ACRS is, therefore,
an
appropriate substitute for tax-exempt financing.
Sub]ect to the additional restrictions on IDB's
generally and small issue IDB's in particular, small issue
IDB's would be allowed to be sold as a part of a composite or
umbrella issue of bonds. When these bonds are limited to
small companies, it is appropriate to permit the marketing of
packages of these issues to reduce transaction costs and to
provide a degree of diversification that may decrease the
risk premiums demanded by investors.
Revenue
Estimate
Fiscal Years
1982
1983
1984
1985
1986
1987
l
3' 2
t$ billions)
0' 2
0.3
l. l
2
TAX-EXEMPT BONDS FOR PRIVATE ACTIVITIES
Technical Explanation
af the
Summa
Ta insure
Pro
sal
that tax-exempt obligations
issued tor private
activities serve valid public purposes, the obligations must
be appioved, after a public hearing by the highest elected
official ar legislative body af the jurisdiction in which the
project is to be located or by a voter referendum.
For bonds issued after December 31, 1985, the
governmental unit must make a financial contribution or
commitment to the project.
The contribution may be a direct
grant, tax abatement, ar provision of additional services
having a value of at least ane percent of the face ameunt of
the bonds. The financial commitment may take the form of a
general abligation of the governmental unit, or primary
guarantee or insurance of the bonds.
Depreciable assets financed with tax-exempt bonds must
be written off using the straight-line method over the
extended cost recovery period used for computing earnings and
profits.
Small issue ZDB's will be limited to small businesses
no more than $20 million of capital expenditures
during a six;year period and have no more than $10 million
industrial development bonds outstanding immediately after
that have
of
the issue.
The bonds must be
must be reparted to the
issuance of the bonds.
in registered form and information
Internal Revenue Service upon the
Restrictions will be placed
profits.
earn arbitrage
on the
ability of issuers to
Except as otherwise indicated abov~, the additional
generally would apply to bonds issued after
requirements
31, 1982.
Detailed Descri tion
December
The proposal
imposes
four additional
requirements
on
State and local governments issuing tax-exempt bonds for
private purposes. Private purpose tax-exempt bonds subject
these requirements include industrial development bonds
(se«ion 103(b) (2) ): qualified scholarship funding bonds
(section 103(a)(2)); and bonds issued for use in a trade
or business by section ~01(c)(3) organizations (section
103(b)(3)(B))
~
A
fifth
requirement
prohibiting
double
dipping"
of tax benefits will apply to all industrial
development bonds ~ A sixth requirement limits small-issue
Mortgage subsidy bonds (section
IDB's to small businesses.
January
lr 1984 (the "sunset" date for
103A) issued before
to these requirements.
subject
such bonds), are nat
additional requirement is that the band issue
must be approved by the highest elected official or
legislative body of the governmental unit hy ar on whose
behalf the bonds are issued and in which the project financed
by the bonds is to be 1ocated (ar in which the eligible
sellers of student loan notes are located, in the case of
qualified schalarship funding bands) ~ To satisfy this
requirement, bonds issued by or on behalf of a state could be
and bands
approved by the governor or the State legislaturet
be
could
approved
a
of
city
by the
issued by or on behalf
.
the
alternative,
an
As
cauncil.
mayor or the elected city
voter
met
a
by
public approval requirement could be
referendum on the bonds to be issued for the particular
project. Any bonds issued by or on behalf of more than one
governmental unit must be approved by each governmental unit
involved.
The public approval requirement would be an
additional requirement af the Pederal tax law and'would not
affect the procedures used to approve bonds under applicable
The
first
local law.
Prior to approval of a band issue, a public hearing must
be held to give members of the public the apportunity to
Notice of the
comment upon the proposed bond issuancepublic hearing must be given prior to the date the public
hearing is held. Similarly, natice must be given to the
public promptly after the approval of the .bands. Cenerally,
the notice wauld be sufficient if given in the same manner as
required for other legal purposes, for example, by
Both the notice of the
advertising in local newspapers.
the
notice
of
of the bond issue
and
.
approval
public hearing
must describe the facility or activity to be financed by the
bond issue and must specifically state the public purpose or
purposes that will be served.
is that the
The second additional requirement
governmental unit issuing the bonds must make a financial
contribution ar commitment to the project. This requirement
will apply to bonds issued after December 31, 1985. A
contribution to the facility or project must have a present
value equal to one percent of the face amount of the bond.
The contribution can take the form of a cash payment, tax
credit or abatement, provision of additional services, or
The present value of
payment of bond issuance expenses.
scheduled future contMibutions to the facility or project
must be determined by discounting the future contributions
by
the yield on the bands- The contribution must be
specifically earmarked for the facility or project and must
be approved
by the
elected official or legislative
bady that
~29~
the band issue. General tax reductions ar regular
services provided to all facilities are not counted for this
purpose. However, general tax exemptions provided for exempt
organixations under State law could be used to satisfy the
contribution requirement with respect to pro)ects for exempt
arganixations.
The governmental
unit may nat be reimbursed
by the user of the facility for any contribution used to
satisfy this requirement.
approves
As an alternative
means of satisfying the second
additional requirement, the issuing gavernmental unit can
make a financial commitment
to the prospect in either of twa
The financial commitment requirement could be
ways
satisfied if the bonds issued are general obligation bonds of
the State or lacal government, or if the State ar local
government assumes responsibility
as the primary insurer ar
guarantor of the bonds.
~
third additional requirement is that the bonds must
form and the issuance of the obligations
by the State ar local government to the
Internal Revenue Service.
The fourth requirement
is related to the unlimited
yields issuers presently can earn on private purpase
tax-exempt bond proceeds during the temporary construction
(section 103(c) (4)). The
period and on reserve funds
proposal eliminates the exceptions for the temporary
construction period and reserve funds for determining whether
the bonds are arbitrage bonds. The yield calculation for
arbitrage limitation purposes cannot take bond issuance costs
into account.
The
be in registered
must be reparted
A limitation
applying to all industrial development bonds
(section 103(b)(2)) is that the costs of depreciable asse4s
financed with tax-exempt ZDB's must be recovered using the
straight-line method over extended earnings and profit
recovery periods (section 312(k), as amended by Section 206
of the Economic Recovery Tax Act af 1981). Assets will not
qualify for treatment under the Accelerated Cost Recovery
System (ACRS) if they are subject to IDB financing when
placed in service by the taxpayer even though the ZDB
financing was originally obtained by another person or is
Assets qualifying for the investment
subsequently paid off
tax credit under present law (section 38) will remain
even though they are financed with
eligible for the credit
The
allowance for any asset
depreciation
tax-exempt bondsZDB's
tax-exempt
shall be the amount determined
financed with
method (using a half-year convention
under the straight-line
other than the 15-year real property,
property
of
case
in the
to
value), using the following
salvage
regard
without
and
periods:
recovery
30ACRS
Classification
3-year
5-year
10-year
15-year
15-year
Straight-Line
Period
property
property
property
real property
public utility property
if
Recovery
IDB Financed
5 years
12 years
25 years
35 years
35 years
For depreciable assets that are not completely financed with
IDB's the denial of ACRS will apply only to the portion
financed with tax-exempt debt. Special rules will be
provided for determining which assets are deemed to be
financed with IDB's.
The
final limitation
on
private purpose tax-exempt bonds
restricts the use of small issue IDB's (section 103(b)(6)) to
small businesses, defined as those with capital expenditures
of less than $20 million during the period from three years
before through three years after the issuance af the bonds.
In addition, bonds will not qualify as exempt small issue
IDB's if the businesy would have more than $10 million of
industrial development bonds autstanding immediately after
the sale of the bonds (excluding any previously issued bonds
redeemed with the proceeds af the bonds in question)
The
~
$1 million and $10 million
continue to be applicable,
disqualified solely because
compasite or umbrella issue
limitations of existing law will
except that bonds will not be
they are sold as a part of a
of bands-
Effective Date
Except as otherwise
noted with respect to the financial
or commitment requirement, these provisions will
apply to all private purpose bonds issued after December 31~
1982, including refunding bonds. However, the provisions
will not apply to single-family mortgage subsidy bonds issued
before January 1, 1984, since such bonds after 1983 will be
contribution
denied tax-exempt
status.
of the TreasurV
apartment
FPR INMFDIATF
Ncishingion,
RFLFASE
Narch
yednesdav,
~
31,
1982
Contact:
SUBMITS GOLD COMYIcSION
SFCRETARY RFCAN
O. C. o Telephone
566-204'
Nary Boswell Watkins
566-204l
REPORT TO CONGRFcS
Treasury Secretary Donald T. Reaan today submitted the
report of the Gold Commission to the President of the Senate and
the Speaker of the House of Representatives
The U. S.
in
Commission
directed the establishment of the Gold
96-389 in order to assess the role of
aold in the domestic and international
monetary systems and to
study the U. S. pclicies related to gold.
Secretary Reaan chaired
the Commission which included seven members of Conaress, three
members of the Board of Governors of the Federal Reserve System,
two members of the Council of Fconomic Advisors and four
distinauished
private citizens. The Commission held its first of
nine meetings on July 16, 1981, and thereafter met on
Conaress
Public
Law
a monthly basis.
Twenty-three witnesses presented
approximately
In addition, a number of
testimony at two of these meetinas.
writter. points of view were submitted bv members of the public.
The report consists of an Introduction,
which includes the
Commission's recommerdations,
and four. chapters.
Six members of
in order to clarify
the Commission drafted minority statements
their views, and these appear in an amex of. the report. Another
annex
contains
written
statements
submit.
that the public
The report may be obtained from
Documents, U. S. Government Printina
048-000-00353-2, Phone Number l'202)
records of
transcripts,
all
Comr.
was
invited
to
of
the Superintendent
Office, Stock Number
783-3238. The c'etailed
ission proceedings,
staff
includina
meetina
ard all papers
in an annex to the
written testimony,
to the Commission, are cataloaued
report and are available for public inspection at the Library of
Cor. aress, the National
Archives and Records Service, and the
circulated
Treasury
R710
Department
library.
memoranda
IpartNent of the Treasur
V ~
D.C. ~ Telephone 585-204
Ncmshington,
STATEMENT
DONALD
T.
BY
REGAN
SECRETARY OF THE TREASURY
GOLD COMMISSION
WEDNESDAY,
MARCH
31, 1982
As Chairman
of the Gold Commission, I have submitted today
the report of the Gold Commission to the president of the Senate
and the Speaker of the House of Representatives.
Although the Commission concluded essentially that
not favor a renewed role for gold at this time, it has
it
did
that the Treasury issue gold bullion coins of
specified weight without dollar denomination or legal tender
status, and to be exempt from capital gains and sales taxes.
recommended
In domestic policy, the majority concluded that, under
present circumstances, restoring a gold standard does not appear
to be a fruitful method for dealing with the continuing problem
of inflation.
In international
policy, the majority concluded that it
favored no change in the use of gold in the operation of present
exchange rate arrangements.
Other
specific findings
and recommendations
regarding
the
policy towards the role of gold in the domestic
and international
monetary systems are presented in this report.
These recommendations
represent the views of the majority of the
have been included
Commission.
Minority views or recommendations
where appropriate.
In many instances, the members of the Gold Commission had
differing opinions on the questions raised. This was evident in
the lively discussions we had and the many position papers that
were written.
In spite of the diversity of the group, however,
the report represents the product of the Gold Commission as a
U. S. Government's
whole.
like to take this opportunity to thank my colleagues
I
for devoting so much of their time to serve on the Commission.
testif
ied
who
would also like to thank the many individuals
I
would
before and submitted
and
It
written
statements
to the Commission.
has been an honor for me to have chaired
to have contributed in this capacity.
R-711
this
Commission
Department
of the Treasury
FOR RELEASE UPON
~
Washington,
O.C. ~ Telephone %66-2041
DELIVERY
Expected at 9:30 A. M. , EST
Thursday, April 1, 1982
STATEMENT OF
THE HONORABLE DONALD T. REGAN
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON FOREIGN OPERATIONS
COMMITTEE ON APPROPRIATIONS
OF THE HOUSE OF REPRESENTATIVES
APRIL 1
Mr. Chairman
Thank
you
and Members
for giving
me
1982
of the Committee:
this opportunity
to address you.
Mr. Chairman, under your able leadership and that of
Jack Kemp, Members of this Subcommittee were able to set aside
differences last year in order to enact the first foreign
assistance bill in three years and, in the process, further
U. S. foreign policy interests.
I know the President appreciates what you did. For my
part, I admire your achievement.
Mr. Chairman, I remember from our hearing last year
that you and your Committee prefer to have a give-and-take
in your hearing rather than to listen to a lengthy prepared
I prefer that myself.
statement.
With your permission and since Mare Leland, my Assistant
Secretary for International Affairs, has already presented
our FY 83 request, I will share with you a few ideas which
reflect my perspective on the MDBs.
R-71 2
as
I
First,
to our budget request which
for increased funding for the
stress three points:
you know
would
with regard
-- calls
MDBs,
The largest part, of the request is based on preThe
viously negotiated international agreements.
President has stressed the importance of living up
to these agreements.
reason for an increase in the request
the proposed addition of $245 million for IDA
The main
--is an
increase which is directly traceable to this Administration's decision to reduce contributions in the
early years of the sixth replenishment within the
context of fulfilling our commitments under the
agreement.
the trend of our contribution
85, when the replenishments will
have been largely negotiated by this Administration,
we plan total appropriation
request levels of about
In the longer
is
down.
term,
By FY
$1.2 billion annually.
Since becoming Secretary, I have met regularly with my
counterparts from Japan, Germany, France, and Great Britain.
The NDBs represent one of the most visible and concrete
examples of allied cooperation in international
economic
relations -- not just cooperation for cooperation's sake,
but because these institutions
serve our common interests.
Our common long term goal is to build and maintain an
international economic system that is open, growing and
characterized by increased efficiency and output. We hope
and expect that such a system will encourage the development of democratic, pluralistic
and free market societies,
such as ours.
As you know, since last year Treasury has conducted
an assessment of the MDBs. Our assessment leads us to
that the NDBs can act as catalysts in the
economic system and, indeed, references to
encouraging private investment and international
trade
are embedded in the Charters of these institutions.
the conclusion
international
We can see an example of the catalytic
role the MDBs
can play close to home and in strong support of U. S. for-
eign policy goals.
The World Bank and Inter-American
Development Bank chair consultative groups for the Caribbean and Central America, respectively, which will contribute to the President's Caribbean Basin Initiative.
While
providing a forum for donor coordination, the MDBs are also
expected to provide development assistance in the range of
$700 to $800 million
annually
to the region.
In addition to these traditional roles of donor and
coordinator, a critically important goal of the MDBs in
the future will be to encourage the private sector to
invest its ow'n capital and expertise in sound projects.
It is in this role, as a catalytic agent in the enhanceinvestment capital and producment of entrepreneurship,
tion, that the MDBs can make a significant contribution
to economic development.
A fair question
is how can the Administration be proto the NDBs
posing both a reduction in our contributions
and continued growth in lending levels.
that the NDBs can use their resources
by exercising greater selectivity
in providing loans, the NDBs can channel financing to those
countries that have adopted sound micro and macro economic
policies. Financing for countries pursuing ineffective
We
more
are convinced
effectively.
First,
policies should be curtailed,
tate, terminated.
and,
if
circumstances
dic-
Second, the MDBs should adopt effective policies to
"graduate" countries from the hard windows, when these
countries have advanced to the point that they can rely
fully on private capital flows. Similarly, countries
that have achieved the requisite level of creditworthiness, such as India, should "mature" from the soft loan
windows and should borrow from the hard loan windows.
these two policies, we can ensure that
By pursuing
scarce resources are concentrated on those countries
which can best employ them and which are in the greatest
need. And we can obtain more cost-effective development
financing from the MDBs, while limiting budgetary outlays.
The ability of the NDBs to support sound programs
will be expanded and enhanced by catalyzing private capital through cofinancing and by working more closely with
private investors.
Treasury's assessment found indications that past
overemphasis on lending targets had eroded MDB effective
ness in encouraging sound economic policies.
Our message is getting through
This is changing.
and
clear:
The World Bank is implementing
uation and maturation policies
in
many
years.
rigorously
its
grad-
for the f irst time
The United
to encourage
States has
minimum
worked
standards
hard
in the IDB
for realistic user
charges in power and transport projects. These
user charges will be designed to cover operating
and capital costs of these services.
States will no longer passively support
loans to countries pursuing ineffective economic
policies. We vetoed our first loan in the Fund
for Special Operations, opposed several other MDB
loans for economic reasons and stand ready to
oppose misdirected loans again in the future.
The United
During the course of this year, the Administration
for the hard and
will be negotiating replenishments
soft loan windows of the Inter-American Development
Bank and the Asian Development Bank. We plan to participate fully in these replenishments, but, we will
insist
Members
I
realism and restraint in future lending
Before this Administration makes any comthere will be thorough consultations with
of this Committee and other interested Members.
on
programs.
mitments,
understand
that
Members
of this Committee have
expressed a strong preference for continuing to include
the requirement for paid-in capital in the Inter-American
capital increases.
believes that reduction or eliminaThe Administration
tion of paid-in capital would reduce the budgetary cost of
U. S- participation
in the MDBs.
Reduced levels of paid-in capital would have the effect
of bringing MDB lending interest rates closer to market
levels and of shifting the program cost from non-borrowing
shareholders to borrowers, since interest-free paid-in capital would be replaced by borrowing from capital markets to
and Asian
support
Bank
lending
programs.
Our analysis indicates that the impact
integrity of the MDBs would be minimal and
by relatively modest increases in financial
on the financial
would be offset
charges.
The Congress would retain full control over callable
capital subscriptions to the MDBs No U. S. subscriptions
to callable capital could be made without approval by the
Congress in authorizing and appropriations
legislation.
Callable capital subscriptions could only be made to the
extent that the Congress provides for program limitations
~
in appropriations
acts.
to stress today that during the course
we will keep the Committee's
negotiations,
of this year's
to
continue
and
intend
consultations with
views in mind
this Committee and other interested Members on this issue.
However,
I
want
Some have asked how can we maintain
sufficient influence
to implement our policies when we are limiting our contributions to the MDBs.
The United States remains the largest contributor
to the
MDBs, and our leadership
position ensures that our views will
We believe our recommendabe given serious consideration.
tions are sound and that they reflect not only our national
interests, but the common interests of the democratic, capitalist countries, who provide the major share of resources
We are committed
to pursuing actively
to these institutions.
recommendations
in our assessment and to continuing to be
a reliable financial supporter of the MDBs.
These factors provide solid foundations
pating continued strong influence in these
for anticiinstitutions.
Last year, this Committee strengthened the Administration's hand in the MDBs by providing the first foreign
assistance appropriations act in three years. You deserve
the credit for some of the changes we are seeing in the
MDBs.
I hope we can continue to rely on your support this
together we can shape the MDBs into
effective and vigorous proponents of market-oriented econo-
year, because working
mic growth.
epartment of the Treasury ~ Washington,
FOR IMMEDIATE
D.C. ~ Telephone 566-2041
March
RELEASE
RESULTS OF AUCTION
31,
1982
OF 7-YEAR NOTES
of the Treasury has accepted $3, 253 million
million of tenders received from the public for the
7-year notes, Series D-1989, auctioned today. The notes will be
The Department
of $6, 142
7, 1982,
issued April
April
and mature
15, 1989.
coupon rate on the notes will be 14-3/8'
of accepted competitive bids, and the corresponding
prices at the 14-3/84 coupon rate are as follows:
The
The range
interest
yield
Highest yield
Average yield
Lowest
Bids
14. 38% 1/
14. 45%
14. 42%
at the high yield
Tenders
were
Prices
99. 957
99. 655
99. 784
allotted 40%.
TENDERS RECEIVED AND ACCEPTED
Location
Boston
Ne w
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San
Francisco
Treasury
Received
26, 066
$
5, 206, 397
21, 300
40, 710
37, 134
25, 086
510, 775
61, 317
12, 882
17, 691
10, 051
171, 291
1, 278
(In Thousands)
~Acce
ted
13, 066
2, 816, 847
14, 700
25, 710
34, 834
24, 586
137, 175
54, 017
12, 562
17, 686
10, 051
90, 691
1, 278
$3, 253, 203
$6, 141, 978
includes $535
The
$3, 253 million of accepted tenders million
of competiand
718
$2,
million of noncompetitive tenders
investors.
tive tenders from private
to the $3, 253 million of tenders accepted in
Zn addition
the auction process, $75 million of tenders were accepted at the
average price from Federal Reserve Banks as agents for foreign
monetary authorities for new cash.
and international
1/ Excepting 1 tender of $10, 000.
Total s
R-713
of the Treasury
Oepartment
FOR IMMEDIATE
~
WashinQton,
D.C. ~ Telephone 566-2640
RELEASE
REMARKS BY THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
DEPARTMENT OF THE TREASURY
BEFORE THE CONNECTICUT BUSINESS INDUSTRIES ASSOCIATION
AND CONNECTICUT
CHAMBER OF COMMERCE
AT THE ANNUAL
CONNECTICUT BUSINESS DAY CONFERENCE
LIBRARY OF CONGRESS
THURSDAY, APRIL
1982
1,
As one whose home for 18 years was in Connecticut,
it gives
great pleasure to speak to you tonight. As both neighbor
to New York City and gateway to New England, Connecticut provides
a fine mix of values which are manifested in its business life
a dynamic, farsighted appr'oach to business tempered by oldfashioned Yankee realism.
me
I should also add that few states equal the Nutmeg state
in physical beauty -- from Sharon and Lakeville in the Northwest
to Mystic in the East. And your institutes of higher learning
including one in New Haven where I spent four years -- are second
to none. In sum, you have chosen a great place to work, to live
and to raise your families.
Connecticut has changed a lot since I was a boy in
Fairfield County in the early 1950's, as has the nation.
In fact, the pace and scope of change during recent years
is sufficient to validate the observation by the Greek
neglected to say was that change occurs
What the philosopher
or
chance
by choice. It is that last factor
either by
-that is the subject of my remarks this
choice
change by
evening.
choices by the American people
One of the most signifcant
a
than
with
the election of Ronald Reagan.
year
more
ago
was made
"enough"
electorate
the
said,
enough of erratic
when
That was
--
R-714
-- enough of inflation -- enough of tax rates
-- enough of
and discourage investment
incentive
that penalize
hinders
productivity
absorbing
resources
government that
by
from the private sector -- and enough of government that
sacrifices initiative on the altar of regulation. The elececonomic
policies
torate voted for change.
In making that choice, the American people did not merely
for another, or place a new tenant
swap one Administration
in the White House; they demanded a new course in the affairs
of the nation.
The new
It is
It is
intended
intended
we have plotted is for the long term.
to produce sustained economic growth, and it will
to produce jobs -- and it will. It is intended
course
objectives that the Administration sought
its program for economic recovery.
when
it first
That program emerged from a series of choices.
have chosen to seek a balanced budget on the backs
taxpayers; we chose instead to cut back the growth
spending.
ment
We
nues;
them
.
we
We
devised
could
of the
of govern-
could have allowed inflation to increase Federal revechose instead -to cut personal tax rates and index
our way
We could have chosen the quick f ix of inflating
into prosperity; we chose instead to encourage the Federal
Reserve in a policy of slow, steady growth in the money supply.
Finally,
that efforts
we
the marketplace;
chose to reduce regulatory intrusions into
and we are well on our way to success in
The cumulative effect of all those choices is a policy
that has begun to turn the economy back to the producers of
this country -- to those who can generate growth, and jobs,
And we have begun to see some of the
and real wealth.
results of that policy.
For the first time in seven years, inflation has actually declined. Some say this is an anomaly -- a transitory
phenomenon.
believe that there
If this is true,the wemonths
ahead -- more
in
those phenomena
progress toward our goal of strong,
will be more of
indicators of
real economic growth.
~
For example, for the first time in years, union contract
settlements are beginning to reflect -- at least in part -- the
That has been manifest
lowering of inflationary expectations.
automobile
the
Those settlements
industry.
in
most recently
are important portents of declining inflation.
are rapidly approaching a new economic environment.
have not as yet broken the back of inflation, we
at least have it pinned to the mat.
We
And,
if
we
inflation will stay pinned even during the economic
is beginning to emerge.
In spite of the continued decline in the current quarter,
there are some hopeful signs. Excess inventories are being
drawn down at a rapid rate.
This is typical of the last stages
of a recession. Retail sales are rising. Housing starts are
and durable goods orders have leveled off.
up slightly,
Granted, as Aristotle said: "One swallow does not a
summer make. " And one or even two positive indicators
does
And
recovery that
Nevertheless, as spring continues, we
not make a recovery.
will see more swallows in the form of positive indicators,
and we will come into the summer with the recovery under a
full head of steam.
All this, of course, is predicated on prompt, deliberate
Cong'ressional action on President Reagan's budget.
Adlai
Stevenson once said: " . .there are no gains without pains. "
made the tough choices that went into our
This Administration
budget proposal.
to accept its portion of pain,
Now it is time for Congress
and make the fiscal choices that will stimulate economic growth
would
The Administration
and maintain the nation's security'
that do not try to balance
welcome bipartisan alternatives
the budget on the backs of the taxpayers, or impede our ability
to defend the nation.
the misgivings of members of Congress and
We understand
others who are worried about budget deficits.
is
Let us be clear from the outset; this Administration
finance
deficits
deficits.
Like
taxes,
troubled
by
deeply
excessive government spending and absorb resources better left
in the private sector. We are opposed to them as a matter of
principle, and intend to see a budget in balance ultimately.
But the deficit must be put in some perspective; it cannot
Granted,
be viewed in isolation from the rest of the economy.
the
dollars,
in
projected
and
terms
of
sheer
isolation
in
viewed
the
history.
is
largest
in
our
deficit
budget
~
put that does not hold true if you put the deficit in the
context of the total economy. For fiscal 1983, we are projecting
a deficit that amounts to 3. 1 percent of the gross national
product. The fiscal 1976 deficit amounted to 4. 5 percent of
the gross national product.
In fact, a number of other industrial nations during the
last several years have consistently posted deficits greater
than ours when compared to their gross national products.
And I include among them West Germany,
Japan, Italy and the
United
Kingdom.
deficit for 1981 amounted to 2 percent of our
This compares, by the way, with
products
West Germany — 4. 8 percent; Italy — 9.4 percent; the United
Kingdom — 5. 0 percent and Japan — 3.6 percent.
Indeed,
Japan has in the past run a deficit as high as 5. 5 percent
of its GNP
Our budget
gross national
~
Japan's experience with inflation, interest
real growth stands in marked contrast to ours. The
reason is primarily its stable monetary policy and high rate
of saving. In 1980, for example, gross saving as a percentage
of Japan's GNP was a little more than 30 percent. Our gross
saving rate, on the other hand, was 18.3 percent, slightly more
than-half that of Japan.
Deficits must be financed, either by borrowing a partion
of national savings, or by inflationary money creation. Japan
has a high enough savings rate to finance a deficit with enough
savings left over for investment and growth without rapid money
creation. Consequently, Japan's inflation rate and interest rates
rates
Nevertheless,
and
have remained
low.
The U. S. on the other hand has done too little saving and
The result has been
allowed too much money creation over time.
slow growth, rapid inflation and high interest rates. We intend
to change that.
the rate of saving in the United States has
We believe that goal has
been one of our major objectives.
been achieved, and that as a result, private saving will be
several times the total borrowing requirement of the Federal
Government in fiscal 1983 and fiscal 1984.
Increasing
projected deficits are symptomatic of
to date
anything, it is
the budget, while
We believe the best way to balance
standards,
is
economic
growth that
through
living
raising
enlarges the tax base. We want to see growing payrolls that
If
current
and
a lack of economic growth
~
will contribute to Federal revenues, not higher taxes
declining number of workers and businesses.
on a
The Congress has tried time and time again to balance
And it has not accomplished
the budget with tax increases.
the objective.
Between 1974 and 1981, despite several legislated tax
reductions, overall Federal tax receipts rose $338 billion;
yet we still accumulated deficits of $350 billion; and today
have a national debt in excess of a trillion dollars.
Raising taxes does not balance budgets.
Tax increases
simply give the Federal Government more to spend on Federal
for yet more spendings
programs that create constituencies
the tax cuts, or eliminating them altogether,
a tax program oriented toward work, saving
into just another attempt to fine tune the
Postponing
would transform
and productivity
economy.
as Francis Bacon said, "History makes men wise, " then
we would do well to learn from past attempts
to attack deficits
through tax increases rather than spending cuts. The Federal
Government imposed a surtax of 7. 5 percent in 1968, 10 percent
in Z969 and 2. 5 percent in 1970.
If,
from late 1969 to late 1970, real gross national
declined 1 percent and unemployment almost doubled.
But more to the point, the deficit -- from being marginally
in balance in 1969 -- grew to $23 billion in 1971. The tax
increases reduced saving, investment and gross national product,
and led to a higher deficit.
And
product
If anything, that marginal balance of $3. 2 billion in the
1969 budget was an exception that proved the rule: Taxes will
not balance the budget, they simply bloat the Government.
You know,
I
know and every
taxpayer knows that,
if
you
it.
send money to Washington,
they will find a way to spend
If you want to stop the child from eating the cookies, you
have to take away the cookie jar.
is what we did when we cut tax rates. Now the free
They
Congress are complaining about deficits.
in
spenders
are trying to conceal their real desires for more taxes and
That.
--
cookies.
That fact is plain to anyone who has paid attention to
It is a fundamental
Washington during the last two decades.
it takes in
will
everything
Congress
spend
that
principle
more
spending
and then
some.
more
principle of Congress is this: It is impossible
to limit action on the tax code once Congress opens it up to
Another
change.
Their legislative axe will fall on much more than just
the third year of the tax cut. It will very likely fall on
other targets -- the cut in the tax on unearned income from
seventy to 50 percent, for example, or the reduction in the
long-term capital gains tax to 20 percent.
no one here is naive enough to believe that
will eliminate or postpone personal tax relief, and
leave other aspects of the tax program untouched.
I trust that
Congress
And if the maximum tax on unearned
income and the 20
percent tax on long-term capital gains are increased -- and
they very well could be -- you can kiss much of the strength
in the new issues market goodbye.
The program
we
have in place should
stay in place.
Tampering with the tax program in the name of balancing
the budget would send a clear, unmistakable message to the
economy -- a message that would say, "We are back to businessas-usual -- back to the old stop-and-go policies. "
belief that the
the legislative branch -- is
incapable of taking the long-term actions necessary for real
And that belief in turn will keep interest rates high.
growth.
That message will confirm the market's
government
-- specifically
to the current crux of the economic problem-Looked at from Treasury's vantage point,
there is little reason for rates to be as high as they are.
The more we search for a reason for current interest rates,
the more we are reminded of the young Irish girl who went to
So now we come
high
interest rates.
Confession.
told the kindly old curate that she
might have committed the sin of vanity.
She
was
afraid she
"Every morning I look in the" mirror, " she told the Father,
"and I think how beautiful I am.
Don't be afraid.
The voice in the confessional " replied:
It's
a
mistake.
sin.
That's not a
rates are no laughing matter.
After all, real interest rates have historically run
percent above the inflation rate. But in recent years,
Today's interest
4
3
or
layered on top of real rates, have been added premiums for
uncertainty and for the expectation of future inflation.
in the climate of
Those premiums were understandable
inflation that existed before this Administration took office.
Clearly, today there is little reason for adding a premium
for inflation -- at least not at the levels that exist today.
it
take to convince the markets that the
committed to slow, steady growth in the
money supply, to not monetizing:the
debt, and to restoring the
course?
economy to a non-inflationary
How much
does
is seriously
Government
this for a
Think about
will take about
22
moment; Federal borrowing this year
percent of the funds in the credit market.
preempted 42 percent of the credit
interest rates were declining.
In light of this year's relatively minor pressure on the
credit markets, one can only conclude that real interest rates
of 7 or 8 percent -- if not unconscionable -- are at least
In 1975, the Government
available
and
paradoxical.
I am sure that in time that paradox will be resolved as
toward a growing economy -- one without the torments
of inflation -- one that affords every one the prospect of
we move
prosperity.
In the final analysis, problems of economic
Behind the cold numbers issued
problems.
of Labor Statistics are people and families who
opportunity to put their skills to work in some
endeavor.
human
policy are
by the Bureau
ask only the
productive
that human dimension, and we are fully
We understand
prepared to put our policy where our principles are. Last
week, the President announced that he would send legislation
to Congress creating enterprise zones that will promote
economic growth in depressed areas.
It is a strategy that we believe will revitalize
of the depressed areas in this country -- particularly
the inner
cities.
many
in
believe that reducing the burdens of taxation and
Federal regulation will create a hospitable economic atmosphere in these zones -- one that encourages new businesses
and preserves existing businesses.
The course we have charted requires discipline and
courage on the part. of all of us. But, believe me, it is
We
the only course which will lead to sustained
--
interest rates
and
recovery.
lowering
of
Sound public policy can come from the Government.
But
real economic growth can only come from the private sector.
And that leads to the responsibility
of those of you in
business.
Now
is the
not timidity;
time for business leaders to show strength,
statesmanship,
not parochial interests.
The American economy, the most massive and complex in
the world, resembles one of those million-ton oil tankers.
You cannot turn it around on a dime, or slam on the brakes
if it is goes too far in any one direction. Our economy is
the same way. But the captain on the bridge has signalled
the turn, the rudder has been moved, the engine room is
operating under a new set of commands, and -- if we will just
be patient
the economy will respond.
—
Thank you very much.
Oepartment
of the Treasury
FOR IMMEDIATE
D.C. ~ Telephone 566-2041
Washington,
~
April 5, 1982
RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4, 701 million of 13-week bills and for $4, 703 million of
26~eek bills, both to be issued on
were accepted todayApril 8, 1982,
OF ACCEPTED
COMPETITIVE BIDS:
13-week
RANGE
maturin
Price
96. 747
96. 729
96. 741
High
Low
Average
at the
at the
Tenders
Tenders
low
low
bills
26-week
maturi
Price
October 7, 1982
Investment
Discount
Rate 1/
Rate
13.49%
13.56%
13.51%
93.550
93.514
93.528
13 ' 83%
12. 758%
13.91/
12. 829%
12.802% 2/ 13.88%
12.869%
12.940%
12.893%
price for the 13-week bills were allotted 34%.
price for the 26-week bills were allotted 42%.
TENDERS RECEIVED
(In
Location
Boston
New York
$
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San
Francisco
Treasury
TOTALS
~e
Competitive
Noncompetitive
Subtotal,
Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Received
64, 740
10, 487, 770
46, 815
AND
~Acce
ted
67, 245
51, 555
66, 270
987, 130
36, 770
48, 880
3, 550, 085
44, 245
52, 180
50, 955
60, 670
134, 770
36, 110
22, 955
55, 195
46, 640
925, 885
54, 825
46, 640
280, 365
331, 170
$13, 190, 140
$11,066, 130
1, 225, 950
$
ACC EPTED
Thousands)
$
9, 955
331, 170
$4, 700, 850
:
Received
100, 325
10, 025, 765
25, 300
88, 770
52, 740
59, 175
1,005, 490
32, 785
25, 280
47, 190
23, 060
1, 224, 010
269, 965
$12, 979, 855
$2, 576, 840
1, 225, 950
$3, 802, 790
752, 960
$10, 994, 455
981, 600
$11,976, 055
145, 100
145, 100
$13, 190, 140 . $4, 7pp, 85p
258, 800
$12, 292, 080
752, 960
745, 000
$12, 979, 855
1/ Equivalent coupon-issue yield.
calculating
maximum
2/ The four-. week average for
on money market certificates is 12 92py
R-715
bills
July 8, 1982
Discount
Investment
Rate
Rate 1/
~dcce ted
$
69, 825
3, 279, 965
25, 300
52, 270
50, 740
56, 775
278, 790
30, 785
17, 280
46, 430
23, 060
502, 010
269, 965
$4, 703, 195
$2, 717, 795
981, 600
$3, 699, 395
745, 000
258, 800
$4, 703, 195
interest rate payable
DEREGULATION
DEPOSITORY INSTITUTIONS
COMMITTEE
(12 CFR Part 1204)
[DOCKET
91-Day Time Deposits
AGENCY:
Depository
ACTION:
Final rule.
Institutions
NO
~
D-00231
of Less
Deregulation
Than
$100, 000
Cormnittee.
Deregulation Cormnittee ("Committee" )
The Depository Institutions
established a new category of time deposit that will enable depository
institutions to compete more effectively with short-term market instruments.
The new deposit category has the following principal characteristics:
(1) a minimum denomination of $7, 500; (2) a maturity of exactly 91
days; (3) a fixed ceiling rate of interest based on the most recent
rate established and announced for V. S. Treasury bills with rnaturities
of 91 days (auction average on a discount basis); and (4) compounding
The Committee also established a temporary
of interest is not permitted.
in, favor of thrift institutions for one
25 basis point differential
year and a separate minimum early withdrawal penalty for this deposit
category. The temporary differential will also not apply when the Treasury
bill rate is 9 per cent or less for four consecutive 'auctions.
SUMMARY:
has
EFFECTIVE DATE:
May
1, 1982.
Rebecca Laird, Senior Associate General
INFORMATION CONTACT:
Federal Home Loan Bank Board (202/377-6446), Mark Leemon, Attorney,
Office of the Comptroller of the Currency (202/447-1880), F. Douglas
Birdzell, Counsel, or Joseph A. DiNuzzo, Attorney, Federal Deposit Insurance
Corporation (202/389-4147), Daniel L. Rhoads, Attorney, Board of Governors
of the Federal Reserve System (202/452-3711), or Elaine Boutilier, AttorneyAdvisor, Department of the Treasury (202/566-8737).
FOR FURTHER
Counsel,
Deregulation
The Depository Institutions
12
U.
S.
C.
et ~se ) ("Act")
96-221;
3501
L.
Act of 1980 (Title II of P.
$$
and
ultimate
elimination
phaseout
the
orderly
was enacted to provide for
of
that
rates
interest
and
dividends
maximum
of the limitations on the
institutions
as
depository
rapidly
accounts by
may be paid on deposit
as economic conditions warrant and with due regard for the safety and
Under the Act, the Committee
soundness of depository institutions.
is authorized to phase out interest rate ceilings by any one of a number
of methods, including the creation of new account categories either
or with interest rate ceilings
not subject to interest rate limitations
set at market rates of interest.
SUPPLEMENTARY
INFORMATION:
.
its
June 25, 1981 meeting, the Committee considered the
issue of short-term time deposit instruments and decided to request
public comment on the desirability of authorizing a new deposit instrument
similar to money market mutual funds (MMFs)
having characteristics
46 Fed. Reg. 36712 (July 15, 1981). The Committee did not put forth
Over 400 comments were received by
a specific proposal at that time.
(An analysis of the comments is contained
the Committee on this issue.
in the DIDC staff paper "Proposals to Change the Method of Calculating
the Ceiling Rate of MMCs and Consideration of Creation of a New ShortSeptember 16, 1981, which is available upon
Term Deposit Instrument",
request from the Executive Secretary of the Committee. ) Approximately
half of the respondents favored creation of a new short-term instrument
Those opposing the authorization
of a
and about half were opposed.
short-term
instrument,
thrift
institutions,
that
generally
argued
new
costs
associated
with
new
instrument
the
a
deposit
and
potential
the higher
shifts from savings accounts would add to their current earnings problems.
At
.
At
its
September
22, 1981 meeting,
the Committee
decided to
solicit additional public comment (46 Fed. Reg. 50804, October 15, 1981)
on several specific deposit proposals as well as the general features
The three specific proposals were&
of short-term instruments.
(1)
ceilingless,
$5, 000 minimum denomination account with a transactions
(2) a time deposit with an initial maturity' of 91 days, and
a 14-day notice period thereafter,
with a ceiling rate tied 'to the 13week Treasury bill rate; and (3) a ceilingless
$25, 000 minimum denomination
1-day notice account.
was requested on several specific account
Cogent
characteristics as well. '
a
. feature;
The Committee received 844 responses on the three proposals
for comment and considered these comments at its March 22,
in the memorandum to the
The comments are summarized
1982, meeting.
Committee dated December 10, 1981, entitled "Short-Term Investment Proposals,
commenting favored a more competitive
About 58 per cent of all respondents
short-term instrument.
The proposal was favored by a majority of commercial
banks and was opposed by a majority of the thrift institutions
commenting.
thrift
institutions
including
opposed to any
Many of the respondents,
published
short-term instrument, stated that competition for short-term funds
is no longer limited to competition among depository institutions but
now also includes
competition with MMFs. Some respondents argued that
regulation of MMFs would be preferable to authorizing a new short-term
new
instrument.
While the respondents opposing a new short-term instrument
generally declined to comment on the specific proposals, those respondents
a ceilingless, $5, 000 minimum denomination
who did comment preferred
This proposal was perceived as
deposit with a transaction feature.
being the most effective of those proposed for meeting MMF competition.
Those opposing the proposal argued that it would cause an increase in
the cost of funds, primarily in shifts from passbook and NOW accounts
Commercial banks opposed the establishment
into the new instrument.
of thrift institutions while thrift institutions
favor
in
of a differential
differential.
a
such
were in favor of
"
the $10, 000 minimum denomination time
deposit with a minimum initial maturity of 91 days and a 14-day notice
period thereafter, was the least popular among those favoring a new
instrument.
About 50 comments favored the adoption of this proposal.
The comments were divided on the 14-day notice feature, and proponents
Opponents
were generally satisfied with its other characteristics.
criticized its similarity to 26-week money market certificates and its
likely inability to attract new funds, particularly funds held by MMFs.
The second
proposal,
The third proposal, a ceilingless $25, 000 minimum denomination
with
a 1-day notice requirement and no transaction feature,
account
second-most
Proponents stated
popular of the three proposals.
was the
that the category would allow them to compete for deposits of corporations
while opponents felt that
would only benefit larger,
and individuals,
highly liquid institutions.
it
One
of the
more popular
of several alternative
short-term
instruments suggested in response to the Committee's proposal was a
of $5, 000, no
91-day or 30-day instrument with a minimum denomination
transactions feature, and a rate tied to a comparable Treasury bill
yield. About 100 respondents favored this suggested category.
its
December 16, 1981, meeting, the Committee postponed
of its proposals until its March 22, 1982 meeting. Since
the December 16, 1981 meeting, the Committee has received over 2, 500
letters (over 90 per cent of which were from commercial banks) urging
active pQrsuit of deregulation.
At
consideration
behind the Committee's consideration of a shortinstrument has been the continued strong growth of MMFs while growth
of small time and savings deposits at commercial banks and at thrift
institutions has been weak. MMFs, though uninsured, offer an investment
of a market return, liquidity, a
which includes the characteristics
transaction feature, no early withdrawal penalty, and can be obtained
in denominations
as low as $1, 000. Short-term Treasury and U. S. agency
securities also provide competition to depository institutions in that
tax advantages, liquidity, safety, and can
they offer a market return,
of $5, 000 to $10,000.
be obtained in minimum denominations
The impetus
term
In order to assist depository institutions in competing with
that offer alternative short-term instruments,
non-depository institutions
to authorize a new deposit instrument that
the Committee has determined
to attract new funds, will help
will enable depository institutions
to
stem deposit outflows and will enhance the ability of institutions
relationships.
customer
retain valuable
After consideration of the comments received, the Committee
has determined
to authorize, effective May 1, 1982, a new category of
~"crt-term time deposit as follows:
--minimum
denomination
of $7i500
—91-day maturity
—a fixed ceiling
rate for savings and loan associations and
savings banks equal to the 91-day Treasury bill rate
(auction average on a discount basis) at the most recent auction.
The ceiling rate for commercial banks will be 25 basis points
less than the thrift ceiling rate. The rate will become effective
the day following the auction.
mutual
—no compounding of interest is permitted
—may be offered in either negotiable or nonegotiable
—the 25 basis points differential in favor of thrift
is
form
institutions
authorized until May 1, 1983. In addition, the differential
will not apply whenever the 13-week Treasury bill rate is
at or below 9 per cent for the four most recent consecutive
auctions. When the differential is not in effect, commercial
banks may pay the thrift ceiling rate.
—a separate
only of
—the
minimum
early withdrawal
all interest earned,
account
penalty
of forfeiture
and
is available to all depositors.
United States Treasury bills. maturing in 91 days are auctioned
normally on Monday.
The 91-day United
weekly by the Treasury Department,
States Treasury bill rate will be announced by Treasury and is published
The ceiling rate
throughout the country.
widely in many newspapers
payable for new deposits, as determined by the most recent auction,
will be effective on the day following the auction.
The rate payable on these deposits may not exceed the ceiling
If such deposits are renewed,
rate in effect on the date of deposit.
automatically or othe~wise, the maximum rate that may be paid may not
exceed the 91-day Treasury bill rate in effect at the time of renewal
of the deposits'
Unlike the money market certificate, averaging of
Premiums,
the four most recent auction rates will not be permitted.
however, will be permitted in accordance with the Committee's rules.
in
25 basis point ceiling rate differential
on
will
expire
1983.
In
May
addition,
1,
institutions
favor of thrift
will not apply if the 91-day Treasury bill
the temporary differential
is at or below 9 per cent for the four
average)
discount rate (auction
bills held immediately prior
Treasury
91-day
of
most recent auctions
differential
is not in effect, commercial
the
When
to the date of deposit.
rate
authorized for thrift
the
ceiling
to
pay
banks wi] 1 be permitted
institutions.
The temporary
recognizes that the new deposit category will
offered by non-depository
not be fully competitive with instruments
institutions.
Therefore, the Committee has also directed its staff
to consider additional short-term deposit categories to enable depository
institutions to compete more effectively with non-depository institutions.
to present its recommendations to the Committee
The staff was requested
within 30 days.
The Committee
the potential effect on small entities
the instrument,
as required
of this new category
In this
by the Regulatory Flexibility Act (5 U. S.C. g 603 et ~se
regard, the Committee's action would not impose any new reporting or
Small entities which are depositors generally
recordkeeping requirements.
should benefit from the Committee's proposal, since the new instrument
would provide them a market rate of return.
If low-yielding deposits
shift into the new account, small entities which are depository institutions
However, their
might have increased costs as a result of this action.
competitive position vis-a-vis nondepository competitors should be enhanced
short-term instrument at market
by their ability to offer a competitive
rates. The new funds attracted by the new instrument (or the retention
of deposits that might otherwise have left the institution) could be
invested at a positive spread and would therefore at least partially
offset the higher costs associated with the shifting of low-yielding
accounts.
The Committee
considered
when
it
established
.).
Pursuant to its authority under Title II of Public Law 96221, 94 Stat. 142 (12 U. S.C. $ 3501 et ~se ), to prescribe rules governing
the payment of interest and dividends on deposits of federally' insured
commercial banks, savings and loan associations, and mutual savings
banks, effective May 1, 1982, the Committee amends Part 1204 (Interest
on Deposits) by adding section 120 as follows:
.
$
1204. 120 — 91-Da
(a)
Time De
Commercial
osits of Less
banks, mutual
than $100, 000.
savings
banks,
and savings
and
associations may pay interest on any negotiable or nonnegotiable
time deposit of $7, 500 or more, with a maturity of 91 days, at a rate
Rounding any rate
not to exceed the ceiling rates set forth below.
and interest may not be compounded during the
upward is not permitted,
term of this deposit.
loan
The ceiling rate of interest payable by mutual savings
banks and savings and loan associations shall be the rate established
(auction average on a discount basis) for U. S. Treasury
and announced
(b)(1)
bills with maturities of 91 days at the auction held immediately prior
of deposit ("Bill Rate" ). Except as provided in subparagraphs
the ceiling rate of interest payable by commercial banks
the Bill Rate minus one-quarter of one percentage point (25
basis points) .
Rate is 9 per cent or below at the four
Treasury bills with maturities of 91 days
most
he]d immediately prior to the date of deposit, the ceiling rate of interest
e by commercial banks shall be the Bill Rate.
payab
pay b]e
Bill
recent auctions of U. S.
Zf the
(2)
(3) Effective May 1, 1983, the ceiling rate of interest
Payable by commercial banks on this category of deposit for deposits
issued or renewed on or after that date shall be the Bill Rate.
(c) Section 103 of this Part shall not apply to time deposits
this section. Where all or any part of a time deposit
issued under this section is paid before maturity, a depositor shall
forfeit an amount equal to at least all interest earned on the amount
withdrawn.
By order
of the Committee,
April
1, 1982.
Steven L. Skancke
Executive Secretary
DEPOSITORY INSTITUTIONS
(12
CFR
DEREGULATION
COMMITTEE
Part 1204)
LDOCKET NO.
D-0022)
Time Deposits of Less Than $100, 000 with
Original Maturit, ies of 3-1/2 Years or More
AGENCY:
Depository
ACTION:
Final Rule
Institutions
Deregulation
Committee
Depository Institutions Deregulation Committee
a new deposit category with a min) has established
maturity of 3-1/2 years and no interest rate ceiling.
imum original
Under a schedule established
by the Committee, the maturity of the
will be reduced annually by one year until March 31,
new instrument
1986, at which time it will have the minimum maturity for time
deposits (currently 14 days). The schedule will also reduce the
and maximum maturities of the small saver certificate (SSC),
minimum
but other existing categories of time deposits will not be changed
by the plan.
SUMMARY:
The
("Committee"
EFFECTIVE DATE: May
1, 1982.
F. Douglas Birdzell, Counsel, or
Federal
Deposit Insurance Corporation
Joseph DiNuzzo, Attorney,
(202) 389-4147; Paul S. Pilecki, Senior Attorney, Board of Governors
of the Federal Reserve System (202)452-3281; Elaine Boutilier,
Department of the Treasury (202) 566-8737; Rebecca
Attorney-Advisor,
Laird, Senior Associate General Counsel, Federal Home Loan Bank Board
(202) 377-6446; or Mark Leemon, Attorney, Office of the Comptroller
of the Currency (202) 447-1880.
FOR FURTHER
INFORMATION
CONTACT:
On October 6, 1981, the Committee
INFORMATION:
requested public comments on two related proposals to help accompobjective of an orderly
lish the Committee's statutorily-required
phaseout of deposit interest rate ceilings giving due regard to
(see 46 Federal
the safety and soundness of depository institutions
Committee
requested
comment
on
whether
The
49137).
ister
~Re
establish a new time deposit account. category that, would have the
(1) an initial minimum orj. gifollowing principal characteristics:
or
more;
years
3-1/2
(2) no interest rate limitations
of
nal maturity
of
an early withdrawal
denomination
$250;
(4)
penalty
(3) a mj. nimum
interest;
and
optional
simple
features
months'
that
would
equa] to 9
account
the
the
first
during
to
year
without
increasa]low additions
to be negotiable.
ing the maturity and would permit the instrument
SUppLEMENTARY
proposal also would have established two new deposit categories
Committee also requested comments on a sched1984 and 1985. The each
reduce
year the minimum maturity of this new
ule that would
one
year.
de osit category bY
The
response to its request, the Committee received 580 let ters
public on the new deregulation plan and the proposed new
account. Of the 121 savings and loan associations and 27 mutual
savings banks responding, about 79 percent indicated they did not
schedule that, included a cei 1 ingle s s deposit
want a deregulation
instrument.
Accordingly, most of them did not respond to the specific questions regarding the characteristics of the proposed
new instrument .
Zn
from the
over 80 percent
Of the 375 commercial banks that responded,
favored a scheduled phaseout but disagreed over the characteristics
The 9 regulatory agencies and
of the proposed new instrument.
Federal Reserve Banks and most of the 28 commercial bank trade
associations wrote in support of the proposed plan while the 10
thrift trade associations expressed opposition. Ten individinstitutions offered comments and half of
uals and non-depository
them were opposed to the plan.
Those opposed to the proposals questioned the authority of
schedule at this time
the Committee to introduce a deregulation
that authorizes new ceilingless instruments . They argued that
mandate that the
such action is contrary to the Congressional
out
interest
rate
Committee phase
ceilings only if economic conditions warrant and only after due regard for the sa fety and soundness of depository institutions .
the proposals expressed the view that a schedule
institutions with an opportunity to plan for the legislated goal of ceil ing less depos it accounts . By beg inning with
long-term accounts, they argued it will permit financial institutions to better control their asset-liability risk and to attract
longer-term deposits that are most appropriate for longer-term
Those favoring
wil 1 provide
lending
~
After considering al 1 of the comments, the Committee has established a new deposit category to become effective on May 1, 1982 .
The new category will have the following characteristics:
( 1 ) no
a
minimum
3-1/2
original
maturity
of
years,
(2)
interest rate ceiling,
but
the
account
must
be
made
available
denomination
( 3 ) no minimum
(4) permits additions to an account during
in a $500 denomination,
its maturity ( optional ), and ( 5 )
extending
the f irst year without
be
negotiable
to
(optional) . 1/ The existing
permits the instrument
will
t
withdrawal
apply o the new instrument . The
penalty for early
1/
Federal Home Loan Bank Board adopted on March 24, 1982 a
regulation permitting institutions insured by the Federal
Savings and Loan Insurance Corporation to 0 f f er certif icates
Prior to this action which
o f deposit in negotiable form.
1982
25,
savings and loan associations
wil 1 take effect April
to
of
permitted
fer negotiable certi f icates
generally
not
no
re
were
denomination
$100,
000) certificates .
(
large
for
ept
excep
The
will be reduced annually by one year,
new deposit category will be used in conjunction with a
designed to phaseout interest, rate ceilings on time deposits.
In addition
the minimum maturity of the SSC will be adjusted downward
The schedule
the
schedule to complement the new deposit. category.
by
follows:
as
is
adopted by the Committee
maturity
and the
schedule
of the
Step 1
(May
new
instrument
1, 1982)
3-1/2 year or longer, ceilingless deposit category becomes effective.
The maturity for SSCs is adjusted to 2-1/2
years to less than 3-1/2 years.
The new
2
Step
(April 1, 1983)
2
1.
2
The minimum
maturity
on the
ceilingless
deposit category is reduced to 2-1/2
years.
The maturity on the SSC is reduced to
1-1/2 years to less than 2-1/2 years,
~
rate is tied to the average
1-1/2 year Treasury securifor
yield
ties with the 25 basis point differential retained.
and the
Step
3
(April 1, 1984)
l.
The minimum maturity for the ceilingless
deposit category is reduced to 1-1/2 years.
Step 4 (April 1, 1985)
for the ceilingless
1. The minimum maturity
deposit category is reduced to 6 months.
Step
5 (March
1.
31, 1986)
The minimum maturity for the ceilingless
deposit. category is reduced to the minimum
maturity for time deposits in effect on
that date.
rules applY onlY to new time deposits issued on or
dates; the rates payable on existing
after each of the relevant are
unaffected by the new rules.
deposits
time and savings
new
time deposits with maturities
for
rates
Moreover, ceiling
in
the
phaseout schedule on each of
specified
other than those
will
remain unchanged unless
dates
implementation
the relevant
in
the
future
the Committee.
upon
by
specifically acted
The new
taking this action, the Committee concluded that the plan
is necessary to Provide additional returns to savers and to provide
Zn
depository institutions and their customers with a specific schedule so that institutions may better plan their asset and liability
strategies in anticipation of an environment without deposit interest rate ceilings. Nonetheless, the Committee will monitor the
schedule at least annually, taking into account economic conditions
of depository
and with due regard for the safety and soundness
institutions.
for public comment on two other new account
established as part of the deregulation
These accounts, like the SSC, would be indexed to Treas-
The Committee asked
would be
categories that
schedule.
securities but would have no thrift differential and would have
reduced minimum and maximum maturity. 2/ However, since these new
accounts would not become effective until April 1984 and April
should consider the necessity
1985, the Committee determined that
of such accounts at that time instead of authorizing them now. This
is in keeping with the public comments, which indicated that most
depository institutions would prefer fewer rather than more new
ury
it
accounts.
In
its
rulemaking,
proposed
the Committee
requested
comments
features, including a minimum denomination of $250,
withdrawal penalty, and allowing additional deposits
during the first year of an account without extending its maturity.
of $250 were mixed.
The public comments on a minimum denomination
commented that no minimum denomination
should be
Some respondents
required, thereby allowing the institution to set whatever it
indicated that
believed was appropriate.
However, mo'st respondents
The Committee concluded that. the institutions
$250 was acceptable.
should be allowed the maximum flexibility possible to set a minimum
denomination on the new category of time deposit without disadvantaging the small saver, and, therefore, adopted the provision curon a number of
a 9-month early
no minimum denomirently used with the All Savers Certificate:
made
available in $500
must
be
account
nation is mandated, but the
free
institutions
to accept deposits
the
denominations.
This leaves
account
is
also
available.
a
$500
of any amount, as long as
feature of additional deposits during the
first year, most respondents indicated that it would be feasible
offered it in conjunction with a floating
only if an institution
and
Many opposed this feature as too complicated
rate instrument.
The Committee has authorized
additional
confusing to the depositor.
deposits during the first year as an optional feature of the new
In commenting
on the
to be established in 1984 would have a
1-1/2 years and could be offered at a rate
to
maturity of
26-week
U. S. Treasury rate (auction average on
the
not to exceed
account
proposed to be established in 1985
The
discount basis).
14-daYto six months and could be offered
of
maturitY
wou]d have a
13
U. S. Treasury bill rate (auction
the
week
exceed
to
at a rate not
2/ The
average
account proposed
6 months
on a
discount
basis).
deposit category. Under this feature (which an institution is not
required to offer) the institution may accept additional deposits
at any time during the first year of the account. without extending
the maturity of the account. The deposit contract shall specify
the method to be used for determining the rate of interest to be
paid on additions to an account during that first year.
The comments received on the proposed 9-month early withdrawal
penalty primarily opposed the proposal as adding confusion and making
less attractive
to depositors. Furthermore, they noted
penalty longer than 6 months can be required
the existing regulation.
The Committee has
the
determined that
existing early withdrawal penalty of a forfeiture
at least 6 months' interest on the amount withdrawn will apply to
It should be noted, however, that under the schedthe new account.
ule, the minimum maturity of the new account will be less than one
year effective April 1, 1985. At that time the early withdrawal
penalty would be that which applies to accounts of less than one
the account
that an early withdrawal
under
by an institution
year,
i.e.
3 months'
interest.
The minimum early withdrawal
penalty for a floating rate time
deposit (for which the interest rate varies during the term of the
deposit) with a maturity of more than one year is an amount equal
to six months' simple .interest.
If a depository institution ties
the interest rate on its new account to an index that is beyond
its control (e. cC. , Treasury security rate, commercial paper rate,
Federal funds rate, Federal Reserve discount rate) for the entire
term of the deposit, the institution
may base the simple interest
rate, for purposes of calculating the minimum early withdrawal
penalty, on the rate in effect on the date the account is opened,
or on the date of withdrawal,
or on an average of the rates in
effect during the term of the deposit. The institution must
specify, however, whether it will use the initial interest rate,
the rate on the date of withdrawal,
or the average rate. For
example, if the rate on the account is set at the twenty-six week
Treasury bill discount rate plus 100 basis points and it changes
weekly with the most recent auction results, the early withdrawal
penalty rate could be the discount rate (plus 100 basis points) in
effect on the date the account was opened, or the date of the
withdrawal,
or an average of all the rates in effect during the
term of the deposit; but the method to be used must be specified
in the deposit agreement.
the depository institution chooses not to tie the interest
rate on its new account to an index, but instead chooses to set
precise way in which the rate varies over the term of the deposit,
or if it changes the relationship of the rate to the index (e. cC. ,
the commercial paper rate minus 50 basis points for the first six
and the commercial Paper rate at minus
months of the instrument
then the early withdrawal penalty
thereafter),
100 basis points
of the simple interest rates on
an
average
using
must be computed
that the deposit was outstanding.
time
period
the
t&e deposit during
established
is
intervals and remains
rate
If the interest regular Periods (~e. . . attheregular
rate
is
established once
in effect for
If
in effect for one month), the average simple
be the sum of the rates established at each
interest
interval. while the funds were on deposit, divided by the number of
periods the funds were on deposit. Each partial period will be
For
considered a full period for the purpose of this calculation.
example, if a 2-1/2 year time deposit with an interest rate that
varies monthly was established on hlay 15, 1983, and withdrawn on
July 7, 1983, the average simple interest rate would be the sum of
the May, June, and July rates, divided by three.
a month
and remains
rate would
If the length of the periods for which rates are effective
varies, the average simple interest rate would be calculated by
dividing the amount of time a deposit was outstanding into equal
periods and then adding the rates that were in effect during
The period
those periods and dividing by the number of periods.
used should be the shortest period for which a rate was in effect.
For example, a time deposit might have the following rates in
effect for the following periods at the time a depositor wished
to withdraw
the funds:
six months. . . . . . . . . . . . . . . 15%
1-1/2 years. . . . . . . . . . . 16%
1 year. . . . . . . . . . . . . . . . . . .14%
was 3 years
The total amount of time the deposit was outstanding
+
+
3-year
l-l/2 years
1 year). This
period would then
(6 months
Then the rates in
be divided into 6 periods of 6 months each.
effect for each period would be:
~
1st six
six
3rd six
4th six
5th six
6th six
2nd
To
~
period.
period.
period.
period.
period.
period.
month
month
month
month
month
month
~
. . 15%
~ ~
. . . 16%
~
16%
16%
~ 14%
~ 14%
~ ~
~
~
~
~ 0
~
~
~
~
~ ~
~
calculate the average simple interest rate, the rate in effect
be added together -- 15 + 16 + 16 + 16
during each period would
sum would then be divided by the
+ 14 + 14 = 91. The resulting
to yield an average
91 divided by 6
number of periods
simple interest rate of 15.17%.
--
--
In the case of lump-sum payments of cash that would be regarded
as interest (see e. cC. , 12 C. F. R. 1204. 109 and 12 C. F. R. 1204. 111),
such payments must be taken into account in computing the penalty
rate. Any lump-sum payment must be prorated over the life of the
deposit. The portion that is attributed to the time period during
must be regarded as interest
which the deposit was outstanding
for purposes of computing the penalty rate. The portion attributable to the remaining life of the deposit is regarded as unearned
interest and must be deducted from the principal amount of the
deposit and returned
to the institutions
For example, assume that cash of $100 that would be regarded
as interest. were given to a depositor at the opening of a $1, 000,
4-year variable rate time deposit, that the entire amount is withdrawn after one year, and that the average of the rates paid on
the deposit during the time it was outstanding was 12 percent.
The
lump-sum of $100 would be regarded by the Committee as a payment of
interest and must be taken into account in computing the penalty
rate. Because the deposit was outstanding for one-fourth of its
expected life, a corresponding amount of the lump-sum must be taken
into account in computing the penalty rate. Thus, 2. 5 percent (25
divided by 1, 000) must be added to the average of the rates paid
during the time the deposit was outstanding
(12 percent) to achieve
a penalty rate of 14. 5 percent.
The remaining three-fourths
of
the lump-sum payment ($75) would be regarded as unearned interest
and would be returned
to the institution.
Thus, the amount that
the customer would return would be $147. 50.
The new rule provides greater flexibility in designing accounts.
Depository institutions will be permitted to accept additions in
the first year to a new account governed by whatever interest rate
structure -- fixed or floating -- they would choose, provided that
the method of varying the interest rate is adequately disclosed in
the deposit
contract.
The Committee also considered the proposal to phaseout interest
rate ceilings in terms of its impact on small entities, as required
by the Regulatory Flexibility Aot (5 U. R. C. $$ 601, ~et ee . ). In
this regard, the Committee's action does not impose any new regulatory burden, or increase any exi'sting or add any new reporting or
record keeping requirements.
Instead, this action eliminates regulatory restrictions on the maximum interest rate payable for certain
time deposits on May 1, 1982. Small entities that are depositors
generally should benefit from the Committee's action because they
will be able to earn higher rates of interest on their time deposits.
could have increased
Small entities that are depository institutions
operating expenses as a result of this action, because it is likely
that they will be paying higher interest rates on certain time
deposits; on the other hand, their competitive position vis-a-vis
nondepository institution competitors should be enhanced by their
ability to offer higher rates on time deposits, thereby attracting
new funds that can be reinvested
profitably.
By law, the Committee is required to work towards the ultimate
The Comelimination of interest rate ceilings on time deposits.
mittee considered several alternatives to accomplish this objective;
is available from the Executive
an analysis of these alternatives
Committee's view, the plan that
the
In
Secretary of the Committee.
for all depository
was adopted provides the greatest flexibility
without
having a disproporinstitutions during the phaseout period,
tionately adverse impact on any particular size of depository insti-
tution.
pursuant
Institutions
to its authority under Title II of the Depository
Deregulation and Monetary Control Act of 1980, 94
Stat.
142 (12 U. S. C. $ 3501 ~et se . ), to prescribe rules governing tbe
payment of interest and dividends on deposits of Federally insured
commercial banks, savings and loan associations, and mutual savings
Interest on Deposits (12
banks, the Committee amends Part. 1204
CFR
--
Part 1204) as follows:
l.
Effective
new
1204. 106
May
paragraph
--
Time De
of 2-1
1, 1982, Section 106 is amended by adding
(c) to read as follows:
osits of Less Than $100, 000 With Maturities
a
Years to 4 Years.
2
(c)(1) Effective
May
1, 1982, this section is
amended
by
the term "2-1/2 years to less than 4 years" wherever it
appears and inserting in its place "2-1/2 years to less than 3-1/2
striking
years".
(2) Effective April 1, 1983, this section is amended
striking the term "2-1/2 years to less than 3-1/2 years"
wherever it appears and inserting in its place "l-l/2 years to
less than 2-1/2 years", and by striking the term "average 2-1/2
year yield" wherever it appears and inserting in its place "average 1-1/2 year yield".
by
2. Effective
would
1204. 119
--
1, 1982,
May
read as follows:
Time De
a new section 119
is
added
that
osits of Less
Maturities
of 3-1
2
Than $100, 000 with Ori inal
Years or More.
(a) A commercial bank, mutual savings bank, or savings and
association may pay interest at any rate as agreed to by the
depositor on any time deoosit with an original maturity of 3-1/2
years or more that has no minimum denomination but is made available
in a denomination
of $500.
(b) Any time deposit with an original maturity of 1-1/2 years
or more issued pursuant to this section may provide by contract that
additional deposits may be made to the account for a period of one
year from the date that it is established without extending the
original maturity date of the account. Deposits made to the account
shall extend
more than one year after the date that it is established
the maturity of the entire account for a period of time at least
equal to the original term of the account.
(c) Any. time deposit offered pursuant to this section may
loan
issued in a negotiable or nonnegotiable form.
April 1, 1983, this section is
(d) Effective"3-1/2
years" wherever it appears
striking the term
"2-1/2 years".
term
the
ing in its place
be
amended by
and insert-
(e) Effectj. ve Apri]. 1, 1984, this sectj-on is amended by
striking the term "2-1/2 years" wherever it appears and inserting
in its place "l-l/2 years".
E f feet j.ve April 1, 1985, this section is amended by
( f)
striking the term "1-1/2 years" wherever it appears in paragraph
(a) and inserting in its place "6 months".
(g) Effective March 31, 1986, this section is amended by
striking the term "with an original maturity of 6 months or more"
wherever it appears.
By
order of the Committee,
March
26, 1982.
Steven L. Skancke
Executive Secretary
of the TreaslirV
pepartment
FOR
~ NashinQton,
RELEASE
IMMEDIATE
TREASURY' S WEEKLY
O.C. o Telephone %66-2041
April 6, 1982
BILL OFFERING
of the Treasury, by this public notice,
for two series of Treasury bills totaling approxiThis
mately $ 9, 400 million, to be issued April 15, 1982.
offering will result in a paydown for the Treasury of about $100
million, as the maturing bills are outstanding in the amount of
million currently held by Federal
including $754
$ 9, 509 million,
for
Reserve Banks as agents
foreign and international monetary
authorities and $1, 942 million currently held by Federal Reserve
The two series offered are as follows:
Banks for their own account.
The Department
invites tenders
bills (to maturity date) for
approximately $4, 700
million, representing an additional amount of bills dated
and to mature July 15, 1982
July 16, 1981,
in the amount of
(CUSIP No . 912794 AW 4 ), currently outstanding
the
additional
and
bills
to be freely
original
$8, 982 million,
interchangeable .
91 -day
182-day
bills for
April 15, 1982,
No. 912794 BP
8).
approximately
and
to mature
$4, 700 million, to
October 14, 1982
be dated
(CUSIP
Both series of bills will be issued for cash and in exchange
Tenders from
for Treasury bills maturing April 15, 1982.
for foreign and
and
as
themselves
agents
for
Banks
Reserve
Federal
at the
will
be
accepted
authorities
international monetary
Additenders.
competitive
of
accepted
prices
weighted average
to
Federal
Reserve
Banks,
issued
be
bills
the
of
may
tional amounts
authorities,
to
monetary
international
and
foreign
as agents for
accounts
tenders
for
such
of
amount
the
aggregate
the extent that
exceeds the aggregate amount of maturing bills held by them
.
The bills will be issued on a discount basis
bidding, and at maturity
and noncompetitive
under
competi-
their par amount
tive
bills will be
series
of
Both
interest
.
without
payable
will be
amount
of $10, 0pp
minimum
in
a
form
book-entry
in
entirely
issued
records
either
of the
the
on
000
multiple,
higher
$5,
and in any
of the
the
Department
of
or
Branches,
and
Banks
Reserve
Federal
Treasury
R 716
.
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 Standard time, Monday,
Form PD 4632-2 (for 26-week series) or Form
April 12, 1982.
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 .
.
Tenders over
Each tender must be for a minimum of $10,000
case
of competiIn
the
000.
000
in
multiples
of
$10,
must be
$5,
tive tenders the price offered must be expressed on the basis of
100, with three decimals, e g , 97 920 Fractions may not be used
. .
. .
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
if the names of the
may submit tenders for account of customers,
furnished . Others
customer
are
customers and the amount, for each
for
their
own
account . Each
submit
tenders
are only permitted to
in the bills
amount
of
net
position
the
tender must state
long
any
excess
of
million
. This
is
in
$200
being offered if such position
information should reflect positions held as of 12:30 p .m . Eastern
Such positions would include bills
time on the day of the auction.
"when
issued"
acquired through
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 .
Banking
No
deposit need accompany
tenders
from incorporated
banks
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
and
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 r'ejection' 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 Secretar; 's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement
for accepted tenders
for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
April 15, 1982,
in cash or other immediately-available
funds
on
or in Treasury bills maturing April 15, 1982.
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.
Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
Under
amount
such discount by a fraction, the
by multiplying
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill. If the gain on the sale of a bill exceeds the taxpayer's
is determined
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
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.
ylpartment
oy
the Treasury
~ Washincl
ton, D.C.
~
TelePhone 588-2041
BY THE HONORABLE BERYL W. SPRINKEL
SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE
TRADE CONFERENCE
NINTH INTERNATIONAL
HOUSTON, TEXAS
REMARKS
UNDER
April 6, 1982
Economic Policies
Rea an Administration
International
of the
I am happy to have this opportunity to address the International
I enjoy opportunities like this to spend some
Trade Conference.
It gives me a
time back in the company of the business people.
You
chance to catch my breath after the battles in Washington.
know, I went to Washington
hoping to change things, and I never
At least I haven' t
expected to avoid criticism and controversy.
on the latter scorch
been disappointed
topic of
The
my
presentation
today
is
the international
I can almost hear
economic policies of the Reagan Administration.
your chins drop at the thought of a luncheon speech on so broad a
to try to make it easier on you by keeping my
remarks as brief as possible, bearing in mind the old rule: a good
speech should be short enough that when the speaker reaches the
topic.
I
end you
can
promise
still
remember
the beginning.
of this conference is stated as a question, "Has
America's New Economic Policy Taken Hold?" I am here to answer
Our policies
perspective.
that question from the Administration's
issues
economic
international
to
approach
represent a sweeping
of the
S.
policies
U.
from
departures
notable
which entail some
our
allies.
of
of
many
policies
current
the
and
recent past,
The theme
We are working
change cannot occur overnight.
are
we
confident
And
view.
to convince others of our point of
direction.
our
in
that momentum will continue to swing
Such a fundamental
Overall
Economic Philoso h
said, just what are these new international
approach to
We have a consistent
oursp
of
ici
policies
economicc po
identical
to our
is
which
issues,
economic
t'onal e
internationa
W
market.
the
free
b 1'
in
believe
we
i o
economic p hilosophy:
t'
through private market a
mic decision-making
that economic
efficient results than decisions imposed
This having
produces
ments.
more
been
pproac»cross
the fu] 1
—
to such diverse areas as
economic policies
our international
economic consultation and cooperation with our Allies, our approach
to foreign exchange markets, international trade and investment,
and our response to the challenges of global economic development.
ones.
title
of this conference refers to our policies as "new"
The
to us,
But, what makes the free-market, approach so appealing
difficult for its critics to refute, is precisely that,
but tested and proven to work. There is ample
it is
historical experience which demonstrates that private markets
generally produce the most efficient economic outcomes. Government,
on the other hand, is an inefficient
planning and intervention,
it is too
economic activity:
and costly means of organizing
and
so
not, new,
inflexible
environment,
to react to the constantly changing economic
and too limited in resources to duplicate the
mechanisms
and automatic allocation and coordination
intricate
built into the market system.
A vivid
historical testimonial to the effectiveness of a
free-market approach to international economic issues is the
Western economic recovery from World War II, and the decades of
Domestically, the Western
rapid economic growth which followed.
industrial nations were rebuilt with a general free-market
the major factor underlying the
orientation.
Internationally,
ensuing growth performance was a dramatic expansion in world
trade and capital flows. This expansion would not have taken
place without the progressive liberalization of international
trade and capital markets, in. which the United States played a
role. Restoration of convertible currencies, gradual
of exchange and capital controls, and the reduction of
tariffs and quotas all gave impetus to vigorous postwar economic
both in industrial countries and developing ones.
growth
leading
removal
—
During the first two postwar decades, the United States was
not just a leader in liberalizing the international
trading
our strong currency and our comparatively good domestic
system
economic performance made United States a reliable center for
the international
economy.
However, in the past decade or so
the United States has often been a source of instability
most
—
particularly
due
to
its deteriorating
growth
and
inflation
—
per-
formance.
Some of this deterioration
in U. S. performance reflected
a response to the oil shocks, which we experienced in common
with every other oil-importing
nation. But a significant, cause
of our disappointing record has been domestic economic policy.
Sometimes the U. S. took interventionist
approaches to domestic
problems which the market mechanism could have addressed more
And attempts
at fine-tuning with a short-term
appropriately.
policy horizon ended up giving other goals so much precedence over
economic efficiency that the ultimate results were a substantial
worsening in U. S. productivity peformance, and an inflationary
bias in wage and price formation.
As you know,
our domestic
reverse this process.
will bring substantial
And
benefits for the rest
is
intended to
in order
of the world, from a
economic program
our domestic
putting
house
pressures,
strong and stable dollar, a lessening of Protectionist
a
market
for
as
foreign
economY
S.
U.
and a healthy and growing
intermediarY.
goods and a
reliable financial
Interest Rates and Exchan e Rates
and destabilizing
from a period of inflationary
Our transition
has unfortunately
growth
non-inflationary
path
economic policy to a
—
difficult
one
to
go through, and
turned out to be a difficult
the
implementation
problem has
Domestically
difficult to implement.
interest
rates.
And
in
interest
clearly
high
been manifested most
as
well.
attention
abroad
of
rates have drawn plenty
I am sure that you are familar with the basic foreign
criticisms of U. S. economic policy. They believe we should not
persist in a tight monetary policy in the face of an already weak
economy, a large government budget deficit, and historically high
interest rates. They feel that our interest rates contribute to
rising unemployment in Europe. And at the same time, they suggest
that because high U. S. interest rates and volatile U. S. monetary
policy are causing exchange market instability and adding to the
uncertainties of an already difficult environment, we should be
willing to intervene in exchange markets to dampen exchange rate
in exchange markets is
Our distaste for intervention
movements.
sometimes described as ~rima facie evidence of our insensitivity
to cooperate with
to European interests and our unwillingness
other countries.
In our direct discussions with foreign governments, we believe
these criticisms successfully —although not
we have answered
believe that the best
We honestly
always to their satisfaction.
growth path
non-inflationary
way of getting back on a vigorous,
will be to persevere in our efforts to get inflation under control,
to revitalize
to reduce the size and intrusiveness of government, and leaders
foreign
think
I
And
the private sector of the economy.
Most
the logic of our approach.
and economic officials understand
economic
policies
sounder
of them are also attempting to implement
in order to control inflation and restore the dynamism of their
But for now, the difficult political problems of the
economies.
transition period are more painfully clear than the benefits we
stand to gain.
that our interest
The standard foreign argument has beenmistaken
"policy mix"
a
to
due
necessary,
than
rates are higher
-these high
and
that
policy
of loose fiscal and tight monetary
feel
they have
currencies.
Many
U. S. interest rates weaken their
artificially
rates
to
interest
forced to drive their own an even more dramatic currency
high levels, in order to avoid
Their basic prescription has been that we should
the budget (through higher taxes if necessary),
f ster to balance po'
move faster
icy, and join them in coordinated ex h
y
perhaps ease m
market intervention.
f
some impact, we believe the impact
Wh'le
Whz e there is
been
has
rope
interest ra e
gn currencies have
inter st ra
to U. S. monetary policy and interest rates.
increases in foreign interest rates can
Qn some occasions,
even more to do with events abroad like past inflation performance,
persistent. inflation expectations, and the large budget, deficits
and external financing needs faced by some countries.
The weakness of some foreign currencies has also reflected
Negative
many other factors besides high U. S. interest rates.
factors for Europe have included inflation trends during the
last year, uncertainty over the resolve of European governments
to continue the fight against inflation, generally weak European
current account positions, and political developments such as
analysis which looks only at
A partial
the Polish situation.
the simple correlation between two variables and assigns a causal
But, in fact, there was
relationship is usually misleading.
usually very little correlation between changes in international
interest, rate differentials and exchange rate movements last
year. This winter, the rebound in U. S. interest rates did seem
to have some direct exchange market impacts, but that correlation
is already weakening again. As UPS. interest rates decline
again differentials may move against us, but the dollar might
well remain strong for other reasons.
to
we believe it would be counterproductive
More generally,
manner
Large
budget
suggested.
change our policy mix in the
deficits are putting some upward pressure on interest rates, as
But
government financing needs crowd out private credit demand.
to explain the level of interest rates we have seen recently.
Furthermore, the total available pool of credit available is
both by the measures which this
being expanded dramatically,
has taken to increase savings, and by an unwinding
Administration
speculative investment in real assets which
Qf the widespread
took place as a result of accelerating inflation over the last
These factors further dilute the crowding-out effect.
few years.
Finally, inflation itself has come down dramatically since the
beginning of of this Administration,
so that cannot be the
reason for persistently high interest rates either.
passive reactions
So excluding these explanations,
we have to assume that what
going on is some combination of persistently high inflation
expectations and a "risk premium, " reflecting the basic unwillingness
of investors to risk being trapped for long in fixed-interest
investments until they are sure inflation is firmly under control.
When market participants
are uncertain, they tend to over-react
to otherwise minor events like a transient upturn in money growth,
and generate the self-fulfilling
prophecy of higher interest
is
rates.
The key
to controlling
inflation
is
a
credible policy of
slow, steady monetary growth.
The task of establishing
the
credibility of the Federal Reserve was set back by its poor
performance in controlling the money supply in the past -- and
until credibility is established, financial markets will probably
recent acceleration of money growth
to be skittish. The confusing
signals on fiscal policy
did little to help this, and
basic
What
the
uncertainty.
to
options in recent months added
that
economic
will
stay on
policy
is needed is a clear perception
Administration
course. This
is going
a steady, non-inflationary
to stick to a steady course, and we fully support the Fed, s intention
to do the same.
International Economic Coo eration
continue
to foreign
Although we are sometimes accused of insensitivity
concerns, the fact is we are very aware of the opinions and
aspirations of our allies, and try to take every available
opportunity to consult with them and arrive at common understandings.
Secretary Regan and other Treasury officials -- myself included
both in Washington and abroad, with our foreign
meet frequently,
counterparts to discuss key economic issues and to exchange
I am hopeful that as we get further down the road
information.
in our own process of controlling inflation and stabilizing the
the other major Western industrial
economic policy environment,
countries will also have been moving with us toward a consistent
approach to controlling inflation and setting the
and coordinated
stage for strong and sustainable economic growth.
in economic cooperation and consultation with our
candid exchange of new ideas and points of view, in
timely notifications of policy changes or upcoming economic events
which impact on one another's policies, and in a thorough airing
of grievances in hopes of finding mutually acceptable solutions.
cooperation
aware that the demands of international
We are fully
sometimes require a country to forego its immediate self-interest
to
We are receptive
common goals.
in pursuit of fundamental
approaches which trade short-run losses for more significant
But we are wary of approaches which run counter
long-run gains.
such as ones which imply collaboration to
to the fundamentals,
circumvent the market system and further distort global resource
cartelization
allocation. We are not backers of subtle international"organization"
.
governmental
schemes, or of proposals to substitute
for the free international trading system.
believe
allies -- in a
We
Our
foreign exchange market policy --is a case in point our
minimizing
are
we
straightforward
policy in that area is
it to
intervention in foreign exchange markets, by restricting
of
functioning
normal
the
disrupt
which
cases of serious disorder
European
some
in
described
been
has
Our policy
these markets.
" But this description is
countries as one --of "benign neglect.
that as a result we are "gaining"
it impliesourbothallies,
very misleading
and that we are "neglecting"
something at the expense of
Neither
is true.
to influence events.
an opportunity
policy.
have two basic reasons for our minimal intervention
individual
or
government
believe
any
we do not
first is that
what the correct level of an exchange
second-guessing
of
capable
that, historically, intervention
is
second
should be. The
rates
simply hasn't worked.
fix or manage exchange
Our
~
Economists have plausible theories about the main factors
determining exchange rates in the long run. But in the short, run,
a much greater variety of factors can influence exchange rates,
not. all of which are measurable or obvious.
Exchange markets are
large and efficient, and market participants make rapid use of all
available information in arriving at. a collective "decision" as to
what rates should be. What, quite often drives short-run rate
of market. fundamentals like inflation rates
But these expectations do
of payments developments.
not necessarily bear any relationship to what those fundamentals
are doing currently, and may even turn out to be inaccurate
predictions of their future behavior.
the future
and balance
behavior
Thus, it is presumptuous
for anybody, governments included, to
think they have sufficient information to pinpoint an equilibrium
exchange rate different from what the market has produced at any
given point in time. Even if intervention were capable of moving
rate levels against market forces, in doing so it would be more
likely to do harm than good. At best it would be a waste of money.
So perhaps it is fortunate that intervention
to fix or manage
exchange rates has been so spectacularly unsuccessful.
The major
Western governments
intervened frequently and massively during the
late 1970s, but this did not prevent large and rapid exchange rate
movements
in the very directions they were trying to avoid
.
There is only one way to attain exchange rate stability, and
that is through greater similarity in the economic policies and
performance of the major economies.
I would welcome with open arms
any attempt to get stability this way.
fact, I expect this will be a major theme for the Economic
meeting in Versailles this June. We will be discussing ways
that the major industrial countries can undertake a more similar
set of stable and non-inflationary economic policies, based on
monetary and fiscal discipline and free-market. principles.
In
Summit
International
Trade and Investment
In the area of international
trade, postwar economic history
home the lesson that a liberal trading system is good for
all participants, while any tendency toward increased protectionism.
threatens this major source of dynamism in the international
The Administration
economy.
is on guard against encroachments
to the free international system of trade and investment and is
pushing for further liberalization.
We hope that other countries
both developed and developing
will do their part as well,
since we all share equally in the gains.
hammered
—
—
topic of particular concern to us is international
Anything that distorts or impedes the free flow of
international investment has unfortunate implications for global
resource allocation and growth.
feel they have
Many countries
legitimate reasons to offer incentives to attract foreign investors;
A
investment.
to force those investors to meet performance requirements; to
control foreign investment in sensitive sectors of their economies;
or to ensure that the achievement of their most basic domest, ic
frustrated by the actions of
economic goals is not arbitrarily
We are not always
multinational
corporations.
in sympathy with
all of their goals, but we recognize that the autonomy of national
economic policies is a basic and desirable feature of international
relations.
Nevertheless, we believe there must be limits on such measures.
are very concerned with the recent proliferation of government
interventions which attempt to appropriate the benefits of foreign
investment -- and at the same time seriously distort trade and
investment flows.
Use of investment
incentives and performance
requirements can be tantamount to an unsubtle version of beggarthy-neighbor trade competition.
In some countries, the property
rights of foreign investors have become unacceptably tenuous; and
many treat foreign investors
in ways that leave them at a significant
competitive disadvantage vis-a-vis local firms.
We
the United States has bilateral agreements covering
international investment issues, and is a participant in
multilateral investment codes under the auspices of the OECD and
the United Nations, we believe these agreements are woefully
inadequate to address current problems.
They don't cover all the
relevant issues or countries, and they are not binding mechanisms
for resolving disputes.
The most comprehensive
of the agreements,
those negotiated in the OECD, bear no relation to the activities
While
some
of the LDCs.
we are pressing
to begin negotiations on a set of
rules to govern restrictions on international investment.
We have taken
with our
up this topic in bilateral consultations
We
major trading partners, and in appropriate OECD meetings.
expect that it will be a major topic of discussion at the
Versailles Summit in June, and at the November GATT Ministerial.
This year,
binding
Economic Growth
it
and Develo ment
come as no surprise to this audience that
free-market approach, nor
Administration's
neither the Reagan
government
of
spending, has required
our actions to cut the growth
countries. We
us to turn our backs on the needs of developing
believe that all countries should have the opportunity to grow,
more fully in the benefits and obligations of
and to participate
trading system.
the international
I
hope
will
this end, in the latest budget, we are proposing to expand
for both bilateral and multilateral foreign economic
assistance next year, in contrast with actual cutbacks in many
significant domestic programs. we believe that the domestic economic
of developing countries are the most important determinant
po]'cies
po 1cles 0
pf their growth rates, although assistance should be available to
urgent needs of the desperately poor. And to these
mos
meett the
t e most
ends we are increase. ng our support for the orzgznal purposes and
To
our expenditures
philosophies of multilateral institutions such as the development
banks and the International
Monetary Fund.
We
recognize
that these institutions
serve a number of purposes.
to the expansion of private
They have been important contributors
economic activity which underlay the world's rapid postwar economic
growth.
They are supportive of fundamental
U. S. economic, political,
and security interests.
And by promoting
sound economic policies,
these institutions make lasting and tangible contributions to
economic and social advancement, in borrowing countries.
Overall,
they are clearly among the most successful cooperative economic
endeavors
in history.
its role
as the world's central official international
monetary institution,
the INF performs a number of functions.
It
provides a mechanism through which governments can consult and
cooperate to maintain and improve the functioning of the international monetary system.
It serves as a means for monitoring the
appropriateness of its member's exchange arrangements and policies.
The IMF is also charged with reviewing the adequacy of international
liquidity and supplementing reserves when necessary by allocating
Special Drawing Rights. Finally, the INF provides technical
assistance and temporary balance-of-payments
financing to its
members, conditional on their implementation
of economic policies
designed to correct their domestic and external imbalances.
In
This Administration
as a cornerstone of our
support the key roles the INF
plays in the international monetary system, and welcome the INF's
focus on market. forces, economic fundamentals,
and the need for
sound economic policy.
We are also working
actively to ensure that
INF conditionality
is used effectively to bring about economic
adjustment, by supporting economic policies in borrowing countries
which give wider scope to market forces.
international
We
economic
also see
views
policy.
an important
the
IMF
We
continuing
role for the multilateral
development banks.
With some modification in their procedures,
the banks can .expand their-role as catalysts for the mobilization
of the private sector resources which are essential to growth and
development.
In late February, we released a thorough report on
U. S. participation
in the MDBs which stressed the directions in
which we think their activities should be guided.
Our suggestions
are aimed at enhancing both the catalytic role of the NDBs and
their ability to provide sound economic policy advice.
The key elements of our proposals are straightforward.
We
will seek to have MDB lending practices place greater stress on
market forces -- on the importance of appropriate pricing structures
and incentives.
We are asking
the banks to make greater resort to
guarantees, participations,
and co-financing as ways of stimulating
increased private foreign investment in developing countries.
Rather than continuing to meet arbitrary annual lending targets,
we are suggesting
that the banks take a selective approach
gearing their lending to the willingness of borrowers to implement
needed policy changes through stricter conditionality.
And we
will be working to ensure that scarce concessional loan funds are
The MDBs
reserved for the poorest of the developing countries.
should have a «maturation" policy which reduces borrowing countries'
"soft, " loans as their economic conditions and "
improve -- eventually aiming at "graduation,
creditworthiness
Finally,
when access to "soft" loans can be cut off entirely.
since the banks will be working more with private lenders, we
expect there will be a phasing-out of paid-in capital subscriptions
As a result, we will be reducing in
as a source of MDB resources.
real terms the U. S. budget outlays which provide resources for
direct MDB loans in future years.
the MDBs will be able to move further in these
We are hoping
In this way, their effectiveness
directions in the near future.
will grow and they will be able to play an important role over the
remainder of this decades
Conclusion
.
While I have
than you expected
brief, I fear I may have spoken longer
our "not-so-new" approach to
international economic policies. Please don't let my elaboration
of details in the many specific policy areas obscure the clarity
and simplicity
of our basic message. We believe in the market
and we believe that the freeapproach to economic decision-making,
economic problems.
answer
most
to
market answer is the right
We
are trying
tried to
be
in describing
to avoid building
up
unrealistic
expectations
economic system
in the international
about what the participants
In a cynical mood, Toulouse-Lautrec once
can hope to accomplish.
said, "Marriage is a long dull meal with dessert at the beginning.
Unlike his idea of marriage, we have not tried to put dessert at
the beginning by concocting dramatic strategies for "a quick fix"
of the world's problems.
But we know the policies
have been in the past.
Such strategies are always disappointed.
have chosen will be effective, as they
we
"
of the TreasurV
pepartment
For release after 7:00
April 6, 1982
~
Washington,
D.C. ~ Telephone %66-2041
p. m.
Address
Donald
T.
by
Regan
Secretary of the Treasury
to the
Harvard
Business School Statesman
Award
Dinner
York, New York
April 6, 1982
New
of course, both touched and honored to receive this
to join a distinguished company of past recipients.
bit leery of being called a statesman. A statesman,
you know, has been defined as a politician who's been dead for
But it's always
ten years -- or a businessman dead for twenty.
Actually,
women.
men
and
Harvard
of
the
company
to
rejoin
nice
English
Harvard
a
of
the
idea
scoffed
at
who
those
there were
in the
But
Secretary.
Reagan's
Treasury
Ronald
becoming
major
fifteen months since this administration took office, I like to
For instance, who better than a
think I' ve proved my worth.
Harvard English major to explain the significance of a Trojan
Horse? And if there's little poetry in supply side economics,
I' ve found more than enough creative fiction in trillion dollar
I
am,
award, and
But I'm a
deficits.
In truth,
I' ve
looked forward
to this evening with
more than
affection for
nostalgia in mind. Like you, I retain a special
-even
if some of us
that intellectual hothouse called Harvard
Nowhere else
Charles.
got our education on the other side of the
inspiring
and
ideas
compelling
is there such a congregation of red
Ralph
green
ivy,
and
brick
of
mile
ghosts. In one square
life.
fossil
studied
Agassiz
Louis
and
Waldo Emerson ruminated
called
Marshall
George
and
Crimson
the
Franklin Roosevelt edited
old.
the
of
rubble
the
from
rise
to
for a new Europe
of
Harvard Business School is one of the brightest facets
wide.
and
far
known
Their case study methods are
the University.
a
take
now
can
School
I'm told that students in the Business
special course in business ethics.
boy who asked his father to
I am reminded of the" young
-- a merchant himself-man
The
define "business ethics.
described the following example.
someone buys something from me, gives
"Son, suppose -$5. 00 -- and starts towards the door. And
price
me the exact
I'm on my way to the cash register I realize
suppose that while given
That
bills stuck together.
that he's actually question mefortwome:$5. 00
Dartner?"
tell
my
I
Should
poses an ethical
— whether
from the business school
post graduates of- Harvard
words of a Harvard
the
mindful
of
are
or any other program
0
R-719
Charles William Elliot, who had carved over one
in
entrance to the Yard his personal motto . . "Enter to grow
"
I
and
kind.
thy
wisdom, depart better to serve thy country
I
Treasury,
of
the
Secretary
became
might add that. when I first
carved
own
of
inscription
an
my
toyed with the notion of having
from Dante like, "Abandon
into the Treasury building, something
"
hope, all ye who enter here.
president,
.
enjoys a premier position in the intellectual and
And it isn't due simply to great
public lives of this country.
For
teachers, or innovative labs, or world-class libraries.
without the tradition of service, personified by Elliot and
continued across the span of three and a half centuries, Harvard
Harvard
little
be
would
more than
a
provincial
cloister.
In my own life, I have
because
I believe in
pursued it within the capitalist framework
more
freedom,
the power of capitalism to deliver more
opportunity, more social mobility and more abundance than any
other system devised by man. I believe in rewarding the
risktaker. I believe in profit as an incentive and in the widest
possible distribution of justice, as well as wealth.
Service can be defined
in
many
ways.
Roosevelt used to say that the inherent vice of
the unequal sharing of blessings -- while the
inherent virtue of socialism was the equal sharing of misery.
Nineteenth century intellectuals practically coined the word
"capitalist" as an insult to the countinghouse society. And
Franklin
capitalism
was
with a 1.6 billion dollar
uncomfortable with
M.
entrepreneurial
zeal. In the land of K. Galbraith and
Keynes, profit has not always been regarded as a positive thing,
of
and capitalism has often been regarded as the handmaiden
Harvard
itself, for
an
has sometimes
endowment,
institution
seemed
J.
J.
greed.
I have in mind demands more than
fair distribution of profit
and a widespread
assumption of responsibility.
For there can be
no real prosperity
in a land where millions are denied a chance
at success. Profit itself has little justification unless it
becomes the fuel for social progress and capitalism must have an
underlying morality if it is not to degenerate into mere
acquisition on a grand scale.
But the kind of capitalism
creature comfort.
It
demands
a
administration
holds. Imagine the economic system as a kind of
race. Government maintains the track and provides basic training
to all the racers. It strives to insure all runners an equal
shot at the start. It umpires the race to insure fairness.
Butit cannot guarantee the outcome. If it were government of
elite, it could select those who would run and those who would
it could compel all the
win. If it were a Socialist government,
runners
to
run slowly
and
to
end the
race evenly matched.
President
Reagan
ahead, " he told the
behind. "
sees
NAACP
it differently."but
last
The Reagan White House
lonely outpost of
--
laissez-faire.
summer,
like our
"We
we
all
must move
anyone
can't leave
alma mater
-- is
the last half century
of the old gulf between business
no
has
seen a constant narrowing
and
so government has come to assume an ever-greater
the humanities,
role in economic affairs. For fifty years, we have turned to
Washington to feed the hungry, house the homeless, provide work
for the unemployed.
So government swelled to meet our demands,
it came to confuse responsibility with dictation. It promised to
realize our dreams
but spent much of its time merely
sleepwalking.
It vowed to raise the floor beneath the poor-but lowered the ceiling on everyone else. It sought to divide
existing wealth more evenly -- rather than foster the creation of
new wealth for millions
of Americans.
As
--
with the best of intentions -- and
it became
little more than a costly
of do's and don'ts, seeking to be
to be competent. And nowhere did its
mismanagement
have more disastrous or ironic effects than in the
economic realm.
Compassion is a word much in today's headlines.
Like. all words, it is vulnerable to distortion.
Real compassion
does not tolerate double-digit inflation.
It does not accept
welfare lines in lieu of lasting jobs. It is not comfortable
with a spider's web of red tape that cripples the small
businessman or woman without adding materially to the protection
of anything, except the bureaucratic peace of mind.
Government
somewhere along
set out
the way,
burden.
An assembly-line
compassionate, forgetting
Real compassion is contained in a weekly paycheck with a
reduced tax bite
a grocery or gas bill that doesn't force a
Real compassion offers a hand
choice between eating or heating.
Real compassion defines the ultimate
up instead of a hand out.
--
social justice as the right of individual self-support.
Real compassion and capitalism of the American brand have
For it was capitalists who
always been comfortable partners.
cursed the darkness and replaced it with light -- who replaced
cold with heat, scarcity with plenty, and squalor with comfort.
Capitalists put Americans on the road -- and sent other Americans
Capitalists have brought better hygiene to
up into the heavens.
world -- more food to feed hungry mouths-the underdeveloped
and more hope in lands where that most precious of all
extinct.
Capitalism succeeds best when allied with what
called
illustrious "predecessor, Alexander Hamilton,atmosphere
reaches
zenith
an
commodities
obligation.
would
It
be otherwise
its
in
my
"moral
of
It is
democracy, equitY, fairness and, yes, real compassion.
and
individual men and women,
based on the genius of individuals
are protected and wherever
thrive:-. , wherever those
a dirty word
maintained.
So
is
why is capitalism
their :iversity
to so
many
--
fifty years to
conversation
including,
keep words
in our own land?
Well, for one thing,
appreciation of
of the marketplace.
an
to say -- some who have sought for
like profit and incentive out of polite
sad
ethic said to engender
also recoils at public celebration
So-called "bourgeois values" strike us as
the very puritan
moneymaking
dull; it is hard to imagine many banners proclaiming the
philisophical thrills of thrift, discipline, hard work and
moderation.
Yet if it isn't romantic, then capitalism is not
without a heart of its own. If you doubt that, consider the fact
that more than half of the adults in America -- 84 million in all
-- give some of their spare time to a cause worthier than their
That's 84 million of us, rolling up our
own line of work.
sleeves instead of twiddling our thumbs.
84 million potential
solutions to America's problems.
And because we recognize the voluntary
spirit in this
country, the President has launched a major campaign to tap the
ingenuity as well as the corporate coffers of the capitalists
among us.
His Private Sector Initiatives program is already
unleashing the skill and enthusiasm of an aroused private sector
on some of our most intractable
social ills. More than any in
memory, this administration
is counting on the marketplace to
improve the standard of living for millions.
This does not mean
retreat from social responsibility; rather, it means sharing that
responsibility with more partners than ever before. We
areletting more dollars stay in more hands. We are hacking our
way through the regulatory
jungle. We are on our way toward
making free enterprise freer than it's been in half a century.
is only because we care about people as well as
Society holds the ultimate franchise on free enterprise
-- and we intend to use that franchise. In Urban Enterprise
Zones, we will invite business and industry to generate hope as
well as income. Where Washington has behaved irresponsibly,
we
will call on capitalism to act responsibly.
We will turn away
from the failed dogmas of recent history, and we will insist on
a creative alternative
from you, who are among the most creative
of Americans.
But that
profits.
For as long as I can remember, you and I have argued that
could not, by itself, guarantee economic prosperity.
It could not tax and tax,
spend and spend its
to social
justice. It could, with the help of a vigorouswayprivate
sector,
achieve both. And so it is that the Reagan Administration
has
departed from the rutted road of paternalistic government, to try
something different.
I don't have to describe our program for
you, but perhaps I need to remind you of some of its
accomplishments.
Perhaps I need to point out. that inflation for
the first three months of this year is running around 3.5
percent, less than where it stood the day Jimmy Carter took
office. Perhaps I should say something about interest rates
that, while still too high, have come down by over 20 percent
government
since Ronald Reagan took of f ice. Perhaps I should mention that
the rate of growth in federal spending is being reduced
If
dramatically -- along with the pace of government regulation.
you don't take my word for it, then take a look at last year' s
Federal Register; you' ll find it 23, 000 pages slimmer than in
1980. Finally, perhaps I ought to say something about the rate
Qf savings in this country, which is finally turning around, and
the rate of taxation, which without the President's program would
have consumed more than 24 percent of the GNP by 1986.
Then, having said all that, perhaps I should point out the
which is more of the same pump-priming
and
logrolling that have characterized our opponents for all of their
political lives. Incredibly the people who caused them have now
taken to criticizing the federal deficit.
alternative,
Deficits are a problem. Personally, I'd be more comfortable
could name a date when the budget would be in balance
But
we were elected to restore the economic health of this country.
tax and other incentives begin to do just
Once the President's
that, then we will see the way toward a budget with a lot less
red ink in it. For now, I would simply point out that Gerald
Ford's administration
sustained a $66 billion deficit in 1976
while Jimmy Carter managed to whittle that figure down to just
$27 billion by 1979. Yet in the same time, inflation doubled and
interest rates soared to record levels. I'd be a lot more
worried about the size of the current deficit if it weren't for
the size of new savings built in to the President's program:
this year alone, new savings will reach $60 billion and by 1984,
and
new savings will have added $260 billion to retool, modernize
if I
aggressively
pursue
new
innovations
and new
markets.
the tools for quick recovery -- and for
And oppose any cutback in the President's
lasting prosperity.
basic program of tax relief precisely because it would reduce
consumer purchasing power as well as the pool of available
program
capital, thereby delaying recovery. We have defended the stale
the
to
return
and
against those who would dull the tools
solutions of an earlier time. We have even stood up against some
elements of the business community itself, who have called for a
rollback in personal tax cuts while preserving accelerated cost
in
recovery and safe harbor leasing. We have done so, not only one
-with
tampering
because
but
fairness
elemental
the name of
element of the basic tax program puts the entire program at risk.
We' ve
provided
the public demands of American business is very close
just
to what the Reagan Administration expects. We don't want
we
cities.
S.
in
U.
more
plants
more yachts in U. ST harbors, but
welfare
social
the
over
don't expect free enterprise to take
own
programs -- but we do expect it to join vigorously in our urban
of
hundreds
and
millions
of
our
reclaim
young
efforts to
for the economic system in which we share a common
neighborhoods
business to sustain our behalf that it can be
expect
We
social
progress, and not merely one more sacred cow
of
an enqine
What
feeding
at the Washington
trough.
Earlier, I spoke of President Elliot, and of the tradition
of service he bequeathed to each succeeding Harvard generation.
Elliot had another admonition to give to the forty classes over
It's just as relevant today. "Look up and
which he presided.
not down, " he told his fellow Harvard men, "look out and not in;
"
look forward
and
not back, and lend a hand.
If I
statistics
could leave you with a message beyond the economic
and political arguments,
that would be
That, in a
nutshell, sums up both the morality and the responsibility of.
capitalists as well as scholars. It is a formula for
statesmanship that goes beyond any award. And it is the credo to
which
it.
this administration
will adhere.
After so many years in your ranks, I know that it is a credo
share. And so it is, that I ask you to join me now, in
transforming that noble ideal into living reality.
I ask you all
to be statesmen of a capitalistic and caring society.
you
Thank
you.
¹ ¹ ¹
PePrtmeni
of tNe TreasiirY
FOR RELEASE AT
12:00
~ Waslllneton,
O.C. ~ Telepgon~
April
NOON
TREASURY'S
8,
1982
g66.go41
52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $5, 250 million of 364-day
Treasury bills to be dated April 22, 1982, and to mature
April 21, 1983 (CUSIP No. 912794 CB 8). This issue will provide
about $1,000 million new cash for the Treasury, as the maturing
52-week bill was originally issued in the amount of $4, 261
million. The additional issues of 136-day and 20-day cash
management. bills totaling $10,017 million issued on December 7,
1981, and April 2, 1982, and maturing April 22, 1982, will be
redeemed at maturity.
The bills will be issued for cash and in exchange for Treasury
bills maturing April 22, 1982. In addition to the maturing 52-week
bills, there are $9, 473 million of maturing
and cash management
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next week.
Federal Reserve Banks as agents for foreign and international
monetary authorities currently hold $2, 266 million, and Federal
Reserve Banks for their own account hold $2, 346 million of the
These amounts represent the combined holdings of
maturing bills.
such accounts for the three regular issues of maturing bills.
Tenders from Federal Reserve Banks for themselves and as agents for
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 for 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
For purposes of determining such additional amounts, foreign
them.
monetary authorities are considered to hold
and international
million of the original 52-week issue.
The bills will be issued on a discount basis under competipar amount
tive and noncompetitive bidding, and at maturity their
will be
bills
of
series
This
will be payable without interest.
of
amount
$10,000
minimum
in
a
issued entirely in book-entry form
of
the
either
records
the
on
and in any higher $5, 000 multiple,
of
the
Department
the
of
or
Branches,
Federal Reserve Banks and
Treasury.
Tenders will be received at Federal
Branches and at the Bureau of the Public
20226, up to 1:30 p. m. , Eastern Standard
1982. Form PD 4632-1 should be used to
be maintained on the book-entry records
Treasury.
R-720
Reserve Banks and
Debt, Washington, D. C.
time, Thursday, April 15,
submit tenders for bills to
of the Department of the
Each tender must be for a minimum of $10, 000. Tenders over
must be in multiples of $5, 000. In the case of competitiv'e
the price offered must be expressed on the basis of 1M', .
Fractions may not be used
with three decimals, e .g . , 97 920
$10,000
tenders,
.
.
.
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
if the names of the.
may submit tenders for account of customers,
are
furnished . Others. .
customer
each
customers and the amount for
own
account. Each
their
tenders
for
are only permitted to submit
tender must state the amount of any net long position in the biII, s
being offered if such position is in excess of $200 million . This,
information should reflect positions held as of 12:30 p .m . Eastern
time on the day of the auction . Such positions would include bills
Banking
issued" trading,
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.
acquired
through
"when
and
of the bills applied for
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 diffeience
between the par payment submitted and the actual issue price as
determined in the auction.
must
Payment for the full par amount
accompany all tenders submitted
deposit need accompany
No
tenders
from incorporated
banks
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
and
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
the book entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
in cash or other immediately-available
funds
on April 22, 1982,
Cash adjustments
or in Treasury bills maturing April 22, 3.982.
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
on
Section 454(b) of the Internal Revenue Code, the
amount of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
retur'n of the owner as ordinary income.
The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
. is determined
such discount by a fraction, the
by multiplying
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
If the gain on the sale of a bill exceeds the taxpayer's
the bill.
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
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
Under
Debt.
&SERT
BQOkBIHDI
Mic
NC,
ncav~a ia
OEC. 83
@FedFRASER